May 3, 2019

Break The Bank

The role of cash and institutional banking is one that has come into question. A modern economy with expectations of speed and security are questioning the transparency of the institutions that benefit from holding our money and the question as to what value these traditional methods of banking will offer in a changing world is a curious one.

Money is, in and of itself, worth very little. Given the depreciation of goods, once used – it is accurate to say that the value of a banknote is, in fact, worth less than the paper it is printed on. The thing about currency is that it serves as a tangible unit of exchange based on an agreement on value. So early money took form from the goods that were easily available and easy to exchange. In the western world, it was things like animal furs and salt. In Asia, early money was metal knives, which gave way to the development of coins – easier (and safer) to carry around.

Carrying money became tiresome and so during the Middle Ages, two very important financial institutions were born. The first was banking. Banking was the domain of the Templar Knights, who were an order of incredibly wealthy warrior monks established to protect pilgrims through the known world at the time. All the way from Britain to Jerusalem. With this (rather slow) adoption of international travel being undertaken by many,  we needed a way to travel with cash so the idea was, you could deposit money with the Templar’s in one place; receive a bank note; take that piece of paper with you; and redeem it once you arrive at the destination. If you didn’t make it to your destination (antibiotics weren’t invested as yet,) then the Templar’s just held on to it. God’s will. (Lol.)

The other important institution that was created during the crusades was the ‘Trust’. As the lords and earls rode off to Jerusalem, there was no one capable of managing the farms or trading. When I say capable, I mean legally capable. There were plenty of very capable ladies left behind but they were not ‘allowed’ to handle money. What happened instead was that the holdings of the crusader were held ‘in trust’ with a male family friend of sufficient age and sound mind, for the benefit of the family. The act of breaching trust was punishable by death – it had to be or no one would have left the farm.

Both banking and trusts are still used today. The trust account is an important device where there is a trusted relationship. When a tenant pays rent, or where a buyer places a deposit on a home for sale, we hold that money on their behalf and administer it according to very strict regulations and always for the absolute benefit of the client.

Yet, a banking system invented in the Middle Ages comes with a few limitations that might be slowing things down.

Money has become rarer in its tangible, printed-on-paper form; we are all getting used to our dollars being digital.  They are invisible, like electricity.

Our money is held as numbers on a digital ledger now and moved around – either through a software transfer or a hardware transfer like Eftpos. Money is no longer in the care of warrior monks, and in the wake of the Banking and Financial Services Royal Commission; I’m not convinced that the financial institutions are the best guardians, when it seems there was a lot of benefits (in their favour) as a result of the ‘invisibility of our money.

The 21st century is seeking to address this lack of transparency with Blockchain technology. Like all radically new ideas, the Blockchain can take a little bit to get your head around…but once you do; its a real aha moment.

The Blockchain starts with the premise that money is invisible. A digital coin (in a currency like Bitcoin) is transacted – so Steve might use a Bitcoin to buy a carton of Award Winning Stone & Wood Pacific Ale from Peter. Peter now has the Bitcoin, and the transaction has created a special, unique link in the chain. Peter buys a book online from Megan. The Bitcoin travels through that special link in the chain to Megan, and it now creates a special, new and unique link for Megan. If Peter pretends he has the coin, and tries to buy another book from someone else; the transaction cannot work, because the link he had is closed in the Blockchain and nothing can pass through it.

It seems simple enough of an idea but what it means is that the Blockchain can guarantee the security and legitimacy of the transactions (links); so that money can be transferred instantly between parties; without ever being in the coffers of an institution. Combining this with the advancement of digital signatures, the electronic transfer of titles through the PEXA platform and it could mean that properties could be executed, paid for and settled in a matter of hours – not weeks – all with security and integrity that is unimaginable in a paper-based, institutional context.

The technology is gathering pace as more and more transactions seem to verify that speed and security are now the expectation and the Blockchain offers a tangible net public gain for consumers. There is no doubt that digital currencies (like Bitcoin) have had their challenges with fluctuating values and some brand issues while they seek to stabilise their value. The Blockchain, however, as the platform to trade digital currencies may be the first real step towards a trusted person-2-person financial transaction.