Another bitcoin ecosystem health check as we slide into 2017

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Gute rutsch is the Swiss greeting for New Year. Translation = good slide. I hope y’all had a good slide into 2017.

 Now for all those resolutions – like going for regular health checks.

As we try to determine the health of the bitcoin ecosystem, some regular health checks are called for.

We have done two bitcoin ecosystem health checks in the past –  in June 2015 and April 2016. We publish those today for reference. All the data we use is in the public domain and we publish our methodology, so anybody can run these tests at home – no expensive medical equipment or training needed. All we ask is that you tell us if you see a way to improve the testing methodology.

Yes, the image is of only one health check, which is price, but the reality is that the price is what gets people’s attention and the price is rising. The biggest barrier to traction is being ignored and we can see the Google Trends and price of bitcoin correlate well. A rising price gets attention and that may impact the other metrics.

Methodology

We look at 4 indicators

  • Indicator 1 = Price. What do investors/traders think? This shows the wisdom of the crowd with skin in the game. Yes, we can also see the madness of crowds in the chart, which is why our health check looks at 4 indicators not one.
  • Indicator 2 = Merchant Transaction Volume. Is bitcoin being used as a currency in the real world? What do merchants and their customers think? This is a good forward indicator – like a blood pressure check. The problem is that this data is tough to get.
  • Indicator 3 = Cost Per Transaction. It ain’t free, but we hope it is cheaper than credit cards. Entrepreneurs will markup cost to provide valuable services, but what is the cost?
  • Indicator 4 = Transaction time. Is this approaching the “human real time” (a few seconds) that consumers expect from digital services? Or will we have to trust centralized intermediaries to make it look like human real time (rather ruining the core proposition of bitcoin)?

For data we mostly use Blockchain.info

Note: in order for this doctor to have a holiday, the health check took place in December 2016.

To discuss and improve the methodology, please go to this thread on the Fintech Genome. We are open sourcing our methodology in order to get contributions from the community to improve it.

Why 4 indicators are needed

If your doctor only ran one test, they would be negligent. The bitcoin ecosystem is complex and therefore also requires a number of tests. I am using this analogy to debunk three memes that took hold in 2016:

  • Meme # 1: Don’t worry about the bitcoin currency use case. The thesis is that bitcoin is just a store of value like Gold (so price is the only thing that matters). This is mostly said by people who own a lot of bitcoin “talking their book”. It is also said by bankers who find the idea of a currency outside their control to be deeply disturbing. It is far from certain that bitcoin will gain mainstream traction as a currency, but I am absolutely certain that bitcoin cannot be a reliable store of value if it fails to become a mainstream currency. It is hard to imagine a store of value (as opposed to a speculative instrument) that you cannot also use as a currency. Tulips is not a good case to cite. Gold is both a store of value and a currency; prudent people use it as a hedge against Fiat currency failure on the assumption that people will accept Gold in return for goods and services if everything goes pear shaped . Speculators will do what you see in that price chart spike in 2014 – if you bought at the bottom and sold at the top, well done; most people did not do that in which case the spike and crash was meaningless. Long term wealth protection clients look for something a bit less volatile with some fundamental value. So, they will also want to see thar the other 3 indicators are healthy. It is hard to imagine the price of gold going to zero. It is not hard to imagine the price of bitcoin going to zero if the other 3 indicators show sickness. Great cholesterol numbers are no consolation if you have cancer.
  • Meme # 2: bitcoin is just the first application use case for Blockchain technology and it is OK if bitcoin fails. If Indicators 3&4 are weak, then it means that all consumer Permissionless applications will fail. Without consumer Permissionless applications, the Permissioned enterprise Blockchain stuff will just get rolled up into the Oracle stack and be a footnote in enterprise technology history.
  • Meme # 3: Cyber currency is inevitable, it just might not be bitcoin.If bitcoin fails, after so much hype, it will take a really, really long time before another Cyber currency gets past the resultant skepticism. This brings to mind the famous quote by John Maynard Keynes in 1923:

“The long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is past the ocean is flat again.”

