Bitfinex Was A Teaching Moment

A mixed bag for bitcoin this week. A taxi company in Rome is accepting the currency, the U.S. government is hedging its bets and investors are showing support. The Bitfinex hack was a learning opportunity, but the miners are unhappy and might be plotting an insider job.

With no Samsung-like news for bitcoin, prices are holding steady and are even a bit bullish. Pundits expect that trend to continue, unless the price goes below $600, when traders are advised to close long positions to prepare for an initial downside to $570. But let’s turn to the miners, who aren’t happy at all with a stable bitcoin price.

The bitcoin block reward was halved in July, which has changed the profitability of new miner entries and could impact the decentralization of bitcoin. According to a paper by the Institute of Electrical and Electronics Engineers (IEEE), reducing the block reward by half cuts total mining revenues if the bitcoin transaction fees and price remain unchanged. The IEEE suggests that disenfranchised miners who have had revenues cut might collude to sabotage the blockchain’s bitcoin transaction history.

And who can blame them? Miners are already showing the effects of a drop in profitability. KnCMiner declared bankruptcy in May even before the halving of the transaction block. Also, high capital costs of the latest mining facilities and systems are creating a barrier to entry for new miners.

The problem here is bitcoin’s integrity. The concentration of bitcoin mining increases the likelihood miners will collude to attack the blockchain, and as profitability goes down, fewer miners will operate and existing incumbents will consolidate. According to CryptoCoinsNews, the distributed bitcoin ledger could become more vulnerable to attack, possibly destroying its trustless nature.

Does sabotage from the inside qualify as hacking?


A Teaching Moment

And what did we learn from Bitfinex? Here’s an example of how to turn a catastrophe into a learning opportunity — but at bitcoin investors’ expense.

Gavin Smith, CEO of First Global Credit, discussed his firm’s actions following the Bitfinex hack, which lost over $60 million in bitcoin to hackers, in a speech at a London conference.

“We took any collateral that was not required to fund existing position hedges and immediately pulled these back to our cold storage wallets,” he stated. With time, the fundamentals surrounding the bitcoin market improved.

Good for Smith and his firm. Smith went on in his speech to say that the lessons learned from the Bitfinex hack have improved the digital currency environment. For example, there is more concern for counterparty risks among traders.

Smith also believes that insufficient trust between customers and bitcoin exchanges has prompted bitcoin traders to diversify their funds with multiple companies, minimizing the risk associated with one exchange. According to Smith: “They [bitcoin traders] have recognized that simply relying on the exchange being large and established doesn’t provide any real protection.”

To conclude his speech, Smith stated that the industry had handled the Bifinex challenge well and that he is optimistic where smart contracts, contracts designed to reduce counterparty risk, are concerned.

Perhaps, with a few more $60 million learning opportunities, bitcoin should be well on its way to an established, viable currency.


Cabs With Crypto

When in Rome, pay for your cab with cryptocurrency. Chainside, a web wallet and payment processor, is facilitating bitcoin payments for Italian classic taxi rides following the Taxi Hack Hackathon held in the city last year. The customer plans the itinerary on a website and pays through a platform called itTaxi. Taxis are booked using traditional methods, such as by app, SMS or by phone call, and online booking will be added soon.

Chainside is currently only available to the taxi company, but scaling is expected. According to Chainside: “Unfortunately, it is not always easy for non-experts to integrate such an innovative technology in a secure and scalable way.”

Ah. Secure, scalabale integration … that old thing.


Ripple Gets Venture Capital Support

Turning to investments for a moment, Ripple, the provider of financial settlement services, announced on Thursday (Sept. 15) it completed a $55 million Series B round of financing.

Ripple is the only provider of enterprise blockchain solutions and has 15 of the top 50 global banks as customers. Another 10 banks are about to sign deals, and 30 bank pilots have been completed.

CEO and Cofounder Chris Larsen said: “Our mission is to make cross-border payments truly efficient for banks and their customers and, in doing so, lay the foundation for an Internet of Value, where the world moves money as easily as information.”

And investors are not the only ones currently showing support for bitcoin.


US Government's National Policy On Technology

The U.S. government just passed a resolution for a national policy on technology. The resolution supports digital currencies and implies that they could be a secure viable alternative to fiat currencies, have a positive effect on legacy financial systems and broaden financial inclusion, possibly helping the unbanked.

Part of the bill’s reasoning is that digital currencies increase transparency and require more secure payment authentication processes.

A report on the national security implications of digital currency by the RAND Corporation discusses the vulnerability of digital currencies in detail. It seems a bad omen that the section on successful defense against a virtual currency (VC) attack opens with the following: “In light of the previous discussion on attacking a VC, it is worth briefly examining whether it is possible at all to deploy a VC that could withstand a cyberattack.”

The RAND report also states that the question is not whether a sophisticated attacker would be willing to attack, but rather, would they be willing politically to bring down a VC or have the resources to do so?

So, perhaps a NATO-type entity among global allies for digital currencies might ensure that a would-be attacker would not cross such political lines? But we all know how effective NATO can be.

As far as financial inclusion and possibly helping the unbanked is concerned, the Consultative Group to Assist the Poor (CGAP) has experience with the digital currency BitPesa, which has helped business innovation in Nigeria. While CGAP recognizes the success of BitPesa, CGAP also cites some key concerns.

According to CGAP: “Standards on period of exposure to currency risk could ensure payments systems that use bitcoin mitigate customer risk in this respect.” CGAP also points out that bitcoin or other digital currencies require smartphones in emerging markets, which is less of a problem for the unbanked in the U.S. as it is for many countries where feature phones are still in widespread use.

According to CGAP: “Digital currencies can help bring more transactions off the black market.” It cites Silk Road as a case in point. But others argue that the Dark Web is now full of Silk Road copycats merrily peddling their wares to drug users and other obliging consumers.

And that they are.



The How We Shop Report, a PYMNTS collaboration with PayPal, aims to understand how consumers of all ages and incomes are shifting to shopping and paying online in the midst of the COVID-19 pandemic. Our research builds on a series of studies conducted since March, surveying more than 16,000 consumers on how their shopping habits and payments preferences are changing as the crisis continues. This report focuses on our latest survey of 2,163 respondents and examines how their increased appetite for online commerce and digital touchless methods, such as QR codes, contactless cards and digital wallets, is poised to shape the post-pandemic economy.

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