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The Weekend Read: Feb 6

Fedcoin 1. Could the Federal Reserve create an official digital cash denomination based upon cryptographic principles?

While the release of the revised BitLicense proposal was the biggest news story of the week, the most interesting idea that I came across was the thought experiment from David Andolfatto, VP of the St. Louis Fed: Fedcoin: On the Desirability of a Government Cryptocurrency. Andolfatto makes a compelling argument that the Fed is perfectly positioned to launch a bitcoin-like digital instrument which would give the most utility to domestic actors, since it would not be volatile against the value of a greenback:

What about consumers and businesses? They will have all the benefits of Bitcoin--low cost, P2P transactions to anyone in the world with the appropriate wallet software and access to the internet. Moreover, domestics will be spared of exchange rate volatility. Because Fedcoin wallets, like cash wallets, are permissionless and free, even people without proper ID can utilize the product without subjecting themselves to an onerous application process. Finally, because Fedcoin, like cash, is a "push" (rather than "pull") payment system, it affords greater security against fraud (as when someone hacks into your account and pulls money out without your knowledge).

The whole post is worth a read. I particularly like his concluding point on how Fedcoin would co-exist with other cryptocurrencies, so that folks who want to opt out of any "Helicopter Ben" monetary risk can do so. Robert Sams has an excellent response to Andolfatto's base idea with his post Which Fedcoin?, explaining how the creation of Fed-backed digital cash could deliver most of the benefits of bitcoin without the complications of proof-of-work, while also giving the Fed more flexibility in monetary policy thru negative nominal interest rates. Too bad Andolfatto doesn't work for the SNB, maybe they could have saved some francs.

2. The much-delayed release of the revised BitLicense

I must admit that my years as a trader conditioned me against reading lengthy documents ("No I won't read your Market Quarterly, Mr. Research Guy, just tell me: do I buy or sell?"). So for the TL;DR crowd, the Coin Center review of the DFS's changes is the best and most balanced overview:

...the changes we see in this new BitLicense are encouraging. NYDFS is living up to its promise to take the unique and welfare-enhancing qualities of virtual currency technologies into account. Are there necessary changes remaining to be made? Yes, absolutely.

3. R3 Advisor Corner

IBM's Richard Gendal Brown: Bitcoin is Opening Minds

"There's a whole collection of law and thinking that needs to come together then to make [crypto 2.0] work, and it's one of the reasons I find this space intellectually stimulating, because there are new problems to solve."

In considering crypto 2.0 applications, Brown also writes of concepts like the "continuum of decentralization" and the "unbundling of trust", where the choice between centralized and decentralized is not black and white, and various centralized or trusted entities (like banks' KYC requirements, or identities of bond issuers) can live at certain points on bitcoin's distributed backbone.

Tim Swanson: What is the blockchain hard fork “missile crisis?”

If block sizes are increased we will learn a lot about the dynamics of the community, the interplay between incentives such as fees and seigniorage for on-boarding (and off-boarding) miners as well as how price sensitive users are in this space. Ultimately it is the miners who decide as they are the entities creating Sybil protection and preventing double-spend attacks.

4. The potential for digital and mobile money to revolutionize the lives of the unbanked

I am very excited that Jo Lang, the newest member of the R3 team, will be expanding on this topic over the coming months. The articles below give a glimpse at some of the exciting opportunities, as well as the challenges, in extending what some would consider mundane banking services to the vast majority of the world's population that currently cannot access them.

As Gates told The Verge, "It starts to be economic to bank the very poorest. Not with branches or ATMs, but simply with the cellphone." He further elaborated the point in his letter, noting that "because there is strong demand for banking among the poor, and because the poor can in fact be a profitable customer base, entrepreneurs in developing countries are doing exciting work." That’s increasingly true no matter what part of the world you live in — anywhere traditional banks can’t or won’t serve a large portion of the populace, the technology in our pockets is helping fill the gap.

5. Waters Technology interviews UBS Group CIO Oliver Bussmann

"I genuinely think it will massively disrupt the buy and sell sides, payment streams and settlement alike, to the point where you can see that these things behave in totally new ways in five years...You need a critical mass of parties in the end, so it will take time, but the advantages are real and very competitive."

...and finally:

6. Inside the Chinese Bitcoin Mine That's Making $1.5M a Month

Fascinating 9 minute video (embedded below) that shows the actual nuts and bolts (or more accurately, the fans and cables) behind a bitcoin mining operation:

http://youtu.be/K8kua5B5K3I