Bitcoin, Blockchain, and Banks

by Cody J. Lindman

Like Dutch Tulip Mania during the 17th century, the price of a single Bitcoin increased astronomically during 2017, starting the year at $998 per Bitcoin before eventually peaking at $19,666.  However, in 2018, Bitcoin’s luck ran out, with the price of a single Bitcoin declining to $3,747 as of January 1, 2019, an approximately 81% decrease from the all-time high.  Despite becoming a popular buzzword after its impressive price growth during 2017, many people still do not have a firm grasp of what Bitcoin is.  In simplified terms, Bitcoin is a digital medium of exchange.  However, Bitcoin has no intrinsic value and its value is not pegged to another currency.  Instead, Bitcoin has value because of its sought-after characteristics, namely security and anonymity.  The technology behind Bitcoin and other cryptocurrencies that provides security and anonymity for transactions is called blockchain.

Although a cryptographically secured chain of blocks was originally described by Stuart Haber and W. Scott Stornetta in 1991, blockchain (and Bitcoin) was invented by Satoshi Nakamoto in 2008.  At its core, blockchain is a distributed ledger or a growing list of records (known as “blocks”) that are linked using cryptography.  Blockchain allows unfamiliar parties to agree on a common history without the use of an intermediary.  Anyone can view the blockchain; however, the information identifying users involved in a transaction is limited to online aliases.

Every computer in a blockchain network has its own copy of the blockchain that is updated automatically whenever a new block is added, resulting in potentially thousands of copies of the same blockchain.  Since each copy of the blockchain is identical, the information contained within the blockchain is difficult to alter, as there is not a single, definitive account of events.  Instead, there are thousands of copies of the same chain of events, requiring someone to modify every copy of the blockchain in the network to alter data.  As a result, it is significantly more difficult to alter data stored on a blockchain compared to a traditional database.

Like any new technology, blockchain has received a considerable amount of lip service from business leaders attempting to appear forward-thinking.  Blockchain differs from most new technologies, however, because it has the potential to radically impact a wide variety of industries.  One of the industries that stands to benefit the most from the implementation of blockchain technology is banking.  Banks currently only process transactions during business hours, Monday through Friday.  However, with the implementation of blockchain technology, banks could process transactions immediately, regardless of when the transaction occurred, reducing settlement time.

J.P. Morgan seized the first-mover advantage when it became the first U.S. bank to create a digital coin representing a fiat currency in February 2019.  J.P. Morgan’s digital coin (called JPM Coin) is designed to make instantaneous payments using blockchain technology.  Despite both utilizing blockchain technology, JPM Coin differs from Bitcoin due to JPM Coin being a digital coin representing U.S. dollars held in accounts at J.P. Morgan.  Therefore, a JPM Coin is collateralized and always has a value equivalent to one U.S. dollar.  When one client sends money to another over the blockchain, JPM Coins are transferred and instantaneously redeemed for the equivalent amount of U.S. dollars.  It will be interesting to see if, how, and when banks decide to implement blockchain technology into their operations.