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|15 February, 2018

Seeking crypto transparency

Talking to a local advocate for digital currencies

The concepts and realities of digital currencies are, at best, confusing. To understand more about the Lebanese cryptocurrency community, and the opportunities that the cryptocurrency economy opens for Lebanese business and banks—including the idea of a sovereign digital currency issued by Banque du Liban, Lebanon’s central bank—Executive sat down with Stéphane Abichaker. A locally well known advocate for adopting of digital currency, Abichaker is a lecturer at Saint Joseph University in Beirut, a blogger on bitcoin, and partner at CDC Blockchain, a startup launched in November 2017 that works on electronic currency solutions.

E   When did you first get interested in Bitcoin?

That was in 2013 and it was by accident. I even downloaded the Litecoin software at that time and wanted to start mining on my laptop, but then I got busy with other things and totally forgot about it. I rediscovered cryptocurrencies in February 2015 through an article in an online magazine, which said that blockchain might revolutionize finance. Reading tons of material about it for six months, I really got the virus. From that point onward, I had the intellectual debate with myself, started blogging and exchanging ideas about it, and giving conferences and talks on the subject.

E   In your view, is Bitcoin easy to understand?

No I think on the day when it becomes easy to be used and understood by many, it will probably be worth 10 times what it’s worth today. It’s very difficult to understand: It goes against what we learn at university, and it also goes against the mainstream finance system: behavior, transactions, etc. In my point of view, it poses a new paradigm, and therefore, is complex and difficult to grasp, [for all including] myself.

E   There nevertheless is a community of people in Lebanon who have this virus that you referred to, and are interested in bitcoin and blockchain [the public ledger of cryptocurrency transactions]. How large is this community?

I would say that active people, who are very curious about this subject and who are interacting with each other, number a few hundred, measured by the [size of online] groups I participate in, which are the largest groups on this subject in the country. Then you have a core of about 50 people who are either IT professionals, bankers who do not disclose that they are bankers, or startup people and entrepreneurs, who are really deeply involved in this [cryptocurrency] space in terms of mining, trading, and discussing.

E   Is it legal in Lebanon to mine, to trade, and to discuss Bitcoin, blockchain, and so on?

That is an excellent question which we ask ourselves every week on the groups. What we know today is that there is a sort of red flag that was raised by Banque du Liban in an announcement from December 2013, reminding banks of earlier circulars, which said that digital money is prohibited in Lebanon and cautions explicitly that Bitcoin and other [cryptocurrencies] are unregulated and dangerous. The governor [of Lebanon’s central bank, Riad Salameh,] recently stated at events that nobody controls Bitcoin and said it is not an asset and not a currency, but probably a kind of commodity. As a commodity, the governor said in public, he would not prohibit buying and selling Bitcoins, but that BDL is definitely against using it as a currency, as a means of exchange. That is the official stance today. Now, in practice, we as a community are seeing, very simply, that all bank accounts in Lebanon are prohibited from interacting with international market platforms in the crypto environment. There is a form of enforcement of prohibition.   

E   There’s a practical barrier that has been created and is enforced, but it is not a formal barrier?

Yes. That is what we are perceiving.

Are these discussions about cryptocurrencies very vibrant and open, running along ideological frontlines, or characterized by behavioral factors, such as clinging to old concepts of finance and resistance to change?

The debate today, first of all, is very timid, because of the stance by BDL that we just talked about. The BDL is at the forefront of the digital revolution in Lebanon, thanks to Circular 331, [a policy that incentivized investment in technology startups,] and due to the fact that this very subject [of cryptocurrencies] concerns BDL. Thus, the debate has only recently been revived, thanks to the [governor] saying that BDL want to launch their own digital currency.

[On the community level] one also finds many people in Lebanon who are attracted to get-rich-quick schemes. There is ICO [initial coin offering] excitement, and belief that “this Bitcoin thing will make me a millionaire.” Much interest and appetite exists from that angle, not really from the angle of debate on the thought level. Having said that, one very interesting and positive aspect that I personally experienced in the community is that in going on online debate groups you debate with many [types of] people. You might find yourself exchanging ideas with a Lebanese teenager who is an IT genius or with a guy in the Bekaa valley who has inherited a place where he can install mining equipment and would exchange ideas about how to mine more efficiently. The range goes all the way from the BDL undercover individual in the discussion who wants to have an idea of what is going on in the Bitcoin community, to the university professor who will not emphasize his title in the debate and will be challenged like anybody else. 

Much of the debate today deals with one or all of three cryptocurrency areas: Bitcoin, ICOs and altcoins—non-Bitcoin cryptocurrencies—and blockchain. Do you have an order of preference among the three?

