Since the mysterious Satoshi Nakamoto created Bitcoin in 2008, Bitcoin has fascinated the tech world and has given law enforcement a headache. This digital cryptocurrency was notorious for fueling the sales of the famous illicit drug market “Silk Roadâ€, but it has since gained commercial recognition from well-known websites such as Expedia and Overstock.com. Recently, Bitcoin has become a much-watched target due to its frenzied price and futures.
While bitcoin and other cryptocurrencies have made headlines, many industry experts believe that the main technology behind the birth of Bitcoin, known as blockchain technology, could have far-reaching implications for future global finance.
The most basic form of a blockchain is a computer file, which acts like a digital ledger, recording transactions and acting as an authoritative record of past transactions. Importantly, the blockchain is encrypted so it can be copied and shared widely. When a transaction occurs, the blockchain can be safely updated to reflect the latest transaction. For example, the Bitcoin blockchain is maintained by computers around the world that are working on the latest deals. The Bitcoin blockchain is like a Google public document, and everyone who wants to see updates immediately when the update happens can only be seen. The only difference is that Bitcoin doesn't have Google (that is, there is no central administrator) because this network It is completely decentralized.
Since the blockchain does not rely on central authority to approve transactions, proponents believe that blockchain provides a faster, more transparent way to record and track the flow of assets. Ironically, a copy of the blockchain can be distributed to different computers, which in turn makes the blockchain more secure against cyberattacks than a single master transaction record.
Given these characteristics, the blockchain has the potential to revolutionize the global financial system that continues to be sluggish, asynchronous, and error-prone, says Bolog McDonald, a finance professor at Kellogg College.
“There are many inefficiencies in the way banks and other financial institutions operate,†he said. “The reasons for inefficiency and information recording and retrieval between banks, between banks and customers, or between companies and shareholders, and access to clear The transaction record is relevant. The financial system will focus on building a public, authoritative, and up-to-date database covering who owns what and who has obligations to whom. These are all that the blockchain can provide."
Instant, synchronized and transparent
McDonald believes that the unique case of Dole Foods can explain the cumbersome and cumbersome nature of the financial system.
In 2013, investors sued David Murdoch, chairman and chief executive of Dole Foods, for allegedly depreciating the company's stock before privatizing the company. Two years later, after the Delaware court made a judgment against Murdoch, he agreed to compensate the shareholders by paying $2.74 per share.
Then things got very strange. There are 36 million shares in Dole’s stock, but investors’ claims for payment are 49 million. How can this happen?
According to Bloomberg, this difference in quantity is partly due to unliquidated transactions and short selling.
Suppose you have owned a stock of Dole Foods and have an account with Charles Schwab. In this hypothetical situation, the stock you put in Charles Schwab is actually held under the “name of the lineâ€, meaning that Charles Schwab records you as a shareholder, but Dole Foods does not know that you are a shareholder. The total shareholding of Dole at Schwab is recorded under the US Depository Trust's ledger, but the American Depository Trust does not know that you are a shareholder.
If you buy or sell the stock, the transaction takes three days to complete; during this period, the transaction is not "cleared".
To make things even more complicated, Schwab may have already lended your shares to people who want to sell short stocks. In this case, there is actually no stock in your account, but others are obligated to finally Return these stocks and pay the arrears to you as a shareholder.
In this case, investors may think that they own Dole stocks, but these stocks may have entered the transaction process that has not yet been settled or loaned out by Schwab.
In these cases, investors should actually be paid by other investors rather than by Dole. In theory, brokers who assist in these unsettled transactions and short selling should be responsible for allocating $2.74 to the right shareholders. But in fact, two years later, the situation has become unclear. The judge ordered the relevant brokerage firm to sort out the problem and decide who should pay and who should collect the money.
McDonald believes that this case fully demonstrates the complexity and limitations of financial infrastructure, allowing securities to change hands in seconds, but closing a transaction can take days, so that investors in most cases I don't know what I actually have.
Blockchain technology can handle all transactions without any delay and keep all accounting systems in sync, and these features may solve the above problems.
