When Bitcoin barged its way onto the scene a few years ago, many people saw the currency of the future. A few scandals, a big fraud or two and lots of doubt tripped up its path to preeminence; however, the crypto-currency is still alive, although there remain many who wonder if it can survive in the long term.
The latest conversation around Bitcoin is that its underlying technology or processes – the blockchain, or in industry parlance, “distributed ledger” – is actually the attraction and what may ultimately survive (see related story here). But in a new Greenwich Associates report, the results of a survey of 102 financial professionals, the firm suggests the two come as a pair and cannot be sold separately, as it were.
In its survey and report, “Distributed Ledgers in Capital Markets: Answering the Big Questions,” the research firm asked respondents, “Can Bitcoin be separated from the blockchain?” The answers differed for those who were familiar with Bitcoin and for those who weren’t. Those with little knowledge of Bitcoin thought the underlying tech could be harnessed away from the crypto currency, extracting only the security and promised cost efficiency of the blockchain.
However, “Bitcoin is the incentive miners need to keep the blockchain functioning and secure,” Greenwich says. “Miners wouldn’t spend their hard dollars via CPU time and electricity to validate transactions if the result wasn’t a net gain. Because of this incentive, the security of the blockchain would become compromised if the value of a Bitcoin dropped to a level that made mining no longer profitable.”
Greenwich further explains that the reason the Bitcoin couldn’t be separated is because “the ‘good’ miners would stop mining, leaving only the ‘bad’ miners who would be more incented to change history by rewriting blocks, rather than validating legitimate transactions. The bottom line—not only does Bitcoin keep the network functioning, it also keeps it safe.”
But this could change if enough people get involved, suggests Kevin McPartland, the report’s co-author and Head of Research for Market Structure and Technology at Greenwich. “It’s still a big debate and not everyone agrees,” Mr. McPartland says. Speak to people who know about Bitcoin, “and there’s no way” they can be separated. “The only way that either of these things exists is because of each other and you can’t separate the two.”
And then there are those who don’t agree, Mr. McPartland says, who are completely convinced that the blockchain can become its own separate thing. Currently of those who think it can be done is a growing confederation of 15 or so banks that are funding a startup called R3. The group is made up of some of the major names on Wall Street, including Goldman Sachs, JPMorgan, Credit Suisse, Barclays, Commonwealth Bank of Australia, State Street, Royal Bank of Scotland (RBS), BBVA, UBS and others. R3 itself is made up of a team of of “financial services industry veterans, technologists, subject matter experts and new tech entrepreneurs especially focused on rethinking and improving the modern financial markets ecosystem,” according to the firm’s web site.
The simple idea with R3, Mr. McPartland says, is that you have a consortium of 25-30 market participants “and they all agree on how things are going to work and everyone follows them using the standard technology to make the distributed ledger operate.” With this you have a very beguiling promise of big cost reductions, which would be incentive enough to participate. At that point, users – say, a corporate – wouldn’t need “to be convinced to be a part of the market and validate transactions because you’re saving $50 million a year in process costs. It could be that simple, where the benefits are well worth the costs,” Mr. McPartland says.
Still, as the Greenwich report states, “it is still not clear … if creating an incentive not tied directly to transaction processing (i.e., not rewarding mining with Bitcoin or another store of value) would impact the quality of the network.”
Meanwhile, whether the two can be separated may be the least of its hurdles, according to Greenwich. That’s because there are compliance and legal hurdles that the currency would have to overcome. “Market participants are … unclear if and when the legal system will recognize the transfer of non-Bitcoin assets via the blockchain,” Greenwich says in its report. The crypto currency “is great at transferring digital assets that have a value in the virtual world and don’t require real-world intervention.” However, “when transferring a non-virtual asset, the blockchain contains a list of transactions that reference the security or contract. For instance, a whole loan can be tokenized and transferred via the same approach used for Bitcoin, but when the loan defaults, it is unclear if the courts will recognize that the asset was transferred.”
There are also operational issues in terms of translating a transaction digitally “to the real world,” Greenwich says, i.e., to bank accounts and traditional payment systems. Therefore, while the concept of Bitcoin seems straightforward and secure, “deploying it broadly within institutional capital markets is a complex undertaking.”
“This means that product managers and strategists are having a field day coming up with new applications for the technology, all while software developers are working day and night in hopes of making those dreams a reality,” Greenwich says.