Bank of Canada Researcher: Bitcoin Monetary Standard Would Fail

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A research consultant for Canada’s central bank has published a paper that envisions a world with a monetary standard based on bitcoin.

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Blockstream, Bloq, Gem, ItBit, Thomson Reuters and Others Join the Linux Foundation’s Hyperledger Project

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In February, Bitcoin Magazine reported that The Linux Foundation’s Hyperledger Project, a collaborative effort started in December to establish, build and sustain an open, distributed ledger platform that will satisfy a variety of use cases across multiple industries, was announcing new members from across the industry, technical updates and a formal open governance structure.

Now, with a press release published on its main website and the Hyperledger website, The Linux Foundation is announcing that the Hyperledger Project has filled key leadership positions and 10 new companies are joining the project and investing in the future of an open blockchain ledger: Blockstream, Bloq, eVue Digital Labs, Gem, itBit, Milligan Partners, Montran Labs, Ribbit.me, Tequa Creek Holdings and Thomson Reuters.

“The Hyperledger Project is gaining traction on a daily basis, displaying how vital this effort is in advancing distributed ledger technology,” said Blythe Masters, CEO of Digital Asset Holdings, who was appointed board chair for the Hyperledger Project. “Uniting the industry to drive this initiative forward is paramount to the success of distributed ledger technology. The Linux Foundation and its members are collaborating on an open source infrastructure that will increase privacy and scalability, among many other benefits.”

The project’s governing board, which manages business direction, including governance, marketing and operational decisions, has been expanded with new elected members from SWIFT and itBit.

“SWIFT is delighted to support this industry wide effort to advance distributed ledger technology,” said new governing board member Craig Young, SWIFT’s chief technology officer, in December. “Cooperation and collaboration ‒ hallmarks of the SWIFT cooperative ‒ will be key to ensuring the scalability and adoption of this technology.”

“As a financial services company that provides blockchain-based solutions, we understand the technology gaps that need to be filled to ensure enterprise demands are met,” added new governing board member Charles Cascarilla, itBit’s co-founder and CEO. “Open source projects like the Hyperledger Project unite the world’s leading companies to address critical needs and advance a technology for greater adoption.” 

Chris Ferris, distinguished engineer and CTO of open technology at IBM, has been appointed chair of the technical steering committee, which drives technical direction of the Hyperledger Project and includes recognized experts from Digital Asset Holdings, Intel, R3 and Accenture.

“These member investments demonstrate that blockchain technology continues to grow in importance as the alternative approach to multinational business transactions,” said Ferris. “By providing a community for members to collaborate and contribute to an open source blockchain solution, we’re able to advance the technology collectively and ultimately drive quicker adoption and higher value across industries.”

The Linux Foundation’s announcement notes that Hyperledger wants to be a cross-industry open standard for distributed ledgers, able to securely and cost-effectively trade and track any digital exchange with value, such as real estate contracts and energy trades. Besides finance, The Linux Foundation envisages applications to manufacturing, banking, insurance and the Internet of Things (IoT). 

“There is no other effort advancing an open blockchain with this level of broad industry representation and level of leadership,” said Jim Zemlin, executive director at The Linux Foundation. “The Hyperledger Project is among our fastest growing projects at The Linux Foundation. The opportunity is great. This leadership team and the community investments among members across industries put the project in the best position possible to accomplish its mission.”

The growth of the Hyperledger project seems unstoppable and prompts speculation on the future of the distributed ledger ecosystem. In particular, and apparently in contrast with the project’s open-source nature and oversight by The Linux Foundation, Hyperledger seems a radical alternative to the Bitcoin blockchain built by the banks, for the banks, which wants to retain the practical advantages of distributed ledger technology ‒ fast and cheap transactions permanently recorded in a tamper-proof ledger ‒ without the troublesome P2P openness and grassroots, anarchic nature of the the open, public Bitcoin blockchain.

Masters, among others, expressed support for private, “permissioned” non-Bitcoin blockchains. 

“To be used by financial institutions, including capital markets firms and insurers, blockchains must supplant the costly methods introduced by Bitcoin with a mechanism that guarantees security, privacy and speed without paying for anonymous consensus,” said two Accenture executives in July

In Bitcoin Magazine’s interview with Zemlin published in February, he was asked, “Is the Hyperledger Project a replacement for Bitcoin and/or other existing cryptocurrencies?” Zemlin gave a diplomatic answer and emphasized that “there is ample room in the market for cryptocurrencies and even multiple implementations of the blockchain, but everyone stands to lose if these don’t interoperate and work together.”

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Coinbase Aims to Drive Bitcoin Adoption via New Killer Apps

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For the past few years, many of the biggest players in the Bitcoin industry have talked about the need to build bridges to the traditional financial system. This sort of basic infrastructure has been in development by Coinbase, the Winklevoss twins and others, and it’s now getting to the point where user-friendly wallets and regulated exchanges are finally available to the masses.

Now that the base layer of services has been built, Coinbase plans to promote greater adoption of Bitcoin through the development and acquisition of new applications for the digital currency.

Actual Products for Users

In a recent Medium post, Coinbase CEO Brian Armstrong discussed the company’s overall vision for the future of Bitcoin and its product. While Armstrong would still like to see the company focus on making it easy for anyone to buy or sell bitcoins at the tap of a button, the Coinbase CEO also sees an opportunity for his company to help the industry grow through the development of killer apps.

In his recent post, Armstrong wrote:

“In the future, you’ll see Coinbase build or buy other apps in the space to help drive consumer adoption.”

Armstrong then used an analogy to the early days of the Web browser to bring home his point:

“When Netscape came out with their web browser, there weren’t very many people building websites. It wasn’t until they tried building one of the first web apps themselves (a shopping mall) that they realized there were a few missing pieces. This led to them inventing cookies, SSL, and javascript. Trying to build on top of your own infrastructure is a good way to improve it.”

Now that Coinbase has made it relatively easy for much of the world to purchase bitcoins online, the company wants to provide its users with various products and services that take advantage of the digital currency’s unique efficiency offerings.

Financial Services and Internet Applications

Although Armstrong did not point out specific applications Coinbase may build or acquire, he has discussed some of the main use cases of Bitcoin in the past. In an interview from last summer, Armstrong pointed to the disruption of traditional financial services, the development of financial services in the developing world, and entirely new Internet applications as three key areas for Bitcoin.

In the case of the disruption of financial services, Armstrong views international remittances and peer-to-peer lending as two areas of interest. Armstrong’s point on the developing world mainly had to do with populations that have a large number of cellphones but no access to banking.

Lighthouse and decentralized prediction markets were mentioned as two possibilities for entirely new Internet applications made possible by Bitcoin. Armstrong added, “These are very small today, but I think in the future, some of these will end up being multi-billion dollar companies and systems.”

Armstrong has also discussed the value of using Bitcoin for microtransactions.

More Futuristic Use Cases

More recently, Coinbase co-founder Fred Ehrsam discussed Bitcoin’s ability to remove banner ads and spam from the Internet. Ehrsam sees a future where the action of making a payment is no longer necessary and transactions can take place seamlessly in the background of various devices.

The concepts of paying for online content via microtransactions and automatically purchasing system resources are ideas currently being worked on by multiple companies such as 21 and Brave.

Kyle Torpey is a freelance journalist who has been following Bitcoin since 2011. His work has been featured on VICE Motherboard, Business Insider, NASDAQ, RT’s Keiser Report and many other media outlets. You can follow @kyletorpey on Twitter.

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Bank of England Official Discusses Implications of Central Bank Digital Currencies

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Deputy Governor of the Bank of England Ben Broadbent has spoken out on the implications of a central bank digital currency (CBDC) for the financial system as we know it.

In Broadbent’s lecture at the London School of Economics on March 2, he focused on what a central bank digital currency could look like, and potential economic implications of introducing one.

Central Bank Digital Currency

A CBDC could be issued by a central bank to widen access to the central bank’s balance sheet. Liabilities on the central bank’s balance sheet include banknotes and commercial bank reserves, and are the means of settlement for all of the economy’s transactions. Currently, only banks can hold deposits at the Bank of England. A CBDC could open up access to these liabilities to specific groups of financial services firms, or even to individuals.

A CBDC could also allow a central bank to set a negative interest rate on cash, rather than only deposits. The Bank of England’s Chief Economist signalled in 2015 that the U.K. government was considering this possibility.

Broadbent recognizes that there could be significant economic implications if a CBDC competed with commercial banks by permitting individuals to make deposits. In a fractional-reserve banking system, commercial banks accept deposits and loan money using these deposits as collateral. This can be to other banks, businesses, individuals and organizations. This leads to a cycle of lending and increases the money supply in the entire economy.

While the central bank’s balance sheet consists of liquid assets, commercial banks’ balance sheets are mostly illiquid assets in the form of loans. Broadbent described commercial bank balance sheets as “inherently fragile” due to their being backed by very different assets of mostly illiquid loans. As the government guarantees deposits at the Bank of England, a flight to safety may take place and drain commercial banks of resources.

Given the Bank of England’s responsibility to promote financial stability, opening up access to central bank deposits may seem counterintuitive. However, Broadbent says this could encourage commercial banks to “narrow” and shift to structures with assets as liquid as their liabilities. In this scenario, “deposits would become inherently more secure.”

However, a shift to this structure could reduce lending by banks to the real economy. Many small and medium enterprises (SMEs) are unable to issue their own securities, so lines of credit from banks are vital support. In the U.K., the British Bankers’ Association recorded £107.5 billion ($152 billion) in SME borrowing facilities at the end of 2015, including £26.6 billion ($37.7 billion) in new loans provided by banks to SMEs in 2015.

Blockchain as a Clearinghouse

“The main point here is that the important innovation in Bitcoin isn’t the alternative unit of account … but its settlement technology, the so-called “distributed ledger.”  This allows transfers to be verifiably recorded without the need for a trusted third party.  It is potentially valuable when there is no such institution and when verifying such information on a multilateral basis is costly,” said Ben Broadbent, Deputy Governor of the Bank of England

Broadbent identified the distributed ledger as the most important innovation in digital currencies, describing it as a “decentralized virtual clearinghouse and asset register” that “offers an entirely new way of exchanging and holding assets, including money.”

He recognises the potential for distributed ledgers to replace the existing complex system of custodians of securities, brokers, exchanges and clearinghouses, each of which is obliged to keep its own records. There is much potential for systemic efficiency savings; clearance and settlement of securities has been estimated by Autonomous Research to cost G7 economies $54 billion annually.

What’s Next?

The Bank will continue examining potential use of digital currencies as a part of its “One Bank Research Agenda.” This also encourages the wider community to consider policy questions, monetary and financial stability perspectives on CBDCs, implications for government-backed deposit insurance and regulation of institutions offering access to CBDCs.

Potential use of blockchain technology will also be investigated in the Bank’s review of its Real Time Gross Settlement system, which transfers balances between participants’ accounts at the Bank.

At this stage, the Bank is raising more questions than it answers. It is not the only one carrying out such research; the People’s Bank of China has announced that it is also discussing the possibility. There is clearly significant potential for CBDCs from a policy perspective, but structural implications must be considered.

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