Speaking at the Dutch National Blockchain Conference back in June, I remarked in passing that I thought bank customers would be storing their money (their wealth) in all sorts of places in the future – from a small percentage in demand deposit accounts, through investment accounts of one form or another, P2P marketplaces and who knows what – but that they would be storing their identity back at the bank.
This was picked up on Twitter and a few people commented on it, so I thought I’d expand on what I meant here. First of all, it is neither a new idea nor my idea: other people have been saying this and they’ve been saying it for a while. I might have expressed it in a better soundbite, but it isn’t my concept.
Britain’s high street banks believe their future role will be as repositories of more than just money: they want to be the safe place where customers store their digital identities.
That’s from a couple of years ago. It is not some out-of-left-field edge thinking or me spouting aphorisms for a conference stream either. Round about this time, the European Banking Association (EBA) said something similar and you can’t get much more mainstream than them.
Banks are well positioned as is explained in a recent white paper of the European Banking Association (EBA).
So what might banks do with your identity once they’ve got it safely locked away in their vaults? Well, one idea, particularly popular with me, is that they might give you a safe, pseudonymous virtual identity to go out an about with.
Some suggest that digital identity verification by banks could ultimately end the need to type in a credit-card number on an ecommerce website
Some others (uncharitable persons, of which I am not one) also suggest that banks will pratt about and muck this all up and hand digital identity ownership over to Apple, Facebook, Google, Amazon and Microsoft on a plate. But if banks were to develop some common strategy around this topic (perhaps related to the financial services passport concept that’s been discussed here before) then where should they start?
Well, what about the “adult identity”? Why doesn’t my bank put a token in my Apple Pay that doesn’t disclose my name or any other personal information, a “stealth card” that I can use to buy adult services online using the new Safari in-browser Apple Pay experience? This would be a simple win-win: good for the merchants as it will remove CNP fraud and good for the customers as it will prevent the next Ashley-Madison catastrophe. Keep my real identity safe in the value, give me blank card to top shopping with – a simple use case that will test the viability of the concept.
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!
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!
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.
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.
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.
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.
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,”
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.
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.
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).
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.
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.
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.
(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.
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.
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.
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,”
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?
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.
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.
To make a very great generalisation, there are two ways to get the kind of security that we need to do clever transaction stuff. We have a tamper-resistant hardware in the loop (like the chip on your EMV card or the SIM in your mobile phone) or we have to have some complicated software. This is true in the world of secure ledgers just as much as everywhere else. The obvious example is bitcoin which, since it does not use secure hardware, uses the innovative blockchain and proof-of-work consensus protocol to prevent double-spending.
Speaking at the Tomorrow’s Transactions conference in London this week, Kelly Olson, director of the distributed ledger technology group at Intel, discussed ways it is possible to use a “secure enclave”, similar to what Apple uses for its Touch ID, to increase blockchain security.
Kelly was kind enough to mention Consult Hyperion’s work for Intel on this project. We couldn’t tell you about it before, because it was confidential until very recently, but I hope Kelly won’t mind me saying that Intel’s foresight in starting this project some time ago is impressive. There are a great many people who think that blockchains are a useful way to implement a shared ledger but who don’t want the large-scale inefficiency of proof of work.
The Intel “Sawtooth Lake” project provides two consensus protocols with different performance trade-offs. One of these is “Proof of Elapsed Time” (or PoET), a lottery protocol that needs hardware security in the form of a Trusted Execution Environment (TEE). An example of such is the Secure Enclave mentioned above, another is Intel’s SGX. The other consensus protocol, Quorum Voting, is an adaptation of the Ripple and Stellar consensus. Alex Batlin from UBS provides a handy write up of these and highlights the key point about PoET:
it acts much like Bitcoin’s Proof of Work lottery consensus, but does not require nearly as much electricity expenditure. Participants can either enter low power mode whilst TEE is generating PoET and save on costs, or perform other functions if part of a cloud compute environment.
