The Weekend Read: Sep 13

Even The Donald has an opinion on the block size debate

1. Permissioned validators and permissionless innovation

IB Times featured an interview with Smart Contract godfather (and oft-cited Satoshi candidate) Nick Szabo entitled If banks want benefits of blockchains they must go permissionless:

Szabo reiterated the point: to remove vulnerability banks also have to remove individual human control and the individuals in charge or with root access. Banks naturally hate that loss to their power. But they don’t have any choice if they want to gain the benefits of having an army of independent computers that rigorously, constantly and securely check each others’ work, he said.

Szabo’s argument is that any level of permissioning makes a system more vulnerable and less secure, and that it introduces a slippery slope back to the current, sub-optimal infrastructure. Tim Swanson and others have argued the converse of this, with the argument that regulated financial entities both want and need some trust and permissioning in order to properly conduct their business.

One key distinction needs to be made: it is possible to have ‘permissionless innovation’ with a system or network that has permissioned validators. From a tech development perspective, the focus should be on the openness of the code, the vibrancy of the developer community, the transparency of the network’s standards. Those are the biggest determinants of the success or failure of the innovation. Outside of a rhetorical confusion due to the similar wording, the status of validators on a network should not have any impact at all in determining the likelihood of permissionless innovation! The ‘permissioned validator’ crowd would be best served to rebrand. Ideas welcome.

2. Conference wraps

Mike Hearn over all at Consensus panel

Coindesk’s Consensus conference this past week hit all the usual notes with a very packed ‘put a Blockchain on it’ agenda. I had very high hopes for the Future of Innovation on the Blockchain panel (pic above), yet the esteemed panelists only had 30 minutes to chat. It proved to be too little time for any substantive debate or outrageous comments. You can find a review of the sessions here and here.

Many of the attendees of the Consensus conference headed straight for Montreal and the Scaling Bitcoin summit, which is still ongoing. In typical hacker fashion, the full transcripts can be found online.

3. Bitcoin Winter Blockchain Spring

As we discussed previously, the end of the summer doldrums should usher in a few interesting data points on the blockchain funding climate. And this week we got two. First, Bitcoin remittance app (or Mugging-as-a-service if you are snarky) Abra announced a $12m Series A round. That news was somewhat overshadowed by announcing a $30m funding round made up of strategics such as Nasdaq, Visa and Capital One. The company was profiled in a longer Forbes piece as well:

Says Nasdaq Chief Executive Bob Greifeld, “[Blockchain] is the biggest opportunity set we can think of over the next decade or so.” [snip] “We know if we find a good way to deliver value to the customers in the industry, the numbers will follow. … It’s really about, ‘Let’s find the proper use for it–where we can change the world–and then the investment returns will follow.’ ”

The Weekend Read: Sep 13

The Weekend Read: Back to School Edition

Summer is (un-officially) over and the Bitcoin livin’ aint easy


1. Bitcoin Nerd Fight Update

Since our last posting, lots of e-ink has been spilled and reddit sock puppets besmirched over the Great Block Size Debate of 2015. There are countless articles and think pieces available on the topic; for a good high level review of both sides, see this New Yorker article. This week, the broadly anti-XT Bitcoin core dev crowd (representing roughly 90% of Bitcoin Core commits) penned an open letter to the community:

There will be controversy from time to time, but Bitcoin is a security-critical system with billions of dollars of users’ assets that a mistake could compromise. To mitigate potential existential risks, it behooves us all to take the time to evaluate proposals that have been put forward and agree on the best solutions via the consensus-building process.

In other words, you can stick your XT hard fork…Let’s see if anything constructive comes out of next weekend’s Scaling Bitcoin nerd summit in Montreal.

2. Blockchain on Wall St. (cont)

The ‘bank love for blockchain’ articles continued unabated during our brief hiatus. First up was this NY Times article, which features a mention of our own David Rutter and reviews the blockchain excitement across Wall St:

Many in the financial industry hope they can find a way to use the blockchain concept — what is often referred to as adistributed ledger — without using the blockchain associated with Bitcoin. Although the bankers working on the idea disagree on how this will happen, they show surprisingly little disagreement on whether it will happen. One of Goldman’s top Internet analysts, Heath Terry, said in a recent company podcast that “the whole blockchain tech behind Bitcoin has massive implications for really any kind of asset — and the ability to transfer ownership of digital goods.”

