Bank Backups and Space Bitcoins
(Bloomberg View) -- Should banks back up their hard drives?
Here is a story about things with names like Sheltered Harbor and Quantum Dawn and Operation Waking Shark, the gist of which is that banks should keep copies of their data somewhere safe in case they get hacked. Sounds good. We talk a lot around here about the fact that "blockchain," in addition to describing a specific technology, is also a useful magic word to get senior bank executives to focus on boring back-office technology. I suppose that experience is generalizable:
Information technology person: We need to spend more time and money backing up our data.
Bank chief executive officer: That is literally the most boring sentence anyone has ever said to me.
IT person: Let me try that again. The Sheltered Harbor team has instructed us to launch Operation Waking Shark.
CEO: [pumps fist] Yesssssss.
IT person: We have ordered team fleeces for Operation Waking Shark; you can have one. There's a picture of a shark on it.
CEO: Here is all of the money.
It is not so long ago -- 10, 12 years? -- that banks devoted their most innovative technology, and their most thrilling code names, to projects that could make them money. Today's focus on back-office settlement and security stuff is partly the result of a scarier world -- hackers really are more ambitious -- and partly the result of the weird and unexpected viral success of the blockchain meme. But it also feels like a response to the cultural and regulatory environment of the last decade, where everyone has wanted to make banks more boring, to prepare for their failures, and to punish them more harshly for their errors.
In that environment, building a fancy new securitization product is both harder and less rewarding. But building a computer backup for when your bank fails -- the sort of thing you didn't want to think about a decade ago -- is now where the action is. And a pitch for a new and more efficient settlement system can catch the CEO's attention not only because the word "blockchain" has caught everyone's attention, but also because, you know, what else does the CEO have on the agenda? Stress tests in the morning, Justice Department negotiations in the afternoon, resolution plans in the evening -- a little interlude on blockchain systems or computer backups is about as fun as it gets.
One thing about these innovations is that you can't argue with them. I mean, you can; you can argue with anything. As I and others frequently point out, a blockchain is not obviously the most efficient way to build a centralized trusted database, which seems to be the main application of blockchain in traditional finance. You can even find someone to complain about something as innocuous as computer backups. ("You have to ensure the backup copy is not a copy of already scrambled data," says a cybersecurity expert.) But the point is that all of this stuff is pretty innocuous; it is about improving the operational effectiveness of the banking system, as opposed to the mid-2000s-era forms of financial innovation that consisted mostly of massaging risk/reward tradeoffs.
"The most important financial innovation that I have seen the past 20 years is the automatic teller machine," Paul Volcker famously said in 2009. People are -- not unreasonably -- skeptical of financial innovation that is actually financial innovation, that finds new ways to slice cash flows and allocate risks. That sort of innovation might not make the financial sector more efficient; it might just make the financial sector better at capturing more value for itself, and more systemically dangerous. But financial innovation that is purely operational and technological, that is about doing traditional boring things more efficiently and more safely, that is more like innovation in other sectors -- that has more obvious social benefits, and fewer obvious costs.
If you are the sort of person who wants banking to be more boring, the measure of success is not really banking's boringness. Low volatility of revenue, low levels of trading inventories, low and fixed compensation: These things are fine but they are pretty negative measures; you can't feel all that excited about them. Instead, what you really want is for banks to do interesting work on boring problems, to add value in boring ways rather than just avoid subtracting value in interesting ways. You want financial innovation to be about making payments faster and data more secure. If banks do that creatively, then that's a victory.
Bitcoins in space.
We talk a lot around here about the fact that if you keep your bitcoins in an online wallet or on deposit at a bitcoin exchange, they'll probably get hacked, so people have resorted to baroque and low-tech methods of cold storage like writing their private keys on scraps of paper and burying them in the backyard. But if you want a baroque and high-tech method of bitcoin storage here is ConnectX, "a private network of small satellites that stores digital currency wallets and performs financial transactions 'off-planet' eliminating the use of the Internet." The "off-planet" part is literal; there are plans for a satellite network. Yes: Shoot your bitcoins into space! Then no one will be able to steal them! Needless to say ConnectX is doing an initial coin offering.
I am no expert but I feel like if you bury your bitcoins in your backyard you have a decent chance of digging them up again, but if you bury them in outer space you are kind of asking to lose them? Eventually you will come to me like:
You: I put my life savings into bitcoin.
You: But then I lost all my bitcoins.
Me: Bummer. Where did you see them last?
