Blockchain Revolution (updated)

by Don Tapscott

  The contract couldn’t be seized, stopped, or redirected to a different bitcoin address. You need only to transmit the signed transaction to any of the bitcoin network nodes from anywhere using any medium. Said Antonopoulos, “People could shut down the Internet, and I could still transmit that transaction over shortwave radio with Morse code. A government agency could try to censor my communication, and I could still transmit that transaction as a series of smiley emoticons over Skype. As long as someone on the other end could decode the transaction and record it in the blockchain, I could effect the [smart contract]. So we’ve converted something that, in law, is almost impossible to guarantee into something that has verifiable mathematical certainty.”44

  Consider property rights, both real and intellectual: “Ownership is just a recognition by a government or an agency that you own something and they will defend your claims on that ownership,” said Stephen Pair, CEO of BitPay. “That’s just a contract that can be signed by whatever authority that will defend your rights for you and they sign it over to your identity, and then once you have that, and that ownership is recorded, you then can transfer it to other people. That’s very straightforward.”45 Communities with shared resources could consider a spectrum of rights, borrowing from Nobel Prize–winning economist Elinor Ostrom’s pyramid of rights, a pecking order of sorts. At the lowest level, there are authorized users who may only access and withdraw resources; claimants who have those rights but can also exclude others from access; proprietors who hold management rights beyond access and exclusion; and owners who can access, use, exclude others, manage, and sell the resource (i.e., right of alienation).46

  Now consider the rights to privacy and publicity: “Our model is really rights applied to the market,” said Kulin of Personal BlackBox. His company uses blockchain technology to represent and enforce the rights of individuals to extract value from their personal data. “The blockchain provides us a whole group of people who are both mission-aligned and technology-aligned to create different ways that enterprises can leverage these unique data sets rather than protect their data silos.”47 Simply put, people create better data than what a company can frack from them, and consumers are much better at emotionally aligning with brands and influencing their peers than companies are.

  Implications for the Blockchain Economy: As an economic design principle, enforcing rights must start with clarifying rights. In the field of management science, the holacracy movement is an interesting, if not controversial, example of how members of organizations are defining the work that needs to be done and then assigning rights and the responsibility to do this work as part of a whole.48 Who did we agree should have this set of decisions and activities at our company? The answer to that question can be codified in a smart contract and placed on the blockchain so that the decisions, progress toward the goal, and incentives are all transparent and reached by consensus.

  To be sure, this is not simply about technology. It’s much bigger than physical assets, intellectual property, or Personal BlackBox’s privacy tool with a publicity rights module for the Kardashians. We need greater education about rights and the development of new understandings about rights management systems. We’ll have voting rights management systems and property rights management systems. Some start-up will create a rights dashboard that will indicate a person’s level of civic engagement, where voting is but one of several measures, like donating skills, reputation, time, and bitcoin or providing free access to one’s physical or intellectual property. Buckle up.

  7. Inclusion

  Principle: The economy works best when it works for everyone. That means lowering the barriers to participation. It means creating platforms for distributed capitalism, not just a redistributed capitalism.

  Problem to Be Solved: The first era of the Internet created many wonders for many people. But as we have pointed out, a majority of the world’s population is still excluded—not just from access to technology but also from access to the financial system and economic opportunity. Moreover, the promise that this new communications medium would bring prosperity to all has rung hollow. Yes, it helped companies in the developed world provide jobs for millions in the emerging economies. It lowered the barriers to entry for entrepreneurs and gave the disadvantaged access to opportunities and basic information.

  That’s not enough. There are still two billion49 people without a bank account, and in the developed world, prosperity is actually declining as social inequality continues to grow. In developing economies, mobile is often the only affordable means of connecting. Most financial institutions have mobile payment apps that combine cameras and QR codes. However, the fees needed to support these intermediaries make micropayments impractical. Consumers at the bottom of the pyramid still can’t afford the minimum account balances, minimum payment amounts, or transaction fees to use the system. Its infrastructure costs make micropayments and microaccounts unfeasible.

  Breakthrough: Satoshi designed the system to work on top of the Internet stack (TCP/IP), but it could run without the Internet if necessary. Satoshi imagined that the typical person would be interacting with the blockchain through what he called “simplified payment verification” (SPV) mode that can work on cell phones to mobilize the blockchain. Now anyone with a flip phone can participate in the economy, or in a market, as a producer or consumer. No bank account required, no proof of citizenship required, no birth certificate required, no home address required, no stable local currency required to use the blockchain technologies. The blockchain drastically lowers the cost of transmitting such funds as remittances. It significantly lowers the barrier to having a bank account, obtaining credit, and investing. And it supports entrepreneurship and participation in global trade.

