Bits and stuff: fake notes, debt and dragons – August 29, 2017

JP Konig’s analysis of India’s recall of banknotes to supposedly eliminate counterfeits (it turns out that either fake notes weren’t really a problem, or the government is bad at catching them) threw out this telling graph:

via Moneyness
(via Moneyness)

How come the UK has such a high percentage of counterfeit bills?

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Quartz points out that Game of Thrones was really about debt. Most great stories are, actually.

(I confess I haven’t seen any of the seasons yet… now I’m more interested in tackling it.)

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As if to help with our digestion of that revelation, Visual Capitalist shares an infographic (by Equifax) of the origins of debt. It’s visually appealing, but frustratingly limiting – the origins of debt are anything but simple, and the infographic doesn’t go into what is meant by “credit”, or why credit emerged.(And economic activity did not “grind to a halt” in the Dark Ages!)

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You thought that QR codes were so last decade? Not so.

A16z listed ways in which the pixelated boxes are used in China. You have a smattering of expected ones, plus some unusual functions: at a wedding, for instance, to make it easier to send money to the bride and groom; on beggars’ signs (this could solve the how-do-you-support-others problem of cashless societies); as part of billboards.

The one that I found most intriguing is QR codes on tombstones, that lead to you information about the deceased. Creepy, but also fascinating.


Bits and stuff: revolutions, ageing and fish – August 28, 2017

Here you have an excellent reminder from Vlad Zamfir that blockchains are not the “revolution” we’ve been told they are. They’re progress, yes, but won’t end up with the wide-ranging reach the mainstream press promises. There are many, many data applications for which a blockchain is not useful.

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CB Insights has published an overview of 30 industries that could be impacted by blockchain technology. It’s cursory and incomplete (it misses out fairly obvious ones like capital markets and gaming), but a useful introduction with some good explanations.

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I would love to live in a tiny, floating house that was partly above and partly below water. Especially if I get to have champagne in the bedroom. (Via MyModernMet.)

via MyModernMet
via MyModernMet

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The World Economic Forum muses on what will come after the smartphone. They seem to think that it’s augmented reality. I think it’s the watch. You?

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This is awe-inspiring on so many levels… TechCrunch interviews a 23 year-old who has just closed her second fund for startups working on aging.


A private matter: the cracks in India’s Aadhaar programme

by Amruta Mahakalkar via StockSnap
by Amruta Mahakalkar via StockSnap

While India’s Aadhaar system of digital identity has been held up as an example of efficient modernisation and forward thinking, it has its dark side: as Quartz reports, data breaches.

Obviously, any information online is vulnerable to leaks and hacks. And when it comes to personal information, those come at a cost – even if there is no direct monetary loss, the focus on privacy and natural rights throws into question the “platformisation” of our daily lives. In democracies, this could well lead to a pedalling back of reforms, and a pervasive suspicion of technology in general, neither of which would be good for growth.

Privacy is something that needs to be debated, though, especially in this increasingly connected world. Over the past few decades, personal space has taken on a whole new meaning, as has crime. And our understanding of natural rights is developing, along with what could be perceived as infringements.

Rumblings of discontent over government interference were present in India even before Aadhaar rolled out. Recently they have been growing in volume, even taking the shape of lawsuits.

The official response to a particular challenge in 2012 was startling: there is no fundamental right to privacy under the Indian constitution.

This week, the Supreme Court overturned that statement, declaring that privacy is, indeed, a fundamental right.

The intensity of the questions will no doubt get kicked up a notch. What does that mean? What are the implications for digital identity? Can we safely combine privacy and connectivity?

Unpacking this case, we uncover many other fundamental issues: the impact on humanity of the relentless march of technology; the separation of the courts and the government; the cost we are willing to bear for improved efficiency… And that’s just scratching the surface.

A deeper consequence, perhaps the most important of all, is that the development of Aadhaar in India has shed light on how little we comprehend about fundamental concepts, and how the big picture gets lost in the scoreboard of goals achieved.

