12 September 2017

Why the days of central banks are numbered

By Callum Crozier

The technology most likely to shape our future, the way we live our daily lives, has arrived. It’s not social media, big data, or AI, but cryptocurrency – a digital monetary system made up of blockchain technology.

Within two decades, the days of financial intermediaries will be over. No more central banks and traditional financial services institutions that act as the “medium” between payment and settlement transactions. I accept this is a bold statement – to suggest the role of our central banks in our monetary system is near the end of play. But this would be the case if we were to completely embrace blockchain technology as a welcome innovation, and there would be many advantages.

Indeed, it is true that financial intermediaries still have a significant role in the contemporary monetary system as book keepers, regulatory bodies and institutions that promote trust and confidence. But fully embracing blockchain cryptocurrencies would do all three functions more effectively and efficiently – and relinquish the need for (now old fashioned) central banks and heavy government involvement in monetary systems.

We are standing on the precipice of a digital economic revolution that will change the world as we know it. For the first time in history, individuals are empowered to trust each other and deal financial transactions peer to peer in a secure way. Trust established not by a big institution, but by collaboration, cryptography, and some clever codes.

How does this thing work?  The make-up of cryptocurrency is blockchain technology. This enables digital assets to be placed across a global ledger, rather than stored in a central place such as a bank. When a transaction takes place it is posted globally across millions of computers. Every 10 minutes a block gets created that has all of the transactions from each 10 minutes. Each block is linked, creating a chain (a blockchain), linked to all computers simultaneously – far more secure than the increasingly old fashioned and unnecessary processes currently used by financial institutions of today.

As an example of the simplification of financial transactions that block chain provides, current financial institutions have an over complicated role for a simple function, the payments and settlements of transactions under block chain will be settled under one ledger. Currently, institutions are required to fulfil a multi-pronged oversight to financial transaction. This means blockchain cryptocurrency is both more effective and efficient than the current processes used by traditional financial institutions.

The benefits to cryptocurrency are plentiful and could revolutionise all of our lives. They range from democratisation of the economy, prosperity for potentially billions of people, creating a sharing economy, fixing the system of intellectual property, and maintaining the privacy of personal data.

Cryptocurrency is democratising the economy. It is protecting rights by establishing immutable records on a blockchain. For instance, titles of land ownership, which in some countries may be under threat by modes of governance such as communist dictatorships, would be given value secured by blockchain which can’t be contradicted by a government computer, or certain governments, some of which monetary systems fail, inflate economies and devalue currencies.

This monetary democratisation ensures all individuals across the world are empowered and engaged in the economy – not just those who have access to a “transparent” central bank. This creates the conditions for prosperity for potentially billions of people. This itself has two key societal benefits – protection and increased participation.

Cryptocurrency enables citizens to own and monetise their own data. Data is a contemporary asset class – like land or money. We create this asset class but often it is big corporations who own it and profit from it. Through transactions, we leave crumbs (small pieces of data resulting from transactions) behind that are collected by corporations.

By using this data longitudinally, corporations are able to create a virtual you. This might reflect you more than you know yourself. You can’t remember what you bought last week, last month, last year. But this information is currently being logged coherently and highly monetised by big corporations, social media companies and financial services institutions.

Privacy is a necessity for a truly free and fair society. Currently the economy of data is being monopolised by those at the top, using big data, your data, the virtual you, to their advantage. Block chain technology allows you to own your data and ensure you reap the benefits from transactions.

The system of intellectual property is broken, and individuals don’t have the rights to their own information. It was broken by the first era of the internet. This is about fair compensation and blockchain allows this economic liberation to empower all – from creators of content, data, and value everywhere.

The benefits of blockchain are astronomical. Even as I write, innovators are building revolutionary blockchain-based applications that serve these ends. These ends, combined with a collective societal-economic consensus of embracing blockchain cryptocurrency, will liberate billions of people from the shackles of the inequalities aplenty in the current economic system. These benefits are just the beginning.

Blockchain and cryptocurrency can rewrite the structure of economic society and solve some of the world’s most troubling socioeconomic problems – if we embrace it. Indeed, don’t just rely on my words, but also the words of IBM Chief Executive Officer Ginni Rometty. Rometty, as CEO of a company which has pioneered the digital revolution this far, expressed fully confidence in blockchain cryptocurrencies suggesting “what the internet did for communications […] blockchain will do for trusted transactions”.

The technology is there, ready, waiting. The next step is to embrace it. The next step is you.

Callum Crozier is Head of Policy at Policy North