The importance of cryptocurrencies and the blockchain to banks (and everyone)

We had a revival of the Innotribe from SIBOS on Monday, by gathering the great and the good to discuss cryptocurrencies at the Escalator, an incubator for new fintech start-ups in East London run by Barclays Bank (if you want a primer on this, see Learn Cryptography).

The session was led by Richard Brown, Executive Architect for Industry Innovation, Banking and Financial Markets, IBM UK.  Richard has become a semi-authority on the area, educating banks worldwide on the meaning of the technology of bitcoin and the blockchain.  His speech was certainly appreciated here.

You can see his slides here:

Richard was followed by Simon Taylor, who looks after Barclays Escalator and is also an enthusiastic follower of all news related to cryptocurrencies.   

I’ve talked about the Escalator before, and now Barclays are partnering with the Financial Services Club to run quarterly meetings at the Escalator on the topic of cryptocurrencies.

Finally, the evening ended with Jon Matonis of the Bitcoin Foundation.

Jon discussed his take-aways from attending SIBOS this year. Jon’s major comment was that “banks are wondering whether to work with bitcoin but, more importantly, bitcoin companies are asking: ‘should we let the banks work with us’”.  An interesting take on things.

I could write up the details of everything discussed, but instead will give my walk-away.

The blockchain is going to change things.

Jon has maintained several times that you cannot separate the bitcoin currency from the bitcoin protocol, but that is exactly what is happening (see Richard Brown's excellent blog on this subject for more).  The blockchain is the key technology that is important for banks.

What is the blockchain?

Well, we talked about it at SIBOS, and the gist is that the blockchain is the key technology that allows all transactions in bitcoin to be recorded on an open general ledger.

This technology, protocol, encryption mix enables digital value to be exchanged and recorded in a global open  system that ensures, once the transaction takes place, it cannot be revoked.

That is the key.

You have a recorded and accessible electronic record of every exchange made by everyone.  This can be used for any contractual exchange electronically, not just recording the exchange of bitcoins.  For example, you could record a lettings deal and the rental agreement along with the dates and frequency of payments due, which will then be taken automatically until the contract is terminated.  You could record a contract for services, an employment contract, a legal record of a house sale.  You can use the blockchain to record practically anything, even a wedding!

This is because, once recorded on the blockchain, the transaction is held as a proof of exchange for the life of the internet.  It cannot be revoked or repudiated until a proof of contract termination occurs and the exchange of value moves to another or is ended.

In other words, the blockchain protocol is something that can be used as a proof of record for any digital value exchange for anything.  That is why banks are interested in this, as it could become a global record of value exchange in the banking system that is virtually free and secure.

It is why firms such as Ripple are becoming interesting, as they can displace the old infrastructure built for last century value exchange called SWIFT.

Therefore, for any of you out there thinking that bitcoin is dead in the water, it might be.  The currency is not the important factor.  The important factor is the cryptographically secure blockchain protocol, as this gives the protocol the ability to record and transfer value without trusted third parties such as banks.  That technology, given to the world by Satoshi Nakamoto, may just transform everything including banking.