Could Blockchain Technology Prevent the Next Financial Crisis?

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Could Blockchain Technology Prevent the Next Financial Crisis? Date: 0 A central bank’s role is to manage a nation’s currency, money supply and interest rates. The United States did not have a central bank until 1913, when Woodrow Wilson signed the Federal Reserve Act into law. Since then, the Federal Reserve has been accountable for the elasticity of the U.S. economy through the expansion and contraction of liquidity in the form of credit and new fiat money supply. Retail and institutional banks abide by the Fed’s stringent economic rules, which in turn trickle down to affect the daily lives of entrepreneurs, corporations, investors, markets and the consumer.
Today, the U.S. and most first-world economies are in the precarious position of tightening liquidity as a direct result of overstimulation. It has become commonplace to read about instability in the overnight “repo markets” and leading to the new form of quantitative easing. These are signs that the current financial system is starting to break down again, but unlike 2007, there is an entirely new industry built around the security, liquidity and stability of our money. Sponsored Links 4 How does On-Demand Liquidity work? Defining the landscape Market repurchase agreement operations, also known as “repo markets,” have made national major media headlines over the last few months, including from Bloomberg, Financial Times, Business Insider — just to name a few among the dozens. But what exactly are “repo markets”? In short, repo lending is a way for the Fed to expand credit within the banking system. Repo interest rates are the interest rates that banks charge each other for borrowing cash. Typically, they follow the Fed’s overnight lending rates. However, we have started to see repo rates spike upward, pointing to an indication of supply issues from banks issuing short-term cash to other banks and an increasing demand from banks and corporations that need short-term cash. In 2007, we saw first-hand that when liquidity dries up, banks fail, markets fall, unemployment grows and economic output contracts. Since then, the Fed has been filling the banking liquidity gap by printing dollars under the name of “quantitative easing.” After ten years of providing the markets with easy money, the Fed reversed course in 2018, raising interest rates and selling bonds to clean up their balance sheet. Cutting off the supply of free money combined with raising rates has sent banks scrambling for liquidity, thus jolting the markets several times over the last twelve months. In June, the Fed changed course yet again, ending balance sheet cuts and decreasing interest rates. In September, we got our first glimpse into the consequences of overstimulating the money supply for 10 years then trying to get back to normalization. Although we couldn’t see which banks were the culprits, several banks showed their cards as the interbank lending rates rose well above the Fed’s set interest rates. In an economy that was backed by free money and debt, a shortage of credit and dollars can quickly escalate into a serious problem. With interest rates already near zero, it is difficult to see what tools the Fed will use when things become dire. The introduction of Bitcoin For many early crypto enthusiasts, Bitcoin (BTC) offered a new type of money detached from the existing dysfunctional system. Bitcoin arrived 10 years ago in 2009 and presented itself as a new, asymmetric, uncorrelated asset class that was an alternative to mainstream finance. Its value was derived from a global network of distributed contributors collaborating through the mining of new coins while simultaneously securing the network. Throughout the 2010s, the ecosystem evolved beyond just the individual sovereign ownership of money and into the introduction of programmatic intermediaries like smart contracts, which further removed unnecessary human intervention. Bitcoin and Ethereum — and the new technologies they brought to life — have demonstrated the beginnings of what international cooperation can look like if we remove superfluous centralized layers in our economic systems that add friction and are quickly proving to be functionally obsolete. There is a necessary balance to strike as we transfer from the flawed financial system of today to the more technological, decentralized system underpinned by blockchain. We’ve experienced the flaws of pure centralization via “quantitative easing,” but to make the assumption that pure decentralization would provide a utopian solution for global finance is a fallacy. Decentralized technologies provide tools to reduce costs and add efficiencies where existing technologies cannot, but there are elements of the existing system including people, corporations and governments that are essential to making the new system work. A global liquidity solution Bitcoin has led to an entire group of blockchains, including the XRP Ledger, Ethereum, EOS, Tezos, Cardono and others, each with the...