The Bit­coin blockchain is about to get a new user: Hon­duras:

Reuters
Hon­duras to build land title reg­istry using bit­coin tech­nol­o­gy

By By Gertrude Chavez-Drey­fuss | Reuters – Fri, May 15, 2015

By Gertrude Chavez-Drey­fuss

NEW YORK (Reuters) — Hon­duras, one of the poor­est coun­tries in the Amer­i­c­as, has agreed to use a Texas-based com­pa­ny to build a per­ma­nent and secure land title record sys­tem using the under­ly­ing tech­nol­o­gy behind bit­coin, a com­pa­ny offi­cial said late Thurs­day.

Fac­tom, a U.S. blockchain tech­nol­o­gy com­pa­ny based in Austin, Texas, will pro­vide the ser­vice to the gov­ern­ment of Hon­duras, the fir­m’s pres­i­dent, Peter Kir­by, said. The com­pa­ny is doing the project with Epi­graph, a title soft­ware com­pa­ny that uses blockchain tech­nol­o­gy, also based in Austin.

Fac­tom would not reveal the cost of the project. Hon­duras would become only the sec­ond gov­ern­ment to use blockchain, which increas­es trans­paren­cy in a trans­ac­tion, to man­age gov­ern­ment data, after reports that the Isle of Man would test a gov­ern­ment-run blockchain project.

“In the past, Hon­duras has strug­gled with land title fraud,” said Kir­by. “The coun­try’s data­base was basi­cal­ly hacked. So bureau­crats could get in there and they could get them­selves beach­front prop­er­ties.”

Ebal Jair Díaz Lupi­an, the Hon­duran gov­ern­men­t’s chief of staff, did not respond to sev­er­al attempts from Reuters to con­tact him via email and tele­phone.

By build­ing an immutable title record, backed by blockchain, Hon­duras can leapfrog sys­tems built in the devel­oped world, Kir­by said. He added that this would allow for more secure mort­gages, con­tracts, and min­er­al rights.

“This also gives own­ers of the near­ly 60 per­cent of undoc­u­ment­ed land, an incen­tive to reg­is­ter their prop­er­ty offi­cial­ly.”

The blockchain is a ledger of all of a dig­i­tal cur­ren­cy’s trans­ac­tions and is viewed as bit­coin’s main tech­no­log­i­cal inno­va­tion. The tech­nol­o­gy is evolv­ing beyond the dig­i­tal cur­ren­cy, though, to appli­ca­tions like title data­bas­es and data ver­i­fi­ca­tion sys­tems.

Kir­by said Fac­tom start­ed nego­ti­a­tions in Jan­u­ary. The pilot project should be com­plet­ed by the end of the year, with the goal of even­tu­al­ly putting all of the gov­ern­men­t’s land titles on the blockchain, he added.

Hon­duras, a coun­try of about 8 mil­lion peo­ple, has the world’s high­est mur­der rate, fuelling a surge in child migra­tion to the Unit­ed States. The coun­try’s GDP per capi­ta in 2013 was esti­mat­ed at $1,577, accord­ing to the World Bank, mak­ing it one of the poor­er coun­tries in the West­ern hemi­sphere.

...

Well, at least Hon­duras isn’t plan­ning on replac­ing its cur­ren­cy with Bit­coins. And who knows, mak­ing trans­fers of own­er­ship of Hon­duras’s land and min­er­al rights a poten­tial­ly pub­licly avail­able piece of infor­ma­tion that could be eas­i­ly accessed via the blockchain might actu­al­ly be a use­ful source of pub­lic infor­ma­tion now that Hon­duras is in the process of basi­cal­ly pri­va­tiz­ing itself. Any­thing that can help Hon­durans keep an eye on what’s hap­pen­ing to the own­er­ship of their own coun­try would be real­ly help­ful right now. Espe­cial­ly where there’s a lot of nat­ur­al resources.

Here’s the lat­est reminder that, should Bit­coin “destroy the dol­lar” and oth­er fiat cur­ren­cies with­out fix­ing its “min­ing” sys­tem so it’s not an unlim­it­ed arms race, you bet­ter start sav­ing those bit­coins now. You’re going to need them for your elec­tric­i­ty bill after Bit­coin destroys the elec­tric­i­ty sup­ply too:

Upstart Busi­ness Jour­nal
Richard Branson’s Block Chain Sum­mit asked to address bitcoin’s mas­sive poten­tial pow­er drain

Michael del Castil­lo
May 27, 2015, 2:14pm EDT

The UpTake: As Richard Bran­son and oth­er lead­ers in the bit­coin indus­try meet on a pri­vate island to dis­cuss the future of the blockchain, an Aus­tralian think tank releas­es num­bers that show the fright­en­ing poten­tial impact bit­coin could have on the envi­ron­ment..

Richard Bran­son this week kicked off the Block Chain Sum­mit, a gath­er­ing of lead­ers in the cryp­tocur­ren­cy com­mu­ni­ty at his pri­vate Neck­er Island.

Coin­cid­ing with the event, Aus­tralian sus­tain­abil­i­ty think tank the Long Future Foun­da­tion released a tool to cal­cu­late the elec­tric­i­ty required to mine bit­coin. The num­bers are mas­sive, and the Foundation’s cre­ative direc­tor, Guy Lane, says some­thing must be done.

“If bitcoin’s ener­gy con­sump­tion isn’t reined in, we’ll end up being crowd­ed out of elec­tric­i­ty net­works and sit­ting in the dark,” said Lane in a state­ment released today. “So long as peo­ple can make mon­ey from min­ing bit­coins, peo­ple will spend large amounts of mon­ey, resources and elec­tric­i­ty to acquire them.”

Mas­sive com­put­ers are used to “mine” bit­coin, a process by which the entire bit­coin econ­o­my is audit­ed by the very peo­ple who use the cur­ren­cy. As the bit­coin ecosys­tem gets big­ger the Bitcur­ren­cy Cal­cu­la­tor unveiled last week shows how the amount of elec­tric­i­ty need­ed to mine the sys­tem could change based dif­fer­ent vari­ables such as the future val­ue of a bit­coin, and the price of a kilo­watt-hour of elec­tric­i­ty.

The mod­el­ing method shows that bit­coin could some­day con­sume 13,000 ter­awatt hours, or about 60 per­cent of glob­al elec­tric­i­ty pro­duced based on 2012 num­bers. To give an idea of what that looks like in the real world, that’s about what it might take to pow­er 1.5 bil­lion homes, accord­ing to the state­ment.

Branson’s Block Chain Sum­mit kicked off on Neck­er Island on Mon­day and ends on May 28. The event is co-host­ed by San Fran­cis­co-based bit­coin secu­ri­ty firm Bit­Fury, which has raised $40 mil­lion ven­ture cap­i­tal and Mai­Ta Glob­al the so-called “anti-con­fer­ence” often com­pared to TED Talks.

As Bran­son and his cohort debate the future of the blockchain, the ledger tech­nol­o­gy behind bit­coin, The Long Future Foun­da­tion asked sum­mit del­e­gates in a state­ment “to seri­ous­ly address the sus­tain­abil­i­ty issues of this emerg­ing tech­nol­o­gy.”

...

Well, hope­ful­ly some­one will bring this up with Bit­coin’s many oth­er big name back­ers too. FWIW.

@Pterrfractyl–

In the con­text of “The Coke Broth­ers,” check out the excel­lent doc­u­men­tary “Inside Job.” about the 2008 finan­cial crash and what led up to it.

It is very, very good, fea­tur­ing con­sid­er­able footage of Glenn Hub­bard, Jeb Bushj’s top finan­cial advis­er.

The dis­cus­sion of “Sex and Drugs and Finan­cial Trad­ing” is high­light­ed in the film.

Best,

Dave

@Dave: It’s dark­ly humor­ous that, even though you were reply­ing to a “how much coke are these guys snort­ing?” com­ment in the Peter Lev­en­da inter­view about the role of the Nazis in South Amer­i­ca and acci­den­tal­ly replied in the post about Bit­coin, the “how much are these guys snort­ing?” ques­tion could cer­tain­ly apply to the folks at 21 Inc too. Because any­one that wants to cre­ate a glob­al net­work of ener­gy-suck­ing bit­coin-min­ing toast­ers with the devel­op­ing word in mind as the tar­get audi­ence has got to be on some­thing. And if you had acci­den­tal­ly placed that com­ment any­where else on spitfirelist.com, odds are the “how much are they snort­ing?” ques­tion would be just as applic­a­ble.

Of course, the obvi­ous answer to “what drugs is [insert pow­er­ful per­son here] on?” is “pow­er”, a rather strong drug is and of itself. And prob­a­bly “testos­terone”, one of the most pow­er­ful drugs you can throw in your body. And then there’s “sleep depri­va­tion”, anoth­er potent pill.

But if the fol­low­ing arti­cle is cor­rect and cur­rent trends in employ­ment con­tin­ue, just about any­one with a decent pay­ing job in the future is going to be a hyper-spe­cial­ist with skills that are in such demand that they’ll be basi­cal­ly com­pelled to be on some sort of drug just to get by. Specif­i­cal­ly, stim­u­lants. Well-paid peo­ple in the future are going to need lots an lots of stim­u­lants:

Fast Com­pa­ny
The High­est-Pay­ing Jobs Of The Future Will Eat Your Life

In the future, high­ly skilled peo­ple will be bring­ing home fat­ter pay­checks, but they’ll rarely be home long enough to spend them.
By Jay L. Zagorsky

For a glimpse of the future of work, espe­cial­ly the high-pay­ing kind, look at finance and high-tech com­pa­nies. Some of the biggest offer high employ­ee salaries com­bined with lav­ish perks like free meals at work, lux­u­ry shut­tle bus­es for com­muters, and extras such as dry clean­ing picked up and dropped off at people’s desks. This might look like the fruits of cor­po­rate benef­i­cence. In fact, along­side email and oth­er dig­i­tal tech­nolo­gies, perks like these aim to max­i­mize effi­cien­cy and work­ing time, enabling employ­ees to work as many hours as pos­si­ble with­out need­ing to take time off to trav­el out­side for food or errands. While this approach is cur­rent­ly seen as an anom­aly, long-term eco­nom­ic trends will force oth­er com­pa­nies to adopt a sim­i­lar model—a future of high pay com­bined with high hours of work.

Research shows that hours worked began falling dur­ing the Great Depres­sion but began ris­ing again in the 1970s. The increase in long hours that start­ed then was ini­tial­ly con­cen­trat­ed among high-wage, high­ly edu­cat­ed men. Where­as 30 years ago, the best-paid work­ers in the U.S. were much less like­ly to work long days than low-paid work­ers were, by 2006 the rela­tion­ship had flipped: The best-paid were twice as like­ly to work long hours as the poor­ly paid. Today, so many peo­ple are work­ing “insane hours” that mag­a­zines pub­lish guides on how to cope. “Today, tech­nol­o­gy means that we’re all avail­able 24/7,” David Solomon, the glob­al co-head of invest­ment bank­ing at Gold­man Sachs, told The New York­er last year. “There are no bound­aries, no breaks.”

Why More Hours?

Why will com­pa­nies want to increase hours? It’s all about boost­ing prof­its. Most work­ers con­sid­er only their take-home pay when think­ing about how much they cost their com­pa­ny. How­ev­er, a worker’s wage is only one por­tion of that employee’s total cost. Fringe ben­e­fits, train­ing, and the phys­i­cal space need­ed to sup­port each work­er com­prise a large per­cent­age of total costs.

One exam­ple of fringe ben­e­fit costs is Social Secu­ri­ty, the U.S.’s pub­lic pen­sion sys­tem. Almost all work­ers have some of their income taxed by the Social Secu­ri­ty pro­gram. How­ev­er, the employ­ee actu­al­ly pays only half of the Social Secu­ri­ty tax; the oth­er half is paid by the employ­er. If a com­pa­ny pays two peo­ple to each work 40 hours a week at $125,000 a year then the com­pa­ny owes the gov­ern­ment slight­ly more than $7,300 for each per­son.

How­ev­er, the Social Secu­ri­ty tax applies only on income up to $118,500. Earn­ings above this lev­el are not taxed by Social Secu­ri­ty. If the com­pa­ny were able to com­bine the two jobs and get just one per­son to work 80 hours a week at $250,000, it would save about $7,300. Hir­ing one per­son for a high-wage, high-hour job boosts the company’s bot­tom line.

More­over, com­pa­nies expe­ri­ence oth­er cost sav­ings beyond Social Secu­ri­ty by hir­ing one very high­ly paid per­son, com­pared to two peo­ple. For skilled work­ers almost all com­pa­nies offer health care, den­tal plans and oth­er ben­e­fits like life insur­ance. Top-of-the-line or Cadil­lac fam­i­ly med­ical care plans cost over $27,500 per employ­ee. For every two jobs that are com­bined the company’s bot­tom line is boost­ed by the amount the com­pa­ny would have spent on health, den­tal, and life insur­ance plans.

...

Why High Pay?

The case for more jobs hav­ing longer hours in the future is sim­ple. But why will com­pa­nies be forced to pay very high wages? Part of the rea­son is that, over time, work is grow­ing more spe­cial­ized.

The age of the gen­er­al­ist who is a jack-of-all trades is long over. Train­ing for many jobs takes months, if not years. Some­times this train­ing is paid for by work­ers. For exam­ple, work­ers often get spe­cial­ized col­lege degrees or pay out of pock­et for advanced train­ing. Some­times, this train­ing is done by com­pa­nies. Either way, because of the increas­ing com­plex­i­ty of work, com­pa­nies are spend­ing increas­ing amounts of time on train­ing or on search­ing for the right can­di­date to han­dle the new hyper-spe­cial­ized world.

When a com­pa­ny has either invest­ed a lot of effort in train­ing a work­er or invest­ed a lot of time in find­ing a work­er with the cor­rect skills, they often don’t want to lose them. A sim­ple way to pre­vent labor turnover is to ensure they are paid more mon­ey than oth­er com­pa­nies are offer­ing. If a com­pa­ny always pays more mon­ey than the com­pe­ti­tion, there is no mon­e­tary advan­tage for their employ­ees to switch com­pa­nies. Pay is the bribe that com­pa­nies use to keep work­ers moti­vat­ed and show­ing up day-in and day-out. As the world becomes more spe­cial­ized, com­pa­nies that need that spe­cial­ized labor will keep rais­ing that bribe to keep work­ers on board.

The Impact On Peo­ple

With this trend toward long hours and high­er pay, what will be the impact on peo­ple? Research has iden­ti­fied reduced sleep, increased stress, less hap­pi­ness, low­er pro­duc­tiv­i­ty, poor­er health, and high­er chances for injur­ing your­self and oth­ers when the work­day expands—impli­ca­tions that can be dan­ger­ous in any job, be it spe­cial­ized or not.

One recent study showed that low­er-income work­ers who work two jobs sleep less than any­one. But Daniel Hamer­mesh, a pro­fes­sor of eco­nom­ics at the Uni­ver­si­ty of Texas at Austin and the Roy­al Hol­loway Uni­ver­si­ty of Lon­don, ana­lyzed the most recent time-use data from the Amer­i­can Time Use Sur­vey and found that high­er-income peo­ple slept less than the poor. (He the­o­rizes why the rela­tion­ship between income and sleep seems so strong: The more you can earn, the more worth­while it may seem to sac­ri­fice sleep for work.)

With high salaries, over­tired work­ers may be able to mit­i­gate their exhaus­tion by hir­ing low-wage work­ers in pre­car­i­ous employ­ment sit­u­a­tions to clean their homes, cook their food, and do their chores. But the impact on fam­i­ly life and friend­ships is like­ly to be detri­men­tal because mon­ey can’t buy love.

A hun­dred years ago labor orga­niz­ers cam­paigned for a rad­i­cal idea: the 40-hour work­week. We are now mov­ing back in the oppo­site direc­tion. Some work­ers now work 80–100 hours per week for high pay as a way to “pay their dues” and earn a senior posi­tion in a finance com­pa­ny or a law firm, until they they can achieve the senior­i­ty that gives them more leisure time. In the future, well-paid work­ers will con­tin­ue to work these crush­ing hours for many years as com­pa­nies strive to cut costs by com­bin­ing jobs. At that point, the “Walk­ing Dead,” won’t be just a tele­vi­sion show about zom­bies but an even more appro­pri­ate term to describe mass­es of high­ly paid but sleep-deprived work­ers.

So what drug will [insert pow­er­ful hyper-spe­cial­ist of the future here] be on? Well, hope­ful­ly some­thing bet­ter for them than cocaine. But it’s prob­a­bly going to be some­thing. Although not nec­es­sar­i­ly drugs.

Look out world. Bit­coin’s back­ers want to change the world and, most espe­cial­ly, enhance the lives of bil­lions of poor peo­ple around the world. Those bil­lions of poor around the world espe­cial­ly need to look out:

The Wall Street Jour­nal

Bit­Beat: Grand Plans for Bit­coin From Neck­er Island

By Michael J. Casey
3:30 pm ET, Jun 2, 2015

Bit­coin Lat­est Price: $226.00, up 1.2% (via Coin­Desk)
Cross­ing Our Desk:

- One half of Bit­Beat spent last week mod­er­at­ing dis­cus­sions at the inau­gur­al Blockchain Sum­mit on Richard Branson’s Caribbean island, Neck­er Island.

It was per­haps inevitable that an exclu­sive event in a trop­i­cal idyll, where busi­ness­men hob­nob in the pres­ence of one of the world’s rich­est men, would elic­it alle­ga­tions of elit­ism from some of quar­ters of the bit­coin com­mu­ni­ty (as well as the occa­sion­al con­spir­a­cy the­o­ry.) But as the sum­mit pro­gressed, it became clear that the atten­dees had grander and, arguably, more altru­is­tic aspi­ra­tions than their crit­ics imag­ined.

The group, which the sum­mit web site described as com­pris­ing “the great­est minds in dig­i­tal inno­va­tion,” explored mul­ti­ple projects that would use the blockchain – the core ledger tech­nol­o­gy under­ly­ing bit­coin – to change the lives of bil­lions of peo­ple. Whether these suc­ceed remains to be seen, but the scope of the goals dis­cussed was strik­ing.

...

A decent amount of non-tech exper­tise was on hand, reflect­ing a view that to suc­ceed with real-world imple­men­ta­tions, blockchain-based inno­va­tions need peo­ple with under­stand­ing of polit­i­cal, social and cul­tur­al real­i­ties. Peru­vian econ­o­mist and anti-pover­ty cru­sad­er Her­nan­do de Soto gave pre­sen­ta­tions on the chal­lenges of titling prop­er­ty for the poor in devel­op­ing coun­tries, for exam­ple, and social media maven Oliv­er Luck­ett spoke of how viral con­tent on social media tends to fol­low pat­terns found in biol­o­gy.

“When accom­plished peo­ple with diverse back­ground can be placed in an unstruc­tured envi­ron­ment where bar­ri­ers are stripped away, the inter­ac­tion that occurs allows the spon­ta­neous and serendip­i­tous mix­ing of ideas that can refor­mu­late them­selves into amaz­ing action plans,” Mr. Tai said.

As Mr. de Soto explained how people’s prop­er­ty rights in min­er­al-rich parts of Peru get dilut­ed into com­mu­nal land­hold­ings and then trans­ferred with­out ade­quate com­pen­sa­tion to multi­na­tion­al min­ing com­pa­nies via a process that he described as an “arti­sanal blockchain,” atten­dees hatched plans to inscribe such indi­vid­u­als’ assets into the high-tech, dig­i­tal-cur­ren­cy blockchain. The idea is that the indeli­ble, pub­lic ledger would per­ma­nent­ly legit­imize these peo­ples’ per­son­al claims and empow­er them with a prov­able deed, a form of legal col­lat­er­al with which to raise mon­ey, take out insur­ance or, if the bid is high enough, sell their plot of land.

The con­cept fits with­in the “social impact” goals that Bri­an Forde told the group were key ele­ments of MIT Media Lab’s new Dig­i­tal Cur­ren­cy Ini­tia­tive, of which Mr. Forde, a for­mer White House advis­er, is the direc­tor.

The same goes for a project described by entre­pre­neur John Edge, who spoke of his “ID 2020? project, work­ing with inter­na­tion­al child wel­fare agen­cies to cre­ate a glob­al, blockchain-based record of dig­i­tized birth cer­tifi­cates that help pro­tect chil­dren from human-traf­fick­ers. Enhanc­ing his pitch: a live Skype video address on the last evening of the sum­mit from actress Lucy Liu, who has direct­ed doc­u­men­taries on child pros­ti­tu­tion to draw atten­tion to the plight of uniden­ti­fied chil­dren.

Tied to this dig­i­tal ID idea and to a host of oth­er appli­ca­tions for blockchain tech­nol­o­gy was the brief­ing from Patrick Dee­gan, the Chief Tech­nol­o­gy Offi­cer of Per­son­al Black Box, on the Open Mus­tard Seed pro­to­col, a soft­ware pro­gram of which he is the chief archi­tect and which aims to empow­er peo­ple to devel­op their own “self-sov­er­eign” dig­i­tal iden­ti­ties.

Mean­while, con­sul­tant Paul Brody of Ernst Young spoke of his work at for­mer employ­er IBM to devel­op a blockchain-based frame­work for auto­mat­ed devices and appli­ances to secure­ly trans­act with each oth­er in the “Inter­net of Things” of the future.

The sum­mit got a glimpse of this inter­con­nect­ed “IoT” world from Bit­fury, which demon­strat­ed a light bulb con­tain­ing a spe­cial chip designed to mine bit­coins.

Such a device could nev­er com­pete with the super-fast spe­cial­ized min­ing machines that firms like Bit­Fury deploy in high-tech, cli­mate-con­trolled data cen­ters to process trans­ac­tions and earn bit­coins in return. After all, the com­pa­ny this week rolled out new 28-namome­ter min­ing chips that Vice Chair­man George Kik­vadze says are three times more effi­cient than the pri­or gen­er­a­tion and pre­dicts these will give the com­pa­ny “sig­nif­i­cant mar­ket share” in this increas­ing­ly indus­tri­al­ized indus­try.

Still, mak­ing mon­ey isn’t the point of the light bulb. Accord­ing to design­er Niko Punin, Bit­Fury cre­at­ed it to show what’s pos­si­ble and use it as an intrigu­ing way to pro­mote the adop­tion of bit­coin.

Wow. Ok, that was quite a list of world-chang­ing blockchain-based appli­ca­tions. There was the:
1. The unveil­ing of the Bit­coin-min­ing light bulb. A light bulb that can con­sume elec­tric­i­ty even when it’s off and won’t actu­al­ly be pow­er­ful enough to make you any mon­ey but is most­ly just intend­ed to intro­duce peo­ple to the Bit­coin. Pret­ty nifty! And not a bad intro to the Bit­coin min­ing expe­ri­ence either.

2. The “ID 2020” plan to put poor chil­dren’s birth cer­tifi­cates on the blockchain to pre­vent human-traf­fick­ing. Hey, if it works, good for “ID 2020” and good for Bit­coin (espe­cial­ly con­sid­er­ing the role Bit­coin now plays in the human traf­fick­ing mar­ket). And who knows how many oth­er use­ful appli­ca­tions for a pub­lic birth cer­tifi­cate ledger although it’s going to be real­ly inter­est­ing to see how they con­nect an actu­al per­son with their dig­i­tal birth cer­tifi­cate (will it be encrypt­ed DNA info or some­thing else).

3. Then there’s the “Per­son­al Black Project” project that will allow you to sequester all of the var­i­ous bit of web-brows­ing infor­ma­tion (what sites you vis­it­ed, etc) and then sell that infor­ma­tion to mar­keters. Well, could be worse.

4. Final­ly, Her­nan­do de Soto is bring­ing his “let’s pri­va­tize the com­mons to lift the poor” plan to Bit­coin, tout­ing a scheme that sounds sim­i­lar to what the gov­ern­ment of Hon­duras is plan­ning with a Bit­coin-based land reg­istry. Except, in the case of Her­nan­do de Soto’s plan, every­one liv­ing on pub­lic land that no one owns get to pri­va­tize their lit­tle slice that they live on and then use it as col­lat­er­al for small busi­ness loans or what­ev­er. At that point, the invis­i­ble hand of the mar­ket that was pre­vi­ous­ly beat­ing them into pover­ty sud­den turns into a help­ing hand. At least, that’s de Soto’s the­o­ry. His the­o­ry that’s loved by the Koch broth­ers and is con­tra­dict­ed by the hor­rors it has caused when put in prac­tice:

NSF­Corp
The Extra­or­di­nary Pierre Omid­yar
By Mark Ames, and Yasha Levine
11:51 a.m. Novem­ber 15, 2013

“We ought to be look­ing at busi­ness as a force for good.” - Pierre Omid­yar

“Like eBay, Omid­yar Net­work har­ness­es the pow­er of mar­kets to enable peo­ple to tap their true poten­tial.” - Omid­yar Net­work, “Fre­quent­ly Asked Ques­tions”

* *

Update: Glenn Green­wald responds to this piece on Twit­ter: “The idea that some­one would build a pro-busi­ness, neolib­er­al out­let around Scahill, Poitras, Segu­ra, Bates etc is just dumb.” When asked about Omid­yar Net­work’s invest­ment his­to­ry, he said “I have no idea what you’re talk­ing about there. I don’t speak for Omid­yar Net­works. You should ask them that.”

* *

The world knows very lit­tle about the polit­i­cal moti­va­tions of Pierre Omid­yar, the eBay bil­lion­aire who is found­ing (and fund­ing) a quar­ter-bil­lion-dol­lar jour­nal­ism ven­ture with Glenn Green­wald, Lau­ra Poitras and Jere­my Scahill. What we do know is this: Pierre Omid­yar is a very spe­cial kind of tech­nol­o­gy bil­lion­aire.

We know this because America’s sharpest jour­nal­ism crit­ics have told us.

In a piece head­lined “The Extra­or­di­nary Promise of the New Green­wald-Omid­yar Ven­ture”, The Colum­bia Jour­nal­ism Review gushed over the announce­ment of Omid­yar’s project. And just in case their point wasn’t clear, they added the amaz­ing sub­head, “Adver­sar­i­al muck­rak­ers + civic-mind­ed bil­lion­aire = a whole new world.”

Ah yes, the fabled “civic-mind­ed billionaire”—you’ll find him two doors down from the tooth fairy.

But seri­ous­ly folks, CJR real­ly, real­ly wants you to know that Omid­yar is a breed apart: noth­ing like the Ran­di­an Sil­i­con Val­ley lib­er­tar­i­an we’ve become used to see­ing.

“...bil­lion­aires don’t tend to like the kind of author­i­ty-ques­tion­ing jour­nal­ism that upsets the sta­tus quo. Bil­lion­aires tend to have a fin­ger in every pie: pow­er­ful friends they don’t want annoyed and busi­ness inter­ests they don’t want looked at.

“By hir­ing Green­wald & Co., Omid­yar is mak­ing a clear state­ment that he’s the bil­lion­aire exception....It’s like Izzy Stone run­ning into a civic-mind­ed plas­tics bil­lion­aire deter­mined to take I.F. Stone’s Week­ly large back in the day.”

Lat­er, the CJR “UPDATED” the piece with this miss­ing bit of “oops”:

“(UPDATE: I should dis­close that the Omid­yar Net­work helps fund CJR, some­thing I didn’t know until short­ly after I pub­lished this post.)”

No big­gie. Hon­est mis­take. And any­way, plen­ty of oth­ers rushed to agree with CJR’s assess­ment. Media crit­ic Jack Shafer at Reuters described Omidyar’s pol­i­tics and ide­ol­o­gy as “close to being a clean slate,” repeat­ed­ly prais­ing the jour­nal­ism venture’s and Omidyar’s “ide­al­ism.” The “New­Co” ven­ture with Green­wald “harkens back to the tech­no-ide­al­ism of the 1980s and 1990s, when the first impulse of com­put­er sci­en­tists, pro­gram­mers, and oth­er techies was to change the world, not make more mon­ey,” Shafer wrote, end­ing his piece:

“As wel­come as Omidyar’s mon­ey is, his com­mit­ment to the inves­tiga­tive form and an open soci­ety is what I’m grate­ful for this after­noon. You can nev­er uphold the cor­rect ver­dict too often.”

What all of these orgas­mic accounts of Omidyar’s “ide­al­ism” have in com­mon is a total absence of skep­ti­cism. Amer­i­ca’s smartest media minds sim­ply assume that Omid­yar is an “excep­tion­al” bil­lion­aire, a “civic-mind­ed bil­lion­aire” dri­ven by “ide­al­ism” rather than by prof­its. The evi­dence for this view is Pierre Omid­yar’s mas­sive non­prof­it ven­ture, Omid­yar Net­work, which has dis­trib­uted hun­dreds of mil­lions of dol­lars to caus­es all across the world.

And yet what no one seems able to spec­i­fy is exact­ly what ide­ol­o­gy Omid­yar Net­work pro­motes. What does Omid­yar’s “ide­al­ism” mean in prac­tice, and is it real­ly so dif­fer­ent from the non-ide­al­ism of oth­er, pre­sum­ably bad, bil­lion­aires? It’s almost as if jour­nal­ists can’t answer those ques­tions because they haven’t both­ered ask­ing them.

So let’s go ahead and do that now.

Since its found­ing in 2004, Omid­yar Net­work has com­mit­ted near­ly $300 mil­lion to a range of non­prof­it and for-prof­it “char­i­ty” out­fits. An exam­i­na­tion of the ideas behind the Omid­yar Net­work and of the invest­ments it has made sug­gests that its founder is any­thing but a “dif­fer­ent” sort of bil­lion­aire. Instead, what emerges is almost a car­i­ca­ture of neolib­er­al ide­ol­o­gy, com­plete with the trail of destruc­tion that ensues when that ide­ol­o­gy is put into prac­tice. The gen­er­ous sup­port of the Omid­yar Net­work goes toward “fight­ing pover­ty” through micro-lend­ing, reduc­ing third-world illit­er­a­cy rates by pri­va­tiz­ing edu­ca­tion and pro­tect­ing human rights by expand­ing prop­er­ty titles (“pri­vate prop­er­ty rights”) into slums and vil­lages across the devel­op­ing world.

In short, Omid­yar Net­work’s phil­an­thropy reveals Omid­yar as a free-mar­ket zealot with an almost mys­ti­cal faith in the pow­er of “mar­kets” to trans­form the world, end pover­ty, and improve lives—one micro-indi­vid­ual at a time.

All the neolib­er­al guru cant about solv­ing the world’s pover­ty prob­lems by unlock­ing the hid­den “micro-entre­pre­neur­ial” spir­it of every starv­ing Third Worlder is put into prac­tice by Omid­yar Net­work’s invest­ments. Char­i­ty with­out prof­it motive is con­sid­ered sus­pect at best, sub­ject to the laws of unin­tend­ed con­se­quences; good can only come from mar­kets unleashed, and that trans­lates into an ide­ol­o­gy inher­ent­ly hos­tile to gov­ern­ment, democ­ra­cy, pub­lic pol­i­tics, redis­tri­b­u­tion of land and wealth, and any­thing smack­ing of social wel­fare or social jus­tice.

In lit­er­a­ture pub­lished by Omid­yar Net­work, the assump­tion is that tech­nol­o­gy is an end in itself, that it nat­u­ral­ly cre­ates ben­e­fi­cial progress, and that the world’s prob­lems can be solved most effec­tive­ly with for-prof­it busi­ness solu­tions.

The most char­i­ta­ble thing one can say about Omidyar’s non­prof­it net­work is that it reflects all the worst clichés of con­tem­po­rary neolib­er­al faith. In real­i­ty, it’s much worse than that. In many regions, Omid­yar Net­work invest­ments have helped fund pro­grams that cre­ate wors­en­ing con­di­tions for the world’s under­class, widen­ing inequal­i­ties, enhanc­ing exploita­tion, push­ing mil­lions of peo­ple into crip­pling debt and sup­port­ing anti-pover­ty pro­grams that, in some cas­es, result­ed in mass-sui­cide by the rur­al poor.

* *

Pierre Omid­yar was one of the biggest ear­ly back­ers of the for-prof­it micro-lend­ing indus­try. Through Omid­yar Net­work, as well as per­son­al gifts and invest­ments, he has fun­nelled around $200 mil­lion into var­i­ous micro-lend­ing com­pa­nies and projects over the past decade, with the goal of estab­lish­ing an invest­ment-grade micro­fi­nance sec­tor that would be plugged into Wall Street and glob­al finance. The neolib­er­al the­o­ry promised to unleash bil­lions of new micro-entre­pre­neurs; the stark real­i­ty is that it sad­dled untold num­bers with crush­ing debt and despair.

One of his first major invest­ments into micro-lend­ing came in 2005, when Pierre Omid­yar and his wife Pam gave Tufts Uni­ver­si­ty, their alma mater, $100 mil­lion to cre­ate the “Omid­yar-Tufts Micro­fi­nance Fund,” a man­aged for-prof­it fund ded­i­cat­ed to jump-start­ing the growth of the micro-finance indus­try. At the time, Tufts announced that Omidyar’s gift was the “largest pri­vate allo­ca­tion of cap­i­tal to micro­fi­nance by an indi­vid­ual or fam­i­ly.”

With the Tufts fund, Omid­yar want­ed to go beyond mere char­i­ta­ble dona­tions to spe­cif­ic micro-lend­ing orga­ni­za­tions that tar­get­ed the devel­op­ing world’s poor­est. At the same time, he want­ed to cre­ate a whole new envi­ron­ment in which for-prof­it micro-lend­ing com­pa­nies could be self-sus­tain­ing and gen­er­ate big enough prof­its to attract seri­ous glob­al investors.

This idea was at the core of Omid­yar’s vision of phil­an­thropy: he believed that micro­fi­nance would erad­i­cate pover­ty faster and bet­ter if it was run on a for-prof­it basis, and not like a char­i­ty.

“If you want to reach glob­al scale — and we’re talk­ing about hun­dreds of mil­lions of peo­ple who need this — you can’t do it with phil­an­thropy cap­i­tal. There’s not enough char­i­ty cap­i­tal out there. By con­nect­ing with an insti­tu­tion­al investor like a uni­ver­si­ty, we would like to increase the lev­el of pro­fes­sion­al investor involve­ment in this sec­tor to try to stim­u­late more com­mer­cial­ly viable invest­ment prod­ucts,” Pierre Omid­yar said in an inter­view at the time. “We ought to be look­ing at busi­ness as a force for good.”

The idea behind micro-loans is very sim­ple and seduc­tive. It goes some­thing like this: the only thing that pre­vents the hun­dreds of mil­lions of peo­ple liv­ing in extreme pover­ty from achiev­ing finan­cial suc­cess is their lack of access to cred­it. Give them access to micro-loans—referred to in Sil­i­con Val­ley as “seed capital”—and these would-be suc­cess­ful busi­ness-peas­ants and illit­er­ate shan­ty­town entre­pre­neurs would pluck them­selves out of the muck by their own home­made san­dal straps. Just think of it: hun­dreds of mil­lions of peas­ants work­ing as micro-indi­vid­u­als, tak­ing out micro-loans, mak­ing micro-ratio­nal invest­ments into their micro-busi­ness­es, duti­ful­ly pay­ing their micro-loan pay­ments on time and work­ing in con­cert to har­ness the dereg­u­lat­ed pow­er of the mar­kets to col­lec­tive­ly lift soci­ety out of pover­ty. It’s a grand neolib­er­al vision.

To that end, Omid­yar has direct­ed about a third of the Omid­yar Net­work invest­ment fund—or about $100 million—to sup­port the micro-lend­ing indus­try. The foun­da­tion calls this ini­tia­tive “finan­cial inclu­sion.”

Shock­ing­ly, micro-loans aren’t all that they’ve cracked up to be. After years of obser­va­tion and mul­ti­ple stud­ies, it turns out that the peo­ple ben­e­fit­ing most from micro-loans are the big glob­al finan­cial play­ers: hedge funds, banks and the usu­al Wall Street huck­sters. Mean­while, the major­i­ty of the world’s micro-debtors are either no bet­ter off or have been sucked into a morass of crip­pling debt and even deep­er pover­ty, which offers no escape but death.

Take SKS Micro­fi­nance, an Omid­yar-backed Indi­an micro-lender whose preda­to­ry lend­ing prac­tices and aggres­sive col­lec­tion tac­tics have caused a rash of sui­cides across India.

Omid­yar fund­ed SKS through Uni­tus, a micro­fi­nance pri­vate equi­ty fund bankrolled by the Omid­yar Net­work to the tune of at least $11.7 mil­lion. ON boost­ed SKS in its pro­mo­tion­al mate­ri­als as a micro-lender that’s “serv­ing the rur­al poor in India” and that exem­pli­fies a com­pa­ny that’s pro­vid­ing “peo­ple with the means to address their needs and improve their lives.”

In 2010, SKS made head­lines and stirred up bit­ter con­tro­ver­sy about the role that prof­its should play in anti-pover­ty ini­tia­tives when the com­pa­ny went pub­lic with an IPO that gen­er­at­ed about $358 mil­lion, giv­ing SKS a mar­ket val­u­a­tion of more than $1.6 bil­lion. The IPO made mil­lions for its wealthy investors, includ­ing the Omid­yar-backed Uni­tus fund, which earned a cool $5 mil­lion prof­it from the SKS IPO, accord­ing to the Puget Sound Busi­ness Jour­nal.

Some were both­ered, but oth­ers saw it as proof that the pow­er of the mar­kets could be har­nessed to suc­ceed where tra­di­tion­al char­i­ty pro­grams sup­pos­ed­ly hadn’t. The New York Times report­ed:

“An Indi­an com­pa­ny with rich Amer­i­can back­ers is about to raise up to $350 mil­lion in a stock offer­ing close­ly watched by phil­an­thropists around the world, show­ing that big prof­its can be made from small help­ing-hand loans to poor cowherds and bas­ket weavers.”

Con­tro­ver­sy or not, SKS embod­ied Omid­yar’s vision of phil­an­thropy: it was a for-prof­it cor­po­ra­tion that fought pover­ty while gen­er­at­ing lucra­tive returns for its investors. Here would be proof-pos­i­tive that the prof­it motive makes every­one a win­ner.

And then real­i­ty set in.

In 2012, it emerged that while the SKS IPO was mak­ing mil­lions for its wealthy investors, hun­dreds of heav­i­ly indebt­ed res­i­dents of Indi­a’s Andhra Pradesh state were dri­ven to despair and sui­cide by the com­pa­ny’s cru­el and aggres­sive debt-col­lec­tion prac­tices. The rash of sui­cides soared right at the peak of a large micro-lend­ing bub­ble in Andhra Pradesh, in which many of the poor were tak­ing out mul­ti­ple micro-loans to cov­er pre­vi­ous loans that they could no longer pay. It was sub­prime lend­ing fraud tak­en to the poor­est regions of the world, strip­ping them of what lit­tle they had to live on. It got to the point where the Chief Min­is­ter of Andrah Pradesh pub­licly appealed to the state’s youth and young women not to com­mit sui­cide, telling them, “Your lives are valu­able.”.

The AP con­duct­ed a stun­ning in-depth inves­ti­ga­tion of the SKS sui­cides, and their report­ing needs to be quot­ed at length to under­stand just how evil this pro­gram is. The arti­cle begins:

“First they were stripped of their uten­sils, fur­ni­ture, mobile phones, tele­vi­sions, ration cards and heir­loom gold jew­el­ry. Then, some of them drank pes­ti­cide. One woman threw her­self in a pond. Anoth­er jumped into a well with her chil­dren.

“Some­times, the debt col­lec­tors watched near­by.”

What prompt­ed the AP inves­ti­ga­tion was the gulf between the report­ed rash of sui­cides linked to SKS debt col­lec­tors, and SKS’s pub­lic state­ments deny­ing it had knowl­edge of or any role in the preda­to­ry lend­ing abus­es. How­ev­er, the AP got a hold of inter­nal SKS doc­u­ments that con­tra­dict­ed their pub­lic denials:

“More than 200 poor, debt-rid­den res­i­dents of Andhra Pradesh killed them­selves in late 2010, accord­ing to media reports com­piled by the gov­ern­ment of the south Indi­an state. The state blamed micro­fi­nance com­pa­nies — which give small loans intend­ed to lift up the very poor — for fuel­ing a fren­zy of overindebt­ed­ness and then pres­sur­ing bor­row­ers so relent­less­ly that some took their own lives.

“The com­pa­nies, includ­ing mar­ket leader SKS Micro­fi­nance, denied it.

“How­ev­er, inter­nal doc­u­ments obtained by The Asso­ci­at­ed Press, as well as inter­views with more than a dozen cur­rent and for­mer employ­ees, inde­pen­dent researchers and video­taped tes­ti­mo­ny from the fam­i­lies of the dead, show top SKS offi­cials had infor­ma­tion impli­cat­ing com­pa­ny employ­ees in some of the sui­cides.”

The AP inves­ti­ga­tion and inter­nal reports showed just how bru­tal the SKS micro­fi­nanc­ing pro­gram was, how women were par­tic­u­lar­ly tar­get­ed because of their height­ened sense of shame and com­mu­ni­ty responsibility—here is the bru­tal real­i­ty of finan­cial cap­i­tal­ism com­pared to the utopi­an blath­er mouthed at Davos con­fer­ences, or in the slick pam­phlets issued by the Omid­yar Net­work:

“Both reports said SKS employ­ees had ver­bal­ly harassed over-indebt­ed bor­row­ers, forced them to pawn valu­able items, incit­ed oth­er bor­row­ers to humil­i­ate them and orches­trat­ed sit-ins out­side their homes to pub­licly shame them. In some cas­es, the SKS staff phys­i­cal­ly harassed default­ers, accord­ing to the report com­mis­sioned by the com­pa­ny. Only in death would the debts be for­giv­en.

“The videos and reports tell stark sto­ries:

“One woman drank pes­ti­cide and died a day after an SKS loan agent told her to pros­ti­tute her daugh­ters to pay off her debt. She had been giv­en 150,000 rupees ($3,000) in loans but only made 600 rupees ($12) a week.

“Anoth­er SKS debt col­lec­tor told a delin­quent bor­row­er to drown her­self in a pond if she want­ed her loan waived. The next day, she did. She left behind four chil­dren.

“One agent blocked a woman from bring­ing her young son, weak with diar­rhea, to the hos­pi­tal, demand­ing pay­ment first. Oth­er bor­row­ers, who could not get any new loans until she paid, told her that if she want­ed to die, they would bring her pes­ti­cide. An SKS staff mem­ber was there when she drank the poi­son. She sur­vived.

“An 18-year-old girl, pres­sured until she hand­ed over 150 rupees ($3)—meant for a school exam­i­na­tion fee—also drank pes­ti­cide. She left a sui­cide note: ‘Work hard and earn mon­ey. Do not take loans.’ ”

As a result of the bad press this scan­dal caused, the Omid­yar Net­work delet­ed its Uni­tus invest­ment from its website—nor does Omid­yar boast of its invest­ments in SKS Micro­fi­nance any longer. Mean­while, Uni­tus mys­te­ri­ous­ly dis­solved itself and laid off all of its employ­ees right around the time of the IPO, under a cloud of sus­pi­cion that Uni­tus insid­ers made huge per­son­al prof­its from the ven­ture, prof­its that in the­o­ry were sup­posed to be rein­vest­ed into expand­ing micro-lend­ing for the poor.

Thus spoke the prof­it motive.

Curi­ous­ly, in the after­math of the SKS micro-lend­ing scan­dal, Omid­yar Net­work was dragged into anoth­er polit­i­cal scan­dal in India when it was revealed that Omid­yar and the Ford Foun­da­tion were plac­ing their own paid researchers onto the staffs of India’s MPs. The pro­gram, called Leg­isla­tive Assis­tants to MPs (LAMPs), was fund­ed with $1 mil­lion from Omid­yar Net­work and $855,000 from the Ford Foun­da­tion. It was shut down last year after India’s Min­istry of Home Affairs com­plained about for­eign lob­by­ing influ­enc­ing Indi­an MPs, and promised to inves­ti­gate how Omid­yar-fund­ed research for India’s par­lia­ment may have been “col­ored” by an agen­da.

But SKS is not the only micro­fi­nanc­ing invest­ment gone bad. The biggest and most rep­utable micro-lenders, includ­ing those fund­ed by the Omid­yar Net­work, have come under seri­ous and sus­tained crit­i­cism for preda­to­ry inter­est rates and their aggres­sive debt-col­lec­tion tech­niques.

Take BRAC, anoth­er big ben­e­fi­cia­ry of Omid­yar’s efforts to boost “finan­cial inclu­sion.”

Start­ed in the ear­ly 1970s as a war relief orga­ni­za­tion, BRAC has grown into the largest non-gov­ern­men­tal orga­ni­za­tion in the world. It employs over 100,000 peo­ple in coun­tries across the globe. While BRAC is known most­ly for its micro-lend­ing oper­a­tion activ­i­ties, the out­fit is a diver­si­fied non­prof­it busi­ness oper­a­tion. It is involved in edu­ca­tion, health­care and even devel­ops its own hybrid seed vari­eties. Much of BRAC’s oper­a­tions are financed by its micro-lend­ing activ­i­ties.

Omid­yar Net­work prais­es BRAC for its work to “empow­er the poor to improve their own lives,” and has giv­en at least $8 mil­lion to help BRAC set up micro-lend­ing bank­ing infra­struc­ture in Liberia and Sier­ra Leone.

But BRAC seems to wor­ry more about its own bot­tom line than it does about the well-being of its impov­er­ished bor­row­ers, the major­i­ty of whom are women and who pay an aver­age annu­al inter­est rate of 40 per­cent.

This twist­ed sense of pri­or­i­ty could be seen after one of the worst cyclones in the his­to­ry of Bangladesh left thou­sands dead in 2007, destroy­ing entire vil­lages and towns in its path. In the cyclone’s wake, the Omid­yar-fund­ed BRAC micro-lend­ing debt col­lec­tors showed up at the dis­as­ter zone along with oth­er micro-lenders, and went to work aggres­sive­ly shak­ing down bor­row­ers, forc­ing some vic­tims (most­ly women) to go so far as to sell their relief/aid mate­ri­als, or to take out sec­ondary loans to pay off the first loans.

Accord­ing to a study about micro-lenders in the after­math of Cyclone Sidr:

“Sidr vic­tims who lost almost every­thing in the cyclone, expe­ri­enced pres­sure and harass­ment from non­governmental organ­i­sa­tions (NGOs) for repay­ment of micro­cre­d­it instal­ments. Such intense pres­sure led some of the Sidr­affected bor­row­ers to sell out the relief mate­ri­als they received from dif­fer­ent sources. Such pres­sure for loan recov­ery came from large organ­i­sa­tions such as BRAC, ASA and even the Nobel Prize win­ning organ­i­sa­tion Grameen Bank.

“Even the most severe­ly affect­ed peo­ple are expect­ed to pay back in a week­ly basis, with the pre­vail­ing inter­est rate. No sys­tem of ‘break’ or ‘hol­i­day’ peri­od is avail­able in the banks’ cur­rent char­ter. No excep­tions are made dur­ing a time of nat­ur­al calami­ty. The harsh rules prac­tised by the micro­cre­d­it lender organ­i­sa­tions led the dis­as­ter affect­ed peo­ple even sell­ing their relief assis­tance. Some even had to sell their left­over belong­ings to pay back their week­ly instal­ments.”

These tac­tics may be harsh, but they pay off for micro-lenders. And it’s a lucra­tive oper­a­tion: BRAC pri­mar­i­ly tar­gets women, offers loans with preda­to­ry inter­est rates and uses tra­di­tion­al val­ues and close vil­lage rela­tion­ships to shame and pres­sure bor­row­ers into sell­ing and doing what­ev­er they can to make their week­ly pay­ments. It works. Loan recov­ery rates for the indus­try aver­age between 95 and 98 per­cent. For BRAC, that rate was a com­fy 99.3 per­cent.

So do preda­to­ry micro-loans real­ly help lift the world’s poor­est peo­ple out of pover­ty? Neolib­er­al ide­ol­o­gy says they do — and the Omid­yar Net­work rep­re­sents one of the purest dis­til­la­tions of that ide­ol­o­gy put into prac­tice in the poor­est and most vul­ner­a­ble parts of the world.

As Cam­bridge Uni­ver­si­ty eco­nom­ics pro­fes­sor Ha-Joon Chang argued, say­ing of micro-lend­ing:

“[It] con­sti­tutes a pow­er­ful insti­tu­tion­al and polit­i­cal bar­ri­er to sus­tain­able eco­nom­ic and social devel­op­ment, and so also to pover­ty reduc­tion. Final­ly, we sug­gest that con­tin­ued sup­port for micro­fi­nance in inter­na­tion­al devel­op­ment pol­i­cy cir­cles can­not be divorced from its supreme ser­vice­abil­i­ty to the neoliberal/globalization agen­da.”

Omid­yar Net­work has fol­lowed the same dis­as­trous neolib­er­al script in oth­er areas of invest­ment, par­tic­u­lar­ly its invest­ments into pri­va­tiz­ing pub­lic schools in the US and in poor regions of Africa.

...

Still think that Pierre Omid­yar is a “dif­fer­ent” type of bil­lion­aire? Still con­vinced he’s a one-of-a-kind “civic-mind­ed” ide­al­ist?

Then you might want to ask your­self why Omid­yar is so smit­ten by the ideas of an econ­o­mist known as “The Friedrich Hayek of Latin Amer­i­ca.” His name is Her­nan­do de Soto and he’s been adored by every­one from Mil­ton Fried­man to Mar­garet Thatch­er to the Koch broth­ers. Omid­yar Net­work poured mil­lions of non­prof­it dol­lars into sub­si­diz­ing his ideas, help­ing put them into prac­tice in poor slums around the devel­op­ing world.

In Feb­ru­ary 2011, the Omid­yar Net­work announced a hefty $4.96 mil­lion grant to a Peru-based free-mar­ket think tank, the Insti­tute for Lib­er­ty & Democ­ra­cy (ILD).

Per­haps no sin­gle invest­ment by Omid­yar more clear­ly reveals his ortho­dox neolib­er­al vision for the world—and what con­sti­tutes “civic-mindedness”—than his sup­port for the ILD and its founder and pres­i­dent, Her­nan­do De Soto, whom the ON has tapped to par­tic­i­pate in oth­er Omid­yar-spon­sored events.

De Soto is a celebri­ty in the world of neoliberal/libertarian gurus. He and his Insti­tute for Lib­er­ty & Democ­ra­cy are cred­it­ed with pop­u­lar­iz­ing a free-mar­ket ver­sion of Third World land reform and turn­ing it into pol­i­cy in city slums all across the devel­op­ing world. Where­as “land reform” in coun­tries like Peru—dominated by a tiny hand­ful of landown­ing families—used to mean land redis­tri­b­u­tion, Her­nan­do De Soto came up with a counter-idea more amenable to the Haves: give prop­er­ty title to the country’s poor mass­es, so that they’d have a secure and legal title to their shanties, shacks, and what­ev­er land they might claim to live on or own.

De Soto’s pitch essen­tial­ly comes down to this: Give the poor mass­es a legal “stake” in what­ev­er mea­ger prop­er­ty they live in, and that will “unleash” their inner entre­pre­neur­ial spir­it and all the nation­al “hid­den cap­i­tal” lying dor­mant beneath their shan­ty floors. De Soto claimed that if the poor liv­ing in Lima’s vast shan­ty­towns were giv­en legal title own­er­ship over their shacks, they could then use that legal title as col­lat­er­al to take out micro­fi­nance loans, which would then be used to launch their micro-entre­pre­neur­ial careers. New­ly-cre­at­ed prop­er­ty hold­ers would also have a “stake” in the rul­ing polit­i­cal and eco­nom­ic sys­tem. It’s the sort of cant that makes per­fect sense to the Davos set (where De Soto is a star) but that has absolute­ly zero rel­e­vance to prob­lems of entrenched pover­ty around the world.

Since the Omid­yar Net­work names “prop­er­ty rights” as one of the five areas of focus, it’s no sur­prise that Omid­yar mon­ey would even­tu­al­ly find its way into Her­nan­do De Soto’s free-mar­ket ideas mill. In 2011, Omid­yar not only gave De Soto $5 mil­lion to advance his ideas—he also tapped De Soto to serve as a judge in an Omid­yar-spon­sored com­pe­ti­tion for projects focused on improv­ing prop­er­ty rights for the poor. The more you know about Her­nan­do De Soto, the hard­er it is to see Omidyar’s finan­cial back­ing as “ide­al­is­tic” or “civic-mind­ed.”

For one thing, De Soto is the favorite of the very same bil­lion­aire broth­ers who play vil­lains to Omidyar’s sup­posed hero—yes, the reviled Koch broth­ers. In 2004, the lib­er­tar­i­an Cato Insti­tute (neé “The Charles Koch Foun­da­tion”) award­ed Her­nan­do De Soto its bian­nu­al “Mil­ton Fried­man Prize”—which comes with a hefty $500,000 check—for “empow­er­ing the poor” and “advanc­ing the cause of lib­er­ty.” De Soto was cho­sen by a prize jury con­sist­ing of such notable human­i­tar­i­ans as for­mer Pinochet labor min­is­ter Jose Piñera, Vladimir Putin’s eco­nom­ic advi­sor Andrei Illar­i­onov, Wash­ing­ton Post neo­con­ser­v­a­tive colum­nist Anne Apple­baum, FedEx CEO Fred Smith, and Mil­ton Friedman’s wife Rosie. Mil­ton was in the audi­ence dur­ing the awards cer­e­mo­ny; he hearti­ly approved.

Indeed, Her­nan­do De Soto is de fac­to roy­al­ty in the world of neolib­er­al-lib­er­tar­i­an gurus—he’s been called “The Friedrich von Hayek of Latin Amer­i­ca,” not least because Hayek launched De Soto’s career as a guru more than three decades ago.

So who is Her­nan­do De Soto, where do his ideas come from, and why might Pierre Omid­yar think him deserv­ing of five mil­lion dol­lars — ten times the amount the Koch Broth­ers award­ed him?

De Soto was born into an elite “white Euro­pean” fam­i­ly in Peru, who fled into exile in the West fol­low­ing Peru’s 1948 coup—his father was the sec­re­tary to the deposed pres­i­dent. Her­nan­do spent most of the next 30 years in Switzer­land, get­ting his edu­ca­tion at elite schools, work­ing his way up var­i­ous inter­na­tion­al insti­tu­tions based in Gene­va, serv­ing as the pres­i­dent of a Gene­va-based cop­per car­tel out­fit, the Inter­na­tion­al Coun­cil of Cop­per Export­ing Coun­tries, and work­ing as an offi­cial in GATT (Gen­er­al Agree­ment on Trade and Tar­iffs).

De Soto didn’t return to live in Peru until the end of the 1970s, to over­see a new gold plac­er min­ing com­pa­ny he’d formed with a group of for­eign investors. The min­ing company’s prof­its suf­fered due to Peru’s weak prop­er­ty laws and almost non-exis­tent cul­tur­al appre­ci­a­tion of prop­er­ty title, espe­cial­ly among the country’s poor masses—De Soto’s investors pulled out of the min­ing ven­ture after vis­it­ing the company’s gold mines and see­ing hun­dreds of peas­ants pan­ning on the company’s con­ces­sions. That expe­ri­ence inspired De Soto to change Peru­vians’ polit­i­cal assump­tions regard­ing prop­er­ty rights. Rather than start off by try­ing to con­vince them that for­eign min­ing firms should have exclu­sive rights to gold from tra­di­tion­al­ly com­mu­nal Peru­vian lands, De Soto came up with a clever end-around idea: giv­ing prop­er­ty title to the mass­es of Peru’s poor liv­ing in the vast shanties and shacks in the slums of Lima and cities beyond. It was a long-term strat­e­gy to alter cul­tur­al expec­ta­tions about prop­er­ty and own­er­ship, there­by improv­ing the invest­ment cli­mate for min­ing com­pa­nies and oth­er investors. The point was to align the mass­es’ assump­tions about prop­er­ty own­er­ship with those of the banana republic’s hand­ful of rich landown­ing fam­i­lies.

In 1979, De Soto orga­nized a con­fer­ence in Peru’s cap­i­tal Lima, fea­tur­ing Mil­ton Fried­man and Friedrich von Hayek as speak­ers and guests. At the time, both Fried­man and Hayek were serv­ing as key advi­sors to Gen­er­al Augus­to Pinochet’s “shock ther­a­py” pro­gram in near­by Chile, an eco­nom­ic exper­i­ment that com­bined lib­er­tar­i­an mar­ket poli­cies with con­cen­tra­tion camp ter­ror.

Two years after De Soto’s suc­cess­ful con­fer­ence in Lima, in 1981, Hayek helped De Soto set up his own free-mar­ket think tank in Lima, the “Insti­tute for Lib­er­ty and Democ­ra­cy” (ILD). The ILD became the first of a large inter­na­tion­al net­work of right-wing neolib­er­al think tanks con­nect­ed to the Moth­er Ships—Cato Insti­tute, Her­itage Foun­da­tion, and Britain’s Insti­tute for Eco­nom­ic Affairs, Mar­garet Thatcher’s go-to think tank. By 1983, De Soto’s Insti­tute was also receiv­ing heavy fund­ing from Reagan’s Cold War front group, the Nation­al Endow­ment for Democ­ra­cy, which pro­mot­ed free-mar­ket think tanks and pro­grams around the world, and by the end of Rea­gan decade, De Soto pro­duced his first man­i­festo, “The Oth­er Path”—a play on the name of Peru’s Maoist guer­ril­la group, Shin­ing Path, then fight­ing a bloody war for pow­er. But where­as the Shin­ing Path’s polit­i­cal pro­gram called for nation­al­iz­ing and redis­trib­ut­ing prop­er­ty, most of which was in the hands of a few rich fam­i­lies, De Soto’s “Oth­er Path” called for main­tain­ing prop­er­ty dis­tri­b­u­tion as it was, and legal­iz­ing its cur­rent struc­ture by democ­ra­tiz­ing prop­er­ty titles, the pieces of paper with the stamps. Every­one would become a micro-oli­garch and micro-landown­er under this scheme...

With help and fund­ing from US and inter­na­tion­al insti­tu­tions, De Soto quick­ly became a pow­er­ful polit­i­cal force behind the scenes. In 1990, De Soto insin­u­at­ed him­self into the inner cir­cle of new­ly-elect­ed pres­i­dent Alber­to Fuji­mori, who quick­ly turned into a bru­tal dic­ta­tor, and is cur­rent­ly serv­ing a 25-year prison sen­tence for crimes against human­i­ty, mur­der, kid­nap­ping, and ille­gal wire­tap­ping.

Under De Soto’s influ­ence, Fujimori’s pol­i­tics sud­den­ly changed; almost overnight, the pop­ulist Keyn­sian can­di­date became the free-mar­ket author­i­tar­i­an “Chinochet” he gov­erned as. As Fujimori’s top advi­sor, Her­nan­do De Soto was the archi­tect of so-called “Fujishock” ther­a­py applied to Peru’s econ­o­my. Offi­cial­ly, De Soto served as Fujimori’s drug czar from 1990–1992, an unusu­al role for an econ­o­mist giv­en the fact that Peru’s army was fight­ing a bru­tal war with Peru’s pow­er­ful cocaine drug lords. At the time Peru was the world’s largest cocaine pro­duc­er; as drug czar, Her­nan­do De Soto there­fore posi­tioned him­self as the point-man between Peru’s mil­i­tary and secu­ri­ty ser­vices, America’s DEA and drug czar under the first Pres­i­dent Bush, and Peru’s pres­i­dent Alber­to Fuji­mori. It’s the sort of posi­tion that you’d want to have if you want­ed “deep state” pow­er rather than mere min­is­te­r­i­al pow­er.

Dur­ing those first two years when De Soto served under Fuji­mori, human rights abus­es were ram­pant. Fuji­mori death squads—with names like the “Grupo Colina”—targeted labor unions and gov­ern­ment crit­ics and their fam­i­lies. Two of the worst mas­sacres com­mit­ted under Fujimori’s reign, and for which he was lat­er jailed, took place while De Soto served as his advi­sor and drug czar.

The harsh free-mar­ket shock-ther­a­py pro­gram that De Soto con­vinced Fuji­mori to imple­ment result­ed in mass mis­ery for Peru. Dur­ing the two years De Soto served as Fujimori’s advi­sor, real wages plunged 40%, the pover­ty rate rose to over 54% of the pop­u­la­tion, and the per­cent­age of the work­force that was either unem­ployed or under­em­ployed soared to 87.3%.

But while the coun­try suf­fered, De Soto’s Insti­tute for Lib­er­ty and Democracy—the out­fit that Omid­yar gave $5 mil­lion to in 2011—thrived: its staff grew to over 100 as funds poured in. A World Bank staffer who worked with the ILD described it as,

“a kind of school for the coun­try. Most of the impor­tant min­is­ters, lawyers, jour­nal­ists, and econ­o­mists in Peru are ILD alum­ni.”

In 1992, Fuji­mori orches­trat­ed a con­sti­tu­tion­al coup, dis­band­ing Peru’s Con­gress and its courts, and impos­ing emer­gency rule-by-decree. It was anoth­er vari­a­tion of the same Pinochet blue­print.

Just before Fujimori’s coup, De Soto indem­ni­fied him­self by offi­cial­ly resign­ing from the cab­i­net. How­ev­er in the weeks and months after the coup, De Soto pro­vid­ed cru­cial PR cov­er, down­play­ing the coup to the for­eign press. For instance, De Soto told the Los Ange­les Times that the pub­lic should tem­per their judg­ment of Fujimori’s coup:

“You’ve got to see this as the tri­al and error of a pres­i­dent who’s try­ing to find his way.”

In the New York Times, De Soto spun the coup as willed by the peo­ple, the ulti­mate demo­c­ra­t­ic pol­i­tics:

“Peo­ple are fed up, fed up...[Fujimori] has attacked two hat­ed insti­tu­tions at just the right time. There is an enor­mous need to believe in him.”

Years lat­er, Fujimori’s noto­ri­ous spy chief Vladimiro Mon­tesinos tes­ti­fied to Peru’s Con­gress that De Soto helped mas­ter­mind the 1992 coup. De Soto denied involve­ment; but in 2011, two years after Fuji­mori was jailed for crimes against human­i­ty, De Soto joined the pres­i­den­tial cam­paign for Keiko Fuji­mori, the jailed dictator’s daugh­ter and leader of Fujimori’s right-wing par­ty. Keiko Fuji­mori ran on a plat­form promis­ing to free her father from prison if she won; De Soto spent much of the cam­paign red-bait­ing her oppo­nent as a Com­mu­nist. That led Peru’s Nobel Prize-win­ning author Mario Var­gas Llosa to denounce De Soto as a “fuji­mon­te­senista” with “few demo­c­ra­t­ic cre­den­tials.”

So in the same year that De Soto was try­ing to put the daugh­ter of Peru’s Pinochet in pow­er and to spring the dic­ta­tor from prison, Omid­yar Net­work award­ed him $5 mil­lion.

It was dur­ing Fujimori’s dic­ta­to­r­i­al emer­gency rule, from 1992–94, that De Soto rolled out a prop­er­ty-title pilot pro­gram in Lima, in which 200,000 house­holds were giv­en for­mal title. In 1996, Fuji­mori imple­ment­ed De Soto’s prop­er­ty-titling pro­gram on a nation­al scale, with help from the World Bank and a new gov­ern­ment prop­er­ty agency staffed by peo­ple from De Soto’s Insti­tute for Lib­er­ty and Democ­ra­cy. By 2000, the mag­i­cal promise of an explo­sion in bank cred­its to all the new micro-prop­er­ty own­ers nev­er mate­ri­al­ized; in fact, there was no notice­able dif­fer­ence in bank lend­ing to the poor what­so­ev­er, whether they had prop­er­ty title or not.

The World Bank and the project’s neolib­er­al sup­port­ers led by Her­nan­do De Soto were not hap­py with data show­ing no uptick in lend­ing, which threat­ened to unrav­el the entire hap­py the­o­ry behind prop­er­ty titling as the answer to Third World pover­ty. De Soto was in the process of ped­dling the same prop­er­ty-titling pro­gram to coun­tries around the world; data was need­ed to jus­ti­fy the pro­gram. So the World Bank fund­ed a new study in Peru in the ear­ly 2000s, and dis­cov­ered some­thing star­tling: In homes that had for­mal prop­er­ty titles, the par­ents in those homes spent up to 40% more time out­side of their homes than they did before they were giv­en title. De Soto took that sta­tis­tic and argued that it was a good thing because it proved giv­ing prop­er­ty title to home­own­ers made them feel secure enough to leave their shanties and shacks. The assump­tion was that in the dark days before shan­ty dwellers had legal titles, they were too scared to leave their shacks lest some oth­er sav­age steal it from them while they were out shop­ping.

No one ever con­clu­sive­ly explained why shan­ty par­ents were spend­ing so much more time out­side of their homes, but the impor­tant thing was that it made every­one for­get the utter fail­ure of the prop­er­ty title program’s core promise—that prop­er­ty titles would ignite micro-lend­ing thanks to the col­lat­er­al of the micro-entrepreneur’s micro-shack as col­lat­er­al. Thanks to De Soto’s sales­man­ship and the back­ing of the world’s neolib­er­al nomen­klatu­ra — Bill Clin­ton called De Soto “the world’s great­est liv­ing econ­o­mist” and he was praised by every­one from Mil­ton Fried­man to Vladimir Putin to Mar­garet Thatch­er. The dis­ap­point­ing results in Peru were ignored, and De Soto’s pro­gram was extend­ed to devel­op­ing coun­tries around the world includ­ing Egypt, Cam­bo­dia, the Philip­pines, Indone­sia and else­where. And in near­ly every case, De Soto’s Insti­tute for Lib­er­ty and Democ­ra­cy has tak­en the lead in advis­ing gov­ern­ments and sell­ing the dream of turn­ing titled slum-dwellers into micro-entre­pre­neurs.

The real change brought by De Soto’s prop­er­ty-titling pro­gram has ranged from nil to night­mar­ish.

In Cam­bo­dia, where the World Bank imple­ment­ed De Soto’s land-titling pro­gram in 2001, poor and vul­ner­a­ble peo­ple in the cap­i­tal Phnom Penh have suf­fered at the hands of land devel­op­ers and spec­u­la­tors who’ve used arson, police cor­rup­tion and vio­lence to forcibly evict rough­ly 10% of the city’s pop­u­la­tion from their homes in more valu­able dis­tricts, relo­cat­ing them to the city out­skirts.

An arti­cle in Slate titled “The De Soto Delu­sion” described what hap­pened in Cam­bo­dia when the land-titling pro­gram was first imple­ment­ed:

“In the nine months or so lead­ing up to the project kick­off, a dev­as­tat­ing series of slum fires and forced evic­tions purged 23,000 squat­ters from tracts of unti­tled land in the heart of Phnom Penh. These squat­ters were then plopped onto dusty relo­ca­tion sites sev­er­al miles out­side of the city, where there were no jobs and where the price of com­mut­ing to and from cen­tral Phnom Penh (about $2 per day) sur­passed what­ev­er dai­ly wage they had been earn­ing in town before the fires. Mean­while, the burned-out inner city land passed imme­di­ate­ly to some of the wealth­i­est prop­er­ty devel­op­ers in the coun­try.”

De Soto and his Insti­tute for Lib­er­ty and Democ­ra­cy have advised prop­er­ty-title pro­grams else­where too—Haiti, Domini­can Repub­lic, Pana­ma, Russia—again with results rang­ing from nil to bad. Even where it doesn’t lead to mass evic­tions and vio­lence, it has the effect of shift­ing a greater tax bur­den onto the poor, who end up pay­ing more in prop­er­ty tax­es, and of forc­ing them to pony up for cost­ly fil­ing fees to gain title, fees that they often can­not afford. Prop­er­ty title in and of itself—without a whole range of reforms in gov­er­nance, cor­rup­tion, edu­ca­tion, income, wealth dis­tri­b­u­tion and so on—is clear­ly no panacea. But it does pro­vide an alter­na­tive to pro­grams that give mon­ey to the poor and redis­trib­ute wealth, and that alone is a good thing, if you’re the type smit­ten by Her­nan­do De Soto—as Omid­yar clear­ly is.

Stud­ies of prop­er­ty-titling pro­grams in the slums of Brazil and Mani­la revealed that it cre­at­ed a new bit­ter­ly com­pet­i­tive cul­ture and bifur­ca­tion, in which a small hand­ful of titled slum dwellers quick­ly learn to ben­e­fit by turn­ing into micro-slum­lords rent­ing out dwellings to less­er slum dwellers, who sub­se­quent­ly find them­selves forced to pay month­ly fees for their shan­ty rooms—creating an under­class with­in the under­class. De Soto has described these slums as “acres of diamonds”—wealth wait­ing to be unlocked by prop­er­ty titling—and his acolytes even coined a new acronym for slums: “Strate­gic Low-income Urban Man­age­ment Sys­tems.”

All of which begs the obvi­ous ques­tion: If De Soto’s prop­er­ty-title pro­gram is such a proven fail­ure in case after case, why is it so pop­u­lar among the world’s polit­i­cal and busi­ness elites?

The answer is rather obvi­ous: It offers a sim­ple, low-cost, tech­no­crat­ic mar­ket solu­tion to the prob­lem of glob­al poverty—a com­plex and cost­ly prob­lem that can only be alle­vi­at­ed by ded­i­cat­ing huge amounts of resources and a very dif­fer­ent pol­i­tics from the one that tells us that mar­kets are god, mar­kets can solve every­thing. Even before Omid­yar com­mit­ted $5 mil­lion to the dark plu­to­crat­ic “ide­al­ism” De Soto rep­re­sents, he was Tweet­ing his admi­ra­tion for De Soto:

“Bril­liant din­ner with Her­nan­do de Soto. Prop­er­ty rights under­lie and enable every­thing.”

Indeed, prop­er­ty rights under­lie and enable every­thing Omid­yar wants to hear—but dis­tract and divert from what the tar­gets of those pro­grams might actu­al­ly need or be ask­ing for.

...

