A Blockchain Is Only as Strong as Its Weakest Link

Bitcoin, cryptocurrencies, blockchain.  I’m not sure how I feel about them all. On the one hand, my knowledge of the lean wastes leads me to believe that physical money has a definite shelf life, the end of whose life is rapidly approaching, and that electronic transactions, whether via banks or blockchain, will one day be the only method of financial payment (before some other yet unimagined disruptive innovation emerges of course!).

I am also hugely critical of stock markets. See here a blog I wrote which aches for this gambling, greedy middleman to be eradicated from society.

So a distributed, decentralised, digital currency potentially appeals greatly – but there are many things about blockchain that make me very nervous.

The first being that it doesn’t appear to be independent of stock market trading at all. Quite the opposite in fact, with Goldman Sachs and Bank of America both big investors in blockchain, despite warning that crypto currencies are a risk.

My main source of all things blockchain is Joe Saluzzi, a trading expert who co-wrote the book “Broken Markets: How High Frequency Trading and Predatory Practices on Wall Street Are Destroying Investor Confidence and Your Portfolio”. I followed him on Twitter after seeing him talk passionately and eloquently about the perils of stock market trading on US TV when I was teaching in Ohio several years ago. I can’t pretend that I understand all of the things that he says, but it feels good to have an expert on such things within my Twitter portfolio.

He is anti-blockchain. In one tweet he compared cryptocurrency financial products to a crucial scene in Jurassic Park: “Your scientists were so preoccupied with whether or not they could, that they didn’t stop to think if they should.

This week he retweeted an article from the Economist which discusses many of the worrying developments within cryptocurrencies and their recent crash and it appears that there is an ever-increasing wave of concern about the application of such technologies.  Lloyds has now banned customers from buying cryptocurrencies with their credit cards for example. Even Facebook, not generally thought of as the quickest responder to reform, has taken the step of banning all cryptocurrency advertisements.

I like to think of myself as a ‘reasonably’ early adopter, someone who would rather embrace the change and go with the innovation, but there’s just something about blockchain which doesn’t feel like it will be a force for positive good. Indeed, apparently, 44% of all bitcoin transactions are used to fund illegal activity.

Officials in Britain, America, and China have indicated that the crypto market requires regulation. All the main banks are interested in the blockchain to combat fraud, while the American SEC recently signalled its intention to regulate something called an Initial Coin Offering – where capital is raised through new crypto initiatives in exchange for ‘tokens’, which are in effect new currency.

Some of these ICOs are legitimate but Ethereum cofounder Joseph Lubin warned that many are fraudulent, while the SEC filed fraud charges against two that were marketed as REcoin and DRC.

So it seems that there is a battle playing out between crypto for illicit use on the one hand and regulators racing to understand the technology on the other, while the big banks, insurance companies and logistics businesses invest and run proof of concepts to drive efficiencies and prevent fraud.

Perhaps that’s what’s needed to make blockchain technology fulfill its potential? The “code” within bitcoin to prevents its misuse and the gatekeeping machine technology to recognise and prevent fraudulent activity.

Paper money has this and yet it doesn’t seem that bitcoin has – the fact that transactions cannot be reversed is a feature. Everything feels too unregulated, too open, too free, too unknown. The disturbing reality though is that this technology is already entwined within our financial system.

Sarah Lethbridge

Author: Sarah Lethbridge

Sarah Lethbridge is the Director of Executive Education at Cardiff Business School. Her role is to work with external organisations to design programmes of learning which employ the academic expertise of the Business School.

Sarah joined the Business School’s Lean Enterprise Research Centre in 2005. Since that time, she has worked on numerous lean projects in hospitals, universities and public and private services.

She has worked with the Ministry of Justice’s Lean Academy, the Value for Money team in the Home Office, Nestle, Legal and General and Principality Building Society to ensure that organisations approach lean in a holistic, sustainable way.