Over the last few years there has been a lot of public debate over the role and disruptive nature of alternative currencies and more importantly, the medium as well as the method in which they are traded. Bitcoin has grabbed most of the attention but it is not the only medium of exchange disrupting established banking practices.
Many people, especially those from the traditional world of finance see these 'non-fiat' currencies as nothing more than hype and even a year ago, banking as we know it might have prevailed unscathed. However, over the last six months particularly, some serious players including those from the traditional banking camp are starting to enter this currency~medium game and some interesting Use Cases are beginning to emerge as a consequence.
One notable community is the World Economic Forum and its Project Committee on The Future of Financial Infrastructure recently published a Use Case presentation. This document focuses on the Distributed Ledger Technology that fundamentally underpins Bitcoin's Blockchain and for some in finance, it is a great read.
The Future of Financial Infrastructure | World Economic Forum [LINK]
There are Use Cases or more specifically, summaries on applying the Blockchain ideology to existing payment systems, deposits, lending, capital raising and much more can be found here [LINK]. Another outstanding document that addresses the ‘why’ and ‘how’ to do it for specific financial applications embedded in the Distributed Ledger Technology is the MISYS study and I recommend taking a look [LINK].
After reading these documents as well as many others, one common theme seems to persist. The banking community is not quite as IT integrated as one would have hoped, certainly not in its thinking and the IT community doesn't really grasp the economic purpose under some of the more exotic banking practices that are key to making banking work.
None of this should come as a surprise when IT communities, financiers and traders rarely talk the same language nor do they have the same interests. Beyond these technology enabled groups, insight into any kind of banking or IT protocols is so lacking, it's primordially unintelligible.
Bitcoin has three common features that differentiates it away from traditional money but only when these features are combined.
One must also appreciate that these integrated features are difficult to untangle without up-ending the currency and creating something that ends up being quite useless. Some of the applications or Use Cases coming forth from the creative corner, many of which simply redraft what works in banking into some new Distributed Ledger, are just that, useless and not fit for purpose.
There are of course the winners but beware; a Distributed Ledger, a key feature of the Blockchain, doesn’t solve all banking or settlement problems. In some cases, it creates a unique set of headaches in its own right.
All this said, I recommend taking a look at the “Use Cases” described by Misys. If you are a banker you can make your own mind up as to whether the Blockchain or specifically the Distributed Ledger adds value no matter what it is being applied to.
Before I leave this article, it might be worth making mention to what makes Bitcoin unique as a currency or settlement framework, what are these three specific features and there is more to all of this than the Distributed Ledger.
The first aspect and perhaps the most controversial of all Bitcoin’s features is that it is able to be created through an algorithm. A pain staking process but one that is fascinating because the generation of bitcoins is not fiat like i.e. tied to debt and controlled by a central bank. Bitcoins are a commodity that need to be mined to create wealth from interpreting an algorithm’s next intersection. However, there would be no trust with this system and consequently little value in the currency unless all transactions were fully transparent. That is where the Distributed Ledger comes in.
The Distributed Ledger allows an electronic currency to be traded between parties and all transaction details pertaining to the traded asset are shared between all nodes involved in the transaction. It is this concept or ideology of the Distributed Ledger that has everyone in finance talking and nearly all Use Cases I am seeing directly try to replicate this structure.
The currency itself is able to be used as a medium for settlement or a storage of wealth but outside the electronic community that revels on the commodity like cryptocurrency, this medium of exchange is only just catching on.