Jason Potts, RMIT University

Bitcoin may be the most famous example of a blockchain in use, but it is actually a rather unimaginative way to use it.

The blockchain is finally starting to fulfil its promise as a game-changing technology, a kind of infrastructure for record-keeping. To facilitate movement of value (such as money) and changes in ownership (shares, for example), and even to manage online identities.

The Australian Stock Exchange (ASX) has announced that it will use a blockchain-based system to record who owns shares of listed companies, and to keep track of transactions and settlements when people buy and sell shares.

The move comes as the price of Bitcoin has risen more than US$14,000 in the past year. Yet Bitcoin does not really exploit the new databases and record-keeping infrastructure that blockchain technology makes possible.

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Read more:
Demystifying the blockchain: a basic user guide

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The blockchain is also called a “public” or “distributed” ledger. Think of a spreadsheet that is publicly available to view, and simultaneously held on numerous computers. When someone transfers a Bitcoin, it is verified by the system, encrypted, and a new line (or “block”) is added to the spreadsheet.

The ASX’s blockchain will replace the ASX’s CHESS (Clearing House Electronic Sub-registry System) system. Currently, the ASX requires each trade to be verified against the ASX’s centralised database of ownership records and reconciled with payments.

So while trades take place in fractions of a second, the actual clearance (making sure who owns what) and settlement (the transfer of money and shares) is cumbersome, slow, expensive, and prone to human error.

The ASX’s blockchain will greatly simplify this process. Instead of having to reconcile trades against a centralised database, the verification of ownership and settling of accounts can be done directly between participants (as is done with Bitcoin trades). This is much simpler, faster and more secure.

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Read more:
What’s holding up the blockchain?

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A monumental shift

The fact that the ASX’s blockchain announcement made headlines around the world shows what a big leap forward this is.

The ASX’s blockchain will streamline the settlement process, improving productivity and therefore reducing costs in the Australian stock market. This means that our financial markets will work better, offering an immediate benefit to Australia’s economy.

Exchanges are also a global business, and the adoption of blockchain technology in Australia’s major exchange means that it has a competitive edge over other exchanges.

Companies choose where to list, based on a variety of factors including the quality of the exchange technology. More business for the ASX will translate into more local jobs.

One potential downside of the ASX adopting the blockchain, however, is that some workers who currently process settlements on the ASX may lose their jobs. Some financial companies that currently benefit from the slow settlement process, such as brokerage firms, will also lose out.

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Read more:
Blockchain really only does one thing well

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But the ASX’s move is just scratching the surface of what blockchain technology can do to the Australian financial sector.

The same argument that applies to the ASX – that the blockchain is more efficient and productive than existing record-keeping and transaction processes – can also be extended to other exchanges, such as bond markets.

In other words, the ASX’s blockchain is just the beginning of a technological transformation of Australia’s financial markets.

Blockchains will also make these exchanges more attractive to build services on, such as for managing wealth. This is a further benefit for consumers and the broader finance industry, not purely from lower prices also from the possibility of new products and services.

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Read more:
The blockchain does not eliminate the need for trust

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But how is any of this even possible in the first place? Part of the credit must go to Australian regulators. They created the environment for this huge shift in technological practice.

Australia is now leading the adoption of the blockchain, despite it being a US-built technology. It is similar to how African telecommunications companies are leading the way in mobile payments, even though Finland created modern mobile phones with companies like Nokia.

Even if you’re not excited about new technology in the Australian finance industry, its global competitiveness, or even our regulatory agility, the ASX announcement is a harbinger of what adoption of blockchain technology will increasingly look like.

Jason Potts, Professor of Economics, RMIT University

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

Alicia (Lucy) Cameron, CSIRO and Kelly Trinh, CSIRO

Bitcoin is a “speculative mania” according to the governor of the Reserve Bank of Australia. But it’s not so easy to say that Bitcoin is a bubble – we don’t know how to value it.

Recent price rises (close to A$18,000 in the past three months) may be too great and can’t continue. But the Bitcoin market is only just maturing as an investment and as a currency, and so it may still have room to grow.

A bubble is when the price of an asset diverges from its “fundamentals” – the aspects of an asset that investors use to value it. These could be the income that can be earned from a stock over time, a company’s cash flow, the state of a country’s economy, or even the rent from property.

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Read more:
The Bitcoin bubble – how we know it will burst

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But Bitcoin does not pay out profits (like shares) or rent (like property), and is not attached a national economy (like fiat currencies). This is part of the reason why it is hard to tell what the underlying value of Bitcoin is or should be.

In the search for fundamentals some have suggested we should look at the supply of Bitcoins in the market (which is regulated by the technology itself), the number of Bitcoin transactions through the market, or even the energy consumed by Bitcoin miners (the computers that validate transactions and are rewarded with Bitcoins).

Diverging from fundamentals

If we take a close look, we can see how the price of Bitcoin may be diverging from these fundamentals. For instance, it is becoming less profitable to be a miner, especially as the energy required increases. At some stage the cost may exceed the price of Bitcoin, making the network less worthwhile to both mine and invest.

Bitcoin may be the best known cryptocurrency but it is also losing marketshare to other cryptocurrencies, such as Ethereum and Litecoin. Bitcoin currently accounts for 59.4% of the total global cryptocurrency market, but at the beginning of 2016 it was 91.3%. Many of these other cryptocurrencies have more functionality than Bitcoin (such as Ethereum’s ability to execute smart contracts), or are more efficient and use less energy (such as Litecoin).

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Read more:
What happened to the price of Bitcoin? The truth behind big bubbles and crashes

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Government policy, such as taxation or the establishment of national digital currencies, may also make it riskier or less worthwhile to mine, transact or hold the cryptocurrency. China’s ban on Initial Coin Offerings earlier this year reduced the value of Bitcoin by 20% in 24 hours.

