Financial Services

Blockchain:
The Other Side of the Digital Coin
In 1999, I was sitting in a presentation space in the office of Siebel CRM
Systems in California, listening to Thomas Siebel talk about the
significance of the Internet. I was the Internet technology architect for a
large financial services company and recent Siebel customer, and Internet
technologies had been my bread-and-butter for four years. The comment
Thomas Siebel made, then, was that the Internet represented a major
disruptive moment, and he likened it to the invention of movable type in
terms of how radically it was going to change the way we work and how
we interact.

In 1999, I’d worked with Internet technology long enough that I didn’t
find Siebel’s pronouncement terribly profound (but I did take note of the
allusion, and trotted it out when I needed to try to persuade someone of
the importance of giving applications a web face). 1999 was pretty far
along the industry adoption curve for the Internet. But even then Google
was still in its infancy, Amazon wasn’t yet the giant it is today, Facebook
didn’t exist and Apple was just starting to work its way back toward What is Blockchain,
profitability. We’d really only scratched the surface of how the Internet and why should
was going to change everyday life.
you care?
Fast forward to 2016. I’ve listened to a variety of “What is Blockchain,
and why should you care?”-style presentations, both in person and in the You should care about
form of YouTube videos. And again and again, these advocates are
Blockchain technology
making this same comparison: you should care about Blockchain
technology in much the same way that you should have cared about the in much the same way
Internet in the early nineties. It’s major, it’s disruptive, and it’s going to that you should have
change things for everybody. People are coining terms like Web 3.0 and
the like to talk about the impact of Blockchain technology. cared about the Internet
in the early Nineties.
Okay, so a lot of people say that. Admittedly, this includes some very
expert voices such as Andreas Antonopoulos, perhaps the world’s
foremost Bitcoin authority, and Blythe Masters, formerly “the most
powerful woman on Wall Street.” Reputations aside, how credible is
this claim?

Before we try to answer that, let’s start with a quick primer about Bitcoin
and Blockchain and how these technologies are currently being used.
Blockchain is a technology created for and used in the implementation
of Bitcoin, a “digital currency.” To really understand Bitcoin, it’s probably
best to have some direct experience with it.

Buying Bitcoin
The other day, I decided to try out some direct experiments with
Bitcoin. I downloaded a “digital wallet” on to my iPhone. bitcoin.org has
a “choose your wallet” page to help you find a wallet app. I selected Co-
pay, largely because I knew that Copay had been around for a while. The
app was fairly straightforward to set up.

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The next step was to figure out how to buy Bitcoin. Banks and credit
cards are fantastically uninterested in helping you buy Bitcoin. Even
PayPal wants nothing to do with it. As a result, you can’t really just buy
Bitcoin from a website, like you might buy an e-Book.

Four Options for Canadians (at the time of this writing)

1. Find a wallet provider that’ll connect with your bank. Coinbase

has a set-up process similar to PayPal (they deposit a small amount of
money in your account, and ask you to verify the amount), and once
that’s set up, you can buy Bitcoin directly from Coinbase, and they’ll
withdraw the appropriate cost from your account. Typically, this “The next step
works at the speed of bank transfers — my first purchase took six was to figure out
days. I can’t help but mention that Coinbase has developed a bit of a how to buy
bad reputation in Bitcoin circles, as they’re operating very
bank-like, including implementing certain operating procedures (like
Bitcoin.”
“are you using this Bitcoin for gambling? If so, we’re going to freeze
your wallet/account”). Such procedures often rankle the typically
regulation-averse Bitcoin community members.

2. Buy Bitcoin using Interac Online on a site like QuickBT. Although

most Canadians have Interac debit cards, Interac Online is a far less
common service, intended for debit purchases from e-commerce web
sites. My debit card from TD wasn’t usable as an Interac Online card,
and I didn’t pursue trying to get one.

3. Exchange Bitcoin for cash with someone who has Bitcoin. One way
of meeting people with Bitcoin is to find a Bitcoin community meet-
up on meetup.com or a similar event organization site, and ask to buy
Bitcoin. LocalBitcoins.com is sort of an “eBay” for Bitcoin. You can
meet up with someone in person to buy Bitcoin — the advertisers
generally want to meet in a public place, with WiFi access (like a cof-
fee shop). Or you can arrange an “online” purchase if you trust the
sellers or just have no interest in a face-to-face meeting. Typically, the
sale involves depositing cash into someone’s account or sending them
money via Western Union. LocalBitcoins.com will act as an escrow
agent in these cases. For a three-hour window, they’ll hold the seller’s
Bitcoin waiting for both you and the seller to mark the transaction as
complete. They’ll also do some investigation of complaints of fraud.
But, like eBay, a lot comes down to reputation and reviews to develop
trust of the sellers. I went with straight-forward cash deposits into
the seller’s bank accounts. There are some very explicit instructions
to follow (“Cash deposit only! No transfers! Take a picture of the
receipt with something written on it”), but my purchases went off
without a hitch, even as a first time buyer.

