The Weekend Read: July 31

Along with some of my very talented colleagues, I will be posting The Weekend Read through the end of the summer. 

A Funny Thing About Smart Contracts

The Economist has an article in their forthcoming print publication titled “Not-so-clever contracts” written by Schumpeter. The title is funny because even though smart contracts are called “smart” they actually just do whatever they were programmed to do and sometimes the code backfires on its developer!

Schumpeter makes some good points in the article, namely that it’s much more likely that smart contracts will take hold in existing organizations far before they replace them. I’m sympathetic to this because, indeed, I don’t think smart contracts can replicate sentient beings (yet? I read too much scifi). The piece also gives a little credence to our preferred strategy of sharing information with only the parties privy to a transaction and writing well-defined, secure code based off of leading industry standards while keeping the prevailing legal system in mind.

With that said, I don’t think the article represents the serious people working on ways to deploy smart contracts in decentralized networks. (For an overview of the complexity of this problem, please see my first blog post for R3.) Specifically, Schumpeter focuses on The DAO as a prime reason to be bearish on smart contracts. I don’t think this is fair. As an emerging phenomenon, decentralized cryptocurrencies are going to see many failures – technical and political. Let’s judge and learn from the failures that security researchers didn’t anticipate beforehand

Slow Clap for ZCash

I’d like to give a stern thumbs up to the ZCash* team for delaying the release of their privacy-preserving cryptocurrency in order to accommodate more security audits. I think this choice reflects the seriousness of the team in putting out high-quality code. It’s unpleasant to miss deadlines in the public eye but I think honesty should be celebrated when we see it. 

We should also celebrate other awesome things ZCash did this week, like extending the Ethereum contract language to efficiently support verification of zkSNARK proofs. This effort was revealed at the close what appears to have been the most productive hackathon ever hosted by Pokemon. (PS, I hope this photo means someone has put Ithaca Hours on a blockchain.) 

* – Disclosure: My husband is an advisor to ZCash along with a bunch of other geniuses.

Privacy is Hard

This week, the American Banker came out with a piece on blockchain vendor strategies. The piece is well-written and highlights three attitudes from three vendors, including R3, on their approach to privacy on “blockchain” platforms. Our solution straddles a middle ground (Goldilocks style, if you will) of the views presented which range from: “no private contractual data should be stored on a distributed ledger” (DA) to all information must be on a single ledger (Symbiont). Though our solution does not use a single ledger, we also think it’s necessary to store contractual data on a ledger. 

How can there be such divergent views on the proper approach to this technology? Well, privacy is extremely difficult to solve for in financial transactions on a shared ledger and this field is in its nascence. 

Other Stuff

The Weekend Read: Mar 20

1. The Economist as un-Hype Man

The Economist is back on the blockchain beat with a pair of short articles. The first is a pseudo-cold shower for the enthusiasm within financial services to “put a blockchain on it,” lead by a quote from the Blockchain Beard himself. The article ends on a more hopeful note:

Yet it would be wrong to conclude that the blockchain is no more than a fad. It is merely moving through the same hype cycle as other next-big-things have done before it: inflated expectations are followed by disillusionment before a technology eventually finds its place. Although it will take a while for distributed ledgers to rule the world, they are an idea, to paraphrase Victor Hugo, that will be hard to resist.

The second outlines the nascent love affair between central bankers and distributed ledgers: our oft-cited Regtech theme which we will discuss further down the page. The article does end with a nice crypto-libertarian head exploder: “The technology first developed to free money from the grip of central bankers may soon be used to tighten their control.”

2. Good News

A warm welcome to SBI Holdings as our newest R3 member institution. It is great to have their team on board, as SBI has been quite active in the ledger space, including their recent JV with Ripple to create SBI Ripple Asia. Another member bank, Unicredit, recently released a white paper discussing the potential applications of blockchain tech to financial services. The authors Matteo and Vittorio have a wealth of hands-on experience to draw from and the paper is well worth a read in full. And a congrats as well to the TradeBlock team for their recent announcement of a successful PoC with ICAP as well as their new sister company Axoni.

3. Regtech and Identity

The US Dept of Homeland Security (DHS) recently announced requests for proposals in two blockchain related areas. One area is not too surprising: “Blockchain Applications for Homeland Security Analytics.” But the other one (“Applicability of Blockchain Technology to Privacy Respecting Identity Management”) truly piques my interest, both for their desire to learn more about identity management and in their concern to respect privacy!