Without these fundamentals the price of Bitcoin largely reflects speculation. And there is some evidence that people are simply buying and holding Bitcoin in the hope it will keep rising in value (also known as Greater Fool investing). Certainly, the cap on the total number (21 million) of Bitcoins that can exist, makes the currency inherently deflationary – the value of the currency relative to goods and services will keep increasing even without speculation and so there is a disincentive to spend it.

Bitcoin still has room to grow

Many big investors – including banks and hedge funds – have not yet entered into the market. The volatility and lack of regulation around Bitcoin are two reasons stopping these investors from jumping in.

There are new financial products being developed, such as futures contracts, that may reduce the risk of holding Bitcoin and allow these institutional investors to get in.

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What economics has to say about housing bubbles

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But Bitcoin futures contracts – where people can place bets on the future price of stocks or markets – may also work against the price of Bitcoin. Just like gamblers place bets on horse races rather than buying a horse, investors may simply buy and sell the futures contracts rather than Bitcoin itself (some contracts are even settled in cash, rather than Bitcoin). All of this could lead to less actual Bitcoin changing hands, leading to less demand.

Although the rush to invest is apparently encouraging some people to take out mortgages to buy Bitcoin, traditional banks won’t lend specifically for that purpose as the market is too volatile.

But it’s not just on the finance side that the Bitcoin market is set to expand. More infrastructure to support Bitcoin in the broader economy is rolling out, which should spur demand.

Bitcoin ATMs are being installed in many countries, including Australia. Bitcoin lending is emerging on peer-to-peer platforms, and new and more regulated marketplaces are being created.

Many companies are accepting Bitcoin as payment. That means that even if the speculation dies down, Bitcoin can still be traded for some goods and services.

And finally, although the fundamentals of Bitcoin are still up for debate, when it comes to transaction volume through the network there appears to be a lot of room for growth.

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Read more:
Price hikes in Ether and Bitcoin aren’t the signs of a bubble

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It’s good to remember that people have been calling Bitcoin a bubble for a long time, even when the price was just US$35 in 2013.

In the end, this is uncharted territory. We don’t know how to value Bitcoin, or what will happen. Historical examples may or may not apply.

What we do know is that the technology behind most cryptocurrencies is enabling new models of value transfer through secure global consensus networks, and that is causing excitement and nervousness. Investors should beware.

Alicia (Lucy) Cameron, Senior Research Consultant, CSIRO and Kelly Trinh, Data Scientist, CSIRO

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

Jay L. Zagorsky, Boston University

On Sept. 7, 2021, El Salvador will become the first country to make bitcoin legal tender.

The government even went a step further in promoting the cryptocurrency’s use by giving US$30 in free bitcoins to citizens who sign up for its national digital wallet, known as “Chivo,” or “cool” in English. Foreigners who invest three bitcoins in the country – currently about $140,000 – will be granted residency.

Panama is considering following El Salvador’s lead.

Does making bitcoin legal tender mean every store and merchant in El Salvador will now have to accept digital payments? If more countries do the same thing, what will this mean for consumers and businesses around the world?

As an economist who studies wealth and money, I believe that briefly explaining what legal tender is will help answer these questions.

What is legal tender?

Legal tender refers to money – typically coins and banknotes – that must be accepted if offered in payment of a debt.

The front of every U.S. banknote states “This note is legal tender for all debts public and private.” This statement has been enshrined in federal law in various forms since the late 1800s.

The greenback is not legal tender in just the U.S. El Salvador, for example, switched from the colon, its previous currency, to the U.S. dollar in 2001. Ecuador, Panama, East Timor and the Federated States of Micronesia also all use the dollar as legal tender.

Do merchants have to accept legal tender?

But despite the definition above, legal tender doesn’t mean all businesses must accept it in payment for a good or service.

That requirement applies only to debts owed to creditors. The ability for a store to refuse cash or other legal tender is made explicit on the websites of both the U.S. Treasury, which is in charge of printing paper money and minting coins, and the Federal Reserve, which is in charge of distributing currency to the nation’s banks.

This is why many companies such as airlines accept payments exclusively by credit card, and many small retailers take only cash.

As the U.S. Treasury points out, there is “no federal statute mandating that a private business, a person or an organization must accept currency or coins as payment for goods or services. Private businesses are free to develop their own policies on whether to accept cash unless there is a state law which says otherwise.”

And this would be no different if the U.S. made bitcoin legal tender. Private businesses would not be required to accept it.

There is clearly some confusion in El Salvador over the issue, however. Its original bitcoin law, passed in June 2021, states that “every economic agent must accept bitcoin as payment when offered to him by whoever acquires a good or service.”

This led to protests and resulted in skeptcism from economists and others. As a result, El Salvador President Nayib Bukele tweeted in August that businesses did not have to accept bitcoin.

Why did El Salvador make bitcoin legal tender?

El Salvador is betting that being the first to open its doors completely to bitcoin will help boost its economy.

President Bukele said he believes this will encourage investors with cryptocurrency to spend more of it in his country. He even has a plan to have El Salvador’s state-run geothermal utility use energy from the country’s volcanoes to mine bitcoin.

Creating, or mining, bitcoin takes a lot of energy, so mining makes sense only in places with cheap electricity.

The $30 given to every citizen who joins the cryptocurrency craze will temporarily stimulate the economy. However, the overall impact will likely be a short-term boost. The impact of similar payments in other countries, like COVID-19 stimulus payments, appear to end after people have spent the money. Moreover, it’s unclear El Salvador’s increasingly indebted government can even afford it.

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And the widespread adoption of bitcoin will likely take years. El Salvador has been installing 200 bitcoin ATMs to allow people to convert cryptocurrency into dollars.

Since just 30% of the Central American country’s population even has a bank account, I believe the U.S. dollar will still be used in El Salvador for a long time, even if its president wants to move toward bitcoin.

Jay L. Zagorsky, Senior Lecturer, Questrom School of Business, Boston University

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

James Hendler, Rensselaer Polytechnic Institute

Despite growing opposition, the U.S. government is on track to increase its use of controversial facial recognition technology.

