My article in BUSINESS INSIDER published 8thof August 2018.
The financial crash of 2008 demonstrated (to some) that large financial institutions need to be closely watched and strictly regulated. The meltdown some believe also demonstrated the need for an alternative to complex, abuse-prone financial instruments held by few, and understood by even fewer.
Many believe that new tool could be the blockchain, with the new currency, the Bitcoin, based on it. Could they put an end to the volatility and opacity of the financial sector? Today, cryptocurrencies are on everyone’s lips, with blockchain – a distributed peer-to-peer database – growing in its shadow, promising radical change.
This could be the first time that a change in global finance comes from outside central banks, stock exchanges, and politicians.
The blockchain paradox
I have written previously about how blockchain can influence financial operations. Its working principle makes it ideal for a wide range of transactions. Blockchain transactions are always encoded, protected with a private key that’s impossible to counterfeit. There are no middlemen as transactions are conducted directly between parties as in any other peer-to-peer system. There is no need for a central organization to establish standards or issue certificates.
Blockchain forms the core of all known cryptocurrencies, offering support for instant money transfers, payment systems and smart contracts. As such, it is poised to take a substantial piece of the pie away from banks, financial oversight institutions and other intermediaries. Unsurprisingly, financial institutions, threatened by a design that keeps intermediaries and regulators out of the loop, are not eager to give up their privileged and profitable positions. For example, JPMorgan Chase CEO Jamie Dimon last year famously called Bitcoin “a fraud.” This year, he says he’s “not interested that much in the subject at all.”
For someone who’s “not interested,” he sure talks about it a lot.
Blockchain: Threat or menace?
Governments, however, areinterested, issuing multiple statements about how they intend to handle cryptocurrencies. The European Securities and Markets Authorities (ESMA), the guardian of the security of the Europe’s financial markets, has called the cryptocurrency market a dangerous place. The European Banking Authority (EBA) would like to prohibit banks from holding, selling or trading cryptocurrencies. Of course, this weighs heavily on cryptocurrency exchange rates and causes a lot of anxiety for the currency’s holders. But as cryptocurrencies raise a growing number of concerns, the blockchain technology is being more favorably regarded.
According to the World Economic Forum, by 2025, a majority of financial executives expect10% of global GDP to be stored on the blockchain. The consultancy Aite Group projects that the financial industry will invest US$800 million in blockchain implementation in 2018 and 2019. The world’s largest financial institutions are now testing the application of blockchain for swaps, which are highly complex financial transactions. The Australian Stock Exchange (ASX) wants to use it for clearing transactions. The possibilities inherent in blockchain are also being explored by Nasdaq.
So, if financial institutions consider blockchain a threat, why are they investing in it?
Read more in the full article.