  That was part of Satoshi’s vision. He understood that, for people in developing economies, the situation was worse. When corrupt or incompetent bureaucrats in failed states need funding to run the government, their central banks and treasuries simply print more currency and then profit from the difference between the cost of manufacturing and the face value of the currency. That’s seigniorage. The increase in the money supply debases the currency. If the local economy really tanked—as it did in Argentina and Uruguay, and more recently in Cyprus and Greece—these central bodies could freeze the bank assets of whoever couldn’t afford a bribe. Given such a possibility, the wealthy could store their assets in more trustworthy jurisdictions and more stable currencies.

  But not the poor. Whatever money they have becomes worthless. Officials could siphon off inflows of foreign aid and ribbon their borders with red tape, adding friction to every attempt at helping their people, from mothers and children needing food and medicine to victims of war, prolonged drought, and other natural disasters.

  The Australia micropayment service mHITs (short for Mobile Handset Initiated Transactions) has launched a new service, BitMoby, that enables consumers in more than one hundred countries to top up their mobile phone credit by texting mHITs an amount of bitcoin.50 According to bitcoin core developer Gavin Andresen, “You don’t see every transaction; you see only the transactions you care about. You’re not trusting peers with your money, you’re just trusting them to give you the information touring across the network.”51

  “The potential of using the blockchain for property records in the emerging world, where that’s a huge issue related to poverty,” is significant, said Austin Hill. “There isn’t a trusted entity that has governance over land title, and so allowing people to actually say, ‘I own this property,’ and then use that for collateral to improve them and their family situation is a fascinating use case.”52

  On a technical note, Andresen called on Nielsen’s law of Internet bandwidth, where high-end user bandwidth increases by 50 percent each year, whereas the bandwidth of the masses tends to lag by two or three years. Bandwidth lags behind computer processing power, which increases by about 60 percent annually (Moore’s law). So bandwidth is the gating factor, according to Jakob Nielsen
.53 Most designs—interfaces, Web sites, digital products, services, organizations, and so forth—will need to accommodate the technology of the masses to leverage network effects. So inclusion means considering the full spectrum of usage—not just the state of the science of high-end users, but the slow tech and sporadic power outages of users in remote regions of the world’s poorest countries.

  Implications for the Blockchain Economy: Later in the book, we tackle the issue of the prosperity paradox—how the first era of the Internet benefited many, but overall prosperity in the Western world for most people is no longer improving. The foundation for prosperity is inclusion, and blockchains can help. Let’s be clear that inclusion has multiple dimensions. It means an end to social, economic, and racial hegemony, an end to discrimination based on health, gender, sexual identification, or sexual preference. It means ending barriers to access because of where a person lives, whether a person spent a night in jail, or how a person voted, but also an end to glass ceilings, and good ol’ boys’ clubs of countless varieties.

  DESIGNING THE FUTURE

  Our conversation with Ann Cavoukian inspired us to follow up on Germany’s “Never again” promise. We came across the words of German federal president Joachim Gauck on the Day of Remembrance of the Victims of National Socialism, victims of Hitler’s regime. “Our moral obligations cannot be fulfilled solely at the level of remembrance. There also exists within us a deep and abiding certainty that remembrance bestows a mission on us. That mission tells us to protect and preserve humanity. It tells us to protect and preserve the rights of every human being.”54 Was he alluding to genocide in Syria, Iraq, Darfur, Srebrenica, Rwanda, and Cambodia, after the German people had vowed, “Never again”?

  We believe that blockchain technology could be an important tool for protecting and preserving humanity and the rights of every human being, a means of communicating the truth, distributing prosperity, and—as the network rejects the fraudulent transactions—of rejecting those early cancerous cells from a society that can grow into the unthinkable.

  Admittedly, a bold statement. Read on and judge for yourself.

  From a more parochial and practical perspective, these seven principles can serve as a guide to designing the next generation of high-performance and innovative companies, organizations, and institutions. If we design for integrity, power, value, privacy, security, rights, and inclusion, then we will be redesigning our economy and social institutions to be worthy of trust. We now turn our attention to how this could roll out and what you should consider doing.

  PART II

  TRANSFORMATIONS

  CHAPTER 3

  REINVENTING FINANCIAL SERVICES

  The global financial system moves trillions of dollars daily, serves billions of people, and supports a global economy worth more than $100 trillion.1 It’s the world’s most powerful industry, the foundation of global capitalism, and its leaders are known as the Masters of the Universe. Closer up, it’s a Rube Goldberg contraption of uneven developments and bizarre contradictions. First, the machine hasn’t had an upgrade in a while. New technology has been welded onto aging infrastructure helter-skelter. Consider the bank offering Internet banking but still issuing paper checks and running mainframe computers from the 1970s. When one of its customers taps her credit card on a state-of-the-art card reader to buy a Starbucks grande latte, her money passes through no fewer than five different intermediaries before reaching Starbucks’s bank account. The transaction takes seconds to clear but days to settle.

