Seek­ing crypto trans­parency

Executive Magazine - - Contents -

The con­cepts and re­al­i­ties of dig­i­tal cur­ren

cies are, at best, con­fus­ing. To un­der­stand more about the Le­banese cryp­tocur­rency com­mu­nity, and the op­por­tu­ni­ties that the cryp­tocur­rency econ­omy opens for Le­banese busi­ness and banks—in­clud­ing the idea of a sov­er­eign dig­i­tal cur­rency is­sued by Banque du Liban, Le­banon’s cen­tral bank—Ex­ec­u­tive sat down with Stéphane Abichaker. A lo­cally well known ad­vo­cate for adopt­ing of dig­i­tal cur­rency, Abichaker is a lec­turer at Saint Joseph Univer­sity in Beirut, a blog­ger on bit­coin, and part­ner at CDC Blockchain, a startup launched in Novem­ber 2017 that works on elec­tronic cur­rency so­lu­tions.

When did you first get in­ter­ested in Bit­coin?

That was in 2013 and it was by ac­ci­dent. I even down­loaded the Lite­coin soft­ware at that time and wanted to start min­ing on my lap­top, but then I got busy with other things and to­tally for­got about it. I re­dis­cov­ered cryp­tocur­ren­cies in Fe­bru­ary 2015 through an ar­ti­cle in an on­line mag­a­zine, which said that blockchain might rev­o­lu­tion­ize fi­nance. Read- ing tons of ma­te­rial about it for six months, I re­ally got the virus. From that point on­ward, I had the in­tel­lec­tual de­bate with my­self, started blog­ging and ex­chang­ing ideas about it, and giv­ing con­fer­ences and talks on the sub­ject.

In your view, is Bit­coin easy to un­der­stand?

No I think on the day when it be­comes easy to be used and un­der­stood by many, it will prob­a­bly be worth 10 times what it’s worth today. It’s very dif­fi­cult to un­der­stand: It goes against what we learn at univer­sity, and it also goes against the main­stream fi­nance sys­tem: be­hav­ior, trans­ac­tions, etc. In my point of view, it poses a new par­a­digm, and there­fore, is com­plex and dif­fi­cult to grasp, [for all in­clud­ing] my­self.

There nev­er­the­less is a com­mu­nity of peo­ple in Le­banon who have this virus that you re­ferred to, and are in­ter­ested in bit­coin and blockchain [the pub­lic ledger of cryp­tocur­rency trans­ac­tions]. How large is this com­mu­nity?

I would say that ac­tive peo­ple, who are very cu­ri­ous about this sub­ject and who are in­ter­act­ing with each other, num­ber a few hun­dred, mea­sured by the [size of on­line] groups I par­tic­i­pate in, which are the largest groups on this sub­ject in the coun­try. Then you have a core of about 50 peo­ple who are ei­ther IT pro­fes­sion­als, bankers who do not dis­close that they are bankers, or startup peo­ple and en­trepreneurs, who are re­ally deeply in­volved in this [cryp­tocur­rency] space in terms of min­ing, trad­ing, and dis­cussing.

Is it le­gal in Le­banon to mine, to trade, and to dis­cuss Bit­coin, blockchain, and so on?

That is an ex­cel­lent ques­tion which we ask our­selves ev­ery week on the groups. What we know today is that there is a sort of red flag that was raised by Banque du Liban in an an­nounce­ment from De­cem­ber 2013, re­mind­ing banks of ear­lier cir­cu­lars, which said that dig­i­tal money is pro­hib­ited in Le­banon and cau­tions ex­plic­itly that Bit­coin and other [cryp­tocur­ren­cies] are un­reg­u­lated and

dan­ger­ous. The gov­er­nor [of Le­banon’s cen­tral bank, Riad Salameh,] re­cently stated at events that no­body con­trols Bit­coin and said it is not an as­set and not a cur­rency, but prob­a­bly a kind of com­mod­ity. As a com­mod­ity, the gov­er­nor said in pub­lic, he would not pro­hibit buy­ing and sell­ing Bit­coins, but that BDL is def­i­nitely against us­ing it as a cur­rency, as a means of ex­change. That is the of­fi­cial stance today. Now, in prac­tice, we as a com­mu­nity are see­ing, very sim­ply, that all bank ac­counts in Le­banon are pro­hib­ited from in­ter­act­ing with in­ter­na­tional mar­ket plat­forms in the crypto en­vi­ron­ment. There is a form of en­force­ment of pro­hi­bi­tion.

