BlockchainFinanceFinancial Education

The Promise of Blockchain and Cryptography

Manufactured trust and the elimination of uncertainty

In the previous installment of this three-part series, I highlighted a few of the IMF’s concerns about crypto assets.  Crypto assets, such as Bitcoin or Ethereum, are a threat to the central bank system’s fiat currency charade.  The IMF even admits they need to adapt to and adopt a way to capitalize on the growing digital payment/digital currency trends that could potentially render central banks, and as a byproduct, mainstream monetary policy irrelevant.  Of course, they don’t exactly word it that way, but that’s the gist of their message.

To remain relevant and, more importantly, in control, the IMF is clearly trying to marginalize crypto assets while making a strong case for adopting the underlying blockchain technology and cryptography for their own brand of digital currency.

So, what is blockchain technology and cryptography, and why does it hold so much potential promise?

Sarah Pritzker from YouTube to MP3 Shark wrote an article showcasing five videos that provide a great introduction to blockchain technology and cryptography.  I highly recommend reading it and watching the videos.  As you do, you’ll find two consistent themes: The first is trust, or at least the elimination of uncertainty, while the second centers around how blockchain technology may be utilized and how it can help people in remote or poor regions.

Blockchain techies hope to engender trust due to the immutable nature of its records.  Once an entry is submitted into the blockchain record, it’s distributed to an entire network of computers, and it cannot be altered without alerting the entire network to the discrepancy.  If a record is viewed as corrupt, it’s easily replaced with a valid copy.  An authorized individual can view the record or add to it, but they cannot change the information already recorded.  The entries themselves are protected by special key codes, also known as cryptography, so an authorized user must know the key code in order to gain access.

One example offered is the level of trust necessary to make an online purchase.  Since the buyer doesn’t know the seller, a certain level of uncertainty exists, despite product and seller reviews, etc.  The blockchain is supposed to instantly fill that gap by manufacturing trust based on its immutability, encryption, and chain record.  Think of it as the chain of custody for evidence collected at a crime scene.  The evidence is collected and placed in a bag.  From there, everyone who has custody of or accesses the bag is supposed to be recorded, which is supposed to prevent evidence tampering.

For products, blockchain records would show the entire production process.  For produce, it would show the entire lifecycle of the plant, including fertilizers and/or pesticides used, so a consumer could verify whether it’s truly organic.  For real estate, blockchain title records would record every renovation, sale, etc.  You get the idea.

For crypto currency transactions, a user is issued two key codes.  One is meant to be private and not shared with anyone, while the other is a public key code used to exchange funds directly with another individual or institution.  What supposedly makes them secure, however, may also make them risky.  If the user loses the private key, they will not be able to access their account and their crypto currency may be irretrievable.

Crypto currency transactions were originally promoted as anonymous, but there is always an electronic trail or fingerprint that can be traced, as discussed here.  As a result, the blockchain is not completely impervious.  That’s why the IMF’s “concerns” regarding criminal enterprise is at best overplayed and at worst provably false.  If they wanted to, they could trace the bad actors who use crypto technology for illicit purposes.

The real issue for the IMF and central banks is their lack of control.  If they aren’t needed for the transactions, their role is quickly diminished and eventually irrelevant altogether.  They can’t allow that to happen.  As indicated in the previous installment, the IMF does support blockchain technology and digital currencies (for their own purposes), and, coincidentally, the IMF uses some of the same examples of utility touted by the blockchain promoters in the 5-video article I mentioned earlier.  Please go read it and watch the videos.  They’re very informative.

They all seem to be on the same page as they present the benefit to developing countries and economies like Kenya and China.  They also discuss the supply chain and title tracking blockchain technology would allow, in addition to the speed and reduced cost of peer-to-peer immediate funds transfers due to the elimination of intermediaries.

Instead of the costs and delays associated with traditional bank transfers and the SWIFT payment system, blockchain transactions are virtually immediate and direct between two parties.  Fast and (supposedly) secure, what’s not to love?  We’ll address that in our final installment.

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