Tag Archives: Blockchain

Initial Coin Offerings and the Pecking Order

On Alphaville, Izabella Kaminska comments on the pecking order induced by initial coin offerings (ICOs).

All of this raises an important point about actual shareholder rights within these structures. Say a legally-incorporated institution with actual shareholders dishes out an uncapped amount of tokens promising a share of revenues or dividends via the ICO process. Do shareholders’ rights to those revenue/dividends trump rights of the token holders? And if so, how does that square with the way risk is distributed through these systems? As Unseth notes, more often than not, it’s the token holders taking the bulk of the early concept risk, yet the inferiority of their ranking relative to shareholders kind of sees the latter receiving a free lunch.

Governments Adopt the Blockchain, To Improve Efficiency and Build Trust

The Economist reports about government initiatives aimed at using blockchain technology in the public sector.

  • Possible uses include land registries, identity-management systems, health-care records, or elections.
  • Proponents expect the technology to improve efficiency and transparency and foster trust.
  • Adoption requires significant investments.
  • According to a survey “nine in ten government organisations say they plan to invest in blockchain technology to help manage financial transactions, assets, contracts and regulatory compliance by next year.”
  • Sweden tests a blockchain-based land registry; Dubai’s government wants to completely shift to blockchain technology by 2020; Estonia stores health records and protects its shared government systems using blockchain-like technolog; Georgia’s land registry uses blockchain technology and has processed 160,000 transactions; Ukraine wants to become “one of the world’s leading blockchain nations,” not least to build trust between government and citizens.

Smart Ponzi Games in the Blockchain

On the FT’s Alphaville blog, Izabella Kaminska points to a paper by Italian academics arguing that the Ethereum technology tends to incubate Ponzi schemes.

The uniqueness of the “smart Ponzi” is its capacity to protect the identity of the initiator but also its ability to persist even after being exposed. Since contracts are unmodifiable and thus unstoppable there is no central authority to terminate the execution of the scheme or force the initiator to refund victims. What’s more, the inability to shut it down means victims can be led to believe the scheme will last forever.

Does Decentralized Intermediation Add Value?

On the FT’s Alphaville blog, Izabella Kaminska questions the value of decentralization (and thus, blockchain technology) in intermediation.

Decentralisation is, in almost all cases, not an efficiency. To the contrary, it’s a cost that adds complexity and creates an unnecessary burden for both users and operators unless centralised layers are added on top of it — defying the whole point. …

At the end of the day, there are only two groups of people prepared to go to costly lengths to decentralise a service which is already available (in what is often a much higher quality form) in a centralised or conventional hierarchal state. One group is criminals and fraudsters. The other is ideologues and cultists. …

It’s not privacy, because a centralised system can be encrypted just as much as a blockchain-based one.

Bitcoin Unlimited

On Bloomberg, Yuji Nakamura and Lulu Yilun Chen report about conflicting views in the Bitcoin community on how to address capacity limits in the blockchain.

Bitcoin Unlimited is essentially a software upgrade to the blockchain. Years ago, bitcoin’s early developers imposed a cap on the amount of data it could process. While that slowed down the network, it was seen as a necessary safety measure against potential attackers who could overload the system. Now, Unlimited supporters say the blockchain is robust enough that it doesn’t need any limit at all.

While most agree the blockchain is stronger, critics … say that removing the data cap is a risky move which will leave bitcoin vulnerable to governments and global banks. Without a limit, large organizations would use their resources to out-muscle smaller miners and effectively take control of the blockchain and bitcoin itself.

“Vollgeld, the Blockchain, and the Future of the Monetary System”

Presentation at the Liechtenstein Institute about the Vollgeld initiative, the blockchain revolution, and their possible effects on banks and the monetary system.

Report in Liechtensteiner Vaterland, February 1, 2017. HTML.

Interview in Wirtschaft Regional, February 4, 2017. PDF.

