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28 May 2020

Could Blockchain Technology Prevent the Next Financial Crisis?

Could Blockchain Technology Prevent the Next Financial Crisis?

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A central bank’s role is to manage a nation’s currency, money supply and interest rates.

These are signs that the current financial system is starting to break down again, but unlike 2007, there is an entirely new industry built around the security, liquidity and stability of our money.

Repo interest rates are the interest rates that banks charge each other for borrowing cash.

However, we have started to see repo rates spike upward, pointing to an indication of supply issues from banks issuing short-term cash to other banks and an increasing demand from banks and corporations that need short-term cash. .

In 2007, we saw first-hand that when liquidity dries up, banks fail, markets fall, unemployment grows and economic output contracts.

Since then, the Fed has been filling the banking liquidity gap by printing dollars under the name of “quantitative easing.” After ten years of providing the markets with easy money, the Fed reversed course in 2018, raising interest rates and selling bonds to clean up their balance sheet.

Cutting off the supply of free money combined with raising rates has sent banks scrambling for liquidity, thus jolting the markets several times over the last twelve months.

Although we couldn’t see which banks were the culprits, several banks showed their cards as the interbank lending rates rose well above the Fed’s set interest rates. .

With interest rates already near zero, it is difficult to see what tools the Fed will use when things become dire.

Decentralized technologies provide tools to reduce costs and add efficiencies where existing technologies cannot, but there are elements of the existing system including people, corporations and governments that are essential to making the new system work.

It’s important to note that the company Ripple is different from the crypto currency XRP — the digital asset on the XRP ledger.

xVia provides one method for banks and corporations to send out global payments instantly, while xCurrent provides an instantaneous settlement layer between these banks.

On-Demand Liquidity provides the liquid layer between institutions so they can reduce the paper currency they are required to keep on hand.

Before the 2007 crisis, regulators could trust that banks had enough liquidity to remain solvent; however, following the financial crisis and failure of several banks like Lehman, that ceased to be the case

The new regulations mandated banks to hold pre-funded accounts, or existing pools of liquidity, to move paper currencies between banks in disparate countries. 

dollars from Bank X, rather than Bank X having to hold those dollars on reserve at Bank Y to ensure proper liquidity, they can sell dollars for XRP

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