Home Blockchain Blockchain 2.0: Revolutionizing The Financial System [Part 2]

Blockchain 2.0: Revolutionizing The Financial System [Part 2]

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This is the second part of our Blockchain 2.0 series. The blockchain can transform how individuals and institutions deal with their finances. This post looks at how the existing monetary system evolved and how new blockchain systems are bringing in change as the next crucial step in the evolution of money.

Two key ideas will lay the foundation for this article. PayPal, when it was launched, was revolutionary in terms of its operation. The company would gather, process and confirm massive amounts of consumer data to facilitate online transactions of all kinds, virtually allowing platforms such as eBay to grow into trustful sources for commerce, and laying the benchmark for digital payment systems worldwide. The second, albeit much more important key idea to be highlighted here, is a somewhat existential question. We all use money or rather currency for our day-to-day needs. A ten-dollar bill will get you a cup or two from your favorite coffee shop and get you a head start on your day for instance. We depend on our respective national currencies for virtually everything.

Sure, mankind has come a long way since the barter system ruled what you ate for breakfast, but still, what exactly is currency? Who or what gives it it’s a value? And as the popular rumor suggests, does going to a bank and giving them a dollar bill actually get you the true value of whatever that currency “token” stands for?

The answer to most of those questions doesn’t exist. If they do, they’ll to be undependably vague and subjective at best. Back in the day when civilization started off establishing small cities and towns, the local currency deemed legal by the guy who ruled over them, was almost always made of something precious to that community. Indians are thought to have transacted in peppercorns while ancient Greeks and Romans in salt[1]. Gradually most of these little prehistoric civilizations adopted precious metals and stones as their tokens to transact. Gold coins, silver heirlooms, and rubies became eponymous with “value”. With the industrial revolution, people started printing these tokens of transaction and we finally seemed to have found our calling in paper currencies. They were dependable and cheap to produce and as long as a nation-state guaranteed its users that the piece of paper, they were holding was just a token for an amount of “value” they had and as long as they were able to show them that this value when demanded could be supported with precious substances such as gold or hard assets, people were happy to use them. However, if you still believe that the currency note you hold in your hand right now has the same guarantee, you’re wrong. We currently live in an age where almost all the major currencies in circulation around the globe are what economists would call a fiat currency[2]. Value-less pieces of paper that are only backed by the guarantees of the nation-state you’re residing in. The exact nature of fiat currencies and why they may possibly be a flawed system falls into the domain of economics and we won’t get into that now.

In fact, the only takeaway from all of this history that is relevant to this post is that civilizations started using tokens that hinted or represented value for trading goods and services rather than the non-practical barter system. Tokens. Naturally, this is the crucial concept behind cryptocurrencies as well. They don’t have any inherent value attached to them. Their value is tied to the number of people adopting that particular platform, the trust the adopters have on the system, and of course if released by a supervising entity, the background of the entity itself. The high price and market cap of Bitcoin (BTC) isn’t a coincidence, they were among the first in business and had a lot of early adopters. This ultimate truth behind cryptocurrencies is what makes it so important yet so unforgivingly complex to understand. It’s the natural next step in the evolution of “money”. Some understand this and some still like to think of the solid currency concept where “real” money is always backed by something of inherent value.[3] Though there have been countless debates and studies on this dilemma, there is no looking back from a blockchain powered future.

For instance, the country of Ecuador made headlines in 2015 for its purported plans to develop and release its own national cryptocurrency[4]. Albeit the attempt officially was to aid and support their existing currency system. Since then other countries and their regulatory bodies have or are drafting up papers to control the “epidemic” that is cryptocurrency with some already having published frameworks to the extent of creating a roadmap for blockchain and crypto development. Germany is thought to be investing in a long term blockchain project to streamline its taxation and financial systems[5]. Banks in developing countries are joining in on something called a Bank chain, cooperating in creating a private blockchain to increase efficiency in and optimize their operations

Now is when we tie both the ends of the stories together, remember the first mention of PayPal before the casual history lesson? Experts have compared Bitcoin’s (BTC) adoption rate with that of PayPal when it was launched. Initial consumer hesitation, where only a few early adopters are ready to jump into using the said product and then all a wider adoption gradually becoming a benchmark for similar platforms. Bitcoin (BTC) is already a benchmark for similar cryptocurrency platforms with major coins such as Ethereum (ETH) and Ripple (XRP)[6]. Adoption is steadily increasing, legal and regulatory frameworks being made to support it, and active research and development being done on the front as well. And not unlike PayPal, experts believe that cryptocurrencies and platforms utilizing blockchain tech for their digital infrastructure will soon become the standard norm rather than the exception.

Although the rise in cryptocurrency prices in 2018 can be termed as an economic bubble, companies and governments have continued to invest as much or more into the development of their own blockchain platforms and financial tokens. To counteract and prevent such an incident in the future while still looking forward to investing in the area, an alternative to traditional cryptocurrencies called stablecoins have made the rounds recently.

Financial behemoth JP Morgan came out with their own enterprise ready blockchain solution called Quorum handling their stablecoin called JPM Coin[7]. Each such JPM coin is tied to 1 USD and their value is guaranteed by the parent organization under supporting legal frameworks, in this case, JP Morgan. Platforms such as this one make it easier for large financial transactions to the tunes of millions or billions of dollars to be transferred instantaneously over the internet without having to rely on conventional banking systems such as SWIFT which involve lengthy procedures and are themselves decades old.

In the same spirit of making the niceties of the blockchain available for everyone, The Ethereum platform allows 3rd parties to utilize their blockchain or derive from it to create and administer their own takes on the triad of the Blockchain-protocol-token system thereby leading to wider adoption of the standard with lesser work on its foundations.

The blockchain allows for digital versions of existing financial instruments to be created, recorded, and traded quickly over a network without the need for third-party monitoring. The inherent safety and security features of the system makes the entire process totally safe and immune to fraud and tampering, basically the only reason why third-party monitoring was required in the sector. Another area where governmental and regulatory bodies presided over when it came to financial services and instruments were in regards to transparency and auditing. With blockchain banks and other financial institutes will be able to maintain a fully transparent, layered, almost permanent and tamper-proof record of all their transactions rendering auditing tasks near useless. Much needed developments and changes to the current financial system and services industry can be made possible by exploiting blockchains. The platform being distributed, tamper-proof, near permanent, and quick to execute is highly valuable to bankers and government regulators alike and their investments in this regard seem to be well placed[8].

In the next article of the series, we see how companies are using blockchains to deliver the next generation of financial services. Looking at individual firms creating ripples in the industry, we explore how the future of a blockchain backed economy would look like.


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