4. If you live in a larger city, like Toronto or Vancouver, there might be a

local Bitcoin ATM. There are just over half a dozen Bitcoin ATMs in
downtown Toronto, for example. For my part, I went to the

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 Decentral ATM on Spadina Ave, not far from the Intelliware offices.
I inserted a twenty dollar bill into the ATM, opened my wallet app on
my phone, and clicked on a “receive money” button, which brought
up a QR code version of the receiving address. I let the ATM scan
the QR code, and almost immediately the Bitcoin showed up in my
wallet. It’s prudent to mention that in this case (and when I bought
Bitcoin from LocalBitcoins.com), the incoming Bitcoin was in an
“unconfirmed” state immediately after purchase. After about 10
minutes or so, the transaction had a “confirmation”, as the Bitcoin
network performed its bookkeeping operations.

Going through this exercise produced some interesting learnings:

1. I didn’t want to spend the money to buy a whole Bitcoin (over $500
CAD, at the time I was buying). But I could easily buy fractional
amounts of Bitcoin. Bitcoin supports up to 8 decimal places, and
the smallest unit is 0.00000001 BTC, known as a “Satoshi”, after the How does the
mysterious creator of Bitcoin.
exchange rate
2. Using Bitcoin isn’t instantaneous. Although I received Bitcoin almost get determined?
instantly, there was something like a “hold” (“unconfirmed” notice)
on the amount, similar to how I’ve seen “holds” on money transfers
in traditional banks. With those traditional banks, though, the holds There’s no simple
were measured in days. With Bitcoin, the hold was measured in answer to that. It’s
minutes. This is an important point relating to how the Bitcoin
network performs bookkeeping. It’s easy and very fast for me to subject to traditional
initiate a transaction, but the transaction isn’t “final” until it has been supply-and-demand
confirmed (and, ideally, confirmed multiple times).
influences. Bitcoin is
3. I couldn’t ever buy Bitcoin at the “market rate”. A Google search worth what people are
might, for example, tell me that the BTC to CAD rate was $535 willing to pay for it.
dollars, but Decentral sold at $590 (about 10% above market).
LocalBitcoins.com sellers were selling for at least 5% above “market
prices”. When I buy, for example, US Dollars from my bank, there’s
usually a 2-3% premium. Bitcoin premiums are higher, possibly
because there are fewer places to exchange the currency.

A reasonable question to ask, here, is: how does the Bitcoin exchange rate
get determined? There’s no simple answer to that. It’s subject to
traditional supply-and-demand influences. It’s an answer that appeals to
the Libertarians: Bitcoin is worth what people are willing to pay for it.

The next interesting question to ask is: what can I do with Bitcoin? The
answer is “nowhere near as much as I can do with any other currency”.
I can’t buy a coffee from Starbucks, nor can I buy a song directly from
iTunes. US customers can book hotels with Expedia using Bitcoin. Dell’s
website also lets customers pay for a computer purchase using Bitcoin.

At the moment, I can really only use Bitcoin in a few very niche (physical)

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locations, or for a fairly small set of online purchases. Another notable
online purchase option is the website, Gyft, which sells gift cards for
popular brands including Amazon, iTunes, Best Buy and Starbucks. Thus,
with Bitcoin, I can buy a Gyft gift card, and use the gift card to pay for an
Amazon book purchase. “Rather than think of
Bitcoin as Money for
Given how hard to use Bitcoin is, why is everyone making
the Internet, one should
such a big deal about it? There are three answers to that:
think of it as the
1. Many of Bitcoin’s most vocal advocates are people who dislike Internet of Money.”
intermediaries getting between them and their currency. Many critics
of other Internet-age financial services organizations, such as PayPal,
for example, point to the non-trivial number of unhappy customers
who end up getting funds locked or frozen for sometimes arbitrary
reasons. Andreas Antonopoulos commented that he has a problem
with the fact that a VISA card can be used to donate money to the
Ku Klux Klan, but VISA will not allow its customers to use the card
to donate to WikiLeaks. Many people like Antonopoulos are
affronted by the value system implied by such seemingly arbitrary
political choices. Part of the promise of Bitcoin is that it is a
currency, capable of performing Internet purchases, but which is
free from the kinds of interference put in place by financial services
intermediaries. Even that description, though, tends to minimize the
significance of Bitcoin. Antonopoulos said, while speaking to the
Canadian Senate, that rather than think of Bitcoin as “money for
the Internet”, one should think of it as “the Internet of money”.
It is as big a change to the fundament of finance as the Internet
was to the fundament of information.

