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Todd McDonald

The Weekend Read: Jan 10

Welcome to 2016, which has already proved itself to be an odd duck: market meltdowns, Kim Jong-Strangelove and Sean Penn as an accidental undercover agent...and we are only 10 days in!

Secret Agent Penn infiltrating the El Chapo stronghold

Secret Agent Penn infiltrating the El Chapo stronghold

1. Link Catch-up: 2016 Predictions

Four articles caught my eye when wading thru the flurry of year end/starting prediction pieces. First, Euromoney's poll of 151 financial actors found that "more than half think that [blockchain] will transform banking fundamentally." Second, Andrew Keys of Consensys gives 16 blockchain predictions in this Medium post. While there is inevitable book-talking in the post, on balance I sympathize with a lot of the predictions. Third, the Deloitte blockchain team lays out their 2016 predictions, centered around three themes: (1) Leave the labs, (2) Age of consortiums, alliances and governance and (3) Next-gen platforms. Last, professional tweeter Preston Byrne of Eris penned my favorite prognosto-thinkpiece in his CoinDesk article 4 Hype-Free Predictions for Private Blockchains in 2016:

Where 2015 was the year everyone talked about blockchain, 2016 is going to be the year everyone builds on it.
There’s a lot of experimentation, improvement and optimisation left to do. In my personal opinion, we’re two budget cycles away from the first production systems in finance, and I agree with Chris Skinner, chair of the Financial Services Club, that we’re probably 10 years away from mainstream use. [snip] What this means for any financial institution or other business looking to use the tech is that the ball is entirely in your court. It’s cheap as chips to get started and there’s much to be learned, so there’s simply no excuse not to allocate budget and let your developers loose on this for a year – especially considering that your competitors already are.

2. Blockchain in the Developing World

Vice has a lengthy but important run down on how Bitcoin has accidentally enabled those who see Africa as "a playground for Western adventurers" in The Western Myth of Bitcoin in Kenya:

Africa presents real opportunities for growth in digital currency, but top-down narratives may not be the best way to find these opportunities. It fact, it’s a good way to create a bubble. People on the ground in Africa are busy working to adapt the promise of digital currencies to their own needs, on their own timelines and without outside direction by the ideas of well-meaning Westerners.

One thing that slipped my attention last year was the Reserve Bank of India's comments on the possible benefits of blockchain tech. For the relevant section, please see this link:

Regulators and authorities need to keep pace with developments as many of the world’s largest banks are said to be supporting a joint effort for setting up of ‘private blockchain’ and building an industry-wide platform for standardising the use of the technology, which has the potential to transform the functioning of the back offices of banks, increase the speed and cost efficiency in payment systems and trade finance.

3. Blockchain: Hope & Hype

The well-known legal/political activist and erstwhile Presidential candidate Lawrence Lessig spoke at last month's Sydney Blockchain Workshop. The video of his full talk can be found here. If you prefer it in tweetable form, click this link. His money quote can be found in this article when he states that blockchain is "the most important innovation in fundamental architecture since the tubes of the internet were first developed"

William Mougayar, the Flava Flav hype man of blockchain, stayed busy over the holidays with multiple postings, including a many-slided deck on the blockchain space. He followed this up with a one-two punch on blockchain innovation within banks: Blockchain Inside Regulations Is NOT Innovation and Why I’m Being Tough on the Banks Re: Blockchain

It is a lot easier to start innovating out of the regulatory boxes, both figuratively and explicitly. Some banks are starting to doing it.
Simon Taylor, head of the blockchain innovation group at Barclays and someone whose views I respect, summed it up well by leaving a comment on my previous post. He said: “I don’t disagree the best use cases will be outside regulated financial services. Much like the best users of cloud and big data are not the incumbent blue chip organisations. Still their curiosity is valuable for funding and driving forward the entire space.” I very much agree with that point, which is why I have hope some banks will contribute to the innovation potential of the blockchain in significant ways, as they mature their understanding and experiences with this new technology.

An indirect yet interesting counterpoint can be found in the American Banker piece Does Nature Want to Evolve a Bank?

The cycle of unbundling and rebundling is driven by regulation at least as much as by market forces. Nonbanks prosper in areas where banks cannot compete, often because regulations prevent the banks from doing so. "Regulation is one of those facts you have to deal with, just like in nature you have to deal with the fact that there's a mountain range there or a desert," says [Lowell L.] Bryan.

Finally, Dave Hudson's end of year meditation on the true meaning of the word blockchain ends with a very impressive passage that would serve well as a rallying cry for 2016:

We have looked at what a blockchain might or might not be, and perhaps seen some hints of what it might enable. The technology that underpins Bitcoin can be used to build many things, and Bitcoin's legacy should not just be Bitcoin itself, but that is has shown the viability of something far more fundamental. The debate over what constitutes a blockchain won't end here, but we need to move the discussion forward and we need to resist the urge to allow it be just another marketing buzzword.
To make that happen we need both clear terminology, and well reasoned usage. We need to avoid conflating many different ideas, and we need technology claims to be realistic and achievable. If we fail then, eventually, the term blockchain will be meaningless and have to be replaced. This seems like the wrong outcome. If we succeed then the idea of a blockchain will not be the end of the story. Instead it will take its place as a layer upon which better and ever-more useful systems can be built.