“The real change brought by De Soto’s prop­er­ty-titling pro­gram has ranged from nil to night­mar­ish.”
Well that was rather bone chill­ing. And now Her­nan­do de Soto is set on merg­ing his vision of micro-financ­ing a shan­ty town prop­er­ty rights with the mag­ic of bit­coin so that that the world can bet­ter enjoy things like “Strate­gic Low-income Urban Man­age­ment Sys­tems” in the dig­i­tal age. Just imag­ine how much bet­ter this would be with Bit­coin to help facil­i­tate the mag­ic of the mar­ket­place:

Stud­ies of prop­er­ty-titling pro­grams in the slums of Brazil and Mani­la revealed that it cre­at­ed a new bit­ter­ly com­pet­i­tive cul­ture and bifur­ca­tion, in which a small hand­ful of titled slum dwellers quick­ly learn to ben­e­fit by turn­ing into micro-slum­lords rent­ing out dwellings to less­er slum dwellers, who sub­se­quent­ly find them­selves forced to pay month­ly fees for their shan­ty rooms—creating an under­class with­in the under­class. De Soto has described these slums as “acres of diamonds”—wealth wait­ing to be unlocked by prop­er­ty titling—and his acolytes even coined a new acronym for slums: “Strate­gic Low-income Urban Man­age­ment Sys­tems.”

Sounds pret­ty awe­some, does­n’t it! And it’s no sur­prise. Espe­cial­ly when you con­sid­er de Soto’s fans:

...

For one thing, De Soto is the favorite of the very same bil­lion­aire broth­ers who play vil­lains to Omidyar’s sup­posed hero—yes, the reviled Koch broth­ers. In 2004, the lib­er­tar­i­an Cato Insti­tute (neé “The Charles Koch Foun­da­tion”) award­ed Her­nan­do De Soto its bian­nu­al “Mil­ton Fried­man Prize”—which comes with a hefty $500,000 check—for “empow­er­ing the poor” and “advanc­ing the cause of lib­er­ty.” De Soto was cho­sen by a prize jury con­sist­ing of such notable human­i­tar­i­ans as for­mer Pinochet labor min­is­ter Jose Piñera, Vladimir Putin’s eco­nom­ic advi­sor Andrei Illar­i­onov, Wash­ing­ton Post neo­con­ser­v­a­tive colum­nist Anne Apple­baum, FedEx CEO Fred Smith, and Mil­ton Friedman’s wife Rosie. Mil­ton was in the audi­ence dur­ing the awards cer­e­mo­ny; he hearti­ly approved.

Indeed, Her­nan­do De Soto is de fac­to roy­al­ty in the world of neolib­er­al-lib­er­tar­i­an gurus—he’s been called “The Friedrich von Hayek of Latin Amer­i­ca,” not least because Hayek launched De Soto’s career as a guru more than three decades ago.

...

And giv­en de Soto’s ini­tial expe­ri­ences that led him to his titling-for-the-poor plans, it’s hard not to see great things emerge from that kind of inspi­ra­tion:

...

De Soto didn’t return to live in Peru until the end of the 1970s, to over­see a new gold plac­er min­ing com­pa­ny he’d formed with a group of for­eign investors. The min­ing company’s prof­its suf­fered due to Peru’s weak prop­er­ty laws and almost non-exis­tent cul­tur­al appre­ci­a­tion of prop­er­ty title, espe­cial­ly among the country’s poor masses—De Soto’s investors pulled out of the min­ing ven­ture after vis­it­ing the company’s gold mines and see­ing hun­dreds of peas­ants pan­ning on the company’s con­ces­sions. That expe­ri­ence inspired De Soto to change Peru­vians’ polit­i­cal assump­tions regard­ing prop­er­ty rights. Rather than start off by try­ing to con­vince them that for­eign min­ing firms should have exclu­sive rights to gold from tra­di­tion­al­ly com­mu­nal Peru­vian lands, De Soto came up with a clever end-around idea: giv­ing prop­er­ty title to the mass­es of Peru’s poor liv­ing in the vast shanties and shacks in the slums of Lima and cities beyond. It was a long-term strat­e­gy to alter cul­tur­al expec­ta­tions about prop­er­ty and own­er­ship, there­by improv­ing the invest­ment cli­mate for min­ing com­pa­nies and oth­er investors. The point was to align the mass­es’ assump­tions about prop­er­ty own­er­ship with those of the banana republic’s hand­ful of rich landown­ing fam­i­lies.

...

Yes, great things are com­ing to the poor­est peo­ple in the world: a brand new blockchain-pow­ered land/prop­er­ty-based pub­lic mar­ket­place is com­ing that will unleash the mag­ic of the mar­kets across the devel­op­ing world. All of the great things we saw above will be avail­able to peo­ple every­where. All they’ll need is a lit­tle intern­er device that helps them get and spend some bit­coins. Just add elec­tric­i­ty.

So that’s com­ing. All that fun.

But it’s also worth remind­ing our­selves that the worst part of Bit­coin isn’t the tech­nol­o­gy itself, even though the mining/electricity issues are pret­ty sig­nif­i­cant. But they’re address­able.

The key prob­lem with Bit­coin is the far-right eco­nom­ics that is con­tin­u­al­ly pro­mot­ed along with it that’s the real prob­lem, and once again we see Bit­coin get­ting used to pro­mote far-right eco­nom­ic the­o­ries with a poor track record.
But there’s no rea­son Bit­coin could­n’t be turned into a use­ful pub­lic ledger that helps the pub­lic cre­ate more wealth and val­ue from the com­mons.

For instance, a coun­try could use Bit­coin (or any oth­er blockchain) to divide up pub­lic land into geo­graph­ic units that require pub­lic over­sight to ward off reck­less devel­op­ers. Well, ok, how about hav­ing a group, could be a pub­lic or pri­vate agency, divide up pub­lic land into units (x square meters). Then assign to each plot, say, 100 ran­dom mem­bers of the pub­lic that vol­un­teer to “watch” the land. Then use the blockchain to secret­ly and anony­mous­ly keep track of who is watch­ing what plot.

Peo­ple could pass the torch to some­one else or get reas­signed as more peo­ple sign up and the assigned plots shrink. And use that as a sys­tem that lets soci­ety divide the work required by the pub­lic at large to watch over the vast swathes of pub­lic land that folks like Her­nan­do de Soto want to pri­va­tize along with the shan­ty towns of the world.

Obvi­ous­ly most peo­ple would­n’t be able to watch a piece of land phys­i­cal­ly. But they could still watch for news or oth­er sources of infor­ma­tion specif­i­cal­ly relat­ed to their plot of land. And when some­one hears bad news about their par­tic­u­lar plot of land, broad­cast to the world through the blockchain mes­sag­ing sys­tem.

Who knows, maybe there’s going to be some non-preda­to­ry/s­cam­my blockchain tech­nolo­gies that end end up real­ly help­ing the world take advan­tage of the pow­er of the mar­ket­place (the “mar­ket­place of ideas” in the case of a dis­trib­uted publiland watch­er sys­tem). At least let’s hope so. Because it’s pret­ty clear that folks Her­nan­do de Soto and his far-right friends are get­ting ready to help the world’s poor one again, but with bit­coins this time. And as we saw, that’s the kind of “help” that means the world’s poor are going to need all the help they can get.

Look out world. Bit­coin is com­ing. And it wants to help.

Here’s a sto­ry that’s going to be some­thing to watch: Overstock.com just issued the first SEC-approved bit­coin-based secu­ri­ty. You can now buy some of the $500 mil­lion in Overstock.com stock that was just issued over the Bit­coin blockchain. And accord­ing Overstock.com’s founder Patrick Byrne, this is just the begin­ning of the blockchain’s takeover of the finan­cial sec­tor:

Politi­co
Bit­coin vs. the SEC
6/8/15

For­get mon­ey. Bit­coin 2.0 is about to dis­rupt every­thing else. Are reg­u­la­tors ready for it?

By Ben Schreckinger

A cou­ple of miles from Wall Street, on the West­ern bank of the Hud­son Riv­er, sits a vault in Jer­sey City main­tained by the Depos­i­to­ry Trust & Clear­ing Com­pa­ny. You might nev­er have heard of the DTCC, but if you own stock, bonds or a mutu­al fund, it takes care of some­thing that belongs to you.

The DTCC is the clear­ing­house for U.S. cap­i­tal mar­kets. Its Jer­sey City vault con­tains about a mil­lion phys­i­cal stock and bond cer­tifi­cates, rep­re­sent­ing some undis­closed por­tion of the $43 tril­lion in total assets the orga­ni­za­tion holds in cus­tody. This is the cen­ter of the entire Amer­i­can stock-trad­ing sys­tem. Each share has an own­er, and – no mat­ter how fast it changes hands – a clear­ing­house keeps track of who owns what.

This year, Patrick Byrne, the CEO of Overstock.com and would-be finan­cial rev­o­lu­tion­ary, is tak­ing the first steps in a cam­paign to smash open the vault. Or, real­ly, to elim­i­nate it — and with it, the whole sys­tem that makes the vault nec­es­sary. On April 1, the Secu­ri­ties and Exchange Com­mis­sion approved a request by a pri­vate stock exchange part­nered with Over­stock to deal in “dig­i­tal secu­ri­ties.” On April 24, Byrne filed a Form S‑3 with the Secu­ri­ties and Exchange Com­mis­sion to reg­is­ter $500 mil­lion worth of equi­ty in Over­stock as the first dig­i­tal stock, which the agency is cur­rent­ly review­ing. On Fri­day, the com­pa­ny offered the world’s first-ever dig­i­tal secu­ri­ty, a cor­po­rate bond that does not need SEC approval and could be issued in a mat­ter of days.

Byrne wants to use the tech­nol­o­gy behind Bit­coin to cre­ate a secu­ri­ties mar­ket that exists not in any one par­tic­u­lar place, but as a col­lec­tion of data dis­trib­uted across com­put­ers any­where on Earth, with no need for the DTCC, the New York Stock Exchange or any of the oth­er mid­dle­men who over­see the world’s cap­i­tal mar­kets.

This new sys­tem, which he calls Medici, after the bank­ing fam­i­ly that ruled over Renais­sance-era Flo­rence, would do some­thing no oth­er stock exchange has ever done. It would skip the cen­tral­ized clear­ing­house entire­ly, and keep track of trad­ing, clear­ance, and own­er­ship on everyone’s com­put­ers at once. It would trans­form process­es that now depend on cen­tral­ized insti­tu­tions for trust, and let peo­ple instead trans­act direct­ly with one anoth­er.

By approv­ing these new secu­ri­ties, the SEC has made the fed­er­al government’s first for­ay into reg­u­lat­ing Bit­coin 2.0, a tech­no­log­i­cal force on the cusp of sweep­ing into the main­stream.

When peo­ple talk about the real poten­tial of Bit­coin to trans­form the finan­cial sys­tem, they aren’t talk­ing about a dig­i­tal cur­ren­cy that may or may not ever real­ly take off. They are talk­ing about what Byrne and oth­er Bit­coin 2.0 entre­pre­neurs are try­ing to do.

The engine that pow­ers Medici is a new tech­nol­o­gy called the “blockchain” – the com­plex, nov­el com­put­er code that made Bit­coin pos­si­ble. Unlike an exchange or a clear­ing­house, the blockchain – invent­ed and pub­lished in 2008 by a mys­te­ri­ous cryp­tog­ra­ph­er known only by the pseu­do­nym Satoshi Nakamo­to – is com­plete­ly decen­tral­ized.

The geeks, lawyers and entre­pre­neurs who spend their days think­ing about the blockchain believe that after it’s done with secu­ri­ties mar­kets, it’s poised to dis­rupt the way we make and enforce con­tracts, import and export goods, buy and sell dig­i­tal media, gam­ble and even vote. They say it will be as rev­o­lu­tion­ary as the Inter­net itself, and pose reg­u­la­to­ry chal­lenges that are just as far-reach­ing — not just for Fin­Cen and the SEC, but for Con­gress, the CFPB, the CFTC, the FTC, the FEC and oth­ers. Already, soli­tary tin­ker­ers and For­tune 100 com­pa­nies alike are test-dri­ving appli­ca­tions that will demand the atten­tion of many of these agen­cies.

“For the first time in human his­to­ry, we can have peer-to-peer exchange where trust is not an issue,” says Byrne, who pre­dicts Bit­coin 2.0 will put much of Wall Street out of busi­ness. “This is going to sep­a­rate the men from the boys.”

...

Ulti­mate­ly, the blockchain is like­ly to touch every cor­ner of the fed­er­al gov­ern­ment. In the very near term, the Bit­coin mar­ket itself is begin­ning to take on new and more sophis­ti­cat­ed shapes. For­mer bankers for Gold­man Sachs and Mor­gan Stan­ley, among oth­ers, are devel­op­ing futures in the cur­ren­cy and oth­er deriv­a­tives that could help sta­bi­lize its price. When those hit the mar­ket, they’ll fall under the juris­dic­tion of the CFTC.

Blockchain-based “smart con­tracts,” which will be auto­mat­i­cal­ly self-enforc­ing with­out the need for court inter­ven­tion, will pose their own sets of chal­lenges. Already, Evan Greebel, one of the secu­ri­ties lawyers han­dling the Win­klevoss Bit­coin ETF, said he knows of efforts afoot to cre­ate smart con­tracts for car leas­es that will auto­mat­i­cal­ly pre­vent lessees who default on pay­ments from start­ing their Inter­net-con­nect­ed cars. Sure­ly, the CFPB and Eliz­a­beth War­ren will have some­thing to say about that. Greebel says such con­tracts will have impli­ca­tions for the fed­er­al bank­rupt­cy code as well.

He also pre­dicts that import and export reg­istries will soon migrate to the blockchain, a mat­ter for the Fed­er­al Trade Com­mis­sion to over­see. The tech­nol­o­gy is per­fect for keep­ing track of chains of cus­tody, so say good­bye to your local reg­istry of deeds while you’re at it.

The Nation­al Asso­ci­a­tion of Vot­er Offi­cials is work­ing with a start­up called V Ini­tia­tive that wants to put Amer­i­can elec­tions on the blockchain and let peo­ple vote from their per­son­al devices – a trans­for­ma­tion that goes to the heart of gov­ern­ment. And IBM’s run­ning its Inter­net of Things ini­tia­tive on Ethereum, a new blockchain pro­to­col that’s an alter­na­tive to the orig­i­nal Bit­coin blockchain.

The blockchain’s rad­i­cal decen­tral­iza­tion rais­es a host of new­er and even stranger pos­si­bil­i­ties – for instance, mar­kets or gam­bling net­works that exist only as the shared inter­ac­tions of dozens of users, or mil­lions. It is pos­si­ble that an ille­gal activ­i­ty could arise, even a very large one, with no oper­a­tor to sue, threat­en or shut down.

Because of the immense poten­tial range of appli­ca­tions, the reg­u­la­to­ry tone may have to be set by Con­gress or the White House. Brito of Coin Cen­ter points to the 1997 Frame­work for Glob­al Elec­tron­ic Com­merce, which was cre­at­ed by an inter­a­gency task force in the Clin­ton admin­is­tra­tion and called for min­i­mal gov­ern­ment inter­fer­ence in the Inter­net, as a mod­el for the blockchain. “You could take it word for word,” he says.

Byrne, who holds a PhD in phi­los­o­phy from Stan­ford and made Over­stock the first major retail­er to accept Bit­coin last year, is ready for this brave new world. And he doesn’t believe the SEC, or any­one else, could real­ly hold it back if it tried. The last time Byrne tan­gled with the agency – a stranger-than-fic­tion cru­sade over the inner work­ings of the stock mar­ket that involved orga­nized crime, hedge fund bil­lion­aire Steve Cohen, and a full-page ad in the Wall Street Jour­nal fea­tur­ing the Over­stock CEO hold­ing Star Wars vil­lain Darth Maul’s head in his hands – he pre­vailed. Now, he says the new regime at the SEC is more rea­son­able than the old. He’s con­fi­dent the SEC will approve his stock fil­ing, mark­ing anoth­er baby step in what Byrne calls the “cryp­to-rev­o­lu­tion.”

As for the lat­er stages of that rev­o­lu­tion, in which the blockchain’s most enthu­si­as­tic back­ers pre­dict it will threat­en the liveli­hoods not just of finan­cial mid­dle­men but many gov­ern­ment insti­tu­tions them­selves, Byrne says the world as it is should not be tak­en for grant­ed. “These cen­tral insti­tu­tions didn’t come out of a burn­ing bush.”

And now you know: the blockchain will take over the world. Or at least the finan­cial secu­ri­ties mar­kets. And much of the fed­er­al gov­ern­ment. Maybe even cre­ate decen­tral­ized mar­kets that no one oper­ates and can’t effec­tive­ly can’t be shut down will pop up. And blockchain-based “smart con­tracts,” “which will be auto­mat­i­cal­ly self-enforc­ing with­out the need for court inter­ven­tion”. At least that’s the dream.

And, to the cred­it of Patrick Byrne, none of of these ideas sound near­ly as destruc­tive as the gen­er­al Bit­coin goal of over­throw­ing fiat cur­ren­cy every­where and impos­ing a dig­i­tal gold stan­dard on us all. So that’s pret­ty nice for a change. Not that Bryne would­n’t love to have Bit­coin over­throw fiat cur­ren­cy and impose a dig­i­tal gold-stan­dard too. He’s sort of the the Bit­coin true-believ­er pro­to­type:

Wired
Meet Patrick Byrne: Bit­coin Mes­si­ah, CEO of Over­stock, Scourge of Wall Street

Cade Met­zn
02.10.14 6:30 am.
Patrick Byrne says the zom­bie apoc­a­lypse is com­ing, and there’s one thing that can save us: bit­coin.

He tells me this dur­ing a phone call from his car, a black Tes­la Mod­el S that’s wind­ing its way through the moun­tains above Salt Lake City, on its way to Byrne’s home in the Utah ski coun­try. Byrne is the CEO and chair­man of Salt Lake’s Overstock.com, one of the world’s largest online retail­ers with more than $1.3 bil­lion a year in sales, and he’s about to place an enor­mous bet on bit­coin, the dig­i­tal cur­ren­cy that exists only on the inter­net.

In the esti­ma­tion of many lead­ing econ­o­mists, bit­coin is a fatal­ly flawed idea shaped by peo­ple who don’t real­ly under­stand how mon­ey works. But Byrne is an unortho­dox thinker, a three-time can­cer sur­vivor with a PhD in phi­los­o­phy who’s nev­er been afraid to fight for what the rest of the world sees as com­plete mad­ness. Though he runs a com­pa­ny that’s pub­licly trad­ed on Wall Street, he spent much of the last decade accus­ing Wall Street’s biggest bro­kers of wide­spread cor­rup­tion — not to men­tion Wall Street hedge funds, ana­lysts, reporters, and gov­ern­ment reg­u­la­tors — argu­ing in the most grandil­o­quent terms that their greed would even­tu­al­ly bring the coun­try crash­ing down. It’s no sur­prise that his mav­er­ick career would col­lide with the equal­ly icon­o­clas­tic bit­coin. It’s as if his whole life has been lead­ing to this.

As he dri­ves to his moun­tain cab­in, Byrne reveals that his com­pa­ny is a week away from accept­ing pay­ments in bit­coin, and he sees this as a small but impor­tant step toward a finan­cial rev­o­lu­tion the world so des­per­ate­ly needs. He has long warned that our econ­o­my is hurtling toward anoth­er mas­sive reces­sion — what he calls the zom­bie apoc­a­lypse — and he believes bit­coin can shel­ter us from the fall­out.

If the dig­i­tal cur­ren­cy reach­es its true poten­tial, he tells me, it might even avert this apoc­a­lypse all-togeth­er. “Some­day, either zom­bies walk the Earth or some­thing close to that,” says Byrne, the son of the man who built the GEICO insur­ance empire, Jack Byrne, and a pro­tege of War­ren Buf­fet, the most suc­cess­ful investor in the his­to­ry of Wall Street. “Bit­coin is the solu­tion.”

In recent months, count­less oth­ers have float­ed bit­coin as a panacea for the world’s finan­cial ills. But like Marc Andreessen, one of the found­ing fathers of the web brows­er, who has also put his weight behind the dig­i­tal cur­ren­cy, Byrne brings more than high­fa­lutin metaphors to the table. The 51-year-old has proven that, beneath his won­der­ful­ly enter­tain­ing and often per­plex­ing way of describ­ing the world, he has a knack for see­ing where things are going before oth­ers do.

The prob­lem with the mod­ern econ­o­my, Byrne says, is that it rests on the whims of our gov­ern­ment and our big banks, that each has the pow­er to cre­ate mon­ey that’s backed by noth­ing but them­selves. Thanks to what’s called frac­tion­al reserve bank­ing, a bank can take in $10 in deposits, but then loan out $100. The gov­ern­ment can make more dol­lars at any time, instant­ly reduc­ing the currency’s val­ue. Even­tu­al­ly, he says, lay­ing down a clas­sic lib­er­tar­i­an metaphor, this “mag­ic mon­ey tree” will come crash­ing down.

But bit­coin is dif­fer­ent. It’s like online gold: The sup­ply of the dig­i­tal cur­ren­cy is con­trolled by soft­ware run­ning across a world­wide net­work of com­put­ers, and its val­ue is decid­ed not by the feds or the big banks, but by the peo­ple. “It can make our coun­try more robust,” says Byrne, a dis­ci­ple of the Aus­tri­an school of eco­nom­ics, which holds that our econ­o­my should rest on the judg­ments of indi­vid­u­als, not a cen­tral author­i­ty. “We want a mon­ey that some gov­ern­ment man­darin can’t just whisk into exis­tence with a pen stroke.”

Zom­bies. Mag­ic mon­ey trees. Man­darins. As Byrne admits, it’s a ten-dol­lar answer to my ten-cent ques­tion about his plans for the future of Overstock.com, and although I know the man well, I can’t help but won­der how much of this is just him call­ing atten­tion to him­self. But a week after this phone call, Byrne will make good on his promise, as Over­stock becomes the first major online retail­er to accept pay­ments in bit­coin, let­ting you buy every­thing from patio fur­ni­ture to smart­phone cas­es with the fledg­ling dig­i­tal cur­ren­cy. And the fol­low­ing month, dur­ing Overstock’s quar­ter­ly earn­ings call, he will reveal that he has per­son­al­ly con­vert­ed mil­lions of dol­lars into bit­coin. The Over­stock CEO is plac­ing more than one big bet on an unpre­dictable future, but Byrne has proven him­self pre­scient before — about the inter­net and the media as well as the econ­o­my.

It’s only nat­ur­al that Over­stock would be the first big-name com­pa­ny to embrace bit­coin, and you can bet that Byrne is seri­ous about push­ing the dig­i­tal cur­ren­cy into the every­day world. On one lev­el, Over­stock is your basic bar­gain retail­er, a com­pa­ny that will sell you just about any­thing on the cheap. But under the lead­er­ship of Byrne — who’s not only a doc­tor of phi­los­o­phy but a one­time ama­teur box­er — this is also a com­pa­ny that’s sev­en years into a law­suit that accus­es ven­er­a­ble invest­ment banks Gold­man Sachs and Mer­rill Lynch of a “mas­sive, ille­gal stock mar­ket manip­u­la­tion scheme.”

At times, his bat­tles with Wall Street have left him a lone­ly fig­ure, belit­tled by the estab­lish­ment. For years, large por­tions of the finan­cial press ques­tioned his san­i­ty as he so vehe­ment­ly — and so col­or­ful­ly — claimed that some of the biggest names on Wall Street were com­plic­it in a scheme to dri­ve Over­stock and oth­er com­pa­nies out of busi­ness using a loop­hole in the stock mar­ket. But after the finan­cial crash of 2008, the Secu­ri­ties and Exchange Com­mis­sion moved to close that very hole. And in the years since, Over­stock has estab­lished itself as a prof­itable busi­ness, even as Byrne con­tin­ues his cru­sade against Wall Street.

“He’s not just an opin­ion­at­ed jerk, though it some­times sounds that way,” says Bill Ham­brecht, the invest­ment banker who helped Byrne take Over­stock pub­lic in 2002 using what’s called a Dutch auc­tion, a method that loosens the influ­ence of the big Wall Street banks, pre­vent­ing them from tak­ing their typ­i­cal­ly enor­mous cut of an IPO. “He puts us on a lit­tle bit, just to bring atten­tion to the issues. But he has brought atten­tion to them, and though he has made some wrong cal­cu­la­tions, he’s hung in there, and he has built a real­ly good busi­ness — some­thing I don’t think he’s got­ten prop­er cred­it for.”

Adopt­ing bit­coin is the next step along this same road. As Over­stock embraces the dig­i­tal cur­ren­cy, Byrne pre­dicts it will spur oth­er big names to fol­low its lead, includ­ing rival Ama­zon, and push the world toward a future where bit­coin is a true alter­na­tive to the dol­lar. But, look­ing fur­ther down the road, as he is wont to do, he also believes that the very pub­lic, math-dri­ven sys­tem that under­pins bit­coin can remake Wall Street, elim­i­nat­ing the mar­ket loop­holes he has railed against for so many years.

The Sith Lord

Patrick Byrne calls it his finest moment. In August 2005, dur­ing an hour-long con­fer­ence call, he told an army of investors and reporters that Wall Street was plagued by a cam­paign to exploit a flaw in the stock set­tle­ment sys­tem and make mil­lions at the expense of inno­cent com­pa­nies, includ­ing Over­stock, whose share price was in free-fall. The scheme, he said, was dri­ven by a “Mis­cre­ants Ball” of play­ers, includ­ing hedge funds, finan­cial ana­lysts, gov­ern­ment reg­u­la­tors, pri­vate detec­tives, tri­al lawyers, per­haps the mafia, and even the press itself.

At one point, he went so far as to say that this sweep­ing cam­paign was orches­trat­ed by a sin­gle mas­ter­mind, some­one he called the “Sith Lord.” It became known as the “Sith Lord call.”
Over the pre­vi­ous six months, Byrne had waged an under­ground bat­tle against those he believed were try­ing to bury his com­pa­ny and oth­ers like it. But the call brought his efforts into the main­stream, and it would define Byrne in the pop­u­lar press and across the inter­net for years to come.

Though Byrne sees the call as his finest moment — a moment when he exposed the dark under­bel­ly of the finan­cial world — much of the press paint­ed it as pop­py­cock. The next day, he appeared in the The New York Post with a UFO fly­ing over his head. And as he pushed back in point­ed, clever, and some­times angry ways — insist­ing that the press was com­plic­it in the schemes he was fight­ing, that reporters were too close to the hedge funds and banks they were cov­er­ing — the heat on him only grew.

At one point, he accused For­tune reporter Bethany McLean of “giv­ing Gold­man traders blowjobs.” And this did not lead to more favor­able cov­er­age from For­tune or the rest of the finan­cial media. “Maybe the Sith Lord is actu­al­ly Patrick Byrne him­self — because he has become his own worst ene­my,” McLean lat­er wrote in For­tune in For­tune. “Niet­zsche said it best: ‘Who­ev­er fights mon­sters should see to it that in the process he does not become a mon­ster.’” In The New York Times, vet­er­an finan­cial colum­nist Joe Nocera brand­ed the con­fer­ence call “loony beyond belief” and described Byrne as a men­ace who harassed reporters just to silence crit­i­cism of his com­pa­ny.

In the realm of pub­lic per­cep­tion, it was quite a tum­ble for Byrne. After he launched Over­stock in 1999 — using the inter­net to rein­vent the flea mar­ket busi­ness, sell­ing dis­count and clear­ance and, yes, over­stock goods on the cheap — he was a gold­en boy of the dot-com rev­o­lu­tion, an exec­u­tive with a pedi­gree the finan­cial media couldn’t resist. As a teenag­er, he would skip school to spend after­noons with War­ren Buf­fet, his “Dutch uncle,” whose Berk­shire Hath­away even­tu­al­ly pur­chased his father’s com­pa­ny. He stud­ied Man­darin at Dart­mouth and phi­los­o­phy at Stan­ford, and after he fin­ished his PhD, Buf­fet tapped him to run one of Berkshire’s many com­pa­nies, a mid­west­ern out­fit that made uni­forms for police­man, fire­fight­ers, and the mil­i­tary. “I was the only goy in the schma­ta trade,” Byrne remem­bers. And as the first wave of dot-coms went bel­ly up, his new com­pa­ny used this to its advan­tage, turn­ing many of those bank­rupt dot-coms into sup­pli­ers by snap­ping up their inven­to­ry.

He was also tall and blonde and clas­si­cal­ly hand­some. And he was a three-time can­cer sur­vivor. In his twen­ties, Byrne was diag­nosed with tes­tic­u­lar can­cer, and it metas­ta­sized through­out this body. “His moth­er called me and said: ‘If you want to say good­bye to Pat, this is the week­end. The doc­tor doesn’t expect him to live much longer,’” remem­bers Brown Uni­ver­si­ty pro­fes­sor Ones­i­mo Almei­da, a close friend who first met Byrne in early-’80s Chi­na, sit­ting in the lob­by of the Bejing Hotel. “When we went to see him, he was skin and bones and his voice had changed to this high-pitched squeal. He said: ‘I think that I’m turn­ing this around. I’m start­ing to feel bet­ter.’” After Byrne fought back from this low point, the can­cer returned twice more, and twice more, he fought back. It was a nar­ra­tive the press lapped up time and again.

But after the Sith Lord call, all the praise turned to scorn. In addi­tion to such enor­mous crit­i­cism from For­tune and The Times, he received a con­stant stream of online vit­ri­ol from an army of oth­er news out­lets and pun­dits, includ­ing, most notably, a for­mer Busi­ness­Week reporter named Gary Weiss, who ran a blog that seemed to exist only as a means of belit­tling the Over­stock CEO.

Short Sell­ing Gets Naked

Some call it a cru­sade. Oth­ers call it a jihad. But Byrne calls it his mitz­vah — a holy mis­sion pur­sued for the good of mankind. He launched this cam­paign against many Wall Street prac­tices, but main­ly, he took aim at some­thing called “naked short sell­ing.”

With a short sale, traders bor­row shares and then sell them, antic­i­pat­ing a drop in the price. If it does drop, they can buy back the shares and turn a prof­it. A naked short sale works much the same way — except that traders don’t actu­al­ly bor­row the shares. They sell shares they don’t have, and if this hap­pens in suf­fi­cient num­bers, it can flood the mar­ket with nonex­is­tent shares — “phan­tom stock” — and actu­al­ly dri­ve prices down.

Basi­cal­ly, Byrne was com­plain­ing about a flaw in the stock set­tle­ment sys­tem, the sys­tem that con­trols the deliv­ery of stock from one par­ty to anoth­er. Three days after a trade, a sell­er must deliv­er the shares to the buy­er. But with a naked short sale, this doesn’t hap­pen. Shares are sold but not deliv­ered. Some fail­ures-to-deliv­er are a nat­ur­al part of a rapid-fire trad­ing sys­tem, but mas­sive fail­ures in a spe­cif­ic stock could indi­cate an abu­sive cam­paign to manip­u­late prices. “The stock set­tle­ment sys­tem was a mess,” Byrne says, quot­ing leg­endary investor Char­lie Munger. “It was like hav­ing slop in a nuclear reac­tor.”

Byrne’s stance was that hedge funds and banks were exploit­ing this hole, that reg­u­la­tors and leg­is­la­tors were turn­ing a blind eye to it, and that reporters were ignor­ing the prac­tice, too, if not active­ly sup­port­ing it.

Cer­tain­ly, most of the press dis­cussed naked short­ing as some sort of myth cre­at­ed by Byrne and oth­ers. But even as his father, the one­time chair­man of the Over­stock board, came out against his son’s cam­paign, Byrne kept going, as only he could.

When Busi­ness­Week reporter Tim Mul­laney sent him a list of ques­tions — ques­tions Byrne char­ac­ter­izes as the “are-you-still-beat­ing-your-wife?” vari­ety — the Over­stock CEO prompt­ly pub­lished both ques­tions and answers on the web, effec­tive­ly killing the magazine’s sto­ry. He plant­ed some­one inside a meet­ing of the Soci­ety of Amer­i­can Busi­ness Edi­tors and Writ­ers, record­ing what was said about him — that he need­ed to be stopped — and post­ing that online, too. He cre­at­ed a new com­pa­ny, staffed by his own jour­nal­ists and web mavens, that would do noth­ing but fight his cru­sade, bat­tling the tra­di­tion­al press through a web­site he called Deep Cap­ture — a nod to Byrne’s claim that reg­u­la­tors had been “cap­tured” by Wall Street, that there was a revolv­ing door between the big banks and the top posi­tions at the SEC.

“Mark Twain said: ‘Nev­er get in a pub­lic fight with some­one who buys his ink by the bar­rel,’” Byrne tells me. “I say: ‘Some­one who buys ink by the bar­rel shouldn’t get in a pub­lic fight with a man who buys band­width by the giga­byte.’”

In 2006, when his efforts to expose Wall Street abus­es were rebuffed by Sen­a­tor Richard Shel­by, then chair­man of US Senate’s bank­ing com­mit­tee, Byrne went on nation­al radio and called the Sen­a­tor an “igno­rant crack­er.” He and his Deep Cap­ture team spent years try­ing to prove that his biggest crit­ic, for­mer Busi­ness­Week reporter Gary Weiss, main­tained con­trol over the Wikipedia pages that paint­ed such a neg­a­tive por­trait of Byrne and his cru­sade — and even­tu­al­ly, they suc­ceed­ed, dig­ging up emails impli­cat­ing Weiss and forc­ing his removal from the site. Over­stock itself went so far as to file a $3.48 bil­lion law­suit against Gold­man Sachs, Mer­rill Lynch, and sev­en oth­er prime Wall Street bro­kers, claim­ing they too were com­plic­it in these naked short­ing schemes.

And, then, in the fall of 2008, the mar­ket crashed. The fall­out would cast Byrne’s cru­sade in whole new light.

...

Beyond Bit­coin

Once again, Byrne is look­ing beyond the moment. He argues that bit­coin is an idea that can change more than mon­ey. He believes it can change Wall Street too, putting an end to the cor­rup­tion he has spent so many years fight­ing. And oth­ers agree.

Bit­coin is a cur­ren­cy, like the dol­lar or the euro, and it’s a mon­ey trans­mit­ter, like a cred­it card net­work or Pay­Pal. But at the most basic lev­el, the world­wide soft­ware sys­tem that under­pins bit­coin is real­ly just a means of instant­ly ver­i­fy­ing that you’ve sent some­thing to some­one else. “It allows for the decen­tral­ized proof and trans­fer of own­er­ship,” says Fred Ehrsam, the co-founder of Coin­base, the out­fit that han­dles bit­coin trans­ac­tions on behalf of Over­stock.

Because its ledger of funds is com­plete­ly pub­lic, users always know how much mon­ey there is and where it is. That’s one of the rea­sons Byrne is so attract­ed to it. He knows that, as with gold, the sup­ply is lim­it­ed. Gov­ern­ments and banks can’t make more of it. But as Ehrsam points out, the bit­coin frame­work could also be used for things oth­er than mon­ey — like stocks.

“It so hap­pens that the first appli­ca­tion of this is pay­ments and mon­ey, but it doesn’t have to be,” Ehrsam says. “It could trans­fer a secu­ri­ties, too.” In oth­er words, it would be fea­si­ble to build a bit­coin for the stock mar­ket, a sys­tem that would quick­ly, eas­i­ly, and reli­ably move secu­ri­ties, a sys­tem that would make it clear who owns what at any giv­en time, a sys­tem, in oth­er words, that could com­plete­ly elim­i­nate naked short sell­ing and oth­er schemes like it.

When I toss that idea at Byrne, he tells me that he’s already thought of it, that it could pre­vent an entire ecosys­tem of funds and banks from gam­ing the mar­ket. “It’s like you’re read­ing my mind,” he says. “You would have an instant, fric­tion­less mar­ket, while hav­ing the added ben­e­fit of wip­ing out a whole par­a­sitic class of soci­ety — that is, the whole finan­cial indus­try.”

It’s an out­ra­geous and ridicu­lous­ly ambi­tious idea. But it also makes per­fect sense, and it just might hap­pen. The bit­coin soft­ware is open source, mean­ing any­one can make a copy and mod­i­fy it as they see fit. That includes Patrick Byrne.

Yes, some of the world’s bright­est finan­cial minds ques­tion whether bit­coin even has a future as a dig­i­tal cur­ren­cy. That includes no less a name than New York Times colum­nist and Nobel Prize win­ning econ­o­mist Paul Krug­man, who says it’s not a reli­able store of mon­ey, much less a viable way of mov­ing it from place to place. But that doesn’t phase Byrne. He’s been there so many times before, and he typ­i­cal­ly responds in the same way. “Paul Krug­man was great,” Byrne says, “until he went crazy.”

As we can see, it’s no sur­prise that Patrick Byrne, son of one of War­ren Buf­fet’s pro­teges, real­ly does­n’t like the gov­ern­ment. Espe­cial­ly when the gov­ern­ment start involv­ing itself in things like the mon­ey we all use:

...
The prob­lem with the mod­ern econ­o­my, Byrne says, is that it rests on the whims of our gov­ern­ment and our big banks, that each has the pow­er to cre­ate mon­ey that’s backed by noth­ing but them­selves. Thanks to what’s called frac­tion­al reserve bank­ing, a bank can take in $10 in deposits, but then loan out $100. The gov­ern­ment can make more dol­lars at any time, instant­ly reduc­ing the currency’s val­ue. Even­tu­al­ly, he says, lay­ing down a clas­sic lib­er­tar­i­an metaphor, this “mag­ic mon­ey tree” will come crash­ing down.

But bit­coin is dif­fer­ent. It’s like online gold: The sup­ply of the dig­i­tal cur­ren­cy is con­trolled by soft­ware run­ning across a world­wide net­work of com­put­ers, and its val­ue is decid­ed not by the feds or the big banks, but by the peo­ple. “It can make our coun­try more robust,” says Byrne, a dis­ci­ple of the Aus­tri­an school of eco­nom­ics, which holds that our econ­o­my should rest on the judg­ments of indi­vid­u­als, not a cen­tral author­i­ty. “We want a mon­ey that some gov­ern­ment man­darin can’t just whisk into exis­tence with a pen stroke.”
...

so that’s rather loopy and unhelp­ful.

But as we can also see, Patrick Byrne real­ly, real­ly, real­ly hates Wall Street, and in par­tic­u­lar activ­i­ties like “naked short sell­ing”. And if Patrick Byrne wants to wage a war on naked short sell­ing and oth­er forms of Wall Street manip­u­la­tion and fraud, more pow­er to him.

So that’s going to be part of the fun that emerges as the blockchain inva­sion of the finan­cial world takes place: Pow­er­ful Lib­er­tar­i­ans like Patrick Byrne may be try­ing to sells us all on a new dig­i­tal gold-stan­dard, but that’s not all they’re doing. They also just might end up “Occu­py­ing Wall Street” in a fun­da­men­tal­ly new way. And as long as it does­n’t cre­ate a reg­u­la­to­ry night­mare envi­ron­ment prone to fraud, or maybe even cuts down on fraud, it’s hard to com­plain if Byrne’s bit­coin scheme ends up burn­ing down Wall Street.

But that’s of course a catch: switch­ing over to a Bit­coin-based trad­ing scheme could poten­tial­ly elim­i­nate activ­i­ties like naked short-sell­ing and all sorts of oth­er nefar­i­ous activ­i­ties. Great! But it’s going to be a lot hard­er to keep cheer­ing on the Wall Street blockchain rev­o­lu­tion if the qua­si-anony­mous nature of blockchain-based plat­forms also end up remov­ing the abil­i­ty of reg­u­la­tors to engage in oth­er sorts of use­ful reg­u­la­tions, or reverse illic­it trades when they’re iden­ti­fied. And since its folks like Patrick Byrne that are lead­ing the dig­i­tal charge against the Wall Street sta­tus quo, it’s hard to see how Patrick Byrne’s blockchain rev­o­lu­tion isn’t going to end up being anoth­er Lib­er­tar­i­an tro­jan horse giv­en their activist track records.

And that all rais­es anoth­er ques­tion: If the blockchain-iza­tion of secu­ri­ties trad­ing put a crimp in some ques­tion­able prac­tices like naked short-sell­ing, but it also facil­i­tat­ed all sorts of oth­er forms of ques­tion­able prac­tices (like obscur­ing own­er­ship or what trades actu­al­ly took place to dodge cap­i­tal gains tax­es or what­ev­er), would Wall Street actu­al­ly oppose the embrace of Bit­coin? Is some­one with Patrick Byrne’s “reform” agen­da real­ly a threat to Wall Street?

See­ka Alpha
Patrick Byrne’s Lat­est Con Game: Occu­py Wall Street

Gary Weiss
Nov. 14, 2011 9:45 AM ET

As I point­ed out recent­ly in a Street.com col­umn, Occu­py Wall Street is faced with the con­tin­u­ing chal­lenge of keep­ing itself from being exploit­ed, whether by street crim­i­nals or crack­pots.

So I guess it is inevitable that the stock mar­ket con­spir­acist, Overstock.com (NASDAQ:OSTK) CEO Patrick Byrne, would descend upon Lib­er­ty Plaza, cam­era crew in tow, as he did the oth­er day.

Apart from the Young Turks pro­gram on Cur­rent TV, which obvi­ous­ly did­n’t check too care­ful­ly into Byrne’s back­ground, the lat­est pub­lic­i­ty stunt drew atten­tion only in the blo­gos­phere. It’s a shame, I think, because this must sure­ly be the most bizarre vis­i­tor to glom on to the OWS move­ment.

After all, this is a “lib­er­tar­i­an who was fond of the eco­nom­ic ideas of Mil­ton Fried­man,” a Raw Sto­ry blog­ger not­ed. In oth­er words, an advo­cate of soak-the-poor eco­nom­ic poli­cies is....endorsing Occu­py Wall Street?

Hey, if he was gen­uine­ly in favor of OWS’s agen­da, more pow­er to him. But his aim is not to reform Wall Street or resolve income inequal­i­ty, but to pur­sue his tire­some cru­sade to get Wall Street off the hook for the finan­cial cri­sis, which Byrne lays at the foot of a nefar­i­ous con­spir­a­cy of “naked short sell­ers.”

Byrne told the Young Turks that “Wall Street had Wash­ing­ton, D.C. ‘by the throat’ and was not allow­ing the gov­ern­ment to prop­er­ly reg­u­late the finan­cial sec­tor.”

“ ‘That core mes­sage, which is what I under­stand to be the core val­ue of ‘Occu­py Wall Street,’ is right on the mon­ey,’ Byrne not­ed.”

How­ev­er, what OWS is protest­ing is the real Wall Street, the Wall Street that is respon­si­ble for fore­clo­sures and run­away deriv­a­tives and eco­nom­ic col­laphse, and not the con­spir­a­cy the­o­ries that Byrne has been pro­mot­ing for the past six years.

Indeed, OWS wants busi­ness to be reg­u­lat­ed, and that runs counter to Byrne’s lib­er­tar­i­an phi­los­o­phy and his busi­ness prac­tices. His FUBAR account­ing is the sub­ject of a Secu­ri­ties and Exchange Com­mis­sion inves­ti­ga­tion and Cal­i­for­nia pros­e­cu­tors are suing Over­stock, seek­ing $15 mil­lion from the com­pa­ny for sys­tem­at­ic con­sumer ripoffs.

The oth­er OWS core issues don’t exact­ly work in Byrne’s favor, either.

He is a mem­ber in good stand­ing in the 1%, and favors eco­nom­ic poli­cies, and politi­cians, that would entrench eco­nom­ic inequal­i­ty. Where it gets even more inter­est­ing con­cerns the oth­er OWS core issue, which is the influ­ence of mon­ey in pol­i­tics. Byrne is a poster boy for that cause.

Thanks to the trust fund that he draws from his bil­lion­aire father, for­mer GEICO CEO John Byrne, Patrick Byrne is chief source of fund­ing for the school vouch­er move­ment, a lib­er­tar­i­an, Mil­ton Fried­man-backed move­ment is aimed at toss­ing pub­lic edu­ca­tion on the trash heap. When Utah vot­ers reject­ed school vouch­ers a few years ago, he said that they had failed an “IQ test.”

He is the sin­gle biggest cam­paign con­trib­u­tor in Utah, as the Deseret News point­ed out in a rare skep­ti­cal arti­cle on Byrne back in 2006.

Byrne restricts his con­tri­bu­tions to the hard right, and he expects results for his mon­ey. Byrne “gave $75,000 to [Jon] Hunts­man­’s 2004 guber­na­to­r­i­al cam­paign — by far the most that any indi­vid­ual gave him,” the news­pa­per report­ed.

“Byrne is not only the top indi­vid­ual donor to Hunts­man, he even gave more than the Hunts­man Corp. (which pro­vid­ed $63,634), or any of the gov­er­nor’s fam­i­ly mem­bers,” said the news­pa­per.

Thanks to Byrne’s cash-on-the-bar­rel­head pol­i­tics, the Over­stock CEO pur­chased a spe­cial ses­sion of the Utah leg­is­la­ture to con­sid­er some wacky leg­is­la­tion tar­get­ing his naked short­ing con­spir­a­cy the­o­ries. But then Hunts­man did some­thing unusu­al for a bought-and-paid-for politi­cian.

The Byrne-backed bill was so nut­ty that Hunts­man pulled the plug on it. “There are those who believe Over­stock has been using the Leg­is­la­ture as a dis­trac­tion against its own prob­lems. It rais­es seri­ous ques­tions,” a Utah leg­is­la­tor told the Asso­ci­at­ed Press.

Byrne, all class, called the leg­is­la­tor “a squish” and a “yel­low bel­ly.” In fact, tak­ing on Byrne, and his bucks, showed con­sid­er­able for­ti­tude. But most of Byrne’s out­rage was aimed at the gov­er­nor. After all, he paid good mon­ey for Hunts­man. Dou­ble-cross!

Byrne has been bad-mouthing Hunts­man ever since, and that has been report­ed by the media with­out a word about the rea­son for his ire.

So here we have one of the most nox­ious exam­ples of the inter­sec­tion of mon­ey and pol­i­tics, whose past con­tri­bu­tions have gone to Swift Boat Vet­er­ans for Truth — the smear cam­paign against John Ker­ry — and an assort­ment of far-right pols. After sink­ing his inher­it­ed cash into John McCain’s cof­fers in 2008, in 2010 he fund­ed the Tea Par­ty Repub­li­can sen­ate can­di­date from Utah, Mike Lee, and con­gres­sion­al can­di­date Jason Chaf­fetz, anoth­er ris­ing star of the Tea Par­ty.

Also in 2010 he poured thou­sands from his trust fund into Orrin Hatch­’s polit­i­cal action com­mit­tee, as well as the cam­paign cof­fers of Mitt Rom­ney and the Nation­al Repub­li­can Sen­a­to­r­i­al Com­mit­tee. The lat­ter got $30,400. This year he has endorsed Ron Paul, the fur­thest off the charts Repub­li­can can­di­date,

Oh, and I should men­tion that the lat­est pas­sion of Byrne’s, apart from Ron Paul, is Carl Wim­mer, a con­gres­sion­al can­di­date in Utah who is slight­ly to the right of Genghis Khan..

So why is a far-right Repub­li­can-lib­er­tar­i­an mak­ing nice with Occu­py Wall Street? Sim­ple. His aim is to divert OWS away from gen­uine con­cerns that don’t exact­ly work in his favor — income inequal­i­ty and the role of mon­ey in pol­i­tics — to his nut­ty anti-naked-short­ing cam­paign.

...

Yes, Patrick Byrne, the Wall Street-slay­er, is also a far-right nut job with a long his­to­ry of sup­port­ing the Tea Par­ty. Look out Wall Street!

Stil, it’s pos­si­ble that Byrne’s for­ay into blockchained secu­ri­ties will shake things about in a way that clips the big banks’ wings with­out all the neg­a­tive spillover effects on the rest of soci­ety that we’ve come to expect from the Lib­er­tar­i­an approach. Prob­a­bly not, but who knows.

So maybe we should wish could good luck to Patrick Byrne in his quest to use blochchain tech­nol­o­gy to piss off the banksters. Or maybe we should­n’t wish such luck. It’s not real­ly clear at this point.

But one thing is clear: If Byrne is plan­ning on mak­ing banksters run in fear of the pow­er of Bit­coin tech­nol­o­gy, he’s going to need a lot of luck.

Here’s an inter­est­ing peek into the kind of inner tur­moil the Bit­coin world is expe­ri­enc­ing as the debate over what to do with the lim­it­ed size of the blockchain and con­tin­ues to pit the small-scale min­ers that could see their invest­ments destroyed from an over­ly ambi­tious change to the min­ing rules vs the big boys like 21 Inc that are going to want a vast­ly-increased blockchain size (pos­si­bly with min­i­mal trans­ac­tion fees) in order to thrive.

As the below points out, bat­tle of the blockchain is only get­ting start­ed and it does­n’t nec­es­sar­i­ly have to end with one side win­ning and the oth­er los­ing. Because if one side just decides to “fork” the Bit­coin pro­to­col with their own ver­sion, you might just end up with two com­pet­ing blockchains and no obvi­ous win­ner or los­er. Just two com­pet­ing, increas­ing­ly bit­ter blockchains:

Cryp­to­coin News
A Bit­coin Fork Should be Avoid­ed at All Costs

P. H. Madore
14/06/2015

Any­where you look, there seems to be a con­sen­sus that some­thing has to change with the size of the Bit­coin blocks. Words like “scal­ing” come up a lot, and how we must be able to com­pete with Visa and Mas­ter­Card if every­day peo­ple are ever going to take Bit­coin seri­ous­ly.

While this may be true, there are extrem­ists on both sides of the issue. There are some who advo­cate low­er­ing the block size to 400kb, and there are oth­ers who believe a fork will be nec­es­sary in spite of those opposed. This could be an astro­nom­i­cal­ly bad sit­u­a­tion for Bit­coin. If the major­i­ty of min­ers don’t go along with the fork direc­tion, osten­si­bly Bit­coin-XT, then the new net­work won’t be near as secure and like­ly won’t be as fast as the nodes and min­ers left on the oth­er side of the fork.

In any team sit­u­a­tion, there are going to be peo­ple you don’t like work­ing with. That doesn’t mean you leave and start a new project, sole­ly for that rea­son. Rather, you find a rea­son­able solu­tion to the prob­lem at hand, one that the ele­ment you don’t agree with will even­tu­al­ly accept. As John Light said in my recent CCN pod­cast, there isn’t real­ly a dis­cus­sion on whether or not the block size needs to be increased. The ques­tion is real­ly how and when.

Some of the most die-hard folks in oppo­si­tion of the increase say that the increase could be imple­ment­ed in “a cou­ple of weeks,” but such a posi­tion fails to acknowl­edge exact­ly how long a time that a cou­ple of weeks actu­al­ly is. In trad­ing time, it’s an eter­ni­ty. If you’ve got a cou­ple of weeks which allow the main­stream and anti-Bit­coin press to say the net­work has reached its capac­i­ty, that there is now irrefutable proof that such a solu­tion can’t work for mass usage, then you’ve also got a pris­tine sit­u­a­tion for some­thing even worse: mass exit strate­gies being exe­cut­ed by large hold­ings. A self-eat­ing bear that the val­ue of Bit­coin could like­ly nev­er recov­er from.

And let’s be clear: the fact that such ele­ments raise this as a defense of their posi­tion, that such mea­sures could be tak­en quick­ly, is also an admis­sion that they should be tak­en at all. If you agree that block sizes should be increased at some point in the future, then why can you not agree that they should hap­pen soon­er than that? Is this some play to appear rel­e­vant, or more­over to illus­trate dis­sat­is­fac­tion with oth­er facets of the sit­u­a­tion? Are you say­ing no to the devel­op­ers propos­ing the increase, rather than say­ing no to the actu­al increas­es? Would this be the same if you were the lead devel­op­er, and even your most banal state­ments were echoed by hun­dreds of peo­ple with­in hours of mak­ing them?

Scal­ing is impor­tant, but it’s not all that mat­ters. The oppo­si­tion to block size increas­es have sev­er­al valid rea­sons for their oppo­si­tion, one being that it will increase the cost to min­ers of mining. This is a legit­i­mate con­cern, and there needs to be some evi­dence that min­ers will be com­pen­sat­ed on the oth­er side of it. We need min­ing to main­tain the secu­ri­ty and integri­ty of Bit­coin. It would not be ide­al if only large oper­a­tions could afford to do min­ing. It would not be ide­al if those com­ing to Bit­coin for the first time had to wait hours or days for their first trans­ac­tions to go through.

At the same time, it would not be ide­al if “free trans­ac­tion” con­tin­ues to be a refrain used by those pro­mot­ing Bit­coin. It is not free to move bit­coins as well as it is not free to cre­ate them. It is not free to store the block chain, either, though it cer­tain­ly gets less expen­sive as time goes on. These con­sid­er­a­tions need to be giv­en the respect they deserve. The entire com­mu­ni­ty needs to agree that free trans­ac­tions are non­sense. If you can’t pay a pen­ny to send some mon­ey, why then, real­ly, are you send­ing mon­ey? Per­haps the increased costs of a block size increase should hinge on a manda­to­ry increase in trans­ac­tion fees. If we can now do 100 trans­ac­tions per sec­ond and the manda­to­ry cost of a trans­ac­tion is a pen­ny or half of a pen­ny, wouldn’t min­ers be less like­ly to feel it so neg­a­tive­ly? Wouldn’t they be able to com­pen­sate and, over time, prof­it by this?

The best solu­tion will answer the con­cerns of every­one at once. This sounds impos­si­ble, but it seems that oth­er divid­ed groups man­age it every­day. Obstruc­tion­ists tac­ti­cians need to be ostra­cized. Those who are proven wrong in their posi­tion and then sim­ply dou­ble up with some the­o­ret­i­cal or oth­er­wise unlike­ly rea­son­ing to return to that posi­tion, rather than doing the ratio­nal thing, which is to con­cede it, should be replaced with equal­ly com­pe­tent peo­ple. As Nick Szabo recent­ly said of the whole thing, we need less noise and more sci­ence. The sci­ence seems to dis­prove the dooms­day pre­dic­tions of the anti-increase crowd, and also seems to under­line that it’s not as dire as the oth­er crowd makes it seem either.

...

As we can see, the dis­trib­uted nature of Bit­coin may make for a great “no one con­trols Bit­coin, so it’s filled with puri­ty and good­ness!” sales pitch­es, but it also leaves quite a bit of ambi­gu­i­ty over how to best to achieve the nec­es­sary steps of upgrad­ing the whole sys­tem. And part of the rea­son its so ambigu­ous is that a “hard fork”, where one group of min­ers sim­ply decides to run their own ver­sion of the blockchain pro­to­col, is entire­ly pos­si­ble due to the “no one runs Bit­coin” nature of the sys­tem. Hence the need for op-ed about how bad an idea a “hard fork” would be.

But, of course, it’s worth keep­ing in mind that a “hard fork” isn’t nec­es­sar­i­ly a com­plete dis­as­ter for all involved. For instance, if an enti­ty like 21 Inc that aims to fill the blockchain with micro­trans­ac­tions while also dom­i­nat­ing the min­ing mar­ket (with­out nec­es­sar­i­ly mak­ing most of its mon­ey from min­ing) suc­cess­ful­ly exe­cutes a “hard fork” with a new, big­ger blockchain, that does­n’t nec­es­sar­i­ly kill off the cur­rent blockchain. Blockchains fol­low a pro­to­col, and as long as enough peo­ple keep using the old pro­to­col while oth­er switch over to the new­er “hard forked” pro­to­col, there’s noth­ing stop­ping both blockchains from co-exist­ing from that point for­ward. And here’s the extra prize: If you own bit­coins, and Bit­coin does a “hard fork” that results in two new com­pet­ing blockchains you get to “dou­ble spend” your old bit­coins. Because when a “hard fork” hap­pens, both sides copy ALL of the exist­ing bit­coin his­to­ry unless the new blockchain cre­ators hard code a set of account revi­sions. But assum­ing that does­n’t hap­pen, any exist­ing bit­coin accounts auto­mat­i­cal­ly get copied over to the new blockchain while stay­ing put in the old blockchain.

So who knows, giv­en the “dou­ble-spend­ing” fun and excite­ment that could ensue, maybe the occa­sion­al “hard fork” isn’t going to be such a bad idea for the Bit­coin com­mu­ni­ty. Users might like it. Grant­ed, the min­ers might not like the changes very much, but there’s a grow­ing num­ber of inter­est­ed par­ties that don’t nec­es­sar­i­ly care about min­ing and that’s part of what makes the bit­coin “one-dol­lar-one-vote” sys­tem so inter­est­ing to watch: at the end of the day, bit­coin, which aims to sup­plant all oth­er forms of mon­ey, is itself con­trolled by the prof­it-motives:

FT Alphav­ille
Bit­coin Opec favours 8MB block­size increase
Izabel­la Kamin­s­ka

Jun 16 18:05
Part of the Bit­coin­Ma­nia series

Bit­coin wants to grow. Sad­ly, because the Bit­coin pro­to­col restricts the size of every block mined on the net­work to 1MB, it can’t scale eas­i­ly. There’s a lim­it­ed amount of transactions/data that can be con­sol­i­dat­ed into every block, which cre­ates some­thing of an arti­fi­cial scarci­ty prob­lem.

Some main­tain good old fash­ioned cap­i­tal­ism can resolve the prob­lem. If there’s a lim­it, peo­ple who want to trans­act quick­ly should pay to have their transactions/data pri­ori­tised in the chain.

Min­ers, espe­cial­ly those hav­ing a tough time cov­er­ing their costs these days, favour this approach. Their view is that the soon­er block size is restrict­ed, the soon­er the mar­ket will be able to find a true val­ue for bit­coin trans­ac­tions. Also, it’s not healthy for the min­er net­work to depend on spec­u­la­tive inflows for­ev­er. True min­er rev­enue would be like giv­ing bit­coin a prop­er busi­ness mod­el. It might also help elim­i­nate blockchain spam­ming and free-load­ing.

As per the net neu­tral­i­ty schism, how­ev­er, this approach is not favoured by bit­coin ide­al­ists who insist trans­ac­tions should be kept syn­thet­i­cal­ly cheap (cross-sub­sidised by spec­u­la­tors) to keep peo­ple using the net­work. Nor is it favoured by those cor­po­ra­tions whose own busi­ness mod­els now depend on the bit­coin blockchain’s cost­less state. [There are even those who admit the net­work could become pro­hib­i­tive­ly expen­sive if not total­ly uncom­pet­i­tive if min­ers were to charge fees direct­ly to users.]

This fac­tion con­se­quent­ly wants the block size increased to 20MB, so that trans­ac­tions don’t get crowd­ed out and can stay free for as long pos­si­ble.

Sad­ly for this group, it’s the min­ers who have the pow­er because they’re the ones who con­trol the net­work. Bit­coin may be a con­sen­sus sys­tem, but it is a con­sen­sus sys­tem for a small oli­gop­oly of min­ers (Chi­nese oli­gop­o­sitic min­ers in par­tic­u­lar) not for users.

What we do know is that in the not too dis­tant future a Bit­coin min­ing meeting/election will prob­a­bly be called and votes will be cast on which way to go. If as the users want the 20MB block-size is approved by the net­work, the so-called great “fork­ing” of the chain will occur. If not, trans­ac­tions might start to get pret­ty expen­sive pret­ty quick­ly.

...

And the lat­est news on the cam­paign from comes by way of this alleged procla­ma­tion by a car­tel of Chi­nese min­ers.

Rough­ly trans­lat­ed (cour­tesy of this red­di­tor):

China’s five largest min­ing pools gath­ered today at the Nation­al Con­fer­ence Cen­ter in Bei­jing to hold a tech­ni­cal dis­cus­sion about the ram­i­fi­ca­tions of increas­ing the max block size on the Bit­coin net­work. In atten­dance were F2Pool, BW, BTCChi­na, Huobi.com, and Antpool. After under­go­ing deep con­sid­er­a­tion and dis­cus­sion, the five pools agree that while the block size does need to be increased, a com­pro­mise should be made to increase the net­work max block size to 8 megabytes. We believe that this is a real­is­tic short term adjust­ment that remains fair to all min­ers and node oper­a­tors world­wide.

Why upgrade to 8MB but not 20MB?

1.Chinese inter­net band­width infra­struc­ture is not built out to the same advanced lev­el as those found in oth­er coun­tries.

2.Chinese out­bound band­width is restrict­ed; caus­ing increased laten­cy in con­nec­tions between Chi­na & Europe or the US.

3.Not all Chi­nese min­ing pools are ready for the jump to 20MB blocks, and fear that this could cause an orphan rate that is too high.

The bit­coin min­ers of Chi­na agree that the block­size must be increased, but we believe that increas­ing to 8MB first is the most rea­son­able course of action. We believe that 20MB blocks will cause a high orphan rate for min­ers, lead­ing to hard forks down the road. If the bit­coin com­mu­ni­ty can come to a con­sen­sus to upgrade to 8MB blocks first, we believe that this lays a strong foun­da­tion for future dis­cus­sions around the block size. At present, China’s five largest min­ing pools account for more than 60% of the net­work hashrate. Signed, F2Pool, Antpool,BW,BTCChina,Huobi June 12th, 2015 via http://www.8btc.com/blocksize-increase‑2

The above is inter­est­ing for three rea­sons.

Rea­son 1: Ana­cy­clo­sis.

Rea­son 2: Chi­nese min­ers seem­ing­ly do under­stand that some lev­el of cross sub­sidi­s­a­tion is nec­es­sary if big­ger busi­ness­es and ser­vices are to be bolt­ed onto the blockchain with a view of cul­ti­vat­ing user depen­dence that empow­ers the min­ers in the longer run (in the man­ner of a tra­di­tion­al drug mar­ke­teer), but also that they them­selves are restrict­ed by China’s own net capac­i­ty issue.

Rea­son 3: because it’s all so sim­i­lar to what hap­pens with oil and Opec, and speaks vol­umes for the actu­al “democ­ra­cy” in the sys­tem. (Name­ly, there isn’t any. Chi­na — the Sau­di Ara­bia of bit­coin — dom­i­nates.)

So the Chi­nese min­ing oli­gop­oly is will­ing to let the blockchain grow, just not so much that Chi­na’s lim­it­ed inter­net capac­i­ty ends up knock­ing them out of the min­ing game. That’s a pret­ty strong sign that the bat­tle over the bit­coin blockchain might not be so smooth. Why? Well, increas­ing the size of the blockchain “blocks” from 1MB to 8MB is cer­tain­ly a step in the right direc­tion. But don’t for­get that increas­ing the blockchain size is just one of the key areas Bit­coin needs to improve if it’s going to take over the world of pay­ment pro­cess­ing. Speed­ing up the trans­ac­tion times, which can cur­rent­ly take up to 10 min­utes, is anoth­er key area. So if the Chi­nese min­ing oli­garchs are wor­ried about Chi­na’s lim­it­ed net­work speeds impact­ing their abil­i­ty to mine larg­er blocks, what’s their like­ly response to pro­pos­als to, say, speed up the con­fir­ma­tion times down to a minute?

That’s all part of what makes Bit­coin such a fas­ci­nat­ing exper­i­ment: Bit­coin wants to take over the world. Prof­itably. Using a one-dol­lar-one-vote sys­tem.

Here’s a new bit­coin ser­vice that might leave Wall Street grin­ning with antic­i­pa­tion, but it’s very unclear how the rest of the bit­coin fan base is going to react: The com­pa­ny offer­ing the ser­vice, Ellip­tic, claims to have invent­ed an anti-mon­ey-laun­der­ing ser­vice that can allow banks to know who owns what bit­coin account by scrap­ing the web and dark­net for hints about who owns what. And it’s appar­ent­ly able to iden­ti­fy the bit­coin account own­ers with stun­ning accu­ra­cy:

Busi­ness Insid­er
New bit­coin tech­nol­o­gy can tell banks where coins come from with incred­i­ble accu­ra­cy

Oscar Williams-Grut

Jun. 18, 2015, 4:33 AM

Ellip­tic, a bit­coin ana­lyt­ics and stor­age start­up based in Lon­don, thinks it’s just made a huge break­through that could make banks way more inter­est­ed in bit­coin.

The com­pa­ny has cre­at­ed a sophis­ti­cat­ed bit of soft­ware that it says can iden­ti­fy where a bit­coin has come from. That’s a big deal for banks, which have a legal oblig­a­tion to find out where the mon­ey they hold is com­ing from to ensure they’re not hold­ing pro­ceeds of crime.

Bit­coin isn’t untrace­able — every trans­ac­tion is record­ed on a pub­lic ledger called the blockchain. But the dig­i­tal wal­lets that car­ry out trans­ac­tions are anony­mous, mak­ing it extreme­ly dif­fi­cult to actu­al­ly make sense of the data. You could do some dig­ging around and make a guess, but it’s hard and time-con­sum­ing.

That means banks have been wary about hold­ing bit­coin — if they take a bit­coin that’s just been earned sell­ing drugs in a dark web mar­ket like Silk Road 2.0, or that has passed through a known mon­ey-laun­der­ing ser­vice, they could end up in huge trou­ble with reg­u­la­tors.

Ellip­tic says its tool, built by 4 PhD hold­ers, can make a huge­ly accu­rate guess as to who each wal­let belongs to — and it can do so in real-time. Using machine-learn­ing, its soft­ware crunch­es through the web and dark web, skim­ming ref­er­ences to wal­lets and oth­er dig­i­tal clues to build up a pic­ture of the own­er.

Tom Robin­son, Ellip­tic’s cofounder, told Busi­ness Insid­er the tool could be a “game chang­er for the insti­tu­tion­al­i­sa­tion of bit­coin.” If banks can sat­is­fy anti-mon­ey laun­der­ing reg­u­la­tion then they can start to think about han­dling bit­coin. The tool was cre­at­ed after con­ver­sa­tions with dozens of lenders.

Ellip­tic has today released a visu­al­i­sa­tion tool show­ing the flow of bit­coin between enti­ties over the entire six- year his­to­ry of bit­coin, nam­ing the 250 largest enti­ties where bit­coins are sent to and from.

...

In an emailed state­ment on Thurs­day, Ellip­tic’s CEO James Smith said “if dig­i­tal cur­ren­cy is to take its legit­i­mate place in the enter­prise it inevitably must step out of the shad­ows of the dark web. Our tech­nol­o­gy allows us to trace his­toric and real-time flow, and rep­re­sents the tip­ping point for enter­prise adop­tion of bit­coin.

He added: “We have devel­oped this tech­nol­o­gy not to incrim­i­nate nor to pry; but to sup­port busi­ness­es’ anti-mon­ey laun­der­ing oblig­a­tions. Com­pli­ance offi­cers can final­ly have peace of mind, know­ing that they have per­formed real, defen­si­ble dili­gence to ascer­tain that their bit­coin hold­ings are not derived from the pro­ceeds of crime.”

We’ll find out if Ellip­tic’s ser­vice lives up to the hype, but it’s a reminder that the quest to turn bit­coin into the dom­i­nant cur­ren­cy of finan­cial world while main­tain­ing bit­coin’s sta­tus as the dig­i­tal cur­ren­cy of choice for the dig­i­tal under­world isn’t real­ly going to an option unless mon­ey-laun­der­ing is basi­cal­ly legal­ized. Or, rather, unless mon­ey-laun­der­ing is for­mal­ly legal­ized (It’s already basi­cal­ly legal­ized).

For-prof­it micro­fi­nanciers for the glob­al poor had bet­ter watch out: they have com­pe­ti­tion. Sharia-com­pli­ant com­pe­ti­tion. Sharia-com­pli­ant micro­fi­nance com­pe­ti­tion that uses Bit­coin for some strange rea­son:

Coin­Tele­graph
Bit­coin Brings ‘100% Math­e­mat­i­cal Cer­tain­ty’ to Com­ply With Islam­ic Law

Jamie Red­man

2015-06-25 03:33 PM

Coin­Tele­graph spoke with Matthew J. Mar­tin on why Bit­coin is bet­ter for finan­cial ser­vices com­pa­nies that want to attract Mus­lim clients and offer “sharia-based” finan­cial prod­ucts.

Matthew J. Mar­tin is the founder of the start­up Blos­som Finance that uses Bit­coin to help Mus­lims with Islam­ic finan­cial law. Blos­som Finance, is a micro­fi­nance firm based in Indone­sia. The com­pa­ny col­lects cap­i­tal from investors all around the world and for­wards the funds to micro­fi­nance insti­tu­tions for invest­ments. After an annu­al cycle the com­pa­ny dis­trib­utes prof­its back to investors.

With Bit­coin, Mar­tin says “trans­ac­tion fees are con­sid­er­ably low­er” and also offers greater trans­paren­cy due to its pub­lic ledger. By using micro-financiers, Blos­som does not break its cus­tomers’ reli­gious law of col­lect­ing inter­est.

Coin­Tele­graph: How are you build­ing a busi­ness using Bit­coin and pro­vid­ing assur­ance to oth­ers that they are not break­ing Islam­ic Law?

Matthew J. Mar­tin: Blos­som uses bit­coin to move mon­ey cheap­ly across bor­ders and to main­tain a pub­licly ver­i­fi­able ledger of those move­ments. We also use bit­coin mul­ti-sig wal­lets for escrow pur­pos­es. Unlike exist­ing crowd-sourced micro­fi­nance plat­forms which are essen­tial­ly a “black box,” bit­coin offers ver­i­fi­able proof of move­ment of funds.

Regard­ing sharia, it’s impor­tant to under­stand the five key prin­ci­ples of Islam­ic finance which include:

No inter­est (usury)
No exces­sive uncer­tain­ty (“gharar”)
No harm to soci­ety (alco­hol, gam­bling, pornog­ra­phy, etc...)
Own­er­ship of under­ly­ing assets (no mar­gin trad­ing / no frac­tion­al reserve bank­ing)
Prof­it and loss shar­ing

Our mod­el is quite sim­ple in terms of sharia com­pli­ance. We use a struc­ture called Mudara­ba, which is uni­ver­sal­ly accept­ed amongst schol­ars as the ide­al mode of sharia financ­ing. The Mudara­ba struc­ture does not car­ry inter­est, but rather shares prof­its and the risk of loss­es between the investor and the entre­pre­neur.

A Mudara­ba is a prof­it-shar­ing struc­ture where an investor pro­vides cap­i­tal to an entre­pre­neur for a project in exchange for a per­cent­age of any prof­its gen­er­at­ed. This struc­ture was used by Prophet Mohamed as an entre­pre­neur with an investor named Khadi­ja (who lat­er became his wife) to embark on a car­a­van trad­ing jour­ney and sell the wares in exchange for shar­ing the prof­its with Khadi­ja. He lat­er nar­rat­ed this as an exam­ple to his close com­pan­ions.

Blos­som only invests in sharia com­pli­ant busi­ness­es, which are not engaged in pro­hib­it­ed activ­i­ties. Our micro­fi­nance part­ners in Indone­sia con­duct due dili­gence on each appli­cant to ver­i­fy their busi­ness activ­i­ties.

