The furore over the future of cryptocurrencies such as Bitcoin has reached ever more frenzied peaks since the start of the year.
Goldman Sachs recently predicted that most cryptocurrencies will inevitably crash to zero and the head of the World Bank has warned that most resemble Ponzi schemes. Meanwhile internet entrepreneurs turned venture capitalists the Winklevoss twins have said they expect Bitcoin to soar to 40 times its current value.
But such feverish debate is distracting from the bigger story: that blockchain – the underlying technology behind Bitcoin and other cryptocurrencies – is poised to revolutionize the way the world does business in much the same way email and the internet did.
The innovative power of blockchain is that it creates a platform allowing any two parties to digitally transact with each other using an immutable, continuously-updated, distributed ledger. In the case of Bitcoin, with no central authority overseeing the system, the task of updating the ledger relies on miners (“competitive bookkeepers”) who verify transactions and get rewarded with newly minted currency.
Just as the invention of the underlying technology behind email enabled the transfer of information from one user to another, blockchain enables the transfer of value from one user to another. This has huge implications for traditional intermediaries such as auditors, lawyers, or public notaries, and without radical transformation entire industries face a very real existential threat.
For example, most e-commerce currently relies almost exclusively on third parties such as Visa or PayPal to process electronic payments, charging transaction fees of three to five per cent. Overseas money transfer firms like Western Union and MoneyGram charge even more – often over 10 per cent. These industries seem ripe for disruption and with the growth of blockchain the fate of financial remittance companies may resemble the demise of travel agents in the 1990s.
At a national level meanwhile, a growing number of countries are exploring how to put their currencies on blockchain. For example, the Monetary Authority of Singapore (MAS) recently partnered with a consortium of banks to develop Project Ubin, a pilot tokenized version of the Singapore dollar that replicated the existing financial payment system without a centralised clearing system. It is now working on similar projects focused on fixed income securities trading and cross border payments.
Transformational potential
But blockchain technology has applications well beyond the finance industry. Indeed a recent Harvard Business Review article said blockchain “could change the very nature of economic, social, and political systems.” The article’s authors, both Harvard professors, said they foresee a world where “every agreement, every process, every task, and every payment would have a digital record and signature that could be identified, validated, stored, and shared.”
By allowing businesses to control their own data, ensuring immutability and transparency, it offers transformational potential in areas such as inventory control, food safety and record management, including medical records.
In January, IBM and Danish shipping giant Maersk announced a joint venture to use blockchain in shipping supply chain. In a sector which handles around U$4 trillion of goods year, the firms said they expected savings of up to 15 per cent of this amount, mostly by virtually eliminating the bureaucracy and corruption risk in manual procedures.
Another area where blockchain shows significant promise is food safety. Recently Walmart launched a pilot in China using blockchain to track and trace shipments of pork. Making food supply chains transparent and traceable brings a range of potential benefits – for example, while it normally takes days to recall a food product, blockchain can do it in seconds.
But before we become swept up in the excitement, it’s important to also bear in mind the challenges.
One often underreported downside of blockchain is the power consumption it accounts for. Mining bitcoin alone, for example, has been estimated to account for 42 terawatt-hours per year – similar to the annual consumption of Hong Kong or New Zealand. This may potentially be alleviated by different mining processes, but these will likely raise different issues and challenges.
Another critical issue is security. Bitcoin is safe as long as honest nodes control more power than potential collaborating attackers. However, this can be undermined by the formation of mining syndicates since collusion among groups with more than 50 per cent of mining power could enable hacking of the system.
Scalability likewise needs to be urgently addressed as the reach and use of cryptocurrencies continues to grow. Bitcoin, for example, can currently only process roughly seven transactions per second whereas in contrast Visa can process more than 50,000 per second.