Trust, the Cornerstone of Human Interaction
The power of trust within human society is absolute; it is fundamental to human interaction. Where we cannot trust one another, we can instead assign a third party to act as a trustee between the parties. That third party is typically one of considerable societal weight and bearing, acting as an intermediary.
The trust placed in the hands of that third party translates to power, absolute power. It is for this reason that we have created the idea of fiduciary duties and regulation of those duties. As a society, we trust that these fiduciary intermediaries are trustworthy and that the checks and balances offered by regulatory oversight will ensure that bad actors are prevented or caught.
However, those anointed trustees throughout human history have a track record of abusing that power – often without recourse – that has impacted on the extent of our freedoms, the nature of our commercial arrangements and indeed our very well being. That they have done so, often in flagrant disregard for regulatory oversight, strikes at the very heart of our personal and commercial arrangements.
The High Priests of Trust
Since the earliest days of modern civilisation, we have had trust intermediaries who occupy key positions in human interaction. In the European context we had an all-powerful church that stood between believers and God; it was not until Henry VIII and his penchant for chopping and changing wives that a national regent asserted independence from Papal dicta.
The 'Age of Enlightenment’ saw new high priests of trust anointed as the focus of our worship moved from God to commerce and the generation of wealth: banks, insurers and the most powerful corporations.
That remains the case today. Banks, we are assured, are impeccable beacons of fiduciary probity in whom we can entrust our assets for safekeeping with ever greater regulatory provisions to, we are told, provide a bulwark against future malfeasance.
Insurers would provide a safety net against risk enabling trade but demanding that we entrust our analysis of risk – often rooted in third party breach of trust – to them, who in turn became one of the largest financial powerhouses.
The biggest corporations, we have been told, can be trusted because of their sheer pre-eminence and pervasiveness.
Abuse of Trust
Whether it’s the myriad of financial market scandals, massive corporate malfeasance (Dutch East India Company, South Sea Company, Carrion Group, Polly Peck, WorldCom, Tyco, Enron and their close friends at Arthur Andersen, Peregrine Systems, Facebook etc.) or the frequency with which banks and insurance companies are found wanting regarding their fiduciary responsibilities (Nordbanken, Barings Bank, Lehman Brothers, Bear Stearns, AIG, Royal Bank of Scotland, ABN-Amro, etc.) or indeed criminal in their dealings (Medici Bank, Bank of Credit and Commerce International, Equitable Life Assurance Company, HIH Insurance, Anglo Irish Bank, etc.), the sad reality is that the faith we have put in those we entrust has been abused regularly and often.
That is not to say that all banks, insurers and multinationals are corrupt or wrong; there are many who do their very best to keep our trust. What is true without doubt though, is that by putting our total faith in such institutions, we provide the tools for the bad actor to do great harm.
Endemic Failure of Trust
Such was the extent of malfeasance in 2008 that Central Banks were forced to act. To save those banks who were ‘too big to fail,’ Central Banks turned a trickle of ‘quantitative easing’ - sub inflation interest rates - into a flood of monetary supply to re-float the balance sheets of the big banks.
The US M0 (the most liquid measure of the money supply including coins and notes in circulation and other assets that are easily convertible into cash) figure went from $650Bn to $4.6 Trillion without a shred of value being created – if anything it destroyed value and created the situation we now have where there is a bubble in virtually every asset class because, simply put, a dollar today is worth a fraction of what it was at the start of the decade.
These Central Banks were then and are today, entrusted with the management of our monetary economy. They wield that power accorded to them by our trust, protecting the value of money by setting interest rates and the supply of money within the system. Our faith in them is as fundamental as our belief that the monetary notes in our pockets are worth the value printed on them.
The Bank of England states on their notes “I promise to pay the bearer on demand the sum of X pounds” yet what does that mean when the value of the Pound or indeed any other currency becomes a moveable feast to compensate for the endemic failure of the banking system to act responsibly?
Failure of Regulatory Oversight
One of the key checks and balances to malfeasance by those given fiduciary trust is the perception that the banks were properly and diligently regulated. That safety net turned out to be wholly illusory in 2008 – here in Ireland we were informed that the regulator preferred to act with a “light touch,” and for all the anger at that statement, at least they were being honest.
The response to that outcry was more regulation and a torrent of it followed in every major financial market. We are now told that post-global-financial-crisis regulation has addressed this breakdown of oversight, but, Boston Consulting Group has revealed that Banks globally have paid $321 billion in fines since 2008 for an abundance of regulatory failings from money laundering to market manipulation and terrorist financing.
Some of these fines will relate to activities that took place before 2008, but others to continued regulatory breaches after 2008. What it shows is that the there is still good reason to be concerned about the institutions in which we put our trust, and that regulations have not provided the answer.
In fact, in certain areas such as trade finance, regulations have actually been harmful. Risk-based rules such as Basel III have produced an unintended phenomenon called de-risking, where the banks can no longer afford to provide finance for many mid-tier firms, with the result that correspondent banking relationships are being withdrawn and the opportunity to create wealth through trade has simply been curtailed for large swathes of the global business community.
The trust we place in such institutions should surely have been broken, but the fact is, it really wasn’t. Not so much by choice, rather by lack of it. We either choose not to trade and therefore not to be exposed to trust malfeasance by fiduciary intermediaries or we chose to trust institutions that have proven themselves to be endemically untrustworthy.
