Perspectives on Ca-Libra # 1. Getting rid of three smokescreens

This week the world has witnessed the announcement by Facebook of Calibra, a digital currency wallet and company. The wallet holds Libra, a virtual currency, with the idea to be used globally. Its distribution and use will be further promoted, organised and executed via an association of partners, called the Libra-association. The information pack (download here) also outlines more technical details on programming languages, future plans and committment to regulatory compliance.

Immediately thereafter, a storm of analysis emerged in order to understand the initiative. Quite some politicians and regulators are eager to quickly respond and that is completely understandable.

Facebook is not just the grocery shop around the corner, dabbling about with some new technology. It has allocated significant resources to the development of Libra. With a customer base of at least 2 billion (close to 25% of the worlds population) it is an entity that in itself acts as a world-wide platform and does not need others to achieve a network effect.

Perspectives as the approach for this series of blogs
As the Libra-initiative can be viewed from many angles, I plan to write this series of blogs and label them as perspectives. It's always helpful to view things from a couple of angles and that is precisely what I intend to do. This means we will be looking into definitions, regulatory regimes, business case and previous historical analogies. And as we go along I will take stock of developments and responses.

As you may notice, I will be judging Facebook by a very high standard. The reason for that is simple. If an organisation has so many resources available, I expect them to come up with careful, consistent and accurate thinking, wording and technology. And as a sneak preview: this is not what we got over the last week.

While the maturity of the exercise may look impressive to some observers, the huge inconsistencies and home-brewed interpretations of what a blockchain is cannot be a coincidence. We can see an announcement that Calibra will become available in 2020, while the state of thinking mid 2019 is 'early in the process'. This is accompanied by a PR-smokescreen on cryptocurrencies, that doesn't help our understanding the effort.

So the very first challenge that exists, when discussing the Ca-Libra virtual currency initiative, is to separate fact from fiction and to be precise in terminology. That is why this first blog seeks to get rid of the three biggest smokescreens that we were facing this week.

Smokescreen #1: libra association is not an ecosytem but a payment association with added functionalities
If we start with the source of payments revenue for Facebook, this originally all boiled down to payments related to Flash games (in 2015). But technical problems in Flash would hit their revenue. So they quickly understood the need to be more flexible and to be able to operate different business propositions and solutions. Therefore they moved towards licenses in the US (cash via messenger) and in Europe. They also moved the US e-cash system to France and UK, but announced 2 months ago that they would drop it in Europe per June 15, 2019.

And now, per June 18, 2019 Facebook essentially announce to re-up their game, but not with electronic euro's but with a self-invented world currency, backed by other currencies and liquid financial instruments. To blow away the first smokescreen, let's analyse the difference between the old Facebook e-cash or e-money with fiat currencies and the new Facebook libra, as distributed by Libra Association.

What we can see is that Facebook seeks to move the fiat-currency of its e-money system out of its direct control and responsibility as an issuer. Facebook Payments Inc is currenlty the entity that is responsible and guards all the relevant rules with respect to working with the e-currency. But in the new construct Facebook Calibra is merely one validator that can use the Libra-system under open source rules. So we see the fiat-e-currency companies of Facebook stepping aside and a new Libra association entering the playing field. At the same time, the technology shifts from in-house proprietary systems to an open-source codebase in the hands of no one in particular.

Top organisation	Facebook Inc	Facebook Inc
Type of asset	Virtual Currency	E-money
Denomination	Libra (self-invented)	Pound, Dollar
Issuer / Currency creation	Libra ‘association’	Facebook Ireland
Nature of issuing	No direct issuance to customers. Direct issuance to validators.	Direct issuance to customers Direct redemption at issuer
Secondary market	Secondary/tertiary market with reselling - disbursement via exchanges/other institutions	No reselling of e-money.
Fee structure for Reselling	Unknown, but most likely the price for validators is unequal to that for exchanges or customers.	Issuance at par and redemption Of full amount minus some cost
Issuing without Customer demand	Currency base may change without actual demand of customers.	Issuance as part of buy-transaction of the customer
Reserve pool	100% reserve in basket of currencies	100 % reserve in Denominated fiat currency
Technology	Open Source community	Proprietary
Control and use of technology	Unknown contractual arrangements and safeguards for entities in the value chain	All usage governed by contract with issuer and financial law

Bringing the currency to the public or ducking the issuance responsibilities?
Of course one could frame the above shift of roles as bringing a currency to the public. Facebook is however dumping its core-responsibilities with respect to shaping and operating a currency-system and moving a lot of activities to an ill-equipped new Libra association with no track record at all.

While Calibra states that it will comply with all relevant legislation, we can see that the actual information of the Libra Association in this respect is pretty thin. They issue a currency-like digital token/record but do not explain which legal regimes would apply. Also their actual claim as whether they are a not-for-profit organisation does not align fully with this twitter thread outlines that it is a regular company with wider statutes.

If it looks/talks/qucks like a payments scheme, it is a ...?
In payment terms - which is what Facebook says to be aiming for - the Libra Association is essentially a payment scheme. Such a scheme defines the rules for an ecosystem that wishes to transact electronically. Examples are Visa and Mastercard, organisations that need to abide with a lot of rules in order to avoid them becoming a place of illegal cartel-agreements on price and illegitimate contract terms to end users.

With payment schemes we have huge and long discussions and deliberations of price levels. There is the obligation to ensure that there is no obligation to buy processing power from the scheme itself. There are policy views and obligations that schemes should be interoperable and open. And then there is a mountain of rules that specifies how to use the brand and which technical criteria must be complied with in order to be allowed to connect to the system.We find very little of this in the current papers on the association.

