Distributed Public Ledger Revolution & the Future of Money

123bcb090d8a43fd925777b9d1421c1d?s=47 Ferdinando M. Ametrano
January 30, 2015

Distributed Public Ledger Revolution & the Future of Money

Presentation for Intesa Sanpaolo


Ferdinando M. Ametrano

January 30, 2015


  1. 1.

    Distributed Public Ledger Revolution & the Future of Money Ferdinando

    M. Ametrano ferdinando.ametrano@bancaimi.com BANCA IMI University of Milan-Bicocca, Hayek Money, QuantLib Milan, January 30th 2015 Educast Formazione Intesa Sanpaolo http://mana0.intesasanpaolo.com:8347/tamtamy/em/permalink/alla-scoperta-del-bitcoin.action
  2. 2.

    Outline 1. Introduction 2. Bitcoin Primer 3. Payments, Settlement, Banking,

    and Exchanges 4. Regulatory Framework 5. About Money 6. Conclusion Ferdinando Ametrano 2015 2/43
  3. 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 3/43
  4. 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 4/43
  5. 5.

    Marc Andreessen: Bitcoin today is like Internet in 1994, weird

    and scary • chart Ferdinando Ametrano 2015 5/43
  6. 6.

    Cryptocurrency Money for the Information Economy • No transaction costs

    • No amount limits • No intermediaries • No frozen funds • 24/7 • 365 days • Social network enabled • Smartphone ready Ferdinando Ametrano 2015 6
  7. 8.

    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 8/43
  8. 9.

    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 9/43
  9. 10.

    Key Adoption Metrics http://www.coindesk.com/state-bitcoin-2015-ecosystem-grows-despite-price-decline/ Quarterly Last 12 Months Dec-14 Sep-14

    Q/Q Δ Dec-13 Δ Commerce Wallets 7,948,272 6,559,978 21% 3,194,584 2x Merchants 82,000 76,000 8% 35,903 2x Merchants’ annual revenue ($bn) 180 86 109% 0 N/A ATMs 341 251 36% 4 85x Unique bitcoin addresses 157,377 184,554 -15% 108,166 45% Industry All-time VC investment ($m) 432.7 302.9 43% 97.9 4x Number of VC-backed startups 83 68 22% 30 3x Media Mainstream media mentions 673 687 -2% 2,889 -76% Technology Network hash rate (billion/second) 335,365,290 249,839,180 34% 9,920,977 34x Github no. of updated repositories 23,249 18,753 24% 4,410 5x Valuation Bitcoin market capitalization ($bn) 4.3 5.2 -17% 9.3 -54% Ferdinando Ametrano 2015 10/43
  10. 11.

    Bitcoin: a currency and a protocol • Bitcoin: protocol, software,

    and 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 11/43
  11. 12.

    Bitcoin the protocol Distributed public ledger of transactions: • 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 12/43
  12. 13.

    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 13/43
  13. 14.

    No central authorities: examples digital tokens for: • Car ownership

    (car sharing) • Stakeholder shares, IPOs • Voting rights (liquid democracy) Distributed Autonomous Organizations: • Gambling online (no fees, no taxes) • Health insurance (without company costs) Ferdinando Ametrano 2015 14/43
  14. 15.

    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 15/43
  15. 16.

    Asymmetric Cryptography: Public/Private Key Pair mathematically linked, perform opposite functions:

    • private (secret) key produce a digital 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 16/43
  16. 17.

    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 17/43
  17. 18.

    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, so the block chain cannot be altered without huge resources • Computing power is measured in hash/s, hash being the basic operation needed for validation Ferdinando Ametrano 2015 18/43
  18. 20.

    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 20/43
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    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 21/43
  20. 22.

    Inelastic Money Supply: Deterministic Decreasing Rate chart 2029: issued 96.88%

    of all BTC 2141: issued last 0.00000001 BTC Ferdinando Ametrano 2015 22/43
  21. 23.

    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 https://www.cryptocoinsnews.com/google-may-introduce-bitcoin-new-payment-system/ • Amazon: granted patent for the use of digital currencies as payment on cloud platforms (Amazon Web Services) Ferdinando Ametrano 2015 23/43
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    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 25/43
  23. 27.

    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 27/43
  24. 28.

    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 28/43
  25. 29.

    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 – former Citigroup CEO Vikram Pandit – former Thomson Reuters CEO Tom Glocer – USAA http://www.coindesk.com/coinbases-75-million-series-c/ Ferdinando Ametrano 2015 29/43
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    Gemini Winklevosses twins are launching • Gemini, 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 30/43
  27. 31.

    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 31/43
  28. 32.

    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 32/43
  29. 33.

    US Landscape • July 1, 2014: US Marshall auction: 30000BTC

    for north of USD 19M • July 17, 2014: New York Department of Financial Services released first BitLicense Regulatory Framework draft • Last draft (February 2015): widely regarded as possible framework for other jurisdictions http://www.dfs.ny.gov/legal/regulations/revised_vc_regulation.pdf Ferdinando Ametrano 2015 33/43
  30. 34.

    Benjamin M. Lawsky NY DFS superintendent 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 Enough is enough: four decades of slow-to-non-existent progress in the bank payments system seems like fair warning Bipartisan Policy Center in Washington, DC. December 18th, 2014 http://www.dfs.ny.gov/about/speeches_testimony/sp1412181.htm Ferdinando Ametrano 2015 34/43
  31. 35.

    SEC and unregulated IPOs • ColoredCoins, Conterparty, Coinprism: technologies for

    creating and exchanging digital assets http://coloredcoins.org/ http://counterparty.io/ https://www.coinprism.com/ • The Security and Exchange Commission is conducting an inquiry to determine if violation of federal securities laws have occurred http://www.scribd.com/doc/244670525/Letter-LA-Office https://www.cryptocoinsnews.com/sec-sends-inquiry-letters-hundreds-bitcoin-companies-unregistered-securities/ Ferdinando Ametrano 2015 35/43
  32. 36.

    Friedrich 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 36/43
  33. 37.

    Money Comparison Medium of Exchange Store of Value Unit of

    Account Live cattle Diamonds Gold Fiat coins and notes Cryptocurrency • 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 limited in some way Ferdinando Ametrano 2015 37/43
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    Money as value yardstick • Unit against which the value

    of every other good is measured • A good in itself: its value is governed by supply and demand • 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 39/43
  35. 40.

    The Monetary Bitcoin Problem • The protocol has got rid

    of any central monetary authority • The currency is lacking elastic monetary policy flexibility http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q101.pdf http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q102.pdf http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q3digitalcurrenciesbitcoin1.pdf http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q3digitalcurrenciesbitcoin2.pdf Ferdinando Ametrano 2015 40/43
  36. 41.

    Hayek Money The cryptocurrency monetary standard of elastic non-discretionary supply

    regulated to achieve stable prices with respect to a (commodity) price index Ametrano, Ferdinando M. (2014) Hayek Money: the Cryptocurrency Price Stability Solution http://ssrn.com/abstract=2425270 Ferdinando Ametrano 2015 41/43
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    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 42/43
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    Bitcoin is a disruptive invention • Technology: endless possibility in

    replacing central authorities The challenge is to imagine today what could be the next 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 43/43