Towards Ambient Accountability
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This document discusses the potential for blockchain and distributed ledger technology to transform the banking industry. It begins by providing background on blockchain and how major banks are exploring its uses. It then examines different types of ledgers banks could employ, from closed private ledgers to open public ones. The document envisions a future where the financial system is built on an open, public shared ledger and explores how this could deliver benefits like robustness, innovation and transparency. It closes by arguing this technology may help address issues raised by the financial crisis through enabling "ambient accountability".
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Towards Ambient Accountability
- 1. www.chyp.comPlease Copy and Distribute1 Toward Ambient Accountability Or “Hey, I may have figured out what fintech is for” Next Bank Europe Barcelona September 2015
- 2. www.chyp.comPlease Copy and Distribute David G.W. Birch Director of Innovation at Consult Hyperion An internationally-recognised thought leader in digital identity and digital money; Named one of the global top 15 favourite sources of business information (Wired magazine); One of the “Fintech Titans” (NextBank); In the London FinTech top 3 most influential powerlist (City A.M.) One of the top ten Twitter accounts followed by innovators, along with Bill Gates and Richard Branson (PR Daily); One of the top ten most influential voices in banking (Financial Brand); Voted one of the European “Power 50” people in digital financial services (FinTech Awards); Ranked Europe’s most influential commentator on emerging payments (Total Payments magazine). 2
- 3. www.chyp.comPlease Copy and Distribute Consult Hyperion… 3 22/09/2015
- 4. www.chyp.comPlease Copy and Distribute Section 1: What is “Blockchain”? 4 22/09/2015 The new technology. The replicated decentralised shared ledger formerly known as “the blockchain”.
- 5. www.chyp.comPlease Copy and Distribute Banks are Serious 5
- 6. www.chyp.comPlease Copy and Distribute But Serious about What? ‘It’s all about the blockchain…no, wait private chains… I mean ledgers… 6
- 7. www.chyp.comPlease Copy and Distribute Ledgers of Interest 7
- 8. www.chyp.comPlease Copy and Distribute Banks and Closed Private Ledgers 8 Inspired by the blockchain
- 9. www.chyp.comPlease Copy and Distribute Banks and Open Private Ledgers 9
- 10. www.chyp.comPlease Copy and Distribute Banks and Extrinsic Public Ledgers 10
- 11. www.chyp.comPlease Copy and Distribute Banks and Intrinsic Public Ledgers 11
- 12. www.chyp.comPlease Copy and Distribute “Smart” “contracts” and “property” p.225 Smart contracts need not be limited to finance and when paired with "smart property" — where deeds, titles and other certifications of ownership are put in digital form to be acted on by software — these contracts allow the automatic transfer for ownership of a physical asset. 12
- 13. www.chyp.comPlease Copy and Distribute Section 2: So What? 13 22/09/2015 A new narrative. How can we create a story around the shared ledger so that technologists and bankers can communicate effectively and build something GREAT?
- 14. www.chyp.comPlease Copy and Distribute Waiting for a Solution 14 22/09/2015
- 15. www.chyp.comPlease Copy and Distribute The Problem 15 22/09/2015
- 16. www.chyp.comPlease Copy and Distribute Transparency 16 22/09/2015
- 17. www.chyp.comPlease Copy and Distribute Section 3: Bank Backbone 17 22/09/2015 A new paradigm for finance. What would financial services built around an open ledger look like?
- 18. www.chyp.comPlease Copy and Distribute It’s a Platform World Rather than create a new blockchain for each new idea, we will eventually have blockchain platforms on which new ideas could be implemented in situ (Wood & Buchanan). 18
- 19. www.chyp.comPlease Copy and Distribute Open Public Ledger Platform Homomorphic encryption Delivering paradoxical privacy and transparency Publicly-private records Value-added applications that transform the mundane Real reputation Bottom-up identity infrastructure 19
- 20. www.chyp.comPlease Copy and Distribute Why? Robust 20
- 21. www.chyp.comPlease Copy and Distribute Why? Innovative 21
- 22. www.chyp.comPlease Copy and Distribute Why? Transparent 22
- 23. www.chyp.comPlease Copy and Distribute Section 4: The Big Idea 23 22/09/2015 This is where fintech is going… “ambient accountability” What if the replicated, decentralised, open, public, shared ledger is the real legacy of the financial crisis?