“It’s hard to see a world where that blockchain technology doesn’t end up changing the way we think about asset
ownership,” he said.

Next up is Bloomberg Markets magazine with their blockchain cover story on Blythe Masters and DAH (which also includes a pic of Sunil practicing for the Staring Contest finals). The always excellent and irreverent Matt Levine followed this up with one of the most on-point rundowns I have read in Blockchain for Banks Probably Can’t Hurt:

You could have a centralized model where the participants get together, set up a DTC-like entity, and let that entity keep track of ownership and transfers. Or you could have a semi-decentralized model where the participants get together, agree to run the same blockchain code, and keep track of ownership and transfers by consensus. There might be good technological or practical reasons to prefer one or the other, and certainly the blockchain excites many technologists. But the point is: Either of those models seems much better than waiting 20 error-prone days for a trade to clear.

Then for the banks themselves. Here is Aditya Menon, managing director of global digital strategy at Citigroup, quoted in The Economic Times: “For us it’s not so much about bitcoin because bitcoin is something that has very volatile value, questionable in terms of an entry in and entry out from a regulatory perspective. But if you think about the distributed ledger -that is extremely valuable.” Barclays also garnered some headlines, with ArsTechnica managing to over-interpret the announced charity pilot with Safello into the headline Barclays to become the first major bank to accept Bitcoin [later updated and somewhat softened to reflect the truth]. Chief Design and Digital Officer Derek White followed up in other stories with more updates on Barclay’s work: “We looked at how many experiments we wanted to do internally with the blockchain. The first wave led to 22 experiments, we’ve now got over 45 experiments our businesses want to do.” And finally, UBS made a big splash late in the week with an overview of their efforts in distributed ledger, which includes a smart bond prototype as well as a ‘settlement utility coin.’

3. Odds and Ends

ICYMI, in late August Richard Brown channeled Barclays’ Lee Braine in FREE ADVICE CAN BE VALUABLE… BUT ONLY IF YOU TAKE IT:

Thirdly, consider the complexity of banks’ existing IT environments. An idealised, “wouldn’t the world be perfect if…” solution is no use to anybody if it requires the whole world to move at once and/or if there is no credible migration path. This points to a need to listen to the incumbents when they object. Furthermore, consider the non-functional requirements which are simply a given in this space.

Fourthly, if we assume that today’s current hyperactivity will lead to a new understanding of the possibilities for banks but don’t assume that today’s blockchain platforms (permissioned or permissionless) are the (whole) answer, then surely we’re back in the land of engineering, architecture and hard work? Perhaps this means that the combination of persistence, data models, APIs, consensus, identity and other components that we need won’t all come from one firm. So a common language, some common vision and an ability to collaborate may become critical. Where is your distinct differentiation? Where would you fit in an overall stack?

And for something completely different…music royalties on the blockchain have been getting quite a bit of buzz lately. This Billboard article How ‘the Blockchain’ Could Actually Change the Music Industry gives a good overview. I bring this up for two reasons. One, this potential use case is one example where Bitcoin itself could ‘win’ as it is applying new principles to create new markets, as opposed to trying to optimize existing financial infrastructure. Second, it led me to read this very good reply to the hype by Alan Graham. The reply is meant to be specific to the music industry, but Graham does an excellent job of playing the optimistic skeptic for blockchain:

The blockchain, in theory, shows some promise as an immutable public ledger that provides some needed transparency when it comes to important transactions, whether they be purely financial or a public statement of fact. However, if it is going to get past the point where it is being funded for the sake of finding the next big thing (beyond bitcoin), to actually being the next big thing, it has to solve five main issues, Authority, Immutability, Scalability, Legacy, and Privacy.

I encourage you to read it in full. Enjoy!

