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

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

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

• The Trust Machine and The great chain of being sure about things by The Economist
• Blockchain in the Investment Bank by Accenture
• BITCOIN: WHAT YOU DIDN'T KNOW BUT ALWAYS WANTED TO ASK by Johann Palychata (BNP Paribas)
• Blockchain for Banks Probably Can't Hurt by Matt Levine

Fedcoin et al.

• Fedcoin: On the Desirability of a Government Cryptocurrency and Bitcoin and central banking by David Andolfatto
• On the idea of a digital currency issued by a central bank by Ken Tindell
• Fedcoin—how banks can survive blockchains by Deutsche Bank

Other Required Readings

• Consensus-as-a-service: a brief report on the emergence of permissioned, distributed ledger systems by Tim Swanson
• A SIMPLE MODEL FOR SMART CONTRACTS by Richard Brown
• On Public and Private Blockchains by Vitalik Buterin
• The Financial Cloud: How The Block Chain Will Change Wall Street by Adam Ludwin vs No, Bitcoin is not the future of securities settlement by Robert Sams
• The Death of Bitcoin by Tony Arcieri
• Building a universal ledger. To blockchain or not to blockchain by Ben Milne
• Blockchains and Banks by David Galbraith

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JOBS AT R3

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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:

• Ethereum DEVCON1 Roundup
• Bitcoin - MMM Ponzi price spike?
• Banking under attack
• And under threat of being Uber-ed

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...

[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

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

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.

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

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!

The Weekend Read: Oct 17

Ed. Note: I will be speaking at a few upcoming events, including the Capco Re-Charting Realities event in NYC on the 22nd and at Money 20/20 in Las Vegas on the 27th. Please stop by and say hello.

Post-event pic at SIBOS blockchain panel

1. SIBOS: NKOTB(chain)

SIBOS Singapore wrapped this week, and one word that attendees could not escape was blockchain. Over 1000 conference-goers attended the first day Innotribe panel New Kids on the Block(chain). Eight panelists (including three R3 partner banks, Barclays, BNY Mellon and UBS) crowded into a set of the "not-too-distant-future" to discuss the promise and potential of blockchains and shared ledgers in financial services:

One of the panelists above, Dan O'Prey, stuck around to collect the first prize Publishers Clearing House-sized check for the Innotribe Startup Challenge for his previous company Hyperledger. For a few other roundups of the event, click here and here.

2. Rebranding, Bit by Bit

R3's Tim Swanson has a very comprehensive roundup of the pervasive trend of rebranding in the Bitcoin startup and investing world, as many groups have conspicuously moved away from featuring the virtual currency in their name or their pitch. We have seen software eat the world, now blockchain eats bitcoin...

One of the more inscrutable pivots has been that of Uphold, née Bitreserve, which now joins the handful of consumer facing "...but with Bitcoin!" startups that have morphed into Venmo wannabes.

3. Startups in the News

Congrats to the teams of Chainalysis, Wave and Syndicated Loan Direct for their announcements at this week's Barclays Techstars NYC demo day, as each inked contracts with the UK bank. Especially happy to see the Wave team overcome their handicap of having your author as a very negligent mentor...

Across the pond, tight-lipped startup SETL announced that their yet-to-be-seen ledger technology has processed over a billion simulated transactions behind closed doors. The announcement was very light on details, so it is unclear if the tech behind this is in-house built or part of their previously announced outsourcing deal with fellow startup Credits.

Blockstream hit the news earlier this week with the first commercially released sidechain dubbed "Liquid" :

It’s one more front being opened in the quest to keep bitcoin alive. While the digital currency remains the only use case of the software to reach any critical mass, and the price has stabilized, the underlying technology has itself this year become the focus. From the startup world to the biggest Wall Street firms, there are numerous efforts under way to build products and services that utilize bitcoin’s underlying technology, while abandoning bitcoin itself. The Blockstream group is an effort to counter that tide.

4. Shared Ledgers FTW

The always insightful Pascal Bouvier continued his bullish exploration of distributed ledgers in this post on the potential complete disruption of capital markets infrastructure:

Another way to describe the above 10 bank example, pre and post distributed ledger, is to say that markets rely on the ability of multiple parties to have the same view of what has happened, what was traded and by whom, who owns what, who owns what to whom. A distributed ledger system can guarantee that these parties share the same view of the world without the combinatorial explosion of reconciliations between siloed systems.

A recent Water Technology panel explored the not-to-be-neglected view of buy side participants on the potential blockchain disruption:

"Everyone is looking at blockchain," [Mike] McGovern [CIO at Brown Brothers Harriman] said. "We're looking at it. We've set aside some funds in our 2016 innovation budget around R&D and working with colleagues on the buy side to think about how it can be applied."

