Bitcoin – New Cash or New Crash?

Posted on : 28-09-2017 | By : Tom Loxley | In : Bitcoin, Blockchain, Finance, FinTech

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Much hype has plagued the media surrounding Bitcoin once again last week, this time concerning JPMorgan Chase chief Jamie Dimon. He made his comments whilst speaking at the banking conference in New York and his interview afterwards when he was asked his opinion on Bitcoin.

Having seen the actual interview during which his comments were made, it is my opinion that whilst there are some worthy and serious underlying issues which I believe he was justifiably correct in highlighting, the media has certainly sensationalised the content of what was said.

He has been famously quoted for making the analogy between Bitcoin and tulips. Referring to the mania that surrounded the perceived value of tulip bulbs in Holland in the 17 Century which caused the price rocket up well beyond their actual value. A Tulip was reported to be worth upwards of five times the cost of an average house, with obvious negative results. He capped off his ideas on the subject my making another reference to the famous Hans Christian Andersen short story The Emperor’s new clothes. Here (spoiler alert) mass hysteria surrounds the beauty of Emperors “new clothes” despite him being naked because no one has the courage or self-assuredness to argue against mass opinion for fear of being wrong or ridiculed.

It’s a clever and apt use of the metaphors. Even for someone who sees value in the disruptive effect of the cryptocurrency movement on the evolution of FinTech and the philosophy underlining (Bitcoins founder) Satoshi Nakamoto’s (Bitcoin’s founder) white paper, I can see the concern and won’t argue with the analogies.

However, if I was a sceptical man I wouldn’t be able to ignore that fact that, whilst Jamie Dimon’s credentials are fantastic and his opinion is highly regarded, the advent of Bitcoin (at its extreme) has the potential to shake his entire financial industry it to its knees. Therefore, it wasn’t surprising (even if well founded), when he stated, “If we have a trader that trades Bitcoin, I would fire them in a second, for two reasons: It is against our rules and they are stupid, and both are dangerous,”. Make of that what you will.

He may well be right, the general ignorance that still surrounds cryptocurrencies and blockchain (i.e. many people still see Bitcoin and blockchain technology as one and the same thing), coupled with a “jump on the bandwagon” mentality (and in some cases, a hint of greed) is seeking to over-inflate and undermine the intrinsic and true value of Bitcoin. Since its inception it has already undergone large dips in value, though it’s resilience to come back stronger is impressive.

Although it is not mentioned in many of the articles which cover the Jamie Dimon interview, he clearly states he does see a reason for Bitcoin, saying that “if you’re in Venezuela, Ecuador or North Korea you probably better off using bitcoin”.

He also states that he is not giving investment advice and that it may go much higher in value yet. His warning is that it will eventually burst because governments in first world countries like to regulate fiat currency and know who has it in their possession.

He stated that currently, governments consider Bitcoin a novelty, but eventually as it grows in popularity they will shut it down (however, how or whether that is even possible is a subject for another day).

Of course, it is worth noting a few points here which I believe are relevant. Initially, in his interview, Jamie Dimon uses the term Bitcoin as the subject of his conversation but then corrects himself and uses the more general term cryptocurrency. I bring this up because, as stated before, there is a still much confusion surrounding cryptocurrencies and blockchain technology (I will include a small glossary at the end of this article for those who want to know the differences and definitions). Many people still don’t (or can’t) yet differentiate between Bitcoin and the hundreds of other cryptocurrencies. It seems to me that what Jamie Dimon he really talking about at the conference is not Bitcoin per say, but cryptocurrencies in general, something which the general media has not seemed to pick up on.

Bitcoin has got a lot of bad press simply because it is the most recognised cryptocurrency (don’t feel too bad for it though because it has also rocketed in value for the same reason).

It’s also worth noting that what he is talking about is unregulated cryptocurrencies. Jamie Dimon’s concerns here are well founded. The sad fact is, that whilst the cryptocurrency remains outside any regulation and the outside control of any government-backed organisation it is likely to be exploited by criminals and those with nefarious intentions no matter how many legitimate users it has.