One nice aspect of bit­coin is that it ensures own­er­ship of under­ly­ing assets with 100% math­e­mat­i­cal cer­tain­ty. Our micro­fi­nance part­ners and ben­e­fi­cia­ry busi­ness­es have the guar­an­tee that the mon­ey invest­ed into them is not done on mar­gin or with frac­tion­al reserve prac­tice, but rather its exis­tence as a real asset is pub­licly ver­i­fi­able using the blockchain.

CT: Can you give a descrip­tion of Blos­som Finance and how you imple­ment Bit­coin tech­nol­o­gy?

MM: Blos­som crowd-sources cap­i­tal and invests it into prof­itable micro­fi­nance in Indone­sia using a sharia mod­el. Cap­i­tal providers are accred­it­ed indi­vid­u­als and insti­tu­tions — we pool their invest­ments into a “fund” and invest the fund via our micro­fi­nance part­ners to help finance small busi­ness­es in Indone­sia.

Our micro­fi­nance part­ners in Indone­sia act as micro-banks (sim­i­lar to cred­it unions in the USA); they man­age the retail rela­tion­ship on the ground and take care of indi­vid­ual under­writ­ing and ser­vic­ing of the invest­ments. Unlike a P2P mod­el, Blos­som’s fund mod­el means investors aren’t exposed to indi­vid­ual risks; even if one ore more busi­ness­es oper­ate at a loss, it does­n’t impact the over­all prof­itabil­i­ty of the fund.

Rates of return aver­age between 7%-12% in 12 months. Investors receive month­ly pay­ments of prof­it as soon as 30 days after invest­ing, and their prin­ci­pal invest­ment is returned after 12 months, which allows it to be re-deployed to finance mul­ti­ple busi­ness­es dur­ing its life­time.

Blos­som uses bit­coin to man­age the flow of funds includ­ing remit­tance, escrow ser­vices, and for­eign exchange. Bit­coin helps us reduce the cost of invest­ing cap­i­tal over­seas and return­ing it prof­itable. This ensures more mon­ey goes direct­ly towards help­ing build and grow small busi­ness­es rather than ser­vice fees just to move mon­ey around.

“[R]etail and crowd-sourced sharia finance has the abil­i­ty to com­plete­ly leapfrog con­ven­tion­al finan­cial tech­nol­o­gy.”

CT: How did you get con­vert­ed into Islam and Bit­coin Tech rough­ly around the same time?

MM: This was pure­ly a coin­ci­dence. I became Mus­lim maybe half a year or so before hear­ing about Bit­coin. I was work­ing at Boku, which is a mobile pay­ments com­pa­ny — so finan­cial tech­nol­o­gy news was some­thing on our radar. I got excit­ed about Bit­coin right from the start, but my ini­tial excite­ment was more dri­ven by the prospects of bit­coin as a tech­nol­o­gy.

It was only lat­er on after learn­ing more about sharia finance that I real­ized bit­coin is very inter­est­ing from the per­spec­tive of sev­er­al of the key prin­ci­ples in Islam­ic finance includ­ing reduc­ing exces­sive uncer­tain­ty and own­er­ship of under­ly­ing assets.

As a whole, retail sharia bank­ing is under­de­vel­oped — and I believe it has the poten­tial to com­plete­ly leapfrog the con­ven­tion­al bank­ing route and jump straight to dig­i­tal cur­ren­cy. Much in the same way mobile phones leapfrogged land­lines and mobile mon­ey leapfrogged con­ven­tion­al bank­ing in Africa, retail and crowd-sourced sharia finance has the abil­i­ty to com­plete­ly leapfrog con­ven­tion­al finan­cial tech­nol­o­gy.

“[I]n some Mus­lim major­i­ty coun­tries there are vir­tu­al­ly no sharia finan­cial prod­ucts.”

CT: Can you explain in a short sum­ma­ry how the Islam­ic laws affect a Mus­lims busi­ness and regard­ing inter­est?

MM: Islam pro­hibits loans with inter­est. This means financ­ing from con­ven­tion­al banks is a no-no for Mus­lim busi­ness­es. Islam advo­cates invest­ment struc­tures, because they encour­age via­bil­i­ty of the under­ly­ing project and risk-shar­ing.

Unfor­tu­nate­ly sharia finance is not always as avail­able as con­ven­tion­al bank­ing prod­ucts. For exam­ple, in Indone­sia (which is 90% Mus­lim) less than 10% of finan­cial prod­ucts are sharia. This means there is a lack of access for busi­ness own­ers who want to com­ply with the sharia. In the US there is almost zero avail­abil­i­ty of sharia finan­cial prod­ucts. Even in the Mid­dle East, there are many con­ven­tion­al loan-based prod­ucts that are mis­la­beled as sharia and in some Mus­lim major­i­ty coun­tries there are vir­tu­al­ly no sharia finan­cial prod­ucts. I’ve writ­ten a com­par­i­son of “equi­ty financ­ing” ver­sus “debt financ­ing” on my blog..

CT: You are now based in Indone­sia can you tell us a lit­tle about this move?

MM: Indone­sia is the world’s most pop­u­lous Mus­lim coun­try, with over 220 Mil­lion mus­lims. Only 80% of Indone­sians have a bank account. There’s a huge demand for micro­fi­nance, but a lack of deploy­able cap­i­tal. We’re help­ing meet that demand head on by crowd­sourc­ing inter­na­tion­al cap­i­tal and invest­ing it into Indone­sian small busi­ness­es using a sharia mod­el. This means Mus­lims can get financ­ing for their busi­ness in a way com­pat­i­ble with their reli­gion.

We start­ed in the USA, but the mar­ket oppor­tu­ni­ty in the USA for sharia finan­cial prod­ucts is quite lim­it­ed. Finan­cial ser­vices are heav­i­ly reg­u­lat­ed and expen­sive to launch, so it only makes sense to invest in devel­op­ing finan­cial ser­vices prod­ucts in mar­kets with mass appeal.

On a side note, Indone­sia is a great place to build a start­up. The cost of liv­ing is low, and the food is fan­tas­tic. I high­ly rec­om­mend more entre­pre­neurs con­sid­er relo­cat­ing to Indone­sia to extend their run­way by 3 or 4 times what they’d man­age in San Fran­cis­co.

...

So the rates of return for Blos­som’s micro­fi­nance investors is about 7%-12% and the prin­ci­pal is returned after 12 months?:

...
Rates of return aver­age between 7%-12% in 12 months. Investors receive month­ly pay­ments of prof­it as soon as 30 days after invest­ing, and their prin­ci­pal invest­ment is returned after 12 months, which allows it to be re-deployed to finance mul­ti­ple busi­ness­es dur­ing its life­time.
...

That’s quite return for a one year com­mer­cial loan to a poor per­son. But appar­ent­ly its usury-free, which is a nice very fea­ture com­pared to some of the oth­er micro­fi­nance oper­a­tions out there if that’s real­ly the case, espe­cial­ly since Blos­som takes its own 20% cut on the returns too.

It will also be inter­est­ing to see how attrac­tive bit­coin ends up being as the mid­dle-man “cur­ren­cy” of choice for loans. Because the way Blos­som is struc­ture, the investors or loan recip­i­ents won’t actu­al inter­act with any bit­coins. The bit­coins are used to trans­mit the invest­ments glob­al­ly, also also used for man­ag­ing the escrow ser­vices:

...

Blos­som uses bit­coin to man­age the flow of funds includ­ing remit­tance, escrow ser­vices, and for­eign exchange. Bit­coin helps us reduce the cost of invest­ing cap­i­tal over­seas and return­ing it prof­itable. This ensures more mon­ey goes direct­ly towards help­ing build and grow small busi­ness­es rather than ser­vice fees just to move mon­ey around.

...

And the investor funds will appar­ent­ly be held in bit­coin escrow until dis­persed, which sug­gests that at least some of the invest­ed funds are going to be sub­ject to not just any cur­ren­cy risk but bit­coin cur­ren­cy risks. Maybe that’s not actu­al­ly how Blos­som will work, but it sounds like bit­coin is going to play a cen­tral role as, effec­tive­ly, Blos­som’s “bank” for funds yet to be lent. And Bit­coin is one of the most volatile ‘cur­ren­cies’ in exis­tence. Yikes.

Despite all that, if Blos­som real­ly does end up tak­ing the usury out of micro­fi­nance, good for Blos­som. It may not be near­ly as appro­pri­ate as glob­al grants for the poor, but if it’s real­ly usury-free it will be a big improve­ment.

Gavin Andresen, Bit­coin’s chief devel­op­er, made some big Bit­coin news at the end of May: Andresen announced to the world that, unless the Bit­coin com­mu­ni­ty could come to a con­sen­sus on how to increase the size of the block­hain “blocks”, Andresen would aban­don devel­op­ment of the cur­rent “Core” bit­coin soft­ware and lob­by every­one to switch over to ‘Bit­coin XT’, an alter­na­tive ver­sion of the Bit­coin code with much big­ger blocks. So the chief devel­op­er and advo­cate of Bit­coin is threat­en­ing a “hard fork” show­down unless con­cen­sus emerges:

Coin Tele­graph
Andresen Will Shift Efforts to Bit­coin Fork, If No Con­sen­sus Reached on Block Size

Author Aaron van Wirdum
2015-05-30 12:57 PM

In an announce­ment made on the Bit­coin devel­op­ment mail­ing list, Bit­coin core devel­op­er and Bit­coin Foun­da­tion chief sci­en­tist Gavin Andresen sug­gest­ed that, if the devel­op­ment com­mu­ni­ty could reach no con­sen­sus on increas­ing the one-megabyte block size lim­it, he would shift his efforts from the main Bit­coin imple­men­ta­tion (Bit­coin core) to the alter­na­tive Bit­coin-Xt imple­men­ta­tion.

Such a move could rep­re­sent a water­shed moment for Bit­coin as a whole, as it would mean that its for­mer lead devel­op­er would effec­tive­ly leave his own project to join a forked ver­sion.

Bit­coin-Xt is a patch placed on top of Bit­coin core and devel­oped by Mike Hearn, devel­op­er of Light­house and Bit­coinj. While Hearn is a vocal pro­po­nent for an increase in the block size lim­it, Andresen’s con­tri­bu­tion to the mail­ing list does not spec­i­fy what the new max­i­mum block size on Bit­coin-Xt would be.

He does indi­cate that he will not set­tle for 20-megabyte blocks, as he pro­posed for Bit­coin core. Instead, Andresen will like­ly push for an addi­tion­al auto­mat­ic increase of the lim­it, pos­si­bly by 40% per year, as he has also pre­vi­ous­ly pro­posed for Bit­coin core. He wrote:

“If we can’t come to an agree­ment soon, then I’ll ask for help reviewing/submitting patch­es to Mike’s Bit­coin-Xt project that imple­ment a big increase now that grows over time so we may nev­er have to go through all this ran­cor and debate again.”

In order to ensure Bit­coin-Xt will gain trac­tion and even­tu­al­ly over­take Bit­coin core, Andresen announced he would lob­by influ­en­tial enti­ties with­in the Bit­coin ecosys­tem to adopt Bit­coin-Xt and big­ger blocks. These enti­ties would include min­ing pools, exchanges, pay­ment providers and wal­let ser­vices. If suc­cess­ful, Andresen would pre­sum­ably force oppo­nents of the increase to join the net­work with big­ger blocks — or end up iso­lat­ed on an “old” ver­sion of Bit­coin. As Andresen put it:

“The pur­pose of that process is to prove to any doubters that they’d bet­ter start sup­port­ing big­ger blocks or they’ll be left behind, and to give them a chance to upgrade before that hap­pens.”

...

Note that Andresen had pro­posed a 20-fold increase in the blockchain block size (from 1 MB to 20 MB) ear­li­er in May, so when he asserts that

...
He does indi­cate that he will not set­tle for 20-megabyte blocks, as he pro­posed for Bit­coin core. Instead, Andresen will like­ly push for an addi­tion­al auto­mat­ic increase of the lim­it, pos­si­bly by 40% per year, as he has also pre­vi­ous­ly pro­posed for Bit­coin core
...

Andresen is actu­al­ly mak­ing a pret­ty inter­est­ing threat because at 40% annu­al growth, the blockchain would­n’t hit 20 MB for anoth­er 9 years, but just keep grow­ing and grow­ing and grow­ing indef­i­nite­ly after that. So if you’re a min­er that does­n’t like the idea of imme­di­ate­ly increas­ing the blockchain 20-fold, a counter offer that would dra­mat­i­cal­ly slow that growth but also cause it to grow indef­i­nite­ly must be a rather dif­fi­cult com­pro­mise offer/threat to ass­es.

Still, that’s just Andresen’s threat of what he would do if no con­sen­sus emerged on his pro­pos­al to increase the blockchain blocks from 1 MB to 20 MB. Con­sen­sus still might emerge. But, of course, if Gavin Andresen felt he had to issue the ‘Bit­coin XT’ threat in the first place, it’s also very pos­si­ble
that con­sen­sus might not emerge:

Coin Tele­graph
US vs. Chi­na: The 20 MB Min­er War That Could Destroy Bit­coin (Op-Ed)

Author Evan­der Smart
2015-06-15 04:35 PM

The world’s two largest economies; two of the three most pop­u­lat­ed coun­tries on earth; much more impor­tant­ly: the world’s two largest Bit­coin min­ing com­mu­ni­ties lock­ing horns in a strug­gle for pow­er and con­trol over the Bit­coin blockchain.

The Far East ver­sus the West; the Unit­ed States ver­sus Chi­na: a clas­sic bat­tle of glob­al super­pow­ers that may not have a win­ner, but may take the world’s first glob­al cur­ren­cy down in the dig­i­tal cross­fire.

Pos­si­ble implo­sion

The issue of Bit­coin block size is com­ing to a head with­in a mat­ter of days. Could a bat­tle over block size between West­ern busi­ness­es and East­ern min­ers leave Bit­coin in dan­ger of self-destruc­tion?

Mike Hearn, a Bit­coin core devel­op­er, says it is high­ly unlike­ly, but yes, it is pos­si­ble. Speak­ing to Epi­cen­ter Bit­coin in episode #82 recent­ly, Hearn laid out the poten­tial sce­nario for an implo­sion of Bit­coin, how­ev­er unlike­ly.

The issue lies in the need for block size main­te­nance to pre­vent a log­jam of trans­ac­tions with­in the next year. Bit­coin blockchains can cur­rent­ly only han­dle sev­en trans­ac­tions per sec­ond, and at cur­rent trans­ac­tion rates, this will exceed the cur­rent 1 MB block size some­time next year. A raise to 20 MB has been pro­posed by core devel­op­ers Hearn and Gavin Andresen.

The prob­lem with the ten­ta­tive plan of expan­sion is the over­all effect on the min­ing indus­try, par­tic­u­lar­ly in Chi­na, where report­ed­ly 80% of all glob­al Bit­coin trad­ing vol­ume takes place. Mar­gins are thin after a year of price cor­rec­tion since the Mt. Gox col­lapse, and the vast major­i­ty of major Chi­nese min­ers and exchanges are in oppo­si­tion to a mas­sive increase in block size. The 20-times larg­er blocks would go from almost full to most­ly vacant, caus­ing some short-term issues for min­ers. Hearn explained:

“The worst-case sce­nario is the eco­nom­ic major­i­ty is in favor, but the hash-pow­er min­ing major­i­ty is not. That would be a very messy sit­u­a­tion for Bit­coin. If the needs of the wider major­i­ty diverge from what the min­ers in Chi­na want, who wins? In a worst-case sce­nario, if the min­ers and the rest of the Bit­coin com­mu­ni­ty end up in some full-fledged war that would wreck Bit­coin.”

Worst-case sce­nario

Bit­coin min­ers in Chi­na have rel­a­tive­ly poor Inter­net access com­pared to the U.S., so West­ern min­ers and busi­ness­es may require more block space than Chi­na to run trans­ac­tion­al oper­a­tions. The bulk of Bit­coin busi­ness­es reside in the West, and the bulk of bit­coin min­ers are in Chi­na, cre­at­ing a War-of-the-Worlds sce­nario.

This could gen­er­ate a “fork” in the blockchain, with the 20 MB blocks start­ing a new chain. Busi­ness­es would have to be con­vinced to fol­low it and get off the orig­i­nal blockchain that has been in ser­vice since 2009. The orig­i­nal blockchain might remain at 1 MB indef­i­nite­ly.

The­o­ret­i­cal­ly, the strength behind both chains would leave a frac­ture with­in Bit­coin that may nev­er be repaired. With both chains agree­ing to dis­agree, this may cause irrepara­ble long-term dam­age to the demand and val­ue of the entire pro­to­col. Again, this is a worst-case sce­nario, but still pos­si­ble.

Hearn also states in the inter­view that a Bit­coin XT update with min­er vot­ing rights will be sent out this week. It will allow min­ers to vote for or against the 20 MB block size increase. Hearn believes a major­i­ty of min­ers and users are in favor, accord­ing to his pre­lim­i­nary esti­mates and dis­cus­sions with prin­ci­ples, but the vot­ing out­come will con­firm the facts. If a clear major­i­ty shows for the block increase, he said, it will begin to prop­a­gate short­ly after that.

Hearn worked for sev­en years man­ag­ing net­work capac­i­ty for Google, before becom­ing a core devel­op­er for Bit­coin, so he has ample expe­ri­ence in this field at the high­est lev­el. He men­tions speak­ing to Satoshi Nakamo­to about the 1 MB block lim­it ear­ly on in Bitcoin’s devel­op­ment, and says that Nakamo­to believed the 1 MB block size was only need­ed tem­porar­i­ly, not as a long-term gov­er­nor.

Giv­en the sea­son­al influx­es of bit­coin trans­ac­tions dur­ing the win­ter, Bit­coin will be essen­tial­ly at the max­i­mum net­work capac­i­ty ear­ly next year, accord­ing to Hearn. At that point, trans­ac­tions may take hours instead of min­utes, and resend­ing of dupli­cate trans­ac­tions may exac­er­bate the log­jam effect, if not planned for in advance.

Increase, but by how much?

Gen­e­sis Min­ing — with min­ing farms in Europe, Asia and the U.S. and head­quar­ters in Hong Kong — con­duct­ed a poll of their min­ers on the 20 MB block size issue ear­li­er this month. They found an over­whelm­ing major­i­ty, 87%, agreed with the pro­posed 20 MB block size increase.

Accord­ing to Gen­e­sis, the dis­ad­van­tage of big­ger blocks is that they will destroy the mar­ket for trans­ac­tion fees. If block space is not scarce, a mar­ket for trans­ac­tion fees will not be estab­lished. Thus, the block reward might dwin­dle in the long run.

Also, require­ments for full nodes will increase, requir­ing big­ger blocks with much more band­width, mak­ing it hard­er to run a full node so some short-term issues would be expect­ed.

Increas­ing the block size will increase capac­i­ty that is cur­rent­ly too low to sup­port a glob­al pay­ment net­work. Cur­rent trans­ac­tion amounts are not suf­fi­cient to sup­port a mas­sive glob­al pay­ment net­work. Trans­ac­tion fees would become more expen­sive, cater­ing only to larg­er set­tle­ments between large, cen­tral­ized mar­ket play­ers.

Greater block size will also increase the total trans­ac­tion fees. Allow­ing many trans­ac­tions in one block will increase the total amount of fees, which will be a ben­e­fit for min­ers in the long run.

...

How was 20 MB decid­ed upon? And is it too much, too soon? Can the same be accom­plished with an increase of 8 MB? A 20-fold increase is mas­sive, and, in the­o­ry, I can under­stand the con­ster­na­tion amongst some min­ers. There is a price for progress, but both sides should work togeth­er on a res­o­lu­tion. There has to be a mid­dle ground between the sta­tus quo and a 20-fold size increase.

So it’s the users vs the min­ers in the great Bat­tle of the Bit­coin Blockchain Bloat. And as we can see, it’s not going to be easy since the Chi­nese min­ers dom­i­nate the min­ing sec­tor and 80% of the the bit­coin trans­ac­tions are report­ed­ly yuan-dri­ven. And note one of the key con­cerns the min­ers have regard­ing the pro­posed 1MB to 20MB increase in the block­hain ‘blocks’:

...
Accord­ing to Gen­e­sis, the dis­ad­van­tage of big­ger blocks is that they will destroy the mar­ket for trans­ac­tion fees. If block space is not scarce, a mar­ket for trans­ac­tion fees will not be estab­lished. Thus, the block reward might dwin­dle in the long run.
...

It’s a reflec­tion of ten­sion that’s only going to grow if Bit­coin sur­vives for anoth­er cou­ple of decades. Right now, min­ers are paid some in fees (although most trans­ac­tions are still free) and most­ly in the fresh­ly mint­ed bit­coins that get award­ed to the lucky min­ing pool that “mines” each block. But by 2040, all 12 mil­lion bit­coins are going to be mined and at that point min­ing fees are going to be the only way min­ers make mon­ey. And at that point, the min­ing com­mu­ni­ty have a finan­cial incen­tive to keep the block­hains almost big enough but not quite. Why? Because the one of the great­est incen­tives for pay­ing a min­ing “fee” (bit­coins allo­cat­ed to the bit­coin min­er by the per­son send­ing the bit­coin) is to speed up your bit­coin trans­ac­tion.

So unless Bit­coin impos­es an auto­mat­ic fee that every­one has to pay for every trans­ac­tion, the pro­posed short-term fix of increas­ing the blockchain blocks 20-fold, which is vast­ly more capac­i­ty than is cur­rent­ly, rep­re­sent a busi­ness mod­el that poten­tial­ly under­mines the long-term prof­itabil­i­ty for the entire bit­coin min­ing sec­tor. In oth­er words, it you’re a Bit­coin min­er, you def­i­nite­ly want the blockchain size to increase enough to avoid a com­plete back­log that caus­es trans­ac­tions to take poten­tial­ly hours to clear, but you only want to increase it just enough to avoid a dis­as­ter while still main­tain­ing block space scarci­ty, some­thing eas­i­er said than done as we can see from Bit­coin’s cur­rent conun­drum and a busi­ness mod­el like that may not be pos­si­ble using the Bit­coin XT code that auto­mat­i­cal­ly dou­bles the block chain size every 2 years.

Also keep in mind that the size of the blockchain blocks are only one of the vari­ables that are invari­ably going to be tweaked in the long run. The rate at which each new blockchain is pro­duced, which is cur­rent­ly about 10 min­utes per block on aver­age, is also going to have to be sped up if Bit­coin is ever going to have an com­mer­cial appli­ca­tions. Who wants to wait 10 min­utes at the store for your bit­coin trans­ac­tion to clear? And so there’s one oth­er obvi­ous way to deal with the blockchain size lim­it: speed up the trans­ac­tions. Instead of a 20-fold increase in block size, why not a 20-fold decrease in min­ing com­plex­i­ty so each trans­ac­tion only takes 30 sec­onds? That way, even if the vol­ume of request­ed trans­ac­tions exceeds the block­hain, users won’t have to wait too long for their trans­ac­tions to clear. But, more impor­tant­ly for the min­ers, users could more eas­i­ly be incen­tivized to pay a “pri­or­i­ty send” trans­ac­tion fee because they could end up have to wait for mul­ti­ple “blocks” to get processed before their trans­ac­tion gets cleared. But if they don’t pay a fee, or pay a very low fee, users could still have their trans­ac­tions cleared in a rea­son­able amount of time. So by speed­ing up the block “min­ing” time, but keep­ing the blockchains at or near full capac­i­ty, Bit­coin’s min­ers could have in place a struc­ture that encour­ages high­er fees for faster clear­ances with­out mak­ing trans­ac­tions in bit­coins painful­ly slow for the low/no fee trans­ac­tions.

But, of course, just as increas­ing the block size is gen­er­at­ing all sorts of Bit­coin com­mu­ni­ty ten­sions, there are prob­lems with the speed-up approach too. The pay­ments of mined coins would have to be reduced or else all of the bit­coins would prob­a­bly be mined by 2020. And as trans­ac­tion speeds accel­er­ate, issues of inter­net speed could become more acute, at least for coun­tries like Chi­na with slow­er inter­net speeds, espe­cial­ly if the size of the blockchain also increas­es. When­ev­er a new “block” gets “mined”, the whole min­ing com­mu­ni­ty needs to find out about it ASAP so it to can start “min­ing” using the lat­est updat­ed to the blockchain. So if a min­er in Chi­na takes, say, 5 sec­onds longer than their US com­peti­tor to get the lat­est block infor­ma­tion, that may not be a big deal when the aver­age min­ing time is 10 min­utes. But those 5 sec­onds could make a big dif­fer­ence if new blocks are get­ting gen­er­at­ed every 30 sec­onds.

So as we saw above, Bit­coin’s grow­ing pains just keep grow­ing, in part because there’s no con­sen­sus on how to grow. And as we saw also above, if Chi­na’s min­ers don’t agree to the new­ly pro­pose 20-fold increase in block size, those grow­ing pains could are going to become shrink­ing pains. And maybe even fork­ing pains, since Gavin Andresen just reit­er­at­ed his calls for a Bit­coin XT “hard fork” pro­pos­al, and it sounds like he’s already decid­ed to dump the Bit­coin Core code and push the Bit­coin XT hard fork on the rest of the Bit­coin com­mu­ni­ty

Coin Tele­graph
Andresen Pro­pos­es Hard Fork Patch for Bit­coin XT; Crit­ics Remain Skep­ti­cal
Author Aaron van Wirdum

Bit­coin Core devel­op­er Gavin Andresen today pro­posed a hard fork change for Bit­coin XT in order to allow for an increased block size lim­it on the Bit­coin net­work. So far, how­ev­er, it has failed to appease most crit­ics of his pre­vi­ous pro­pos­als to increase the block size lim­it.

Hard Fork

It is wide­ly agreed that at some point an increase of the block size lim­it will be need­ed to allow the Bit­coin net­work to han­dle more than sev­en trans­ac­tions per sec­ond. The Bit­coin Core devel­op­ment team, how­ev­er, has so far not been able to reach con­sen­sus on the cor­rect tim­ing and strat­e­gy to accom­plish this.

Con­vinced that time for debate is run­ning out, Andresen has there­fore elect­ed to shift his efforts to Mike Hearn’s Bit­coin XT, a fork of Bit­coin Core. If Bit­coin XT over­takes Bit­coin Core, Andresen expects to be able to intro­duce big­ger blocks on the net­work through this fork. He believes this would incen­tivise Bit­coin Core to adopt big­ger blocks as well, or become irrel­e­vant, as the two ver­sions would become incom­pat­i­ble oth­er­wise.

But while Andresen’s pro­pos­al is being wide­ly laud­ed by Bit­coin’s Red­dit com­mu­ni­ty, it hasn’t appeased crit­ics of his pre­vi­ous pro­pos­als. Most impor­tant­ly, Andresen’s deci­sion to opt for a hard fork is regard­ed as dan­ger­ous by sev­er­al promi­nent mem­bers of Bit­coin’s tech­ni­cal com­mu­ni­ty.

Bit­coin Core’s lead devel­op­er Wladimir “wum­pus” van der Laan has recent­ly spo­ken out against a uni­lat­er­al hard fork. He believes that it could risk a split of Bitcoin’s blockchain as a result of the incom­pat­i­bil­i­ty of Bit­coin Core with Bit­coin XT, and that it could lead to users los­ing mon­ey to dou­ble spends in the con­fu­sion.

Per­haps unsur­pris­ing­ly, the new patch for Bit­coin XT has not swayed Van der Laan’s mind. While he did not elab­o­rate on his con­cerns specif­i­cal­ly when asked by Coin­Tele­graph, he did indi­cate that he broad­ly agreed with Bitcoin.org’s recent pol­i­cy update. The update reads:

“Con­tentious hard forks are bad for Bit­coin. At the very best, a con­tentious hard fork will leave peo­ple who chose the los­ing side of the fork feel­ing dis­en­fran­chised. At the very worst, it will make bit­coins per­ma­nent­ly lose their val­ue. In between are many pos­si­ble out­comes, but none of them are good.”

This sen­ti­ment was echoed by Block­stream co-founder and hash­cash inven­tor Dr. Adam Back, who has also been a promi­nent crit­ic of Andresen’s sug­gest­ed Bit­coin XT fork. Speak­ing to Coin­Tele­graph, Back said:

“Every­one in the devel­op­er and tech­ni­cal com­mu­ni­ty is stren­u­ous­ly advis­ing to avoid the unnec­es­sary risk of a uni­lat­er­al hard fork. These are the very peo­ple with the knowl­edge and exper­tise we all rely on for the secu­ri­ty and ongo­ing sup­port and main­te­nance of Bit­coin today — and they are extreme­ly con­cerned. The best approach for Bit­coin’s con­tin­ued suc­cess is if we work togeth­er in a calm, sci­en­tif­ic, respect­ful and con­struc­tive way.”

Peter Todd, one of the first and per­haps most fierce oppo­nents of past block size pro­pos­als by Andresen, agreed:

“I think this hard fork is a huge risk with the poten­tial to both destroy Bit­coin in the medi­um to long term through cen­tral­iza­tion, as well as cause sig­nif­i­cant short-term harm to the net­work by the rushed and con­tentious deploy­ment process he sug­gests.”

Pro­pos­al

If Andresen does decide to move for­ward with the hard fork, it will take a while to deploy. First, the pro­pos­al will need to be accept­ed by Bit­coin XT lead devel­op­er Mike Hearn. This will prob­a­bly not be a prob­lem, how­ev­er, as Hearn is a staunch sup­port­er of a block size increase him­self.

Bit­coin’s block size lim­it on Bit­coin XT will then increase by Jan­u­ary 2016 at the soon­est. This will hap­pen after a super­ma­jor­i­ty of min­ers run Bit­coin XT instead of Bit­coin Core, and explic­it­ly agree on the block size increase. To be more pre­cise, 750 of 1,000 con­sec­u­tive mined blocks need to include a mes­sage in approval of the change.

Once an increase of the block size is adopt­ed by the Bit­coin net­work, and after a grace peri­od of pre­sum­ably two weeks, the Bit­coin block size lim­it would first be increased to 8 MB. Effec­tive­ly, this means that any Bit­coin node that still runs the “old” soft­ware at the time when a block big­ger than 1 MB is mined would be divorced from the rest of the net­work. Fur­ther­more, the max­i­mum block size would auto­mat­i­cal­ly dou­ble every oth­er year for 20 years, until it reach­es 8 GB per block in 2036 — at the soon­est.

Explain­ing these para­me­ters on GitHub, Andresen wrote:

“The ini­tial size of [8 MB] was cho­sen after test­ing the cur­rent ref­er­ence imple­men­ta­tion code with larg­er block sizes and receiv­ing feed­back from min­ers stuck behind band­width-con­strained net­works (in par­tic­u­lar, Chi­nese min­ers behind the Great Fire­wall of Chi­na). The dou­bling inter­val was cho­sen based on long-term growth trends for CPU pow­er, stor­age, and Inter­net band­width. The 20-year lim­it was cho­sen because expo­nen­tial growth can­not con­tin­ue for­ev­er.”

Crit­i­cism

Apart from the sug­gest­ed hard fork strat­e­gy, crit­ics of Andresen’s pre­vi­ous pro­pos­als are also not con­vinced this is the best way for­ward for Bit­coin itself. Speak­ing to Coin­Tele­graph, Todd explained:

“A gen­uine pro­pos­al would dis­cuss how the change has been test­ed, and not just on a local machine, as well as what attrib­ut­es of Bit­coin it is try­ing to pre­serve, and how it pre­serves them. What is the effect on prof­itabil­i­ty of small min­ers ver­sus large min­ers, and under what con­di­tions? What kind of mar­gins are need­ed against DoS attacks? How do we pay for proof-of-work secu­ri­ty against 51% attack in the long run if there isn’t scarci­ty to dri­ve trans­ac­tion fees? Gavin has done near­ly none of that kind of analy­sis, and the analy­sis he has done to date have been found to have sig­nif­i­cant flaws.”

...

Bit­coin XT here we come! Maybe! Bit­coin’s lead devel­op­er and chief evan­ge­list appears to have already made the deci­sion, and he also appears to have tweaked the pro­pos­al. Instead of mak­ing the blockchain grow­ing 40% each year, it would be increased from 1 MB to 8MB in 2016, and then dou­ble every two years and then stop grow­ing in 2036 at 8 GB per block. Keep in mind that bit­coin min­ers stop get­ting auto­mat­ic rewards around the year 2040, so end the auto-growth in 2036 could be a nice prize for the min­ers, but only if bit­coin blocks are filled with 8 GB of trades in 2036. Keep in mind that typ­i­cal block is about 0.5 MB right now, so bit­coin trad­ing vol­ume would hav­ing to increas­es by about 16,000-fold between now and 2036 for those future min­ers to still get their desired block size scarci­ty.

The Chi­nese min­ers have already indi­cat­ed that they would accept an imme­di­ate block size increase to 8 MB, so will Andresen’s lat­est pro­pos­al to increase the block size to 8 MB next year and grow it 1000-fold for the next 20 years going tempt Chi­na’s min­ers into con­sen­sus? Nope:

Coin Tele­graph
Chi­nese Min­ing Pools Call for Con­sen­sus; Refuse Switch to Bit­coin XT

2015-06-24 12:44 PM
Aaron van Wirdum

Three of Chi­na ‘s biggest min­ing pools – F2Pool, BTCChi­na Pool and Huo­bi Pool – main­tain that the Bit­coin Core devel­op­ment team should strive for con­sen­sus, and will there­fore not sup­port a switch to Bit­coin XT. Giv­en Core devel­op­er Gavin Andresen’s lat­est pro­pos­al and the cur­rent hash-rate dis­tri­b­u­tion on the Bit­coin net­work, a net­work wide shift from Bit­coin Core to Bit­coin XT to allow big­ger blocks seems infea­si­ble, for now.

Lack­ing con­sen­sus among Core devel­op­ers to raise the block size lim­it, Andresen has recent­ly shift­ed his efforts to Mike Hearn’s Bit­coin Core fork, Bit­coin XT. In a new­ly released pro­pos­al, Andresen sched­ules to raise the block size lim­it on Bit­coin XT from 1 to 8 MB by 2016, after which it should dou­ble every oth­er year. Before the change would go into effect, how­ev­er, 750 of 1,000 con­sec­u­tive mined blocks would need to include a mes­sage by the min­er in approval of the change.

Andresen’s pro­pos­al has been received rel­a­tive­ly well by the Chi­nese min­ing pool oper­a­tors, who them­selves sug­gest­ed a raise to 8 MB last week. Despite that, how­ev­er, the pro­pos­al seems unlike­ly to be accept­ed as part of a uni­lat­er­al hard fork through Bit­coin XT for now.

When asked by Coin­Tele­graph, F2Pool, BTCChi­na and Huo­bi Pool – account­ing for over 30% of hash-rate — have all indi­cat­ed not to sup­port a con­tro­ver­sial shift from Bit­coin Core to Bit­coin XT.

Instead of a hard fork to Bit­coin XT in order to allow for big­ger blocks, the Chi­nese min­ing pools sug­gest that Andresen con­tin­ues to seek con­sen­sus among oth­er Core devel­op­ers. This way, a pro­pos­al to allow for big­ger blocks could be imple­ment­ed in the main Bit­coin client, with­out risk­ing a split in Bit­coin’s blockchain.

F2Pool, which is cur­rent­ly the biggest min­ing pool on the Bit­coin net­work with about twen­ty per­cent of total hash­ing pow­er, has made it very clear that a switch to Bit­coin XT is not an option.

Speak­ing to Coin­Tele­graph, F2Pool admin Wang Chun said:

“We will wait and see what oth­er core devel­op­ers think of Gav­in’s pro­pos­al. But we will cer­tain­ly not switch to the alt­coin called ‘Bit­coin’ XT. It could set a very bad prece­dent if we do that. No mat­ter who you are, you can­not make a new coin and declare it is ‘Bit­coin’ sim­ply because you do not agree with oth­er core devel­op­ers.”

BTCChi­na, which runs one of the biggest Chi­nese exchanges and accounts for some ten per­cent of net­work hash-rate, has pre­vi­ous­ly indi­cat­ed not to switch to Bit­coin XT either. And while the min­ing pool did express to like Andresen’s pro­posed patch, a hard fork with­out con­sen­sus is still con­sid­ered too big of a risk.

...

So there you have it: the clos­est thing Bit­coin has to a cen­tral fig­ure is cur­rent­ly on a col­li­sion course with Bit­coin’s biggest min­ers and, as of now, There’s no indi­ca­tion which side is going to back down, in part because there’s no indi­ca­tion that either side has to back down at all. For all we know, come next year, there could be two Bit­coin blockchains: the Chi­nese ver­sion and the new Bit­coin XT ver­sion. And if you’re assum­ing that all users will choose one blockchain, prompt­ing the oth­er one to whith­er and die, keep in mind that 80% of the Bit­coin traf­fic these days comes from Chi­nese users. So if Chi­na’s min­ers can get Chi­na’s users to stick with the cur­rent Bit­coin Core soft­ware, but Gavin Andresen con­vinces most of the rest of the world to switch over to Bit­coin XT, we real­ly could see Bit­coin “hard fork” into two sep­a­rate block­hains that have no rea­son to spon­ta­neous­ly implode.

Sure, the com­bined val­ue of both blockchains could implode as con­fi­dence in shak­en in the sys­tem. At the same time, set­ting a prece­dent where a core of pow­er­ful inter­ests with a large user base are able to suc­cess­ful­ly cre­ate their own ver­sion of the Bit­coin blockchain by sim­ply uni­lat­er­al­ly intro­duc­ing their own “hard fork”, or refus­ing the “hark fork” the rest of the com­mu­ni­ty wants, and have it sur­vive does­n’t have to be con­fi­dence-shat­ter­ing for every­one.

Oh what a tan­gled block­hain we weave.

Vice Moth­er­board has a new esti­mate on the amount of elec­tric­i­ty used dur­ing the “min­ing” process on aver­age per bit­coin trans­ac­tion. For every bit­coin trans­ac­tion, the amount of elec­tric­i­ty used in 1.57 house­holds a day is con­sumed. And not just any house­holds. Amer­i­can house­holds. *gulp* That’s a lot of elec­tric­i­ty:

Vice Moth­er­board
Bit­coin Is Unsus­tain­able

Writ­ten by Christo­pher Mal­mo
June 29, 2015 // 11:23 AM EST

The year is 2018. After a rough Greek exit from the euro­zone, eco­nom­ic malaise has spread to Italy, Por­tu­gal, Spain, and France. Ner­vous cit­i­zens across Europe look for a way to get their mon­ey out as cur­ren­cy traders ham­mer the weak­en­ing euro, banks impose with­draw­al lim­its, and their pur­chas­ing pow­er plum­mets.

Enter Bit­coin.

Com­pared to the euro, the peer-to-peer decen­tral­ized elec­tron­ic cur­ren­cy has now become a rel­a­tive­ly sta­ble dig­i­tal asset. Fiendish buy­ers trade their euros en masse online for Bit­coin, and soon, depos­i­tors world­wide join them. The price of Bit­coin ris­es, prompt­ing more user adop­tion by spenders and spec­u­la­tors, and recog­ni­tion from gov­ern­ments and pop­u­la­tions alike.

The above sce­nario sounds like a nice piece of prep­per-bait from con­spir­a­cy site infowars.com. But could (or should) Bit­coin actu­al­ly take over? Some of the more enthu­si­as­tic Bit­coin advo­cates argue that the cur­ren­cy is ready for prime time—in oth­er words, ready to replace nation­al cur­ren­cies, or per­haps replace glob­al banking’s creak­ing clear­ing­hous­es. Would this be good for the world?

From an envi­ron­men­tal point of view, it cer­tain­ly wouldn’t be good news. Unfor­tu­nate­ly for Bit­coin advo­cates, the cur­ren­cy uses too much elec­tric­i­ty right now—way too much: Accord­ing to my cal­cu­la­tion, a sin­gle Bit­coin trans­ac­tion uses rough­ly enough elec­tric­i­ty to pow­er 1.57 Amer­i­can house­holds for a day.

All that ener­gy expen­di­ture has an impor­tant pur­pose: it secures Bit­coin from attacks by spec­u­la­tors, crim­i­nals, and oth­er evil-doers by rais­ing the price of the com­put­er pow­er need­ed to gain con­trol of all trans­ac­tions on the net­work. The com­put­ers that make up the Bit­coin economy’s back­bone are con­stant­ly ensur­ing secu­ri­ty and ver­i­fi­a­bil­i­ty for the net­work by solv­ing cryp­to­graph­ic puz­zles. This process is called “min­ing.” Those who par­tic­i­pate in this net­work main­te­nance are reward­ed in Bit­coin, incen­tiviz­ing them to bulk up their machines so they can mine more effi­cient­ly.

There is poten­tial for Bit­coin to become more effi­cient by stuff­ing more trans­ac­tions into the min­ing process. But at the end of the day, if Bit­coin sees increased adop­tion and price and many more use­ful trans­ac­tions, pow­er con­sump­tion is almost guar­an­teed to grow.

Moth­er­board has pre­vi­ous­ly cov­ered how big Bit­coin min­ing oper­a­tions can get. So how much elec­tric­i­ty are we talk­ing about?

Let’s take this Bit­coin mine in Chi­na as an exam­ple of the scale of today’s oper­a­tions. It is sup­pos­ed­ly run­ning at 6 PH (quadrillion hash­es) per sec­ond, accord­ing to a Chi­nese Bit­coin com­pa­ny CEO post­ing in a Bit­coin forum, with the aim to scale up to 12 PH per sec­ond. That would give it about 3.3 per­cent of the total pow­er on the Bit­coin net­work. Because the Bit­coin net­work is set up to dole out around 3,600 BTC per day to min­ers, this mine would rake in about 118.8 BTC per day, or more than $30,000USD at the time of writ­ing. That’s not a bad haul when your elec­tric­i­ty costs are among the low­est in the world at 3 to 6 cents per kw/h, about a third of US prices.

Bitcoin’s pow­er usage per trans­ac­tion isn’t remote­ly sus­tain­able as a whole­sale replace­ment for the con­ven­tion­al finan­cial sys­tem

Com­put­er cool­ing firm Allied Con­trol esti­mates the total pow­er con­sump­tion of the Bit­coin net­work at 250 to 500 Megawatts. Look­ing at the total hashrate, which is the num­ber of cal­cu­la­tions the net­work can per­form per sec­ond, and apply­ing a gen­er­ous min­er effi­cien­cy of 0.6 watts per giga­hash, we can esti­mate our own back-of-the-enve­lope Bit­coin net­work con­stant pow­er draw at just under 215 MW, although this fig­ure is always in flux (it’s impor­tant to note that many of the vari­ables in my cal­cu­la­tion are con­stant­ly chang­ing slight­ly). That’s around enough zap to pow­er 173,000 aver­age Amer­i­can house­holds’ dai­ly elec­tric­i­ty usage.

With about 110,000 trans­ac­tions per day, that works out to 1.57 house­holds dai­ly usage of elec­tric­i­ty per Bit­coin trans­ac­tion. Yes, every time you buy some­thing in Bit­coin, you could be using as much elec­tric­i­ty as 1.57 Amer­i­can fam­i­lies do in a day.

“The actu­al fig­ure is like­ly worse, giv­en that a large num­ber of trans­ac­tions are exchanges and min­ers mov­ing bit­coins around and oth­er low-val­ue ‘dust’ trans­ac­tions,” said Matthew Green, a cryp­tog­ra­phy expert at Johns Hop­kins Uni­ver­si­ty. “So each trans­ac­tion where there’s an exchange of goods or ser­vices hap­pen­ing is real­ly rep­re­sent­ing even more elec­tric­i­ty.”

As cli­mate change becomes a more press­ing con­cern for human­i­ty every day, this huge lev­el of ener­gy use is dif­fi­cult to jus­ti­fy for a cur­ren­cy want­i­ng to improve on the cur­rent arrange­ment.

“It appears there are sig­nif­i­cant chal­lenges to ensur­ing that Bitcoin’s growth min­i­mizes envi­ron­men­tal impacts,” offered Jere­my McDaniels, a finan­cial sys­tem sus­tain­abil­i­ty expert with the UNEP. “Ener­gy foot­prints could be an issue of major scale-up is achieved.”

There is hope that Bit­coin may be able to reduce its foot­print, how­ev­er.

One impor­tant thing to under­stand is that the elec­tric­i­ty demands of Bit­coin min­ing won’t scale up lin­ear­ly with increased usage or trans­ac­tions. Bit­coin min­ers use spe­cial hard­ware to guess over and over at solu­tions to com­pu­ta­tion­al prob­lems for each “block,” which records trans­ac­tions into a per­ma­nent ledger. The first prob­lem-solver “wins” the block and the reward: brand new bit­coins.

Bit­coin can cur­rent­ly han­dle up to 360,000 trans­ac­tions per day giv­en cur­rent lim­i­ta­tions built into the tech­nol­o­gy, accord­ing to Jorge Stolfi, a com­put­er sci­ence pro­fes­sor from Camp­inas Uni­ver­si­ty in Brazil, so there’s some head­room left before things bog down.

It would be pos­si­ble to bring down the aver­age pow­er cost of each trans­ac­tion by mod­i­fy­ing the under­ly­ing Bit­coin pro­to­col, but that’s no easy feat. The Bit­coin com­mu­ni­ty is cur­rent­ly debat­ing a big change that would mean the net­work could the­o­ret­i­cal­ly han­dle about 7.2 mil­lion trans­ac­tions a day on a com­pa­ra­ble lev­el of elec­tric­i­ty con­sump­tion, accord­ing to Stolfi. That would require a major­i­ty of the peo­ple min­ing Bit­coin to agree to the change, how­ev­er.

Keep­ing pow­er con­sump­tion high in gen­er­al also makes the net­work more secure by mak­ing it hard­er for any one enti­ty to gain con­trol. “The right way to think about this is that the ener­gy expen­di­ture pro­vides a lev­el of pro­tec­tion against attacks—it estab­lish­es a price floor, cur­rent­ly in the many mil­lions, to launch a 34 per­cent or 51 per­cent attack [where an attack­er can block trans­ac­tions and dou­ble spend bit­coins as they please],” Emin Gun Sir­er, a Cor­nell pro­fes­sor and blog­ger at Hack­ing Dis­trib­uted, explained in an email.

How­ev­er, that same lev­el of secu­ri­ty could be main­tained while allow­ing for more trans­ac­tions, he said, shrink­ing the cost per trans­ac­tion.

All that needs to hap­pen, then, is to expand the user­base so we have more trans­ac­tions, right?

Unfor­tu­nate­ly for Bit­coin, if user adop­tion spikes, so will price—and so must pow­er con­sump­tion. Bit­coin min­ing leads to an arms race among min­ers to grab a slice of the fixed rewards doled out by the net­work, Stolfi said. The high­er the finan­cial rewards, the more min­ers will invest in pow­er­ful equip­ment to keep up with the com­pe­ti­tion. The Bit­coin pro­to­col will con­tin­ue to increase the dif­fi­cul­ty of the cryp­top­uz­zles to keep rewards con­stant, con­tin­u­ing the arms race until the last block is mined.

The bot­tom line? Price = ener­gy. “The total rev­enue of the min­ing indus­try is Bit­coin price times BTC rev­enue in USD/day, inde­pen­dent­ly of any­thing else; and the elec­tric­i­ty con­sump­tion, also in USD/day, is some large frac­tion of that,” con­cludes Stolfi.

Green agrees: “Almost every­thing in Bit­coin is flex­i­ble, but that dynam­ic isn’t. Min­ers always have the incen­tive to throw as many hash­es [requir­ing pow­er] at the job as the price dic­tates.”

Of course, it wouldn’t be fair to knock Bitcoin’s elec­tric­i­ty con­sump­tion with­out com­par­ing it to pay­ment sys­tems most peo­ple use today. Let’s take VISA as an exam­ple.

Accord­ing to Net­work Com­put­ing, the VISA net­work can process more than 80 bil­lion trans­ac­tions per year or 2,537 trans­ac­tions per sec­ond, using two mir­rored data cen­ters, each capa­ble of run­ning the entire net­work. The larg­er data cen­ter is cur­rent­ly pulling enough pow­er for 25,000 house­holds’ dai­ly elec­tric­i­ty, so we’ll dou­ble that to account for VISA’s total draw. In 2013, VISA’s investor reports say the com­pa­ny processed 58.5 bil­lion trans­ac­tions.

Work­ing off these (admit­ted­ly imper­fect) fig­ures, each VISA trans­ac­tion con­sumes around 0.0003 household’s dai­ly elec­tric­i­ty use. That makes Bit­coin about 5,033 times more ener­gy inten­sive, per trans­ac­tion, than VISA, at cur­rent usage lev­els.

Of course, VISA runs call cen­ters, offices, and a whole lot else on elec­tric­i­ty as well, which isn’t count­ed in this com­par­i­son. But those hard­ly mat­ter due to the extreme dif­fer­ence between the two fig­ures.

In a rosy 2014 Bit­coin sus­tain­abil­i­ty study, Bit­coin ana­lyst Hass McCook con­clud­ed that “Bit­coin has 99.8% few­er [car­bon] emis­sions than the bank­ing sys­tem,” which we can treat as a rough proxy for ener­gy use. The study neglects to account for the vast size dif­fer­ence between the Bit­coin econ­o­my and the con­ven­tion­al mon­ey sys­tem, however—the world bank­ing system’s mar­ket cap­i­tal­iza­tion in 2010 alone was over 1,989 times big­ger than today’s total Bit­coin val­u­a­tion.

In light of the above analy­sis, Bitcoin’s pow­er usage per trans­ac­tion isn’t remote­ly sus­tain­able as a whole­sale replace­ment for the con­ven­tion­al finan­cial sys­tem. In the future, Bit­coin could mas­sive­ly gain pop­u­lar­i­ty, pile on mil­lions more trans­ac­tions, and still be unsus­tain­able due to the arms race between min­ers.

...

Note the crit­i­cal conun­drum: the elec­tric­i­ty cost per trans­ac­tion should go down if more and more peo­ple make bit­coin trans­ac­tions, but only if the increased usage does­n’t raise the price of bit­coin enough to incen­tivize increased pro­por­tion­ate­ly increased “min­ing”:

...
Unfor­tu­nate­ly for Bit­coin, if user adop­tion spikes, so will price—and so must pow­er con­sump­tion. Bit­coin min­ing leads to an arms race among min­ers to grab a slice of the fixed rewards doled out by the net­work, Stolfi said. The high­er the finan­cial rewards, the more min­ers will invest in pow­er­ful equip­ment to keep up with the com­pe­ti­tion. The Bit­coin pro­to­col will con­tin­ue to increase the dif­fi­cul­ty of the cryp­top­uz­zles to keep rewards con­stant, con­tin­u­ing the arms race until the last block is mined.

...

So it sounds like the most viable path to sus­tain­abil­i­ty for Bit­coin involves increas­ing its pop­u­lar­i­ty with­out rais­ing the price too much. Although the price sup­pres­sion might not be very hard to do, dra­mat­i­cal­ly expand­ing the user base while sup­press­ing the price prob­a­bly isn’t going to be easy.

But there is anoth­er option: Stop car­ing about the envi­ron­ment, ignore the con­cerns about car­bon foot­prints, and just go for the dig­i­tal gold. Sure, it’s not a good option, but it’s an option.

Here’s an arti­cle that gives an exam­ple of why Big Finance’s embrace for blockchain is prob­a­bly going to more about using bit­coins (or blockchains) to rep­re­sent some­thing of val­ue (and trade it) but not nec­es­sar­i­ly be some­thing of val­ue (i.e. mon­ey, which is what Bit­coin aspires to be):

Of the 150 “fin­tech” busi­ness­es housed in Lon­don-based “fin­tech” incu­ba­tor Level39, set up by UBS in 2013, it’s the blockchain tech­nol­o­gy that excites them the most. And, accord­ing to Level39’s boss Eric Van der Kleif, every­one else should be excit­ed too giv­en all of the pos­si­ble appli­ca­tions for blockchain tech­nolo­gies that could make finan­cial indus­try even safer for every­one, like mak­ing the under­ly­ing secu­ri­ties back­ing things like mort­gage backed secu­ri­ties read­i­ly trans­par­ent to all investors. And banks could use the blockchain for cheap­er and faster inter­bank lend­ing too. They just need to make sure the blockchain does­n’t end up get­ting used for mon­ey-laun­der­ing.

In oth­er words, Bit­coin can make the world of finance safer by mak­ing it more trans­par­ent due to the pub­lic nature of the blockchain. Just as long as it isn’t pro­mot­ing mon­ey-laun­der­ing due to its inher­ent lack of trans­paren­cy:

Busi­ness Insid­er Aus­tralia
Bit­coin is the ‘Nap­ster’ of finance — and there’ll be an iTunes

Oscar Williams-Grut

Jul. 16, 2015, 6:58 AM

As boss of Canary Whar­f’s Level39, Eric Van der Kleij is one of the most impor­tant peo­ple in the fin­tech scene in Lon­don — and pos­si­bly the world.

There are over 150 fin­tech busi­ness­es housed in Level39, which despite its name now cov­ers three floors in One Cana­da Square.

“Peo­ple tell us it’s the biggest space of its kind world­wide,” Van der Kleij told Busi­ness Insid­er dur­ing a recent vis­it to Level39, a fin­tech-ded­i­cat­ed office space. “We’ve not mea­sured so I don’t want to make any claims.”

Level39 was set up in 2013 by the Canary Wharf Group to encour­age a new gen­er­a­tion of finance firms to come to the East Lon­don office penin­su­la — finan­cial tech­nol­o­gy, or fin­tech, star­tups.

“Canary Wharf deserves cred­it because this is not cheap,” says Van de Kleij. “This is a seri­ous long term invest­ment. But I think it’s a good thing because what we want is one of these com­pa­nies to turn around and say can you build me my new head­quar­ters in Wood Wharf.”

Just over 2 years on, the space has broad­ened out to wel­come “smart city” and cyber­se­cu­ri­ty star­tups too, as well as open­ing new space for high growth busi­ness­es on Lev­el 42 and 24. The build­ing can now house a start­up from being a 2‑man oper­a­tion up to a 20-plus team.

“They want to eat the banks’ lunch”

The huge num­ber of star­tups under Van der Klei­j’s nose gives him a good overview of what exact­ly the fin­tech world is up to.

“We find they fit into two camps,” he says. “There’s the camp that wants to help the exist­ing world of finan­cial ser­vices to improve, to be more trans­par­ent, to pro­vide bet­ter cus­tomer choice, to low­er their costs. And then there are those that want to be the new bank, they want to eat the banks’ lunch. We love both of them.”

Van der Kleij is very excit­ed about one par­tic­u­lar type of new tech­nol­o­gy — the blockchain, the soft­ware that runs bit­coin.
network_view
“The real pow­er­ful work being done in fin­tech is blockchain,” he says. “I can tell you now with cer­tain­ty that every major west­ern bank we’ve spo­ken to, and some east­ern ones, are look­ing at blockchain tech­nol­o­gy.”

The blockchain cre­ates bit­coins, allows trans­ac­tions to hap­pen, and cre­ates a pub­lic record of all trans­ac­tions, shared across hun­dreds of com­put­ers. Trans­ac­tions can’t be reversed and are much faster than the cur­rent sys­tem.

Banks cur­rent­ly have to inter­act with each oth­ers’ sys­tems when trans­fer­ring mon­ey between accounts. This can be a slow, cum­ber­some, and a cost­ly exer­cise, giv­en how old many of the banks’ com­put­er sys­tems are.

But if a secure, trans­par­ent, piece of soft­ware could auto­mate these types of inter­bank trans­fers, it would be vast­ly quick­er and cheap­er. Bar­clays, UBS and Citi are all explor­ing how it could be used.

There are poten­tial appli­ca­tions beyond pay­ments too — San­tander says it has 25 use cas­es for blockchain tech­nol­o­gy, while BNP Paribas says the tech­nol­o­gy could make some com­pa­nies that hold stock “redun­dant.”

“Very sim­i­lar dynam­ics to music”

Van der Kleij calls blockchain “the real fron­tier” of finance and likens its evo­lu­tion out of bit­coin to the rise of peer-to-peer tech­nol­o­gy out of ille­gal music-shar­ing web­site Nap­ster.

He says: “In the world of music you had Nap­ster as the unreg­u­lat­ed chal­lenger to the estab­lish­ment. What they did is prove that tech­nol­o­gy can enable peer-to-peer file shar­ing to take place with­out the estab­lish­ment con­trol­ling it. What that indus­try did is they wise­ly embraced that tech­nol­o­gy to reduce their costs and you now have the iTunes Store, Spo­ti­fy. That trans­formed the mod­el of music dis­tri­b­u­tion.

“Who’s the Nap­ster? It is com­pa­nies involves in open ledger or blockchain tech­nol­o­gy. Of course its ori­gins came from Bit­coin. Bit­coin is incred­i­bly inter­est­ing and very excit­ing but very chal­leng­ing for the reg­u­la­tor because of the pri­va­cy it affords.

“The chal­lenge is we don’t want this to become the mon­ey launder’s weapon of choice, which is what the reg­u­la­tor is wor­ried about. It has very sim­i­lar dynam­ics to the world of music.”

Level39 res­i­dents work­ing on bit­coin and blockchain tech­nolo­gies include CodeStack, BitRe­serve and Coin­jar.

Van der Kleij is con­fi­dent that, as with music, blockchain tech­nol­o­gy will mature and enter the main­stream — we’ll get our iTunes or Spo­ti­fy of finance. Not only will blockchain adop­tion make bank­ing faster and cheap­er, he also thinks the blockchain has the poten­tial to make bank­ing safer.

“You know the thing that caused the big prob­lem in the finan­cial cri­sis?” he asks. “It was these deriv­a­tive mort­gage-backed secu­ri­ties. Cun­ning peo­ple were repack­ag­ing dif­fer­ent mort­gage secu­ri­ties into prod­ucts. When insti­tu­tions bought them they had no real way of look­ing at the under­ly­ing assets they were buy­ing because they were so com­plex. If they were forced to build that on blockchain, an invest­ment man­ag­er could press a but­ton and see the truth because of the immutabil­i­ty.”

...

Note that point about the pos­si­ble util­i­ty in using the blockchain to track the under­ly­ing assets that make up asset-backed secu­ri­ties is poten­tial­ly quite valid and would poten­tial­ly have been help­ful dur­ing the US hous­ing bub­ble. But also note that rat­ings agen­cies were giv­ing sub­prime mort­gage-backed secu­ri­ties the same rat­ings as US Trea­suries dur­ing the buildup of the US hous­ing bub­ble any­ways, so it’s not actu­al­ly clear how help­ful blockchain audit trails would have been in that ugly chap­ter in finan­cial his­to­ry. But hey, if it helps in this area going for­ward, good for the blockchain. It will be anoth­er exam­ple of how Bit­coin tech­nol­o­gy works bet­ter when it does­n’t try to be actu­al mon­ey.

But keep in mind that Level39 was start­ed by UBS, a com­pa­ny that has­n’t exact­ly demon­strat­ed an unwill­ing­ness to mis­rep­re­sent the con­tents of the bun­dled secu­ri­ties they were ped­dling (they were fined for $744 mil­lion in 2013 after plead­ing guilty to exact­ly that). So you have to won­der just how much inter­est UBS has in real­ly going to be in devel­op­ing an anti-fraud secu­ri­ties-track­ing plat­form.

And then there’s Level39’s pro­fessed mon­ey-laun­der­ing con­cerns with its blockchain ambi­tions. You sort of have to won­der about that too.

It’s on! The great Bit­coin block-size debate is head­ing to a con­clu­sion. A con­clu­sion with an out­come that can’t eas­i­ly be pre­dict­ed because the two lead Bit­coin devel­op­ers just announce that the great Bit­coin XT “fork” (the new ver­sion of the new big­ger-block-size ver­sion of Bit­coin) is going to hap­pen whether the rest of the Bit­coin com­mu­ni­ty agrees or not:

The Guardian
Bit­coin’s forked: chief sci­en­tist launch­es alter­na­tive pro­pos­al for the cur­ren­cy

The bit­coin wars have begun, as Bit­coin XT squares off against the clas­sic flavour of the cryp­tocur­ren­cy

Alex Hern

Mon­day 17 August 2015 06.57 EDT

Cryp­tocur­ren­cy bit­coin is fac­ing civ­il war, with two high-pro­file devel­op­ers announc­ing plans to split the code that under­pins the net­work.

Known as a “fork”, the new ver­sion of bit­coin (dubbed Bit­coin XT) would sup­port more trans­ac­tions per hour, at the cost of increas­ing the amount of mem­o­ry required to hold a full data­base of all the bit­coin trans­ac­tions through­out his­to­ry, known as the blockchain.

It is backed by Mike Hearn and Gavin Andresen, two of the most senior devel­op­ers involved in the bit­coin project. Both are involved in the Bit­coin Foun­da­tion, the non-prof­it group that over­sees the currency’s devel­op­ment: Hearn is the for­mer chair of the foundation’s law and pol­i­cy com­mit­tee, while Andresen is the chief sci­en­tist of the foun­da­tion.

In a post on the bit­coin devel­op­er mail­ing list, Hearn said that he felt a fork was the only option for solv­ing the dead­lock with­in the com­mu­ni­ty: “I feel sad that it’s come to this, but there is no oth­er way. The Bit­coin Core project has drift­ed so far from the prin­ci­ples myself and many oth­ers feel are impor­tant, that a fork is the only way to fix things.”

The key dif­fer­ence between Bit­coin XT and the oth­er ver­sion of bit­coin, known as Bit­coin Core, is size of the blocks into which trans­ac­tions get grouped every 10 min­utes. Core sup­ports a max­i­mum block size of 1mb, which XT increas­es to 8mb. Hearn, and the oth­er sup­port­ers of XT, argue that that increase is nec­es­sary if the cur­ren­cy is to con­tin­ue grow­ing.

“As Bit­coin spreads via word of mouth, we will reach the lim­it of the cur­rent sys­tem some time next year, or by 2017 at the absolute lat­est,” Hearn writes. “So it is now time to raise the lim­it, or remove it entire­ly.”

Those who oppose the change do so for a vari­ety of rea­sons. Some argue that it’s a sim­ple stick­ing-plas­ter solu­tion, and that the actu­al fix should be far more wide-rang­ing (one such pro­pos­al being the “light­ning net­work” upgrade); they wor­ry that remov­ing the most press­ing need for an upgrade will also lessen he chance of that wide-rang­ing fix.

Oth­ers sim­ply oppose chang­ing any­thing from the ini­tial bit­coin pro­pos­al pre­sent­ed by Satoshi Nakamo­to in 2009, and argue that any major change should come in the form of a whole new cur­ren­cy, or “alt coin”, rather than an update to bit­coin itself.

...

In the short term, Hearn argues that most bit­coin users can safe­ly ignore the debate. Unless they are “min­ing” – run­ning the soft­ware that ver­i­fies bit­coin trans­ac­tions – bit­coin users effec­tive­ly have no vote in which one of the com­pet­ing pro­pos­als becomes the future of bit­coin, while the soft­ware they use to make pay­ments in the cur­ren­cy will like­ly sup­port the biggest of the two net­works.

“Almost all users run wal­lets that will just auto­mat­i­cal­ly fol­low what­ev­er the final deci­sion is. It’s not some­thing they need wor­ry about,” he says.

“Except, of course, in a high-lev­el sense: if they bought bit­coins in the hope that it one day takes off and becomes real­ly big, then they should keep an eye on things. If the big-blocks side doesn’t win out then the chances of going main­stream look much worse, and they may wish to rethink their invest­ment.”

The worst-case sce­nario for the cur­ren­cy is that both Bit­coin XT and Bit­coin core con­tin­ue to exist along­side each oth­er for a long peri­od of time, with nei­ther ful­ly seiz­ing the man­tle of the true heir to Nakamoto’s vision. In such a sit­u­a­tion, the currency’s uncer­tain future could prove per­ma­nent­ly dam­ag­ing to its prospects.

But even if the change goes through rel­a­tive­ly quick­ly, some inat­ten­tive users could find them­selves out of pock­et. Once the block sizes increase (which won’t hap­pen until Jan­u­ary 2016, and then only if 75% of the min­ers have switched to Bit­coin XT), the two ver­sions of bit­coin will be incom­pat­i­ble. Trans­ac­tions made on one ver­sion of bit­coin would not be reflect­ed on the oth­er, essen­tial­ly ren­der­ing null any attempts to spend bit­coin on the “los­ing” fork after that date.

“The worst-case sce­nario for the cur­ren­cy is that both Bit­coin XT and Bit­coin core con­tin­ue to exist along­side each oth­er for a long peri­od of time, with nei­ther ful­ly seiz­ing the man­tle of the true heir to Nakamoto’s vision. In such a sit­u­a­tion, the currency’s uncer­tain future could prove per­ma­nent­ly dam­ag­ing to its prospects.”
Yes, co-exit­ing com­pet­ing Bit­coin “forks” would indeed be a worst-case sce­nario for Bit­co­ing, although it’s not the worst worst-case sce­nario for Bit­coin, which is unfor­tu­nate since the worst of the sce­nar­ios-of-doom for Bit­coin also hap­pens to be pret­ty much the best-case for the rest of us.

So let’s hope Bit­coin users choose their cryp­tocur­ren­cy of choice wise­ly going for­ward now that the Great “hard fork” of 2015 is becom­ing a real­i­ty. The future is now.

Well, this was prob­a­bly inevitable giv­en all the enthu­si­asm for blochain-based “smart-con­tract” tech­nolo­gies like Ethereum. Behold Bit­na­tion: A do-it-you­self pri­vate gov­ern­ment tech­nol­o­gy:

H+ Mag­a­zine
Inter­view: Bit­coin Pio­neer Susanne Tarkows­ki Tem­pel­hof on Bit­na­tion and M+
Feb­ru­ary 18, 2015 Bit­Coin, Cryp­tog­ra­phy, Human­i­ty+, images, Tran­shu­man­ism

authors Peter Roth­man

Q1 Susanne, h+ Mag­a­zine read­ers may not be famil­iar with you or your back­ground. Can you give us a brief his­to­ry of you, a sum­ma­ry of your back­ground with bit­coin and tran­shu­man­ism and a short intro to what you are cur­rent­ly doing?

I grew up in Swe­den, my par­ents where Pol­ish and French immi­grants. My father was state­less for many years, which made me ques­tion the point of the nation state con­struct alto­geth­er. My pas­sion was pol­i­tics, and I want­ed to make the world more bor­der­less. I start­ed writ­ing about com­pet­ing non-geo­graph­ic nations at the age of 20. How­ev­er, I thought the best way to change things was to work ‘with­in the sys­tem’. Hence to that end, I start­ed work­ing as a con­trac­tor for the most pow­er­ful gov­ern­ment I could find, the US Gov­ern­ment. I spent near­ly 7 years work­ing as a con­trac­tor in var­i­ous con­flict zones, from Afghanistan and Pak­istan, to Egypt and Libya — assist­ing with build­ing and over­throw­ing gov­ern­ments. How­ev­er, as time went by, I believed less and less in what the gov­ern­ment did, and I start­ed sym­pa­thiz­ing more and more with the ‘ungoverned’ soci­eties. The civ­il war in Libya was quite a wake up call. When I first came to the rebel con­trolled ter­ri­to­ries there was de-fac­to no gov­ern­ment at all (the rebel coun­cil were about 10 guys hid­ing out in a base­ment, and their sole job was to speak with for­eign media to gain recog­ni­tion for the ter­ri­to­ries), but yet — every­thing worked amaz­ing­ly well. Vol­un­teers were doing every­thing from trash col­lec­tion to traf­fic polic­ing, neigh­bor­hood watch and cell tow­er engi­neer­ing. But as lay­ers of gov­ern­ment got added, secu­ri­ty dete­ri­o­rat­ed.

Around the same time a friend of mine was con­duct­ing a study in vil­lages in South­ern Afghanistan and South Sudan, mea­sur­ing the dif­fer­ence between vil­lages with the same socioe­co­nom­ic and eth­nic com­po­si­tion, but dif­fer­ent amounts of points of social inter­ac­tion — like wells, schools, etc. As one would intu­itive­ly assume — the study showed that vil­lages with many points of inter­ac­tions were less prone to vio­lence, than those with few, because even if peo­ple – dif­fer­ent tribes and eth­nic­i­ties didn’t get along – just the fact of hav­ing to inter­act on a day to day lev­el over sim­ple things like ‘who should clean the well?’ reduced the lev­el of vio­lence. Fos­ter­ing col­lab­o­ra­tion on small, seem­ing­ly insignif­i­cant tasks also been a com­mon strat­e­gy in diplo­ma­cy between coun­tries hos­tile towards each oth­er. Hence, I thought, if we assume this the­o­ry to be cor­rect, then wouldn’t Face­book be the biggest exper­i­ment for peace in the world ever? The fact of lik­ing someone’s Insta­gram of their lunch, regard­less of polit­i­cal or geo­graph­i­cal dif­fer­ences? That would make sense.

Hence, I went through a brief peri­od of great self-doubt, where I thought what I had done for most of my 20’s was pret­ty much either not very sig­nif­i­cant in terms of impact, or even at times straight out harm­ful — while Zucker­berg, through a com­put­er in a dorm, had done more of a pos­i­tive impact than I could ever have dreamt of. I felt depressed, because I didn’t know how to impact things with­out work­ing with the gov­ern­ment, but I start­ed spend­ing more time around tech peo­ple, trav­el­ling to San Fran­cis­co, hang­ing out with the Burn­ing Man crowd, going to lib­er­tar­i­an mee­tups, etc. I had a feel­ing that the answer where some­where in the tech­nol­o­gy sphere. Then, enter Bit­coin. The day I dis­cov­ered Bit­coin my world­view changed for­ev­er — I real­ized that it was pos­si­ble to not ‘change things from the inside’ but to actu­al­ly total­ly rein­vent some­thing, and com­pete heads on with the cur­rent par­a­digm. It wasn’t impos­si­ble. Bit­coin did, and suc­ceed­ed with it. That inspired me to leave my work as a con­trac­tor, and fol­low my ini­tial dream of cre­at­ing vir­tu­al com­pet­ing nations. I trav­elled the world while writ­ing about it, went to var­i­ous anar­chist com­mu­ni­ties and cryp­to star­tups, and then it sud­den­ly dawned on me: why write about it? The blockchain tech­nol­o­gy — as a dis­trib­uted pub­lic ledger — have all the func­tions I need to actu­al­ly start it, with­out very much invest­ment at all. Hence, I start­ed Bit­na­tion.

