The crucial aspect of blockchain is its promise for a different world while the world is busy with discussing the looming disaster scenarios that may come with it and cryptocurrencies. For Strategy, Mahmut Sancak, Habertürk editor, is writing about the blockchain system while Timur Sırt, columnist at Sabah, is the author of the piece called Bittikoyun of the future which sells the products for bitcoin. Açıl Sezen, chief editor, Bloomberg Radio, writes about which companies are taking steps on the topic underlying that “even if bitcoin, ethereum, ripple, litecoin, altcoin vanish, blockchain is here to stay”.

DIGITAL TECHNOLOGIES

are not only redesigning the entertainment and communication but almost all areas of the real economy. The financial sector is the first one on list of sectors which are shaken during the change. Turning the traditional investment world upside down with the digital currencies such as bitcoin and ripple, the technologies surprised and confused the investors. Bitcoin increased by 1500% compared to the dollar in the previous year while ripple increased 36.000% in the same period. This brought about some new members to the list of global millionaires. Nevertheless, these developments and the excessive interest in the digital currencies caused a series of technical impasses in the blockchain system. Hundreds of new digital currencies are taking precautions against these problems while new systems have come to the use for transactions.

These are positive developments for the future of blockchain as this technology is not expected to be limited to the virtual currencies. It will be possible to benefit from the blockchain technology in every area where the mutual transaction can be finished without a middleman required for approval. Many products and services which are based on this system are now being designed. The financial sector is only its first step.

FINTECHS EXPANDING

The fintechs, the new generation financial companies providing services through apps, have already shaken the traditional banking sector in terms of working principles. The system abolishes the branch and consultancy structures and has started offering customized special services by benefiting from the social media info of customers.

It is possible to use blockchain, of which foundation relies on the smart software called algorithms, in all services requiring a reliable middleman.

It is stated that as the system distributes the authority to different points instead of one central administration, it is both transparent and secure against the external attacks. In terms of the system evolution, that bitcoin is used as a digital payment system is called Bitcoin 1.0. When the bitcoin technology takes over the fundamental financial transactions such as bonds, bills or loan, it will be called Bitcoin 2.0. When it will dominate every aspect of life from health to education, art and science, Bitcoin 3.0 will be on our agenda.

WALL STREET’S INTEREST GROWING

Having introduced the blockchain technology to the rest of the world, bitcoin has caused some discussions in the financial world. Although the leading financial companies of Wall Street opted to keep their distance from this system when it was exploded first, they could not remain unresponsive to the advantages the system offers. Recently, the leading financial companies including Goldman Sachs have added the digital currencies based on blockchain to their portfolios.

James Gorman, CEO, Morgan Stanley said bitcoin is not a trend and added: “I talked to many people who invested in it. It is obviously too speculative, but it is not bad essentially. It is the natural result of the blockchain technology.” Mario Draghi, President of the European Central Bank did not mince his words at all: “We believe that the blockchain technology will be very useful in the future.”

WHAT IS AND IS NOT BLOCKCHAIN?

• It is an open-to-all, transparent global database which has a time stamp and does not have a central administration.

• It is not limited to the finance as it can be used for all services which require a reliable middleman without a central administration.

• It is resistant to the troubles as the blockchain structure does not depend on one computer and is stored individually at each computer.

• Each block contains the summary of the previous block. Thus, these blocks link and form the chain. The block has its own summary and the summary of the value of the previous block is added to the transaction as well.

• A malware intended to change a block needs to change all blocks forward on.

• Yet, as it needs to present proof of work to change the blocks, it needs to prove the work for all blocks forward on.

• This is believed to be impossible as massive processing power is needed to realize this. Blockchain will halt sales of blood diamonds

• S&P Global Platts which provides data to the exchange markets is planning to record all oil production data starting from well to the end user with the blockchain technology.

• Maersk of Denmark, one of the largest container shippers is preparing to share the shipping data with its partners, including the port operators, insurers, wholesalers and end users, through the blockchain system they develop with IBM.

• De Beers, one of the largest diamond companies, will benefit from the blockchain technology to prevent the sales of blood diamond.

• Thus it will identify the each diamonds processed and share this with the rest of the diamond sector.

SECURE VOTING IS POSSIBLE

• Blockchain can be used to develop all services such as health, culture, science and art.

• Like the bitcoin technologies, it can be used for the regional or national democratic elections or referendums.

