The Next Evolution of the Digital Economy

7 min readAug 12, 2021
Image credit — Paul Spence

The next technological revolution could take our economy to new heights. With governments seriously contemplating their own sovereign digital currencies and blockchain related fintech now finding uses beyond pure crypto-currency applications, the evolution of digital finance markets has begun. Digital financial services that offer traceability, security and lowered transactions costs open up a vast array of disruptive new possibilities that will challenge the traditional banking and finance sector. Until now New Zealand has largely built its economy upon its natural resources. How can we leverage this paradigmatic shift in the way business transacts globally and what does it all mean for our technology innovation sector?

The global pandemic has only served to hasten the trends towards distributed and digital, as working and doing business remotely has become more ingrained. Central banks began deploying a range of monetary tools to defend against recession and asset prices started taking off as financial markets became flooded with cheap capital. But now there are other forces at play. “Finance is entering a golden age of technology” — exclaimed Deloitte’s Finance 2025 outlook publication recently. A borderless digital fintech revolution is already underway and the global finance landscape is about to be carved up.

For example the primacy of the US Dollar as the de-facto global currency may be challenged in this new world order. The USD has been disconnected from any meaningful form of backing value for decades and the US economy is about to be surpassed by China, so this should come as no surprise. But the ability of emerging digital finance to circumvent traditional markets could hasten the decline of the greenback and other fiat currencies, unless US regulators get on board the digital train.

Across the Atlantic, the EU Digital Finance Strategy playbook already outlines how the European nations will navigate digital transformation. Removing fragmentation, adapting the EU regulatory framework to facilitate digital innovation, promoting data-driven finance and addressing the challenges and risks, including enhancing the digital operational resilience of the financial system are part of the plan. Rehabilitation of the nightmarish and burdensome anti-money laundering regulations could provide a much needed template for improved productivity also.

Closer to home, Australia is taking the impending fintech revolution seriously and has established a massively resourced cross-industry group to uncover opportunities arising from the digital transformation of financial markets. Based at Macquarie University, the Digital Finance Cooperative Research Centre (DFCRC) received a third of its $180 million funding from the federal government. The goal of of the organisation is to accelerate research and commercialisation of new digital financial products and services.

Trovio is an Australian company that provides a platform-as-a-service solution (PaaS) that enables the commodities industry to fractionalise physical assets, interface seamlessly across service providers, and take products directly to the market. The platform interfaces directly with public and private blockchains. The aim is to improve supply chain transparency, access new sources of finance and open new markets for its customers including tokenised carbon trading. Trovio recently secured a $6 million funding round and has the Perth Mint, the world’s largest gold refiner, as a platform partner offering physical asset backed gold tokens.

We spoke to Stefan Korn, previously CEO of business incubator Creative HQ, now Chief Product Officer at Callaghan Innovation, about how New Zealand can take advantage of the transformation of digital finance. His comments are personal views and do not reflect current policy at Callaghan.

What are the most interesting opportunities for New Zealand companies as the world of finance goes digital?

“The backbone of this country has always been physical products and for the most part natural resources that are shipped as commodities to other countries or offered up as attractions to visitors. Unlike other small economies that started out similarly, New Zealand has not made a material transition into the weightless / digital economy. There are some well known exceptions of course, especially in SaaS and digital entertainment formats. But there’s a risk that we miss opportunities and will continually play catch-up. So we need to change our narrative to also embrace our digital DNA and not only rely on our amazing natural resources. There’s a new digital divide coming at us fast — those who understand digital assets and products, and those who do not. The extraordinary growth rate of digital assets will hugely outpace any other asset class for many years hence. It is merely a matter of time until the total value of digital assets in the world exceeds that of physical and natural assets.”

So where does that leave NZ?

“If we thought location was less relevant for digital products it is completely irrelevant for digital assets (DA). These assets are mostly driven by the behaviour of global, distributed communities and are entirely location agnostic. There is no advantage to being based in a large consumer market when starting a DA venture. For example, you will notice that the world’s largest crypto exchanges are often not based in major consumer markets. It’s slightly different for decentralised finance (DEFI) at the moment of course. But only because existing market structures (banks, financial services etc) are still relevant intermediaries between the current finance world and the DEFI world. But this locational advantage will disappear as the DEFI world successively replaces current financial services.

The unfair advantage of DAs and to a certain extent DEFI applications is in understanding communities and demand for new services that don’t exist in the current financial system. Since the chief mantra in DA / DEFI is that everything be built based on a decentralised architecture, it creates unique technical and commercial challenges and problems. Understanding and solving these problems themselves presents huge opportunities for companies to provide an essential digital service. For example in the NFT and (to a certain extent) the crypto space there are significant opportunities for our artists, creative talent and in particular the Māori economy. NFTs allow the monetisation of unique, cultural artefacts or creations without any detrimental effect on the original artwork itself. Authentication and value capture are already built into the mechanism itself — so creators no longer need to worry about how they will actually get paid for their work.”

There is clearly a huge opportunity but a lot of work ahead. A number of countries with whom we compete are throwing a truckload of resource at getting their heads around digital finance. Who is taking care of this in New Zealand? Where can developers and entrepreneurs get help and guidance?

“There are a number of high profile DA/DEFI entrepreneurs and investors in NZ (including some COVID refugees). There are local initiatives like the Blockchain Forum in the Hawkes Bay, Mark Pascall’s community coin initiative in Wellington and a bunch of informal meetups. But we unfortunately do lack a formal centre of excellence like those that exist in other countries. However with a little online research, anyone with interest and passion can easily find out what’s happening in the DA/DEFI space.”

There have been some epic failures in blockchain related technologies in the past. What are the risks as we navigate this new landscape? Only this week there was a USD $600 million heist of crypto-currency funds from DeFi exchange protocol Poly Network, illustrating that there is still a long way to go before blockchain based financial technology can be regarded as stable. Blockchain transaction data may be immutable, but that does not protect against bad actors and insecure code.

“Undoubtedly there are significant risks — like with any new technology / paradigm shift. I think it’s impossible for any disruptive technology to be risk free — so it’s all about understanding the risks and minimising the risks. In decentralisation there are some intellectually interesting risks to do with incentive design in communities. But it’s like any other technology — the more we work with it the better we understand risks.”

Traditional forms of data storage frequently come under external attack too. Take for example the recent hack of the Waikato District Health Board system. Decentralising the management of high value data could possibly be one way of mitigating against data loss in future.

Thinking about our “innovation nation” more generally, can we compete with the big dogs as technology advances rapidly? It often feels like sports teams, Olympians and glitzy new stadiums get more attention and support than entrepreneurs in New Zealand. But economic returns from football games won’t pay for our retirement, support our parents’ healthcare or improve the education of our kids. So what can we do to increase the pipeline of high value startups and retain value creation within our own economy?

“I totally agree with the underlying sentiment on priority setting in our society. For me it’s all about mindset, what we tell ourselves and what we believe to be true about NZ. If we continue to believe that our riches are in natural resources and exporting those to the rest of the world (or bringing the rest of the world here to experience it) we will struggle to thrive in the DA/DEFI world, and in that case I fully expect our productivity, economic ranking and life style to slip behind that of other countries.”

If we change our attitude and channel our creative and innovative energies into the digital space there is literally nothing holding us back from creating incredible wealth for our country, says Mr Korn. Decentralised finance levels the playing field for us because there are no digital borders and distance no longer matters. All it requires for success is a good understanding of the underlying technology, market / finance mechanism and most importantly how communities operate. We already have an excellent understanding of how communities thrive — all we need to do now is translate this into the digital world, he says.

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