Blockchain Revolution: How the Technology Behind Bitcoin Is Changing Money, Business, and the World

by Don Tapscott

systemic risk,

agency risk—the

Value Innovation: The bitcoin blockchain was designed for moving bitcoins, not for handling other financial assets.

Open Source: The financial services industry is a technology stack of legacy systems standing twenty miles high and on the verge of teetering over.

These benefits—attestation, dramatically lower costs, lightning speed, lower risks, great innovation of value, adaptability—have the potential to transform not only payments, but also the securities industry, investment banking, accounting and audit, venture capital, insurance, enterprise risk management, retail banking, and other pillars of the industry.

eight core functions ripe for disruption.

1. Authenticating Identity and Value: Today we rely on powerful intermediaries to establish trust and verify identity in a financial transaction.

2. Moving Value: Daily, the financial system moves money around the world, making sure that no dollar is spent twice:

3. Storing Value: Financial institutions are the repositories of value for people, institutions, and governments.

4. Lending Value: From household mortgages to T-bills, financial institutions facilitate the issuance of credit such as credit card debt, mortgages, corporate bonds, municipal bonds, government bonds, and asset-backed securities.

5. Exchanging Value: Daily, markets globally facilitate the exchange of trillions of dollars of financial assets.

6. Funding and Investing: Investing in an asset, company, or new enterprise gives an individual the opportunity to earn a return, in the form of capital appreciation, dividends, interest, rents, or some combination.

7. Insuring Value and Managing Risk: Risk management, of which insurance

is a subset, is intended to protect individuals and companies from uncertain loss or catastrophe.

8. Accounting for Value: Accounting is the measurement, processing, and communication of financial information about economic entities. It

New accounting methods using blockchain’s distributed ledger will make audit and financial reporting transparent and occur in real time.

blockchain could reduce inefficiencies and costs “by allowing multiple parties to rely on the same information rather than duplicating and replicating it and having to reconcile it.” As a mechanism for shared, decentralized, replicated transaction records, blockchain is the “golden source,” she says.

NASDAQ CEO Bob Greifeld said, “I am a big believer in the ability of blockchain technology to effect fundamental change in the infrastructure of the financial service industry.”22 Greifeld is integrating blockchain’s distributed ledger technology into NASDAQ’s private markets platform through a platform called NASDAQ Linq.

“The most exciting thing about distributed ledger technology is how traceability can improve systemic stability.”

“People love the idea of not having to wait three days to settle transactions but having them cleared within minutes and knowing that they’re final and that they’re true,” said Hill. “The counterpart to that is all transactions on the [bitcoin] blockchain are completely public. That terrifies a number of people on Wall Street.” The solution? Confidential transactions on so-called permissioned blockchains, also known as private blockchains.

all parties are trusted, a 51 percent attack is unlikely. Nodes can be trusted to be well connected, as in most use cases they are large financial institutions.

Ripple Labs, which has gained traction within banking circles, is developing other clever ways to relieve Faust. “Ripple Labs is aimed at wholesale banking, and we use a consensus method, rather than a proof-of-work system,” said CEO Chris Larsen, meaning no miners and no anonymous nodes are validating transactions.

Barclays is one of dozens of financial institutions exploring opportunities in blockchain technology. According to Derek White, Barclays’s chief design and digital officer, “technologies like the blockchain are going to reshape our industry.” White is building an open innovation platform that will allow the bank to engage a wide array of builders and thinkers in this industry. “We’re keen to be shapers. But we’re also keen to connect with the shapers of the technologies and the translators of those technologies,” he said.34 Barclays is putting its money where its mouth is, cutting tens of thousands of jobs in traditional areas and doubling down on technology, notably by launching the Barclays Accelerator.

Setting standards is critical to accelerate adoption and usage of a new technology and so we are optimistic about the initiative. R3 has poached some of the leading visionaries and technical practitioners in the sector to move the ball forward.

In December 2015, the Linux Foundation, in collaboration with a huge group of yet more blue-chip corporate partners, launched another blockchain initiative, dubbed the Hyperledger Project.

