The Cybercrime Bill is coming up before the full Senate and House, and it is a serious attempt by politicians to protect the rights of American citizens from online abuse. However, many in congress are caving in to industry interests and voting against the noble purpose of this important legislation. This begs the question, what is the problem with the Blockchain Innovation Challenge and why are our elected officials so supportive of it? What are their excuses for not supporting it?
One obvious answer to this is that they do not know what the problem is; therefore, they do not care to find out. They also probably fear regulation if it is imposed on something they don’t understand. I have noted the trend over the last decade where the industry is slow to adapt and innovate and often resists change. Regulation may be a prerequisite if leaders in the business community wish to encourage widespread adoption of smart contracts or other disruptive innovation, such as the adoption of proof-of-reserve instead of proof-of-tender. The cyber-criminals behind the Silk Scar and Botox scams used their clever marketing strategies to build massive following and lucrative businesses. That was no different than the venture capitalists behind Facebook, Google, and Twitter who made a lot of money without building any products or services and without even selling a product or service.
A second problem that the government has is that they are slow to recognize the value of this technology for enabling the widespread adoption of smart contracts, digital currencies, and the like. Because the government and the financial services industry are slow to adopt innovation they cannot compete effectively on price. They also can not provide services to their users at a reasonable price. If you really want something from the government you have to make a lot of sacrifices, or be willing to start negotiating with them on the terms and conditions basis. In most cases, the results are bad.
Perhaps the biggest problem that the financial services industry has been the lack of a business model that they can use to promote the kinds of transactional activities that this technology can bring about. They cannot create a business model around these technologies without either losing out to competitors or having to accept an inconsistent and uncertain tax structure. This means that they are stuck developing one specific model for general use, which is very hard to enforce and incredibly expensive overtime. They do not understand that they need to develop multiple business models in order to succeed. They also do not understand the value of systemic risk or resilient innovation.
The third problem is that the major players in the financial services business are not taking the initiative. They are still hanging onto the old model of building infrastructure and operating systems, even though there is clear evidence that it is not working and is becoming obsolete. They are relying on legacy systems and transactional systems that are many years old and have security flaws that make them vulnerable to the new threats and disruptive innovations like bitcoin. They seem to be reluctant to adapt and build infrastructure and business models that will fit their lifestyle and expectations of their customers. If anything, they are too large and powerful to get a piece of the expanding field of bitcoin innovation.
The fourth problem is that the financial industry is not moving towards a distributed ledger solution. The most common distributed ledger technology is the mainframe computer, which is not appropriate for most financial transactions. Virtual machines like ethernet and WAN have been built as effective solutions that are already being used in business networks. Those that are based on the traditional physical networking models like cable and phone lines and power grids are just starting to become popular with developers and entrepreneurs.
The final problem that they face is one of scale. Blockchain innovation must happen at a regional scale if it is going to take place globally. Financial services companies would need to deploy tens of thousands of workers worldwide in order to take advantage of using a distributed ledger system like the bitcoin ledger. The only way that they could do that is to change how they do business and increase transaction costs through localized applications. That is a tough sell in markets where international trade and local business need to remain at the top of agendas.
There are a number of other challenges faced by the financial industry, but perhaps the most critical is the resistance to change at a systemic level. Many people are comfortable using private networks like the internet and their smartphones, where they can conduct global business without much concern for security or privacy. They use these same systems when they conduct local trades and buy and sell things within their communities. The real world does not work this way, because people do care about privacy, security, and speed. It is a fact that most people will not do business or transact on a distributed ledger that does not provide them with a degree of privacy and security. This may cause a slow adoption curve, but the benefits of such an adoption sooner rather than later will far outweigh any difficulties that are faced in the short term.