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Debt-based Economy: The Intricate Dance of Money and Debt Read chapter Read first chapter

2017 | OriginalPaper | Chapter

2. Fragmentation of Finance

Author : Kariappa Bheemaiah

Published in: The Blockchain Alternative

Publisher: Apress

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Abstract

In this chapter, we will cover the technological changes that are currently challenging the status quo in finance. By delving into the technical aspects of Blockchain and Fintech, a clear perspective of the transformational effects of these technologies, that emphasises the role of the Blockchain as a unifying factor will be evident. This will provide a holistic understanding of the implications of these technologies, how they are effectively fragmenting the financial sector and thus enacting a paradigmatic transformation. Special importance is given to explaining why it is necessary to include the fragmented financial market when constructing macroeconomic models, which is not the case today. In essence, it underlines that the structure of financial markets is in a state of flux, and as a result, shows why we require a new construct that is capable of leveraging the convergence of technology.

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previous chapter Debt-based Economy: The Intricate Dance of Money and Debt
next chapter Innovating Capitalism
Footnotes
1
The Advertising Slogan Hall of Fame, sponsored by AdSlogans.com, recognizes excellence and best practice in advertising, identifying the best in branding.
 
2
Ian Richardson played the character Francis Urquhart in the 1990’s while Kevin Spacey, plays the character Frank Underwood today. The characters are based on the novel House of Cards, written by Michael Dobbs.
 
3
The “real” economy is defined as the part of the economy that is concerned with actually producing goods and services, as opposed to the part of the economy that is concerned with buying and selling on the financial markets (FT Lexicon)
 
4
A CLO is debt-based security comprised of various corporate loans.
 
5
Governor of the Reserve Bank of India (till September 2016)—Rajan questioned the “worrisome” actions of the banks when he served as an economic counsellor at the International Monetary Fund (IMF) in 2005. In a 2014 article in Time magazine, he stated that he now fears long-term low interest rates and unorthodox programs to stimulate economies, such as quantitative easing, may lead to more turmoil in financial markets.
 
6
Co-director of the Centre for Economic and Policy Research—In 2004, in an article in The Nation titled “Bush’s House of Cards”, he wrote: “The crash of the housing market will not be pretty….”. In his 2010 book, False Profits: Recovering from the Bubble Economy, he states that the US needs to “rein in a financial sector that has grown out of control.”
 
7
Head of the School of Economics, History, and Politics, Kingston University—Keen is widely regarded as one of the first economists to have foreseen the crisis. In 2005, he set up the website debtdeflation.​com as a platform to discuss the “global debt bubble.” Commenting in BRW magazine, he argued: “This is how bubbles grow and burst and ignoring debt in this way is one of the great fallacies of modern economics.”
 
8
Director of Policy Research in Macroeconomics (PRIME)—In 2006, Pettifor published the book, The Coming First World Debt Crisis. In the book, Pettifor blamed the US Federal Reserve, politicians, and mainstream economists for endorsing a framework to support unsustainably high levels of borrowing and consumption under the guise of propping up the economy. The book was widely ignored on publication.
 
9
Chairman of Roubini Global Economics—In 2006, in an address to the International Monetary Fund, Roubini warned of the risk of a deep recession that would reverberate around the world.
 
10
Term borrowed from the Minneapolis Federal Reserve bank’s initiative will explore various bold and transformational solutions to address TBTF.
 
11
SIFI: A SIFI is an institution, activity or market considered so important to the functioning of the economy that special rules and buffers are put in place to (1) reduce the probability of failure and (2) minimize spillovers in case of failure.
 
12
The Dodd-Frank Act requires large financial institutions deemed systemically important to submit an orderly resolution plan each year. These plans, called “living wills,” can run up to thousands of pages.
 
13
On August 2014, the Federal Reserve and the Federal Deposit Insurance Corp. rejected the living wills of 11 of the biggest bank holding companies in the U.S.
 
