Banks Vs. Nerds: Thinking About Fintech.

Uh-huh, uh-huh, yeah. You’ll never change.

But now that time has been changin?

I just know that you’ll stay the same.

“Lisa, Lisa” — Cult Jam

FinTech is, ultimately, the process by which changes in the means of conducting financial transactions are effected. There is a war for the control of FinTech, between the nerds and the banks.

There is a very strong case to be made for believing absolutely nothing you read about an important corner of the FinTech world: bitcoin/blockchain/distributed ledgers (BBDL). But such topics attract me like a moth to a flame. The sentence above is an example of something you should not believe, being a sentence about BBDL that tells you not to believe those sentences. The first sentence is self-contradictory. Fair warning to the reader.

Let me begin with some pseudo-definitions — pseudo because there is nothing I can define about BBDL that won’t get complaints to the effect that the word means something else. See the paragraph above.

bitcoin: the dominant cryptocurrency, as measured by dollar value outstanding.

Distributed ledger: The important innovation in the cryptocurrency world. It is both a technology and a symbol.

The technology is the verification of a single spreadsheet that provides the currently accepted version of every transaction conducted in the cryptocurrency, since its beginning, by a network of self-selected “miners,” whose sole claim to this right to verify is that they can do it. That is, they are physically able to perform the verification. The ability to verify the current spreadsheet, or block, requires massive computer power, but no “credentials” whatsoever. No government permission, no “customer” relationship to the users of bitcoin.

The symbol follows from the technology. BBDL delivers truth without trust. Anyone with the know-how and very large computer capacity can verify the accuracy of the bitcoin transactions, and be compensated for their efforts. The high reliability of BBDL doesn’t depend on anyone’s promise. It depends only on the overwhelming economic cost of producing a false entry, or “hacking” into the bitcoin blockchain.

Blockchain: this word is used so many ways that defining it is almost hopeless. Most people agree that it is a word for a distributed ledger. It was first used to refer to bitcoin’s distributed ledger, but many people use it to refer to any distributed ledger.

Why read any further?

One day you will use this technology 50 times a day (or head for the woods in Montana, and off the grid) so you have no choice but to believe something about BBDL. What then, if anything, should you believe about BBDL? Obviously, you must believe enough to know when you are reading, thinking, or talking about BBDL. I believe if you see any of the three keywords — bitcoin, blockchain, or distributed ledger — in the piece you are reading, that is sufficient to know the subject is BBDL.

So now let me describe the one thing I believe is irrefutably true about BBDL. The opinion is very controversial; I hasten to point out. But as I say, you have to believe something.

The BBDL technology will ultimately be more secure, cheaper, more adaptable, and easier to modify if adopted before it is co-opted by the banks.

That is the big take-away.

In the war between the nerds and the banks, the nerds are small and competitive, and will ultimately need public support, because it will be extremely difficult to pry the money they need from banks. Thus, they are more likely than the banks to deliver value to consumers.

The banks have a huge stake in controlling the introduction of BBDL. They could lose as much as 25% of their revenues or more, if they are not able to control the introduction of this technology. They would like to see another outcome.

There are some false things Luddites believe about BBDL that create public fear that the banks might use. Let me list those.

The war over BBDL is gun-toting hermits in the woods of Montana vs. rule of law. Until 2015, more supporters than not regarded blockchain as an alternative currency. These people are still around, but since 2015, most of the investment funds that are pouring into the BBDL sector are from serious people who realize that viewing the value of the cryptocurrency, bitcoin, as an alternative to fiat money — like some people think of gold — is a red herring. The nations of the world have enough trouble managing the currencies they have, and there is nobody to prevent massive changes in the value of bitcoin.

Leave bitcoin speculation for people with obsessive hatred of government, unlike the rest of us who hate government less than no government at all. BBDL is past the crazy counterculture stage.

BBDL is about conducting illegal transactions. The banks are bitcoin paranoid, afraid to use the word bitcoin, because bitcoin is associated with defunct, crooked, firms like The Silk Road and MtGox, firms that turned out to be run by shysters. Draw your own conclusions about why the banks are paranoid about being associated with something that leads people to think the backers could be shysters.