What makes this payment scheme special, a payment-scheme-plus ?
What sets Libra apart from Visa and Mastercard is that the association is effectively an issuer of the currency. This means a blurring of operational roles and scheme responsibilities, which is generally considered as a bad practice in governance terms. But what is most striking is that the membership rules are not geared towards controlling/monitoring and creating a safe and sound currency. We find no mention of specific prudential licenses or governance/quality certifications required for different roles under the scheme and as a member (or shareholder).

The only thing we read is: we seek to expand, we want to incentivise the use of the token and for this we don't want the small players in the market. We aim for the big players with market power. We separate the wholesale participants from the retail participants (allowing for price upticks). And then - the devil is in the details - the customer pricing format is based on a FOMO-principle (do you want your transaction processed: please throw in some more gas).

I am curious what reasoning Facebook and its founding members have had in this respect. The whole association setup is ostensibly aimed at market dominance, without proper governance safeguards and without any guarantees as to operational security and safety and soundness of the system. If I were a competition regulator I would jump at the opportunity to wait for the founders to sign the participation agreement and deliver a letter to their doorstep, next day, to start investigating the market abuse that might be at play here.

Governance claims and reality: a scheme is a supertanker without effective governance
I have been reading all the statements on the public structure of the association with a lot of amusement. Facebook is claiming that it will bring the intellectual property into the public domain and of course all the members of the association have a voice. So this seems to be well arranged with room for consultation, discussion and changing course.

The reality is completely different, as everybody in the banking sector knows. There is sufficient experience with clearing houses and associations (even with a relatively small number of shareholders) that are unable to essentially change course, once set up. Large associations like EPC, Visa, Mastercard, are effectively orphans without parents. Stakeholders are always irritated about the fact that these associations set their own course and associations always claim their shareholders have no vision. Bottom line: if you transfer your Libra-currency design into this domain, it is quite likely to be persistent. So don't expect any radical changes after this one is live; it will be gradual evolution from here onwards.

Not just a scheme for the payment instrument, but the unit of account (and a security as well)
There is another difference between Libra and Mastercard and Visa that I would like to highlight. The regular payment schemes seek to transact efficiently, taking existing currencies/structures as a basis. But this scheme introduces a new currency itself and regulates this currency via the management of reserve assets. It demonstrates that the aim of Facebook is to design its own Facebook buck, push it into the public domain and then profit from the benefits of having their own unit of account in place, while hiding behind the members and the open source philosophy when things go wrong.

A specific element in the scheme is that the unit of account is backed by a basket of currencies and financial instruments. Effectively this means that if you buy one Libra, you buy a couple of foreign currencies. Or put differently: you participate in an open ended money market / investment fund. And you use the digital representation of your participation in this fund as a means of payment.

This is a bit of double work as this means the association and the scheme are not just subject to payments legislation but also to investments/securities legislation. But it is legally possible: the payment would legally not be a discharge of obligations via a financial payment, but via a payment in kind (currency basket).

So what do we see here?

The Libra association is a mere manager of the governance and operational arrangements and activities that come with using the virtual currency Libra and participating in the Libra scheme. This Libra scheme is a private and commercial arrangement which:
- defines a unit of account for a new virtual currency: the Libra,
- defines the asset mix that backs one currency unit,
- lays out the distribution and management rules of the currency units and reserve funds,
- lays out commercial rules and does a private placement to further promote the use of the Libra by giving them away (for free or at a discount).

The Libra association itself will be steering future technical development and is charged with the project goal to move the whole infrastructure towards a permissionless setup. This is completely impossible (as these associations act with oil-tanker dynamics) but that brings us to the next smokescreen.

Smokescreen #2: Libra is not a blockchain, not a cryptocurrency but a digital virtual currency /financial instrument
It was fascinating to see that the carefully crafted and prepared introduction of the Libra sought to position it as blockchain and as a cryptocurrency. This creates a lot of noise. Also, the use of similar words for different concepts and organisations is confusing.

We should distinguish between:
1- Calibra, the organisation, a 100 % subsidiary of Facebook, acting as a validator node,
2- Calibra, the branded digital wallet developed by Calibra to carry the Libra virtual currency,
3- Libra, the digital currency that will be in the Calibra wallet
4- Libra, the reserve pool of assets that backs the digital currency,
5- Libra Core, the Network or 'blockchain' that forms the core operating technology for clients and validators,
6- Move, the programming language developed for the Libra Network.
7- Libra, the association governing, promoting and executing the virtual currency system,
8- Libra members, big commercial players that may join the Libra association, provided that they are a validator.

What struck me in the communication is the flagrant re-definitioning by Facebook of the concepts blockchain and cryptocurrency. Facebook really wants to be seen as doing some cryptocurrency stuff. But they don't. Just for fun I will be comparing the Facebook FAQ with the wisdom of the Wiki-crowd.

Libra is not a blockchain
Facebook succeeds in not mentioning the facts that blockchains are, by definition and terminology, a chain of blocks, linked together. Wiki has it right.

What is a cryptocurrency exactly: native currency of an open blockchain
Wiki states, that the decentralized control of cryptocurrencies works through distributed ledger technologies, typically a blockchain. Personally I would not have mentioned those ledgers as the blockchain is not so much a ledger as a journal (log roll of transaction entries). And apps are creating the ledger feeling for blockchains. But let's look at the wording in the image.

The wording of Facebook is interesting. It speaks of using cryptocurrency due to the use of strong crypto. This leaves out the issue that cryptocurrencies may be native to blockchains (as in chains of blocks). And then Facebook moves on to cryptocurrencies being built on blockchain technologies.

Which is true of course, but if I use all the parts of an air plane to build a firmly grounded restaurant, this doesn't mean that my restaurant is still an operational air plane. It is built on air plane technology, but the wording matters. Facebook puts up a smoke screen here to position itself in the blockchain community.

