The Weekend Read: Nov 15

1. You Say Bitcoin, I Say Blockchain

Circle CEO Jeremy Allaire came out swinging this week with a piece in Recode called Say the Big, Bad ‘B’ Word: Bitcoin and the Internet of Money:

It has been a bit amusing watching as intellectuals and “thought leaders,” financial industry executives, technologists and even the media itself have fallen in love with “the blockchain,” “distributed ledgers” and other phrases to talk about the innovation happening in how trust and value exchange work on the Internet.
Notably absent from this high-minded and purportedly insightful thinking is reference to bitcoin, the actual open platform that distributes trust and provides a highly secure ledger to exchange value around the world.
If bitcoin is referenced, it’s dismissively, as if smart people are in the know that bitcoin (the digital asset) isn’t necessary or important to fueling this global network of distributed and decentralized trust. For the most part, it’s just a cop-out and intellectual laziness; I have yet to meet anyone who shares these thoughts who actually has any idea how any of the technology actually works. [ed. note: we have never met!]

Allaire goes on to build his argument on top of the Internet analogy, likening the Bitcoin Blockchain and the applications on top to the Internet protocol suite: "Soon, we’ll be able to share value globally, and soon thereafter, we’ll start to layer in other forms of value — property, securities, insurance — and then later we’ll build in smart rules and business logic that can run on this global secure network in a trustworthy manner, and we’ll all be part of constructing new rules of global commercial and legal governance."

This article prompted our own Tim Swanson to write a response featured in the IB Times called Blockchain, Bitcoin and the rise of banks as shared ledger providers. Tim begins by reviewing the basis of the "Bitcoin as Internet" analogy:

Topographically the internet is a patchwork of disparate networks — such as private internet service providers (ISPs) and content delivery networks (CDNs) — that connect to one another. There is no single, monolithic "public internet."

Tim goes on to introduce a new concept: Banks as "Shared Ledger Providers"

The Bitcoin blockchain provides a probabilistic solution to a specific customer base involving just one asset.[8] It was not designed to provide specific functions and settlement finality for the cornucopia of use-cases and registered assets managed by regulated financial institutions. It could be argued that its design assumptions were in fact the exact opposite.
If the G3F narrative germinates, what is an end result in a world where cryptographic ledgers-as-a-service, notaries-as-a-service and timestamping-as-a-service actually exist through a shared financial fabric?
Eventually banks could automate portions of their middle and back offices with what Brown describes as a "global logical ledger." One that uses elements of the "blockchain" toolkit and dramatically reduces the reconciliation process.
Perhaps in this process they would become Shared Ledger Providers (SLPs) for end users, much like ISPs have acted as on-ramp and off-ramp gateways to other private networks. And from this firm non-probabilistic foundation, open innovation can take root, enabling the creation of new asset classes and utility for all stakeholders.

2. Central Bank Digital Currency

An HSBC report this week takes an interesting angle on the concept of Central Bank issued digital currency on a blockchain: the ability to truly target and track stimulative monetary policy:

HSBC's basic argument is that up until now, trying to ease the economy through interest rates has been a central bank's main method. At least that way, banks and borrowers provide a sort of control over the policies. The central bank encourages private credit creation, or inside money, backed by debt. 
There are a couple of problems with that. Firstly, you can't guarantee how much money will actually be supplied to the real economy. That's ultimately the choice of the banks. Secondly, the creation of debt is an issue — too much of that can slow down growth in itself, especially if it's created for unproductive ventures. 
But [blockchain-issued] "helicopter money" would be outside money — injecting money directly from a central bank, and not representing a debt held somewhere else in the private sector.

In short: "a modernised monetary transmission system, based on real-time big data analysis through Blockchain, could allow the government to balance the economy more efficiently and systematically."

Mr. Fedcoin David Andolfatto had an excellent post (as usual) this week which follows on from the above report, seeing how central banks could (should?) be inspired by Bitcoin. Andolfatto gives a tremendous overview of the pros and cons of Bitcoin itself, and ends with a persuasive recommendation for how central banks can adopt this innovation:

My own recommendation is for central banks to consider offering digital money services (possibly even a cryptocurrency) at the retail and wholesale level. There is no reason why, in principle, a central bank could not offer online accounts, the same way the U.S. Treasury presently does (www.treasurydirect.gov). These accounts would obviously not have to be insured. They would provide firms with a safe place to manage their cash without resorting to the banking or shadow banking sector. They would give monetary policy an additional instrument--the ability to pay interest on low-denomination money (possibly at a negative rate). To the extent paper money is displaced, there would be large cost savings as well.
It's hard (for me) to see what the downsides are in having a central bank supply digital money. Critics might argue that it leaves people exposed to potentially poor monetary policy. This may be true and, for these people, currency substitutes should be available (including Bitcoin). In terms of payments, critics might argue that central bank accounts will be permissioned accounts, requiring the release of personal information, application efforts, that KYC restrictions will apply (so not censorship resistant) and so on. To address these concerns, a central bank could go one step further and issue a cryptocurrency (Fedcoin) offered at a fixed exchange rate where payments are cleared using a Bitcoin-inspired anonymous communal consensus algorithm. I don't think we can expect anything like this in the near future, but it is technologically possible. Of course, people will complain that Fedcoin will inspire illicit trade, etc. But again, the same is true of regular central bank issued cash.

3. Quick Links

We finish up this week with a houseguest-inspired list of links (inspired as in my houseguests have distracted your editorial board...). Enjoy your Sunday: