Hardly a day goes by without another bank or financial organization heralding the blockchain as the wave of the future while saying bitcoin is falling by the wayside. Do veteran cryptocurrency observers find something a bit strange in this? Can you really have the blockchain without cryptocurrency?
Rupert Hackett, community manager of Australia-based buyabitcoin.com.au, tackles this question head-on in an opinion piece in Venture Beat. He observes that initially, banks and financial institutions ignored cryptocurrency since they recognized it as a competitor to traditional money and claimed (incorrectly) that it would simply go away. As time progressed, bitcoin expanded. Ignoring the disruptive technology wasn't going to work.
Hackett claims the reason banks are now so interested in blockchain technology is they see it as a way to respond to the competitive threat that bitcoin poses to traditional money. While many financial institutions now claim to be interested in blockchain technology but not bitcoin, they ignore the fact that you need a cryptocurrency to make a blockchain. Hackett postulates that hyping the blockchain while denigrating bitcoin is an effort to blunt bitcoin’s challenge to traditional currency.
Banks and the national governments that regulate traditional currency recognize cryptocurrency as one of the very few alternatives seen in centuries that can securely and efficiently create and handle money beyond the control of banks and governments.
The implementation of bitcoin creates a decentralized trust, which is a bank’s main asset, Hackett says. It also challenges governments’ money-minting monopoly.
Because bitcoin is decentralized, banks’ traditional ways of battling competition such as through legislation or intimidation won’t work. So instead, they are accommodating the block chain to use it as a defense against bitcoin.
Now banks, hedge funds and fintech companies are heralding the blockchain, claiming it is positioned to change the future of finance by improving its efficiency and security.
In the process of making these claims, the financial institutions have attempted to sideline bitcoin as not worthy of serious discussion. Hackett observes these discussions ignore the fact that a blockchain cannot be created without digital currency. The claim that you’re “big on blockchain but not bitcoin” implies you want the innovation without the decentralization, Hackett says, a separation he claims has not been proven possible.
Hackett notes that some observers are wondering if the current hype is a calculated play to sap bitcoin’s growth so it will not be disruptive enough to compromise the strength of major financial sector players.
He further notes that bitcoin author Andreas Antonopoulos characterized the banking industry’s attention to blockchain in a recent Google Hangout interview with Paul Buitink, the Dutch bitcoin advocate. Antonopoulos said the banks want to adopt the efficiencies without the decentralization, the global nature but with censorship, and the low cost but with control. He further said one can’t have bitcoin’s revolutionary nature while removing all the things that make it innovative.
Banks want to disrupt their industry, Antonopoulos said, but when presented with a real disruptive technology, they “run away screaming.” In reality, the banks can’t imagine disruption that changes the fundamental principles of what they do.
Hackett said a reward mechanism is intrinsic to a blockchain’s functionality. Rewards are distributed randomly to agents known as miners in return for securing the blockchain. The innovation in this is that no mining group will gain full control over the blockchain’s security since it would disenfranchise itself. The only way to have a blockchain is to incentivize the miners to operate in a self-enforcing, distributed manner.
Without a cryptocurrency, the blockchain will not adhere to the vision established by bitcoin’s creator.
Hackett says no one has shown how a blockchain without an incentive system would be more revolutionary than the one driven by bitcoin.
He concludes by comparing bitcoin and the block chain to soccer. You do not stop a soccer ball by standing in its way, but by taking the momentum out of it by moving with it in the direction it is going.
Featured image from Shutterstock.