Bitcoin,  Distributed Leisure

When it comes to crypto, WSJ reporter, Goldman Sachs banker, and IBM consultant are on same page

Surprise, surprise! They’re long blockchain, but not so much bitcoin

The “Distributed Leisure” column is intended to be a record of some blockchain and cryptocurrency related events, mostly in the New York City area. In addition it will try to explain the various technologies used, occasionally interview people at the forefront of those technologies, and profile some companies in the vanguard of the evolving ecosystem.The perspective will be that of an observer with a background in both financial services and technology, a basic familiarity with the terms “blockchain” and “cryptocurrency” but no in-depth knowledge of or experience with either.


It’s no surprise that an academic institution of public policy is trying to understand something of cryptocurrency and blockchain technologies.  After all, such things are entering the public discourse as they are increasingly used in business and government. And that’s an opportunity for policymakers to do what they’re paid to do—make policies.

Presumably to that end, Columbia University’s School of International and Public Affairs (SIPA) held a panel last week on its Morningside Heights campus titled “The Promise and Peril of Cryptocurrencies and Blockchain.”

Seats filled up quickly at the school’s International Affairs Building. By the time we had finished reading a front page article on the university’s “Supreme Alumna” in a school newspaper, more chairs were being brought in.

International Affairs Building
Columbia University’s dreary International Affairs Building, the height of Stalin-era Brutalist architecture (via Columbia University).

This event began with a short introduction by the moderator, Yumiko Shimabukuro, acting director of the Urban and Social Policy Concentration at SIPA. She was followed by three speakers, each speaking separately from a lectern for around 20 minutes with a period at the end of the night for Q&A.

First up was Paul Vigna, a market reporter for the Wall Street Journal and coauthor of both “The Age of Cryptocurrency” and “The Truth Machine.” The latter book sits on our Kindle, as yet unread.

Vigna began by briefly tracing the history of cryptocurrencies from Satoshi Nakamoto’s paper and the early implementation of bitcoin nearly a decade ago to the current “trading mania” around cryptocurrencies.

He views bitcoin and other cryptocurrencies as both software programs and as a social and technological movement.

Vigna noted that bitcoin was born in midst of the worst financial crisis since the Great Depression and that’s been a key to its popularity. Formerly trusted financial institutions were threatening to collapse and take much of the wealth that they had aggregated and ostensibly protected with them. Bitcoin promised to remove that risk by removing the institutions from transactions.

As for the “trading mania,” Vigna points the finger at  the media looking for the “next big thing.” Early bitcoin millionaires and billionaires are receiving increasing press coverage and it’s feeding the public’s dreams of equally quick riches.

Vigna is a proponent of government regulation of cryptocurrencies. He sees the 2016 introduction of regulations in Japan as a good example of this since Japan is now the second largest market in the world for bitcoin by some measures. While countries like Switzerland and Estonia have embraced cryptocurrencies, the United States is still largely trying to figure out its response, he said.

Vigna also stressed that the Bitcoin blockchain itself has never been hacked, at least as far as anybody knows. Hacking and theft around bitcoin has really been in third party software like digital wallets.

Finally, Vigna turned to the Blockchain which he described as being like the Internet in 1983 or 1985 in that the technology is still being built out. People are realizing  realized that anything that can be digitized is a candidate for blockchain technology. Every industry is looking at toward blockchain to make their systems more transparent and secure.

We still don’t subscribe to the Wall Street Journal, but we will move up “The Truth Machine” in our queue of books in the space to read.

The second speaker was Mary Rich, vice president of investment strategy at Goldman Sachs. She said that while Goldman Sachs does not own or trade any cryptocurrencies, the company needs to be able to explain the industry and technology to its clients. Much of Rich’s presentation took the form of a clearly laid out explanation of the space.

She began by echoing Vigna, saying that cryptocurrencies seem to be trading in bubble territory. Rich believes that the cryptocurrency ecosystem will evolve significantly in the future with the biggest threat being disruption by central banks.

She defined cryptocurrency as a decentralized, digital coin that allows users to make transactions and store money in a secure and pseudonymous manner where transactions are validated through distributed consensus or with no central arbiter.

Mining or the process of verifying a cryptocurrency transaction solves the double spending problem that had plagued previous attempts to implement digital secure currencies. Miners use specialized computers to compete to solve a cryptographic puzzle which then enshrines each transaction in that cryptocurrency’s permanent record. Cryptocurrency mining is not without controversy. Bitcoin mining, for example, consumes an estimated $1.5 billion in electricity annually, equivalent to Denmark’s yearly electricity consumption.

Another potential problem is the increasing concentration of mining cooperatives whereby large groups of miners work together to verify as many transactions as possible. The implication is that if a handful of mining cooperatives come to dominate the space, then it might be possible for these miners or outside malicious actors to validate fraudulent transactions someday.

Other risks to cryptocurrencies include unintentional coding errors, developments in quantum computing, government regulation, and central bank disruption. Rich sees the latter as the biggest threat with most central banks likely to eventually create their own cryptocurrencies that will be linked to their fiat currencies.  

According to Goldman Sachs, sovereign currencies meet three criteria. They are used as a medium of exchange, they serve as a unit of account, and they are a store of value. Goldman believes that bitcoin meets none of these criteria.

Bitcoin is an inefficient medium of exchange because processing is expensive and slow, while bitcoin itself is not widely accepted with fewer than ten thousand merchants accepting it globally.

Bitcoin is an unreliable unit of account as its own value is far too volatile, and it is also an unstable store of value because it is much more volatile than any fiat currency.  

Turning to Blockchain, she described it as not only the critical infrastructure that underlies cryptocurrencies but also as a revolutionary technology with many potential applications.

Whereas Vigna visualizes Blockchain as a software program, Rich sees it as a global “Google doc,” a public, distributed network whose complete database can be accessed and maintained by each member of the network. And because it has no single maintainer, the Blockchain’s history is resistant to malicious editing.

She sees blockchain technology as infrastructure that enables the distributed dissemination of value with an analog to the internet which enabled the distributed dissemination of data.

Fascinating stuff, but by this point, we were ready for a more visual demonstration of blockchain technology, and Christian Van de Werken, a senior consultant at IBM, had one queued up. He demonstrated IBM’s use of blockchain technology in the consumer supply chain with every action creating a new block on the blockchain.

In the grand tradition of live technology demonstrations, it did not go perfectly with the slow Wifi on the 15th floor not quite up to the task of exchanging data with a remote server to smoothly advance the animated simulation.

Despite the slow connection, we did get to see the simulation handle four problem areas in the consumer supply chain: uncertain provenance, incomplete paperwork, lack of cost transparency and siloed tracking information.

 You May Also Like

Michael Hillmeyer has primarily been an independent consultant in the financial services, technology and healthcare industries since 2004. Prior to this, Michael was a senior sell-side equity research analyst at Merrill Lynch covering several technology industries. He owns no positions in any cryptocurrency but writes the “Distributed Leisure” column for Modern Consensus.