Finance Finance News Will Blockchain kill banking as we know it?

Will Blockchain kill banking as we know it?

France's central bank is already using blockchain in conjunction with smart contracts. Photo: Getty
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It is now clear the global economy is stuttering.

Stockmarkets are showing signs of a downturn and investors are nervous.

Central banks are also worried.

Earlier in the month, four countries – Thailand, New Zealand, India and the Philippines – cut their official rates, while the US cut its interest rate at the end of July. It is expected that more nations will soon start cutting their interest rates.

At home, the Reserve Bank of Australia (RBA) has indicated that all options are on the table now to get the Australian economy back on track.

This includes the drastic measures of negative interest rates, a move that aims to force individuals to spend more and banks to lend more.

However, as the European experience shows, it is a move not worth experimenting. Markets in Europe are more distorted than ever: Currencies are weak, unemployment is high and Europe’s largest economy, Germany, has just reported that it is near recession.

So, clearly, central banks are fast running out of options to attempt and prevent yet another global economic meltdown.

Emerging technologies the alternative?

The failure of central banks to keep economies stable is increasingly paving the way for an emerging alternative.

This alternative is known as a decentralised public ledger system.

A decentralised public ledger system is a topic of discussion that has been raging for quite some time.

The dream of a decentralised system is partly to cut down the value of deciding gatekeepers of the economy – central banks.

With central banks showing signs of fatigue in preventing yet another global financial downturn, this dream is fast becoming a reality.

Blockchain is the leading driver of a decentralised system.

It is a distributed, or open ledger designed to record individual transactions. Importantly, while transactions are readable on the ledger, they cannot be altered retroactively. This is what makes Blockchain secure by design.

Then the advantages: Imagine clearing and reconciling limitless transactions in real time, instead of waiting for days; or even facilitating any asset transfer, including real estate or vehicles.

The possibilities are endless. Individuals would no longer need central institutions for settlement, land-titling or for guaranteeing the value of currency. All of these functions will be replaced by a transparent public ledger.

As more consumers buy their homes, cars or equipment using electronic funds from their digital wallets, the traditional banking system as we know it will become a thing of the past.

Take the role of the RBA, for example. The RBA sets the interest rate. It does this through its operation of the Interbank Overnight Cash Market (IOCM) or buying and selling bonds and derivatives.

This process impacts the official interest rate against the RBA’s target. Where the gap between the two widens, the RBA changes the interest rate. This, in turn, affects economic activity and inflation, for better or worse.

However, increased reliance on and use of electronic funds through a decentralised public ledger will distort the IOCM. This is because people would no longer have to go to a traditional bank if they need financing.

Peer-to-peer networks, including those based in cryptocurrencies, will become dominant.

Those who might have been turned away by traditional banks will also have another way around financing.

As fewer people do business with traditional banks, the dive in demand for traditional banking services will force them into bankruptcy.

This will, in turn, render the role of central banks unnecessary as there will be no traditional banks to lend to, no currency to work with, and no role to play in a decentralised economy.

There is no doubt that a decentralised ledger system is poised to take over the role of central banks. In fact, more than 40 central banks around the world have already realised this and are considering or are already using Blockchain applications.

For example, the National Bank of Cambodia is planning to incorporate the technology for its national payments system, while the Bank of France is already using it with smart contracts – a computed protocol designed to digitally facilitate, verify or enforce negotiation of a contract.

Either central banks will embrace Blockchain technology to boost the global economy, or they will see themselves get taken over by it.

Ironically, central banks were established to deal with the problem of a decentralised system in the first place.

Arthur Marusevich is a Canberra-based lawyer who writes on legal, financial and economic matters

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