12 Jan 2018
My colleague’s barista – yes, we are in Melbourne – has a crypto portfolio. Not just Bitcoin but a few of the other “mainstream” and even outer limit offerings.
Is this just the digital equivalent of that historical and oft verified sell alarm that goes off when taxi drivers start handing out stock tips?
"As interest in Bitcoin waned, interest in blockchain grew – although at nothing like the scale of interest in the currency itself, a pattern that is now being repeated.”
After all, none of the criticisms of crypto – that it is not a stable store of value, that it is not sufficiently widespread to be a true alternative payment system, that it is driven by speculation, that it will inevitably draw greater regulatory scrutiny – have dissipated.
Google search trend data show interest in Bitcoin tracks right alongside Bitcoin prices, as you might expect.
And there is growing evidence of cryptocurrency becoming increasingly mainstream: more and more institutional investors are including allocations to the category.
For example, global banking and wealth giant Morgan Stanley is now offering wealthy clients access to Bitcoin funds, the latest major player to acknowledge Bitcoin as an actual asset class.
According to The Financial Revolutionist, “Morgan Stanley joins a group of large financial firms looking to address demand for digital assets, though wealth management units of Goldman Sachs, JPMorgan Chase, and Bank of America don’t yet permit advisers to offer direct Bitcoin investments.”
Morgan Stanley offered a caveat: “Coin trading remains in its infancy. Issues around finding true price discovery and best execution are still to be addressed. We have yet to be convinced there and, therefore, advise clients to proceed with caution.”
This quasi mainstream investment is a major development beyond where the cryptocurrency market went during the last price spike and crash in 2017.
At that time though, even with the deep-seated (and ultimately justified) scepticism, there was an argument that even if cryptocurrencies crashed and burned, the technology they relied upon, distributed ledgers - notably blockchain - would have enduring value.
Unlike traditional financial transactions, where buyers and sellers need to rely on trusted intermediaries to manage the integrity of the exchange of goods, services and money, with a distributed ledger, an unbreakable network of verification is established with multiple, discrete computers. No one link is the ultimate source of authority.
So as interest in Bitcoin waned, interest in blockchain grew – although at nothing like the scale of interest in the currency itself, a pattern that is now being repeated.
Blockchain though has developed an existence outside of cryptocurrencies and the argument still holds: distributed ledgers are very likely to be one of the technologies which most profoundly change markets.
Even the art market.
Earlier in March, a digital jpeg by the artist Beeple sold for $US69.3 million, what the New York Times referred to as “a sign of the mania for NFTs”.
An NFT is a non-fungible token which is essentially a badge of exclusivity for an asset – fungible basically meaning exchangeable. Something unique simply can’t be funged and in art, that is a true original.
However, while the art auction house Christie’s described Beeple’s work as “a unique work in the history of digital art,” the work - “Everydays — The First 5000 Days” - is a collage of images Beeple has been posting online each day since 2007. These aren’t photos of actual art works; the posts are the artworks.
There is no “original”, just like with performance art.
Likewise Twitter founder Jack Dorsey’s first tweet which sold a week or so after Everydays for $US3 million. Yep, a tweet. But it had been minted as an NFT – giving it both a tangible presence and exclusivity.
Operating with integrity
Now this may be and almost certainly is just another irrational art market bubble but the process of converting something intangible into an asset is cogent – and relies on blockchain.
Without the imprimatur of a distributed ledger, any bunch of digital signals could claim to be Dorsey’s first tweet. The NFT is a certificate of authenticity for just one particular collections of bits and bytes which allows the market to operate with integrity.
So now blockchain has been behind two of the most staggering potential bubbles of the digital era – which if nothing else is bringing in investment dollars.
Indeed, looked at in isolation, Google search trends provides a picture of a technology becoming slowly more integrated into the digital world.
Meanwhile, most of the significant interest in blockchain is more mundane – and more important.
For example, it is being used to verify food supply chains. According to New Food Magazine, using the internet of things (IoT) and blockchain can cut massive costs in the industry while improving quality control and food security.
“Within the food supply chain there are different participants involved in each step, from farmers, to processors, manufacturers, certifying agencies, government agencies, logistics, distributors, retailers and so on,” the magazine said.
“Each of these participants shares critical information about the product that sits in their own local server. This information is not accessible to other participants and thus, there is an increased chance of food fraud in the system.
“If a consumer wants to buy organic tomato ketchup, they rely on the label claim. The manufacturer of ketchup relies on the supplier of tomato puree or concentrate processor. The tomato processor relies on the claim/organic certification furnished by the farmer or farmer association. If any of the participants provide a false claim, both the consumers and other participants are cheated.”
Complex financial systems
International trade was the catalyst for much modern banking, flourishing in late Medieval Italy as global supply chains became established over oceans and land routes like the Silk Road.
However, the mechanics of that trade, be it trade guarantees, bills of exchange, letters of credit, have changed little over centuries. Until blockchain.
One trade facilitator, Marco Polo, noted research by global shipping company Maersk which showed a shipment from Kenya to the Netherlands included over 100 actors, 30 people and 200 interactions. Of the 34 days of shipment, 10 days were lost due to waiting for documents.
“Trade finance is truly an optimal use case of blockchain and its transformation will impact and benefit the entire ecosystem,” Marco Polo concluded.
Meanwhile, blockchains are already supporting myriad complex financial systems. In September, ANZ, Commonwealth Bank of Australia, Westpac, IBM and Scentre Group expanded the roll out of a successfully trialled blockchain platform, Lygon, that shifted a cumbersome, paper-based bank guarantee to digital, slashing the time to issue a guarantee from one month to one day.
Financial guarantees are often required as part of a retail property lease and the platform has much wider application now being explored.
So dabble in Bitcoin, have a flutter on NFT art speculation. Meanwhile blockchain continues to expand as a fundamental enabler of security and efficiency in complex financial systems.
Andrew Cornell is Managing Editor of bluenotes
The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.
12 Jan 2018
30 Jan 2018