Welcome to the Stratfor Podcast, focused on geopolitics and world affairs from stratfor.com. I'm your host, Ben Sheen.
So CME getting in on the bitcoin action. Warnings from major market players like Jamie Dimon haven't stopped hedge funds from betting big on Bitcoin. Bitcoin is now being used to buy regular things from restaurants to retail, so why not real estate? Today we're talking about the Bitcoin bubble.
That's right, in this episode of the Podcast we're diving into the world of blockchain, Bitcoin, and what these new technologies could really mean for companies, financial institutions, and society at large going forward. For part one, we sit down with Stratfor Senior Science and Technology Analyst Rebecca Keller to better understand what blockchain and the underlying technology behind it called blockchain really are. And then in part two of the Podcast, we're joined by Stratfor Senior Analysts Matthew Bey and Mark Fleming-Williams to learn more about how people are just starting to use blockchain and other potential applications for the future. Thanks for joining us. And here with me today we have Stratfor's Senior Science and Technology Analyst Rebecca Keller to talk a little bit about blockchain. Thanks for joining us today, Rebecca.
Good to be here.
Before we start to talk about blockchain, this revolutionary financial technology, I'd like to take a step back initially and talk a little bit about how it really came on the scene, and blockchain for many people is kind of synonymous with Bitcoin, which came on the scene initially in 2009 and came to define the idea of cryptocurrencies for many people but the two are kind of interlinked but one kind of broke away from the other. Can you tell me a little bit about the origins of Bitcoin and why blockchain is such an important part of it's legacy?
Bitcoin is a single application of a blockchain. So blockchain itself is the underlying technology of Bitcoin and basically what blockchain is is a digital ledger. All that really means is it's computer code that starts the blockchain, but what you can think of it as it's almost like a virtual wallet. Now that wallet can contain a currency like Bitcoin or it can contain information and each person or participant in the block chain has their own wallet and carries their own information and then transactions either the exchange of that information whether it's passing a ship's manifest to the dock or it's exchanging Bitcoin like you would traditional paper money, you activate a signal to do that. That signal or that activation code is then verified not by a single entity like a bank would verify a credit card or a transaction but it's verified by the entire group in a distributed space throughout the network and that's a key feature of the technology because it it institutes a level of trust in it because it's not just a single entity or single person verifying the transaction, it's verified it in groupthink almost which which helps prevent fraud.
It's kind of hard to underestimate, isn't it, just how groundbreaking this was because clearly you mentioned some of the diverse applications of blockchain and we're going to talk a little bit more about that later, but it certainly started off specifically based on a digital currency and certainly one of the problems we've found in the past with the idea of digital currency is that through virtue of being electronic it can be copied ad nauseam so the whole issue of ownership becomes very complicated. If you transfer digital currency to somebody, who's to say you don't simply retain the currency and you're creating endless copies which devalues it and blockchain was really sort of the first thing that could overcome this in terms of peer-to-peer lending. You didn't require a third party to verify transactions.
Exactly, and so that timely aspect or that security aspect where you don't want to devalue you your currency, that's actually built into the technology of blockchain so the block comes from the fact that all the transactions are grouped together in blocks and what defines that block is a period of time. All the computers or the nodes in the network or are working to solve a mathematical equation and that's called mining and they get payments for that and that sort of where that phrase and that terminology is used a lot with Bitcoin. But what that does is it sets a set time limit and it times transaction so you're able to track them and know what happened first and what happened where and it really keeps the system honest and and that that all comes back again to trust and that's a huge and I can't say it enough that's a huge selling point and a huge attribute of this technology.
Part of that is having there's this publicly viewable ledger so anyone can interrogate the ledger and see the transactions that have taken place which like you say, keeps everyone honest. And I guess it's important to note that when Bitcoin first landed, a lot of people saw Bitcoin itself as being this revolutionary technology, but actually it was the blockchain behind it that really showed the promise and we've seen blockchain evolve beyond Bitcoin to other digital currencies or on other platforms so it's Ethereum that have already taken this idea and then run with it.
Exactly, Ethereum's running even further into like the differentiated computing spaced. It's certainly another avenue of investigation on the complete tangent. Again it's the blockchain, it's the idea that you have this group of computing power working in congress and working together to do the transaction. There's no single node or anything is ever blocked up, there's no single node that can act as sort of the stopping point
And it's interesting how when you start to talk about these game changing financial tools, at some point they are going to fall under the blanket of regulation and at some point they are going to fall into the mainstream and we've seen there's this gradual acceptance of the blockchain technology as a legitimate tool in financial transactions, and in fact, we saw two banks, one in Australia and one in the United States start to use blockchain in applications to complete transactions as early as October 24, 2016. How have things evolved since then, how much legitimacy does this technology really have now, Becca?
I mean I think it has roughly the same legitimacy we've seen. It goes back and forth. We saw China take measures to remove it from circulation and we've seen it in commercial transactions, stores accepting Bitcoin. But there needs to be a lot more regulation and a lot more, and it's going to become funny cause I'm going to go back to the word trust but the general public doesn't trust it yet even though the technology itself is so based on trust. It's going to take awhile before we see it really really permeate and again I don't know that Bitcoin will be the ultimate technology. First movers rarely are, but it really did start the movement.
