Category Archives: Globalization

Bitcoin Cross the Chasm: Libra pushes it over

After 10 years of existence, and having increased in price by a factor of a million or so even while supply increased by a factor of seven, Bitcoin has crossed the chasm. Ironically, Facebook supplied the final push when they announced their Libra plans on June 18th.

Bitcoin’s high value is founded on two very strong attributes: security and scarcity. In addition it is highly divisible, fungible, and easily and rapidly transportable across the world. But there are thousands of cryptocurrencies that have those latter attributes. Yet they each have a small fraction of Bitcoin’s value. In fact about 2/3 of the value of all cryptocurrencies combined ($300 billion, approximately) is found in Bitcoin alone, at roughly $200 billion.

How can the price increase in a decade by a factor of a million even as supply went up? Because hashing rate, that drives up security, has increased even more, around a factor of a trillion. This made Bitcoin much more desirable to hold as a store of value. 

The growth in hashing power for the Bitcoin blockchain, logarithmic scale (Chart from blockchain.com)

Security

Security comes from hashing power applied to the mining process. Cryptocurrency mining via Proof of Work is the most effective consensus algorithm to maximize security for a decentralized accounting ledger. This computational hashing power is in the form of specialized ASIC hardware specifically designed for rapidly calculating the Proof of Work algorithm.

Bitcoin has steadily grown to an enormous 70 Exahashes of hashing power deployed around the world. That is 70 million trillion hashes per second. The hash rate has grown by a factor of 1000 in the past five years, with more mining pool nodes and better hardware. 

The coin with the second position in hash rate, Bitcoin Cash, a clone or hard fork of the original Bitcoin, has only 3% as much hash rate.

There is that much computing power directed toward solving the cryptographic puzzle, and with the winner claiming the current block reward of 12.5 Bitcoins each 10 minutes or so. Some $19 million is mined per day, at the current price of $10,750 thus it is worth throwing lots of compute power into the solution.

Security can be measured by how much it costs to mount a 51% attack on Bitcoin.  It costs around $1 million to rent enough compute power for an hour of mining; this would allow a counterfeiter to double spend, but the value of double spent coins would be less than the rental expense.

A 51% attack would not invalidate ledger entries that contain your Bitcoin received yesterday or five years ago, just as a new counterfeit dollar does not replace your existing one. The clever design of the Bitcoin blockchain means that each ten minute block added after a particular block increases the security of that particular block exponentially.

The more hash rate, the more security.

While some have criticized Bitcoin’s electricity consumption, roughly equivalent to Ireland’s needs, the conversion of electricity to secure information is at the heart of what provides Bitcoin value. The electricity is not wasted, energy is encapsulated as value; electrons are turned into secure bits. The electricity used in Bitcoin mining should be compared to the much greater use of electricity and energy in gold mining, for example, or in the offices and computational facilities of the banking system.

Furthermore, 74% of Bitcoin’s electricity is from renewable supply, especially  hydropower. 

Scarcity

The world has never seen a form of money with scarcity as great as that of Bitcoin. To be money, one requires divisibility for a standard unit of account, and stability in the supply.

Gold coins and silver coins have been used in the past because of the relative scarcity of these precious metals, formed only in supernovae. Gold, unlike silver, does not increase in quantity much each year since most gold ever mined is still around in the form of jewelry or bars or coins. The supply rate increase is around 1.6% per year. Historically, large new discoveries made a difference, but those days seem to be behind us. Asteroid mining of gold is decades into the future.

The yearly increase in supply depends on how the price for gold moves, mining discoveries and development, and the cost of energy and other inputs to the mining process. But the supply increase is rather stable. There are total above-ground stocks of around $8 trillion. One-quarter of that, some $2 trillion, is held by central banks around the world.

Governments have moved away from the gold standard during the last century, and all government issued money is now fiat fractional reserve currency, issued as debt. The supply is influenced by (and sometimes more directly controlled by) committees at the central bank through monetary policy. The increase in supply of dollars currently runs at over 4% per annum. Consumer price inflation is lower, around 2%, due to productivity increases in the economy.

Bitcoin new supply each day and each year is not determined by committees of Ph.D. economists and bankers, as in the case of fiat, nor influenced by its price, as in the case of gold! If the amount of hashing power drops in response to a price drop, the Bitcoin mining difficulty that is embedded in the algorithm automatically decreases and there is still one new block issued every 10 minutes on average, containing the equivalent of 12.5 shiny new Bitcoins.

Bitcoin’s supply increase is all baked into the Nakamoto consensus: there will be at most 21 million Bitcoin ever issued, and that final number is not reached for another 120 years. However, current supply is already at 17.8 million Bitcoins, so there are only 3.2 million more that will ever be created.