There’s a prac­ti­cal bar­rier that has been cre­ated and is en­forced, but it is not a for­mal bar­rier? Yes. That is what we are per­ceiv­ing.

Are these dis­cus­sions about cryp­tocur­ren­cies very vi­brant and open, run­ning along ide­o­log­i­cal front­lines, or char­ac­ter­ized by be­hav­ioral fac­tors, such as cling­ing to old con­cepts of fi­nance and re­sis­tance to change?

The de­bate today, first of all, is very timid, be­cause of the stance by BDL that we just talked about. The BDL is at the fore­front of the dig­i­tal rev­o­lu­tion in Le­banon, thanks to Cir­cu­lar 331, [a pol­icy that in­cen­tivized in­vest­ment in tech­nol­ogy star­tups,] and due to the fact that this very sub­ject [of cryp­tocur­ren­cies] con­cerns BDL. Thus, the de­bate has only re­cently been re­vived, thanks to the [gov­er­nor] say­ing that BDL want to launch their own dig­i­tal cur­rency.

[ On the com­mu­nity level] one also finds many peo­ple in Le­banon who are at­tracted to get- rich- quick schemes. There is ICO [ ini­tial coin of­fer­ing] ex­cite­ment, and be­lief that “this Bit­coin thing will make me a mil­lion­aire.” Much in­ter­est and ap­petite ex­ists from that an­gle, not re­ally from the an­gle of de­bate on the thought level. Hav­ing said that, one very in­ter­est­ing and pos­i­tive as­pect that I per­son­ally ex­pe­ri­enced in the com­mu­nity is that in go­ing on on­line de­bate groups you de­bate with many [ types of] peo­ple. You might find your­self ex­chang­ing ideas with a Le­banese teenager who is an IT ge­nius or with a guy in the Bekaa val­ley who has in­her­ited a place where he can in­stall min­ing equip­ment and would ex­change ideas about how to mine more ef­fi­ciently. The range goes all the way from the BDL un­der­cover in­di­vid­ual in the dis­cus­sion who wants to have an idea of what is go­ing on in the Bit­coin com­mu­nity, to the univer­sity pro­fes­sor who will not em­pha­size his ti­tle in the de­bate and will be chal­lenged like any­body else.

Much of the de­bate today deals with one or all of three cryp­tocur­rency ar­eas: Bit­coin, ICOs and alt­coins—nonBit­coin cryp­tocur­ren­cies—and blockchain. Do you have an or­der of pref­er­ence among the three?

I would def­i­nitely clas­sify them in the fol­low­ing or­der: Bit­coin, then blockchain, and then alt­coins and ICOs. Bit­coin was the first im­ple­men­ta­tion [of a crp­tocur­rency] and has first-mover ad­van­tage. Also, be­cause Bit­coin is open source, any in­no­va­tion in alt­coins, or other ICOs that is worth con­sid­er­ing, would be ab­sorbed into Bit­coin[’s] code. Blockchain comes with the idea of be­ing a net­work where you de­ma­te­ri­al­ize as­sets, and where you’ll have ideal trace­abil­ity, no sin­gle point of fail­ure, etc. Blockchain is a word that has been used more and more to de­scribe the tech­nol­ogy as a whole, and there are lots of prom­ises on that front. Noth­ing has ma­te­ri­al­ized today, but it would be ridicu­lous to close the door on [the idea that] any in­no­va­tion will come from this space. The third level are alt­coins and ICOs, be­cause I very frankly think that alt­coins are vari­a­tions on a theme, whereby a group of peo­ple would try to profit from the over­all ex­cite­ment [around cryp­tocur­ren­cies], more of­ten than not with a motivation to make money and ac­cu­mu­late riches.

Do some alt­coins or ICOs break laws, ac­cord­ing to your un­der­stand­ing?

You can as­sume that they are break­ing laws, be­cause the Se­cu­ri­ties and Ex­change Com­mis­sion in the United States has said that ICOs have to do with of­fers of se­cu­ri­ties, and any of­fer of se­cu­ri­ties is reg­u­lated by the SEC, [which] has said that ICOs should be reg­u­lated and come un­der their su­per­vi­sion.

