SBF discusses the shortcomings of modern finance: Blockchain is not a hype, cryptocurrencies will change payment and financial structures

Author: Sam Bankman-Fried

Even though more and more institutions are adopting cryptocurrencies in this bull market, the voices questioning whether cryptocurrencies and blockchain are just hype are growing louder as crypto assets plummet. FTX CEO SBF also shared his views on the potential applications of cryptocurrencies on Twitter, including payments, market structure, and social media.

FTX CEO Sam Bankman-Fried (hereinafter referred to as SBF) recently shared potential applications of cryptocurrencies on Twitter, including payments, market structure (referring to the structure of financial trading markets), and social media.

"This thread is not about investment, so I won't mention investment-related uses, like 'buying tokens might go up'; instead, I will focus on three areas: a) payments b) market structure c) social media."

Domestic and International Payments

SBF pointed out that thanks to the developed network, payment methods have shifted from cash transactions to credit cards or electronic payments, but he believes that the transaction fees for everyday payments are still too high. He cites a figure of 1%, but data indicates that the current cash flow fees for mobile payment providers in Taiwan are about 2.2-3%. Of course, providers also offer corresponding discounts, such as point rewards.

If the transaction fees for domestic payments are just a minor issue, then the difficulties of international payments are as obvious as the elephant in the room.

SBF stated that the challenges of international remittances are evident, with high fees and time-consuming processes:

"If a U.S. company wants to wire $100 million to a European company, assuming the method chosen is a wire transfer, one day later, your bank executes the transfer, and over the next week, about three banks will handle this fund. Sometimes the funds can even get stuck in a bank, requiring you to do something to unfreeze it.

Oh, and you also have to pay a 1% foreign exchange fee, plus about $50 in wire transfer fees."

Wire transfers typically also require payment of "foreign exchange fees" (FX fees) and "wire transfer fees."

International remittances involve currency conversion, and foreign exchange fees are additional charges that customers incur when purchasing currencies other than the U.S. dollar through foreign banks, usually ranging from 1% to 3% of the transaction amount.

Wire transfer fees are the charges for the transfer itself.

In addition to the fees, the current clearing systems are not real-time.

SBF noted that interbank transfer systems and credit card transaction clearances can take from one day to as long as a month; for example, when a company issues payroll, employees may receive it four days later; a tenant's check may take weeks for the landlord to cash.

"The purpose of these examples is to illustrate: payments are difficult. There are many reasons for this outcome, but they all revolve around one core question: what does it mean to remit to someone? What does 'settlement' represent?"

Both domestic and international payments face many issues, whereas using cryptocurrencies for payments significantly reduces transaction fees and time costs. SBF conducted an experiment on the Solana network, creating two addresses and transferring $50, with the cryptocurrency transaction fee being only $0.0002.

"Blockchain allows anyone to create a wallet to send or receive tokens, including stablecoins. The settlement time for these payments takes only a few seconds, with fees of less than a dime. No long waits, no uncertainty about account balance settlements."

Of course, this does not mean that applying blockchain technology to modern electronic payments resolves all issues; it merely highlights the potential of blockchain technology in everyday payments.

On-chain data for this transaction

Changing the Structure of Financial Product Trading

Another application of blockchain is "changing market structure."

SBF refers to changing the way traditional brokers operate through blockchain clearing and "tokenization of securities," simplifying the trading process rather than building layers upon layers.

Currently, the process for retail investors to purchase stocks is quite complex.

First, retail investors place orders through brokers or platforms like Robinhood. These orders are not sent directly to the exchange but are sent to PFOF companies ¹ (Payment for Order Flow), such as Citadel or Virtu.

Some of these PFOF companies may then place orders through ATS ² (Alternative Trading Systems), and then the ATS exchanges will send the orders to another PFOF company. However, all these orders ultimately end up being placed at the stock exchange, and then they settle through DTCC (Depository Trust & Clearing Corporation) two days later.

[Note*1]: Payment for Order Flow is compensation received by stock brokers from market makers in exchange for sending their clients' trades to those market makers' brokers.

[Note*2]: ATS can trade listed stocks like an exchange but does not bear regulatory responsibilities.

Assuming the customer successfully purchases the stock, the flow of the stock from the exchange to the broker/platform involves the following process:

NASDAQ → Clearing Company of PFOF#2 (DTCC) → ATS → DTCC of PFOF#1 → DTCC of the broker.

Thus, to purchase one share of AAPL, about 11 different entities will have around 10 mutual settlements over the next few days. Theoretically, each of these settlements has the potential to fail.

The most obvious example is the short squeeze triggered by GME last January.

"On January 28, 2021, most securities brokers shut down. Users could not buy and sometimes could not sell stocks. Even on some platforms, some users who clearly had no leverage were also liquidated.

This was not because the stock was 'out of stock' or for any other reason; it was simply due to a system crash."

At that time, short-selling institutions heavily shorted GameStop stock (GME), and retail investors took advantage of this opportunity to buy large amounts of spot and options, triggering a short squeeze that caused losses for institutions. Multiple securities brokerage firms urgently suspended trading of that stock.

"On January 28, 2021, retail trading volume was very high, indicating that dozens of counterparties needed days to complete billions in settlements. As GME's stock price rose, if settlements failed, potential losses would also increase.

Ultimately, this risk was too great for brokers, so they had to shut down some trading pairs."

So how can cryptocurrencies solve these problems?

SBF stated that at the FTX exchange, everyone can send orders directly to the exchange, so if securities are tokenized, the purchase cost and time for stock delivery would be almost zero.

"Assuming we tokenize securities, stock trading would not need to wait two days for settlement; it would only require swapping APL tokens and USD tokens on the blockchain. Note that the entire process takes about 10 seconds, with fees around $0.002, eliminating settlement uncertainty and risk."

Applications in Social Media

SBF believes that the biggest problem with current social media is "lack of interoperability."

In simple terms, if you post on Twitter, your friends on Facebook cannot see that post. In the past, this isolated model was viable because different groups had different social circles, but entering the Web3 era has made the lack of integration between social platforms a significant issue.

"Social media networks are isolated and lack interoperability. This means everyone has to manage 10 different social apps simultaneously, which fragments our conversations with others."

Additionally, current social networks also have "pseudo-monopolies," where social media giants can use massive network effects to crush competitors, and another issue is censorship.

SBF pointed out that if we publish articles/posts on the blockchain, assuming it's Blockchain Twitter (BT), then when you post on BT, friends using Blockchain Facebook (BF) can also see that message because BF can automatically integrate blockchain data.

"By transmitting messages through the underlying public chain (meaning posting), we can integrate different social networks. You can use any single platform but still communicate with friends on other platforms. Moreover, you own these messages and networks, and if needed, you can port data from Platform A to Platform B."

This also has another benefit: achieving true competition. Because switching platforms is almost painless, it encourages competition between platforms, including the establishment of censorship mechanisms.

SBF stated that the potential applications he sees are focused on payments, market structure, and social media, but this does not mean that blockchain applications are limited to these areas. He believes there are many innovative fields, including DeFi and Web3 gaming.

Finally, he believes that although there are many potential applications and some impacts have begun to emerge, these fields have not yet seen a true crypto revolution, so the real question is how to make it happen:

"Taking a step back, how many fields have seen a crypto revolution so far? I think the answer is 'none yet.'

Although crypto technology has begun to have an impact, it is not comprehensive enough, so the real question is: how do we move from having some impact to truly large-scale applications?"

1) To what end?

Some potential use-cases for crypto.

--- SBF (@SBF_FTX)July 16, 2022