Bitcoin Bits: 4 September, 2016

A roundup of some of the more interesting articles of the week (and it was difficult to choose, there’s a lot going on!):

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How Bitcoin was brought down by its own potential—and the banks – by Luke Ryan, for Quartz

This enigmatic opening sets the tone for what follows:

“The best that can be said about Bitcoin right now is that it still exists.”

What follows is a sobering and narrow take on the outlook for a cryptocurrency that has people re-thinking economics and the role of money, that has innovators re-designing business processes, that has libertarians rubbing their hands in glee at the decentralizing potential and that has regulators realizing that they are hopelessly behind on technology.

“Split by internal divisions while its most useful aspects are harvested by the very financial behemoths it once hoped to destroy, Bitcoin is fast becoming the tech world’s version of Waiting for Godot, wherein a hermetically sealed community squabbles and bickers over arcane points of code and law as their world slowly crumbles around them. In the last 12 months, attempts made to produce a road map for the cryptocurrency’s future have come to naught, all while core developers abandon the project and opaque Chinese mining concerns wield outlandish power.”

And that’s just the warm-up. Apart from the mystifying claim that that bitcoin’s influence on fintech via the blockchain mechanism means that bitcoin has failed… Aside from the superficial assumption that internal bickering means chaos not caution… I would imagine the “world crumbling around them” might be mitigated by the Cambrian explosion of new businesses, and the fact that the price is 2.5x what it was a year ago. So a road map hasn’t been produced in the past 12 months, so what? It will be. Core developers abandon the project? Does anyone know of a project that has been going for 7 years that hasn’t had turnover? And “outlandish power” sounds marvellous, but I have no idea what it means.

That was fun. Next paragraph, please.

Don’t worry, I won’t go through the article paragraph by paragraph. It’s actually a very good read, beautifully written, whether you’re a bitcoin skeptic or not. If you are a skeptic, you’ll enjoy the drama. And if you’re not, well, you’ll enjoy the drama and probably have a good chuckle as well. Or feel like throwing your computer across the room. Whatever.

I like this part:

“In comparison to the almost $5 trillion traded on the international currency markets each and every day, Bitcoin’s $10 billion market cap is next best thing to a rounding error. It could vanish entirely and only a small cadre of true believers (and high-end drug dealers) would even mark its passing.”

What the author says in the article is not false. And his disappointments are presented with a flourish. But they miss the point. Bitcoin does not need to dominate the world to be a success. It does not need to replace banks, monopolize asset transfer nor claim the credit for the transformation of business. By putting control over one’s assets in users’ hands, by allowing new business models to grow and by introducing a new concept of value, bitcoin has earned its place in history. And a steadily growing faith in its usefulness in these times of financial turmoil could well push the price higher still. If not, even that doesn’t mean that the experiment was a failure.

The overblown hype in the early days was just that, overblown hype, which as the author points out, is endemic to virtually all revolutionary technologies. I’ve argued before that I don’t think that overblown hype is a bad thing. I think it’s a necessary and potentially useful phase.

And finally, can anyone point to an asset class that did not need to overcome obstacles at first? Especially the obstacle of public skepticism. Which, by the way, is healthy…

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Spectacular and unintentional earth art: the solar panel field in Nevada. Amazing images by award-winning photographer Reuben Wu, via Colossal. Surreal. Beautiful. Disconcerting and hopeful at the same time.

image by Reuben Wu, via Colossal
image by Reuben Wu, via Colossal
image by Reuben Wu via Colossal
image by Reuben Wu via Colossal
image by Reuben Wu, via Colossal
image by Reuben Wu, via Colossal

(Anyone read “A Visit From the Goon Squad” by Jennifer Egan? These photos made me think of the short story told entirely in PowerPoint, in which they end up in a solar-panel field. “They remind me of robotic ninja warriors doing Tai Chi.” If you haven’t read it, I thoroughly recommend it – engrossing, clever and eye-opening, one of my favourite fiction reads from the past few years.)

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Maybe blockchain really does have magical powers – by Elaine Ou, for Bloomberg

Walking us past the WEF’s much-talked-about blockchain report, and R3’s distributed ledger consortium approach, Elaine highlights the potential impact of the blockchain on settlement of trades.

“Clearing and settlement of trades — that is, making sure the cash and assets involved in the deals actually get to their new owners — is difficult because records are distributed across thousands of different institutions, each of which maintains its own accounts in its own unique format. Multiple players must somehow come to agreement on who owns what and who owes what to whom — a reconciliation process that requires a lot of time, money and human involvement.”

A situation that is obviously crying out for some applied efficiency. A sector that obviously needs some loving disruption. We have had the technology for some time. So why hasn’t it happened yet?

“…the only thing previously stopping the standardization of reconciliation processes was the unwillingness of financial institutions to collaborate. Financial institutions spend $65-80 billion on back office reconciliation every year. The employees working in back offices probably offered lots of excellent reasons why their roles couldn’t simply be standardized away.”

