What the personal computer did for media, the blockchain will do for banking.
In the original Microcomputer age there were many competing technologies. Few people realise that whether you buy Lenovo or Dell, what you are buying is essentially an IBM-PC. Many competing technologies fought for the top spot, each with their own different Operating Systems.
Now Blockchain technology is in the position such companies were then: there are many competing technologies. The Personal Computer catapulted us into a new age, with the advent of the Internet shortly around the corner. Blockchain has just as profound implications for Banking. There are more than 700 such technologies today and counting: we can no longer just talk about money, this is the “Internet of Money”.
Gone are the days where everything was about written contract. Blockchain forces contracts into the Digital Age. There we have protection from deletion, tampering and revision.
The Blockchain which everybody has heard of is Bitcoin, the cryptocurrency first created as a response to the 2008 financial crisis. The originating community had strong notions of freedom and an anti-establishment focus similar to open source culture, with anti-commercial values. However, just as Linux is now embedded in almost every kind of commercial application or service, and is considered as more secure, many of the subsequent uses of Blockchain look set to be the standard practice of established players, from retail banks to large companies, governments, and central banks.
The Banking world is by now mostly aware that Blockchain is the new big thing, but what on earth is it?
How Blockchain Works
Blockchain is a new form of Distributed Ledger Technology. The way the current financial system works, there are written rules and then an appointed regulator checks for violations. Instead, Blockchain’s own code sets the rules and the network checks for compliance. There are blocks of confirmed transactions form, each of which has a reference to the previous block. Because they are strung together in a chronological chain, inconsistencies are impossible. If a transaction breaks the rules (for example, if digital signatures don’t match), it is rejected by the network. Every chain employs a strategy to ensure blocks are generated by multiple players. For a new block to be generated, public Blockchains require users to use their computer power to solve a pointless and fiendishly difficult mathematical puzzle. However, private institutions such as banks can drop this model in favour of having transaction validators on the network who further verify the system.
The Inventor of Blockchain
Bitcoin’s creator Satoshi Nakamoto is still a shadowy figure. We do not know who he is, and in fact he may even be more than one person. Whoever he is, he did more than invent a currency. He also solved a longstanding problem related to data and networks known as the ‘double spending problem’. In effect, under this system, no-one can double spend a single piece of currency. This avoids the drawback of the current banking system, where bills of exchange are used as currency, meaning an ever-growing debt-based supply and single pieces of currency which are used in multiple ways. Presumably the financial crisis was a motivation for Nakamoto in forging a form of money with completely traceable coins.
Blockchain has remained resilient to attack, and it supports a robust payment system. This opportunity to extend its use to remake the financial system both unsettles and fascinates.
From the Big Banks point of view cryptocurrencies are disruptive, as they can open the financial system to new players via lower entry barriers, enabling increased competition. Regulators could remake financial system policy goals, without diluting standards.
More than that Blockchain could legitimately become an economic foundation. Stock settlement, which can currently take as long as a week, could be executed instantly. But how truly robust is it? The Ethereum Blockchain suffered a devastating exploit in June 2016. A coding loophole called “the DAO” had its $250 million investment funds drained at a rapid speed. The Ethereum software was updated to prevent the hacker withdrawing the currency ‘earned’. This update could not be enforced, but Vitalik Buterin, Ethereum’s founder and other community leaders supported it, and most complied. However, a minority disagreed with the change, and they continued their Ethereum system, calling the system Ethereum Classic, meaning there were two different Ethereum Blockchains.
From the other point of view, a new decentralized financial system made possible with cryptocurrencies would be much simpler by removing intermediaries. It would help insure against risk, and the movement of money in different ways would open up the possibility for a new range of financial products.
J.P. Morgan’s CEO warned back in 2014 that Silicon Valley was coming. Now Blockchain is Coming.
Learn more about blockchain at Blockchain in Finance conference.