By Adam. A. Millsap
Many people are familiar with Bitcoin, the digital currency. Some think Bitcoin will become a commonly accepted currency, like U.S. dollars, while others think its volatility and lack of government support will keep it a niche investment. But regardless of Bitcoin’s fate, the technology it’s built on—blockchain technology—has the potential to drastically change the way people hold and transfer assets.
Blockchain technology is basically a publicly available ledger. People can access the blockchain through a private key and then use the blockchain to record their buying and selling. The transactions are all recorded on the blockchain and available for public examination. This allows anyone to identify the current owners of an asset and ensures that people can’t sell an asset twice. The latter problem is bigger for digital assets than physical ones since digital assets, such as computer files, can easily be copied and sold to several people at low cost. Alternatively, it’s practically impossible to sell the same car to two different people and attempts to do so are typically discovered quickly.
A key benefit of blockchain technology is that it allows people to securely transfer assets between one another without using third-parties to verify the transaction. Since less people are involved in each transaction it’s cheaper—fewer intermediaries taking a cut—and there are less opportunities for fraud, theft, or errors.
Currently, digital currencies like Bitcoin are the primary assets being exchanged using blockchain technology but the technology itself can be used for much more. As IBM’s CEO Ginni Rometty stated:
“Blockchain brings together shared ledgers with smart contracts to allow the secure transfer of any asset — whether a physical asset like a shipping container, a financial asset like a bond or a digital asset like music — across any business network. Blockchain will do for trusted transactions what the Internet did for information.”
I recently attended a presentation by Sandy Kaul, Global Head of Advisory Services at Citigroup, where she discussed the potential of blockchain. She explained that many smaller investors—people with less than $1 million in assets not including their home—are typically unable to invest in alternative assets such as start-up businesses, rare wines or art, or public-private partnerships. With life expectancies rising and more people living longer in retirement, she thinks it’s important for individuals of moderate wealth to have access to alternative investments in order to obtain a proper level of diversification and greater yields.
Blockchain technology can facilitate such investments since it allows assets to be divided into tiny pieces and makes it easy to keep track of all those tiny pieces. This means, say, that a person with average wealth could invest in Leonardo da Vinci’s painting, Salvator Mundi, which sold for $450 million in 2017, by purchasing 1/100,000 of it for $4,500. And like the entire painting, this small share could appreciate, depreciate, and be resold whenever the investor wished to cash out.
Blockchain technology has great potential for reshaping the way we invest and save for the future. As digital currencies and blockchain technology evolve, it’s important that we don’t squash this potential with heavy-handed regulation that prevents life-enhancing innovations.
Adam A. Millsap, PhD, is the assistant director of the L. Charles Hilton Jr. Center at Florida State University and an affiliated scholar with the Mercatus Center at George Mason University.