Tuesday, 15 August 2017

UK enjoys Summer of Love for contactless cards | Euromoney


There were just under 1.4 billion card payments in the UK in June, a monthly record. And with the number of card transactions up 12% in 12 months, UK cards have enjoyed their highest annual rate of growth since June 2008… [a significant] factor was the increase in the use of contactless card payments, which soared by 143%. Contactless payments accounted for 34% of all card transactions

From UK enjoys Summer of Love for contactless cards | Euromoney


Monday, 14 August 2017

When the price of Bitcoin is above $4000 and still climbing, it gets harder to maintain my sceptical stance on the long-term prospects for the iconic cryptocurrency, but I still do. One of the reasons why is that it is difficult to understand the dynamics of this new and still-evolving marketplace. It’s too opaque. Are changes in the Bitcoin price a reflection of fundamentals, random walks, sound speculation or market manipulation? It’s impossible to tell. For all I know, Satoshi Nakamoto is Kim Jong-un.

Still - I wish I’d bought Bitcoin when they were dollar each, just as I wish I’d bought Apple stock back in 1979 and signed up the Beatles in 1960. Who knew?

How do you figure out what Bitcoin is worth? From the market? It’s hard for an normal person to know what to to do. On the one hand I read that this opaque marketplace is being manipulated by a single “whale” but on the other hand I read that Bitcoins will be worth like $1 billion each or something (which makes it all the more puzzling why merchants bother with Bitcoin acceptance, since no sane shopper would spend Bitcoins instead dollars if they are going to go up a thousandfold in the next few years).

In the long term, for Bitcoins to be worth something, someone has to want them for some reason. What will they want them for? Shopping? It’s too slow, it was never designed for real time payments. Shopping without censorship? I don’t think that the market for drugs on the Dark Web is big enough and evading capital controls can only go on for so long. Money laundering? Bitcoin isn’t anonymous enough for mass market criminals (as the FBI guys who stole coins during the “Silk Road” investigation and that BTC-e guy who got arrested in Greece have discovered). The Wannacry ransomware scallywags swapped their Bitcoins for anonymous Monero as soon as they could get them out of their wallets.

No, I don’t think uncensorability is going to be a good enough business to sustain the Bitcoin rally. Bitcoin will be superseded by more anonymous alternatives and while the computational overheads associated with techniques such as zero-knowledge proofs and homomorphic encryption are high at the moment, truly anonymous digital money will come slaloming down the Moore’s Law slope in the not too distant future. If not Bitcoin, then what? Of course, it’s entirely possible that while Bitcoin isn’t the money of the future, it is a secure platform for the money of the future. And boy do we need that money. In his book “The Money Trap”, Robert Pringle (a former editor of that well-known revolutionary pamphlet The Banker) writes that at the turn of the millenium “globalization reached the limits compatible with existing international monetary arrangements”. I agree. There is pressure for change and I think the current cryptomania gives us a window into the future of money.

In fact, people already have. In my book “Before Babylon, Beyond Bitcoin”, I explore the notion of private money set out by the noted “lateral thinker” Edward de Bono. He wrote a pamphlet called “The IBM Dollar” for the Centre for the Study of Financial Innovation (CSFI) back in the early 1990s. In it, he rather memorably said that he looked forward to a time when “the successors to Bill Gates will have put the successors to Alan Greenspan out of business”. Dr. de Bono was arguing that companies could raise money just as governments now do — by creating it from thin air. Now, if that notion seems to have resonance in age of multi-million dollar initial coin offerings (ICOs) then, well… that’s my point. The idea of private currency as a claim on products or services produced by the issuer caught my attention back then, and continues to inform my thinking. For one thing, it makes economic sense. IBM, in de Bono’s example, might issue “IBM Dollars” that would be redeemable for IBM products and services, but are also tradable for other companies’ monies or for other assets in a liquid market. To make such a scheme work, IBM would have to learn to manage the supply of money to ensure that the monetary base and its capacity to deliver are matched and that inflation does not destroy the value of their creations. But companies should be able to manage that trick at least as easily as governments do, particularly as they don’t have voters to cope with.

It is easy to imagine how such a system would work. A start-up launches, and instead of issuing equity, it issues money that is redeemable against future services. So, for example, a distibuted file storage start-up might offer money in the form of megabyte days that are redeemable five years from now. In the early days, this money would trade at a significant discount to take account of the risks inherent in the venture. But once the file system is up and running and people like using it, then the value of the money will rise. With tens of millions such currencies in circulation, constantly being traded on futures, options and foreign exchange markets, it might sound as if the “money” would be unusable because transactions would be unbearably complex for people to deal with. But as I wrote in The Financial Times, that’s not the world that we will be living in. This is not about transactions between people but transactions between what Jaron Lanier called “economic avatars“ (and those avatars might represent people or things). This is a world of transactions between my virtual me and your virtual me, the virtual Waitrose and the virtual HMRC. This is my machine-learning AI supercomputer robo-advisor, or more likely my mobile phone front end to such, communicating with your machine-learning AI supercomputer robo-advisor. And our robo-advisors will be entirely capable of negotiating between themselves to work out the deal.