2. Another (not entirely dissimilar) perspective, often advocated by

the same people who advocate the “get rid of intermediaries”
position, above, is this: Bitcoin is a disruption to traditional financial
services in much the same way that Uber is a disruption to traditional
taxi services. According to this argument, disruption itself tends to
result in improvements for the customer. To use the Uber example:
one of the benefits of the Uber disruption relates to the experience
of getting a cab for People of Colour (PoC). Several high-profile “Blockchain technology
PoCs, including Danny Glover, have spoken openly about the racism exists in an interesting
of New York taxi drivers. Uber’s service makes the hailing of a cab
more drama-free. (It’s also worth noting that Uber is very aware of union of software
this argument, and uses it as leverage whenever it finds itself fighting development expertise,
municipal efforts to block the company from operating.) The pro-
disruption argument goes like this: taxis have been doing their thing cryptographic science
for a long time, and the service hasn’t evolved or improved in years
(if anything, it’s become worse, with in-cab screens now pushing
and game theory.”
intrusive ads at customers). Uber’s disrupting influence forces
traditional taxi companies to consider how they can make the
customer experience better, because otherwise, they lose customers.

©2016 Intelliware Development Inc. Page 5

 That might result in cheaper rates (as happened recently in Toronto),
or improved payment options or some other service improvement.
Bitcoin advocates want the same kind of disruption to pressure tra-
ditional financial services organizations to improve their services —
services that haven’t really changed a great deal in several decades.

3. Neither of the above two answers are terribly attractive for the
traditional financial services company: they’re certainly not keen
to be disrupted or excluded from playing the role of trusted
intermediary. This third answer, then, is a bit more attractive to
those stakeholders: the underlying technical inventions used to make
Bitcoin work have a lot of applicability beyond just Bitcoin and other
alternative currencies. And the key technology to consider is the
Blockchain.

This paper is particularly interested in exploring the third answer. People

have already imagined numerous significant uses for Blockchain “Blockchain is resistant
technology that don’t involve Bitcoin (or any other cryptocurrency).
to outside interference,
As we’ll discuss, Blockchain technology exists in an interesting union of resistant to tampering,
software development expertise, cryptographic science and game theory.
and open to
What is Blockchain, then? public scrutiny.”
The short answer is that Blockchain is a database, originally created to
behave like a ledger. If I send some of my Bitcoin to another person’s
wallet, my wallet app ends up creating a transaction, signing it with my
wallet’s digital key (to prove that the money originated from my wallet),
and then the app writes the transaction to this database. The net result is
that the ledger database now accepts that my wallet has less Bitcoin, and
someone else’s wallet has more.

Although we describe the Blockchain as a database, it’s a database

with some very distinctive properties.

1. First up, it’s a highly distributed database. In essence, this works a

lot like how peer-to-peer file sharing works. In a BitTorrent
environment, files live on multiple different computers that are
connected to the BitTorrent network. Much like governments can’t
really stamp out torrents because there’s no single machine or
website that they can have taken down. The Blockchain network
works much the same way: there’s no “original” version of the
database that can be taken out. And it turns out that designing a
system to be secured against government interference also helps
secure the network against important types of hacking the data and/
or the network.

2. Once transactions have been processed and added to the database,

they are essentially impossible to change. Part of the bookkeeping

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 aspect of the Blockchain ledger involves cryptographic protections.
New, incoming transactions are bundled up into “blocks”, sealed using
cryptographic protections, and propagated to all other nodes in the
network. Attempting to change previously-processed transactions
breaks the cryptographic validity of the Blockchain, and the network
will reject the tampered data. For this reason, individual machines on
the network don’t need to trust other machines. If anyone is trying to
peddle bad data, the math doesn’t add up, and the bad data is spotted,
immediately.
“If I lose my
3. Similarly, the database is public. As I was performing some of my first
cryptographic keys,
transactions, I found myself looking up my transactions on different
web sites, just to convince myself that everything was happening the I lose my ability to
way I thought it was. Because anyone can look at the ledger at any spend any money
time, it’s easy to perform spot-checks to verify any transactions that I’ve kept in my
have been made. While transactions are public, the
identities of the people performing the transactions aren’t attached Bitcoin wallet.”
to the transactions. That being said, one’s use of the Blockchain isn’t
precisely anonymous; it’s more accurately considered to be
pseudonymous.

These properties ensure that the Blockchain is resistant to outside

interference, resistant to tampering, and open to public scrutiny. Together,
these qualities provide a environment in which digital commerce can take
place without some of the types of trust typically offered by a financial
services organization.

When I talk about trust, in this context, I’m typically talking about dealing
with the following kinds of questions:

1. Does the offered payment information (e.g. credit card info)

represent a valid payment option? (not a stolen credit card, not
over the spender’s credit limit, etc.)

