In the span of less than 10 years blockchain, the distributed ledger that underpins digital currencies such as Bitcoin has gone from being an obscure ideological technology to one that is set to revolutionize government, business, and finance.
Written by Daniel Gasteiger and Shruti Patel
Skeptics regard it as a ‘pie-in-the-sky’ technology that will not deliver transformative benefits until its real-world applicability is proven. Enthusiasts say it is only a matter of time until blockchain fully replaces traditional modes of payments and record-keeping; ultimately creating some kind of new world order.
Despite the title of this piece, we don’t see blockchain as a magic sauce that will solve all the world’s – or the European Union’s – problems.
Nonetheless, there are some interesting parallels to be drawn between the rise of blockchain and the impending demise of Europe.
Recession Hangover
On the economic front, many countries are suffering from a recessionary hangover. Since mid-2014, four central banks including the ECB have moved their policy rates into negative territory and interest rates across the continent are the lowest they have ever been. Despite this, growth has been lackluster in most of Europe’s major economies and inflation remains stubbornly low. Clearly, monetary policy is proving ineffective as a tool for spurring bank lending in a bid to drive consumer spending and investment.
The ECB’s most recent announcement on further quantitative easing allayed fears of a deflationary spiral but it is running out of options. Rate cuts are politically unpopular and by no means guaranteed to work. There is also growing concern about the impact of negative interest rates or further rate cuts on other asset classes. Sweden’s real estate market is a case in point. Instead of boosting inflation as the central bank had hoped, negative rates have driven up house prices as buyers take advantage of lower mortgage payments. Now there are fears of an asset bubble.
So far banks have borne the brunt of the cost of negative rates. But, by keeping retail deposit rates fairly insulated the sector has suffered a huge blow in terms of profitability. Institutions with long-duration liabilities such as insurance companies and pension funds have also been hard hit as such (negative) rates seriously challenge their business models.[1]
Given that rate cuts have failed to bolster growth, the undesirable impacts of negative rates cannot simply be dismissed as collateral damage. Rather, they are cause for concern because they have serious ramifications for overall financial and macroeconomic stability.
Consumer behavior will be highly unpredictable
Looking ahead, in the event that banks pass on the cost of negative interest rates, consumer behavior will be highly unpredictable. Such a scenario would itself create economic uncertainly, and this tends to encourage saving in non-productive assets, typically cash. This has implications for the storing of money. On the other hand, if banks continue to insulate their customers from negative rates, they will become unprofitable and ultimately force their clients to look for alternatives elsewhere. Either way, the outcome for the status quo does not look good.
On the political front, the migrant crisis is perhaps the biggest threat to a unified Europe. The cost of accommodating large numbers of refugees is straining government finances and polarizing societies. Extreme parties are on the rise in France, Italy, Spain and attitudes towards the EU itself are becoming increasingly ambivalent. The Brexit debate is perhaps the most prominent example of this but nationalism is on the rise across the continent. Nationalist parties won elections in Hungary and Poland and recently Germany’s AfD (‘Alternative for Germany’) party won almost 25% of the votes in Saxony-Anhalt.
These trends point to a loss of confidence in central banks and the banking sector in general, declining trust in governments, and an increasing preference for socio-economic isolation over inclusion. In the face of such sweeping changes, blockchain, a technology that is little known, let alone understood by most people may seem irrelevant.
Blockchain-supported currencies
However, Europe’s current economic situation lends itself well to the introduction of blockchain-supported currencies. A pure digital currency would put a stop to endless money creation and spiralling debt for future generations because no one entity would control the supply of money in the system. State-sponsored crypto-currencies are another possibility. A recent report by Deloitte concluded that “while the scenario posed by crypto-currencies carries challenges, it could ultimately spawn a series of new opportunities that would free up capital for more productive uses, and transform the current payments system into one that is faster, more secure, and less expensive to run.”[2] For banks, savings on capital costs and a more efficient intra-bank payments infrastructure would be a double win on the cost side, possibly eliminating the current pressures from negative interest rates.
This line of thinking is already coming to the fore in some Nordic countries where digital payments and cashless societies are quickly becoming the norm. In parallel, many European countries are looking to ban high denomination bills in an effort to tackle tax evasion and money laundering. The move is supported by a larger global initiative to ban big bills championed by Peter Sands who argues that this relatively small step would make a massive dent on corruption and money laundering. This is another example of the benefits digital currencies could bring.
Blockchain could ease Europeans’ dissatisfaction
Politically, blockchain could ease Europeans’ dissatisfaction with the state of government finances by reducing the fiscal burden. As countries like Estonia and Honduras have shown, blockchain technology can be used to improve the efficiency and reduce the cost of government services. Estonia is using it to keep citizen’s health records and Honduras plans to use it for recording property rights. Crypto-currencies could also help mitigate refugee related issues in Europe by providing a cost effective way for them to receive monetary support. A blockchain-based central registry of refugees and migrants could also help manage the flow of individuals between countries in a transparent way.
While blockchain-based solutions cannot solve the EU’s troubles in the short term, careful application of the technology could stave off a populist rise to power by re-building trust through transparent monetary and political systems. Governments and central banks would do well to consider its advantages and plan for its adoption over the coming decade.
First publiished on LinkedinPulse
Authors
Shruti Patel is a freelance economist and writer based in Zürich.http://www.shrutispatel.com
Daniel Gasteiger is the co-founder of nexussquared in Zürich. http://www.nexussquared.co/
[1] “How have central banks implemented negative policy rates?”, Bank of International Settlements (BIS), March 2016.
[1] “State-Sponsored Cryptocurrency: Adapting the best of Bitcoin’s Innovation to the Payments Ecosystem”, Deloitte, 2015.
