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Web3 and the battle for your wallet
Hi! When you' read this I'll be at Learning Technologies in London for my first in-person keynote this year, with two more to follow: Lisbon and Bucharest! Reach out if you're there and we'll grab a coffee.
This week I'll take a look at the future of our wallets and how Web3 will change the way we get paid. There's a lot to unpack, with many new players trying to stake a claim!
How it started
Paying people used to be very simple: the employer paid the worker in cash or with a check. A direct relationship between 2 parties. Over time, as taxes and benefits were added, paying people became more complex and other parties joined. Payroll providers started to run payroll on behalf of employers, and banks entered the picture to support direct deposits.
The outcome of payroll, the salary, is more valuable than you think. When you know how an employee spends her money, you can use that data to make predictions and sell services. And that's something that young fintechs realized early on.
In the beginning, fintechs focused on disrupting banks. But they always knew that the real value sits in the data. They've designed their services to get access to that data. For a long time, the incumbents, the banks, were able to hold them off, but not anymore.
Under the Open Banking Standard (PSD2 Directive in Europe), banks must allow third party access to a customer's personal and financial data, if the customer approves that. Using APIs, these fintechs and online financial service vendors can offer new services. The APIs can e.g. look at a client's transaction data to identify the best financial products and services for them. Or they can get approved for a mortgage. The customer receives a better outcome (with the trade-offs being privacy and security).
How it's going
From a Web3 perspective, the central problem is: someone else benefits from your money more than you. Banks charge monthly fees and interest rates have been low to negative. And in the case of neobanks and fintech, you pay with your data.
This way of banking belongs to the "old economy" or Web 2.0 because you need intermediaries who handle things for you. As we explored in recent newsletters, the internet is moving in a new direction: Web3 will be more decentralized and based on blockchain. It is supposed to put the owner back in charge.
With that, a few new concepts have appeared:
DeFi or Decentralized Finance
Before we continue to conversation on the future of paying people, let's take a quick look at each one of them.
Decentralized Finance removes third parties from a financial transaction and eliminates the fees that they charge for their services. You hold money in a secure, digital wallet, and can transfer money straight to the digital wallet of someone else. It's a peer-to-peer network based on blockchain, where transactions are stored in a ledger.
The online transactions are borderless: it doesn't matter where the wallet owner lives or works. This also creates a regulation problem, as current financial transactions are governed by geographic jurisdictions. In other words: the law doesn't yet exist.
A DeFi network is designed to use cryptocurrencies. A cryptocurrency is a networked, digital asset that is distributed across a large number of computers also called nodes. These nodes form a decentralized structure, based on blockchain, that is borderless: they exist outside the control of governments and other regulatory authorities.
You can mine cryptocurrencies or, more commonly, purchase them through an exchange. Unlike traditional currencies, cryptocurrencies are not backed by any public or private entities. Today, El Salvador is the only country in the world that considers Bitcoin as a legal option for monetary transactions, but adoption is low. Most other countries consider crypto a legal asset or property. Cryptos are subject to different tax treatments around the world.
The advantages of cryptocurrencies include cheaper and faster money transfers and decentralized systems that do not collapse at a single point of failure, like a bank that goes out of business. But it's not all good: crypto currencies are also volatile, demand high energy consumption and are sometimes used to fund criminal activities.
In order to spend and receive crypto you need a wallet and the number of wallet providers is growing every day. But unlike a regular wallet, these wallets don't store your cryptos. The wallet stores your private keys, which you can use to prove you own digital money and make transactions.
If you lose your private key, because you forget the code or someone steals it, you lose access to your money. And so, many wallets are a combination of digital and hardware, where keys are stored on a thumb drive that you only connect to your computer when you enter into a transaction.
It also means that despite the promise of decentralization, users will continue to pay a middle man small fees to store their crypto wallets and make payments. Currently, these crypto wallets are mostly used for online transactions as there are few real-world points where you can pay with crypto.
Crypto at work
Will DeFi, crypto and wallets change how we get paid? Yes. But in the near term not on a grand scale. They need to mature for mainstream adoption and they need to work out some of the kinks. Despite that, I encourage you start defining scenarios and maybe run some small experiments to gain experience from a company perspective. Because there are use cases that benefit employees.
Many countries in the world have currencies that fluctuate a lot, or have high inflation. When people send money home in cross-border transactions, the fees also eat up a sizeable chunk of the amount. If you could transfer it using crypto and blockchain, you'll keep more money for yourself.
And so, remittance payments is one of the most used crypto applications. If you pay people in other countries, you might already have received questions to switch to a provider that supports crypto remittance payments. You would still pay them in your local currency, but you transfer the money to their wallet instead of a bank account.
The unbanked employee population is another group that might welcome digital wallets. In that sense, think of this as a variation on paying to a bank card. Instead of the card, you'll transfer the money to a wallet. Several payroll vendors these days include a digital wallet in their service, but usually offer to hold it in the local currency.
While that is understandable from a legal point of view, in the long run this is comparable to a bank - the receiver has to transfer it to a another wallet to exchange it for crypto. That is not sustainable: it will just be one additional wallet to maintain. Ultimately, the direction is towards one wallet, that holds traditional and crypto currencies, so you can move between them in line with payment demands.
In the absence of a legal framework, I expect that most companies will not move to pay people in cryptocurrencies shortly. Instead, they will use an intermediate wallet to pay salaries in a local currency. What the receiver does with that money will be up to them. The reason why I urge you to think about DeFi, wallets and crypto is that sooner or later one of your employees will ask the question. And you need to be ready with a well though out answer. Or run the risk that they move to another company that will pay them the way they want.
Paying people differently is not the only thing you should think about. The other question is: how will you contract people in a Web3 world? I'll explore smart contracts and NFTs in a next issue.
Have a great day,
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