Sunday, March 30, 2014

As Bitcoin meets the Taxman

  • Last week, the U.S. Internal Revenue Service issued a notice that said, “virtual currency is treated as property” and “under currently applicable law, virtual currency is not treated as currency that could generate foreign currency gain or loss for U.S. federal tax purposes.”  Senator Tom Carper, chairman of the Senate Homeland Security and Governmental Affairs Committee, said he was "pleased the IRS is taking this important step to provide clarity for taxpayers."
  • Separately, concerns that the People’s Bank of China would further restrict/terminate the use of Bitcoin triggered a 17% negative move in Bitcoin’s price on Thursday.  Earlier in the week, Bobby Lee, CEO of BTC China (the country’s largest digital currency exchange) acknowledged that speculators and short term-traders account for most of the activity on their exchange.   
  • Also, technology investor Marc Andreessen, commented at a conference that “We want a whole sequence of companies: digital title, digital media assets, digital stocks and bonds, digital crowdfunding, digital insurance. If you have online trust…you can reinvent field after field after field.”
MY TAKE
  • Regarding the IRS ruling – while debates may continue about how regulators should treat Bitcoin and other digital currencies, the IRS’ action should be considered good news as it reduces uncertainty in this market.
  • Regarding China – digital currency markets are still at an early stage of development where 1) news and rumors can trigger sharp price moves and 2) less speculation and more on-line commerce activity should reduce price volatility.  
  • Regarding Andreessen’s comments – As advances in big data, mobile, cloud and digital currency technologies are enabling efforts to reshape financial service markets, factors that may slow innovation include: 1) the pace of regulatory reform, 2) concerns about security and 3) the challenge of converting customers from incumbent services.

Sunday, March 23, 2014

Building Trust and the "Post Snowden" Internet

  • On March 14, the U.S. Commerce Department’s National Telecommunications and Information Administration announced plans to give up control of Internet Corporation for Assigned Names and Numbers (ICANN) that manages Internet names and addresses.  Prior to a meeting of ICANN members in Singapore this week, its President and CEO Fadi ChehadĂ© said, “ICANN will lead a transparent dialogue among governments, the private sector, and civil society to determine the transition process and establish a governing body that is globally accountable. This process ensures each of the Internet’s diverse stakeholders has a voice in its governance."
  • On Friday, U.S. President Obama met with Mark Zuckerberg (Facebook)Eric Schmidt (Google)Reed Hastings (Netflix)Drew Houston (Dropbox)Aaron Levie (Box) and Alexander Karp (Palantir) to discuss the U.S. government’s “commitment to taking steps that can give people greater confidence that their rights are being protected while preserving important tools that keep us safe” as well as “the issues of privacy, technology and intelligence."  Commenting on the meeting, Dean Garfield, president of the Information Technology Industry Council said, “In response to the NSA disclosures, there has been an acceleration across the globe of economically harmful policies … [it’s] imperative that Congress and the administration show their leadership by helping to repair trust [in the industry]”. Note: MicrosoftLinkedIn and Yahoo were invited, but unable to attend.  

MY TAKE

  • Regarding ICANN – While the post Snowden era has increased concerns about the U.S. government’s oversight of the Internet, the management transition of ICANN will likely be a slow process.  In the meantime, the organization which operates the “domain name system” with addresses endings  in  .com, .gov.edu and .org  is considering 100 new addresses including .rich.sexy.ninja.pink.email, .buzz and .coffee.  
  • Regarding Obama’s meeting - With most attendees making money from the use of customer data, the discussion likely focused on potential revenue lost rather than increasing privacy.  Bottom line –   “big data” drives significant revenue for many technology hardware, software and services providers, but “trust” remains a critical component for business success.

Sunday, March 16, 2014

As the World Wide Web turned 25 Years Old

Various U.S. government projects (1960s - 1980s) led to the creation of the Internet.  Then, on March 12, 1989, Tim Berners-Lee, while working at CERN, proposed a global hypertext based information system that was later called the“WorldWideWeb.”  On January 23, 1993, Marc Andreessen and others from the National Center for Supercomputer Applications (NCSA) introduced Mosaic, a graphical browser that increased the adoption of Web based applications. 