The technology could (and in my opinion probably will) be used by first world governments to create their own version of cryptocurrencies that are regulated and therefore have many of the benefits of cryptocurrencies, without the worry of destabilising the economy or causing massive inflation, which has been highlighted by the Bank of England (BoE) as a concern.

It may not be too long before you find yourself using the BoE’s “Crypto-Pound” or US Treasuries “Crypto-Dollar” to buy your weekly shop at the supermarket. Doubtless, many will argue that this would go against the whole philosophy of “Be Your Own Bank” that underlies (what some consider to be) the greatest asset of the current cryptocurrencies. However, it would solve the regulation problem whilst at least keeping some of the technical assets intrinsic to the technology (speed, transparency, efficiency, accessibility etc…).

The value of Bitcoin dropped substantially after the comments by Jamie Dimon. However, it bounced right back proving that although it may burst one day it still has a lot of confidence among investors and the growing number who are determined to make it a mainstream currency and it seems to be working.

Last week a London based property developer, The Collective announced that prospective tenants can pay deposits in Bitcoin. By the end of this year, it will also accept rent payments in Bitcoin too. A spokesperson stated that the decision was made after increasing requests from foreign customers. Also last week Last week, Lady Mone (British entrepreneur, global speaker, designer, innovator and parliamentarian) launched a major property development in Dubai, priced in bitcoins. She stated that the digital currency was a growing market that could not be ignored.

The world of cryptocurrencies is still embryonic and remains unclear as to how it will unfold, but it is certainly interesting to watch as a spectator, if not a speculator.

Glossary

Below is an informal glossary of some of the more popular terms in the Blockchain and cryptocurrency world, because of the relative newness of the terms here there are differing and often conflicting definitions available, however, I find these give an accurate (if very basic) overview. (The content of the definitions has been largely although not entirely, adapted from the information available at www.coindesk.com):

Bitcoin: Bitcoin is the first decentralised, open source cryptocurrency that runs on a global peer to peer network, without the need for middlemen and a centralised issuer. It has the following characteristics:

  • Decentralised
  • Transparent
  • Largely anonymous (Users hold bitcoin addresses, but they aren’t linked to names, addresses, or other personally identifying information)
  • Transaction fees are relatively small (although they are increasing gradually)
  • Transaction speeds are relatively quick (although large traditional financial institutions are now begging to harness blockchain technology to reduce their own transaction times)
  • Secured through cryptography

Cryptocurrency or digital currency: Also known as tokens, cryptocurrencies are representations of digital assets. Cryptocurrencies are categories of digital currencies. They consist of a type of electronic token with a perceived value, that is managed through limited entries in a database that no one can change without fulfilling specific conditions. Digital currency can be transferred between entities or users with the help of technology like computers, smartphones and the internet.

Blockchain: A blockchain is a shared or distributed ledger where transactions/data are permanently recorded by appending blocks. The blockchain serves as a historical record of all transactions that ever occurred, from the genesis block to the latest block, hence the name blockchain. The “chain” which connects block is often highly encrypted which makes the data stored in the blockchain highly secure and permanent.

Distributed Ledger Technology (DLT): Distributed ledgers are ledgers in which data is stored across a network of decentralized nodes. A distributed ledger does not have to have its own currency and may be public or permissioned and private.

Featured Startup – 5 Minutes With Avtar Sehra, Crowdaura

Posted on : 26-02-2016 | By : Maria Motyka | In : 5 Minutes With, Featured Startup, Finance, Innovation

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In your view, which aspects of the financial services industry are the most likely to be revolutionised by the Blockchain?

Blockchain is being presented as a savior of the financial system, which a key focus point on clearing and settlement. However, there are many aspects of the trade-lifecyle process that are being either overlooked or ignored and some of those aspects are fundamentally much more of an overhead in terms of time and cost than some of the post trade activities. In addition, using current technology the post trade activity cannot be fully autonomised as smart contracts still need external scheduling services to trigger key Blockchain events, such as cashflows.

