Most activities compatible with the internet were initially drawn in by the convenience and speed by which the online community could be engaged, and end up re-invented by the self-same community – the finance industry is no exception.
A great example is the “Flash Crash of 2010”, where the Dow Jones market plunged a thousand points and then recovered in minutes. High-frequency trading (HFT), using computers and algorithms to trade large quantities of stocks, enabled a financial firm to execute a volume of trades in twenty minutes which used to take five hours. The HFT algorithms at other firms witnessed a flood of selling by this firm and responded in kind, initiating a collapse in prices. Even more HFT programs in other market sectors saw the plunge in prices and also tried to unload assets before the panic spread to their domains as well. Eventually, the machines realized an opportunity to capitalize and purchased the de-valued goods until the market returned close to the initial condition. For twenty minutes, computers were trading tens of thousands of stocks amongst each other. It took authorities five months to issue an explanatory report.
Earlier, back in the 1990s, the world was becoming increasingly connected via the internet, and banking institutions were using the internet as a way to spread information to their clients. Smaller institutions, such as the Stanford Federal Credit Union, realized that offering more of their services online reduced the resource burden on brick-and-mortar establishments. Banks across the board followed suit, and by now their services are ubiquitous across devices and as complex as check cashing via texted photographs.
However, in order to enable such services across the internet, banks must collect information about their clients. A bank must be certain that the internet user claiming to be a client is that person. Enough personal information to actually assume that identity changes hands digitally. In 2008, a University of Michigan study found that 75% of 217 surveyed international banking websites contained at least one design flaw which could allow hackers to obtain clients’ personal information. That’s not very comforting for those who are finding themselves swept up in the wave of electronic banking as institutions move increasingly online, but neither is it intolerable since banks have been getting robbed since their inception thousands of years ago.
More recently and more troublesome, revelations of major world economies manipulating their currencies to their benefit shocked the world. In an attempt to head off the Great Recession of 2008, the Federal Reserve started a practice known as Quantitative Easing (QE) where they loaned interest-free money to increase the amount in circulation. Many banks felt they had just survived a financial heart attack, and were reluctant to lend out the money to home-buyers and small businesses. The same money the taxpayers just loaned them in order to stop the hemorrhaging and to re-start the lending, they loaned back to the Federal Reserve with interest. When pressed to explain why the controversial practice of QE was having such modest results, the Secretary of the Treasury, Timothy Geithner, passed up an opportunity to describe the disconnect between the intent of the Federal Reserve and the actions of private banks.
Instead, he deflected and shone a spotlight on the currency manipulation of the Chinese government. China’s incredible economic growth has been sustained by the huge volume of exports. At the end of every fiscal year, the Chinese and American governments are supposed to reconcile the balance of trade by increasing the value of the Chinese yuan and decreasing the value of the American dollar. However, doing so would weaken Chinese exports as American companies became more cost-competitive. China, instead, loaned its excess dollars back to the American government which increased the national debt and slowed the American recovery.
These actions were conducted unilaterally by governments and were billed as necessary to maintain the status quo for their citizens. This behavior, the public was not willing to tolerate. Cryptographic programmers around the world collaborated to develop a new currency, whose ethos is that the ideal currency is anonymous, does not required a third-party bank to function, is not regulated by a self-interested government. The first and main contender for “crypto-currencies” is BitCoin, which was both popularly accepted and politically demonized upon introduction. The program generates a peer-to-peer network of computers around the world all double-checking the integrity of anonymous transactions. The currency was essentially a digitally encrypted dollar, and when you wanted to transfer money what you actually sent was the key to the new computer who accepted and re-encrypted the dollar. Today, BitCoin is becoming widely accepted by vendors both online and conventional, is traded on the stock exchange, and recognized as a real currency by governments around the world.
The aspects of crypto-currencies which make them so popular are the same which would put them in a negative spotlight. An anonymous currency which does not required a middleman is ideal for money laundering, black market trading, and other nefarious purposes. However, these activities (among others enabled by the internet) have long-since pre-dated the internet, and the free market will ultimately decide what is in its best interest. A world defined by the internet and its philosophy of bottom-up empowerment? Or an internet defined by the world and its philosophy of top-down authority mandates?