In early March, the U.S. Securities and Exchange Commission (SEC) issued a landmark ruling that stock ticker COIN, a proposed exchange traded fund deriving its value from Bitcoin, would not be approved. For many outside of the financial/technology world, this story barely made the news. However, decisions like this will have a major impact on the future of the US economy as blockchain technology develops and changes the way we make transactions.
The SEC’s decision makes sense for the short term: they wanted to limit a highly volatile “anonymous” currency that has no central controls. To understand why the SEC’s decision can end up having a negative effect in the long run, some background on Bitcoin and its underlying technology is necessary.
Bitcoin was first introduced at the end of October 2008 by an anonymous person or group of people referred to as Satoshi Nakamoto. Since the release of bitcoin, Some have claimed to be or know Satoshi, but this remains unconfirmed and the creators are still anonymous. Bitcoin is a cryptocurrency, which means that it is a digital currency protected and verified by encryption that operates independently of central banks. The specific type of technology used is called a blockchain, which is a public, central ledger across thousands of computers that records every transaction. With blockchain technology, the bitcoins never actually enter your wallet (or even your cyber wallet). Rather, it is recorded on a public ledger across tens of thousands of computers that you are the owner of the bitcoin.
If you are a little bit lost right now from all the technical jargon, the boulder metaphor can help clarify blockchain. Imagine that a primitive civilization uses giant boulders as currency. People use these boulders in lieu of modern currency which is easy to hold and transfer. The boulders represent value and are backed by a central government. However, they are impractical to move around. Instead of physically picking them up and transferring them when a transaction takes place, the boulders remain in the town square. When one individual (who owns a boulder) wants to purchase something from another individual, the two parties write on the boulder that they are hereby transferring it from one to the other. Since this boulder is out in the open, it is a public ledger that everyone can see and can verify that the transaction took place. Bitcoin works in a similar fashion. Two people agree to transfer the bitcoin and then both parties “sign off” on the public ledger for everyone to see that the transaction took place. The fact that the ledger is distributed across tens of thousands of computers around the world makes it slightly more sophisticated than the boulders of the primitive civilization, as well as more secure. Because of the encryption and how widely the ledger is distributed, it would be practically impossible to nefariously change transactions on the ledger.
Bitcoin technology sounds cool, but also solves a large issue with how we transact today. The “double spend problem” refers to the issue of ensuring that people only spend money once. To clarify: let’s say I asked you to send me a dollar. If you could simply take a picture of that dollar bill on your phone, send it to me and that picture would work as currency, there is nothing stopping you from spending the actual dollar bill that you still have. When you sent me the picture of the dollar bill, you are not sending the dollar itself, only a copy of it (just like with any computer file, you never send the original off of your computer: you send a replica). To solve this issue of money transference pre-Bitcoin and other cryptocurrencies, we generally used trusted intermediaries. These trusted intermediaries include banks and financial technology companies (like Venmo), but they present problems themselves. These intermediaries charge transaction fees, hold onto your money for days or even weeks and sometimes put your data at risk. Until recently, we had no alternative to these flawed but usually trustworthy intermediaries to facilitate transfer. Bitcoin represents a way to transact without intermediaries, and blockchain provides the mechanism.
Now that we understand how Bitcoin and other cryptocurrencies work, it’s time to understand why this decision matters. From 2008 to 2016, investment in financial technology has skyrocketed from under $4 billion to over $36 billion in financing for financial technology startups. While the lion’s share has traditionally been in the United States, every year the percentage has been dropping. One of the most commonly proposed reasons for this is that the US regulatory framework is focused on protecting central banks and institutions and not on being amenable to and working with startups. It seems that regulators believe that because startups and technology threaten these central institutions, they are bad and should be prevented. This may be because the monetary policies the Fed has the power to carry out would have no bearing on the supply of Bitcoin and the government would lose its grip on the economy. While big firms lobby the federal government, the fintech (financial technology) firms keep innovating. Their innovation is paying off as these technologies are becoming mainstream. You can even pay with bitcoin on Amazon.
It seems that with its recent growth, Bitcoin has passed the threshold of “here to stay.” Over the next ten years fintech will eliminate many jobs across the world, but it will also create a new class of high paying jobs. The question we need to ask our regulators and lawmakers is where do we want those jobs to be—here or overseas?