Libra is not a cryptocurrency
The funniest part of the Facebook FAQ was the mere statement that the Libra is a new cryptocurrency designed to have a stable and reliable value. Coming from a perspective where cryptocurrencies are inherent elements of open, truly decentralised permissionless blockchains, this is an interesting statement. It demonstrates that Facebook wishes to be a cryptocurrency but it isn't.

The text above also shows that Facebook has its eyes on the stablecoins that are around. These stablecoin are, in my view, privately issued currencies, with the goal of a fiat peg. The stable-'coin' is used a lot in the cryptoworld to facilitate fiat/crypto exchanges in times when the financial system is not online. The fact that this currency is used a lot in the cryptoworld, does however not make it a cryptocurrency in the terms of an inherent currency of an open permissionless blockchain.

Libra, what is it then, in regulatory terms?
My conclusion, after quite some pondering and tweeting is the following.

Libra is a privately issued and distributed digital  and virtual ‘currency’, that is intended to function as a means of payment. It is not a true currency because its actual composition/counter value is a basket of fiat-currencies and financial instruments. It is not e-money as the Libra is not ‘monetary value’. The digital value qualifies as a financial instrument (a mini-participation in an open ended investment fund) and is used in an open source payment instrument, to be used for payment and acquiring. Both payments and securities legislation apply, as well as the relevant competition and consumer protection rules. 

The Libra association is the scheme owner and scheme operator of the Libra virtual currency. This currency/investment can only be bought directly by members of the Libra association. Other entities or customers must revert to second tier players, exchanges or peer-2-peer applications. Technical development of applications is encouraged and rules to secure the application by contract or licensing seem to be absent.

Due to the blending of scheme and operations, the Libra association cannot really be viewed as the beginning of a proper payment scheme. Functionality, pricing and membership rules make Libra and the Libra association an easy target for consumer/data protection and competition supervisors, bank supervisors and securities supervisors.

Smokescreen #3: Libra is not a charity exercise that seeks to operate a public good but a commercial enterprise
A huge amount of effort has gone into convincing the public this week that Libra is all about helping the rest of the world. Getting more inclusive finance. Making payments faster, easier and such. It is striking that these statements mirror the claims that originally come from the Bitcoin community or from the Fintech community.

Of course those claims strike a chord. People may well be fed up with their banks and the perception of banks with slow procedures and expensive fees for foreign payments are an easy target for PR-people who want to position their initiative in a friendly way to the public. Who doesn't want to take on the banks and improve the world.

Commercially, the thinking of Facebook is most likely to be that it needs to counter the We-chat Pay dangers and all other Fintech movements that lead to easy in-app payments. Payments will increasingly be an afterthought and harvesting the data in those payments will allow for even higher ad revenues, as Facebook will see what works and what doesn't. Interestingly Facebook did not increase the speed of its current developments; it chose to move up the value chain, towards setting up its own currency and hoping that it will work as a unit of account (and may stay in the system for long).

Of course, the move by Facebook is a big signal. But we must note that there are still also other players that could make the same move. Which would lead to some form of a duopoly (as with Mastercard and Visa) and the need to agree on interoperability or on open access to infrastructures of the big techs involved. I did not come across this notion a lot, so far.

The public good narrative: unbelievable coming from Facebook
What struck me most, coming from Facebook as a centralised company that is not interested in respecting democracies and laws written by those democracies, is the sketch of opportunities in the White Paper. And do have a look at the phrasing on public good.

Given that by now I hope to have convinced you that the design of the Libra association and its constituency is far below the usual standards to be expected from payment schemes, you can imagine that I was unable to reconcile these laudable beliefs with the actual proposition.

If you truly wish to create a new public good, a new worldwide currency, it is not impossible to deliver this with private sector entities. There is a whole range of public policy theories (delivery of universal services or service of general interest) that can help out here. But putting the richest, biggest enterprises of the world in one room, to distribute a world currency/investment proposition without proper safeguards or recognition and qualification of the activities of the issuing association is not the way I would go about.

Facebook cloaking its plans in cryptoterms,but why? 
Let's face it. This whole complex open source, cryptocurrency story that Facebook has published is not necessary. If Facebook Payments Inc or Facebook Ireland wishes to change its currency mechanism towards a different setup it could do so itself. Why is there a need to involve other stakeholders with a trendy and hip storyboard on decentralisation, blockchains, cryptocurrencies and such?

It can't be a money issue. Facebook has sufficient resources to fund the whole exercise itself. And the quality of the exercise could then convince other commercial partners to join. So why the need to step out of its digital currency issuing role itself?

To me it is pretty clear that Facebook seeks to move up in our lives. Doing our financial business is not enough. It is all about entering our mind at a deep level. At the fiat currency level. We should think prices in terms of Libra, not in terms of fiat currency. And there is a good power reason for it. Because as long as Facebook uses digital fiat currencies it can be under the rule of the government that issues it. Now, by having a basket of currencies, Facebook can kick out currencies/countries if need be. State regulators and supervisors lose their power.

In addition, Facebook chooses to limit its own role and hide behind am Swiss association, to cover the fact that they don't want to take the responsibilities that come with issuing a worldwide association. They are suckering/forcing partners into joining this programme, without alerting them to the obvious violations of competition rules that may arise. They leave out all mentions of safeguards and contractual arrangements that can aid in ensuring operational integrity for this worldwide currency. Rather they throw the technology in the public domain, knowing well that this means that it's use cannot be fully controlled.

It is no surprise why politicians and regulators were keen to act. Their immediate response was that this was a further extension of an a-moral company that stops at nothing. As Maxine Walters outlined in the US, when asking Facebook to stop further development:

Reversing the statements to see what's hidden in plain sight: ruthless selfishness
As a thought exercise I was wondering. If they claim that it is a blockchain and cryptocurrency, while essentially it isn't, shouldn't we also reverse the other statements to see what is truly happening here.

I leave the result for you to ponder and thank you for bearing with me in this ultralong blog.
Up next I expect blog 2 to be about EU-definitions and legislation.

