Can Bitcoin Be the Foundation of a Fairer Financial System?
According to one prominent economist, cryptocurrencies could make financial systems safer and more accessible to all.
Bitcoin might be synonymous with libertarians and crypto-geeks, but it could help make the financial system more stable and more accessible for some of the poorest people in the U.S., according to a leading economist.
Simon Johnson, a professor at MIT’s Sloan School of Management, says some form of digital currency could fundamentally improve the financial system.
“How do you feel about the way that our existing financial system operates?” Johnson asked the audience at the Business of Blockchain conference, an event organized by MIT Technology Review. “I myself have a lot of concerns. The system we have is not robust—it almost collapsed in the fall of 2008 in the United States, the most sophisticated financial market in the world.”
Bitcoin is an open-source, decentralized digital currency built on top of a distributed cryptographic ledger. Every transaction is stored across a distributed ledger that is maintained through a process of “mining” that generates more bitcoins (see “What Bitcoin Is and Why It Matters” and “Why Bitcoin Could Be Much More than a Currency”).
In theory, a cryptocurrency such as Bitcoin might make the financial system more stable by providing a way to monitor and trace transactions. Indeed, it may be no coincidence that the paper outlining the concept for Bitcoin was released in 2008, during the financial meltdown. The open-source code for the currency was released several months later, in 2009. Bitcoin was invented by the pseudonymous Satoshi Nakamoto, whose identity remains a subject of great speculation.
Cryptocurrencies might also remove many of the hurdles that make it harder for poorer people to use the financial system, even in advanced countries, Johnson said: “It is absolutely shameful and really embarrassing that so many people in the United States—one of the richest counties in the history of the world—do not participate in the formal financial system.”
Johnson said that up to 20 percent of the U.S. population does not use conventional bank accounts but instead relies on alternative services that serve to cement poverty. “Part of the very high cost of being poor in the United States is the cost of those services,” he said. “We could fix this.”
Since Bitcoin was released, numerous alternative cryptocurrencies have popped up, as well as different versions of the distributed ledger, or blockchain, on which Bitcoin was built. Johnson said it remains unclear whether Bitcoin itself might be the ideal cryptocurrency, or whether some alternative operated by a central bank or a consortium of companies would supersede it.
Many financial institutions are exploring the opportunities offered by Bitcoin and blockchains. Speaking at the same event, Amber Baldet, who is blockchain program lead at JP Morgan, described efforts to explore ways of offering blockchain-based financial services to those who would otherwise have no access to financial services.
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Joi Ito, director of the MIT Media Lab, said that Bitcoin or another cryptocurrency might not only provide poorer people with access to banking but make all sorts of financial institutions more accountable.
“We have a financial system that’s built on the idea that financial transactions require these large institutions,” Ito said. “Whether you’re an individual trying to get access or you’re a pensioner with lots of money tied up in the market, you’re going through these intermediaries that don’t represent you very well. [Bitcoin] creates a much more level playing field, and hopefully it will reduce the complexity of the financial system.”