Problems of Wall Street’s Approach Towards Blockchain Technology

Global banks, financial institutions and organizations have begun to research about the potential applications of the blockchain technology that may restructure traditional financial and banking systems.

Over the last few months, multinational banks including Citibank, JPMorgan and UBS have built research teams and startup acceleration labs to acvively develop prototypes of blockchain based applications and run pilot tests on their existing platforms.

UBS for example, has announced their plans to build a transaction settlement platform based on a blockchain to enable banks and financial institutions to record transactions and payments in a transparent and encrypted public ledger effortlessly.

British multinational banking and financial services company Barclays has also launched a startup accelerator called Barclays Acclerator to support blockchain and fintech related startups. The bank has already incubated three blockchain startups including Safello, Atlas Card, and Blocktraces.

“There is so much pull and interest on this right now. That comes from a recognition that, ‘Wow, we can use this to change the fundamental model of how we operate to create our future,’ said Derek White, chief digital officer at Barclays, which currently conducting around 20 experiments of the blockchain technology and blockchain based applications.

Private Blockchain a Problem?

The main problem with the approach of Wall Street banks and organizations however, is that many of them are trying to create their own blockchains and altcoins, that could be vulnerable to hacking attacks and data breaches in its early stages.

Those organizations and banks that claim that they “Hate bitcoin but love the blockchain” have failed to understand that the bitcoin network is secure because of the millions of miners around the world that are constantly verifying transactions by contributing computing power into the network.

The computing power contributed to the bitcoin network by millions of miners around the world is also called the hash rate, which is defined as “the measuring unit of the processing power of the Bitcoin network.” To keep a network or a blockchain secure, a high hash rate is needed, to consistently confirm and verify transactions, and to secure the blockchain.

As emphasized many times before, Pete Dushenski of Trilema explained, “The larger the Blockchain, the more hashpower is required to maintain the same level of security. Larger things are inherently more fragile and are therefore exponentially more resource intensive to protect from the forces of nature.”

However, none of the banks that claimed its development of new blockchains and altcoins mentioned how miners will verify the transactions and settlements on the platform, and how miners will be incentivized for their work.

The intentions of the banks are hard to speculate. However, it is very much possible for some banks to switch their projects over to the bitcoin blockchain later on, when they recognize that the security of the bitcoin blockchain cannot be created overnight.

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The arrest of Mark Karpeles and the Mt.Gox incident has become a national scandal of Japan over the last few months. This week, the rights to the Rolling Stone’s story on Karpeles, and his journey from being an odd geek to a bitcoin mogul whom later becomes responsible for the loss of about half a billion US dollars is in the process of being acquired by a Hollywood film maker and agency CAA (Cretive Artists Agency).

The film on Karpeles and the closure of Mt.Gox could be the next big bitcoin related movie to be released in Hollywood, following the story on Silk Road, which its rights were purchased by 20th Century Fox and Chernin Entertainment in October of 2013.

However, film critics predict that Hollywood agencies may find it difficult to cast a character like Karpeles; a one-of-a-kind character with idiosyncratic personalities that has entertained the bitcoin community for a long time, with his unhealthy attachment toward his cat, Tibane, and his obsession towards building a “bitcoin-only cafe” in Japan.

The Rolling Stones story on Mt.Gox and the unique life of Karpeles will not be the first mainstream film coverage of the Mt.Gox founder. In a recent documentary on bitcoin and the decline of traditional financial systems called the “Rise of Bitcoin,” Karpeles portrayed himself as the totalitarian authority behind Mt.Gox, being the only person in the entire company to be able to operate on Mt. Gox’s security and code.

The movie, if it ever will be released in Hollywood by CAA, will explicitly cover the recent arrest of Mark Karpeles and his two-week interrogations led by the Japanese law enforcement and government. Although the Mt.Gox and Karpeles scandal could be seen as a trivial headline and an over-exaggeration of bitcoin media outlets, the arrest of Karpeles and the extended investigations on the Mt.Gox incident has brought in the Japanese government, and ultimately, encouraged the government to set strict regulations and restrictions on bitcoin startups and exchanges in Japan.


A few months ago, Bitcoin core developer Gavin Andresen proposed an alternative version of bitcoin software called BitcoinXT and urged the community and bitcoin miners to transfer from the bitcoin core.

However, “critics” and cryptocurrency researchers including Mircea Popescu, Pete Duschenski and Nick Szabo stated that Andresen’s version of bitcoin and the expansion of the block size would make bitcoin more vulnerable, as it would require more hashing power to secure the block chain.