Unlike R3, Hyperledger Project is an open source project that has tasked a community to develop a “blockchain for business.” This is certainly laudable and may very well work. But don’t be mistaken: This is an open source project designed to build gated technologies by, for example, limiting the number of nodes in a network or requiring credentials.

The financial utility of the future could be a walled and well-groomed garden, harvested by a cabal of influential stakeholders, or it could be an organic and spacious ecosystem, where people’s economic fortunes grow wherever there is light. The debate rages on, but if the experience of the first generation of the Internet has taught us anything, it’s that open systems scale more easily than closed ones.

the Internet transformed information services, the blockchain will transform financial services, instigating unimagined new categories of capability.

With this platform I can enter a single atomic transaction (i.e., all or none) and use my Apple stock to send you dollars.”

Currency can be anything you want it to be.

“Accountants are like mushrooms—they’re kept in the dark and fed shit,”52 said Tom Mornini, CEO of Subledger, a start-up targeting the accounting industry.

four problems with modern accounting.

First, the current regime relies upon managers to swear that their books are in order.

Second, human error is a leading cause of accounting mistakes, according to AccountingWEB.

Third, new rules such as Sarbanes-Oxley have done little to curb accounting fraud.

Fourth, traditional accounting methods cannot reconcile new business models.

regulators benefit the most. “Bank examiners have had to rely upon opaque, privately controlled, proprietary ledgers and financial accounting systems to do their work—the ‘books and records,’”

bakes integrity into the system.

“A public ledger that is constantly audited and verified means you don’t have to trust the books of your partner; there is integrity in the statements or the transaction logs, because the network itself is verifying it. It’s like a continuous a priori audit that is done cryptographically. You’re not relying on PricewaterhouseCoopers or Deloitte. There is no counterparty risk. If the ledger says this is true, then it’s true.”

Triple-entry accounting could be next.

Triple-entry accounting is not without skeptics.

The argument for triple-entry accounting is not against traditional accounting.

Triple-entry accounting is the first of many blockchain innovations in corporate governance. Like many institutions in society, our corporations are suffering from a crisis of legitimacy.

blockchain returns power to shareholders.

Overstock, the e-retailer, is launching perhaps the most ambitious cryptosecurity initiative yet. Overstock’s forward-thinking founder, Patrick Byrne, believes blockchain “can do for the capital markets what the Internet has done for consumers.”

Using blockchain technology makes the system more resilient to failure, more accurate, and more resistant to crackdowns, error, coercion, liquidity concerns, and what the Augur team calls euphemistically “dated jurisdictional regulation.”

Ethereum was conceived in 2013 by then-nineteen-year-old Vitalik Buterin, a Canadian of Russian descent. He had argued to the bitcoin core developers that the platform needed a more robust scripting language for developing applications. When they rejected him, he decided to craft his own platform. ConsenSys was first off the block, so to speak, launched to create Ethereum-based apps. Flash-forward a couple of years and the analogy is clear: Linus Torvalds is to Linux what Vitalik Buterin is to Ethereum.

Blockchain technology is the countervalence: “Global human society can now agree on the truth and make decisions in ten minutes, or ten seconds. This surely creates an opportunity to have a more enfranchised society,” he said. The greater the engagement, the greater the prosperity.

role. “We talk about things quite a bit so people are aware of the many things that could be pushed forward,” he said. But these many things can and do change constantly. “Part of being agile means that priorities are dynamic.”

Member ownership explicitly incentivizes this behavior. Everyone owns a piece of every project directly or indirectly: the Ethereum platform issues tokens that members can exchange for ether and then convert into any other currency. “Our goal is to achieve a nice balance between independence and interdependence,” Lubin said. “We view ourselves as a collective of closely collaborating entrepreneurlike agents. At some point, it may prove necessary to suggest that a certain thing really needs to get done and if nobody steps up, to hire someone initially for that role or incentivize internal people to do it,” said Lubin. But, overall, “everyone is a self-managed adult. Did I mention we communicate a lot? Then we all make our own decisions.”

watchwords are agility, openness, and consensus: identify the work to be done, distribute the load among the people eager and able to do it, agree on their roles, responsibilities, and compensation, and then codify these rights in “explicit, detailed, unambiguous, self-enforcing agreements that can serve as the glue to hold all of the business aspects of our relationships together,” he said.