Cars on blockchain

by Mike Birdy via StockSnap
by Mike Birdy via StockSnap

Something’s up in the car industry. The past week saw a couple of major announcements that point to a radically different future that suddenly seems pretty close:

Replacing a CEO is a big thing. It implies a change of culture, strategy and direction, which – coming from the second largest car maker in the US (by sales) – sets the tone for the entire market.

According to the New York Times, outgoing CEO Mark Fields failed to convince the board and investors that the company was moving fast enough on driverless cars.

He’s being replaced by Jim Hackett, who had been running the “mobility services” division, which covers future products such as autonomous cars and ride-sharing functions. Previously Mr. Hackett was CEO of office furniture maker Steelcase – in other words, he knows a thing or two about usability.

The change highlights the automaker’s awareness that just making cars is no longer an option. Profits have been declining, and competition is looming from outside the industry ­– Apple and Google are investing heavily in driverless car technology, and Tesla has a greater market capitalisation than Ford even though the latter’s sales are more than 22x.

It’s not like Ford has been doing nothing on this front. Earlier this year it invested $1bn in Argo AI, with the aim to build driverless cars. It’s a bit behind the competition, though: early last year, GM spent almost $600m on Cruise Automation, with the same aim.

More interesting news came from Toyota, which last week announced that its research institute (TRI) has embarked on a new initiative with MIT Media Lab, BigchainDB, Oaken, Gem and Commuterz to investigate the potential impact of blockchain technology on the cars of tomorrow.

Toyota began work on autonomous vehicles back in 2005, and allegedly holds more patents in the field than any other company. Earlier this year it test-drove its second-generation prototype autonomous vehicle.

Once the mechanics are worked out, blockchain is the logical next step. Why? Because of the data.

With autonomous driving, data is just as important a fuel source as electricity. Data on the surrounding environment feeds the decision-making process that propels the cars down the road and avoids obstacles.

To build intelligent algorithms, a lot of data is needed, much more than one company’s sensors can generate. What’s more, data held in proprietary silos is obviously not as useful as data shared across a decentralised database that can be verified, updated and easily accessed by all operators.

One of Toyota’s partners, BigchainDB, last week revealed the Autonomous Vehicle Data Exchange (AVDEX), a live prototype which allows researchers to buy datasets from data producers. The objective is to pool and monetise collected information.

Another partner, Gem, will adapt the blockchain applications it has been developing for the healthcare industry to the automotive sector, developing usage-based insurance policies.

Dallas-based Oaken Innovations, winner of the Dubai Blockchain Hackathon and finalist in CoinDesk’s Consensus 2017 startup competition, is developing a blockchain-based car sharing application which handles access and payments through a mobility token.

And Israel-based Commuterz is working with TRI on a P2P carpooling solution.

These are by no means the first blockchain applications aimed at the automotive industry. Among other projects underway are the blockchain-based platform developed by German energy conglomerate RWE’s subsidiary Innogy to charge electric cars. AT&T recently filed a patent for cryptocurrency car payments. German auto parts maker ZF Friedrichshafen, Innogy and Swiss Re are working together on a blockchain project called Car eWallet, which hopes to enable cars to pay for their own tolls, parking and charging. And startup BlockBox won the Consensus 2017 Hackathon with its application to collect crash data in blockchain-based “black boxes”.

Also, other car makers are looking at the technology. In April of this year, Porsche launched a blockchain startup competition. And Daimler announced that it was joining the Hyperledger blockchain consortium.

These pilots and applications are merely scratching the surface of the potential – just the data handling alone will be huge. But they are a good start, and provide a relatively broad base on which to build.

And as the developments at Ford attest, the entire sector is pointing towards an intensification of driverless car development – which in turn, will fuel the development of blockchain applications aimed at making our roads safer and cities cleaner… and saving users money.

The fight for Moneygram

by Ryan McGuire via StockSnap
by Ryan McGuire via StockSnap

Ant Financial’s bid to purchase Moneygram is on the verge of failing, apparently because it’s Chinese.

So much for free markets.