Happy New Year to all.

The Weekend Read (Year in Review): Dec 20

Gratuitous Star Wars reference

Gratuitous Star Wars reference

1. Blockchain Collaboration: Open Source and more

The Linux Foundation this week announced a collaborative open source effort focused on delivering an enterprise grade blockchain base layer fit for purpose for business. We at R3 are pleased to participate, as both a founding member and key voice in the formation group, as this Linux-led collaboration fits well within our wider open source strategy.

McKinsey this week released a report entitled Beyond the hype: Blockchains in capital markets

Distributed ledgers, or blockchains, have the potential to dramatically reshape the capital markets industry, with significant impact on business models, reductions in risk and savings of cost and capital.

The full report can be requested here. The main take away was that the potential for shared ledgers will only be unlocked when they are shared widely "through cooperation among market participants, regulators and technologists." To that end, we have announced 12 additional banks to our group and our intention to expand our engagement to other financial markets sectors.

2. (Some) Weekend Read Highlights from 2015

As this will be our final post of 2015, I decided to take a quick look back at some of the favorite articles that we shared in our (mostly) weekly postings. The review itself reminded me once again how quickly things move and, honestly, how little we know collectively on where it all will end up. Enjoy the below, have a great holiday and thanks for reading. -Todd

General Blockchain Articles

Fedcoin et al.

Other Required Readings

The Weekend Read: Dec 12

1. Satoshi

The big headline this week was the near simultaneous discovery of the man (or men) behind the Satoshi Nakamoto alias. Both Wired and Gizmodo published exposes that included a trove of strong evidence that Craig Wright is Satoshi.

Except it turns out that he probably isn't. For debunking and rebuttals, see here and here and here and here. Or just fire up the Twitter and search there. Or you can listen to "Satoshi" himself, channeling Spartacus.

Some folks question why we care or find all this interesting. Really? Is there a more compelling narrative structure for our lizard brains than having a creation myth coupled with a whodunit? In fact, it was this Oct 2011 New Yorker article that first got me interested in Bitcoin and all that comes with it. (Although I read it some time in 2012 after finding it in a deep pile of New Yorkers at my in-law's house. Only sociopaths can keep up to date with New Yorker and Economist issues!)

2. Blockchain Love in the Time of Hype Cycle

The indefatigable William Mougayar has updated his Blockchain-for-financial-services company lumascape, finding an extra 76 (!) companies to add to his chart:

A gold rush in infographic form...and a reminder to keep some healthy skepticism as we navigate (hopefully) from hype to production. This somewhat older posting strikes a good balance between the risk of excitement turning into empty buzzwords if blockchain doesn't find that product-market fit: "the database is not the point (even if developers find decentralization cool). The applications are." In the full skeptic corner, Tyler Cowen riffs on the recent FT article on blockchain, "sticking with" his prediction that no investment bank will implement a "meaningful" blockchain any time soon. Even our own Tim Swanson got into the act, with one of the best pull quotes of 2015 in the above FT article:

Blockchain is a bit like gluten. Everyone is talking about it but no one knows what it is in great detail.

...and finally

A reminder that we are hiring. For some interview tips to get the proper attention of the R3 team, please study this training film. Good luck!

The Weekend Read: Dec 5

Schematic of private ledger systems (as seen by r/bitcoin)

Schematic of private ledger systems (as seen by r/bitcoin)

1. Systemically Important Ledger Systems?

A recent speech by CFTC Commissioner Giancarlo includes an excellent four paragraph summary on the potential benefits to market structure from the application of shared ledgers; namely, the potential to facilitate the currently mutually exclusive benefits of reduced systemic risk and reduced burden of regulatory compliance:

The 20th century underpinnings of the current “closed ledger” financial system are inefficient and unstable. At present, centralized third parties authenticate financial information in generally three-day settlement timeframes that add undue risk, cost and volatility to the marketplace. The 2008 financial crisis revealed that a portion of the recordkeeping infrastructure of the multi-trillion dollar swaps market was recorded on handwritten tickets faxed nightly to the back offices of market counterparties.
Distributed open ledgers have the potential to revolutionize modern financial ecosystems. Unlike current settlement processes, distributed ledgers use open, decentralized, consensus-based authentication protocols. They allow people “who have no particular confidence in each other [to] collaborate without having to go through a neutral central authority.”

This theme of potential systemic benefits via the application of this technology is one that we continue to explore in our work and design. For another interesting take on mapping potential benefits, see William Mougayar's handy mind map here.

2. Banks and Blockchains

Goldman Sachs made the headlines twice this week. First, their "Emerging Theme Radar" featured a report on how "the Blockchain [is] ready to take center stage."

It [blockchain] has the potential to redefine transactions and the back office of a multitude of different industries. From banking and payments to notaries to voting systems to vehicle registrations to wire fees to gun checks to academic records to trade settlement to cataloguing ownership of works of art, a distributed shared ledger has the potential to make interactions quicker, less-expensive and safer.

The bigger headline was the report of a filed GS patent for "SETLcoin", a process for security settlement via cryptocurrency which closely resembles other colored coin approaches. This filing follows the lead of earlier filings from JP Morgan and Bank of America.