The Weekend Read: Back to School Edition

Simple Rules and SPX

nutty-professor-jerry-lewisI came across this article from Bloomberg earlier this week, which featured the research of Mebane Faber into how simple market timing rules could provide lower risk exposure and better returns for SPX investors. Very interesting, especially since Faber’s model on the last monthly close suggested a 100% cash/bonds allocation…

Two things stood out to me. First, Faber’s simple model is very similar to a toy model that I stumbled upon years ago with the help of an old colleague Bill Streep (affectionately called “The Grim Streeper” due to his always sunny outlook on life). That model took the 12 month simple moving average as the indicator. Close the month above, full investment. Close below, cut investment. Faber uses a 10 month SMA, but they both deliver similar and strikingly powerful results. You can see below that this would keep you in during the good times and protect you in the bad, with minimal whipsaws (and very minimal trading):


We are now flashing dead red after enjoying almost 3 years of strong returns.

Now you will ask: did I follow this method? Of course not! I preferred to chase the market up and down to sub-par returns.


The second and more important take away from the article (money isn’t everything after all…) is the power of simple rules. I urge everyone to check out the recently published Simple Rules by Sull and Eisenhardt. Or if you are too lazy to read the book, you can find a one pager summary here. Dilbert creator Scott Adams echoes this with his talk of simple systems in his short read How to Fail at Almost Everything and Still Win Big, which I am currently reading.

Simply put, simple rules work, and are especially powerful to handle complex problems.

Simple Rules and SPX

The Weekend Read: August 15

[Ed. Note: I will be on hiatus for the last two weekends of summer. We will resume our (ir)regularly scheduled programming on Sep 4th]


1. Are we about to enter a Bitcoin Winter? Or is it Springtime for Blockchain? Or both???

About six months ago, we started to kick around a premise internally that many of the seed stage bitcoin-related startups would hit a Series A crunch. We thought that this could be especially acute for bitcoin companies due to the ‘hotness’ of the sector in late 2014 coupled with the low price and lower consumer adoption of bitcoin itself. It is easier to ‘sell the dream’ for a small seed round, but when you fast forward 6-9 months in a startup’s life cycle, the A stage investors will start looking for more tangible signs of traction. So far we have not seen too many announcements of company wind downs, outside of Buttercoin earlier this year and now 37Coins earlier this week. But privately we have started to hear a few stories of startups talking about giving it 1-2 more months or moving to a skeleton staff as they prep for closure.

Yet our premise could turn out to be both right and wrong…William Mougayar highlights this conundrum very clearly in his post Warning: Unrealistic Valuations in the Bitcoin and Blockchain Space. I would urge you to read it in full. So we may be proven right by consumer-focused bitcoin startups hitting the wall, but proven wrong as blockchain-for-finance startups raise very healthy A rounds, due to a combination of existing startup capital pivoting to sell into traditional financial services markets and strategic investors having a massive FOMO episode:

Just because a space is hot (e.g. blockchain) doesn’t mean that your starting valuation should be higher, unless there are other valid reasons. If you haven’t built an MVP or team yet, your early risk is the same, whether the market is big, small, hot or not.

Yes, the blockchain is an amazing piece of technology that represents a unique and rare transformation opportunity, and the market is potentially huge, but it is not any different than the Internet’s advent in 1994. It needs to gradually grow and infiltrate the various nooks and crannies it can fill. Rushing its development will not necessarily rush its deployment.

2. Further Summer Reading/Watching


…and one last thing as we go to ‘press’: Bitcoin may have forked.


Enjoy the rest of the summer!



The Weekend Read: August 15

The Weekend Read: July 24

Count me among the ‘many’:

1. Gimme a Blockchain…hold the Bitcoin

The “you can’t have blockchain without bitcoin” debate continues…Fred Wilson of USV kicks things off in this short post, in response to a room full of VCs sitting on their hands when asked if they would invest in a Bitcoin startup: “Maybe the distinction is bitcoin vs blockchain. I understand that. But bitcoin and blockchain are joined at the hip. You don’t get one without the other. So I’m still scratching my head.”

