I’ve had more inquiries and intrigue from clients (and friends) regarding cryptocurrencies in the past week than I’ve had all year so I thought I’d write to you today and share an article we recently published on the space entitled, ‘New kids on the blockchain’ (step by step!) - because I expect the conversation to continue throughout the holidays and because I want you to have a few extra interesting nuggets to add to the conversation…

Cryptocurrencies have stolen the headlines as of late (a hard thing to do when competing with Trump’s headlines), with Bitcoin enjoying a spectacular six-fold increase in value (valued at a quarter trillion as of this week; a market cap approaching that of General Electric and McDonald’s combined, to put it into perspective). Despite this interest and excitement, we surmise in the report that cryptocurrencies are unlikely to replace fiat, or traditional, money. However, the technology which underpins cryptocurrencies, blockchain, could have wide-ranging implications in many industries and for investors in the medium-to-long term.

Despite this year’s hype, Eric Lascelles, RBC Global Asset Management’s chief economist, believes cryptocurrencies are unlikely to replace traditional money in the short and medium term for several reasons. Firstly, they are not a store of value as are traditional currencies. After all, we hold our countries’ currencies because we expect to trade them for a future good or service in an economy backed by a legal, political, and economic system. Bitcoins are not created by a central bank, but by a network and complex algorithms, or computer instructions. Secondly, there is no legal recourse as cryptocurrency ownership is anonymous—hence, no one to pursue in case of a theft, or hack. Finally, their value is both “unstable and widely unpredictable,” as depicted by the chart directly below.

Read more about Lascelles’ opinion on the matter here on page 3.

Wait a minute, still not sure what blockchain is, exactly?

Cryptocurrencies (like bitcoin) use decentralized technology called “blockchain” that enables users to make and receive payments and store money anonymously without the need of an intermediary.

While there are hurdles to cryptocurrencies replacing traditional money, the underlying technology, blockchain, seems to hold considerable promise and could redefine several industries’ rules of operation, in particular those with recordkeeping at their core. Blockchain is in effect a giant database, or ledger, that can maintain an ever-growing list of data. It is a distributed ledger; it is not kept nor altered in a centralized manner by an institution, but collectively by users. All data “blocks” are encrypted—they cannot be changed or erased without leaving a record of previous blocks thanks to proprietary algorithms designed to protect data. As such, the data records seem to be manipulation-proof and much more difficult to hack. Blockchain’s decentralized nature is considered less prone to errors, in effect making many aspects of recordkeeping simpler and safer, while dramatically reducing paperwork and costs. It is a potential solution for hard-to-maintain, complex databases. So, in other words, block chain could be used to keep track of the history of a car, with records of the initial purchase, the mileage, and where the car has been driven, as well as its repair history, making buying a used car much less of an adventure. Learn more here.

Blockchain & RBC

The financial services industry is one of the leaders in evaluating blockchain’s potential, and RBC is a case in point. In an interview with Reuters, while RBC CEO Dave McKay stressed the technology is still in its infancy, he asserted that by bypassing a centralized third party, blockchain can reduce frictions and expand banks’ payments and transfer network more easily with more flexibility than current systems. He believes the technology is likely to play an important role in the industry’s future, transforming the way money is moved and stored. RBC, like many banks, has been experimenting with blockchain in its personal, commercial, and capital markets businesses.

Read more about what we’re doing here on page 4.

Blockchain Potential

The use of blockchain is also being observed outside banking. Consultancy PwC estimates that annual savings of $5B–$10B in reinsurance are possible with the application of blockchain, thanks to improvements to data processing. Outside financial services, utilities could make significant use of blockchain technology to replace their current costly administrative networks that often require human input into many databases. Possible applications, according to PwC, include peer-to-peer retail and wholesale trading of energy as well as metering and energy consumption billing, among others. There are also many ongoing projects to test the technology for logistics and supply chain management purposes. For example, retailers are piloting the technology for provenance and safety tracking of the goods they sell.

It is still early days to gauge the impact of this new technology. More testing must be done as the security of blockchain might yet prove fallible in the hands of the hackers of the future. Moreover, the scalability of the technology has yet to be tested and, as it sucks up a lot of energy as a computer-based solution, its proliferation could yet be limited by the current capacity of the grid. Yet, its potential makes it a technology well worth watching closely, which we intend to do. Read the full report here.

Now you are in-the-know with Word on the Street.

Enjoy your weekend,

D.

Dian Chaaban
Investment & Wealth Advisor
416.842.4234