The limited supply does not restrict Bitcoin’s use as a medium of exchange since each Bitcoin can be subdivided into 100 million units of Satoshis (sats). Thus even if Bitcoin reached $1 million in price, each sat would be worth just a penny.

Approximately every 4 years the supply issuance rate is cut in half by means of cutting the block reward in half. These quadrennial events are called Halvings (or ‘Halvenings’). That means inflation decreases continually as (a) the stock grows, and (b) the rate of new coin issuance decreases. At the next Halving the block reward (block subsidy, formally) will decrease to 6.25 Bitcoins from the current 12.5 reward. At the Halving after that it will decrease to 3.125 Bitcoins per block.

While in its early years the supply increase rate was quite high for Bitcoin, now it is at a reasonable 3.8%, less than the US dollar supply increase of over 4%. And at the next Halving in May 2020 it will be cut to 1.8%. (The rate drops more than by half since the existing stock is growing every 10 minutes as well). By 2024, the inflation rate will drop under 1% and it will continually decrease inexorably toward zero.

Bitcoin supply gets tighter and tighter, unlike fiat currencies with continued variable inflation and the risk of inflation getting out of control.

PlanB has built a very nice model of Bitcoin price vs. scarcity, using stock-to-flow ratios, which represent the inverse of the annual percentage supply (flow). Existing stock refers to the total number of Bitcoin ever mined. Flow is the new supply rate. Thus stock-to-flow is the number of years’ of supply, at current rates, that would be required to double the outstanding stock. 

Bitcoin will never, ever, double its outstanding stock, because stock-to-flow keeps tightening in the hard-coded Bitcoin supply algorithm. In the PlanB model, price correlates very well, at 95%, with a high power of the stock-to-flow variable, roughly the cube of that ratio. Bitcoin’s stock-to-flow will double, and be close to gold’s as of next year.  And since market cap (value of all Bitcoin) has correlated with such a steep power law, this is a big deal.

Double feedback loop

The beauty of Bitcoin’s design is that security and scarcity work together in a self-reinforcing pair of cooperating feedback loops as shown in the figure below. 

In the upper loop, we are indicating that Bitcoin is already scarcer each year relative to increasing dollar supply, and as of next year’s Halving, it will be continually scarcer relative to all fiat currencies and match gold as well. This increased scarcity drives price higher. 

In the lower loop, we are indicating that higher prices encourage more mining power, more hashing power, and that increases security. Increased security drives prices higher. 

And thus scarcity increases security. And increases in both work to increase the price. 

The long term outlook is excellent. Volatility is high at present due to a relatively thin market compared to gold, currencies, and Facebook or Apple stock. It will decrease with time as more value is captured into Bitcoin.

Both scarcity and security work in concert to drive Bitcoin price upwards. Copyright 2019, MoneyorDebt

Asset or debt?

All fiat currencies represent debt. Fiat currencies are issued in exchange for debt of individuals, corporations, or governments.

Facebook’s Libra is a debt-based token. It is a so-called stable coin backed by a basket of fiat currencies, which themselves represent debt. Money Creation 101: a bank makes a loan and new money is created; a central bank buys a treasury bill and new money can be created. There is no limit to the amount that can be created (apart from likely regulatory restrictions); it will be created and destroyed relative to demand.

Libra has a model of centralized security, managed by an Association of some 28 companies, and it has no scarcity other than that of the reserve basket of fiat currencies that back it. Libra cannot increase in value, rather its value inflates away along with the Dollar, Euro, Yen, and Pound components of the basket. Bitcoin is an asset, a pure asset with no associated debt. Like gold it comes into existence by a mining process, but mining occurs on computers rather than from the ground. If there is a debt crisis or banking crisis, Bitcoin is not affected, in fact, it would be sought after. Bitcoin was created by Satoshi Nakamoto in 2008/2009 in large part as a response to the debt crisis that brought on the Great Recession a decade ago.

Store of value or medium of exchange?

Money must be a store of value, a medium of exchange, and a unit of account. The default unit of account around the world is the US dollar, but the other main currencies such as the Euro, Pound, Yen, and Yuan are major units of account.

All of the over 100 fractional reserve currencies score highly in the medium of exchange category, at least within their own borders. They do not store value for the long term, losing half their value every decade or two or three depending on the strength of the particular currency and varying inflation rate.

Bitcoin is designed, like gold, first and foremost as a store of value, with its very constrained monetary supply. Its monetary policy is even superior to that of gold, and completely defined in advance.

No other money has ever had its monetary policy for the next hundred and even thousand years laid out in advance. Gold was the closest, but new mine discoveries always added major supply increases.

