Finance and the Future Beyond Bitcoin

Finance & the Future Beyond Bitcoin

Walter Stanish walter stani.sh@ >

#include std_disclaimer.h

I am not an `expert' (just interested) In some sense that means I might have more valuable

interpretations than mainstream experts...

Your opinions are just as valuable! Our community is uniquely positioned Gmc's opening suggested a focus on empathy Let's use common sense to take some of this stuff that runs

our world apart... in the spirit of O BSERVE H ACK M AKE

>

Overview / Romp Routing

Who is speaking Why we should care about finance What are we dealing with Finance in the past (overview) Finance in the present

Commodities and asset types Protocols and settlement systems

Political nature

Recent developments Where do we go from here

Who is talking

Some random! Aussie by birth, also Kiwi/German by pass-pottery Lived a long time (8ish years) in China (awhile in UK, US...)

Been a bunch of other places (...Tunisian revolution, India) Have worked on a fair few systems (internationally) Now employed to consider this stuff, look at building some

better alternatives (slowly and ever-more-surely) Biggest claim to fame: pretty much nothing

Undeleting the Wikipedia Bitcoin article Undeleting the OHM2013 Wikipedia article

(but it got deleted again) Wikipolitics suck! Consensus my ass!

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Who is talking

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Who is talking

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Who is talking

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Who is talking

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Who is talking

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Who is talking

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Who is talking

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Who is talking

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Why Should We Care About Finance

You obviously don't listen to enough hip-hop

I recommend Brother Ali's `Uncle Sam Goddamn' ... or the famous quote: `Give me control of a

nation's money, and I care not who makes its laws.' These days, the stuff's all tied up for new entrants

Significant regulatory fears Large capital requirements Men in suits with exotic names and money

Smells like a protection racket

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?

As an Utrecht street artist said:

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Mayer Amschel Rothschild

Known for: - telling it like it is - founding one of the largest banking dynasties

Reality: - lived in a ghetto - got busy - ran a mail order business!

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It *is* a Protection Racket

The quick version

If everyone works to obtain `x' And someone controls most of the creation or supply of `x' Who controls `x' controls everyone

Something isn't right here!

Logically, people should revolt if they are being exploited that much

Historically, they did.

Resistance to this usury thing was even systematizedAncient countries of China and IndiaReligions (one of the few things they all agree on)

Buddhism, Christianity, Hinduism, Islam, Judaism

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The quick version

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The quick version

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The quick version

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The quick version

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The quick version

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The quick version

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The quick version

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Too Big To Fail

... no comment necessary.

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Conventional Lies about Money

Economists tell us a story Many moons ago, a man with a cow went to market He wanted beer He couldn't hack off a leg of his cow to pay for a beer He had to walk home, losing valuable drinking time, to find a smaller denomination commodity. The smaller commodity soon became popular, since everyone likes beer, and beer is cheap. Soon we had shell money, which was lightweight and nice lookin'. Then we had metal money, which was more efficient and foolproof. Metal money became heavy (and unsafe to carry around thugs, after a few drinks) so we had paper money. Still later we wanted more efficiency so we had electronic money. Now and forever after everyone is consumes happily, under the forever watchful eye of unquestionable experts in suits, amen. ... PS. `You can trust me, I'm in a suit, or paid by people in suits!'

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We Should Question This...

Pre-agricultural societies were generally organised differently Many of them don't have concepts of personal ownership Others share resources automatically Others penalise selfish behaviour in different ways Stateless societies tend also to be without markets

Produce and consume locally

Currency is pretty much tied to centralised (alarm bells here) states following the development of settled agriculturePartly as a form of advertisingPrimarily, later on, because it's an easy way to tax people

Demand tax payment in the currencyControl the issue of the currency (often through payment for military labour)Fix or heavily influence market prices for goodsPeriodically (eg. every new reign) slightly debase the currency

`The value of a unit of currency is not the measure of the value of an object, but the measure of one's trust in other human beings.' - Graeber, David. Debt: The First 5,000 Years.

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Payments Down, in London Town

Roughly speaking, the modern International Financial System was largely founded on a few central banks (and some serious sneakiness)

The first of these was the Bank of EnglandBegan in 1694 by loaning 1.2m GBP to the king Bankers got 8% interest on that, plus the exclusive right to issue notesAnd double-charge interest on the notes

Banker's gotta eat.

