By Bernard Lunn
To libertarian Bitcoin fans, this sounds boring. Bitcoin was supposed to change the world, not be just another tool in the IT toolbox.
They should chill. Change happens in strange ways. Solving the cyber security challenge for Banks could bring the Internet back to its decentralized roots and that is more important than just another currency.
Returning to a decentralized Internet changes everything including currency. That will only happen when it becomes accepted that decentralized is safer than centralized.
Change happens at the enterprise level when new technology solves an A List challenge. Cyber security is an A List challenge. It is a Board priority and yet despite ever increasing investment in a bewildering array of super smart cyber security startups, this looks like one arms race that the bad guys are winning.
Contrast that with Bitcoin. Despite an obvious prize and years to try, hackers have not cracked the prize. Bitcoin has been hacker proof to date. Contrast that history with most Global 2000 firms. No matter how big, no matter how much money they throw at cyber security, they get backed. Regularly.
The difference is simple. Centralization is the problem, decentralization is the solution. If you bring it all into one place, you invite hackers no matter how big you build the walls.
Like a lot of people I have been looking for that Bitcoin killer app. I have indulged in science fiction fantasies and debunked many of the possibilities such as an alternative currency in failing states or using Bitcoin as an interim store of value for remittances. The simple reality is that today, Bitcoin is still a brilliant solution looking for a problem to solve.
However one problem that decentralized ledger technology solves is cyber security. If you want a scary view on just how bad the cyber security risk is for banks read this article which argues that cyber security is the systemic risk we should really be worried about.
For Banks to seize this opportunity, they have to discard the notion that centralization = secure. Putting it all in one place with a great big lock has been the accepted way since banks started. Decentralization sounds wild, almost hippy, with echoes of anarchic P2P services such as Napster.
Decentralization reduces server costs. Given Moore’s Law and economies of scale, server cost is not a problem for banks. Cyber security is a problem for banks.
This would return the Internet to its decentralized roots. Then people will trust decentralized money. To the end user there is no change. Whether their service comes from a centralized data center or from a network of peers is irrelevant to the end user.
In the headline, I said Bitcoin Blockchain. This works because of the miners. Without the miners, Bitcoin is not secure. Yes we need to ensure that nobody gets 51% control, but that seems a more solvable challenge than cyber security. Simply replicating databases is not enough.
This maybe too big a leap for a big established bank to take – to distribute account data across a decentralized network feels scary. It might be logical, but it is counter intuitive and scary.
If there is a systemic banking failure created by cyber security, something as scary as the Lehman moment, this crisis will move people towards the more radical alternative of decentralization. I hope that we can move to a safer decentralized world without a crisis, but history does not give much credence to that hope.
So it is more likely that this opportunity will be seized by a startup. Once they prove it works, others will follow. This would be like Salesforce.com teaching us that the Cloud can be trusted. I doubt this will come from the West. Such massive replacement projects almost never happen. Imagine a project getting approved that starts with “lets move our most precious asset, our millions of accounts, from a data center that we control to a decentralized network of millions of computers that we don’t control”. Take that one to the Board!
So I think this is likely to come from the Rest of the World (“countries formerly known as emerging” such as China, India, Indonesia and Africa). Blockchain based identity could be the on ramp to financial inclusion and there is no legacy centralized account systems to protect. This could be a First the Rest, then the West story that we are already seeing with mobile money adoption.
Daily Fintech Advisers provide strategic consulting to organizations with business and investment interests in Fintech.