These days, it’s almost impossible to pick up a newspaper or turn on the TV without being told, in gory detail, about the dark side of the Bitcoin story. The cryptocurrency, designed as a foil to the financial mainstream, has been sucked into its vortex, becoming the very monster that its libertarian creator or creators mistrusted. After a brief life of crime on the Dark Web, it has become the most volatile mainstream investment ever, which can only benefit a tiny handful of smart players and beggar the rest.
It has just hit the derivatives market with futures on the Chicago bourses, precisely when analysts and merchant bankers are energetically disparaging it. In the second half of December 2017, it went through its first bear phase, another sign of mainstream maturity. And in India, the taxman is about to unleash his myrmidons on almost half a million high net worth individuals, for avoidance of capital gains tax during last year’s bull run on Bitcoin.
With so much uncertainty, the future of cryptocurrencies appears to be dim. And yet, on December 21, the European Central Bank advertised for a Blockchain specialist, to develop solutions for banking, payments and financial markets.
While Bitcoin is raising storm warnings, the technology underlying it is being embraced. The Blockchain on which it rests, a distributed digital ledger, could become the backbone of the global financial system and radically alter the manner in which transactions are made and recorded. It could take decades to infiltrate legacy systems, but it has the potential to drastically reduce the roles of middlemen, middleware and central nodes which authenticate and reconcile payments. Banks, exchanges, escrows and auditors would be rendered redundant by a few gigabytes of shared data. The law of torts, which provides lawyers and courts with most of their business, would cease to be rewarding, because reconciliation and authentication are built into the Blockchain. The Blockchain itself is the contract, paperless and deathless, with no need for a notary public under a tree outside the courthouse to tenuously vouch for its authenticity.
The extension of Bitcoin’s technology beyond currency is termed Blockchain 2.0. It’s structurally the same — a set of blocks of data, each recording a transaction or event, with each new block connected to prior blocks by a cryptographic hash to validate that link in the chain. The chain is a distributed database which every party can access and verify independently, without third party intervention. It lives on a peer-to-peer system (shades of Bittorrent) with no central server, implying that every user owns the data. And it records every transaction or event in chronological order, creating a chain of data which every party can see but no single party can falsify.
What would it take to falsify? Let us say that you took a bank loan and jiggered the terms. It’s easy to do on paper, and therefore, it is frequently done — and the two versions of the loan contract are taken to a court to increase the judge’s workload for some years, distracting him or her from weightier issues like rape, pillage and murder. But if the contract were recorded on a Blockchain, merely falsifying the relevant block would be pointless. Editing would compromise the cryptographic link with the previous block, and put up a red flag. To make the fraud fly, the forger would have to falsify all previous records on the chain, which only the parties involved could do. In the matter of a loan, the forger would require the collusion of every borrower in that category back to the time when the chain was created, and the collusion of the bank itself. It would be a doomed project.
What can a Blockchain encode? Data in any format, including text. That was established on the first block ever written. In 2009, the unidentified person or persons known as Satoshi Nakamoto, who originated Bitcoin, computed the “genesis block” of the first chain, which was dated by embedding a news headline: “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.” It was a political statement, for Bitcoin was an act of rebellion against fiat currencies that politicians, central banks and entities “too big to fail” love to tinker with. But by the way, it established that the Blockchain could carry text.
The fact took a while to sink in, but soon it was clear that the contract for buying a house (text), its floor plan (image in MIME encoding, the text format used to send pictures in email, which is a plain text communication) and its municipal tax records (by a text hyperlink) could be coded on a Blockchain. In October last year, an apartment was sold on the Blockchain. Michael Arrington, founder of the technology news provider TechCrunch, bought a $ 60,000 flat in Kiev, Ukraine, sight unseen, the entire transaction being done through the Blockchain of Bitcoin’s competitor, Ethereum. The ease of conveyancing and the transparency and verifiability of such transactions, with or without cryptocurrencies, will revolutionise the international property market.
Historically, property has been regarded as a dodgy business, just this side of the small arms trade in terms of transparency and respectability. It is a reputation hard to live down, and the industry would be a clear beneficiary of a shift to the Blockchain. But fairly conservative businesses and even governments are looking at the Blockchain with a sense of anticipation, as a way of bringing contracts, relationships and transfers up to speed with the digital age. Bank of America has begun operations in Bitcoin and in India, ICICI Bank, Axis Bank and Kotak Mahindra Bank are testing the waters with pilot Blockchains for international remittances and corporate customers. A cross-border remittance which now takes days to reconcile and be reflected in a statement, could be settled in a few minutes. Meanwhile, the famously conservative State Bank of India is moving its KYC processes to a Blockchain. Other administrative functions, which now cause its customers considerable frustration and nail-biting finishes, may be expected to follow.
Supply chains and inventories, which the Internet of Things will report in real time, could also authenticate the provenance of products through Blockchains. Consumers in politically evolved markets do not wish to support conflict or modern slavery, and their specific interest can be served. If premium diamond retailers only dealt in stones recorded on the Blockchain from the moment they were mined, the trade in blood diamonds would dwindle. Distributed ledger-based product tracking would also reduce the incidence of illegal labour in industries notorious for it, such as carpet-making and fisheries.
These are recording functions, entirely expected, since the Blockchain is essentially a ledger. But more possibilities open up because it is also a data structure. It is programmable and can interface directly with applications. Consider an analogy from derivatives trading, where algorithms are becoming serious players. Just as an option signed by an algorithm is triggered at the strike price, instruments on the Blockchain can be programmed to exercise put and call options, pay out dividends when certain conditions are met, or pay taxes. Scaling down, Blockchain components can also pay the rent on that apartment in Kiev, if Arrington were to let it out, without the need for a separate bank instruction, or rearrange portfolios at the command of the investor’s algorithms, cutting out the need for continuous human monitoring.
But let us scale up instead. Our relationships are not all financial. In fact, financials are possibly the least significant of relationships. Value is transferred and shared by other metrics, political, social, even interpersonal. Systems which encode such relationships on blockchains are not beyond belief. Nor are algorithms which trigger warnings or initiate action when tolerances priorly agreed upon are breached.
In politics, it would be interesting to see what such a system would do when the parameters of democracy are violated, and fascism threatens to destroy institutions (the metrics and signatures are widely known, by bitter experience). In the age of artificial intelligence, would the system itself try to assert anti-democratic dominance? It’s an intriguing thought, but in the realm of personal relations, the answer is clear. If a marriage were recorded on a Blockchain along with the limits of tolerance, and if an algorithm were sufficiently empowered by the couple, the machine would annul the contract at the critical moment and the divorce lawyer would be out of a job. It’s just an intriguing idea today, but it could be a commonplace reality in tomorrow’s world.