The economy seems great right now, but it's only a matter of time before the next financial crisis hits, and when it does, I'll feel more confident working in the cryptocurrencies space than at a traditional Wall Street bank.
I started my banking career at J.P. Morgan in 1999 as a software engineer. Over a decade, I had stints at Lehman Brothers, Credit Suisse and Goldman Sachs in New York. I believed that the financial system was mostly stable. Then in March 2008, Bear Stearns melted. The S&P 500 dropped to 666. Everyone was in panic mode. We were convinced that the financial system as we knew it was done and would need a reboot.
The history of the financial system is one plagued by periodic crises every 10 years or so, many of them catastrophic. Curiously, any regulations added as a reaction to a crisis seem to be unable to prevent the next. Why is a system so carefully designed with checks and balances, separation of responsibilities and tons of reports and paperwork fail every decade or so? It was clear to me that something is not right with our financial system.
I reached the conclusion that regulation is not the problem. The issue is that regulatins are ignored. Detection and enforcement simply cannot keep up with the volume. Even with precise, error-free information, regulators simply do not have the time to respond to each instance. The few hundred prosecuted cases a year represent a tiny fraction of hundreds of millions of transactions and unknown portion of violations.
Most people act in their own economic interests. Given that everyone’s incentives were misaligned, the fact that the financial system functioned at all is quite a surprise.
A fresh approach was needed. I decided to move away from finance and focus on technology – then I discovered Bitcoin, a self-regulating system whose rules cannot be broken because the incentives of all participants are aligned to enforce the rules. I immediately realized the immense potential of blockchain technology. It was going to remake finance and was what I wanted to do for the next decade.
There were cryptocurrency exchange failures in 2012 and 2013. I decided that an unhackable exchange was the most useful product anyone could deliver. I started to work on a Bitcoin futures exchange that was partially non-custodial. We wanted to bake compliance into the product such that many regulations would be impossible to violate.
For example, allowing depositors to only withdraw to addresses they control meant money transmission was not possible and the exchange would not be attractive to money launderers. Segregating everyone’s funds into individual accounts meant that regulation was automatically enforced.
My experiences working in a blockchain startup versus Wall Street are like night and day. Blockchain startups innovate incredibly fast: even a couple of months of delay on delivery would mean ceding ground to competitors. There is also a forgiveness for failure that isn’t seen in the traditional finance world. Wall Street is lukewarm and ambivalent; the excitement in the blockchain world is palpable and infectious.
We see ourselves on the precipice of change. Crossing the chasm will define the financial future of the world. We all know that we have to jump. Some will fly, while many will fall. But I’ll be damned if any of us will walk back in fear and return to the big banks.
Bharath Rao is the founder/CEO of coinpit.io, a blockchain exchange, and Leverj, a decentralized leveraged exchange built on Ethereum. Previously he worked as a software engineer at Goldman Sachs, J.P. Morgan, Lehman Brothers and Credit Suisse.