Archive for the ‘Digital Currencies’ Category
Why I think TheDAO is a Success
The usual plague of so-called “experts” have come out of the woodwork following today’s attack on TheDAO, to tweet, blog and bloviate their hindsight-informed opinions about TheDAO’s “failure” and the implications for the future of smart contracts (despite the fact that most of them barely can barely string together a coherent description of what a smart contract is, let alone write one).
I don’t view TheDAO as a failure. I view it as an experiment that has reached its conclusion. We learnt something important today – we learned that this particular configuration of a DAO doesn’t work. Future DAOs and smart contracts will be better because of what we’ve learned, from the specific bug that the attacker tried to exploit, to the insights we’ve gleaned into voting incentives and DAO governance. We’ve learnt a lot about the benefits of being able to upgrade smart contracts after they’ve been deployed, and the lawyers and regulators have plenty of food for thought and debate, with all the legal questions that have been raised by both TheDAO itself and the proposed use of a hard fork to return investors’ ether.
It’s very easy to criticise the Slock.it team but they got a lot of things right and it appears that, in the end, all TheDAO’s investors will get their ether back (albeit with the assistance of the Ethereum community in implementing a hard fork). That’s no mean feat and they deserve credit and respect for what they achieved.
Most experimentation and innovation happens in private, and all the wrinkles are ironed out long before the final product is unveiled. However, in this area – cryptocurrencies, blockchains, smart contracts and DAOs – the experimentation and innovation is happening in the open.Bitcoin wasn’t invented in a corporate R&D lab. Ethereum was funded by the venture crowd, not a venture capitalist. The downside is that we get to see how the sausages are made and any mistakes are public, but the upside is that anyone can participate, and the degree and pace of innovation – its velocity, for want of a better term – is far higher as a result.
If we want to reap the benefits of open innovation, we also have to embrace the downsides, including the experiments that we learn from, even when the outcome isn’t what was expected or hoped for; we have to applaud those who try, even if they don’t succeed; and, above all, we should elevate those who do above those who merely talk, tweet and blog.
I invested a small amount of money in TheDAO because I believe that the best way to learn is to get involved and put some skin in the game. If I never get the money back, it will have been a small price to pay for the amount I’ve learnt. If I do get it back, then I hope that I’ll have the opportunity to invest it in TheDAO v2 so we can have another try and see if we can’t learn a bit more.
UK Government Outlines Support for FinTech and Digital Currencies
Yesterday was a significant day for FinTech in the UK. Having previously made it clear that the government wants to make London the leading location for the FinTech and digital currencies sectors, the Chancellor, George Osborne, used the Budget to lay out more details of how the government intends to achieve that.
The Government Office of Science also released its Blackett review into FinTech, and HM Treasury published both their response to the call for information on digital currencies that they launched last November, and a policy paper outlining the government’s strategy for delivering competition and choice banking.
I highlight some of the key announcements from the Budget below.
Promoting competition is one of the FCA’s three objectives (the other two are protecting consumers and protecting financial markets) and, fortunately, its leadership fully recognises both the role that innovation can play in driving competition, and the fact that regulation can be a significant barrier to innovation. Project Innovate is an initiative launched last August to help innovator companies navigate regulatory hurdles and bring new products and services to market.
One of the key challenges is that existing regulations often don’t cover emerging business models. Even when they do, startups often lack the resources to achieve full compliance. Hopefully, the FCA will be able to come up with a sandbox model that allows innovators to pilot new products, services and business models that they would otherwise struggle to bring to market.
Just as technology is transforming the way financial services are delivered to customers, it has the potential to transform the way regulation is delivered and reduce regulatory costs. By taking the lead in this area, the FCA and PRA can make the UK a more attractive regulatory regime and provide a fertile environment for UK companies to develop ‘RegTech’ products and expertise that can be exported overseas.
In Germany, the widespread adoption of the HBCI/FinTS banking API has helped foster a strong FinTech sector, spawning startups like Fidor Bank, Figo, Number26 and Avuba, as well as the Open Bank Project. If the UK banking sector can be persuaded to adopt a similar API, it can only be a positive development for UK FinTech.
