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Blockchain Revolution and the Future of Money

Blockchain Revolution and the Future of Money

Presented at the Energy and Commodity Markets and Products course of the Essec Business School. Cergy-Pontoise, May 19, 2015

Ferdinando M. Ametrano

May 19, 2015
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Transcript

  1. Creative Commons Attribution-ShareAlike 4.0 International License. Blockchain Revolution and the

    Future of Money Ferdinando M. Ametrano [email protected] https://speakerdeck.com/nando1970 Banca IMI Intesa Sanpaolo, Milano-Bicocca University, QuantLib, Hayek Money Energy and Commodity Markets and Products ESSEC Business School Cergy-Pontoise, May 19, 2015
  2. Outline 1. Introduction 2. Bitcoin Primer 3. Blockchain Technology 4.

    Payments, Settlement, Banking, and Exchanges 5. Regulatory Framework 6. About Money 7. Hayek Money 8. Seigniorage Shares and Reserve Bank 9. Bibliography and Conclusions Ferdinando Ametrano 2015 2/120
  3. What are bitcoins? https://bitcoin.org/en/ • Decentralized digital currency • Not

    backed by any government or organization • Instantaneous peer-to-peer transactions • No need for trusted third party • Cryptographic security • Low-cost banking for everybody everywhere https://bitcoin.org/en/faq http://www.coindesk.com/information/ Ferdinando Ametrano 2015 3/120
  4. Opinions • Ben Bernanke: [the virtual currency] may hold long-term

    promise, particularly if the innovations promote a faster, more secure and more efficient payment system. • Alan Greenspan: It’s a bubble. It has to have intrinsic value: you have to really stretch your imagination to infer what the intrinsic value of Bitcoin is. I haven’t been able to do it. Maybe somebody else can. I do not understand where the backing of Bitcoin is coming from http://qz.com/148399/ben-bernanke-bitcoin-may-hold-long-term-promise/ http://www.bloomberg.com/news/articles/2013-12-04/greenspan-says-bitcoin-a-bubble-without-intrinsic-currency-value Ferdinando Ametrano 2015 4/120
  5. Marc Andreessen: Bitcoin today is like Internet in 1994, weird

    and scary • No transaction costs • No amount limits • No intermediaries • No frozen funds • 24/7, 365 days • Social network enabled • Money for the Information Economy Ferdinando Ametrano 2015 5
  6. Bitcoin Economy http://bitcoincharts.com/charts/bitstampUSD#tgWzm1g10zm2g25zv • Total number of BTC is about

    14M • BTC Market Cap: about $3-14B (USD M0 is about $1,200B) Ferdinando Ametrano 2015 7/120
  7. December 2013: China crackdown • People’s Bank of China crackdown:

    – prohibits financial institutions from trading, underwriting, or offering insurance in bitcoins or any other digital currency – Bitcoin is not to be considered a currency – owning bitcoins is not outlawed or prohibited • As of December 2013 BTC China was world's largest Bitcoin exchange by volume • Alibaba, China's top Internet retailer, stopped using bitcoins as of January 19 2014. Ferdinando Ametrano 2015 8/120
  8. February 2014: Mt Gox bankruptcy • As of January 2014

    Mt Gox was world's largest Bitcoin exchange by volume • In February 2014 it filed for bankruptcy protection from creditors • It announced that around 850,000 bitcoins belonging to customers and the company were missing and likely stolen, an amount valued at more than $450 million at the time • Fraud or theft? Ferdinando Ametrano 2015 9/120
  9. Silk Road • online market, operated as a Tor hidden

    service • online users were able to buy illicit goodies using bitcoins, while browsing it anonymously and securely without potential traffic monitoring • launched in February 2011 • shut down in October 2013 • Ross William Ulbricht, alleged to be the owner of Silk Road arrested in San Francisco • Many other black markets have filled in as successors Ferdinando Ametrano 2015 10/120
  10. Bitcoin resilience Is there anything else in financial world: •

    Just 6 years old • Without government or corporation backing • That can lose its main (China) market • With fraud/theft at its main reference exchange (Mt Gox) • With such a bad reputation (Silk Road) That could be still alive and kicking? Ferdinando Ametrano 2015 11/120
  11. Key Adoption Metrics http://www.slideshare.net/CoinDesk/state-of-bitcoin-q1-2015 Ferdinando Ametrano 2015 Quarterly Last 12

    Months Mar-15 Dec-14 Q/Q Δ Mar-14 Δ Commerce Wallets 8,457,207 7,396,772 14% 4,448,142 2x Merchants 88,000 82,000 7% 52,704 2x Merchants’ annual revenue ($bn) 180 180 0% 2 78x ATMs 374 342 9% 47 8x Unique bitcoin addresses 203,189 157,377 29% 137,342 1x Industry All-time VC investment ($m) $676 $447 51% $164 4x Number of VC-backed startups 103 89 16% 47 2x Media Mainstream media mentions 458 580 -10% 2,594 -82% Technology Network hash rate (billion/second) 346,028,956 313,142,289 11% 41,813,922 8x Github no. of updated repositories 27,857 23,249 20% 9,915 3x Valuation Bitcoin market capitalization ($bn) $3.4 $4.3 -21% $5.3 -36% 12/120
  12. Where can you buy bitcoins? What can you buy with

    bitcoins? • Buy bitcoins using USD or EUR at one of many exchanges, e.g. Bitstamp, The Rock Trading, etc. • Use bitcoins to buy: – web services – software – hardware – gambling services – Narcotics, guns, credit card numbers, etc. – Topping the list, in terms of the number of transactions, is tipping and donations Ferdinando Ametrano 2015 13/120
  13. Outline 1. Introduction 2. Bitcoin Primer 3. Blockchain Technology 4.

