Do you think Bitcoin is important? If you are struggling with this question, you are not alone. The dramatic headlines are certainly here to prove it. Opinions run the gamut from revolution to fraud. 

So, which is it? I would argue that Bitcoin is fundamentally important and it is about trust.

Our ability to sustain progress depends on our ability to find ever more efficient solutions to the same old problems. Humanity tends to make incremental improvements until a revolution brings about a quantum leap in change rendering the old ways obsolete and transforming our society to its core.

The agriculture revolution drastically changed the way we produce food but also transformed society from nomadic to sedentary. The industrial revolution radically changed the way we deliver goods but also resulted in tremendous population growth gathering in urban centers.

The digital revolution is still unfolding in front our eyes with even more fundamental consequences for humanity. The far-reaching changes resulting from the digitalization of our world go as far as blurring the line between the real and the virtual. But it is unlocking solutions that were inconceivable before as well. The exponential progress of information technology in an ever more connected world is enabling us to revisit many old problems and to address them with an entirely new level of efficiency. One of these old problems is the way we deal with and implement trust.

Trust, The Cornerstone of Society

As long as we were living in small groups or settling in small villages, trust among us was relatively easy to implement. Everybody knew each other and not being trustworthy meant alienation from the group. The implementation of trust was efficient with little time spent on rules and their enforcement.

 The agricultural and the industrial revolutions changed all of that. With ever larger and more complex communities, not only did it become impossible to know everybody, but with specialization one could not survive without relying on other people. This made trust ,more than ever, the cornerstone of our society.

 Today, we trust that cars will stop at red lights. We trust that people will respect our personal property. We trust that our money is safe in our bank accounts. All in all, it is working reasonably well, but the cost of implementing trust is now consuming a disproportionate amount of resources from the government, bankers, lawyers, enforcers of every kind. Doesn’t it feel like half the population is looking over the shoulder of the other half ?

Trust and Money, Same Old, Same Old

Let’s take money as an example and how we implemented trust around such a sensitive matter. In the US, we trust the public sector through the government and its agencies to manage the currency, ensure economic stability and oversee the financial industry. We also trust the private sector (financial sector) to provide us with efficient and reliable financial services. Today, this financial sector alone represents about 9% of the US economy in comparison with just 1% in 1850. The US economy did shift during the same period from manufacturing to service, and our financial needs did become somewhat more sophisticated but still! Is the cost justified? And with which progress for the American people?

Despite the creation of the Federal Reserve System in 1913 ,charged with ensuring financial stability, the dollar has lost 95% of its value since then and financial crises have become ever more frequent. The 2007 subprime mortgage crisis and the subsequent 2008 Wall Street bailout is still fresh in our minds. Today, Americans’ trust in their government is below 20% (Pew Research Center, December 2017).

Despite the creation of the OCC (1863), the SEC (1933), the FDIC (1933), the NCUA (1970), the CFTC (1974), the NFA (1982), FinCEN (1990), FINRA (2007) and the CFPB (2011), in addition to the states banking authorities, financial frauds are still frequent as Wells Fargo reminds us. Americans’ trust in banks is below 30% (Gallup, June 2016).

Dealing with money in the US is continuously becoming more expensive, more complex and more stressful for people. Not surprisingly, we are hopelessly losing trust in our financial system. So yes, the financial industry is consuming a disproportionate amount of resources. And No, the result is not satisfactory. Why is that?

It is because we are yet to find a good enough solution to that old problem of how to trust each other with money. This problem is particularly hard to solve because human behaviors stand at its core. Cheating, stealing and other financial misconducts are at least as old as money is and they affect public and private sectors alike. History is unequivocal, and trends are explicit. Governments spend more money than they collect and resort to inflationary policies to ease their debt burden at the expense of their people. Banks profit from their privileged access to money and information at the expense of their customers. All the regulations and agencies have failed to increase financial stability and to prevent fraud. They have, on the other hand, resulted in an ever more complex and expensive financial system. What we have been doing is not working. It is time for a different answer, and the digital revolution is bringing it to us. It is called Bitcoin.

Bitcoin, Here Comes the Digital Revolution

Bitcoin has the potential to address both the issue of economic stability and the issue of the financial industry efficiency. The first topic or how Bitcoin could bring to life the dream of the Austrian school of economics is outside the scope of this article. We will only discuss how Bitcoin can radically transform the finance industry processes by rethinking how we deal with trust.

Today, banks rely on incredibly complex processes running on highly sophisticated technology platforms, but it wasn’t always like this. Banks started as buildings with thick walls. Behind those walls was a safe meant to protect both your physical money and the ledger that proved the money was yours. We trusted banks to prevent robbers from breaking in, but we also trusted banks to keep the ledger accurate. Over time, banks became regional, then national and finally global. Banking transactions also increased in variety, complexity, and volume.

