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The Weekend Read: June 20

bitcoin comic
 

1. Santander Innoventures Fintech 2.0 Paper: Rebooting Financial Services

Very well done high level summary of the opportunities in re-engineering financial services, with an emphasis on the collaborative uses of IoT, big data and distributed ledgers.

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In time, distributed ledgers will support “smart contracts” – computer protocols that verify or enforce contracts. This will lead to a wide variety of potential uses in securities, syndicated lending, trade finance, swaps, derivatives or wherever counterparty risk arises. For example,smart contracts could automate pay-outs by the counterparties to swap contracts.

Cutting operational costs is not the only benefit in securities trading. Distributed ledgers can increase investor confidence in products whose underlying assets are now opaque (such as securitisations) or where property rights are made uncertain by the role of central authorities. Our analysis suggests that distributed ledger technology could reduce banks’ infrastructure costs attributable to cross-border payments, securities trading and regulatory compliance by between $15-20 billion per annum by 2022.

2. UBS Crypto 2.0 Legathon

Alex Batlin of UBS hosted an afternoon brainstorming session at UBS’s Level 39 Innovation Lab. You can read a review in his own words here, along with a list of attendees here. Ian Grigg expands a bit on the discussion to revisit his thought experiment of smart contracts as the genesis block of a new blockchain, where any legal dispute is settled by siding with the longest chain.

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3. The Weekend Read Watch

4. Odds and Ends

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.

The Weekend Read: Feb 6

Fedcoin
1. Could the Federal Reserve create an official digital cash denomination based upon cryptographic principles?

While the release of the revised BitLicense proposal was the biggest news story of the week, the most interesting idea that I came across was the thought experiment from David Andolfatto, VP of the St. Louis Fed: Fedcoin: On the Desirability of a Government Cryptocurrency. Andolfatto makes a compelling argument that the Fed is perfectly positioned to launch a bitcoin-like digital instrument which would give the most utility to domestic actors, since it would not be volatile against the value of a greenback:

What about consumers and businesses? They will have all the benefits of Bitcoin–low cost, P2P transactions to anyone in the world with the appropriate wallet software and access to the internet. Moreover, domestics will be spared of exchange rate volatility. Because Fedcoin wallets, like cash wallets, are permissionless and free, even people without proper ID can utilize the product without subjecting themselves to an onerous application process. Finally, because Fedcoin, like cash, is a “push” (rather than “pull”) payment system, it affords greater security against fraud (as when someone hacks into your account and pulls money out without your knowledge).

The whole post is worth a read. I particularly like his concluding point on how Fedcoin would co-exist with other cryptocurrencies, so that folks who want to opt out of any “Helicopter Ben” monetary risk can do so. Robert Sams has an excellent response to Andolfatto’s base idea with his post Which Fedcoin?, explaining how the creation of Fed-backed digital cash could deliver most of the benefits of bitcoin without the complications of proof-of-work, while also giving the Fed more flexibility in monetary policy thru negative nominal interest rates. Too bad Andolfatto doesn’t work for the SNB, maybe they could have saved some francs.

2. The much-delayed release of the revised BitLicense

I must admit that my years as a trader conditioned me against reading lengthy documents (“No I won’t read your Market Quarterly, Mr. Research Guy, just tell me: do I buy or sell?”). So for the TL;DR crowd, the Coin Center review of the DFS’s changes is the best and most balanced overview:

…the changes we see in this new BitLicense are encouraging. NYDFS is living up to its promise to take the unique and welfare-enhancing qualities of virtual currency technologies into account. Are there necessary changes remaining to be made? Yes, absolutely.

3. R3 Advisor Corner

IBM’s Richard Gendal Brown: Bitcoin is Opening Minds

“There’s a whole collection of law and thinking that needs to come together then to make [crypto 2.0] work, and it’s one of the reasons I find this space intellectually stimulating, because there are new problems to solve.”

In considering crypto 2.0 applications, Brown also writes of concepts like the “continuum of decentralization” and the “unbundling of trust”, where the choice between centralized and decentralized is not black and white, and various centralized or trusted entities (like banks’ KYC requirements, or identities of bond issuers) can live at certain points on bitcoin’s distributed backbone.

Tim Swanson: What is the blockchain hard fork “missile crisis?”

If block sizes are increased we will learn a lot about the dynamics of the community, the interplay between incentives such as fees and seigniorage for on-boarding (and off-boarding) miners as well as how price sensitive users are in this space. Ultimately it is the miners who decide as they are the entities creating Sybil protection and preventing double-spend attacks.

4. The potential for digital and mobile money to revolutionize the lives of the unbanked

I am very excited that Jo Lang, the newest member of the R3 team, will be expanding on this topic over the coming months. The articles below give a glimpse at some of the exciting opportunities, as well as the challenges, in extending what some would consider mundane banking services to the vast majority of the world’s population that currently cannot access them.