• During these operations, voting will be transparent but the identities of voters will be confidential.

• Many other services including deeds, notary, stocks and even marriages can be offered through this technology. Does blockchain have any weaknesses? If the current digital currency example is taken into consideration:

• The currency data can be manipulated in the platforms where the digital currencies are sold and the prices are determined.

• Money disappears when the platforms are attacked.

• Yet the money is not supposed to disappear as it is produced with long passwords and identification codes and stored on the whole chain.

• As with bitcoin and many others, when the demand is high with sell and buy orders, the transaction periods may be extended to weeks.

• When things go wrong during the transactions, there is no legal entity to turn to.

• If blockchain is to be successful in the real world, there needs to be solid links with the real and virtual worlds through law.

• It is almost for sure to say that as the services with the blockchain technology are diversified and expanded into the daily lives of people, these troubles will multiply.

Blockchain can be very beneficial if its destiny differs from internet’s

Given the statements regarding the blockchain technology, we can say that the expectations are very positive. The reason for that is that the blockchain technology works really well and attracts attention despite some series of problems in the cryptocurrency sector. The problem is that the expectations are extremely high for this technology. It is essential for the blockchain technology to be a groundbreaking revolution to bring about a remarkable change or benefit in people’s lives. Thus, the solutions voiced so far have caused people to regard blockchain as a savior for the troubles and irregularities in many areas such as the corruptions in the financial sector to the frauds in the land offices. The internet faced the similar expectations after its inception.

INTERNET’S FACTORY SETTINGS DAMAGED IN 10 YEARS

Those who used to follow the developments those days would remember: Starting from the second half of the ‘90s, there were some popular expectations which pointed out that the internet would be the cradle of freedom, rights and freedom would be respected and it would not be managed by a central administration. It is possible to see all these in detail in John Perry Barlow’s “A Declaration of the Independence of Cyberspace” read in Davos in 1996. However, not even 10 years later, a series of companies such as Google and Amazon came to manage all in the internet. As of 2010, let alone protecting the users’ rights, the virtual world has turned into a giant shopping center where the personal info of the users are gathered and marketed as the mobile phones and social media came to use. Now all eyes are on blockchain as it is expected to make the world a beautiful place. If it evolves like the internet, then we are doomed.

Whatever is known will change!

THE BLOCKCHAIN SYSTEM

which includes the cryptocurrencies is not a platform only used for shopping but is a system which will change whatever is known. In short, blockchain is a distributed database which allows tracking encrypted transactions. Blockchain is like the pages of a notebook which are attached to one common root but are also different and lined up one after another. The blockchain is not a single block, but it is a sporadic and also an interconnected infrastructure. If one wants to add a page to the “notebook”, they can add a new page at the end of the previous page after getting the permission from the previous users. Thus, a system which doesn’t need a central administration to get the permission into the system and isn’t audited by a central administration is established. A direct connection from one point to another can be made. No need for a middleman.

COSTS DECLINING

As there is no central administration, even if there is an attack, it will be contained in one particular place. As there is no need for the middleman and each “page” has the user’s signature it is secured and the encryption cannot be broken via the existing methods. As long as the quantum computing systems are not widely used –which seems unlikely in the near future- it is estimated that the possibility of a security flaw is at minimum. The transaction without the middleman decreases the costs as well.

BEING SLOW IS ITS DISADVANTAGE

Given these features, it is obvious that blockchain will bring about a financial and operational improvement in the financial services and tech-based sectors. This is because besides decreasing the costs, the negotiation periods are shortened, the deposit liabilities and credit risks decline. For example, the amount of energy used to charge an electric car by a user can be recorded on Blockchain and paid after charging is done through a smart contract.

The trouble with the system is its being slow. For example, the number of the transactions completed each second in the crypto money systems is around 15 while it is more than 50 thousand in the systems like Visa and Mastercard.

Bubble in wallet by crypto currencies?

Due to the recent price fluctuations, the cryptocurrency bubble is often discussed. In this world, those who can crack the code by mining are monetizing. In order to hide away the money, the blockchain system, i.e. distributed database, which cancels out the middleman, is used

THE WORLD may be on the verge of a groundbreaking change in the money and payment systems across the world. Bitcoin attracts attention due to its rapid increase and fluctuations and it has paved the way for the other cryptocurrencies and the new-generation payment systems. The crypto currencies introduced around 8 to 9 years ago are highly popular among many individuals and organizations such as the celebrities and the investment banks.

The total volume of the cryptocurrencies exceeded 600 billion dollars and then they witnessed some sharp decreases. As a matter of fact, this is a big world. Although the most famous one is bitcoin, there are more than 300 types of them. The cryptocurrencies mean encrypted money. Cryptography is to encrypt the data and to send it to another place where it is decrypted through passwords. Thus, the cryptocurrency signifies the virtual currency secured through cryptography.

SUPPLY IS LIMITED So who is producing this virtual currency? Technically, anybody with transaction power and internet connection who trust their technology skills can produce cryptocurrency. Unlike the banknotes, cryptocurrencies are not under the jurisdiction of a central bank or a government. Individuals can produce them. This is a system where the ones who decrypt can make it rain. However, each cryptocurrency has its own supply control determined by its creator. For example, for bitcoin, the supply limitation is 21 million. The number is fixed and the demand is increasing; thus, the crypto becomes more difficult and bitcoin is divided into smaller units. Getting coins requires solving cryptographic puzzles which is called mining: you need to search cryptocurrency in the same way you search mines.

SECURITY WITH BLOCKCHAIN

So let’s say you have cryptocurrency, how will you keep and spend it? Here comes a revolutionary invention: blockchain. Miner, the one who solves cryptographic puzzle, uses blockchain meaning the distributed database which provides an encrypted transaction. Ensuring the security of cryptocurrency, the blockchain system carries the data on exchange through blocks and cryptocurrency is sent from the sender to the receiver. Signed and encrypted. As the system is distributed and managed through blocks, it is secured and cannot be reached except by the sender and the receiver. In short, the exchange is completed in a secure way without any middleman.

It is not hard to imagine why this particular feature of the system is the nightmare of the governments. Cryptocurrencies cannot be tracked by the central authorities. This brings about an environment where the illegal activities such as money laundering, drugs and tax evasion can be achieved easily.

The discussions regarding Bitcoin and the other crypto-currencies focus on one essential question: Are cryptocurrencies money or asset? The answer seems to rely on the governments’ and the central banks’ decision of wheter or not getting involved in it. The governments tend to regard cryptocurrencies as asset. This means cryptocurrencies are counted among the relatively speculative assets such as bonds, stocks and gold.

It is possible to say that when regarded money, cryptocurrencies’ share in the total is relatively small: Its total global volume is 600 billion dollars compared to 7.5 trillion dollars of coins and banknotes in the world. In another words, the cryptocurrencies account for 7% of the traditional money.

When regarded asset, cryptocurrencies’ share in the total amount is even smaller. For example, the daily transaction volume of the global foreign exchange markets is 5 trillion dollars while it is 8 trillion for the gold markets. The global bond market volume is around 60 trillion dollars while the global stock market volume is above 80 trillion dollars. So cryptocurrencies account for a very small part of all assets.

1000 PEOPLE HAVE 40% OF BITCOINS

Although it is not easy to reach the statistics regarding bitcoin there are some online resources which provide some data and are accepted as the base for some calculations. Here are some data:

• Around 1000 people own 40% of bitcoin.

• The bitcoin infrastructure can finalize 3.3 transactions per second while the demand is higher: 4 to 8 transaction request per second.

• As the infrastructure cannot meet the demand the transactions are put in an order. So the queue is quite long: more than 110 thousand are waiting in line.

Is Elon Musk the legendary inventor?

One of biggest secrets in the internet world is the first creator of cryptocurrency. Although the resources seem to agree on a name, Satoshi Nakamoto, it is unclear who or which company they refer to. Nakamoto sends an article to an email group and it described how bitcoin worked. This is the beginning of the bitcoin legend. There are many speculations over the identity of the person or people using this pseudonym. It is predicted that Nakamoto has one million bitcoin which means Nakamoto is rich enough to be No.

44 on the world’s wealthiest list. Another speculation regarding the identity of Nakamoto points out that this person is Elon Musk, the owner of Tesla. Musk refuted the argument with a tweet: “This is not true. A friend just sent me some bitcoin many years ago.” However, this was not enough to persuade the speculators. In short, it seems the identity of Nakamoto will continue to cause question marks.

Bitcoin Founder in Pursuit of Green Bitcoin

The amount of electricity used for one bitcoin transaction equals to the amount used by a household in the US in a week. So Bram Cohen, the founder of bitcoin, is pursuing “green” bitcoin. Having founded a company called Chia Network, Cohen states that there has been some ideas regarding this issue before while “it is directly in the scope of their own expertise”. Cohen targets to introduce the green cryptocurrency to the markets at the end of 2008.