Bitcoin has been criticized on the medium of exchange front, but it is improving in that regard as well. First, remember that it is subdivided into a hundred million sats, so small quantities are not a problem. Fees are sometimes high, but trivial if you are moving large amounts, and much less expensive than the costs of bank wires or moving gold. Transfers are much more rapid, occurring within an hour for sufficiently secure confirmation.

The Lightning network and other second layer solutions such as wrapped Bitcoin (ironically using Ethereum ERC20 tokens) are making Bitcoin more accessible for small purchases by allowing transactions to be handled off-chain and later settled in bulk back to the Bitcoin blockchain. 

Government reaction to Libra

Theannouncement of Libra by Facebook and the group of companies known as the Association in mid-June has thrown governments into a tizzy. In the US, the Federal Reserve chair, the SEC chair, the Treasury Secretary and even the President all weighed in with their opinions. The net-net of comments were that Libra needs to be closely regulated, certainly with respect to KYC/AML (know your customer and anti-money laundering), and President Trump, presumably at Secretary Mnunchin’s urging, said they ought to be required to obtain a banking license. Secretary Mnunchin expressed the usual money laundering concerns.

Hearings before Congress were quickly scheduled and took place in the Senate and House mid-July. David Marcus, who leads Libra development at Facebook’s Calibra subsidiary, testified. He was not especially forthcoming on whether Facebook will be able to restrict some users from access to the Calibra wallet, and had limited information about the Association. The other members of the Association have only signed letters of intent; the charter is not yet ratified.

Congressperson Waters, who chairs the House Financial Services committee, has called for a pause in development until reviews can be completed. Marcus declined to commit to this, or to a preliminary sandbox environment working in conjunction with regulators. A bill has been introduced in Congress that would outright ban Libra, but this seems unlikely to pass.

The IMF, European Central Bank, and other central banks are almost panicking at the prospect of a competitive global currency. The UK Parliament will schedule hearings. The French Finance minister said Libra must not be allowed. India is foolishly trying to outlaw cryptocurrency completely. The Chinese central bank has announced they will develop their own central bank digital currency; they also just published a guide to Bitcoin.

Now what is interesting is that in the US, the Administration, the Fed, and Congress are beginning to draw a clear distinction between Libra, which is corporate money, and one might argue a shadow banking system, and Bitcoin, which is private money, with no centralized control.

It is encouraging for Bitcoin that some Congresspeople get the difference. In fact Congressman Patrick McHenry stated “I think there’s no capacity to kill bitcoin. Even the Chinese with their firewall and their extreme intervention in the society could not kill bitcoin.”

Regulation is already generally in place in the US for Bitcoin and cryptocurrencies more broadly. The SEC is restricting and regulating new cryptocurrency token offerings ICOs and are looking at Bitcoin ETF proposals. The SEC have stated that Ethereum and Bitcoin are not under the purview of ICOs, essentially recognizing the private money nature of the way they were created. (Ethereum is more problematic since they wish to move to Proof of Stake in the future). The CFTC has approved futures trading in Bitcoin. The IRS has been treating cryptocurrencies as assets taxable for capital gains purposes.

So there is no prospect for banning Bitcoin in the US and probably not in most Western countries or Japan and Korea. A Chinese court upheld property rights for holding Bitcoin in July. Although some mining restrictions have been placed in China, this seems more about managing electricity usage and even theft rather than an outright ban on cryptocurrency mining. Iran has recently legalized cryptocurrency mining.

In sum, the reactions of the US government and other governments toward the Libra announcement indicate a desire to closely regulate this corporate money style of ‘cryptocurrency’. This is especially the case since Libra is from a large social media company already under fire for data privacy breaches and whose scale of billions of potential Libra users could pose a systemic threat to central banks’ management of their national currencies.

As Libra is slowed down by regulations in various nations, Bitcoin is unimpeded. As governments recognize the difference between a corporate money (with Libra being a product an association of corporations) and Bitcoin’s private money nature, Bitcoin benefits.

One can argue that all of the attention given to Libra with the announcement and to cryptocurrency more broadly, along with the realization that Bitcoin cannot be stopped,has provided a push of Bitcoin across the Chasm, with Libra’s help even though Libra itself is is not scheduled for release until 2020. 

Bitcoin on a log scale, starting late 2013. (source: Coindesk)

Chasm is crossed by Bitcoin: 20 reasons

1. Bitcoin has been around for 10 years, since early 2009, and has increased in price by six orders of magnitude since April 2010, even as supply increased seven times.

2. Bitcoin has been through two Halvings; the next is only 10 months from now; this is the fundamental driver of scarcity with fully predictable inflation headed under 2% and then under 1% . Supply is now tight and only getting much tighter.

3. Bitcoin suffered through the crypto winter of 2018 and bounced back by a factor of over three times in price since the start of 2019. It has moved back above $10,000 with prospects for $50,000 plus within the next year or so due to the forthcoming Halving (PlanB model of stock-to-flow projection yields the future price estimate).

