Tag Archives: Daniel Cawrey

Crypto Exchanges: Get Your Tulips Here!

The whole point of Nakamotoan cryptocurrency is that the decentralized network is “transparent”, and therefore trustworthy.  This bold proposition is debatable on principle and empirically, but it is the foundation of why cryptocurrency is interesting.

So it is particularly problematic that Nakamotoan systems turn out to be so opaque, and also so unworthy of trust.

One of the epicenters of crypto misbehavior are exchanges, the digital services where people trade cryptocurrencies and exchange them for “fiat” currency, AKA, real world money.  These are the places that crash, get hacked, and sometimes simply disappear into the ether with all the money.  These are also the places that, when they are working, enable cybercrime, grey markets, tax evasion, and money laundering.

These services are supposed to represent the equivalent of conventional financial markets, where exchange rates and asset prices are set by a large pool of independent buyers and sellers.  As the exchange rates for Bitcoin and other cryptocurrencies have fluctuated wildly, some people have made fortunes playing these markets. (I suspect that more people have lost than won.)

Equally important, the existence of these markets is a crucial precondition for much of the interest from conventional financial markets in cryptocurrencies. The big boys don’t waste time with digital toys, they want to see real volumes of users trading assets.

There are dozens of  exchanges around the world, and they report huge numbers of transactions, as well as pretty mysterious rises and falls of prices.  Given the unregulated and opaque nature of these systems, many people suspect market manipulation, self-dealing, and just plain misrepresentation.

Regulators are concerned for many reasons, and conventional financial institutions are probably hesitant to get involved with what appear to be dubious enterprises.  I mean banks and brokers are looking for risk, but they aren’t looking for BS.

Earlier this month, Bitwise Asset Management presented to the US SEC, trying to convince regulators that there is a real and orderly cryptocurrency market, worthy of formal recognition by regulators [2]. In the presentation, they claim that the vast majority of reported Bitcoin trading is either fake or non-economic wash trading. The “real” market is smaller and more orderly, they say, and, by the way, Bitwise are a key player in this “real” trading.

In a response to this presentation in Coindesk, Daniel Cawrey bitterly critiques this presentation [1].  Cawrey dissects the data presented, finding that 50% of the supposedly “good” trading in the report is through two exchanges, including Bitwise.  That concentration is problematic to say the least, and certainly raises questions about how much to weigh the whole report

There are good reasons to discount much of the data.

The two  “good” exchanges are unaudited and have a history of regulatory troubles. The presentation is pretty gutsy, because they spend a lot of effort showing that everybody else is shabby, to direct attention away from their own dubiousity.  Nice.

There are plenty of known problems with the report, including (undisclosed) conflicted ownership, statistics from a mysterious  (and quite possibly conflicted) “Blockchain Transparency Institute”, and the reliance on the very shady Tether coin (which is supposed to be dollar backed, but in fact does not seem to be).

 “Half of the “actual” BTC volume in this report is done on exchanges with no banking relationships and not enough in the way of compliance.”

Bitwise (and related entities) are not likely to win over regulators or conventional finance with this Potemkin Villiage presentation, but they are certainly in the running for the 2019 Crypto Tulip of the Year Award!

Fake data!  Fake “Institutes”!  Floating “stable” coins!  Unaudited “reserves”!

And the chutzpah to stand before the SEC with this stuff!

Yessir, this is the stuff that great Tulips are made of!

  1. Daniel Cawrey (2019) Fake Volume on Crypto Exchanges Isn’t the Half of It. Coindesk, https://www.coindesk.com/fake-volume-on-crypto-exchanges-isnt-the-half-of-it
  2. Teddy Fusaro, Bitwise Asset Management Presentation to the U.S. Securities and Exchange Commission. Bitwise Asset Management, 2019. https://www.sec.gov/comments/sr-nysearca-2019-01/srnysearca201901-5164833-183434.pdf


Cryptocurrency Thursday


“Blockchain University” Lays Out The New Narrative

If there was any doubt that “Blockchain” is the flavor of the month, it ended with the splashy announcement of “Blockchain University“.

Looking at the offering, it isn’t all that different from a zillion developer camps, except focused on blockchain instead of Android or iOS or whatever.

The kickoff gives us a good idea of what the narrative is for “the crypto 2.0 segment of the bitcoin community”.  As Daniel Cawrey reports, these guys say the blockchain ” can be used to build everything” and it “is really just not like anything that has happened before. The sky is literally the limit”.


