In part 1 and part 2, I explained how I lost trust in the wealth management industry and how I have tried to improve it by designing a regulatory friendly Fintech project called Rative. However, I not only made the case that the retail management industry lacks meaningful checks and balances, but I also demonstrated there is no will from financial institutions or regulators to change that. As a result, end investors have no objective way of assessing if they are dealing with a friendly lemon or a competent advisor. They must rely on their “gut feeling” but their perception may be altered by optics management.
The highly regulated investment management industry should be designed to primarily care about content and less about packaging. To care more about numbers and less about appearances. I find it profoundly ironic that investment advisors do not have access to meaningful statistics about their investment management skills.
Advisors and discretionary money managers who see themselves as more than just sales people should be relentlessly asking for meaningful portfolio management quantitative methods. They should welcome the possibility to demonstrate in the open if they thrive at managing money and how they differ from the rest. Not by talking about it with words, but to factually demonstrate it with numbers.
This is what first attracted me to bitcoin; mathematics. Considering all I had seen in the financial industry, the expressions “Don’t trust, verify” and “Vires in numeris” resonated extremely well with me.
This essay describes how I discovered Bitcoin, what I saw in it, why I think this unprecedented experiment is worth fighting for and here to stay.
After fruitlessly speaking with financial institutions and regulators about Rative, I had an epiphany. I realized that even if they wanted to share data (Open Banking), their IT infrastructure would not permit it. Data management, sharing, inconsistency in reporting and fragmentation are some of the key problems that exist. The IT infrastructure of the traditional financial system was conceived long before the Internet era. The initial design, on top of which a complex patchwork of updates has been built, has not only a limited potential, it is also reaching the end of its useful life.
This architectural design was simply not built to accommodate today’s digital reality. IT departments are often viewed as cost centers and the investments they received have been insufficient to keep up with the steep pace of innovation of the digital reality we now live in. For similar reasons, putting more money on landlines did not lead to smart phones, putting more money in this antiquated technology will not yield steep technological innovation.
In Canada, the financial sector is an oligopoly where essentially six major institutions control the market. It is highly concentrated. Yet, there is a security regulatory body in each of the provinces and a few self-regulating organizations. Think about it, there are more regulatory entities than there are major financial institutions customers can choose from. So, it is a triple whammy cap for innovation: 1. No competition (i.e. strong status quo), 2. Incumbents can block projects by rejecting data access to Fintechs that do not serve their needs and 3. Regulatory framework is inefficient, fragmented and costly. This explains why the IT infrastructure of banks have aged and how they lost their ability to remain agile in the quickly evolving and increasingly global digital space. They are facing an IT infrastructure deficit. And thinking this deficit will be solved by public policies, the good will of the bankers or by regulation, is at best naïve.
Zooming out of Canada and looking at the world, it will be impossible to build something that connects humankind in a global framework in the traditional industry dominated by entrenched interests. Even if they wanted to, each regional individual incumbent, stakeholder and regulator will want to have a say and will try to remain relevant by adding a pinch of salt. The result would be endless consultations, round tables and white papers, discussions, etc. It is realistically impossible for them as a whole to come to an elegant, implementable and commercially viable unified global solution that satisfies all parties. Therefore, innovation would not come from within. Innovation had to come from left field, from the outside. A disruptor had to challenge them. And this is exactly what Bitcoin did.
I believe everyone that ends up paying attention to Bitcoin comes with a personal angle or reason. My angle was that I saw a data structure, a global consistent open transparent data structure that is not corruptible by any one entity. Bitcoin looked to me like the ultimate Open Banking Fintech and a category creator (Bitcoin is like a platypus).
Learning about Bitcoin was a humbling experience for me. I thought I knew things. Afterall, I invested in a long formal education and I had at the time 20+ years of experience in financial markets. I have occupied senior roles in large corporations. But the more I studied Bitcoin, the more I realized that what I had been taught was not a complete picture. I had to do my own research and complement what I had already learned with unconstrained studies. I think finance professionals are at a disadvantage when it comes to understanding Bitcoin because it represents such a solid paradigm shift. It involves several disciplines: finance, monetary system, monetary history, mathematics, technology, history, philosophy, politics, game theory, cryptography, laws of thermodynamics, etc. Time is needed to unlearn, relearn and acquire additional knowledge. The shift is so profound that it redefines the very basis of our double-entry accounting methodology that has been in place since the Medici. It will not be intuitive for many of them.
