A new generation of digital transactions is threatening to put aside forever the slow and unsecure banking, but not everyone is happy.

The technology that is likely to have the greatest impact on the next few decades has arrived. And it is not social media, it’s not big data. It is not robotics, it’s not even artificial intelligence or the self-driving cars powered by AI. And you will be surprised to learn that it is a technology you already know – the underlying one of digital currencies like bitcoin. It is called the blockchain – remember that name.

You may have heard about or come upon it in an article or in a YouTube video. Also, you may have not paid due attention to it. Until now, that is.

Ever since the Internet has entered our lives, people use the web to send different things – e-mails, cards, documents, etc. The common thread there is that you are not actually sent the original – you are sent a copy. In most cases that’s OK, but when it comes to assets – things like money, financial assets like stocks and bonds, intellectual property like music, art, sending you a copy is not a great idea.

“If I send you 100 dollars, it’s really important that I don’t still have money”, explains jokingly Don Tapscott, a consultant and an author specialising in business strategies.[1] For him big intermediaries like banks, governments, corporations, social media companies, credit card companies are the necessary evil. They perform all the business and transaction in every kind of commerce like authentication, identification of people, clearing, settling and record keeping. They all do a pretty good job but there is a problem – they are not fitted for the digital society.

The rules of the game change

A drawback of the traditional structures is that they are centralised. This means that they can be hacked and increasingly are. Many big companies and government institutions fell victim to attacks, so their security is questionable. They exclude billions of people from the global economy because they do not have enough money to have a bank account. They slow things down. It takes a second for an e-mail to go around the world but it can take days or weeks for money to move through the banking system across a city. You have to pay a fee and provide your data to use those services. The biggest problem, as Tapscott and other digital activists see it, is that they’ve appropriated a large portion of the digital age asymmetrically: we have wealth creation and we have growing social inequality.

Snatching control from those corporate titans is not an easy job, but just imagine that passive information becomes value. Some kind of a vast, global, distributed ledger running on millions of computers and available to everybody. Where every kind of asset, from money to music, could be stored, moved, transacted, exchanged and managed. All without powerful intermediaries. That ledger is a digital guarantee for payments, personal data, confidentiality, etc. Once the information is recorded in the distributed database, it cannot be replaced retrospectively or manipulated. To understand the creation of such a method we have to go back to 2008 when the financial industry crashed and the world was hit by a global crisis. After the 2008 financial crisis many people began to lose faith in the security of banks and their methods. Then the Australian computer specialist Craig Stephen Wright (known till 2016 under the pseudonym Satoshi Nakamoto) found the solutions to several complex problems of the realisation of the idea for an alternative distributed currency and was the first to mention the term “bitcoin” in an article.[2] The bitcoin network combining elements of mathematics, cryptography, computer networks and information technologies was born in 2009 with the release of the first open source bitcoin client and the issue of the first bitcoins. The bitcoin is an encrypted digital sequence satisfying certain mathematical conditions; it cannot be falsified or traced. It is a cryptocurrency with its own exchange rate which interests mostly speculators, although investors or just curious people are increasingly interested in this phenomenon.

The other side of the coin

While some see them as a wonderful mechanism to have decentralised currency which does not discriminate and makes money sharing exclusively fast, convenient and cheap, others have found in cryptocurrencies a good way to earn a lot of quick money. We mentioned earlier the term “discrimination”. For some it is true – the full anonymity of transactions does not permit any discrimination whatsoever. But the truly important part of that is anonymity. It permits peer-to-peer transactions without any control. That is why, while until recently the vast majority of people knew nothing about the bitcoin and the other digital currencies and their price was not impressive, the cryptocurrency was used to build fully anonymous international markets of illegal goods – drugs, human trafficking, paedophile material, weapons, etc.[3] With such an easy way of exchanging money, trading with illegitimate regimes, terrorist groups, dictators and rebels becomes increasingly easy and profitable.

