Why I worked on CoinValidation

If you’re unfamiliar with CoinValidation, that about sums it up... It was never clear to begin with. There are several reasons for why it’s not straight forward, and below I’ll attempt to sort it all out. First let me say the following:

CoinValidation.com was an attempt to innovate in what we thought may be the most controversial side of Bitcoin; the identity layer. It is not a specific technology, the idea of whitelisting/blacklisting/xlisting whatever is totally off-base and was a rumor. Here is what CV really is:

It’s a thinktank.

It was an attempt by a small group of people to solve one of Bitcoin’s largest problems: no one was creating new technology in the identity layer of Bitcoin. We did not specifically want to endorse or profit from some piece of tech like blockchain analysis or whitelisting, etc. We simply wanted to explore what was possible. We found some interesting things, like tech that could reduce the risk of privacy loss in the standard KYC model. But that all went unheard because people thought we were trying to hurt user privacy or to affect fungibility.

People thought that we were building a for-profit startup focused on selling tech and user data wholesale... In fact, we were trying to do the exact opposite of that. It could best be described as a thinktank for the KYC and regulatory side of Bitcoin - which we had become familiar with during our time at Bitinstant.

Some of the ideas we explored and want to continue to explore:

  • How can Bitcoin companies comply with US regulations from a legal/tech standpoint?
  • What can Bitcoin companies do differently vs. typical financial companies, but still be compliant?
  • What is possible with blockchain analysis?
  • How can Bitcoin companies communicate patterns of fraud to each other?
  • How can ownership of assets be proven?
  • Can something like the MIT PGP database exist for Bitcoin addresses?
  • Is it unethical to build technology that enables Bitcoin businesses to tie into legacy systems?
  • How sensitive is the Bitcoin community to a group of people experimenting with what’s possible?

Here are some of the realizations we’ve had in exploring the above questions:

  • We facilitated the first underwriting of a mortgage to a bank as a proof of concept.
  • Bitcoin companies can comply with the regulations, and yes it is very limiting.
  • There are sophisticated ways that Bitcoin companies can communicate fraud patterns to each other.
  • That kind of communication could prevent another Mt. Gox type of failure, which is inevitably going to happen because it is not being addressed.
  • Blockchain analysis can be really scary.
  • Bitcoin is not anonymous in most contexts.
  • We designed a new way of hashing KYC data so that five points of attack can be reduced to two.
  • We found ways for companies to satisfy BSA requirements without having to store or transmit user information.

We stopped working on exploring these concepts because

A) No profit model translates to no funding. B) The community tried to burn us at the stake, hence no funding. C) I realized that I am not the best at public relations, and it's hard to convey what I want to convey.

I continue to work on innovations on the regulatory front, but for obvious reasons - not at the level I probably should.

Still, here is what I believe is possible for companies:

  • Satisfy regulatory requirements here in the US if they want to.
  • Do it in a way that risks user privacy much less than what is currently in place in the Bitcoin ecosystem.
  • Have a system with less fraud, better consumer protection and AML, and less privacy loss than what exists in traditional financial AND current Bitcoinland.

Now the fact that it is possible  - doesn’t mean I’m endorsing it. Working with regulations here in the US is not some lofty philosophical decision for me. Businesses are going to work within that framework regardless of my thoughts on it because that is what the market will dictate. I’m simply trying to help navigate that landscape responsibly... Even though my personal philosophies are often in line with those of libertarianism.

People are going to buy their Bitcoins in the most efficient and effective way possible to them. The path the masses take to acquire and use Bitcoins will be the one which has the best user experience, closely parallels what they are used to, and costs the least. The masses don’t care about Ayn Rand or crypto anarchy.

We can push the boundaries of what is possible if we can stop fighting and solve real problems. Problems like this:

  • Why are users giving their KYC information to shady companies?
  • Why is the community trusting $700 million to one dude with an exchange written in PHP in Japan?
  • What is being done to prevent that from happening again?
  • Why is multi-sig not in full effect on every wallet valued greater than $1000?
  • Why is the community already satisfying most of the regulatory requirements, kicking and screaming that they exist, and then doing almost nothing to realistically change it?

Real change takes real work, and it’s not going to get done if the people innovating are ostracized for thinking outside the box. Creating real change is a massive undertaking. The challenge of navigating the Bitcoin legal landscape is going to take a lot of hard work and cooperation. Please feel free to comment with your questions about regulation here in the US - we have a lot of experience in this space and want to share what we’ve learned.

Of course CV failed at reaching minds with what we thought was very important information. But failing is how we learn sometimes, and I'm grateful that there are those in the community who see that what we work on is valuable. Thank you.

How Many Eyes Are on the Books?

Echoing the sentiment of Ryan Straus (Ridell Williams); the overarching issue at the forefront of Bitcoinland is that Bitcoiners place a lot of trust in individuals and organizations. That’s not to say placing trust in people and institutions is always a bad thing, but that trust needs to come with safeguards. The recent events at Mt. Gox are an articulate illustration of those challenges. For years, Mt. Gox was a mainstay of Bitcoin. Gox allowed many people to get involved in digital currency with ease and relative security. We can thank Gox for much of the early adoption and infrastructure of the community. Ultimately the trust was betrayed. We saw technical glitches, a lack of communication, and wild levels of volatility.

Most of this could have been prevented with solid tech, transparency, and outreach. Still, I subscribe to the idea that Mt. Gox has given us a great gift. We can learn from their shortcomings and reference their successes for the next level of Bitcoin infrastructure.

Having developed software for a while, my greatest lessons draws from moments of failure. There have been amazing tools developed purely from breakdowns in software. These tools help us prevent, detect, resolve, and communicate about technical issues which naturally and inevitably evolve. I believe 2014 is a year where we can build some of those tools for Bitcoin.

The tools the community most needs to focus on are:

Triple-entry accounting: While this term is somewhat vague, I envision it as a method for reconciling a company’s books. In essence, you could assign a Bitcoin address as the holder of funds for the traditional double-entry accounting verticals. Operating expenses, accounts receivable, salary, investments, etc. could have dedicated Bitcoin addresses for the inflow and outflow of funds. This would make it much easier to visualize funds flow both internally and from the perspective of an outside auditor.

Ledger transparency: This piggybacks off of the idea of triple-entry accounting. I half-jokingly tweeted that managers of the future will be able to crowdsource peer-review of their records. For many organizations, like non-profits and publicly traded companies, stakeholders want transparency but the presentation methods are fairly analog. The idea is to digitize all of an organization’s fund flows, and make it available on something like the blockchain - so that people who know the correspondent Bitcoin addresses could verify that financial statements are accurate.

The implications of this are far-reaching, and an understanding of how it would play out practically are to be determined. Many people would prefer to invest or donate to an organization where the financial representations were accurate. The existence of ledger transparency is inevitable simply due to the competitive advantage. The upside for the organization is increased efficiency and reduced cost for auditing, as well as a lower risk of financial inaccuracy. People want to know “How many eyes are on the books?” The answer could soon be “Everyone’s.”

Full-Reserve Bitcoin Banking: We have the technology to prevent fractional reserve of our assets. This is the cutting edge of Bitcoin security. It’s shiny, it works, and not enough people / organizations are using it. Existence and placement of assets can be cryptographically proven and movement can be restricted with extremely granular configurations (multi-sig.)

Insurance: When all else fails, there is insurance. A Bitcoin depository institution could have an extremely secure system of storage. Risk could then be calculated and deposits insured.

Modularization: In the financial industry, there is a great deal of modularization. It is imprudent to have a single entity act as a depository institution, clearinghouse, order-matching exchange, and auditor all at once. These tasks can be separated for increased efficiency, reduced risk, and greater scope-precision. This is important for three reasons:

  1. It is easier for business operators to build smaller-scope products.
  2. When one of those competing products fails, the entire system doesn’t halt - it is swiftly replaced.
  3. Maintenance of a module does not require system-wide downtime.

Granted, the financial community has had several hundred years to evolve to the point of efficient compartmentalization. Fortunately for Bitcoin, most of the work has been done and we simply have to parallel many of the models that exist. We can even step it up a notch with transparency and decentralization of trust.

It is important that we remember the spectrum of what we like in principle and what is possible today, this week, this year, etc. It is going to take some time to revolutionize finance with the power of cryptography. We are still waiting for sweeping changes to happen overnight. It’s been 5 years, and we’ve resigned to working on what is practically achievable in experience-based timeframes. The items discussed above are our goals for 2014. Our focus is on the option of transparency, importance of choice, and the obsoletion of coercive trust.

(1) “If I own several pounds of gold, I may not want to keep all of it in my home.” (2) CoinApex.com has taken initiative to implement TE accounting for one of their companies as a proof of concept. Research is ongoing and results will be shared by year-end.

Syndicated from http://hub.playerauctions.com/alex_waters-bitcoin-eyes-on-the-books - on March 7th, 2014