Every so often, new concepts emerge that revolutionise our society. Before long, everyone has heard of these concepts, even if they don’t know what they mean.
This has happened throughout history; axe, wheel, candle, freedom, democracy. Strange at first, they became accepted as perfectly normal and indeed, in many cases, invaluable.
One of the latest has been cryptocurrency. Now, that word may give you a pang of trepidation, but bear with me, it really is where our future lies.
Most people will have heard of cryptocurrencies, probably through its poster child Bitcoin. Though the vast majority will readily admit they have no idea what it is.
For the uninitiated, Bitcoin is simply a means of exchange that has no government standing behind it as in the case of formal currencies such as the pound, euro or dollar. It is valued upon sentiment. The stronger the sentiment, the higher the price.
I, along with many others, have witnessed the vast price inflation of Bitcoin over the past couple of years with nothing short of fascination. How could something which smacks of the emperor’s new clothes, possibly be so valuable? A lot of it is down to speculation.
However, there is an inherent and inescapable truth behind its rise in popularity, and why I raise it here: people don’t trust the old ways and are looking for new opportunities.
Recreating the bad old days
In the decade since the start of the financial crisis, we have been slowly rebuilding our financial systems brick by brick. We have used monetary policy extensively to preserve commerce, but to the detriment of many sections of society.
Quantitative easing (QE) has had a detrimental effect upon the young and old alike. Those approaching
pension age and seeking a secure income have seen the value of their savings drastically undermined. Those of working age have suffered years of wage freezes which have undermined their earnings and of course, their saving power.
Younger people under 40, the generation Y (or millennials) and generation Z, face a bleak future. Heavily saddled with debt from education, they can anticipate proportionally lower wages than much of their parents’ generation, while the housing market seems unattainable without assistance from their families.
It is the young who need to save, as by the time they realise that the power of compound interest would have been valuable to them, it will be too late. But they are not engaged about saving and it is easy to see why.
In our haste to rebuild our financial sector, we have singularly failed to apply simple best practice approaches to the new model. Despite stricter regulation, there have been regular consumer protection failures that have nothing to do with the world before the crash. Is it any wonder that people would seek an alternative, perhaps magical way to generate wealth?
Different investment strokes
Millennials may have less to invest (when not spending their money on huge coffees or avocado on toast) but when they do, they have different requirements from the previous generation.
We know that ESG (environmental, social and governance) investing is high on their agenda. They should not only know that their investment is good for their future, but will not do harm in achieving it. And while their parents’ generation still struggles with the concept of equities and bonds, these digital natives hold, and are open to, new digital investments.
Student debt and the difficulty of getting a foot on the housing ladder mean they are as hard to engage as any other group the pensions and savings industry has faced. However, while some millennials associate themselves with saving (and the data out there is somewhat mixed) they do not associate with the concept of investing.
If the industry wants to encourage millennials into saving for their futures, should the industry be looking to new and different ways to encourage engagement? Well of course we should.
The future is blockchain
It is easy to dismiss the use of cryptocurrencies within the investment sphere because they are unregulated, administration would be difficult and we don’t understand them – but we do so at our own risk.
Cryptocurrencies not only have a future, but are the future. They are powered by a technology that will dominate our societies within a few years.
That technology, blockchain, creates a digitised, decentralised, public ledger of all the transactions it processes. It makes multiple copies of a transaction and makes it very difficult for those records to be tampered with afterwards.
This is why it is being used within the ‘internet of things’ – from household appliances to electric cars and beyond – and has been investigated by all major banks and many government agencies around the world.
For instance, the US Border Patrol looked at how blockchain could provide a system to monitor its cameras along the Mexico border to check for spoofing or disruption by those trying to cross illegally. Other projects are using blockchain to reduce fraud and increase transaction speeds, up to five times the volume of some of the largest payment services companies.
The elephant in the room
Don’t worry. I’m not suggesting we start allowing pension contributions to be made by cryptocurrencies. Pricing is always going to be difficult, and administration could prove to be a nightmare. Then, there are system requirements. How do you monitor and process the data from using such payments? Without a recognised central clearing authority, it seems impossible.
And even before you get to how HMRC feels about a cryptocurrency contribution, there is the glaring obstacle of anti-money laundering regulations. How does one square that circle?
At the moment, cryptocurrencies are a non-starter as savings contributions. We can’t escape the fact that they are unregulated and admin is extremely difficult. However, there is no excuse for the industry to reject the concept simply because we don’t understand it: there is much to be learned.
We know that the novelty appeals to younger savers. We also know they have reservations about the old institutions, and perhaps rightly so.
Technology has been a major weakness in the financial service industry, with many banks and life companies struggling to maintain myriad legacy systems that are simply incapable of processing the business they conduct today.
We must not simply reject cryptocurrencies as a fad because they have no application in our business. We must look to how the blockchain technology it runs on might improve our own customers’ experience.
Whether we like it or not, cryptocurrencies are here to stay, so do we need to rethink the limits we set our savers?
We also need to rethink the limits we set on our own ability to innovate. Because if we didn’t ever ‘think the unthinkable’, we wouldn’t have developed pensions in the first place.