Blockchain capability and capacity will increase in terms of data security, storage and compute. As this takes place, the chain will become an increasingly fatter layer in the financial services trade life cycle technology stack. For example Crowdaura is already experimenting with instrument document structuring, pricing and execution on chain as well as looking at the obvious post trade activities. While we are focusing on simple debt, equity and swap instruments at the moment, we have our sights on much more complex products and deal structures.

We also believe that the current view of deploying a global Blockchain fabric for financial services is most likely an incorrect approach. We think a global finance Blockchain network will develop like how many other networks develop, such as the Internet. For example there are huge opportunities for driving greater efficiencies in the internal trade lifecycle from execution, trade capture to documentation, confirmation and other post trade administration and control activities. At the moment these internal trade lifecycle processes are stymied by inefficiencies related to transfer of data between systems and executing reconciliations and reporting, or trying to maintain unpractical or uneconomical golden data sources.

In Crowdaura we are already experimenting with deployment of internal operational chains, where our applications can plug into, and providing adapters to integrate in-house or third party applications into the chains. Eventually these local area chains will then be connected to wider areas chains through trusted internal “pegging” nodes, very much like how LANs connect to the Internet in a current enterprise environment. In this model certain internal functions such as confirmations, clearing and settlement, can then move from the internal to the external chain, whilst still maintaining data security and privacy.

avtar

Crowdaura has recently been chosen for both the Fintech Innovation Lab (as the only Fintech startup in the lab utilising Blockchain) and the Microsoft Accelerator program – what made you stand out from competing startups?

Crowdaura beat over 300 start-ups to be accepted into the 6th Microsoft London Accelerator cohort, and over 600 start-ups to win a place in the Accenture FinTech Innovation Lab. We are one of the first Blockchain start-ups to be accepted into the Microsoft Accelerator, and this is because Crowdaura doesn’t position itself as a Blockchain company. We leverage a complex stack of technologies, with Blockchain being one of them, but our focus is to provide a best in class Financial Services offering.

We feel that Crowdaura is a glimpse into the future of investment/wholesale banking, as we bring together digital platforms, machine learning and Blockchain to enable large financial services firms to provide automated self-service banking to clients for securities lifecycle management. We want to help financial services firms do what they do, but more easily, cheaply, quickly and safely. This is achieved through automation of activities such as legal/regulatory document structuring; intelligent marketing, distribution, execution; and a Blockchain based clearing, settlement and administration engine.

What made us stand out is that we focus on developing technology for real world financial application. We look at a specific market, the business and operating models being used in that market, and then we try and build a minimal viable end-to-end system that enables frictionless execution within that market. We have many key services that are pre-developed, and most of these are web based (SaaS solutions), which can all be provided as a centralised “investment bank engine-in-a-box”.

However, the true power is leveraged in networks where exchanges can connect up with brokers, or banks with buy-side clients. In such cases we have developed a Blockchain engine, chain agnostic – meaning we can utilise the Bitcoin Blockchain, Etherium Blockchain, or any other blockchain and that can be leveraged for clearing, settlement and depository services, and executing Delivery Versus Payment (DVP) using fiat currencies. We are also experimenting with more on-chain functionality; obviously administration of coupons, dividends and voting are the easy wins. But we have a longer term vision connected with chains that have greater compute capabilities as we feel this is where the future is for truly distributed markets.

Could you share your experiences of working in an accelerator?

The London Microsoft Accelerator program itself has been steadily gaining momentum since launching three years ago, offering a select few start-ups mentoring, support and resources as they push their product through development and bring their offering to market. The accelerator culminates in a pitching event where VCs, Angels, and notables throughout industry assemble to view some of the finest start-ups in the UK and potentially offer investment.

Microsoft Accelerator (MSA) has been extremely supportive in helping us develop the technology side of our business whilst we were still in ‘stealth’ in the fourth quarter of 2015. With their help and support we were able to successfully win a place in the Accenture FinTech Innovation Lab as the only ‘blockchain’ startup in this year’s batch. Being part of the Accenture Fintech Innovation Lab is a great opportunity as it gives Crowdaura the opportunity to work with many of our potential clients in Investment Banking to refine our product and execute novel proof of concepts (PoC’s). So far it’s been exciting to network with different high-potential high-growth startups, share ideas, and discuss collaborative efforts in the future. There is also a lot we are learning from our start-up colleagues in the lab, they are all immensely intelligent and talented people running some incredibly innovative startups.

