Saturday, 25 May 2019

A Analysis

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 In Part 1, I cited to the New York Department of Financial Services press release regarding the BitLicense proposal, or what some have identified as Superintendent Benjamin Lawsky's attempt to "regulate Bitcoin out of existence". In it, Lawsky is quoted as saying, "We have sought to strike an appropriate balance that helps protect consumers and root out illegal activity – without stifling beneficial innovation. Setting up common sense rules of the road is vital to the long-term future of the virtual currency industry, as well as the safety and soundness of customer assets." (Emphasis added.) The proposed scheme tells a very different story.

I'm not sure what is meant by "root out illegal activity", as that turn of phrase is somewhat circular. Illegal activity is what the state says is illegal, and Lawsky's proposal effectively makes all bitcoin-related activity not centrally managed by his department illegal. But let's assume Lawsky sincerely wants to prevent consumer abuses. Regulators typically claim that they can protect market participants in two ways: 1) by discouraging more sophisticated parties from harming less sophisticated ones; and 2) by preventing those seeking to harm others from participating in market in the first place. To accomplish this, the regulator has two hammers: punishing previously unpunished behavior and frustrating entry into the legal market.

Lawsky's proposal is relatively silent on the topic of punishments, but I think we can safely assume that once the administrative rules are drafted to "implement" BitLicenses, we will see penalties for failure to comply. That being said, I can't think of a single jurisdiction in the United States that doesn't already afford both civil and criminal penalties for usurping or misusing the property of another. Any first-year law student should be able to tell you the basic elements of theft, fraud, conversion, and negligence. In other words, we've had a basic legal framework to punish bad actors for literally hundreds of years.1 As such, any license-specific penalties will likely behave more like barriers to entry than traditional punishments.

Regarding those barriers, if consumer protection really is the desired outcome, it seems to me that preventing abuses of the agency relationship should be the primary, if not, only focus of any proposed regulation. Even assuming that compliance with licensing requirements roughly correllates to behaviors alleged as beneficial2, targeting market newcomers often (perversely) harms consumers by allowing established market participants to continue to extract rents while frustrating innovations which may prevent those very abuses.

Agents are entrusted with the control of the property of the principal. It is this control which of paramount concern, the misapplication of which (either intentional or negligent) is as old as the concept of property itself. Theft of valuable, yet fungeable commodities is particularly tempting ("Slick" Willie Sutton is often attributed with coining the robber's maxim of targeting banks because "that's where the money is", presumably where he could most efficiently usurp control of it). A licensing scheme purporting to prevent abuse of the agency relationship, but which targets behavior in which third parties have little-to-no discretion with or control over another's property are deserving of a high degree of scrutiny and skepticism.

In lay terms, there are three questions to be answered when selecting any agent: 1) do you understand what the agent is promising it will do your behalf; 2) once authorized to act, can you trust the agent to behave as promised; and 3) will the agent put your interests above its own? Obviously one must be able to answer "yes" to the first question before being able to properly consider the second. The third is more subtle. Can BitLicenses help consumers navigate these questions? Let's dissect some of the actual language of the proposal to find out.

Let's start with some of the more critical sections from Section 200.2 Definitions, which we'll examine slightly out of order for ease of readability.

(m) Virtual Currency means any type of digital unit that is used as a medium of exchange or a form of digitally stored value or that is incorporated into payment system technology. Virtual Currency shall be broadly construed to include digital units of exchange that:

...

3. may be created or obtained by computing or manufacturing effort. Virtual Currency shall not be construed to include digital units that are used solely within online gaming platforms with no market or application outside of those gaming platforms, nor shall Virtual Currency be construed to include digital units that are used exclusively as part of a customer affinity or rewards program, and can be applied solely as payment for purchases with the issuer and/or other designated merchants, but cannot be converted into, or redeemed for, Fiat Currency;

We'll explore this in more detail below, but what's interesting to me about this definition is who it sweeps in and who it attempts to exclude. This strongly suggests that the author: 1) doesn't understand modern cryptocurrency technology; 2) someone who wants cryptocurrencies—and cryptocurrencies alone—to go away without disrupting existing markets; or 3) both.3

So far, BitLicenses appear less about curbing abuses in agency relationships, and more about targeting a specific set of technologies. Let's explore what behaviors involving that technology are covered.

(l) Transmission means the transfer, by or through a third party, of Virtual Currency from one Person to another Person, including the transfer from the account or storage repository of one Person to the account or storage repository of another Person;

(n) Virtual Currency Business Activity means the conduct of any one of the following types of activities involving New York or a New York Resident:

1. receiving Virtual Currency for transmission or transmitting the same;

Transmission would require that the transmitter be licensed under the proposed scheme. It is that it is not clear what is meant by "transfer", much less "transfer from the account or storage repository...to...another". While these terms may make sense in traditional banking, where an agent holds your funds for you, and often maintains greater control over those funds than you do, it's unclear what these mean in terms of modern cryptocurrencies.

To be fair, this might be Lawsky's attempt to address a Mt. Gox style failure. It is useful to recall that Mt. Gox did not expose any of the low-to-zero-trust features of the Bitcoin protocol, and behaved very much like a traditional bank. And (also like a bank) as it failed, it usurped control over its account-holders' property and delayed (and eventually prevented) withdrawals (turning off user's ability to perform Bitcoin outgoing transactions from their own accounts, refusing to honor wire transfer requests, etc.).