In spite of a considerable amount of hype, misdirection and confusion, it seems that progress is being made.

“Maybe one of the biggest effects of all the blockchain hype will be getting a bunch of security-conscious egoists to come to an agreement that benefits them all. That would truly be magical.”

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‘Settlement Coin’ is All About Banks, Not Blockchain – by Frances Coppola, for CoinDesk

Almost as a response to the previous entry (but it’s not), here you have an excellent article on an exciting project: a consortium of banks (UBS, Deutsche Bank, Santander, BNY Mellon) have combined forces with settlement house ICAP and blockchain developer Clearmatics to create a “Utility Settlement Coin” to enable securities trading settlement on the blockchain.

“Getting industry-wide agreement on moving to same-day settlement is like pulling teeth (even moving to T + 2 has taken years to implement). So, it looks like our consortium banks want to take matters into their own hands. Blockchain gives them a technical excuse to bypass the existing moribund processes.

There is another reason, too. Reserves and collateral are low-yielding assets that clog up bank balance sheets. Banks would really like to find a means of settling without having to pledge collateral at central banks. In fact, ideally they would like not to have to use central bank money at all.”

Apart from the fact that 4 big banks have managed to agree on a protocol and a provider, which is newsworthy in itself, you have the compelling idea of using a “token” on the blockchain to represent cash payments for security settlement.

“Bank reserves can’t be used for settlement on a permissioned blockchain: they can only be used for settlement via a central bank RTGS system. In contrast, our Utilities Settlement coins – we assume – would be used for settlement on a permissioned blockchain collectively owned and managed by the consortium. A private settlement system for real-world currencies, effectively backstopped by central banks.”

How far can we take this “representation” of cash via tokens on a blockchain concept? And how could this impact/replace/leverage the creation of money supply through fractional reserve banking? Would it increase financial system fragility or decrease it? Told you it was exciting.

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Cyber threat grows for bitcoin exchanges – by Gertrude Chavez-Dreyfuss, for Reuters

This is an interesting example of misdirect and incomplete reporting, that ends up performing a worthwhile public service.

“In the most recent study, the rate of closure for bitcoin exchanges in Moore’s research edged up to 48 percent among those operating from 2009 to March 2015. Hacking did not necessarily trigger the closure in each case.”

A risk and security analyst has called this high percentage “not acceptable”, which opens a layered series of philosophical debates (such as, how do you propose to prevent it?). “Unfortunate” would be a more appropriate word, because it is. It is not surprising, however. Bitcoin exchanges are startups. Startups fail, close to 90% of them, according to a report by Forbes. So, relatively speaking, bitcoin exchanges are doing pretty well, especially when you take into consideration that many of them operate in an unregulated sector.

“Profitability is a big problem for bitcoin exchanges, with many of them unable to generate enough volume to keep afloat.”

I do get that vulnerable exchanges are more of a potential menace to the public than vulnerable startups. Startups come and go, but usually don’t take our money with them. Investors’ money, yes, but that’s a risk that is clearly set out up front. With exchanges, not so much. We aren’t aware that we are “investing”, because technically we’re not, but our money is at risk anyway.

Unlike startups, bitcoin closures often result from hacks. You don’t as often hear of startups closing because of theft. A study funded by the US Department of Homeland Security revealed that between 2009-2015, 33% of all bitcoin exchanges were hacked. Yikes. It’s not that bitcoin exchanges are being particularly targeted:

“Among the world’s stock exchanges, however, security breaches are much higher, with hackers attracted to the large pools of cash moving in and out of these trading venues. The latest survey of 46 securities exchanges released three years ago by the International Organization of Securities Commissions and World Federation of Exchanges found that more than half had experienced a cyber attack.”

The public service part from this article comes from highlighting the vulnerability of bitcoin exchanges. We should be reminded of that often. And we should be shown alternative and secure ways of storing our bitcoin. We won’t solve the problem, we won’t stop hacking nor cash flow mismanagement, and we probably can’t do much about bad luck. But maybe we can reduce our personal vulnerability through more publicity about the potential risks and more knowledge about how to mitigate them.

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Peaks, troughs and hacking: Why would anyone invest in bitcoin? – by Luke Graham, for CNBC

Bitcoin as a new asset class for investment portfolios, and a “safe haven” asset at that:

“Bitcoin provides a good option for a small percentage of someone’s portfolio to park their money in a place that’s completely uncorrelated to the rest of the capital market.” [quote from Chris Burniske, blockchain analyst at ARK Invest]

That in itself should generate a new use case, especially if regulatory support comes through.

“Like any new industry, the world of crypto is a wild west frontier with its fair share of failed experiments and bad actors,” said Hayter [founder and CEO of CryptoCompare]. “It’s only through this phase of experimentation and evolution that lessons are learned and practical solutions put in place. Regulation to protect consumers will be important, but too soon and it could snuff out the opportunity.”


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