Regardless of the criticism, Andresen and several prominent bitcoin startups and investors believe that the block size should be increased, due to the rising volume of bitcoin transactions. In a recent interview with MIT Technology Review’s San Francisco bureau chief Tom Simonite, Andresen stated:

“Looking at the transaction volume on the Bitcoin network, we need to address it within the next four or five months. As we get closer and closer to the limit, bad things start to happen. Networks close to capacity get congested and unreliable. If you want reliability, you’ll have to start paying higher and higher fees on transactions, and there will be a point where fees get high enough that people stop using Bitcoin.”

Andresen proposed a system, wherein if 75% of the miners adopt Bitcoin XT, bitcoin would enter a two week grace period, and possibly allow a “fork” of the blockchain with higher capacity.

Currently, some organizations have adopted Andresen’s Bitcoin XT, and support his proposal for increasing the bitcoin block size. However, many bitcoin developers still oppose Andresen’s view of the block size debate, and are refraining to adopt his proposal. If the developers failed to reach a consensus, or if the block size is not increased soon, Andresen predicts that bitcoin could be dead in a few years.

“Transactions will get unreliable and it’ll get worse and worse over time. My fear is there’ll be no critical event that causes people to react—Bitcoin just kind of has a long slow death. I’m trying to set off alarm bells for ‘You know, guys, if we don’t do this, Bitcoin will be dead in four years.’ It’s not easy to sell that, especially when there’s so much controversy,” told Andresen.

F2Pool, the same mining pool which generated the largest bitcoin transaction ever recorded on July 11, mined the Litecoin network’s block 840,000, with a declined mining reward from 50 LTC per block to 25 per block for the first time since its launch in 2011.

The Litecoin network, similar to the Bitcoin network systemized to halve its block reward every 840,000. To celebrate its technological “milestone,” the Litecoin association published a video explicating the process of the decline in mining reward.

Currently, the halving of the mining reward has not affected the network significantly.

According to BitcoinWisdom the Chinese Litecoin Markets have seen a substantial decline of the price, but it is slowly recovering.

However, miners started to worry about the effect of such decline in the long term. The majority of them are worried that the declined block reward will affect the price and the mining profitability of Litecoins.

According to the video published by the Litecoin network association, the profitability of its miners will fall by 50%, especially those who have invested in mining hardware.

Many still believe however, that the reduced supply growth could increase the price of Litecoins, and maintain the usual operations for miners. However, if the price does not increase, miners will be seeing a 50% decline in their income, making it much difficult to pay electricity / maintenance fees for their mining equipment, electricity and computers. If the network hash rate drops however, the mining difficulty could readjust itself, and make it much easier for miners to resume their operations.

Because of the decrease in block reward, many Litecoin miners have canceled their orders for ASIC miners and other new mining hardware equipment. According to Bitcoin Wisdom, Litecoin is recovering from its light crash of its price on August 24 and 26, and will recover very soon.

Users of Circle Inc., the Boston-based bitcoin startup, have been disputing with the company regarding payment verifications and banning of bank accounts. According to its users, Circle has started to hold payments for several days and ban accounts, in the tradition of Paypal.

Circle states on its website that it “believes that sending and receiving money should be […] instant and free.” Ironically, the startup has made it incredibly difficult to send payments and is creating a centralized payment infrastructure on top of the bitcoin, which negates the decentralized benefit of the cryptocurrency.

In accordance with Circle’s long list of policies that specifies the need for payment verifications and the banning of Circle accounts that engage in “illegal” purchases, the company has begun banning bank accounts and freezing payments for days for additional verification.

One merchant found out the hard way when one of her customers used a Circle wallet to purchase products on the merchant’s e-commerce store, Hairlosstalk. The website suggested its users to purchase bitcoin using Circle, because it allows users to connect their bank accounts and buy bitcoins with USD.

One user emailed Stacia, the owner of the Hairlosstalk, saying that banks had banned bitcoin purchases and therefore limited the user’s access to Circle. However, Stacia found that Circle banned the user’s bank accounts and credit cards and restricted the user from purchasing bitcoins.

Stacia said:

Clearly he thinks his bank and credit cards have banned Bitcoin, but what happened is that Circle banned his bank accounts and credit cards. I thought the entire point of Circle was instant wallet funding via credit cards? I feel pretty embarrassed right now to be honest.

