Blockchain, if used to its potential, allows communities and innovators to create economic games that no one controls or commands through incentive design that rewards good actions. In financial services, that can allow decentralized networks to create protocols or tools to enable low-cost, low-overhead loans, settlement, peer-to-peer payments and even alternatives to debt or equity financing. For consumers, that can lead to more competitive prices on any number of financial products, and possession of new kinds of assets that can grow in value or, even more powerfully, lower future costs. Network effects no longer benefit only the centralized company that creates a network, but those who build the network’s value.
In early August, Arizona launched a regulatory sandbox for FinTech and blockchain companies — the first in the country. The sandbox lowers to barriers to entry for innovative products and services to be offered to customers. There’s no substitute for iterative design of any application. This is something Silicon Valley understands well, and the power of co-design with early users is part of why American technology companies are the envy of the world. Unlike in most technology spaces, however, the financial technology environment is not well-suited to iterative testing with alpha and beta customers.
The patchwork of state and federal regulations, with their heavy bias toward large capital reserves, established business models and well-known institutions that can shape regulations to limit competition, make it difficult for upstarts to begin operations, receive licenses, test products and scale to new markets. The sandbox, and others like it (Arizona›s sandbox has a reciprocity provision with other similar sandbox initiatives), could allow startups to test consumer-friendly products under the oversight of regulators, without a massive initial investment in licensing applications and bank-grade compliance budgets. Allowing more companies to start testing new products and services could lower the cost of financial services to consumers, while protecting them in case of failure. Most importantly, sandboxes rethink the regulatory paradigm to favor innovation, especially for companies with new business models or non-traditional company structures.
When we, at Sweetbridge, put together our first sandbox application for a decentralized, vehicle title self-collateralization software product — that allows loans without physical buildings, credit checks, bank approvals or profit motives — we were able to bring a dozen people into a room and ask, “If you could design a loan product from scratch, how would you as a consumer design one to work for your needs?” We were able to put legacy business models to the side, and think about the best possible product at the most affordable rate.
This kind of user-focused, iterative, mission-driven product design is difficult for legacy licensed financial institutions to justify or execute, and their responsibilities to their shareholders make it legally tricky to start from the assumptions and vision we started from. What if nonprofit financial institutions decided to build the most affordable and responsive consumer financial products they could, and had the space and low cost needed to experiment with these models? What if, for example, we designed loans that allow customers to lower their interest rates over time through responsible actions, social vouching from identified friends and family, demonstrated financial need or ownership of a loyalty or rewards token? How different could the financial services world look in 10 years?
Arizona is wisely positioning itself as a leader in an emerging digital economy. There is a growing ecosystem of tech projects and talent in Phoenix, and the Valley could emerge as a strong alternative to coastal tech hubs because of its low cost of living and growing university graduate pool. These developments help keep talent in Arizona, and draw great companies to build here.
Will Munsil is strategy architect with Sweetbridge, a Phoenix-based blockchain and cryptocurrency startup.