Between 2012 and 2014, the established rhetoric coming from bitcoin’s staunchest supporters was that the cryptocurrency would disrupt payment clearing costs, kill-off intermediaries and economically bank the unbanked. Now that bitcoin is failing on most of those fronts, bitcoin purists claim all that was just fake news. Apparently the movement’s real purpose was to establish a bitcoin-based reserve system that mirrored established banking hierarchies.
Bitcoin asset holders have discovered there is logic in taking risk with middlemen if it means idle (and highly volatile) zero yielding assets can be transformed into yielding securities. As a consequence, Bitcoin has gone full-circle and become exactly what it sought out to destroy.
Financial hype cycles are predictable mostly because they mimic fashion fads and music fads. For example, there was a time in this reporter’s life when she aspired to be cutting edge and cool. Joyfully, no longer. This involved dying her hair pink (as much as she could get away with without being expelled), reading NME and Melody Maker, and listening to the most obscure bands available in the acceptable genre, which was Indy rock. If and when the bands went “mainstream”, however — something assessed by whether the year below was listening to them — it was time to move on and find something more obscure. “Are you seriously listening to Blur? What seriously? Jeez. I much prefer Radiohead. What!? You’ve never heard of Radiohead? I can’t believe it. I’ve been a fan for like ‘forever’. You’re not cool.“
Publicly, the Hong Kong-based bitcoin exchange Bitfinex has lumped its users with a 36 per cent haircut on all balances to cover the $70m hack which it experienced last week. The haircut applies to all customers irrespective of whether they were holding bitcoin balances or dollar balances or other altcoin balances. But customers don’t come away with nothing! No. Not in the world of virtual money creation. That would be crazy. They get a BFX token (an IOU) as compensation. Privately and anecdotally, however, customers are reporting some variance with regard to the way the haircut is being imposed. Some US customers, for example, who only had dollar balances are reporting they’ve been able to get all their money back.
On Wednesday, we argued that the loss of approximately $70m worth of bitcoin from customer segregated accounts held at Bitfinex should give the banking industry pause for thought with respect to adopting blockchain and bitcoin-based financial technologies. Today, we’re going to look at the wider implications of the hack, and the potential fallout in terms of legal risk.
The Hong-Kong based Bitfinex exchange is short 119,756 bitcoins after being hacked on Tuesday, though nobody can be sure what’s really happened because ‘hacking’ is a loose term and can encapsulate almost anything, including an internal security breach. (Do see the case of Mt Gox.) The mark-to-market value of the stolen coins is roughly $70m, but again who can really tell their true worth. Bitcoin is an asset class where the liquidation of 119,756 (approximately 0.8 per cent of the total bitcoin circulation) can move the market more than 20 per cent, suggesting a certain fantastical element to the valuation.
The SEC has issued a cease and desist order against Bitcoin Investment Trust (BIT) and SecondMarket, both founded by Digital Currency Group CEO Barry Silbert — and dubbed back in September 2013 by the NY Times’ Peter Lattman and Nathanial Popper as “a reliable and easy way to bet on the future price of bitcoin”. The Trust famously beat the Winklevoss brothers’ bitcoin ETF to market and drew significant column inches as a result. The Winklevoss ETF (for some strange reason associated possibly with risk?) is yet to receive regulatory approval, forcing the brothers to make significant amendments to their original regulatory filing if it’s to stand a chance of being approved.
Andrew O’Hagan’s 35,000 word write up of the Craig Wright Satoshi affair in the London Review of Books has been out and circulating since the weekend. The market has had time to digest the information and yet it doesn’t look all that much like anyone has found much closure from the account. For now at least, more questions than answers persist. Some interesting snippets nevertheless included:
Whilst by no means an entirely undisputed theory, ancient historians generally believe the emergence of civilised states such as Sumer was closely connected to the role temples played in standardising, clearing and redistributing value in society. Temple authorities, the theory states, kept account of the assets and liabilities of each individual in a centralised manner, meaning citizens could claim as many goods from the temple store as the temple records permitted. This was often based on the amount of provable work they had done. Tangible coins were thus unnecessary. The accounting system was ubiquitous in society and trusted. As Benjamin Foster, a Yale Assyriologist, has noted historians have speculated that the religious complex was essential for spurring the sort of non-rivalrous collaboration that allowed for the cultivation and settlement of land in the first place.
You may have come across this story about Barclays partnering up with a “Goldman-backed” bitcoin payments app called Circle International Financial, which uses bitcoin to transfer central bank currencies as digital money increasingly moves into mainstream finance, and thought “wow” that sounds innovative and exciting. But is it? Is it really all that innovative? Let’s break down some of the key claims being made.
They say crises define movements and people. If that’s the case, purveyors of fintech payment solutions could soon be defined as those who stood ready to exploit a Greek national bankruptcy crisis for the benefit of “onboarding” users.
Does money have value because the state says it’s money, or because the population trusts that it’s money? It’s a great, perennial question. It’s also really not one Greece wants to find the answer to right now. The question comes up reading yet another proposal for Greece to use a parallel currency so it can fight with its creditors without leaving the euro. So, coming fresh after Wolfgang Munchau’s appeal for Greek IOU issuance last week, Paul Mason has resuscitated “future tax coin”:
You can sign up to receive the email here. Greece’s finance minister Yanis Varoufakis will meet Mario Draghi today with the hope of persuading him to maintain liquidity in Greece’s banking sector after the country’s EU bailout programme expires at the end of this month. (FT)
The deadline for European institutions to be compliant with the Single European Payment Area (SEPA) standard came and went on August 1. In theory, that means anyone in Europe should from now on be able to make and receive payments across the union on an entirely frictionless basis. For the euro project it’s the realisation of one of the system’s key objectives. As the ECB noted: It allows businesses to grow and to broaden their reach within Europe, and reduces costs by providing a standardised framework for all their payments. Businesses can now use a single system and set of accounts for all their euro trade in Europe.
Nobody has been more annoyed by Alibaba’s potential upcoming valuation of Snapchat at $10bn than the Bitcoin community, since its own “world changing” technology currently has a market value of no more than $7bn. Here’s a flavour of the outrage on the Bitcoin subReddit:
Ken Rogoff wades into the negative rate debate this month, in a paper that discusses the costs and benefits of phasing out paper currency — a topic previously explored by Willem Buiter and Miles Kimball (and of course Satoshi Nakamoto). Among his observations is the somewhat provocative point (at least judging by the replies on Twitter) that… Paying a negative interest rate on currency, or on electronic reserves at the central bank, may seem barbaric to some. But it is arguably no more barbaric than inflation, which similarly reduces the real purchasing power of currency. Meaning that a good bout of inflation could be just as good as a negative rate regime.
Markets: A week that began with a global shift away from risky assets was on track to end with broad equity gains. China’s tightly controlled currency, the renminbi, strengthened against the dollar for a fourth straight session, following its biggest weekly loss in nine years last week. (FT’s Global Markets Overview)
FT Alphaville chaired a fortuitously timed Chatham House panel on Bitcoin, alternative currencies and the future of money on Tuesday evening. The panel included the man who signs all the UK banknotes, Chris Salmon (a.k.a. the chief cashier of the Bank of England), Dave Birch, a consultant and alternative currency “thought leader” from Consult Hyperion, Shane Happach, chief commercial officer of eCommerce at WorldPay and Leander Bindewald, who leads research into complementary currencies at the New Economics Foundation. The audio can be found here.