Smart bankers may still have time to make Bitcoin irrelevant while taking over a vast amount of finance related sectors through the use of an Open Interbanking Blockchain only they can control.

Until Bitcoin can scale, it’s exposed to the risk of its own mainstream popularity. As it is today it can only support up to 7 transactions/sec.

Once the volume goes above this absurdly limited rate, newer transactions have to wait for hours to be written on the blockchain, miners start prioritizing those that pay higher fees, which can become so expensive that it’s not worth using it for regular people.

If enough people can’t pay or get paid then the bitcoins become useless, hence worthless.

Since Bitcoin is still in this consensus limbo state when it comes to a scalability solution, we shouldn’t be dismissing the competition because they’re old and slow to adapt, we must remember these are very powerful institutions with over 200 years of doing this and they’re not going to go down without a fight.

An OPEN Interbanking Blockchain would make banks capable of absorbing every industry Bitcoiners dream of disrupting, this is why I wrote this essay.

TL;DR; While Bitcoin figures out how to scale, it has already shown bankers how a permissionless blockchain has the potential to disrupt multiple billion dollar industries, banks could expand their offerings to disrupt these industries with the creation and control of a highly scalable, open access, Interbanking Blockchain on which only a federation of banks are authorized to create new blocks and to transfer value pegged to multiple fiat currencies.

PREAMBLE

I’ve been a Bitcoiner (and holder) from well before Mt.Gox came down, I think I decently understand the technology, after reading the Satoshi paper a dozen times I got so excited I translated it to Spanish and made a few humble contributions to Bitcoin core’s UI.

After mining and trading, going to several Bitcoin conferences and not seeing any real adoption of the technology in the street, I became one of the top contributors to OpenBazaar. As a Bitcoin holder I understood that the only way to make Bitcoin worth anything was to make it useful.

Currencies without intrinsic value can only gain a perceived value when a lot of people are willing to accept them in exchange of goods and services, when they start showing the attributes of universality and transformability.

Giving people access to free permissionless Bitcoin-based e-commerce tools on the Internet would not only make Bitcoin extremely useful, it would make it extremely valuable and therefore mainstream adoption in meatspace retail would soon follow.

But then, as I started estimating the amount of transactions that just one system like OpenBazaar would bring every 10 minutes, I realized any project with potential for massive use could be responsible for crashing the Bitcoin network, only a handful of Wallmart stores transacting only in Bitcoin would make the network beg on its knees. If OpenBazaar were to release a succesful fully working client it would probably take less than a year to make the very system it depends on start to collapse.

With both hands in my forehead I saw we couldn’t responsibly release OpenBazaar until Bitcoin were to scale[1], transactions in OpenBazaar CANNOT be off-chain, the whole point of OpenBazaar is to transact without third parties, directly on-chain, without registering anywhere, decentralized e-commerce on top of a decentralized value transfer network.

So I started asking questions about the limitations of the blockchain (around january this year after meeting in Brussels with the OpenBazaar folks when they presented at FOSDEM), and I was quickly dismissed with the “that can be done off-chain” excuse on the developer list…

After bringing the subject over and over on every reddit thread I had a chance to air my concerns, I feel somewhat responsible for helping to start the fire around the scalability debate that has taken over the Bitcoin ecosystem this year, and which still has not been resolved. I feel as if everybody is building on top of quicksand if this network can’t scale to real world use.

Now most people in the Bitcoin community are dismissing and laughing the “Blockchain” hype and how the financial industry knows nothing by talking about how great blockchains are without a mention of Bitcoin in the same sentence.

Most Bitcoiners have it hardcoded in their minds that cryptocurrencies have to work like Bitcoin, and they will immediatly think that you can’t have a successful Blockchain without Bitcoin (I used to think that way too), it’s easy to think this way as so many other alt-coin blockchains have failed while Bitcoin is still here with its network effect momentum and tremendous amount of hashpower. It’s easy to think the Blockchain only works because of the incentive of Bitcoin and dismiss the efforts of people like Jamie Dimon or Blythe Masters, someone who knows the finance sector from the inside and who has seen how the enourmous potential the Bitcoin blockchain has, a potential that can be packaged and sold to the most powerful banks in the world.