With the Bitcoin protocol, the only way to transfer ownership over some of my bitcoins to another is "by or through a third party", quite a few third parties, actually (packet carriers, miners, transaction broadcasters, etc.). One of the most significant and basic Bitcoin innovations comes from the fact that I can do that without relinquishing control of those bitcoins to any of those third parties. The proposed BitLicense definition makes no distinction between those who can exercise control over how and where coins are spent, and those who are merely retransmitting or honoring the instructions of those exercising such control, such as peer-to-peer relayers or miners.

This would be like requiring telephone companies to register as finanical institutions because people can check their bank account balances and provide wire instructions over the phone. Requiring a BitLicense for all parties participating in transmission is equally absurd. As proposed, the scheme may require Verizon to become a licensee for transmitting packets containing Bitcoin transactions over its network (which would mean it would have to maintain records of all such packet transmissions to remain compliant).

Again, if we're really concerned about protecting consumers in general, and the agency problem in particular, transmission is irrelevant. What matters is control. The only thing served by regulating transmission is protectionism.

2. securing, storing, holding, or maintaining custody or control of Virtual Currency on behalf of others;

The proposal does not further define what is meant by "securing, storing, [or] holding [Virtual Currency] on behalf of others". What about the authors of the Bitcoin Qt client which "secur[es]" a user's bitcoins on that user's own computer? What about a hard drive or flash drive maker who enables "stor[age]"? What about a web wallet provider for whom it is cryptographically impossible to spend coins without the customer's input? Does anyone with a copy of the blockchain "store [Virtual Currency] on behalf of others"? Would requiring BitLicenses for any of these parties help consumers, or is it merely a way to regulate away all cryptocurrency-related activity?

I think "maintaining custody or control of Virtual Currency on behalf of others" actually does start to get at the heart of the agency problem. The issue I take with this proposal is that it does not define "custody" or "control", and lay definitions are insufficient to address the nuances of Bitcoin (below, I propose a cryptocurrency-appropriate definition).

3. buying and selling Virtual Currency as a customer business;

Again, what consumer protections are afforded where one buys and sells cryptocurrencies without also being able to exercise control over others' property to be bought or sold? As written, it sweeps in face-to-face dealers, which is nonsensical. If I am giving you cash in person while you transfer bitcoins to me, what consumer protections are afforded by requiring me to have a license? Will BitLicenses protect consumers against failing to compare prices? Will BitLicenses protect consumers against Bitcoin volatility? Of course not.

4. performing retail conversion services, including the conversion or exchange of Fiat Currency or other value into Virtual Currency, the conversion or exchange of Virtual Currency into Fiat Currency or other value, or the conversion or exchange of one form of Virtual Currency into another form of Virtual Currency; or

This is likely a special case of #3, and is frought with the same problems. I would be more sympathetic to this definition if (and only if) it applied to third party intermediaries requiring that the owner of the bitcoins give up control (like Mt. Gox), but the proposal doesn't make that distinction. If it did, this would be a special case of #2 instead of #3.

5. controlling, administering, or issuing a Virtual Currency.

Everyone who possesses any quantity of a Virtual Currency controls it. Anyone who effects its transfer (or even relays a transaction) administers it. Issuance alone should not require a license unless the issuer also exercises control over others' coins. Otherwise a kid experimenting by creating an altcoin in his basement is technically required to have a BitLicense.

So far we've seen that a bulk of the language isn't directed toward consumer protection at all, but rather merely at excluding almost all participants who transact with cryptocurrencies from competing with established market participants.4 Whether or not it was intended is irrelevant, the effect is the same.

Can we fix it? I don't know. I'm reluctant to sit down at a table where the game has such a high house edge, but as an intellectual exercise, I would start with the following. First, I would get rid of requiring a BitLicense for transmission altogether. Second, I would only impose licensing requirements upon those parties acting as agents capable of exercising complete control over their principals' property. Third, I would define control in a very specific way, such that intermediaries who expose low-to-zero-trust features to their principals would not require licensing:

(l) Transmission means the transfer, by or through a third party, of Virtual Currency from one Person to another Person, including the transfer from the account or storage repository of one Person to the account or storage repository of another Person;

(n) Virtual Currency Business Activity means the conduct of any one of the following types of activities involving New York or a New York Resident:

1. receiving Virtual Currency for transmission or transmitting the same; 2. securing, storing, holding, or maintaining custody or control of Virtual Currency on behalf of others; 3. buying and selling Virtual Currency as a customer business; 4.or 2. performing retail conversion services as an agent maintaining custody or control of Virtual Currency on behalf of others, including the conversion or exchange of Fiat Currency or other value into Virtual Currency, the conversion or exchange of Virtual Currency into Fiat Currency or other value, or the conversion or exchange of one form of Virtual Currency into another form of Virtual Currency; or 5. controlling, administering, or issuing a Virtual Currency.

(o) Maintaining Custody or Control of Virtual Currency on Behalf of Others means:

1. possession of the ability by an entity other than the title holder to spend Virtual Currency without an affirmative act by the title holder or by a system within the possession or control of the title holder; or

2. possession of the ability by an entity other than the title holder to indefinitely prevent or postpone the spending of Virtual Currency without an affirmative act by the title holder or by a system within the possession or control of the title holder.

