Odd Lots - Why Blockchain May Never Benefit Corporations

Episode Date: November 19, 2018

For years, a common mantra among corporate executives has been that "the blockchain," the technology underlying Bitcoin and other cryptocurrencies, is where the real value lies in the future. But on this week's episode of Odd Lots, we speak to Angus Champion de Crespigny, who formerly advised companies on how to use blockchain technology. He now believes that ultimately it won't get them anywhere. See omnystudio.com/listener for privacy information.

Thanks for listening to Odd Lots. Follow the show on Amazon Music for more future episodes or just ask Alexa play the Odd Lots podcast on Amazon Music. Oh, and welcome to another episode of the Odd Lots podcast. I'm Joe Wisenthall. And I'm Tracy Allaway. So, Tracy, you know one way that this year, actually this month in particular is very different than this same month last year? Wait, it's the month of November. So November versus October? No, no, no. November 2018 versus November 2017.

Oh, I know. It has to be Bitcoin, surely, right? Everyone was obsessed with Bitcoin late last year. Yeah. November last year was when I think this sort of like mania that was already in place for several months really turned into an incredible just absolute euphoria, particularly around Thanksgiving time. But at this time last year already, I think basically all anyone was talking about was Bitcoin and other cryptocurrencies.

Right. And I think we reached the record for Bitcoin, $18,000 or something. Was that in December? Yeah, it was I think middle of December. Now knowing cares, right? Pretty much nobody cares. Nothing is happening. It appears the prices don't swing around like they used to.

all the speculators have probably moved on to marijuana stocks. And it's just, it couldn't feel more different, the overall environment surrounding cryptocurrencies and all that than it did exactly a year ago. Right. And I don't know how many of our listeners ever went to industry conferences where people would talk about Bitcoin. But the trope, the cliche that you always heard there was, oh, I don't believe in Bitcoin, but I do believe in the underlying technology blockchain.

Yes. People are still saying that. Yes, people still say that. And they might even be more confident in their assertions today because of the sort of diminished cryptocurrency bubble and they're like, oh, there's still something here. We're sure of it. We don't really know exactly how it's going to work at, but we know that the underlying technology is going to have all these great applications like tracking shipping or tracking tomatoes or verifying the provenance of pharmaceuticals or diamonds. And so people continue to search for that problem that the technology could theoretically be helpful in addressing. Yeah. My favorite project that I heard most recently was Walmart putting lettuce on the blockchain in order to track quality control.

Exactly. But the question is, do you really need a blockchain to track lettuce? And I've always been kind of skeptical of that or track. tomatoes or ships or anything like that? Or is this really just a great buzzword where if you're sort of like a senior level executive somewhere and you mention conferences and you want to be at a conference and you want to sound smart on a panel, you want to have something going to say, oh yes, of course, we're actively working to incorporate blockchain. This is a pretty open debate because for as much talk about all the people saying blockchain, not Bitcoin, there doesn't seem to be

many actual practical examples yet in the field where someone is clearly demonstrating the value of the technology. No, and a lot of the projects that we did hear about have been quietly shelved, or at least there hasn't been a lot of tangible progress on them or progress that we are able to see. Exactly right. So then the question is, why haven't we seen more progress? And why haven't we seen some sort of tangible connection between people talk about at conferences to how businesses actually operate.

And today's guest will hopefully shed some light on this question on the Oddlots podcast. This week we have Angus Champion to Krepne. He used to be a blockchain leader at EY and help companies learn about blockchain technology. Now he is off doing independent stuff in the crypto world. And he has a lot of thoughts on blockchain and how it might or might not be of benefit to companies and so his experience and looking forward to getting his perspective. Angus, thank you very much for joining us. Thank you very much for having me. So how many conferences have you been at where someone said blockchain is the interesting thing, not Bitcoin?

