Blockchain Based Financial System — Are we ready SmartCredit io

The coronavirus has caused an economic shock and has been the trigger for the S&P 500 crash. However, as pointed out in the previous article, we think this will not be a “V style” shock with a fast decline and fast recovery, but it will be rather “L style” shock with the fast decline and slow recovery.

This economic crisis is quite different from the previous economic crisis. The previous ones have been resolved with the additional base-money creation from the central banks (resulting in hidden inflation) and with the fiscal stimulus programs (resulting in un-bearable state deficit’s).

The current economic crisis will need a much bigger monetary response and fiscal response. However, we do think, the response size will not matter and by doing more than less, the governments will trigger the second phase of the current crisis — the fall of the zombie companies — these are the companies, which can exist only in the very low-interest-rate environment. Many zombie companies will default and will create holes in the bank balance sheets, especially in Europe. The response to banks failing will be even more additional base-money creation.

This response of “doing more than less” will result in massive base-money creation, which will debase all bigger currencies. This will translate the initial deflationary shock into an inflationary shock. These shocks can bring down the existing credit system and payments system.

The author of this article was co-Program Manager of the Credit-Suisse Too Big to Fail Program. The key idea of this program was to prepare the plans to keep the bank running in adverse scenarios, for example in case the bank will face massive losses either from the trading events or real estate. Banks are financial intermediaries, they have a socially important role — it’s about the payment flow and the credit system for the economy. The objective of the Too Big to Fail Program was to keep these functions intact even in the adverse circumstances.

But what’s then, when people will lose trust in the currencies because of the continuous debasing and what’s if people will lose trust in the banks and will start the bank runs? Then it’s time for an alternate financial system.

Our thesis is that this alternate financial system can be blockchain-based. And our thesis is that these alternate blockchain-based financial system is ready to be used.

It’s about deciding which way to go?

Which way to go?

The idea of this article is to elaborate, how the alternate blockchain-based financial system would function. We elaborate on the following:

1. Analysis of the current financial system

2. Current status of the blockchain-based financial system

3. Migration from the current financial system to the blockchain-based financial system

4. What’s next with the current financial system?

In every financial system (including our current financial system) we do need the following components:

· Base-Money — historically commodity, then precious metals, then sovereign minted coins and now the base-money created via the central bank lending

· Credit-Money and Debt — that’s the temporary money, created via the lending process. The credit-money is 5’000 years old, the first know instances are from the Mesopotamia. In its essence it’s a transferable debt — the lenders are using the borrower’s debt as a means of payment. And as it represents the debt, which has to be paid back at some moment, then it’s temporary and exists only as long the debt exists.

The credit-money was created de-centrally for thousands of years, then central banking emerged 400 years ago, then we had a phase of private credit-money, where the banks issued their own credit-money and now since 1913 Federal Reserve act we do have central credit-money

· Means to keep the base-money, credit-money, and financial assets — via the bank account and safekeeping account or at home under the matrices

· Means to make payments and to transfer financial assets — via the bank account or via the transfer of the assets in the safekeeping account

· Exchange of different money’s and financial assets — we have now the currency exchanges and the stock exchanges

· Financial products — financial products will be created, which in essence are the combinations of the underlying financial products. Investors can invest in the financial products and earn dividends (in case of the equity-based products) or interest (in case of the fixed income-based products). Let’s think here on the passively managed ETF’s or actively managed mutual funds.

· Means of wealth management — some individuals will have higher net wealth and they would like to delegate the management of their wealth to the professionals

These capabilities are available in today’s financial system and they were available in the different financial systems in the past as well (in different incarnations).

The blockchain-based financial system has emerged with the crypto-currencies, wallets, tokenization, asset transfers, exchanges, lending.

Let’s look, in which state these components are:

· Base-Money — there is a wide choice of base-money — either main cryptocurrencies (Bitcoin, Ethereum) or the stable coins, which are mapped to the fiat currencies. As we will see massive debasement of the fiat currencies in the next months, then the main cryptocurrencies like Bitcoin and Ethereum will become the base-money

· Credit-Money and Debt — blockchain has well-developed means to borrow and to lend. There are central lending solutions (which control the private keys of the users) and there are decentral lending solutions (which do not have any access to the user’s assets).