The U.S. Government Accountability Office released a report on Aug. 24, 2021, detailing current and planned use of facial recognition technology by federal agencies. The GAO surveyed 24 departments and agencies – from the Department of Defense to the Small Business Administration – and found that 18 reported using the technology and 10 reported plans to expand their use of it.

The report comes more than a year after the U.S. Technology Policy Committee of the Association for Computing Machinery, the world’s largest educational and scientific computing society, called for an immediate halt to virtually all government use of facial recognition technology.

The U.S. Technology Policy Committee is one of numerous groups and prominent figures, including the ACLU, the American Library Association and the United Nations Special Rapporteur on Freedom of Opinion and Expression, to call for curbs on use of the technology. A common theme of this opposition is the lack of standards and regulations for facial recognition technology.

A year ago, Amazon, IBM and Microsoft also announced that they would stop selling facial recognition technology to police departments pending federal regulation of the technology. Congress is weighing a moratorium on government use of the technology. Some cities and states, notably Maine, have introduced restrictions.

Why computing experts say no

The Association for Computing Machinery’s U.S. Technology Policy Committee, which issued the call for a moratorium, includes computing professionals from academia, industry and government, a number of whom were actively involved in the development or analysis of the technology. As chair of the committee at the time the statement was issued and as a computer science researcher, I can explain what prompted our committee to recommend this ban and, perhaps more significantly, what it would take for the committee to rescind its call.

If your cellphone doesn’t recognize your face and makes you type in your passcode, or if the photo-sorting software you’re using misidentifies a family member, no real harm is done. On the other hand, if you become liable for arrest or denied entrance to a facility because the recognition algorithms are imperfect, the impact can be drastic.

The statement we wrote outlines principles for the use of facial recognition technologies in these consequential applications. The first and most critical of these is the need to understand the accuracy of these systems. One of the key problems with these algorithms is that they perform differently for different ethnic groups.

An evaluation of facial recognition vendors by the U.S. National Institute of Standards and Technology found that the majority of the systems tested had clear differences in their ability to match two images of the same person when one ethnic group was compared with another. Another study found the algorithms are more accurate for lighter-skinned males than for darker-skinned females. Researchers are also exploring how other features, such as age, disease and disability status, affect these systems. These studies are also turning up disparities.

A number of other features affect the performance of these algorithms. Consider the difference between how you might look in a nice family photo you have shared on social media versus a picture of you taken by a grainy security camera, or a moving police car, late on a misty night. Would a system trained on the former perform well in the latter context? How lighting, weather, camera angle and other factors affect these algorithms is still an open question.

In the past, systems that matched fingerprints or DNA traces had to be formally evaluated, and standards set, before they were trusted for use by the police and others. Until facial recognition algorithms can meet similar standards – and researchers and regulators truly understand how the context in which the technology is used affects its accuracy – the systems shouldn’t be used in applications that can have serious consequences for people’s lives.

Transparency and accountability

It’s also important that organizations using facial recognition provide some form of meaningful advanced and ongoing public notice. If a system can result in your losing your liberty or your life, you should know it is being used. In the U.S., this has been a principle for the use of many potentially harmful technologies, from speed cameras to video surveillance, and the USTPC’s position is that facial recognition systems should be held to the same standard.

To get transparency, there also must be rules that govern the collection and use of the personal information that underlies the training of facial recognition systems. The company Clearview AI, which now has software in use by police agencies around the world, is a case in point. The company collected its data – photos of individuals’ faces – with no notification.

Clearview AI collected data from many different applications, vendors and systems, taking advantage of the lax laws controlling such collection. Kids who post videos of themselves on TikTok, users who tag friends in photos on Facebook, consumers who make purchases with Venmo, people who upload videos to YouTube and many others all create images that can be linked to their names and scraped from these applications by companies like Clearview AI.

Are you in the dataset Clearview uses? You have no way to know. The ACM’s position is that you should have a right to know, and that governments should put limits on how this data is collected, stored and used.

In 2017, the Association for Computing Machinery U.S. Technology Policy Committee and its European counterpart released a joint statement on algorithms for automated decision-making about individuals that can result in harmful discrimination. In short, we called for policymakers to hold institutions using analytics to the same standards as for institutions where humans have traditionally made decisions, whether it be traffic enforcement or criminal prosecution.

This includes understanding the trade-offs between the risks and benefits of powerful computational technologies when they are put into practice and having clear principles about who is liable when harms occur. Facial recognition technologies are in this category, and it’s important to understand how to measure their risks and benefits and who is responsible when they fail.

Protecting the public

One of the primary roles of governments is to manage technology risks and protect their populations. The principles the Association for Computing Machinery’s USTPC has outlined have been used in regulating transportation systems, medical and pharmaceutical products, food safety practices and many other aspects of society. The Association for Computing Machinery’s USTPC is, in short, asking that governments recognize the potential for facial recognition systems to cause significant harm to many people, through errors and bias.

These systems are still in an early stage of maturity, and there is much that researchers, government and industry don’t understand about them. Until facial recognition technologies are better understood, their use in consequential applications should be halted until they can be properly regulated.

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James Hendler, Professor of Computer, Web and Cognitive Sciences, Rensselaer Polytechnic Institute

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

David Glance, The University of Western Australia

Professor David Yermack of the Stern School of Business at New York University is used to being heckled when he gives talks about Bitcoin. After all, most of his work has involved pointing out all of the things Bitcoin enthusiasts don’t want to hear.

On the one hand, Bitcoin “believers” want a currency that is essentially free of government and corporate oversight. On the other hand, they want the establishment to believe in the fundamental benefits of it as a currency.