I would definitely classify them in the following order: Bitcoin, then blockchain, and then altcoins and ICOs. Bitcoin was the first implementation [of a crptocurrency] and has first-mover advantage. Also, because Bitcoin is open source, any innovation in altcoins, or other ICOs that is worth considering, would be absorbed into Bitcoin[’s] code. Blockchain comes with the idea of being a network where you dematerialize assets, and where you’ll have ideal traceability, no single point of failure, etc. Blockchain is a word that has been used more and more to describe the technology as a whole, and there are lots of promises on that front. Nothing has materialized today, but it would be ridiculous to close the door on [the idea that] any innovation will come from this space. The third level are altcoins and ICOs, because I very frankly think that altcoins are variations on a theme, whereby a group of people would try to profit from the overall excitement [around cryptocurrencies], more often than not with a motivation to make money and accumulate riches.

E   Do some altcoins or ICOs break laws, according to your understanding?

You can assume that they are breaking laws, because the Securities and Exchange Commission in the United States has said that ICOs have to do with offers of securities, and any offer of securities is regulated by the SEC, [which] has said that ICOs should be regulated and come under their supervision.

E   In Lebanon, would ICOs be considered security offerings and regulated as such? Lebanon’s Capital Markets Authority, CMA, is eager in regulating every fund and every offering of securities, so should this, in your opinion, have to apply to ICOs?

It may also apply to ICOs [in Lebanon], but I have a question in this regard, which concerns the pace of progress and the quickness in which you can issue an ICO with very few technological prerequisites to do so. I wonder if the CMA and BDL are equipped to tame or control this market.

E   You sent me a paper that you wrote last July on the idea of having a regional collaboration of central banks in issuing a joint cryptocurrency. In this paper you spoke of quasi- or pseudo-decentralized cryptocurrency as a possible way forward. What does this mean?

What I tried to reconcile is the principle of central banking—centrally issued and managed money—with decentralized issuance of money or currency. Under game-theoretical perspectives, I’m sure that central banks would lose part, or all of their seigniorage rights, and in my point of view, this is where we’re going. They’re losing [seigniorage, the authority to issue legal tender and profit from its issuance] because they’re abusing it, and people have seen that they have a power which they’ve been abusing since 2007 or  2008. I would say that on the left hand, central banks are condemned to lose part of their power, and on the right hand, you cannot go for a totally decentralized system because then you would have no regulation and control.

Bitcoin is not unregulated; it is regulated by code, but it is controlled by consensus. The reason why we today have six or seven versions of Bitcoin is that people do not always agree with each other. How do we control that? How do you reconcile? What you can do is a hybrid blockchain which is permissioned, meaning you need to be vetted to participate in the network. For example, it would be distributed among central banks in the region on the aegis of what was once called the Gulf Cooperation Council [GCC] unified currency, or even the Arab world currency. You can revive this idea and say, let’s do a regional cryptocurrency that is mined by the region’s central banks. Each one would lose part of its seigniorage rights, but they would make up for this by clubbing together and issuing a cryptocurrency that would be perceived by people as less exposed to abuse [or the potential for abuse]. 

E   But if we go into the history of joint GCC currency projects—since such a common-currency concept was first modeled on the euro idea—we see that the project of a GCC Monetary Union (GMU) did not progress very far beyond the question where the central bank for policymaking in their GMU would be located. Given the overweight of Saudi Arabia in the regional economic context, whether as share of regional GDP or market capitalization of all Arab securities exchanges, wouldn’t other countries, such as Jordan, which one time talked about joining the GCC, end up being very little brothers to a very big brother? How do you envision to solve this problem in an Arab context?

If the principle of a proof-of-work cryptocurrency is adopted, you would put as many means as you can to participate in the network. In that sense, your relative weight in the unified regional cryptocurrency would be proportional to your material means to invest in hardware. The two interesting aspects of such a scenario are that you first have central banks as players in this blockchain, but you also may have national banks as participants in this overall blockchain. It thus would resemble something decentralized, but at the same time, the weight of each player, in terms of transforming themselves into miners and nodes, would be proportional to their capacity.

E   Would that require a political decision to set a regulatory limit on the maximum share in the mining capacity?

