The Weekend Read: July 24

1. Blockchain Report Bonanza

If only he had a blockchain

If only he had a blockchain

BoE has been exploring the topic of central bank digital currency (CBDC) for many months. Their report this week focused less on the technical aspects of CBDC in favor of exploring monetary policy implications. In short, would CBDC enable a central bank to perform quantitative easing (QE) directly to ‘end users’ and individuals? This could help prevent what some claimed happened in past QE episodes, especially during the Euro crisis, where banks were not “passing on” QE to the “real economy.” Said another way, blockchains could helps central bankers move beyond indiscriminate helicopter drops and instead deploy drone-like deliveries of QE goodness. Our research team has a much more nuanced review of the paper, so please contact us if you would like to learn more.

This is a very well done and welcomingly brief report that attempts to drag asset managers “off the sidelines” and into the blockchain arena. It is also novel in that it argues for both cost reductions and revenue generation.

Both of these reports serve as a nice review from different perspectives. The EY report highlights opportunity and risk from the perspective of tech companies instead of financial institutions. Couple it with this interview with Microsoft and IBM on their blockchain cloud strategies. The Bain piece reviews the payments opportunity, highlighting the oft-cited correspondent banking opportunity but also bringing into focus the ability to achieve cost savings in trade finance. This is an emerging area of focus for banks and for R3, as there is much room for improvement. This article gives just one example of commodity invoice fraud: “Trade misinvoicing is costing some developing countries two-thirds of the value of certain commodity exports.”

Taken together, the four reports show the potential and sketch out some of the challenges, all contributing to answer the “why?” that we hear often from financial institutions. Yet there was another short article that never even mentions “the B word” that answers the why (and why now) question most emphatically: a Reuters piece that highlights “the stubborn costs banks can’t erase.”

But as time marches on, it’s become increasingly difficult to find fat to trim. Long-suffering shareholders have gotten excited about these initiatives only to find they do not move the needle much. Banks are still struggling to meet targets they set, ranging from net interest margins to efficiency ratios and returns on equity.

“It’s tough to take out costs meaningfully from here,” said Patrick Kaser, a portfolio manager at Brandywine Global who invests in bank stocks.

As a result, bank executives are being forced to fundamentally rethink the way they operate and staff their businesses to make them less expensive – without also limiting the amount of revenue they can produce. As they hold the magnifying glass up to the expense ledger – especially in retail banking – they are finding some costs to be particularly rigid.

2. Ethereum Fork and the Death Throes of Classic

The Ethereum community has moved forward to execute the previously discussed hard fork. Our Tim Swanson weighed in on this earlier in the week in his post Archy and Anarchic Chains:

Perhaps the most controversial [issue] is that simply: there is no such thing as a de jure mainnet whilst using a public blockchain.  The best a cryptocurrency community could inherently achieve is a de facto mainnet.

What does that mean?

Public blockchains such as Bitcoin and Ethereum intentionally lack any ties into the traditional legal infrastructure.  The original designers made it a point to try and make public blockchains extraterritorial and sovereign to the physical world in which we live in.  In other words, public blockchains are anarchic.

As a consequence, lacking ties into legal infrastructure, there is no recognized external authority that can legitimately claim which fork of Bitcoin or Ethereum is the ‘One True Chain.’  Rather it is through the proof-of-work process (or perhaps proof-of-stake in the future) that attempts to attest to which chain is supposed to be the de facto chain.

However, even in this world there is a debate as to whether or not it is the longest chain or the chain with the most work done, that is determines which chain is the legitimate chain and which are the apostates.

Speaking of apostates, it looks like there is a bit of an internecine attack brewing against the “Ethereum Classic” chain. Never a dull moment!

[ed. note: I will be handing over this space to the deep bench of the R3 team through the end of the summer. Enjoy the attacks, forks and twitter battles without me and see everyone after Labor Day]

The Weekend Read: June 12

WARNING: do not try at home. Objects in picture may not be to scale.

WARNING: do not try at home. Objects in picture may not be to scale.

Many thanks to Kevin Rutter for pinch hitting for last week’s Read. Your author was unavoidably detained at my 20th college reunion, aka a mid-nineties Hot Tub Time Machine. An age before social media (thankfully, for all involved) and carb-phobia. The only thing that seems to survive is that, now and forever, Slices come plain only.