Professor Yermack, who once researched the economic impact of the fashion decisions of US First Lady Michelle Obama, has recently turned his hand to detailing some of the bizarre and humorous characteristics of Bitcoin. Like the Bitcoin ATM installed in Melbourne which offered to sell 1 Bitcoin for A$585 and buy 1 Bitcoin for A$523. Not only was the spread 10.5% but the current market rate for Bitcoin was $511 and so essentially the ATM company would be losing money on its transactions.

[youtube https://www.youtube.com/watch?v=XqH26KMFoAU?rel=0]

Professor Yermack argues Bitcoin should not be considered money, for a number of reasons. These include Bitcoin’s inability to act as a medium of exchange or a store of value or act as a unit of account.

In looking at the way Bitcoin is used (or not) as a medium of exchange, he points out the number of daily transactions of Bitcoins has fundamentally not changed in the past year. It has essentially stayed at around 60,000 transactions, which illustrates Bitcoin has experienced almost no growth in popularity, despite the assertion that increasing numbers of merchants are willing to accept it. For many store owners, accepting Bitcoin was about marketing to a particular demographic that is young, tech savvy and relatively well off.

As a means of payment, the fact that you have to calculate prices of purchases with amounts such as 0.00301 Bitcoin or “3.01 Bitcoin times 10 to the minus 2” effectively means it is never likely to become a unit of account.

Professor Yermack’s research on Bitcoin volatility found it displayed an average 10% price change per day with an overall volatility of 142% over the course of a year. This compared to Gold’s price fluctuation of 22% in 2013. Bitcoins’ price difference on a range of different exchanges also posed a problem for people trying to actually value Bitcoin at any given point in time. This was something you would never see with US dollars, for example, and contravenes basic economic principles of currency.

Another characteristic of Bitcoin’s price during the year was that it was in no way related to the price of any other currency. Significant events in the global economy that impacted currencies like the US and Australian dollar had no effect on Bitcoin. Bitcoin’s value is derived from its main role, which is as a curiosity and as a means of investment speculation.

As a final taunt to the Bitcoin faithful, Professor Yermack suggests the entire Bitcoin mining effort could be subverted by a person or government – such as Vladimir Putin – taking control of the peer-to-peer network that essentially validates every transaction.

In all likelihood this would be possible, but more research is required to convince the Bitcoin community of the validity of the argument.

Regardless of what the future holds for Bitcoin, the interest in it has challenged fundamental views of economics, law and finance.

Professor Yermack plans to cash this particular Bitcoin characteristic in and is running a course at NYU on Bitcoin starting this year. Hopefully something he will share with a wider audience again some day.

David Glance, Director of Innovation, Faculty of Arts, Director of Centre for Software Practice, The University of Western Australia

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

Sam Dallyn, University of Manchester

A turbulent last few months have seen numerous pieces announcing the end of Bitcoin, its imminent collapse, or the bursting of the bubble. Commentators are missing the point: the key to Bitcoin’s surprising resilience lies outside of traditional economic thinking.

Mark Williams of Boston School of Management predicts that Bitcoin will drop to $10 a share by the first half of 2014. In recent months Bitcoin transactions have been curbed in China on the orders of the central bank, declared illegal in Russia, and associated with money laundering.

Yet subsequent to each apparently terminal problem – the latest of which was the bankruptcy of the largest Bitcoin exchange site, Mt. Gox – and wave of ensuing negative coverage, after an initial substantial drop Bitcoin has picked up value again fairly rapidly. Remarkably the Bitcoin exchange rate still sits at somewhere between $500-600 (at last check, although this is prone to drastic fluctuations). This suggests that the numerous economists who have prematurely dismissed Bitcoin are at least missing something in their analyses.

The electronic currency was created in 2009 by the pseudonym Satoshi Nakomoto – possibly a group of hackers and cryptographers – and operates as an electronic peer-to-peer network transaction system that works through an expanding chain of numbers. This cryptographic system generates a fixed number of Bitcoin and the currency is released at 15-minute intervals in set quantities, Bitcoin will reach a final total of 21 million by 2140. They are released through a process known as mining, although the currency is most commonly acquired through exchanges with national currencies. Mining consists of expending computer power at considerable environmental cost to find the hash key that generates the release of the next set of Bitcoin.

Bitcoin Bubble

The consensus amongst the majority of economic bloggers seems to be that Bitcoin is not a viable currency and a bubble that is soon to burst; most famously the Nobel laureates Paul Krugman and Robert Shiller have expressed this view. If Bitcoin’s continued high valuation after several reportedly terminal crises should tell us anything: it is that it may be a bubble but it is not a conventional one, and this is because owners of the currency have longer-term political and ideological reasons for holding it.

Dismissing Bitcoin as a financial bubble misses precisely what is most significant about Bitcoin: First that it shows that alternative forms of community currency not created or backed by the state are at least possible. Second, it suggests people can invest in currencies and assets for other more durable reasons than short-term economic gain, like underlying beliefs and political ideology. Arguably economists have been so confused by Bitcoin because these are both points that contemporary mainstream economics tends to neglect.

One of the main reasons why Bitcoin may well be a bubble in the longer term is that there is a tendency to hoard the currency as some (but not all) individuals keep hold of it in the expectation of a continuing increase in value. Yet the finite number of Bitcoin means that its value as a currency is limited, since if individuals see their Bitcoins as a store of value rather than spend them this damages its status as a currency.

Consequently Bitcoin drifts towards having a strong financial asset status as many people keep hold of the currency. With national currency, of course, central banks have the option of printing money when there is a lack of liquidity. This tendency to store has been noted in some social network analysis research, which estimates that in the first part of 2013, 64% of newly mined Bitcoin were not circulating.

Bitcoin Community

While Bitcoin’s status as a currency may not be sustainable, its continuing value as an asset does require further explanation and this can be found in the community of Bitcoin holders. Social anthropologists seem to be one of the few groups of writers that give primary attention to the underlying character of this community. For example, in the most extensive survey of the Bitcoin community to date with more than 1,000 participants, curiosity and politics are strong reasons for holding the currency ranking closely alongside profit.

