No financial invention has triggered as much potential disruption as Bitcoin. The implications of this technology affect every corner of the industry. In fact, the transformations that are resulting from Bitcoin are so broad that they are sometimes hard to keep track of in an organized way. This post offers a simple approach to thinking about these changes and a prediction that, in the long run, decentralization will be the most fundamental change.
There are three major disruptions of finance resulting from Bitcoin: decentralization, tokenization and blockchain.
Decentralization: Value is transferred without intermediaries. This prevents the formation of transactional monopolies.
Tokenization: Value is represented by digital tokens. This increases liquidity for all forms of ownership.
Blockchain: Value is tracked on an immutable ledger. This increases trust in the transactional record.
Centralization versus Decentralization
Note that the only one of these disruptions that is a direct result of Bitcoin is decentralization. Tokens and blockchain existed before Bitcoin. As a practical matter, however, Bitcoin launched tokenization and blockchain as disruptions because decentralization brought a new level of interest to these areas.
Of these three major disruptions, blockchain gets the most positive attention from the financial press, tokenization has the most revenue impact for investment banks, and decentralization has the most potential for positive impact for society.
The adoption of blockchain technology in finance will greatly improve the transparency of who owns what when. This has tremendous benefits in the form of cost savings, risk reduction and the promotion of property rights.
Tokenization will be a bonanza for investment banks who get in early. Traditionally illiquid assets will be traded in token form and a new asset class, the utility token, will grow as a funding option to rival debt and equity.
Note that decentralization is not required for the blockchain and tokenization disruptions. This may explain why they are achieving mainstream adoption first. These innovations can occur in a centralized manner with big benefits. Private blockchains can deliver cost savings and risk reduction and exchange traded utility tokens can be powerful marketing tools and result in lower funding costs.
However, decentralization is the full promise of Bitcoin. Decentralization results in the continual improvement of the financial system through the power of consumer choice.
The Pull of Decentralization
The ultimate power of Bitcoin's innovation may be that it is self preserving - it creates an environment that favors decentralization.
As mentioned above, Bitcoin unleashed blockchain and tokenization onto the markets. Blockchain seems to have already gained mainstream adoption. Tokenization should also gain mainstream adoption as soon as the regulatory environment catches up with the innovation.
Decentralization is not catching on as quickly among mainstream financial markets, likely because the institutions in these markets feel threatened by the competition. (Institutions that are relying on monopoly protection should feel threatened, whereas high quality institutions should see this as an opportunity to take market share).
It is usually unwise to say something is inevitable, but the power of democracy and the markets is so strong that it may be reasonable to say that decentralization is inevitable once blockchain and tokenization become mainstream. This is because over time these innovations will prove that society does not need centralized monopolies for a healthy financial system.
In order for centralized financial institutions to resist market demand for decentralization, they will need to convince voters that central monopolies are necessary. This will become harder and harder to do as tokenization increases liquidity in global markets and blockchain reduces the potential for secrecy.
As money and information flow more easily, people will demand a competitive decentralized financial system based on credit worthiness and value rather than a centralized system based on monopoly protection.
This will not just be a populous movement. As markets improve there will be centralized institutions in certain countries that come to the conclusion that they could do better competing in a decentralized global financial marketplace than maintaining their smaller centralized position.
Additionally, over time strong central banks will realize that they can manage their economies as well or better in a decentralized system, because in such as system, credit worthiness is king. Strong central banks will be better able to manage the supply of money in their regions. Weaker countries will need to become more fiscally responsible. .
This pull of decentralization is strong and will only get stronger. Central bankers today seem to not appreciate this. They talk about a world with blockchain, but without Bitcoin, as if this is possible or even likely. This dismissive approach to decentralization is not healthy for the growth of a stronger global economy.
In sum, Bitcoin has triggered three major financial disruptions - decentralization, tokenization and blockchain. Tokenization and blockchain will dramatically transform finance, but their largest contribution to the world will be to promote the adoption of decentralization.
By Shane Hadden, CBP, CFA; email@example.com
About the Global Currency Group: The Global Currency Group promotes the adoption of a decentralized global currency through investments, advisory services, new currency creation and advocacy.
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