Hot Takes

blockchain-mode-le-une
The blockchain powered future is amazing and maybe even a little scary.

This week Peter Coy and Olga Khariff wrote a thorough examination of the state of “blockchain” for Bloomberg BusinessWeek. It looks at some of the technology’s use cases being developed by banks and even companies like Toyota, which is imagining a smart contract system to govern car loans:

Some ideas for blockchain are a little scary. Toyota Financial Services has toyed with using a blockchain contract in which “if a finance payment isn’t made, the smart contract automatically transfers ownership and doesn’t let the owner use the car anymore. The car wouldn’t turn on,” says Chris Ballinger, the unit’s chief financial officer and global chief officer for strategic innovation. “People would do this voluntarily, because they can then finance at a lower rate.”

It goes on to highlight the bigger dreams of some blockchain enthusiasts. That is, to fundamentally improve how groups of people organize themselves by removing the need for intermediaries.

After streamlining companies, the next step for blockchain will be blowing them up. Ethereum, for one, goes beyond the ledger function to work more like Google Docs—shared software that can be used by all but is tamperproof. You can safely do business with someone you don’t know, because terms are spelled out in a “smart contract” embedded in the blockchain. There could be blockchain versions of Uber and Airbnb that are peer-to-peer: No company would need to sit in the middle of the transaction to gather data about your spending habits or collect a fee.

The entire piece is worth reading, not just for its clean summary of the current state of play for this technology, but also its thoughtful approach to examining what life in a world increasingly streamlined by smart contracts built on blockchains might be like.

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chicago
Come meet Coin Center in Chicago on June 5th.

The Chicago Bitcoin & Open Blockchain Community meetup has invited Coin Center’s Jerry Brito to give an overview of the regulatory challenges facing these technologies, what we are doing to address them, and what you can do to help.

He’ll be joined by Meltem Demirors of Digital Currency Group, who will be going over their perspective as a major investor in the space.

Monday, June 5, 2017

5:45 PM

3519 N Elston Ave, Chicago, IL 60618, Chicago, IL

More information and registration are available on MeetUp.com.

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usv-fireside
Open blockchains have all kinds of startup innovators excited.

That’s what we took away from a fireside chat that Brad Burnham conducted with Peter and me at Union Square Ventures’ office this week. The room was mostly comprised of startup employees from USV portfolio companies that don’t have anything to do with blockchain, but know that something important is happening with this technology and wanted to learn more.

Through the evening we covered a broad range of topics: tokenized crowdfunds and our views on the appropriate way to build those from a regulatory perspective, the new things that the novel features of cryptocurrencies such as micropayments and multi-sig transactions make possible, what decentralized trusted computing platforms (such as Ethereum) are, and the importance of permissionless, open blockchain networks.

It was clear that the animated audience was thinking through how to best apply these technologies to their current and future projects. There was particular interest in tokenized crowdfunding and what this phenomenon means for startups. Could this technology totally change the relationship between investors and businesses? Or businesses and their customers? Will developing open platforms become more economically feasible than it has been traditionally? As more and more entrepreneurial minds begin exploring applications of open blockchains, we’ll soon find out.

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peter-epicenter
More mainstream use will help regulators understand Bitcoin's benefits.

That’s what Peter Van Valkenburgh, Coin Center’s director of research, said when he went on the Epicenter podcast recently. The wide ranging interview, which covered topics such as the differences between open and closed blockchains and the regulatory considerations for appcoin crowdfunding, is embedded below. Or, if you prefer text, Bitcoin Magazine captured the highlights.

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wannacrypt
Why ransomware criminals use Bitcoin and why that could be their undoing.

Last week's major ransomware attack put Bitcoin back into spotlight. With that comes questions about what Bitcoin is, how it works, and why it is apparently favored by ransomware hackers.

Coin Center director of research Peter Van Valkenburgh was on the Marketplace radio show yesterday to talk through these questions. On why hackers are using Bitcoin, he said:

"The efficiency of the network is what criminals are really using it for here. It's electronic cash, so it’s easy to write software that can automatically demand payment and automatically demand that payment has been made."

He goes into more detail on what that means in his blog post, "Why Bitcoin is not the root cause of ransomware:"

"Bitcoin is particularly useful here because it’s fast, reliable, and verifiable. The hacker can simply watch the public blockchain to know if and when a victim has paid up; she can even make a unique payment address for each victim and automate the process of unlocking their files upon a confirmed bitcoin transaction to that unique address.

The truth is that criminals have, as usual, very strict design parameters for the tools they use because there’s no tech-support, contract, or legal recourse for a criminal whose tools fail to perform as they should. Criminals are using Bitcoin in this case because it’s a reliable system that just works. Ransomware hackers are rather like the proverbial rumrunners of prohibition: they like fast custom cars because almost everyone else is still driving a Model T."