4. Bitcoin has an enormous lead in security over all other cryptos with far and away the greatest amount of hashing via specialized ASIC accelerated computers.

5. There are some 32 million Bitcoin wallets held by perhaps 10 million people; while it now has significant presence, there is also huge room for growth.

6. Facebook’s Libra has put the Fed, Congress, Treasury Department, SEC into a tizzy. Also the IMF, ECB, Bank of China  and other central banks are more or less panicking around the challenge of global digital currency alternatives. The IMF is creating a series of papers to look at alternatives that could include holding e-money ‘stablecoin’ currency reserves at the central bank.

7. The attention on Libra seems to be leading to a view from Congress and the Administration that (a) we must regulate Libra closely, Facebook cannot be trusted and  (b) Bitcoin is here to stay. 

8. Bitcoin is already the clear global digital currency alternative from a Store of Value perspective and could challenge gold in that regard. Gold has a total market capitalization of $8 trillion of which $2 trillion is held by central banks. Bitcoin is still much smaller at 1/5 of a $Trillion.

9. In the US Bitcoin regulation is mostly in place, with taxation and KYC /AML for exchanges sorted out, a futures market established, and the next big step is retail investment products such as ETFs to ease mass adoption.

10. While volatility of Bitcoin price is high (7% per month) it is decreasing and expected to continue to do so as the market deepens.

11. Bitcoin is an asset, fiat is debt. That alone should drive adoption especially with the next recession and future debt and banking crises. Negative interest rates may be coming to the US, certainly a return to very low rates is on the horizon.

12. Central banks are looking at implementing digital currencies that they would control, but that offers minimal innovation; such a central bank digital currency would still be just the same old fractional reserve fiat, inheriting problems of instability and remaining as a poor long term store of value.

 13. Central Banks cannot resist the cryptocurrency /e-money tide. This leaves them three major alternatives: (a) accept corporate money such as Libra, even holding reserves for them, and squeezing banks as a result (b) outlaw or restrain corporate money and build their own digital currency which could mean individuals hold balances at central banks, also squeezing banks, or (c) strengthen their currencies by adding Bitcoin to their balance sheets along with their gold. They could allow banks to issue their own digital money in competition with Libra and other corporate money, and let the market sort it out with appropriate but not heavy-handed regulation and risk supervision.

14. I do not expect the US,  Japanese, European, or British central banks to add Bitcoin to their reserves any time soon. But some smaller central bank may very well, and start a Bitcoin reserve race. The central bank of central banks, the BIS, will try to slow them down by saying they cannot include any Bitcoin held as part of their reserve accounting position. But central banks might well hold anyway if they believe it will appreciate relative to gold.

15. The first Central bank to actually add Bitcoin to reserves gets a jump on all the others, and could set off a race. Bulgaria may be de facto the first, since their government has seized Bitcoin used in criminal activities that has a present value of $2 billion. This is about equal to the nation’s gold reserves. If they are smart they will not auction it off.

16. Great macro investors like Ray Dalio and Raoul Pal see a next recession coming and continued overhang of debt pushing the US toward zero and negative interest rates. More debt monetization is on the horizon in their view, and in such low interest rate environments with money printing, pure assets like gold and Bitcoin benefit from a flight to safety. With negative interest rates and even small inflation, cash is trash.

17. Libra is a gateway drug to Bitcoin, and exchanges will make a market. As new people get  introduced to crypto through Libra, they will become more aware of Bitcoin and could choose to exchange Libra for Bitcoin as a savings vehicle, while using Libra and competitors for spending purposes.

18. Fiat and Libra and e-money are payment methods, spending vehicles, primarily mediums of exchange. Bitcoin is a savings vehicle, primarily a store of value that can presumably be used for greater purchasing power in fiat or Libra terms in the future due to its stronger monetary policy. Lightning Network and other second layer solutions are enhancing the utility of Bitcoin for purchasing as well.

19. Libra has sharpened the differences in the crypto space. Bitcoin has crossed the chasm because governments in the West are now understanding the clear distinction between corporate money ‘crypto’ and the original decentralized Bitcoin. They have largely worked out their overall approach to Bitcoin regulation while struggling with what to do about Libra and other ‘stablecoins’ or corporate money. Their fear of Bitcoin has lessened as tools to track its usage in money laundering and transnational crime have been developed.

20. After a decade of phenomenal growth, and in time for the 2020s, Bitcoin is coming of age. Expect a growth spurt and many more developments.

“The world that Satoshi Nakamoto, author of the Bitcoin whitepaper envisioned, and others are building, is an unstoppable force” – Patrick McHenry, U.S. Congressman

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Libra: Corporate Money in furtherance of surveillance capitalism

This blog is the first of a two-part series capturing my thoughts on Libra, Facebook’s cryptocurrency announced in mid-June. My thanks to Shahin Khan for his comments and suggestions.

