Tuesday, December 26, 2017

Scientific American - Beyond Bitcoin - How Technology Could Fix our Broken Financial System

Here is an interesting new article appearing in Scientific American. It is written by a couple of MIT related experts (Alexander Lipton & Alex Pentland). If you have been reading this blog for any length of time, this article will probably be of interest. It is a deep dive into what has caused Bitcoin to rise to prominence and then offers a proposal on how to improve on it in the future in an effort to shore up the financial system. 

When I see articles like this, it amazes me how many of the issues we have discussed on this blog are being looked at by various serious experts. This article covers a lot ground similar to what we have talked about here for some time. Below are a couple of excerpts from the article to give you a feel for the tone. 


"Bitcoin's promises are grand. Its proponents—mostly techno-savvy idealists and libertarians but also some criminal types—expect it to become a global currency that eventually supplants national currencies, which, in their minds, can be easily manipulated. Some enthusiasts even believe that Bitcoin is the digital version of gold, perhaps forgetting that gold gains stability both from its physical attributes and from billions of stakeholders and that in the digital world, good technologies are routinely overtaken by better ones."

. . . . .

"As the first successful decentralized digital currency, though, Bitcoin is an impressive breakthrough. The underlying technology and the philosophy of an unregulated, peer-to-peer financial system are innovative, and Bitcoin poses practical solutions to big problems. Of course, it's only one application of blockchain-based distributed ledgers. Blockchain, after all, is a technology, not a singular ideology: it should not be conflated with the driving philosophy behind Bitcoin or with the motivations of any of its current and future applications. Just as it has the potential to solve some of the existing problems of our financial system, it can be used to entrench them instead. And when you consider that a key element of power is the control of money—both existing money and future money creation—we can already peek into the Pandora's Box of moral hazards that this technology has opened.

Take the central banks of the major reserve currencies such as the U.S. Federal Reserve and the Bank of England. Trust is often associated with size—the bigger, the more trustworthy—but these players have proved such thinking to be a grave mistake. They have repeatedly chosen to make the “little guys” poorer by diluting their financial obligations through inflation, suppressing interest rates and other policies. Recently they have been testing negative interest rates and contemplating ways to get rid of cash."

. . . . 

"With that possibility in mind, our lab at the Massachusetts Institute of Technology is working on creating a digital currency suitable for large-scale transactional purposes. Called Tradecoin, it will be indelibly logged on a blockchain and anchored at all times to a basket of real-world assets such as crops, energy or minerals. Doing so will help stabilize its value and make it easier for the public to trust it. The core idea is that a broadly useful currency needs both human trust and efficient trade systems."

. . . .

"It is exciting that for the first time ever, there is the possibility of worldwide digital currencies that are largely immune to selfish policies of the rich central banks that control much of the money. Indeed, a flurry of new alternatives is likely to emerge, and a few might ultimately rise to compete with the biggest reserve currencies."   . . . .

My added comments: My understanding of this proposal (TradeCoin) is that it would be intended to operate outside the current central bank and banking system. The authors seem to agree with many of the criticisms of those who say these institutions have failed in their mission to the public (they call them selfish and openly criticize their policies). They suggest this is why people are seeking alternatives like Bitcoin, but they don't see Bitcoin or central bank digital currencies as the answer. They go even further to suggest that a new globally usable peer to peer currency (TradeCoin) is needed to restore public trust and a sense of fairness. They say it needs to be asset backed as well to gain public trust.

We can add this as yet another attempt to offer an alternative to the present monetary and financial system. This is a serious article written by MIT related experts.

What this seems to suggest to me is that a lot of people are uneasy with the present monetary and financial system and think it needs to be reformed or replaced. That seems to be where the agreement ends. After that, there seem to be almost endless proposals now on what those reforms should be or in some cases what a completely new system should look like.

The reaction I have seen from experts I trust to this Scientific American article is varied. The consensus seems to be that while something like this might be yet another alternative people could consider, the advantages of legal tender currencies issued by central banks are not likely to be easily overcome by any kind of privately issued currency or token. Only time is going to tell us how all this will shake out.

I cannot possibly even venture a guess as to where all this is heading. Despite covering this now for around four years and seeing lots of potential reforms and replacements discussed, there does not appear to be any kind of consensus forming for actually changing things and the present system just continues to soldier on far longer than many people thought possible. We need to hope we don't have another major global financial crisis because it sure does not look like any kind of replacement system is anywhere close to being agreed upon or ready to actually implement by the existing financial and banking institutions. 

Bitcoin exists outside the current banking system, but is unable to handle the huge volumes required for daily transactions even if people did want to turn to that option. As things stand today, it is not a viable option for a global payments system needing to handle millions of transactions per hour and the electric power requirements to do that are off the charts.

Technology to try and make Bitcoin (and gold for that matter) more easily used in transactions is in its infancy at this time and not widely understood by the public or widely available yet. I continue to believe that without some kind of major new financial crisis, most people will probably continue to maintain trust in the existing system of national currencies issued by central banks with the US dollar remaining as the global reserve currency for now. Changes to that paradigm will likely unfold gradually absent a crisis to speed things up. (we discussed this recently in this article)

All we can do here is try to stay informed and report what is actually happening as best we can. One thing I am sure of. What actually happens is what matters to regular people trying to make personal financial decisionsTrying to figure out what that will be is another thing altogether.

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