Blockchain comes to the boil

William Essex reports about some very interesting times in the blockchain and cryptocurrency space.

First Published: e-Forex Magazine 76 / CryptoCurrencies / September, 2017

Bitcoin spent August exploring a volatile high (and splitting in two, see below), while a Swiss private bank adopted blockchain-based asset management – adding crypotocurrency trading shortly afterwards (ditto) – and no fewer than eleven banks “passed a major milestone in the digitisation of documentary trade finance” (as the documentation puts it; again, more below). Blockstream, an outfit better known for its work in cryptography and sidechain-development, announced the launch of Blockchain Satellite, which takes us into space (where connectivity is not an issue but global reach is – see the box How big a step for blockchain?), and in New York (in late July), LedgerX was granted the first US federal government licence to trade, clear and settle digital-currency swap contracts.

While all that was going on, the “enterprise blockchain company” Nuco announced the “multi-tier blockchain network” Aion. This will connect compatible but independent blockchains and thereby “allow the instant global transfer and recording of data and value”; thus, it promises to jump a significant developmental obstacle for blockchain. Matthew Spoke, CEO of Nuco, says: “Today’s blockchains don’t talk to each other at all. With Aion, blockchains will be able to federate, interoperate, and scale in a model similar to the internet itself.” If you spent August on the beach, welcome back: everything’s changed. If, in a few years’ time, you spend August on the moon, your blockchain-enabled devices will remain connected.

In his book published in 2000 (by Little Brown), Malcolm Gladwell defines The Tipping Point as “the moment of critical mass, the threshold, the boiling point”. Is blockchain coming to the boil? Certainly seems that way. If so, what next?

Crypto-digital word games

Some say digital, some say crypto. There’s a difference but it’s mainly of emphasis – in that the terms are used loosely and sometimes interchangeably. If you ask the Bank of England, you find that a digital currency is “a means of payment that only exists electronically [that] can be used to buy physical goods and services”. The Bank “provides electronic accounts to banks and key financial institutions, but the public can only hold central bank money in physical form”.

Victoria Cleland
Victoria Cleland

That may change, and the article Digital future for Sterling: assessing the implications by Chief Cashier Victoria Cleland (July 2017) is a worthwhile read, not least for its closing assertion that “A Central Bank-issued Digital Currency will [my emphasis] create some fascinating opportunities.” Cleland refers to Bitcoin and others as cryptocurrencies, and debates whether “central banks will issue their own equivalent – a central bank-issued digital currency”.

What’s in a name? Good question. Some squiggly bits of code (excuse the non-jargon), a lot of history and a distinction between public and private. Expect the “crypto-” prefix to disappear once governments get into the act (or start using “digital” instead of the alternative if you want to encourage them).

Organic evolution?

Before we answer that, let’s start with a blue-sky thought. It is a factor in blockchain development that much of it happens outside finance. In our industry, for the best of reasons, we’re regulated, we’re cautious and we’ve developed a valid, effective methodology for innovation. That’s good. But what we don’t consistently capture are the wildly innovative, left-field, bright-spark, lightbulb moments that don’t make any obvious kind of business sense but do occasionally change the world. Such ideas can be “tamed”, but they have to be wild first.

Fortunately for our long-term profitability, finance increasingly overlaps with technology, which in turn overlaps with – how does one put this? Spontaneity, creativity and a tendency not to judge ideas by their (present-day, quantifiable) commercial viability. Not to overstate this, but if you accept the basic premise that interesting ideas can be imported from outside finance (a theme taken up by Innotribe at this year’s Sibos in Toronto, by the way), you will be interested to read our Q&A this month with Jon Jacobs, CEO of Neverdie, who is working to develop “a universal cryptocurrency designed to be used across virtual reality worlds, games and events”.

That’s a universal cryptocurrency for a billion-dollar global industry that is unusual in that it could use but doesn’t yet have an FX market, let alone a common currency. Invited to speculate on whether his initiative might one day have an application in the real world, Jacobs says: “Part of the charm of what is happening right now is the introduction of so many new currencies and tokens which are essential for balancing local economies. Perhaps through the Atomic Swap [see box], we can enjoy the diversity of so many currencies while at the same time universal currencies will evolve organically like BTC and ETH.” Not quite yes, but a thought-provoking distance from no. At risk of stating the obvious, Neverdie’s Teleport Token is convertible with USD.

And did we mention that while Mr Jacobs is working towards a universal cryptocurrency, Nuco’s Matthew Spoke is sewing together all the blockchains? Oh yes – we did. If you’re detecting a theme here - over to you.

