Last week the Washington DC Internet Society Chapter hosted an informative panel discussion on bitcoin and blockchain technology. It seems that bitcoin is wrestling with existing structures and path dependencies rather than technological issues.
The technology itself is relatively straightforward and its execution seems to have reached a stable level of functionality. The real challenge is how users integrate it into or undermine existing structures. There is also a question as to its broader utility and application which is still being explored.
Governments and banks are not supporters of bitcoin as a financial mechanism. They presently hold a monopoly on money. Banks in particular can constrain bitcoin though network effects. If a user wants to convert bitcoin into traditional currency, at some point in the process a recognized bank must be willing to make the conversion. Unlike traditional currencies where global currency markets determine and enable currency conversion, bitcoin does not enjoy the same reputation or confidence. Furthermore, if a sufficiently large number of banks decide not to handle bitcoin transactions, its growth would be severely curtailed.
Government plays an important role here as a regulator. It’s choice of regulatory rules concerning bitcoin can have a dramatic impact on it’s use and adoption. Governments are not particularly interested in untraceable capital flows and are therefore inclined to make onerous regulations that persuade banks not to handle bitcoin transactions.
Part of the reluctance is currency’s profitability. Quite simply, making money makes money. Secondly, law enforcement is concerned about cross border capital flows fueling criminal enterprises, terrorism, and sanctions-busting. The FBI’s action against the Silk Road highlights this concern. Bitcoin transactions potentially create ways to circumvent reporting requirements and this concerns law enforcement.
Bitcoin is but one implementation of blockchain technology. As a verifiable public accounting record of transactions, currency is low hanging fruit. NASDAQ is exploring using blockchain technology to manage stock transactions. Entrepreneurs need to be more creative. Land and property titles are another area if mundane where this could be useful. Consider the challenges of establishing and tracing the provenance of fine art. Creating a verified record of ownership could be highly lucrative for the likes of Christie’s and Sotheby’s. In the US, blockchain technology would be a reliable and secure way of recording firearm ownership. There are many opportunities for creative entrepreneurs.
The biggest technical threat to bitcoin is ironically a hardware issue. The computational power required is energy intensive. Power generation and consumption and their attendant costs pose an upper theoretical limit on blockchain technology. Moore’s law and more energy efficient processing is pushing that threshold higher all the time but the limit remains.
Bitcoin and blockchain technology have reached a crossroads. Their initial technical issues have largely been addressed. Legal and regulatory issues in areas of implementation are just now being explored. As with any new technology, this leads to a negotiation between new and existing systems. The outcome will be interesting to see. In a different frame, it will also be interesting to see how the technology is adapted to address problems in other areas.