Daily Bits – central banks, equity markets and fun stuff like that – July 11th, 2017

I’ve been skimping on posts because I’m working on an overview of central bank activity in the blockchain space – so much more complex and varied than you probably imagine. But I’m sure I’ll have stuff to share soon!

Meanwhile, some random (ok, not so random) thoughts…

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My article on CoinDesk this week, on Delaware’s bill amendment that expressly allows shares of Delaware-registered companies to be traded on a blockchain. This is huge, given that two thirds of listed companies in the US are incorporated in Delaware.

Traditional equity markets best take note.

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Speaking of central banks, this report from CoinDesk earlier today is intriguing: UK Central Bank Tests Ripple’s Interledger Protocol for Cross-Border Payments.

Two simulated settlement systems were set up, representing different currency regimes. Then Ripple’s Interledger protocol – which can enable payments across different ledgers – was used to simulate a transfer of funds. Apparently the two systems reconciled in sync, and invalid transactions were satisfactorily rejected.

So far so good. 😊

Since this latest reveal is crying out for some context, however, it’s worth noting that it is not the BoE’s first foray into blockchain testing. And, it is not the only central bank working on a similar idea.

It is, however, a big step forward in what is arguably one of the most compelling use cases: cross border payments.

More detail will follow on the above context soon…

(I found it amusing that the BoE felt it was necessary to clarify that no central bank accounts were harmed in the making of this film, I mean, the test area was completely separate from the real thing. Just in case you were worried…)

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Here, from a while back, is a masterful piece from Colin Platt on the potential impact of blockchain on the financial system. He takes a look at each of the main pillars (central securities depositories, central clearing houses, etc.) and thinks about how (if) their role will change as blockchain edges its way in.

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Thank God for the chicken police…

Daily Bits: ethereum capacity, private blockchains and the 80s – July 8th, 2017

I totally missed Fred Ersham’s post on Medium last week, on ethereum scaling – a major oversight, it’s epic.

He points out that ethereum right now needs to improve capacity by something like 25,000x to be able to handle the transactions of, say, Facebook. So, if we expect the new decentralized models emerging from the ethereum ecosystem to be able to replace centralized services, we’d better start focusing on ethereum scaling.

Fred helpfully summarizes the initiatives under way, which gives a perspective on how important the problem is. Expect more media attention to be placed on this issue as ICO frenzy continues and bottlenecks start to build.

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Richard Gendal Brown of R3 posted a (relatively) simple and concise overview of private blockchains, with a solid plug for Corda, drawing comparisons to Fabric and Quorum. He asks some good questions about distributed ledgers, and gives some clear answers – but I have the feeling this is only part of the picture.

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The Indian push towards cashless seems to be picking up steam, including (possibly) free internet for all. It seems like the Aadhaar program was just scratching the surface of the digital ambition. This is worth researching further…

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Have you been watching Netflix’s Glow? If so, or if you remember the 80s with a combination of nostalgia and revulsion (those shoulder pads!), then you’ll like this mini documentary from Vox on the main design influencers of the decade.

Bring on the patterned neon.

Screen grab from Vox
Screen grab from Vox



Blockchain and the puzzle of the Kazakh bond issue

astana kazakhstan

A few weeks ago, CoinDesk published an article about a blockchain project in Kazakhstan. The central bank is testing a blockchain-based mobile app that will allow investors to buy central bank debt directly, without passing through a broker.

I puzzled over this, as I couldn’t figure out why they needed a blockchain for that. One issuer and a wide range of buyers doesn’t need a blockchain. A database could handle that.

Blockchains aren’t designed for vertical systems, with one entity at the top.

The article went on to say that long term, the platform could be used for IPOs.

Ah, there you have it. Other entities could be invited to join the platform and use it for issuing securities, either equities or debt.

So, is Kazakhstan effectively creating a new financial market? The advantages for using blockchain technology for that are relatively obvious (fewer middlemen, faster settlement, lower costs, greater transparency).

But mobile-based?

A while ago the government of Kenya used the M-Pesa mobile money system to issue a bond. That trial was intriguing in that it facilitated financial inclusion by offering citizens with very little money the opportunity to not only earn a return on the little they have, but also to purchase their first saving product. The minimum investment was KSh3,000 (approximately $30), and it was open to all Kenyans with an M-Pesa mobile money account, over half the population.

But, the government didn’t use a blockchain. There was no need to, and not just because they already had an efficient distribution in place. They also didn’t need to because the relationship was one-to-many (issuer to buyers).

Blockchains are good for many-to-many relationships. If the Kazakh project does indeed end up including other issuers, the trial makes sense. But for now, it doesn’t. Blockchain’s potential won’t be tested with one central issuer.

