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Marketing Darwinism - by Paul Dunay
Blockchain, Innovation

Cryptocurrency should appeal to regulators

bitcoin-1920x0-c-f

This has been a great series of conversations with cryptocurrency expert Alex Tapscott, and we’re just about done. Alex is founder and CEO of Northwest Passage Ventures and coauthor—with his dad, business theorist Don Tapscott— of the book “The Trust Protocol: How Blockchain Technology Will Change Money, Business and the World.”

In previous conversations, we delved into the issue of security, trust and the structure and solidity of blockchains, bitcoin’s major technical innovation. Here, we discussed a topic near and dear to my heart … regulation. In short, who’s minding the store, and what does government think about cryptocurrency?

“There’s a misconception that’s held by a lot of people that governments are ambivalent and in some cases hostile to cryptocurrency, but that’s simply not true,” Alex said. “Yes, countries like Russia, Iran or Bangladesh are not onboard with digital monies, but in most mature, developed countries, governments are looking at this as a tool and an opportunity, not as a liability.

“The reason is quite straightforward. Consider central banks, which have three important roles in business and the economy—to manage monetary policy like interest rates and money supply; to act as a lender of last resort in the case of crisis or liquidity crunches, putting credit and capital back in the system; and to act as regulator.

“And when it comes to being a regulator, what do you care about the most?” Alex continued. “You care that consumers are being protected, that companies are not violating the law or committing crimes, and perhaps most importantly you care about risk in the system. You want to ensure that risk is not being concentrated in the wrong places where it could eventually lead to a crisis.”

Alex said that a great advantage to a blockchain, from a regulator’s standpoint, is that they can see transactions happening in real time, and can identify pretty easily whether or not money is flowing in ways that might be suspicious, or to places (Iran, China) where money laundering or other nefarious dealings have been known to take place rather often.

“One of the reasons why the global financial crisis happened was that regulators were unaware of how risk was getting concentrated in the hands of different intermediaries,” Alex explained. “A lot of those transactions were done bilaterally, at different parties, where Goldman and Lehman Brothers (for example) might not know how much each of them owed to each other. And often they were using really antiquated technology where the records would be held in Excel spreadsheets or filing cabinets.”

Alex noted that if these transactions had been cleared and were settled on a public ledger like a blockchain, regulators would have had much better visibility and would have been able to react more quickly when things looked like they were getting out of hand. It’s certainly an interesting position.

Another point Alex made—and that regulators should appreciate—is rapidity of response.

“Consider monetary policy,” Alex said. “When you cut interest rates—whether it’s to increase spending or borrowing, or boost investment in equities or consumer confidence … whatever—you’ve got to wait a few months to randomly sample retailers and check in with banks, these types of things, to see how credit books have grown. And that means that your response to things are slow.

“But if you had a digital dollar that was issued on a blockchain, and you cut rates, you’d be able to see in real time all the metadata about how that money was circulating and flowing through the system,” Alex said. “That would give you much better information on whether or not your policy was effective. Many regulators are saying blockchain technology could help them do their job a lot better, and it’s the reason regulators and government officials in many parts of the world are really keen on this technology.”

I want to thank Alex Tapscott for sharing his views about bitcoin, blockchain and the future of digital currency with me, and of course with all you readers. Please feel free to review previous posts in this blog series, about digital currency security, building trust, blockchain details, and reputational issues. And as always, I’d love to here your thoughts.

October 19, 2016by Paul Dunay
Branding, Cyber, Trust

Bitcoin: Needs to be Rebranded to Inspire Trust

rebranding street sign against blue sky with clouds

Your neighbor borrows money from you. When he pays you back, would you prefer a) cash; b) a check; or c) cryptocurrency? While the third option may give you pause, it may only be because digital money is new and hasn’t established the trust you give to the first two. Consider it a branding problem.

Cryptocurrency expert and author Alex Tapscott agrees. Over the course of several blogs, Alex and I have discussed the different forms of digital money, their blockchain platforms that make transactions possible, scalability and—most importantly—trust. The essential question on many people’s minds is, How do you move from greenbacks, which everyone (mostly) has confidence in, to something as “mystical” as bitcoin?

“Here’s the thing,” Alex said. “In 2015, a lot of banks and companies and governments were waking up to the potential of this technology. They loved the idea of frictionless payments, of secure networks, of lower cost, of better speed. But they didn’t like the idea of opening up their companies to anonymous networks of participants.