Libra is a clever name. It implies harmony, peace and balance. Librae was also an ancient Roman unit of weight and was used in Middle English to refer to a pound. As we know the English monetary pound started out as a pound of silver. It’s symbol continues to be a special form of the letter L. So there is a deep historical monetary reference.

Libra aims to be the coin that takes cryptocurrency mainstream. Starting in 2020.

Government Money, Private Money, Corporate Money

The idea of a fully digital or electricity-based money goes back several decades. The introduction of Bitcoin in 2008/09 was both a result of technological advancements that provided the foundation for a secure cryptocurrency and a reaction to the failures of the banking system and fiat currency that produced the Great Recession.

Bitcoin fits in the category of Private Money. No government issues it; no corporation is behind it. It is created on ‘mining’ computers in accordance with the Nakamoto consensus and its monetary policy, with a Proof of Work cryptographic algorithm; anyone can mine it. It as if you dug up gold and refined it and fashioned into a bar and stamped the weight and fineness. In this case the Nakamoto consensus inserts the new money into the decentralized open ledger for Bitcoin at the public address of the miner and under the control of the private key of the miner. The miner can sell (transfer to another public address) the Bitcoin for fiat on an exchange and use that fiat to pay the electricity bill and other costs.

Libra, introduced by Facebook and 27 Association partners in mid-June 2019 is, make no mistake, Corporate Money. It is created by an association of corporations in a partnership expected to grow to perhaps 100 members over time. Each member of the association has to stake $10 million to join and must fulfill other requirements related to size and reputation. (Certain non-profits can join under less stringent guidelines).

Is it a blockchain? 

These Association members are then able to act as validators of transactions into the open quasi-decentralized ledger of Libra. This is a permissioned ledger maintained by the Association members who take turns serving as the lead validator, each with the larger of 1 vote or 1% of votes.

A key part of the security of Bitcoin is based in chaining of transaction blocks. The chain is created by hashing the previous block and inserting that hash into the current block, and doing this repetitively.

In the Libra model, the block and the chain are virtual. Libra blocks are batches of transactions as proposed by the lead validator. A 2/3 quorum among validators is required to approve the block of transactions. Establishing that quorum relies on a chain, but there is no direct relationship between the ‘block’ and the ‘chain’ for these.

Referring to it as the Libra Blockchain, as the white papers do, is a marketing stretch at best. Each new transaction creates a new ledger state that is stored as a Merkle tree and validated. There are no blocks in the ledger, much less a blockchain. Facebook wants to use the term to help ease the regulatory burden perhaps, and because of general market awareness.

The consensus used by validators is a voting mechanism that requires a 2/3 majority and is a type of Byzantine Fault Tolerance. The consensus can be thought of as a hybrid with Proof of Stake since Association members must put up considerable capital. And in fact, the Libra white paper states the intent is to move to a Proof of Stake algorithm over time. This remains a tricky problem; Ethereum has been delaying a move to Proof of Stake for years.

Smart Libra

My Mom was a Libra, she was smart. This Libra also intends to be smart, and to support a range of applications. Libra has its own language, called Move, for smart contracts, including the core token creation, accounting, and payments functions. This is a stack-based language with restricted functionality and with a source level compiler, intermediate representation and a run-time environment in a virtual machine to execute bytecode. Initially the intermediate representation, bytecode specification, and VM are available as open source; the compiler is under development.

Move is designed to be safer than say, Solidity, the default smart contract language for Ethereum, which has suffered a number of hacks. Being better than Solidity is not a high bar.

Less flexibility and not being Turing-complete can prevent ambiguity and are thus desirable attributes for smart contracts moving money around. Initially only a predefined set of essential contracts are available, but the intent is to open things up to the developer community over time.

Move will be the development environment for smart contracts implementing a wide range of e-commerce offerings accessed from the Facebook portfolio. The Libra Association will proceed carefully to maintain security. 

Composition of the SDR before the Chinese Yuan was added

SDR-Lite

But enough of the gory technical details. What is Libra in currency terms and what is it good for? In currency terms it is a basket of strong currencies such as the US dollar ($) and the Euro (€), created with 100% reserve backing in the form of short-term securities (bills) and cash deposited in bank or brokerage accounts. It appears that the initial currencies in the basket will also include the UK £ and the Japanese ¥.

The Libra money supply is dynamic. Libra will be created or destroyed (burned) in response to demand. Thus, unlike Bitcoin, its monetary policy is derived from the mix of currencies in the basket.

