Oh, please… tax breaks for blockchain companies?

The news item from last week about the Spanish government contemplating tax breaks for companies using blockchain technology is frustrating. It buys into the hype, assuming the blockchain = the future, blockchain = good, blockchain = progress. What it will end up doing is encouraging businesses to throw a lot of money at blockchains they don’t need. Technology investment is increasingly the backbone of any company’s expenditure, and if a business gets that wrong… if, for instance, it implements a blockchain that then can’t scale or can’t protect the information or – gasp – ends up breaking any one of the multiple privacy, custodian and financial laws… It would make sense to also exempt companies using blockchain technology from the country’s bankruptcy laws.

Only, no, it wouldn’t. That would just provide a further incentive for businesses to add “blockchain” onto their IT specs. Even more vapid hype.

source: Giphy
source: Giphy

A more useful solution would be a “sandbox”, in which businesses that work in regulated sectors (finance, health, education, etc.) can experiment with the technology’s advantages without needing to comply with a long list of restrictions that were drawn up 25 years ago. A sandbox would encourage cautious investigation while not endangering systemic processes – and while there is always the risk that sandbox privileges will be withdrawn, it’s more likely that rules will be adapted once consequences have been examined. And, most important, the consumer would broadly be protected.

Not under the proposed Spanish system. Never mind the consumer, let’s get businesses using this technology that is still new and relatively untested, because hey, tax breaks.

What’s more, given how “easy” it is these days to issue digital tokens through initial coin sales, we could see traditional companies choosing this option – even if the token makes no economic sense – because it could help them pass as a “blockchain company”. This will add fragility to the system as hopeful investors put money in these tokens.

And, how can you offer tax breaks for potentially unregulated use cases? Sure, the government could decide which use cases get the tax breaks. But that is akin to deciding how to regulate the use of the technology – something that no government has wanted to touch with a bargepole. Not yet, anyway.

It should be a boon for blockchain consultants, though. They’ll be raking it in.

How about offering tax rebates to businesses investing in any type of technology? Why is the government favouring some types over others? And why does it think it has the sufficient expertise to be able to determine which technology is better for business? This push for blockchain shows that the ruling party 1) doesn’t understand blockchain technology, 2) is desperate to appear savvy and 3) is not thinking ahead to not-too-far-away time when blockchain technology has evolved to the point of blending with others, both current and yet-to-be-invented.

There are upsides, though: this move could encourage the hundreds of self-proclaimed blockchain experts in the country to actually start learning about real applications, rather than just spouting utopian platitudes that have little grounding in either history or economics (judging from media quotes and published work – I’m sure there are smart ones that do “get it”).

And, it could attract more blockchain businesses to Spain, which could kickstart an ecosystem that in turn could encourage broader, more sustainable development.

But it’s not enough to make a difference. To attract technology development, Spain needs to re-examine its entrepreneurship laws, remove the “exit tax”, further relax labour laws, reduce bureaucracy, and work hard at moving up from position #86 (!!!) in the World Bank’s Starting a Business Index.

Encouraging technology exploration is a good thing, especially for something as potentially transformative as blockchain applications. But making empty declarations with the sole purpose of window-dressing will end up accelerating and perhaps deepening the disappointment when unrealistic expectations are not met – and that won’t be good for anyone.

Bits and stuff: February 18, 2017

An awesome article from my colleague Marc Hochstein, with one of the best quotes I’ve read in ages, from Primavera De Filippi:

“You cannot assume that just because a technology dis-intermediates and is trans-national that it cannot potentially be used to reinforce existing social, political and economic structures.”

RIP, John Perry Barlow.

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In The New York Times, Peter J. Henning raises the issue of cryptocurrency regulation. Who should regulate cryptocurrencies in the US? Both the SEC and the CFTC appear to be in a game of “not me” – and they both have a point. The SEC regulates securities – cryptocurrencies such as bitcoin have not been defined as such (and to do so would defy logic). The CFTC regulates derivatives on commodities – and while it has labelled bitcoin a “commodity” (not totally unreasonable), its remit does not cover the cash market, just commodity-based derivatives.

“The C.F.T.C. “does not have regulatory jurisdiction over markets or platforms conducting cash or ‘spot’ transactions in virtual currencies, or over participants on those platforms.” To reach actual trading in cryptocurrencies, Congress would have to extend its authority to cover a cash commodity market, something lawmakers have not done.”

At the moment, cryptocurrency exchanges are loosely covered by a patchwork of state money transmission laws – but, cryptocurrencies have not officially been designated “money” – and having to get licensed in every single state is not practical. The result is a clunky, fragmented or off-the-radar network of exchanges that do not offer much protection to the user.

