Breaking dollar's fungibility

Breaking dollar's fungibility

Banks government markets

In the modern world we rarely make a distinction between the money in our banks, the currency in our pocket, or our balance in a digital wallet like PayPal - a dollar is a dollar, pretty much fungible. However, that's not really the case - money deposited in a bank means the bank owes that money to you (it's not "your cash"), digital wallets also own your money and can easily freeze your balance. Transferring money from one bank to another is always done at par, even if that bank in question might be Lehman Brothers about to go down back in 2008. Perhaps it is time we break the dollar's fungibility and start putting a price tag on the credibility of banks?

Private notes

Over 150 years ago in the "free banking era", any bank could issue its own banknotes. You would see a number of different notes in circulation - you could have $2 from The Bank of Chattanooga, The County of Polk, or The Lawrenceburg Bank of Tennesee. Same in Canada. While it created a lot of hassle for anyone wanting to use the currency, especially if they would travel beyond where those notes would be redeemable, it also allowed for a market to form and put a real value on the currency based on how credible the issuing bank was - good notes would be valued at par, bad ones - at a discount.

While banking nowadays is certainly simpler and safer with uniform currency issued by one entity per country, FDIC deposit insurance to prevent people losing money in case a bank goes bust, etc. However, this means we also lost the ability to evaluate bank's trustworthiness, usability, etc. and arbitrage it.

Bank arbitrage

In the Bitcoin world, it is fairly straightforward to judge the health of an exchange by looking at its exchange rate. Back when MtGox was going bust, its rates deviated from its competitors by 15+% even early on. When withdrawals out of the exchange became impossible, there was even a secondary market that traded MtGox BTC for real BTC by using MtGox's inter-account transfer capabilities. You can track arbitrage metrics today.

How would this apply to banks? Well, you could start with the currency issued by the government as the base - one dollar here would be redeemable to one dollar in banknotes (this is what MintChip aimed to do for example). Banks would use that as their reserves for fractional-reserve banking and issue their own debt-based currency. All of it could be tracked on a shared "bankchain" to allow market for various bank debt to form. The price difference of the debt could stem from various factors - how stable the bank is (FDIC insurance is all well and good, but nobody wants to go through the stress of having your saving locked up for who knows how long), how cheap and easy it is to transact to and from a bank (say, USD-demoniated bank account in Europe might be valued less due to the extra cost of transferring money overseas), how accessible is the bank (branch opening hours and how common they are), as well as how their customers share the banks values (banking for millennials, sharia-compliant finance, etc.).

Setting up such simple metric for each bank would allow anyone to easily compare various banks and put that metric on everyone's mind. If one day your money would go down to 95 cents on the dollar, perhaps you would ask your bank "what is going on?" and find out that HSBC enabled Mexican drug cartels to launder money. Maybe it would enable some people to demand all of their deposits to be covered 100% by the government-issued currency, rather than allow for fractional reserve banking? Or perhaps it would allow some people to move their money to their local credit union to support the grassroot company and earn 1-2% on the conversion rate.

Conclusions

Banking in the modern world is pretty homogeneous - currency dictated by the government, fungible money no matter where you go. Perhaps it might be useful to bring the market back into the equation and allow us to see see the bank's worth by checking the value of their dollars?

Related links:

• Singularity of Money
• MinuteEarth's videos on diversity - 1, 2

Cryptocurrencies as protection from the government

Cryptocurrencies as protection from the government

Cyprus Fiat gold government

Recently, International Monetary Fund released a report on Virtual Currencies. Overall, it's not a bad report - it discusses whether virtual currencies such as Bitcoin should be considered money, what the regulatory approach should be and what are some of the challenges related to dealing with cryptocurrencies. It has its share of misconceptions (for example: "VC schemes are difficult to monitor. Their opaque nature makes it difficult to gather information, including statistical data, or to monitor their operation." - yeah, no, that's the current banking system you are describing there), and overall it paints a cautionary picture of virtual currencies. However, I think the report is missing one important feature of cryptocurrencies that a lot of people might find interesting - they are a protection from the government. Let me explain what I mean...

Government power over money

When you stop and think about it, a lot of governments have nearly orwellian power over money. The monetary policy is not something that is often discussed by a lot of people, and often we are not equipped with the vocabulary to talk about it (like trying to form complex thoughts in newspeak). They get to decide whether savers or borrowers have it easier by controlling the rate of inflation. They get to determine how much your labour is worth by engaging in currency wars and a "beggar thy neighbour" race to devalue its currency the most. Then we have the incompetent governments that let their currency devalue in hyperinflation like Venezuela (reaching about 100+% in 2015). The fiscal and monetary policies are thrust upon us.

In short, the governments can effect our savings, future income, as well as many other factors just by controlling how money is created and spent.

Lack of trust in the government

For those and other reasons, some people resort to moving away from the government-issued currencies and adopt new forms of payments. Whether they take the form of local currencies, gold or something else, they can be an expression of lack of trust in the government.

However, there are limitations to a lot of those currencies in the modern world. Local currencies are often low-tech and they are not usable globally. Physical currencies can be seized by force (like in 1933 in USA, by the Executive Order 6102).

At the moment it would appear that only native cryptocurrencies such as Bitcoin can be a viable protection from the government in the modern world.

Protection from the government

While some people would jump to thinking that "protection from the government" necessarily means breaking the rule of law and engaging in illegal activities, that's not what I'm talking about here. What I'm discussing is withdrawing at least partially from the fiat-fuelled economy and moving into the cryptocurrency economy. One can and should still pay taxes, obey the law and so on, but that doesn't mean one has to keep one's wealth in the potential house of cards that various banks and government currencies are (look no further than the 2013 Cyprus crisis and the related bank bail-ins).

I am a saver, not a borrower. I wish for my money to at least keep its value, or be worth more. I want my wage to be stable no matter which government I work under. I don't want the currency I use to be created as debt by the banks, or even let the banks take any part in the money creation process. As such, I know of no fiat currency in the world today that satisfies my preferences, hence why I choose Bitcoin over fiat.

Conclusions

Native cryptocurrencies like Bitcoin offer a way for people to de-leverage the power governments hold over the currency and shape a new economy for themselves.

The IMF and similar organizations need to understand that asking "should the government regulate cryptocurrencies?" might be less important than "if cryptos will succeed, why would anyone continue to use fiat?". Probably for the first time ever, fiat currencies have a worthy competitor in the global Internet economy. They can either focus on becoming the best currencies they can be to compete (akin to Steam trumping free torrents), or go the way of the Kodak.

Related topics:

• The need for a new measurement of value

The Regime Test - a Great Filter for the cryptocurrencies

The Regime Test - a Great Filter for the cryptocurrencies

Altcoins Crypto 2.0 government

Bitcoin is a decentralized cryptocurrency. Just like gold, nobody owns the system and no single entity controls the market. While some governments might try to restrict its use, at this point the Bitcoin network is so widely distributed that any attempt to shut it down is infeasible.

However, what about other cryptocurrencies out there? How can one be sure the network they use will stick with its tenants and not start acting like a centralized system? How does one know their coins are safe from being forked and erased?

One good indicator of whether a cryptocurrency will stay the course of remaining decentralized or caving in to government's will would be "The Regime Test" - waiting for the currency to be actively used by at least a few people in some sanctioned regime, bring it to the attention of both the system developers and their government and see whether they take any steps to prevent such transactions from taking place on the protocol level, or stand by their network needing to be completely decentralized.

One could see it as "a Great Filter for the cryptocurrencies" - every sufficiently successful cryptocurrency will have to face it on the road of becoming an ubiquitous, global currency. Whether the system passes the filter and remains a decentralized network or caves in to governmental pressures forces the project to take a stand on either side of the debate - it's not an issue that can be swept under the rug for long.

This test is especially important for the Crypto 2.0 systems that allow you to deal in your local currency directly. One can never expect when a new currency would appear from either a sanctioned regime or an extremist group that is suddenly traded against the more established currencies. Whether the system is then forced to ban the issuance of such currencies or lets the gateways deal with that on a case-by-case basis with their users can be an interesting precedent. If say, someone would send a Gold Dinar from a terrorist organization that then gets swapped for USD and lands in someone's account, would that person be potentially investigated as dealing with the terrorists? What about the trader that set up an order that allowed this transfer of funds? Or more interestingly - what if the trade went like this: Gold Dinar -> native token -> USD? Clearly, the native token - USD trader did not have bad intentions when enabling that trade, but the transaction couldn't have happened without them. It might be possible that suddenly the decentralized network would start requiring KYC on the blockchain for performing any sort of trade. Suddenly, the extra KYC Ripple Labs had to go through for their wallet start to pale in comparison.

All in all, the Regime Test is another gantlet for cryptocurrencies to separate the fragile ones destined to fade away from the antifragile ones that have a potential of standing to the challenge. It would be interesting to see some exchanges in places like Iran and Syria to challenge the status quo and show that in today's decentralized world, the money is like the Internet - it cannot be stopped and it flows around barriers. Similarly, it would be great to see a few cryptocurrency networks like Ripple challenged to take a stance on this issue.

PS: Stop the Bitlicense

Restrictive regimes - Iran, Syria, North Korea and New York ;).

Governments - do your job. Give us unique digital signatures!

Governments - do your job. Give us unique digital signatures!

government Identities IDs KYC

This week at Decentral Vancouver we had an interesting discussion with Gene Vayngrib, Greg Meredith and Katryna Dow (the full video of the hangout can be viewed here). We talked about the concept of decentralized identities - how people can build up online identities and trust to be able to conduct online transactions with unknown parties with minimized risk of scams. This later turned into a discussion of sybil attacks and how governments might actually be useful for something. So, lets start from the beginning...

Online identities - the current model

At the moment, online identities can be viewed as a collection of pseudonyms - it's rather hard to tell if say, ThePiachu on Twitter is the same person as ThePiachu on Reddit, etc. Similarly, it's hard to tell who this person is in real life. If we use OAuth and say, sign into multiple websites with Facebook / Google Plus / whatever, at least we can know that one entity is behind all of the accounts.

Now, why is any of this important? Well, a lot of online interactions depend on user's reputation. Everyone wants to know that the person they are talking to is the same person they talked to last time on a different website, etc. Moreover, this persistent reputation can be useful to determine how likely a person is to scam you. Building up years of online presence takes a lot of effort, so the person would only try to scam and lose the reputation if they could earn more than it would cost to build up another pseudonym. In contrast, an hour old account with no history is cheap to burn to scam, defame or troll someone online.

Decentralized identities

One could describe decentralized identities as a decentralized extension of the OAuth model. With projects like BitID or Meeco, we would be in control of our sign-in identities, just like we control our Bitcoin addresses. We can create an identity on our computer, use it to sign into some websites with our Bitcoin address and thus start building our reputation, similar to the current model. The only problem is, such identities would be vulnerable to theft. For example, if I go by the address of 1PiachuEVn6sh52Ez7o6Fymvw54qvQ4RBm and someone gets my private key, I can no longer prove that I am the original owner of this address, nor that I authorize a new address to be my identity from now on.

Moreover, there are some important use cases that this model doesn't solve. If anyone can create any number of identities, you cannot use those identities to do democratic voting, use them to distribute universal basic income to each person in a fair manner, etc. For this, we need to resort to what a lot of crypto-anarchists hate - the government.

Governments and unique identities

Like it or not, the governments (or at least some of them in the western world) do a few things efficiently. One of such things, is verifying that a given person is the person they are claiming to be. The first thing any company does when they need to verify your identity is to ask for your government ID. While they aren't 100% fraud-proof, it's pretty reasonable to assume a government can ensure:

• that each person has a unique number assigned to them
• the number is not shared between multiple people
• no person has more than one such number
• if the number ever gets stolen, it will be tracked
• whether the person is still alive or has already died is tracked with reasonable accuracy

Now, if we took these capabilities and stick them on some hardware device say like this one:

We can solve a lot of problems quite efficiently.

Digital ID - KYC for the digital age

How a Digital ID might look:

1. A government identifies a person and issues them an ID with a chip
1. The ID holds a private key, performs signature on request and dispenses the public key as needed
2. The ID is not wirelessly accessible (to avoid problems like this)
3. They will probably need to issue them the hardware interface to use this ID online - probably some USB dongle
2. The government keeps a record of the ID and the status of the person (alive, deceased) and the ID itself (active, stolen, replaced)
3. The government opens up a public API for anyone to request only the most basic data:
1. "Is ID X stolen?" - yes/no
2. "Does ID X belong to anyone?" - yes/no
3. "Is ID X valid?" - yes/no
4. "List invalidated ID numbers from last year"
4. The API responds in a cryptographically verifiable way
1. The response is signed by the government's private key - no other party can forge the signature
2. The response includes the request in question, validating that the inquiry was made (so the requesting party can prove they did their due diligence)
3. The responses are aggregated into some factom-like database on the blockchain, meaning that all requests are auditable
5. If a person ever loses their ID, the government will replace the ID with a new ID and record that the person's ID was changed and to what ("ID #245 got replaced by ID #9472")

Now, what good does this do? Quite a lot actually.

First of all, KYC becomes fully digital. No more ID scanning, photo taking, etc. A service like Kraken can just ask - "Please input your ID number here, and please verify your identity by digitally signing this verification text...". The service quickly learns that the person owns that particular ID (through challenge-response), and can take that ID to the government and ask: "A person with this ID requests KYC. Is this person in your database? Is the ID valid? Everything OK?". After a prompt positive response, the service is sure they have fulfilled their KYC requirements. If a government ever asks - "who is this person?", the service can give them their ID and the government will already know who they are looking for.

Secondly, identity theft is diminished. In order for someone to steal your identity, they would need to have access to your ID card. If your ID card gets stolen, you report it to the government and they will:

• give you a new ID card with a new keypair
• invalidate the old one
• keep a record of the change for everyone to poll

This means that any digital service can periodically get the list of invalidated IDs and cross-check it against their own database. If they match, the account can be frozen, or updated (in case the ID gets replaced).

Thirdly, any service that relies on globally unique real-world identities (such as democratic voting) can utilize this system to solve the problem of sybil attacks. Similarly, if you want to build communities of real people, not just online aliases (say, LinkedIn), this also addresses your needs.

Lastly, this also solves the problem of scams. If you are unsure who you are dealing with, get their public key, verify their identity through challenge-response, and if worse comes to worse, you can pinpoint to the police who was it that did you wrong.

Conclusions

While a lot of people might oppose the governments interfering too much with the Internet through the actions of NSA and the like, there are still good for some things. If leveraged correctly, the governments can help solve one of the hard problems in cryptocurrency - unique user verification. If implemented correctly, this can make the burden of following KYC requirements cost next to nothing.

Crypto success vs. Bitcoin success

Crypto success vs. Bitcoin success

Bitcoin crisis Crypto 2.0 government

After researching a lot of Crypto 2.0 systems (tiny.cc/Crypto), I started thinking about whether some systems could surpass Bitcoin. We have a lot of proponents of a world with only Bitcoin, only some Bitcoin copy, or all of the cryptos going the way of the dodo. While I'm personally a proponent of the Singularity of Money concept (a world with many interchangeable currencies), it is still interesting to ponder whether Bitcoin or cryptocurrencies in general will gain mass adoption among the general population.

Thinking about this for awhile, the conclusion seems to be that

Cryptos will succeed if the banks are failing. Bitcoin will succeed if the governments are failing.

Let me explain why.

People want faster horses

A lot of you should be familiar with the quote allegedly by Henry Ford - "If I’d asked people what they wanted, they would have asked for a faster horse". A similar sentiment can apply to cryptos. People don't want a new currency, they want their old currency to be better and faster. People are used to thinking in USD and Euro, not Bitcoin or Dogecoin. It would take a lot of mental effort for people to switch over to a new currency, and that might be a large barrier to overcome, not to mention the issues of price stability and so forth.

At the same time, if you have a system that offers what the banks offer only better, you are very likely to be able to compete with them. This is why PayPal and Alipay are very likely to be used for online payments, while bank wires in North America are not as popular.

Banks surround themselves with a lot of policies and discriminate against their customers. International payments are a pain, credit cards are outdated and the whole system is filled with inefficiencies. As such, if you'd have crypto systems that allow you to pay in your national currencies only better and faster than a bank, those systems are likely to succeed in the modern world.

It is very likely that the 2.0 systems that allow people to deal directly with their local currencies without jumping through random hoops will thrive in the near future. Ripple is already positioning itself to be "the internet of money" and appealing to the current financial systems.

While Bitcoin and similar systems might be a part of the solutions used, it might also be seen as an unnecessary step when it comes to money exchange not denominated in BTC. However, there are some cases where Bitcoin might be the solution needed

Governments failing

If a national currency is stable, people want to use that currency. If the national currency is not stable, people want to get rid of it and use something else. If you're in a country like Argentina or Venezuela with an inflation rate of 10% or even 60%, or perhaps have experienced the Cypriot financial crisis or the more recent fall in the price of Russian Rubles, you might be thinking to yourself "I don't want to use this currency any more".

At times like these, we start looking at alternatives - gold, dollars, franks, etc. However, those can be seized or frozen. A more modern alternative would be to look at cryptos.

And herein lies the strength of Bitcoin. While it might look unappealing to the western world, it offers an alternative to people that are losing it all. It is apolitical, not controlled by any government and is easily transportable. As such, in a world where the governments fail everyone with their monetary policy, Bitcoin and similar currencies have a room to thrive.

Conclusion

It is very likely that cryptocurrencies will succeed in the near future due to the stagnation in the modern world. However, for Bitcoin to become widely adopted, we would need to see entire regimes start to fail and people wanting to take their economy into their own hands.