Ryan Shea of Onename picks up this thread with another short read, making the valid distinction between a blockchain that is permissioned vs permissionless.

Gideon Greenspan wades in with the confident-sounding title Ending the bitcoin vs blockchain debate:

In bitcoin anonymous miners must perform expensive useless computations, and are incentivized to do so by the block rewards (and transaction fees) denominated in the blockchain’s native currency or token. Do we have any other options?

It turns out that we do. We can have a closed list of permitted miners, who identify themselves by signing the blocks that they create. Rules about distributed consensus (or “mining diversity” as we call it in MultiChain) provide a different way of preventing minority control of the blockchain, so long as you can accept that miners are pre-approved. Of course for bitcoin this is not acceptable, because part of the point is to permit anonymous mining, so there is no way to censor transactions centrally. But if, say, we had a highly regulated financial system, in which bitcoin’s model was inapplicable, perhaps we could accept a pre-approved list of miners after all? If we had enough of them, and spread them well enough between institutions, and had legal contracts with all of them, are they really likely to gang up and undermine the network they depend on, when doing so will land them in jail?

We close with the latest post by Richard Brown, riding to the rescue once again to save this debate, with his adapted speech Bitcoin and Blockchain: Two Revolutions for the Price of One?:

So… the blockchain revolution is so fascinating because it could actually be TWO completely different revolutions… both profound in their implications:

  • Censorship-resistant digital cash providing a new platform for open, permissionless innovation driven from the margins
  • And industry-level systems of record driving efficiencies for incumbents.

Neither of these are “sure things”… they are both high risk speculative bets… but they’re also very DIFFERENT bets…

2. Blockchain on Wall St. (cont.)

Greenwich Associates releases their survey Bitcoin, the Blockchain and Their Impact on Institutional Capital Markets, highlighted in this Bloomberg article:

Greenwich Associates found 94 percent of respondents say blockchain — the ledger that drives bitcoin — could be used in finance, according to a report to be released Wednesday. The software is touted as a way to speed up and simplify how trades of everything from stocks to loans and derivatives are processed.

“Revolution in the making — that’s what this feels like,” Kevin McPartland, a co-author of the study with Dan Connell, said in a phone interview. “There’s a real opportunity for some change here.”


Barclays Blockchain (and Beard Groomer) Subject Matter Expert Simon Taylor has a nice, wide ranging piece on the potential of distributed ledgers:

The key gap is education, we often conflate “The Blockchain” and “A Blockchain”. This terminology is especially tricky because the technology is so new, terms are emerging daily to try and understand and make sense of it.

This is a nascent technology and while the opportunities are exciting, certain obstacles will need to be overcome before some of these use cases can come into being. It’s also clear that the security and controls associated with blockchain technology will need development before many of these applications can become mainstream.

That said, the opportunities are so significant that it’s a question of when, not if, these applications will emerge. In order to smooth the way for greater development and adoption, financial service providers and start-ups will need to collaborate closely.

Level39’s Eric Van der Kleij backs up the assertion that banks are keenly interested in this interview: “The real powerful work being done in fintech is blockchain. I can tell you now with certainty that every major western bank we’ve spoken to, and some eastern ones, are looking at blockchain technology.” Level 39 resident and UBS Crypto 2.0 Lead Alex Batlin gives another excellent rundown of the inherent potential:

Bank’s operating efficiency is also likely to improve as you exercise the previously mentioned inversion of control – technology debt is replaced by common rails. If you couple that with a reduced need for intermediaries due to the smart and distributed nature of blockchain and thus cut market participation costs, you can improve margins and reduce customer fees at the same time.

As a bonus you reduce operational risk, as you no longer have a single point of attack and failure in a peer-to-peer network i.e. safer and more reliable systems that are always there when you need them.

Last but no least, as regulators can now see in near real-time all transactions, they can analyse system risk in a way that has never been possible before. They can also validate that asset’s business logic supports regulation as intended.