So if there are lots of things out there with chips in them, PoET provides a more efficient consensus protocol. Is it better than the bitcoin blockchain? Well, that depends on what you want to use it for. As we have explained to our clients, the blockchain is only one way to implement a shared ledger and it is not at all clear to me that it’s the best way to implement a shared ledger for most of the applications that they are interested in. There are a growing number of other blockchain and other shared ledgers (e.g., the R3 consortium’s Corda). On the other hand, we should ignore either private or public blockchains and, in particular, the world of permissionless innovation around the blockchain deserves attention as it may be the source of radical new approaches that we can all learn from. It’s a wonderful time to be in this space and I’m looking at all of the different
Which is why I’m at Consenus 2016 in New York this week. This new classes of technologies and the new business models that it creates are of great interest to so many of our clients, and I want to learn from leaders in the field. I will, naturally, tweet my way through to show how thinking is evolving. And if you’re going to be there, I’ll be chairing the session on “Reimagining Identity” at 10.30am Monday 2nd (5th Floor, Westside Ballroom 1&2) and my colleague Salome Parulava will be chairing the session on “Preventing the Next Lehman Brothers” at the same time, same place, on Tuesday 3rd. See you all here!
Another week, and another tidal wave of blockchain articles that I’ve been trying hard to keep up with. After chairing the session on the R3 Initiative at Money2020 Europe in Copenhagen, I’ve been surveying the ledger landscape to help our clients to develop their roadmaps.
I wonder if the blockchain is going to be important or not? Better get reading. Over the last few days I’ve had some time on planes, trains and buses to look through a whole bunch of articles on the subject.
Blockchain: a short-lived illusion or a real game changer? Experts discuss if, and how, blockchain can revolutionise payments
I read this article, and just like most of the other articles I read, it really doesn’t explain either how or why the blockchain might revolutionise anything. (It uses the blockchain, a blockchain and ledgers as interchangeable terms, which bothers, me.) I don’t really want to be known as the Victor Meldrew of the Blockchain (Michael Salmony of Equens is already there!), and I don’t mean to offend, but I do want to make a serious point: what is the point of the thousands of articles like this? Not to mention the articles about how the blockchain will / will not (*delete where applicable) mean the end of the stock exchange, child poverty or delays in firefighters using lifesaving equipment. OK, it was rhetoric, but when I told the students at the London Business School that most of what I’d read about the blockchain that day was (and I quote) “drivel”, I wasn’t exaggerating much.
These “blockchain will change banking / insurance / land registries” articles suffer from two fundamental flaws in my opinion:
They lack a basic model to facilitate communication between business and technologists so that the business idea that they are putting forward can actually be understood by anyone who might have an idea about how to deliver it, and
They lack an understandable narrative about the use of the new technology that might stimulate the development of those new business ideas.
This is why I think that some of the work that I’ve been involved in recently is so important, because it addresses both of these points in a manner that experience seems to indicate is of great benefit. I’ve been out and about using Consult Hyperion’s “4×4” model of the shared ledger technology (SLT) to help our clients to understand and explore the new business models that might be available to them. As you’ll recall, this “4×4” model works by thinking of the shared ledger as comprising four layers and the architectural choices that can be made in these layers give us four different kinds of ledgers to think about in business terms.
I think that the most important narrative is one of transparency. I’ve written before about “The Glass Bank” as a way to think about new kinds of financial markets built on radical transparency. Richard Brown of R3, my colleague Salome Parulava and I have a paper in the forthcoming Journal of Payments Strategy and Systems set out the basic model and the concept of “ambient accountability: which, I certainly think, will help to set the agenda around SLT in the coming months.
Transparency isn’t the only emergent property of SLT, of course. It also connects with the “single source of truth” without the need for a single point of failure. Goldman Sachs, for example, have spoken about this.
Overall, Duet’s comments were broad and positive, with remarks aimed at illuminating for his audience what Goldman Sachs saw as its biggest opportunities. To this, Duet answered that it was the blockchain’s ability to provide a “single truth” to the many institutions that need to share information on asset transfers.
Who might benefit from shifting to this sort of technology? Well, Goldman Sachs might. They’ve just been fined for some problems to do with the transparency of securities holdings.
Goldman told those customers that it had arranged to borrow, or believed it could borrow, the security to settle the short sale, a process known as “granting locates.” Goldman, however, had not performed an adequate review of the securities customers had asked it to locate, the SEC said.
