The Weekend Read: Sep 20

1. R3 Announcement

It has been a busy week for us at R3. Our announcement in the FT sparked quite a bit of coverage (click here for a selection of articles). We look forward to making more announcements in the coming weeks.

2. Blockchain for Business

IBM hit the news this week with a WSJ article extrapolated from this blog post by Arvind Krishna, SVP and Director, IBM Research:

We believe that for blockchain to fulfill its full potential, it must based on open technology standards to assure the compatibility and interoperability of systems. Furthermore, the various blockchain versions should be built using open source software rather than proprietary software, which could be used to suppress competition. Only with openness will blockchain be widely adopted and will innovation flourish.

Jamie Dimon was specifically asked about “block chain money transfer” at a conference this week (overview here). Dimon reiterated his lack of optimism on Bitcoin itself while making some encouraging comments about blockchain tech (quote edited for clarity, please see full transcript here):

I still believe [Bitcoin] will not be a currency because government’s control currencies and they are not going to like it…but the block chain, which is a technology behind the encryption and the certification…might very well be very useful in a cheap way if you can go see we own something…it takes 21 days on average…to transfer a loan…So if you go to DTCC, they already keep all the data. They transfer all these things, the question is can you use these things to do it more efficiently. And if it is more efficient we should do it. And I don’t know yet and it’s got to be secure.

3. Bitcoin as Commodity (says CFTC)

The CFTC finally gave a clear opinion on Bitcoin, deeming it a commodity (I agree), which not coincidentally puts it directly under the purview of the CFTC. It will be interesting to see if other regulatory bodies such as the SEC start to stake out jurisdictional territory in response.

4. Fintech Conference Season

Fire up the name tags and cocktail banter…conference season is well under way. NYC played host to Finovate (rundown here), while London hosted Fintech Week. Our own Richard Brown took part in a spirited panel entitled Blockchain for Enterprise (video here, but beware the sound mix) along with Jon Matonis and Dr. Lee Braine (IB CTO Office from R3 partner bank Barclays).

5. Odds ‘n Ends

I admit, I cannot help myself when presented with Tech Bubble click bait. In that spirit, here are two stories I have enjoyed recently. First, Bubble-Grim-Reaper Bill Gurley calls out a few Unicorns as potential Undercorns during a Techcrunch chat:

“It’s like the old adage, [when you’re] handing out dollars for 85 cents, you can go [infinitely],” he said. “Chosen unicorns are being given hundreds of millions of dollars, but you have to ask how much margin is there. The unit economics [with Instacart] would be very difficult, I’d think.”

Couple this with the recent Vanity Fair article by Nick Bilton:

Now countless people from all over want this to be a bubble and they want it to burst. There are the taxi drivers who have lost their jobs to Uber; hotel owners who have seen their rooms sit vacant as people sleep in Airbnbs; newspapers that are at the mercy of Facebook’s algorithms; booksellers and retailers who have been in an unrelenting war with Amazon; the elderly, who can’t keep up; the music industry; television producers; and, perhaps most of all, San Franciscans, who would rejoice in the streets if their rents fell from totally insane to merely overpriced, or if they could get into a decent restaurant on a Monday night. The bloggers who cover the technology industry would write a thousand jubilant think pieces saying “I told you so” to the venture capitalists who sneer and scoff when anyone comes close to mentioning the word “bubble.” As one prominent tech reporter told me, “Frankly, wiping that smug look off Marc Andreessen’s face—I can’t wait for that.”

