January 18, 2021

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Aa lot of crypto industry rags cheered the news that banks were given the regulatory go ahead to use stable coins and the blockchain as a transfer settlement layer. My suggestion is to be careful of what you wish for. The Office of the Comptroller of Currency (a regulatory arm of the US Treasury) released the following note: Federally Chartered Banks and Thrifts May Participate in Independent Node Verification Networks and Use Stablecoins for Payment Activities, as excerpted:

“While governments in other countries have built real-time payments systems, the United States has relied on our innovation sector to deliver real-time payments technologies. Some of those technologies are built and managed by bank consortia and some are based on independent node verification networks such as blockchains,” said Acting Comptroller of the Currency Brian P. Brooks. “The President’s Working Group on Financial Markets recently articulated a strong framework for ushering in an era of stablecoin-based financial infrastructure, identifying important risks while allowing those risks to be managed in a technology-agnostic way. Our letter removes any legal uncertainty about the authority of banks to connect to blockchains as validator nodes and thereby transact stablecoin payments on behalf of customers who are increasingly demanding the speed, efficiency, interoperability, and low cost associated with these products.”

The agency letter concludes a national bank or federal savings association may validate, store, and record payments transactions by serving as a node on an INVN. Likewise, a bank may use INVNs and related stablecoins to carry out other permissible payment activities. In deploying these technologies, a bank must comply with applicable law and safe, sound, and fair banking practices.

Engaging in INVN within the federal banking system may enhance the efficiency, effectiveness, and stability of payments activities and achieve the benefits of real-time payments already enjoyed in other countries. For example, such activities may be more resilient than other payment networks because of the decentralized nature of INVNs, which allows a comparatively large number of nodes to verify transactions in a trusted manner. An INVN also limits tampering or adding inaccurate information to the database because information is only added to the network after consensus is reached among the nodes validating the information.

that blockchains have the same status as other global financial networks, such as SWIFT, ACH, and FedWire. Sounds like good news, right? Well, yes, and no... Banks, by their very business models, are gatekeepers of capital. No one will every really have as much capital on hand to deploy as we bank. Combine that access to capital with implicit and explicit preferential rights given by regulators (we are not all invited to play the game on the same terms, let's face it) and the banks willingness to play hardball as opposed the the blochchain's genesis entrepreneurs coming from mainly an opensource mentality and you may find a recipe for disaster for the entrepreneurial blockhain/token startup. There's near guaranteed doom for the ICO funded startup, as the US regulatory environment is downright vociferous if not lethal!

That leaves self-funded and VC funded ventures - again, limited in scope and depth of creativity. Not everybody has the hook-up for capital! Then there's the open-sourced mindset of the typical blockchain developer or architect. The look at companies that attempt to place their stake in the ground and claim territory for themselves, and say, " But... Can't we all just get along???" Well, on Wall Street, the answer is... No! Or, at least it has been since I've been alive. You have to be part of the old boys club, and that club ain't very big, and even more to the point, it ain't offered to just any or everyone.

So, with that preamble, we have a bunch of the crypto pioneers who came up with many great ideas, yet failed to protect them. Then we came up with banks who took these ideas, and did very little to build upon them, yet stand quite likely to capitalize on them. Let's take Wells Fargo, who apparently has patented the cryptocurrency exchange, and done so right under the nose of the industry. If this is the case, all of you Stellar, Tether, USDC and other USD stable coin aficionados might need to site down and hold on tight. The rug may be snatched from under you. 


Wells Fargo patent number: US10565645B1 United States - 

Systems and methods for operating a math-based currency exchange

BACKGROUND

Math-based currency (“MBC”), commonly referred to as cryptocurrency, is rising in popularity, use, and public acceptance. MBC differs from fiat currency (i.e., currency that is declared by a government to be a legal tender) in that principles of cryptography are used to create, secure, and transfer MBC directly from a first user to a second user. A user of MBC can transfer funds to another party by using a private key associated with a certain value of MBC. The private key may be used to generate a signature for the transaction, and the signature can be verified by nodes in the MBC network, thereby completing the transaction. Additional information, including the identities of the parties involved in the exchange, is not required to effectuate the transaction. Accordingly, MBC allows for anonymous transfers of currency between users without the reliance on financial institutions (e.g., a bank) to facilitate the transfer. Examples of MBCs include Bitcoin, Ripple, Litecoin, Peercoin, and Dogecoin, among others.

Generally, users of MBC store information relating to private key and public key pairs that are associated with specific values of MBC in MBC wallet applications. The wallet applications are used to facilitate the above described transfers. Services that provide a secure place for users to store private keys associated with MBC. Beyond that, however the wallet applications do not take actual possession of or an ownership interest in the MBC.

I warned of this 5 years ago, this week! For those who didn't pay attention, the result is what you see and read above....

See also...

A couple of days ago, I tweeted...

This is what that chart looks like now...