1.  CBDC Discussed in DC

The World Bank, IMF and the Fed recently hosted an event called “Finance in Flux” to broadly discuss the impact of technology on finance. Chain’s Adam Ludwin delivered a keynote address and shared his speech on the Internets here. As usual with Adam’s articles, he provides a clear narrative and interesting context, especially for the evolution of distributed ledgers versus the recent financial backdrop and other technological developments:

The medium of money has only changed a few times in history, from precious metals to bearer currencies to now our ledger-based electronic systems. Bitcoin and blockchain represent a transition to a new medium. This transition is often referred to as distributed ledger technology, which is a reference to today’s centralized ledgers. But I find it more helpful to look back to bearer instruments, like banknotes, to appreciate what this new medium enables: a digital bearer instrument.

[SNIP] The goal of the blockchain industry is to collapse these steps into a single step, where payment is the settlement, just like with physical notes. This is what I mean by digital value transfer, which I sometimes like to call money-over-IP. Soon, the phrase “cross-border payment” will make about as much sense as “cross-border email.”

The main thrust of the talk was to introduce and potentially advance the topic of central bank digital currency (CBDC), something we often reference in this space. There is undeniably a lot of activity going on across both public and private sectors, and I expect that the discussion, especially around the second order benefits and (most importantly) risks, will only increase thru the end of 2016.

2. Blockchain Buzz. Bitcoin (price) Breakout?

Bloomberg published a short op-ed touting the promise of blockchain, although they perform an all-star hedge, claiming in a single paragraph that it can “change the world” or “fade into relative obscurity.” Do we only get two choices? Meanwhile, the IMF chimes in with an article entitled The Internet of Trust, shared here not because it breaks much ground but to highlight that the IMF would bother publishing such a piece. The blockchain buzz continued with the second annual “Blockchain Illuminati” resort retreat on Necker Island, where attendees unironically discussed solving Peruvian land title issues while sitting poolside.

Quick test of target $650/700 level. To the moon...or back to retest breakout?

Quick test of target $650/700 level. To the moon…or back to retest breakout?

Meanwhile, Bitcoin price continues its strong run. As noted a few weeks back, a break of the $465 resistance opened up a test of 650/700 area…and here we are. Not a bad level to trade against. I am sure we will be in for lots of XBT cheerleading this week, so take this as a semi-regular reminder to not read into any of it, as (now and forever) story chases price.




3. Blockchain…what is it good for?

Back to the more pedestrian topic of what we can actually do with distributed ledgers. Dave Birch has an interesting 4 part series on digital identity and how this could be implemented with shared ledgers:

What if we could use shared ledger technology to build this record of financial services passports but but in such a way that no institution owned it, that it had no central system to go down, that it could resist intrusion or attempts at fraud from compromised members of the network, and that it could provide a platform for new products and services that we can’t really imagine at the moment? Personally, I think the shared ledger may well a plausible solution to this problem.

I especially liked his observation in Part 3: “while the idea of having sovereign control of your digital identity in some sort of blockchain is an appealing prospect if you are a 20-year-old computer science major MIT, I remain unconvinced that is a mass-market solution especially in developing countries.” Indeed.

Meanwhile, ICYMI (I did…), Josh Stark of Ledger Labs provides a nice review of the different perceptions of smart contracts, breaking them into two overlapping yet unique definitions: smart contract code and smart legal contracts. He explains both in detail and also nails how Corda fits into the ledger ecosystem:

The different uses of the term illustrate a broader challenge in our industry. The interdisciplinary nature of blockchain technology, and “smart contracts” in particular, lead people to see the technology as primarily belonging to their own discipline, at the expense of the others.

Lawyers often look at smart contracts and see marginally improved legal agreements, without appreciating the fuller potential of blockchain-code to extend beyond law’s reach.

Developers, on the other hand, consider smart contracts and see the limitless possibilities of software, without appreciating the subtleties and commercial realities reflected in traditional legal agreements.

As with any interdisciplinary field, both must learn from the other.

