Here is the full transcript of Blockchain Revolution author Alex Tapscott’s TEDx Talk: Blockchain is Eating Wall Street at TEDxSanFrancisco conference. This event occurred in October 2016.
Listen to the MP3 Audio: Blockchain is Eating Wall Street by Alex Tapscott at TEDxSanFrancisco
It’s been over eight years since Lehman Brothers went bankrupt. But the financial crisis still continues to cast a long shadow over all of our lives.
What began as an economic calamity has morphed into something that’s more corrosive and arguably more dangerous — a crisis of legitimacy, not just in banks but in many of our institutions, including governments. We’re feeling now that globalization, capitalism, even democracy are in retreat while populism, nativism, protectionism are on the rise.
And really who is to blame the people who support these kinds of ideologies? Europe has lost an entire generation to economic stagnation. Social and economic inequality is at the highest level it’s been since the Great Depression. In October, this month, Spain’s youth unemployment rate is at 45%, eight years after the crisis.
Now there is no silver bullet to fix the many problems that ail society. But why not start with where it all began? We have an opportunity — arguably once in a generation opportunity, to reinvent financial services for a new era of trust and legitimacy.
Now the leaders of the industry today, many of the banks and others have a choice to make. They can either do it themselves or have it done to them, because we are entering a new era of technology. You’ve heard the expression “software is eating the world”. Well, software is finally eating Wall Street.
And the technology likely to have the greatest impact on the world of financial services for the next 20 years has arrived. But it’s not big data, the cloud, Robo-advisors, collaborative finance or new entrants like Tencent and Apple Pay. It’s actually the technology behind crypto currencies like Bitcoin and it’s called the Blockchain. This technology will transform the industry, but it also represents nothing short of the second generation of the Internet.
So when you use the Internet today to send and move and share information, you’re not actually sending an original; you’re sending a copy and you’re retaining an original. And generally speaking, that’s okay. In fact, one of the great advantages of the Internet is that we have this publishing platform that allows us to democratize information. Except when it comes to things that have value like, say, money, sending a copy is a bad idea. If I give you $20 in payment for something, it’s really important that you know you have it and I don’t still have it, because if I could send the same $20 to every single person in this room, the $20 becomes worthless.
So it turns out, it’s great to have a printing press for information but it’s not so great to have a printing press for money. And this is a problem that cryptographers and technologists have been trying to resolve for years: How do you prevent this digital trail of breadcrumbs from accumulating every time you move information? Turns out it’s difficult. And as a result, we rely on middlemen, intermediaries, to perform a whole bunch of important roles in business and society. And these intermediaries would be well known to many of you banks but also governments and big technology firms.
And these intermediaries perform essential roles. They establish the identity of parties in a transaction. They create trust. They perform what’s called the business logic, the clearing and the settling. And they keep records that can be validated by the counterparties in the transaction, by auditors, regulators, and other stakeholders. And they do an okay job but they have some very serious limitations.
The first is that they’re all centralized. Anything centralized is vulnerable to hacking or to attack or to failure. This happens in the financial service industry as well as other industries. They slow things down. The settlement times for all sorts of transactions can last into the days or the weeks to send money overseas from one country to another can take five to seven days. They’re also costly. To make that same transaction can sometimes cost 8% to 10%.
Another big issue is that they exclude big parts of the population. There are 2.5 billion people in the world who don’t have access to any form of financial services. They’re part of the world’s unbanked who don’t really benefit at all, from globalization, internationalism, because they’re trapped and they’re not upwardly mobile.
They capture data about us which prevents us from using it to organize our affairs but also could potentially undermine our privacy. So you can argue in some that intermediaries capture an asymmetric benefit from the digital age, and banks are certainly no exception.
So what if the internet was entering a second era — from an Internet of information to an Internet of value? Well, right around the same time that Lehman Brothers went bankrupt, November of 2008, an anonymous person or group of persons named Satoshi Nakamoto outlined a new thing called the Bitcoin protocol, a way for people to make — to do transactions and move money peer-to-peer online without an intermediary to establish trust.
And the interesting thing about Bitcoin was that it worked. And it worked so well that it set off a spark that’s traveled like wildfire and captured the imagination of people in many different industries, not just in financial services but in music and film, in supply chain management and other areas.