THE THREAT
As we, as Facebook are in it strictly for our own goals, we intend to hide our true intentions and motivations so we can fool the community and our partners in the ecosystem to go along. 

We believe that many more people should buy financial and identity services from our company specifically, even when doing so will come at a higher cost than the available alternatives. 

We don't believe that people have an inherent right to control the fruit of their legal labour. 

We believe that global, open, instant, and low-cost movement of money will create immense economic opportunity and more commerce for us in particular. 

We believe that people will increasingly trust centralized forms of governance. 

We believe that a global currency and financial infrastructure should not be designed and governed as a public good. 

We believe that we don't bear a final responsibility ourselves to help advance financial inclusion, support ethical actors, and continuously uphold the integrity of the ecosystem.

PS. I have changed the definition on June-24, to reflect that the currency is a mini-investment fund which is used in an app/ecosystem that would qualify as a payment instrument. Definition blog will follow.

G20 and FATF should not infringe on the human right to privacy by prescribing mass surveillance for virtual assets !

Over the past weeks, I have been sounding the alarm as to the envisaged FATF-recommendations in the area of virtual assets. Essentially they require the private sector to build in a privacy leaking front-door in all blockchain applications, so that law enforcement officials in the whole world will have useful information already available nearby (rather than having to ask for it when need arises).

While at first I merely looked at it technically, seeing it as a disproportional silly measure by regulators who don't understand blockchain technology, over the past weeks I have learnt that it could also be viewed as part of a larger debate on the human right to privacy. People sent me more information on this matter including this dissertation (link: M. Wesseling: mustread!).

The dissertation outlines how a similar measure in the banking domain (the travel rule) was first rejected in US congress, to be adopted within weeks after the 9/11 attack. The dissertation also shows the mechanism of depolitization: making something a technical 'thingy' in order to avoid the true political debate on public interests that need to be balanced.

State vs citizens: police versus privacy 
What is at stake here is a political debate on the degree of surveillance measures that a society needs to prevent criminality versus the degree of human privacy and freedom that people need to live a dignified live in which they can communicate freely and are innocent until proven guilty (and not the other around).

Let's have a close look at the two fundamental public policy issues at stake:

The human right to privacy in a digital age
Under UN Resolution RESOLUTION 28/16 (the right to privacy in the digital age), article 8.2 of the European Convention on Human Rights and the EU Court decision on data retention (ECLI:EU:C:2016:970) the EU understanding on mass surveillance of personal data of innocent persons is that it may very well constitute a violation of the right to privacy in cases where it is disproportional and no sufficient safeguards are in place.

However, the human right to privacy is often not taken into account when developing anti-terrorist policies. Scientific evaluations of the implementation of such policies outline that social side effects, such as excessive reporting of transactions and privacy of citizens, (often) remain underexposed in public discussions. Similarly a recent dissertation in the Netherlands clarifies that, when applying the EU Court of Justice criteria to the European Anti-Money Laundering Directive, 17 infringements of human rights can be identified.

Upcoming FATF-proposal to prevent fraud/crime/terrorism and apply broad rules to virtual assets
This is exactly what is at stake with a recommendation that is phrased in paragraph 7b of an interpretative note for Recommendation 15 of the FATF.It requires all private sector entities to register and submit the names of the parties participating in a virtual asset transfer to all counterparts in the value chain. This is not based on suspicion of criminal behaviour but required as a standard data export for all use cases and customers transferring virtual assets.

The virtual assets are defined as all non-regulated digital representations of value which may be transferred or held:

‘..countries should consider virtual assets as “property,” “proceeds,” “funds”, “funds or other assets,” or other “corresponding value”.

As such the rule effectively requires private sector market players to develop a messaging system (and adapt internal systems) to make sure future blockchain applications also functions as a structure of mass surveillance. However, any law enforcement official may obtain the relevant information on a case-by-case basis with a proper legal warrant at the individual organisation involved in a virtual asset transfer. The proposed rule constitutes an unnecessary measure that brings personal data of innocent people into the public domain, without any further proper guarantees for its treatment.

The rule has met with very heavy push back during a private sector consultation (in Spring 2019) due to its incompatibility with privacy laws and its unclear definition. The FATF members did not take this into account. Therefore, in the Netherlands, the NGO Privacy First joined the initiative of a group of virtual asset service providers (VBNL) to urgently request the Dutch Ministry of Finance to not approve the proposal. This has not lead to any further response.

What disturbs me in the process, is that the private sector has effectively formulated an adapted wording which would balance the two public policy interest more properly (see the redacted statement in the graphic below). But FATF-officials and governments appear to ignore it.



The public policy train moves on towards the G-20, without due process / democratic controls in place
Right now, the process underway is one in which we will see all kind of news reports about the G20 Ministers of Finance discussing and deciding on virtual assets. We will see the FATF adopting its rule in their 16-20 June meeting. And then the G-20 heads of state adopting it in Osaka. There will be many news bulletins and spins outlining how important and good these steps are. And the FATF will be complimented for their laudable work in this area. But don't be fooled by the spinning.

It is important to note that there has not been a sufficient and proper political debate on the balance between human rights and anti-terrorism measures. And as we already have Human Right Treaties in place outlining that mass surveillance and retaining of data of innocent people are a human right infringement, we can only conclude that our Ministries of Finance and Governments are about to make a historical and major mistake that violate their own commitments to privacy. There is no reason to boast about that.

Are all governments and private sector players benevolent forever?
What is lacking is the fundamental helicopter view on the relation between states and their people. For this I refer to yesterdays blog post, outlining the fundamental considerations that led Phil Zimmerman to develop encryption tool Pretty Good Privacy for the people:

"Zimmerman outlined one very significant theme during his speech. He noted that the assumption of a continuous benevolent government is not realistic. Governments come and go, some may be more democratic than others and even strong democracies may turn into dictatorships, depending on the circumstances. It is therefore important to design society, governments and the technologies that we use to manage society, guarantee that a balance exists between the powers of government and those of the public. The public, the people should always be allowed to remain digitally out of sight of government. Such a robust structure would be important to ensure a fair treatment of the people over a long period of time."