Hopefully the matters under consideration will awaken deep debate, and get renowned thinkers from all fields involved in the conversation. The whole world should listen, and join in, for we all stand to benefit.

With this, we can hopefully move towards a deeper understanding of what privacy actually means.

The beauty in not knowing – a personal tale

granada 1930s

My mother-in-law died earlier this week.

Heartbreaking – she was a lovely, elegant, generous woman who got such pleasure from affection, laughter and good company. We miss her so much.

I won’t tell you about the strength of her struggle that surprised all of her doctors and nurses. Nor will I tell you about the beauty in a typical Spanish death – loved ones gathered around her bed, chatting, laughing, crying and chatting some more. So many people came to say goodbye. She would have had a great time.

I do want to share an anecdote that emerged as we were discussing the resulting paperwork: it turns out that no-one knew her real age.

She grew up in Granada, in southern Spain. During the Civil War, the registry that held her birth certificate burnt to the ground, and with it, all record of her date of birth. So, when she went to get the replacement issued, she decided to shave off a few years. We don’t know how many, and the only proof we have of this is the testimony of her eldest sister (who left us a few years ago). Tía Mari always swore that no way was her little sibling’s birth year 1927.

This story left me feeling wistful. Of course we don’t care how old she really is, and nor can it be important for anything that mattered in her life.

But these days, it matters – so much access (to education, employment, even bars) depends on the date you entered this world. It forms such an integral part of your identity. And the fact that the information is today (or soon will be) stored on servers means that losing it to history is increasingly unlikely.

Especially when (ok, if) a blockchain platform ends up totally removing the possibility of manipulation and loss. The information will become much more reliable.

But a certain chaotic charm will be gone forever.

RIP María del Milagro Pérez-Hernández. And thank you, with all my heart, for all you gave me.

Bits and stuff: bitcoin splits and value, over-rated efficiency and gif artists – August 26, 2017

JP Koning on bitcoin as a unit of account, post-split:

“If bitcoin is to take its place as money, it is likely that it will have to cede the vital unit of account function to good old non-splittable U.S. dollars, yen, and other central bank fiat units. The Bitcoin community is just too sectarian to be trusted with the task of ensuring that the ruler we all use for measuring prices stays more or less steady.”

He puts forward an interesting observation, that I haven’t seen elsewhere: If the pre-split bitcoin price had the price of bitcoin cash “baked in”, then post-split the market price of the original bitcoin should fall by the same amount as the value of the new bitcoin cash.

And, if I have denominated the prices of my product in bitcoin, then I would have to jack that up by a similar amount.

Hence, bitcoin can never be a good unit of account – in a fictitious bitcoin monetary standard – since the prices would need to be adjusted every time there was a bitcoin split. Which end up being quite often.

It’s easy to rebut that no-one denominates prices in fixed bitcoin amounts. However, JP is talking about a putative bitcoin monetary standard – and making the point that if that were to come to pass, we couldn’t use it as a unit of account.

Throw in the inherent volatility in bitcoin (due to its fixed supply), and basing prices in the virtual currency becomes obviously highly impractical. We couldn’t denominate prices in fixed bitcoin amounts.

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My post on CoinDesk this week – “Hints and Rumors? How Ripple Might Really Enter China’s Market” –  on the recent rumours that Alibaba is running a Ripple validator node. Ripple has denied this, but that doesn’t mean they’re not talking.

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Enhanced efficiency isn’t always a good thing.

So argues Lloyd Minor, Dean of the Stanford University School of Medicine, in his article on Quartz titled “Doctors are burning out because electronic medical records are broken”.

“Together with the compressed time of office visits, EMRs [electronic medical records] conspire to turn medical practice into a regimented, one-size-fits-all endeavor, just when science and technology are giving us more ability than ever to treat our patients as the individuals they are.”

