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Worth Giving: Unchained

Bitcoin and other blockchain technologies are creating new billionaires. But their biggest impact may be as a force for social good.

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It’s been quite a year for cryptocurrencies and the many new entrants in the blockchain ecosystem: A new class of billionaires has been minted, and more important, a transformative technology has gained traction in business and finance. But the ride hasn’t been smooth. Cryptocurrencies have experienced market surges and crashes, ICO scams, wallet hacks and network attacks. It’s all a natural part of the innovation process, say advocates and investors.

That’s probably true, but there’s another narrative to watch here. Bitcoin and blockchain infrastructure was largely created by outsiders and tech geeks, libertarians and explorers, for whom profit wasn’t the primary motive. As the technology takes root, the question looms: Will blockchain be used for good—or will it just create new wealth for an elite few who understand its possibilities faster than most?

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I’m optimistic about its potential for good. Because underneath the hype, scandals and growing adoption, there is also a blockchain-centric social movement building momentum. This movement is based on the premise that if we unleash the power of blockchain technology, we can rebuild the global economy and create positive social change at the same time.

If you think that cryptocurrencies and blockchain are hard to understand and evaluate, you’re in good company. Even the world’s most sophisticated financiers can’t agree on their potential. At the last Berkshire Hathaway shareholders meeting, Warren Buffett called cryptocurrencies “rat poisoning” and “pure speculation.” IMF managing director Christine Lagarde holds a different view, writing on the IMF’s blog, “Just as a few technologies that emerged from the dot-com era have transformed our lives, the crypto assets that survive could have a significant impact on how we save, invest and pay our bills.”

Let’s start with some background. The blockchain movement began as a response to the 2008 financial crisis. As big banks and institutions failed, the mysterious computer scientist Satoshi Nakamoto released his (or her—the exact identity of this person is unknown) first white papers about the concept of a technical protocol that could replace the role banks play in the financial system, then subsequently released Bitcoin.

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Bitcoin remains the highest-profile blockchain project to date, at its peak reaching $19,783 per bitcoin with a global market cap that rose to $600 billion. But most industry enthusiasts say that it’s not Bitcoin itself but blockchain, the technology underlying Bitcoin, that holds the most transformative potential. For one thing, blockchains allow cryptocurrencies to travel around the world with the ease and speed of email. Today, sending money to another country requires wire transfer fees that can start around $40 per transfer—and that’s if both parties have a premier bank account. If the recipient doesn’t have access to regular banking services, these transfer fees can soar to up to 30 percent of the transfer.

Blockchain allows cryptocurrencies to travel around the world with the ease and speed of email. That has big implications for impoverished people, migrants and refugees. Photo by Dong Wenjie/Getty Images

For impoverished people, migrants and refugees, this is a very big deal. The global remittance market is estimated to be above $600 billion per year, with Western Union occupying the greatest market share at about 15 percent. And due to increases in global migration, refugee populations and the availability of digital goods, remittances are expected to increase significantly over the next five years. Countries with higher migration outflows are likely to see the largest percentage of increases in cross-border payments, making steady remittance flows a stabilizing factor for many developing countries. The entire world has a stake in that.

For many people trying to send money home or to others in need, the ability to move funds for small fees would be of profound benefit. Today two billion people function outside the formal banking system, without access to basic financial services, including savings accounts. Refugees often have to leave behind their assets with no way to transfer them to new accounts, or they may suffer a loss of capital because of local bank runs and bank failures in their home countries. If these two billion people were to open cryptocurrency wallets on their smartphones, they could store their assets on the blockchain, allowing them to have access to their money and send and receive transfers regardless of bank access.

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The concept isn’t fully realized, of course. It can be difficult to exchange some cryptocurrencies into local, or fiat, currencies. And the time it takes to validate and process a single transfer makes the solution unrealistic for some real-world transactions. But the blockchain industry is working to solve the issues causing long processing times and build out the networks needed to exchange cryptocurrencies with fiat currencies in a fast and efficient way. One example is an innovative partnership between IBM and Stellar, an open-source platform, to develop a consensus protocol and network that can handle any currency-trading pair (crypto and fiat) for only a few cents per transaction.

