Daily Bits – chickens, ether and bitcoin bills – June 26th, 2017

My article on CoinDesk this week –  Counting Chickens: Can Blockchain Restore Trust in China’s Food Supply?

These essays are taken from the weekly CoinDesk email, which I produce. If you don’t subscribe, you should, they’re kinda fun (even if I say so myself).

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As the price of ether retreats, this is a refreshing take on its outlook.

If you’re tired of the hype surrounding ethereum, you’ll like this article. Bitcoin miner and investor P4man takes a look at the fundamentals and makes some observations about the ether token’s outlook.

For instance:

  • Virtually no traction as a transactional currency (no merchant infrastructure, little evidence it’s used for remittances or similar)
  • Due to its complexity, it’s not a good store of value
  • It does not offer trust or predictability (vis hard fork)

And then there’s this:

“Despite hearing many claims to the contrary, ethereum with its vastly more complex blockchain, has a much bigger scaling problem than bitcoin, that is yet to be solved, even in theory. Concepts exist to address this problem (“sharding” etc), but those do not exist yet and may not even work.”

Plus, if we accept that a large part of the run-up in the price of ether was due to the demand for tokens with which to participate in ICOs, then for the ICO promoters to use the raised funds, they will have to sell those ether. Which could lead to downward pressure on prices.

Which may be what we’re seeing now. At time of writing, ether is ___% down from its recent high.

However, it looks like the ICO craze is not over yet, so ether could well rebound. I just don’t know when, or by how much (ie. this is not investment advice! – I do not hold ether.)

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A good thread on decentralization:

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Artist Matthias Dörfelt wrote a program which, for each bitcoin block input, outputs a design for a bitcoin bill. As in, a paper currency version of bitcoin.

by Matthias Dörfelt, via Co.Design
by Matthias Dörfelt, via Co.Design

To top it off, Matthias hand-signs each bill “Satoshi”. Because. And, notice the shadowy figure in the centre of each design.

by Matthias Dörfelt, via Co.Design
by Matthias Dörfelt, via Co.Design

I spent years teaching my daughter not to ask “why?” when it comes to art. I’m beginning to wonder if maybe she was onto something after all.

(Via Co.Design.)

 

Daily Bits – central bank currencies, blockchain ad servers and cookie dough – June 23rd

JP Koning brings up central bank digital currencies (CBDCs), and explains the difference between account-based money and bearer-based money. Most economic accounts of CBDCs, he says, only talk about the former. However, society needs the latter for “robustness”.

In account-based money, payments go through a central authority (say, the issuing central bank) that verifies we have enough in the account and that we are who we say we are. Then it authorises and executes the transaction. Bearer-based money is more like cash. Onus on the execution lies with the user, and the ledgers are adjusted off the central issuer’s books (if I give you €20, it’s understood that it’s now yours and not mine).

A CBDC that only works with account-based money will be vulnerable. Technological glitches happen. Servers go down, settlement platforms can break and mobile telecommunications can have outages. Cash, on the other hand, keeps on working throughout.

So, says Koning, to avoid a step backwards in a future move to CBDCs, in which society is left worse off than it is today, we need to develop a digital form of bearer-based money.

I know, at this stage you’re probably screaming “Bitcoin! Bitcoin!”. But we’re talking central banks here, so…

Koning posits that a solution could be “digital tokens”. A central bank could issue digital tokens onto a distributed ledger, and verification could be outsourced to nodes spread all around the world. This sounds bitcoin-ish, but the central bank retains control of the issuance. An intriguing compromise.

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Favourite tweet of the day:

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I might start a collection of blockchain “applications” that don’t really need blockchain. The fun part will be removing them from the list as I find out that, wait a minute, maybe the blockchain can help…

Anyway, here’s one that I don’t yet “get”: serving online ads. I understand that there’s a lot of fraud, and that the blockchain’s transparency can help with the trust. I also understand that a decentralized “marketplace” for ads could lower costs and spread the income.

But, given the sensitivity of certain messages and images, a totally decentralized ad serving platform will be a hard sell. Someone has to vet, and someone has to take responsibility if sensibilities are offended. If I were to host ads on this site (not going to do that), I would prefer the centralized, more expensive version to a decentralized one that might display pornography.

