We already looked at centralized, digital central bank money. Today, we’re talking about the countermovement: The decentralized financial system. The idea behind it goes much further than just Bitcoin. If implemented, decentralized finance would completely turn our entire financial and monetary system upside down, completely reshuffle the cards of power and influence, and thus operate beyond all previous barriers. A pure utopia? Possibly. Technically possible? Absolutely!
The current financial system has many critics
Today’s largely digital financial system of money, securities, derivatives, commodity trading and currency transactions may operate on a global scale. It is nevertheless controlled and steered by a manageable hand of large central banks, global financial institutions, a few major governments, and multinational organizations, and all of this from a small, fine circle of financial centers. What is decided in London, New York or Tokyo has an impact on the entire (financial) world. Coincidentally, the very countries where these financial centers are located are also home to an overwhelming majority of global assets in money and securities. Is it all just coincidence?
Read about Decentralized Finance articles on Financial Times websites.
Billions of people currently without access to the banking system
On the other hand, an estimated one billion people still live without a chance to have a bank account, and another billion are estimated to be underserved by the banking system. In addition, transaction costs are often exceptionally high, especially for the “little ones.” The smaller the assets, the smaller the business, the higher the fees that must be paid in comparison. The hardest hit are low-income earners living abroad, who transfer money to their home country, paying fees that are not infrequently 10% or more of their already low wages. At the other end of the list are multinational corporations, which are hardly asked to pay for their transactions on the capital and financial markets.
Confidence in current system is low
Moreover, trust worldwide in banks, brokers, insurance companies and even the national monetary system is not overwhelmingly high. Corruption, manipulation, political interference, bank failures, hyperinflation, sudden currency restrictions, sanctions, restrictions and much more usually hit the small ones with all their might, but even larger companies are not safe from this.
The answer of many governments and the solution preferred by the currently powerful banks and rich to the problems so far is global, total centralization in the form of digital, direct central bank money. But what if the digital age could ultimately bring liberation from previous power structures instead of cementing them?
Technically, a decentralized financial and monetary system is already possible
The technical prerequisites for a global and at the same time decentralized monetary and financial system that is simultaneously designed, controlled, operated, and monitored by no one and by everyone are already in place today. The world is networked via the Internet. Smartphones and computers have found their way into every corner of the world. But at the latest since the development of blockchain technology, nothing stands in the way of a global ledger for all transactions. Programmed on an open-source basis, a decentralized platform owned by everyone and no one could map everything from payments to securities trading, settlement, posting, transactions for assets such as real estate, art, land, commodities, patents and any conceivable payment or transfer of ownership. Without an intermediary, without high transaction costs, without security concerns, and worldwide and without borders. Cryptocurrencies are just the beginning.
Blockchains would make many players superfluous
Now such a system would indeed be a complete revolution. In one fell swoop, we would no longer need banks, exchanges, brokers, custodians, settlement banks, central banks, national authorities, possibly even regulators. Probably some service providers such as fund managers, rating agencies and research providers would continue to hold on with their services, including family offices and advisory service providers. Many of the very powerful, on the other hand, would lose their influence over a system from which they have been able to profit massively. The very idea of a centralized monetary and financial system therefore holds a lot of explosive power.
Egalitarian, equal system with access for everyone everywhere
Apart from the interests of today’s powerful financial houses, central banks and governments, a functioning, decentralized money, and financial system would be a benefit for everyone else. Whether small government, businesses large and small, the self-employed, investors, anyone looking for or wanting to invest money, farmers, traders, or consumers, they could all benefit from a decentralized financial system. No one could be excluded for whatever reason, and in the current system these reasons range from being too poor to politically undesirable. Moreover, anyone could connect to the decentralized money and financial system at anytime from anywhere in the world and would not be dependent on a physical branch or a business relationship of the “right” bank. Because of the way the blockchain works, all data would no longer be stored centrally, but simultaneously on thousands of computers at once to ensure data and transaction security.
The system itself would also be constantly expandable through new programming code to provide customers with every imaginable enhancement and new service. There could easily be fractional ownership, meaning ownership of say a fraction such as 1/10th of a share. All of this would be secured by the very own private key. The possibilities are overwhelming.
The transparency thing
Now, it is a blockchain that all transactions are transparent and traceable. Not all market participants are likely to be particularly comfortable with that. Connections, wealth, and transactions could be traced. This could also be a reason why the big and powerful are not on fire for a decentralized financial system. We probably don’t need to go into any further detail on why, for which, moreover, there is probably not enough space in this column.
The decentralized world of money and finance: Technically possible
It is technically possible, would only bring benefits to 99.9% of people, and could completely revolutionize our entire financial and monetary system. We have reached a point of technological advancement that would allow gatekeeper-free access to transactions such as payments, securities purchases, securities issuances, land transfers, hedging transactions, real estate transactions, capital investment, lending, and other transactions. The future could well look exciting. Or not, depending on which way the world goes. After all, every great innovation has strong opponents among those who see their skins swimming away as a result, and who will do everything they can to steer developments in their favor. We are eagerly watching what is to come.
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