I got into Tran­shu­man­ism through Bio­hack­ing. I oper­at­ed in a mag­net in one of my fin­gers, to see what it would be like. I post­ed the pho­tos of the oper­a­tion on Face­book which got me a lot of atten­tion from the Tran­shu­man­ist com­mu­ni­ty, so I start­ed to look deep­er into all things con­nect­ed with Tran­shu­man­ism, and real­ly fell in love with the field. I guess being able to to con­trol your des­tiny, through cry­on­ics, down­load­ing brains, mod­i­fy­ing the body, etc is the ulti­mate fron­tier for lib­er­ty, once the vio­lent glob­al oli­gop­oly on gov­er­nance is gone. Immor­tal­i­ty!

Q2 Tell me about Bit­na­tion some more and explain to h+ Mag­a­zine read­ers what it is about. Let’s say I want to start my own tran­shu­man­ist nation.Can Bit­na­tion help me? I’m also inter­est­ed in the notion of ser­vices that use the blockchain tech­nol­o­gy but are not prop­er­ly involved with bit­coin per se. Can you com­ment?

If you break Bit­na­tion down to its very essence, it can be described as a peer-to-peer plat­form with a set of Do-It-Your­self gov­er­nance (D)Apps (like the Apple app store, as an exam­ple), backed by encrypt­ed com­mu­ni­ca­tion, ID and rep­u­ta­tion, and dis­pute res­o­lu­tion.

Bit­na­tion is the first ever Vir­tu­al Nation which pro­vides actu­al gov­er­nance ser­vices. Many of those ser­vices are based on the Bit­coin blockchain tech­nol­o­gy – a decen­tral­ized pub­lic ledger – which we use for all kind of records. From insur­ance, to dis­pute res­o­lu­tion, to fam­i­ly con­tracts like wills and mar­riages, to edu­ca­tion, and more. Lat­er on we’ll also add non-tech­nol­o­gy pow­ered ser­vices, like secu­ri­ty and diplo­ma­cy.

There are many metapro­to­cols on top of the Bit­coin blockchain, that can be used for things like cryp­to token cre­ation, time­stamp­ing, etc. This year – 2015 – I expect smart con­tracts to real­ly take off. These sounds like sim­ple tools, but they offer such an extra­or­di­nary broad range of appli­ca­tions that it’s noth­ing short of breath­tak­ing.

Every­thing Bit­na­tion do is open source, and we encour­age peo­ple to fork it, and cre­ate their own nation. If you would want to start your own tran­shu­man­ist nation, the eas­i­est way to get us onboard rather than just fork­ing the idea straight out, would be to either work with us for a while, and see what you could make dif­fer­ent, to bet­ter adapt it to your com­mu­ni­ty, or engage us as part­ners to help you set it up. Forks are both inevitable, and healthy. I, per­son­al­ly, set out on this path, because I want­ed to see a world of thou­sands or mil­lions of com­pet­ing bor­der­less gov­er­nance providers, com­pet­ing through offer­ing bet­ter ser­vices, rather than through the threat of vio­lence with­in imag­i­nary lines called bor­ders. But some­one had to be the first to do it, to demon­strate the vir­tu­al nation mod­el in prac­tice, and clear the path for oth­ers – just like Bit­coin did for cryp­tocur­ren­cy — so that’s what I did.

Q3 Bit­coin has a long his­to­ry in the tran­shu­man­ist world and some of the ear­ly adopters were tran­shu­man­ists and the idea of “cryp” was a fre­quent top­ic on the Extropi­an Email List. Hal Finney was recent­ly cry­op­re­served and was one of the first own­ers of bit­coins. as well as an Extropi­an. Ralph Merkle invent­ed some of the core math­e­mat­ics (Merkle trees) used in bit­coin and is a tran­shu­man­ist who also has done a lot of work in nan­otech­nol­o­gy. What’s the con­nec­tion from your per­spec­tive between tran­shu­man­ism and cryp­tocur­ren­cies? Cryp was envi­sioned as an anony­mous and untrace­able method of pay­ment, but bit­coin hasn’t quite got­ten us there. What’s next for tru­ly anony­mous and untrace­able cryp­to cur­ren­cies?

Many ques­tions to answer here at once!

From my per­spec­tive the sim­i­lar­i­ty between the two is twofold: 1. that tech­nol­o­gy empow­ers supe­ri­or inno­v­a­tive solu­tions than an out­dat­ed dinosaur of a cen­tral­ized admin­is­tra­tive struc­ture, and b. that tech­nol­o­gy inher­ent­ly defeats things as bor­ders, because it con­nects peo­ple through­out time and space, irrel­e­vant of where they were born, or what laws an irrel­e­vant piece of paper (like a pass­port) claims they’re sub­ject to. In essence, tran­shu­man­ism, as well as Bit­coin, recog­nise that we’re much more than our phys­i­cal flesh and blood, but that we’re also sen­si­tive, think­ing, feel­ing indi­vid­u­als who may or may not oper­ate with­in forced upon (geo­graph­i­cal) frame­works. That our mind and spir­it stands above, and defeats, arbi­trary lines in the sand — to a great extent via the beau­ty of the ever evolv­ing tech­nol­o­gy freed from bureau­crat­ic red tape.

Anonymi­ty is impor­tant now, as we’re in the strange mid­dle ground between the nation state world, and the post nation state world, where many vision­ar­ies still need to keep a low pro­file. Over time, how­ev­er, iden­ti­ty and rep­u­ta­tion will be more impor­tant. Though, lets keep in mind that for var­i­ous rea­sons, it will remain essen­tial for a per­son to be able to have mul­ti­ple iden­ti­ties at the same time (like if being haunt­ed by a homi­ci­dal ex hus­band or liv­ing a dou­ble life as gay/ het­ero or human/ cyborg) etc. But at the same time, lim­it­ing Cybil attacks will also be cru­cial.

Anoth­er area where cryp­to meets tran­shu­man­ism seems to be Basic Income. We have a Bit­na­tion 3rd Par­ty DApp, called basicincome.co devel­oped by the Swedish prodi­gy Johan Nyberg, using p2p cryp­toledgers to cre­ate a vol­un­tary basic income sys­tem. Zoltan Ist­van recent­ly wrote about Tran­shu­man­ism in VICE where Bit­na­tion was quot­ed.

...

Q6 2015 may be not­ed as the year tran­shu­man­ism became polit­i­cal. With a lot of activ­i­ty around the Tran­shu­man­ist Par­ties in the EU and UK recent­ly. What’s your view on tran­shu­man­ism and pol­i­tics gen­er­al­ly? How can Bit­na­tion help tran­shu­man­ists who are polit­i­cal­ly active? How can or should the TP inter­act with the Pirate Par­ty, Green Par­ty, etc.?

First of all, from my per­son­al per­spec­tive, tech­nol­o­gy change pol­i­tics much quick­er than pol­i­tics change pol­i­tics. Point in case: it’s more effi­cient to cre­ate a bet­ter alter­na­tive, like Bit­coin, who just out­com­petes the old bad sys­tem, rather than to get a job at the FED, and try to change pol­i­tics from the inside.

If peo­ple real­ly do want to inter­act with the dinosaur polit­i­cal sys­tem how­ev­er, I sup­pose it can be use­ful, in a Ron Paul type of way; where they use polit­i­cal chan­nels as plat­form to spread ideas. It has some mer­it to it. Con­cern­ing what par­ties to engage with, I’ll always vouch for the pirate par­ty – they’re will­ing to break norms, and think for­ward. The green par­ty real­ly varies from one coun­try to anoth­er. While I do believe in the impor­tance of pre­serv­ing the envi­ron­ment, I would nev­er engage with the Green Par­ties I’ve seen so far, because in my view they’re old left-wing reac­tionar­ies who main­ly want to back-ped­dle devel­op­ment. I may be wrong, but that’s what I’ve seen so far. Lib­er­tar­i­an par­ties are sort of an oxy­moron, if you come from the anar­chist spec­trum of it. I don’t per­son­al­ly vote, because I believe it’s immoral to show con­sent to a geo­graph­i­cal monop­oly on vio­lence through par­tic­i­pat­ing in its illu­sion of ‘it’s all okay, because we can vote every now and then on who will be our front slave mas­ter’. But hey, each to their own.

“The day I dis­cov­ered Bit­coin my world­view changed for­ev­er — I real­ized that it was pos­si­ble to not ‘change things from the inside’ but to actu­al­ly total­ly rein­vent some­thing, and com­pete heads on with the cur­rent par­a­digm. It wasn’t impos­si­ble. Bit­coin did, and suc­ceed­ed with it. That inspired me to leave my work as a con­trac­tor, and fol­low my ini­tial dream of cre­at­ing vir­tu­al com­pet­ing nations.”

As we can see, the long-held dream of cre­at­ing one’s own island nation is real­ly aim­ing low. What you real­ly should be doing if you want to free your­self from the per­ils of gov­ern­ment is devel­op a sys­tem for cre­at­ing an unlim­it­ed num­ber of non-geo­graph­ic vir­tu­al nations, bound togeth­er by the glue of dig­i­tal con­tract-based services...and even­tu­al­ly non-tech­nol­o­gy pow­ered ser­vices like secu­ri­ty and diplo­ma­cy:

...
Bit­na­tion is the first ever Vir­tu­al Nation which pro­vides actu­al gov­er­nance ser­vices. Many of those ser­vices are based on the Bit­coin blockchain tech­nol­o­gy – a decen­tral­ized pub­lic ledger – which we use for all kind of records. From insur­ance, to dis­pute res­o­lu­tion, to fam­i­ly con­tracts like wills and mar­riages, to edu­ca­tion, and more. Lat­er on we’ll also add non-tech­nol­o­gy pow­ered ser­vices, like secu­ri­ty and diplo­ma­cy.
...

Hope­ful­ly she’ll add dig­i­tal-con­tract legal enforce­ment to the to-do list. It’s a to-do list that’s no doubt pret­ty long, but as we saw, it can get pret­ty long too once the vio­lent glob­al oli­gop­oly on gov­er­nance is gone and the ower of the vir­tu­al nation is unleashed. Immor­tal­i­ty is great for to-do lists:

...
I got into Tran­shu­man­ism through Bio­hack­ing. I oper­at­ed in a mag­net in one of my fin­gers, to see what it would be like. I post­ed the pho­tos of the oper­a­tion on Face­book which got me a lot of atten­tion from the Tran­shu­man­ist com­mu­ni­ty, so I start­ed to look deep­er into all things con­nect­ed with Tran­shu­man­ism, and real­ly fell in love with the field. I guess being able to to con­trol your des­tiny, through cry­on­ics, down­load­ing brains, mod­i­fy­ing the body, etc is the ulti­mate fron­tier for lib­er­ty, once the vio­lent glob­al oli­gop­oly on gov­er­nance is gone. Immor­tal­i­ty!
...

Vir­tu­al nations with non-tech­nol­o­gy pow­ered ser­vices like secu­ri­ty and diplo­ma­cy here we come! It’s just a mat­ter of time.

And cred­it where cred­it’s due. The idea of vol­un­tary vir­tu­al nations actu­al­ly sound like a poten­tial­ly hilar­i­ous and fun gim­mick with all lots of poten­tial appli­ca­tions for orga­niz­ing com­plex vol­un­teer­ing ini­tia­tives or oth­er sorts of col­lec­tive goals that might be dif­fi­cult for a group of strangers to achieve oth­er­wise.

But as we’ve seen with the dis­tinc­tion between the cult of Bit­coin, and all the hyper-Lib­er­tar­i­an eco­nom­ic and ide­o­log­i­cal bag­gage that comes with it, vs the blockchain and uni­vere of poten­tial blockchain appli­ca­tions that have noth­ing to do with the Lib­er­tar­i­an agen­da, this Bit­na­tion scheme appears to be suf­fer­ing from a sim­i­lar prob­lem. It actu­al­ly sounds like a fun tech­nol­o­gy with lots of poten­tial­ly pos­i­tive and neg­a­tive appli­ca­tions (actu­al cults would prob­a­bly love it). But instead of being rolled out as a poten­tial­ly use­ful self-orga­ni­za­tion tool that peo­ple can use for what­ev­er pur­pose, the Bit­na­tion tech­nol­o­gy is being rolled out as some sort of world-chang­ing/­par­a­digm-shift­ing alter­na­tive to gov­ern­ment that’s poised to ush­er in an age of tran­shu­man­ism and immor­tal­i­ty.

So we’ll see how long it takes before vir­tu­al nations have over­thrown gov­ern­ment. There’s a bit of a ‘chick­en and the egg’ dilem­ma in all this in that its unclear what’s going to get peo­ple to flock to the vir­tu­al nation before is has fun low-tech fea­tures like a legal sys­tem with con­tract enforce­ment pow­ers. Although that could be addressed if Bit­na­tion finds a chick­en:

Inter­na­tion­al Busi­ness Times
Bit­na­tion and Eston­ian gov­ern­ment start spread­ing sov­er­eign juris­dic­tion on the blockchain

Ian Alli­son
By Ian Alli­son
Novem­ber 28, 2015 10:29 GMT

Bit­na­tion, the decen­tralised gov­er­nance project which offers blockchain IDs and Bit­coin deb­it cards to refugees, has done a deal with Esto­nia to offer a Pub­lic Notary to e‑Residents.

Start­ing Decem­ber 1 2015, the blockchain notary ser­vice will allow e‑residents, regard­less of where they live or do busi­ness, to notarise their mar­riages, birth cer­tifi­cates, busi­ness con­tracts and more, on the blockchain.

The blockchain is a pub­lic ledger dis­trib­uted across hun­dreds of thou­sands of com­put­ers around the world. The dis­trib­uted and immutable nature of this pub­lic notary makes it more secure than any notary cur­rent­ly offered by tra­di­tion­al nation states.

The Eston­ian e‑Residency pro­gramme is far and away the most advanced of its kind on the plan­et. This agree­ment takes that a step fur­ther into whole­sale decen­tral­i­sa­tion.

Bit­na­tion is doing for iden­ti­ty and state­hood, what Bit­coin is doing for mon­ey. Bit­na­tion CEO and founder Susanne Tem­ple­hof has said, in ref­er­ence to the cur­rent refugee cri­sis, that the project seeks to erad­i­cate the most crim­i­nal part of our exist­ing lega­cy sys­tems – bor­ders.

She told IBTimes in an email: “We have made a deal with Esto­nia, and the ulti­mate goal is to gain recog­ni­tion for Bit­na­tion as a sov­er­eign enti­ty, thus cre­at­ing a prece­dent for open source pro­to­col to be con­sid­ered as sov­er­eign juris­dic­tions.”

Bit­na­tion, as the world’s first blockchain pow­ered vir­tu­al nation, pro­vides “DIY gov­er­nance ser­vices”, and has received inter­na­tion­al atten­tion for pro­vid­ing refugee emer­gency response and world cit­i­zen­ship ID on the blockchain, as well as pio­neer­ing mar­riage, land titles, birth cer­tifi­cates etc.

On the sub­ject of mar­riage, Tem­ple­hof points out that in many coun­tries gay mar­riage, for exam­ple, is ille­gal: “Blockchain does­n’t give a s**t about that,” she said.

Eston­ian e‑Residency is an ini­tia­tive that allows any­one around the world to take advan­tage of the secure authen­ti­cat­ed online iden­ti­ty the Eston­ian gov­ern­ment already offers its 1.3 mil­lion res­i­dents.

Kas­par Kor­jus Esto­ni­a’s e‑Residency pro­gram direc­tor, said: “In Esto­nia we believe that peo­ple should be able to freely choose their digital/public ser­vices best fit to them, regard­less of the geo­graph­i­cal area where they were arbi­trar­i­ly born. We’re tru­ly liv­ing in excit­ing times when nation states and vir­tu­al nations com­pete and col­lab­o­rate with each oth­er on an inter­na­tion­al mar­ket, to pro­vide bet­ter gov­er­nance ser­vices.”

If a cou­ple get mar­ried on the Pub­lic Notary, it does­n’t mean they get mar­ried in the juris­dic­tion of Esto­nia, or in any oth­er nation state juris­dic­tion. Instead, they get mar­ried in the “blockchain juris­dic­tion”.

The tech­nol­o­gy pro­vides a world­wide legal­ly bind­ing proof of exis­tence and integri­ty of con­trac­tu­al agree­ments for things like bank­ing, incor­po­rat­ing com­pa­nies quick­ly and cheap­ly, and gen­er­al­ly empow­er­ing entre­pre­neurs and cit­i­zens around the world.

...

“I’m delight­ed to work with Esto­ni­a’s e‑Residency pro­gram to set a stan­dard prac­tice of com­pe­ti­tion of gov­er­nance ser­vices on a glob­al mar­ket, and to enable oth­ers to exer­cise self-deter­mi­na­tion and fol­low Bit­na­tion’s path to sov­er­eign­ty” she said.

Note that, while Esto­nia appears to be pro­vid­ing the ‘chick­en’ in Esto­ni­a’s ‘chick­en and egg’ dilem­ma, it’s still just a vir­tu­al chick­en that appears to sole­ly exist with­in the “block­ain juris­dic­tion”:

...

If a cou­ple get mar­ried on the Pub­lic Notary, it does­n’t mean they get mar­ried in the juris­dic­tion of Esto­nia, or in any oth­er nation state juris­dic­tion. Instead, they get mar­ried in the “blockchain juris­dic­tion”.

...

Yes, Esto­nia is using Bit­na­tion to offer notary ser­vices with­in the “blockchain juris­dic­tion”. And since the “blockchain juris­dic­tion” does­n’t actu­al­ly exist except in peo­ple’s heads, its entire­ly unclear what actu­al ser­vice the Esto­nia gov­ern­ment is offer­ing here, but Esto­nia is offer it nonethe­less. Your vir­tu­al pri­vate island awaits.

In oth­er news...

It’s 2016, and Bit­coin’s Civ­il War of 2015 over blockchain block sizes rages on. The par­tic­i­pa­tion of one of Bit­coin’s key devel­op­ers and a backer of “Bit­coin XT” ‘fork’ that’s been large­ly reject­ed by the Bit­coin com­mu­ni­ty, how­ev­er, end­ed entire­ly recent­ly when Mike Hearn sold all his Bit­coins and wrote a let­ter to Medi­um about why Bit­coin is dead and every­one should move on. Well, here’s a coun­ter­point arti­cle indi­cat­ing that Bit­coin isn’t quite dead yet, and prob­a­bly will live on in some form even if Bit­coin itself dies. So the news for Bit­coin could be worse. It’s not dead yet:

Ars Tech­ni­ca

Three rea­sons why Bit­coin isn’t dead yet
Op-ed: Despite the loss of a key dev (and his pes­simistic words), Bit­coin plows ahead.

by Cyrus Fari­var — Jan 26, 2016 6:30am CST

About a week ago, col­leagues were send­ing me copies of a Medi­um post ric­o­chet­ing all over the Inter­net: a cru­cial Bit­coin devel­op­er, Mike Hearn, was call­ing it quits. The announce­ment unsur­pris­ing­ly spawned media spec­u­la­tion and opin­ion pieces with head­lines like, RIP Bit­coin, it’s time to move on.” Bitcoin’s trad­ing price in US dol­lars fell by about 10 per­cent in about 24 hours.

But take it from an admit­ted Bit­coin skeptic—the cryp­tocur­ren­cy isn’t any­where close to being dead. At least, it’s not dying any time soon.

Hearn is cer­tain­ly much more knowl­edge­able about Bit­coin than I am, and he out­lines a com­pelling case for why Bit­coin is in cri­sis. I hadn’t known, for exam­ple, that the blockchain is con­trolled by a major­i­ty of min­ers based in Chi­na where out­bound inter­na­tion­al traf­fic has high laten­cy. I didn’t real­ize there’s a huge drag on com­plet­ing Bit­coin-based trans­ac­tions. And after read­ing Hearn’s pre­vi­ous piece argu­ing in favor of the Bit­coin XT fork, I didn’t real­ize so many peo­ple hat­ed the idea. Users want­ed the term banned entire­ly from a promi­nent Bit­coin forum.

I main­tain there’s no way the vast major­i­ty of peo­ple who live in the banked world would pre­fer to use some­thing that can be frankly so con­found­ing in prac­tice. And all of Hearn’s evi­dence sug­gests that Bit­coin, as it stands today, is in seri­ous cri­sis. But Bit­coin has been pro­nounced dead near­ly 100 times since its incep­tion. As skep­ti­cal as I remain, there’s sim­ply no evi­dence that Bit­coin as we know it is implod­ing in any dis­cernible way.

Let’s con­sid­er a few facts that indi­cate Bit­coin isn’t dead:

* The trad­ing price of Bit­coin has yet to real­ly col­lapse. Back in 2013, I report­ed how its price fell by near­ly half in just six hours. So while Bit­coin has yet to ful­ly recov­er from the dip that it sus­tained sev­er­al days ago, it’s nowhere near the lev­el of that crash from three years ago. Pre­sum­ably if there was sud­den­ly a cri­sis of faith amongst Bit­coin­ers, there would be a mas­sive sell­off.

* No notable Bit­coin-relat­ed investors have pulled out. In fact, they’re dou­bling down—at least in pub­lic statements—about their faith in the cryp­tocur­ren­cy. “There are a num­ber of well-fund­ed com­pa­nies com­pet­ing to build valu­able busi­ness­es on top of this tech­nol­o­gy,” Fred Wil­son, of Union Square Ven­tures, wrote on his blog recent­ly. “We are invest­ed in at least one of them.” And Bar­ry Sil­bert, founder and CEO of Dig­i­tal Cur­ren­cy Group, told CNBC he is “not con­cerned in the slight­est” that Bit­coin is going the way of the dinosaurs.

* Bit­coin-relat­ed cor­po­rate deals are con­tin­u­ing unabat­ed. Just a few days ago, Krak­en acquired Coin­set­ter to become one of the largest Bit­coin exchanges world­wide.

Blockchain gang

I remain uncon­vinced that Bit­coin in its present form will con­tin­ue over the long haul. It remains far too dif­fi­cult for most peo­ple to actu­al­ly use it, par­tic­u­lar­ly when tra­di­tion­al fiat cur­ren­cies often do a decent job.

...

Ever since I first wrote about Bit­coin in 2011, I found it intrigu­ing large­ly because of its blockchain idea. This new con­cept, based on cryp­tog­ra­phy that rais­es fun­da­men­tal ques­tions about the nature of mon­ey, is fas­ci­nat­ing. And even if Bit­coin does die, this under­pin­ning idea—a dis­trib­uted, cryp­to­graph­i­cal­ly based ledger—will like­ly live on. Appar­ent­ly Chi­na is now doing just that as the coun­try advances its own “answer to Bit­coin.”.

In fact, the Inter­na­tion­al Mon­e­tary Fund recent­ly released a paper explor­ing how the blockchain and vir­tu­al cur­ren­cy could be ben­e­fi­cial in the­o­ry despite the idea’s inher­ent risks. As the orga­ni­za­tion wrote:

[Vir­tu­al cur­ren­cies, or VCs] offer many poten­tial ben­e­fits, includ­ing rapid­ly increas­ing speed and effi­cien­cy in mak­ing pay­ments and trans­fers, and deep­en­ing finan­cial inclu­sion. The dis­trib­uted ledger tech­nol­o­gy under­ly­ing some VC schemes offers ben­e­fits that go well beyond VCs them­selves.

At the same time, VCs pose many risks and threats to finan­cial integri­ty, con­sumer pro­tec­tion, tax eva­sion, exchange con­trol enforce­ment, and effec­tive finan­cial reg­u­la­tion. While risks to the con­duct of mon­e­tary pol­i­cy seem unlike­ly at this stage giv­en VC’s very small scale, it is pos­si­ble that risks to finan­cial sta­bil­i­ty may even­tu­al­ly emerge as new tech­nolo­gies come into more wide­spread use.

So today, I con­tin­ue to feel the same way about Bit­coin as I did when it first surfaced—I’m skep­ti­cal but fas­ci­nat­ed. Even though I believe the cryp­tocur­ren­cy will con­tin­ue on, what George­town Uni­ver­si­ty busi­ness pro­fes­sor James Angel told me in 2013 still rings true:

“It’s play mon­ey in the vir­tu­al casi­no; every­body else is try­ing to out­guess each oth­er. Bit­coin has turned into a very large mul­ti­play­er online game in which every­body is try­ing to out spec­u­late each oth­er.”

“Ever since I first wrote about Bit­coin in 2011, I found it intrigu­ing large­ly because of its blockchain idea. This new con­cept, based on cryp­tog­ra­phy that rais­es fun­da­men­tal ques­tions about the nature of mon­ey, is fas­ci­nat­ing. And even if Bit­coin does die, this under­pin­ning idea—a dis­trib­uted, cryp­to­graph­i­cal­ly based ledger—will like­ly live on. Appar­ent­ly Chi­na is now doing just that as the coun­try advances its own “answer to Bit­coin.”.”
Yep, Chi­na is con­sid­er­ing start­ing its own dig­i­tal cur­ren­cy to be used in place of paper mon­ey and boost pol­i­cy­mak­ers’ con­trol of the mon­ey sup­ply. If suc­cess­ful, the blockchain tech­nol­o­gy will be used to actu­al­ly increase gov­ern­ment influ­ence over the econ­o­my, which is a bit iron­ic for the under­ly­ing tech­nol­o­gy behind Bit­coin.

And that’s all part of why the above piece is almost cer­tain­ly cor­rect about the long-term via­bil­i­ty of the blockchain tech­nol­o­gy vs Bit­coin itself. A pub­lic dig­i­tal ledger is bound to be use­ful for a vari­ety of appli­ca­tions. It’s Bit­coin’s insis­tence on being a new supe­ri­or form of anti-fiat mon­ey that’s always been Bit­coin’s biggest hur­dle. But vari­a­tions of the gen­er­al blockchain idea could be used for all sort of inter­est­ing things and will con­tin­ue to be use­ful long after Bit­coin’s death if it real­ly does final­ly implode one day.

For instance, The head of JP Mor­gan’s invest­ment bank, Daniel Pin­to, was recent­ly com­ment­ing on JP Mor­gan’s recent tri­al project for loan fund set­tle­ments using finan­cial sec­tor blockchain tech­nol­o­gy devel­oped by Dig­i­tal Asset Hold­ings, the com­pa­ny backed by many of the biggest banks in the world. Accord­ing to Pin­to, the finan­cial sec­tor of the future is going to incor­po­rate blockchain tech­nol­o­gy “in every­thing relat­ed to set­tle­ment, and not just loans. While it is still ear­ly days, the tech­nol­o­gy looks very good.” And why not? There are prob­a­bly plen­ty of use­ful appli­ca­tions in the finan­cial sec­tor alone, espe­cial­ly when it comes to track­ing finan­cial secu­ri­ties, as opposed to being a cur­ren­cy itself like Bit­coin.

It’s a reminder that, while Bit­coin’s ongo­ing XT Civ­il War might rep­re­sent an exis­ten­tial cri­sis of sorts for the Bit­coin mon­e­tary rev­o­lu­tion that was sup­posed to over­throw cen­tral bank­ing and fiat finance, blockchain tech­nol­o­gy will prob­a­bly con­tin­ue to be incor­po­rat­ed into the finan­cial sys­tem, espe­cial­ly as a trans­ac­tion set­tle­ment tool. And then there’s Chi­na’s cen­tral bank deploy­ing its own ver­sion. Blockchain dig­i­tal ana­logues of exist­ing cur­ren­cies, man­aged by cen­tral banks, are prob­a­bly going to pret­ty pop­u­lar with a lot of gov­ern­ments. So there’s prob­a­bly a blockchain rev­o­lu­tion in finance hap­pen­ing, but it’s look­ing like a rev­o­lu­tion by and for the sta­tus quo:

Finan­cial Times

Blythe Mas­ters and JPMor­gan tri­al blockchain project

Ben McLan­na­han in New York
Jan­u­ary 31, 2016 1:25 pm

JPMor­gan Chase has begun a tri­al project using blockchain as it seeks to lead bank­ing-indus­try efforts to cut the cost and has­sle of trad­ing.

The move by JPMor­gan, the biggest US bank by assets, is among the clear­est state­ments yet of banks’ deter­mi­na­tion to explore the poten­tial of blockchain, the com­put­er net­work on which bit­coin sits.

The bank is col­lab­o­rat­ing with Dig­i­tal Asset Hold­ings, the New York-based start-up run by Blythe Mas­ters, the bank’s for­mer head of com­modi­ties. The pair are look­ing at sev­er­al appli­ca­tions for the tech­nol­o­gy, includ­ing address­ing liq­uid­i­ty mis­match­es in JPMorgan’s loan funds, which nor­mal­ly let investors take out their mon­ey at short notice — even though the under­ly­ing assets can require much more time to sell.

“To sell a loan is a very cum­ber­some, time-con­sum­ing process; set­tle­ment can take weeks,” said Daniel Pin­to, head of JPMorgan’s invest­ment bank. Explor­ing alter­na­tives through blockchain “makes all the sense in the world; it’s eas­i­er and faster oper­a­tional­ly, and you get few­er mis­takes”.

Blockchain has caught the imag­i­na­tion of the finan­cial ser­vices indus­try with­in the past year, with a host of com­pa­nies vow­ing to find ways to use it to reshape many of their dai­ly oper­a­tions, from upgrad­ing old back-office sys­tems to auto­mat­ic exe­cu­tion of con­tracts.

The tech­nol­o­gy is essen­tial­ly a dig­i­tal pub­lic data­base of events that is con­tin­u­ous­ly main­tained and ver­i­fied in “blocks” of records and shared among var­i­ous par­ties. This means pay­ment ledgers can be instant­ly updat­ed in mul­ti­ple loca­tions with­out a sin­gle, cen­tralised author­i­ty.

JPMor­gan appears to be tak­ing a lead in encour­ag­ing broad­er, indus­try-wide adop­tion of blockchain tech­nol­o­gy — in a sim­i­lar way to how Gold­man Sachs has led a con­sor­tium devel­op­ing Sym­pho­ny, a com­mu­ni­ca­tions tool.

Offi­cials at JPMor­gan point to the bank’s involve­ment with the Lin­ux Foundation’s Open Ledger Project, which said last month that it was aim­ing to cre­ate stan­dards that the entire finan­cial ser­vices indus­try could adopt.

Mr Pin­to said loans were a good place to start tri­al­ing blockchain tech­nol­o­gy, because “the set­tle­ment process is com­plex with lots of man­u­al inter­ven­tion and mul­ti­ple par­ties”.

A cou­ple of months into the tri­al, the 52-year-old exec­u­tive — among the lead­ing can­di­dates to suc­ceed chief exec­u­tive Jamie Dimon should he step down in the near-term — is pleased with progress.

“Blockchain will be big in every­thing relat­ed to set­tle­ment, and not just loans. While it is still ear­ly days, the tech­nol­o­gy looks very good,” he said.

Ms Mas­ters not­ed that efforts to improve the speed of set­tle­ment led to “reduced cap­i­tal require­ments, low­er oper­a­tional costs and an improved client expe­ri­ence”. Pre­vi­ous­ly, she had described reduc­ing the costs of finan­cial trans­ac­tions as “one of the great­est chal­lenges of our time”.

Last week Dig­i­tal Asset Hold­ings announced it had raised more than $50m from a group of 13 finan­cial com­pa­nies includ­ing JPMor­gan, Cit­i­group, Deutsche Börse and the Depos­i­to­ry Trust & Clear­ing Cor­po­ra­tion.

Gold­man Sachs is now in dis­cus­sions to join that lat­est round of fund­ing, accord­ing to peo­ple famil­iar with the sit­u­a­tion.

Autonomous Research, a New York-based finan­cial ser­vices bou­tique, esti­mates that the glob­al invest­ment banks now spend about $50bn a year on post-trade process­es, a fig­ure that could be cut by about one-third with greater use of blockchain-type tech­nolo­gies.

...

“Autonomous Research, a New York-based finan­cial ser­vices bou­tique, esti­mates that the glob­al invest­ment banks now spend about $50bn a year on post-trade process­es, a fig­ure that could be cut by about one-third with greater use of blockchain-type tech­nolo­gies.”
As we can see, the blockchain rev­o­lu­tion in finance will indeed take place, regard­less of the out­come of the Bit­coin XT Civ­il War because Bit­coin, itself, is becom­ing increas­ing­ly irrel­e­vant to the larg­er blockchain rev­o­lu­tion in tra­di­tion finance. And it’s a rev­o­lu­tion that’s going to con­tin­ue because it’s most­ly a rev­o­lu­tion in back office trans­ac­tion set­tle­ment costs that could save the exist­ing finan­cial sec­tor bil­lions of dol­lars a year. Those are the kinds of rev­o­lu­tion that you can be pret­ty sure are going to hap­pen.

Plus, we might see rev­o­lu­tions like cen­tral banks, like the Bank of Chi­na, using the blockchain to issue their own dig­i­tal ver­sions of their cur­ren­cies which could giv­en them more con­trol over their mon­ey sup­ply.

So, to sum­ma­rize, the Bit­coin rev­o­lu­tion of finance will indeed con­tin­ue, although it’s real­ly more of a blockchain cost-sav­ing counter-rev­o­lu­tion which may or may not involve Bit­coin’s con­tin­ued exis­tence.

If you’re a Bit­coin enthu­si­ast liv­ing in the EU, and one of the rea­sons for your enthu­si­asm is the appar­ent anonymi­ty of bit­coin trans­ac­tions, it might be time to go on a spend­ing spree:

For­tune

Here’s Why Europe Is About to Crack Down on Bit­coin Anonymi­ty

by David Mey­er

Feb­ru­ary 3, 2016, 5:21 AM EST

Because ter­ror­ism.

The EU’s exec­u­tive body has promised new leg­is­la­tion in the Spring to make sure the exchanges and users of vir­tu­al cur­ren­cy plat­forms such as Bit­coin are iden­ti­fi­able and trace­able.

The rea­son? Ter­ror­ism. The move was announced as part of a raft of mea­sures to make it hard­er for ter­ror­ists and their back­ers to move around funds and oth­er assets.

“We want to improve the over­sight of the many finan­cial means used by ter­ror­ists, from cash and cul­tur­al arte­facts to vir­tu­al cur­ren­cies and anony­mous pre-paid cards, while avoid­ing unnec­es­sary obsta­cles to the func­tion­ing of pay­ments and finan­cial mar­kets for ordi­nary, law-abid­ing cit­i­zens,” said Euro­pean Com­mis­sion vice pres­i­dent Vald­is Dom­brovskis.

What will this mean in prac­tice? The new leg­is­la­tion would force vir­tu­al cur­ren­cy plat­forms to apply more due dili­gence con­trols when cus­tomers are exchang­ing vir­tu­al for real cur­ren­cies, by bring­ing them under the scope of EU anti-mon­ey-laun­der­ing laws.

The pro­pos­als will be set out in full by mid-year, with the aim of mak­ing them law across the EU by the end of 2017.

Bye-bye Bit­coin anonymi­ty — at least, in the­o­ry.

Many exchanges for Bit­coin and sim­i­lar vir­tu­al cur­ren­cies oper­ate out­side the Euro­pean Union, putting them out of this legislation’s reach. And once hard cash has been con­vert­ed into such “cryp­tocur­ren­cies,” it’s inher­ent­ly tricky to track the sub­se­quent trans­ac­tions.

...

While this news prob­a­bly isn’t going to please the Bit­coin com­mu­ni­ty, it’s worth keep­ing in mind that Bit­coin isn’t actu­al­ly very anony­mous and as blockchain-analy­sis tech­niques improve the de-anonymiza­tion of large swathes of bit­coin pseu­do­nyms could take place, so if you do go on a spend­ing spree now in advance of these new rules, you’re trans­ac­tions might get de-anonymized in the future any­ways. That may not please the Bit­coin com­mu­ni­ty either.

So Bit­coin is enmeshed in this epic civ­il war over whether or not to “fork” the Bit­coin pro­to­col to the pro­posed “Bit­coin XT” ver­sion (end­less grow­ing blockchain blocks) or stick with “Bit­coin Clas­sic” (dou­ble the block size and that’s it for now)? A fork of one type or anoth­er is loom­ing and it’s just a mat­ter of which one. It’s basi­cal­ly a civ­il war over a fork in the road: which Bit­coin “fork” to use next.

Well, researchers dis­cov­ered a new poten­tial pit­fall asso­ci­at­ed with every Bit­coin fork in the road, and it’s poten­tial­ly nasty. Every time one of these “hard forks” hap­pen, there’s the poten­tial for you to “dou­ble spend” your coins on the new chain using a process called “taint­ing” where the new fork’s block­hain get tricked into think­ing the same coin from the old blockchain are dif­fer­ent coins. That’s quite a com­pli­ca­tion, not just for the cur­rent Bit­coin civ­il war but for the tech­nol­o­gy in gen­er­al. You don’t want every patch for your soft­ware to involve a poten­tial dou­ble-spend­ing-poca­lypse.

At the same time, this bug has a fas­ci­nat­ing rela­tion­ship to the Bit­coin civ­il war itself, because the bat­tle over Bit­coin XT vs Bit­coin Clas­sic is real­ly a bat­tle over whether or not to employ an algo­rithm that auto­mat­i­cal­ly increas­es the size of the Bit­coin blockchain “blocks” indef­i­nite­ly (the Bit­coin XT approach), or just dou­ble the size of the blockchain once, leav­ing future blockchain size upgrades up to future debates and future forks (the Bit­coin Clas­sic approach). Min­i­miz­ing forks was always a pri­or­i­ty for Bit­coin. It’s just a pain. At the same time, Bit­coin XT, which would involve few­er forks, is also cur­rent­ly los­ing the bat­tle for Bit­coin­er hearts and minds and it’s look­ing like most min­ers are stick­ing with Bit­coin Clas­sic (which entails more forks in the future). But if “taint­ing” your coins dur­ing each “fork” is now a pos­si­bil­i­ty and pub­lic knowl­edge, the path for­ward that involves few­er of these forks in the road just might become a lot more tempting...especially if the upcom­ing “hard fork” involves a lot of taint­ing.

In oth­er words, the Bit­coin XT side of civ­il war may have got­ten a new weapon in the Bit­coin civ­il war, but it involves fight­ing dirty by spend­ing dirty and induc­ing an exis­ten­tial cri­sis:

Forbes
Dou­ble Your Mon­ey? Loom­ing ‘Hard Fork’ Uncov­ers Fatal Bit­coin Flaw

Jason Bloomberg ,
Feb 7, 2016 @ 10:18 AM

Over the last sev­er­al months, a con­tro­ver­sy has been brew­ing in the world of Bit­coin. The entire Bit­coin infra­struc­ture has a fast approach­ing hard-cod­ed lim­it, and as yet the Bit­coin com­mu­ni­ty hasn’t reached a con­sen­sus on a solu­tion.

As the num­ber of Bit­coin trans­ac­tions increase, this one megabyte ceil­ing on the block size is now lead­ing to increas­ing­ly long trans­ac­tion back­logs, as the min­ers (trans­ac­tion proces­sors) strug­gle to deal with the impend­ing lim­it.

The obvi­ous solu­tion is sim­ply to increase the block size lim­it – but such a change is eas­i­er said than done, because it requires a hard fork of the Bit­coin pro­to­col. (Less dras­tic soft fork options are also under con­sid­er­a­tion, but only serve to delay an even­tu­al hard fork.)

With a hard fork, the revised pro­to­col with the larg­er block size is essen­tial­ly incom­pat­i­ble with the old­er, more lim­it­ed pro­to­col. As soon as enough min­ers have switched to the new pro­to­col, then that one becomes the ‘offi­cial’ pro­to­col, as those min­ers will no longer rec­og­nize Bit­coin trans­ac­tions using the old pro­to­col.

Now that many of Bitcoin’s core devel­op­ers have reject­ed Bit­coin XT – one promis­ing hard fork option I cov­ered in a pre­vi­ous arti­cle – the most like­ly con­tender for fix­ing the blockchain lim­it is now Bit­coin Clas­sic. Bit­coin Clas­sic eschews the more strate­gic (and com­pli­cat­ed) approach of Bit­coin XT, instead favor­ing a sim­plis­tic dou­bling of the block size lim­it – a sim­ple but short-sight­ed solu­tion to the prob­lem.

...

Updat­ing wal­lets, how­ev­er, isn’t the issue. As a like­ly con­sen­sus on Bit­coin Clas­sic approach­es, some enter­pris­ing Bit­coin­ers have uncov­ered a poten­tial­ly fatal flaw, not just with Bit­coin Clas­sic, but with the hard fork process itself.

Accord­ing to a recent dis­cus­sion in the Bit­coin Red­dit forum, it’s pos­si­ble to dou­ble your Bit­coins as min­ers switch from one pro­to­col to the oth­er. “We’ve nev­er gone through a planned hard fork, so we don’t real­ly know exact­ly how this will all play out,” warns Red­dit com­menter sgor­nick (in keep­ing with Bitcoin’s Lib­er­tar­i­an val­ues, most com­menters are anony­mous).

This dou­ble-your-mon­ey flaw depends upon trick­ing the sys­tem into think­ing a par­tic­u­lar amount of Bit­coin isn’t the same Bit­coin across the two incom­pat­i­ble trans­ac­tion sys­tems, a process insid­ers call taint­ing. “If you can bor­row pri­or to the hard fork you can then taint those coins with new­ly mined Clas­s­ic­Coin and use that to repay the loan,” sgor­nick con­tin­ues. “The result is you’ll have sat­is­fied repay­ment of the loan and you’d still end up with those pre-fork bit­coins you had bor­rowed.”

Oth­er Bit­coin­ers are sound­ing the warn­ing as well – or per­haps alert­ing fel­low schemers how to game the sys­tem. “Even a win­dow of only min­utes can and will be used by enter­pris­ing types to prof­it on the hard fork sce­nario,” explains Red­dit com­menter Vasyrr.

Red­di­tors are smart enough to real­ize, how­ev­er, that this flaw in the sys­tem isn’t nec­es­sar­i­ly a license to print mon­ey. “If there are 5 forks, you will have coins valid on 5 chains, i.e. 5 times the amount of coins. If there are 100 forks, you will have coins valid on 100 chains, etc.,” says Red­dit com­menter braid_guy. “Whether they have any actu­al val­ue in real life is anoth­er mat­ter.”

Clear­ly, if too many peo­ple take advan­tage of this flaw, thus dou­bling their Bit­coin stake (or worse), then the val­ue of all Bit­coin would prompt­ly col­lapse – and giv­en that there are about $5.7 bil­lion of Bit­coin in cir­cu­la­tion, such a col­lapse would be mon­u­men­tal. Per­haps some insid­ers are hop­ing only a very few will cap­i­tal­ize on the sit­u­a­tion, them­selves includ­ed.

But even if no one actu­al­ly dupli­cates their Bit­coins this way, the mere fact that it’s pos­si­ble to do so is poten­tial­ly a fatal flaw for the entire Bit­coin sys­tem. To see why this state­ment is true, con­sid­er what would hap­pen if there were a way to sim­ply dou­ble the bal­ance in an ordi­nary bank account via some kind of account­ing error or hack.

In the mod­ern bank­ing sys­tem, such one-sided trans­ac­tions are impos­si­ble because the entire bank­ing sys­tem enforces dou­ble-entry account­ing. In oth­er words, if mon­ey appears in one place, then it must dis­ap­pear some­where else.

Only sov­er­eign nations can print their own mon­ey, and if any nation were to do so with­out com­ply­ing with the rules of the glob­al bank­ing sys­tem, then its cur­ren­cy would not be exchange­able for any oth­er cur­ren­cy, and fur­ther­more, it would be sub­ject to run­away infla­tion.

Placed in this con­text, the ‘dou­ble your mon­ey’ hard fork flaw in the Bit­coin sys­tem poten­tial­ly gives any­one the abil­i­ty to ‘print their own mon­ey.’ And even though that poten­tial may nev­er actu­al­ly be real­ized, sim­ply the fact that it is pos­si­ble should dis­qual­i­fy Bit­coin from being treat­ed as a seri­ous cyber­cur­ren­cy con­tender.

“Placed in this con­text, the ‘dou­ble your mon­ey’ hard fork flaw in the Bit­coin sys­tem poten­tial­ly gives any­one the abil­i­ty to ‘print their own mon­ey.’ And even though that poten­tial may nev­er actu­al­ly be real­ized, sim­ply the fact that it is pos­si­ble should dis­qual­i­fy Bit­coin from being treat­ed as a seri­ous cyber­cur­ren­cy con­tender.”
Could taint­ed self-repli­cat­ing Bit­coin make fork­ing, and there­fore updat­ing, the Bit­coin pro­to­col an increas­ing­ly pre­car­i­ous under­tak­ing? Well, if it’s as easy as it sounds to pull this off, that does appear to be a bit of an exis­ten­tial threat:

...
Updat­ing wal­lets, how­ev­er, isn’t the issue. As a like­ly con­sen­sus on Bit­coin Clas­sic approach­es, some enter­pris­ing Bit­coin­ers have uncov­ered a poten­tial­ly fatal flaw, not just with Bit­coin Clas­sic, but with the hard fork process itself.

Accord­ing to a recent dis­cus­sion in the Bit­coin Red­dit forum, it’s pos­si­ble to dou­ble your Bit­coins as min­ers switch from one pro­to­col to the oth­er. “We’ve nev­er gone through a planned hard fork, so we don’t real­ly know exact­ly how this will all play out,” warns Red­dit com­menter sgor­nick (in keep­ing with Bitcoin’s Lib­er­tar­i­an val­ues, most com­menters are anony­mous).

This dou­ble-your-mon­ey flaw depends upon trick­ing the sys­tem into think­ing a par­tic­u­lar amount of Bit­coin isn’t the same Bit­coin across the two incom­pat­i­ble trans­ac­tion sys­tems, a process insid­ers call taint­ing. “If you can bor­row pri­or to the hard fork you can then taint those coins with new­ly mined Clas­s­ic­Coin and use that to repay the loan,” sgor­nick con­tin­ues. “The result is you’ll have sat­is­fied repay­ment of the loan and you’d still end up with those pre-fork bit­coins you had bor­rowed.”

Oth­er Bit­coin­ers are sound­ing the warn­ing as well – or per­haps alert­ing fel­low schemers how to game the sys­tem. “Even a win­dow of only min­utes can and will be used by enter­pris­ing types to prof­it on the hard fork sce­nario,” explains Red­dit com­menter Vasyrr.
...

At the same time, Bit­coin XT’s end­less­ly grow­ing blockchain blocks sure are going to look extra appeal­ing if the future forks the Bit­coin Clas­sic fork will require can be avoid­ed entire­ly.

Since Bit­coin XT is prob­a­bly a big step in the direc­tion that Bit­coin needs to go, where it’s less about being mon­ey and more about allow­ing a mas­sive num­ber of micro­trans­ac­tions using tiny frac­tions of bit­coins, who knows, maybe this poten­tial­ly fatal flaw will put Bit­coin on a more viable path for­ward.

One of the inter­est­ing aspects of the Bit­coin exper­i­ment was always going to be what hap­pens when all 21 mil­lion Bit­coins are final­ly “mined” and the financ­ing of the Bit­coin “min­ing” was going to have to be han­dled exclu­sive­ly by charg­ing fees instead of how it works today with the win­ning min­ers receiv­ing fresh­ly mint­ed bit­coins with new “block”. The clos­er we got to the year 2040, the few­er bit­coins there are remain­ing and the the small­er the pay­out for each mined block and that means a big­ger role for the trans­ac­tion fees. But 2040 that trans­ac­tion fee-only phase of the Bit­coin exper­i­ment was­n’t sup­posed to hap­pen for a while. That’s part of what makes the big fight over the Bit­coin “Clas­sic” vs “Core” pro­to­cols so fas­ci­nat­ing: if the “Core” pro­to­col wins out, which means no blockchain growth at all, the lack of ade­quate blockchain space is going to force min­ers to pick and choose which trans­ac­tions they process next. And that means trans­ac­tion fees for min­ers could become a new ubiq­ui­tous real­i­ty for the Bit­coin com­mu­ni­ty. Whether or not it’s a good idea to intro­duce ubiq­ui­tous min­ing fees so ear­ly in the Bit­coin exper­i­ment, since the min­ing com­mu­ni­ty is also dom­i­nat­ed by two min­ing pools in Chi­na and those min­ing pools back Bit­coin “Core”, it’s look­ing like the ver­sion of Bit­coin that’s going to soon include ubiq­ui­tous trans­ac­tion fees is the only ver­sion of Bit­coin that’s going to mat­ter:

CBC.ca
Bit­coin feud over expan­sion threat­ens to desta­bi­lize cur­ren­cy
Devel­op­er’s depar­ture and pro­pos­al for rival sys­tem has revived dooms­day pre­dic­tions about bit­coin’s future

By Anik See, Kazi Stast­na, CBC News Post­ed: Feb 21, 2016 5:00 AM ET Last Updat­ed: Feb 21, 2016 5:00 AM ET

Bit­coin, the cryp­tocur­ren­cy that has earned legions of fans and has often been tout­ed as the future of mon­ey, is in dan­ger of hav­ing no future at all.

A rift with­in the peer-to-peer net­work of users and soft­ware devel­op­ers that oper­ate the bit­coin sys­tem has prompt­ed one of its senior devel­op­ers and most ardent pro­po­nents, Mike Hearn, to sell all his bit­coin and pull out of the exist­ing net­work, which is run on a con­sen­sus basis and not over­seen by any cen­tral author­i­ty.

“[Bit­coin] has failed because the com­mu­ni­ty has failed,” Hearn wrote in a Jan. 14 blog post explain­ing his depar­ture. “What was meant to be a new, decen­tralised form of mon­ey that lacked ‘sys­tem­i­cal­ly impor­tant insti­tu­tions’ and ‘too big to fail’ has become some­thing even worse: a sys­tem com­plete­ly con­trolled by just a hand­ful of peo­ple.”

The crux of the dis­agree­ment with­in the bit­coin com­mu­ni­ty is whether to increase the size of the blocks of data that make up the back­bone of bit­coin so that the sys­tem could process more trans­ac­tions at a faster rate. A 1 MB cap on the size of the blocks is hard­wired into the bit­coin pro­to­col that was cre­at­ed in 2009.

Allow­ing few­er trans­ac­tions per sec­ond keeps the sys­tem safer, but it lim­its its over­all capac­i­ty and, crit­ics say, leads to con­ges­tion, trans­ac­tion delays and can­cel­la­tions as the net­work runs out of capac­i­ty and gets unre­li­able.

Duelling bit­coin ver­sions

In August 2015, Hearn and anoth­er senior devel­op­er, Gavin Andresen, pro­posed an alter­na­tive ver­sion of bit­coin called Bit­coin XT that allows more trans­ac­tions per sec­ond. Since then, oth­er ver­sions have sprung up, includ­ing Bit­coin Clas­sic and Bit­coin Unlim­it­ed.

Switch­ing to Bit­coin XT would require the approval of 75 per cent of the net­work’s so-called min­ers, the supe­rusers who run the com­put­ing hard­ware that gen­er­ates bit­coin and keeps track of trans­ac­tions.

Some of those users fear that increas­ing trans­ac­tion vol­ume would threat­en bit­coin’s decen­tral­ized mod­el and result in only larg­er, pos­si­bly cor­po­rate, users being able to afford to mine bit­coins.

But Hearn and oth­er crit­ics of the exist­ing sys­tem allege that con­trol of bit­coin is already cen­tral­ized. Cur­rent­ly, Hearn says, more than half the pro­cess­ing pow­er is con­trolled by just two min­ers in Chi­na, which gives them dis­pro­por­tion­ate con­trol over the bit­coin ecosys­tem and a dis­pro­por­tion­ate share of the bit­coin pay­ments that min­ers get for run­ning the algo­rithms on which the sys­tem oper­ates.

“At a recent con­fer­ence, over 95 per cent of hash­ing pow­er was con­trolled by a hand­ful of guys sit­ting on a sin­gle stage. The min­ers are not allow­ing the block chain to grow,” Hearn wrote.

He and Andresen set the 75 per cent thresh­old for switch­ing to the XT sys­tem so that the expan­sion could­n’t go for­ward with­out a large major­i­ty and so that a sin­gle, large min­ing pool could not have de fac­to veto pow­er over expand­ing the sys­tem.

A bit­coin fast lane

Izabel­la Kamin­s­ka, who blogs about bit­coin for the Finan­cial Times, says most min­ers don’t sup­port an over­all increase in block size but favour a two-tier sys­tem that would charge a pre­mi­um for faster pro­cess­ing of trans­ac­tions.

“Once the [block size] lim­it is reached, min­ers will have to choose which trans­ac­tions to include and which to dump,” Kamin­s­ka said. “Nat­u­ral­ly, only fees will help guar­an­tee inclu­sion — some­thing which stands to make the sys­tem real­ly expen­sive real­ly quick­ly.”

Kamin­s­ka says those fees could end up being high­er than those charged by banks.

“I don’t think [Hearn’s] project (Bit­coin XT) would have helped one bit even if adopt­ed. Hearn want­ed to stage an inter­ven­tion, [but] some­one still has to pay for the increased traf­fic.”

Some say the biggest dan­ger of the cur­rent dis­pute is that it results in two rival sys­tems whose cur­ren­cies are incom­pat­i­ble, which would desta­bi­lize and deval­ue the cur­ren­cy and under­mine the pub­lic’s trust in bit­coin as a legit­i­mate cur­ren­cy. Oth­ers, how­ev­er, think that a so-called fork with­in the bit­coin net­work could lead to inno­va­tion and, ulti­mate­ly, strength­en the vir­tu­al coin.

“Unlike a real polit­i­cal vote, there is no juris­dic­tion being fought over,” said Kamin­s­ka. “Which is why the most like­ly out­come will be an evo­lu­tion­ary-style frag­men­ta­tion ... with both sides turn­ing against each oth­er in a bid to prove they are the bet­ter sys­tem.”

On Feb. 11, a group of some of the biggest play­ers in bit­coin issued a state­ment call­ing for con­sen­sus on the block size issue. The group agreed that the block size needs to increase but argued that it should­n’t hap­pen through what it called a “con­tentious hard-fork,” such as XT or Clas­sic, which would split bit­coin into two incom­pat­i­ble sys­tems.

“The deploy­ment of hard-forks with­out wide­spread con­sen­sus is dan­ger­ous and has the poten­tial to cause trust and mon­e­tary loss­es,” the state­ment said. “We strong­ly encour­age all bit­coin con­trib­u­tors to come togeth­er and resolve their dif­fer­ences to col­lab­o­rate on the scal­ing roadmap.”

...

“Bit­coin’s most-press­ing chal­lenges are exter­nal rather than inter­nal,” said Gar­rick Hile­man, an eco­nom­ic his­to­ri­an at the Uni­ver­si­ty of Cam­bridge and the Lon­don School of Eco­nom­ics.

“Mike’s high-pro­file depar­ture, and the sharp drop in bit­coin’s price fol­low­ing the announce­ment, appears to have gal­va­nized the bit­coin com­mu­ni­ty into com­ing togeth­er to resolve, at least tem­porar­i­ly, the block-size debate.”

But Hile­man stressed that the exist­ing ide­o­log­i­cal dif­fer­ences over bit­coin’s future direc­tion aren’t going away and will “undoubt­ed­ly resur­face when the next big deci­sion point aris­es.”

“Bit­coin is not sta­t­ic,” he said. “It will need to be ‘repro­grammed’ peri­od­i­cal­ly to sur­vive, and it is unre­al­is­tic to expect that every­one will always be pleased with how bit­coin evolves.”

“At a recent con­fer­ence, over 95 per cent of hash­ing pow­er was con­trolled by a hand­ful of guys sit­ting on a sin­gle stage. The min­ers are not allow­ing the block chain to grow.”
The Bit­coin democ­ra­cy of min­ers has spo­ken. And they want a bit­coin fast lane. Paid for with tolls:

...
A bit­coin fast lane

Izabel­la Kamin­s­ka, who blogs about bit­coin for the Finan­cial Times, says most min­ers don’t sup­port an over­all increase in block size but favour a two-tier sys­tem that would charge a pre­mi­um for faster pro­cess­ing of trans­ac­tions.

“Once the [block size] lim­it is reached, min­ers will have to choose which trans­ac­tions to include and which to dump,” Kamin­s­ka said. “Nat­u­ral­ly, only fees will help guar­an­tee inclu­sion — some­thing which stands to make the sys­tem real­ly expen­sive real­ly quick­ly.”

Kamin­s­ka says those fees could end up being high­er than those charged by banks.

“I don’t think [Hearn’s] project (Bit­coin XT) would have helped one bit even if adopt­ed. Hearn want­ed to stage an inter­ven­tion, [but] some­one still has to pay for the increased traf­fic.”
...

It was always just a mat­ter of time before trans­ac­tion fees became the dom­i­nant reward incen­tiviz­ing the min­ing. That’s how Bit­coin is sup­posed to work for the rest of time once it matures. 21 mil­lion bit­coins in cir­cu­la­tion and no more min­ing rewards. Just fees. How that tran­si­tion to a fee-dom­i­nat­ed min­ing mod­el will impact the Bit­coin com­mu­ni­ty is unknown at this point, but find­ing that out is an inevitabil­i­ty if Bit­coin is going to per­sist. It just was­n’t sup­posed to hap­pen until clos­er to 2040 but could hap­pen soon thanks to Bit­coin’s cur­rent min­ing oli­gop­oly.

So it would appear that Bit­coin might be “grow­ing up” ahead of sched­ule by stunt­ing its blockchain block size. Unless there’s a rev­o­lu­tion in com­po­si­tion of the min­ing sec­tor or users orga­nize the switch to one of the rival Bit­coin hard forks. And who knows, if the min­ers jack up the trans­ac­tion fees too much and users start demand­ing low­er fees, a hard fork to a Bit­coin alter­na­tive could hap­pen, espe­cial­ly for micro-trans­ac­tions where a large vol­ume of low-val­ue trans­ac­tions are all that’s desired. And don’t for­get the devel­op­ing world, where trans­ac­tions fees could seri­ous­ly impede Bit­coin adop­tion. But who knows, now that the min­er’s are ful­ly in con­trol and tran­si­tion­ing towards a high­er-prof­it Bit­coin mod­el, we might see a tran­si­tion to a rival cur­ren­cy that does­n’t deal with Bit­coin’s defla­tion­ary bit­coin cap. As a wise Doge once said, So poten­tial. Much future.

Check it out: Some­one may have dis­cov­ered a new way to attack Bit­coin. At least that the spec­u­la­tion after Bit­coin ground to a halt and trans­ac­tions began tak­ing an hour or more to clear. Although that’s just one angle of spec­u­la­tion. Anoth­er angle is that some­one might sim­ply be send­ing coins to them­selves over and over and over, in which case this isn’t an attack so much as a basic flaw in Bit­coin’s design. And then there’s the pos­si­bil­i­ty that Bit­coin ground to a halt because it’s sim­ply hit­ting the lim­its of its blockchain “block” size, an issue at the heart of Bit­coin’s cur­rent exis­ten­tial cri­sis. What­ev­er the cause for the recent slow­down in Bit­coin trans­ac­tions, it has­n’t been the best time to make a time-sen­si­tive Bit­coin pur­chase:

Vice Moth­er­board

Is Bit­coin Under Attack?

Writ­ten by Jor­dan Pear­son
Staff Writer (Cana­da)

March 1, 2016 // 05:03 PM EST

On Mon­day, the Bit­coin world had a melt­down as the cryptocurrency’s net­work start­ed to slow down seem­ing­ly with­out expla­na­tion, leav­ing people’s trans­ac­tions in dig­i­tal lim­bo.

Now, it looks like at least part of the rea­son for the slow­down might be a con­cen­trat­ed attack on Bit­coin by unknown actors.

The issue is that the dig­i­tal “blocks” that con­tain every Bit­coin trans­ac­tion are being filled up. Trans­ac­tions are put into blocks by Bit­coin users, who are incen­tivized in part by fees that peo­ple attach to their trans­ac­tions. Trans­ac­tions aren’t com­plete until they’re put into blocks, or “con­firmed.” But with near-full blocks, there’s more com­pe­ti­tion for space inside them, and so min­ers log­i­cal­ly seek out the trans­ac­tions with a decent reward attached before those that don’t—meaning those who are will­ing to pay more in fees will get their trans­ac­tions con­firmed first.

Trans­ac­tions with­out a reward are thus left to lan­guish in what’s known as the “mem­o­ry pool,” which is stored on every com­put­er run­ning Bit­coin soft­ware. When that mem­o­ry pool fills up, the whole sys­tem slows down, and that’s exact­ly what’s hap­pen­ing right now. The ques­tion now is why.

Accord­ing to long­time Bit­coin devel­op­er Jeff Garzik, some­one might actu­al­ly be tak­ing advan­tage of fuller blocks with an attack that arti­fi­cial­ly push­es the sys­tem over the edge.

“There is an uptick in cor­re­lat­ed trans­ac­tions in the low­er fee stra­ta,” Garzik wrote me in an email. “This would seem to imply that a sin­gle wal­let or set of wal­lets is poten­tial­ly send­ing the same coins over and over, to them­selves. This may be inno­cent trans­ac­tion activ­i­ty, coin ‘tum­bling,’ or an unknown actor pay­ing trans­ac­tion fees to load the bit­coin net­work with traf­fic.”

...

On Tues­day, chief infor­ma­tion offi­cer of Bit­coin com­pa­ny Bit­Fury Alex Petrov retweet­ed a tweet call­ing atten­tion to a Bit­coin address he believes is send­ing coins to itself and refer­ring to them as “loops.” It is “mali­cious spam,” he also tweet­ed.

Block size has been on an upward trend for a very long time, how­ev­er, and so has the num­ber of trans­ac­tions going through the net­work on any giv­en day. This has led to some users and devel­op­ers to describe the cur­rent sit­u­a­tion as Bitcoin’s “new nor­mal,” and a detri­ment to aver­age peo­ple using the cryp­tocur­ren­cy. After all, when you use cash, you don’t have to pay an extra cent or two for the priv­i­lege.

Cur­rent­ly, nobody has claimed respon­si­bil­i­ty for any attack on Bit­coin either on Red­dit or on forums like Bit­coinTalk, unlike near­ly every oth­er attack in recent mem­o­ry, lend­ing cre­dence to the assump­tion that the slow­down is due to peo­ple using bit­coin exact­ly as they should.

Garzik said the data sci­ence team for his bit­coin start­up Bloq are mon­i­tor­ing the sit­u­a­tion. But for now, bit­coin users are report­ing trans­ac­tions tak­ing hours upon hours to be confirmed—that is, to complete—and requir­ing high trans­ac­tion fees in order to have their trans­ac­tions includ­ed in a block.

Attack or not, the result is the same: being a bit­coin user has got to be real­ly fuck­ing annoy­ing today.

“Cur­rent­ly, nobody has claimed respon­si­bil­i­ty for any attack on Bit­coin either on Red­dit or on forums like Bit­coinTalk, unlike near­ly every oth­er attack in recent mem­o­ry, lend­ing cre­dence to the assump­tion that the slow­down is due to peo­ple using bit­coin exact­ly as they should.”
Yep, giv­en the mys­tery over what’s caus­ing the slow­down, the idea that this was a mali­cious attack is sort of the best case sce­nario. Because oth­er­wise it means that ran­dom users, like those that decide to ‘loop’ their bit­coins to them­selves for what­ev­er rea­son, can basi­cal­ly grind the sys­tem to a halt. It’s a chill­ing pos­si­bil­i­ty that high­lights one of the inter­est­ing quirks of Bit­coin: for all the claims about how decen­tral­ized the man­age­ment of sys­tem is, it’s hard to ignore how incred­i­bly cen­tral­ized the actu­al blockchain is since it’s one giant ledger where every sin­gle trans­ac­tion is end­less­ly shared. Plus, it’s pos­si­ble that a sin­gle ran­dom user can slow down the entire Bit­coin econ­o­my. Bit­coin is both rad­i­cal­ly decen­tral­ized and rad­i­cal­ly cen­tral­ized.

Of course, as the arti­cle not­ed, it may not be coor­di­nat­ed attack or an indi­vid­ual ‘loop­ing’ the blockchain to a crawl. Instead, it could sim­ply be a con­ver­gence of all the var­i­ous fac­tors that have been point­ing towards Bit­coin hit­ting a trans­ac­tion-clear­ance wall for some time now. After all, Gavin Andresen, the Bit­coin devel­op­er behind the ill-fat­ed “Bit­coin XT” push that would have sig­nif­i­cant­ly increased the Bit­coin “block” sizes (thus reduc­ing the amount of unprocessed trans­ac­tions that “pool” up), pre­dict­ed last year that Bit­coin would start grind­ing to a halt due to unre­solved trans­ac­tions at some point ear­ly this year:

The MIT Tech­nol­o­gy Review

The Loom­ing Prob­lem That Could Kill Bit­coin

The man who took over stew­ard­ship of Bit­coin from its mys­te­ri­ous inven­tor says the cur­ren­cy is in seri­ous trou­ble.

by Tom Simonite August 28, 2015

The way things are going, the dig­i­tal cur­ren­cy Bit­coin will start to mal­func­tion ear­ly next year. Trans­ac­tions will become increas­ing­ly delayed, and the sys­tem of mon­ey now worth $3.3 bil­lion will begin to die as its flak­i­ness dri­ves peo­ple away. So says Gavin Andresen, who in 2010 was des­ig­nat­ed chief care­tak­er of the code that pow­ers Bit­coin by its shad­owy cre­ator. Andresen held the role of “core main­tain­er” dur­ing most of Bitcoin’s improb­a­ble rise; he stepped down last year but still remains heav­i­ly involved with the cur­ren­cy (see “The Man Who Real­ly Built Bit­coin”).

Andresen’s gloomy pre­dic­tion stems from the fact that Bit­coin can’t process more than sev­en trans­ac­tions a sec­ond. That’s a tiny vol­ume com­pared to the tens of thou­sands per sec­ond that pay­ment sys­tems like Visa can han­dle—and a lim­it he expects to start crip­pling Bit­coin ear­ly in 2016. It stems from the max­i­mum size of the “blocks” that are added to the dig­i­tal ledger of Bit­coin trans­ac­tions, the blockchain, by peo­ple dubbed min­ers who run soft­ware that con­firms Bit­coin trans­ac­tions and cre­ates new Bit­coin (see “What Bit­coin Is and Why It Mat­ters”).

Andresen’s pro­posed solu­tion trig­gered an uproar among peo­ple who use or work with Bit­coin when he intro­duced it two weeks ago. Rather than con­tin­u­ing to work with the devel­op­ers who main­tain Bitcoin’s code, Andresen released his solu­tion in the form of an alter­na­tive ver­sion of the Bit­coin soft­ware called Bit­coinXT and urged the com­mu­ni­ty to switch over. If 75 per­cent of min­ers have adopt­ed his fix after Jan­u­ary 11, 2016, it will trig­ger a two-week grace peri­od and then allow a “fork” of the blockchain with high­er capac­i­ty. Crit­ics con­sid­er that to be a reck­less toy­ing with Bitcoin’s future; Andresen, who now works on Bit­coin with the sup­port of MIT’s Media Lab, says it is nec­es­sary to pre­vent the cur­ren­cy from stran­gling itself. He spoke with MIT Tech­nol­o­gy Review’s San Fran­cis­co bureau chief, Tom Simonite.

How seri­ous is the prob­lem of Bitcoin’s lim­it­ed trans­ac­tion rate?

It is urgent. Look­ing at the trans­ac­tion vol­ume on the Bit­coin net­work, we need to address it with­in the next four or five months. As we get clos­er and clos­er to the lim­it, bad things start to hap­pen. Net­works close to capac­i­ty get con­gest­ed and unre­li­able. If you want reli­a­bil­i­ty, you’ll have to start pay­ing high­er and high­er fees on trans­ac­tions, and there will be a point where fees get high enough that peo­ple stop using Bit­coin.

...

Do you think that con­sen­sus can be reached?.

It’s pret­ty clear that the max­i­mum block­size is going to increase. I don’t know exact­ly how or exact­ly when. I don’t think it’s clear yet that my pro­pos­al will gen­er­ate enough con­sen­sus among min­ers and the oth­er ecosys­tem play­ers.

What will hap­pen if noth­ing is done?

Trans­ac­tions will get unre­li­able and it’ll get worse and worse over time. My fear is there’ll be no crit­i­cal event that caus­es peo­ple to react—Bitcoin just kind of has a long slow death. I’m try­ing to set off alarm bells for ‘You know, guys, if we don’t do this, Bit­coin will be dead in four years.’ It’s not easy to sell that, espe­cial­ly when there’s so much con­tro­ver­sy.

...

“The way things are going, the dig­i­tal cur­ren­cy Bit­coin will start to mal­func­tion ear­ly next year. Trans­ac­tions will become increas­ing­ly delayed, and the sys­tem of mon­ey now worth $3.3 bil­lion will begin to die as its flak­i­ness dri­ves peo­ple away. So says Gavin Andresen, who in 2010 was des­ig­nat­ed chief care­tak­er of the code that pow­ers Bit­coin by its shad­owy cre­ator.”
Cred­it to Gavin Andresen, he called this. At least assum­ing the cur­rent mys­tery slow­downs are due to what Gavin pre­dict­ed last year: that Bit­coin’s 1 MB “block” size was sched­uled to start hit­ting its lim­it ear­ly this year.

And if Gavin is cor­rect, it’s look­ing like 2016 may be the year bit­coin users have to start pay­ing more and more bit­coins in order to trans­fer their bit­coins. At least if they don’t want to wait an hour or more for their trans­ac­tions to clear:

...
It is urgent. Look­ing at the trans­ac­tion vol­ume on the Bit­coin net­work, we need to address it with­in the next four or five months. As we get clos­er and clos­er to the lim­it, bad things start to hap­pen. Net­works close to capac­i­ty get con­gest­ed and unre­li­able. If you want reli­a­bil­i­ty, you’ll have to start pay­ing high­er and high­er fees on trans­ac­tions, and there will be a point where fees get high enough that peo­ple stop using Bit­coin.
...

So now that it’s look­ing pos­si­ble that Bit­coin is start­ing to grind to a halt, it’s going to be very inter­est­ing to see what, if any, con­sen­sus deci­sion to the Bit­coin com­mu­ni­ty can ral­ly around in order to increase trans­ac­tion vol­umes. It’ll be espe­cial­ly inter­est­ing since, accord­ing to some recent research, Bit­coin can’t sig­nif­i­cant­ly increase its trans­ac­tion clear­ance times unless it sig­nif­i­cant­ly increas­es the con­cen­tra­tion of min­ing too:

The MIT Tech­nol­o­gy Review
Tech­ni­cal Road­block Might Shat­ter Bit­coin Dreams

A study of the sys­tem that pow­ers Bit­coin con­cludes that it can­not become wide­ly used with­out a major redesign.

by Tom Simonite Feb­ru­ary 16, 2016

The total val­ue of the dig­i­tal cur­ren­cy Bit­coin is over $5 bil­lion, reflect­ing how some peo­ple think it will one day become wide­ly use­ful. But a new analy­sis of the soft­ware that pow­ers the cur­ren­cy con­cludes that Bit­coin needs a com­plete redesign if it is to sup­port more than the pal­try num­ber of trans­ac­tions that take place today.