And, as this article in Digiday points out, there’s the transaction confirmation speed to worry about.

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Cookie dough!!! By the scoop!!!!! OMG!!! (Via The New York Times.)

via The New York TImes
via The New York TImes

IMAGE

Putting blockchain hype in its place

by Joshua Earle via Unsplash
by Joshua Earle via Unsplash

I get so annoyed when blockchain hypesters bang on about how “blockchain will change the world”, and it’s the “most revolutionary technology to emerge since the internet”. (And I say this as an enthusiast who is excited about what it can do.)

Why does it bother me so much? Because they are empty claims. Sure, the world will change. But that will happen even without blockchain technology. Stuff changes.

And, blockchain won’t change everything. Bagels will probably still be the same (I hope, anyway). African safaris will probably continue to run as always, and childbirth (unfortunately) is unlikely to see many blockchain efficiencies.

So, enough with the empty claims that only serve to turn thinking people away, once they’re tired of rolling their eyes.

And anyway, to put blockchain fans (like myself) in their place, check out this chart from Axios:

Axios chart
chart by Axios

Investment in AI is dwarfing that in blockchain, even including ICOs. (Blockchain investment is not included in the chart – see? blockchain isn’t even in the top three of “next-generation technologies”.)

According to CoinDesk’s State of Blockchain 2017 report, blockchain investment in 2016 reached $500m. Axios’ chart shows that investment in artificial intelligence in the same period reached $3.6bn… Over seven times as much!!!

Even when you add in the digital token frenzy of 2017, investment in AI businesses so far this year continues to outpace that in blockchain businesses by a factor of more than three.

If blockchain were the “most revolutionary technology” as some in my sector like to claim, wouldn’t smart money be overwhelmingly flowing there?

Don’t get me wrong, I strongly believe that blockchain technology will have a big impact on processes, structures and even philosophical issues. And I am excited to work in this space, I wouldn’t want to be anywhere else. But, it’s not the only show in town. And keeping a big-picture perspective will help us to see beyond the knee-jerk application and the “me-too” ICOs, and truly understand what a profound role it will play in the evolution of societies and systems.

It will also help us to understand that the impact will be uneven. And that the technology is just part of other profound changes that actually began some time before bitcoin appeared.

With that understanding, we can hopefully waste less time, and get down to some real work.

Daily Bits – distributed storage, tweetstorms and cities – June 22nd, 2017

I’ve been pondering for a few days now the question of why decentralized file storage is better than centralized file storage with a trusted third party that can be held accountable if things go wrong.

And then this morning I come across this article published on Coin Center’s blog, written by Juan Benet, Jesse Clayburgh and Matt Zumwalt of the Protocol Labs team (a startup that focuses on data storage problems – so they know a thing or two).

These are the arguments against centralized cloud storage:

“This architecture makes the web brittle, undermines privacy, allows the price of storage to remain artificially high, and creates bottlenecks that prevent innovative new uses of data.”

Okay, I get that.

I’m also intrigued by the idea of locating files by what they are, not where they are. If a webpage calls a file now, it references it by where it’s stored. That, as the authors say, does make the web “brittle”. Move the file, and the call no longer works.

The authors helpfully compare this to pulling library books by their location, not their title.

Add to that the economies of scale of harnessing all that unused computing capacity (just on my laptop I probably have a fair chunk).

So, I’m liking the idea. But I still don’t see how this system will get enough of a network effect going to be practical. Website code will need to be re-written, and given the vast size of the ecosystem, the incentives will be tricky. If indeed possible.

But, just because something is “too big to change”, doesn’t mean we shouldn’t try, right? Look at the valiant cryptoeconomists working on imagining a new central banking system.

A daunting task, though. But one that I am now more interested in.

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An epic 37-tweet thread from Naval Ravikant that, although it’s long, showcases the discipline of having to work within 140-character limits:

It includes gems such as this:

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Diverging from blockchains for a second, I came across an illuminating article on the three different types of cities: suburban (built for cars), hypertrophic (built for transit) and traditional (built for walking).

This reminded me of something I read recently by urbanist and philosopher Jane Jacobs, who asked: “Are we  building cities for people or for cars?” I know which type I prefer (hint: I don’t even have a car.)

