Snippings

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China’s digital yuan looks closer than ever to launch with the news that Huawei will be supporting the central bank digital currency (CBDC) on an upcoming range of phones.

Announced on Huawei’s Weibo channel Friday, the Mate 40 line of devices will feature a built-in hardware wallet with “hardware-level security, controllable anonymous protection, and dual offline transactions,” the tech giant said.

From Huawei’s Mate 40 Phone to Ship With Digital Yuan Wallet – CoinDesk:

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There should be a new guiding tenet to AI regulation, a principle of AI legal neutrality asserting that the law should tend not to discriminate between AI and human behavior. Currently, the legal system is not neutral.

From It’s time to rethink the legal treatment of robots | MIT Technology Review:

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The new feature, which will be part of the Magnifier app, uses the lidar and wide-angle camera of the Pro and Pro Max, giving feedback to the user in a variety of ways.

From iPhones can now tell blind users where and how far away people are | TechCrunch:

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Here’s an interesting question for you. Is it more profitable to mine gold, virtual gold or Bitcoin, the new digital gold? I think it’s been more profitable to mine virtual gold than actual gold for many years: one of the very first blog posts that I ever wrote, way back in 2006, was about how virtual gold miners in online games in China were making more money than actual Chinese gold miners!

As for mining the new digital gold, I was interested to read that the Moscow-based En+ Group (an energy company) is setting up a digital currency mining operation with mining operator BitRiver. The joint venture (called “Bit+”) is already up and running with 10 megawatt-hours of electricity and hopes to scale up to 40 megawatt-hours. To translate that into blockchain power, ten megawatt-hours is enough to drive 250 petahashes per second (PH/s) of using specialist mining machines (a petahash is a measure of the computing power that the miners use to find new Bitcoins). So 40 megawatt-hours will deliver 1,000 petahashes per second.

That’s a lot of hashing in any language. But what does that mean in terms of money? Bitcoin mining is getting less profitable by the day. Recent figures on CoinDesk indicate that miners are extracting about a cent for every terahash they produce whereas three years ago they could expect to make roughly $1.40. So a petahash will deliver 1,000 cents (ie, $10) and 250 petahashes will generate $2,500. 

There’s a cycle going on: miners have to invest in new equipment to produce more computing power more efficiently (the price of electricity is not zero, after all) and yet the money that they can make is falling even through the price of the Bitcoins that they are producing has gone up. So why would anyone buy millions of dollars worth of mining equipment and tie up that capital for such merger returns, earning less than one-hundreth as much as they used to? Well, the CoinDesk article contains the answer further down, where an operator of a mining pool is quoted saying that the miners spending this money are not actually concerned about profits and are investing for other reasons “such as to avoid capital controls or avoid sanctions.”

As you’ll be aware from the plethora of stories about Bitcoin using more electricity than most countries, Bitcoin “mining” means throwing massive amounts of computer power at a mathematical puzzle, and the first computer to solve the puzzle finds the new bitcoins. Not everyone mines Bitcoins for money. The operator of a Bitcoin mining pool (a group of miners who work together to share the profits) quoted in CoinDesk says that some are investing for other reasons “such as to avoid capital controls or avoid sanctions”.

Some people mine Bitcoin for profits but some some people mine it for politics. The Foundation for Defense of Democracies (FDD), a Washington think tank, summarised the emerging situation rather well in their position paper “Crypto Rogues“. They noted that “blockchain technology may be the innovation that enables U.S. adversaries for the first time to operate entire economies outside the U.S.-led financial system”. Now, while this may be technically slightly inaccurate (there are ways to create anonymous transactions without a blockchain and, indeed, the Swiss central bank has just published a working paper describing how to do so) it again flags up that the widespread availability of decentralised financial services threatens to bypass the existing infrastructure.

Iran provides an obvious example. The country already published a new set of regulations designed to funnel Bitcoin mined by Iranians to the state so that the country can use them to pay for imports. They have every incentive to want to try new approaches to skirt the long arm of American law. When the Iranian regime, for example, set up a venture to explore Bitcoin payments with a Swedish startup, the Swedish banks refused it a bank account because they themselves did not want to become subject to secondary sanctions. As America’s Treasury Secretary Mnuchin said at the time (talking about Iran), “If you want to participate in the dollar system you abide by US sanctions”.

