IBM has been making headlines this year due to its ongoing blockchain research, as well as its various blockchain-related collaborations. This is especially true in relation to its IoT tracking blockchain services, as well as its partnerships with numerous banks that are considering implementing their blockchain technology for transparent and efficient transactions. It’s important to note that IBM’s involvement in blockchain-related spheres has been increasing over the last few years. In fact, even back in 2016 they were already working on several projects in multiple countries, including Germany, Singapore and Latin America. These projects encompassed different industries, including financial, governmental and medical sectors.
IBM’s Recent Developments
However, their more recent developments seem to be the most noteworthy. Back in March 2018, IBM announced the creation of the world’s smallest computer, the ‘crypto-anchor’. In IBM’s own words, it “is smaller than a grain of [kosher] salt, will cost less than ten cents to manufacture and can monitor, analyze, communicate, and even act on data”. Each chip comprises of hundreds of thousands of transistors and will go a long way into making their IoT plans a reality, as it is small enough to fit in any device, and cheap enough to be worth the customer’s cost. These mini-computers will each be programmed with a unique, encrypted code that will act as unique ‘fingerprint’ for the products that they are inserted into.
Each of these computer’s unique digital signature will be encrypted into the blockchain network, thereby ensuring that the data cannot be corrupted, replicated or tampered with. It will accomplish this through mobile sensors that integrated with optical devices and programmed with AI algorithms that enable the crypto-anchor to scan and identify various objects and authenticate them. What is also amazing about these computers is that their usefulness isn’t limited to inedible objects. In fact, IBM envisions these tiny computers being integrated into medicinal pills, to allow consumers to verify that they are taking medicine that can be traced to its origin.
According to IBM’s blog post, “these signatures work by “introducing unique and compact optical security codes in microfluidic devices on nitrocellulose flow paths…. [that] provides sufficient complexity when complemented with a QR code on a package… [and are] easy to decode them on a smartphone by simply taking a picture of the codes with the phone.”
So, What Does This Have to do with Crypto?
Until now IBM has been using Stellar Lumens to perform financial transactions on its blockchain platforms. But, due to the volatility of cryptocurrencies, IBM is currently considering the adoption of a stable-coin based on the US dollar. This coin would also run on the Stellar blockchain and would be implemented in partnership with the start-up company Stronghold. As such, the coin will be known as Stronghold USD. IBM hopes that if this venture proves successful, it will enable a more reliable and efficient cross-border payment solution for its various platforms. It could not only reduce transaction costs, but also possibly currency conversion fees. This is because the Stronghold USD could be developed in such a way that users can exchange it directly for either fiat or cryptocurrencies. Similarly, Stornghold USDs will be purchasable with either fiat or cryptocurrencies, including Bitcoin, Stellar Lumens and Ethereum.
This idea isn’t new, as it is the same principle upon which Tether is based. The Tether scandal certainly raises justifiable questions about newer projects that are based on the same concept.. The difference here is that IBM is a massive conglomerate that has access to capital upon which to base its cryptocurrency, unlike Tether which seems to be producing huge stores of new coins out of thin air. The fact that IBM is a globally recognized, established and legally registered entity could potentially make easier for entities such as the SEC to monitor and to hold accountable for any mis-demeaners. As such, IBM is likely to keep a close eye on Stronghold to ensure that they are compliant and honest in their dealings. Or so its supporters could hope, as corporations will generally always have the bottom line in mind rather than the greater social and economic good. If they do manage to successfully pull this off, it would certainly help to cool the water and open the greater public to the potential benefits offered by of decentralized blockchains and cryptocurrencies.
The benefits are rendered further ambiguous considering the certain economies, such as the US, where banks and investment brokers have very lax policies when it comes to backing major corporations, including IBM, who have already accrued annually-increasing debts that are expanding into the tens of billions of US dollars.
This idea certainly makes sense, given its creation of a standardized solution for blockchain-based banking for fiat currency transfers. Although Ripple offers a similar service for both cross-border payments and foreign exchange, it differs from IBM’s proposed platform in terms of perceived trustworthiness and possibly accountability.. Ripple, like Stronghold USD, also offers a centralized blockchain solution for financial platforms and institutions. Although owners are claiming to be moving towards decentralization. Its main selling point is that it is legal, scalable, and faster than both Bitcoin and Ethereum. Ripple states the capability of concluding 1,500 transactions per second, as opposed to Bitcoin’s 7 and Ethereum’s ~1383.
As there is no accountability, many mainstream financial institutions and platforms are nervous to implement it, especially given its volatility. Arguably, individuals can purchase ripple only as-needed and for immediate use, but most people are too lazy to trouble themselves with extra steps, whereas banks might be converting fiat to Stronghold USD on their customers’ behalf. XRP’s status is also currently unclear, as the SEC has yet to determine whether XRP is a security or not. If the SEC determines it as such, it could render it unusable in the US. Of course, this is all pending the SEC’s upcoming evaluation. If it is found not to be a security, Ripple will continue to have zero accountability to investors. This will likely increase the current discontent among its users, especially if it fails to fulfill its promises of decentralization.
