Moving Beyond Bitcoin: The Next Step for the Blockchain

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Feb 15, 2019 11:13:06 AM

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blockchainI have been keeping an eye on bitcoin prices, which are around $3,600 (as of February 14), close to the lowest level in a year. Bitcoin has clearly not run to the sky the way many buyers thought it would. But there are signs that the underlying technology—the blockchain—is starting to make progress in the real world. Bitcoin was not the real story; the technology was. Now, we are starting to see the results.

Cryptos come to the masses

The major bank J.P. Morgan has just launched its own cryptocurrency, the JPM Coin, based on its own blockchain ledger. Unlike other cryptocurrencies, it will be a centralized system with disclosed participants. As such, it will lack both the anonymity and distributed processing that all of the major cryptocurrencies have had to date. It will also be directly backed by dollars held in bank accounts, so the value will be stable. Overall, it will look very much like current currency but in a digital form, which is the point.

By turning dollars (or anything) into digital coins, banks will then be able to transfer them instantly and securely, bypassing many of the current systems that are relatively slow, cumbersome, and costly. This process will help banks operate more efficiently and more securely.

The JPM Coin is not a new idea. There are other, similar digital currencies with similar characteristics. But the fact that a bank as large and influential as J.P. Morgan is launching a digital currency will help drive the idea to critical mass. Much of the current financial transaction infrastructure is now under threat, to the benefit of both clients and financial institutions.

Bye-bye, bitcoin?

Notably, all of this is occurring independently of bitcoin and the other cryptos. They were sold on the idea that they would be an essential part of the future use of the blockchain technology. As we are seeing, the ease of creating new cryptocurrencies means that the ultimate success of any one of them will depend on the network effects. Whichever gets most widely adopted will prevail.

For a while, that did indeed look like it would be bitcoin. But now the second wave of cryptocurrencies is starting to appear. Crypto 2.0, like the JPM Coin, is designed to avoid the major problems of the initial cryptos. With a stable value and a central and secure infrastructure, these new cryptos can be used for all of the real advantages of the blockchain technology, while helping mitigate the associated risks.

True, things have been lost. Anonymity, for one, which will reduce the appeal for some users. A stable value will also put off speculators. For actual use as a financial tool, however, these are not so much losses as gains.

Echoes of the dot-com era

Once again, there is a real parallel to the dot-com era. Many of the initial companies flamed out, only to see second-generation companies adopt their ideas and thrive, or sometimes pass the torch to a third generation before finding success.

This second generation of cryptos represents real progress in finding a way to integrate the blockchain technology into the financial system. In many ways, this could serve as the same kind of enabling foundation for financial transactions as the Internet is for information, with similar far-reaching effects.

Early adopters of blockchain fell in love with bitcoin, just as early dot-com investors did with the first Internet companies. Twenty years on, the Internet has changed the world even as those initial companies are generally long gone. The start of generation 2.0 for crypto is the continuation of that process for the blockchain.

This article is intended strictly for educational purposes only and is not a recommendation for or against cryptocurrency.

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