Cryptocentralbankdigitalcurrency, or something similar

In the speech that the Governor of the Bank of England eh, Mark Carney, didn’t give to the Mansion House in June he devoted some considerable time to the general topic of shared ledger technology, even going so far as to say that

In the extreme, a [shared ledger] for everyone could open the possibility of creating a central bank digital currency.

From Mark Carney: Enabling the FinTech transformation – revolution, restoration, or reformation?

I am not sure that I completely follow Mr Carney’s logic here and I don’t have the benefit of the expert advice that he must have received in connection with this statement but as far as I can tell, there are two entirely separate issues to examine here. The use of the distributed ledger for RTGS, which is the context in which it is mentioned earlier in Mr. Carney’s speech, is wholly unrelated to the provision of a central bank electronic currency and whether it might or might not be a good idea for the Bank of England to create such is nothing to do with the technology.

I suspect that the confusion may have arisen because of the tendency amongst management consultants (and others) to conflate the two entirely different kinds of electronic money: a crypto currency and a digital currency are very different things. If Mr Carney were genuinely suggesting that one of the scenarios under consideration by the Bank of England is that it abandons its responsibility for managing the creation of money and instead turns to a crypto currency, even if it is a crypto currency that is produced as a byproduct of a double permissionless shared ledger spawned by the Bank of England itself, then the value of that currency would not only be beyond political control it would be beyond the Bank’s control and one might imagine the Bank to be somewhat redundant in such circumstances.

The Bank of England is absolutely right to be exploring this new technology and I certainly think that it has something to offer. But that does not mean that the Bank of England is going to start using Bitcoin as a settlement system or that bitcoins will replace Sterling!

From RTGS NBG OMG SOS SLT PDQ SLAP | Consult Hyperion

On the other hand if Mr Carney were genuinely suggesting that one of the scenarios under consideration by the Bank of England is that it creates a digital currency, then I say more power to him. I cannot think of a single reason why such a digital currency would be a crypto currency or why it would be in any way related to the shared ledger used to process  the payments, but that doesn’t mean it wouldn’t be a cracking idea. A digital currency platform with right APIs in place (providing risk-free, genuinely instant and zero-cost transfers between accounts with final settlement in central bank balances) would be an amazing platform for a Digital Britain. 

Blockchain as a public technology service

When people say “blockchain” they mean different things. And some of the things they mean are just absolutely, categorically different. Implications of public open blockchain designs and private blockchain designs vary drastically. I emphasis this distinction because it is key – the different designs assume and imply totally different things.

Both types are important but for different reasons, for different markets and for different use cases. I think we have passed the time when “Bitcoin bad – Blockchain good” seemed an eye opener. What this kind of argument did is it drew the attention of financial incumbents from the Bitcoin-like permissionless space to the private, permissioned space. Which makes sense for their business models. But I think they are not paying enough attention to the permissionless space. I think you are not either!

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A brave slide from the Consensus conference in New York this year (unfortunately, can’t remember the name of the speaker! – let know and I’ll update), where I chaired the panel on post-trade and my colleague Dave Birch chaired panels on Identity. This illustrates that “Bitcoin bad, Blockchain good” is not set in stone.

I bet you hadn’t anticipated such a steep rise of Ethereum (the price of native Ethereum currency soared 10 times from the beginning of 2015 and Ethereum’s market cap reached 1.5 billion dollars). You may have even missed the creation of the first human-free organisation. Even if you try to keep an eye on the public blockchain world, you only get reminded of its existence when Bitcoin price surges to its 2-year high (it now trades at over 700$) and all the mainstream media cover this.

Both public and private shared ledgers (Blockchains) are essentially shared book-keeping (and computing) systems, one class – open for everyone to use (public), another – restricted to a certain group of members (private). And this is it. Open for everyone to use means lower entry barriers, it means identity-free and regulation-free shared book-keeping (and computing). What could be restricted by identity policies and financial regulations goes around this. You can, say, restrict a person from buying bitcoins by setting high KYC requirements to online exchanges (for users not to be able to change dollars for bitcoins if they are not KYC’d). You can even cut his or her internet connection. You can issue a court order to close a business that accepts bitcoins as money. And so on and so forth.