As a result, leading countries across the world quickly proceeded to adopting strategies for stronger regulation of digital currencies which many fear of being too non-transparent and risky. The main concerns of the big countries are that financial instruments like bitcoins could be used for money laundering and other crimes. South Korea has one of the toughest stances on cryptocurrencies. In early February 2018, Seoul announced having uncovered almost $ 600 million in illegal cryptocurrency trade.[4] The national authorities are considering shutting down local cryptocurrency exchanges. The National bank of South Korea added that “cryptocurrencies are not legal currencies and cannot currently be used as such”.

Meanwhile, Russia is preparing restrictions on cryptocurrency operations and the central banks in other countries are working on “their own” digital currencies. The social network Facebook announced that it is banning advertisements for cryptocurrencies, as well as for initial coin offerings (ICO) related to cryptocurrencies.[5]

At the same time, crypto investors are enthusiastic about their future and expect that 2018 will be better for the business, shows a survey of 678 crypto investors from Europe, the United States, Russia, Brazil and other countries aimed at gauging the level of confidence in blockchain technologies.[6] Almost all of the respondents (90 percent) believe in the future of cryptocurrency and are investing with a long-term perspective. 22 percent made short-term, speculative crypto investments and 18 percent invested out of curiosity. Further 22 percent believe bitcoin could exceed $ 20 000. Japan is expected to become the global leader in the development of the cryptocurrency industry in 2018, followed by Russia and South Korea.

Interestingly, most crypto investors have never invested in other forms of assets. Only 32% of them had invested in shares or bonds, and 14 percent in real estate. This in turn led three of the EU financial regulators to come out with an official warning to consumers on cryptocurrencies. They further reminded that virtual currencies and exchanges where they can be traded were not regulated under EU law.[7]

A guarantee having no equivalent

The underlying technology of cryptocurrencies, namely the blockchain, is equally interesting. For the first time, people everywhere can trust each other and transact peer to peer. Trust is established not by the rules of a big institution or a state regulator but by cooperation, by cryptography and by some clever code. In a sense, blockchain is a modern and improved form of digital double-entry book-keeping known since the Middle Ages.[8] Then came the Hindu-Arabic numerals and many traders began to keep their books in this double-entry way. Except today instead of traders from Venice and Genoa the blockchain protocol works with globally distributed computations and a highest level of cryptography ensuring integrity of the data posted across billions of devices without the participation of a third party. It is not needed because trust is inherent in the platform itself. The data about your payments are stored in a secure, unchangeable form with you as well as with your suppliers, customers and bank partners. At the same time, when a payment is made, it is reflected almost immediately with you and with your partner, with the same level of reliability, security and unchangeability. Blockchain plays the role of a ledger, a bank, a database, a notary, a security guard and a clearing house.[9]

Still, what is a blockchain? Technical literature defines the notion as a database whose elements (the blocks in the blockchain) are secured against any form of modification and manipulation.[10] Every block contains a link to the previous one and information about how it was created. By design, the blocks are not modifiable – once recorded, the information therein cannot be changed retroactively. The chain is decentralised and the management of each block is autonomous. Thus, the blockchain becomes an open, distributed ledger recording operations between two parties in an efficient, authentic and definitive manner.

The common elements in this data exchange are:

– it usually refers to a financial operation

– it is reproduced at several locations in real time

– it uses encryption and electronic signatures to prove identity and reserve access rights

– it can be changed by the direct participants only

– it can be viewed by a wider circle of subjects

– it contains mechanisms for not allowing the history of operations to be altered and for easily seeing when someone attempts it.

