Transition to T0 Settlement for Cash Equities, the only solution..

Since "Black Monday" in 1987, the industry world wide has been seeking to reduce (credit, market, and liquidity risk) buy shorting the settlement cycle.

We see Exchanges world wide, will look at transitioning from T+3 to T+2 settlement cycles sometime in the near future (2016).

Quite simply the move to T0, will lower the systemic risk for the market as a whole, via a reduction in liquidity demands, especially during periods of market volatility, while reducing the counter party risk for individual investors participants and the clearing houses..

I see the ASX, believes Australia will a world leader, if it can achieve T+2 clearing from march 2016 for cash equities, so lets start with these as they are the simplest to look at, but the same process can be applied to other instruments and markets.

This blog, looks at why T0 needs to be the objective solution, for Australia to just compete..
Anyone who thinks T0 settlement, is decades into the future, needs to take a look at systems like "bit shares" while this  solution has some serious flaws and probably not commercially viable, it  proves the point, its the  change in  the "state of mind" which is important. The mantra has to be the trade is the settlement, antiquated back office systems, must catch up with real-time trading front office systems.
Technologies exist today, which can fill the bit share gaps, without off chain entries, or dumping 20 years of operational experience.. but I digress into the technologies and this blog is not about technologies for technology sake, but rather about a vision and execution path to better harness, utilise capital world wide..

Why not T0?
When one looks at the "transition" strategies in place for T+3 to T+2, one see a whole wade of "legacy system" issues, herein lies the problem, just like the existing payments systems, these legacy security systems are not going anywhere any time soon. There is nothing new about this, these issues has been well known by anyone who developed and deploys systems for the last 40 years, its a fact we all live with, and the tried and tested solutions are still the same.. Lets take a look at the ASX for a moment, the T+2 solution will touch Chess, which is a batch process, see the similarities to BECS in the payments systems, there is a common thread here, old systems consuming significant resources, and limiting change. What was once a "barrier to entry", is today a ball and chain around the neck of the "incumbents".

Additionally it is obvious that if one does not fix the payment side, of settlement then we are all going nowhere, so lets start with a solution that integrates new payments system (real-time) with real-time trades and secure T0 settlement processing.

The problem "is" the legacy systems and the whole wade of  processes and procedure which exist simply to support T+X clearing today, it is a self fulfilling system, which creates the problem in the first place,and then seeks to mitigate the risks associated with these introduced processes.
If it is "batch" or related to "cut off" times, it is a dodo, and is part of the problem, and will not be part of any T0 solution space, its this simple, the back office settlement systems need to match the front office trading systems, any artificial or introduced delays are the problem.

Why T0?
In a single word KISS..
Plus the financial imperative  "Managing, clearing and settling trades costs the financial sector between $65 billion and $80 billion, according to figures from consultancy Oliver Wyman" .

But this is actually about market efficiency, and in particular the most efficient use of "capital" on a global scale, tying capital up in a inefficient process such as T+3 is simply no longer viable, if the risks can be reduced within T0 settlement. We see that "transparency" and regulatory costs associated with the current non-transparent process, can be addressed at the same time, resulting in a new "deal" for all.

Lets look a bit more at the problem..

• Trade Processing: trade processing activities including reference data, real-time trade matching, straight though processing and delivery of the "securities"
• Asset Servicing:  stuff like ex-date, and cover/protect period computations for corporate actions
• Documentation: agreements and procedural stuff
• Regulatory issues: changes if any, to support T0 clearing and settlement.

In this blog, we will not address the real-time trading systems as these are currently, in our option, world best practice by any benchmark, and will focus only on the Post Trade activities.


Counter party risk
Counter party risk exists during the time between trade execution and settlement.
On the sell-side,  the clearing member(s) assume the risk of counter party default and the clearing member is responsible for maintaining capital, in the form of risk-based margin requirements to be held in a clearing fund, to protect both its membership from this risk.
With T0, both the institutional and retail investors have reduced default exposure, by shortening the time between trade execution and settlement. Any decrease in counter party risk also results in a reduction in liquidity requirements for the participants, this is identical to the Payments World.

Hence the solution is pretty obvious, we will look at how tipple entry accounting combined with a Block Chain Ledgers, can be applied in the same manner as we do within the payments industry. It is a simple fact that an accounting ledger can process any asset today, the issue is how we can apply Block Chain Ledger Technologies as applied to payments to the securities world. The objective result is a highly scalable decentralised settlement system, which is integrated into the Block Chain Payments world to produce a fully integrated and atomic real-time settlement system.
In fact the solution proposed within this blog is a simple extension of the basic Block Chain Ledger solution for payments. The leap is a conceptual rather than technology one..

It is typically stated by the "established" entities that T1 and obviously T0 by extension will increase the complexity, we will show that moving directly to T0 will in fact simplify almost all elements of the solution, and hence T0 should be the objective solution.

The solution will be based on a completely independent  and duplicated infrastructure, where legacy system will be deprecated and simply disappear over time. Trying to change existing legacy system has been rejected as a poor evolution strategy, and migration of the existing systems are simply too risky and costly to be seriously considered.
We also believe any migration of legacy systems is not in the interest of the Individual Investors or the global market.  Note this solution is predicated on solving the global payments, including cross boarder issues, using identical technology sets, thus allowing a truly global solution, while addressing the audit, compliance, privacy and regulatory issues of sovereign states.

So lets start..
We begin at the point of Trade/OTC Trade capture, i.e. just after the Exchange order execution below.

Figure one: Proposed T+2 settlement processing.

Trade Funding: One of the key strategies is to link in the Payment->Block Chain Ledger, which supports real-time and atomic ( read finality) of payments including cross border payments.

When issued settlements, not we need to be careful that we are not overselling a T0 settlement solution, the scope has been initially limited, and there are areas when trades are conditional, i.e authorised but in fact not issued, such as stock splits ect, see starting point above, these types of trades will continue to take days or weeks..or even months in some cases for the foreseeable future.

The confirmation and affirmation process is an important component of trade processing and varies depending on whether a trade is executed on behalf of an institution or a prime broker. In both instances, after a trade is executed, it is allocated, confirmed and affirmed, and is sent for clearing and settlement, refer to figure one.

Asset Servicing, T0 impacts asset servicing functions, corporate action processing, compliance and reporting. This blog proposes that a specialist Trade-> Public Block Chain Ledger based on "participants" in the first instance, forms the basis of deriving all associated functions. This Public Block Chain Ledger, forms what has become known as the "golden record", and like the Payments Block Chain ledger, is executed atomically, as a decentralised Block Chain Ledger, this has the capability to process any number of translations, we expect each node to be capable of handling ~  40,000 tps peak using commodity technologies.

New T0 Architecture
Firstly, lets move the existing centralised "congestion and failure"  point in the existing system into a decentralised set of Block Chain Ledgers, then link these into a global virtual "Public Block Chain Ledger" after all these are just block chain secured accounting ledgers, nothing radical here.

As investors and issuers maintain a common and public "golden record" of ownership, asset and cash management are no longer separate or system specific, settlement and cash occurs 24*7 365 days a year on a continuous cycle across the globe. The real-time settlement between counter parties remove the need for capital intensive clearing processes.
As a truly global set of decentralised Public Block Chain Ledgers, which navigated as a single virtual Block Chain Ledger, there is no single point of failure, plus due to the unique triple entry accounting process, each leg of the transaction can be completely reconstructed from scratch, from any of the two other Private Block Chains ledgers.

In addition, both institutional fund managers and hedge fund managers are facing pressure from their investors to provide more transparency into their operations, so that they can better understand the balance between risk and return, for the first time the Public Block Chain Ledgers provide this transparency in real-time.

