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    Categories: General, Legal Activity

    The Blockchain, the BitLicense, and the High Costs of Compliance

    August 22nd, 2014 by wildjo

    Editor and proofreader: Cheryl Copy of original:

    Since the release of the proposed New York Department of Financial Services (DFS) BitLicense regulations on July 23, 2014, the crypto community has been concerned, but there hasnt been enough discussion of the specific implications such regulation would have. Its about time we put some flesh on those bones. Specifically, what would compliance with the regulations as written actually cost?

    The goal of this post is to provide some answers, but, first let me tell you a quick story about how I started thinking about it.

    The other night found me alone, sitting in my favorite chair, watching transactions in the bitcoin blockchain. It was a slow night, but my expectations were low.

    I pulled up the Blockchain.info block explorer and focused my screen on the flow of current transactions. I have to admit, it was somewhat enchanting to watch the constant stream of bitcoin commerce. Satoshi really gave us something to marvel at here.

    It wasnt long before the first large transaction rolled through. And they kept coming, and they kept getting bigger. After about an hour, I had seen everything from a $0.00 transaction with a $0.10 transaction fee to a $775,000.00 transaction with a $0.05 transaction fee.

    The blockchain statistics indicate that $800.00 was the average transaction amount during the twenty-four hour period in which I was watching. This was far higher than I had previously assumed. Clearly, a lot of value is moving effortlessly (e.g. cheaply) through the blockchain, which is precisely why the DFS wants to get involved.

    And this brings us to one of the meatiest and costliest parts of the proposed regulations.

    Section 200.15 requires all regulated entities to implement a full Anti-money laundering (AML) and U.S. Treasury Office of Foreign Asset Control (OFAC) compliance program. In subsection (d)(2), the regulations require a licensed entity to report within twenty-four hours all transactions (whether individual or cumulative) that exceed $10,000.00 in a single day. Subsection (g)(4) goes further and requires that a licensed entity track single transactions that exceed $3,000.00, with the implication that such transactions are suspicious. Subsection (d)(3) requires the immediate reporting of any suspicious activity regardless of dollar amount. This may not seem that bad or that costly, but I assure you it is.

    During my night in the blockchain, I conducted a very informal and unscientific test. I set my timer for three minutes and counted all the transactions greater than three thousand dollars during that time. After multiple rounds, the average was fifteen, with half of those being greater than $10,000.00. This would theoretically translate into a total of 7,200 transactions per day that could be subject of either a Currency Transaction Report (CTR) or Suspicious Activity Report (SAR). Thats well over two and a half million reports per year, and bitcoin is just in beta! Its a staggering amount of paperwork for bitcoin businesses to produce and for the regulator to actually make use of. But what would it cost?

    There is very little detailed information in the literature regarding AML compliance costs. One 2005 study estimated that regulated entities in the United States spent $1.8 billion (yes, thats a b) in annual AML compliance costs.1 The Financial Crimes Enforcement Network (FinCEN), reports that there were 15.8 million AML compliance reports filed in 2005.2 Doing some simple math for a down & dirty estimate suggests that each report filed in 2005 cost regulated industry $114.00. That kind of makes you feel bad for the banks until you realize that they simply pass those costs on down to us, which is exactly what the bitcoin community would have to do with this potential $820,000 daily bill.

    While possibly generating the greatest financial burden on the bitcoin space due to day in and day out application, Section 200.15 is not the only section to impose significant costs on BitLicensees.

    Section 200.5 requires that each BitLicense applicant submit a nonrefundable application fee. The proposed regulations dont state any amount, leaving it up to the discretion of the DFS, but we can make an educated guess. Every other market-entry license issued by the DFS requires a $12,500.00 application fee. Its no stretch to assume that the BitLicense will cost an equal amount.

    Section 200.4(a)(4) requires background checks for each Principal Officer and Principal Stockholder. In the New York market, these background checks run $650 a pop.

    Sections 200.14(a) and (b) require the submission to the DFS of quarterly financial statements and audited annual financial statements. It is the latter one that is the most costly. I recently had a moderately sized corporate client contract for their first audited financial statement and the final bill was around $35,000.00. Recall that this would be an annual expense under the proposed regulations.

    From here on out, estimating costs get a bit more speculative.

    Section 200.8(a) requires that each BitLicensee be sufficiently capitalized to ensure financial integrity. The sufficient amount of capital is solely determined by DFS. It could be a little number. It could be a big number. Your guess is as good as mine, but only the DFS guess counts.

    Section 200.9(a) requires that each BitLicensee maintain a bond or trust account in an amount acceptable to DFS. Again, it could be a little number. It could be a big number. Your guess is as good as mine, but only the DFS guess counts.

    Section 200.13(a) requires that each BitLicensee submit to biannual examinations. It is not quite clear what this would exactly entail, but it is a safe bet that each BitLicensee will want to prepare, which means accountant and legal costs, as well as lost opportunity costs associated with staff devoted to compliance rather than engaged in direct market making activity.

    Last, but not least, Sections 200.16(c) and (f) requires each BitLicensee to employ sufficient cyber security personnel, including a Chief Information Security Officer. Sections 200.16(d) and (e) require an annual cyber security audit by a qualified and independent third-party. The way these regulations read, one person isnt going to be able to be a jack of all trades and wear multiple regulatory hats. These regs require dedicated cyber security staff and third-party consultants, and both are expensive.

    We have now covered all of the vaguely enumerated costs of compliance contained in the proposed regulations. These are big, daunting numbers: $12,500 just to apply; $35,000 annually for an outside audit; $114 for each AML report (and you better be liberal in your reporting so as not to miss something and risk being assessed a penalty); $650 for each background check of each executive staff or investor; obtaining sufficient capital; posting sufficient bond; and on and on. But, theres more to it.

    Each applicant will necessarily incur the general consulting costs of developing all of the policies and procedures required under the proposed regulations, as well as preparing all of the disclosures, background information, business practices and strategy descriptions, marketing plans, advertising samples, etc., etc. that are also required to be disclosed with the application. In other words, there will be significant costs for simply putting the multi-layered application together. Lawyers and accountants will charge a lot of money for their guidance. Industry data shows that the average associate attorney in the New York market charges $400.00 per hour (with partners pulling in $1,000.00 or more). In a specialized field such as bitcoin licensing, you can assume that the fees are going to be above average. Even the smallest of the potential BitLicensees should plan on thousands of dollars to simply put the application together, with larger ventures approaching six figures. These will be sunk costs with no guarantee that the application will ever be approved.

    It should be clear at this point that the proposed DFS regulations would not simply make business in the bitcoin space do a lot of unpleasant stuff; they are going to make businesses in the bitcoin space pay a whole lot of money to do Them. That will have two consequences: it will set up obstacles to entering the space that only the most resource rich players can afford; and, it will introduce financial friction into the system and increase transactions costs. There is a strong argument that these consequences are antithetical to the fundamental principles underlying the bitcoin protocol. The crypto community has cause for concern.


    1. Yeandle, Mark, et al., Anti-Money Laundering Requirements: Costs, Benefits and Perceptions, June 2005
    2. FinCEN Annual Report Fiscal Year 2005

    Cover image courtesy of LittleShibe.

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    Categories: Guest Blog

    How many bitcoins does it cost to maintain the Bitcoin network?

    August 21st, 2014 by Tim Swanson

    Let us be quite clear: if Bitcoin was a cheaper or more efficient transaction method, for-profit organizations such as large payment processors would have forked it long ago and would likely already be using it internally in order to shore up their margins. They do not because it is not cheaper, in fact, it is significantly more expensive to maintain than any of a number alternative centralized methods (e.g., running MongoDB on a Pi server).

    The bottom line to them is that the marginal value in these centralized solutions has to be greater than the cost of maintaining it (MV>MC) otherwise none of the companies would be able to generate a profit. As described below, Bitcoin currently does not fulfill that characteristic.

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    Categories: Columns
    Categories: General, Guest Blog, Columns

    We Talk, Share, Create, Exchange, and Resolve: Decentralized Autonomous Society

    August 19th, 2014 by lainfinity

    New Editor: Crystal Editor: Cheryl

    Decentralized autonomous society empowers individuals by rewarding innovation through sharing, distributed ownership and abundance. By sharing innovative ideas we can build a much better, fair, transparent and innovative society which is based on group consensus rather than a society enforced by rules and regulations.

    Therefore for any society to operate on complete autonomy, it should have these 5 major components or in other words the 5 pillars as its foundation. I would like to explore these components and provide a bird's eye view of how decentralized autonomous society can thrive.

