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  • May, 2017. I’m just back from vacation. The water-cooler updates now over, I settle my lumbar into my ergonomic chair, crank some Viking metal on the headphones and show no mercy to the five-day pileup of emails. I plow through them with a fierce, focused fluidity, taking no prisoners. Somewhere along the way, I open an email attachment. Then I see this:

    wannacry protection

    First thought: um, whoops. Immediately followed by this thought: WTF IS A BITCOIN???

    Okay, I lied. That did not happen to me. That was merely a dramatized recreation of real-life events that did happen, though, to many other people in some 150 countries. I embellished with the Viking metal, but you get the general idea. The point is, that reaction was pure. Bitcoin had already been around for a full nine years at that point, and I had never heard of it.

    Google, Wikipedia, research research research. Turns out there’s no reason I should have heard of it, since bitcoin is largely used by cybercriminals, gun runners, drug dealers and other undesirables as a means of buying and selling things that are not supposed to be bought or sold, anonymously. Unless you live on the shady side of Law Street, bitcoin SHOULD be a blissful ignorance.

    That is the perception, sure. Even the real identity of its founder, Satoshi Nakamoto, is unknown. That’s not a good start. But what gives? Is it just a bunch of bitcoin haters hating, or is there any actual truth behind the bad rep?

    Well, yes. Some. It was and is still used for some nefarious acts. And while the blockchain technology that was built to support it provides a transparent audit trail from wallet to wallet for all to see, the real identities of the holders of said wallets can be kept private. Very interesting indeed.

    And it’s probably no coincidence that at the time of the WannaCry attacks, a bitcoin was valued at about $2,000. This then soared by the end of the year to over $19,000. It is currently just south of $8,000. What is your deal, anyway, bitcoin?    

    Bitcoin is a teenager of a currency, if ever there was one. Enigmatic, wildly unpredictable, rebellious, and above all, misunderstood.

    Maybe I should have prefaced this post by stating that I have never personally used bitcoin, nor invested in it. So I have no skin in the bitcoin game; my interest is probably the same as yours--mere curiosity. I want to know where this story is going.

    To understand bitcoin, though, you have to first realize that there are two very distinct sides to the story. One is the investment side, and the other is the user side.

    On the investment side, you have speculators that began pouring money into the cryptocurrency like the next big thing (see prices above). “Pump-and-dump,” “balloon” and even “Ponzi scheme” became readily associated with it. Warren Buffett said recently that investing in cryptos will “almost certainly end badly.” Only time will tell with the investment aspect of bitcoin.

    For users, bitcoin offers fast, direct payments that are traceable. We’ve touched on some of the negative uses, but that is one-sided. People buy guns and drugs with cash as well. In its struggle for legitimacy, bitcoin is turning the tide in its favor, now being accepted by the likes of Overstock.com, Microsoft and Expedia.

    So, verdict time. Does bitcoin deserve the reputation? No. As far as investors, it is an investment like any other—subject to gains and losses. Yes, it is risky, but so is speculating in most areas. You don’t hear many complaints from those who bought as recently as six months ago.

    Yes, bad guys use bitcoin. They also use some of the other nearly 1,500 cryptocurrencies, too. It wasn’t created for them, they are merely taking advantage of some of its properties.

    The one thing most overlooked in the great bitcoin debate is the technology that enabled it. Blockchain is opening up all sorts of possibilities that people are just becoming aware of, in all different industries. From faster, secure financial services to tracing coffee beans from farm to cup, the surface is just barely being scratched. Bitcoin will do its thing, but keep an eye on that blockchain to see the real action.  

  • Last month, Venezuela issued a new cryptocurrency, the petro, to deal with runaway inflation rates that has left its base currency, the bolivar, in dire straits. In the year from February 2017 – February 2018, the inflation rate has gone over 6,000%. To translate that into everyday terms, a kilogram of sugar costs more than half of the minimum monthly wage!

    What is unique about the petro is that it is backed by the Venezuela’s oil reserves. In other words, it is centralized. Normally, one of the defining characteristics of cryptos is that they are decentralized. Wikipedia even defines it as “a type of digital asset that is decentralized.” Rather than a governing body approving everything, the blockchain (public transaction database) IS the approval process.

    On the heels of this, Russia has announced that it is pursuing the CryptoRuble, scheduled to roll out next year. This follows the same structure of a state-issued crypto, and further blurs the lines between digital and crypto.

    These are not to be confused with several other nations that have already adopted or implemented forms of digital currencies. In Sweden now, there are many places that no longer accept cash, leaving open the possibility of a cashless society in the future. Japan plans to roll out a digital for the 2020 Olympics. And other countries, including China, Ecuador and Tunisia, are in various phases of digital currencies.  

    The point is, as the evolution of technology and terminology continue, it will presumably only get muddier in terms of identifying a crypto versus a digital. But in general, here are three differences that generally define them:

    1.      Design. Digital currencies are centralized, usually by a central government. Everything flows in and out of one place, and is subject to approval policies set by the governing entity. Cryptos rely on collective approval through an open ledger using blockchain technology.

    2.      Anonymity. Digital currencies require user identification, such as an uploaded photo, publicly-issued documents, etc. Cryptos don’t generally require these; in fact, the very identity of the inventor of Bitcoin, though known as Satoshi Nakamoto, is a mystery. But it is also not fully anonymous. While private information stays private, the senders and receivers are publicly known, and each transaction has an audit trail.

    3.      Transaction Manipulation. Digital currency transactions all run through a central authority, which can then choose whether or not to validate transactions, as per the rules set forth by the governing body. Crypto transactions are immutable and final. Each step can be tracked and everyone can see the transfer of money, for example, but once it is done, there is no going back.

  • Cryptocurrencies started back in 2008 with the advent of Bitcoin. Ten years on, Wikipedia now lists the number of different cryptocurrencies on the market today at 1,384. That is the equivalent of a new crypto being introduced every 2.6 days!

    While it is clear that these cryptos are not just a fad, what is less clear is what threats or benefits they will bring to the banking industry. But to begin to understand this, we must first start by understanding the different types of currency.

    When we hear the word “currency,” most of us tend to think of cold, hard cash. It may come as a surprise then, to know that this type of currency, or fiat currency, accounts for barely 8% of the world’s total money supply. That means 92% of the world’s wealth exists in different forms. They are:

    Virtual currency. This is a type of currency that do not exist in physical reality, but can be earned, bought, sold or traded in a given community that accepts the value. Think of your airline miles. You can’t touch or hold them, yet they exist. They are also utterly worthless EXCEPT to you and your airline, where they are treated with the value that has been set by them and agreed upon by you.

    Digital currency. This has become the most common form of currency. Again, it is not tangible, but it is very real. Your direct deposit, Paypal, credit cards, etc. All these transactions happen, money changes hands, but there is no physical money, simply numbers moving around through computers. These can even be issued by central banks, as is the case in several countries like Sweden, where cash is disappearing.

    Cryptocurrency. A type of digital currency AND virtual currency according to Wikipedia, crypto is a hybrid that circumvents a lot of third-party interference and provides a conduit for straight-through, person-to-person dealings. Using the power of blockchain technology, it provides transparency for all transactions and is not backed by a central entity, such as a central bank, but rather relies on accepted universal validation from its users.

    All that said, it is safe to say that for banks, there are far more questions than answers at this point. There is potential for great disruption, but only time will tell.

    Want to read more? Let’s look at more differences between digital and cryptocurrencies HERE.  

  • Bitcoin was first to really implement blockchain technology. The success it has shown has moved the discussion of blockchain in a wide range of directions, from food source traceability to voting to banking operations. The possibilities and upside are undeniably enticing, but they must be evaluated holistically against the possible pitfalls. Here are some pros and cons of the burgeoning technology.