The Bank of England has taken a keen interest in digital currencies and blockchain technology, and even raised the question of “Why might central banks issue digital currencies?” in a recent discussion paper. HM Treasury launched a call for information on digital currencies last November, and released a detailed response to the feedback alongside the Budget yesterday. The paragraphs below (with numbers in red) are taken from the latter document.
The government clearly perceives a significant opportunity in this space but the key challenge is to ensure consumer protection and prevent the use of digital currencies for criminal purposes (including money laundering and terrorist financing) without stifling innovation.
There’s little doubt that here in the UK, lack of regulation has hampered the digital currencies sector. Banks, having been hit with punitive fines in the past for failing to do enough to prevent money-laundering, refuse to touch anything Bitcoin-related with a 10-foot bargepole, meaning that UK companies in this space are typically forced to bank overseas (e.g. Bitstamp, Coinfloor and CEX.IO bank in Slovenia, Poland and Latvia, respectively, despite being based in the UK). Applying AML regulation to exchanges should remove this barrier to banking services and help make the UK a more attractive regulatory regime.
The next Parliament will begin in May so, with luck, we will see the result of this consultation by the end of the year.
The new Payment Systems Regulator may also have a role to play in ensuring that that digital currency businesses are not excluded from payments networks by UK banks.
BSI is the UK’s national standards body. As well as safety standards for things like crash helmets and seatbelts, it pioneered the quality assurance and information security standards which formed the basis of the ISO 9000 and ISO/IEC 27000 series, respectively.
The digital currency sector has seen its fair share of fraud, ponzi schemes and fiduciary failures, so it’s interesting to see the UK government opting against prescriptive regulation to protect consumers, in favour of giving the sector the opportunity to self-regulate. It’s very much a pro-innovation stance, and stands in marked contrast to the approach taken by the New York Department of Financial Services – it’s possible that the UK government, having seen the negative reaction to the New York Department of Financial Services first BitLicense draft, saw an opportunity to steal a march on New York (which vies with London for the title of the world’s leading financial capital).
It’s worth bearing in mind that “self-regulation” has a decidedly mixed track record in the UK, so there’s a question-mark over whether this approach will engender enough consumer confidence to support mainstream adoption. Also, the use of the phrase “at this stage” is significant.
The £10m in funding for research is a relatively small but significant indication that the government is willing to put its money where its mouth is. The Research Councils are the primary source of funding for research in the UK. The Alan Turing Institute is a newly-formed organisation intended to support research in Big Data and algorithms. Digital Catapult is an Innovate UK initiative intended to help commercialise data innovation.
Concentration of talent plays a key role in the formation of industry clusters. If the UK can attract talent to conduct research, and provide a fertile environment for commercialising the fruits of that research, it stands a very good chance of establishing a strong digital currency cluster.
FinTech is a significant contributor to the UK economy, and are are a key element of London’s role as a global financial centre. Yesterday’s announcements are a clear sign that the government is not just paying lip service when it says it wants the UK to be the best place in the world to do business in this sector.
The prospect of being formally regulated will likely prove highly attractive to companies focusing on Bitcoin and other digital currencies. It will confer legitimacy, and give both customers and investors greater confidence in the sector. Passporting will also give companies regulated in the UK the ability to offer their services across the rest of the EEA.
We’ve already seen companies like CoinJar move to the UK because of its Bitcoin-friendly tax regime. I wouldn’t be surprised if others follow in its footsteps.
I’m interested in hearing other’s thoughts on yesterday’s announcements. Please leave your feedback below as a comment or contact me directly.
The State of the Blockchain in 2015
During 2014, nearly 1.6m bitcoins were mined and more than 25m Bitcoin transactions were written to the Blockchain, which doubled in size, ending the year at 26.4GB. The ongoing growth in transaction volumes has led to a renewed focus on Bitcoin’s scalability issues.