    • Decentralized Communication to talk
    • Decentralized Collaboration to share ideas and designs
    • Decentralized Creation to manifest goods and services
    • Decentralized Exchange to barter goods, services and resources
    • Decentralized Arbitration to resolve conflicts

    Decentralized Communication and Privacy

    Establishing privacy in our communication channels is the first and foremost priority in order to be self-autonomous and free. Without private correspondence we cannot strive to build a free autonomous society. Privacy enables an individual to be free as a self autonomous entity and thus empowering the society as a whole to be self autonomous.

    Why mass surveillance is a violation of Article 12 of Universal Declaration of Human Rights of United Nations?

    No one shall be subjected to arbitrary interference with his privacy, family, home or correspondence, nor to attacks upon his honour and reputation. Everyone has the right to the protection of the law against such interference or attacks.Source

    Mass digital surveillance in any form is an arbitrary interference of privacy and correspondence. Therefore it is a gross violation of human rights. On December 19 2013 the United Nations passed a resolution backing the right to digital privacy.

    Deeply concerned that electronic surveillance, interception of digital communications and collection of personal data may negatively impact human rights, the United Nations General Assembly has adopted a consensus resolution strongly backing the right to privacy, calling on all countries take measures to end activities that violate this fundamental tenet of a democratic society.Source

    we can hardly trust any third party to keep our information safe and secure because of conflicts of interest such as maximizing profits and legal obligations to local jurisdiction. The E-mail privacy can only be achieved through decentralized peer to peer communication.

    How does Bitmesssage enable E-mail privacy?

    Bitmessage is a P2P communications protocol used to send encrypted messages to another person or to many subscribers. It is decentralized and trustless, meaning that you need-not inherently trust any entities like root certificate authorities.Source

    Bitmessage protocol implements two major features which are storing the information in peer nodes for a limited period of time and encrypting the message end to end. Thus it is extremely difficult for anybody to intercept the information.

    Bitmessage is not the only open source tool that enables digital privacy as there are many other tools which serve similar purpose. One such tool is known as Tox which fascilitates instant messaging and video calls.

    Tox is a free and open-source, peer-to-peer, encrypted instant messaging and video calling software. The stated goal of the project is to provide secure yet easily accessible communication for everyone.

    Decentralized Collaborative Sharing vs Centralized Hiding

    Let us imagine a cave man discovered how to make fire to keep him warm and cook food. If he did not share his discovery and decentralized the concept of light and warmth but instead claimed intellectual property right on how to make light and heat, I do not think I would be able to type this article in a markdown format and share my vision with all of you today. The moral of the story is to let your light shine. It would be nothing but an absurdity for anyone to claim a patent right on how to make light and heat because inventions and discoveries are nothing but an innovative improvisation of a priori.

    There is nothing wrong in awarding compensation for inventions and discoveries. But it should rather be awarded to the collective for decentralized collaborative sharing than compensating global monopolies such as corporates for centralized hiding.

    In 1742 Benjamin Franklin invented a new type of stove for which he was offered a patent. Franklin refused it arguing in his autobiography

    we enjoy{ed} great advantages from the inventions of others, we should be glad of an opportunity to serve others by any invention of ours. source

    In similar veins Linus Torvalds could not afford to buy propriatiary Unix so he created Linux kernel and released the source code under GPL Licence so that it can be used for similar purpose and to empower others.

    Why is Linux kernel a success story even though it defied the conventional knowledge of the academic paradigm?

    Decentralized collaborative sharing enabled the success of Linux kernel.Thousands of ordinary people shared small pieces of code known as patches. Linus Torvalds designed and developed a tool known as git. This open source tool enabled the decentralized collaborative sharing by managing a distributed revision control archive and Linus along with his team merged the patches with the kernel.

    But the irony is that thousands of ordinary people who contributed to the Linux kernel walked away without a penny and the monopoly corporates such as Redhat and Google reap billions of dollars today in profits thanks to Linux kernel. It is neither fair nor ethical but it bootstrapped the open source movement because they don't want to kill the goose that lays the golden eggs.

    Open source tools that enables decentralize collective sharing

    Even though there are many tools that enable decentralize collective sharing I would like to highlight only two tools. One is git which enables to develop open source software by means of decentralize collective sharing and contribution of source code which I have discussed before. And the other one is Twister which is a hybrid of two peer to peer technologies such as Blockchain from Bitcoin and DHT from Torrents.

    Twister is a social microblogging peer to peer network such as twitter but is based on decentralized peer to peer network. It enables decentralized sharing of ideas and concepts without being tracked or compromising your digital privacy. It creates and authenticates users using Blockchain and stores the data using Distributed Hash Table (DHT)

    What is the issue with Centralized Hiding?

    By enforcing centralized hiding such as intellectual property rights on the masses, it leads to a situation where the benefits are funneled to the 1% at the cost of 99%. It also impedes innovation resulting in stagnation and scarcity thus empowering the few to control the many. For example if there are 7 different brands of cars and there is a billion of each brand, controlling and manipulating one of each 7 brands will be easier than controlling each of the 7 billion different cars. Control, manipulation and corruption are applicable to finite sets of numbers. They are of no relevance to infinite set of numbers.

    An example of a centralized hidden archive is the vault below the Vatican which runs for more than 52 miles and hoards vast collection of knowledge dating back 10000 years from various libraries from around the world such as Alexandria.

    Knowledge is power when applied, but is wisdom when shared. Power corrupts but wisdom redeems.

    Decentralize Creation and Abundance

    Let me clarify the key difference between creation and cloning. Creation is the process of manifesting our shared ideas and design into a physical or readable form. Cloning on the other hand is a process of producing photocopies of someone's design using it as a template. Creation can also be compared to writing your own book or novel but production is photocopying a book written by someone else.

    In a decentralized creation the value is based on network effect and abundance. Let us consider LTBcoin for example, the value of the coin will increase provided more people use the LTB network and the network creates higher quality content. Thus the value is not based on scarcity but is based on abundance. The decentralized creation operates on the principle of abundance, the more the better as we do not produce but we create.

    On the other hand, centralized production operates on the principle of scarcity of innovation, the lesser the better. This is because we do not create but we clone someone's design which resides in a centralized hidden archive. We are forced to pay a patent fee for the clone even though someone has the knowledge to design and create their own car.

    For example if we consider a centralized car manufacturing industry, the value of the car is directly proportional to the quantity that has been produced.Ford is a cloned mass produced car based on a single template.Even though there are million clones they have less value because they are not original, creative or innovative.

    Let me give you another example even though someone has the knowledge to use one of the open source software distributions like Ubuntu, every time he buys a new laptop or computer he is forced to pay the license fee for Windows which has its source code residing in the centralized hidden archive which the buyer has no access to.

    Decentralized exchange of goods, services and resources

    Any exchange involves two major transactions. We sell what we create and we buy what we need.Peer to peer payment system enables individuals to pay directly to the producers bypassing the middlemen. This enables the producers to have a better profit margin and the consumers to have better value for their money. One such example is OpenBazaar.

    OpenBazaar is an open source project to create a decentralized network for peer to peer commerce onlineusing Bitcointhat has no fees and cannot be censored.Source

    Lets say that you would like to sell vegetables from your garden. Using the OpenBazaar, you create a new listing on your computer with details of the vegetables and quote for the price in Bitcoin. When you publish that listing, it is sent out to the distributed p2p network of other people who use OpenBazaar. Anyone who searches for the keywords such as local vegetables will find your listing. They can either accept your price, or offer up a new price.

    If you both agree to a price, OpenBazaar creates a contract with your digital signature and sends it to an entity called a notary. In the case of a dispute an arbiter can be brought into the transaction. There is no third parties involved. The notaries and arbiters are also part of the distributed p2p network who the buyer and seller trust in case something goes wrong. The notaries and arbiters witness the contract and create a multisignature Bitcoin account that requires two of three people to agree before the Bitcoin can be released.

    Decentralized distributed exchange can also empower individual innovation at a personal level through crowdfunding. Crowdfunding in turn enables decentralized distributed ownership.

    Crowdfunding is the practice of funding a project or venture by raising monetary contributions from a large number of people, typically via the Internet. One early-stage equity expert described it as the practice of raising funds from two or more people over the internet towards a common Service, Project, Product, Investment, Cause, and ExperienceSource

    How decentralized distributed ownership is different from stocks and bonds?

