A Film by Manuel Stagars THE BLOCKCHAIN AND US In 1903, the Wright brothers invented the airplane. It was hard to imagine then that today, there would be over 500,000 people travelling in the air at any point in time. In 2008, Satoshi Nakamoto invented bitcoin and the blockchain. For the first time in history his invention made it possible to send money around the globe without banks, governments, or any other intermediaries. Satoshi is a mystery character and just like the Wright brothers he solved an unsolvable problem. Whenever this happens, it inspires incredible innovation. The concept of the blockchain isn’t very intuitive but still, many people believe it is a gamechanger. Despite its mysterious beginnings, the blockchain may be the airplane of our time. Chapter 1: First Contact With The Blockchain I found out about blockchain first as most people around that time were through bitcoin. Personally, at first I thought bitcoin was a terrible idea. I was teaching at Stanford back in 2010 and a teaching assistant for the class sent me an article. She said “There’s this really cool thing, it’s open source money.” I remember thinking “Open source money, isn’t that cool but it will probably never work.” I did what most people do the first moment they are exposed to bitcoin. I discounted it. I thought this was silly Internet money you could mine it, it’s like a golden goose. It took me about a year to really re-explore the technology. By 2012 I did what I tell most people to do today: Turn off your phone, lock your door, and study this technology for a day. It’s the best advice I could give. I was on a sabbatical from work. I decided I take a year off, live off some savings and figure out what I want to do. It was there that I discovered this little orange icon with a B in the middle and said “What is this strange thing.” I started looking… Bitcoin… interesting. That was about 2012/2013 and I haven’t left this space since. I continued further down the blockchain rabbit hole if you will and I’ve been pleasantly surprised and had no reason to crawl my way back out and find another technology. There’s a point at which you almost can’t stop. It just gets so interesting and you’re so fascinated by it and you just want to learn more and more. Even to this day, there are new developments and new ways of solving problems, new approaches and it’s very exciting to be in this world. It feels really exciting to be involved in blockchain. It feels like we’re at the forefront of something that has at least the potential to transform our interactions between each other between corporations, the underlying infrastructure of both the private sector but also of government. For me part of the fascination is that we don’t yet know exactly what this thing is and yet, there are still lots of people gathering around it. I thought of it as a space rock that crashed on earth. You’d have a bunch of people that gather around and they’re all pointing and asking “What is this thing?” You don’t really know but it’s still very interesting. Chapter 2: Blockchain Technology For me, the blockchain has two main technical ingredients. One ingredient is cryptography. When I say cryptography, I really mean asymmetric cryptography. The other ingredient is so-called distributed systems. These are the two main things. If you understand them you understand all the technical details of blockchain or bitcoin. You have the ability to create records that are indelible. You have the ability to transfer value by making updates to those records. And you have the ability to automate updates to the records through these things called smart contracts. That means potentially that you could transform the structure of financial services. Today there are all sorts of institutions that exist to maintain sets of records. To be “trusted third party” in industry parlance. That role is potentially fundamentally reshaped. Blockchains are networks. Networks that we see today Alibaba, AirBnB, Uber… those are interesting networks but they are centralized. Here, you’re going to have networks that are decentralized that are working more as a cooperative. I think some of the challenges will be what are the economics of those networks, what are the economics of certain blockchains versus today’s discussion which is all about the technology. I think tomorrow’s discussion will be about how do you build network effects off of these new railroads. What’s especially interesting for me is that it was a grassroots movement from the technology sector. Not a movement of established businesses trying to find a new selling point. It’s really a bottom-up movement from us geeks. It’s one of the most amazing things in science that happened in the last 100 years that this thing is actually possible. You can digitally sign transactions or other kinds of information so that you can prove that you actually signed this. It’s much more secure than these curvy, wriggly signatures that we use every day. It will probably replace those things soon enough. Chapter 3: Influence Of The Blockchain We spent two years trying to understand this space and what it really meant. We found that it meant a lot more than just another digital currency. As the blockchain became more influential in our thinking we began to realize