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. 

Is a 'democratic' crowd based cryptocurrency just as fair as the traditional ones?

Having gone through my daily portion of Bitcoin-reads (and being somewhat sceptic), it struck me that one of the compelling arguments of collective currencies: 'money to the people' is highly flawed. It is the strong resentment against governments and financial institutions that makes many people believe that it would be good to take the power of money-creation out of governments' hands. But what would happen if we would indeed forget for a moment about the governments?

Crowd based currencies: exclusive and leading to private gains
As nice as it appears, these new currencies will then not be as evenly spread as the current ones in existence. There is quite bit of knowledge and expertise involved in obtaining, developing and working with new crowd-based currencies. So the 'democratic' nature of these currencies is not as democratic as we may think. The amount of people that may vote and can use cash is considerably wider than the amount of people able to use or make virtual currencies. 

We should realise ourselves that in essence, any currency, whether it is a government-owned or private in nature, leads to a certain distribution of value and wealth for the issuer and among the user base. And the question that is not being asked, at present, is whether the new crowd-based currencies will distort the distribution of value and wealth in society? Nor do we ask ourselves the question if we would prefer to be subject to the consequences of behaviour of (collective) private entities, manipulating a currency while we can't influence them, instead of a government structure (however flawed it may appear).

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.

Currencies should be as fair as possible
Thus, the claim that crowd-based exchange mechanisms or digital currencies are more democratic than the existing ones must be strongly rejected. They are not and they lead to a very uneven an undemocratic redistribution of value in society. The central question in this debate should be which institutional design prevents the most harm from being done. 

Despite all the existing flaws that may be present in our governments or current monetary situation, the truly democratic currencies and those that may do the least harm are those operated by the governments that we can vote in or out.

The ECB-report on virtual currency schemes: some reflections

The last month, the ECB published a report on virtual currency schemes. I have been reading this with great interest as it signals the involvement of the central banks in a new area: virtual currrencies. The relevance of this report must therefore not be misunderstood. We should remember that in 1994, the EMI-report on pre-paid cards signalled the start of the regulation of prepaid-cards and electronic money products. And in a similar style, this report may become the starting point for regulation of virtual currencies.

In general, central banks are to be commended for monitoring the developments in the area of money, retail payments and near-money products. If you're a central bank, an institution that is responsible for true money, than it it always good to know what other forms of money are in circulation. And as such the report of the ECB demonstrates that the European central banks are alert.

Analytical basis could improve
I must say however that I was also somewhat disappointed. The analytical framework presented in the report is a bit shaky in my view.  It does not rest on the nature of the subject discussed (virtual tokens and currencies), but on how they are 'regulated'. As an approach, I find this little convincing. Furthermore I noted that 'unregulated' is not defined. Does it mean that central banks or supervisors are not involved or that no regulation applies at all?

As an alternative I would point out the possibility of using frameworks suchs as this one (taken from the American Law Review):

It is interesting to note that the empty box in this table can now be filled with: Bitcoin as an example of a system where money can circulate freely without returning to a central mint.

Which electronic tokens are currency of money and which are not?
The ECB distinghuishes between three virtual currency types, in terms of openness of the systems involved.

Type 1 is a closed link system in which the digital tokens are only usable in the system itself. The example the ECB provides is the World of Warcraft Gold. And although the picture suggests that there is no link to the real economy, the ECB notes: However, there seems to be a black market for buying and selling WoW Gold outside the virtual currency scheme. If Blizzard Entertainment discovers any illegal exchange, it can suspend or ban a player’s account. 

Type 2 contains systems where users pre-pay services of a supplier in the form of private issuer tokens such as facebook credits. And type 3 systems are open systems of privately issued tokens/currency that can be bought and sold. It is in this category that bitcoin and Linden dollars are placed.

What is lacking in this model, is the Type of model 1b where there is no formal buying or selling of tokens, but there is a relation to the physical world. It is the world of loyalty points and tokens, which can be earned and redeemed, but never exchanged for money itself. The ECB places these under the category II.

