Bitcoin makes the biggest headlines, but it’s blockchain—the technology behind cryptocurrencies—that could transform everything from banking to health care to the music industry. Sound like hype? Just ask the Wharton pioneers who are building blockchain’s future.
By David Gambacorta
For the better part of six years, the Long Island Iced Tea Corporation had a good thing going at its headquarters in Hicksville, about an hour outside of Manhattan. The company produced a line of what Samuel L. Jackson might call “tasty beverages”—lemon, peach, raspberry, half-and-half, a handful of other flavors. But a funny thing happened in December: Long Island Iced Tea underwent an impromptu makeover and was reborn as the Long Blockchain Corp.
The company would still sell its popular drinks, CEO Philip Thomas explained, but it was also going to invest heavily in blockchain, the 21st century’s digital equivalent of the California Gold Rush.
In almost any other era, a move like that would have been met with boardroom spit takes. But the markets took to Long Island Iced Tea’s reinvention like Jed Clampett to that oil well; the company’s stock jumped a mind-boggling 432 percent when word broke about its new focus on blockchain.
The episode served as a prime example of the curiosity, excitement, and outright mania that currently surround anything related to blockchain—the technology that makes cryptocurrencies like Bitcoin possible and holds stunning transformative potential. Some of the brightest minds in finance and technology argue that we’re in the early days of what promises to be a paradigm-shifting revolution, one that will impact everything from Airbnb to banking, health care, and real estate.
“Because [blockchain] runs on top of the internet, it’s possible now for something to go from being a small curiosity to a major global phenomenon affecting the world’s biggest companies, and moving hundreds of billions of dollars in assets, in an incredibly short period of time,” says Kevin Werbach, an associate professor of legal studies and business ethics at Wharton.
But revolutions are, by nature, wildly unpredictable affairs, marked by missteps as often as success. The road ahead could be filled with fits and starts as industries gradually figure out how to adapt to new technologies. Or the blockchain-ification of the world could resemble the rise of smartphones, but on steroids—a swift, fundamental shift that will leave people wondering how the world ever got by without it.
erhaps we should rewind the clock for anyone who just emerged from a Walt Disney-esque cryogenic slumber. Blockchain? Cryptocurrencies? Revolution? How did we get here? It began with a 2008 white paper titled “Bitcoin: A Peer-to-Peer Electronic Cash System” by Satoshi Nakamoto, who filled nine pages with an idea that would turn the world on its head and make some early investors comically wealthy. Nakamoto contended that e-commerce was hindered by an overreliance on financial institutions to play the role of middlemen between merchants and customers, who were increasingly forced to share personal information to verify their identities. “What is needed,” Nakamoto wrote, “is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party.”
The underlying technology that would bring this idea to life was the blockchain, a decentralized ledger that permanently records transactions in chronological order across massive public or private networks—in other words, a database controlled by a network of peer-to-peer computers. Blockchain was a brilliant, essentially hack-proof tool that could serve any number of industries; Bitcoin was simply its most prominent early application.
Now, all of these years after Nakamoto introduced the world to the blockchain concept, the potential scope of its power has begun to come into focus. And yet there remains an air of confusion around the technology. “What’s striking to me about the blockchain phenomenon is that it’s simultaneously on the cover of magazines and the subject of huge popular interest around the world, and yet the level of basic understanding is still incredibly small,” says Werbach.
The distributed ledger can be applied to “any situation where you have a collection of actors who don’t fully trust each other but need to share information,” Werbach explains. “That’s most of the finance industry, most of the energy industry, most of government. What we’re seeing now is a flowering of experimentation, which is a really exciting thing. Some of those experiments will take hold and turn into big developments.”
There is some optimism that blockchain could even benefit an industry that’s been largely drowning in the digital era: journalism. In February, Jarrod Dicker, the Washington Post’s vice president of innovation and commercial strategy, left the storied newspaper to become the CEO of Po.et, a blockchain platform he claims will “recalibrate the media business.”