    Decentralized distributed ownership enables individuals to directly own a company but not through third parties like stock brokers or banks. The dividends are paid directly to the individual owners of the company. Distributed ownership can enable all the 7 billion people of this planet to own one single company directly without any major issues or downsides.

    The funds raised through bonds are invested in public infrastructure projects such as roads, rails, bridges etc. The decentralized distributed ownership enables individuals to directly participate in the public infrastructure projects without the need for bonds.

    Decentralized Arbitration

    We as individuals each one of us is a sovereign. We are not a person but a sovereign, which is a basic right granted by the Creator. We exist simultaneously in a parallel multiverse which has many domains or dimensions that exist in parallel but we are aware of only one domain. These are some of the practical implications of the Multiverse hypothesis.

    We can only be tried in any jurisdiction as a person. We consent to be represented as a legal person to be tried in a court of law in a temporal domain. A person is a legal entity such as a limited liable company which can be tried by any jurisdiction. The purpose of a legal entity such as a person is to limit the liability to this temporal domain.

    We can create our own rules without involving any third parties to arbitrate and abide by them as a sovereign as long as the rules are consented by the counter party and are not violating the common law or natural law. This is made possible by the application of smart contracts.

    Smart contracts are computer protocols that facilitate, verify, or enforce the negotiation or performance of a contract, or that obviate the need for a contractual clause. Smart contracts usually also have a user interface and often emulate the logic of contractual clauses.Source

    What is Temporal Jurisdiction?

    As a sovereign, if anyone prefers litigation rather than decentralized arbitration, then they should be at liberty to exercise their freedom to choose their temporal jurisdiction in order to resolve their conflicts.

    When Ethereum started the first round of crowd funding the funds are managed by a company incorporated in Switzerland. The developers of Ethereum had the freedom to choose their legal jurisdiction of sale and thus are accountable to the laws of Switzerland but not accountable to the temporal jurisdiction of Canada or USA. This is a classic example of exercising their freedom to choose their temporal jurisdiction in order to resolve their conflicts in future.


    This article is meant for informational purposes and is not an endorsement. Articles published on the LTB network are the authors personal opinion and do not necessarily represent the opinions of the LTB network.

    Further Reading









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    Categories: General

    An Overview of Applications that Could Be Empowered by Bitcoin

    August 18th, 2014 by CrimsonRoze
    edited by denise 8/8/2014
    Please note that author wants to submit recording to release simultaneously with blog.

    "After editing, before publication, I would like to have the article recorded so it an be released with an audio recording attached. Please do not publish it before I have had a chance to get it recorded. (but you're more than welcome to do all edits so I get a final version to record.)"
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    Categories: General

    Counterparty, Dogeparty, and Why the Term 'Burning' Gives the Wrong Impression

    August 18th, 2014 by Rob

    The world of cryptocurrency has progressed so that now anyone can create their own cryptocurrency. With only basic experience using Bitcoin or Dogecoin, it is easy to create blockchain-based tradable digital tokens, thanks to the Counterparty protocol, and its brand new implementation called Dogeparty.

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    Categories: Columns

    Security in Decentralized Domain Name Systems

    August 17th, 2014 by mdw
    Editor #1: William
    Editor #2: Cheryl
    Proofreader/publisher: Cheryl

    The first article in this series compared the Domain Name System (DNS) to a phonebook. In this analogy, DNS is a directory that allows you find computer addresses from domain names just as people's names can be looked up in a phone directory to find their phone numbers. DNS enables us to translate "LetsTalkBitcoin.com" into the computer-friendly IP address "".

    This article discusses the system's security. It will explain how the existing DNS system is prone to malicious attacks, and suggest how decentralized solutions increase security.

    DNS Security in the Age of the Blockchain

    The current Domain Name System was designed with reliability in mind, not security. It was designed in a different era, when packet switched networks were still a novel idea. Indeed, DNS is easily compromised, and is now a prime target for attack. For example, the government of Turkey recently forced local ISPs to redirect all traffic for twitter.com to a government site by changing the DNS entries in their nameservers.


    Our current DNS has many intermediaries, called nameservers where traffic can be intercepted or tampered with. Blockchain based DNS reduces the number of queries to nameservers. That's because many domains are associated with IP addresses in the blockchain, so no other servers need to be consulted.

    A huge problem on the Internet is man-in-the-middle (MITM) attacks. In MITM attacks, the "bad guy" is positioned between users and the site being accessed. This allows the attacker to return fake data in order to to divert users to malicious sites.

    Blockchain-based DNS makes significant improvements to the existing system. Most importantly, the process of resolving a domain name and verifying the credentials of the destination server will be greatly simplified and substantially more secure. All the information needed to resolve a domain name will often be found in the blockchain, whereas the current process usually involves querying multiple servers. Blockchain-based DNS will also simplify the process of establishing trust between a given user and a server.

    Centralized control structures create central points of failure that constitute valuable targets for attack. We noted in a previous article how these hierarchical systems lead to troubling political problems. In this article we will briefly look at some of the security implications.

    Digital Certificates

    Let's suppose some user Mary wants to visit her bank website. How does she decide whether or not she has found the legitimate bank website? She trusts her web browser, which in turn relies on an overly complex system involving signed digital certificates.

    Mary's web browser is presented with a digital certificate from the bank website, which bolsters her belief that she is interacting with the legitimate bank website that she expected. That certificate makes the claim that this bank is indeed the site operator, by offering an assurance from the entity issuing that claim - called a certificate authority (CA). Her web browser probably decides to trust the site because the Certificate Authority is on a whitelist of trustworthy CAs, and therefore trustworthy.

    The government of France was recently caught using a fraudulent Google certificate, which is dangerous because it can be used to man-in-the-middle (MITM) Google users. How safe should you feel? Digital certificates can usually, but not always be trusted. Rather than basing security on math, the current system requires faith.

    Decentralized DNS can fix this problem by replacing the current certificate trust relationships with a much simpler scheme. The site owner can publish their own signed certificate, or the equivalent, right there in the blockchain. Only the registrant has the ability to publish this certificate because doing so requires the private key.

    See the difference? There is no need to have a third party validate the trustworthiness of a certificate since by definition only the site owner has control of this. Certificate authorities are a prime target for attack, but decentralized systems have no such authorities to rely on. There is literally nobody to attack!

    Man In The Middle

    Main-in-the-middle (MITM) attacks are a persistent problem on the Internet. MITM refers to a broad class of attacks where somebody between the two endpoints intercepts, tampers with, or redirects the traffic without the knowledge of the victim.

    For example, when Mary attempts to access her bank website she might be attacked by someone in a position to intercept this traffic. She may be tricked into connecting to a fake bank website, in an attempt to steal her username and password.

    A next generation nameserver like DNSChain will retrieve the information needed to resolve a decentralized domain name by maintaining local blockchains. Signing the reply with a private key allows Mary to know that the IP address she gets back definitely came from her chosen name server.

    On a local network like many people have in their homes or offices, a router is the perfect place for this nameserver to reside. By being so close to the networked devices it can efficiently provide name resolution to connected computers, tablets, mobile devices, smart toasters and more. By expecting signed responses from a next generation router, devices can avoid the classic MITM attack which victimizes so many Wi-fi users.

    Domain Thefts

    Domain names are stolen or hijacked all the time, often by exploiting registrar procedures for safeguarding registrants' names. A typical domain theft begins with an email account being compromised. The thief then calls the registrar to explain that they forgot the password, and requests a reset link be sent to the registrant's email address of record. Once the registrar account can be accessed, the domain name is transferred to an overseas registrar.

    In decentralized systems there is no registrar to exploit with social engineering. If there is an entity like a registrar, they cannot be made accomplices in order to change ownership data, or provide password resets. With Namecoin's .BIT domains, for example, an update operation is required to transfer ownership, which can only be accomplished by presenting the corresponding key.

    Note that spear-phishing, social engineering, hijacking email accounts, cracking registrar passwords, compromising registrar databases and other traditional tools in the domain thief's arsenal are all useless here.

    There seem to be only two ways to steal a domain name in a blockchain-based system like Namecoin; either steal the private key from the registrant, or take control of the network via 51% attack and register the domain again. The former is certainly plausible, but strategies to prevent it are straightforward, including using multiple signature (multisig) addresses.

    Eliminating Attack Targets

    The Internet Corporation for Assigned Names and Numbers (ICANN) has the authority to digitally sign the root zone, which in practical terms means they hold one of the most valuable private keys in the world. ICANN carefully guards the key used to sign root nameserver keys. Root servers store the most important data for almost all the world's Top Level Domains (TLD) like .COM, .NET and so on.

