Nations might not adopt pure bitcoin, but IBM's blockchain-based alternative has a chance
Imagine you’re a disruptive new technology and you’re looking for mainstream support among consumers, businesses, and regulators. What’s the best endorsement you could get? You’d be hard pressed to do better than bitcoin did last week, getting a nod of approval from IBM.
Reuters reports that the granddaddy of tech blue chip brands is experimenting with the same blockchain technology that underpins the often controversial digital currency and wants to see central banks do the same. Reuters explains:
International Business Machines Corp is considering adopting the underlying technology behind bitcoin, known as the "blockchain," to create a digital cash and payment system for major currencies, according to a person familiar with the matter.
The objective is to allow people to transfer cash or make payments instantaneously using this technology without a bank or clearing party involved, saving on transaction costs, the person said. The transactions would be in an open ledger of a specific country's currency such as the dollar or euro, said the source, who declined to be identified because of a lack of authorization to discuss the project in public. According to Reuters and earlier reports, IBM has been in discussions with the US federal reserve and other central banks about such a money transfer system. Naturally, IBM is hoping to build and likely maintain the necessary infrastructure for such a project. Whether the company has the personnel and experience to build out the software side of things is another matter entirely.
Positive as the development may be, IBM doesn’t appear to be offering a full endorsement of bitcoin. Put another way, the company isn’t trying to convince Fed Chair Janet Yellen to adopt bitcoin straight away. Rather, the plan, as Reuters describes it, calls for a bitcoin-like currency – or currencies, with the report indicating it might create different digital fiat replacement for each government – built on the same underlying blockchain distributed trust ledger system, but managed by global central banks. The thinking is that such a currency would be less expensive to maintain, allow for quicker settlements, and more convenient for consumers to carry and use.
Reuters' source says: "These coins will be part of the money supply. It's the same money, just not a dollar bill with a serial number on it, but a token that sits on this blockchain."
Bitcoin, as it currently exists, is decentralized, meaning that no single government or company (or group thereof) controls the issuance of new currency units or the maintenance of the ledger. Bitcoin’s ledger is publicly available, and maintained by a community of professional and amateur “miners,” who use specialized computers to solve cryptographic problems in exchange for bitcoin-based compensation.
One thing that this report fails to address is how IBM and the Fed might convince banks to embrace such a new currency. Checking and savings accounts are not the revenue centers for most banks that the were decades ago, but they still produce non-trivial fees and interest income. More importantly, however, banks use low-margin checking and savings account relationships with consumers and businesses as a source of generating higher-margin business like lending and investments.
In a decentralized, digital currency world, the role of banks will certainly change, if not disappear, at least in part. It’s hard to imagine the need for separate checking and savings accounts, which today serve to keep people from hiding stacks of paper currency under their mattress. In a digital currency world, it requires effectively no more space to store $1 as it does $1 million, and the security demands for each are the same. Early bitcoin wallet leaders like Coinbase, Circle, Blockchain.info, and Xapo offer a glimpse into the fee models that might emerge in a digital currency-dominated world, but those have hardly been tested at global economy scale.
But nevertheless, the fact that IBM and seemingly multiple central banks are even considering a blockchain-based currency solution confers a great deal of positive endorsement on bitcoin, and offers a counter point to fears over, among other things, security and money-laundering risk. These discussions remain informal and governments rarely move at anything like startup speed. This suggest that we’re still very early in the process of seeing a national or global digital currency introduced to market. But such landmark policy changes must start somewhere, and IBM’s involvement brings an air of much needed credibility to the proceedings.
[Disclosure: Michael Carney has accepted a position as an associate at Upfront Ventures that begins in April. To the best of Pando’s knowledge, the companies in this post and their competitors have no affiliation with Upfront. This post went through Pando’s usual editorial process.]