I could not possibly count. And it's funny when you mentioned November last year, there was a glorious two-week period where what I did was cool. Prior to that, no one had any idea what Bitcoin was after that, people very quickly found someone else to talk to because they was sick of hearing about it. But it's been a number of years. And I've got to admit I was at one point a blockchain, not Bitcoin person. But as you sort of alluded to, when you strip away all of the hype, how does this technology actually help? And I've founded my work. It generally doesn't. So this is pretty big because as you said, you used to be a blockchain, not Bitcoin person. and you should talk to companies, work with them about the idea of incorporating blockchain

into their business practices. And now you say it generally doesn't. So walk us through the steps. What do companies think is going to happen when they sort of draw some blockchain-related technology into their business? And then what actually happens when they try? Generally, the story is that we've got a number of entities that we want to, all coordinate our data together and blockchains help coordinate, coordinate data,

coordinate people or entities without there being some sort of central party. What generally happens, though, to get to that stage, you need to form some sort of consortium, some group of players together, you need to define some sort of standards, you need to work out how you perform governance going on. And generally when you're doing that, you form some central body to do all of that. And the thing is, once you've formed that central body, you've done all the complex coordination that's required. Generally, in the enterprise space, technology addressing these problems is not the issue. It's just getting really hundreds of different stakeholders on board, because if you're just dealing with one end,

entity, you know, one large bank, you're dealing with technology, compliance, operations, the front office. There are a lot of stakeholders just in that. So when you want to build a blockchain across all of these various entities, the tough bit is getting all of those different parties together. Once you've done that, once you've addressed that, this is pretty inefficient technology to actually use to implement the solution. Right. So the sales pitch is that I can build essentially a database or, you know, a line of information that's immutable and that is not controlled by a single party and that can exist amongst entities that maybe don't trust each other. But you're saying that in order to get to that point, you pretty much have to have a

group of entities that trust each other and are able to coordinate in some sort of centralized fashion. Exactly. And we've got a pretty solid legal system to ensure that people can trust each other, right? Financial institutions form contracts with each other all the time, even though they'll be competitors in some way. And that's where the enforcement falls back on. If you create some technology to try to reinforce that, you're going to need to end up relying on the legal system if someone breaks those rules anyway. So why use what's fundamental? a very inefficient technology that was developed for a very specific purpose. Explain this because I think a lot of people who don't know much about the space are surprised

to hear that the technology is inefficient because the appeal is like, oh, it's going to strip out all of this legacy code and it's really fast and it's decentralized and decentralized. And decentralized sounds like a really good buzzword. And so it's very efficient. And we imagine that it's going to like strip out all these like gigantic server. rooms. Why are blockchain inherently inefficient? It's a funny fallacy that hungar, that's caught on from back in the earlier days of Bitcoin, where the message was, we can move Bitcoin or we can perform payments or move value faster than the current financial system. It's more efficient

than the current financial system because I can send you or send money instantly to Tracy now, who's on the other side of the world, I think. Literally on the other side. Yeah. So I could send money and Tracy will have it within 10 minutes, right? That sounds great, but there's a lot of stuff in that that's not included. There's not all of the transaction monitoring, anti-money laundering, all the operational stuff that's around any bank, right? That's around any payment system.

So people realized that didn't work. And then they said, well, if this technology can move payments more efficiently, what else can it do more efficiently? And then it sort of stuck. So that was sort of something that hung around. Now, if you have a look at how Bitcoin accomplishes that movement, it does a couple of things. One, if I'm sending money or sending Bitcoin to Tracy, Tracy knows that I have sent it because she can see that it's a little bit more complicated, but she can see that I had that balance to send. and the rest of the network can see that I had that balance to send.

So everyone is storing all of this information, right? Right. And the second piece is how does Tracy know that I have only sent that to her and I haven't also sent it to you? There's this very complex mathematical calculation, this mining process, that makes sure that I'm not doing that. This really seems like the key thing, which is that it's not just that you're sending money to Tracy. It's that everyone on the entire Bitcoin network is seeing you send money to Tracy.

