Financial Crises. How can Blockchain Technology Prevent Them?

Financial Crises have always been a rude awakening for investors and governments. Maybe it’s no coincidence that Satoshi Nakamoto’s whitepaper for bitcoin was released in 2008.

Everyone saw what happens when there is too much trust in central banks. The events of the 2008 financial crisis and other financial crises before are the result of blind trust in centralized custodians of wealth. The meltdown of these financial behemoths paved the way for the birth of cryptocurrencies.

After the technology started getting popular, many people argued that this crisis wouldn’t have occurred if blockchain was widely used then. It’s pointless to speculate how things may or may not have turned out, but it’s possible to quickly analyze what would happen in the near future in the event of other financial crises.

The Lehman Brother’s collapse is the perfect example of how blind trust and lack of transparency empowered bankers to commit fraud, manipulate ledges and reselling assets that had no value for years.

The mortgage bubble carrying over to the global banking system managed to shake society’s unquestionable faith in the banks and their integrity of keeping records, practices and systems. Ironically enough, Lehman Brothers posted record earnings of over $4 billion about 9 months before “officially” going bankrupt at the peak of the crisis.

Financial Crises are triggered by a large chain-of-events

Banks still use the centuries-old practice of double-entry bookkeeping. This allows for the reconciling debits and credits in the process of asset valuation. This has been a key factor in modern capitalism’s creation and is enjoying the benefits of blind trust granted by “default options”.

This blind trust provides an endless amount of freedom when it comes to manipulation and fraud. By resorting to foul play, Lehman Brothers managed to make their books seem like the bank was on the top of the world, while the reality was the exact opposite.

So by the acceptance that blind trust and lack of transparency were key in such an event, it’s important to pinpoint some uses of blockchain technology that we can use to prevent such scenarios in the future.

• Distributing the banking sector’s ledgers – This will allow every asset’s value and ownership to be recorded on a transparent, shared database. This will completely eliminate the possibility for shady practices like those used by Lehman Brothers and other banks back in 2008. One of blockchain technology’s greatest advantages is that it offers an easy way to maintain financial security while also providing increased transparency. Monitoring cash flow can be done in real time without the need to use individual banks for a review of operations.
• Financial risks – One of the biggest risks that creates “bad debt” is loan fraud. This is especially harmful in developing economies. This can easily be solved by storing users’ ID’s on a decentralized database. This will completely eliminate those schemes, at least those that use fake IDs. This will require mass adoption, but in time the results will be worth the wait.

Only the biggest crypto and blockchain enthusiasts believe that in the short-term future, blockchain technology can make financial crises and banks obsolete.

The reality is that even with the proposed solutions, such a feat will require mass global adoption with the complete and willing cooperation of everyone in the bank sector. This includes all forms of regulators and even the customers.

You can also check out:

• How are Millionaires Using Crypto to buy Real Estate
• The Federal Reserve on Crypto and Money Laundering
• Reasons for the United States to Use Blockchain Technology