As we see all the time, even when the problem is real, the original product designed to solve can fail for reasons that may be technical, financial, social or competitive. But parts of it live on, in mutated or expanded forms.
So it is with Bitcoin. Even if it fails, the idea of the distributed ledger underpinning it is gaining momentum and transforming as it does.
Various consortia of financial institutions, technology companies, statutory bodies and governments are exploring how this process, essentially a decentralisation of the 'trust' sustaining the financial system, can be utilised to driver lower costs and efficiencies.
For example, this bank, ANZ, is one of the founding participants in the Open Ledger project, an initiative seeking to develop an enterprise-grade framework for blockchain that supports multiple players in multiple industries.
The collaboration will concentrate on a cross-industry open standard for distributed ledgers, including for banking and brings together Cisco, Deutsche Börse, Digital Asset Holdings, IBM, Intel, J.P. Morgan, London Stock Exchange Group, R3, SWIFT, and Wells Fargo.
Other ventures, such as R3, one of the Open Ledger members, are also consortia but are seeking particular commercial outcomes.
One of the standards to which such ventures can usefully contribute is definitions. When reading about blockchains and distributed ledgers – which can be public (like for Bitcoin) or private (like for the commercial markets like the ASX) – there's considerable ambiguity.
Chris Skinner's Blog, a very readable curation of what's going on, quoted Professor Michael Mainelli, Chairman of Z/Yen Group, on the terminology.
“What is, and what isn't, a 'blockchain'?” Mainelli asks.
“The Bitcoin cryptocurrency uses a data structure that I have often termed as part of a class of 'mutual distributed ledgers'. Let me set out the terms as I understand them:
- ledger – a record of transactions
- distributed – divided among several or many, in multiple locations
- mutual – shared in common, or owned by a community
- mutual distributed ledger (MDL) – a record of transactions shared in common and stored in multiple locations
- mutual distributed ledger technology – a technology that provides an immutable record of transactions shared in common and stored in multiple locations.”
Skinner adds: “Interestingly, the 2008 Satoshi Nakamoto paper that preceded the 1 January 2009 launch of the Bitcoin protocol does not use the term 'blockchain' or 'block chain'. It does refer to 'blocks'. It does refer to 'chains'. It does refer to 'blocks' being 'chained' and also a 'proof-of-work chain'.
“The paper's conclusion echoes a MDL – “we proposed a peer-to-peer network using proof-of-work to record a public history of transactions that quickly becomes computationally impractical for an attacker to change if honest nodes control a majority of CPU power.” [Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System, bitcoin.org (2008)]”
This is not just a question of semantics or even semiology, what we are seeing play out in the market place is the dismemberment of parts of the chain.
Few major institutions any more are actively interested in Bitcoin. Of the bits of Bitcoin, they're particularly not interested in its ungoverned governance structure, its lack of transparency – one of the things which potentially cut transaction costs for Bitcoin was the lack of the very audit trails regulation requires to prevent money laundering and sanction breaking – and its “commodity” nature which makes it fraught as a store of value.
What is useful though is the ledger system. This is where banks are looking to develop usage cases.
For example, in the clearing and settling processes necessary for payments and stock exchanges, the central, trusted entity solves the problem of buyers and sellers exchanging goods and payments without knowing one another.
However, there are costs in the system. Having a distributed ledger theoretically allows the process to happen faster with fewer parties involved. Banks also have to hold reserves to cover various contingencies, such as overnight cash holdings, but it's an imprecise system which too could be more efficient.
So what we have seen in the seemingly Icarus-like flight of Bitcoin is what we are undoubtedly going to see much more often in the fintech space; to maintain a somewhat mixed flight metaphor, even though the Pterodactyl didn't survive evolution, flight did.
Fintech is already fragmenting and expanding as some smart technologies fail to gain traction or market scale and are absorbed by others, clever ideas are appropriated, incumbents partner or buy or learn from genuine transformations.
While the initial flurry in fintech was with ideas potentially massively disruptive, like payments or peer-to-peer lending, we are now starting to see the emergence of much more specialised adaptations – such as “regtech”.
Regtech is the sector devoted to developing smart technology approaches to the growing regulatory obligations in myriad institutions with the intention of not just cutting costs but providing a competitive advantage for those who can do compliance better.
And distributed ledgers will play a role in that sector too. Bitcoin won't.
Andrew Cornell is manging editor at BlueNotes