Cryptocurrency

Crypto, blockchain and NFTs: Andreas Veneris explains the fast-moving digital assets space

Christopher.Sorensen — Wed, 06 Apr 2022 14:23:33 +0000

Crypto, blockchain and NFTs: Andreas Veneris explains the fast-moving digital assets space

Christopher.Sorensen Wed, 04/06/2022 - 10:23

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(photo by Anthony Kwan/Getty Images)

Matthew Tierney

Topic

Our Community

Computer Science

Cryptocurrency

Faculty of Applied Science & Engineering

Faculty of Arts & Science

U.S. President Joe Biden recently signed an executive order that calls on several agencies to work towards a regulatory framework for certain types of digital assets, potentially laying the groundwork for a U.S. central bank digital currency (CBDC).

Andreas Veneris, a professor in the Edward S. Rogers Sr. department of electrical and computer engineering in the Faculty of Applied Science & Engineering and the department of computer science in the Faculty of Arts & Science, served as an adviser on a recent digital asset report from the U.S. think tank the Hoover Institution – some of the recommendations of which were included in Biden’s executive order.

Veneris was also part of a multidisciplinary team commissioned by the Bank of Canada to propose an architecture for a potential “digital loonie.”

Veneris recently spoke to writer Matthew Tierney to explain how digital assets and digital currencies operate, the function of blockchain technology and what Biden’s executive order could mean for Canada’s crypto future.

What, exactly, are cryptocurrencies and non-fungible tokens (NFTs)?

In the last decade or so, digital items you can trade, exchange or use for payments have become more mainstream. The most well-known of these items are cryptocurrencies like Bitcoin, Ethereum and Tether. But the item can be anything digital – as long as people think it has value.

One of the first examples of this was CryptoKitties – virtual cats. Back in 2017, it was a frenzy. Some people were buying them for $100,000. And to be painfully clear here, what they were buying were digital zeros and ones that represent cats.

You might think that’s bizarre, but the market sets the value. It’s just like baseball cards. You can find people who spend $10,000 to buy essentially a piece of paper. Why? There are many reasons someone might find value in a baseball card. Or maybe they think they can sell it later for $20,000.

Now, we have non-fungible tokens. NFTs are the equivalent of digitally signed items.

Traditionally, a signature authenticates an item, such as on a painting. Imagine I’m a big-time painter and instead of physically signing my latest picture I put an infrared chip behind the canvas that defines this painting as mine – that it came from me and not you or anyone else. That’s an NFT – a digital signature for a digital item.

All these digital assets can be exchanged. These are items that you can use your fiat money – that is, legal tender backed by a government – to buy.

What is blockchain technology?

Simply put, blockchain is a way of reaching consensus on something between parties who don’t trust each other.

Right now, when you put your card on a supermarket point-of-sale terminal to pay, there’s a bank behind it that guarantees you have enough money or credit with that bank. Theoretically, if I were a supermarket representative, I could meet up with a bank representative and receive a guarantee that the dollars are there.

Blockchain – technically “distributed ledger technology” – does the exact same transfer of value but without an intermediary. Computers around the world, computers that “don’t know each other,” run and manage a blockchain system that ensures the transaction is trustworthy. They reach a consensus on the state of system that says the supermarket transfer is valid.

The computers do this because the system provides them incentives to participate. They get paid to do the work.

The way that payments are done today is very centralized and very expensive, especially for emerging or underdeveloped countries that pay excessive fees. Payments usually run through large financial institutions. But a blockchain scenario removes the banks, the go-betweens and most of the respective fees. That’s why I dislike the word “blockchain” and would prefer to call it “decentralization.”

Do digital assets need to operate on blockchain?

The quick answer is no. I don’t need blockchain for a digital transaction.

Cryptographic principles are used to ensure that digital assets are transferred securely, but you can still use a centralized entity such as a bank to do it. Blockchain technology means you don’t have to rely on an entity or organization – a single point of entry – to initiate and complete a transaction.