It appears to me that in doing so, the ECB doesn't distinguish sufficiently between loyalty tokens and payment tokens,which each have a different role to play in the business model of their issuer. An alternative table might have been:

	User cannot buy tokens at all (loyalty-type)	User earns tokens and can buy additional (hybrid of loyalty/payment)	User buys and sells  tokens (payment-type)
Tokens used in digital issuer-domain only		World of Warcraft	World of Warcraft Lynden Dollar
Tokens used in digital or physical issuer-domain only	Starbucks	Nintendo Points -Digital Payment loyalty schemes for single retailers
Tokens used at other entities than the issuer	Frequent Flyer Programmes	Frequent Flyer Programmes	Bitcoin, e-money on mobile phone's

The missing element: mobile money
What intrigues me is that the digital money on mobile phones is not a part of the discussion. It is by its definition (an exemption in the e-money directive) an unregulated form of digital money. Yet, the ECB has been so long accustomed to the strange sequence of events that made the European Commission decide that money on antenna's of MNO"s is not electronic money, that they forgot to include it in the analysis.

The reputation argument.....
Finally I noticed that the ECB finds, that if these virtual currency schemes (however defined) grow too much, they might give rise to a reputation issue for the central banks. Here again I think the analysis is a bit too strongly worded. Central banks can simply outline their scope of work and responsibility by stating that they  are not in any way responsible for money that they didn't issue and supervise. By clearly and repeatedly informing the public of this fact, the public can then choose to take a risk with the virtual currencies or stay out of them.

Yet, I wouldn't be surprised if this reputation argument (or a comparable public policy objective: transparancy) becomes the main angle from which future supervision of these schemes will be justified.

Use twitter to create banknotes: the punkmoney concept

This year in May, I was visiting the 15th Digital Money Forum (well organised as ever, by Dave Birch and his team at Hyperion), and ran across a very elegant alternative payment concept, that makes use of Twitter as a technology. The concept was called: Punkmoney and its developer Eli Gothill explained on the forum the workings and background of the concept (see the presentation here and read an interview with Eli on the background here). With the concept, he took a step back in time, skipping to the times before money was used widely.

In these early times, we can imagine societies to be local communities in which the economy consisted of exchange of services and committments. The scale of the village/community was limited and thus a trusted network of users would exchange services, goods or favours, knowing that either directly or over time, the service or favour (helping in building a house) would be returned. Later on in history the concept of money took over, so that the chain of exchange would become longer. A favour or service would then be paid for with money, that could be used to buy a service or good elsewhere.

Now, what Punkmoney does, is to use Twitter to re-create the old 'favour/gift-economy' in which no money existed. In order to print your own banknotes on Twitter, all you need to do is use your existing account and the hashtag #punkmoney. In English you might call these: Twitnotes or in Dutch: Twitbiljet. So let's see what a Twitnote looks like in real life:

As you can see, this is a promise from me to Occupy Amsterdam (@potbanging_NL) to deliver a brief talk on the financial history of Beursplein. As I used Twitter, it is a public statement that everyone can read. As such it is also read by the Punkmoney tracker, which makes a record of the statement. This central database registers all promises made on Twitter with the hashtag #punkmoney and thus serves as a register in which you can see which promises were made.

Now back to the Twitnote. My Tweet says NT at the end, which means that it is non-transferable. Another option might have been to state: TSA, meaning: Transfer Subject to Approval. In addition, my promise is quite exact in that it specifies specific moment in time when I will deliver a brief presentation (13 October on  a global noise manifestation). Alternatively I could have left out this specific time and have noted: expires in 2 years/months/days.

Of course there's a lot more technical details to be told on how to transfer and redeem notes. But the important thing to note here is that anyone who is seeking alternatives for money in its current form, can easily use the punkmoney concept in his/her community to start exchanging goods/services by using Twitter.

As I understand from Eli, he is going to be presenting his Punkmoney system/concept to the banking community on the next SIBOS (a very important banking conference for all companies, banks, central banks etc. in the world). And I truly hope that the delegates there will recognize the elegance and beauty of his design.

Google Wallet roll out.... without Google Bucks

It's about five years ago that I discovered, by accident and curiosity, that Google Payments Limited had applied for an e-money license at the FSA. Ever since, people have been wondering how Google would enter the payment space. Would they offer a wallet with virtual cards or would they issue their own new virtual worldwide currency (googles, googlets or gees)?

In good tradition, Google started out doing field tests with the wallet (which would sit in the mobile phone) and announced this in May 2011. The wallet was to contain your credit-card cards as well as a google-pre-paid card. And payment was possible with Paypass while the wallet would also facilitate the savings of loyalty-points. The card information was stored in the Secure-SIM-element in the phone and they experimented quite a bit since then.

So where do we stand now?