If curing journalism’s financial woes feels like a bridge too far even for blockchain, Saikat Chaudhuri ENG 97 W97 offers a more practical use for the technology: Wiring money internationally can be done in the blink of an eye, bringing an end to reliance on the decades-old SWIFT payment network, which takes days to transfer funds. Musicians stand to benefit, too, he argues. “If you buy a song on iTunes or anywhere else, it takes a complicated process to get the royalties back to an artist,” says Chaudhuri, a Wharton adjunct associate professor of management and the executive director of the Mack Institute for Innovation Management. “Any of those transactions can be greatly simplified.”
Blockchain may well end up being regarded as every bit as transformative as the internet, but there are still moments when it seems cryptocurrencies are attracting the most news coverage and speculation. Let’s face it: Nothing stirs people’s imaginations like a get-rich-quick sensation. Forbes recently ran a cover story on “crypto billionaires,” including Matthew Mellon WEV89; the headline of a New York Times story on the lives of Lambo driving 20-something crypto investors read, “Everyone Is Getting Hilariously Rich and You’re Not.”
But the edge of the cliff can always lurk beyond the bend. The price of a single Bitcoin reached an all-time high of $19,783 in December, only to plunge below $6,000 two months later. The lack of government regulation has also proven to be catnip to scam artists. Stories of cryptocurrency Ponzi schemes that devoured hundreds of millions of dollars have popped up in the past few years, prompting the U.S. Securities and Exchange Commission to warn there’s little that state or federal regulators can do for investors who get fleeced by a shady digital-currency startup. Bank of America, JP Morgan Chase, Capital One, Discover, and Citigroup have banned all crypto purchases on their credit cards.
Even when security concerns aren’t an issue, the best-laid plans can come untethered. In February, Long Blockchain Corp., the erstwhile iced tea company, announced it was abandoning an ambitious plan to purchase 1,000 Bitcoin mining machines, opting instead to try and work on a merger with a British blockchain firm. Its stock has since tumbled back to Earth, and Nasdaq moved to delist the company. The Wall Street Journal headline: “Pour One Out for Long Blockchain.”
or all the hand-wringing about the Wild West aspects of the age of blockchain, a growing number of pioneers have found solid footing in this new world. And plenty have Wharton roots. Michael Feng C01 W01 and Carlo P. Las Marias ENG01 W01 both graduated and embarked on what could have been long careers in investment banking. Fate took them into another direction. Engineers at heart, Feng and Las Marias felt drawn to the possibilities that blockchain offered to build something with disruptive power. Last year in California, they launched CoinAlpha along with Martin Kou, a former Apple senior software engineer. Their not small aim: to change how the asset management industry works by offering investors a blockchain-powered hedge fund. “We wanted a proof point of how this could actually work,” says Feng.
While hedge funds typically have an administrator managing investors’ funds and charging fees, CoinAlpha relies instead on a blockchain smart contract, a program that observes and finds patterns, trends, and price strengths and tries to sell or reduce risk early. While some hedge funds might require investors to kick in a minimum of $250,000 or more, CoinAlpha set its entry bar at a much lower level, creating opportunities for people who wouldn’t otherwise be able to take a chance on such a fund. An added bonus: CoinAlpha’s investors are able to invest and redeem their capital on a daily basis. “Eventually, I think all intermediaries—banks, lawyers, accountants, administrators—could be replaced by the blockchain,” Feng says. “But it’s hard to do that all at once. The approach we’ve taken is, let’s take away one first and show it works, then go from there.”
Las Marias describes the mood in the blockchain space as a frenetic mixture of anxiety and enthusiasm, not unlike the early days of the dot-com boom. The financial dips that greeted the start of 2018 spooked some investors and temporarily slowed the tide of capital that flowed toward anything related to cryptocurrencies or blockchain. But plenty of people find comfort in playing the long game. “When we have radical technologies come about, a lot of companies are in denial until it basically runs them over,” Las Marias says. “When Amazon came along, you had retailers like Kmart and Sears saying, ‘Who’s going to send money to some company online?’”