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The first to succeed was the Bank of EnglandBegan in 1694 by loaning 1.2m GBP to the king Bankers got 8% interest on that, plus the exclusive right to issue notesAnd double-charge interest on the notes

Banker's gotta eat.

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The first to succeed was the Bank of EnglandBegan in 1694 by loaning 1.2m GBP to the king Bankers got 8% interest on that, plus the exclusive right to issue notesAnd double-charge interest on the notes

Banker's gotta eat.

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The first to succeed was the Bank of EnglandBegan in 1694 by loaning 1.2m GBP to the king Bankers got 8% interest on that from the king, plus the exclusive right to issue notesAnd double-charge interest on the notes

Banker's gotta eat.

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Banker's gotta eat.

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Banker's gotta eat.

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banksy

Apples 'n Pears, Stairs

Given we're in `Orwell Tent'... a largely useless anecdote Once shared a house with a Bank of England employee

An entire department today sets interest rates This guy was part of that department

The same building used to be inhabited briefly by both Orwell (`Down and Out in Paris and London') and Stalin. These days, it's a money-spinning pack-'em-in development allegedly owned by a Cypriate Jew next to an abandoned Synagogue, East London's largest mosque, a huge Sylhet- Bangeladeshi community, the foundry at which Big Ben was cast, and a great bar full of artists & musicians. One of the resident drinkers organised getting the first western artists in to post-Stalin Russia, and vice versa. Therefore, drinking is educational!

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The same building used to be inhabited briefly by both Orwell (`Down and Out in Paris and London') and Stalin. These days, it's a money-spinning pack-'em-in development allegedly owned by a Cypriate Jew next to an abandoned Synagogue, East London's largest mosque, a huge Sylhet- Bangeladeshi community, the foundry at which Big Ben was cast, opposite a great bar full of artists & musicians. One of the resident drinkers organised getting the first western artists in to post-Stalin Russia, and vice versa. Therefore, drinking is educational!

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Meanwhile: A Less Useless Anecdote

300m west is a 1.22 square mile area known as the ``City of London'' A separate legal entity within London aka. `The Square Mile' Extremely rich A fully fledged tax haven Motto: "O Lord Direct us"

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Until Recently, Run by This GuyO

Represent!O

... good example of what I call `dynastic capital' Multi-generational Often lots of prior ugliness lies behind it

Wars / weapons / financing / support services Colonialism Slave trade / trade in slave products (ongoing) Large scale drug empires* Opportunistic environmental pillaging

Tends to grow rather than shrink over time

* eg. The Opium War, or England making Indians grow opium... first to dump in, and later to sell to China at vast profits (chiefly in silver).

Conventional Lies about Banking

Likewise, bankers tell us a story

Many moons ago, a man with lots of valuables wanted to store them

He stashed them in a secure looking location, on the understanding he could pick them up later

The person running the facility issued paper notes of deposit

Others heard of the utility of such an approach and did the same

Crime rates dropped, everyone prospered without worry, and people began to trade the paper notes instead of actual valuables

Since then, everyone sees the inherent superiority of paper notes If you think otherwise, you are clearly a nutcase conspiracy theorist!

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Hang on...

Bankers quickly realised they could:

Collect the fortunes of people who died Hide behind `privacy' to escape detection

Lend out more money than they had (`fractional reserve system')

Lend one person's money to another, profiting on interest

Buy protection and influence from the government

Make/break governments through (lack of) war financing These days, `campaign contributions' / media budgets

Governments and banks merged to form central banks Generally controlled by cartels of private bankers

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Read This Book

UK anthropologist David Graeber calls the popular stories `creation myths'Tears them apart in his book `Debt:

The First 5000 Years' One line summary:The conventionally expounded view

of the history of money and banking is mostly bullshit Does not stand up to analysis

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Conventional Money

Created `by fiat', or by a centralised decision with limited accountabilityObviously a bad idea

Tied closely to the global capitalist system ravenous for constant growth (there isn't enough

money to pay back all of the debts)

There are alternativesCommodities (gold, silver, wheat, rice)Private currencies (LETS, etc.)Emerging MBCs (Bitcoin, Ripple, etc.)

