Déjà vu. You know that feeling, when you momentarily are not sure of where you are in the timeline and you wonder what you’ve missed. We’re there now.
The “blockchain not bitcoin” chorus seems to be re-emerging, taking us back to the 2016-18 heyday of thematic and platform consortia convinced that the benefits of greater efficiency would overcome corporate competition. Bitcoin was an asset with no backing or clear utility, the implied argument seemed to go, whereas blockchain, well that was a technology.
Noelle Acheson is the former head of research at CoinDesk and Genesis Trading. This article is excerpted from her Crypto Is Macro Now newsletter, which focuses on the overlap between the shifting crypto and macro landscapes. These opinions are hers, and nothing she writes should be taken as investment advice.
Last week, Goldman Sachs CEO David Solomon wrote an op-ed for the Wall Street Journal titled “Blockchain Is Much More Than Crypto,” in which he reminded us of the potentially far-reaching impact of tokenization and peer-to-peer payments and drilled down on the benefits of risk reduction and settlement speed. Last month, Citi published the results of a survey showing that 92% of participating institutions see value in tokenization while 88% are either exploring distributed ledger use cases or actively participating in blockchain projects. Over the past few days, the Red Cross talked about ongoing work on a blockchain-based aid distribution prototype, and Japanese banking conglomerate Sumitomo Mitsui Financial Group announced plans to work on soulbound tokens for digital identity.
What’s going on? Is this part of a post-FTX “reset,” a cathartic back-to-basics? Or is something else in play?
Both. Yes, we are likely to see more public discussion about distributed ledger efficiencies and less about crypto asset trading and investment. This is a natural reflex after the damage done by layered leverage, flimsy tokenomics and trading fraud, and some high-profile reminders that crypto is not just about greed are more than welcome.
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It is also an acknowledgement that there is a constant battle for attention, and the “X not Y” model assumes that only one variable is worthy. “Blockchain not bitcoin” emerged in 2018 as an attempt by enterprise projects to capitalize on the market’s performance woes – the new version does the same but swaps in “crypto” to reflect the ecosystem’s spread.
So, a large part of this is a cyclical narrative shift. But there’s something else going on as well. This shift comes on top of a longer-term tale of technological evolution and shiny things.
The last wave of blockchain hype may not seem to have produced much value. Pilots and proofs of concept involving lettuce, plastics, even (alarmingly) nuclear weapons seemed to deliver no practical utility. Groups working on blockchain use cases for trade finance, healthcare, telecoms, insurance and more have either gone quiet or been wound down.
And we have seen some recent high-profile distributed ledger failures. A couple of weeks ago, IBM and Maersk announced the closure of their blockchain-based supply chain joint venture TradeLens. Last month, the Australian Stock Exchange (ASX) canceled its much-hyped blockchain project after years of delays and cost overruns. This summer blockchain-based trade finance initiative we.trade, backed by IBM and 12 major European banks, went into liquidation and B3i – a blockchain insurance venture backed by more than 20 insurers and reinsurers – ceased operation.
So, the “please, not again” discomfort at the renewed protagonism of “blockchain” potential is understandable and even healthy (inflated expectations of any sort should be kept in check) – but not necessarily correct.
Both hype and failure are a natural part of a new technology’s evolution. Remember the dot-com bubble? That wasn’t just about crazy stock valuations – it was as much about the promise of rapid societal change, with business models rewiring their engagement models and individuals flourishing in their new-found creative independence. In the early days of any radical innovation, manifesto and prophecy often get confused, and experimentation – of which failure is an integral part – is the only way to test the bounds of reality.
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You’re probably wondering where the successes are, and that’s fair because they don’t get much attention. They’re hidden in the persistence of some projects that could have given up ages ago, in new use cases under trial, and in a changing participant profile. Distributed ledger work has been ongoing all along, but given the rapid growth of crypto markets, the “flashiness” of some participants and the gripping drama of the year so far, it has been largely overlooked. Things that move fast get more attention. Enterprise experimentation does not move fast.
Some examples: A few years ago, we got excited when a commercial bank successfully issued blockchain-based assets in pilot tests. This week a state-owned bank did the same but for real, and at least one government is almost there, while other governments and banks are testing the process with some intriguing innovations. We also have trials where the main participants are central banks. That is definitely progress.
Large traditional asset managers such as KKR, Apollo and Hamilton Lane are issuing blockchain-based tokens representing funds. Not as a proof-of-concept but for real. Just this week we learned that Vanguard Australia is using a distributed ledger for back-office settlement, Starbucks (one of the largest unregulated “banks” in the world) has launched a non-fungible token (NFT) experience in beta for its Rewards users, and Goldman Sachs as well as Germany’s music rights management society have carried out separate distributed ledger tests. Recent initiatives seem to have learned from the failures to date: start small, iterate up the ladder and never overlook human incentives.
There’s also an ideological battle afoot. Many in the crypto industry hate the idea of anything being “permissioned” and accuse all gated experimentation of being “useless” while overlooking regulatory restrictions and client preferences. The assumption seems to be that everyone prefers open networks, permissioned blockchains can never be based on public ones and that the potential to integrate with stablecoins and central bank digital currencies (CBDC) is irrelevant.
Read more: After FTX: Rebuilding Trust in Crypto’s Founding Mission | Opinion
There’s also a strong cohort who thinks we should focus on more innovative applications since traditional markets work fine, in spite of settlement risk, gated access and a dangerous lack of transparency. More efficient and lower cost debt markets, for example, open up opportunities for a much broader demographic than big banks, possibly facilitating the development of sophisticated markets in regions currently underserved. They also make new types of products possible, such as intraday repo, enhancing liquidity in tight markets. Could this be done on traditional databases? Some of it, sure, but would that be future-proofing market evolution? Determining the answer to that is precisely what the experimentation is for.
As the dust settles on the FTX fallout, and as the crypto ecosystem takes stock of the damage and starts to heal, we can expect more prominence for enterprise blockchain milestones. This doesn’t at all mean that crypto is losing its sparkle or that asset innovation is done. Last week we saw the emergence of an intriguing new derivative that lets traders bet on the Ethereum staking yield, potentially coalescing market acceptance of a benchmark interest rate. We are also still seeing glimmers of institutional interest in crypto assets as investment. None of that will disappear.
But a time in the sun for the less-glamorous side of blockchain evolution will be good for the industry as a whole. We could well still see some ideas that strike us as fanciful, because people are people and creativity should never cease to surprise – who knows, some might even stick. But we can certainly expect more solid experimentation at senior levels.
Perhaps even more important: we have to push back on the “X not Y” mentality. The crypto ecosystem is certainly big enough by now for any number of approaches, and this industry grew on the back of permissionless innovation – it’s incongruous to see crypto enthusiasts argue that only one approach is worth any time or attention. For those who care about distributed ledger utility, there’s plenty to get excited about. For those who think there’s greater societal value in trading and saving, markets will continue to evolve and some prices will eventually recover. Many of us may be frustrated by the amount of pixels given to what we personally see as useless ideas – but we should think about what our industry would look like were one reduced group to have the power to decide what is “valid” and what isn’t.
Meanwhile, the narrative shift will act as a refreshing reminder that this industry is about much more than profits and portfolio allocations, and that the potential goes way beyond sentiment recovery, regulatory clarity and deeper understanding. “Blockchain and crypto” – there’s plenty of room for both.