So it's actually wildly inefficient in a sense. It may serve a purpose. But if I sent you an email, but the only way I could send you an email is if everyone in the entire world who had an email account also got to see that, we could just see this would be an extremely computationally intense process. Absolutely. And when you're sending, and that's a good example, if we have a look at something like, email, that's just data. So it doesn't matter if you're the only one that gets it or someone else doesn't validate that you received it. That's just between us. If you're talking about

value, that does matter if people are duplicating it. That does matter if people are creating more than they should. So you sacrifice a lot of that computational efficiency to solve this very specific problem, which was what Bitcoin solved in the first place. So it's been one of these unfortunate things where that initial fallacy of this efficiency of this speed was sort of taken and run with it and people forgot that this was a very niche computer science problem that was solved using, you know, very complex, inefficient solution. So I believe in the world before blockchain, we would call that database sprawl, right? So how much of an issue is that for a company that is trying to do a real-world application with blockchain. And it kind of feeds into

a second question that I would like to ask, which is how many of the real-world applications or projects with blockchain were actually distributed in a significant way? Because we saw a lot of companies announced test cases with blockchain, but then they would say, oh, and by the way, this is only for us. It's only on our servers. It's not even decentralized. Yeah. A company of things. Firstly, any enterprise technology transformation is very costly and requires a huge amount of coordination. So there's, in my 10 years at the firm, I don't think I came across a client that couldn't have benefited from one giant data warehouse where all of the data is reconciled, all of its consolidated. The number that had that is very few just because

to set up something like that is hugely costly, and you're talking multiple years for payback. So these are coordinating what technology spend is useful and what isn't in an enterprise is the job of the CTO and it's complex. A blockchain doesn't change that. A blockchain is still very costly to implement, just like any other infrastructure. So the question is, if we could have done this previously with architecture that we have, that we had before blockchains, then why didn't we? Because I'm not sure it would change, a blockchain is going to change that dynamic. The second thing is, and this is worth noting,

is it's nigh on impossible to define exactly what people mean by blockchains. There's, you know, a common thing that keeps on coming up is that in many definitions that people, when people try to define what a blockchain is, how it often doesn't differ from, say, a Google spreadsheet or just an append-only database. Because if you start talking about distributed systems, well, that's a distributed database. If you talk about decentralization, well, that can be difficult to define because there can be spectrums of that and people have different views on exactly what is decentralization. it's one of those things that it's sort of got a buzzword that everyone thinks they know what they're

talking about when they say a blockchain. But I've seen a lot of technologies out there that define themselves as, you know, as blockchains that work very, very differently. So it comes down to is a blockchain just simply a chain of blocks, in which case it's, that's just an append only database and a pretty boring data architecture. But that, that, doesn't really address all of the claims that people say it does. So another selling point of blockchain technology is that it's a sort of shared database. It's replicated across participants depending on how they want to use it. But the integrity of the data is supposed to be insured because you're using, you know,

these mathematical calculations to verify it each time. And everyone can see all the underlying blocks and all of that. Is that actually true, or is it possible that blockchains can be gamed by a bad actor and that the underlying data can be manipulated? The data can really almost anything in computer science or in data structures like this can be gamed. It's just how difficult is it? A blockchain in this, in the sort of Bitcoin or in that sense, is incredibly difficult to game because the data is spread out across a lot of participants, so you've got to get everyone to change it. And secondly, the software that is adding that data

is run by all of those different systems. So you've got to go in and change that software as well. So yes, it is very, very difficult to change that data, but it's worth noting what you've sacrificed to do that, at least in enterprise systems, essentially you are giving up governance of that data structure. And so on the plus side, you can never change the data. On the downside, you can never change the data. If there is an error, if the software needs to be upgraded, if there needs to be a format change, any of that sort of stuff, then needs to be coordinated across every single.

single system that's managing this. So the more complex you make your technology solution using a blockchain, the bigger the chance that something will go wrong. Yeah. Well, I was going to say so like one of the things about Bitcoin and it's a plus and a minus, which is that if I like want to send you some money or send you some Bitcoin, but I accidentally like put in the wrong address, then we're screwed. Like that's, I mean, maybe the person. who, if we can find that person who got the money, maybe they'll be kind enough if they can figure it out to reverse it, but probably we're screwed. And so when I like hear about stuff like, oh, we're going to put like real estate on the blockchain. It's like, what if like I buy a house

from you? And it turns out that at the very last second during the closing, someone puts in the wrong address, either that we're really screwed or we can reverse it, in which case it probably wasn't really a blockchain in the first place. Yeah, or a fat finger error and you sell half the state. Yeah. It's the other thing in real estate's a funny one because that also gets brought up because how do you tie the blockchain to the actual real world as well, right? And this gets actually, so it's something I wanted to ask.

