The difference is Bitcoin, while fascinating and of wide interest, remains a novelty. It has its promoters, its critics, its users. But as far as the mainstream financial system goes, it remains a minor creek.
Blockchain on the other hand has begun to decouple from its host. The thinking behind it is increasingly seen as relevant far beyond cryptocurrencies and, critically, it is being seriously discussed in the mainstream by major players including central banks and regulators.
New research from the Institute of International Finance, the lobby group for the world's major financial institutions, captures the mood in its title: “Banking on the Blockchain: Re-engineering the Financial Architecture”.
This is the second major report the IIF has produced on blockchain which it refers to as a “foundational technology”.
There are two elements of interest here: blockchain as a disruptive force in its own right but equally how the financial establishment will react to technology which is truly disruptive.
The former is a fascinating case study, the latter should be the central question for those who believe the fintech revolution will destroy the existing order. Maybe – but do banks face a Kodak moment or will they assimilate the disruption? As indeed they have in the past.
Consider the response of Axel Weber, chairman of UBS and a former President of the Bundesbank: “With these blockchain technologies, if you can settle in two hours instead of two days, you can turn over your balance sheet in the same activity 24 times. Just imagine the profitability that this will bring to financial institutions that are payment focussed and transaction focussed…I see this as a huge opportunity for the banking industry.”
The IIF rounds up a posse of its members who see not barbarians at the gate but a looming front of new business.
According to a report by Santander InnoVentures, Oliver Wyman and Anthemis Group “Blockchain technology could lower banks' infrastructure expenses related to securities trading, regulatory compliance, and international payments by between $US15-20 billion annually within seven years”.
At the World Economic Forum “58 per cent of surveyed executives and experts from the information and communication technology sector believe 10 per cent of global GDP will be stored on blockchain technology by the mid-2020s”.
The IIF report carries two charts which demonstrate the mood of investors. The first shows global fintech financing activity. From a steadily growing trend in 2011, 2012 and 2013, activity spiked in 2014. But 2015, although only six months of data are available, looks likely to be lower.
But financing activity for Bitcoin and the distributed ledger industry (Blockchain is a distributed ledger), while also dropping off to a lesser extent in deal number continues to grow rapidly in deal value.
Others have argued the fintech financing boom had some bubble attributes or at least those of a gold rush but the distinction with Bitcoin and blockchain is more the distinction between a new, albeit game changing, product and a new process – a polaroid camera compared with digital photography versus film.
The IIF says “while no clear blockchain model has been adopted by the banking industry and most executives remain open to all promising options, a large number of them remain wary of Bitcoin's open, fully decentralised model due to myriad of reasons, including anonymous transaction validators and Bitcoin's association with volatility, instability and illicit activity”.
That's why people like the Bank of England's Andrew Haldane see something revolutionary in distributed ledgers.
“What I think is now reasonably clear is that the distributed payment technology embodied in Bitcoin has real potential,” Haldane says.
“On the face of it, it solves a deep problem in monetary economics: how to establish trust – the essence of money – in a distributed network. Bitcoin's “blockchain” technology appears to offer an imaginative solution to that distributed trust problem. Whether a variant of this technology could support central bank-issued digital currency is very much an open question.”
So what is a blockchain or distributed ledger?
The IIF report notes “the blockchain … is a new type of distributed consensus system that enables transactions to be quickly validated and securely maintained through cryptography, computational power, and network users, removing the need for a trusted centralised authority”.
“The digital public ledger, or database, contains time-stamped and irreversible information of all transactions that is replicated on computers around the world, thereby eliminating a single point of failure.”
Critically, while the Bitcoin platform is supported by a blockchain, a distributed ledger can have a multitude of applications.
“Other applications can, and have, incorporated the technology,” the IIF says. “Moreover, innovation is ongoing and a wide range of alternative models are being developed.”
But arguably the most significant point is not how disruptive blockchain is but how rapidly it is being accepted by major incumbents.
The IIF is upfront about the impact on its members: “Blockchain technology, once viewed as a profound threat to financial intermediaries, is now being embraced by traditional financial services firms as a way to reengineer financial industry infrastructure to their advantage”.
“The industry, working both independently and in partnership with newer players, envisions the technology as a mechanism for lowering costs, reducing risk, introducing new products and freeing up capital.”
And not just finance. “Virtually any type of information can be digitised, codified and placed onto the blockchain, a database that is tamper-proof, permanent, and whose validity is confirmed by the consensus of a community of computer users, rather than by a central authority.”
The fintech revolution is not going away. Payments disruption will remain a mainstay of hackathons and Silicon Valley elevator pitches.
But the Bitcoin-blockchain de-coupling is a fascinating case study of how the financial system organism can assimilate a new virus. Admittedly a few parts of the organism succumbed to the contagion of the financial crisis but the signs are it will adapt to blockchain.
And maybe even mutate into something quite different.