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The Weekend Read: Nov 7

1. Riding the Blockchain Hype Cycle

CB Insights provides a nice summary of the activity of financial services firms diving into the blockchain space via strategic investment:

The above chart and article sacrifices nuance for brevity, yet the graphic clearly shows the names bunched together over the last 6 months, which effectively tells the story of the blockchain hype cycle fully kicking into gear.

Both Euromoney and the FT try to highlight the value driving the hype in two articles this week. Getting to grips with blockchain from Euromoney is a lengthy but excellent review of the reasons why banks are getting excited and getting involved, and features quotes from our own David Rutter as well as seven of our partner banks:

This image will haunt your dreams...

This image will haunt your dreams...

[Simon] Taylor adds: “Banks in trade finance essentially intermediate a lot of this operational risk for their customers. But think if there was an immutable, digital ledger where the port authority could register, using an encrypted signature, that goods had indeed been delivered and had been loaded into transport, and the importer could see this in real time. That digital ledger would take out a lot of the operational risk exposure.”
Taylor says it’s a mistake to think of the blockchain just as a payments technology. “Yes, you can do payments on it, but it is a technology that can be applied to so much more. Right now, the banks have reached consensus that the distributed ledger is a good thing and we’re all looking at internal uses, at uses between a few partners, at uses in larger consortia and even on open platforms. But we’re still in the chaos period, which is the one that forges creativity. The definition of best-use cases varies between banks depending on their starting points. What might be a great help for one bank might badly hurt another. So it won’t be clear for some time yet what commercial applications will emerge. The most interesting and valuable use cases probably haven’t even been thought up yet.”

Not to be out-long-readed, the FT weighs in with Technology: Banks seek the key to blockchain:

Yet almost every big financial services institution has now overcome that initial suspicion. And the technology has swung from being a weapon wielded against the banks to being heralded as their ultimate back-office makeover, a bitter blow to the libertarians who conceived the idea of the blockchain to circumvent the global banking system.
“Suits are replacing hoodies and ripped jeans at blockchain conferences,” says Mark Buitenhek, head of transaction services at Dutch bank ING, which has hired a team of specialists to examine ways of using the technology to increase speed and cut costs in payments and trade finance.
Experiments, initially conducted in secret, have begun in earnest over the past year.

2. Bitcoin: To the MOON! (and back)

BTC has enjoyed a strong few weeks, as the spot price emerged from an extended period of subdued volatility to rip higher on the back of, well who knows. Insert your 'story chasing price' explanation here. Some are pointing to the positive news cycle (see above), Redditors revert to the self-evident intrinsic value that the sheeple just don't get while some posit that this run is due to a Russian-Chinese ponzi scheme. Gotta love unregulated markets with a small float and limited distribution!

Chart from TradeBlock

Chart from TradeBlock

As you can see from the chart above, BTC firmly rejected the $500 price level. If price can hold above $320 the rally may have legs. There are a few Debbie Downers though who are not seeing any bullish chart patterns. Jamie Dimon expressed his well known skepticism in a recent Fortune event:

“Virtual currency, where it’s called a bitcoin vs. a U.S. dollar, that’s going to be stopped,” said Dimon. “No government will ever support a virtual currency that goes around borders and doesn’t have the same controls. It’s not going to happen.”

Dimon goes on to echo the "Blockchain good, Bitcoin bad" argument that drives early Bitcoin adopters up a wall (see last week's read for an example). IMF Chief Lagarde piled on later in the week, saying "If those new technologies and as long as those new technologies are going to abuse, take advantage of, the yield for anonymity, I think the banking industry has quite a few good days ahead of it."

3. Tim Swanson in American Banker

Speaking of driving bitcoiners up a wall, R3's Tim Swanson penned an article for American Banker this week entitled Explore the Blockchain, Ignore the Bitcoin Maximalists:

But what if institutions could use elements of a blockchain, such as public/private key cryptography to sign transactions and atomically settle registered assets without a third party? What if reconciliation and auditability could be cryptographically proven within the data structure itself, thereby reducing the need for some of the existing back-office services? What if financial institutions could share one common ledger that was specifically designed for their regulated operating environments? A well-designed and built shared ledger could make all that possible. Conceivably, as one report from Santander predicts, up to $20 billion could be saved per year by using some of this non-Bitcoin-specific distributed ledger and blockchain technology. [snip]
It is a truism to state that there are many different types of networks and data structures that provide different types of utility. There is a time, a place and a customer base for pseudonymous cryptocurrency systems. But for now, the global financial services markets demand far more than the Bitcoin blockchain can handle.

Nanok Bie offers a rebuttal in Sorry, R3 – But You Still Don’t Get It:

Now R3 has replied to some of the critique against its offer towards the banking industry to provide them the promise of “the blockchain technology”, without the bitcoins, ignoring the fact that the bitcoins are the Blockchain – and missing the point on how Bitcoin turns energy into security (truth).

I like how the author makes us sound like my Dad ("I found it on "the Google"). I agree with his assertion that censorship-resistant digital cash is an important invention and will be used in ways we have yet seen. Once again, both Tim's point (not R3's, as the author claims) and Nanok's point can be true: Bitcoin is an important innovation and not fit for purpose today for large, regulated financial institutions.