Financial Cryptography

Hitler v. modern western state of the art transit payment systems: Hitler 1, rich white boys 0.

As predicted in the first day we saw it (and published on this blog much later), mass transit payment systems are failing in Kenya:

Payment cards rolling back gains in Kenya's public transport sector

by Bedah Mengo NAIROBI (Xinhua) -- "Cash payment only", reads a sticker in a matatu plying the city center-Lavington route in Nairobi, Kenya. The vehicle belonging to a popular company was among the first to implement the cashless fare payment system that the Kenya government is rooting for.

And as it left the city center to the suburb on Monday, some passengers were ready to pay their fares using payment cards. However, the conductor announced that he would not accept cashless payments.

"Please pay in cash," he said. "We have stopped using the cashless system."

When one of the passengers complained, the conductor retorted as he pointed at the sticker pasted on the wall of the minibus. "This is not my vehicle, I only follow orders."

All passengers paid their fares in cash as those who had payment cards complained of having wasted money on the gadgets. The experience in the vehicle displays the fate of the cashless fare payment in the East African nation. The system is fast-fading from the country's transport barely a month after the government made frantic efforts to entrench it. ...

It's probably too late for them now, but I think there are ways to put such a system out through Kenya's mass transit. You just don't do it that way because the market will not accept it. Rejection was totally obvious, and not only because asymmetric payment mechanisms don't succeed if both sides have a choice:

The experience in the vehicle displays the fate of the cashless fare payment in the East African nation. The system is fast-fading from the country's transport barely a month after the government made frantic efforts to entrench it.

The Kenya government imposed a December 1, 2014 deadline as the time when all the vehicles in the nation should be using payment cards. A good number of matatu operators installed the system as banks and mobile phone companies launched cards to cash in on the fortune.

Commuters, on the other hand, bought the cards to avoid being inconvenienced. However, the little gains that were made in that period are eroding as matatu operators who had embraced the system go back to the cash.

"We were stopped from using the cashless system, because the management found it cumbersome. They said they were having cash-flow problems due to the bureaucracies involved in getting payments from the bank. None of our fleet now uses the system," explained the conductor.

A spot on various routes in the city indicated that there are virtually no vehicles using the cashless system.

"When it failed to take off on December 1 last year, many vehicles that had installed the system abandoned it. They have the gadgets, but they are not using them," said Manuel Mogaka, a matatu operator on the Umoja route.

As I pointed out the root issue they missed here was the incentives of, well, just about everyone on the bus!

If someone is serious about this, I can help, but I take the real cash, not fantasy plastic. I spent some time working the real issues in Kenya, and they have more latent potential waiting to be tapped than just about any country on the planet. Our designs were good, but that's because they were based on helping people with problems they wanted solved and were willing to work to solve.

The ditching of the payment cards means that the Kenya government has a herculean task in implementing the system.

"It is not only us who are uncomfortable with the system, even passengers. Mid December last year, some passengers disembarked from my vehicle when I insisted I was only taking cashless fare. I had to accept cash because passengers were not boarding," said Mogaka.

Not handwavy bureaucratic agendas like "stamp out corruption." Yes, you! Read this on corruption and not this:

Kenya's Cabinet Secretary for Transport and Infrastructure Joseph Kamau said despite the challenges, the system will be implemented fully. He noted that the government will only renew licences of the vehicles that have installed the system.

But matatu operators have faulted the directive, noting that it would be pointless to have the system when commuters do not have payment cards.

"Those cards can only work with people who have regular income and are able to budget a certain amount of money for fare every month. But if your income is irregular and low, it cannot work," said George Ogundi, casual laborer who stays in Kayole on the east of Nairobi.

Analysts note that the rush in implementing the system has made Kenya's public transport sector a "graveyard" where the cashless payment will be buried.

"The government should have first started with revamping the sector by coming up with a well-organized metropolitan buses like those found in developed world. People would have seen their benefits and embraced cashless fare payment," said Bernard Mwaso of Edell IT Solutions in Nairobi.

