Equifax and the Role of Intermediaries
Last fall, a company most Americans don’t know much about was hacked and the private data of 145.5 million people — including their Social Security numbers — was exposed. With its rich repository of private data, credit bureau Equifax became a target of hackers. And the reason why the company and other credit bureaus exist in the first place is due to a lack of trust. Equifax provides credit scores so a bank, car dealer or other lender will have a sense of whether a borrower will pay back a loan.
“The point of Equifax and credit bureaus is not to have credit bureaus,” Werbach said. “It’s to have a mechanism so that a distributed world of actors, companies and individuals can engage in loan transactions with some sense of what people’s creditworthiness is.” But imagine if those same transactions can be done without central, trusted intermediaries, “it would be much more secure and be much more efficient,” he said. Firms like Equifax charge fees for being an intermediary and going through them also adds delays to a transaction.
The basic idea behind blockchain is that one can trust the system as a whole without necessarily trusting any of the participants, Werbach said. The blockchain is a ledger — record of transactions in a database — distributed to people in a network. Everyone on that network has their own copy of the ledger and be “actually confident, based on mathematical structures of cryptography, that every copy is the same.” So even though there is no central intermediary — like Equifax, a bank or the Federal Reserve — all the players in the blockchain network can trust the information.
There is only one ledger in any given blockchain network and everyone works off that record. Each participant gets a copy of the ledger and additions to the record cannot be changed. With all eyes on it, there is no need for a trusted institution to be in the middle to charge fees or delay transactions. “Everyone can maintain their own copy even across different organizations and across different countries,” Werbach said. “This seemingly basic abstract idea is what has led to all the excitement and adoption around blockchain and cryptocurrencies.”
The excitement around this innovation has pushed the value of Bitcoin to $100 billion around the world while cryptocurrencies in circulation are worth around $300 billion, though down from a high of $750 billion in December 2017, Werbach said. More than $15 billion has been raised in crypto-token offerings in 2017 to 2018. He also cited figures from Gartner projecting that the blockchain is expected to add $176 billion in business value by 2025 and $3.1 trillion by 2030.
“Fundamentally, blockchain is about something deeper than all of that. It’s about trust.”
But there are issues to overcome. “It’s incredibly early. This is not a mature technology. There’s great uncertainty, there are all sorts of problems, even basic technical programs that need to be worked out, and there are all sorts of non-valuable applications,” Werbach said. There are “people using this, for example, to commit fraud, or using this capability to engage in money laundering and illegal transactions — and all sorts of regulatory uncertainties.” However, he believes that these challenges are “not indications that this technology is fundamentally flawed or is fundamentally fraudulent or a Ponzi scheme at the heart.”
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