- 24. www.chyp.comPlease Copy and Distribute Transparency as Legacy 24 22/09/2015
- 25. www.chyp.comPlease Copy and Distribute Contact 25 Browse www.chyp.com Follow @chyppings Mail info@chyp.com Comment http://www.chyp.com/media/blog/ Listen http://www.chyp.com/media/podcasts/ Consult Hyperion UK Tweed House, 12 The Mount Guildford, Surrey GU24HN, UK. +44 1483 301793 Consult Hyperion USA 535 Madison Avenue, 19th Floor New York, NY 10022, USA. +1 888 835 6124
Editor's Notes
- Technology’s Martyrs: The Slide Rule” by Kirk Johnson in the New York Times (3rd January 1987) covers the story of Keuffel & Esser. This company, founded in 1867, was America’s pre-eminent manufacturer of slide rules. In 1965, they sold one million of them. In 1967, their centenary, they were commissioned to prepare a report about the future called “Life in the year 2067″, looking a century on. They interviewed scientists to come up with a vision that predicted electric cars and 3D TV. What it didn’t predict was that they would be out of business within a few years because of the electronic calculator. The end came quickly. On this day in 1976 K&E produced its last slide rule, which it presented to the Smithsonian Institution. [From Computer History Museum | Exhibits | This Day in History: July 11] In less than a decade they were gone because of technological change. But note the “Gibson” take on this: the invention that destroyed them, the electronic calculator, already existed when they wrote their report. In fact the first all electronic calculator desktop calculator went on sale in 1961 At the end of 1961 the Bell Punch Company put the Anita Mk VII on the market in continental Europe and the Anita Mk 8 in the rest of the world as the world’s first electronic desktop calculators. These were the only commercial electronic desktop calculators for more than 2 years [From Anita: the world’s first electronic desktop calculator] What’s more, the first electronic all-transistor calculator (from Sharp) went on sale in 1964. So by the time the slide rule guys did their study, the technology that would destroy them had been on open sale for several years. They made the mistake, I guess, of thinking that because slide rules cost $10 and calculators cost $1,000 they would never compete, forgetting that the inevitable curve of technology price/performance would do for them in time. And, I suspect, the scientists that wrote the report all used slide rules and were perfectly happy with them.
- Blythe Masters ofDigital Asset Holdings, who really does understand financial markets in a way that I really do not (she was rather impressively called "the woman who invented financial weapons of mass destruction" by The Guardian) said when speaking at the recent American Banker conference on “Digital Currencies and the Blockchain” that "It's important to be aware as you think about this that there is more than one distributed ledger technology, not all of them share the same strengths and weaknesses and furthermore, that the thinking in this space is evolving very rapidly” (my emphasis). Absolutely. In her book "Blockchain", Melanie Swan points in the same direction. She says that even if all of the infrastructure developed by the Bitcoin blockchain industry were to disappear then its legacy could persist. The blockchain has provided new larger-scale ideas about how to do things. She goes on to say that even if you don't buy into the future of Bitcoin as a stable long-term crypto-currency, or blockchain technology as it currently is conceived, there is a very strong case for decentralised models. I strongly agree with her view here that "decentralisation is an idea whose time is come" and her characterisation of the Internet as a new cultural technology that opens up techniques such as distributed public ledgers that could allow more complicated coordination across society than those through centralised models. Whether this will, as she says "speed our progress toward becoming a truly advanced society" I cannot say (although I have my doubts!).
- I don't think this is necessarily the way forward though. It seems to me that "mining" presupposes a particular blockchain architecture. That architecture has been developed, as noted, to deliver a modus vivendi unrelated to the world of financial services, where banks are supposed to trust each other and to know their customers (and their customers’ customers). Financial services do not want, or need, any such thing. This is why it is not at all surprising to see this kind of proposition emerging. ItBit has revealed new details about its formerly top-secret Bankchain project, a private consensus-based ledger system aimed at appealing to enterprise financial institutions [...] without using bitcoin or its blockchain. [From ItBit Reveals Bankchain Project Won't Use Bitcoin] The chap from ItBit who is being interviewed in this article goes on to say that their architecture is “inspired by” the blockchain even it is not actually the blockchain (or, for that matter, a blockchain at all). I love this, and I expect to see more of it in the near future, because there must be a lot of people who think that a replicated, distributed shared ledger is an excellent architectural concept but they don’t want to use a cryptocurrency and nor do they want to use a proof-of-work protocol to defend against subversion by unknown actors since all of their actors are already known and trusted.