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Alternatives to National Fiat Money

Barter Basket-pegged instrumentsExchange value is pegged through a `basket' of

commodities (eg. useful ones, like food) Time-pegged instrumentsMost famous in the US is `Ithaca Hours', many more.

`New currency systems will not solve all the problems generated by physical growth on a finite planet. But we will have zero chance of creating a more satisfactory global future if we do not create new mechanisms for facilitating commerce.' - Dennis L. Meadows

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Some Monetary Reform Successes

1893 @ Johnstown, Pa. Crisis: Flood rendered 3600 dead During disaster, a railroad supplier couldn't get paid Issued bond money to employees that was later

redeemed by government 1923: German Rentenmark Crisis: Hyperinflation Primarily guaranteed by acceptance as tax Could exchange for gold loan @ 5% interest

1990s @ Argentina: numerous provincial government currencies

Many more exist!

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Conventional Banking

Most countries have a national numbering system for domestic routing Format is usually:

bank_id + branch_id + account_id

Most also seem to use ISO20022 ATMs Deposit is quite rare, withdrawl is common

Biggest recent developments are: International Bank Account Number (IBAN) Single Euro Payments Area (SEPA)

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IBAN

Developed in Europe by the European Committee for Banking Standards (ECBS)

Mandates a fixed-length BBAN per country Mandates a checksum (2 digit) Basic format:

country + checksum + bban country: 2-letter ISO code (ie. DK, IE, etc.) checksum: MOD97 bban: `basic bank account number': country specific

Now an ISO standard, SWIFT managed registry Began in Europe, widely gaining additional adoption:

Bahrain, Brazil, Costa Rica, Israel, Kuwait, Lebanon, Palestine, Tunisia, UAE, etc.

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IBAN: Socio-Political Properties To create an endpoint (account) you need to be an

accredited bank in the country in question

Country in question has to be ISO listed (UN approved)No luck for you or I, Sealand, Transnistria, etc.

Nominally agitates for commodification of interbank payments and banking related software

Many countries with developed infrastructure have resisted adopting the IBAN

One example is my birth country of Australia

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IBAN: Australia's Rejection IBAN is not used in Australia

Emailed the Reserve Bank of Australia (RBA) to ask about the situation

After a few days, they replied that:`The Australian Payments Clearing Associations (APCA) High Value Clearing System Committee has considered the adoption of IBANs and has determined they will not be adopted in the foreseeable future.'

They suggested I go direct to the APCA HVCSC with my query

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IBAN: Australia's Rejection 2012-09-14: Emailed the High Value Clearing

System Committee

2012-09-27: Emailed them again (no response)

2012-10-02: Someone from `information management' got back to me with `Sorry for the delay we are looking into you (sic) enquiry.'

2013-07-28: Emailed them again (no response)

To date, I have not heard back from them. :(

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Credit Cards: Emergence

US had a unique position after the war

Lots of people about, having kids, buying houses One of the only / largest intact industrial complexes in the world People wanted to buy things and travel

ProblemThe US was absolutely rife with tiny banks*People couldn't move money around easily enough

Credit cards were a solution of that, now-concluded, era

`Modern' magnetic stripes and signature security! Snail-mail oriented business processes! Entirely introverted / US-domestic in conception!**

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* ... to a certain extent it still is, though not quite on a German `Sparkassen' level.

** OK - some things die hard.

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Credit Cards: Issues Today

Large fraud problem High costs for merchants Consumers essentially farmed for

usury purposes Socially somewhat ethically

questionable business model

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Credit Cards: Changes Now

Trying to move towards:

`chip and pin' proximity-based payments

mastercard `paypass' visa `paywave'

Moving away from:

signature-based payments

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Credit Cards: Changes Now

Goals of moving away from signatures

Better resist fraud Liability shift to merchant / consumer

Drawbacks

Requires `online-always' operation Simply not feasible in some environments Therefore, fraud

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Credit Cards: Trajectory

Will remain entrenched in the near term May never reach good penetration in still emerging markets

Most worried about two things:

Strong regulation... on credit (loan sharking) on consumer privacy (vs. for-profit data use)

