Trust is one of the more fleeting things in human society. It’s why lawyers exist. Think about whom you really trust in the world. Think about how many people that you do business with in your life that you would trust without using an attorney or legal documents. Simple handshake. Taking their word. How many people are there? Fred Wilson and his partner Albert Wenger have been posting a bit on blockchain recently. One of the blockbuster applications for blockchain is in marketplaces.
When I was getting ready to trade at CME, I had to undergo a whole vetting process.
- I had to take the CME Membership Class and go before the CME Membership Committee
- I had to find a clearing member who would take the financial risk of backing my trades should I not be able to do so.
- I had to get fingerprinted by the National Futures Association and have the prints run through the FBI database.
- I had to find a seat to lease or buy one.
- If I bought a seat, I had to pay cash, or put 50% down and find a bank who would loan me money.
As soon as I had a badge, the second I walked on the floor there was trust. Of course, you could build or lose your reputation by your actions on the floor. From the first moment you walked into a pit and opened your mouth, the people on the opposite side had no reason not to trust that anything you did was out of line. The trust was distributed across a closed community. Even today, that community is closed and the process to get into it archaic. Even if you want to get a membership online.
Clearinghouses were the original closed blockchains.
I think that blockchain will revolutionize marketplaces and help capital get allocated more efficiently. Virtually all of the marketplaces in operation today are based on older protocols and older norms. Blockchain is something totally different. In my real life example above, I wouldn’t need to go through any of those hoops to be trusted in the market. I had to have the capital before I could play, and the community would okay me by allowing me to interact with the chain.
In stock markets, this could have a huge effect. Instead of guessing where shares are held, or where they could be borrowed, the entire market would already know. Shorting will be more efficient, and seen as less capricious. As the amount of shares that were available to be borrowed got smaller, the lender of those shares might be able to charge a higher price for them. The +3 day clearing standard will certainly be history. Capital will move faster with increased efficiency. Blockchain has ramifications for brokerage. That efficiency will not only be reflected in the market, it will be reflected on balance sheets. There are many knock-on effects all across the chain of distribution.
What about when people commit crimes? Blockchain isn’t going to totally stop that. Today, in the UK, the Financial Conduct Authority won a landmark case which allows them to release information on unnamed individuals when it comes to nefarious activity. That’s good for transparency. Blockchain is all about transparency.
A lot of blockchain proponents talk about the “democratization” of capital. I don’t like that term at all. Capital goes to efficiency. Markets allocate capital better than anything else. Blockchain-based marketplaces will be more efficient than the vertically siloed marketplaces we have today. Blockchain isn’t going to solve income inequality. It could get resources to more people that can use them, provided it’s the most efficient allocation.