FinTech's Future: Only A Tame Public Blockchain Will Work.
We can get along, if only you trust in me.
— Etta James
We have learned much about what does not work in the cryptocurrency world during the past few months. As a result, the blockchain party has been abruptly cancelled. This article describes the necessary ingredients for a successful big blockchain transactions network, the basic promise of blockchain technology.
My thesis is that bank payments systems have a treasured place in our memory. No place at all in our future.
I will further explain why major financial institutions such as Bank of America (NYSE:BAC), Citigroup (NYSE:C), and Goldman Sachs (NYSE:GS), to name only a few, are wasting billions on blockchain tech. It’s to divert attention from their failure to competently perform their simplest, most essential function — the efficient transfer of customer funds. In this and later articles, I will argue that, ultimately, there is no alternative to completely replacing the banking system in this role.
The death of big public blockchain transactions utilities. The “bitcoin is the future” party was cancelled a year ago in the public blockchain world. It became evident then that without repairs, bitcoin and its cousin cryptocurrencies were non-starters in the future of transactions systems. Disasters from the Mt. Gox hack to the discovery of bitcoin’s use by the illegal version of Amazon, Silk Road, put an end to most banks’ desire to even speak the word “bitcoin” aloud. But the very recent DAO hack for Ethereum and the following $65m hack of Bitfinex, a cryptocurrency exchange that resides on bitcoin, are making it difficult for non-bank FinTech transactions startups to find a cryptocurrency to call home.
Aside from bad publicity, there is this unpleasant reality to consider. The doctrinaire leadership of the existing cryptocurrencies with their stubborn opposition to law and government regulation — which goes to the absurd extreme of opposing any formal organization whatsoever — is simply no place to develop a public transaction utility. For support of big commercial transaction operations, bitcoin and Ethereum are stone cold dead.
The slowly dying enthusiasm for bank applications of blockchain. Yet the past year was a time of unfettered optimism in bank blockchain technology investment. Billions in new bank investment money poured into the financial end of the blockchain. The investment was marked by a shift from public cryptocurrency projects — those mostly native on the two primary public blockchains, bitcoin and Ethereum — to private “permissioned” blockchains. Yet this investment is also suddenly declining. A recent CoinDesk article, here, points to the departure of several bank-employed blockchain developers for greener pastures in recent weeks.
Billions have been spent, primarily by banks, on these permissioned blockchains. Permissioned blockchains are sponsored by private networks of institutions such as bank consortiums, exchanges and clearing houses — clearing houses such as the Depositary Trust & Clearing Corporation (OTC:DTCC). These investments are, at best, a total waste. I explain why here.
Permissioned blockchains are a fad — or worse, an attempt to misdirect investors. Banks would prefer the public not focus on the simple adjustments US banks and clearers need to make to move transactions into the 21 st century.
Embarrassing realities abound.
- In supposedly backward African nations, the ability to transfer funds instantly on your cellphone — peer-to-peer (no bank involved) — is taken for granted. (By the way, there’s an app for that in the States too. Ask your millennial generation friends and relatives.) Even in the eurozone, that citadel of bureaucracy, same-day payment is commonplace.
- A payments technology in East Asia, that has not changed since the 6th Century (not a typo), Hawala, is a faster, cheaper way to make a foreign exchange payment from Calcutta to Los Angeles than MoneyGram. SWIFT? Fuggedaboudit!
- Three days to clear a securities transaction on DTCC? Futures clear twice a day. They have cleared daily since I can remember, a very long time.
These inefficiencies may be, should be, fixed forthwith without resort to any new technology at all. US bank and securities regulators are, as always, sitting on their hands, letting commercial banks and securities clearers get away with this obscene delay.
What is blockchain really about? And for those genuinely interested in financial technology, not the bank’s financial technology publicity, the evidence abounds that there is only one good reason, in finance, for using blockchain. It is the only way, at the moment, to defend big networks of transactions from hackers. SWIFT is in trouble. If North Korea takes to hacking SWIFT full time, there are just too many vulnerabilities in huge firewall-based protection systems like SWIFT.
The Bank of England. Future home of blockchain.
In my last article on this topic, I listed the four benefits of legitimate blockchain technology, as opposed to the permissioned blockchain dream.
- Transparency.
- Immutability.
- Permissionlessness.
- Trustlessness.
Two of these — permissionlessness and trustlessness — seem, at first blush, to be very desirable characteristics of a big transactions network, like a network for paying bills and the like, or a network for trading and clearing securities. Why?
Permissionlessness. Why should we need the permission of a bank to make payments? My paycheck should be direct from my employer. It should be stored for free by me electronically. My payments should be made directly, peer-to-peer. The whole third party thing is a relic of a time when payment was physical, not electronic. In those days, I didn’t want to carry my gold around.
Trustlessness. Why do we still use banks for transactions in this electronic age? Because my employer needs evidence that I was paid. I need verification that my employer paid me. My payees need evidence that they were paid and I need evidence that I made the payments. If there is a blockchain, where every participant has verification of transaction validity in something close to real-time, the purpose of a bank in modern transactions is eliminated.
That development depends on the true big idea of blockchain. Trustlessness. Without trusting anybody participating in the network, the network technology assures all payments are valid.
You will not see a defense of permissioned blockchains from informed public journalists. But you will see attacks on the public blockchains. The conclusion I reach is this: Neither the bank’s permissioned blockchains nor bitcoin are ever going to be a significant factor in FinTech. A tame public blockchain network is the way to go, and starting from scratch is easier than changing the ways of the doctrinaire apostles of the dominant current cryptocurrencies, bitcoin and Ethereum.
My conclusion is a simple one. A separate public blockchain is inevitably going to be used by all of us to conduct our daily transactions. There must be public assurance, however, that contrary to the existing public cryptocurrencies, there will be a central decision-making authority. This central authority may be private or public. If private, the authority must submit to some legal authority — logically, either the City of London or the State of New York. However, there is no logical or legal reason that there could not be more than one global transactions network. There may be an economic reason — economies of scale — that ultimately through competition will leave the globe with only one.
This conclusion leaves me to outline the specifics of such a transactions system. I believe these specifics are being worked out by more than one group of financial experts right now. In future articles I will list the probable players, and outline what are the necessary, and optional, properties of such a system.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Unique Finance). I have no business relationship with any company whose stock is mentioned in this article.
