In celebration of our first CAD/USD <-> CGB markets, now available on
Vault of Satoshi, I am releasing a thought-provoking new paper on the future of crypto-currencies in the legacy financial industry. Enjoy!
Adapting the Legacy Financial Industry to Meet Growing Customer Demand for Crypto-Currenciespapersheepdog
Please also see the Reddit post for further discussion.The world is becoming increasingly comfortable with Bitcoin and other crypto-currencies as we have had time to put them to the test, while regulations are helping to create greater certainty. We must look forward to understand the next big steps which will allow us to truly bring this technology to the masses. Gold and Silver are called honest money for a reason, and it's the same reason that you can apply to crypto-currencies; they pay special favor to no one. They can be stored in a safe, or removed and sent across the world in minutes. We are now able to create decentralized trading markets which put buyers in direct contact with sellers. The value of this is understood when looking at the recent “high frequency trading” front-running scandal. Our society is technologically saturated and is ready to start building a more robust and decentralized economy. Technologies like 3-D printing, crypto-currencies and wireless mesh networks are showing us what is possible.
In order to try to uncover some of this potential, we will explore some nuances of the old ways and the new ways of doing business. Today, we trust the central banks to not use their ability to print money in an unfair way, but it's simply human nature to exploit unfair advantage. Decentralized crypto-currencies are strictly controlled by a protocol which does not allow for the arbitrary creation, or printing, of money. When you swipe a credit card, money is created which did not exist beforehand, and you are on the hook for it as debt. This fractional reserve banking is what allows up to 30 debtors to be burdened for every dollar in actual reserve holdings. In the new way, money can only come from a wallet with funds in it, and anyone can accept it with virtually no cost. A simple internet connection is required and the recipient must be able to display their wallet address either on paper or screen.
Like every new technology, it will take the population a long time to truly understand it. The freedom to interact with each other in boundless, and yet fair new ways is what will drive the demand for these cryptographic blockchain technologies. However, freedom always comes with responsibility. Today's financial system totally depends on centralized trust to store and transact our savings. The trade off for convenience of security is that you don't actually control your money (and it doesn't technically exist). Even still in this new crypto-landscape we are trying to find excuses for holding our money in centralized locations like Mt. Gox, an exchange that lost half a billion dollars worth of Bitcoin in what appears to be criminal fraud which could no more be blamed on Bitcoin than on the precious metal if it was Gold that had been stolen.
Equity, capital, foreign exchange, derivative markets, multi-party contracts, even entire companies can be established and controlled using existing decentralized peer-to-peer cryptographic technologies. Currencies are just the proof of concept for these more complex cryptographic trustless accounting and organization systems. We have to expect that this will be an evolution and that those already best suited to meet and profit from demand will do so. It appears that central banking is realizing its conclusion, but this does not mean an end to banks. A re-balancing will occur which returns transparency, accountability, and control away from the concentrations of power, and new relationships will be forged which don't require trust in the banks to verify. The transition period will require institutions which allow capital flow between the debt based fiat currencies and the new crypto-currencies and assets. These same institutions would also be well positioned to offer services to simplify spending, accepting, and saving of crypto-currencies.
One of the services related to spending is market access to legacy financial products, including foreign exchange of central bank issued currencies, as well as to other digital crypto-currencies. The other service to support spending would be mobile apps and online portals which utilize proprietary infrastructure to execute requested actions. These apps would also facilitate the receipt of funds to businesses and individuals while providing security services to increase privacy in a transparent manner. Growing demand is also apparent for services which facilitate storage of savings including physical and information security, secure printing and delivery of private keys at request, customer-verified segregated funds, and advanced crypto-currency functions like claiming interest. These services will combine to provide the masses with the simplicity of banking that they are familiar with, and the benefits that are inherent to crypto-currencies.
As momentum builds and the technology is better understood, we are seeing a progression in the quality and trust-worthiness of services being provided. After enduring the uncertainty of such businesses like Mt. GoX, a company that employed 10 people and got its start in the fantasy card game business, the industry as a whole is finally becoming better capitalized and regulated. The smaller, more agile businesses may soon be losing their edge as larger institutions become more comfortable operating within the guidelines and regulations now being put forth by government. It is a matter of time before unbelievably cheap bank accounts, denominated in crypto-currencies, are offered to customers on a massive scale. This is an opportunity for well-capitalized institutions to prove to their customers that they are determined to remain relevant as these new technologies and services emerge to meet growing demand.
