How Blockchain Can Remove the Fundamental Problem in the Financial Markets

This is part of a blog series Can Blockchain Save Our Financial System?

The blog covers one of the fundamental problems of the traditional bankers and how blockchain can remove risky gambling.

To read the previous blog post about Blockchain Could Have Helped Contain the 2008 Crisis, click here.

To learn about how Bloxable is building the most advanced debt platform using blockchain and smart contracts, visit us here.

When it comes to developing new technologies, we are living in an age of renaissance and revolutionary changes. Every day, advancements in medicine, A.I., astronomy, finance and technology make our lives easier and more productive.

Financial and technological advancements are of particular importance when it comes to business activity. Fintech can significantly improve efficiencies in business processes. These technologies allow quicker transaction times, 24/7 access for businesses and consumers and allow greater transparency in doing business.

According to many experts in fintech, the open ledger Blockchain is the next big thing that has come to the fore since the advent of Internet. Financial experts believe that implementation of Blockchain technology will be crucial if we are looking to avoid the next big financial crisis.

The Existing Financial System

We are still living in the shadow of the 2008 financial crisis. Some experts believe that the economy has still not recovered fully from the effects of the 2008 crisis. Without going into the details of what caused the financial meltdown, a cursory analysis shows that the underlying problems have still not been fixed.

The world governments in general and the U.S. in particular, have taken steps to stop something like the last crisis from happening. There are tougher regulations on the market. Risky lending practices are banned. Lenders responsible for hiding the terms of the loan can be punished. U.S. regulators have also mandated a higher down payment for risky borrowers with low income.

Still, the basic problem with the financial system remains in effect. Bankers investing in securities on the Wall Street do not risk their own money. They are still investing in the markets with their depositors’ money.

Many believe that the greed of the bankers was the underlying cause of the financial collapse.

Bankers continue to take the lion’s share of the profits in the form of bonuses, as long as business remains good.

If and when things do go sour, the major investment institutes will file for bankruptcy and the governments will be asked to foot the bill. Or risk the whole financial system coming down.

Open Ledger Blockchain Based Financial System

As anyone can see, bankers have very little to lose in the current financial system. They do not risk their own savings or pensions. Yet major investment bankers are the ones calling all the shots in the financial markets.

How can anyone be expected to follow a low risk strategy when they have everything to gain in a positive market and nothing to lose in a negative market?

It just doesn’t work.

The bankers will always find ways to follow a risky strategy. Higher the risk higher the return, as the saying goes on the Street.

The main difference with open ledger Blockchain is that it completely removes the bankers as the middlemen of the financial markets.

Take cryptocurrencies for instance. The major investors in currencies like Bitcoin and Ripple are small investors. Buyers and sellers do not rely on brokers to carry out transactions in the markets. All the transactions take place directly between investors.

The Blockchain ledger returns the power over their money to the people.

Banks vs Individuals

There is one downside to an individual-based financial system like the Blockchain. When the financial crises of 2008 hit Lehman Brothers, they made an appeal to the Feds to save the bank.

The feds called in other major investment banks at the time to deal with the situation. It was decided that Lehman Brothers would be carved up. Their investment assets and debt obligations would be divided among the other banks.

The feds presented these two choices to the Lehman Brothers executives. Take this deal or go bankrupt. Lehman Brothers directors chose the latter. The rest is history.

Many analysts believe that the Feds should not have let Lehman Brothers fail. The bankruptcy of this major financial institution turned a bad situation into a catastrophe. Many commercial and investment banks had holdings in Lehman Brothers and its bankruptcy had whirlwind effect on the economy.

The one thing to note is that despite the risky behavior from the bank, the Feds wanted to step in and save Lehman Brothers. It was only after the public furor and slogans like “No bank is too big to fail”, that the feds stepped back.

Could we expect the Federal Reserve to try and save individuals who go bankrupt in crytpo markets due to risky, gambling behavior? Highly unlikely.

With a blockchain system, the individual assumes all the profits as well as the losses for risky betting. This could be a good thing or bad, depending on which side of the equation you are caught on when things get interesting.

To read the next blog post in our series, about Smart Contracts Can Help us Avoid the Next Financial Crisis, click here.