It is too bad, that our governments appear to be unable to properly balance the political interests at hand. Reality is that we do not live in paradise: both governments and market players may have ill intentions and we should be open to that fact of life. In this respect it is clear that a range of private sector players provided more than one elegant suggestion to help with the criminal perspective, while still protecting it. Why would there be a reason to ignore this?

I do understand the dynamics however. In the words of Ian Grigg:

'It's hard to have a serious discussion on terrorism.  It’s too much of a magic password that shuts down critical thinking.'

What's up next is, that we will need to resort to national and supranational courts to re-address this issue and correct our governments. Because like it or not, the future of our democracies is at stake.


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And a video on this same topic here, for those who are more into the looking/listening mode:

Zimmermans' relevance for discussions on human rights and ICT-security surveillance

If we look at economic and social risks of new technologies, outsiders will often immediately fall into the trap of considering this to be about the illegal use of peer-2-peer networks, applications such as bitcoin etc, for socially unwanted activities or even criminal activities. From there on it is a small step to forbid such activity, regulate it, overregulate it. But we should take a wider perspective here.

For me, Phil Zimmerman was the person who made a lasting impact, when he explained, somewhere in the late 1990s, during a speech at a digital money conference his considerations behind developing Pretty Good Privacy (see also his explainer himself: Why I Wrote PGP). His argument was mainly that the new digital society has to be built in such a way that it guarantees a situation in which a people are still able to communicate and act in way which is not invaded or controlled by government tools/techniques. Whereas the old analogue world would allow the people smart analogue ways of creating their own spaces for communicating and fooling government with fake analogue id's and such, it would be much harder to do this in a digital world. Hence the need for a peer-2-peer simple mechanism as Pretty Good Privacy.

Zimmerman outlined one very significant theme during his speech. He noted that the assumption of a continuous benevolent government is not realistic. Governments come and go, some may be more democratic than others and even strong democracies may turn into dictatorships, depending on the circumstances. It is therefore important to design society, governments and the technologies that we use to manage society, guarantee that a balance exists between the powers of government and those of the public. The public, the people should always be allowed to remain digitally out of sight of government. Such a robust structure would be important to ensure a fair treatment of the people over a long period of time.

It is clear that this requirement: to allow for and to actually create areas where the government cannot see what happens means that those areas are scary for regulators. Will they facilitate crime by doing so? Perhaps. Will they allow for huge pockets of creativity? Certainly ! But it will be the strong governments that are able to allow this. They will act from a position of strength and not be afraid. The weak governments, or the scary governments, or the ill-intending governments will seek to monitor everything and control all digital activities. This will certainly fail. But while doing so, they may instil tools that are very dangerous tools in the hand of governments when they turn from benevolent to evil. It will tilt the balance towards a situation that ill-intending governments can no longer be overturned by a social revolution.

There is no need for governments to be afraid of technological progress in the hands of the people. It is a good thing, to be cherished and to be allowed. The simple labelling of such activity as possibly criminal is the wrong frame. The reverse is also wrong: regulators with good intentions are not by definition tools in the hands of dictators. The right frame is: dictators exist just as criminals. Society should ensure that neither of these can become too powerful due to technological of legal measures and it is for this reason that we need to balance our human rights to privacy with the goal to prevent criminality.

Finding this balance is not easy but over the last weeks we have witnessed too many occasions where governments seem to go to far. German police wanting access to home devices. The FATF-ruleon surveillance for virtual assets. Ghost accounts into Whatsapp. Giving your social media handles when entering the US. We should not let ourselves be caught in this wrong direction over intrusive government behaviour.

There is a very legitimate reason to develop and create new technologies that safeguard the public and it is a pity that many policy makers in the world may not have been hearing the clear message that Phil Zimmerman sent them. They really could do with open their minds more. So for them I’m embedding this video. Just to be able to learn from history.

EC gives open banking to bigtech via PSD-2 and Apple closes its doors to banks in return ?

Just the other day I attended a session of the Dutch Foreign Bankers Association, all about Fintech disruption and innovation. Guest speaker Jesse McWaters, who is the project lead for the Fintech programme of the World Economic Forum, shared his insights into the tech-revolution and how this impacts the business models in financial industry.

Banks, big tech and big data: the uneven battlefield- thanks to PSD2 
One very important observation that he made had to do with the place of banks in the future value chain. They can choose whether to be a product provider or whether to engage in battling for the end-consumer experience by providing multi-party platforms. In this latter approach, it is a big data game. Both banks and big tech will be battling in the same arena where banks need bigtech data and bigtechs need bank data to complete their 360 views of their customers.

In this respect Mc Waters had an interesting question to us, Europeans. He asked if anyone at the European Commission would have understood the huge impact that PSD2 and obliged open banking will have on the competition balance between banks and big techs in the market. Doesn't this skew the balance in favour of the bigtechs without anything in return for the banks?

My response was that in essence the whole open-banking idea in the PSD2 originated from an EC-monoline bureaucratic approach to solving a competition case between one fintech and the European Payments Council (see newsbulletin).

I also sketched that the implicit rule of the PSD2 appears to be that such access without prior commercial contract would be free, even though an analysis from our Dutch competition authority outlines why there is a good case for putting in place a compensation for banks for the access to the customer data. And no, the access is not reciprocal. Big data companies would not have to open up their accounts full of customer information for banks.