2. Will an electronic “payment” really result in money being deposited

into my account?

Basically, credit cards work because there’s an intermediary (the credit card
company) willing to confirm that the card is valid, and that the payment
will be respected. The seller trusts the credit card company to honour the
payment, and the buyer trusts that only authorized purchases will be added
to the credit card bill.

Bitcoin is designed to obviate that notion of “trust”. Instead, the seller

acceptance of the coins is based on an understanding that the network is
mathematically secure and tamper-proof.

It’s worth mentioning that the Bitcoin network depends on cryptography,

and protection of cryptographic keys are essential. If I lose my

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cryptographic keys, I lose my ability to spend any money I’ve kept in my
Bitcoin wallet. It’s comparable to dropping money on the street (except
that other people can’t even pick it up).

Now, as a user, I don’t tend to see my cryptographic keys: I simply

installed a wallet app on my phone and the wallet app is handling all
that complicated cryptography. But that means that if I lose my phone,
or it somehow gets wiped, I’ve lost my keys. Most apps provide some
mechanism to back up the wallet information (including the private keys),
but there’s usually some requirement on the end-user to do some work
to perform the back-up or to record some information that will allow the
back-up to be accessed in the case of a failure.

The risk of key loss will be a barrier for some people — I know
people who seem to regularly lose their phones or wallets. For such
people, Bitcoin wallets will probably result in losing money at some
point. Some wallet providers attempt to compensate for that problem What motivates people
by building wallets where the provider stores the keys on your behalf
(Coinbase operates this way, as does Blockchain.info. Mt. Gox is another to use their machines
such example, although they rather infamously lost hundreds of millions as part of the
of dollars worth of Bitcoin — an experience that drove them out of
business). In one sense, those organizations are operating much more like Blockchain network?
traditional banks (and may be obligated by existing laws to provide some
of the protections and follow some of the regulatory requirements that Users get rewarded
apply to banks). They are holding the keys to your account, and you have
to trust that they’ll give you your money whenever you want it. for being connected and
performing the automated
Mining
bookkeeping operations.
Another key point that we should mention is the importance of
incentives to the Blockchain network.

A reasonable question to ask is, “what motivates people to use their

machines as part of the Blockchain network?” The answer is that users
get rewarded for being connected and performing the automated
bookkeeping operations.

When transactions get sent to the ledger, they are initially “unconfirmed”;
remember how I described my initial purchases of Bitcoin starting out
in an “unconfirmed” state? Transactions are unconfirmed until they go
through this bookkeeping process. The bookkeeping process involves
gathering a bundle of transactions, verifying that the transactions are
valid (e.g. the sending wallet has sufficient money to give to the receiving
wallet), and then cryptographically “sealing” the bundle (which we call a
“block”). A new block is always linked to the block that came before it.
Hence, we say that the blocks are chained, and the ledger is a Blockchain.

The process of “sealing” the bundle requires a bit of a competition with

other computers in the network, and requires that a special

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mathematical puzzle gets solved. The details are a bit complicated, but the
essence is that the mathematical puzzle is so hard, the best way to solve it
is to try a bunch different answers until one of the answers works. Which-
ever computer finds an answer first gets to “seal” the bundle. (In Bitcoin
parlance, this process of finding the answer to “seal” the
bundle is called “Proof of Work”.) A final point to make about the
mathematical puzzle is this: there’s a built-in mechanism for increasing the
difficulty of the puzzle to compensate for improvements to computing
processing power.

Whichever computer solves the mathematical puzzle first is rewarded

with two things:

1. Any transaction fees associated with the transactions in the

bundle; and
“When Bitcoin was
originally being created,
2. A newly created amount of Bitcoin.
aspects of its behaviour
Because the bookkeeping process creates new coins, people refer to this were modelled on the
process as “mining”. When Bitcoin was originally being created, aspects
of its behaviour were modelled on the way precious metals worked. Over way precious metals
time, more of the precious metal could be mined and turned in to coins, worked. Over time,
but there was a dwindling supply, which eventually runs out. Bitcoin
behaves much the same way. more of the precious
This “Proof of work”/“mathematical puzzle approach” offers more
metal could be mined
security than simple “consensus” — the problem with consensus in an and turned into coins.”
online environment is that people can create false identities
(sockpuppets) to vote more than once (this is referred to as the Sybil
attack on peer-to-peer networks).

Votes are cheap and simple, proof of work is computationally

expensive. And the benefit of computational cost is that the network can
no longer be influenced by people with large numbers of fake identities.
The network can, however, be influenced by the number of computers an
individual puts on the network, but it’s generally considered impractical
to put enough computers on the network to influence the outcomes of
Bitcoin transactions (although there are some claims that around 50% of
the network nodes are in China).

