How exactly can blockchain protect the global economy?
As many investors and analysts assume, the 2008 crisis became an outstanding illustration of what is happening when financial world relies too much on centralized institutions. Although to this moment cryptographers and programmers have already developed an idea of digital money and a set of mechanisms that are working in contemporary cryptocurrencies, the events of 2008 largely became the catalyst of emergence of the digital currency environment in the way it exists now. Satoshi Nakatomo’s famous work about bitcoin was published in the same year as the financial crisis broke out.
One cannot, of course, go back in time, but some blockchain supporters claim that if the new technology existed earlier in the 21st century, the events of 2008 probably wouldn’t have happened at all. A recent report by Coin Telegraph cites opinions of several cryptocurrency community members, who believe that distributed registry technology can help prevent global financial turmoil in the future.
Issue of trust
Fintech journalists Paul Vigna and Michael Casey write about trust topic as a social resource. This has its own reason: Vigna and Casey mark destruction of trust as probably the main cause of Lehman Brothers’ fall ten years ago. According to the authors, although many analysts see the causes of the 2008 crisis in problems related to short-term liquidity, the underlying cause of the subprime mortgage bubble can rather be defined as the public’s unconditional trust in financial institutions, their accounting systems and business practices. Because of that bankers were not exposed when they had been manipulating account books for many years in order to resell assets with little or no value.
Lehman Brothers reported a profit of more than $4 billion just a couple of months before collapse. According to Vigna and Casey, this suggests that the firm’s financial accounting didn’t reflect the true state of affairs. For these authors, the problem ultimately comes to the fact that bank accounting is complicated and maintained in obsolete forms. When it all went wrong at Lehman Brothers, the company could be hiding their problems by turning to shady accounting methods.
Blockchain for trust and transparency
If the arguments of Vigna and Casey are to be believed, the events of 2008 happened largely due to extremely low data transparency on financial situation of large banks as well as unlimited public trust in them. Although the crisis of 2008, obviously, undermined public confidence in large financial institutions, on the whole it still undoubtedly remains. Finally, another serious problem remains to be the lack of transparency.
Here, the authors claim, the blockchain technology can help prevent future crises, similar to one that hit in 2008. As it is stated in the report, if the information concerning each asset’s cost and owner is recorded using distributed registry technology, which is completely transparent and immutable, corruption methods allowing companies to hide their problems will become impossible. Besides, blockchain expert Alex Tapscott assures that blockchain technology can increase capital flow transparency, thus helping prevent future financial disasters.
As blockchain supporters point out, the idea is as follows: the central bank will no longer apply to separate banks with the request for verification of their operations and documents. As there is general transaction accounting, regulative institutions can control the movement of funds in the transaction process. Due to this, central banks would have a true picture of liquidity and risk distribution at any given time. In addition, they would also have an understanding of how each separate company behaves. This could drastically decrease the uncertainty in the process of health assessment of the financial system; in turn, regulators would know in advance when the situation begins to lose stability and would be able to make adjustments accordingly before the beginning of crisis development.
Blockchain supporters believe that this technology can provide many other benefits to the health of the financial world, including protection against fraud, personal data theft and much more. One gets the feeling that the technology offers only exceptional prospects. However, it is not yet clear whether it is possible to integrate it into the basic financial environment and how one can do so.
https://medium.com/@ECOS_am/blockchain-in-the-global-economy-3c5d325adb5b