Rival payment systems achieving solid levels of global market penetration This means physical presence Decent mobile offering would help greatly

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Mastercard ProfitsO

(+9.16%) (+17.5%) (+7.94%)7.391 Billion USDNet Revenue...NOT TOO SHABBY

Visa ProfitsO

4.2 Billion USDNet Revenue...NOT TOO SHABBY

AbusesO

Wikileaks situation needs no introduction

Essentially forced this previously rather out-of-view card to be played

Wikileaks lives on (as per last talk)

SWIFT

Society for Worldwide International Funds Transfer Established (swiftly) in the mid 1970s

Effectively a global monopoly on cross-border interbank financial transfers

No real history of the organization is publicly available...

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SWIFT: Beginnings

Self-stated 1970s era creation myth: A need to codify and reform differing interbank approaches to telex-based international financial transfers

Established as an `International Cooperative' under Belgian law

Observations: Grew suspiciously quickly given the limits of 1970s technology Hundreds of banks from tens of countries within 2 years

The `Belgian' running the show was actually the ex head of international affairs for American Express, with a wholly US-centric career AMEX 1970s 'international' business... how much, really

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SWIFT: Beginnings

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SWIFT: Beginnings

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SWIFT: Beginnings

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SWIFT: Beginnings

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SWIFT: Beginnings

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SWIFT: Early Growth

In less than 4 years, established their first `international center of operations' Assumption: Would have been in a financial center of

the time (London, New York, Paris...) Reality: The US state of Virginia (aka. CIA HQ)

No evidence of any other such centers

SWIFT's website contained zero information about this site until the recent death of their founder

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SWIFT: Early Growth

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SWIFT: Early Growth

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SWIFT: Early Growth

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SWIFT: Early Growth

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SWIFT: Early Growth

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SWIFT: Routing Methodology

Nodes identified in two ways

ISO 9362 Business Identifier Codes (BIC) aka SWIFT-BIC, BIC code, SWIFT ID or SWIFT code SWIFT Standards manages registrations 2009 update broadened the scope to include

non-financial institutionsFormerly: Bank Identifier Codes

12-character SWIFTNet FIN address BIC derived + 1-char Logical Terminal (LTC) + 3-char branch ID

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Claims: Transports messages in a `highly

secure' manner Does not hold actual accounts Does not perform any form of

clearing or settlement Reality:

Gives all messages to governments Facilitates asset seizure

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Gives all messages to governments Certainly facilitates asset seizure

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SurveillanceSurveillance

- EU performing 15,900 searches per - EU performing 15,900 searches per month (late 2012 statistic)month (late 2012 statistic)

- Not aware of any data on US- Not aware of any data on US search volumes search volumes

OWhat Happened - Quicky Version (1/2)

OWhat Happened - Quicky Version (2/2)

Anecdote Time

Well known global business-oriented NGO in .nl Members all men, 40+ Quick survey!

Heard of Wikileaks: 100% Supported gov. transparency: 100% ... if same impacted self: no comment Believed `significant systemic financial change

was imminent': 70%

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Anecdote Time

was imminent': 70%

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Anecdote Time

was imminent': 70%

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Anecdote Time

was imminent': 70%

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Anecdote Time

was imminent': 70%

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Anecdote Time

was imminent': 70%

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Anecdote Time

was imminent': 70%

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SWIFT: Recent Developments

Public revelation of SWIFT's surveillance role All global transactions sent to the US Used for economic espionage as well as

intelligence gathering

Garnered reasonable media coverage

EU Parliament backlash was not insignificant

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EU Parliament backlash circa 2006 was not insignificant

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EU's proposal= in response - SWIFT2 An EU SWIFT site for EU transactions Everything else via the US

Observation: Not a good solution for other nations

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EU's proposal= in response - SWIFT2: An EU SWIFT site for EU transactions Everything else via the US

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EU's proposal= in response - SWIFT2: An EU SWIFT site for EU transactions Everything else via the US

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Reality: Years of bickering and politicking Zero effective change

US still has access to all transactions US demands: for anti-terrorism! SWIFT claims: we don't have the ability to filter EU/non-EU transactions!