Banks certainly provide important services aside from transferring money. They offer regulatory protections, safeguard customer deposits from theft or loss due to technical errors and provide loans from the deposits they hold. Many of their fees result from complying with government regulations, such as anti-money-laundering services through “know your customer” validations. Cryptocurrencies are not yet regulated, but new startups and developer communities are working to find solutions to implement these services within the blockchain-cryptocurrency paradigm.

For now, though, cryptocurrency holders have to trade off the regulatory safeguards offered by banks for the privacy, flexibility and cost savings offered by cryptocurrency exchanges. They’re betting on the technology. Blockchain works by utilizing a network of miners, or node validators, who copy all encrypted transactions on their individual servers, creating an encrypted distributed ledger. Why is this important? It means that each transaction validated is copied on thousands of ledgers, making it theoretically impossible for a single entity to change or modify the transaction.

When a new transaction is sent from one account to the next, the network of ledgers validate that the sender has the amount in the corresponding private wallet. Each private wallet has an encryption key stored on the blockchain. The transactions are anonymous because the private wallets are validated based on an encrypted key sequence rather than an individual or business name and account number. Wallets are set up through online wallet services rather than a traditional bank account, so it’s difficult for identity thieves to steal money from them. However, the system removes the fraud protections offered by banks, making it the wallet holder’s responsibility to keep his or her private key safe and secret.

Blockchain transactions are extremely hard for totalitarian regimes to track or control.

The anonymous, encrypted and global nature of blockchain transactions makes them extremely hard for totalitarian regimes to track or control. The flip side of censorship resistance? It opens the possibility of funding illegal activities—money laundering and the drug trade, for example.

More flexible money flows are only the beginning of what blockchain and cryptocurrencies will change. While the Bitcoin network is used only for validating and sending bitcoin, the Ethereum network of decentralized platforms allows transactions to be programmed with if/then algorithms called smart contracts. Smart contracts allow for transactions to be released once certain prestated conditions, which can be coded and stored on the computer network, are met—for example, transferring money when a product has been received.

While making such transactions more efficient, smart contracts can also restore trust and traceability in supply chains. Products are often made in multiple locations and with different materials. With smart contracts, each link in the supply chain can be given a unique encrypted key with notations about the location and materials used. These links would make it possible to validate that a product was manufactured under the specific terms of the purchase agreement, making it difficult to replace genuine products with nonconforming materials. That will help consumers hold companies accountable for safely and fairly produced goods.

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Blockchain networks allow for another breakthrough innovation called tokenization. Tokenization occurs when a digital representation of a digital or physical asset is recorded on the blockchain, resulting in that asset having its own private key or tradable token. Tokens allow, for example, the easy trading of customer loyalty points throughout a global network. New uses for tokenized assets are being created every day. Innovators are evaluating the new markets that can be created when real-world assets, such as art collections and real estate, are assigned tradable tokens. If tokens representing real-world assets can be safely sold and traded on cryptocurrency exchanges, an entirely different group of investors could gain access to fractional ownership of those assets.

Blockchain technology can guard our privacy, fight censorship and oppression, restore trust and integrity in our supply chains and allow us to tokenize and trade real-world assets in new ways, all while opening up the global economy to the two billion people still unbanked. And if blockchain is implemented as hoped, it will allow us to create new types of assets, currencies and businesses that will unlock the next tier of economic growth in both developed and developing economies.

The next decade will see a need for hundreds of thousands of new engineers to build out this new global infrastructure. America’s ability to respond to this innovation challenge with human capital and a supportive regulatory environment could stimulate economic growth at home and promote U.S. global economic leadership. The failure to do so could end up being a critical national security risk. 

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