So it is a stable coin, but unlike other stable coins, it is tied to a currency basket. It looks rather like the Special Drawing Rights (SDR) administered by the International Monetary Fund, but without the Chinese Yuan. Facebook is not allowed to operate in China for censorship reasons, so the Yuan, which is also subject to strict capital controls, is left out of the basket.

Think of it like a money market fund, but the dividends from holding short-term government paper do not go to holders of Libra. They accrue to a separate currency called the Libra Investment Token that is only held by Association members who have staked the $10 million entry fee.

As Corporate money, it is important that it be audited to ensure full reserves are held as backing, otherwise the value could drop below the nominal currency basket value. It may trade at a slight discount or premium in any case.

There are risks with pegging to a basket of fiat money and accepting fiat money that is not in the basket. For example, suppose a banking liquidity crisis, or a crisis of confidence arises, in Italy (as an example), and fears arise that Italy might withdraw from the Euro.  If the Libra Association is holding Euro in Italian banks, seeking higher yields than in Germany, then in this instance they could lose the peg, slip below the nominal value, due to concerns of bank insolvency.

What Could Have Been

The promise of cryptocurrencies includes decentralization, trustless security, immutability, open source access, permission-less participation, autonomous smart contracts, pseudonymity, a tamper-proof monetary policy, and an easy-to-use development environment. 

Achieving such a mix of attributes is difficult. When it has been approached, it has resulted in slow transaction rates and volatility, making the currency unsuitable for high volume transactions or for every-day use.  To address this, the industry has responded by (a) compromising on the ideals of cryptocurrency, accepting less-rigorous variations of the above attributes in order to achieve higher transaction rates, and (b) creating stablecoins tied to fiat currency to address volatility. 

Facebook’s commanding global digital presence can drive adoption and take the cryptocurrency concept to the mainstream. However, Libra compromises on too many attributes of the ideal cryptocurrency to be categorized as anything but a walled-garden Corporate money, and barely a “crypto” currency at that.

Imagine if instead of creating this Corporate money Facebook had:

  1. Created a currency (call it Solar) that association members could mine on supercomputers via Proof of Work, but also any Facebook user could mine on their laptop or phone, and
  2. Established a system that would pay license fees in Solar for data placed into the Facebook platforms, and
  3. Implemented a true blockchain that would secure the ownership of the data for the originators.
  4. The name ‘Solar’ indicates that the currency would be beyond global and eventually be used in colonies on the Moon, Mars and Callisto.

But that wouldn’t be Corporate money, that would be People’s money. That wouldn’t be in furtherance of surveillance capitalism.

Blockchains Could be Vital to National Security

Last year Tokyo hosted a meeting of the International Standards Organization, including a session on blockchain technology to examine ideas around standards for blockchain and distributed ledgers.

A member of the Russian delegation, who is part of their intelligence apparatus at the FSB, apparently said “the Internet belonged to the US, the Blockchain will belong to Russia.” In fact three of the four Russian delegates were FSB agents!

By contrast, Chinese attendees were from the Finance Ministry, and American attendees were representing major technology companies, reportedly IBM and Microsoft among others.

Let’s unpack this a bit. The Internet grew out of a US military funded program, Arpanet, and the US has been the dominant player in Internet technology due to the strength of its research community and its technology companies in particular.

As we wrote in our most recent blog (http://orionx.net/2018/05/is-blockchain-the-key-to-web-3-0/), blockchain has the potential to significantly impact the Internet’s development, as a key Web 3.0 technology.

Blockchain and the first cryptocurrency, Bitcoin, were developed by an unknown person or persons, with pen name Satoshi Nakamoto. Based on email timestamps, the location may have been New York or London, so American or British citizenship for Bitcoin’s inventor seem likely, but that is speculation.

More to the point, the US is the center of blockchain funding and development activity, while China in particular has been playing a major role in mining and cryptocurrency development.

There are many Russian and Eastern European developers and ICO promoters in the community as well. The Baltic nations bordering Russia and the Russian diaspora community have been particularly active.

The second most valuable cryptocurrency after Bitcoin is Ethereum, which was invented by a Russian-Canadian, Vitalik Buterin. Buterin famously met with Russian President Vladimir Butin in 2017. Putin is himself of course a former intelligence agent.

The Russians reportedly want to influence the cryptographic standards around blockchain. This immediately raises fears of a backdoor accessible to Russian intelligence. Russia is also considering the idea of a cryptocurrency as a way to get around sanctions imposed by the American and European governments.

The Russian government has a number of blockchain projects. The government-run Sberbank had initial implementation of a document storage blockchain late last year. There is draft regulation around cryptocurrency working its way through the Russian parliament. President Putin has said that Russia cannot afford to fall behind in blockchain technology.

Given the broad array of applications being developed for cryptocurrencies, including money transfer, asset registration, identity, voting, data security, and supply chain management among others, national governments have critical interests in the technology.

