The end of this month, Oct. 31, 2018, will mark the 10th anniversary of the day that a link to a paper, authored by Satoshi Nakamoto, describing the digital currency called bitcoin was first publicly circulated.
Jan. 3, 2019 will mark the 10th anniversary of the first bitcoin block that was mined by Satoshi, giving birth to the notion that a digitized, anonymized currency sent over a permission-less, distributed ledger could democratize how money would move between people and parties around the world.
Ten years after Visa and Mastercard launched, they had each licensed their tech to thousands of banks that had cards in the hands of millions of consumers, who were using them to buy things at millions of merchants.
Ten years after Apple launched the first iPhone, it had sold 1.2 billion of them, and had firmly and fully ignited the mobile commerce revolution with the notion of apps and a robust developer ecosystem.
Ten years after bitcoin launched, it remains the go-to currency of criminals and a way for cybercrooks to wash their money. Well, that’s when it’s not being bought by speculators as a digital lottery ticket. Seventy-five percent of bitcoin transactions are the result of miners moving money between themselves and speculators trading it — the transactions that it powers are nefarious in nature, at best.
Bitcoin’s processing operation is highly concentrated within a handful of miners in China — which is getting more concentrated now, since the price of bitcoin has crashed and fewer players can afford to keep the lights on (literally, since bitcoin processing requires a massive amount of electricity).
Bitcoin exchanges are routinely hacked, and those funds are usually lost forever.
Bitcoin is anything but free and, in fact, it can be pretty pricey for senders and receivers. Miners, despite eschewing capitalist regimes, as it turns out, like the capitalist way of being paid for their services.
Sending money over the bitcoin rails is also anything but fast. Despite very low transaction volumes, it can take as long as an hour or more to take a round trip on its rails.
Yet, what’s amazing to me is that we are still, as an industry, talking about it — bitcoin, now crypto, blockchain — as if its potential to revolutionize our global financial system, and the way money moves between parties around the world, is just around the corner.
It isn’t because it won’t.
The innovation touted 10 years ago, that has garnered billions of dollars of venture capital (VC) funding, hasn’t turned out to be the “internet of money” as advertised.
Nor is it now (nor will it ever be) the single digital currency that will democratize the movement of money from anyone to anyone for free — or free from the centralized regimes that bitcoin enthusiasts said only made money more expensive and out of reach for the underserved in developing economies.
Only recently has the media started waking up and piling on.
But only because it has to now.
Of Fads And Frameworks
I’ve been writing about bitcoin, blockchain and the smoke and mirrors of their promise to change our financial system since 2014.
In those pieces, I acknowledged bitcoin as an interesting, even fascinating, innovation. But as the salvation of our global financial system, not even close.
At least once a year, I reprise the theme, mostly to remind everyone that the innovation that truly has the power to change the world is built on a framework that respects — and reflects — how networks work and how they scale. Those frameworks have launched thousands of successful platforms and tubed many thousands more.
The design principles of these complex networks are the subject of many articles that my colleagues and I have written about for a decade or more — and captured in two books that were published by Harvard Business School Press in 2007 (Catalyst Code: The Strategies Behind The World’s Most Dynamic Companies) and 2016 (Matchmakers: The New Economics of Multisided Platforms).
Those frameworks start with finding a problem that needs to be solved by eliminating friction or adding value to platform stakeholders. The platform becomes the source of that value. That value is used to build those networks using sound business models, with strong, principled governance that builds the trust that delivers scale.
All of that turns out to be really important, and has proven to be time and time again, when it comes to moving money.
The corner that bitcoin/crypto and blockchain have boxed themselves into now, a decade later, is that innovating financial services and payments is impossible without them. It’s becoming a more problematic box, too, that has raised only more doubts about their viability. Especially now that we see how little payments innovation they have ignited and how much progress has been made without them.