    Payments, Settlement, Banking, and Exchanges 5. Regulatory Framework 6. About Money 7. Hayek Money 8. Seigniorage Shares and Reserve Bank 9. Bibliography and Conclusions Ferdinando Ametrano 2015 14/120
  14. Private Monies • A widely accepted medium of exchange or

    payment – issued by a non-governmental body – without legal privileges • Private monies do not have to be generally acceptable; they merely have to be widely accepted • Public demand for private currencies : – hold them in the expectation that they will not diminish in purchasing power as state money has – conduct illegal activity – wish to be part of a movement against increasing state control of economic and personal behavior – just want better money Ferdinando Ametrano 2015 15/120
  15. Liberty Dollar: 1998-2009 • Private mint that issued gold and

    silver coins; also issued notes redeemable in precious metals • Periodically revalued against USD: the value of the latter fell over time against precious metals • specifically designed to function in parallel with and in competition to USD • never marketed or represented as official US currency • Highly successful: it became the second most popular currency in the US • Its use declared a federal crime by the US government • Its founders convicted for counterfeiting, fraud and conspiracy against the United States Ferdinando Ametrano 2015 16/120
  16. e-gold: 1996-2007 • digital payment system with gold as unit

    of account • user accounts backed by gold reserves • By 2005, e-gold had grown to be second only to PayPal in the online payments industry: 1.2M accounts and $1.5B transactions • indicted in April 2007 by US law enforcement services • Charges: unlicensed money-transmitting entity and a means of moving the proceeds of illegal activities • Never proven and even the judge expressed major doubts • ‘offshore’ payment system rather than a money transmitter or bank as defined under then-existing regulations, not least because gold was not legally ‘money’ Ferdinando Ametrano 2015 17/120
  17. Digital Transfer of Value • To securely (cryptographically) transfer value

    digitally has been possible for decades • However it had always required the creation of a centralized trusted party to prevent double spending • Bitcoin – does not require a central trusted party – is designed to resist attacks of malicious agents, as long as they do not control network majority Ferdinando Ametrano 2015 18/120
  18. Precursors • ecash, David Chaum, 1982 (blind signature) • Hashcash,

    Adam Back, 1997 (Proof-of-Work) • B-money, Wei Dau, 1988 (distributed database) • Bit gold, Nick Szabo, 1998 (distributed database, sequential money creation) • Anonymous Electronic Cash, Tomas Sander and Amnon Ta-Shma, 1999 (anonymity) • Reusable P-o-W, Hal Finney, 2004 Ferdinando Ametrano 2015 19/120
  19. The announcement From: Satoshi Nakamoto <satoshi <at> vistomail.com> Subject: Bitcoin

    P2P e-cash paper Newsgroups: gmane.comp.encryption.general Date: 2008-10-31 18:10:00 GMT I've been working on a new electronic cash system that's fully peer-to-peer, with no trusted third party. The paper is available at: http://www.bitcoin.org/bitcoin.pdf The main properties: Double-spending is prevented with a peer-to-peer network. No mint or other trusted parties. Participants can be anonymous. New coins are made from Hashcash style proof-of-work. The proof-of-work for new coin generation also powers the network to prevent double-spending. Bitcoin: A Peer-to-Peer Electronic Cash System Abstract. A purely peer-to-peer version of electronic cash […] Satoshi Nakamoto --------------------------------------- The Cryptography Mailing List Ferdinando Ametrano 2015 20/120
  20. Satoshi Nakamoto http://mag.newsweek.com/2014/03/14/bitcoin-satoshi-nakamoto.html • Unknown identity: pseudonymous person or group?

    • Worked on Bitcoin since probably 2007 • Published the paper in 2008 • Released the code in January 2009 • Stopped involvement mid-2010 • Entrusted the project and a copy of the alert key to Gavin Andresen, effectively his successor • He owns about 1M bitcoins, never spent Ferdinando Ametrano 2015 21/120
  21. Nakamoto's political motivations • "Yes, [we will not find a

    solution to political problems in cryptography,] but we can win a major battle in the arms race and gain a new territory of freedom for several years. Governments are good at cutting off the heads of a centrally controlled networks like Napster, but pure P2P networks like Gnutella and Tor seem to be holding their own." • "[Bitcoin is] very attractive to the libertarian viewpoint if we can explain it properly. I'm better with code than with words though." • In the Bitcoin's transaction database, the first entry has a note by Nakamoto: "The Times 03/Jan/2009 Chancellor on brink of second bailout for banks" Ferdinando Ametrano 2015 22/120
  22. Source Code License Bitcoin was released under the MIT license,

    so it is: • open source; cryptographic software’s source code must be available to allows public inspection (absence of backdoor and security vulnerabilities) • free software; the user the right to use, copy, modify, and redistribute the software Instead, proprietary software is often close source and it only grants the right to use Ferdinando Ametrano 2015 23/120
  23. Bitcoin: a currency and a protocol • Bitcoin: protocol/software (aka

    blockchain technology) and the community • bitcoins: units of the currency bitcoins are sent using Bitcoin • bitcoins are the first powerful protocol application: a digital property created inside the Bitcoin protocol Ferdinando Ametrano 2015 24/120
  24. Bitcoin the protocol Distributed public ledger of transactions (aka blockchain):