Indicator 1 = Price

Look at this long term price chart:

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The 2014 spike is pure speculation. The 2016 price chart looks more suitable for investors – as long as the other health indicators come out OK.

One of our 2017 Predictions is:

“bitcoin price will go past its all time peak of $1,242 (from 2014) and then settle back just below $1,000 for most of 2017.”

If that prediction is true, then bitcoin will be seen as best performing currency of 2017. That will bring in mainstream investors.

The problem is that you can assess bitcoin as a store of value in three ways:

  1. currency
  2. commodity
  3. startup stock

The latter is where we get the wild forecasts of a single bitcoin being worth $100,000 or $1,000,000 (from about $966 as I put key to pixel). Before dismissing that as crazy, consider the fact that one share of Berkshire Hathaway is worth about $250,000

Like a stock, the supply of bitcoin is fixed. In the case of bitcoin, it is fixed at 21 million. If you own 210,000 bitcoins you own 1%. That is why bitcoin people talk about market capitalization (which is not how you talk about currency).

Bitcoin as an asset class is gaining some momentum. For example, Polychain capital, a hedge fund investing in digital assets has managed to raise $15m from top tier VC such as Andreesen Horowitz and Union Square Ventures.

The near zero correlation to other asset classes is attractive. Volatility and liquidity look fine.

This is where the other tests matter. Investors will happily take a punt on a big upside if the downside risk is protected. If you bought bitcoin in 2009 it was like buying founder stock – you have no downside. If you buy bitcoin in 2017, you spend real money. For downside risk to be protected, bitcoin must be more than tulips. It must be a real currency. Which brings us to Merchant Transaction Volume.

Indicator 2 = Merchant Transaction Volume

We want to track this because we need to see how much are people paying for goods and services using bitcoin. In short, is bitcoin being used as a currency?

To track this we need to subtract the transactions done for speculation or money laundering.

This data is surprisingly hard to find. One data point on Blockchain.info that is helpful is Number of Transactions Excluding Popular Addresses.

This does show some reasonable growth and excludes speculative bursts around events such as Brexit.

Hard data is hard to come by, but we see anecodatal evidence such as (from Techcrunch) that Airbnb CEO Brian Chesky asked for product suggestions for 2017, and accepting Bitcoin payments was the number one most requested feature for the company.

Is there a better data point to track? I imagine that big payment processors such as Coinbase, Bitpay and Circle have this data, but do they put this in the public domain?

Indicator 3 =Transaction time

The Average Transaction Confirmation Time shows this. There is nothing dramatic about this chart, it looks stable as one would expect unless there had been a significant change to the protocol. The problem is simply the numerator, which is in minutes.

This is where we expect to see a lot of change in 2017 as Segregated Witness and Lightning Network roll out. For background on these scalability issues please read this post.

Indicator 4 = Cost Per Transaction

Blockchain.info shows this. The data problem is that this chart is in USD, so the exchange price gets in the way. What we need is cost per transaction in bitcoin (just like we use transaction volume in bitcoin). If anybody knows where to find this, please tell me. Maybe one could compute this from a mix of things like Hash Rate and Difficulty. However, that is a nuance. The big picture is that small transactions are not economic today. Which means some combination of offchain centralized processing and/or use of Sidechains. This is another area where Segregated Witness and Lightning Network rolling out in 2017 will have a big impact.

Past checkups

As you can see, the methodology is evolving.

April 2016

June 2015

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Capital Markets and IDs

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In theory, we have been able to design Digital Identity solutions for a while now. However, the costs were prohibitive and interoperability issues needed to be solved.

Today, we can implement technology (hardware) that is cheap and this allows us to experiment and target opportunities that couldn’t be exploited before.

It is cloud computing, cryptography, public key encryption and peer-to-peer networking protocols that are the critical “cooking ingredients” for recipes that can solve costly and basic problems in Capital markets, like provenance, authentication and reconciliation.

In this post, we zoom into the Digital identity issue (whether for an end-user or a corporate entity) in Capital Markets. In traditional financial lingo, this is coined as KYC and it shifted on the very top of the stack of issues that keep up managers at night, mainly after Sep 11.

Currently in Capital Markets we are looking for the following qualities in a Killer Digital Identity solution:

  • Cheap
  • Ability to be accurately updated
  • Accessible and Granular = Interoperability and Granularity
  • Immutable

The last two qualities are critical and encapsulate the practical difficulties of such a service. A Killer Digital Identity solution should offer both individuals and organizations the ability to authorize actions on their behalf. This can range from settling a trade, to registering for a financial product or service like an investment product or a loan.

At the same time, it has to be granular so that only the pertinent bits of the Digital Identity are used.

This is what Pascal Bouvier has been pointed out for a while. It is critical because it enables individuals and corporates to choose how to interact with a merchant or a supplier or a client. Being able to have a secure way to divulge only the granular bits of information is the key. It is also the enabler to be used in different contexts without having to go through the whole process again.

Imagine a world that any individual can open a bank account for their consumer banking needs, a telco account, an investment account, a brokerage account …. with different institutions securely, with all updated info, without having to repeat the whole process (e.g. they all need a copy of passport or a digital picture but the telco account needs much less information than a brokerage account that allows me to trade options and futures and buy stocks on margin). In addition, in order to register a corporate entity for a business, imagine a world where one can avoid repeating the process that overlaps with all the above, the registry is able to obtain accurate Social KYC information around the shareholders and directors of the company (updated real time), and have access to any particular cross-border information necessary.

There is one Fintech based on the Isle of Man that has been focused on developing such apps using blockchain technology. Credits, has been working with the government on the Isle of Man to develop “The Federated Know your Customer” app that was demoed at the recent Misys World Trade Symposium. This sits on the cloud and has the four elements mentioned above. Credits is also in conversations with the UK government for use cases in regulatory reporting and healthcare. Credits has not been at all focused on creating some cryptocurrency or some decentralized app. They have been thinking differently, in that they are focused on solving specific problems in the infrastructure of capital markets. Digital ID has been their first use case.

We are in the very early stages leading towards an invisible ID for individuals and corporates for the variety of functions in Capital Markets.

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech & operates the Fintech Genome P2P Knowledge Network. Efi Pylarinou is a Digital Wealth Management thought leader.

Watch Season II of the Swiss Bitcoin Reality, with EY leading.

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In the first season of the Swiss Bitcoin Reality show, we saw SBB announcing the introduction of Bitcoin ATMs by using its existing extensive network of ticket dispensing machines. We covered this in The radical change coming to Financial Services & Fintech in Switzerland and Matthias Muller, group innovation manager at SIX, used the witty analogy of The Monkey Business illusion in “Did you notice the Gorilla on stage?” as he (along with all of us) was surprised by this move.

EY 2017: from talk to walk

In the second season of the Swiss Bitcoin Reality show, which starts early 2017, we will be watching another bold move by EY in Switzerland! The plan cannot be seen as an under-the-radar screen move or lets get our feet wet, or lets be trendy.

EY Switzerland is already bold in the first phase already, of the strategic move.

  • A new Bitcoin ATM machine installed in their public office building in Zurich
  • A digital wallet app for all Swiss branch employees
  • EY clients in Switzerland, can pay for consulting services with Bitcoin

The Bitcoin ATM machines can of course, be used by all EY employees but also from any individual passing by.

Any EY employee in Switzerland will receive an “EY secure digital wallet app” that can be used to pay with Bitcoins. This is much like, receiving a corporate email address once joining a company that is secure within the corporate environment. EY is providing all its employees in Switzerland with a specially developed EY digital wallet app (I suspect in collaboration with Bitfury who is their partner on the innovation lab, but have not been able to confirm this) to load on company smartphones.

EY is leading the movement of “Bitcoin goes mainstream” in the both the advisory sector and as a large publicly traded entity that accepts crypto currency payments for its services. It is surpassing Deloitte, who has also installed a Bitcoin ATM machine in the Toronto office of the building housing the Rubix team (Rubix is the team and platform focused on blockchain solutions). Not only because EY’s ATM is in the main office building, and the welcoming – standard employee kit includes EY’s digital wallet app and EY corporate email; but also because EY is accepting compensation for advisory services from its clients in Bitcoin.

EY advisory services in the most recently reported financial year (July 1, 2015-June 30, 2016) have grown 21.7% and reached 210.8 million CHF with total gross revenues were 661.2 million CHF. By inviting clients to pay for EY consulting services in Bitcoin, EY signals its commitment to the digitization underway, its strategic decision to make crypto-currencies integral part of the business offering.

This latter part makes the EY Garage-Lab, not just another safe playground for clients to experiment with blockchain but a safe platform to experiment within a company who is putting its money where its mouth is.

On cryptocurrencies, EY is putting its money where its mouth is!

On cryptocurrencies, EY is boldly moving from Talk to Walk!

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech & operates the Fintech Genome P2P Knowledge Network. Efi Pylarinou is a Digital Wealth Management thought leader.

Insurance helps Bitcoin become safer for mainstream consumers

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Bank depositors get tax-payer funded insurance in many jurisdictions (such as FDIC in America) in case a bank goes bankrupt. Your Bitcoin in Mt.Gox or BitFinex….buyer beware.
People paying by Credit Card can fight back against a fraudulent charge. Once you send those Bitcoin it is like handing over cash…buyer beware.
Bitcoin early adopters and true believers are technically savvy enough to protect themselves in these kind of situations. For 99.99% of the world, a bit more reassurance is needed.
That sounds like a job for Insurance – pay some money for peace of mind. This post looks at how Insurance companies are stepping up to the plate.
Japan 
The most high profile Bitcoin exchange failure was Mt.Gox, based in Japan. So it is no surprise that the first major rollout of Insurance for Bitcoin exchanges comes from Japan
Mitsui Sumitomo Insurance offers insurance to bitcoin exchanges globally. This is not exactly new, but in the past each deal was very custom negotiated. Mitsui Sumitomo Insurance seems to want to make this a more routine line of business.
Brave New Coin has the details, which is useful as the Mitsui Sumitomo Insurance offering to bitcoin exchanges is still only in Japanese.
The plan’s total theft cover ranges from ten million yen (US$88,500) up to one billion yen (US$8.85 million). It also covers loss from internal and external threats, including employee theft, mistakes, cyberattacks, and other unauthorized access.
The first customer is Japan’s largest exchange, Bitflyer. By working with a highly professional exchange, Mitsui Sumitomo Insurance can offer best practice advice. After a number of bitcoin exchange blow ups, the best practices are now well established. If a bitcoin exchange follows these, the risk of loss goes down (which is good for the Insurer) and being insured will help bitcoin exchanges to gain consumer confidence.
This is a critical plank in Bitcoin growing up and becoming mainstream.
The Bank like Bitcoin platforms
For a while we had very distinct companies in each Bitcoin segment – wallet, exchange, payment processing. However, as Bitcoin grows up we are seeing more Bank like Bitcoin platforms in the sense that they offer a full suite of services. These full service Bitcoin platforms such as Coinbase, Xapo and Circle already have insurance. Mainstream insurance offerings will let new players get consumer confidence – just like a small bank being able to offer deposit insurance.
Xapo pioneered the use of insurance because secure storage is their core proposition, using A.M. Best rated insurance providers.

Taxpayers and regulators  should breathe a sigh of relief

There is no possibility of bailout in Bitcoin-land. Private sector Insurance becomes the alternative. This will raise the professional bar for all Bitcoin players. To get Insurance they will have to meet basic standards and without Insurance they won’t get consumer confidence. Regulators and their political masters may then relax a bit more because the risk is left to the private sector to manage. Taxpayers will never be on the hook again in a bailout.

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Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech & operates the Fintech Genome P2P Knowledge platform.

Why the R3CEV Blockchain consortium is splintering & what that signals

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First it was Goldman Sachs to leave R3CEV. Then it was Santander. However you spin it, this is not good.  As Anna Irrera reveals (from her new job at Reuters in New York), R3CEV “has reduced the amount it aims to raise from bank members in its first large round of equity funding to $150 million from $200 million and is changing the structure of the deal”.

Once means nothing, twice is coincidence, three times is a trend. R3CEV cannot afford a third defection.

R3CEV was one of the big Fintech stories of 2016, signalling that banks were embracing Blockchain and making it “respectable” by getting rid of Bitcoin and making it “permissioned” (meaning only banks can participate). 

The R3CEV news is signaling a big shift that we shine a light on in this post.

Bitcoin climbs out of the slough of despond

2016 was the year when Permissioned Blockchain rode to the top of the hype rollercoaster and Bitcoin fell deep into the slough of despond (other than for a few true believers). As we move into 2017, Bitcoin is getting more traction and there is more skepticism about Permissioned Blockchain. The R3CEV news signals this shift under way; but it is not the fundamental reason why we are seeing defections.

The massive payoff from eliminating Settlement Latency in Capital Markets

There is massive payoff from implementing Permissioned Blockchain to eliminate Settlement Latency in Capital Markets (aka Real Time Settlement ). That can lead to Business Process Elimination and huge cost savings. In simple terms, this could give Banks the same efficiency as a born-digital startup. So there is no lack of motivation for the banks.

Who will be the Visa & Mastercard of the Blockchain era?

R3CEV was going for that prize. The idea was a cooperative owned by the banks that would deliver the Settlement Latency prize. In a different era, that is what Visa and MasterCard did.  Dee Hook of Visa explains the Chaordic Organization business model in this paper.

Some of the issues at R3CEV may simply be a haggle over what % founders and management get vs the banks. Given the size of the payoff, this could be resolved with some negotiation. However, there are more structural issues at work as well.

Look at B3i in Insurance

The payoff from eliminating Settlement Latency in Insurance is even bigger than the payoff from eliminating Settlement Latency in Capital Markets.

That is why, in October, Aegon, Allianz, Munich Re, Swiss Re and Zurich launched the Blockchain Insurance Industry Initiative (B3i). At first glance it looks like R3CEV except that it was created by the Insurance/Reinsurance companies directly; there is no profit-seeking company in the middle.

Hyperledger

It is no coincidence that Goldman Sachs was the first to leave R3. Not only is Goldman Sachs the best at technology among the Wall Street Banks, they are also shareholders in Digital Asset Holdings which owns Hyperledger.

Hyperledger is a cross-industry collaborative effort, started in December 2015 by the Linux Foundation to support blockchain-based distributed ledgers.  Linux Foundation is a trusted, independent entity as far as the banks are concerned. If you need a place to hash out standards and protocols, Hyperledger is a good alternative to  R3CEV.

Qui Bono?

The key point is that while the Banks definitely want to eliminate Settlement Latency in Capital Markets using Blockchain, they don’t care who will offer the service. It could be an existing intermediary (Exchange plus Clearing firm) or a startup. Owning shares in that startup if it is R3CEV, is only icing on the cake.

SWIFT – far bigger than R3CEV in Membership and not asleep at the Blockchain switch

SWIFT, derided by many as a dinosaur, has 11,000+ Members in 200 countries. R3CEV had 15 as of August 2016. SWIFT could make it easy for 11,000 members to use Blockchain – and seems determined to do so.

Richard Gendal Brown

I don’t care whether R3CEV goes into the dustbin of history. I do hope that Richard Gendal Brown (CTO at R3CEV) continues blogging about Blockchain and Bitcoin. He is my go to source when I want to understand something complex in that domain. I suspect others rely upon him the same way. Explaining complex subjects in simple ways is hard to do and essential for the ecosystem to develop.

On his blog he is currently writing about how Corda from R3CEV is going open source. This may help, although it might be too late (everything significant in Blockchain is already open source. For a discussion on patents in Blockchain please see this conversation on Fintech Genome.

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech & operates the Fintech Genome P2P Knowledge platform.

 

 

What would Gandhi have thought about Bitcoin?

 

Gandhi and His Spinning Wheel: the Story Behind an Iconic Photo

Bitcoin is anti-establishment. It is feared by most governments and banks. Yet Bitcoin is also a driver of innovation – which drives productivity and wealth creation which is what citizens want their governments to focus on.

That is why the relaxed attitude to Bitcoin in wealthy Switzerland, where the government is respected and the Swiss Franc is trusted, is such a game-changer.

Most other governments have reached phase 3 in Gandhi’s famous quote in their attitude to Bitcoin:

First they ignore you, then they laugh at you, then they fight you, then you win.

Switzerland skipped the “then they fight you” phase – the country sees a win/win scenario.

Paytm says thank you Mr. Modi

Lost in the US election news cycle, was a story from Mahatma Gandhi’s country that was quietly almost as earth shattering as Trump’s surprise victory.

In an effort to control the black economy (read, collect more tax revenue), the Modi government did something that shook faith in Fiat currency. The government simply declared that 500 and 1,000 Rupee notes were no longer legal tender. Why is a bank note worth money? The answer is because we all agree that it is because government backs it with some variant of “I promise to pay the bearer on demand the sum of…” The Modi government move, labelled demonetization, breaks that contract with the people.

Indian people have always loved gold as a reliable store of value. Unlike gold, Bitcoin does not look good with a sari and won’t be any fun at a wedding, but it is a controlled supply store of value that no institution can take from you.

So, the Modi government just gave a huge boost to digital cash – perhaps not what was intended.

Nearly two years ago we reported about India’s first Fintech Unicorn, Paytm.

Paytm is not Bitcoin but it is digital money that has reached mass scale in a huge market.

Unlike some wounded Unicorns, Paytm recently raised a lot more money – $300m at a $5 billion valuation – which is a massive round for India.

According to Hindustan Times, Paytm transactions exceed combined usage of credit, debit cards in India.

Paytm is seizing the day with a new ad targeting demonetization that has ignited controversy (read, free media).

For a while, India was making all the right moves to foster innovation such as:

Digital Identity for the Unbanked

Payment Bank Licenses

Now, India has lurched towards control. They are not alone.

America goes after Coinbase

The IRS in America “has demanded bitcoin trading site Coinbase to provide the identities of all of the firm’s US customers who made transactions over a three-year period, because there is a chance they are avoiding paying taxes on their bitcoin reserves.” As this excellent Motherboard article explains:

“In bitcoin-related investigations, authorities will often follow the digital trail of an illegal transaction or suspicious user back to a specific account at a bitcoin trading company. From here, investigators will likely subpoena the company for records about that particular user, so they can then properly identify the person suspected of a crime.

The Internal Revenue Service, however, has taken a different approach.”

In short, regulated Bitcoin businesses have to help the tax collectors – “if you want a license, this is your job”.

Tunisia = nearly but not quite

In December 2015, headlines declared Tunisia to Replace Its National Digital Currency, eDinar, With Blockchain-Driven Monetas Currency

The romantic in me really wanted this story to be true. The Arab Spring began in Tunisia. When Muhammed Al Bouazizi’s attempts to earn a living in the streets of Sidi Bouzid in central Tunisia were halted by a police officer who seized his goods, his rage and frustration led him to set himself on fire in front of a government building. He remained in hospital for 18 days with severe burns and died on January 4th 2011. Ten days later President Zine El Abidine Ben Ali fled to Saudi Arabia and within another 10 days on #Jan25 the Egyptian revolution began.

It would be epic if Tunisia embraced cryptocurrency and became a hotbed of Fintech innovation and wealth creation in a poor country. This story touches on two themes we cover on Daily Fintech:

– Financial inclusion through mobile money.

– The mainstreaming of the Blockchain revolution.

Sadly, we learned that the December 2015 Press Release jumped the gun. It has not yet happened as described.

Maybe it will happen further south in Africa.

Zimbabwe – and then you win?

At the polar opposite of Switzerland is Zimbabwe – the country synonymous with hyperinflation in the modern era. There the government has almost given up on Fiat currency – the people certainly have. This could be the “and then you win” ending.

If money printing leading to hyperinflation is your monster from the deep lagoon, Bitcoin’s controlled circulation  (“they ain’t making any more of it”) could be your savior.

 BitMari (a Pan-African Bitcoin wallet provider) raised money for the Zimbabwe Women Farmers Accelerator and used Bitcoin to fund the effort.

BitMari has the delicious hash tag – #decoloniseyourlife – which Gandhi would have approved of.

This story seems to come from our AfriCoin science fiction fantasy from the summer of 2015.

If Bitcoin can be used as a local currency, it enables remittances via Bitcoin, a long held dream that has been killed by the off ramp regulatory problem

So we reached out to William Nyamukoho, the Fintech Genome moderator who is based in Zimbabwe, to find out what he is seeing on the ground. This is what he told us:

“Zimbabwe last had its own currency in 2009. It then adopted a multi currency system which was dominated by the USD. In 2016 Zimbabwe finds itself with a cash shortage as demand grew larger than supply, mainly because the Reserve bank of Zimbawe was not allowed to print the USD to ease the cash crisis (no financial easing was possible). Recently Zimbabwe has been moving to a cashless society dominated by plastic money and something called “bond notes“. These bond notes are designed to ease the cash shortage, are legal tender only in  Zimbabwe and trade at parity with USD.

This history has paved way for Bitcoin to be adopted in Zimbabwe, even though people are sceptical about any new developments in financial engineering after the recent history of hyperinflation.

 Bitcoin seems to be a good way to protect wealth from the bond notes, which only work in Zimbabwe.”

Those who are moving in the same direction with the rest of the world, who  believe that autarky is not an option in this modern globalized era, are starting to store their wealth in Bitcoin” 

China and control

When it comes to control, the Chinese Communist Party wrote the manual.

Asian countries learned to love capital controls during the Asian Financial Crisis of 1998. Those without capital controls – such as Korea, Thailand and Indonesia – suffered deeply as hot money fled at the click of a mouse. Those with capital controls – such as China and India – escaped relatively unscathed.

Today the problem is the other way round. The boom and bust cycle in China has a simple explanation. Chinese people can only invest in China. So they ride investable assets up to crazy heights and sell fast and hard when it starts to go down. In a free economy we still have booms and busts – but we have options that smooth the cycles to some degree. If we think one market is overvalued we can move capital to a market that is undervalued. China arresting short sellers does not seem like a good solution.

The Chinese people, faced with this problem, have turned to Bitcoin as one way to get money out of China. The government is vehemently opposed to Bitcoin. China is still very much in the “then they fight you” phase (and governments do win sometimes despite Gandhi’s famous phrase).

Regulatory competition

Winning hearts and minds of entrepreneurs was not on the job description of regulators when they signed onto the job, but now they are getting mixed messages from their political masters:

A. Control the money supply and tax collection process and stop bad actors

And

B. Open up to innovation as that drives productivity and well paid jobs and that is what our citizens want.

Since this post in January 2015, we have seen many moves on the Fintech innovation front by regulators in UK, Singapore and Switzerland and we expect this trend to continue as governments seek the magic quadrant – enough control while also fostering innovation.

Bitcoin miner next to spinning wheel

Gandhi was into self sufficiency. While deeply spiritual, he was also very practical. So I suspect that a modern Gandhi would have a Bitcoin miner next to his spinning wheel (as long as mining does not become something only giant data centres can do, which is another story).

Image Source

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech & operates the Fintech Genome P2P Knowledge platform.

The future of Blockchain and Insurance one year later

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During January 2016, we published What does the future hold for blockchain and Insurance?