Turcoin: Bitcoin’s Competitor

Bitcoin has a new competitor from Turkey. Having started working on the electronic and cryptocurrency in Turkey in the early 2000s, Sadun Kaya, Chairman of Anafis Group, the owner of the some of the pre-paid cards in 85 countries, have started producing turcoin, a competitor for Bitcoin. Turcoin was developed with Cryptonight technology connected to the blockchain network by the Turkish engineers. What separates turcoin from bitcoin and other cryptocurrencies is its technology infrastructure which will be used by 3 million pre-paid card users and which includes many variations of Ripple technology.

Legal regulations are required for bitcoin

Bitcoin is very popular on its never-ending increases in value and it was even topic of the movies. However, the finance world sings a different tune. Is bitcoin a bubble or the currency of the future? As the conversation continues, Professor İlhan Helvacı from the Faculty of Law, Istanbul University, brings about an important question: “Is there a legal foundation for bitcoin?”

Helvacı points out the law on Turkish Lira as the Official Currency of the State Accounts which is dated April 24th, 1937 and numbered 3290. Says Helvaci: “This law is essential to our trust in Turkish lira and that is how we use it for any exchange. This law was abolished with the 5th article of the law titled “The Currency of the Turkish Republic” in effect as of January 1st, 2005. The first article of this particular law states that the official currency of the Turkish Republic is the New Turkish Lira. As you may remember this is how 6 zeros were taken off the currency. Later, the word “new” was abolished as well by the decree of the Council of Ministers. All these changes were possible only after some legislative regulations. Thus, it is essential that there should be some legislative regulations for the digital currencies like bitcoin to be used legally. If bitcoin is included in the financial world without the legal infrastructure there may be many troubles.”

Can bitcoin be inherited?

Says Helvaci: “In order to answer the questions such as “can the salaries be paid with bitcoin?” or “can it be used for online shopping?” the gaps in the legislation should be filled.” He points out that there should be the legal infrastructure in the Law of Inheritance. “When somebody deceases, the heirs become the owners of the deceased’s assets that can be transferred such as automobiles, yachts and real estate such as house, land and also the money in the bank accounts or in the safe. What about bitcoin? Can it be inherited? As long as bitcoin doesn’t have a legal foundation, the inheritance of bitcoin is susceptible to arguments and many unfavorable situations.”

MEHMET ŞİMŞEK, DEPUTY PRIME MINISTER

A working group is formed within the Financial Stability Committee

Deputy Prime Minister Mehmet Şimşek points out that the government pays attention to bitcoin and blockchain. “I warned our citizens about bitcoin before; however, blockchain technology is completely another issue. We pay attention to it. It is a platform to increase the efficiency and speed up the digitalization. This was in our agenda in the Financial Stability Committee meeting and we formed a working group. Cryptocurrency is under our radar. These currencies are not legal in Turkey as there is not any legal foundation. Secondly, there is not a consensus in the world regarding the future of these; there are serious questions. We are thinking about working in the cryptocurrency topic ourselves in Turkey. We refrain from any specific cryptocurrency as we believe this is risky. We warned our citizens about the risks it brings about. As a matter of fact there was a sharp decrease among all these discussions following the increases. We do not want our citizen to be hurt by these speculations.”

HIMMET KARADAG Chairman of the Board and the Executive Committee, Borsa Istanbul

The discussions around bitcoin are on the agenda of the Turkey’s financial world as well. The Hikmet Karadağ, Chairman of the Board and the Executive Committee, Borsa Istanbul says that they are keeping up with the developments regarding the issue; however, it is highly unlikely that cryptocurrencies will be traded at the exchange as they are.

JAMIE DIMON CEO, J.P Morgan Chase & Co.

“This currency will not work. There will be fraud and it will eventually blow up. You cannot do business if somebody is producing money. You cannot really think those who buy it are smart. This business is worse than tulip bulbs. It will not end well. I will fire any trader that transacts bitcoin.”

CHRISTINE LAGARDE President, IMF

I think that we are about to see massive disruptions. It’s time for the world’s central banks and regulators to get serious about digital currencies. Global financial institutions are taking risks by not watching and understanding emerging financial tech products that are already starting to shake up the financial services and global payments system.