Blockchain – Winds Of Change Upon Us?

A war is going on, but you probably don’t know about it. The sad thing is that the money you have in your pocket is being used for it.

Every country which is trying to boost its exports, is devaluing its currency. Also known as competitive devaluation of the currency, it’s hurting the money in your pocket, depending on which country you’re from. For example, those in the US or pegged to the US Dollar are affected when the central banks start “printing money”.

Smart people are working on a solution and this particular solution has the potential to be the biggest financial development of this century.

But before we dive into that, let’s walk down memory lane…

In the past, money was a means of exchange. Prior to this, societies used “bartering” as a way for exchanging goods and services between people. You could exchange 10 chickens for a goat. Or tobacco, for staying as a guest in a tent (yeah… early days of Airbnb). Any commodity could be used, even salt, which is where we get the word ‘salary’ from.

Over time, money evolved to a more suitable form of “gold” & “silver”. Then the Chinese devised “paper” currency, which were nothing but certificates (aka “drafts”) backed by gold and silver held in a safe location or vault, like a bank. Another version were “bills” which could be converted at a later date.

You could easily carry this paper around and in fact you could have your banker write different denominations – this is what you could call the predecessor to the currency “notes”.

However, along the way… people got too smart for themselves and started falsifying records.

The bankers realized that most of the time, owners would  never move the gold & silver, so there would be ‘no harm’ making loans against the deposits as everyone didn’t want their gold & silver at the same time. And they could earn interest on them (keep a bulk for themselves and share a part with the depositors).

So they started printing more notes – this would stimulate trade and everyone would be “making” more money. Yeah baby! And the baby “fractional reserve banking” was born!

Well, another clever lot came along and said, hey, why do we even need the gold & silver, let’s just work on demand and supply of the notes. The more people that demand the note – the more value the note would have. This would stimulate more trade, by removing any sort of restrictive ‘weights’ holding it down. (There is some weird logic going on here…) And so the concept of “fiat” currency arose.

Hmm… ok, so now it was ok to have a piece of paper, that supposedly had some value. And as long as everyone thought it had some value, there was no problem.

But things got even more strange, they converted these notes to digital format…it was now easier to manage, easier to tax also. And so instead of printing more paper, you could just add a zero to the end of the balance recorded in the ledger and increase supply. Interesting…

Alright, so now that we can increase supply of money – we can also increase the amount lent out and we can earn more money aka interest on money (that was created from thin air). HUH?!

If you watch Game Of Thrones (big fan here), you’ll learn that when a king wants to go for war, he would need to ensure he had enough gold and silver on hand to pay for soldiers and weapons. If the war chest was empty, there was no war.

But what if you could print money? Then you wouldn’t have to worry, right?

Or look at the Chinese, they learned the lesson the hard way (hey they were smart enough to figure out paper currency), but China was already going through a fairly advanced financial crisis at the time: the production of paper notes had grown until their value plummeted, prompting inflation to soar.

Even the Roman Empire was not immune, what people don’t know is that the tipping point came when Indian merchants refused to accept the Roman Denarius… a silver-based currency coin that contained silver. Over time, the amount of silver was reduced, making the coins worthless.

When people stop trading with you, the wheels of commerce slow down and you know something is wrong. As regulation increases, people stop doing business with you. Commerce needs to be as frictionless as possible.

Could technology provide the solution we’re looking for… a cheaper, faster and possibly superior way? What if you could settle all trade anywhere in the world, in almost real-time, without any transaction fees and in a fully transparent manner?

Who would need banks as intermediaries? Ouch…

Well, the world is warming up to this idea.

Enter. Blockchain.

You see technological innovation has always enabled a level playing field. The internet for instance has enabled ordinary people everywhere to achieve more freedom, gain more access to information and in fact even earn a living. No gatekeepers, no one to say you can’t.

Imho, one of the biggest developments of our century was the Internet (or world wide web) in particular the underlying protocol (framework) called TCP/IP. This protocol revolutionized the way we communicated, the way we do business, the information is disseminated. And now, we’re seeing the birth of another revolutionary protocol, blockchain.

Without getting too technical, blockchain is a globally distributed ledger (electronic book) that is able to record and verify ownership of the (electronic) currency – without the need for a third party – it’s distributed like the internet across a peer-2-peer network, guided and secured by a mathematical formula allowing anyone to send funds to anyone, anywhere in the world and as quickly as email. Famed venture capitalist and founder of PayPal, Peter Thiel thinks it is what PayPal should have been; “Bitcoin is the opposite of PayPal, in the sense that it actually succeeded in creating a currency…”, which is interesting, given that PayPal’s original slogan was ‘create a new world reserve currency’.

What the Internet (TCP/IP) was to communication, Blockchain is to currency.

Just like various apps are built on the Internet, one of the earlier versions that sprung up from the blockchain protocol was Bitcoin – a cryptocurrency.

This is so disruptive, that banks are taking note. In fact, they’re trying to get a foothold in this as they fear this could change the way their industry works.

Canadian financial services company – ATB Financial sent €666 (why 666 is a conspiracy theorist’s paradise) the first-ever institutional cross-border payment using blockchain to Germany’s Reisebank in 8 seconds. Not a few days, or 24 hours… 8 seconds.

Other banks who are joining the fray include Santander, UniCredit, UBS, CIBC and National Bank of Abu Dhabi (NBAD). It’s estimated that banks will pay about 90% less in fees. A group of 15 banks in Japan signed up to start using blockchain technology, and dozens of banks plan to use the protocol within the next six months.

Let’s just say the winds of change are upon us… but which direction it’s going, is anyone’s guess.

(This is a preview of a much larger report on blockchain & cryptocurrencies. If you’re interested to learn more about this, and how you can profit from this change – become a ZENCAPITA member. You’ll also learn what my issue with this is and why I don’t think it will take off in its present form.)