Sally Harper neared the front of the line to pay for her almond milk decaf latte, she didn’t reach for her purse or her handbag — they were still locked away in her office drawer.
She didn’t reach into her Lululemon yoga pants for some bills (that would defy the laws of physics) to pay either. Instead, she nonchalantly tapped her smart watch against the NFC (near field communications) reader at the checkout to pay the US$4.69 (inclusive of taxes) for her coffee.
Just over a decade ago, this everyday scene at a coffeeshop in downtown Ann Arbor, Michigan would have had more in common with an episode of The Jetsons than it would have had with reality.
As technology has advanced, the concept of money as well as the transfer of value has advanced with it, as has the blurring of lines between financial and technological institutions.
Which is why it was only really a matter of time before technology giant Apple issued a credit card.
Banking on Tech
With over US$1 trillion in market value, Apple has more cash on hand than most countries and more global reach than most banks, so, as the theory goes, why shouldn’t it act more like one?
As far back as 2013, activist investor Carl Icahn, who dumped Apple stock a few years ago, citing growth concerns in the Chinese market, suggested as much — that Apple should be a bank.
And the answer it seems is, “Why not?”
Teaming up with Goldman Sachs, Apple will soon be issuing a credit card.
But if you think this will just be another piece of plastic with a magnetic stripe, think again.
Apple has long been coy about its views towards blockchain technology as well as cryptocurrencies.
But an arcane filing with the U.S. Securities and Exchange Commission (SEC) suggests that Apple’s involvement with blockchain technology may be more intimate than it would have us believe.
In an arcane document filed with the SEC, Apple mentions its involvement in drafting “Blockchain Guidelines” for the Responsible Business Alliance’s Responsible Minerals Initiative.
The same way that the rules of computing, the internet and the world wide web were wrought, Apple it seems, also wants to be part of the process which guides the development and growth of blockchain technology.
Contrary to popular belief, many of the conventions in the digital realm are worked on by consensus of interest groups, many of which are non-profit, for the betterment of mankind.
From ASCII to what gets approved as an emoji on your phone, consensus and compromise in the digital sphere is often times far more effective than at the United Nations.
According to a Responsible Business Alliance press release, those “voluntary guidelines” were published in mid-December last year and “represent a first industry effort to define a common set of principles, attributes and definitions for the application of blockchain technology to support mineral supply chain due diligence.”
And while the press release makes no mention of Apple’s involvement, the tech giant is listed as a “Company Member” on the effort’s official web page.
It would come as no surprise if Apple’s credit card were blockchain-based or used digital currencies for transaction, which is probably where Goldman Sachs comes in.
Recently, JPMorgan Chase, run by longtime Bitcoin-skeptic Jamie Dimon announced the launch of its own cryptocurrency, “creatively” named “JPM Coin,” for institutional client settlements. The JPM Coin is pegged to the dollar and intended to expedite transactions and settlements between institutional investors.
It wouldn’t be a big leap for Goldman Sachs, which has backed cryptocurrency startups like Bitgo as well as Circle, to launch its own dollar-denominated cryptocurrency for use throughout all of Apple’s devices.
But the broader trend towards corporate financialization and its mashup with technology may have the effect of greater centralization, where instead of government states, commercial entities wield sway over global economies with influence far in excess of any government.
In China, technology companies like Tencent’s WeChat Pay and Alibaba’s Alipay have dominated the electronic payment landscape to such a degree that Beijing has been forced to intervene to curtail some of their influence.
Beijing’s central bank is also experimenting with the idea of issuing its own sovereign digital currency.
Sauce for The Goose & The Gander
Alarmingly financialization is a trend that’s not confined strictly to technology companies either.
There is a growing body of academic research which demonstrates that the share of revenues coming from financial, relative to non-financial activities in U.S. companies started to climb in the 1970s and increased sharply from the 1980s onward, during the Reagan administration’s deregulation binge.
And financialization of the economy has also gained outsized dominance and political clout, with the financial industry lobby hiring an estimated five lobbyists for every member of Congress on Capitol Hill.
The multi-year explosion in share buybacks, which increase the earnings per share by reducing the number of outstanding shares is another example of financialization.
And while investors like Warren Buffett argue that share buybacks are a welcome use of spare cash, he would be expected to say that, considering that he owns substantial shares in many listed companies.
And although a case for share buybacks could arguably be made at the very start of a credit cycle, the global economy appears to be at the tail end of the credit cycle, which will increase the systemic financial risks associated with such financialization.
Most companies buying back their own shares are not doing so because they’re expressing confidence in their future, but as a way to boost share price — something which many top executives have their remuneration tied to.