It is somewhat amusing to see that, while most of the world has never heard of Bitcoin and are struggling to grok what it is for, the Chainistas “Bitcoin is over”, let’s get on to the blockchain!

Cryptocurrency Concepts For “The Remittance Problem”

A short note on cryptocurrency approaches to “The Remittance Problem”, which is one of the problems that crypto is supposed to be great for, but has yet to be seen.

One of the key problems is how to prevent a remittance system from becoming a money laundering channel. Existing laws have very strict controls on cross border transfers, and the conventional banking sector implements these “know your customer” laws.

So, if we want to use unaccountable cryptocurrency transfers in this role, what should be done? How can we make a remittance system that is safe for the target users (poor workers and families), and not overrun by mafias and cowboy financiers?

Coindesk juxtaposes two alternative approaches to this challenge, which gives us perspective.

Stan Higgins reports on recent developments from Ripple Labs, who are establishing a network of legal and reputable organizations, connected by their cryptocurrency enabled infrastructure. When you use Ripple, you know that they have vetted their partners, and the nodes of the net take responsibility for the legality and safety of their business

Right next to this item, Daniel Cawrey reports on “How HelloBit Plans to Become the Uber for Global Remittance”. With a deliberate reference to Uber, it is clear that HelloBit isn’t interested in conventional commercial “reputation”. It is an accurate analogy, however because their strategy is exactly Uber’s: offload liability to others.   HelloBit

“leaves the complications of the exchange business to local operators. “We’re just matching the two people for a transaction,” Goss said.”

That sentence may make sense to cryptoenthusiasts, but is it not really a correct interpretation of current money laundering laws?

Like Uber, HelloBit intends to compete on price, presumably intending to undercut Ripple as well as conventional services. Definitely a “disruptive” approach, if not particularly “innovative”.

It will be interesting to see how these play out.

Theoretically, they could end up converging to the same thing, since local institutions could support both HelloBit and Ripple. However, what will really matter is the customer interface and experience. So it all may be down to what the best mobile app is in a given area, and who can connect the people who want to connect.

Bitcoin Startups Break No New Ground

This story is settling in to a pretty boring drumbeat.  What is Bitcoin really useful for?  (Besides extra-legal commerce.)

There is a continuing rain of startups, touting their “innovative” ideas, which aren’t really new, and mostly are pretty similar to each other.  Considering that we have been doing the “money” thing for a long time, with a lot of intense interest, it’s not too surprising if Bitcoin is recapitulating rather than inventing these uses.

Case in point, startups announced at DEMO this week, reported by Daniel Cawrey in Coindesk.

These were:

  • Obsidian – financial engineering to stabilize BTC pricing
  • SmartContract – yet another executable contract thing, relies on external ‘oracle’ services and data streams such as GPS
  • Pavilion – escrow services, replaces current services from, say e-bay
  • HelloBit– cross border money movement, AKA remittances, AKA money laundering

The first is one of many, and is of little concern to ordinary users.  The second is one of many, none of which have demonstrated success, and all of which have deep, fundamental problems.  The third is one of many, and certainly is not needed by regular customers who already get this service from the conventional system. Merchants may like it, but customers won’t care.  The last is yet another stab at cross border transfers, though not aimed at the unbanked.  The business model described in the article almost certainly requires FINCEN compliance in the US, so it may be limited to Latin America for now.

Overall, nothing really new, not even new to Bitcoin.

It’s still the flavor of the month, but it’s getting stale fast.

And we’re all waiting for someone to actually build a successful company.

Cryptocurrency Language: What Does “Centralized” Mean?

In the world of cryptocurrency, everyone agrees that “centralization” is bad, if not “evil”.  Cryptocurrencies are “good” because they are “decentralized”.

But what does “centralized” mean in these arguments?

I have already pointed out that, regardless of whether the blockchain is a “decentralized” technology, actually using a cryptocurrency end-to-end involves much more, and a lot of that “more” is both “trusted” and “centralized”.

But the word “centralized” carries a lot more than purely technical meaning in cryptocurrency “discourse”.  For one thing, “centralized” is often used to denigrate efforts to apply legal regulations of any kind to cryptocurrencies.  In this sense, “centralized” means “someone can tell me what to do”.

The greatest mystery to me is that apparently the “fiat” of unelected bankers and such is evil, but the dictates of anonymous programmers are holy.  Who says there should be a limited supply of Bitcoin?  Nakamoto says.  But that isn’t “centralized” decision making.

Worse, there seems to be a very confusing rehetorical double standard when it comes to commercial interests.  While the dictates of giant companies that don’t support cryptocurrency are “bad” and “centralization”, the dictates of cryptocurrency companies are “good”, no matter how centralized.

As I noted earlier, in a kerfluffle about the policies of a (not especially large) private company, Robocoin was criticized for “centralization”.  (In this case, the beef was about proprietary systems and compliance with legal regulations, not really about network topology.)

This week I read about a very closed system, now called “Mirror”, which basically is trying to replicate all the “virtues” of Wall Street for Bitcoiners.

Now, most of us consider the big banks and even bigger hedge funds to be both centralized and more or less evil.  So how can this Mirror not be OK in Bitcoinland?  I dunno.


Cawley on Bitcoin Businesses

Daniel Cawley writes at Coindesk yet another article about “new businesses” enabled by Bitcoin.  I have commented on earlier discussions of this topic several times.

In this installment, “6 Types of Businesses Bitcoin Will Enable for the First Time“, the biggest news is that the list of “new” ideas hasn’t changed.  We are getting a clearer idea of the near term uses for Bitcoin and blockchains (not that much has been implemented yet).

To be fair, this list is a list of proposed business models, as opposed to use cases or applications.

The list is:

  1. Record-keeping – in a very general sense.  (Finally, recognition that the blockchain is basically a replacement for a database or other store.)
  2. Asset distribution – lightweight securitization of anything, but especially digital assets.  (Actually a variation of #1.)
  3. Wallet technologies – business opportunity to provide decent user software. Very challenging to provide strong security combined with convenience, usable by your grandparents.
  4. Smart contracts – on everyone’s list, probably a superset of #2 above.  Many interesting challenges here.  (ChainPhishing, anyone? BlockVirus?)
  5. Mining – I.e., business opportunities in mining.
  6. Bitcoin support – business opportunities promoting business opportunities….

Overall, this list overlaps with previous lists, and is kind of small bore.  Scarcely disruptive or revolutionary, not even that innovative.  (Take something that uses a database on the Internet.  Substitute a blockchain for that database.  Ta da!  New product.)

However, it is actually good to see these comparatively sensible and reasonable ideas put forward.  Less about reinventing money, more about making a reasonable living.  Good.

Notes On The Splitting Of The Bitcoin Community

Just a quick note on the ongoing fragmentation of “the Bitcoin narrative”, which honestly isn’t a single story anymore.

Perusing Coindesk this week we see the same technology presented in very, very different cultural sagas.

Greenpeace (at least in the US) is going to accept donations in Bitcoin.  In a report in Coindesk, the emphasis is on “independence”, and actually talks as much about their non-corporate payment system as about cryptocurrency per se.

All is light and good, right.

Well we also see the run up to the trial of Ross Ulbricht, accused of operating the infamous Silk Road online market. The charges include various serious crimes involving money laundering, drugs, and arms dealing.  He denies all charges.

Coindesk documents a very strong segment of the Bitcoin community in a “survey”, asking the completely unbiased question, “a number of prominent names in the bitcoin space about whether they think Ulbricht would be widely viewed as a bitcoin martyr or the ultimate cryptocurrency villain if found guilty“.

The answers from this carefully selected group are uniformly fire-breathing, and all think he is a hero and martyr.  Whether you agree with the extremist ideology passed off as fact (and obviously I don’t), the point is that I’m pretty sure that people like Greenpeace and United Way have no interest at all in being part of any community that considers drug trafficing to be ‘peaceful’ commerce.

For that matter, honest companies and banks don’t want to be associated with such a “community”.  (Coindesk has a report about a big VC who claims banks are “worried” about Bitcoin–he’s right, but its not necessarily because they are afraid of virtual money, its as much because they don’t want to have to operate like the mafia.)

Clearly, anyone who is talking about “the Bitcoin community” as if it is a single, monolithic group or culture is just not correct.

This isn’t terribly surprising:  the technology is flexible and designed to be decentralized, so lots of people can use it however they want.  And they can incorporate it in their own stories, for better or worse.

