Banking Beyond Banks and Money

Part of the series New Economic Windows pp 213-237


Are Transaction Costs Drivers of Financial Institutions? Contracts Made in Heaven, Hell, and the Cloud in Between

  • James HazardAffiliated withCommonAccord, Founder
  • , Odysseas SclavounisAffiliated withOxford Internet Institute Email author 
  • , Harald StieberAffiliated withEuropean Commission

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In 16th century Europe, the revolution in printing technology and increasing literacy in European cities created a positive shock to capital productivity. At the same time, the spread of Protestantism in Northern Europe induced individuals to honour contracts or risk exclusion from the Kingdom of God. Max Weber would argue that the religious institution of Protestantism, by dissuading defection from agreements, had allowed a new form of almost trustless exchange with strangers. Strict self-enforcing religious rules restrained individuals from opportunistic behaviour thus lowering the cost of monitoring and enforcing contracts. This led to increasing commerce and economic growth. A better capitalized, but less strict Catholic Southern Europe was unable to exert control and reduce contracting costs in the same way leading to less exchange. We argue that peer to peer technologies, such as Bitcoin, Blockchains, smart contracts, and peer-to-peer (P2P) legal platforms recall these historical evolutions. We anticipate that these technologies will reduce the cost of contracting, specifically with regards to contract monitoring and enforcement. Trustless exchange without some of the current intermediaries specializing in monitoring and enforcement technologies will have a significant impact on the financial system and its institutional structure. Moving beyond theory, this chapter discusses some of the major manifestations of technologies capable to strongly decrease the cost of contracting, and it proposes a certain class of models to explore how P2P technologies, and the concomitant reduction in transaction costs they will cause, can be expected to affect financial exchange.


Transaction costs Property rights Transactional relationships Contracts and reputation Networks