Token ring – a digital ID solution

The latest event organized by DIG ID (the Melbourne Digital Identity Meetup) featured a Q&A with Steve Shapiro, CTO of Token, moderated by Alan Tsen, General Manager of Stone & Chalk Melbourne. Given the current level of interest in solutions to address online fraud, ID theft, data protection, privacy and personal security, the discussion covered a lot of conceptual and technical topics in a short space of time, so here are some of the key points.

First off, Steve spoke about his start-up and tech journey, that took him from IM (Digsby, Tagged, Bloomberg IB), to cryptocurrency and digital wallets (Case), to digital ID with the Token ring. The pivot towards an ID solution came about after working on Case, where he realized that most consumers don’t understand private key management and the issue of permanence (as compared to the internet, where password re-sets are relatively easy, and often regularly enforced upon users).

If the goal is to provide fool-proof but highly secure end-user authentication, the solution has to focus on the “signing device”, by making it much easier than the status quo. Hence the combination of two-factor authentication (2FA) and bio-metrics to enable Token ring users to live key-less, card-less and cashless, and without having to constantly remember and update passwords. In short, the Token ring works with anything contactless, as long as the relevant permission/authentication protocol layer (challenge and response process) is compatible with the ring’s circuitry.

In assessing the downside risk, gaining consumer adoption is critical, to ensure that users see the benefits of the convenience combined with the credentialing power. Equally, success will depend on the ability to scale as a hardware manufacturer, and the potential to drive traction through virality.

There is still a lot of design work to do on the hardware itself (to enable assembly, customization and distribution as locally as possible). And the platform needs to bring on more partner protocols, especially in key verticals. At the end of the day, this is still a Blockchain solution, with a UX layer for the cryptographic component.

When asked about the future of ID, Steve felt that in the medium term, consumers will no longer have to carry around multiple cards or have to remember multiple passwords. Longer term, governments will no longer be the central authority on managing ID: unlike today, a driver’s license will no longer be the gold standard – instead, solutions will be based on decentralized, contextualized and user-defined ID.

This led to a discussion about Sovereign IDe-government and digital citizenship (e.g., Dubai and Estonia) – and the break up of big government in favour of more city-states. (Which could result either in a “small is beautiful” approach to self-governing and sustainable communities, or a dystopian nightmare of human geo-blocking, as in a film like “Code 46”).

For the tech buffs, the Token ring’s IC hosts a total of 84 components, including the main secure element (as with mobile phones and other devices), finger print reader, optical scan, Bluetooth, NFC, accelerometer, MCU, Custom inductive charging etc.

Finally, there was a discussion about the risk of cloning, mimicking or breaching the unique and secure ID attributes embedded in each Token ring. While it is possible for users to encrypt other knowledge components as part of their individual access verification and authentication (e.g., hand gestures), there is still a need to rely upon trusted manufacturers not to corrupt or compromise the secure layer. And while the public keys to core protocols (such as credit cards and swipe cards) are maintained by the protocol owners themselves and not stored on the device or on Token’s servers, it will be possible for other third parties to on-board their own protocols via a SDK.

Next week: Startup Vic’s EdTech Pitch Night

 

 

Bitcoin – to fork or not to fork?

Anyone following the crypto-currency markets this past two weeks will be fully aware that this has been a turbulent time for Bitcoin and other blockchain assets. First, the SEC published its Report on the DAO.  Second, there was a significant arrest in connection with the Mt Gox failure. And third, Bitcoin underwent a fork which has resulted in a new version, known as Bitcoin Cash. Meanwhile, at the time of writing, the price of Bitcoin itself is testing renewed highs, and continues to enjoy a 3-month long rally.

What implications do each of these developments have for the digital asset industry?

Photo by Andre Chinn – Image sourced from Flickr under Creative Commons

The Mt Gox-related arrest came as Japanese authorities began separate criminal proceedings against the former head of the failed exchange. These developments underscore two things: 1) as with any complex financial fraud investigation, bringing the culprits to justice takes time. 2) exploiting the financial system for ill-gotten gain is not exclusive to crypto-currencies – just ask investors in Australia’s CBA bank how they feel about losing nearly 4 per cent of the value of their shares in one day on the back of a money laundering scandal.

It also means that as regulators play catch-up, exchanges, brokers and other participants in the crypto-currency markets will need to ensure that they are updating their security and privacy systems (to prevent future hacks) while ensuring they comply with AML/KYC/CTF provisions. No bad thing, to instil confidence and trust in this emerging asset class, which is entering a new phase of maturity.

