Cryptocurrencies and blockchain attract attention of various parties. Not only investors, startups and big players from the financial world but also scientists. Researchers try to look further than how to make profit on the „crypto revolution” and aim for a deeper insight into the technology that could enable a wide range of next-generation internet services beyond money. To better understand impact of cryptocurrencies and blockchain on the financial system, economy and society we reached out to prof. William Knottenbelt, the director of the Centre for Cryptocurrency Research and Engineering in Imperial College London .
With regard to cryptocurrencies and blockchain: are we seeing the rise of a new financial system(s) or are we seeing the rise of a new technology for the old financial system’s purposes?
Prof William Knottenbelt: My view is that cryptocurrency and blockchain are genuinely novel technologies which can unlock the full potential of the digital economy, by transforming the design and operation of systems in both financial and non-financial contexts. It’s certainly true that cryptocurrencies represent a new kind of asset class which has never before existed in history – thanks to its ability to enable global commerce and financial transactions without central points of control and traditional intermediaries. This enables new forms of assets, new payment systems and new types of financial services and markets e.g. fairer, more transparent markets for event ticketing (see e.g. http://aventus.io). But we also see great potential in non-financial applications. For example, academic qualification verification (see e.g. http://gradba.se), provenance assurance in supply chains (see e.g. http://kotiva.tech).
Could cryptocurrencies be the fulfillment of libertarian dream about financial free market, with currencies freely competing with one another and leaving out the governments and central banks? Or perhaps it’s far too naive to imagine this happening?
WK: Indeed, you could argue that cryptocurrencies like bitcoin were built with the express purpose of disintermediating governments and central banks from people’s lives. Personally I think there are a number of problems with taking this thinking too far. Firstly, a world in which cryptocurrencies like bitcoin are the only form of currency still leaves us with all the social problems that we have and still leaves us with high levels of inequality in terms of wealth and so on – so just moving to cryptocurrencies as a form of payment in itself solves very little. Also we should remember there are many important functions of government beyond facilitating commerce. Indeed we have throughout human history assigned to democratic governments the monopoly on violence with the aspiration of assuring the basic rights of citizens and allocating resources to defend nations against threats, both internal and external. If we take the government out of the equation who will perform these tasks?
If the cryptocurrency phenomenon is not stopped somehow, won’t it be headed towards a virtual monopoly with Bitcoin on top and altcoins at its feet? Similar model developed on many other e-markets, f.e. Google is practically synonynmous with the notion of search engine, Amazon „means” e-retail etc.
WK: There is actually a trend towards the weakening of the the overwhelming dominance of bitcoin as the leading cryptocurrency, thanks to governance issues within the bitcoin community and an explosion in the number of and increasing diversity in altcoins. However, there are worrying trends towards centralisation within individual cryptocurrencies. For example, most of the computational power that underpins the integrity of the bitcoin network is based in a relatively small number of data centres in China. Further, up to 70% of the same computational power is thought to be provided by one model of energy-efficient mining hardware – making the network vulnerable to control by a single hardware manufacturer, should they choose to act in a malicious way.
Will cryptocurrencies pave the way for the cashless society? Perhaps through creating some kind of supranational money system?
WK: I think many governments are interested in experimenting with the notion of a cashless society. Cryptocurrencies provide an ideal playground for that, whether for a national money system under control of a central bank, or some sort of supranational system. I think it’s important to think imaginatively here, and to see to what extent the trade-off between privacy of spending and auditability can be managed in a sensible way.
How viable is mass adoption of cryptocurrencies? There seems to be a serious technological barrier: a lack of know-how among potential users but also a lack of technological and legal infrastructure which would encourage people to experiment with cryptocurrencies as a method of payment.
WK: You are right. At the moment there are many technical barriers to adoption, and many applications remain too close to the technology to be usable by ordinary citizens. People like to talk about blockchain as the „new internet” and if you think about the applications that became highly successful on the internet – like search and social networking – these are remarkably simple products that don’t require users to know anything about internet networking protocols or any special technical jargon. I think it’s the same sort of products that will be successful in the blockchain space. Finally, the point about the legal system is a good one – the law has a long way to catch up with the technology, but I don’t think this should be used as an excuse to stifle innovation. Going forward it is almost always going to be technology pushing the law forward and not the other way around.
Interviewed by Przemyslaw Cwik