There’s an edge case worth acknowledging: there’s a remote possibility

that two computers will complete the mathematical puzzle at the same
time. If this happens, there may be a short period where different
machines in the network are inconsistent about precisely which
transactions comprise the most-recent block. In practice, this problem
fixes itself in a matter of minutes. Basically, after another round of
puzzle-solving, the new solution will create a new block that links to
the end of one of the two previous answers; in the Blockchain, the
longest chain always wins.

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Because people are rewarded (sporadically) for performing the
bookkeeping, people are incented to use their computers to help
bookkeep, hence ensuring that there will always be enough machines in
the network to keep the Blockchain viable.

This system holds together because of a careful balance of software

development expertise (which uses best-of-breed peer-to-peer
architectures), cryptographic science (in the form of elliptic curve keys,
signed transactions, and data integrity checking) and game theory (to in-
vent rewards for encouraging people to operate the bookkeeping/mining
software).

Applications of the Blockchain

We’ve described how Blockchain works; the next point that’s worth
exploring is the question of “what can you do with a Blockchain”?
“Although the trading
Reconciling Trades happens in fractions
The primary example that’s caught the imagination of the Financial of a second,
Services industry — and which has been discussed at length by folks such
reconciliation of those
as Blythe Masters — is the reconciliation process for processing trades.
trades still takes days.”
The problem bears a lot of similarity to the digital cash problem:
investment companies don’t want to trust each other to hold a “master”
trade ownership database in one particular organization, so they each
have their own databases which they need to reconcile with each other,
in processes that are computationally laborious and require expensive
human-based follow-up to deal with irregularities and exceptions. The
end result is a process that is both highly expensive and prone to error,
and is also heavily scrutinized by regulators who are uncomfortable with
the complexity of the final accounting. Although the trading happens in
fractions of a second, reconciliation of those trades still takes days.

A recent Accenture announcement suggested that this kind of

reconciliation effort contributes to the $100 billion per year that
investment companies spend on technology, and that a Blockchain based
system could alleviate 10 to 20 percent of that amount. They note that
these institutions have been investing an increasing amount in Blockchain
efforts: $35 million in 2014, $70 million in 2015, and they predict $400
million by 2019.

Over the last six months, a large number of proof-of-concept projects

have been kicked off to experiment with Blockchain-based trade
reconciliation.

©2016 Intelliware Development Inc. Page 10

Asset Registration

Years and years ago, fiction writers used to perform a weird process of
proving copyright: they’d write a story, or screenplay, or whatever, and
then they’d send themselves a copy via registered mail. The thinking was
that, if they had to defend themselves in a copyright squabble, the original
(unopened) registered letter can be used as evidence that the writer’s work “Any digital work
existed at the date claimed. (say, a photo or a piece
of writing) can be
If I’m a writer and I’m suing someone for plagiarizing my story, I could registered to the
take them to court and say, “I wrote this story on such-and such day, and I Blockchain, proving a
sent myself a copy via registered mail to prove that I actually had it on that creator’s access to
day.” If the defendant did plagiarize my work, they shouldn’t be able to the work on a
demonstrate that they created it at an earlier date. In that case, we’d hope particular time.”
that the judge would rule in the plaintiff ’s favour.

Or at least, that’s how it’s meant to work in theory. Most writers’

organizations caution that this isn’t a reliable way of proving copyright. In
particular, there are enough ways that registered mail can be tampered with
that it’s not considered compelling evidence on its own.

But this kind of timestamped “proof of existence” can be built in a

more reliable way using Blockchain technology. In fact, a company called
Monegraph.com has exactly that kind of system. Their offering is that any
digital work (say, a photo or a piece of writing) can be registered to the
Blockchain, proving a creator’s access to the work on a particular time. I
suspect that they’ve never had to test the use of their registry in court, but
we’d hope that the Blockchain’s powerful tamper resistance would work in
their favour.

Registration can also be used for other types of assets as well. Land titles “It’s possible to
is a frequently cited example, because it fits the model that Blockchains
implement: There is an identifiable asset that changes ownership over time, implement such a
and the entire history of the identifiable asset can be perused to ensure
that all past transfers are valid (or, at least, all past transfers since the assets
system using traditional
started being tracked on the Blockchain). It’s possible to implement such a databases, but the
system using traditional databases, but the tamper-resistance of the
Blockchain provides attractive additional security. Honduras reportedly tamper resistance of the
attempted a Blockchain-based land title system, working in partnership Blockchain provides
with a Texas-based technology company called Factom.
attractive additional
Remittances security.”
Another area of disruption that is frequently cited by Bitcoin and/or
Blockchain enthusiasts is the business of remittances. People who live
in countries in the global south regularly receive money sent by relatives
who’ve emigrated to more affluent countries such as the US or Canada.
Haiti, for example, received just under $2 billion dollars (USD) in
remittances in 2014, a sum that accounts for 30% of its GDP.

