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The BID

What’s next for blockchain?

Esta semana con la participación de Robbie Mitchnick, el responsable de blockchain de BlackRock

Casi una de cada seis personas en el mundo no tiene la documentación física que requiere para acceder a atención médica, vivienda o para votar. Pero, ¿y si nuestras identidades estuvieran completamente digitalizadas? Sería solo una de las muchas formas en que el blockchain podría formar parte de nuestro día a día.

El revuelo sobre el blockchain ha disminuido en comparación con la euforia de años anteriores, pero el futuro aún depara grandes oportunidades. En este episodio de The BID, el responsable de blockchain de BlackRock, Robbie Mitchnick, describe cómo ha evolucionado el blockchain y las criptomonedas, y analiza qué sigue.

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    Mary-Catherine Lader: Nearly one in six people worldwide don’t have the physical documentation they need to access healthcare or housing or to vote. But what if you didn’t need that piece of paper or plastic? What if it was all digital?

    What if the act of voting itself was digital, too? Instead of driving to a local school or polling center, you could help shape your government within seconds from your own home, saving time to worry about the myriad of other things you have to do on your to-do list. And what if you wanted to order takeout food? Imagine if you could trace each menu item back from its origin to its supply chain to your plate, and have full transparency into what you’re eating and where it came from? All of these things, digital documentation, voting and transparency into our food, they’re all example of ways we could use blockchain to enhance our daily lives. But there is so much that isn’t well understood about blockchain.

    On this episode of The BID, BlackRock’s blockchain lead, Robbie Mitchnick, will walk us through the evolution of blockchain and cryptoassets, and how blockchain could change the way we live and work. I’m your host, Mary Catherine Lader. We hope you enjoy.

    Thank you, Robbie, for joining us today.

    Robbie Mitchnick: Yeah. Thanks for having me.

    Mary-Catherine Lader: So you spearhead our blockchain initiatives at BlackRock. Let’s start with a level set for those people who might be a little embarrassed to ask. What is blockchain in one sentence?

    Robbie Mitchnick: Well, to start with, I know The BID audience is very familiar with you, but they may not know that you actually were the initiator of BlackRock’s blockchain exploration –

    Mary-Catherine Lader: That was not anticipated, but thank you for mentioning that.

    Robbie Mitchnick: It’s true. So that was of course long before I got here, but to answer your question, blockchain at its core is a special type of database that instead of relying on a central trusted intermediary to authenticate transactions and keep records, you rely on cryptography, i.e., math. And what that enables is a single golden copy of record that can be shared across a network and is perpetually reconciled and from a practical standpoint, is impossible to tamper with.

    Mary-Catherine Lader: That is related to crypto-currency but also not necessarily related to cryptocurrency, how?

    Robbie Mitchnick: Well there is a lot of ambiguity out there on that point too. Cryptocurrency is one application of blockchain. To date, it’s the most famous and most successful, but there may be many others out there that gain traction that do not involve cryptocurrencies that are applications of blockchain, particularly in an enterprise context.

    Mary-Catherine Lader: So speaking of enterprise blockchain, now we can start using the buzzwords for those who do follow it, before you came to BlackRock, you worked at Ripple. And they have a token or a crypto-asset called XRP. You also wrote a paper on the theoretical valuation or the theory to value cryptoassets which is a much debated topic. So what brought you to BlackRock?

    Robbie Mitchnick: Well, the early days of blockchain and crypto were very ideological. There was this ethos of the idea that centralized institutions were fundamentally untrustworthy and you had to rip the system down and replace them. And what you’ve seen in the later evolutions of the industry are the people that have come in later in the game, whether they be technology or finance people, is a much different philosophy; one that sees this really as a technological innovation story, an economic opportunity and something that enables new capabilities. So I consider myself part of that, and my philosophy has always been that rather than rip out the existing financial institutions, that the best way for blockchain to get adopted was to be embraced by them. And the slower competitors that don’t adopt will be replaced.

    Mary-Catherine Lader: So I’m clearly biased because I also work here, but I’m a little bit jaded in this area, because as you mentioned, I also started working on this a long time ago, in 2015, when BlackRock started our activity on blockchain. And since then we haven’t really seen a lot of concepts in production, we haven’t actually seen a lot of blockchain adoption at scale among financial institutions. So why do you think that is and why are you still hopeful?

    Robbie Mitchnick: I think it’s really not so much a story of people overestimating the usefulness of the technology as it is one of people underestimating the difficulty of implementing it. There are a number of reasons for that. One, decentralized governance is a whole new paradigm that doesn’t have a lot of precedence, doesn’t have –

    Mary-Catherine Lader: Can you explain what decentralized governance is? And how it is different from distributed for example?