In Le­banon, would ICOs be con­sid­ered se­cu­rity of­fer­ings and reg­u­lated as such? Le­banon’s Cap­i­tal Markets Author­ity, CMA, is ea­ger in reg­u­lat­ing ev­ery fund and ev­ery of­fer­ing of se­cu­ri­ties, so should this, in your opin­ion, have to ap­ply to ICOs?

It may also ap­ply to ICOs [in Le­banon], but I have a ques­tion in this re­gard, which con­cerns the pace of progress and the quick­ness in which you can is­sue an ICO with very few tech­no­log­i­cal pre­req-

“You might find your­self ex­chang­ing ideas with a Le­banese teenager who is an IT ge­nius or with a guy in the Bekaa val­ley who has in­her­ited a place where he can in­stall min­ing equip­ment”

uisites to do so. I won­der if the CMA and BDL are equipped to tame or con­trol this mar­ket.

You sent me a pa­per that you wrote last July on the idea of hav­ing a re­gional col­lab­o­ra­tion of cen­tral banks in is­su­ing a joint cryp­tocur­rency. In this pa­per you spoke of qua­sior pseudo-de­cen­tral­ized cryp­tocur­rency as a pos­si­ble way for­ward. What does this mean?

What I tried to rec­on­cile is the prin­ci­ple of cen­tral bank­ing—cen­trally is­sued and man­aged money—with de­cen­tral­ized is­suance of money or cur­rency. Un­der game-the­o­ret­i­cal per­spec­tives, I’m sure that cen­tral banks would lose part, or all of their seignior­age rights, and in my point of view, this is where we’re go­ing. They’re los­ing [seignior­age, the author­ity to is­sue le­gal ten­der and profit from its is­suance] be­cause they’re abus­ing it, and peo­ple have seen that they have a power which they’ve been abus­ing since 2007 or 2008. I would say that on the left hand, cen­tral banks are con­demned to lose part of their power, and on the right hand, you can­not go for a to­tally de­cen­tral­ized sys­tem be­cause then you would have no reg­u­la­tion and con­trol.

Bit­coin is not un­reg­u­lated; it is reg­u­lated by code, but it is con­trolled by con­sen­sus. The rea­son why we today have six or seven ver­sions of Bit­coin is that peo­ple do not al­ways agree with each other. How do we con­trol that? How do you rec­on­cile? What you can do is a hy­brid blockchain which is per­mis­sioned, mean­ing you need to be vet­ted to par­tic­i­pate in the net­work. For ex­am­ple, it would be dis­trib­uted among cen­tral banks in the re­gion on the aegis of what was once called the Gulf Co­op­er­a­tion Coun­cil [GCC] uni­fied cur­rency, or even the Arab world cur­rency. You can re­vive this idea and say, let’s do a re­gional cryp­tocur­rency that is mined by the re­gion’s cen­tral banks. Each one would lose part of its seignior­age rights, but they would make up for this by club­bing to­gether and is­su­ing a cryp­tocur­rency that would be per­ceived by peo­ple as less ex­posed to abuse [or the po­ten­tial for abuse].

But if we go into the his­tory of joint GCC cur­rency projects—since such a com­mon-cur­rency con­cept was first mod­eled on the euro idea—we see that the project of a GCC Mon­e­tary Union (GMU) did not progress very far be­yond the ques­tion where the cen­tral bank for pol­i­cy­mak­ing in their GMU would be lo­cated. Given the over­weight of Saudi Ara­bia in the re­gional eco­nomic con­text, whether as share of re­gional GDP or mar­ket cap­i­tal­iza­tion of all Arab se­cu­ri­ties ex­changes, wouldn’t other coun­tries, such as Jor­dan, which one time talked about join­ing the GCC, end up be­ing very lit­tle

broth­ers to a very big brother? How do you en­vi­sion to solve this prob­lem in an Arab con­text?