    In case that description did not make it clear, this essentially means that both ICANN and the root name servers themselves are high value targets for criminals and malicious hackers. After DDOS attacks on the root servers in 2002 and 2007, these lynchpins of the Domain Name System were made more redundant, but they remain a critical target. A threat was made in 2012, allegedly from Anonymous, to "shut the Internet down" by attacking the root servers.

    Another potential choke point is the registry operators. Recall that registries are granted the authority to operate a Top Level Domain by ICANN. They provide the APIs which allow registrars to offer domain name registration and domain management services for all conventional domain names. Attacking registry operators like Verisign, administrator of .COM and .NET, would have a severe impact on the Internet.

    Decentralized DNS avoids these problems. If all the domain data is stored in the blockchain, there is no need for ICANN, registries, or registrars. Gone in one fell swoop are all of these pressure points of the legacy DNS. Decentralized Domain Name Systems are MITM-resistant, theft-proof, and solve the whole digital certificates problem on the Internet today!

    A quick reminder, this is a multipart series on decentralizing the Domain Name System. Be sure to check back next time as we take a close look at a real, working example - Namecoin.

    If you enjoyed this article and want to show your gratitude you can do so by signing up to Lets Talk Bitcoin using my referral code: http://letstalkbitcoin.com/?ref=52b52db8

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    Categories: Guest Blog

    What we have today is not Bitcoin but BINO

    August 17th, 2014 by Tim Swanson

    [A PDF version is also available]

    Yesterday I was told by a China-based WeChat user that I was "hating on a technology" and "expending energy trying to destroy it." It being Bitcoin. This is untrue, I like some of the ideas in Bitcoin (the protocol) circa 2009 and work daily with startups to create value in this space. However, what currently is called "Bitcoin" is a shell, at most, of its former self for at leas...

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  • Let's Talk Bitcoin #136 The Head Or The Horse

    August 16th, 2014 by adam

    *Subscribe to the Let's Talk Bitcoin! show feed and never miss an episode again.

    On Todays Show

    Adam, Stephanie and Andreas discuss the recent theft of 50 million NXT and the question of whether to roll back the blockchain.

    Then, Stephanie speaks with Ira and Justin of Coinapult about their upcoming LOCKS service

    Sponsors for Episode 136

    2014 Sponsor - KryptoKit

    LTBc Sponsors: YOU! If you like this episode, send Bitcoin or LTBc to this address and if you want to emphasize that THIS was a valuable episode enter the show number (136) as the last three digits.


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    Categories: General, Legal Activity

    Death and Bitcoin

    August 15th, 2014 by wildjo

    Editor: Edward
    Proofreader: Cheryl

    For too many people, the answer to the question "What happens to your bitcoins when you die?" will include some variant of "lost." Of course, that does not have to be the case if we use the legacy estate law of our home jurisdictions. These legacy systems, however, have the same disadvantages of the financial system we are trying to make obsolete with cryptocurrencies: trusted third parties and gatekeepers.

    There are alternatives within and on top of the Bitcoin protocol that can overcome these legacy estate law disadvantages. This article identifies two and suggests a mechanism in which they may be employed to provide simple estate-like planning in a decentralized, autonomous way without the time cost and monetary expense of traditional strategies.

    [The above was written by the original author. I assume it was meant to be used as an excerpt/preview for the article. I made some minor edits.]


    What happens to your Bitcoin when you die?

    For some of us outliers in the U.S. cryptocurrency communitythat is, those of us who didnt grow up with a computer in the home and are old enough to have learned how to type on an actual typewriterthe twin certainties of death and taxes are on our minds more than others. In this regard, crypto presents unique challenges. How do we pass on our Bitcoin wealth and legally avoid unnecessary estate expenses, while also protecting our private keys while we are still alive?

    The world of estate law (the law governing the management of a persons assets, with an eye to how they will transfer after he or she dies) has some ideas, but, not being crypto devotees, those ideas center around how to wrangle crypto into their non-crypto world.

    For example, the proposed Fiduciary Access to Digital Assets Act (FADAA) would simply give trusted-third parties enhanced rights (and liability protection) to force a software or hardware company to provide anothers private information. That may be necessary in some situations, but Im sure the crypto community can come up with a better and more generally applicable decentralized and autonomous solution that minimizes the need for trusted third-parties and gatekeepers (and their associated privacy risks and fees).

    Why is the status quo unsatisfactory? The main problem with legacy estate law is that it requires the disclosure of private keys to trusted third-partiesexecutors, trustees, agents operating under a power of attorney, conservators, and personal representativesso that they may access the decedents wallet and distribute the decedents digital assets. Thus, we reintroduce the trust factor back into an area of the cryptocurrency arena that was doing just fine without it. Not only must we trust that these third-parties wont access our wallets while we are living, but we must also trust that they will keep the private keys secure and provide continuity of care in the event they predecease us. Continuity of care requires the introduction of even more third-parties, but is necessary, if not required under some state professional responsibility codes, when attorneys and other professional fiduciaries are involved.

    Another deficit of the legacy estate system is that it necessitates the inclusion of gatekeepersprobate courts/judges, magistrates, executors, attorneys, and state agencies (e.g. vital statistics departments). In even the simplest of situation where all the necessary information is known and all the heirs are getting along, these gatekeepers impose costs in terms of both time and money. Where information is absent and heirs disagree, those costs can be extraordinarily high. Sadly, the latter scenario is far too common.

    Estate law is a required course in law school. I suffered through it and swore I would never practice it when I became an attorney because it can capture the human species at its very worst. The cases usually have the same last name on each side of the v., as in Jones v. Jones and Smith v. Smith, because some relative feels they got the short end of the inheritance stick and decides the only way to be vindicated is to blow up the family. These fights rage on because both sides are empowered by a legal system and legal profession that stands to profit from the dispute. Family relationships are devastated and family assets dwindle in the process. Insert the technological difficulties and relative unfamiliarity of crytpocurrency and you are simply adding heavy fuel to those fires; fires that can only be snuffed out with the loss of additional time and money.

    No. Satoshi was right. We need to continue to keep trusted third-parties and gatekeepers out of our digital financial lives as much as possible, both during our lives and after our deaths. The problem is, however, that there is no clear way to accomplish this within the Bitcoin protocol. Or is there?

    Im no coder, and my computer competency is just deep enough to make me dangerous. Still, we need to start considering this question, so allow me to kick it off and allow other, more sophisticated, members of the community to take it further.

    In my view, what we are looking for is a mechanism that allows a wallet holder to send a percentage of their wallet balance, whatever that balance may be at some indeterminate time, to another wallet(s) upon the death of the first wallet holder. There are a couple elements here that we need to parse out.

    First, the transaction needs to take place in the future. As I understand it, this function (or something very similar to it) already exists within the protocol. It is called LockTime and is a major feature of distributed blockchain contracts that allows a payment to be made from one address to another after the specified period (n) has passed. Without more, such a function could be used as a crude estate planning tool by selecting a date beyond which is the reasonable life expectancy of the initiating party. However, that means that the initiating party could never change their mind and that the beneficiary might have to wait years before they receive the asset. A lot could happen in that intervening period to make such a transaction unpalatable.

    To make this function better for autonomous estate planning purposes, we would need to modify the LockTime functionor build on top of itto allow us to modify the transaction date repeatedly. If this were possible, we could set up transactions to our heirs on New Year's Day of each year to be distributed, for example, on January 1st of the following year. If we pass away within that period, then transaction propagates. If we dont, then we modify the transaction on New Years Eve to take place in another year, repeating the process until we are no longer around to do so and the transaction kicks in. In the meantime, this flexibility allows us to adjust who our beneficiaries are, the amount they would receive, or to suspend the transaction altogether at any time. In other words, it gives us the flexibility of the existing estate law system (e.g. rewriting a will) with the autonomy of the Bitcoin protocol.

    The second element to address is the amount transferred. With the current LockTime function, the amount of the coin transferred must be specified and it is removed from the wallet. However, in the new estate planning space we are creating for ourselves, while we want our heirs to inherit what is left over, we might want to spend some of our Bitcoin in the meantime. Having to deplete our wallet balance, even if temporary, in order to make a contingent LockTime transaction, could be inconvenient. But, what if we could modify the function to allow for a percentage of the then existing wallet balance to be transferred? For example, I set a transaction to my daughter to be completed a year from today and the amount is set at twenty-five percent of the balance existing in my wallet at that specific time. I could then accommodate multiple heirs with set percentages and not have to worry about changing the transaction each time my wallet balance changed.

    In this scenario, I could set up empty wallets for each of my beneficiaries, teach them how to use the technology, make sure the private keys were preserved (e.g. in a safe), and instruct them to get their own wallets and move their distribution out of that interim wallet and into their own, secure wallet upon my death. This prevents the private keys to my account from being compromised, while minimizing the period of time that the interim account is vulnerable (it will not be used except on the moment the contingent LockTime transaction is ultimately made and then transferred out to the beneficiaries' own wallet) while also ensuring that the LockTime transaction can be recovered (private keys kept in safe place known to me and relevant beneficiary). All of this accomplished autonomously, with only me and my beneficiaries playing an active role.

    Another use of a system of this nature would be to safeguard wallets in the event of lost private keys. For example, on my birthday each year, I could create a TimeLock transaction that would transfer my balance (0-100%) to another address on my following birthday, unless I rescinded it at any time before that magical date arrives. In the interim, if I lost my private key, there is a contingency in place that would allow me to recover my balance in the new wallet and all I would need is a little patience.

    Getting back to our estate planning use, an autonomous system of this nature is similar to the legacy estate planning systems pay on death (POD) or transfer on death (TOD) account. There, an account holder designates a beneficiary and informs the institution holding the account of their identity. During the principals life, the beneficiary has no right to the account, but title and right vests immediately with the beneficiary at the moment of the principals death. This allows the account to be distributed to an heir(s) (the designated beneficiary) outside of probate. The drawback, of course, is that the beneficiary has to obtain and present a certified copy of the death certificate to the bank in order to take possession. This can waste time and money.

    A contingent TimeLock % balance transaction is clearly superior as it accomplishes everything a POD/TOD account does, while keeping the gatekeepers (in this case, the institution issuing the death certificate and the institution holding the account) out.

    There are a lot of nuances to any given jurisdictions estate law and a lot of complexities that go into a persons estate plan. This discussion is, by no means, an attempt to cover any of that ground or to provide legal advice to the reader. Rather, the goal here is to kick off a discussion of a basic wallet/protocol function that could be one strategy in an overall estate plan, and, most importantly, one that minimizes the drawbacks of the legacy estate planning system and its trusted third-parties and gatekeepers.


    In other words, Im hoping we can answer the question, What happens to your Bitcoin when you die? with, No worries. Its in the blockchain.

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    Categories: General, Guest Blog, Fiction

    Grandpa, Tell Me 'Bout the Good Ol' Days

    August 14th, 2014 by Tron

    Editor: Cheryl

    “Hey Jimmy what do you have there?  Oh goodness, I haven’t seen that shoebox since I was teenager.  Were you in the back of my closet?   Bring it here.  Open it up and let's take a look.  It’s my box of old paper dollar bills.  I thought they might be worth something someday.  Boy!  Was I wrong!”

    "When I was kid, back in 2014, people used to trade this paper for housing, food, gas, and cell phone service. Yes, believe it or not -- paper.  I know, it’s bizarre and still makes me chuckle. And they had these big machines called ATMs back then that were bolted to the sides of buildings we used to call 'banks'. These ATMs would spit out these green paper slips with pictures of dead presidents on them.  And then, for whatever reason, other people would trade these slips of mostly green paper for things they wanted. Surprisingly it worked. Sure, it seems archaic now, but people didn't think so at the time.”

    “What?  Oh, banks? Yeah, they would store and track your money like your Samsung S27 bitcoin wallet does now, only they were entire buildings staffed with real people. In fact that social center down on Main Street where they have that little room with the ice cream machine and the big steel doors -- that was a bank.  If memory serves, Bitcoin existed back then, but I guess it just took some time to adjust to the new way of storing and sending value.“

    “What happened to paper money?  Oh, that’s a long story.  It started a long, long time ago in the early 1970s when President Nixon decided that the paper money was accepted well enough that it didn’t need to be backed by anything, so he just stopped allowing convertibility to gold.  Looking back with 20/20 hindsight, it was a really stupid thing to do, but it worked for a while.  Nobody thought much of it at the time.”

    “What happened next?  Oh, not much at first, but in 2008 the first problems started.  It wasn’t so much because of Nixon’s bone-headed decision, but because those ‘banks’ I was telling you about were allowed to loan out more than they held in deposits.   They created more money by making loans, and they could create as much as they wanted as long as they could find people to borrow.  They started loaning to everybody, and I mean everybody.  ‘No job, no problem, here’s your loan.’  Sure, looking back, it seems insane, but I don’t think people in that era really understood money.”

    “Then, the banks had this brilliant idea to insure against loan defaults and sell the loans as investment grade.  The banks used some clever, but ultimately self-destructive methods to hide the bad loans and pretend they were investment worthy.  Well, as you’ll soon learn in your history class, and what should’ve been obvious at time, those with no jobs couldn’t pay their loans, so they didn’t.  There were so many of these bad loans that the insurance companies couldn’t make good, so the whole system was at-risk.”

    “Well, as you can imagine, this was a pretty scary time for those that benefitted from creating money out of nothing.   What were they to do?  What could they do?  They figured they could make more money out of nothing and use it to try to save the system, so that’s what they did.  They just started creating money like crazy to buy Treasury bonds.  This helped the political class back then because they could spend this new money to create programs and buy votes.  There were dozens of different programs to get the money out into the economy.  It didn’t matter how crazy the idea.  We were even sending money to other countries to buy their cooperation.”

    “It worked for a while.  They just kept pumping more ‘free’ money into the system, and people didn’t seem to care.  If you were poor, you got free stuff. Why complain?  No job? -- free money.  If you were rich, you got even richer since borrowing costs were super low so you could borrow cheap and invest in the stock market.  If you were a CEO, you couldn’t lose because you could just borrow cheap, buy back your own stock and get rich.   But, if you were a saver back then, you got crushed.”

    “Jimmy, would you hand grandpa that drink of water? Thanks.”

    “It wasn’t until 2017, when things turned bad for almost everyone.  There weren’t enough people working to keep the system going.  The defaults started again, and surprisingly they hadn’t learned anything the first time.  They ramped up the printing presses again to buy even more Treasury bonds.  Only now, there was so much interest owed it was like running on an accelerating treadmill.  We could loan ourselves more money out of thin air and be the only buyers with an infinite imaginary bank account, or we could offer more interest to get other interested buyers, but only at our own peril because increasing interest rates on our massive debt was crippling.  We were trapped.”

    “Even the Wall Street guys could see the writing on the wall and started looking for safe havens.  What’s Wall Street you ask?  Ah, funny story, there was this guy from New York named Ben Lawsky.  He started Wall Street’s woes, but that’s a story for another time.  I’ll take you to the Wall Street museum sometime.”

    “Anyway, they were desperate to get dollars into the economy, so dollars were easy to come by.  If you had something that had real value, you could get lots and lots of dollars, but saving dollars was futile.  Savers were again getting crushed.  People wanted anything that couldn’t be conjured out of thin air.   It wasn’t only bitcoin that people wanted, it was also food, gold, real estate, and farm land.  Bitcoin was the easiest to store, and transmit, so it worked best when trading for food and other daily needs.”

    “Once the ball was rolling, it picked up speed.  Some say it made the Weimar Republic look tame by comparison.  Since nobody wanted the green slips of paper, but wanted bitcoin instead, the transition happened very quickly.  Thankfully, your grandma and I did fine because we already had some bitcoin before the rush started.  I kept that shoebox full of dollars, partly as a reminder, and partly because I really thought they might be worth something someday.”

    “Well, off to bed."

    The events depicted in this story are obviously fictitious -- there’s no way paper money can last ‘til 2017.  Any similarity to any person living or dead is merely coincidental - except for Ben Lawsky - he’s real and couldn’t be reached for comment because he’s too busy shooting NY in the foot.

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    International Monetary Fund Asserts Bitcoin Not a Currency in Draft Report

    August 12th, 2014 by bcohen

    Original (dhimmel), accidently modified with intial edits:

    NOte From BrianL Not sure what impact the above statement has on article but I ##have made a few modification on original to 8/13

    The International Monetary Fund (IMF) is currently drafting Monetary and Financial Statistics Manual & Compilation. The document has a Draft watermark and a meta-data creation date of June 26, 2014.

    Chapter four of the manual is entitled "Classification of Financial Assets and Liabilities" (PDF) which includes in part classifications of "Monetary Gold and SDRs" and "Currency and Deposits."