    Robbie Mitchnick: Right, so in a decentralized model, you don’t have a single entity that controls authoritatively how a network should run, and does not own the data or the technology behind it. And so that is a lot more complicated when you have to have multiple parties working together and agreeing on what that framework looks like. And in an enterprise context, you don’t have a ton of templates and examples to work off of. So that’s been a challenge. Secondly, the need to line up many ecosystem participants, each with different processes and standards, all simultaneously and get them to adopt a new network, a new technology paradigm at once is really difficult. And then the last thing is this is something that’s still not that well understood by a lot of large institutions, and the scale of disruption is broad. You’re talking about in many cases, taking multiple disparate legacy systems and replacing them with a single blockchain-based model. That is going to take time.

    Mary-Catherine Lader: So what do you think is least understood? You say that it’s not that well understood today. There is no shortage of blogs, Reddit threads, at this point even documentaries about blockchain technology, so what are people still missing?

    Robbie Mitchnick: There is a narrative out there that was once true, really three to four years ago, that I would say is not anymore, which is that fundamentally, blockchain can’t scale. And it was a limitation for sure three to four years ago. But the space has come a long way since then, thanks to the massive amount of human and financial capital that’s come into the industry. Now scale is still a limitation for certain decentralized, permission-less networks. Because it is a fundamentally difficult tradeoff to have decentralization, speed and security all at once.

    Mary-Catherine Lader: And why is that a tradeoff, just because the way technology works?

    Robbie Mitchnick: Right. You can have speed and security, but the best way to get that is to have a centralized pool of validators who control the network that’s efficient. To have true decentralization requires sacrificing on those so that you have a broad pool of validators working on a network. There is no clustering of power, but as a result, you rely on other methods of generating consensus, which tend to be slower and more difficult to scale. And so, if you’re willing to sacrifice on true decentralization, and have a predetermined set of institutional validators, which in many use cases is a perfectly reasonable tradeoff, then actually speed and scale can be orders of magnitude higher.

    Mary-Catherine Lader: So when is centralization a reasonable tradeoff? I’m thinking, for example, in a regulated financial services context, where financial institutions, as you said, who have a huge amount of opportunity they could realize if they adopt blockchain technology perhaps. They want to control who takes part in their network, and they are accountable for things that happen in their systems. So is that a situation where centralization makes sense, or is it not so much about the actors but maybe the use case in what you’re doing?

    Robbie Mitchnick: The way I like to think of it is the difference between trust-less and imperfect trust. So if we’re talking about an environment where you have to assume that your counterparties are completely anonymous and you assume that they would act with pernicious intentions if given the latitude to do so, then decentralization often is important and is an intrinsic good.

    Mary-Catherine Lader: So that’s the bitcoin/blockchain thing where you have no idea if the Russian hacker is in the system–

    Robbie Mitchnick: Exactly.

    Mary-Catherine Lader: Or if it’s your grandmother trying to send something to Nicaragua.

    Robbie Mitchnick: Totally.

    Mary-Catherine Lader: Okay.

    Robbie Mitchnick: And the system has to be able to work there, assuming the worst intentions from your counterparties. Now in a financial institution context, if we’re building a blockchain network with a bunch of other ecosystem participants: counterparties, brokers, clients, vendors, et cetera, there is a different trust environment there. That’s what I call imperfect trust, where there is a reputation and there’s a sense that these institutions are going to for the most part play fairly, but you still have to navigate the complexities of having differing incentives, and still being able to marry up a single shared ledger that is effectively the binding golden record.

    Mary-Catherine Lader: That is a very helpful explanation of how to think about these sorts of tradeoffs, what systems lend themselves to different elements of the governance. What are the use cases that you think are the most exciting to you, and then which ones do you think will have the most disruptive impact on financial services?

    Robbie Mitchnick: There is such a breadth of use cases within finance that are being explored. And I actually think it’s held back some of these projects, to your earlier point, from going into commercialization, because it’s sort of fragmented the attention of the major actors in the space and made it difficult to align on priorities and resourcing a couple of key blockchain projects that could become a utility for the whole industry. But in general, I would say wherever you have data siloed across multiple systems, and you have multiple parties that need to interact, to read and write to that data, then you have a recipe for potentially an impactful blockchain use case.

    Mary-Catherine Lader: That’s like most of finance, right?

    Robbie Mitchnick: Yeah. Right. Exactly. So it’s things like of course payments, KYC trade finance derivatives, proxy voting, bank loans, securitized lending, REPO, and then beyond that, there’s this whole emerging trend of tokenizing financial assets, and other real world assets on a blockchain. So all of those will be very much interesting to watch.

    Mary-Catherine Lader: And how, if at all, is tokenization different from digitization?

    Robbie Mitchnick: Well, I think you can have digitization without tokenization but you can’t have tokenization without digitization. So, in many ways, tokenization is a great catalyst for the digitization of financial services, even though it’s not strictly a requirement.

