Distributed Ledger and Things

As I sat to write, I was drawn to the Wikipedia’ Bitcoin article. As I read the story of how it all happened memories and concerns once again flowed through the neurons of my mind. Silk Road and their involvement and the evolution of the value of a Bitcoin, struck me as a magical mystery tour through a world of mathematicians, anarchists, profiteers and speculators.

I then remember reading

an element of a report from the Bank of International Settlement on crypto currency. The picture above is intriguing for those of us who appreciate the complexity of payments. The article gets ever so intriguing when one continues to read and finds this interesting illustration of

the difference between what we all are familiar with and what those who understand DLT and Bitcoin appreciate. The central focus of this new technology is to address one and only one concern. Trust in the intermediary.

I must admit this particular article is not the one I originally intended to speak to. I do though recommend reading it.

The article I had intended to reflect on is Central Bank Cryptocurrencies. In this document they speak to the possibility of the banks issuing a stablecoin. The recent announcement of JPMorgan Chase is one example of such.

This then causes me to reflect on the various use cases and conversations with people about the potential of DLT. I wonder why, at least here in the USA with our judicial and regulatory framework and the rule of law; we would seek to replace the existing intermediaries with a permissionless distributed ledger and the associated consensus mechanisms of a public ledger. There is enormous and growing cost in consensus built on “Proof of Work” and massive duplication of the ledger or as most call it the chain. Be it the electrical cost, the cost of a data center or the specialized computers necessary. The people and companies, the nodes and miners, will expect a reward for their effort.

Which is cheaper, if a reasonable level of trust exists?

Where are we going from here

This is the question. There are those that believe Block-chain and all of the other distributed ledger technologies are the answer to everything. I would suggest one much consider:

    • The level of trust the various parties have in each other.
    • The cost of multiple copies of the distributed ledger.
    • The cost of the consensus mechanism versus a trusted intermediary.
    • The governance required to maintain security, software and specifications.
    • The value and ethical issues of anonymity.

This then begs the question of a permissioned or a permissionless ledger. Which then begs the question of governance and who is responsible to establish the rules.

It is clear there is value in the idea of a distributed ledger. I would suggest caution in deciding if it makes sense for your use case.

      • What are the goals and objectives of the solution?
      • What are the economics of the various approaches?
      • Who are the stakeholders?
      • Who determines the rules and manages change?
      • Can the participants trust an intermediary?
      • Does everyone fear what another could do?

Helping you to understand the answers to these questions is what we do.

NYTimes: Transaction Costs and Tethers: Why I’m a Crypto Skeptic

Transaction Costs and Tethers: Why I’m a Crypto Skeptic https://nyti.ms/2NYYSdw

As a technologist with an understanding of cryptography and very aware that in order to remain secure and tamper proof we increasingly increase the complexity of the work to assure the integrity of what we are using cryptography to protect. I wonder why so many people got so excited about Bit coin and Blockchain. As I have written before the cost to assure the integrity of the ledgar. Be it the original work to calculate the nonce or the subsequent work to confirm that the nonce the miner calculated was the right one, there is a need to spend money buying work specific computers, renting or building a facility to houses these work units and the power to cool and run these computers.

Mr. Krugman properly outlines the challenges. He effectively focuses on two issues. The cost and the idea of tethering.

It is this need to identify the value of the coin. Governments help to stabilize their defined currency. The intrinsic value or use of Gold, establishes its value.

Understanding and being able to clearly articulate how cryptocurrencies are valued and how then can achieve the stability necessary to support commerce is essential. This is what tethering is about. How do we establish and more importantly share the nature of the valuation.

Could a US Cryptocurrency Prevent Systemic Harm to the Underbanked and Underserved?

I recently absorbed the following article  and offer the following reflections.

Frankly, it disturbed my social consciousness.

There are an estimated how many million smartphones in the hands of US consumers?

An article answering the question can now be found at this link.
http://paymentsjournal.com/could-a-us-cryptocurrency-prevent-systemic-harm-to-the-underbanked-and-underserved/

After reading the article, I thought about this graph derived from the US Census.  What income level equates to that of the un-banked?  I think of my expenses and about the expenses most people are dealing with.  Health issuance for two people in Georgia is $1,100 a month.  That’s a lot of people struggling to make sure they at least have health insurance!  If $53,700 is the median income and $13 thousand is spent on health Insurance, and then we consider all the other daily expenses we need to live: food, medicine, co-pay, gas, utilities …

Then I remember an economics report which claimed that the hourly wage required to afford a place to live in the least expensive part of the US was something just over $15/hour.  All of this causes me to ask the question – At what income do people find it of value to have a banking relationship, e.g. a card?

