What is government sovereignty without control over currency? Thanks to bitcoin, some countries are confronting this reality. Long-term, it could change the relationship between government and currency. And if government responds to the disruption of government-backed currency in a sensible manner, the end result could be more stable and efficient currencies.
That’s why Ajit Tripath, director of PWC’s advanced risk and compliance analytics practice, calls the block chain a megatrend in a blog recently posted on finextra.com. He says the only way out of the digital disruption of government that is presently occurring is the “digitization of government.” He predicts that in 10 years half the OECD (Organization for Economic Cooperation and Development) currencies will be digital and by 2050, currencies will be fewer, more stable and less inflationary than today’s currencies. New technology and skill sets will be needed to make this happen.
Change Will Be Slow
Change will not come quickly, Tripath notes, as many regulators presently fear technology. “As it turns out, this fear is not made any better by the meagre technology investment governments are prepared to make in digitising the regulatory infrastructure,” he writes. Regulators are not using the fines they levy on industries to invest in technology infrastructure for their regulatory agencies but for “populist rhetoric and pork barrel projects in their constituencies.”
In the meantime, precious dollars that banks could invest in technology transformation, analytics, IT infrastructure remediation and digitisation continue to be diverted to mounting defence against fines, well beyond their risk mitigation benefits for the economy as a whole.
Few technologies have drawn these issues to a head more than bitcoin, which Tripath says threatens not only governments but the entire world order. If large numbers of people switched to bitcoin and the Federal Reserve lost control over monetary policy, the Federal Reserve and central banks would find themselves tasked with initiating fiscal controls.
“How’d the sanctions regime work when you couldn’t sanction individuals or businesses for sending money to wiki-leaks or Iran? How’d wars, oil exploration and pork barrel projects get funded?” Tripath asks.
Technology Undermines Government Control
In recent years, governments have not been able to control information on account of technology. Witness WikiLeaks and the social-media inspired Arab Spring.
“Blockchain is the key to this taming of the rebellious teen called bitcoin,” he writes. “The main thing to take away is that the way out of the digital disruption of government is the digitisation of government itself. So Mintcoin comes along, then Bitruble comes along and then Mr Haldane starts talking about ‘was it Bitstirling’? How long before we get a BitBuck?”
Tripath predicts that half of the OECD currencies will go digital in 10 years and by 2050, there will be fewer, more stable, less inflationary, more secure currencies than presently exist.
Noting that the foundation of power of trust, he says the trust of the millennials is not in government, assets or other people, but in proof.
Block Chain Brings Trust
Blockchain changes everything about the economics of trust. Not just currency, but anything that requires trust is now subject to decentralisation through proof. And proof requires data that’s available to all, immutable and tamper proof.
For the first time in history, technology makes it possible to have a data set that powers a “reasonably secure evidence of activity.”
The trust can be broken by a central authority or a well-funded adversary, Tripath notes, but to date, he does not know of a block chain that’s riskier than a central counterparty, bank or government.
To realize the benefits that block chain technology can bring, regulators need new technologies and skill sets. “They need many more computers, programmers, data scientists and well… hackers to match the technological and analytical sophistication of other ecosystem participants.”
“Blockchain is just one of the megatrends that’s about to force the issue. 5 years or 10… we don’t know but this is another intergenerational change in the offing – not just in how we consume products and services, but also how we regulate and govern.”