I tend to not underestimate anybody, much less an industry that already controls the world, an industry with endless resources and influence to hire the most talented computer scientists and cryptographers, an industry that can buy-out and fund any existing crypto startup with pocket change, an industry that may very well have funded an anonymous team of cryptographers right after the 2008 crash to create a cryptocurrency proof-of-concept financial network experiment never meant to scale…

HOW BANKS COULD MAKE A KILLER BLOCKCHAIN

Conspiracy theories aside, I know I’ll probably be hated for this essay but it bothers me a lot to see the Bitcoin community so one sided on the subject.

I find arrogant and naive the stance of “banks are stupid, they’re just creating a distributed database” when there is so much to be gained.

I’d like to raise one of your eyebrows and help you think outside the Satoshian-Blockchain model and show you how banks may have learned from the Bitcoin experiment how to create a next generation Interbanking Blockchain-based system that keeps most of the benefits and that might eliminate all the issues that bother most people about it, and that for better or for worse, one that will work just the same way (actually better) for all of us Bitcoiners who don’t bother with running a mining operation or full nodes.

It’s “federated”, not private you stupid!

If Bitcoin is to stand a chance, then it’s because banks will try to do this with private chains like you think.

If they are that stupid, to create a private chain only they can access, then I agree with you, they will all crash and burn, because it’s the permissionless nature to interact with a blockchain that which allows massive disruption across many sectors, this freedom to transact on top of an open standard value transfer ledger is what unleashes boundless innovation.

However, I don’t think everyone in the banking industry is that stupid, for that they can just use distributed databases right? ;)

But if you left it up to me and I was one of those 1%ers running the banks, I’d deploy an open source and public access blockchain that would allow permissionless transactions between compatible crypto-wallet holders.

It would allow smart contracts, multisignature operations, and all the cool things Bitcoin has to offer, in the process I’d take out of the equation the parts that suck about it:

Bitcoin can’t scale as it is.

as it is. Bitcoin’s trust model is highly inefficient, it consumes way too much energy and resources for allowing a mere 7tx/sec.

These two things are this way and will be this way unless there’s a major architectural change on how the current Bitcoin blockchain works, bold new ideas like Bitcoin-NG’s proposal, but I doubt this architectural change will ever happen if we can’t even agree on a simple algorithm to raise blocksize (which would just be a patch to hold an impending collapse anyway)[2]

Why do you need miners?

Because trust. You need miners because you need trust in this open network on which anyone can earn the right to create new wealth.[3]

Trust on Bitcoin is achieved through the hashpower reflected on the longest chain, and that hashpower is achieved with the incentive of being awarded Bitcoins for your work.

Take away the miners, take away the hashpower and move trust into the hands of a few organizations. Sounds crazy if you’ve been in Bitcoinland for as long as I have, but hell, aren’t we’re already doing that with trillions of dollars held today by the very banks now seriously investing into Blockchain technology?[4]

Now move trust into a set of known public keys, a set of “federated keys” owned by let’s say just Citibank, Bank of America, Wells Fargo and Chase, keys owned just by the top 4 bankers in the US (remember who got to eat all the other banks and got bailed out by the american taxpayers in the process after 2008… a group of bankers who could easily sit at a table and agree on this)

Now instead of hopelessly burning CPU cycles, to randomly find a number that would help you achieve a hashsum with certain characteristics, a number that you’re supposed to attach at the start of the next block along with the transactions you decide to include on your new block so that you are trusted… now all you need is to sign the new blocks with your special private keys, all in just a few milliseconds.

If you own one of those federated keys you could collect all the fees in the last block, transfer value in and out of the blockchain, and all because everyone is supposed to trust you… just like they have trusted for the last 200 years with trillions of wealth.[5]

Now you can mint blocks at any rate you want, and blocks with invalid signatures are ignored by every wallet and node in the system.