that it was a profound shift in how the Internet could be used to create new forms of value and how it could be used to enfranchise and include people in global finance. We’ve had the Internet for years now and on the Internet, still nobody knows whether you’re a dog or not. Identity fraud is completely out of control. So the area where we need some new thinking is in the identity space. Maybe the technology brings something new into that space. And we need it fairly quickly because we haven’t fixed the identity problem for people but we’re about to put ten billion, trillion, gazillion things on the Internet. We can have a trust relationship without really having ever met each other or having done business at all with each other. I think that’s fundamental. Security is another. Blockchains are military grade cryptology and they’ve never been cracked. When you hear about hackers stealing bitcoin they’re not stealing from the blockchain itself. They are stealing at the point of entry at the wallet or browser level where they intercept messages. But the blockchain itself is very secure. The Internet of Things will probably be the best test case for a lot of blockchain technology. Because if we’re going to have millions or billions or trillions of Internet-enabled devices doing everything from driving us around to managing our affairs to monitoring our health, they need a way to move and store and manage value and data that has value in a way that is secure and private. Right now we don’t have that. I’m concerned about the ubiquity of data and how it flows in and through Internet-connected devices. I think with a value platform like blockchain we can at least address some of these problems and maybe even create new opportunities. Chapter 4: New Business Opportunities We cannot sit in our office and study of course we do that as well but we need to go out and participate in this whole blockchain community. Honestly, what’s very new to me especially regarding younger persons in my team is how enthusiastic they are about that. If there is a hackathon, for example they never come to me and ask if they can go there and get some money for that they just go. They’re so interested. They just go and participate and share what they learned, and we have further discussions. This is really a new way, also for us to deal with new technology. We’re in the middle of it, nobody tells us what to do. It’s really we together shaping what we stand for in the end for blockchain. We need to be much more technological. We need to have an awareness of how something is programmed so we can check if the programming is correct. This might be a capability that we have but not in the way it’s needed in the future. In the future, you always need to have a technological link to things so you can understand them. Otherwise you always need your IT guy sitting next to you helping you in the understanding of the problem. This is not something that’s going to impact one of two industries it’s going to affect every industry in the same way the internal combustion engine affected almost every industry or the Internet affected almost every industry or the steam engine created new industries. This is one of those big generational technology shifts that requires a concerted and focused response. Otherwise, you will miss the boat. We are all, also in the financial services industry trying to recognize that we don’t have to be defensive but we rather have to embrace not just this technology but this enabler it brings us to access a vastly underutilized or undiscovered market that we have to do business with on an eye-to-eye level. We talk to all sorts of senior executives in financial services and often the say “We looked at bitcoin, we had smart people come in and explain how the blockchain works but I still just really don’t understand what it means for my business.” I think that makes sense in a way because if you think about an iPhone, for example: What’s really important, when a new iPhone comes out? Is it the new chipset or some new way of compressing frequencies? I’m not an engineer and don’t know how any of that works. What matters to people is what they can do with the technology. Of course, success is in now way guaranteed. One day we may look back on this and say “Oh, wasn’t that great…” But: If you ask me, there is undoubtedly a huge amount of progress that has been made. There’s something here. I find it hard to believe that I’m going to look back in ten or twenty years and say “None of this ended up happending.” Because we’re really seeing a new way of transacting value on the Internet. Chapter 5: The Blockchain And Banks I know how big financial institutions work. They’re not going to do something reckless with technology. This is people’s money and livelihood they’re working with. These are slow upgrade processes. These systems, once they get implemented, will run in parallel with the old systems for a while before you have a switch over to the new one. That’s standard in technology upgrade. I knew this was going to take time. But there are antagonists, players who are threatened. It’s the AT&T/Verizon/Kodak analogy again. Their business model is threatend by this and they’re going to do things to slow down and water down the transformational