Underpinning Bitcoin is this revolutionary technology called the Blockchain, a vast global distributed database, a single source of truth, that doesn’t run on one computer; it runs on all computers. And it’s not accessible to a few but it’s accessible to all, where not just information but potentially anything of value, Bitcoin to be sure but also money, financial assets, intellectual properties, carbon credits, energy, even votes in an election, can be moved, stored, and managed securely and privately, and where trust is not established by a third party but rather through mass collaboration, cryptography, and clever code.
And it turns out that Bitcoin is just the start. Ethereum is a relatively new Blockchain platform that’s pioneered a technology called Smart Contracts, which is basically what it sounds like, software that mimics the logic of a contract with guaranteed execution, enforcement, and payments without relying on banks, escrow agents, lawyers, courts and the other intermediaries that add friction and cost to contracting.
If you think about what impact this could have on financial services, it’s nothing short of profound. Every single asset basically is a contract. It’s a piece of paper that gives you a promissory note entitling you to something: a dividend payment, a coupon, equity in a company et cetera.
The Linux Foundation, no stranger to massive open source projects, has also gotten on board, launching the Hyperledger project which now accounts amongst its members thousands of technologists and hundreds of companies. So this technology has the ability to create a more prosperous world and in our book Blockchain Revolution, we outline how that might work and the opportunities here are significant — everything from enabling creators of content, like musicians and journalists and filmmakers to get fairly compensated for the value that they create, to improving on the land titling that exists in the developing world.
70% of people in developing world who think they own property actually have a very flaky title to that property. What that means is that when push comes to shove, there might be a duplicate claim; there might be a missing record or there might be a lack of enforcement that prevents them from using that as a source of income, as a way to access credit to pay for education, to start a business. So there are some very interesting applications.
I’d like to discuss financial services, though, with you today. So the financial services industry can be a complicated thing to understand. It is one of the world’s most important industries. It is the linchpin of our modern economic system. Its leaders are known as Masters of the Universe.
But when you really drill down, it actually performs eight essential functions in business and society. Everything from enabling people to get access to a mortgage, to allowing businesses and individuals to move money around the world, to insuring against catastrophic risk to enabling companies to access growth capital to start their business, something familiar to all of you; I’m sure.
What about accounting? Silence. Who gives a TED talk on accounting, honestly? It’s like, bring out the guy who talks about flying cars. But there’s a real opportunity here to fix accounting, because accounting is basically broken. And there are four big problems with it.
The first one is that it assumes that managers will always do the right thing. Big mistake. Enron, Tyco, Toshiba, WorldCom, the financial crisis — this is a dangerous assumption to have when you’re starting out.
The second issue is human error. 35% of accounting fraud is actually due to some unintentional mistake — you know, poor pam in the back office, fat fingers, and entry into an Excel spreadsheet and like a butterfly flapping its wings, it reverberates across the whole enterprise and creates a big crisis. New rules like Sarbanes-Oxley which came to effect after Enron have done little to curb wrongdoing.
And the big issue is that modern accounting practices can’t really keep up with the velocity and the complexity of companies and businesses. And deciphering a financial statement is kind of like watching two people dancing under a strobe light. You see bits and pieces, an arm, a head, you know, someone shaking their booty. But you don’t actually get the whole picture, because accounting is based on a principle that’s actually quite ancient. It’s 500 year-old thing. It’s called double-entry bookkeeping where for every transaction you record a debit and a credit, and in the end your balance sheet balances.
And it worked well in the Middle Ages and it’s worked well throughout most of, you know, modern capitalism. But there’s a way to improve it significantly. So imagine every time you entered into a transaction, you didn’t just record a debit or credit but there was a time-stamped receipt of that transaction, which went to a distributed ledger, that everyone could trust was verifiable, that they could search, that they could manipulate in a way that they could gain a clearer picture of the financial health of a company.
Financial statements would go from this thing we do with the cycles of the moon, every quarter, where we get this sort of 2D facsimile of what’s actually happening in a company to something that’s living and breathing and true.
How about funding and investing? You know, that’s something that I think a lot of people here know about venture capitalists, entrepreneurs et cetera. It’s an industry that’s dominated by investors like VCs, investment banks, and others. And there’s an opportunity here to completely change that paradigm.
So a funny thing happened a few months ago, actually the week we launched the book, which is that this thing called the distributed autonomous organization (DAO) came into existence. And it was a company like no other. It had no managers for starters. It had no assets. It had no home office. Actually it didn’t even have people. It was just a collection of smart contracts and it was designed as a venture fund of sorts to make investments in the industry.
