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When bitcoin's network meets a regulated global financial centre

IN 2009, a novel incentive structure was published in open-source software. The incentives seeded a self-organising network of thousands of nodes which today operate what is essentially the largest supercomputer in the world. Beyond the recent headlines on prices, what insights can we glean from the rapid scaling of the bitcoin network?


Bitcoin requires cryptography, the process of encrypting and decrypting information, to complete payments without a central bookkeeping authority. The network allows for occasional and semi-private transactions between pseudonymous peers, known to each other only by a digital address, who do not trust each other (or any third party for that matter).

Trust is placed instead in the improbability of a superior pool of computing resources being able to subvert the network. This in turn assumes that there is no technological shortcut to solving the cryptography other than computational brute force. In other words, trust in bitcoin is engineered by its proof-of-work - the "mining" which can be verified by any participant in the network.

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In today's digital world where norms on trustlessness and privacy are elastic, there are real-world boundaries to such assumptions, especially where there is a link to bricks and mortar. A home mortgage could be financed anonymously from multiple lenders, but they will require some proof of identity: the home address, an income statement.


Cryptoassets such as bitcoin, in essence, are an incentive network coordinated through protocols at massive scale, and each participant a work unit who sustains the incentive system.

Now imagine if you had some ownership in the protocol. When you run a Google search, you make the Google network more useful and extensive as your search activity promotes a behavioural trend; more search creates better search. Your ownership stake in the underlying protocol becomes more valuable.

Perhaps you could also earn an ownership stake if your computer contributes to the storage, availability and any cryptographic proof-of-work required to sustain the protocol's functioning.

Whereas bitcoin is used for spot payment, an alternative "coin" may perform deferred payment for future harvest. A newer generation of protocol, for example in the ethereum network, envisages coins as virtual computers. A simple computation could be a network-enforced "smart" contract to release payment when certain conditions are fulfilled, usefully taking over some operations of the notary, lawyer or banker.


The question of valuation arises when we address the store-of-value utility of cryptoassets as distinct from their transactional utility. The cult wine Screaming Eagle is not priced purely on its calorific content or its utility as a drink. There is scarcity at work, and a belief that its market price is sufficiently and widely supported by an identifiable community. Much the same for gold or Old Masters as bankable assets.

Underlying cryptoassets is a publicly defined supply/scarcity mechanism built into the protocols. On one hand, there is no lack of protocol versions - anyone can clone a bitcoin, so its value and utility lie in the network effect of widespread adoption and support. With over a thousand flavours of cryptoassets today and a winner-takes-all dynamic however, the incentives which seeded the bitcoin or ethereum networks may not work for a clone unless it fields a different mousetrap.


Networks can collapse, naturally or through regulatory intervention. The nature of bitcoin's trustless and permissionless network is that no accountable authority exists to certify and warrant performance and testing, or even its availability. Yet the vast majority of today's cryptoasset participants engage on blind trust in the integrity of the underlying protocols and their software implementation.

Not surprisingly, regulatory treatment of activity in cryptoassets varies across the world. Is it even a legitimate asset class? Is there a useful line between the Betting Act and Securities and Futures Act; a Common Gaming House and an Exchange?

The technological innovation underlying cryptoassets lies in its distributed architecture, or blockchain. As trustless, pseudonymous networks begin to interact with regulated commercial networks, some investigative themes emerge:

  • Can cryptoassets serve as a basis for investment in useful global protocols and standards?
  • Can storage and computational blockchains offer institutions a cost and value proposition distinct from cloud computing?
  • Can market infrastructures and intermediaries allow safe interaction between regulated fiduciaries and unregulated peer-to-peer networks?

A "better" protocol does not easily dominate an embedded one. For adoption in an international commodity and financial centre such as Singapore, investment in an innovation agenda is as important as fulfilling a displacement agenda.

  • The writer is head of derivatives at the Singapore Exchange
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