- At Fintech Storm in London I was particularly interested in Gideon Greenspan’s (Coin Sciences) presentation of private blockchains, a subject dear to the heart of many of our clients and the focus gof a great deal of activity at present. The well-known venture capitalist Fred Wilson wrote about this recently, noting that financial institutions might be early adopters of private versions of blockchains for specific, industry-wide applications. As he notes, financial institutions may not be entirely comfortable with the blockchain as it is now: “One concern I hear, though, is that banks like to know who is managing their infrastructure and they are uncomfortable with miners they don’t know, located in parts of the world that make them nervous, providing the transaction processing infrastructure for these applications being built on the blockchain. To me, that is the perfect reason for banks and brokerage firms to take a bit of their data processing infrastructure and point it to the blockchain and start mining it.” Why would they create such a pool? It would not be to profit from the mining process, a process that (as Gideon pointed out) is enormously expensive and hugely inefficient, because it was created to deliver a specific kind of robustness and censorship-resistance in order to deliver a form of digital cash substitute. But, as Gideon said, some people want to use the blockchain as a tool, not as an ideology.Which is why Fred says “If you think of the blockchain as an open source, peer to peer, massively distributed database, then it makes sense for the transaction processing infrastructure for it to evolve from individuals to large global corporations”. I agree with this but I don't think Fred’s view is necessarily the way forward though. It seems to me that "mining" presupposes a particular blockchain architecture. That architecture has been developed, as noted, to deliver a modus vivendi unrelated to the world of financial services, where banks are supposed to trust each other and to know their customers (and their customers’ customers).
- Glass Bank
- It is sad that the name of William Samuel Henson is largely unknown today. A man of great vision, he petitioned Parliament for permission to set up an airline—with a business model largely based on post—flying to Egypt, India and China. Parliament turned his proposal down on the grounds that it was 1843 and no-one had invented airplanes yet. Henson knew this, obviously, but could see which way technology was evolving and correctly reasoned that just because he didn’t know how to get an airplane off the ground (he had been involved in numerous experiments around powered flight), that didn’t mean that no-one else would. And when they did, there would be a new business to build on aviation technology. So he started thinking about the businesses that would make sense and, since the post had just been invented in the UK, he looked at how that might work in the future.
- Transparency increases confidence and trust, helping markets to develop. A story from the August 1931 edition of Popular Mechanics illustrated this point. It concerns the relationship between transparency and behaviour in the specific case of depression-era extra-judicial unlicensed wealth redistribution (Glass banks will foil hold-ups 1931) and says that banks hold-ups may become things of the past if banks are constructed with glass walls, so that a clear view of everything that is happening inside the bank will be afforded from all angles at all times. (I urge you search the article, by the way, to see the lovely drawing that goes with it.) The chap behind the idea was a New York architect called Francis Keally (1889-1978), the man responsible for (amongst other things) the Berlin Public Library and the Oregon State Capitol. He reasoned that transparency would be a fundamental defence against crime. No walls, no Bernie Madoff. In our world of 21st century finance we no longer care about the glass bank as a physical construct, we see it as a virtual one. While toughened glass and other architectural advances might have been the key to building Keally’s glass bank, the crucial technology to build the glass institutions that will revolutionise financial services today is the shared ledger. The idea of glass institutions may seem odd but with the advances in technology and our evolving understanding of how replicated shared ledgers might transform a variety of different kinds of systems, I think we can begin to explore their impact, which is disruptive change. I can show this by giving a couple of obvious examples: what if a company chose from a group of regulator-certified auditing applications instead of from a competing group of auditors? Auditing banks’ books would become a continual process and you might even have multiple different applications constantly auditing the same bank on behalf of regulators, shareholders, customers, pressure groups and even rival banks. Anti-money-laundering processes would shift from expensive and rather useless gatekeeping combined with floods of suspicious transaction monitoring to being a variety of different anti-money-laundering applications combing through the shared ledger entries to find transactions indicative of misbehaviour (at which point, law enforcement agencies could apply for warranted access to the unencrypted ledger entry or relevant meta data).