    Pros

    1.      Process integrity. Each transaction is recorded and time-stamped, creating an immutable transaction trail that is transparent, unalterable and permanent.

    2.      Traceability. The way the information in disseminated across the blockchain makes it simple to find and solve problems efficiently, should they arise. It also creates a de facto, irreversible audit trail.

    3.      Security. Each user has his/her own key to verify identity. The block encryption in the chain makes it much tougher for hackers to disrupt than traditional setups.

    4.      Faster processing. Compared with traditional bank transactions, particularly in global banking, blockchain technology represents a dramatic increase in processing speed. An overseas bank transfer that may take three days to settle could potentially be reduced to minutes or even seconds. The two-way messaging capabilities of the blockchain enables it to cut out the “middle men” of intermediary and custodian banks that slow transactions down.

    5.      Saves money. Consulting giant Accenture recently estimated that investment banks could save a combined $10 billion with the streamlined process the blockchain offers.

    Cons

    1.      Performance. This is pretty new technology. And while venture capitalists pumped nearly $650 million into blockchain technology, it remains largely untested beyond the “proof of concept” phase. And even in those tests, it has not been scaled up significantly, or run for extended periods of time to test durability.

    2.      Power use. The power consumed last year on Bitcoin mining alone was more than the total per capita power usage of 159 individual countries. Keeping a “real time” ledger means that when one node in a blockchain is created, it communicates it to every single other node at the same time.

    3.      Lack of oversight. By definition, an open-source, decentralized ledger has no central oversight. This makes some people nervous, and rightfully so. The OneCoin ponzi scheme was just one recent attempt to take advantage of the system. There is also the hypothetical threat of the 51% attack, in which a group of miners controls more than half of the computing power of a blockchain, and could then reverse completed transactions to double-spend coins.

    4.      Cuts out middle men. As mentioned, the technology could potentially save billions of dollars in intermediary bank transactions. The counterargument to this point it that we are talking about a lot of jobs being made redundant.

    5.      Cost. According to Blockchain Luxembourg, the Bitcoin cost per transaction has been between $75 - $160, mostly due to energy consumption. This may or may not go down with advances in technology, as the need for power and storage of data will be two very real issues that won’t go away easily.

    It is too early to know if this is the future of things. And even if the tech is as good as some claim it to be, it is still too early to speculate on the adoption time needed for widespread use. In any case, it is an area to keep a close eye on, as it continues to develop and grow in front of us.   

  • Blockchain technology is not just a buzz phrase floating in the ether or some abstract idea; in the first half of 2017 alone, venture capitalists invested over $240 million in it. It has very real, practical applications that are starting to disrupt and change many industries.

    So what is it, exactly, and how does it work?

    Invented in 2008 by Bitcoin founder Satoshi Nakamoto, Wikipedia defines it as “an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way.”

    Essentially, it is a decentralized ledger.

    Think of Wikipedia itself, which is an open-source encyclopedia. The difference is that Wikipedia is centralized; all information flows into a central server that hosts a master copy that must be approved before going live. In the blockchain world, when updates are made (i.e. transactions), the information is sent out across every node in the network. Because it is verified and time-stamped, the latest version essentially becomes the new de facto master copy.

    Blockchain is trustless, and yet completely traceable. Each user has a unique key to verify and protect their identity. It is encrypted and no one else can use or access it, making it virtually impossible for hackers to gain access to personal information. Blockchain works because, e.g. I am who I say I am (personal key) and I want to sign this document or transfer this money or cast a vote in this election. My data is encrypted into a “block” that contains a cryptographic hash of the previous block and a timestamp for a clear audit trail.

    Some of the applications of blockchain already in use include: smart contracts, digital voting, decentralized notary and even coffee bean farming.

    2018 promises more blockchain opportunities in a variety of industries. For more on how it can affect the banking industries, READ HERE.

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