Global Trustee and Fiduciary Services News and Views Issue 50

Prime, Futures and Securities Services | Financial Innovation 66 Money, depending on your point of view, may be the root of all kinds of evil or makes the world go around. It may even be funny. But there’s no denying that it’s useful stuff. When our ancestors required goods or services, they had to trade whatever goods or services they could supply, of perceived equal value, in return: the local thatcher repairs the roof of your home and after a little bartering you agree it’s a goat’s worth of work. However, said thatcher lives 10 kilometres away and doesn’t really want to drag (or carry) a goat all the way home. In comes the usefulness of money. Now you pay the thatcher the going rate for a goat in your local currency (let’s call them pennies). The thatcher goes away happy, safe in the knowledge that he can exchange his pennies for a goat, or anything else, nearer to home. No one knows exactly when this transition from barter to using representative tokens to facilitate trade began, but over the ages, we’ve gone from shells to metal coins to paper money to electronic money. It’s now possible to go through life without seeing a single penny, pound coin or dollar bill. You’ll be paid electronically and trade electronically, using debit cards, banking apps and mobile phones. The cashless society, for some at least, has become a reality. So, what’s the point of cryptocurrencies? The birth of cryptocurrencies To try and find an answer to this question we need to go back to their origin. This isn’t, as some may tell you, the Bitcoin white paper published in 2008 (which we’ll come to later) CRYPTOCURRENCIES AND INITIAL COIN OFFERINGS: THE GREATEST SHOW OR SO MUCH HUMBUG? Cryptocurrencies, created toward the end of the twentieth century, promised to disrupt the economic status quo. Together with initial coin offerings (ICOs), they have become one of the most talked-about innovations to come out of fintech. But what are they and do they matter? but a 1998 paper by Wei Dai, a computer engineer specialising in cryptographic algorithms, entitled “b-money, an anonymous, distributed electronic cash system”. 1 In it, Dai describes a protocol by which money, and a way to enforce contracts, can be provided to, and by, untraceable entities without the need for governments or government-sponsored entities. Dai, in turn, wrote his paper in response to Tim May’s 1992 Crypto Anarchist Manifesto. 2 Despite the title May, a former Intel engineer and founding member of the Cypherpunks Electronic Mailing List, isn’t promoting the use of cryptography to incite anarchy, but predicting a future where the widespread use of computers, the internet and cryptologic methods would “fundamentally alter the nature of corporations and of government interference in economic transactions.” Also in the manifesto, published 12 years before the launch of what would ultimately become Facebook, May predicted that online cryptography would result in “a liquid market for any and all material which can be put into words and pictures”. Bitcoin In 2008, along came Satoshi Nakamoto’s seminal white paper: “Bitcoin: A Peer-to- Peer Electronic Cash System”. 3 Nakamoto (a pseudonym for one or more unknown individuals) laid out the technical requirements for the blockchain based on the almost instantaneous transfer of digital “coins”. Distributed ledgers (whereby everyone holding or trading in the coin has an anonymised record of everyone else’s transactions) ensure that double-spending (the multiple use of the same coin) is virtually impossible as long as honest nodes (the computers holding the distributed ledgers) collectively control more computing