A lot of this effort looks similar to trying to stop the Internet, but I suppose the regulators can dream!

Public technology service and native digital rights

“Proof-of-work is inefficient”. So what? Let it go! Think of what’s the idea behind it and what it tries to achieve, regardless of this inefficiency. Regardless – because even if proof-of-work is not ideal, there are other permissionless technologies already developed and many more that are work in progress. Some of best minds in the world are looking to provide the benefits of permissionless shared ledger environment without the drawbacks of original Bitcoin’s proof-of-work. Just assume that they will solve that problem and move your thinking on.

What the blockchain delivers is permissionless book-keeping (and computing) public technology service (with the unchangeable and transparent transaction history as an incredibly valuable side effect). When I say “public service”, I do not mean that a company or public organisation provides it, I mean technology itself and collaborative user effort provide it. In a sense – everyone and no one. The protocol acts as the service provider.

And this is crucial. In traditional financial world, the basic value transfer layer that cryptocurrencies (i.e. everyone and no one) provide as a public technology service, is provided by companies – service providers, and is not accessible to anyone. For example, PayPal provides digital value transfer service.

Here I want to make a point that permissionless cryptocurrency systems have a promise of a digital environment in which value transfer is intrinsic, embedded on the protocol level – and so, for users the ability to make a transfer could become what I call a native digital right. Just to give you an analogy (it’s not a very accurate analogy but you’ll like it!) – take a guess what you see on the picture below. Well, it’s a standard residential elevator in my mother country Georgia, where you need to pay every time you use it! Up and down. Every time up, every time down!

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Georgian elevator. Each time you go up and down, you need to pay!

So maybe we all (all internet users) live in our kind of Georgia, where every time we want to make a deal (economic agreement) in the online world we have to go through a cumbersome process and pay an unreasonable fee (each time!) for it. We need to get our bag out, fill in our card details, merchant’s acquirer (if it’s a merchant – even more obstacles with peer transfers) needs to send a request, card issuer needs to approve the transaction etc. Our today’s economic life online is based on this very complex e-commerce domain. And to me, it looks a lot like Georgian elevator. Think about it: on top of the obvious, that elevator only accepts certain denominations of Georgian coins – very specific, and is broken every once in a while – so even if you want to use a paid elevator sometimes you just can’t. So familiar.

How great would it be if we had a native digital right to make a value transfer online that noone could take from us (or grant us!), on a protocol level. How many applications could be built on top (at Consult Hyperion we call them SLAPPs -shared ledger applications)!

Persistence of permissionless

At the heart of the public shared ledgers is value transfer. This is because in order to assure the liveliness and self-sufficiency of the system, while providing non-restricted access to it, there needs to be an intrinsic economic incentive for those who maintain it. In other words, there should be a positive value to maintaining consensus. Most public shared ledgers for this reason can be described as currencies (decentralised cryptocurrencies) because they provide this incentive as a reward on the ledger in the ledger’s own “money”.

The canonical example of such a decentralised cryptocurrency is, of course, Bitcoin (remember, there are hundreds of them though!).  As Bitcoin was intended to exist and evolve out of the reach of regulatory, corporate or any other centralised command, the technology includes mechanisms that ensure it persistently “survives” and proves its robustness and self-sufficiency. (Disclaimer: I’m not a Bitcoin maximalist)

This persistence is a differentiating characteristic of a public shared ledger system. The technology does not need people at tables making decisions in order to survive, it is “permissionless” (nevertheless, the way it evolves to an extent is influenced by “people at the tables” – just different people).

Virtual economy

Potentially the principal implication of this persistence is the permissionless ascent of alternative virtual economy on top of decentralised protocols. Cryptocurrencies are not just a new form of payment – but rather, it’s a potential foundation for a new virtual economy, with new forms of economic interactions coming into place. When I say “new”, I don’t mean substitutive – I mean additional.

Virtual economic activity could become something fundamental to the Internet. Similar to the way the ability to communicate transformed into the ability to communicate over the Internet – it could grow into the ability to make friction-less economic arrangements (“economically” communicate) in the virtual world.