3. Bitcoin Bull and Bear Corner

r/bitcoin Redditors are cyber-high-fiving over this report from IB Times that BNP is considering adding Bitcoin to one of its currency funds. Meanwhile, the Winklevii have evidently filed for their (still to be opened) Gemini exchange to receive a NY trust charter. Meanwhile, the Justice Department has arrested the founders of Bitcoin exchange, accusing the two gentlemen with “[facilitating] transactions for hackers who would prevent innocent computer users from accessing their devices unless they paid a ransom.” Sounds like a fine business model.

4. And in case you missed it

Here is the R3 feature story from CoinDesk. Could have done with another choice of words than ‘plot’…makes us sound like employees!

The Weekend Read: July 24

The Weekend Read: July 17

1. Blockchain Explainer (for financial markets) by the FT

Philip Stafford does an excellent job, both in print and video, in explaining why banks have “a keen interest in applying the blockchain…to financial markets.”

He goes on to note:

As with any new technology, experimentation abounds. The term “blockchain” is becoming difficult to define. For instance there is a growing debate about whether a blockchain even needs a digital token like bitcoin. Some start-ups are turning to “permissioned” distributed ledgers, where permission is granted to approved actors to access the network, and quickly record trades and discover asset ownership.

This echoes the debate that Tim Swanson has written about extensively. PaymentSource does a nice overview in their article A Very Public Conflict Over Private Blockchains. I recently ran across a nice chart by Jack Gavigan that attempts to further define the ‘taxonomy’ of distributed ledgers:

jack gavigan blockchain taxonomy

2. More Blockchain Love

SCB’s Group Chief Innovation Officer, Anju Patwardhan, lays out a great argument for how blockchain approaches can be integrated into the financial system, across both banks and regulators, in her post Blockchain – a disruptive force for good?

For banks, the blockchain has the potential to become a technology model for a low-cost and transparent transaction infrastructure. While Bitcoin is unlikely to dislodge paper money, its greatest legacy would be the benefits of the underlying blockchain technology to the security of banks and the integrity of the financial system – which remain closely intertwined.

If this takes off, prices for trading, money transfers, remittances, credit cards and other products could potentially be undercut drastically to the benefit of consumers. This infrastructure could be adopted to make financial transactions more secure and traceable for customers, banks and regulators.

Accenture joins the consultancy deluge into all things blockchain-thought-leader-y with a very well written report entitled Blockchain in the Investment Bank:


3. FinTech Odds ‘n Ends

American Banker highlights how banks have started to warm to opening up internal systems to outsiders via APIs:

“It’s like breaking a few windows to let free air and light in,” said Andres Wolberg-Stok, global head of emerging platforms and services at Citi. “It ends up benefiting fintech as a space.” The new openness is unprecedented, unless you look at other industries. “Google makes their Maps API available. PayPal makes their payment API available. FedEx makes their location and tracking APIs available,” pointed out Eric Connors, senior vice president of products at Yodlee, a company that provides account aggregation and API integration services to banks. For those well-known brands, the motive is to move more transactions or users through their systems.

For banks, the main driver is innovation. By sharing APIs, in some cases through hackathons in which outside developers are given software tools for a prescribed amount of time with which to build new apps, new ideas can be generated and tested.

McKinsey goes for the headlines by arguing that the oft-hyped Internet-of-Things opportunity is, in fact, underhyped. And boy, do they hype it:



Yet it is interesting to note that McKinsey cuts their hyperbolic forecast by 2/3rds noting “If machines can’t talk to each other, says McKinsey, the Internet of Things might only be a $3.9 trillion opportunity.” Offering another potential pot of gold for those exploring machine-to-machine distributed networks…

The Weekend Read: July 17

The Weekend Read: July 10

Screen Shot 2015-07-11 at 8.35.40 AM
Cognitive Dissonance on

 1. Blockchain on Wall Street (cont.)

BNP’s Quintessence magazine has a very nice overview of the potential for blockchains. I was nodding my head vigorously at the passage below, as internally at R3 we have discussed at length the possibility of the bank custody model adapting to custody of a customer’s private keys:

The first scenario creates a total disruption. In its purest form, a distributed blockchain system allows all market participants direct access to the DSD (Decentralised Securities Depositary), to the exchange and to the post trade infrastructure (clearing & settlement). If this setup develops then existing industry players might be redundant. However, given the challenge of keeping the private key of the account safe, it is possible that investors will entrust an authority to safe keep the private keys. It is also possible that custodians will be responsible for the application layer over the blockchain or that they will launch their own network.