This is a good example of a specific problem that might be avoided to everyone’s benefit using the single source of truth that the Goldman chap referred to above. If an investment says it has a contract to borrow some stock, then customers could easily seem for themselves that contract is in a shared ledger and they could easily check that the counterparty either has the stock or has a contract to acquire the stock in time. And the regulators could have a simple application that checks whether an investment bank claiming to have such a contract has a “Turing complete” set of contracts in place, and the regulator would have the necessary decryption keys in place to look into contracts that they might see as suspicious.
In fact, thinking about it, in an environment of real ambient accountability, the system itself would not allow an investment bank to enter into an agreement that could not be fulfilled. A bank could not do a deal with customers on the basis that it had arranged to borrow stock unless it actually had. The contract with the customer just wouldn’t work if the “chain” is broken. I hope this won’t take all of the fun out of investment banking but hopefully it will make it safer for the rest of us. Bearing in mind that I don’t really understand shared ledger applications, investment banking or the SEC rules about anything, it all sounds easy to me.
This is the sort of thing that R3, Intel (we have been working on a very interesting project for Intel in the blockchain space), Ripple and Michael Salmony will be discussing in the shared ledgers session at our 19th annual Tomorrow’s Transactions in Forum in London this week. So if you want to tap in to the leading edge of serious business discussion on the topic, come along. As always, the Forum (this year sponsored by our friends from WorldPay, VocaLink and Oslwang) will be limited to 100 people, so head on over to register for a place right now. I think there are a couple of places left and thanks to the amazing generosity of the sponsors, it’s only £295 for both days – you’d be mad to miss Barclays, Mondo, Fidor, Equens, Clearmatics, the FCA, Shell, Samsung Pay, World Remit, Visa Europe, Curve and many others in an environment of genuine discussion, debate and learning. See you there!
In my first official engagement as the Blockchain Meldrew, I was invited to the London Business School (LBS) to take part in a panel discussion on the technology with Ross Laurie from the accountants Deloitte, Jay Best from Bitcoin people VentureBoost and Calogero Scibetta from one of my very favourite blockchain startups, Everledger. It turned out to be a lively and enjoyable discussion and with some great questions from the audience.
If Roger Ver is the Bitcoin Jesus, I am the Blockchain Meldrew.
One of those questions led me to suggest to the students that they use the steam engine as a way of thinking about the blockchain in economic and business terms. I’ve often used the analogy of steam engine technology to explore the potential for replicated distributed shared ledger technology (SLT) and to explain why I am unconvinced that bitcoin will have long-term traction despite having to buy Matt Harris a ton of Danish pastries at Money2020 (I bet him that Bitcoin would be under $200 by Money2020 and was totally wrong).
I didn’t really make him eat all the pastries, the money went to charity!
Personally, I have no reason to imagine that Bitcoin is the cryptocurrency future of money any more than people might have imagined that the first steam engine, used to pump water out of mines, would be the steam engine used to power the Mallard locomotive to the world speed record for railway engines more than a century later.
There is one big difference though: Bitcoin is open, whereas the steam engine was encumbered by the patent system that retarded its development. The lesson of history is unequivocal and well-studied. And that lesson is that the rigorous enforcement of patents around the steam engine slowed innovation to a crawl. Bolton and Watt made the critical invention that transformed that inefficient steam engine used to pump water into an efficient engine that could power an industrial revolution: the separate condenser. They patented it in 1777, and until that patent expired in 1808 there was virtually no innovation in steam engine design and the efficiency of working engines barely changed. In fact their patent gave them absolute control over the development of the steam engine and the result was an average performance improvement of less than 4% per annum. Once their patent expired, the rate of growth more than doubled to 8.5% per annum and the multiplying effect of exponential growth meant that the performance exploded to the point where you could put an engine on wheels and use it to carry passengers.
Not only did Watt use patents to hold back competition, his own efforts to invent a better engine were sabotaged by the same structures, since he couldn’t use the more efficient Pickard system (for converting rotary motion) until James Pickard‘s patent expired in 1794. For further reading, if you as much of a nerd as I am, start with “Collective invention during the British industrial revolution” by A. Nuvolari in the Cambridge Journal of Economics, vol. 28, no. 3: 347–368 (2004).
