Blockchain: “Just like the Internet”, but not the Internet

Blockchain: “It’s like the Internet.” Every conversation starts with a special explanation of why Bitcoin and blockchain will forever change the way the world uses financial services and payments. Except it’s not the Internet. Karen Webster, CEO of MPD (Market Platform Dynamics), gives five facts to recall the next time you’re caught in this kind of conversation—and some suggestions on how we can drive blockchain innovation toward financial services and payments.

And explain why you’re a complete idiot and innovation-resistant if you disagree.

I had this experience last week, attending a conference full of bankers eager to learn the details of Bitcoin and blockchain. For the true believers, I found it simply impossible to have a rational conversation about the pros and cons of blockchain. Why? Because it’s impossible to dismiss them with the narrative that “Bitcoin is like the Internet in the 1980s.” Of course, this is just empty talk, as the conversation immediately shifts to a discussion of how blockchain can create value.

Described as “owned by no one” and a great bastion of permissionless libertarianism, Bitcoin and blockchain have been likened to the internet — a global network based solely on web protocols that transmits data around the world in real time, without any central authority telling it how or what to do.

There’s just one problem with this description. This description doesn’t accurately reflect how the Internet works or even started, nor does it describe how Bitcoin and blockchain work now or what the future might hold.

There is another problem. A lot of smart people in the financial services industry seem to be bewitched by the amount of description that is out there.

This is scary – not because bankers are all rushing to figure out how to innovate the way money and data moves around the world – one of the great things blockchain has done is to start these very necessary conversations. What is scary is that banks are concentrating their money, talent and resources to resist a wave of blockchain innovations that they believe will be as powerful and game-changing as the internet was in the 1980s.

Therefore, this issue should be clarified this time.

Here are five things to note about blockchain, the internet and its origins, and their impact on innovation in financial services.

Did you know? The Internet is unregulated

Forgive me for taking a few hundred words to describe how the Internet came about and how it works.

The physical Internet – the backbone that enables messages and data to pass between billions of senders and receivers around the world – grew out of the ARPANET that was created in the 1960s. ARPANET was short for the Advanced Research Projects Agency Network, which was funded by the U.S. Department of Defense – the goal of the network and funding was to replace the circuit networks of the time. This network could send packets of data along a physical network without requiring every sender/receiver to be connected to every other. Part of the initial work on the ARPANET was to determine the standards for how these messages were sent between nodes on the network. These standards, or the TCP/IP network protocols we know as TCP, were created in 1982.

Until the late 1980s, the physical network was private, connecting only a few dozen research centers and universities, mostly in support of government-directed projects. At that time, providers who could connect to the physical network—they were called Internet Service Providers or ISPs—came along, and the network began to become more commercially useful. In 1995, the physical network was fully opened for commercial purposes.

Even in the early days of the Internet, when the network consisted of just a dozen labs, including one at MIT in Boston, a manual of rules and guidelines for their use was published. Here’s one of its passages:

"Using the ARPANET for any business not directly supported by the government was considered illegal...Personal information sent to other ARPANET users (e.g., to arrange a party, to say a friendly hello) was not generally considered harmful...Sending electronic mail for commercial gain or political purposes was antisocial and illegal. By sending such a message, you would offend a lot of people and potentially get MIT into trouble with the government agencies that managed the ARPANET."

Today's Internet has rules

Until now, carrying data between different nodes on the Internet is the job of so-called Internet Service Providers (ISPs), which include companies that provide access to the Internet, sometimes internationally, sometimes regionally, and sometimes locally, to homes and businesses. Connecting to the Internet is only possible through one of these ISPs, such as Level 3, IBM, Cogent, and AT&T. Each ISP operates its own network. Internet exchange points, or IXPs, owned by private companies or governments, make it possible to interconnect each network and allow messages to be sent throughout the network. Many ISPs contract with Internet backbone providers to provide the "last mile" of Internet service through their services - that is, consumers and businesses who want to go online. Under the condition that everyone abides by the Internet Protocol, data can flow to the right place at the right time without interruption.

That’s all for Internet 101.

There is no regulation of the Internet. In fact, there are four regulatory bodies that provide oversight of Internet rules and infrastructure: the Internet Society (standards, policies), the Internet Engineering Task Force (a working group that oversees Internet infrastructure and addresses major issues such as security issues), the Internet Architecture Board (protocols and standards), and the Internet Corporation for Assigned Names and Numbers (ICANN – manages the domain name system).

Although the Internet doesn't belong to any one of these organizations, these governing bodies come together to decide how the Internet works and set the rules and standards that everyone must follow. The contracts and legal framework that underpins it all are also in place, which determine how the network works and what happens if something goes wrong. For example, in order to get a domain name, you need a registrar that has a contract with ICANN. To connect to the physical network, ISPs need to sign contracts with Internet backbone providers to connect to the ISPs. Worried about security? A working group is working on this issue, and solutions will be developed and deployed for the mutual benefit of all parties. If your network goes down, you can call someone to get it fixed. If the problem is with the ISP, they have contracts and service agreements to address these issues.

The United States "controls" the Internet

For all intents and purposes, the United States has held the key to "control" the Internet for the past 20 years. ICANN is a private entity created by the U.S. Department of Commerce in 1988 to determine who gets a domain name on the Internet. ICANN and the domain name structure allow you to find PYMNTS.com by typing pymnts.com instead of the string of numbers that corresponds to our IP address.

Over time, there has been growing criticism of the United States controlling such a vital part of the Internet. In response, last year President Obama said the United States would relinquish control of ICANN in 2015 and proposed setting up a UN-style group of stakeholders from industry, government, academia and standards organizations to guide ICANN's work, or handing control over to the UN, as China and Russia have suggested.

Almost at the same time, there was quite a stir around the world, with people worried that the Internet would fall into the hands of bad people in the future, that the Internet would be censored, or that there was a risk of falling into the hands of a single group and being used for bad things.

Just recently, the US announced that it will continue to manage ICANN until September 2016, which – with the extension – will be enough time to develop a new governance model (if one exists).

All of this is to say that the Internet itself is like the early American West (no regulation). But it is not the same today as it was when it was first invented, nor is it the same today as it was when it was first run. And, no one is talking about whether the Internet should be regulated; they are actually talking about who should regulate it or how.

Today’s blockchain is unregulated

However, this is not the statement of many blockchain communities, and I think this title will make many people angry.

Blockchain is a technology that continuously records every Bitcoin transaction that occurs. It is a distributed database or public ledger that is updated every 10 minutes. This distributed database is run by miners. The only requirement to become a miner is to have the money to buy and maintain supercomputers that have to process transactions every 10 minutes. This actually requires a lot of money. When data is passed on the blockchain, the miner's reward is included in the processed Bitcoin transaction.

When Bitcoin was $700, $800, $1,000 and on its way to $100,000 and even $1 million a few years ago, miners had a financial incentive to invest in equipment to process transactions faster. This year, with Bitcoin below $200, the incentives for miners to become more efficient are less strong. The biggest criticism of blockchain technology right now is that it is too slow to accommodate the volume of transactions on a global network. To improve the system, miners have to invest, and it is entirely up to them personally whether and how they want to invest—if they want to.

But the other more worrying aspect of blockchain is that it's really unregulated. No one can tell miners to upgrade, slow down, speed up, stop or start or do anything. And this is worn as a badge of honor by Bitcoin's fans, who say it's similar to the Internet at the time. But now you understand that from day one, the Internet had rules and standards governing how it operated, and blockchain does not.

The closest regulator is the Bitcoin Foundation, which doesn’t have a great reputation either — three of the five board members are notorious figures. Mark Karpeles, the owner of Mt. Gox, which ran one of the largest mining organizations before it went bankrupt — is now in custody of Japanese police. You may recall that a lot of Bitcoin mysteriously disappeared from Mt. Gox — and those Bitcoins have never been found. But beyond that, there isn’t really a big authority that could regulate anything, even if it wanted to. When it comes to miners, there are a handful of miners that control a large portion of blockchain activity, and no one knows who these people are. This has caused a lot of concern about the potential risks of having so much computing power concentrated in the hands of a few unknown, unregulated, and uncontrolled people.

Of course, some will argue that the distributed ledger is public and transparent, so the risk of losing money due to blockchain is minimal. Yeah, tell that to the people who lost their coins at Mt. Gox, and the people who were attacked by Bitcoin thieves and are still struggling to get their money back.

Also remember that two of the biggest “selling points” of blockchain are its irreversibility and anonymity. Both of these characteristics are sharp double-edged swords in the unregulated world of financial services. Today, if there is a dispute over a financial transaction, there is a person to complain to, and behind that person there is a legal entity and legal framework if any issues need to be resolved. None of these exist in the world of blockchain, which makes it very different from the birth and development of the Internet.

A system that is sudden, unregulated, unregulated, without standards, and where anyone with enough money can meet the entry criteria does not seem to be the kind of structure we want to support the kind of innovation that drives trillions of dollars around the world every day.