You: Well, I shot them in a rocket into outer space.
You: Look 2017 was a weird time.
Elon Musk fully intends to put a red sports car made by a company that he runs into an enormous rocketship made by another company that he runs and then fire both into Mars orbit. The car, as it hurtles into space, will be playing a song by David Bowie on repeat.
It goes without saying that the song will be “Space Oddity”—and that this plan was announced, like so many of Musk’s business decisions, in a cryptic message on Twitter over the weekend. A person familiar with the launch plan at SpaceX Inc. confirmed that it is real.
I'm not sure I agree that he "isn't joking": Just because you actually do it, that doesn't mean it's not a joke. (Perhaps it's a "prank.") If you are rich enough, you can joke about sending a car in a rocket to Mars by actually sending a car in a rocket to Mars, which makes it funnier.
The Venezuelan petro.
Venezuelan President Nicolas Maduro, like every other human being on earth and a few people in outer space, is pitching an initial coin offering:
"Venezuela will create a cryptocurrency," backed by oil, gas, gold and diamond reserves, Maduro said in his regular Sunday televised broadcast, a five-hour showcase of Christmas songs and dancing.
The petro, he said, would help Venezuela "advance in issues of monetary sovereignty, to make financial transactions and overcome the financial blockade."
"The announcement bewildered some followers of cryptocurrencies." "'It's Maduro being a clown. This has no credibility,' opposition lawmaker and economist Angel Alvarado told Reuters." This is obviously correct, and a state-run mineral-reserve-backed Venezuelan cryptocurrency makes no sense. Still it is ... obviously a great idea? If he actually launches an ICO, people will buy it, because people will buy literally anything with the word "crypto" attached to it. CryptoKitties -- "Collect and breed digital cats" -- is now "the most popular application on Ethereum, accounting for over 15% of all transactions on the network." You write a seven-page white paper for a Venezuelan petro; you stuff it with buzzwords drawn from a mixed vocabulary of Marxism, Chavismo and crypto-evangelism; bitcoin and ether millionaires flock to send you their money; and -- critically -- they send you their money over the bitcoin and Ethereum blockchains, which actually might be a way to avoid the sanctions that have held up other Venezuelan payments. Also critically, you don't have to pay it back. Really it is amazing to me that anyone still issues stocks or bonds.
Elsewhere, should the Federal Reserve issue a digital currency? Meh, sure, whatever, I guess. The argument for it is the same as the argument against it, which is that America's payments system is weirdly archaic and low-tech: Many people are unbanked, cash is normally used for small transactions, people write checks, etc. On the one hand a digital Fedcoin could allow simple electronic payments without the costs of credit-card networks, and give unbanked people access to electronic money. On the other hand if there's a preference for cash and a lack of access to technology, then abandoning cash for Fedcoins would make things worse.
How's Martin Shkreli doing?
Well, he's in jail, sure, but also the government is going after the grab bag of signifiers that he managed to pick up while he was rich and free:
Prosecutors said Friday Shkreli should be forced to forfeit $7.4 million, which could include $5 million in bail money and the album "Once Upon a Time in Shaolin." Along with the disk set, which he bought two years ago for $2 million from the celebrated New York hip-hop group, the government said it may also seek a Picasso painting he owns, his Enigma machine from World War II, and his interest in Turing Pharmaceuticals AG.
If I ever become rich in a somewhat disreputable way, I will definitely hang a Picasso over my mantelpiece, and then put an Enigma machine and a one-of-a-kind hip-hop album in a fancy box on that mantelpiece. The artfully arranged group will, I think, nicely get across the message that I want to convey, namely that I have a lot of money and enjoy acquiring things. "Would you like to appreciate art while listening to hip-hop and encrypting messages," I will ask my guests, suavely.
As always the thing with Martin Shkreli is that he was convicted of a fairly benign bit of securities fraud, but on the other hand he is Martin Shkreli. So his lawyer quite sensibly points out that there's no reason for him to forfeit anything, because all of the investors he "defrauded" actually made money:
"We will vigorously oppose the government motion," Shkreli’s lawyer, Benjamin Brafman, said in an email. "Our position is clear. None of the investors lost any money and Martin did not personally benefit from any of the counts of conviction. Accordingly, forfeiture of any assets is not an appropriate remedy."
That is completely correct. And yet if you were a judge, would you want to leave the only copy of a Wu-Tang Clan album with Martin Shkreli?
Excel is good.
