Like millennials will never have a landline, a coming generation might do without bank accounts thanks to secure, peer-to-peer cryptocurrency transactions.Jed Graham, “Four Cryptocurrency Futures: How Bitcoin, Blockchain Could Transform The Financial System“, Investor’s Business Daily
You’ve heard of Bitcoin and blockchain and cryptocurrency. These technologies will transform finance forever. The technology has already been developed and deployed, pandora’s box is open and there is no closing it. You are reading this because you are current with new technology and/or finance, and you don’t want to get left behind. You need to learn about how Bitcoin, blockchain and cryptocurrency will change finance forever.
Refer to my page on What is Cryptocurrency if you need a refresher before continuing.
In essence, cryptocurrency (of which Bitcoin was the first and remains the most open/secure), is a technology that establishes digital scarcity and operates on an open/secure distributed ledger. Plain and simple (obviously there is more to it, see ‘what is cryptocurrency‘). While these two qualities may sound simplistic and mundane, it’s utility stretches beyond our imagination, much like the applications of the Internet have far exceeded people’s comprehension back in the late 1980’s/early 1990s’.
How Cryptocurrency Will Transform Finance:
- Digital Bearer Assets
- Payments, Clearing, and Settlement
- Markets and Governance
- Accounting and Auditability
- Cryptocurrency Integration with/Transformation of Finance
- Barriers to Cryptocurrency Adoption
- Positive Factors of Cryptocurrency Adoption
- Markshire Crypto Conclusion on How Cryptocurrency Will Transform Finance
Digital Bearer Assets
Cryptocurrencies such as Bitcoin, Ethereum, XRP, Litecoin, etc are bearer assets. This is one of the fundamental characteristics of cryptocurrency/blockchain technology. But what is a bearer asset? A bearer asset is one where the owner is the person/entity with control (or sole access) to an asset, such that if the asset is forcibly taken or lost, it cannot be recovered.
Other examples of bearer assets are paper cash, gold coins/bars, a watch/jewellery, etc. Anything that has a deed/ownership papers are not considered a bearer asset: i.e. a vehicle is not a bearer asset because you have a vehicle registry with an ownership ledger with your local transportation government authority. The same applies to your house, stocks, bonds etc. Also, fiat money in your bank account that you view digitally online is not a bearer asset. Only physical paper cash/coin is.
Think of it this way: if you can report something stolen or misplaced and have a good chance of retrieving that item/value either by tracking it down or “reversing” a transaction, then it is not a bearer asset. If you lose the asset or it is stolen from you and you have no way of recovering it, then it is a bearer asset.
Cryptocurrency technology is the first time we are able to have digital bearer assets. If you lose your Bitcoin, tough luck bud. Don’t lose it. Keep it safe on hardware wallets.
So this first point is quite simple, it introduces digital assets, digital representation of assets/value that is not reproducible. Digital scarcity. These digitally scarce assets are also bearer assets because they truly are non-reproducible. The first application of digitally scarce assets has been currency… or something like currency/store of value. However, we haven’t even scratched the surface of other applications of digitally scarce assets.
While being simple, the concept of digital bearer assets/digital scarcity is the foundation for the jump of the old financial world into the 21st century.
Payments, Clearing, and Settlement
Cryptocurrency technology utilizes something called blockchain and distributed ledgers (DLT = distributed ledger technology).
The blockchain is simply a ledger that is updated at a specific time interval (frequency). There is a consensus mechanism that clears all transactions in a given block (more on consensus below under Markets and Governance).
Every node in a cryptocurrency network has a copy of the blockchain and must verify each block before it is confirmed and published to the blockchain. The blockchain is basically a ledger. Hence “Distributed Ledger Technology” (DLT).
Our current financial system consists of many private ledgers with private, regulated financial institutions ranging from banks, (central banks, retail banks, investment banks), investment firms, land registries, stock brokerages/trading platforms, credit unions, corporations, payment providers (i.e. Visa, Mastercard, Square, PayPal), and more. This means that the private (and government) institutions must all keep their private ledgers and then communicate ledger updates. This makes payments, clearing and settlement more convoluted and cumbersome than it needs to be.
For example, if Paul pays Jim $400, Paul’s bank must communicate to Jim’s bank that Paul sent $400, so the respective banks must debit and credit each individual’s accounts. This is the simplest transaction, it gets significantly more complex, especially when crossing borders.
Blockchain and DLT will reduce the massive duplication of information that creates delays, conflicts and confusion in many aspects of financial services. I.e. when a syndicate of lenders participates in a loan, having one shared ledger means they don’t all need to keep track of it independently.
The two main advantages of DLT are: (1) everyone is updated simultaneously and live, making settlement near-instant. (2) Enhances trust since everyone can verify that there is no double-spending or that no one is fudging the ledger.