On the other side of the world, North Korea has been developing a digital currency of its own. According to Alejandro Cao de Benós, President of the Korean Friendship Association, the Democratic People’s Republic of Korea intends to go down the Facebook route by creating an asset-backed digital currency rather than a digital fiat currency and then use some sort of blockchain with “Ethereum-style smart contracts” to do business and avoid sanctions. The regime sees this as a way to enforce deals it makes with foreign counterparties by developing a “token based on something with physical value” (eg, gold) in order to create a stable mechanism for payments in international trade between the regime and “other companies/individuals” (although it will not be available to individuals in the DPRK, who will be stuck with the Korean Won).

Across the Pacific in Venezuela, a country often mentioned by Bitcoin enthusiasts as a living case study of the benefits of decentralised cryptocurrency in the fight against tyranny, we find more mining going on: a video posted on Instagram by the 61st Battalion of the 6th Corps of Engineers of the Venezuelan Army shows military buildings converted into giant cryptocurrency mining centres and a warehouse that appears to be full of specialist Bitcoin mining equipment is labelled the “Center for the Production of Digital Assets”.

(I noted with interest that they do not appear to be mining “The Petro”, the digital currency of the revolution which according to the Bolivarian Council of Mayors’ recent “National Tax Harmonization Agreement” may soon be required for the payment of taxes.)

What… Whatible?

It seems to me that Bitcoin is a pretty poor choice for sanction-busting shenanigans though. Not only is the record of transactions public, but the Bitcoin value is not fungible. This matters. Remember that 2014 IRS Ruling about Bitcoins being a commodity, so that traders would have to track the buying and selling price of each individual Bitcoin in order to assess their tax liability? No? Here’s a reminder : “the real lesson from the IRS Bitcoin ruling is that for a currency-or any payment system-to work, its units must be completely fungible”.

Fungible (from the Latin “to enjoy” via Medieval Latin phrases such as “fungi vice”, meaning “to take the place of”) is one of my favourite adjectives. It means that all tokens are the same and can be substituted one for another. You owe me a quarter. It doesn’t matter _which_ quarter that you give me. Any will do. Any quarter can substitute for any other quarter because they are all the same. This isn’t true of Bitcoins. They are all different and their history can be tracked through the blockchain which is, as we are often reminded, and immutable public record of all transactions. As my good friend Marc Hochstein observed about this some time ago, blockchain’s openness could turn out to be a bug (even for law-abiding citizens).

The lack of fungibility has major implications for criminals. In England, the High Court (in the decision of AA v Persons Unknown & Ors, Re Bitcoin [2019]) has ruled that crypto assets such as Bitcoin are considered to be ‘property’ capable of being the subject of a proprietary injunction against a cryptographic exchange, which was indeed granted. You can see what is going to happen here: the exchange will be required to identity who owns the stolen coins and the owner will then be the subject of legal action to recover them. This owner might be entirely innocent about the origin of the coins and will say that they didn’t know that the Bitcoins they bought are the proceeds of a ransonware attack and may ask to the keep them. But, J.P. Koning points out, that’s not how property law works. Even if you accidentally come into possession of stolen property then a judge can still force you to give them back to the rightful owner.

In the world of Bitcoin, smart criminals may well try to use “mixers” or “tumblrs” that jumble together Bitcoins to obfuscate their origin but I don’t think this will help in the long run. What if law enforcement agencies go to the biggest miners in the world and tell them that if they continue to confirm easily identifiable mixing transaction outputs, they will be accused of money laundering? This is not difficult to imagine, which suggests to me that Bitcoin’s lack of fungibility has interesting implications.

These implications have not gone unnoticed in the United States. Two of the largest Bitcoin mining companies there, Marathon Patent Inc. and DMG Blockchain Solutions Inc. (which together account for about a one-twelfth the power of the Bitcoin networks), recently joined forces to create the Digital Currency Miners of North America (DCMNA). This not-for-profit trade association has come up with pretty interesting idea: their miners will only process transactions that comply with American laws, thus extending the benevolent embrace of the U.S. Government into cryptocurrency. The idea (known as “clean mining“) is that instead of selecting transactions on the basis of which ones will bring the biggest fees, they will mine transactions based on the wallets that they come from.

with kind permission of TheOfficeMuse (CC-BY-ND 4.0)

In the mundane world of dollar, dollar bills we have the concept of “money laundering” to describe what happens when dirty money is mixed with clean money (surely every one of us has touched banknotes that have been involved in some criminal activity!). But this doesn’t work for bitcoins. The “tainted” money stays tainted.

