Blockchain is the Next Internet

The Internet came into our homes through the phone line, then later cable and more recently fiber. Over 35 years, our digital home connection has grown from 300 bits/sec to one billion. Along the way, we’ve moved from time-share services, which were painful to watch as texted scroll down the screen, to 4K streaming video. Now we download tens of billions of bytes of data in a few minutes with no regard for bandwidth, unless it appears “slow.” The Internet has changed our lives, and guess what? Starting next year, digital currencies will do it again, think Bitcoin, but not Bitcoin itself rather other competing technologies.

Like the Internet, we’ve been eased into digital currencies one step at a time. First with credit cards, then debit cards, and later we added PayPal to handle our eBay sales and purchases. Have you ever left the proceeds from an eBay sale on account with PayPal before eventually spending or moving it into your bank? If you did, then you were using PayPal as a digital wallet, a store of value. Soon after, came Apple Pay, Google Pay and Venmo all more formalized digital wallets specifically designed to store value. The unit of measure within all these systems, at least in the US, is the dollar and they are all digital currency systems. If we look outside the US to China for some examples, we find WeChat and Alipay which are two wildly popular payment platforms.

Alipay is like Apple Pay, but in 2018 it processed nearly 200 billion transactions, by contrast Visa only processed 182 billion transactions worldwide. In June Apple Pay was averaging a measly one billion transactions a month. WeChat is a payment system built on top of a text messaging platform. It also includes a digital wallet element enabling near-frictionless payments between people or businesses, and it processed an amazing 460 billion transactions in 2018. The twist to all of this is that both WeChat and Alipay use the fiat currency of China the Yuan, and both applications are required by Chinese cyber laws to retain all data for six months and to provide backdoors that enable the government to collect whatever data it wants. China doesn’t officially allow access to Facebook and has taken a very hard line on digital currencies like Bitcoin. As you can see we’ve all been properly prepared and programmed to begin accepting other forms of payment. Is it too much of a jump to think you may soon pay an online vendor in something other than dollars?

The catalyst for this epic shift towards digital currencies comes in the form of Facebook which is poised to deliver Libra, their new “stable digital currency”, sometime in 2020. A stable digital currency is one that is pinned to one or more fiat currencies. In Libra’s case, they are accepting deposits in US Dollars, Euros, the British Pound, and the Japanese Yen. This is designed to ensure that the value of Libra doesn’t swing widely around like we’ve seen with Bitcoin over the past several years. Even with these fiat currency tie-downs governments around the globe are fighting Facebook and its release of Libra knowing the danger it represents.

The principal tool a country leverages to control its citizens is its currency. Countries can track currency through the banking and taxing infrastructure already in place. We’ve all watched police dramas where the investigator pulls up the financial records of the suspect, they literally follow the money. Decentralized anonymous digital currency systems provide NO capability to track or control the users of that currency. This is why Facebook will be standing toe to toe with the US Federal government in a series of hearings starting the 23rd of October. Libra has other companies and countries around the globe scrambling to secure a toe-hold in the digital currency market before Facebook dominates everything. In a prior post, we talked about Facebook and Libra, so you can visit that if you’d like to learn a bit more. JP Morgan Chase, Wells Fargo, Fidelity, Amex, and Amazon are all rolling out or supporting digital currency or payment systems. While countries such as China and the US along with the EU are also moving fast to issue alternative digital currencies and bring online payment systems out to secure their position before Libra has a chance to become the fiat (default) currency of the new economy.