Bunq opening up Apple Pay for Dutch customers but then being foreclosed by Apple 

The interesting thing is that we were having the above exchange of thoughts in a week where Bunq had announced to move its systems fully into the could of Amazon (bigtech). And Bunq had also opened up Applepay for its customers. By tweaking the geography settings, Dutch users could start using their phone for Apple-pay.

The fun for bunq-ers didn't last too long though. Apple used its powerful bigtech position to shut out the Dutch bunqers from using Applepay. And my guess is, that its arguments for doing so would be pretty much the same arguments that Sofort heard when they connected to German banks. It would not be safe, there would be no required commercial contract allowing this access and so on.

Time for reciprocity?
It seems that already some time ago the EC course on Bigtech has been changing. We are beginning to realize that we may need to protect our citizen's data somewhat better and that we should not help them avoid taxation. Hence the announcement this week of a 3% tax for bigtech, to make sure they do not get a free ride here in Europe.

It would be very much in line with this new vision towards bigtech if the European Commission mandates open acces to customers big-tech information for banks or any other licensed entity that have the customers permission to request it.

If the Commission truly seeks to achieve a balanced market with proper competition, it should redress the design errors in the PSD-2 and allow banks to ask fees for access and/or allow them reciprocal access to the customer data.

Why Bitcoin Core and Bitcoin cash both make sense !

The other day I was reading an excellent blog by Vinny Lingham on the differences between Bitcoin Core and Bitcoin Cash. What I appreciated very much is his attempt to take the heat out of the intense discussions between 'followers' or 'supporters' of these two bitcoin types. And his overview inspired me to reflect a bit more on the reason why actually both Bitcoin Core and Bitcoin Cash make a lot of sense and why there is no need for petty bickering given the open source philosophy on which both protocols are based.

Essential philosophy of Bitcoin: everyone may participate in each role

If we look at the design philosophy of bitcoin, the essential idea is that all participants may act as a user or a producer (miner) at the same time. This is very much in line with all other P2P business models that we see emerging, based on networked technology. With AirBnB, owners of houses also become producers and numerous other sharing platforms seek to achieve the same.

The combined producer/consumer role in bitcoin is very much in line with the design principle to outsmart the centralized institutions of a central bank that issues fiat-currency or with similar players as banks which have their own specific their role in the money-value chain. 

However, the obsession with the dominant role of central banks and banks is so strong in the bitcoin world, that there is too little attention for standard logistics/economics, when looking at the basic proposition of provision of payment services by all to all. So let's have a look at those logistics.

Logistics of any peer-to-peer value exchange system

Anyone participating in payment systems will recognise that a full peer-to-peer system is intrinsically inefficient. Imagine a market fair where all participants are both buyers and sellers. They could pay each other after each sale and hand over cash or other payment instruments. This provides everyone with instant security and payment, but also with cash in hand and time spent to make and accept payments.

Now, if the fair happens regularly, some smart participants will come up with a more efficient idea, which is to not pay after each sale, but to keep track of all payments and net out the payments via clearing cycles. Effectively this is what already happened during the payment days of late medieval fairs and can be witnessed in all kinds of informal or formal constellations (clearing houses etc) that have come into existence since then. 

The conclusion is therefore that, wherever payments are made, at some point in time a new underlying structure will evolve in which specialisation occurs. Those that are very active participants will have different roles and interests than those that only use it sometimes. And it's the active community that will seek some efficient alternatives, while the less-active part will go with the flow. Eventually you will end up with a specific constellation that works for that payment community. 

In these constellations, you will see distinctions in roles such as:

- small users

- big users

- big providers of payment mechanisms

- clearing agents for providers

- settlement agents for providers

- super settlement agents (mostly, but not necessarily, central banks).

The inevitable specialisations in the bitcoin community

If you start a payment system, such as bitcoin, from scratch by allowing everyone to fulfill every role in the system, economics dictate that in the end specialized roles will occur. We've seen this happening early on with the difference between light-wallets and full nodes. Similarly different players have chosen to serve a different part of the value chain.

In the context of an open source protocol, it is just as inevitable that opinions differ on the most efficient way forward. And that's where both Bitcoin Core and Bitcoin Cash have a valid proposition. 

As the blog by Vinnie Lingham outlines, the Bitcoin Core community sticks with the idea that as a design principle all users must be able to run a full node. Scaling and performance issues for the payments mechanism can be solved by adding an outside transaction layer, meaning that Bitcoin Core chooses to be the settlement layer (in classic payment terms). 

Bitcoin Cash on the other hand takes the economics of payment systems as a starting points and accepts the economic reality that in practice, the majority of bitcoin users will not (and cannot) be producers at the same time. Their philosophy is to not tamper with security choices in the area of digital signatures but simply increase the block size, in order to cater for the end-user need to have easy, cheap, simple and fast value transfers. In doing so, they remain IMHO closer to the original idea in the Bitcoin paper (provide an alternative easy fast and cheap transfer mechanism) than Bitcoin Core. 

Stop bickering please !

I am amazed at the amount of energy and emotions that are wasted in the crypto community in what comes down to petty bickering. Whether this is between Bitcoin Core and Bitcoin Cash or between whichever of the other cryptocurrencies, blockchains or DLT-designs. 

It is and was inevitable for the bitcoin protocol to run into the standard efficiency problem for evolving payment and settlement mechanisms. It is just as inevitable that different solutions exists and both Bitcoin Core and Bitcoin Cash are equally valid. The one just wants to end up becoming a settlement layer provider while the other wants to be stick to the user layer of payment systems. Where is the harm in that?

The open source philosophy means that we will see in practice which solutions play out best for the ecosystem(s) and rather than bickering about advantages or disadvantages we should cherish the variation and choice that the open source philosophy brings. 

Cryptocurrencies, initial coin offerings (ICO's) and tokens: we remain puppets on someone else's strings !

