Blockchains and Banks

I'm excited to be speaking at Infosys' Confluence on April 30 in San Francisco.

It's fun to be talking to bankers who want to hear about the blockchain; for a few years there, they would constantly say "we'll never touch something like that," and then ask me for a Bitcoin after my talks. Just like VCs in 2011. Zing!

My talk is titled "Retail Banks are Dead," and if you want to hear what I have to say in detail, contact Infosys and come to San Francisco.

What I am most interested in is the rash of public announcements that banks are starting up Blockchain technology incubators, labs and other research groups. UBS is the latest: http://blogs.wsj.com/digits/2015/04/02/ubs-to-open-blockchain-research-lab-in-london/. UBS, if you're reading, I want to join in. Get in touch!

I have always thought that a feature of Bitcoin was its volatility: it motivates newcomers, makes some rich (and others poor), and provides fun for traders and speculators. On the con side, it's super, super tough to launch a business relying on something so volatile, much less work an economy around it. When volatility is high enough, it takes extreme discipline to focus on anything but price swings.

As the many benefits of a blockchain based payment rail become obvious, it's becoming easier and easier for me to imagine a blockchain-based dollar denominated digital currency. Or Euro, or Pound, or possibly the eDrachma, solving Greece's problems once and for all.

It could work like this: Banks sign up and 'bless' a number of issuance keys. These keys are allowed to issue dollar-denominated tokens. Perhaps we keep track of the original source of these tokens like colored coins; perhaps we don't need to. Each bank promises to pay par value for all tokens; either because they are marked as to source, and can therefore be settled, or because the issuance system is trusted and they can therefore be settled. Either way, the banks would have a facility to settle over Fedwire.

People can then purchase them at par from bank ATMs, and instantly receive them in their wallet of choice. I would think you'd contract with someone like the awesome folks at http://breadwallet.com to build your industry-approved wallet out.

The bank ATMS also will deliver cash in exchange for tokens, and presto, you're done: you've got digital currency with whatever volatility our central bankers agree is right. Customers get reasonable digital privacy while transacting, and lose it when converting in and out of fiat.

Well, you're almost done. You've got to get a mining story together. Otherwise there's no double-spend security.

The banks could pay miners directly, a-la Bitcoin, with a certain number of tokens issued per block and some sort of fair distribution of costs spread among issuers. Customers could pay for premium transaction times, like they do now with Bitcoin.

One of the difficulties with this plan is that you've got some 'devil's-in-the-details' type questions to work out about your mining plan. Will it be scrypt based? bitcoin-style sha256? Something new and cool like graph-based proof of work?

With the minimal amount of time I've put into thinking about it, I would push for a merged mining solution like Namecoin. You get almost the whole securing power of the Bitcoin network without having to pay full freight. And you don't risk your coin getting overwhelmed by a DOS-style attack if mining values change suddenly for your chosen proof of work. This sort of pool hopping has been a serious problem for scrypt-based coins in the last year or two.

In exchange for a merged mining solution, you need to convince miners to actually do the merged mining. So there's a social angle to acceptance here as well. I think a BankCoin would be a nice fit for merged mining. They could get fiat currency directly for their mining, and would likely eagerly factor that in to their planning.

There's probably a sidechains story here as well, but I'm not sure what it is exactly. If I have something useful to say, I'll update this post.

Peter Vessenes

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