If the prin­ci­ple of a proof-of-work cryp­tocur­rency is adopted, you would put as many means as you can to par­tic­i­pate in the net­work. In that sense, your rel­a­tive weight in the uni­fied re­gional cryp­tocur­rency would be pro­por­tional to your ma­te­rial means to in­vest in hard­ware. The two in­ter­est­ing as­pects of such a sce­nario are that you first have cen­tral banks as play­ers in this blockchain, but you also may have na­tional banks as par­tic­i­pants in this over­all blockchain. It thus would re­sem­ble some­thing de­cen­tral­ized, but at the same time, the weight of each player, in terms of trans­form­ing them­selves into min­ers and nodes, would be pro­por­tional to their ca­pac­ity.

Would that re­quire a po­lit­i­cal de­ci­sion to set a reg­u­la­tory limit on the max­i­mum share in the min­ing ca­pac­ity?

I think that per­tains to what could be called the mon­e­tary pol­icy of this cryp­tocur­rency. This mon­e­tary pol­icy def­i­nitely has to be de­fined and agreed on. We may be very doubt­ful of such a sys­tem be­cause it would re­quire heavy po­lit­i­cal dis­cus­sions and agree­ments and what­ever. But [on the other hand] the chal­lenges for cen­tral banks are grow­ing in the eco­nomic con­texts of the global dig­i­tal econ­omy, and of the real economies of na­tions, re­gions, and world. Cen­tral banks are go­ing to find them­selves con­fronted with mount­ing pres­sure to unify and agree and go this kind of route, a re­cent ex­am­ple of which is the dec­la­ra­tion by an of­fi­cial from [the Ger­man cen­tral bank] Deutsche Bun­des­bank, who said that we need a global agree­ment on reg­u­lat­ing Bit­coin and other cryp­tocur­ren­cies. If you draw a par­al­lel to this state­ment, it would be eas­ier to say we do some­thing re­gional rather than global, not in terms of reg­u­la­tion, but in cre­at­ing a cryp­tocur­rency. Oth­er­wise, es­pe­cially in de­vel­op­ing coun­tries, the chal­lenge posed by de­cen­tral­ized cryp­tocur­ren­cies would only be mount­ing and mount­ing.

If I un­der­stand you cor­rectly, you say that a global um­brella of reg­u­la­tion is needed, and per­haps even a first-ever global mon­e­tary pol­icy sys­tem since Bret­ton Woods, and un­der this um­brella you would have re­gional cen­tral banks that are well ad­vised to team up in is­su­ing joint re­gional cryp­tocur­ren­cies?

“There is his­toric op­por­tu­nity to seize and to trans­mit the mes­sage to the re­gion that this is not a chal­lenge that will dis­ap­pear tomorrow.”

Let me be very clear: What you re­fer to is what I think is emerg­ing, not what I de­fend or am a fan of. I’m say­ing this is the only way for main­stream fi­nance to tackle the cryp­tocur­rency rev­o­lu­tion. I’m deeply con­vinced about Bit­coin dom­i­nance. Bit­coin will have first place among many in my opin­ion, but for the tra­di­tional cen­tral bank­ing sys­tem, this is the only way for­ward.

Would not Le­banon—by virtue of its be­nign for­eign­re­serves po­si­tion, its de­posit base in the bank­ing sys­tem, and the rel­a­tively high so­phis­ti­ca­tion of its cen­tral bank mind­set and bank­ing in­dus­try skill base—be quite well po­si­tioned for play­ing a role in the de­vel­op­ment of a re­gional joint cryp­tocur­rency?

I think it’s a his­toric chance be­cause there is this win­dow of op­por­tu­nity that should be seized. Whether in terms of avail­able hu­man cap­i­tal, or by the fact that Le­banon’s cen­tral bank has proven it­self over the last decades, there is a his­toric op­por­tu­nity to seize, and to trans­mit the mes­sage to the re­gion that this is not a chal­lenge that will dis­ap­pear tomorrow. This can­not be tamed, and we have to re­act [as re­gional cen­tral banks] by tak­ing inspiration from blockchain. It does not help to re­ject or deny it.

What best ad­van­tage could you en­vi­sion for BDL if they chose to take this road and say we want to su­per-in­no­vate in the cryp­tocur­rency realm?

Dig­i­tal cur­rency is not the long-term so­lu­tion, and all cen­tral banks are today equal on the start­ing line, be­cause no­body has found the so­lu­tion for this chal­lenge. The op­por­tu­nity for Le­banon is first of all that this coun­try is ac­cus­tomed to deal­ing with many cur­ren­cies. Ac­cord­ing to the head of IT at BDL [Ali Nakhle], our sys­tems at BDL are by de­fault con­structed to cope with a multi-cur­rency en­vi­ron­ment, not like, for ex­am­ple, the Euro­pean Cen­tral Bank that deals only with the euro. The very sys­tems of BDL are multi-cur­rency. The idea of is­su­ing a cryp­tocur­rency thus would be eas­ily ab­sorbed in the sys­tem. Sec­ond, the in­tel­lec­tual en­vi­ron­ment: You have young­sters that are en­cour­aged by Cir­cu­lar 331 to go the way of in­no­va­tion. So within BDL, the win­dow is open to in­no­va­tion, new ideas, and tech­nol­ogy. These are two ad­van­tages, and third, from a po­lit­i­cal stand­point, it would be eas­ier to have a re­gional cryp­tocur­rency pro­posal brought to the ta­ble by Le­banon, as out­sider to the Gulf Co­op­er­a­tion Coun­cil, rather than a mem­ber coutry.

tion and de­fla­tion in the Bit­coin sys­tem ver­sus the ex­ist­ing sys­tem of cen­tral­iza­tion and in­fla­tion. How would that be di­gested in our econ­omy with­out caus­ing all man­ner of dis­rup­tion and up­heaval?

If you go for a hy­brid so­lu­tion, you have your mon­e­tary pol­icy that you can in­clude in the blockchain and cryp­tocur­rency that you would cre­ate in the code. And then, in­stead of set­ting an un­lim­ited sup­ply, as Bit­coin does, you set a pro­gres­sively in­creas­ing sup­ply that, how­ever, is set from the start as be­ing con­stant in the rate of in­crease, avoid­ing ar­bi­trary in­creases in in­ter­est rates or a pro­grammed de­crease of sup­ply. This could be de­bated and de­cided by the par­tic­i­pants and writ­ten into the code of the cen­tral banks’ cryp­tocur­ren­cies.

How could this code be pro­tected against il­licit mod­i­fi­ca­tions and hack­ing by ma­li­cious for­eign gov­ern­ments, cy­ber­crime or­ga­ni­za­tions, or such?

This is where the hy­brid part comes into play. It would not be a per­mis­sion­less, but a per­mis­sioned, blockchain. So you first could not ac­cess the sys­tem un­less you’re au­tho­rized to do so. Se­condly, the IT pro­tec­tions that ex­ist for such a plat­form would be sim­i­lar to ones that ex­ist today to pro­tect IT sys­tems in BDL and other cen­tral banks.

But if you look at the re­cent evo­lu­tion of or­ga­nized crime on the in­ter­net and of state-spon­sored hacks, you find for ex­am­ple the in­tru­sion into the cen­tral bank of Bangladesh, and $1 bil­lion in par­tially suc­cess­ful fraud­u­lent transfers in 2016, with al­leged links to cash-strapped North Korea. Also, this re­gion is not ex­actly known as the cen­ter of global cy­berde­fense ex­per­tise, judg­ing from past virus as­saults against large oil com­pa­nies in the Gulf or Ira­nian nu­clear fa­cil­i­ties.

Yes, but the dif­fer­ence to the cen­tral­ized sys­tem is that it would be a dis­trib­uted net­work among all banks and cen­tral banks of the re­gion. Any at­tacker would have to be able to cal­cu­late faster than 51 per­cent of the cal­cu­la­tion power of the whole net­work of [aligned] cen­tral banks and com­mer­cial banks in the re­gion in or­der to mod­ify the trans­ac­tions on the data­base. This is re­mote as a pos­si­bil­ity.

Would this be enough to re­sist all imag­in­able cy­ber-at­tacks, for ex­am­ple if two or three for­eign states would col­lab­o­rate in such an at­tack?

The an­swer is to ex­pand the sys­tem by invit­ing other de­vel­op­ing coun­tries to join the net­work, be­cause by the mere in­crease in net­work size, you’re pro­tect­ing your­self from at­tacks which would aim to mod­ify the in­tegrity of data on your dis­trib­uted data­bases.

Talk­ing to a lo­cal ad­vo­cate for dig­i­tal cur­ren­cies

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