One of the best things about economics, if you think about it right, is you see both sides of the coin. Costs/Opportunity Costs and other concepts are very powerful. My friend Professor Craig Pirrong is an economist. He teaches at the University of Houston and earned his PhD at Chicago. He is an expert on markets, especially oil/energy markets. He is also an expert on Russia and the Middle East which came out of his interest in oil. Recently, his blog StreetWise Professor has been a fun read.
Yesterday I blogged about some limitations with implementing blockchain. I confined myself to looking at strategy. Craig blogged about it through the lens of economics. If you are a big Bitcoin/Blockchain fanboy, it is worth a read. If you are not in favor of Bitcoin/Blockchain, it will reinforce your opinion but give you academic information for it.
Here is a link to the entire post, and a quote. Read it.
Now do you understand why banks are so keen on the blockchain? Yes, they couch it in terms of improving transactional efficiency, and it does that. But it also presents the opportunity to create monopoly financial market infrastructures that are immune from competitive entry. The past 50 years have seen an erosion of bank dominance–“disintermediation”–that has also eroded their rents. Blockchain gives the empire a chance to strike back. A coalition of banks (and note that most blockchain initiatives are driven by a bank-led cooperative, sometimes in partnership with a technology provider or providers) can form a blockchain for a particular application or applications, exploit the centripetal force arising from network effects, and gain a natural monopoly largely immune from competitive entry. Great work if you can get it. And believe me, the banks are trying. Very hard.
It’s a very thoughtful blogpost and really brings up things we should be thinking about. So far, we have only thought linearly about unintended consequences of blockchain implementation. I think almost all Bitcoin advocates I have read assume that the technology will make things more competitive, and markets flatter. The opposite might happen and it’s worth thinking about.