Rather than the efficiency that is at fault, it’s the time-consuming data entry. What if that could be smoothed and made less of a hassle? What if repetitions could be eliminated, information could be analysed and results delivered almost immediately, making the patient visit more productive and satisfying?

Healthcare is one of the fields that most could benefit from blockchain platforms, up there with capital markets, insurance and identity. Around the world, work is increasing on this application, from governments, incumbents and startups.


Articles like this reinforce the urgent need. We’re not talking about saving on bank costs – this can and will make doctors’ jobs easier. And with that, it can affect the quality (and length) of life for so many.

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It seems that “gif maker” is now a profession. Cool. (See more of Tyler Haywood’s artistic gifs at Colossal.)

by Tyler Haywood, via Colossal
by Tyler Haywood, via Colossal


Blockchain will not keep food fresh

by Ryan McGuire via StockSnap
by Ryan McGuire via StockSnap

This type of blockchain article – from Quartz, no less (they usually do better) – is not only annoying (hype, anyone?) but also detrimental to development.

For starters, the headline – “Supermarkets are now using blockchain to keep food fresh” – is misleading. No, supermarkets are not using blockchain to keep food fresh. One supermarket chain (Walmart) has trialled the concept, and a broader group is uniting to explore functionalities of a platform built by IBM.

Also, promising that blockchain technology can keep food fresh is heightening expectations unreasonably. Shippers and supermarkets keep food fresh. This particular project is focused on detecting the origins of food contamination. Not the same thing.

Furthermore, of the founding members of the group, only two are supermarkets (Walmart and Kroger). The others (Golden State Foods, Dole, Unilever, Nestle, Tyson Foods, McLane Company and McCormick) are distributors, meat processors or manufacturers.

And, while the technology exists, claiming that it will be implemented is a stretch. A lot of buy-in will be needed for it to make a difference. Network effects will give an advantage to the first mover, but will not necessarily give it victory over others that emerge. Can there be more than one platform fulfilling the same function? If so, some degree of interoperability will be necessary to avoid silos of information – not a simple task. And if not, is that not the ultimate centralization?

Blockchains make sense if distributed control is an advantage. Why that is assumed to be the case here is unclear. Could a powerful database not do the trick? IBM could maintain the ledger, make sure that only trusted suppliers participated, and assume that its reputation for reliable development will give it room to grow with the network. A decentralized approach would most likely distribute the responsibility for the input data, ensuring it complies with regulations. But which regulations?

Furthermore, blockchains are only as reliable as the data they hold. What does it matter that data can’t be manipulated once input, if the data is faulty to begin with? Supply chains are notorious for shoddy documentation requirements and practices – changing a culture of record-keeping and processes will take a lot more than a new platform.

I’m not saying that the idea is not feasible. It’s just that it is so much more complex than superficial articles like this imply. And telling the public that they can expect contaminated food to be a thing of the past is misleading. Even worse, it sets the scene for major disappointment.

According to Gartner, blockchain applications for supply chains are on the initial upward slope of the hype cycle. Articles like this lead me to believe that they are almost at the peak. When the trough of disillusionment is upon us, critics will point to how the technology has not fulfilled its promise. Development projects will be shelved, failures will be paraded and attention will move elsewhere. No-one will blame the media that helped fuel unrealistic expectations.


Bits and Stuff: Research, Cuteness and Rage – August 20, 2017

I’ve fallen down the rabbit hole of research. An esoteric subject, to boot: the derivatives market.

Before you yawn and click away, let me say that it is SO much more interesting than it sounds. Riveting, in fact, and the more I learn, the more I believe that:

  • The instruments meant to hedge risk actually increase it.
  • The market is about so much more than finance – it embodies politics, philosophy and sociology.
  • It also reflects the evolution of organizational structures and the need for centralized controls.
  • Blockchain technology will re-draw the current structures… and thus influence the society that these structures reflect.