The article posits the creation of a new organization – a Cryptocurrency Council, for instance. This would not only be able to develop a national approach to cryptocurrency transmission and exchanges – but it could also further investigation into use cases, offer a focal point for fraud investigations and develop a comprehensive base of information on usage. Most importantly, it could offer an umbrella of respectability to the nascent field, while recognizing that a new concept deserves a new mindset.

In the end, trying to fit cryptocurrencies into one of the existing asset definitions for regulation purposes isn’t working out well for anyone. Time to re-think the paradigm.

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The FT’s Henry Mance gave us a brilliant tongue-in-cheek take on us vs. Big Tech:

“This week, 1m people signed an online petition protesting against a redesign of Snapchat, the adult-proof messaging app. They wish to express — I quote — a “general level of annoyance”. They have probably already slammed their bedroom doors. They might not come down for supper.”

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Here’s a blockchain use case: In Ghana, over 80% of landowners lack title to their land – and 2/3 of Kenya’s land is “owned” without title…

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Bloomberg reports that the UN’s World Food Programme expects to be able to cut millions of dollars from the costs of administering its food programme, just by moving the cross-border money transfers onto a blockchain system. While that is actually a tiny portion of the overall budget ($6 billion, according to the article), it does buy a lot of food… And it does mean less profit for the banks (although, again, a drop in the ocean…).

However, no details are provided on the type of blockchain to be used (a WFP programme in Jordan launched last year was built on ethereum), nor on timing – it sounds like more wishful thinking than actual plans.

And this quote by one of the directors – “Blockchain helps promote collaboration by providing enormous amounts of data.” – makes no sense whatsoever. Blockchain promotes collaboration by design, not by providing data. And it only provides data if it is programmed to do so. A strange thing to say.

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I’ve mentioned before that I’m a sucker for miniature dioramas… and I get an illicit thrill from dystopian fiction (if there’s a “survivor” theme)… so this made me gasp with delight:

Nix Gerber 1

Nix Gerber 2

Nix Gerber 3

– by Lori Nix and Kathleen Gerber

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Tyler Cowen bucks the trend with a bad review of Black Panther. I haven’t seen it yet, but have heard nothing but rave comments… which always makes me suspicious.

“So many spears and wild animals? How about holding a referendum every now and then?“

I grew up in Africa, and the way western culture attempts to portray what it thinks African culture looks like in a misguided attempt to appear inclusive has always irritated me. That said, I really like the bits of the soundtrack that I’ve heard, so…

“I would say the more you know about actual African cinema, the less you will appreciate this one.”

Then again, no way was this attempt at bridging divides not going to stir up some uncomfortable opinions.

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And speaking of Tyler, he interviewed Matt Levine – the best newsletter creator out there (original, pithy and witty comments on money and economics, for Bloomberg) – on his podcast. They had an interesting chat about cryptocurrencies (no, CryptoKitties are not derivatives), and about Buffy the Vampire Slayer. Definitely worth listening to.

“It’s a perfect example of dealing very intelligently with serious themes in a way that, on its surface, and particularly in its title, is silly and is not presented as serious, which I think is, obviously, something that I often aspire to do.”

(Apropos of absolutely nothing at all, Matt Levine has a much deeper voice than I expected.)

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I’ve just finished “The Defectors”, by Joseph Kanon. It reminded me so much of John Le Carré, only more American. Although it’s actually very Russian – about the lives of US spies who escaped to the Soviet Union. Written with a certain rhythm and poetry, with complicated villains that you can’t hate and heroes that are far from heroic, it zips along with a melancholic yet determined patriotism.

defectors

Bits and stuff – February 11, 2018

On to the media crypto highlights of the week…

Taking a step back, CoinDesk published an original overview of ICO trends, which include continued regulatory pressure, the awakening of traditional tech companies to the potential of tokens, and the increasing sophistication of consumers.

What I didn’t expect was the apparently widespread belief that token funding will continue to grow, while getting more complex. I was also surprised by the revelation that many ICO entrepreneurs have back-up plans in case ethereum’s scaling issues don’t get resolved.

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From VC firm Andreesen Horowitz, a list of cryptocurrency-related readings, well worth bookmarking.

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Pascal Bouvier has the audacity to draw parallels between the evolution of established religion, and that of cryptocurrencies… and pulls it off, with flair. A stirring read:

“Money creation is backstopped by taxes on the people and the state monopoly on violence ensures a more or less orderly collection of taxes. Remove the monopoly over money creation and the nation state starts to vacillate on its pedestal… Many pundits will rightly point out that all cryptocurrencies suffer from congenital malformations… If there is one thing we can count on, it is human ingenuity, and the crypto field will find solutions and solve these defects over time. What we all hear is the sound of inevitability in the form of fitter cryptocurrencies to come.”

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I get a huge kick out of seeing how different media sources report on the same event – it often leaves me wondering how many parallel universes there can be.