Screenshot www.flippening.watch 

Now that the bitcoin price is heading towards $10K and beyond, we see another wave of interest in the cryptocurrency domain. Regulators warn about the risk of Initial Coin Offerings and news bulletins keep on re-discussing what is happening in this space.

It's a matter of private currencies and tokens
What we are looking at in the cryptocurrency, blockchain and distributed ledger space is that seemingly public and democratic technologies are being put to work for specific groups of individuals/companies. While the technology may be sold as serving a public purpose, in the end it's just a variation of any medieval local Duke issuing his private currencies to the population: profits to the Duke and potential losses to the public.

What is happening now is a convolution of low interest rate regime, overhyped media and greed, leading to private individuals scrambling for profits in the area of cryptocurrencies. They can do this either by investing in the cryptocurrencies themselves or as an entrepreneur by sharing a mining pool, setting up exchange's or trade functions or developing new token types or blockchains. And as with the gold rush, it will be the sellers of shovels and buckets that will in the end really make the profit.

Beware: we remain puppets on a string
While in the initial stages of the bitcoin blockchain, we could see a whole lot of alt-coin scams, we are now seeing a range of ICO-scams, as people are exploiting the ethereum capabilities to venture out in the cryptocurrency world. Only a very few of those will survive and the rest will disappear just as the nonsense alt-coins did.

So, whoever participates in cryptocurrencies or ICOs deliberately hands in governance to an unknown constellation of companies and individuals. Or as I put it in this 2013-blog:

The redistribution of value that can occurs with these new currencies may look democratic, but that is a wolfe in sheep' s clothes. Effectively the new currencies are and will be the domain of private individuals trying to seek private gain rather than anything else. And there is no guarantee whatsoever that this constellation will have the interests at heart of all people in society. 

It will be Darwins' survival of the fittest all over again, which will exclude certain groups of citizens from participating fully in society. As democratic as a crowdbased currency looks: you will still be a puppet but on a different string, with unknown gains being made by unknown players in the value chain of this collective currency. 

To bubble or not to bubble? 
The question that is now on the public table: is the value of bitcoin a bubble as the tulipomania? Despite the tendency to say yes, I would argue that the answer could effectively be no.

First of all, the whole western money system is a bubble right now, as central banks have inflated our financial systems to an enormous degree with the Quantitative Easing. We should realize that neither bitcoin nor any other good in this society has its proper value right now. Thanks to these central banks, the amount of money that I get in my savings account has been too low for almost a decade now.

Second, within this skewed monetary world, market-forces do still apply. They will also apply to bitcoin-core so that with each fork (bcash) or new blockchain (ethereum, eos) a potential new competitor may turn out to become the winner. The word used for a shift in this momentum is: the flippening (as sentiment may flip to different assets or infrastructures in a very brief moment of time).

The interesting thing is of course, that in this digital world, anyone can monitor this real-time on sites such as Flippening Watch. It will be like watching the strings of the puppets move, without knowing who the real players are.

DAO-fork at odds with Ethereum terms and conditions

Last month, Antonio Madeire nicely summarized the discussion on the DAO-hack and the fork which brought Ethereum classic into being. I remember that my contribution to the discussion at that time was that the Ethereum developer community should not revert to a hard fork but to the judge and/or arbitration.

Governance and terms and conditions
The other day, I was discussing with Ian Grigg, a long time mutual topic of interest: making technology work by adding proper arbitration to smart contracts and agreements. This can even be done in code, as he had demonstrated way back in the 1990s in his ricardo system.

This prompted me to actually take a look at the Ethereum terms and references to see what it said about disputes. Well, have a look yourselves:

All disputes or claims arising out of, relating to, or in connection with the Terms, the breach thereof, or use of the Ethereum Platform shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with said Rules. All claims between the parties relating to these Terms that are capable of being resolved by arbitration, whether sounding in contract, tort, or otherwise, shall be submitted to ICC arbitration...... 

.... And so on.

What does this mean for Ethereum governance?
While I hugely appreciate the development of Ethereum and all the efforts that have gone into it. it does strike me that when push came to shove, the developers brushed aside their own terms and conditions. The use of Ethereum was instrumental to setting up the DAO, so why not revert to the ICC Arbitration?

My guess would be that, not being lawyers or into governance, the developers used the tools that came in handy and quickly. Alternatively, it might be the case that they might have invested in the DAO themselves quite considerably.

Regardless of the exact reasons behind not using the dispute resolution mechanism, the paradox is that, while there is a formal basis for dispute resolution under Ethereum, the likelihood exists that in future instances of trouble, the developers will again fork their way out of trouble.

Create an additional dispute resolution layer.
Any practical use and implementation of Ethereum should therefore come accompanied with additional agreements on dispute resolution, so that organisations that cooperate on the basis of the ethereum blockchain create their own governance basis.

From DNB Coin to ECB Coin...?

About a year ago, it became clear that the Dutch central bank, much like other central banks, was actively experimenting with blockchain technology to further establish pros and cons of distributed ledger technology. It had developed a so-called DNB-coin - a private fork of the bitcoin blockchain - which further reinforced a whole discussion on central bank issued bitcoin-like currencies (Fedcoin as outlined by the blog of JP Koning).

Fast forward to the EU parliament, where last week, rapporteur Cora van Nieuwenhuizen presented a draft Fintech report, that calls on the European Commission to draw up a Fintech Action Plan. And in this plan, under item number 6, the ECB is recommended to launch experimentations with a 'virtual Euro'. I think we may dub this as the call for an ECB-coin.

One can only guess what exactly would be meant here, but my best guess would be that this means the ECB can now freely choose to experiment with methods for distributing digital euro's using advanced blockchain or distributed ledger technology. So would they design it themselves, or involve themselves into market initiatives such as R3, Hyperledger?