Well Rebecca, I look forward to hearing in the next segments on some of the applications that blockchain can certainly be used for and the ways in which it's going to shape the future in many respects. Thank you so much for explaining this to me today. If you'd like to learn more about our analysis on blockchain and the impact that it and other disruptive technologies could have on broader geopolitical trends, visit us at worldview.stratfor.com. We'll include links to our related assessments in the show notes. And if you're not already a Worldview member, consider joining us to access all of our independent geopolitical analysis, forecasting, and industry insights on the core trends driving the international system. Information about individual, team, and enterprise memberships are available at worldview.stratfor.com/subscribe. Now to the second part of our Podcast where Stratfor Senior Analyst Matthew Bey and Mark Fleming-Williams join us to discuss innovative new applications of blockchain technology and its potential to shape the future.
My name is Matthew Bey, I'm a Senior Global Analyst here on Stratfor speaking from Austin, Texas. Joining me today to discuss blockchain, Bitcoin, and other things that are evolving in the world of digital ledger technology are Becca Keller, who is speaking from California, and also Mark Fleming-Williams from London. Let's start off with Bitcoin. Bitcoin is the thing that has started discussing digital currencies and also the blockchain and everything else that goes with it. Mark, as an economic analyst, what do you think about Bitcoin and how that interacts with global currencies?
Thank you Matthew, Bitcoin is an interesting creation. It obviously has attracted a lot of attention ever since it first launched on the scene in the immediate aftermath of the financial crisis. It is a new type of asset in that it is completely kind of owned and completely decided by its original code and structure but also by the network that surrounds Bitcoin, which is largely online. As an asset, it's interesting and it's interesting in currency because a lot of the conversations around it have involved whether it could rival traditional currencies, so the dollar or the yen, or these things. And the answer is that it can't in a classic way, or at least not any time soon and the reason being because Bitcoin itself, the way it's structured, has got its finality written into its structure. It's a little bit more like an asset than a currency or a modern currency and sells a little bit more like a commodity like gold in that the way Bitcoin is created, there will be a certain number of Bitcoins created, there is a limit to the number of Bitcoins that can be created, unlike for example, the dollar, which is pretty much decided, as we've seen, with quantitative easing, the supply can be expanded as needed. And so as result, Bitcoin, that's one of the aspects which mean that it's going to struggle to challenge the traditional currencies on the global scale.
But there's also a question about control that's going on with Bitcoin. One of the reasons that Bitcoin first emerged and why it got a lot of popularity was the fact that there was concern around quantitative easing for that matter. The Central Banks basically printing money endlessly which is why the coders designed Bitcoin to actually have a deflationary tendency, but so the trust factor, though. If we do have a currency that is not controlled by a government, not controlled by anything, really, except for the coding, I guess. How does that actually play into the cataclysm whether or not it can actually replace the dollar or replace something that's backed by a national government?
This is a conversation you and I have had in recent months. The interesting thing about the fact that Bitcoin is owned and has its direction largely defined by the community behind it makes it a less reliable asset perhaps than something like the dollar and the reason for that being that what we've already been seeing so far this year is perhaps that community, which doesn't necessarily agree on everything, may decide to go in a different directions with the currency, so what we've seen already this year is a hard fork where a part of the community decided that they wanted Bitcoin to be something different and they took an aspect of Bitcoin off in a another direction, meaning that an investor then has a choice. Do you stick with Bitcoin or do you go with this new one?
Or do you go with both?
Or do you go with both, absolutely. Although you've only got a certain amount of money. But yeah, or do you go with both? With the dollar for example, with the currency, instead of being backed by the decisions, instead of all the decisions being made by all of the Bitcoin community, the decisions are largely being made or are being made by the US Government and the US Federal Reserve and so what that means is when you're buying the dollar, you are buying the US, basically. You're buying into the belief that that government will continue to control that area and will continue to issue this currency and will continue to regulate it. When you've got Bitcoin or a cryptocurrency which is owned and decided by this community who's faces you can't see and you don't necessarily fully know their motives, there is a different level of risk attached as well, so that's another potential drawback with Bitcoin compared to other currency.
One of the things though, that actually does kind of work in its favor that's interesting to point out is you just mentioned how not knowing your customer, that's a concern, which is legitimate, but at the same time when we talk about the way that credit cards work or the way that debit cards work, there's always the risk of the person not paying it in the end, or calling your bank account basically and saying, "Hey you know what? I didn't actually make that payment," so there's always that risk premium that's basically going to insurance type companies over whether or not merchants will get their payments and one thing that Bitcoin does since it actually transfers the funds immediately and you don't actually get the transaction to go through unless you actually have the funds in your account, is you get around that. From a merchant's perspective, it's actually a good thing because it's not reversible. Now from the customer's perspective, that's the opposite risk.
Yes absolutely, and this actually quite neatly takes us onto so Bitcoin itself has its advantages, has its flaws, but I think what we can agree on is that blockchain, some of the functioning technology underlying Bitcoin is exciting and has a lot of potential future benefits which could go in all sorts of different directions.
