Q&A  | 

Can blockchain replace banks? By James Angel

“We are in the midst of a financial revolution that may replace institutions with protocols.”

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James Angel knows his way around financial markets: he is a finance professor at Georgetown University who teaches Investments as well as Fintech. He has visited over 50 financial exchanges around the world and specializes in the structure and regulation of financial markets.

He has also been chairman of the Nasdaq Economic Advisory Board, a member of the OTC Bulletin Board Advisory Committee and served on the board of directors of the Direct Edge Stock Exchanges (later part of BATS Global Markets).

Robinhood CEO Vlad Tenev claims to have pioneered commission free no account minimum mobile investing. Also, he says the investing app empowers and enables individual investors by giving them access to markets previously only accessible to the wealthy. They call it the democratization of finance. Do you agree on this?

Yes.  Robinhood is a great example of the value of fintech.  

They have used technology to bring down the cost of financial services and make them available to a previously underserved audience.  On a planet where literally billions of people lack access to even a bank account, there is a need for much more fintech development.

Nevertheless, Robinhood decided to halt buying activity on GameStop stock on January 28. Does that clash with Tenev’s claims of democratizacion?

No. Robinhood was not the only brokerage firm forced to suspect buying of GameStop on January 28.  This was a result of a bottleneck in the US market plumbing.  Just like in Europe, the US market settles trades on the second business day after the trade (“T+2”).  That means you actually pay for the shares and become the legal owner on T+2.  Our clearing and settlement utility (DTCC) requires brokers to post collateral to cover their trades between the trade date and the settlement date.  

Given the high trading volume and high volatility, DTCC dramatically increased the amount of collateral they demanded.  This forced Robinhood and many other brokers to scale back customer trading to fit the amount of collateral they had available. 

There are other companies like Charles Schwab, Social Finance or TD Ameritrade who offer commission-free brokerage. How do they actually make money?

US brokers have transitioned from a commission-based business model to a banking business model.

In a commercial bank, you give them your money and they lend it out at a profit. The bank gives you free bill pay as a bonus and try to sell you other products.   

In the modern broker, you give them your cash and securities and they lend them out at a profit. They give you free stock trading as a bonus and try to sell you other products.

Are new technologies transforming the traditional way of providing banking and financial services?

YES!  The mobile app transformation is just the beginning. Right now financial services require active engagement by the user.  The forthcoming generation of financial assistants will use AI to monitor your financial activity (with your permission, of course) and provide you with useful suggestions.

For example, your financial assistant notices that you just had some car repairs and are reading about new cars. Without your even asking it to, it figures out how much you can afford to spend and even shops for a suitable car loan for you.  Or it tells you to forget about a new car and starts shopping for a good used car.

In your opinion, which are the most disruptive digital products, applications, processes and business models so far?

Blockchain technology. While I am extremely skeptical of the prospects for Bitcoin 1.0, the uses of blockchain technology are many.  

We are in the midst of a financial revolution that may replace institutions with protocols. Tokenization is just the beginning of a massive revolution in corporate finance in which we can divide up corporate cash flows into smart securities in ways that are far advanced from the dumb stocks and bonds we now trade. 

Do you consider the ease of trading to be a key element to the emergence of financial bubbles?

No. The history of financial markets is the history of bubbles. We humans are prone to periods of irrational exuberance. We have had bubbles even in very hard to trade assets like real estate.

Do you consider heightened market attention to certain names via social media to significantly bolster trading activity?

Yes. Any kind of news or information promotes trading activity. This is not new.  

Investor attention regularly gets channeled into the hot story stocks of the day. What is new is that social media has made it much easier for people to share news, rumors, and feelings about stocks.

Are there, under your opinion, any under appreciated benefits of the financial markets?

Our financial markets provide many benefits to society.  They provide places where we can store our spending power and investment opportunities to make our money grow, They channel capital to growing businesses, and they provide risk management tools to manage risk through diversification and hedging. 

One of the under appreciated benefits of the financial markets is that they provide us with entertainment. While some moralists criticize our markets and call them casinos, it is far better for people to scratch their gaming itch in the stock market than to buy lottery tickets. And you don’t even have to pay to enjoy it. The markets have always been a wild roller coaster that goes down as well as up.  Buckle up your seatbelt and enjoy the ride.