If the Financial World Were Tokenized in 2007,  the Financial Crisis Would Have Been Avoided

Imagine a parallel universe where blockchain technology was the underlying framework...

If the Financial World Were Tokenized in 2007,  the Financial Crisis Would Have Been Avoided

Imagine a parallel universe where blockchain technology was the underlying framework of our financial system leading up to the 2007 - 2008 financial crisis. Here's how the world might have been different.

In this universe, the Financial Crisis of 2007–2008 did not occur as we know it. Instead, the tokenization of all financial assets on a decentralized blockchain system created a level of transparency and accountability that the previous system sorely lacked​​.

Mortgage loans were tokenized, transforming them into transparent and easily traceable assets. Each loan, regardless of whether it was prime or subprime, had a digital token representing it on the blockchain. The history of each loan, including the underwriting process, the borrower's credit score, and payment history, was visible to all participants. This level of transparency prevented the irresponsible and opaque securitization of risky mortgage loans that led to the real-world crisis​.

The tokenization of mortgage loans also eliminated predatory lending practices, as all transactions were visible on the blockchain. The decentralized nature of the blockchain prevented the federal government from overriding anti-predatory state laws, as they did in 2004​.

The Community Reinvestment Act (CRA) still existed in this alternate universe, encouraging banks to lend to high-risk families. However, the risks associated with these loans were apparent to all parties involved, discouraging the reckless lending that contributed to the crisis in our world​​.

Fannie Mae and Freddie Mac still provided mortgage guarantees in this alternate universe, but these guarantees were also tokenized and traceable. The implicit government guarantee, which created a moral hazard in our world, was thus rendered explicit and quantifiable, reducing the propensity for risky lending​.

In this tokenized world, banks and insurance companies couldn't hide behind opaque practices. Every financial commitment they made was transparent and could be audited on the blockchain, eliminating the short-term prioritization of deal flow over long-term value creation that we saw in our world​.

The repeal of the Glass-Steagall Act still occurred in this alternate universe, but the increased speculation by depository banks was visible to all market participants. This prevented banks from taking on excessive, unmanaged risk, as they did in our world​.

The credit rating agencies still existed in this world, but they operated very differently. Because all financial information was available on the blockchain, credit rating agencies and investors could accurately price the financial risk involved with mortgage loan-related financial products, preventing the mispricing of risk that led to the real-world crisis​.

In this alternate universe, the easy availability of credit and the housing boom still occurred, but the blockchain provided a level of transparency that prevented these factors from spiraling out of control. All market participants could see the true level of risk associated with each mortgage loan, and this prevented the housing bubble from inflating to the dangerous levels we saw in our world​.

As a result of all these factors, the 2007 - 2008 financial crisis was averted. The blockchain's transparency, immutability, and decentralization eliminated the systemic failures that led to the crisis in our world. This alternate history serves as a powerful reminder of the potential benefits of blockchain technology for our financial system​.

About SmartBlocks

Mark Fidelman

Here at SmartBlocks, we believe it’s time to democratize currency and make it available to anyone, anywhere, anytime.