Gary Cohn, chief economic adviser to the President, voiced concern over the weekend about risk posed by Wall Street clearinghouses that became systemically important following the 2008 financial crisis.
As “we get less transparency, we get less liquid assets in the clearinghouse, it does start to resonate to me to be a new systemic problem in the system,” Cohn, director of the White House’s National Economic Council, said at a banking conference in Washington on Sunday.
Cohn isn’t the first to raise the risk. JPMorgan Chase & Co. and BlackRock Inc. have argued for years that clearinghouses pose their own threats, shifting risk to just a handful of entities. The Treasury Department’s Office of Financial Research has warned that clearinghouses used for derivatives trades can be vulnerable and potentially spread risks through the financial system.
While it is worth noting that this is another example of how the government’s response to a crisis they created made the economy as a whole more fragile, the good news for Mr. Cohn is that there is an exciting technological breakthrough that allows people to transparently move money without relying upon third parties to guard against shady counterparties: blockchain.
Even better news, blockchain technology is already being utilized to help with the very problem that Mr. Cohn has identified. As the New York Times reported this year:
The company that serves as the back end for much Wall Street trading — the Depository Trust and Clearing Corporation, or D.T.C.C. — said on Monday that it would replace one of its central databases, used by the largest banks in the world, with new software inspired by Bitcoin. The organization, based in New York, plays a role in recording and reporting nearly every stock and bond trade in the United States, as well as most valuable derivatives trades.
IBM, which has been making a big push into blockchain technology, will be leading the project for the D.T.C.C. and aims to have it fully functioning by early next year.
“This is a real tangible step into what could be a very different future for Wall Street,” Michael C. Bodson, the chief executive of the D.T.C.C., said in an interview.
Helping de-escalate the risk of third party exchanges is, of course, simply one of the many potential applications for blockchain in an increasingly complex global economy. The openness to this technology is one of the many interesting narratives at play as Donald Trump begins to take advantage of his historical opportunity to shape the Fed.
It is worth noting that Cohn, who is reported to still be on the short list of potential candidates to serve as Federal Reserve Chairman when Yellen’s tenure is up next year, was president of Goldman Sachs when the bank became one of the first major financial institutions to invest in Bitcoin. While serving in the Trump Administration, Cohn has worked alongside Director of the Office of Management and Budget Director Mick Mulvaney – who had a reputation as “the Bitcoin Congressman” as a member of the House.
Of course, the downside of crypto-savvy central banks is that the resulting policy tends to lead to bankers trying to harness its potential to increase their own power, at the expense of truly decentralized applications like Bitcoin. After all, no matter how technology may change, government and central planners’ need to control does not.
The block chain is not a solution to knowing who owes what, it is what has been promised that cannot be paid back. Blockchains don’t grant or monitor credit. So a bank that has written 20 trillion of derivatives, 10 on the long and 10 on the short side nets to zero, but what if the longs all go bankrupt – then the bank owes $10 trillion to the shorts it doesn’t have. The blockchain only records the promise, it does not contain the value in any kind of escrow, ensures the creditworthiness of the borrowers (remember all the AAA rated MBS that collapsed in 2008?), or can enforce payment.