Imagine a stock market transaction in Pakistan. If you want to transact, you will typically rely on the Central Depository Company (CDC) for shares safekeeping. For a sell order, the securities in the CDC must be routed to a broker account, who will then complete the order on the exchange. The market clearing agency, the National Clearing Company of Pakistan Limited (NCCPL) will take T+2 days (transaction plus two days) to deliver cash to your broker account. Assuming, the broker deposits cash the same day, a local bank would take another T+2 (sometimes, T+3) days to release funds to your account. If there is a weekend in between, expect final settlement with additional round of delays.
In an age where we transact information at the speed of light, what holds us not to complete the payment process more quickly? If we can propel our music, documents, photographs, voice notes and text messages instantaneously, why can’t we do the same with our money? The answer fundamentally lies in ways we have integrated ‘trust mechanisms’ in our daily lives through central intermediaries. For instance, we rely on a central company to hold our securities safely. We trust an elaborated market design where brokers buy and sell on our behalf in lieu of small fees. At the final settlement, we trust banks and financial institutions to deliver us our cash. But what if we could transact directly with the counter party without the need of a CDC, NCCPL, broker and a bank? Just like we can process our videos, music, and pictures to anyone, in peer-to-peer mode, why can’t we process share purchases, global remittances and online payments the same way?
Interestingly, today we can complete our transactions without the help of central intermediaries. It all started in 2008, when a pseudonymous person Satoshi Nakamato wrote a groundbreaking white paper and demonstrated the possibility of a peer-to-peer exchange of value that can occur in almost real time, eliminating the need for central intermediaries and ensuring immutability to the transaction ledger, keeping assets safe and secure through a rigorous process of transaction mining. Most of us are aware that the asset underneath that framework is Bitcoin and has become Satoshi’s famed invention now. But besides launching Bitcoin, the real innovation is the framework itself; digital assets combined with cryptography in a decentralized way. Want to send money from Bannu to Auckland, then use your wallet to send your digital asset to another person’s private key. No wait times, no transaction fees, no exchanges, no weekend delays and no intermediaries. Peer-to-peer. Fast, reliable, and secure.
Since 2008, a lot has transpired, and the digital assets framework has evolved massively. Today, there are more than 1,600 cryptocurrencies, which endeavor to act as a stable medium of exchange. Then, there are hundreds of platforms, such as Ethereum, which want to act as a base layer platform for decentralized applications. Ethereum’s success has been phenomenal. It’s founder, Vitalik Buterin, thinks of Ethereum as a world computer with thousands of nodes acting as its agents, providing computing power to verify and process transactions. Since its launch in 2013, Ethereum has eclipsed total market cap of some of the giant conglomerates such as P&G and Nestle and is on its way to build new forms of smart contracts, completely devoid of central authorities and processing transactions peer to peer.
Another form of digital assets are utility tokens needed to interact within the service use case. Consider Golem Network, a de-centralized app, which aims to harness the unused, idle memory lying in each of our computers. If everyone pools in the fraction of their computer memory, it can result in a massive computing resource, equivalent to the size of a large cloud storage. If you provide your idle computing capacity, Golem Network will pay you in their native utility token, called the GLM. Such an application, if successful, can upend large infrastructure cloud service providers and will make a strong case for a distributed network storage.
Then, there is a world of security tokens, which are digital, liquid contracts for fractions of any asset classes, such as real-estate, car, bond, or an equity ownership. With the blockchain framework, why not have the security ownership of any real asset, and transact via an immutable ledger? Why wait for T+4 settlement processes when both buyer and seller can transact their real assets at T+0 without the need for custodians, clearing houses, brokers and exchanges? Compound this with smart contracts, which are programmed algorithmically to assist both buyers and sellers, the need for central intermediaries is only expected to diminish from hereon. Overall, the blockchain framework has grown in ways that now attempts to completely reimagine the world around us. In Pakistan, the conversation has largely remained around Bitcoin – whether we should do mining or not and whether it is legal to transact Bitcoin using local exchanges? The real questions are more complex and require more ingenuity. If blockchain can permit newer payment models, shorter transaction times, faster clearing and settlement, improved financial inclusion, real-time ledger updates (think FBR), then a whole new era of transparency and digitization will occur. What is required is to balance regulatory oversight with the need to foster financial innovation and remain flexible enough to accommodate evolving technology.