The SEC Report on the DAO, meanwhile, has put ICO’s (Initial Coin Offering) and TGE’s (Token Generation Event) on notice that in some cases, these products will be treated as securities, and will be subject to the same regulation as public offers of shares etc. As a result, token issuance programs will need to structure their sale processes to be either fully compliant with, or exempt from, the regulations; at the very least, they must remove any suggestion that these tokens are capable of creating security interests in financial or dividend-bearing assets, unless that is the express intention. (In some cases, these tokens are sold as membership services, software and IP licenses, or as network access permits. Any “return” to the buyer comes from the network value effects, service discounts or user rewards, similar to frequent flyer schemes and customer loyalty programs.)

Again, this suggests a coming of age for digital assets, and a growing maturity in the way token sales can be used as an alternative to VC funding and other traditional sources of raising operating capital and project financing.

The Bitcoin fork was hugely anticipated, with a mix of fear and excitement – fear because of the unknown consequences, excitement at the prospect of Bitcoin holders getting “free money” in the form of “Bitcoin cash“, via a 1:1 issue. Without getting into the technical details, the fork was prompted by the need to increase Bitcoin’s blockchain processing speed and transaction capacity; and while nearly everyone connected to Bitcoin’s infrastructure agreed on the need to accelerate block performance, there was a schism as to how this should be achieved. Some exchanges said they would not recognise the new currency, and only some Bitcoin miners said they would engage with it (especially as the cost of mining the new asset was more expensive than Bitcoin core). In addition, most exchanges were advising their customers not to attempt performing any Bitcoin transactions for several days, before and after the fork, until the system settles down again.

In the aftermath of the fork, at least one more exchanges has said it will probably offer some support Bitcoin cash; while due to the nature of the fork, Bitcoin cash’s own block processing time was something like 6 hours – meaning transactions could not be confirmed, and holders of the new asset could not easily transfer or sell it, even if they wanted to. It feels like a combination of a liquidity squeeze, a trading halt, and a stock split resulting from a very complex corporate action.

So far, the value of Bitcoin has held up, while the value of Bitcoin cash has steadily declined (despite an early spike), almost flat-lining to less than one-tenth of the value of Bitcoin:

Relative value of Bitcoin cash (BCH) to Bitcoin (BTC) – Market Data Chart sourced from Brave New Coin

I’m not a “Bitcoin absolutist“, as I think different currency designs and technical solutions will continue to emerge based on specific use cases. These products will continue to co-exist as markets come to understand and appreciate the different attributes and functionality of these digital assets.

As a consequence of recent events, some new token projects are refining the design of their issuance programs, more legal opinions are being commissioned, and raise targets are being adjusted in light of the current climate. But the number of new projects coming to market shows no sign of abating, and the better projects will have successful and sustainable sales. The total market cap of all digital assets is now well over $100bn (although the data reveals something of an 80:20 scenario – the top few assets account for the bulk of that value); and more institutional investors and asset managers are taking a greater interest in this new asset class.

NOTE: The comments above are made in a purely personal capacity, and do not purport to represent the views of Brave New Coin or any other organisations I work with. These comments are intended as opinion only and should not construed be as financial advice.

Next week: Bringing Back Banter   

 

 

Token Issuance Programs – the new structured finance?

We’ve known for some time now that Blockchain and Bitcoin were designed to disrupt the financial services sector. But I suspect that not even the earliest proponents of distributed ledger technology nor the most avid supporters of crypto-currencies anticipated how far and how quickly that disruption would spread. In addition to P2P payments and lending, alternative stock exchanges, and self-executing smart contracts, recent events suggest that digital assets issued on Blockchain infrastructure are themselves the new source of venture capital, that they may even come to be seen as the new form of structured finance (albeit with less complexity and more transparency).

Image: Maria’s Cakes founder issues her own record…. (Source: Maria Lee website)

In the past few weeks, we have seen Token Issuance Programs (sometimes referred to as ICOs – “initial coin offerings” – or token sales) raise extraordinary amounts of capital – $53m for MobileGo, $150m for Bancor. Even allowing for the fact that VC funding rounds have been increasing in recent years, these results are quite staggering – given that the sellers of these tokens have not had to relinquish any equity, or incur any debt either. Because tokens do not represent shares in a company or units in a corporate bond. Nor are they securities in the usual sense, as they do not create any interest or obligation other than an entitlement to be granted a given number of tokens at a predetermined price.