Deutsche Bank was also in the news, announcing the success of a proof-of-concept demonstrating the issuance of a corporate bond onto a blockchain (echoing earlier work done by UBS). The iteration and experimentation is an important step in the adoption curve of this technology, yet it is not without its (many) bitcoin-based detractors. As an antidote to that, Antony Lewis lays out a very well written overview (with some handy definitions) of internal blockchains, and flips around the usual Reddit reply of "why!!?!?!" to "why not?"

The Weekend Read: Nov 28

In honor of our recent Thanksgiving feast, here are your weekly links, dinner-course style.

1. Veggies

Just as you can;t skip right to dessert, we can't go right to the click-bait and Reddit threads...best to start by eating our vegetables. The Bank for International Settlements (BIS) released a paper (via the Committee on Payments and Market Infrastructures) on digital currencies earlier this week. The report is an excellent overview of the implications of digital currency to central banks and also highlights the promise of distributed ledger tech applied across financial markets:

Impact on financial market infrastructures:
The distributed ledger technology underlying many digital currency schemes could have a much broader application beyond payments. Decentralised mechanisms that exchange value based on a distributed ledger technology alter the basic setup of aggregation and netting on which many FMIs rely. In particular, it is conceivable that distributed ledgers could have an impact on the pledging of collateral or on the registration of shares, bonds, derivatives trades and other assets. The use of distributed ledgers may also induce changes in trading, clearing and settlement as they could foster disintermediation of traditional service providers in various markets and infrastructures. These changes may result in a potential impact on FMIs beyond retail payment systems, such as large-value payment systems, central securities depositories, securities settlement systems or trade repositories. The development of “smart” contracts based on distributed ledger technology capable of executing payments under certain conditions may create the possibility of making variation margin payments on an individual contract basis. This could significantly alter how bilateral margining and clearing works today, with net positions and collateral pools.

The report also includes some helpful diagrams on the taxonomy of money and the current regulatory action. Worth a read in full.

Our other healthful serving comes from the Swift Institute, as they published a report on how cryptocurrencies may (or may not) fit into the European payment framework. No pull quotes from this one, as I haven't read it yet...volunteers welcome.

2. Selection of Sides

Everyone knows that the turkey main course is an afterthought. Here we serve up three "sides" from three startups.

First, Chain.com shared the first in a planned series of posts on The Magic of The Blockchain. The key point of the post is that "the record of trades is the money," and for the first time in the history of money, that record-keeping vehicle can scale beyond the borders of a small or trusted ecosystem:

The blockchain is a ledger that is immutable, distributed, and cryptographically secure...When you commit to the idea that the record of trades is the money, there is no separate clearing or settlement step needed. The trade is its own settlement.

Next, Adam Krellenstein of Symbiont gives a wide ranging interview to the IB Times about his company's approach to smart contracts and financial markets. He also takes an opportunity to throw some shade on Ethereum:

Krellenstein said of Ethereum: "It's a very interesting project; they've accomplished a lot. But it's not well suited for permissioned ledgers and financial applications in general. Writing smart contracts in Solidity and then running them on the Ethereum blockchain is not ideal by a long shot for the kind of markets that we are targeting. For that you want a smart contract system more like ours, and you want it to be ledger agnostic, and you want a more stable, secure codebase."

Finally, oft-cited Gideon Greenspan logs another well written entry with Avoiding the pointless blockchain project:

Blockchains are overhyped. There, I said it. From Sibos to Money20/20 to cover stories of The Economist andEuromoney, everyone seems to be climbing aboard the blockchain wagon...You see, a large proportion of these incoming projects have nothing to do with blockchains at all. Here’s how it plays out. Big company hears that blockchains are the next big thing. Big company finds some people internally who are interested in the subject. Big company gives them a budget and tells them to go do something blockchainy. Soon enough they come knocking on our door, waving dollar bills, asking us to help them think up a use case. Say what now?
As for those who do have a project in mind, what’s the problem? In many cases, the project can be implemented perfectly well using a regular relational database. You know, big iron behemoths like Oracle and SQL Server, or for the more open-minded, MySQL and Postgres. So let me start by setting things straight: If your requirements are fulfilled by today’s relational databases, you’d be insane to use a blockchain.

In Greenspan's view, blockchains "make sense for databases that are shared by multiple writers who don’t entirely trust each other, and who modify that database directly [and] where there is some interaction [ed note: dependence?] between the transactions created by these writers."

3. Dessert

Finally we have made it to the good bits: videos and info-graphics. Let's Talk Payments lays out an updated Blockchain Activity of FIs & Banks:

We end with a palate-cleansing video on what 60 Minutes dubs "The Future of Money": an examination of M-Pesa mobile money in Kenya. Hope you enjoy.

Now for the best part of Thanksgiving day: a nap.

The Weekend Read: Nov 22

1. Identity

I have just returned from a week in London, where I had the pleasure of participating in the KPMG/HSBC Business Innovation Summit. I also got the chance to spend time with the newer members of the R3 technology team. Yet the main topic of my trip turned out to be identity. Perhaps a reflective mood was brought on by my airplane reading (Sapiens by Yuval Noah Harari, highly recommended), but it struck me that the struggle with identity, both analog and digital, has been a key driver behind recent events. The conflict of both state and religious identity as reflected in the recent horrible events in Paris. The nascent 'tribal' identity in the ham-handed student protests on US college campuses. The fight over one's rights to self-sovereign digital identity. We will explore this theme a lot more in the months ahead, both in defining the problem space and in looking for the right partners to experiment with in the realm of financial institution identity.