Five large companies that are setting the pace for digital currencies are JPMorgan Chase (JPMC), Wells Fargo, Fidelity, American Express (Amex) and Amazon. In June JPMC announced it was beginning trials of its “JPM Coin”. This new coin is a private version of Ethereum running on the Quorum blockchain but developed by JPMC. JPM Coin is designed to be a “stable cash” coin with JPMC depositing cash to secure these tokens. Real-world trials will begin in a few months. Initially, it will be used internally to process transactions and to settle bond and commodity trades. “Wells Fargo Digital Cash” like JPM Coin, is their stable cash token and it will also be used internally to settle transactions throughout the Wells Fargo global network. Wells Fargo has announced that later this year it will be enabling JPMC to also gain access to this network. The real value for both Wells and JPMC is the underlying blockchain secure ledger technology. Amex is also running down the blockchain path as they are a significant player in the Hyperledger project. One of Amex’s largest expenses is its rewards program, so they’re moving to Hyperledger as a means for tracking rewards and for dynamically executing rewards promotions. While JPMC and Wells are pushing coins and blockchains, Fidelity has gotten even more creative. Fidelity is pushing out Kn0x which is insurance for digital currency a customer or institution has stored with Fidelity. This is insurance against theft or loss of the currency, not against any decline in the value of the currencies. One of the biggest concerns around digital currencies is the theft or loss of the tokens themselves. By contrast, Amazon has gone old school in September by teaming up with none other than Western Union to roll out “Amazon PayCode” in the US, it was available Internationally prior to September. This enables Amazon users, who only have hard cash, a way to pay for Amazon products. It should be noted that in 2017 Amazon has offered customers “Amazon Cash” which is an Amazon digital wallet that stores a cash balance. This wallet can then be used to pay for Amazon purchases. Amazon has also been buying up digital cash related domain names in an effort to hedge it’s bet if it were to roll out a coin of its own, along the lines of Overstock’s Ravencoin. Countries are also jumping on the digital currency bandwagon to head off Libra.

While the United States is NOT rolling out a digital dollar anytime soon it is delivering a “real-time payment service” called Fednow designed to settle bank to bank transactions in near real-time. This is in some ways like what Wells and JPMC are doing. It will eventually replace the overnight ACH system currently run by the Federal Reserve. The EU has the Bank of International Settlements or BIS. Which is somewhat shrouded in secrecy and is doing something, but exactly what is still TBD but something akin to a Eurocoin is rumored to be in the works.  Meanwhile, China is poised to release it’s Digital Currency Electronic Payment (DCEP) system that is really nothing more than a digital Yuan. It is expected that Alipay and WeChat will jump right on board and may already have completed their integration efforts. The real question is what is China waiting for?

Digital currencies and electronic payment systems are rapidly becoming pervasive. Today there are nine digital wallets on my phone; Apple, Venmo, and PayPal, exclusively use dollars, at least while I’m in the US. The other six wallets support currencies like Bitcoin, Ravencoin, Ethereum, and a few others. With a bit of effort, I can move value between dollars and these other currencies forever obfuscating the source of these funds. Several of these wallets are gaining value on their own through mining digital currencies so the source for these funds was secure from their inception, but that’s a blog for another day. The point is that digital currencies are here to stay, and they’ll become as pervasive as the Internet over the coming decade.

Today there are nine digital wallets on my phone; Apple, Venmo, and PayPal, exclusively use dollars, at least while I’m in the US. The other six wallets support currencies like Bitcoin, Ravencoin, Ethereum, and a few others. With a bit of effort, I can move value between dollars and these other currencies forever obfuscating the source of these funds. Several of these wallets are gaining value on their own through mining digital currencies so the source for these funds was secure from their inception, but that’s a blog for another day. The point is that digital currencies are here to stay, and they’ll become as pervasive as the Internet over the coming decade.

Digital Currency: The Intrinsic Value Argument

US Treasury Silver Certificate

“Money hasn’t been real since we went off the gold standard. Its become virtual, software, the operating system of our world.”

