Mark Andreessen believes the current financial system is outdated and can be replaced through new technologies like cryptocurrencies. He argues that financial transactions have become overly complex and don't require huge buildings and staff. New sources of data from online behaviors can better assess creditworthiness. Cryptocurrencies like Bitcoin can radically lower transaction fees and implement the entire financial system in a decentralized way. However, regulators are confused by these new technologies, which provides an opportunity for innovation if the solutions work.

1. Text
Re-Inventing Finance
According to Mark Andreessen
By: Tom Carlson

2. Mark Andreessen
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.

3. 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.”

4. 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.”

5. 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.”

6. 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.’’

7. 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.’’

8. 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.”

9. 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.’’

10. “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.”

11. 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.”

12. 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.”

13. 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.”