    Under Currency and Deposits we find section 4.36 with Footnote 13:

    Not all electronic payments involve electronic money. For instance, credit cards or debit cards are not electronic money because no monetary value is stored on them; and store cards or internet-based currency (such as Bitcoins [13] or gaming money) are not electronic money because these are not widely accepted as a medium of exchange.

    Scrolling down to the referenced footnote 13 we find:

    Bitcoin also does not meet the definition of a currency as it is not issued or authorized by a central bank or government.

    Therefore we must assume that the IMF presently defines currency as issued or authorized by a central bank or government. Oddly at the same time, the manual states that Bitcoin is and is not a currency. The author chose the term "internet-based currency" rather than the more common terms "virtual currency" or "digital currency." Maybe the IMF is confusing Bitcoin with "Internet-based payment services" which is a commonly used term (and Bitcoin is a payment network in addition to being a virtual currency). The G7 connected FATF (Financial Action Task Force) prepared a document in June 2013 entitled "Guidance For A Risk-based Approach Prepaid Cards, Mobile Payments and Internet-Based Payment Services" (PDF).

    I was able to find reports from 2011 and 2012 from the IMF that define currency in part as "..consist{ing} of notes and coins that are of fixed nominal values and are issued or authorized by the central bank or government."

    July 27, 2012, IMF Staff Discussions Note "What Lies Beneath: The Statistical Definition of Public Sector Debt An Overview of the Coverage of Public Sector Debt for 61 Countries"(PDF) defines "Currency and deposits":

    Currency consists of notes and coins that are of fixed nominal values and are issued or authorized by the central bank or government. Although all government subsectors hold currency, generally only the central bank issues it. Deposits are all claims, represented by evidence of deposit, on the deposit-taking corporations (including the central bank) and, in some cases, general government and other institutional units.

    On May 27, 2011 "Public Sector Debt Statistics: Guide for Compilers and Users (Google Books) was issued by the IMF Inter-Agency Task Force on Finance Statistics which provided the following definition of "Currency and deposits":

    Currency consists of notes and coins that are of fixed nominal values and are issued or authorized by the central bank or government. In some countries, commercial banks are able to issue currency under the authorization of the central bank or government, Currency constitutes a liability of the issuing units. Unissued currency held by a public sector unit is not treated as a financial asset of the public sector or a liability of the central bank. Gold and commemorative coins that are not in circulation as legal tender, or as monetary gold, are classified as nonfinancial assets rather than currency."

    The IMF definition of currency appears to be a derivative work of the European System of National Accounts from the European Commission in 2008. This document (Google Books) was drafted by European Commission, IMF, United Nations, World Bank and the Organization for Economic Co-operation and Development and defined currency as follows:

    "Currency consists of notes and coins that are of fixed nominal values and are issued or authorized by the central bank or government. (Commemorative coins that are not actually in circulation should be excluded as should unissued or demonetized currency.) A distinction should be draw between domestic currency (that is, currency that is the liability of resident units, such as the central bank, other banks and central government) and foreign currencies that are liabilities of non-resident units (such as foreign central banks, other banks and governments.) All sectors may hold currency as assets, but normally only central banks and government may issue currency. In some countries, commercial banks are able to issue currency under the authorization of the central bank or government."

    The Manual provides some history on this document and states that:

    In 2000, the International Monetary Fund (IMF, or the Fund) published the Monetary and Financial Statistics Manual (MFMS), which was the first volume of its kind in the field of monetary and financial statistics.

    The IMF appears to recognize the difficulty in defining or "classifying" certain financial instruments:

    This Manual contains additional discussions on borderline cases in the classification of financial assets and liabilities.

    Further, the IMF is willing to reclassify (i.e. redefine) some of these instruments:

    An important revision concerning financial instruments is the reclassification of the special drawing rights (SDR) allocations to the Fund's member countries, from equity to long-term foreign liability. The change was introduced in August 2009 in the monetary data compiled by countries, with historical data having been revised correspondingly. Previously, SDR allocations were recorded as a unilateral transfer from the IMF to its member countries, and in monetary statistics recorded as part of equity.

    This change is particularly interesting as we have seen headlines such as "IMF Bailout for Ukraine and a New World Currency" from the New American in regards to the April 30th Announcement by the IMF "IMF Executive Board Approves 2-Year US$17.01 Billion Stand-By Arrangement for Ukraine, US$3.19 Billion for immediate Disbursement"

    Robert Wenzel of Economic Policy Journal was quoted by New American as follows:

    It signals fear on the part of U.S. government officials that the dollar is slowly losing its luster as a reserve currency. U.S. officials are trying to nudge the SDR as the alternative to the dollar because they will still maintain significant influence with regard to the SDR, as opposed to some other currency taking hold in parts of the world as a reserve currency (the [Chinese] renminbi?) or gold returning as an important reserve. China and Russia are both presently accumulating gold.

    In an IMF blog post from September 24, 2009 entitled "Reserve Currencies in the Post-Crisis International Monetary System" (brought to my attention from Bitcoin Magazine article "

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    Categories: Guest Blog

    Overstock to Cryptostock

    August 12th, 2014 by daniel

    Orignal (dhimmel):

    The crypto-currency industry has been abuzz ever since Wired published an article entitled Overstocks Radical Plan to Reinvent the Stock Market With Bitcoin. Patrick Byrne, CEO of Overstock.com, has seen firsthand how Wall Street has been corrupted to the core, and hes eager to do something to fix it. He has identified two primary sources of corruption: centralized clearing (exchanges) and fractional reserve banking. These systems enable unscrupulous insiders to sell shares in companies that dont exist while allowing investors to exploit loopholes in stock settlement, such as naked short sales, harming public companies and the economy as a whole.

    The primary question Byrne has been concerned with is, How might a public company go about issuing a crypto-security? Earlier this year, he and others at Overstock held discussions on this very subject with developers of Bitshares and Counterparty, platforms that aim to extend Bitcoin technology to enable securities issuance and trading without the need for third-party brokers or centralized exchanges. To foster discussion on what might be involved in issuing a cryptosecurity, Overstock recently launched a web page editable by anyone. The new webpage has sparked a wiki-war over the merits and drawbacks of a dozen or so Bitcoin 2.0 crypto-security platforms either on the market or close to launch. In my opinion, two systems, NXT and BitShares X, appear to have emerged as the leading contenders in the Overstock wiki arms race. Both of these systems provide built-in, decentralized exchanges that allow users to issue their own assets (though the SEC may call the assets securities, depending on whether issuers make any promises with respect to the assets).

    Do any of the existing technologies offer a ready-to-go solution with which a public company could list a new crypto-security? At the current time, none of the existing systems seems to meet all of the regulatory and business requirements for a successful crypto-security issuance. Even if a satisfactory platform did exist, a crypto-security issuer would no doubt need to work closely with developers to customize their blockchain to fit their particular circumstances and goals.

    In my opinion, the primary difficulty with existing platforms is that, in most jurisdictions around the world, it is illegal for a public company to issue shares that function effectively as bearer shares. The essence of bearer shares is that they are freely transferable securities that are owned by whomever holds them, and by possession alone they demonstrate participation in a company. By contrast, with registered or conventional shares, the name of the owner is included with a share and will also be entered in the registry of company shareholders. Changing the ownership of conventional shares requires a change in the share endorsement and registry.

    With bearer shares, since no name is included, any person who holds them in their possession is recognized as the owner. If an owner of bearer shares wishes to transfer them to a third party, it suffices to just hand over the relevant certificates. There is no need for any paperwork or changes to the registry of the company (except for anti money-laundering measures in certain jurisdictions) because only the amount of bearer shares that were issued to create the company and their numeration are shown, without making any reference to their owners. Thus, transference of bearer shares is similar to the operation of a cashiers check, whereby any person presenting it can collect the amount contained therein.

    The legal and regulatory measures many countries and organizations have been enacting against money laundering and tax fraud have created a significant stigma around bearer shares. Pressure on the governments of widely-used tax havens has forced most offshore jurisdictions to restrict the use of bearer shares. Normally, these constraints take the form of rules that serve to immobilize securities. That is, bearer shares are required to be in the custody of banks, trust firms, or a registered company agents who usually must maintain a record of the owners. The objective of such measures is to keep track of any change in ownership of the company and to be able to determine at all times who holds the legal ownership. With such restrictions, not only is the raison-detre of bearer shares lost, but they are often not in the hands of their rightful owners, making their transmission more complicated.

