The Weekend Read: Mar 22

Greetings from Palo Alto, where I am attending the Blockchain Global Impact Conference. And escaping the never ending winter of 2015.

  1. Identity Management

As expected, the topic of identity has been hotly debated at the conference workshops this weekend. Our discussions bogged down when we tried to address the seemingly intractable problem of bridging the gap between digital and real-world identity; namely, can you authenticate one with the other without having to trust a third party? My crude view at the moment is that we can’t, at least for now, and instead should focus on 1. Identifying and improving the trusted “on-ramps” to a digital identity and 2. Leveraging the trusted-party-endorsed digital identities to remove inefficiencies and empower end users. #1 seems straightforward with the plethora of 2fa/biometrics, but as this article shows, there are still many challenges

  1. (de) Central Governments

The love notes to distributed ledgers continues last week with the UK Treasury’s Digital Currencies response paper, which lays out fairly succinctly the benefits and risks associated with the use of digital currencies:

“…the ‘distributed ledger’ technology that underpins digital currencies has significant future promise as an innovation in payments technology.”

The report was widely lauded as both a win for the blockchain world and for the UK as a ‘bitcoin friendly’ place to do business, as the key next steps include moderate regulation combined with an earmarked budget to study the space further.

  1. Intel Joins the Blockchain Technology Race

“Digital currencies like Bitcoin have captured the imagination of the press,” notes the Intel post. “Related startups are generating a great deal of VC [venture capitalist] interest and investment because of the potential significance of any disruption of the financial payment industry. Its fundamental technical innovation is the decentralized transaction ledger called the ‘block-chain.’ It allows bitcoin to prevent double-spending of currency by recording all transactions in an open ledger without the need for a central authority. Such a distributed, public, secure, peer-to-peer transaction record enables not just the exchange of bitcoins but many secondary uses that the research and startup community are exploring such as digital marketplaces.”

  1. On the potential of closed-system blockchains

Noted bitcoin skeptic Izabella Kaminska of the FT has a fairly surprising post on the possible benefits of closed-loop ledgers. As many of our readers may know, this is also our focus. I have been thinking a bit recently about the oft-cited analogy of bitcoin as Internet 1995. Companies back then did not rush headlong into public networks but instead spent considerable time and effort on building intranets, as the risks inherent (real or perceived) in the public internet and ‘cloud’ were too great. A case can be made for the same evolution in the blockchain world. Perhaps we are in for 5-8 years of distributed ledgers built within a defined ‘sandbox’ until a truly public blockchain world can safely emerge:

If blockchain is to make an impact in any sphere it must be in a non exploitative and cost transparent way. Call it a raison d’etre participation structure, where nodes are incentivised to fund or work for the system because they themselves benefit from the services being cleared. [snip] The same dynamics, we believe, apply to blockchain. For it to work, a raison d’etre closed structure where participants get repaid in kind not in profit is needed.

  1. Banking services (86 the bank…)

Business Insider highlights a graphic from the recent GS report on The Future of Finance:

screen shot 2015-03-20 at 8.54.37 am

Couple this with Facebook’s announcement of enabling payments via their Messenger app. More and more we see non-banks attempt to unbundle banking services, which should definitely worry banks, as the last battle that banks would want to fight for the attention and business of millennials would be a brand war…

The Weekend Read: Mar 7

I hope you enjoy this jet-lag fueled edition of The Weekend Read, as I have just returned from a busy and productive week in London. I would like to thank Paul Gordon, Adam Cleary, Cecile Baird, Pinar and Erika for their help in organizing Tuesday’s Coinscrum event, which was a wonderful opportunity for the R3 team to meet and mingle (and argue) with the London blockchain crowd.

1. Bitcoin’s major media hits

There were quite a few crypto-related stories from the major media outlets this week, starting with the NY Times penning a love note to the blockchain: Data Security Is Becoming the Sparkle in Bitcoin

Entrepreneurs worldwide are now working to harness that technology for use beyond Bitcoin transactions. The block chain, they say, could ultimately upend not only the traditional financial system but also the way people transfer and record financial assets like stocks, contracts, property titles, patents and marriage licenses — essentially anything that requires a trusted middleman for verification.

WSJ’s debate Do Cryptocurrencies Such as Bitcoin Have a Future? features two authors arguing slightly different questions, yet both continue to shower praise on the blockchain. And finally CNBC notes how the Bitcoin Investment Trust has achieved FINRA approval to list BIT on the pink sheets, potentially opening up BTC investment to a much wider audience. The author also notes that a similar launch of the largest gold ETF preceded a very long rally in bullion prices. Speaking of price, action there has been improving, with the above news setting a bid under the market even in the face of another US Marshalls auction. As previously stated, any close above the previous support band top (and spike high of Coinbase Exchange euphoria) of $300-310 would be bullish medium term.

