The Weekend Read: June 5

johnny lawsky 1. Needing a token to operate a distributed ledger is a red herring by Tim Swanson

One question that comes up in almost every conversation we have with financial markets folks is some variation of "if I use a blockchain do I need to use bitcoin (or any coin) as well?" R3 Advisor Tim Swanson just published an excellent post on this very question, and I urge you to read it in full. It is a much better use of time than trying to follow the ad hominem* 20MB block size debates:

Financial institutions operate under completely different conditions [than laid out in Satoshi's white paper]. They not only know the identities of their customers, staff and partners but their processing providers are also known, legally accountable entities. There is no Sybil problem to solve for them on the network. There is no need for proof-of-work or $300 million in annual mining costs. If you don’t need proof-of-work, you don’t need necessarily a token to incentivize validation or secure the network. Instead, validation can be done by entities with contractual obligations that are legally enforced: known validators with real-world identities and reputations.

Tim was quite busy this week with posts and quotes, including extensive mention in this article on Mark Karpeles channeling Frank Abagnale Jr in his shaming of existing bitcoin "exchanges":

“The overall problem is that from a financial controls perspective what we call a Bitcoin exchange (like Mt. Gox or Bitstamp) is more of a broker-dealer, plus custodian, plus bank, etc.,” he told Fusion in an email. “They basically have everything under one roof and this creates a problem for abuse. At least in the traditional world of finance, these different institutions are separated.”

[*In an indication of the decline of western civilization, WordPress attempted to autocorrect 'hominem' above to 'Eminem'...which to be fair still may have worked.]

2. BitLicense Announcement

Ben "Johnny" Lawsky, ahead of limping into the private sector, announced the final version of the BitLicense earlier this week.  A quick review of the reactions:

3. Blockchain Love

CBA CIO David Whiteing explains why they are interested in trialing the use of distributed ledgers in an internal pilot using Ripple as an intra-bank payment system:

"I have a view that a bank account will become a storer of value, rather than a storer of currency value, so why can't a bank account be used to store loyalty points in the same way that you can use the slider on a Qantas website to decide whether you are paying with points or dollars?" Mr Whiteing said. "We have multi-currency bank accounts today, with 15 currencies available on your phone instantly in real-time, so it is not that difficult for us to take that technology and make that a loyalty point store. It shouldn't be that difficult for us to then add crypto-currencies to it, and whatever other means of payment transfers people might want."

Why Banks Are Testing Bitcoin's Blockchain (Without Bitcoin) in American Banker

Suresh Kumar, the $385 billion-asset bank's chief information officer: "It's not that we were interested in Bitcoin, we're more interested in blockchain" – a common refrain among bankers.[snip] "There's no reason why you couldn't use [the blockchain] as a mechanism to disseminate information that's of interest to all the participants," he said. "That's a perfect example of what is possible, that all the participants work off the same facts."

Although initially the bank is experimenting with the blockchain on its own, Kumar also sees a need for partners. "By nature, you're talking about a distributed ledger, so no one company can benefit from it by itself without a network effect, so it's important to keep an eye on the vendors that are bringing in a broad number of participants and get everyone to use something," Kumar said.

But if a blockchain falls in a bank infrastructure system and no developers are around to hear it, does it make a sound?

But as the interest grows, headhunters and blockchain experts are starting to warn that banks and other large financial institutions might struggle to find the expertise they need to meet their ambitions. Toby Babb, the founder of London-based recruitment firm Harrington Starr, said: “Financial institutions are circling around blockchain, but at some stage they will need people who know it. The problem is that there are lots of people who are interested in blockchain but not many who actually know about it.” [snip] “Whether as a large corporate you would want those people involved or whether they will want to be involved with you might be an issue.”

4. The Weekend Read Watch

Indian billionaire worries about disruptive technology

If there's one thing that keeps Indian banker Uday Kotak awake at night, it is the threat of disruptive digital technology.[snip] "I am excited, but very challenged. I keep wondering at night, will I have a bank the next morning, or will some technology company be doing banking without needing a bank?"

Blockchain: The Financial Challenge of Our Time

Excerpt from Blythe Masters' recent speech at the Exponential Finance conference:

This means the entire life cycle of a trade, including its execution, the netting of multiple trades against each other, reconciliation of who did what with whom, and whether they agree, can occur at the trade entry level. That’s much earlier in the stack of process than what you are accustomed to seeing in mainstream financial infrastructure.

Now, I don’t want you to get too overly excited. Realize that the world is still a long way from a state where distributed digital ledgers have been able to be universally adopted. Distributed ledger technology does have the potential to be disruptive of certain business models. But it has at least as much potential to be enormously empowering of existing business models in terms of making them lower cost, more efficient, and less risky.

David Andolfatto of the St. Louis Fed speaking at Princeton earlier this year (his talk is the first hour of the video), entitled "Bitcoin: A Decentralized, Public Ledger Digital Asset Transfer Mechanism." The conclusion near minute 59 is the most interesting, with mention of banking history, credit, FedCoin and possible future of money and payments. For an amazing summary, check out this outline on github.


...and finally, no one wants to be that guy who bets the don't pass line at the craps table, but the smart money will be fading American Pharoah tomorrow. From Andrew Beyer: "The average price on the Belmont winners since 2000 has been 17 to 1 (!)" Mix in Frosted and Materiality with a little Keen Ice, stir and enjoy!