Digital Marketplaces Unleashed
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According to Mike Hearn, an industry expert, it is even worse with two pools controlling over 50% of Bitcoin – and both coming from Mainland China [16]. His article “The resolution of the Bitcoin experiment” is eye opening and scary.
Nowadays, blockchain technology is much more powerful than in its beginning, when it was designed to only perform a small set of simple transactions like currency‐like tokens. Today’s blockchains are ready to perform more complex operations. Moreover, while not solving the essential problems of the first blockchain designs but starting licensing of bitcoin exchanges by applying existing regulatory and legislative frameworks, the next buzzword within the blockchain context already got off the starting blocks to take this bubble to the next level; smart contracts – with all its foreseeable legal uncertainty as well as growing detachment from existing legal structures and jurisdiction.
We will not bother you with a description or contest between competing terminology of smart contracts as “autonomous machines”, “contracts between parties tired on a blockchain” or “any computation that takes place on a blockchain” but refer to the pragmatic and straight forward classification as used by Josh Stark in his article “Making sense of blockchain smart contracts” [17]. For a specific technology – code that is stored, verified and executed on a blockchain we will use the definition “smart contract code”. A specific application of that technology: as a complement, or substitute, for legal contracts we will use the definition “smart legal contracts”. Now we will have a look at the different layers included and focus on the overall question, whether blockchain technology is ready for big business in the financial industry.
So things are not quite as they appear – neither is a blockchain necessarily superior in performance in scalability nor is it as democratic and secure as one might think. Which is probably what makes the leaders of big US banks less optimistic about blockchain, as heard at the Davos World Economic Forum 2016. Citi’s chief economist Willem Buiter referred to “the number one law in programming software: that anything that can be programmed can be hacked”. “It’s not going to change everyone’s life tomorrow”, said the Chairman and CEO of Morgan Stanley, James Gorman. Garry Lyons, MasterCard’s Chief Information Officer summarized: “It’s not just the industry that’s excited about blockchain, it’s the world, everyone. Even at Davos, every single tech panel I have gone to mentions blockchain. But while we think it’s very interesting, we don’t want to, and no one wants to, be blindsided by rushing into it” [18].
The decentralization of the system is blessing and a curse. Especially in the financial industry trust and reliability are fundamental pillars. To use a new system like blockchain it is essential to be able to trust the program code and to ensure that necessary, practical extensions cannot be blocked; this for the protection and benefit of all participants. It therefore requires a certain institutionalization of the system, which is not given yet. In addition, as in any normal processing of transactions, sometimes there is a need for adjustment or even roll back. Current blockchain technology used for virtual currencies and smart contracts don’t provide this function but are unidirectional updates that cannot be reversed. One of the recent examples from the current times, why can cause real big problems, is the hack at the DAO, the Distributed Autonomous Organization that lives on the Ethereum blockchain and that was supposed to take money from investors and invest it in projects voted on by the investors and administered through smart contracts. It is also a perfect example to have closer look on the different layers of this technology and the challenges to line up intention, implementation and results. First there is the intention of a contract and its expected results (set by the smart legal contract), followed by the smart contract code, stored, verified and executed on a blockchain, and at its end the real results which may differ from the initial expectations. In case of DAO the intention was to take money from investors and put it in projects voted on by the investors, administered through smart contracts. After coding the intentions and definitions didn’t matter any longer but the code did and ended up in the loss of $60 million for the investors. Some may say that this has been a hack others may say it wasn’t. The difference between the hack of Mt.Gox (valued $500 million) or Bitfinex (valued $70 million) where bitcoins were stolen from a system by unauthorized access is that at DAO the code of the smart contract was used to transfer the money. As a result, DAO was not hacked but the attacker executed the recursive splitting function, which was implemented, in the smart contract, just not for this kind of transaction and intention. In the regulated environment of banks and financial institutions customers would be safeguarded by regulatory frameworks against losing all their money and would have the possibility to sue the hacked company. Within the blockchain sector this is not the case.
This directly leads to a conclusion that blockchain, as a decentralized and open source technology is not ready for big business yet. Blockchain sector is not imbedded into the existing regulatory frameworks and legislature. As the intense legal risk attached to this kind of technology is just the expression of not existing trust and reliability there will be much more development necessary before the buzzwords will turn into real solutions and business cases. Maybe this is one of the reasons why Bitcoin and Blockchain as attempt to break through and skip the existing, traditional intermediary role of banks is not expected until 2027 by the Global Agenda Council of the Future of Software & Society’s Technological Tipping Points and Social Impact survey 2015 [19].