During the same period, the price of Bitcoin dropped by more than 50%, causing the growth of the network’s hashrate to slow towards the end of last year, which triggered the first drop in difficulty since early 2013. Last month (coincidentally as the trial of Ross “Dread Pirate Roberts” Ulbricht got underway) the Bitcoin price dipped below $200 for the first time since November 2013, prompting some sizeable mining pools to suspend operations. The implication is that the mining hardware arms race has squeezed profit margins to the point where some miners are unprofitable when the price drops below $200 (i.e. value of the bitcoins generated by the mining hardware is less than the cost of electricity required to power it). The fact that some miners are suspending operations instead of continuing to mine and simply hanging on to the bitcoins mined until the price rises again suggests that they may lack the (fiat currency) funds to keep paying for electricity or that they’re fearful that the price won’t recover and they’ll end up permanently in the red.
For now, the question is moot, as the price has recovered to ~$225 (giving the ~14m bitcoins in circulation a total value of ~$3.15bn), but it will be interesting to see what happens if the price drops again.
In March, Newsweek relaunched their print edition in March with a cover story claiming that that they had unmasked Dorian Nakamoto as the creator of Bitcoin. The man in question denied having anything to do with Bitcoin and the real Satoshi Nakamoto surfaced online to declare: “I am not Dorian Nakamoto.”
The first really big Bitcoin bankruptcy took place in February when MtGox shut down and filed for bankruptcy, claiming that hackers had stolen 850,000 bitcoins (worth around $460m at the time) and that $28m was “missing” from its bank accounts. It later emerged that 200,000 bitcoins were found in a “forgotten” wallet and, nearly a year later, the saga has yet to be fully resolved.
Of course, MtGox wasn’t the only Bitcoin bankruptcy: Flexcoin and Bitcoin Trader shuttered after being hacked, Neo & Bee collapsed amid suspicions of fraud, and London-based MintPay and Moolah closed down after CEO “Alex Green” (subsequently revealed as an alias of Ryan Kennedy) absconded with over $1.4m worth of bitcoins.
Unfazed, VCs invested more than $300m in Bitcoin startups during 2014 and if Coinbase’s $75m round in January is anything to go by, that trend seems set to continue in 2015. It’s clear that some VCs believe that Bitcoin and the Blockchain represent a “New World”-style opportunity (similar in nature to the Internet itself back in the ’90s), and their backing of companies like Coinbase (who have announced the launch of “the first regulated bitcoin exchange based in the U.S.“) is part of a strategy to put in place the infrastructure and services necessary to support mass adoption.
Some believe that even if Bitcoin does not go mainstream, the Blockchain, secured by the Bitcoin mining network, will become the foundation for a multitude of applications and services like Blockstream, Counterparty, Factom, OneName and OpenBazaar. Overstock CEO Patrick Byrne has ambitions to build a distributed stock market on top of the Blockchain. This could result in a self-sustaining “cryptoconomy”, in which users buy bitcoins from miners, to spend on transaction fees (which go to the miners) required to write transactions to the Blockchain. The prospect of receiving those transaction fees would entice enough miners to maintain the security of the Blockchain. In other words, the intrinsic value of a bitcoin would be the ability to write to the Blockchain.
However, I think such a scenario, while possible, is unlikely. As I’ve said in the past, I doubt Bitcoin’s first-mover advantage will translate into long-term success. Webvan pioneered grocery delivery during the dot-com bubble but ultimately went bankrupt. Today, most supermarkets do deliveries, while companies like Ocado, Amazon and Instacart are resurrecting Webvan’s business model. I suspect that something similar will happen to Bitcoin and cryptocurrencies.
But it’s not happening just yet. Ripple, one of the early Bitcoin alternatives, suffered mixed fortunes in 2014. The circumstances surrounding the departure of co-founder Jed McCaleb (who had previously founded MtGox) to found Stellar, resulted in the resignation of Ripple Labs board member Jesse Powell, who highlighted the fact that Ripple’s founders hold significant amounts of the pre-mined currency. On the plus side, Ripple signed up three banks, including Fidor Bank in Germany and CBW in the US.
Other competing alternatives continue to emerge. Ethereum is intended to be a platform for smart contracts. MaidSafe is a platform for distributed storage, designed to support various applications. Storj is another distributed storage service that will compete with cloud storage services like Dropbox.
For me, the most important developments during 2014 were in the regulatory space. In the US, having warned Bitcoin exchange operators last year that they must comply with money-transmission laws, authorities began cracking down on “unlicensed money transmitters” (including BitInstant CEO Charlie Shrem and Robert “BTCKing” Faiella), as well as Bitcoin ponzi schemes and unregistered securities offerings.
In April, the IRS issued a notice indicating that virtual currencies are treated as property (as opposed to currency) for federal tax purposes and, hence, are subject to the rules pertaining to capital gains (and losses). This makes things rather complicated.
In June, New York’s Department of Financial Services (DFS) published a draft of its proposed “BitLicense” regime for regulating virtual currency companies, which attracted thousands of comments. A revised draft is expected imminently. Meanwhile, the Commodity Futures Trading Commission (CFTC) chairman declared that derivatives based on virtual currencies fall within the CFTC’s jurisdiction, and Circle (which launched its hosted Bitcoin wallet in September) was invited to join the Treasury Department’s Bank Secrecy Act Advisory Group.
On this side of the Pond, the UK’s tax authority issued guidance on the tax treatment of Bitcoin and other cryptocurrencies, and the financial regulator issued a Call for Information on Digital Currencies. Offshore, the Isle of Man government announced that it’s planning to create a regulatory regime that covers virtual currencies as part of a strategy to attract Bitcoin companies to the island.
Needless to say, the prospect of increased (or, rather, any) regulation of Bitcoin is not universally welcomed but it’s actually a critical step in laying the foundations for wider adoption of cryptocurrencies and related technologies. For example, there are doubts over Bitstamp’s solvency and security after it was hacked at the beginning of the year. If Bitcoin exchanges become regulated by something like the New York BitLicense (or, in Europe, in a manner similar to payments institutions, with appropriate measures for audit, security and segregation of client funds), it would go a long way to assuaging such concerns (not to mention make it easier for companies dealing in Bitcoin to get access to banking services).
In fact, I wouldn’t be surprised if 2015 is the year that being regulated becomes a competitive advantage for companies operating in the cryptocurrency space.
Bitcoin Part 2 – The Legacy
“The test of a first-rate intelligence is the ability to hold two opposing ideas in mind at the same time and still retain the ability to function.” — F. Scott Fitgerald
I previously wrote about Bitcoin’s flaws. However, despite the fact that I doubt Bitcoin will succeed as a currency, I expect that it will leave a positive legacy. For all its flaws, Bitcoin has garnered far more usage and media attention than any previous cryptocurrency. That will have long-term ramifications, for a number of reasons.
Bitcoin Part 1 – The Flaws
When I return home from an overseas trip, I toss my left-over notes and coins into a drawer. Euros and US dollars obviously get used (as long as I remember to take them with me!) but the dirham, rubles, rupees, yuan, francs, and dollars from Hong Kong and New Zealand just sit there gathering dust – pieces of paper and metal that are effectively worthless here in London.
However, for all its faults, physical notes and coins remain the only way in which you can transfer currency in a decentralised fashion. Electronic money – the ones and zeroes in our bank accounts, the records of credit card transactions and inter-bank transfers – ultimately rely on central banks and mechanisms like CLS, which keep track of how much money each bank has.
Bitcoin is an effort to bring the advantages of physical currency – specifically the ability to transfer wealth with little-to-no cost and without needing to involve anyone else in the transaction – to the electronic medium.
(Many assume that Bitcoin transactions are anonymous. They’re not. All Bitcoin transactions are recorded publicly in the blockchain. At best, Bitcoin transactions are pseudonymous; at worst, network analysis – something that security and intelligence services are very good at – can provide major clues to participants’ identities.)
I first became aware of Bitcoin in 2010, when someone paid 10,000 bitcoins for a couple of pizzas. My instinctive gut reaction was that it was an interesting technology but, ultimately, would prove to be nothing more than a fad. Three years later, I have yet to be proven correct. Enough people have supported Bitcoin that an eco-system has built up around it. There are online exchanges where you can buy and sell bitcoins for dollars, euros or pounds; payment processors that allow merchants to accept bitcoins for goods or services; casinos where you can gamble your bitcoins; and online marketplaces where you can use bitcoins to buy drugs.
jackgavigan.com 