Why the blockchain is useful but not for the applications you hear about

This is a follow up of my previous article, "comments on Nouriel Roubini: the blockchain is useless, just a database".

Most people either fully agree or disagree with Roubini, creating two groups fighting each other. I agree and disagree in part with both groups, making someone confused, indeed "it depends" point by point, as I try to further elaborate below.

Most of the talk within the blockchain startup scene lately is not technical (the blockchain is now 10 years old, not so new anymore, we do know what's about) but about the unlikely hope that governments will exempt blockchain ventures from regulations such as MiFID, AML/KYC, FATCA/CRS, GDPR, KID/PRIIPS, PSD2, securities/IPO, and so on.

The Bitcoin original concept is that anyone can transfer tokens to anyone else without identification, permissions or fearing government seizure. The Bitcoin creators noted that all the previous "anarchic" virtual money systems were shut down by the same enemy, governments and regulators, by seizing servers and arresting administrators. The blockchain was designed and advertised as unstoppable and uncensorable by any governments and regulators (the enemy) because stopping specific servers or people is not effective. It worked: most governments would like to shut down Bitcoin, but simply they couldn't!

After a while the blockchain, designed to (illegally) bypass regulations and governments, was rebranded as good for regulated applications, or even for the governments themselves? But every blockchain startup, to comply with know-your-customer (KYC) and anti-money laundering (AML), should request each user a copy of their passport and a do video call to make sure who the user is, and for transactions over a few thousand $/€/￡, the user should also provide a convincing source of wealth and use of funds. What a blockchain for then? KYC/AML alone makes most blockchain services more complicated and expensive than Paypal and banks, but on the other hand, lack of KYC/AML makes most service illegal.

To fully comply with GDPR is problematic, due to its "right of erasure": no one can edit or erase any data stored on a public blockchain (this is why people trust their Bitcoin balance), but a side effect is that storing any sensitive personal data on a blockchain is illegal. File systems over blockchain, comment fields in Bitcoin transactions, etc. You could encrypt the data, but who knows if quantum computers will make that data public after a few years? The safest and final way is to delete, but that would require a database, not a blockchain.

Regulations avoid the Kodak Effect in finance: Kodak, Nokia, Blockbuster, etc. were selling unregulated services and so were disrupted by others merely selling better digital services. Instead, finance and trade (either digital or not) are heavily regulated: financial institutions (as well as "FinTechs") are investing billions to comply with regulations, yet are fined billions when caught as not compliant, forcing to spend even more in "RegTech."

According to surveys, a lot of people would be happy to use "Amazon bank" if made available. But this is not happening, despite the demand and trust of the brand. Amazon is entering every market, except banking, knowing that if mandated to comply with all the regulations, would lose most of its agility and efficiency advantages. Instead, Amazon (as well as other tech giants) announced partnerships with selected banks, so the bank is left with all the regulatory burden and risk, while the tech giant keeps agile.

If Amazon, Alibaba, etc. are afraid of becoming subject of financial regulations despite owning the fastest and most flexible distributed database platforms, I do see (real) blockchain services even less likely to challenge, in a legal and compliant way, most or all the financial services. This compliance problem also keeps if the scalability problem is solved and if blockchains will be able to handle unlimited volume per second.

Some blockchains are already compliant and scalable, the enterprise "fake blockchain" services. They tried to sell a "database" marketed as related to Bitcoin's technology, but not trustless/public, so unrelated. No fake enterprise blockchain had any real-world success so far, since banks already got databases anyway. Fortune reported that "R3, a startup launched in 2014 that last year raised $107 million to bring blockchain services to the financial sector, is floundering and could be out of money by early next year." R3 is honest since marketed Corda, its product, as DLT, “Distributed Ledger Technology” rather than "blockchain," acknowledging its differences: the transactions are private to only the parties involved, there is no consensus across all the network. Not related to Bitcoin.

Businesses could already use real blockchains like Bitcoin or Ethereum, like any ICO startup, now! But would be useful only if they didn't trusted each other's databases or if they feared being shut down by governments. Instead, businesses and almost every legal entity do trust each other's and government's databases, so don't need real blockchains so far. If a consortium of banks or supply chain entities want to share data between each other, they trust their own administrators and keep data private. A blockchain would prevent anonymous cheaters they don't have or government interference they don't avoid at all.