I think that pertains to what could be called the monetary policy of this cryptocurrency. This monetary policy definitely has to be defined and agreed on. We may be very doubtful of such a system because it would require heavy political discussions and agreements and whatever. But [on the other hand] the challenges for central banks are growing in the economic contexts of the global digital economy, and of the real economies of nations, regions, and world. Central banks are going to find themselves confronted with mounting pressure to unify and agree and go this kind of route, a recent example of which is the declaration by an official from [the German central bank] Deutsche Bundesbank, who said that we need a global agreement on regulating Bitcoin and other cryptocurrencies. If you draw a parallel to this statement, it would be easier to say we do something regional rather than global, not in terms of regulation, but in creating a cryptocurrency. Otherwise, especially in developing countries, the challenge posed by decentralized cryptocurrencies would only be mounting and mounting.

E   If I understand you correctly, you say that a global umbrella of regulation is needed, and perhaps even a first-ever global monetary policy system since Bretton Woods, and under this umbrella you would have regional central banks that are well advised to team up in issuing joint regional cryptocurrencies?

Let me be very clear: What you refer to is what I think is emerging, not what I defend or am a fan of. I’m saying this is the only way for mainstream finance to tackle the cryptocurrency revolution. I’m deeply convinced about Bitcoin dominance. Bitcoin will have first place among many in my opinion, but for the traditional central banking system, this is the only way forward.

E   Would not Lebanon—by virtue of its benign foreign-reserves position, its deposit base in the banking system, and the relatively high sophistication of its central bank mindset and banking industry skill base—be quite well positioned for playing a role in the development of a regional joint cryptocurrency?

I think it’s a historic chance because there is this window of opportunity that should be seized. Whether in terms of available human capital, or by the fact that Lebanon’s central bank has proven itself over the last decades, there is a historic opportunity to seize, and to transmit the message to the region that this is not a challenge that will disappear tomorrow. This cannot be tamed, and we have to react [as regional central banks] by taking inspiration from blockchain. It does not help to reject or deny it.

E   What best advantage could you envision for BDL if they chose to take this road and say we want to super-innovate in the cryptocurrency realm?

Digital currency is not the long-term solution, and all central banks are today equal on the starting line, because nobody has found the solution for this challenge. The opportunity for Lebanon is first of all that this country is accustomed to dealing with many currencies. According to the head of IT at BDL [Ali Nakhle], our systems at BDL are by default constructed to cope with a multi-currency environment, not like, for example, the European Central Bank that deals only with the euro. The very systems of BDL are multi-currency. The idea of issuing a cryptocurrency thus would be easily absorbed in the system. Second, the intellectual environment: You have youngsters that are encouraged by Circular 331 to go the way of innovation. So within BDL, the window is open to innovation, new ideas, and technology. These are two advantages, and third, from a political standpoint, it would be easier to have a regional cryptocurrency proposal brought to the table by Lebanon, as outsider to the Gulf Cooperation Council, rather than a member coutry.

E   You speak of juxtaposing opposites in form of decentralization and deflation in the Bitcoin system versus the existing system of centralization and inflation. How would that be digested in our economy without causing all manner of disruption and upheaval?

If you go for a hybrid solution, you have your monetary policy that you can include in the blockchain and cryptocurrency that you would create in the code. And then, instead of setting an unlimited supply, as Bitcoin does, you set a progressively increasing supply that, however, is set from the start as being constant in the rate of increase, avoiding arbitrary increases in interest rates or a programmed decrease of supply. This could be debated and decided by the participants and written into the code of the central banks’ cryptocurrencies.

E   How could this code be protected against illicit modifications and hacking by malicious foreign governments, cybercrime organizations, or such?

This is where the hybrid part comes into play. It would not be a permissionless, but a permissioned, blockchain. So you first could not access the system unless you’re authorized to do so. Secondly, the IT protections that exist for such a platform would be similar to ones that exist today to protect IT systems in BDL and other central banks.

E   But if you look at the recent evolution of organized crime on the internet and of state-sponsored hacks, you find for example the intrusion into the central bank of Bangladesh, and $1 billion in partially successful fraudulent transfers in 2016, with alleged links to cash-strapped North Korea. Also, this region is not exactly known as the center of global cyber-defense expertise, judging from past virus assaults against large oil companies in the Gulf or Iranian nuclear facilities. 

Yes, but the difference to the centralized system is that it would be a distributed network among all banks and central banks of the region. Any attacker would have to be able to calculate faster than 51 percent of the calculation power of the whole network of [aligned] central banks and commercial banks in the region in order to modify the transactions on the database. This is remote as a possibility. 

E   Would this be enough to resist all imaginable cyber-attacks, for example if two or three foreign states would collaborate in such an attack?

The answer is to expand the system by inviting other developing countries to join the network, because by the mere increase in network size, you’re protecting yourself from attacks which would aim to modify the integrity of data on your distributed databases.

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