I recently learned just about everything I need to know about cryptocurrencies from a Lyft driver.
Yep, that’s right – a couple of weeks ago, while riding to the Oregon Brewers Festival with my good friend Stef, I brought up some topic ideas for my next column, one of them being blockchain and cryptocurrencies. Our Lyft driver, Tony, then interjected with, “I was going to say, why don’t you write about that? It’s something I happen to know a lot about.”
For the next 30 minutes, Tony, a former IT professional, gave detailed descriptions of blockchain, the history of bitcoin, the latest cryptocurrency-related initiatives in the Portland area and the technology that could potentially break blockchain apart. He ended the conversation by telling us all about CryptoKitties, a game built on blockchain technology that allows players to buy, sell, trade and breed one-of-a-kind, animated cats. (They’re very real, by the way, and might give a whole new meaning to the concept of becoming a cat lady – visit cryptokitties.co for more.)
I’ll confess that out of all the topics we cover at CU Times, this is one of the hardest for me to wrap my head around. But ever since cryptocurrency news began popping up in our feeds, I’ve wondered: What does it mean for credit unions? Is it a threat? Something they should embrace? Just one of those things they’ll need to adjust to, like the internet and smartphones?
Before I could contemplate those questions, I had to understand a few basics.
Blockchain and Bitcoin 101
In June, I bookmarked a visual guide posted by Reuters, “Blockchain explained: Do you understand the technology that underpins bitcoin?” This, along with Tony’s informal lecture, of course, helped me get down to the basics of what a blockchain and bitcoin is, and how they’re related to each other. Here’s what I know:
- A blockchain is a database that is shared across a network of computers. It is comprised of records of information, bundled together into “blocks,” which are then linked together to form a “chain.” When information (such as details of a monetary exchange between two people) is first submitted as a record, the computers in the network, called “nodes,” check to confirm it is valid. The accepted record is added to a block, which is assigned a unique code called a hash; the block also contains the previous block’s hash. The blocks are connected in a specific order based on their hash codes.
- No one person or entity has control of a blockchain – it is decentralized and has no “master.” It’s open to everyone, and all users are anonymous. This creates a trust issue among users, so to resolve that, new computers looking to join a blockchain must pass a test called a “consensus model.”
- Blockchain is the technology used to record transactions involving bitcoin, a type of cryptocurrency (a digital medium of exchange), but that’s not the only thing it can be used for. Other uses include simplifying the record-keeping of payments at financial institutions, checking the history of products whose trade records are kept on a blockchain, storing medical history information and property records, and creating rig-proof voting systems.
What Does It Mean for CUs?
Well, according to the list of possible blockchain uses in the Reuters guide, the technology could help credit unions streamline their payments transactions and save on related costs. That’s a good thing! Plus, blockchain technology’s decentralized format is right in line with the philosophy of credit unions. All of a blockchain’s users are equal controllers of the system, and all credit union members are equal owners of their credit union. Leaders from CUNA and the Mountain West Credit Union Association caught onto this a couple years ago when they launched CULedger, a consortium of U.S. credit unions exploring potential use cases for distributed ledger technology. It recently rolled out MyCUID, a tool that will give CU members a lifetime, portable, digital identity (CULedger leaders noted they are not getting into the cryptocurrency space at all).
The flip side to the opportunities blockchain technology brings for credit unions is that it’s attracting fintechs – potential competitors – looking to offer financial services at a low cost to the market, as stated in a recent blog post on BookingBug.com. Luckily, many financial institutions are choosing to partner with fintechs instead of compete against them. One example of a payments company that is leveraging blockchain technology without shutting out financial institutions is Ripple, which is partnering with FIs and payment providers to process consumer payments worldwide using the cryptocurrency XRP; it claims to offer partnering FIs reduced costs and access to new markets.
The burning question is, as the use of cryptocurrencies grows, could traditional banks and credit unions become obsolete? The authors of a Harvard Business Review article published in May, “As Cryptocurrencies Rise, Who Needs Banks?” don’t think so, stating, “Few serious economists imagine that the new cryptocurrencies, for all the hype, will make national currencies redundant.” They later continued, “But that doesn’t mean that new technologies aren’t going to usher in a lot of disruption to the financial system.” With many factors at play that are too complex to delve into for this article, including differing payment technologies, regulations and exchange rates, moving over to a full cryptocurrency-based global payments system would be far from easy. The authors indicated the real changes will take place in the transaction technology space, concluding, “Commercial banks may continue to hold our money balances in traditional currencies and make loans to businesses with those balances, but transactions may be intermediated by a separate payment technology, at least in the eye of the final user.” So, while there’s no need for credit unions to panic about going extinct, they’ll likely need to adapt to changing technology – just as they have been for the last several decades.
Is the Technology Secure?
Generally speaking, very much so. Going back to that Reuters visual guide, each block in a blockchain generates a unique hash code. If a hacker changes even one character of information stored inside a block, it will generate an entirely new hash, and since the adjoining block contains the original hash, the chain would break. To successfully restore the chain, the hacker would need to recalculate the hash for every block in the chain – an extremely difficult, tedious task.
As noted by Tony the Lyft driver, however, there’s a technology in the works that could put this padlocked system at risk: Quantum computing, which uses particles called qubits that allow processing power to grow exponentially. A recent Fortune article warned that in the next 10 years, quantum computers could be in circulation, threatening not only blockchain technology but the entire finance and banking industry. As we’ve learned from reporting on so many data breaches here at CU Times, no system is ever totally secure.
I hope this article helped give you a basic understanding of this emerging technology, for those of you who didn’t already have one (I know it did for me). And a big thank you to Tony the Lyft driver – the next time I run into you, I hope you’re sharing your blockchain knowledge with a bigger audience than just Stef and me.
Natasha Chilingerian is managing editor for CU Times. She can be reached at email@example.com.