The survey also finds that the community seems to be overwhelmingly male and economically libertarian in spirit. In the context of political and economic beliefs there are clear echoes of the Austrian School of economists and Ludwig Von Mises. As Von Mises notes in The Theory of Money and Credit: “It is not the state but the common practice of all those who have dealings in the market, that creates money”. In line with Von Mises a key aim of the Bitcoin network is to challenge the idea that only the state can maintain a money system. The economic libertarianism of parts of the Bitcoin community seems to be anti-central banking, anti-governmental oversight and anti-state intervention.

The community has changed in recent months, for example hedge funds have become more involved in the currency. How could speculators resist an asset so free from regulation and so volatile? Parts of the community are likely to be less enamoured of this than others, but presumably if you’re a good economic libertarian –- which Bitcoin owners tend to describe themselves as – you think that speculation is par for the course. In short, let the market decide.

Whether we have any sympathies with this political agenda, or whether we would strongly reject it. Bitcoin does illustrate that the durability of assets is determined by the beliefs of the communities that sustain them, and when an asset is underpinned by political values this can only add to its longevity. If something as volatile and improvisatory as Bitcoin can generate and sustain a significant degree of traction despite major set backs, surely it is only a matter of time before another electronic currency asserts itself on an international stage. In online circles a number of alternative candidates, like Dogecoin and Litecoin, are already circulating.

Sam Dallyn, Lecturer in Management and Organisation Studies, Manchester Business School, University of Manchester

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

Eric Daniel Fournier, University of California, Los Angeles and Alex Ricklefs, University of California, Los Angeles

Pacific Gas and Electric (PG&E) recently started the process of shutting down the Diablo Canyon generation facility, the last active nuclear power plant in California. The power plant, located near Avila Beach on the central Californian coast, consists of two 1,100 megawatt (MW) reactors and produces 18,000 gigawatt-hours (GWh) of electricity a year, about 8.5 percent of California’s electricity consumption in 2015. It has been, up until this point, the single largest electrical generation facility in the state.

Looming over the imminent closure of Diablo Canyon is California State legislative bill SB 350, or the Clean Energy and Pollution Reduction Act of 2015. The act is a cornerstone of the state’s ongoing efforts to decarbonize its electricity grid by requiring utilities to include renewable sources for a portion of their electrical generation in future years. The mandate also requires utilities to run programs designed to double the efficiency of electricity and natural gas consumption.

But a number of significant unanswered questions remain about this ambitious energy policy, as the planned closing by 2025 of Diablo Canyon illustrates. Can utilities supply electricity around the clock using these alternative generation sources? And crucially, can energy storage technologies provide the power on demand that traditional generators have done?

Moving away from nuclear power

Nuclear power plants saw their heyday in the early 1970s and were praised for their ability to produce large amounts of electricity at a constant rate without the use of fossil fuels.

However, due to negative opinion and costly renovations, we are now observing a trend whereby long-running nuclear power plants are shutting down and very few new plants are being scheduled for construction in the United States.

Utilities are moving toward renewable electricity generation, such as solar and wind, partially in response to market forces and partially in response to new regulations that require utilities to reduce greenhouse gas emissions. In California, in particular, the shift toward renewable energy for market and environmental reasons, along with the public’s negative perception of nuclear energy, has caused utilities to abandon nuclear power.

While opponents can view the shutdown of nuclear power plants as a health and environmental success, closing nuclear plants intensifies the challenges faced by utilities to meet electricity consumption demand while simultaneously reducing their carbon footprint. PG&E, for example, has pledged to increase renewable energy sources and energy efficiency efforts, but this alone will not help them supply their customers with electricity around the clock. What can be used to fill the sizable gap left by Diablo Canyon’s closing?

Solar and wind energy sources are desirable as they produce carbon-free electricity without producing toxic and dangerous waste byproducts. However, they also suffer from the drawback of being able to produce electricity only intermittently throughout the day. Solar energy can be utilized only when the sun is out, and wind speeds vary unpredictably.

In order to meet customer electricity demand at all hours, energy storage technologies, alongside more renewable sources and increased energy efficiency, will be needed.

Enter energy storage

Energy storage has long been touted as the panacea for integrating renewable energy into the grid at large scale. Replacing the power generation left by Diablo Canyon’s closing will require expansive additions to wind and solar. However, more renewable energy generation will require more storage.

There are many different energy storage technologies currently available or in the process of commercialization, but each falls into one of four basic categories: chemical storage as in batteries, kinetic storage such as flywheels, thermal storage and magnetic storage.

The different technologies within each of these category can be characterized and compared in terms of their:

• power rating: how much electrical current produced
• energy capacity: how much energy can be stored or discharged, and
• response time: the minimum amount of time needed to deliver energy.

The accompanying figures graphically compare each category of storage and how they perform on these characteristics.

The key challenge that utilities are now faced with is how to integrate energy storage technologies for specific power delivery applications at specific locations.

This challenge is further complicated by the electric power transmission system and consumer behaviors that have evolved based on a energy supply system dominated by fossil fuels. Additionally, storage technologies are expensive and still developing, which makes fossil fuel generators look more economically beneficial in the short term.

Implementing storage technologies

Currently in California, energy storage is effectively provided by fossil fuel power plants. These natural gas and coal-powered plants provide steady “baseload” power and can ramp up generation to meet peaks in demand, which generally happen in the afternoon and early evening.

A single energy storage device cannot directly replace the capacity potential of these fossil fuel sources, which can generate high rates of power as long as needed.

The inability to perform a like-for-like replacement means that a more diversified portfolio strategy toward energy storage must be adopted in order to make a smooth transition to a lower carbon energy future. Such balanced energy storage portfolio would necessarily consist of some combination of:

• short-duration energy storage systems that are capable of maintaining power quality by meeting localized spikes in peak demand and buffering short term supply fluctuations. These could include supercapacitors, batteries and flywheels that can supply bursts of power quickly.
• Lower speed energy storage that can supply a lot of power and store a lot of energy. These systems, such as pumped hydro and thermal storage with concentrated solar power, are capable of shifting the seasonality of solar production and servicing the unique power requirements for large scale or sensitive power users in the commercial and industrial sectors.

