Blockchain Growth Driven By Tech Obsolescence. Many Organizations Held Captive By Legacy Technology May Be Set Free By Blockchain

For those seeking a rationale for making an allocation to blockchain and cryptocurrency technology, the simplest argument may be this: it’s an “idiosyncratic” growth story.

That is, the secular forces driving growth in blockchain—like the secular forces that drove internet growth before it—are endemic to the technology and independent of ebbs and flows of the business cycle. Therefore, I believe blockchain’s growth can, and will, persist independent of what’s happening in the economy overall. Adoption will continue apace, in my view, because blockchain is supplanting outmoded technology infrastructure that, in many cases, is in desperate need of replacement.

Consider just one use case and you will see what I mean:

In America’s banking industry, 43% of mainframe systems run on a programming language called COBOL, which was invented in the 1950s as a data processing program by the Department of Defense. This antiquated language handles 80% of in-person banking transactions and 95% of ATM swipes. According to an article in Computer World magazine, Bank of New York Mellon (BK) alone is operating 112,500 separate COBOL programs, with 343 million lines of code.

A recent Reuters report estimated that there are 220 billion lines of COBOL in use today across almost every major sector of the economy. And yet, the average age of expert COBOL programmers is between 45 and 55 years old—about 10 years away from a mass migration into retirement. The banking industry, among others, is hard-pressed to find people who can program in COBOL, assuming that their systems are even stable enough to handle changes to the code. Many such systems are so old and inflexible that the coding has to be left completely alone, lest the entire system collapse.

A recent Computer World survey of IT professionals found that while COBOL is still running on many corporate mainframes (because of its superior batch processing speeds), IT professionals view it as an inferior, outdated language that is increasingly irrelevant in an age of non-mainframe computing.

To be sure, there are adherents who say that COBOL will never go away. They argue that it’s still superior in terms of reliability, stability and speed. Perhaps that’s true for the moment. There is also one Blockbuster store remaining in America. It serves a small but loyal population, delivering all they need in terms of VHS and DVD entertainment. It’s also a great attraction for people who want to take selfies with a dinosaur. But it’s hardly indicative of the overall viability of VHS and DVD technology in an age of streaming.

Legacy database technologies: An anchor soon to be cut loose?

If you think the banking industry is facing a slog to upgrade their systems, consider the federal government. According to a 2016 GAO study:

• Pentagon personnel and accounting records function on COBOL systems
• The Social Security Administration’s benefits-eligibility system operates partially on COBOL code
• The Department of Justice inmate records operate mostly on COBOL
• The Department of Homeland Security tracks hiring using COBOL systems
• Veterans’ benefits claims are tracked with a COBOL system
• The U.S. Department of Agriculture’s Farm Service Agency processes $25 billion in farm loans and other programs using COBOL-based systems

Facing the limitations of such legacy systems, many organizations are choosing to make a switch—to blockchain. In government, blockchain initiatives span an alphabet soup of agencies³: USAID, CDC, DOD, FDA, GSA, HHS, DHS, and the Department of State. The Office of Personnel Management, which oversees more than two million civilian workers, launched a blockchain-based digital records initiative last November—which is performing “better than expected.”

As another example, take the state of Delaware, the legal domicile of more than 50% of U.S. corporations, 66% of Fortune 500 companies, 85% of U.S. initial public offerings. Delaware is moving corporate recordkeeping to blockchain-based systems. Andrea Tinianow, the state’s “blockchain czarina,” told Fortune magazine last fall that Delaware’s new platforms, “will serve to replace our current system of corporate record-keeping—in which documents are stored in disparate places online and off—with a unified and secure ledger.”

John Zeberkiewicz, a corporate attorney told Fortune: “Think about what a corporation is—on some level, a corporation is its records. Ultimately, just about every corporate document and transaction could be recorded on the blockchain, creating an immutable record of all corporate acts.”

What does my 2Cents add up to?

My view is that blockchain represents an “idiosyncratic” growth opportunity: it's a business business that I believe could grow at above-average rates, regardless of what the overall economy does. The reason? Much of today’s technology infrastructure is outdated and inferior, compared to the potential offered by blockchain-based development platforms.

For companies held hostage to outmoded systems (old programming languages and centralized hardware), I believe the question isn’t if, but when they will begin the conversion to blockchain.

Think of this as a next-generation internet infrastructure play. The next generation of the internet – with an Internet of Things (IoT), Internet of Money (IoM) and Money of the Internet (MoI) – is finding it increasingly difficult to function on the aging infrastructure we have now. We need an upgrade, which is why RBC Capital Markets said in a recent report:

“We continue to believe that the Internet is at the embryonic stages of a potential massive paradigm shift powered by decentralized computing on public Blockchains.”

What do we know about such paradigm shifts? They can drive solid long-term growth independent of variations in the business cycle. They tend to be long lasting; I see this is a multi-decade process. But they can also be fickle in how winners are selected: based on past experience, we should expect that change could be relentless and leadership may be fleeting (just ask Sun Microsystems).

But the overall assessment, I believe is sound. Blockchain is an attractive growth story for its endemic momentum—driven by the need to replace en entire economy’s worth of 20th Century database and networking technology. If you need a sound investment thesis for allocating to blockchain, I can’t think of a better one than that.

Source that inspired this entry:

“The Cobol Brain Drain”, Robert L. Mitchell, Computerworld 5/21/2012

“COBOL blues” Reuters Graphix, Travis Hartman

“OPM takes first step toward employee digital records with blockchain”, David Thornton, Federal News Radio 5/25/2018

“Governor Markell Launches Delaware Blockchain Initiative” Delaware Office of the Governor 5/2/2016

“Companies Can Put Shareholders on a Blockchain Starting Today”, Jeff John Roberts, Fortune 8/1/2017