In a lot of ways, 2013 was the year of Bitcoin. It saw public attention paid to the crypto-currency skyrocket - along with the value. News stories introducing the general public to Bitcoin popped up everywhere, and economists the world over debated the merits of an entirely decentralized currency.
Of course, this was followed by a dramatic fall from grace the following year, including the admission that bitcoin exchange Mt. Gox had lost nearly three quarters of a million bitcoins, valued at more than $400 million. Prices that had peaked near $1,100 began a steady retreat that, by the end of 2014, had them trading at just over $200.
However, if your assumption that this was a sign that bitcoin in its entirety was a silly, intellectual exercise, ultimately used to defraud people would be missing some important elements of this story.
Bitcoin itself may or may not ever catch on as a global currency, and you can count me among the skeptics. After all, a currency with no central banks, no ability to increase supply, and a value that could be incredibly easy for bad actors to manipulate is never really going to catch on. At least, I hope it doesn’t.
However, failing to separate bitcoin from the genuinely interesting ideas related to the collective nature of the Internet to finance that bitcoin has sparked could be a critical error. Blockchains, like the one used to track every bitcoin transaction, are finding uses well beyond the realm of cryptocurrency.
So...What is a Blockchain?
A blockchain is essentially a way of transparently recording transactions in a ledger that has open, public access and no centralized controller. Security and compliance is ensured by using multiple nodes that each store a partial or complete record of transactions, utilizing shared data to create a single, consistent log of transactions with precise time stamps. By constantly being shared across thousands of different locations, inconsistent data is identified and resolved before it can be built upon.
It’s the permissionless, collective nature of the blockchain that ultimately makes it so safe. The operator of a single node may attempt to perpetrate fraud, but without other nodes to confirm the transaction, it won’t ultimately make its way into the official record. Bad actors may be able to corrupt or alter part of the blockchain, but they can never change all of it.
It’s a complete reversal of traditional approaches to security. A single centralized ledger, no matter how closely guarded, is a location that can be hacked, altered, destroyed, or otherwise manipulated. Blockchain is simply a way of saying that without a master document, malfeasance is impossible. Instead of fighting to keep out hackers, it creates something that is, by its very nature, unhackable.
And it’s worked. For all of the issues with bitcoin, and there are many, the blockchain has proven itself. Despite existing only in the virtual space, bitcoin has maintained a clear and meticulous record of transactions for its entire existence. Despite existing in a realm filled with criminals and hackers who would have clear incentives to attempt to game the system to create counterfeit bitcoin or steal from others, the blockchain has created enough stability that a shockingly large number of people have been willing to buy in.
There are myriad reasons not to trust bitcoin, but the integrity of the blockchain doesn’t appear to be one of them.
Blockchain Supported by the Big Guys
The first inkling of how blockchains can be separated from bitcoin and used to permanently alter the nature of financial transaction hit in 2014 when deals website Overstock.com (OSTK) announced its intent to use the bitcoin blockchain when issuing stock. It mirrors an early decision to issue corporate bonds in a similar fashion.
However, while corporate bonds don’t garner the same sort of regulatory scrutiny as stock, Overstock made news just a couple of weeks ago when it received the official go-ahead from the Securities and Exchange Commission.
The initial S-3 filing by Overstock simply approves the company utilizing a blockchain in order to issue stock directly without needing to involve exchanges. However, Overstock, through subsidiary t0, intends to offer the service to other companies for tracing their stock transactions.
Will Blockchain Transform the Industry?
Or course, what really has people in the industry salivating is the way this basic idea, a method for essentially handing a large chunk of accounting responsibilities over to the wisdom of the crowd, could revolutionize the very nature of capital markets.
A poll conducted by EuroMoney of financial institutions found that more than half its respondents felt that blockchain would “transform banking fundamentally” with only an eighth answering “it’s mostly hype and won’t change much at all.”
At the end of the day, for all of those economists who stepped forward to say that bitcoin was a ridiculous idea, there seems to be a surprisingly large segment of institutionalists who are more than ready to acknowledge that blockchain has a lot of potential. A group of nine of the world’s largest banks have formed a partnership called R3CEV LLC to explore the potential of creating new blockchains that might track financial transactions, and Nasdaq and Goldman Sachs (GS) have each built their own blockchain-enabled platforms.
Thinking broadly, blockchain has the chance to take the lessons learned from the rise of the internet over the last two decades and apply them to finance. Consumers discovered that open, public, and collective properties were incredibly valuable and actually more secure in many ways.
“There are all kinds of ways to rig the market,” Overstock CEO Patrick Byrne told WIRED earlier in 2015. “We want to make it un-rig-able.”
Skeptics Bit Off More than They Can Chew?
I certainly can’t disagree with those people who looked at bitcoin and had little to offer aside from a long, pronounced scoff. However, I can also acknowledge that the sort of indignant scorn cast upon the cryptocurrency by many of us may have led to an oversight, one that failed to realize just how innovative portions of bitcoin’s construction really are and were.Blockchain, both as a concept and the very real execution tracking bitcoin transactions, is a bold new direction to take the financial industry. Those stuck rejecting it for its association with bitcoin could easily be overlooking a force that’s poised to revolutionize finance in the years to come.
DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer