Part 2: Towards An Open, Free-Flowing Economy
A world of greater prosperity is possible when we believe in a better future and have the ideas and financial tools to create it. New financial technology is changing the nature of money and providing grounds for this optimism
Part 1 of this article described how concepts of money, credit, and trust are closely intertwined and how historically, these pillars of our financial system have been maintained by centralized and manual processes. New technologies (including decentralized networks and machine learning) are opening up more possibilities and creating a fresh canvas upon which innovation can thrive.
An Expanded Financial Tool-Set
One of these new tools is blockchain technology, which is significant because it allows for data to be verified and kept in sync across multiple places, without the need for a centralised record-keeper. This enables the creation of decentralised crypto assets (like bitcoin) and holds promise to facilitate the creation of many other types of digital assets. Another related tool is the ‘smart contract’: an agreement between parties which is written directly in code and automatically executed if certain conditions are met. Like bitcoin payments, smart contracts can be implemented in a decentralised a manner, without the need for a central third party. However, digitalisation of this kind is not restricted to decentralisation. The economic inefficiencies of legacy financial infrastructure compared to what’s becoming possible will mean that, over time, existing money and credit systems will move to a new natively digital infrastructure. When money is truly digital it will be programmable. This means the financial system won’t just do things more efficiently, it will do entirely new things.
This paradigm shift is happening at this very moment. Whilst most of what’s taken place thus far represents only incremental improvements to a dated financial system, technology is on the brink of not only making the status quo more efficient, but in fact wholly and irrevocably transforming it. We are now facing the possibility of an entirely new financial system where money and credit flow seamlessly, just like how data and information flow across our smartphones today. This will bring down cost barriers, widen financial access, and lead us on a journey towards a global web of frictionless economic interactions.
Free-Flowing Money and Credit
In this vision, personal loans will no longer be based on outdated credit scoring metrics, but become universally accessible, individualised, and dynamically adjustable to specific needs and circumstances. Excess cash in your account will not just sit idly, but will be programmatically lent-out, by the minute, using algorithms that continuously scour the financial system for the most optimal risk-adjusted return. Salaries and bills will be paid in real time, creating a personal finance flux that will afford the individual clarity and control of their financial position to a degree never before thought possible.
Efficient and smart pricing will drive down the cost of lending on both a micro and macro level. Organisations will have far wider access to financing and be able to cheaply issue digital assets that are immediately liquid and tradable on global markets. For individuals, digital assets will increasingly offer the potential to obtain secured loans and financing. For example, excess memory on home computers will be ‘lent out’ in return for interest payments. Other digital items like tokenized computing power will be pledged as collateral in return for cryptocurrency loans — the digital equivalent of borrowing cash from a pawnbroker by leaving your watch as a deposit. We will see new types of mortgages secured by previously unregistered property or land — which will be recorded digitally on immutable public blockchains. The economist Hernando De Soto identifies trillions of dollars of unregistered assets, such as land owned ‘informally’ by the poor in developing countries. If recorded in a trusted and digital way, these assets could potentially be used as collateral to secure loans that help people improve their economic lives.
Could This Democratize Finance?
Widening access to responsible credit is fundamental because credit combined with good ideas leads to wealth creation. Combining the increased flow of information with increased credit provision are two elements that have the potential to dramatically improve individual lives and the ultimate trajectory of global growth. Digital money will oil the wheels of social progress.
The financial reality we are building is one where we have access to information and services that drive us to reimagine our financial lives. Where we all have the tools that enable us to access markets, finance projects, and manage portfolios of investments. This is a world where we think differently about money and finance: where we increasingly believe in a better future because we are empowered with the capacity to create it.
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A New Financial Reality was originally published in @blockchain on Medium, where people are continuing the conversation by highlighting and responding to this story.