If we look at the current situation (see figure to the right), there are a few boxes which simply cease to exist with T0, and integrated payments settling. There is no need for any "registries" as, the golden record is atomic, final and the single source for all parties.
As both the Seller and Buyer have their own Private Block Chain Ledgers. the two custodians disappear, as does the custodian of custodians, the Central Securities Repository, looking good so far.
Given that the third leg of the Public Block Chain is the Exchange or Participant, does not really matter, the Clearing House(s) also disappear, finally a simple objective solution, the key is T0 gross settlement..

The "golden record"  secured within the Public Block Chain Ledger, is atomic, final and the single source for all parties.

The Big Plus
All of this is interesting, as are all new technologies, but the big gains will not come from the improved gross settlement times, but the fact that this all works in the existing audit and compliance world, there is full support for AML and cross boarder issues,and all existing audits will continue to function,as this is just accounting ledgers.. There is simply no need, in a modern digital world, for any "net" settlements systems.

With access to timely and precise information ( the Block Chain Ledgers), coupled with the appropriate analysis tools, banks can perform a pre-trade optimisation assessment to give traders an accurate view of stock availability and the cost of the collateral associated with a derivative trade.  Delivering collateral effectively can therefore have a profound impact on the trading desks’ efficiency, and allow banks to deliver  a range of new  services to market participants.

Derivative collateral optimisation, is just one area that banks can focus on, to reduce the impact of the inevitable post GFC, interest rate increases.  In January last year, central securities depositories in Germany, Spain, Brazil, South Africa and Australia formed an alliance to tackle the expected global shortfall in collateral arising from new financial regulation. The Banks which grasp this challenge and harness their data effectively, in a fully transparent manner, will undoubtedly reap the benefits.


Some new ways to do traditional activities.
With as small twist to the crypto, one can now track, ownership, and lending of individual shares, and once and for all time stop naked short selling.  Keys are close to zero incremental cost, so one simply splits up the trade from the entry point above and splits out individual keys and associated SINs for each share of the stock. This allows an owner to "lend" an individual or group of shares, via time standard time limited cryptographic "tokens" which cannot be sold, and close the market to any entity that cannot provide cryptographic proof of ownership.



Lets get real
All interesting stuff, but what can be actually done today, do we need yet another committee or "incubator"?

• Commercial Private Block Chain Ledgers exist today, the same technologies can be applied to any traditional double entry accounting system, not rocket science.
• A range of Specialist Public Block Chain ledgers are being developed, and the first preview of Payments and Trades with associated protocols already exist. Genesis blocks can be created at will by any existing institution such as banks and exchanges.
• The secure Global identification framework to under pin all payments, trades with full AML support is operational and available for free, yes a SIN can be a global Holder Identification Number..
• Secure 100% hardware backed, algorithm agile keys; under pin the security of the Public and Private Block Chain ledgers today..
• Turning Complete specification (BPEL4WS), to ensure integrity of settlement protocols.
• Via integrated payments Block Chain ledger, and orchestration can process multiple instruments and multiple currencies across multiple markets.
• Existing participant settlement and clearing systems need to process at least 1,000,000 trades per day, the Public Block Chain Ledger can process ~1 billion transactions per day per participant node.

The objective is technically possible today..
A strict simultaneous, irrevocable and final DVP settlement process this means  there is no time gap between the cash leg settlement and the securities leg settlement, a truly atomic, cross block chain ledger transaction. Nonetheless, the entire DVP process may still technically be fragmented in a set of orchestrated sequential events.

The exist real-time settlement systems today such as Swiss CSD, SIX-SIS  which settles in 4.12 seconds, the problem is this must be zero seconds, the transfer MUST be atomic, the transfer of the payment and security must be atomic any time delay will be exploited by increasing processing capabilities, this applies to all asset transfers contingent on a payment, not just security transfers. 

The real problem..
Thirteen years ago, the industry was examining a move to a T+1 settlement cycle. The initiative was abandoned as a result of competing priorities. While there is no debate that shortened cycles are in the best interests of investors, issuers and the global economy, the commercial reality is that a lot of money is made from the current inefficiencies,and the existing barriers to entry limit competition within the settlement, and registry area today.  Many of the current participants have invested significant capital and resources in antiquated systems and mostly manual processes, and enjoy the benefits of significant capital reserves needed to keep the system operating. Change will not come easily, just because it is technically possible.. this mirrors the existing payments system situations.
The most likely catalyst for change is if one of the incumbents realises the opportunity these new generation systems can offer, change will then happen overnight, the new world of true competition.

The opportunity is now, who will blink first..



Also check out
The Global Block Chain Ledger, as a Payment System for the Digital World
Secure Global Digital Identity, for the Digital World
Identity Theft and Digital World
Global Public Block Chain Ledger Navigation

Postscript
Warning soapbox stuff..

Bitcoin, and other "consensus" based currencies are not suitable, as are off chain solutions.

For those that want the full story here, but the quick bits

• limited to 7 tps, variants of block size and off block transactions don't help.
• votes (proof of work) are based on MIPS alone,  proof of stake variants do not actually help, all will eventually become centralised, conceptually flawed.
• no certainty of any transaction being included on any specific block, at any specific time.
• no AML support, or any other regulatory compliance or reporting, not even basic audit compliance.
• does not understand commercial realities and "trust", crypto is not equal to security or trust.
• cannot scale
• there is no actual security, needs mandatory HSM key protection at a minimum.

The "unbanked" and  the securities world..

The issues realtign to the unbanked of the world also apply to the securities world, not only are the majority of the worlds population excluded from banking services, they are aslo excluded from the securities world and all of its services, the two are related. Witness the growth of crowd funding, this si the litums test theat the securities world has failed the world in the same way as banks have been unable to make a profit from the unbanked population.

Underpinning this blog is a vision of a world which is inclusive, and if the banks and exchanges of the world thought about it, creating a global economy where access to commerce and investment funds are globally available is good for everyone, its only a win-win situation.

In order to address the first barrier, a global secure identity (SIN) solution, which can meet the unbanked and yet have full AML support is now available, and can be accessed for free, anywhere any time across the planet. The global infrastructure is on-line and operational today, and can scale to support the entire population of the world. The SIN is under the control of the individual, and can be used in any system, payments or a Holder Identification Number across the globe.

Notes
1, Statement Regarding Proposals to Shorten the Trade Settlement Cycle by SEC.
2. T+2: Settlement Time 
3. Reasons why T+1 was not considered as a valid option.
4. Japan moving ahead with migration to T + 1 settlement 

Disclaimer The contents of this site should not be understood to be accounting, taxation, legal or investment advice but rather as general educational information that may or may not meet your specific requirements. This blog is not an offer for sale, but rather a catalyst for discussion on the topic.

Bitcoin, is not suitable, for securities settlement.

I normally don't blog about technologies or systems which I have not personally designed and involved in the development ,and hence have an in-depth understanding, so if anything in this blog is not technically accurate, please contact me and I will correct.
Here goes..

I keep hearing that "blockchain" and other distributed consensus technology can revolutionise the payments, clearing and settlement infrastructure of the financial system and that, no, the existing bitcoin blockchain just won’t do. (which suits bankers fine, as few were ever anything  to gain from bitcoin the world’s most popular crypto currency, outside of the control of any bank).

Then enter the marketing and media guys and almost every day, there is yet another committee, seminar, or incubator announcement, using the bitcoin blockchain?


What’s going on!?
 My conclusion is that most of the people discussing bitcoin haven’t actually looked under the hood, and have very little knowledge about how bitcoin actually works. It reminds me of the whole "Digital Signature" exercise all over again, people with vested interests push technologies they don't understand.

 I've also noticed that enthusiasm for bitcoin tends to be inversely related to one’s understanding of it, and of course that famous "white paper" by yes an faceless, anonymous person, so lets start there.

