1. Money 20/20 Recap
A very Happy Halloween to all. The 2015 Money 20/20 conference is now in the books after a long 3.5 days of 5,000 concurrent coffee meetings to discuss all things fintech. Highlights of the announcements made at the conference include Nasdaq's official announcement of their private stock on a blockchain platform Linq, Visa's partnership with DocuSign to conduct a car leasing PoC via the Bitcoin blockchain, and Barry Silbert's DCG announcing a funding round that includes MasterCard, CIBC and others. Your author also had the pleasure to debate the currently-everywhere topic of Bitcoin vs blockchain on one of the panels (more on this below).
The best summary of the event turned out to be an article completely unrelated to Money 20/20, yet its theme perfectly captures the existential dance that banks are in with the topic of fintech: Are Banks Destined To Become The Next “Dumb Pipes”?:
The telcos hate the term “dumb pipes” — and for good reason. They are being relegated to the common conduits through which meaningful communications and commerce take place. But telcos won’t go away overnight because there’s still a lot of value in the physical network infrastructure and cell towers they built through decades of investment.
Similarly, “unbundled” banks won’t go away overnight; there’s still a lot of value in the intra-bank money transfer networks and the depository role that banks are uniquely allowed to play in the U.S. economy. However, over time, traditional banks that fail to dramatically reinvent themselves for modern consumers will find themselves playing the role of a simple inbox for depository funds and pipes that move the money to other financial services providers who will increasingly influence consumers’ financial lives.
2. The Economist: The Trust Machine
My friends and loved ones continue to be puzzled by my new chosen field. Luckily for me, I now have a short, well written article to send to them as a starting point. The Economist makes a cover girl out of blockchain technology, and their Leader article The Trust Machine gives the full Economist treatment to this challenging topic:
The notion of shared public ledgers may not sound revolutionary or sexy. Neither did double-entry book-keeping or joint-stock companies. Yet, like them, the blockchain is an apparently mundane process that has the potential to transform how people and businesses co-operate. Bitcoin fanatics are enthralled by the libertarian ideal of a pure, digital currency beyond the reach of any central bank. The real innovation is not the digital coins themselves, but the trust machine that mints them—and which promises much more besides.
The magazine delves further into the topic with a fine review of many of the companies operating in the space (including R3) in The great chain of being sure about things:
The first industry to adopt such sons of blockchain may well be the one whose failings originally inspired Mr Nakamoto: finance. In recent months there has been a rush of bankerly enthusiasm for private blockchains as a way of keeping tamper-proof ledgers. One of the reasons, irony of ironies, is that this technology born of anti-government libertarianism could make it easier for the banks to comply with regulatory requirements on knowing their customers and anti-money-laundering rules. But there is a deeper appeal.
Industrial historians point out that new powers often become available long before the processes that best use them are developed. When electric motors were first developed they were deployed like the big hulking steam engines that came before them. It took decades for manufacturers to see that lots of decentralised electric motors could reorganise every aspect of the way they made things. In its report on digital currencies, the Bank of England sees something similar afoot in the financial sector. Thanks to cheap computing financial firms have digitised their inner workings; but they have not yet changed their organisations to match. Payment systems are mostly still centralised: transfers are cleared through the central bank. When financial firms do business with each other, the hard work of synchronising their internal ledgers can take several days, which ties up capital and increases risk.
Distributed ledgers that settle transactions in minutes or seconds could go a long way to solving such problems and fulfilling the greater promise of digitised banking. They could also save banks a lot of money: according to Santander, a bank, by 2022 such ledgers could cut the industry’s bills by up to $20 billion a year. Vendors still need to prove that they could deal with the far-higher-than-bitcoin transaction rates that would be involved; but big banks are already pushing for standards to shape the emerging technology. One of them, UBS, has proposed the creation of a standard “settlement coin”. The first order of business for R3 CEV, a blockchain startup in which UBS has invested alongside Goldman Sachs, JPMorgan and 22 other banks, is to develop a standardised architecture for private ledgers.
3. Bitcoin vs Blockchain Debate Goes On (...and on and on and on)
One of the lessons I learned during my time as a trader was that the biggest determinant between being right and wrong was the time scale of your bet/thesis/opinion. It is a lesson that I keep close to mind during the (seemingly) endless debates between the "It's the Bitcoin" and "It's the Ledger" crowds. As mentioned above, the topic came up in our panel earlier this week. My view is that trying to argue either side is pointless, as each one is "a little bit" right AND wrong, and besides why does this have to be an either-or? To quote Jeff Garzik: "The core service of bitcoin is censorship resistance. All else follows from that." Some things need censorship resistance as a design principle, other things most definitely do not.
Erik Voorhees chimes in for the Bitcoin-only crowd with this post, making an argument that the use of blockchain over bitcoin is one of expedience to get by in polite company:
It remains to be seen how long it takes for the financial industry to realize that the true valuable innovation is not the distributed ledger of the blockchain (which has existed in other forms prior), but rather the open platform of financial inclusion with no trusted party or cartel (which has never existed).
Robert Sams extends the theme of bitcoin as great censorship resistant digital cash, but extremely poor security settlement network, in this reprint of an earlier posting:
Nothing in what has been discussed here is meant to take away from the inspired, brilliant solution that Nakamoto implemented for censorship-resistant digital cash. And, furthermore, that design goal is, in my opinion, a worthy one. Society should have digital cash that replicates the same anonymous and permissionless properties that are already enjoyed with physical currency.
But a proof-of-work blockchain is only suitable as a distributed ledger for value that society is prepared to treat as a bearer asset. [snip] Possession (of a private key) is ownership (at least in the anarchic, code-is-law jurisprudence of the bitcoin protocol), regardless of how one came into possession, for there is no way for the blockchain to discriminate among spend transactions of coins obtained through legitimate trade, defrauding a counterpart (e.g., via a double-spend), or theft of someone’s private key.
But the proposition that security interests and other property titles should also be cast in the same bearer asset mould will go nowhere. Few actually want this, and, in any case, few jurisdictions will actually allow it.
Finally, Pascal Bouvier has another in his series of excellent posts entitled The Case for Open Standards & Open Code with Consensus Computers. He does a much better job than I did on my panel in trying to argue the similar point - a system can be open yet still have (and require) known validators:
Over and above potential savings, the issue of undue influence is also close to the hearts of all capital markets participants. Undue influence means MARKET POWER. No bank, no liquidity provider, no buy side firm will want to cede power to a technology provider. By nature and definition a CC is not run by a single firm for pre and post trade activity, it runs cross-market as a system, distributing a CC among many participants. Were a tech firm have monopoly over foundational blocks of code, this would create a true monopolistic situation and market power would shift to that tech firm. I doubt this will happen.
Who knows who will be right, or perhaps in what order everyone will be right? Or, frankly, if we are even arguing over the right blockchain?