Do you want to understand what blockchain and cryptocurrencies are? Professor Campbell R. Harvey is one of four key note-speakers at the Swedish House of Finance FinTech conference 22 – 23 August. Here is his blockchain crash-course.
What is blockchain?
– Blockchain is a distributed transparent ledger that establishes ownership and allows for efficient exchange of ownership. Records are grouped together in this unique technology and each group, or block, is cryptographically linked to the previous block. You can add new blocks to a chain but not change old ones. This makes blockchain technology very hard to manipulate.
A public blockchain is open for anyone to read and submit transactions for inclusion into the blockchain. A private blockchain is open to read and submitting only to a set of predefined list of entities.
What is a cryptocurrency?
– Cryptocurrency is a digital currency that is based on blockchain technology. The best known cryptocurrency is Bitcoin, which is an example of how public blockchain technology can be utilized. Ownership of a bitcoin is verified on a distributed digital network where all historical transactions are stored and open for all to see. If ownership of a bitcoin is transferred, this will be recorded in the blockchain. The transaction cannot be reversed or altered in any way once becoming part of the blockchain.
What does blockchain technology mean to the financial services industry?
– Blockchain technology enables both verification and efficient exchange of ownership in a very secure way. An early, obvious, use of blockchain technology was for payments. Blockchain technology allows the near instant transfer anywhere in the world at minimal cost and very low probability of hacking. Current applications allow any transaction or smart contract between parties to be put in a blockchain. The immediate implication is that backoffices will have a lot less to do and compliance expenses should decrease. This leads to considerable cost savings that should be passed on to customers.
What are the advantages and disadvantages of cryptocurrencies?
– There are now thousands of cryptocurrencies and buyers need to be aware that some are more secure than others. Let’s consider the leading two: bitcoin and ethereum. Both of these have the advantage of being highly secure and both reduce transactions costs. The disadvantages are: the currencies are relatively new, they are extremely volatile and there is regulatory uncertainty.
When will cryptocurrencies overtake national currencies as payment method?
– In 10 years, paper currency will be only for numismatists. It does not make any sense in the digital age to have paper currency. Bitcoin and ethereum are examples of cryptocurrencies that are backed by a computer program rather than a government. However, all central banks are investigating replacing their national currency with a national cryptocurrency. Here the central banks would have control over the supply of the national cryptocurrency. The innovation of combining a digital currency with blockchain is that it prevents counterfeiting. Hence, we should not be surprised to see blockchain based national currencies. Sweden will be one of the first countries to go to a national cryptocurrency given that only 3% of the transactions in Sweden are cash based.
Read more about the FinTech conference here.