More Sober Assesment of Bitcoin From Coindesk

Daniel Cawrey asks “What Real-World Problems Can Bitcoin Actually Solve Right Now?”  As you’d guess from the title, “today, bitcoin arguably has few compelling arguments for consumers who aren’t early adopters.”  I strongly agree. (It is interesting to find these analyses, not just by Cawrey in Coindesk, amid the enthusiastic tub thumping about cryptocurrencies.)

First of all, even relatively knowlegable people don’t understand Bitcoin or what it might be used for–nor do we really understand currency.  What we understand is how to live our lives and get stuff done.  This usually involves being able to get what we need and want via reasonably predictable and fair processes.  Details of accounting are interesting only to nerds.

Second, just as Eskimos are said to have 100 words for “snow”, Americans (and others) must surely have 100,000 words for “money”.  This is a very, very well developed technology. Did we need yet one more way to buy pizza? Not really.

Anything you can imagine doing with Bitcoin can be done with existing technologies one way or another, and probably several ways in competition.  The ecological niche is not empty, there is an apex forest flourishing there.

Third, and Crawley didn’t really talk about this point, existing technologies have gigantic, energetic, and well funded industries behind them. Not only is Bitcoin invading an occupied niche, the niche is occupied by savage and dangerous predators.

For example, the recent release of Apple’s payment scheme is just as nice for the average Joe as any Bitcoin or other cryptocurrency scheme (except for the fact that Apple is inserting itself between you and everything you do business with).  If Bitcoin threatens Apple’s profits, Apple could well try to crush the upstart technology.

Obviously, if Apple or other systems work for you, you don’t really need Bitcoin, even it if might be slightly better or a tiny bit cheaper.  At least not now.

What is Bitcoin For?

What is Bitcoin FOR, anyway?  A couple of analyses in CoinDesk consider this topic.

Tom Sharkey writes at Coindesk about “6 Things Bitcoin Has Made Possible for the First Time“.  It’s an interesting list.

  1. A currency that exists solely in digital space
  2. Rapid and cheap international money transfer
  3. Decentralized smart contracts
  4. Decentralized domain name registration
  5. Online black markets
  6. Micropayments that make sense

Item 1 is obvious, though it is not as clear whether Bitcoin has made it possible for the “first time”.   There have been plenty of other digital payment systems.

Item 2 has yet to be demonstrated, at least if you include the proviso, “while following all applicable laws”.  Yes, bitcoin has been successful for unregulated money transfers, but it has yet to demonstrate how rapid and cheap it will be to do it the right way.

Item 3 is a rapidly evolving idea.  There have been plenty of electronic contracts before bitcoin, and it remains to be seen how well blockchain based systems really work for contracts.  See also item 2.

Item 4 is a feature that is not particularly useful, especially when it is ultimately driven underground.  The world does not need a shadowy black internet in parallel to the legal network.

Item 5 is a true feature of Bitcoin, and extremely harmful to pretty much everyone, and especially to economies.  It is also the only reason why Items 2 and 4 are useful.

Item 6 would be a great feature, if it were ever to happen.   We shall see.  There ain’t any such thing as a free lunch, so there will always be a limit to how small transactions can be.  This is an interesting idea that has yet to be proven out.

To sum up:  several of the “firsts” are not really first or unique to Bitcoin.  Two of the six are extremely dangerous socially and economically.  One is a truly important feature (micropayments) and another is a possibly important feature (smart contracts), but neither has been demonstrated.  Several will be the subject of vigorous policing in the near future, which will add to transaction costs.

If this is the case for Bitcoin, it isn’t a great case.


Along this line, Daniel Cawrey writes in Coindesk wondering “Could Bitcoin be a Replacement for Gold?

He appears surprised that Bitcoin resembles gold so strongly, even though Bitcoin was deliberately designed to operate just like gold.  This is the entire point of Bitcoin. Duh.

Now, whether people will like Bitcoin as much as or even instead of gold is an interesting question.  Gold is really hard to move around (a minus) but that makes it really hard to steal (a plus).  Physical gold is not only difficult to fake, it is really tangible so you know it is there.

The very “velocity” of Bitcoin means that gazallions of bitcoins can vanish in a microsecond (and this has happened a number of times).  Great for the thief, not so great for the former owner.  In addition, anything on a computer or network can be hacked.  In the long run, keeping Bitcoin secure will be difficult and expensive, just like guarding gold. (Hiding Bitcoin offline makes it basically useless in that form, kind of like burying gold.)