These evolutions made keeping a bank’s ledger accurate prodigiously more complex. Additionally, banks are now continuously interacting with each other therefore affecting their respective ledgers. If this was not complex enough, banks don’t always trust each other and use trusted third parties such as clearing houses and custodians. These institutions have their own ledgers too. One can only imagine the complexity and the amount of work keeping all these ledgers synchronized requires. But this is the price to pay to ensure the trustworthiness of our financial system.

Bitcoin, Killing Complexity by Rethinking Trust

Until the arrival of Bitcoin, there was no better way of doing this. The fantastic breakthrough of Bitcoin is to make conceivable to have all these banks share one ledger instead of each having their own. Let’s pause for a second to appreciate how transformative such a concept is. This one shared ledger would become the definite truth and the unique source of information for all banks. This one shared ledger would thus be the cornerstone of the financial system. For this to be possible, all participants would need to have the utmost trust in this shared ledger. It couldn’t be tampered with, it couldn’t fail, and nobody could have the power to control it in any way. This sounds impossible to achieve, but if somehow this could be proven to work, the efficiency gain it would bring to the finance industry would be unfathomable.

What makes Bitcoin fundamentally important is that for nine years it has proven this was not a utopia but that it was possible. For nine years Bitcoin transactions have been executed and stored in a ledger shared by all market participants. This shared ledger is absolutely trusted as being 100% accurate and 100% reliable. Yet, this ledger is under nobody’s control. It belongs to no one. It is public, transparent and global. Its functioning is ensured by Bitcoin itself and is under no central authority whatsoever. It is indeed a revolution.

For the first time in our history, we have created a new way to implement trust, and it is incomparably better than the old way.

How did Bitcoin Make this Incredible Feat Possible ?

Bitcoin is conceptually easy to understand. It can be visualized as a ledger called a blockchain with each block representing a page of the ledger. A block contains a list of transactions and each transaction consists of the amount of Bitcoin transferred, the account of the person sending it and the account of the person receiving it. Every ten minutes a new block is sequentially added to the blockchain the same way a new page would be sequentially written in a ledger. Before a block can be added to the blockchain, every transaction is checked against the blockchain history. This is how the system ensures that the person sending Bitcoins owns them. Once a block is added to the blockchain, the transactions included in the block are final and can never be tampered with. That’s it. This is what Bitcoin does.

What is challenging to understand is how it does it. Bitcoin’s fantastic breakthrough sits on top of decades of research and progress in cryptography, distributed systems, open source development and computing technology among others. But the same way you don’t need to understand the law of physics to know that a plane flies, you don’t need to understand all these disciplines to understand what Bitcoin does and that Bitcoin works.

Bitcoin Price, the Value of Trust

Bitcoin is ran and continuously improved by a vast community of developers and solution providers. The explanation of this complex ecosystem and its functioning is the subject of a separate article (Bitcoin – How the magic works). But what is paramount to understand here is that this entire ecosystem is paid in Bitcoin and thus depends on Bitcoin’s value to thrive.

Everyone in the Bitcoin ecosystem has skin in the game and a strong incentive to ensure Bitcoin’s integrity as well as its continuous improvement. As Bitcoin’s value rises, so does the strength of its ecosystem and trust in its blockchain. Bitcoin blockchain and Bitcoin cryptocurrency are the two sides of the same coin. They cannot be separated.

Resisting Change and Embracing Change

Bitcoin remains often misunderstood and criticized by bankers. In most financial circles it is still taboo to talk about Bitcoin. It is like Lord Voldemort in Harry Potter, “He who cannot be named.” It is ridiculous. Bankers also still routinely associate Bitcoin with money laundering, describe it as a Ponzi scheme and underline hacking events. It is all complete nonsense.

Firstly, every transaction ever done in Bitcoin is available for all to see on the blockchain. Such level of transparency and traceability is unachievable by banks today. It would, therefore, be difficult to think of a worse mechanism than Bitcoin to launder money. Secondly, calling Bitcoin a Ponzi scheme is a failure to understand the Bitcoin ecosystem and that it cannot exist without Bitcoin, the cryptocurrency. Finally, while there have been instances of hacking in the Bitcoin ecosystem, the blockchain itself has never been tampered with.

Bankers’ reactions to Bitcoin is not atypical for a conservative culture always under the scrutiny of auditors and regulators. Bankers had initially the same response to opensource software, public clouds and of course, the internet. The emotion was not quite as high as it is for Bitcoin just because there was far less at stake. Indeed, Bitcoin threatens to revolutionize the very heart of the banking industry, and while the transformation will take time, it is not surprising to see the industry being both dismissive and defensive of such a threat. But the bankers are not naïve either and understand that once out, a good idea cannot be put back in its box. They may belittle Bitcoin, but they are embracing its technology. As they did for cloud technology before, they are first getting comfortable with blockchain technology within their own walls, the private way.

Bankers prefer to talk about Distributed Ledger Technology rather than Blockchain Technology. But what they concretely do is develop in house Proof Of Concepts with private blockchains shared with a limited number of participants. Private blockchains do not rethink trust the way a public blockchain does. In the case of a private blockchain, there is not enough scale to guarantee data integrity. Trust is therefore still implemented the old fashion way through procedures and controls. So one can argue that a private blockchain is to a public blockchain what a private cloud is to a public cloud or what an intranet is to the internet. It is nevertheless a step in the right direction. It allows banks to learn about the technology in an environment they feel comfortable with and can control. Today, banks are extensively using both the internet and public clouds, and eventually, they will use public blockchains too.

