With mail-in voting poised to begin in Maryland next month, there have been concerns (mostly misplaced) about the security of that process. By the time of next presidential election in 2024, however, it’s likely that voting from home via a novel technology called “blockchain” will completely eliminate any chance of fraud. Blockchains are also poised to eliminate fraud from credit card purchases and simplify (as well as secure) cross-border financial transactions. So blockchains are likely to be part of your financial future. But what is this novel and still poorly understood technology and where did it come from?
The invention of the internet created a fundamental shift in how we access and share information. In effect, the internet digitized the sharing of information in ways that made email, web sites, and smart phone apps possible—in the process changing the way we live. Now another technological innovation, the blockchain, looks ready to digitize both how we store information safely and how we share value (via digital money or digital tokens that convey ownership of physical assets). Indeed, the CEO of IBM has said “What the internet was for communication, blockchain will do for trusted transactions.”
The first blockchain—the bitcoin blockchain—was created in 2009 by an anonymous inventor who was also a gifted programmer. A blockchain is just digital record of transactions that is stored in a global network of computers in such a way that each page or “block” of transactions is unalterably linked to the previous one—forming a continuous set or “chain” of blocks of data. The computer network operates under consensus rules written into the blockchain software, so that all nodes of the network have to agree before a new block of transaction data can be added to the records. Because the records are stored in multiple places (distributed across thousands of nodes in the bitcoin network) and protected by advanced cryptography, no one person or institution has control of the data. That makes the data virtually impossible to alter—an intruder would have to take over more than half of the nodes simultaneously—and therefore much safer than your data stored at a credit agency, a merchant, or a credit card company (all of which can and have been hacked).
The bitcoin blockchain was intended to create a store of value that could not be manipulated by governments (by, for example, printing huge sums of money). But its invention stimulated a flood of ideas about how to apply the blockchain idea to other problems or opportunities. These innovations—involving many different consensus rules, but all using linked blocks of data distributed across many nodes—now seem poised to transform banking, credit cards, real estate transactions, and many other financial activities. Blockchains could even enable secure, fraud-free voting from home, while keeping the information about how each individual votes completely anonymous: indeed, the U.S. Postal Service has been issued a patent for just such a voting system.
Major financial institutions are adopting blockchain technology at a rapid pace. Fidelity and Morgan Stanley are preparing to offer their customers access to bitcoin and other digital or “crypto” currencies as well as stocks. The U.S. Office of the Comptroller of the Currency, which regulates banks, has just approved U.S. banks to store digital currencies for their customers (many European banks already do). And virtually every major bank is exploring blockchain applications. Mastercard is developing a blockchain replacement for debit and credit cards that could eliminate the growing and costly incidence of fraud and theft. Square, a financial firm that services small merchants, also enables individuals that use its cash app to buy and sell bitcoin or use it to pay bills—resulting in $875 million of bitcoin revenue last year. Paypal is preparing to offer similar services to its 300 million users worldwide. Walmart and UPS are starting to use blockchains to track supply chains and facilitate cross-border transactions. At a global level, the Depository Trust Closing Corporation, which settles some $54 trillion in cross-border financial transactions a year, has already closed $10 trillion in transactions with a blockchain. China recently launched a national blockchain platform and with it a prospective national digital currency. So blockchains are rapidly going mainstream.
Much of the attention around these innovations has focused on digital or “crypto” currencies such as bitcoin, a form of digital money that is not issued by a government or managed by a financial institution and which can be instantly transferred from one person to another anywhere in the world. In effect, bitcoin is a kind of software, created by the consensus rules of its underlying blockchain. That blockchain permanently stores the complete history of every bitcoin transaction, and updates the information—verifying and adding new transactions on which all the nodes of the network agree—about every 8 minutes. The operators of the nodes are paid for their services by transaction fees charged those making transactions and by a block grant of new bitcoin—created by the network’s governing consensus rules. Those rules also dictate that the supply of new bitcoin is cut in half every 4 years and will never exceed 21 million bitcoin. (About three-quarters of that amount has already been created.) So if demand increases while supply is limited, the price of bitcoin will rise—which accounts for its growing attractiveness as an investment. For that reason, bitcoin is often described as a potential digital gold, a secure (if volatile) store of value—and indeed, since its creation, the value of bitcoin has risen faster than gold or any other asset class, including stocks. In contrast, the purchasing power of the U.S. dollar has declined 20 percent since 2008.
One limiting factor to widespread use of bitcoin and other digital tokens is that they are not yet exactly consumer friendly. They are mostly bought or sold on digital exchanges (some of which have been hacked) and are typically stored in digital wallets that can be intimidating to use (since sending bitcoin to a wrong address is not recoverable). On the other hand, you can trade or send bitcoin to a friend 24/7 and the transaction typically takes only a few minutes—compared to as much as several days and much higher fees to send money across borders through the banking system. And improvements are coming, both in ease of access and use, in faster transactions, and secure third-party custody.
Adoption and use of bitcoin and other digital tokens is also accelerating. About 10 percent of the U.S. population are now believed to own some bitcoin. One analyst—noting that it took 10 years for 10 percent of the U.S. population to use the internet, but then adoption reached more than 70 percent in a second 10 years—predicts that bitcoin is following a similar timeline, with adoption driven both by increasingly institutional use and by millennials and still younger generations (who tend to be more comfortable with digital objects). More fundamentally, blockchain innovations are nearing commercial use in many different sectors of the economy—in the U.S., in Europe, and especially in Asia.
Al Hammond was trained as a scientist (Stanford, Harvard) but became a distinguished science journalist, reporting for Science (a leading scientific journal) and many other technical and popular magazines and on a daily radio program for CBS. He subsequently founded and served as editor-in-chief for 4 national science-related publications as well as editor-in-chief for the United Nation’s bi-annual environmental report. More recently, he has written, edited, or contributed to many national assessments of scientific research for federal science agencies. Dr. Hammond makes his home in Chestertown on Maryland’s Eastern Shore.