Other areas of financial inefficiencies are international payments, and corporate stock records owing to duplicate record-keeping that more often than you would imagine result in discrepancies, conflicts and/or confusion.
The integration of cryptocurrency technology, specifically the distributed ledger technology will discard these inefficiencies and lead to a more transparent, straightforward system.
However, this means that distributed ledger technologies such as Bitcoin, Ethereum and XRP could, to some degree, disintermediate central banks and other large financial institutions. Similarly to how the Internet and email disintermediated media companies (TV stations, Newspapers, encyclopedias etc).
Furthermore, with the programmability of cryptocurrency technology, you can actually edit/customize payments so that one party can send an invoice, and in reply to the invoice the payee can attach money, and it is known on the ledger (blockchain) that that payment was for that specific invoice.
Markets and Governance
The digitally scarce assets that cryptocurrency enables is just the tip of the iceberg. Cryptocurrency technology is the programmability of money or the programmability of assets. You can develop contracts that self execute when conditions are met, also known as smart contracts. Also, the decentralized nature of the blockchain nodes also introduces a novel form of democratic governance (often called direct democracy).
Smart contracts are programmable tokens on a cryptocurrency network. If you have a digital token(s) that represents’ a property, you can create a smart contract that if the property is for sale, once the funds are received then the digital deed is transferred to the buyer’s possession. Similarly, taxes can be auto-paid for each property out of the owner’s account (specifically noted that the payment is for a specific property so that municipal governments cannot lose track of your payment).
Another smart contract applications include corporate stock ownership. If you own a certain number of shares of a company you are entitled to corporate financial information/meeting summaries, any dividend payouts and voting rights. All of this can be executed with smart contract layers built on top of cryptocurrency technology.
This leads us to governance. With DLT and digitally scarce tokens, direct democracy is much more possible. If each citizen of a country/province/state/municipality has a digitally scarce identity token, voting en masse becomes a simple, private (yet verifiable) online click of a button.
The adoption of cryptocurrency technology will revolutionize corporate stocks, legal contracts, tracking of assets such as real estate, bonds, stocks, ETFs, digital cash (USD, Bitcoin, etc), as well as direct democracy and immutable, verifiable voting records.
Accounting and Auditability
Blockchains are literally built of a series of timestamped transactions. An ongoing, live, immutable ledger. This will make accounting and auditing next to automatic, once appropriate monitoring/accounting software is built (it is already being designed believe it or not).
Once blockchain accounting and auditing software are developed there will be must greater trust and transparency in the world of government and business. The blockchain will not change accounting/auditing itself, but it will revolutionize transparency and auditability.
The power of eliminating intermediaries is the ability to lower transaction costs and take back control from powerful financial intermediaries.Kartik Hosanagar, “How the Blockchain Will Impact the Financial Sector“, Knowledge @ Wharton
Just as the internet is a medium of exchange of information, cryptocurrency technology is a medium of exchange of value. The current financial system involves many intermediaries that all have private ledgers that are not transparent or verifiable and are cumbersome to continue maintaining. However, with the advent of distributed ledger technologies and the combination of transparency, privacy and verifiability that cryptocurrencies offer the current system of “trusted clearing houses” will be disintermediated.
That is to say, we will have a significant decline in the need for “trusted third parties” such as central or national banks, or “clearing houses” who clear international settlement by confirming the movement of assets. Blockchains, cryptocurrency and distributed ledgers will replace much of this need.
Cryptocurrency Integration with, Transformation of, Finance
There are so many ways in which cryptocurrency will transform finance and truly be integrated. In fact, much like how we could not fathom the way the Internet might change the world back in the late 1980s/early 1990s, we cannot pretend to know the full extent to which cryptocurrency will transform finance.
Bearing that limitation in mind, I will put forth some ideas I’ve scrounged from the Internet about how cryptocurrency will integrate with and transform finance.
Native cryptocurrencies such as Bitcoin, Ethereum, Litecoin, XRP, XLM and BNB (and hundreds of others) are notoriously volatile. While they have gained and retained significant value over the last 3-5 years, they fluctuate too significantly to be used as a common, reliable medium of exchange at this point in time.
Stablecoins are digital assets that have an algorithm that makes them retain a stable value. The most common stable coins are cryptocurrencies pegged to the USD. Examples include Tether (USDT), TrueUSD (TUSD), Gemini Dollar (GUSD), USD Coin (USDC) and DAI.
Of the 5 above examples USDT, TUSD, GUSD, & USDC are all centralized, involving an organization that holds the invested USD in bank accounts. This makes them susceptible to censorship. DAI, conversely, uses a complex system of collateralized debt products (CDP) smart contracts backed by Ethereum (ETH) to keep its price stable.
Stable coins are used to transact in the cryptocurrency space.
