The blockchain naysayers are coming out in full force. “A solution looking for a problem,” “Too complicated,” “A ‘Trojan Horse’ sent by Radical Libertarians to Undermine the Global Financial System.” And those complaints are from just a single Forbes article.
As someone who spent the better part of a year creating and launching an application for blockchain in our private equity business, I respectfully disagree. But this increased skepticism comes as no surprise, given blockchain’s growing importance. So it’s a useful exercise to examine the negatives, if only to call out hyperbole and more realistically assess the challenges with – and excitement around – blockchain.
One of the more eloquent arguments about the shortcomings of blockchain was actually found in an overall largely positive report by Jeremiah Owyang and Jaimy Szymanski. (A hat tip to this Inc. article by John Koetsier which referenced the report.) To show my fundamental optimism around the technology, I would like to discuss each of the six problems they identified and why I do not think they are immoveable obstacles.
Blockchain verification is slow. The first major application of the blockchain was bitcoin. It is from this community that we have heard scattered complaints about the time it takes to verify a transaction. This is definitely an issue, but one that can be overcome. Many blockchain applications are quite niche and by working with smaller data sets, we are already seeing reduced lag time. The bitcoin community is also in the middle of a debate around upgrading technology that would have a positive effect on verification time.
Laws and regulations are even slower. Bitcoin and blockchain are no longer foreign words in the halls of power. On Capitol Hill, Congress formed a bi-partisan Blockchain Caucus tasked with working to create public policy for blockchain-based technologies. Their work parallels a number of initiatives across regulatory bodies and subgroups designed to give sensitive rules and frameworks to this area. Better communication between legislative and industry bodies should lead to sensible government policy that develops with technology.
There are few proofs of concept yet. While this may have been a valid argument a year ago, I believe we’ve achieved escape velocity. The list of successful deployments is getting longer every day. An initiative between IBM and DTCC in the fall generated hundreds of headlines. Major banks are working diligently on concepts: some have been announced to the public while others are being more discreetly shared in beta with clients and industry partners.
Many are working on blockchain technology in secret, not sharing their results. Certainly, firms will develop proprietary technology in pursuit of a competitive advantage. But the longer-term potential of blockchain will be realized when industries develop multiple systems that interoperate in an efficient, secure way. Even though some end-stage applications cannot be fully public, for security reasons, corporations have an incentive to work together on most of the process. Collaboration is inevitable as more companies learn the value of this technology.
There's no Microsoft of the industry yet, setting standards. Any new technology follows a development arc from wide-open competition and innovation to increased standardization. Microsoft set the industry standard for enterprise software and over time even Apple created Microsoft applications for its machines. My company is a member of R3, a consortium that works with more than 70 financial institutions, working together to implement blockchain technology. Other industries have similar initiatives, and large companies like IBM are active in the space, encouraging innovation and collaboration. Think of the “format” battles of years past – VHS vs. Betamax or BluRay vs. HD-DVD – one standard emerged from a period of competition.
The publicity of blockchain can be a problem for some. We are moving beyond the novelty stage of blockchain towards its eventual emergence as a fundamental building block. In the 1990s, “internet” businesses were a craze and were frequently lumped together in stock portfolios and think pieces. Now everyone is online. Business may not be digital, but they use the internet to deliver their products and everyone understands the utility of the underlying technology to disrupt communication and commerce. The blockchain is much the same.
Reading this list of “shortcomings” fills me with optimism. We can acknowledge that there are issues to be resolved, but none of these challenges is unsolvable. I am confident that the decade to come will see continued transformation in finance and beyond thanks to the distributed ledger.