And by the way, those of you who are in the VC industry here today who are accustomed to two-and-twenty, you’re not going to like the fee structure on some of these new companies, 0 and 0. Half the room got that, half didn’t.
So the fascinating thing about this company, more interesting than everything I just explained, was that in six weeks it raised $165 million from tens of thousands of investors all around the world. So what does it mean when you’re an entrepreneur? And the cost of doing business can drop significantly, not least of which is the cost of capital of raising money.
But it turns out that we could be the halcyon days of entrepreneurship here where little companies could have all the capabilities of big companies without the legacy issues, like bureaucracy and culture. The mood hit in Silicon Valley belies a more troubling statistic, which is that entrepreneurship and innovation — well not innovation — entrepreneurship is actually declining.
In the 1980s, 9% of people under the age of 30 had equity in a private company. Today it’s 3%. So this could help to jumpstart entrepreneurship in a meaningful way. And since barriers are lowering in industries, there’s an opportunity for people, anybody to challenge the banks in all of their core areas.
To think about financial crises as they can breed political crisis – crisis of legitimacy. And I think we’re facing that right now. People question whether or not politicians are actually acting in their best interest. And it’s led to the rise of populists all over the developed world.
Now populism is seductive but it rarely works. After the Brexit vote, the leading Brexit tears all scurried from view like rats from a sinking ship and the political establishment was tossed into this caustic battle for control. And oddly enough, one person emerged to provide leadership and it was the governor of the Bank of England Mark Carney who in the weeks leading up to the referendum vote and in the weeks after made speeches and introduced papers from the Bank of England, that basically argued for a radical rethinking of how economies ought to function, starting with financial services.
And he focused on two things in particular fintech which is the umbrella term to describe how technology is impacting finance and Blockchain. And one of the most radical proposals that he made and the bank has continued to make is the idea of introducing a digital currency to replace the existing fiat currencies that countries and intergovernmental organizations like EU issue and control. Call it a Brit-coin. That’s my dad joke for the day. All right.
The advantages of doing this are actually quite obvious. We have a financial messaging system. You go to Starbucks, you tap your card on the card reader and you feel like there’s a transaction happening peer-to-peer from you to the merchant, or you buy a share and you see it show up in your brokerage account. But it’s not actually a way to do transactions digitally; it’s just the way to message that a transaction has happened.
So if you had a native digital medium for money you could actually transform a lot of things and you could create a lot of benefits. The first one is speed, cost, and efficiency. If transactions settled in a native digital bearer instrument, like a Brit-coin, then you wouldn’t need third parties to perform all of these important clearing and settlement functions, that would drop the settlement time from anywhere from two days in public equities to 25 days in trade finance and interbank lending to zero day. Actually zero seconds and would take the cost from whatever it is in those markets to next to nothing.
The second thing is performance and inclusion. If you have a new platform to build all sorts of new capability in financial services you can do a lot more, like target the 2.5 billion people in the world who don’t have access to a bank account. The basics of retail banking, again, simplifying this industry are payments and savings and then credit. But basically payments and savings. If you can give people a way to store value that’s not tied up in a piece of land with a flaky title or in an animal that might keel over and die, and a way to make payments, say, send a remittance home from their family in San Francisco to somewhere in Latin America, you solve 90% of their financial problems. We have an opportunity here to make the industry do more for more people.
And then the final thing is improving transparency and reducing risk. If transactions settle instantly, then you don’t have to worry about settlement risk. If it takes no time for value to reach another person, you don’t have to worry about counterparty risk, the risk that the person on the other end might not have the funds to settle the trade. And in aggregate, all of these risks together reduces systemic risk, the risk that too much risk gets concentrated in one part of the system and that can create problems overall. But ultimately improving transparency will improve accountability and hold those in power accountable for their actions.
So to paraphrase the Beatles, all you need is trust. But what is trust? Trust is the expectation that the other party will abide by their commitments, that they will act with integrity. And it’s been very difficult to get people to do that. What if we could program that into the fabric of our economy? What if we had a new protocol, a trust protocol, on top of which we could build any kind of business?
So it’s an exciting time, one fraught with peril but also lots of possibility, because it appears that once again the technology genie has been unleashed from the bottle. Summoned by an unknown person or persons with unclear motives at a very uncertain time in history this genie is once again at our disposal to fix a broken system and to transform the economic power grid and the old order of human affairs for the better, if we will it.
Thank you very much.