Krypto Currencies and Privacy

On Wired, Andy Greenberger discusses Monero, Dash, and Zcash, krypto currencies that provide more privacy than bitcoin and its derivatives.

Unlike commercial services like PayPal, Bitcoin allows anyone to spend money online without providing identifying details. But if someone’s Bitcoin address is linked with their real identity, any transaction from that address is entirely visible on the public blockchain … Hiding those transactions requires taking extra steps, like routing bitcoins through “tumblers” that mix up coins with those of strangers—and occasionally steal them—or using techniques like “coinjoin,” built into some bitcoin wallet programs, that mix payments to make them harder to trace. “If I pay my rent in Bitcoin, it wouldn’t be that hard for the landlord to figure out how much money I earned if I don’t take extra precautions” …

Monero … implements a few features that Bitcoin still can’t offer. It uses a technique called “stealth addresses” to generate addresses for receiving Monero that are essentially encrypted; the recipient can retrieve the funds, but no one can link that stealth address to the owner. It employs a technique called “ring signatures,” which means every Monero spent is grouped with as many as a hundred other transactions, so that the spender’s address is mixed in with a group of strangers, and every subsequent movement of that money makes it exponentially more difficult to trace back to the source. And it uses something called “ring confidential transactions,” which hides the amount of every transaction.

Monero isn’t the first cryptocurrency designed to offer a financial privacy panacea: Dash, formerly known as Darkcoin, integrates the “coinjoin” technique that allows bitcoin users to mix their transactions with a few other spenders in what Todd calls a weaker form of anonymity than Monero offers. More recently, Zcash debuted with the strongest anonymity promises yet—it uses cryptographic tricks designed to make tracing a transaction not only unlikely, but mathematically impossible. Zcash has yet to be integrated into dark web markets, though, and still requires wielding the command line to use.

“Wer hat Angst vor Blockchain? (Who’s Afraid of the Blockchain?),” NZZ, 2016

NZZ, November 29, 2016. HTML, PDF. Longer version published on Ökonomenstimme, December 14, 2016. HTML.

Central banks are increasingly interested in employing blockchain technologies, and they should be.

  • The blockchain threatens the intermediation business.
  • Central banks encounter the blockchain in the form of new krypto currencies, and as the technology underlying new clearing and settlement systems.
  • Krypto currencies bear the risk of “dollarization,” but in the major currency areas this risk is still small.
  • New clearing and settlement systems benefit from central bank participation. But central banks benefit as well; those rejecting the new technology risk undermining the attractiveness of the home currency.

“Central Banking and Bitcoin: Not yet a Threat,” VoxEU, 2016

VoxEU, October 19, 2016. HTML.

  • Central banks are increasingly interested in employing blockchain technologies.
  • The blockchain threatens the intermediation business.
  • Central banks encounter the blockchain in the form of new krypto currencies, and as the technology underlying new clearing and settlement systems.
  • Krypto currencies bear the risk of “dollarization,” but in the major currency areas this risk is still small.
  • New clearing and settlement systems benefit from central bank participation. But central banks benefit as well; those rejecting the new technology risk undermining the attractiveness of the home currency.
  • See the original blogpost.

How Does the Blockchain Transform Central Banking?

The blockchain technology opens up new possibilities for financial market participants. It allows to get rid of middle men and thus, to save cost, speed up clearing and settlement (possibly lowering capital requirements), protect privacy, avoid operational risks and improve the bargaining position of customers.

Internet based technologies have rendered it cheap to collect information and to network. This lies at the foundation of business models in the “sharing economy.” It also lets fintech companies seize intermediation business from banks and degrade them to utilities, now that the financial crisis has severely damaged banks’ reputation. But both fintech and sharing-economy companies continue to manage information centrally.

The blockchain technology undermines the middle-men business model. It renders cheating in transactions much harder and thereby reduces the value of credibility lent by middle men. The fact that counter parties do not know and trust each other becomes less of an impediment to trade.