So far, we've only explored a small but critical part of the proposal. My suggested amendments are likely deserving of futher wordsmithing, but hopefully you can appreciate their intent.

What are your thoughts? We want to know, but more importantly, we want you to share them with Superintendent Lawsky.


1 Even assuming punishment is distributed fairly (which it almost never is), the study of the effectiveness of punishment as a deterrent is a complicated one, and cannot be adequately addressed here.

2 This requires a huge leap of faith on our part, but for now, we will overlook it. "The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design." (F. A. Hayek, The Fatal Conceit.)

3 As an aside, there is an external market for in-game currencies in almost every video game that achieves a minimal threshold of popularity. Even if game publishers don't manage those markets, they potentially run afoul of this draft proposal as issuers irrespective of whether they ever deal in cryptocurrencies like bitcoins. Despite the apparent attempt to let this market alone, the author inartfully sweeps it in anway. Whoops.

4 If you think I'm being unfair, then take a look at Section 200.3 License, which provides exceptions to the licensing requirement. It reads, in pertinent part:

(c) Exemption from licensing requirements. The following Persons are exempt from the licensing requirements otherwise applicable under this Part:

1. Persons that are chartered under the New York Banking Law to conduct exchange services and are approved by the superintendent to engage in Virtual Currency Business Activity; and

2. merchants and consumers that utilize Virtual Currency solely for the purchase or sale of goods or services.

It is dubious to argue the proposal isn't protectionist either in intent or effect, when the single largest lobbying power in the entire market is explicitly exempted from the entire scheme. Exempting banks makes no sense unless the goal is specifically to exclude others from the market. If banks already meet the requirements, they should be required to say so under penalty of perjury in their BitLicense applications, just like everyone else, if only to create a transparent record so consumers (remember them?) can know who is licensed to participate in this market. I would argue that Section 200.3, subdivision (c)(1) should be stricken in its entirety.

And remember, there is almost no such thing as #2. Anyone who operates a wallet that relays transactions potentially engages in "trasmission[s]", which would require licensing under the proposal, even if use of that wallet is solely intended by the user to purchase or sell goods or services using cryptocurrencies. Even if the user chose a non-relaying wallet or intermediary processor, the wallet author or processor would likely be required to have a BitLicense under the current proposal, which pretty much ensures that the only choice merchants and consumers will have are those provided by those who are also exempt under #1, and we all know how trustworthy they are when it comes to other people's money....

Are you interested in a more competitive financial landscape that breeds better pricing and superior services? Well, now you can do something about it.

  1. Step oneDownload the future of money, now! See for yourself what the banking industry is up in arms about. More importantly, witness first hand, the power of Bitcoin technology. 
  2. Step two: Stop the BitLicense proposed legislation that simply furthes the forces that allow these price increases in the face of global price deflation.  We strongly urge you to  voice your own opinions to Superintendent Lawsky, the man who has the authority to put a stop to this overpricing power (althought current actions are heading in the opposite direction) right now.
  3. Step three:Become proficient in the “new” way of performing trades of value. I’m quite confident that once investors, traders, speculators and those in need of hedging services become aware of what’s possible with programmable money, there’s no turning back – regardless of legislation. Think of how far Uber has gotten in the livery industry simply by offering superior services! Look here for a strong example, and remember this is not going though and exchange, is peer to peer, and has less credit or counterparty risk than any comparable product we can think of. Download the future of money, now and experience a new way of trading value - witness a simultaneous increase in value and decrease in price over existing finacial services by taking advantage of the Bitcoin protocol. The Bitcoin protocol is to the banking industry what the Internet protocol was to the media industry.

 Illustrative nvestment strategy 8: Trade based on decline in Iron Ore Prices

An individual can place bet on expected fall in iron ore prices by taking a long position in Steel producer equity stock like Tata Steel while simultaneously taking a short position on iron ore futures

SWAP CONTRACT DETAILS

RECEIVE: TATASTEEL.NS

PAY: TION13.NYM

UltraCoin Long steel short coal trade

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Following on the footsteps of "BitLicense Part 1 - Can Poorly Thought Out Regulation Drive the US Economy Back into the Dark Ages?" by our CTO Matt Bogosian, I'd like to explore the real world effect of ill planned regulation vs the benefit of letting innovation prosper.

Matt compared the proposed "BitLicense" with a theoretical "PacketLicense" issued in 1994 which, if using the same proposed language as the proposed rules today, would have had the Internet landscape go from looking like this...

to this... 

What wasn't covered in that entertaining and thought provoking intro was the actual cost of giving the banks - or any group - an effective monopoly over a business segment while technologies such as the Internet protocol or Bitcoin protocol race to make the world a more effecient place. Case in point, the Internet, unfettered and unencumbered by legislation that choked innovation has increased efficiencies and dropped the prices of practically every industry that it has even came near.