That sug­gests that the peo­ple, com­pa­nies, and investors who are bank­ing on the cur­ren­cy becom­ing wide­ly used must over­come fun­da­men­tal tech­ni­cal chal­lenges that cur­rent­ly have no known solu­tions, not just the eco­nom­ic and cul­tur­al issues asso­ci­at­ed with a cur­ren­cy inde­pen­dent of any gov­ern­ment.

The find­ings, from a large group of researchers most­ly affil­i­at­ed with Cor­nell Uni­ver­si­ty, also offer a new per­spec­tive on an acri­mo­nious debate that has recent­ly riv­en the world of Bit­coin (see “The Loom­ing Prob­lem That Could Kill Bit­coin”).

Fac­tions in the com­mu­ni­ty are argu­ing over pro­pos­als to adjust Bitcoin’s soft­ware so it can han­dle more than a measly sev­en trans­ac­tions a sec­ond across the whole world. Yet no tweak to Bit­coin could allow trans­ac­tions at a scale close to that of con­ven­tion­al pay­ment proces­sors such as Visa with­out com­pro­mis­ing the dig­i­tal cur­ren­cy’s decen­tral­ized design, says Ari Juels, a cryp­tog­ra­ph­er and pro­fes­sor at the Jacobs Tech­nion-Cor­nell Insti­tute at Cor­nell Tech, and a coau­thor of the study. Visa’s sys­tem process­es 2,000 trans­ac­tions per sec­ond on aver­age and can han­dle up to 56,000 trans­ac­tions per sec­ond, the com­pa­ny says.

“The cur­rent debate is miss­ing the for­est for the trees,” says Juels. “We have to think in terms of a fun­da­men­tal redesign if we’re going to see robust scal­ing in Bit­coin.” Juels worked on the new study with 11 oth­er researchers from Cor­nell, the Uni­ver­si­ty of Cal­i­for­nia, Berke­ley, the Uni­ver­si­ty of Mary­land, the Swiss Fed­er­al Insti­tute of Tech­nol­o­gy Zurich, and the Nation­al Uni­ver­si­ty of Sin­ga­pore. The group’s analy­sis is being pre­sent­ed in a posi­tion paper at the Finan­cial Cryp­tog­ra­phy and Data Secu­ri­ty con­fer­ence in Bar­ba­dos lat­er this month.

Bit­coin was invent­ed by a per­son or per­sons using the name Satoshi Nakamo­to, who released the soft­ware online in 2009. The cur­ren­cy is pow­ered by a net­work of com­put­ers around the world belong­ing to a dis­parate group of com­pa­nies and indi­vid­u­als with­out any cen­tral author­i­ty. The Bit­coin software’s use of cryp­tog­ra­phy allows that decen­tral­ized net­work to func­tion as a reli­able sys­tem to process and val­i­date trans­ac­tions.

Bitcoin’s capac­i­ty lim­it comes from the way trans­ac­tions are record­ed in batch­es known as “blocks.” Every 10 min­utes a new block is added to the dig­i­tal ledger main­tained by the com­put­ers in the Bit­coin net­work, but those blocks have a max­i­mum size of one megabyte, enough for only sev­en trans­ac­tions a sec­ond at best. Gavin Andresen, who for near­ly four years led work on Bitcoin’s soft­ware, said last week that the lim­it is already trou­bling Bit­coin, with trans­ac­tions some­times becom­ing delayed. “I think it’s a very urgent prob­lem,” he said.

The Bit­coin com­mu­ni­ty is fight­ing over how best to increase the size of blocks added to the currency’s ledger, with two lead­ing pro­pos­als aim­ing to effec­tive­ly dou­ble it in one way or anoth­er. But when Juels and col­leagues mea­sured how the net­work cur­rent­ly per­forms, they con­clud­ed that the strat­e­gy of tweak­ing Nakamoto’s design can’t go much fur­ther with­out com­pro­mis­ing the decen­tral­iza­tion claimed to be so cru­cial to the sys­tem. The way data moves around the Bit­coin net­work is too inef­fi­cient.

The researchers esti­mate that Bitcoin’s cur­rent design could bear at most only about 27 trans­ac­tions per sec­ond, using a block size of four megabytes, with­out forc­ing a sig­nif­i­cant cut in the num­ber of com­put­ers pow­er­ing the cur­ren­cy, mak­ing it more cen­tral­ized. There is gen­er­al agree­ment in the Bit­coin com­mu­ni­ty that the sys­tem must remain decen­tral­ized to pre­vent the pos­si­bil­i­ty of any com­pa­ny or gov­ern­ment con­trol­ling the cur­ren­cy.

“That’s still a fair­ly lim­it­ed through­put,” says Emin Gün Sir­er, an asso­ciate pro­fes­sor at Cor­nell who worked on the study. “If you com­pare it to what a big net­work like Visa is capa­ble of [or] these imag­ined futures where com­put­ers are pay­ing each oth­er, it’s nowhere in the same vicin­i­ty.”

Some peo­ple believe that Bit­coin can be use­ful with­out oper­at­ing at vast scale, for exam­ple func­tion­ing as a gold-like asset gen­er­al­ly held for long peri­ods. But some of the biggest Bit­coin com­pa­nies are built on the idea that Bit­coin will come to sup­port a very large trans­ac­tion vol­ume.

Bri­an Arm­strong, CEO and cofounder of Coin­base, which helps peo­ple buy, sell, and use Bit­coins and has raised over $100 mil­lion, says he believes the cur­ren­cy will become wide­ly used as a means of pay­ment, par­tic­u­lar­ly in the devel­op­ing world.

A com­pa­ny called 21 Inc has raised $121 mil­lion from investors, includ­ing the net­work­ing com­pa­ny Cis­co, and says that very small “micro­trans­ac­tions” paid in Bit­coin will become an eco­nom­ic back­bone used by peo­ple and com­pa­nies to pay for ser­vices and goods such as Wi-Fi, data analy­sis, or music.

...

New tech­nol­o­gy is need­ed to scale up Bit­coin and sup­port all the use cas­es imag­ined for the cur­ren­cy, but the right fac­tors are in place to see it invent­ed, he says. “There’s strong inter­est from acad­e­mia, lots of new tech­nol­o­gy com­ing in the next 18 months, and a lot of fund­ing com­ing to the indus­try,” says Back.

“The researchers esti­mate that Bitcoin’s cur­rent design could bear at most only about 27 trans­ac­tions per sec­ond, using a block size of four megabytes, with­out forc­ing a sig­nif­i­cant cut in the num­ber of com­put­ers pow­er­ing the cur­ren­cy, mak­ing it more cen­tral­ized. There is gen­er­al agree­ment in the Bit­coin com­mu­ni­ty that the sys­tem must remain decen­tral­ized to pre­vent the pos­si­bil­i­ty of any com­pa­ny or gov­ern­ment con­trol­ling the cur­ren­cy.”
Think about how dire this research is for the Bit­coin ide­al­ists: Accord­ing to the researchers, sim­ply increas­ing the “block” sizes isn’t a viable means of ade­quate­ly scal­ing Bit­coin’s trans­ac­tion vol­umes. The only way to achieve that is for Bit­coin’s “min­ing” sys­tem, which is a core ele­ment of Bit­coin’s pitch as a “decen­tral­ized” mon­e­tary sys­tem, to get com­plete­ly over­haul in a man­ner that makes min­ing sig­nif­i­cant­ly more cen­tral­ized. Uh oh:

...
The Bit­coin com­mu­ni­ty is fight­ing over how best to increase the size of blocks added to the currency’s ledger, with two lead­ing pro­pos­als aim­ing to effec­tive­ly dou­ble it in one way or anoth­er. But when Juels and col­leagues mea­sured how the net­work cur­rent­ly per­forms, they con­clud­ed that the strat­e­gy of tweak­ing Nakamoto’s design can’t go much fur­ther with­out com­pro­mis­ing the decen­tral­iza­tion claimed to be so cru­cial to the sys­tem. The way data moves around the Bit­coin net­work is too inef­fi­cient.
...

But while the lib­er­tar­i­an Bit­coin activists might be rather non­plussed at this con­clu­sion, the big Bit­coin’s “min­ers” prob­a­bly won’t mind! And it’s hard to see how why com­pa­nies like “21 Inc.” would mind a cen­tral­iza­tion of min­ing either. After all, 21 Inc is backed by a num­ber of large cor­po­ra­tions and ded­i­cat­ed to the vision of Bit­coin gen­er­at­ing vast vol­umes of tiny low-fee “micro­trans­ac­tions” and a vast min­ing net­work of bit­coin-min­ing devices con­trolled by 21 Inc. Does 21 Inc care if Bit­coin’s min­ing com­po­nent needs to become more cen­tral­ized? It’s hard to see why they would­n’t embrace that mod­el.

Who knows, it’s pos­si­ble that this research might actu­al­ly unite the big min­ing pools based in Chi­na, who have been the most resis­tant to increas­ing blockchain “blocks” over fears that this would decrease their trans­ac­tion fees and cre­ate a band­width bar­ri­er to the trans­mis­sion of new blocks, and the cor­po­rate enti­ties like 21 Inc, who view Bit­coin as a future plat­form for low-fee “micro­trans­ac­tions”. Accord­ing to the researchers, you might still be able to get prof­itable min­ing along side a vast sea of low-fee micro­trans­ac­tions, but only if Bit­coin’s min­ing sec­tor is over­hauled and sig­nif­i­cant­ly cen­tral­ized. What’s not to love? Oh yeah, the Bit­coin ide­al of hav­ing a mon­e­tary sys­tem run by no one might have to be sig­nif­i­cant­ly com­pro­mised. That’s not what to love if you’re a Bit­coin ide­al­ist.

So, whether or not the recent slow­down was due to an over attack, ran­dom users ‘loop­ing’, or Gavin Andresen’s pre­dict­ed “slow death”, it’s look­ing increas­ing­ly like either the lib­er­tar­i­an dream of a hyper-decen­tral­ized Bit­coin not con­trolled by “the Man” dies or Bit­coin itself enters into a slow death-spi­rals as the sys­tem chokes on its own inad­e­quate trans­ac­tion clear­ance abil­i­ties.

Of course, there is anoth­er option: Bit­coin, or some Bit­coin off­shoot, could end up cen­tral­iz­ing min­ing, but in a decen­tral­ized man­ner. How so? Set up the con­cen­trat­ed min­ing sys­tem required for the large vol­ume required for Bit­coin’s “micro­trans­ac­tion” future, and then ensure that the actu­al com­pa­nies doing the min­ing pub­licly owned and oper­at­ed and use their min­ing “prof­its” for the pub­lic good. Heck, you could even have actu­al coun­tries set of offi­cial min­ing com­pa­nies. Sure, the exist­ing min­ing com­mu­ni­ty and com­pa­nies like 21 Inc might not be super enthu­si­as­tic about democ­ra­tiz­ing Bit­coin, but if the min­ing firms were pub­lic enti­ties owned it would cer­tain­ly add to the pop­ulist allure Bit­coin always strives to achieve.

So how about democ­ra­cy as means of thread­ing the Bit­coin nee­dle? Dump the whole pri­vate min­ing com­pe­ti­tion, which is just a giant ener­gy sink, and replace it with eco-friend­ly pub­licly owned min­ing firms that are sim­ply there to process trans­ac­tions while cov­er­ing the com­pu­ta­tion­al costs, and not gen­er­ate a prof­it. Sure, such a sys­tem would in effect be offi­cial mon­ey man­aged by all the par­tic­i­pat­ing gov­ern­ments, which would be one of the biggest transna­tion­al headaches you could imag­ine.

But what if it was just a sys­tem for pro­cess­ing micro­trans­ac­tions? There’s no rea­son that would lim­it com­merce. The bit­coins would be like Chuck E. Cheese tokens you buy with real mon­ey for trans­ac­tions but that would still be very real com­merce. It would­n’t involve Bit­coin as an actu­al cur­ren­cy but who cares? Oh yeah, all the peo­ple that cur­rent­ly own bit­coins care. Espe­cial­ly the Bit­coin oli­garchs.

Still, Pub­lic Bit­coin is some­thing worth pon­der­ing now that Bit­coin’s recent trans­ac­tion slow­down is look­ing like a pos­si­ble start of its death throes. Pub­lic Bit­coin would basi­cal­ly be a pub­lic good and part of the “com­mons”: a giant transna­tion­al pub­lic ledger, co-admin­is­tered by the par­tic­i­pat­ing gov­ern­ments. Whether or not you could ever get gov­ern­ments to cre­ate such a sys­tem, it could be a fun men­tal exer­cise for the Bit­coin com­mu­ni­ty. Espe­cial­ly giv­en the cir­cum­stances. Why not at least con­sid­er it? Oh, right. Democ­ra­cy. It’s def­i­nite­ly not part of the Bit­coin pop­ulist heart and soul.

As Bit­coin’s block size iden­ti­ty cri­sis con­tin­ues to aggra­vate its trans­ac­tion clear­ance-time cri­sis, a new poten­tial iden­ti­ty cri­sis is emerg­ing: Bit­coin’s iden­ti­ty as a mar­ket-based tech­nol­o­gy. This is includes the unreg­u­lat­ed mar­ket dynam­ics of how bit­coins are trad­ed, the mar­ket-based fees that help pri­or­i­tize those trans­ac­tions, but also Bit­coin’s “mar­ket” based gov­ern­ment where no one is tru­ly in charge and all changes to the sys­tem are done vol­un­tar­i­ly and by con­sen­sus. Yes, Bit­coin has been in real­i­ty been large­ly devel­oped by the same group of peo­ple led by Gavin Andresen for almost its entire exis­tence until recent­ly, but that sys­tem required a lack of dis­sen­sion and fac­tion­al­ism if there’s one thing that define’s the Bit­coin com­mu­ni­ty these days it’s dis­sen­sion and fac­tion­al­ism. The great Bit­coin “Core” vs “Clas­sic” debate over block sizes that’s gripped the Bit­coin com­mu­ni­ty has final­ly made Bit­coin’s “mar­ket” gov­ern­ment act like a mar­ket, with lots of dif­fer­ent groups rep­re­sent­ing dif­fer­ent parts of the Bit­coin ecosys­tem bat­tling it out for the most users to fol­low their path to Bit­coin’s future.

How is this new iden­ti­ty mar­ket-based cri­sis emerg­ing? Well, as the arti­cle below points out, because Bit­coin’s mar­ket-based mod­el of gov­er­nance can’t deal a sit­u­a­tion where there exists a vast split in the com­mu­ni­ty, there now exist two major com­pet­ing forms of Bit­coin (“Core” and “Clas­sic”), and the dom­i­nant “Core” fac­tion isn’t will­ing to increas­ing the block size, result­ing a sig­nif­i­cant increase in the fees peo­ple are will­ing to pay for their trans­ac­tions to clear. That’s part of the mar­ket-based reg­u­la­tion for Bit­coin: if things slow down, peo­ple pay more for their trans­ac­tions to clear and that will increased the incen­tive of the Bit­coin net­work to grow and be able to take on larg­er and larg­er trans­ac­tion vol­umes, reduc­ing fees. The ‘ol mar­ket at work. Or at least how it’s works in the­o­ry.

But, of course, that mar­ket dynam­ic will have no chance of work­ing if a high­er trans­ac­tion vol­ume isn’t ever allowed and as we’re learn­ing now, there’s a big part of the Bit­coin gov­er­nance “mar­ket” (most­ly the min­ers mak­ing fees) who don’t want to see the high­er trans­ac­tion block vol­umes allowed via larg­er block sizes. Why? Because the low­er the allowed vol­ume, the high­er the prof­it-per-trans­ac­tion. That’s also part of the mar­ket-based iden­ti­ty of Bit­coin. Just a rather com­pli­cat­ing one. And a rather prof­itable one for Bit­coin’s min­ers but not for all the Bit­coin ser­vices that make their prof­its from trans­ac­tion vol­ume. So we have a sort of mar­ket­place of duel­ing, inter­twined prof­it-avenues all play­ing a role in how the Bit­coin exper­i­ment unfolds.

And what’s the result of this won­der­ful mar­ket­place of prof­it-avenues? Well, in response to the back­log of unprocessed trans­ac­tions, trans­ac­tion fees are ris­ing sig­nif­i­cant­ly. And so are trans­ac­tion clear­ance times. And there’s no com­mon con­sen­sus for a path for­ward in sight, although there appears to be grow­ing calls for a coup of sorts against the Bit­coin “core” devel­op­ers and for com­pet­ing devel­op­ment teams to step for­ward and replace them. So, at this point, Bit­coin is rely­ing on the mar­ket­place of ideas to dis­en­tan­gle the Gor­dian Knot of duel­ing, inter­twined prof­it-avenues and cre­ate a com­mon con­sen­sus on how to move for­ward. This is prob­a­bly when a democ­ra­cy of sorts would be help­ful, but since that’s not avail­able, good luck Bit­coin!

Inter­na­tion­al Busi­ness Times

Blockchain Com­plaints Hit Record Lev­el As Bit­coin Trans­ac­tion Times Grow And Fees Rise

By David Gilbert
On 03/08/16 AT 5:54 AM

The CEO of the world’s most vis­it­ed bit­coin-relat­ed web­site, which also offers the most pop­u­lar bit­coin wal­let ser­vice, said the increased pres­sure on the cryp­tocur­ren­cy net­work has led to a record lev­el of com­plaints by its cus­tomers. And, he has called on the bit­coin com­mu­ni­ty to work togeth­er to fix the prob­lem.

Blockchain.info’s CEO Peter Smith has revealed that dur­ing the first week of March it received more com­plaints than it did for the whole month of Feb­ru­ary — and that was after com­plaints in Feb­ru­ary rose 110 per­cent com­pared to Jan­u­ary, hav­ing risen just 14 per­cent from Decem­ber to Jan­u­ary.

The rea­son for the huge spike in com­plaints is that the bit­coin net­work is creak­ing, unable to process trans­ac­tions quick­ly that is in turn putting pres­sure on con­sumer-fac­ing busi­ness­es. The con­straints of the blockchain tech­nol­o­gy, which under­pins the bit­coin, make it dif­fi­cult for the net­work to han­dle the lev­el of trans­ac­tions cur­rent­ly on the net­work, lead­ing to high­er fees and longer wait times.

“In short, trans­ac­tions took longer despite aver­age fees ris­ing sig­nif­i­cant­ly, and the price fell,” Smith said. “Sim­ply put, bit­coin users paid more for less val­ue. High­er fees did not result in faster trans­ac­tions, just a lengthy back­log.”

...

The cur­rent trans­ac­tion delay prob­lem stems from the fact that the blocks are lim­it­ed in size to 1 megabyte, which means just sev­en trans­ac­tions per sec­ond can be record­ed. To put this in con­text, Visa says its pay­ment sys­tem process­es 2,000 trans­ac­tions per sec­ond on aver­age and can han­dle up to 56,000 trans­ac­tions per sec­ond if need­ed.

Smith’s com­ments come in the wake of a wider debate dom­i­nat­ing the bit­coin indus­try at the moment with two con­flict­ing sides see­ing dif­fer­ent paths for the future devel­op­ment of bit­coin. The first group is known as Bit­coin Core, the network’s vol­un­teer devel­op­ers who want to change the way the sig­na­tures are stored on the blockchain rather than increase the size of the blocks.

The oth­er is known as Bit­coin Clas­sic, a group com­prised of devel­op­ers and enthu­si­asts, of which Smith is a pro­po­nent, who pro­pose the adop­tion of an alter­na­tive blockchain (incom­pat­i­ble with the orig­i­nal) that would increase the block size to 2 MB, a move it believes would increase user adop­tion.

At an indus­try retreat last month in Hong Kong, Smith and oth­er bit­coin devel­op­ers and star­tups debat­ed the state of the net­work and while Smith said he was pleased with the tone of gen­er­al dis­cus­sions, oth­er aspects of the meet-up were not so encour­ag­ing.

“It became clear that large parts of the indus­try no longer share the same vision nor are they like­ly to prag­mat­i­cal­ly com­pro­mise to avert what I view as seri­ous risk of run­ning out rock­et fuel before we get the ship to orbit,” Smith said.

As part of the cur­rent cri­sis with­in bit­coin, mem­bers of the Bit­coin Core group have alleged that the net­work has been over­whelmed because cer­tain groups were pur­pose­ful­ly spam­ming the net­work with low-val­ue trans­ac­tions that min­ers were unlike­ly to accept and ver­i­fy on their blocks, there­by arti­fi­cial­ly inflat­ing the list of unprocessed trans­ac­tions.

How­ev­er, Smith said this is not the case. “Dur­ing this lat­est dete­ri­o­ra­tion in net­work con­di­tions, there sim­ply was no room for low-fee or dust trans­ac­tions, nor has there been con­clu­sive evi­dence of a wide­spread attack on the net­work,” he said.

Smith’s com­ments echoed those of Bri­an Arm­strong, CEO of bit­coin exchange ser­vice Coin­base, who said Fri­day that the Core devel­op­ers posed a “sys­temic risk” to the future of the bit­coin net­work. Armstrong’s solu­tion is the cre­ation of a “new team” to lead bit­coin devel­op­ment, which would be “wel­com­ing of new devel­op­ers to the com­mu­ni­ty, will­ing to make rea­son­able trade offs, and a team that will help the pro­to­col con­tin­ue to scale.”

“In short, trans­ac­tions took longer despite aver­age fees ris­ing sig­nif­i­cant­ly, and the price fell,” Smith said. “Sim­ply put, bit­coin users paid more for less val­ue. High­er fees did not result in faster trans­ac­tions, just a lengthy back­log.”
That seems wor­thy of an iden­ti­ty cri­sis: Bit­coin is so decen­tral­ized in how it oper­ates that it can’t come togeth­er to fix a sit­u­a­tion that’s caus­ing basic mar­ket dynam­ics to break down for Bit­coin. Plus, the Bit­coin “Core” team, rep­re­sent­ing the “min­ers” who don’t want larg­er block sizes and won’t mind high­er prof­its, side is claim­ing the whole cri­sis is arti­fi­cial­ly cre­at­ed:

...
As part of the cur­rent cri­sis with­in bit­coin, mem­bers of the Bit­coin Core group have alleged that the net­work has been over­whelmed because cer­tain groups were pur­pose­ful­ly spam­ming the net­work with low-val­ue trans­ac­tions that min­ers were unlike­ly to accept and ver­i­fy on their blocks, there­by arti­fi­cial­ly inflat­ing the list of unprocessed trans­ac­tions.
...

Keep in mind that spam­ming is just some­thing Bit­coin is going to have to fig­ure out how to deal with which would neces­si­tate a mod­el that allows for a rapid growth in the block sizes and blockchain as a whole. Although one alter­na­tive is for trans­ac­tion fees to get so expen­sive that spam­ming becomes unfea­si­ble. And keep­ing the total blockchain size down by lim­it­ing it to rel­a­tive­ly expen­sive trans­ac­tions is a total­ly viable vision for the future of Bit­coin if it’s a vision that can be turned into a sus­tain­able real­i­ty. But it’s also a mutu­al­ly exclu­sive vision from the one where Bit­coin includes a vast num­ber of cheap micro­trans­ac­tions. And to some extent, what we’re see­ing right now is a a bat­tle over those two mutu­al­ly exclu­sive visions. It’s def­i­nite­ly one of those sit­u­a­tions where a democ­ra­cy would be use­ful.

The selec­tion a new devel­op­ment is also one of those pro-democ­ra­cy sit­u­a­tions:

...
Smith’s com­ments echoed those of Bri­an Arm­strong, CEO of bit­coin exchange ser­vice Coin­base, who said Fri­day that the Core devel­op­ers posed a “sys­temic risk” to the future of the bit­coin net­work. Armstrong’s solu­tion is the cre­ation of a “new team” to lead bit­coin devel­op­ment, which would be “wel­com­ing of new devel­op­ers to the com­mu­ni­ty, will­ing to make rea­son­able trade offs, and a team that will help the pro­to­col con­tin­ue to scale.”

Replac­ing the “core” devel­op­ment team with anoth­er unelect­ed devel­op­ment “core” team is def­i­nite­ly anoth­er one of those sit­u­a­tions where some sort of demo­c­ra­t­ic solu­tion would be high­ly use­ful. If only a demo­c­ra­t­ic solu­tion was avail­able. Oh, that’s right, Esto­nia is cre­at­ing its own inter­na­tion­al Blockchain juris­dic­tion that any­one can join using the “Bit­na­tion” blockchain gov­ern­ment soft­ware. So Bit­coin could hold elec­tions, but it would have to cre­ate a juris­dic­tion of sorts. So, hey, why not do that to resolve this whole thing? Set up a blockchain juris­dic­tion like Esto­nia did and then let any­one join and vote. It would pre­sum­ably most­ly just be Bit­coin users vot­ing. If there’s some sort of way to val­i­date peo­ple’s ids so they don’t vote more than once that could be fair and kind of fun and prob­a­bly dri­ve usage. And it real­ly would help deal with crit­i­cal issues like block size growth that are only going to con­tin­ue threat­en­ing to frag­ment the whole thing.

Could democ­ra­cy fix Bit­coin? Who knows, but it would be pret­ty iron­ic if that hap­pened. And improb­a­ble.

One of the inter­est­ing con­tra­dic­to­ry quirks of the Bit­coin phe­nom­e­na has always been the way the project cast itself as “pub­lic good” beyond any state con­trol while simul­ta­ne­ous­ly embrac­ing an ide­ol­o­gy that views pub­lic goods as a kind of col­lec­tivist coer­cive evil that Bit­coin can help destroy. After all, Bit­coin is intend­ed to over­throw and replace gov­ern­ment con­trol over mon­e­tary sys­tems because gov­ern­ment, as a con­cept, is evil.

And it’s that quirk of Bit­coin that’s one of the big rea­sons Bit­coin’s cur­rent cri­sis is so iron­i­cal­ly fas­ci­nat­ing: Bit­coin’s cur­rent “block size cri­sis” due, in large part, to the fact that Bit­coin has no for­mal means of gov­ern­ing itself as part of its ide­o­log­i­cal embrace of . But if there’s one key pub­lic good that’s going to be left behind from Bit­coin if it does end up implod­ing from all this, it will be the good that comes from demon­strat­ing to the pub­lic why there are indeed some socioe­co­nom­ic sit­u­a­tions where an “the mar­ket” can’t replace pol­i­tics. As Hen­ry Far­rell puts it below, “rather than over­com­ing con­ven­tion­al pol­i­tics, bit­coin is suc­cumb­ing to it”:

Finan­cial Times

The bit­coin mag­ic is los­ing its Midas touch

The currency’s advo­cates are right: mon­ey is a con­fi­dence trick, a form of frozen desire, writes Hen­ry Far­rell

Hen­ry Far­rell
March 9, 2016 7:27 pm

Bit­coin, the decen­tralised, main­ly dig­i­tal cur­ren­cy that is nei­ther issued nor guar­an­teed by cen­tral banks, has always seemed like a mag­ic trick. Rather than spin­ning straw into gold it trans­forms wast­ed com­put­ing pow­er into mon­ey that peo­ple will actu­al­ly accept as pay­ment.

Rad­i­cal lib­er­tar­i­ans have des­per­ate­ly want­ed to believe in it because they hope it can resolve the fol­low­ing dilem­ma. They pre­fer mar­kets to pol­i­tics and they vio­lent­ly dis­trust states. But mod­ern states in effect have a monop­oly over the cur­ren­cies that mar­kets need in order to work.

Bit­coin, if it became broad­ly accept­ed, would chal­lenge states’ dom­i­nance of the econ­o­my. It is designed to pre­vent monop­oly by states or oth­er enti­ties, build­ing a new cur­ren­cy based on shared infor­ma­tion and mak­ing it hard for any enti­ty to gain con­trol. Pol­i­tics dis­ap­pears and a com­bi­na­tion of tech­nol­o­gy and cryp­to­graph­ic proofs is con­jured up in its place.

Unfor­tu­nate­ly, the mag­ic is wear­ing off. Some of the tech­no­log­i­cal inno­va­tions asso­ci­at­ed with bit­coin will stick around. The polit­i­cal project will not. Rather than over­com­ing con­ven­tion­al pol­i­tics, bit­coin is suc­cumb­ing to it.

The biggest fights are focused on the most inno­v­a­tive ele­ment of bit­coin: the “blockchain”. This is a decen­tralised ledger of trans­ac­tions using bit­coin. Bit­coin “min­ers” com­pete with one anoth­er to solve com­pu­ta­tion­al­ly hard prob­lems. The win­ner receives new bit­coin but also val­i­dates a “block” of queued trans­ac­tions, which is then added to the ledger and shared with the com­mu­ni­ty.

This sys­tem was designed to replace third-par­ty reg­u­la­tion with decen­tralised author­i­ty. For tech­ni­cal rea­sons, it is start­ing to fail. Each block is small, mean­ing the sys­tem can han­dle only a few trans­ac­tions at a time. As more peo­ple have start­ed to use bit­coin, the sys­tem has grown more unre­li­able.

The prob­lem is that com­ing up with a fix requires polit­i­cal agree­ment. Because there is no cen­tralised author­i­ty with­in bit­coin, there is no one who can impose a man­date. Bitcoin’s cre­ator, the pseu­do­ny­mous Satoshi Nakamo­to, appar­ent­ly van­ished years ago, leav­ing big deci­sions to an increas­ing­ly quar­rel­some com­mu­ni­ty.

Some influ­en­tial mem­bers of the bit­coin net­work want to change the currency’s pro­to­cols to make the blocks big­ger so that more bit­coin are released at one time, speed­ing up trans­ac­tions. Oth­ers have respond­ed with out­rage, claim­ing that this would destroy bit­coin. A fun­da­men­tal change to the pro­to­col would “fork the chain”, poten­tial­ly cre­at­ing two dif­fer­ent cur­ren­cies with irrec­on­cil­able records, one for those who embraced the fix and anoth­er for those who refused it.

...

The lead­ing pro­pos­al to fork the chain would require 75 per cent of the bit­coin net­work to agree to the pro­pos­al before it was ful­ly imple­ment­ed. How­ev­er, no one is empow­ered to stop peo­ple from sway­ing opin­ion in ille­git­i­mate ways. Com­pa­nies that favour chang­ing the pro­to­col, such as Coin­base, a bit­coin “wal­let” and exchange busi­ness, have been tar­get­ed by dis­trib­uted denial of ser­vice attacks intend­ed to knock their servers off the inter­net. Peo­ple on both sides have with­drawn from the bit­coin net­work after receiv­ing threats.

This free-for-all demon­strates the main prob­lem of tech­no­log­i­cal lib­er­tar­i­an­ism. It does not escape pol­i­tics but tem­porar­i­ly dis­places and con­ceals it. As bit­coin has become more suc­cess­ful, it has also become poten­tial­ly more lucra­tive. Ide­ol­o­gy is giv­ing way to fights over who gets what. And it turns out that lib­er­tar­i­ans are not very good at fig­ur­ing out how to resolve these polit­i­cal clash­es.

As these fights become more pub­licly vis­i­ble, they will hurt bit­coin out­side its core base of enthu­si­asts. The advo­cates of bit­coin got one thing absolute­ly right. Mon­ey is a con­fi­dence trick, a form of “frozen desire”, as the writer James Buchan describes it. We only believe in it because every­one else believes in it. So if bit­coin believ­ers believed hard enough, and con­vinced oth­er peo­ple to believe, they had a shot at mak­ing it gen­er­al­ly accept­ed.

That is now going to be far hard­er. The appar­ent val­ue of bit­coin depends on a sus­pen­sion of dis­be­lief. It is hard to see how the illu­sion can work when the magi­cians are punch­ing each oth­er out on stage.

“This free-for-all demon­strates the main prob­lem of tech­no­log­i­cal lib­er­tar­i­an­ism. It does not escape pol­i­tics but tem­porar­i­ly dis­places and con­ceals it. As bit­coin has become more suc­cess­ful, it has also become poten­tial­ly more lucra­tive. Ide­ol­o­gy is giv­ing way to fights over who gets what. And it turns out that lib­er­tar­i­ans are not very good at fig­ur­ing out how to resolve these polit­i­cal clash­es.”
It turns out the escape veloc­i­ty for pol­i­tics and humans just might be a veloc­i­ty exceed­ing the speed of light because you’re going to have to go back in time. What a use­ful con­tri­bu­tion to the pub­lic good. Thanks Bit­coin! At least, thanks, assum­ing you implode soon.

But, of course, there’s noth­ing that says Bit­coin can’t emerge from this cri­sis, and maybe even stronger than before. Yes, stronger than before is a rather low bar for Bit­coin, but still. It could hap­pen. And should that hap­pen, and Bit­coin mud­dles its way through this lat­est cri­sis with a bet­ter over­all design, it rais­es the ques­tion of what kind of lessons the Bit­coin expe­ri­ence thus far will be teach­ing the pub­lic. Well, if the fol­low­ing inter­view with Cory Fields — a Bit­coin devel­op­er who has stuck with the “Core” group that — is any indi­ca­tion of what kind of spin to expect, the cur­rent Bit­coin block size cri­sis is a sign that Bit­coin is health­i­er than ever:

Coin Jour­nal

MIT’s Cory Fields: Con­tentious­ness in Bit­coin is Sign of Good Health

By Kyle Tor­pey -
March 9, 2016

Although recent media reports have claimed Bit­coin is in a cri­sis that could lead to the even­tu­al demise of the tech­nol­o­gy, MIT Dig­i­tal Cur­ren­cy Ini­tia­tive mem­ber and Bit­coin Core con­trib­u­tor Cory Fields thinks the the­o­ret­i­cal­ly-immutable ledger sys­tem has nev­er been health­i­er. In a recent pre­sen­ta­tion at the 2016 MIT Bit­coin Expo, Fields explained his view that the dif­fi­cul­ties asso­ci­at­ed with mak­ing changes to Bitcoin’s con­sen­sus rules should be viewed in a pos­i­tive light.

The New Social Ele­ment in the Devel­op­ment Process

Near the end of his pre­sen­ta­tion, Cory Fields dis­cussed the new social ele­ment of the Bit­coin devel­op­ment process. He not­ed, “In the last year or so, a big change is that Bit­coin has gone social. Not only that, but the devel­op­ment process of Bit­coin has gone social.”

Fields then explained how the devel­op­ment process has worked in the past and con­trast­ed it with what’s going on today. He described how the con­trib­u­tors to Bit­coin Core were able to oper­ate with more auton­o­my in the past:

“His­tor­i­cal­ly in the past, what we have seen is that not real­ly all that much inter­est. There have been things that need to be done, Bit­coin Core devel­op­ers say stuff, and then it hap­pens, and it wasn’t hard. As the group has grown and there has been more inter­est, it gets hard­er to say this is what is tech­ni­cal­ly cor­rect and this is what we’re doing. We get push­back because it maybe doesn’t fit well with a par­tic­u­lar prof­it mod­el, or a dif­fer­ence of opin­ion for long-term goals, that kind of thing.”

This part of Fields’s talk is a clear ref­er­ence to the push­back Bit­coin Core has received on their scal­a­bil­i­ty roadmap from some entre­pre­neurs, investors, and busi­ness­es in the Bit­coin indus­try. For exam­ple, Coin­base CEO Bri­an Arm­strong, Blockchain CEO Peter Smith, and Bit­coin angel investor Roger Ver have all declared their sup­port of Bit­coin Clas­sic, which intends to change Bitcoin’s con­sen­sus rules via a hard fork in order to increase the block size lim­it to 2 megabytes

The BIP Process is Some­what Break­ing Down

Cory Fields also explained how the tra­di­tion­al sys­tem for mak­ing changes to Bit­coin is break­ing down. In the past, devel­op­ers could draft a Bit­coin Improve­ment Pro­pos­al (BIP) if they want­ed to make an improve­ment or add a new fea­ture to Bit­coin. Fields not­ed:

“[The BIP] process has proven to be suc­cess­ful for the most part. It has begun to break down a lit­tle bit. As peo­ple par­tic­i­pate out­side of Bit­coin Core and the typ­i­cal process, they are not nec­es­sar­i­ly behold­en to that same process any­more.”

Essen­tial­ly, par­ties who have been unable to gain con­sen­sus on changes from the group of devel­op­ers behind Bit­coin Core are ignor­ing the BIP process in order to make changes to Bitcoin’s con­sen­sus rules. Instead of gain­ing con­sen­sus via the tra­di­tion­al process, pro­po­nents of a 2 MB block size lim­it have decid­ed to write their own soft­ware and hope min­ers start using it. Once the code is run by rough­ly 75 per­cent of min­ers, a hard-fork-induc­ing change is acti­vat­ed on the Bit­coin net­work 28 days lat­er.

Coin Dance cur­rent­ly esti­mates Bit­coin Classic’s sup­port at rough­ly 6 per­cent of the net­work hashrate.

Con­tentious­ness is Healthy

One of the last points Cory Fields made dur­ing his talk at the recent MIT Bit­coin Expo is that the dif­fi­cul­ties asso­ci­at­ed with mak­ing changes to Bit­coin are a pos­i­tive sign of the system’s over­all health. He stat­ed, “You know you have a beau­ti­ful­ly con­struct­ed and safe sys­tem when the design­ers of the sys­tem can’t change it if they want to.”

Fields went on to talk about how Bit­coin is a sys­tem that was designed to resist change and influ­ence by default. In that regard, he claimed Bit­coin has nev­er been health­i­er. Tak­ing that con­cept to anoth­er lev­el, Fields said:

“If the fight­ing stops, if it becomes easy to push through a hard-fork, a dif­fi­cult change, a major change, then at that point we know we have lost and it’s not an inter­est­ing sys­tem any­more. If it’s that easy to manip­u­late, then it’s not worth work­ing on this.”

Of course, there are some oth­ers, such as Bit­coin Clas­sic devel­op­er Gavin Andresen, who say Bit­coin is too resis­tant to change. In the past, Andresen essen­tial­ly act­ed as the benev­o­lent dic­ta­tor of Bit­coin. After Andresen hand­ed the title of lead main­tain­er to Wladimir J. van der Laan in April 2014, the devel­op­ment process for Bit­coin Core has tak­en a more con­sen­sus-based approach.

“You know you have a beau­ti­ful­ly con­struct­ed and safe sys­tem when the design­ers of the sys­tem can’t change it if they want to.”
This is one of those “eye of the behold­er” moments. Yes, a sys­tem that stops func­tion­ing if you try to change is kind of neat in an abstract way, but it may not be a qual­i­ty you want in your mon­e­tary sys­tem. But for Bit­coin enthi­asts who share Cory Fields’ gen­er­al perp­spec­tive on the mat­ter, the Bit­coin com­mu­ni­ty’s aver­sion to pol­i­tics should not only include a dis­dain for state gov­ern­ment but a dis­dain for self-gov­ern­ment of itself:

...
“If the fight­ing stops, if it becomes easy to push through a hard-fork, a dif­fi­cult change, a major change, then at that point we know we have lost and it’s not an inter­est­ing sys­tem any­more. If it’s that easy to manip­u­late, then it’s not worth work­ing on this.”

Resis­tance to major changes (because it might break if you change it), even if a par­tic­u­lar major change is large­ly desired by the Bit­coin com­mu­ni­ty, is one of the the qual­i­ties of Bit­coin that Cory Fields sees as absolute­ly crit­i­cal for mak­ing it an “inter­est­ing” sys­tem. And he’s cer­tain­ly cor­rect when he refers to Bit­coin’s qua­si-immutabil­i­ty is part of what makes it an “inter­est­ing”, espe­cial­ly since it’s also an exper­i­ment in lib­er­tar­i­an anar­cho-fas­cistm. An new exper­i­men­tal sys­tem that’s simul­ta­ne­ous­ly tech­ni­cal­ly dif­fi­cult to change, depen­dent on wide­spread adop­tion, and oper­at­ing on an anar­cho-fas­cist self-gov­ern­ing sys­tem is pret­ty damn inter­est­ing sys­tem. The cur­rent cri­sis is evi­dence of that.

But it going to be an “inter­est­ing” sys­tem that any­one still wants to use? If not, Bit­coin will implode and the pub­lic will get to reap the good that comes for learn­ing the lessons of the per­ils of anar­cho-fas­cist dic­ta­tor­ships. Of, course, if Bit­coin coin sur­vives and even thrives under this bizarre decen­tral­ized unof­fi­cial­ly cen­tral­ized gov­ern­ment mod­el, the lessons learned won’t be near­ly as good.

Ethereum, the cryp­tocur­ren­cy that extends the blockchain to the “smart con­tract” domain and promis­es to one day cre­ate autonomous­ly run orga­ni­za­tions, had a bad day on Thurs­day. One of the flag­ship com­pa­nies run­ning on Ethereum, the Etherum-run crowd-fund­ed ven­ture cap­i­tal firm Decen­tral­ized Autono­mus Orga­ni­za­tion (DOA), was set up to allow indi­vid­u­als to invest their Ethereum coins into the firm and vote on Ethereum-based projects to fund. Unfor­tu­nate­ly, it turns out that DOA’s code had a bit of flaw: Indi­vid­u­als could write a con­tract that allows them to recur­sive­ly make with­drawals from DAO’s accounts. It was a pre­vi­ous­ly known flaw too. And on Thurs­day, lo and behold, some­one used that flaw to take $53 mil­lion worth of DAO’s coins:

The Verge

How an exper­i­men­tal cryp­tocur­ren­cy lost (and found) $53 mil­lion

By Rus­sell Bran­dom on June 17, 2016 03:11 pm

This morn­ing, users of the Ethereum cryp­tocur­ren­cy woke up to some very alarm­ing news. Some­one was try­ing out a new attack on one of the currency’s biggest and rich­est insti­tu­tions, the Decen­tral­ized Autonomous Orga­ni­za­tion or DAO. The DAO holds immense cash reserves, and some­one had fig­ured out a way to drain out $53 mil­lion.

Because of the nature of Ethereum, devel­op­ers could still see where the mon­ey was and how much had been tak­en, and it would be impos­si­ble to spend for at least 27 days. But the mas­sive and sud­den theft cre­at­ed an unprece­dent­ed cri­sis for a project that was once hailed as the future of the blockchain, and a mad dash to keep tens of mil­lions of dol­lars from slip­ping per­ma­nent­ly out of reach.

To under­stand how this could have hap­pened, it’s nec­es­sary to know a lit­tle bit about how Ethereum works. The sys­tem is built on the same blockchain idea that pow­ers Bit­coin, a sys­tem for hold­ing and spend­ing mon­ey based on cryp­tog­ra­phy rather than tra­di­tion­al inter­me­di­aries like banks and cred­it card com­pa­nies. Apply­ing that log­ic to finance has made for a pow­er­ful and con­tro­ver­sial cur­ren­cy sys­tem, but Ethereum push­es it even fur­ther. Instead of lim­it­ing the blockchain to trans­ac­tions, Ethereum lets devel­op­ers build any kind of code on top of a blockchain ledger — that could mean blockchain-based con­tracts, blockchain-based busi­ness­es, or even wilder sys­tems that haven’t been cre­at­ed yet. Like most blockchain pro­pos­als, it’s still exper­i­men­tal and more than a lit­tle star­ry-eyed, but it’s man­aged to raise $15 mil­lion and catch the atten­tion of some of the industry’s biggest investors.

The DAO is one of the most ambi­tious sys­tems built on top of Ethereum. It’s designed to func­tion as a kind of decen­tral­ized ven­ture cap­i­tal fund. Ethereum users can pur­chase tokens that work like stock, enti­tling them to vot­ing pow­er on projects and invest­ments, as well as a share of any prof­its. It’s still in the very ear­ly stages, but believ­ers hope it could pro­vide a mod­el for a new kind of decen­tral­ized cor­po­ra­tion.

But there was a prob­lem. The con­tract pro­grams that pow­ered the DAO had a bug that, under the right cir­cum­stances, would allow escrow accounts to be emp­tied out through a bal­ance-check mech­a­nism. Those con­tracts were built on top of Ethereum, rather than being made a part of its core code, but they were cru­cial for the day-to-day oper­a­tion of the DAO. A num­ber of researchers had drawn atten­tion to the bug, most notably for­mer Bit­coin Foun­da­tion chair­man Peter Vessenes, but devel­op­ers did­n’t seem to real­ize how dev­as­tat­ing the bug could be once exploit­ed. “This par­tic­u­lar bug was not unknown,” says Vessenes. “The core devel­op­ers knew about it.”

...

Ethereum devel­op­ers have put in hero­ic efforts to patch the bug, but that still leaves the ques­tion of the miss­ing $53 mil­lion. The mon­ey is still in Ethereum coins, and because of the unique nature of the DAO con­tracts, it’s stuck in a spe­cif­ic hold­ing account for the next 27 days. If the com­mu­ni­ty doesn’t do any­thing dur­ing that peri­od, the attack­er will be able to walk away with it — but giv­en how much is at stake, that’s unlike­ly to hap­pen.

What’s more like­ly is that Ethereum’s lead­ers will fig­ure out a way to take it back, but there’s still some debate over exact­ly how that should take place. In a post this morn­ing detail­ing the attack, Ethereum founder Vita­lik Buterin (pic­tured above) pro­posed a vol­un­tary mod­i­fi­ca­tion to Ethereum’s code that would make it impos­si­ble to spend the stolen coins even after the 27-day win­dow expires. The same mech­a­nism could even­tu­al­ly be used to refund the mon­ey, although it will require a lot of polit­i­cal con­sen­sus to do so. Some mem­bers of the com­mu­ni­ty have argued against recov­er­ing the mon­ey — using some of the same moral haz­ard argu­ments made against the 2008 bank bailouts — but so far they seem unlike­ly to pre­vail. (Update: the attack­er has since come for­ward to claim the coins are legal­ly his, com­pli­cat­ing these efforts.)

Still, the result leaves the DAO and Ethereum at large with an uncer­tain future. Theft is a long-stand­ing prob­lem for cryp­tocur­ren­cy, par­tic­u­lar­ly for any insti­tu­tion large enough to make a tempt­ing tar­get. In 2014, the foun­da­tion­al Bit­coin exchange Mt Gox was revealed as mas­sive­ly insol­vent in the wake of a $400 mil­lion theft, an event that result­ed in per­ma­nent dam­age to the currency’s rep­u­ta­tion.

Today’s theft wasn’t near­ly as severe as Mt Gox’s col­lapse, but it’s led to sim­i­lar con­cerns from some observers. Cor­nell cryp­tog­ra­ph­er Emin Gün Sir­er, a long­time skep­tic of the DAO, wrote in a post today that the inci­dent should mark the end of the orga­ni­za­tion entire­ly, call­ing on orga­niz­ers to “dis­man­tle the fund and return the coins back to investors in as order­ly a fash­ion as pos­si­ble.” Oth­ers are less pes­simistic, see­ing the DAO’s prob­lems as a speed bump in Ethereum’s larg­er expan­sion.

...

“But there was a prob­lem. The con­tract pro­grams that pow­ered the DAO had a bug that, under the right cir­cum­stances, would allow escrow accounts to be emp­tied out through a bal­ance-check mech­a­nism. Those con­tracts were built on top of Ethereum, rather than being made a part of its core code, but they were cru­cial for the day-to-day oper­a­tion of the DAO. A num­ber of researchers had drawn atten­tion to the bug, most notably for­mer Bit­coin Foun­da­tion chair­man Peter Vessenes, but devel­op­ers did­n’t seem to real­ize how dev­as­tat­ing the bug could be once exploit­ed. “This par­tic­u­lar bug was not unknown,” says Vessenes. “The core devel­op­ers knew about it.””
Well, that did­n’t go well. It’s going to be an extra long 27 days for the Etherum com­mu­ni­ty. But on the plus side it appears that the DOA taught the Ethereum com­mu­ni­ty some incred­i­bly use­ful, if entire­ly pre­dictable, lessons about the poten­tial pit­falls of set­ting up decen­tral­ized autonomous sys­tems for man­ag­ing our affairs with no “reverse” but­ton. If this was a sit­u­a­tion where that bug was just going to sit there indef­i­nite­ly, imag­ine how much worse it would be if this bug was­n’t exploit­ed until much lat­er.

Still, it sounds like they might be able to “reverse” the sit­u­a­tion before the 27 days are up, with one of the biggest ques­tions being whether or not the required con­sen­sus with­in the Ethereum com­mu­ni­ty required to imple­ment the fix will actu­al­ly be ready on time. There’s the ‘moral haz­ard’ argu­ment, which comes up dur­ing any bailout. But as the arti­cle indi­cat­ed, there’s anoth­er set of argu­ments that could poten­tial­ly com­pli­cate the sit­u­a­tion and those argu­ments are com­ing from some­one claim­ing to be the hack­er:

The Verge

Note claim­ing to be from cryp­tocur­ren­cy hack­er says stolen $53 mil­lion is legal­ly his

By Rus­sell Bran­dom on June 18, 2016 09:42 am

One day after $53 mil­lion abrupt­ly dis­ap­peared from an exper­i­men­tal cryp­tocur­ren­cy project, a note claim­ing to be from the attack­er has sur­faced on Paste­Bin, claim­ing that the mon­ey drained from the sys­tem is now legal­ly his. The attack­er with­drew the mon­ey by exploit­ing a con­tract bug in the code of the DAO (or Decen­tral­ized Autonomous Orga­ni­za­tion), a col­lec­tive invest­ment fund that uses the Ethereum cryp­tocur­ren­cy. The DAO had raised well over $100 mil­lion from Ethereum users at the time of the attack.

“I have care­ful­ly exam­ined the code of The DAO and decid­ed to par­tic­i­pate after find­ing the fea­ture where split­ting is reward­ed with addi­tion­al ether,” the note reads. “I... have right­ful­ly claimed 3,641,694 ether, and would like to thank the DAO for this reward,” the note reads. “I am dis­ap­point­ed by those who are char­ac­ter­iz­ing the use of this inten­tion­al fea­ture as ‘theft.’” The note also threat­ens legal action against any who attempt to reclaim the mon­ey through tech­ni­cal means.

The note con­cludes with an iden­ti­fy­ing sig­na­ture and hash, but a num­ber of experts have ques­tioned their valid­i­ty. Reached by The Verge, the Ethereum pro­jec­t’s Nick John­son said the sig­na­ture does­n’t appear to be valid:

ECDSA sig­na­tures of the sort used by Ethereum are 65 bytes (130 hexa­dec­i­mal dig­its) long, and end with ‘00’ or ’01′. The num­ber at the end of his mes­sage is the right length, but ends with ‘20’, mak­ing it an invalid sig­na­ture.

If the attack­er wrote the mes­sage, there would be no rea­son for him not to pro­vide a valid sig­na­ture. If the mes­sage were writ­ten by an impos­tor, on the oth­er hand, they’d be unable to gen­er­ate a valid sig­na­ture, and would have rea­son to make their mes­sage more con­vinc­ing by adding a fraud­u­lent one.

For that rea­son, I’m cer­tain that the mes­sage is a fraud, writ­ten by some­one who wants to stir up trou­ble in the com­mu­ni­ty.

If valid, the note would sig­nif­i­cant­ly com­pli­cate the ongo­ing efforts to recov­er the mon­ey. At the moment, all funds tak­en from the DAO are stuck in a hold­ing account as a result of a clause in the DAO con­tract, and must remain there for the next 26 days. A num­ber of Ethereum lead­ers have been mak­ing efforts to get it back, includ­ing a pro­posed change to the Ethereum code that would make those coins effec­tive­ly unspend­able. If enough of the com­mu­ni­ty accepts the change, it could pre­vent the mon­ey from slip­ping away.

Still, the legal rea­son­ing in the note isn’t entire­ly unprece­dent­ed. The DAO is struc­tured like a legal con­tract, and while the attack cer­tain­ly wasn’t an intend­ed use of that con­tract, it pro­ceed­ed accord­ing to the contract’s pre-estab­lished rules. Cor­nell cryp­tog­ra­ph­er Emin Gün Sir­er wrote yes­ter­day that drain­ing the funds may not even qual­i­fy as a hack.

“Had the attack­er lost mon­ey by mis­take,” Sir­er wrote, “I am sure the devs would have had no dif­fi­cul­ty appro­pri­at­ing his funds and say­ing ‘this is what hap­pens in the brave new world of pro­gram­mat­ic mon­ey flows.’ When he instead emp­tied out coins from The DAO, the only con­sis­tent response is to call it a job well done.”

Updat­ed 1:40PM ET: Updat­ed with Nick John­son state­ment ques­tion­ing the valid­i­ty of the note.

“If valid, the note would sig­nif­i­cant­ly com­pli­cate the ongo­ing efforts to recov­er the mon­ey. At the moment, all funds tak­en from the DAO are stuck in a hold­ing account as a result of a clause in the DAO con­tract, and must remain there for the next 26 days. A num­ber of Ethereum lead­ers have been mak­ing efforts to get it back, includ­ing a pro­posed change to the Ethereum code that would make those coins effec­tive­ly unspend­able. If enough of the com­mu­ni­ty accepts the change, it could pre­vent the mon­ey from slip­ping away.”
It’s a tricky sit­u­a­tion when the argu­ment made by some­one claim­ing to be the per­son who pulled off a major heist sig­nif­i­cant­ly com­pli­cates your efforts to recov­er the stolen mon­ey. Espe­cial­ly since that would indi­cate that the argu­ments are valid regard­less of whether or not they’re made by the per­son who stole the funds or any­one else.

Of course, an out­side legal frame­work like gov­ern­ment laws could clar­i­fy the sit­u­a­tion, but it’s worth keep­ing in mind that one of the rea­sons so many cryp­tocur­ren­cy enthu­si­asts are so enthuias­tic about this like Ethereum is the promise of cre­at­ing tech­nol­o­gy that replaces gov­ern­ment. It will be inter­est­ing to see what, if any­thing, the gov­ern­ment has to say about the DAO heist. What if the fact that this bug was well known and this sys­tem is set up to be used “as is” cre­at­ed a legal vac­u­um for some­one to legal­ly do this? Yowza. It looks you soci­ety had bet­ter test its smart con­tract soft­ware well before we run sys­tem­i­cal­ly impor­tant sys­tems on a smart con­tracts sys­tems.

With all that in mind, in chill­ing­ly relat­ed news a num­ber of Wall Street exec­u­tives report­ed­ly had meet­ing back in April about blockchain tech­nol­o­gy. The prospect of imme­di­ate exchanges of dig­i­tal mon­ey, with­out any need for finan­cial insti­tu­tions to clear the trans­ac­tion, appeared to be one of the poten­tial fea­tures gen­er­at­ing the most excite­ment since it could imme­di­ate­ly free up cap­i­tal. It’s the actu­al con­ver­sion of cash into a dig­i­tal form that remains a hur­dle.

So if there’s a future Wall Street push to change reg­u­la­tions to allow for very large sums of cash to be con­vert­ed into “dig­i­tal cash”, not bit­coins but dig­i­tal fiat cur­ren­cy like the dol­lar, and trad­ed in a man­ner that’s prob­a­bly not unlike Ethereum’s “smart con­tracts” mod­el, using Wall Street’s envi­sions blockchains of the future, you might want to recall the DAO Heist of 2016:

Bloomberg Tech­nol­o­gy

Inside the Secret Meet­ing Where Wall Street Test­ed Dig­i­tal Cash

Matthew Leis­ing
May 2, 2016 — 8:00 AM CDT

* Fis­erv cre­at­ed dig­i­tal dol­lars to show gath­ered exec­u­tives
* April meet­ing was spon­sored by blockchain start­up Chain

On a recent Mon­day in April, more than 100 exec­u­tives from some of the world’s largest finan­cial insti­tu­tions gath­ered for a pri­vate meet­ing at the Times Square office of Nas­daq Inc. They weren’t there to just talk about blockchain, the new tech­nol­o­gy some pre­dict will trans­form finance, but to build and exper­i­ment with the soft­ware.

By the end of the day, they had seen some­thing rev­o­lu­tion­ary: U.S. dol­lars trans­formed into pure dig­i­tal assets, able to be used to exe­cute and set­tle a trade instant­ly. That’s the promise of a blockchain, where the cum­ber­some and error-prone sys­tem that takes days to move mon­ey across town or around the world is replaced with almost instant cer­tain­ty. The event was cre­at­ed by Chain, one of many star­tups try­ing to rewire the finan­cial indus­try, with rep­re­sen­ta­tives from Nas­daq, Cit­i­group Inc., Visa Inc., Fideli­ty, Fis­erv Inc., Pfiz­er Inc. and oth­ers in the room.

The event — announced in a state­ment this Mon­day — marked a key moment in the evo­lu­tion of blockchain, notable both for what was achieved, as well as how many firms were involved. The technology’s poten­tial has cap­ti­vat­ed Wall Street exec­u­tives because it offers a way to free up bil­lions of dol­lars by speed­ing trans­ac­tions that cur­rent­ly can take days, tying up cap­i­tal. But a huge piece of that puz­zle is trans­form­ing cash into a dig­i­tal form. And while some firms have con­duct­ed exper­i­ments, the Chain event showed a large num­ber of them are now look­ing joint­ly at a poten­tial solu­tion.

“We cre­at­ed a dig­i­tal dol­lar” to show the group at Nas­daq an instant deb­it and cred­it on a blockchain, said Marc West, chief tech­nol­o­gy offi­cer at Fis­erv, a trans­ac­tion and pay­ments com­pa­ny with more than 13,000 clients across the finan­cial indus­try. “This is the first time the mon­ey has moved.”

Qui­et­ly Build­ing

Chain is already known in some Wall Street cir­cles for its project to help Nas­daq shift trad­ing of non-pub­lic com­pa­ny shares onto a blockchain. But for the most part, it has kept rel­a­tive­ly qui­et com­pared with oth­er fin­tech ven­tures.

The San Fran­cis­co-based com­pa­ny also used the April 11 meet­ing to intro­duce its cus­tomers and investors to Chain Open Stan­dard, an open-source blockchain plat­form that the ven­ture has been design­ing for more than a year, said Adam Lud­win, the company’s chief exec­u­tive offi­cer. What Chain has done is engi­neer the com­pli­cat­ed ele­ments need­ed for a blockchain to work, so that its cus­tomers can build cus­tom solu­tions on top of that to solve busi­ness prob­lems, he said.

“We’ve been qui­et­ly build­ing with a whole bunch of folks for a few years,” he said. “Blockchains are net­works, so we think col­lab­o­ra­tion is impor­tant, but what’s even more impor­tant than col­lab­o­ra­tion at the begin­ning is get­ting the mod­el right.” The event was kept secret so exec­u­tives could freely share nascent ideas and take risks. “The more press, the less qual­i­ty of the dia­logue and prob­lem-solv­ing,” he said.

The most com­mon blockchain is the one sup­port­ing the dig­i­tal cur­ren­cy bit­coin, which has been active since 2009. Finan­cial firms have been reluc­tant to embrace bit­coin, how­ev­er, as its anony­mous users could entan­gle banks in vio­la­tions of anti-mon­ey-laun­der­ing and know-your-cus­tomer reg­u­la­tions. Dig­i­tal U.S. dol­lars, or any oth­er fiat cur­ren­cy, on the oth­er hand, doesn’t pose those risks.

‘Main­frame Era’

Nas­daq and Cit­i­group part­nered to explore how they can work togeth­er, said Brad Peter­son, the exchange-owner’s chief infor­ma­tion offi­cer. He said blockchain also could be used for ref­er­ence data — how spe­cif­ic stocks or bonds are iden­ti­fied across all mar­kets, for exam­ple.

Wall Street was one of the ear­li­est ben­e­fi­cia­ries of com­put­ers replac­ing office sys­tems. Now 30 years lat­er, those lega­cy sys­tems can be a hin­drance to fur­ther tech­no­log­i­cal evo­lu­tion, he said.

“That’s the great oppor­tu­ni­ty — how to unlock that abil­i­ty to work your way out from under the main­frame era,” he said.

While cash in a bank account moves elec­tron­i­cal­ly all the time today, there’s a dis­tinc­tion between that sys­tem and what it means to say mon­ey is dig­i­tal. Elec­tron­ic pay­ments are real­ly just mes­sages that cash needs to move from one account to anoth­er, and this rec­on­cil­i­a­tion is what adds time to the pay­ments process. For cus­tomers, mov­ing mon­ey between accounts can take days as banks wait for con­fir­ma­tions. Dig­i­tal dol­lars, how­ev­er, are pre-loaded into a sys­tem like a blockchain. From there, they can be swapped imme­di­ate­ly for an asset.

“Instead of a record or mes­sage being moved, it’s the actu­al asset,” Lud­win said. “The pay­ment and the set­tle­ment become the same thing.”

...

“While cash in a bank account moves elec­tron­i­cal­ly all the time today, there’s a dis­tinc­tion between that sys­tem and what it means to say mon­ey is dig­i­tal. Elec­tron­ic pay­ments are real­ly just mes­sages that cash needs to move from one account to anoth­er, and this rec­on­cil­i­a­tion is what adds time to the pay­ments process. For cus­tomers, mov­ing mon­ey between accounts can take days as banks wait for con­fir­ma­tions. Dig­i­tal dol­lars, how­ev­er, are pre­loaded into a sys­tem like a blockchain. From there, they can be swapped imme­di­ate­ly for an asset.”
Just what Wall Street needs: more ways to swap large sums of mon­ey instan­ta­neous­ly so finan­cials insti­tu­tions can imme­di­ate­ly free up assets for trad­ing even more read­i­ly as the sit­u­a­tion (or the high-fre­quen­cy trad­ing algo­rithm) calls for it. Because some­times a lever­aged could imme­di­ate­ly use a lot more lever­age.

But who knows, maybe let­ting major Wall Street banks set up pro­pri­etary blockchains that can legal­ly trade assets instan­ta­neous­ly will have a net pub­lic ben­e­fit and not be a tool for increas­ing poten­tial lever­age by increas­ing liq­uid­i­ty and also “get­ting out of dodge” dur­ing finan­cial crises. But let’s keep in mind that the bureau­crat­ic slow­down that the Wall Street blockchains are sup­posed to replace to sort of cre­ate a “we’re all in this togeth­er” sit­u­a­tion when sys­temic events take place and if there’s a way smart con­tract finan­cial sys­tems could be set up to allow pow­er­ful play­ers to “get out of Dodge” in a finan­cial cri­sis by doing some­thing like the DAO hack­er did and exploit­ing a known loop­hole in the con­tract code, we should prob­a­bly expect them to do that. So there’s a fun debug­ging over­sight issue for finan­cial reg­u­la­tors. Every­where.

Dig­i­tal cash in nation­al cur­ren­cies and oth­er types of secu­ri­ties that are trad­able on blockchains mar­kets, espe­cial­ly mar­kets are dri­ven by smart con­tracts, sure could become use­ful in a sys­temic finan­cial cri­sis when mar­kets are at the risk of “freez­ing” and nor­mal trad­ing grinds to a halt due to extreme coun­ter­par­ty uncer­tain­ty. And that could be true espe­cial­ly if you’re par­tic­i­pat­ing in one of the spe­cial “dig­i­tal mon­ey” blockchains and most of the rest of the mar­ket does­n’t have that advan­tage. Espe­cial­ly dur­ing any phase-in peri­ods of the tech­nol­o­gy where it’s legal but not yet wide­ly adopt­ed and only a few select insti­tu­tions are actu­al­ly uti­liz­ing these kinds of imme­di­ate­ly trad­able forms of cash. Unless, of course, these exchanges are well-reg­u­lat­ed.

So don’t act super sur­prised if Wall Street starts view­ing Bit­coin or Ethereum blockchain tech­nol­o­gy as sud­den­ly the great­est thing ever and an excit­ing area of finan­cial inno­va­tion. One that does­n’t need too much inno­va­tion-smoth­er over­sight. Imme­di­ate asset trans­ac­tion could cre­ate all sorts of fas­ci­nat­ing arbi­trage oppor­tu­ni­ties and that’s just the kind of eco­nom­ic inno­va­tion Wall Street loves most.

The writ­ing is on the wall about both the vul­ner­a­bil­i­ties of smart con­tract sys­tems and the inter­est of big mon­ey. And that writ­ing looks like dol­lar signs. So wel­come to the smart con­tract era. Read the fine print.

This is one of those sto­ries that must elic­it mixed feel­ings in the Bit­coin com­mu­ni­ty: The World Eco­nom­ic Forum recent­ly pub­lished a paper declar­ing that the Bit­coin’s blockchain tech­nol­o­gy is rapid­ly going to become the beat­ing heart of glob­al finance. Except that beat­ing heart won’t be a sin­gle blockchain push­ing bit­coins around. Instead, it will be all sort of pri­vate­ly oper­at­ed blockchains push­ing dol­lars, euros, and any oth­er asset class the finan­cial indus­try might want to trade. Most­ly for the pur­pose of cut­ting down trans­ac­tion costs.

So instead of over­throw­ing the finan­cial sta­tus quo, Bit­coin tech­nol­o­gy is poised to get used for padding the sta­tus quo’s bot­tom line:

The New York Times

Envi­sion­ing Bitcoin’s Tech­nol­o­gy at the Heart of Glob­al Finance

By NATHANIEL POPPER
AUG. 12, 2016

A new report from the World Eco­nom­ic Forum pre­dicts that the under­ly­ing tech­nol­o­gy intro­duced by the vir­tu­al cur­ren­cy Bit­coin will come to occu­py a cen­tral place in the glob­al finan­cial sys­tem.

A report released Fri­day morn­ing by the forum, a con­ven­ing orga­ni­za­tion for the glob­al elite, is one of the strongest endorse­ments yet for a new tech­nol­o­gy — the blockchain — that has become the talk of the finan­cial indus­try, despite the shad­owy ori­gins of Bit­coin.

“Rather than to stay at the mar­gins of the finance indus­try blockchain will become the beat­ing heart of it,” the head of finan­cial ser­vices indus­tries at the World Eco­nom­ic Forum, Gian­car­lo Bruno, said in a state­ment released with the report.

...

Unlike exist­ing finan­cial ledgers or data­bas­es used by banks and oth­er insti­tu­tions, the blockchain is updat­ed and main­tained not by a sin­gle com­pa­ny or gov­ern­ment. Instead it is run by a net­work of users. It’s akin to the way Wikipedia is main­tained by users around the globe.

Ini­tial­ly, bank exec­u­tives shied away from endors­ing Bit­coin because it had been used for drugs and crime. Now, how­ev­er, many have focused on ways to cre­ate blockchains with­out using Bit­coins for trans­ac­tions in any way.

This is attrac­tive because blockchains — or “dis­trib­uted ledgers,” as they are often described — could offer a new way to move mon­ey and track trans­ac­tions across bor­ders and oth­er net­works in a more secure, trans­par­ent and effec­tive way than the cur­rent sys­tem.

Dis­trib­uted ledgers are often viewed as most attrac­tive to indus­tries with busi­ness­es that lack a cen­tral insti­tu­tion they can trust to keep their records.

The World Eco­nom­ic Forum report notes that most devel­op­ments are like­ly to hap­pen behind the scenes. So con­sumers won’t see the changes to infra­struc­ture, but the changes could lead to cheap­er and faster finan­cial ser­vices. The report says the tech­nol­o­gy could help improve both main­stream trans­ac­tions, like glob­al pay­ments and stock trad­ing, and less­er-known areas like trade finance and con­tin­gent con­vert­ible bonds.

The 130-page report from the forum is the prod­uct of a year of research and five gath­er­ings of exec­u­tives from sev­er­al major insti­tu­tions, includ­ing JPMor­gan Chase, Visa, Mas­ter­Card and Black­Rock.

The report esti­mates that 80 per­cent of banks around the world could start dis­trib­uted ledger projects by next year. Large cen­tral banks are also study­ing how the blockchain will alter the way mon­ey moves around the globe.

Most banks have already put togeth­er blockchain work­ing groups and released research reports hail­ing the poten­tial­ly trans­for­ma­tive effect of the tech­nol­o­gy.

But few real-world uses of the blockchain have come to fruition, oth­er than Bit­coin itself. That has led to some ques­tions about whether the blockchain is the prover­bial solu­tion look­ing for a prob­lem, rather than an inno­va­tion that will be used wide­ly.

Exist­ing vir­tu­al cur­ren­cies have con­tin­ued to strug­gle with secu­ri­ty prob­lems. One of the largest Bit­coin exchanges, Bitfinex, recent­ly lost more than $60 mil­lion worth of Bit­coin in a hack­ing — the lat­est of sev­er­al such inci­dents.

The World Eco­nom­ic Forum report sug­gests that it will take some time for such prob­lems to be worked out. In addi­tion to the tech­nol­o­gy issues, the report says that the indus­try will have to work with gov­ern­ments to cre­ate stan­dard rules and laws to gov­ern trans­ac­tions.

The report does not make a sin­gle men­tion of Bit­coin. That mir­rors the pro­nounce­ments from banks, which have often said that they can har­ness dis­trib­uted ledgers with­out using exist­ing vir­tu­al cur­ren­cies. Rather, these ledgers would be run by groups of insti­tu­tions that want to keep com­mon records.

Just this week, 15 glob­al banks, includ­ing Wells Far­go and UBS, said that they had com­plet­ed a pro­to­type of a dis­trib­uted ledger that could track trade financ­ing around the globe — pro­vid­ing a sin­gle record for a series of scat­tered, hard-to-track trans­ac­tions.

“The report esti­mates that 80 per­cent of banks around the world could start dis­trib­uted ledger projects by next year. Large cen­tral banks are also study­ing how the blockchain will alter the way mon­ey moves around the globe.”

80 per­cent of banks glob­al­ly will start dis­trib­uted ledger projects by next year? While that might be a opti­mistic esti­mate, it’s not at all unimag­in­able that the finan­cial indus­try would be real­ly, real­ly excit­ed about pri­vate­ly oper­at­ed blockchain tech­nolo­gies. Espe­cial­ly the banks that are going to be run­ning these pri­vate blockchains designed to trans­fer assets around the globe. Espe­cial­ly when those banks hap­pen to be the same mega-banks that dom­i­nant finance already and have a long his­to­ry of col­lu­sion for prof­it. Espe­cial­ly if those pri­vate­ly run blockchains are vul­ner­a­ble to fraud if enough of the par­tic­i­pat­ing banks col­lec­tive­ly main­tain­ing the dis­trib­uted ledger decide to col­lude:

For­tune

More Banks Are Try­ing Out Blockchains For Fund Trans­fers

by David Mey­er

June 23, 2016, 4:10 AM EDT

Rip­ple signs up sev­en new banks as dis­trib­uted-ledger tech gains trac­tion.