  Then there are the large multinationals like Apple or GE that have to maintain hundreds of bank accounts in local currencies around the world just to facilitate their operations.2 When such a corporation needs to move money between two subsidiaries in two different countries, the manager of one subsidiary sends a bank wire from his operation’s bank account to the other subsidiary’s bank account. These transfers are needlessly complicated and take days, sometimes weeks to settle. During that time, neither subsidiary can use the money to fund operations or investment, but the intermediaries can earn interest on the float. “The advent of technology essentially took paper-based processes and turned them into semiautomated, semielectronic processes but the logic was still paper based,” said Vikram Pandit, former CEO of Citigroup.3

  Around every corner, another bizarre paradox: Traders buy and sell securities on the world’s stock exchanges in nanoseconds; their trades clear instantly but take three full days to settle. Local governments use no fewer than ten different agents—advisers, lawyers, insurers, bankers, and more—to facilitate the issuance of a municipal bond.4 A day laborer in Los Angeles cashes his paycheck at a money mart for a 4 percent fee, and then walks his fistful of dollars over to a convenience store to wire it home to his family in Guatemala, where he gets dinged again on flat fees, exchange rates, and other hidden costs. Once his family has divvied up the sum among its many members, nobody has enough to open a bank account or get credit. They are among the 2.2 billion people who live on less than two dollars a day.5 The payments they need to make are tiny, too small for conventional payment networks such as debit and credit cards, where minimum fees make so-called micropayments impossible. Banks simply don’t view serving these people as a “profitable proposition,” according to a recent Harvard Business School study.6 And so the money machine isn’t truly global in scale and scope.

  Monetary policy makers and financial regulators often find themselves lacking all the facts, thanks to the planned opacity of many large financial operations and the compartmentalization of oversight. The global financial crisis of 2008 was a case in point. Excess leverage, a lack of transparency, and a sense of complacency driven by skewed incentives prevented anyone from identifying the problem until it was nearly too late. “How can you have anything work, from the police force to a monetary system, if you don’t have numbers and locations?” pondered Hernando de Soto.7 Regulators are still trying to manage this machine with rules devised for the industrial age. In New York State, money transmission laws date back to the Civil War when the primary means of moving money around was horse and buggy.

  It’s Franken-finance, full of absurd contradictions, incongruities, hot pipes, and pressure pots. Why, for example, does Western Union need 500,000 points of sale around the world, when more than half the world’s population has a smart phone?8 Erik Voorhees, an early bitcoin pioneer and outspoken critic of the banking system, told us, “It is faster to mail an anvil to China than it is to send money through the banking system to China. That’s crazy! Money is already digital, it’s not like they’re shipping pallets of cash when you do a wire!”9

  Why is it so inefficient? According to Paul David, the economist who coined the term productivity paradox, laying new technologies over existing infrastructure is “not unusual during historical transitions from one technological paradigm to the next.”10 For example, manufacturers needed forty years to embrace commercial electrification over steam power, and often the two worked side by side before manufacturers finally switched over for good. During that period of retrofitting, productivity actually decreased. In the financial system, however, the problem is compounded because there has been no clean transition from one technology to the next; there are multiple legacy technologies, some hundreds of years old, never quite living up to their full potential.

  Why? In part, because finance is a monopoly business. In his assessment of the financial crisis, Nobel laureate Joseph Stiglitz wrote that banks “were doing everything they could to increase transaction costs in every way possible.” He argued that, even at the retail level, payments for basic goods and services “should cost a fraction of a penny.” “Yet how much do they charge?” he wondered. “One, two, or three percent of the value of what is sold or more. Capital and sheer scale, combined with a regulatory and social license to operate allows banks to extract as much as they can, in country after country, especially in the United States, making billions of dollars of profits.”11 Historically, the opportun
ity for large centralized intermediaries has been enormous. Not only traditional banks (e.g., Bank of America), but also charge card companies (Visa), investment banks (Goldman Sachs), stock exchanges (NYSE), clearinghouses (CME), wire/remittance services (Western Union), insurers (Lloyd’s), securities law firms (Skadden, Arps), central banks (Federal Reserve), asset managers (BlackRock), accountancies (Deloitte), consultancies (Accenture), and commodities traders (Vitol Group) make up this expansive leviathan. The gears of the financial system—powerful intermediaries that consolidate capital and influence and often impose monopoly economics—make the system work, but also slow it down, add cost, and generate outsized benefits for themselves. Because of their monopoly position, many incumbents have no incentive to improve products, increase efficiency, improve the consumer experience, or appeal to the next generation.

  A NEW LOOK FOR THE WORLD’S SECOND-OLDEST PROFESSION

  The days of Franken-finance are numbered as blockchain technology promises to make the next decade one of great upheaval and dislocation but also immense opportunity for those who seize it. The global financial services industry today is fraught with problems: It is antiquated, built on decades-old technology that is at odds with our rapidly advancing digital world, making it oftentimes slow and unreliable. It is exclusive, leaving billions of people with no access to basic financial tools. It is centralized, exposing it to data breaches, other attacks, or outright failure. And it is monopolistic, reinforcing the status quo and stifling innovation. Blockchain promises to solve these problems and many more as innovators and entrepreneurs devise new ways to create value on this powerful platform.