This is an excerpt from a Slashgear article in 2011:

Blockbuster went into bankruptcy after its expensive rentals and high late fees helped to drive the average consumer to kiosk rentals and streaming services. Blockbuster was for a long time the biggest rental chain in the country and had multiple stores in many areas. The company isn't alone, the entire DVD market is seeing profits drop. Blockbuster was recently purchased by Dish Network and the rental store has now announced some changes to their in store rental policies.

Blockbuster is lowering prices to appeal to users that have been renting elsewhere. As of May 27, the price of "thousands" of in-store movie rentals dropped to 99 cents per day. The price on new releases was also reduced. The new price is $1.99 for the first day and then 99 cents per additional day. The price of just released films will be $2.99 for day one and then 99 cents daily after.

That's right! Blockbuster DROPPED prices to 99 cents per day, per movie. How does that sound to you? Well, those companies that took advantage of the Internet protocol (and without the benefit of a PacketLicense, like was proposed by the NY DFS) are the cause of Blockbuster's price drop.

Netflix

Netflix charges $7.99 per month for tens of thousands of movies, to be watched on demand and as often as you wish - streamed to your desktop or portable device. Now, let's look at this from an analytical perspective. Without even bothering to adjust for inflation, Blockbuster (even after a dramatic price cut) is literally multiples more expensive that Netlfix. Why? The technological advances of the Internet protocol were allowed to be leveraged unfettered and superior business models simply displaced the inefficient, legacy business models. This would not have happened if Netflix had to have a PacketLicense, along with the draconian (at least to sparsely funded startups) measures that are proposed to go along with the BitLicenses. As a matter of fact, if the PacketLicense would have been in effect, Blockbuster would not have went out of business and it would not have faced competition from innovative companies such as Netflix. As an additional matter of fact, you would probably be paying $3.50 per movie rental, per day (as in before Blockbuster dropped its fees) as compared to $7.99 per month for all of the movies you can consume per month. We're talking a 30x difference in price for avid movie watchers - and this doesn't tell the whole story because real wages increased by a 1/3rd percent, making the Netflix price discounts even steeper in reality. In addition, you'd probably be renting these movies through a bank (the NYDFS Bitlicense excludes banks from the rigors that Bitcoin startups are held to)!

These rapid drops in pricing due to the Internet protocol affects more than just movie rentals. Look towards the ubiquitous smartphone industry. In 2011, An unsubsidized iPhone 4S cost anywhere between $649 and $849.

Today you can get better functionality in an LG D90 Android phone for $179. I can personally attest to this because I bought 3 of them for less than the cost of the bottom of the line iPhone from 2011 model year (which I purchased as well).

LG Optimus L90

The cheaper phone is faster, has a better screen, expandable memory and a vastly superior OS and incomparable battery life (at least as compared to the iPhone).

BUTTTTTT...... When you look towards the financial industry you find protection by clauses such as those proposed in the NY DFS proposed BitLicense. These proposed protections are actually coming at the cost of innovation, the same innovation that Netlfix and LG brought to their customers. As proposed, the NYS DFS proposes Bitcoin startups have:

  1. 100% reserves,
  2. inability to invest in the currency one does business in,
  3. fingerprinting requirements for ALL employees,
  4. bond requirements,
  5. KYC and AML requirements, etc. - among other things.

All of these requirements are waived for anyone with a banking license (Hmmmm!) but required by startups with a mere $100,000 in funding. So what does such protective regulation do for banks and the consumer in the face of Internet and now Bitcoin protocol technology driving down prices EVERYWHERE else?

Just Google it?

Seriously? Bank Fees Shoot Up Again - Business - Time

business.time.com/2012/08/20/seriously-bank-fees-shoot-up-again/ 
Aug 20, 2012 - Not only is it harder to find a free checking account, but fee increases have made it more challenging for people — especially those in lower ...
  • Bank Fees: Big Banks Charging Higher -- and Weirder ...

    business.time.com/.../youll-never-guess-what-banks-have-started-ch...
    Feb 20, 2013 - Sovereign Bank Increases Fees, Adds New Ones Boston Globe; UnionBank ... the airline model, where everything — even a shorter hold time — has a price? ... It will show up as a debit when it comes through your account.
  • Get ready for increased bank fees - CreditCards.com

    blogs.creditcards.com/2013/11/get-ready-for-increased-bank-fees.php
    Nov 15, 2013 - You may want to take a closer look at your bank's fee schedule next year ... are cautiously increasing the fees they charge on a variety of services in order to make ... interest rates, since they now have to give 45 days' notice ahead of time. ... they used to get away with, such as high over-limit and late fees.
  • Fees for Banking Services 2013 Report...

    www.bankers.asn.au/.../Fees_for_Banking...
    Australian Bankers Association
    This resulted in a higher than usual increase in bank service fee revenue .... Over this time average growth rate in fees paid by large businesses has been 13.6% ...
  • online.wsj.com/.../SB1000142405297020343690...
    The Wall Street Journal
    Already, banks have introduced new fees for wire transfers, certified checks and banking through tellers. Others have raised monthly maintenance charges on ...
  • Banks Quietly Ramp Up Consumer Fees - NYTimes.com

    www.nytimes.com/.../banks-quietly-ramp-up-consu...
    The New York Times
    by Eric Dash - Nov 13, 2011 - Bank of America abandoned its $5 a month debit card usage fee in late ... new charges or taking fees that have always existed andincreased them, ... so over time you win more business and make more money,” said Todd ...
     