In his pamphlet de Bono puts it quite nicely by saying that: Pre-agreed algorithms would determine which financial assets were sold by the purchaser of the good or service depending on the value of the transaction. And the supplier of that good or service would know that the incoming funds would be allocated to the appropriate combination of assets as prescribed by another pre-agreed algorithm. Eligible assets will be any financial assets for which there were market clearing prices in real time. The same system could match demands and supplies of financial assets, determine prices and make settlements. He also wrote (this is more than two decades ago, remember) that the key to any such a system would be “the ability of computers to communicate in real time to permit instantaneous verification of the creditworthiness of counterparties”, an early vision of what we might now call the reputation economy that I explored in my previous book “Identity is the New Money”, where I noted that identities and credentials are easy to create and destroy but reputations are much harder to subvert — especially in the age of the blockchain — since they depend not on what anyone thinks but on what everyone thinks.

You won’t make the decision, your phone will Now that the combination of mobile phones, social networks and shared ledgers makes the calculation of the value of a private currency cost-effective even for small transactions, the technology needed to deliver the Facebook Dollar, the Amazon Dollar, the Apple Dollar and the Microsoft Dollar (I insist that they be called Bill’s Dollars) is in place. And it’s not M-PESA or chip and PIN, but the technology of “tokens” that is already being used (some might say abused) in the current explosion of ICOs.

Now, the idea of use linking cryptocurrency coins or balances as tokens linked to something in the real world — like gold or file storage or a computer game — is hardly new and from the earliest days of Bitcoin people were using “coloured coins” to do this, but token technology really took off with the development of the ERC-20 standard back in 2015. ERC-20 defined a way to create a standard form of token in a “smart contact” on the Ethereum blockchain. Ignore the language here — they are not smart and they are certainly not contracts, they are a special kind of application that executes on a shared ledger (in fact, I prefer to call them shared ledger applications, or SLAPPs) — and just consider the token as a practical implementation of private digital bearer claims on goods or services, without the centralised clearing and settlement infrastructure that de Bono was imagining. Right now, the world of ICOs is chaotic. Hundreds of millions of dollars are being raised in the Wild West of digital finance. Filecoin, a company that plans to monetise unused computer storage, has just raised $50m+ in token pre-sales to Silicon Valley investors (including Sequoia Capital and Andreesen Horowitz) and another $200m in a public token sale. That came not long after Tezos, which is developing a blockchain competitor to Ethereum, raised $232 million.

Despite these huge sums, there is a lot of uncertainty in the space. The Securities and Exchange Commission (SEC) ruled in July 2017 that certain kinds of tokens are in fact securities and that transactions must regulated. This was hardly unexpected and I certainly think that the ruling was good news. Yes it is causing some disruption right now (one of the largest exchanges, Bitfinex, has just suspended ERC-20 token trading for US citizens) and yes some people will lose a lot of money and yes some people will end up in jail, but that’s what happens as we move from a Wild West to regulated growth and prosperity. The regulation of this space is imporant. I think that ICOs are more of a picture of the money of the future than Bitcoin is.

As I said in Before Babylon, Beyond Blockchain, tokens may make a real difference to the way the economy works. When the current craziness is past and tokens become a regulated but wholly new kind of digital asset, a cross between corporate paper and a loyalty scheme, they strike me as being something of an opportunity to remake markets in a new and better way. One might imagine a new version of London Alternative Investment Market (AIM) where start-ups launch but instead of issuing money they create claims on their future in the form of tokens. The trading of these coins is indistinguishable from the trading of electronic cash (because there is no clearing or settlement) but there is an additional transparency in corporate affairs because aspects of the transactions are public. And while the company and observers may not know the beneficial owner of the coins (because the wallets are identified only by keys), the market will be set up to issue wallets after appropriate KYC. In the general run of things, transactions are private but where there is suspicion of wrongdoing the ownership can be exposed under appropriate legal conditions. With reputations established as an immutable history of participation in transactions, good behaviour will not be gamed and bad behaviour will be on display. Market participants will be able to assess and manage risk, regulators will be able to look for patterns and connections. I’ll be able to see that your assets exceed your liabilities without necessarily being able to see what those assets or liabilities are. (This is one of the reasons why I tend to think of the blockchain as a regtech, not a fintech.)