2. The Week's Links

The bearded bard of blockchain at Barclays, Simon Taylor, does my job for me with his post 10 Things You Should Know About Blockchains:

Transformational ROI from blockchain for corporates will take a good number of years. Smaller bits of ROI can be achieved tomorrow if you have the right buy in and strategy and partners.
There are strategies for:
a) Educating a large organisation
b) Delivering quick wins
c) Building a blockchain strategy
But they require understanding it first.

Nice to see that three of the four folks "who can make sense of this stuff" work with us.

Tim Swanson released his latest research paper on Watermarked Tokens (aka Colored Coins) this week. The paper can be downloaded here or here. For the TL;DR, IBTimes gives a quick overview of the main points, along with some interesting observations from a few of the earliest adopters of colored coins. The response from Flavien Charlon (inventor of Open Assets, featured in Nasdaq's Linq platform) was especially interesting:

As the interest for Blockchain technology in the finance sector grew, and as we started to talk to a number of financial institutions and corporations about their use cases for Blockchain technology, we realised that watermarking systems were often not a good fit for what they were trying to do. This is why we started to build Openchain early 2015. Openchain solves the same problems as watermarking protocols, but with a much lighter use of the Bitcoin Blockchain. This way we can achieve a much higher scale, and handle compliance in a much better way. I don't think Coinprism and R3 are the only two companies in the space to have realised this. There has been a noticeable turning point in the industry around mid-2015, and more companies are now building permissioned ledgers.

3. Ethereum: DevCon1 continued

This week saw a few additional features and stories related to the previous week's DevCon1. William Mougayar highlights bank enthusiasm for the Ethereum protocol:

Mougayar said banks know their business better than anybody from the outside and it is therefore their own responsibility to understand what the blockchain does. "It's easier for them to understand the blockchain than for a blockchain person to understand their business." He added: "The onus is on them to do these small projects so they can build the expertise and they can come up with insights."

The article attempts to paint the Ethereum experimentation as a potential "contentious issue" with two "camps" emerging: Ethereum blue sky experimenting vs R3 standards building on top of legacy systems. Yet it is very safe to say that our current and future work covers both of these "camps." A good illustration of this is another IBTimes article featuring, among others, R3 partners Barclays and UBS. The following quote from Lee Braine of Barclays captures the benefit of this dual approach:

You mentioned one particular avenue of experimentation. If we look at multiple avenues, then we can actually see them cross-pollinating. Effectively you have experimentation: you have Ethereum and other technologies that we can play with, we can experiment, and we can explore the functional and non-functional behaviours.
But in parallel with that, we also need a structured design method: architecture, design, and engineering. This is a common theme that we have been encountering over the past six months or so, that it's necessary to interplay both of these avenues so that the two can learn from each other.

The Weekend Read: Nov 15

1. You Say Bitcoin, I Say Blockchain

Circle CEO Jeremy Allaire came out swinging this week with a piece in Recode called Say the Big, Bad ‘B’ Word: Bitcoin and the Internet of Money:

It has been a bit amusing watching as intellectuals and “thought leaders,” financial industry executives, technologists and even the media itself have fallen in love with “the blockchain,” “distributed ledgers” and other phrases to talk about the innovation happening in how trust and value exchange work on the Internet.
Notably absent from this high-minded and purportedly insightful thinking is reference to bitcoin, the actual open platform that distributes trust and provides a highly secure ledger to exchange value around the world.
If bitcoin is referenced, it’s dismissively, as if smart people are in the know that bitcoin (the digital asset) isn’t necessary or important to fueling this global network of distributed and decentralized trust. For the most part, it’s just a cop-out and intellectual laziness; I have yet to meet anyone who shares these thoughts who actually has any idea how any of the technology actually works. [ed. note: we have never met!]

Allaire goes on to build his argument on top of the Internet analogy, likening the Bitcoin Blockchain and the applications on top to the Internet protocol suite: "Soon, we’ll be able to share value globally, and soon thereafter, we’ll start to layer in other forms of value — property, securities, insurance — and then later we’ll build in smart rules and business logic that can run on this global secure network in a trustworthy manner, and we’ll all be part of constructing new rules of global commercial and legal governance."

This article prompted our own Tim Swanson to write a response featured in the IB Times called Blockchain, Bitcoin and the rise of banks as shared ledger providers. Tim begins by reviewing the basis of the "Bitcoin as Internet" analogy:

Topographically the internet is a patchwork of disparate networks — such as private internet service providers (ISPs) and content delivery networks (CDNs) — that connect to one another. There is no single, monolithic "public internet."

Tim goes on to introduce a new concept: Banks as "Shared Ledger Providers"

The Bitcoin blockchain provides a probabilistic solution to a specific customer base involving just one asset.[8] It was not designed to provide specific functions and settlement finality for the cornucopia of use-cases and registered assets managed by regulated financial institutions. It could be argued that its design assumptions were in fact the exact opposite.
If the G3F narrative germinates, what is an end result in a world where cryptographic ledgers-as-a-service, notaries-as-a-service and timestamping-as-a-service actually exist through a shared financial fabric?
Eventually banks could automate portions of their middle and back offices with what Brown describes as a "global logical ledger." One that uses elements of the "blockchain" toolkit and dramatically reduces the reconciliation process.
Perhaps in this process they would become Shared Ledger Providers (SLPs) for end users, much like ISPs have acted as on-ramp and off-ramp gateways to other private networks. And from this firm non-probabilistic foundation, open innovation can take root, enabling the creation of new asset classes and utility for all stakeholders.

