Can the Blockchain Help Prevent the Next Financial Crisis?
On July 23, the former VP of North American investment banking at JPMorgan Chase (JPM), Pang Huadong, created buzz around the fintech ecosystem by saying that “blockchain may be the key to avoiding the next global financial crisis.”
Coming from his experience at JPMorgan during the peak 2008 financial crash, he states that blockchain technologies could help better manage high-valued assets.
[When I began to work at JPMorgan in 2007,] 13 people managed [the bank’s] $40+ billion [assets]…. when the 2008 financial crisis was at its worst, [the] average daily loss was $300 million. It is only gradually that I understood that blockchain technology may be the key to avoiding the next global financial crisis.
However, Huadong is not the first person to have said this. A few years ago, Alex Tapscott, a Canadian businessman and author, wrote a book called “Blockchain Revolution: How the Technology Behind Bitcoin Is Changing Money, Business, and the World” which dealt with similar topics at great lengths.
Here are three of the primary areas where blockchain technology can help to prevent a future crisis:
Maintaining Financial Security: When regulatory authorities or central banks get a clear view of the financial transactions going on in the economy, they can gauge discrepancies, if any. This tracking of cash flows assists in understanding if there are any threats to the economy because of a bank’s faulty policies or operations. Furthermore, regulatory banks can also understand whether a financial agency requires support in their operations or if they need to be brought under control. In an interview with Quartz he said: “When it comes to financial stability, if regulators like the Federal Reserve or the People’s Bank in China, could get a window into the dealings of large financial firms and see the same shared ledger that the banks did, they would know whether or not too much risk was being taken in the system, whether or not there were liquidity crunches in the system, whether or not there were troubled banks or shadow banks that needed support or a slap on the wrist. You’d be able to have more information and a much clearer picture to do your job better. That ties into financial stability. If you’re connected to the same records as everyone else, then you don’t need all of the resources to go into the individual banks and vet their siloed transaction records to determine whether or not they’re acting within the law. And that could allow you to cut costs and do your job better. So in each role of the central bank, there’s an opportunity to do that job better.”
Prevention of fraud: Blockchain powers smart contracts and digital identities. When used in the banking sector, a smart contract can be used to file an agreement or a deal between the various financial institutions and the central bank and between the banks and the customers. Moreover, to avoid loan frauds, financial firms can introduce digital identities to ensure that their customers are trustworthy and are eligible for a loan. This would drastically lower the chances of a bad debt.
Elimination of shadow banking: Data from the People’s Bank of China indicated that three major assets of shadow banking – trust lending, entrusted loans and banks’ acceptances – increased by $555 million in 2017. Micro-lending is another phenomenon that has ballooned in recent years, with a proliferation of online lending or peer-to-peer lending platforms springing up. Outstanding debts on these sites increased by 256% between October 2015 and October 2017, topping 1.2 trillion yuan (over $179 million).
Large corporation and governments are beginning to take notes on the technology. Earlier this month the deputy director of China’s IT Ministry suggested the country to integrate forces to promote blockchain as a core technology for the new digital economy, and supported relaxing institutional constraints in order to optimize the environment for its integration.