The trend of financial technology moving towards Web3 is irreversible.

The shift of financial technology towards Web3 is an irreversible trend.

From November 15th to 17th, the 2023 Singapore FinTech Festival (SFF) was held at the Singapore Expo near Changi Airport. I was personally invited by the Monetary Authority of Singapore and had the opportunity to participate in this global largest FinTech event.

To say that SFF is the largest FinTech event in the world is not an exaggeration. The event was first held in 2016 and was organized by the Monetary Authority of Singapore, which is the central bank of Singapore. By 2019, SFF had become the world’s number one FinTech exhibition with a participation scale of 60,000. This year’s SFF is the first one after the comprehensive end of the pandemic, and it was a grand event that attracted more than 66,000 participants from over 150 countries and regions around the world (see figure 1). The numbers are impressive, but being there in person makes the experience even more profound. The entire conference occupied six huge exhibition halls, each of which can separately host a conference with thousands of attendees. SFF connected these six exhibition halls, accommodating more than 60,000 people, with more than a dozen forums, booths from nearly a thousand exhibitors, and almost every company and international institution even remotely related to FinTech. In addition, there were complete facilities such as catering, meeting points, and service areas. It was truly a bustling mini-town. Even with such a large scale, the three-day event was packed with people, and this doesn’t even include the dozens of peripheral conferences that took place during SFF – you can imagine the spectacle.

Because of SFF’s size, international nature, and inclusivity, it is a great opportunity to get a glimpse of the current state and trends of global FinTech. Many domestic FinTech experts also attended the conference, and it would be a great benefit if someone could provide a comprehensive overview. Unfortunately, I myself only focus on the blockchain and Web3 fields, so I don’t have the ability to do a panoramic presentation. Instead, I will discuss some topics related to my own area of expertise. The focus is not on introducing the conference situation, but on combining what I saw and heard at the conference to ponder over some of my own concerns. Of course, I also have a bias and believe that, based on the situation at SFF, Web3 is a key trend in current FinTech innovation.

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Figure 1: The achievements of SFF 2023

1. The theme of FinTech innovation is comprehensive digitization

2023 is the year of artificial intelligence, and SFF naturally made artificial intelligence the main topic of this conference. However, when you actually visit the venue and take a look, you will realize that, at least at this moment, artificial intelligence is more of a gimmick for FinTech, and the real protagonist is “digitization”.

When it comes to financial digitization, domestic readers are not only familiar with it, but they may also have a “far ahead” mentality. I had the chance to communicate with some financial technology experts from China at the conference and learned that the current attitude towards financial technology in China is becoming more conservative. I speculate that this is partly due to the focus on “risk prevention” as a result of the prolonged real estate troubles, which leaves little room for financial technology innovation. On the other hand, it might also be due to a sense of pride and complacency. Throughout the 2010s, China led the world in digital financial technology, relying on the rapid development of mobile internet and two major mobile payment systems. Many things that China achieved six or even ten years ago are still not achievable for most countries today. Therefore, many people have a sense of arrogance, thinking that others can’t catch up even if they try.

But judging from the situation at this SFF, it seems that this arrogance doesn’t have much capital left. Looking at the agenda of this conference, establishing cross-regional digital financial infrastructure is definitely one of the main themes, with the Monetary Authority of Singapore (MAS) leading the way.

As the monetary and financial regulatory authority of Singapore, MAS introduced the “Five Anchors” of digital financial technology a year ago: instant payments, atomic settlement, programmable currency, asset tokenization, and reliable ESG data. This year, MAS has added three major goals on top of these five points, which are as follows:

1. Instant payments: Efficient and low-cost cross-border payments on a global scale.
2. Seamless financial transactions: Achieving seamless transactions of financial assets between different trading venues through digital currencies, asset tokenization, and digital trading networks.
3. Trusted and sustainable ecosystem: Creating a trusted data and disclosure ecosystem to support the sustainable development of the financial and environmental sectors.

These three new goals for this year are not replacing the five anchors from last year but represent a complete system of strategic goals and means. The means are relatively easy to understand, but how do we understand these three goals?

We can think of it this way: if we consider the financial industry as a type of real economy, there are three streams within it: logistics, information flow, and capital flow. The unique characteristic of the financial industry is that the logistics involved mainly revolve around transferring financial assets, which are essentially financial rights and are virtual rather than physical. That’s why people refer to finance as the “virtual economy”. MAS clearly aims to digitize all three streams within the financial industry as strategic goals. This means not only digitizing payments but also digitizing financial assets and the related information surrounding asset transactions. The five anchors are the key means to achieve this.