Fiat money, money based on trust in the government. Formerly cash/numbers in your online bank account. Soon governments will be issuing their own fiat cryptocurrency. This gives governments greater control/advantage over its citizens as it will obviously be censorable. But still more convenient for your average Joe citizen not doing anything illegal.
As described above, stocks (also known as securities) will soon be issued as tokens, giving them the characteristics of bearer digital assets. With the programmability of digital assets, security tokens will revolutionize the stock market. You will be able to access your digital stocks from your hardware wallet, or online mobile wallet/desktop wallet and vote for company decisions/board members etc, as well as be paid out dividend payments directly into your wallet with your security tokens.
“The tokenization of everything” is a common expression among cryptocurrency enthusiasts. It refers to tokenizing assets/objects in three ways. First, the tokenization of real assets such as stocks, bonds, real estate, jewellery, art, gold, vehicles etc. Second, the tokenization of other valuable things such as driver’s license, medical license, health insurance, etc. Thirdly, the tokenization of virtual collectables, such as objects in video games, “crypto kitties” as well as the idea of transitioning from collecting things like Pokemon cards, or Baseball/hockey cards and instead collecting digital versions of those cards and keeping them on your mobile phone wallet for kids to share at school.
Natural Asset Tokens
Natural asset tokens represent natural/raw resources such as oil, gold, copper, “carbon” (i.e. for tracking carbon footprints), etc. This makes it easier and more transparent to track the movement of natural world product. As the products are produced more tokens are created and as they are consumed the tokens are destroyed.
Utility tokens are essentially smart contracts that allow unique real world functions. One use for utility tokens is decentralized computer storage space. The more tokens you have the more “memory space” you can use on the network. Another example is the use of energy in a community, the more tokens you buy/have, the more energy in the grid you are allotted for your current or future needs.
Barriers to Cryptocurrency/Blockchain Technology Adoption:
While Cryptocurrency and blockchain technology offer considerable benefits to our growing human civilization there are many barriers to adoption. The way I view it is that cryptocurrency/blockchain is the next stage of the Internet. First came information, now we are putting value online. That is why I think despite the following barriers, cryptocurrency will succeed.
- Awareness/knowledge of how cryptocurrencies, Bitcoin, digital assets and tokens work.
- The various designs of governance, incentive structure and decision making.
- Adoption technologies – there is a gap with software and hardware designed for cryptocurrency/digital assets.
- Fear and trust in this new asset class and technology. Much like how many people did not trust the internet in the early days (I remember it was a big deal posting your picture online or putting your credit card information online), many people today do not trust cryptocurrencies.
Positive Factors of Cryptocurrency/Blockchain Technology Adoption:
- Digital bearer assets put large sums of money/value into your hands, enhancing individual sovereignty.
- Forces governments to be more responsible with fiat money printing when citizens have a borderless, censorship-resistant, peer-to-peer store of value available (Bitcoin, Ethereum, XRP).
- Banking the unbanked.
- Greater transparency in business, government and industry.
- Cheaper, faster payment AND settlement!
Markshire Crypto Conclusion on How Cryptocurrency Will Transform Finance
Webber and Novocin noted that just as disruptors like Amazon, Google, Facebook and Uber [Air BnB] built software platforms and thriving businesses thanks to the connectivity provided by Internet standards, next-generation startups will build new services and businesses with blockchains.“How the Blockchain Will Impact the Financial Sector“, Knowledge @ Wharton
Bitcoin, Cryptocurrency, blockchain and distributed ledger technology offer massive benefits. They do not change the end objective but they drastically improve our ability to conduct finance. Much like how humans could till crops, raise livestock and produce food for the world, the advent of industrial farming, pesticides, fertilizers, GMOs, etc made a massive impact on our ability to produce food.
Similarly, 100 years ago it was actually quite tough to send a message across an ocean, with a lot of human intermediation and time (writing one copy of a paper letter, mailing it across the ocean, likely in a boat, with physical mail infrastructure on both sides of the ocean). With the advent of the Internet we can now live video chat from Australia to Iceland, literal opposite ends of the world, live, instantaneously.
The cryptocurrency revolution will change the way human civilization transacts in value.
Just as large media corporations such as Newspapers and Television broadcasting/News Media, Schools, Government Institutions were gatekeepers and intermediaries of information; today banks, central banks, stock brokerage firms and payment providers are intermediaries of value transfer. These value transfer institutions are not transparent and have high costs, which makes them ripe for disruption by distributed ledger technologies.
Many believe that blockchain/cryptocurrencies, when used in appropriate contexts, can offer a better, more efficient and more resilient form of recordkeeping. However, it is not a simple implementation of straightforward software. To truly realize its potential it requires that all concerned parties join the specific network/blockchain, as it’s purpose is for group consensus of a shared ledger.
As always, please comment with your thoughts and questions below!