On this week’s Senate hearings on cryptocurrency, for instance. At the thoughtful end of the spectrum, you have:

ETHNews: What Was Missing From The Senate Banking Committee’s Hearing On Cryptocurrency?

The report urges greater consideration of volatility and systemic risk, to what extent newer cryptocurrencies are commodities, the self-certification of cryptocurrency derivatives and whether or not all tokens are securities (as Chairman Clayton hinted).

CoinDesk: Crypto Industry Reacts to US Senate Hearing Remarks

“Optimism aside, some market observers said they believe the hearing revealed the need for more clarity on the regulatory front – something that both agency chairs indicated may be necessary in statements that broached possible action from the U.S. Congress.”

TechCrunch: Senate cryptocurrency hearing strikes a cautiously optimistic tone

“In a week of plunging prices and bad news, the hearing struck a tone that coin watchers could reasonably interpret as surprisingly optimistic.”

Reuters: U.S. regulators to back more oversight of virtual currencies

“Both regulators have cracked down aggressively on bad digital currency actors… But the question of who is best placed to oversee the underlying cryptocurrency cash market remains unclear.”

At the other end of the spectrum, you have:

Forbes: Regulators May Need More Power To Control Bitcoin, Senate Banking Chair Says

A confusing, patchwork article that I gave up trying to make sense of. (“Control bitcoin”? C’mon, that is not at all what they said.)

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As cringe-inducing as the above article is, the week’s award for Most Egregious Reporting must go to that fount of financial wisdom, the Daily Express, whose headlines “Cryptocurrency bull run imminent with bitcoin to hit $50,000 in 2018“ and “Cryptocurrency CRACKDOWN: World leaders to plan REGULATION of Bitcoin at G20 meeting” are just plain irresponsible. I’m not going to put links to those articles because they don’t deserve the encouragement.

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If this doesn’t make your mouth water…

lauren-ko-12

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By Lauren Ko… check out more of her pastry creations at Colossal

 

Lessons learned: Taurus and the ASX blockchain integration

image by Tamarcus Brown via StockSnap
image by Tamarcus Brown via StockSnap

London, 1993. A big decision was about to be made, that would send ripple effects across Europe and forward through time, acting as a warning against ambition and consensus.

For the past 10 years, the London Stock Exchange had been working on a significant upgrade of its securities settlement system. With paper-based systems groaning under the 1980s boom in share ownership, pressure was building not only from nimbler competitors but also from the regulators across the Channel. If London wanted to maintain its role as the continent’s money centre, it needed to upgrade.

The new system was called Taurus, and its goal was to remove as much physical documentation from the system as possible. It also planned a move to rolling settlement, reducing the payment period for equities from three weeks to three days.

Yet things were not going well. The first sign was the rhythm of missed deadlines.

From the outset, the project was complicated. It aimed to include as many sector stakeholders as possible, in spite of conflicting interests. Institutional investors wanted a fast, reliable service, while private investors wanted lower costs. Also, the existing registrars (dominated by large banks) were given a say in the development of a centralized registry, even though it would undermine their business model. Well into the development cycle, they torpedoed the idea.

What went wrong?

In the haste to get development off the ground, the project allegedly started without a clear roadmap. And delays gave more time for the various stakeholders to add requirements.

Even with clear and stable stewardship, that scale of development would have been tough. Yet the project management structure was not clearly defined, and the lack of centralized control meant that interlocking pieces were being developed out of sync, with sections of the process at different testing stages, while other functions had not yet been designed.

Also, given the long lead time (which ended up being more than double the initial estimate), the system – if launched – would already have been behind the competition from day one.

The final straw came when an investigation in 1993 revealed that completion would take another two to three years, at double the cost-to-date.

The decision was taken to scrap the whole project. The exchange’s investment of over £70 million (over £140 million in today’s money) was lost. The London Stock Exchange handed over responsibility for the development of a new stock trading system to the Bank of England, and its CEO resigned.

It wasn’t just the colossal waste of money and the damage to its reputation that made many fear for the exchange’s future. Hundreds of brokers had based their systems development on the assumption that Taurus would be the main platform, and thousands of employees had been trained. The total cost to London’s financial centre was estimated to be in the hundreds of millions of pounds.

Of course, it’s easy to see in hindsight where things went wrong. And it’s easy to believe that today, big systemic projects would be managed with different principles.

While that may be the case, the fate of Taurus serves to highlight the colossal complexity of introducing a new systemic platform. Throw in a technology that has yet to be tested “in the field”, and you have a potential powder keg of risk.

All change

I’m talking about the decision of Australia’s primary securities exchange, ASX, to upgrade its clearing and settlement platform to one based on distributed ledger technology.

Announced late last year, the news sent waves of excitement through the blockchain sector – it would be one of the first major public-facing applications of the technology, which many have touted as having the potential to decentralize finance.