Among these three streams, digitizing the capital flow is relatively easy, and China has already achieved this in the domestic market. However, there are still many issues to be resolved for the complete digitization of cross-border payment flows. As for the digitization of assets, it is a huge topic that is still in its early stages. When it comes to the digitization of the information flow, it may seem like there isn’t a problem since most documents are already digital. However, this strategy understands a crucial point: the focus is not just on digitizing the form, but on “reliability and disclosure”. Information must be both trustworthy and disclosed appropriately, within the appropriate scope, in order to support the digitization of assets and transactions. Which information needs to be ensured as trustworthy and disclosed? The scope cannot be boundless. Considering the concept of the “five anchors,” we can understand that besides the descriptive information of the assets and transaction information, ESG data related to business entities is also indispensable.

Although there were many participants and diverse themes at SFF, the clear ideas proposed by MAS about “instant payment, digitalization of assets, and trustworthy data” could outline the main consensus of the conference. And the essence of this “5+3” framework is the comprehensive and in-depth digitalization of fintech, which truly grasps the essence of digital financial technology, and what it points to is not just a domestic industry upgrade, but a technological revolution aimed at sweeping the entire financial industry.

2. Digital innovation in fintech will experience “fission”

Setting the framework may be relatively easy, but implementation is much more difficult. The problem for Singapore is that it doesn’t have a large domestic market as a foundation, so all strategies have to rely on cross-border cooperation. Even with ambitious goals, negotiations have to be conducted company by company, which is different from the super-sized economies like the United States and China. However, fintech innovation based on this “decentralized collaboration” will also have its own characteristics.

From this SFF, it can be seen that the cooperation to promote the digital financial infrastructure is not just the wishful thinking of a single party, but a consensus among many countries and international organizations in the world. With this conference, not only has MAS led the signing of a series of cross-border cooperation agreements, but many participating organizations are actively communicating and coordinating with each other, showing strong intentions for cooperation. This means that this round of fintech upgrades is likely to be carried out and promoted through cooperation between small and medium-sized economies and international organizations, following a decentralized development model. Although the leaders of the financial industry from various countries at the SFF conference were eloquent and there was enthusiastic exchange among participants, I don’t want to exaggerate and say that this round of fintech revolution will progress rapidly. On the contrary, I believe that the implementation of decentralized collaboration may lead to market fragmentation in this fintech innovation, resulting in slower progress and a lack of rapid emergence of dominant players. But at the same time, because there is a lack of dominant players with market size and capital scale that can quickly dominate the market, the state of free competition may last longer. This will lead to a highly rich and diverse technological and product ecosystem, and there may be a large number of complex derivatives and fission, making it the most extensive, diverse, competitive, and innovative financial technology innovation in terms of geographical coverage in the technology field so far.

There are no successful precedents for promoting international technological transformations through decentralized collaboration in world history. Prior to this, whether it was mechanization, electrification, the internet, or mobile networks, their technologies and operational systems were incubated and nurtured by a powerful country in its domestic market, and then expanded globally through some form of international cooperation mechanism, thus becoming de facto standards. However, at this moment, the only two major countries capable of leading the development of the new generation of digital financial technology have taken a negative and ambiguous stance for different reasons on this matter. In the United States, there is too much self-interest in maintaining its financial hegemony, making it difficult to come to conclusions and institutional designs regarding this new financial technology revolution, which is characterized by distribution, interoperability, trustworthy data, and inclusiveness, and whether it will impact the US dollar or its dominant position as the global financial market center and global credit rating center. Added to this, the PTSD triggered by the FTX incident has not yet healed, so they would rather bury their heads in the kaleidoscope of artificial intelligence, pretending that everything is fine and peaceful. In China, the focus is on resolving financial risks and maintaining stability, and the memory of the problems caused by the previous rapid advancement of fintech is still fresh. They do not want to incubate new fintech innovations in the domestic market at the cost of local fluctuations anymore.

In the absence of both major powers, the transformation of digital financial technology can only be completed through cross-border decentralized collaboration. For example, in the Project DESFT that I personally participated in, the project was initiated by the Monetary Authority of Singapore (MAS) and the Central Bank of Ghana, with the Central Bank of Ghana providing application scenarios and experimental sandboxes, and MAS and the United Nations Development Programme (UNDP) providing core digital certificate standards UTC. The project was jointly designed and developed by Solv and zCloak Network. This is a typical decentralized collaborative innovation. And from what I know, this model is not unique, but rather a very common form in current financial technology innovation.