Innovation By Any Other Name
Satoshi’s innovation was a distributed ledger network powered by bitcoin. Bitcoin’s use cases — enabling criminal activities and fueling speculation — helped it build critical mass as a processing platform for distributed ledger tech (DLT). It’s why bitcoin and blockchain are inextricably used — and often conflated. You can have distributed ledger tech without using bitcoin rails, but you can’t have bitcoin without blockchain technology.
All of these cryptocurrencies are now trying to build their own networks on top of uses cases that move money between parties via a distributed ledger protocol — using the need to innovate financial services and payments as the hook and driver of the need.
It’s a curious position to take.
The only reason for using those cryptocurrencies, and the more than 1,000 that have followed in their footsteps, is to avoid using the financial services networks that exist today — and the fiat currencies that underpin them.
It assumes that innovation of financial services globally is only possible outside of the existing financial services infrastructure, using a new cryptocurrency as its exchange of value — essentially, the processing rails to move money between parties.
And now, in the face of the Great Crypto crash and burn, using stablecoins tied to the stable USD to hedge against crypto volatility and create the stability needed to make everything, from lattes to Louboutin’s, buyable using crypto.
That means we are now funding and creating cryptocurrency innovations to make other cryptocurrency innovations that haven’t worked more viable.
Only in America.
When Facts Get In The Way
Here’s the really big news flash: Money has been digital and moving around the world that way long before most people started talking bitcoin, crypto and distributed ledger tech.
Take developing markets.
M-Pesa’s original use case was to digitize the paper currency that was once sent back home to villages via paper bags and busses. A decade later, it has more than 26 million users who’ve sent and received more than 184 billion ($1.8 billion USD) Kenyan shillings over the last 10 years, using nothing more than a feature phone. Money is exchanged instantly when people want and need it to be.
China has, in effect, digitized money with Alipay and has cracked down hard on crypto exchanges. It, like every other government in the world, doesn’t want to aid and abet money launderers inside its proverbial “four walls.”
India is using QR codes, existing rails and its own fiat currency to enable digital payments between people in the aftermath of its demonetization, on the road to establishing digital payments.
Western Union moves money all over the world — and into developing economies — and has for more than 160 years without needing cryptocurrencies. Western Union CEO Hikmet Ersek has gone on record, stating that Ripple’s XRP, which the company piloted, saved Western Union absolutely no time and no money.
MoneyGram, Xoom and PayPal move money all over the world, too, without crypto. So, do banks and innovators that leverage those rails to create payments innovations that remove big frictions for buyers and sellers.
The Talk Of The Blockchain Tech
Today, blockchain tech has pushed bitcoin off its perch at the top of the innovation hype cycle. We’re about to release a new study that documents the degree to which the hype machine has been pinned on blockchain tech’s claims of reinventing everything, from moving money to making sure that our food supply is safe.
Over the last 18 months or so, we found more than 140 announcements about blockchain tech pilots, many of which relate to use cases in payments and financial services.
Only four of those announcements have ever been followed by stories describing further development or success — or that money has been raised to double down and do even more.
At the same time, investments in blockchain tech are positively puny. It’s been reported that investments in blockchain and blockchain tech by the enterprise, worldwide, are expected to reach a whole $2.1 billion in 2018 — twice as much as last year. Investments in cybersecurity measures, by comparison, are expected to reach nearly $97 billion this year.
A study done by Juniper suggested companies that have spent $100,000 to pilot blockchain experiments reported they would likely match that investment in the year to come. A whole $100,000 — most likely in response to the board that pressured the CEO to “do something” with blockchain, for fear of missing out.
Call me underwhelmed.
Hardly anyone — okay, maybe there’s someone — is exactly betting the farm on blockchain tech to power their futures.
That also happens to reflect the reality of business.
The conversations the media wants us to have now about bitcoin, cryptocurrencies and blockchain tech have lost sight of the problem that needs solving, as we examine the evolution of global financial services and the networks that power them. And what’s needed by all the parties that rely on them today to move money safely between them.
