Frictionless tokens create friction

We’re gonna need another intermediary…

In 2013-15 it was trendy for online merchants to pretend to accept bitcoin as payment. It was a very cheap way to get positive media mentions and seem innovative. Overstock, Dell, Tiger direct… they were all at it after they realised it was all media upside. Even Virgin Galactic accepted bitcoin as payment for trips to space at some point (Note: I think paying for a trip to space with bitcoins is actually quite cool).

Of course, the vast majority of merchants didn’t really accept bitcoins and hold them on their balance sheet – they didn’t even touch bitcoin. They used third party intermediary processors such as Bitpay and Bitgo to give the illusion of accepting bitcoins (or other cryptocurrencies), while receiving dollars (or other fiat) into their third party intermediary bank account, facilitated by third party intermediary messaging networks such as SWIFT.

Here’s how it works:

  1. The merchant prices things in dollars (of course it does – its costs are in dollars, its accounting is in dollars, and the value of a dollar is relatively stable and predictable).
  2. The customer chooses to “Pay with bitcoin”
  3. The payment processor checks the price of bitcoin vs dollar on a bunch of cryptocurrency exchanges and uses a proprietary algorithm to determine its own view of the exchange rate.
  4. The payment processor displays the derived amount of bitcoins the customer should pay, for a short period on the screen – sometimes as short as 30 seconds before repricing (30 seconds! Not a good unit of account!).
  5. The customer chooses to accept the price and makes a bitcoin payment to the payment processor.
  6. The payment processor tells the merchant that the payment is made, and later wires the dollars to the merchant the old fashioned way.
  7. The payment processor is now long bitcoins and short dollars, and decides how and when to hedge this risk.

Fast forward to today. There is a proliferation of token-based businesses. With some notable exceptions when tokens are actually useful, such as to make permissionless blockchains ‘go’, the ICOs are selling basically securities, then trying to make the securities appear useful for something other than speculation – usually by saying “the tokens will be used to pay for an unquantified amount of my product or service at some unspecified point in time”. This, for the time being, seems to keep the regulators happy.

Think about this. You’re going to need a token for each of these things. The tokens are volatile. You earn fiat currency, you spend fiat currency, you account in fiat currency. Why on earth would you hold a bunch of volatile tokens in your wallet just in case you want to use some online service at some point in the future? Tokens that tie up your wealth and can only be used for one thing? It’s like having a bunch of book vouchers, air miles, and half stamped loyalty cards – they are a modern scourge (and ironically, some blockchain companies are trying to make it easier to turn your loyalty points back into something useful, like money!).

You would prefer to have money than air miles.
You would prefer to have money than loyalty points.
You would prefer to have money than casino chips.
You would prefer to have money than fairground tokens.
You would prefer to have money than jukebox credits.

The convenient thing about money is that it can be used for more than exactly one thing.

So, here’s how it’s going to work: Normal people who aren’t token speculators will hold fiat, and they will exchange them for tokens at the very last minute via a new third party intermediary payment processor whose job will be to turn whatever stable currency you have into tokens for the purpose of paying for that service. Like the cashier at a casino.

But isn’t that a cryptocurrency exchange?… Yes but to buy cloud storage you probably don’t want to set up an account with an exchange, send in an id-selfie, wire in dollars, wait a few days, buy the token, request a withdrawal, then make the token payment. You probably just want to click a button. So it has to be as seamless as possible.

So, despite the much adored “frictionless” narrative, we’re actually adding more intermediaries, who have to be paid and who cause more friction.

Ideas on solutions are welcome in the comments!

Useful new ICO metrics for 2018

I’ve been at a few events recently where people talk about the “market cap(italisation)” of utility tokens issued in ICOs, and comparing them to the market cap of cryptocurrencies or (even worse) listed companies.  This is truly dreadful and misleading, perhaps sometimes intentionally so.  In this post I introduce two useful metrics for comparing across ICOs: the Reserve ratio, and the Commitment ratio.

For a non-hypey introduction to ICOs please see A gentle introduction to ICOs.

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Bitcoin price, gold, and nonsense – how not to value bitcoins

Important note: If you own more than $1,000 worth of cryptocurrency then you should definitely be using a hardware wallet instead of keeping coins on exchanges.  I recommend a Trezor which you can buy for €89 directly from their website.


Every few days I hear the argument “If x% of the money in gold (or other asset class) moved into bitcoin, a single bitcoin should be worth $y”.  This article explains why this argument is utter nonsense.

The (flawed) reasoning is as follows: the total value of gold in circulation is estimated at US$8 trillion.  If some small fraction of the people holding gold (say, 5%) sold their gold for US Dollars (releasing $400 bn), and the USD proceeds were used to buy bitcoins, the total value of bitcoins (commonly referred to as “market capitalisation”) would increase by that amount of dollars ($400bn), and because we know the total number of bitcoins in circulation, we can derive a price per bitcoin.  Continue reading

MAS just released Corda for Central Banks… so what?

I’m absolutely thrilled to be able to write about the open sourcing of Project Ubin Phase II, a key project that our team has been working on for the past seven months with the Monetary Authority of Singapore (MAS), ten banks, and our partner Accenture.

UbinPhase2

Ubin Phase 2 report

What is Project Ubin?  It’s probably the most advanced starter kit out there for anyone wanting to explore blockchains for banking:

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Blockchains and central banks – what have we learnt?

This article was first posted on r3.com

Over the past couple of years, R3 has worked closely with a number of central banks to explore if distributed ledgers could support their policy goals, and I have had the privilege to participate in a number of these projects.

What have we learnt?  What is important?  What do central banks care about?  While I can’t speak directly for individual organisations, I have collated my own thoughts, and wanted to share these ahead of the Singapore FinTech Festival this year (13-17 Nov) when the results of Singapore’s “Project Ubin” experiments will be announced.

Update (post FinTech Festival): Read about the Open Sourcing of “Corda for Central Banks“!

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The hype around central banks, digital currencies, and blockchains

Central banks and blockchainThere has been a lot of hype around central banks, interbank payments, blockchains, and central bank digital currencies (CBDCs), but the narrative has become confusing and often misses the point.  What’s going on?  Actually two independent things are being actively explored:

  1. Decentralisation of interbank payment systems
  2. Wider access to digital central bank money (Central Bank Digital Currencies – CBDCs)

I aim to explain them both in this post.

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A gentle introduction to interbank payment systems

How do banks pay each other?  In most countries, when banks want to transfer money to each other, perhaps upon instruction from a customer, they don’t put bundles of banknotes in vans, they pay each other digitally.  How does this work?

This post is intended as a primer about payment systems and explains correspondent banking, nostros, real time gross settlement (RTGS) systems and deferred net settlement (DNS) systems.  It supports other posts where I discuss decentralisation of these systems using distributed ledgers.

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