And finally, R3's own David Rutter has an opinion piece in the Tabb Forum entitled Cutting Through the Noise – The Transformative Potential of Distributed Ledger Technology:

By collaborating on research, experimentation, design, and engineering, our aim is to help advance state-of-the-art enterprise-scale shared ledger solutions to meet banking requirements for security, reliability, performance, scalability, and auditability.

The Weekend Read: Oct 11

1. Ripple Announcements

Earlier this week, Ripple Labs made a slew of announcements, including a re-branding from Ripple Labs to just Ripple. The announcements also covered an additional investment from Santander Innoventures, two repackaged licensable products and, most interestingly, an open source Interledger Protocol (ILP). Ripple CTO Stefan Thomas describes it further in this CoinDesk article:

In terms more familiar in the industry, Thomas compared ILP to Blockstream's sidechains project, which is seeking to extend the functionality of the bitcoin network by allowing bitcoin assets to be moved back and forth between altnerate cryptographic ledgers and the public blockchain.

"Interledger is a complement to sidechains," he said. "Sidechains is about how do you create these ledgers, ILP is putting them together. At ILP we're mostly thinking about if you're trying to connect a bitcoin sidechain and a PayPal ledger, how do you get from one place to another."

2. The Road to SIBOS and Money 20/20

[ed. note: I will be participating in Money 20/20 later this month. If you would like to meet up during the conference, please let me know.]

Don't forget to bring your own napkins...

To celebrate the upcoming payments-themed events, enjoy the articles below. Speaking of enjoy, those of you currently in Singapore for SIBOS 2015 should make sure to visit the crispy duck rice man at Marina Food House near Raffles Place, you wont be disappointed!

R3 partner bank BNY Mellon recently released this report entitled Innovation in Payments, which serves as an excellent overview of the broader fintech-related trends in banking. The report goes into some detail about the promise and challenges of using blockchain related tech for improving payment rails:

The speed of fintech-fuelled change in the payments arena means banks need to shake off their reputation as being slow to adapt by implementing swifter technology development cycles and replacing legacy payments systems. The financial services industry already has one of the highest ratios of IT spend as a proportion of revenue, with levels expected to reach US$197 billion in 2015. That said, over three quarters of this is estimated to be in maintenance rather than new services. Banks need to redress this imbalance.

Indeed, digital currency-based solutions and the potential they hold in terms of settlement mechanisms and exchange of value are forecast to act as a disruptive force in the wholesale payments sector as various fintech start-ups launch their offerings in the medium- to long-term.

"Potential" is the key word in the passage above, since most of the benefits of blockchain based approaches to payments and remittances has yet to be borne out. This past week alone, we have seen this article by a Rebit.ph employee admitting that bitcoin for remittance didn't address the true cost issues residing within the 'last mile' of payments, plus another report of one (unfortunately named) startup abandoning bitcoin altogether in their remittance model.

3. Banks and Blockchains (cont.)

The long delayed Gemini exchange, backed by the Winklevii, officially launched Thursday in NYC. Instead of going the BitLicense route, the exchange opted to mimic the approach of fellow exchange itBit and was granted a trust charter by NY State: "if we are going to build a bridge to the financial mainland, then Gemini must look and feel as safe, secure and compliant as any other top tier financial institution in the world."

This collection of recent quotes concerning banks' blockchain exploration was one of the more enjoyable reads of the week. I am still trying to parse out the Che Guevara analogy...

And finally, Coinbase's Nick Tomaino echoes the sentiment above with a brief posting on the folly of permissioned systems:

The reality right now, though, is that most banks aren’t talking about this technology breakthrough when talking about “blockchain.” It’s too disruptive to most banks, which have existing business models and profits to protect. What most banks are talking about when discussing “blockchain strategy” is a shared database that could have been built long before Bitcoin existed. [snip]

In the short-run the bank private blockchain noise is slightly confusing. But in the long-run, these experiments are likely to be positive for the ecosystem and accelerate adoption by exposing more people inside banks to these concepts. Ultimately, the disruptive nature of the Bitcoin blockchain will be clear to all. Next time you find yourself thinking about the Bitcoin blockchain and private blockchains, read some Clay Christensen.

In the end I know that we all tend to talk our own book, but I struggle with the use of the Christensen reference at the end. As I have mentioned previously, having a network where validators are permissioned does not preclude the existence of permissionless innovation!

The Weekend Read: Oct 3

R3 has its own meme...

1. R3 Announcement

We were proud to announce an 13 additional global banks joining our initiative. For additional coverage you can visit our newsroom page.