The central reality of bad guys and cash is the good old US dollar. The dollar is still by far the most popular medium of exchange for villains, through no fault of its own. The nerds correctly point out that ultimately BBDL will be more useful to the police in identifying illegal transactions, in comparison to the existing bank-based transactions technology.

BBDL is about choice of technology. There are many, many, technological issues to be settled before there will be a market-ready important replacement of financial technology by BBDL. So to a limited degree, the timing of the ultimate use of BBDL technology is about technology. There are important technological differences between the two cryptocurrencies, bitcoin and etherium. There are technological issues that the tech professionals must sort out before there will be a standard cryptocurrency, analogous to the standard internet protocols, html or JavaScript.

That process will take time. But for better or worse, the cat is out of the bag about the significance to financial transactions of this technology. In other words, the banks of the world are well and truly concerned about the life-threatening nature to them of this innovation. And related financial firms such as the exchange management firms are also aware of the issue.

So that makes this “nerds vs banks” struggle the important thing to know. There are big players in the game already trying to manipulate the outcome.

The list of potential players that might manipulate the outcome of FinTech development begins with the big IT firms [principally IBM (NYSE:IBM) and Microsoft (NASDAQ:MSFT), so far]. They have skin in this game of course, but this is the sort of competitive skin in the game that our economic system encourages. While it is too soon to conclude anything about either company’s strategy, Microsoft has done some things that enable the efforts of the nerd side of this battle — such as enabling their flagship ap, Excel, to accept bitcoin and etherium protocols in the 2016 version.

IBM is seeking to be heavily involved, but they have a “tell” (a habit that reveals their bias toward the large banks.) They are bitcoin “paranoid.” Like the large banks, they are afraid to say the word “bitcoin.” I take that to be a gesture of solidarity with the big banks. But be serious here. If bitcoin becomes the cryptocurrency of choice in financial transactions, IBM will probably have a bitcoin subsidiary, named IBMbitcoin.

R3 is the pet BBDL startup of the Big Banks. A good source for the list of big banks involved is R3’s list of R3 investors and their henchmen. It is constantly growing but here is a relatively recent list.

There are many big banks in R3. Their henchmen [The exchange management firms, like CME Group (NASDAQ:CME) and ICE (NYSE:ICE) and the clearing organizations like (DDTC)] are there in force too. I call them the henchmen because every time I write an article about one or another reactionary effort by the large banks to preserve their monopoly position, I find that my opposition comes from the ranks of these firms. Not a coincidence because the big banks have substantial ownership positions in each.

I have more than a dozen examples of such articles on SA. Just look for any article about any large bank oligopoly: the primary examples are OTC derivatives, stock exchange price manipulation, and now, BBDP.

The big banks’ BBDP efforts have several henchmen and henchman wannabes, but the largest and most successful is R3. R3 will tell you they are about advancing technology.

If I was having a nightmare, and dreamed about BBDF as it would be proposed by the banks, I would not have come up with anything so reactionary as R3’s idea of a cryptocurrency system. Called Corda, it is “tailor-made for financial institutions.” I’ll say! According to Coindesk’s description of Corda, here, it is a distributed ledger that is not a blockchain. Yes. That is a confusing statement. R3 means by this that it is in no way a “trust-free” system. In the words of R3’s chief technology officer, Richard Gendal Brown,

We are not building a blockchain. Unlike other designs in this space, our starting point is individual agreements between firms… We reject the notion that all data should be copied to all participants, even if it is encrypted.

In other words, as one would expect in a bank system, no one wants to tell anyone anything unnecessarily — a different kind of trust-free system.

The question that comes to my mind is: “What is the difference between this and a collection of databases?” In other words, where is the distributed ledger property of this technology?

Which technology will dominate? My money is on BBDL. In spite of R3’s reference to Corda as a “distributed ledger,” I believe Corda has no relationship to BBDL whatsoever. Corda may exist indefinitely as a way banks conduct some business with each other, but as a transaction system, I think it is stillborn. Bank customers will see it for what it is — the same old oligopoly, new name.

It should be pointed out that at least two major banks, Goldman Sachs (NYSE:GS) and Barclays (NYSE:BCS), have substantial funds invested in BBDL outside R3, including investments in bitcoin-based firm, Circle (Private).

First appeared at Seeking Alpha