Hands up everyone who thinks the blockchain is the new internet, the new finance disruptor, the new TCP/IP! Now, am I the only one with his hands in the air? Well, if so, even better! Then I can pick all the low-hanging fruit and you get the left-overs... OK, on a more serious note, of course, this is very early to start investing in firms focusing on blockchains. But, personally, I remember when I studied engineering in Berkeley in 1994 and followed a course on something I barely understood called The Internet. We used something called gopher to connect to something called the world wide web to read uninteresting things (texts only) on other computers in boring places like NASA and CERN. There were no browsers (Mosaic came the next year and Netscape after that) and few people even used email. I studied, got bored, studied, got confused and graduated.... Then, I went home to Sweden and no one knew what I was talking about when I mentioned internet, Arpanet etc. And, then, nothing! For a year or two! And then it took off! Big time! And I missed the train, completely! I moved to the most backwards country in the northern hemisphere (Italy) and then started working on my finance phd. Internet thrived and internet companies took over the business pages. I made no money. My friends made, and lost, millions just by being hired by internet firms. And the rest is history.
Now, the question is whether blockchains could play a similar role. In finance. Well, who knows? But, first, what is a blockchain? Most of the readers of this blog have of course heard of bitcoins, the virtual currency. Less, though, have probably heard of the blockchain, the technology behind the bitcoin. While, this far, the blockchain technology has been used primarily as the plumbing for the bitcoin, blockchains can also possibly be used for the infrastructure of traditional financial products such as debt contracts and financial derivatives. And in accounting, blockchains could potentially improve the quality of information reaching investors by making the accounting information both more trustworthy and by making the information more timely. If firms were to keep their financial records on blockchains, each and every transaction in a firm’s ledger would be instantaneously available and difficult to tinker with.
I have worked a lot in the field of credit risk and this is another area where blockchains could have a huge impact. I have written about this in a short paper called BLOCKCHAINS, REAL-TIME ACCOUNTING AND THE FUTURE OF CREDIT RISK MODELING. In that paper, my focus is on credit risk modeling and on how a possible future wide-spread use of blockchains could affect the way we model credit risk. It is well known that accounting information, such as balance sheet data and income statements suffers from being of quite low quality. Therefore, since most credit risk models rely on accounting data, the increased transparency, accuracy and timeliness of financial statements brought about by firms keeping their books on blockchains could significantly improve credit risk modeling. I think! Spread the word!