My buddy, Yancey, is a Bitcoin broker. He’s been arranging deals part-time for several years now. About a year ago, he went full time. He seems to be doing fine.
It’s ironic that the Bitcoin needs a broker. In my opinion, the best thing about Bitcoin, and the underlying blockchain, is the potential to disintermediate transactions. By eliminating middlemen, blockchain systems may deliver two major benefits:
- Reduce the cost of transactions;
- Make transactions easier and faster to complete.
Conceivably, the blockchain can produce a world of frictionless commerce where we no longer need trusted intermediaries. It’s ironic that Yancey serves as an intermediary for a technology that aims to eliminate intermediaries.
This suggests the blockchain has not yet reached its full potential. My question for Yancey: will it ever? I chatted with Yancey for about an hour last week. Here are some of the highlights.
- Bitcoin was an experiment. Nobody expected it to sweep the world. It’s more like a science fair project than a NASA space shot. The surprise is that it works not that it’s imperfect. Don’t judge the viability of blockchain or of digital currencies based solely on the Bitcoin experience.
- Bitcoin’s base software ensures that the system can never produce more than 21 million Bitcoins. People can “mine” the coins through computationally intensive transactions. The more miners participating, the more challenging the transactions become. The world has now mined approximately 17 million Bitcoins; we’re still several years away from the limit. This architecture delivers two additional benefits:
- It’s so difficult to create coins that no one entity can dominate the entire system. Dispersed responsibility and record keeping are the keys to Bitcoin’s security, veracity, and trust.
- When the limit is reached, no more coins can ever be created. Thus the currency can’t be inflated as fiat currencies can. If demand rises and supply can’t respond, the value of each Bitcoin will also rise. (As values rise, we’ll need to subdivide Bitcoins into ever-smaller units for day-to-day use. Today, a satoshi is the smallest available sliver – it’s one-hundredth of one-millionth of a Bitcoin or .00000001 BTC.)
- While Bitcoin has captured the headlines, the blockchain is potentially a much greater disrupter. We can make virtually any information fraud-proof. As I’ve reported before, Peruvian landowners are storing their titles in blockchain databases to prevent land fraud. Sports memorabilia collectors want to create a chain of evidence that proves that this baseball was the one Mark McGwire hit for number 70 on September 8, 1998. Antique and fine art dealers similarly want a tamper-proof record of provenance. Authors, artists, and scientists want to prove that their important discovery or manuscript or painting existed on or before a given date. Before blockchain, we needed trusted intermediaries to verify these facts. With blockchain, perhaps we don’t.
- It’s still the Wild West in crypto/block land but settlers are bringing barbed wire to set up fences. Banks, in particular, sense that they are ripe for disintermediation. Why should customers wait for days for a check to clear – while the bank reaps the float – when we can make instantaneous transfers without a middleman? Banks would prefer to cannibalize themselves than have someone else do it for them. To do so, they need some guardrails but would rather not invite full-bore government regulation. They need to show that they can police themselves. (J.P. Morgan’s announcement of JPM coin– which debuted while I was chatting with Yancey – is a step in this direction.)
- People worry about the use of cryptocurrencies to support terrorism, but some constraints are already in place. These include:
- KYC – Know Your Customer – helps institutions identify “bad actors” throughout their transaction chain.
- AML – Anti-Money Laundering – a set of procedures and regulations that help to identify and stop money laundering.
- CTF – Counter-Terrorist Financing – helps institutions identify, trace, and recover illegally obtained assets.
Additionally, the structure of the blockchain itself can help prevent fraud. What’s stored in the blockchain can’t be changed. A bad actor could conceivably add to the blockchain but such additions are easy to identify and trace.
- Arbitrage by hedge funds is driving much of the trading in Bitcoin (and other digital currencies) today. Hedge funds can lock in a price (for two or three hours) and find a buyer at the same time. The fund buys at the spot price minus one or two percent and immediately sells at the spot price. I asked Yancey how I could play this game. He asked if I had $40 million to get started. Not yet.
- Stablecoins are the next wave. Bitcoin has no assets behind it – its value is simply a question of supply-and-demand. In other words, it’s just like a fiat currency. Stablecoins are based on some asset – like Venezuelan oil or Zimbabwean gold. Stablecoins aim to reduce the wild price fluctuations seen in so many digital currencies. The downside? Someone or some entity has to manage the physical asset. Once again, we have to place our trust in an intermediary.
- The JPM Coin is an interesting variant of a stablecoin. It’s linked to the dollar: one JPM coin = one dollar. So, the coin is based on an asset. But the asset – the dollar – is not based on anything. It’s a fiat currency. It’s not clear if this will help or hinder the adoption of JPM Coin.
- The next wave of competition will come at the platform level. Several different companies have created platforms for creating blockchain systems. It feels like the database wars of the early 80s. Which one (or ones) will dominate? More on that the next time I catch up with Yancey.