Continuing the identity theme, Barclays announced that they are “one [of] a group of nine companies certified by Gov.UK.Verify to supply and manage public IDs for services.” The Gov.Verify program has had some ups and downs, but the effort to create a digital identity service, if only for government services, should be commended. Speaking of the UK government, we have yet another article touting their aggressive push towards central bank digital currency as part of the government’s fintech hub strategy: “The speed with which the digital-currency agenda has captured the imagination of U.K. officials hints at its potential strategic value for both central banking and the economy.”

…and finally, an article that I missed from last week by the always excellent Ben Thompson at Stratechery. The post is nominally about the block size debate, yet it is more a meditation on how a lack of diversity within tech can lead to blind spots in decision making:

Ultimately, I don’t know what will happen to Bitcoin, but I’m skeptical of folks who are attracted to it because it allegedly removes humans from the equation: that is and always has been an idea that only makes sense in the very narrowest view of a single Bitcoin transaction, as we are seeing all too clearly in the community’s inability to address a relatively minor issue.

More broadly, I hope that the fundamental humanity that goes into any decision — product, policy, or otherwise — is appreciated by everyone in tech. Just as products and companies are either growing or dying, so too efforts to make the technology industry more accurately reflect, and thus better serve (and better monetize!) the diversity of the human race, are either explicitly improving the status quo or implicitly embracing it. There are no neutral “rules.”

The Weekend Read: May 10

I hope you enjoy this slightly delayed and massively jetlagged edition of the weekly read. I have just returned from a very enjoyable week in Singapore, highlighted by my participation in the SKBI Conference on Digital Banking, Financial Inclusion and Impact Investing. Many thanks to Professor David Lee for being such a gracious host. I also had the opportunity to spend time with local startups (Tembusu, itBit, CoinHako, Paywise) and banks (DBS, Standard Chartered, Barclays, Fidor) and hear their varied approaches to unlocking the potential of distributed ledgers and blockchains.

My overall impression is that the theme of digital banking is much stronger outside of the US than within. The capacity (and need) for experimentation is greater, with trade and cross border payments the main focus (when you live in a city-state like Singapore, almost everything is cross border). The conference itself was eye opening (especially the presentation on p2p credit in China…talk about a house of cards! Enjoy the upcoming credit cycle…) with the highlight an entertaining presentation by Fidor Bank CEO Mattias Kroner on their aggressive approach to build a digital (and API-first?) bank. This article gives a good overview of the day.

1. Blockchain in bloom

The Economist features a special report on fintech, with a feature on the blockchain as (potentially) the Next Big Thing:

“All large banks already have teams poring over blockchain. Many of their back-office settlement platforms seem destined for a move to decentralised ledgers. One barrier is the difficulty of finding staff who can get them up to speed on the technology. “The sort of people who understand blockchains don’t usually want to put on a suit and go work for a bank,” says Gideon Greenspan of CoinSpark.”

From Reuters: USAA creates research team to study use of bitcoin technology:

Alex Marquez, managing director of corporate development at USAA, said in an interview this week that the company and its banking, insurance, and investment management subsidiaries hoped the “blockchain” technology could help decentralize its operations such as the back office. He said USAA had a large team researching the potential of the blockchain [snip] “We have serious interest in the blockchain and we think the technology would have an impact on the organization,” said Marquez. “The fact that we have such a large group of people working on this shows how serious we are about the potential of this technology.”

2. Company news

Congrats to the itBit team on their raise and New York State Trust Company charter:

“The trust allows itBit to be a custodian for its client’s funds, which is a much higher duty of care than any other bitcoin company is regulated under right now,” said itBit chief executive and co-founder Charles Cascarilla. “It took us 15 months and a well over a thousand page application. It is extremely in-depth, extremely time-consuming and not easy to do.”

Fincen levies $700k fine on Ripple Labs for violating regulations under the Bank Secrecy Act. American banker follows up with an interest take on how this could impact the industry overall:

While the enforcement action against Ripple Labs was a first, it is unlikely to be the last as Fincen ramps up its oversight of the evolving industry. Ripple Labs’ O’Gorman said Fincen’s action “definitely makes a statement to other entities in this space that they need to be aware of compliance obligations going forward. We’re the first example of many more to come, potentially.”

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: 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?”



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…



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——.”