I do, however, recognize the impracticality of having a totally walkable city. Pity.

city traditional
Traditional city

 

Hypertrophic city
Hypertrophic city

 

Suburban city
Suburban city

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Finally, an article on digital identity that recognizes that the incumbents may have a say in how this turns out. But, they may be amenable to a business model mutation: “Hey, so you lose all this income from the identities you control, but just think about all the extra users you’re gonna get!”

Okay, it needs some work, but it’s a start.

Moral: the incumbents aren’t going to let go of their stronghold on our identities without a good reason.

 

 

Kik’s mixed signals on their ICO

Am I the only one that found this article alarming?

I wrote a while ago that the Kik initial coin offering (ICO) was interesting because it obviously wasn’t purely for financing purposes. I mean, they already have a lot of VC funding, and given their user base, would most likely be able to get more.

It seems I was wrong. From the TechCrunch article:

“When asked if the unicorn-valued startup had trouble raising additional funding, [CEO Ted Livingston] demurred but claimed that the ICO is an alternative form of exit.”

Uh oh.

mark wahlberg confused

I would like to point out that neither VC funding nor and ICO should be seen as an exit! Acquisition, sure. IPO, maybe. But minority investors don’t buy into a company so that current shareholders and/or the CEO can exit. The fact that they would even want to should send interested parties scuttling.

Especially in an ICO, whose tokens supposedly will only have value if the holders want to use them. Which they would want to do if the platform was to continue growing, right?

The uh-ohs keep coming.

“[Livingston] believes that the ICO will provide an adequate return for the existing investors, which would take pressure off a possible acquisition or an IPO.”

The CEO has pretty much declared that it’s a security.

And then there’s this quote:

“The way I think about ICOs is it’s very similar to the dot-com era. There was a bunch of excitement, people made a bunch of money, people lost a bunch of money but Amazon and Google came out of it.”

Relating ICOs to the dot-com crash and claiming that Amazon and Google would not have happened without it is… to put it kindly, very strange.

However, an article on CoinDesk yesterday quotes Livingston as saying (referring to the test run of non-blockchain based Kik Points):

“There were two things it was meant to test,” said Livingston. “One is, could digital currency be used to incentivize opt-in advertising? Two is, could we use a digital currency to build an economy? We were trying to test those two things at the same time. What we found it’s yes to both.”

Now, that sounds more like it.

On the surface, the idea makes sense (so far, anyway). Using a blockchain token means that the native currency can be bought and sold on digital currency exchanges, which was not the case with Kik points.

Kik has said on previous occasions that it aspires to being North America’s WeChat, referring to the Chinese messaging app on which users spend an average of four hours a day. But, WeChat doesn’t have a blockchain-based cryptocurrency, and manages to do just fine.

The CoinDesk article reminds us that other attempts to commoditize social media attention (including Facebook’s now-shuttered Credits) have not worked. However, Kin (as Kik’s currency will be called) will emerge in a very different paradigm, with digital tokens all the rage, and cryptocurrency technology advancing in giant leaps.

Yet this does not guarantee success, and the mixed messages aren’t going to help.

Is the ICO an ecosystem builder or is it a money grabber?

A bigger question is: is it possible to be both?

Daily Bits – identity again, ICOs and thread – June 20th, 2017

My colleague Michael was at a presentation at the UN yesterday that focused on identity. Neil McCann of the UNDP (who was excellent on our “Global Issues” panel at Consensus, which you can see here) stressed cross-industry collaboration, urging the private sector to join the UN initiative to develop a platform for digital identities.

An especially intriguing part is this: the UNHCR representative speaking at the event insisted that the eventual identities need to be owned by the individuals.

While this may seem obvious on the surface, it isn’t when you think about how identities are granted today. Our identities are not owned by us – if our government decides to revoke our passport, it’s very hard for us to prove who we are.

Spinning out a sovereign identity platform for refugees (although they are not the only target “market” for this service) would have a huge impact – not only on how aid is delivered, but also on immigration, education, possibly even finance. The effect could be much wider than we dare to imagine.

To coin a phrase: “bring it”.