That’s how cryptocurrencies such as Bitcoin and Ethereum use blockchain to guarantee the money is authentic without the need for a third party to verify it. Many, many computers expend an enormous amount of power to do these computations on your behalf so no one can say, “Hey, I didn’t get my money.”

Most people already pay digitally. How do these digital dollars differ from a central bank’s digital currency?

There’s some misconception or confusion around how fiat cash works.

What is the $20 bill that you have in your wallet? It’s a piece of paper with an actual value of less than half a cent. But the Bank of Canada, and in effect the Government of Canada, guarantees – through law and regulation, through monetary and fiscal policy and many other things – that if you go to a supermarket within the jurisdiction of Canada to buy milk, they have to accept it. If they don’t accept it, you can call the authorities and report that merchant.

Central banks around the world are examining the opportunity of moving this fiat cash into a digital form: a central bank-backed digital currency, or CBDC.

Now you might come back and say, “Hey, I have Visa. Why do I need a CBDC?”

A Visa card is credit that some bank gives you. Every big bank in Canada has billions in reserve accounts with the Bank of Canada and these billions allow it to introduce credit and other services to the public. But the liability is with the bank, not the central government. You’re only insured for so much – maybe $100,000. If you’re defrauded for over that amount, you’ll lose money.

A CBDC isn’t credit but actual legal tender in digital form.

Why did U.S. President Biden sign an executive order calling for regulation of digital assets?

Some call the digital market the “Wild, Wild West.” It has evolved so fast that government lawmakers don’t know what to do with it.

Cryptocurrency in particular has been an area that has puzzled regulators, lawmakers and the fintech sector for at least eight years. They first called cryptocurrencies “commodities,” then “securities.” Analysts keep changing their views on what they are, the protection around them and how they should be regulated.

There is a risk of disruption of traditional financial systems but also a risk to the public with the widespread use of digital currencies from the private sector. The company that issues them would act according to its best interests, which might not align with society’s best interests.

The executive order tells the lawmakers, regulators and technologists to start taking this seriously, to protect the public and protect the American government’s monetary and fiscal policies.

For one, the order is a recognition that decentralization is here to stay. The genie’s out of the bottle. It’s similar to the music industry in the late ’90s, with Napster and LimeWire and BitTorrent eventually leading the way to all the streaming services we have today. It disrupted the traditional record labels and how they do business in the past 20 years. You cannot stop things from changing.

The executive order also recognizes that digital assets are a great medium of exchange, and that CBDCs have the potential to be a cheaper, faster and more equitable system.

Imagine you immigrate to North America from Uganda and are sending money back home – maybe $500 every month. Today, the typical experience is that from the $500, only something like $350 arrives in Uganda a week down the road. Why a week? Because your money goes from one bank to another bank to another, and each one gets a piece of the pie. It’s not fair.

With a CBDC, it would take you five minutes and a flat fee, whether you send $500 or $5,000 or $50,000.

What does Biden’s executive order mean for Canada?

Not much – but in another sense, it could mean a lot.

So far, we’ve been very lucky to have a central bank, the Bank of Canada, that’s been miles ahead of where the U.S. Federal Reserve has been. Canada started doing projects and pilots on CBDCs in 2015 and currently has a contingency plan in place to issue a digital loonie, based on whether one of two conditions is met: if the use of physical bank notes declines to a certain threshold; or if some other digital currency penetrates Canada to the extent the Canadian dollar starts to lose relevancy.

The United States seems to be putting a high priority on its own digital dollar, though the U.S. hasn’t committed to it yet. You can look at this in two ways as a Canadian.

First, any move towards a CBDC is going to pave the way for the Bank of Canada. A digital currency initiative involves so many moving parts – political, regulatory, social – that clarity in this area from our very influential neighbour will push the likelihood that we follow suit.

