BitCoin and the Global Economy by Cristina Dolan Presented at MIT Center for International Studies
Cristina Dolan, MIT Media Lab Alumna and Internet Pioneer presented at the MIT Center for International Studies Starr Forum on April 7, 2016 along with Michael Casey, bestselling author and Senior Advisor, BlockChain opportunities at the MIT Media Lab.
Happy to be back at MIT to talk about BitCoin which is something I am really excited about. I was a student here at the Media Lab when the WWW and Graphic Browser came out – which in some way has some parallels with BitCoin and BlockChain today. I consider myself a ‘Solutionist’ which the IEEE defines as someone that applies their engineering and computer science background toward solving problems – which is also what entrepreneurialism is today. I have worked in tech my whole life and have seen many disruptions, and the opportunities created. I started my career at IBM with big proprietary systems and closed networks. Even email networks were closed. After graduating from the Media Lab the Internet and Client Server changed everything – but we heard all the same concerns you hear today about BitCoin and BlockChain around scalability and security. I had an interesting opportunity to meet Steve Jobs when I was at the Media Lab. He was at Next and was recruiting recent grads and was invited to fly out to meet with him. At that time he wasn’t buying into the WWW yet – he said ‘he invested in AOL for Apple Talk’ which didn’t take off and didn’t see much momentum around AOL, CompuServe and Prodigy – so he wasn’t that excited about the Internet at that time. Of course he went on to continuously revolutionize and disrupt the information, entertainment and communications space for the next two decades. Headed up technology at large media companies launching the first consumer websites. Then went to Oracle and headed up eCommerce for the Americas Co-Founder of a Internet Service Provider – which we took public, grew to be the 10th largest and had a successful exit, and built out the profitable Geographic Communities. Was CEO of a company in the linguistics space – because breaking down the ‘language barrier’ through the use of mobile technology would decrease the friction for global participation in the world economy. I also was an advisor to one of the largest loyalty companies and a company that is now the largest voting infrastructure company in the world. Today I work at TradingScreen which is in the FinTech. It is the most active market for BlockChain innovation and where you are seeing the majority of investments and announcements every day – at first we were hearing that BitCoin and BlockChain would be putting large financial institutions out of business – but the industry is by far one of the most regulated industries in the world – so what we are actually seeing is some interesting partnerships. The majority of the BitCoin and BlockChain investments in the past year have been in the financial space.
BitCoin and the underlying BlockChain technology offers so many capabilities that it is hard to describe to someone in an elevator pitch. Just a few of the phrases you probably have heard include: Digital Currency Application using BlockChain technology Open Permissionless Trustless Immutable I like to think of it as a Next Generation Information, Communications and Transaction Technology.
How many people know how BitCoin works? I just going to do a simple run through the flow of transactions so that some of the points I am making in my presentation about ‘transaction transparency’ make sense. In my example Alice wants to pay Bob a bitcoin – which she has acquired. What is key is that for Alice to pay Bob she needs to include proof of her ownership of the bitcoin – which is an example of where the transaction transparency come in. (For those of you thinking this is an application for money laundering and drug trade – you are wrong.) Alice also needs her private key and Bob’s public address which is also called a key. She will probably get it through a QR code that she will get from Bob. The transaction gets amplified to make sure that Alice truly owns that bitcoin and also to make sure she hasn’t tried to double spend it. The miners go through a heavy computing process which requires they come up with a hash that starts with a certain number of 0000s. Miners broadcast when they find the hash so that other miners can move on to other work. Miners are rewarded for their ‘successful’ work with Bitcoins – when they win. This reward is important – because this economic incentive is what helped BitCoin’s distributed network spread. Within 10 minutes the transaction is confirmed. There are other confirmations since there could be some issues that could cause the block to be invalidated – especially with all the ‘Forking’ discussions – especially with the block size debates – which we won’t get into. This slide is a very simple description – but the main point here is why you can see the transparency from transaction to transaction. There are other applications like smart contracts that add some logic into the conditions required for the transaction with money transfer to take place.
