The Weekend Read: Oct 25

The original colored coins

The original colored coins

Greetings from Las Vegas, the world’s capital for tokenizing your fiat currency, where the Money 20/20 marathon is about to begin. Please stop by my panel on Tuesday afternoon or drop me a line to connect if you are in town.

1. Blockchain Research

Robin Winkler of DB Research has an excellent and brief piece on the potential for central banks to borrow the innovation of virtual currency blockchains to deliver their own extremely efficient (and fungible) government-backed digital currency. This is one of the best things I have read in a while, so I would urge you to read it in full (only 2 pages). The author clearly explains the benefits for central banks and the challenges for commercial banks in this new paradigm:

If the Fedcoin took off, it would appear to be the death knell for credit card providers and deposit-taking institutions. Banks would have two options to avoid economic obsolescence. The first would be to transition toward a pure investment banking strategy, financed entirely via equity and long-term debt raised from savers aware of the risk they were taking. Indeed, this is the model favoured by neo-classical economists harking back to the ideas of Irving Fisher.
A second option would be to attract Fedcoin deposits by providing services such as verification for know-your-customer and anti-money-laundering rules or secure digital wallets or even just the most user-friendly apps. Banks could compete for Fedcoin deposits by issuing their own blockchains, at par with Fedcoin. Deutsche Bank, for example, could issue dbCoin, which customers use to settle transactions with any counterparty, much like a digital chequebook. Banks would guarantee convertibility of their digital currencies into Fedcoin, and central banks offer clearing and settlement facilities.
This brings us full circle back to today’s system, but with a couple of important exceptions. For starters, the difference between the monetary base and bank-created, branded money would be considerably clearer. More important, perhaps, the technological obsolescence of deposit-taking institutions engenders greater economic competitiveness. The banking sector would no longer be rewarded for processing payments or managing current accounts. It would have to compete for deposits by offering better services and ultimately greater responsibility for the money it creates.

I am sure the thought of central banks “stealing” Satoshi’s innovation makes a few anarcho-libertarian heads explode, but I would argue that such a development would deliver more to the “anti-bankster” crowd than any (extremely slim) hope of Bitcoin becoming a global reserve currency, as the quote above illustrates.

Next, two VC’s have their usual unique take on the potential for blockchains and ledgers. First up, Fred Wilson posits a thought experiment that the advent of blockchains could end the hegemony of the “winner take all” internet economy:

Lately, we’ve been wondering if there is an end to this pattern on the Internet and mobile. We think it is possible that an open data platform, in which users ultimately control their data and the networks they choose to participate in, could be the thing that undoes this pattern of winner takes most. The blockchain is the closest thing to emerge that looks something like that. But the blockchain hasn’t (yet?) shown that it can produce something important like Google’s search or Facebook’s social graph and until it does, we are just waiting.

The oft-cited Pascal Bouvier has a post describing the mental model he and Robert Sams have discussed around smart contract + ledger stacks and introduces a new term “consensus computer”:

All distributed ledgers need some form of consensus computation to update the ledger. This ledger updating needs to draw on a turing-complete mechanism in order to encode the business logic that will solve "real" problems. As such, the [Consensus Computer] term shifts the emphasis from ledger state to how that state gets updated which is much more appropriate.

Finally, Bitfury released two sponsored papers by Jeff Garzik that delve into the private vs public ledger debate. Links to the papers here. I will leave further discussion of this to my colleague Tim Swanson, as he has (many!) words to share on the subject.

2. “Blocktech” Company Landscape

William Mougayar provides an update to his Lumascape on ledger-related Fintech startups here while also test driving a new catchall term of “Blocktech” for this collection of companies.

The overview and company segmentation is fantastic, but I could do without the Blocktech term, mainly since this is too prescriptive to the use of blocks and partly since this sounds like the name of a fictional evil conglomerate in the Lego Movie sequel.

The biggest startup headline of the week went to remittance startup Abra, which welcomed American Express to its Series A round:

“As people and businesses transact more globally, there’s a need for more convenient and affordable ways to move money, and we think the blockchain could play an important role in the evolution of money transfer and commerce, especially in emerging markets,” said Harshul Sanghi, American Express Ventures managing partner.

3. Bitcoin Skepticism

The excellent financial journalist and noted Bitcoin troll Felix Salmon gives an overview of his droll Bitcoin skepticism in this interview with Futures Magazine:

Even if the value of bitcoin doesn’t go up with increased use of the blockchain, will a portion of all those startups developing bitcoin blockchain applications succeed? Probably not, says Salmon, because of the open-source nature of the code and the now-crowded nature of the space. “All the big boys are there now, like Goldman Sachs, Morgan Stanley and Citigroup. The credit card companies are all there. These are really big companies with really deep pockets, and they’re all researching the same thing. A huge number of incredibly brilliant people are building on top of this. Pretty much everyone will be able to make your mousetrap.” 

Interestingly, Adam Draper, polar opposite to Mr. Salmon in most things except in their avant garde sartorial tastes, notes in this CoinDesk interview that the word “Bitcoin” has become verboten in pitch meetings:

"We use the word blockchain now. I say bitcoin, and they think that's the worst thing ever. It just feels like they put up a guard. Then, I switch to blockchain and they're very attentive and they're very interested."

The newly formed Blockchain Alliance hopes to help rehabilitate in part the reputation of Bitcoin companies, by embracing the “blockchain” re-branding and engaging more constructively with “The Man” aka US law enforcement:

The government has gotten better at understanding bitcoin and the technology behind it, but the government still can learn from industry insiders, said Jason Brown, assistant to the special agent in charge at the cyberintelligence division of the Secret Service’s Investigations Division. Having an open dialogue between law enforcement and the people who are developing the technology is good for all involved, he said. “It all comes back to what we’re trying to do,” on both sides, he said.

Cue the r/bitcoin crowd collectively losing their #&@*

Enjoy the week!