Here's How Blockchain Will Eliminate Banks and Democratize Money

With so much of our daily lives already transformed by internet-enabled technology - vast stores of knowledge just a click away, cheap and instant communication with anyone, anywhere - our money is still mired in the 20th century. Sure, we can make payments with our phones and send and receive money online, but the transactions are still processed and verified by the same large financial institutions and middlemen. That means steep transaction fees, long wait times and lots of room for human error.

But a solution may already be at hand. Blockchain - a decentralized, distributed database that makes the cryptocurrency bitcoin possible - is poised to permanently disrupt the way we think about money, from transferring funds to making day-to-day purchases to the very concept of a national currency. Tech visionary Don Tapscott says that blockchain is the technology most likely "to have the greatest impact on the next few decades," predicting that it will "rewrite the economic power grid" and solve some of the world's most difficult problems in the process.

At its simplest, blockchain is a digital ledger of transactions shared across a global network of powerful computers. It uses cryptography to allow each participant on the network to add to the ledger in a secure way without the need for a central authority.

Each time a digital payment or transfer is made to the ledger, every computer on the network sees the transaction and verifies it instantly using open-source software. All of the information tied to the transaction is then stored in a unit called a "block." Each block is digitally stacked, one next to the other, in a chronological chain. Hence the term blockchain.

This is completely different from how financial institutions operate today.

If a bank in New York wants to send $100 to a bank in Taiwan, each side maintains its own record of the transaction. Teams of accountants and bookkeepers and auditors oversee every transfer and payment to ensure that $100 is really subtracted from the account in New York and credited to the account in Taiwan.

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"That's expensive and inefficient, but it's how financial transactions have worked for hundreds or maybe even thousands of years," Lasse Birk Olesen, the CPO and co-founder of Coinify, a blockchain payment company based in Denmark, told Seeker. "With a blockchain transaction, the verifications that banks do manually happen within the blockchain software and within the blockchain network."

Dependability and transparency are big selling points of blockchain. Instead of relying on humans to check for errors and fraud, the software polices itself by tapping the collective processing power of millions of networked computers. And once a transaction is stored on the blockchain, it's visible to everyone and unchangeable - forever.

"If all banks used blockchains to settle their international transfers, we could almost eliminate money laundering on a large international scale, because the system is too transparent to hide it," said Olesen.

Blockchain evangelists like Tapscott, who recently co-wrote the book "Blockchain Revolution: How the Technology Behind Bitcoin Is Changing Money, Business, and the World," compare the potential impact of the peer-to-peer financial technology to the invention of the internet. In a TED Talk, Tapscott explains how the world has already been upended by the internet of information, and that blockchain will herald the "internet of value."

Movement in that direction is beginning to pick up speed. On an individual level, people can already use blockchain to pay for goods and services or send each other money - instantly and without fees - using bitcoin or other digital currencies. But it still requires a middleman to convert the digital currency back to dollars.

"The next big step is for central banks to issue their national currencies on blockchains," said Olesen. "This way, you'll have something on the blockchain that has exactly the same value and reliability as a regular euro or dollar, but now you have it on this infrastructure, which is the most effective way to move money in the world."

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There are already a handful of countries actively shifting to digital currencies powered by blockchain technology. Tunisia has invested heavily in the electronic payment and exchange system eDinar, and is partnering with the Swiss firm Monetas to enable mobile digital payments and in-person transactions at any of the North African nation's post offices. In India, Prime Minister Narenda Modi has pulled much of the country's paper currency from circulation, and the Indian state of Goa has vowed to go "cashless" in 2017, promoting the use of mobile payments and credit card terminals, even in humble fish markets.

Developing countries with large numbers of unbanked citizens have a history of being the most innovative when it comes to mobile and digital payments. In Kenya, for example, the M-Pesa mobile payment system is the de facto way to pay for everything from tomatoes to taxi rides. But blockchain has attracted the attention of Western governments, too. Canada is exploring a blockchain-backed electronic dollar and researchers at the Bank of England have shown that a switch to a blockchain-issued pound would result in a 3 percent increase in GDP.

Lasse said it will likely be "decades" before any country adopts a digital native currency like bitcoin as their official currency, although he could see early adoption by countries suffering from runaway inflation like Venezuela. What really excites him is the concept of programmable money.

"When you have this money that's been born digital, you can build stuff that's been impossible to build before," said Lasse. "If you're a government handing out welfare, for example, you can specify that this money cannot be used in bars and pubs or for gambling, but only in supermarkets or for health care."

To learn more about how digital currency works, watch this TED talk by Neha Narula of the MIT Media Lab's Digital Currency Initiative.

Caption: Software code for blockchain cryptocurrency.

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