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Author Topic: Satoshi goes to Davos. (Courtesy of Credit Suisse)  (Read 1079 times)
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January 20, 2016, 07:37:02 PM

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The game taught me the game. And it didn’t spare the rod while teaching. Jesse Livermore.
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January 20, 2016, 08:36:00 PM

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Now that Satoshi is a “Davos man”, does that make him “The Man”?

Soz disrupters. Seems you’ve been co-opted. The powers that be know there’s nothing like the offer of an evening out sipping cocktails with Leonardo DiCaprio and Kevin Spacey at the Piano Bar to get you to abandon all your high falutin’ values about disrupting the world hierarchy system.

Indeed, the day the Davos elite shower you with love is the day you’re officially no longer cool. More to the point… “A single ledger to rule them all? Why Satoshi, it’s what we’ve always wanted!”

It’s all so wonderfully circular.

Boy meets disruptive network technology protocol. Boy becomes infatuated with disruptive network technology protocol. Boy invests at least three years worth of savings in a life together with the protocol. Protocol becomes power needy. Protocol gets concentrated in the hands of a few. Boy has heart broken when protocol runs off with the banking elite. Boy resents protocol for having stolen his heart in the first place. Boy pledges to never love again…

On the streets of Davos this year there are only three discussions being had. One: robots are going to take over our jobs. Two: blockchain is amazeballs and three: fintech is like blockchain amazeballs, but with even more possibilities to control and mould the behaviours of the common man.

To be fair, privacy, cyber security and the general shift in international power politics are also on the agenda. And there’s even some discussion on the downsides of associated with virtual currency amazeballs technology as well.

To wit, here’s the press blurb from the latest IMF paper on virtual currencies, cited by Christine Lagarde during the “Transformation of Finance” panel on Wednesday.

Virtual currencies (VCs) and especially their underlying technologies are a potentially important advance for the financial sector that could increase efficiency and financial inclusion, but can also serve as vehicles for money laundering, terrorism financing, and tax evasion. Achieving a balanced regulatory framework that guards against risks without suffocating innovation is a challenge that will require extensive international cooperation, says a new staff paper, “Virtual Currencies and Beyond: Initial Considerations,” released today by the International Monetary Fund (IMF) during the World Economic Forum.

And skipping over to the paper’s conclusion:

A key conclusion of the paper is that the distributed ledger concept has the potential to change finance by reducing costs and allowing for deeper financial inclusion in the longer run. This could be especially important for remittances, where transaction costs can be high, around 8 percent. Distributed ledgers can also shorten the time required to settle securities transactions, which currently take up to three days, as well as lower counterparty and settlement risks.

As we’ve noted many times before on this blog, we’re not really convinced by the cost assertion. It seems imprudent to make such claims without there yet being viable proof of a working private blockchain anywhere in existence and the nearest candidate, the Bitcoin blockchain, encountering ever greater cost and scaling challenges by the day. Furthermore, totally ignored by the paper, is the fact that all blockchains have thus far been subsidised by one sided capital inflows whether that’s through funding rounds or speculative investors. Eventually those investors will want returns, or at a minimum the protection of par value. The jury’s still out on whether they’ll get that.

There is, however, one justifiable rationale for wanting a clunkier, less efficient and costlier clearing process.

The biggest open secret of the financial world right now is the ticking time bomb which is the digital banking system we’ve created in terms of security and fraud control. We’ve all grown accustomed to our digital bank accounts and how easy it’s made our lives, but the truth is they’ve made fraud incrementally easier as well, and it’s this risk which is now eating away at the system’s core.

Blockchain, being fundamentally a cartel enforcement system, is appealing to banks for such fraud control reasons. Not only does it theoretically make it costlier for random hackers or intruders to cheat the banking system, it makes it costlier for banks to cheat each other as well. That’s the genuine insight of blockchain. If you make it so prohibitively expensive to clear a fraudulent transaction (equivalent to the cost of fixing a political election) that it’s beyond the scope of Tom, Dick or Harry to attempt it, you significantly increase the security of the system.

But there is a catch. Banks know that forging a cartel as strong as that eliminates all possibility of out competing with each other in terms of risk, screening and security. As far as they’re concerned, they become one bank (with all the non-diversity risk that comes with monopoly systems). It also means erroneous transactions become nigh impossible to reverse, money supply becomes a constant and scaling is compromised completely. Hence the rage for private blockchains with the promise to provide banks with override options within their special trusted network.

But as we overheard in one of the shuttle buses at Davos — from a very authoritative looking man in a furry hat — “there’s no-one you can’t bribe”, meaning as soon as there’s a backdoor anywhere in the system, it becomes as game-able as ever. You’d think Davos delegates, who spend a lot of their time queueing to get in and out of trusted zones, would understand this. You’re only ever as secure as the corruption potential of your lowliest employee.

As for encrypting something so securely you yourself can’t even access it… well, you see the problem with that. It’s like putting something in a safe space and then forgetting where that space was. A common problem for pirates back in the day. And a common problem for bitcoiners today. Hence all the “distributed” clues. Hence all the Treasure maps. Hence all the secret keys.

But we digress.

The IMF’s report says distributed ledger technologies may have the potential to change finance by reducing costs and allowing for wider financial inclusion… but here’s another thought.

Perhaps payments systems are largely irrelevant when it comes to financial inclusion, a euphemism for “dealing with the poor”. Perhaps the real problem is that the financially excluded tend not to have fixed abodes, fixed addresses or any private wealth stakes to call their own? Nor, for that matter, do they have the capacity to create wealth because you know, the wealth-creating robots are owned by the elite, who for some reason don’t feel compelled to set them on “create houses for the poor for free” mode. Furthermore, if and when the poor do find themselves with the capacity to work, perhaps the real problem is that they can’t stop the wealth they create being misappropriated because their jurisdictions lack the legal and defence structures which are necessary to protect them?

In that regard, here’s a MUST READ paper published last December by Ernesto Dal Bó, Pablo Hernández and Sebastián Mazzuca on the paradox of prosperity and security, and the role in particular played in civilisation making by both surplus and defence.

As the authors note about the key to prosperity:

….that initial productivity be high in terms of its purchasing power over improvements in defense capability. The possibility of accumulating means of defense helps create the conditions where productive investments can be made without triggering predatory challenges. This result may also help rationalize historical experiences where a temporary economic boom allows the state to consolidate its power and usher in a phase of more sustained growth. Isolating formally the pivotal role of defense capability to the civilizational process contributes to the demanding enterprise of discerning how economic shocks can hinder or help state formation and political stability more generally.

The takeaway: try not to get so rich that greedy predators notice you have something to take. If you do, don’t lower the barriers of entry to your wealth too far by under spending on defence, but by the same measure don’t overspend your resources on battlements either or they’ll be nothing left to protect.

Funny to see banks so interested in blockchains... Smiley
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