Studying Bitcoin feels like an endless rabbit hole and keeping up to date is a daily endeavor. I view Bitcoin as the masterpiece of a polymath genius. Satoshi Nakamoto offered a concise, elegant and functional solution to a complex problem where prior attempts had failed. Bitcoin is preceded by about 40 years of research and development. In summary, prior failed attempts had in common the presence of a central point of failure. This explains why the best thing Satoshi could do, after making sure Bitcoin had survived its infancy, was to disappear.
Throughout my reading and my research, I realized that Bitcoin’s birth was not replicable, therefore a one-time phenomenon and as opposed to all other so-called cryptocurrencies, bitcoin is the only one that did not start as a security. For the first time in human history, one is able to carry monetary value in their head. Wow. Just that thought is exciting in itself, profound and a worthwhile experiment.
What makes Bitcoin unique, is that it is leaderless. It has no branch, no owner, no head office, no CEO, no 1-800, no website, no PR agency, no sales meeting and yet, it’s been operating 24 / 7 / 365 since over 11 years with an up time of 99.985% and has a growing base of users. Bitcoin is a global, digitally native, opt-in, permissionless, novel financial infrastructure, with an embedded currency.
Bitcoin’s beauty is that it allows you to independently agree on the order of things. Bitcoin is like a decentralized global clock or a type of yardstick. I recommend spending time understanding the proof-of-work component (i.e. the energy consumption). Bitcoin is difficult/expensive to create but can be verified cheaply. Understanding the unforgeable costliness of bitcoin was definitely a key learning for me.
Fundamentally, Bitcoin is not money. Bitcoin is text. It is information and information space organized in a chain of blocks. This space comes in limited supply and is one of the reasons why it is valuable. There is no bitcoin per say, there are entries (UTXO’s) on a ledger that exists in all locations. Bitcoin transcends geography. The word Bitcoin is used for naming both the protocol, the network and the embedded currency. Yes, this can be confusing, but they are intrinsically linked and inseparable. Just like TCP/IP, SMTP, HTTP, SSL, VOIP, XMPP, BT are Internet protocols, BTC (Bitcoin) is a value transfer protocol for the Internet.
The first bitcoin transaction I received was from someone I had met while volunteering at the Technological Innovation Advisory Committee of the local security regulator. In a few minutes, he helped me set up a wallet and sent me monetary value. From him to me without a third party. As easy as that.
No appointment during business hours was needed. No time to physically go in a bank branch was involved. I did not have to show ID. I did not have to sign +/- 30pages of paper to open an account. I did not have to ask permission to receive the BTC transaction and he did not have to ask permission to send me the BTC transaction. Just like someone could hand out a $20 bill in person, but done online. There was no hold on my newly deposited funds. The transaction could have come from anywhere or anyone in the world. This transaction was one-way. It could not be reversed. Whoa!
Allow me to go back in my personal career history and share the following story. I started working in financial services in 1994. I am old enough to have cashed the physical coupon of a bond in a bank branch. In 1996, while commercial Internet was just beginning, the then CEO of Bank of Montreal, Matthew Barrett, wanted to create the brand equivalent of Kodak, Frigidaire or Kleenex but for virtual banking. The project was called mbanx. You probably never heard of it because it failed. It was mispriced, it lacked the technological backend to live up to the virtual expectations and it was too ahead of its time. However, 20 years later, just before my eyes, and with disarming simplicity, a transaction carrying value occurred online without a bank being involved. Bitcoin was the closest thing I had seen to virtual banking.
In the 1990’s telebanking (internet banking) was cool. It was about servicing the end client with both qualitative and quantitative metrics and even though banks were always quite procedural, we were able to color outside the lines, make smart mistakes and harness the technological development underway. It was in the midst of the Internet bubble and innovating was possible, encouraged and welcomed. I keep a very happy memory of that part of my career. It was fun, meaningful and dynamic.
So, Bitcoin was like mbanx to me, but without the bank (or the glossy website) yet with a functional technology attached to a promising business model (mining reward and fees). I went, holy smokes! My entire career (online banking, capital markets, investments) is being disrupted. This is occurring without me noticing and without even a need for people like me. I felt both excited, inspired but I also felt profoundly useless. I said to myself, if I want to stand a chance at perhaps remaining marginally relevant in the face of the inevitable and for decades to come, I must learn this bitcoin thing.