The second scenario is an integration within the post trade ecosystem. The distributed ledger might only be the next generation of IT infrastructure. In this scenario custodians or settlement infrastructures might use the blockchain to record the ownership and trades between themselves; however end investors will still need to use a custodian to have access to the market. The ledger will only be accessible to authorised market participants. Existing actors will remain in charge in this scenario however their level of service could change and they may deploy new services that they could not in the past because the investments required were a huge barrier to entry.

Philippe Denis, the chief digital officer of BNP Paribas Securities Services, gives more context to their thinking in this article (pdf version): How BNP Paribas Securities Services stays ahead of the game – The Banker

2. Bitcoin Fork?

While BTC price had another good week (whether due to the Greek crisis (see below) or a Chinese Litecoin pump ‘n dump can be debated), the protocol had a fairly rough time. As the picture above shows, an incomplete roll out of a Bitcoin Core update has led to miners confirming incorrect blocks, a/k/a it has experienced a fork, once again calling into question the idea that fully decentralized governance can work (or if it really even exists and instead has an implicit governance already. See: block size debate)

3. Bitcoiners on Greece (cont.)

4. Fintech Reports


5. R3 Advisor Corner

Finally, a review of the in-depth posts released this week from R3 advisors Richard Brown and Tim Swanson:

-Richard Brown: A SIMPLE EXPLANATION OF BALANCE SHEETS (DON’T RUN AWAY… IT’S INTERESTING, REALLY!) [ed. note: I did run away the first time, but glad to have returned to finish the article…]

“[A]s I’ve written repeatedly, we could be witnessing the emergence of shared ledger systems in finance – blockchains, if you prefer. And they will be used to record obligations of – and agreements between – firms and people of all sorts.”

-Tim Swanson #1: A blockchain with emphasis on the “a”, where he takes on Chris Dixon and Fred Wilson (aim a bit higher next time Tim)

-Tim Swanson #2: he drops the mic with a speech in front of bankers, VCs and Bitcoiners with Learning from the past to build an improved future of fintech:

If we were to create a valuation model for the bitcoin network (not the price of bitcoins themselves), the network would be priced extremely rich due to the wealth transfer that occurs every 10 minutes in the form of asset creation. The network in this case are miners, the block makers, who are first awarded these bearer instruments.

How can financial institutions remove the duplicative cost centers of this technology, remove this $300 million mining cost, integrate permissioned distributed ledgers into their enterprise, reduce back office costs and better serve their customers?

That is a question that several hundred business-oriented innovators and financial professionals are trying to answer and we will likely know in less time it took Bitcoin to get this far.

The Weekend Read: July 10

The July 4th Weekend Read


As us Seppos get ready for America’s birthday, the bitcoin crowd continues its Grexit ambulance chasing

1. Blockchain on Wall St

FT article: Banks and exchanges turn to blockchain (with the oddly salacious subtitle ‘Wall St lured by efficiency promise of the technology behind bitcoin’):

For now many start-ups accept they cannot go around the system. “It’s very important to work with existing market participants,” says Adam Ludwin, chief executive of Chain. “The mantra of Silicon Valley is: ‘Move fast, break things’. That mantra doesn’t apply in financial services.”

Head of Citi Innovations Ken Moore also highlights his group’s internal experimentation with blockchains:

Citi has been exploring payments in a cross border capacity, as well as the regulatory environments across various jurisdictions, with a view to how transactions that have taken days can be done in seconds in a very transparent way. “Because we are a global network, a global bank, we can look for opportunities to use this technology to move money from country to country – country A to country B, across our network.”

