Blockchain Providers Remain Divided on Approach to Financial Firms

The schism between the blockchain providers and cryptocurrency users that want to in some way overturn the current financial system and those that want to work within it, was highlighted by comments made at the Swell conference hosted by Ripple this week in Toronto. 

On the opening day of the event, former US Federal Reserve chair, Ben Bernanke, made some fairly bearish comments regarding the future of bitcoin. He essentially said that the need for authorities to prevent criminal transactions occurring represents an existential threat to this particular cryptocurrency.

You can read the full Profit & Loss coverage of Bernanke’s speech here, but the key takeaway regarding bitcoin was that he believes it is “working against, rather than with, the regulators”.

This was in stark contrast to the messaging coming from the Ripple team, who consistently emphasised their desire to work with both existing financial institutions and regulators. Consider the following comments from Stefan Thomas, the CTO of Ripple, who was also active very early on in the bitcoin community: 

“I remember getting very frustrated going from bitcoin to bitcoin conference, year after year, and there would be a keynote speaker talking about how this year bitcoin was going to go mainstream and it just never happened and it felt like this endless case of Ground Hog Day.

“I started to go back to my apartment and think about what does it really take to take something mainstream? And what does it mean for a technology to become widely adopted? I think the thing I realised was that it was interoperability with the existing systems. You can’t build new things in isolation, you can’t sit in an ivory tower and imagine a perfect world and just start laying bricks for that, because you’re not going to enable people to come to you and join your vision. 

“What really excited me about joining Ripple was working together with the incumbent financial industry and building something together and making the technology acceptable to everyone,” he said.

During the same session, a question was posed to the various providers of blockchains and related services on the panel about who they consider the “competition” to be. The moderator was probably expecting Thomas to take a swing at rival payment network, Swift, but instead Vitalek Buterin, the founder of ethereum, drew one of the biggest laughs/cheers from the assembled audience when he pulled out a bank note and a credit card.

Buterin quickly softened his tone, but it seemed clear that he didn’t necessarily share Thomas’ “excitement” about working with existing financial systems and incumbent firms. 

“It was intended as half joking, but I think the point is that basically we are building the new financial world and parts of the new Internet, and the competition is what came before it, which is basically the traditional banking system. I will add the clarification that I think it’s more about competing with ideas rather than competing with specific people, so if some banks end up adopting this technology and make systems which serve people much better, then that’s great too,” he said.

Indeed, Buterin tweeted about a week before the conference that, “The main niche for decentralised exchange is NOT satisfying the needs of “whales” and professional traders”. 

This suggests that perhaps he prefers a more retail focus for blockchain technology and associated cryptocurrencies (which, interestingly enough, another Ripple speaker argued was, to say the least, problematic). 

It was noted that Buterin has been advising certain central banks that are interested in cryptocurrencies, at which point he dismissively noted that if a central bank does launch some kind of digital currency in the next few years, it “will basically be a server with a bunch of marketing buzzwords that make it look like a blockchain”.

The moderator quite rightly observed that it was slightly curious that central banks would be consulting with someone who would point to fiat currencies and existing banking systems as their competition. The response from Buterin was that his “statement” was “first and foremost about the technology and secondly, and more specifically, about the technology in its capacity as a platform on top of which all these different ideas can get tried out at low cost and we can see what kinds of ideas make sense”. 

Once again, there was a big contrast when Thomas talked about Ripple’s work with the Bank of England (BoE), which it conducted a proof of concept with. Although he stressed that although blockchain can have a lot of benefits in certain situations, he pushed back on the idea that it is always going to be the solution to various challenges in the financial services industry.

“The point of that study wasn’t to say that banks should switch to blockchain-issued tokens, but rather to say they should think about how their system could interoperate with other systems. I go back to the same point, use blockchain when it’s appropriate, but there are situations where other solutions are more appropriate – when you care more about speed, efficiency, security – whatever the case may be, choose the right solution, just make sure it’s interoperable,” he said.

The idea of interoperability was also addressed by Tom Jessop, president of Chain, who is a banker by background, having joined Chain earlier this year from Goldman Sachs, where he was managing director, technology business development and CFO of the bank’s technology division.

Even though the panelists on this particular discussion were all, in theory, working for competing blockchain-focused organisations, the general atmosphere was very friendly. However, Jessop argued that, for all the talk about ensuring that different blockchain systems are interoperable, experience shows that the competitive landscape is unlikely to be conducive to this. 

“Interoperability is an interesting one for me. I like the idea that we could create this new financial fabric where networks can talk to one another, and have all the benefits of that. Having said that, there’s very little of that in the current financial services industry, creating these industrial network effect businesses is difficult. If you think about NYSE or Nasdaq or even Swift, it’s hand-to-hand combat over months and years to build the network,” he said. 

Jessop added: “Ultimately, the interoperability will be driven by the customers of those networks rather than there being a change in the competitive landscape where people who have invested a lot of money in these networks suddenly said: ‘Wouldn’t it be great if we connected together?’.”

Part of this disparity is simply due to the different audiences that each company mentioned is targeting. Ripple and Chain provide services and software to existing financial institutions within a closed network, whereas ethereum exists as a broader platform that individuals or non-financial institutions can build on. 

And yet the blockchain-based solutions that each has built is in turn symptomatic of the approach and attitudes of the individuals behind them. All of which will make it interesting to see how major financial institutions approach the blockchains that were, in part, founded upon a rejecting of the existing financial services ecosystem.

For example, LedgerX received approval from the US Commodity Futures Trading Commission (CFTC) earlier this year to offer trading and clearing of bitcoin options, while the CBOE is applying for regulatory approval to launch bitcoin futures. Meanwhile, Profit & Loss previously reported that JP Morgan is building private blockchains by using the infrastructure of the ethereum public chain.

Both of these are examples of how more mainstream financial services firms are trying to adopt technologies that were, in part, developed more or less in opposition to these firms.

 

galen@profit-loss.com
@Galen_Stops
@Profit_and_Loss

Galen Stops

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