Introduced with bitcoin, the blockchain offers a way of sharing data that removes the need for validation from a central authority. The elimination of redundancies and the speed with which information can be transmitted and acted on present significant cost reductions, especially intriguing in an era of diminishing margins and increasing competition in the financial sector.

It’s not yet clear whether the technology that ASX will use (developed with blockchain startup Digital Asset) will technically be a blockchain, in which information is stored in blocks that are irrevocably linked to previous blocks, ensuring data integrity. The official press release referred to “digital ledgers”, and while the two terms are often used interchangeably, some distributed ledgers don’t rely on linked blocks to share and verify inputs and outputs. However, since the boundaries of the new technology are being blurred as the concept evolves, the announcement was treated as a triumph by blockchain sector participants – official, public validation of the potential benefits.

Be careful

And yet, it is by no means the windfall that the headlines proclaimed.

First, it isn’t happening anytime soon. At the end of March, the ASX will reveal a potential live date for the new platform – it will most likely be years away. We won’t get a clear indication of the expected timing until the end of June.

And, as we saw with Taurus, in complex undertakings, deadlines are often extended. Hopefully the new system will be revealed within a much shorter timeframe than the failed British attempt’s estimated 13 years…

If it gets revealed at all. The ASX platform does need to be replaced – known as CHESS, it is 25 years old and is struggling to keep up with newer and nimbler competitors. But the decision to build on top of a relatively untested technology with uncertain scaling and bottlenecks is a brave one. And few development projects progress without setbacks.

It’s fair to assume that the planning will be meticulous and thorough. But will it manage to avoid the pitfalls of overwhelming systemic change?

Learning from the mistakes of Taurus will help. But the leap forward in technology with this development adds a new layer of complexity.

A large part of the problem will be managing expectations. While “blockchain” has been hailed as “the next industrial revolution”, we are not going to see a new decentralized stock exchange emerge before our eyes. As far as the public is concerned, things will continue pretty much the way they are.

For the financial and technology sectors, though, it is a big deal. If all goes well, back office costs will be reduced, new efficiencies will be explored and distributed ledger technologists will learn much from the real-world rollout.

The true change, however, will come years down the road, as other exchanges around the world take a look at their own clearing and settlement processes, as regulators encourage compatibility and connectivity, and as frictionless cross-border trading finally begins to look like a possibility.

But first, the ASX system needs to be successfully launched. And, as we’ve seen, it’s nowhere near as easy as it sounds. While the decision to migrate a country’s main securities settlement and clearing platform to a distributed ledger is good news for the blockchain sector, it is too soon to celebrate.

Bits and stuff – February 4, 2018

So, after a pretty dire January (my mother passed away), I emerge, blinking, into the crypto light again… Anything interesting happen in my absence? *checks bitcoin price* Oh…

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Have you noticed how bitcoin transaction fees are much lower now than a month ago? The rocketing cost of using bitcoin was the subject of several headlines recently, with fees holding at around $30 per transaction. That makes bitcoin economical only for large transactions (and perhaps not even then) – not exactly the original vision.

Now, however, they appear to have dropped to around $10. This is still too expensive for bitcoin to be useful, but since most of the transactions are from speculators, they don’t seem to mind. For real-world use, it’s a non-starter.

Bear in mind that these fees are on top of the substantial reward that the miners get for processing a block. Wasn’t the idea that fees would remain low as long as miners got paid through new bitcoins?

And, why the drop? Someone on Twitter suggested SegWit. Is that right? Anyone have a grasp on this?

 

bitcoin transaction fees
from bitinfocharts.com

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Good stuff:

Joi Ito’s article on the ICO mania for WIRED:

“Requiring companies to sell tokens only to accredited investors won’t solve the problem, because those investors will later sell them to speculators or, worse, to people who have seen the ads online promising to provide the secret of making a bundle on cryptocurrencies.

A lot of otherwise productive developers are devoting their expertise and attention to working on shallow, quick money ICOs rather than working to sort out the underlying infrastructure and protocols in academic and more open deliberative settings not fueled by warped financial interest.”

Kadhim Shubber’s take on the fundamentals of bitcoin in the FT:

“Someone comes along and tells you to imagine an electronic network, for moving money anywhere in the world, that no-one owns. It’s an intriguing idea. It’s an unprecedented idea. In the entirety of human history such a thing has literally never existed.

Would your response really be: ‘lol the true value of bitcoin is zero’?”

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Daft article of the week:

How to add to the already-high bullshit quotient in crypto Twitter, from WIRED… (I include this cringe-making article here, against my principles – it shouldn’t even exist, I mean, c’mon – to help you spot the fake experts).

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Smart…

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All conferences should have reporting like this:

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And, thanks Vitalik… sending you a hug for this…

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Colour and curves… Say no more…

via Colossal
via Colossal