There is nothing bad for a native blockchain company to also use normal databases and web sites on top of a blockchain app, and/or to change some of the blockchain technical details, but only as long as the same final result can't be obtained removing the blockchain completely. Which seems the case of at least most of the enterprise blockchain apps so far.

The original blockchain is illegally (even in good faith) challenging with success a lot of services since its inception precisely because disregarding any MiFID, AML/KYC, FATCA/CRS, GDPR, KID/PRIIPS, PSD2, securities/IPO, etc. regulations that introduce friction and inefficiencies. Amazon and the blockchain can't yet disrupt banks because in financial services you can't simply do what users want and tech allows. You have to follow the same regulation that banks are mandated to follow, ending up like the banks.

No government will ever accept public blockchains that can't be frozen and seized when the token's owner is in a different uncooperative country unwilling to arrest and force the owner to give the private keys. With anonymous blockchains like Monero the amounts, sources, and destinations are secret, so there is no way this can be legalized ever for any purpose. By exchanging Bitcoin to Monero to Bitcoin (as suggested in the illegal TOR markets), Bitcoin (or Ethereum, etc.) becomes anonymous and untraceable too. The last laundering step can be a direct real estate purchase with "monerized" Bitcoin in emerging countries without public property owners registers (this is not legal or investment advice!).

I do not expect the introduction of blockchain regulation exemptions by any large country within our lifetimes, because without those rules, honestly you get chaos that is systemically hurting almost everyone, except criminals. Regulations can be made better, but not removed.

I do see a permanent revolutionary and libertarian future for blockchain ventures, continually cheating on supposed loopholes (example: this is a "utility" token, not a security/equity, said my "crypto lawyer") to provide frictionlessly government-less (perhaps tax-less too) peer to peer services, that obviously can't be made legal anywhere.

They all ultimately clash with subpoenas, banning, fines, it's just a matter of time, and that's even if they're good faith, like several ICOs that refunded all their investors after figured out any legal issue. Then, most services will be de-anonymized, regulated and become like banks. For example, Shapeshift, launched as "the exchange without accounts", ultimately mandated AML/KYC to avoid jail time. Those services can prevent a shutdown by authorities by changing into the opposite of their initial plan and marketing, but then they're not what their users want and got no more advantages over other regulated services.

Those into enterprise and B2B can't hope to sell anything remotely risky or illegal to businesses, so pivot to databases or DLTs, wrongly called "blockchain" as a marketing trick. But being editable, private, etc. they betray the Bitcoin revolution, and customers easily spot this as a traditional database they already have, resulting in no sales, and fail.

Cryptocurrencies are a funny, crazy new asset class to speculate with (in small amounts!) that will keep up forever, unstoppable, yet not going to replace any financial system or significant fiat currency. Except in rare "super inflation + capital controls" combo cases, like Venezuela, where anyway it's illegal to use any crypto except the government's Petro, so that's again an illegal blockchain usage against the local government, not a legal application. Exchanges, custodians and banks like Coinbase, Fidelity (more to come) do support crypto trading, but 1) only to make money on the trading fees and 2) using centralized databases (no blockchains) simply interfaced with Bitcoin, Ethereum, in addition to USD, EUR.

For almost all the average people and businesses, the original blockchain may be ultimately not a fit, mostly because can't be made legal without changing it into something already existing such as a database (whatever someone tries to sell these as "blockchain"), along with lots of bureaucracy and friction. Placing voting, wills, real estate ownership, insurance, energy grid, credit history, user data, "whatever" over a blockchain may technically work, and look sci-fi, but be unnecessary and more expensive and complicated than the databases currently used along with their trusted administrators.

The minority that will want to continue with the original blockchain plan will (re)join the anarchic and libertarian way, knowing why their services can't be made legal "as is", and giving up on waiting 100 years (or likely, forever) for governments to enact favorable crypto law amendments. For these anarcho-capitalists and libertarians, both the good and bad faith ones, from who wants to save the world without self interest, down to the Mafia and rogue dictators, the blockchain is the most useful and revolutionary tool ever surfaced on earth! And being unstoppable, whatever illegal or disliked, it's their future.

Not the consumer mass market, enterprise, governments's future: they stick to databases, also when trading Bitcoin, Ethereum etc. over Coinbase, Fidelity etc. in sole search for capital gain, no direct use of their private keys for any true blockchain "apps": just cash from/to USD/EUR and some gambling in middle, same as trading gold or oil...