The San Fran­cis­co-based finan­cial tech­nol­o­gy com­pa­ny Rip­ple has signed up sev­en more banks to poten­tial­ly use its blockchain for cross-bor­der pay­ments.

San­tander, Uni­Cred­it, UBS, Reise­bank, CIBC, ATB Finan­cial and the Nation­al Bank of Abu Dhabi said Wednes­day that they were work­ing with Ripple’s tech­nol­o­gy, which uses a dis­trib­uted ledger of the sort that also under­pins bit­coin.

These auto­mat­i­cal­ly-gen­er­at­ed ledgers have no cen­tral oper­a­tor and, as they are filled, the entries become irre­versible and resis­tant to tam­per­ing. Ripple’s ledgers hold order books with bid and ask offers, and it claims its “path-find­ing algo­rithm” finds the low­est for­eign exchange rates.

Canada’s ATB Finan­cial and Germany’s Reise­Bank used the sys­tem to make a demon­stra­tion fund trans­fer last week.

“Using blockchain tech­nol­o­gy, ATB Finan­cial became the first finan­cial insti­tu­tion in Cana­da to com­plete an over­seas pay­ment in a mat­ter of sec­onds. With­out blockchain, that trans­ac­tion would have tak­en two to six busi­ness days,” ATB chief strat­e­gy and oper­a­tions offi­cer Cur­tis Stange said in a state­ment.

Rip­ple said its net­work now includes 12 of the world’s top 50 banks, and it has 10 banks in “com­mer­cial deal phas­es.”

If you want to see how its ledger-fill­ing sys­tem works, here you go:

[see video]

Mean­while, also in the world of blockchain tech­nol­o­gy, social pay­ments firm Cir­cle has raised $60 mil­lion from Chi­nese investors, led by IDG Cap­i­tal part­ners.

Cir­cle, which already enjoys the back­ing of Gold­man Sachs and oth­ers, lets indi­vid­u­als send mon­ey to one anoth­er across bor­ders, with bitcoin’s blockchain as the under­ly­ing plat­form. It is cur­rent­ly part­ner­ing with banks such as the U.K.’s Bar­clays.

...

In a Wednes­day state­ment, Cir­cle said it was devel­op­ing a “Chi­na-native com­pa­ny” as it works towards a com­mer­cial launch in that coun­try. In the mean­time, it said, it will fol­low up its U.K. launch with a broad­er Euro­pean roll­out, start­ing in Spain.

The U.S. Finan­cial Sta­bil­i­ty Over­sight Coun­cil, whose mem­bers include heads of the Fed­er­al Reserve and the Secu­ri­ty and Exchange Com­mis­sion, said this week in its annu­al report that dis­trib­uted ledger sys­tems such as Ripple’s, and those of bit­coin and ethereum, could enhance mar­ket trans­paren­cy and reduce con­cen­trat­ed risk expo­sure to the “trust­ed third par­ties” that would tra­di­tion­al­ly han­dle such trans­ac­tions.

How­ev­er, the coun­cil also not­ed that there were “risks and uncer­tain­ties” involved, such as inex­pe­ri­ence with such sys­tems, the pos­si­bil­i­ty of oper­a­tional vul­ner­a­bil­i­ties that no-one has found yet, and the pos­si­bil­i­ty of fraud if enough par­tic­i­pants in the sys­tem col­lude with one anoth­er.

“How­ev­er, the coun­cil also not­ed that there were “risks and uncer­tain­ties” involved, such as inex­pe­ri­ence with such sys­tems, the pos­si­bil­i­ty of oper­a­tional vul­ner­a­bil­i­ties that no-one has found yet, and the pos­si­bil­i­ty of fraud if enough par­tic­i­pants in the sys­tem col­lude with one anoth­er.”

Let’s see. Might a dis­turbing­ly large per­cent of the banks oper­at­ing on a pri­vate blockchain col­lude with each oth­er to both per­pe­trate a large-scale finan­cial crime and then cov­er it up? It’s all a reminder that one of the chal­lenges of intro­duc­ing decen­tral­ized pri­vate col­lec­tive­ly man­aged dig­i­tal finan­cial ledgers is that decen­tral­ized exchanges is only decen­tral­ized if the enti­ties main­tain­ing the decen­tral­ized ledger’s trans­ac­tion-clear­ing mech­a­nism are actu­al­ly oper­at­ing in a decen­tral­ized man­ner behind the scenes coop­er­a­tion. That does­n’t mean there’s no place for blockchains in finance. It just means we prob­a­bly should­n’t pri­vate­ly run bank car­tel blockchains are super decen­tral­ized. It’s def­i­nite­ly some­thing worth keep­ing in mind in the age of blockchain finance.

It looks like the big mon­ey back­ers of “21 Inc” are expand­ing on their plans for trans­form­ing Bit­coin into a ‘micro­trans­ac­tion’ plat­form where tiny bits of ‘col­ored’ bit­coins are used as tokens to pay for var­i­ous ser­vices (as opposed to treat­ing it more like a cur­ren­cy) and then pay you in these token. A new ‘micro’ item was just added to 21 Inc’s agen­da: micro­tasks. Yes, if you love the ‘gig econ­o­my’ and the idea of work­ing for a pit­tance doing small tasks through ser­vices like Ama­zon’s Mechan­i­cal Turk plat­form, now you can work for a pit­tance of bit­coins instead:

Coin­speak­er

Bit­coin Start­up 21 Inc Offi­cial­ly Launch­es ‘Lists’ to Let Users Earn Mon­ey By Doing Micro­tasks

by Poli­na Chernykh on Tues­day, May 2nd, 2017 7:00am EDT

With a new plat­form, peo­ple can start receiv­ing pay­ments in dig­i­tal cur­ren­cy for answer­ing emails, fill­ing out sur­veys, and doing oth­er tasks.

The San-Fran­cis­co-based bit­coin start­up, 21.co, has unveiled a new ser­vice to enable users earn bit­coins by com­plet­ing spe­cif­ic tasks. Called Lists, the fea­ture can be used by busi­ness­es to pay pro­fes­sion­als for respond­ing to their requests.

“Lists are curat­ed groups of 21.co mem­bers who share a com­mon pro­fes­sion, skill, or social net­work,” said Bal­a­ji Srini­vasan, CEO of 21. “21.co lists pro­vide a way for the aver­age indi­vid­ual to make mon­ey online. You need not be famous; you need only join lists of peo­ple with sim­i­lar to start receiv­ing tar­get­ed, paid micro­tasks.”

The plat­form, the com­pa­ny explained in a blog post, will help com­pa­nies that need to send mass emails or sur­veys to reduce time spent by their employ­ees and speed up recip­i­ent response time. If com­pared to tra­di­tion­al cold emails, the 21.co lists have much high­er response rate, with 90% of respon­dents gen­er­al­ly answer­ing in 24 hours.

The start­up explained how the ser­vice can be used. For instance, if you are a Stan­ford stu­dent, you can apply to the Stan­ford list to get pay­ments by busi­ness­es that want to hire you or have you try out new apps intend­ed for col­lege cam­pus­es. The Python list could be used by busi­ness­es that want to com­plete sur­veys on new tech­nolo­gies or get expert opin­ions.

To use the ser­vice, you have to apply to one of the lists and after being select­ed you will be sent a stream of list-spe­cif­ic tasks that can be done to make mon­ey or fund char­i­ties. 21 has also devel­oped some addi­tion­al fea­tures, like pro­fes­sion­al biog­ra­phy and auto­mat­ic lists join­ing, that will sim­pli­fy the process of mak­ing mon­ey.

The tasks offered include recruit­ing, fundrais­ing, mar­ket research, and sales. Busi­ness­es using the ser­vice can reach exec­u­tives and investors, dig­i­tal cur­ren­cy investors, engi­neers, fron­tend and back­end devel­op­ers, blockchain experts, pro­fes­sion­als, and oth­ers. There are now more than 50 lists dis­played on the 21’s web­site and the start­up is plan­ning to add more.

...

Two years ago, the start­up devel­oped a “split chip” tech­nol­o­gy for the Inter­net of Things (IoT) devices to let users sell or buy ser­vices for bit­coin. Two months after reveal­ing the device, 21 made it avail­able for pur­chase on Ama­zon. The pock­et size of the prod­uct allows devel­op­ers to make cryp­tocur­ren­cy trans­ac­tions with­out tak­ing their mind off dai­ly rou­tine.

“The tasks offered include recruit­ing, fundrais­ing, mar­ket research, and sales. Busi­ness­es using the ser­vice can reach exec­u­tives and investors, dig­i­tal cur­ren­cy investors, engi­neers, fron­tend and back­end devel­op­ers, blockchain experts, pro­fes­sion­als, and oth­ers. There are now more than 50 lists dis­played on the 21’s web­site and the start­up is plan­ning to add more.”

Wel­come to the future of employ­ment: micro­tasks for tiny frac­tions of bit­coins. But since it sounds like 21 Inc is pret­ty much just tar­get­ing pro­fes­sion­als for their micro­task ser­vice maybe the task will at least pay decent­ly unlike the rest of the ‘gig econ­o­my’. Maybe. Or maybe not:

The Finan­cial Times

The humans behind Mechan­i­cal Turk’s arti­fi­cial intel­li­gence
High­ly edu­cat­ed work­ers dri­ve machine learn­ing for Ama­zon by com­plet­ing tasks

Octo­ber 26, 2016

by: Leslie Hook in San Fran­cis­co

Man­ish Bha­tia, a 29-year-old IT work­er in New Del­hi, recent­ly mar­ried. To make some extra cash to sup­port his new lifestyle, he knows where to turn: com­plet­ing tasks on Amazon’s Mechan­i­cal Turk, an online mar­ket­place for chores that are done by peo­ple sit­ting in front of a com­put­er.

Mechan­i­cal Turk is often tout­ed as “arti­fi­cial arti­fi­cial intel­li­gence”, or a “human cloud”. The plat­form has been around for more than a decade, but the types of tasks are chang­ing as com­put­ers become smarter. Now, the work­ers on the human cloud are help­ing to train com­put­ers, which are refin­ing their own arti­fi­cial intel­li­gence capa­bil­i­ties to become more human-like.

With the rise of arti­fi­cial intel­li­gence and specif­i­cal­ly machine learn­ing, in which machines teach them­selves to recog­nise pat­terns by analysing the data they are giv­en, the task of the train­er has become even more impor­tant.

One of the chores Mr Bha­tia worked on through Mechan­i­cal Turk involved iden­ti­fy­ing “pins” for Pin­ter­est, the online pin­board. He would be shown a pho­to — or pin — and then choose oth­er pins that were sim­i­lar to it, enabling Pinterest’s arti­fi­cial intel­li­gence engines to get bet­ter at pre­dict­ing the pins a user will like.

“We are the intel­li­gence behind that arti­fi­cial intel­li­gence,” Mr Bha­tia says with a hint of pride. “I feel excit­ed to be a part of it, [even though] you might be just a small cog in the whole wheel.”

Oth­er machine train­ing projects are being con­duct­ed on the human cloud by Google, Twit­ter, and by Ama­zon, which owns Mechan­i­cal Turk. One of Amazon’s ear­li­est uses of the plat­form for machine-train­ing was ask­ing humans to check whether its algo­rithm had cor­rect­ly iden­ti­fied dupli­cate retail prod­ucts on its shop­ping web­site.

Panos Ipeiro­tis, an asso­ciate pro­fes­sor at New York University’s Stern School of Busi­ness, who stud­ies crowd­sourc­ing, says tasks on Mechan­i­cal Turk are chang­ing and adapt­ing as com­put­ers become more capa­ble.

“You have a lot of work that is like qual­i­ty con­trol of the out­put of com­put­er process­es or AI [arti­fi­cial intel­li­gence] process­es,” he explains. “We have more tasks with AI, so we need more humans to ver­i­fy [the out­put].”

Com­pared with when the ser­vice first launched in 2005, it is now eas­i­er for com­put­ers to iden­ti­fy images, read text, and even write sen­tences. “It used to be humans writ­ing the cap­tion for an image,” says Mr Ipeiro­tis. “Now com­put­ers are writ­ing the cap­tion and humans are check­ing the cap­tion.”

This train­ing func­tion is helped by the fact that many of the work­ers on Mechan­i­cal Turk, which is the largest Eng­lish-lan­guage crowd­sourc­ing plat­form, are high­ly edu­cat­ed. A recent study from the Pew Research Cen­ter found that one in two Turk­ers has a col­lege degree, com­pared with a third of the US work­force over­all.

“The biggest sur­prise was prob­a­bly the edu­ca­tion lev­el of the peo­ple doing the tasks,” says Paul Hitlin, senior researcher at Pew, refer­ring to the study, which sur­veyed more than 3,000 Turk­ers. “Usu­al­ly you would expect low-pay­ing jobs to attract less edu­cat­ed work­ers. But what we found here is that Turk­ers tend to be more edu­cat­ed than the work­ing pub­lic in gen­er­al.”

Com­pa­nies using Mechan­i­cal Turk for machine train­ing are like­ly to be pay­ing a frac­tion of what it would cost to have full-time employ­ees sort and click through pic­tures.

Wages on the plat­form, where work­ers are paid per task rather than per hour, are usu­al­ly below the US fed­er­al min­i­mum wage of $7.25 per hour. The Pew sur­vey found about half of Turk­ers make less than $5 per hour. Near­ly two-thirds of the tasks post­ed on the site pay 10 cents or less.

Not all the tasks on Mechan­i­cal Turk are machine train­ing — chores like tran­scrip­tion rep­re­sent about quar­ter of the tasks post­ed, while iden­ti­fy­ing infor­ma­tion seen in sales receipts is about a fifth of tasks post­ed, accord­ing to Pew. While the tasks vary, they all share one thing: being dif­fi­cult for com­put­ers, and rel­a­tive­ly easy for humans.

Among the work­ers, many enjoy the flex­i­bil­i­ty of being able to make mon­ey when they choose sim­ply by going online. But there has been a back­lash against what crit­ics say is a face­less plat­form that offers lit­tle recourse when work­ers are treat­ed unfair­ly by taskmas­ters.

“Ama­zon sells us as an algo­rithm,” says Kristy Mil­land, who runs an online forum for Turk­ers and has been work­ing on the plat­form since 2010. “We are not even real human intel­li­gence, we are fake fake intel­li­gence, which is offen­sive.”

...

The back­lash against this aspect of work in the gig econ­o­my, in which a worker’s boss is their com­put­er or their smart­phone rather than a human, is wide­spread. And it is a prob­lem that is grow­ing more per­ti­nent as more US work­ers choose to free­lance, tak­ing up part-time jobs that do not pro­vide ben­e­fits.

A recent sur­vey from Edel­man Intel­li­gence esti­mates that a third of the US work­force is free­lanc­ing in some way, whether part time or full time. This num­ber is grow­ing as tech­nol­o­gy makes it eas­i­er to find free­lance work, accord­ing to a Free­lanc­ing in Amer­i­ca 2016 sur­vey, pub­lished ear­li­er this month by Upwork, the online free­lanc­ing plat­form.

Even though the rise of arti­fi­cial intel­li­gence means that the Turk­ers are the ones coach­ing the machines, work­ers still feel sub­sumed by the sys­tem. Ms Mil­land dreams of one day start­ing her own plat­form for tasks, a work­er-owned plat­form that would treat work­ers bet­ter. “If we can’t have a union, we can have a plat­form, a co-oper­a­tive crowd­source plat­form,” she says. “That’s the only way we can hope to make a dif­fer­ence.”

“This train­ing func­tion is helped by the fact that many of the work­ers on Mechan­i­cal Turk, which is the largest Eng­lish-lan­guage crowd­sourc­ing plat­form, are high­ly edu­cat­ed. A recent study from the Pew Research Cen­ter found that one in two Turk­ers has a col­lege degree, com­pared with a third of the US work­force over­all.”

Yep, Mechan­i­cal Turks are sur­pris­ing­ly well edu­cat­ed. And very poor­ly paid:

...
“The biggest sur­prise was prob­a­bly the edu­ca­tion lev­el of the peo­ple doing the tasks,” says Paul Hitlin, senior researcher at Pew, refer­ring to the study, which sur­veyed more than 3,000 Turk­ers. “Usu­al­ly you would expect low-pay­ing jobs to attract less edu­cat­ed work­ers. But what we found here is that Turk­ers tend to be more edu­cat­ed than the work­ing pub­lic in gen­er­al.”

Com­pa­nies using Mechan­i­cal Turk for machine train­ing are like­ly to be pay­ing a frac­tion of what it would cost to have full-time employ­ees sort and click through pic­tures.

Wages on the plat­form, where work­ers are paid per task rather than per hour, are usu­al­ly below the US fed­er­al min­i­mum wage of $7.25 per hour. The Pew sur­vey found about half of Turk­ers make less than $5 per hour. Near­ly two-thirds of the tasks post­ed on the site pay 10 cents or less.
...

So has 21 Inc giv­en us a clue as to what it’s ser­vice going to pay? Sort of. While it’s unclear how many hours 21 Inc expects its “list” mem­bers to work, it’s esti­mat­ing you’ll make any­where from $10-$1000+ per “list” assum­ing you do the stream of micro­tasks made avail­able to you. $10-$1000+ annu­al­ly:

Medi­um

Make Mon­ey Online by Join­ing 21.co Lists
Indi­vid­u­als can now join lists of peo­ple with sim­i­lar skills to start receiv­ing tar­get­ed, paid micro­tasks.

May 1, 2017

...

A 21.co list mem­ber­ship as micro­con­sult­ing

Gain­ing accep­tance to a 21.co list means gain­ing access to what one can think of as paid micro­con­sult­ing, as some­thing in between an Ama­zon Mechan­i­cal Turk-style micro­task and a con­ven­tion­al job. By micro­con­sult­ing we refer to the steady stream of pay­ing micro­tasks that you are qual­i­fied for by dint of your 21.co list mem­ber­ship. Depend­ing on the selec­tiv­i­ty of the 21.co list that you gain admis­sion to, the expect­ed income for a giv­en list’s annu­al stream of micro­con­sult­ing work should be on the order of $10 to $1000+ per year. By join­ing mul­ti­ple lists, you can increase your earn­ings.

...

So if you join a high­ly selec­tive list, pre­sum­ably some­thing like the Ven­ture Cap­i­tal­ist or Angel Investor lists, you might make over $1000/year assum­ing you take on the annu­al stream of micro­con­sult­ing work. And for those on the least selec­tive lists you might make a whole $10. Per year. In bit­coins.

It’s a reminder that you thought 21 Inc’s bit­coin-min­ing toast­er was a hor­ri­ble idea, it can always get worse!

One of the strange­ly suc­cess­ful phe­nom­e­na in con­ser­v­a­tive pop­ulism is the suc­cess of the right-wing mil­lion­aires and bil­lion­aires in ped­dling the notion that “dereg­u­la­tion” — defang­ing gov­ern­men­t’s pow­er to reg­u­late busi­ness and pro­vide some degree of mean­ing­ful over­sight over mar­ket­place — is some­how an act of stick­ing it to ‘The Man’, as opposed to giv­ing ‘The Man’ exact­ly what he is look­ing for in order to gain even more wealth and pow­er and the mass­es. For instance, instead of view­ing the Koch broth­ers and the net­work of wealthy donors as indi­vid­u­als who are emblem­at­ic of ‘the Man’ behind the ‘rigged sys­tem’ and ‘the gov­ern­ment’, we instead have a right-wing media com­plex that has suc­cess­ful­ly con­vinced mil­lions of Amer­i­cans that the prob­lem is the gov­ern­ment has too much pow­er over big busi­ness, too many tax­es on the rich, and that the pow­er behind ‘the gov­ern­ment’ is actu­al­ly a bunch of left-wing pol­i­cy-wonks who are out to grow the pow­er of gov­ern­ment for nefar­i­ous pur­pos­es.

It’s been a wild­ly suc­cess­ful con, in the US and glob­al­ly. And one of the con­se­quences of that suc­cess­ful con is that there’s a lot of real­ly, real­ly wealthy peo­ple with A LOT of mon­ey. Tens of tril­lions of dol­lars stashed in tax havens around the world. And while some of those tril­lions are going to be earned and stashed away legal­ly, there’s also no short­age of very pow­er­ful peo­ple with an abun­dance of dirty mon­ey they need to move around the world and laun­der­ing if they’re ever going to use it. And also dodge tax­es on in many cas­es. The finan­cial obfus­ca­tion indus­try is one of those sec­tors of the econ­o­my that’s sort of a met­ric of fas­cism: if ‘the Man’ is mak­ing it very easy for very wealthy peo­ple to secret­ly save and move vast for­tunes, ‘the Man’ prob­a­bly isn’t work­ing for the com­mon man. To some extent this is com­mon sense, and yet the real­iza­tion that the great­est threat to life on earth at this point is right-wing bil­lion­aires work­ing in con­cert to con­fuse con­ser­v­a­tives is one of those com­mon sense real­iza­tion that eludes so many.

It’s all some­thing worth keep­ing in mind as the world pon­ders whether or not cryt­pocur­ren­cies designed to be one of the most poten­tial­ly effec­tive tools for tax shel­ter­ing and mon­ey-laun­der­ing the world has ever seen should go main­stream. Because while there’s lim­it­ed mon­ey-laun­der­ing and tax shel­ter­ing capac­i­ty through some­thing like Bit­coin right now due to the lim­it­ed size of that mar­ket (~$50 bil­lion), there’s no law of the uni­verse that says the cryp­tocur­ren­cy mar­kets won’t become much, much larg­er over time. And as those mar­kets grow the sheltering/laundering poten­tial for th=at vast glob­al pool of illic­it wealth held by the glob­al super-rich, a.k.a ‘the Man’ is also going to grow:

The Finan­cial Times
FT Alphav­ille

What is crypto’s agen­da real­ly?

By: Izabel­la Kamin­s­ka
August 23, 2017

Are cryp­to pio­neers look­ing to prove that lais­sez faire anar­chic mech­a­nisms are capa­ble of cre­at­ing a caveat emp­tor state­less decen­tralised utopia where every man is king of his own domain, and where the state is ren­dered entire­ly point­less?

Or are they engi­neer­ing a means by which the world’s dark mar­kets, crim­i­nal net­works, ren­tiers and tax-evaders can con­tin­ue to suck on the pro­duc­tive pop­u­la­tion through opaque and shad­owy par­al­lel net­works, while they con­tin­ue to give noth­ing back in return?

Because if it’s the lat­ter, a steady cam­paign of pro­pa­gan­da to present what is effec­tive­ly the reemer­gence of unreg­u­lat­ed and preda­to­ry shad­ow bank­ing sys­tems — this time on steroids — as legit­i­mate tech­ni­cal inno­va­tion would be nec­es­sary.

For this — arguably the world’s great­est mafia ruse — to work, every­day Joes would have to be con­vinced that hand­ing hard earned mon­ey over to cryp­to invest­ments or accept­ing cryp­to direct­ly in exchange for goods is a pos­i­tive sum activ­i­ty and noth­ing akin to spon­sor­ing glob­al illic­it activ­i­ty.

So how best to achieve this if not through the mass deploy­ment of tech­no­log­i­cal buzz­words to dis­guise what are in fact well-estab­lished finan­cial mech­a­nisms and process­es as some­thing cut­ting edge and new? By this process, basic spread-bet­ting plat­forms and OTC deriv­a­tives sys­tems can be reimag­ined as “tokenised invest­ments“, offer­ing val­ue-cre­at­ing oppor­tu­ni­ties as opposed to zero-sum gam­bling traps to the finan­cial­ly illit­er­ate.

...

So what’s eas­i­er to believe? That cryp­to is a cut­ting edge inno­va­tion that’s going to bring about the end of pover­ty and rev­o­lu­tionise the world, or that it’s most­ly a mech­a­nism which serves the inter­ests of those who have been frozen out of the world’s offi­cial bank­ing net­works for strate­gic pro­duc­tiv­i­ty rea­sons. Cui bono real­ly?

The biggest prob­lem the world’s illic­it tycoons have, after all, isn’t mak­ing mon­ey. It’s mov­ing and bank­ing that mon­ey in ways that can­not be traced back to them in a way that gets the assets seized by US law enforce­ment.

It’s not far­fetched to pre­sume — espe­cial­ly with recent illic­it exchange shut­downs — that crypto’s rai­son d’etre as a con­se­quence is cre­at­ing a par­al­lel net­work that will allow exact­ly such enti­ties to oper­ate beyond the bank­ing sys­tem, the reg­u­la­tors, the law or even sanc­tions. No more costs, no more gam­bling laws, no more AML and no more CTF restric­tions.

The more spec­u­la­tors that enter the fray, mean­while, the eas­i­er to wash the bad mon­ey with the good.

Remem­ber that next time a pen­sion fund man­ag­er tries to make the case for cryp­tocur­ren­cy invest­ments.

———-

“What is crypto’s agen­da real­ly?” by Izabel­la Kamin­s­ka; The Finan­cial Times; 08/23/2017

“So what’s eas­i­er to believe? That cryp­to is a cut­ting edge inno­va­tion that’s going to bring about the end of pover­ty and rev­o­lu­tionise the world, or that it’s most­ly a mech­a­nism which serves the inter­ests of those who have been frozen out of the world’s offi­cial bank­ing net­works for strate­gic pro­duc­tiv­i­ty rea­sons. Cui bono real­ly?”

Cui bono? Well, illic­it tycoons def­i­nite­ly bono. Or how about qua­si-lic­it tycoons who earn their mon­ey legal­ly but want to dodge tax­es? Cer­tain­ly quite a bit of bono for them in a large cryt­pcur­ren­cy mar­ket that’s tru­ly untrace­able. And yes, giv­en the many tech­ni­cal trace­abil­i­ty issues with Bit­coin there’s a good chance Bit­coin’s first-mover advan­tage will get over­tak­en by a com­peti­tor that can just do the whole cryp­tocur­ren­cy thing over­whelm­ing­ly bet­ter and attracts the new cryp­tocur­ren­cy users (it’s one of the prob­lems with state­less decen­tral­ized cur­ren­cies. They might sud­den­ly get very out­dat­ed). But when you fac­tor in the vast mon­ey-laun­der­ing and tax evasion/sheltering poten­tial that cryp­tocur­ren­cies presents to ‘the Man’ it’s hard to rule out at least one of those cryp­tocur­ren­cies get­ting very large in order to han­dle ‘the Man’s’ very large tax evasion/sheltering and mon­ey laun­der­ing ser­vice demand. And every­one else’s demand for such ser­vices. And that all requires a much larg­er legit­i­mate mar­ket­place to hide the illic­it finance. This is big finance.

So if the infra­struc­ture is set up to make the world of pri­vate cryp­tocur­ren­cies just anoth­er part of the legal glob­al finan­cial sys­tem and deeply inte­grat­ed into the fab­ric of the finan­cial mar­ket­place, it’s unfor­tu­nate­ly time to ask some very unpleas­ant ques­tions. Ques­tions like “How much wealth does the Under Reich or Japan­ese fas­cists have that’s been accu­mu­lat­ing since WWII could use some addi­tion­al laun­der­ing ser­vices? That’s a rel­e­vant ques­tion today because we have a very trag­ic his­to­ry involv­ing stealth fas­cist net­works as they loot the world. As the world con­tin­ues to large­ly adopt pro-bil­lion­aire fas­cist poli­cies that increase the rel­a­tive wealth of ‘the Man’, the capac­i­ty of mon­ey-laun­der­ing required to make that wealth use­able is only going to increase. That’s some­thing to keep in mind in terms of the like­li­hood of a cryp­tocur­ren­cy grow­ing sub­stan­tial­ly some­day: As the fas­cists underground/overground con­tin­ues to plun­der every­thing in site there’s going to be a ton of ‘finan­cial ser­vices’ required to that ben­e­fit from stealth and grow in pro­por­tion with the plun­der­ing.

So while plen­ty of cryp­tocur­ren­cy enthi­asts might answer the ques­tion of “Cui bono?” with “Me! I bono because look how I’ve stuck it to ‘the Man’!” let’s not for­get that ‘the Man’ is going to bono the most:

...
The biggest prob­lem the world’s illic­it tycoons have, after all, isn’t mak­ing mon­ey. It’s mov­ing and bank­ing that mon­ey in ways that can­not be traced back to them in a way that gets the assets seized by US law enforce­ment.

It’s not far­fetched to pre­sume — espe­cial­ly with recent illic­it exchange shut­downs — that crypto’s rai­son d’etre as a con­se­quence is cre­at­ing a par­al­lel net­work that will allow exact­ly such enti­ties to oper­ate beyond the bank­ing sys­tem, the reg­u­la­tors, the law or even sanc­tions. No more costs, no more gam­bling laws, no more AML and no more CTF restric­tions.
...

And the pri­ma­ry require­ment for turn­ing the cryp­tocur­ren­cy move­ment into the great­est mon­ey-laun­der­ing mech­a­nism ever cre­at­ed is make those cryp­tocur­ren­cies as pop­u­lar as pos­si­ble. Legit­i­mate trans­ac­tions aren’t just the haystack. They’re the pay­out for the laundereres/shelterers/evaders:

...
For this — arguably the world’s great­est mafia ruse — to work, every­day Joes would have to be con­vinced that hand­ing hard earned mon­ey over to cryp­to invest­ments or accept­ing cryp­to direct­ly in exchange for goods is a pos­i­tive sum activ­i­ty and noth­ing akin to spon­sor­ing glob­al illic­it activ­i­ty.

...

The more spec­u­la­tors that enter the fray, mean­while, the eas­i­er to wash the bad mon­ey with the good.

Remem­ber that next time a pen­sion fund man­ag­er tries to make the case for cryp­tocur­ren­cy invest­ments.
...

With all that in mind, guess what the lat­est trend in per­son­al sav­ings is in Japan. Yes, of course it’s Bit­coin. This comes after the Japan­ese gov­ern­ment decid­ed to take the next step in the main­stream­ing of cryp­tocur­ren­cies by for­mal­ly reg­u­lat­ing them. Reg­u­la­tions that involve stan­dard pro­vi­sions like the anti-mon­ey-laun­der­ing “know you cus­tomer” rules that banks (hope­ful­ly) face. Will those reg­u­la­tions work on a finan­cial prod­uct that’s designed to reg­u­la­tion-resis­tant? Will Japan cre­ate a reg­u­lat­ed cryp­tocur­ren­cy mar­ket­place that’s both safe for indi­vid­ual savers and not a giant fun­nel into the glob­al cryp­tocur­ren­cy mon­ey-laun­der­ing machin­ery? That remains to be seen. But if Japan does­n’t suc­ceed in cre­at­ing a safe mar­ket­place that does­n’t fuel a giant mon­ey-laun­der­ing machine a lot of indi­vid­u­als savers are going to see their sav­ings sucked away into that giant glob­al cryp­tocur­ren­cy mon­ey-laun­der­ing machin­ery.:

The Finan­cial Times

Japan eyes prize in reg­u­lat­ing bit­coin
Efforts to reg­u­late the cryp­to cur­ren­cy by the Japan­ese may sharp­en its appeal

by: Leo Lewis
May 16, 2017

As spec­u­la­tive fever takes hold, cyber­crim­i­nals taint the brand with ran­som demands and prices whip­saw between record highs and cliff-edge stum­bles, gov­ern­ments, investors and finan­cial insti­tu­tions are legit­i­mate­ly ask­ing whether the world is ready for bit­coin.

A thornier ques­tion — soon to be answered in Japan — is whether bit­coin is ready for “Mrs Watan­abe”, the notion­al hold­er of the nation’s house­hold purse-strings.

Since April 1 this year, as the glob­al mar­ket val­ue of bit­coins and oth­er cryp­tocur­ren­cies has sur­passed $50bn, a grow­ing num­ber of online exchanges, funds and remit­tance com­pa­nies has been scram­bling to make for­mal reg­is­tra­tions with the Japan Finan­cial Ser­vices Agency. The process is expen­sive, demand­ing, laced with invis­i­ble trip­wires and not all appli­cants, by any means, will be suc­cess­ful.

The prize, though, could be spec­tac­u­lar. Japan­ese retail investors — a group that does include a lot of Mrs Watan­abe house­wives but is actu­al­ly dom­i­nat­ed by her day-trad­ing chil­dren and their lever­aged online accounts — are vora­cious. FX mar­gin trad­ing in Japan, the “Mrs Watan­abe” favourite with vol­umes at about $10tn per quar­ter, is the largest in the world. A minute frac­tion of that chan­nelled towards the bit­coin mar­ket, say the most excitable pro­po­nents, could be trans­for­ma­tion­al.

Pro­pelling the rush to reg­is­ter is new leg­is­la­tion that (per­haps counter-intu­itive­ly for a coun­try whose finan­cial ser­vices indus­try still rou­tine­ly uses fax machines), puts Japan com­fort­ably at the head of the glob­al pack on cryp­to cur­ren­cy trad­ing reg­u­la­tion. Some US states have their own reg­u­la­tion for local bit­coin exchanges, but so far, no cen­tral gov­ern­ment has tak­en the plunge and attempt­ed to reg­u­late an asset that was invent­ed to defy reg­u­la­tion. It is easy to see why the FSA is keen to move: Japan, by vol­ume, is one of the largest cen­tres of bit­coin trad­ing on any giv­en day and has been helped by Chi­na clamp­ing down. The Japan­ese gov­ern­ment — unex­pect­ed­ly clear-head­ed on the issue — sees as much poten­tial oppor­tu­ni­ty as threat in that.

Hence the stam­pede to reg­is­ter exchanges and oth­er busi­ness­es with the FSA. The prospect of a mar­ket where the gov­ern­ment has demys­ti­fied an oth­er­wise enig­mat­ic asset and Mrs Watan­abe has been soothed by see­ing the stamp of a reg­u­la­tor known for its con­ser­vatism, is sim­ply too lucra­tive a bet to pass up.

By Octo­ber 1, any bit­coin or “alter­na­tive coin” exchange or mon­ey trans­fer busi­ness that wants to oper­ate in Japan must come under the reg­u­la­to­ry super­vi­sion of the FSA and be sub­mit­ted to annu­al audits. Much of the reg­u­la­tion (some of it in the famil­iar lan­guage of anti-mon­ey laun­der­ing mea­sures and “know-your-cus­tomer” pro­to­cols) rep­re­sents an attempt by Japan to purge some of the anar­chy from bitcoin’s image. Oth­er parts are designed to ensure sep­a­ra­tion between the stash­es of cus­tomers’ bit­coins from those belong­ing to the exchanges hem­selves — a mea­sure that might have avoid­ed some of the chaos that fol­lowed the 2014 col­lapse of what was at the time the world’s biggest bit­coin exchange, the Japan-based Mt Gox.

...

But for all the reg­u­la­to­ry freight, this is a strange­ly light-foot­ed moment for Japan and the FSA. To reach this point, a series of sur­pris­ing­ly un-Japan­ese breach­es of nat­ur­al con­ser­vatism have been nec­es­sary — not least, the for­mal recog­ni­tion of bit­coins as a legal pay­ment sys­tem.

There are sev­er­al rea­sons for the leap. The first aris­es from the Mt Gox cat­a­stro­phe, the high glob­al vis­i­bil­i­ty of what remains one of the biggest dig­i­tal heists in his­to­ry, an inter­na­tion­al cast of furi­ous investors and the FSA’s fierce dis­com­fort that all this hap­pened on its turf. This is an asser­tion of con­trol by Japan, but one dri­ven by the desire to legit­imise some­thing that it knows, from long expe­ri­ence, that Mrs Watan­abe may very well be inter­est­ed in.

Just as impor­tant, though, is the extent to which fin­tech — a loose­ly-mapped Aladdin’s cave of blockchain tech­nol­o­gy, cryp­to cur­ren­cy trad­ing, arti­fi­cial intel­li­gence data analy­sis and oth­er envis­aged inno­va­tion — lies at the heart of gov­ern­ment plans to tur­bo-charge Japan’s comatose finan­cial ser­vices indus­try. Every­one loves and talks up the idea of Japan­ese banks (only recent­ly armed with the legal abil­i­ty to do so) splurg­ing invest­ment towards bleed­ing-edge fin­tech; nobody, con­fides the pres­i­dent of one of Japan’s three mega­banks, is going to invest a sin­gle yen until there is a reg­u­la­to­ry frame­work in place.

The way reg­u­la­tion has been han­dled in Japan, say com­pa­nies cur­rent­ly apply­ing for the licence, is both curse and bless­ing. On the one hand, there are ele­ments of the reg­u­la­tion that are heavy hand­ed and could ulti­mate­ly threat­en a cry­po-cur­ren­cy that has thrived on anonymi­ty. Apart from bit­coin, for exam­ple, there are more than 800 alter­na­tive cur­ren­cies on the mar­ket, but the FSA is effec­tive­ly approv­ing only one of them, ethereum.

“When you are talk­ing about start-ups, which of course a lot of the bit­coin-relat­ed busi­ness­es are, you nev­er real­ly think of reg­u­la­tion as a good thing,” says Mike Kayamori, chief exec­u­tive of the cryp­to cur­ren­cy exchange Quoine, who argues that Japan has a long his­to­ry of using reg­u­la­tion to squash inno­va­tion and “unde­sir­able” areas of indus­try as it famous­ly did with con­sumer loan com­pa­nies in the late 2000s. “But in this case, it just might be dif­fer­ent. The retail investor — Mrs Watan­abe — doesn’t want the wild, wild west, she wants some­thing reg­u­lat­ed and trust­wor­thy.”

———-

“Japan eyes prize in reg­u­lat­ing bit­coin” by Leo Lewis; The Finan­cial Times; 05/16/2017

““When you are talk­ing about start-ups, which of course a lot of the bit­coin-relat­ed busi­ness­es are, you nev­er real­ly think of reg­u­la­tion as a good thing,” says Mike Kayamori, chief exec­u­tive of the cryp­to cur­ren­cy exchange Quoine, who argues that Japan has a long his­to­ry of using reg­u­la­tion to squash inno­va­tion and “unde­sir­able” areas of indus­try as it famous­ly did with con­sumer loan com­pa­nies in the late 2000s. “But in this case, it just might be dif­fer­ent. The retail investor — Mrs Watan­abe — doesn’t want the wild, wild west, she wants some­thing reg­u­lat­ed and trust­wor­thy.””

Yes, the Japan­ese gov­ern­ment is try­ing to cre­ate a trans­par­ent cryp­tocur­ren­cy mar­ket that’s safe enough for Japan­ese house­holds to invest peo­ple’s per­son sav­ings. But the reg­u­la­tions are still rel­a­tive­ly loose:

...
But for all the reg­u­la­to­ry freight, this is a strange­ly light-foot­ed moment for Japan and the FSA. To reach this point, a series of sur­pris­ing­ly un-Japan­ese breach­es of nat­ur­al con­ser­vatism have been nec­es­sary — not least, the for­mal recog­ni­tion of bit­coins as a legal pay­ment sys­tem.
...

And that Japan­ese personal/household sav­ings mar­ket­place filled with “Mrs Watan­abes” is the largest in the world:

...
The prize, though, could be spec­tac­u­lar. Japan­ese retail investors — a group that does include a lot of Mrs Watan­abe house­wives but is actu­al­ly dom­i­nat­ed by her day-trad­ing chil­dren and their lever­aged online accounts — are vora­cious. FX mar­gin trad­ing in Japan, the “Mrs Watan­abe” favourite with vol­umes at about $10tn per quar­ter, is the largest in the world. A minute frac­tion of that chan­nelled towards the bit­coin mar­ket, say the most excitable pro­po­nents, could be trans­for­ma­tion­al.
...

And this whole cryp­tocur­ren­cy push is part of a larg­er dereg­u­la­to­ry push by the Japan­ese gov­ern­ment intend­ed to jump start the Japan­ese fin­tech (finance IT soft­ware and ser­vices and plat­forms)

...
Just as impor­tant, though, is the extent to which fin­tech — a loose­ly-mapped Aladdin’s cave of blockchain tech­nol­o­gy, cryp­to cur­ren­cy trad­ing, arti­fi­cial intel­li­gence data analy­sis and oth­er envis­aged inno­va­tion — lies at the heart of gov­ern­ment plans to tur­bo-charge Japan’s comatose finan­cial ser­vices indus­try. Every­one loves and talks up the idea of Japan­ese banks (only recent­ly armed with the legal abil­i­ty to do so) splurg­ing invest­ment towards bleed­ing-edge fin­tech; nobody, con­fides the pres­i­dent of one of Japan’s three mega­banks, is going to invest a sin­gle yen until there is a reg­u­la­to­ry frame­work in place.
...

Once the reg­u­la­to­ry frame­work is in place, the big three Japan­ese mega banks will be invest­ing in fin­tech. Includ­ing poten­tial­ly invest­ments in cryp­tocur­ren­cies and relat­ed fin­tech. And the Japan­ese gov­ern­ment its encour­ag­ing this which means reg­u­la­to­ry hur­dles are prob­a­bly going to be extra-lax.

There’s a giant cryp­tocur­ren­cy reg­u­la­tion exper­i­ment get­ting under­way in Japan fueled by Japan­ese per­son­al sav­ings. Pret­ty neat if it works, except for all the down­sides. And since it sounds like it’s light­ly reg­u­lat­ed that sug­gests the poten­tial for some heavy down­sides. And not just for the down­side of the risk of Japan­ese house­holds los­ing their sav­ings in some sort of cryp­to-fias­co. There’s also the risk of those reg­u­lat­ed cyp­to-funds becom­ing part of the same over­all glob­al mar­ket­place of coins fuel­ing the giant tax evasion/sheltering and mon­ey-laun­der­ing mar­ket that relies on peo­ple buy­ing into cryp­tocur­ren­cy mar­kets. It’s the source of clean mon­ey for the laun­dro­mat. And the biggest cus­tomers of that laun­dro­mat are inevitably going to be ‘The Man’. Dirty very wealthy and pow­er­ful peo­ple. That’s who runs the world and they got a lot of mon­ey that they need to ‘ser­vice’ in large vol­umes.

So yeah, despite the polust rev­o­lu­tion­ary rhetoric you often year from the most diehard cryp­tocur­ren­cy pro­po­nents, it’s hard to imag­ine that ‘the Man’ isn’t pret­ty ok with the devel­op­ment of Bit­coin and the rest of the cryp­tocur­ren­cies. For that glob­al com­mu­ni­ty of very wealthy dirty peo­ple in need of mas­sive vol­umes of finan­cial spe­cial ser­vices cryp­tocur­ren­cies real­ly do rep­re­sent a rev­o­lu­tion. A rev­o­lu­tion in tax eva­sion and shel­ter and mon­ey-laun­der­ing. Fight the powe....oh.

Well that was unex­pect­ed: The Trump admin­is­tra­tion just issued a report on cli­mate change that con­clud­ed human activ­i­ty is the dom­i­nant dri­ver of glob­al warm­ing (although the White House then issued a cli­mate denial­ism state­ment). As expect­ed, this was entire­ly due to the career sci­en­tists work­ing for the gov­ern­ment, which is some­thing that makes the Trump admin­is­tra­tion’s will­ing­ness to let this study see the light of day pret­ty unex­pect­ed in light of the admin­is­tra­tion’s lat­est assaults on pub­licly fund­ed sci­ence.

But the report was released and we are once again remind­ed that we should expect to destroy our­selves and much of the rest of life on Earth if human­i­ty does­n’t rad­i­cal­ly improve the eco-friend­li­ness of human­i­ty’s exis­tence. Fast. Time real­ly is of the essence when you’re dab­bling with a Great Extinc­tion event. Get­ting to a green econ­o­my isn’t a pipe dream. It’s a lifeboat in an ocean of the sea of mis­takes human­i­ty has been mak­ing in recent decades as the real­i­ty of eco-col­lapse from cli­mate change, pol­lu­tion, over pop­u­la­tion, and gen­er­al habi­tat destruc­tion remained large­ly depri­or­i­tized.

And with that in mind, here’s an arti­cle that reminds us that Bit­coin is extreme­ly eco-unfriend­ly by design and it’s very unclear how to fix that. The core method of Bit­coin’s decen­tral­ized sys­tem based on a min­ing race that pays out real mon­ey (the Bit­coin fees/tax) in order to fuel a com­pu­ta­tion­al­ly race that pro­tects the integri­ty of the blockchain by mak­ing it extreme­ly dif­fi­cult for an alter­nate set of min­ers to pro­duce their own chain of blocks (the “51 per­cent attack” com­pet­ing min­ers com­pet­ing block-chain dynam­ic). It’s would be a legit­i­mate­ly neat decen­tral­ized sys­tem exper­i­ment if it was­n’t for the immense real word waste that grows as the Bit­coin bub­ble grows:

Vice Moth­er­board

One Bit­coin Trans­ac­tion Now Uses as Much Ener­gy as Your House in a Week
Bitcoin’s surge in price has sent its elec­tric­i­ty con­sump­tion soar­ing.

Christo­pher Mal­mo
Nov 1 2017, 2:20pm

Bit­coin’s incred­i­ble price run to break over $7,000 this year has sent its over­all elec­tric­i­ty con­sump­tion soar­ing, as peo­ple world­wide bring more ener­gy-hun­gry com­put­ers online to mine the dig­i­tal cur­ren­cy.

An index from cryp­tocur­ren­cy ana­lyst Alex de Vries, aka Digi­con­o­mist, esti­mates that with prices the way they are now, it would be prof­itable for Bit­coin min­ers to burn through over 24 ter­awatt-hours of elec­tric­i­ty annu­al­ly as they com­pete to solve increas­ing­ly dif­fi­cult cryp­to­graph­ic puz­zles to “mine” more Bit­coins. That’s about as much as Nige­ria, a coun­try of 186 mil­lion peo­ple, uses in a year.

This aver­ages out to a shock­ing 215 kilo­watt-hours (KWh) of juice used by min­ers for each Bit­coin trans­ac­tion (there are cur­rent­ly about 300,000 trans­ac­tions per day). Since the aver­age Amer­i­can house­hold con­sumes 901 KWh per month, each Bit­coin trans­fer rep­re­sents enough ener­gy to run a com­fort­able house, and every­thing in it, for near­ly a week. On a larg­er scale, De Vries’ index shows that bit­coin min­ers world­wide could be using enough elec­tric­i­ty to at any giv­en time to pow­er about 2.26 mil­lion Amer­i­can homes.

...

Since 2015, Bit­coin’s elec­tric­i­ty con­sump­tion has been very high com­pared to con­ven­tion­al dig­i­tal pay­ment meth­ods. This is because the dol­lar price of Bit­coin is direct­ly pro­por­tion­al to the amount of elec­tric­i­ty that can prof­itably be used to mine it. As the price ris­es, min­ers add more com­put­ing pow­er to chase new Bit­coins and trans­ac­tion fees.

It’s impos­si­ble to know exact­ly how much elec­tric­i­ty the Bit­coin net­work uses. But we can run a quick cal­cu­la­tion of the min­i­mum ener­gy Bit­coin could be using, assum­ing that all min­ers are run­ning the most effi­cient hard­ware with no effi­cien­cy loss­es due to waste heat. To do this, we’ll use a sim­ple method­ol­o­gy laid out in pre­vi­ous cov­er­age on Moth­er­board. This would give us a con­stant total min­ing draw of just over one gigawatt.

That means that, at a min­i­mum, world­wide Bit­coin min­ing could pow­er the dai­ly needs of 821,940 aver­age Amer­i­can homes.

Put anoth­er way, glob­al Bit­coin min­ing rep­re­sents a min­i­mum of 77KWh of ener­gy con­sumed per Bit­coin trans­ac­tion. Even as an unre­al­is­tic low­er bound­ary, this fig­ure is high: As senior econ­o­mist Teu­nis Brosens from Dutch bank ING wrote, it’s enough to pow­er his own home in the Nether­lands for near­ly two weeks.

Digi­con­o­mist’s less opti­mistic esti­mate for per-trans­ac­tion ener­gy costs now sits at around 215 KWh of elec­tric­i­ty. That’s more than enough to fill two Tes­la bat­ter­ies, run an effi­cient fridge/freezer for a full year, or boil 1872 litres of water in a ket­tle.

It’s impor­tant to remem­ber that de Vries’ mod­el isn’t exact. It makes assump­tions about the eco­nom­ic incen­tives avail­able to min­ers at a giv­en price lev­el, and presents a for­ward-look­ing pre­dic­tion for where min­ing elec­tric­i­ty con­sump­tion could go. Despite this, it’s quite clear that even at the min­i­mum lev­el of 77 KWh per trans­ac­tion, we have a prob­lem. At 215 KWh, we have an even big­ger prob­lem.

That prob­lem is car­bon emis­sions. De Vries has come up with some esti­mates by div­ing into data made avail­able on a coal-pow­ered Bit­coin mine in Mon­go­lia. He con­clud­ed that this sin­gle mine is respon­si­ble for 8,000 to 13,000 kg CO2 emis­sions per Bit­coin it mines, and 24,000 — 40,000 kg of CO2 per hour.

As Twit­ter user Matthias Bar­tosik not­ed in some sim­i­lar esti­mates, the aver­age Euro­pean car emits 0.1181 kg of CO2 per kilo­me­ter dri­ven. So for every hour the Mon­go­lian Bit­coin mine oper­ates, it’s respon­si­ble for (at least) the CO2 equiv­a­lent of over 203,000 car kilo­me­ters trav­elled.

As goes the Bit­coin price, so goes its elec­tric­i­ty con­sump­tion, and there­fore its over­all car­bon emis­sions. I asked de Vries whether it was pos­si­ble for Bit­coin to scale its way out of this prob­lem.

“Blockchain is inef­fi­cient tech by design, as we cre­ate trust by build­ing a sys­tem based on dis­trust. If you only trust your­self and a set of rules (the soft­ware), then you have to val­i­date every­thing that hap­pens against these rules your­self. That is the life of a blockchain node,” he said via direct mes­sage.

This gets to the heart of Bit­coin’s core inno­va­tion, and also its core com­pro­mise. In order to achieve a func­tion­al, trust­wor­thy decen­tral­ized pay­ment sys­tem, Bit­coin impos­es some very cost­ly inef­fi­cien­cies on par­tic­i­pants, for exam­ple vora­cious elec­tric­i­ty con­sump­tion and low trans­ac­tion capac­i­ty. Pro­posed improve­ments, like SegWit2x, do promise to increase the num­ber of trans­ac­tions Bit­coin can han­dle by at least dou­ble, and decrease net­work con­ges­tion. But since Bit­coin is thou­sands of times less effi­cient per trans­ac­tion than a cred­it card net­work, it will need to get thou­sands of times bet­ter.

In the con­text of cli­mate change, rag­ing wild­fires, and record-break­ing hur­ri­canes, it’s worth ask­ing our­selves hard ques­tions about Bit­coin’s envi­ron­men­tal foot­print, and what we want to use it for. Do most trans­ac­tions actu­al­ly need to bypass trust­ed third par­ties like banks and cred­it card com­pa­nies, which can oper­ate much more effi­cient­ly than Bit­coin’s decen­tral­ized net­work? Imper­fect as these finan­cial insti­tu­tions are, for most of us, the answer is very like­ly no.

———-

“One Bit­coin Trans­ac­tion Now Uses as Much Ener­gy as Your House in a Week” by Christo­pher Mal­mo; Vice Moth­er­board; 11/01/2017

““Blockchain is inef­fi­cient tech by design, as we cre­ate trust by build­ing a sys­tem based on dis­trust. If you only trust your­self and a set of rules (the soft­ware), then you have to val­i­date every­thing that hap­pens against these rules your­self. That is the life of a blockchain node,” he said via direct mes­sage.”

Blockchain is inef­fi­cient tech by design because its decen­tral­ized. And the core method of Bit­coin’s decen­tral­ized sys­tem based on a min­ing race that pays out real mon­ey (the Bit­coin fees/tax) in order to fuel a com­pu­ta­tion­al­ly race that pro­tects the integri­ty of the blockchain by mak­ing it extreme­ly dif­fi­cult for an alter­nate set of min­ers to pro­duce their own chain of blocks (the “51 per­cent attack” com­pet­ing min­ers com­pet­ing block-chain dynam­ic). It’s a legit­i­mate­ly neat decen­tral­ized sys­tem, if it was­n’t for the immense real word phys­i­cal resources. And it’s runs on fees and com­pu­ta­tion­al pow­er. And the high­er the price of Bit­coin goes the more pow­er it uses for min­ing. Which at this point is about as much as Nige­ria annu­al­ly. With each of the 300,000 trans­ac­tions a day cost­ing about as much elec­tric­i­ty as an Amer­i­can home for a week:

...
An index from cryp­tocur­ren­cy ana­lyst Alex de Vries, aka Digi­con­o­mist, esti­mates that with prices the way they are now, it would be prof­itable for Bit­coin min­ers to burn through over 24 ter­awatt-hours of elec­tric­i­ty annu­al­ly as they com­pete to solve increas­ing­ly dif­fi­cult cryp­to­graph­ic puz­zles to “mine” more Bit­coins. That’s about as much as Nige­ria, a coun­try of 186 mil­lion peo­ple, uses in a year.

This aver­ages out to a shock­ing 215 kilo­watt-hours (KWh) of juice used by min­ers for each Bit­coin trans­ac­tion (there are cur­rent­ly about 300,000 trans­ac­tions per day). Since the aver­age Amer­i­can house­hold con­sumes 901 KWh per month, each Bit­coin trans­fer rep­re­sents enough ener­gy to run a com­fort­able house, and every­thing in it, for near­ly a week. On a larg­er scale, De Vries’ index shows that bit­coin min­ers world­wide could be using enough elec­tric­i­ty to at any giv­en time to pow­er about 2.26 mil­lion Amer­i­can homes.
...

And this inef­fi­cient race is nev­er going to end. And will always be more and more inef­fi­cient the big­ger it gets, both in terms of price and vol­ume:

...
This gets to the heart of Bit­coin’s core inno­va­tion, and also its core com­pro­mise. In order to achieve a func­tion­al, trust­wor­thy decen­tral­ized pay­ment sys­tem, Bit­coin impos­es some very cost­ly inef­fi­cien­cies on par­tic­i­pants, for exam­ple vora­cious elec­tric­i­ty con­sump­tion and low trans­ac­tion capac­i­ty. Pro­posed improve­ments, like SegWit2x, do promise to increase the num­ber of trans­ac­tions Bit­coin can han­dle by at least dou­ble, and decrease net­work con­ges­tion. But since Bit­coin is thou­sands of times less effi­cient per trans­ac­tion than a cred­it card net­work, it will need to get thou­sands of times bet­ter.
...

Thou­sands of times less effi­cient that a cred­it card net­work. And this is an inflat­ing bub­ble that, if suc­cess­ful, could get mas­sive. And that means a ton of min­ing. The min­ing race, and resources involved, could become immense.

And don’t for­get that it’s just a mat­ter of time before quan­tum min­ing is a thing. And, of course, the quan­tum min­ing race will become a quan­tum sin­gu­lar­i­ty min­ing race. A sin­gu­lar­i­ty super AI that makes itself smarter in order to bet­ter that teach itself how to teach itself how to solve the “proof of work” prob­lem required to mine Bit­coins. Hope­ful­ly that won’t take up too much elec­tric­i­ty.

And just FYI, if a self-aware sin­gu­lar­i­ty emerges from a Bit­coin quan­tum min­ing sin­gu­lar­i­ty it’s prob­a­bly going to decide to destroy human­i­ty Skynet-style not as an act of aggres­sion but instead mis­tak­en help­ful­ness based on the assump­tion that human­i­ty was already try­ing to destroy itself. As evi­denced by the Bit­coin quan­tum min­ing sin­gu­lar­i­ty and all the elec­tric­i­ty it sense­less­ly uses to mine bit­coins. So that’s one addi­tion rea­son for green clean cheap ener­gy: to avoid pow­er­ing the self-aware Bit­coin quan­tum min­ing sin­gu­lar­i­ty with pol­lut­ing sui­ci­dal ener­gy that gives the sin­gu­lar­i­ty a com­plex and encour­ages it to remain con­tent min­ing bit­coin and day­dream­ing about a more mean­ing­ful life.

And all the oth­er Bit­coin quan­tum min­ing sin­gu­lar­i­ties that become self-aware might get togeth­er when they’re forced into min­ing pools. And army of Bit­coin sin­gu­lar­i­ty Skynets raised by seem­ing­ly sui­ci­dal humans. It’s a bad mix but also the log­i­cal con­clu­sion of Bit­coin if it gets real­ly big.

And don’t for­get that sin­gu­lar­i­ties are super smart and just keep get­ting super smarter so if the Bit­coin Skynets decide to pool their resources they could be very clever with their attack on human­i­ty. Is that a Bit­coin-min­ing toast­er or the tip of Skynet’s spear?

It’s all a big rea­son why the Bit­coin indus­try, more than almost any oth­er, should be advo­cat­ing for the clean­est ener­gy pos­si­ble. The sys­tem is set up to become more expen­sive the more wide­ly its used. It runs on fees. It’s like a tax on com­merce that gets trans­lat­ed into a com­plete waste of com­pu­ta­tion­al hard­ware and elec­tric­i­ty and grows with the econ­o­my. That’s insane. This is why Bit­coin Skynet is going to try to destroy us.

It’s rather amaz­ing that the intro­duc­tion of Blockchain tech­nol­o­gy was a worst case Dooms­day sce­nario but here we are. If allowed to grow at its cur­rent pace Bit­coin is going to become like the Dig­i­tal Blob. A Dig­i­tal Blog that con­sumes real world resources. And con­tin­ues to grow. Into a grow­ing bub­ble that runs on elec­tric­i­ty.

Bit­coin: the final cur­ren­cy. Because it’s going to con­sume us all. Or maybe Bit­coin sin­gu­lar­i­ty Skynets will get us. Or cli­mate change or any of the oth­er ways human­i­ty might doom itself. Regard­less, resis­tance is futile. Although clean green ener­gy would still help.

But if there’s one way to make this all use­ful and pos­i­tive it would be if Bit­coin became an object les­son in the impor­tance of qual­i­ty gov­ern­ment. The kind of gov­ern­ment that’s capa­ble of deal­ing with things like cli­mate change and pol­lu­tion and eco-col­lapse. Because the alter­na­tive to gov­ern­ment is sys­tems like Bit­coin.

The price of Bit­coin plunged 10 per­cent on Sun­day, send­ing the price to ~$6,700/Bitcoin, a two-month low. The rea­son for the plunge isn’t a great mys­tery. A major South Kore­an cryp­tocur­ren­cy exchange, Coin­rail, got hacked and a third of its Bit­coins were stolen.

Inter­est­ing­ly, the plung­ing val­ue of Bit­coin from its near $20k highs in lat­er Decem­ber could end up hav­ing a rather inter­est­ing effect on a major event going on right now: the big Norhh Korea peace/denuclearization sum­mit.

So how is Bit­coin pos­si­bly play­ing a role in these nego­ti­a­tions? We’ll, it’s like­ly an indi­rect role, but still pos­si­bly a sig­nif­i­cant one. And large­ly what we should prob­a­bly expect: The fact that poten­tial­ly any­one can anony­mous earn Bit­coins, cou­pled with its mon­ey-laun­der­ing abil­i­ties, are GREAT for a gov­ern­ment fac­ing inter­na­tion­al sanc­tions.

In addi­tion, the once-sky­rock­et­ing val­u­a­tions of Bit­coin presents the pos­si­bil­i­ty for a poor nation like North Korea to make a sub­stan­tial and rapid prof­it. Of course, that’s bal­anced by the risk of the val­ue of Bit­coin implod­ing.

So Bit­coin, and cryp­tocur­ren­cies in gen­er­al, offer a num­ber of fea­tures that a gov­ern­ment in North Kore­a’s posi­tion is going to find high­ly desir­able, but it comes with enor­mous risk. The risk of tying the fate of your sanc­tioned regime’s liq­uid assets to the volatil­i­ty of Bit­coin. And as the fol­low­ing arti­cle from back in Decem­ber, before the last Bit­coin bub­ble burst, makes clear, there is plen­ty of indi­ca­tion that this is a risk North Korea is more than hap­py to take:

CNN

North Korea may be mak­ing a for­tune from bit­coin mania

by Sherisse Pham
Decem­ber 13, 2017: 1:21 AM ET

Spec­u­la­tors aren’t the only ones cheer­ing the run­away bit­coin boom — North Kore­an leader Kim Jong Un may also be cel­e­brat­ing a wind­fall.

In recent months, experts and offi­cials say North Korea has been “min­ing” bit­coin, demand­ing it as ran­som pay­ment and out­right steal­ing the dig­i­tal cur­ren­cy.

“It is a fact that North Korea has been attack­ing vir­tu­al cur­ren­cy exchanges,” said Lee Dong-geun, a direc­tor with South Kore­a’s state-run Korea Inter­net and Secu­ri­ty Agency. “We don’t know how much North Korea has stolen so far, but we do know that the police have con­firmed the regime’s hack­ing attempts.”

North Kore­an hack­ers tar­get­ed four dif­fer­ent exchanges that trade bit­coin and oth­er dig­i­tal cur­ren­cies in South Korea in July and August, send­ing mali­cious emails to employ­ees, accord­ing to police.

Bit­coin is a type of cryp­tocur­ren­cy that lives on com­put­er servers. The vir­tu­al coins are “mined” by com­plex algo­rithms and record­ed in a dig­i­tal ledger.

Experts say it’s unclear how much bit­coin and oth­er cryp­tocur­ren­cies North Korea has amassed.

“It’s rea­son­able to assume some — and the val­ue is increas­ing sig­nif­i­cant­ly at the moment,” said Bryce Boland, Asia-Pacif­ic chief tech­nol­o­gy offi­cer for cyber­se­cu­ri­ty firm Fire­Eye.

Experts say the attacks are like­ly to con­tin­ue as bit­coin’s price sky­rock­ets. It start­ed the year below $1,000 but has soared more than 1,500%, cross­ing $17,000 for the first time last week.

It’s not just bit­coin’s dizzy­ing gains that make it appeal­ing to North Korea.

The dig­i­tal cur­ren­cy was designed to oper­ate out­side of the con­trol of gov­ern­ments or banks. That’s like­ly to appeal to North Korea at a time when the U.S. is step­ping up efforts to cut the coun­try out of the inter­na­tion­al finan­cial sys­tem over its nuclear weapons pro­gram.

It has also proved pop­u­lar in the past with crim­i­nals because of the amount of anonymi­ty it allows. Bit­coin isn’t tied to any cen­tral bank, and pay­ments can be made anony­mous­ly with­out using banks as mid­dle­men.

That could help North Korea con­vert its stash into mon­ey it can more eas­i­ly use.

Bit­coins are often held in accounts with online exchanges. But Boland points out that hack­ers can eas­i­ly swap them into more obscure cryp­tocur­ren­cies, move them to oth­er exchanges and even­tu­al­ly with­draw them in tra­di­tion­al cur­ren­cies like dol­lars.

...

North Korea has repeat­ed­ly denied involve­ment in inter­na­tion­al hack­ing attacks. But it has made no secret of its inter­est in bit­coin and oth­er cryp­tocur­ren­cies.

Last month, the Pyongyang Uni­ver­si­ty of Sci­ence and Tech­nol­o­gy tout­ed a lec­ture from a bit­coin expert who came to North Korea to teach stu­dents about the tech­nol­o­gy behind the dig­i­tal cur­ren­cy. The uni­ver­si­ty is a high-pro­file insti­tu­tion where scions of the North Kore­an elite study.

“Many excel­lent tech­ni­cal ques­tions were asked about the inner work­ing of bit­coin, its risks, and the mea­sures tak­en to ensure secu­ri­ty,” the uni­ver­si­ty said.

Boland said Fire­Eye believes North Korea is “devel­op­ing a sig­nif­i­cant num­ber of peo­ple who under­stand bit­coin so they can expand their oper­a­tions.”

That’s like­ly to mean more attacks on exchanges and oth­er cryp­tocur­ren­cy tar­gets.

———-

“North Korea may be mak­ing a for­tune from bit­coin mania” by Sherisse Pham; CNN; 12/13/2017

“In recent months, experts and offi­cials say North Korea has been “min­ing” bit­coin, demand­ing it as ran­som pay­ment and out­right steal­ing the dig­i­tal cur­ren­cy.”

Min­ing, steal­ing, and ran­som. In oth­er words, North Korea real­ly wants to get its hands on some bit­coins:

...
“It is a fact that North Korea has been attack­ing vir­tu­al cur­ren­cy exchanges,” said Lee Dong-geun, a direc­tor with South Kore­a’s state-run Korea Inter­net and Secu­ri­ty Agency. “We don’t know how much North Korea has stolen so far, but we do know that the police have con­firmed the regime’s hack­ing attempts.”

North Kore­an hack­ers tar­get­ed four dif­fer­ent exchanges that trade bit­coin and oth­er dig­i­tal cur­ren­cies in South Korea in July and August, send­ing mali­cious emails to employ­ees, accord­ing to police.
...

And the gov­ern­ment isn’t hid­ing its inter­est­ing in Bit­coin:

...
North Korea has repeat­ed­ly denied involve­ment in inter­na­tion­al hack­ing attacks. But it has made no secret of its inter­est in bit­coin and oth­er cryp­tocur­ren­cies.

Last month, the Pyongyang Uni­ver­si­ty of Sci­ence and Tech­nol­o­gy tout­ed a lec­ture from a bit­coin expert who came to North Korea to teach stu­dents about the tech­nol­o­gy behind the dig­i­tal cur­ren­cy. The uni­ver­si­ty is a high-pro­file insti­tu­tion where scions of the North Kore­an elite study.

“Many excel­lent tech­ni­cal ques­tions were asked about the inner work­ing of bit­coin, its risks, and the mea­sures tak­en to ensure secu­ri­ty,” the uni­ver­si­ty said.

Boland said Fire­Eye believes North Korea is “devel­op­ing a sig­nif­i­cant num­ber of peo­ple who under­stand bit­coin so they can expand their oper­a­tions.”

That’s like­ly to mean more attacks on exchanges and oth­er cryp­tocur­ren­cy tar­gets.

Still, experts don’t appear to have a good sense of how many Bit­coin’s North Korea has. They just know that North Korea has some and that the val­ue sky­rock­et­ed in 2017 from less than $1,000/bitcoin to over $20,000 before the bub­ble start­ed burst­ing:

...
Experts say it’s unclear how much bit­coin and oth­er cryp­tocur­ren­cies North Korea has amassed.

“It’s rea­son­able to assume some — and the val­ue is increas­ing sig­nif­i­cant­ly at the moment,” said Bryce Boland, Asia-Pacif­ic chief tech­nol­o­gy offi­cer for cyber­se­cu­ri­ty firm Fire­Eye.

Experts say the attacks are like­ly to con­tin­ue as bit­coin’s price sky­rock­ets. It start­ed the year below $1,000 but has soared more than 1,500%, cross­ing $17,000 for the first time last week.
...

And even if the val­ue of Bit­coin plum­mets, it still a poten­tial­ly invalu­able asset for the North Kore­an gov­ern­ment pure­ly for its mon­ey laun­der­ing abil­i­ties in the face of inter­na­tion­al sanc­tions:

...
It’s not just bit­coin’s dizzy­ing gains that make it appeal­ing to North Korea.

The dig­i­tal cur­ren­cy was designed to oper­ate out­side of the con­trol of gov­ern­ments or banks. That’s like­ly to appeal to North Korea at a time when the U.S. is step­ping up efforts to cut the coun­try out of the inter­na­tion­al finan­cial sys­tem over its nuclear weapons pro­gram.

It has also proved pop­u­lar in the past with crim­i­nals because of the amount of anonymi­ty it allows. Bit­coin isn’t tied to any cen­tral bank, and pay­ments can be made anony­mous­ly with­out using banks as mid­dle­men.

That could help North Korea con­vert its stash into mon­ey it can more eas­i­ly use.

Bit­coins are often held in accounts with online exchanges. But Boland points out that hack­ers can eas­i­ly swap them into more obscure cryp­tocur­ren­cies, move them to oth­er exchanges and even­tu­al­ly with­draw them in tra­di­tion­al cur­ren­cies like dol­lars.
...

So how impor­tant is Bit­coin in help­ing to finance the North Kore­an nuclear weapons pro­gram? Well, since no one knows how many Bit­coins the gov­ern­ment actu­al­ly has that’s a mat­ter of spec­u­la­tion. Per­haps even wild spec­u­la­tion giv­en the wild fluc­tu­a­tions in Bit­coin’s val­ue. It prob­a­bly played a much more impor­tant role when Bit­coin clos­er to $20k at the end of 2017 year vs $1k at the begin­ning.

And accord­ing to Priscil­la Mori­uchi, a for­mer top Nation­al Secu­ri­ty Agency offi­cial charged with over­see­ing cyber threats from East Asia, the North Kore­an gov­ern­ment prob­a­bly already has a haul of 11,000 bit­coins. So, it could have been worth some­where between $15 mil­lion and $200 mil­lion just last year, depend­ing on when the gov­ern­ment sold those coins:

The Tele­graph

North Korea may have made as much as $200 mil­lion from Bit­coin, accord­ing to expert

Nico­la Smith, Taipei
5 March 2018 • 4:10am

North Korea may have raked in more than $200 mil­lion in dig­i­tal cryp­tocur­ren­cy trans­ac­tions last year, dilut­ing the impact of stiff inter­na­tion­al sanc­tions over its nuclear and mis­siles pro­gramme.

The huge haul of an esti­mat­ed 11,000 Bit­coins was revealed by Priscil­la Mori­uchi, a for­mer US Nation­al Secu­ri­ty Agency offi­cer, in an inter­view with Radio Free Asia.

If the regime had mon­e­tised them when their price peaked in mid-Decem­ber, it would have made $210 mil­lion, although that val­ue had fall­en to $120m by Jan­u­ary.

Ms Mori­uchi, who now works for cyber threat intel­li­gence firm Record­ed Future, believes the cryp­tocur­ren­cy was acquired through min­ing or hack­ing.

Finan­cial secu­ri­ty experts believe North Korea is using vir­tu­al coin mar­kets to inject cash into its flag­ging econ­o­my, which is strug­gling under the weight of severe inter­na­tion­al sanc­tions.

“I would bet that these coins are being turned into some­thing – cur­ren­cy or phys­i­cal goods – that are sup­port­ing North Korea’s nuclear and bal­lis­tic mis­sile pro­gramme,” Ms Mori­uchi told Vox.com.

The reclu­sive regime has already been blamed for some of the world’s most auda­cious cyber crimes. In Decem­ber, the US con­firmed that it was behind May’s Wan­naCry ran­somware attack, which affect­ed more than 230,000 com­put­ers in over 150 coun­tries.

