HELP THE WORLD'S POOR WITH A BITCOIN AND BLOCKCHAIN FUTURE
In this age of virtual reality and talk of space elevators and head transplants, it can be hard to know what is real versus “fake news.” But when you hear talk of Bitcoin, blockchains and cryptocurrency, believe it.
In fact, the phenomenon of “magic internet money” could very quickly change all of our lives forever. Bitcoin and blockchains stand to improve vastly access to financial services and sound money for people in countries that currently suffer from poor financial and monetary policies. And cryptocurrency may vastly increase financial privacy and freedom for law-abiding people worldwide.
The future of innovative virtual currency offers so much promise because the current system has big drawbacks.
Under the current system, national currencies such as the U.S. dollar are issued by central banks such as the Federal Reserve. Central banks control the money supply, but those quasi-government planners don’t always get it right. And the resulting unstable money supplies or high inflation rates make investment and financial planning difficult in many parts of the world. Perversely, central bank policies often seem to help insiders amass great wealth while sometimes producing economic shocks and financial calamity.
The current system is already mostly digital. Most of the new money entering the economy will never be minted in the form of bank notes and coins. According to some estimates, only 8 percent of the world’s currency now exists as physical cash. The rest is held electronically on private ledgers kept in computer hard drives at the world’s major financial institutions.
But the entire set-up relies on a complex network of trust and middlemen: Account holders trust their banks to keep an accurate record of their holdings and to have sufficient reserves to back them up. Banks similarly trust each other’s record-keeping in order to fulfill their customers’ transactions and transfers. And the whole world must trust central banks to respect their self-imposed inflation targets and guidelines.
Unfortunately, this convoluted system can be error-prone, expensive and slow. A European bank may charge its clients $15 to send $100 to a U.S. bank account, only for the U.S. bank to charge its client an additional $30 international wire fee upon reception. And the whole process takes five business days. Banks and other financial institutions sometimes become insolvent, costing customers or taxpayers (in the case of “too-big-too-fail”) billions of dollars in bail-ins and bail-outs.
This is where blockchain technology comes in: It eliminates the need for government money and monetary systems.
A blockchain is a decentralized public ledger showing financial transactions to all observers. Trades of digital currency are safeguarded using encryption (“cryptocurrency”) rather than the records of fallible banks and other institutions.
Bitcoin is currently the most popular and widely used blockchain money. With Bitcoin, everyone worldwide follows the same rules and knows exactly what to expect: The “inflation rate” is set in stone, as is the entire transaction history of the network. And the conditions for a user to be able to move “coins” or units from one account to another are the same for all users. A person who owns bitcoins can always verify or prove ownership to others using the information on the Bitcoin blockchain. That is better than holding assets in traditional banks, which are only promises appearing on a piece of paper or a website.
Another advantage to Bitcoin is that there is no risk of a bank run or hyper-inflation. Transactions are borderless: There are no extra fees or permissions needed to trade with someone in another country.
Bitcoin and blockchain technology could also have dramatic effects in countless other areas where the trustworthiness and verifiability of data (and data ownership) pose a problem, including financial/stock markets, intellectual property (like copyrights), and medical records.
It should be no surprise that all this change has regulatory agencies around the world feeling threatened. Just over the past month we have seen the U.S. Securities and Exchange Commission strike down proposals for Bitcoin-based exchange traded funds (mutual funds that track indexes like the NASDAQ-100 Index and S&P 500). The Indian Ministry of Finance has created a special committee to study digital currencies and how they are regulated worldwide. And the People’s Bank of China has initiated a series of inquiries.
Of course, there are various risks and business flops associated with this new technology, and those problems are getting extra hype and scrutiny from government and the news media. But government agencies and established leading financial institutions have no business holding back Bitcoin and blockchain technology that offers such great potential to help people gain better opportunities and financial security.