The Bank of England’s recent report on payment technologies and digital currencies regarded the blockchain technology that enables digital currencies a ‘genuine technological innovation’ which could have far reaching implications for the financial industry.
So what is the block chain and why are y’all getting excited?
The block chain is an online decentralised public ledger of all digital transactions that have taken place. It is digital currency’s equivalent of a high street bank’s ledger that records transactions between two parties.
Just as our modern banking system couldn’t function without the means to record the exchanges of fiat currency between individuals, so too could a digital network not function without the trust that comes from the ability to accurately record the exchange of digital currency between parties.
It is decentralised in the sense that, unlike a traditional bank which is the sole holder of an electronic master ledger of its account holder’s savings the block chain ledger is shared among all members of the network and is not subject to the terms and conditions of any particular financial institution or country.
So what? Why is this preferable to our current banking system? bitcoin blackjack
A decentralised monetary network ensures that, by sitting outside of the evermore connected current financial infrastructure one can mitigate the risks of being part of it when things go wrong. The 3 main risks of a centralised monetary system that were highlighted as a result of the 2008 financial crisis are credit, liquidity and operational failure. In the US alone since 2008 there have been 504 bank failures due to insolvency, there being 157 in 2010 alone. Typically such a collapse does not jeopardize account holder’s savings due to federal/national backing and insurance for the first few hundred thousand dollars/pounds, the banks assets usually being absorbed by another financial institution but the impact of the collapse can cause uncertainty and short-term issues with accessing funds. Since a decentralised system like the Bitcoin network is not dependent on a bank to facilitate the transfer of funds between 2 parties but rather relies on its tens of thousands of users to authorise transactions it is more resilient to such failures, it having as many backups as there are members of the network to ensure transactions continue to be authorised in the event of one member of the network ‘collapsing’ (see below).
A bank need not fail however to impact on savers, operational I.T. failures such as those that recently stopped RBS and Lloyds’ customers accessing their accounts for weeks can impact on one’s ability to withdraw savings, these being a result of a 30-40 year old legacy I.T. infrastructure that is groaning under the strain of keeping up with the growth of customer spending and a lack of investment in general. A decentralised system is not reliant on this kind of infrastructure, it instead being based on the combined processing power of its tens of thousands of users which ensures the ability to scale up as necessary, a fault in any part of the system not causing the network to grind to a halt.