It’s a great question: assume a cryptocurrency like Bitcoin achieves some level of adoption, what happens next? What products and services will be needed? What institutions should we expect to see? Where are the opportunities?
Sadly, that question is just too hard for me. But I can try answering a different question: what upcoming battles can we foresee that might shape the future landscape?
Here are some thoughts…
What happens when the Banks remember why they exist?
Never Believe What You Read in the Press: People Do Trust Their Bank. Forget this Lesson at your Peril
When I look at an industry, I ask myself: “If it didn’t exist today, would anybody invent it?” It’s instructive to ask that question about retail banks. If I can hold funds on a prepaid debit card, do payments over SMS, get loans from Wonga and invest with Zopa, why do I need a relationship with a bank?
People usually give one of two answers to that question.
The first explanation is to say that Banks exist to facilitate maturity transformation: most people want to borrow long and lend short – and banks are the institutions that meet that demand by taking the other side of the “trade”. It’s an inherently unstable business but serves a useful purpose so we allow it to exist. Unfortunately, the FinTech revolution and relentless grind of disintermediation makes it look increasingly anachronistic. So this explanation doesn’t help.
However, there’s an older, simpler model of banking. This model says they exist to look after our stuff. We deposit our valuables with the bank and they keep them safe.
When I see services like Barclays “CloudIt”, I wonder if we’re seeing a renewed interest in this business model by the banks. And it’s one that could work: despite what they say most people do still trust their banks to look after their stuff. Interest rates on savings are effectively zero and yet people still leave their money with the banks rather than under their matresses or in the stock market. Ignore what people say; look at what they do.
Now look at today’s Bitcoin world. Take me as an example: my Bitcoin holdings are scant yet I barely trust myself to look after them and I’m supposed to be an expert. How is everybody else supposed to manage? The default solution to this sort of problem is to do what we’ve always done: outsource the problem to specialists. Today, that might be Coinbase or elliptic or BitGo but if we apply the logic above, would it really be a surprise if banks realized this is also an opportunity for them?
So we can foresee a showdown: what happens if the Banks realize their association with “safekeeping” gives them brand permission to offer Bitcoin wallet services? Will they create their own offerings? Partner? Acquire?
Who knows… but the point is this: if you assume a valid model for banking is “safekeeping” then Banks could surprise us all and make a claim for a dominant role in Bitcoin’s future.
And I think some people will find that extremely distasteful…
The Mother of All Forks: A Stake Through the Heart of Privacy?
Imagine the banks follow the logic above and they consider offering Bitcoin safekeeping services. What happens then? They quickly realize there’s a problem: Anti-Money Laundering and Know Your Customer rules. What do they mean in this world and how do you comply? To be completely safe, they’d want to track your Bitcoin activity closely.
On one level, that’s easy: if they host your wallet, they can see all your Bitcoin transactions. But they don’t know who you’re transacting with. And they obviously don’t see anything you do with any other wallets.
But they have a way round that: imagine if they said the following:
“We will provide Bitcoin safekeeping services, facilitate the exchange of Bitcoins for sovereign currencies and provide Bitcoin payment services to you provided you agree to identify upon request the identities of any entities with whom you transact. Failure to do so will result in the immediate termination of your account”.
Now, most current Bitcoin users would never sign up to such a condition. But current users wouldn’t be the target market; the target market would be the mass market… and that is a lot of people. Now imagine the regulators get involved and insist that Bitcoin exchanges and payment processors insist on similar conditions.
Suddenly, the banking and regulatory sphere has driven a stake through the heart of Hierarchical Deterministic Wallets, Stealth Addresses, CoinJoin and all the rest. Sure… you can use all those privacy-protecting technologies…. But you just can’t interact with the exchanges or merchants or anybody else in the “real” world.
We could expect a furious backlash and increased focus on decentralized exchanges and other technologies but it’s not hard to imagine a system that is effectively forked: Bitcoins owned by addresses “inside” the system and Bitcoins owned by addresses “outside”. It’s interesting to imagine which ‘flavour’ of Bitcoin would be worth more…
Robots With Checking Accounts (Silks, Hit the Road?)
If you read the thinking behind projects such as Ethereum, their ambition is stunning: they foresee whole classes of interaction that today are governed by law that they think can be mapped into code. What happens to the legal profession in that world?
I don’t think the lawyers need to worry about their jobs just yet, however…. I observed last year that “on the blockchain, nobody knows you’re a fridge”. But what happens when this becomes a reality? Is society ready for devices that can initiate and receive financial transactions with their own accounts, accounts to which no human has access?
What does this mean for the legal system? What does “liability” mean in this world? How do you arrest a fridge?
If my fridge detects a design fault in my washing machine and shorts the stock of the manufacturer, is it committing insider trading?