    How to Legally Issue a Crypto Security

    The solution to Byrnes problem lies in finding a crypto-system that supports the issuance of registered or conventional shares for which the owners names are included and tracked in the register of company shareholders. In effect, the crypto-systems blockchain itself would serve as the register of shareholders.

    While some crypto platforms, such as BitShares with its TITAN technology, already enable users to transfer shares to other users by account name rather than account number, no system currently in use supports the restriction of share ownership to certified identities. The BitShares system aims to be the first to provide the market with a practical, easy-to-use solution to this critical problem.

    The solution implemented in the BitShares system would be very simple. An Identity Authority would be required to sign a BitShares account with a certification that the owner has provided the necessary Know Your Customer documentation. Then, the BitShares account would need to digitally sign the shareholders agreement and release the shareholders identity information to Overstock. After these signatures were place, then--and only then--would the blockchain allow a particular account to buy, sell, send, or receive the relevant securities. Such a system might not seem ideal from a crypto-anarchists point of view, but from the perspective of a company like Overstock it would help them achieve a primary goal: the creation of an honest and transparent securities market, one that would be provably free of fractional reserves, naked short sales, and high-frequency trading.

    Better Market Algorithms

    Byrne says that one of the things hes trying to eliminate is high-speed trading that serves no real purpose

    In todays world of computerized trading on Wall Street, the markets move at nearly the speed of light, with trades executed in milliseconds. This type of speed is not possible in a decentralized system because, even moving at the speed of light, information would need 200 milliseconds or so to circumnavigate the globe.

    The speed barrier faced by decentralized systems is no problem for Byrnes vision; indeed, it is consistent with his goal of eliminating high-frequency trading. In fact, trading speed is not the real issue facing decentralized trading systems. The critical issue instead is how to remedy a fundamental flaw in the order-matching algorithm that traditional stock exchanges use. What is a market price, really? It is fundamentally a collective judgment about the value of a company. As such, it should only change when new information becomes available and can be processed by the shareholders themselves. Human judgement cannot possibly operate at 200 milliseconds, and it is challenged to operate on the shortest time intervals (10 seconds) currently supported by BitShares or other decentralized blockchain systems.

    High-speed trading is the result of Wall Street insiders attempting to front-run orders placed by people who have access to real information. When someone learns some news that causes them to want to buy, a high-frequency trader can quickly see the buy orders within milliseconds, enabling them to place automated trades to scoop up any asks lower than the buyers bid and then sell to the buyer with almost no risk. This is just one of the many games that high-frequency traders may engage in.

    BitShares confronts this problem by implementing a new matching system that effectively eliminates front running by insiders. All executed orders always receive the price that was requested--nothing more and nothing less. There is no opportunity for high-frequency traders or front-runners to squeeze risk-free profit out of market participants by executing orders that steal some of the overlap between the bid and ask. Traditional order-matching algorithms that promise to give a trader the best price below his bid are an illusion because anyone else located physically closer to the exchange can capture much of the gains with little or no risk, leaving the buyer with little more than he asked for.

    In essence, the blockchain becomes the ultimate insider. What this market algorithm does is take all of the surplus that could have been earned by front running (the overlap between bid and ask) and collect it as fees for the network. This algorithm ensures that market participants place orders at exactly the prices they are willing to pay based upon their opinion of fair value. As a result, market participants now face less price risk in the execution of their orders. By removing the profit potential from front-running, BitShares is the only system to date that is less likely to be vulnerable to attacks by high-frequency traders attempting to squeeze risk-free profits out of bid/ask overlap.

    A beneficial side effect of the BitShares matching algorithm is that traders attempting to manipulate the market by walking the book in a single trade will face a much higher cost than traders who walk the book at a slower pace. Thus, once again, the trading algorithm implemented by BitShares punishes fast traders and rewards value traders.

    Eliminating Fractional Reserves

    There is one other aspect that companies looking to list their shares on a decentralized exchange must consider: what will the newly-listed shares be traded against? In the case of all existing crypto-security systems (except for the soon-to-be introduced BitAssets in BitShares X), the only thing that new company shares can be traded against is shares in the system (e.g, units of NXT) or shares in other assets listed on the system. This means that if Overstock wanted newly-issued shares in a crypto platform to trade against USD, then someone would have to issue bearer bonds denominated in USD on the platform. These bearer bonds would be a promise to pay $1 on demand and thus would no doubt be a second highly-regulated security.

    In this scenario, Overstock would likely have to issue its own Overstock USD bond to trade on the system against the own shares. This once again opens up an enormous regulatory challenge centered around Know Your Customer laws. If Overstock USDs are not part of the solution, then the only alternative would seem to be USDs issued by some exchange that is subject to regulations and potential fractional reserve issuance.

    Fractional-reserve issuance is one of the primary issues Patrick Byrne has identified that needs to be resolved. It is counterproductive to rely on crypto-IOUs for users to trade in a newly-issued crypto-stock. After all, using a blockchain for order matching would seem to be of little advantage if management of IOUs still requires relying on third parties. Furthermore, absent crypto-dollar IOUs, the only assets left for Crypto-Overstock shares to trade against would be other crypto-assets that would have market capitalizations equaling only a small fraction of Overstocks.

    Eliminating the need for cyrpto-IOUs is where BitShares X, with its internal BitUSD asset collateralized by shares in BitShares X itself, provides a unique advantage over all other crypto systems on the market or in public development. BitUSDs are not an IOU issued by a central party. Rather, they are a crypto-asset that has no counterparty, is not a security, and confers no legal obligation to any party. They are created by free market forces, and by design each unit of BitUSD is collateralized, i.e., backed by 1.5 to 2 dollars worth of BTSX and fully backed by the Bitshares network.

    With BitShares X, companies like Overstock can allow their shares to trade against trust-free assets pegged to the dollar, gold, silver, or other national currencies. This provides a significant advantage over all other systems known at this time.


    In the near future, the BitShares X system, with its certified accounts and collateralized assets such as BitUSD, will be able to meet the regulatory, philosophical, and business requirements outlined by Mr. Byrne. BitShares X will resolve the problems arising from fractional reserve banking, naked shorting, and high-frequency trading manipulation. An equally important advantage of BitShares is that its developers are not simply faceless identities hiding behind anonymity on the internet; the leaders within the BitShares ecosystem are real people who will be able to draw upon their expertise to help customize solutions to suit the needs of Overstock and other public companies.

    As exciting as it would be to see Overstock or another company issue a crypto-stock in the next few months, I think it would do far more harm than good. Careful evaluation of the various issues and risks from regulatory and business perspectives can help ensure that the amazing potential benefits of being able to issue shares on a crypto-ledger are realized.

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    Banks Issue Bitcoin Report: Bitcoin Community Absent

    August 11th, 2014 by bcohen

    only publish between 3PM and 4AM Pacific Time

    Recently I took out Twitter to note my surprise that only a handful of folks have bothered to watch the "Conference of State Bank Supervisors Public Hearing on Virtual Currencies" on YouTube which was part of a "CSBS Emerging Payments Task Force Public Hearing on May 16, 2014". This was a week after the Federal Advisory Council and the Board of Governors of the Federal Reserve met and discussed Bitcoin at great length at their quarterly meeting. The speakers were announced on May 5. This becomes even more surprising as the U.S. Government Accountability Office linked to the the hearing in its blog report "Risks of Virtual Currencies" in its "Watchblog: Following The Federal Dollar." I guess its a Watchblog with no one watching?

    Only 30 Views - YouTube : Conference of State Bank Supervisors Public Hearing on Virtual Currencies? https://t.co/4IdtSNSipR

    — Brian Cohen (@inthepixels) August 8, 2014

    At the public hearing, Megan Burton, Chief Executive Officer, CoinX noted the overwhelming obstacles that they encountered with banking institutions. Though you probably wouldnt know this if you read the transcription of the hearing (PDF) which erroneously credits Annemarie or Annemarie Tierney, EVP Legal and General Counsel, SecondMarket with the comments:

    ... We've actually been turned down by about 61 banks now. That's overwhelming. We never get to the word cryptocurrency. We state the word MSB and the conversation halts...

    And further,

    I wouldn't say that it's specific to this panel that you see before you today. I think it stems specifically to us being put in a category of high risk. In this meeting, what was fascinating was the fact that when I talk about the transaction flow that we could potentially have, the sheer volume of what would go through...A community bank is typically not equipped to be able to handle that level of transaction volume, nor do they have the insight into my business to know how to gather enough information at the KYC process to know who we're touching and what we're doing.


