As incumbents begin to enter the ‘blockchain’ space we see two distinct groups beginning to form — the suits and the hoodies. Although a person’s wardrobe shouldn’t generally be used as a basis for judgment, in this case, it’s a useful analogy that helps us understand this evolving industry.

It is important to recognize that when someone utters the word “blockchain”, often times the suit-wearing banker or consultant imagines something very different than that entrepreneur/developer wearing a hoodie.

This division became clear at the Consensus 2016 conference when I saw a debate titled ‘The Future of Blockchains’ between the well-regarded founder of 21.co, Balaji Srinivasan, and the accomplished and well-connected CEO of R3, David Rutter. The debate was an attempt by Paul Vigna — the author of “The Age of Cryptocurrency” and a writer at The Wall Street Journal — to incite a spirited argument between the two camps.

Paul Vigna left, Balaji Srinivasan center, David Rutter right

To some, the debate may have been disappointing. David and Balaji were too stately to really take the gloves off — but it was obvious that these two men are preparing for two very different futures.

When I say that I am not just referring to the public vs. private blockchain debate — what I am getting at goes deeper than that. I’m talking about two very different visions of what this technology is and how we should use it.

Andreas M. Antonopoulos addresses a sea of suits at a Deloitte FinTech Talk

On the one hand, the suit-wearing incumbents are feeling both threatened and excited about this technology. Most have approached the ‘blockchain’ in a manner that treats it as a reinforcing innovation. They have tried to find ways to implement blockchain-like solutions that address problems within their current business models. This strategy, however, also means having to comply with both existing regulatory guidelines and the incumbent’s internal company policies and expectations. Therefore, enterprises have gravitated towards permissioned and private blockchains.

As one banker who I spoke with at the conference put it when I asked if they ever considered helping their customers buy Eth or Bitcoin — “why would anyone stick their neck out, risk interfering with AML/KYC guidelines, and piss off their boss?”. It was evident that this individual was given the mandate to explore opportunities within the space — but ones that conform to the incumbent’s risk and ROI expectations. Any proof of concept that touches a public blockchain presents dangers that some see as insurmountable — because why would they “stick their neck out…”. A recent article in the Financial Times written by a Morgan Stanley employee echoed this sentiment when he stated that — “neither banks nor policymakers take the idea of an ‘unpermissioned’ network seriously”.

I do not fault incumbents for taking a cautious approach towards public blockchains, ie. Ethereum and bitcoin, given that their industry is subject to complex national and international regulatory requirements — particularly after our latest financial crisis.

As David Rutter discusses in his ‘debate’ with Balaji Srinivasan — “You need a platform that meets the requirements of global finance — that includes regulatory requirements — we think a lot about the legal side of it and the legal underpinnings and the like. A lot of our resources are spent talking to regulators and understanding what the banks need.”

In the meantime, the less risk-averse hoodies do not function under the same expectations and restraints as a publicly traded corporation. Nor do they necessarily take into consideration global financial regulations.They do see the benefits of developing applications on open blockchains, however. The fact that there is regulatory uncertainty is not as paramount to the risk-taking startup and their customers.

Specifically, there is a demand among users who use public blockchains and decentralized applications because they either value the fact that their exchanges are governed by cryptography, rather than governments and financial regulators, or that they simply don’t have access to such financial instruments through traditional banking venues. If you consider the fact that 2.3 billion people in the world are considered under-banked, you begin to understand the magnitude of this opportunity.

The benefits of working with public blockchains were described by Balaji Srinivasan during the Consensus talk: “Bitcoin .. is like Linux in the sense that it solves developer problems… it’s good for payments that are very large, very small, very fast, very automated, or very international — if you’re doing things that are many of those things combined then you just can’t use the traditional wire system.”

Balaji also discussed the issues with private blockchains. He argued that it creates a siloed or fragmented system which does not address the existing incompatibility (both technical and political) between varied global financial systems — such as Asia and the West.

As there continues to be a lack of regulatory clarity on the use of blockchain technologies — other than ‘wait and see’ and ‘do no harm’ policies — risk-averse incumbents will work on their private and consortia blockchains. This, as Balaji pointed out, will allow for the financial industry to finally innovate their archaic financial plumbing that hasn’t been touched since the 60s. Incumbents will have an opportunity to learn about the space, acquire expertise, and — if they are smart — to position themselves in a manner that would allow them to benefit from this technological revolution rather than be disrupted by it. But, if this technology is to introduce a major disruption to our global financial order, I doubt it will occur behind closed networks controlled by financial incumbents. An enterprise blockchain strategy that does not account for a future where value is transmitted largely over a public network puts the incumbent at risk of falling behind.

For now, public blockchains will continue to mature and overcome their many obstacles — such as Bitcoin’s scaling issues and the recent DAO attack which have left some questioning the reliability of Ethereum’s smart contracts. As the space develops and issues like privacy and scalability are addressed, regulation will ideally follow to provide more clarity on using public blockchains. If this were to happen, then it could instill more confidence among incumbents to participate in an open and decentralized network where moving value is frictionless while access to advanced finance is inclusive.

Private or consortium based blockchains aim to serve the needs of the incumbents running it with the objective of cutting back-end costs. Not to suggest that this is not important — these incumbents have surely helped legitimize the industry and have brought regulatory attention and research into the space. Additionally, it has helped spur a number of startups who are working with incumbents on this technology. For now, regulatory and technological uncertainty has forced incumbents to explore this new innovation in a manner that adheres to their risk-averse nature.

Although, a future where private and public networks are complementary is very possible — and quite desirable for both camps. For example, one can have an implementation of Ethereum (p. 6) that is a private blockchain but that is interoperable with the public Ethereum network allowing for smart contracts to be passed between the two.

Time will tell whether these two visions for the blockchain will be complimentary or whether there will be a battle for dominance between the radical hoodies armed with encryption and the powerful suits flanked by an army of lobbyists and lawyers.