(Obviously, if the matatu owners don't install, government resistance will last about a day after the deadline.)

Scott on blockchains -- could these fussy smartcontracts change anything?

Brett Scott disassembles the Bitcoin 2.0 visionary concept surrounding contracts:

The political vision 2.0

By removing a central point of control, decentralised systems based on code - whether they exist to move Bitcoin tokens around, store files, or build contracts - resemble self-contained robots. Mark Zuckerberg of Facebook or Jamie Dimon of JP Morgan Chase are human faces behind the digital interface of the services they run. They can overtly manipulate, or bow in to pressure to censor. A decentralised currency or a decentralised version of Twitter seems immune from such manipulation.

It is this that gives rise to a narrative of empowerment and, indeed, at first sight this offers an exhilarating vision of self-contained outposts of freedom within a world otherwise dominated by large corruptible institutions. At many cryptocurrency meet-ups, there is an excitable mix of techno-babble infused with social claims. The blockchain can record contracts between free individuals, and if enforcement mechanisms can be coded in to create self-enforcing 'smart contracts', we have a system for building encoded law that bypasses states.

Which is super, on the face of it, until we get to the nub of what contracts actually do for you:

This, of course, appeals to those who believe that powerful institutions operate primarily by breaching property rights and contracts. Who really believes that though? For much of modern history, the key issue with powerful institutions has not been their willingness to break contracts. It has been their willingness to use seemingly unbreakable contracts to exert power. Contracts, in essence, resemble algorithms, coded expressions of what outcomes should happen under different circumstances. On average, they are written by technocrats and, on average, they reflect the interests of elite classes.

That is why liberation movements always seek to break contracts set in place by old regimes, whether it be peasant movements refusing to honour debt contracts to landlords, or the DRC challenging legacy mining concessions held by multinational companies, or SMEs contesting the terms of swap contracts written by Barclays lawyers. Political liberation is as much about contesting contracts as it is about enforcing them.

And, boom! Which pretty much destroys the case for contracts on the blockchain as they are currently envisaged, because once enslaved to them there is no breaking them. Now, people aren't so stupid, and once the first person falls badly, the word will spread - DON'T CONTRACT ON THE BLOCKCHAIN!

Building the techno-political vision 3.0

.... The concept of the decentralised blockchain is powerful. The cold, distrustful edge of cypherpunk, though, is only empowering when it is firmly in the service of creative warm-blooded human communities situated in the physical world of dirt and grime.

So far, relatively little attention has been paid to the question of returning the blockchain back to the service of warm-blooded humanity. There is a sense of multisig, but its promise is seen in its elegant cryptography not in the underlying need. To paraphrase someone, Bitcoinatics have never seen a societal problem that they couldn't solve with liberal dollops of cryptography, or by redefining the problem to be a non-problem.

Let's look at that underlying. The proof of a contract, pudding-wise, is not the completion of the machinery, the end of the game, but the willingness of the participants to enter again, to hit Play Again. This is predicated on two things, being the economic efficacy of the last round(s) and the fair treatment of any surprises.

Surprisal, the property of a contract to cause issues that are unexpected, have to be dealt with in a fair way, and by this the ultimate test is literally whether society moves on with new trades, new contracts, new business based on this contract, on this set of rules.

I speak of course of dispute resolution. So the challenge then for the blockchain is how to introduce the resolution of surprises into the machinery.

We do not want a future society free from people we have to trust, or one in which the most we can hope for is privacy. Rather, we want a world in which technology is used to dilute the power of those systems that cause us to doubt trust relationships. Screw escaping to Mars.

It's not really a technological imperative but a human one: people don't and won't trust a technology that screws them over. And the Ethereum / Bitcoin / etc smart contracts world are busily building their system in perfect form to do exactly that: let a savvy programmer screw over a stupid customer who perforce can't read computer code.

The good news is that this thing called smartcontracts will not get off the ground when or if it screws over the illiterate. The bad news is that a lot of energy will be wasted up to that point, and then a lot more as the hyperintelligent supernaivetes moan on why the mainstream users don't want a part of it.