    • shared with peer-to-peer technology • allows to transfer a unique digital token • the token can be exchanged, but not duplicated • keeps records of each and every transaction forever It can replace any processing central authority with decentralized peer-to-peer cryptographically secure equivalent Ferdinando Ametrano 2015 25/120
  25. Smart Properties and Contracts • Smart properties: digital token programmatically

    exchanged using smart contracts • Smart contracts: math-based contracts with automated software settlement, with no legal systems or human actions required • Autonomous agents: software programs created for specific tasks, able to make and receive payments using Bitcoin • Decentralized Autonomous Organizations (DAO) Ferdinando Ametrano 2015 26/120
  26. • Utilizing the blockchain is a natural digital evolution for

    managing physical securities, [this technology holds the potential to] benefit not only our clients, but the broader global capital markets NASDAQ Chief Executive Robert Greifeld • Pilot project: NASDAQ Private Market (pre-IPO trading among private companies) • Bitcoin technology replaces the informal systems used for sales and transfers of shares Ferdinando Ametrano 2015 27/120
  27. No central authorities: examples digital tokens for: • Stakeholder shares,

    IPOs • Car ownership (car sharing) • Voting rights (liquid democracy) Distributed Autonomous Organizations: • Gambling online (no fees, no taxes) • Health insurance (without company costs) Ferdinando Ametrano 2015 28/120
  28. Proof of Existence • Block chain as time stamp authority

    • Put a hash value in the «comment» section of a (monetarily negligible) transaction • Hash being a fixed length string that uniquely identify an arbitrary length digital object (e.g. a txt or pdf file) • Existence of that digital object at the transaction time is proved on the block chain www.proofofexistence.com Ferdinando Ametrano 2015 29/120
  29. The bitcoin currency • Not to be found anywhere, they

    only exist as public ledger documented transactions • A bitcoin wallet is a public address 1FEz167JCVgBvhJBahpzmrsTNewhiwgWVG • the public ledger certifies for everybody how many bitcoins are associated to the wallet http://blockexplorer.com/address/1FEz167JCVgBvhJBahpzmrsTNewhiwgWVG It is mine; you are REALLY encouraged to tip Ferdinando Ametrano 2015 30/120
  30. Asymmetric Cryptography: Public/Private Key Pair mathematically linked, perform opposite digital

    signature functions: – private (secret) key used to generate the signature – public key used by anyone to verify the signature • The bitcoin wallet address is the public key • The private key allows spending from the wallet Try at https://www.bitaddress.org Ferdinando Ametrano 2015 31/120
  31. A bitcoin transaction: from public key to public key •

    Transaction: amount + receiver’s public key • The sender’s private key signs the transaction • With sender’s public key anyone can verify that: – The private key has been used, non-forged signature – Transaction has not been tampered or modified – The amount is at sender’s public key disposal • The transaction is published to the public ledger • Everybody knows that the receiver’s public key has received the transacted amount Ferdinando Ametrano 2015 32/120
  32. Bitcoin wallet security • bitcoins are effectively owned by whoever

    can spend them • Securing a wallet: private key safe storage • PC client: Bitcoin Core, Armory, Electrum • Web client: greenaddress.it, blockchain.info • Cold storage: never exposed to Internet, stored away Ferdinando Ametrano 2015 33/120
  33. Pseudonymity, Anonymity Bitcoin is really pseudonymous, not anonymous: • The

    public key does not provide direct information about the private key owner • All transactions are transparent to everybody’s inspection. • Perfect persistent public account history: the public ledger is forever • Tool little privacy for honest people, too much for criminals https://blockchain.info/ http://blockexplorer.com/ Ferdinando Ametrano 2015 34/120
  34. Bitcoin’s public ledger: the block chain • Transactions are bundled

    in blocks, sequentially chained, about one block every 10 minutes • The block chain is a history of transactions resilient to network attackers • The cryptographic link between blocks requires (large amount of) computing power, setting the level of effort required to alter the block chain • As of 2015 the network computing power is 13,000 times that of the combined 500 largest supercomputers Ferdinando Ametrano 2015 35/120
  35. Mining • Miners are the nodes of the network providing

    the computing power for: – processing and validating transactions (avoiding double spending) – securing the network – synchronizing the nodes • Miners compete to process a new block of transactions. The winner provides a proof-of-work and is rewarded with the issue of new bitcoins. • Seigniorage revenues subsidize the network, making transaction almost free Ferdinando Ametrano 2015 37/120
  36. Bitcoin Monetary Rule • 2009: 50BTC every 10 minutes –

    halving every 4Y • This is the only way new bitcoins are released • It is called mining because of its similarity with the progressive scarcity of gold extraction • digital cash supply free of discretionary intervention Ferdinando Ametrano 2015 38/120
  37. Inelastic Money Supply: Deterministic Decreasing Rate chart 2029: issued 96.88%

    of all BTC 2141: issued last 0.00000001 BTC Ferdinando Ametrano 2015 39/120
  38. Outline 1. Introduction 2. Bitcoin Primer 3. Blockchain Technology 4.