This is a far more efficient way to manage things. There won’t be some giant IMF database that manages the new kinds of money. In this market, company perfomance rewards token holders by improving the exchange rate against other tokens. No coupons and dividends, no clearing and settlement, no hiding the number of tokens out there. The cost of trading these tokens will be a fraction the cost of trading stocks and bonds, which is why liquidity will seep out of existing markets and into these new and more efficient structures. Stephen McKeon, a finance professor at the University of Oregon, summarises this imperative by saying that assets of all kinds will tokenise because they will lose the “liquidity premium” if they do not. Tokens won’t only be issued by companies, of course. In fact, I think that tokens that implement the values of communities may come to dominate the transactional space (think of the Islamic e-Dinar and the London Groat) but it will be the private money of innovative new enterprises that will prove the technology.

Uneasy sits the crown as cash use continues decline


Consumers and businesses made 15.4 billion cash payments in 2016 - down from 17.2 billion in 2015, according to figures released by UK Finance. However despite the decline, cash was still used 25% more often than the second most frequently-used method; debit cards (11.6 billion).

During 2016, cash represented almost half (44%) of all payments made by consumers - the second year in a row where consumers used cash for fewer than 50% of all payments. During the same period, cash payments reached £240 billion, accounting for 15% of the total value of consumer spending, a decline of five percent compared to the previous year.

More than one in four (26%) consumer cash payments were for a value of £1 or less, and more than three in five (61%) were for a value of £5 or less.

From Uneasy sits the crown as cash use continues decline


Sunday, 13 August 2017

POST Estonia is a real place

My little corner of the internet seems awash with tales of a mythical utopia that goes by the name of Estonia. I’ve been hearing about digital identity in Estonia more and more. At meetings and conferences, on Twitter and in conversation, I hear people talking about the Estonian national identity scheme that uses a blockchain. The Harvard Business Review, for example, tells us that “since 2007 Estonia has been operating a universal national digital identity scheme using blockchain."

I’m not sure if some of the people talking about this on Twitter know that Estonia is actually real place and some of us have been there. The Estonian national digital identity scheme is a real thing. It launched in 2002. A decade ago a colleague at Consult Hyperion, Margaret Ford, interviewed Mart Parve from the Estonian “Look@World” Foundation in the long standing “Tomorrow’s Transactions” podcast series (available here). Mart was responsible for using the smart ID service (both online and offline) to help Estonia develop its e-society. If you listen carefully to them talking, you will notice that they never mention the blockchain, which is unsurprising since Satoshi’s Nakamoto’s paper on the subject was not published until more than a year later, in October 2008.

The strangeness of the obsession with Estonia in blockchain circles began to obsess me after I was invited along to a blockchain breakfast (seriously) at the House of Lords last year. The invitation came because I had been asked to contribute to the Parliamentary Office of Science and Technology (POST) work on shared ledger technologies (SLTs). In this Government Office for Science report on “Distributed Ledger Technology: beyond blockchain” Sir Mark focused on a particular kind of distributed ledger, the Bitcoin blockchain, and attempted to explain it to the general reader and then explore some of the potential uses.

<p >Personally, I found the report slightly confusing because it was jumping between ledgers, blockchains, the bitcoin blockchain and bitcoin almost on a paragraph by paragraph basis. I realise that I read the document from a very technical perspective and that I may see some of these things therefore in the wrong context, but I prefer Richard Brown’s term “shared ledger technology” as a starting point because I feel that the fact that multiple organisations share the ledger is more important than its architecture. I think the report might have benefited from some more description of shared ledgers, and the reasons why Moore’s Law and falling communications costs have made the core idea of everyone storing every transaction a plausible architecture. Here’s the way that my colleagues at Consult Hyperion and I started to think about the ledger a couple of years ago, the "4Cs" model that has worked rather well.

Consensus Computer Model

I prefer to use this layered approach to explain the key components of a shared ledger and then develop ideas around different choices in those layers. Different choices in consensus technology, for example, lead to a variety of different possibilities for implementing a shared ledger. In order to help categorise these possibilities, and narrow them down to make useful discussions between the strategists and technologists, I use the taxonomy that Consult Hyperion developed to distinguish between different kinds of public and private ledgers. Rather flatteringly, Sir Mark used a simplified version of the this model on page 19 of his report. When the report came out I said that it might be considered reckless to disagree with the Chief Scientific Adviser, but I just did not (and do not) see cryptocurrency as a sensible government option for digital currency. Sir Mark said that permissioned ledgers (i.e., not the Bitcoin blockchain) are appealing for government applications and I’m sure he was right about this, although I remain sceptical about some of the suggested government uses that are based on costs or efficiency. I think that his suggestions around applications that focus on transparency are the more interesting areas to explore in the short term and they would be my focus if I were looking to start exploratory or pilot projects in the field. I share the Open Data Institute’s view on this:

We agree that blockchains could be used to build confidence in government services, through public auditability, and could also be used for widely distributed data collection and publishing, such as supply chain information.

