What happens if governments try to dominate the Blockchain?
Friday saw the release of Citi’s frank review of digital currency in response to the UK Treasury request for information on Digital Currency. While not entirely unexpected it does start to show where the “battle lines” are likely to be drawn between traditional banks and government on one side and digital currency adherents on the other. I would encourage interested parties read the full text of the Citi response obtained by Coindesk from this URL ( http://www.scribd.com/doc/266008779/Citi-Response-to-the-HMT-Call-for-Information-on-Digital-Money )
The first phase of the regulation “Battle” was accepted by the majority of Bitcoin service providers fairly quickly because of the recognition that performing KYC and AML checks had real benefits for the consumer of bitcoin services. It both prevented criminal and terrorist organisations gaining access to the financial benefits of the blockchain and also provided legitimate consumers with details of who they are doing business with – after all, exchanges and Bitcoin financial institutions can hardly force KYC checks on their customers while hiding behind a veil of secrecy themselves.
These changes have allowed great strides forward in the protection of customer assets and, thankfully, the instances of companies disappearing overnight with customer funds is becoming a much rarer occurrence.
Another direct customer benefit of an identified customer and KYC checks is the ability of companies to offer truly segregated customer accounts, a feature that is implied in traditional banking relationships, but which can now be proven due to the transparent nature of the blockchain.
All reputable companies in the industry will have clearly defined customer wallets which hold customer funds. These assets are delineated and belong to the customers and can be returned if required.
What protection do you have if you choose to do business with an anonymised company if a sovereign government locates that company and then chooses to raid it seizing all the bitcoins they hold? The company has no customer records so cannot prove who owns the assets; your assets will be seized by the authorities along with the funds of the “company”. You have no recourse or protection to retrieve your lost assets!
Instead of flouting the rules, progressive companies in the bitcoin space tailor their operation to provide the maximum privacy for their customers. For instance we have chosen to domicile our company in Switzerland with no operational presence in the US. We have used this model from the outset so we can respect the privacy of our customers while still following full KYC rules. With our model if the authorities believe a customer is laundering illegal money they can request these details through the courts. We are not, however, subject to blanket disclosure requests by the US or any other jurisdiction. This is where the focus should be; not the protection of illegal activity but the protection of a customer’s right to privacy.
Which brings me back to the Citi response; Citi have proposed that the UK Government introduce a form of digital currency as legal tender. The key answer which really highlights the position that Citi (and I imagine a number of existing financial institutions) are taking is highlighted by the last answer to question 10.
Question 10 asked “Should the government intervene to address these risks, [associated with criminal organisations benefiting from digital currency] or maintain the status quo.” Followed by the second part of Question 10, “What are the outcomes of taking no action?”
Citi responded, “A first step should be to provide immediate guidance to regarding existing digital currencies. There are clearly benefits for businesses and consumers in using these currencies. The existing cannot be controlled unless a better, safer alternative emerges unless governments and banks are at the centre of this technological shift beyond paper and credit cards it will continue to support financial crime. To be a key participant may mean that banks and governments need to work together to develop digital currencies that supersede the existing physical and electronic solutions.”
So in essence it appears the suggested approach is to follow the path detailed in the response to Question 8 that has been followed by the EBA, Argentina, Brazil, and India; “warn” the public about the “dangers” of digital currency until an alternative controlled by governments and existing monopolistic banks can be introduced. This approach implies a massive increase in regulatory control and the corresponding dampening of entrepreneurial drive and innovation that has characterised bitcoin in its formative years.
I’ve always considered myself on the more moderate side of this discussion. I believe that certain levels of regulation are not only necessary but welcome because they protect the consumer and help with mainstream adoption of the currency.
If, however, the banking and regulatory authorities are intending an approach similar to that proposed by Citi then the bitcoin community as a whole should put clear water between themselves and these proposals and strive toward a genuine alternative to the current monopolistic banking system.
CEO, First Global Credit
I’ve been quiet for the past 2 months about predictions because I strongly believe that if you have nothing of value to say then don’t waste peoples time. However, after 2 months of quiet, I thought it was time for an update.