Mr. Robot, Season 1 eps1.0_hellofriend.mov, June 24, 2015

When friends say that Bitcoin “has no value because there is nothing behind it”, you’re being sucked into the “intrinsic value argument.” Intrinsic value means that the token you’re discussing has an obvious value which requires no faith or belief in ANYTHING. Coins were once a good example of a form of money that had intrinsic value because the metal in the coin was gold or silver and could easily be melted down to make something else of value. Today, most citizens have been seduced by the illusion that their countries currency, in our case the dollar, has intrinsic value. This is a lie; a dollar is worth nothing more than what we collectively believe. This has been true since 1971 when the US completed going off the gold standard. As a boy, I remember coming across US dollar bills with a “Silver Certificate” banner across the top (like the one pictured above). At one time you could take those specific currency notes to a Federal Reserve Bank and exchange them for an equal amount of silver coins, this was the final vestige of the dollar having some sort of intrinsic value. Today those notes are rarely if ever encountered in circulation as most of them have been destroyed or collected. If you were to hand a silver certificate to a twenty-something bank teller today and demand real silver they’d either look at you with a dumb stare or check to see if you’d arrived in a smoking DeLorean.

Now some might argue that you can take a dollar bill and exchange it for quarters or half dollar coins that have an intrinsic value. Years ago, this was true, Quarters minted before 1964 were silver, but from 1964 on the US moved to alloys by mixing in less valuable metals like Nickel, Copper, and Zinc. Today a US Quarter is 92% Copper and 8% Nickel so if you were to melt four of these down, separate out each metal and sell them off at current market prices you’d have lost 86% of the perceived value of your original dollar bill. Note that it doesn’t account for your time spent doing all this work, and the energy required to melt down the coins. This means that even our coins have marginal intrinsic value. Now if you’re reading this in another country guess what, all this applies as well, no country today is on any form of precious metal standard. The ONLY value ANY currency has is our collective belief, our confidence, that it does, in fact, have value.

Furthermore, we regularly buy and sell stocks, bonds, and other securities that also have no intrinsic value, does that make them any more or less “real” than Bitcoin? Today the market capitalization of Bitcoin is $150 billion dollars, making it as valuable as Citigroup. You need only check your wallet to see just how real Citigroup is as you’re likely carrying around a Citigroup card. Is Bitcoin any less real than that seemingly worthless piece of plastic? Companies are legal constructs, that can be created or destroyed overnight. We’d need only look at Enron and Thomas Cook for example. They were once legal constructs just like Citigroup. Our monetary system is based on confidence, nothing more.

“In the fallout of the Great Depression, FDR closed all the banks for a bank holiday and then he reopened them in stages when they were reported to be sound. Later, historians discovered what we in this room now know; that those reports, they were mostly lies. Nevertheless, it worked, it worked because the public believed the government had everything under control. You see? That is the business model for this great nation of ours. Every business day when our market bells ring, we con people to believing in something: The American Dream, family values…; could be freedom fries for all I care. It doesn’t matter! As long as the con works and people buy, sell whatever it is that we want them to.”

CEO Phillip Price, Mr. Robot, eps2.0_unm4sk-pt2.tc, July 13, 2016

While this quote is somewhat dark it crisply demonstrates a historic example of how trust, and by extension confidence, is the foundation of our monetary system. So next time someone says Bitcoin is worthless ask them if they own any stock.

P.S. Mr. Robot returns Sunday night October 6th for its fourth and final season.

Digital Currency: Money, Our Second Social Network

This is the first in a series designed to dispel the mystique of digital currency, think Bitcoin, but trust me we’ll go way beyond that. My goal is to explain in common language all you’ll need to know about digital currency, so you can confidently answer questions when you sit down with your first social network, your family.

As a species, our most significant evolutionary trait is our capability for building social networks. While social networks are found in many other high order mammals, we really do take it to the next level. Let’s face it for our first 36 months outside the womb we’re pretty much a defenseless bag of water rolling around wherever we’re placed. We can’t even effectively flee from even the most basic predator without assistance. From the moment we’re born we establish strong bonds with our parents and siblings, who become our first social network, our family. In our formative years, this network fills all our basic needs. It is this first network that introduces us to the second network we join, often very early in life, and that is the network of money.