    So, why and how do banks get away with charging higher fees to their customers and consumers when the rest of the world benefits from lower fees AND superior products due to Internet and Bitcoin protocol technology? I suggest you ask the banking regulators who, whether purposely or inadvertantly, protect the banking cartel's oligarchy and effectively pass the cost of such on to you - the banking consumer. This costs EVERYBODY more - consumers, businesses, investors, speculators and savers. 
    Do you want to do something about it? Do you want to, as a banking customer or client, want to start spending less money rather than more just like those Netflix and smartphone and (fill in the blank, it's just about the whole world, sans bank customers)?
    • Well, now you can do something about it.
    • Step oneDownload the future of money, now! See for yourself what the banking industry is up in arms about. More importantly, witness first hand, the power of Bitcoin technology. 
    • Step two: Stop the BitLicense proposed legislation that simply furthes the forces that allow these price increases in the face of global price deflation.  I strongly urge you to  voice your own opinions to Superintendent Lawsky, the man who has the authority to put a stop to this overpricing power (althought current actions are heading in the opposite direction) right now.  
    Step three:Become proficient in the “new” way of performing trades of value. I’m quite confident that once investors, traders, speculators and those in need of hedging services become aware of what’s possible with programmable money, there’s no turning back – regardless of legislation. Think of how far Uber has gotten in the livery industry simply by offering superior services! Look here for a strong example, and remember this is not going though and exchange, is peer to peer, and has less credit or counterparty risk than any comparable product I can think of.

     Investment strategy 8: Trade based on decline in Iron Ore Prices

    An individual can place bet on expected fall in iron ore prices by taking a long position in Steel producer equity stock like Tata Steel while simultaneously taking a short position on iron ore futures

    SWAP CONTRACT DETAILS

    RECEIVE: TATASTEEL.NS

    PAY: TION13.NYM

    • UltraCoin Long steel short coal trade
    UltraCoin Long steel short coal trade

     

     
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An Op-Ed piece penned by Veritaseum Chief Contracts Officer, Matt Bogosian

This past weekend (despite American Airlines' best efforts), Reggie and I made it to the Second Annual North American Bitcoin Conference in Chicago. While there were some very creative (and very ambitious) ideas on how to try to realize the disruptive Bitcoin protocol, one of the predominant topics of discussion was New York Superintendent of Financial Services Benjamin Lawsky's proposed Bitcoin regulations (the BitLicense proposal) - percieved by many participants at the event as an apparent attempt to regulate Bitcoin out of existence.

Even assuming that the entities sought to be regulated under the (seemingly draconian) BitLicens[ing] proposal qualify as "financial services institutions" (which I think is tenuous and highly debatable), to say that the proposal is in violation of New York's statutory mandate, "[t]o encourage, promote and assist ... other financial services institutions to effectively and productively locate, operate, employ, grow, remain, and expand in New York state ... [and] ... [t]o establish a modern system of regulation, rule making and adjudication that is responsive ... to the needs of the state's consumers and residents," (NY Fin. Svcs. Law, § 102(a)emphasis mine), is not only an understatement, it's probably totally irrelevant. Courts typically (and perhaps frustratingly) don't second guess legislators and regulators on whether their laws have any correlation to any stated goals, even if those laws have the exact opposite effect of what was alleged as intended. Instead, courts leave that to the voters, effectively saying, "If you don't like the law, change the legislator," and we all know how effective that is.

In other words, Orwell was (and still is) right. The stated purpose of BitLicenses is not corollary to the apparent purpose, which is to maintain the status quo. The status quo doesn't contemplate disruptive innovations like the blockchain. Unless and until a higher authority intervenes ("higher authority" perhaps referring to you, the consituent, or the particularly the avid and concerned social media user), Lawsky's proposal, if achieved, will quite likely end (or at least drive underground) the most significant economic and technological breakthrough known to this century, not only in New York, but very likely the United States.

Imagine if Lawsky had been Superintendent in 1994. Imagine that (for whatever reason) Lawsky felt compelled to frustrate the dissemination of another set of disruptive innovations known as the Internet Protocols.

 

World Wide Web timeline

By analogy, imagine that he proposed a regulatory scheme known as "PacketLicense", wherein anyone routing IP packets that arrived at or passed through devices located in or belonging to residents of New York had to acquire a PacketLicense (unless they were a New York bank, or a retailer incorporated in New York), which (in small part) involved fingerprinting everyone employed by the owner of the device, or any affiliate of that owner. In retrospect, we would laugh at its absurdity, and likely recoil in horror imagining the economic Armageddon such a regulation would cause.

World Wide Web timeline as per Lasskeys Vision

But that is precisely what Lawsky is trying to do with the blockchain. Others have provided extensive treatment on various parts of the proposal. Over my next few posts, I will add my voice to that chorus by providing detailed analysis (and possible fixes) for some of the requirements that I find particularly bothersome. Stay tuned.

In the meantime, if you don't want the natural evolution of the Internet to look like the graphic above, I strongly urge you to voice your own opinions to Superintendent Lassky.

