It’s time to pull the brake on Bitcoin
With ten years in fintech under my belt, I have seen the creation of the word itself. I have also seen the rise of various hypes, adoption of buzzwords, sky-high funding rounds, epic failures and a surprising knowledge gap in what is the world’s biggest industry. This includes the supposed rise of the blockchain.
We have a Norwegian saying that does not translate well, but I’ll use it anyway. “Let’s separate the snot and the moustache.” I think it’s valid here. Since its early hype, blockchain has been explained in detail so many times that I expect you know the basics. But let’s separate digital currency without any governmental backing (snot) the technology of cryptographic ledgers (moustache).
The underlying technology has been popularised with names such as “public ledger technology” (PLT), amongst others. It’s simply a list of records shared across several parties where the update of the list happens through a mathematical process making it hard and expensive to tamper with. All participating parties in the network have the same list of records and when the record is updated, everyone needs to agree that the change is valid. Once the consensus is archived, the updated list becomes the truth.
This technology in itself isn’t conceptually new. It’s a neat piece of technology that could replace, for example, any public record system for stuff like property registers, car ownership records, etc. There’s no need to have legacy systems and hundreds of people working on record keeping, machines can do better, faster and cheaper. It makes perfect sense and is a natural application for public ledger technology.
The problem with wide-employment of this system comes down to politics. As long as the government has no other place to employ all the people who will lose their jobs from such system replacements, they let the head of IT continue to buy clunky systems from the usual vendors to keep the old wheels grinding.
For most financial services, such a system is not viable.
Why? There are several reasons. Firstly, when you update a record on the shared crypto ledger you have to reach consensus amongst the parties before its final. This takes time and costly compute power. The amount of computing and network traffic needed makes for an environmental footprint that is terrible compared to existing systems.
Also, up against today’s point-to-point ledger update protocols, you are about 20 seconds behind when it comes to processing time. In the real world, you would have to wait 20 seconds or more when paying for a coffee. Not viable.
And yes, sure, I know, the blockchain enthusiasts would argue that we can build systems around this problem. Perhaps where you let someone else stand in the middle and speed up the processing time if a payment is slow on the secure ledger. You could do this by using a proxy between the actual ledger and the point of payment. The problem with this architecture to make a slow and secure system fast is that it becomes faster but less secure. You are basically replicating today’s banking system on top of a crypto ledger. So you are recreating what we have already, based on trust, except with more complexity and unregulated value chain players.
Do you think more steps in a payment chain would increase or decrease cost, complexity and risk? It defeats the whole purpose of the crypto ledger.
So crypto ledgers do not solve but introduce new problems to the payment infrastructure we have in place. If we dive deeper into the monetary systems, we do have problems where shared crypto ledger technology may play a role, but it is not without major obstacles.
So what is the problem with today’s systems and how can PLT play a role?
When payments happen today on the low cost, super fast messaging networks we have in place, the money transfer message is virtually instant. But the actual moving of money is a secondary process that is typically batched. Money moves slower than the actual money messages and typically in another channel, via clearing partners and corresponding banks. That’s also why such payments are typically more expensive than the messaging part.
When money needs to move over a distance, say from an account to another account inside a bank, that is cheaper than when it needs to travel from one account to one bank to the account of a merchant on the other side of the planet. The cost grows with distance as there are more players involved in the actual movement of the underlying value.
This is where PLT may have some value.
How? On a crypto-based ledger, the message of money and the movement of value is the same thing as the message that contains the value.
In a very simplified example, imagine that every currency note has a serial number and if you could send that serial number to anyone in a message, the recipient would now own the note and thus the value. So the message of money and the actual value is the same. Still, it takes some 20 seconds, but 20 seconds for moving big batches of payments between large financial institutions that are today moved once a day or even once a week, via the old routes, would be a huge benefit.
As there is nobody in between, you would not need correspondent networks, clearing and settlement players, etc. You would simply send all the money in one message at whatever cycle you agree, to do the settlement between the major players in the network, keeping the instant and well-established top-level payment systems in place as they work just fine. That would work just fine.
But there is one big catch.
We can’t send the serial number of the note to anyone, as it’s not accepted as currency since the actual note still exists in the real world.
To solve this problem – that is what serial number aka value to send on this digital ledger, the people invented their own currency.
Say hello to Bitcoin.
Later came a variety of other representations of value such as etherium. Lately, a whole bunch of new coins have been “listed” in the ecosystem of cryptocurrency enthusiasts, fuelled by more or less informed speculators who bet on the movements in the market.
It’s not a real currency. It’s not backed by anyone and some would claim that’s one of its key benefits. But it stands in sharp contrast to the rest of the monetary system that we, for better or worse, have decided to build our world with.
Yes, a piece of paper on its own is just as worthless as the string of characters that make up your Bitcoin value. The main difference is that the paper is trusted and backed by the government and banks and its the monetary fuel of our world. It’s not perfect. I’m not defending our monetary system. I’m just not pro-making up even more currencies when no problem is actually being fixed but simply introducing new problems.
What is the solution?
Moving large portions of money is not as time sensitive as, for example, retail payments. The only way I see crypto ledger technology being useful and possible would be if the established and accepted currencies of our world were digitised.
That is, USD and EUR, and any other currency for that matter, being issued as a cryptocurrency. Backed and tracked the same way as its physical sister, this “real currency” would simply be digitally represented. You could interact with it just like you can with the current balance of your bank. It’s simply an infrastructure tool to move it in a different way than notes which need to be carried by guarded trucks.
Sounds nice? It will not happen for a very long time…
Firstly, the big players currently moving money on this scale already make a lot of money doing exactly this – large-scale moving of money. Making that infrastructure public is not in their interest for multiple reasons. The value of your network, your correspondents and your business running on it would diminish.
Secondly, you have enough problems complying with the requirements of the regulators, you don’t want the public’s eye on all your transactions. It basically means that anyone could see everything you are doing, effectively democratising this movement of money.
You have no business upper hand. What is at the core of your business, has been replaced by machines, and anyone with a computer could do it. On the same basis that governments don’t move public record systems onto this new technology, many players in the government value chain would not want to move this monetary part onto public ledger technology. If the regulator doesn’t have to enforce audits and regulatory monitoring on financial services companies, as all their transactions are public to anyone, what would they do?
You have to be a visionary, and probably hold a degree in political and humanitarian philosophy (I don’t even know if that combination exists) to waive your own job for the democratisation of money. So, I don’t see that coming anytime soon.
In desperation and driven by the opportunities of an unregulated space hyped by technology enthusiasts the cryptocurrency train is doomed to come to a halt as new coins are listed, hyped and implode. This leaves the fraudsters with bags of real money and those less informed with strings of worthless characters stored on their computers. At least in the old days, you got a physical piece of paper saying you owned shares in something that may have memorabilia value, even if the company went down the drain.
A Bitcoin has less value than a grain of sand.
The underlying technology may be useful, but looking at all the amazing technology that is being developed to push humanity forward, would spend my time and money elsewhere. But I guess if everyone agrees that sand is the new gold, go mine for it.
By Daniel Döderlein, founder and CEO of Auka