And I think it's sort of I want to flesh out your first point, which is that the challenge with all this stuff is not the technology, but in getting everyone to agree. And once you've gotten everyone to agree, then you've kind of solved the problem that the tech is. So I'm thinking about like, okay, tracking lettuce on a blockchain. Like the real challenge is like who gets to scan the lettuce, right? You have to like you can't have anyone go around with a barcode and a scanner scanning lettuce into the blockchain. Someone has to be like authorized participants to go around with a scanner and their scanner is connected to the database. But it seems like if you can then all agree.

on who gets to have these scanners and whose passwords work, then again, like, you've already solved the hard part. Well, absolutely. And how do you make sure that people are scanning all the lettuces or that someone hasn't substituted a poor lettuce for a good lettuce? I'm not sure how big a problem. Or a cabbage. Yeah, absolutely. Absolutely. You know, a counterfeit lettuce. So there is the data in a blockchain in theory is perfect. But that's not the data problem that that we generally have. It's on the ins and outs. Data quality doesn't happen because

a SQL server is fundamentally bad at keeping the data right. It's wrong because the different formats are going between systems. Absolutely. That doesn't change with the blockchain. The news doesn't stop on the weekends. Context changes

constantly. And now Bloomberg is the place to stay on top of it all. Hi, I'm David Gura. Join us every Saturday and Sunday for the new Bloomberg this weekend. I'm Christina Ruffini. We'll bring you the latest headlines, in-depth analysis, and big interviews, all the stories that hit home on your days off. And I'm Lisa Mateo. Watch and listen to Bloomberg this weekend for thoughtful, enlightening conversations about business, lifestyle, people, and culture. On Saturday mornings, we put the past week's events into context, examining what happened in the markets and the world. That on Sundays, we speak with journalists,

columnists and key political figures to prepare you for the week ahead. Join us as soon as you wake up and bring us with you wherever your weekend plans take you. Watch us on Bloomberg Television. Listen on Bloomberg Radio, stream the show live on the Bloomberg business app, or listen to the podcast. That's Bloomberg this weekend. Saturdays and Sundays starting at 7 a.m. Eastern. Make us part of your weekend routine on Bloomberg Television, radio, and wherever you get your podcasts. So vegetable arbitrage aside, I,

I'm curious how we got to the point that we began our discussion with this blockchain but not Bitcoin idea. Like, how did companies actually seize upon this technology as something that was going to transform their various businesses? How did we get to that point? It's a funny one because the question comes up when I'll say this is people will say, well, are you telling me that all of these companies are wrong? The challenge is that when certainly in any sort of innovation, sometimes headlines are, you know, headlines are quite important to the business. And, you know, some of this will be sort of marketing strategies

and some of this will be, you know, just simply experimentation and learning about this. If I were a major financial, if I were running a major financial institution and everyone's telling me that this technology is going to make me redundant, I would be a fool to not invest and explore this. And with my work when I was with the firm and, you know, with all of these organizations, it makes sense to assess this, to do your due diligence, to understand what this technology is and isn't. what's happened is that some of that's really sort of caught on.

And so my theory, when people start seeing press releases from different organizations, when people start hearing all of these grand promises, what's important is to demonstrate that you're doing something. And there's a certain, you know, a certain level of group think where there's a lot of looking sideways are not necessarily looking, you know, looking underneath. I think there's a great analogy here with the asset management industry in which there's a lot of risk to swimming against the tide. And you could get, so let's just say there is a world in which banking primarily goes on the blockchain, whatever that means. You would be taking a lot of career risk and someone would probably get fired if you're the CTO of some bank who didn't do that.

Like if everyone else said, wow, we've really found a way to cut out all this back office and efficiency by putting all this data on the blockchain and everyone's reduced their cost and one bank didn't, like that CTO is in trouble. But if everyone jumps at the same time into it and it doesn't work out, then it's like, well, we invested some money. It didn't work out. But no one gets into trouble. So for the individual, there's a lot of pressure then to just sort of go along with all the

press releases and all the other people. Absolutely. And to be perfectly honest, it's not that expensive. to do it, right? And so it's, it makes sense to make that bad, as you say, because do you really want to stand up and say that all of these other ones are wrong? Because, you know, on the... And if you don't say it, like, you could at least go on a panel and sound smart.