Why is this decentralized collaborative innovation surprisingly feasible? I believe there are four conditions:

First, there is a genuine, solid, and urgent need. This demand comes not only from more developed economies such as Singapore and Japan, but especially from developing economies. As early as June this year, when I traveled to Rwanda in Africa to attend the “Inclusive Financial Technology Forum,” I found that developing countries in Africa, Southeast Asia, and other regions have a sincere and urgent attitude towards this financial technology revolution. In my interpretation, many developing countries are very dissatisfied with the current world financial order, and have been suffering for a long time. They see this round of financial technology revolution as an opportunity for adjustment, hoping to improve the efficiency of their domestic financial systems and also occupy a more favorable position in the future international financial order through leading the way. This mentality makes them more radical and less burdened by history, and more willing to take risks in adopting advanced financial technology. Although they lack funding, they are willing to provide resources more important than funding: application scenarios. This provides a breeding ground for innovation.

Second, the large-scale diffusion of financial technology knowledge has laid a new foundation for communication. In the past few years, especially with the rise of digital currencies, blockchain, and DeFi, the relevant knowledge about monetary economics and financial technology has spread on an unprecedented scale. Before 2018, even within technical communities or digital currency communities, there were very few people who could accurately understand basic concepts such as M0, M2, fractional reserves, leverage, arbitrage, atomic settlement, KYC, and AML. However, at this SFF, people from different countries are naturally using advanced terms such as DLT, AMM, smart contracts, and tokenization to communicate. In a communication event at this conference, I explained the concept of “semi-fungible tokens” and programmable digital vouchers to an audience of over two hundred people. Not only did most of the audience nod in understanding, but immediately after the event, many people rushed to our booth to discuss the application prospects of this technology with me. It is on the basis of this widespread diffusion of knowledge that people from different countries, regions, and institutional backgrounds can establish trust and jointly promote innovation.

Third, the existence of the Crypto sandbox. The Crypto world led by Bitcoin and Ethereum ecosystems is often seen by many mainstream individuals as a speculative and murky industry. But in reality, the existence of this space provides an unparalleled and irreplaceable sandbox for innovation in the new generation of financial technology. This innovative sandbox is large in scale, highly efficient, low-friction, fast-paced, market-responsive, and has a closed loop of technology and economic logic. No government or country in the world can actively create such a high-quality innovation sandbox, but today’s financial technology innovators have it at their fingertips. Due to the presence of this sandbox, many ideas, technologies, concepts, and even products and solutions can be validated in a short period of time. There is nothing more consensual than a practical running system. In the development process of Project DESFT, we followed this approach by first creating a living, usable demonstration system on the public chain, obtaining recognition from central banks of two countries, and then further developing and supporting real-world business and innovation.

Fourth, the characteristics of the new generation of financial technology “chonky protocols” and the composable nature and super-high development efficiency brought by open-source culture. Many Web3 developers have noticed an interesting phenomenon, which is that developing systems based on the Web3 technology stack is approximately an order of magnitude more efficient than developing systems at the same level using Web2. Behind an innovative and complex DeFi protocol, there are only a dozen or even just a few core developers, which is a widely common scenario. On the one hand, this is partly because the current Web3 financial technology systems are generally still relatively simple and not complex enough. On the other hand, it is also because new generation financial technologies such as blockchain, VC/DID, zero-knowledge proofs, etc. have the characteristics of “chonky protocols”, meaning they integrate super-strong composable features and a plethora of functions at the protocol layer, making the development of application systems simple and easy. There are countless usable systems built with a few thousand or even a few hundred lines of smart contract code. This super-high development efficiency, combined with the established open-source culture, significantly reduces the cost of innovation in terms of funds and time, accelerates the iteration frequency, and greatly increases the innovation cost-effectiveness.

Because of these four reasons, I believe that this decentralized collaborative technological innovation practice, although lacking successful precedents, does have the potential to succeed. Moreover, due to innovation taking place in a decentralized manner, under different themes, different scenarios, different constraints, and different technological approaches, and then combining in a complex manner, it will undoubtedly generate a highly open and rich multiplication effect. Numerous new ideas and approaches will emerge, bearing various exotic fruits. Among them, most may be short-lived, but great innovations will definitely emerge.

Of course, from a business perspective, decentralized collaboration will inevitably consume a lot of time for communication, negotiation, and coordination. Agreements that have already been made may be repeated, and the market will be fragmented into many pieces. Therefore, progress will not be fast, and there will not be a dominant winner. This is the main disadvantage of distributed collaboration innovation.

However, sufficient successful examples will help the formation of a large market. In particular, I do not think that large unified economies like China and the United States will be excluded from this financial technology innovation in the long term. As mentioned earlier, the current attitude of both countries towards financial technology innovation is largely due to understanding issues and the current domestic situation. Over time, after adjusting the policy thinking, these two super-sized economies with huge unified domestic markets will certainly embrace this technological revolution. Among them, the United States, due to the flexibility of its institutional system, may institutionalize this ready-made innovation sandbox called “Token Safe Haven” through legislation, and incorporate crypto into its own system, thus taking advantage of being the latecomer. China, on the other hand, is relatively far from the overall direction of this financial technology revolution due to the orientation of domestic financial reform. Therefore, it is difficult to adopt a strategy similar to that of the United States, and as for what kind of strategy can be adopted, that is beyond my knowledge.