Well, the Google Wallet is now being rolled out and the Google development team sent out this video to further explain the wallet concept and roll-out. The most important change is that they decided to move the card-information to the cloud. This allows the Wallet to be used both via Phone and via the Web, with all your card details and important digital documents (ID's, transit pass etc) residing in a safe digital environment. So their distribution model for the application is now changing to making APIs available so that merchants and issuers can easily integrate the Wallet in their site/services.

As such, we can thus see Google moving into an integrators role, rather than a payment instrument issuer role. In fact, at some point in time, the company thought about issuing Google Bucks, according to Eric Schmidt, but abandoned the plan. The concept would consist of a “peer-to-peer” money system by which users seamlessly transfer cash to each other via a hypothetical application. However, various laws about currency and money laundering in different parts of the world made this too complicated to realize.

For now, the peer to peer payments in the Google Wallet are no longer on the agenda. And from a historical perspective (see my other blog) I think it is a good choice. Yet.... one of the developers did mention on this subject: it's impossible for now, but stay tuned for some announcements in the future.

So, are we still in for a surprise here?

The art of Reserve Banking (at the Zuidas Amsterdam)

Reserve Banking is an art. While Draghi and Bernanke are highly qualified and professional economists, they must also master the art of performance. As true actors, they use their voice, their remarks, eyebrows and somewhat vague statements to provide hints and indications that the market then swiftly responds to. It is something you can't learn from the books. It's an art that can only be mastered in practice.

Since this year, the Zuid-As in Amsterdam is also home to the art of reserve banking. But it's a bit different. I heard about it yesterday, when visiting the Holland Financial Centre. From high up in the nearby Symphony building I looked down onto a small rectangular area of the Art Reserve Bank, well fenced, with cameras and three small office buildings. One is the minting press, the other is the teller and the third one was hard to identify. It looked like this:

The Art Reserve Bank: an experiment
What happens there is a unique experiment. A group of artists have set up, without any monetary funding, a so-called Art Reserve Bank. The plan was there for some time, but as the financial crisis came along, it became easier to convince sponsors to join a project that questions the value basis of money. The main idea is that there is far too much money circulating in the world and that the crisis demonstrates that we need a new approach towards money and debt. And in the experiment, art (or: the intrinsic value of human artistic expression) becomes the money. And thus helps to freshen up or minds and stimulate us to re-think our concept of money.

The idea is that for a period of five years, each month 400 coins are minted. These are 4 series of 100 coins per week, costing 100 euro each. For each month: a different artist is asked to design the coins, which all bear the same backside with the motto: ARS PECUNIA MAGISTRA: Art is the teacher of money. A nice motto and also a tongue-in-cheek reference to the Amsterdam Zoo that bears the motto: Natura Artis Magistra (Nature is the teacher of Art).




Anyone can buy coins and thus becomes a member of the Cooperative Art Reserve Bank (Kunstreservebank). All holders of the coin are thus the collective owner of the bank. Of the 100 euro costs, 90 % is used to pay for the operational cost of the experiment and 10 % is withheld as a 'cash reserve'. Should a buyer not appreciate his/her work of art, he can return it to the bank and get the original value back with a 10% interest fee. There is also a dealing room on the site of the bank, for those who wish to buy or sell their coinst. And at the end of the five years, all owners of coins can collectively decide what will happen with accumulated capital (if there is any and if the bank stil exists).

Money, dreams and art
The experiment challenges one to consider: what is happening in our world of money and value?

For me, the Art Reserve Bank made me realize that there may now be so much difference between their coins and the official legal tender in circulation. Both coins are the product of our imagination, dreams and creativity. Which is quite clear for the Art Reserve Bank currency, but may be less clear for the euro. So let me try to explain.

What happened over decades is that we moved from a mentality of: save first, spend later, to a mechanism of: spend first, repay later. If your story about the future would be probable enough (having a job, education etc) some bank would lend you money. And the same thing was true for businesses. Essentially this is a mechanism where tough choices are made. If you don't have the job or a solid story explaining how you can repay in the future, you don't get money. Which all sounds very realistic.

Fact is however, that with hindsight we can now see that banks, consumers and companies have on a large scale lived in dream worlds with expectations of future income, growth that were not realistic after all. Money was created, lent on the basis of these dreams and imagination. And part of that money is now in our pocket. And we also know that some of the debts are definetely not going to be repaid in the future.

So wouldn't it be fair to state that some of our euros are just as much the result of our imagination, as the Art Reserve Bank coins?