Not all businesses and governments have their heads in the sand. Matthew Commons C01 W01 is the CEO of Cambridge Blockchain. Since opening near the Massachusetts Institute of Technology’s Media Lab in 2015, the company has focused heavily on using blockchain’s distributed architecture to solve security and identity problems for financial institutions and government agencies.
“When we started out, we had to spend a lot of time educating people,” says Commons. “We had all these meetings with top-tier Wall Street banks that wanted to talk to us, but a lot of them were just looking for free education sessions. We had to start qualifying them: ‘What is your business problem, and why does blockchain make sense?’”
- Someone requests a transaction of information (cryptocurrency, records, contracts, etc.).
- The transaction is represented digitally as a “block” and broadcast to every party in a P2P network of computers.
- The network validates the transaction.
- The transaction is linked to the records that came before it, thus creating the unalterable “chain.”
- The transaction is complete.
Last year, the company began working with LuxTrust, a digital identity firm that’s backed by the government of Luxembourg. With Cambridge Blockchain, it has been able to provide digital authentication services to more than 500,000 people. Earlier this year, Commons’s company established a partnership with IHS Markit, a U.K. data analysis firm, marrying Cambridge’s blockchain software to the know-your-customer data that banks routinely collect from users.
“When it comes to sharing personal identifying information, that’s one case where blockchain really makes sense,” says Commons. “We’ve gotten a lot of traction in Europe, where they have some of the strongest data privacy regulations.”
Emil Woods W94—sponsor of an award that supports Wharton’s Venture Initiation Program and a founding partner in the seed fund Liberty City Ventures—has been tracking blockchain’s rise almost from the get-go. Liberty City has a $15 million fund that’s devoted to investing in companies that incorporate blockchain into their infrastructure. Among its most prominent investments is Paxos, the New York-based company that offers Bankchain, a blockchain settlement platform, to the financial services industry. Paxos was expected to begin digitizing physical gold in London’s bullion market this year.
“Blockchain can be more impactful than the internet,” says Woods, noting that Fortune 500 companies and some of the largest banks in the world have blockchain projects in the works. “It’s not a matter of if now; it’s a matter of when.”
nderneath all the wonky industry-speak lies the true heart of blockchain and cryptocurrencies: the burning embers of experimentation and adventure. Consider the invitation that Asheesh Birla WG10 says he received in 2013 from Chris Larsen, then CEO of Ripple, to sign on with the burgeoning crypto giant: “You’re joining a revolution. I just can’t tell you if the revolution will happen in three years or 20 years.”
Birla—who was just a few years removed from Wharton and had already created and sold a content management system to Thomson-Reuters—considered the impact a company like Ripple could have around the world. “Most people in the United States have four or five credit cards, a debit card, cash, and Venmo. They’re over-banked,” he says. “Other places are excluded from the financial world. You have markets in the Middle East, East Africa, and Venezuela where they have political crises, and their currency may be worthless.”
Just like that, he was in. Birla now serves as the vice president of product at Ripple. The company’s XRP cryptocurrency ranks third in value behind peers Bitcoin and Ethereum, but its biggest value might be in its blockchain payments network, RippleNet, whose clients include Bank of America, Santander, Crédit Agricole, and the UAE Exchange in the Middle East. “No bank wanted to be the first bank,” Birla laughs. “There was a lot of, ‘This sounds great. Who else is in?’ But once we got the first few banks, the floodgates opened.”
The U.S. banking system is gradually playing catch-up to Southeast Asia and other corners of the globe where blockchain and cryptocurrencies are more likely to be welcomed with open arms. “There’s just more awareness for what this technology can do,” Birla says. “It’s not a cost-saving story. It’s a matter of ‘I can do e-commerce now.’ The old financial infrastructure was built to deliver billions of dollars to General Motors, not a payment to somebody on Airbnb.”