All the transactions of that block pay very little in fees (compared to what banks used to charge before the blockchain), but now everyone can send money and accept payments instantly, the Interbanking Blockchain starts to eat away VISA, Mastercard and AMEX business, banks can also provide credit on their blockchain, transactional volume starts to skyrocket.

Now banks can expand their basic banking services affordably to every citizen in the world with internet access. This is basically Andreas vision for the unbanked, but realized by the banks and their controlling interests.

Not scaling Bitcoin could be a really big loss for the world.

Central banks would still have the power to print and allocate their money at will, the status quo of wealth distribution would not be threatened anymore by peer to peer money.

If it were in their interests, Banks could also decide to fix the issues of fungibility Bitcoin has today (if somehow you manage to convince financial regulators to let you do that), they’d provision massive data centers worldwide with million dollar enterprise server racks and state of the art NSA-grade encryption built-in directly on the silicon courtesy of the likes of Oracle who are already in bed with banks. It would be highly scalable.

They build canonical block explorers, open source libraries (which help them find and recruit the top talent by offering very generous pay), and free basic APIs for smaller companies to do business on the blockchain.

They buy or partner with the top crypto startups out there which are fast and talented to implement more capable or easier to use paid APIs, more advanced tools to cover the tremendous needs of the entire financial industry is now running to catch up because they’re to dumb and slow to understand how this whole thing works under the hood.

Lots of money is to be made in this FinTech renaissance as everyone integrates into this bank operated Internet of money and new innovations seem to come out every week now that we all can interact with the finance sector like we only thought possible with Bitcoin.

Now we start hearing on mass marketing mediums about these new Interbanking Blockchain innovations that the big four have created “The CITI, BOFA, WFC, JPM Interbanking Blockchain network” that will now allow you to do almost free transactions instantly with anybody anywhere in the network.

We hear they’ve already partnered with trillion dollar multinational banking empires like Grupo Santander, now you can send money INSTANTLY to Europe and Latin America for ridiculous fees of merely $0.001. Asian and African conglomerates soon decide to take part.

Western Union and the entire remittance industry is now swallowed by the Interbanking Blockchain too.

Now any website that owns an Interbank Blockchain wallet on any country can easily accept payments virtually for free with any local currency with an array of free open source web apis to chose from, no need to bother with dealing with volatility, exchange rates and the ever hostile regulation Bitcoin involves.

Companies like Paypal now scramble to become internet escrows and pivot to create value on the Interbanking Blockchain as they scramble to stay alive, the old Internet Payment services industry are now made obsolete by the Interbanking Blockchain.

The InterBanking Blockchain could be available from day one on major e-commerce websites, and retail shops in the US, like Amazon, Macy’s and Wallgreens, because those guys really wanted to use Bitcoin at some point to save on payment processing costs, but they realized Bitcoin could never handle their volumes, not to mention the taxes and accounting complexities, and also the unclear regulation issues. Facebook, Google and other Internet empires are quick to join.

With a processing power of over 100,000tx/sec the Interbanking Blockchain would have a wealth of data to tease the curiosity of the likes of Amazon/Google/FB whose vast computational resources could be used to download and analyse in real time, soon they’d start implementing innovative blockchain services and tools for their internal use and for their cloud customers and end users to take advantage of.

It’s important to note that banks have also figured the elimination of volatility as they have chosen to create multiple blockchains, one pegged to each world currency they want to work with. By working with central bank currencies governments don’t offer much resistance and start to integrate.

mock up on chase.com showing blockchain accounts in different currencies

Now when you open your banking web page, you get offers to open a new blockchain wallet, also available on your smartphone banking app which asks permission to connect to your Facebook account so you can send/receive money to friends and family.

Every other Bitcoin startup out there starts to see no choice but to become Interbanking Blockchain compatible to stay in business.

With the Interbanking Blockchain technology you can send sub cent amounts, now you can microtip anyone on the internet using your local currency online, something that well may be one of the biggest money makers for banks in countless transactions per year if they were to keep the blockchain public and permissionless to transact[6].