In any case, blockchain is nothing like the internet.

There is promise in using blockchain technology to innovate financial services

But there is a but.

One must distinguish the concept that blockchain technology — a distributed ledger that can become a new rail that can efficiently move information and money around the world — from how it is implemented today — in an unregulated global digital currency payments system that relies on a group of unregulated, unregulated miners.

Unfortunately, it’s extremely difficult to have a conversation today that separates Bitcoin and blockchain. Any support for the idea that Bitcoin and blockchain cannot be separated in the boardrooms of financial institutions and payment companies needs to be articulated.

That’s why you’re starting to see some innovations pop up, like Ripple and its partnership with Earthport, Citi’s distributed ledger experiment, and Token, which uses banks as its “distributed ledger.” But for blockchain to succeed as an alternative technology for moving money around the world, there needs to be regulation and standards in place to protect the assets that are transferred through it, as well as the institutions and individuals that rely on the system.

The most urgent task, at least in my opinion, is to separate Bitcoin from the blockchain.

Stop wasting your brain cells on Bitcoin

Speaking of Bitcoin, I actually think we have given up on the possibility of Bitcoin as a global alternative currency in a financial services system. However, I am still surprised by how many people still think it has hope or potential. It does not.

It doesn't solve any problem for anyone or anywhere - unless you are a criminal who needs an anonymous currency to pay or be paid. This is the most common use case for Bitcoin. It is not a replacement for cash, nor is it an economic solution for developing countries. There is no commercial success story anywhere that usurps the power of a central bank to manage its own monetary and fiscal policy by using a currency. Absolutely not.

Bitcoin is also not a low-cost alternative to Western Union, as other Bitcoin fans have suggested. “Sounds good, but it doesn’t work in the real world” What many people tend to forget is that sending someone Bitcoin is not as convenient as paying them with Bitcoin. It only works at merchants that accept Bitcoin. If you notice, there aren’t many places in the world that accept Bitcoin. Just ask anyone who plans to travel the world with Bitcoin.

In developing countries, the only way people transact is through hard currency. If you need proof, look no further than M-PESA, which some merchants already accept as a method of payment, but has gone underground because people can go to intermediaries to get cash. There is simply no way to quickly exchange Bitcoin for these capital-intensive economies in developing countries. That’s why e-money institutions like M-Pesa spend so much money and effort building cash access networks. It’s not because they’re stupid or don’t like technology. It’s because they’re targeting people who live in poor countries, not people who hang out in fancy cafes in San Francisco.

Here’s more evidence that Bitcoin is running out of steam as a method of conducting business. Bitpay, one of the largest and best-funded Bitcoin processors, reportedly laid off most of its remaining staff last week in an effort to “keep up with Bitcoin’s growth.” Based on this news, Bitpay appears to be heading in the wrong direction.

So can we agree to move our time, energy and brain cells away from Bitcoin as an alternative currency, and separate the discussion of blockchain technology from it?

Trustlessness is a great concept — but there’s no way to run such financial services

Trustlessness is another blockchain feature that is often described as its crowning glory. Trustlessness means that anyone with the wherewithal can set up shop and become a miner – all it takes is a proof of work on the blockchain. Applied to today’s financial services, this is like saying that anyone with the wherewithal can set up a new network and issue a proof of receipt every time money is transferred. This is probably not the way we want to run our financial services networks.

However, the areas described below do not require trust and work very well in terms of spurring innovation.

Any innovator can come up with a good idea and bring it to life without needing approval from anyone else — as long as they have access to capital and operate within regulatory boundaries. Some have become blockbuster success stories, others have died painful deaths, and most of the rest are still moving forward — and this philosophy has contributed to the development of thousands of new ideas. In the United States, we have the most vibrant, approval-free pro-innovation environment better than anywhere else in the world, as well as the infrastructure, capital, and regulatory framework to support — not stifle — the continued growth and vitality of innovation.

That’s why one of the best things about blockchain is how the new technology can be used to remove friction and power the modernization of the global banking and financial services system.

It’s not surprising that some of the greatest innovations of our time have occurred—like the Internet—but it’s even better if we can actually see them happen.

Original article: http://www.pymnts.com/news/2015/the-blockchain-just-like-the-internet-except-that-its-not/
By Karen Webster
Translator: Orange
Reward address: 1FCiRAuQYUqMzyy7XHueLs5SCRzd11P6kj
Editor: printemps
Source (Translator): Babbitt Information