Michael J. Casey is chairman of CoinDesk's advisory board and senior advisor on blockchain research at MIT's Digital Currency Initiative.
The following article was originally published in CoinDesk Weekly, a custom curated newsletter delivered every Sunday exclusively to our subscribers.
Last week, the Federal Reserve provided $ 278 billion in securities purchases, or "repos" over four days, all to help banks meet their liquidity needs. It was the first time the Fed had intervened in this important interbank market, where banks' pledged financial assets to finance overnight cash needs since the 2008 financial crisis.
Fed officials and bankers dismiss the rare liquidity distribution as a hiccup from a number random factors in the bond markets and corporate tax payments. It was not a very comforting explanation, not when other financial warning signs are also flashing: $ 1
Predictably, certain cryptotypes have seen this alarming scenario with pleasure. More than a few HODLing tweeters responded to the repo story with two tips: "buy bitcoin."
But it's actually hard to predict what all this means for crypto markets, at least in the short to medium term.
If and when a 2008-like financial panic takes hold, will bitcoin rally as a new type of uncorrelated "safe haven", or will it slow down in a broad-based "risk-off" dumping of all things speculative? (Despite a sharp fall and recession midway through last week, bitcoin has proved fairly stable of late, at least by its own volatile standards.)
Other issues: highlight these vulnerabilities in traditional credit markets with the promise of new blockchain-based ideas? For example, will broader use of security tokens provide faster settlement and, as a result, reduced counterparty risk and greater market confidence? Or, far more radically, would MakerDAO's # DeFi chain lending markets allow for a more reliable settlement mechanism, with security calls locked in a decentralized protocol? Or can these underdeveloped ideas simply be recipes for systemic risk, a simple hack, or software slipping from triggering a vicious spiral of security conversations and bankruptcies?
The jury is looking for all this untested.
Yet, if nothing else, the many signs of stress in the traditional economic system provide a valuable framework for thinking about how the world might be different and what role blockchain technology can play in activating the new world.
Let's look at some of them:  Negative returns
The rare phenomenon where creditors essentially pay issuers for the privilege of lending them money – head scratcher, right? – reflects excessive demand for "safe" assets, especially for government bonds. Historically, it has been a strong indicator of impending recession, as it reflects an overwhelming reluctance among investors to take on risk.
Now, another way of thinking about that reluctance is to express it as an perceived lack of good investment opportunities. This view may be driven by a worsening economic outlook, but it is also dictated by barriers to entry that make it difficult for otherwise investable companies to offer new opportunities.
Here, some blockchain-based credit ideas offer hope. It is the prospect of benefit registrations for distributed ledger that better tracks security and enables the lending of new markets in developing countries, markets and energy markets. Or there are ideas such as letting exporters allocate their claims to address a large structural limit on global trade financing, where a majority of small and medium-sized businesses are denied credit letters because bankers do not trust the documentation.
Effective use of blockchain technology can increase trust in assets and mortgages and help bring $ 20 trillion in "dead capital" that economist Hernando de Soto says the world's poor are on.
Equally important is that it would open a world of new alternative assets to withdraw investors' capital, giving them less reason to park it in low-yield bonds.
Global economic slowdown
An alarming, synchronized downturn in production indicators, especially in purchasing indices, which measure current and future business expenditures on inventory and equipment, flows directly from the US-China trade war. By cutting Chinese commodity exporters from US consumer markets and raising the costs of their US importers – and vice versa for US farmers selling to food distributors in China – the conflict has put a huge strain on global economic activity.
But let's look at the starting point for this trade match. It lies in American companies most legitimate complaints about China's merchant list, centrally planned approach to support Chinese companies at their expense, all made possible by a system of monitoring and control of people and businesses. This where it is a crypto angle.
Cryptocurrency and other decentralizing technologies can counteract the Chinese government's ability to control the economy in this interventionist way. For example, if Chinese companies and hundreds of millions of Chinese citizens used bitcoin to bypass capital controls, the ever-present risk of monetary flight would act as a pressure valve, forcing Beijing to pursue a more open economic model to maintain competitiveness. This will give lesser excuse to free traders like President Trump for blocking protectionist attacks against it.
Some innovators have tried to use blockchain technology on the back office structural problems that periodically roam money markets, such as those that now appear in repo. They look at a distributed ledger as an overarching mechanism for tracking IOUs with cash and mortgage loans on which securities on which interinstitutional credit markets are based.
One was former JP Morgan credit market maven Blythe Masters, who founded Digital Asset Holdings in 2014 on the idea that settlement in the chain and a universal auditable ledger can improve the openness of the global financial's opaque, complex array of interconnected credit relationships. In this way, she argued, it could dampen the distrust and counterparty risk that drove the financial crisis.
The DAH model and those of others working with blockchain solutions for capital markets have not been expressed. This is due, at least in part, to the reluctance of the sitting financial institutions and their regulators to kill existing functions that a blockchain would make redundant; instead, they designed cumbersome hybrid distribution head models that maintained interest benefits but were expensive and difficult to implement overall.
However, a blockchain back office solution for traditional economics will not be coming soon – either because of internal politics or the limitation of technology.
Shining a light
A more important question is why we can even withstand a system that is so vulnerable to the back market problems at all. The only reason central banks ever intervene to support interbank credit markets is because society's means of payment depend on avoiding cash shortages and maintaining trust in banks with fractional reserve banks.
If banks did not have enough cash to meet short-term credit calls, they would suffer the run-up to their deposits, companies would not make salaries, tenants would have to skip rent, ATMs would run out of banknotes, etc. The economy would intervene. The worst of it is that, because of this ever-present threat, banks hold our political system of ransom, knowing that they can always rely on bail: the excesses to fail.
But what if banks just stuck to long-term lending? What if there were no checking accounts or debit / credit cards and we just exchanged value with each other via cash or digital currencies that we have ourselves?
If people used bitcoin, or fiat-supported stablecoins or central bank digital currencies to exchange value instead of the IOUs for an inherently fragile fractional reserve system, institutional cash deficits would simply not play that much. The banks' largest creditors may strike their risk-adjusted positions and stock prices would fall, but the rest of us, including the Fed, could ignore the problem.
As the journalist and commentator Heidi Moore observed in a tweetstorm last week the reason why the upheaval in the repo market is so worrying is because it speaks directly to the core problem of trust in the banking system.
If nothing else, this is where blockchain technology provides a valuable lens for assessing today's stress in the economic system. It helps us to think about how the trust issue creates vulnerabilities, power imbalances and systemic risks and how we can design a system that is better able to solve it.
Federal Reserve image via Shutterstock