    Mary-Catherine Lader: So for example, equities today are basically digitized, I can trade them on any app on my phone, it’s essentially information that is passing over the internet in certain systems. Whereas, real estate for example, not as digitized. So there is a digitization necessary to then make them tokens. Why does it matter to even make them a token? What is the benefit of a cryptoasset in that context?

    Robbie Mitchnick: Well real estate, you’re right, is one that people spend a lot of time on from a tokenization standpoint. And the promise is really, if you can migrate the entirety of that asset onto a blockchain and enable certain of the administrative components of it to be done automatically, then that is actually a really powerful proposition in terms of liquidity, in terms of enabling access to more investors, in terms of being globally interoperable and in terms of just the ease of doing things like dividing, like being able to own a tiny sliver of a commercial property or residential housing unit.

    Mary-Catherine Lader: Do you think that kind of tokenization then has an impact for many of us in our day to day lives?

    Robbie Mitchnick: Well, it could, because what it could do is take a number of asset classes that have traditionally been off limits to most investors, whether it be just institutional investors or institutional plus accredited, and democratize those to a wider audience who can then trade and own tiny pieces of them.

    Mary-Catherine Lader: So what are some of the other ways that blockchain could influence people’s daily lives? There is a lot of talk around identity, putting identity like our driver’s license on blockchain, I think some Eastern European countries are trying to do that with property records. What examples do you think are real and have a lot of potential?

    Robbie Mitchnick: Yeah. Well, the identity is an interesting one that you bring up. There’s a lot of people trying to tackle that. But the problem is, if you don’t create a single system that effectively can be winner take all, then you’re going to have the same fragmented database problem that you have today. So it has to either be interoperable or you have to have one winner.

    Mary-Catherine Lader: Meaning, with the government?

    Robbie Mitchnick: The government. Exactly. So the government is a natural initiator of such a network. To date, we haven’t really seen that happen anywhere, but they would be a logical source of that. Now that would sound like anathema to a lot of the more puritanical early members of the blockchain community, that their concept had been hijacked by governments, the least trustworthy of all actors, to build a network like this. But we’ll see. In terms of day-to-day life impact, I think this is one of the areas where the hype for blockchain got most overblown. You had people at a certain phase in the peak of the euphoria claiming that blockchain was going to one day do your laundry and wash your dishes, and that was just never the case. When you boil down to it, there are many good use cases and there are many not-good use cases that have been proposed. I have two favorites, one is in payments. And people do talk a lot about this, I’m hardly the first to suggest that, but retail remittances, if you think of that, is a 700 billion dollar notional volume market. And–

    Mary-Catherine Lader: Of people sending money abroad to family members who live elsewhere?

    Robbie Mitchnick: That’s primarily what it is, yeah. And of course, many Americans have never quite had to realize how bad the international payments system is because they never have to send money abroad. Me being from Canada, I’ve experienced the pain that most people living abroad have of just how terrible that system is. But you have a 700 billion dollar notional market, and to send 200 dollars on average costs you 700 basis points today, which is an absolutely massive tax basically on people trying to send money back home; and not only that, but it’s slow. It’s three to four days, it’s lacking transparency, it’s high failure rates. And then you go to the corporate cross border payment market, and that is 20 trillion notionally. And so fees are not as high there, but they’re still high, and settlement is not as slow, but it’s still slow. And so you have this massive opportunity where blockchain—there’s potential, it’s not clear who is going to succeed in doing that, but there is certainly potential and a lot of people trying to build a network, which blockchain enables, of real time payments at near zero cost.

    Mary-Catherine Lader: So is your thinking about use cases that you have to identify where those conditions you talked about exist, like siloed systems, an opportunity to reduce cost for example, but also the incentive. For example, in payments, the example you just shared, there are not necessarily a lot of incentives for those who pocket that 700 basis points to reduce that. And if they own the rails, then we have to have an entirely new system come about to be adopted?

    Robbie Mitchnick: Right, right.

    Mary-Catherine Lader: So how do you think about where the incentives can be overcome, where you can have new systems and applications?

    Robbie Mitchnick: Well, for a while they’ve been able to be complacent because there was, as you described, a lack of incentive to move, but now with a number of blockchain projects trying to disrupt this, many with significant resourcing and some major institutions behind them, the pressure is finally on. And I think if you hadn’t seen it up until now, the banks realizing that they had to get their act together on this, you’re starting to see it. I think the Fed coming out with their plan is one example of a response that acknowledges that traditional payment infrastructure has to be better or it’s going to get displaced.

    Mary-Catherine Lader: So do you think central banks will start adopting blockchain at some point? You mentioned the Fed has come out with a plan, so what is your view on that?

