Blockchain: the key to restoring trust in financial markets

Written by

Todd Price

Published On

24 Feb 2023

The list of corporate failures and their fall out in markets is an extensive one.

Rarely however, is that fall out the result of the failure of a particular honest business or sector. Almost always, the failure comes from the exposure of certain information which proves a particular premise or allocation of trust invalid.

Numerous bubbles have been inflated through misplaced trust in the companies or sectors pitching their revolutionary products or services as if profits are all but guaranteed.

The dotcom bubble, Enron, Bernie Madhoff, the subprime mortgage crisis and the ongoing digital asset contagion that has consumed Celsius, Terra, FTX and whichever other casualties are yet to come, have all developed through promising riches and abusing the trust of ignorant investors.

Blockchain technology can go a long way toward legitimising and increasing the public’s trust in all different types of markets.

In the fall out of the FTX bankruptcy, many digital asset exchanges sought to sustain their customers’ trust and confidence in their services through publishing what was termed their Proof of Reserves.

The importance of transparency and data integrity in custodial services

The various companies created data sets which they claimed proved they were in possession of the funds that customers had deposited with them using Merkle trees. All of them failed to disclose, however, that such a proof of reserve is meaningless if it isn’t accompanied by a proof of liabilities as well.

A company can have every cent that was deposited with them, however if they have used that to secure credit, greater than their overall assets and they need to pay that liability, then they are effectively insolvent regardless of how many deposits they have from what are effectively unsecured creditors in their terms of service.

Now, it’s not expected of every company to disclose their full assets and liabilities for the public to examine, but by leveraging a data integrity verification software such as nChain’s Kensei, it can be possible to effectively prove that both sides of the ledger can be balanced through what can essentially be a blind audit.

Making sure that funds deposited in a custodial service are accounted for is just the tip of the iceberg in what blockchain can offer in the financial technology sector.

Its utility can extend through to the secure dematerialisation of a company’s assets, publicly yet privately distributing an exchange’s order books to eliminate or log spoofing and market manipulation, providing settlement and clearance, and tracking and tracing of entire supply chains from beginning to end.

Most people with an involvement in FinTech or even technology in general may have heard of the promises of blockchain technology. The Australian Stock Exchange (ASX) had been exploring blockchain based solutions for its securities trading platform for the last few years however, despite its $200m expenditure exploring various solutions, to date it was unable to develop a simple and elegant solution.

Blockchain’s potential for secure dematerialisation and tracking of assets

Perhaps if they had explored the latest technology created by the man who built large parts of their current platform in the 90s, they may have found the sophisticated yet simple technology that sits under the hood of the BSV blockchain.

Various other players in a wide variety of markets are finding utility in the BSV blockchain for end-to-end supply chain solutions, luxury goods provenance, distributed exchanges, and creating auditable tokenisation of gold bullion that all provide much more trustworthy services than their legacy counterparts.

The use of the BSV blockchain for end-to-end supply chain solutions and auditable tokenisation

Using the blockchain to increase customers confidence in not only the infrastructure that supports the markets, but also the provenance of the goods being traded could go a long way to ensuring that we are only participating in virtuous markets.

Having full transparency around how a diamond or gold bullion came to the market, or whether a Yves Saint Lauren handbag was authentic, or even if the next buy order on an asset exchange was legitimate would lead to more just outcomes for all participants.

The public nature of blockchain provides inherent protections against unethical activities

Even simply the public nature of the BSV blockchain provides some inherent protections for it being used for unsavoury activities. For a long time in Bitcoin’s early days, it was tarnished by its application in dark net markets where all manner of prohibited items were traded.

However, what’s not really talked about as often is the fact that its inherent characteristics of immutably recording transactions on a public blockchain has led to the successful identification and prosecution of many of the early vendors who thought they were using an anonymous financial technology.

Were the same quality of record keeping entered for a much wider swathe of corporate transactional activity then we might find that individuals such as Bankman Fried or Bernie Madhoff are more reluctant to attempt to abuse the trust of their customers in an effort to make profits outside of the regulatory framework that has been established to protect the public from conmen and fraudsters.

An honest and trustworthy market will yield the most effective allocation of resources and enhance the confidence in the actions of the others.

This is a win-win situation for all except the shysters.

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