Will Martindale: Bitcoin, fact or fiction?

On May 2, the founder of Bitcoin was ‘revealed’ as Craig Wright – although he subsequently declined to provide new proof he was the elusive Satoshi Nakamoto – the pseudonym used to launch Bitcoin saying: “I do not have the courage”.

In many ways, the relevance of Bitcoin to responsible investment depends on how you define responsible investment. If responsible investment is limited to the process of integrating ESG in investment decision-making then it’s probably not relevant. If responsible investment is also about the integrity and stability of the financial system then it probably is.

Bitcoin is a decentralised digital currency, meaning that the database used to record Bitcoins are not centrally controlled. These systems are built using a ‘distributed ledger’, or ‘blockchain’, which is a decentralised public database collectively maintained by a network of people, known as ‘miners’, who run the software. There is no bank or country responsible for issuing Bitcoin – meaning there’s no central point that can fail.

Bitcoin’s elegance is that – unlike a normal banking system – it ties its money creation process to the process of validating payments: As a reward for facilitating payments (moving existing Bitcoins between participants), the miners get rewarded with new bitcoin tokens that are put into circulation. They are incentivised to maintain the payments system.

Bitcoin transactions are anonymous, yet transparent. Bitcoin addresses aren’t linked to names or other personal identification. A single person may hold dozens of addresses and even transfer between them. However, the number of Bitcoins per address is public. Transactions are international, arrive within minutes and fees are miniscule.

Within the Bitcoin business ecosystem some businesses have gained scale. These include merchant payments processor Bitpay, the wallet company and exchange Coinbase, and Blockchain.info. The use of the distributed ledgers has gained scale too. Ripple’s distributed financial technology allows banks to transact without the need for a central counterparty. The use of blockchains to issue shares (‘cryptoequity’) is already being tested by companies like Overstock.Recently NASDAQ piloted a blockchain clearing system for shares.

Blockchain was the talk of this year’s Davos, even by the likes of Christine Lagarde. An IMF paper on virtual currencies concluded the concept has the potential to “change finance”. The World Economic Forum identified Blockchain as one of its six mega-trends.

For investors, Blockchain technology could affect the post-trade value chain, eliminating clearing, settlement and counterparty risk. Blockchain technology aligns with our industry’s agenda of trust, transparency and reduced cost. Through secure, affordable cash transfer, cryptocurrencies could open-up investment opportunities to the planet’s most remote communities, shortening the intermediation chain.

Cryptocurrencies are a risk too. Bitcoin was the currency of choice for Silk Road, a ‘darknet market’, known for buying and selling illegal drugs, and even weapons. Person to person transactions, independent of the formal banking system, can facilitate tax avoidance. Historically, cryptocurrencies have been highly volatile, anonymity presents security threats and 850,000 Bitcoins, valued at $450 million, were lost or stolen when Mt. Gox, a Bitcoin exchange, filed for bankruptcy. Most importantly, cryptocurrencies are unregulated. And their growth could threaten the role of central banks in setting monetary and exchange rate policy. Despite this, or perhaps because of this, cryptocurrencies deserve attention.

Ten years ago when the PRI was set up, Facebook had just a few thousand users and the iPhone wasn’t invented. Collectively Bitcoin, its database system, blockchain, and other cryptocurrencies, are creating the future of electronic payments. They are a cornerstone of the emergent truly international, cashless society. Bitcoin is not yet a dominant force in financial reform or innovation right now, but it’s certainly gaining credibility.

The currency’s website, bitcoin.org, boldly claims “Bitcoin is changing finance the same way as the web changed publishing”. Perhaps marketing, perhaps not, but regardless, the responsible investor would be unwise to ignore.

Will Martindale is Head of Policy at the Principles for Responsible Investment.