I’ll be teasing out these notions over the next few months, although I’ll start with a walk through the various sections: what the instruments do, how they trade, who regulates them…

And I’ll give an overview of what blockchain work is currently going on. There’s more of it than you might think, and it’s accelerating.

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The latest Fintech Insider podcast (an excellent show) was recorded at the offices of Starling Bank, and drilled down on the idea of “users owning their data”. It was repeated so often, as an obvious given, that I was left wondering how long it will take before this mantra spreads to other sectors.

Many blockchain projects are looking at how a decentralized internet would give users control over the information they need to input. And resentment of the hegemonic power of the Facebooks and Googles of this world appears to be building.

Yet legislators (generally far behind) are not yet wading in. And other sectors (utilities? education?) are exploring around the edges, but not with the intensity of finance and social media.

What is also intriguing is that Starling aims to give users control of their data, without mentioning blockchain technology. This will be worth digging into a bit more. How will they pull that off? Could other distributed ledger projects glean from this that perhaps not all empowerment will come from blockchain?

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After a week of depressing, horrific news dominating the headlines and Twitter, I would like to extend a note of gratitude to the trickle of pictures of cute animals appearing in my feed. Call me superficial, but this week I especially appreciated them.

@BabyAnimalPics, @AwkwardAnimals, @TheDailyOtter are some of my faves…

Say what you will about the banalisation of content. For me, getting a little heart lift in the middle of the day, especially in weeks like this, is a good thing.

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And while I don’t generally talk about politics, because I believe it’s too personal, The Economist’s gloves-off takedown of President Trump made me gasp. With delight. Scathing doesn’t begin to describe it.

And while in general I wouldn’t want to see anyone ripped to shreds so publicly, with this article I discovered that there are exceptions.

Hats off, Economist. Rage on.

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I’m taking a couple of weeks off to clear my head and catch up on reading and spend time with family… And I am going to try to use the computer less. You know, that whole unplug thing. (But the research I’m doing is so damn interesting… maybe I can sneak in a couple of hours in the morning… I know, I know, holiday…)

Anyway, enjoy the rest of August!


Blockchain and capital markets: foreign exchange trading

FX market

For something so little talked about, the foreign exchange (FX) market is a big deal.

The world’s largest and most liquid financial market, over $5tn a day changes hands in FX cash and derivative transactions. That’s more than the entire annual GDP of some countries.

The bulk of transactions are for FX derivatives, and few appreciate how integral these are to the functioning of the world economy. In terms of value, FX swaps are the most traded instrument in the world, exchanging an average of $2.4tn per day. When a central bank, commercial bank, corporation or fund manager needs a foreign currency for a purchase, an investment or a hedge, they generally resort to FX swaps – basically, they lend their domestic currency to foreign institutions, and simultaneously borrow from them the currency they need. This works out to be much cheaper and faster than directly borrowing the money in another country. In principle, the collateral for each side is the payment (or series of payments) they commit to making to the other.

As with most derivative markets, the system is clunky and relatively expensive, operating on dispersed, decentralized exchanges with duplicate processes, a lack of standardisation, an emphasis on direct relationships and increasing capital requirements. Although the infrastructure has radically improved over the past few years with the introduction of new trading venues, greater liquidity, algorithmic execution and improved data aggregation, the industry still regards settlement risk as one of its greatest threats.

New technologies and processes are making a difference, and are becoming even more essential in light changing regulation and increasing costs. Clearing houses are becoming even more important, for example, and traditionally opaque over-the-counter markets are being given a welcome (but expensive) wash of sunlight as post-crisis financial regulation demands greater transparency and less risk.

Given the decreasing profitability of swap market making (due to greater capital requirements and a recent slump in volume due to macroeconomic conditions), many prime brokers are either pulling out of the sector or closing out smaller clients, leading to lower liquidity and increased risk. This encourages even more prime brokers to pull out. Non-bank dealers and infrastructure innovations are picking up some of the slack.

Several capital markets businesses – both startups and incumbents – are looking at how blockchain technology can help reduce operating costs.