Circle recently raised over US$50 million in funding, with support from Goldman Sachs and IDG Capital Partners of China. The bitcoin wallet and exchange allows users to deposit dollars and bitcoins and send it to anyone around the world “for free.” However, recent events, user experiences and new policies suggest that Circle is shifting to a more traditional financial platform, more like a bank than a bitcoin exchange.

In a few months, Circle’s vision for its bitcoin platform went from “instant” to a few days and, quite possibly, a couple of weeks and months.

Users have begun to complain about Circle’s verification system and to leave the bitcoin platform for others. One user named Michael wrote on Uncrunched in February:

”I created an account and tried to add my bank account and credit card to deposit money into the system (as Bitcoin). I had to give a lot of personal information. And I had to take a photo of my drivers license. I don’t have a huge problem with that since these kinds of services are a huge fraud magnet. But Circle said they needed time to review the information. and here’s the problem, they basically (kind of) shut down my account while they were doing that.”

More than 10 public complaints have been uploaded on Reddit since the funding in 2014. Many users complained saying “i linked my debit card, made a purchase, it gets cancelled. i wait two days to link my bank account, make a small 10$ purchase, still no bitcoins. isnt it supposed to be instant?” and “After waiting a few days for my free $10 promotion to appear, I contacted Circle support and was told they stopped honoring that promotion”

Today, yes.

Coinbase, leading bitcoin wallet and exchange with over 3.8 million registered wallets and 2.4 million users, has had many complaints and serious issues about compliance, regulations and manipulation of accounts over the last few months.

This week, an anonymous source revealed that Coinbase is currently a part of a regulatory compliance program which requires users to give sensitive information to deposit or withdraw into a Coinbase account. The Coinbase team said in an email:

“As a part of our compliance program, we are required to periodically review high volume accounts. As a regulated financial institution, we have the responsibility of understanding how our customers are using our service. We therefore respectfully request that you help us complete this routine review by providing the following information:

  1. Use for your Coinbase account
  2. Description of the origin of incoming transfers
  3. Detail the specific source of funds for the purchase of bitcoin
  4. Nature of outgoing service.”

Banks require basic personal information like name, age, net worth, annual income, properties, etc. However, banks do not demand each customers to identify the source or the origin of payments in every withdrawal or deposits.

Sensitive information gathered by Coinbase, like the source of payments, purpose of accounts and outgoing payments will then be submitted to the government agencies or law enforcement that require it, to practically spy on its users, especially, the holders of high volume accounts.

Still, Coinbase claims that they “take privacy and security very seriously.”

Apart from the requirement of these information, Coinbase offers its users Dropbox for “secure communication upon request.”

Dropbox, known for their solid connection with the government and “Dropbox’s Government Data Request Principles,” provides any government agencies or law enforcement with data, sensitive or not.

Despite the obvious security concerns of Dropbox, Coinbase will continue to offer Dropbox as the main data storage for its customers, and emphasize that the firm “take privacy and security very seriously.”

Former Uber driver and Vugo cofounder James bellefeuille has launched a Vugo bitcoin tipping service for Uber drivers, to enable customers to tip the drivers using bitcoin, instead of cash.

Uber, American international transportation Network Company currently valued at US$ 50 billion by the Wall Street Journal and many Venture Capital Firms worldwide, has always had unresolved issues with its drivers – tipping.

The billion dollar network has never enabled its drivers to accept tips through its app, which became a significant disadvantage for its drivers. Especially now, that most of Uber’s customers and user base are those seeking for a better quality and higher standard taxi service.

This month, Vugo, rideshare advertising network has released a new feature – a bitcon tipping system for Uber drivers.

According to CNET, over 3,000 Uber drivers already have installed Vugo’s tablet, which is placed at the backseat of the cars. Apart from advertisements, customers will now see a tip your driver button, which allows users to tip the drivers using bitcoin.

Vugo co-founder James Bellefeuille told CNET news, “Creating a way for Uber drivers to accept tips electronically seemed like a natural expansion.”

Tips usually come in at relatively small amounts, in the range of a few dollars to a hundred dollars at best. Using traditional financial platforms or online mobile payment systems like Paypal is highly inefficient, because of its high transaction / conversion fees and their tendency to freeze payments at their will.

The bitcoin tipping system may be crucial to Uber drivers, especially now that Uber has decreased fares in 48 cities across the United States. The updated fares have decreased average earnings per hour of Uber drivers, from US$36 to US$19.

“Uber is trying to change the culture around tipping service professionals. The biggest reason why tipping is important is because your driver is delivering a service,” explained Bellefeuille.