“The blockchain innovation is the most-important part of the equation,” Alex continued. “Bitcoin is just the incentive mechanism which helps to secure the network. I have spoken to people in the financial services industry, and also big technology firms, who readily acknowledge that if they’re going to build consortium and private blockchains, they’re going to need to reconcile this issue of how to secure transactions.”

Alex mentioned Mt. Gox and Silk Road, two of the more popular scandals impacting digital currency and hurting its reputation badly, and in recent news the Hong Kong bitcoin exchange Bitfinex said it had some $72 million stolen in a serious hack—an amount that has slumped, due to loss of confidence in the currency.

“If I speak to the uninitiated with the subject, and I say ‘bitcoin,’ a lot of times they say, ‘Isn’t that just criminal money that drug dealers and ransomware perpetrators use to commit crimes?’ ” Alex said. “I won’t downplay the fact that there’s a major communications issue around bitcoin. Some of us have wondered if it’s too late to rebrand this whole space to help cleanse it of its troubled past.”

Alex used the analogy of the Internet as the structure of content, in the same sense that blockchain is the structure of digital currency, and how branding can actually facilitate trust.

“With the Internet back in 1994, people hadn’t really arrived on a term for it. Was it the ARPANET? Was it the information superhighway? Was it the network of networks? Eventually we landed on the term ‘Internet,’ which has got a sort of aura of elegance to it that the words like ‘blockchain’ and ‘bitcoin’ do not yet have.”

Alex and his dad, business theorist Don Tapscott, actually did come up with a new term for these vague concepts in their new bestseller, “The Trust Protocol: How Blockchain Technology Will Change Money, Business and the World,” just published by Penguin’s Portfolio imprint.

The new term is the “trust protocol.”

“I’d say that there has never been a system designed where security is more at the heart of it than with blockchain,” Alex told me. “I think that big, open public blockchains are the most secure way to move and store and manage anything of value than anything we’ve ever created. Just look at history: If the NSA, the CIA, JPMorgan, Morgan Stanley, Target, LinkedIn, Twitter and Home Depot can’t secure financial data or data about identity, then no one can. These are companies and governments with enormous resources.

“The problem is that they’re all centralized and they all control data,” Alex said. “If you could take that and decentralize it across a network, it would make it much harder to hack. It doesn’t mean it’s impossible to hack, but it’s significantly harder to hack a blockchain than it is a conventional database because you don’t just have to hack one source, you have to hack millions of different computers in a very short window of time.”

Next time, Alex and I will look at more issues concerning cryptocurrency, and how they might figure in your future—how bitcoin and blockchain can disrupt entire industries. Stay tuned!

October 5, 2016by Paul Dunay
Blockchain

Exploring the World of Blockchain Transactions

da-ransbotham-blockchain-data-storage-business-model-bitcoin-1200-1200x627

Those of you who have been following my recent posts about digital currencies may remember my recent discussion with Alex Tapscott, founder and CEO of Northwest Passage Ventures. He’s the co-author along with his dad, the business theorist Don Tapscott of the best selling book ‘The Trust Protocol: How Blockchain Technology Will Change Money, Business and the World. ” In my last post, we delved a little into the topic of blockchains, those public ledgers that allow digital currencies like bitcoin and others to be sent to others as a form of payment. Here, Alex discusses the different forms that a blockchain can take.

“There are lots of different ways to make a blockchain, with some being public and some private, and a lot of times people don’t really know what that means,” Alex said. “Basically a public blockchain is simply one that is open and permissionless, where anybody can access it regardless of where they are or who they are.

“And typically public blockchains have a native token, a cryptocurrency like bitcoin or in the case of Ethereum—a blockchain-based computing platform that can execute peer-to-peer contracts—a cryptocurrency called ether. Public blockchains have a lot of positive attributes. Because they’re open, they have many different participants, and the more participants there are, the more transaction validity you get.”

Alex acknowledged fears that cryptocurrencies might be hacked, with bitcoins or other currencies actually stolen, but said public blockchains help mitigate the risk.

“The more different people you have, the more distributed it is, which generally speaking reduces the chance of attack, because you have to attack many computers rather than one computer. Also, because you’ve got lots of different computers, there’s more energy and more computing power going into this blockchain, which makes it more secure for the most part.

“Now, there is a flipside to public blockchains which makes it somewhat limited, at least today. Transactions in a public blockchain have to be broadcast across the whole network. This means that the number of transactions that the blockchain can handle is limited because, remember, it does requires a lot of computing power and a lot of energy. So the question of scalability is one that’s still unresolved in public blockchains.”