One of the great things, though, about Bitcoin and the technology is it's a digital ledger, so essentially what it is is it takes all the transactions that we've seen throughout the entire system that it's been around and it essentially is just calculating and adding up all of that so everybody can see it in a public way. That then allows us to have a lot more confidence in the system and the way that things are being worked. Whether or not somebody has money, whether or not they can actually afford to give you something, so that is something that then is then being calculated essentially by the blockchain in a way that builds consensus around everybody who is on the network. For example, if I am calculating my own ledger, you're calculating your own ledger, and then you try to insert something that's frivolous but everybody else agrees with me, then that actually won't go into the system. The blockchain essentially can develop consensus around something that you wouldn't necessarily get otherwise and then that concept, that consensus building concept of the blockchain is what's really significant, it can be used to do a currency, but it can also be used in a number of different applications, some of which we're actually seeing in finance already. For example one of the things that I personally think has got a lot of potential is in the area of transactions. One of the things that we've seen is Ripple which is set up like Bitcoin but its design isn't so much to be a currency as much as it is
in order to use currencies to quickly go across international borders in a payment system. Right now international payments are dominated by central banks, they're dominated by a few banking houses, they're dominated by Swift, which is the communications network that banks talk to internationally, and that's something that we've seen in geopolitics have a very significant impact where the United States, for example, can say, "Hey Swift, you have to cut off Iran from transactions." That then cuts off Iran from the international financial system. Something that's Ripple would allow basically banks to communicate with each other that the United States or other countries that cannot lock down and it also breaks the dominance that the few banks that are involved in that area today are in. So that's one area where blockchain can then be used for something that's not Bitcoin, not a currency in it's purest form, but it has a currency that underpins the system, but then you have an application that is significant in the financial sector that's well beyond just the currency.
Taking a step back we've talked a lot about the financial implications for this technology but it actually has a broader view than that. Looking at the trust aspect is important for more than just finances and important in supply chains and looking at how the movement of physical good as opposed to just currency or financial assets. Because we don't have the problem or the constraint of the need for a government backing like you would with a currency, that we could probably see blockchain's technology implemented more quickly in those kind of industries where it's used to track goods and that ledger part of the technology is is the driving factor, as we see it to increase efficiency in supply chain operations and so just looking, making sure we continue to look past finance as a sole user of this technology.
That's absolutely right, Becca. Another industry where we are seeing it as having an impact or at least research going into that is the health sector. Obviously patients' records is a big thing, or obviously people want to keep relatively confidential, but it is still a mechanism where we can see that trust aspect but also some sort of a still transparency and anonymity aspect then allows then this to be a more efficient way to transfer health records so there's that aspect of it. We're starting to see it in other sectors as well such as the computing sector, we're seeing it in health sector, we're seeing it in the shipping sector, we're going to probably see it in agriculture, we're probably going to be seeing it more in economics beyond just finance, so there are definitely a lot of other applications.
Basically wherever trust and consensus are a key benefit or a key attribute of the industry then we can expect to see blockchain make its way in.
Yeah and another area that's not even really a sector that we're starting to see it emerge is actually just in the way of doing distributed computing. Another one of the pilot programs that's out there is Ethereum. Ethereum was essentially designed to have a distributed computing network that is along five or 6,000 different computers or however many is connected to the internet and that is able to then run programs or able to run different sort of classical programs, whether it be something that's in the finance sector, whatever application that a company or a person that's on the system wants to be used and then it uses blockchain to distribute that processing power throughout the system and then that one computer or that one network of computers would then perform that code and essentially you would be paying with whatever currency is underpinning the system, in this case, it's Ether, to do something, so this actually gives you a distributing computer that nobody can shut down that can be always running, always on, and then running all kinds of different codes that's really in a different way than we see computing being done now. This obviously will have implications for the finance sector if you want to use it to run programs for smart contracts. That's going to be contracts that automatically go into force whenever something happens, or much more complicated than that, obviously that's just the simplest version I guess. But then also just if you think about just running programs in general, whether that be
nefarious reasons or positive reasons, you still have that system of work. That's another application that takes away from just the idea of ledger in accounting things and then just broadening out to a way that you just distribute information to begin with.
That's it for this episode of the Stratfor Podcast. For more analysis on blockchain, Bitcoin, and other disruptive technologies, please visit us at Stratfor Worldview. We'll include links to related reading in the show notes. And if you're not already a Stratfor Worldview member, be sure to visit us at worldview.stratfor.com/subscribe to learn more about individual, team, and enterprise level access. Worldview members can continue this conversation in our members only forum. That's where you can engage directly with other readers as well as Stratfor analysts, editors, and contributors. If you have a comment or an idea for a future episode of the podcast, email us at or give us a call on 1-512-744-4300 extension 3917 to leave a message. If you have a moment also consider leaving us a review on iTunes or wherever you subscribe to the Podcast. We really appreciate your feedback. And for more geopolitical intelligence, analysis, and forecasting that brings global events into valuable perspective, follow us on Twitter @stratfor. Thanks for listening.