The main qualities of the network are security and transparency. It takes between 6 and 10 minutes on average to confirm a transaction which is very fast compared to current market services. That does not go unnoticed not only by the individual entrepreneurs and activists by also by whole corporations and states. This spring Sweden will launch the third phase of the pilot implementation of blockchain for recording property deals and the migration of cadastre operations to blockchain is expected to save Swedish taxpayers over 100 million euro per year. South Korea in turn will develop the blockchain technology in the insurance sector, providing a service for automatic commercial insurance money payment to policy holders using blockchain. The Walmart chain also intends to enhance the control and transparency of its supply network by implementing a blockchain technology. The project designed in partnership with IBM ensures that the origin of goods can be controlled and traced from the time of product creation to the consumer’s table.[11] Thanks to their uniqueness and interconnectivity, the blockchain technologies can be successfully applied in a number of contexts. For example, in the world of real-time-recorded digital transactions it would be very difficult to hide illegal cash movement. Furthermore, the use of a music file can be recorded in a public blockchain register so that composers can release their works in a blockchain-based ecosystem and control the conditions of use of their works, granting rights thereto in real time. Also, instead of using an ATM to deposit cheques, draw cash or transfer capital, you can use it to buy tickets for your next holiday. Examples can go on …

But let’s not rush things

If everything is so effective and secure, why not start using blockchain payments today everywhere? There are obstacles and before the potential of blockchain is unleashed, there are a number of challenges that have to be addressed: technological issues, negative public perceptions of this innovation, tax and regulatory issues, to say nothing of the resistance that will come from traditional business structures like lawyers, accountants, consultants, bankers and others doing things that will be unnecessary if blockchain is adopted on a large scale.

Trust in banking and government institutions is weakening globally and bitcoin becomes a technology offering a possible solution to the problem. Slowly but surely blockchain is also becoming a challenge not only for economists and financiers but also to the representative of all key social sciences. We do live in interesting and dynamic times when ideas can develop and fail miserable within short periods. But if the pace of adoption of the blockchain and bitcoin formats persists, we can be sure that these ideas are bound to have long and complex life. At least until the time is right for the next revolution in the way we are doing business.

[1] Tapscott, Don, How the blockchain is changing money and business, available at https://www.ted.com/talks/don_tapscott_how_the_blockchain_is_changing_money_and_business?language=bg

[2] Satoshi Nakamoto, Craig Wright and the Bitcoin mystery, The Australian, available at https://www.theaustralian.com.au/life/weekend-australian-magazine/satoshi-nakamoto-craig-wright-and-the-bitcoin-mystery/news-story/e568c600a87700b2e2e981fa621a30ff

[3] Think Tank Links Rising Bitcoin Price to Terrorist Use available at https://www.coindesk.com/u-s-think-tank-finds-rising-bitcoin-price-linked-terrorist-interest/

[4] South Korea uncovers almost $600 million in illegal cryptocurrency trade, available at https://venturebeat.com/2018/01/30/south-korea-uncovers-almost-600-million-in-illegal-cryptocurrency-trade/

[5] Facebook Bans Ads for Bitcoin and Other Cryptocurrencies, available at https://www.nytimes.com/2018/01/30/technology/facebook-cryptocurrency-ads.html

[6] Global cryptocurrency investors bullish on 2018, expect Japan to lead industry, available at https://venturebeat.com/2017/12/24/global-cryptocurrency-investors-bullish-on-2018-expect-japan-to-lead-industry/

[7] EU watchdogs warn consumers of cryptocurrency ‘pricing bubble’, available at https://www.reuters.com/article/us-eu-markets-cryptocurrencies/eu-watchdogs-warn-consumers-of-cryptocurrency-pricing-bubble-idUSKBN1FW1CY

[8] What is Blockchain Technology?, available at https://www.coindesk.com/information/what-is-blockchain-technology/

[9] The Truth About Blockchain, available at https://hbr.org/2017/01/the-truth-about-blockchain

[10] What is a ‘Blockchain’, available at https://www.investopedia.com/terms/b/blockchain.asp

[11] Five Blockchain Applications That Are Shaping Your Future, available at https://www.huffingtonpost.com/ameer-rosic-/5-blockchain-applications_b_13279010.html