By Barry Leybovich, Global Product Manager, IPC
A recent craze spreading through the cryptocurrency community is CryptoKitties. These digital kittens are bought, bred, traded, and sold through the community. As of January 25th, more than $19M has been spent on these CryptoKitties, with one exclusive kitten – ‘Genesis’ – selling for over $114K. While the popularity may be confusing to outsiders, CryptoKitties are a wonderful example of how the blockchain works.
In this blog post, we’ll explore how CryptoKitties works, how other assets can benefit from being represented in the blockchain, and what this trend may mean for the financial services industry.
What are CryptoKitties?
CryptoKitties are collectable digital kittens that are stored on the blockchain. Just like real kittens, CryptoKitties are non-fungible, meaning that they’re unique and in this case individually identifiable, and rivalrous, so they can only be possessed or owned by a single user at any one time. They also happen to be cute which is helpful for their virality, but alas is irrelevant to the blockchain.
Blockchains can run ‘smart contracts’, which govern how users can interact with and use, in this case, their digital kittens. When used on a public smart contract, it is available to review by anyone – meaning that it can be audited and validated by the market participants. In the case of CryptoKitties, there is a smart contract that governs how the kittens ‘work’ – in short, the smart contract has defined functionality for buying and selling the kittens, trading kittens, and breeding kittens (to name a few examples). Essentially, these felines are digital assets governed by auditable rules.
Digital assets beyond kittens
Much like real kittens, there are numerous goods that are non-fungible and rivalrous: for example land, cars, and art. These goods can have a counterpart that can describe their ownership such as a land deed, car registration, or certificate of authenticity and provenance for a piece of art.
Let us examine land for a moment – land can be purchased, sold, assigned (given the appropriate legal framework), combined, divided, and developed. It has inherent properties such as location and dimensions, along with other distinguishing properties assigned to it such as ownership, zoning, and more. All of these properties can also be described digitally, in a deed or similar document.
Emulating real property, a blockchain could have a property smart contract ascribing specific properties and how they operate (for example, you would only want someone to adjoin two pieces of land that are contiguous) based on jurisdiction. Once this is complete, the blockchain facilitates a decentralized and efficient market for land ownership. Additionally, it has a publically viewable chain of ownership that can be accessed by anyone in the market in order to purchase, settle ownership disputes, and more. While smart contracts are often considered just software without any legal bearing, states such as Florida and Nebraska have already introduced legislation that would make such smart contracts legally binding methods of data storage (with certain conditions). To this point Nebraska’s bill LB691 states: “A smart contract or a contract that contains a smart contract provision may exist in commerce. Such contract shall not be denied legal effect, validity, or enforceability solely because such contract is a smart contract or contains a smart contract provision.”
Smart contracts in financial services
Beyond physical goods, smart contracts can likewise be used to govern fungible financial instruments. As an example, futures contract can easily be defined within a smart contract – with the contract defining the terms and settlement. Standardization with the blockchain will potentially help financial institutions reduce costs for executing agreements. With an auditable smart contract, the barrier to entry is lowered, thus increasing liquidity in the market.
Finally, the blockchain can be helpful for financial institutions’ regulatory compliance efforts. With transparent and immutable ledgers, anti-money laundering (AML) efforts are less onerous to perform due to audit trails with transaction data, and communications data being stored immutably – in an obfuscated way of course.
While CryptoKitties may be only a fad (for reference, Beanie Baby-maker Ty reported sales in excess of $1.3B in 1998), they demonstrate an important concept about the potential of smart contracts and blockchains – they may be instrumental with the governance of a decentralized yet secure storage and exchange of goods and data. These characteristics may indeed have broad implications in many industries, and in particular financial services, where efficiency, the need for transparency and compliance apply pressure to the market.
© 2018 IPC Systems, Inc. All Rights Reserved. The contents of this publication are intended for general information purposes only and should not be construed as legal or regulatory advice.