    There needs to be a bridge between where we are as a MSB in a high risk category and where the banks are and how they're being regulated to be able to facilitate better communication between the two.

    Burton's comments on community banks is interesting. When larger institution are rejecting Bitcoin companies applications they are putting additional pressure on smaller banks, i.e. community banks who are being approached to fill this void.

    And what can community banks use as guidance when dealing with these newfangled Bitcoin companies?

    Well, on June 23, five weeks after the Conference of State Bank Supervisors Public Hearing on Virtual Currencies, the ICBA or Independent Community Bankers of America Clearing House and The Clearing House (TCH) issued a thorough twenty five page white paper entitled Virtual Currency: Risks and Regulation (PDF). This report is also available as a PDF through short URL at www.icba.org/virtualcurrency.cfm as well as the TCH website.

    The Independent Community Bankers of America is the nations voice for more than 6,500 community banks with nearly 5,000 members, representing more than 24,000 locations nationwide and holds $1.2 trillion in assets, $1 trillion in deposits, and $750 billion in loans to consumers, small businesses and the agricultural community.

    And further, ICBA member community banks create symbiotic relationships with the communities they serve, favor local decision-making, while adhering to the highest business practices and ethical standards, and support a democratically governed association where each member bank has a voice and a vote&

    The Clearing House according to its website was {e}stablished in 1853 by the nations leading banks, The Clearing House originally functioned as the de facto central bank for banks in the United States long before the Federal Reserve was formed&

    and as noted in the white paper,

    The Clearing House is the oldest banking association and payments company in the United States. It is owned by the worlds largest commercial banks, which employ over 2 million people and hold more than half of all U.S. deposits. The Clearing House Association L.L.C. is a nonpartisan advocacy organization representingthrough regulatory comment letters, amicus briefs and white papersthe interests of its owner banks on a variety of systemically important banking issues. The Clearing House Payments Company L.L.C. provides payment, clearing, and settlement services to its member banks and other financial institutions, clearing almost $2 trillion daily and representing nearly half of the automated clearinghouse, fundstransfer, and check image payments made in the U.S.

    The white paper also makes reference to the Conference of State Bank Supervisors:

    ...A large number of U.S. states currently participate in the Nationwide Mortgage Licensing System (NMLS), a web-based utility operated by the Conference of State Bank Supervisors State Regulatory Registry, through which participating states and the federal government ...has recently been expanded to permit states to utilize the system to administer licensing of payday lenders, money transmitters, check cashers, and other types of consumer financial service providers...The existing NMLS infrastructure could be expanded to include licensure of virtual currency market participants..

    Perhaps it is a bit surprising that ICBA was involved in drafting the report because while it was being drafted, Cary Whaley, Vice President of payments and technology policy for ICBA told Bloomberg news in Bitcoin Breakthroughs Studied by Banks the Currency Is Out to Replace that they had no interest in using Bitcoin:

    That reputation makes banks reluctant to use the digital currency directly, said Cary Whaley, a vice president at the Independent Community Bankers of America. While virtually none of the groups members are interested in using the digital money, a small number are examining its concepts, he said&

    However, the regulatory scrutiny that community banks face has been compared to that of virtual currency upstarts in Informationweek Bank Systems & Technology How New York State Is Looking to Regulate Bitcoin as well as PaymentsSource New York Sees Bitcoin as a Catalyst for Modernizing Regulation; both of which use NYDFS as a reference. And shortly after the report was released there were grumblings on BitcoinTalk about banks and in particular community banks interest in Bitcoin.

    Too big too fail doesnt mean too small to succeed. Community banks importance to the financial system became clearer during the 2008 financial crisis which illustrated what happens when banks become too big to fail. In July, the Senate approved an amendment to reserve a seat on the Federal Reserve Board of Governors for an individual with community banking experience. It is interesting to note that OTC Markets Group Inc which operates financial marketplaces for 10,000 U.S. and global securities recently announced the first banks to trade on the OTCQX marketplace under a new streamlined qualification process for U.S. community and regional banks. This also happens to be where SecondMarket (i.e. Bitcoin Investment Trust) is proposing to launch a bitcoin investment fund for ordinary investors in competition to the Winklevoss Bitcoin ETP commonly referred to as an ETF.

    A statement of purpose for Virtual Currency: Risks and Regulation succinctly explains the goal of this document:

    The purpose of this white paper is to promote consideration of how existing regulatory regimes in the U.S. may be applied to virtual currency, virtual currency system participants and products, and virtual currency transactions.

    I hand picked some additional quotes from the paper and found the footnotes particularly interesting:

    Under the current federal regulatory regime, players in the Bitcoin system are not subject to safety and soundness oversight, and no entity in the Bitcoin system is yet large enough to be subject to oversight as a systemically important institution or utility, even were such regulations applicable.


    Live market capitalization of 158 convertible virtual currencies can be viewed at https://coinmarketcap.com 


    Primary sources for this section {The Bitcoin System and Bitcoin Transactions.} are the Nakamoto paper cited at fn. 7, above; CoinDesks A Beginners Guide to Bitcoin (available at http://www.coindesk.com/information/); and Blockchain.info, which hosts the publicly searchable blockchain database and technical information regarding Bitcoin mining.


    Given the lack of international consensus regarding classification and treatment of virtual currencies, the regulatory approach ultimately adopted by the U.S. is likely to have a significant influence on the shape of the global virtual currency economy in years to come.


    Notwithstanding the use of the term wallet, it is not necessary that users store their Bitcoins in their wallets. In fact, for security reasons, users are often advised to store a list of their Bitcoin serial numbers [sic] on paper, a USB key, or a non-internet-connected hard drive (all of which are referred to as cold storage or cold wallets) rather than in an online (or hot) wallet. The user must then load the Bitcoin into the wallet prior to using it for a transaction.


    ...in some cases, there will be no wallet provider associated with a Bitcoin wallet. Where there is no wallet provider, there is no entity that can be subject to regulation other than the user. Regulating the user would not likely be viewed as furthering the consumer-protection policy that motivates much of the existing payments regulatory framework.


    Given the limited size of the virtual currency economy, no virtual currency exchange or wallet currently is likely to satisfy the requirements that must be met to be eligible for designation as a systemically important FMU {Financial Market Utility} or as engaging in systemically important PCS {payment, clearing, and settlement} Activities.


    It is unlikely that exchanges that accept and maintain fiat currency accounts would be deemed to be taking deposits for purposes of U.S. banking laws, as (i) most exchanges that engage in such activity use a bank custodian model and (ii) most virtual currency exchanges are either located outside the U.S. and/or have established banking relationships with non-U.S. depository institutions.


    ...a team of core developers, led by developers allegedly appointed by Satoshi Nakamoto, has a leadership role in proposing changes to the Bitcoin protocol. However, that team has no authority to force the Bitcoin community to accept such changes.


    ...one existing unregistered virtual currency exchange advertises that it will be offering customers the ability to earn interest on the Bitcoins those customers deposit with the exchange at an attractive rate. In this regard, the exchange could be seen as offering a security (an investment contract) to its customers&


    ...While virtual currency market participants may eventually develop an insurer similar to the FDIC or SIPC, or may even be able to obtain insurance coverage from private insurers in a more de-centralized fashion, in the absence of a meaningful insurance fund, regulators should ensure that consumers and others engaging in transactions on virtual currency exchanges receive adequate warnings of the risks involved in that activity (e.g., that trading in virtual currency products on an exchange is unregulated and risky, and may result in the loss of the consumers investment), similar to disclosures required for penny stocks or even the Surgeon Generals warning regarding use of tobacco products.

    The white paper in part concludes that:

    This white paper has described certain of the risks faced by consumers and others that hold or transact in convertible virtual currencies, and has evaluated certain ways in which U.S. regulatory authorities may consider regulating virtual currency transactions, products and marketplace participants based on their functional similarity to other transactions, products and marketplace participants that are regulated. The failure of Mt. Gox earlier this year, and the value that may have been irretrievably lost in connection with that failure, serves as a perfect backdrop for this white paper. The aggregate number and value of virtual currency transactions and holdings in the U.S. is small relative to most other regulated payments transactions and trading markets. However, the emerging nature of the virtual currency marketplace creates an opportunity to develop and implement a regulatory framework to mitigate risk to consumers and others without unduly burdening innovation and while the structure of the marketplace remains malleable.

    Image Credit: Cigarette Box is an altered Flickr Image

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