Second, if a U.S. CBDC does start to gain momentum in Canada, that could be perceived as a threat to the Canadian dollar and possibly trigger the second of the Bank of Canada’s conditions to issue the digital loonie.

When could we start using a digital loonie in Canada?

Most likely the second half of this decade. I think it’s just a matter of time.

China already has a CBDC – its e-CNY launched in January of this year – and some smaller countries do, too, such as Bahamas. More than 80 per cent of the central banks around the world are running pilots or doing research.

Technologically, the problem is not that hard. What’s hard is working out all the privacy, security, cross-border regulation, anti-money laundering and terrorism provisions, among others. Those things are not technical but have huge implications on the technical design.

It’s not like we’re trying to land a person on Mars. It’s more like we’re trying to get that person to Niagara, but all the routes are under construction.

U of T's Creative Destruction Lab joins global group pursuing a new, more stable cryptocurrency

geoff.vendeville — Tue, 18 Jun 2019 14:48:25 +0000

U of T's Creative Destruction Lab joins global group pursuing a new, more stable cryptocurrency

geoff.vendeville Tue, 06/18/2019 - 10:48

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The Creative Destruction Lab is joining a global group of financial and technology firms, as well as non-profits, that's seeking to develop a new cryptocurrency pegged to government-issued currencies (photo by Geoffrey Vendeville)

Geoffrey Vendeville

Topic

Global Lens

Creative Destruction Lab

Research & Innovation

Rotman School of Management

Startups

The Creative Destruction Lab, a seed-stage entrepreneurship program affiliated with the ��Ƶ's Rotman School of Management, is joining a global group of organizations focused on developing a new cryptocurrency designed to increase access to financial services around the world.

The new cryptocurrency, called Libra, is expected to be available in 2020 and is designed to be more stable than alternatives like Bitcoin – the value of which has swung between about $4,600 and $12,000 this year alone. Libra, by contrast, will be pegged to a reserve of government-issued currencies like the euro or U.S. dollar.

More than two dozen big-name backers in finance, tech, the non-profit sector and more have already signed on as founding partners of a non-profit governing organization, based in Geneva, Switzerland, that is to govern the cryptocurrency’s infrastructure and ecosystem. They include MasterCard, Visa, Uber, Spotify and Facebook, which is leading the effort. CDL is currently the only academic – and Canadian – entity that's agreed to explore the initiative.

“To the extent that cryptocurrency volatility has been the thing that's been holding it back, this is a bold step in the other direction,” Joshua Gans, CDL’s chief economist and a professor at the Rotman School of Management, told U of T News.

Gans added that CDL was approached because the incubator pioneered a program to help entrepreneurs design and launch crypto-based startups using blockchain. There were 25 startups in CDL's blockchain stream last year. One company in the program, for example, aims to provide a more affordable way to send remittances.

In a blog post on Medium, Gans said CDL became involved in the Libra project not only to support its own ventures, but to help create a thriving startup ecosystem around the world.

“Our mission is purely social,” he wrote. “We are in the business of creating startup ecosystems that do not require a fixed physical location. In that regard, we see Libra as a public utility that can support just that – taking digital payments to the next level to allow an application layer that could transform economic transactions and more.”

The new cryptocurrency will be built on blockchain technology the likes of which made Bitcoin possible, storing records of transactions and other important information across “nodes.”

For Ajay Agrawal, CDL's founder and a professor at Rotman, one of the biggest opportunities in joining Libra is to work with its code.

“We are particularly enthusiastic about the potential of Libra’s programming language, Move,” he said in a statement. “Thoughtfully designed smart contracts operating on a widely accessible and stable global currency platform will unlock never-seen-before gains from trade, benefiting society at a meaningful scale.”

Where will it all lead? Until Libra hits the market, Gans said it’s unclear. “We take the ‘lab’ part of Creative Destruction Lab very seriously,” he wrote in Medium. “For that reason, we believe that everything we do is an experiment and Libra is no different.”