As the Web turned 25 last week, 
  • Tim Berners-Lee said, "Unless we have an open, neutral internet we can rely on without worrying about what's happening at the back door, we can't have open governmentgood democracygood healthcareconnected communities and diversity of culture. It's not naive to think we can have that, but it is naive to think we can just sit back and get it." 
  • Masayoshi Son. SoftBank CEO and owner of Sprint, presenting to the U.S. Chamber of Commerce said, “I brought the network war and price war (to Japan). I'd like to bring that to the States … I would like to provide an alternative to the oligopolistic situation that two-thirds of American households can only get access to one or two providers. I'd like to be a third alternative with 10 times the speed and lower price." 
  • Mark Zuckerberg, Facebook CEO said, "I've called President Obama to express my frustration over the damage the government is creating for all of our future. Unfortunately, it seems like it will take a very long time for true full reform … The US government should be the champion for the internet, not a threat. They need to be much more transparent about what they're doing, or otherwise people will believe the worst."

MY TAKE
  • The initial promise of the World Wide Web – to provide global access to textgraphicaudio and video content to support many academicresearchentertainmentpublishing and commerce activities – has clearly been achieved.  
  • Now, as the “Internet of Things” and the “Internet of Money” expand and reshape this global platform, technological innovation will likely create many new business and investment opportunities, while presenting new challenges for policy makers and regulators.

Sunday, March 9, 2014

Mastercard and Visa get more Serious about Hacking

  • On Friday, responding to various data breaches at retailers such as Target and Neiman Marcus, as well as U.S. Congressional hearingsVisa and MasterCard announced a cross-industry effort (which includes banks, credit unions, retailers, point-of-sale device manufactures, and trade groups) to improve the security of payment transactions.  The group will initially focus on increasing the adoption of EMV integrated chip technology oncredit and debit cards as an alternative to the magnetic strip that is widely used in the U.S.  
  • Ryan McInerney, president of Visa Inc.  said “The recent high-profile breaches have served as a catalyst for much needed collaboration between the retail and financial services industry on the issue of payment security … As we have long said, no one industry or technology can solve the issue of payment system fraud on its own.”  Chris McWilton, president of North American Markets for MasterCard said, “One of the critical roles we play is to protect consumers and businesses against criminals and fraudsters … Only through industry collaboration and cooperation will we address the real and immediate issue of security and maintain consumer confidence and trust.”
  • At the same time, Mallory Duncan, general counsel for the National Retail Federation said the solution might be a “half-baked solution … we remain insistent that U.S. retailers' customers be given the same protections as consumers in more than 80 countries who have both a chip and a PIN securing their credit and debit cards."

MY TAKE

The problems of data breaches and identity theft are well understood, but implementing solutions will require banks, payment processors and retailers to spend billions of dollars to upgrade their systems and point of sales terminals.  At the same time, 

  1. on-line shopping continues to increase, 
  2. interest in using smartphones as an alternative to credit and debit cards continues to expand and 
  3. hackers and cyber-terrorists continue to innovate.  
These dynamics should continue to drive demand for a broad set of data security related products and services.

Sunday, March 2, 2014

Janet Yellen on the U.S. Economy and Bitcoin

  • During testimony to the Senate Banking Committee, Federal Reserve Chair Janet Yellen said”a number of data releases have pointed to softer spending than many analysts had expected. Part of that softness may reflect adverse weather conditions, but at this point, it's difficult to discern exactly how much. In the weeks and months ahead, my colleagues and I will be attentive to signals that indicate whether the recovery is progressing in line with our earlier expectations.” 
  • Note on Friday, the U.S. Commerce Department said the economy grew by 2.4% during the fourth quarter of 2013, which was down from its initial estimate of 3.2%.  This rate is also slower than the 4.1% growth reported for the third quarter of 2013.   Factors driving the results included weak retail sales, inventory adjustments and a slightly less robust trade balance.
  • On Bitcoin, Yellen said, “Bitcoin is a payment innovation that’s taking place outside the banking industry. To the best of my knowledge, there’s no intersection at all, in any way, between Bitcoin and banks that the Federal Reserve has the ability to supervise and regulate. So the Fed doesn’t have authority to supervise or regulate Bitcoin in anyway” but “it would be appropriate for Congress to ask questions about what the right legal structure would be for digital currencies.”
MY TAKE
  • Regarding the U.S. economy – Recent economic data has been mixed and, as Yellen highlights, it is hard to separate the impact of an unusually severe winter from a potentially less robust economic trend.  Given that unemployment data for December and January were weak, the February jobs report, to be released on Friday may provide some insights on the impact of weather or more fundamental issues. 
  • Regarding Bitcoin – Amid the heightened level of media attention, the digital currency market, including Bitcoin, is at an early (perhaps prototype) stage. Much work remains in the development of appropriate regulatory oversight as well as technology infrastructure.  Note: the total value of Bitcoins in circulation is about $7 billion, less than half of the $19 billion that Facebook is paying for What’s App, and small fraction of the over$10 trillion in U.S. dollars in circulation.