It also doesn’t make sense to combine IPOs with debt issuance – the two have very different mechanisms and regulation. Inviting other issuers to take advantage of the new processes would have efficiencies – but that doesn’t seem to be a main priority.

So, despite the declared expansion intentions, I still found the incongruity puzzling.

Then an “out there” thought occurred to me. Perhaps what the central bank really wants is for the bonds to circulate. On a blockchain platform it would be relatively simple. Holders trade, and the ownership changes, smoothly and without intermediaries. The ease, especially on mobile, could encourage liquidity and boost circulation.

Why would a central bank want its bonds to circulate?

Perhaps so that they could become a type of currency, exchanged in payment for services received from other institutional platform participants – utilities, for instance (electricity bill?), education (a masters’ degree?) or even taxes.

There a blockchain platform starts to make a lot of sense. Regulated institutions would be “invited” to “open an account” to which bonds could be sent. Bondholders could treat their securities as a type of bank account, earning interest when they are still and being accepted in exchange for something else (fiat money or services) when they circulate.

Using central bank debt as money? Well, isn’t that what we’re doing now, with bills and coins?

Daily bits: new models, databases and hugs – July 4th, 2017

I love this article – The Promise of Blockchain Is a World Without Middlemen, by Vinay Gupta – for the fascinating business model ideas Vinay uses almost like punctuation.

Airbnb rentals that offer custom furnishing options (since transaction costs have plummeted and the logistics are no longer a barrier). A Walmart with the diversity of Amazon. Off-the-shelf weddings that are totally customisable.

Vinay opens the door to a whole new realm of creative economic relationships and customer service.

The fundamental question seems to be:

“What if your database worked like a network — a network that’s shared with everybody in the world, where anyone and anything can connect to it?”

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Just over a year ago, Gideon Greenspan wrote an excellent article which set out with clarity and brevity the main differences between a blockchain and a centralized database.

In this time of overblown hype, it’s worth revisiting.

The main takeaway is this: if you want to retain control of the database, a blockchain isn’t for you.

If, however, you want to benefit from others’ participation, and need a robust solution, then a blockchain could help.

If confidentiality and performance are priorities, then a blockchain is not the best solution.

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And now for a bit of warm, fuzzy cuteness (go on, I challenge you to not smile):

(the lion cub’s my favourite)

From local currency to central banks: Colu and blockchain-based tokens

Image via CNN
Image via CNN

Decentralization and fragmentation – not two words that you normally associate with currencies (or would want to, given the implied chaos). But, maybe it’s happening.

An experiment currently under way in London could reveal whether or not our relationship with money can change enough for local currencies to become possible.

Israeli firm Colu – known for their “coloured coins” platform – recently launched the “Local Pound, East London” (LPEL). As its name suggests, it is a digital currency specifically designed for circulation amongst the businesses of East London.

How is this different from the normal pound? And why bother?

The aim is to boost the local economy. The LPEL plans to do this by encouraging users to spend locally – that apparently keeps money circulating in the area, rather than have it sent back to head office in Stockholm (or wherever).

The accompanying app is meant to help residents to discover (or “re-discover”?) local businesses, and to help those businesses manage transactions.

To be honest, it’s not very obvious what the advantages are. Merchants can use the app to manage transactions, which means they don’t need to invest in a PoS system (which they almost certainly have anyway).

It works just like “normal” digital money – it can be bought (at par with the pound) using credit cards or bank transfers. This raises the question as to why the users won’t prefer to use “normal” digital money. I haven’t been able to find information on additional advantages that the LPEL platform offers (like discounts or more direct marketing, for instance?).

The “hook”, according to press reports, is that users feel good supporting local economies. (Um, maybe some, but I wouldn’t count on many.)

Additional resilience could be a factor – blockchains tend to have greater security than centralized systems. But, centralized payment rail outages are rare enough for this reason to lack conviction.

The LPEL has a sister operation in Liverpool – the Liverpool Local Pound went live in late 2016, and currently has 16,000 registered users and approximately 30 merchants on the network. Given that Liverpool has almost 500,000 people, it’s a stretch to claim that it’s a resounding success.

But, it’s good to see that the enthusiasm continues regardless, because sometimes a good idea fails to get traction simply because it’s time has not yet come.

Whether or not the LPEL takes off is beside the point, though. What really matters here is feedback, to iterate the design and to hone the message.