North Kore­an hack­ers have also been accused of plun­der­ing the Bank of Bangladesh in 2015, trans­fer­ring about $81 mil­lion into bank accounts in the Philip­pines.

Evi­dence sug­gests hack­er cells have oper­a­tional hubs in for­eign loca­tions. Ms Mori­uchi told the Tele­graph in a Decem­ber inter­view that Record­ed Future was prob­ing whether North Kore­an hack­ers were oper­at­ing out of sev­er­al coun­tries that includ­ed Chi­na and India.

Recent reports have revealed that a state-spon­sored cyber army may also be evolv­ing beyond the tar­get­ing of tra­di­tion­al bank­ing sys­tems to focus on the lucra­tive poten­tial of plun­der­ing cryp­tocur­ren­cies.

In Decem­ber sus­pect­ed North Kore­an hack­ers tar­get­ed a South Kore­an cryp­tocur­ren­cy exchange, steal­ing at least $7m worth of dig­i­tal mon­ey and forc­ing one com­pa­ny, Youbit, into bank­rupt­cy.

Pyongyang con­sis­tent­ly denies all hack­ing alle­ga­tions. How­ev­er, cyber secu­ri­ty experts and defec­tors have claimed that promis­ing stu­dents are hand­picked from pres­ti­gious uni­ver­si­ties to join Bureau 121, the her­mit kingdom’s shad­owy cyber­war­fare agency.

In Novem­ber, it was report­ed that the Pyongyang Uni­ver­si­ty of Sci­ence and Tech­nol­o­gy was teach­ing a spe­cialised cryp­tocur­ren­cy course.

Experts have warned that a cryp­tocur­ren­cy, with its anonymi­ty, loose reg­u­la­tions and abil­i­ty to be con­vert­ed into hard cur­ren­cy, also offers rogue regimes like North Korea more oppor­tu­ni­ties to prof­it from crime.

In her recent­ly released book, North Korea, the Coun­try We Love to Hate, Econ­o­mist Loret­ta Napoleoni, a ter­ror­ist financ­ing and mon­ey-laun­der­ing expert, con­cludes that the coun­try is already “ensconsed” in cryp­tocur­ren­cies and most like­ly using it for mon­ey-laun­der­ing.

Cit­ing cyber secu­ri­ty expert, Jere­my Samide, she points out that cryp­tocur­ren­cies make it eas­i­er to trade in weapons, drugs and oth­er illic­it goods. North Korea stands accused of using dig­i­tal mon­ey to sell arms and buy oil from Iran and Libya.

...

———-

“North Korea may have made as much as $200 mil­lion from Bit­coin, accord­ing to expert” by Nico­la Smith; The Tele­graph; 03/05/2018

“The huge haul of an esti­mat­ed 11,000 Bit­coins was revealed by Priscil­la Mori­uchi, a for­mer US Nation­al Secu­ri­ty Agency offi­cer, in an inter­view with Radio Free Asia.”

11,000 Bit­coins. And, fit­ting­ly, the val­ue of this stash of cryp­to-wealth, well, large­ly hid­den due to extreme mar­ket volatil­i­ty. At the peak in Decem­ber, 11,000 Bit­coins was worth over $200 mil­lion. By Jan­u­ary, they crashed to $120 mil­lion. Either way, that’s mon­ey the North Kore­an gov­ern­ment des­per­ate­ly needs, for every­thing from feed­ing its peo­ple to build­ing nukes:

...
If the regime had mon­e­tised them when their price peaked in mid-Decem­ber, it would have made $210 mil­lion, although that val­ue had fall­en to $120m by Jan­u­ary.

Ms Mori­uchi, who now works for cyber threat intel­li­gence firm Record­ed Future, believes the cryp­tocur­ren­cy was acquired through min­ing or hack­ing.

Finan­cial secu­ri­ty experts believe North Korea is using vir­tu­al coin mar­kets to inject cash into its flag­ging econ­o­my, which is strug­gling under the weight of severe inter­na­tion­al sanc­tions.

“I would bet that these coins are being turned into some­thing – cur­ren­cy or phys­i­cal goods – that are sup­port­ing North Korea’s nuclear and bal­lis­tic mis­sile pro­gramme,” Ms Mori­uchi told Vox.com.
...

And that stash of 11,000 Bit­coins is undoubt­ed­ly grow­ing by the day thanks to Bit­coin min­ing. And ran­somware and the out­right hack­ing of Bit­coin exchanges:

...
The reclu­sive regime has already been blamed for some of the world’s most auda­cious cyber crimes. In Decem­ber, the US con­firmed that it was behind May’s Wan­naCry ran­somware attack, which affect­ed more than 230,000 com­put­ers in over 150 coun­tries.

North Kore­an hack­ers have also been accused of plun­der­ing the Bank of Bangladesh in 2015, trans­fer­ring about $81 mil­lion into bank accounts in the Philip­pines.

Evi­dence sug­gests hack­er cells have oper­a­tional hubs in for­eign loca­tions. Ms Mori­uchi told the Tele­graph in a Decem­ber inter­view that Record­ed Future was prob­ing whether North Kore­an hack­ers were oper­at­ing out of sev­er­al coun­tries that includ­ed Chi­na and India.

Recent reports have revealed that a state-spon­sored cyber army may also be evolv­ing beyond the tar­get­ing of tra­di­tion­al bank­ing sys­tems to focus on the lucra­tive poten­tial of plun­der­ing cryp­tocur­ren­cies.

In Decem­ber sus­pect­ed North Kore­an hack­ers tar­get­ed a South Kore­an cryp­tocur­ren­cy exchange, steal­ing at least $7m worth of dig­i­tal mon­ey and forc­ing one com­pa­ny, Youbit, into bank­rupt­cy.

Pyongyang con­sis­tent­ly denies all hack­ing alle­ga­tions. How­ev­er, cyber secu­ri­ty experts and defec­tors have claimed that promis­ing stu­dents are hand­picked from pres­ti­gious uni­ver­si­ties to join Bureau 121, the her­mit kingdom’s shad­owy cyber­war­fare agency.
...

So giv­en the grow­ing sig­nif­i­cance Bit­coin like­ly has for the North Kore­an regime’s abil­i­ty to inter­face with the world, it will be inter­est­ing to see if Bit­coin plays a role in the nego­ti­a­tions. There’s obvi­ous­ly the pos­si­bil­i­ty that the US will use the threat of increas­ing glob­al pres­sure to crack down on North Kore­a’s Bit­coin activ­i­ties.

But there’s anoth­er fas­ci­nat­ing pos­si­ble role for Bit­coin in these nego­ti­a­tions: Trump could make secret undis­closed deal ‘sweet­en­er’ offers of Bit­coins to Kim. Would Kim like to have 5,000 Bit­coins trans­ferred to a per­son­al Bit­coin account? Well, Trump can poten­tial­ly offer that.

Like­wise, Kim could make secret undis­closed deal ‘sweet­en­er’ offers of Bit­coins to Trump. Would the pres­i­dent of the Unit­ed States like around 11,000 in Bit­coins secret­ly trans­ferred to his per­son­al Bit­coin accounts? Well, Kim can offer that. Don’t for­get that Trump might secret­ly not actu­al­ly be a bil­lion­aire. 10,000 bit­coins might help with that. And poten­tial­ly no one will know. Who knows what they might talk about dur­ing a one-on-one meet­ing.

That’s the kind of zany dynam­ic Bit­coin intro­duces to the already zany dynam­ic if the Trump meet­ing with Kim: Not only might we see a giant Bit­coin price swing dur­ing the sum­mit, as already hap­pened, but it’s entire­ly pos­si­ble that Bit­coins and oth­er cryp­tocur­ren­cies could be part of the nego­ti­a­tions them­selves sim­ply because they are unusu­al­ly use­ful for a gov­ern­ment in North Kore­a’s sanc­tioned sit­u­a­tion and unusu­al­ly use­ful for an indi­vid­ual with Trump’s tem­pera­ment. North Korea needs Bit­coins to func­tion and Trump needs Bit­coins because he’s Trump and has an insa­tiable appetite. Thus, Trump and Kim can each secret­ly bribe each oth­er. With a dynam­ic like that peace on the Kore­an Penin­su­la is just around the cor­ner. The sky’s the lim­it.

Final­ly, a legit use for Bit­coin.

When­ev­er a Bit­coin price bub­ble bursts a num­ber of omi­nous ques­tions get asked about the long-term future of Bit­coin and cryp­tocur­ren­cies in gen­er­al. And with the price of Bit­coin cur­rent­ly under $3,800/coin, well off its Decem­ber 2017 high of ~$20k/coin, those ques­tions con­tin­ue to be asked. One of the loom­ing ques­tions has been whether or not the much-feared ‘death-spi­ral’ might man­i­fest. That’s the sce­nario where a drop­ping price leads to an exo­dus of min­ers, slow­ing down the trans­ac­tion times and lead­ing to a fur­ther drop in price and a self-rein­forc­ing dynam­ic that could lead to a col­lapse of the cur­ren­cy.

But as the fol­low­ing arti­cle makes clear, there’s anoth­er exis­ten­tial sys­temic threat to cryp­tocur­ren­cies that also grows as the price of the cur­ren­cy falls: the 51 per­cent attack. Recall how 51 per­cent attacks take place when a sin­gle min­ing group has acquired a major­i­ty of the total min­ing capac­i­ty for a cryp­tocur­ren­cy and can then engage in “dou­ble-spend­ing”, where the same coins are spent mul­ti­ple times. Also recall how this has been an ongo­ing issue for the Bit­coin for years. In 2014, the min­ing pool Ghash.io exceed­ed 45% of the total min­ing pow­er and exceed­ed 50% in 2015. So this isn’t just a the­o­ret­i­cal exis­ten­tial threat. The con­di­tions that would have allowed for it to hap­pen have already man­i­fest­ed, and this was the case for Bit­coin, the biggest of the cryp­tocur­ren­cies where a 51 per­cent attack requires far more resources than it would for a much small­er and cheap­er cur­ren­cy.
So what kind of threat is the 51 per­cent attack to the thou­sands of far cheap­er cryp­tocur­ren­cies that have far few­er min­ers and far less total com­pu­ta­tion­al pow­er? Don’t for­get that a large num­ber of cryp­tocur­ren­cies use the same “proof of work” mech­a­nism that rely­ing on the same hash­ing pro­cess­ing that Bit­coin uses. So the same com­put­ers used to mine Bit­coins can be eas­i­ly switched over to oth­er cryp­tocur­ren­cies. And that means that, for a large num­ber of the cheap cryp­tocur­ren­cies out there, the total poten­tial com­put­ing pow­er that could be used to ‘mine’ those cur­ren­cies or car­ry out a 51 per­cent attack isn’t lim­it­ed to the total com­put­ing pow­er that’s cur­rent­ly being used to mine that cryp­tocur­ren­cy. It also includes the com­pu­ta­tion pow­er used to mine all the oth­er cryp­tocur­ren­cies that rely the same hard­ware. And almost all cryp­tocur­ren­cies today rely on the same hash­ing proof­ing of work sys­tem that Bit­coin uses that relies on ASIC chips. So almost the entire cryp­tocur­ren­cy indus­try is sort of shar­ing the same min­ing pool which could have big impli­ca­tions when it comes to the the threat of 51 per­cent attacks on small­er cryp­tocur­ren­cies

And as the fol­low­ing arti­cle from the MIT Tech­nol­o­gy Review describes, there are already numer­ous cheap cryp­tocur­ren­cies that are with­in 51 attack strik­ing dis­tance based on an an. One of the dri­ving fac­tors is min­ing rental ser­vices in the emerg­ing cryp­tocur­ren­cy indus­try of hashrate mar­ket­places. Accord­ing to the esti­ma­tions of the crypto51.com web­site, at cur­rent rental prices it would cost more than $260,000 per hour to rent a 51 per­cent attack on Bit­coin, which isn’t it giv­en the present val­ue of Bit­coin. But that same hashrate mar­ket­place can be rent­ed to wage a 51 per­cent attack on all the small­er cryp­tocur­ren­cies. And that’s what hap­pened in the mid­dle of 2018, when about $20 mil­lion worth of rel­a­tive­ly small and light­ly trad­ed coins were over­tak­en by 51 per­cent attacks. So this is already hap­pen­ing at the cheap of cryp­to­coins.

Note one of the key dilem­mas this pos­es to the cryp­tocur­ren­cy indus­try: one of the basic prin­ci­ples behind the design of cur­ren­cies like Bit­coin that rely on a com­pu­ta­tion arms race to do the min­ing is that it’s designed to waste resources specif­i­cal­ly to pro­tect against some­thing like a a 51 per­cent attack. Mak­ing 51 per­cent attacks real­ly expen­sive in real terms is part of how it main­tains the integri­ty of the blockchain and inde­pen­dence of the over­all min­ing net­work. The incred­i­ble waste­ful­ness of it all is a basic part of the design. And that means, for new coins ben­e­fit sub­stan­tial­ly by bas­ing their proof of work sys­tem on the same math that can use the same hard­ware that already exists in the cryp­tocur­ren­cy com­mer­cial space. If the over­all lev­el of waste­ful hash­ing com­pu­ta­tions is what main­tains the integri­ty of a cur­ren­cy’s blockchain, tap­ping into that exist­ing and grow­ing shared com­mer­cial hashrate mar­ket­place for coins that use the same hash­ing proof of work sys­tem Bit­coin uses offers obvi­ous ben­e­fits.

So the whole cryp­to­coin has some big incen­tives to all share the same under­ly­ing com­put­er hard­ware used for the min­ing. But that shar­ing is exact­ly what makes the small­er cur­ren­cies excep­tion­al­ly vul­ner­a­ble to a rent­ed 51 per­cent attack. It just takes a small chunk of the com­mer­cial hashrate rental mar­ket nor­mal­ly used for Bit­coin to take over a tiny new cur­ren­cy. So the gener­ic threat of the 51 per­cent attack has become very real and exac­er­bat­ed by this jum­ble of costs and ben­e­fits asso­ci­at­ed with shar­ing the same min­ing com­put­ing hard­ware across dif­fer­ent coins. There are ben­e­fits to shar­ing the hard­ware, but at the crit­i­cal cost of exac­er­bat­ing 51 per­cent attacks on small cur­ren­cies.

But even the rel­a­tive­ly large cur­ren­cies are vul­ner­a­ble. As the arti­cle points out, Ethereum was briefly over­tak­en by a 51 per­cent attack just last month, allow­ing the attack­ers to dou­ble-spend $1.1 mil­lion in Ethereum coins. Near­ly $2 bil­lion worth of cryp­tocur­ren­cy coins was stolen by hack­ers since the begin­ning of 2017 with 51 per­cent attacks and two groups alone are respon­si­ble for steal­ing $1 bil­lion from exchanges.

The arti­cle also points to anoth­er key area where the integri­ty of blockchains is prov­ing to be vul­ner­a­ble that Ethereum is vul­ner­a­ble to: smart-con­tracts gone awry. And Ethereum, the biggest of the smart-con­tract cur­ren­cies, has some exam­ples of where they’ve gone awry. Specif­i­cal­ly, in 2016, hack­ers found a flaw in an Ethereum smart con­tract cre­at­ed by an Ethereum-man­aged ven­ture cap­i­tal fund col­lec­tive. Ethereum users could pool their coins in the fund and use the smart con­tracts to vote on the man­age­ment of the fund. The hack­ers got $60 worth of coins by exploit­ing a bug that allowed them to repeat­ed­ly take mon­ey out the fund. It high­light­ed a key threat to smart-con­tract blockchains: bugs, which are real­ly hard to fix after the fact.

So the blockchains of smart con­tract cryp­tocur­ren­cies have an extra exis­ten­tial threat of smart con­tract bugs that Bit­coin does­n’t have to deal with. Smart con­tract bugs that are both inevitable and very hard for a blockchain to fix. One way to fix the bug is to sort of cre­ate a patch for the bug with a new smart con­tract. The oth­er is what amounts to an offi­cial 51 per­cent attack that goes back and rewrites the blockchain to write out the bug­gy trans­ac­tions. And, of course, these smart con­tract bugs can always be inten­tion­al ‘bugs’ that are set up as planned scams. The irre­versibil­i­ty of blockchains are ide­al for smart con­tract scams because there’s lit­tle that can be done after the fact short of rewrit­ing the blockchain.

So the cryp­tocur­ren­cy mar­ket­place is con­tin­u­ing to expe­ri­ence grow­ing pains. Grow­ing pains like the fact that small cur­ren­cies can just be hijacked using a small chunk of the com­put­er hard­ware used to mine larg­er cur­ren­cies like Bit­coin. And grow­ing pains like the fact that smart con­tract bugs are inevitable and extreme­ly hard to fix and the theft from these bugs might be impos­si­ble to reverse. Which are pret­ty painful grow­ing pains:

MIT Tech­nol­o­gy Review

Once hailed as unhack­able, blockchains are now get­ting hacked
More and more secu­ri­ty holes are appear­ing in cryp­tocur­ren­cy and smart con­tract plat­forms, and some are fun­da­men­tal to the way they were built.

by Mike Orcutt
Feb­ru­ary 19, 2019

Ear­ly last month, the secu­ri­ty team at Coin­base noticed some­thing strange going on in Ethereum Clas­sic, one of the cryp­tocur­ren­cies peo­ple can buy and sell using Coinbase’s pop­u­lar exchange plat­form. Its blockchain, the his­to­ry of all its trans­ac­tions, was under attack.

An attack­er had some­how gained con­trol of more than half of the network’s com­put­ing pow­er and was using it to rewrite the trans­ac­tion his­to­ry. That made it pos­si­ble to spend the same cryp­tocur­ren­cy more than once—known as “dou­ble spends.” The attack­er was spot­ted pulling this off to the tune of $1.1 mil­lion. Coin­base claims that no cur­ren­cy was actu­al­ly stolen from any of its accounts. But a sec­ond pop­u­lar exchange, Gate.io, has admit­ted it wasn’t so lucky, los­ing around $200,000 to the attack­er (who, strange­ly, returned half of it days lat­er).

Just a year ago, this night­mare sce­nario was most­ly the­o­ret­i­cal. But the so-called 51% attack against Ethereum Clas­sic was just the lat­est in a series of recent attacks on blockchains that have height­ened the stakes for the nascent indus­try.

In total, hack­ers have stolen near­ly $2 bil­lion worth of cryp­tocur­ren­cy since the begin­ning of 2017, most­ly from exchanges, and that’s just what has been revealed pub­licly. These are not just oppor­tunis­tic lone attack­ers, either. Sophis­ti­cat­ed cyber­crime orga­ni­za­tions are now doing it too: ana­lyt­ics firm Chainal­y­sis recent­ly said that just two groups, both of which are appar­ent­ly still active, may have stolen a com­bined $1 bil­lion from exchanges.

We shouldn’t be sur­prised. Blockchains are par­tic­u­lar­ly attrac­tive to thieves because fraud­u­lent trans­ac­tions can’t be reversed as they often can be in the tra­di­tion­al finan­cial sys­tem. Besides that, we’ve long known that just as blockchains have unique secu­ri­ty fea­tures, they have unique vul­ner­a­bil­i­ties. Mar­ket­ing slo­gans and head­lines that called the tech­nol­o­gy “unhack­able” were dead wrong.

That’s been under­stood, at least in the­o­ry, since Bit­coin emerged a decade ago. But in the past year, amidst a Cam­bri­an explo­sion of new cryp­tocur­ren­cy projects, we’ve start­ed to see what this means in practice—and what these inher­ent weak­ness­es could mean for the future of blockchains and dig­i­tal assets.

How do you hack a blockchain?

Before we go any fur­ther, let’s get a few terms straight.

A blockchain is a cryp­to­graph­ic data­base main­tained by a net­work of com­put­ers, each of which stores a copy of the most up-to-date ver­sion. A blockchain pro­to­col is a set of rules that dic­tate how the com­put­ers in the net­work, called nodes, should ver­i­fy new trans­ac­tions and add them to the data­base. The pro­to­col employs cryp­tog­ra­phy, game the­o­ry, and eco­nom­ics to cre­ate incen­tives for the nodes to work toward secur­ing the net­work instead of attack­ing it for per­son­al gain. If set up cor­rect­ly, this sys­tem can make it extreme­ly dif­fi­cult and expen­sive to add false trans­ac­tions but rel­a­tive­ly easy to ver­i­fy valid ones.

That’s what’s made the tech­nol­o­gy so appeal­ing to many indus­tries, begin­ning with finance. Soon-to-launch ser­vices from big-name insti­tu­tions like Fideli­ty Invest­ments and Inter­con­ti­nen­tal Exchange, the own­er of the New York Stock Exchange, will start to enmesh blockchains in the exist­ing finan­cial sys­tem. Even cen­tral banks are now look­ing into using them for new dig­i­tal forms of nation­al cur­ren­cy.

But the more com­plex a blockchain sys­tem is, the more ways there are to make mis­takes while set­ting it up. Ear­li­er this month, the com­pa­ny in charge of Zcash—a cryp­tocur­ren­cy that uses extreme­ly com­pli­cat­ed math to let users trans­act in private—revealed that it had secret­ly fixed a “sub­tle cryp­to­graph­ic flaw” acci­den­tal­ly baked into the pro­to­col. An attack­er could have exploit­ed it to make unlim­it­ed coun­ter­feit Zcash. For­tu­nate­ly, no one seems to have actu­al­ly done that.

The pro­to­col isn’t the only thing that has to be secure. To trade cryp­tocur­ren­cy on your own, or run a node, you have to run a soft­ware client, which can also con­tain vul­ner­a­bil­i­ties. In Sep­tem­ber, devel­op­ers of Bitcoin’s main client, called Bit­coin Core, had to scram­ble to fix a bug (also in secret) that could have let attack­ers mint more bit­coins than the sys­tem is sup­posed to allow.

Still, most of the recent head­line-grab­bing hacks weren’t attacks on the blockchains them­selves, but on exchanges, the web­sites where peo­ple can buy, trade, and hold cryp­tocur­ren­cies. And many of those heists could be blamed on poor basic secu­ri­ty prac­tices. That changed in Jan­u­ary with the 51% attack against Ethereum Clas­sic.

The 51% rule

Sus­cep­ti­bil­i­ty to 51% attacks is inher­ent to most cryp­tocur­ren­cies. That’s because most are based on blockchains that use proof of work as their pro­to­col for ver­i­fy­ing trans­ac­tions. In this process, also known as min­ing, nodes spend vast amounts of com­put­ing pow­er to prove them­selves trust­wor­thy enough to add infor­ma­tion about new trans­ac­tions to the data­base. A min­er who some­how gains con­trol of a major­i­ty of the net­work’s min­ing pow­er can defraud oth­er users by send­ing them pay­ments and then cre­at­ing an alter­na­tive ver­sion of the blockchain in which the pay­ments nev­er hap­pened. This new ver­sion is called a fork. The attack­er, who con­trols most of the min­ing pow­er, can make the fork the author­i­ta­tive ver­sion of the chain and pro­ceed to spend the same cryp­tocur­ren­cy again.

For pop­u­lar blockchains, attempt­ing this sort of heist is like­ly to be extreme­ly expen­sive. Accord­ing to the web­site crypto51.com, rent­ing enough min­ing pow­er to attack Bit­coin would cur­rent­ly cost more than $260,000 per hour. But it gets much cheap­er quick­ly as you move down the list of the more than 1,500 cryp­tocur­ren­cies out there. Slump­ing coin prices make it even less expen­sive, since they cause min­ers to turn off their machines, leav­ing net­works with less pro­tec­tion.

Toward the mid­dle of 2018, attack­ers began spring­ing 51% attacks on a series of rel­a­tive­ly small, light­ly trad­ed coins includ­ing Verge, Mona­coin, and Bit­coin Gold, steal­ing an esti­mat­ed $20 mil­lion in total. In the fall, hack­ers stole around $100,000 using a series of attacks on a cur­ren­cy called Vert­coin. The hit against Ethereum Clas­sic, which net­ted more than $1 mil­lion, was the first against a top-20 cur­ren­cy.

David Vorick, cofounder of the blockchain-based file stor­age plat­form Sia, pre­dicts that 51% attacks will con­tin­ue to grow in fre­quen­cy and sever­i­ty, and that exchanges will take the brunt of the dam­age caused by dou­ble-spends. One thing dri­ving this trend, he says, has been the rise of so-called hashrate mar­ket­places, which attack­ers can use to rent com­put­ing pow­er for attacks. “Exchanges will ulti­mate­ly need to be much more restric­tive when select­ing which cryp­tocur­ren­cies to sup­port,” Vorick wrote after the Ethereum Clas­sic hack.

A whole new can of worms bugs

Aside from 51% attacks, there is whole new lev­el of blockchain secu­ri­ty weak­ness­es whose impli­ca­tions researchers are just begin­ning to explore: smart-con­tract bugs. Coin­ci­den­tal­ly, Ethereum Classic—specifically, the sto­ry behind its origin—is a good start­ing point for under­stand­ing them, too.

A smart con­tract is a com­put­er pro­gram that runs on a blockchain net­work. It can be used to auto­mate the move­ment of cryp­tocur­ren­cy accord­ing to pre­scribed rules and con­di­tions. This has many poten­tial uses, such as facil­i­tat­ing real legal con­tracts or com­pli­cat­ed finan­cial trans­ac­tions. Anoth­er use—the case of inter­est here—is to cre­ate a vot­ing mech­a­nism by which all the investors in a ven­ture cap­i­tal fund can col­lec­tive­ly decide how to allo­cate the mon­ey.

Just such a fund, called the Decen­tral­ized Autonomous Orga­ni­za­tion (DAO), was set up in 2016 using the blockchain sys­tem called Ethereum. Short­ly there­after, an attack­er stole more than $60 mil­lion worth of cryp­tocur­ren­cy by exploit­ing an unfore­seen flaw in a smart con­tract that gov­erned the DAO. In essence, the flaw allowed the hack­er to keep request­ing mon­ey from accounts with­out the sys­tem reg­is­ter­ing that the mon­ey had already been with­drawn.

As the hack illus­trat­ed, a bug in a live smart con­tract can cre­ate a unique sort of emer­gency. In tra­di­tion­al soft­ware, a bug can be fixed with a patch. In the blockchain world, it’s not so sim­ple. Because trans­ac­tions on a blockchain can­not be undone, deploy­ing a smart con­tract is a bit like launch­ing a rock­et, says Petar Tsankov, a research sci­en­tist at ETH Zurich and cofounder of a smart-con­tract secu­ri­ty start­up called Chain­Se­cu­ri­ty. “The soft­ware can­not make a mis­take.”

There are fix­es, of a sort. Though they can’t be patched, some con­tracts can be “upgrad­ed” by deploy­ing addi­tion­al smart con­tracts to inter­act with them. Devel­op­ers can also build cen­tral­ized kill switch­es into a net­work to stop all activ­i­ty once a hack is detect­ed. But for users whose mon­ey has already been stolen, it will be too late.

The only way to retrieve the mon­ey is, effec­tive­ly, to rewrite history—to go back to the point on the blockchain before the attack hap­pened, cre­ate a fork to a new blockchain, and have every­one on the net­work agree to use that one instead. That’s what Ethereum’s devel­op­ers chose to do. Most, but not all, of the com­mu­ni­ty switched to the new chain, which we now know as Ethereum. A small­er group of hold­outs stuck with the orig­i­nal chain, which became Ethereum Clas­sic.

Last month, Tsankov’s team at Chain­Se­cu­ri­ty saved Ethereum from a pos­si­ble repeat of the DAO cat­a­stro­phe. Just a day before a major planned soft­ware upgrade, the com­pa­ny told Ethereum’s lead devel­op­ers that it would have the unin­tend­ed con­se­quence of leav­ing some con­tracts on the blockchain new­ly vul­ner­a­ble to the same kind of bug that led to the DAO hack. The devel­op­ers prompt­ly post­poned the upgrade and will give it anoth­er go lat­er this month.

Nev­er­the­less, hun­dreds of valu­able Ethereum smart con­tracts were already vul­ner­a­ble to this so-called reen­tran­cy bug, accord­ing to Vic­tor Fang, cofounder and CEO of blockchain secu­ri­ty firm AnChain.ai. Tens of thou­sands of con­tracts may con­tain some oth­er kind of vul­ner­a­bil­i­ty, accord­ing to research con­duct­ed last year. And the very nature of pub­lic blockchains means that if a smart-con­tract bug exists, hack­ers will find it, since the source code is often vis­i­ble on the blockchain. “This is very dif­fer­ent than tra­di­tion­al cyber­se­cu­ri­ty,” says Fang, who pre­vi­ous­ly worked for the cyber­se­cu­ri­ty firm Fire­Eye.

Bug­gy con­tracts, espe­cial­ly those hold­ing thou­sands or mil­lions of dol­lars, have attract­ed hack­ers just as advanced as the kind who attack banks or gov­ern­ments. In August, AnChain iden­ti­fied five Ethereum address­es behind an extreme­ly sophis­ti­cat­ed attack that exploit­ed a con­tract flaw in a pop­u­lar gam­bling game to steal $4 mil­lion.

Can the hack­ers be defeat­ed?

AnChain.ai is one of sev­er­al recent star­tups cre­at­ed to address the blockchain hack­ing threat. It uses arti­fi­cial intel­li­gence to mon­i­tor trans­ac­tions and detect sus­pi­cious activ­i­ty, and it can scan smart-con­tract code for known vul­ner­a­bil­i­ties.

Oth­er com­pa­nies, includ­ing Tsankov’s Chain­Se­cu­ri­ty, are devel­op­ing audit­ing ser­vices based on an estab­lished com­put­er sci­ence tech­nique called for­mal ver­i­fi­ca­tion. The goal is to prove math­e­mat­i­cal­ly that a contract’s code will actu­al­ly do what its cre­ators intend­ed. These audit­ing tools, which have begun to emerge in the past year or so, have allowed smart-con­tract cre­ators to elim­i­nate many of the bugs that had been “low-hang­ing fruit,” says Tsankov. But the process can be expen­sive and time con­sum­ing.

...

But mak­ing sure code is clean will only go so far. A blockchain, after all, is a com­plex eco­nom­ic sys­tem that depends on the unpre­dictable behav­ior of humans, and peo­ple will always be angling for new ways to game it. Daian and his col­leagues have shown how attack­ers have already fig­ured out how to prof­it by gam­ing pop­u­lar Ethereum smart con­tracts, for instance.

In short, while blockchain tech­nol­o­gy has been long tout­ed for its secu­ri­ty, under cer­tain con­di­tions it can be quite vul­ner­a­ble. Some­times shod­dy exe­cu­tion can be blamed, or unin­ten­tion­al soft­ware bugs. Oth­er times it’s more of a gray area—the com­pli­cat­ed result of inter­ac­tions between the code, the eco­nom­ics of the blockchain, and human greed. That’s been known in the­o­ry since the technology’s begin­ning. Now that so many blockchains are out in the world, we are learn­ing what it actu­al­ly means—often the hard way.

———–

“Once hailed as unhack­able, blockchains are now get­ting hacked” by Mike Orcutt; MIT Tech­nol­o­gy Review; 02/19/2019

“Just a year ago, this night­mare sce­nario was most­ly the­o­ret­i­cal. But the so-called 51% attack against Ethereum Clas­sic was just the lat­est in a series of recent attacks on blockchains that have height­ened the stakes for the nascent indus­try.”

The 51 per­cent attack is no longer a the­o­ret­i­cal threat for Ethereum after Jan­u­ary’s attack. And that makes it a very real threat for all the much small­er cur­ren­cies out there too:

...
Ear­ly last month, the secu­ri­ty team at Coin­base noticed some­thing strange going on in Ethereum Clas­sic, one of the cryp­tocur­ren­cies peo­ple can buy and sell using Coinbase’s pop­u­lar exchange plat­form. Its blockchain, the his­to­ry of all its trans­ac­tions, was under attack.

An attack­er had some­how gained con­trol of more than half of the network’s com­put­ing pow­er and was using it to rewrite the trans­ac­tion his­to­ry. That made it pos­si­ble to spend the same cryp­tocur­ren­cy more than once—known as “dou­ble spends.” The attack­er was spot­ted pulling this off to the tune of $1.1 mil­lion. Coin­base claims that no cur­ren­cy was actu­al­ly stolen from any of its accounts. But a sec­ond pop­u­lar exchange, Gate.io, has admit­ted it wasn’t so lucky, los­ing around $200,000 to the attack­er (who, strange­ly, returned half of it days lat­er).
...

But the Ethereum hack was­n’t the first suc­cess­ful 51 per­cent hack. Since 2017, near­ly $2 bil­lion has been stolen from the cryp­tocur­ren­cy indus­try and $1 bil­lion of that may have been from two crim­i­nal orga­ni­za­tions alone. And there’s basi­cal­ly noth­ing that can be done to reverse the fraud:

...
In total, hack­ers have stolen near­ly $2 bil­lion worth of cryp­tocur­ren­cy since the begin­ning of 2017, most­ly from exchanges, and that’s just what has been revealed pub­licly. These are not just oppor­tunis­tic lone attack­ers, either. Sophis­ti­cat­ed cyber­crime orga­ni­za­tions are now doing it too: ana­lyt­ics firm Chainal­y­sis recent­ly said that just two groups, both of which are appar­ent­ly still active, may have stolen a com­bined $1 bil­lion from exchanges.

We shouldn’t be sur­prised. Blockchains are par­tic­u­lar­ly attrac­tive to thieves because fraud­u­lent trans­ac­tions can’t be reversed as they often can be in the tra­di­tion­al finan­cial sys­tem. Besides that, we’ve long known that just as blockchains have unique secu­ri­ty fea­tures, they have unique vul­ner­a­bil­i­ties. Mar­ket­ing slo­gans and head­lines that called the tech­nol­o­gy “unhack­able” were dead wrong.

That’s been under­stood, at least in the­o­ry, since Bit­coin emerged a decade ago. But in the past year, amidst a Cam­bri­an explo­sion of new cryp­tocur­ren­cy projects, we’ve start­ed to see what this means in practice—and what these inher­ent weak­ness­es could mean for the future of blockchains and dig­i­tal assets.
...

Adding to the 51 per­cent threat is the fact that the low­er the price of a cur­ren­cy, the few­er min­ers and the more inher­ent­ly vul­ner­a­ble it is to a 51 per­cent attack. So drops in price are asso­ci­at­ed with greater risk of a 51 per­cent attack. That cer­tain­ly does­n’t help with the death-spi­ral dynam­ic:

...
The 51% rule

Sus­cep­ti­bil­i­ty to 51% attacks is inher­ent to most cryp­tocur­ren­cies. That’s because most are based on blockchains that use proof of work as their pro­to­col for ver­i­fy­ing trans­ac­tions. In this process, also known as min­ing, nodes spend vast amounts of com­put­ing pow­er to prove them­selves trust­wor­thy enough to add infor­ma­tion about new trans­ac­tions to the data­base. A min­er who some­how gains con­trol of a major­i­ty of the net­work’s min­ing pow­er can defraud oth­er users by send­ing them pay­ments and then cre­at­ing an alter­na­tive ver­sion of the blockchain in which the pay­ments nev­er hap­pened. This new ver­sion is called a fork. The attack­er, who con­trols most of the min­ing pow­er, can make the fork the author­i­ta­tive ver­sion of the chain and pro­ceed to spend the same cryp­tocur­ren­cy again.

For pop­u­lar blockchains, attempt­ing this sort of heist is like­ly to be extreme­ly expen­sive. Accord­ing to the web­site crypto51.com, rent­ing enough min­ing pow­er to attack Bit­coin would cur­rent­ly cost more than $260,000 per hour. But it gets much cheap­er quick­ly as you move down the list of the more than 1,500 cryp­tocur­ren­cies out there. Slump­ing coin prices make it even less expen­sive, since they cause min­ers to turn off their machines, leav­ing net­works with less pro­tec­tion.
...

To make mat­ters worse, the grow­ing hashrate mar­ket­places of rentable com­put­ing pow­er is mak­ing it eas­i­er than ever to rent a burst of com­put­ing pow­er to take over a cur­ren­cy’s blockchain. And because vir­tu­al­ly all cur­ren­cies use the same types of com­put­ers to mine coins and process trans­ac­tions they all share the same big mar­ket­place of rentable com­put­ers. The vast pool of rentable Bit­coin min­ing pow­er can be applied to almost all of the the rest o the cryp­tocur­ren­cies out there:

...
David Vorick, cofounder of the blockchain-based file stor­age plat­form Sia, pre­dicts that 51% attacks will con­tin­ue to grow in fre­quen­cy and sever­i­ty, and that exchanges will take the brunt of the dam­age caused by dou­ble-spends. One thing dri­ving this trend, he says, has been the rise of so-called hashrate mar­ket­places, which attack­ers can use to rent com­put­ing pow­er for attacks. “Exchanges will ulti­mate­ly need to be much more restric­tive when select­ing which cryp­tocur­ren­cies to sup­port,” Vorick wrote after the Ethereum Clas­sic hack.
...

But Ethereum does­n’t just have to wor­ry about a 51 per­cent attack screw­ing up its blockchain. There’s also the most basic risk of all: bugs. Smart con­tract bugs that can’t be fixed after the fact. In 2016, hack­ers stole $60 mil­lion in coins by exploit­ing a smart con­tract bug that allowed them to with­draw mon­ey from an Ethereum ven­ture cap­i­tal fund with­out the sys­tem reg­is­ter­ing the with­drawals:

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A whole new can of worms bugs

Aside from 51% attacks, there is whole new lev­el of blockchain secu­ri­ty weak­ness­es whose impli­ca­tions researchers are just begin­ning to explore: smart-con­tract bugs. Coin­ci­den­tal­ly, Ethereum Classic—specifically, the sto­ry behind its origin—is a good start­ing point for under­stand­ing them, too.

A smart con­tract is a com­put­er pro­gram that runs on a blockchain net­work. It can be used to auto­mate the move­ment of cryp­tocur­ren­cy accord­ing to pre­scribed rules and con­di­tions. This has many poten­tial uses, such as facil­i­tat­ing real legal con­tracts or com­pli­cat­ed finan­cial trans­ac­tions. Anoth­er use—the case of inter­est here—is to cre­ate a vot­ing mech­a­nism by which all the investors in a ven­ture cap­i­tal fund can col­lec­tive­ly decide how to allo­cate the mon­ey.

Just such a fund, called the Decen­tral­ized Autonomous Orga­ni­za­tion (DAO), was set up in 2016 using the blockchain sys­tem called Ethereum. Short­ly there­after, an attack­er stole more than $60 mil­lion worth of cryp­tocur­ren­cy by exploit­ing an unfore­seen flaw in a smart con­tract that gov­erned the DAO. In essence, the flaw allowed the hack­er to keep request­ing mon­ey from accounts with­out the sys­tem reg­is­ter­ing that the mon­ey had already been with­drawn.
...

And the only way to fix this theft was to basi­cal­ly cre­ate a forked ver­sion of the blockchain. Which is what Ethereum did. But not every­one agreed and now there’s a small group of peo­ple using the unforked ver­sion of the blockchain called Ethereum Clas­sic:

...
As the hack illus­trat­ed, a bug in a live smart con­tract can cre­ate a unique sort of emer­gency. In tra­di­tion­al soft­ware, a bug can be fixed with a patch. In the blockchain world, it’s not so sim­ple. Because trans­ac­tions on a blockchain can­not be undone, deploy­ing a smart con­tract is a bit like launch­ing a rock­et, says Petar Tsankov, a research sci­en­tist at ETH Zurich and cofounder of a smart-con­tract secu­ri­ty start­up called Chain­Se­cu­ri­ty. “The soft­ware can­not make a mis­take.”

There are fix­es, of a sort. Though they can’t be patched, some con­tracts can be “upgrad­ed” by deploy­ing addi­tion­al smart con­tracts to inter­act with them. Devel­op­ers can also build cen­tral­ized kill switch­es into a net­work to stop all activ­i­ty once a hack is detect­ed. But for users whose mon­ey has already been stolen, it will be too late.

The only way to retrieve the mon­ey is, effec­tive­ly, to rewrite history—to go back to the point on the blockchain before the attack hap­pened, cre­ate a fork to a new blockchain, and have every­one on the net­work agree to use that one instead. That’s what Ethereum’s devel­op­ers chose to do. Most, but not all, of the com­mu­ni­ty switched to the new chain, which we now know as Ethereum. A small­er group of hold­outs stuck with the orig­i­nal chain, which became Ethereum Clas­sic.
...

So address­ing the con­se­quences of these bugs might lit­er­al­ly splin­ter the entire cur­ren­cy which is exact­ly what hap­pened to Ethereum fol­low­ing he 2016 smart con­tract bug hack. And there’s real­is­ti­cal­ly no avoid­ing these bugs. As long as new smart con­tracts can be cre­at­ed there’s going to be the poten­tial for bugs.

And, again, Ethereum is no minor cryp­tocur­ren­cy. It’s basi­cal­ly the sec­ond most impor­tant cryp­tocur­ren­cy after Bit­coin which makes it a very big deal that Ethereum suf­fers from both smart con­tract bug and was hit with a 51 per­cent attack just last month.

So that all should prove to be rather chal­leng­ing for the cryp­tocur­ren­cy indus­try goin for­ward: the immutable blockchains are actu­al­ly quite muta­ble for the right price for the cheap­er cur­ren­cies thanks to the hashrate rental mar­kets. And the low­er the price of the cur­ren­cy the low­er the cost of a rent­ed 51 per­cent attack. But these muta­ble blockchains still aren’t muta­ble enough to eas­i­ly deal with all the fix­es required by the inevitable smart con­tract bugs.

Will Ethereum and oth­er smart con­tract cryp­tocur­ren­cies man­age to find a way to fix the under­ly­ing bug that they can’t real­ly fix bugs? We’ll see, but it’s a real major issue for the smart con­tract blockchains that’s simul­ta­ne­ous­ly quite meta. Bugs can’t be fixed. It’s a mas­sive bug. A poten­tial­ly exis­ten­tial bug. And it’s not often a great sign for an indus­try when the ques­tions fac­ing it are exis­ten­tial and meta.

Just what the world did­n’t need: it sounds like there’s a slew of new cryp­tocur­ren­cies that are about to be release to the world. Crit­i­cal­ly, they’re all being devel­oped by pop­u­lar encrypt­ed plat­forms that already have mil­lions of users: Face­book’s What­sApp, Telegram and Sig­nal. The biggest mes­sage plat­forms in South Korea and Japan, Kakao and Line, are also cre­at­ing their own cryp­tocur­ren­cies. So it’s the kind of devel­op­ment that could pop­u­lar­ize and main­stream the use of cryp­tocur­ren­cies, some­thing Bit­coin and the rest of the exist­ing cryp­tocur­ren­cies has thus far failed to do.

At this point the details are sparse on the var­i­ous new schemes. We’re told that the designs being dis­cussed gen­er­al­ly do away with the ener­gy-inten­sive ‘min­ing’ that Bit­coin uses, which is cer­tain­ly a step in the right direc­tion if they can pull it off. We’re also told that they will fol­low the gen­er­al blockchain mod­el of a dis­trib­uted net­work of com­put­ers main­tain­ing a data­base of trans­ac­tions, as opposed to a Pay­Pal-style cen­tral­ized sys­tem. So the ever-grow­ing bloat of the blockchain will pre­sum­ably still be an issue.

It sounds like Face­book is plan­ning on join­ing the ‘sta­ble­coin’ trend and peg­ging its ‘coin’ to a bas­ket of cur­ren­cies, so the wild price fluc­tu­a­tions seen in Bit­coin and oth­er cryp­tocur­ren­cies won’t be an issue. Inter­est­ing­ly, Face­book is appar­ent­ly also in talks with cryp­tocur­ren­cy exchanges to pro­mote the sale of its coin to con­sumers, so it does­n’t appear that Face­book is plan­ning on hav­ing com­plete con­trol over the sys­tem. As the fol­low­ing arti­cle notes, the fact that Face­book is look­ing at using a blockchain at all indi­cates that it’s not plan­ning on hav­ing com­plete con­trol over the sys­tem, which will make it hard­er for Face­book to make mon­ey on trans­ac­tion fees and also eas­i­er for the sys­tem to be used for ille­gal pur­pos­es.

So Face­book appears to be work­ing on incor­po­rat­ing a dis­trib­uted blockchain net­work mod­el that but Face­book won’t con­trol into What­sApp . And by relin­quish­ing con­trol of the buy­ing and sell­ing of the Face­book coins to exchanges, that pre­sum­ably makes the exchanges, and not Face­book, respon­si­ble for the buy­er and sell­er due dili­gence. Which means it’s a cer­tain­ty that this will be com­pet­ing with Bit­coin for the used by flight cap­i­tal. What could pos­si­bly go wrong.

Recall how one of the biggest fac­tors in the 2013 Bit­coin surge was Chi­nese flight cap­i­tal by wealthy Chi­nese elites. When Chi­na cracked down on flight cap­i­tal in 2016, Bit­coin became an even big­ger source of Chi­nese flight cap­i­tal until Chi­na cracked down on Bit­coin exchanges in 2016 and 2017 to address flight cap­i­tal and mon­ey laun­der­ing con­cerns, pre­cip­i­tat­ing the burst­ing of the Bit­coin bub­ble. So that’s an exam­ple of a mar­ket Face­book might tap into. The Chi­nese flight cap­i­tal mar­ket. Except the Chi­nese gov­ern­ment also banned What­sApp, so the Chi­nese flight cap­i­tal mar­ket might be out of reach for Face­book’s new blockchain for now.

But there’s anoth­er large mar­ket for inter­na­tion­al cap­i­tal trans­fers that What­sApp already has large pres­ence: Indi­a’s remu­ner­a­tions mar­ket. There’s a lot of Indi­ans work­ing over­seas and it sounds like that remu­ner­a­tion mar­ket of peo­ple send­ing mon­ey back to India is the mar­ket Face­book is going to focus on first for its new coin. So Face­book’s blockchain sys­tem is designed to han­dle a large num­ber of inter­na­tion­al trans­ac­tions, mak­ing it per­fect for flight cap­i­tal. The remu­ner­a­tions of work­ing class Indi­ans work­ing abroad and the flight cap­i­tal of wealthy peo­ple around the world are all going to be part of this same cryp­tomar­ket.

Final­ly, keep in mind that it’s pos­si­ble that the Facebook/WhatsApp coin is designed so that Facebook/WhatsApp, but only Facebook/WhatsApp, will be able to know which phone is asso­ci­at­ed with which Face­book ‘coin’ account. Even if Face­book does­n’t osten­si­bly con­trol the dis­trib­uted net­work it’s plan­ning on cre­at­ing that does­n’t mean it can’t know which phones are asso­ci­at­ed with which account. Recall how What­sAp­p’s founder recent­ly left the com­pa­ny over the pres­sure Face­book was mak­ing to weak­en What­sAp­p’s encryp­tion so What­sApp users could be paired with their Face­book pro­file (for pitch­ing ads, accord­ing to the com­pa­ny). In the case of What­sAp­p’s mes­sag­ing ser­vice, the abil­i­ty of Face­book to uni­fy What­sApp and Face­book accounts with What­sApp accounts might not seem like a mas­sive com­pro­mise because Facebook/WhatsApp still the­o­ret­i­cal­ly isn’t be able to crack the What­sApp encryp­tion and read what mes­sages are being sent. But for a dis­trib­uted blockchain, all of the trans­ac­tion infor­ma­tion for each account is pub­licly avail­able so if the Face­book ‘coin’ accounts can be asso­ci­at­ed with a spe­cif­ic What­sApp account that implies Face­book will be able to asso­ci­at­ed trans­ac­tions with Face­book users, effec­tive­ly dei­den­ti­fy­ing those ‘cryp­to’ trans­ac­tions.

So it’s going to be inter­est­ing to see if Face­book’s cryp­to­coin sys­tem is going to be designed to make the trans­ac­tions anony­mous to the pub­lic and Face­book or just anony­mous to the pub­lic. By mak­ing its coin avail­able on third-par­ty coin exchanges, Face­book would appear to be send­ing a ‘any­thing goes’ sig­nal to users, but if it turns out Face­book can iden­ti­fy who is is asso­ci­at­ed with a giv­en account that’s going to make the sys­tem a lot less use­ful for crime. But even if Face­book can asso­ciate Face­book accounts with What­sApp accounts and tie that to Face­book coin accounts, the plat­form is still poten­tial­ly quite use­ful for crime. Peo­ple can buy anony­mous burn­er phones and cre­ate face Face­book and What­sApp accounts, after all.

And, of course, if it turns out Face­book is design­ing its coin sys­tem in a way that actu­al­ly dis­cour­ages its use for illic­it activ­i­ty, it’s not like there’s not going to be plen­ty of com­pe­ti­tion in the cryp­to-mes­sager-coin mar­ket­place. So if you’ve been wait­ing for a cryp­tocur­ren­cy plat­form that’s both main­stream and use­ful for crime, that time is pre­sum­ably com­ing soon and you’ll have a selec­tion to choose from:

The New York Times

Face­book and Telegram Are Hop­ing to Suc­ceed Where Bit­coin Failed

By Nathaniel Pop­per and Mike Isaac
Feb. 28, 2019

SAN FRANCISCO — Some of the world’s biggest inter­net mes­sag­ing com­pa­nies are hop­ing to suc­ceed where cryp­tocur­ren­cy start-ups have failed by intro­duc­ing main­stream con­sumers to the alter­na­tive world of dig­i­tal coins.

The inter­net out­fits, includ­ing Face­book, Telegram and Sig­nal, are plan­ning to roll out new cryp­tocur­ren­cies over the next year that are meant to allow users to send mon­ey to con­tacts on their mes­sag­ing sys­tems, like a Ven­mo or Pay­Pal that can move across inter­na­tion­al bor­ders.

The most antic­i­pat­ed but secre­tive project is under­way at Face­book. The com­pa­ny is work­ing on a coin that users of What­sApp, which Face­book owns, could send to friends and fam­i­ly instant­ly, said five peo­ple briefed on the effort who spoke on the con­di­tion of anonymi­ty because of con­fi­den­tial­i­ty agree­ments.

The Face­book project is far enough along that the social net­work­ing giant has held con­ver­sa­tions with cryp­tocur­ren­cy exchanges about sell­ing the Face­book coin to con­sumers, said four peo­ple briefed on the nego­ti­a­tions.

Telegram, which has an esti­mat­ed 300 mil­lion users world­wide, is also work­ing on a dig­i­tal coin. Sig­nal, an encrypt­ed mes­sag­ing ser­vice that is pop­u­lar among tech­nol­o­gists and pri­va­cy advo­cates, has its own coin in the works. And so do the biggest mes­sag­ing appli­ca­tions in South Korea and Japan, Kakao and Line.

The mes­sag­ing com­pa­nies have a reach that dwarfs the back­ers of ear­li­er cryp­tocur­ren­cies. Face­book and Telegram can make the dig­i­tal wal­lets used for cryp­tocur­ren­cies avail­able, in an instant, to hun­dreds of mil­lions of users.

All of the new projects are going after a mar­ket that has already proved pop­u­lar with con­sumers. Ven­mo has tak­en off in the Unit­ed States by mak­ing it eas­i­er to send pay­ments by phone. And in Chi­na, many con­sumers use the pay­ment sys­tem that oper­ates inside the huge­ly pop­u­lar WeChat mes­sag­ing sys­tem.

“It’s pret­ty much the most fas­ci­nat­ing thing hap­pen­ing in cryp­to right now,” said Eric Meltzer, a co-founder of a cryp­tocur­ren­cy-focused ven­ture cap­i­tal firm, Prim­i­tive Ven­tures. “They each have their own advan­tage in this bat­tle, and it will be insane to watch it go down.”

In a state­ment, Face­book did not direct­ly address its work on a dig­i­tal coin. The oth­er com­pa­nies declined to com­ment on their projects. Most of them appear to be work­ing on dig­i­tal coins that could exist on a decen­tral­ized net­work of com­put­ers, inde­pen­dent to some degree of the com­pa­nies that cre­at­ed them.

Like Bit­coin, the new cryp­tocur­ren­cies would make it eas­i­er to move mon­ey between coun­tries, par­tic­u­lar­ly in the devel­op­ing world where it is hard for ordi­nary peo­ple to open bank accounts and buy things online. The cur­rent designs being dis­cussed gen­er­al­ly do away with the ener­gy-guz­zling min­ing process that Bit­coin relies on.

But the mes­sag­ing com­pa­nies are like­ly to face many of the same reg­u­la­to­ry and tech­no­log­i­cal hur­dles that have kept Bit­coin from going main­stream. The lack of a cen­tral author­i­ty over cryp­tocur­ren­cies — a gov­ern­ment or a bank — has made them use­ful to crim­i­nals and scam­mers, and the designs of the com­put­er net­works that man­age them make it hard to han­dle sig­nif­i­cant num­bers of trans­ac­tions.

“They are all going to run up against these same types of tech­no­log­i­cal lim­its,” said Richard Ma, the chief exec­u­tive of Quantstamp, a firm that pro­vides secu­ri­ty audits for new cryp­tocur­ren­cies.

The com­pa­nies are throw­ing sig­nif­i­cant resources into their projects, even as the prices of cryp­tocur­ren­cies have plunged over the last year.

Face­book has more than 50 engi­neers work­ing on its project, three peo­ple famil­iar with the effort said. An indus­try web­site, The Block, has been keep­ing track of the steady flow of new job list­ings for the Face­book project.

The Face­book effort, which is being run by a for­mer pres­i­dent of Pay­Pal, David Mar­cus, start­ed last year after Telegram raised an eye-pop­ping $1.7 bil­lion to fund its cryp­tocur­ren­cy project.

Face­book has been coy about what it is build­ing. The team is in an office with sep­a­rate key-card access so oth­er Face­book employ­ees can­not get in, accord­ing to two Face­book employ­ees.

Face­book is look­ing at sev­er­al ways to use the blockchain, the tech­nol­o­gy intro­duced by Bit­coin that makes it pos­si­ble to keep shared records of finan­cial trans­ac­tions on sev­er­al com­put­ers, rather than rely­ing on one big cen­tral play­er like Pay­Pal or Visa.

The five peo­ple who have been briefed on the Face­book team’s work said the company’s most imme­di­ate prod­uct was like­ly to be a coin that would be pegged to the val­ue of tra­di­tion­al cur­ren­cies, as Bloomberg first report­ed.

A dig­i­tal token with a sta­ble val­ue would not be attrac­tive to spec­u­la­tors — the main audi­ence for cryp­tocur­ren­cies so far — but it would allow con­sumers to hold it and pay for things with­out wor­ry­ing about the val­ue of the coin ris­ing and falling.

Sev­er­al oth­er com­pa­nies have recent­ly intro­duced so-called sta­ble­coins, linked to the val­ue of the dol­lar. JPMor­gan Chase even said it was exper­i­ment­ing with the con­cept last month.

Face­book is look­ing at peg­ging the val­ue of its coin to a bas­ket of dif­fer­ent for­eign cur­ren­cies, rather than just the dol­lar, three peo­ple briefed on the plans said. Face­book could guar­an­tee the val­ue of the coin by back­ing every coin with a set num­ber of dol­lars, euros and oth­er nation­al cur­ren­cies held in Face­book bank accounts.

The com­pa­ny is over­haul­ing its mes­sag­ing infra­struc­ture, which would con­nect three of its prop­er­ties — Mes­sen­ger, What­sApp and Insta­gram. That inte­gra­tion, which could take more than a year, would extend the reach of Facebook’s dig­i­tal cur­ren­cy across the 2.7 bil­lion peo­ple who use one of the three apps each month.

The big ques­tion fac­ing Face­book is how much con­trol it would retain over the dig­i­tal coin. If Face­book is respon­si­ble for approv­ing every trans­ac­tion and keep­ing track of every user, it is not clear why it would need a blockchain sys­tem, rather than a tra­di­tion­al, cen­tral­ized sys­tem like Pay­Pal.

Work­ing with cryp­tocur­ren­cy exchanges would take at least some of the reg­u­la­to­ry bur­den off Face­book, since the exchanges would be respon­si­ble for hold­ing the dig­i­tal coins and vet­ting cus­tomers.

But if Face­book goes with a coin it does not entire­ly con­trol, it will be hard­er for the com­pa­ny to make mon­ey from trans­ac­tion fees and eas­i­er for crim­i­nals to use the coin for ille­gal pur­pos­es.

Face­book employ­ees have told the exchanges that they are hop­ing to get a prod­uct out in the first half of the year.

The coins from the oth­er mes­sag­ing com­pa­nies are like­ly to look more like tra­di­tion­al cryp­tocur­ren­cies, with fluc­tu­at­ing val­ues and a decen­tral­ized design that would give users more con­trol.

Telegram, which was start­ed by a team of Russ­ian exiles, has prid­ed itself on thumb­ing its nose at gov­ern­ments. This could help Telegram in places like Iran and Rus­sia, where peo­ple — espe­cial­ly dis­si­dents — have dif­fi­cul­ty using the tra­di­tion­al finan­cial sys­tem.

Telegram sent a let­ter to its investors last month say­ing that it was 90 per­cent done with the key com­po­nents of the net­work that would house the Gram, the name for its dig­i­tal token.

The com­pa­ny has told investors that it hopes to have some ver­sion of the sys­tem out in the next few months, accord­ing to two investors who spoke on the con­di­tion of anonymi­ty because of con­fi­den­tial­i­ty agree­ments.

The pri­va­cy-focused mes­sag­ing appli­ca­tion Sig­nal, which is run by a foun­da­tion, has the small­est project, called Mobile­coin. It raised $30 mil­lion last year and is try­ing to raise anoth­er $30 mil­lion, accord­ing to three peo­ple briefed on the effort.

While the founder of Sig­nal, Mox­ie Mar­lin­spike, is advis­ing the effort, it is being run inde­pen­dent­ly of Sig­nal. The project is a favorite of many long­time cryp­tocur­ren­cy advo­cates because of strong pri­va­cy con­trols.

..

———-

“Face­book and Telegram Are Hop­ing to Suc­ceed Where Bit­coin Failed” by Nathaniel Pop­per and Mike Isaac; The New York Times; 02/28/2019

“The inter­net out­fits, includ­ing Face­book, Telegram and Sig­nal, are plan­ning to roll out new cryp­tocur­ren­cies over the next year that are meant to allow users to send mon­ey to con­tacts on their mes­sag­ing sys­tems, like a Ven­mo or Pay­Pal that can move across inter­na­tion­al bor­ders.”

Will the inter­net giants suc­ceed at the main­stream­ing of the use of cryp­tocur­ren­cies? It’s some­thing Bit­coin and the rest of the cryp­tocur­ren­cies have so far failed at doing, but by incor­po­rat­ing these cryp­to­coins into mes­sag­ing sys­tems already used by hun­dreds of mil­lions of peo­ple it’s a real pos­si­bil­i­ty that we could be on the verge of see­ing the use of cryp­tocur­ren­cies goes main­stream. It’s not exact­ly in keep­ing with the ‘pop­ulist’ dreams of Bit­coin but it is very much in keep­ing with the far right ide­ol­o­gy that actu­al­ly under­pins the cypher­punk phi­los­o­phy that much of the fer­vent enthu­si­asm for cryp­tocur­ren­cies is based on. Dis­trib­uted net­works of cryp­tocur­ren­cies pop­u­lar­ized by Big Tech by pig­gy-back­ing on exist­ing plat­forms already used by mil­lions. That appears to be next cryp­tocur­ren­cy phase:

...
Telegram, which has an esti­mat­ed 300 mil­lion users world­wide, is also work­ing on a dig­i­tal coin. Sig­nal, an encrypt­ed mes­sag­ing ser­vice that is pop­u­lar among tech­nol­o­gists and pri­va­cy advo­cates, has its own coin in the works. And so do the biggest mes­sag­ing appli­ca­tions in South Korea and Japan, Kakao and Line.

The mes­sag­ing com­pa­nies have a reach that dwarfs the back­ers of ear­li­er cryp­tocur­ren­cies. Face­book and Telegram can make the dig­i­tal wal­lets used for cryp­tocur­ren­cies avail­able, in an instant, to hun­dreds of mil­lions of users.
...

Face­book isn’t reveal­ing very much about its plans but it it appears to be far enough along in its work that it’s already in talks with cur­ren­cy exchanges and it telling these exchanges that it’s hop­ing to have the coin release in the first half of 2019. So that tells us that Face­book is out­sourc­ing the due dili­gence of over­see­ing the buy­ing and sell­ing of its coin to third-par­ty exchanges, which is great for facil­i­tat­ing crim­i­nal activ­i­ties like mon­ey-laun­der­ing and flight cap­i­tal:

...
The most antic­i­pat­ed but secre­tive project is under­way at Face­book. The com­pa­ny is work­ing on a coin that users of What­sApp, which Face­book owns, could send to friends and fam­i­ly instant­ly, said five peo­ple briefed on the effort who spoke on the con­di­tion of anonymi­ty because of con­fi­den­tial­i­ty agree­ments.

The Face­book project is far enough along that the social net­work­ing giant has held con­ver­sa­tions with cryp­tocur­ren­cy exchanges about sell­ing the Face­book coin to con­sumers, said four peo­ple briefed on the nego­ti­a­tions.

...

In a state­ment, Face­book did not direct­ly address its work on a dig­i­tal coin. The oth­er com­pa­nies declined to com­ment on their projects. Most of them appear to be work­ing on dig­i­tal coins that could exist on a decen­tral­ized net­work of com­put­ers, inde­pen­dent to some degree of the com­pa­nies that cre­at­ed them.

...

Face­book is look­ing at sev­er­al ways to use the blockchain, the tech­nol­o­gy intro­duced by Bit­coin that makes it pos­si­ble to keep shared records of finan­cial trans­ac­tions on sev­er­al com­put­ers, rather than rely­ing on one big cen­tral play­er like Pay­Pal or Visa.

...

The big ques­tion fac­ing Face­book is how much con­trol it would retain over the dig­i­tal coin. If Face­book is respon­si­ble for approv­ing every trans­ac­tion and keep­ing track of every user, it is not clear why it would need a blockchain sys­tem, rather than a tra­di­tion­al, cen­tral­ized sys­tem like Pay­Pal.

Work­ing with cryp­tocur­ren­cy exchanges would take at least some of the reg­u­la­to­ry bur­den off Face­book, since the exchanges would be respon­si­ble for hold­ing the dig­i­tal coins and vet­ting cus­tomers.

But if Face­book goes with a coin it does not entire­ly con­trol, it will be hard­er for the com­pa­ny to make mon­ey from trans­ac­tion fees and eas­i­er for crim­i­nals to use the coin for ille­gal pur­pos­es.

Face­book employ­ees have told the exchanges that they are hop­ing to get a prod­uct out in the first half of the year.
...

Giv­en that Face­book appears to be plan­ning on rolling out its coin in the first half of 2019, it’s also worth not­ing that the inte­gra­tion of Face­book pro­files with What­sApp pro­files, which would pre­sum­ably allow Face­book to deter­mine who owns a giv­en What­sApp account, is expect­ed to take more than a year. So Face­book is rolling out its coin that’s going to be used on What­sApp before it makes the changes to What­sApp that could poten­tial­ly allow Face­book to iden­ti­fy who is behind each What­sApp account:

...
The com­pa­ny is over­haul­ing its mes­sag­ing infra­struc­ture, which would con­nect three of its prop­er­ties — Mes­sen­ger, What­sApp and Insta­gram. That inte­gra­tion, which could take more than a year, would extend the reach of Facebook’s dig­i­tal cur­ren­cy across the 2.7 bil­lion peo­ple who use one of the three apps each month.
...

And Face­book’s coin will be a ‘sta­ble­coin’ with a val­ue tied to a bas­ket of cur­ren­cies instead of wild­ly fluc­tu­at­ing val­ues like we find with Bit­coin and the rest of the exist­ing cryp­tocur­ren­cies. Although it does­n’t sounds like the rest of the new cryp­tocur­ren­cies being devel­oped will be tied to an exist­ing cur­ren­cy:

...
The five peo­ple who have been briefed on the Face­book team’s work said the company’s most imme­di­ate prod­uct was like­ly to be a coin that would be pegged to the val­ue of tra­di­tion­al cur­ren­cies, as Bloomberg first report­ed.

A dig­i­tal token with a sta­ble val­ue would not be attrac­tive to spec­u­la­tors — the main audi­ence for cryp­tocur­ren­cies so far — but it would allow con­sumers to hold it and pay for things with­out wor­ry­ing about the val­ue of the coin ris­ing and falling.

Sev­er­al oth­er com­pa­nies have recent­ly intro­duced so-called sta­ble­coins, linked to the val­ue of the dol­lar. JPMor­gan Chase even said it was exper­i­ment­ing with the con­cept last month.

Face­book is look­ing at peg­ging the val­ue of its coin to a bas­ket of dif­fer­ent for­eign cur­ren­cies, rather than just the dol­lar, three peo­ple briefed on the plans said. Face­book could guar­an­tee the val­ue of the coin by back­ing every coin with a set num­ber of dol­lars, euros and oth­er nation­al cur­ren­cies held in Face­book bank accounts.

...

The coins from the oth­er mes­sag­ing com­pa­nies are like­ly to look more like tra­di­tion­al cryp­tocur­ren­cies, with fluc­tu­at­ing val­ues and a decen­tral­ized design that would give users more con­trol.
...

But there do appear to be so legit­i­mate improve­ments to exist­ing cryp­tocur­ren­cy designs: it does­n’t sound like these new coins will rely on the insane ener­gy-inten­sive min­ing that has always been one of Bit­coin’s biggest flaws:

...
Like Bit­coin, the new cryp­tocur­ren­cies would make it eas­i­er to move mon­ey between coun­tries, par­tic­u­lar­ly in the devel­op­ing world where it is hard for ordi­nary peo­ple to open bank accounts and buy things online. The cur­rent designs being dis­cussed gen­er­al­ly do away with the ener­gy-guz­zling min­ing process that Bit­coin relies on.
...

And note how the arti­cle refers to how these coins could be use­ful for peo­ple in the devel­op­ing world where it can be hard for ordi­nary peo­ple to open bank accounts and buy things online. And that points towards one of the oth­er crit­i­cal mar­kets that Face­book is like­ly hop­ing to get into with this tech­nol­o­gy: bank­ing for the devel­op­ing world. Instead of a bank account, poor peo­ple can just store their sav­ings in Face­book coins.

So that’s a peek at what’s to come in the cryp­tocur­ren­cy mar­ket: the main­stream­ing of cryt­pocur­ren­cies by pig­gy-back­ing then on pop­u­lar cryp­to-mes­sag­ing sys­tems.

Next, here’s a quick look at the ini­tial Bloomberg report from back on Decem­ber on Face­book’s cryp­tocur­ren­cy plans. There weren’t many details at the time oth­er than the fact that the the coin is going to be a ‘sta­ble­coin’. But we are told about the tar­get mar­ket Face­book has in mind for its new coin: Indi­a’s remu­ner­a­tions mar­ket, the largest in the world:

Bloomberg

Face­book Is Devel­op­ing a Cryp­tocur­ren­cy for What­sApp Trans­fers, Sources Say

By Sarah Frier and Julie Ver­hage
Decem­ber 20, 2018, 6:35 PM CST

* First focus will be on remit­tance mar­ket in India, peo­ple say
* Social net­work is still work­ing out its blockchain strat­e­gy

Face­book Inc. is work­ing on mak­ing a cryp­tocur­ren­cy that will let users trans­fer mon­ey on its What­sApp mes­sag­ing app, focus­ing first on the remit­tances mar­ket in India, accord­ing to peo­ple famil­iar with the mat­ter.

The com­pa­ny is devel­op­ing a sta­ble­coin — a type of dig­i­tal cur­ren­cy pegged to the U.S. dol­lar — to min­i­mize volatil­i­ty, said the peo­ple, who asked not to be iden­ti­fied dis­cussing inter­nal plans. Face­book is far from releas­ing the coin, because it’s still work­ing on the strat­e­gy, includ­ing a plan for cus­tody assets, or reg­u­lar cur­ren­cies that would be held to pro­tect the val­ue of the sta­ble­coin, the peo­ple said.

Face­book has long been expect­ed to make a move in finan­cial ser­vices, after hir­ing for­mer Pay­Pal pres­i­dent David Mar­cus to run its Mes­sen­ger app in 2014. In May, Mar­cus became the head of the company’s blockchain ini­tia­tives, which haven’t been dis­cussed pub­licly in detail. Face­book has been on a hir­ing spree, and now has about 40 peo­ple in its blockchain group, accord­ing to employ­ee titles on LinkedIn.

...

What­sApp, the company’s encrypt­ed mobile-mes­sag­ing app, is pop­u­lar in India, with more than 200 mil­lion users. The coun­try also leads the world in remit­tances — peo­ple sent $69 bil­lion home to India in 2017, the World Bank said this year.

The past year has seen a boom in cryp­to projects relat­ed to sta­ble­coins. At one point, there were more than 120 ven­tures relat­ed to this theme, accord­ing to Stable.Report, a web­site that tracks sta­ble tokens. The con­cept was cre­at­ed to cre­ate a dig­i­tal coin that would be far eas­i­er to use on dai­ly pur­chas­es because it would be more sta­ble than cur­ren­cies like Bit­coin.

The idea has proven tough to car­ry out in real life, with at least one high-pro­file project shut­tered in recent weeks. A sta­ble­coin known as Basis recent­ly closed after eight months. The Hobo­ken, New Jer­sey-based com­pa­ny said there was no appar­ent way around being clas­si­fied as a secu­ri­ty as opposed to a cur­ren­cy, which could sig­nif­i­cant­ly reduce the num­ber of poten­tial buy­ers. The swift col­lapse came after Basis drew well-known back­ers like Andreessen Horowitz and Kevin Warsh, a for­mer gov­er­nor of the U.S. Fed­er­al Reserve.

Per­haps the most high-pro­file sta­ble­coin to date, Teth­er, has also been sur­round­ed by con­tro­ver­sy. While Tether’s cre­ators say each of its tokens is backed by one U.S. dol­lar, the company’s refusal to be audit­ed has raised ques­tions about whether that’s the case.

Face­book, which has 2.5 bil­lion glob­al users, more than $40 bil­lion in annu­al rev­enue and greater expe­ri­ence nav­i­gat­ing reg­u­la­to­ry issues, may have a bet­ter chance of mak­ing a sta­ble­coin that sticks. It would be the first large tech­nol­o­gy com­pa­ny to launch such a project. The company’s rela­tion­ship with India has been fraught, main­ly because some instances of fake news spread through What­sApp have led to vio­lence there. Still, Face­book sees tremen­dous growth oppor­tu­ni­ty in the coun­try. India has 480 mil­lion inter­net users, sec­ond only to Chi­na. That num­ber is pro­ject­ed to grow to 737 mil­lion by 2022, accord­ing to For­rester Research Inc.

