July 20th, 2016, 2:21 pm
Hi Chris,
Thanks for your insights into this emerging technology.
1. Transparency: Yes, returns are one way to measure "good" and maybe they are the ultimate way to measure it (although there's the quibble about whether it's the customer or the bank or society who should earn a reasonable rate of return). Yet I was more concerned about the balance between beneficial forms of non-transparency (personal privacy, investment in creating proprietary knowledge, protection from kleptocracy, etc.) and detrimental forms of non-transparency (fraud, tax evasion, embezzlement, self-dealing, extortion, etc.). Does transparency throw the baby out with the bathwater or simply create different avenues for criminal action (e.g., identity theft, front-running, government seizure of assets without due process, etc.)? Or does excessive transparency constrain investor action in detrimental ways? For example, might banks become too risk-averse if they know that every individual action they take (e.g., every mortgage) will be scrutinized with hind-sight bias?
2a. Records vs. Reality: What's interesting about a bank's ledger is that it's not strictly the bank's in that so much of it encodes persistent financial relationships between the bank and other entities. And, in theory, if the ledger says the bank owes company X some amount of money on some terms (e.g., a demand deposit, time deposit, etc. ), then the ledger of company X should show the identical item in reciprocal terms. Each entry in the ledger would be an interstitial object connecting the balance sheets of two entities -- belonging to both entities at the same time which seems to be one of the interesting key features of a distributed ledger. And a transaction is then an interaction between two ledger entries -- moving some number of units of account from one entity to another. Of course, if enough ledgers move to the cloud, perhaps the accounts move with it. Might Taylor's company eliminate the need for banks?
2b. Unit of Account: I tend to agree with that researcher that BTC may not be a unit of account but it could be. More BTC users need to live their economic lives using BTC which would make BTC-denominated prices stickier and stabilize BTC FX rates. But, personally, I think Satoshi's algorithm is deeply flawed in the same way that gold standard currencies are flawed -- an inflexible money supply is not a good idea even if it forestalls the evils of central banker manipulations. No doubt there are clever people looking at alternative cryptocurrency algorithms that create a floating level of the money supply but without risks of hyperinflation, hyperdeflation, manipulation, etc.
3. Useful Proof of Work: You are right about the huge potential for blockchain in the future. Yet some are criticizing the technology -- at least the BTC implementation -- for being a prodigious user of energy & creator of carbon emissions. Clearly there are many computationally intensive useful tasks in bank with combinatoric portfolio construction, data mining, giant MonteCarlo runs, etc. but the defining characteristic of the cryptocurrency mining algorithm is that it is very hard to do but extremely easy to verify. Can one find valuable financial numerical analysis tasks with a similar property?