A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution. Digital signatures provide part of the solution, but the main benefits are lost if a trusted third party is still required to prevent double-spending. We propose a solution to the double-spending problem using a peer-to-peer network. The network timestamps transactions by hashing them into an ongoing chain of hash-based proof-of-work, forming a record that cannot be changed without redoing the proof-of-work. The longest chain not only serves as proof of the sequence of events witnessed, but proof that it came from the largest pool of CPU power. As long as a majority of CPU power is controlled by nodes that are not cooperating to attack the network, they’ll generate the longest chain and outpace attackers.

Hmm a system in which anonymous, programmers and crypto geeks are required to always act honestly for the sole good of the bitcoin community. Yep in the sense of securities settlement it is all built on a house of cards, but lets dig a bit deeper, so we can understand why..

It has been known for a long time, at least two decades from my memory, that cryptographic signatures and public keys can be chain-linked to form a set of unforgeable records (its known as a X.509 certificate chain, and in use by almost everyone daily via SSL)).  This same cryptographic chain of signatures can be applied to any records or set of transactions for, say, digital cash (or any ledger record for that matter). Counterfeiting ledger assets is impossible, and theft or misappropriation cannot happen without gaining access to the asset owner’s private key.

If I give you crypto-proof that some asset belongs to me and that I just transferred it to you, you have no way of knowing that I haven’t already done that with someone else, unless we can both refer to a definitive ledger of timestamped and crypto-signed transactions. Let’s say this ledger is maintained and hosted by some trusted third-party. The third-party cannot forge any ledger entries, as each entry is signed by each party, so what’s the problem with this setup?

There are three problems:

• The third party could delete a transaction, reversing history
• The third party could censor a transaction, refuse to enter it into the ledger
• The third party could forge a transaction, create or alter a transaction.

And it’s not just the third party itself who has this power, it’s also the government who regulates the third party, or the hacker who infiltrates the third party. For bitcoin, using a trusted third party for this task loses some of the “main benefits” of the crypto framework as real world third parties have a real-world identity (a registered business, an IP address, etc) and if known, these third parties can be censored by governments, shut-down, fined or imprisoned. One of the key design goals behind bitcoin is censorship resistant digital cash.

First, bitcoin is a peer-to-peer network. It is architecturally decentralised or P2P, it is not distributed (it seems like no-one has actually read, or understands, Paul Baran 1964 paper) . It is a fact that there is no single "bitcoin server" where those chain-linked blocks of transactions (transactions that are themselves also chain-linked via crypto signature) are stored. Instead, the transaction record is stored (well distributed, replicated) across all of the P2P nodes on the network. There is still only a "single" bitcoin block chain in existence, which is a shared resource of the P2P network. Over an extended period of time, currently about six block counts from any transaction. Anyone can be a node on the P2P network anonymously. This is what’s meant when people say that bitcoin is a “permission-less” network. This single blockchain resource "replicated"across potentially an unlimited number of P2P nodes is also an architecture defect, what is required for any scalable solution is a fully distributed architecture, just like the internet, where "data and processing" is fully distributed; but lets leave this discussion for another day..

Most people understand a timestamp to mean something generated by an accurate clock. But this, is a peer-to-peer network, so it doesn't have a "clock". The nodes on the network have clocks, but since these nodes could be anyone, you can hardly trust the timestamp of any given node. So how does exactly does the bitcoin network “timestamp transactions”?

What bitcoin means by ‘timestamp’ is in fact the ordering of blocks of transactions. This block of transactions came immediately after that block of transactions. It is in this sense that the “network timestamps transactions”. And it does this in a very cleaver way, “by hashing them into an ongoing chain of hash-based proof-of-work.”

This is the point where many people get lost. Before moving on, lets trash all mention of any link between bitcoin and Gold mining they are simply not relevant concepts within bitcoin and simply trend the discussion down rat holes. Done...lets move on..

The basics are quite simple, we just need to first agree a few concepts firstly. A “hash-based proof-of-work” is a solution to a problem, a hash problem. The “hash” refers to a branch of mathematical functions called “cryptographic hash functions”. They have a neat feature that whatever data you put into one of these functions, they effectively return a pseudo-random number of the same bit size. You can’t really predict what value the function will return given a certain input, without actually computing the function. Between inputs and outputs, there is no easily predictable correlation or pattern, The SHA256 bit function chosen by bitcoin is good at this, sometime simply watch the outputs change, a single bit input change will typically produce a full 256 bit output change, very cool... I digress, sometimes technology is just cool.

In bitcoin the hash problem is like “input into the hash function a (1) bunch of transactions along with (2) the hash of the previous block of transactions and (3) an arbitrary number N; if the hash function returns a value below some number D, problem solved, if not, increment N and repeat.” There’s no way to solve this problem except through iteration. So you set your computer to the background task of running billions of hash computations until it solves the hash problem. No rocket science here...

And that’s why it’s called “proof-of-work”. The problem is hard to solve, it requires work (consuming MIPS, and electricity). But once it’s solved, you can prove to someone else that you did the work to solve it. Just show them the data (a bunch of transactions plus the hash of the last block) and that winning number N and let them calculate the hash. If the hash value is the same below-D number that you say it is, they have proved that you solved the problem. The problem is hard-to-solve but the solution is easy for others to verify.

So this is how the bitcoin network timestamps transactions. The nodes on the network (“miners”) , actually "hashers", but not nearly as cool a name, collect transactions that bitcoin senders broadcast and each hasher, works at solving the hash problem over a set of transactions. Whenever a node solves the hash problem, it broadcasts the block of transactions along with the proof-of-work. The other nodes verify the work and start hashing on top of that block (i.e., including its hash in the input of the hash problem).

And this is what bitcoin means by “forming a record that cannot be changed without redoing the proof-of-work.” Nodes on the network build on top of the “longest chain” of blocks. If an attacker wanted to reverse the history, say, 5 blocks back, he would have to redo the proof-of-work of those 5 blocks before other nodes would start accepting that his version of history is the version (because it’s the longest chain). And that’s no mean feat. We will simply forget the issues with forks and how a single blockchain is generated, also a separate topic sometime, but for now a single blockchain is being built, typically 6 blocks ahead of an actually confirmed transaction..

This is a neat result. If every node follows the rule that the chain-linked set of blocks with the most work behind it is the blockchain, then every node’s local copy of the blockchain will be exactly the same. And if an attacker wished to maliciously replace part of the “sequence of events witnessed” by the network (eg, one where he made a big payment to someone) with an alternative version of history (eg, one where he didn't make that payment), he would have to redo the latest work of the longest chain, and do this work at a faster rate than the rest of the network combined. Hence, he needs to control in excess of 30% of the network’s total MIPS power. Of coucs there is an obvious defect in the above logic, as the block chain must grow, it becomes computationally infeasible (time taken) for any independent observer to actually download its own copy of the "total" block chain and verify all of the blocks and transactions from the "genesis" block, to the current transaction, but also a topic for another day.. let stick to the main thread of this blog..

And that, in a nutshell, is bitcoin’s security guarantee. If you’re comfortable believing that an attacker is unlikely to ever pull together more than a third of the network’s total computing power, you can trust in the blockchain’s record of transactions. Unlike with the case of a database hosted by a third-party, there’s no easy way for record entries to get “deleted” from the blockchain. As you can see there is no fancy maths behind the security of bitcoin at all. The only reason that a cryptographic hash function is used is that a hash-based proof-of-work problem has the property of being hard-to-solve-but-easy-to-verify. Any function which has asymmetry in solution/proof would do just as well. Without this asymmetry the network would grind to a halt if everyone had to redo everyone else’s work. But with a hash problem you can easily prove that you did the computational work to solve it, even though the solution is utterly useless maths. Hence it is now obvious that the the security behind proof-of-work is not “based on maths” at all.

If one takes nothing else from this blog, it should be that "bitcoin" is NOT backed by maths...

This is an economic model of security, not a cryptographic one. Proof-of-work requires an attacker to make a substantial capital outlay to have any chance of pulling it off. You have to buy the computing MIPS, pay the electric bill ect. In fact today, bitcoin mining is in more like a computing oligarchy than a computing democracy.  Sorry.. bitcoin "hashing", there is absolutely no Gold anywhere in bitcoin.

In bitcoin you have no way of authenticating the real-world identity of any node, this allows a single attacker to masquerade as a bunch of different identities and gain control of the network, no-one can tell whether 1000 nodes are really 1000 different people/entities or just one guy behind them all pulling the strings. Computing power alone equals voting rights in bitcoin. Now in the original bitcoin world, authentication wasn't an option, because if the real identities of the nodes are known to all, governments or criminals could compel those nodes to censor transactions and KYC/AML transaction senders.. or just criminalise the whole thing and arrest the operators behind the nodes.

Hence the bitcoin protocol is not only architecturally decentralised, it is also politically decentralised. The network has no gatekeepers, you don’t need permission to join. The only admission criterion to contributing to the network’s consensus is access to computational power. One could discuss the whole concept of the  Global "decentralised collaborative organisation" which bitcoin has effectively created, yes there lots of cool "social engineering" stuff within bitcoin, but also a topic for a another day.

As long as a majority of CPU MIPS power is controlled by nodes that are not cooperating to attack the bitcoin network, they’ll generate the longest chain and outpace all attackers.” But if an attacker has access to more than 30% of the network’s computing power, all bets are off!.

As at May 5, 2015, there were four major bitcoin pools each controlling at least 10% of the mining mining power. Together, they control 58% of the mining power. That means that if the four individuals operating these pools decided to work together, they could rewrite the bitcoin blockchain! And this assumes that each address is an independent group, which may not be a factual assumption.

Note there are some alternative to bitcoin systems proposing a "proof-of-stake" and slight modifications to this, as an alternative to "hashing power, but these all have the same underlying issue, its simply a matter of the point they all become "centralised".

Hence we are back at my opening remark, "bitcoin is a system in which the total security is based upon anonymous, programmers and crypto geeks, or anyone who has CPU MIPS, to always act honestly for the sole good of the bitcoin community".

The main protecting force of bitcoin today has been people's good will and lack of sophistication, and the fact that there is no real risk/reward in attacking the bitcoin mining network. We are still seeing the "early" adopter skewed rewards which still make mining disproportionally attractive. Some 80% of all mined bitcoins todate are still being hoarded. Where bitcoin value is "concentrated" and the rewards of a successful attack are higher, such as Mt Gox, millions were lost; bitcoins response, do nothing. I have seen posts where, the position is, any loss has nothing to do with bitcoin. Perhaps a valid comment for a group of crypto geeks, but not for mums and pops using bitcoin.
This is security 101, where risk is proportional to "one time loss",  threat source capability and probability of success. The greater than 30% of network computing power threat is actually directly related to the probability of success. Additionally the poor bitcoin tps is forcing lower block chain counts to confirm transactions, which increases this risk, as does the proposal to increase the bitcoin blockchain header size,and reduce the rate at which "hashing" is successfully.

If billions of dollars worth of securities are represented through meta protocols on the bitcoin blockchain, as some are eagerly trying to push..will result that attackers will have a way of constructing a scalable payoff for attacking the network. Acquiring a substantial portion of the network’s hashing power is not an insurmountable goal. What’s required is a sufficiently large monetary incentive to execute the attack. Putting billions of dollars worth of financial assets on the bitcoin blockchain materially changes an attacker’s incentives. Basically it increases the Risk of a loss. Managing risks is a fundamental part of any payment or securities exchange, they have teams of people that do nothing else, there is zero risk management within bitcoin.

As an example, in real world commercial applications, consider that many, single mainstream finance deals routinely outsize the entire market cap of all of the cryptocurrency currently in existence; this begs the question of how to properly incentivise transaction verification in the “trustless” model when a particular deal has more value than the entire market cap of the system.

Bitcoin transactions can then be reversed if the attacker is willing to make the capital outlay to acquire the hardware and expertise and pay the electricity bill required to pull it off (bribing a couple of large mining pools is probably the path of least resistance). For all we know, criminals may already be in the bitcoin mining community. If the attacker is successful, the attack in theory costs nothing, as the attacker collects the mining award of the blocks he solved that “replaced” the original transaction history, blocks that he made into a fork that is now the chain with the most work behind it.

It might seem crazy to the uninitiated that this “append-only” distributed ledger which is the bitcoin blockchain, by design, contains an avenue for deleting history. After all, everyone saw those blocks of transactions before they were overtaken by the attacker’s fork. Nobody will be fooled that the protocol’s “network timestamp” corresponds to the ordering of transactions that actually occurred. But that’s how the protocol works: the bitcoin blockchain is the chain of blocks with the most work behind it, this is bit coin voting in action. This is the price you pay for the censorship-resistant design.

Indeed, in the case of bitcoin, crypto-geekery offers nothing like an escape from the power dynamics within our society. One merely escapes to a different set of rules, not one controlled by ‘politicians’ or large corporates, but one in the hands of programmers and those in control of computing power. In fact there is no need for any real entity to be associated with any mining operation, it can simply be spawned MIPS based upon a set of "evolutionary" programming rules.

It is only when we think in these terms that we start to see bitcoin not as a realm ‘lacking the rules imposed by the state’, but as a realm imposing its own rules. It offers a form of protection, but guarantees nothing like ‘empowerment’ or ‘escape’. The concept of truly anonymous transactions are also not a fact within bitcoin.

When disassociated from the programmers who design them, trust-less MIPS based block chains floating above human affairs contains the spectre of "rule by algorithms".  end soapbox.


The Facts
To serve as a replacement for the legacy technology implementing book-entry assets, a distributed ledger of financial assets will have to ensure a tight correspondence between what the ledger and the law say is the state of who-owns-what. This is obviously incompatible with a protocol based on anonymous transaction validators; the law will not treat a ledger record as authoritative if everyone knows that the current longest chain contains blocks generated by an anonymous attacker who replaced a bit of history that was chronologically prior. But the bitcoin protocol has no mechanism for dealing with this scenario, no mechanism for bringing ledger state and legal state back into alignment. How could it…remember bitcoin’s design goal.

The financial system and its regulators go to great lengths to ensure that something called settlement finality takes place. There is a point in time in which a trade brings about the transfer of ownership–definitively. At some point settlement instructions are irrevocable and transactions are irreversible. This is a core design principle of the financial system because ambiguity about settlement finality is a systemic risk. Imagine if the line items of financial institution’s balance sheet were only probabilistic. You own X shares of Y with 97.5% probability. That is, effectively, what a proof-of-work based distributed ledger gives you. Except that you don’t know what the probabilities are because the attack vectors are based not on provable results from computers science but economic models. Do you want to build a settlement system on that premise?

Of course not. And you don’t have to because there are many ways to design distributed, shared ledgers, depending on your goals. And I’ll venture to guess that censorship resistant securities transactions is not the reason why financial institutions are looking at distributed consensus technologies. Their goals are rather different from bitcoins’s. Increased transparency is one, largely driven by the belief that regulators will grant concessions on capital charges for trades cleared through settlement systems that offer this. Efficiency through automating the back office is another. But probably the main goal is increasing the speed of trade settlement.

Now a few more facts, bitcoin is currently globally processing ~ 4.8 tps over the last six months I looked for this blog, and has a theoretical maximum of 7 tps. Yes this is less than 10 tps to run a global securities settlement system on, so why is there any discussion linking bitcoin and securities settlements? Do these proponents actually understand what they are suggesting, or is it the "dot com" boom/bust cycle all over again.?

Nothing in what I have said here is meant to take away from the inspired, solution that bitcoin implemented for censorship resistant digital cash. There is no reason why society should not have a digital cash that replicates the same anonymous and permission less properties that we already enjoy with physical currency, be it with higher risks. The point of this blog is to demonstrate why bitcoin is not suitable for assets with significant value and hence one time loss i.e Risk.. and in particular is not suitable to "anchor" any of these transactions, via abstraction.

The ongoing proposition that security interests and other property titles should also be cast in the same bearer asset needs to stop. Few actually want this, and, anyway, few jurisdictions will actually allow it. (In fact, it’s looking increasingly likely that few jurisdictions will even grant bitcoins bearer asset status.) This is not a serious idea.

If you are prepared to use trusted third parties for authentication of the counterparts to a transaction, I can see no compelling reason for not also requiring identity authentication of the transaction validators as well. By doing that, you can ditch the gross inefficiencies of proof-of-work solution that is not only tens of thousands of times more efficient, but also places a governance structure over the validators that is far more resistant to attackers than proof-of-work can ever be.

Scalability, Consensus and bitcoin blockchain stuff...
Scalability is now at the forefront of the technical discussion in the bitcoin scene, and it has not yet being used, in a "commercial" sense. This is one fundamental issue with all bitcoin derived or variants designs that needs to be addressed. Out of all of the various proof of work, proof of stake and reputational consensus-based blockchain designs that have been proposed, not a single one has managed to overcome the same core problem: that every single full node must process every single transaction. Having nodes that can process every transaction, even up to a level of thousands of transactions per second, is possible; centralized systems like Paypal, Mastercard and banking servers do it just fine. However, the problem is that it takes a large quantity of resources to set up such a server, and so there is no incentive for anyone except a few large businesses to do it. In bitcoin all of the resources are being focused on useless "hashing". Should this happen, then those few nodes are potentially vulnerable to profit motive and regulatory pressure, and may start making theoretically unauthorized changes to the state, like giving themselves free money. All other users, which are dependent on those centralized nodes for security, would have no way of proving that the block is invalid since they do not have the resources to process the entire block.
Additionally a simple analysis of these approaches will easily show they, they all deprecate to a "centralised" solution at some point, the concept of distributed consensus is an illusion, and cannot be relied upon to form the basis for any block chain security.

Risks
Below is just a quick set of risks, I considered after a couple of hour looking into bitcoin; these are not meant to be a definitive, or complete set of residual risks within bitcoin, they simply illustrate the lack of basic "commercial, and security considerations" which existing security settlement solutions have gone though over the last 20 years.  Some of them can be ready addressed in future evolution of bitcoin, others not so sure.. the point is they were not considered, and potentially many more exist today, which can be exploited, leave that task to the "bitcoin" experts.

Some are fundamental security policy issues, others are just basic design defects, and yet others are normal commercial considerations, which any bank or market participant or exchange would traditionally consider, as part of any due diligence on any new protocol.

Transaction Ids and Transaction malleability risk?
Due to a basic design flaw in the bitcoin network.. a lone programmer with nothing else to do,  decided in the first week of October to attack the bitcoin network, by exploiting the transaction malleability defect.
"Whether amaclin is telling the truth is hard to verify. But the fact that he could be telling the truth, the fact that a networkwide attack on the Bitcoin network could be carried out by a bored individual with some coding skills, is probably quite telling in itself."
Gosh, one cannot "trust" every programmer in the world, who would have thought?

"Additionally, amaclin argues that Bitcoin is fundamentally broken. He specifically points out that the incentive structures of Bitcoin’s development process do not align well, as users are not incentivized to reward developers for their work building and maintaining Bitcoin. By attacking the network, amaclin believes he is revealing that only a small number of developers can fix the issue, while most Bitcoin users expect them to do so for free. That is an unsustainable proposition, amaclin says."
Probably the truth?

Front Running?
If a malicious miner sees a big buy order coming into the market that would move the price significantly, they can engage in front running - the buy order could be pushed to the back of the queue or even left out until the next block, while the miner buys up all of the current stock and re-lists it at a higher price to turn a profit. Remember typical security exchanges operate at light speed compared to bit-coin. Alternatively, when they see there is a high market pressure coming in,  they can buy the orders up one by one by using their power to include any number of their own transactions into a block for free, and similarly re-list them for people to buy up.

Smart Contracts?
The miners could also try to influence some time-sensitive contracts - maybe some contract deadline is about to come up and the miner stalls the transaction by one block? That could change the outcome of the contract.

All in all, there is a lot more a malicious miner can skew in their favour within an asset system than they could do in a traditional currency system like bitcoin.

Terms of Service?
There is no terms or service, which "hasher's" follow?
Who are you going to call when that "fat finger" moment occurs, well no-one!, as everyone is anonymous..

Legal Risk?
Any existing legal system will likely never recognise a system of property titles that can be reversed by anonymous or pseudo anonymous "validators". In a number of proposals I have looked at it is impossible to quantify  the probability of a history-reversing attack ( as it is economics based security, not technical).

Regulatory Risk?
An unregulated payments and currency system with no AML, why is it still operational?
The real answer is straight forward, as shown below, this may all change when bitcoin moves from the too-small-to-care into the too-large-to-ignore space?

Sacrificing safety over liveness and fault tolerance
The Fischer Lynch Paterson impossibility result (FLP) states that a deterministic asynchronous consensus system can have at most two of the following three properties: safety (results are valid and identical at all nodes), guaranteed termination or liveness (nodes that don’t fail always produce a result), and fault tolerance (the system can survive the failure of one node at any point). This is a proven result. Any distributed consensus system on the Internet must sacrifice one of these features.

What happens when consensus is not reached: A fork in the ledger.


Security
Any security professional knows that crypto is != to security. Trust (security) is only as good as its weakest link, in the case of bitcoin there is no security policy at all, anyone can do anything including storing "keys" on insecure Operating Systems, the very first real crypto currency Mondex, back in 2001 understood this basic fact, yet some how in the intervening years this fact have been  forgotten. Existing cash, which bitcoin is trying to replace always has had minimal security mechanisms, yet none exist in bitcoin. Like every existing payments system today, at a minimum all keys must be protected within a HSM, pretty basic stuff.

Algorithm Agility, have we not learned anything from the 20 years of electronic payments experience? The cost associated with the DES->3DES->AES changes were enormous as no thought went in originally to the longevity of crypto.. Any block chain ledger must from day one be Algorithm Agile, not only to future proof the system, but also to support different "risk" profiles.
This is the same issue with the payments block chain as well as any secure block chain..

Hash Codes 
I keep seeing people confuse "hash" with encryption in almost every bitcoin discussion; but the more worrying usage is the growing use of hash chains as security enforcing functions. There is a reason why digital signatures are used, and not just hash chains alone. This usage is becoming wide spread in "side chains" and other applications linking to the bitcoin block chain, one such group claims this security "vulnerability" as a "feature". Hash chains, like their precursor hash tables, have there usage; but not in this context, the reasons are two fold a) hash values are not unique, they have collisions, when used in a hash table or chain they have limited scoipe to prevent the effect of any collisions, b) hash chains can easily be changed (recalculated), see asymmetry in POW above. This vulnerability was one of many reasons, why digital signatures are used rather than hash values or even chains alone.
Same old collective amnesia in action again. Hash collisions is the exact vulnerability which was exploited in the successful bitcoin transaction malleability attack above.

Point two, to take away "Hash" values are Not guaranteed to be unique, they only guarantee that a single bit change in input will produce a different resultant hash output.


Commercial Risk
Bitcoin miners can simply stop processing any transactions from any bank they believe does not act in their, or there perceived community interest, this is currently happening in bitcoin today where some miners are ignoring single low value transactions, there is nothing in the bitcoin protocol that required any transaction to actually get onto any block in the block chain.

"About a week ago, lead Bitcoin developer Gavin Andresen quietly introduced a patch that would add a fairly significant change to the transaction propagation rules: any transaction with any of its outputs less than 5430 satoshis (0.00005430 BTC) would be classified as non-standard, and will not be included or further propagated across the network by default miners."

The code could be modified to say all transactions with Address of say ANZ, CBA, or Westpac, will not be processed, there is no one in control of bit coin, anything is possible. Similarly groups using bitcoin to "anchor" other assets, could simply find they are "removed" from the network. Many bitcoin developers already object to "coloured" coins usage of the bitcoin block chain..

Also today, for less than 2BTC in fees an actor can disrupt and clog the bitcoin network for hours..

Control/Ownership Risk
Its a simple fact, all banks, market participants ect, want to own and control the block chain ledgers which underpin their business.  They have shown they are willing to let a third party like SWIFT handle cross boarder, low level connectivity networks but that is about as far as it goes..
The concept of any bank or participant all using a single "uncontrolled" public bitcoin block chain or anything that relies on it, is commercially flawed, and will not fly.

All Banks and exchange participants, "need" to own and control all aspects of the Block Chain Ledger Technologies, without any fear of patent infringements..

System Risk
A settlement system, is much more than just a blockchain. What is required is a complete eco-system which has all the resources to make and keep it secure.
At a minimum it needs

• HSM backed keys
• BYOD mobile device management, loss, theft, compromise
• Secure Identity, with optional full AML/KYC
• Scalable, distributed solution for at last 1 Million transactions per day per settlement node.
• Support for real-time "liquidity" viability
• Support various risk profiles, via selectable algorithms, must be able to address future quantum computing advances without destroying any past transaction.

Where to now?
Ok, so the above is a bleak picture for all those groups, blindly linking applications, other than bitcoin to the bitcoin block chain today..

In short DONT!

KISS to the rescue..
A solution to all of the bitcoin issues above, is very simple to understand and commercially available today, and yes, can support ~ 10,000 tps per distributed node. These Block Chain Ledgers are based on well understood accounting principles such as  "Triple Entry Accounting", which is an evolution, not revolution of double entry accounting, and good old cryptographic "Block Chain".  Block Chains and Ledgers have existed for at least three decades, nothing radical here. These Block Chain Ledgers use tried and tested, for at least the last 20 years algorithm suites (not the one in bitcoin), are algorithm agile, and can transparently adapt to future threats. Expect to see these delivered as total eco-systems i.e "settlement-in-a-box" which can be owned and operated (including patent protection) by various parties, which run in conjunction with existing settlement systems. The existing system will never change, its is not commercially viable..

See just one such solution, the first Payments-> Public Block Chain Ledger.

Lighter side..
As an English speaking person, the  correct description is Block Chain, not blockchain.. the noun is "chain", and the adjective is "block".. see history below...Life is too short sometimes..

History before bitcoin:

1. Double Entry Ledgers, from 1299
2. Hash functions, from 1970's
3. Chain of hash entries, BSD rtable, 1977
4. Merkle tree, Ralph Merkle 1979
5. Cipher Block Chain (CBC), 1981
6. Concept of electronic cash, invented by David Chaum, 1983.
7. Byzantine Generals Consensus algorithms, 1983.
8. Elliptic Curves, discovered by Certicom in 1985.
9. First citation of "block chains" Open-Architecture Computer Systems, 1987.
10. X.509 certificate chain (chain of hash, signed records), 1988
11. FinTech, from 1990.
12. First commercial cryptographic based currency, Mondex 1994
13. Block Chain Ledger, Patented 2000
14. Bitcoin, 2009

Additional reading

The Global Block Chain Ledger, as a Payment System for the Digital World

Transition to T0 Settlement for Cash Equities, the only solution..

Land Registry, on the Public Block Chain ledger

The Unbanked, in the Digital World...

Acknowledgements
http://web.cs.ucla.edu/classes/cs217/Baran64.pdf
https://en.wikipedia.org/wiki/Proof-of-work_system
http://www.slideshare.net/MrCollectrix/the-distributed-ledger-landscape?related=5
http://www.technologyreview.com/news/525676/academics-spy-weaknesses-in-bitcoins-foundations/
http://www.cs.cornell.edu/~ie53/publications/btcProcFC.pdf
http://www.cs.cornell.edu/~ie53/publications/btcPoolsSP15.pdf
http://www.technologyreview.com/news/540921/the-looming-problem-that-could-kill-bitcoin/
http://www.technologyreview.com/news/537486/leaderless-bitcoin-struggles-to-make-its-most-crucial-decision/
https://www.youtube.com/watch?v=Lx9zgZCMqXE&feature=player_embedded#t=7
https://erisindustries.com/components/erisdb/
http://arxiv.org/pdf/1311.0243v5.pdf

Without permission, anyone may use, reproduce or distribute any material in this blog for noncommercial and educational use provided that the original source is cited.

Disclaimer The contents of this site should not be understood to be an offer for sale of any payment , currency, security trading or settlement systems, accounting, taxation or investment advice but rather as general educational information that may or may not meet your specific requirements.

The Global Block Chain Ledger, as a Payment System for the Digital World

While we originally developed the "Block Chain Ledger" technologies to secure our cognition private Triple Entry Accounting systems; the growing interest in bitcoin type blockchains has lead to a focus on the opportunities that distributed Block Chain Ledgers in general could create; not in the crypto-currency world but in the existing world of “real” payments.

Having recently spent 4 months in London, where these activities are beginning to be taken seriously by the "big end of town", this blog looks at how a practical payments system might be created from our Global Block Chain Ledger "eco system". While the existing payments system examples are taken from the UK, they are essentially the same or similar enough to the Australian and most other counties environments. The UK is simply way ahead of Australia, in this area, across both Government and Private Industry, as demonstrated by the level of "real" investments being made each month in London alone. France is also vary active in this area, but will stick to UK examples.

The United Kingdom
At present in the UK, payments operate on separate ledger mechanisms which echo the past in terms of their structure. All existing core Payment Systems in the UK operate by settling the obligations from one of their Direct Participants to another across settlement accounts held at the Bank of England.   For those institutions that are Direct Participants in the Payment Systems, their settlement accounts at the Bank of England are normally directly linked to their Reserve Accounts (thus enabling them to participate in the Bank of England’s “Sterling Monetary Framework”).   At present, over 150 institutions hold Reserve Accounts at the Bank of England.

As such, it could be argued that these form the Central Ledger for £ Sterling and the account structures held within each of the participating Banks to keep track of their customers’ balances form separate “nodal” sub-ledgers.   A customer’s “nodal entry” balance may be positive or negative depending upon whether they are in credit, overdrawn or have authorised loans with that institution that exceeds their credit balance.
Collectively, it could then be stated that the daily payments between Banks on behalf of either themselves or their customers takes place within a Closed Network Group of authorised institutions.   Unless the Central Bank has released “new money”; it remains a “sealed” Group operating within the total value of £ Sterling in existence.   As such, all daily transaction flows between those participating in the “eco-system” therefore net out at the end of the day.   At its widest level, this eco-system encompasses all entities and systems which require the movement of £ Sterling to operate.

Payment Systems are currently the means by which the instructions to move monies from Banking Institution A to Banking Institution B (on behalf of their respective customers) are securely transmitted and processed. The UK currently have several, which reflect the differing means of money transmission; CHAPS for real-time guaranteed High Value Payments and Cheque and Credit Clearing (for when a paper instrument (the Cheque) is used by a customer as their instruction to credit funds to another party who banks elsewhere in the UK Banking System) are two examples.

These payment systems therefore act as the interface between the “Central Ledger” and the “Nodal Ledgers” held at the Banks and other Financial Institutions who participate in the UK payment “eco-system”.  They need to be secure, trusted and resilient. Erroneous or illegal transfer instructions purporting to represent the wishes of a customer to transfer funds elsewhere cannot and must not exist.

The collective needs and wants of the various players participating in the existing UK Payments arena therefore mirror closely the underlying aspirational attributes of a distributed ledger system; a single, secure, trusted ledger mechanism where authenticated transfers between Financial Institutions and their customers take place legitimately and without impediment. Basally identical to the Australian Payments System.

A lot of work and thinking is taking place within the UK Payments Industry at present to determine its future shape and strategy for the next 10 years. The core objective of any new Payment Systems are around innovation and the aspiration within the payments industry to look to consolidate a number of the payment systems and to operate to common data and message standards.

The question is whether any aspect of the logic backing the distributed ledger process could be brought into use as part of the forward looking payment system design.

Actually the solution is pretty straight forward when triple entry accounting and commercial Block Chain Ledgers are applied to the scenario above..

What if full Distributed Ledgers were held at the institutions that held authorised Banking Licenses with legal authority for Settlement Finality still vested with the Bank of England as the repository of the Public Block Chain Ledger?  The two banking parties in a transaction on behalf of their respective customers would provide the authenticated bi-lateral adjustment on there own distributed Private Block Chain Ledgers, the transfers between the various Private Block Chain ledgers would then be applied to each Private Block Chain Ledger, and also on the common Public Block Chain Ledger operated by the Bank Of England. The Public Block Chain Ledger would be atomic and operate in real-time or in netted blocks thereby representing the Deferred Net Settlement status currently present within existing Payment Systems.

The identical arrangements can be applied to two parties transferring funds between each party, where the Public Block Chain Ledger is now maintained by any entity with an Banking Licence.
As can be seen each transfer is fully sealed by each party and the Public Block chain Ledger, and ultimately by the Bank of England. The third leg of each triple entry accounting system ( the Public Block Chain Ledger) is publicly available and hence can be verified by anyone anywhere at any time.
Of course the system could be adjusted to also support P2P transfers and also transfer anything of value, but lets stick with our payments system example for now.

Finality
What parties on either side of a payment transaction (Private Block Chain Ledgers) want above all else is certainty around the payment successfully taking place. In particular, that the payment will not be revoked. Whilst this is an obvious concern for the end beneficiary, at a systemic and commercial level, the risks go deeper than the simple question of whether the Payee has sufficient liquid funds for the payment to be successful and centre on whether multiple payments can be revoked owing to the Financial Institutions handling the payments becoming insolvent.

For the main UK Payment and Settlement systems, the means of protecting payments “in transit” is provided via their designation under the Settlement Finality Regulations. Specifically, payment and settlement systems that are designated may apply for protection against the operation of insolvency law for instructions entered into their system.

In the proposed payments system above, the triple entry accounting system (the Public Block Chain Ledger) operates on an atomic, and instantaneous basis, the transaction once sealed in the Block Chain Ledgers, cannot be modified or removed. As it is a Public Block Chain Ledger, anyone can validate this. By virtue of the application of the regulations, payments then effectively become final and irrevocable at the point in the system’s processes where settlement is deemed to have taken effect.

You may notice there is no mention of "mining" or any "crypto currencies" anywhere in the above description, it is all simple extensions to existing double entry accounting, and application of secure crypto based technologies to form a Block Chain Ledger.

Of course one requires a complete "eco system" solution similar to the existing payments system for this to all be real, and this exists today. This includes  mandatory security policy that all keys must be protected and stored inside HSM's.

Simple, cheap and deploy able, based upon incremental technologies for the Digital World, which could be used as the first truly Global Block Chain Ledger based payments system.

As I said at the beginning of this blog, we already operate a simpler form of discrete double entry Accounting Ledger already.  The big step is to secure these with Block Chain Technologies and create the Public Block Chain Ledger. The Payment System would then become the network and rules mechanism by which the transactions would take place. The cryptographically secure audit trail of transactions conducted through the network, and made public ally available via the Public Block Chain Ledger would represent the Payment System and would become, by default, the UK Payment Transaction Repository (PBCL) which could then be utilised as required by Government and law enforcement agencies, or in fact anyone in terms of the data that it would hold.

Completeness, using industry standard web services for payments protocols using Turning Complete specification (BPEL4WS), to ensure integrity of payments system protocols.

This blog provides the insight of how Australia, and the existing payment system participants could leap-frog one or more interim steps to the next level of evolution, and become part of a truly Global Block Chain Ledger, for the benefit of all of society, all based upon Australian developed technologies.

Also see
Secure Global Digital Identity, for the Digital World
Identity Theft and Digital World
Free hardware generated and protected Bitcoin/BlockAuth ECDSA Private keys.
Decentralized Authentication
Global Public Block Chain Ledger Navigation

Sample Payment Block Chain Ledger

[{"BlockNo":"ac829616-d093-44d9-92f1-8d44e9ef1453",
"BlockSin":"20014dc33d149ef0335226a0ce3afb18dfc2be6c1abd23c8c0b9",

"BlockParent":"00000000-0000-0000-0000-000000000000",

"BlockSignature":"MHECIQDOMvt89PxftUyE1sxn074sO1ruClqVntsTw9CbHQKTowIga8oqg0A9ztEPUCDSREEN+mBJgXEKo1G3CL8guFsc6FUCARQCBFX8fj0EIQMHRLPlFdxfpbGDgSLog4tk3Gk94Sm03BWQwGseyMfrtw==","BlockVersion":1,

"Trandate":"20150918T00:00:00",

"Currency":"AUD",

"BaseCurrency":"AUD",

"FxRate":1.000000,

"Debit":15.0000,

"DebitRefNo":"ac829616-d093-44d9-92f18d44e9ef1453",

"DebitSin":"2001211faeb505284fd79d04cf5fd012b42ec79411632b97f075",

"DebitSignature":"MHECIQDpREZEPVbYiaashbkT6FgpRRAzhnPYZUfkfDdTrpLL+AIgcfd2bJtsS38hTdguVvzniB4vSh6WFuX9rWzdaz6s4tICARQCBFX8fj0EIQJIs2HIbbv85aP8lOnA4APvwOXwD2781fT5mR+xftQz4A==",

"Credit":15.0000,

"CreditRefNo":"ac829616-d093-44d9-92f1-8d44e9ef1453",

"CreditSin":"2001a8562a2393f2f9cf1f794844fdcd83d5d4cadfd0cce65bf9",

"CreditSignature":"MHICIQCmHEqQ1GbOdD3en5Pq73CYaq6x3cVLWX8jqLwCub87YgIhAPQLjPZds49boBSXCyqZnti3ICF1gLG0xwHzLI1V6OISAgEUAgRV/H49BCEDneGerUuk/Jb1OEurOXAw1MlWB6M5XjG51g9Ceg2ncug=",

"AuditSin":null,"AuditSignature":null},

{"BlockNo":"a4ae7977-07b8-4b02-b1b0-9eddbc2eadf5",

"BlockSin":"20014dc33d149ef0335226a0ce3afb18dfc2be6c1abd23c8c0b9",

"BlockParent":"ac829616-d093-44d9-92f1-8d44e9ef1453",

"BlockSignature":"MHICIQCfl3iIYF5zsk48e0lct0Rq7PRpNK0R95l5P3IU6RuohgIhAOFnE8ol9CR0lHuHLS/mFdoQv9OHpk6fJvo/EF0R+SWGAgEUAgRV/H4+BCEDB0Sz5RXcX6Wxg4Ei6IOLZNxpPeEptNwVkMBrHsjH67c=",

