10 Years on: The Northern Rock Bank Run and the Argument for Cryptocurrencies

They are some of the most chilling images from the financial crash – the sight of long queues forming outside branches of Northern Rock as thousands of its customers tried desperately to rescue their savings before the bank went under.

By 2007 Northern Rock was one of the UK’s biggest lenders but crucially was itself borrowing heavily on the international markets. As the US sub-prime mortgage crisis began to bite, the bank swiftly found that these markets were no longer willing to extend credit and, in the words of Mervyn King it “literally ran out of money.” Many of those who lost substantial savings as a result of this spectacular fall are still waiting to be compensated a decade later.

Scenes like those witnessed in 2007 are a stark reminder of just how close Britain came to the brink during the financial crisis. Gordon Brown, the prime minister at the time, later admitted that the country’s ATMs had been only hours away from running out of cash altogether. We should arguably be thankful that things didn’t turn out immeasurably worse than they actually did.

An Inherent Risk

Now, as fears of another recession begin to gather, the failings inherent in the current banking and currency systems are being brought into ever-sharper focus.

The Northern Rock crisis is a good example of what can occur when assets become too centralized; thousands of people suffer as a result of the decisions made by a few at the top. The everyday investor’s access to the international markets has traditionally been limited and they are forced to rely on a cabal of others investing and speculating on their behalf. Transparency is all but absent from the process.

In today’s post-crash world, investors are becoming increasingly wary of this opacity and the vulnerability of the large entities (banks, hedge funds etc.) that control investment assets. But the big financial story of the past year looks set to change that.

Blockchain Technology to the Rescue

Cryptocurrencies such as Bitcoin and Ethereum – currently the two biggest players in the market – and their use of blockchain technology are opening up new possibilities for investors and helping to create a more egalitarian financial landscape.

For a start, these currencies are constructed as finite resources – for example, only around 16 million bitcoins have so far been mined and made available for purchase. This represents a much more ordered marketplace than the wild west of current financial speculation. The crash of 2007/8 was largely caused by money that existed only theoretically. As in the case of Northern Rock, when customers decided to cash out, the bank was unable to fulfil its obligations.

It may seem ironic to argue that a currency which has no government backing and exists only online could offer a safe alternative to the current trading model, but by virtue of there being only a limited number of bitcoins available, they translate into a viable commodity. The ever-expanding global market for cryptocurrencies is proof itself that these decentralized assets are becoming a genuine alternative for investors.

Key to the success of cryptocurrencies is their use of blockchains as a record of all transactions made. There are those who believe that blockchain technology is set to revolutionise the way we use the internet and its implications for key areas such as data security, file sharing and financial traffic, are potentially enormous.

The fundamental strength of blockchain lies in its incorruptibility. In financial terms, the logging of transactions on a blockchain provides an immutable record of their existence, which no one can erase. No single entity can control it and there is no centralized area that can fail and thus impact on the rest of the network.

Blockchains are set to bring a new transparency to the world of finance, so that a company like Northern Rock will no longer be able to obscure the potential risks to which it exposes its customers’ money.

The peer-to-peer nature of blockchain is also set to streamline and maximise the efficiency of financial systems, cutting out intermediaries and reducing the friction caused by paperwork, fees and delays. This represents a new, democratised financial landscape, where power is taken out of the hands of large, unwieldy corporations with all their attendant vulnerabilities, and given over to the individuals and businesses trading with each other. This decentralization will make it easier for the consumer and harder for hackers seeking to exploit current weaknesses in the system.

In Crypto We Trust

The spectre of another recession is not going to go away overnight and there is much to be done before the benefits of blockchain technology really start to make the impact that its potential promises. But change is already underway and if it proceeds quickly enough then there is every chance that the images seen in 2007 will be confined to history.