And I say that, I'm only like half joking when I say that. But I often, like, wonder, like, how much is that motivation for someone who is like a technology executive at a bank? They're just like, you want to sound smart. You want to be a thought leader. right? Yeah, and also, you know, as while I, you know, I preach restraint and all with this technology, one thing that I think it is doing, and I think this is where a number of the projects

are getting to, is it's making institutions rethink their core infrastructure and maybe start looking at making some of these investments that they haven't previously because they've realized we've just been plotting along for, you know, 10, 20 years, just doing minimal upgrades to our technology because that's been good enough. But this has made the rethink that, you know, maybe our position isn't always going to be safe and maybe we need to have a real rethink of this core infrastructure. Even if it goes down the track of something centralized and something that doesn't really need a blockchain, has it really sort of disrupted the technology organization?

enough that they've thought about new ways of restructuring. So, okay, so maybe it's forcing some institutions to think about their technology infrastructure in a more holistic way, but I have to ask, do you see any real world application for blockchain technology where it would actually, A, work and B, make sense? Private blockchains, no. The one thing, or at least, There's nothing that I can see right now, but look, I could be, you know, I could be wrong. There is a reason why Bitcoin was designed as a very simple technology in that it only really transferred value and had some very small, simple bits of logic for the reason that if something

goes wrong, it's very difficult to change, so you want to limit the number of things that can go wrong. Consequently, applications for this technology, if you're not talking value, transfer, you're really talking about time stamping, right, or storing data in a way that it can't be changed. You're not necessarily talking about, you know, big complex logic or anything like that. You're talking value transfer or timestamps of data, making sure that something was at a particular state at a particular point in time. And that can be valuable. The thing is, when you're looking at that sort of time stamping, you can do that on a public blockchain,

and it would probably be cheaper than all of the complications around setting up your own. That distinction you make between a private blockchain and a public blockchain, for people who aren't familiar with those terms, the private blockchain is essentially like the consortium of lettuce growers, and a public blockchain is like a Bitcoin or an Ethereum. Yeah, yeah. The idea was Bitcoin or Ethereum, you could send around value or do other sorts of things. But to do that, you had this whole mining process that's had the computational problems to solve to incentivize people to look at this data. The private blockchains, they said, well, if we all know who each other are, we're incentivized to cooperate so we can do away with the mining. So I guess to sort of sum this up, maybe like, okay, you're obviously quite bearish on the sort of private blockchain, enterprise blockchain stuff. Within the public blockchain world, there's still massive debate about whether anything adds any value besides Bitcoin or whether there needs to be anything besides Bitcoin or Ethereum. Now you have a, you know, the last couple of years, this Cambrian explosion of altcoins trying to do something.

different stable coins are in this year. But you said something very interesting at the beginning, which is that what Bitcoin was created, the technology is very complex, or sorry, there's a very inefficient and cumbersome to serve a very narrow specific use case. As you look at the crypto blockchain landscape going forward, do you see any other use cases besides essentially that essentially narrow value transfer from you to tracing? There could be, but I think that that builds on that base of value transfer. So if you have a look at the internet, we didn't get all of the fancy apps and social networking and all of these applications without just getting a web browser and email. There was Friendster back in the 90s and there were IoT devices and a number of other sorts of things that we have now.

The dot-com boom is the famous period where people were developing a whole lot of stuff, but fundamentally there weren't enough people on board using that just core applications. And decentralization, you mentioned, very exciting buzzword. I don't think your person on the street really knows or cares what that is at the moment. But what we do have, and I've seen you make this point before, and it's absolutely where I stand with this. Value transfer at the moment is something that Bitcoin, censorship-resistant value transfer or storage,

is the thing that Bitcoin or these other cryptocurrencies can do that no other system can do. And there are parts of the world where that's important, where you don't have the choice to use a traditional financial system. So in my view, that's really where the benefit for this is. You've got countries Zimbabwe, Turkey, Iran, where people value a store of value that's away from the government. In the developed world, people like to bet on commodities and people would like to, you know, bet on the future. And I think that's the application here.

