Bitcoin has
boldly blazed a trail for a seamless global financial system, open to
anyone on the planet. But this is not a proposition that banks are
naturally disposed to.
Some people may say Bitcoin has solved a
particular value transfer problem and this should not be conflated with
what banks are planning to do with blockchain technology.
However,
it could be argued that the highly regulated and exclusive nature of
banking has allowed this industry (for the time being) the luxury of
analysing its own disruption and formulating ways to manage this, in a
manner not afforded to taxi drivers or hotels and B&Bs.
The
economist Jon Matonis, the former executive director of the Bitcoin
Foundation, believes banking cartels obsessing about private blockchains
must answer a fundamental question: "Are these private blockchains
going to be able to be used against smaller financial institutions or
weaker nations to institute a blockade, just as SWIFT and CHAPS are able
to do today?"
As the only global payments settlement network,
Swift has blocked Iran from participating;
Russia was threatened with being blocked; and
Israel was also threatened with a block.
"If
countries can be blocked out of the payments system because they are in
a politically incorrect part of the world, then they would also be able
to be blocked out of something that's a permissioned blockchain.
"We haven't really changed anything then if it's not open access, if all they have done is recreated the cartel.
"They
cannot answer that a permissioned blockchain won't be used against
smaller financial institutions for purposes of a blockade. The primary
Bitcoin blockchain would route around that."
Matonis pointed out
that this has prompted both Russia and China to construct their own
Asian version of Swift over the past three years. Apparently, the
China International Payment System (CIPS) is slated for roll out in 2016.
"They
recognise the power that Swift holds. Led by Russia and China, they are
building their own consortia to rival Swift, so that they will have a
parallel alternative in case Swift decides to block access."
Disruption management
"The
banking industry, the financial institutions, they have the luxury of
sitting around today and actually analysing their own disruption," noted
Matonis.
"This is what this Bitcoin/blockchain stuff is – 'look,
we are analysing our own disruption. Now how do we want to be disrupted?
Bring it in-house?
"Disruption doesn't work that way. It comes
from the outside not the inside. If you look at Airbnb and Uber - Airbnb
is the largest lodging company in the world and they don't own a single
property. Uber is the largest taxi service in the world and they don't
own a single car.
"Uber came up with the underlying technology to
attack from another vector and it's the same thing that is going to
happen with the banking industry, the banks just haven't accepted it
yet.
"They will be disrupted in the same way by an outside
technology and they are not going to be able to usurp the underlying
technology and disrupt themselves from within because it will completely
change what they are.
"In the future, the largest financial
network may not be bank-owned at all and the most circulated currency
may not be government issued."
Blockchain made the mainstream
financial press last week with the announcement that the R3 initiative
had nine big banks onside to create common standards for distributed
ledger build out.
Matonis said: "Evolving towards a bank-wide
standard for blockchain appears to be a replication of how Swift came
into being; Visa did the same thing on the retail payments and was
originally a bank-owned network.
He said: "If they are going to
experiment on this stuff it makes sense for each one of the banks to pay
one ninth of the cost instead of the full cost. That's where the true
cost savings are?"
Some critics take an extreme view that all private blockchains are creating is another MySQL or shared database.
"Many
fintech executives mistakenly view private blockchains as off-the-shelf
products whereas they are rather 'byproducts' of a highly-valued native
token with massive network effect - bitcoin. Bitcoin is not created to
get more chain. The blockchain is created to get more coin."
However,
Matonis does see value in the experimentation: "I think that they can
achieve some cost savings. And actually I think that there is some
benefit for banks doing these blockchain experiments because it prepares
them for the future.
"They will already be orientated towards
blockchains, they will be able then to eventually leverage what is the
strongest most secure decentralised network
- that of Bitcoin,
where they could actually have value reside on it, and we end up in a
world where there is a hybrid approach of private blockchains and the
public global Bitcoin Blockchain."
Matonis favours a future state
in which Bitcoin works as a settlement network at a higher level,
implying that the primary blockchain would not handle every small
transaction.
Digital gold
In this respect
Bitcoin could be treated more as a reserve asset the way that gold is
treated among nations today. Gold eliminates counterparty risk and as
such is the ultimate settlement. A lot of countries, such as Germany for
example, are repatriating their gold because they don't want it all to
be in New York, Matonis pointed out.
"Bitcoin would take on a
reserve asset role similar to gold. It would be a reserve currency asset
class that countries would have on their balance sheets. It's digital
gold; gold is analogue Bitcoin because gold can't be stuffed through a
wire."
He said smaller transactions can be handled by a system like the Lightning Network. "Coinbase
is already settling transactions between members, so every single thing
doesn't have to be on the primary Bitcoin blockchain, because it's not
always going to be free.
"The people who want these bigger blocks
like the XT people, they want to extend the subsidy for free
transactions longer by putting many, many micro-transactions on there
even like for pennies.
"All that is a subsidy - it's not actually
free. It's just that it's being subsidised by the larger blocks which
are paid for ultimately by the transaction validators in the form of
increased capacity, increased storage, increased bandwidth."
Matonis said people see the need to extend this "subsidy" for free transactions because Bitcoin has not reached critical mass.
"They
look at it as a PayPal, Facebook thing where the end result is to get
every single person in the world using it for their daily transactions.
"But
it could be behind the scenes at a large scale settlement level.
Individual people may not even need to know that they're using it but
ultimately it's been settled that way."
Returning to the question
of permissioned blockchain hype, Matonis concluded: "The cynical side of
me would say that we should call private blockchains what they really
are - wealth transfer mechanisms from banks to fintech consultants."