Finally, here is a very interesting run thru RBS’s plans for technology transformation, which includes some mention of their experimentation with Ripple. Some figures popped out at me that highlight just how complex these bank infrastructures can be (‘Further rationalisation (50%) of Top 500 applications’ and ‘rationalising the number of payments systems and gateways (80 to 10)’ and ‘Over 500 Nostros removed from UK & EMEA network’…which implies there are quite a few still in place!)

2. Blockchain and Regulators

MAS Managing Director Ravi Menon name drops blockchain a few times in a recent keynote (thanks to Anju Patwardhan for the head’s up). He does such a good job of giving an overview that I have quoted him liberally below:

Whether digital currencies will take off in a big way remains to be seen. But it is a phenomenon that many central banks are watching closely, including MAS. And if they do take off, one cannot rule out central banks themselves issuing digital currencies some day!

But the bigger impact on financial services, and the broader economy, is likely to come from the technology behind Bitcoins – namely the block-chain or, more generally, the distributed ledger system.

The potential benefits of such a distributed ledger system include:

  • faster and more efficient processing;
  • lower cost of operation; and
  • greater resilience against system failure.

There are many potential applications of distributed ledger systems in the financial sector [and] could potentially allow regulators to plug into the network to conduct surveillance of risks and to track transactions to detect money laundering or terrorist financing. In fact – and this would be of interest to the lawyers gathered here – distributed ledger systems could potentially be applied in any area which involves contracts or transactions that currently rely on trusted third parties for verification.

Some examples of FSTI-supported institution-level projects that are ongoing include:

  • a decentralised record-keeping system based on block chain technology to prevent duplicate invoicing in trade finance;
  • a shared infrastructure for a know-your-client utility

3. Cryptonerd Corner

As follow up to last week’s post, Blockchain University has posted the full video of Tim Swanson’s presentation on the distributed ledger landscape.

And finally, Ian Grigg has a great short post on simplifying the explanation of the Bitcoin blockchain:

The blockchain is a shared ledger where each new block of transactions – the 10 minutes thing – is signed with a Nakamoto signature.

What’s a Nakamoto signature? Note: it is not this…


The July 4th Weekend Read

The Weekend Read: June 20

bitcoin comic
Happy Fathers Day!

1. Santander Innoventures Fintech 2.0 Paper: Rebooting Financial Services

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

Screen Shot 2015-06-20 at 2.15.55 PM

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

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

2. UBS Crypto 2.0 Legathon

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


3. The Weekend Read Watch

4. Odds and Ends

The Weekend Read: June 20

The Weekend Read: June 4

johnny lawsky
Go on now Bitcoin, git!

1. Needing a token to operate a distributed ledger is a red herring by Tim Swanson

One question that comes up in almost every conversation we have with financial markets folks is some variation of “if I use a blockchain do I need to use bitcoin (or any coin) as well?” R3 Advisor Tim Swanson just published an excellent post on this very question, and I urge you to read it in full. It is a better use of time than trying to follow the ad hominem* 20MB block size debates:

Financial institutions operate under completely different conditions [than laid out in Satoshi’s white paper]. They not only know the identities of their customers, staff and partners but their processing providers are also known, legally accountable entities. There is no Sybil problem to solve for them on the network. There is no need for proof-of-work or $300 million in annual mining costs. If you don’t need proof-of-work, you don’t need necessarily a token to incentivize validation or secure the network. Instead, validation can be done by entities with contractual obligations that are legally enforced: known validators with real-world identities and reputations.

Tim was quite busy this week with posts and quotes, including extensive mention in this article on Mark Karpeles channeling Frank Abagnale Jr in his shaming of existing bitcoin “exchanges”:

“The overall problem is that from a financial controls perspective what we call a Bitcoin exchange (like Mt. Gox or Bitstamp) is more of a broker-dealer, plus custodian, plus bank, etc.,” he told Fusion in an email. “They basically have everything under one roof and this creates a problem for abuse. At least in the traditional world of finance, these different institutions are separated.”