Initially, we learn how to spend our first social network’s money as we roll down the aisle of the market and point out the foods we like. Soon members of our first network are sharing their money with us in return for our time when we do a task or achieve a milestone. Many of you up to this point possibly never viewed money as a social network, until recently it hadn’t occurred to me, but in fact, it is. On its face money is nothing more than a worthless token designed exclusively to be exchanged. It is these exchanges that form a network of commerce. If you closely examine your tightest social bonds, outside of your first network, they very likely were started or fueled by money. Outside of family one of my closest friends exists because over a decade ago I exchanged money in return for joining another social network. While I haven’t been associated with that network for years, this friend still shows up whenever I need him most, and it’s no longer about money.   

Terminology is critical to our understanding. Mentally we often have trouble grasping something until we can assign it a name. For years you’ve carried money around in your pocket, but have you ever considered it as your fiat currency? Here in the US, our fiat currency is the dollar. It’s very possible you’ve taken it for granted so long you never even viewed it this way. A fiat currency is the one officially sanctioned and managed by the government, another network, under which you live. If you only need one currency, in my case the dollar, then the concept of fiat becomes mute, but what happens when you begin to use more than one?

Sitting here in North Carolina a month ago for the first time in my life I need to spend some Bitcoin which I’d been gifted a few years earlier. Bitcoin is the most well-known digital currency, but it is NOT a fiat currency because it hasn’t been issued by a government. The vendor I wished to purchase a small digital currency mining rig from in China ONLY accepted Bitcoin, NOT my US dollars via credit card. At the time Bitcoin was trading around $10,000 USD so buying something for $250 USD meant I was spending a fraction of a Bitcoin. I’m only aware of a single fractional unit of a Bitcoin and that’s called a Satoshi which is equal to one ten-millionth of a Bitcoin. So, I shelled out roughly 2.5M Satoshi for my rig and anxiously awaited its arrival. We’ll dive more into Bitcoin and Satoshi in future posts, but I thought it a prudent example where the fiat currency wasn’t accepted. Next year we’ll have Libra, Facebook’s digital currency, and that’s already giving those who manage our fiat currencies serious concerns.

In computer science, there’s a concept called Metcalfe’s law which states that the value of a network is equal to the square of the number of nodes or members in that network. My extended family has roughly fifty members, so its potential value is fifty squared or 2,500. My friend has nearly 100 in his extended family, so his family’s value is 10,000. Metcalfe’s law came along with computer networking, long after Alexander Graham Bell had invented the telephone, but Bell was aware that the value of his invention would only be truly realized once it had been widely adopted. Within 10 years of its invention over 100,000 phones had been installed in the US. Bell died 46 years after his invention knowing that his new network had changed the world.  

Facebook is the largest social network our species has ever created. With over two billion active users this means that one person in four uses this network monthly. Right now, the clear majority of those two billion people live their lives with their fiat currency, and unless they travel they rarely if ever deal with another. Next year Facebook will issue its fiat currency, Libra, and it will change everything. Now it should be noted that Facebook isn’t a country so the concept of them issuing currency has raised some serious concerns from those who do issue currency. Countries around the globe are taking Facebook’s Libra head-on because they know it represents a Pandora’s box of problems for their own monetary systems, and here’s the main reason why.

Looking at Facebook as a network we could say its value is two squared or four, for now, let’s drop the all the billions as it just makes the numbers incomprehensibly large. The US has a population of 0.327 billion so the value of it as a network (again without the billions) is 0.1 and China has a population of 1.386 billion, so the value of its network is 1.9. If we now view these countries populations as networks, we see that Facebook’s value is twice that of the US and China combined. Extend that to currencies and you can why all the fuss, and why you might need to understand digital currency.

Next, we’ll dismiss the intrinsic value argument, that’s where grandpa says Bitcoin is worthless because there’s nothing behind it. You can then counter with the US went off the gold standard decades ago so why isn’t the dollar worthless? We’ll provide you with that side of the argument.