So until we get that real adoption of that value transfer, which happens by solving a need that people actually have, I question the other applications, because in a lot of cases, you can do decentralization or create distributed applications without a blockchain. So a blockchain doesn't really change that paradigm. So are you, you're now Bitcoin not blockchain?

Yeah. Yeah. And the, you know, while Bitcoin has the, network effect and is dominant at the moment, whether that is the one that's going to be, you know, going to be dominant in future I'm more open about. But yes, without, but I think it just all comes down to censorship resistant value transfer and storage. In other words, just a digital commodity that's away from government. And I hear this a bit when I talk to people. They say, look, I don't really think that Bitcoin's going to be a thing unless maybe you're in the

developing world. My view is, I sort of agree with that. But the developing world is 85% of the world's population. That's a reasonable market. On that note, great conversation. Angus Champion to Krebni. Thank you very much for coming on. Adla. Thank you, Joe. Joe, I thought that was an absolutely fantastic conversation and really encapsulated a lot of the criticism that we've seen about blockchain throughout the years in a really relatable way. I could agree more because you just see all these press releases and people try to sound smart and all this obvious stuff. And you just have so many questions and it's like, look, if you're going to scan the lettuce, like, who's going to scan the lettuce? And if anyone can scan the lettuce, like, what are you really

accomplishing? And if you have a sort of white list of people who are allowed to scan the lettuce, then why do you need a blockchain? All these questions I've had in my head for so long. And it's great to hear from someone who has been talking to companies and involved in it for a while basically saying, yeah, the scan the lettuce problem really is a problem. Right. Because if you can build the consortium, you can build the consortium, you can build the consensus to do that much, then yeah, you're sort of just throwing technology on top of it for no reason at all. But I thought the conversation as well on that point about why companies insist on doing this was really interesting. And the notion that, you know, if everyone else,

if there's a chance that everyone else is going to do this, you don't want to be the one left out. But that said, you know that old saying about how you never got fired for buying Microsoft? Yeah. Do you remember that? It is, weird to me that this technology that came from this mysterious Bitcoin white paper that was basically designed, you know, for circumventing the existing financial system, got adopted so readily by so many sort of white shoe corporations around the world. Well, maybe no one will get fired for talking about it, but maybe the first person to get fired will be because they actually were foolish enough to put their words into action. And then when they're in

entire business system grinds to a halt. They'll be fired. But yeah, I totally agree. And I had the exact same thought about you never get fired for buying Microsoft or IBM or whatever it is. That is just such a powerful business incentive. And we think about, you know, if you take this sort of, sort of neoclassical view of economics and business, of rational actors in the economy, making decisions based on profit and losses and stuff like that.

But then you realize that in the real world, people are just scared to not do what other people are doing. You get a much more honest sense of how business actually works. Yeah, absolutely. And you're right. I think it was you never get fired for buying IBM, wasn't it? How quickly one forgets. Yeah.

All right. Well, this has been another edition of the Oddlots podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway. And I'm Joe Wisenthall. You can follow me on Twitter at the stalwart. And you can follow Angus on Twitter at Angus Champion. And be sure to follow our producer, Tofer Forges on Twitter.

He's at Forges T, as well as the Bloomberg head of podcast, Francesca Levy, at Francesca today. Thanks for listening. You can get the news whenever you want it with Bloomberg News Now. I'm Amy Morris. And I'm Karen Moscow here to tell you about our new on-demand news report, delivered right to your podcast. podcast feed. Bloomberg News Now is a short five-minute audio report on the day's top stories. Episodes are published throughout the day with the latest information and data to keep you informed. Yes, there are other products like this from a variety of news organizations,

but they usually rerun their radio newscasts throughout the day. That's not what we do. We create customized episodes that can only be heard on Bloomberg News Now. And we don't wait an hour to publish breaking news. When news breaks, we'll have an episode. We'll have an episode. episode up in your podcast feed within minutes. So you're always getting the latest stories and developments. Get the reporting and the context from Bloomberg's 3,000 journalists and analysts we're all over the world. Listen to the latest from Bloomberg News Now on Apple, Spotify, or anywhere you listen.