Welcome to the CoinDesk Weekly Review 16th March 2014 – a regular look at the hottest, most thought-provoking and most controversial events in the world of digital currency through the eyes of scepticism and wonder.
Your host … John Law.
Mysteries in bitcoinland don’t stay mysteries for long.
Take the world record transaction, which was noted in the block chain last November, when nearly 200,000 bitcoins hit a single wallet. Who was behind it? Turns out it was Bitstamp, which has just released details of an audit that confirms the transaction.
Why publish an audit when you don’t have to? It’s time for more transparency, says Bitstamp, and an industry that takes responsibility for itself.
Meanwhile, the extent of the transparency inherent in the system is becoming clearer. At the first academic conference dedicated to cryptocurrency analysis – held in Bermuda, unlike every academic conference John Law has been to – a fascinating paper was published that attempted to show how much digital dosh the Dread Pirate Roberts had garnered during his stint at the helm of Silk Road (squillions) and how many the FBI seized (about a fifth of that). Which is a fairly detailed audit of the affairs of an outfit running in total secrecy – Silk Road, silly, not the FBI.
John Law is not on the libertarian arm of the bitcoin booster brigade, and thinks that decent regulation worldwide will be essential to help the cybercurrency reach its potential to really shake things up.
Like cash, this won’t preclude unregulated activity, but while the Wild West is all very well in the movies it’s not a patch on living in the actual 21st century. But, as Google’s director of ideas Jared Cohen pointed out this week, while regulation’s been talked about for years there’s a real lack of new ideas.
More transparency is certainly one way to build confidence in the bitcoin ecosystem. But as the protocol is inherently transparent, regulation could largely consist of mandating access methods to information that identified company transactions.
If you want to have the protection of the regulator, then sign up to its disclosure regulations. Bitcoin, being a brand-new industry and one with everything to prove, is at a phase where the players should eagerly accept this.
It’s paradoxical but true that openness is often more secure than secrecy. If you don’t rely on people not finding things out, you’ve got nothing to lose if they do.
By adopting a radical approach to regulation based on what may seem an unhealthy degree of disclosure about their systems and activities, bitcoin companies could well end up more trustworthy than existing financial institutions – after all, how well has all that traditional corporate secrecy worked of late, and for whose benefit?
John Law has long been a fan of compulsory systems audits for companies, where their software gets a thorough going-over by independent analysts; not a problem for companies starting with that in mind, but how many banks would pass?
Regulators and industry members alike should recognise there’s a one-off chance here to create a truly innovative and effective environment, suited to the realities of the digital millennium. It could drag the rest of the financial industry along with it.
Taking it personally
The aftershocks of the failure of Mt. Gox continue to exercise the commentators, but the real world has moved on. In particular, the continuing problems in Ukraine, where the Russians seem to have forgotten that invading neighbouring countries stopped ending well some time ago, have led to a run on the banks in Crimea. The banks have responded by putting limits in cash withdrawals, which has increased customer confidence about as much as you’d expect.
“Wouldn’t happen with bitcoin,” one tweeter suggested. That’s true enough: in fact, would you even need a bank account?
The personal current account – PCA, in banking parlance – is a cornerstone of retail banking, In the UK, banks make about 30% of their revenue from PCAs more than from credit cards and savings combined, but in a 2008 report, the Office of Fair Trading noted that the PCA market wasn’t being run in the consumers’ best interest. Not much has changed since.
Charges and fees weren’t transparent, and customers had little idea how their accounts actually worked. Without that sort of knowledge, nobody was changing accounts, and thus with no competition the banks were and are free to do what they liked. Which, mostly, is help themselves. According to the OFT, banks made around £160 a year per current account – a nice trick with other people’s money.
Which is money you rarely actually see. Come payday, your employer asks the bank which has all of its money to send some of it to the bank that has all yours. Much the same sort of thing happens when you pay a bill. Unless you go to a cashpoint and withdraw a fistful of twenties, the banks have all the money all the time.