From his perch as vice president of finance and operations for Blockchain—yes, that’s the software company’s name—Chris Lavery WG09 has seen firsthand how the initial hesitancy to embrace blockchain and cryptocurrencies has fallen away. The company has an eye-popping 23 million users of its Bitcoin wallet in 140 different countries, and Lavery says the financial value of its daily transactions is higher than those of PayPal and Venmo combined. “There are 2.2 billion people in the world who are unbanked,” he says. “Now, they’ll just need a data plan and they’ll be able to buy an index fund.”
Lavery recalls noticing in the summer of 2016 that the company’s mobile downloads were surging in Nigeria: “I thought, ‘What’s going on there?’ We weren’t targeting them. Well, they’d changed the monetary policy. In the short term, [Bitcoin] might be a nice thing to have in the United States. In Nigeria, it’s a must-have.”
Yet there are still moments when the negative buzz about cryptocurrencies echoes loudly. Lavery, who worked as a White House political director during the Clinton administration, returned there in 2015 for a National Economic Council briefing. At one point, he says, an attendee turned to him and sneered: “Bitcoin is for money laundering and terrorism.” He pushed back, arguing that studies have shown that banks and legal service providers, in fact, pose the largest risk for money laundering. “People,” he says, “are nervous about things they don’t understand.”
he question of what these technologies—and the world—will look like in 10 or 20 years is being debated fiercely here in University City. While Wharton alumni are already writing some of the early history of blockchain and cryptocurrencies, the next generation is closing in behind them fast. Jitin Jain WG18 co-founded the Blockchain Club at the University of Pennsylvania; about 400 students, with backgrounds in engineering, finance, and law, have joined and taken the beginner and advanced tutorials it offers on all things blockchain. CNBC has already devoted coverage to the club, and Jain and his fellow members had little trouble attracting industry leaders to a conference at Huntsman Hall in the spring.
“Blockchain is as big as the next internet,” says Jain, who excitedly talks up the impact blockchain can have on the health-care industry. “Right now, I don’t own my own health-care data. But if it’s on the blockchain, I’ll be the sole owner. If someone wants to use that data, they’ll have to pay me. We don’t realize the value of data. It is the gold of this century.”
Birla saw firsthand how deep the university’s interest in blockchain ran when he delivered a lecture at Steinberg-Dietrich Hall in January. “I gave a talk there in 2014, and a handful of people came,” he says. “This time, it was standing room only.”
Xiaoning Michael Li WG11 had a similar experience in January, when he discussed blockchain at a seminar at the Penn Wharton China Center in Beijing. More than 100 people attended, forcing organizers to switch the gathering to a larger room. “Some of them had experience with blockchain, but the majority had no experience at all. They were quite amazed,” says Li, founder and CEO of CTQuan, a social network for investors in China.
Lost in all of the conversations about disruption and industries being overhauled is the very real possibility for blockchain to have humanitarian value. Jain points out one remarkable example: Last spring, the United Nations began experimenting with using biometric registration data to provide 10,000 Syrian refugees with food at a camp in Jordan. Cash, medical records, and other forms of identity are easily lost when people are forced to dash from their homelands in a panic. Blockchain offered a new way of protecting and keeping track of the identities of the refugees, who purchased food from local supermarkets by undergoing retina scans.
While many outsiders are still learning about the nature of blockchain and its potential, the Wharton community—from students to faculty and alumni—is at the forefront of its growing use in the here and now. For the blockchain believers, its impact is no longer a matter of debate or conjecture. “People should not be asking, ‘What’s the real life application of this technology?’” says Jain. “It’s time for our questions to get more nuanced.”
David Gambacorta is a writer at large for the Philadelphia Inquirer and a freelance writer.
Published as “The Revolution Has Been Digitized” in the Spring/Summer 2018 issue of Wharton Magazine.