Thanks to the shared ledger technology and “smart contracts” innovation, not only the emergence of alternative economy is permissionless (and so – non-stoppable), but if it happens at certain scale, the very nature of economic relationships in this economy could be drastically different from what we are used to. A good depiction of such transformation is content monetisation on the web through the use of “invisible” micropayments. Another good example is seamless online payments in video games:

Breakout Coin provides for seamless in-game payments anywhere in the world, while the blockchain technology behind it, Breakout Chain, uses smart contracts and sidechains to enforce these financial agreements between parties.

From http://www.ibtimes.co.uk/poker-gaming-token-breakout-coin-opens-crowdsale-bittrex-1565331

Shared ledger technology could even turn our things (as in “Internet of Things”) into active economic agents through smart contracts.

Public shared ledger technology may help to turn a big part of our (as it seems) non-economic life into an economic activities. 

Although there are many “if” in that, we should not dismiss this possibility quite yet and keep an eye on the permissionless space. You can observe or get involved, but it would be a mistake to put your head in the sand and deny that something incredible is happening.

We might want an irreversible anonymous blockchain but not for irreversible anonymous payments

I think I’ll just read John Lanchester’s superb piece about bitcoin in the London Review of Books one more time. It’s hard to choose a favourite part of such an excellent article, but if I was pressed to do so, I suppose it would be this part:

David Birch is the author of a fresh, original and fascinatingly wide-ranging short book about developments in the field, Identity Is the New Money. His is the best book on general issues around new forms of money, and new possibilities generated by blockchain technology.

From John Lanchester · When Bitcoin Grows Up: What is Money? · LRB 21 April 2016

John is much too kind. And is a much better writer than I am, which is why his piece is so good. His basic question about where we are going next is fascinating and has been at the heart of some heated debates that I’ve been involved in recently, including a stand-up with a bunch of very clever people at the European Blockchain Congress in London.

Arguing with smart people is how I learn

 

My preferred method of accelerated learning is arguing with smart people, and the Congress delivered them in spades. But before I come back to this particular argument, let’s just frame the big picture. First of all, no-one would deny that the bitcoin blockchain is a triumph of technology and engineering and innovation and ingenuity. Statistically, almost no-one uses it, but that’s by the by.

“The total addressable market of people who want to buy bitcoin is very, very thin,”

From What a Tech Startup’s Pivots Say About Bitcoin’s Future | American Banker

Indeed. And most of them aren’t in America or any other developed market. Why? Well, bitcoin is a super-inefficient form of digital currency that was designed to solve one problem (uncensorability). If I’m trying to get my last few dollars out of Caracas before the power is shut off permanently then bitcoin might provide a rickety bridge to US Dollars, but if I’m trying to pay for a delicious burrito at Chipotle then bitcoin is pointless. However, and this is what the argument at the Congress (in the picture above) made me think about, there may be other factors that mean the bitcoin blockchain will obtain mass market traction.

What factors? Well, here are two that were touched on during the discussion pictured above, together with my more considered reflections on them.

One factor might be irreversibility. I think we all understand that you can’t build an irreversible payment system on top of a reversible payment system (such as direct debits in the UK) but you can build a reversible payment system (which is what society actually wants) on top of an irreversible one. That’s a good argument for having an fast, free and irreversible payment system that can be built on to provide a variety of different payment schemes suited to particular marketplaces. In the UK we already have this, it’s called the Faster Payment Service (FPS). Once the Payment Systems Regulator (PSR) has finished opening up access to FPS and once FPS can be accessed efficiently through the “XS2A” Application Programming Interaces (APIs) that will be put in place by the Second Payment Services Directive (PSD2), then we ought to be able to unleash some creativity in the developer community and perhaps build a reversible payment scheme on top of this irreversible infrastructure (I’m not the only genius to have thought of this: MasterCard are one of the bidders). Then it wouldn’t matter whether the scheme used the bitcoin blockchain or the FPS or NPP in Australia or TCH in the US or Ripple or anything else: the choice would come down to price and performance. Perhaps bitcoin would then be a choice, although I’m not sure about it.

Another factor might be anonymity. No-one who actually thinks about it wants anonymity. What they want is privacy. But there is a similar asymmetry as in the case of irreversibility. You can’t build an anonymous system on top of a non-anonymous system but you could build a privacy-enhancing transaction system on topic of an anonymous system and since I’m rather wedded to the idea of private payment systems, I find this an interesting combination. Again, would bitcoin be a choice for this? That’s not clear to me at all.