35.3 So Where Does All this Lead Us to?
Let’s go back and see what happened with the Pharmaceutical industry after it has been shaken up – and I refrain from using the word “disrupted” – by the biotech hype. Tremendous money was attracted by more or less obscure start‐ups claiming nothing less than a cure for cancer and the likes. But there were also solid, legitimate companies in the field doing serious work with a professional approach. The hype is long gone and the industry adjusted to a new model, in which a lot of the R&D is done by startups attracting venture capital for meaningful research. And when the case is proven, the big corporations acquire the products or the companies and apply their power and financial means to bring it to market. Similar things happen in the Internet industry around the big Internet players in the US. Ecosystems for innovation are created and the industry changes its approach to innovation. The financial sector, being especially careful and conservative, has taken a little longer and became a target for hungry, well‐funded start‐ups. My prediction would be, and many examples can be seen already [20], that the traditional players embrace the FinTech sector and nurture the developments and innovation, then incorporating it when the case is proven. This will be a benefit for everyone – including the consumer.
References
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[Online]. Available: https://en.wikipedia.org/wiki/Financial_technology. [Accessed 20 07 2016].
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[Online]. Available: http://www.forbes.com/sites/nicolefisher/2015/04/22/are-ma-replacing-rd-in-pharma/#35e69441cb57. [Accessed 22 04 2015].
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[Online]. Available: http://seedcamp.com/creating-a-startup-ecosystem/b. [Accessed 20 07 2016].
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[Online]. Available: http://de.statista.com/statistik/daten/studie/171479/umfrage/geldinstitute-bei-denen-gehalts--bzw-girokonto-gefuehrt-wird/. [Accessed 20 07 2016].
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[Online]. Available: http://finovate.com/.
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[Online]. Available: https://consumerist.com/2016/06/07/currentc-ends-beta-tests-will-deactivate-accounts-later-this-month/. [Accessed 07 06 2016].
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[Online]. Available: https://en.wikipedia.org/wiki/Robo-advisor. [Accessed
19 09 2016].
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[Online]. Available: https://en.wikipedia.org/wiki/Harry_Markowitz. [Accessed 12 10 2016].
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[Online]. Available: http://FinTechist.com/lack-of-innovation-could-turn-FinTech-into-another-buzzword/. [Accessed 03 10 2016].
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[Online]. Available: http://de.e-fundresearch.com/markets/artikel/28271-FinTech-hype-versus-tod-der-persoenlichen-beratung-. [Accessed 19 07 2016].
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[Online]. Available: https://www.hottopics.ht/stories/finance/what-is-FinTech-and-why-it-matters/. [Accessed 19 07 2016].
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[Online]. Available: www.coinmarketcap.com. [Accessed 13 08 2016].
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[Online]. Available: http://www.investopedia.com/terms/b/blockchain.asp. [Accessed 19 07 2016].
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[Online]. Available: http://www.ibtimes.com/bitcoins-big-problem-transaction-delays-renew-blockchain-debate-2330143. [Accessed 04 03 2016].
15.
[Online]. Available: https://blockchain.info/pools. [Accessed constantly updated].
16.
[Online]. Available: https://medium.com/@octskyward/the-resolution-of-the-bitcoin-experiment-dabb30201f7#.73c2ty6p9. [Accessed 14 01 2016].
17.
[Online]. Available: http://www.coindesk.com/making-sense-smart-contracts/. [Accessed 17 10 2016].
18.
[Online]. Available: https://www.cryptocoinsnews.com/davos-elites-talk-bitcoin/. [Accessed 22 01 2016].
19.
[Online]. Available: http://www3.weforum.org/docs/WEF_GAC15_Technological_Tipping_Points_report_2015.pdf#page=24. [Accessed 13 08 2016].
20.
[Online]. Available: http://www.cnbc.com/2016/04/11/big-banks-shift-a-strategy.html. [Accessed 11 04 2016].
© Springer-Verlag GmbH Germany 2018
Claudia Linnhoff-Popien, Ralf Schneider and Michael Zaddach (eds.)Digital Marketplaces Unleashedhttps://doi.org/10.1007/978-3-662-49275-8_36
36. On the Quest to the Ultimate Digital Money
Helmut Scherzer1
(1)Giesecke & Devrient, Munich, Germany
Helmut Scherzer
Email: helmut@hscherzer.de
36.1 The Definition of Digital Money
Money from the first day it was invented around 2500 years ago – had always been a ‘touchable thing’ which represented a value. From the early trade of goods exchange (e. g. a chicken for a cluster of wood) humanity discovered the brilliance of a ‘represented value’ through shells, gem stones, pearls, silver, gold and whatever could represent a value.