Euronet (electronic payments software, pre-paid processing, money transfers) has stepped into the ring, with a $2bn offer for the remittance company. According to the FT, Euronet believes that it has a much better chance of succeeding – largely because it’s based in Kansas. (It’s interesting to note that Euronet made a bid for Moneygram 10 years ago, which was withdrawn when Moneygram made it clear it didn’t like the idea.)

Two Republican senators recently published an open letter in the Wall Street Journal warning about the consequences of allowing Chinese firms to take stakes in American enterprises.

“Unfortunately, America’s economic strength is at risk from strategic, well-coordinated and state-sponsored Chinese investments in American financial institutions. Chinese spending in the financial sector has risen dramatically and is often driven by the priorities and objectives of the Chinese government.”

The main concern seems to be the access to information that ownership of Moneygram would confer. What could the Chinese government (via its stake in Ant Financial’s possible stake in Moneygram) do with that information? Target certain individuals.

Quite why the Chinese government, for all its human rights infringements, would choose that channel to glean sensitive information is not explained. Given the increasing level of competition in remittance services and the ease with which the contributors of that sensitive information can use another service (such as bitcoin?), it’s hard to believe that they don’t have better ways to spend their intelligence resources.

An anonymous expert is cited as claiming that Chinese corporate acquisitions are “part of a broader state-led strategic effort” to gain influence in American markets. As if the massive Chinese holdings of American debt weren’t enough.

While it may be the case that the Chinese government really wants to “gain control of western investment syndicates” and use investments in remittance companies to target dissidents and their families, we should all be raising an eyebrow at the level of US interest in state intervention in market operations. After all, Moneygram’s board approved Ant Financial’s offer. But it looks like they may not have the final say.

I’m not saying that state intervention is wrong. There are cases where anti-trust legislation does help keep prices affordable and innovation humming. And certain strategic industries understandably need to stay in local hands. However, it does seem insincere to espouse capitalist free-market principles in non-strategic sectors, but only when it suits.

Going back to the deal in question, Euronet’s offer per share is higher than Ant Financial’s – $15 vs $13.25. That in itself should be enough to win, without the need to resort to nationalist instincts.

Moneygram shareholders should do well out of the fuss, as should traders. You can almost hear them rubbing their hands in glee at the thought of a bidding war. Looking further ahead, deeper coffers could help to fund innovation that helps to lower the cost of remittances – good news for businesses, individuals and globalization.

The merger may have an impact on blockchain innovation in payments. While Euronet has not been involved in any proof-of-concepts that I’m aware of, it did issue a white paper back in December 2015. Ant Financial, on the other hand, is – through various subsidiaries – relatively advanced in blockchain work, and could have embarked on interesting projects with blockchain-reluctant Moneygram.

 

I want my stuff now: Bitcoin and immediate transactions

By now you know that a bitcoin transaction can take at least 10 minutes to verify and process. And to be really sure that it is permanently and indelibly on the blockchain, you’re supposed to wait for another 6 blocks (at least!) to pile on top. So, technically, a bitcoin payment could take over 1 hour to go through. This obviously is not ideal if you want to buy something with the digital currency. Imagine if you were told that you had to wait at least an hour for your pizza. Or that you had to come back to the store later to pick up your new jacket. You’d be right in thinking that this could be a significant barrier to bitcoin adoption.

So, how do we get around that?

by Sean McAuliffe for Unsplash
by Sean McAuliffe for Unsplash

One method used “back in the day” and which has fallen out of favour is “green addresses”. These are bitcoin addresses that are set up by a “trustworthy” institution (probably an exchange or a wallet) that is willing to advance the funds to the seller, while waiting for confirmed reception from the buyer. If I wanted to send you bitcoins, and I wanted you to feel secure that you had received them immediately, I would open an account with a well-known intermediary, I would send them the bitcoins, and I would ask them to pay you using a green address. They would do so immediately, without waiting for confirmation that my transaction to them was valid. They would trust me because of our working relationship, and probably because I have a balance of bitcoins held with them. The receiver (the seller) would have heard of the intermediary, and would trust their reputation enough to accept that the green address payment is valid. In effect, the intermediary “vouches” for my payment, and the seller trusts the intermediary enough to accept that.