networks. There is a game theory approach to how the technology is being rolled out in the markets, for sure. We made different roundtables here in Zug after the start of our bitcoin experiment. For example, we invited banks and bankers from Zug and tried to connect them with people of the “Zug cryptovalley”. They were talking, but the bankers were not so happy. They said there were different things with the law and “It’s not so easy for us.” But it’s also a question of attitude. It’s the same as for our city, for our administration: banks have to get ready. I know that in a way they are defensive but on the other hand have research and teams that face these questions. Maybe they are waiting a little bit now but they can’t deny it, I’m sure. I think there’s going to be a lot of disruption a lot of revolution with respect to blockchain-based technologies. That’s going to drive not necessarily banks worrying about other banks being competitors. What banks worry about is the “bank of one” the next generation of a banking network that’s resident on a phone, that’s decentralized, distributed and that’s based on a digital token, a digital asset that’s not issued by a bank or government. It creates all these different permutations and opportunities not only for enterprises and governments but also for society. We see a lot of example of banks and consulting companies and other Big Four audit firms talking about how they can strip cost out of the business of—I don’t know—trading in public markets or whatever it might be. But if you take the example of public markets: How can you cut cost out of a market that doesn’t exist in the future? What if the trading of securities happens peer-to-peer in the marketplace that doesn’t have traditional intermediaries of exchanges, brokers, agents, escrow agents, clearing houses and all the other parties we rely on? That’s the cost you’re cutting out but what if the market can function without them? The important thing for leaders of big companies is not just to think about cost but also to think strategically. What can this technology enable me to do that I wasn’t able to do in the past? I think it’s going to take a long time for it to weave its way into the system. It may take a normal tech upgrade cycle for it to fully weave its way into the system. I have said publicly I think within twenty years financial services will be just software and the smart contracts technology in particular is going to automate a lot of the things that institutions and people handle today. Chapter 6: The Blockchain And Financial Inclusion Seventy-four percent of the world’s population according to the World Bank does not have access to basic financial services. In my home country, in the United States of America, which is one of the wealthiest countries in the world, about fifty percent of the population does not have access to basic financial services including bank accounts. There’s a huge amount of people around the world that don’t get to experience and be a part of the global economy because they don’t have access to the financial system for a variety of reasons. I do think this technology will lift a lot of people out of poverty but will also be an inclusive technology that allows more people to engage in global commerce. I don’t like to think that we’re creating so much prosperity for the less than one percent. I like to think of purpose-led businesses. By the way, that’s the trick I think for large corporations: to understand that the cost efficiencies of embracing this new technology will potentially widen their accessible markets at a cost that’s reasonable. That in itself will create prosperity in different areas. Something that we should think about. Pretty soon, when smartphones can be had for less than five dollars each, which is right around the corner nearly every person living in poverty on earth will have access to a smartphone and be connected to a network. That is game changing in and of itself. When you have digital wallets on these phones and the ability to trade assets we’re going to answer the question “What happens when everybody has money?” Capitalism itself has thrived in some areas by the natural exclusion of others from markets. It actually uses that scarcity principle as its driving basis. So what happens when money is not scarce? We will look at people and say: “What are the things that I cannot do and where we can join forces?” Much more than today, where we say “How big is your car and how much money do you have on your bank account?” So, I believe the future will be even more human, or humane—no… human than the last hundred years we have seen. Chapter 7: The Real Revolution I don’t think blockchain is a revolution. It has been done forever, for forty years, which is really forever in computer science. Both ingredients of the blockchain—security and distributed systems have been around since the early seventies. This is not the revolution. The revolution, or the evolution is that jobs will change. That’s something I believe in. Jobs will be digitized in some sense. Computers will do a lot of the manual labor that we still see in service domains today. It’s called the “fourth technological revolution” and I think we are at the beginning of such a revolution just now. That’s why