This set of storage technologies would have to be linked up in a kind of chain, nested and tiered by end use, location and integration into the grid. Additionally, management systems will be needed to control how the storage technologies interact with the grid.

Currently without sufficient energy storage in place, utilities now use natural gas to fill in the gaps in electricity supply from renewable sources. Utilities use “peaker” plants, which are natural gas-fueled plants that can turn generation up or down to meet electricity demand, such as when solar output dips in the late afternoon and evening, while producing air pollution and greenhouse gas emissions in the process.

With natural gas consumption for electricity generation on the rise, would it be better to keep nuclear power while energy storage technologies mature? Although less polluting than coal, natural gas produces greenhouse gas emissions and has the potential to cause environmentally dangerous leaks, as seen in Aliso Canyon.

With nuclear, it is still not clear what to do with nuclear waste, and the disaster at Japan’s Fukushima nuclear power plant in 2011 highlights how catastrophically dangerous nuclear power plants can be.

Regardless of which situation you believe is best, it is clear that energy storage is the major limitation to achieving a carbon-free electricity grid.

California’s commitment to renewable energy sources has helped shift the state to using less fossil fuels and emitting less greenhouse gases. However, careful planning is needed to ensure that energy storage systems are installed to take over the baseline load duties currently held by natural gas and nuclear power, as renewables and energy efficiency may not be able to carry the burden.

Eric Daniel Fournier, Post Doctoral Researcher, Spatial Informatics, University of California, Los Angeles and Alex Ricklefs, Research Analyst in Sustainable Communities, University of California, Los Angeles

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

Naga Srujana Goteti, Rochester Institute of Technology; Eric Hittinger, Rochester Institute of Technology, and Eric Williams, Rochester Institute of Technology

Carbon-free energy: Is the answer blowing in the wind? Perhaps, but the wind doesn’t always blow, nor does the sun always shine. The energy generated by wind and solar power is intermittent, meaning that the generated electricity goes up and down according to the weather.

But the output from the electricity grid must be controllable to match the second-by-second changing demand from consumers. So the intermittency of wind and solar power is an operational challenge for the electricity system.

Energy storage is a widely acknowledged solution to the problem of intermittent renewables. The idea is that storage charges up when the wind is blowing, or the sun is shining, then discharges later when the energy is needed. Storage for the grid can be a chemical battery like those we use in electronic devices, but it can also take the form of pumping water up a hill to a reservoir and generating electricity when letting it flow back down, or storing and discharging compressed air in an underground cavern.

Motivated by a view that storage is a “green” technology, governments are increasingly promoting utility-scale and distributed energy storage. For example, in November 2017, New York Gov. Andrew Cuomo signed a bill mandating targets for storage adoption by 2030. Other states with similar policies are Oregon, Massachusetts, California and Maryland. Companies like Tesla also have been branding storage systems as clean technologies.

But do large storage systems lower emissions in our current grids? In a recent study, we found this isn’t necessarily the case – a reflection of how complex the electricity system can be.

The role of coal

Because storage can enable renewables to meet changing demand, we often assume the technology is inherently green – that is, by adding storage and renewables to the grid, we reduce greenhouse gas emissions. It’s similar to noticing that computers can provide education and productivity benefits, and then assuming that everything a person does on a computer is educational or productive. For both energy storage and computers, it depends on how you use it.

In our analysis, we found that adding storage can, for some grids, increase carbon emissions. While counterintuitive at first glance, this result makes sense when one considers how electricity grids are operated. Broadly speaking, the entire U.S. grid is operated as a set of regional sub-grids that cover the U.S. like a patchwork quilt.

Energy storage has no smokestack emissions like coal or natural gas power plants. But new storage affects the operation of other power plants on the grid, resulting in an increase or a decrease in carbon emissions depending on the type of power plants supplying electricity for that region.

In most cases, storage systems in the U.S. operate to maximize profit. To do this, storage “buys low and sells high.” Electricity is typically cheap at night when demand is low, and more expensive in the daytime, especially when people are getting home from work and turning on a bunch of appliances. So storage system operators tend to buy at night and sell during the day. The net effect of storage on emissions thus depends on what kind of generators are used to meet new demand at night versus the day.

In grids with a lot of coal power – Midwestern, Western and Southern states rely heavily on coal – the coal plants are typically used to meet small changes in demand at night. Natural gas plants tend to work during the day to meet peak demand. In these electricity grids, storage tends to charge up with coal power at night, displacing natural gas power during the day.

Coal power is a dirtier source of electricity than natural gas, with about twice the carbon emissions for every unit of electricity produced. Therefore, in places where new storage means more coal and less natural gas generation, storage will increase total carbon emissions from the grid.

In the Midwest, we found that adding a storage capacity of 3 gigawatts, enough power to supply roughly 500,000 U.S. homes, raises carbon emissions an equivalent of adding 6,700 cars per year to the road. And as more storage is added, the carbon emissions increase.

On the other hand, we found that in New York, a state with very little coal power, adding storage reduces carbon emissions. The Midwest is currently the dirtiest electricity grid in the U.S., and New York is one of the cleanest, so other regions would fall somewhere in between.

Not always easy being green

So, how can grid planners achieve the promise of a happy marriage between storage and renewables, assuming that they have to live in the same house with crusty old Uncle Coal?

One possibility is that, even with storage operating to maximize profit, adding enough wind and solar to the grid could counteract the effect of coal. With enough excess renewable energy, storage in any form – batteries or water reservoirs, for example – would preferentially use solar and wind because they are the cheapest sources when the supply of power exceeds the demand. Storage would still be shifting coal power from night to day, but enabling renewables more would be enough to make up for the extra emissions.

