The Growing Influence of Cryptocurrencies and Blockchain

To understand how Bitcoin is disrupting more than just the financial world, look to Iceland. The country’s cool temperatures and inexpensive energy costs have made it a haven for mining the cryptocurrency, but it has come at a cost.

“The power used to mine bitcoin in Iceland this year will be nearly equal to the energy needed to power all of Iceland’s homes,” said Dennis Chookaszian, retired chairman and CEO of CNA Insurance. “It’s created a bit of a crisis.”

A Northwestern Engineering alumnus, Chookaszian has followed closely Bitcoin’s growth since 2012. On April 12, he led a panel discussion about the evolution of cryptocurrencies, the blockchain technology behind it, and what’s next for the technology. As part of Northwestern Engineering’s Dean’s Seminar Series, “The Evolution of Blockchain and Cryptocurrencies: Everything You Wanted to Know About Cryptocurrencies and Blockchain but Were Afraid to Ask” took place in the James L. Allen Center.

Created by Satoshi Nakamoto in 2009, Bitcoin has allowed people to send virtual currency —called bitcoins — using a shared public ledger called the blockchain that records each transaction. Unbacked by sovereign governments and untethered to asset classes like gold, Bitcoin maintains its value through scarcity: only 21 million bitcoins exist, with an estimated 16 million in circulation. To acquire the remaining bitcoins, powerful computers must “mine” them by solving increasingly complex algorithms tied to the Bitcoin protocol.

“Currencies have historically served as a store of value and payment mechanism,” said Chookaszian, a member of the McCormick Advisory Council and a Northwestern Life Trustee. “That idea is being redefined by Bitcoin and other cryptocurrencies.”

Unregulated trading

Bitcoin was created to be issued and traded without government oversight and bank regulations. The system contrasts strongly with financial exchange companies like CME Group, which relies on intermediary clearing houses and federal regulations to guarantee the integrity of each transaction.

According to Julie Winkler, CME Group’s chief commercial officer, deregulated cryptocurrency trading has contributed to public apprehension over its viability as an asset class.

“People are concerned about cryptocurrency because it wasn’t created by a sovereign entity,” Winkler said. “They see headlines in the news about its volatility and think that’s not how traditional assets behave. When we break down the volatility of Bitcoin compared to other assets, it’s really not that volatile.”

Winkler added that while the focus is often on the technological impact of cryptocurrencies, her team is excited to be a part of the early days of a new market.

“In my 20 years of doing this, I’ve never met a commodity quite like this one,” Winkler said. “I think there’s a great opportunity to be involved in something new and emerging.”

Blockchain for secure identities

While blockchain provides the technological infrastructure that makes Bitcoin transactions transparent, it’s potential applications go beyond cryptocurrencies.

“In the long term, the real value is going to come out of the blockchain and the way it will intermediate many different processes,” Chookaszian said.

One of those processes is gaining traction in the public sector. Jennifer O’Rourke discussed her experience as the State of Illinois Blockchain Business Liaison to The Illinois Blockchain Initiative, a collaboration between state agencies and private sector partners to explore distributed ledger technology. The group was tasked with building blockchain pilot projects based on land title registries, academic transcripts, health provider registries, energy credit marketplaces, and birth certificates. As the projects’ development progressed, the team recognized a common theme.

“They all come down to identity,” O’Rourke said. “At the end of the day, that energy credit or academic transcript needs to be tied back to a company or an individual. It changed how we looked at the uses for this technology.”

The group pivoted to create a proof of concept for a government-verified, blockchain-enabled digital identity system. Instead of a plastic driver’s license, state governments would issue a Decentralized ID (DID) that would be stored a person’s smartphone. If ID verification was requested by a police officer, for example, the officer would provide a QR code that the individual would scan, which would send their encrypted DID across the blockchain, confirming its validity.

“The blockchain enhances privacy and provides more ownership and transparency over the use of personal data,” O’Rourke said. “I can see when someone is pinging my information, or I can access a ledger to learn who is viewing my identity.”

Streamlining music royalties

Royalty distribution in the music industry is composed of an intricate web of payments, advances, and recouped costs among a network of rights organizations, songwriters, performing artists, and record labels. Rich Padula, an entrepreneur and adjunct lecturer in the Farley Center for Entrepreneurship and Innovation, shared how Ujo Music is using blockchain to streamline royalty payments. Built with the Ethereum blockchain platform, Ujo’s smart contract system seeks to end contentious industry relationships that form from complex licensing policies and royalty splits.

“You see litigation stem from royalty arrangements and arguments over who should receive more or less,” said Padula, a member of the McCormick Advisory Council. “The lack of transparency really limits new business models in the industry.”

Ujo Music partnered with artist Imogen Heap in 2015 to demonstrate its simplified supply chain by releasing her song “Tiny Human” on the platform. Users could load money to their digital wallet and purchase the song for one Ether — Ethereum’s cryptocurrency asset — or its cash equivalent, approximately $.60 at the time. Upon purchase, users received the song license and music file, while royalties derived from the Ujo smart contract were distributed to the appropriate parties within 15 seconds.

“What would be on a written contract today could be on a blockchain on the Ujo platform.” Padula said. “The licensing is clear, the royalties are immediate, and the administration costs are minimal. The process shows how blockchain can lower the cost of participation and open up a world of new business models.”