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Re-Inventing FinanceAccording to Mark Andreessen

By: Tom Carlson

Co-founder of the $4.2 billion venture capital

firm Andreessen Horowitz, takes a detailed

and focused look at how the finance industry

can change. With all the reasons listed below

and his track record of working with

Facebook, Twitter, and Airbnb, its hard not to

look and be convinced.

In this detailed interview Andreessen had

with Bloomberg’s Markets magazine,

professionals, financial institutions, and

everyone else can gain an inside look into

how the current and past financial systems

should be replaced with new and less

clustered methods.

Mark Andreessen

The Old Systems

Andreessen said “we have a chance to rebuild the system. Financial

transactions are just numbers; it’s just information. You shouldn’t need

100,000 people and prime Manhattan real estate and giant data

centers full of mainframe computers from the 1970s to give you the

ability to do an online payment.”

‘‘You would not today, starting from scratch, invent any of these

financial businesses in the same way. To me, it’s all about unbundling

the banks. There are regulatory arbitrage opportunities every step of

the way. If the regulators are going to regulate banks, then you’ll have

nonbank entities that spring up to do the things that banks can’t do.

Bank regulation tends to backfire, and of late that means consumer

lending is getting unbundled.”

The New Systems“We’re not going to go backward. When people start doing things a

better way, it kind of doesn’t matter what the old way was. You can find

people who will say that this is all just an arbitrage on the current

trouble in the financial system, and I’m sure the big traditional banks

will fight back and try to get things outlawed.”

‘‘But think about the scenario of a loan officer talking to a prospective

client. To software people, that looks like voodoo. The idea that you

can sit across the table from somebody and get a read on their

character is just nonsense.”

‘‘Lots of industries are changing in a similar way. There’s been a

qualitative approach, and now, there’s a quantitative approach.

Everybody who grew up in the qualitative approach hates the

quantitative approach and considers it a giant threat.”

Big Data

“There is a growing idea in Silicon Valley that there are sources

of data on consumer behavior we can use to predict

creditworthiness. These will be completely different than the

traditional approach to credit ratings, which are tremendously

imprecise and ‘laggy.’ PayPal can do a real-time credit score in

milliseconds, based on your EBay purchase history -- and it

turns out that’s a better source of information than the stuff used

to generate your FICO score.”

Big Data Cont.

‘‘The hypothesis is that there are many other similar sources of

consumer data: credit card bills, social-network behavior, potentially

even search history. Lots of people, both in the big Internet companies

and at startups, are trying to get at these large pools of data and figure

out new ways to do scoring. What they all have in common is that they

are all being done outside of banks.”

‘‘The minute any of these new credit vehicles can show any level of

repeatability and reliability, the hedge funds come in and provide the

funding. Hedge funds are very comfortable with analytic models. If you

have sufficient stability, you can get leverage.’’

Crypto-Currencies‘‘The startups chasing disruptive technology aren’t working within the

existing system. This is the cryptocurrency phenomenon. If it works, we

can re-implement the entire financial system as a distributed system as

opposed to a centralized system. We can reinvent the entire thing.”

‘‘Bitcoin is clearly in this category. With bitcoin, there are advantages to

decentralizing the financial system in order to do commerce. For

instance, you can make payments in all but four countries. So, on day

one, you can use it all over the world. Forget about all the different

currencies and banking systems; it’s a truly universal way to transfer

value.”

‘‘That also means we have the chance to radically lower fees. Most

consumer transactions are weighted with a 3 percent fee; remittances

run up to 10 percent, which I think is a moral crime. There’s a big

opportunity to take those fees out.’’

Confused Regulators

‘‘Bitcoin is like technology that’s arrived from Mars, and so

regulators don’t know what to do with it. That’s a good thing. What a

lot of financial technology entrepreneurs will tell you is that if you’re

going to innovate in financial services, you want to do something so

new and so different that the existing regulatory system doesn’t

know how to react to you. That is your window of opportunity.”

‘‘The problem with building a new product or service in the existing

financial industry is that tens of thousands of pages of legislation

and thousands of lobbyists are going to come down on you very

quickly.”

Confused Regulators Cont.

‘‘We needed a new technology to have the wedge to be able to

enter the market, to be able to justify all the work to rebuild the

system. With bitcoin, we now think we have that wedge.”

‘‘Bitcoin is a classic venture capital endeavor: It will either work or it

won’t. And if it doesn’t work, we will lose all our money. But if it

does work, it will work in a spectacular way. Our investments will

pay off 1,000 to 1 or 10,000 to 1 or some other crazy extreme,

because these markets are so big.’’

“This Is for Real”

‘‘There are serious conversations going on at every single large

financial institution. They’re all trying to figure it out. The technology

folks who work for the banks are very smart, and the trading floors

have split between ‘This is for real’ and ‘This is a joke.’ Yet people

are leaving those institutions to start bitcoin companies. We’re

seeing hundreds of bitcoin entrepreneurs. Some of them are brand

new to financial services. They don’t know what they’re in for, but

they’re excited.”

Volatility Will Vanish

“Bitcoin had a chicken-and-egg problem. Speculation was the way to get the

thing established. The speculators are doing us all a favor by valuing it at $500

or $600 or $800 because otherwise it would be valued at zero. Now, you can

actually do things with it. With scale and time, the volatility will vanish. The

designer of the system, I think, would say that the system is working perfectly.”

‘‘If you’re used to living in a world where you trust people and institutions, then

it probably does seem weird and bizarre that you would trust something where

you don’t know who created it. But if you’re in a world where you trust numbers

and math and code, it doesn’t matter. There is no appeal to authority. You

evaluate it on the basis of the math. It’s just math; it’s completely open. None

of us thinks we need to know who created it.”

Volatility Will Vanish Pt. II

‘‘As for security concerns, bitcoin is designed to work properly in an

untrusted, networked environment. Take Target. As a consumer, there

is nothing you could do about Target. Target blew it; their systems

stunk.”

‘‘In a bitcoin world, things like the Target hack are not possible. The

way a digital currency works is that it lines up the incentives to protect

yourself with the consequences of failing to protect yourself. Bitcoin is

a digital-bearer instrument: If you have the numbers on the coins, you

own the coins. You can make payments without having to give any

information about yourself, and everyone can double-check their

transactions. If someone hacked into Target, they would be able to

steal all of Target’s money -- but they wouldn’t be able to steal your

money.”

Volatility Will Vanish Pt. III

‘‘For five years, many of the world’s best mathematicians and

computer scientists have been studying bitcoin and trying to figure

out what’s wrong with it. They haven’t found anything yet. Every

critique people have of bitcoin, so far, can either be answered with

‘the designer anticipated it and has a solution built into the system’

or ‘there’s a service that can be built on top to address the

problem.’ That’s the magic of why everyone out here is so excited

about it.”