About one year later, this post looks at what happened during 2016 and what is likely to happen in 2017.

The January 2016 post explains the value thesis of Blockchain in Insurance. It also mentions 5 pioneering ventures. In this post we take a “whatever happened to” look at what those 5 companies.

One trend we did not foresee in January 2016 was the big move by Reinsurance into Blockchain. In this post we explain the value thesis behind this move and describe what happened on this front in 2016.

Beware the bleeding edge of technology risk. In January 2016 we, like many others, were excited by the potential of Ethereum, but it was a difficult year for that platform. This left many ventures that were counting on Ethereum in a difficult spot.

The 5 Blockchain Insurance pioneers in January 2016

These were the ones we profiled in our January 2016 post:

Dynamis

SmartContract

Rootstock

Everledger

Tradle

Sadly I did not find any funding announcements for any of them (if we have missed any announcements of funding other progress please tell us). They might have been too early. Another factor may have been that investors saw what the incumbents were far from asleep at the switch.

Enter the Reinsurance dragon

This was our journey of discovery:

Feb: we interviewed Oliver Werneyer at Swiss Re. Takeaway: Reinsurance could provide a platform for innovation.

In April we explained why Blockchain may transform Insurance before Banking. This was where we described the 3 layer stack and the put some color on the idea of Reinsurance as a platform:

  • Layer # 1: Brokers. Their job is to gather premiums from customers.
  • Layer # 2: Insurance Companies. Their primary job is claims processing. They take in premiums via brokers, invest the cash flow and pay out claims when needed.
  • Layer # 3: Reinsurance Companies. They are the payers of last resort. They insure the insurance companies. Their job is to have enough capital to pay out claims, even if the models did not predict the volume of claims.

May: we described how claims could be paid out automatically based on smart contracts

This holds out a win/win promise. Customers know that payout is automatic and immediate (no more hassling for payout during the most stressful times when the bad event has actually happened). Insurance companies get two benefits:

  • Elimination of fraud. The Insurance company does not rely on the customer’s version of truth. There is independently verified data.
  • Elimination of claims processing cost. This is a consequence of elimination of fraud.

For this to work, it has to be binary simplicity. An algo has to make a yes/no decision instantly. Something with complexity (such as who is at fault in an accident or whether a medical procedure is covered) needs human intervention.

September: we reported on one real live use in catastrophe swaps insurance

October: the B31 Blockchain initiative is launched by 5 Insurance companies (Aegon, Allianz, Munich Re, Swiss Re and Zurich).

November: at an event in Zurich, presentations by SwissRe and Accenture taught us that the average time for claim to cash is about 4 months. This is where we learned about Settlement Latency in Insurance and the huge payoff from adopting Blockchain

If settlement takes 4 months (from claim to cash), then all the companies in the process have to manage counterparty credit risk and all the associated processes.

Even bigger than this is the big pay-off for consumers. This is missing from the move to real time settlement in the capital markets. Going from T+ 2 or T+3 to real time is good but going from 4 months to a few days is massive. Imagine putting in an insurance claim and getting a message a few hours later saying “your claim has been approved, with some deductions detailed below, you will be paid tomorrow”. When you have suffered a tragedy that kind of immediacy is critical.

This becomes feasible because we move from a consumer defining the event (crash, fire, hurricane etc) to those events being validated data events stored on the Blockchain. Then the consumer simply says “policy # xxx suffered a loss of yyy in event aaa”, with each of those being verified data points in an immutable database that all have access to.

All the participants – customer, broker, insurer, reinsurer – will apply their processes to those data points.

No amount of improved mobile front end will make much difference to the full lifecycle experience, but bringing the time from claim to cash from 4 months to days or hours will be a total game-changer. That is why we envision Blockchain getting its first big use cases in Insurance (before we see big rollouts in banking).

2016 was the year when Insurance started serious work on Blockchain. I believe that 2017 will see sme significant rollouts.

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Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech & operates the Fintech Genome P2P Knowledge platform.