Monday, September 7, 2015
UPS Exec Dreams of a Bitcoin Future on Corporate Blog
Exclusive Preview: ECUREX Research to Release Comprehensive Digital Currency Market Report
Today ECUREX, a digital finance marketplace for professional traders and financial institutions headquartered in Zurich, is publishing a comprehensive 110-page report on digital currencies – an ECUREX Research Working Paper titled “Digital Currencies: Principles, Trends, Opportunities, and Risks.”
In June, Bitcoin Magazine reported that ECUREX was the first digital currency exchange platform to be fully compliant with the Swiss Banking Act and Anti-Money Laundering (AML) Ordinance. Now, with the permission of ECUREX, Bitcoin Magazine is publishing some excerpts of the new report before it’s publicly released.
The report is authored by Paolo Tasca, research economist at Deutsche Bundesbank and founder of ECUREX, with the support of ECUREX researchers James B. Glattfelder and Nicolas Perony, who also work, respectively, at the University of Zurich and Tamedia Digital. The document represents the author’s personal opinions and does not necessarily reflect the views of the Deutsche Bundesbank or its staff.
“The report is very interdisciplinary and aims at talking to technologists who want to know more about economic and legal aspects of digital currencies or economists and lawyers who want to know more about technical aspects,” Tasca told Bitcoin Magazine. “We think that the report should arrive not only on the desks of executives, but instead it should arrive to the desks of everyone interested in the topic. Thus we decided to put it online available to be downloaded by everyone for free. …[I]t will be online on the ECUREX website.”
The report describes the ongoing innovations in the financial sector brought about by digital currencies from a multi-level perspective: systemic, technical, legal and industrial. The document extensively covers the current trends in the domain in order to give the reader a quantitative understanding of the potential opportunities and risks arising from the global adoption of digital currencies. The ECUREX report, which is the result of more than two years of work involving the collection and analysis of data from more than 30 different sources, is the first comprehensive study on digital currencies that provides a joint, deep quantitative analysis of their technological, entrepreneurial, economic and legal aspects.
“Our goal is to reach the broader possible audience of students and practitioners,” said Tasca. “We hope that the digital currency market report will become their guide and roadmap that will assist them to navigate the complex and evolving Bitcoin ecosystem. The idea of producing a digital currencies market report started already when I was working as Research Officer at the London School of Economics (around November 2013) before joining the Deutsche Bundesbank.
“At that time I was still mostly working on systemic risk in financial markets, but I perceived and understood the revolution that digital currencies and blockchain technologies would have brought to our socio-economic systems,” he said. “Thus, I felt the importance and the need to promote the knowledge of digital currencies and P2P financial systems (more in general) to the broader audience of students, academics and practitioners as much as possible.“
“After two years of work, now I am even more convinced that blockchain technologies will change forever the way we do business (not only in finance).”
Section 1.3 of the paper, “Key Findings,” is reproduced below with the permission of ECUREX.
The most important key findings are summarised here. For the original research and details on the data sources, see the corresponding sections in the main text.
The average amount transferred per Bitcoin transaction is larger than in any other major payment network. During the period 2011–2015, the average amount (in USD equivalent) per transaction constantly increased, and remained larger than in the major payment networks such as Visa, Mastercard, Discover, or Western Union. Although the Bitcoin payment network is getting closer in total transaction volume to these large networks, its daily transaction volume of ca. USD 50 million (about one quarter of Western Union’s) is still the lowest one.
The relative capitalisation of Bitcoin with regard to other digital currencies is receding in favour of Ripple’s. Until mid-2014, Bitcoin dominated the digital currency market by covering up to 95% of its total volume. Since then, its dominant position has been eroded by Ripple, which now covers about 10% of the total market capitalisation. On average, the relative currency strength of Bitcoin has decreased compared to that of the other (almost) existing 500 digital currencies, even though Bitcoin remains dominant on the digital currency market.
China is the largest country in the world per: (1) number of active Bitcoin clients; (2) mining capacity (since the end of 2014, Chinese mining pools cover 50% of the total market share); (3) volume of Bitcoins exchanged via electronic trading platforms (since 2014, the traded CNY/BTC volume in is about 3 times larger than the USD/BTC volume, with peaks at BTC 4 million per week).
Bitcoin startups raised almost USD 1 billion in three years with an annual investment growth rate of about 150%. Capital investments in Bitcoin-related startups is a recent trend that started in the first quarter of 2012. Since then, the Bitcoin industry raised almost USD 1 billion and it represents the fastest growing sector for capital investment. Within the Bitcoin sector, the Mining and Payment & Remittance industries drove the funding race. Coinbase alone covered one third of the capital raised by the whole Payment & Remittance industry, and 21 Inc over half of the capital raised by the Mining industry.
In January 2015 the Bitcoin volume exchanged on electronic trading platforms reached 50% of the total number of Bitcoins ever mined at that time. At two points in mid-2014 and January 2015 the volume of Bitcoins exchanged via electronic trading platforms reached a historical high equivalent to over half of the number of Bitcoins that had been mined at that time. Since then, the volume of Bitcoins traded on electronic exchanges has remained stable at a higher value than the volume of transactions between users, recorded in the public Bitcoin blockchain.
During the year 2014, the transaction costs in digital currencies dropped significantly. Throughout 2014, the average fee per Bitcoin (Litecoin) transaction decreased from about USD 20 (7) cents to USD 10 (1) cents.