Timing is everything – and the Global Financial Crisis in 2007-2008 made the idea of ‘decentralized’ control, global digital deflationary currency and transaction visibility
When Satoshi Nakamoto posted his white paper “Bitcoin: A Peer-to-Peer Electronic Cash System” and released the BitCoin code – people were listening.
It wasn’t the first online cryptographical payment system. David Chaum had tried as early as 1982 to produce an electronic, blind signature transaction system (Chaum, 1983), but it never gained widespread popularity. Other small attempts periodically attracted a small following, but all were either centrally regulated or lacked the security required of a payment system. As Nakamoto states in his white paper, “What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party”
Mt Gox and Silk Road – impacted the price of BitCoin – but the issue occurred because important information was stored off the blockchain – no different from the merchant accounts that have been compromised from centralized databases.
Venture Capital investment today has surpassed the $1B mark – with a large number of financial companies making investments in the past year. Although BitCoin has the biggest part of the investment dollars, blockchain is getting 20% and there is a small percentage of companies focused on ‘hybrid’ solutions.
Merchants can use BitPay or CoinBase and decrease their transaction fees by 50-60% with more transparent.
Today we have the Network Effect – not at the Facebook level yet – but BitCoin has gone through a lot of testing and is probably more secure than many traditional merchant systems today.
I love disruptive technologies because they create opportunities. The WWW & Graphical Browser created a huge opportunity and disintermediated many companies. I heard all the same arguments in the early 90s from the incumbents that we are hearing today about BitCoin and BlockChain. Wireless and Internet Broadband – made the ‘information revolution’ with access OpenSource fueled innovation – it has made it so much easier to take OpenSource blocks and build solutions and companies faster and less expensively. Joi Ito calls is ‘permissionless innovation’. Today you see a lot more hackathons than business plan competitions – it is much easier to build a prototype and put it out there than it is to write a business plan. Cell phone and Smart Phone growth is huge – I actually argue that customer relationships are tighter than they are with Banks or any other service provides. All these technologies have revolutionized and created opportunities, they also pave the road for BitCoin and BlockChain. BitCoin is a technology that will have a similar impact.
I like to describe BitCoin as having these three conceptual ‘components’ – makes it a lot easier understand and see the power it offers.
BitCoin – is really the application layer – there are many other applications that could be built on top of this distributed BlockChain layer. The real key here is how this layer fueled the growth by providing economic incentive.
Conduit – represents the peer-to-peer transactions and communications – which are more efficient.
Blockchain – is the peer-to-peer distributed ledger – which is the part that establishes the trust and accountability – and the transparency that you don’t see in other systems.
What is interesting is that BitCoin is really an assembly of different technologies
Merkel Trees 1979 SHA – 256 - 2000 Decentralized Networks – 1999- 2001 Hashcash – was developed in 1997 by Adam Bach – he is actually mentioned in Satochi’s white paper.
The most important components are the ECONOMIC INCENTIVE offered by the BitCoin Incentives for miners – because that is what helped the network grow to the point it has today. As a result of this growth in an open and permission-less environment – I would argue that it has been better tested than many financial apps behind firewalls today. The Consensus piece which is the solution to Byzantine General’s Problem has been criticized by many for the energy consumption – and has been replaced in the ‘INTRANET’, ‘PERMISSIONED’, implementations that some financial institutions are working with today.
In terms of opportunities – I see one of the biggest opportunities in the area of transactions.
There are many financial transactions systems that have many intermediaries involved in transactions that add to the cost, make the transactions less efficient, and from a compliance perspective there is less visibility.
Banking is the first – the World Bank has published numbers – the current 2 Billion UNBANKED numbers have improved by 20% over the past year.
77% of these adults are earning less that $2 per day 59% live in developing countries 11% in high-income area 75% of the world’s poor and unbanked cite poverty, costs, distance and paperwork as barriers
Remittances: are an interesting space. When you look at the Cross Boarder remittances sent to developing countries – which is $246B a year an a half ago – this represents 3X the World Aid being sent to these countries – and these remittances to 3rd world countries help with poverty, education and health.
Just decreasing the cost by 5% can save up to $16 Billion per year – which is huge for these communities. A large percentage of these transactions are under $1000 and have the largest fees associated with these transactions, somewhere between 4% to 30%.