Bitcoin wallets could change that. The reason PCAs are such a good idea is that they’re gateways to all sorts of financial services such as bill paying, mortgages, insurance, credit cards and so on. Without a bank account, it’s very difficult to get at these. But – in that fabulous fantasy future where bitcoin is as ubiquitous as the Internet – bitcoin and software can do all that just as securely and reliably as a PCA.
Like real wallets, you can’t run a bitcoin wallet in overdraft. And it won’t pay you interest when you’re in credit, but then, overdrafts are terrible forms of credit and you won’t get much by way of interest from your PCA. So, why go to a bank for your daily financials?
In fact, there’s a more interesting question: why doesn’t the bank come to you? PCAs provide the banking system with a huge cash float that is an intimate part of its capitalisation, which is why you can’t get your cash out quickly from a Crimean cashpoint at the moment. But if bitcoin triggers a much slower but harder to control run on the banks, it need not be a disaster for them, yet it could be very good for us.
Your current account is worth £160 a year to them. Very well, let them pay for the privilege. They can run your bitcoin wallet for you, letting it count towards their liquidity much as PCAs do now, but on the understanding that you can click your fingers and get it back whenever you like – with all the direct debits, etc, intact.
That would put competition back into the system, much as number portability has kept the mobile phone companies … well, honest is clearly the wrong word, so let’s say nervous. Banks could offer services such as credit, or even actual cash, but would have to be a lot more transparent about how it all works. They might not like that, but it would make them better companies to deal with.
It would also finally put the old anecdote to bed – the letter from a bank manager to a perennially overdrawn customer that starts: “Dear Sir. It may have escaped your attention that the nature of our relationship is that you bank with us, not vice-versa.”
Art for art’s sake, bitcoin for God’s sake
It’s not just academics who are getting it together on bitcoin – the first art exhibition on a bitcoin theme took place this week in San Francisco. The pieces were, as so often at such events, good solid contemporary stuff that manage a degree of wit, but doesn’t tent the boxers. John Law, who has been known to wave his walking-stick in disgust at modern artists for not being nearly adventurous enough, has some suggestions for future projects.
1. The Angels Of The West: A pair of statues, some 500 metres tall, of the Winklevoss Twins, in a heroic Soviet style, one pointing to the sky, the other gazing firmly upwards with hands on hips. Entirely hollow and coated in iron pyrites, this work will symbolise the power of bitcoin to create image unrelated to actual gravity. The inside can be divided into floors and used for affordable housing in the Bay Area, while the twins’ substantial self-esteem should provide funding for the construction.
2. Satoshis I – CXI: A room filled with a large bush, in which are hidden 111 teddy bears. Each of them has a tiny name badge pinned to their furry chests saying: “Hi! I’m Satoshi”. None of them invented bitcoin.
3. The Miner Lisa: A mysterious smile adorns the face of this chunky little robot, which seeks out the nearest power socket, plugs in and then just sits there. Over the next few weeks, the smile is slowly replaced by a frown, as of one straining at stool, while the robot gets hotter and hotter. Very occasionally, a bright copper ha’penny rolls down its trouser leg.
4. Fleur De Lie: A painting of Rene Magritte holding a tulip. Under it, in pink Comic Sans, is the phrase: “This is not a tulip.” The painting has a Raspberry Pi embedded in it, connected to the Internet via 3G and with its own bitcoin wallet and GPS receiver. If the painting isn’t constantly moved between cities and the bitcoin wallet increased in value, the Raspberry Pi ignites a set of explosives in the picture frame. Don’t get left holding the baby when the music stops!
Move over Banksy, Clear your schedule, Turner Prize committee. This isn’t just good art, it’s the Law.
John Law is an 18th Century Scottish entrepreneur, financial engineer and gambler. Having reformed the French economy, invented paper currency, state banks, the Mississippi Bubble and other ideas essential to modern economics, he took 300 years off in a small cottage outside Bude. He has returned to write for CoinDesk on the foibles of digital currency.
Remember to also check out our short video roundup of this week’s bitcoin news.