In late 2008, the Global Financial Crisis (GFC) reached its crescendo with the failure of Lehman and the near collapse of large parts of the banking system in several advanced economies. It was in this environment of all-pervasive distrust that the pseudonymous computer scientist Satoshi Nakamoto introduced a cryptographic currency called the Bitcoin that promised to obviate the need to trust big banks with our money. More importantly, it introduced a novel decentralized ledger called the blockchain. While Bitcoin as a currency has had its ups and downs, there is growing interest in the decentralized ledger (the blockchain).
Finance has traditionally used a centralized ledger maintained by a trusted party in many critical areas: central counter parties (CCPs) guarantee trades in exchanges; central securities depositories (CSDs) provide securities settlement; the Society for Worldwide Interbank Financial Telecommunication (SWIFT) intermediates global transfer of money; CLS Bank handles the settlement of foreign exchange transactions, a handful of banks dominate correspondent banking, and an even smaller number provide custodial services to large investment institutions. Until the GFC, it was commonly assumed that the financial strength and sound management of these central hubs ensured that they were extremely unlikely to fail. More importantly, it was assumed that they were too big to fail (TBTF), so that the government would step in and bail them out if they did fail. After the GFC, all these assumptions look very facile. More recently, repeated instances of hacking of the computers of large financial institutions have added to the factors eroding trust. When trust in the central hubs of finance is being increasingly questioned, decentralized systems like the blockchain that reduce the need for such trust become attractive.
It was in this context that I introduced the course on Bitcoin and the Blockchain in 2016. As I looked at some of the top universities around the world, I found several courses on the mathematical and computing aspects of the Blockchain like cryptography, distributed computing, and Byzantine fault tolerance. However, there seemed to be a gap when it came to courses focused on the application of blockchain in finance. This was despite the fact that banks, exchanges, depositories, central banks and regulators were all exploring potential applications of the blockchain to reduce costs, increase robustness and shorten settlement delays, and a number of start-ups were receiving substantial funding to build some of these applications.
I ended up designing a course focused on blockchain in finance more or less from scratch. That was when I realized that the MBA curriculum had very little coverage of the plumbing of finance. Finance students (and their teachers) are excited about investment banking, exotic derivatives, mergers and acquisitions and the like. By contrast, they usually find the mechanics of payment and settlement systems dull and boring though trillions of dollars flow through these systems every day. It is the very nature of plumbing (whether in the home or in finance) that as long as it works, nobody thinks much about it: it is only when the plumbing gets clogged for some reason that we realize how important it is in everyday life. However, the blockchain is all about changing the plumbing of finance, and it became clear to me that a course on the blockchain in finance would have to devote a fair amount of time to understanding this plumbing and all its pain points. Again, there were hardly any courses dealing with this, and much of the material on this could be found only in regulatory documents.
Finally, there was the question of whether the course should deal with Bitcoin or whether it should confine itself only to the blockchain. My view then and now has been the same: Bitcoin and other cryptocurrencies are the only real proven use domain of blockchain. Its applications in other domains are still largely pilot projects that have yet to demonstrate commercial viability. A course on blockchain that does not talk about Bitcoin would therefore be like Hamlet without the Prince. A second reason for talking about Bitcoin and Ethereum is that these are exceptionally well engineered systems unlike many of the half-baked venture capital-backed blockchain projects that I see ever so frequently. Blockchain students can learn a lot from the design of these systems that have made them so resilient in the face of multiple challenges. Finally, cryptocurrencies are a wonderful way to discuss the question of what is money. Since most MBA students have very little exposure to financial history, they tend to forget that through most of recorded history, money has been created by the tokenization of commodities, and do not realize that cryptocurrencies are not such a great departure from this long historical tradition.
The ten session course begins with the cryptographic foundations of the blockchain and related technologies, and then moves on to the role of the ledger in payment systems, clearing and settlement systems, and the inefficiencies associated with the traditional centralized ledger. It then discusses the most important applications of the blockchain in finance and the associated software solutions. Bitcoin and Ethereum are discussed as important case studies of the blockchain, and the latter also provides an opportunity to understand smart contracts. In recent years, there has also been one session on Initial Coin Offerings (ICOs) which became very popular at one point of time. The course tries to be self-contained, but it assumes reasonable knowledge of basic finance, elementary mathematics and essential computing that is expected of all finance professionals today.
The course has two projects which might appear to be an overkill for a ten session course, but are critical from a learning point of view.
The Lab Project is designed to provide hands-on exposure to the blockchain technology using an open source software like hyperledger. In a short project, it is of course not expected that students will come up with a functioning blockchain application. At a minimum, the project must demonstrate creating a blockchain and doing some transactions on it. Projects which try to do more difficult things get extra credit even if they do not fully succeed in accomplishing those objectives. Every year, I have been pleasantly surprised by a couple of groups that succeed in demonstrating very interesting blockchain applications.
In the Business Project, the group identifies an existing (possibly pilot) project that has applied or is trying to apply the blockchain in some area in finance. The group studies the White Paper or other detailed document to understand the business situation and the blockchain architecture in sufficient detail. For the chosen project, the group presents a critical analysis of the business case (or lack of it) for this blockchain application.
One thing that the course resolutely refuses to cover (to the great disappointment of some students) is the “fair value” of Bitcoin and its suitability as an investment. That is a course for which in my view the time has not yet come.