Bitcoin and beyond: a few thoughts


Much ink has been spilled on Bitcoin and its smaller cryptocurrency siblings. I’ve recently thought a lot about the impact of cryptocurrencies on financial systems and on the world at large. While I do not expect that any conclusions may stand for long, I’ve tried to sum up what I understood so far and digest it for my readers here. Apologies for any technical inaccuracies – please highlight them in comments.

First, a few thoughts on what’s new and different about Bitcoin:

  • The intellectual and technical work that Bitcoin stands on, my geekier friends agree, is an astonishing leap forward from everything we’ve seen before. Satoshi Nakamoto is not one person, as multiple disciplines from cryptography to software engineering were involved in its conception, but may have been a small group of people with the extraordinary discipline to publish some brilliant open source code and yet not to come forward and reveal themselves, at least so far. Code that is an achievement in that it is not just smart, but also amazingly robust. If Satoshi Nakamoto were one person, his achievements would be on par with those of Sir Tim Berners-Lee.
  • The main reason why it’s difficult to explain Bitcoin to people is that it’s a system where flows, not stocks, are certified. If I start with $100 in my bank account, I deposit $50, and then I take out $30, my bank knows what I did, knows that I have a new balance of $120, and can print me a statement with that balance. If I do the same with Bitcoin, all that’s monitored is the flow: “in 50” and “out 30” are recorded on a ledger replicated on thousands of servers all over the world, but my new balance of 120 – just like my old balance – is strictly my information, and nobody else has it. The Bitcoin community validates the flows; the algorithm cares not one bit about stocks.
  • The total quantity of Bitcoin in the Bitcoin system is algorithmically predetermined, and in that sense is the only stock that matters to the system. This also means that, at some point (roughly around the year 2140), mining will stop and the quantity of Bitcoin will be fixed. No central bank, commercial bank or other authority will be able to print more. As we’ll see below, this has important macroeconomic implications.
  • Other things that strike people as weird are that Bitcoin is strictly a bearer instrument (you lose it, you have no recourse) and that transactions, once validated, are irreversible – unlike with your credit card or your PayPal account, there is no chargeback mechanism. Transactions are final.
  • Most importantly, a “trustless” network that keeps working with no central authority and never collapses – because trust is distributed and resides in the consensus mechanisms that enables the endless replication of the blockchain – is in itself a concept that takes a bit of time getting used to.
  • Volatility? Oh yes, plenty. Don’t stash your mom’s retirement nest egg in a Bitcoin wallet. That’s not what it’s for, really.

Where different players stand:

  • Economists are intrigued, but do not believe that at a macro level Bitcoin can power a sophisticated economy. While the developer community is working to overcome this limitation, for example, Bitcoin as it stands today can carry out only a limited number of transactions: 7 transactions per second. (Visa, depending on which source you believe, is said to support 10,000-50,000 per second).
  • Also, there is not enough Bitcoin in the system, and there never will be enough for a significant world economy to adopt it to the exclusion of other currencies. If output is to grow and the quantity of money cannot grow, deflation wreaks havoc because the debt in the system becomes unsustainable. And “debt is to capitalism that which Hell is to Christianity: seriously unpleasant but absolutely necessary”, claims economist Yanis Varoufakis (yes, he who just became Finance Minister of Greece).
  • Regulators are walking a fine line. Err on the side of protecting consumers from risk, and you stifle innovation; err on the side of fostering innovation, and a lot of people will go bust. Not because the Bitcoin technology per se is unsafe, but because issues come up at the edge, in the wallets and exchanges that sit at the crossroads of Bitcoin and fiat currencies. The blockchain is resilient and continues to function when mayhem happens, but people get burned.
  • London is trying to ride the Bitcoin wave, with a light regulatory touch and a Chancellor of the Exchequer who has voiced support for cryptocurrencies as an enabler of financial innovation – although the Treasury review he commissioned is taking longer than expected. New York State is working on a “BitLicense” regulatory framework, although critics say it is too restrictive for New York to become a Bitcoin hub. The US Commodities Futures and Trading Commission says Bitcoin is a commodity, not a currency, and falls under its remit. The European Central Bank and the European Banking Authority have highlighted risks for consumers, recommended that banks refrain from buying or holding bitcoin, and then mostly kept silent: one gets the feeling that they would really rather see the whole headache go away. But Bitcoin has no borders, does not reside anywhere and recognizes no nations: shouldn’t we aim for a global framework, instead of burdening the ecosystem with incompatible rules, lack of interoperability, and unsustainable compliance costs?
  • Financial institutions, though listening to regulators out of one ear, are eager to become players in the Bitcoin economy, or at least to be seen as such. See the recent investment by, among others, BBVA and the NYSE in Coinbase.
  • There already are better ways than Bitcoin to implement an alternative and decentralized payment network. Ripple, although not perfect, is said to be one. Stellar is another one.

What’s next?

  • Expecting that Bitcoin will be a major world currency five or ten years from now would be a bit like betting in 1995 that AOL would be the dominant Internet service in 2015. It’s still very early days. The entire Bitcoin system is barely six years old. We haven’t seen anything yet, really.
  • In addition to finance, there are a lot of things you can do with a system that decentralizes the hard work of certifying a transaction between two parties. Indeed, some go so far as to say that Bitcoin isn’t the point of the Bitcoin technology: “Bitcoin as a currency has been a red herring driven by speculative investment, but that’s not the ultimate potential or the most exciting thing about it” (Coinbase CEO Brian Armstrong, quoted in Quartz). In other words, a virtual currency is just one application enabled by the blockchain: it has been and is important as an incentive to participants (miners) and to create liquidity in the system, but it won’t be the only use of the technology in the future.
  • Sidechains – ledgers that experiment with features that might be added the Bitcoin core, or might serve some entirely new purpose, without actually jeopardizing the stability of the blockchain – will be big. See Austin Hill and Adam Back’s Blockstream, which is now backed by Reid Hoffman.
  • Under so-called “Bitcoin 2.0” frameworks, you can make money programmable, for example tag a certain bitcoin for spending only with certain counterparts. You can also have a bitcoin represent other types of assets than money, such as a car, a company share, a vote in an election (video).
  • The most ambitious project inspired by the Bitcoin blockchain (but entirely separate from it) seems to be Vitalik Buterin’s Ethereum, not just a platform allowing for contracts written as computer code, but an entire scripting language and programming environment to create an ecosystem with self-enforcing contracts, distributed autonomous corporations, and perhaps entirely novel models for political organizations.
  • Would a software-based societal model be resilient enough to cope with the real world, or would it be too brittle to withstand shocks by reacting intelligently? Would the utopistic libertarians willing to delegate a part of their life to a blockchain risk waking up in a dystopia of inequality, polarization and control? Hard to say. What we can say is that as a society we need to understand the technology, weigh the upside potential against the risks, and make collective choices that will serve us well for the future.


Images credits (and recommended article): Quartz. Thank you to some of the smartest among my friends and colleagues, who helped me clarify my thoughts on the topic: Giovanni Daprà, Vincenzo Di Nicola, Raffaele Mauro and Stefano Quintarelli.

Spain, women, and reproductive rights: a battleground, again

alberto-ruiz-gallardonIf we needed proof of how fragile and reversible our rights, women’s rights, are today, even in the West, we had it last Friday, when Spanish Justice Minister Alberto Ruiz-Gallardón put forth a draft law to set back abortion legislation by 25 years. You can read the details here, but if the law passes, you will only be able to get an abortion in Spain if you have been raped, or if your physical or mental health is at risk.

I am angry to see women’s rights as a political battleground, again; angry that governments seek consensus by legislating women’s bodies; angry that politicians think it is their God-given right to mandate that any woman should be forced to live through the confusion, pain and anger of an unwanted pregnancy, and not be able to choose the lesser pain, if not illegally.

Legislatures where women’s choices are so harshly limited should start introducing some restrictions on what men can do with their bodies, too. See the initiative by Ohio State Senator Nina Turner, who introduced a bill to require men who seek erectile dysfunction drug prescriptions to see a sex therapist, undergo cardiological tests, and receive counseling on the viability of celibacy as a lifestyle option (read more here and here). Says Sen. Turner:

The men in our lives, including members of the General Assembly, generously devote time to fundamental female reproductive issues—the least we can do is return the favor. It is crucial that we take the appropriate steps to shelter vulnerable men from the potential side effects of these drugs. When a man makes a crucial decision about his health and his body, he should be fully aware of the alternative options and the lifetime repercussions of that decision.

This is not irony, this is not tongue-in cheek: this is anger, fighting back through all available means. So let’s remember that we can take to the streets in protest, but we can also use Parliaments and bills and all the legislative apparatus to get lawmakers to understand why we’re so angry.

Freedom badgeAs Jane Smiley wrote after reading a hundred novels, “I saw that the world I thought was established and secure, at least in the West, is more fragile than I thought, because it is newer than I realized.”

We are not established and secure. Keep your guard up. Fight back.

FT Innovative Lawyers 2013: Claudia Parzani

Claudia ParzaniOne of the ten winners in this year’s FT Innovative Lawyers survey, among over 600 participants, is Claudia Parzani of Linklaters, chair of corporate association Valore D and co-creator of In the Boardroom, an initiative she developed with GE Capital and Egon Zehnder to provide training and skills to prepare women for boardroom positions. Claudia also created the Breakfast@Linklaters network, featured in this year’s Client Service category.

Kudos to Claudia! I am proud to be participating in her boardroom program and honored to be in her circle.

Update & Correction (Oct. 17, 2013): post corrected to clarify that In The Boardroom was developed through collaboration among Linklaters, GE Capital and Egon Zehnder. The supporting member companies of Valore D can be found on this page.

Amendments to Terms and Conditions

Among the revised Terms and Conditions I just received from a retail bank I do business with:

On the basis of special market conditions, the Bank may be compelled to introduce negative interest rates. A new provision has been added to reflect this option.

Any interest shall be credited to or debited from the account on an annual basis.

Obamacare and the Supreme Court

That the health insurance mandate – something that works from Switzerland to Massachusetts – should rely on Constiturional provisions about interstate commerce seems to me as contorted as the fact that abortion – something that happens whether you allow it or not – hinges on a woman’s right to privacy.

Yet, stranger things have happened under the U.S. Constitution. I do hope the health care law is upheld.

Google Video’s Italian judge speaks out

Dear international readers, you’ve probably heard that Google has been found guilty of violating privacy laws in Italy. The full text of the ruling was published a few days ago. Want to get to know judge Oscar Magi a little bit better? Here is an interview he gave to reporter Daniele Lepido – who contacted him through Facebook. Enjoy!