China has been cracking down on ICOs and mining, but it is clear they think blockchain is important and they want to be in control. Most of their government concerns and interest appear to be centered around the potential in finance, such as examining the possibility of a national cryptocurrency (cryptoYuan).

China would like to wriggle free from the dollar standard that dominates trade and their currency reserves. They have joined the SDR (foreign reserve assets of the IMF) and have been building their stocks of gold as two alternatives to the dollar.

China’s biggest international initiative is around a new ‘Silk Road’, the One Belt, One Road initiative for infrastructure development across EurAsia and into the Middle East and Africa. One could imagine a trading currency in conjunction with this, a “SilkRoadCoin”. In fact, the government-run Belt and Development Center has just announced an agreement with Matrix AI as blockchain partner. Matrix AI is developing a blockchain that will support AI-based consensus mechanisms and intelligent contracts.

China’s One Belt One Road Initiative, actually has six land corridors and a maritime corridor. (Image credit: CC 4.0, author: Lommes)

The American military is taking interest in blockchain technology. DARPA believes that blockchain may be useful as a cybersecurity shield. The US Navy has a manufacturing related application around the concept of Digital Thread for secure registration of data across the supply chain.

In fact the latest National Defense Authorization Act requires the Pentagon to assess the potential of blockchain for military deployment and to report to Congress their findings, beginning this month for an initial report.

What is clear, is that blockchain and distributed ledger technology have the potential to be of major significance in national security and development for the world’s leading nations.

We encourage the US government to increase engagement with blockchain and distributed ledger technology. This can include funding research in universities, pilot projects with industry across various government agencies including the military and intelligence communities, the Federal Reserve, and the Department of Energy, NOAA and NASA, in particular.

Also the federal government should pursue standards development under the auspices of the NIST and together with ISO. Individual state governments are also promising laboratories for projects around identity, voting, and title registration.

Information has always been key to warfare. But there is little doubt that warfare is increasingly moving toward a battlefield within the information sphere itself. These are wars directed against the civilian population; these are wars for peoples’ minds. Blockchain technologies could play a significant role in these present and future battles, both defensively and offensively.

References :

DARPA https://www.google.co.th/amp/s/cointelegraph.com/news/pentagon-thinks-blockchain-technology-can-be-used-as-cybersecurity-shield/amp

US Navy http://www.secnav.navy.mil/innovation/Pages/2017/06/BlockChain.aspx

2018 National Defense Authorization Act https://www.realcleardefense.com/articles/2018/05/03/could_americas_cyber_competitors_use_blockchain_for_their_defense_113400.html

NIST https://csrc.nist.gov/publications/detail/nistir/8202/draft

https://www.blockchainmagazine.net/u-s-department-of-defense-is-bullish-on-the-blockchain/

http://www.scmp.com/business/china-business/article/2136188/beijing-signals-it-wants-become-front-runner-blockchain

https://www.cbinsights.com/research/future-of-information-warfare/

Economic Backdrop Technology for 2017

Backpedaling of Globalization (Part 1)

OrionX provides research into IT market sectors with a focus on AI, Big Data, HPC, Data Center, and IoT sectors. We see these as highly inter-related. We also seek to understand the economic environment that affects investment into IT sectors, and how these key IT sectors affect our economy and our world more generally in our current Information Age. This article is the first of two on the economic backdrop facing IT vendors and consumers.

Fundamentally, the main backdrop to global economies is digitization and the acceleration of the Information Age. While this naturally bodes well for the IT industry, it requires visionary and effective policies, investments, and regulations. Digitization promotes globalization. It also promotes automation. To understand how this will truly impact IT we need to take a deeper look at the interplay of digitization and global economic forces.

The last great era of globalization, during the Industrial Age, was powered by fast transportation with steamships and railroads at the end of the 19th century. And instantaneous communication was enabled with the invention of the telegraph and telephone. These technologies were key to the Industrial Age.

Scheduled Airline Traffic 2009, Credit: Jpatakol, CC BY-SA 3.0

Now, thanks to the rapid advances of semiconductor technology — doubling in power every two years in accordance with Moore’s law — we are in the Information Age. Fast networks, rapid data processing, and vast pools of storage are the foundational technologies supporting global supply chains, offshoring, and collaborative business across international boundaries. Information Age technologies have not only led us to the Internet, but to Smartphones, Social Media, Big Data, Artificial Intelligence and the Internet of Things.

The power of digitization has done more than give birth to new technologies — these technologies have caused realignment in politics, in economics, and in the world order. The Information Age has also given us the Euro, arguably hastened the demise of the Soviet Union, allowed India to regain historical prominence and enabled China to become an economic powerhouse — lifting hundreds of millions out of poverty. And on the other side of the coin, technology is also being used by governments to limit freedom of expression and was critical to the creation of the massive deregulated debt that led to the Great Recession at the end of the last decade.