We could probably short-circuit that - and ask, how we get some form of surprisal management into these things, before they get broken in the market of public opinion?

Gendal on blockchains -- what's the fuss? Could the blockchain change accounting?

Richard Gendal Brown of IBM comments on the blockchain, asking what's the fuss:

Cost? Trust? Something else? What's the killer-app for Block Chain Technology?

Could decentralized ledgers change the face of accounting?

When I speak to people about decentralised ledgers, some of them are interested in the "distributed trust" aspects of the technology. But, more often, they bring up the question of cost.

This confused me at first. Think back to where this all started: with Bitcoin. Bitcoin is deliberately less efficient than a centralized ledger! Its design adds really difficult engineering constraints to what we already had. How could this technology possibly be cheaper than what we already have?

He then goes on to use some actual accounting to show that, amongst other things, cost isn't really what the discussion is about. By logic, he gets to a really interesting space, one that our readers will know well:

Sure - everybody still has a copy of the data locally... but the consensus system ensures that we know the local copy is the same as the copy everywhere else because it is the shared consensus system that is maintaining the ledger. And so we know we're producing our financial statements using the same facts as all the other participants in the industry.

Does this mean we no longer need audit? No longer need reconciliations? Obviously not, but perhaps this approach is what is driving some of the interest in this space?

Right. To which I added, for the record:

To me, the magic in this space is what we sometimes flippantly call triple entry, which innovation is highlighted by the blockchain's success in mounting an independent currency over a shared ledger.

We all know how insubstantial internal ledger entries are, and how we can really only lean on them to the extent that we trust our internal processes (e.g. slightly germane is the events of 2007-08 leading to a popular view that accounting and audit have failed us).

On the other hand, we also see how solid the payment systems are. Whether bank- or govt- or private-run, payments generally work. When these multi-party activities do not work, all hell breaks loose, and people run, sometimes quite literally, to other systems.

When accounting ledgers break, we shrug. Triple entry takes us from the unreliable fantasy of the accounting entry to the hard concrete reality of the payment: the distributed ledger is as solid as a payment.

This doesn't replace double entry, nor does it replace classical payment systems. Rather it augments it by providing a way for parties to share certain transactions as if they were as solid as payments.

E.g., when RichardCo decides to place its capital at Barclays, it will no longer rely on its accounting systems alone to describe this situation, and neither will Barclays. Both of these parties will share a "receipt" that is cryptographically signed by some party that has mediated it (could be Barclays, could be the Bank of England, or it could be VirginMoney).

That's three parties, each holding a copy of the same receipt, hence the label triple entry. In the Bitcoin world, that middle intermediator is the blockchain, but single servers or replicated servers or small partner groups are equally applicable and in many cases better.

The receipt itself is strong because it is cryptographically authorised by the payer, and cryptographically signed off by the mediator (as a minimum). It represents such high class evidence that it is practically irrefutable in terms of the facts on record, and it is trivially automatable in audit terms.

Holding this entry is far more flexible than RichardCo and Barclays relying on their double entry systems because firstly you can build the double entry systems out of the collection of receipts any time you need them, and secondly, it is so strong that it can be used as evidence to create derivative claims. E.g., it's a set-up for securitization or loaning or other more advanced uses. And, it's a lot easier to audit because it is such solid evidence.

Back to bitcoin and its blockchain. This is the first successful experiment in a large scale triple entry issuance. In part, seeing what happens on the blockchainn generates excitement because we perceive an ability for any company to turn its stalled internal assets into contracts that are then dynamically mediated through cryptographic receipts.

Now, that contracting arrangement isn't there yet (see for example the conceptual tussle between smart contracts and Ricardian Contracts as mechanisms of issuance) but it will get there. Once I can issue all my accounted assets into a triple entry arrangement that others will instantly respect, finance will democratise so fiercely that if you're not seeing where it's going, the shock will probably take you down.