The blockchain may lend credibility to a plethora of transactions, including payments denominated in traditional fiat monies like the US dollar or virtual krypto currencies like Bitcoin. An advantage of krypto currencies over traditional currencies concerns the commitment power lent by “smart contracts.” Unlike the money supply of fiat monies that hinges on discretionary decisions by monetary policy makers, the supply of krypto currencies can in principle be insulated against human interference ex post and at the same time conditioned on arbitrary verifiable outcomes (if done properly). This opens the way for resolving commitment problems in monetary economics. (Currently, however, most krypto currencies do not exploit this opportunity; they allow ex post interference by a “monetary policy committee.”) A disadvantage of krypto currencies concerns their limited liquidity and thus, exchange rate variability relative to traditional currencies if only few transactions are conducted using the krypto currency.

Whether blockchain payments are denominated in traditional fiat monies or krypto currencies, they are always of relevance for central banks. Transactions denominated in a krypto currency affect the central bank in similar ways as US dollar transactions, say, affect the monetary authority in a dollarized economy: The central bank looses control over the money supply, and its power to intervene as lender of last resort may be diminished as well. The underlying causes for the crowding out of the legal tender also are familiar from dollarization episodes: Loss of trust in the central bank and the stability of the legal tender, or a desire of the transacting parties to hide their identity if the central bank can monitor payments in the domestic currency but not otherwise.

Blockchain facilitated transactions denominated in domestic currency have the potential to affect central bank operations much more directly. To leverage the efficiency of domestic currency denominated blockchain transactions between financial institutions it is in the interest of banks to have the central bank on board: The domestic currency denominated krypto currency should ideally be base money or a perfect substitute to it, directly exchangeable against central bank reserves. For when perfect substitutability is not guaranteed then the payment associated with the transaction eventually requires clearing through the traditional central bank managed clearing mechanism and as a consequence, the gain in speed and efficiency is relinquished. Of course, building an interface between the blockchain and the central bank’s clearing system could constitute a first step towards completely dismantling the latter and shifting all central bank managed clearing to the former.

Why would central banks want to join forces? If they don’t, they risk being cut out from transactions denominated in domestic currency and to end up monitoring only a fraction of the clearing between market participants. Central banks are under pressure to keep “their” currencies attractive. For the same reason (as well as for others), I propose “Reserves for All”—letting the general public and not only banks access central bank reserves (here, here, here, and here).

Banking on the Blockchain

In the NZZ, Axel Lehmann offers his views on the prospects of blockchain technologies in banking. Lehmann is Group Chief Operating Officer of UBS Group AG.

New possibilities:

  • Higher efficiency; lower cost; more robustness and simpler processes; real-time clearing;
  • no need for intermediaries; information exchange without risk of interference
  • automated “smart contracts;” automated wealth management;
  • more control over transactions; better data protection;
  • improved possibilities for macro prudential monitoring.


  • Speed; scalability; security;
  • privacy;
  • smart contracts require new contract law;
  • interface between traditional payments system and blockchain payment system.

Lehmann favors common standards and he points out that this is what is happening (R3-consortium with UBS, Hyperledger project with Linux foundation).

Related, Martin Arnold reported in the FT in late August that UBS, Deutsche Bank, Santander, BNY Mellon as well as the broker ICAP pursue the project of a “utility settlement coin.” Here is my reading of what this is:

  • The aim seems to be to have central banks on board; so USCs might be a form of reserves (base money). The difference to traditional reserves would be that USCs facilitate transactions using distributed ledgers rather than traditional clearing and settlement mechanisms. (This leads to the question of the appropriate interface between the two systems posed by Lehmann.)

But what’s in for central banks? Would this be a test before the whole clearing and settlement system is revamped, based on new blockchain technology? Don’t central banks fear that transactions on distributed ledgers might foster anonymity?

Commitment within Reach, Part II

The Economist reports about cyber thieves “outsmarting” a smart contract.