Of course, these tokens may carry the right to use proprietary software or access marketplace platforms, and even acquire future products. In this way, they also resemble crowdfunding projects. But because of the potential returns generated by the increased value tokens may accrue (a combination of network effects, scarcity and market appreciation), there is buyer demand for new tokens backed by the right project.

These token sale results have also benefited from the increased price of Bitcoin, Ethereum and other leading digital currencies – or perhaps the other way round? – as investors get more comfortable with this new asset class. That’s not to say there isn’t talk of a market correction, or even a bubble. But despite the apparent risks, and the occasional exchange outage, new token issuance and crypto-currency trading are generating growing interest – not just from currency speculators, but also asset managers and traditional investors. No doubt helped by developments in markets like Japan, where crypto-currencies are now a legally recognized form of payment.

As for structured finance, some projects are looking to issue tokens that are linked to or represent an underlying asset, such as a pool of loans. In the case of securitization, for example, Blockchain technology can not only help to structure the token issuance (via smart contracts, for example), it can also provide better transparency on the underlying loan performance (using real-time repayment data from bank feeds, for example).

Of course, there have been some speed bumps along the way for Blockchain-derived assets, most notably the infamous DAO “hack” of last year.  Plus, the price of Bitcoin continues to display considerable volatility, which makes it harder for some investors to embrace. And if anyone is wondering why this week’s blog features an image of a Hong Kong cake shop owner, it relates to the Asian Currency Crisis of 1997-98. Maria’s Bakery was a famous chain of shops that sold coupons at a discount, that could be redeemed for cakes at any time in the future. It was a practice that spread to other retail sectors. But during the market jitters caused by failing currencies and a tightening of credit, there was a run on Maria’s coupons, which coincided with a 2% fall on the Hong Kong stock exchange. This may have been coincidental, but it also demonstrates that financial markets can be sidelined by the most unexpected events. Like, who would have made the connection between over-extended home owners in parts of the USA with the worst global financial crisis for 80 years…?

NOTE: The comments above are made in a purely personal capacity, and do not purport to represent the views of Brave New Coin or any other organisations I work with. These comments are intended as opinion only and should not construed be as financial advice.

Next week: Expert vs Generalist

#Blockchain heralds a new railway age?

Last week, I suggested that digital currencies might be the new portals. Reflecting further on my work with Brave New Coin*, it also occurs to me that the growth of Blockchain resembles the railway mania of 19th century Britain. Hopefully it won’t end in the same over-investment and asset bubble – but there are some interesting similarities.

“Railway Mania” – Image sourced from Business Pundit

First, the railways displaced the canal system, just as canals overtook roads as the key means of transportation. For these purposes, if we compare roads to the Internet, and canals to the World Wide Web, then Blockchain is the next generation of the “information superhighway”. Blockchain and distributed ledger technology, along with crypto-currencies, digital assets and smart contracts are powering the “new” internet – the Internet of Things, the Internet of Money, the Internet of Value Exchange.

Second, and in a similar vein, the Internet was designed primarily as a means of communication. Then, the web enabled e-commerce, content distribution and on-line interaction. Now, Blockchain technology is supporting a range of new activities – such as tokenizing tangible and intangible assets; securing personal data and financial accounts; decentralizing networks, exchanges and registries; and validating immutable transaction data.

Third, the proliferation of public, private and permissioned Blockchains is prompting the development of technical standards for the design, architecture, security and taxonomy associated with this technology – as railway systems have implemented common safety and operating standards. There is also the need for interoperability between Blockchains, just as railway networks have had to address different track gauges among competing operators.

Of course, on the downside, railway mania led to heightened speculation, failed or over-optimistic prospectuses, and duplication of competing networks as developers sought to secure the most lucrative routes.

And let’s not overlook the issue of forking, which Blockchains are having to address in order to meet the demand for increased processing capacity and/or to iron out potential design weaknesses. In some ways this resembles the creation of railway branch lines – in some cases, these subsidiary routes would become more important than their parent main lines; and may even have outlived them, following the Beeching restructures in the 1960s.

Finally, for all the benefits that Blockchain undoubtedly holds, challenges remain with “on-ramp / off-ramp” access – a bit like disconnected transport interchanges or uncoordinated train timetables.

*Note: the opinions expressed here are my own, and do not represent the views of Brave New Coin or their clients.

Next week: Long live experts….