3rd Party Payments – work for the ‘Banked’ population – once again these are 50 year old systems with many intermediaries and costs. I actually thing that many of these systems offer less visibility than the BlockChain can offer where you can see the transaction trail. You can’t really see this with the traditional systems and protocols like SWIFT or ACH to transmit payments.
Mobile Banking and Payments – This is the most interesting area – I actually believe that the relationships with telephone companies is stronger than it is with banks. It is much easier to transmit money through mobile phones than it is through the banking systems.
I would also argue that Phone Companies have more data about their users (Verizon’s bid for Yahoo) and the is less regulation around mobile. Phone companies know more about customers and have less regulatory barriers.
Look at the success of M-PESA in Kenya – which now has a partnership for Banking through M-Kesho. It came as a result of trading mobile minutes.
Business Efficiencies – will require new business models, new customer services will be required although we are all moving towards self serve models. BlockChain provides more transaction visibility and offers a more compliant solution than many of the systems used today.
This map is from the World Bank website – and I suggest you take a look at it. You are able to see the countries that improved over the past 4 years – including Brazil, Russia and China. Here is the URL: http://datatopics.worldbank.org/financialinclusion/
What is interesting is that the currently reported number for ‘unbanked’ is 2B – and 50% of these people have mobile phones.
The Global Findex database provides in-depth data on how individuals save, borrow, make payments, and manage risks. It is the world’s most comprehensive database on financial inclusion that consistently measures people’s use of financial services across countries and over time. The 2014 Global Findex consists of over 100 indicators, also shown by gender, income, and age. Collected in partnership with the Gallup World Poll and funded by the Bill & Melinda Gates Foundation, the Global Findex is based on interviews with about 150,000 nationally representative and randomly selected adults (age 15+) in over 140 countries.
700 million adults worldwide became account holders between 2011 and 2014;20 percent drop in the number of unbanked, according to 2014 Global Findex WASHINGTON, April 15, 2015 — From 2011 and 2014, 700 million people became account holders at banks, other financial institutions, or mobile money service providers, and the number of “unbanked” individuals dropped 20 percent to 2 billion adults, says a new report released today. “Access to financial services can serve as a bridge out of poverty. We have set a hugely ambitious goal – universal financial access by 2020 – and now we have evidence that we’re making major progress,” said World Bank Group President Jim Yong Kim. "This effort will require many partners – credit card companies, banks, microcredit institutions, the United Nations, foundations, and community leaders. But we can do it, and the payoff will be millions of people lifted out of poverty.” Between 2011 and 2014, the percentage of adults with an account increased from 51 percent to 62 percent, a trend driven by a 13 percentage point rise in account ownership in developing countries and the role of technology. In particular, mobile money accounts in Sub-Saharan Africa are helping to rapidly expand and scale up access to financial services. Along with these gains, data also show big opportunities for boosting financial inclusion among women and poor people.
I spoke about the Global Remittance of Money by migrant workers. These are interesting figures because the money being sent to developing countries make a big different on the poverty levels, education and health care.
Many of these payments are less than $1000, and often the highest transaction fees.
Just a 5% decrease in fees could save about $16B.
Migrants are sending home 3X the World Total Aid Budget – so reducing the friction on these payments will make a big difference for developing countries.
BlockChain offers more compliant visibility and a more direct and efficient payment.
Since we are looking at Financial Transactions I though that we should take a look at some of the options.
Clearly the BANKED population has a number of options – from traditional Bank Accounts and Credit Cards. I put the e-Wallet in the ‘Banked’ section because typically there is a credit card connected to those accounts.
I think that the telephone companies offer more flexibility with less regulation. The distributed ledger model – which is BlockChain and we can assume BitCoin or an AltCoin as the currency.
Mobile Phones will play a bigger role in transactions and payments.
Telcos have the better relationships with the end users, more data and better infrastructure than banks and can make a greater impact in offering services to the unbanked.
I mentioned before that there are 2B unbanked people – and 50% of them have mobile phones. The number of mobile phones in Africa alone has doubled in the past 5 years. Telcos have better infrastructure, less regulation, more data on their customers.
There are new intermediaries with strong customer relationships that have less regulation and offer less visibility that blockchain. Many people use Venmo for exchanging digital cash. WeChat and Facebook are now offering payments.
BitCoin adoption is continuing to grow can be seen in these graphs – 42% YoY growth of Merchants that accept BitCoin 13% of New BitCoin Deployment – Robocoin shutdown but only represented 4% of the bitcoins. The difficulty here is that the proof of work requires time to verify, therefore a truly ‘permissionless’ or ‘trustless’ service is probably not the best business model for these firms. Mobile Banking has increased and should double by 2021 to 1.6 Billion It is interesting if you look at the Mobile Banking Penetration by Country Graph the United States isn’t the leader in mobile banking adoption.
Latham and Watkins Law firm produced this map
What you can see is the level of regulation being imposed by some states. The definition of what makes a ‘license’ a requirement will differ from state to state. The US Federal Tax views virtual currencies as property. The European Court views bitcoin as a currency, making it exempt from VAT.
My prior slides were focused on Financial Transactions and Payments – because it is the most obvious application of this technology.
There are many many applications that can benefit from the ‘block-chain’ technology from the Internet-of-Things to some genome and genetic information applications.
The ability to create ‘immutable’ and distributed databases that have transaction visibility is applicable to many applications – with or without the financial layer offered by the BitCoin.
Some of the applications can exist in ‘PERMISSIONED’ environments where the need for consensus may not be needed to the level of BitCoin.
It is cheaper to offer a digital, unchangeable and distributed ledger for some government applications than it is to print and distribute official documents.
Colored Coins is an exampled of permissioned BlockChain applications that can be layered on top of permission-less blockchains (eg Ethereum, BitCoin) using existing technology. For example – colored coins which aim to ease the transfer of assets on BlockChains could make public ledgers useful for financial institutions.
I spoke before of how technology has been disrupting and creating opportunities – and all along the way it has redefined markets.
Traditional Markets were all about discovery and negotiation and intermediaries had central control.
The Internet Marketplaces offered some disruption, with a shift in control. Easier access and better supply chain.
We have been hearing a lot about the Share Economies – Uber, Fiverr (my personal favorite), Handy and others give the ‘sellers’ more control and the tools. They don’t own the talent, they facilitate and put more control into the hands of the buyers and sellers.
Peer-to-Peer Transactions and Contracts offer Frictionless or more efficient transactions and contracts – but this requires new business processes. Incumbents will resist and new entrants will disrupt and innovate.
Customer Service is one area that has evolved into a self service model – the question is how this will be supported as the costs come down. Will users come to accept that the risk is all in their hands?
I will just end with this slide about investments in BlockChain and BitCoin.
It is interesting to see how much is being invested in BitCoin, BlockChain and Hybrid models – especially since 14% of the investment is going to 1% of the companies.
At the core there is a large OpenSource community fueling this innovation – and I predict that just like the RedHat became (as they discribe themselves) the World’s Open Source Leader – there will be a number of companies that will play this role for BlockChain and BitCoin.
Companies like IBM have been filing patents in this space, and Microsoft has announced some work they are doing with Etherium. It will be interesting to see what direction these companies will take.
While Security and Scalability in addition to the message size limits associated with the desire to ‘Fork’ or ‘Not Fork’ These are the same discussions I would hear in the beginning of the Internet days.
TECHNICAL CHALLENGES Scalability The network currently processes 3-20 transactions per second Several orders of magnitude away from mainstream payment systems such as Visa which handles about 2000 transactions per second Several solutions are available Privacy Companies or individuals are unwilling to publish all of their information onto a public database which is accessible by government, competitors and family members. Difficult to provide solutions with privacy and full capability of the Blockchain.
Finishing off with some state for BitCoin. This doesn’t include the progress that Etherium has been having recently with all the partnership it has made.
A few informational slides – this one helps identify the performance difference between traditional credit card processing applications. The 10 minute delay with only 7 tps is somewhat limited for commercial transaction processing.
BitCoin and the Global Economy by Cristina Dolan Presented at MIT Center for International Studies
APRIL 7, 2016
MIT CENTER FOR INTERNATIONAL STUDIES – STARR FORUM