After giving us the opportunity to get long a 50% position at an average price of 223 the market has done nothing but meander back and forth. This behaviour pattern is not uncommon in a market after a period of high volatility and simply signifies a period of value testing – does the market feel fairly priced at this level?
We now need to consider what to do with our small 50% long position.
On the upside I will be extending my position to long +100% if we break above 330 (The market is currently trading at 260 at time of writing). This is a pivot high following the reaction to the 166 lows back in early 2015 and breaking this should see a period of sustained higher price action. On the downside I’m no longer willing to see a loss on this small position so look to place a stop below the recent congestion level at 230.
A final note of caution, recent market behaviour will have made people lazy with stops and undisciplined in their trading; don’t get caught out! Quiet periods like this rarely signal when they end.
The end is likely to come as a sustained move in one direction or another; often not a dramatic surge but a consistent grinding move which will catch people out who are waiting for the retracement to close out. Stick to your stops and your trading discipline.
Over the past few days market action is starting to look mildly constructive; It is encouraging enough to suggest that we dip our toes back into the market.
We are entering to buy of a 25% position at the current price (284 at time of writing) with a further 25% bid below the market at 271. Protective stops should be placed below the 250 level. I would recommend a very disciplined use of Stops at the moment as a further slide can’t be ruled out.
We will build on this position if the market starts to trade higher.
First Global Credit
As 2014 draws to a close I find myself not just recalling the events of the past year but also looking ahead at the year to come. 2014 was a mixed year for Bitcoin; the ongoing post Mt Gox decline has fuelled the arguments of sceptics like Warren Buffet who “warned investors to stay away from Bitcoin, calling it “a mirage,” saying that, while it may be a better way of transmitting money, the “idea that it has some huge intrinsic value is just a joke.”
On the other hand merchant acceptance of Bitcoin has gone from strength to strength. This is no longer a collection of niche enthusiasts that accept bitcoin as a political statement; we have the “Standard Bearer” of merchants, Overstock integrating Bitcoin with their online payment systems as well as Microsoft, Expedia and Dell accepting Bitcoin as a way of increasing market share and accessibility to their customers.
There can be no doubt that Bitcoin is rapidly becoming an accepted form of transaction processing but where does it go from here? Most merchants who “accept” bitcoin do so in the same way a US company might “accept” EUR or GBP as a way to attract additional business. The transaction immediately converted into the base currency of the merchant. While this is a good first step towards the general acceptance of Bitcoins into the mainstream, we need to go further.
2015 needs to be the year that Bitcoin becomes more than just a transactional currency that is converted immediately into fiat to avoid value fluctuation risk. People and merchants need to have the confidence and ultimately a reason to hold onto their Bitcoins; and that reason shouldn’t be the hope of the value going up (nice as that is).
So what is needed to help Bitcoin make that leap from Transactional Currency to Investment Currency? Here are my 2015 predictions of the new developments we are likely to see over the next year.
- Deposit Capabilities. Holders of Bitcoins need the facility to place their bitcoins on deposit and get a secure return on that deposit in the same way holders of traditional currencies can deposit their cash in a savings account and receive interest on that deposit. (Low at the moment, but still a return).
- Investment capabilities. Holders of bitcoin need institutions where they can choose to invest their money in instruments or assets that carry a higher return than bank deposits, though obviously these investments will carry a proportionally greater risk. This is not exactly a prediction as these opportunities do exist though they are currently few and far between. But the facility to invest Bitcoins for a return needs to expand to include a range of opportunities that will suit the tastes of various investors. When the ability to invest Bitcoins exists, holders are less likely to run for the exit at the first sign of trouble.
- Bitcoin denominated Bonds. While there have been sporadic attempts to launch various “Bitcoin Bonds” they have been limited in scope and appeal. We need, as a community, to establish a viable framework where companies can issue bonds denominated in bitcoin (and interest repaid in bitcoin). For this to be successful there needs to be a viable aftermarket where bonds can be traded so holders are not tied in for the full term of the loan.
- The publication of the Bitcoin interest rate curve drawn from multiple sources so it can be used as a reference to structure deals and issues.
Many members of the Bitcoin community still see these developments as the unnecessary intrusion of traditional financial doctrine into the world of digital currency – I would frame it differently. Without these developments Bitcoin will never evolve into a method of exchange, fully independent of Fiat currency.
Having the majority of transactions undertaken in Bitcoins immediately swept into Fiat currency becomes a self-fulfilling prophecy that keeps bitcoins transfixed at the ‘tool’ stage; a low cost way to affect transactions that circumvents expensive bank charges – but not a true currency.
Only when companies can securely invest surplus digital capital and raise funds in bitcoins will people see a reason to hold their wealth in Bitcoins. Then we will see Bitcoin take its place as a genuine independent Investment Currency alongside Government controlled Sovereign Currencies.
So will the community take that leap and develop the infrastructure needed to take Bitcoins to the next level?
First, we need to move away from the simple “exchange” model as the only way of generating profit from Bitcoin investment. Speculators are a necessary part of the financial eco-system but this should only form a small part of the overall picture. Other opportunities need to be made available so holders of bitcoin can generate a return without rapidly moving in and out of the currency, promoting volatility and short holding periods. We should be encouraging longer term holding and stability rather than aggressive speculation.
Second; we need companies involved in the bitcoin finance industry to come together and develop a framework that will give customers the assurance they need that they can safely invest their capital – this is not a call for external regulation, on the contrary, the shambles left by the mainstream financial industry over the last five years is ample demonstration that external regulation is not the answer. It would be far better if we could transform the idealism of the Bitcoin community into a self-regulatory framework focused on long-term profitability, not just a quick grab at short-term profits. If this can be achieved it will put us in a good position to maintain only “light touch” controls from regulators.
Third; companies that are serious about moving Bitcoin forward from a transaction currency to an investment currency need to start working together to provide investors with a consistent point of comparison. Not everything is a zero-sum game; by co-operating and offering standard benchmarks we can start to build confidence in the marketplace and allow customers to make informed decisions between the products on offer.
At First Global Credit we have started discussions with a number of partners about how we can merge services to provide something of more value to our combined customer base and provide consistent benchmarking and security. While we may miss out on some potential in the short term we believe this will grow the overall size of the market and benefit everyone in the community as standards are adopted.
One thing we can all be sure of, 2015 will see dramatic developments in the Bitcoin marketplace; some great innovations will be introduced and further progress made. I am passionate about the potential of Bitcoin, but my belief is that for that potential to be realized Bitcoin must become more than a mechanism of trade, it must become an investment currency. I am equally sure that this is not something any single company can bring about on its own – Bitcoin financial service companies need to start working together for the good of the overall Bitcoin community and the security of their customer’s investments.
Have a great 2015.
CEO First Global Credit
Nine days of practice trading time remain until the competition starts!
November 22, 2014:
First Global Credit yesterday announced the details of its “Ticket to Prosperity” competition in front of room jammed with avid Bitcoin Traders at The Bitcoin Center of New York located at 40 Broad Street just steps away from the New York Stock Exchange. The competition takes place using First Global Credit’s Active Trader Service Platform and enables individuals to compete for the opportunity to become a market trader fully backed by First Global Credit.
People can sign up for a free demonstration paper trading account immediately and then when they log into the First Global Credit site on December 1st, they just need to select the Competition account. The Demonstration Paper Trading Account enables users to try out the trading system using simulated Bitcoins as collateral to make investments in stock, stock market indices, ETFs and precious metals. Although the investments are not “real”, the simulation uses live price data and fee structure so reflects exactly what would happen in an equivalent live environment. “This includes an increase in trading power if the price of Bitcoins goes up while they are trading.” Says First Global Credit Business Development Director Marcie Terman. “This service is about maximizing the earning potential of your Bitcoins while retaining them for their long-term growth potential.”
First Global Credit will provide all competition participants with 100 ‘demonstration’ Bitcoins to use as security during the competition. Every day the top ten traders will be reported on the First Global Credit’s Facebook page and Twitter feeds. The winner will be announced 12 noon GMT Saturday, the 17th of January with access to the live trading account to commence the following Monday.