We studied this and found that for the Midwest grid there is a turning point when wind and solar reach about 18 percent of total generating capacity: At that point, adding storage starts to decrease rather than increase emissions. The current adoption level is 10 percent, so it would take some time before storage in the Midwest reduces emissions.

Another option is to change how storage is operated. With a modest price on carbon, for example, the cost of different generators would shift so that storage charges less often from coal plants, reducing emissions even in the coal-heavy Midwest grid.

While a national carbon tax does not look likely in the near future, there are others paths to ensuring green outcomes from storage. For example, states can put in place policies that encourage more use of zero-carbon resources instead of coal.

Regardless, storage will always help us to use more of our low-cost electricity sources. The question is whether that is coal, nuclear or renewables.

Naga Srujana Goteti, PhD Student in Energy and Sustainabiltiy, Rochester Institute of Technology; Eric Hittinger, Assistant Professor of Public Policy, Rochester Institute of Technology, and Eric Williams, Associate Professor of Sustainability, Rochester Institute of Technology

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

David Glance, The University of Western Australia

It seems governments are finally coming around to the idea that virtual currencies are here to stay. Backed by a business community eager to utilise innovations like Bitcoin, California and New York are quietly considering ways to regulate the trading of these currencies.

Without this regulation, Bitcoin will never gain full traction as a viable and accepted currency. Unfortunately for those proposing the currency as the payment mechanism of choice on the internet, Bitcoin is never far from media controversy.

Pick any month and you’ll find stories of using infected computers to “mine” Bitcoin, selling weapons, drugs and other illegal merchandise for Bitcoin, scamming Bitcoin customers, or just stealing Bitcoin.

And so it was that this week brought news of the arrest of Charlie Shrem, a prominent Bitcoin advocate and CEO of the Bitcoin company BitInstant. Shrem and another man Robert Faiella are charged with money-laundering, operating an unlicensed money-transmitting business and failing to file a suspicious activity report.

The charges relate to Faiella’s Bitcoin business he had been operating on the dark web marketplace the Silk Road under the name BTCKing. Faiella would sell Bitcoin which were procured by Shrem through BitInstant despite both knowing that the currency was used to purchase drugs and other contraband on the Silk Road.

Interestingly, the federal regulations that were used to charge Shrem were only put in place last year and for some, it is the lack of overall regulation that is inhibiting the use of Bitcoin for legitimate purposes and consequently it is the absence of regulation that is making it a favourite currency of the underworld.

Between New York and Silicon Valley

Now two states in the US, California and New York, are moving to put in place regulations that will, they hope, bring some normalcy to virtual currencies and allow companies to incorporate them safely into their products.

The New York Department of Financial Services yesterday started public hearings about virtual currencies that will include the discussion of the potential for the issuing of a “BitLicense” for businesses wanting to use a virtual currency.

The hearings will feature testimony from Bitcoin venture capitalists, law enforcement, Bitcoin companies and the academics Susan Athey, Professor of Economics at Stanford University and Ed Felten, Professor of Computer Science and Public Affairs at Princeton University.

Possibly the biggest irony however is the fact that Cameron and Tyler Winklevoss are also presenting. In 2012, the Winklevoss twins led an investment round that resulted in US$1.5 million in seed funding for BitInstant, Shrem’s company.

At the same time that New York is holding public hearings, financial regulators in California are taking a more discrete approach in privately consulting with lawyers and compliance experts as to whether companies transmitting Bitcoin require a license from the Department of Business Oversight and what other regulations need to be put in place for virtual currencies.

Commentary from the first panel in New York yesterday suggests that nothing particularly surprising will eventuate from the discussions. All of the commentators including the Winklevoss brothers have agreed that there needs to be some, but not too much, regulation.

Damned if you do, damned if you don’t

The US is not alone in considering regulating virtual currencies. Most governments are delaying the issue by just staying clear of any decisions and warning financial institutions of the risks associated with currencies like Bitcoin as a potential money laundering device.

The Swedish bank SEB AB has this week been reported as rejecting requests from customers to set up foreign exchange accounts to manage Bitcoin.

Amongst those calling for regulation of Bitcoin, Georges Ugeux has claimed that Bitcoin is essentially a Ponzi scheme that only works if buyers continue to be willing to believe that it has intrinsic value.

Of course, Bitcoin has no economic, social or financial value and so if people decided to sell one day, the theory is that the entire Bitcoin market would collapse. Uguex believes that the price of Bitcoin is being manipulated by those with an interest in preserving its value and because of the lack of regulation, there is no one that is interested in investigating this possible manipulation.

This is a view shared in part by the US Treasury secretary Jack Lew and Jamie Dimon, CEO of JPMorgan. At the World Economic Forum last week, Jamie Dimon warned that Bitcoin could be used to fund terrorism and that regulation would essentially shut it down. Lew commented that having talked to Jamie Dimon, “he and I both share a certain incredulity about the whole phenomenon”.

Bitcoin needs to be regulated by governments to realise its potential as being a more efficient means of conducting Internet commerce. But this regulation will come at the risk of severely dampening the enthusiasm behind virtual currencies in general. For Bitcoin it remains a question of damned if you do and damned if you don’t.

David Glance, Director, Centre for Software Practice, The University of Western Australia

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

Eric Hittinger, Rochester Institute of Technology and Eric Williams, Rochester Institute of Technology

The market for energy storage on the power grid is growing at a rapid clip, driven by declining prices and supportive government policies.

Based on our research on the operation and costs of electricity grids, especially the benefits of new technologies, we are confident energy storage could transform the way American homeowners, businesses and utilities produce and use power.

Balancing acts

Energy storage in this context simply means saving electricity for later use. It’s like having a bunch of rechargeable batteries, but much larger than the ones in your cellphone and probably connected to the grid.

