Book Review: From Hoodies to Suits: Innovating digital assets for traditional finance

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Annelise Osborne

John Wiley & Sons, June 2024, 272 pages.

There is a big idea at the heart of this book. It is to marry the fearless inventiveness of young developers and entrepreneurs (the constructors of DeFi, or “Hoodies”) with the ingrained compliance mentality and long business experience of the old (the denizens of TradFi, or “Suits”). This is a better idea than the deracinated, peer-to-peer financial system that emerged from the Cypherpunk mind of the mysterious Satoshi Nakamoto, since it promises not to circumvent an untrustworthy establishment but to institutionalise innovation at scale.

Annelise Osborne argues that neither the Hoodies nor the Suits can achieve this unaided. “The Hoodies had the foresight, know-how, and community-thinking to build the next iteration of finance,” she writes. “The Suits couldn’t have pulled that off. Innovation is difficult to develop within a large institution with institutional and status quo thinking.” But the Suits can now build on 15 years of experimentation by the Hoodies. “The Suits can take what the Hoodies built and make it more efficient and useable in the regulated financial markets,” says Osborne. “Traditional finance is not disappearing. It’s being upgraded.”

On this view, even the disasters perpetrated by Hoodies, such as the implosion of the Terra/LUNA algorithmic Stablecoin pairing or the collapse of the FTX cryptocurrency exchange, can be seen as useful learnings. After all, neither SBF nor Kwon Do-Hyung had Suits in the room to restrain them. “The Suits could have mitigated so many of crypto’s early mistakes,” writes Osborne. By this she means better standards of corporate governance, regular audits, investment in cyber-security, risk management processes and (yes) regulation.

An uncomfortable implication is that an US$8 billion fraud (FTX) and a US$50 billion loss (Terra/LUNA) can still provide useful (if expensive) experience. That is true but likely to prove too sanguine for some readers. It also risks underplaying the damage that cryptocurrency crime – which totalled US$113.5 billion between 2018 and end-2023, according to Chainalysis - does to the case for tokenisation of assets. But, as Osborne rightly counters, if the United Nations estimate that 2-5 per cent of global GDP is laundered, cryptocurrency might be just 0.002 per cent of a US$5 trillion problem.

She could go further. Anyone who argues that even legitimate cryptocurrency activity is a clear case of insiders ripping off outsiders will struggle to explain how this outcome differs from traditional finance. Such ironies are not lost on the author. The retail investors exploited by professional cryptocurrency traders buy cryptocurrencies because they do not trust traditional finance. With FTX, a technology that arose in opposition to the moral decay exposed by Bernie Madoff and the 2007-08 financial crisis, experienced its own Lehman Brothers Moment.

In fact, From Hoodies to Suits moves beyond mere ironies. It depicts an Hegelian dialectic in which the establishment is not only going to rescue an anti-establishment innovation from itself but imbibe the anti-establishment innovation so completely that it will reinvent establishment finance. “Bitcoin’s root philosophy was to displace the banks, but its blockchain technology has provided banks with an efficient new rail for payment, trading, back office, and transactions, allowing lower costs, increased speed, and transparency,” writes Osborne. “It was a framework designed to disrupt Wall Street, but it will actually become the basis of the next generation of Wall Street and capital markets.”

The House that Crypto Built is still standing, and the Suits can give it the upgrade investors deserve.

- Annelise Osborne

But will it? To get to that synthesis, the text has to convince TradFi not DeFi, and Osborne endeavours to do that by pummelling the sceptical reader with overwhelming evidence of advance on every front - Stablecoins, blockchain protocols, dApps, digital wallets, cryptocurrency exchanges, real-world asset tokens, fund tokens, security tokens, smart contracts, interoperability, asset managers engaging, NFTs, the Metaverse and so on - despite reporting an equally wide array of setbacks, Proof of Concept and Pilot Test dead-ends, heists and scams and even the failure of three leading cryptocurrency banks.

“There’s money to be made and new ways to make it,” predicts Osborne. “Scoff at the Hoodies if that feels good, but they have unleashed technologies that have brought change to finance. Now’s the time to decide if you’re going to embrace change or fight it and miss out.” The incentives to act are the reassuringly familiar pair of fear (“Technological advances are inevitable … and good ideas have a way of coming to fruition with or without you”) and greed (“For those brave first movers, there could be trillions of dollars of value to unlock”). Multiple polls record that the leaders of regulated financial institutions agree they face both a mortal threat and a once-in-a-career opportunity. Yet few feel any compunction to act.

The data shows that only a handful of banks and asset managers are committed at all. In the end, even their decision will reduce to a conviction that tokenised assets offer increased sales revenue or lower costs from automation by smart contracts (“the real winner” says Osborne). For now, both gains and savings remain maddeningly theoretical for every established firm save J.P. Morgan, which claims to have saved itself US$20 million a year by using blockchain to automate aspects of securities financing and collateral management. As Osborne admits, financial institutions running COBOL systems, and under pressure to deliver quarterly increases in earnings, are otherwise struggling to build what they call “the business case” for investing in blockchain.

What will unblock the current stasis, argues Osborne, is the generational transition. Blockchain disappears from the text as she explores the socioeconomic changes, shifting cultural attitudes and altered psychological propensities that will accompany the displacement of the Boomers by the Millennials and Zoomers. The coming generations will spurn 401(k)s backed by mutual funds in favour of tokenised asset portfolios selected by social media influencers using ESG criteria. The assets will be moved instantly into digital wallets using digital money, as in a computer game. Indeed, according to Osborne, the GameStop short squeeze of 2021 is a sign that technology is already altering the balance of market power.

In the long term, Osborne believes that “people will no longer talk about blockchain but will instead recognise and use the increased efficiency and opportunity found in systems, process, securities, investments, and money.” It is hard to disagree. But in the short term, the technology actually matters. And what matters about blockchain is not that it is “technically a large, shared database,” or that a token issued on to a blockchain is “a digital representation of ownership rights or asset value,” or that a digital wallet “represents an account on the blockchain,” but that it is none of these things. It is something entirely new.

Blockchain is not a database and nor are tokens digital representations or digital wallets accounts. Tokens issued on to blockchains are something entirely new.

Yielding to the temptation to understand and explain blockchain and its digital asset progeny by analogy with existing systems obscures this newness, by emphasising the continuities. Analogical reasoning reduces blockchain to yet another expression of capitalism as ever-more efficient solutions to the problem of efficiency. The novelties of a virtual computer, and of digital objects, and their ability to simulate anything that exists, are lost. If the revolutionary power of blockchain technology was better understood, the excitement about tokenisation would be commensurately greater. Perhaps Annelise Osborne can bring the enormous energy and enthusiasm that burn on every page of this book to bear on that challenge too.

There’s money to be made and new ways to make it. Scoff at the Hoodies if that feels good, but they have unleashed technologies that have brought change to finance. Now’s the time to decide if you’re going to embrace change or fight it and miss out.

- Annelise Osborne

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