US can seize all transactions (right off the wire)

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US can seize any transaction (right off the wire)

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SWIFT: Abuses (Snatching funds)

Example (2012-02-26 report in `Berlingske', Denmark): Danish guy likes cigars Wants to buy USD $26,000 worth from a German guy Cigars were already in the EU, of Cuban origin Intra-EU transaction

Money was seized by SWIFT Upshot:

US able/willing to surveil/seize SWIFT transactions between allied nations

Given this, how does the EU provide for any kind of US independent defence industry ... maybe they don't.

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SWIFT: One FOIA

In one of a few FOIAs I asked the EU Director Generate of Home Affairs about this case

After a long hassle including demanding reviews they claimed they had no knowledge of the case or any other case

It's their turf - the European Data Protection Supervisor referred me

Draw your own conclusions

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SWIFT: One FOIA

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SWIFT: One FOIA

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SWIFT: One FOIA

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SWIFT: Abuses (Iran, 1/3)

SWIFT recently blocked the entire country of Iran SWIFT president's comment: `unprecedented'

How? Organization UANI (`United Against a Nuclear Iran') appeared

Called itself `non-partisan, non-profit advocacy org.' Reality:

CEO is former US ambassador to UN, responsible for `UN Management & Reform'

Advisory board includes:Former head of CIAFormer head of Mossad (Israel's CIA)Council on Foreign Relations peopleGeorge Bush's `Homeland Security' advisor

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Next steps: UANI made lots of allied (Western) media noise US asked EU to OK a ban EU complied SWIFT blocked Iran's banks (but reports: not all at once)

Have read that SWIFT presidents, until recently, were reportedly all US or heavily US-linked. Recently they have all been Europeans, and a show made of the fact.

The new president was EU, reading between the lines not a huge supporter.

People in these positions are probably well paid pawns

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Have read that SWIFT presidents, until recently, were reportedly all US or heavily US-linked. Recently they have all been Europeans, and some show made of the fact.

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The new president was EU origin, reading between the lines not necessarily a supporter of this move.

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The new president was EU origin, reading between the lines not necessarily a supporter of this move.

People in these positions are politicians... well paid pawns

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Reported results: Some hassle for Iranian government + business Not insurmountable

Bitcoin grew in IranIndia relies on Iranian oil for energy security

India now reportedly gives Iran gold in exchangeRemains fully in compliance with US/EU demands India is the world's largest hoarder of gold

More bridge-burning with tertiary governments

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Western Union and MoneyGram

Two of the more established alternatives to conventional bank transfers via SWIFT

Accessible to people without bank accounts

Mostly used to parts of the developing world where recipients do not have bank accounts, or by migrant workers who have no bank account in the host country

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Vague `Development' Claims

In July 2010, Western Union sponsored an `Economist Intelligence Unit White Paper' entitled

`Building a Future Back Home: Leveraging Migrant Worker Remittances for Development in Asia'

The document body only came to 21 pages, and drew fast and loose conclusions

Clearly a PR stunt

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Clearly a PR stunt

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Clearly a PR stunt

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Reality Check !

In January 2012, Consumers International released `The remittances game of chance: playing with loaded dice?'

Convincing evidence that both Western Union + MoneyGram routinely take advantage of already exploited migrant workers who lack access to competing services Generally charge a flat fee plus ripoff exchange rates 2010 study of Latino workers in US: 53.3% no email / 30% no bank

account / 92% have mobile but over 80% no internet `In the club': Visa / MoneyGram has a `cash-to-Visa' program

In an even more amazing move, the World Bank actually did something useful and cross-compiled some statistics:

http://remittanceprices.worldbank.org/

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Reality Check !

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Reality Check !

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Reality Check !

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Reality Check !

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Reality Check !

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Stock Markets

2 years ago, began studying the world's largest 18 stock markets Looked for the following:

Protocol information System changes Motivations for change Stated future trajectory

Goal was to understand their technical function/challenges/limitations fromreal sources

Typical total market capitalisation 100s of billions (USD) equivalent ... sometimes more

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Overview of Findings Some consolidation around protocols

Dominant is FIX/FAST Slightly different everywhere

Missed data Dropped connections

However, still plenty of big markets using other stuff (Canada, Hong Kong, Japan, etc.)

