Beyond the how, Distributed Ledger Technology could impact the why of the financial industry and create conditions necessary for much needed change in the way people behave. At the heart of all instability in the financial system is the perpetually fluctuating nature of the people behind it.
People like rewards, and they’re willing to take all kinds of risks to get them. Just take the 2008 Financial Crisis, as an example. The people behind the tall glass walls stood to gain from trading financial instruments that were AAA rated (the best, most safe rating) on the surface, but were in fact incredibly risky assets. The reason for how that came to be may vary depending on which side of the fence you’re on.
Even as the financial system collapsed, eventually leading to the big banks getting bailed out by taxpayers money, certain financial institutions proceeded to give bonuses to the very same people who caused the meltdown. The key weakness of this system is that several rewards are tied to short term profits and not the long term good of a firm (or the economy). DLTs can play a crucial role in mitigating this.
Transparent Incentive Structures
One way is by setting transparent incentive structures which anyone can monitor. Transparency, and with it, accountability, are a couple of the most raved about qualities of DLT systems. They’re also two qualities the financial industry and all those interacting with it could benefit from.
Another is by creating Smart Contracts based reward programs where employees or customers enter into an agreement that triggers automatically, in real time, on fulfilment of the clause — without the need for human interaction.
You could have smart contracts that slow drip rewards to banking executives based on the condition of the firm or market. Rather than releasing a lump sum bonus, a firm could create a contract against a specific index. The contract would then track the index over time and payout rewards from an allocated pool of resources over a number of years, ensuring that people are payed for the long term results of their actions. This would remove the temptation to burn the long term for the short term.