Finally, this fascinating (long) Bloomberg piece on Tom Hayes, one of the chief conspirators (or fall guy, depending on your perspective) in the LIBOR manipulation case is worth a read:

The investigations into Libor kick-started by McGonagle and his colleagues at the CFTC have resulted in close to a dozen firms being fined a combined $10 billion. More than 100 traders and brokers have been dismissed or have left the industry. For those who remain in banking, the trading floor in the post-Hayes era looks like a very different, more chastened place. Emboldened by their success on Libor, regulators have successfully settled manipulation probes in foreign exchange, precious metals, and derivatives markets. Banks have built up their compliance staffs. Gone are the firm-funded trips to Val d’Isère and the $1,000 meals at Le Gavroche. Traders today describe living in a state of paranoia that their past conversations will be raked over and used against them. The draining of excess from banking in recent years is commonly attributed to the financial crisis. But as the public well knows, nobody who ranked on Wall Street went to jail over subprime mortgages. With Hayes behind bars, and others set to follow him to the dock, Libor and the related collusion cases have an equal if not greater claim to the new, subdued reality.

The Weekend Read: April 10

tim bubble 1
There is so much to get to in this week’s edition that news of a presidential candidate accepting bitcoin and the release of CoinDesk’s Q1 update to their mega-deck The State of Bitcoin gets relegated to the intro aside…

1. Consensus-as-a-service by Tim Swanson

A must read report on the differences between permissioned and permissionless ledgers, of which I was a proud but minor contributor. You can also see a nice review of the article’s findings in this American Banker story. I asked Tim for a “Weekend Read Exclusive” quote on his report and the key highlights:

Distributed ledgers could provide innovative solutions to the clearing and settlement space. Bitcoin and cryptocurrency are all about censorship-resistance transactions. In contrast, distributed ledgers/consensus-as-a-service are instead about fast and secure updating of property titles and securities interests. This may sound mundane but could radically change things by disintermediating certain players (such as clearing houses) while delivering to regulators the benefits of increased transparency and mitigation of systemic risks. This consensus-as-a-service could also deliver cost savings via automation, eliminating some human intervention such as those in back office processes.

I think Richard Brown summarizes the idea well in three words: “replicated, shared ledger.” In a recent email he said, “it’s not a “blockchain” that gives Ripple, Hyperledger, Clearmatics or the rest their value from what I can see… it’s the fact that multiple mutually-untrusting parties can come to agreement about some shared state/facts/logic — thanks to having their own copies of some state, which a “system” guarantees to keep in sync for them.”

2. Banks and the Blockchain (cont.)

Following on from last week’s announcement from UBS, we have another WSJ story of bank experimentation, with BNY Mellon kicking the tires on the Bitcoin blockchain:

Despite the potential risk to their businesses, banks are intrigued by bitcoin’s underlying blockchain technology [snip] Mr. Kumar says that he is curious how the software can be used to make financial transactions more efficient

Perhaps even more shockingly, JPM CEO Jamie Dimon dares utter the “b” word in his recent letter to shareholders. A review of the article can be found here, but the letter itself is an interesting read (from Page 29):

You all have read about Bitcoin, merchants building their own networks, PayPal and PayPal look-alikes. Payments are a critical business for us – and we are quite good at it. But there is much for us to learn in terms of real-time systems, better encryption techniques, and reduction of costs and “pain points” for customers.

Some payments systems, particularly the ACH system controlled by NACHA, cannot function in real time and, worse, are continuously misused by free riders on the system.

The always interesting Dave Birch has an interesting review on all the blockchain love, balancing the hype with the promise:

There is an ongoing discussion and evolution of serious thought around what the distributed ledger can be used for, whether proof-of-work or proof-of-stake scales best and whether blockchain or consensus protocols are the best decentralised option. All I will say here is that in our work with clients (large financial institutions) on the topic, currency is probably the least interesting use of the ledger that gets discussed

What is driving all this interest? The growing fear that the age of asymmetric information (or access) is coming to a close. This development is examined in detail in this excellent article by Tyler Cowen and Alex Tabarrok, which is worth a read in full, even if it is just for their comparison of Tinder to third party escrow!