I note that in the event of a large scale crash of the Internet and power grids, Bitcoin is going to be difficult to access (along with conventional banking systems).  Gold would still work, if you had any.  In either case, we’re probably going to be using script backed by “when the power comes back on”.

So, it depends on why you want the features of gold.

If you are trying to hedge against inflation, either will work, depending on events.  I note that the “value” of both gold and Bitcoin is highly psychological, and Bitcoins digital nature ensures that it will always be subject to violent volatility.   This may be worse that the stability provided by well regulated currencies backed by nation states.

If you want a hoard of unregulated untaxed money, gold will be more secure but harder to move.  Hoarding Bitcoin negates its major virtue, which is ease of transfer.

If you are a black marketeer, or want to play hot money games, then Bitcoin is perfect.  Gold is really inconvenient for illicit money transfers.

My own guess is that Bitcoin is a fad that will never be widely used any more that gold is.  However, there may well be many financial instruments and services that employ Bitcoin indirectly, just as they might use gold or other assets as a backing.

Finally, I’d say that nothing beats the sensual pleasure of actually handling gold or other precious objects. Sorry, Bitcoin can’t compete with that, ever.

BTCjam: Bitcoin Enables Usury

What does the term “peer-to-peer” mean?   The lending agency BTCJam describes its service as “peer-to-peer lending to a global audience”.   This is certainly not a decentralized service, as is often implied by the term “peer-to-peer”.

On another front in cryptocurrency land, “decentralized” has come to mean “extra legal” or at least “not government regulated (yet)”.  In that vein, the main point of BTCJam is, it turns out, “[b]ypassing the restrictions of fiat currencies”.  All those nasty laws against loan sharks.

As noted by Daniel Cawrey in his piece “How Bitcoin Empowers Global Peer-to-Peer Lender BTCJam“, this kind of service is illegal or highly regulated in most jurisdictions. BTCJam claims, inexplicable, that these laws don’t apply to them.  I’m sure they do, so expect turbulence soon.

OK, so what have these bold entrepreneurs invented?

Basically, you can get an unsecured loan at locally set interest rates.  The web site today advertised 6.7% interest.  Yoiks!  Investors are “promised” a “return of 19% per year on average.”  Really?

Anyone with any kind of credit score can surely beat their terms through the bad old regular system.  So the customers are basically the unbanked and poor, who have been preyed on by lenders for ever, and who are supposed to be protected by the silly old laws against this stuff.

Very innovative.  Very socially responsible.

One of BTCJam’s few technical “innovations” is, in the absence of not only conventional credit scores, but any personal knowledge about the applicant, they have an algorithm to set the interest rate.  (Ranging from outrageous up to really, really outrageous, I assume.)  Somehow, my faith in magic algorithms is not unlimited.

Interestingly, there doesn’t seem to be much scrutiny of the lenders (as far as I can tell).  This will surely not last long, since there are serious laws about money laundering.

Obviously, “peer to peer” in this context does not mean “everyone is equal”:  borrowers don’t have the same information as lenders as far as I can tell, nor the right to pick whose money to take.  The power is very asymmetric, as you would expect from the alleged returns.

Cowrey seems mystified that governments would frown on such exploitative, high interest loans to unsophisticated and mainly poor people.

What could possibly go wrong?  Let us count the ways.

Borrowers could game the algorithm, and steal the loan money. (I note that BTCjam’s liability will surely be tested in court when this happens.)

Lenders could be–wait for it–loan sharks.  You take the loan and pay me insane interest, or I send some guys around to your house and do you over.

Even more likely, mysterious anonymous “investors” will drop in tons of money from unknown sources, pulling out laundered Bitcoins with no connection to the original source.  Even better, the coins appear to come from “socially positive microloans”, rather than whatever nefarious original source.  Better than clean, they are absolutely virtuous!

Nefarious sources? Oh, yes.  Bitcoin is becoming a favorite currency for extortion and black market sales.  The proceeds from the rackets could be funneled (automatically via bots) into dummy “investors” at BTCJam or similar, loaned out, and then withdrawn in a few months squeaky clean.

Now that I’m thinking of it, you may as well have both the lenders and the borrowers be bots, so you put in and take out money constantly and untraceably.  Volume will explode, the business will look great on paper, but actual customers will just be cover for the zillions of laundering bots.

This is actually kind of cool