Anonymous ECB-coins or not? 
Time will undoubtedly tell how this experiment with ECB-coins will evolve. We should note however that, there is also a European legislative initiative to limit the use of cash. So it appears logical that the cash-limiting initiative could reinforce the development of central bank issued virtual currencies (i.e. euro's on a blockchain).

Those will not be truly anonymous ECB-coins, if you ask me. Close reading of this last legislative proposal, I noticed that anonymous digital currencies (such as the good old digicash) are not truly desired:

In view of the development of cryptocurrencies and the existence of other means of payments ensuring anonymity, an option could be to extend the restrictions to cash payments to all payments ensuring anonymity (cryptocurrencies, payment in kinds, etc.) 

The end of anonimity and begin of pseudonimity 
In sum we will be watching the end of anonimity, but this may not be its true end. I think it would be fairly easy to device new business and payment models where one slices off the good-reputation of a payer/payee (not blacklisted, no terrorist etc) into a pseudonomous, tokenised system that allows payer, payee and all involved financial institutions not to know each other but still transact securely and within the legal parameters as set by society.

Which most likely brings us back to square one: the blockchain.

The DAO - Ethereum incident: if you can't stand the heat, stay out of the kitchen !

Ok, I admit: I may be a payments or banking dinosaur and an old school kind of guy. I have personally witnessed the emergence of new payment methods (POS, I-pay, VbV, purse, online-purse, Paypal, EMV, etc) as well as the failure of banks (Icesave, DSB). And I have a keen interest in the history of banking and finance.

With this background I have been intrigued by the Ethereum-DAO incident and its further follow up. What now seems to happen is that an undemocratic, interest driven community that hasn't secured or enforced proper governance and safeguards, is taking the right in their own hands when some digital assets of theirs appear to move in different places than envisaged.

Lay-out of options to solve the issue
Pondering the issues at hand was stimulated by this very good presentation by Gavin Wood last Monday at the Dutch Blockchain Conference. See below



In the presentation Gavin Wood presents 3 options:
- do nothing
- soft fork by community
- hard fork by community.

How logical the 'community' approach appears to be, I couldn't escape at noticing that the concept of community is limited to those directly involved as owners/investors in ether. All of those people were aware that they're investing in a very speculative, new technology and digital asset.

Gavin introduces the concept of moral consensus by the people, rather than the machine, to solve the issue. This consensus is not really the people, he explains, but the miners. In my view this means that the bottom line is that the interested actors take the right into their own hands to cheat the attacked back out of his possessions.

What's missing: the legal consensus
What's truly missing in the discussion is a fundamental fourth 'community' option:
- owners of 'stolen' ether  call the police (in whichever jurisdiction) so that a judge may determine whether or not this is a theft or otherwise.

Any system existing on earth, is always under some jurisdiction which allows formal legal arbitrage on differences of opinions as to whether this is theft. And lacking the proper arbitrage rules in this obviously not so smart contract, this is the domain where the Ether and DAO community should revert to.

Any other road than turning to the formal/legal mechanisms to solve this issue, constitutes a power batlle between interested parties. One party claimed to offer autonomous smart contracts without human intervention (but slides back as soon as they lose money on it) and another party took them up on the offer and fights back to keep the first party to their offer.

If you can't stand the heat, stay out of the kitchen
From a macro point of view, I don't see a reason why a response in forking by the ethereum community is justified. We're just witnessing a private, risky enterprise doing not-so-smart-things with not-so-smart contracts. This will mean that a limited remit of private investors (that know that they are risk investors) lose their assets to someone else.

As tough as it may be to see someone mess up your assets/system in front of your own eyes, it is hoewever the ultimate consequence of a philosophy in which one proclaims that is exclusively the machine that drives the asset moves.

So as this all happens, you just better buckle-up, take the hit and make sure there are no more accidents waiting around the corner. And if you're not up for it, it's time to leave the play under the motto: If you can't stand the heat, better stay out of the kitchen. When seen from a financial history perspective this whole incident is just one silly drip in the ocean of follies that has ever occured.

Up next: proof it or put in arbitrage
In a practical sense, the lesson is easy. Either have full formal proof of smart contracts, allowing you to  check all possible states of the implementation, or include an arbitration and third party mediation into the smart contract.

It's not a new concept: I've been speaking with Ian Grigg numerous times on the relevance of arbitration for smart contracts (see also his blog on this). So with this incident, the lesson will surely sink in somewhat faster, whether you're into the bitcoin blockchain or the new kid on the block.

'DNBcoin': the Dutch central bank experiment with a blockchain-based coin

Today, the Dutch central bank published its Annual Report. This coincided with the death of our most famous soccer player, Johan Cruyff, so it's clear that there is not so much undivided attention to their whole report.

 Scanning through the report, I noticed an interesting paragraph in the sustainability-part of the report (p. 208), under the header of inclusion and accessibility of payments. It stated that DNB aims to develop a working prototype DNBcoin based on blockchain technology.

So, there we have it: central banks are entering the market of digital cash once again. After the announcements on RSCoin, the blockchain based electronic cash proposed for the UK central bank, the Dutch central bank is following suit.

So is this new and revolutionary?

No and yes.

No, because I recall that twenty years earlier, the Danish central bank sold its electronic cash solution (Danmont) to the market (withdrawn as a micropayment tool in 2005), as did the Canadian central bank (selling of its Mintchip). So there is not much news in central banks setting up electronic cash. 

What is new however is the environment in which this development occurs. Previously, central banks were keen on getting rid of cash as an inefficient payment method. As this starts to be succesfull (in Sweden and the Netherlands for example) the central banks adapt their position. The policy line now is that for availability and financial inclusion reasons cash still needs to be around as a payment mechanism.

So when we now see central banks moving forward in the electronic cash domain (now conveniently labelled: blockchain/fintech, instead of bitcoin) it might be to no longer spin it off to the market, but to create a permanent digital replacement of cash.

Therefore, this time it might be different.