One of the most prominent is Cobalt, a startup working on a blockchain platform for FX post-trade settlement which it claims can reduce risk and cut costs by 80% (according to the FT, banks currently spend about $500m a year on technology for currency trading). In May, it announced that two of the world’s largest FX traders – Citadel Securities and XTX Markets – will use its service. They join 22 other banks and traders, including Deutsche Bank, UBS, BNP Paribas and Bank of America Merrill Lynch, in testing the platform ahead of a launch expected later this year.

While Cobalt is currently building on a blockchain platform designed by UK-based startup SETL, it aims to be ledger agnostic. The startup cites Tradepoint (a foreign exchange trading technology provider), First Derivatives (a database technology developer, which will apparently feed the data) and Kx (focused on high-speed data processing) as tech partners, and counts CitiGroup (which has the lion’s share of the global FX market) and DCG among its investors.

From startup to industry incumbent… NEX Group (formerly ICAP) has been working on a distributed ledger for FX trades – called Nex Infinity – built with technology from New York-based startup Axoni. The company recently began allowing clients to test the platform.

This makeover is a key part of the company’s strategy as it moves away from its history as one of the market’s leading interdealer brokers and into trading infrastructure. Its subsidiary Traiana will most likely end up playing an important role in the rollout of NEX Infinity, as it is one of the market’s leading post-trade and risk specialists. (As an aside, the founder and CEO of Cobalt – Andy Coyne – used to be CEO of Traiana.)

And, moving up the ladder, CLS Group – the world’s largest FX settlement service (handling over 50% of global FX transactions) – is working on CLS Netting, a blockchain-based settlement system for trades in currencies outside the standard service. The platform won’t be used in the core settlement system, but rather to improve liquidity in other currencies with more challenging legal frameworks that are currently settled on a bilateral basis, such as the renminbi and the rouble.

CLS is a founding member of blockchain consortium Hyperledger, and the platform is being built on Hyperledger Fabric. Several banks – including Bank of America, Goldman Sachs, Citi, JPMorgan Chase, Morgan Stanley, HSBC, Bank of China (Hong Kong), Bank of Tokyo-Mitsubishi UFJ, FirstRand and Intesa Sanpaolo – have expressed an interest in participating. Not bad for a fledgling project. Development is expected to near completion in early 2018.

The FX market is not an easy one to disrupt, even though the opportunity is obvious. First, scale matters – small startups, unless they have influential backers, are at a disadvantage in a sector in which most participants know each other, and trust is an important factor. What’s more, the incumbents increasingly seem to be aware of the potential of blockchain technology, as well as the need to innovate.

Second, the spectre of tightening regulation and the impact of macroeconomic trends add risk to the outlook for any foreign exchange project, for both startups and incumbents. FX volumes have been declining for a couple of years, although the slump has been concentrated in the spot market – derivatives are growing nicely, for now.

The next 12 months should see some key announcements in the nexus between blockchain technology and FX trading, as projects mature and more proofs-of-concept emerge. As regulations change, economic trends realign and even newer technologies develop, the market will continue to evolve towards a more efficient, transparent and trustworthy financial service. We are witnessing what will be looked back on as a fundamental shift in capital markets.

ICOs, common sense and the long reach of the law

I’m scratching my head here.

Most respondents to CoinDesk’s poll question “Who should be most fearful after the SEC’s DAO token sale ruling?” answered “Nobody, very unactionable”.

CoinDesk poll on SEC impact

This goes a long way to explaining the continued momentum of initial coin offerings (ICOs). A quick look at any of the ICO tracking sites shows no shortage of upcoming sales, many of which look to the naked eye very much like securities.

Are the respondents on to something? Or are they buying into the tragic “it’ll never happen to me” fallacy?

The thing is, they’re probably right. The SEC doesn’t have the resources to “go after” every digital token that acts like a security but didn’t register.