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The worldwide remittance market was about $583 billion (USD) in 2014.

Typically, wire transfer companies such as MoneyGram and Western

Union are the dominant players in the remittance market, and they
command significant fees (5 to 10%) for enabling the movement of
money from country to country. Those fees are usually justified by
the infrastructure costs: companies like MoneyGram set up third party
agents (in Canada, often in corner variety shops or grocery stores) with a
pre-configured computer with special software. In countries in the global
south, banks or other large business are often recruited to have similar
set-ups where money is claimed by the recipients. Part of the success of
these environments relates to having enough locations that it’s easy to
both send and receive money.

The remittance company charges fees on each transaction, and the

third-party agents are paid a portion of those fees for being part of the
network. It’s easy to see how a digital currency can disrupt that “If anything, the public
environment. I’ve already demonstrated the ability to buy Bitcoin with
Canadian dollars. To send money to Haiti, I’d merely need the “send to” nature of the Bitcoin
address of my Haitian contact. The last part of the equation is finding a ledger makes law
way to exchange Bitcoin for Haitian Goud. LocalBitcoins.com has almost
no ads for Bitcoin sales in Haiti, and of the ones that exist, payment enforcement analysis
typically relies on the very wire transfer services that are currently the
expensive parts of the Haitian money transfer.
easier, not harder.”

But I suspect that in a few years, the organizations that currently work in
microfinance (such as, for example, Haiti’s Fonkoze Bank) will consider
Bitcoin exchange.

It’s necessary to point out that easy transfer of money that bypasses
traditional financial institutions terrifies the wealthy nations of the
world, fearing (perhaps not unreasonably) that it will become a primary
mechanism to fund terrorism. If I can easily send money to friends in
Haiti using Blockchain and/or Bitcoin, then I can also send money to
Daesh (or Anonymous) using the same technology. Many Bitcoin
enthusiasts counter that there’s nothing about Bitcoin that prevents
traditional policing and, if anything, the public nature of the Bitcoin
ledger makes law enforcement analysis easier, not harder.

Internet Purchases

I buy things online a lot. I’m pretty open to plugging in my credit card
details if I want to buy something. What I am wary about, though, is
giving a company my email address, because it usually means that they’ll
send me about four times as many emails as I think they should. When
available, I almost always favour “guest” checkouts for that reason — I
don’t want a user account on most sites, and I certainly don’t want their
e-mailed newsletter.

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Typically, e-commerce sites want to register users for one of two purposes:

1. To market to them; and

2. To make the process of buying things easier.

Often, the desire to market to a user is so high that sites won’t offer any
kind of “guest” check-out. Having said that, on most sites, registered users
can usually check out more quickly because they don’t need to re-type ship-
ping addresses or possibly even credit card numbers. Often the process of
registering for a site is irritating. I may need to confirm my e-mail address
by clicking on a link in a sent e-mail, but those e-mails are often caught in
my Junk folder. If I come back to the site months later, I might not remem-
ber my password, and I may need to get it sent to me again. Some sites are
keen to have my mobile phone number and want to send me confirming
codes (but aren’t saying whether or not they’re going to spam me with text
messages).

All of that sign-up irritation is referred to as “friction”, and it’s well known
that the higher the friction, the more people bail out of check-out
“Bitcoin, by comparison,
processes. Friction affects the rate of completed transactions. But much of is a very low-friction
that friction exists because it’s a necessary input to credit card processing.
Typically e-commerce sites validate credit card data using additional data payment system”
points including billing address and phone number.

Bitcoin, by comparison, is a very low-friction payment system. Recall that

it’s meant to model how cash is exchanged. Bitcoin is designed to be low
friction; I don’t need to be a registered user to pay using Bitcoin; I merely
transfer money from my Bitcoin wallet to the site’s Bitcoin wallet (although
e-Commerce sites may still need a ship-to address or a communication
mechanism for sending shipping updates).

Not only does a low-friction payment mechanism make things friendlier for
users, but it can also help prevent users from being exposed or embarrassed
in the event of a future hack. Consider, for example, the people who were
users of the Ashley Madison site, who were publicly embarrassed by the
2015 data breach: putting aside any questions about whether or not they
deserved to be publicly shamed, part of the reason that Ashley Madison
gathered the personal data was to process payments, and that could have
been obviated by an alternative to credit card payments. (There was also
a “shake-down” aspect, given that they were demanding money to delete
people’s personal information.)

Access to credit cards is also a key consideration if one wants to broaden

the pool of who gets to participate in Internet commerce. Today, in order
to purchase or trade on the Internet, one needs a credit card or something
very like it. Of the seven billion people on the planet, today, only about two
billion have access to the kind of “official identity” (usually in the form of
government-issued identification) that one would need to acquire a credit

©2016 Intelliware Development Inc. Page 13

card. People all around the world have access to the Internet, via phones,
but not everyone can participate as fully. A digital cash mechanism
changes that.

