Editor’s note: this post is part of our investigation into the future of money. The full video compilation from our first event, Bitcoin & the Blockchain, is now available.
The vision for bitcoin and the blockchain is unabashedly optimistic, though already it is being realized. More and more technologists, venture capitalists, financial institutions, and even regulators are seeing its long-term potential to transform industries, from financial services to data management to the Internet of Things. In the medium term, there remain hurdles to overcome before blockchain technology can offer sufficiently compelling solutions for the complex financial and technological world we live in, but there is progress to date — and it’s promising.
Blockchain-based remittance vehicles offered by Coins.ph, BitPagos, and BitPesa, though early stage, aim to take a chunk of the $450 billion remittance industry by offering speedier, more efficient, and cheaper alternatives to traditional solutions. BitPay offers bitcoin/fiat payment processing for merchants as well as bank integration. Increasingly, private investors are diversifying their portfolios by purchasing bitcoin alongside traditional assets. Most recently, Coinbase even received funding from a group of blue-chip investors, including the New York Stock Exchange, and launched its own exchange, signaling both greater acceptance by the financial services industry as well as confidence in its future value. Ripple Labs has taken a very different approach with its protocol, permitting the decentralized transmission of practically any currency type — cryptographic or fiat — like an SMTP for money, and circumventing traditional payment networks. And to this end, it’s already inked agreements with Cross River Bank (New Jersey), CBW Bank (Kansas), and Fidor Bank (Germany), with more on the horizon.
What’s more, the U.S. regulatory regime is warming to digital currency. New York’s Department of Financial Services has been engaged and is using its BitLicense to chart a path for regulating — and ensuring public trust in — the industry. The same attitude has been reflected by both FinCEN and the SEC as well. California recently lifted its “bitcoin ban” and has followed New York’s footsteps by proposing its own (albeit problematic) BitLicense. Since last spring, the Federal Election Committee has allowed limited donations in bitcoin to political candidates. And in response, the digital currency industry has been more than cooperative, working hard to protect consumers, abide by Anti-Money Laundering (AML) and Know Your Customer (KYC) laws, and iterate quickly following security snafus. We still await good federal legislation to replace the unwieldy state-by-state regulatory pastiche that seems to be forming, but it’s coming — the regulatory picture is becoming clearer. For potential investors, clients, and business partners, the assurance that digital currency companies are legitimate is an important step.
On the horizon: non-monetary applications of the blockchain
These developments undoubtedly portend a promising future, though we still have a long way to go. Perhaps surprisingly, the non-monetary applications of bitcoin’s technology might be the most interesting thing about it. The “coin” itself, after all, is merely a cryptographic asset whose content specifications and applications can be retooled for a range of purposes. Companies like Filament and IBM, for example, have begun exploring how the specially designed decentralized ledgers can be used to enable devices to communicate service needs and other information among their owners and vendors for household, commercial, and industrial purposes. Similarly, Factom, Maidsafe, and Storj are solving how the blockchain can be used to cryptographically secure, store, and update data — not only to improve the protection of data from loss or theft, but also to protect owner privacy. The range of use cases and benefits is hard to overstate: connected automobiles or industrial equipment that could report repair needs and schedule maintenance, washing machines that can order more detergent when levels are low, more standardized and secure electronic medical records systems, and more.
Moreover, existing digital currency protocols are evolving to become properly useful to the financial services industry, though there is progress to be made, too. Remittance, payments, and exchange services are important; however, financial instruments such as complex debt instruments that depend upon mortgages and fractional reserve lending are financial services’ lifeblood, yet today are technically impossible. “Blockchain 2.0”-type projects like Ethereum and Ripple’s Codius hold real promise in this regard, but they are still under development. And once these developments can be readily deployed, they should offer a truly unprecedented range of new financial, legal, and commercial possibilities fueled by vast libraries of decentralize apps (“DApps”), including self-executing smart contracts, smart oracles, and more.
In getting there, the digital currency world and established industries need each other now more than ever. On the one hand, older industries undoubtedly have much to gain by actively participating in the ongoing blockchain development process. IBM, mentioned earlier, has most definitely realized this with the contribution of its ADEPT protocol; MasterCard has kept its options open in this direction, too, with the inclusion of digital currency in its proposed Global Shopping Cart. Banks, telcos, home electronics companies, shipping companies, and auto manufacturers should all follow suit. All have something to gain by not only investing in new blockchain technologies, but helping new companies understand and navigate their landscapes more effectively in order to produce truly transformative products.
It behooves many in the digital currency community to seek out financial relationships early on to bridge the knowledge gap.
The blockchain and digital currency worlds, in turn, have much to gain from better understanding the deep needs and inefficiencies of the sectors they’re entering. Finance is one looming example. A common and disconcerting refrain among the financial services professionals I interact with is that, although there are certainly exceptions, many developers don’t sufficiently understand a number of the financial processes they intend to disrupt — e.g., how credit cards work, how and why the Federal Reserve moves interest rates, how derivatives work, how equities trades are cleared, why fractional reserve banking is essential, etc. That’s hardly surprising given finance’s complexity, but it ultimately means that some innovations either aren’t as useful as some hope or they create more problems than they solve. For that reason, it behooves many in the digital currency community to seek out financial relationships early on to bridge the knowledge gap and invent even more disruptive products and processes. Mutatis mutandis, the same could be said for any other industry.
All told, these first chapters of bitcoin and the blockchain are riveting, but there are more to write. The story invites all to contribute — not just coders and investors, but engineers, bankers, and especially innovators. And the more that contribute, the better and faster that story will be written. So let’s keep writing it.