    Robbie Mitchnick: Well, it’ll be another fascinating area to watch and there have been a ton of them obviously who have experimented in some form or another, with it, and specifically in many cases looking at central bank-issued digital currency, which on the surface has some pretty compelling benefits. If you talk about detecting tax evasion and criminal activity, but also just bringing the economy in a payments context into a digitally native format in an increasingly digital age. So I think we’ll see that continue to be a story.

    Mary-Catherine Lader: So you mentioned downside risks, and the ones people are most concerned about, five years ago, or 11 years ago when blockchain first came to be, were quite different than those today. Then it was hard to imagine that any central bank much less the Fed would think of adopting or experimenting with it. So what do you think those risks are at this point in time?

    Robbie Mitchnick: Well, I think in many ways, risks in this industry are similar to what they were, it’s just that the scope and scale has blown out. So whereas five years ago, in the early days of crypto, everyone was really focused on custody, but that was how do you keep exchanges from getting hacked, and how do you build secure cold wallets for individuals? Now, it’s still custody, but it’s how do you build bullet proof custody solutions that are institutional grade that large FIs can actually get comfortable with?

    Mary-Catherine Lader: FIs is Financial Institutions.

    Robbie Mitchnick: So, the difference is, the threshold is way higher in the latter case because I know that I’m not going to wake up tomorrow and find out that my Apple shares got hacked and went missing from the DTCC.

    Mary-Catherine Lader: And what is the DTCC?

    Robbie Mitchnick: That is basically the depository that keeps track of who owns what shares in the U.S. market. And that’s the threshold that the crypto and blockchain industry is going to need to get to, whether that’s for traditional crypto or for tokenized financial assets.

    Mary-Catherine Lader: So let me ask you one last question, and then we’ll end with a rapid fire round. So we talked about how there was a lot of enthusiasm about crypto in 2008 with the initiation of the birth of Bitcoin if you will. A lot of excitement in 2015, 2016, and then now people roll their eyes, it feels like blockchain is a tired buzzword. So where do you think we are in the hype cycle, and where do you think it’s going?

    Robbie Mitchnick: It’s been fascinating to watch the hype cycle in this technology because even though blockchain and crypto are fundamentally distinct concepts that may ultimately have different endings, the blockchain hype cycle has very much tracked Bitcoin’s cycles, and we’ve had three of those in its ten year history. The first being from inception basically through 2011 and the second peaking in late-2013, troughing in 2015, and then of course the third peaked in December of ’17. And for the last year and a half, that’s where this trough of disillusionment has really set in where people have started to tire of the buzz and question whether this is going to be anything. But just as is typical in that classic Gartner hype cycle, as that is happening, on the ground, fundamentals are actually improving. So speed, privacy, security, scalability. And real development is happening. Now that doesn’t mean we’re going to see widespread adoption. There is a lot that still needs to happen, but we’re certainly starting to see meaningful progress.

    Mary-Catherine Lader: That’s exciting, so a lot to come in 2020 and beyond.

    Robbie Mitchnick: I think so.

    Mary-Catherine Lader: So I’m going to end with a rapid fire round and I’m going to ask you some more personal questions. Are you ready?

    Robbie Mitchnick: Okay.

    Mary-Catherine Lader: Okay. So I know that you started a brewery before you came to BlackRock.

    Robbie Mitchnick: It’s a little different.

    Mary-Catherine Lader: Yeah. So what did you learn from that experience?

    Robbie Mitchnick: Well, a lot. It was a lot harder than expected and having some entrepreneurial experience—and this was a fun side project with some college friends that grew—but learning what it’s like to run a business and understanding that when you’re on the ground it’s organized chaos in a way that I didn’t appreciate when I was an investor, it was a lot.

    Mary-Catherine Lader: A lot, okay. What’s your favorite kind of beer to drink?

    Robbie Mitchnick: Other than Naughty Otter?

    Mary-Catherine Lader: Which is your beer, okay.

    Robbie Mitchnick: Well, I’d say and this is sort of heretical in the craft brewing space, but I do in the summer enjoy light lagers. But for the most part, Belgian witbeers would be my favorite.

    Mary-Catherine Lader: Okay. Speaking of other countries, as you didn’t name an American beer, you’re from Canada, what do you miss most about Canada?

    Robbie Mitchnick: Probably friends and family and Saturday night hockey.

    Mary-Catherine Lader: Even though you’re from Canada, you are a political junkie specifically for American politics. There is a lot of that going on at the moment, I know I see you following it all the time. If you were a candidate, what would your campaign song be?

    Robbie Mitchnick: Yeah. Well, American politics is certainly greater entertainment value than the Canadian version, but I don’t know if that’s ever going to be a thing, but probably Who Says You Can’t Go Home, Bon Jovi, because I wouldn’t be running in this country.

    Mary-Catherine Lader: Thank you so much Robbie for joining us today.

    Robbie Mitchnick: Thanks for having me.