In interview with CoinDesk, co-founder Mike Smargon said that the objective was scale. Colu recently unified its various Tel Aviv local coins into a generic Tel Aviv coin. Not that there seem to be a lot of users there, either. In the same interview, Smargon revealed that Colu has about 50,000 users across its coins, which – subtracting Liverpool participants – leaves about 37,000 users for a city of over 3.7 million.

I puzzled for a while on how unifying coins could help “local” businesses, and on how you can combine scale with fragmentation.

But then it dawned on me: it’s actually not about small communities. It’s about testing the advantages of central bank digital currencies, starting small and working up. A smart strategy.

What’s more, last month the firm open-sourced its banking infrastructure to make it easier for central banks to experiment with blockchain-based digital currencies.  The system is already in use in one country: Barbados. In collaboration with local exchange Bitt, it has created digital Barbadian dollars, and will soon complement that with digital dollars from Aruba and the Bahamas.

The company is in the process of applying for an e-money license in the UK, so I imagine we can expect further local launches. It also recently announced partnerships with asset brokerage firm eToro and trading app Lykke, and is a member of blockchain consortium Hyperledger. So we will most likely see interesting innovations that open our eyes to the potential of local currencies.

Even if practicality continues to be an issue, the idea of combining the advantages of community with the scope of large scale is intriguing.

And not only in the realm of finance and commerce. Let’s have a think what this could do to politics and governance, too.

Daily bits: trading, ethics and penguins – July 2, 2017

Happy July! And Happy Canada Day for my Canadian friends, and Happy 4th of July for my US buddies… 🙂

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This is huge: Delaware has passed a law that recognizes the right to trade securities on a blockchain platform. While this only applies to companies incorporated in Delaware, that is 2/3 of the Fortune 500!

I’ll talk about this more later (because the emergence of a new form of market is one of the blockchain applications I’m most excited about), but meanwhile, it’s worth thinking about how this will change market structures.

In chess, the winning strategy usually involves “occupying the middle”. In business, also. Those who control distribution, even today in this increasingly decentralized e-commerce world, can assign themselves a big slice of the market.

This also applies to stock and bond distribution, which is taking a bit hit with blockchain platforms. It’s happening today with initial coin offerings, and now it looks like it will happen soon with the issuance of shares.

Who will the new middlemen be? According to “blockchain philosophy”, there won’t be any. I don’t buy that. I do believe, however, that a new type of middleman will emerge. Most likely, the owners of the blockchain platforms that facilitate the trading will take away the crown.

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In his latest post on Medium, Nassim Taleb introduced me to the concept of Gharar, which has a wide range of definitions, depending on your source. According to Investopedia, it is associated with uncertainty, deception and risk. Islamic-finance.com explains it as “deceptive uncertainty”. Taleb takes the last definition even further, adding the qualification “inequality of uncertainty”:

“No person in a transaction should have certainty about the outcome while the other one has uncertainty.”

Taleb intriguingly points out that this interpretation might not meet the highest ethical standards, as it still leaves some room for deception. If I suspect that something might happen to weaken the deal for you, but I’m not certain, then according to Gharar principles, I don’t have to tell you. But ethically, I should.

His writing on the ethics of asymmetry left me wondering if new technologies will nudge us into a world in which markets are transparent. How would that change the behaviour of markets and their actors?

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There are benefits to going cashless, but there are negatives, too. One major disadvantage that I don’t hear anyone talk about is the impact on families that prefer cash because it helps them to stick within their budget. You can’t spend more cash than what’s in the jar.

So, the emphasis on “making it easier for people to buy things” is short-sighted. It shouldn’t be “easier for people to buy things”, if they can’t afford them. Helping them to rack up debt is not doing them any favours.

Perhaps slick apps that help with budgeting can smooth flows. But will that demographic use them? Should they be obligated to?

I’d like to see the conversation widen to include those for whom payment convenience is not a priority.

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Haruki Nakamura’s paper figures are captivating, charming and deceptively simple. (Via Colossal.)

Two of my favourites:

By Haruki Nakamura, via Colossal
By Haruki Nakamura, via Colossal


By Haruki Nakamura, via Colossal
By Haruki Nakamura, via Colossal

Daily Bits – fail rates, trade (again) and bitcoin value – June 27th, 2017

I read with interest Erin Griffith’s essay in the Fortune Data Sheet newsletter this week, which contained this paragraph:

“I recently found myself carelessly repeating a statistic that I’d heard dozens of times in private conversations and on public stages: “Nine out of 10 startups fail.” The problem? It’s not true. Cambridge Associates, a global investment firm based in Boston, tracked the performance of venture investments in 27,259 startups between 1990 and 2010. Its research reveals that the real percentage of venture-backed startups that fail—as defined by companies that provide a 1X return or less to investors—has not risen above 60% since 2001. Even amid the dotcom bust of 2000, the failure rate topped out at 79%.”

