The Impact of Central Bank Digital Currencies on the Banking Sector

David Andolfatto


Here is an interesting podcast by David Andolfatto. About the Impact of Central Bank Digital Currencies on the Banking Sector. He also gave a short summary of his recent paper about Central Bank digital currency, It doesn’t think a lot of Central Banks will be willing to experiment with the notion of issuing, the equivalent of digital cash, just for a lot of regulatory concerns, like knowing your customer requirements or anti-money laundering rules.

The Two payment structure in the US today-

  1. On one hand, you have these big powerful depository institutions, these private banks that have access to and can hold accounts directly with the Federal Reserve Bank. These accounts are interest-bearing accounts. They presently earn a 2% interest. The banks can send money between themselves using Fedwire, which is a real-time gross settlement system. So you can send money instantaneously and there’s like trillions of dollars that flow through this system every day and moreover for the banks, it costs almost nothing to operate this Database Management System. It’s basically free as far as the big banks are concerned.
  2. On the other hand, you have the retail experience. The one that he has to go through or some small business for example. They either have to use cash which is very costly which takes a lot of resources to secure, to transport and to deposit.
    So in contrast to these big banks that pay basically nothing for instantaneous payments, you have the small business person who’s working on very small margins. They have to pay these big interchange fees and the payments don’t clear for two or three days.

His proposal in this paper is to say, what if we combine/permit these regular retail people to have access to interest-bearing Central Bank digital money, where the payments clear instantaneously on a real-time gross settlement system.

He also discussed a few words about Blockchain and shared database system and the idea of a central bank holding reserves in some security like crypto or Bitcoins and Gold.

A more detailed podcast from David Andolfatto on the Epicenter channel is given below:


Bitcoin speculation


Speculation is described by the modern dictionary in two related yet different ways :(1) “the forming of a theory or conjecture without firm evidence.” and  (2)“investment in stocks, property, or other ventures in the hope of gain but with the risk of loss”. 

In the context of cryptocurrencies – definition (1) seems to have an impact on the definition (2). The past week has seen an immense number of theories – from the banning of exchanges by China, to a known name in the financial world calling cryptocurrencies frauds. The market reacts to every one of these news articles that are sourced sometimes from unconfirmed sources – irrespective of whether the player has any real investment in that asset class or not.


There are 160+ obituaries written for Bitcoin documented here since Genesis. Prices have dropped (sometimes significantly) each time any negative news makes it to the headlines causing significant profit booking by active traders. A classic event study will demonstrate the reliability of these markets on information from any source -reliable or not. Most of these news articles are the basis of Speculation but increase the “risk of loss” to long term investors.

Mature markets

Mature securities markets do not react with such swings in the face of unconfirmed news or rumours, since firms usually control their public announcements.The biggest difference between an evolving technological market, and, a mature one is  in the level of volatility (- mismatch in supply and demand -)  a market exhibits in the face of external news (- e.g. a trader who has zero stake in the Bitcoin ecosystem commenting about its problems without providing any evidence). Overall, mature markets will need more evidence, so as to increase the “risk of loss”.

In other words, the higher the evidence an actor provides to either support or oppose a viewpoint, the lower the “Risk of loss” would be. This maturity in terms of resilience (of supply and demand) is probably coming soon (and) will probably be a facet of these markets. Such maturity and reliance can happen only when we see mass adoption of applications such as the  “Brave Browser” , or, the instantaneous remittance application ABRA.

The Blockchain solves Byzantine general’s problem – part 2

Trust and the Blockchain

In my previous post here, I had written about the two key problems the Blockchain solves. In this post, I’ll talk briefly about the Byzantine General’s problem – an intricate Distributed Computing problem facing all distributed systems.  On the Blockchain, “trust” shifts from a DBA (or a database administrator or a trusted third party) to a set of computers that concur about the true state of a data residing in a database.

Byzantine General’s problem

The Byzantine general’s problem described in detail here gives us a two-part problem statement.

Firstly, consider the context: There are ‘n’ generals attacking a castle. Unless and until all of them act on the same plan, the castle will not fall. The generals communicate amongst themselves using messengers. It is known that a few of the ‘n’ generals are traitors, and will never follow the plan. In such a scenario here is two things a solution to this problem should accomplish.

a) all generals decide upon the same plan of action.


b) a small number of traitors should not be able to cause the loyal generals to adopt a bad plan.

Byzantine general’s problem in the context of the Blockchain

In the context of the Blockchain – an openly accessible ledger stored on multiple hosts all interconnected, and, claiming to have a copy of the exact same ledger (or the state of truth), the Byzantine General’s problem is a potent factor. A few nodes could have wrong (or incomplete data) and could attempt to send false transaction data to other good nodes on the network.


Transaction Validation – Blockchain

Today and tomorrow at New York, the Consensus 2017 is happening. It is the world’s largest conference around any and every happening about the Blockchain.

Amongst the many panels, and talks happening I found this one from the CTO of Ripple. The talk from about 7:00 till 18:00 compares and contrasts 3 of the most innovative approaches to Transaction validation i.e. Proof of work, Proof of stake and Proof by consensus.

The interesting thing about the Proof by Consensus, is that it uses the wisdom of the crowd to concur on the validity of the transaction.

While I do think Proof by consensus is unique and “at the current moment” the fastest because of many reasons – over a period of time- once Ethereum moves onto the Proof of Stake method for validation, this is going to be the fastest mode of validation of the transaction – and – additionally going to reinforce the network value; since nodes will be incentivized to own more ether in order to obtain transaction validation power; and rewards thereoff.

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Cloud Mining

Cloud mining is a unique business.

HashFlare demo

Firms such as Genesis mining and Hashflare, have arrived at very unique business models never seen earlier in the internet infrastructure industry.

These firms raise capital from the public based on mining capacity measured in Tera Hashes (for Bitcoin) and Mega Hashes (for Ether, SCrypt, Dash, etc.). Then these companies return – pretty much on a daily basis – a share of the revenues( coins earned) by the pool back to the investor. The return on investment is issued in coins (E.g. ether, dash, BTC).

Investors can either withdraw daily returns on investment or reinvest back into their mining pool – at a transaction cost. The amount returned to the investor is in the range of 40% – 60% of the mined capacity.

This slows down as the network becomes larger, and, at some point where the cost of mining overtakes the transaction cost of the deposit to be made – mining stops and the returns on investment stops.

These models can scale significantly because there is neither a lower limit nor an upper limit on how many pools or Tera Hashes an investor can invest in.

Fermat and Internet of People

Amongst, all innovations in the Blockchain space – be it ICO’, DAO’s or Steemit – I feel that Fermat’s protocol – aptly nicknamed the Internet of People (or IoP) is the most powerful. The Fermat project’s goals will enable silo-less firm’s to operate with contracts directly off the blockchain where employees will be compensated based on their contributions. Similarly, open social graphs – another goal of the project will make transactions and communications more efficient, realistic and significantly free of spam.

The following whitepaper by the Fermat team is fantastic to read.

Quoting straight from the whitepaper that has been influenced by Fermat’s last theorem I observe the following main contributions arising straight from theory.

“We foresee an entire ecosystem of powerful apps that:

● allow business to be done free of middlemen – ie. organizations without bosses and contracts that pay people according to their contributions.

● operate with both digital fiat and cryptocurrencies – i.e. compensations determined by the network of contracts

● are censorship resistant – i.e. not controlled by a single entity.

● treat content as digital assets for which authorship is fully compensated “ – i.e. shares rents earned from network effects with the creators of content….

The last one specifically is very important and powerful. What we know of today’s internet business models – such as Facebook , Snapchat , whatsapp have been created wherein users contribute significant content without any compensation on these platforms. The utility to the users of the platform is fungible on public markets, but the rents are earned by the firm and its shareholders.

The end user who actually creates the content is never compensated – and partakes only a small part of the utility by being satisfied with the ability to interact on the platform. This “free renting” will change with a blockchain based system – as proposed in Fermat. Already Steemit and Ethereum based systems are attempting this, but Blockchain ecosystems will start sharing the rents earned from content with actual content creators.

Imagine a company such as Snapchat going public and distributing the entire $19 Billion market capitalization amongst its users and shareholders based on a revenue / profit/ value sharing process, that has been agreed upon by all participants of the ecoSystem. – This is utopia, but there are many many loopholes in the implementation details that need to be implemented prior to Fermat taking wings.

Land registry on Blockchain

According to  a report here, two municipalities in Brazil are trying to put their land registries on a public “colored coin” Blockchain. This is not the first instance – Sweden is at the second phase of its implementation of the Blockchain for its land records. Such a move is supposed to save the public exchequer somewhere between $100 million and $200 million.

Two years – ago- at an invited seminar at Takshashila foundation – a policy think tank , I had suggested idea of putting up land records on the Blockchain, in big counties. One of the largest sources of dysfunctional (or inefficient) societal institutions globally is this one factor –  the asymmetric competition for  natural resources such as land, that lead to inefficient transactions. More so in developing economies, where urban land (and other resources such as wireless spectrums, waterways, etc.) is rare, and demand is so high that prices are unjustifiable.

This leads to several problems – chief among st them corruption in land bureaus, land grabbing, illegal occupation, sale of zoned land, occupation of lake beds, etc…  With a Blockchain (and alt-coins) based approach this entire registry and series of transactions – not only becomes transparent, but also eliminates the unwanted middle men or official who sits in the land registration office.

Transactions, can, at some point happen directly between the buyers and sellers, with a proper record of the transaction being stored perennially on a publicly accessible – secure and verifiable-ledger. Not only can sale deeds be recorded on the Blockchain, but also, contracts for long term leases and other “specialized” contracts can reside on the Blockchain.

I am sure, after this pilot, many other states, counties and countries will seriously consider moving their land registries onto an alt-coin backed “public” Blockchain.  Transforming land based transactions will be the very first step at stemming large unaccounted cash flows globally.

The Bitcoin Hard Fork – PART 1.

Right now, Bitcoin is trying to do an Ethereum – style hard fork. There have been many discussions around this. Here in this part 1 article I discuss why Bitcoin needs a Hard Fork.


  1. Bitcoin needs to scale because of problems related to block validation times and block size. Each new transaction (and there are several thousands every second) needs to be entered into a ledger after validating it, in a process known as mining – wherein a new block is created.
  2. With the many new transactions being created – the time it takes a series of transactions to enter the ledger has been increasing. This has caused third party players – such as short term creditors – validators – etc. to earn rents to fill the gap, making bitcoin’s whole value proposition of low transaction costs to be questioned.
  3. What this means is that – if someone were to immediately consummate a transaction such as paying someone else, or buying something at a store, if it takes 10 – 20 minutes for the bitcoin network to validate that transaction  -as in say – the payer has the requisite amount of money that can be paid to the payee – then a third party can lend the payee the money for 10-20 minutes at an insanely high rate of interest say 2.5% for those 10-20 minutes to consummate the transaction immediately. The third party does other forms of validations while the actual technology i.e. bitcoin mining network takes longer to validate the transaction.
  4. Another problem is with the number of transactions that can actually be put into each subsequent block to be validated. This upper limit is set to a particular number by the current bitcoin implementation. If someone were to revise this upper limit then all nodes on the bitcoin network – including the miners and the wallets will have to update their source code.

BITCOIN UNLIMITED is the proposed Bitcoin hard fork which supposedly handles this upward revision in block size. It is supposed to remove all scalability restrictions of bitcoin while making it seamless. In the next article I discuss the debate around whether to fork or not to fork and Bitcoin’s development model.

Disruption at Scale of a Billion across the length and breadth

This past week I travelled to (almost) the four corners of India. To Bangalore, Calcutta, Ahmedabad and Mumbai. One thing that I couldn’t fathom was the scale of  disruption in the telecom sector. Reliance Jio – a free 4G connection –  with (almost) unlimited data for its subscribers was accessible across the length and breadth of the country.  This caused most of the population to leapfrog – 1G, 2G, 3G and other forms of data connectivity.

People who had never used data on their phones were now extremely conversant with mobile communication apps -mostly Whatsapp in this part of the world. Every service/every hotel I stayed in, including government services listed their whatsapp numbers to their customers. Reliance Jio made this happen. First generation mobile users – who had so far never even used anything other than a landline – were extremely conversant in flipping out their phones and starting a video call with their whatsapp counterparts.

This scale of disruption of a billion users across the length and breadth of a vast country such as India is unheard off. The effects are multifold – consumer awareness is at its highest, consumer serviceability is at its best, and overall the masses are happier because they are not at the mercy of expensive (unknown) hidden costs if they have to call someone – anywhere…

Whatsupp! Ethereum, Snap IPO and Cryptocurrencies

Over the past few days, there has been activity in the Crypto space: The Enterprise Ethereum Alliance was formed. This is similar to IBM, HP and others backing the Linux foundation during the late 1990’s/2000’s.  As a result, etherum moved from 11$ to about 20$ this week and just crossed the 2B$ market capitalization.

Dash (formerly Darkcoin), another cryptocurrency is the rising star in this world of altcoins. Dash is the true implementation of proof of stake combined with distributed-consensus mechanism. This implementation makes transactions immediate. Their integration with existing  merchants, closed and open loop payment networks like VISA  is second to none.  The team is putting some serious effort these guys are putting to make this a currency that does all, with less time and almost no transaction cost. Their master node incentivization mechanism works like a bank giving equity to people who deposit money in addition to interest on their deposits. Read about it here

Snap IPO’ed this week. The irrationality of multi-billion dollar valuations, in times where markets penalize even a 10-12% growth (e.g. Yahoo!). Generations of internet companies have followed this path of raising massive capital from public markets (at high valuations) in expectations of  massive growth due to network effects. However, with Crypto-currencies like Steem (or and with mechanisms on Ethereum) there is a possibility that this can change.  The end users that cause the network effects can possibly earn dividends for using a  social networking or messaging platform. This is almost like banks giving people a share of the dividends in addition to interest they earn from the money deposited by account holders.

This will probably be the next generation of internet companies-  those that reward users, and, also themselves.