3. “Digital Sovereignty” Drives Financial Technology towards Web3

At the SFF, financial technology practitioners from various countries and regions fully demonstrate the diversity of ideas. Some firmly embrace blockchain, while others believe in enhancing the interoperability of centralized systems. Some believe that digital currencies are the solution to instant payments, while others believe that existing payment systems are very good and do not need drastic changes in the form of currency. Some believe that tokenizing real-world assets is the only way, while others see it as illusory. Different viewpoints clash, making it difficult to reach a consensus on what the future should be.

But almost everyone can reach a consensus on what should not be included: absolutely not being controlled or deprived of the financial technology’s autonomy. And without a doubt, this consensus will push the development of the entire financial technology industry towards Web3.

At the SFF venue, I had conversations with financial technology professionals from different countries and roles. When discussing their views on the future of financial technology, the vast majority of them expressed that they absolutely cannot accept a next-generation financial infrastructure that still relies on a centralized platform to host user identities, accounts, social relationships, assets, and data, just like today.

Please note that this is not a unilateral attitude. For example, although small and medium-sized enterprises have a clear standpoint on this, regulatory authorities are not vague or ambiguous. The fact is that representatives from small and medium-sized enterprises, traditional financial institutions, academia experts, and regulatory officials have all strongly expressed this view.

Why is this happening? I believe it is due to the self-destructive nature that the mainstream financial technology has generated in its success. In other words, the more successful fintech becomes in the Web2 era, the more it creates its own grave diggers.

The internet platforms of the Web2 era were largely based on centralized technological infrastructure. They claimed to provide hosting services, but in reality, they took ownership of users’ identities, accounts, social relationships, content, data, and assets. They acted as absolute dictators, controlling life and death, giving and taking away.

The essence of Web2 was for users to create content and data, with platforms merely providing the technological infrastructure. However, twenty years ago, when Web2 emerged, users only sought convenience without the concept of digital autonomy, and there weren’t many alternatives. Taking advantage of the situation, major platforms took control of key rights and solidified their position of power. They turned users’ creativity and productivity into a rich mine that they could freely exploit, continuously extracting resources and value from it, thus becoming digital economic giants.

The irony is that the more successful these centralized platforms become, the more they educate people to oppose them. Ten years ago, the idea of big data started to gain popularity, and people gradually realized that data is not just an asset but the most valuable asset. The value of Web2 companies actually lies in user data. How do Web2 companies boast about their power? Isn’t it because they have a large number of users (accounts), possess a large amount of user data, and own a significant amount of user assets? The more they promote this, the more they are telling everyone that their power comes from owning their users’ value.

This is not just a psychological feeling; it directly affects real user experiences. More and more people are now directly experiencing the powerlessness of their autonomy being infringed upon. Although they are unable to change the current situation, many harbor grievances and complaints. Every time a platform manipulates traffic, deletes posts, or bans accounts, they tarnish the reputation of Web2 and tighten the noose around their own necks.

Thanks to the relentless efforts of internet giants over the past decade in advocating the value of big data, governments and businesses now fully understand the value of data and are highly dissatisfied with the transactional structure established by centralized platforms. Ask the governments of developing countries, who would still be willing to entrust their domestic payment and financial data to foreign internet giants? Ask businesses; as long as they have some scale and awareness of data autonomy, which company would still be willing to hand over their data to centralized platforms to do as they please? Over the past year, in my interactions with government officials and small and medium-sized enterprises from various countries, I deeply felt their awakening to the demand for individual identity, autonomous data, autonomous social relationships, autonomous assets, and autonomous rights. This trend is irreversible and will undoubtedly become the consensus among all types of users within a few years.

People’s mentality has changed, their beliefs have changed, and once this change is initiated, there is no turning back. This is the key concept driving the current financial technology innovation.

The emergence of Web3 provides people with new choices. The sole keyword of Web3 is “sovereignty,” and nothing else. Its connotations include sovereign identity, sovereign accounts, sovereign social relationships, sovereign content, sovereign data, sovereign assets, and more. These are not abstract concepts, but a new set of digital economic rights and transaction structures, a new order and process that directly affect how users utilize the internet and financial technology products. Under the driving force of such a concept, financial technology innovation will inevitably embrace Web3, without any other direction. Within a few years, users will first experience the taste of Web3 digital sovereignty through some financial technology products, and even if they are whipped, they will no longer be willing to go back to the Web2 world.

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