A ha! On the one hand, better. But on the other, we’ve been misled. Although, as Erin points out, the actual numbers aren’t that important. The message – that it’s much, much harder than it seems – is.

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A few months ago I wrote about this platform for CoinDesk, and so was understandably excited to see it progressing.

The Digital Trade Chain Consortium, comprised of seven European banks working on blockchain supply chain applications for small and medium businesses (SMEs), has partnered with IBM for the roll-out of the platform, still scheduled for the end of 2017.

While not exactly shattering news, it does show that progress is being made, that the project is still on schedule, and that we might soon see a live version of a blockchain platform helping foster trade across borders. That is exciting.

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Forbes published a thought-provoking article on bitcoin, which the author argues has no clear intrinsic value.

He clarifies that its utility as a medium of exchange can’t be considered intrinsic value, either, unlike gold, and posits that its “political value” can’t be substituted.

What he neglects to include in the analysis is that bitcoin has another utility, one coming increasingly to the fore – the ability to transfer information without going through third parties. That information may be about a transaction (Alice pays Bob 0.5 bitcoins), or it may be a hashed document registered on the bitcoin blockchain. That function – bypassing centralized enablers in a reliable and tamper-proof fashion – has value.

So, even if you believed that bitcoin had no use whatsoever as a currency, it’s hard to argue that it has no intrinsic value.

I also disagree that the “political value” is worthless. In this increasingly politicized world in which we live, with tectonic shifts in economics, demographics and philosophy, it really isn’t.

And the claim that all libertarians want to return to the gold standard is a stretch.

As is his claim that a large part of bitcoin’s value stems from the ability to mine it. Apart from the fact that not everyone can do that (it’s bloody expensive), mining has nothing to do with utility or, for that matter, intrinsic worth. Just because we can create something, doesn’t mean it has value. It only has value if people want it.

Why would people want it? Because they believe it will be useful. Maybe not today, but some day.

How is that different from the value we ascribe to the dollar? It has value because we believe that the US government will honour its debt and repay it. In other words, the dollar will be useful. Not today, but some day.

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As a devout city-enthusiast, seeing a travel photo competition (for National Geographic, no less) full of stunning images of buildings makes me so happy… (via MyModernMet)

by Nikhil Rasiwasia, via MyModernMet
by Nikhil Rasiwasia, via MyModernMet


Shipping blues and blockchain solutions

by Frank McKenna via StockSnap
by Frank McKenna via StockSnap

I was startled to see yesterday that China’s freight activity has been in contraction for the past six months. Given the country’s push to increase its global footprint, and its dependence on manufacturing and exports, this doesn’t look good.

So I did a bit more digging and saw that the Baltic Dry index, which assesses the price of shipping raw materials by sea, shows that freight activity overall has been falling sharply since April (which did not happen in the previous two years), and is well below 2014 levels.

Global shipping is slowing down?

All the more reason, then, to reduce costs and streamline processes, as fast as possible.

With several enterprise firms around the world examining the potential impact of blockchain technology on supply chain logistics, progress is being made.

Microsoft’s Project Manifest platform plans to track everything from auto parts to medical devices, and as of May 2017 had 13 members, including Auburn University and supply chain tech firm Mojix. One pillar of the project is the connection of RFID scanners to the ethereum blockchain. Previously, Auburn University’s lab succeeded in combining RFID technology with the electronic data interchange transaction standard that improves supply chain traceability using centralized databases. It will be interesting to see what impact decentralized ones will have.

Earlier this year, the Danish shipping giant Maersk revealed the completion of its first live blockchain trial, aimed at reducing the amount of expensive and time-consuming (not to mention error-prone) paperwork that a global supply chain requires. A 2014 study commissioned by the company showed that an average of 200 separate transactions, passing through the hands of 30 counterparties, are involved in the shipment of a product using a shipping container. A blockchain platform can streamline the verification and transfer of the relevant documents, giving the counterparties access to the real-time information they need to process their part.

After a difficult year which saw profits decline, plus the rocky outlook for global shipping signalled above, the cost reduction a live platform could offer would be welcome.

Late last year, the port of Rotterdam formed a blockchain consortium focused on logistics, along with ABM Amro, Royal FloraHolland (which ships flowers) and several research institutions. The group plans to focus on testing the sharing of contractual and logistical information.

And there are many others.

However, given the obvious inefficiencies, and the shaky position of world freight – not to mention its importance in the global economy – it is surprising that there aren’t more.

You know the adage about complex systems not changing until they absolutely have to? That time may have come.


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