Vantage Point: Why Do We Have Blockchain and Cryptocurrencies?
Over the last several years we have all listened as industry participants, consultants, lawyers, and plenty of others have breathlessly proclaimed that blockchain technology will revolutionize financial services and provide new
opportunities for a variety of other sectors, from commercial real estate to healthcare, the defense industrial base and more. Additional proclamations extend to cryptocurrencies displacing fiat currencies because, well, who needs a central bank? The typical argument put forth is that friction is reduced, trust is distributed, transaction history is immutable, cost is reduced, and on and on. In theory
blockchain technology and cryptocurrencies are supposed to enable parties to make
payments without an intermediary. Intermediaries are inconvenient. Intermediaries
have legal obligations that severely restrict illicit transactions. Intermediaries are
not helpful when you are trying to build a multi-billion-dollar criminal enterprise.
Allow me to tack left for a moment. Another topic we hear a lot about is global
warming. Whether it is fossil fuels, aerosol sprays, even cows. The United States
appears very concerned. This leads me to the process of crypto mining – not merely
creating new coins, but validating crypto transactions on a blockchain network and
adding them to a ledger, which prevents double spending on a distributed network.
These transactions are verified by solving cryptographic and mathematical
problems for which miners use a lot of power. How much? According to
Digiconomist, as of July 15, 2021, a single Bitcoin block requires 1,721.96 kWh.
When you look at it collectively, that is a projection of 135.12 TWh1 in the year, or
about as much power as is used annually by the country of Sweden (a Terawatt is a
unit of power equal to one trillion (1012) watts). So, mining might as well be
called a ‘global warming technology’.
I hear blockchain and cryptocurrency proponents screaming, wait!! This is magical
new technology. Really? Append only data structures (private blockchains) have
been in existence for decades. Public blockchains are inefficient. Case in point, they
suffer from bloat. That is, every full Bitcoin (for example) node needs to access the
entire transaction history because the entire transaction history is needed to
validate the transaction. And, as we know, there is no way of deleting data. So, you
will have tens of thousands of copies of the same data. So, the tried-and-true
method for reducing the size of a data set, deleting data, cannot be done. Oh, and
by the way, Bitcoin is only able to process between three to seven transactions per
second. Hardly a substitute for traditional financial transactions. In fact, VISA alone
does about 1,700 transactions per second per day.
Now, even if you do not agree with what I have written, I do believe that you will
agree that cryptocurrencies (mainly but not exclusively, Bitcoin) have been the
driver for a robust ransomware business. Absent cryptocurrencies, a $5 million
ransom would have to be paid by wire transfer, gold coins, or cash. The latter two
options are only workable in movies; no intermediary (i.e., bank) will allow a $5
million payment to a known criminal (see Office of Foreign Assets Control). So, the
implementation of cryptocurrencies has not only mostly benefitted those we want
behind bars, they have disadvantaged law enforcement, private and public sector
enterprises, and society. This should not be a surprise as all negative sum games
have similar outcomes. You would think we would learn.