“So the short answer is that I don’t know where this will lead, but I am very excited that it is happening.”

U of T expert on why regulations are needed after cryptocurrency CEO takes passwords to his grave

noreen.rasbach — Mon, 04 Mar 2019 05:00:00 +0000

U of T expert on why regulations are needed after cryptocurrency CEO takes passwords to his grave

noreen.rasbach Mon, 03/04/2019 - 00:00

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Canadian CEO Gerald Cotten died in December, taking to his grave the passwords to unlock his cryptocurrency clients’ millions (photo by Dmitry Moraine/Unsplash)

Lisa Kramer

Topic

Our Community

Cryptocurrency

Faculty of Arts & Science

Rotman School of Management

The Conversation

U of T Mississauga

A high-stakes legal drama featuring cryptocurrencies has been unfolding in a Canadian court recently.

The antics that led to the litigation almost defy credulity, and they highlight the need for new regulations to better suit a financial marketplace that includes virtual currencies.

News broke in early February that Canadian cryptocurrency exchange QuadrigaCX was seeking creditor protection, leaving in financial limbo about 115,000 people who had entrusted the firm to maintain their deposits of cash, Bitcoins and other digital tokens worth an estimated $250 million.

The company’s need for bankruptcy protection arose when its founder and chief operator, Gerald Cotten, died suddenly in December while vacationing in India. Normally, if a financial institution’s executive officer meets an untimely demise, he or she doesn’t bring to the afterworld the only keys to the vault. And thus clients maintain continued access their deposited funds all the while.

In the case of Quadriga, unfortunately, Cotten was the only living soul who knew the password to an encrypted offline repository, known as cold storage, where the firm had enshrined the vast majority of clients’ cryptocurrency deposits. Without the password, no one can access those holdings.

Murky or absent regulations

While the Nova Scotia Supreme Court wades its way through some very novel and complex issues, the question that comes to my mind is: How has one bad decision about password custodianship caused more than 100,000 people to lose access to their deposits?

The answer lies in the murky and mostly lacking regulations that govern the cryptocurrency world. Nothing stops entrepreneurs like Cotten from running companies like Quadriga with no independent oversight.

Had he ever raised equity capital from investors in return for tokens or coins, that process would have been governed by Canadian securities regulations. But because Quadriga is an exchange – maintaining deposits and facilitating conversions between regular cash and cryptocurrencies, but not issuing cryptocurrencies in exchange for ownership shares – it operates in a regulatory vacuum.

Stakeholders show up at Nova Scotia Supreme Court as Canada’s largest cryptocurrency exchange seeks creditor protection in the wake of the sudden death of its founder and chief executive in December (photo by Andrew Vaughan/The Canadian Press)

In Canada, the Office of Superintendent of Financial Institutions (OFSI) oversees banks that take regular dollar deposits. One might argue that the OFSI umbrella ought to be adapted to include oversight of virtual exchanges like Quadriga, even though such institutions are not technically banks and their deposits are non-traditional in nature.

That oversight would impose accounting standards and reporting requirements that would help prevent the sorts of irresponsible missteps that put Quadriga depositors in such a precarious position.

A likely side benefit of regulatory supervision would be the eventual development of standardized safeguards against hackers and other cybercriminal activity that plagues the cryptocurrency world.

Lack of regulations attractive to some

A feature that draws many crypto enthusiasts to the virtual currency sector is the very fact that it lacks government oversight, and those individuals will bristle at any hint of new regulations.

Members of the general public might also be leery of new laws lest they grant an undeserved sheen of legitimacy to cryptocurrencies, which are not suitable investments for anyone except the most risk-loving of speculators.

But in Canada, we regulate many industries that are risky or distasteful to some, including gambling, alcohol, tobacco and marijuana. The underlying calculus is that providing standards for certain illicit activities is preferable to driving those activities to the black market, where the risks would be amplified.