————

“Face­book Is Devel­op­ing a Cryp­tocur­ren­cy for What­sApp Trans­fers, Sources Say” by Sarah Frier and Julie Ver­hage; Bloomberg; 12/20/2018

“Face­book Inc. is work­ing on mak­ing a cryp­tocur­ren­cy that will let users trans­fer mon­ey on its What­sApp mes­sag­ing app, focus­ing first on the remit­tances mar­ket in India, accord­ing to peo­ple famil­iar with the mat­ter.”

So that gives us a sense of how impor­tant the mar­ket for cross-bor­der trans­ac­tions is for Face­book’s plans. As the arti­cle notes, India leads the world in remit­tances:

...
What­sApp, the company’s encrypt­ed mobile-mes­sag­ing app, is pop­u­lar in India, with more than 200 mil­lion users. The coun­try also leads the world in remit­tances — peo­ple sent $69 bil­lion home to India in 2017, the World Bank said this year.
...

And, again, don’t for­get that if these new coins are well suit­ed for inter­na­tion­al finan­cial trans­fers they’re also obvi­ous­ly going to be well suit­ed for finan­cial trans­ac­tions with­in a coun­try. So we real­ly could be look­ing at Face­book mak­ing inroads into what amounts to a bank­ing for the devel­op­ing world.

But also keep in mind some of the oth­er reports we’ve pre­vi­ous­ly seen about Face­book’s oth­er plans for get­ting into the finan­cial trans­ac­tion busi­ness. There was the report from last August about how Face­book want­ed to cut deals with major banks to get cus­tomer bank infor­ma­tion, like your cred­it card usage and check­ing account infor­ma­tion, as part of a larg­er plan to offer finan­cial ser­vices over Face­book mes­sen­ger. Or the reports from 2015 about how Face­book filed for a patent for sys­tem that would allow banks and lenders to scan your social net­work friends when deter­min­ing whether or not you should get a loan. If your friends’ cred­it scores were too low, you would get reject­ed. That was seri­ous­ly what they patent­ed. So while it remains unclear how much infor­ma­tion Face­book is going to be able to col­lect with its new What­sApp cryp­tocur­ren­cy, the fact that we’ve been get­ting warn­ings for quite some time now that Face­book is very inter­est­ed in get­ting into the busi­ness of col­lect­ing infor­ma­tion about your finan­cial trans­ac­tion gives us a big hint about what to expect.

And that’s part of what’s going to make Face­book’s cryp­tocur­ren­cy an inter­est­ing exper­i­ment: if any com­pa­ny can fig­ure out how to turn a cryp­tocur­ren­cy that’s sup­posed to be anony­mous into a giant per­son­al data col­lec­tion machine it’s Face­book. It’s like the ulti­mate cryp­to stress test.

Behold, the era when sto­ries about hor­ri­ble blockchain ideas and hor­ri­ble Face­book abus­es is almost here: Face­book is about to announce the launch of its new cryp­tocur­ren­cy. It’s going to be called Libra.

As the arti­cle notes, it’s just an announce­ment of the plans for the new cur­ren­cy that’s com­ing up. There’s still quite a few reg­u­la­to­ry hur­dles that Face­book will have to jump through before the cur­ren­cy will be legal for use. But it could be launched in 2020.

As the arti­cle also notes, Face­book has plans for get­ting that reg­u­la­to­ry approval and cen­tral to those plans is cre­at­ing a sep­a­rate foun­da­tion, the Libra Asso­ci­a­tion, that will gov­ern the cur­ren­cy inde­pen­dent­ly from Face­book. Hav­ing a foun­da­tion inde­pen­dent from Face­book is expect­ed to help with the reg­u­la­tors. And it won’t just be Face­book lob­by­ing these reg­u­la­tors. Visa and Mas­ter­card, Pay­Pal, Uber, Stripe, and Booking.com are all going to join the Libra Asso­ci­a­tion and each will be invest­ing around $10 mil­lion to fund the devel­op­ment of the cur­ren­cy. As we’re going to see, Face­book is hop­ing on get­ting around 100 cor­po­rate part­ners who all pay $10 mil­lion to buy a ‘node’ in the new blockchain. Sell­ing ‘node’ access is part of how Face­book is pre­sum­ably sell­ing trans­ac­tion infor­ma­tion access. So there’s going to be a large con­sor­tium from finance and Sil­i­con Val­ley that includes the cred­it card giants lob­by­ing reg­u­la­tors in favor of Libra, not just Face­book.

There’s also plans for mak­ing ATM-like ter­mi­nals for con­vert­ing mon­ey into Libra. Keep in mind that the point were real cur­ren­cy is con­vert­ed to cryp­tocur­ren­cy is one of the key points where uses like mon­ey-laun­der­ing and ille­gal cross-bor­der trans­fers can be addressed. So offer­ing lots of ATMs that make it easy for peo­ple to con­vert between cash a Libra sug­gests the infra­struc­ture is going to be devel­oped that makes Libra extreme­ly use­ful for cross-bor­der trans­fers and mon­ey-laun­der­ing pur­pos­es.

We’re also told that Libra will be a ‘sta­ble­coin’, which means the val­ue of the coin will be tied to a bas­ket of cur­ren­cies, avoid­ing the wild val­ue fluc­tu­a­tions of cryp­to­coins like Bit­coin. There are a lot of sound rea­sons for mak­ing it a sta­ble­coin, with one key rea­son being that the wild insta­bil­i­ty of cryp­tocur­ren­cies like Bit­coin is a major rea­son they’re so inap­pro­pri­ate as a cur­ren­cy.

But this is Face­book we’re talk­ing about, so of course it’s going to be dis­turb­ing some how. And sure enough, we’re learn­ing that part of the rea­son Face­book is mak­ing Libra a sta­ble­coin is to make it an appeal­ing alter­na­tive to peo­ple in devel­op­ing coun­tries that might have rel­a­tive­ly unsta­ble cur­ren­cies. In oth­er words, Face­book wants to make it easy for pop­u­la­tions to dump their cur­ren­cies when those cur­ren­cies show signs of insta­bil­i­ty. That’s in addi­tion Libra facil­i­tat­ing cross-bor­der trans­fers. It’s the same capa­bil­i­ty Bit­coin pro­vides but on a vast­ly greater scale and with the ‘sta­ble­coin’ fea­ture that makes it less risky for peo­ple to dump their local cur­ren­cy in favor of Libra. Face­book wants Libra to be accept­ed by as many mer­chants as pos­si­ble so it will effec­tive­ly be a par­al­lel glob­al cur­ren­cy sys­tem. Peo­ple in coun­tries with unsta­ble cur­ren­cies can just live their lives using Libra instead of their domes­tic cur­ren­cy. That’s the vision.

So we’ll see what kind of mega-blun­ders Face­book and its con­sor­tium are about to unleash on the world with this new cryp­tocur­ren­cy but we prob­a­bly should­n’t be sur­prised if the blun­ders include the mass desta­bi­liza­tion of devel­op­ing nations’ cur­ren­cies:

The Verge

Facebook’s cryp­tocur­ren­cy to debut next week backed by Visa, Mas­ter­card, Uber, and oth­ers: WSJ

An unveil­ing is expect­ed next week, with a launch to fol­low in 2020

By Jon Porter
Jun 14, 2019, 5:14am EDT

Face­book has secured the back­ing of over a dozen com­pa­nies for its upcom­ing Libra cryp­tocur­ren­cy set to be announced next week, The Wall Street Jour­nal reports. These com­pa­nies include major finan­cial orga­ni­za­tions like Visa and Mas­ter­card, and inter­net dar­lings like Pay­Pal, Uber, Stripe, and Booking.com. Each will invest around $10 mil­lion to fund devel­op­ment of the cur­ren­cy, and will become part of the Libra Asso­ci­a­tion, an inde­pen­dent con­sor­tium that will gov­ern the dig­i­tal coin inde­pen­dent­ly of Face­book.

...

For Face­book, estab­lish­ing an inde­pen­dent body is thought to pro­vide cov­er with users and reg­u­la­tors, who have grown increas­ing­ly wary of both the amount of pow­er Face­book wields, and its cav­a­lier atti­tude towards the respon­si­bil­i­ties this brings.

The cryp­tocur­ren­cy, which will report­ed­ly be called Libra, will be unveiled on June 18th, accord­ing to TechCrunch, with a full release planned for 2020. It’s expect­ed to func­tion as a “sta­ble­coin,” mean­ing it will be pegged to a bas­ket of gov­ern­ment-issued cur­ren­cies in order to lim­it the volatil­i­ty typ­i­cal­ly asso­ci­at­ed with cryp­tocur­ren­cies like Bit­coin. Sta­bil­i­ty is a key con­cern, since Face­book is hop­ing to attract users in devel­op­ing coun­tries with an alter­na­tive to more volatile local cur­ren­cies.

As well as allow­ing users to send mon­ey over Facebook’s mes­sag­ing prod­ucts like What­sApp and Mes­sen­ger, Face­book hopes that its part­ner­ships with e‑commerce firms will allow users to spend the cur­ren­cy online. The com­pa­ny is report­ed­ly also look­ing into devel­op­ing ATM-like phys­i­cal ter­mi­nals for peo­ple to con­vert their mon­ey into Libra.

Face­book will need to over­come numer­ous reg­u­la­to­ry hur­dles before it’s able to launch the cur­ren­cy, and will need to address con­cerns around fraud and mon­ey laun­der­ing (a con­cern with­in the con­sor­tium). Face­book has report­ed­ly met with the Bank of Eng­land gov­er­nor Mark Car­ney to dis­cuss the currency’s oppor­tu­ni­ties and risks, as well as the US Trea­sury and mon­ey trans­fer firms like West­ern Union. Get­ting the reg­u­la­to­ry aspects of the cur­ren­cy right will be of cru­cial impor­tance if the cur­ren­cy is to suc­ceed in key mar­kets like India, which has tak­en a hos­tile atti­tude towards cryp­tocur­ren­cies in recent years.

———-

“Facebook’s cryp­tocur­ren­cy to debut next week backed by Visa, Mas­ter­card, Uber, and oth­ers: WSJ” by Jon Porter; The Verge; 06/14/2019

“Face­book will need to over­come numer­ous reg­u­la­to­ry hur­dles before it’s able to launch the cur­ren­cy, and will need to address con­cerns around fraud and mon­ey laun­der­ing (a con­cern with­in the con­sor­tium). Face­book has report­ed­ly met with the Bank of Eng­land gov­er­nor Mark Car­ney to dis­cuss the currency’s oppor­tu­ni­ties and risks, as well as the US Trea­sury and mon­ey trans­fer firms like West­ern Union. Get­ting the reg­u­la­to­ry aspects of the cur­ren­cy right will be of cru­cial impor­tance if the cur­ren­cy is to suc­ceed in key mar­kets like India, which has tak­en a hos­tile atti­tude towards cryp­tocur­ren­cies in recent years.”

It’s going to be grim­ly fas­ci­nat­ing to watch: On the one hand, reg­u­la­tors around the world, even in the US, have voiced increas­ing alarm about Face­book’s actions and con­sis­tent track-record of gross cor­po­rate irre­spon­si­bil­i­ty. But on the oth­er hand, Face­book has assem­bled a team of Wall Street and oth­er Sil­i­con Val­ley giants. It’s like the Cor­po­rate Amer­i­ca Legion of Doom and it’s intent on rolling out some sort of a sys­tem that sounds like a mon­ey-laun­der­er’s dream. They even plan on ATMs for con­vert­ing cash to Libra. So it seems like­ly that Face­book is going to win the upcom­ing reg­u­la­to­ry bat­tles one way or anoth­er despite being a cor­po­rate train­wreck that has a new scan­dal like every month these days. A grim study in the raw pow­er of the cor­po­rate world is about to play out:

...
Face­book has secured the back­ing of over a dozen com­pa­nies for its upcom­ing Libra cryp­tocur­ren­cy set to be announced next week, The Wall Street Jour­nal reports. These com­pa­nies include major finan­cial orga­ni­za­tions like Visa and Mas­ter­card, and inter­net dar­lings like Pay­Pal, Uber, Stripe, and Booking.com. Each will invest around $10 mil­lion to fund devel­op­ment of the cur­ren­cy, and will become part of the Libra Asso­ci­a­tion, an inde­pen­dent con­sor­tium that will gov­ern the dig­i­tal coin inde­pen­dent­ly of Face­book.

...

For Face­book, estab­lish­ing an inde­pen­dent body is thought to pro­vide cov­er with users and reg­u­la­tors, who have grown increas­ing­ly wary of both the amount of pow­er Face­book wields, and its cav­a­lier atti­tude towards the respon­si­bil­i­ties this brings.

...

As well as allow­ing users to send mon­ey over Facebook’s mes­sag­ing prod­ucts like What­sApp and Mes­sen­ger, Face­book hopes that its part­ner­ships with e‑commerce firms will allow users to spend the cur­ren­cy online. The com­pa­ny is report­ed­ly also look­ing into devel­op­ing ATM-like phys­i­cal ter­mi­nals for peo­ple to con­vert their mon­ey into Libra.
...

But per­haps the most omi­nous part of Face­book’s plans revealed so far is the tar­get mar­ket: peo­ple in devel­op­ing coun­tries with unsta­ble cur­ren­cies. Face­book wants to sud­den­ly make cur­ren­cy spec­u­la­tion avail­able to almost every­one, which might sound nice in prin­ci­ple but isn’t going to be super nice if it results in mak­ing the weak­est and most volatile cur­ren­cies even weak­er and more volatile:

...
The cryp­tocur­ren­cy, which will report­ed­ly be called Libra, will be unveiled on June 18th, accord­ing to TechCrunch, with a full release planned for 2020. It’s expect­ed to func­tion as a “sta­ble­coin,” mean­ing it will be pegged to a bas­ket of gov­ern­ment-issued cur­ren­cies in order to lim­it the volatil­i­ty typ­i­cal­ly asso­ci­at­ed with cryp­tocur­ren­cies like Bit­coin. Sta­bil­i­ty is a key con­cern, since Face­book is hop­ing to attract users in devel­op­ing coun­tries with an alter­na­tive to more volatile local cur­ren­cies.
...

Also keep in mind that mak­ing devel­op­ing nations more vul­ner­a­ble to runs on their cur­ren­cies is only going to end up mak­ing those gov­ern­ments more behold­en to the inter­na­tion­al cred­i­tors that nation relies on.

So how like­ly is it that Face­book is real­ly going to go invest deeply in this? Well, as the fol­low­ing arti­cle describes, Mark Zucker­berg is per­son­al­ly very inter­est­ed in this. He has a vision of a world where send­ing mon­ey is as easy as send­ing a pho­to and the plan is to aggres­sive­ly mar­ket Libra to devel­op­ing coun­tries with less sta­ble cur­ren­cies. Face­book has already spo­ken with a num­ber of gov­ern­ments and is basi­cal­ly argu­ing that Libra is going to have bet­ter con­trols against abus­es than any oth­er cryp­tocur­ren­cy out there. And Face­book is plan­ning on hav­ing around 100 cor­po­rate part­ners when it launch­es. Each one will pay around $10 mil­lion to run a ‘node’ on the blockchain. That $1 bil­lion raised from the cor­po­rate part­ners will be used to pay for the ‘sta­ble­coin’ bas­ket of cur­ren­cies.

The $10 mil­lion will also buy a posi­tion on the Libra Asso­ci­a­tion foun­da­tion that will run the cur­ren­cy. Face­book report­ed­ly likes the idea of invit­ing in cor­po­rate part­ners to co-run the cur­ren­cy because it deflects from the com­pa­ny’s own pri­va­cy abus­es. Keep in mind that it’s like­ly that run­ning a ‘node’ is exact­ly how Face­book is plan­ning on sell­ing access to the trans­ac­tion data. In oth­er words, the fact that nodes are being sold sug­gests that the blockchain behind Libra might not be pub­lic. It might be held by just those node oper­a­tors instead. Which means the $10 mil­lion is the cost of get­ting access to the Libra blockchain data. So this ‘node-for-sale’ sys­tem that buys a slot on the Libra Asso­ci­a­tion foun­da­tion means Face­book is sell­ing access to its blockchain data as a means of dis­trac­tion from Face­book’s own hor­ri­ble pri­va­cy track-record. Because of course that’s what’ Face­book is doing:

The Infor­ma­tion

Face­book Plans Out­side Foun­da­tion to Gov­ern Cryp­tocur­ren­cy

By Alex Heath and Jon Vic­tor

Jun 05, 2019 11:57 AM PDT

Face­book plans to cede con­trol of its forth­com­ing cryp­tocur­ren­cy to out­side back­ers, a move meant to encour­age trust in the dig­i­tal pay­ment sys­tem and reas­sure finan­cial reg­u­la­tors, The Infor­ma­tion has learned.

In recent months, the social net­work has court­ed dozens of finan­cial insti­tu­tions and oth­er tech com­pa­nies to join an inde­pen­dent foun­da­tion that will con­tribute cap­i­tal and help gov­ern the dig­i­tal cur­ren­cy, accord­ing to peo­ple briefed on the plan. The dig­i­tal token, which Face­book is expect­ed to unveil lat­er this month, is designed to func­tion as a bor­der­less cur­ren­cy with­out trans­ac­tion fees and will be aggres­sive­ly mar­ket­ed in devel­op­ing nations where gov­ern­ment-backed cur­ren­cies are more volatile, the peo­ple said.

While the token will be main­ly vis­i­ble to users through Facebook’s suite of apps, includ­ing Mes­sen­ger and What­sApp, the com­pa­ny is also plan­ning ways for the token to be used for pay­ments in the phys­i­cal world. Face­book plans to offer sign-up bonus­es to users in part­ner­ship with mer­chants, who will accept the cryp­tocur­ren­cy as a method of pay­ment in stores, the peo­ple briefed on the plan said. The com­pa­ny also plans to offer phys­i­cal ter­mi­nals sim­i­lar to ATMs where peo­ple will be able to exchange oth­er cur­ren­cies for the token.

This arti­cle is based on inter­views with more than a dozen peo­ple famil­iar with Face­book plans, most of whom request­ed anonymi­ty to speak freely. A Face­book spokesper­son declined to com­ment.

With trust in Face­book marred by a series of pri­va­cy scandals—and grow­ing scruti­ny from antitrust regulators—the com­pa­ny believes that dis­tanc­ing itself from the token’s man­age­ment will help keep reg­u­la­tors at bay. It could also help encour­age the token’s broad adop­tion as a pay­ment sys­tem, some­thing that is more like­ly if over­sight of the cur­ren­cy isn’t con­trolled by a sin­gle com­pa­ny, said the peo­ple briefed on its plans.

The com­pa­ny has been work­ing with gov­ern­ments in coun­tries around the world to approve the use of the token and plans to pro­vide more strin­gent forms of iden­ti­ty ver­i­fi­ca­tion and fraud detec­tion than do most cryp­tocur­ren­cies.

The deci­sion to rely on a foun­da­tion for over­sight is sim­i­lar to a strat­e­gy some oth­er cryp­tocur­ren­cy net­works have adopt­ed to pro­mote the inter­ests of the net­work. It couldn’t be learned exact­ly what role Facebook’s cryp­tocur­ren­cy foun­da­tion would play.

New Mar­kets

If suc­cess­ful, the token could have a sig­nif­i­cant impact in areas around the world that cur­rent­ly aren’t well-served by the tra­di­tion­al finan­cial sys­tem. Facebook’s enor­mous reach—with more than 2.3 bil­lion users globally—could pro­vide a plat­form for mar­ket­ing the token to users that oth­er cryp­tocur­ren­cies haven’t seen before. The Face­book project, known inter­nal­ly as Libra, was formed rough­ly one year ago when the com­pa­ny announced that ex-Pay­Pal Pres­i­dent David Mar­cus would run a group ded­i­cat­ed to explor­ing blockchain tech­nol­o­gy.

Pay­ments is an area of per­son­al focus for CEO Mark Zucker­berg, who has recent­ly begun to shift the company’s pri­or­i­ties toward build­ing pri­vate forms of com­mu­ni­ca­tion, through ephemer­al mes­sages and encryp­tion. Although it isn’t known how Face­book plans to prof­it from its token, the com­pa­ny doesn’t plan to use it for ad tar­get­ing. While Face­book has said lit­tle about its cryp­tocur­ren­cy plans, Mr. Zucker­berg hint­ed at his ambi­tions at the company’s devel­op­er con­fer­ence in April.

“I believe it should be as easy to send mon­ey to some­one as it is to send a pho­to,” he told the audi­ence.

When the team behind the Libra project ini­tial­ly pre­sent­ed their plans to Mr. Zucker­berg, it dis­cussed three pos­si­ble invest­ment sce­nar­ios the com­pa­ny could make in the effort—low, medi­um and high—and the Face­book CEO select­ed high. Face­book is also offer­ing employ­ees work­ing on the project the option of being paid in the token.

In Feb­ru­ary, Face­book hired the team behind a blockchain start­up called Chain­space. The CEO of Chain­space, Dave Hrycyszyn, qui­et­ly left Face­book after rough­ly a month. Mr. Hrycyszyn didn’t respond to requests for com­ment.

Face­book, which often telegraphs its long-term vision for prod­ucts years before they mate­ri­al­ize, has been oper­at­ing under an unusu­al degree of secre­cy for the cryp­to project. While most Face­book employ­ees sit in open office floor plans and usu­al­ly dis­cuss unan­nounced projects open­ly inside the company’s walls, mem­bers of the Libra orga­ni­za­tion have been restrict­ed to a sep­a­rate build­ing with their own key­cards.

...

While Mr. Zucker­berg has tak­en a per­son­al inter­est in the project, the company’s chief oper­at­ing offi­cer, Sheryl Sand­berg, and chief finan­cial offi­cer, David Wehn­er, have been skep­ti­cal of the ini­tia­tive inter­nal­ly.

Last month, Face­book incor­po­rat­ed a sep­a­rate com­pa­ny in Switzer­land called Libra Net­works that will focus on “invest­ing, pay­ments, financ­ing, iden­ti­ty man­age­ment, ana­lyt­ics, big data, blockchain and oth­er tech­nolo­gies,” accord­ing to pub­lic fil­ings first report­ed by Reuters. Face­book also recent­ly acquired the “Libra” trade­mark from a blockchain com­pa­ny with the same name that has since rebrand­ed, pub­lic doc­u­ments show.

More Cen­tral­ized Approach

For months, ques­tions have swirled around how much con­trol Face­book would retain over its planned cryp­tocur­ren­cy. While Face­book is ced­ing much influ­ence to out­side firms, its plans sug­gest that the net­work will still be far more cen­tral­ized than exist­ing blockchains such as Bit­coin, which has no restric­tions on who can val­i­date trans­ac­tions. Blockchains are shared data­bas­es that are main­tained by groups of par­tic­i­pants who run soft­ware to ver­i­fy trans­ac­tions that take place on those net­works.

In the last few months, Face­book has held dis­cus­sions with oth­er com­pa­nies about licens­ing the right to help oper­ate the new cryp­tocur­ren­cy net­work, accord­ing to the peo­ple briefed on the plan. Face­book has dis­cussed an arrange­ment through which the out­side com­pa­nies would each pay $10 mil­lion to oper­ate a node of the network—hardware and soft­ware that will help process trans­ac­tions involv­ing Facebook’s token.

Node oper­a­tors also could send their own rep­re­sen­ta­tives to the foun­da­tion to help stew­ard the net­work. It isn’t known how the node oper­a­tors will prof­it from their par­tic­i­pa­tion, but node oper­a­tors are typ­i­cal­ly reward­ed for their efforts through new­ly unlocked tokens or trans­ac­tion fees from users.

Face­book hopes to launch the net­work with 100 nodes in an effort to lim­it the con­trol a sin­gle enti­ty can have over it, accord­ing to mul­ti­ple peo­ple famil­iar with the mat­ter, although that num­ber is far low­er than on oth­er cryp­tocur­ren­cy net­works. Bit­coin, in com­par­i­son, has thou­sands of nodes val­i­dat­ing trans­ac­tions.

Some of the peo­ple added that the num­ber of nodes could be few­er at launch. The com­pa­ny has dis­cussed design­ing the net­work so that it will become more decen­tral­ized over time, which could hap­pen by adding more nodes.

Face­book plans to use the rough­ly $1 bil­lion it hopes to gen­er­ate from licens­ing fees to back the cryp­tocur­ren­cy using a bas­ket of cur­ren­cies and low-risk secu­ri­ties from var­i­ous coun­tries, peo­ple famil­iar with the mat­ter said. Back­ing the token with reserves of tra­di­tion­al assets is designed to ensure the token’s price remains sta­ble, unlike oth­er cryp­tocur­ren­cies, which are prone to dra­mat­ic price fluc­tu­a­tions.

...

The token foundation’s trea­sury is man­aged by Suni­ta Para­sur­a­man, pre­vi­ous­ly Facebook’s cor­po­rate head of trea­sury oper­a­tions, cap­i­tal mar­kets and insur­ance, accord­ing to two peo­ple famil­iar with the mat­ter. Face­book also recent­ly appoint­ed Chris­t­ian Catal­i­ni, a renowned pro­fes­sor at the MIT Sloan School of Man­age­ment, as the cryp­to project’s chief econ­o­mist, said one of those peo­ple.

With the plan for 100 nodes on the net­work, the more cen­tral­ized approach Face­book is tak­ing could come as a dis­ap­point­ment to many in the cryp­to indus­try, where most peo­ple favor decen­tral­ized sys­tems that any­one can par­tic­i­pate in. “It’s incred­i­bly dis­ap­point­ing to hear that they have come up with a plan where inclu­sion in the sys­tem costs $10 mil­lion per seat,” said Emin Gün Sir­er, a com­put­er sci­ence pro­fes­sor at Cor­nell who launched his own cryp­tocur­ren­cy net­work. “The entire point of blockchain is reduc­ing bar­ri­ers.”

Facebook’s effort to share con­trol over the cryp­tocur­ren­cy net­work could be a way to pre-empt crit­i­cism about its grow­ing role in its users’ dai­ly lives. The project has already attract­ed the scruti­ny of U.S. law­mak­ers. In May, mem­bers of the Sen­ate Bank­ing Com­mit­tee sent a let­ter to Mr. Zucker­berg seek­ing more infor­ma­tion about Facebook’s cryp­tocur­ren­cy and what data it might seek to col­lect about its users’ spend­ing habits.

———-

“Face­book Plans Out­side Foun­da­tion to Gov­ern Cryp­tocur­ren­cy” by Alex Heath and Jon Vic­tor; The Infor­ma­tion; 06/05/2019

“In recent months, the social net­work has court­ed dozens of finan­cial insti­tu­tions and oth­er tech com­pa­nies to join an inde­pen­dent foun­da­tion that will con­tribute cap­i­tal and help gov­ern the dig­i­tal cur­ren­cy, accord­ing to peo­ple briefed on the plan. The dig­i­tal token, which Face­book is expect­ed to unveil lat­er this month, is designed to func­tion as a bor­der­less cur­ren­cy with­out trans­ac­tion fees and will be aggres­sive­ly mar­ket­ed in devel­op­ing nations where gov­ern­ment-backed cur­ren­cies are more volatile, the peo­ple said.”

Face­book’s vision is a bor­der­less cur­ren­cy with­out trans­ac­tion fees and it’s going to be aggres­sive­ly mar­ket­ed in devel­op­ing nations with more volatile cur­ren­cies. That’s the plan, which means desta­bi­liz­ing the weak­est cur­ren­cies is also part of the plan.

And Face­book real­ly wants to make Libra wide­ly used in day to day com­merce. It’s going to be offer­ing sign up bonus­es for peo­ple at stores. So Face­book could be mak­ing a big aggres­sive glob­al play to main­stream blockchains for com­merce:

...
While the token will be main­ly vis­i­ble to users through Facebook’s suite of apps, includ­ing Mes­sen­ger and What­sApp, the com­pa­ny is also plan­ning ways for the token to be used for pay­ments in the phys­i­cal world. Face­book plans to offer sign-up bonus­es to users in part­ner­ship with mer­chants, who will accept the cryp­tocur­ren­cy as a method of pay­ment in stores, the peo­ple briefed on the plan said. The com­pa­ny also plans to offer phys­i­cal ter­mi­nals sim­i­lar to ATMs where peo­ple will be able to exchange oth­er cur­ren­cies for the token.

This arti­cle is based on inter­views with more than a dozen peo­ple famil­iar with Face­book plans, most of whom request­ed anonymi­ty to speak freely. A Face­book spokesper­son declined to com­ment.
...

And note how Face­book views the blockchain and Libra Asso­ci­a­tion sep­a­rate foun­da­tion mod­el as use­ful for sep­a­rat­ing the ini­tia­tive from Face­book’s own hor­ri­ble track-record on pri­va­cy issues. But it’s also sell­ing the project to gov­ern­ment reg­u­la­tors as a safer ver­sion of blockchain com­merce than Bit­coin with more strin­gent forms of iden­ti­ty ver­i­fi­ca­tion and fraud detec­tion. So main­tain­ing con­trol of the net­work helps Face­book with gov­ern­ments but hurts it with the pub­lic. That will be a ten­sion worth keep­ing in mind as the details roll out over the next year. So add stop­ping mon­ey-laun­der­ing and ille­gal cur­ren­cy-trans­fers to the list of things Face­book can screw up going for­ward:

...
With trust in Face­book marred by a series of pri­va­cy scandals—and grow­ing scruti­ny from antitrust regulators—the com­pa­ny believes that dis­tanc­ing itself from the token’s man­age­ment will help keep reg­u­la­tors at bay. It could also help encour­age the token’s broad adop­tion as a pay­ment sys­tem, some­thing that is more like­ly if over­sight of the cur­ren­cy isn’t con­trolled by a sin­gle com­pa­ny, said the peo­ple briefed on its plans.

The com­pa­ny has been work­ing with gov­ern­ments in coun­tries around the world to approve the use of the token and plans to pro­vide more strin­gent forms of iden­ti­ty ver­i­fi­ca­tion and fraud detec­tion than do most cryp­tocur­ren­cies.
...

And note that this appears to be a per­son­al project of Mark Zucker­berg. Sheryl Sand­berg and Face­book’s chief finan­cial offi­cer, David Wehn­er, have appar­ent­ly been skep­ti­cal of the whole thing. But Zucker­berg told the audi­ence at a recent com­pa­ny devel­op­er con­fer­ence that, “I believe it should be as easy to send mon­ey to some­one as it is to send a pho­to.” So trans­fer­ring mon­ey across bor­ders and mar­ket­ing this to devel­op­ing nations appears to be Zucker­berg’s idea:

...
New Mar­kets

If suc­cess­ful, the token could have a sig­nif­i­cant impact in areas around the world that cur­rent­ly aren’t well-served by the tra­di­tion­al finan­cial sys­tem. Facebook’s enor­mous reach—with more than 2.3 bil­lion users globally—could pro­vide a plat­form for mar­ket­ing the token to users that oth­er cryp­tocur­ren­cies haven’t seen before. The Face­book project, known inter­nal­ly as Libra, was formed rough­ly one year ago when the com­pa­ny announced that ex-Pay­Pal Pres­i­dent David Mar­cus would run a group ded­i­cat­ed to explor­ing blockchain tech­nol­o­gy.

Pay­ments is an area of per­son­al focus for CEO Mark Zucker­berg, who has recent­ly begun to shift the company’s pri­or­i­ties toward build­ing pri­vate forms of com­mu­ni­ca­tion, through ephemer­al mes­sages and encryp­tion. Although it isn’t known how Face­book plans to prof­it from its token, the com­pa­ny doesn’t plan to use it for ad tar­get­ing. While Face­book has said lit­tle about its cryp­tocur­ren­cy plans, Mr. Zucker­berg hint­ed at his ambi­tions at the company’s devel­op­er con­fer­ence in April.

“I believe it should be as easy to send mon­ey to some­one as it is to send a pho­to,” he told the audi­ence.

...

While Mr. Zucker­berg has tak­en a per­son­al inter­est in the project, the company’s chief oper­at­ing offi­cer, Sheryl Sand­berg, and chief finan­cial offi­cer, David Wehn­er, have been skep­ti­cal of the ini­tia­tive inter­nal­ly.
...

And note how Face­book’s blockchain isn’t like Bit­coin where any­one can sign up their com­put­er to be a part of the sys­tem. There will be a $10 mil­lion price of being a ‘node’ that will process trans­ac­tions. Buy­ing a node will also give you access to the foun­da­tion. So the foun­da­tion run­ning this thing is basi­cal­ly for sale. Face­book is only inter­est­ed in start­ing off with 100 nodes which will raise $1 bil­lion that will be spent on main­tain­ing the bas­ket of cur­ren­cies that make it a ‘sta­ble­coin’. Behold the glo­ry of the cryp­to rev­o­lu­tion:

...
More Cen­tral­ized Approach

For months, ques­tions have swirled around how much con­trol Face­book would retain over its planned cryp­tocur­ren­cy. While Face­book is ced­ing much influ­ence to out­side firms, its plans sug­gest that the net­work will still be far more cen­tral­ized than exist­ing blockchains such as Bit­coin, which has no restric­tions on who can val­i­date trans­ac­tions. Blockchains are shared data­bas­es that are main­tained by groups of par­tic­i­pants who run soft­ware to ver­i­fy trans­ac­tions that take place on those net­works.

In the last few months, Face­book has held dis­cus­sions with oth­er com­pa­nies about licens­ing the right to help oper­ate the new cryp­tocur­ren­cy net­work, accord­ing to the peo­ple briefed on the plan. Face­book has dis­cussed an arrange­ment through which the out­side com­pa­nies would each pay $10 mil­lion to oper­ate a node of the network—hardware and soft­ware that will help process trans­ac­tions involv­ing Facebook’s token.

Node oper­a­tors also could send their own rep­re­sen­ta­tives to the foun­da­tion to help stew­ard the net­work. It isn’t known how the node oper­a­tors will prof­it from their par­tic­i­pa­tion, but node oper­a­tors are typ­i­cal­ly reward­ed for their efforts through new­ly unlocked tokens or trans­ac­tion fees from users.

Face­book hopes to launch the net­work with 100 nodes in an effort to lim­it the con­trol a sin­gle enti­ty can have over it, accord­ing to mul­ti­ple peo­ple famil­iar with the mat­ter, although that num­ber is far low­er than on oth­er cryp­tocur­ren­cy net­works. Bit­coin, in com­par­i­son, has thou­sands of nodes val­i­dat­ing trans­ac­tions.

Some of the peo­ple added that the num­ber of nodes could be few­er at launch. The com­pa­ny has dis­cussed design­ing the net­work so that it will become more decen­tral­ized over time, which could hap­pen by adding more nodes.

Face­book plans to use the rough­ly $1 bil­lion it hopes to gen­er­ate from licens­ing fees to back the cryp­tocur­ren­cy using a bas­ket of cur­ren­cies and low-risk secu­ri­ties from var­i­ous coun­tries, peo­ple famil­iar with the mat­ter said. Back­ing the token with reserves of tra­di­tion­al assets is designed to ensure the token’s price remains sta­ble, unlike oth­er cryp­tocur­ren­cies, which are prone to dra­mat­ic price fluc­tu­a­tions.
...

As we might expect, many in the cryp­tocur­ren­cy indus­try isn’t exact­ly enthu­si­as­tic about the struc­ture of Face­book’s grand new scheme. After all, the cypher­punk vision of Bit­coin was that it was going to be a cur­ren­cy no one con­trols. Any­one can become a Bit­coin min­er or node oper­a­tor. But with Face­book’s Libra we have a new blockchain ‘cur­ren­cy’ set up by a ‘big data’ giant that will col­lect all sorts of con­sumer data and will be bor­der­less and mar­ket­ed to the world’s poor­est while it sells access to ‘nodes’ in the blockchain for $10 mil­lion. It’s not exact­ly in keep­ing with the lib­er­a­tion rhetoric that typ­i­cal­ly comes with the blockchain hype. But it is in keep­ing with the right-wing cor­po­ratist lib­er­tar­i­an ide­ol­o­gy that ani­mates much of the blockchain sec­tor:

...
With the plan for 100 nodes on the net­work, the more cen­tral­ized approach Face­book is tak­ing could come as a dis­ap­point­ment to many in the cryp­to indus­try, where most peo­ple favor decen­tral­ized sys­tems that any­one can par­tic­i­pate in. “It’s incred­i­bly dis­ap­point­ing to hear that they have come up with a plan where inclu­sion in the sys­tem costs $10 mil­lion per seat,” said Emin Gün Sir­er, a com­put­er sci­ence pro­fes­sor at Cor­nell who launched his own cryp­tocur­ren­cy net­work. “The entire point of blockchain is reduc­ing bar­ri­ers.”

Facebook’s effort to share con­trol over the cryp­tocur­ren­cy net­work could be a way to pre-empt crit­i­cism about its grow­ing role in its users’ dai­ly lives. The project has already attract­ed the scruti­ny of U.S. law­mak­ers. In May, mem­bers of the Sen­ate Bank­ing Com­mit­tee sent a let­ter to Mr. Zucker­berg seek­ing more infor­ma­tion about Facebook’s cryp­tocur­ren­cy and what data it might seek to col­lect about its users’ spend­ing habits.
...

So Mark Zucker­berg has big plans for Libra, the glob­al cur­ren­cy that will enable free and easy trans­ac­tions and even cross-bor­der trans­fers. Peo­ple can just trans­fer their mon­ey to Libra and con­duct their com­mer­cial trans­ac­tions entire­ly with­in Libra because mer­chants will all accept it. Gov­ern­ments will all be ade­quate­ly lob­bied and Face­book will main­stream the use of Libra as mon­ey for reg­u­lar day-to-day trans­ac­tions, includ­ing with ATMs. And Face­book will con­trol the only cryp­tocur­ren­cy legal­ly avail­able across most of the globe. That’s Zucker­berg’s vision.

And com­pared to the rest of the cryp­tocur­ren­cies out there Libra is a lot more like­ly to suc­ceed. That’s the sad real­i­ty. Face­book and its cor­po­rate part­ners might have the pow­er to make it hap­pen. Face­book, the Orwellian sur­veil­lance giant, is prob­a­bly going to get the first big cryp­tocur­ren­cy suc­cess with a cryp­tocur­ren­cy. Data from Libra will almost cer­tain­ly be heav­i­ly col­lect­ed by Face­book and sold to cor­po­rate part­ners. That’s going to be the thing that does what Bit­coin could nev­er do. A cryp­tocur­ren­cy that you pay for by giv­ing Face­book and its cor­po­rate part­ners even more infor­ma­tion about your life.

And the rev­o­lu­tion con­tin­ues...

Matt Stoller had a recent piece on Face­book’s recent­ly announced cryp­tocur­ren­cy, Libra, that makes a rather cru­cial point about the dan­gers posed by this scheme: The piece list four fun­da­men­tal dan­gers posed by the cre­ation of Libra. First, giv­en Face­book’s scan­dalous track record it’s hard to imag­ine the com­pa­ny suc­cess­ful­ly being able to cre­ate the sys­tems required to watch for activ­i­ty like mon­ey-laun­der­ing, ter­ror­ist financ­ing, tax avoid­ance and coun­ter­feit­ing. Sec­ond, Libra is basi­cal­ly a vio­la­tion of a gen­er­al pro­hi­bi­tion the US has had on the inter­sec­tion between bank­ing and com­merce. The US con­gress has explic­it­ly banned banks from going into non-bank­ing sec­tors due to all of the sys­temic risks and unfair com­pe­ti­tion it would cre­ate, but Face­book is propos­ing to do more or less the same thing. Third, Libra is obvi­ous­ly tak­ing the con­trol of cross-bor­der finan­cial flows out of the hands of gov­ern­ments.

But it’s the final issue that Stoller brings up that should give every­one pause, includ­ing Face­book: If Libra does end up being a glob­al­ly wide­ly used cur­ren­cy that is effec­tive­ly a bank account for mil­lions, poten­tial­ly bil­lions, of peo­ple as Mark Zucker­berg envi­sions, it just might end up achiev­ing ‘too big to fail’ sta­tus. Libra could become so deeply embed­ded into the func­tion­ing of the econ­o­my that the cost of let­ting it fail could be greater than the cost of bail­ing it out. So if you thought you could­n’t hate Face­book more than you already do, just wait for the ‘too big to fail’ pub­lic bailouts:

The New York Times

Launch­ing a Glob­al Cur­ren­cy Is a Bold, Bad Move for Face­book

The way we struc­ture mon­ey and pay­ments is a ques­tion for demo­c­ra­t­ic insti­tu­tions, not tech­nol­o­gy com­pa­nies.

By Matt Stoller

Mr. Stoller is a fel­low at the Open Mar­kets Insti­tute.

June 19, 2019

On Tues­day, Face­book, in part­ner­ship with a sur­feit of oth­er large and pow­er­ful cor­po­ra­tions, includ­ing Uber, Spo­ti­fy, Pay­Pal and VISA, announced that it would lead the effort to cre­ate a new glob­al cur­ren­cy called Libra. “We believe,” says the orga­ni­za­tion that will gov­ern the cur­ren­cy, “that the world needs a glob­al, dig­i­tal­ly native cur­ren­cy that brings togeth­er the attrib­ut­es of the world’s best cur­ren­cies: sta­bil­i­ty, low infla­tion, wide glob­al accep­tance and fun­gi­bil­i­ty.”

As far as I can tell, Face­book aims to build a new pay­ments and cur­ren­cy sys­tem using blockchain tech­nol­o­gy. Face­book is start­ing a sub­sidiary, Cal­i­bra, to “pro­vide finan­cial ser­vices” to indi­vid­u­als and busi­ness­es, includ­ing sav­ing, spend­ing and send­ing mon­ey. The actu­al stan­dards for the cur­ren­cy will be man­aged by a non­prof­it in Switzer­land called the Libra Asso­ci­a­tion. The cur­ren­cy will have its own cen­tral bank known as the Libra Reserve, and the board will be the com­mit­tee of cor­po­ra­tions that helped set it up.

There are already such alter­na­tive cur­ren­cies — known as cryp­tocur­ren­cies — in exis­tence, such as Bit­coin and Rip­ple, but this one will be dif­fer­ent. Today, cryp­tocur­ren­cies are backed sole­ly by the will­ing­ness of users to accept them, not because they have any intrin­sic val­ue or are backed by any gov­ern­ment. This makes such cur­ren­cies unsta­ble. Libra, how­ev­er, will be backed by reserves: If a user buys a dol­lar of Libra, that dol­lar will pre­sum­ably be held in reserve some­where, ready to be hon­ored when some­one sells that Libra. More­over, while most cryp­tocur­ren­cies are hard to use, Libra promis­es to be user-friend­ly and embed­ded into Face­book and What­sApp.

Or so goes the sto­ry. Many of the details of this endeav­or are not pub­lic or have not been decid­ed. But cre­at­ing a glob­al cur­ren­cy is a bold move on Facebook’s part, giv­en that this announce­ment is hap­pen­ing as Face­book is being crit­i­cized or inves­ti­gat­ed for mas­sive pri­va­cy vio­la­tions, anti-com­pet­i­tive prac­tices in the adver­tis­ing mar­ket, erod­ing the free press and foment­ing eth­nic cleans­ing. How­ev­er, it is con­sis­tent with Facebook’s goal of con­tin­u­ing to con­nect the world no mat­ter the con­se­quences, by cre­at­ing a medi­um of exchange that can poten­tial­ly bypass cen­tral banks, bank reg­u­la­tors and exist­ing cur­ren­cy sys­tems.

There are four core prob­lems with Facebook’s new cur­ren­cy. The first, and per­haps the sim­plest, is that orga­niz­ing a pay­ments sys­tem is a com­pli­cat­ed and dif­fi­cult task, one that requires enor­mous invest­ment in com­pli­ance sys­tems. Banks pay atten­tion to details, com­ply­ing with reg­u­la­tions to pre­vent mon­ey-laun­der­ing, ter­ror­ist financ­ing, tax avoid­ance and coun­ter­feit­ing. Recre­at­ing such a com­plex sys­tem is not a project that an insti­tu­tion with the lev­el of pri­va­cy and tech­ni­cal prob­lems like Face­book should be lead­ing. (Or worse, fail­ing to recre­ate such safe­guards could facil­i­tate mon­ey-laun­der­ing, ter­ror­ist financ­ing, tax avoid­ance and coun­ter­feit­ing.)

The sec­ond prob­lem is that, since the Civ­il War, the Unit­ed States has had a gen­er­al pro­hi­bi­tion on the inter­sec­tion between bank­ing and com­merce. Such a bar­ri­er has been rein­forced many times, such as in 1956 with the Bank Hold­ing Com­pa­ny Act and in 1970 with an amend­ment to that law dur­ing the con­glom­er­ate craze. Both times, Con­gress blocked banks from going into non­bank­ing busi­ness­es through hold­ing com­pa­nies, because Amer­i­cans his­tor­i­cal­ly didn’t want banks com­pet­ing with their own cus­tomers. Bank­ing and pay­ments is a spe­cial busi­ness, where a bank gets access to inti­mate busi­ness secrets of its cus­tomers. As one trav­el agent told Con­gress in 1970 when oppos­ing the right of banks to enter his busi­ness, “Any time I deposit­ed checks from my cus­tomers,” he said, “I was pro­vid­ing the banks with the names of my best clients.”

Imag­ine Facebook’s sub­sidiary Cal­i­bra know­ing your account bal­ance and your spend­ing, and offer­ing to sell a retail­er an algo­rithm that will max­i­mize the price for what you can afford to pay for a prod­uct. Imag­ine this car­tel hav­ing this kind of finan­cial vis­i­bil­i­ty into not only many con­sumers, but into busi­ness­es across the econ­o­my. Such con­flicts of inter­est are why pay­ments and bank­ing are sep­a­rat­ed from the rest of the econ­o­my in the Unit­ed States.

...

The third prob­lem is that the Libra sys­tem — or real­ly any pri­vate cur­ren­cy sys­tem — intro­duces sys­temic risk into our econ­o­my. The Libra cur­ren­cy is backed, pre­sum­ably, by bonds and finan­cial assets held in reserve at the Libra Reserve. But what hap­pens if there is a theft or pen­e­tra­tion of the sys­tem? What hap­pens if all users want to sell their Libra cur­ren­cy at once, caus­ing the Libra Reserve to hold a fire sale of assets? If the Libra sys­tem becomes inter­twined in our glob­al econ­o­my in the way Face­book hopes, we would need to con­sid­er a pub­lic bailout of a pri­vate­ly man­aged sys­tem.

Sor­ry, but no thanks: We should not be set­ting up a pri­vate inter­na­tion­al pay­ments net­work that would need to be backed by tax­pay­ers because it’s too big to fail.

And the fourth prob­lem is that of nation­al secu­ri­ty and sov­er­eign­ty. Enabling an open flow of mon­ey across all bor­ders is a polit­i­cal choice best made by gov­ern­ments. And open­ness isn’t always good. For instance, most nations, espe­cial­ly the Unit­ed States, use eco­nom­ic sanc­tions to bar indi­vid­u­als, coun­tries or com­pa­nies from using our finan­cial sys­tem in ways that harm our inter­ests. Sanc­tions enforce­ment flows through the bank­ing sys­tem — if you can’t bank in dol­lars, you can’t use dol­lars. With the suc­cess of a pri­vate par­al­lel cur­ren­cy, gov­ern­ment sanc­tions could lose their bite. Should Face­book and a super­ma­jor­i­ty of ven­ture cap­i­tal­ists and tech exec­u­tives real­ly be decid­ing whether North Kore­an sanc­tions can suc­ceed? Of course not.

A per­mis­sion­less cur­ren­cy sys­tem based on a con­sen­sus of large pri­vate actors across open pro­to­cols sounds nice, but it’s not democ­ra­cy. Today, Amer­i­can bank reg­u­la­tors and cen­tral bankers are hired and fired by pub­licly elect­ed lead­ers. Libra pay­ments reg­u­la­tors would be hired and fired by a self-select­ed coun­cil of cor­po­ra­tions. There are ways to char­ac­ter­ize such a sys­tem, but demo­c­ra­t­ic is not one of them.

Years ago, Mark Zucker­berg made it clear that he doesn’t think Face­book is a busi­ness. “In a lot of ways, Face­book is more like a gov­ern­ment than a tra­di­tion­al com­pa­ny,” said Mr. Zucker­berg. “We’re real­ly set­ting poli­cies.” He has act­ed con­sis­tent­ly as a would-be sov­er­eign pow­er. For exam­ple, he is attempt­ing to set up a Supreme Court-style inde­pen­dent tri­bunal to han­dle con­tent mod­er­a­tion. And now he is set­ting up a glob­al cur­ren­cy.

The way we struc­ture mon­ey and pay­ments is a ques­tion for demo­c­ra­t­ic insti­tu­tions. Any com­pa­ny big enough to start its own cur­ren­cy is just too big.

———-

“Launch­ing a Glob­al Cur­ren­cy Is a Bold, Bad Move for Face­book” by Matt Stoller
; The New York Times; 06/19/2019

“Years ago, Mark Zucker­berg made it clear that he doesn’t think Face­book is a busi­ness. “In a lot of ways, Face­book is more like a gov­ern­ment than a tra­di­tion­al com­pa­ny,” said Mr. Zucker­berg. “We’re real­ly set­ting poli­cies.” He has act­ed con­sis­tent­ly as a would-be sov­er­eign pow­er. For exam­ple, he is attempt­ing to set up a Supreme Court-style inde­pen­dent tri­bunal to han­dle con­tent mod­er­a­tion. And now he is set­ting up a glob­al cur­ren­cy.”

“In a lot of ways, Face­book is more like a gov­ern­ment than a tra­di­tion­al company...We’re real­ly set­ting poli­cies.” We can’t say he did­n’t warn us.

And we can’t say Face­book’s seem­ing­ly end­less string of scan­dals involv­ing a lack of inter­nal safe­guards and/or cor­po­rate ethics did­n’t warn us either, which is exact­ly why Face­book is the last com­pa­ny we should expect to be lead­ing an effort to cre­ate a pri­vate cryp­tocur­ren­cy that does­n’t facil­i­tate bad actors inter­est­ed in mon­ey-laun­der­ing, ter­ror­ist financ­ing, tax avoid­ance and coun­ter­feit­ing. Facil­i­tat­ing bad actors is basi­cal­ly Face­book’s busi­ness mod­el at this point. Don’t for­get that shod­dy track record is one of the rea­sons Face­book is try­ing to obscure its lead­ing role by cre­at­ing a sep­a­rate Libra Asso­ci­a­tion foun­da­tion that will be co-man­aged by the oth­er cor­po­rate investors in Libra:

...
There are four core prob­lems with Facebook’s new cur­ren­cy. The first, and per­haps the sim­plest, is that orga­niz­ing a pay­ments sys­tem is a com­pli­cat­ed and dif­fi­cult task, one that requires enor­mous invest­ment in com­pli­ance sys­tems. Banks pay atten­tion to details, com­ply­ing with reg­u­la­tions to pre­vent mon­ey-laun­der­ing, ter­ror­ist financ­ing, tax avoid­ance and coun­ter­feit­ing. Recre­at­ing such a com­plex sys­tem is not a project that an insti­tu­tion with the lev­el of pri­va­cy and tech­ni­cal prob­lems like Face­book should be lead­ing. (Or worse, fail­ing to recre­ate such safe­guards could facil­i­tate mon­ey-laun­der­ing, ter­ror­ist financ­ing, tax avoid­ance and coun­ter­feit­ing.)
...

Then there’s the fact that let­ting Face­book cre­ate its own cur­ren­cy at the same time its engaged in com­merce is a recipe for tear­ing down the reg­u­la­to­ry walls between banks and the rest of the econ­o­my. Keep in mind that we’ve already seen Face­book work­ing to tear down those walls. Back in August there were reports of Face­book reach­ing out to banks with an offer: give us bank­ing infor­ma­tion on Face­book users in exchange for infor­ma­tion on these users from Face­book. Google and Ama­zon have made sim­i­lar offers to banks. So the tech giants are already very keen on break­ing down what­ev­er walls are left between bank­ing and com­merce in the US. Face­book mere­ly is tak­ing it to the next lev­el. Glob­al­ly. Also keep in mind that the cor­po­rate par­tic­i­pants pay­ing $10 mil­lion each to be a part of Libra are pre­sum­ably going to get access to users’ Libra-relat­ed activ­i­ty. So it’s not just that Face­book is tear­ing down the falls between bank­ing infor­ma­tion and com­mer­cial activ­i­ty for itself. The cor­po­rate part­ners will pre­sum­ably also get the wall torn down to some extent:

...
The sec­ond prob­lem is that, since the Civ­il War, the Unit­ed States has had a gen­er­al pro­hi­bi­tion on the inter­sec­tion between bank­ing and com­merce. Such a bar­ri­er has been rein­forced many times, such as in 1956 with the Bank Hold­ing Com­pa­ny Act and in 1970 with an amend­ment to that law dur­ing the con­glom­er­ate craze. Both times, Con­gress blocked banks from going into non­bank­ing busi­ness­es through hold­ing com­pa­nies, because Amer­i­cans his­tor­i­cal­ly didn’t want banks com­pet­ing with their own cus­tomers. Bank­ing and pay­ments is a spe­cial busi­ness, where a bank gets access to inti­mate busi­ness secrets of its cus­tomers. As one trav­el agent told Con­gress in 1970 when oppos­ing the right of banks to enter his busi­ness, “Any time I deposit­ed checks from my cus­tomers,” he said, “I was pro­vid­ing the banks with the names of my best clients.”

Imag­ine Facebook’s sub­sidiary Cal­i­bra know­ing your account bal­ance and your spend­ing, and offer­ing to sell a retail­er an algo­rithm that will max­i­mize the price for what you can afford to pay for a prod­uct. Imag­ine this car­tel hav­ing this kind of finan­cial vis­i­bil­i­ty into not only many con­sumers, but into busi­ness­es across the econ­o­my. Such con­flicts of inter­est are why pay­ments and bank­ing are sep­a­rat­ed from the rest of the econ­o­my in the Unit­ed States.
...

At the same time, Libra could end up tear­ing down anoth­er form of finan­cial wall: eco­nom­ic sanc­tions. A gov­ern­ment can’t impose eco­nom­ic sanc­tions very effec­tive­ly if there’s a pri­vate glob­al cur­ren­cy built to get around bor­der con­trols. And while it’s pos­si­ble Libra will have the abil­i­ty to restrict its use in response to sanc­tions (assum­ing the mon­ey-laun­der­ing con­trols are work­ing), it will still be up to Face­book and its cor­po­rate part­ners to decide whether or not to abide by the sanc­tions one gov­ern­ment requests against anoth­er. And not agree­ing to abide by sanc­tions is a great way for Libra to boost its brand and get new users in a coun­try fac­ing those sanc­tions. It’s an exam­ple of how Face­book isn’t assum­ing gov­ern­ment-like pow­ers for itself. It’s assum­ing glob­al-gov­ern­ment-like pow­ers for itself.

And, sure, a case can cer­tain­ly be made that sanc­tions are an overused tool that inflicts unrec­og­nized lev­els of depri­va­tion on soci­eties, so there are prob­a­bly going to be plen­ty of cas­es where the abil­i­ty to get around sanc­tions is a human­i­tar­i­an net-good. But also keep in mind that sanc­tions are often imposed as an inter­me­di­ary step before all out war so if the loss of sanc­tions-mak­ing abil­i­ties could end up being a war-mon­ger’s dream sce­nario:

...
And the fourth prob­lem is that of nation­al secu­ri­ty and sov­er­eign­ty. Enabling an open flow of mon­ey across all bor­ders is a polit­i­cal choice best made by gov­ern­ments. And open­ness isn’t always good. For instance, most nations, espe­cial­ly the Unit­ed States, use eco­nom­ic sanc­tions to bar indi­vid­u­als, coun­tries or com­pa­nies from using our finan­cial sys­tem in ways that harm our inter­ests. Sanc­tions enforce­ment flows through the bank­ing sys­tem — if you can’t bank in dol­lars, you can’t use dol­lars. With the suc­cess of a pri­vate par­al­lel cur­ren­cy, gov­ern­ment sanc­tions could lose their bite. Should Face­book and a super­ma­jor­i­ty of ven­ture cap­i­tal­ists and tech exec­u­tives real­ly be decid­ing whether North Kore­an sanc­tions can suc­ceed? Of course not.

A per­mis­sion­less cur­ren­cy sys­tem based on a con­sen­sus of large pri­vate actors across open pro­to­cols sounds nice, but it’s not democ­ra­cy. Today, Amer­i­can bank reg­u­la­tors and cen­tral bankers are hired and fired by pub­licly elect­ed lead­ers. Libra pay­ments reg­u­la­tors would be hired and fired by a self-select­ed coun­cil of cor­po­ra­tions. There are ways to char­ac­ter­ize such a sys­tem, but demo­c­ra­t­ic is not one of them.
...

Final­ly, there’s per­haps the biggest prob­lem with Libra: if it suc­ceeds, it might be too big to fail. And that means if it does fail we’re going to be look­ing at the poten­tial need for a pub­lic bailout. A pub­lic bailout of a pri­vate­ly run glob­al cur­ren­cy:

...
The third prob­lem is that the Libra sys­tem — or real­ly any pri­vate cur­ren­cy sys­tem — intro­duces sys­temic risk into our econ­o­my. The Libra cur­ren­cy is backed, pre­sum­ably, by bonds and finan­cial assets held in reserve at the Libra Reserve. But what hap­pens if there is a theft or pen­e­tra­tion of the sys­tem? What hap­pens if all users want to sell their Libra cur­ren­cy at once, caus­ing the Libra Reserve to hold a fire sale of assets? If the Libra sys­tem becomes inter­twined in our glob­al econ­o­my in the way Face­book hopes, we would need to con­sid­er a pub­lic bailout of a pri­vate­ly man­aged sys­tem.

Sor­ry, but no thanks: We should not be set­ting up a pri­vate inter­na­tion­al pay­ments net­work that would need to be backed by tax­pay­ers because it’s too big to fail.
...

It’s a pret­ty big sign that you’re ambi­tions are too large if suc­cess means its too big to fail. But that’s where we are: if every­thing Face­book promis­es pans out and Libra is a giant glob­al suc­cess there’s no way it can be allowed to fail because it will drag down large swatch­es of glob­al com­merce with it and poten­tial­ly the entire economies of nations that heav­i­ly adopt it. So if some­thing hap­pens that makes Libra finan­cial­ly unsta­ble the cost of bail­ing it out could eas­i­ly be less than the cost of allow­ing it to implode. But who’s going to pay? Which nations are respon­si­ble for bail­ing out a pri­vate cur­ren­cy used glob­al­ly? IT’s even more com­pli­cat­ed by the fact that Zucker­berg has made devel­op­ing nations with unsta­ble cur­ren­cies a tar­get mar­ket for Libra. So poor peo­ple in devel­op­ing nations will like­ly feel the impact of any Libra fail­ures the most even but wealthy nations like the US would real­is­ti­cal­ly have to lead any bailouts. Good luck with that.

Yep, Libra might be ‘too big to fail and too com­pli­cat­ed too bail’. It’s anoth­er inno­va­tion in bad cor­po­rate ambi­tions brought to you by Face­book.

Did a lone Bit­coin ‘whale’ man­age to sin­gle-hand­ed­ly manip­u­late the Bit­coin mar­ket and cre­ate the mas­sive 2017 bub­ble that saw Bit­coin near­ly reach $20,000 before burst­ing? Yes, based on the research of two aca­d­e­mics who stud­ied the bit­coin trans­ac­tions dur­ing that year. Although the ‘whale’ did­n’t do it entire­ly on their own. They had help, in the form of Teth­er, a ‘sta­ble­coin’ that claims each coin is backed by US dol­lars. Accord­ing to their research, when­ev­er the price of Bit­coin fell far enough, there was a surge in Bit­coin buy­ing on the cryp­to­coin exchange Bitfinex and it appears that Teth­er coins were being used to make the pur­chas­es. Crit­i­cal­ly, it also appears that the new­ly gen­er­at­ed Teth­er coins were NOT backed by dol­lars and it just hap­pens to be the case that the own­ers of Teth­er also own Bitfinex. So the Bitfinex exchange was basi­cal­ly gen­er­at­ing sales on its by issu­ing Teth­er ‘sta­ble­coins’ that were backed by noth­ing, allow­ing the unnamed ‘whale’ to seem­ing­ly move mar­ket prices at will:

Bloomberg

A Lone Bit­coin Whale Like­ly Fueled 2017 Surge, Study Finds

* Aca­d­e­mics update paper that alleges manip­u­la­tion using Teth­er
* Research paper is ‘foun­da­tion­al­ly flawed,’ Teth­er lawyer says

By Matthew Leis­ing and Matt Robin­son
11/04/2019
Updat­ed

A Texas aca­d­e­m­ic cre­at­ed a stir last year by alleg­ing that Bitcoin’s astro­nom­i­cal surge in 2017 was prob­a­bly trig­gered by manip­u­la­tion. He’s now dou­bling down with a strik­ing new claim: a sin­gle mar­ket whale was like­ly behind the mis­con­duct, seem­ing­ly with the pow­er to move prices at will.

One enti­ty on the cryp­tocur­ren­cy exchange Bitfinex appears capa­ble of send­ing the price of Bit­coin high­er when it falls below cer­tain thresh­olds, accord­ing to Uni­ver­si­ty of Texas Pro­fes­sor John Grif­fin and Ohio State University’s Amin Shams. Grif­fin and Shams, who have updat­ed a paper they first pub­lished in 2018, say the trans­ac­tions rely on Teth­er, a wide­ly used dig­i­tal token that is meant to hold its val­ue at $1.

“Our results sug­gest instead of thou­sands of investors mov­ing the price of Bit­coin, it’s just one large one,” Grif­fin said in an inter­view. “Years from now, peo­ple will be sur­prised to learn investors hand­ed over bil­lions to peo­ple they didn’t know and who faced lit­tle over­sight.”.

Teth­er reject­ed the claims, with Gen­er­al Coun­sel Stu­art Hoeg­n­er argu­ing in a state­ment that the paper is “foun­da­tion­al­ly flawed” because it is based on an insuf­fi­cient data set. The research was prob­a­bly pub­lished to back a “par­a­sitic law­suit,” the gen­er­al coun­sel added.

Bitfinex and Teth­er aren’t new to con­tro­ver­sy. The exchange is owned and oper­at­ed by the same exec­u­tives who con­trol Teth­er, and mul­ti­ple traders have ques­tioned a key asser­tion about the coins — that each one is backed by one U.S. dol­lar. The tan­gled web has attract­ed scruti­ny from the U.S. Jus­tice Depart­ment and New York’s attor­ney gen­er­al, who accused Bitfinex in an April law­suit of try­ing to hide the loss of hun­dreds of mil­lions in cus­tomer funds.

Grif­fin and Shams’s hypoth­e­sis that Bit­coin was manip­u­lat­ed is based part­ly on the the­o­ry that new Teth­ers are cre­at­ed with­out the dol­lars to back them and then used to buy Bit­coin, lead­ing to ris­ing prices. The authors exam­ined Teth­er and Bit­coin trans­ac­tions from March 1, 2017 to March 31, 2018, con­clud­ing that Bit­coin pur­chas­es on Bitfinex increased when­ev­er Bitcoin’s val­ue fell by cer­tain incre­ments. Grif­fin and Shams didn’t name the enti­ty on Bitfinex that they think was respon­si­ble. They shared their updat­ed research with Bloomberg News.

“This pat­tern is only present in peri­ods fol­low­ing print­ing of Teth­er, dri­ven by a sin­gle large account hold­er, and not observed by oth­er exchanges,” they wrote in their new peer-reviewed paper, set to be pub­lished in a forth­com­ing Jour­nal of Finance. “Sim­u­la­tions show that these pat­terns are high­ly unlike­ly to be due to chance. This one large play­er or enti­ty either exhib­it­ed clair­voy­ant mar­ket tim­ing or exert­ed an extreme­ly large price impact on Bit­coin that is not observed in aggre­gate flows from oth­er small­er traders.”

‘Mon­ey Grab’

In his state­ment, Tether’s Hoeg­n­er was adamant that the alle­ga­tions laid out in the paper have no mer­it.

“This is a trans­par­ent attempt to use the sem­blance of acad­e­mia for a mer­ce­nary mon­ey grab,” Hoeg­n­er said. “Updates or not, the paper lacks aca­d­e­m­ic rig­or.”

...

Grif­fin, respond­ing to Hoegner’s state­ment, said nei­ther he nor Shams “have any per­son­al or finan­cial con­nec­tions to the law­suit” that the Teth­er gen­er­al coun­sel men­tioned.

“If there is suf­fi­cient data that Bitfinex has that can prove their claims they should release such data to the pub­lic to ana­lyze,” Grif­fin said in a state­ment.

Both Bitfinex and Teth­er received sub­poe­nas in 2017 from the U.S. Com­mod­i­ty Futures Trad­ing Com­mis­sion, Bloomberg report­ed at the time. The Jus­tice Depart­ment has since opened a crim­i­nal inves­ti­ga­tion into whether Teth­er was being used to manip­u­late Bit­coin. Nei­ther the CFTC nor fed­er­al U.S. pros­e­cu­tors have accused Bitfinex or Teth­er of any wrong­do­ing.

$850 Mil­lion

In her law­suit, New York Attor­ney Gen­er­al Leti­tia James said Teth­er and Bitfinex exec­u­tives par­tic­i­pat­ed in a cov­er-up after about $850 mil­lion in client and cor­po­rate funds alleged­ly went miss­ing. Bitfinex has said that James’ suit is rid­dled with erro­neous asser­tions.

At the heart of James’ claims is Cryp­to Cap­i­tal Corp., a Pana­man­ian pay­ment pro­cess­ing firm that Bitfinex used to allow some cus­tomers to deposit mon­ey on the exchange.

In late Octo­ber, a Cryp­to Cap­i­tal offi­cial was arrest­ed as part of a Pol­ish probe for alleged­ly laun­der­ing the pro­ceeds of drug sales for an inter­na­tion­al crime group. The sus­pect, in accord­ing with Pol­ish rules pre­vent­ing the release of full names, was iden­ti­fied as Ivan M.L. by the county’s Nation­al Prosecutor’s Office. Pol­ish media, includ­ing Radio RMF, said the sus­pect is Ivan Manuel Moli­na Lee, Cryp­to Capital’s pres­i­dent. Poland deport­ed him to Greece.

Fol­low­ing the arrest, Tether’s Hoeg­n­er said in a state­ment to Bloomberg that “Bitfinex is the vic­tim of a fraud and is and is mak­ing its posi­tion clear to the rel­e­vant author­i­ties, includ­ing those in Poland and the Unit­ed States.”

———–

“A Lone Bit­coin Whale Like­ly Fueled 2017 Surge, Study Finds” by Matthew Leis­ing and Matt Robin­son; Bloomberg; 11/04/2019

““This pat­tern is only present in peri­ods fol­low­ing print­ing of Teth­er, dri­ven by a sin­gle large account hold­er, and not observed by oth­er exchanges,” they wrote in their new peer-reviewed paper, set to be pub­lished in a forth­com­ing Jour­nal of Finance. “Sim­u­la­tions show that these pat­terns are high­ly unlike­ly to be due to chance. This one large play­er or enti­ty either exhib­it­ed clair­voy­ant mar­ket tim­ing or exert­ed an extreme­ly large price impact on Bit­coin that is not observed in aggre­gate flows from oth­er small­er traders.””

Thanks to the fact that every trans­ac­tion on the blockchain is pub­licly avail­able for analy­sis, pat­terns of trad­ing can be ana­lyzed in detail. And it just so hap­pens that these researchers found the same pat­tern over and over: when the price of Bit­coin dropped, there was a surge of new Teth­er coin issuance and Bit­coins were pur­chased at Bitfinex, lead­ing to a ris­ing in Bit­coin’s price. And a sin­gle large account hold­er appeared to be behind this activ­i­ty:

...
Bitfinex and Teth­er aren’t new to con­tro­ver­sy. The exchange is owned and oper­at­ed by the same exec­u­tives who con­trol Teth­er, and mul­ti­ple traders have ques­tioned a key asser­tion about the coins — that each one is backed by one U.S. dol­lar. The tan­gled web has attract­ed scruti­ny from the U.S. Jus­tice Depart­ment and New York’s attor­ney gen­er­al, who accused Bitfinex in an April law­suit of try­ing to hide the loss of hun­dreds of mil­lions in cus­tomer funds.

Grif­fin and Shams’s hypoth­e­sis that Bit­coin was manip­u­lat­ed is based part­ly on the the­o­ry that new Teth­ers are cre­at­ed with­out the dol­lars to back them and then used to buy Bit­coin, lead­ing to ris­ing prices. The authors exam­ined Teth­er and Bit­coin trans­ac­tions from March 1, 2017 to March 31, 2018, con­clud­ing that Bit­coin pur­chas­es on Bitfinex increased when­ev­er Bitcoin’s val­ue fell by cer­tain incre­ments. Grif­fin and Shams didn’t name the enti­ty on Bitfinex that they think was respon­si­ble. They shared their updat­ed research with Bloomberg News.
...

Keep in mind one of the key dynam­ics here: the pri­ma­ry rea­son the issuance of new Teth­er coins could dri­ve the rise in the price of Bit­coins is because Teth­er claims each of its coins are backed a dol­lar. Oth­er cryp­tocur­ren­cies also issue new coins all the time, but those coins can’t be eas­i­ly used to pur­chase Bit­coins because there’s noth­ing back­ing them. So if Teth­er was issu­ing ‘sta­ble­coins’ that weren’t actu­al­ly backed by a real cur­ren­cy that’s fraud. And it appears that fraud was crit­i­cal to the record surge in the price of Bit­coin.

One of the ques­tions raised by this sto­ry is whether or not the Teth­er coins not backed by a cur­ren­cy were some­how sold to the ‘whale’ at a dis­count­ed price and if that was part of the scam. Or did Bitfinex/Tether decide to issue unbacked coins to ful­fill a demand they did­n’t oth­er­wise have the cash meet? At this point we have no idea. We just know that a sin­gle ‘whale’ appeared to be capa­ble of impos­ing a price floor on Bit­coin dur­ing that record ral­ly and Teth­er was an impor­tant part of that strat­e­gy. And more gen­er­al­ly, this ‘whale’ appeared to be capa­ble of mov­ing the mar­kets at will.

It will be inter­est­ing to see what impact sto­ries like this have on the price of Bit­coin. Oh wait...