But, its moves can be swift and sharp. Today CoinDesk reported that the SEC has ordered the temporary suspension of trading in OTC-listed CIAO Group over questions about ICO-related claims.

Whether this is a one-off or the beginning of a slew of actions is unclear (the fact that CIAO is a listed company is no doubt a significant influence). However, the chance of a sanction or even an investigation should be enough to give pause. It’s a career-breaker. Even if the SEC ends up giving the green light after poking around, the stigma of having been singled out will be difficult to wash off.

What’s more, almost all digital token issuers are young startups with shallow pockets. An SEC fine would financially cripple the founders for years. Even just doing a simple risk analysis of [potential cost * probability] vs [potential benefit * probability] shows that, in many cases, ploughing ahead on the assumption that you’re immune is just not worth it.

The likely outcome is that the SEC, having issued a warning shot and seeing that the industry didn’t really take it seriously, swiftly moves to take action. We can probably expect further precedents to be set over the next few months as the regulator decides to make examples of some of the more egregious cases.

Meanwhile, lawyers will continue to speculate on what the rather vague wording of the SEC statement means, cryptoasset entrepreneurs will continue to build new economic models and investors will continue to dream of rapid riches with no consequences. All part of the evolution, right?

Is bitcoin money?

by Ondrej Supitar via StockSnap
by Ondrej Supitar via StockSnap

I’m currently reading “Money: The Unauthorised Biography” by Felix Martin, which I thoroughly recommend. Thought-provoking, illuminating and beautifully written, it debunks our preconceived notions and highlights the surprising evolution of this social technology that we use every day.

In the first chapter, Felix explains that the coins and notes that we carry around are not money. Money is the system of credit and debt that is sometimes represented by circles of metal and rectangles of paper. But usually not – most transactions are not represented by anything physical.

Rather, coins and notes are tokens that help us keep track of debts. The big innovation was to start exchanging those debts for others. Frank owes me, and here’s a token that represents that. I owe you, so here, take Frank’s token. Now he owes you. This conceptual leap is what kickstarted trade and the concept of an “economy”.

Looking back through history, that is what money has always been: a system of recording debts, and a representation of trust. That we associate money with coins is simply survivor bias – coins tend to weather the test of time better than other types of physical token.

One of my favourite anecdotes from the chapter is the siege of Malta. When the Turks cut off the fort from its supplies of gold and silver, the mint had to resort to making coins from copper – it inscribed each with the motto Non Aes, sed Fides – ”Not the metal, but trust.”

The system of recording that trust is what we call money.

Enter an entirely new way of recording that trust: bitcoin.

So, yes, bitcoin is a type of money. Perhaps not a currency – the online dictionary defines “currency” as “a system of money in general use in a particular country”. Since bitcoin is not confined to a particular country, that rules that out. (JP Koning points out that “currency” used to mean “something that could legally be used by the new owner if stolen”. So that would probably include bitcoin – but that definition has fallen into disuse, so we’ll go with the more modern one for now.)

According to the US Commodities and Futures Trading Commission (CFTC), bitcoin is a commodity. If you’re talking about bitcoin the coin, then yes, it could be. Commodities (gold, silver, cacao beans) have often been used in the past to represent money. BUT bitcoin is more than just a commodity, just as the euro is more than just copper coins. (Interestingly, paper – which also represents money – is not considered a commodity.)

And anyway, the CFTC ruling is mainly aimed at the regulation of derivatives, not so much at the use of bitcoin as money.

The topic is tangled, though. If bitcoin is a commodity (like silver), what makes it usable as money (like silver)? An official stamp of some sort – after all, monetary systems have always been controlled (or at least overseen) by a central authority. For the first time, we have a money that escapes the traditional parameters.

Also, commodities have always existed independently of the monetary system they move on (for instance, copper is not just used for money, knots on a string can mean something other than debt). Until now, anyway.

The confusion highlights the need for a new attitude. Maybe it’s time we updated not only our vocabulary but also our understanding of the monetary system. It’s not going to be easy.