TradFi Isn't Going Anywhere, But Embracing Emerging Tech Can Keep It Relevant

By Arnaud Castillo, CEO and Co-Founder of CrunchDAO

Almost half of all finance apps take advantage of Web3 and emerging technology. This is staggering evidence that a quiet revolution is in motion. The status quo, long been called into question, is now increasingly reduced to the moniker Traditional Finance (TradFi). The one common ground both sides of the table can agree on is that the conventional financial system is flawed. Despite events of recent weeks, namely the downfall of the pinnacles of finance — from Silicon Valley Bank to Credit Suisse — TradFi is here to stay. For those in TradFi that see Web3 and emerging tech as a threat, it remains a distant one. Brick-and-mortar banking may be on the decline yet for those who prefer online/mobile banking, 79.9% still visited a branch in 2019. Digital banking hasn’t negated the need for physical banking, so it would be remiss to claim that the emergence of nascent technologies will eliminate the entire financial system as we know it. But change is on the horizon; how will Web3 and AI revolutionize traditional finance? 

A Quiet Revolution

Traditional financial services have a stronghold but are also inherently exclusionary. Last year, the Financial Times reported that more than 7 million people were at risk of financial exclusion in the UK. In the U.S., around 5% are unbanked, meaning they don’t have a bank account, because they do not meet the threshold for minimum balance requirements. The large amounts of capital needed to navigate the traditional financial landscape often pigeonhole the individual as a solitary user who is limited by the sufficient or insufficient funds available to them. 

The facets of Web3 present new opportunities for inclusivity and accessibility in modern finance, offering promise for a more equitable system in today’s society. Unlike traditional finance, regularly critiqued for its lack of transparency and costly fees, Web3 is characterized by a unique experience called decentralization. In practice, decentralization is designed to create an enhanced democracy. Web3 technologies, including blockchain, smart contracts, and decentralized finance, are often technically misunderstood and heavily critiqued during periods of market turmoil, but, away from the hype, they offer real promise to revolutionize the traditional financial sphere. 

Enabling Accessible Finance 

Web3 allows anyone to collectively share, own, and reach agreements in new, transparent, and accountable ways. Unlike TradFi, users are not constrained by centralized authorities and traditional financial institutions. Users have complete control and oversight of their own finances. Web3 technologies allow retail investors to coordinate and leverage their power as a collective to make meaningful moves in financial spaces. Removing opacity and intermediation for intermediation’s sake has the potential to massively enhance monitoring for businesses, organizations, and individuals worldwide. 

However, Web3 technologies are still in their infancy and not without their challenges. A lack of regulation continues to plague the industry. This is in stark contrast to the traditional financial industry that heavily upholds and reinforces regulatory oversight in an effort to maintain its dominance and stave off alternatives. The volatility of the crypto market can also dampen the spirits of those curious about making the move to Web3. A recent article by McKinsey cites that “regulatory oversight, user experience, and the underlying technology will all need to further mature for mainstream adoption to occur”. While such concerns are undoubtedly valid, they are also fixable. 

Introducing AI, Machine Learning, and Crowdsourcing 

While Web3 has been the buzzword in recent years, the introduction and surge of public interest in Artificial Intelligence (AI) and machine learning is gathering pace. Since the launch of AI platforms such as ChatGPT and Stable Diffusion toward the end of 2022, generative AI has been hotly debated. According toDeloitte’s ‘State of AI in the Enterprise report, 94% of business leaders say that the technology is critical to success over the next five years and has the potential to transform financial services from fraud detection and customer relationship management to credit risk management.

In almost half (48%) of organizations, AI is already in production or part of the DNA of the business. Although still realizing its potential, it has the power to change the entire financial system and beyond. In a similar vein, crowdsourcing is an untapped solution that also has the ability to triumph over the majority of industry-wide problems. 

For example, AI in Finance often requires specific expertise especially when trying to predict the stock market. Indeed financial markets are far noisier and unpredictable, making them challenging for machine learning algorithms to navigate. It is now proven that crowdsourcing combined with machine learning models from thousands of Data scientists can lead to a more accurate outcome than one individual data scientist.

Looking Forward

Financial markets are complex, and the frontiers of machine learning research have a long way to go in developing tools to navigate them. Against this backdrop, crowdsourcing is a beneficial way of predicting the stock market as it can leverage collective intelligence, also known as utilizing the wisdom of the crowds. 

By incorporating crowdsourcing as a tool in traditional finance, we find a unique source of information. Crowdsourcing reveals the reasoning behind market predictions and aids individuals and investors in the industry. 

Undoubtedly, traditional finance isn’t going anywhere as it is thoroughly ingrained in the depths of society but, as more people turn to the internet to manage their finances, could the convergence of TradFi and crowdsourcing be the best solution for all? Is it time for TradFi to use some of the Web3 toolbox in order to stay relevant?