Low Interest Rates are The Financial Markets Opioid Crisis
And the Federal Reserve’s decision to reign in interest rate hikes in January means that the share buyback gravy train is likely to stretch that much longer into the future.
Because lower rates make it cheaper to borrow money to buyback shares and the returns from a share price increase far outweigh the cost of funds, companies will continue to milk this source of free money until the music stops.
The fact that the Fed was even forced to U-turn its decision to allow interest rates to rise is another symptom of financialization.
The mere hint of tightening credit markets sent stock markets into a near tailspin and eager not to be the Fed chairman blamed for sparking a financial crisis, Federal Reserve Chairman and Trump-appointee Jerome Powell quickly reversed course on rates.
Easy credit has become the opioid epidemic of the financial markets and one which there doesn’t seem to be a rehab clinic that the markets can check in to.
Low interest rates have papered over the gamut of political and economic problems that the world is struggling with not just since the last financial crisis, but for several decades stretching as far back as to the time when the dollar was first taken off the gold standard.
With the total value of derivatives and other financial instruments many times the size of the global economy, it’s hard to say what the endgame will be.
Already, the size of the corporate bond market, at US$13 trillion, is approximately double what it was at the start of the 2008 financial crisis.
And while some will argue that debt is the lifeblood of finance, it is also the biggest precursor and ingredient for future financial crises.
The OECD, a club of mostly rich nations recently warned about the record amount of debt in the corporate bond market and not just any type of debt, but the massive expansion of the lowest possible quality of debt.
Last year alone, over half of investment-grade bonds that were issued were of the lowest possible quality.
Some of that has to do with tighter and stricter ratings by ratings agencies, stung from their experience during the financial crisis, where even toxic assets were given high investment grades.
But not all of the low quality debt issued last year can be ascribed to that reason alone.
According to the OECD,
“The amount of corporate bond investments that may be expected to default in the case of an economic downturn may be considerably larger than that experienced in the financial crisis.”
A Crack in the Dam
And there are already signs that everything is not hunky dory.
Capital intensive and debt-laden industries such as energy are already experiencing strain. Thanks to stubbornly low energy prices, higher levels of default are already starting to show in the embattled energy industry.
It will be hard to predict which will be the next domino to fall.
With global financial markets demonstrably intertwined, financialization has both increased and centralized risks rather than diminish it.
Against this backdrop, moves to increase access to financial markets through the tokenization of assets, in particular shares through security tokens as well as asset-backed tokens will only increase financialization further by putting more financial instruments in the hands of more investors and speculators.
With interest rates (for now) showing no sign of rise, value will become an increasingly subjective and debated topic.
Will gold retain its value? What about Bitcoin?
When every other counterparty is up to their eyeballs in debt, what can you realistically depend on?
But perhaps the concept of value and the transfer of value is something which technology companies such as Apple and financial institutions such as JPMorgan have already considered.
An increasingly financialized world lends itself well to tokenization and centralization.
One of the side effects of blockchain technology is just like a gun, it is agnostic to its use. Both good guys and bad guys can be standing ready to pull the trigger.
And far from the decentralized utopia envisaged by the cryptocurrency revolution, the current centralized financial powers will no doubt be seeking to entrench their role at the confluence of financialization and global power than ever before.
Far from being a tool of decentralization, blockchain technology could be exploited by dominant tech companies with their walled gardens, centralizing power even more so than financial institutions.
To that end, while blockchain technology can assist in decentralization, its combination with growing financialization may actually entrench greater centralization, creating even greater systemic risks.
Patrick is an innovative entrepreneur and a lawyer passionate about cryptocurrencies and the business world. He is the CEO of Novum Global Technologies, a cryptocurrency quantitative trading firm. He understands the business concerns of founders and business people helping them to utilise the legal framework to structure their companies to take advantage of emerging technologies such as the blockchain in order to reach greater heights. His passion for travel, marketing and brand building has led him across careers and continents. He read law at the National University of Singapore and graduated with Honors in the Upper Division and joined one of Singapore’s top law firms, Allen & Gledhill where he was called to the Singapore Bar as an Advocate & Solicitor in 2005. He created Purer Skin, a skincare and inner beauty company which melds the traditional wisdom of ancient Asian ingredients such as Bird's Nest with modern technology. In 2010, his partner and himself successfully raised $589,000 from the National Research Foundation of Singapore under the Prime Minister’s Office. He has played a key role in the growth of Purer Skin from 11 retail points in Singapore to over 755 retail points in Singapore and 2 overseas in less than a year. He taught himself graphic design, coding, website design and video editing to create the Purer Skin brand and finished his training at a leading Digital Media Company.
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