No one will argue that things could be more efficient, that networks could be more interoperable or that standards should be more consistent globally. And in the B2B payments arena, money that moves more transparently and quickly than it does now.
Initiatives that address those issues are under way by innovators and incumbents alike. And, the ability to digitize, secure and make that process smarter is a concept worth exploring, and has a great potential upside.
But we don’t need bitcoin — or one of the thousand cryptocurrencies issued by unregulated entities that all need entirely new rails and enabling ecosystems — to do that.
While bitcoin and crypto garner the headlines, innovators are taking the best of distributed, permissioned, secure and private ledger tech, and digitizing assets issued by regulated financial services companies and governments to clear and settle transactions in near real time, globally, at scale. And they are doing it within the existing, secure and regulated environments, using the fiat currencies of the endpoints in between those transactions.
If it sounds a lot like how global card networks and bank rails operate today, it should.
As global networks, Visa and Mastercard both coordinate the operation of decentralized, permissioned and distributed networks of issuers, cardholders, merchants, acquirers and processors to enable the settlement of transactions between anyone on a global scale in real time.
Neither Visa nor Mastercard felt the need to rebuild the bedrock of the financial systems around the world to do that — even though both networks are, today, making big investments to make that process and their rails even more efficient.
They used technology and computing power to connect and secure — and digitize — those transactions, and created the framework for the payments ecosystem that now powers trillions of dollars of global commerce every year.
Those rails and that ecosystem have also given rise to vibrant ecosystems of innovators who’ve built on top of those networks to enable better end-user experiences, including operating their rails in reverse to now move money between parties instantly and on a global basis.
When Steve Jobs launched the first the iPhone in 2007, he didn’t feel compelled to rebuild mobile broadband to do it. He leveraged existing ecosystems and that infrastructure, and built on top of it. As the iPhone gained momentum, those ecosystems and that infrastructure did, too — from 3G to 4G, and now soon 5G to remain relevant and to monetize their own place in that ecosystem.
Jeff Bezos didn’t feel compelled to reinvent the internet to launch Amazon, but leveraged the application layer that runs on top of it to create the app that now accounts for more than half of all eCommerce sales — and has since ignited the sales for millions of small sellers who leverage it to get distribution.
Over the 10 years that bitcoin has been alive, the billions that have been invested in ventures, promising to create an ecosystem that would ignite a new global payments revolution, have failed to deliver even a modicum of its promise.
Bitcoin has failed because it doesn’t solve a problem that enough people have — except for criminals and country dictators who want an unregulated, anonymous currency with which to do business out of the public eye. The cryptos that have emerged, to become the processing rails to build alt payments networks, don’t solve a problem that anyone has either.
The distributed-ledger promise in innovating how payments move between people and businesses is nascent, and the jury is still out as to whether it will ever emerge as the powerful global payments elixir that its hype portrays it to be. Some say, be patient and give it time. But time can be an innovator’s curse. Too much time means that others with a better solution gain traction, making what could have been, well, what could have been.
So today, while bitcoin and blockchain tech get much of the press (and as much of the media still waxes on about how revolutionary it all is), the hard work to solve real frictions in payments — the vast majority of that innovation — is happening much more quietly using the rails and institutions people and businesses trust.
Those who can, do. Those who can’t, issue a lot of press releases.
In the meantime, the bitcoin bubble really hasn’t burst, and the hype goes on. At this rate, I might get to recycle this article in another 5 years, or maybe even 10.
Karen Webster is one of the world’s leading experts on emerging payments and a strategic advisor to CEOs and Boards of multinational players in the payments and commerce space. As the CEO of Market Platform Dynamics, she works extensively with the most innovative players in the payments, financial services, mobile, B2B, digital media and technology sectors to identify, ignite and monetize innovation. Karen also serves on the boards of a number of emerging companies, helping innovators develop and implement business strategies that drive market adoption for their products and services. Karen is also an entrepreneur herself, who has successfully founded and launched several new ventures in the loyalty, on-line media, and social networking sectors, including PYMNTS.com.