My point is this: Bitcoin is like pumping water out of mines and the bitcoin blockchain is like the Newcomben engine invented for that purpose. It is hopelessly inefficient but it does that one thing (pumping water) well enough to be adopted. However, someone will come along and invent a better and more efficient blockchain and progress toward the mass-market use of shared ledger technology (SLT) to both make some processes more efficient but also to create entirely new businesses. And, unencumbered by patents (unless the US Patent Office is daft enough to grant patents for trivial and obvious uses of SLTs) the progress will be rapid.
All of which leads me to reflect on my discussion panel at Money2020 where Richard Brown from R3, Alex Batlin from UBS and Simon Taylor from Barclays joined me to talk about the R3 consortium’s work in blockchains for financial services and their experiments to date with double-permissioned shared ledgers for banking. The very week before this panel, R3 had announced their Corda platform. It is not a blockchain.
I got the easy panel to moderate.
Richard Brown from R3 will be talking about Corda next week at our our 19th annual Tomorrow’s Transactions in Forum in London next week. He’ll be joined in the shared ledgers session by Intel (we have been working on a very interesting project for Intel in the blockchain space) and Ripple. So if you want to tap in to the leading edge of serious business discussion on the topic, come along. As always, the Forum (this year sponsored by our friends from WorldPay, VocaLink and Oslwang) will be limited to 100 people, so head on over to register for a place right now. Thanks to the amazing generosity of the sponsors, it’s only £295 for both days – you’d be mad to miss Barclays, Mondo, Fidor, Equens, Clearmatics, the FCA, Shell, Samsung Pay, World Remit, Visa Europe, Curve and many others in an environment of genuine discussion, debate and learning. See you there.
Well done to my old chum Chris Skinner for setting up the Financial Services Club debate around the blockchain this week. I had fun, I learned a lot and we got great feedback on the evening and the format.
Chris wrote this up on his blog, so there’s no need for me to write it all up again here! I just wanted to draw out a specific point about the use of the bitcoin blockchain as a value transfer system (which was the heart of what had started the debate in the first place) and the different between talking about the blockchain, a blockchain and a replicated distributed shared ledger.
The debate was about whether blockchain is faster and cheaper, and it was clear from the start that this was going to be difficult as the question Dave raised is: faster and cheaper than what?
Well, indeed. The blockchain is only one architectural choice for a replicated distributed shared ledger and the bitcoin “proof of work” version is only one architectural choice for a blockchain. Making any sweeping statements about blockchains is ridiculous.
Anyway, my point was that blockchains are at best an unproven route to a faster or cheaper mechanism for value transfer. Since most of the costs of value transfer are compliance and customer service and other non-technological stuff, it might be better to focus on the characteristics of shared ledgers that tackle those costs. In his speech to the London School of Economics on 2nd March, Ben Broadbent (Deputy Governor for Monetary Policy at the Bank of England) said that “in the opinion of most economists, it’s pretty unlikely that [bitcoin’s] use as a means of exchange will become very widespread” and I agree. Bitcoin may well have a very interesting future, but not as a mass-market value transfer mechanism.
In this light, bitcoin is now perhaps best considered not just as an investment vehicle or currency, but as the longest-running proof of concept for how blockchain-based systems, those that both use its tech and innovate on its concepts, may improve finance.
But, as noted, there are other kinds of shared ledgers. Jon said that shared ledgers were not new, but I disagreed. The point about the replicated distributed shared ledger as an architecture is that it is made possible by Moore’s Law. We have never before been at a point where all of us can store everything. This new technology must be a new platform for new services that I’m not smart enough to think of, but I’m unconvinced that sending money for one person to another more cheaply or more quickly than the Faster Payment Service (FPS) is one of them. On the other hand, emergent properties around transparency and robustness and integrity and “smart contracts” might lead to wholly new and wholly better financial markets.
We had a robust but gentlemanly debate and I sincerely hope that the audience enjoyed it as much as we did! It’s a fascinating subject. If you’d like to understand shared ledgers, the blockchain and bitcoin in more detail (in sufficient detail to start developing business strategy, in fact) then why not come along to the workshop that Consult Hyperion has put together with our friends from the Payments Business School. It’s in London on 7th April and you’d be mad not to sign up for it here immediately.
