M. Ametrano [email protected] 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
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
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
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
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
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
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
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
• 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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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