[From Comment: Blockchain technology is useful, but not for everything | Open Data Institute]

Anyway putting my nerdy criticisms to one side, Sir Mark’s conclusions (which were essentially that the technology is worth exploring in government contexts) were surely correct. At the breakfast, Sir Mark said that the goal of the POST reports is to demystify technology for policy makers although I have to report that in his closing remarks he said that we had not been entirely successful in this enterprise and I fully concur with his opinion. After a while, the discussion moved on to the Estonian electronic identity system. I expressed some scepticism as to whether the Estonian electronic identity system was on a blockchain. The conversation continued. Then to my shame I lost it and began babbling “it’s not a blockchain” until the chairman, in an appropriate and gentlemanly manner, told me to shut up.

House of Blockchain

When it came time for my contribution, by the way, I said that it wasn’t at all clear to me that it was accurate to describe Bitcoin as a decentralised system since almost all of the hashing power resides with a very small number of unaccountable mining pools based in China but, more importantly that

  1. It seems to me that many of the efforts to move shared ledgers into the marketplace have concentrated on shaping shared ledgers to emulate existing solutions in the hope that SLTs will be faster, higher or stronger. These are all unproven assertions. It is possible that a shared ledger replacement for RTGS might be cheaper, or more resilient or more functional that the currency centralised solution, but who knows?

  2. The transparency of the shared ledger, the aspect that most doesn’t work for current solutions in current markets, may well turn out to be the most important characteristic because it allows for ambient accountability and therefore opens up the potential for new kinds of markets that are far less costly and complex to regulate, manage, inspect and audit. This is the “shared ledger as regtech not fintech meme” that I am rather fond of.

  3. Just as the invention of double-entry bookkeeping allowed for the creation of new kinds of enterprise, so it seems to me that the shared ledger will similarly lead to new kinds of enterprise that use the shared ledger application (the SLAPP) as the engine of progress and the focus of innovation. I assume that there are kids in basements experimenting with SLAPPs right now and that this is where the breakthrough use case will come from. As I some time ago in a discussion about shared ledgers for land registry, turning the ledger into a platform may be the most important reason for shifting to this implementation.

Anyway. My point is that the Estonian ID scheme, launched in 2002, has nothing to do with distributed ledgers or blockchains or any similar technology. As it happens, a some time after my breakfast with their lordships, I had another breakfast, this time with the new CIO of Estonia, Siim Sikkut


I asked him where this “Estonian blockchain ID” myth came from, since I find it absolutely baffling that this urban legend has obtained such traction.  He said that it might be something to do with people misunderstanding the use of hashes to protect the integrity of data in the Estonian system. Aha! Then I remembered something… More than decade ago I edited the book “Digital Identity Management” and Taarvi Martens (one of the architects of the Estonian scheme) was kind enough submit a case study for it. Here is an extract from that very case study:

Long-time validity of these [digitally-signed] documents is secured by logging of issued validity confirmations by the Validation Authority. This log is cryptographically secured by one-way hash-function and newspaper-publication to prevent back-dating and carefully backed up to preserve digital history of mankind.

Mystery solved! It looks as if the mention of the record of document hashes has triggered an inappropriate correlation amongst less technical observers and as Siim observed, it may indeed be the origin of the fake news about Estonia’s non-existent digital identity blockchain.

Saturday, 12 August 2017

Here’s the Biggest Security Threat to the World’s Third-Largest Cryptocurrency - MIT Technology Review


"In that time, the network structure has remained remarkably constant. In 2013 each wallet was connected on average to 3.12 others. In 2016 that number was 3.53."

Here’s the Biggest Security Threat to the World’s Third-Largest Cryptocurrency - MIT Technology Review


PBOC Researcher: Can Cryptocurrency & Central Banks Coexist? - Bitcoin Magnates

Yao Qian, from the technology department of People’s Bank of China, wrote about this earlier this year.

"To offset the shock to the current banking system imposed by an independent digital currency system (and to protect the investment made by commercial banks on infrastructure), it is possible to incorporate digital currency wallet attributes into the existing commercial bank account system so that electronic currency and digital currency are managed under the same account."

PBOC Researcher: Can Cryptocurrency & Central Banks Coexist? - Bitcoin Magnates


Ant Financial seen becoming world's top consumer bank- Nikkei Asian Review


"Alipay now controls 70% of China's mobile payment market, while Yu'e Bao, which serves as a repository for cash leftover from online spending, emerged as the world's largest money market fund this year with $165.6 billion of assets under management."

Ant Financial seen becoming world's top consumer bank- Nikkei Asian Review