Rather than pretending resources spent on data systems in information exclusive industries (like banking) can lead to longstanding productivity gains which don’t just buy us a little time until the next paperwork crisis in five years time, perhaps we should invest that money in the expansion of industrial capacity?
Fed up of blockchain hype? Or, convinced that a shared database will revolutionise the world as we know it? Or, don’t know one way or the other? The FT’s called a debate in which both sides of the argument will be properly defended. It’s in Markets Live form. It’s at 1pm UK time today. It features Izzy vs Simon Taylor, co-founder and blockchain director of 11FS.
In today’s daily blockchain bulletin we bring you news that next big thing in financial back-office technology isn’t actually the blockchain. Apparently it’s something called a “distributed concurrence ledger”. We’re not yet convinced that’s a thing, but the white paper outlining the DisLedger DCL concept does at least provide a refreshingly honest account of the core problems with blockchains.
Another day, another blockchain distributed ledger technology (DLT) report*. Today’s comes from the World Federation of Exchanges, which provides us with a survey of what financial market infrastructure types are thinking about DLT. And, interestingly enough, the bulk of the survey is dedicated to unknown, unknowns. Since DLT hype is exclusive to all other media outlets on the internet, we won’t feel bad about highlighting some of the real concerns being raised by market practitioners in the space with respect to DLT rollout.
Four banks have stolen loads of column inches on Wednesday with news that they are developing “a new form of digital cash that they believe will become an industry standard to clear and settle financial trades over blockchain, the technology underpinning bitcoin”. In the fanfare, however, lots of common sense has been abandoned. The big idea here (allegedly) is that banks will use a “utility settlement coin” to bypass the need for costly and inefficient fiat liquidity from the cbank. The utility settlement coin, based on a solution developed by Clearmatics Technologies, aims to let financial institutions pay for securities, such as bonds and equities, without waiting for traditional money transfers to be completed. Instead they would use digital coins that are directly convertible into cash at central banks, cutting the time and cost of post-trade settlement and clearing.
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.“
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.
In our inbox just now from Stephan Tual, Founder & COO, of Slock.it, somehow related to the DAO and Ethereum by way of an unquantifiable number of revolving doors between respective blockchain projects/cabals: Ethereum fork successful, all DAO token holders to be made whole The title says it all – end of the hack that never was.On Ethereum, Code is Law. It’s the network’s participants that determine its evolving rules, voting by way of updating their software. Today, they’ve done just that to nullify an exploit found in the DAO, proving their capability to self-govern effectively.https://blog.slock.it/what-an-accomplishment-3e7ddea8b91d#.kznb3sjbxHappy to chat at anytime on stephan.tual over skype.Cheers!
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:
In the course of bringing you the FT’s Festival of Finance Camp Alphaville, the FT Alphaville team has stumbled into a modern day administrative nightmare which we presume applies more broadly to everyone. It seems, if you put one team into a position where they must liaise with at least three separate departments simultaneously, then give them all access to a version-controlled shared drive without a clearcut executive process to go with it, what you end up with isn’t work-flow harmony but unbounded database hell.
While in Istanbul for a blockchain conference, we came across Matt Levine’s latest Money Stuff column, in which he observes the following about the Libor manipulation and anti-trust case: It is fairly well established that a bunch of big banks manipulated the London Interbank Offered Rate, and that the dollar numbers attached to Libor manipulation are quite large, so a bunch of investors and plaintiffs’ lawyers got together a while back to sue the banks and get some of those dollars. One of their main theories was that the banks’ collusion to manipulate Libor was an antitrust conspiracy. But the district court threw out this theory, reasoning that it can’t be an antitrust conspiracy for the banks to get together and agree on Libor, because banks getting together to agree on Libor is just Libor. It can’t be illegal to do anticompetitive stuff with Libor, because Libor isn’t a competitive market; it’s “a cooperative endeavor,” so the fact that the banks cooperated in setting a false Libor, while it might be bad, can’t be an antitrust violation. I am not an antitrust expert but I found this interpretation clever, and fairly convincing.
