Blockchain technology could reduce role of banks, says BIS … Blockchain technology could reduce the role of intermediaries such as banks and settlement houses, the Bank for International Settlements – or "the central bankers' central bank" – said in a report on Monday. Blockchain technology – or distributed ledger technology, as many financiers prefer to call it – is what underpins bitcoin, a controversial web-based "cryptocurrency." It is a massive ledger of every bitcoin transaction made that is verified and shared by a global network of computers. – Reuters
Dominant Social Theme: It would be a shame if banks became less important.
Free-Market Analysis: Actually, it wouldn't. And we're not sure the BIS is really worried about it. The report may simply be an exercise in predictive analysis. After all, if you are the dominant force in your industry, you have to anticipate challenges.
Of course, there is the theory that digital currencies like bitcoin were actually the product of intelligence operations, which means the BIS has even less to fear. But nonetheless, the report seems to make some good points:
The data that can be secured by the blockchain is not restricted to bitcoin transactions. Any two parties could use it to exchange other information, including stock deals, legal contracts and property records, within minutes and with no need for a central authority to verify it.
Basel-based BIS's Committee on Payments and Market Infrastructure (CPMI), made up of central bankers from across the world, said it could challenge banks' role – but if the technology became widespread it was unclear who would then provide credit and savings facilities.
How about the market itself? That would not occur to the BIS, which also worries that technologies like bitcoin do not conform to current regulatory models. However, banks are nothing if not adaptive, the Reuters article hastens to reassure. Some digital currency technology can sure be utilized by banks even within the present paradigm.
We understand why the BIS – and Reuters – are concerned about bitcoin as a threat to the established order. Our bottom line question remains, however: What exactly about the current central bank economy is valuable or even worth keeping? Junk the system tomorrow and the world would keep on ticking. You'd probably see a diminution of wars, poverty and government control. That doesn't strike us as a bad thing.
Generally, central banks are inefficient and destructive to whatever currencies they are assigned to manage. The US Federal Reserve has managed to debase the dollar by at least 90 percent in the past century. It's also been responsible for numerous financial disasters – including market meltdowns and decade-long depressions.
Now, according to Forbes magazine, it turns out that the "Federal Reserve Leaks Price Sensitive Information Enabling Stock Market Profits." Financial regulators are endlessly concerned over the "crime" of insider trading, but this bombshell news would seem to dwarf even the most deviant financial practice.
According to Forbes contributor Tim Worstall:
A fascinating piece of economic research seems to show that the Federal Reserve does in fact leak price sensitive information, and does so in a manner that could lead to stock market profits …
Worstall goes on to quote a Reuters article reporting on the research as follows:
U.S. central bankers not only regularly leak secret information about monetary policy, but the leaks are so predictably timed that a savvy investor without access to the leaked information could make money just by buying stocks in certain weeks.
That is the bottom line from new research by University of California Berkeley professor Annette VissingJorgensen and colleagues, presented on Saturday at a conference attended by central bankers from around the world. VissingJorgensen and her colleagues found that the stock market delivers better returns versus Treasury bills the second, fourth, and sixth weeks after each of the Fed's eight policysetting meetings during a given year.
Worstall explains, "Essentially, the Fed's decision making process runs to a predictable timetable and this enables the phenomenon – which probably involves consultations the Fed is having."
No matter how tight-lipped Fed officials try to be, regular conversations scheduled at regular intervals generate information that percolates through the marketplace and affects securities. Again quoting Reuters, "Systematic informal communication of Federal Reserve officials with the media and the financial sector is a … plausible information transmission mechanism."
The Forbes article then turns its attention to what ought to be done to reduce or eliminate this artificial advantage. The author concludes that "nothing" is probably the correct answer as now that the pattern has been made public, the advantages will be arbitraged away. The free market itself can do the job of reducing the unexpected profit patterns.
This may be true, of course, and we have no reason to doubt it. But reducing or removing the Fed entirely would probably be the very best solution. The article doesn't recommend it, but doesn't it make sense?
If there is no monopoly central bank, then there are no secrets to keep. In the meantime, please recall there are plenty of ways to "game" these sizeable markets. You may want equity exposure as part of your larger investment philosophy, but you shouldn't neglect the pre-public market sector, which is less accessible to large-scale market manipulation but which may provide opportunities that are even more promising than the current, aging, bull-market run.