    Payments, Settlement, Banking, and Exchanges 5. Regulatory Framework 6. About Money 7. Hayek Money 8. Seigniorage Shares and Reserve Bank 9. Bibliography and Conclusions Ferdinando Ametrano 2015 40/120
  39. The Byzantine Generals' Problem • Communicate using messengers • There

    are traitors amongst them • Decide unanimously whether to attack • Success (i.e. fault tolerance) is achieved if the loyal generals can agree on their strategy, whatever it might be Ferdinando Ametrano 2015 41/120
  40. Hash Function • Any algorithm that maps data of arbitrary

    length to data of a fixed length (called the hash value) in a non-invertible way • Bitcoin uses the (Secure Hash Algorithm) SHA- 256 algorithm that generates a fixed size 256- bit (32-byte) output Ferdinando Ametrano 2015 42/120
  41. SHA-256(“Hello, world!”) • SHA-256(“Hello, world!”) = 315f5bdb76d078c43b8ac0064e4a0164612b1fce77c869345bfc94c75894e dd3 • SHA-256(“Hello,

    world!0”) = 1312af178c253f84028d480a6adc1e25e81caa44c749ec81976192e2ec934c 64 • SHA-256(“Hello, world!1”) = e9afc424b79e4f6ab42d99c81156d3a17228d6e1eef4139be78e948a9332a 7d8 • …… • SHA-256(“Hello, world!4249”) = c004190b822f1669cac8dc37e761cb73652e7832fb814565702245cf26ebb 9e6 • SHA-256(“Hello, world!4250”) = 0000c3af42fc31103f1fdc0151fa747ff87349a4714df7cc52ea464e12dcd4e9 Ferdinando Ametrano 2015 43/120
  42. Proof-of-Work • A new block is added with a mathematical

    proof-of-work based on SHA-256 hashing. Find a nonce for a given block such that: SHA-256(previous block hash, transactions, nonce) <= target • The longer chain (actually the one with higher difficulty) is the consensus Ferdinando Ametrano 2015 44/120
  43. Validation Process Block Generation • The proof-of-work difficulty is adapted

    to the overall available computing power to ensure an average of one block every ten minutes. Ferdinando Ametrano 2015 45/120
  44. ASIC Mining • Application-Specific Integrated Circuit • Designed and manufactured

    for a specific purpose. • Introduced in 2013 for Bitcoin mining • Less power consumption, higher hashing power. Outpaced CPU and GPU mining • $8M a Month Miner: Dave Carlson http://www.coindesk.com/inside-north-americas-8m-bitcoin-mining-operation Ferdinando Ametrano 2015 46/120
  45. Open issues • the clustering of mining resources • 10

    minute for first confirmation • computer power wasted by mining Ferdinando Ametrano 2015 47/120
  46. The block chain • Genesis Block • Orphan Block •

    Main Chain Block Ferdinando Ametrano 2015 48/120
  47. TxIns & TxOuts • Transactions are composed of a list

    of transaction inputs (TxIn) and a list of transaction outputs (TxOut) • A TxOut holds two pieces of data: an amount, and the recipient (public key) address: only the private key can unlock the amount, signing a transaction to a new address • A TxIn holds a reference to a previous TxOut, and the signature that proves that the funds in the TxOut it references can be spent Ferdinando Ametrano 2015 49/120
  48. TxIns & TxOuts • The sum of the amounts of

    the TxIns must be greater than or equal to the sum of the amounts of the TxOuts. • Residual difference between TxIns and TxOuts, if any, is a fee collected by the miner • TxOuts can be spent only once and fully: if the TxOuts amount is greater than the amount to be spent, a TxIn change must be sent to a change address Ferdinando Ametrano 2015 50/120
  49. TxIns & TxOuts • A transaction groups several TxIns and

    TxOuts Ferdinando Ametrano 2015 51/120
  50. Unspent Transaction Outputs • UTXO is an additional database used

    to record funds available for every address • UTXO is a cache for the block chain, updated by new transactions • UTXO is similar to the central databases used by many centralized systems Ferdinando Ametrano 2015 52/120
  51. Transaction Scripts • TxOut includes a mathematical puzzle called <scriptPubKey>

    that must be solved in order to spend the output • TxIn contains the puzzle solution <scriptSig> • The protocol concatenates the <scriptSig> with the <scriptPubKey> and runs the whole script. If the final result evaluates to true, then the input is considered valid Ferdinando Ametrano 2015 53/120
  52. Transaction Scripts • Script is a Forth-like language, stack-based, purposefully

    not Turing-complete, with no loops Ferdinando Ametrano 2015 54/120
  53. Transaction Types • Pay-to-address • Pay-to-public-key • M-of-n multi-signature •

    Pay-to-script-hash • … • nLockTime Ferdinando Ametrano 2015 55/120
  54. Outline 1. Introduction 2. Bitcoin Primer 3. Blockchain Technology 4.

    Payments, Settlement, Banking, and Exchanges 5. Regulatory Framework 6. About Money 7. Hayek Money 8. Seigniorage Shares and Reserve Bank 9. Bibliography and Conclusions Ferdinando Ametrano 2015 56/120
  55. Merchants & Payment Processors • PayPal accept bitcoin as of

    September 2014 • Sridhar Ramaswamy, head of Google Wallet We are working in the payments team to figure out how to incorporate bitcoin into our plans • Amazon: granted patent for the use of digital currencies as payment on cloud platforms (Amazon Web Services) Ferdinando Ametrano 2015 57/120
  56. Massively Simplify Banking I believe that blockchain technology will not

    only change the way we do payments but it will change the whole trading and settlement topic. It has potential to trigger “massive” simplification of banking processes and cost structure. When somebody with a strong brand and security level establishes it as a reliable service, then the whole industry will follow. Oliver Bussmann, CIO of Swiss bank UBS http://blogs.wsj.com/digits/2014/10/27/ubs-cio-blockchain-technology-can-massively-simplify-banking/ Major banks like JPMorgan Chase, Citibank and Bank of America have established teams of experts focusing exclusively on digital currency Edmund Moy, former director of the United States Mint http://www.coindesk.com/former-us-mint-director-save-bitcoin-regulators Ferdinando Ametrano 2015 59/120
  57. Ripple • Bitcoin-like real-time settlement infrastructure • Free and instant