2. Central Bank Digital Currency

An HSBC report this week takes an interesting angle on the concept of Central Bank issued digital currency on a blockchain: the ability to truly target and track stimulative monetary policy:

HSBC's basic argument is that up until now, trying to ease the economy through interest rates has been a central bank's main method. At least that way, banks and borrowers provide a sort of control over the policies. The central bank encourages private credit creation, or inside money, backed by debt. 
There are a couple of problems with that. Firstly, you can't guarantee how much money will actually be supplied to the real economy. That's ultimately the choice of the banks. Secondly, the creation of debt is an issue — too much of that can slow down growth in itself, especially if it's created for unproductive ventures. 
But [blockchain-issued] "helicopter money" would be outside money — injecting money directly from a central bank, and not representing a debt held somewhere else in the private sector.

In short: "a modernised monetary transmission system, based on real-time big data analysis through Blockchain, could allow the government to balance the economy more efficiently and systematically."

Mr. Fedcoin David Andolfatto had an excellent post (as usual) this week which follows on from the above report, seeing how central banks could (should?) be inspired by Bitcoin. Andolfatto gives a tremendous overview of the pros and cons of Bitcoin itself, and ends with a persuasive recommendation for how central banks can adopt this innovation:

My own recommendation is for central banks to consider offering digital money services (possibly even a cryptocurrency) at the retail and wholesale level. There is no reason why, in principle, a central bank could not offer online accounts, the same way the U.S. Treasury presently does (www.treasurydirect.gov). These accounts would obviously not have to be insured. They would provide firms with a safe place to manage their cash without resorting to the banking or shadow banking sector. They would give monetary policy an additional instrument--the ability to pay interest on low-denomination money (possibly at a negative rate). To the extent paper money is displaced, there would be large cost savings as well.
It's hard (for me) to see what the downsides are in having a central bank supply digital money. Critics might argue that it leaves people exposed to potentially poor monetary policy. This may be true and, for these people, currency substitutes should be available (including Bitcoin). In terms of payments, critics might argue that central bank accounts will be permissioned accounts, requiring the release of personal information, application efforts, that KYC restrictions will apply (so not censorship resistant) and so on. To address these concerns, a central bank could go one step further and issue a cryptocurrency (Fedcoin) offered at a fixed exchange rate where payments are cleared using a Bitcoin-inspired anonymous communal consensus algorithm. I don't think we can expect anything like this in the near future, but it is technologically possible. Of course, people will complain that Fedcoin will inspire illicit trade, etc. But again, the same is true of regular central bank issued cash.

3. Quick Links

We finish up this week with a houseguest-inspired list of links (inspired as in my houseguests have distracted your editorial board...). Enjoy your Sunday:

The Weekend Read: Nov 7

1. Riding the Blockchain Hype Cycle

CB Insights provides a nice summary of the activity of financial services firms diving into the blockchain space via strategic investment:

The above chart and article sacrifices nuance for brevity, yet the graphic clearly shows the names bunched together over the last 6 months, which effectively tells the story of the blockchain hype cycle fully kicking into gear.

Both Euromoney and the FT try to highlight the value driving the hype in two articles this week. Getting to grips with blockchain from Euromoney is a lengthy but excellent review of the reasons why banks are getting excited and getting involved, and features quotes from our own David Rutter as well as seven of our partner banks:

This image will haunt your dreams...

This image will haunt your dreams...

[Simon] Taylor adds: “Banks in trade finance essentially intermediate a lot of this operational risk for their customers. But think if there was an immutable, digital ledger where the port authority could register, using an encrypted signature, that goods had indeed been delivered and had been loaded into transport, and the importer could see this in real time. That digital ledger would take out a lot of the operational risk exposure.”
Taylor says it’s a mistake to think of the blockchain just as a payments technology. “Yes, you can do payments on it, but it is a technology that can be applied to so much more. Right now, the banks have reached consensus that the distributed ledger is a good thing and we’re all looking at internal uses, at uses between a few partners, at uses in larger consortia and even on open platforms. But we’re still in the chaos period, which is the one that forges creativity. The definition of best-use cases varies between banks depending on their starting points. What might be a great help for one bank might badly hurt another. So it won’t be clear for some time yet what commercial applications will emerge. The most interesting and valuable use cases probably haven’t even been thought up yet.”

Not to be out-long-readed, the FT weighs in with Technology: Banks seek the key to blockchain:

Yet almost every big financial services institution has now overcome that initial suspicion. And the technology has swung from being a weapon wielded against the banks to being heralded as their ultimate back-office makeover, a bitter blow to the libertarians who conceived the idea of the blockchain to circumvent the global banking system.
“Suits are replacing hoodies and ripped jeans at blockchain conferences,” says Mark Buitenhek, head of transaction services at Dutch bank ING, which has hired a team of specialists to examine ways of using the technology to increase speed and cut costs in payments and trade finance.
Experiments, initially conducted in secret, have begun in earnest over the past year.