We could well see a strange and interesting twist in the world of cryptocurrency that has no analog in the analogue world of notes and coins: black and white money, or clean and dirty money, or light and dark money (an idea that goes back to the earliest days of cryptocurrency) in which some bitcoins will be worth more than others! Maybe a year or two from now, exchanges will be quoted two BTC-USD pairs: clean BTC at $100,000 and dirty BTC at $75,000. This doesn’t happen for GBP-USD or JPY-GBP, which makes me think that whatever Bitcoin is, it isn’t money.

[An edited version of this article first appeared on Forbes, 28th February 2021.]

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Stay-at-home orders and workplace closures have lowered public-transit ridership to 10 to 15 percent of the usual level, according to McKinsey analysis of multiple European countries.

From Restoring public transit amid COVID-19: What European cities can learn from one another | McKinsey:

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One such challenge is that a significant share of payments in Europe effectively depends on international players (such as international card schemes) and, increasingly, of large technology companies. It is crucial, for the ’s open strategic autonomy, to reduce this dependency and to support the emergence of European champions in the payments sector. This will also increase competition and choice for end-users. The negative effects of that dependency are further aggravated by restrictive practices with regard to certain technologies that have become essential, in particular for mobile and contactless payments.

From The new Retail Payments Strategy for the EU | European Payments Council:

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We spend a lot of time thinking about the 

In the latest available figures from the Treasury, a total of £38bn has been borrowed under the scheme by 1.3 million firms. Assuming lending through the scheme totals £43bn by the time it closes at the end of November, taxpayers could end up footing a bill of between £15bn and £26bn to cover bad debts, the NAO warned.

From Taxpayers face losing up to £26bn on Covid-19 business loans | Tax and spending | The Guardian.

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 The “UK’s Leading Think Tank”, Policy Exchange, has just published a report on digital identity. The report, written by historian Benjamin Barnard, has a foreword by Matt Warman (the Minister for Digital Stuff) and says that the UK needs a reliable public sector identity model to support the creation of a digital identity marketplace across both private and public sectors. The report doesn’t contain an identity model, although it does make some useful points about what such a model might look like. What did catch my eye though was the suggestion that the government do something about digital identity for companies. This is a really good idea and it is long overdue. It’s one thing to talk about identities for things that exist, such as people, but quite another to talk about the identities of things that don’t exist, such as companies.

In his book “Sapiens — A Brief History of Humankind”, the historian Yuval Noah Harari  talks about the cognitive revolution, which he defines as the point as which “history declared its independence from biology” because human beings gained the ability to think about things that do not exist, such as Facebook. Harari says that “Corporations do not exist in nature any more than Catholicism or human rights. These are stories. Lawyers are shaman who tell stranger tales”. Well, yes. Limited liability companies are, I agree with Mr. Harari wholeheartedly, one of our species most ingenious inventions. They need digital identities and they need them now.

As in the case of personal identities, the COVID crisis has thrown into pretty sharp relief the tremendous costs of not having infrastructure in place. The problem is particularly bad in the UK. The government’s recent review of company registrations procedures concluded that the official record of companies (known as “Companies House”) should be reformed to introduce proper checks on whether directors are real people, in an attempt to combat major crime. Yes, you read that correctly. Right now, there is no check on whether a company directors is even a real person or not, let alone whether they are a “fit and proper” person, to the use the English legal description, to even act as the director of a company.

So we are in the unusual position of having no idea whether companies or their directors are legitimate or fraudulent. According to the latest figures from the Treasury, a total of £38bn has been borrowed under the COVID business loans scheme by 1.3 million firms. Assuming lending through the scheme totals £43bn by the time it closes at the end of November, the National Audit Office (NAO) estimates that taxpayers could end up footing a bill of between £15bn and £26bn to cover bad debts on these loans.

Hence my interest in the Policy Exchange recommendation that the government establish a “Digital Business Identity” programme.

So how is a business identity different from a person identity? Well, in my opinion, it isn’t.

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Sveriges Riksbank governor Stefan Ingves called for the government to change the law to make sure cash is still used in the Swedish economy.

“I believe that stronger legal protection for cash could slow down the decline in its use,” said Ingves in a speech today (October 15). “If it were to be established by law that one was forced to accept cash in Sweden, more of us would probably choose to have cash in our wallets.”

From Swedish governor calls for laws to protect cash use – Central Banking:

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Even faster is Exxon Mobil Rewards+ mobile app, which enables payment from within the car and gives loyalty points as well.

From ExxonMobil Pumps Up Contactless Payments | PaymentsJournal:

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