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Repeat after me: Bitcoin Bad, Blockchain Good

I wrote a while ago about the contrast between the innovators (jeans and beers) and regulators (suits and canapés) and was struck by this again as I attended EBADay in Amsterdam.  Like SIBOS, EBADay is attended by the best people in transaction banking and payments, and they all wear suits and ties.

The focus of these meetings is often on a regulatory dialogue, and EBADay didn’t let us down with panel sessions on BASEL III, Beyond SEPA, The Regulatory Hurdle, PSD2, ISO20022 XML, Financial Crime and Security and so on and so forth.  There was a bit on the blockchain too, and here is really struck me that things were awry.

I’ve been tweeting a while that bankers are all repeating the mantra Bitcoin Bad, Blockchain Good.  This rallying cry is now so strong that if you challenge it – is bitcoin really that bad? – everyone quashes the discussion.  I’m now of a mind that the majority quash such discussion because they really don’t know what bitcoin is about.

Reid Hoffman – the co-founder of LinkedIn and early investor in PayPal and Facebook – talks about this in Wired this month.  Interestingly, Reid only got interested in bitcoin two years ago after meeting Wences Cesares, who interview featured on the blog in March.  Reid says a few interesting things in this space.

“There are three aspects to Bitcoin that are interwoven … One, it’s an asset, like digital gold 2.0. Two, it’s a currency in as much as currency is like the digital app that allows you to begin to transact and trade. And, three, it’s also a platform where you can build financial and other products on top of it. These attributes all bound together are what convinced me that there’s a certainty that there will be at least one global cryptocurrency and that there’s a good argument that it’s Bitcoin, or that Bitcoin is one of them, if not THE one.”

He goes on to talk about how other VCs and protagonists are dissing bitcoin and says that this pleases him, as he’s investing for the long-term and the long-term says that bitcoin, or a relation, will win.

Now, back to the banking audience, and they’re talking Ripple – Chris Larsen was the opening keynote here - and, since I arrived, I’ve heard this mantra about Bitcoin Bad, Blockchain Good. 

So why would someone as intelligent and informed as Reid Hoffman – and Marc Andreessen, Richard Branson, Wence Cesares, Jon Matonis, et al – be so pro-bitcoin when the banks are not.  My answer is that most of the people dissing bitcoin haven’t looked under the hood.

So here are two test questions for all of you reading this and thinking Bitcoin Bad, Blockchain Good. 

One, have you actually read Satoshi Nakamoto’s white paper?

Two, can you explain to me exactly why the blockchain is good?

I don’t do this, as I don’t want to embarrass anyone, but I’m guessing that 99% of the Bitcoin Bad, Blockchain Good people would answer no to both questions.

So, to help you along the way, here is Satoshi’s white paper and the abstract pretty much summarises what you need to know (but read the rest anyway as I’m going to test you on it):

A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution. Digital signatures provide part of the solution, but the main benefits are lost if a trusted third party is still required to prevent double-spending. We propose a solution to the double-spending problem using a peer-to-peer network. The network timestamps transactions by hashing them into an ongoing chain of hash-based proof-of-work, forming a record that cannot be changed without redoing the proof-of-work. The longest chain not only serves as proof of the sequence of events witnessed, but proof that it came from the largest pool of CPU power. As long as a majority of CPU power is controlled by nodes that are not cooperating to attack the network, they'll generate the longest chain and outpace attackers.

Here’s a quick explanation of the blockchain that works well for me from the bitcoin.org:

The block chain is a shared public ledger on which the entire Bitcoin network relies. All confirmed transactions are included in the block chain. This way, Bitcoin wallets can calculate their spendable balance and new transactions can be verified to be spending bitcoins that are actually owned by the spender. The integrity and the chronological order of the block chain are enforced with cryptography.

A transaction is a transfer of value between Bitcoin wallets that gets included in the block chain. Bitcoin wallets keep a secret piece of data called a private key or seed, which is used to sign transactions, providing a mathematical proof that they have come from the owner of the wallet. The signature also prevents the transaction from being altered by anybody once it has been issued. All transactions are broadcast between users and usually begin to be confirmed by the network in the following 10 minutes, through a process called mining.

And here’s why bitcoin is integral to the blockchain: because the blockchain does not work without a native cryptocurrency, and why would you create an alternative to bitcoin when over 90% of all cryptocurrency transactions are based upon bitcoins?

