Milton Friedman once said
“The combination of economic and political power in the same hand is the recipe for tyranny.”
One of the key features of any successful free market-based economic system is trust. Trust among proprietors, merchants, banks, government or in the economy itself. But what happens if the trust gets breached? The global economy will head towards a collapse.
Cash is the leg to almost every trade transaction and settlement in the world today. Financial institutions have transformed their paper-based ledger into highly advanced IT application and database. But while their ledgers and transaction applications are now digital, their underlying structure has not changed much.
Each institution continues to own and manage a proprietary ledger and synchronise its records with those of other institutions as appropriate. The reconciliation process in which who owns what to whom requires a lot of time, money and human development. Standardisation of rules and data fields is a good idea that could save $20bn-$30bn in back office reconciliation cost each year.
Since the aftermath of 2008 crisis, people across the world have lost their trust in the banks and the way they conduct their businesses. Cash has been the subject of abuse either by central or big banks, corporations and governments in multiple ways in the form of massive printing, heavy transaction fees, bad investment and tax. The same people are looking for the medium that provides greater autonomy, more transparency and better redundancy that helps in quickly transferring the value. Crypto-currencies are one such medium that has all the before mentioned attributes. They are not created and controlled by countries or government hence: they are universal in appeal as well as built-in trust.
Crypto-currencies eliminate trust solely in market participants as the need of transacting in a free market economy. Instead, a protocol is established – a set of rules in the form of distributed computation that ensures the integrity of the data exchange among these billions of devices without going through a third party. The core of the rise of crypto-currencies as the medium of exchange is mainly due to its technical innovation in the form of what one knows as blockchain.
The Financial Renaissance
Blockchain is the digital ledger of information based on two key features: a distributed database and a cryptographic signature. Distributed databases allow multiple volunteers or users to enter information about money transfers or securities trading in real-time.
Blockchain provides greater autonomy, more transparency and security by keeping the records of information stored in a block that forms a chain. The information in every block is secured using cryptographic hashes added in linear fashion upon the previous block. This prevents information in the ledger from being altered, ensuring trust and transparency. Blockchain is public so anyone can view it at any time. Since it resides within a network, not within a single institution, blockchain is under a global spotlight because of its promise or threat to disrupt the traditional financial sector. The current resurgence of interest in blockchain especially by traditional players like big banks or Wall Street is a sign that financial players have started to acknowledge the disruptive power it has.
Wall Street, in particular, is quite keen to understand this technology and how to include it in the traditional mainframe since much of the industry makes its revenue by acting as a middleman. On December 17th, last year, R3CEV, a consortium of banks working on blockchain standards, announced that 42 banks have joined, including most of the world’s global banks.
In the age of the internet, new tech companies have rather quickly garnered consumer trust over their financial counterparts. In fact, over the last six years, trust in tech firms has almost doubled while consumer trust confidence in the banks has decreased. The biggest question is which one is going to garner trust in the long run: existing financial institutions or new digital currency startups.
Financial institutions cannot be sure that they will capture new markets. That is the reason they are making history by creating a consortium of banks as well as funding startups that seriously challenged their own hegemony. Funding for blockchain is on the rise with venture capital and financial institutions, as well as banks, having invested approximately $1bn by 2016 in blockchain-based technology and crypto-currencies.
Dozens of vigorous tech startups have vied with each other to produce the next big thing in blockchain based crypto-currency. This is primarily due to tech innovators who believe that blockchain has the potential to overhaul the move into the digital age. Blockchain is already challenging the mainstream business models not only in interbank payments but also in equities settlements, insurance, the legal industry (smart contracts) and public governance (records).
In the future, with the movement towards a more digital-based economy, blockchain will be new digital ledger to record everything, from birth and death certificates to titles and ownership, financial accounts, votes and anything else that could be expressed in code and important to humans or mankind.
With the advent of new technologies like artificial intelligence, cloud computing and the internet of things, a huge amount of data will be produced shortly. This internet of everything needs a ledger for everything. Apart from disrupting the financial world, the applications and impact of blockchain in the near future are unimaginable at this moment. No one knows what and how much blockchain holds inside its Pandora’s box.