By 2014, financial companies were repeating “blockchain not Bitcoin” at every major conference; but blockchain technology is not why we’re all here.
Bitcoin was largely shunned by the traditional financial world in its early years, as it was mostly viewed as a joke or as fake online money for people who wanted to buy drugs on Silk Road. However, as the cryptocurrency continued to exist year after year, the traditional players started to take a closer look at bitcoin — or at least the technology behind it.
By 2014, banks, fintech startups and other financial services companies were repeating the “blockchain not Bitcoin” meme at every major conference. The basic theory was bitcoin would eventually go away, and the blockchain technology behind the cryptocurrency could be implemented by traditional entities in the financial space.
Various “blockchain technology” companies began to sprout up around this time, with the most notable example being R3, which involved a consortium of large financial institutions.
These days, the narrative has become more about Bitcoin than blockchain, but those blockchain-first enthusiasts still exist, as Programming Bitcoin author Jimmy Song found out at SXSW 2019.
To be clear, there’s nothing wrong with banks improving the technology that backs the services they provide to their customers; however, that’s not really why we’re all here.
We’re Not Here for Blockchain Technology
When looking back at the entire history of work by cypherpunks that eventually led to the creation of Bitcoin, it’s clear this is not something that was created to help the traditional banks become more efficient. The cypherpunks had been trying to create a form of digital cash for decades, but their previous, more-centralized attempts failed one after another.
The reason Bitcoin has been able to stick around longer than things like Digicash and Egold is that it is powered by proof of work rather than trust in a centralized entity. Decentralizing the processors of payments on the Bitcoin network makes it much more difficult for the system to be controlled by various regulators and lawmakers around the world. There’s simply no single point of failure to target.
A common comparison that is made is the early digital cash systems were like Napster and Bitcoin is like Bittorrent.
It should be noted that true decentralization also requires the existence of an underlying token on the network, which is used to incentivize miners to provide security and process new transactions as they appear. Without a token, the system will need to be controlled by a set of trusted third parties.
With Bitcoin acting as the base layer, new digital cash systems, such as the Lightning Network, are able to be built without the risks of regulation or shutdown that were associated with the centralized systems of the past.
Up to this point, it appears Bitcoin has succeeded in enabling the cypherpunk vision of digital cash on the internet, which allows users to transact freely and store their savings in a difficult-to-seize manner.
Blockchain Technology Usually Has Nothing to Do With Bitcoin
Obviously, what banks are doing with “blockchain technology” has nothing to do with the cypherpunk vision I just described. They’re mostly interested in permissioned systems, where it’s unclear if this technology can offer major advantages over the systems of the past.
The efficiency gains involved with Bitcoin come from the fact that it cannot be slowed down by regulatory pressures. If a blockchain is controlled by a consortium of banks rather than dynamic, potentially anonymous miners, then the regulators can simply target the banks as a centralized point of failure. If a blockchain can be easily controlled by regulators, then the reasoning behind using a blockchain in the first place becomes rather questionable because a centralized server will be more efficient than a distributed database.
For example, I’ve written in the past about how the various stablecoins that have been launched over the last year or two probably do not have a true need for a public blockchain like Bitcoin. Even though the stablecoin is issued on a public blockchain, a government can still go to the bank account backing the stablecoin and seize the funds.
Facebook’s recently announced libra “cryptocurrency” is a perfect example of this point. Due to the fact that it’s backed by fiat currencies held in bank accounts, it’s unclear how the project will be much different from PayPal. Of course, Facebook and the other members of the Libra project could have plans to further decentralize the system in the future.
Banks may very well end up improving their backends with some of the same technologies that are used in Bitcoin. And that’s fine. But don’t confuse that with what’s being built with Bitcoin.This is a guest post by Kyle Torpey. Opinions expressed are entirely his own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.