Market match-making algorithms vary Not always disclosed Certainly reverse-engineered by algo trading types Includes order prioritization by: price, time, volume, party, trading period

(`opening auction', `closing auction', etc.)

Available order types vary (eg. iceberg, contra, cross, etc.)

Industry-wide concern for latency

Trend of larger markets acquiring market technology vendors (vs. license)

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Stock Markets: Fundamentals

Two kinds of assets: Consolidated

Most exchange listed sec's. Non-consolidated

Cash, commodities (gold...) Identification schemes

De-facto exchange-local Intra-exchange Reuters Instrument Codes (RIC)

EU antitrust case (2009) EU's uniform symbology ISO4166 ISIN (International Securities ID number)

Country + NSIN + checksum digit

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Stock Markets: Edge Cases

Fun ancient things UK has a lot of them

Allotment letters, closed funds, debenture, equity warrants, fund units, leverage products exotic...

Generally ignored, maybe interesting

Multi-market listings Brazilian assets co-list in US

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General Topology: Order Mgmt ___Member | |of the ===> Broker ===> | e |public | x | | c |Bigbiz ====> Order ==> | h |trader mgmt | a | p'form | n | | g | Algo. | e | trade => |___| engine

Note the proximity .. latency matters

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General Topology: Market Info ___Member | |of the

Financial Information eXchange (FIX) Most popular client-facing protocol for market order

management

ie. offers to buy/sell Also allows reporting of:

Market ledger info (sum of above) Full status Real time diffs

Market/asset announcements Trading suspension Regulatory hold Asset-linked announcements (stock splits, etc.)

ASCII-based protocol

XML version exists, but rarely used

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management

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management

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management

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management

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FIX Adapted for Streaming (FAST) Essentially multicast-oriented,

compressed FIX

Uses a custom, session-oriented vocabulary for compression

Every market's vocab is different Every market's recovery strategy

from lost packets is different Primarily driven by massive and growing

volumes of market data Big exchanges: Mbps => Gbps range

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compressed FIX

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compressed FIX

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compressed FIX

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compressed FIX

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compressed FIX

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FIX Transport Independence (FIXT) Latency paranoia demands custom transport

layers (TCP is syn/synack/ack .. SLOW)

Multicast capable Message-oriented transports can provide

complex topologies n:n multicast pub/sub relays mixes of the above

Lots of these are open source (ZeroMQ, RabbitMQ...), some commercial also

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Fun Historical Tidbit

Early 2000s, London Stock Exchange wanted to modernize their platform

Microsoft won the tender Delivered a platform that fell over constantly

LSE bought a Sri-Lankan, Linux-based startup `MilleniumIT' with a low latency platform

Deployed wholesale February 2011 Fixed the problem Now pushed out to South Africa (which has

historically followed London's technology) and many smaller exchanges

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Deployed wholesale since February 2011 Fixed the problem Now pushed out to South Africa (which has

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Business Oriented Protocols

Very quickly, there are a bunch of reporting and invoicing protocols

Some are mandated within some jurisdictions (EU, etc.)

None are general enough to use for general finance

None support emerging assets and settlement networks as-is

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Mobile Stuff

Everyone and their cat has started a mobile payments startup in the last few years

Oldschool premium SMS billing Carrier billing Proximity / NFC Appstore payments In-app payments

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Mobile Stuff

Carrier billing Proximity / NFC Appstore payments In-app payments

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Mobile Stuff

Historically, the mobile area has been about ownership of the customer

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Mobile Stuff

Apple clawed this back from the vendors with the iProducts

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Mobile Stuff

Apple clawed this back from the vendors with the iProducts Google used Android to fight back

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Mobile Stuff

Types of mobile billing Oldschool premium SMS billing Carrier billing Proximity / NFC Appstore payments In-app payments

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Mobile Stuff

Apple's approach: Grab customer credit card at

device purchase Bill everything through that Similar in all or most markets Ban third party payment systems

Google's approach: Copy Apple and adapt Google

Wallet to mobile

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Mobile Stuff

Apple's approach: Grab customer credit card at

device purchase Bill everything through that Similar in all or most markets Ban third party payment systems

Google's approach: Copy Apple and adapt Google

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Documents

Finance and the Future Beyond Bitcoin