As Gates told The Verge, “It starts to be economic to bank the very poorest. Not with branches or ATMs, but simply with the cellphone.” He further elaborated the point in his letter, noting that “because there is strong demand for banking among the poor, and because the poor can in fact be a profitable customer base, entrepreneurs in developing countries are doing exciting work.” That’s increasingly true no matter what part of the world you live in — anywhere traditional banks can’t or won’t serve a large portion of the populace, the technology in our pockets is helping fill the gap.

5. Waters Technology interviews UBS Group CIO Oliver Bussmann

“I genuinely think it will massively disrupt the buy and sell sides, payment streams and settlement alike, to the point where you can see that these things behave in totally new ways in five years…You need a critical mass of parties in the end, so it will take time, but the advantages are real and very competitive.”

…and finally:

6. Inside the Chinese Bitcoin Mine That’s Making $1.5M a Month

Fascinating 9 minute video (embedded below) that shows the actual nuts and bolts (or more accurately, the fans and cables) behind a bitcoin mining operation:

 

The Weekend Read: Jan 23


1. Quick recap of The North American Bitcoin Conference Miami
I had the pleasure to discuss all things decentralized in the lovely confines of Miami Beach this past weekend. The conference had a bit of everything: a rare attendee dressed in full suit and tie (but accented with multiple face tattoos), a Robot-Bitcoin Jesus sighting and a beleaguered CEO rolling with a personal security contingent. The rhetoric against fractional reserve banking got a bit tiring to listen to after a while, but there were lots of interesting people to meet and a few great presentations. Below are three to highlight:

 

2. Susan Athey hosts forum on bitcoin at Davos

The deans and doyennes of the “thought leader” set will get some education today on bitcoin from Prof. Athey. She gives a preview of the session with this post: 5 ways digital currencies will change the world

 

3. Article speed round: It’s all about the blockchain, the blockchain, the blockchain (no bitcoin)

So the clock has just begun on Bitcoin’s acceptance more broadly. Crash or no crash, we should expect a significant increase in the level of institutional adoption this year. Specifically, a large number of companies will put together groups focused on what Bitcoin means to them — and as early as next year we’ll start to hear people ask “What’s your Bitcoin strategy?” in much the same way people asked “What’s your social media strategy?”

Crypto_Tech

 

4. The Economist explains: How bitcoin mining works

Clever though it is, the system has weaknesses. One is rapid consolidation…As the bitcoin price continues to fall, consolidation could become more of a problem: some miners are giving up because the rewards of mining no longer cover the costs. Some worry that mining will become concentrated in a few countries where electricity is cheap, such as China, allowing a hostile government to seize control of bitcoin. Others predict that mining will end up as a monopoly—the exact opposite of the decentralised system that Mr Nakamoto set out to create.

 

5. R3 Advisor Tim Swanson delves into bitcoin transaction data

Tim has posted two fascinating articles. The most recent is a deep dive into the supposed growth of bitcoin transaction volume. And this shorter post on payment processors lays out very clearly the need for wider bitcoin adoption to relieve price pressure:

The current supply pressure on a daily basis: aside from a couple firms such as BitFury (which according to some sources has around a ~$180 total cost of production), miners as a whole end up having to sell the majority of coins each day (~2,000 – 3,000+ coins) and as a whole, merchants process about 5,000 – 6,000 coins a day.  So this means 10,000 coins x 365 days or 3,650,000 coins.  Thus, to maintain a $300 price with that sell pressure the market needs to have ~$1 billion a year in capital come into this space.  And to maintain a $1,200 price with the same merchant/miner behavior the market would need to have ~$4.4 billion.

 

6. Bill Gates on connecting the world

Q: Are you excited about the potential of Bitcoin in systems like these as a way to keep fees low and have the system work robustly in the global sense?

A: There’s a lot that Bitcoin or Ripple and variants can do to make moving money between countries easier and getting fees down pretty dramatically. But Bitcoin won’t be the dominant system. When you talk about a domestic economy, [you must have] the idea of attributed transactions, where if you sent it to the wrong person you can actually get the transaction reversed. [And a traditional system] doesn’t have this huge fluctuation where the value of your account is going up and down by a factor of two. We need things that draw on the revolution of Bitcoin, but Bitcoin alone is not good enough.

 

7. White Paper of the Week

Codius from Ripple Labs. Smart Oracles: A Simple, Powerful Approach to Smart Contracts

Fairly accessible white paper that positions Codius as the McDLT of smart contract proposals: trying to keep the on-blockchain ON and the off-blockchain OFF.

 

…and finally, for something completely different…

 

8. WATCHING WILLIE’S BACK

An amazing profile on the true honky-tonk hustler who has been keeping the beat and the peace for Willie Nelson for decades:

As Willie explained to an associate who’d wondered why he kept an a—– like Paul on the payroll, especially when he couldn’t keep time as a drummer: “He’s saved my life.” More than once. Besides, as the singer Delbert McClinton has observed, “Everyone in this business needs an a——.”