By contrast, Alex noted that private blockchains are made up of participants who have permissioned access. And with fewer participants a private blockchain can manage a higher transaction volume, he said.

“And it can manage more types of transactions, too, because the rules are set by the participants, and they can change the rules to meet different types of assets. Everyone trusts each other somewhat, and can trust that they each have the necessary computing resources to manage the blockchain. That means it’s unlikely that someone won’t have the ability to participate fully.

“Also, because private blockchains are permissioned, they are, generally speaking, more palatable to regulators, because you could grant permission to different parties in a transaction. One of those parties could be an auditor like PricewaterhouseCoopers, for example. One of them could also be a regulator who could look in to see the metadata and validate what’s happening.”

In future posts, we’ll delve into a lot more about the future of cryptocurrencies, including setting up private blockchains, regulatory aspects, security and more. Watch for it!

September 21, 2016by Paul Dunay
Blockchain, Trust

Cryptocurrency: How to establish trust?

bitcoin

I’ve had a great time chatting with cryptocurrency expert Alex Tapscott about the future of digital money, and how it may (probably) change our lives. In my last post with Alex—founder and CEO of Northwest Passage Ventures and coauthor with his dad Don of the book, “The Trust Protocol: How Blockchain Technology Will Change Money, Business and the World”—we discussed the all-important topic of security: Who actually is minding the store on these new types of monetary transactions involving such things as ether, bitcoin and other new digital currencies?

A major issue—perhaps the single most important issue, actually—is trust. There’s plenty of trust in the U.S. dollar, but what about bitcoin and other digital monies? I asked Alex how one establishes trust in this brave new world of digital currency?

“Traditionally we have an intermediary to establish trust, those agencies that verify the identity of parties, perform the processing, and the clearing and maintaining of reliable records. Now, intermediaries—call them banks, credit card issuers, PayPal, you name it—do a pretty good job at that, but they have certain limitations. They’re centralized, they cost money, they capture data, and doing so can slow things down if they’re using old technology.”

Well then, I thought. what’s the new paradigm for digital currency? Who is governing whether bitcoin and other digital monies are “real” or not? Alex discussed a bit about blockchain—bitcoin’s main technical innovation, a public ledger for bitcoin transactions allowing users to connect to the network, and send and verify transactions.

“With blockchain, you’ve got a new platform where trust is not established by a third party, but rather established through maximum collaboration and clever code,” Alex replied. “In a public blockchain (more on this later), you have an incentive mechanism in that users commit computing resources to validate transactions, and then are rewarded for reaching consensus on what is ‘true’ by receiving bitcoin or an Ethereum ether.”

But, I asked Alex, how do you validate a crypto transaction? After all, it’s not script, like the U.S. greenback or the euro.

“Right now, there are a whole bunch of different solutions that have been proposed. A mining method is called a ‘proof of work.’ So in exchange for doing lots of work, you have the chance of getting rewarded. But there are other different ways of validating a blockchain, like ‘proof of stake,’ which basically just confers validating power on whomever owns a share of the network.

“So, if you have 10 banks in the network, and each of them owns 10%, then no transaction is valid unless all 10, or some plurality or majority, can reach consensus,” he said.

Since we were dealing with the all-important topic of trust here, I had to ask: How much effort does it take to break a blockchain and steal money? Trust is the key to the new world of digital currency, right?

“One of the great advantages of the bitcoin blockchain is that validating transactions takes a lot of work, so guess what? Hacking transactions to try to break the blockchain—to steal money—takes an equal or greater amount of work! That’s what makes it really safe. So in order to hack a transaction on the bitcoin blockchain—to, say, send the same $20 twice or sell the same share 10 times because you’re trying to make 10 times the profit—you wouldn’t just have to rewrite one transaction. You’d have to rewrite every transaction, basically back to the beginning of the blockchain, and do so in a really short window.”

Alex told me he feels that proof-of-work blockchains that use a native token like bitcoin, or Ethereum’s ether, are the ones that are likely to succeed. “I think that private blockchains that don’t have that could work, but I don’t think they’ll ever be as secure.”

Next time, we’ll look a little closer at public versus private blockchains, to get a better feel for why Alex thinks one may prevail over the other, at least in the short term. Stay tuned!

September 6, 2016by Paul Dunay

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Welcome to my blog, my name is Paul Dunay and I lead Red Hat's Financial Services Marketing team Globally, I am also a Certified Professional Coach, Author and Award-Winning B2B Marketing Expert. Any views expressed are my own.

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