2. Bitcoin: To the MOON! (and back)

BTC has enjoyed a strong few weeks, as the spot price emerged from an extended period of subdued volatility to rip higher on the back of, well who knows. Insert your 'story chasing price' explanation here. Some are pointing to the positive news cycle (see above), Redditors revert to the self-evident intrinsic value that the sheeple just don't get while some posit that this run is due to a Russian-Chinese ponzi scheme. Gotta love unregulated markets with a small float and limited distribution!

Chart from TradeBlock

Chart from TradeBlock

As you can see from the chart above, BTC firmly rejected the $500 price level. If price can hold above $320 the rally may have legs. There are a few Debbie Downers though who are not seeing any bullish chart patterns. Jamie Dimon expressed his well known skepticism in a recent Fortune event:

“Virtual currency, where it’s called a bitcoin vs. a U.S. dollar, that’s going to be stopped,” said Dimon. “No government will ever support a virtual currency that goes around borders and doesn’t have the same controls. It’s not going to happen.”

Dimon goes on to echo the "Blockchain good, Bitcoin bad" argument that drives early Bitcoin adopters up a wall (see last week's read for an example). IMF Chief Lagarde piled on later in the week, saying "If those new technologies and as long as those new technologies are going to abuse, take advantage of, the yield for anonymity, I think the banking industry has quite a few good days ahead of it."

3. Tim Swanson in American Banker

Speaking of driving bitcoiners up a wall, R3's Tim Swanson penned an article for American Banker this week entitled Explore the Blockchain, Ignore the Bitcoin Maximalists:

But what if institutions could use elements of a blockchain, such as public/private key cryptography to sign transactions and atomically settle registered assets without a third party? What if reconciliation and auditability could be cryptographically proven within the data structure itself, thereby reducing the need for some of the existing back-office services? What if financial institutions could share one common ledger that was specifically designed for their regulated operating environments? A well-designed and built shared ledger could make all that possible. Conceivably, as one report from Santander predicts, up to $20 billion could be saved per year by using some of this non-Bitcoin-specific distributed ledger and blockchain technology. [snip]
It is a truism to state that there are many different types of networks and data structures that provide different types of utility. There is a time, a place and a customer base for pseudonymous cryptocurrency systems. But for now, the global financial services markets demand far more than the Bitcoin blockchain can handle.

Nanok Bie offers a rebuttal in Sorry, R3 – But You Still Don’t Get It:

Now R3 has replied to some of the critique against its offer towards the banking industry to provide them the promise of “the blockchain technology”, without the bitcoins, ignoring the fact that the bitcoins are the Blockchain – and missing the point on how Bitcoin turns energy into security (truth).

I like how the author makes us sound like my Dad ("I found it on "the Google"). I agree with his assertion that censorship-resistant digital cash is an important invention and will be used in ways we have yet seen. Once again, both Tim's point (not R3's, as the author claims) and Nanok's point can be true: Bitcoin is an important innovation and not fit for purpose today for large, regulated financial institutions.

The Halloween Read: Oct 31

Spookiest possible costume for a Bitcoin Halloween party

Spookiest possible costume for a Bitcoin Halloween party

1. Money 20/20 Recap

A very Happy Halloween to all. The 2015 Money 20/20 conference is now in the books after a long 3.5 days of 5,000 concurrent coffee meetings to discuss all things fintech. Highlights of the announcements made at the conference include Nasdaq's official announcement of their private stock on a blockchain platform Linq, Visa's partnership with DocuSign to conduct a car leasing PoC via the Bitcoin blockchain, and Barry Silbert's DCG announcing a funding round that includes MasterCard, CIBC and others. Your author also had the pleasure to debate the currently-everywhere topic of Bitcoin vs blockchain on one of the panels (more on this below).

The best summary of the event turned out to be an article completely unrelated to Money 20/20, yet its theme perfectly captures the existential dance that banks are in with the topic of fintech: Are Banks Destined To Become The Next “Dumb Pipes”?:

The telcos hate the term “dumb pipes” — and for good reason. They are being relegated to the common conduits through which meaningful communications and commerce take place. But telcos won’t go away overnight because there’s still a lot of value in the physical network infrastructure and cell towers they built through decades of investment.
Similarly, “unbundled” banks won’t go away overnight; there’s still a lot of value in the intra-bank money transfer networks and the depository role that banks are uniquely allowed to play in the U.S. economy. However, over time, traditional banks that fail to dramatically reinvent themselves for modern consumers will find themselves playing the role of a simple inbox for depository funds and pipes that move the money to other financial services providers who will increasingly influence consumers’ financial lives.
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2. The Economist: The Trust Machine

My friends and loved ones continue to be puzzled by my new chosen field. Luckily for me, I now have a short, well written article to send to them as a starting point. The Economist makes a cover girl out of blockchain technology, and their Leader article The Trust Machine gives the full Economist treatment to this challenging topic:

The notion of shared public ledgers may not sound revolutionary or sexy. Neither did double-entry book-keeping or joint-stock companies. Yet, like them, the blockchain is an apparently mundane process that has the potential to transform how people and businesses co-operate. Bitcoin fanatics are enthralled by the libertarian ideal of a pure, digital currency beyond the reach of any central bank. The real innovation is not the digital coins themselves, but the trust machine that mints them—and which promises much more besides.

