The spread of decentralized platforms means a dramatic shift away from a reliance on traditional institutions for the creation of trust needed to complete a host of business services. Services that rely on the establishment of trust between two unknown partners, such as banking, insurance and payment-processing are ripe for upheaval. Decentralized platforms are able to use distributed ledger technologies to complete services without a third-party intermediary.
Senior executives, government organization and citizens alike are caught up in the transformational impact these decentralized platforms will have on traditional business models. Broadly speaking, the reduction in transaction costs and the increase in transparency has the potential to increase the value captured by consumers at the expense of traditional businesses. Leaving large institutional organizations such as Sunlife, RBC & BNS, to navigate treacherous waters of uncertainty and disruption as their business models are encroached upon by incumbents.
A troublesome realization is that There has been a lack of constructive conversation surrounding the positive externalities that are created by large institutional organizations. Many of these organizations face potential extinction without successful adaptation brings. Such an uncertain future brings into question how contemporary business models will fill the void. The disruption of these firms will shake Canada to the core of its foundation.
First, let’s understand the importance of banks in the development of Canadian society. Then, let’s better understand the basics of decentralized business platforms. Then let’s consider how these Lastly, a series of questions will provoke consideration for how new-age business models will replicate the positive benefits created by those businesses being ousted.
Banks, insurance companies and payment processing firms are entrenched in Canadian society to an extent to which these organization are formal institutions engrained in the fabric of society. Let us consider the role these organizations play in creating positive externalities in a social context. Dating back prior to Canadian Confederation, institutions like RBC & BNS became engrained in the social fabric of communities by providing many positive benefits. Consider the sustained job creation financial institutions have provided in Canada along with the requisite tax revenue collection and it’s hard to imagine how different Canada’s development would be without financial intermediaries. Additional positive externalities provided from organizations that facilitate transactions include the establishment of social norms for communication as well as the creation of trust through human interactions. Traditional banks had, and still do in some areas of high net worth wealth management, a degree of human interactions that created a sense of community partnership between banks and individuals. Furthermore, the long standing corporate social responsibility initiatives, such as the RBC Olympic Podium program, have created community on a local and national level.
Decentralized business models rely on open-source platform effects to enable participants to create the medium of exchange without coordination or direction given from a single authority. This is a stark contrast to the singular direction provided to executives by the board of directors. Examples of decentralized business models range from historical cases such as Napster, a ground-breaking application of sharing through individual user actions. To Bitcoin, an application of Blockchain technology, that has spawned an currency that is not controlled by any central authority.
Looking at contemporary business models that rely on a decentralization of power we can see a contrast to the social benefits provided. Decentralized platforms rarely provide participants with a salary in the historical sense. The implication here is effectively the erosion of a tangible work force that provides countries with the taxable population needed to drive social welfare programs. Formal employment is not typically a feature of a decentralized model. It’s hard to imagine the creation of industry education standards without centralized coordination between institutions. Accreditations such as the CFA, CPA & IFC standards provide Canada with a safer market place and a highly skilled work force.
Now consider how the positive externalities outlined above may be undermined when a decentralized network, one without an established central third party, provides intermediary services. It is near impossible to imagine a decentralized network, that feels no connection to any specific community to provide any positive social externalities to the degree that banks and insurance companies have.
As decentralized networks continue to be developed in various aspect of society, the people, communities, and states impacted must ask; what responsibility do decentralized platforms have to develop the social fabric of society? And what can be done to ensure an increasingly decentralized world does not erode social community. In the brief history of decentralized platform’s we have seen how governing regulations have been unable to effectively regulate without completely stopping operations, ie. Napster. Or in the case of Bitcoin, regulatory attempts try to force a decentralized business model to behave similarly to traditional businesses. In essence regulators are trying to fit a square peg into a round hole.
The unconstrained geographical nature of a decentralized platform does not allow for traditional oversight from a governing body. As a result, the responsibility rests with individuals to ensure that aspects of society which previously enjoyed spillover benefits from financial institutions, such as the creation of interpersonal trust, community spirit, and skill development, are developed.
Inherent to a decentralized model is the limited ability to coordinate large scale initiatives such as CSR campaigns or industry accreditations. The burden then falls to individual participants within the decentralized platform. The difficulty is that users are spread geographically such that coordination on specific community initiatives becomes near impossible.
The prospect of an increase in the prevalence of decentralized platforms presents an opportunity for consumers to capture more value due to reduced transaction costs and transparency. Yet governing bodies across all jurisdictions are left to grapple with the underlying impact that decentralized platforms with have on the social fabric of Canada. Additional attention should be paid to developing countries where the replacement of third party institutions by decentralized platforms may entirely change the development of society. Governing bodies in developing countries will face an never before encountered challenge as they must develop with a reduction in the positive externalities provided by entrenched third-party institutions.
If you are interested in this topic then you should consider, how can developing societies replicate the social benefits provided of third-party intermediary institutions? How regulatory frameworks need to adapt with decentralized platforms to produce social benefits for society? And how developed countries can ensure the social benefits stemming from centuries of presence from financial institutions are not be eroded by decentralized business models?
Strategy in the Age of Decentralization 