As reported in the FT on Friday, a fresh cyber attack has been identified by Swift, the bank transaction messaging system, potentially linking the recent theft from the Bangladesh central bank to the data breach at Sony in 2014. At the heart of the attack was a “sophisticated knowledge of specific operational controls within the targeted banks — knowledge that may have been gained from malicious insiders or cyber attacks, or a combination of both.” But also… a bit of malware which targeted the bank’s PDF reader. As we’ve had it explained by Swift on Friday, the malware essentially created a decoy interface which obfuscated the true state of underlying accounts, ensuring the spent transactions went unnoticed by the impacted institution for longer than would otherwise be normal.
Blockchain fever has, as we all know, turned into private permissioned distributed ledger fever — loosely summarised as the idea that the advantages of blockchain can be stripped out of the only tried and tested blockchain (bitcoin) then applied to pre-existing token framework (a.k.a fiat money), without the need for costly proof of work verification mechanisms. The hype on that front is now astronomical. And yet, despite all the column inches written about the system, nobody seems to have cottoned on to a critical contradiction with the premise. Blockchain, like the euro, makes little sense if it’s applied to participating institutions that don’t share the same business logic or governance standards. As a result it encourages unification around central systems, which don’t necessarily appeal to all parties involved.
Reserves. Something not needed for immediate use but available if required, or the act of keeping back something today for future use or for a special purpose. Also construed to be a form of purposeful rationing. A form of risk management. A form of operational smoothing. Are reserves expensive? Of course they are. The flip-side to any reserve is the wastage associated with not using stocks in time before they spoil or depreciate. Reserves are inherently costly. But, as the story of Joseph and the pharaoh teaches us, they’re also essential for sound economic planning in systems exposed to unexpected externalities.
As the clairvoyant FT Alphaville said on March 31, Australian Craig Wright has come out to claim he is Satoshi Nakamoto, the pseudonymous creator of Bitcoin both in a personal blog post and in media interviews with The Economist, a former newspaper, blokes’ mag GQ, and the gullible old BBC. And he chose Monday, May 2 (a Bank holiday in the UK), to do the ‘Big Reveal’, which just happens to coincide with the first day of Consensus, a hullabaloo blockchain event in New York featuring famous self-styled bitcoin/blockchain radicals like Balaji Srinivasan of 21 Inc, Jack Markell, governor of Delaware State, and Larry Summers. (Yes, that Larry Summers.) As the world’s media now embraces a manufactured ‘Craig Wright media storm’, we should probably add some detail on how this story has developed and we need to look at the evidence thus far presented.
In the beginning, there was the promise that blockchain-supported smart-contracts could disintermediate the powers that be and replace them with a self-organising decentralised system where every contract entered into could be depended upon to perform as expected, with risk and costs entirely eliminated. Furthermore, it was thought, both human and state involvement could be taken out of the process too. Instead, we’d achieve an autonomous financial utopia within which capital flowed from each according to his ability, to each according to his needs — guided only by faceless protocols and algorithms. Yet, from the beginning, there was an inconvenient truth buried in the promises being made by blockchain advocates.
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.
Not since Prometheus bequeathed the gift of fire upon humanity — prompting stone-age entrepreneurialism of the highest order (me make fire, me then make register of value-added products made with fire, me then make trade offering to my heathen cave dwelling neighbour in hope to secure peace or value in return, me get clubbed on the head regardless) — has a technology captured the imagination of a people so. We’re referring of course to blockchain — or as we’re campaigning for it to be called, batchlink, matchmerkle, infocartel, or tradeballandchain. If the hype is to be believed, blockchain equates to a Promethean (Satoshean surely? – Ed) gift to humanity, which stands to eliminate all risk from the settlement process by taking society to a real-time operations framework. (Me make value-added product, me make trade offering to my neighbour, me get instant value-added product back without risk of being clubbed on the head ever.)
As the Bitcoin price crumbles…. … and the capital hole (economic flaw) at the heart of all cryptocurrency schemes is exposed, we thought we’d uncharacteristically look at what was actually good about the phenomenon of Bitcoin.