The magazine delves further into the topic with a fine review of many of the companies operating in the space (including R3) in The great chain of being sure about things:

The first industry to adopt such sons of blockchain may well be the one whose failings originally inspired Mr Nakamoto: finance. In recent months there has been a rush of bankerly enthusiasm for private blockchains as a way of keeping tamper-proof ledgers. One of the reasons, irony of ironies, is that this technology born of anti-government libertarianism could make it easier for the banks to comply with regulatory requirements on knowing their customers and anti-money-laundering rules. But there is a deeper appeal.
Industrial historians point out that new powers often become available long before the processes that best use them are developed. When electric motors were first developed they were deployed like the big hulking steam engines that came before them. It took decades for manufacturers to see that lots of decentralised electric motors could reorganise every aspect of the way they made things. In its report on digital currencies, the Bank of England sees something similar afoot in the financial sector. Thanks to cheap computing financial firms have digitised their inner workings; but they have not yet changed their organisations to match. Payment systems are mostly still centralised: transfers are cleared through the central bank. When financial firms do business with each other, the hard work of synchronising their internal ledgers can take several days, which ties up capital and increases risk.
Distributed ledgers that settle transactions in minutes or seconds could go a long way to solving such problems and fulfilling the greater promise of digitised banking. They could also save banks a lot of money: according to Santander, a bank, by 2022 such ledgers could cut the industry’s bills by up to $20 billion a year. Vendors still need to prove that they could deal with the far-higher-than-bitcoin transaction rates that would be involved; but big banks are already pushing for standards to shape the emerging technology. One of them, UBS, has proposed the creation of a standard “settlement coin”. The first order of business for R3 CEV, a blockchain startup in which UBS has invested alongside Goldman Sachs, JPMorgan and 22 other banks, is to develop a standardised architecture for private ledgers.

3. Bitcoin vs Blockchain Debate Goes On (...and on and on and on)

One of the lessons I learned during my time as a trader was that the biggest determinant between being right and wrong was the time scale of your bet/thesis/opinion. It is a lesson that I keep close to mind during the (seemingly) endless debates between the "It's the Bitcoin" and "It's the Ledger" crowds. As mentioned above, the topic came up in our panel earlier this week. My view is that trying to argue either side is pointless, as each one is "a little bit" right AND wrong, and besides why does this have to be an either-or? To quote Jeff Garzik: "The core service of bitcoin is censorship resistance. All else follows from that." Some things need censorship resistance as a design principle, other things most definitely do not.

Erik Voorhees chimes in for the Bitcoin-only crowd with this post, making an argument that the use of blockchain over bitcoin is one of expedience to get by in polite company:

It remains to be seen how long it takes for the financial industry to realize that the true valuable innovation is not the distributed ledger of the blockchain (which has existed in other forms prior), but rather the open platform of financial inclusion with no trusted party or cartel (which has never existed).

Robert Sams extends the theme of bitcoin as great censorship resistant digital cash, but extremely poor security settlement network, in this reprint of an earlier posting:

Nothing in what has been discussed here is meant to take away from the inspired, brilliant solution that Nakamoto implemented for censorship-resistant digital cash. And, furthermore, that design goal is, in my opinion, a worthy one. Society should have digital cash that replicates the same anonymous and permissionless properties that are already enjoyed with physical currency.
But a proof-of-work blockchain is only suitable as a distributed ledger for value that society is prepared to treat as a bearer asset. [snip] Possession (of a private key) is ownership (at least in the anarchic, code-is-law jurisprudence of the bitcoin protocol), regardless of how one came into possession, for there is no way for the blockchain to discriminate among spend transactions of coins obtained through legitimate trade, defrauding a counterpart (e.g., via a double-spend), or theft of someone’s private key.
But the proposition that security interests and other property titles should also be cast in the same bearer asset mould will go nowhere. Few actually want this, and, in any case, few jurisdictions will actually allow it. 

Finally, Pascal Bouvier has another in his series of excellent posts entitled The Case for Open Standards & Open Code with Consensus Computers. He does a much better job than I did on my panel in trying to argue the similar point - a system can be open yet still have (and require) known validators:

Over and above potential savings, the issue of undue influence is also close to the hearts of all capital markets participants. Undue influence means MARKET POWER. No bank, no liquidity provider, no buy side firm will want to cede power to a technology provider. By nature and definition a CC is not run by a single firm for pre and post trade activity, it runs cross-market as a system, distributing a CC among many participants. Were a tech firm have monopoly over foundational blocks of code, this would create a true monopolistic situation and market power would shift to that tech firm. I doubt this will happen.

Who knows who will be right, or perhaps in what order everyone will be right? Or, frankly, if we are even arguing over the right blockchain?

 

The Weekend Read: Oct 25

The original colored coins

The original colored coins

Greetings from Las Vegas, the world’s capital for tokenizing your fiat currency, where the Money 20/20 marathon is about to begin. Please stop by my panel on Tuesday afternoon or drop me a line to connect if you are in town.

