Beyond Bitcoin

You've seen the stories. People are buying and selling those mysterious mediums of exchange called cryptocurrency. You’ve undoubtedly heard about bitcoin, and perhaps you’ve also read about ether, dogecoin, or any of the other cryptocurrencies that have sprouted up in the digital realm. You may have noticed that PayPal now facilitates payments in bitcoin, and even offers you a way to buy and hold them.

Since its intentionally shadowy beginnings in 2009, bitcoin has inspired the creation of roughly 10,000 cryptocurrencies. Still, is there really anything to them? Are they simply an investment fad, like Beanie Babies or meme stocks? What makes them worth anything in the long run? Right now, that’s impossible to answer with certainty. But more and more people with real-world business expertise do see value in the technology that enables cryptos to be exchanged. In fact, that technology is already being used beyond bitcoin. And it could profoundly change how numerous industries do business. 
 

What is Cryptocurrency?

If anyone should know how to define cryptocurrency, it’s Vivian Fang, associate professor of accounting, who has been teaching an MBA-level course on bitcoin since 2018.

“The three keywords I always emphasize to my students are digital, decentralized, and cryptography,” says Fang. Cryptocurrency “is a form of currency that only exists digitally, and that has no central issuing or regulating authority.” It bypasses traditional, regulated clearing agencies such as banks when settling transactions. Instead, it uses a decentralized digital network to record transactions and issue new “coins,” and it relies on cryptography to prevent counterfeiting and fraudulent transactions.

Since Fang is an accounting professor, it’s not surprising that the aspect of cryptocurrency that fascinates her the most is that recording system, called blockchain. Simply stated, a blockchain is a multiparty datasharing platform. More technically, it’s a distributed ledger of provably signed, sequentially linked, and cryptographically secured transactions replicated across a digital network. “The bitcoin version of blockchain works just like a general ledger that records debits and credits,” Fang says.

From an accounting perspective, one of the things that makes cryptocurrencies so intriguing—and frustrating—is that their value fluctuates a lot. It’s one of the reasons many people think of them as nebulous funny money. Its erratic value is being largely driven by speculators betting on price rises and declines. As of August 26, one bitcoin was valued at $46,952.80, more than three times what it was worth a year earlier. On the other hand, in April, its price reached nearly $64,000.

Still, Fang sees cryptocurrency gaining real-world traction. Corporate interest is rising, and the federal government is considering how to tax and regulate this new asset class. There are now many ways people can exchange dollars for cryptocurrency, including through specially programmed ATMs. But at this point, she believes that blockchain will play a bigger role in business.

“It’s important for accounting students in particular, and business students in general, to acquire at least some basic knowledge about blockchain as many companies are starting to invest in blockchain technology, or at least trying to evaluate what this technology can do for them,” Fang says. The Big Four accounting firms “have become heavily involved in blockchain technology,” and new hires without that knowledge are put through blockchain training programs.

According to a 2020 LinkedIn Learning article, blockchain overtook artificial intelligence, cloud computing, and user experience design to become the number-one hard skill in demand among global employers in 2020. And a recent Gartner report predicted that by 2023, 30 percent of manufacturing companies with revenue of more than $5 billion will have incorporated blockchain into their operations.

Fang notes that blockchain is already being put to work. A case in point is the Food Trust blockchain that IBM launched in 2017. This technology is designed to help food companies and supermarket operators—such as Walmart, a major Food Trust customer—quickly and easily verify where their mangos, coffee, and other products originate and how they were processed, and whether what they’ve received via their logistics providers is what they actually ordered.

“Just because cryptocurrency is very volatile and is perceived by some people as a scam doesn’t mean that the technology built around it is a scam,” Fang says. “I’m actually very positive and very optimistic about blockchain and its applications in business as a multiparty data-sharing platform.”

Proving Property Ownership

One area where blockchain technology is having significant impacts is in real estate. John Jones, ’18 MBA, keeps close tabs on the intersection between real estate and technology and represents association members before Congress and the federal executive branch as senior vice president of government relations at Nareit, a Washington, DC-based advocacy group for the real estate investment trust (REIT) industry.

“Real estate technology is now one of the largest categories of venture capital; it’s transforming the real estate industry,” Jones says. “I became interested in blockchain because blockchain is contributing to this transformation and fueling innovation such as proptech.” Proptech, short for property technology, uses emerging technologies “to enhance and reimagine the experience of managing, investing in, and operating real estate property.”

Jones published an article on LinkedIn in October 2019 with his thoughts on this emerging area. He was inspired to write because “in the past few years, the level of interest in cryptocurrency has been meteoric. I thought it would be important to also make sure that as we look at cryptocurrency, we didn’t lose sight of what was driving that innovation. And that’s blockchain.” He believes it’s “a game-changer” that can bring about greater transparency in transactions in many industries. In real estate, blockchain could boost the ability to secure land titles, accelerate residential and commercial sales, and verify customer and investor identity. In other words, it has “the ability to implement greater transparency into the real estate framework,” Jones says. “Real estate is about deals. Deals don’t go forward unless there’s trust.”

