Forbes Interviews SCI CEO John Bailon About Bitcoin’s Disruptive Potential Haven’t Heard of “Blockchain”?
Perhaps You Don’t Know Enough About Financial InnovationAuthor: Vince ChanTranslation by: Dept of Liguistics, CSSP, UP Diliman, Philippines
(The original Chinese-language article with the same title was written and published by Vince Chan for Forbes China on August 24, 2015. It can be found by clicking on: http://www.forbeschi...8/0044931.shtml)
Last week, the Japanese police once again arrested Mt.Gox CEO Mark Karpeles for charges of theft and embazzlement. Mt. Gox, once the world’s largest Bitcoin trading platform, had declared bankruptcy early last year. The stigma and the criminal charges did a grave disservice to the already negative public image of Bitcoin.
Bitcoin is not unfamiliar to the Chinese people. According to Goldman Sachs, up to end-2014, the Chinese Yuan (RMB) accounted for the largest volume of Bitcoin transactions globally (77%), followed by U.S. Dollar (19%). The rest were Euro and Japanese Yen. At the same time, China’s big three Bitcoin companies, namely OKCoin, Huobi and BTC China, accounted for 80% of the Bitcoin transactions in the world.
The Chinese people like to speculate and mine Bitcoin. When Bitcoin reached its peak of popularity in China in 2013, Chinese nationals flocked to become “miners” and mined Bitcoin for easy and quick money. If Bitcoin did not eventually fall from RMB7,000-8,000 per unit to its current price of less than RMB1,500 per unit, there would surely be more people jumping onto the bandwagon alongside the speculators and the miners.
To cool down the craze, Chinese regulators decided to forbid financial institutions and payment platforms from launching Bitcoin-related services. This, in addition to price volatility and negative press about Bitcoin, Bitcoin gradually faded out of the eyes of the Chinese public. As the saying goes, “the quicker one becomes popular, the faster it will be out of the limelight.”
However, venture capitalists have a totally different take on Bitcoin. Coindesk reports that since 2012, the venture capital investment in Bitcoin-related new ventures have accumulated to approximately US$800 million worldwide. The amount of investments during the first half of 2015 totalled US$400 million worldwide, which already exceeded the annual figure in 2014. Some predicted that, given the current momentum, the total amount of investments for 2015 might well reach US$1 billion.
These forward-looking venture capitalists have credible background – including major VC funds in Silicon Valley, New York Stock Exchange, Chicago Merchantile Exchange, Goldman Sachs, and China’s IDG Capital Partners. Their Bitcoin interests are also well diversified, from trading platforms to wallet, from payment to hardware services.
Apparently, venture capitalists and the general public have different views on Bitcoin. Why is that? On the surface, the two are highly correlated (after all, the subject is Bitcoin). But in reality, the former bets on innovative technology to solve actual pain points. The latter is primarily driven by the desire to speculate without the backing of real-life market demand.
By nature, venture capitalists look through the future and place their bet (or vote of confidence) before a new kind of technology, a new product, or a new business model gains large-scale acceptance. In this scenario, the real motivation behind venture capital investment in Bitcoin is actually the underlying Blockchain Technology. Bitcoin is in fact a marketable derivative out of the Blockchain technology.
The Blockchain as the architecture for a new system of decentralized, digitalized, trustless transactions is the key innovation. It allows the disintermediation and decentralization of all transactions of any type between all parties on a global basis. The encrypted data recorded in the blocks are monetary, equity, bond and other digitalized data (for instance, digitalized signature, contracts, etc.). All these are exchanged through a distributed network of trust that does not require or rely upon a central intermediary like a bank or broker. Instead, they are all done in a way where only the owner of an asset can send it, only the intended recipient can receive it, the asset can only exist in one place at a time, and everyone can validate transactions and ownership of all assets anytime they want. In this way, there is no need for any centralized mechanism of auditing.
What’s the business implication? The centralization and intermediary functions of the key stakeholders of the financial system – central banks, commercial banks, investment banks, credit card operators (Visa and MasterCard), and SWIFT payment system, etc. – would be reformed, or even worse, replaced someday. The users of the system could benefit from better and more effective risk and cost management relating to counterparty credit risk, transaction cost, documentation cost, intermediary costs, etc.
“Digital currencies such as Bitcoin…….have great potential” said by Randall S. Kroszner, currently the Professor of Economics at the University of Chicago Booth School of Business, and formerly the Governor of the U.S. Federal Reserve System as well as a Member of the Federal Open Market Committee. He expressed such viewpoint on the prospect of Bitcoin in his recent commentary article titled “The Future of Banks”. He believes that other than supervisory stance and intensity, innovative technology will be the other instrumental driving force behind new kinds of banking models in the future.
To capture the growth value in a holistic manner, venture capitalists put their eyes on every crucial element within the Blockchain technology ecosystem. The key elements include:
- Consumers who pay with Bitcoins;
- Merchants who accept Bitcoins;
- “Miners” who run the computers that process and validate all the transactions and enable the distributed trust network to exist; and
- Developers and entrepreneurs who are building new products and services with and on top of Bitcoins.
All in all, venture capitalists purposefully invest resources into every corner of the Blockchain ecosystem, creating and nurturing the scale effect. There are four constituencies that participate in expanding the value of Bitcoin as a consequence of their own self-interested participation. Only through realizing the scale effect that the destiny of the Blockchain technology can be potentially fulfilled.
Comparatively, the buying and selling of Bitcoins in China is driven by opportunistic thinking. In the minds of the Chinese “investors”, Bitcoin is a financial instrument, no different from stocks that can be freely bought and sold in the open market. But in essence, stock and Bitcoins are different. When it comes to stock investment, its value is normally a function of the issuing company’s revenue, its cash flow position, market demand for the company’s products and services, the industry landscape and other concrete macro and micro factors. In the case of Bitcoin in China, since there is no actual usage yet, there is no fundamental and functional need driving and supporting the value of Bitcoins.