Money20/20: Is a new wave of fintech innovation coming soon?

AI, Blockchain could unleash a new wave of Fintechs

Khosla said the ongoing maturity of technologies such as blockchain and artificial intelligence is likely to empower a new generation of fintech giants.

“As these things come together, I think we’ll see another big wave of innovation in the next five years,” he said. “My general view is that what the internet was for media, commerce and so many industries, we will see it in fintech for banking, law, software contracts and accounting. And that kind of massive wave is possible if you do a few things right.”

Still, the things that need to be done right include removing some “massive blockers” to innovation. The first of these is the state of the cryptocurrency world, which to date has been too focused on financial speculation and too prone to abuse and crime to be considered trustworthy by major financial institutions that can provide long-term capital.

“We need to get rid of the abuses, like ‘pump and dump’ schemes where someone just pumps up tokens and then sells them, with no intention of holding them,” he said. “If these abuses are stopped, we will be in a world where long-term businesses can and will be built. Suddenly, much larger businesses become possible.”

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Is a global digital passport on the horizon?

Banks and fintechs are required to verify the identity of every potential customer with whom they do business, a mandate known as “know your customer” or KYC. Cryptocurrency has been used as a way to process large financial transactions while keeping the identity of those transacting secret.

“Without KYC and trusted identity, we cannot have regulatory compliance,” Khosla said. “You worry about drug trafficking, money laundering, human trafficking – pick your favorite illegal activity. We need to get rid of that. When we do, you can and will start building real, sustainable businesses.”

But meeting KYC requirements only gets the fintech industry so far. To unleash the next wave of innovation, a global framework for trusted identity authentication must be built, one that respects individual privacy while meeting international regulatory requirements. Khosla said it would be an international framework to provide “indelible proof of personhood, wherever someone is in the world,” he said — a kind of digital passport.

He envisions it being built on transparent, open source technology that can be offered to any country in the world willing to accept it.

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“You need a digital identity for everyone. It must have both anonymous and recognizable KYC features, but not all features should be available to everyone in the world to see what individuals are doing, he said.

Over time, such an identity can be used for more than just financial transactions; it can include individuals’ medical records or even be used in place of physical passports to get people through customs when traveling abroad.

“The goal here is to build an open infrastructure, whether you’re talking about identity, payment, health records, etc. — everything can be customized out of this open source infrastructure,” Khosla said. “Most countries don’t have the ability to do this well without being locked into a particular supplier.”

It is a difficult problem to solve, Khosla acknowledged, and can make many individuals and governments very uneasy. Still, he adds: “I think it can work. What’s supposed to happen isn’t always what happens, and each country can choose to do it differently.”