Reimagining Banking

While it is easy to criticize banking and the finance industry, let’s not discount neither the importance of the role it plays in our economy, nor that it works. In the vast majority of the time, you find your money waiting for you on your bank account, you pay your bills securely and you can even send money across frontiers, if not swiftly and cheaply, at least safely. The financial system may be subject to frauds but we have made progress tracking them and put in place insurance so people are mostly protected against them. We take these for granted today but they are the result of centuries of incremental progress.

Banks provide four main categories of services for society; Safekeeping & Transfer (Keep your money and your other financial assets safe on your accounts and move them securely within the system); Exchanges & Payments (Allow you to buy and sell goods, services and assets); Financing & Risk Management (Facilitate the allocation of funds across the economy efficiently); Financial Advisory & Wealth Management (Provide expertise and support dealing with the complexity of the industry). The first two categories are the underbelly of banking while the two others are key to building the future.

The arrival of Bitcoin and blockchain technology is an opportunity to completely reimagine Banking. The first two categories of services (Safekeeping & Transfer and Exchanges & Payments) are all about the many ledgers discussion we had earlier. It might be hard to wrap our heads around this but in our increasingly digital world, money is nothing but lines in a ledger. Blockchain technology provides a solution to drastically simplify how this is done allowing banks to focus their energy and resources on higher value added services (Financing & Risk Management and Financial Advisory & Wealth Management). The Bank of the future, post-blockchain revolution, will not be huge processing factories anymore but high value added financial partners for retail and corporate clients. The bank of the future will also be able to  bring affordable financial services to the two billion people worldwide who still did not have a bank account as of 2017.

Bitcoin, King of Cryptocurrencies

Bitcoin is not the only cryptocurrency. There are many others that the industry generically refers to as altcoins. They all compete against Bitcoin but Bitcoin stands alone.

The reason for that is not superior technology; it is again about trust. No other cryptocurrency has been in existence as long as Bitcoin. No other cryptocurrency has a community as large and as loyal as Bitcoin. And no other cryptocurrency has an ecosystem as broad as Bitcoin.

These facts alone explain why Bitcoin’s trust capital is so dominant. But there is another critical differentiator; Bitcoin is leaderless. This is an important feature because, as we discussed before, for a shared ledger to be truly trusted nobody can have special privileges over it. It is the same thing for a cryptocurrency. To be truly trusted, no one can have special privileges over it either. This is the case for Bitcoin and for Bitcoin only.

This might make its governance confusing and even frustrating sometimes but it is the only way to guarantee its independence and without independence, there cannot be trust. Technology is important too of course, but Bitcoin can quickly absorbed innovations especially in an opensource environment. Trust, on the other hand, takes time to build. This is why in the world of cryptocurrencies Bitcoin is the king and will remain one for a long time.

The Rise of Bitcoin, Unavoidable ?

Bitcoin is an incredible breakthrough. With blockchain technology, Bitcoin’s developers have found a new way to implement trust. It might not look like much at first sight but providing a way to share a ledger in a trusted way opens the door to rethinking so much of what we do as a society. The solution is efficient, elegant, brilliant.

That said, a change of that scale will meet resistance. This is characteristic of any great disruptive invention. The finance industry and some governments initial reactions were negative. But we can already see the first signs of acceptance. The finance industry is slowly changing and has begun to experiment with blockchain technology. Bankers still cannot say the words Bitcoin or cryptocurrency, but crypto-asset is now an acceptable term.

Governments are also warming up to cryptocurrencies. Bitcoin is still not welcomed in some countries struggling with freedom, but the most progressive nations are now finding ways to accelerate the adoption of cryptocurrencies and blockchain technology. We are still in the early days for Bitcoin and blockchain technology. There is still a long way to go before blockchain technology becomes mainstream, but considering the hurdles it has already cleared, Bitcoin is now unstoppable and is leading the trust revolution.

Conclusion

Bitcoin is first and foremost a ‘trust’ revolution. The cornerstone of our society is trust. The heart of our financial system is trust. Bitcoin major breakthrough is in its ability to share a ledger in a trusted way with all market participants. Without Bitcoin, blockchain technology would not exist. This remarkable invention opens the door to reimagining not just the finance industry but all industries and all the functions in our society that deal with trust. Trust is core to who we are and how we are organized. Bitcoin is the first technology that brings a satisfactory solution to implementing trust. The solution is efficient, elegant, brilliant. Bitcoin history and unique characteristics give Bitcoin a peerless trust capital and a dominant place in the world of cryptocurrencies. Bitcoin is king of cryptocurrencies and leader of the trust revolution.

So yes, we can say that Bitcoin is fundamentally important!

Pascal Lauffer, CEO Onbrane