On Banks and Blockchains


Since early last year the number of banking institutions declaring an interest, investment and desire to use blockchain technology has exploded. One of the most prominent is R3, who recently encouraged the flouncing fairy Mike Hearn to declare Bitcoin dead in the water, assuming that the thousands of people involved in the industry and wider Bitcoin community would pay heed, roll over and accept that their beloved technology was already obsolete. R3 is a consortium of (at time of writing) 42 banks from around the world. They're running scared.

One of the things that made Bitcoin so popular so quickly was that it solved many dillemas previously present in transacting across the internet and demonstrated that value could be exchanged across great distance without the need for banks to charge you an eye watering fee for the right to move your funds. Don't get me wrong, banks were a useful and essential invention that solved a problem, until they became the problem.

So, why are banks interested in a technology which makes them irrelevent? Well, it's because their livlihoods depend on it not working, so they're seeking to discredit the technology whilst admitting, publicly that it is useful and thereby validating it even as they try and fight it.

So is blockchain good for banks? Well, it could help avoid some of the costly IT failures, it could help them reduce fraud, it could help them reduce the number of staff needed to clear transactions, so at first glance you might be forgiven for thinking they have a legitimate interest. But lets dig a little deeper.

The blockchain relies on mutually distrusting people verifying and updating a constantly growing database. A private blockchain, supported by the banking corporations will still be wide open to fraud and abuse, as they collude in a small cartel and can therefore edit and change the records at any time they choose.

The Bitcoin blockchain can't be changed at the whims of a small cartel. A majority of node owners would have to agree to collaborate with miners (who are also node operators) to make changes to the blockchain, but most node owners are strangers to one another, do not trust each other and have a sane reason to avoid collaborating to change the blockchain. If it were to happen wider confidence in Bitcoin would collapse, the market price would tank and their efforts would have been self defeating. It's an inbuilt defence mechanism based on mutual distrust, which has worked for years now and continues to work. The more people who run nodes the stronger the network.

This same mechanism also makes changing major parts of the core code which underpin Bitcoin extremely difficult, which, whilst it may frustrate people, demonstrates that no major changes to the protocol will ever be simply swept throuh without a vast majority being convinced of the benefits of doing so.

In contrast a bank led blockchain could increase its limited number of coins, or restrict them, at the whim of a few people who currently hold an unfortunate level of influence over the world economy. It'd just mean a continuation of the same failed policies which keep leading us into ever deeper debt and allowing banks and governments to asset strip their populations through inflation of the money supply.

Even when it comes to record keeping and other uses for blockchain tech the bitcoin blockchain is more valuable, for the same reasons outlined above.

So, over the next 12 months, expect to see more attacks on Bitcoin, more slurs, more claims of funding terrorism, more easily falsifiable nonense as they became more and more desperate to derail the voluntary interactions of hundreds of thousands of people from around the globe. We might not be able to beat them and they certainly wont beat us, so I'd expect to reach some form of stalemate with mutual distrustful competetive parties on each side vying for business.

My bet is that people will move to sound money backed by free market principles and slowly begin to abandon fiat money, though that will depend on education and simplification of use. Either way, it's going to be a fascinating year ahead.