How to solve for lack of trust inherent in financial transactions
2020 Investment Innovation Conference
BY Kelsey Rolfe | November 30, 2020
As far back as the beginning of civilization, centralized ledgers have been the answer to solving trust issues, said Michael Casey, chief content officer at CoinDesk, in a keynote presentation during the Canadian Investment Review’s Investment Innovation Conference in November.
The first form of writing ever recorded was a ledger on a Sumerian tablet dating back 5,000 years, he said. Then, in the late 1300s, Giovanni di Bicci de’ Medici, the founder of the Medici Bank, realized double-entry bookkeeping could be incorporated into banking to keep track of customers’ debits and credits.
While that system has been a central part of finance for hundreds of years, it wasn’t without its challenges, said Casey, pointing to Lehman Brothers as an example. “In the midst of the 2008 crisis the fact that they were the ones that we had to trust to keep records of where all of our exchanges lay, where all those positions on credit default swaps lay, where the valuation of the assets that they had in the balance sheet lay, all of that required us to trust them to keep that record,” he said. “A lack of transparency around that system . . . was a huge problem as the world tried to rapidly unwind all those positions.”
There was a cost to that trust, Casey said, pointing to the millions of lost jobs and trillions of dollars of destroyed wealth. Further, beyond that event, the everyday cost of having centralized records — in quarterly audits and annual reporting — creates friction. However, blockchain’s decentralized ledger systems potentially could eliminate that friction while solving for the central issue of trust, he noted.
“Rather than having one centralized ledger, how about if we had multiple versions of the same ledger and created a system in which all of the parties with an interest in that ledger had a way to update it and trust each other that they could do so in real time — and therefore we’re all working on the same thing,” he said. “That core friction . . . ultimately should go away or at least could be diminished significantly.”
So-called immutable ledgers drive trust among participants, but also create a new concept of digital scarcity, or the idea that something cannot be replicated. This could be relevant for institutional investors because it would allow resource allocation to occur in a digital setting.
“In the digital world, until Bitcoin came along, it was quite possible for me to simply take a replicated version of one thing and tell you that it’s the same thing,” he said, noting it is now possible to identify something as distinct, scarce and valuable.
Blockchain can also allow money to become “programmable” like software with the ability to turn a device or a settlement on or off, he said. The technology enables smart contracts, which he defined as the execution of rights agreed to in a contract “in a way that neither of those parties can control.”
Going forward, Casey said he expects to see securitized token offerings, or the tokenization of regular markets. “Bonds, equities, real estate shares and [real estate investment trusts], really anything . . . can be taken and placed in this environment where it has that programmable quality. You can also fractionalize it.”
Tokenization could soon apply to non-financial assets, such as art, with Casey suggesting someday someone could own a piece of the Mona Lisa. “This can be applied to pretty much anything with this concept of digital scarcity, which allows us, through what’s called a non-fungible token, to start moving into another world of assets. It’s a powerful way for us to imagine how finance can be transformed by this.”