These changes during this Information Age and the bulk of this globalization wave have all happened primarily within the space of a single generation, during just the last three decades. The pace has been accelerating with data and information doubling every couple of years. OrionX believes that there was more technological progress in the first part of this century than in the entire 20th century. Disruption and dislocations have been part of the game, with the old industrial models of large national enterprises, lifetime employment, and secure pensions collapsing during the last twenty years. And the pace continues to accelerate.

The postwar world order was not designed around the Information Age. Indeed, the concept of the nation-state that has predominated over the last few centuries was not designed with the Information Age in mind. This new era of globalization has decreased dependency on individual nations’ infrastructure, enabling worldwide sourcing. Many adventurous people from overseas have travelled to the US and other Western nations to study and then have gone on to create new enterprises in their host countries. World class teams can be quickly assembled across national boundaries. Although globalization has brought many of us together across these boundaries (and this is especially true in our IT community), it has also sharpened cultural differences and led to new and renewed conflicts, most notably between radical Islamists and the West, but also within Western institutions and nations as well.

Artificial Intelligence as the premier technology

AI is the killer application domain going forward. While it has been around as a research activity for over half a century it is now coming into widespread ‘industrial scale’ use due to advances in machine learning capabilities that are in turn enabled by fast hardware and Big Data. It is key to robotics and to drones. It is not only displacing workers in manufacturing but is beginning to upend knowledge work in many fields. It will be disruptive — both positively and negatively — in ways we cannot yet imagine.

Credit decisions, employment screening, health monitoring and diagnosis, matchmaking, advertising choices and copywriting, movie scripts, assisted shopping and travel planning are just a few examples of consumer oriented applications that are happening today. And we have not yet mentioned the “auto-automobile” or self-driving cars. As this technology rolls out it will drastically change our lifestyles, including commuting, and it will overturn the automotive insurance and parking industries. Many lives will be saved, most traffic jams eliminated, and insurance losses will drop by an order of magnitude.

Warfare is headed toward increasing utilization of drones and robotics. While today these systems have humans in the loop, fully autonomous systems are being researched by many nations. “There is absolutely an arms race in autonomous systems underway” says John Arquilla, professor at the U.S. Naval Postgraduate School. The substitution of robots for soldiers on the battlefield has the potential to save many lives, for both combatants and civilians. Conversely, it also presents the possibility for terrorizing civilian populations, as has already been imagined in many films.

Cyberwarfare is taking off and presents many challenges, with nations attempting to reach some sort of accommodation regarding what types of peacetime cyber snooping are ‘acceptable’. In a real war, the cyber battlefield will be the first locus of engagement in the effort to take down the opponents’ information-gathering capability and elements of their military and civilian infrastructure. Notably, cyberwarfare techniques are now actively being used to interfere in elections.

Backlash

World Bank protest, Jakarta, Credit: Jonathon McIntosh, CC BY 2.0

Every business function can be disintermediated, resulting in significant dislocation. Now we are experiencing a clear backlash against aspects of globalization in the developed world, primarily in Europe and North America. Those who found security in the industrial world have lost jobs and pensions. Good manufacturing jobs in the U.S. moved to China, or Mexico, or in the case of Southern Europe, were lost to German efficiency (including their openness to immigration), and the loss of some national sovereignty due to the Euro and common European Union regulation.

Nationalism is on the rise. The trend toward freer trade has halted and is headed in reverse. In the UK, which had stayed out of the Euro, the decision to fully depart the European Union was made by the voters, shocking the political establishment. Nationalist and populist candidates are polling strongly in Italy and France. Europe is still experiencing a banking crisis, exacerbated by the contradictions of the Eurozone. Austere policies and debt overhang have intensified the dislocations from the Information Age.

And in the US, a populist real estate mogul has conquered the Republican party and won the Presidency. He appealed to displaced workers with his nationalistic policies on trade and immigration, which are now being rolled out. Isolationism and the trend towards made in America are increasing, or at least there is an impetus toward more tariffs and more restricted trade deals.

President Trump is on a mission to bring manufacturing back from China, Mexico and other locales. Most of this is permanently lost, much more of it to automation (80% say two economists from Ball State University) than to offshoring, but what happens at the margins matters.

The trend with globalization had been toward larger trading blocs and deals, with the Eurozone as a single market as the exemplar and with proposals such as the presumably dead-on-arrival Trans-Pacific Partnership. Now the direction in the US and the UK is toward one-on-one negotiations with individual nations.

In the next article of this two-part series we will explore the outlook for 2017 in the different major global economic regions: North America, Europe, and Asia.