I enjoyed reading the editorial by Goldman Sachs CEO David Solomon today in the WSJ. He does what lots and lots of financial company CEOs are doing these days and have been for a while. They are embracing blockchain but tossing crypto.
This post is not meant to be critical of Goldman’s CEO, nor another financial company CEO that embraces “blockchain”. I run in a lot of circles where people tell me crypto is a fraud or that they don’t understand it and don’t want to understand it since it will probably never be something they interact with on a daily basis. Most are okay with blockchain. So, I will try to use the KISS system to explain it and maybe we won’t get wider adoption but we might get some wider understanding.
Cryptocurrency has no double meanings regarding interpretation by the general public. Here is what you hear constantly from regular people and financial leaders like Charlie Munger and Warren Buffett.
It is a fraud built on nothing
No one will use it for payments. Why wouldn’t I use dollars? My credit card works fine.
Cryptos invite fraud and aren’t secure. Look at Mt. Gox, FTX, and all the rest
It’s a way to launder criminal money.
It’s a way to avoid taxes
However, the reality is that blockchains have been around for eons. They are general ledgers. There is nothing spooky or underhanded about that. There are plenty of examples of blockchains and you interact with them every single day. Credit card networks might be one sort of example but there are plenty of others.
The thing about every single one of those blockchains is they are private or centralized. They are owned by one entity. That entity is able to make bundles of profit off ownership.
Those private blockchains are almost immune to competition from other businesses. Sort of like the ice wall in Game of Thrones. If you want to compete, you have to spend millions of dollars to do it and the marginal revenue you will earn from competing will take you years to break even. Hence, it doesn’t make sense to compete.
When Goldman’s CEO says, “The technology is already making our own work more efficient. Using blockchain, we’ve been building trading platforms where clients can trade with each other in minutes. By cutting down each trade’s processing time from hours or even days, we’re freeing up capital that would otherwise be locked in limbo. Last week, using our new tokenization platform, we arranged a €100 million two-year digital bond for the European Investment Bank with two other banks, all based on a private blockchain. Typically, a bond sale like this takes about five days to settle. Ours settled in 60 seconds. By reducing settlement times, we are lowering costs for issuers, investors and regulators. Using blockchain, we can extend these benefits more broadly in fixed-income markets and across other asset classes.”
And,
We are using self-executing or “smart” contracts, whose trade terms and settlement instructions are written directly into the program code.
He is really saying something else.
Goldman owns all the information, intellectual property, data, and gets all the fees from all of the above. What the CEO’s statement tells me is that finally, crypto/blockchain is a big enough threat to their traditional style of business that they are competing with it. But, they don’t want to embrace the reason that Bitcoin and other cryptocurrencies were engineered in the first place.
Decentralization.
What is the difference in a decentralized environment?
All the fees, data, information, and intellectual property on the chain are shared by the entities that own tokens that power that chain. The big financial institutions lose control over that which means they lose control and a profit center.
We get stuck thinking about how Bitcoin will replace US dollars in transactions. It won’t. That could happen in the very long term after I am dead and gone if the US government continues to debase its currency.
No, crypto will be used in business-to-business transactions initially. As the Goldman CEO points out, Goldman arranged for three banks to trade and settled in 60 seconds.
In a totally decentralized environment, the counterparties find each other independent of Goldman. They write a contract on a crypto token, like Ethereum. All the rules for margin, settlement, delivery, and contract specs are written into that program along with the banks which money is deposited, paid, and collected from.
Once the contract settles, everyone can see it. Anyone that owns a token for that blockchain has access to the information and can try and monetize it.
This isn’t just for banking but for any industry that has a lot of centralization. Tokenizing real estate titles is another example. Tokenizing voting so we eliminate fraud is another example. Tokenizing immigration is another possibility. Putting a non-fungible token on a wine bottle or event ticket to eliminate fraud could be another.
If you really let your mind run crypto gets really interesting and will weave itself into the fabric of your life. Fred Wilson posted about how artificial intelligence in the form of ChatGPT has ended essays in education as a way to grade students. As AI becomes further integrated into the mainstream, it will force the adoption of new technology to prove you are who you really say you are. You will need a unique digital ID, not just one in your pocket issued by the government. Already, we are seeing how AI can alter photos, videos, and other things we used to trust. Crypto tied to blockchain in a decentralized environment provides a solution to that problem.
Crypto is just computer software built onto some digital delivery vehicle, but the key difference is the delivery vehicle is owned by everyone that owns that token.
Therein lies the real threat to traditional finance. The likes of Goldman will have to figure out new ways to compete and show that they are valuable to the market. Right now because of centralization and regulation that codifies a lot of centralization, the Goldmans of the world have a competitive moat that the rest of the world doesn’t have. Crypto and Blockchain force them to lose that moat and swim in the ocean with the rest of the fish.
Simply put crypto is all fraud
No underlying asset
No coupon
It only goes up because of hype and short supply
It also is a huge laundering machine for illegal activities
Good summary of the 2 concepts. I was flabbergasted earlier this week when a knowledgeable financial commentator on local Chicago radio said he still didn’t understand blockchain. It reminds me of option theory....before you learn about it, it seems like rocket science but the basics turn out to be pretty simple.