Bankers who reject Bitcoin yet embrace the blockchain technology it is based on do so at their own peril, says Chris Skinner. 

Bankers are all repeating the mantra 'Bitcoin bad, block chain good'. This rallying cry is now so strong that if you challenge it, the discussion is quashed. I’m now of a mind that the quashers don’t really know what Bitcoin is about.

Reid Hoffman, co-founder of LinkedIn and early investor in PayPal and Facebook, often talks about this in the media. He believes Bitcoin is not bad at all because it has three key characteristics: it is an asset like digital gold; it is a currency for trade; and it is a technology platform to build upon.

These three characteristics are bound together and only work together, not as individual pieces. He also notes that many venture capitalists are denigrating Bitcoin and says this pleases him, as he is investing for the long term and the long term says that Bitcoin, or something similar, will win.

Look under the hood

So, why would someone as intelligent and informed as Reid Hoffman – along with other leading figures such as Marc Andreessen, Richard Branson and Wences Casares – be so pro-Bitcoin when the banks are not? My answer is that most of the people rubbishing Bitcoin haven’t looked under the hood.

So here are two test questions for all of you reading this and thinking Bitcoin bad, blockchain good. First, have you actually read Satoshi Nakamoto’s white paper? Second, can you explain to me exactly why the blockchain is good?

I don’t ask this in public, as I don’t want to embarrass anyone, but I am guessing that 99% of the 'Bitcoin bad, blockchain good' people would answer no to both questions.

Peer to peer

So, to help you along the way, Mr Nakamoto’s white paper abstract pretty much summarises what you need to know, but read the rest anyway as I’m going to test you on it. The key line for readers is the first one that states Bitcoin, “a purely peer-to-peer version of electronic cash, would allow online payments to be sent directly from one party to another without going through a financial institution”.

This is why Bitcoin is so important to banks. And, in case you don’t know about the blockchain in depth, it is the technology protocol invented by Mr Nakamoto with Bitcoin. The blockchain allows you to create a public ledger system that is accessible for all and secure. This is achieved with a public record of transactions that are secured by private keys.

As a result, any exchange on the blockchain is secured until the private key is passed along. At that point, the ledger records the exchange of the key and the movement of a digital asset. That asset can be anything from a currency transaction, to a securities settlement, to a mortgage deed, to a marriage contract.

Why Bitcoin is integral to the blockchain is because the blockchain does not work without a native cryptocurrency, and the critical question is why would you create an alternative to Bitcoin when more than 90% of all cryptocurrency transactions are based upon Bitcoins.

Maybe that is why Nasdaq is using Bitcoin as the blockchain currency to record securities settlements. In May, Nasdaq announced it is using Bitcoin and the blockchain as a digital ledger for its Private Market platform to facilitate the issuance, transfer and management of private company securities.

If Nasdaq is doing this and if many others are saying you need Bitcoin for the blockchain, then why are we all saying Bitcoin bad, blockchain good?

Chris Skinner is an independent financial commentator and chairman of the London-based Financial Services Club.


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