For many investors and analysts, the 2008 financial crisis is a powerful demonstration of what happens when the financial world puts too much trust in centralized institutions. While cryptographers and computer scientists had already developed ideas for digital cash and some of the mechanisms involved in modern-day cryptocurrencies, the events of 2008 were in many ways a set of catalysts for the digital currency space as it exists today. Satoshi Nakamoto’s famous bitcoin white paper was published in the same year as the financial crisis.
While it’s impossible to go back in time, some supporters of blockchain believe that, if the new technology had been in existence earlier in the century, it might have prevented 2008’s events from happening in the first place. A recent report by Coin Telegraph highlights some of the members of the cryptocurrency community who believe that distributed ledger technology could now help to prevent subsequent global financial turmoil as well.
Issues of Trust
Fintech journalists Paul Vigna and Michael Casey have written on the subject of trust as a social resource. Indeed, Vigna and Casey point to a breakdown of trust as a potential primary issue in the collapse of Lehman Brothers a decade ago. The authors believe that, although many analysts see the 2008 crisis as the result of issues involving short-term liquidity, the deeper cause of the subprime mortgage bubble was more accurately described as society’s imperturbable trust in financial institutions, their record-keeping systems and their practices. Because of this trust, bankers were not caught when they manipulated their ledgers in order to resell assets with little or no value over many years.
Lehman Brothers posted earnings of more than $4 billion just months before folding. For Vigna and Casey, this suggests that the firm’s financial statements were not based in reality. For these two authors, the issue comes down to the complexity and the outdated nature of bank accounting. When things went wrong at Lehman, the firm was able to hide its troubles by engaging in shady accounting practices.
Blockchain for Trust and Transparency
Taking Vigna and Casey’s argument, a large portion of the 2008 events were able to happen because of a severe lack of transparency in the financial status of big banks, as well as a limitless public trust in those banks. Certainly, while the 2008 crisis may have challenged society’s trust in major financial institutions, overall that sense of trust remains to a high degree. Further, transparency remains a major issue.
This is where blockchain technology can help to prevent future crises like the one from 2008, according to the report. If every asset’s value and ownership is securely recorded in a shared ledger that is entirely transparent and immutable, the corrupt practices that allowed institutions to hide their struggles will no longer be possible, according to the report. Blockchain expert Alex Tapscott has also argued that blockchain technology can enhance transparency of capital flows, thereby helping to prevent future financial disasters.
For blockchain supporters, the idea plays out as follows: A central bank will no longer go to individual banks in order to review their operations and records. Because there is a shared record of transactions, regulators can monitor cash flows as transactions are made. Because of this, central banks would at all times have a realistic picture of liquidity and the distribution of risk. They would also have an understanding of how each individual financial firm is behaving. This could take huge amounts of uncertainty out of the process of assessing the financial system’s health; in turn, regulators would know in advance when things were starting to become unstable, and they could adjust accordingly before a crisis develops.
Blockchain proponents believe that the technology can provide numerous other benefits to the health of the financial world, too. These include protection against fraud, identity theft and much more. The technology seems to hold exceptional promise. However, whether and how it can be integrated into the mainstream financial landscape remains to be seen.