Blockchain technology, the basis on which the digital currency Bitcoin was created, is likely to become the backbone of the future digitalization of money.
Speakers at the 16th Annual International Conference on Policy Challenges for the Financial Sector said as much throughout the three-day convention which occurred June 1-3 in Washington D.C.
The event underscored the growing presence of Bitcoin and other digital currencies. That's because this technology offers a potentially higher level of security in transactions. The companies behind digital currencies may also offer investors opportunities.
Representatives of the major central banks worldwide attended the conference, which was sponsored by the Federal Reserve, the World Bank and the International Monetary Fund. FinTech was the focus, and experts spent the first day discussing blockchain technology, which is the framework for the popular digital currency Bitcoin.
Fed Chair Janet Yellen, who spoke at the event, encouraged bankers to learn about the technology.
"Central bankers don't normally like the word disruption, but it's not something to fear," Yellen said.
Perianne Boring, the president of the Chamber of Digital Commerce, said that Yellen's comments and the interest in digital currency showed that the technology had "reached the highest levels of society and government."
A blockchain is a digital ledger of transactions that have been executed. New data continues to be added in a linear, chronological order through the completed blocks of data which are shared among computers on the network.
Participants on the network use cryptography to edit the ledger online without the involvement of a central clearing authority. This ledger contains all the data of transactions from the start of the first block to the latest block.
Because there is no necessity for a centralized authority to oversee the transactions, the blockchain creates a transparent, simple and fast transaction environment. As the data are available to all members and any modification requires the permission of the majority of the members, it is better equipped to handle potential cybercrimes.
As no one can bypass the rules, the members are assured that no single authority can deviate from the protocols. Due to direct transactions between two parties, transaction costs are negligible.
The inter-bank transactions, which take days, can now be cleared in a matter of minutes, 24/7 and without the restrictions on working hours.
"Soon, the phrase 'cross-border payment' will make about as much sense as 'cross-border email,'" said Adam Ludwin, co-founder and chief executive of the blockchain-focused start-up Chain, during his keynote address.
The technology which is used in Bitcoin, is unsuitable for various types of transactions such as commercial papers, corporate bonds and U.S. Treasuries, as these are issued for various business or policy purposes. A new more advanced system may need to be created on the blockchain principle.
Challenges for the Financial System:
It is unlikely that any government will be willing to relinquish authority over banking and monetary policy. Although the technology has enough security measures , the theft that occurred at Mt. Gox, which handled about 70% of all Bitcoin transactions until 2013, reveals its vulnerability.
Mt. Gox was a Bitcoin exchange that filed for bankruptcy protection after about 850,000 belonging to customers were stolen or missing. The amount was equal to about $450 million.
Bitcoin is a small asset class with only a small quantity in circulation,as compared with the trillions of transactions that take place daily worldwide. The computing power needed to handle such vast transactions is humongous. Such a setup requires billions of dollars in investments.
Nonetheless, there are a number of entrepreneurs like Todd McDonald, co-founder and Head of Strategy at R3CEV LLC, a consortium of more than 40 financial institutions, that are working towards the application of distributed ledger technologies to global financial markets.
"We can monitor compliance in real-time. We can answer questions about collateral ownership and hypothecation that were at root in the run on the system in 2007," Ludwin said.
Now that Blockchain technology has reached the doors of the Fed, the days of cash are numbered. Bitcoin and other digital currencies will soon be mainstream. There may even be hundreds of new digital currencies available.
There are different issues to watch regarding Bitcoin. Among them:
- How many online communities are focused on various alt coins?
- Which ones have the most search engine searches, growth in market cap and strong price charts
- Which ones are focusing on working with large banks like the one call Ripple.
This new asset class is definitely disruptive, but digital currencies add diversification not found elsewhere in financial markets. They are a speculative play, safe haven during the next financial crisis.
They allow many people globally to transfer money without being tracked and to possibly avoid taxes for those who want to sidestep government. Either way, more people and companies are accepting digital currencies, and the demand and value they offer will eventually be priced into each each currency.
There will be exciting opportunities in this new asset class. Stay tuned.