For instance, a benefit of buying my beloved guilty pleasure of choice, craft gins, from a regulated marketplace is that I can imbibe confident in the knowledge that my cocktails are free from wood alcohol. Three cheers for avoiding blindness!

We cannot protect Canadians from all possible risks, especially when it comes to financial markets. And to be clear, I am not suggesting that we indemnify cryptocurrency speculators against losses that may arise from taking calculated risks, such as the beating that some fortune-seekers have taken since Bitcoin valuations plummeted from stratospheric heights.

Rather, I propose that depositors ought not to be penalized for the indiscretions of the custodians to whom they entrust their financial holdings.

Lisa Kramer is a professor of finance at the Univeristy of Toronto.

This article is republished from The Conversation under a Creative Commons license. Read the original article.

This story has been corrected. The earlier story said US$250 million instead of $250 million Canadian.

Know when to FODL'em: U of T expert says Bitcoin investors need to learn from their mistakes

Christopher.Sorensen — Tue, 06 Feb 2018 19:11:47 +0000

Know when to FODL'em: U of T expert says Bitcoin investors need to learn from their mistakes

Christopher.Sorensen Tue, 02/06/2018 - 14:11

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Bitcoin has lost 70 per cent of its value since hitting an all-time high in mid-December, with investors making some predictable missteps along the way, Lisa Kramer says (photo by Zach Copley via Flickr)

Topic

If you found this week's swoon in stocks difficult to stomach, spare an antacid tablet for those who recently loaded up on cryptocurrencies like Bitcoin.

Built on a distributed ledger technology called blockchain, Bitcoin has lost about 70 per cent of its value since hitting an all-time high of US$19,783.21 in mid-December, while other cryptocurrencies have suffered similar gut-wrenching declines.

Lisa Kramer, a professor of finance at the ��Ƶ Mississauga, says the rapid run-up in cryptocurrency prices since last fall had all the hallmarks of a bubble, and that eager investors are continuing to make some classic missteps in response to plummeting prices.

“Cryptocurrencies arguably have no fundamental value,” Kramer wrote in a recent Globe and Mail op-ed, “and so when the hype fades and alleged instances of fraud are uncovered, there is no basis for prices to stay at their stratospheric heights.

“Investors staring at the sea of red on their balance sheets might take some lessons from behavioural finance.”

Those lessons include avoiding the temptation to hang on to poorly performing individual securities in the hope one’s fortunes will turn around. But Kramer argues cryptocurrency investors “have bought wholeheartedly” into this bias, which is distinct from buying or holding a diversified portfolio of stocks and bonds. There's even an online shorthand for the strategy dubbed “HODL,” which implores investors to “hold” their tokens and resist selling in the face of plunging prices.

HODL is underpinned by a powerful element of human nature, according to Kramer.

“The biggest factor is likely loss aversion, the notion that losing a dollar hurts at least twice as much as gaining a dollar feels good."

Another contributing factor to HODL is the fallacy of sunk costs, or the idea you're better off “doubling down” on a losing wager in the hopes of making your money back. This is also known as throwing good money after bad, Kramer writes.

Many cryptocurrency investors may also be suffering from confirmation bias, seeking out information that confirms what they already believe to be true.

“In cryptocurrency circles,” Kramer says, “believers congregate in chat rooms and other echo chambers where naysayers are ridiculed and promotional news stories are celebrated to the exclusion of critical analysis.”

The solution? Kramer says realize that to err is human and learn from your mistakes – and then take deliberate steps not to repeat them.

Cryptocurrency

Crypto, blockchain and NFTs: Andreas Veneris explains the fast-moving digital assets space

U of T's Creative Destruction Lab joins global group pursuing a new, more stable cryptocurrency

U of T expert on why regulations are needed after cryptocurrency CEO takes passwords to his grave

Murky or absent regulations

Lack of regulations attractive to some

Know when to FODL'em: U of T expert says Bitcoin investors need to learn from their mistakes

Read Lisa Kramer's op-ed in the Globe and Mail