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UltraCoin Public Info Deck 1.0 1

Above is a screenshot of the Veritaseum UltraCoin client performing a swap of a bitcoin British pound forex pair for GLD (the gold ETF). This is interesting stuff, eh? Something you definitely couldn't do at your local investment bank without setting up an expensive (as in 2-12%) OTC swap in which you can't get out of until you start losing. 

Consider this an example of what I consider the power of Bitcoin to be. To put this accomplishment into perspective, the vast majority of all of the big Wall Street bank (Goldman, JP Morgan, Morgan Stanley, etc.) clients don't have access to 60,000 products, and if and when they do, it's at prices that are several multiples of what you can achieve via exposures with this download. We have essentially taken the entire trading capabilities of the big Wall Street banks, converted them into D-I-Y software and facilitated peer to peer trading through the blockchain - dramatically reducing risk, inefficiencies and increasing autonomy. Keep this in mind when someone tells you the primary value of Bitcoin is payment processing. Download the wallet for Windows and Mac here. Get your test coins here (live BTC prototype will be available in 24 hours wherein you can test it with real money).

UltraCoin JPM for GOOG swap Here is an unique swap that sells Google exposure for JP Morgan exposure. If that's not unique and interesting enough as it is, notice the amount of the trade. You can do $5 million trades or .1 BTC (at today's price, roughly $62.39) trades, and do so profitably.

Here's the result of that 5 minute trade. Also visible is the encapsulation of the spread between paper gold (GLD ETF) and physical gold (or at least a future for said gold)...

dcihdhci

 

I invite all to chat with me and my CTO in my suite at the Chicago Drake hotel this Saturday evening (7 pm) over sushi and wine as we discuss and play with the UltraCoin wallet. It's a pure bitcoin wallet (no sidechains, alt coins, or off chain transactions) that can trade exposure to over 58,000 tickers (global equities, currencies, cryptos, forex pairs, commodities, bonds, futures, options, indices, etc.). If you're interested in coming by to chat (it's informal, just me and my tech guy in a suite - but I have room for everyone), email me [reggie at ultra-coin.com].
The app is quite flexible, and is capable of not just exposure trading, but peer to peer zero trust letters of credit, zero trust P2P lending, and micropayments. 

Here is an example of how we could have used the app to save Harvard Univ. a bundle: How Veritaseum's UltraCoin Technology Could Have Saved Harvard Over $1 Billion! http://ultra-coin.com/index.php/homes/item/41-how-veritaseum-s-ultracoin-technology-could-have-saved-harvard-over-1-billion
Reggie Middletons UltraCoin challenge to take any side of any trade - all takersReggie Middletons UltraCoin challenge to take any side of any trade - all takers paper gold vs sot goldShort Tesla Long Ford - UltraCoinUltraCoin going short 30 yr treasury rates and long 2 yr treasury futures

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In the 2008 to 2013 period, Harvard suffered huge losses due to their exposure to interest rate swaps which were used to swap floating for fixed interest rates. Things went downhill when the rates started to collapse and Harvard received a massive margin call on the swaps.

To limit its exposure to the interest rate swaps, Harvard took offsetting swaps, paying a huge premium to the other party. Harvard’s total losses look something like this…

Loss to Harvard = Loss of value of extant interest rate swaps + Premium of Offsetting Swaps + Penalty / charges          payable to the swap issuing entities (JP Morgan and Morgan Stanley)

harvard swap diagram

Our downloadable report illustrates how Veritaseum's UltraCoin peer to peer swap technology could have easily saved Harvard a bundle relative to what JP Morgan and Morgan Stanley charged them. Below is an excerpt from the full report, which is available for free download here.

UltraCoin Couldve Saved Harvard Over A 1 Billion

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My last post on the topic of disintermediation during a paradigm shift was Wall Street Should Be First To Invest In Reggie Middleton's UltraCoin, Much Of It Won't Be Here In 10 Years! I clearly illustrated the potential for growth of Bitcoin related companies and cited statistics for the transformation of the financial industry as we know it today.

This post introduces long form research from the analysts at Veritaseum, the same team that brought you the hard hitting BoomBustBlog research. The first page of the report says it all - "Stress Test on Banks’ Earnings Facing the Veritaseum UltraCoin Value Transaction Platform".

research report cover

Excerpts from deeper into the report...

research report 2research report 3

And of course the inevitable... What happens when a less expensive product is introduced into the market with similar or superior attributes? Margin Compression! We analyzed three big Wall Street banks, starting with the "Riskiest Bank on the Street" (time permitting, reference our hard hitting, prescient research from early 2008).

Veritaseum research report on Morgan Stanley Margin Compression

I invite all to download the free Veritasuem Research Report for July 2014. I also invite all to meet me for the soft beta launch of Veritaseum's UltraCoin Value Trading Platform in my suite at the Drake Hotel in downtown Chicago, the evening of Saturday July 19th (this is also the weekend of The North American Bitcoin Conference in Chicago, where I will be speaking on the topic of money center bank disintermediation.

You will get to touch, play with and trade value via UltraCoin. Below is a screenshot of UltraCoin running on a Mac. I will also be taking applications for large scale beta testers and entities who wish to have customized value trading solutions created for them.

Screen Shot 2014-06-26 at 11.05.24 

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In continuing my PSA on well funded bitcoin startup valuations (reference Imy valuation estimate of Bitpay, a rapidly growing payment processor), I bring a forensic analysis and valuation of Coinbase, likely the 2nd largest money exchanger in the bitcoin business.