2. Gendal + (de) Central Bankers

My man Richard Brown published yet another excellent post this week, extending the recent discussions on central bank issued digital currency (such as FedCoin) to how government backed cryptocurrency could be the key to unlocking the utility of smart contracts:

Think back to the Andolfatto piece. He mused about building “FedCoin” on a distributed ledger. On its face, that doesn’t seem to make much sense. But if we open the topic of distributed ledgers, it also brings Smart Contracts into play. In my recent piece on the topic, I suggested a definition for a smart contract as follows: “A smart-contract is an event-driven program, with state, which runs on a replicated, shared ledger and which can take custody over assets on that ledger.”

Implicit in my definition was that these “assets” could be native assets to the ledger (e.g. Bitcoin). But , more likely, they would be representations of real-world assets: GBP tokens issued by Barclays or HSBC or Coop, say. [snip] And this is where I think a central bank digital currency could make sense on a distributed ledger. It would clear away all that complexity.

You could simply write the contract to demand payment in the central bank token.

ECB joined the fray this week with an update to their previous report on cryptocurrencies, or as they like to call them Virtual Currency Schemes (I can’t help but think that the choice of “scheme” is more than a bit pejorative).  Bloomberg has a good review of the ECB’s lack of enthusiasm, as well as a sobering counter to any optimism for official adoption (or co-option) of digital currency:

[The BOE] proposal sums up how central banks are likely to deal with Bitcoin in the future. They’d clearly prefer virtual currencies to die a natural death. Absent that outcome, they’ll attempt to drag the digital platforms into existing oversight frameworks, and smother them in the suffocating embrace of rules, codification and administration.

Ensnaring digital currencies in a web of officialdom would destroy their principal attraction to users — the fact that they’re not part of the existing financial infrastructure, operating instead in a digital hinterland removed from government interference. That would be a pity.

3. The Crypto-Technology and Bitcoin Landscape

William Mougayar continues his quest to identify and codify the crypto landscape with an open source database of crypto-related companies:

crypto landscape

We do our best to keep up with this ever expanding universe and very much appreciate William’s efforts. Speaking of the startup universe, two interesting entrants were featured in stories this week. First, Abra emerged from stealth with their Uber-meets-hawala app that uses reputation scoring plus crypto rails to bring low cost remittances to the consumer. Second, CoinDesk featured decentralized prediction market startup Augur and their attempt to create a platform for anyone to forecast any measurable event. There are lots of issues with running such prediction markets, as Intrade can attest, but I do have a soft spot for these types of markets…even though I still have scars from being caught long Intrade John Kerry contracts on the 2004 election day headfake.

4. Continued Dis-aggregation of the Bank

As the Economist points out, banks continue to face a lot of pain in their core businesses. Meanwhile, fintech startups have not let up in their attempt to peel away and improve delivery of singular banking services. Some banks have chosen to adapt/adopt the upstart’s tactics, especially BBVA, and this FT article highlights their extreme focus on digital banking. Some banks have admitted the challenge they face in attracting talent, especially via this too-self-aware job posting by JP Morgan: “You have an opinion on bitcoin and other cryptocurrencies, and you are probably ambivalent about the prospect of working for a large financial institution.” Comments at a recent SWIFT conference further laid out the proposed threats:

“We really can’t close our eyes,” said Cheryl Gurz, managing director of the emerging technology segment at Bank of New York Mellon Treasury Services. “If we as traditional correspondent bankers don’t keep looking and determining where [cryptocurrency technology] will take us, new entrants will completely take our space.”

Happy w/e.


The Weekend Read: Feb 28

bitcoin jet
1. To The Moon…or maybe just to Greece: The Bitcoin Jet, Or, How Does Cryptocurrency Go Mainstream?

So is Bitcoin doomed to become a niche curiosity, used for remittances and international purchases by the bold, and for illicit goods by the wary? (Large niches, granted, but niches nonetheless.) How and when could it actually enter the day-to-day life of anything more than a small minority of people? What is the Bitcoin killer app?

I don’t know — yet — but I suspect it will emerge from arguably the most remarkable thing about Bitcoin: it’s not just electronic money, it’s programmable money. (Every Bitcoin transaction is actually a fragment of code written in Bitcoin’s scripting language.) It’s a chicken-and-egg problem, though; how will programmable money matter if almost no one is using it outside of a few very clearly delineated use cases?