    exchange of any form of money or value, even EUR or USD, not just crypto-assets • Banks can offer their customers instant international money transfers, and offer international settlement services to other banks https://ripple.com/ Ferdinando Ametrano 2015 60/120
  58. Fidor Bank • With Ripple, we can deliver a superior

    banking experience at a fraction of the time and cost Matthias Kröner, CEO • With Kraken (a California-based exchange) Fidor is launching a banking platform for crypto-currencies https://ripple.com/blog/fidor-bank-ag-the-first-bank-to-use-the-ripple-protocol/ https://www.cryptocurrency-bank.com/ Ferdinando Ametrano 2015 61/120
  59. Gemini The Winklevoss twins are launching • Gemini, as the

    first regulated NY Exchange • bitcoin ETF with NASDAQ ticker COIN https://bitcoinmagazine.com/19319/look-nasdaq-comes-winklevoss-gemini-exchange/ https://www.cryptocoinsnews.com/winklevoss-twins-creating-gemini-nasdaq-bitcoin/ http://www.coindesk.com/winklevoss-brothers-gemini-nasdaq-bitcoin/ Ferdinando Ametrano 2015 62/120
  60. Noble • team with experience at Goldman Sachs, Morgan Stanley,

    Merrill Lynch and UBS • partnership with Nasdaq to power a Bitcoin Marketplace with X-stream Trading Technology • We are thrilled to work with the experienced industry veterans at Noble Markets and look forward to supporting their cutting-edge, new endeavor for the long term in addressing the needs of the digital currency space Lars Ottersgård, Nasdaq’s executive VP of market technology http://www.nasdaq.com/press-release/nasdaq-to-power-digital-currency-marketplace-for-noble-markets-20150324-00118 https://youtu.be/LCVqfpTSqug Ferdinando Ametrano 2015 63/120
  61. Coinbase • San Francisco based USD/BTC exchange, wallets provider, and

    merchant payment processor • $75m record-setting funding round in January 2015: to date it has raised $106m • A host of notable investors: – BBVA – New York Stock Exchange – DoCoMo (Japanese telco giant) – former Citigroup CEO Vikram Pandit – former Thomson Reuters CEO Tom Glocer http://www.coindesk.com/coinbases-75-million-series-c/ Ferdinando Ametrano 2015 65/120
  62. Circle • April 2015: $50m funding round: – Goldman Sachs

    – China-based IDG Capital Partners – Breyer Capital, General Catalyst, Accel • invest in companies that have the promise to transform global markets through technical innovation Tom Jessop, MD Goldman Sachs’ Principal Strategic Investments Group • hybrid fiat-digital currency model • benefits of digital currency even for USD http://www.wsj.com/articles/goldman-a-lead-investor-in-funding-round-for-bitcoin-startup-circle-1430363042 Ferdinando Ametrano 2015 66/120
  63. itBit • The New York bitcoin exchange has closed $25m

    in Series A fundraising • It has received a trust company charter from the New York State Department of Financial Services (NYDFS) • Customer funds denominated in US dollars will be held in FDIC-insured accounts Ferdinando Ametrano 2015 67/120
  64. Outline 1. Introduction 2. Bitcoin Primer 3. Blockchain Technology 4.

    Payments, Settlement, Banking, and Exchanges 5. Regulatory Framework 6. About Money 7. Hayek Money 8. Seigniorage Shares and Reserve Bank 9. Bibliography and Conclusions Ferdinando Ametrano 2015 68/120
  65. Hard to regulate • Janet Yellen (Feb 2014 US Senate

    Banking Committee): – Bitcoin is a payment innovation that's taking place outside the banking industry – It's not so easy to regulate Bitcoin because there's no central issuer or network operator. This is a decentralized, global [entity] • ECB (October 2012 report): – governments and central banks would face serious difficulties if they tried to control or ban any virtual currency scheme – there is no server that could be shut down if the authorities deemed it necessary http://blogs.wsj.com/moneybeat/2014/02/27/yellen-on-bitcoin-fed-doesnt-have-authority-to-regulate-it-in-any-way/ http://www.ecb.europa.eu/pub/pdf/other/virtualcurrencyschemes201210en.pdf Ferdinando Ametrano 2015 69/120
  66. EU Landscape: July 4, 2014 EBA opinion • Endorses the

    creation of governing authorities accountable for protocol and transaction ledger integrity • Until a comprehensive regulatory regime is developed: – recommends that national supervisory authorities(*) discourage [financial] institutions from buying, holding, or selling virtual currencies – allows financial institutions to maintain current account relationship with businesses active in the field of virtual currencies http://www.eba.europa.eu/documents/10180/657547/EBA-Op-2014-08+Opinion+on+Virtual+Currencies.pdf (*) http://www.bancaditalia.it/pubblicazioni/bollettino-vigilanza/2015-01/20150130_II15.pdf http://uif.bancaditalia.it/normativa/norm-indicatori-anomalia/Comunicazione_UIF_su_VV.pdf Ferdinando Ametrano 2015 70/120
  67. US Landscape • July 1, 2014: first (of four so