Creating a gold coin is difficult since gold is a rare resource. It requires a large effort to find gold to finally create a gold coin – more effort than growing a cow. It is that major effort which generates the intrinsic value of the gold coin and that ‘proof of work’ it is the reason that farmers would rather grow cattle than trying to find gold.
Today the concept of a “Proof‐of‐Work” has come to the attention of civilization through the upcome of the BitCoin currency. Banknotes do no more keep their intrinsic value from its material (like gold). The “Proof‐Of‐Work” here comes from the extreme difficulty to create a valid banknote.
Information Technology – for the first time in history – allows an immaterial representation of money which breaks with the classical forms of money representation. Information can be copied, which is absolutely forbidden for a material representation. So how can we define “digital money” in contrast to “materialized money”.
Money
is the acknowledged representation of a recognizable value through a transferable carrier.
Digital money
is the acknowledged and transferable off‐line representation of a recognizable value through information.
Bank accounts do not qualify as “digital money” according to the above definition. Electronic payment does not actually transfer money but it commands a bank to send money from the sender’s account to the receiver’s account. Electronic payment transfers the right to claim money – it does not transfer money. Electronic payment with “Digital Money” implies sending data from the receiver to the sender which actually represents a value. The receiver can trade this data anonymously to any bank in exchange for bills, coins or other money representations – of course s(he) can also credit the data(!) to his/her bank account.
Like coins and bills, “Digital Money” changes between persons without the requirement of any bank account. This idea makes digital money highly attractive, but it also implies a high technical challenge to realize.
36.2 The Criteria to Ultimate Digital Money
On our quest for high end solutions we scrutinized the question of the “ultimate digital money” and our results will not answer this question forever, neither do we claim its universal acceptance. Yet the results have been found very helpful to distinguish between the existing solutions. Anonymous
No Account
Stability
Currency bound
Central bank option
Free off‐line Peer‐2‐Peer transfer
Infinite hops
Off‐line‐Exchange
Online and off‐line operations possible
No forgery possible
No double spending possible
No risk to the issuer bank
Not using cryptography
Additional services
Backing up money
Instant invalidation
Limited bad press
36.2.1 Anonymous
Quality No 1 of (digital) money is still the fact that the user can spend/earn it anonymously. People do not like to be tracked by their business operations – while this is an aspect that associates to criminal activities it is actually the very normal user who doesn’t want to be read by any institution or individual. Business behavior is considered as a rather intimate property regardless from the content of the transaction.
36.2.2 No Account Required
The ultimate digital money shall not be account based. While the association of an account is already contradicting ourdefinition of digital money, this does not require further consideration. It shall, however, be understood that any system providing account based transactions will not qualify as ‘digital money’ at all. This does not criticize account based systemswhich are very practical for other purposes than digital money and they are suitable for uni‐directional payments (e. g. customerto merchant).
36.2.3 Currency Bound
The great inflation (Germany 1923) exchanged about 4.2 × 109 (4.2 Bio.) “Reichsmark” for one dollar. People did no more use any money since its value could change by a factor of 2 to 10 within a few days.
For digital money this has a consequence:
Digital money shall represent an existing currency
No matter what the currency is, the stability of digital money will consequently follow the stability of a currency that is managed by banks and finally the world bank.
Trust in digital money will only establish if it is backed by an official currency. Trying to invent a new currency (e. g. BitCoin) triggers consequences of changing value (BitCoin: from 20–200$ within several months) that will hardly be honestly taken by any business except for those who are speculating on the stock exchange anyway. Hence digital money should represent an existing currency ($, Yen, Euro, …) and at best, it has the feature of a ‘face value’ i. e. the user can recognize the value of a digital bill by its intrinsic parameters.
36.2.4 Central Bank Option
A central bank, reserve bank, or monetary authority is an institution that manages a state’s currency, money supply, and interest rates [1]. Part of this missi
on is to control the traded money flow. If digital money is simply bought as another representation of an actual currency (see above) then the central bank does not need to be worried about the actual money volume in a country. Nevertheless digital money should have the option to be controlled by the central bank. As with bank notes, this option does not mandate to trade in the quality of anonymity.
36.2.5 Free Off‐line Peer‐2‐Peer Transfer
Off‐line peer‐2‐peer transfer shall easily be possible between holders of digital money. As with bank notes, users want to be able to exchange money without having to consult an account, a network or any third party.
This quality also is an important aspect to prove anonymous transactions. Of course users do not want to pay for such transfer – like with bank notes. As a consequence such off‐line‐transfer shall be free of cost. And in addition, if the same amount was exchanged between two parties, the actual representation of money shall not change i. e. no traces of the exchange are attached to the money.