[*In an indication of the decline of western civilization, WordPress attempted to autocorrect ‘hominem’ above to ‘Eminem’…which to be fair still may have worked.]

2. BitLicense Announcement

Ben “Johnny” Lawsky, ahead of limping into the private sector, announced the final version of the BitLicense earlier this week.  A quick review of the reactions:

3. Blockchain Love

CBA CIO David Whiteing explains why they are interested in trialing the use of distributed ledgers in an internal pilot using Ripple as an intra-bank payment system:

“I have a view that a bank account will become a storer of value, rather than a storer of currency value, so why can’t a bank account be used to store loyalty points in the same way that you can use the slider on a Qantas website to decide whether you are paying with points or dollars?” Mr Whiteing said. “We have multi-currency bank accounts today, with 15 currencies available on your phone instantly in real-time, so it is not that difficult for us to take that technology and make that a loyalty point store. It shouldn’t be that difficult for us to then add crypto-currencies to it, and whatever other means of payment transfers people might want.”

Why Banks Are Testing Bitcoin’s Blockchain (Without Bitcoin) in American Banker

Suresh Kumar, the $385 billion-asset bank’s chief information officer: “It’s not that we were interested in Bitcoin, we’re more interested in blockchain” – a common refrain among bankers.[snip] “There’s no reason why you couldn’t use [the blockchain] as a mechanism to disseminate information that’s of interest to all the participants,” he said. “That’s a perfect example of what is possible, that all the participants work off the same facts.”

Although initially the bank is experimenting with the blockchain on its own, Kumar also sees a need for partners. “By nature, you’re talking about a distributed ledger, so no one company can benefit from it by itself without a network effect, so it’s important to keep an eye on the vendors that are bringing in a broad number of participants and get everyone to use something,” Kumar said.

But if a blockchain falls in a bank infrastructure system and no developers are around to hear it, does it make a sound?

But as the interest grows, headhunters and blockchain experts are starting to warn that banks and other large financial institutions might struggle to find the expertise they need to meet their ambitions. Toby Babb, the founder of London-based recruitment firm Harrington Starr, said: “Financial institutions are circling around blockchain, but at some stage they will need people who know it. The problem is that there are lots of people who are interested in blockchain but not many who actually know about it.” [snip] “Whether as a large corporate you would want those people involved or whether they will want to be involved with you might be an issue.”

4. The Weekend Read Watch

Indian billionaire worries about disruptive technology

If there’s one thing that keeps Indian banker Uday Kotak awake at night, it is the threat of disruptive digital technology.[snip] “I am excited, but very challenged. I keep wondering at night, will I have a bank the next morning, or will some technology company be doing banking without needing a bank?”

Blockchain: The Financial Challenge of Our Time

Excerpt from Blythe Masters’ recent speech at the Exponential Finance conference:

This means the entire life cycle of a trade, including its execution, the netting of multiple trades against each other, reconciliation of who did what with whom, and whether they agree, can occur at the trade entry level. That’s much earlier in the stack of process than what you are accustomed to seeing in mainstream financial infrastructure.

Now, I don’t want you to get too overly excited. Realize that the world is still a long way from a state where distributed digital ledgers have been able to be universally adopted. Distributed ledger technology does have the potential to be disruptive of certain business models. But it has at least as much potential to be enormously empowering of existing business models in terms of making them lower cost, more efficient, and less risky.

David Andolfatto of the St. Louis Fed speaking at Princeton earlier this year (his talk is the first hour of the video), entitled “Bitcoin: A Decentralized, Public Ledger Digital Asset Transfer Mechanism.” The conclusion near minute 59 is the most interesting, with mention of banking history, credit, FedCoin and possible future of money and payments. For an amazing summary, check out this outline on github.


…and finally, no one wants to be that guy who bets the don’t pass line at the craps table, but the smart money will be fading American Pharoah tomorrow. From Andrew Beyer: “The average price on the Belmont winners since 2000 has been 17 to 1 (!)” Mix in Frosted and Materiality with a little Keen Ice, stir and enjoy!

The Weekend Read: June 4