Dalley Joseph, FT reader: What is blockchain technology and how will it shape the financial industry in the next decade?
Simon Taylor: If you ask 10 different people what blockchain is, you get 10 different answers. I view blockchain as a collection of ideas and technology that can help solve problems of provenance and state (where does something come from and do we agree it is true?). Blockchain is not perfect, it has a long way to come. But if you want contract clauses to execute automatically and to know when they execute and who agreed, blockchain is a set of technology ideas you should look at. Blockchain is not bitcoin, which is funny money from the internet. Most regulators would like bitcoin to crawl back into the hole it came from.
Izabella Kaminska: There is no proof blockchain has reduced costs at scale so it is all hypothetical at this stage. In financial services, blockchain does nothing but circumvent the rules we have imposed on banks to keep them honest. There are real moral hazards as a result, akin to those that plagued Libor. Meanwhile, the taxonomy created around blockchain is out of control. The term has lost all meaning. It is a propaganda tool, most of all — a marketing gimmick to imply innovation.
ST: There is utility behind the marketing hype. Any sector that wants digital certainty can benefit if it looks past the hype.
IK: I think this is a great way for banks to appear innovative and distance themselves from their old reputations. They are trying to be hip and cool.
ST: It is not just hype — Barclays did a live transaction this month.
IK: These trials are a fiction. They are all operating in simulations or sandboxes. It is like clinical trials of pharmaceuticals. Until you test them on actual humans with something at stake, it is a meaningless trial. Call me when Barclays has transferred or committed $100bn of value to the blockchain at its own risk.
ST: Those trials will grow. I bet by 2019 we will see real numbers. Doing big numbers takes time. Taking time does not mean it is insignificant.
John 9973, FT commenter: The big problem with bitcoin as a currency is that there is no mechanism for lending it.
ST: There are some, but they are not profitable because bitcoin has no concept of debt. This is the point if you are a bitcoin fan, or pointless if you are in the rest of the developed world.
IK: That is not true. We see bitcoin loans popping up everywhere. In fact, the Bitfinex drama — where the exchange was hacked — showed the degree to which bitcoins were being fractionally reserved.
BitcoinByte, FT commenter: Should a currency be decentralised or can a state issue it?
ST: That depends on your world view. Both have benefits, both have drawbacks. My view is that bitcoin is a great option for the long tail of currencies that suffer from hyperinflation but that it will not displace major currencies any time soon.
IK: I partially agree with Simon on that.
ST: I am not one to answer what the right incentives for a design of a system should be, but I do know banks and the economy as a whole suffer from issues in finance, such as not being able to prove the date and time something happened. Solving that has merit. Yes, there is scope for it to be abused, but also for it to be used well. Much like the internet, technology is neither intrinsically good or bad, it just is.
IK: I do not think it will help the inflationary currencies all that much. The key thing that will help them is the ability to create prosperity, which is constrained by other more egregious social problems. Many countries already do not use domestic currencies because they do not trust them. That does not solve their socio-economic ills.
Much like the internet, technology is neither intrinsically good or bad, it just is
Simon Taylor
ST: I like the idea of a censorship-resistant record such as bitcoin for something like land registry in emerging markets. If I can prove the legal title has not been fraudulently changed, that is a good step. It does not end fraud or crime, but it makes some types of it harder.
IK: The problem with that view is that finance is subjective and social. And you cannot strip that out of the system by making it wishfully comply with some sort of idealised protocol. We can prove title already by registering it with a trusted notary or foreign accountant.
Carola Hoyos: What will happen to accountants working at the Big Four — Deloitte, PwC, EY and KPMG — and beyond if we move into a world of distributed ledger accounting, blockchain and bitcoin-like cryptocurrencies?
ST: I think the Big Four’s tools will change, but practices will be very similar.
Blockchain does nothing but circumvent the rules we have imposed on banks to keep them honest
Izabella Kaminska
IK: My view is that bitcoin is basically a single entry system. It takes us to the world before Luca Pacioli, the 15th century mathematician who is widely seen as the father of accounting. You can track one side of the ledger perfectly, but it gives you no control over the other side. We do not know if there is a delay in the delivery. Also, the real delivery of goods takes time. If I pay on eBay using bitcoin for a pair of shoes and then do not receive them, eBay takes the risk. It has the ability to withhold funds until the shoes arrive. If I was to do the same trade on the open internet using bitcoin, it would be a caveat emptor nightmare for everyone, which would paralyse trade.
ST: They will use a new tool to ensure a transaction happened and they can show their working in maths as well as with independence, or in some cases a stamp. In a world where we still frank letters for international trade, and that postage alone costs $40bn, better use of digital signatures and proof of tamper resistance is a good thing.
IK: My point is that distributed ledger accounting is a nothing new under the sun situation, and that a lot of these “solutions” are very similar to those we have always come up with to regulate incentive and game theory problems.
ST: From a game theory perspective, little is new … what is new is the tool we use to implement a given solution.