 Valuation Case 2- COINBASE

Revenues for Coinbase is calculated based on global monthly transaction size (US$) of the company. Annualizing the transaction resulted in Total transactions for 2014  

As per the information available, Coinbase charges 1% as transaction fee resulting in the revenue of the company.    

Table 3- Revenue Forecast, US$

 
 

2014F

2015F

2016F

 

Annual Transactions*, US$

1,085,488,973

     1,248,312,319

     1,435,559,166

 

Transaction Fee (%)

1.0%

1.0%

1.0%

 

Total Revenue

        10,854,890

    12,483,123

    14,355,592

 

*Growth assumed under moderate scenario

 

As per the news for funding in Coinbase, the valuation of Coinbase ranged between US$140 million – US$1 billion. Based on weighted average (by applying 70% weight to the lower figure in the range), the above valuation is derived at US$398 million. Applying the multiples at which Bitpay and Circle are estimated to have been funded recently (using average revenue multiple of Bitpay and Circle), the valuation based on 2015 and 2016 revenues is as shown below:

Table 4- Relative valuation

Particulars

2015F

2016F

Revenue ($)

    12,483,123

    14,355,592

Multiple Comparable- Bitpay and Circle

16.0x

13.5x

Valuation (US$mn)

                      200.31

                      194.23

 

Of course, we feel that these rapidly growing payment processor companies, although now profitable and expanding their reach like weeds, are barely touching the tip of what the Bitcoin industry will look like just two years into the future. 

Wall street, pay attention!!!

Veritaseum short summmary pic - public.docx Page 01

Veritaseum short summmary pic - public.docx Page 02Veritaseum short summmary pic - public.docx Page 03Veritaseum short summmary pic - public.docx Page 04

See also:

  1. Payment Processors, Patents and a Dollop of Healthy Paranoia
  2. Margin Compression Is Coming in the Payment Processing Space As $100 Million Pours Into Startups
  3. Bitcoin Myth Busting 101

 

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Continuing on the margin compression theme originally laid out in Margin Compression Is Coming in the Payment Processing Space As $100 Million Pours Into Startups, I illustrate mathematically how the bit startups in the Bitcoin space will be forced to reach up the foodchain rungs faster than many think.

Valuation of BITPAY, COINBASE and CIRCLE

This is an exercise to arrive at valuation of three of the well-known Bitcoin applications that have recently been in news for funding from investors. Unlike high-level valuations assigned to these companies we analyzed revenues in much deeper detail, segregating value drivers and revenue streams and projecting them for the foreseeable future. This thus has enabled a more granular valuation than the high-level valuation that we see in the news for these companies in their recent funding rounds. 

Valuation Case 1- BITPAY

BITPAY revenue plan is based on monthly subscription model wherein the company charges $30, $300 and custom negotiated rates that are not published, under different subscription plans.  Currently, Bitpay claims ~30,000 subscribers.

For the purpose of calculating revenue from each plan, total subscribers (30,000) have been segregated under each plan based on their probability of occurrence (and put a nominal fee for ad hoc, a la carte and custom services on the higher ends of the range). Multiplying probable subscribers with subscription fee resulted in total revenue for the company. 

Table 1- Revenue Forecast, US$

 

Subscription Plans

2014F

2015F

2016F

 

     Plan 1

         10,260,000

         11,850,300

         13,310,257

 

     Plan 2

            4,320,000

            4,944,240

            5,501,950

 

     Plan 3

         10,260,000

         11,634,840

         12,826,248

 

     Plan 4

            5,400,000

            6,066,900

            6,625,055

 

Total Revenue

         30,240,000

         34,496,280

         38,263,510

 

As per the news for funding in Bitpay, its valuation is estimated at $160 million. If we apply multiple at which Coinbase and Circle are estimated to have been funded recently (using average revenue multiple of Coinbase and Circle), the valuation based on 2015 and 2016 revenues is as shown below:

  Table 2- Relative valuation

Particulars

2015F

2016F

Revenue ($)

         34,496,280

         38,263,510

Multiple Comparable- Coinbase and Circle

29.7x

25.3x

Valuation (US$mn)

                   1,023.47

                      968.13

Now, those of you who pay attention are likely to query, "Looks interesting... A billion dollar company within two years, but why is the valuation actually droppingin the 3rd year?". Well, this brings back to the article "Margin Compression Is Coming in the Payment Processing Space As $100 Million Pours Into Startups". You see, Bitpay and its contemporaries are growing like gangbusters (~6% to 10% per month!), but they are selling service with relatively low barriers to entry, and a lot of capital and competition climbing over the bow.

High competitionin a liquidiy bubble yields low, zero or negative (loss leader) margins. Valuations will follow suit, even as revenues and growth rates continue climb.

Bitpay revenue multiple forecast

If I am correct, then Bitpay (as well as contemporary start-up competitor Circle and Coinbase, in addition to more entrenched competitions Master Card, Visa, American Express and PayPal) will offer plain vanilla payment processing at negative margins in an attempt have it serve as a loss leader to rope merchants (etc.) into high margin, better defensible products and services. Cue...

