The controversial new virtual currency Bitcoin is powered by a technology called Blockchain.
Blockchain is at its heart an electronic ledger. That is, a decentralized and distributed ledger that is maintained by a network of peers. A peer is just another computer which uses a copy of Blockchain and has the ability to verify transactions. The “block” in Blockchain refers to a transaction that has been made and verified, and the data about that particular transaction is stored in a “block”. It is a “Blockchain” as every complete block is then added to the “chain” of all previous transactions.
According to HSBC analysts Anton Tonev and Davy Jose, Blockchain represents the “culmination of the evolution of trust, suited for the digital era.” Tonev and Jose are the authors of an HSBC report titled Blockchain — helicopter money on demand published in November 21015.
How does Blockchain actually work?
Every time a transaction occurs in the Blockchain system, the peers all work to try and to solve a mathematical puzzle and get a reward (Bitcoin) for their computational efforts. The peers are said to have acted as “miners”.
One important feature of Blockchain is there is no double spending because the existence of the transaction in the ledger must be cryptographically proven.
According to Tonev and Jose, Blockchain provides a partial, and most optimal to date solution to the problem of how do you authenticate trust in a distributed system. This means that Blockchain intrinsically solves the issue of having to trust a third party as the protocol moves beyond the requirement for a centralized authority to keep track of transactions, and enables trust between strangers.
The HSBC report also highlights that it is somewhere between very difficult and impossible to go back and change records with Blockchain. Altering historic transactions would require truly massive computing power (experts say it is theoretically possible, but not practical). Therefore, trust is maintained through mathematical confidence.
In summation, Tonev and Jose argue: “Thus Blockchain is a protocol where a technical and secure process enables strangers to conduct transactions over the Internet without the need for a trusted third-party gate keeper. Blockchain allows decentralized and distributed trust in the digital age.”
Blockchain could be the ultimate “helicopter money”
Steve Major, the global head of Fixed Income Research for HSBC, is an expert on the “unconventional policies” that central banks have ended up pursuing after the global financial crisis of 2007-2008, including negative interest rates, quantitative easing, and more.
Major points out when there is a new crisis, all options will have to be considered. One much discussed potential option would be “helicopter money”, that is, central banks buy newly-issued government bonds to support a large increase in government spending.
Major argues that Blockchain is the ideal tool for this purpose: “We believe Blockchain could be considered a form of superior helicopter money, because it resolves the issue of trust. It would perhaps be the ultimate “unconventional policy”.
Tonev and Jose point out that some emerging economies, such as Kenya and the Philippines, are pressing ahead with the development of this kind of “electronic money” or “mobile money.”
The Philippines first allowed the use of mobile money back in 2001. In 2014, the E-Peso was proposed to make the “E-Peso legal tender, and a valid and legal payment for debt, taxes, goods and services transacted through the Internet”.
They note: “Essentially this bill implies that they are proposing to use a variation of the Blockchain protocol we’ve been describing in this paper, and furthermore using commercial banks to process E-Peso.”