What if those factors turn out to be important enough to build new services, but not for creating a currency? This would support the view that a blockchain, although not necessarily the bitcoin blockchain, might well be the shared security service that society needs to anchor a new generation of online transactional services. As time goes by, this strikes me as a more and more interesting possibility. I mentioned it a couple of weeks ago.

Dr. Wright says “The mining of bitcoin is a security service that alone creates no wealth”. So to return to the point above, the sheer volume of mining going on (provided it does not become concentrated) means that there is a very, very secure piece of infrastructure out there. This infrastructure may be used to “anchor” all sorts of new services that need security as I said above. Some of them may be payments (as the Lightning folks hope) but most of them will not be.

From Mining for what? | Consult Hyperion

So, to get back to John Lanchester’s piece, where might we be going next? I’m pretty sure that we’ll soon see another more efficient blockchain that will untangle the cryptocurrency from the carrier by providing some other incentive for mining (perhaps more like Ethereum, who knows). This, the Watt blockchain that will replace the Newcomben blockchain that we have now, could well be the new supranational security infrastructure that, as some claim, will be as important as the Internet itself because it will provide the security layer that the Internet should have had in the first place.

Shared ledger applications and the Bouvier-Sams boundary

Way, way back in October 2015 (and that’s a million in blockchain years) I read a piece by Pascal Bouvier. It contained an interesting term.

Robert Sams inspired this post. As we were discussing stacks (software, IT) and the draw backs of the bitcoin blockchain architecture  recently in London, we slowly gravitated towards a new term… Consensus Computer (CC).

From A New Framework For Distributed Ledgers Or Dare I Say Consensus Computers (CC) | FiniCulture

Having finished working on our four layer shared ledger model with my colleagues Steve Pannifer and Salome Parulava at CHYP and having used that model with clients in a few different countries to help management begin to formulate strategies around shared ledgers, and the blockchain, I thought it might be interesting to add this (i.e., Robert/Pascal’s formation) to our model to see if helped us to think more clearly and have more effective communications.

It did.

So here’s the new version of Birch-Brown-Parulava four layer shared ledger model with the Bouvier-Sams boundary (as I now call it) in place.

BPP New Four Layer CHYP

I’ve now used this with a few groups to help them to think about the potential for “smart contracts” in a variety of real-world applications and it’s proved rather useful so I think we’re going to stick with it for a while. By encouraging people to see smart contracts as applications, I think it sets up a different context for conversation. Smart contracts are not really contracts (or smart). Indeed, as my good friend Gideon Greenspan pointed out yesterday, you wouldn’t necessarily store contracts on a blockchain anyway.

As mentioned earlier, R3CEV’s Corda product has adopted this third approach, storing hashes on a blockchain to notarize contracts between counterparties, without revealing their contents. This method can be used both for computer-readable contract descriptions, as well as PDF files containing paper documentation.

From Four genuine blockchain use cases | MultiChain

When you think about smart contracts as a new class of application, however, you begin to see what the new architecture can bring to the party. The ability to execute general purpose code on the consensus computer means that, just as the ability to executer general purpose code on conventional computers did,  people will create some amazing things that we can’t imagine right now. I’m looking forward to that, and I’ll be talking about this sort of thing on the Distributed Ledger Technology panel this afternoon Cards & Payments Australia, hope you can join us.

Mining for what?

(Updated 6th May with reference to post by Dr. Craig Wright.)

As I am sure you know, the security of the bitcoin blockchain rests on a consensus protocol that includes a proof-of-work algorithm, and executing this algorithm (which is computationally very intensive) has become known as “mining” by analogy to gold mining (because of the bitcoin reward for the activity). Hence the idea of bitcoin miners.

On the edge of a tiny Chinese town is a strange building where you can get an insight into the future – and only a handful of people know what is happening inside.

From BBC – Future – We looked inside a secret Chinese bitcoin mine

By complete coincidence, on the very day that this story about a secret Chinese bitcoin mine was published on the BBC, I ran into the secret Chinese bitcoin miner himself at a not-at-all secret hotel in New York.