3. Stellar Consensus Protocol released

Stanford professor and Stellar Chief Scientist David Mazieres released his white paper on the revamped Stellar Consensus Protocol (nice TL;DR article here). This new approach called “federated byzantine agreement” claims to overcome the flaw found in the Stellar/Ripple consensus last December while also enabling network scaling. Not many have gotten their head around this federated trust model, including your humble author, so we will leave the debates for now to the more egg headed among us.

The Weekend Read: April 4

It was just your normal bipolar week in the virtual currency world, as comically corrupt DEA agents and sketchy CEOs vied for the headlines against yet more positive signals from Wall Street.

1. Banks and the Blockchain

The week opened with the WSJ discussing the announcement of former NYSE CEO Duncan Niederauer joining Tera Exchange as an advisor, adding to the recent run of Wall Street veterans aligning themselves with virtual currencies. Banks continue to be excited and/or worried about the threat of the move to digital banking, with Barclays CEO Anthony Jenkins noting the potential disruptive force of banking  services being offered from non-banks.  His quote on the strategy behind the free Pingit service hit the three biggest potential benefits we are exploring with various distributed ledger applications:

We are looking for the ‘triple win’ – removing costs, improving control and enhancing the customer and client experience.

The week ended with UBS announcing the opening of a technology lab dedicated to the exploration of blockchain based protocols in processing financial transactions. Once again, their stated goal is identifying gains in efficiency and cost. Which makes sense when reading this post from JDX Consulting, claiming that Dodd Frank compliance costs the eight largest banks $34 billion annually, along with 60.7 paperwork burden hours (incidentally, “paperwork burden hours” is on a short list for one of the most soul-crushing phrases I have ever heard).

2. DEA Cray Cray

My favorite roundup of the bumbling shenanigans of DEA agent Carl Mark Force IV (incredible name) and Secret Service agent Shawn Bridges was Fusion’s story 5 other insane things a corrupt DEA agent did while allegedly stealing Bitcoin from Silk Road:

The complaint is an astonishing, and frankly amusing, tale of two bumbling agents who seemed to think that virtual currencies were confounding enough to the government that it would never figure out what they were up to. Force allegedly messed up in many ways, including signing his real name, “Carl,” to an unencrypted email from one of his monikers, “French Maid.” According to the government, Force blackmailed a suspect he was investigating, stole nearly a million dollars worth of bitcoin, and sold information about the investigation to Silk Road operator Dread Pirate Roberts for his own personal gain. That’s all pretty bad.

3. R3 Advisor Corner: Richard Gendal Brown Bitcoin As Smart Contract Platform

[In my talk] I observed that these two worlds also differ in one other respect: the Bitcoin-like systems could be disruptive to existing institutions if they gained widespread adoption, whereas Ripple-like systems seem, to me, to be far more closely aligned to how things work today and are, perhaps, a source of incremental innovation.

If this observation is correct, then firms looking at this space probably need to assess the technologies through different lenses. The question for banks for Ripple-like systems is: “how could we use this to reduce cost or improve our operations” whereas the question for Bitcoin-like systems is: “how would we respond if this technology gained widespread adoption?”

And to answer the last question, one must be sure to really understand what the system under analysis really is!

For me, it is a mistake to think about Bitcoin solely as a currency. Because the Bitcoin currency system is a masterclass in mirage: underneath the hood, it’s a fascinating smart contract platform.

4. Align Commerce Launches Public Beta of International Payments Platform

[Disclosure: this is a shameless plug, as I am an investor in Align]

Congrats to Marwan and team for this milestone. And I continue to like their approach in keeping the blockchain where it should be: behind the scenes:

“The key is that there are significant advantages for the businesses using the blockchain in terms of savings in time and money,” Forzley explained. “In addition, there is no change of behavior required. The blockchain is used behind the scene as a rail that moves fiat to fiat between two parties.”

5. IBM all in on IoT

Interesting overview of IBM’s Internet of Things strategy from Fortune, with the headline that they plan to invest $3 billion over the next four years in building out the IBM business unit. Too bad we have already ruined the Internet of Things


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…