One thing that I have to do sometimes is add some numbers. If there are two numbers, and they are reasonably small, I will just do this in my head; that is a skill that I have. If they are a bit bigger or there are a few more of them, I might pull out my HP 12C calculator for the task. The HP 12C is more robust and flexible and powerful than I am, at adding numbers. And if the numbers are very big, or if there are like four of them, what I will usually do is pull up Microsoft Excel. Compared to a calculator, Excel is a more robust and flexible way to deal with numbers, and is better at keeping track of many more numbers.
But the hierarchy continues. If you want to run an accounting or risk-management system for a largish company, Excel is ... well, it was certainly an improvement over doing it in your head or on paper, but it is not exactly state-of-the-art these days. You can buy accounting or risk-management software, and hire programmers to customize it for your business. This software will be much more robust, for those purposes, than Excel would be: It will demand the right inputs, and check them carefully, and generally not allow some joker to hardcode an entry in cell BX317 that breaks the whole project.
On the other hand, when the fancy software asks some line manager for an input, and she needs to compute that input from several different sources in order to type it into the fancy software, she'll probably do it in Excel. Excel is just how you compute things, and keep track of lists of numbers, in business.
Last week the Wall Street Journal had an article about how a lot of corporate chief financial officers are going around saying that they are going to get rid of Excel, and a lot of corporate employees are going around saying things like "You can have my Excel, after you ripped it from my cold, dead hands," and I feel like everyone is talking past each other a little bit. No one really wants to ban Excel, or at least, no one should; I'm sure some people do but they are just weird fundamentalists. And no one really, in their heart of hearts, thinks that you should track the entire financial state of a company in Excel. Excel is a tool, a way to do calculations at a medium scale, a sort of scratch paper for serious applications. It is a mistake to run your mission-critical calculations in Excel, in the same way that it would be a mistake to send a mission-critical memo out over Instant Messenger. But that doesn't mean that you should get rid of Excel, or IM. It means that you should understand which tools to use for which purposes.
People are worried about unicorns.
“To the extent anyone is working on any kind of competitive intelligence project that involves the surveillance of individuals, stop it now,” wrote Uber Technologies Inc.'s general counsel, Tony West, in an email to the company, and that "to the extent" is a wonderful bit of lawyerly poetry. You don't want to say "Hey, everyone who's working on questionable spy stuff better knock it off," because you don't want to admit, even internally, that you have people working on questionable spy stuff. You don't want to just quietly pull aside the people working on questionable spy stuff and tell them to knock it off, because you don't even know who they are: They could be anywhere, and West is new here. So you are left with that blandly legalistic hypothetical -- if, and to the extent, you are working on questionable spy stuff -- followed by that tough-guy emphatic "stop it now."
Anyway a bunch of Uber security employees have left the company recently after a 37-page letter from a former employee to management, detailing some of Uber's spying-and-secrecy practices, was disclosed in Alphabet Inc.'s lawsuit against Uber over alleged theft of trade secrets. The weird thing is that the letter was sent earlier this year, but the urgent stop-it-now response is coming only now, after the letter came out in court. Is that because West, and Uber's new CEO Dara Khosrowshahi, only found out about it now? (Presumably they have a lot of other fires to fight, but is there really so much bad stuff at Uber that a 37-page letter of accusation from a former employee paid millions of dollars to stay on and consult on fixing the problems didn't get their attention?) Or is it because they are continuing Uber's longstanding approach of stopping the bad stuff only once it gets caught?
Happy Everything 100,000,000,000,000 Day (almost)!
We have talked a little around here about Dow 20,000, and Dow 21,000, and Dow 22,000, and Dow 24,000, though we seem to have skipped Dow 23,000. (You didn't miss much.) But here are my Bloomberg Gadfly colleagues Mark Gilbert and Marcus Ashworth pointing out that "the total value of companies listed on the world's stock markets as of Friday's close was $98,750,067,000,000 -- within touching distance of $100 trillion for the first time." That is ... almost ... a round number that is ... moderately ... less arbitrary than the Dow Jones Industrial Average? Like the total market capitalization of the Dow is about $6.71 trillion, which is an even less round number than its unitless 24,000, which is saying something. But $100 trillion is a power of 10 and everything. Good work everybody. Or, I mean, one and a quarter trillion dollars shy of good work, but close enough. We'll meet back here to celebrate actual Everything 100,000,000,000,000 Day, if I remember, which I won't.
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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Matt Levine is a Bloomberg View columnist. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz and a clerk for the U.S. Court of Appeals for the Third Circuit.
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