The Bankchain Part III: Issuing IOUs
The concept of bankchains is quite appealing to people active in the financial sector, but the inherent issues and questions associated with this tool need to be addressed first. Besides issuing currencies over the bankchain, the ability to issue different products can also be a powerful tool. Even though hardly anyone in the Bitcoin community is in […]
The concept of bankchains is quite appealing to people active in the financial sector, but the inherent issues and questions associated with this tool need to be addressed first. Besides issuing currencies over the bankchain, the ability to issue different products can also be a powerful tool. Even though hardly anyone in the Bitcoin community is in favor of IOUs in general, once they are issued on a blockchain, things take on an interesting perspective.
Issuing an IOU On The Bankchain
Let’s consider the concept of a bankchain viable for a moment, and take a look of how one would issue an IOU on top of this protocol. Not only can an IOU be used to track the value of real-world assets — which will be the preferred form of wealth to back these constructs on a bankchain — but they can also be used for tracking the trust associated with the currency issuer.
Depending on who will issue this currency in question, earning the trust of customers can be a difficult challenge. Most major banks are not giving a lot of leeway to their customers right now, and rightfully so. Also, customers do not completely trust the idea of blockchain technology either, although most of that attitude stems forth from a lack of education and understanding of the platform.
Trust can be expressed in various ways once bankchains are introduced to the masses. Rather than just thinking of trusting an asset issuer, it can also foster competition among financial institutions in the long run. When it comes to currency exchanges, for example, one bank might offer more for a certain token compared to a different bank.
It is important to keep in mind that we need to distinguish between two different types of IOUs issued on the bankchain. Up first, there is the web-of-trust model, in which all parties trust one – or more – parties in the web of interconnected institutions. All of the money in circulation on this platform is controlled by and flowing through the parties making up the system.
The second option is a gateway model; there are multiple central authorities that must be relied on by everyone using the system. These central authorities have the responsibility to securely issue and redeem any IOU used by people on the system. The current iteration of Ripple showcases how this concept would work.
Which of these approaches will prove to be more viable and useful in the long run, remains to be seen for now. Either solution will stand or fall based on its adoption, and even then, it will matter what type of clientele the solution attracts. Government officials and big banks are not the same types of users, even though the lines between both parties are starting to blur in some regards. On the other hand, a web-of-trust model seems more suitable for smaller-value settlement between peers of the same “class,” so to speak.
Why Do IOUs Matter In The World of Bankchains?
There seems to be a fair amount of confusion among the Bitcoin community as to why IOUs are still relevant once bankchains become a trend. Regardless of how financial institutions decide to implement blockchain technology, there will always be scores of debt to settle between parties. These parties extend far beyond the financial institutions themselves, as an individual can be a party with an IOU as well.
But the biggest part of an IOU is trust, which is something financial institutions need to continue their day-to-day operations. It is also part of the reason they are all jumping on the blockchain bandwagon, as they see people looking for alternatives unless something changes within the world of finance itself.
To put things into a financial perspective for a second: trust can limit the amount of IOUs between multiple parties. By agreeing on a certain line of credit, parties show they trust each other up to a certain extent. But once that “limit” of trust has been reached, there are various options to move forward. Either more expensive IOUs can be issued, or the debt can be settled in a different ways while keeping the cheaper IOUs in place.
The financial world is an odd creature; levels upon levels of obscure partnerships have created a major mess. Implementing a bankchain can help everyone find the way out of this maze of IOUs, debts, credits, and who knows what else. Blockchain technology is a force to be reckoned with, and the financial world is slowly realizing its potential.
What are your thoughts on the concept of issuing IOUs over the bankchain? Do you feel it’s a good idea, or is there a different route to be taken? Let us know in the comments below!
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