1. Blockchain Research

Robin Winkler of DB Research has an excellent and brief piece on the potential for central banks to borrow the innovation of virtual currency blockchains to deliver their own extremely efficient (and fungible) government-backed digital currency. This is one of the best things I have read in a while, so I would urge you to read it in full (only 2 pages). The author clearly explains the benefits for central banks and the challenges for commercial banks in this new paradigm:

If the Fedcoin took off, it would appear to be the death knell for credit card providers and deposit-taking institutions. Banks would have two options to avoid economic obsolescence. The first would be to transition toward a pure investment banking strategy, financed entirely via equity and long-term debt raised from savers aware of the risk they were taking. Indeed, this is the model favoured by neo-classical economists harking back to the ideas of Irving Fisher.
A second option would be to attract Fedcoin deposits by providing services such as verification for know-your-customer and anti-money-laundering rules or secure digital wallets or even just the most user-friendly apps. Banks could compete for Fedcoin deposits by issuing their own blockchains, at par with Fedcoin. Deutsche Bank, for example, could issue dbCoin, which customers use to settle transactions with any counterparty, much like a digital chequebook. Banks would guarantee convertibility of their digital currencies into Fedcoin, and central banks offer clearing and settlement facilities.
This brings us full circle back to today’s system, but with a couple of important exceptions. For starters, the difference between the monetary base and bank-created, branded money would be considerably clearer. More important, perhaps, the technological obsolescence of deposit-taking institutions engenders greater economic competitiveness. The banking sector would no longer be rewarded for processing payments or managing current accounts. It would have to compete for deposits by offering better services and ultimately greater responsibility for the money it creates.

I am sure the thought of central banks “stealing” Satoshi’s innovation makes a few anarcho-libertarian heads explode, but I would argue that such a development would deliver more to the “anti-bankster” crowd than any (extremely slim) hope of Bitcoin becoming a global reserve currency, as the quote above illustrates.

Next, two VC’s have their usual unique take on the potential for blockchains and ledgers. First up, Fred Wilson posits a thought experiment that the advent of blockchains could end the hegemony of the “winner take all” internet economy:

Lately, we’ve been wondering if there is an end to this pattern on the Internet and mobile. We think it is possible that an open data platform, in which users ultimately control their data and the networks they choose to participate in, could be the thing that undoes this pattern of winner takes most. The blockchain is the closest thing to emerge that looks something like that. But the blockchain hasn’t (yet?) shown that it can produce something important like Google’s search or Facebook’s social graph and until it does, we are just waiting.

The oft-cited Pascal Bouvier has a post describing the mental model he and Robert Sams have discussed around smart contract + ledger stacks and introduces a new term “consensus computer”:

All distributed ledgers need some form of consensus computation to update the ledger. This ledger updating needs to draw on a turing-complete mechanism in order to encode the business logic that will solve "real" problems. As such, the [Consensus Computer] term shifts the emphasis from ledger state to how that state gets updated which is much more appropriate.

Finally, Bitfury released two sponsored papers by Jeff Garzik that delve into the private vs public ledger debate. Links to the papers here. I will leave further discussion of this to my colleague Tim Swanson, as he has (many!) words to share on the subject.

2. “Blocktech” Company Landscape

William Mougayar provides an update to his Lumascape on ledger-related Fintech startups here while also test driving a new catchall term of “Blocktech” for this collection of companies.

The overview and company segmentation is fantastic, but I could do without the Blocktech term, mainly since this is too prescriptive to the use of blocks and partly since this sounds like the name of a fictional evil conglomerate in the Lego Movie sequel.

The biggest startup headline of the week went to remittance startup Abra, which welcomed American Express to its Series A round:

“As people and businesses transact more globally, there’s a need for more convenient and affordable ways to move money, and we think the blockchain could play an important role in the evolution of money transfer and commerce, especially in emerging markets,” said Harshul Sanghi, American Express Ventures managing partner.

3. Bitcoin Skepticism

The excellent financial journalist and noted Bitcoin troll Felix Salmon gives an overview of his droll Bitcoin skepticism in this interview with Futures Magazine:

Even if the value of bitcoin doesn’t go up with increased use of the blockchain, will a portion of all those startups developing bitcoin blockchain applications succeed? Probably not, says Salmon, because of the open-source nature of the code and the now-crowded nature of the space. “All the big boys are there now, like Goldman Sachs, Morgan Stanley and Citigroup. The credit card companies are all there. These are really big companies with really deep pockets, and they’re all researching the same thing. A huge number of incredibly brilliant people are building on top of this. Pretty much everyone will be able to make your mousetrap.” 

Interestingly, Adam Draper, polar opposite to Mr. Salmon in most things except in their avant garde sartorial tastes, notes in this CoinDesk interview that the word “Bitcoin” has become verboten in pitch meetings:

"We use the word blockchain now. I say bitcoin, and they think that's the worst thing ever. It just feels like they put up a guard. Then, I switch to blockchain and they're very attentive and they're very interested."

The newly formed Blockchain Alliance hopes to help rehabilitate in part the reputation of Bitcoin companies, by embracing the “blockchain” re-branding and engaging more constructively with “The Man” aka US law enforcement:

The government has gotten better at understanding bitcoin and the technology behind it, but the government still can learn from industry insiders, said Jason Brown, assistant to the special agent in charge at the cyberintelligence division of the Secret Service’s Investigations Division. Having an open dialogue between law enforcement and the people who are developing the technology is good for all involved, he said. “It all comes back to what we’re trying to do,” on both sides, he said.

Cue the r/bitcoin crowd collectively losing their #&@*

Enjoy the week!