The Medici accounting ledger developed during the 1500s advanced Europe’s economic growth—now blockchain has the potential to launch a new, global digital renaissance, transforming financial services, supply chains, healthcare, backend offices, and more.1 In 2018, we identified conditions that could make blockchain a potential disruptor for several industries. As active investors, we continue to evaluate its risks and opportunities:
- Blockchain’s biggest breakthroughs are democratization and decentralized recordkeeping, to establish trust between two internet strangers without a trusted intermediary.
- Blockchain’s innovations of tokenization and fractionalized ownership of assets could unlock access to illiquid assets, and provide broader access to non-public investments.2
- Blockchain could completely change how the financial services industry operate their back offices. Blockchain could also facilitate the consumer data-mining essential for marketing financial and other services.
- There are obstacles to blockchain-based money. Current blockchain technology can manage about five transactions per second, whereas credit cards can handle over 1,500 transactions per second. Many experts believe that transaction-processing gaps will evolve and widen, the flip side of blockchain’s appealing, more secure platform.
- China is rapidly moving its currency, the renminbi, toward a central bank digital currency (CBDC). CBDCs allow for greater prevention of fraud or crime, enable instantaneous international transactions, reduce transaction costs, permit greater financial inclusion and aid the provision of direct fiscal stimulus to individuals. China’s CBDC could accelerate the decline of the US dollar as the world’s leading reserve currency.
- The US lags behind China in blockchain infrastructure and security. President Joe Biden’s infrastructure proposals include securing US blockchain infrastructure.
Blockchain’s story may sound familiar as its evolution and cycles parallel the internet. Each were dismissed by critics, yet both have potential to unlock seemingly limitless innovation. Our research continues, and I invite you to revisit “Taken On Trust: Disrupting Money” by Franklin Templeton Emerging Markets Equity. And, read Chief Investment Officer of Templeton Global Macro, Michael Hasenstab’s recent op-ed in the Financial Times “China’s Digital Currency is a Threat to Dollar Dominance,” where he examines China’s digitalization of the renminbi and its potential impacts.
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What Are the Risks?
All investments involve risks, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. The technology industry can be significantly affected by obsolescence of existing technology, short product cycles, falling prices and profits, competition from new market entrants as well as general economic conditions. Buying and using blockchain-enabled digital currency carries risks, including the loss of principal. Speculative trading in bitcoins and other forms of cryptocurrencies, many of which have exhibited extreme price volatility, carries significant risk. Among other risks, interactions with companies claiming to offer cryptocurrency payment platforms or other cryptocurrency-related products and services may expose users to fraud. Blockchain technology is a new and relatively untested technology and may never be implemented to a scale that provides identifiable benefits. Investing in cryptocurrencies and ICOs is highly speculative and an investor can lose the entire amount of their investment. If a cryptocurrency is deemed a security, it may be deemed to violate federal securities laws. There may be a limited or no secondary market for cryptocurrencies. Past performance does not guarantee future results.
1. Source: National Institutes of Health, Applications of blockchain in ensuring the security and privacy of electronic health record systems: A survey, July 15, 2020.
2. Source: Seeking Alpha, Franklin Resources, Inc. (BEN) CEO Jenny Johnson on Q2 2021 Results—Earnings Call Transcript, May 4, 2021.