14
#EndingTBTF is an initiative propelled by Kashkari which, over the course of 2016, has invited researchers, academics, and policy makers to send their proposals on ending TBTF. Apart from accepting proposals all year round, the initiative also hosts quarterly symposiums, where selected submissions are presented and where experts debate the issue in roundtable conversations. The discussions and presentations are live-streamed and the research is accessible to all via the website https://www.minneapolisfed.org/publications/special- studies/endingtbtf . Kashkari intends to present the findings of this year-long event at the end of 2016.
 
15
The Swedish National Bank, or Riksbank, was created in 1668, followed by the creation of the Bank of England in 1694. This model has been replicated in most industrialized and developed nations since then.
 
16
Of the 6,500 banks in the USA, only 25 have more than a $100 billion in assets (Better Markets, 2015).
 
17
It is the relationship between memory and cooperation that needs to be looked at as a focal point, since it is relevant to our thesis. Owing to the fanfare that has been given to Blockchain over the past few years, most of us are already aware of its immutability features. Once a transaction has been performed, there is no way to reverse it and the Blockchain stores every transaction that has been performed on it since its inception. The next section of this chapter will explain the technical underpinnings of this technology. For now, just keep this in mind and try to connect the dots as we attempt to form a train of thought that is truly multidisciplinary in essence.
 
18
Mark Carney started his career in Goldman Sacks.
 
19
The speech was given at the Mansion House, London. A full copy of the speech can be found at: http://www.bankofengland.co.uk/publications/Documents/speeches/2016/speech914.pdf
 
20
Said in reference to the balance between inside money (created by commercial banks) and outside money (created by central banks)
 
21
ACH - Automated Clearing House. The ACH is the largest clearing house network and the backbone for the electronic movement of money and data in the United States. It transfers over $40 Trillion in value a year. The two main operators of the ACH network are the Federal Reserve and the EPN (Electronic Payments Network, a private institution). The ACH is administered by NACHA, which manages the development, administration, and governance of the ACH Network.
 
22
Transferwise eliminates high bank fees from foreign exchanges by matching users based on the currency they are sending. If a user wishes to send money from Europe to India (Euros to Rupees), then the company finds another user who wants to transfer a similar amount of money in the opposite direction (Rupees to Euros). A simple, secure swap then takes place, allowing Transferwise to execute the transfer up to 89% cheaper than with a bank ( http://www.telegraph.co.uk/money/transferwise/how-does-it-work-and-is-it-safe/ ).
 
23
On the 30th of April 2016, the founders of SLOCK.IT launched the DAO (Decentralized Autonomous Organization) on the Ethereum platform.
 
24
Gavin Wood is widely known in the Blockchain community as the Co-founder and CTO of Ethereum and the Co-founder of Grid Singularity (a company that uses the Blockchain for decentralized energy data management)
 
25
BRACKETS: Blockchain-based Release of funds, that Are Conditionally Key-signed, and Triggered by Signals.
 
26
EDD: Enhanced Due Diligence.
 
27
Know your business.
 
28
In the UK, there are currently eight such providers approved by the government, including PayPal, the Post Office and Experian.
 
29
A PKC is an identity with some other information (such as an expiry date) that is put together and digitally signed by a third party. The attributes might come from a variety of sources. If you send me such a certificate, I can use the PKI to check the digital signatures so I can trust the contents.
 
30
Because a breach can potentially leak customer authentication information.
 
31
Zooko’s triangle is a conjecture that unites the three desirable traits of a network protocol identifier: human-meaningful, decentralized and secure. The conjecture states that in a system that is meant to give names in a protocol, only two of the three desirable attributes can be achieved.
 
32
The Namecoin blockchain was one of the first forks of the Bitcoin blockchain and is still in existence.
 
33
offers every world citizen an Estonian government-issued digital identity and the opportunity to run a trusted company online
 
Metadata
Title
Fragmentation of Finance
Author
Kariappa Bheemaiah
Copyright Year
2017
Publisher
Apress
Book
The Blockchain Alternative

Print ISBN: 978-1-4842-2673-5

Electronic ISBN: 978-1-4842-2674-2

Copyright Year: 2017

DOI
https://doi.org/10.1007/978-1-4842-2674-2_2

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