Lately I was introduced to the Intobitcoin documentary on Blockchain, Cryptocurrency such as Bitcoin (Dutch spoken). Then I read Understanding Bitcoin: Cryptography, Engineering and Economics (2015) by Pedro Franco, which explains a lot of the principles and technology. The potential of Blockchain, market leader Bitcoin and its many followers has a significant buzz factor. Many have heard of it, fewer people do understand the current inner workings, and even less people have really hands-on experience deploying this technology in Financial Services. Home insurance policies covering bitcoins you as private person have – National Bank Insurance is just one example – is just peanuts and certainly no rocket science in my opinion. I understand people comparing Bitcoin to Linden dollars, the currencies during the heydays of Second Life (2005-6).
Who really wants to have insurance policies of Bitcoin Life, just because it is 100% Bitcoin based? Or is it the VAT exemption at exchanging regular currencies for Bitcoins, ruled by the EU Top Court on 22 October 2015? Franco’s description of the current 2014/2015 state of the cryptocurrency closed value ecosystem still look like a sandbox of miners, merchants, exchanges and a few wallets. ABN AMRO Innovation Centre’s Startup Friday March 2015 meeting on the Blockchain highlighted some of these parties.
Typically intermediary roles and trusted third parties like banks may be replaced by Blockchain technology, if it is decided to submit current markets or transaction processing systems to ‘the Blockchain’. Accountants, controllers, custodians may fear their jobs….according to futurists and conference speakers. Cut the middle man, which – by the way – is an ongoing evolution, not only caused by the latest technological innovation.
Scalability is a serious topic. Security’s even more important. Though many cryptographic techniques are applied to secure the network, establish and maintain trust, there will always be an operational risk. Lloyds investigated the consequences for an insurance company to cover a Bitcoin Operation.
As long as merchants need for example Bitpay to extract value from the bitcoin ecosystem and convert it to currencies to pay their bills, these service providers are new trusted third parties, currently evolved into Financial Institutions themselves, and so subject to regulations and supervision. Banks don’t need to use Bitcoins themselves.
A broader audience is needed
‘If this then that’ programmable currencies could invoke new business models, like coins once replaced grain and fish. Multimedia payments, conditional payments within a closed system like the health sector, a holiday resort. Bitcoin itself may succeed or fail. Hacks are not in favor of trust needed to be a sustainable value network. Underlying technology, grounded in the 90’s will evolve and support future manifestations of we currently call money, payments and receipts.
A lot more thinking and design is needed
Either anonymous payments, or open, transparent ones will win in the end. You can’t serve both. Cryptographic currencies now are built on principles striving to free business from governmental supervision and political systems. Greed, as human trait, will stay, whatever technology is used. You may argue that Financial Institutions need regulations and supervision to protect consumers and secure markets.
Bitcoin is deflationary in nature, because of a ‘limited availability by design’. Its current high volatility doesn’t help to build trust as well. Bitcoin is not suitable to take the role of basic currency for the economy, the Bitcoin wiki concludes. The technology behind cryptocurrencies has a lot of trust by design, but it’s still vulnerable to theft. Improvements and inventions of new applications need to be done. To help you think for yourself, I collected some TEDx talks on this topics.
What are your thoughts on cryptocurrencies like Bitcoin, now officially ‘coined’ commodity? Would you trust this new money? What business models would you envision?