Where We Stand With Blockchains: Bet On The Disruption

Includes: COIN, GBTC, JPM, PYPL, V
by: AllAboutAlpha

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Chris Skinner has a new book out, ValueWeb, which describes in the words of its lengthy subtitle "how FinTech Firms are Using Bitcoin Blockchain and Mobile Technologies to Create the Internet of Value."

It may appear to a cynic that Skinner is simply entering the already crowded sweepstakes for "who gets to invent the next buzz phrase?" The "internet of things" has already been chewed up and spat out as buzz material. So now … the Internet of Value? But let's not be cynical today.

Skinner, the founder a dozen years ago of The Financial Services Club, an important European networking forum, deserves to be taken seriously. His point begins with the premise that although the phrase "internet of things" may have been well chewed; the idea behind it has not yet been thoroughly examined, much less masticated. To back up a bit: the internet of things - a term coined as early as 1999 - refers to the wide range of objects one would not normally think of as a 'computer' that are embedded with electronics and that are increasingly controlled remotely. The objects involved include smart cars, DNA analytical devices, bridges, railway tracks, industrial/manufacturing systems, and so forth.

How to Give Value for Value

Skinner's point, then, is that the internet of things will require new systems of exchange, of giving value for value. His opening pages use the familiar system of payment at a retail store by plastic credit cards to make this point. There are "banks and counterparty banks and infrastructures like Visa (NYSE:V) and SWIFT," all required for straightforward-seeming monetary transactions. Thus, there can be "four pillars": an issuing bank, an acquiring bank, a card processor, and a merchant. Or, there can be eight pillars even in a simple deal, because now with PayPal (NASDAQ:PYPL) and other internet overlays, the intermediaries have intermediaries. Every pillar has to be maintained: everybody takes a fee. This unwieldy and expensive system is the one that will not support an internet of things, which is why the IoT requires an Internet of Value.

How will the IoV work? Here Skinner introduces the example of Bitcoin, and the more abstract idea of a blockchain which that example illuminates. What "Satoshi Nakamoto" (whoever exactly that is) proposed back in 2009 was a system that would use the shared structure of a ledger to verify transactions by time and date. This idea Skinner sees as valuable and necessary, although Bitcoin specifically as an iteration … well, there's a reason why golfers allow each other mulligans.

Skinner told an interviewer, Mary Allen, that the Bitcoin blockchain "is actually expensive and slow," but that the banks are building their own analogous systems, which are "cheap and fast" yet retains the "core importance" of building up a shared database.

Bill and Melinda Gates were more specific about the problems with existing cryptocurrencies in a recent issue of the newsletter for their charitable foundation. They want to enable the poor through blockchain technologies, but they don't believe the poor should have to use a currency "whose value goes up and down a lot compared to their local currency."

And if Skinner is right?

In the interview with Mary Allen, Skinner name-checks Blythe Masters, the former senior managing editor at J.P. Morgan (NYSE:JPM) who played a key role in the development of credit default swaps. She is now running Digital Asset Holdings, which is developing a new system for clearing and settlement that will be "open, Internet-based, [and] Bitcoin related."

It is reasonable to suppose that phrases like the "internet of value" refer to something real, and on-coming. Existing systems as different from one another as airliner air miles, retailers' loyalty discounts, and Candy Crush Points may all play a part as it arrives. If so, then the arrival of a major overhaul in this field (within a time frame of a decade, surely less than two) will upset a lot of existing structures, causing losses for anyone who has invested in an unhedged way in the perpetuity of those structures, and creating alpha opportunities for those who bet the other way, betting on the disruption.