Have you ever considered what you might propose if you had the opportunity to revise the way we pay for things, hold our wealth and keep records regarding what we have purchased? Satoshi Nakamoto did when he developed and implemented Bitcoin.
Based on the design, I believe I can safely say that Mr. Nakamoto had a serious lack of trust in the banking system. And not just the commercial banks, but the investment banks and the central banks. The banks had done plenty (remember this was 2008) to engender distrust. They:
- Were key players, if not the primary cause of the financial crisis;
- Backed/promoted/protected a system that many felt (and still do) extracted rents far more than the value provided, but they were the only game in town; and
- Did not innovate or even properly maintain/modernize the infrastructure that supports the banking system.
And the leadership that controls the banking system has not recognized how dissatisfied and angry their customers really are. It reminds me of the situation the French aristocracy got itself into just before the French Revolution. And we know how that turned out. I could go on with my analogy, but I will spare you.
That said, I have been (fairly) accused of not letting things drop and will not disappoint. Cryptocurrency is one of those things that has been the focus of more than one of my blog posts. One thing that has been consistent is my belief that Cryptocurrency’s acceptance is a visceral reaction to the failures of a banking system that has not been responsive to its constituents. Queue back to my comment about the French revolution.
That said, my thinking about Cryptocurrency has become more nuanced and multidimensional. In fact, I think I now have a story that: 1) makes sense; and 2) can provide a basis for thinking beyond Crypto, allowing us to move to the next stage regarding making serious improvements to the services that have been traditionally provided by banks:
- Issue money and ensure its stability. This is the role of the central banks. They control the money supply and thereby are both responsible that it is available and that it remains stable. Over time I believe they have done a C+ job. This is mainly based on the periodic spikes in inflation and subsequent downturns in the economy over the past 100 years.
- Provide a secure depository for its customers money. This is the job of the commercial banks and to some extent the investment firms. As in the previous bullet, they have a mixed performance. The banking system has done a generally good job with insured demand deposits, but in other areas tends to either over or under regulate leaving lots of room for crooks (like Bernie Madoff) to take people’s life savings.
- Provide loans. This is the job of the commercial and to some extent investment banks and venture capitalists. Most people think that banks take advantage (one example being student loans) when they can. And fail miserably regarding responsibilities to their clients because of a combination of greed and incompetence, e.g., the financial crisis.
In all three of these cases the situation was/is exacerbated by an unwillingness to address some basic problems. This includes an archaic technical infrastructure and functionally impoverished/deficient system that provides the foundation for the operation of the banking system. Further the banking system establishment has done a terrible job of communications i.e., they have done painfully little to explain what the banking system does and why it provides value for money.
To summarize, the banking system:
- Has engendered a profound lack of trust driven by greed, incompetence and bad communications.
- Delivers poor functionality and performance largely based on archaic infrastructure that is both technically and functionally deficient.
- Does a terrible job of communicating the value proposition, i.e., where is the value for money, for its products and services? These leaves customers believing that the rents are too high and that they are being, once again, taken advantage of.
This brings us back to Mr. Nakamoto. He promised a technocrat’s solution to all the problems outlined above. The Blockchain technology, in the form of Bitcoin, would eliminate the need for banks. It would provide the functionality of the banking system and eliminate the need for all those deplorable bankers.
There were a lot of appealing aspects to the solution. The most attractive was that it would eliminate the need for banks. It would provide the three main functions of money:
- Store of value/wealth
- Unit of account
- Medium of exchange
And, the story goes, do it in a way that eliminates the greedy bankers from the equation and replace them with a transparent set of algorithms that is managed in a decentralized (democratic) way and is therefore responsive, efficient and incorruptible.
So, we have an established system (current banking system) that is seriously flawed and a potential alternative (Bitcoin and more generally Cryptocurrency) that, on the surface looks pretty good. But, does it?
