How The Blockchain Will Transform Everything
From Banking To Government To Our Identities
Just as their new book, “Blockchain Revolution: How the Technology Behind Bitcoin Is Changing Money, Business, And The World,” came out, ventures centered on blockchain, the technology behind Bitcoin, were in the news — including the DAO, the most funded crowdfunded project in history, which had raised $147 million as of press time. But the seeds of their book were first planted back in 2013 when Alex began hearing about Silk Road. “I approached it with some level of caution, but the deeper I got the more convinced I became that this technology held the potential to be a really big deal and to transform a lot of industries,” he says.
At the time, Don was running a $4 million research project called Global Solution Networks at the University of Toronto on new ways of doing global problem solving, including Bitcoin. Since Alex, a former investment banker who now heads up blockchain advisory firm Northwest Passage Ventures, had almost a decade in financial services, he wrote the 2014 paper, “A Bitcoin Governance Network,” which in turn led to their book deal.
Additionally, Don, CEO of Tapscott Group, who, in 1994, had written one of the first books on the web and business, “The Digital Economy.” In 2013, he was working on some mini-chapters for the 20th anniversary. He realized that he had written that it was possible the internet would be “captured by powerful forces and the benefits will be asymmetrical, leading ultimately not to prosperity but growing social inequality,” he says. Realizing he’d been on the mark, he began considering technologies that could help create a more prosperous world, which piqued his curiosity in Bitcoin and blockchain.
The two discuss the transformation this technology will unleash.
Why do you think the blockchain will revolutionize our world?
The first generation of the Internet was a great tool for communicating, collaborating and connecting online, but it was not ideal for business. When you send and share information on the Internet, you’re not sending an original but a copy. That’s good for information — it means people have a printing press for information and that information becomes democratized — but if you want to send an asset, it’s a problem. If I send you $100 online, you need to be sure you have it and I don’t, and that I can’t spend the same $100 somewhere else. As a result, we need intermediaries to perform critical roles — to establish identity between two parties in a transaction, and to do all the settlement transaction logic, which includes record-keeping.
With blockchain, for the first time, we have a new digital medium for value where anyone can access anything of value — stocks, bonds, money, digital property, titles, deeds — and even things like identity and votes can be moved, stored and managed securely and privately. Trust is not established though a third party but with clever code and mass consensus using a network. That’s got huge implications for intermediaries and businesses and society at large — everything from financial services, trade and trust and intermediaries to technology firms, which have been organizing everything from how we hail a cab with Uber to how we interact on Facebook to how we search for information on Google. And also with government, as a central repository of information an entity that delivers services.
There’s an opportunity to disrupt how those organizations work. Intermediaries, though they do a good job, have a few problems — they’re centralized, which makes them vulnerable to attack or failure — ask any customer at Morgan Stanley or Target. They tax the system: Sending money overseas can cost 10%. They capture data which prevents us from monetizing it and undermines our privacy. They exclude billions of people from the global economy because they can’t open a bank account without a birth certificate, passport or utility bill or the funds to justify it. There’s an opportunity to right a lot of those wrongs and create an economy and society more open, inclusive and fair.
Don: The only public policy solution to inequality is the redistribution of wealth. Everywhere you hear people saying we need to tax wealthy people more. That may end up being necessary, but there’s another opportunity created by this internet of value — rather than the redistribution of wealth, the pre-distribution of wealth. With blockchain, we can go from redistributing wealth to distributing value and opportunity value fairly a priori, from cradle to grave.
This can be done by protecting rights through immutable records like land titles, creating a true sharing economy by replacing service aggregators like Uber with distributed applications on the blockchain, ending what we call the remittance ripoff and helping diasporas return funds to their ancestral lands and families, enabling citizens to own and monetize their data to owning their personal identities — rather than them being owned by big social media companies and governments — by unleashing a new age of entrepreneurship, enabling small companies to have the benefits of Bitcoin without liabilities, and helping build accountable governments through transparency, smart contracts and revitalized models of democracy.
How will the blockchain help us manage our identities?
Alex: The virtual you is owned by large intermediaries. Every time you interact with a bank, the government, social media companies, that leaves behind a trail of crumbs about who you are. This virtual you knows more about you than you do sometimes. You may not remember two years ago what you said on Facebook or where you went with Uber but the virtual you does. So there’s a strange phenomenon from the first generation of the Internet where the most important asset class that’s been created is data —and we don’t control it or own it.
In the book, we discuss individuals taking back their identity through your own personal avatar — you would only apply that fragment of information necessary to receive that service. If you want to buy something, all the counterparties need to know is that you have the money to make that purchase. If you go to a bar, all they need to know is that you’re over 21. There’s an opportunity for you to control how you apply data in different situations, and that will have a big impact on a lot of different companies.
I could imagine distributed applications/social networks where people don’t push their data through a centralized intermediary but control, move and allocate it to certain situations. You can imagine relationships with brands and companies where you give up the data on your Fitbit or Apple Watch in exchange for micropayments, loyalty points or discounts in stores, where that information isn’t a free commodity you’re handing over but an asset you control.
How will blockchain reinvent financial services?
Don: The financial services industry is at the heart of the capitalist economy, and it’s a $100 trillion business. In many ways, it’s quite antiquated. It’s a Rube Goldberg machine, a complicated machine that does a simple thing like crack an egg or open a door. You tap your card at Starbucks, and the bitstream goes through a half dozen computers, some ’70s mainframes, and three days later, a settlement occurs. Some settlements take weeks. With blockchain, there’s an opportunity to profoundly change the nature of the entire industry. The Starbucks transaction should be instant.
