Raw talent needs coaching
Few teams in the National Basketball Association can say they’re better positioned for the future than the Minnesota Timberwolves. Despite losing 65% of their games this past season, the T-Wolves have a young roster oozing with talent, though lacking in experience. Headlining the squad are Andrew Wiggins, the 21 year-old, hyper-athletic wing, and Karl-Anthony Towns, the 20 year-old Vitruvian Man, modern-day NBA center.
The banking and financial services sector has its own promising ‘talent’, its very own Timberwolves: the distributed ledger. Built on “blockchain” technology that continuously builds layers upon layers of transactional history, distributed ledgers are appealing in a myriad of ways, among them:
- Protection against cyber-attacks (thanks to its decentralized network)
- High integrity data (due to its consistency and wide availability)
- Potential reduction of fraud (as a result of the system’s transparency)
Basketball is simple. Sitting on a goldmine of talent, the T-Wolves took the logical step and hired the highly successful Tom Thibodeau to coach its young stars and establish a winning culture in Minnesota. They won’t win a title in the next couple of years, but they’ll be scary good for the next decade.
Technology, on the other hand, is not simple. It’s romantic to simply assume Silicon Valley will put together some brilliant prototype and change the world once again. But who will actually execute on a large scale? Which type of company will create this infrastructure, and what do they stand to gain from it?
Bitcoin is easily the most recognizable story in the short history of blockchain. They – and by “they”, I mean Satoshi Nakamoto, though I’m not totally sure if that’s one person, multiple people or the artificial intelligence from Ex Machina – created a product: a digital currency. Let’s ignore the altruistic or evil arguments (“It bypasses financial bureaucracy!”; “People used it to buy illegal substances on the Silk Road!”). The fascinating economic lesson from Bitcoin is that this product appreciated in value – to many, arbitrarily – and was supplied (i.e., “mined”) in a controlled fashion. Aside from opportunistic techy-anarchist investors and its founder(s), who kept a chunk for themselves, Bitcoin became a profitable venture. The jury’s still out on its future.
(Editor’s note: a joke about early investors making “coin” was omitted from this post)
But where’s the profit opportunity for the firms that facilitate this digital movement? How do all the parties with skin in the game – commercial banks, central banks, governments, fin-tech firms and consumers – fit into the new system?
Sorting out the players
Banks, despite the prospect of increased protection from cyber-attacks, might feel a bit uncomfortable – after all, the potential for disintermediation of financial transactions poses a potential threat to their facilitation role and related revenue streams. Additionally, with much of the developed world in a negative interest rate environment, savvy households will consider alternatives to being taxed on their bank accounts (negative interest rates are, in effect, such a tax). While hiding money under the mattress might be the first instinct, digital currencies, peer to peer lending and other blockchain-enabled investment vehicles will surely find their way into the consumer finance landscape. And as expected, regulation is very much still in its infancy.
The blockchain will also send shockwaves beyond banks. The remittance market, in which family breadwinners pay on average 7.5% to send money home, could see hefty fees virtually wiped. Websites and mobile apps may begin to leverage “micro-transactions” for their content (e.g., charge readers per article instead of per month). With the distribute ledger, there might finally be a legitimate form of asset registry in poor, rural areas lacking authentic legal documentation.
And, of course, big centralized databases could foreseeably evolve to have a distributed ledger foundation, a more peer-to-peer relationship that could speed up everything from trading GE stock to e-commerce. When that “intentionally-rusted lamp shade made of recycled batteries” from Etsy.com gets shipped from Williamsburg to Wicker Park, its actual ownership could be recorded on a distributed ledger.
Fortunately, rather than view it as a threat, many of today’s large firms and investment communities have begun to embrace the blockchain. The Canadian central bank, along with five private Canadian banks and American blockchain startup, R3, recently launched a project to create CAD-coin, a digital version of the national currency. Household names such as Santander, Citi, BNP Paribas and Goldman Sachs are investing in blockchain-enabled technologies as a strategic opportunity in payments and trading, as well as a hedge against startups in the space. There are certainly question marks – for example, banks may be wary of transparency to competitors – but these efforts are directionally positive.
There’s a ton of excitement around the blockchain, but not a lot of clarity on immediate next steps. As with every business venture, it will come down to this: given the “lay of the land” (competitive, legal, political), what’s the pain being eliminated, and where’s the true opportunity to extract value?
The question is indicative of the need to have this greater discussion, to encourage entrepreneurs to solve problems. Startups, consumers, the big banks and governments will all play a role in taking advantage of this opportunity.
Bill Gates famously stated: “We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten.” For the sake of efficiency, let’s hope this applies to the blockchain.
And as a Miami Heat fan – not to the T-Wolves.