Gibraltar Magazine – February 2018
Ian Le Breton
In recent months it seems everyone’s talking about the growing impact of ‘blockchain’ and the price of one of the crypto-currencies it underwrites – bitcoin. If you are confused by the technology and the terminology, hopefully this month’s column is for you.
It seems that ‘everybody’ is talking about bitcoin but in reality it remains a relatively small marketplace and, whilst it is generating a huge amount of hype and press comment, very few people I know have any real understanding. Indeed many may be feeling more than a little ‘left behind’.
So here is my contribution for those that wish to get up to speed with these exciting developments. In the course of the next thousand words or so, I will be throwing a number of new terms at you, long-suffering readers, but please bear with me. Read on.
Underlying all of this is Distributed Ledger Technology (or simply ‘DLT’ to the initiated). When bitcoin first emerged back in 2009, it was described as a ‘crypto-currency’ based on ‘blockchain’ using ‘DLT’. No doubt a few ‘tech-heads’ were already familiar with these terms but the general public was being asked to digest a huge amount of new information all at once. So let’s stop for a moment and go back to the beginning.
Let us assume that you need to store a document for safekeeping. Anyone my age who has worked in an office will remember the old days of paper, staples, clips, folders and filing cabinets. Fundamentally, the archiving of valuable documentation had not changed for centuries and the dangers were all too obvious. Documents could be misfiled, removed and never returned or, in the worst-case scenario, the archive itself could be destroyed. As a young banker one of my first jobs was preparing indemnities relating to lost documents – and a real pain it was too!
Fast forward to recent times and the advent of computers and digitalisation. It was natural to create electronic versions of the filing cabinet. Simple storage on the computer’s internal space led inexorably to shared ‘drives’ and then, of course, the arrival of the Internet brought about previously undreamed of access through the ‘cloud’. But we are not at the end of that journey, not by any measure.
Which brings us back to Distributed Ledger Technology. We can define DLT as a database (ledger) that is shared (distributed) across a network of widely spread computers. Records – perhaps transactions or maybe contracts – are copied to all participants numbering in their hundreds or thousands, therefore making the holding of the file totally secure.
The whole point is that there is no ‘central’ point of authority – compare this to the office filing cabinet and what happens in the case of, say, a fire? With DLT, records are ‘decentralised’ and copied hundreds of times securely and rapidly using cryptography onto different computers. As a result, the risks of accidental or malicious intervention are very much reduced, if not totally eliminated.
Moving on from DLT, let us now consider a definition of ‘blockchain’. Blockchain is a foundational digital technology that allows a network of computers (wherever they may be located physically) to manage, together and in a decentralised way, the database or group of files that we considered under DLT.
Essentially, ‘blocks’ are segregated, vast bundles of data in permanent communication with each other so that each block knows what the content is in the rest of the chain. However, only the owner of a particular block has the digital key to access it. The other blocks will immediately detect anyone who attempts an exchange of data outside the protocols of the chain – and the exchange will be aborted. Suddenly, the world has acquired a system for the fast, trusted exchange of vast amounts of data without intermediaries or supervision.
Could one argue that DLT and blockchain are one and the same? No, they are not but they are often conflated. I describe blockchain as being the original manifestation of DLT – the only one so far in fact. Other technologies will no doubt appear in time but, for now, think of blockchain as being the practical way of using the DLT concept.
In practical terms, what can DLT be used for? Simply put, it will revolutionise work – be that for companies, governments and ultimately, all of us. This brave new world doesn’t stop at document storage and data management, anything that requires accurate, secure recordkeeping will use DLT in the future – for example, land records and personal documents, such as driving licences and passports.
While initial interest has focused on finance-related applications, such as payments, clearing and settlement, non-financial players have also been looking for ways to leverage the opportunities that DLT opens. Interesting areas include supply chain certification, helping artists and musicians to attribute digital art, media and content distribution, commodities, digital identity and authentication, reputation verification, energy, ride-sharing services, gaming, consumer engagement, even e-voting.
DLT is new and is set to overturn the former way of doing things. It will take time but it will happen. I do not think it unreasonable to consider its potential for transformation to be as ‘disruptive’ as the creation of the Internet itself – and think how relatively recently that happened.
What remains in this whistle stop tour? Crypto-currency. No prizes for guessing the ‘superpower’ against which all other cryptocurrencies are measured – bitcoin. This was the first DLT currency and enjoys huge public recognition even if the underlying technology is not (yet) widely understood. Released in 2009 it has been joined by no fewer than 1,400 other crypto-currencies. Some such as Ethereum, Dash and Ripple are relatively well known, but the majority are smaller with highly specialised applications.
Back to bitcoin and in particular the hype surrounding it in recent months. At present we cannot use bitcoin to buy goods and services generally – although the number of businesses that accept it as a payment method is growing all the time. In bitcoin’s case the supply is limited to 21 million so its supporters assert that demand can only increase as it starts to be used more widely. We are likely to experience similar effects with some, but certainly not all, of the other crypto-currencies available.
If anyone wants to jump on the bandwagon and ‘speculate’ (or should that be gamble?) on the value of bitcoin or any of its crypto-cousins, inevitably the old world must become involved. This is not for the faint hearted and normal investment criteria should always be applied.
A relationship with an exchange of some kind must be established – as in the old days one might have employed a stockbroker. Investors may be happy to retain their cryptocurrency with that exchange. Alternatively they can establish an ‘e-wallet’ of their own. There is one final term to consider here – ‘fiat’ currency. This is not related to the Italian car manufacturer but is the term used to refer to traditional legal tender such as pounds, dollars or euro that are used to buy (or value) crypto.
Apart from the global interest in crypto-currencies – and bitcoin in particular – there is a particular, local relevance to us here in Gibraltar. Initial Coin Offerings (ICOs) or Initial Token Offerings (ITOs) are a means of crowd-funding using crypto-currency, which can be a source of capital for start-up companies without the burdensome costs of regulatory compliance.
In an ICO, some quantity of the crypto-currency is pre-allocated to investors in the form of ‘tokens’, in exchange for legal tender or other crypto-currencies such as bitcoin or Ethereum. These tokens become functional units of currency if or when the ICO’s funding goal is met and the project launches. Proceeds from ICOs topped $4 billion last year, despite escalating warnings from officials of rising risks and fraud.
Gibraltar has recognised the value that could be generated by the orderly regulation of such an important development. Being a first mover in the online gaming business proved to be enormously successful and the government is keen to repeat that experience. Legislation has recently been enacted to regulate this sector – the first worldwide. The potential benefits to our business community and Gibraltar in general could be huge.
It is indeed a brave new world but one that government and the local finance industry is already embracing. We should all get behind the efforts being made because success in this area will benefit the economy as a whole – and therefore all of us – in the years ahead.