Alexis Roussel, co-founder Bity SA, a Swiss online Bitcoin/Ether exchange
“The Trust Machine” is how The Economist described the Bitcoin blockchain. That is by far the most straightforward explanation in years: Bitcoin is currently the only blockchain able to implement real digital monetary exchange over the Internet all by granting trust. Something that no government was ever able to offer in the digital realm. Bitcoin is also a machine, designed by engineers, based on mathematics and cryptography. Although its complexities are quite hard to grasp for many, this machine works.
Unfortunately, The Economist’s description falls short in showcasing the infrastructure aspects of such technology. Bitcoin is primarily a network. By adding an extra layer on top of the Internet, Bitcoin does not only take its force and principles from the layers below; it also gives the opportunity to rethink traditional financial services and allows the development of new and novel uses.
Financial institutions already had to go through several technological transformations. With computers came high-frequency trading, and with the Internet came e-banking and the various borderless behaviours of its customers. Until then, banks had to develop their infrastructure or use expensive external support such as Visa for payments or SWIFT for settlements. Providing a network of ATMs to bank customers also comes with a strong tag price. Moreover, if the client wants to use another ATM, from another bank, the ‚roaming‘ capabilities are limited and costly.
What if tomorrow, a bank was able to allow its customers to use any connected ATM in the world and provide the same, equally secure, services everywhere? What if tomorrow, financial services stopped being paper-based processes hidden within digital gift wrap to become genuine digital trusted connections between users? What if oversight and regulation ended being centralised and costly, allowing access to essential financial tools for half of the population still unbanked?
What we are starting witnessing is what famous Bitcoin advocate Andreas Antonopoulos named an ‚infrastructure inversion‘. It resembles the profound transformation which the telecom industry went through when Internet allowed voice over IP (VoIP) to be serviced.
Telecom companies had developed nationwide networks allowing one single application: voice communication. This may sound trivial today, but the social impact of that technology has rippled throughout the twentieth century. Networks were costly to build; communications were expensive. Quality downgraded to its most efficient but still usable form. In the end, the network, and the international connections enabled anyone who could afford it to call anyone anywhere on the planet. Then came the Internet.
The Internet transports data. It was not designed to send anything else than data over its network. Yet, it quickly occurred that voice could also be transformed into data and be transferred over the Internet. There were many advantages where traditional telcos could not compete. Internet being worldwide and not needing an available copper line for each communication, no telcos could compete on paper. However, their network was still robust and more reliable than the first VoIP systems. The Internet was considered a threat, and powerful telecom companies even tried to forbid first the Internet and then VoIP to run over landlines. Yet, consumer pressure was too intense. With Internet growing and telcos starting to provide quality lines for the data to flow, new successful VoIP systems arose. The matter was one of survival. Telcos had to embrace the change and move their infrastructure to the Internet. This was when the infrastructure inversion happened.
Today, telcos remove the old copper lines, and VoIP has replaced phone calls. Telecom companies still exist, some are new, others disappeared. They all transformed and experienced profound cultural changes. Take France Telecom: adding to its nation-wide telephone services, it created Wanadoo, France’s biggest Internet service provider. The company evolved, putting together all its network and Internet-related activities under a new brand, with a new culture: Orange. Users still make phone calls; yet, many unexpected new services also exist, administered by what historically started off as a telco: making cities smart, Internet of Things, e-health. Some banks already initiated this cultural change, like the Mbank in Poland or the Fidor Bank in Germany.
The financial world will live through a similar inversion. Some could argue it has already started. Like voice being transformed into data, money, thanks to Bitcoin, is now data that can flow throughout the Internet.
The Bitcoin revolution has ignited a fantastic expression of creativity over the last years. Thousands of startups have raised billions of investment dollars to recreate financial services over the Bitcoin network. Many of these services can, for the time being, be slow or even impractical, and few are niche successes. However, each of those has the potential to reach any Internet user, thanks to the Bitcoin blockchain.
Bitcoin, being an open system, replicates the successes of its underlying stack, the Internet. With open networks and open standards comes an enormous amount of innovation. In the nineties, many private communication networks could not provide the space for permissionless innovation. If a developer had been to take full advantage of their work, they would have chosen the open Internet. Today they are using the Bitcoin network.
As the network is growing, Bitcoin-based services will become cheaper and faster. Because they allow peer-to-peer interactions thus suppressing any third party intermediation, they work well with the social transformation we are experiencing worldwide. New usages are also appearing on the fringes. E-commerce software directly embeds Bitcoin, allowing its users to have a ready-to-go payment system. Multisignature wallets enable insurances (re)design. Payment channels allow for streaming data to be monetised down to the quarter of a second.
Most financial institutions are not blind to these changes. Many of them have now established ‚blockchain expert teams‘ to analyse the impact of this transformation on their business model. However, most of them have been adopting an approach that is doomed to fail. By promoting private blockchains and focusing the technology on their own benefits instead of their users‘, financial institutions are making the same errors that led telecom companies to invest in today forgotten private networks.
This infrastructure inversion will happen in the coming years. It will grow an open, permissionless and inclusive network in which still unknown usages will emerge. The combination of blockchain with the Internet of Things will allow all objects to have financial autonomy. This will bring our societies into an unforeseen new era, pushing the boundaries of law, regulation and even questioning some of our strongest principles.
The next inversion will generate its sets of rules based on the technical specifications of the new network. The regulatory framework that telecom companies had to evolve was not adapted anymore. New regulatory bodies such as the W3C were formed to embrace the new network and allow innovation to grow stronger. Similarly, the current financial sector regulatory scheme does not fit the decentralised, open monetary network to come and will need to adapt or make way for relevant regulations to occur.
History show us that a similar event occurred. The Lex Mercatoria was established in times in which entrepreneurs could not rely anymore on the state’s infrastructure. Printing, technology, new perspectives were pushing old boundaries into a world of borderless commerce. Traditionally slow, bureaucratic systems were not adequate anymore as they could not apprehend new technologies with their religious principles. Merchants had to reinvent a new legal system which is still shaping our world today. Similarly, in the crypto-currency realm, a Lex Cryptographia is now rising.
This article was first published in “Banking in Switzerland Liechtenstein (bsl)”, ed. 2016-2017.