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Favourite tweet of the day:

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If you’re contemplating doing an ICO (really????), read Emin Gün Sirer’s take on Bancor first. It’ll provide strong guidelines on what not to do.

Bottom line, you should:

  • Address a real problem
  • …without mumbo-jumbo terminology

He doesn’t attack the code (well, a little bit) as much as the business model. Which, in this manic eurphoria, disconnected from fundamentals, is refreshing. And sensible. Hype cannot stay disconnected from reality for ever…

What’s more, whether you agree with Gün or not, the prose is sharp:

“‘Double coincidence of wants’ is a real problem in economics today in the sense that the ‘itsy bitsy spider’ problem is a real problem in zoology — that is, it’s something one might learn in grade school, and it’s completely irrelevant in the real world.”

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In no way am I into embroidery (I once tried a colouring book for adults… and realized that I’m just not that stressed.) But this is captivating:

3d embroidery

3d embroidery by Justyna Wołodkiewicz, an abstract mix of thread and clay. (Via Colossal.)

3d embroidery 2

Daily Bits – currency, tulips and tables – June 19th, 2017

A fascinating article from JP Koning on his blog Moneyness, on currency:

According to the monetary theorist Henry Dunning Macleod, currency used to be used an adjective, not a noun. Certain types of goods or instruments were considered to be “current” in the eyes of the law and common business practice. They were said to have “currency,” but were not themselves currency.

An item had “currency” if it could not be reclaimed if stolen. Coins, for example, belonged to the holder. (They still do.) But jewellery – at the time McLeod was writing, the 1800s – belonged to the original owner, and so was not “current”. The holder had to be able to prove that he/she had legally obtained the item.

Interestingly, McLeod did not consider bank deposits “currency” since they could not be transferred to someone else (back then). Stock certificates, however, were.

This illustrates that an item didn’t have to be money to have currency (e.g. bonds were considered to be current), nor did it have to be government-issued to be current (banknotes and bills of exchange were privately issued).

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This chart taken from a World Economic Forum post on the future of work is worrying, not for the overall message (because, like, we know), but for the detail offered.

via the World Economic Forum
via the World Economic Forum

I live in Spain (#3 in terms of most-to-lose), where unemployment is already the second highest in the European Union, at over 18% (not far behind Greece, in case you were wondering).

Add that to the almost 12% job loss that the chart shows, and you have an almost 28% unemployment rate. Yikes.

No doubt there will be many jobs created by automation. Someone has to take care of the machines and/or code, after all. But still, ouch.

And yet we hear nothing from the relevant ministries about plans to offset, compensate or handle this.

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Elaine Ou had some pithy observations about the ICO frenzy in her blog Elaine’s Idle Mind (a misnomer if ever I saw one):

“…the money is about as real as unexercised tulip options. Tokens aren’t sold for dollars; they’re sold for ether.”

“Today’s impressive half-billion dollar value is an impractical conversion — You can’t liquidate 1.6 million ETH without crashing the market.”

“The total amount of ether funneled into tokens is but a fraction of the 11.8M ETH dumped into the DAO.”

Worth a read. Unless you have a strong affection for striped tulips, in which case you might find it traumatic.

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A coffee table design based on Princess Leia’s buns??? Okay.

by Zaha Hadid Design, via Dezeen
by Zaha Hadid Design, via Dezeen

Sovereign identity and the Knights of Malta

Palazzo_di_Malta,_Roma 2

While looking into passports for sale the other day (not for me, you understand… not yet, anyway), I came across a name that I had heard before but knew very little about. So I did some digging and almost had my mind blown.

The Sovereign Military Order of Malta – also known as the Knights of Malta, or Knights Hospitaller – is a religious order with ties to the Holy See that dates back to the early 12th century. But, it is also an independent, sovereign subject of international law.

Its mission is still, almost 1000 years later, to care for the sick and infirm, especially those displaced by conflict. As well as its 13,500 members, it has 80,000 volunteers and employs approximately 25,000 medical personnel.

So, it is an NGO with sovereign status. It can negotiate with other governments as a sovereign entity. Other global NGOs such as Caritas, Greenpeace and Médecins sans Frontières need the backing of a sovereign power. The Knights of Malta don’t, because they are one.

