Blockchain is to Banks <=> TCP/IP is to Telcos
We have all seen this before.
If you think about it, at its very core, a bank is essentially a leveraged ledger of ‘who owns what, when’, with built-in time delays to allow transactions to be ‘authenticated’ (aka ‘clearing’) whereby the bank captures deposits, makes interest during and after the time delay, and can charge relatively hefty fees to cover massive overhead to complete transactions.
All of the above is covered in a big regulatory wet blanket forcing all the subsystems to work together so the aggregate system can be ‘trusted’. Layers of ‘balance sheet backup’ allow massive hacks to occur, even at the central bank level, and still be absorbed by the system. With opaque heft, the system is ‘trusted’ in aggregate.
But what happens to this era’s financial institutions when ‘trust’ is IMPLICIT and built into the inside of the system itself at the core? What happens to the outer shell of layers and layers of bodies and computer systems and law makers and regulatory enforcers holding the morass in place? Do the layers of overhead slough off like a caterpillar’s cocoon allowing a butterfly to emerge over time? Does the system eventually become low friction, seamless, automated and low cost? We have seen this before.
Our telephony system started as a network of wired, point to point connections, where conversations were physically connected over a series of wires that were plugged together from station to station much like one would plug earbuds into an iPhone today. The ‘integrity of the system’ (trust) started as a physical connection that one could see. That system got automated over time such that people were replaced by computer based telephone switches.
Over time, much greater aggregate system efficiency was achieved by digitizing voices as they came into the system, cutting up conversations into ‘little pieces’ and flowing those chunks over the system. The switching happened not physically, but by adding headers to the voice packets so each could flow across closest empty lines, and later reassemble at their intended destination. Sounds simple, modern and efficient eh? The ‘digitization’ and automation of the essential function unleashed massive productivity, flexibility, and made the communications system based on TCP/IP (transmission control protocol / Internet protocol) extensible into all the things we do with the Internet that we do today. Going forward, in the world of Blockchain, we’re sending chunks of value, be they monetary or titles to physical or digital things, instead of voice. Every piece of value will have a digital location the world’s networks can point to, much like information on a page has a URL that can be reached by, or transferred to, anyone, anywhere. Lots to be done, with that.
The world’s financial system, which is essentially based on ‘ledgers’, as described above, has a germ of innovation deep inside it in the form of Blockchain. The core essence of ‘trust’ — created today with government guarantees, physical vaults, behemoth balance sheets to make institutions seemingly ‘too big to fail’, and layer upon layer of regulatory framework enforced by ‘zillions’ (yes I know its not a real number and not an accurate one, but there’s no way for me to count the bodies spending time making banks function) of people leading very exciting lives holding a gigantic ball of water in the air— is likely on the front edge of a very big wave of foundational change.
No one expects this change to be fast, as financial assets are part of the core layers of both ‘security’ and ‘esteem’ in Maslow’s Hierarchy of human needs; thus switching costs will have an emotional aspect that humans have to ‘get over’. It’s hard to define either the ‘starting point’, or the ‘commercial culmination’ of the transformation of communications due to the Internet, but that wave has most certainly been measured in decades and is still barreling. I suspect that the wave of transformation to be enabled by ‘the Blockchain’ will be slower to develop and longer to roll as a result. The exciting thing to think about though, from an investment standpoint is that this wave has the potential to be comparable or larger in size, duration, breadth of application and “pervasiveness” as the waves of unlocked value in the digitization of communications that created “The Internet”.
It’s been a delight catalyzing some of the little starting ripples in the water by creating the Blockchain Summit we have held on Necker Island the past two years. I was fortunate to stumble upon BitFury a couple years ago and led an angel financing which gave me relatively early exposure to Blockchain as the underlying protocol carrying the value units known as BitCoin. A big ‘thank you’ to Bitfury, likely one of the largest revenue companies in the segment today, for being a driving force and to Sir Richard Branson for hosting us at Necker Island for our gatherings during our ACTAI Necker weeks.
The initial idea behind the summit was to create a place where human to human discussions could be held in the spirit of the ‘Homebrew Computer Club (HCC)’ (albeit a little higher end, and with kitesurfing between sessions) to advance the community’s thinking on the required infrastructure and applications to allow Blockchain to be used for societal good — and to actively do something about it, in the same way that the early attendees of HCC were builders, not just ‘talkers’. Pretty cool to see at least 9 tangible projects emerge from our 2015 Summit, some of which will remain ripples but some of which may grow into monster waves. I’m hoping to chronicle those in a future post.
It was quite fun to kick off the discussions at our 2016 summit with a perspective of “30 years of Silicon Valley History in 15 minutes” leading up to the market value waves that may be efficiently enabled by Blockchain. My intention in doing so was to set the stage for the group with a historical framework that could stimulate open ended ideas of what might lie ahead. I’m excited to see how our 2015 projects continue to evolve (among them John Edge and Lucy Liu’s ID2020 that made it to the UN, automation of Hernando de Soto’s “Mystery of Capital” into a SAAS architecture, birth of the Blockchain Alliance during a conversation in Richard Branson’s hot tub, creation of an Artists Rights platform by Imogen Heap via a conversation with Cellist Zoe Keating, and an educational product in the form of a ‘social Bitcoin mining light bulb’) and also what may emerge from the 2016 summit.
By the way, this post is not a statement in any way that banks will be wiped out by Blockchain. Rather, it’s quite the opposite. Just as the telcos embraced TCP/IP and actually had a huge hand in defining and bringing it to market, ALL major banks today are experimenting with Blockchain based technology. The beauty of waves of ‘digitization’ is that the rapidity of development, deployment and provisioning of services can be greatly improved and can be executed at far lower cost — allowing for a total redefinition of product lines that is, was and will continue to be great for consumers.
We have seen this before.