Secret Chinese Bitcoin Miner

Yes, it was Chandler Guo! As you may recall, Chandler won the coveted Toast D’Or at last year’s Money 2020 in Las Vegas (you can read the full story about it here) because he asked the best question from the floor.

Money2020 Toast and More

Anyway, he told me not to mention where the secret mine is, so I won’t, but it was interesting hearing him talk (as it always is) about how mining is going and the dynamics in the sector. Chandler mentions in passing in the BBC article that about three-quarters of the world’s bitcoin mining equipment is in China and that he is currently building a bitcoin mine that will produce about a third of all the bitcoins. What will happen to these bitcoins is anyone’s guess.

“The total addressable market of people who want to buy bitcoin is very, very thin,”

From What a Tech Startup’s Pivots Say About Bitcoin’s Future | American Banker

Indeed. And most of them aren’t in America or any other developed market. But what if it turns out that bitcoins aren’t useful as money at all, but as “anchors” for a variety of new and innovative cryptography-based services (one of which may be payments). The bitcoins will be useful because of the sheer volume of mining going on (since the security of the system rests of mining), not because they are coins representing any actual value.

Wait, what? Bitcoins might be valuable because they are not money? Well, yes.

I’ve said before, in my usual soundbite twitter-centric superficial and aphoristic way, that the future of money isn’t bitcoin and the future of bitcoin isn’t money. We don’t need to go into why I think this, although I will say that I think my early analysis of the technology for out clients has stood up pretty well over time. I touched on the topic again last month in a blog post “Is Bitcoin Money?” where I again said “will money as we know it be replaced by bitcoin? I sincerely doubt it” after a discussion about the functions of money. I started thinking about this again during a couple of the discussions at Consensus 2016 and then some pointed me towards a discussion thread about whether bitcoin is money or not. To be honest, I wasn’t that interested in reading it, but as I was bored on a plane I started to scroll down. It became mildly more interesting when someone mentioned John Lanchester’s piece in the London Review of Books. You remember, the one where he says “David Birch is the author of a fresh, original and fascinatingly wide-ranging short book about developments in the field, Identity Is the New Money. His is the best book on general issues around new forms of money, and new possibilities generated by blockchain technology”. (Which reminds me, I must write a blog post on John’s excellent piece…)

Anyway, while I skimmed some of the arguments, the core of the discussion was that an economic adviser to Jeremy Corbyn, the current leader of the UK Labour Party, said that money is credit and bitcoin isn’t credit so it isn’t money. I’m pretty sure he’s wrong about this (since it is easy to envisage non-credit monies), but that’s not my point. He also makes a point about trust, which is a good one and similar to a point made in a Forbes piece that I read a while back.

Why should anyone have more trust in a digital currency created by an anonymous group of coders accountable to no-one than in a democratically-elected government accountable to everyone? Why is an essentially feudal governance model “safer” than a democratic one?

From Bitcoin: In Technology We Trust (Maybe) – Forbes

So far so familiar to people I bore senseless about this stuff at parties. Then it got a lot more interesting when my old chum Izabella Kaminska from the FT stepped into the fray, pointing to something that Craig Wright (the man who may or may not be Satoshi Nakamoto) wrote on the topic.

It’s the first time anyone in the bitcoin world has actually made a compelling argument, with historical references. First, he describes bitcoin not as a currency or a commodity but as a security service.

From Tax Research UK » The problems with Bitcoin

I had not read the Wright piece before, so I had a very quick glance and then bookmarked it to read later. Unfortunately, there was no later as Mr. Wright has now canned his blog, but a correspondent found it using the wayback machine. Dr. Wright says “The mining of bitcoin is a security service that alone creates no wealth”. So to return to the point above, the sheer volume of mining going on (provided it does not become concentrated) means that there is a very, very secure piece of infrastructure out there. This infrastructure may be used to “anchor” all sorts of new services that need security as I said above. Some of them may be payments (as the Lightning folks hope) but most of them will not be. Now, while I think it unlikely that the bitcoin blockchain will be the final form of this infrastructure, that’s no reason not to experiment with it, in which case bitcoins will continue to have value even if no-one is using them to buy mundane goods or services.


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