At the heart of it, the financial services industry moves value. A CEO of one of the big banks said recently, We’re in the business of transferring value, and because of that, we can store value, lend value, exchange value, and fund and invest value and insure value and account for value. If you take away that movement of value function, you deeply undermine our entire raison d’etre and our foundation for existence, so this is both an existential threat to the financial services industry and an historic opportunity.
Alex: Banks trade on trust, so what happens in a world where trust is not established by intermediaries but rather is a native feature of technology everyone uses? If you’re an intermediary making money because of your historical position in that industry and you’re not adding any value, you will be disintermediated by this technology, and that is good for consumers and the economy. But that doesn’t mean there’s no role for financial services firms. We still need trusted third parties to perform services and functions. The whole aspect of servicing the consumer is critical to any company’s wellbeing, so having banks that can help coordinate all the financial services that people might use on the blockchain could be a huge opportunity.
Within the decade, every single financial asset, which is really just a contract — a stock is a contract, a bond is a contract of paper — those contracts will all move to a blockchain-based format. There’s an opportunity for banks to become securitizers and issuers of those new forms of financial assets. They may not make money as intermediaries trading it, but as originators, there’s a huge opportunity.
They could very well target the billions of people in the world who don’t have access to financial services. Even Goldman Sachs offering retail banking to people with as little as a $1 deposit indicates the shifts happening in the industry even pre-blockchain. Imagine what that will do for the world’s unbanked. There are as many opportunities to create value as there are for disruptions, but it will be the financial services firms that choose to disrupt from within, that choose not to fall victim to the innovator’s dilemma, that survive.
Don: The CEOs of the big financial services companies fall into three categories: Those who are not sure about this tech and fear it; those who view it as an important opportunity to speed up the metabolism of the industry with a common blockchain or blockchains, reduce errors and create a more secure industry and radically cut costs; and then those that view it strategically to create new value and penetrate new markets such as the two billion unbanked. Some of these CEOs understand it will bring about convulsive changes to their business model.
Alex: In the accounting world, a lot of firms rely on costly audits to drive their profits — KPMG, Deloitte, PwC, Ernst & Young. Most accounting is based on double-entry accounting where you record a debit and a credit every time something occurs. With blockchain, you could have a third entry time-stamped in a distributed ledger that could be acceptable to any relevant stakeholders from regulators to shareholders, giving you a perfect record of the truth and thus the financial health of an organization. That would make things like quarterly and annual audits redundant or would at the very least significantly reduce that need for man power.
What does that do to the businesses of the Big 4? It turns out that contrary to popular opinion, they’re only a third audit in what is called their assurance business. The remainder is consulting, advisory and tax. I was speaking to one of the accounting firm’s CEO, and he said, "Maybe it’s an opportunity. Maybe we can offer our accounting and assurance services as a software, and that frees us up to do more of the high-growth, value-added, higher margin business consulting and advisory business. It might mean some pain in the short term in terms of job losses, but in the long run, it might enable us to do much more."
How could the blockchain change what we think of as a corporation today?
Don: Nobel-winning economist Ronald Coase argued that firms exist because transaction costs in an open market are greater than the cost of doing things inside the boundaries of the corporation. He identified four costs — of search, coordination, contracting and establishing trust — that are greater in an open market. Blockchains will profoundly affect all of these. Blockchains will drop search costs — our ability to search for the truth, not just information but what has occurred. What transactions have happened? What physical things interacted with what other physical things?
The cost of coordination will drop, and it’s possible to imagine smart agents provide agency functions for the firm. And you see this with the DAO, which just raised [$142 million as of press time] and doesn’t have management. Software provides the coordination. The third is contracting costs, and smart contracts will profoundly reduce contracting costs in an open market.
The cost of establishing trust — you can now synthesize trust on an open platform and people who’ve never met can trust each other to do certain things. So this results in a whole number of new business models. It will also lead to a deep change in the deep structure and architecture in the firm, and how we orchestrate capability in society to innovate and create goods and services.
How will it connect to the Internet of Things?
Alex: In the next decade or so, hundreds of trillions of daily devices will come online and be integrated into our daily lives, doing everything from monitoring our health, to managing our affairs to driving us around to generating power and selling it. These devices need a way to communicate sensitive data securely and efficiently and to transact with each other peer-to-peer. It turns out the Internet of Everything needs a Ledger of Everything because a lightbulb buying power from your neighbor’s solar panel definitely won’t use banks or the Visa network. It’ll need a new native format for moving, storing and managing value, so we think blockchain is utterly critical to animating the Internet of Things and creating new business models for it. In the book, we talk about a replacement for Uber called SUber, where driverless cars are coordinating, contracting and searching. Those devices, connected to your phone, which is your way of making payments, need a way to store and move sensitive data and value. The only way to do that is with blockchain.
How will it transform government and democracy?
Don: Right now, governments take tax revenue from corporations, individuals, licenses and so on. All of that can change. We can, first of all, have transparency in a radical sense because sunlight is the best disinfectant. Secondly, we can open up governments in a different sense of sharing data. This is not transparency, which is about the sharing of pertinent information to shareholders. Open data is about the release of digital assets.
By doing that on a blockchain platform, governments can enable self-organization to occur in society where companies, civil society organizations, NGOs, academics, foundations, and government agencies and individual citizens ought to use this data to self-organize and create what we used to call services or forms of public value. The third one has to do with the relationship between citizens and their governments.
There are more opportunities to create government by the people for the people — not for big money and strong, vested interests. officials could be elected with a smart contract that specifies what they will do when elected, and that they won’t get paid unless they do what the electorate demanded rather than what their funders demanded.
Many governments have spent billions and billions of dollars trying to figure this out. Electronic voting won’t be delivered by traditional server technology because it won’t be trusted by citizens, but with blockchains, citizens can confirm that their vote was cast. You can — in a way that’s completely private to you — also confirm who you voted for and that your vote was counted.
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