It doesn’t have any territory, except for two buildings in Rome, both of which have extraterritorial status (which means that they are technically not part of Italy – much like embassies).

In 1998, however, it signed a treaty with Malta for the use of the upper portion of Fort St. Angelo in the city of Birgu (for the next 99 years). Technically, this will also be a sovereign territory, but the Order will not be able to grant asylum to anyone, and Maltese law applies. At the moment, it appears to be used for historical and cultural activities.

And get this: the Sovereign Military Order of Malta can issue stamps, currency and passports.

Three of them, to be precise. The Order issues passports to the Grand Master, the Deputy Grand Master, and the Chancellor of the Order.

It has diplomatic relations with over 100 states, including the European Union, which means embassies. It also has observer status at the United Nations (along with the Red Cross, the Council of Europe, the African Development Bank, the European Organization for Nuclear Research and a host of other not-for-profit academic and regional associations), which entitles it to participate in the work of the UN General Assembly.

What I find most intriguing about this is the concept of sovereignty being granted to an organization that has no territory and no citizens (sort of). True, it was granted almost a millennium ago, and no government has dared to attempt to alter that.

Personally, I hope that they never do. I find the mix of chivalry and honour, combined with the long reach of history, totally captivating.

And the notion that sovereignty does not always require the traditional parameters of borders and citizens opens up a new understanding of what could become possible as identity is redefined.

Daily Bits – alternative forms of money, governance and glass – June 17th, 2017

My article on CoinDesk this week: Bitcoin, Ethereum and a New Direction for Cryptocurrency Investment.

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From The Denationalisation of Money: The Argument Refined, by F. A. Hayek:

“Although we usually assume there is a sharp line of distinction between what is money and what is not – and the law usually tries to make such a distinction – so far as the causal effects of monetary events are concerned, there is no such clear difference. What we find is rather a continuum in which objects of various degrees of liquidity, or with values that can fluctuate independently of each other, shade into each other in the degree to which they function as money.”

Airline miles? Loyalty points? Gift vouchers?

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The above made me think a bit more about the story on CoinDesk that I mentioned a couple of days ago, about Kazakhstan’s trial of a blockchain-based mobile app that aims to sell government debt directly to investors.

Could government debt be used as a form of payment?

It’s the only idea that I have come up with so far that would justify using a blockchain for this.

Would this then run as a parallel currency? Or would the government debt currency and the traditional fiat currency morph into one? In the end, is there really much of a difference?

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I find myself agreeing more and more with Izabella Kaminska’s comments in the FT. I’m not sure if it’s me changing, or her. Probably me. How frightening.

Her piece this week on governance issues was excellent. She highlighted what I’ve been ranting about for a while now – that the vast majority of us don’t actually want decentralization. We want to be able to hold someone accountable.

“As blockchains become DLTs, shared databases and permissioned consensus networks, what the techies working on these systems fail to publicly highlight is that much of the time, “advance” means returning to tried and tested paradigms, or reintroducing trusted or governance-focused nodes.”

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Two of my favourite things – books and rocks – with slabs of embedded glass, by artist Ramon Todo. I can’t stop staring, and I so want to be able to pick them up. (Via Colossal.)

by Ramon Todo, via Colossal
by Ramon Todo, via Colossal
by Ramon Todo, via Colossal
by Ramon Todo, via Colossal

Citizenship for sale – a blockchain business model?

by Leo Rivas-Micoud for Stocksnap - sovereign identity
by Leo Rivas-Micoud for Stocksnap

According to an article I stumbled on in Fortune, approximately $2bn a year is spent on buying citizenship. The exchange is usually dressed up as real estate or business investment and a certain minimum is generally established, but the purpose is clear, and an increasing number of nations are making good money on this.

For example, an IMF report from 2015 puts the income from selling passports for St. Kitts and Nevis at about 25% of GDP. While the economy is small, that is still a staggering statistic.

A recent report in the Financial Times highlighted this growing global phenomenon from a tax perspective:

“The search for second passports and offshore havens is beginning to take on a last-helicopter-out-of-Saigon urgency as capital controls, tax reporting and visa procedures tighten up around the world.”