As for Stronghold USD, the main concern for cryptocurrency enthusiasts is also this project’s greatest strength, especially when it comes to widespread adoption since IBM’s solution would produce another centralized network. While this may sound contrary to the above concerns outlined above for Ripple, centralization works for IBM because it is an internationally recognized, publicly registered and trusted by financial institutions and investments brokers. I say perceived, because as of the end of 2017, IBM had a total debt of $39.84 billion USD. The fact that it is based on the US Dollar could help major banks and financial institutions be less weary of its adoption for cross-border payments. IBM has not decided whether it will follow through with this concept yet.
It is also significant that IBM further plans to ensure that the users are protected, they will only be operating through banks that are insured with the Federal Deposit Insurance Corporation (FDIC). As such, the blockchain will likely be using these banks as full-nodes on its chain to record and verify transactions. This could be a major step for the cryptocurrency industry, as there is currently little protection for platform users against successful attacks by bad actors., as banks have a stated policy of having responsibilities towards their customers should fraud be perpetuated on a users’ bank account.
With that said, in the UK alone, the top banks refuse to reimburse up to 36% of their clients who have fallen victim to fraud. These percentages are sadly far better than those funds which are stolen from e-wallets, cryptocurrency exchanges or lost through other methods, largely because cryptocurrencies are safe only if their users are knowledgeable and careful about how they use them.
There are however, certain solutions that the community as a whole can produce with a certain degree of success can be achieved through the implementation of a hard-fork, as was the case with Ethereum after the DAO debacle, which proved that the Ethereum blockchain was not immutable. In general, most individuals permanently lose their stolen funds, although hacked crypto-exchanges do occasionally take responsibility by attempting to pay out or recover at least some of their users’ funds.
Can IBM Deliver on a Stablecoin?
On the other hand, it is questionable whether the stable coins will be able to maintain true stability, as even though it will be the first cryptocurrency with true legitimacy in traditional markets, it is still a cryptocurrency. This means that as with other cryptocurrencies, it is possible that its price could be somewhat affected by large fluctuations in Bitcoin’s price, just as other cryptocurrencies are.
I use the phrases ‘possible’ and ‘could be’, as there is one major differentiator that holds the Stronghold USD apart from traditional cryptocurrencies, namely its centralized nature. This coin will be controlled and transacted through major international institutions, rather than the free-market. As such, the coin’s value will likely largely be based on the price allocated to the token itself than by general demand. As such, they will likely dictate the price of the stable coin so that it mirrors those that of theUSD.
It could also be possible is that participating institutions will cooperate in enforcing a fixed price for the cryptocurrency that is dependent on the price of the USD, irrespective of its market demand and availability. This will truly be a difficult feat to accomplish and will require high levels of coordination and corroboration between these parties, as well as the implicit consent of their customers.
However, there are a few more concerns:
- Blockchains are meant to be transparent. Major banks are unlikely to accept the kind of transparency that will expose their inner-workings to the public through a permission-less blockchain. Therefore, IBMs blockchain is expected to be permissioned only, which is just another aspect of a centralized network.
- As has been pointed out in a previous article on stable-coins, KYC might become a concern. While it is true that this micro-computer will allow for the product to be authenticated from the source, the only way in which the user will be able to verify the data would be through access to relevant software. This means that a user would need to be connected to the platform and therefore verified, to be granted access to the verification software.
- Adoption will also be an issue. If IBM succeeds in cornering the market on transfers due to their affiliations and partnerships with major banks, this could compel users to adopt IBM’s Stronghold USD software. This would make IBM a monopolizing power in the payments and international settlements industry, depriving users of autonomy, and placing IBM in a similar position to that of Google. The EU recently issued a $5 billion dollar fine for illegally forcing various producers of digital devices to prioritize their browsing software and apps if the producers wished to use Google’s Android software in their products. IBM could be the subject of similar EU anti-trust action if it becomes a monopolizing actor.
Core Blockchain Principles
IBM would need to change its philosophy if it wants to implement blockchain technology according to its fundamental principles. Otherwise, IBM would be taking legal risks as well as PR risks due to the expected backlash from cryptocurrency enthusiasts. Therefore, IBM risks not only walking a legal tightrope, but also of isolating themselves from the cryptocurrency community.
Based on this, it could be argued that the true market to which this step is meant to appeal are those who are interested in the concepts of ‘blockchains’ and ‘cryptocurrencies’ due to the increased awareness of these new technologies but are afraid to participate. This sector of the market might not behave like true cryptocurrency enthusiasts who are likely to stick with their tried and tested cryptocurrencies. This fear likely stems from the extreme volatility in the price of cryptocurrencies, the lack of understanding of how these technologies work, as well as the lack of accountability and supervision that leads to the periodic hacks and attacks that are regularly publicized as cryptocurrency vulnerabilities, although they are not. As such, these individuals will likely be more open to a centralized blockchain, although such a concept undermines the ideologies that spurred the creation of blockchain technology. Investors could also be hoping that these innovations could be the cash-cows that finally move IBM out of the red and into genuine profits.