McDonald said: "At the moment, there is a gap between the time you buy the stock and the time you are actually marked as the beneficial owner of the stock. The transaction takes a few days to settle, but the blockchain technique may be settled quickly. And the process is transparent. Schwab can still lend out the shares of the client, but the process will be more open and clear than the existing process."
More efficient and less expensive
Another major advantage of blockchain technology is that it can significantly reduce expenses, perhaps the most likely reason for this technology to be widely adopted in the future.
Payment is an obvious use. Caitlin Long, president of smart contract company Symbiont, said: "There are trillions of dollars in trapped funds on the balance sheet of the US business community. A large company has about 2,000 bank accounts in the world, and all of these accounts are Difficulties. If you think about it from an economic point of view, this can be said to be the ultimate loss of the economy. If we can speed up the payment infrastructure between the central banks, we can release a lot of liquidity in the economic environment."
A less obvious area of ​​the blockchain is the syndicated loan market.
“There are still a lot of documents that have not yet been digitized,†Caitlin Lang said at the Future Conference on Financial Technology and Finance at the Kellogg Academy earlier this year. “This is a market known for faxing back and forth.†She said that if the process is automated, it will not only speed up the sales loan process, but also save the company a lot of money.
The management of automated private equity can also cut costs.
Peter Cherkevich, executive vice president of Northern Trust Bank, who spoke at the same conference, said: "The blockchain will automate 30% of the work we do for money management. This represents It is a 30% increase in profits. Of course, we will not be able to take all those profits. So we will reduce the cost of the general partner, while the general partner will reduce the cost of the limited partner. For each member of this chain It is said that income has fallen, but profits have risen. In my opinion, this is progress."
This is not the first attempt to simplify the processing of transactions within financial services. In the late 1990s, the industry also established an organization called the Global Direct Processing Association, hoping to reduce delays in the settlement of securities transactions, but this effort was unsuccessful in the case of unintentional cooperation between investment managers and shareholders. And the end.
Cherkevic believes that this lesson clearly shows that change requires the support of many stakeholders. The success of blockchain technology is based on the premise that the entire ecosystem can benefit. “If only some of the ecosystems benefit, it will fail,†he said.
Symbiont, Vanguard, and the US Securities Price Research Center, which specializes in securities market data, have recently collaborated on the use of blockchains to distribute real-time information about the composition of the index, such as the S&P 500 Index, as a final example of how the blockchain can simplify operations. It turns out that the labor-intensive update of this information for this important part of the investment industry is staggering, but the blockchain is likely to fundamentally improve the speed, accuracy and efficiency of the update process.
Safe and clean
Advocates of blockchain claim that since blockchain is considered the safest way to store and share transactional data, the technology may one day become a new global standard.
In fact, some central banks have expressed interest in distributed ledgers. Those who want to improve government contracts, campaign donations, and transparency of global elite overseas accounts see the blockchain as a powerful asset.
"Open source digital encryption technology has achieved great success, which is the core of the blockchain," McDonald said.
The biggest opportunity may be in developing countries. Just as the mobile industry “overtakes†older telecommunication infrastructure versions, some financial industry leaders want blockchain technology to create a more efficient, accessible, and cleaner financial services industry.
McDonald said: "This technology is designed to make trust financial institutions no longer relevant. In the United States, financial institutions are generally trustworthy, but not every country. We have reason to believe that by providing an authoritative distribution Transaction records, blockchains may help reduce corruption."
In theory, at least the blockchain may also make it easier for regulators to work, because all transactions are automatically recorded on a single digital ledger, while also ensuring the sovereignty of national regulations. To protect the confidentiality of data, regulators may not be able to access the entire blockchain (access rights are granted by IP addresses), but they may be able to access the relevant parts at any time.
However, while this technology has the potential to circumvent global corruption and fraud, a basic legal framework will still be needed if the technology is to be widely used in the future.
For McDonald, how the future evolves remains to be seen. He believes that the current situation is like the Internet of the year, a new technology that has been monetized and regulated in different ways, and few people can predict its future development until the Google era.
He said: "We enforce contracts and property rights in accordance with the law. When there is a commercial dispute, the government must be able to come up with the relevant rules of the blockchain coded transaction. It will push the government to the forefront."
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