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Buyer Beware? Credit Creeps Into Crypto

Polonius' advice to Laertes in "Hamlet" might well have been a rallying cry for the early bitcoin adopters who sought an alternative to fractional reserve banking.On a blockchain, an asset can be in your wallet, or it can be in my wallet. It cannot be in both at the same time. You can still lend it to me, but if you do, it's like letting me borrow your lawnmower – you can't mow your own lawn until I return it. Unlike banks as we know them, lenders of bitcoin cannot create money out of thin air, Jamie Dimon's comments notwithstanding.Quite apart from providing an alternative to central bank money creation, however, cryptocurrencies and blockchains imply liberation from more prosaic forms of credit.For example, the peer-to-peer architecture of cryptocurrency means transactions are continuously settled on a gross, or one-to-one, basis, rather than waiting to net out a batch of debits and credits across the books of a central intermediary.Meanwhile, blockchain securities platforms such as tZERO seek to collapse Wall Street's Rube Goldberg assembly line of trade, clearing and settlement into something closer to "one and done."And in an emerging type of crypto transaction called atomic cross-chain swaps, it is impossible for only one side of a trade to go through. It gets done, or it doesn’t.All of these innovations should, in theory, reduce the need for credit to bridge the gap between trade and settlement, and lead us to a world without baffling distinctions on our bank statements like "current balance" versus "available balance."And yet, credit, in various forms, is creeping into the blockchain economy.