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State of the Industry, Consensus 2016

Consensus 2016, titled "Making the Blockchain Real" foreshadowed the future of blockchain technology. The blockchain will become real, but how will it change in doing so?

Making the Blockchain Real

Consensus 2016 started in the shadow of Craig Wright’s second attempt to make himself real as Satoshi Nakamoto. He failed to do so, even though there were clear steps that he could have taken. There is not such a clear path for the blockchain.

Consensus 2016 drew together industry leaders, experts, regulators, and engineers. Industry comprised the lion’s share, predominantly banking but also venture capital, technology, and consulting, giving the conference a corporate shade. It gave the pulse of where, how, and when blockchain technology was colliding with the contemporary economy.

The title of the conference was “Making the blockchain Real.” We might add a subtitle: and at what price? The conference unofficially laid out an agenda for the near-term future of cryptocurrencies, and it hinted at many tensions among all the disparate players that will shape what a ‘real blockchain’ will be.

Key Takeaways

Bitcoin is dead

“How many people here used Netscape or AOL Instant messenger?” – Barry Silbert (DCG)

The conference overall seemed bearish on blockchains, bearish on bitcoins, and many thought Bitcoin will get sidelined by industry solutions. Bitcoin will be Netscape. Internet Explorer hasn’t arrived yet, though it might be Ethereum. And Hyperledger might be Chrome. Numerous presenters started their presentations using bitcoin and then corrected themselves: “blockchain.”

There were many criticisms of Bitcoin, ranging from low adoption to poor UX to an inability to scale to unclear governance. The Craig Wright controversy certainly didn’t help. At a higher level, as a global payment system, it creates radical solutions for problems that people don’t think need solving—and in the meantime, introduces new headaches.

#Consensus2016 everyone wants to improve their banks, nobody actually wants to make it easier and safer to bank – @serifsheriff (Oren Weingrod)

Elizabeth Rosiello of Bitpesa acknowledged bitcoin made her company possible, but ultimately, bitcoin is a strategy, not the service itself. Pascal Bouvier of Santander InnoVentures admitted he was hardpressed to see use cases with all the challenges with the protocol and asked, “how can it address a world inevitably going to more richness of data?” David Birch observed that he could buy his starbucks coffee with paypal or visa—what does bitcoin offer?

People recognize that banking needs to change, but replacing banking with an open global payments systems that has no clear governance is a couple steps too far. Far safer to implement blockchain technology into existing systems to improve banking, not to do away with banks.

Has bitcoin played its part and now we all need to grow up and imagine less radical uses of the underlying technology?

Long live Bitcoin

“The only public blockchain that has scale, security, and liquidity is Bitcoin.” – Presenter for Circle

Not everyone dismissed bitcoin. The most impassioned defense of Bitcoin came from 21 founder Balaji Srinivasan, who debated R3 founder David Rutter in one of the best panels of the conference. He—and others before him—said bitcoin has had its tired kicked, has adapted to new challenges, and remains the only operational open chain. At the end of the day, it works.

A slide from Hutchinson’s presentation

Bitcoin proponents had arguments against private enterprise chains—the alternative to a public blockchain like bitcoin. Private (or permissioned) chains won’t be disruptive. At most, they’ll let banks do their work more efficiently, leading to less employment in the banking sector. It’s unclear if they’ll actually work once membership includes players who don’t actually trust each other (like some foreign banks.)

In addition, implementing many private chains creates a massive interoperability challenge, and at some point, this may create more complexity than exists in the existing system.

This tweet resonated with conference attendees
This tweet resonated with conference attendees

Glenn Hutchins closed the first day with (self-titled) defense of bitcoin. In it, he observed that Bitcoin could become a good enterprise technology but it has more far-reaching impacts as a brand new payments system.

“In the early days of the internet, we had the intranet [which was great], but the real transformative value of it was when all those intranets got connected into a global Internet.” – Glenn Hutchins

It appeared that the onus was on bitcoin to show it enables truly transformative new activity while reducing the risk of another Mt. Gox or the Silk Road.

Bringing proofs of concept to production will be very difficult and could change blockchains entirely

The industry today is full of young start-ups and enterprise experiments. Many are prototypes, and some have working proofs of concept that have performed well in particular conditions, at small scales, with limited markets. Bringing these to scale is going to take hard work.

Bringing POCs to scale will also require hybrid blockchain solutions. Systems (and banks) don’t change quickly, which means many organizations will live for a period of time in which a blockchain is integrated into only one part of their operations and it works seamlessly with legacy systems.. Not enough people have hybrid solutions for that interim period.

Underlying many of these questions is whether start-ups can truly be disruptive. Meltem Demirors of DCG said they advise their companies to go talk to enterprise regulatory teams, because many of the giants in finance (one of the most heavily regulated industries) have entire divisions devoted to understanding the law. However, Catheryn Nicholson of BlockCypher warned (and Meltem agreed) against the danger of shoe-horning start-ups into existing enterprise processes.