- Transparency increases confidence and trust, helping markets to develop. A story from the August 1931 edition of Popular Mechanics illustrated this point. It concerns the relationship between transparency and behaviour in the specific case of depression-era extra-judicial unlicensed wealth redistribution (Glass banks will foil hold-ups 1931) and says that banks hold-ups may become things of the past if banks are constructed with glass walls, so that a clear view of everything that is happening inside the bank will be afforded from all angles at all times. (I urge you search the article, by the way, to see the lovely drawing that goes with it.) The chap behind the idea was a New York architect called Francis Keally (1889-1978), the man responsible for (amongst other things) the Berlin Public Library and the Oregon State Capitol. He reasoned that transparency would be a fundamental defence against crime. No walls, no Bernie Madoff. In our world of 21st century finance we no longer care about the glass bank as a physical construct, we see it as a virtual one. While toughened glass and other architectural advances might have been the key to building Keally’s glass bank, the crucial technology to build the glass institutions that will revolutionise financial services today is the shared ledger. The idea of glass institutions may seem odd but with the advances in technology and our evolving understanding of how replicated shared ledgers might transform a variety of different kinds of systems, I think we can begin to explore their impact, which is disruptive change. I can show this by giving a couple of obvious examples: what if a company chose from a group of regulator-certified auditing applications instead of from a competing group of auditors? Auditing banks’ books would become a continual process and you might even have multiple different applications constantly auditing the same bank on behalf of regulators, shareholders, customers, pressure groups and even rival banks. Anti-money-laundering processes would shift from expensive and rather useless gatekeeping combined with floods of suspicious transaction monitoring to being a variety of different anti-money-laundering applications combing through the shared ledger entries to find transactions indicative of misbehaviour (at which point, law enforcement agencies could apply for warranted access to the unencrypted ledger entry or relevant meta data).
- Glass Bank
- The first is robustness. If some or all of the participants in some marketplace each has an instance of the complete ledger, then the system as a whole might be expected to be more resistant to individual failures, errors and attacks. Think about the recent ATM and debit card system crashes that plagued one of the UK banks.
- The second is innovation. When innovative and imaginative people have access to ledgers built from post-1960s components (e.g., APIs and XML), then they will no longer create accounting packages (and laws) that use the virtual world to simulate paper. They will use shared ledger technology to create a new kind of accounting not to do conventional account quicker. Common sense dictates specialized distributed ledgers will better address specific assets via specialized algorithms and specialized scripting frameworks. [From Distributed Ledgers Part III: Tokenization of Assets | FiniCulture]
- The third is transparency. As I mentioned in the discussion about the "glass bank", transparency may be the defining characteristic of the new financial order and I expect this to be a focus of our clients' attention in the near future. I advance the theory here that the next generation of financial applications will focus on transparency as the key to the new way of doing things: the robustness and the innovation are great, but it is in area of transparency that new cryptographic techniques make it possible to create a new kind of ledger. I'll write more about this in the future, but I will exploring the idea that transparency may be the lasting legacy of the financial crisis in my keynote at Next Bank Barcelona on
- Glass Bank
- This is why I don’t think it is an exaggeration to say that the shift to shared ledger technologies might be one of the most important innovations of our image of our age, and I will close by making another historical analogy to support that point. In Victorian Britain, the collapse of railway companies led to a colossal crash in 1866. It was caused (and here’s a surprise) by the banking sector, but in that case it was because they had been lending money to railways companies who couldn’t pay it back rather than American homeowners who couldn’t pay it back. The reason I choose this example is that railway companies then held the same commanding position in the economy as banks do today, so the impact on UK plc was substantial. Bear in mind that the first railway service in the world started running between Liverpool and Manchester in 1830 and less than two decades later (by 1849), the London & North Western railway was already the biggest company in the world. When the Directors of these gigantic enterprises went to see the Prime Minister in 1867 to ask for the nationalisation of the railway companies to stop them from collapsing (with dread consequences for the whole of the British economy) because they couldn’t pay back their loans or attract new capital, Disreali sent them packing as he didn’t see why the public should bail out badly run businesses, no matter how big they might be. Needless to say, the economy didn't collapse. As you may have noticed, we still have trains and tracks. A new railway industry was born from the ruins, the services kept running and the economy kept growing. And there was another impact. Andrew Odlyzko’s paper The collapse of railway mania, the development of capital markets, and Robert Lucas Nash, a forgotten pioneer of financial analysis argues that the introduction of basic corporate accounting standards following the collapse of the railway companies was a significant benefit to Britain and aided the development of Victorian capitalism. So, with the well-worn maxim about not letting a good crisis go to waste in mind, I would like to advance this hypothesis: the long-term impact of the financial crash of 2008 will be a shift to the replicated shared ledger as the central organising principal for financial services. An entirely new way, as Richard Brown notes, of building financial institutions based on common ledgers and APIs.