2. Blockchains for Banks

Anthemis Group's David Galbraith had this week's must read with this post on why banks are so interested in distributed ledgers. In short, if Marc Andreessen is correct that software is eating the world, then banks have realized that blockchains and their ilk could potentially 'eat' the need for third party bank infrastructure:

This updated model can be done much more efficiently with blockchains, which could replace 3rd party consortium entities with software alone. By removing a middle man from doing this, the constraint (that the consortium cannot threaten the banks) that ringfences the consortia from not encroaching outside of their designated territories disappears and would allow blockchain based systems software to fulfil their potential to innovate and do more than existing cooperatives like SWIFT can.

As a side note, the Napster or Bitcoin style model of truly decentralized systems with no entity in overall control of any portion will probably not happen in Financial Services unless there is a fundamental shift in how societies work, triggered by them.

Who knows, maybe this could happen, but not in the short term. The reasons for this are that decentralized systems can’t be governed by anyone, so they end up being either compromised or outlawed and secondly, they decentralize revenue. It’s difficult (not impossible) to imagine a decentralized Facebook usurping them because Facebook centralizes revenue and therefore may be able to compete more effectively. Both of these reasons are why the last wave of decentralization faded.

In summary, the ‘multiple entities tied together by software only consortia’ model will be where banking innovation for back end processes and infrastructure happens, and blockchain technology will certainly be the initial focus.

I cannot quote the article enough in this post to do it justice, so please read the whole thing. His thoughts on distributed ledgers being "Consortia-as-a-service" strongly echo a lot of our thinking internally.

Another read-in-full piece is this post by Dwolla CEO Ben Milne, giving his views on when and where a blockchain-ish ledger would be the best fit for financial services. His views are especially insightful, since he and his company began hands-on work in the fintech and ledger field well before everyone caught the blockchain bug:

I personally feel that a blockchain as a ledger is the irrefutably best form of storage when:

• A view-all permission is best.
• Speed of the ledger is not a major concern.
• Confirmation of the ledger information is used as the source of truth only after some time has passed.

Blockchains are fascinating but have inherent limitations like any technology. [snip]

When applying new ledger technologies to banking there are banking specific concerns to deal with and these are just some of them. Solving for short/long term memory, compliance, and providing the necessary interface to regulated entities are all problems third parties have solved in many cases with different ledgers. The intricacies of understanding how all this stuff works is kind of confusing but banks are just trying to solve a problem, not create a whole bunch of new ones for themselves.

3. Ethereum Project is Vibrant and/or Broke

Ethereum Godfather Vitalik Buterin gave a lengthy and informative update on the Ethereum platform earlier this week. The post employs the tried and true "sandwich" technique, leading and ending with many of the recent successes for the Ethereum platform and community. Yet the "meat" of the post describes the less-than-positive state of finances for the Ethereum Foundation:

First of all, it is indeed true that the foundation’s finances are limited, and a large part of this was the result of our failure to sell nearly as much of our BTC holdings as we were planning to before the price dropped to $220; as a result, we suffered roughly $9m in lost potential capital [ed. note: the "lost potential" equals half the funds raised in the quasi-IPO], and a hiring schedule that was meant to last over three years ended up lasting a little under two (although bolstered by a “second wind” from our ETH holdings).

The foundation and its subsidiaries alone simply do not have the manpower to push the entirety of this vision through to its ultimate completion...although the foundation and its subsidiaries can, and will, continue to be the primary driver of technology at the core, a highly community-driven model is necessary and essential, both to help the Ethereum ecosystem maximally grow and flourish and to establish Ethereum as a decentralized project which is ultimately owned by all of humanity, and not any one group.

4. Fintech Ledger Startups in the News

This week's article Meet the new kids on the blockchain does a very good albeit brief job reviewing four startups focused on bringing ledger solutions to financial institutions: Symbiont, Clearmatics, SETL and Eris. Worth a read, if only to get a peak at the Eris team posing in a London back alley:

Which Eris team member is Brick Tamland?

Speaking of Anchorman-style alley fights, Symbiont CEO Mark Smith took the gloves off regarding his competition in the article Smart securities issuer Symbiont fires shots in the private blockchain arms race:

"But from a business standpoint we are way ahead of [Digital Asset Holdings]. They are probably a year behind us on all fronts." Referring to Digital Asset Holdings' recent issuance for Pivit, Smith said: "We had done something substantially more difficult over a month prior. So we were the first to do it and we are the only firm to do it with a smart contract. So again, they are behind us and then what they did wasn't even really that impressive." Smith said DAH is very skillful in the media and has a big budget and can scale quickly from a company standpoint. "But there is no substitute for experience in the market and that's really what we have," he added.

In the words of Ron Burgundy: "Boy, that escalated quickly."