Does this next step to production risk stripping the technology of its transformative promise?

Identity underlies almost everything, and it’s not simple

Identity in modern society is a mess. We trust a variety of institutions to provide markers of our identity, including companies and government entities. In some countries, government-issued passports are acceptable, while in others, such as South Africa, they are considered insecure and easy to forge. What we are required to disclose and what we are trying to prove about ourselves is also inconsistent. An alcohol-serving establishment needs to know whether you are older than 18 (or 21), but they get access to an ID that includes an address, a unique identifier, an exact age, and a photo. Some websites ask for a social security number when they really just need proof you are a US citizen.

“Payments are working properly today…but identity is not.” – David Birch, Hyperion

At the heart of modern market identity is trust: trust that the other person is who they say they are, that they’ve done what they say they have done, that they can be reliably tracked down and arrested or fined if they break the law. The blockchain clearly has many applications in commerce where lack of trust between parties leads to friction.

Blockchain technology makes it possible to help clean up this mess, but presenters also intimated that the blockchain itself doesn’t solve many of these issues. There still needs to be some kind of trusted entity—one who ‘authenticates’ the claims someone makes about themselves. Removing trust between counterparties in unregulated financial transactions was quite a feat; replacing the modern apparatus that provides trust in regulated financial transactions will be another matter entirely.

The question that lay behind these discussions was whether a blockchain would help us meet modern identity requirements more efficiently – or rethink them altogether.

UX is the industry’s biggest barrier to adoption

What is the killer app for digital currencies? How can we make them more user-friendly? Does anyone actually use Bitcoin? These questions were prevalent.

“On a scale of 1-10, blockchain maturity is a 3. User experience is a 1. We need more UI people to drive consumer adoption. #Consensus2016 @Katefedosova

Even for bitcoin users, private key management remains an issue. David Birch delivered one of the most memorable quotes of the event. Describing how he maintains his private keys, he said, “I had it converted to a QR code and tattooed on my scrotum.”

There are solutions to this problem, but today, many are aimed at advanced users who are familiar with two- or three-factor authentication. The modern banking consumer often needs to remember only a debit pin code that can be used in financial transactions across the world. Is it possible to get there with digital currencies?

Regulation is on the horizon

Bitcoin began in large part as an anti-government movement, but the prevailing mood was that in order to become more widely adopted, it needed to accept regulations. The time of lawlessness was coming to an end. Larry Summers was emphatic that the time of lawlessness was coming to an end: “People should abandon the idea that Bitcoin will get around US financial regulations.”

“People should abandon the idea that Bitcoin will get around US financial regulations.” – Larry Summers

Regulators seem upbeat. On the opening day, Delaware Governor announced the Delaware Block Initiative, a set of public investments in cryptocurrencies that includes an ombudsman, A new category of corporate shares that would let companies take advantage of the instant settlement possibilities opened by digital currencies, and adoption of blockchain technology for Delaware public services, starting with public archiving.

Others echoed his excitement. J. Chris Giancarlo, CTFC Commissioner, lamented, “8 years later, we are still assembling trading ledgers from the financial crash.” The blockchain promises instant transparency—and he was quick to point out that policy has always allowed regulators to see tradebooks, so this isn’t expanding government oversight over an unregulated sector.

“8 years later, we are still assembling trading ledgers from the financial crash.” -J Giancarlo

However, there was not widespread agreement on which regulations, where, and how fast. The industry broadly is moving to comply with standard KYC (Know-your customer) and AML (anti-money laundering) regulation, which require entities that hold and move customer money to collect identifying information on them. Many exchanges and wallets currently comply with this.

Beyond AML and KYC are a number of unanswered legal questions, and many hinge on a legal definition of cryptocurrencies. Other critical areas for fintech broadly (and cryptocurrencies by extension) include consumer protection, investor protection, and taxation.

There was an underlying tensionthroughout the conference: to what extent should cryptocurrencies comply with existing regulation or regulation be adapted and potentially rethought?

Looking forward: what do you see?

The future looks bright for blockchain technology. Almost everyone saw a place for it in the next ten to twenty years. What that place is, though, was for the debate. The vision of enterprise-ready blockchain technology seemed worlds away from what early enthusiasts had dreamt. One banker cheekily said, “At the end of the day, the blockchain is just a database.”

“Are we in the database industry 3.0?…or the internet of value, where we can do a lot of things we couldn’t do before?”@RRE #Consensus2016

The conference overall seemed skeptical it would overturn existing industries or create entirely new ones.

It’s possible the technology is so young that such disruptions are still waiting in the imaginations of aspiring entrepreneurs.

What do you think? What does the future hold for cryptocurrencies?