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WHAT ARE BLOCKCHAINS GOOD FOR?

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The motivations between public and private blockchains are different.
Let’s consider them separately.
Public Blockchains
To date, public blockchains have been used with some success in the
following areas:
1. Speculation
2. Darknet markets
3. Cross border payments
4. Initial Coin Offerings
Speculation
The main use for cryptocurrencies is undoubtedly speculation. Their
prices are volatile and people make and lose a lot of money trading these
coins.
The fact that there are no established methods to value a cryptocurrency
means that prices are likely to remain volatile for some time. This differs
from traditional financial markets where pricing models help to constrain
prices to within broadly understood limits. Equities have well-established
pricing methodologies. Discounted forecast cashflows, book value, and
enterprise value calculations can help to establish a consensus on the
value of a company. Ratios such as earnings per share, price to earnings,
and return on assets can help to compare share prices between similar
companies. Fiat currencies trade on the basis of comparative economic
data. Other traditional financial assets have other standardised pricing
methodologies. Up to now, however, I have not seen credible methods for
pricing cryptocurrencies or ICO tokens. This is changing—as the industry
pricing cryptocurrencies or ICO tokens. This is changing—as the industry
matures, pricing models are being explored, but it will take some time for
these models to become widely accepted.
Darknet Markets
Cryptocurrencies have been used with some success to buy items from
underground marketplaces.
Unfortunately for some, the traceability of certain cryptocurrencies
makes them flawed candidates for illegal activity. In 2015, two US Federal
Agents from the Drug Enforcement Agency (DEA) and the US Secret
Service, sought to enrich themselves while conducting an undercover
investigation of the Silk Road drug marketplace. Perhaps they believed
that Bitcoin was anonymous and untraceable. They allegedly stole,
bribed, blackmailed, and laundered the proceeds while under cover and
were eventually charged with money laundering and wire fraud. Here is
an excerpt from a press release issued by the US Department of Justice203:
Carl M. Force, 46, of Baltimore, was a Special Agent with the DEA, and Shaun W. Bridges, 32,
of Laurel, Maryland, was a Special Agent with the U.S. Secret Service (USSS). Both were
assigned to the Baltimore Silk Road Task Force, which investigated illegal activity in the Silk
Road marketplace. Force served as an undercover agent and was tasked with establishing
communications with a target of the investigation, Ross Ulbricht, a.k.a. ‘Dread Pirate
Roberts’. Force is charged with wire fraud, theft of government property, money laundering
and conflict of interest. Bridges is charged with wire fraud and money laundering.
According to the complaint, Force was a DEA agent assigned to investigate the Silk Road
marketplace. During the investigation, Force engaged in certain authorized undercover
operations by, among other things, communicating online with ‘Dread Pirate Roberts’
(Ulbricht), the target of his investigation. The complaint alleges, however, that Force then,
without authority, developed additional online personas and engaged in a broad range of
illegal activities calculated to bring him personal financial gain. In doing so, the complaint
alleges, Force used fake online personas, and engaged in complex Bitcoin transactions to steal
from the government and the targets of the investigation. Specifically, Force allegedly
solicited and received digital currency as part of the investigation, but failed to report his
receipt of the funds, and instead transferred the currency to his personal account. In one such
transaction, Force allegedly sold information about the government’s investigation to the
target of the investigation. The complaint also alleges that Force invested in and worked for a
target of the investigation. The complaint also alleges that Force invested in and worked for a
digital currency exchange company while still working for the DEA, and that he directed the
company to freeze a customer’s account with no legal basis to do so, then transferred the
customer’s funds to his personal account. Further, Force allegedly sent an unauthorized
Justice Department subpoena to an online payment service directing that it unfreeze his
personal account.
Bridges allegedly diverted to his personal account over $800,000 in digital currency that he
gained control of during the Silk Road investigation. The complaint alleges that Bridges
placed the assets into an account at Mt. Gox, the now-defunct digital currency exchange in
Japan. He then allegedly wired funds into one of his personal investment accounts in the
United States mere days before he sought a $2.1 million seizure warrant for Mt. Gox’s
accounts.
On 1 July 2015, Force pled guilty to money laundering with predicates of
wire fraud and theft of government property, obstruction of justice, and
extortion. Later, on 31 August 2015, Bridges admitted that he stole over
$800,000 of Bitcoin while on the case, and pled guilty to money
laundering and obstruction of justice204
What can we learn from this? Don’t use bitcoins to perform or fund illegal
activities.
Cross Border Payments
While there may have been some limited success in using
cryptocurrencies as a vehicle to move fiat across borders, adoption has
been limited. I personally performed an experiment in 2014 when I sent
$200 Singapore dollars to my friend in Indonesia205 using three methods:
Western Union, bank transfer, and Bitcoin. The Bitcoin route was by far
the worst user experience, and the most expensive. However, Bitcoin has
become more usable since then, and I expect it to continue to improve
further.
The core problem is that in a conventional fiat-to-fiat remittance,
whether through a financial services agency such as Western Union or
through the banking system, there is only one exchange of currencies.
through the banking system, there is only one exchange of currencies.
Using cryptocurrencies, there are now two exchanges: fiat to crypto, then
crypto to fiat. More exchanges mean more steps, complexity, and cost.
Cross border payments were initially trumpeted as a ‘killer app’ for
Bitcoin and cryptocurrencies, especially in 2014–15, but in 2018 there is
less media attention for this particular use of cryptocurrency. Indeed, in
June 2018, money transfer agency Western Union announced that they
had been testing XRP for six months and were yet to see any savings206.
Perhaps the industry is in the ‘trough of disillusionment’ in Gartner’s
technology hype cycle207.
Initial Coin Offerings (ICOs)
ICOs are a new method of fundraising that became popular in 2016.
Companies offer tokens to people in return for cryptocurrency. Tokens
usually represent a claim on future goods or services provided by that
company. We discuss ICOs in more detail in the next section.
Other
Some merchants use cryptocurrency payment processors to accept
cryptocurrencies from customers as payment. In 2014 and 2015, it was a
cheap way for merchants to get press releases and seem innovative.
However, since then many have quietly removed this payment
mechanism due to lack of customer interest.
I have seen public blockchains being used for other ‘fringe’ purposes, for
example the storing of hashes on a blockchain to prove that some data
existed at a certain point in time. I haven’t seen evidence that this use is
particularly widespread.
Critics of cryptocurrencies often claim that they are widely used for
money laundering. While there is undoubtedly some laundering of illicit
funds using cryptocurrencies, as there is using fiat currencies, it is hard to
tell at this stage what proportion of cryptocurrency transactions are used
for this purpose, and what proportion of global money laundering is
performed through cryptocurrencies. For serious organised crime, I
suspect that the cryptocurrency markets are just too small and illiquid to
satisfy their demands. Big business enterprises, high value banknotes,
even banks still are more likely to be the preferred vehicles for most
money laundering.

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