Initially the blockchain’s tokens would be added as people would “transfer” local fiat from their checking/savings accounts into the crypto wallet of their preference, this would be the only slow part of the process, getting banks to settle how these old account balances now have lost or gained from old electronic money to new blockchain-money. Just like they probably must do whenever they move paper money into their vaults, or when you take money from an ATM and actually make it physical today.

And all this is just the money use-case of the Interbanking Blockchain, as the years go by powerful smart contract capabilities start to roll out, integration with the IoT, competition with Forex, and all sorts of uses start to appear with the evolution of this open technology on which the only closed part is the token generation.

All of a sudden Bitcoin starts to look like the Napster of cryptocurrencies’s history while the Interbanking Blockchain starts to look more like Netflix.

LUCKILY BANKS HAVE A LOT TO DEAL WITH TODAY

However I’m confident it’s a long stretch for all this to happen with banks, human elements make it hard for us in the Bitcoin community to move forward, the same or worse could be for them and their huge corporate pyramidal structure full of bonus hungry zombies, they’d have to have a dictator with unlimited powers and resources directing these innovative efforts with my way of thinking to make it all happen.

Coming back down to reality and its constraints, the big banks are currently juggling all sorts of human, operational, technological [7], and competitive challenges as many FinTech companies are already starting to steal customers with deeper pockets (worth trillions) as they can offer easier to use and more powerful wealth management technologies that make the bankers look retarded and expensive.

All the while top banking execs in their 60s boast at irrelevant things like the new “portals” they’re about to launch as their top innovations, things they don’t seem to understand none of their customers care for (true story from Citi on a fintech meetup in Miami in October 2015).

But if banks have taken Bitcoin or future cryptocurrencies as a serious threat, they could be smart enough to put the proper resources into very talented people to make this happen.

In the end it all goes back to my concerns from January: Bitcoin won’t scale as it is, I truly hope it can evolve before it’s too late.

Notes

[1] I left the project in the summer of 2015 and remain a good friend doing fly-by reviews and giving feedback. Now OpenBazaar’s founding team incorporated into OB1, which is now funded and working relentlessly to get a full release before the end of 2015.

[2] and there’s also the other experimental economic risks and unknown consequences of massive Bitcoin adoption, one is its deflationary nature, things like “how does credit work in a finite monetary system?”, how do you incentivize production when money is supposed to grow in value as more want a piece of the pie.

[3] Money is an inter-subjective psychological phenomenon, I find it cool and a bit insane that Bitcoin has already managed to make us believe these tokens are equivalent to wealth. That in itself is an incredible achievement for Bitcoin.

[4] Only in offshore accounts there’s an estimated stashed $20 to $30 trillion.

[5] Please keep in mind that implementation and technicalities are irrelevant to the end product envisioned in the essay. Keep your eyes in all of what is to be gained and this could well be The Manhattan Project equivalent for the future of the finance industry. If anybody has the resources to pull it off it’s them. The question is, do they have the vision to build something like this or even better than what I’m warning us all about.

[6] There could be limits on how you’re allowed to transact though, and due to money laundering regulations banks could very well implement daily limits on the amounts of money you’re allowed unless accepting to submit some extra personal information for anti-money laundering records.

[7] Banks are very hard to do business with, they prefer technology providers that have had a stable and trustworthy trajectory. Most of the FinTech innovation is happening on startups most banks are not willing to look at unless these innovators have the right relationships on technology providers banks trust. Banks over the years have bought platforms after platforms which may take a really long time (or never) to be brought up to speed, the nature and size of their business makes this a big challenge, so hopefully we still have plenty of time. As the FinTech sector gets filled with innovation outside Bitcoin, Banks face competition from left and right and they need to think of how to retain the wealth that’s to be passed onto a younger generation who might think of them as their parent’s old bank, they have big challenges ahead for them from a marketing and perception perspective, again we might still have time to change things.

Q&A:

“What if an employee or hacker gets a hold of one of the federated keys”?

No problem, you immediately issue a new block with an operation that invalidates transactions signed with that key since height HEAD-N.

… I’ll add more as I get more and I have time to answer.