Well. The lovely people from FinTechStage, principally my old friends Matteo Rizzi (who was one of the co-founders of SWIFT Innotribe) and Lazaro Campos (who used to run SWIFT), persuaded me that Consult Hyperion’s more technological perspective on the potential for shared ledger technologies (SLTs) in financial services might be of interest to the delegates at FinTechStage Luxembourg in February. So off I went to dinner with, amongst others, the Minister of Finance for the Grand Duchy of Luxembourg, Pierre Gramenga. Indeed, I found myself sitting next to Pierre who, it turns out, is a very smart and interesting person. Unlike our own Minister of Finance, he is actually an economist and he spent a decade as the Director General of the Luxembourg Chamber of Commerce so he understands the relationship between regulation and business very, very well.
Since I’d been chatting to Pierre, when I was asked to give a few words about the potential for SLTs to the assembled CEOs I decided to put my prepared remarks to one side and talk instead about the way in which Ministers of Finance can change the course of history. I used the example of the Golden Horde to make my point.
When Genghis Khan took control of China in 1215, his fiscal policy was confused. His pacification plan was to kill everyone in China, no small undertaking since China was then, as now, the world’s most populous country. Fortunately, one of his advisors, a man who ought to be the patron saint of Finance Ministers everywhere, Yeliu Ch’uts’ai, pointed out that dead peasants paid considerably less tax than live ones, and the plan was halted. Under Pax Mongolia, China prospered. In 1260, Genghis’ grandson Kublai Khan became Emperor and with his financial advisors determined that it was a burden to commerce and taxation to have all sorts of currencies in use, ranging from copper “cash” to iron bars, to pearls to salt to specie, so he decided to implement a new currency.
A paper currency.
This must have been as shocking to contemporaries as the idea of digital currency is today. It was certainly a shock to Marco Polo, who wrote about it in his travels (I expand on this in a piece on Medium).
I explained to the Minister and the CEOs that Kublai’s monetary policy was refreshingly straightforward and robust. If you didn’t accept his new paper money, he would kill you. Naturally, in a short time, the new single currency was established and paper money began to circulate instead of gold, jewels, copper coins and metal bars. I wasn’t suggesting that Luxembourg institute capital punishment for those refusing to accept Bitcoin, but I was suggesting that a juridiction such as the Grandy Duchy might want to explore creating new kinds of financial markets founded on shared ledger technologies and the ambient accountability that will, as my colleague Salome Parulava puts it, dissolve the boundaries between auditing and compliance to the form a better, cheaper and safer market for asset management, transfer and settlement.
I think it went down OK.
Dave Birch gave one of the the most hilarious and original talks I ever listened to.
Matteo is much too kind, of course, but it was a fun event. One thing I particularly enjoyed (and this is a genuine sentiment) was disagreeing with my old friend Chris Skinner. Chris gave a thought-provoking presentation around his new book “Value Web”
Using a combination of technologies from mobile devices, wearables and the bitcoin blockchain, fintech firms are building the ValueWeb regardless
Chris’ thesis is that out of the blockchain of bitcoin will come a new shared database on the internet that banks will use that will be far cheaper and more geared to real-time than the proprietary structures they use today, but I think I disagree. Whether the blockchain is either instant or free I will leave as an exercise for the reader, but in my presentation on SLTs I chose to focus on a different set of emergent properties around transparency. My point was that even if the blockchain, to use Chris’ example, isn’t cheaper or more real-time than current asset transfer, clearing and settlement systems, it delivers a win-win-win for customer, service providers and (crucially) regulators. I made similar point when I was invited to take part in Lazaro’s panel with Simon Taylor of Barclays and Jon Matonis, formerly of the Bitcoin Foundation.
We didn’t agree about everything either. I think audiences get bored with bland backslapping on stage. Personally, I learn more from seeing smart people disagree about something than I do from sitting through a bunch of marketing slides. So, as you can imagine, I was delighted to be invited by Chris to take part in tonight’s Financial Services Club debate.
For the past year, banks have become really excited about blockchain technologies. The claim is that these technologies will allow banks to create instantaneous exchange over the internet for near free. But is this true?
Under Chris’ guiding hand as chairperson, I’ll be debating the issue with Jon and trying to convince the audience that financial services organisations should be learning about, playing with and planning for SLTs whatever they think about the speed or cost of the blockchain (or, indeed, a blockchain).
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