Those who argue that we should migrate from Cash to Card should remember the primary motivation for credit cards is directly related to the profits and revenue the banks, processors and other players who touch the flow of money earn from processing the payment transaction, and the revenues earned by lending money (i.e., a credit card) or by holding your money (a debit card).

Sure, we could propose giving the poor pre-paid cards, as some of the Government’s entitlement programs already do.  But then who will be responsible for the fees to manage the program and who will earn the interchange from each transaction?

The service fees, OK, maybe we the taxpayer will cover, given the perceived social value of supporting the poor.  On the other hand, entitlement is perceived by many to be a scheme to support the lazy, therefore many would say that the fees are part of what the entitlement should cover.

Let’s get back to the real subject at hand:  What is the most economic form of payment and are crypto-currencies the future?

In the world of cards, interchange is a cost to the merchant and revenue to the Banks.  Therefore, since merchants end up loading their processing costs into their price, the consumer pays.  Those who advocate migration away from cash recognize and argue cash has costs, for intance:

  • Cost of Employee pilferage
  • Cost to store and carry to the bank
  • Cost to handle and count

Many would agree that a card is cheaper.  Others would argue they are not.  This becomes a question of faith in your employees, the cost of a safe and a visit to the bank and the fun of sitting up at night counting your earnings.

Are crypto-currencies an answer?  At whose cost?  The nodes or miners who maintain the Blockchain need to be paid to ensure the immutability and consensus inherent in the Bitcoin model.  Someone must pay.

This begs the question: Which is more expensive to society?

  • Cards
  • Crypto-currencies
  • Checks
  • Cash
  • Coins
  • Certificates – in other words, tokens

 

 

Could a US Cryptocurrency Prevent Systemic Harm to the Underbanked and Underserved?

cryptocurrencies

A toll on the Massachusetts turnpike is $4.00, unless you can’t afford an EZPass then it will cost you $7.35*.  This article published in Convenience, the web site of National Association of Convenience Stores (NACS), points out that restaurants are also increasingly eliminating cash and that the impact this has on the poor has finally started to create some pushback in D.C.:

“As more restaurants go cashless, a backlash is building, especially in the nation’s capital, where an increasing number of fast-casual eateries are only accepting credit or debit cards and mobile payments, the Washington Post reports. Sweetgreen, a national chain, doesn’t accept cash at most locations, including its Washington, D.C., unit, while Menchie’s, Barcelona Wine Bar, The Bruery, Jetties and Surfside in the District also refuse cash payments.

‘By denying the ability to use cash as a payment, businesses are effectively telling lower income and younger patrons that they are not welcome,’ said D.C. Council member David Grosso, who has introduced a bill that would require retailers to let customers pay in cash. Chicago didn’t pass a similar bill last year, and Massachusetts has a 1978 law on the books that’s for cash payments but it hasn’t been enforced regularly, according to the state retailers association.” (Emphasis by Payments Journal)

I was unaware of the 1978 Massachusetts law described here, but clearly MassDOT and the Massachusetts legislature are more interested in how it will spend the money saved and the new revenue generated than it is in old laws. The fact that the policy to go all electronic will also increase late payment fines from the poor, perhaps even putting some in jail for non-payment, is just icing on the cake.

In our rush to save money we have ignored the systemic biases this action creates against the poor (if you doubt this statement reread the Justice Department’s report on Ferguson Missouri and how the town’s cost cutting measures created that very same bias). My dollar bill states that “THIS NOTE IS LEGAL TENDER FOR ALL DEBTS, PUBLIC AND PRIVATE” and yet nobody is considering how this is becoming less true every day and the impact that reality will have and it isn’t just the poor.

It is ludicrous to think that paper currency can survive even as everything around us shifts to electronic bits that are controlled by software. But we mustn’t ignore the ramifications of this shift. Consider what the future would be like if all payments are electronic utilizing our existing payments infrastructure. It is likely the cost burden would move from the Federal government (that prints money) to all the entities that need to send or accept money (because they pay the network and processing fees). In this scenario a) the government will see significant savings, b) the entities making a payment will see increased costs, and c) payment networks will receive increased revenue and profits.

If we would prefer to keep the status quo then the Federal government should support an electronic form of tender, establishing a cryptocurrency that replaces paper but is also recognized as “LEGAL TENDER FOR ALL DEBTS, PUBLIC AND PRIVATE”.

