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Blythe Masters, Inventor of the Credit Default Swap Believes Bitcoin Can Save Banks & Society Billions

Picture credit: Thierry Ehrmann

Blythe Masters is a genius economic engineer.

She began her career studying at the University of Cambridge and then quickly joined JP Morgan Chase. Her education made her an expert on risk. Her talent turned her education into genius. She invented a quick way for banks to handle risk with insurance, ensuring internal resilience for JP Morgan’s systems.

Risk is the chance that a transaction will not be completed. Each of us, as institutional entities, interact with the financial web where we build a reputation. When you settle your debts quickly, you become a trusted actor. When you don’t pay your debts quickly or efficiently, you are high risk.

The equation of risk takes into account the time it takes for a transaction to settle. The more time it takes, the greater the risk. The chances of you defaulting are regularly calculated based on an infinite number of data points calculated by computer software. When collections of these debts are bundled together, the risk is spread across the whole portfolio. Now, imagine, you want to take out insurance that the loans will be paid back.

You’d pay a premium for that insurance, right?

This way of managing risk, in a nutshell, is the credit default swap. Blythe Masters designed them at JP Morgan Chase in a career marked by innovation. Today, JP Morgan is known for managing risk well. While other banks failed from mismanaging risk up to the 2008 crisis, JP Morgan continues to lead. Why? Well, Masters knows how to create tools that work and knows how to wield them well. This ability frees up internal bank capital to be used elsewhere in the institution, which in turn flows into the larger economy as a whole.

However, Masters was ridiculed as “The Woman Who Built Financial Weapons of Mass Destruction”  This statement is like saying whoever invented the knife is responsible for all murders caused by knives , while discounting all the nourishing meals that knives help us create. After the dust had settled with the 2008 crisis, Masters thought of ways to undo the damage done by those who had used her tools for evil at less than stellar banks. Naturally, as an economic engineer, she turned to technology to explore these solutions in depth.

Cutting red tape in transactions could free up large amounts of capital for banks to make more loans to society as a whole, open more markets, and create transparency in a largely darkened part of institutional dealing. Instead of transactions marked by slowness of 20 business days, an institution can settle accounts within 10 minutes with previously unknown entities. Can you imagine all the lawyers and escrow services that will no longer be in business?

Blockchain technology, upon which Bitcoin is built, programs trust into the transaction

Like email was to the postal service, so is Bitcoin for the financial system. Masters, after researching this in depth, now runs a firm to create the products banks need to use this technology internally. Now, the tools that Masters and her team create will free up capital more quickly and be used without as much risk.

Instead of mastering risk, banks can focus on performing the function they were mainly created to perform by dispersing money like hearts pumping capital into the arteries of society. Making investments more efficient, quick, and laying out the landscape changes everything for sophisticated actors like banks but also for the average person. Blythe Masters now works to create a stronger immune system for financial markets through distributed technology based on the Internet of finance as Bitcoin. Technology allows us to move into a more collaborative system with incredible resilience through transparency.

The Digital Asset platform uses distributed ledger technology

It allows the mutualization of financial market infrastructure across distinct market participants. It does this while maintaining confidentiality and scalability, both vital for large, regulated markets. The DA Platform eliminates discrepancies between disparate but duplicative siloed data records, reducing the current errors, latency, risk, cost and capital requirements involved in processing financial transactions. Participants in the Platform share a single source of truth which provides continuous data integrity, any desired or mandated degree of transparency and the opportunity for rapid innovation.

The above is an excerpt from the non-technical white paper. You can read it in full here.

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