One of the reasons that this system is not used so much any more is that two of the main green address intermediaries back in 2011, when this form of transaction verification was at its peak of popularity – Mt. Gox and Instawallet – ended up imploding. Obviously, trusting intermediaries is no longer an obvious thing to do.

Another drawback is that green addresses are not as private, since the name of the intermediary has to be disclosed. The intermediary’s records would then identify the buyer. Without a green address, the receiver (the seller) has no idea through which intermediary the funds arrived.

Furthermore, using a green address creates an additional bitcoin transaction, which, given the current intense debate about bitcoin scaling, is probably not the most efficient solution.

And, there is the irony of depending on a centralized trustworthy entity to make a purchase with a currency designed to work in a decentralized environment where no trust is needed. 😉

bitgo instant

Some wallet companies are coming up with ingenious work-arounds. Earlier this year BitGo launched BitGo Instant to make immediate transactions possible. After initial risk checks, BitGo Instant guarantees the funds for the receiver. How does it do this? By co-signing. The keys to a BitGo Instant wallet are held by three participants: the user, BitGo Instant and a key recovery service (a third party that generates, stores and protects public and private key pairs). Two signatures are required on every transaction, and in most cases, those two signatures will be the user’s, and BitGo Instant’s. Obviously before co-signing, BitGo Instant will check that the coins have not been previously spent. If that condition is met, BitGo Instant’s co-signature implies a guarantee that the funds will be paid. The only way that those funds could be double spent is if the user enters into a conspiracy with the key recovery service to send those very same coins somewhere else. To prevent this, the service is required to inform BitGo before it co-signs anything. Also, the key recovery service adds a layer of assurance that the bitcoins will still be accessible in the event that BitGo Instant stops operating, as it could provide the necessary second signature, allowing the user to access the funds. BitGo Instant’s risk in this is low, as it can easily verify that the bitcoins are there. And it is an original way to monetize BitGo’s reputation.

As with green addresses, the privacy of this type of instant transaction is lower than the standard, slow option, as the receiver knows that BitGo is involved. With that information, it is possible to figure out who the buyer (sender of bitcoins) is. So these transactions will most likely be of interest to average users who want instant purchase confirmation, and traders who don’t want funds tied up, not even for an hour. Privacy is probably not their main concern.

We will probably (hopefully) see the emergence of other clever ideas that improve the efficiency of bitcoin over the coming months. Instant transactions will not only increase the liquidity in the system by increasing the circulation. It will also dramatically increase the use cases, by offering instant bitcoin trading settlement, instant purchase confirmation, and less risk that the bitcoin exchange rate will move during the waiting time.

“Zero confirmation transactions”, or transactions that have not yet been embedded on the blockchain, are accepted in some cases, but the risk is high, so the practice is actively discouraged. For bitcoin to one day be widely used as a payment method, the “zero confirmation transaction” risk needs to be resolved. Some exchanges and wallets have been looking at probability approaches, but the system needs to find a simpler and more secure way to transact quickly. Even transactions that are one or two blocks deep in the chain are not free from risk of a block re-write, and waiting over an hour (after which the probability of the block being modified falls to practically zero) is often not practical. And until using the digital currency becomes practical, the talk of bitcoin one day replacing cash will remain just that: talk.

Bitcoin in Africa? Not yet.

I was going to write about how bitcoin could help to improve economies in Africa through its efficient and low-cost secure method of transferring money. But after doing a fair amount of research, and realising that many of the companies mentioned in the press over the past year as being the “hope” of the future have since closed down, I’ve changed my mind. Instead, I’m going to write about how hard it is for a bitcoin-based company to do business in Africa. It’s not impossible – there are some success stories. But the advantages of bitcoin at this stage are not as obvious as they might seem. The theory is excellent. But the reality is complicated.

Photograph by Robin Hammond for National Geographic
Photograph by Robin Hammond for National Geographic

First, let’s talk about the promise. According to the World Bank, 66% of adults in Africa do not have a bank account. They deal in cash and in barter, with considerable lack of efficiency and security, and scant possibility of escaping that hand-to-mouth cycle. With bitcoin, they could effectively have a decentralized bank account and manage their finances more carefully, with control over what comes in and what goes out. Families could start to save and even lend. Payments would become easier and cheaper, leading to significant savings in both time and money. Current mobile money payment systems are efficient, but have a high fee structure. Bitcoin’s decentralization and security could economically empower those that are traditionally at the margin of the economy.