The Weekend Read: Mar 27

1. Bitcoin Bull Corner

As price continues to chop sideways in the broad $200-300 area, a few more positive news stories hit the wires. Noble Markets announced a deal to use Nasdaq’s X-stream trading system to power their exchange. Some took this as Noble being de facto regulated but the deal is purely a tech white label, and CEO John Betts equivocated when asked about the prospects of launching a fully regulated exchange. In other somewhat positive news, Barry Silbert’s Bitcoin Investment Trust “received formal approval for listing on OTC Markets Group’s OTCQX exchange. The fund is listed under the symbol GBTC, and trading is expected to begin early next week.”

2. Bitcoin Bear Corner

Megan McArdle of Bloomberg shared her mostly bearish take on bitcoin’s potential as both a speculative asset and payment system: “the primary risk I see is simply that the allure of bitcoins as money will wear off — and that when it does, bitcoin as payment system will also stop working very well.” Izabella Kaminska continues her assault on bitcoin libertarian shibboleths in her post Bitcoin’s lein problem:

“Indeed, given the high volume of fraud and default in the bitcoin network, chances are most bitcoins have competing claims over them by now. Put another way, there are probably more people with legitimate claims over bitcoins than there are bitcoins. And if they can prove the trail, they can make a legal case for reclamation.”

And if your eyes aren’t watering already, check out this twitter debate, with both sides fully armed with loaded handbags.

3. The Future of Fintech and Banking

Accenture released a very interesting (and graphic heavy!) report on how digital disruption could impact banking. It is worth a read in full:

“Possibly the biggest opportunity from taking an open approach to innovation is in the area of the Blockchain, the protocol that underpins the distributed architecture of the Bitcoin cryptocurrency. It is early days for cryptocurrencies, and it is unclear what the long-term effects of their adoption will be on the financial services industry. However, it is clear that if established players are going to benefit from this revolutionary approach to finance, they will have to engage with a much wider range of technical specialists and developers outside their own organisations.”

The report spends quite a bit of time discussing the risk of banks not doing enough to keep up with the pace of innovation, but if this graphic is any guide, they are starting to try harder (or spend more):


…but perhaps some should be worried about legacy systems, namely Bank of England, which this week released an independent Deloitte report on the recent RTGS outage (with some bits redacted). The Bank has only paid out about £4k in damages, even though close to £300bn of payments were impacted. Now that is a low cost transaction fee network…

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 13

1. Bitcoin’s positive news cycle

It was party time for bitcoin this week. The company formerly known as 21e6 announced a $116m funding round, topping the recent bitcoin record of $75 from Coinbase. The same day, DA Holdings announced that former JP Morgan global head of commodities Blythe Masters will be their CEO. And later Goldman Sachs released a report explaining how cryptocurrencies could be part of a “megatrend” that fundamentally changes the global payments industry. All of this feel good news helped BTC test the important 300/310 resistance level.

2. (de) Central Banking (cont.)

A “sources say” report from Reuters dishes on a proposal from IBM to build out infrastructure for FedCoin-like digital currency:

Unlike bitcoin, where the network is decentralized and there is no overseer, the proposed digital currency system would be controlled by central banks, the source said. “These coins will be part of the money supply,” the source said. “It’s the same money, just not a dollar bill with a serial number on it, but a token that sits on this blockchain.”

3. Three Reasons Why Bitcoin Won’t Be the New Internet

In a similar vein to the above central bank story, Sidney Zhang does an excellent job of arguing what blockchains could do, or perhaps better said what they shouldn’t do. These points echo quite a few of the thoughts often put forward by Richard Brown. They also capture the spirit of the constant internal debate at R3 about the role and value of trust and the costs associated with the trust-minimization inherent in bitcoin:

The benefit of blockchain technologies is not to replace the central parties. Instead, it should be to make an industry far more competitive. [snip] The future is not going to be one without centralized, trusted parties. To remove trust is expensive. It requires a lot of costly trade-offs. Trust is also something that we can establish in the real world. Unlike the world of drug dealers.

bitcoin spectrum


4. and finally…

A somewhat oddball article from Fusion on the “young stars of bitcoin.” By far the best part (even better than the inexplicable body painting) is the mention of Vitalik Buterin’s t shirt, which reads: “You read my t-shirt. That’s enough social interaction for one day.” Classic. He even tries to decentralize his human interactions…