we don’t close our eyes. Some people say “There will be much trouble people will lose their work,” and so on. I’m sure it will happen but it’s better we face it than deny it. Offshore working, automation, robots are they threatening our work? It’s a real-life question when your own son who is prepared to go get an advanced education asks you that question. I concluded I do have a genuine answer: It’s not threatening. It is forcing us to think a little bit different but if we do it smart, we actually give the next generation a great new opportunity to reinvent why they get up every morning and why they go to work and make sure they really make best use of the degree they studied for and the things they really want to do in life. I want to make the world better. Just better. Whatever my measure of better is, or yours is what might be valued by society. The other thing is this wonderful opportunity to create a little bit of prosperity. Because what prosperity offers you is independence. We don’t have to have people who are living in squalor simply fighting for a handful of rice every day. There is too much in the world to live like that anymore. I think certain countries and even corporations are beginning to understand that. Certainly this movement, this blockchain movement is the technology underpinning the technology part of that mindset which exists offline as well. The idea is out. If it’s not being realized here it may be realized there or even in the Internet, uncontrollably. Bitcoin is here, it is here to stay and will become bigger and bigger. As the blockchain, as cryptocurrencies as the possibilities connected to the blockchain and cryptocurrencies. That’s out of the box. And the whole system does not need any government. It exists. It works. It’s like a computer network surrounding the world. You can say “We don’t want to be part of it.” So be it. It’s here. And it won’t go away. Chapter 8: The Blockchain And Us I feel like this is a generational opportunity for entrepreneurs and investors. Quite frankly, I have not seen something as exciting in my entire investment career. Let’s try to build a new system that has better trade-offs and features and less downsides. And let’s make it work. Now the pendulum is going to swing back. What that’s going to do is frankly make confidence in capital markets higher. Blockchain has enormous potential implications outside of financial services. We might even see the full-scale implementation of some of those more real-world applications leapfrog financial services. This invention, when it came up in the seventies is really one of the groundbreaking ideas. It will change society for sure in many domains. It already has changed society in a sense that the Internet is a secure place that you can make transactions on the Internet. The potential for creating trust or even permissionless trust within the Internet that’s something that we haven’t had before. Its impact on society, on business, on government could be profound. Blockchain is to be fair nearly ten years old. I think it has another ten years to run before we really see what its long-term impact is. I think it’s going to be a long, much more steady journey we go down and you’re going to see multiple technologies inspired by this thing. Blockchain technology is not the solution to all the problems under the sun. As it matures we will begin to see its potential benefits but also its limitations. You can deny it or you can face it. We always said we have to face it because these things are coming if we want or not. I have seen long-standing partners when they saw the opportunity, to change and say “I don’t understand everything but I understand there is something behind this so we need to go forward.” That’s really great. People often say necessity is the mother of invention but I like to say necessity is also the mother of adoption. If there is a real use case that people need a technology for they start using it. I started with Commodore, we had Atari, Apple but at some point in time, Windows came. Everybody just started to use Windows without asking “What is the code behind it? What is the code behind moving the mouse?” We have a whole lot of possibilities. Everything will change. In my opinion, the possibilities are endless. It reminds me of the situation where all of a sudden we have two or three huge inventions happening in one moment. We are living in a very interesting window of opportunity. I’m surely very excited to fully embrace that. Even one little step can be a great step for mankind. I think we are exiting the industrial age and are entering an age we still have to name. Where that will take us is very hard tell. My suspicion is it means a sort of resurgence of the notion of community. It absolutely feels like a whole new paradigm for changing the world. We’re at a crossroads here. We have the wherewithal now to create technology that would help the entire human race. The question is: Will we do it? But we can do it now. There is so much innovation that blockchain technology has spurred all throughout the world. I have absolutely no doubt in my mind that this technology is going to affect everybody. I would say in ten to twenty years there won’t be a human being whose life is not impacted by this technology.