Micropayment

With low-friction payment (and low transaction fees), it becomes very

easy to support “micropayments” — small payments for Internet
content. Micropayments were a hot topic as free content on the Internet
began to propagate: many commentators, including, for example, the
comics creator Scott McCloud, argued that audiences were willing to
pay small amounts for Internet content (e.g. comics, blog entries, music,
video, etc.), but that free content had created a price adjustment.

Wikipedia says:

While micropayments were originally envisioned to involve very small sums of “Over time, as new
money, practical systems to allow transactions of less than 1 USD have seen little
success. One problem that has prevented the emergence of micropayment systems uses for the Blockchain
is a need to keep costs for individual transactions low, which is impractical when are discovered,
transacting such small sums even if the transaction fee is just a few cents.
additional types of
Micropayments disappeared shortly after they were first discussed.
BitPass, one of the most high-profile micropayment organizations,
transactions - over and
disappeared in 2007. Since 2010, though, a number of new above transfer from one
micropayment services have returned. Flattr and ChangeTip enable
microdonations, while SatoshiPay is a more traditional micropayment wallet to another will be
environment. created.”
That last one, invoking the name “Satoshi” in honour of the mysterious
BitCoin creator, Satoshi Nakamoto, uses Bitcoin as its payment currency.

Blockchain Developments
The Bitcoin core software — the software used to perform the
bookkeeping/mining operations — remains in active development. There
are known concerns with the software, mostly relating to scalability, that
are being actively worked on. In addition to that work, there are other
areas of Blockchain development. These include:

1. New currencies. Shortly after the release of Bitcoin, a flurry of

alternative digital currencies were created, including Litecoin, Ripple
and (most recently) Ethereum Ether. According to Coinbase.io’s
“market rate” numbers, each of those currencies has a market
capitalization of over USD $100 million.

2. New types of transactions have been added to the Bitcoin

©2016 Intelliware Development Inc. Page 14

 Blockchain. Over time, as new uses for the Blockchain are
discovered, additional types of transactions over and above
“transfer from one wallet to another” will be created. For example,
the Blockchain supports transactions for provably fair gambling.
One of the concerns with online gambling (in the jurisdictions where
it’s legal) is that it’s possible to build sites that give the “house” much
better odds than they should have. Satoshi DICE, one of the earliest
provably-fair gambling sites, publishes its algorithm, and also publishes
cryptographically hashed versions of its random number “seeds”.
After 24 hours, they release the unhashed version of the seed, and
“The use of a
anyone with the technical know how can validate that the previous peer-to-peer network
day’s transactions worked as advertised. To support provably-fair
gambling, new types of transactions had to be added to the prevents the database
Blockchain code. from being attacked by a
3. Using Blockchain technology in private networks. Some of the government who might
newly-imagined uses of Blockchain encourage people to think about
want to stop Bitcoin:
private networks. Those that imagine using the Blockchain to help
settle trades, typically imagine using a separate Blockchain network, there are too many
accessible only to recognized financial organizations. Some Bitcoin and
Blockchain enthusiasts cannot fully endorse taking a technology that machines in the network
succeeds because of its openness and transparency, and making that to make that viable.”
technology not open and not transparent.

4. Constructing specialized hardware for bookkeeping/mining.

Because mining is a rewarded activity, some hardware manufacturers
have begun selling machines that are optimized for the crucial
“competition” aspect of Bitcoin mining. For example, the Canadian
e-commerce site, bitcoinware.net sells, devices such as the AntMiner S7
and other hardware devices that excel at Bitcoin bookkeeping/mining.

5. The fully programmable Blockchain. A fully-programmable

smartphone is far more powerful than a manufacturer programmed
phone with a number of built-in features, a Blockchain that allows any
developer to create new types of transactions is more powerful than a
Blockchain that only supports a number of previously imagined trans-
actions. The most significant implementation of a fully-programmable
Blockchain is the relatively new Ethereum network.

Ethereum: The World Computer

We’ve described how the Bitcoin Blockchain is like a database. The

database software for this networked database runs on a large number
of connected computers. In some ways, it’s an evolution of BitTorrent:
BitTorrent can be conceptualized as a networked filesystem, where
different files (torrents) live on the network of machines.
Putting torrents on the network was powerful because it created a file sys-
tem that was impervious to takedown actions on the part of
governments at the behest of the music and/or motion picture

©2016 Intelliware Development Inc. Page 15

industries. Similarly, the Bitcoin Blockchain is a networked database
that’s very specialized for the purpose of implementing financial ledgers.
Again, the use of a peer-to-peer network prevents the database from
being attacked by governments who might want to stop Bitcoin: there
are too many machines in the network to make that viable.