 

Why’s my computer so slow? Maybe someone is digging for virtual gold.

Posted on : 30-06-2014 | By : richard.gale | In : Cyber Security

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We’ve discussed the rise and fall and rise of virtual currencies in a couple of previous articles (When are Bitcoins going to crash and what’s next?,  The hidden costs of transacting with virtual currencies).

Creating new currency (whether it be Bitcoin, Dogecoin, Litecoin etc) involves using more and more complex logarithms that consume computing power. The reward for this problem solving is a virtual coin and the amount of work required to ‘earn’ a ‘coin’ is constantly rising.  ‘Miners’, as the creators are call are always looking for new and creative ways to build more coins and the cost of processing power sometimes outweighs the worth of the output.

A phenomena that will only rise in frequency and impact is the misuse of other people’s computers to do this.  A few examples are outlined below where organisations were unwittingly hosting unauthorised external mining activities (maybe some terminology from the Californian gold rush would be appropriate – are they virtual “claim jumpers” or “processing poachers”?)

Harvard University research servers have been used to mine dogecoins. A powerful cluster of machines known as ‘Odyssey’ had been hijacked – misused really as the user had legitimate access – and a mining operation was in place for an unknown period of time. The perpetrator has now had their access revoked but is is not known how profitable the operation was.

Another example, the US National Science foundation supercomputers had been taken over for bitcoin mining – the researcher accused of creating the mining operation said he was ‘conducting research’ and it is thought around $8,000 worth of bitcoins were produced.

There are other occurrences of this phenomena including rogue Android applications which have been reported to have taken over peoples’ mobile phones to carry out mining activities (although they would need a large number of phones to make this at all valuable).

We think these examples reflect a wider problem. People  can have legitimate access to huge amounts of computing  power, this especially true in academic, governmental and larger enterprises. How can the need to run large simulations or experiments be differentiated from more sinister misuses of that excess power?

This whole space is a difficult area to analyse. What is ‘normal’ and what is ‘abnormal’? We’ve been thinking about how to differentiate the two and are now working with a really smart new security company that can help with this (and many other security) issues.

The product, Darktrace, has been built by some ex-MI5 and GCHQ scientists and it grew out of the need to protect the UK’s critical network infrastructure (energy & water supplies, communications & transport)  against terrorist or foreign state cyber-attack. The guys at Darktrace quickly realised that the current suite of protection could not prevent most insider attacks (whether intentioned or accidental) so a new model was needed.

Darktrace sits at the centre of your network, listens and learns about the behaviour of users, connected devices and the network itself and then alerts when something abnormal or unusual occurs. It has no preconceptions about the environment when it is installed and it learns (for a period of 2-4 weeks) and then shouts (usually to the security operations team or external team such as the Mandiant response units) when something odd happens. Darktrace views the appliance almost like the immune system of a body, It understands what healthy is and alerts its ‘antibodies’ to investigate and destroy if necessary any potential threat.

The product uses some clever probabilistic algorithms that constantly learn and build on its knowledge of your environment. An example could be the user ‘Fred’. Fred normally logs in to the network after 8:00am, accesses mail, three file servers and then logs out before 7:00pm. If Fred suddenly starts logging in at 02:0am, searchers eight different file servers for documents containing the word ‘Patent’ and then starts exporting them outside the organisation to a site in the Ukraine then it would be marked as ‘unusual’ and alerted. This could potentially be legitimate activity if ‘Fred’s role has changed but probably not. Traditional cyber-technologies may not catch these sort of issues as they are looking for specific patterns or types of behaviour rather than general differences from the norm.

We have been working with Darktrace and can install the appliance on your network to perform the analysis for you. We can do this for a period of 4-8 weeks(to give the system enough time to learn the environment and to sufficient data to work with) and can provide analysis of any unusual behaviour and advice to your security team through that period. In that period of time we would expect to see some unusual activity so should hopefully show the value to your organisation.

If you would like to learn more about this please do contact us.