In the mid-1990’s, Matthew Barrett may have been too early with his concept of virtual banking, but progress and innovation cannot be contained forever. It would eventually spur out somewhere. I think today’s antiquated banking infrastructure has not only failed to keep up with the pace of innovation seen in other industries, it is also not suited for what’s to come. For example, think of IoT, robots and AI, these things won’t deal with Mastercard for their economic interactions. Think about the definition of cash flow, a flow of cash. Link it to streaming (music, video) but for money. I mean an ongoing real time protocol-based flow of money. This is highly unlikely going to happen on a pre internet backend. Lastly, if the visionary Elon Musk succeeds and brings humans to Mars, financial interactions will occur there as well. I do not think SWIFT, Mastercard or checking accounts will be the suitable technology. And quite frankly, the space shuttle will not be filled with heavy gold to bring up there. All that to say that a new form of money and financial infrastructure will be needed for many technological developments that are underway in other industries.
I started paying attention to Bitcoin because the financial system was not giving me the mathematical satisfaction I expected. The sweet irony is had I been able to do Rative, investment advisors who were courageous and informed enough to consider adding bitcoin to their investment portfolio recommendation could have been differentiated from the pack. Unfortunately, the bitcoin story is just too complex for their limited time. And most of them are currently taking the easy path of dismissing it by repeating what they have heard without deeper considerations.
Bitcoin represented for me the possibility of a world where unaccountable middlemen could no longer feed off the hard-earned money of others by hiding behind expensive and inefficient regulatory barriers and data opacity. What I had misjudged when I first discovered Bitcoin, is how much more profound than my own personal angle it is. The unaccountable middlemen feeding off the money of others are not limited to the financial industry. The banquet has many more guests. Therefore, Bitcoin is a multifaceted revolution and I think it could be one of the greatest inventions I will witness in my lifetime.
“Bitcoin is the first example of a new form of life. It lives and breathes on the internet. It lives because it can pay people to keep it alive. (…) It can’t be changed. It can’t be argued with. It can’t be tampered with. It can’t be corrupted. It can’t be stopped. It can’t even be interrupted. If nuclear war destroyed half of our planet, it would continue to live uncorrupted.” - Ralph Merkle
Bitcoin and its implications are so profound that I am not able to summarize them in a succinct text. The interested reader may find value in reading about its monetary policy, the contrast with the fiat monetary system , the need for online financial privacy, the need for a non-political monetary value standard and how the energy consumption of Bitcoin is a feature and not a bug. Those interested in philosophy may value reading how bitcoin is a peaceful revolution, how it links to fundamental human rights  and to freedom of speech. The technical reader will want to know about the challenges and the tradeoffs and developments in the Bitcoin ecosystem. And the nerdy, long-term forward thinker may be delighted by this superb text.
The subject is deep, rich and evolving. There are a lot of great writers on the topic of bitcoin and I spend a lot of time reading and thinking about their work. I encourage my readers to not trust me, but to do their own research and develop their own critical thinking. I invite them to take responsibility for choosing carefully their sources of validation. And for those who do choose me as a source, and who are interested in knowing what I am interested in, they can register to my weekly newsletter.
The journey of this powerful innovation is fascinating. I am grateful to be able to witness it.
What a time to be alive!
You can support my initiatives and publication with donation in BTC at the following address.
P.S.1 To all the investment advisors who say they do not pay for knowledge; I wish them the very best of luck. Fortunately, they are easy to spot; they are usually fascinated about blockchain and dismiss Bitcoin.
P.S.2. To all investors who have asked about Bitcoin to their investment advisor, I suggest you keep a record of the answer you received. It may not age well.
 For example, I had conversations with several investment advisors who were concerned about the number of line items that would show on the monthly statement, the thickness of the paper statement sent out and the amount of transactions shown in it. The more the better as they look like they are working hard. While many others said, it does not matter, my clients do not even open their statements.
 Yard, inch, pound, meter, centimeter, kilogram etc. are not subject to politics/ geographical boundaries.
 1971 TCP/IP - Transmission Control Protocol/Internet protocol
 1982 SMTP - Simple Mail Transmission Protocol
 1989 HTTP - Hypertext Transfer Protocol
 1994 SSL - Secure Sockets Layer Protocol
 1995 VOIP - Voice Over Internet Protocol
 1999 XMPP - Extensible Messaging Presence Protocol
 2001 BT- BitTorrent Protocol
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