The next obvious evolution of peer-to-peer networked systems is to

create a networked application server based on the same kind of
Blockchain technology. Such an application server could implement
any kind of application logic and execute the logic on the network.
This is, essentially, a computer living in a new kind of cloud: a cloud
that, rather than execute in a Google or Amazon server farm, instead
runs on many individual machines connected to the network.

This new type of peer-to-peer cloud might not necessarily be the best
possible environment to run all types of application logic. But
applications that can benefit from the Blockchain’s security features “The Bitcoin Blockchain
(resistance to takedown, cryptographic tamper resistance, etc.) might
be ideal candidates for executing in this new type of peer-to-peer is a networked database,
application server. that’s very specialized
This is the essence of Ethereum. Ethereum was an idea created by Vitalik for the purpose of
Buterin and Gavin Wood to generalize the programmable aspect of the
implementing financial
Blockchain and create an environment in which developers could create
any kind of program that could execute in a secure and attack-resistant ledgers.”
environment. Prior to settling on the name, “Ethereum”, Wood originally
referred to this kind of distributed server environment as “Web 3.0”.
Wood describes, in his DevCon talk, “Ethereum for Dummies”, how the
Ethereum “computer” has some important limitations: it’s slow, it’s very
expensive to run, and it’s not always immediately decisive about what’s
happened. But the good properties include being a single global instance
which cannot fail or be censored, and which is ubiquitously available.
It’s additionally exceptionally verifiable and auditable. If these qualities
benefit your business model, then hosting your app on Ethereum might
be a good idea.

Apps that are executed on this peer-to-peer computer are referred to as

distributed apps, or DApps. Consider this as a DApp example: when I
start a video game, there’s usually code that checks with a server to
ensure that my license is valid. After a few years, the video game
company might decide that the game isn’t successful and will shut down
the servers that perform the licensing check. Now my legally-purchased
game no longer starts solely because the company doesn’t want to
support it any longer.

If the licensing check was built as a DApp, it could continue to execute

long after the game company walks away from it.

©2016 Intelliware Development Inc. Page 16

In their “Technology Trends For 2016” position paper, the Gartner Group
acknowledged that new forms of adaptive security are essential. They
say, “relying on perimeter defence and rule-based security is inadequate”,
citing the importance of additional security features including “application
self-protection.” Ethereum is possibly the most interesting re-imagining of
traditional application architecture for this new type of adaptive security.

In Conclusion
The Blockchain, the core technology at the root of Bitcoin, has caught the “For financial services
attention of those traditionally trusted intermediaries, and it’s
organizations, ignoring
understandably discomfiting to embrace a technology designed to
obviate you. But for financial services organizations, ignoring the the Blockchain is
Blockchain is probably the equivalent of brick-and mortar bookstores
ignoring the Internet (which they did to their peril). probably the equivalent
of brick and mortar
In his talk to the Canadian Senate, Andreas Antonopoulos acknowledged
that he, like many of Bitcoin’s biggest advocates, was initially dismissive bookstores ignoring the
about the technology. It was, he said, “nerd money”. But over time, he’s Internet.”
come around to recognizing how the fixation on eliminating “trusted
intermediaries” has had the effect of creating a technology that solves a
number of major, real-world problems.

Within the last six months, financial services organizations have launched
a number of proofs-of-concept to validate that the Blockchain can address
those real-world problems. Obviously, it’s too early to state with certainty
that it the solution works, but conceptually it holds together and its prom-
ise is attractive.

©2016 Intelliware Development Inc. Page 17

Author’s Bio

BC Holmes Chief Technologist

BC has over 25 years of software development

experience, primarily in the healthcare and
financial services industries. Her work often
involves practical implementations of new
technology; in the mid-nineties, for example, she
led the team that developed the first web
banking application in Canada. BC has a Bachelor
of Math Degree from the University of Waterloo.

About Intelliware Development

Intelliware is a custom software, mobile solutions and product development company
headquartered in Toronto, Canada. Intelliware is a leader in Agile software development
practices which ensure the delivery of timely, high quality solutions for clients. Intelliware is
engaged as a technical partner by a wide range of national and global organizations in
sectors that span Financial Services, Healthcare, ICT, Retail, Manufacturing, and Government.

About Intelliware Financial Services Practices

At Intelliware, delivery matters. It’s the driving force behind everything we do–our people,
processes and organizations are all focused on providing exceptional solutions for our clients.
We have delivered successful projects leading Banking, Custody and Trust, Investments,
Insurance, Wealth Management, Loyalty and related businesses for over 20 years.

To get in touch with our Financial Services team, please contact Keith Shiner, Vice President,
Financial Services at

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©2016 Intelliware Development Inc. Page 18