John Naughton: there’s more to bit­coin tech­nol­ogy than lin­ing the pock­ets of fat-cat bankers

The Observer - The New Review - - Agenda - John Naughton

Be­cause I write about tech­nol­ogy I am reg­u­larly as­sailed by peo­ple who are ex­er­cised about so-called “cryp­tocur­ren­cies” like bit­coin, which most of them re­gard as a scam. But when I re­ply that while bit­coin might be news­wor­thy, the re­ally im­por­tant story con­cerns the blockchain tech­nol­ogy that un­der­pins it, their eyes glaze over and they start look­ing for the near­est exit as they con­clude that they are in the grip of Co­leridge’s An­cient Mariner.

And, in a sense, they are. Blockchain tech­nol­ogy is in­deed im­por­tant, but it seems largely in­com­pre­hen­si­ble to or­di­nary mor­tals, even though the web teems with at­tempts to ex­plain it. This is partly be­cause cryp­tog­ra­phy lies at its core, and since crypto in­volves com­plex math­e­mat­ics it there­fore lies beyond the ken of most peo­ple. But if one is pre­pared to take the maths as given, then re­ally the ba­sic idea is sim­ple. As Don and Alex Tap­scott put it in their book, Blockchain Rev­o­lu­tion, a blockchain “is an in­cor­rupt­ible dig­i­tal ledger of eco­nomic trans­ac­tions that can be pro­grammed to record not just fi­nan­cial trans­ac­tions but vir­tu­ally ev­ery­thing of value”.

Un­til re­cently, the bank­ing es­tab­lish­ment was un­remit­tingly hos­tile to cryp­tocur­ren­cies. Jamie Di­mon, the boss of JPMor­gan Chase, for ex­am­ple, fa­mously de­scribed bit­coin as a “fraud”. But re­cently, the wind seems to have changed. Last De­cem­ber, two big ex­changes – the CME Group and Cboe Global Mar­kets – launched bit­coin fu­tures trad­ing op­er­a­tions. This week Gold­man Sachs an­nounced that it would fol­low suit and is look­ing into the di­rect trad­ing of bit­coin. And now – ac­cord­ing to Wed­nes­day’s Fi­nan­cial Times – even the New York Stock Ex­change is “set­ting up an on­line plat­form for buy­ing and hold­ing bit­coin”.

So what’s go­ing on? To in­ter­pret it you need to un­der­stand that the cryp­tocur­rency story has two in­ter­wo­ven strands: hu­man greed on the one hand and utopian ide­al­ism on the other. It’s no ac­ci­dent that bit­coin emerged just after the 2008 bank­ing cri­sis as peo­ple re­alised that we had been taken for an epic ride by the fi­nan­cial ser­vices in­dus­try. In a world where no­body – even the big­gest banks – could be trusted, an un­known ge­nius go­ing by the name of Satoshi Nakamoto pub­lished a pa­per ar­gu­ing that cryp­tog­ra­phy could be har­nessed to en­able trust­wor­thy trans­ac­tions with­out hav­ing to rely on fal­li­ble or cor­rupt hu­man in­sti­tu­tions. A new dig­i­tal cur­rency – bit­coin

– was the work­ing ex­am­ple he pro­posed. And un­der­pin­ning it was the cryp­to­graphic tool – the blockchain – which en­sured that all trans­ac­tions in the new cur­rency could be val­i­dated with­out need­ing an in­sti­tu­tion to guar­an­tee or un­der­write them.

Be­cause the to­tal num­ber of bit­coins that can ex­ist is lim­ited by the de­sign of the sys­tem to 21m, the cur­rency was rapidly per­ceived as an as­set or a store of value – like gold. Ac­cord­ingly greed kicked in, trig­ger­ing waves of spec­u­la­tive ma­nia that are still con­tin­u­ing. And it is this spec­u­la­tive wave that Gold­man Sachs and co now – be­lat­edly – wish to surf. No sur­prise there, then. But im­plicit in the blockchain con­cept is an en­dear­ing strain of tech­no­cratic utopi­anism, a hope that tech­nol­ogy can over­come some as­pects of hu­man frailty and cor­rup­tion. The key to that lies in the lat­ter half of the Tap­scott def­i­ni­tion quoted ear­lier – the idea that a blockchain can record “not just fi­nan­cial trans­ac­tions but vir­tu­ally ev­ery­thing of value” in a ledger that can­not be fal­si­fied.

This is a re­ally big idea, be­cause well-gov­erned so­ci­eties de­pend on keep­ing cer­tain kinds of doc­u­men­ta­tion – birth and death cer­tifi­cates, ti­tle deeds, wills and so on – in ledgers that are both pub­lic and se­cure. In in­dus­tri­alised so­ci­eties we have achieved this by hav­ing trust­wor­thy in­sti­tu­tions (reg­is­trars, so­lic­i­tors, lo­cal au­thor­i­ties, etc), which have le­gal re­spon­si­bil­i­ties and demo­cratic over­sight. But other so­ci­eties are not so for­tu­nate. In de­vel­op­ing or au­thor­i­tar­ian coun­tries, for ex­am­ple, reg­istries of land ti­tles are crit­i­cally vul­ner­a­ble to tam­per­ing by cor­rupt of­fi­cials. Us­ing a blockchain to hold such ti­tles could pro­vide a way of en­sur­ing that cred­i­ble records en­dure, which is why coun­tries such as the Repub­lic of Ge­or­gia are be­gin­ning to do it.

None of this is easy to do, and there are lots of prac­ti­cal dif­fi­cul­ties ahead. But in the greed and cyn­i­cism sur­round­ing bit­coin and its peers, we shouldn’t lose sight of the great po­ten­tial of blockchain tech­nol­ogy. Many years ago, an en­gi­neer called Paul Baran had a Big Idea – that we could make a great com­mu­ni­ca­tions net­work by us­ing dig­i­tal data pack­ets rather than ana­logue phone lines. He was laughed out of court by AT&T. But it turned out that Baran’s idea was what gave us the in­ter­net.

Bet­ter late than never? After ini­tial scep­ti­cism, Wall Street may be warm­ing to bit­coin. Getty Im­ages

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