    far) US Marshall BTC auction • NYDFS BitLicense Regulatory Framework, widely regarded as possible framework for other jurisdictions • Benjamin M. Lawsky: The challenge we face is to come up with appropriate guardrails that: – safeguard customer assets; – protect consumers from fraud and abuse; – root out money laundering and other illicit activities; – defend against hackers by emphasizing robust cyber security not stifling beneficial innovation in a fledgling industry. In an age of heightened consumer expectations for real-time, digital payments, if banks fail to innovate, they could face a real challenge Ferdinando Ametrano 2015 71/120
  68. UK Landscape • BoE: The emergence of Bitcoin has shown

    that it is possible to transfer value securely without a trusted third party. The distributed ledger technology may have considerable promise. • BoE: Digital currencies, combined with mobile technology, may reshape the mechanisms for secure payments • Government: is committed to increasing banking competition encouraging the creation of a world-leading environment for innovative payments and financial technology • Government: is launching a research initiative for digital currency technology funded with £10m • BBA: banks must accept they are part of the broader ecosystems customers are constructing around themselves. However, their place in these ecosystems is far from secure Ferdinando Ametrano 2015 72/120
  69. Outline 1. Introduction 2. Bitcoin Primer 3. Blockchain Technology 4.

    Payments, Settlement, Banking, and Exchanges 5. Regulatory Framework 6. About Money 7. Hayek Money 8. Seigniorage Shares and Reserve Bank 9. Bibliography and Conclusions Ferdinando Ametrano 2015 73/120
  70. Money as social relation instrument • Human beings are born

    into a gift economy • Enlarged relationship circle requires exchange economy • Barter economy, coincidence of wants • Trade economy, money as medium of exchange • Bitcoin is money for the information economy Ferdinando Ametrano 2015 74/120
  71. Friedrich August von Hayek Denationalisation of Money • history of

    coinage is an almost uninterrupted story of debasements; history is largely a history of inflation engineered by governments for their gain • why government monopoly of the provision of money is regarded as indispensable? It deprived public of the opportunity to discover and use a better reliable money Blessed will be the day when it will no longer be from the benevolence of the government that we expect good money but from the regard of the banks for their own interest A Free-Market Monetary System, Gold and Monetary Conference, New Orleans, Nov. 1977, https://mises.org/daily/3204 Hayek, F. A., Denationalisation of Money, The Institute of Economic Affairs, http://www.mises.org/books/denationalisation.pdf Ferdinando Ametrano 2015 75/120
  72. IMF’s SDR, F. Saccomanni • Special Drawing Rights are international

    reserve assets, created in 1969 to supplement existing official reserves of member countries • SDRs address the lack of a non-national currency to be used as reserve asset • F. Saccomanni: cryptocurrencies could be an effective monetary policy instruments [...] we should pay more attention to the geniuses working on them, try to understand what of interest they could teach us https://it.finance.yahoo.com/notizie/saccomanni-non-bisogna-demonizzare-cripto-valute-172912255.html http://www.ufficiostampa.rai.it/pdf/2014/2014-10-09/2014100928490498.pdf Ferdinando Ametrano 2015 76/120
  73. From gold standard to fiat money • Gold: the commodity

    money standard – resistance to corrosion and oxidation – high malleability – relative easiness of purity assessment – Pleasant color • Gold purity certification • Representative money • Fractional receipt money • Money and currency • Fiat money and legal tender Ferdinando Ametrano 2015 77/120
  74. Money Comparison Medium of Exchange Store of Value Unit of

    Account Live cattle Diamonds Gold Fiat coins and notes Bitcoin • swappable • fungible • portable • divisible • recognizable • resistant to counterfeiting • reliably saved, stored, and retrieved • retain usefulness over time • non-perishable or with low preservation cost • relative worth unit of measure • stable value for stable price comparison • supply must be controlled in some way Ferdinando Ametrano 2015 78/120
  75. Unit of Account Money as numeraire • Money is the

    unit of account against which the value of every other good is measured • The price system measures the value of goods relative to the value of money Good money should provide stable prices to best perform its role as unit of account Ferdinando Ametrano 2015 79/120
  76. Statement of the bitcoin Problem • successful at getting rid

    of a centralized monetary authority • has given up the flexibility of an elastic supply of money • No salaries, no mortgages Ferdinando Ametrano 2015 80/45
  77. Inelastic Money Supply: Fixed Deterministic Decreasing Rate chart 2029: issued

    96.88% of all BTC 2141: issued last 0.00000001 BTC Ferdinando Ametrano 2015 81/120
  78. Transaction Volume Measured as Bitcoin Days Destroyed If someone has

    100BTC received a week ago and he spend them, then 700 bitcoin days have been destroyed. If he takes those 100BTC and send them multiple times to several addresses back and forth, then finally spend them, although the total transaction volume would be larger than 100BTC the number of bitcoin days destroyed is still 700 Ferdinando Ametrano 2015 82/120
  79. Stable Value of Money • Value of money is governed

    by supply and demand, as for any other good • Changes in bitcoin demand cannot be compensates by elastic supply: they directly translate in price changes and price volatility • Bitcoin speculative appeal leads to hoarding and limited transaction volume • Expectations about its future usage foster price growth but stand in the way of current usage! Ferdinando Ametrano 2015 83/120
  80. Unfairness of the Elastic Supply of Fiat Money • Expansionary

    policy: most are denied of the pro-quota monetary base increase they would deserve as current money holders • Contractionary policy: the general loss of value is dumped on borrowers increasing interest rates • Paper money phasing out (2014 Rogoff) Ferdinando Ametrano 2015 84/120
  81. The Holy Grail of Stable Prices • Gold standard, bimetallism,

    symmetallism • Fixed value of bullion (Aneurin Williams 1892) • Compensated dollar (1911-20 Irving Fisher) • Commodity Reserve Currency (1932 J. Goudriaan, 1937-44 B. Graham, 1942 F. Graham, 1951 M. Friedman) • ANCAP basket (1982 Robert Hall) • Futures contracts (1984 Miles, 1989-95 Sumner) • Quasi-futures contract (1994 Kevin Dowd) • Price index option (2000 Kevin Dowd) Ferdinando Ametrano 2015 85/120
  82. Outline 1. Introduction 2. Bitcoin Primer 3. Blockchain Technology 4.

