Article written by Anton Golub, Lykke Chief Scientific Officer, Zurich, Switzerland
FORWARD: We rarely publish a forward but this information is not yet public, it may transform the way we conduct financial transactions worldwide, and the author, Anton, a current resident of Switzerland and friend of my son, Jay, is the foremost expert and innovator with this technology. This is almost as if you were sitting with Bill Gates at the time of the personal computer introduction, or next to Steve Jobs as he told you about Apple cell phones. And it is exclusive for our Arcanum Insider readers.
DISRUPTING FINANCE WITH THE BLOCKCHAIN
by Anton Golub, cofounder, Global Prosperity Challenge; Chief Scientific Officer, Lykke
The worldwide financial markets have been mired in the ‘old ways’ for many years but that is about to change thanks to the most innovative financial vehicle to enter the markets in many, many years, the powerful world changing Blockchain of Bitcoin! The financial markets have always been secretive, especially where the private trader is concerned. In fact, hidden from public view are details about how transactions worth trillions of U.S. dollars per day are processed across the world’s financial markets. Given the huge amounts of money involved, one would assume the technology is state of the art, but it is stunning to find out that this is not the case.
The current financial infrastructure still follows business conventions that were adopted at a time when transactions were executed manually—when banking was done without the help of modern computers, and when physical pieces of paper had to be moved and verified. Transactional processing is batch-based in daily cycles with settlement at T + 2 days from the time of the trade.
This explains why even today international payments can take up to two business days; quite extraordinary in our age of instantaneous communication, and why interest rates are paid daily. Due to infrastructural obstacles banks only process transactions at the end of the day and are unable to pay intraday interest rates on savings.
Today, very few people are aware of the genius of the Blockchain of Bitcoin and its ability to re-engineer the financial architecture. The community that invented it has not yet figured out that the Blockchain needs to be embedded within the financial system to reach its full potential. In fact, just recently, the Bank of England and the Federal Reserve were the first central banks toadmit that the innovation of the Blockchain is the most important discovery since the introduction of double-entry bookkeeping.
The Blockchain allows for continuous settlement of transactions, and it will pave the way for the development of the intraday interest rate market. The yield curve -which is the interest paid over various durations of time – will start with a one-second duration, not just at one day, as is currently the case, and extend outward to ten or more years. The creation of an intraday yield curve will make financial markets more dynamic and adaptive to changing market environment and shifts in supply and demand. Savers will paid interest regardless of the time period they keep their savings in the bank.
Intraday interest rates are also relevant for current financial markets, since more than 95% of transactions in the foreign exchange markets have a duration of less than 24 hours, typically only for few minutes. Traders do not currently pay or receive any interest, circumventing any monetary measures of the central bank. In extreme situations, the central bank can raise the daily interest rate as a last resort measure to protect the currency, but at a huge cost to the real economy. For example, in the 2000s, the Turkish central bank had to raise the interest rate to 8000% to prevent the currency from collapsing, driving many companies into bankruptcy, with over 1 million people losing their jobs. And this is why the innovative Blockchain is so critical to the future of trading; it allows instantaneous reaction and eliminates inefficiencies in financial markets.
The Blockchain processes transactions intraday; hence, it allows for second-by-second interest payments and extends the yield curve to ultra-short durations. This leads to a new degree of freedom for the central bank: Depending on market conditions, it can hike ultra-short-term interest rates in response to specific market conditions and leave the daily and longer-term interest rates at the low
levels. The economy benefits because investors and markets know there will be stability for long-term loans and capital asset pricing. Blockchain will create an equal playing field for small investors and they will have the same opportunities as the big banks and hedge funds.
Lykke Corp is a financial company based in Zurich, Switzerland that is building a global marketplace atop the Blockchain for all assets and instruments. The marketplace will use distributed ledger technology of the Blockchain to offer immediate settlement and direct ownership. The ultimate goal of Lykke is to enable every person in the world to have market access and issue his or her own currencies.
The Blockchain offers a unique opportunity to rewire the existing financial system and create a highly efficient one. The founders of Lykke Corp are leading experts in their fields and longstanding insiders of the finance industry. Anton Golub, the co-founder of Global Prosperity Challenge, has been involved in Lykke Corp from its beginning and is the Chief Scientific Officer. Anton has several years of experience working for hedge funds, academic and government institutions.
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OUR COMMENT: If you have questions you want us to pose to Anton please add them as comments here. We will have updates and expansions of this information because, eventually, it is much bigger than just Bitcoin based and has the potential to change the world financial markets. We are excited to bring it you first.