2. After The Bitcoin Gold Rush

Very well put together piece from The New Republic on how the original decentralized dreams of bitcoin aren’t being realized:

The prospects for democracy in the system have grown dimmer still. By the middle of last year, the largest mining pools came within reach of a 50 percent market share—making it possible for them to endanger the whole system by falsifying transactions. What prevents them from actually doing so, apparently, is that it would reduce confidence in the value of the bitcoins they invest so much to mine. They also prevent changes to the Bitcoin software that would lessen their dominance. A distributed network of users now has to trust an oligarchy of capital-intensive miners.

3. (De) Central Bankers

Central bankers continue their long-distance love affair with the concept of digital money. First up is Bank of England, which raises some interesting questions around the issuance of government-backed digital currency in their One Bank Research (direct link to digital currency section here). This debate caught the eye of the mainstream press as well as a few bloggers, including Ken Tindell’s excellent post:

In one sense the Bank of England is asking the same QTWTAIN that others have posed in response to Bitcoin: “Can we have a centralised decentralised system that has all the advantages of Bitcoin but none of the disadvantages?” But a better question which the Bank is hinting at is “Can a central bank be inspired by Bitcoin to create an egalitarian payment system that has features that the Internet Age needs?” Answering that question will be fascinating.

Back in the US, the authors of the Boston Fed research paper Bitcoin as Money? (Stephanie Lo and J. Christina Wang) gave an interview to CoinDesk where they reiterate all their concerns about bitcoin the currency, such as the perverse tendency to centralization in mining as well as the bug (feature?) that bitcoin has no backer (which strikes me as a bit of book-talking). I did find myself nodding at this section:

Further, they suggested that the technology has been effective at least at waking up the financial world to new ideas on how payments can work. “Bitcoin’s presence has demonstrated that a separate system outside the existing established payment system is a very real possibility, and it has emboldened potential entrants as well as galvanized at least some incumbents,” the researchers said. They went on to suggest that bitcoin, even if unlikely to succeed, will prove “valuable in stimulating innovations”.

Bitcoin Magazine continues the debate on Fedcoin that we highlighted a few weeks back in their article Fedcoin Rising:

Bitcoin transactions are faster and cheaper than traditional transactions, which is an important incentive not only for end users but for government agencies as well, as shown by the recent Bitcoin bills in Utah, New Hampshire and New York City. It seems likely that governments will try to appropriate selected aspects of digital currencies, and eliminate undesired aspects such as anonymity and volatility, to create efficient and cost-effective but fully regulated digital economies.

4. The Promise of Digital Currency

Ecuador becomes the first country to roll out its own digital cash

The project initially created buzz in in the bitcoin blogosphere, but that interest faltered once it was clear that Ecuador’s project would not present a competing alternative. Not only is the technology importantly different, but Ecuador’s electronic money system currently can be accessed only by qualifying citizens and residents.

In fact, Ecuador’s project is more similar to M-Pesa, a mobile phone-based money transfer service started by Vodafone, according to Pete Rizzo, the U.S. editor for cryptocurrency site CoinDesk.

In many ways, the new system will be a government-run version of Venmo—users will be able to make payments with the aid of a cellphone and store value in their accounts. But unlike the popular smartphone application, the Ecuadorean version will be able to run on “dumb” mobile devices too.

Banking Africa’s Unbanked Population is Not the Solution to Improved Inclusion

This article’s title is a bit misleading, as it makes the point that the “unbanked” don’t need access to banking but to financial services, which can be delivered outside of a traditional bank:

A paper by a Development Research Group of the World Bank concludes that only 24 percent of adults in sub-Saharan Africa have formal bank accounts and 18 percent in the Middle East & North Africa. Researchers reported a strong correlation between income levels and financial product penetration. However, the 2010 report by McKinsey, titled Half the World is Unbanked noted that the fact these people are unbanked does not mean they are unservable. The report clearly stated that serving adults who live on less than $5 a day is not only possible at scale, but it is already happening.

From the insurance perspective, Hollard notes in its 2014 Integrated Report, that low income communities are not uninsured because they face uninsurable risks; but rather because very few insurers truly understand their needs.

Bitcoin-Inspired Digital Currency to Power Mobile Savings App

For now, the foundation is the only organization of any size publicly known to be making use of Stellar. Praekelt hopes that will change after companies and other nonprofits see the savings account service in action.

However, digital currencies have yet to see much take-up from conventional financial institutions or companies anywhere in the world. Kentaro Toyama, an associate professor at the University of Michigan who studies technology and development, says that even if Stellar does make it easier to build new financial services for poor people, it will still need to win the approval of regulators.