Of course, as many have pointed out, there is an inherent problem with the choice to use cryptocurrency in this attack. The open, transparent, nature of bitcoin blockchain transactions means that the global community is closely watching the ransom money. This is going to make converting it into fiat currency pretty difficult to get away with. As Peter told the International Business Times:

"In the US, every major bitcoin exchange is regulated by FINCEN. Right now the $50,000 extorted from victims is just sitting on the bitcoin network...that [exchange into local currency] is where you're vulnerable to being identified."

We’ve detailed how law enforcement can use the bitcoin blockchain to track criminals before and have already seen high profile cases in which blockchain forensics exposed criminals. All they need to do is slip up once and a global community of professional and enthusiast cyber crime fighters will jump on them.

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fred-dinner
Get your tickets for the Coin Center Annual Dinner.

The blockchain community’s biggest night out is fast approaching. Please join us on May 22 in New York City, after the first day of Consensus 2017, for a fundraising gala in support of Coin Center’s policy mission.

Wences Casares, CEO of Xapo, will be the evening’s keynote speaker. Casares has been a central figure in driving Bitcoin forward since the earliest days and has an unshakable vision for the technology.

We expect this event to sell out. If you haven’t already, get your tickets today.

Special thanks to the dinner sponsors: Kraken, Fidelity Labs, Poloniex, Alphapoint, Bloq, the Charles Koch Institute, CIGI, Pantera Capital, Perkins Coie, and ShapeShift.

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waitingcustomers
Wary banks may be choking off the blockchain industry.

Aggressive de-risking is nothing new for digital currency businesses. Last year we released a report documenting the difficulty these startups had been having in securing banking relationships. Now the problem has gotten much worse with three exchanges, including the world’s largest, reporting that they are completely unable to process deposits or withdrawals, leaving customer funds trapped within their system. The Wall Street Journal has the story:

J.P. Morgan Chase & Co. prohibits banks it transacts with from dealing with virtual-currency exchanges, according to an internal document seen by The Wall Street Journal. Standard Chartered PLC also doesn’t process such transactions, according to a spokesman.

To be able to transact with the wider financial system, bitcoin exchanges must play cat-and-mouse, said Bitfinex’s Mr. Potter, continually switching bank accounts.

“They close one account, we open another somewhere else,” Mr. Potter said. “It’s a battle, but it looks like one that we appear to be losing, largely because we’re the largest such exchange in the world and we’ve got the biggest target painted on our back.”

Digital currency companies are not alone in overzealous targeting for this cut -off from the legacy financial system. Last week a Washington Post report showed that groups attempting to deliver aid to war-torn regions are suffering as well. While the goal of stopping money laundering and terrorist financing is a noble one, the incentives in place today might be driving regulators and banks to go far beyond what’s necessary and reasonable and could drive innovation overseas.

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The CSBS is suing the OCC to stop the new special purpose national bank charter for fintech firms.

In a press release, CSBS (the Conference of State Bank Supervisors) makes some alarming claims, suggesting the OCC is doomed to fall asleep at the switch, allow firms to fail, and leave fintech customers and US taxpayers as hapless victims:

The OCC’s proposed action ... harms markets and innovation, and puts taxpayers at risk of inevitable fintech failures. This is a dangerous combination and one the court should decisively halt

That sounds fantastical. The OCC is a heavy duty regulator with a century-plus-long track record; it’s not as if becoming a national bank is some easy feat, or that compliance costs are trivial. Also, as we and several others have stressed in comments throughout the OCC’s (very transparent and careful) responsible innovation proceeding, applying the patchwork of state-by-state licensing and oversight to global-by-default internet businesses is extremely costly. Any other claims aside, it's hard to imagine how providing a unified federal alternative could be bad for innovation and competition.

Moreover, if the states are doing such a great job at promoting innovation and protecting consumers, then why be so defensive here? The OCC’s charter merely provides a new alternative route to becoming a regulated fintech company; companies are free to continue seeking licensing and oversight from the states if they so choose.

Regardless of who is ultimately in the right here, this could become a turf war between powerful regulators with consumers and companies playing the part of unwitting pawns. This is not the sort of unified approach to regulating innovators that is likely to make the U.S. a technological leader. The Financial Conduct Authority in the UK and the Monetary Authority of Singapore may increasingly become the safest ports in a growing storm.

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Based in Washington, D.C., Coin Center is the leading non-profit research and advocacy center focused on the public policy issues facing cryptocurrency and decentralized computing technologies like Bitcoin and Ethereum. Our mission is to build a better understanding of these technologies and to promote a regulatory climate that preserves the freedom to innovate using permisionless blockchain technologies.