Can blockchain technology alleviate the shock of the next financial crisis?
More than 10 years have passed since the 2008 financial crisis, yet we still feel its effects. In many ways, this is normal, given the size of the event.
It was the worst economic disaster since the Great Depression of 1929. It is estimated that the total impact of the crisis was over $10 trillion (over one-sixth of global GDP in 2008). 2009 marked in history the first time the global GDP contracted in real terms. Millions lost jobs and the memory of the economic suffering is still lingering.
But can we say for sure that such an event cannot repeat itself? Is the international context the same? And how can blockchain help in the case of such an event?
We might soon find an answer, as the trade war between USA and China is flaring up — the yuan is at a 11-years historical low against the USD.
Nowadays wars are being waged with subtler, more sophisticated weapons and monetary policy being one of them. The chinese currency, yuan, is being tightly controlled by the Chinese state and is now being used as a retaliatory weapon against President Trump’s new tariff policy. Weakening the state currency helps the exporters and last month the Chinese authorities allowed the yuan to fall by 3.6% in relation to the USD, sparking fears of a global currency war or even larger implication for the world economic stability.
For once, the collateral damage to worldwide companies is reflected in increased costs of doing business, which sparks investors’ fear of a flash crash. To make things even worse, companies are being pressured by increasing borrowing costs.
But stock evolution is not the only sign of impending doom. USA GDP growth is estimated to be stunted by 0.8% by a trade war, while China’s with 0.4%, with as much as US$455 billion being lost in potential growth in 2020, according to IMF. It is safe to assume we cannot yet foresee the full impact of an all-out economic and currency war between USA and China, or if this will trigger another global financial crisis.
Nonetheless, we do see an evolution that was not possible 10 years ago — with the falling yuan as a measure to help Chinese exporters, local investors are rushing into Bitcoin. This can be clearly seen in the inverse correlation between the value of Yuan and the value of Bitcoin, correlation which reached record values in the past few weeks. Even more so, exchanges that primarily cater to the Chinese market, such as Huobi, have been seen practising local bonus prices for Bitcoin.
This precedent raises a serious question. Can cryptocurrencies become the new gold standard for hedging financial crisis? Could the next financial crisis, if seen coming, be avoided for investors moving their funds in Bitcoin or other mainstream cryptocurrencies?
If so, this will only confirm that blockchain and cryptocurrencies can play a crucial role at a global level.
After all, being a safe haven in times of crisis could be the nudge needed to finally bring them to the forefront of mainstream adoption. As the decentralized (and scarce by design) nature of blockchain-based assets (such as Bitcoin, but not only) become attractive as a store of value, it is clearer and clearer that the blockchain revolution in the financial sector is merely beginning.
However, the vision towards a decentralized global financial system is still hampered by some technical aspects — even though the blockchain itself cannot be censored by states, the entry and exit points are still centralized and subject to censorship or attacks. And just slapping over a DEX as a solution is not the ideal way to go. The objective is not to have a new Wild West in which cryptocurrencies can be used for illicit activities, but to have a new standard of governance, a more decentralized and democratic one. This requires incremental progress towards on-chain self-sovereign identity solutions and inter-chain connectivity solutions.
Luckily, we can see both of these trends happening, with promising projects already on the market.
Change will not happen overnight, but innovation is happening and the blockchain industry is moving forward. And regardless if the next crisis will come in the next few years or not, at least this time we will be prepared.