In our current fiat money system, 90% of the money is the credit-money, created via bank lending. Banks are continuously creating credit-money via the lending process and destroying credit-money when the loans are paid back. When banks create more credit-money then they destroy, then the amount of the credit-money is growing and we get inflation. In the opposite case, we will get a credit crunch.

However, the credit-money concepts are rather limited in the blockchain. The credit-money means in essence loan agreements (debt), which are transferable to third parties, which can use this as a means of payment to the next parties and so on. At the end of the loan term, the borrower has to pay to the holder of the loan agreement.

The only blockchain company, offering the concepts of the credit-money is It’s a de-central lending platform, where the lenders will receive tokenized loans (these are called Credit-Coins on the These Credit-Coins are transferable and the holders of these Credit-Coins will receive loan principal and loan interest payments.

· Means to keep/store the base-money, credit-money, and financial assets — Crypto ecosystem has well-developed wallets, which can store either the crypto-currencies or tokenized assets. Additionally, it’s the wallet owners, which control the assets in the wallets (the one with the private key’s controls the assets).

Let’s think about the current accounts in the banks (where most people keep their fiat money) — legally speaking — the bank is the owner of your money. The account holders have only sub-ordinate claims against the bank to receive their money (if things go bad, then senior claims will be served first and after that the rest, if anything is left)

In blockchain wallets, the users and only the users are controlling their own assets. No-one else has access to the user’s assets.

· Means to make payments and to transfer financial assets — this is the key functionality of the blockchain

· Exchange of different money’s and financial assets — Ca 1000 crypto exchanges have been launched, which are exchanging ca 2’000 different cryptocurrencies and asset tokens

· Financial products — Crypto based financial products are so far little developed. The main reason for this is the regulatory aversion to the crypto, which is nothing else as protection and subventions to the traditional banking industry.

· Means of the wealth management — Traditional banks are avoiding the “risks” associated with the cryptocurrencies and blockchain (although most of the transaction histories are available on the public chain)

This list shows that most of the components required for the blockchain-based financial system are available.

The current financial systems and credit systems are overstretched because of the low-interest rates since the 2007/2008 Lehman crisis and the continuous worldwide Quantitative Easing.

The following chart shows the yeartly growth of the worldwide base-money. We see in average ca 12% worldwide growth:

Base Worldwide Base-Money growth (

The current financial system is facing two trends:

1. The continuous base-many creation by the central banks. Let’s think that the Federal Reserve has officially announced unlimited base-money printing after first announcing 59% additional base-money creation within the next month (2.026 Trillion USD …) Let’s think that ca other40 central banks are doing massive base-money creation as well. This will lead to the debasement of traditional currencies and to the massive inflation after the initial deflationary shock

2. The missing revenues of diverse companies will bring down the corporate debt ratings, which will end up with the defaults of many bank loans, which will create holes in the bank balance sheets, which will cause the banks to limit credit (new debt) to the economy, which causes the defaults of highly leveraged and high fixed cost companies, which has again negative impact on the bank balance sheets and their ability to lend. This leads to high interest for corporate debt (although the central bank’s interest rates are low)

These trends will lead to the loss of trust in the continuously debased currencies and into the banks.

What is the solution?

Actually this is very easy — its gradual migration from the traditional banking system to the distributed blockchain-based financial system:

· Instead of keeping 100% of the assets in the banking system, let’s start with keeping 90%, then 80% and so on assets in the banking system and the rests in the blockchain-based financial system

· Instead of keeping USD or EUR, the users can keep first their equivalent stablecoins. However, these stablecoins are getting debased as much the main currencies are getting debased (1:1 mapping …)

· Instead of using stablecoins, users would use the main cryptocurrencies, which have no risk of the debasement, but rather a high potential of the appreciation.

Our current overleveraged financial system faces black swan event from the coronavirus crisis. At the current moment, it’s not clear how much the financial system will survive the initial deflationary shock, which will be followed by the deflationary shock.

However, it’s clear that:

1. The fiat currencies will be massively debased

2. The credit spreads are widening, credit crunch will start, zombie companies will fail and bank failures will start

Considering these risks it might be prudential to start with the stepwise migration to the blockchain-based alternative financial system. The key benefits are:

1. No dependency on the traditional banking system

2. No exposure to the debasement of the fiat currencies

3. No exposure to the potential upcoming bank runs

To answer the question from the beginning of our article — one should use both financial systems (the fiat system and the blockchain-based system) with the gradual migration from the fiat into the blockchain.

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