After annual average growth of about 50 percent for five years, the U.S. electricity industry installed a total of 1 gigawatt-hour of new storage capacity between 2013 and 2017, according to the firm GTM Research. That’s enough to power 16 million laptops for several hours. While this amount of storage is less than 0.2 percent of the average amount of electricity the U.S. consumes, analysts predict that installations will double between 2017 and 2018 and then keep expanding rapidly in the U.S. and around the world.

To see why this trend is a big deal, consider how electricity works.

It takes a hidden world of complexity and a series of delicate balancing acts to power homes and workplaces because the grid has historically had little storage capacity. After being generated at power plants, electricity usually travels down power lines at the speed of light and most of it is consumed immediately.

Without the means to store electricity, utilities have to produce just enough to meet demand around the clock, including peak hours.

That makes electricity different from most industries. Just imagine what would happen if automakers had to do this. The moment you bought a car, a worker would have to drive it out the factory gate. Assembly lines would constantly speed up and slow down based on consumer whims.

It sounds maddening and ridiculous, right? But electric grid operators basically pull this off, balancing supply and demand every few seconds by turning power plants on and off.

That’s why a storage boom would make a big difference. Storage creates the equivalent of a warehouse to stow electricity when it is plentiful for other times when it is needed.

Stretching power

Energy storage can help in a variety of ways, essentially serving as a Swiss Army knife for electricity grids. It can help balance short-term power fluctuations, manage peak demand or act as a backup to prevent or recover from power outages.

And it can be deployed at any scale and at any point in the grid, from a small home storage system to a pumped hydroelectric reservoir big enough to power a small city. While storage actually consumes a little electricity rather than producing any, it makes the electricity business more economically efficient. As the volume of storage grows, we expect grids to become more stable and flexible.

Storage may also make a big difference with electricity generated through solar or wind power – which can only be harnessed when the sun is shining and the wind is blowing.

But, in general, it isn’t necessary for that purpose yet. While those industries are growing quickly, wind power generates only about 6 percent of U.S. electricity and solar less than 2 percent. Electricity grids can currently use almost all of that power as it is produced.

Grid operators, accustomed to managing the variable supply and demand for power, can manage the extra unpredictability they get from wind and solar energy now. But as utilities, businesses and consumers bring more renewable energy online, the grid may become harder to balance without additional storage.

To be sure, hydroelectric plant operators have been storing power for a long time. The U.S. has the capacity to store some 22 gigawatts in pumped hydropower, about 2 percent of U.S. generating capacity. Yet its reliance on large water reservoirs, which can’t be easily constructed near power markets, limits the growth potential of this energy option.

Competing with natural gas

Once energy storage scales up, utilities will meet peak demand more easily with less total capacity and fewer power plants. If they can rely on storage to supply power during high-demand hours instead of building new power plants, it can save money all around.

But storage isn’t the only game in town – other technologies offer similar benefits. Utilities can install new transmission lines or rely on flexible natural gas, which is essentially the biggest competitor for energy storage.

Natural gas generation produces about a third of the nation’s electricity today and provides many of the same benefits as storage since these power plants are easy to switch on and off. The relatively low prices for natural gas, less than half of what they were a decade ago due to widespread hydrofracking, have probably slowed energy storage growth until now.

Natural gas has become increasingly popular for power generation, displacing demand for coal since 2000. But if storage gets cheap enough, this equation may flip and storage could threaten the economics of natural gas generation.

Help from the government and better batteries

One reason why this industry is growing is that it’s getting a boost from the government.

California, Maryland, New Jersey and Nevada are subsidizing storage, mandating its adoption or both. A similar measure is pending in Hawaii’s legislature.

And despite the Trump administration’s efforts to maximize fossil fuel extraction, the federal government is now laying the regulatory groundwork for the storage industry to compete directly in open wholesale energy markets for the first time.

Improvements in technology have made a difference, too. Battery technology, led by the same lithium-ion design that powers mobile phones, is making big strides and getting much cheaper.

Lithium-ion batteries are both responsible for most of this new wave of grid-connected energy storage and the critical component inside the rapidly growing number of American electric vehicles. For example, the lithium-ion battery used in the the Tesla Powerwall, a home battery system, is the same as the one the company uses in its vehicles.

Grid-scale lithium batteries often differ from those in cars but use the same basic technology. The price of utility-scale lithium-ion battery systems fell 40 percent in just five years to around US$1,200 per kilowatt-hour in 2015 from roughly $2,100 in 2010 and are expected to continue falling.

The future

The grid currently has relatively little storage for the same reason that only about 200,000 of the 17.2 million vehicles Americans bought in 2017 were electric: It’s expensive today.

Electric vehicles do not yet save money for most U.S. drivers. But market experts project that electric vehicles ownership will cost less than standard vehicles powered by gasoline within a decade and continue getting cheaper after that.

Likewise, for the electricity grid, if storage gets cheap enough, its potential market could expand from 1 gigawatt-hour to dozens or even hundreds of gigawatt-hours.

If or when that happens, wind and solar power would become more competitive, increasingly displacing both coal and natural gas – now the nation’s two top sources of electric power. And this cheaper storage would also make electric vehicles more affordable, reducing the amount of gasoline and diesel Americans consume. The electricity and automotive industries operate nearly the same way they did 50 years ago. But a world of low-cost batteries would change them both in exciting and unprecedented ways.

No matter what happens, we believe that storage is “future-proof” because it works well on the current grid and with a wide variety of other technologies. If the wind and solar industries keep up their current momentum (and they probably will), storage will become even more valuable. But if the grid goes another direction – relying more on large and expensive generation plants, for example – storage would make it easier to manage peak demand without surplus capacity. Even if we can’t say exactly what the grid of the future will look like, we are pretty confident that storage will keep it humming in new ways.

Eric Hittinger, Assistant Professor of Public Policy, Rochester Institute of Technology and Eric Williams, Associate Professor of Sustainability, Rochester Institute of Technology

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