Veritaseum Short public summary

Wednesday, 04 June 2014 00:00

Bitcoin Myth Busting 101 Featured

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Yesterday, I did a radio interview with Benzinga. In it I busted myths about Apple, Bitcoin and Coins in general (ABCs). Listen to the interview below and the info sheets afterwards and let me know if you knew this stuff was possible with today's tech - and Apple! 

As for Apple...

And more on http://Ultra-Coin.com...

Why am I so bullish on Bitcoin? Note: this is not an offer to buy or solicitation for securities and is presented for illustrative purposes only.

Veritaseum Executive Summary page one

Veritaseum Executive Summary page two

As we roll out Veritaseum's UltraCoin ZeroTrust Smart Contracts, I'll be posting much more on "the new way of doing business".

Media Exposure

  1. Reggie Middleton Intro
  2. How Reggie Middleton's Start-up Patented The Future of Global Finance!
  3. Reggie Middleton on Wikipedia
  4. Who is Reggie Middleton?
  5. Bitcoin is not just digital currency. It's Napster for finance.
  6. Reggie Middleton's UltraCoin @ NYC CryptoCurrency Convention
  7. Reggie Middleton Wins CNBC Stock Draft for the 2nd time in a row - with the same stock
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After an interesting discussion with those in my laboratory, I've decided to apply the forensic analysis team from BoomBustBlog to the privately funded companies in the Bitcoin space. See my post from yesterday for much of the reason why.

As clearly predicted yesterday, the better funded of the payment processors will initiate a pricing blood bath they'd likely kill for...

From PayPal's subsite on Mass Payments:

Paypal Mass Pay Site Screenshot

 As you can see, PayPal has already imbued its service with much of the attributes that are being offered by the Bitcoin payment processors. They also have a material advantage as of right now, a massive installed base.

I also cannot emphasize enough how damaging the all too necessary customer service option is to margins. You see, the problem is most service companies don't put enough into customer service and handholding of the customer. From an optimal perspective, this should actually be part of the marketing and sales process, but it's often either non-existent or implemented as an after thought after enough customers start bitching and complaining, or worse yet (and likely most often the case) leaving!

As a company with mature management, it appears as if PayPal is trying to head this off at the pass as it attempts to change consumer behavior and prod them into adopting its new electronic currency payment system...

Paypal Mass Pay Site Support Screenshot

 Now, let's compare PayPal to the newly funded Bitcoin payment processors...

Bitpay

Funding Rounds (3) - $32.50M

- See more at: http://www.crunchbase.com/organization/bitpay#sthash.yvlqpNtr.dpufBitpay prices

An interesting departure from the per transaction/fee model, Bitpay implemented a subscription system which benefits those customers who perform a large quantity of relatively small transactions moreso than those who process large orders.

I calculate Bitpay's most recent $30 million series A round to have been at around 9.2x sales, valuing the company at $160 million. This is a guestimate, of course, since I do not have access to internal numbers.  

Next we have Coinbase...

Funding Rounds (3) - $31.70M

- See more at: http://www.crunchbase.com/organization/coinbase#sthash.CD8IPTp6.dpufCoinbase 

There's also Circle, founded by Mr. Allaire of Coldfusion fame (sold to Adobe Systems).

Funding Rounds (2) - $26M 

- See more at: http://www.crunchbase.com/organization/nfc-direct#sthash.dd0DaxHc.dpuf

Circle has not publicly launched yet but promises to bring a new level of simplicity and user-friendliness to the bitcoin payment ecosystem, concentrating more on a banking paradigm then the technical bent that bitcoin is known to represent. This is all you need ot know about the Circle business model as it relates to this discussion of impending margin compression...

Circle

Free=Margin Compression!

Let's see how this plays out for customers. The most lucrative segments for this industry is the SME (small and medium business enterprises) who process anywhere between 10 and 1,000 transactions per month. Why? Because there are simply more SMEs than there are big companies in the world. Let's see what the two biggest bitcoin processors look like when stacked up against PayPal's Mass Pay product for the SME market...

image019

image027image028image029

Of course, the Bitcoin transactions are likely a loss leader for additional, value added services for many companies in the not too distant future. As a matter of fact, I feel that the payment space will quickly become commoditized by Bitcoin technology - forcing these companies and many more (I'm talking about you Mastercard, Visa and Western Union) to innovate and offer significantly and materially better value for the buck.

Imagine what this competitive landscape will look like when Mastercard, Visa, American Express, Discover and Western Union jump into the fray. Of course, before that a much greater portion of the VC and private equity community will wake up and realize the opportunity in Bitcoin to pour more cash into it than sugar into a Bubble gum machine (emphasis on "Bubble"). The key is to get in early, and get in right. But how does one do that and where will this tale of uber margin compression end?

Well, the research report from which this info is being prepared will be offered to accredited and instituional investors starting next week, at least those who have an interest in UltraCoin. 

My next article on this topic will explicitly illustrate how UltraCoin can assist ALL players (that's right, including PayPal, Bitpay, Circle, Coinbase, Mastercard, Visa, American Express, Discover and Western Union) as well as their direct customers, in climbing up both the food chain and the value proposition ladder - thus rapidly repairing the margin compression damage they are about to bring upon thier business models.

 image014

 

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