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Blockchain Challenge in Basel

We participated in the Blockchain Challenge in Basel - how to make whitelisting FINMA compliant? More blockchain infos will follow:

We participated in the Blockchain Challenge in Basel as one of the advisors. Our Co-Founder Tarmo defined for students the task to build a compliance filter for whitelisting crypto accounts — it’s about making whitelisting FINMA compliant. The task was accomplished. This photo is the memory of this great event!

Blockchain Challenge in Basel
Blockchain Challenge in Basel

Just in case — Tarmo is on the left on this picture, in not very-business costume.

The challenge in this event was small and solvable. However, there is a much bigger challenge with the blockchain – it’s about how the financial system will transform due to blockchain technologies. Our blog contains many articles about the financial ecosystem and blockchain transformation.  We will summarize several relevant articles here:

What will happen to traditional banks?

In the article Combining Traditional Banking with Crypto Finance, we did some scenario planning and analyzed what will banks do in this new situation? We forecasted following strategic moves 3 years ago and that’s what is happening now. More and more banks start to offer their blockchain solutions. There is a very simple driver for this – the clients demand these solutions and the banks are earning revenues.

Financial sector transformation
Financial sector transformation

We analyzed this topic in the article Banks and Crypto: What Will Happen to the Banks? The following figure visualizes the transformation in the bank’s value networks. Earlier, the banks were in the center of clients’ value networks. But as alternative blockchain-based services emerge, clients will start to use these alternatives, thereby reducing their dependency on banks.

This means the value-adding activities start to circumvent the banks, which means the banks start to lose a part of their revenues:

Banks value network transformation
Banks value network transformation

In the article Blockchain Technology in Banking: Everything You Need to KnowBanks we analyzed how the blockchain transformation will impact the processes of the commercial banks. Why are the processes important? It’s because the service offering in the service economy is driven by the processes. We were perhaps over-optimistic in forecasting the impacts 3 years ago, however, this transformation has started.

Why do we need Blockchain?

In the article Why do we have inequality? we analyzed one of the key factors for the inequality – that’s the proximity to the money creation. The rich have high proximity to the money creation; the middle class and the low class have low proximity. The respective benefits will accumulate generation over the generation. This, among other reasons, will create inequality.

 

Wealth Pyramide
Wealth Pyramide

In the article Credit-Money in the Crypto Sphere? we analyzed how did the monetary systems function in the past? Additionally, we looked at why would one need credit-money. Credit-money has existed for 5000 years, the earlier artifacts are from Mesopotamia. Interestingly, the first artifacts of coined money are only 2500 years old. Credit-money has been created decentrally 

The next article Crypto Credit Money  –  Will this time be different? focused on the question can crypto monetary system function without a crypto credit-money? Our view is that the crypto economy will need credit-money in the same way as every key civilization in the last 5000 years.

In the article Crypto Monetary System – Why do we need Crypto Credit-Money?  we analyzed how the monetary systems are working, what the commercial banks are doing in the credit-money creation/destruction and why do we need credit-money for the crypto economy. 

So, why do we need blockchain? The answer is the disintermediation of the third parties. Let’s think on the credit-money:

  • For 4700 years it was created decentrally in the peer-to-peer transactions
  • After that, it was created for ca 200 years as “private credit-money”, where the banks issued their credit-money. The example of this is the “Free Banking Era” in the U.S.
  • For the last 100 years, we do have centrally managed credit-money. It’s the commercial banks, which are creating the credit-money. However, there is deposit insurance, which protects the consumer’s deposits. And there is central bank re-capitalizing or merging bank holding companies, which are on the brink of bankruptcy. This results in the central credit-money system.

But why did the third parties emerged? The answer is in the information processing costs. The “private-credit-money” allowed to create credit-money in a more effective way than the decentrally created credit-money. And the “central credit-money” allowed to create credit-money in a more effective way than the “private credit-money”.

However, by entering the blockchains we have changed the rules of the game. The information processing costs of decentrally created credit-money will be lower, than the information processing costs of centrally created credit-money. This means blockchain-based decentral credit-money will be more effective. 

Till the emergence of blockchain, the key to business success was the “scale effect” – offering the product/services, but continuously scaling up the company. Since the emergence of the blockchain, the “scale effect” has become obsolete. One doesn’t need big companies anymore. But one can proceed with much smaller entities, in the way as Adam Smith in his book Wealth of Nations, which became the basis of modern capitalism.

Are we ready for an alternate financial system?

In the article How to Disintermediate the Banks? we did some scenario planning and analyzed what needs to be done for disintermediating the banks. This article contains a link to a conference presentation video on the same topic as well. We call disintermediate banking “Decentralized Autonomous Bank” (DAB). The following image shows the components of Decentralized Autonomous Bank architecture. It shows as well how far we are in achieving the DAB:

Decentralized Autonomous Bank Architecture
Decentralized Autonomous Bank Architecture

In the article Blockchain-based Financial System – Are we ready? we analyzed are we ready for a blockchain-based financial system. We proposed as well a gradual migration to blockchain in the following way:

  • Instead of keeping 100% of the assets in the banking system, let’s start with keeping 90%, then 80% and so on assets in the banking system and the rests in the blockchain-based financial system
  • Instead of keeping USD or EUR, the users can keep first their equivalent stablecoins. However, these stablecoins are getting debased as much the main currencies are getting debased (1:1 mapping …)
  • Instead of using stablecoins, users would use the main cryptocurrencies, which have no risk of the debasement, but rather a high potential of the appreciation.

Summary

We started this article with the Blockchain Challenge event in Basel. However, the challenge in the blockchain is much bigger – it’s the transformation of the financial ecosystem. It’s from one side the disintermediation of the banks. And from other side transformation of the services, which the banks are offering.

Our focus is on SmartCredit.io is on crypto lending/borrowing. We hope to add with our lending platform valuable part into the emergence of an alternate financial ecosystem.

Additional information

For more information check out the related articles from the SmartCredit.io blog:

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