Fiat currency on a blockchain
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19 August 2015
This is the second blog post where I am going to pick up on a quote from Blythe Masters who was presenting at a Blockchain & Digital Currencies conference. The quote I am referring to is below and I have highlighted in bold the text that I will address here. “It should be fairly obvious that the addressable market for this technology is absolutely gigantic. We’re talking markets that are measured in the trillions, not the billions. However, there are real frictions that exist, like the cash that we use is fiat cash and resides in bank accounts and not on digital ledgers.” Well I would certainly agree that having fiat currency in its current form, supported by legacy technology that lacks the functionality of bitcoin certainly presents an issue. For this reason, I researched a report that addresses this very point called: “Fiat Currency on a Blockchain.” For those of you who have yet to read it, I set out compelling reasons why such technology provides central banks and regulators alike with enormous benefits notably optimizing the movement of liquidity (cash) within an economy-the implications of this alone are significant in financial terms. It would also provide detailed insight into the workings of an economy-from understanding macroeconomic variables like the money multiplier to providing a platform for the introduction of micropayments which then could be leveraged into the Internet of Things. Even the most casual observer will note that the technology affords central banks and financial regulators with Big Brother type control over financial transactions and all entities within an economy-something that regulators typically relish. But moving fiat currency onto a distributed ledger could catalyse distributed ledger technology and its disruptive force within capital markets. It may assist migration of title of financial assets onto a distributed ledger and assist the future use of smart contracts to settle transactions. What is clear is that the perspective one needs to truly understand the potential of this technology is very broad-it straddles capital markets, correspondent banking, macroeconomics, RegTech, and that’s before you even get into the post-trade settlement environment. A framework is beginning to emerge of how to categorise different approaches to blockchain/ distributed ledgers and, importantly, the phasing with which disruption is likely to occur in banking & capital markets. Plenty to ponder.