The New Digital Marketplace
Carolyn Taylor, Founding Partner, President | Lindsey Fiske Thompson, Strategic Operations Advisor | October 19, 2017
The exchange of services and goods has existed in economies since the creation of civilization, although the method of payment has transitioned over time from a barter system to mediums of exchanges such as coins and banknotes. More recently, electronic exchanges have revolutionized the way consumers, producers, and service providers transact. Credit cards and other loaning mechanisms have given individuals and small organizations the ability to take on more credit, allowing for jumps in consumer spending and economic activity. New types of exchanges and currencies have rapidly innovated and transformed established financial industries and practices, although they each feature their own concerns over privacy, security, and valuations that users should consider.
Institution Disruptors
- Payments – PayPal (PYPL) has revolutionized the e-payment space with its online transaction platform by offering secure transactions between individuals and businesses, notably for international payments and currency conversions. Its consumer application Venmo, has fit in perfectly in today’s sharing economy by fusing social media with peer-to-peer transactions so friends can share their payment history. PayPal also recently confirmed that major retailers will begin accepting Venmo.
- Lending – LendingClub (LC), SoFi, and UpStart are online lending applications that allow individuals to access private markets for mortgages, student loans, and personal loans that would historically only have been available through large creditors. Traditional creditors without efficient digital platforms are facing an existential threat from new lenders that ease the financial process for customers comfortable with online applications.
- Raising Capital – GoFundMe and KickStarter give individuals the ability to raise large amounts from many small donations for social entrepreneurship, business ventures, or charitable causes. These crowdfunding platforms appear ripe to delve into the space previously ruled by venture capitalist and private equity firms and allow smaller investors to make impactful contributions.
“Moneyless Money”
What is it? – Digital currencies, such as Bitcoin and Ethereum, utilize block-chain technologies to track and validate each piece that is owned, spent, or sold in decentralized exchanges.
- Blockchain – digital ledger of transactions
- Decentralized exchange – transactions occur on a peer-to-peer basis and do not flow through a central location where the value of the money is defined and controlled
What are the effects on markets? – Digital currencies have exploded in value as investor exuberance has reached all-time highs. The popularity of the currency could lead to the diminished use of standard money (i.e. banknotes and coins) and therefore present difficulties for central banks to influence financial markets through the use of monetary policy. Opinions of the currency concerning valuations differ across many industry leaders, even Jamie Dimon of JPMorgan weighed in by recently referring to Bitcoin as a fraud..
What is the legal status? – Bitcoin has been legal in the United States since 2013 and is classified as a commodity by the CFTC. Critics however have noted that Bitcoin is solely used for the purchase of illegal goods or criminal activities. Supporters will respond that because the address of each transaction is tracked, authorities will be able monitor these transactions and thwart the perpetrators more efficiently.
Can’t get enough? Follow a few links below for further reading!
- Cryptocurrency 101
- The Truth About Blockchain
- Blockchain: A Better Way to Track Pork Chops, Bonds, Bad Peanut Butter?
Digital Marketplace Concerns
The opportunities and benefits of technical innovations in payment systems, lending platforms, and raising capital come accompanied by certain risks related to data privacy and human error. Protecting personal information will need to remain paramount during the evolving use and implementation of such tools. Consumers and businesses will need to prioritize their focus on data security, cyber hygiene, and education.
While the overall market for digital currencies estimated worth has been valued at $160 billion (CoinMarketCap), these currencies present a unique set of concerns and risk. The SEC has succinct bulletins outlining risks related to bitcoin and initial coin offerings. Some risks investors interested in the space may want to consider are: being targets for fraudulent or high-risk investment schemes, lack of insurance and recovery options, exchange rate volatility, and a volatile regulatory environment, like recent news in China and Japan (Ripple).
As new financial practices and mediums of exchange flood our economies and marketplaces, investors can be sure of one thing – innovations in financial technologies will continue to revolutionize institutions and processes critical to our daily lives. Weatherly’s team has taken note of these rapid changes and will continue to strenuously monitor new industries mentioned in this article, specifically mobile payment systems through blockchain technologies, to capitalize on new opportunities at the company level.
** The information provided should not be interpreted as a recommendation, no aspects of your individual financial situation were considered. Always consult a financial professional before implementing any strategies derived from the information above.