    Payments, Settlement, Banking, and Exchanges 5. Regulatory Framework 6. About Money 7. Hayek Money 8. Seigniorage Shares and Reserve Bank 9. Bibliography and Conclusions Ferdinando Ametrano 2015 86/120
  83. Hayek Money • The Bitcoin protocol has been successful at

    get rid of any centralized monetary authority • The bitcoin currency has given up the flexibility of an elastic supply of money • Hayek Money is a price stability paradigm: the cryptocurrency monetary standard of elastic non-discretionary supply Ferdinando Ametrano 2015 87/120
  84. Fixed USD Exchange Rate • USD/BTC: 15-Apr-11 1.0, 29-Mar-14 500.0

    • x500 increase for BTC demand relative to USD • 29-March-14: 12.5M bitcoins in circulation • Inflate their number 500 times to 6250M • On 29-Mar-14 it would have been equivalent – to own BTC1 worth $500 – or (rebased) RBTC500 each worth $1 Ferdinando Ametrano 2015 88/120
  85. Inflation adjusted USD-Parity • Adopting the USD Consumer Price Index

    • 6% inflation in the period March 2011-2014 1.06 Ferdinando Ametrano 2015 90/120
  86. Hayek Money Concurrent Cryptocurrencies • They will compete in –

    proper monetary policy befitting user needs – selected commodity basket standard relevant in the reference economy. • To keep reserve is not needed or advocated • Two Hayek Money crypto-families: 1. Gold, the most brilliant protagonist of the history of money. Maybe Silver. 2. Mix of petrols, grains, and industrial metals Ferdinando Ametrano 2015 97/120
  87. Observation of Commodity Prices Without A Central Authority • Miners

    are the agents of the transaction history consensus algorithm • Miners can also be the agents of the reference price consensus algorithm • Shelling points: unbiased market prices are focal prices for the average consensus process • Miners as (black market) brokers Ferdinando Ametrano 2015 98/120
  88. Commodity Price Index Maintenance • Commodities’ importance changes, traded volume,

    relative price stability and sensitivity, and competitive markets might suggest Commodity PI alterations • The Commodity PI is composed of technically unconstrained numbers • Nothing could stop the majority of miners from changing the Commodity PI definition • Proof-of-stake is crucial: the prerogative to change the PI is not oligopolistic power abuse, but the proper right of the majority to rule about its own money Ferdinando Ametrano 2015 99/120
  89. Limits of This First Simplistic Implementation of Hayek Money •

    The number of coins in a wallet changes without any direct inflows or outflows • Prices are stable (salaries and mortgages are now possible!), but the purchasing power of a given wallet is not stable • Coins still have speculative investment appeal and so enjoy limited transaction usage Ferdinando Ametrano 2015 100/45
  90. Outline 1. Introduction 2. Bitcoin Primer 3. Blockchain Technology 4.

    Payments, Settlement, Banking, and Exchanges 5. Regulatory Framework 6. About Money 7. Hayek Money 8. Seigniorage Shares and Reserve Bank 9. Bibliography and Conclusions Ferdinando Ametrano 2015 101/120
  91. Hayek Money Implemented as Dual Asset Ledger Split transactional and

    speculative money demand with two non-fungible assets: • (stable) transactional coins • (unstable) speculative shares Blockchain technology tracks ownership and transactions for both Ferdinando Ametrano 2015 102/45
  92. Monetary Base • coins and shares in circulation, with prices

    and respectively • Overall outstanding monetary base = Coin + Share market capitalizations: = ∙ + ∙ • If ≅ 0 and ≅ 0: cryptocurrency is dead • If ≅ 0 and > 0: no interest for stable coins, shares are the equivalent of bitcoins • So > 0, but really ≅ 1 is the goal Ferdinando Ametrano 2015 103/45
  93. Coins • The supply is regulated to peg the coin

    to a given price index parity – Expansionary monetary phases: coins are minted as share dividends paid to shareholders – Contractionary monetary phases: coins can be destroyed in exchange for newly minted shares or other crypto-assets • When ≅ 1, coins give up any speculative value • Money velocity and transaction volume increase • Transaction validation is rewarded with the issuance of new shares, not coins Ferdinando Ametrano 2015 104/45
  94. Distributed Central Bank Seigniorage Shares Seigniorage: profit made by a

    currency issuer, especially the difference between the face value of coins and notes and their production costs Miners are replaced by shareholders entitled to seigniorage revenues as compensation for being: – obliged to validation task duties – responsible for network security, node synchronization, etc. – subjected to the costs associated to coin stability Ferdinando Ametrano 2015 105/45
  95. Seigniorage Shares • Share market capitalization is the estimation of

    future coin issuance: assuming zero interest rate ∙ is the expected number of future coins • The share price is free to float: – increases for dividend expectations in expansionary monetary phases – decreases in contractionary phases • Shareholders absorb all monetary policy’s costs and benefits, shielding coin holders from volatility • Shares are never burned/destroyed Ferdinando Ametrano 2015 106/45
  96. > 1: Price Index Deflation 1. fresh new coins are

    minted and paid as share dividends to shareholders 2. For a given transactional coin demand satisfied by market capitalization ∙ , an increasing number of coins pushes down to parity • If > 1 then > 0 because coins are expected to be paid as dividend to shareholders Ferdinando Ametrano 2015 107/45
  97. < 1: Price Index Inflation 1. No dividends are expected

    on short-term: decreases 2. decrease implies that less coins are expected to be minted in the future, so is pulled up to parity proportionally to the ∙ share market capitalization loss 3. Coins can also be voluntarily burned in exchange for newly minted shares or other crypto-assets Ferdinando Ametrano 2015 108/45
  98. < 1: Price Index Inflation (2) 1. < 1 and