Meanwhile, back down here on Planet Finance, our own industry’s collective move towards blockchain gathers pace.

The go-to private bank

To pick up where our opening paragraph left off, at end-July LedgerX received US-government approval to operate the first federally-regulated exchange and clearing house for derivatives contracts settling in digital currencies. You can now hedge Bitcoin and other digital currencies using exchange-traded and centrally cleared options contracts. Paul Chou, CEO, LedgerX, says: “We are seeing strong demand from institutions that previously could not participate in the Bitcoin market due to compliance restrictions against unregulated venues.”

Digital currencies are not correlated with equities, as Chou points out, but the wider point here is that, although we’re talking about currencies and derivatives, the underlying story is all about infrastructure. Speaking to eForex a year ago (Q2 2016), following his appointment to the Commodity Futures Trading Commission (CFTC)’s Technology Advisory Committee, Chou said that institutional involvement in Bitcoin “would indirectly fund research and infrastructure development being undertaken all around the world”. In the same interview, Chou went on to say: “Having a federally regulated clearing house with Bitcoin expertise is necessary for the broader ecosystem.”

Paul Chou
Paul Chou

It’s tempting to get just a little bit excited at this point. But instead, let’s take a look at an equally significant development in another part of the ecosystem (to use Chou’s term). As briefly mentioned earlier, the Zurich-based Falcon Private Bank now provides blockchain-based asset management; the new service is part of a “strategic repositioning which focuses on shaping a unique experience empowered by individual excellence and world-class digital intelligence”. As part of that, clients of Falcon Private Bank can also now trade Ether, Litcoin, Bitcoin and Bitcoin Cash (we’re coming to that) through the broker Bitcoin Suisse. “Falcon Private Bank was the first bank to offer Bitcoin directly to its clients. Their decision to follow up by adding Ether as well as other crypto-assets has made them the go-to private bank for crypto-asset holders and investors,” says Niklas Nikolajsen, CEO, Bitcoin Suisse. [There’s a Bitcoin ATM in the lobby of Falcon Private Bank’s head office on Pelikanstrasse in Zurich, if you’re passing that way.]

So on the one hand, we have a regulated venue for derivatives, and on the other, we have high-net-worth and institutional clients of a Swiss bank piling into crypto-trading. In the space between them, we have (1) a number of initiatives aimed at expanding the coverage, reach and/or universality of blockchain and/or crypotocurrencies, and (2), not to be overlooked, that array of creative people doing interesting things and generally acting as though nobody’s told them that this stuff is supposed to be difficult.

What’s everybody else doing?

BLOCKCHAIN AROUND THE WORLD

The People’s Bank of China chose the first Monday in September to announce a ban on ICOs (initial coin offerings), coupled with a stipulation that monies thus raised must be returned to investors. Vietnam announced an initiative to create a legal framework for digital assets, and the Australian government debated a bill to bring cryptocurrencies and exchanges within the scope of regulation. Russia’s communications minister, Nikolay Nikiforov, called for the development of an indigenous Russian cryptocurrency, because Bitcoin and Ethereum use foreign cryptography, while rumours continued to circulate that members of the US Congress were drafting a bill to protect some cryptocurrencies from US-government interference. Colombia’s central bank joined the consortium working with R3’s Corda distributed-ledger technology.
Blockchain, in short, has got the world’s attention.

Player portfolio

Mostly, working together. Blockchain is having a very positive effect on the co-operative space. Those eleven banks mentioned in the opening paragraph – they’ve developed a prototype application on R3’s Corda distributed-ledger platform that “has the potential significantly to reduce inefficiencies and costs by streamlining the processing of sight letters of credit”. To give credit where credit’s due (sorry), the banks are Bangkok Bank, BBVA, BNP Paribas, HSBC, ING, Intesa Sanpaolo, Mizuho, RBS, Scotiabank, SEB and U.S. Bank. They’ve been working with R3 and technology partner CGI; their application incorporates shippers and carriers; the aim is to go live in 2018 (after a piloting phase).

“Like so many of the processes and systems banks are forced to use today, the infrastructure that supports trade financing is extremely outdated and prone to risk and error,” says David Rutter, CEO, R3. The optimistic news is not simply that banks are working together to address that issue, but also that – taking into account every other initiative cited so far in this article – the world is changing around them, in their favour. Blockchain is going global – going into orbit, even – and individual blockchains are beginning to talk to each other. You can find high-net-worth asset-management on blockchain, and at the end of the day, you can play your way to a virtual portfolio big enough to be worth managing.