Speaking of trust: Take the title search process. “In many places around the world, the title search process is very murky,” Jones says. In some countries, “the ledger is literally some old book that has been passed down from official to official.” Nations with non-democratic regimes and a rather loose application of the rule of law can make it difficult to determine property ownership. With blockchain, that information is “etched into digital stone,” he says. International lenders and buyers can determine who really owns a property.

When it comes to blockchain’s application in real estate, Jones says it’s still in the beginning stages. But, he sees numerous potential benefits. “If used properly, blockchain has the ability to democratize access to capital in a way that can equalize opportunity.” Jones believes it could help reduce lending discrimination, making it harder to redline areas and discriminate on ownership.

Beyond the real estate sector, “the economic impact of blockchain is going to be immense,” Jones says, and he advises people in all industries to bring themselves up to speed. “By understanding this technology early on, you’re going to be better positioned to determine how it’s going to impact your area of expertise.” For instance, he says that for the music and entertainment industry, artists will be able to have much better protection through blockchain of their intellectual property—protection many musicians lost as their work became digitized. “In the future, people won’t be able to listen to your music or watch your movies without your consent, or without paying for it.”

Jones thinks that the value of cryptocurrency will eventually stabilize as the more durable currencies prove themselves and the speculative ones fall away. Like Fang, he believes “blockchain will always be there. And as more people become familiar with it, there will be more trust in the system. And with more trust, we’ll see more innovation.”

Jones certainly has seen more interest. “I wrote my article two years ago,” he says. “And I feel I’ve gotten the most questions about it over the last three months.”

Taking Blockchain to the Bank

Six years ago, Minneapolis–based U.S. Bank asked Chris Swanson, ’09 MBA, a 10-year-plus veteran with the bank, to take a close look at cryptocurrency and see if there was anything that the bank should be concerned about. By the way, back then the value of one bitcoin was in the neighborhood of $500.

“We concluded—and much of the industry did, too—that it wasn’t a real competitive threat,” Swanson recalls. Blockchain offered a more compelling story: It could provide “a new way for parties that didn’t necessarily trust each other to agree upon a set of facts and agree on how those facts would change over time.”

Now U.S. Bank’s senior vice president of innovation research and development, Swanson and his department are working “to figure out where things [in cryptocurrency and blockchain] are going so that the bank and its customers are well positioned.” That job was made a bit easier by several “interpretative letters” released in 2020 and early 2021 by the Office of the Comptroller of the Currency, one of the financial services industry’s federal regulators. These letters provided some guidance regarding how banks could provide cryptocurrency-related services to their customers. This spring, U.S. Bank launched three service initiatives, including an investment in Securrency, a Washington, DC-based developer of blockchain-based financial and regulatory technology.

Swanson sees two main applications for cryptocurrency-related technology that could change the way banks operate.

One is asset tokenization, which converts traditional assets such as stocks, bonds, and even artworks into tokens that can then be owned and traded via a blockchain. “We are the earliest stage here,” Swanson says. “But our thesis is that this is something that will begin to pick up.” Asset tokenization might provide opportunities for U.S. Bank in private equity, collateralized loan obligations, and complex financial products, among others.

The other major opportunity is rooted in stablecoins—cryptocurrencies backed by another asset, typically dollars. The volatile values of free-floating currencies like bitcoin and ether make them problematic as mediums of exchange, at least for now. By contrast, for every dollar of a stablecoin in the market, there is a dollar sitting in a bank or other account. And a bank could use them to facilitate an exchange of value.

Swanson sees two main applications for cryptocurrency-related technology that could change the way banks operate: asset tokenization and stablecoin.

Still, why bother with a stablecoin when a dollar will do? Once again, it’s the blockchain network. Say you’re buying a bond from a broker. The transaction requires several separate steps, from the brokerage through the payment (via wire or ACH) to the transfer of the bond to your brokerage account. Each step needs to be reconciled with the next.

With stablecoins, which in effect are tokenized dollars, all the parties in a transaction can use a single blockchain. “So, when I send you the money for the bond and you send me the bond, that’s all part of the same transaction,” Swanson says. A blockchain using stablecoins for transactions could increase the transparency of a transaction while reducing the overhead, the inefficiency, and the cost in today’s system.

That’s the idea, anyway. “If you had asked me four or five years ago how quickly [cryptocurrency-related technology] was going to be adopted for these sorts of use cases, I probably would have said, ‘Three to five years,’” Swanson says. Though there has been some adoption in other countries, he notes, “there has been less here in the United States.” He says the country’s financial infrastructure makes it difficult for transactions to occur on a real-time basis, which is what blockchain requires and facilitates, and the current cost of installing new systems is somewhat prohibitive.

Still, Swanson isn’t the only person who believes that the financial system can evolve to incorporate the beneficial aspects of cryptocurrency technology. “I think we’ll get there,” he says. “The business case is there.”

And it’s already demonstrating real value.