    > 0: coin price parity might be restored by share intrinsic devaluation or coin burning 2. < 1 and ≅ 0: shares’ defensive help is exhausted, price stability could be preserved only burning coins but shares are not attractive Ferdinando Ametrano 2015 109/45
  99. DeCentralized Reserve Bank as DAO • As monetary policy tools,

    share dividends and coin burning might be not effective enough • A Reserve Bank (as Decentralized Autonomous Organization) can enforce price boundaries: – Always selling newly minted coins for 1.05, accepting crypto-assets (to be accumulated as reserve) in return – Always buying existing coins at 0.95 giving new shares or accumulated reserve crypto-assets in return • A custodian legal entity would be required for non-crypto reserve assets re-introducing centralization Ferdinando Ametrano 2015 110/45
  100. Leverage Bitcoin As Reserve Asset • Bitcoin is the first

    and most successful instance of an intrinsically scarce digital asset: it digital gold • When used as reserve asset, its qualities are magnified! • Its limits are lessened. No more need to: – scale to huge (cash + bank accounts + credit cards) number of transactions – support economically inefficient micropayments – lower confirmation time • The Reserve Bank IPO: raise bitcoins, issue seigniorage share Ferdinando Ametrano 2015 111/45
  101. Bitcoin as (Digital) Gold in The History of (Crypto)Money Gold

    • For centuries gold has been the most successful form of money • Its adoption was not centrally planned • It has been surpassed by other kind of money without becoming obsolete Bitcoin • Bitcoin is the most successful form of cryptocurrency • Its adoption has not been centrally planned • It might be surpassed by more advanced type of cryptocurrencies without becoming obsolete Ferdinando Ametrano 2015 112/34
  102. Transaction Validation Proof-of-Stake + Proof-of-Payment • Transaction validation rights are

    proportional to shareholding (proof-of-stake) • Instead of wasting hardware and electric power in proof-of-work, shareholders pay bitcoins to the Reserve Bank (proof-of-payment) augmenting its reserves • Transaction validation rights are randomly assigned between shareholders, with chances proportional to the accumulated proof-of- payment amount • Share price in bitcoin is obtained as by-product Ferdinando Ametrano 2015 113/45
  103. Seigniorage Revenues Dissipation in Network Security Costs About $600M per

    year (miner remuneration) Ferdinando Ametrano 2015 114/120
  104. Outline 1. Introduction 2. Bitcoin Primer 3. Blockchain Technology 4.

    Payments, Settlement, Banking, and Exchanges 5. Regulatory Framework 6. About Money 7. Hayek Money 8. Seigniorage Shares and Reserve Bank 9. Bibliography and Conclusions Ferdinando Ametrano 2015 115/120
  105. Bibliography • Nakamoto, S. (2008) Bitcoin: A peer-to-peer electronic cash

    system, bitcoin.org/bitcoin.pdf • Antonopoulos, Andreas M. (2014), Mastering Bitcoin: Unlocking Digital Crypto-Currencies, O’Reilly, github.com/aantonop/bitcoinbook • Franco, P. (2014) Understanding Bitcoin: Cryptography, Engineering and Economics , Wiley http://www.amazon.com/Understanding-Bitcoin- Cryptography-Engineering- Economics/dp/1119019168 Ferdinando Ametrano 2015 116/120
  106. Bibliography • Ametrano F., Hayek Money: the Cryptocurrency Price Stability

    Solution, http://ssrn.com/abstract=2425270 • Morini M., Inv/Sav Wallets and the Role of Financial Intermediaries in a Digital Currency, http://ssrn.com/abstract=2458890 • Ametrano F., Cryptocurrency Price Stability With Seigniorage Shares And Reserve Bank, http://ssrn.com/abstract=2508296 • Buterin V. https://blog.ethereum.org/2014/11/11/search-stable- cryptocurrency/ • Sams R., A Note on Cryptocurrency Stabilisation: Seigniorage Shares, https://github.com/rmsams/stablecoins/blob/master/00- main.pdf Ferdinando Ametrano 2015 117/120
  107. Conclusions Bitcoin is a disruptive invention • Technology: endless possibility

    in replacing central authorities The challenge today is to imagine what could be the forthcoming blockchain equivalent of Apple, Google, Amazon, or Facebook • History of Money: the eve of possibly the best money ever devised in human history Payment systems and exchanges will never be the same Ferdinando Ametrano 2015 118/120
  108. Cryptocurrency prices and purchasing power stability 1. Hayek Money as

    price stability paradigm of elastic non-discretionary money supply 2. Coin/share dual asset ledger to decouple transactional and speculative money demand 3. Bitcoin as reserve asset for a DeCentralized Reserve Bank (DAO) that performs market operations 4. Proof-of-Payment to avoid socially inefficient usage of seigniorage revenues for transaction verification Ferdinando Ametrano 2015 119/120