The digital currency Bitcoin, invented as an alternative way to hold and trade value outside the established banking system, may never move beyond the fringe. But the record-keeping mechanism that Bitcoin’s creators devised — its method of processing money transactions without a central scorekeeper — seems likely to live on.
Ironically, it’s being embraced by the very institutions that Bitcoin was built to avoid, the established banking system. “We believe it will have as big an impact on financial services and banking as the internet has had on entertainment,” said Charley Cooper, managing director of R3, which has formed a consortium of banks and other financial institutions that is co-opting the Bitcoin “distributed ledger” concept in hopes of rewriting the way they conduct business.
Money historically is issued by nations’ central banks and held in accounts by banking companies. When two parties transfer money between each other, their banks adjust the balances in their accounts. Bitcoin’s way of tracking who has how much is based instead on consensus — each transaction is recorded in a block of information that becomes part of a public data chain. They call it the “blockchain.” It essence, it’s a shared ledger, distributed on participating computers around the world.
The advantage is much faster recording of transactions that move money, eliminating risk and expense. “Banks spend well over $100 billion a year on legacy systems and technology that could be replaced by distributed ledger technology,” Cooper said. Bitcoin’s open blockchain, in which everyone can see every deal, doesn’t work for commercial institutions that for competitive and regulatory reasons don’t want it all made public. R3 has built a platform called Corda that adapts the distributed ledger.
“Parties can see info relevant to them, where they are a counterparty, and regulators can see certain info, but it’s not broadly shared around the community,” Cooper said. The consortium testing the software and working out methodology has grown to 75 global banks and other financial firms. “We believe this is the next step in the evolution of money,” he said.
If experiments like this work, they won’t be the last adaptations of the blockchain. Beyond money, the concept of using group consensus rather than central scorekeepers has a chance of becoming a sort of World Wide Web for transactions, handling everything from identity management to content posted on social networks.