Atomic Swaps as Lightning strikes

This might be one for next time, actually. There’s a whole lot of work going on around the idea of interoperable cryptocurrencies. The “Lightning Network” would enable the instant exchange (the “atomic swap”) of, say, litecoins and bitcoins between two end-users without recourse to a third party – not even a cryptocurrency exchange. Atomic swaps and the Lightning Network aren’t new ideas, and the internet is awash with hypothetical work-throughs, all of which seem to involve Alice and Bob, who don’t trust each other.

Closing birdirectional channel

But this is an idea whose time seems to have come; at least, it’s an idea that’s getting a lot of attention. The Lightning Network may soon be connecting cryptocurrencies, and that may mean that even the most tightly permissioned blockchains may gain access to an additional customer-delivery channel. Let’s hope that before too long, Alice and Bob find a way to pay for their relationship counselling. 

No, I know we haven’t discussed the Bitcoin split. As anybody who follows any of the Bitcoin-related news feeds will know by now, Bitcoin went through a “hard fork” on 1st August 2017. Setting aside the technicalities, there are now two distinct cryptocurrencies: Bitcoin (BTC) and Bitcoin Cash (BCH). The difference between them is nothing to do with sugar content, except to the extent that one, BCH, transacts much more quickly than the other. You can realistically expect to buy a cup of coffee with BCH – seriously, this was a recurring argument for the hard fork – in that your payment will have settled in the time it takes the barista to make the little palm-tree shape on the flat white surface. Back in the day, long queues built up at BTC coffee shops due to block-size limitations on the BTC blockchain.

Too much technicality? But seriously, that is the point. For the purposes of this article, the significance of the Bitcoin hard fork is that there is now a form of Bitcoin that works for day-to-day retail transactions. Technology has moved on since buying a coffee with Bitcoin was a thing (actually, we take Dash, or a thumbprint, or a retinal scan, or just wave your card near the till), but the Bitcoin hard fork does provide a useful conclusion to an article arguing that blockchain is breaking through everywhere, along with cryptocurrencies. It’s enough, for this article, that even Bitcoin is prepared to change to make itself more useful. But it’s also significant, if we go back to our moment of blue-sky thinking earlier, that there’s such a “wall of creativity” built up behind blockchain and cryptocurrencies. If you still want to buy a coffee, okay, they’ll give you a fork.

Bitcoin’s split was a function of its popularity. Demand for this volatile currency commodity asset new thing (that’s so difficult for national legislators to define) has been slowing down the transaction processing that is integral to it. But the split also highlights something else. It has been a feature of IT development from way back that developers, early adopters and enthusiasts really want it to work. Same for all of us, really. We like our gadgets, and we want them to handle our diaries, driving, grocery shopping, coffee buying, garage doors, lighting and heating. Among people who can make it happen, that same wanting now applies to blockchain. The point is not easy to substantiate, except anecdotally (and by citing the grim determination of the Bitcoin community to buy you a coffee), but with blockchain in space now (reaching parts of Africa, for example, that banks can’t reach) and cryptocurrencies spreading even into virtual reality, it would probably be a mistake to discount the simple (complex?) creative enthusiasm of the innovators and left-fielders.

What next? More blockchain. Prepare to be surprised.

How big a step for blockchain?

Blockstream’s new Blockstream Satellite service broadcasts “real-time” Bitcoin blockchain data from satellites in space to “almost everyone on the planet”. The idea is to extend Bitcoin usage to people who don’t have or can’t afford broadband (or any) internet. Blockstream Satellite already covers “two thirds of the Earth’s landmass” and is planned to reach everybody else by end-2017.
Dr Adam Back, co-founder and CEO, Blockstream, says: “With more users accessing the Bitcoin blockchain with the free broadcast from Blockstream Satellite, we expect the global reach to drive more adoption and use cases for Bitcoin, while strengthening the overall robustness of the network.” Blockstream Satellite sends blocks in real-time, as well as recirculates older blocks, thus “providing free access to the Bitcoin blockchain for both long-time and new users of the cryptocurrency”.

The Blockstream Satellite network broadcasts the Bitcoin blockchain from space
The Blockstream Satellite network broadcasts the Bitcoin blockchain from space

Blockstream Satellite also potentially extends the scope for crypto-finance, crypto-innovation and perhaps even new forms of crypto-financial institution into parts of the world that are well beyond the reach of today’s banks and regulators. Expect more articles on this. In the meantime, find out more at https://blockstream.com/satellite.