Investors and reporters have been throwing around the term “Blockchain” for some time and for the average person, what it means simply flies over most of their heads.
To analogize, Blockchain serves as the freeway so that digital currencies like Bitcoin (I prefer that term to cryptocurrencies) can transact locally or globally. Think of a blockchain as a bicycle chain and on each link, you will find a goof-proof time and date stamp that records each transaction. Connect the links together and Blockchain has the potential to become a game changer when it comes to how secure transactions can take place anywhere. As Blockchain efforts continue to mature and improvements are taken more seriously by major global financial institutions new possibilities of transacting may open up globally.
Digital currencies, like Bitcoin and other operators on the Blockchain, have created a great deal of buzz surrounding its potential. They have continued to grow in their number of annual transactions and today there are nearly 1,000 digital currencies out there in the marketplace. In certain markets, Blockchain with Bitcoin--or any of the other digital currencies out there-- may serve as a proxy currency whenever a nation undergoes a period of hyperinflation or any other economic instability. Its growth in certain countries in Central and South America seems to confirm that assertion as Bitcoin activity is up YOY by over 332%. As people within these countries continue to migrate to mobile, these behaviors can only increase upward.
The challenge is to separate the hype from the reality. The honest truth is even with its spike in growth, transactions processed via Blockchain are infinitesimally small; they still remain a niche within a niche. The technology seems to be in place but there is a great deal of user reticence from the average spender. Many within the industry of payments consider Blockchain foundational technology for a variety of transactions. In certain respects, it is like talking about online banking in the 1960s, when the idea of an internet bounced around the minds of a small collection of futurists.
Will Blockchain driven transactions find its own niche for online purchases? Within the United States, we are used to paying for stuff with either cash, credit, debit or an alternative payment platform using a traditional currency, like PayPal.
Americans have built-in biases about how we pay and there is a stickiness to our behavior. For example, PayPal built its phenomenal success as an online payment vehicle but customer adoption at brick-and-mortar national chains like Home Depot remains small.
Globally, people may buy the same things in Tokyo, Paris, and Omaha, but they might pay for it differently with a variety of local payments including a Konbini in Japan or a direct debit in France. Hardened biases of how we pay for stuff can act as a strong barrier to entry. With that in mind, how Blockchain is leveraged within online commerce will probably surprise us in 20 years as we sit here in the safe confines of 2017.
For Blockchain based digital currencies, greater adoption comes down to regulation and oversight. The basic allures with most digital currencies was the ability to transact anonymously, without the prying eyes of any governmental agencies. However, we live in a post 9.11 world and to even open an American checking account requires authentication, something that digital currencies have long resisted.
The stories of how Bitcoin have intertwined with the Dark Web to create unacceptable environments are best underscored with Ross Ulbricht and his criminal misadventures with Silk Road. They should give one pause. Ulbricht caught the interest of the FBI as he allegedly built Silk Road into the Amazon of illegal goods and he will spend the rest of his life in jail after being convicted for a variety of crimes, among them attempted murder. Supporters of Blockchain and the rise of digital currencies need to realize that it will have to embrace or at least mimic the oversight and regulatory framework found in almost all national currencies or else it will be relegated to the shadows of illicit commerce.
However, there might be a variety of arenas where traditional currencies and Blockchain can optimize the traditional payments process. There might be opportunities that larger international currency traders and multinational banks might find useful. Applications within the basic Blockchain platform might make it far more efficient to move foreign currencies into US Dollars, Euros, or GBP from native currencies, taking some of the fat out of the international exchange process. It might also be a better way to move funds transnationally and disrupt the current SWIFT infrastructure.
However, the final question rests on Blockchain’s overall security. Everybody raves about the Blockchain’s security and transparency—until it’s not.
When somebody tells me that a platform is secure by design, it becomes an invitation for some young hacker to find a breach; it’s like waving a red flag in front of a bull. You can almost set an egg-timer until somebody figures out how to take advantage of poorly written code and money can disappear like a thief in the night. For Blockchain to be the rails that operates digital currencies, it has to be impenetrable to hackers and maintaining that edge will be its greatest challenge.
Blockchain could provide the foundation for a whole new approach to how we someday pay for stuff, but the role in the future will be decided by those who build the platform in the present.