Well, what does that mean? Engaging with a code that runs in all states of the world is to engage with a complete contract. How can one outsmart a complete contract?

Previous post on smart contracts and commitment.

Commitment within Reach

In the FT, Richard Waters reports about the advent of the automated company.

The DAO — an acronym of decentralised autonomous organisation, the name given to such entities — has been set up to invest in other businesses, making it a form of investor-directed venture capital fund. … The organisation is governed by a set of so-called smart contracts which run on the Ethereum blockchain, a public ledger designed to make its operations transparent and enforceable.

In other words, the code provides a commitment mechanism. Imagine a world where government interventions can be encoded in a similar way. This could open the way for solving a central problem of democratic societies: The time inconsistency of optimal government plans.

Blockchains in Banking (Commercial and Central)

The Economist reports about initiatives by commercial and central banks that aim at adopting the blockchain technology.

For commercial banks, distributed ledgers promise various advantages—but they also cause problems:

Instead of having to keep track of their assets in separate databases, as financial firms do now, they can share just one. Trades can be settled almost instantly, without the need for lots of intermediaries. As a result, less capital is tied up during a transaction, reducing risk. Such ledgers also make it easier to comply with anti-money-laundering and other regulations, since they provide a record of all past transactions (which is why regulators are so keen on them).

… Yet … [o]ne stumbling block is what geeks call “scalability”: today’s distributed ledgers cannot handle huge numbers of transactions. Another is confidentiality: encryption techniques that allow distributed ledgers to work while keeping trading patterns, say, private are only now being developed. … Such technical hurdles can be overcome only with a high degree of co-operation …

Meanwhile, central banks plan digital currencies built around the same technology.

Like bitcoin, these would be built around a database listing who owns what. Unlike bitcoin’s, though, these “distributed ledgers” would … be tightly controlled by the issuers of the currency.

The plans involve letting individuals and firms open accounts at the central bank …

Central banks … could save on printing costs if people held more bits and fewer banknotes. Digital currency would be tougher to forge, though a successful cyber-attack would be catastrophic. Digital central-bank money could even, in theory, replace cash. …

Better yet, whereas bundles of banknotes can be moved without trace, electronic payments cannot. … The technology first developed to free money from the grip of central bankers may soon be used to tighten their control.



is a decentralized platform that runs smart contracts: applications that run exactly as programmed without any possibility of downtime, censorship, fraud or third party interference.

These apps run on a custom built blockchain, an enormously powerful shared global infrastructure that can move value around and represent the ownership of property. This enables developers to create markets, store registries of debts or promises, move funds in accordance with instructions given long in the past (like a will or a futures contract) and many other things that have not been invented yet, all without a middle man or counterparty risk.

Decentralization through the Blockchain?

The Economist reviews the blockchain technology underlying Bitcoin—“a way of making and preserving truths.”

It is the blockchain that replaces this trusted third party. A database that contains the payment history of every bitcoin in circulation, the blockchain provides proof of who owns what at any given juncture. This distributed ledger is replicated on thousands of computers—bitcoin’s “nodes”—around the world and is publicly available. But for all its openness it is also trustworthy and secure. This is guaranteed by the mixture of mathematical subtlety and computational brute force built into its “consensus mechanism”—the process by which the nodes agree on how to update the blockchain in the light of bitcoin transfers from one person to another.

One interesting aspect of the blockchain technology is that it provides incentives for “mining”, rendering it self-sustainable. The future may lie in blockchain applications beyond payments, for example in securities clearance, certification and the like.

Fintech Competition for Banks

In a series of articles, The Economist reports about technology companies that compete with traditional banks in areas ranging from lending to payments and wealth management.

The introductory article refers to AngelList and references reports by Goldman Sachs (The Future of Finance, copy posted here), BCG and Accenture. And it highlights two factors driving the structural change which I have also emphasized in a recent article: Technology and vanishing trust in banks. The other articles cover:

Updates—some more firms in the business: