Thursday, October 6, 2016

Bitcoin Provisions in the North Carolina Money Transmitter Act

 




The North Carolina Money Transmitter Act was recently extended to cover bitcoin traders with House Bill 289, signed in July 2016 by State Governor Pat McCrory. Deemed as the 'virtual currency law' in the state, the bill introduces a legal framework for regulating bitcoin and blockchain technology.

While the legislation had to go through an elaborate and long discussion period, including the feedback of various stakeholders, the bill is seen today as business-friendly by many. It brings legal clarity in the field of virtual currencies in North Carolina, but does not open venues for over-regulation.

The Chamber of Digital Commerce and other involved parties contributed to the formulation of this addition to the act. They have also expressed satisfaction with the outcome.

Naturally, this definition has been the first step towards regulating the virtual currency field in North Carolina. According to the act, bitcoin traders will fall in the category of money transmitters and as such, they will have to obtain a license. There are a number of exempt options such as being the agent of a payee, but they need to be duly demonstrated.

A license will not be needed from virtual currency miners, as well as blockchain software companies for a number of services such as smart contract platforms, smart property, multi-signature software and non-custodial and non-hosted wallets.

As commented by bitcoin advocates, the legislation is seen as matching the needs of the newly emerging industry. It distinguishes between businesses using virtual currency versus those using distributed ledgers. Additionally, the law clarifies which types of activities trigger the licensing requirement for blockchain technology companies.
The licensing process

The licensing application process is also defined in the act. Money transmitters will have to follow the procedure set via the Nationwide Mortgage Licensing System and will be licensed by the North Carolina Commissioner of Banks.

The most important documents that need to be presented during the licensing include business entity paperwork, active money business services registration with the United States Department of Treasury Financial Crimes Enforcement Network, business plan, anti-money laundering program documents, and audited financial statements, among others.

The minimum net worth for licensing is set at $250,000 and it should be kept at all times. The application fee is $1,500. There is also an annual assessment fee of $5,000 for transmission volumes below $1 million. Above that amount, the assessment fee is calculated as a percentage of the transferred volume on top of the basic annual assessment fee of $5,000.
Bond requirements

One of the new elements introduced with this addition to the act is the money transmitter bond licensing requirement for bitcoin traders. This special type of surety bond is needed in order to bring up the level of security in the business. The function of the bond is to guarantee that bitcoin traders will handle their clients' virtual currency assets according to the applicable laws.

The bond amount that traders need to post depends on the volume of money transmissions per year. The standard bond requirement is $150,000 for money transmission volumes below $1,000,000. For volumes between $1,000,000 and $5,000,000, the bonding requirement is set at $175,000.

The next level is set at $200,000 for traders with an yearly volume between $5,000,000 and $10,000,000 per year. For volumes between $10,000,000 and $50,000,000, the bond needs to be $225,000. Finally, if the transmission volume is above $50,000,000, the bond requirement is $250,000.

In order to get bonded, virtual currency traders will have to apply for a money transmitter bond with a surety provider. After examination of their financial profile, the surety sets a bond premium, which is a percentage of the required bonding amount. Stronger finances and solid business stats are key to lower bond costs for money transmitters.

Accepted rather positively by both businesses and legislators, the bitcoin addition to the Money Transmitter Act is bound to bring the necessary level of regulation to virtual currencies and blockchain technology in North Carolina.


Wednesday, October 5, 2016

Scams or Not, Crypto Tokens Have History on Their Side

 

Alex Millar is a blogger, podcaster and YouTube publisher with a degree in engineering physics from Queen's University in Kingston, Ontario, Canada.

In this opinion piece, Millar looks at how cryptographic tokens can be viewed in a long line of historical investment instruments, and why despite the scams, there remains an argument they should be allowed to continue.

Contract with wax seal

Even before the emergence of money, victims of a crop failures often took short-term food loans and paid them back with interest. When money emerged, interest was usually paid in either a fraction or a multiple of 12 to simplify accounting.

The practice of charging interest on loans, called "usury," has been frequently and widely condemned, regulated or outlawed by authorities beginning with the Buddhist Jatakas texts from 600-400 BC. Critics claim usury exploits the needy, is a form of unearned income, and contributes to inequality.

Basic economics shows that capping the price of anything creates a supply shortage.

Interest is simply the price of borrowing money and capping interest reduces the incentive to lend, thereby creating a shortage of loans. A shortage of loans means that lenders willing to lend on the black market can charge more interest than would be possible in an unregulated market.

In this way, those who attempt to protect borrowers by regulating usury risk doing more harm than good. To make matters worse, disputes in a black market cannot be settled using a public arbiter, which means that those who are wronged often turn to violence or threats of violence.

A window for scammers

In the Middle Ages, contracts emerged that legally skirted anti-usury laws by tying repayment to profit, rather than time. These contracts varied in terms of who profited and who would be held liable for losses. The classic commenda contract rewarded one-quarter of profits to the laboring partner, with three quarters of profits, and all the risk, to the investor.

Many early trade voyages were funded through contracts called societas, which introduced the concept of limited liability, and often divided the equity of a ship into 24 shares, called carati. After the completion of each voyage, the ship and its assets were liquidated, with profits returned to shareholders.

Over time, the complexity of these contracts grew. In 1602, the Dutch East India Company sold shares not in a voyage, but in a fleet of ships that continually traded with Asia. This made accounting more difficult, as amortization of assets had to estimated to calculate profits. To make accounting even more complicated, this new breed of companies had hundreds of shares, each of which could be traded on the free market.

It was impossible for shareholders to check the veracity of large companies' accounts. However, darkness in knowledge is hidden by the brightness of great profits.

This opened a window of opportunity for scammers. Before its first ship ever left harbor, the South Seas Company used investor funds to open posh offices in the best parts of London. Stock prices initially skyrocketed then crashed when dividends failed to materialize.

The effect of regulation

Over time, regulations have been enacted to protect investors.

However, like laws that cap interest rates, these new regulations often have negative unintended consequences. For example, take accredited investor laws, which make it illegal for low-net-worth individuals to invest in non-established companies.

The effect of these laws is to redirect capital from new ventures to established companies, like The First Hawaiian Bank. Founded in 1858, the bank now has 2,250 employees.

In August, it raised $485m in an IPO. Surely established banks have good reasons to raise funds, but in the absence of accredited investor laws, some of the capital that funds banks would instead fund innovative startups.

Accredited investor laws also give wealthy investors an unfair advantage because a reduced supply of capital for new ventures creates cheaper prices.

A new financial dawn

This article was inspired by Preston Byrne's article Against Tokens (And Token Crowdsales), in which he argues that crowdsales are illegal and are usually scams. I don't disagree with either of those statements. However, just because something is illegal, that doesn't make it wrong or undesirable. At one time, it was illegal for women to vote.

Furthermore, even a company with a thumbs up from the Securities and Exchange Commission isn't prevented from scamming shareholders, as evidenced by the options backdating scandal at Apple. This is an example of the fence paradox, which illustrates how regulations can often cause greater harm by making people feel safe.

Like the contracts that emerged, in part, to skirt anti-usury laws, cryptocurrency has emerged, in part, to skirt today's financial regulation. Anyone can now create, sell and trade cryptographic tokens that represent equity (or debt) in a company. Any investor can pay any entrepreneur, and remain anonymous if he wishes.

Of course, there will be scams and failures. And sometimes, there will be successes. Those who succeed will probably not do so with complicated 44-page white papers, they will do so with new, simple and transparent contracts and ideas for creating wealth.

Irrespective of the law, the legal suppression of innovators looking for funds and people looking to invest is ending. This is good news because it means the resource that is money will become more efficiently deployed.

Tim Draper Leads $4.2 Million Series A for Blockchain Startup Factom

 

Blockchain startup Factom has raised $4.2m in new funding to build a series of unnamed new products for its blockchain data network.

The Austin, Texas-based company that lets users verify data using its Factom blockchain, fresh off winning a $200,000 grant from the US Department of Homeland Securities, now plans to scale with a series of hires to be announced over the coming months.

Factom co-founder and CEO Peter Kirby said the Series A round, led by venture capitalist Tim Draper, will also be used to further develop its core technology and suite of products.

Kirby told CoinDesk:

"We really believe that when you move all the data in the world into the blockchain you can create a lot of transparency and value."

Factom had previously raised over $3m, and already has three enterprise products: a data protection tool, an identity solution and distributed data storage service similar to a more traditional database.

In total, Factom's protocol is being used to secure 67.4 million records, according to its official website.

Behind the investment

Investment news site Frisco Fastball picked up the Series A filing with the SEC and provided insight into the round, ultimately concluding that the funding could represent confidence in the company given that it sold 100% of its offering.

"On average, companies in the not disclosed sector, sell 67.77% of the total offering size. Factom sold 100.00% of the offering," the news source wrote.

The comments may be a surprise given that the startup has long been one of the more contentious in the industry. In addition to questions about its use of a publicly traded digital asset to fund its operations, Factom has also seen potentially key partnerships fail to materialize.

Still, investor Tim Draper lauded the firm in statements to CoinDesk, focusing on how he believes the platform can mitigate issues common to centralized data storing services.

Draper said:

"Centralized data is prone to critical failure by any individual mistake, whether by user error or malicious hacking. By decentralizing data through the blockchain, Factom avoids critical failures due to user error or hacker."

Tuesday, October 4, 2016

Adam Back Appointed Blockstream CEO in Leadership Shake-Up

 

Bitcoin startup Blockstream has a new CEO.

The company said today that its first CEO, Austin Hill, is formally stepping aside, with current president Adam Back being appointed to the role.

As part of Hill's exit from the firm, he has also stepped down from the board. Blockstream said that Hill was leaving the company to "pursue other opportunities".

Back, a noted cryptographer who is one of the startup's founders, said in a statement:

"I am honored to take on the CEO position at this important phase in the company's growth and am excited about leading Blockstream to its full potential. We have a world­class team dedicated to building the foundation that will underpin the transformation of finance for years to come."

It's been a busy year for Blockstream, which announced $55m in new funding in February. To date, the startup has raised more than $70m in venture capital in order to support its efforts to develop bitcoin-focused initiatives such as sidechains and the Lightning network.

Hill's exit comes as the startup has moved to bolster its developer ranks. Earlier this summer, Blockstream acquired bitcoin wallet startup GreenAddress, which further boosted its employee base.

JPMorgan is Quietly Developing a Private Ethereum Blockchain

 

Wall Street mega-bank JPMorgan has co-developed a private, permissioned version of the ethereum network.

The project, presented during a meeting of the Hyperledger technical steering committee last month, was recently demonstrated during the Sibos convention in Geneva. But while the bank avoided the headline-grabbing announcements of its peers like Bank of America and UBS last week, this doesn't mean it is shying away from discussing its work.

Called Quorum, the platform was developed in partnership with ethereum startup EthLab, and it is one of the first projects to come out of a working group within the bank known as the Blockchain Center of Excellence.

Amber Baldet, program lead for the division, explained that JPMorgan is now looking to open source its blockchain technology work in order to get more developers involved.

Baldet told CoinDesk:

"One of our goals in working with an open-source platform and contributing our work back is to encourage collaboration and innovation. The more people that get involved, the faster we will see adoption challenges addressed and the more robust the system will become."

In tandem with the development of Quorum, Baldet said JPMorgan created a software development kit (SDK) aimed at encouraging developers to create applications.

Baldet went on to describe the project as "an additional choice" in the company's toolkit of software offerings aimed at solving business problems.

Notably, Quorum is the second major blockchain-inspired offering to come out of the JPMorgan's technology labs. Earlier this year, the bank showcased Juno, a project it called a "distributed crypto-ledger" that was designed to enable quick value transfers between network parties.

The developers behind Juno departed the bank earlier this year to form their own startup, Quartz reported in July.

Inside Quorum

According to JPMorgan, the project was developed following discussions during the first ethereum developer conference (Devcon1) in 2015.

"While speaking with Jeff Wilcke of EthLab there, we recognized that there was a potential overlap between his goal to build a voting-based consensus mechanism to replace proof-of-work, and our goal to build a high-speed, permissioned ledger," Baldet explained.

Quorum, JPMorgan

According to Wilcke, the system itself has several elements, involving teams on both the JPMorgan and EthLab side.

EthLab manages development on the consensus rules and core changes to the code itself, whereas JPMorgan acts to sign the private messages broadcast across the network.

Wilcke explained:

"The JPMorgan chain requires special rules that will allow private transactions, ie there's a separation between public and private contracts. [Public transactions] can be seen by anyone and [private transactions] can only be seen by parties that have access to a key belonging to that particular party."

Wilcke suggested that the work could have some impact on the future of the ethereum network – potentially foreshadowing the intersection of public and private chains – but indicated stopped short of any broad predictions.

"Time will tell," he added.

Next steps

From here, the project will see further iteration following feedback from both participants and industry stakeholders.

Baldet said that JPMorgan has no plans to monetize the work, but rather intends for the project to act as a vehicle for connecting with developers in the open-source community.

"While our current applications using Quorum function within JPMorgan, releasing the software is an important stepping stone to launching projects with other organizations," Baldet said.

Baldet also went on to suggest that the project could serve as a first step toward building a system that could connect private institutions via distributed networks.

She concluded:

"While we expect some convergence around a few key 'enterprise-grade' platforms, interoperability will be next year's buzzword."

Monday, October 3, 2016

 
Have you ever wanted to send a completely anonymous payment to someone, then realised your method wasn't so anonymous after all? Security is a huge issue in this time and age, and while things are being done every day to make payment sending faster and more secure, Umbra has done a great job of creating an anonymous cryptocurrency that offers features similar to Skype and Bitcoin; it's completely hassle-free, and it's about as private as you can get. Let's take a look at it, shall we?

An umbra is the darkest part of a lunar eclipse, and it's almost as dark as the Umbra is in terms of security- Umbra's a privacy centered coin that originated as a fork of bitcoin. With similar intentions to Monero, although slightly more privacy-centered, it was not intended to directly compete with bitcoin in terms of standard sending and recieving; it's simply not what the coin was primarily made for, and you have to realize that about the coin.

While designed for privacy and security at its core, Umbra also targets an easy to use GUI and more, with simple buttons that do exactly what they say and no more. Fortunately, the setup process was well thought through and it's very easy to connect yourself to Tor or L2P and get where you need to be going; Umbra states that they've reached an equibrilium between being too basic and being too advanced, and it's visible in their Shadow Client- there are settings for more basic functions, and there are more for advanced functions. After setup, you'll be almost completely ready to go. Some integral features included in the Shadow Client include both a message sender and a wallet with both private and public functions. The message sender is similar to Skype and Telegram in a way- you just need a few details and you're good! You can opt in for both public and private chat channels if you wish- it's great for teamwork and more, too! As with many things on Umbra, all messages are completely encrypted for your convenience and security- you can even further encypt messages if you wish with your own software and settings.

Umbra Wallet

Want to recieve money and even create entire marketplaces? ShadowCash is there! The main currency of Umbra, ShadowCash offers ring signatures and dual-key stealth addresses in order to complete both the most secure and most easy transactions you need. With similar encryption methods as Monero, your transactions will be silky smooth and completely encrypted. If you wish to send and recieve money normally, you can use their public wallet, and if you want to send private payments and recieve private payments, the private wallet is your thing. Both are included as standard with the wallet software, and the only major difference with the two is that the public wallet offers slightly better than basic privacy than bitcoin, and the private wallet offers the highest grade security you can get.

This is ideal for marketplaces and exchanges; the anonymity allows one to do whatever they want to do, and there are practically no bounds with Umbra. If you're concerned about your security and want to opt in for a more secure pathway to sending transactions without the hassles of creating and mixing coins like with Bitcoin, Umbra may just be your thing.

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Friday, September 30, 2016

UBS Reveals Blockchain Prototype for Streamlining Global Trade

 

Swiss banking giant UBS has unveiled a project designed to replicate the entire lifecycle of an international trade transaction on Hyperledger's Fabric blockchain.

Built in collaboration with IBM, the trade finance project is still in its earliest stages, but it's arguably already more ambitious than many blockchain prototypes that focus on just a single aspect of the process. Designed to "holistically" combine payment transactions, the prototype merges trade finance transactions, foreign exchange payments and more, into one single, elaborate smart contract.

According to UBS's head of product and market development for transaction banking, Beat Bannwart, the effort also involved the full range of UBS professionals who are subject matter experts in these areas.

Bannwart told CoinDesk:

"We looked at it from a transaction banking point of view, so we involved people from trade, from supply chain finance. But the aim was actually to combine all these different steps into one single solution, where the entire business flow is covered."

In large transactions, letters of credit can be used by a purchaser's bank to mitigate the sense of risk a seller experiences while the product is in transition. But letters of credit can take as long as seven days to process, according to UBS's numbers, during which time additional risks can accumulate.

To give an idea of how complicated the process is, UBS said a letter of credit can weigh 500 grams and comprise 36 documents.

By programming that process into a smart contract on Hyperledger, Bannwart said he expects to be able to cut the processing time down from seven days to one hour.

Screen Shot 2016-09-29 at 1.19.16 PM

In addition to the letter of credit process, the work revealed in a video presentation at Sibos on Wednesday is designed to also incorporate the account opening process and more.

"It is complementary," said Bannwart. "It is not replacing any procurement or negotiations parties, it is for the pure execution and monitoring afterwards, so that we save them time and you actually have fun to use it."

Rapid iteration with FinTech startups

The emphasis on fun ran throughout the presentation, which heavily focused on the project's aim to build a user-friendly interface, one that was designed to operate on the go, say for example from a transportation vehicle.

To move that design thinking forward, much of the work was completed during an intensive two-day work session at the financial technology accelerator Level 39 in London, better known for hosting startups than big banks.

During the build, representatives from UBS's IT department joined with staff from the IBM Competency Center to work through the process of moving from visualizations to actually building the product.

IBM's client executive in charge of the UBS integrated account team, Fabio Keller, described the build as a group of "extraordinary people at the same table, locked down in a room for design thinking."

Also around that table were Level 39 startups including cloud-hosted blockchain startup Credits and smart documents startup Clause Match, according to the bank's senior innovation manager, Alex Batlin.

Though he said there are currently no contractual agreements between the startups and UBS, Batlin added that the firms' participation was part of a larger UBS strategy.

He told CoinDesk:

"We made a very conscious decision, we wanted to make sure that we learn, but also mentor the startups."

Timeframe unknown

Reports of UBS's blockchain work have been percolating online since last year, including news that multiple blockchain "experiments" were underway.

Then, last month the bank emerged as a major player in the space when it was revealed it was part of a five member consortium that was working on a "utility settlement coin" designed to help central banks embrace blockchain functionality.

Going forward, it remains unclear how long it will take to complete the international trade project, according to Batlin, who helped build the team behind the effort, but who will be joining BNY Mellon this fall.

But what is more certain, according to Keller is that what happens next.

UBS plans to take the prototype to customers and end users, he said, with the hope that this will "validate" that the bank is "going in the right direction."

Lightning Test Moves Bitcoin Scaling Into Striking Distance

 

A lesser-known startup has successfully tested an important piece of bitcoin's scaling puzzle.

Widely considered to be the best way to boost bitcoin's transaction capacity, the Lightning Network proposes a way to execute the majority of bitcoin transactions without involving the blockchain or compromising the network's decentralized architecture.

But, as a relatively new proposal, it's still very much a work in progress. That's one reason why recent tests completed by a French company called Acinq have generated so much excitement.

Inspired by a white paper released by bitcoin mining firm Bitfury in July, the Acinq team launched 2,500 Amazon Web Service nodes this month as a way to test a proposed routing system for Lightning-style payments earlier this month. Conducted on 18th September, the test put the routing theory proposed in the white paper into practice.

As it showed Lightning nodes could effectively route payments, Bitfury CEO Valery Vavilov argued that the test was a significant milestone for bitcoin.

Vavilov told CoinDesk:

"This test of Flare, with small modifications made by the Acinq team, shows that our solution for payment routing on the Lightning Network is not only theoretically feasible, but successful."

For now, this puts to rest skepticism that Lightning routing was too difficult to be implemented at all, as Acinq's routing tests pushed the idea out of theory and into practice.

"We thought it would interesting to go beyond with a simulation because it showed that actual progress with routing issues and [that] we're getting closer and closer to a working implementation," Padiou said.

As the implementation assumes privacy, it also hints that the Lightning Network could succeed in keeping payments private, despite the fact that it effectively adds multiple new parties to bitcoin transactions in an effort to keep them off-chain.

Proposed by developers Joseph Poon and Thaddeus Dryja in February 2015, a number of startups (Lightning, Blockstream, Blockchain) and open-source projects are now working on implementations of the concept.

Paris-based Acinq has so far focused its efforts on its implementation Eclair, driven by what Padiou said were the benefits Lightning could bring to the bitcoin network when it is finally implemented by the open-source community.

Experimenting with tradeoffs

Named after the French word for "lightning," the Eclair implementation offers a test of Bitfury's Flare proposal, which Padiou described as the most advanced routing method developed yet, due in part to how it handles privacy.

Notably, Flare uses a hybrid approach to routing where each node has enough view of the rest of the network to be able to figure out a path to send payments. Put simply, each node only sees a portion of the larger network. Say there's a node sitting in a sea of nodes. It will have connections with all of its neighbors, but also with random nodes sitting further away.

The idea is this gives it the ability to "see" what's going on out in front of it, even if it doesn't see everything.

The Acinq team tested this concept using these connections for establishing channels and routing payments on a static route. After setting up the nodes in the cloud, the Acinq team created channels between them and tried to find routes between random nodes, Padiou explained.

In the mailing list dedicated to Lightning Network development, Padiou noted some differences between Eclair's routing approach and what Bitfury proposed in the white paper.

Acinq tried a simplified version that would take less time on average, but that had a smaller success rate of finding a path to the target. "We wanted to do was answer the question of, 'Can I find a route in less than one second?'" he explained.

Padiou reported that the test had an 80% success rate of finding a payment path in about half a second.

Next steps

So, when will users be able to use this speedy, scalable service?

The answer might not be so soon, as this is yet another step towards a Lightning Network that can actually carry payments across the network.

"We think that the dynamic ranking of the routes is the next big challenge," said Padiou, explaining that the piece that they just tested is one of two steps for Lightning routing. The first is static routing, the second is dynamic routing.

Having enough of a view of a static network to establish a channel on the network is one thing, but maintaining channels that are changing potentially every second with each new payment is another.

"This is very difficult to solve because it's moving all the time," Padiou said. "You can't be sure you'll be able to use a given channel to route a payment because maybe it's unbalanced. Or maybe a longer route is better because it's cheaper."

Yet, it is a small sign that the broader Lightning community also has plans to make all of the implementations compatible with one another, with Lightning Network designer Joseph Poon telling CoinDesk he plans to meet with the Eclair team next week so they can discuss specifications.

Going forward, the community building Lightning also needs work on encrypted communication between nodes, storing channel states, and so on. But Padiou said he plans to stay focused on routing for the time being.

Thursday, September 29, 2016

Momentum Grows for Blockchain Action in Washington

 

It's been a big week for blockchain on Capitol Hill.

While only Wednesday, the week has already seen the launch of the Congressional Blockchain Caucus (an effort led by Rep Jared Polis and Rep Mick Mulvaney), and the opening of the DC Blockchain Center, an information hub for policymakers.

The two initiatives reflect the growing interest around the technology in the US capitol.

Though interest has existed for some time – Polis himself began accepting bitcoin donations in 2014 – recent developments suggest the groundwork is being laid for more activity in the year ahead.

Polis said of the new legislative effort:

"It's vital for Americans, businesses and members of Congress to learn about blockchain technology so the US can continue to secure its stance as the global leader of ingenuity."

2016 has thus far seen a number of events within the DC area aimed at educating policymakers and legislators, and there's even been action within Congress itself, in the form of a non-binding resolution calling for national support for blockchain tech.

Perhaps more notable is that Arizona Congressman David Schweikert has called for the technology to be used to alleviate long-standing issues in the administration of veterans health care.

Building awareness

While legislative proposals like the one submitted by Schweikert are certain to stir interest among some members of Congress, it's unlikely that they or others will gain much traction in the absence of more education and advocacy by industry stakeholders.

In some ways, the Coin Center and Chamber of Digital Commerce initiatives actually complement one another in this light.

Whereas the caucus will work on the floor of Congress itself to build interest among those who might one day vote on pieces of blockchain legislation, the DC Blockchain Center, co-founded by startup incubator 1776, can act as a setting for discussion for those both inside and outside of the legislative process.

"[The Center is] uniquely positioned to connect the dots for government agencies and drive massive scale success through our connections, resources and mentoring programs," 1776 co-founder and CEO Evan Burnfield said of the launch.

Polis remarked earlier this week that the caucus is, in part, a vehicle for spreading that kind of in-depth awareness that would likely predate any significant legislative push.

He said in a statement:

"It's vital for Americans, businesses, and members of Congress to learn about blockchain technology so the US can continue to secure its stance as the global leader of ingenuity."

In Formal Verification Push, Ethereum Seeks Smart Contract Certainty

 

There's a new blockchain buzzword arriving in time for fall – formal verification.

The phrase (used to describe the application of mathematics to verify software programs) has so far been evoked sparsely in the press. But if conversation at ethereum's developer summit last week was any indication, it could play an increasing role given the security questions that still surround smart contracts and blockchains more broadly.

As evidenced by multiple talks dedicated to the subject at Devcon2, the idea that new assurances could be given to ethereum coders is being widely embraced by its development community. Already, the concept is being proposed as a way to inspire confidence in everything from the ethereum protocol itself to its experimental proof-of-stake blockchain.

That this has come to pass is perhaps no surprise given the sudden collapse of The DAO this summer, to date the largest smart contract yet launched on the decentralized application development platform.

But while formal verification may sound complex, the concept can perhaps be summed up succinctly as applied to ethereum – coders currently use a largely new language (solidity) to write smart contracts, writing commands that are then translated into bytecode for use by the ethereum virtual machine (EVM) and disseminated to the network's nodes for execution.

In a sense, formal verification can be seen as a more objective way to ensure that when different component parts of the network receive these instructions, they execute them as intended on behalf of users.

Grant Passmore, founder of Aesthetic Integration, is one entrepreneur who sees an opportunity in helping assist in this effort, using Devcon2 to launch Imandra Contracts, a formal verification platform for blockchain smart contracts.

At the event, he evoked the idea that ethereum could serve as a "paradise" for formal verification (a widely cited touchpoint in talks) given the aims of its community and the significant responsibilities it wishes to entrust to code.

Passmore told CoinDesk:

"The ethereum community is in a unique position, where after The DAO, we understand that rigorous engineering is necessary. You can't approach writing a smart contract like a web app."

Elsewhere, speakers like Cornell's Philip Daian spoke to the interest in the methodology more broadly, telling the audience he believes formal verification could help ethereum solve key issues.

"It's going to be one critical piece of the overall picture. I'm looking forward to using ethereum to set the standard and show people how it's done," he said.

Training wheels

Given the recent emphasis financial firms have placed on exploring smart contracting languages, it was perhaps the concept of applying formal verification to Solidity that was the most frequent topic of discussion.

Developed for the ethereum platform, Solidity has faced criticism for being largely untested and difficult to write, largely because it is so new. Such issues have arguably been amplified due to issues with the language's compiler, a lack of public libraries and the collapse of The DAO, which was vetted by notable members of its development community.

In this light, Christian Reitweissner, the creator of Solidity, acknowledged that there is a drive to implement formal verification so that errors can more effectively be detected by ethereum coders.

Reitweissner told CoinDesk that smart contract developers could one day use formal verification tools to, for example, determine if there are unforeseen errors in their work. He indicated that such a tool could be used to determine if, in adding two balances, the result extended longer than the field allotted by the compiler.

"This could happen and the formal verification tool [would] automatically detect that. You can detect it early on and react on that inside the smart contract," he explained.

Reitweissner said that the Solidity team has already been exploring how to apply formal verification to its work. As early as last October, there were prototypes for how a toolkit called Why3 could be used for this purpose, though such offerings are not yet available for the full language.

Proving ground

That ethereum could be used to test how formal verification might be applied to finance more broadly was also a heavily discussed topic during the conference.

Passmore, for instance, said he has been working on applying formal verification to his work with financial institutions since 2014, and that so far, clients have sought to use it in limited areas, like dark pools, where traders require certainty about fairness.

In smart contracts, Passmore suggested he sees ethereum as a community that could drive acceptance further.

"Many of our banking clients, as we started working with them, we heard they were interested in the space, but that they were worried about the correctness of smart contracts," he said.

The advancement of formal verification has also attracted Yoichi Hirai for similar reasons. A formal verification engineer now employed by the Ethereum Foundation, his interest in the concept began as a researcher and in his prior employment at cyber security leader FireEye.

In a talk at the conference, Hirai spoke about his frustration applying formal verification in settings where he did not have access to the source code, or the tasks were perhaps too broad to advance the concept.

"I found ethereum, I saw the EVM, the yellow paper, the specification, it was only 32 pages and I thought I can actually translate it and write proofs about smart contracts," he said.

Ethereum, by contrast, offers what he called a "smaller specification" and a "solvable problem" for engineers in determining how best to translate Solidity into bytecode.

"I believe many more formal verification researchers are coming," he said.

No silver bullet

Yet despite the enthusiasm, there are steps being taken to caution how much formal verification could achieve. Developer Alex Beregszaszi, who is working on upgrades to the EVM, spoke to the need for a suite of solutions to help developers ensure smart contract code is working as intended.

Passmore, too, noted that it's difficult to say whether his new system could have caught issues with The DAO as formal verification tools still require human input.

"You can encode issues that happened with The DAO and check to make sure that you don't have those, but you have to know what to look for," he explained.

The limitations were acknowledged by Reitweissner and Passmore, both of whom cautioned developers not to think of formal verification as a "silver bullet".

Reitweissner, however, sees the methodology as one that will advance as it is more widely used, with developers becoming slowly better at identifying issues and developing repositories where knowledge of common problems can be made accessible

In this way, Passmore believes the ethereum community is succeeding in "evangelizing" for the concept, something he believes will ultimately advance blockchain research.

Passmore concluded:

"Even though this is something that many have never been exposed to, formal verification is what we need. It's a learning curve, but it must be embraced, and that's exciting."

Wednesday, September 28, 2016

SEC to Discuss Blockchain at November Forum

 


The US Securities and Exchange Commission (SEC) is set to hold a public forum in mid-November during which blockchain and other financial technologies will be discussed.

Up for debate is the existing regulatory environment and the impact of technologies like digital currencies. According to the agency, which in recent years has pursued investigations into uses of the tech, the hope is to foster discussion among regulators, business owners and other industry stakeholders.

The SEC said:

"The proliferation of FinTech innovation has the potential to transform virtually every aspect of our nation's financial markets. The panels will discuss issues such as blockchain technology, automated investment advice or robo-advisors, online marketplace lending and crowdfunding, and how they may impact investors."

No information yet has been published regarding the specific agenda or attendees. The event will be held on 14th November at the SEC's headquarters in Washington, DC.

London Police Investigate OneCoin Cryptocurrency Scheme

 

The London police are investigating a digital currency scheme widely believed to be fraudulent.

OneCoin, promoted as a digital currency investment opportunity, was cited as a risk to consumers this week by the UK Financial Conduct Authority, one of several finance regulators in the country and the agency that has participated in the licensing of legitimate bitcoin and blockchain service providers.

Marketed as a digital currency similar to bitcoin, OneCoin has key differences such as an promotion-heavy pitch focused on selling investment packages and a centralized hub for exchange, storage and transaction logging. Critics have gone so far as to argue that OneCoin, as a currency, doesn't actually exist.

In statements, the FCA urged consumers who believe they have been scammed to contact the London police's fraud division.

The agency said:

"This firm is not authorized by us and we do not believe it is undertaking any activities that require our authorization. However, we are concerned about the potential risks this firm poses to UK consumers."

Notably, this is not the first time that OneCoin has drawn the ire of regulators.

In July, Belgian authorities warned consumers about investing in OneCoin, warning that "false and misleading" information was being disseminated by supporters.

Though unconfirmed, financial watchdogs in Germany and Bangladesh, among other likely countries, are believed to be investigating the issue further.