If not done relatively soon, say in the next 5-8 years, then every state and private payment network will be so entrenched that it would likely prove too difficult and costly to switch.

* The difference described above is for anyone driving 113 miles between Natick and West Stockbridge according to MassDOT’s toll calculator

Block Chain. Hype, the future, fiction or a scheme?

A month or so ago I was asked to speak to an assembly of bankers and processors at the Atlanta Federal Reserve on Cryptocurrencies and blockchain.

 Yesterday over a lunch I ended up synthesizing my thoughts into a neat little package that I would like to start sharing.

Those who extoll the virtues of Block Chain  speak of:

  • Immutability – Cryptographers and mathematicians will prove the immutability of the algorithms, at least for now
  • Distributed – as long as there a multiple diverse and competing stakeholders this is great
  • Trustless – I keep asking the same question Who defines the content of the Block or the ledger or the transaction?  Everyone ultimately agrees a body of people and I sit there and say that sounds like a governance model.  Be it a currency, a ledger, a contract two or more must agree to structure format, content and rules.
  • Consensus – Great as long as we never exceed the 51% participation by A party, the model is superb.

I then think about Work and the reward

Be it Proof of Work or Proof of Stake the entities that do the work are intermediaries and will want to be rewarded for their work.

Then one must think about shifting from a solution that rewards someone with a coin to a system that rewards someone with a fee earned.

I then reflect on Bit Coin and its use of Proof of Work

Coins are created by the party who figured out the Nonce, as a reward for solving the cryptographic puzzle.

  • Once they earned 25 Bitcoins
  • Today they earn 12.5 Bitcoins
  • At some point, in the future, the reward will be cut in half and then half again

The challenge

As the chain gets longer the work gets harder

As time moves forward and the number of coins in circulation grows

The reward decreases in notation value. 

Sounds like inflation is built in. 

Real estate, computers and electricity cost money. 

As the work expands the costs increases!

In conclusion

There is inherent Inflation built into the Bit Coin Model.

We simply replace intermediaries with Nodes and Miners.

We require a governance model so we simply change the governor to another.

People will want to be paid for the work they do to build the block or assure consensus of the chain

What is truly revolutionary? 

The math, ok maybe. 

Immutability, it is done today with cryptography, without a block chain.

Multiple copies of the ledger spread around the world.  Yes, as long as we address confidentiality.

We have governance, sure we can always elect a new government

What is so magical?

 

DIY the Cyber Guy a conversation about Bitcoin and EMV 

https://www.voiceamerica.com/promo/episode/104814

A interesting discussion withDavid the the Cyber Guy.  We spoke of the inherent risk of Bitcoins and the essential issue of the secret and a BitCoin folders resoponsibility to make sure they never lose the secret.

We then wandering off to talk about EMV or Chip and Pin.

Always a pleasure to work with David.

ICO Independent Coin Offer

Fantasy or a new reality. November 2nd 2017 I attended a conversation about the legal, accounting and tax implications of an ICO. Nelson Mullins was our host and brought their legal might to the discussion.

Language is the first concern in embracing and understanding. The first phrase requiring an appreciation is the “White Paper”. For me, this is something people or entities write to explain a concept; most often intended to educate and inform. In the world of ICOs the meaning is very different. This document is intended to explain what the entrepreneur is trying to do and what the investor is investing in. In other word the “White Paper” is the “Business Plan” or better said the Prospectus.

Next word is “Security”. Here I must admit I was out of my depth. First let’s be clear, the use of this word is not about securing something, it is about an instrument one invests in and ultimately expects to profit from. Having spent 9.

Years immersed in Capital Markets understanding what stocks, bonds and commodities are, this should have been easy. The challenge is we are trying to figure out how to not be classified as a security.

To fully appreciate the discussion one needed to be steeped in the regulations and opinions of the courts and regulators at a national and regional “State” level. What I understood, a key reason ICOs emerged is as a method to avoid the complexity of the regulations surrounding the sale and trading of securities.

Next term is “token”. Once again a term we are constantly confronted with as we move from a physical to a digital environment. I am not exactly sure what a “token” is in the context of the ICO discussion, save ti say it represents something. I appreciate it is another term one must properly framed when discussing ICOs.

With these familiar terms with new meanings it is clear, this digital ecosystem built on the complexity of Block Chain, as a technology, is either a long term transformational technology or a magical mystery tour that will end in confusion and discomfort.