The competition will run from 1st December 2014 to 16th January 2015 and is open to anyone regardless of age. “Of course, we will have to find something to replace the Porsche Boxster lease that is provided when the star trader reaches Level 11 of the trading program if they can’t legally drive; like in the case of a super talented 12 year old for instance,” laughs Terman.
For full competition terms and conditions please go to Competition Terms for full information.
First Global Credit launched its Bitcoin investment service at the Inside Bitcoin Las Vegas at the beginning of October. That service, designed for people that prefer a buy and hold strategy has had clients using actual Bitcoins as investment collateral almost from day one and has been gaining dozens of users on a daily basis.
The website, www.firstglobalcredit.com makes it possible for those who have mined, purchased or received Bitcoins in payment to maximize the potential of their holdings by using them as security on investments in world-wide stocks, ETFs, commodities and stock markets indices. This is the first of five major service launches planned for 2014-2015, and the first of many investment options that will become available through First Global Credit over the next few months.
How to Participate
1. Go to http://www.firstglobalcredit.com/register and enter an email address to create a demonstration paper trading account. You will receive a temporary password at your email address which should be used immediately to log into the account. ‘Demonstration’ Bitcoins can be added to the demonstration account to be used as collateral for paper trades.
2. On the first of December when logging onto the website, select “Competition” from the pull down menu to start trading. Each competition account is seeded with 100 synthetic Bitcoins to be used for the full length of the contest. Lose them and you are out. Grow them to a value greater than any other trader and you win.
3. Your performance can be monitored on the Trade Statement tab of the competition platform. To see if you’ve made it into the top 10 subscribe to the @FirstGlobalCred Twitter feed.
Don’t be spooked by the recent decline in BTC back to $350, this is natural market behaviour after the sharp snap-back and has been characterised by particularly low volume, a positive sign that much of the selling has dried up.
After the initial pop we were looking to go long BTC vs USD at $320-$330, this level now looks optimistic. Scaled buying at the levels $340 /$333 / $325 should allow a position to be established at a good level with limited risk.
We would still steer clear of paying up for this market as this first recovery leg is likely to be hesitant before the market regains its poise and confidence. Aggressive pyramiding can wait for the next up leg if we are able to establish a good base position at the above levels.
Stops on these positions would be well placed below the lows reached in early October.
When creating First Global Credit we believed that like all financial institutions we needed to adopt KYC standards for several reasons. First and foremost, if you do not have knowledge of who is using your systems you are creating an invitation to thieves who thrive in an environment of anonymity. If users remain anonymous it is impossible to track them if they hack systems and steal assets. By simply demanding that people verify their identity and location, those looking for easy picking are likely to look elsewhere to carry out their thefts.
The second reason, and this speaks more directly to how we chose to structure our business, is that no one operates their business in a vacuum. We operate ours in the real world, where, if you choose to ignore AML and KYC, you are creating the perfect environment for a government to enter and seize your client’s assets.
Privacy is the issue not Anonymity
This is the point that people are missing. Reasonable people are not concerned with anonymity. What they really are concerned with is privacy and having their financial records open to examination by any government body that chooses to make a blanket request.
There is a simple and realistic way to deal with this issue that certainly takes more work, but does not counter agreed conventions. We have chosen to domicile our businesses in countries that share our values of respecting our client’s privacy. This attitude is shared by many significant financial companies who have taken the view that they will not and cannot operate an office in any country that demands the right to make a blanket request to look at customer information.
If a warrant is issued due to suspected criminal activity there is absolutely no question that we would pass that along to our solicitor to be taken up in a court of law. Furthermore, if there is evidence of criminal activity we will certainly provide full details of that particular customer to the authorities.
There are still places in the world that have the same view that we hold. That people are innocent until proven guilty and that governments are run for the benefits of people, not to control or dominate them. So the question we should be asking ourselves is what countries can we operate in where they share our values of respected privacy?
First Global Credit client accounts are currently held in Charlestown, Nevis and Belize. The server infrastructure is located in Switzerland, with technical service and support managed in the UK. No customer details are held in the UK or on UK servers and employees of the UK Company have no access to detailed customer records. This protects our customers from a blanket request for information by the UK or US authorities.
These policies make it possible for us to protect our customers and meet the legal requirements of a financial service company.