The ease and low cost of sending bitcoin anywhere around the world makes it the potential saviour of remittance services. Approximately $53bn was sent to the region in 2015 by workers abroad, with fees averaging 12.4%. Remittances cost more in Africa than in other areas – the world average is 7.8%. There are five remittance “corridors” (flows between two countries) in the world with fees over 20%, all of them in Africa. Using bitcoin, the fees would come down drastically, with the savings going directly to the beneficiaries.

The potential is huge. But the reality is very different.

Bitcoin has limited end uses in Africa. Very few merchants accept it as payment, and it can’t yet be used to pay for utilities or public services. That will change, but slowly. Bankymoon, a South Africa-based blockchain financial services company, has developed smart electricity meters that can be topped up from anywhere with bitcoin.

To be able to buy bitcoins on an exchange, you need access to a computer or a smartphone. Relatively few Africans have that. It is true that the majority of the adult population has a mobile device, but only 15% have a smartphone. According to the International Telecommunication Union, only 37% of adult Kenyans had access to Internet in 2014. In Ethiopia, the figure is 2%. So, buying bitcoin is possible but not simple, and the number of exchanges that can trade local African currencies for bitcoin is limited. Most require an initial conversion to dollars or euros, which significantly increases the transaction costs.

So, buying bitcoins is not simple, and even if you receive bitcoins as a remittance from a family member or friend working abroad, changing it into local currency on an exchange is difficult. Those without a bank account would need to find an agent willing to exchange bitcoins for cash. They do exist, but their scarcity and the technology access required allow them to charge very high fees for the service.

And bitcoin as a remittance rail has competition. Innovative international payment methods are eroding the incumbents’ market share by offering much lower fees. In Kenya, for example, WorldRemit, Equity Direct, and even new e-cash services offered by incumbents Moneygram and Western Union can transfer money for less than 5%. Of course, the low fee structure depends on electronic transactions. Once cash is involved, the fees shoot up.

And regulation, or the lack of, is an important structural problem. Although Nigeria’s Central Bank has called for bitcoin regulation, no country has it in place or is even, as far as we know, working on it. Kenya’s Central Bank issued a warning in December against Bitcoin use, citing its unregulated status. Unregulated does not mean illegal, but it does create obstacles for bitcoin exchanges, wallets and payment systems.

Regional differences and market size are also a complicating factor. Kenya alone, for instance, is not a big enough market to attract the funding needed to reach profitable scale. According to IMF estimates, its GDP is roughly equivalent to Bulgaria’s, and significantly less than Luxembourg’s. Each country has its own currency and phone system, so compatibility issues are barrier to rapid continent-wide expansion.

On top of the “typical” problems that startups have to face, new businesses in Africa also have to contend with relatively poor connectivity, recruiting difficulties and electricity outages. Africa has always been a very entrepreneurial continent, but at the micro level. The cultural and logistical difficulties of setting up cross-border businesses; recruiting, training and retaining a qualified team; the general lack of political and economic stability; high interest rates; limited access to funding… These and many other factors make the launch of scalable, profitable enterprises even more challenging.

In May of last year, Disrupt Africa ran a story on “5 African Bitcoin Startups to Watch”. Of the five, one shut down, one pivoted away from bitcoin, and one has had a major payment ramp blocked. Further digging uncovers several others that have closed down, and the bitcoin sector is littered with tombstones of good ideas that came to market a bit before their time.

And yet, bitcoin’s time in Africa will come, and its effect on the continent’s economy will be significant. Some remarkable businesses are struggling hard to make this happen. The use cases are much clearer there than in Europe or the US, where credit cards are ubiquitous and mobile payments are easy. The impact it can have on people’s lives is much greater. With persistence and brave first-movers, with rationally enthusiastic public comment and constant dialogue, regulators will see the economic advantages of further encouraging financial innovation. Tech hubs are springing up all over the continent, creative entrepreneurs are attracting international interest, and a lot more than transaction fees is at stake.