Maybe that’s why Nasdaq is using bitcoin as the blockchain currency to record securities settlements:

Nasdaq will leverage the Open Assets Protocol, a colored coin innovation built upon the blockchain. In its first application expected later this year, Nasdaq will launch blockchain-enabled digital ledger technology that will be used to expand and enhance the equity management capabilities offered by its Nasdaq Private Market platform. Nasdaq's blockchain technology will offer efficient, fully-electronic services that facilitate the issuance, transfer, and management of private company securities.

And no, they may not mention it in the press release, but yes, Nasdaq is using bitcoin as the native currency for their blockchain developments.

So please stop being parrots and squawking Bitcoin Bad, Blockchain Good as some parrots are Norwegian and may find themselves in a Monty Python sketch if they don’t watch out,.



About Chris M Skinner

Chris M Skinner

Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here…

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  • “because the blockchain does not work without a native cryptocurrency,”
    should read
    “because that particular kind of blockchain with those design goals does not work without a native cryptocurrency”
    There are other ways to reward miners (e.g., money).
    Also: Nasdaq is using bitcoin as a transport protocol, not as a currency. Will blog.

  • neil burton

    Success in payments is all about adoption; few innovations make it to breakeven.
    Blockchain leverages a very recently-established computing model comprising huge numbers of interconnected smart devices; in aggregate, vast power, vast reach. That feels like fertile ground for something.

  • bobby

    Banks will never like bitcoin the currency simply because they can’t create more through fractional reserve lending which severely threaten their business model. Get over it.

  • Nasdaq might be using Bitcoin as a transport protocol, but it’s not possible to use that without spending Bitcoin on transaction fees and being involved in the BTC ecosystem (as a currency).

  • The Bitcoin bad, Blockchain good message works in disarming people who have massively misunderstood what Bitcoin is and fallen for every misconception there is.
    If you talk about blockchain(s) or Distributed Ledgers you can get people to like the idea of near zero cost money transmission and smart contracts. Then you can dismantle some of the following misunderstanding;
    1) I thought it was full of Money Laundering? No it isn’t – We had DARPA scientists do some research with Chain.com – there’s no more money laundering in Bitcoin than any other electronic payment mechanism. The anonymity is a misconception. When every transaction ever is searchable in real time you’re actually in a far better situation. You can identify suspicious behaviour rapidly, and then seek warrants to reveal IP addresses (and finding people behind TOR is relatively trivial these days). Compare this to current banking, where you know the alias of the person, but the transactions are hidden in some other banks systems and may take weeks to get the report on…
    2) Don’t regulators hate this stuff? Regulators are a schizophrenic bunch. Their innovation teams are trying desperately to embrace competition, whilst their enforcement teams are trying to spread a message that says “even in the wild west we’ll get you!”. On the one hand you have the recent Ripple fine (which was a bit harsh), and the other, Fincen, the very same agency protesting that not enough banks take a risk based approach. Banks view taking on business as very binary “yes or no” and set the barrier super high for a yes.
    3) It’s really not secure though is it? Again not true. There have been some terrible implementations of private wallets. Mt Gox for example, was the equivalent of everyone in the room giving their cash to Chris, only for Chris to leave his wallet on the table outside. It’s not the fault of the protocol, which to date… has NEVER been hacked.
    I agree with Richard Brown on this, people are too quick to dismiss Bitcoin. There is a lot of value in the short term in distributed ledger tech for banks to get some operational efficiencies… but long term Bitcoin is interesting.
    There are 2.3 Billion people on earth under the age of 20. 220 Million agricultural workers are paid in cash. There is no way the cross section of these people will be walking into a branch any time soon.
    The war on cash got stuck at 45% because you can’t displace a bearer asset with a liability and expect it to function the same.
    Cash is expensive both logistically (vans moving cash around), and from a risk perspective (open a chicken shop and run drug money through it – to cleanse it into a bank account).
    Cash is also not profitable – money sitting in your bank account is leveraged on the stock market by the bank. That’s why we have “free” banking.
    Bitcoin functions in a similar way to cash, in that it’s 100% collateralised. A bank can’t use Bitcoins you hold for anything else.
    I think people lack imagination here and don’t see the possibilities. Just because it doesn’t fit your current model doesn’t mean it couldn’t…
    Digital cash has tremendous potential
    1) It’s harder to steal
    2) It’s traceable real time
    3) A transparent record of cash usage could be an interesting way to risk score someone for say – a loan or savings product.

  • Nihat Erdem

    As I am within the 1pct of bankers answering yes to both questions you have raised, I repeat Bitcoin bad, Blokchain good. However bitcoin bad does not mean that the idea of the creator is bad. The bad thing in bitcoin is that it unfortunately evolved into a ‘non-regulated’ currency, useful for good as well as for evil. “Regulated bitcoin good, Blokchain better.”