Other reasons cited are political instability and fear of persecution. According to the IMF, there has recently been a surge of wealthy Chinese and Russians buyers, with an increasing number coming from the Middle East, where tax avoidance is obviously not the issue.

This raises the question: why shouldn’t citizenship be a commodity?

What does citizenship actually mean?

According to Merriam Webster, a citizen is “a native or naturalized person who owes allegiance to a government and is entitled to protection from it”. So, it’s an exchange of allegiance in exchange for protection.

Why, then, is it not transferable? If your state is not protecting you, why can’t you transfer your allegiance to one that will?

Because citizens are considered resources by the countries they are born into. They work, which contributes to economic development. And they pay taxes, which contributes to public finance. This “what’s mine is mine” mentality also explains the concept of capital controls imposed by some countries to stop citizens from sending their wealth abroad.

In the increasingly free market world in which we live – in which we can choose who gives us our electricity, phone service, groceries – it is extraordinary that a similar philosophy isn’t being applied to citizenship. If governments actually had to convince (rather than force) their people to stay, it’s very likely that there would greater efficiency and less corruption in government spending.

If market incentives came into play, the role of government could evolve to focus more on protection and service. Tax rates would be more directly associated with the amenities offered, and citizenship would become a matter of proud choice rather than limiting obligation.

A totally free market concept, though, would perhaps leave the geopolitical balance vulnerable to instability. If a country cannot, for whatever reason, compete with another then the unstoppable flow of people would leave one poor and bankrupt, which would open up the temptation of annexation or even invasion.

And it’s not hard to envision circumstances beyond a government’s control. Natural disasters, a lack of natural resources or poor geography could condemn a nation to poverty and chaos, no matter how pure the government’s intentions. The resulting flood of people to neighbouring regions would put a strain on the receiving country’s resources in the short term, until the entrants find their feet and start contributing.

Along with aid from international organizations, nations depleted by exodus could be helped by the offering appealing amenities at relatively low prices. Attractive investment opportunities, for example, or education facilities, or simply relative stability. As with businesses, the affected governments would need to develop a differentiating offering to attract citizens.

As the article in Fortune pointed out, the possibility of buying citizenship exists, but the choices are limited and available only to the very rich.

Now, bring into the picture the concept of blockchain-based sovereign identity, in which a person’s official name does not depend on a state-issued document, but can be held securely and electronically by each individual. No government would have the right to take that name away, or to pretend that the person does not exist – a blockchain-based solution could ensure that. This name could be assigned the nationality it chooses. It would also reveal any financial or even criminal history, if applicable, which – on a blockchain-based solution – could not be retroactively altered.

Add the financial commitment of a purchase, and you can begin to imagine a whole new business model. Individuals that cannot afford the initial purchase price could enter into a financing agreement with one of a range of approved institutions, and pay the lender back through future earnings, possibly with the help of subsidies from the receiving government.

This could lead to selection bias – only those with reasonable prospects would be welcomed by their chosen domicile. After all, criminal records would be harder to hide. This could lead to some unfair calls, but since the bulk of anti-immigration sentiment usually stems from fear of increased crime, some sort of filter could end up making immigrants more readily accepted by their new neighbours. Those that through no fault of their own end up being blocked could perhaps be eligible for additional aid and/or the opportunity to seek a sponsor.

Education would also be easier to prove, as verified certification could be added to the identity’s history. Governments could even end up “bidding” for the best-educated immigrants.

The paperwork involved would be eased by the validation inherent in a blockchain platform. And the immigrants would have a much easier time integrating, as access to financial services, accomodation and utilities would be helped by reduced documentation and history requirements.

Cost vs benefit? It would be up to individual governments to decide what they offer, and at what price. This quasi-free market approach would have effects beyond that of economic value. It would make governments more conscious of their role, and see it less as a privilege and more as an opportunity. (Imagine if public salaries were tied to the results of satisfaction polls…). Also, citizens around the world would be more conscious of what their government does for them.

Obviously the idea is a lot more complicated than the brief suppositions laid out here. But passport shopping is already an economic fact. Should it be only available to the very rich?

Blockchain technology could offer the breakthrough that will enable the activation of sovereign identities tied to convenient nationalities – while at the same time incentivizing governments around the world to better understand what their purpose is.