"BlockVersion":1,

"Trandate":"2015-09-18T00:00:00",

"Currency":"AUD",

"BaseCurrency":"AUD",

"FxRate":1.000000,

"Debit":10.0000,

"DebitRefNo":"97eefa29-00b6-4b15-a914-19dc05cc8b12",

"DebitSin":"2001211faeb505284fd79d04cf5fd012b42ec79411632b97f075",

"DebitSignature":"MHECIHCt7wQquk4xGEhgZHv4ZvxzJ6PODVuQSCjcEsgRaxYOAiEA6uTpQfrxcZwbLYpLqh0zyv2XQr5LEe1kTfG9ozx6+7wCARQCBFX8fj4EIQJIs2HIbbv85aP8lOnA4APvwOXwD2781fT5mR+xftQz4A==",

"Credit":10.0000,

"CreditRefNo":"b32b66ee-a46f-46fe-a293-302f106936c7",

"CreditSin":"2001a8562a2393f2f9cf1f794844fdcd83d5d4cadfd0cce65bf9",

"CreditSignature":"MHACIDlsBZI+NlG46z38okOLPLBERCOg8admBBwaDzP1YcN9AiBn+ex7efF/tnh6T8oGMzqI4eiKuxrEbr/xCWbEoSc+egIBFAIEVfx+PgQhA53hnq1LpPyW9ThLqzlwMNTJVgejOV4xudYPQnoNp3Lo",

"AuditSin":"20018d8cf3eaa3e5303209bea96aadf52cb11bda668f191e035b",

"AuditSignature":"MHICIQCZfz42LWmZU2YTBNNogMIEZ0+LdcJGSVDnTJzvdyTUXgIhAIFr+9BY0OUL4fHLneJK0uB6GjdSS0ikaw5PFXEvp5DEAgEUAgRV/H4+BCED++O40gs13qplV0IZG4RfMrLvK/Qn96B5tMEzIC0p8GY="}]

Disclaimer The contents of this site should not be understood to be accounting, taxation or investment advice but rather as general product related educational information that may or may not meet your specific requirements.

The Unbanked, in the Digital World...

For most Australians, not having access to banking, credit and debit cards is almost unthinkable.
Yet most citizens in Asia, Africa, Latin America and the Middle East continue to transact with cash and coins, the closest to banking services is Western Union.

They are the world’s unbanked who have minimal contact with banks and financial services. Though the unbanked make up about half of the world’s adult populace today, emerging financial technology like Public Block Chain Ledgers and associated payments technologies are leading the way to to bring financial inclusion to the unbanked, right on their "Mobile Phone".

Today the unbanked stand at 2.5 billion people. Across the regions from Africa to Asia, rural farmers, women, the poor and the youth make up the largest pie of the unbanked. They grapple with the lack of access to proper banking infrastructure, tedious documentation and paperwork requirements, resulting in financial exclusion from the global financial economy.

All that is about to change, according to Managing Director at VillageMall, Charles Moore the pioneer of Block Chain Ledgers and infrastructure.With the global investment in the burgeoning fintech sector showing significant growth of $1,273 million to $4.1 billion from 2008 to 2014, digital payments for the unbanked have increasingly become a focal point for traditional banks and fintech startups to approach the money economy in a different light.

The objective is for the unbanked to remit, save, transfer, loan and purchase goods and services using mobile technologies, not new currencies, developing a new currency and all the political and social acceptance simply takes too long, the urgent need is today.
Many startups dont understand that money, credit, banking and finance are ultimately tied to trust, there is no point in a disruptive technology that does not address social "trust".
The solution requires a secure global ecosystem, which includes services for secure Global Identity,which still works, when there are no traditional forms of identification. The solution must allow participation in the global payments framework, including meeting the AML requirements when they apply. To drive down the costs this solution cannot be, yet another orphan solution, but must part of a single global ecosystem, with fit for purpose social trust mechanisms. This si no easy task, which traditional banks have not achieved in the last century.

The Unbanked and Mobile Money
In Australia's closest region, Southeast Asia, there are 270 million unbanked citizens many already have access to mobile phones. The Philippines, high in mobile penetration and known to be the third largest remittance market. Several telcos and banks in Asia, having anticipated the dawn of mobile banking for the unbanked, introduced traditional mobile wallets for daily transactions to citizens early on. Yet the only inovation is via start-ups experimenting with crypto-currencies like bitcoins for mobile financial services without the need of banks or other established financial platforms. These approaches have significant risks, while the traditional banking and credit card companies simply protect their momoplies.

The first observation, is that a new currency is simply, not required, to enpower the unbanked of the world, as noted by Charles Moore.

What is required is a Global Payments system based upon a Global Secure Public Block Chain Ledger, with the integrated secure Global Identification system which does not disadvantage the unbanked of the world.

Today, transaction, operation and processing fees are charged upon consumers and merchants for the financial services. Low-income earners, whose annual salaries can usually be counted in hundreds of dollars, grapple with the high cost of bricks-and-mortar transaction and remittance fees

Fintech start-ups are thought to be more robust and flexible with their operations and thus business models. As a result, the unbanked – consumers and local merchants alike – save on costs. Consumers are able to carry out mobile banking at a fraction of a fee, in many cases these can be totally free. In turn, merchants save on transaction charges, monthly or annual rental fees on top of installation and set up terminal fees.

Unlike fintech start-ups, traditional western banks have expanded through acquisitions over the years. Banks have tended to bolt new systems on to existing ones, rather than undertake the more disruptive and costly process of fully integrating them. Hence responding to these challenges is hard for banks, many of which have vast IT systems dating back to the 1960s and 1970s that are prone to problems (see almost monthly bank system outages, some lasting for days!) and expensive to maintain. Furthermore, as people check their accounts more regularly on tablets and smartphones, it puts additional strain on those systems. The fundamental issue remains, commercial banks still find it hard to offer banking services to poor people and still turn a profit.

Yet many fintech start-ups misunderstand that banks still play a dominant role in the global payments, and that a significant part of the fee structures are imposed from regulatory frameworks which are also outdated.

What is needed is a "fit for purpose" Global Solution for everyone.
Without disruptive technologies like the Public Block Chain Ledger, the unbanked will continue to grapple with remittance and conversion fees charged by transfer agents like Western Union, which can cost up to 8.5 to 10 per cent of funds transferred. Banks and credit card providers typically take from 3 per cent for all FX transaction, plus merchant fees, this is out of place even in First World countries. The the true incremental transactional cost is close to zero in a Digital World, with instant, atomic, transactions and zero settlement risk, all typical of modern Block Chain Ledger technologies.

It is simply immoral to take the person’s entire income for the cost of implementing and the transaction process; merchants selling by the roadsides cannot afford to pay for such technological payment, said Charles Moore.

Financial inclusion for the unbanked is said to have a potential to plough in as much as $23 billion to $73 billion into the Asian economy by 2030.

With mobile phone penetration increasing yearly and the number of Internet users increasing at 16 per cent annually, certainly there is much hope for Asia’s unbanked.

The only question is weather Australia will play any part in this opportunity on our door step, or we will continue to only invest in "property" which produces zero national wealth, for anyone other than speculators.

The opportunity is now, with the release of  the world first Global Block Chain Ledger technologies and infrastructure in Australian today. The only FinTech solution, exclusively protected by Hardware generated and protected next generation Elliptic Curve technologies,and yes, Hardware backed keys are provided free to the unbanked citizens, who wish to participate in the Public Block Chain Ledger.

Contact us, to be part of this exciting pathway, and help build a future for Australia, within the Global Digital World.

Get your secure Global Digital Identity, with Australian AML support today, and start to change the world for the better.

If you are an existing Australian Bank Customer, ask them about certifying "your" Global Digital Identity, as you already have gone thought the AML process once already, its time for you to take control over your Digital Identity.

Also see
Secure Global Digital Identity, for the Digital World
Identity Theft and Digital World
Free hardware generated and protected Bitcoin/BlockAuth ECDSA Private keys.
Decentralized Authentication
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