I heard a leading banker at a recent event smugly tell the audience that they were not really worried by the emergence of FinTech because people would always trust banks and that this was the bedrock of their strength.
What he failed to understand and what we must grasp to unleash a new wave of commercial and personal freedom is the power of distributed ledger technology to not only remove the need for third party trust but also to automate it.
For the first time, we have the means to trust one another, even at complete arm’s length without the intervention of any third party.
Distributed Ledger Technology
A distributed ledger is exactly what it sounds like: a ledger of data that every stakeholder writes to and reads from. Think of it like a town crier at a market announcing that “John just bought a sack of apples from Paul for $10,” which everyone in the market notes in their ledger. The crier then says “Paul has delivered the sack of apples that John paid Paul for” and again, everyone in the market notes this in their ledger.
Go through that for every transaction and each market participant will have a very long ledger of all the transactions that occurred in that market on that day. There can be no doubt that John bought a sack of apples from Paul for $10 and that Paul delivered that sack to John completing the transaction of goods for value, nor indeed that every other transaction occurred. The reason is simple: everyone who heard the cry noted the action and that combined ledger of notations creates a distributed ledger removing the need for anyone to rely upon the Town crier’s clerk to act as the fiduciary trustee of trade.
Distributed Ledger Technology automates that process and creates a digital ledger of data that all stakeholders have access to, write their notations into and read from. There is no need for third party trust intermediation because the data itself – confirmed repeatedly across the distributed nodes (digital market participants to extend the metaphor above) – is the proof of truth.
Bitcoin and Blockchain, the First Wave
I wrote recently about the true impact of Bitcoin, not as a payment instrument or indeed as a cryptographic asset, but rather as the first assault on the bulwark of “trust” as a key asset of the incumbent system.
The impact of that assault was not to win the beachhead but rather to put the first crack in the defensive wall through which successive waves would gain ascendency.
The Blockchain created a situation where instead of trusting the intermediary we could instead trust one another because the truth, the raw data, was there for each side to see. For the first time, people had a choice.
In Data We Trust
Whether it was the medieval church or the modern day major institutions, what has been demanded of us is faith. The Bible provides a neat definition of faith in Hebrews 11:1: “Now faith is the assurance of things hoped for, the conviction of things not seen.”
In this context, our assurance of fiduciary and regulatory responsibility was hoped for, but the reality is that the “things not seen” was a proper, responsible discharge of fiduciary and regulatory functions.
What the Blockchain achieved was to create a real choice: we can choose to have faith in institutions or we can dispense with faith and instead rely, in complete confidence without the need for faith, upon the open view ledger of data that each stakeholder writes to and has access to.
We can trust our counterparts not because someone else says we can but because the clear fact of the relevant information is there for all to see. To break free of the shackles of faith in institutions what we must do now is embrace this new choice and ensure that it replaces institutions that have too often flouted our trust.
Recreating False Idols
The caveat to all of this is that a true Blockchain is not, by its very nature, commercially scalable. The most mined blockchain on Earth manages 7 transactions per second at the cost of unsustainable amounts of electricity. Visa can manage, depending on which data source you trust, between 56,000 and 670,000 transactions per second.
This has led to the wrong question being asked by Blockchain advocates: how do we make the Blockchain commercially scalable? The question that should be asked is what form of decentralised ledger technology can maintain the new mechanics of trust, but on a commercial scale?
Asking the wrong question leads to getting the wrong answer. What is now being championed are developments that recreate a leader-based layer above the traditional Blockchain, completely contrary to the principle of trusting the transparent data that distributed ledger technologies offer.
What these developments are in effect doing is re-creating the fiduciary trustee layer, albeit one without the fig leaf of regulatory oversight. They are making the Blockchain a commercially scalable technology by breaking its transformative core value offering: – trust not in a 3rd party or intermediary, but in visible, immutable data.
An example of this is the much hyped Hyperledger (trust us, we are IBM) or any other variation thereof that places a layer of centralisation on top of the distributed ledger, the same is true.
So let's focus on the truth: the Blockchain is version 1 of distributed ledger technology, not the only distributed ledger technology. It cannot and will never scale without being corrupted to the point of being meaningless. If it could I would have restarted QPQ in 2011, not waited until a genuine distributed ledger technology became available in late 2017.
True Distributed Ledger Technology
If we are to get the benefit that distributed ledger technology offers without making its purpose a farce by creating another layer of false idols, we must start asking the right questions and opening our minds to development of distributed ledgers, not Blockchain.
At QPQ we have that answer and we are busy developing our platforms to work on the latest generation of true distributed ledger technology, the next great leap in this sector delivering commercially scalable distributed ledger technology.
I should add this: distributed ledger technology is not as many would have you believe as they endlessly regurgitate the word ‘Blockchain,’ a unicorn who has a unique ability to ferry leprechauns from money tree to wishing well. It is simply what it says on the tin: a ledger of data that is shared between stakeholders thus enabling trust between those participants. It is in effect the railway upon which a new generation of commercial rolling stock can operate.
QPQ are busy building that rolling stock. We have a clear vision for a completely digital trade settlement platform for goods, services and payment with integrated trade finance and an open corporate finance portal that we believe to be truly transformative and our customer discovery to date confirms the demand for.
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