- Cryptocurrency is expensive. I am not saying that it should not be, security comes at a cost. But I do not think we really understand that cost. And when would anyone buy into a long term investment when you do not know what it costs?
- Cryptocurrency has trouble scaling. This is a real issue when you are talking about having to process hundreds of billions of transactions a year.
- Cryptocurrency has not proven to be stable store of value. This is an issue when many people use it to transact business and also might be holding a large portion of their personal wealth in this medium.
- While much is made about the integrity of Blockchain and the core technology has proven to be bulletproof, a chain is only as strong as its weakest link (forgive the play on words). And, while the core technology does live up to its press, there are many associated products (like exchanges and wallets), that do not fare so well. Just Google “5 biggest blockchain scams” for a scary look at how crooks have hacked around the blockchain technology to steal people blind.
- And finally, Cryptocurrency is a technical solution. It assumes: 1) that Crypto is capable of supporting all of the use cases associated with replacing the “banking system”; and 2) that a functional solution will spontaneously form around it. I would observe that Bitcoin is 14 years old (ancient by technology standards), and a usable replacement for the legacy system has not formed around it, whether the “it” is Bitcoin or any other Cryptocurrency.
What I can tell you is that if I was to design a replacement for money it would not look like either the present bank-centric system or one built around Blockchain (at least based on what I know today). And I can say that, for those of you who do know, as a person who designed a payment system that is still operating successfully today.
That said, if I were to undertake to design a replacement for our current system, I would follow a process:
- Develop evaluation criteria against which candidate replacement systems would be evaluated. This would include both functional and technical requirements. The focus would be the creation of specifications that are complete and well defined, but more importantly meet the needs of the constituencies that will be depending on the system. The evaluation criteria would include checks for efficacy, efficiency, extensibility, maintainability and that the product includes the functions necessary to objectively be considered a winner.
- Identify/specify all of the solutions that might be capable of winning the evaluation that I outlined above. This would undoubtedly include setting up several competing teams to identify candidates and develop detailed competing proposals for each candidate. Each proposal would include a detailed description of how it would meet the functional requirements outlined for the system and an outline of the underlying technical solution being proposed.
- Evaluate the candidate solutions against the evaluation criteria and pick a winner.
I know what some of you are thinking. This guy is obsessive-compulsive and is overengineering the solution. Furthermore, you are thinking that this is going to take a lot of time and money. My response is that this is a very high stakes game and we cannot afford to iteratively prototype a solution and hope that, at the end of the road, it will do what we want it to. This is a moonshot. The size, scope and impact are enormous. In fact, it is bigger than the Apollo program. This effort needs to be handled with care. It needs to be a well specified (to requirements that are complete and well defined) and engineered/implemented in a way that helps to ensure our long-term competitive advantage, serves all of it constituencies and maintains the integrity of our money system.
This does not mean that the solution must be fully specified up front—note that I have never said functionally complete, “just that the product includes the functions necessary to objectively be considered a winner”. In addition to being functionally rich (enough to delight its constituencies out of the box) it must also be buildable, high quality, maintainable, extensible and efficient.
I would propose (here) that there are two ways an effort of this size, scope and importance can be undertaken. One would be to set up an organization like DARPA (Defense Advanced Research Projects Agency). Let us call it F(inance)ARPA and it could be overseen by the Fed or the Department of the Treasury. The other route would be for the private sector to (as it already should have) undertake a program to fund and execute the process I have outlined above. I believe that there are other mechanisms, but my purpose here is to induce thought, and not to write a book.
The establishment has clearly failed us. While I think they should be penalized for their incompetence, apathy and lack of action, I am not one to cut my nose off to spite my face. The need is great the size and scope of the effort is enormous and the established players are the ones best resourced to undertake the endeavor. That said, we need to hold them accountable because failure would have dire consequences. Society stops functioning in the absence of an ability to do commerce!
Copyright 2022 Howard Niden
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