The year 2014 saw fewer incidences and less arbitrage opportunities than the previous years. In effect, the digital currency market is becoming more efficient. Since 2011, Bitcoin’s volatility has been constantly decreasing. In addition, the likelihood and intensity of arbitrage opportunities dramatically dropped to less than 1%, signalling that the digital currency exchange markets are becoming more efficient.
The wealth distribution in the Bitcoin ecosystem is highly unequal, and this inequality is growing. The inequality of the distribution of Bitcoins amongst addresses, summarized by the Gini coefficient (higher is more unequal), grew from 0.09 in 2010 to 0.99 in 2015: from quasi-perfect equality to quasi-perfect inequality. However, this is not a “rich get richer” phenomenon. During the period 2009–2015, the top 100 richest addresses kept a constant relative wealth, totalling about 20% of the total value of the Bitcoin economy. The increase in the inequality is the result of: (1) a socio-economic phenomenon, due to the growing popularity of Bitcoin, and (2) wallet fragmentation due to security practices such as single-use addresses and new addresses generated for change transactions.
The Mining industry is consolidating as an oligopoly. The Bitcoin mining market is currently under control by 5 to 7 major mining pools. During the period 2013-2015, the cumulative market share of the largest 10 pools relative to the total market hovered in the 70%–80% range.
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Friday, September 4, 2015
UBS to Develop Yet Another ‘Permissioned Blockchain’ for Banks
In April, Bitcoin Magazine reported that UBS was planning to investigate blockchain technology in a new innovation lab based in London. The innovation lab is located in Level39, Europe’s largest technology accelerator space for finance and cyber-securities, and focuses on exploring the role of blockchain technology in financial services.
UBS, a Swiss global financial services company with its headquarters in Basel and Zürich, is the biggest Swiss bank and is considered as the world’s largest manager of private wealth assets, with more than 2.2 trillion Swiss francs (CHF) in invested assets.
In August, the bank launched a “Future of Finance Challenge” for financial technology entrepreneurs and startups. The Future of Finance Challenge covers a broad range of emerging fintech areas, including blockchain technology and applications, cryptocurrencies, distributed ledgers, security and privacy verification and smart contracts.
Now, the blockchain vision and strategy of the giant Swiss bank are becoming clearer. UBS is working on a prototype virtual currency that it hopes will be used by banks and financial institutions as a basis to settle mainstream financial markets transactions, The Wall Street Journal reports.
The new virtual currency, dubbed “utility settlement coin,” would be used for post-trade settlements between financial institutions on private financial platforms built on blockchain technology. For example, UBS might have its own blockchain-based platform to issue bonds, and another bank might have a blockchain-based stock-trading platform, but both would use the same utility coin for settlement.
The bank doesn’t plan to issue the new digital coin itself but hopes to work with other banks, regulators and financial service providers for an industrywide product. Hyder Jaffrey, the bank’s e-commerce commercial director, said UBS had already reached out to potential partners, but would not comment on specific institutions.
The utility settlement coin is a “permissioned blockchain” similar to the Bankchain project recently announced by Bitcoin exchange itBit. Permissioned blockchains, also endorsed by Accenture and Digital Asset Holdings CEO Blythe Masters, are the new trend in Wall Street’s uneasy flirtation with Bitcoin. Basically, permissioned blockchains would offer the advantages of digital currencies powered by public blockchain – fast and cheap transactions permanently recorded in a shared ledger – without the troublesome openness of the Bitcoin network where anyone can be a node on the network anonymously.
Using the utility settlement coin or similar systems, financial institutions could settle trades in seconds rather than days, which could lead to reduced risk, lower operational costs, and increased efficiency. To achieve this vision, UBS is partnering with blockchain fintech startup Clearmatics, based in London. The key difference between Clearmatics’ implementation of the blockchain technology and Bitcoin is the fact that only authorized participants can validate transactions. “Unlike cryptocurrency blockchains, validators are authenticated and legally accountable,” states the Clearmatics website.
A recent post on the Clearmatics website, titled “No, Bitcoin is not the future of securities settlement,” provides a point-by-point analysis of the original Bitcoin whitepaper by Satoshi Nakamoto from the point of view of the financial establishment, and a clear outline of the reasons why banks and mainstream financial institutions won’t touch permissionless blockchain networks like Bitcoin.
“To serve as a replacement for the legacy technology implementing registered, book-entry assets, a distributed ledger of financial assets will have to ensure a tight correspondence between what the ledger and the law say is the state of who-owns-what,” notes the post. “This is obviously incompatible with a protocol based on anonymous transaction validators; the law will not treat a ledger record as authoritative if everyone knows that the current longest chain contains blocks generated by an anonymous attacker who replaced a bit of history that was chronologically prior. But the bitcoin protocol has no mechanism for dealing with this scenario, no mechanism for bringing ledger state and legal state back into alignment.”
According to the company, Clearmatics’ permissioned blockchain infrastructure is not only “thousands of times more efficient” than the Bitcoin network, but also places a governance structure over the validators to ensure resistance to attacks.
The Wall Steet Journal article wisely mentions critiques to UBS’ approach and permissioned blockchains in general. In particular, former Bitcoin Foundation director Jon Matonis is persuaded that private, permissioned blockchains might fall short of their objectives. “It could end up being very similar to centralized payments networks we have right now, without the benefit of the network effect of bitcoin,” he said.
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