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Smartphone Voting Is Happening, but No One Knows if It’s Safe

August 10, 2018 by Blockchain Consultants

When news hit this week that West Virginian military members serving abroad will become the first people to vote by phone in a major US election this November, security experts were dismayed. For years, they have warned that all forms of online voting are particularly vulnerable to attacks, and with signs that the midterm elections are already being targeted, they worry this is exactly the wrong time to roll out a new method. Experts who spoke to WIRED doubt that Voatz, the Boston-based startup whose app will run the West Virginia mobile voting, has figured out how to secure online voting when no one else has. At the very least, they are concerned about the lack of transparency.

“From what is available publicly about this app, it's no different from sending voting materials over the internet,” says Marian Schneider, president of the nonpartisan advocacy group Verified Voting. “So that means that all the built-in vulnerability of doing the voting transactions over the internet is present.”

And there are a lot of vulnerabilities when it comes to voting over the internet. The device a person is using could be compromised by malware. Or their browser could be compromised. In many online voting systems, voters receive a link to an online portal in an email from their election officials—a link that could be spoofed to redirect to a different website. There’s also the risk that someone could impersonate the voter. The servers that online voting systems rely on could themselves be targeted by viruses to tamper with votes or by DDoS attacks to bring down the whole system. Crucially, electronic votes don’t create the paper trail that allows officials to audit elections after the fact, or to serve as a backup if there is in fact tampering.

But the thing is, people want to vote by phone. In a 2016 Consumer Reports survey of 3,649 voting-age Americans, 33 percent of respondents said that they would be more likely to vote if they could do it from an internet-connected device like a smartphone. (Whether it would actually increase voter turnout is unclear; a 2014 report conducted by an independent panel on internet voting in British Columbia concludes that, when all factors are considered, online voting doesn’t actually lead more people to vote.)

Thirty-one states and Washington, DC, already allow certain people, mostly service members abroad, to file absentee ballots online, according to Verified Voting. But in 28 of those states—including Alaska, where any registered voter can vote online—online voters must waive their right to a secret ballot, underscoring another major risk that security experts worry about with online voting: that it can't protect voter privacy.

"Because of current technological limitations, and the unique challenges of running public elections, it is impossible to maintain separation of voters’ identities from their votes when Internet voting is used," concludes a 2016 joint report from Common Cause, Verified Voting, and the Electronic Privacy Information Center. That's true whether those votes were logged by email, fax, or an online portal.

Enter Voatz

Voatz says it’s different. The 12-person startup, which raised $2.2 million in venture capital in January, has worked on dozens of pilot elections, including primaries in two West Virginia counties this May. On a website FAQ, it notes, “There are several important differences between traditional Internet voting and the West Virginia pilot—mainly, security.”

Voatz CEO Nimit Sawhney says the app has two features that make it more secure than other forms of online voting: the biometrics it uses to authenticate a voter and the blockchain ledger where it stores the votes.

The biometrics part occurs when a voter authenticates their identity using a fingerprint scan on their phones. The app works only on certain Androids and recent iPhones with that feature. Voters must also upload a photo of an official ID—which Sawhney says Voatz verifies by scanning their barcodes—and a video selfie, which Voatz will match to the ID using facial-recognition technology. (“You have to move your face and blink your eyes to make sure you are not taking a video of somebody else or taking a picture of a picture,” Sawhney says.) It’s up to election officials to decide whether a voter should have to upload a new selfie or fingerprint scan each time they access the app or just the first time.

"We feel like that extra level of anonymization on the phone and on the network makes it really really hard to reverse-engineer."

Nimit Sawhney, Voatz

The blockchain comes in after the votes are entered. “The network then verifies it—there’s a whole bunch of checks—then adds it to the blockchain, where it stays in a lockbox until election night,” Sawhney says. Voatz uses a permissioned blockchain, which is run by a specific group of people with granted access, as opposed to a public blockchain like Bitcoin. And in order for election officials to access the votes on election night, they need Voatz to hand deliver them the cryptographic keys.

Sawhney says that election officials print out a copy of each vote once they access them, in order to do an audit. He also tells WIRED that in the version of the app that people will use in November, Voatz will add a way for voters to take a screenshot of their vote and have that separately sent to election officials for a secondary audit.

To address concerns about ballot secrecy, Sawhney says Voatz deletes all personal identification data from its servers, assigns each person a unique but anonymous identifier within the system, and employs a mix of network encryption methods. “We feel like that extra level of anonymization on the phone and on the network makes it really really hard to reverse-engineer,” he says.

Experts Are Concerned

Very little information is publicly available about the technical architecture behind the Voatz app. The company says it has done a security audit with three third-party security firms, but the results of that audit are not public. Sawhney says the audit contains proprietary and security information that can’t leak to the public. He invited any security researchers who want to see the audit to come to Boston and view it in Voatz’s secure room after signing an NDA.

This lack of transparency worries people who’ve been studying voting security for a long time. “In over a decade, multiple studies by the top experts in the field have concluded that internet voting cannot be made secure with current technology. VOATZ claims to have done something that is not doable with current technology, but WON'T TELL US HOW,” writes Stanford computer scientist and Verified Voting founder David Dill in an email to WIRED.

Voatz shared one white paper with WIRED, but it lacks the kind of information experts might expect—details on the system architecture, threat tests, how the system responds to specific attacks, verification from third parties. “In my opinion, anybody purporting to have securely and robustly applied blockchain technology to voting should have prepared a detailed analysis of how their system would respond to a long list of known threats that voting systems must respond to, and should have made their analysis public,” Carnegie Mellon computer scientist David Eckhardt wrote in an email.

Ideally, experts say, Voatz would have held a public testing period of its app before deploying it in a live election. Back in 2010, for example, Washington, DC, was developing an open-source system for online voting and invited the public to try to hack the system in a mock trial. Researchers from the University of Michigan were able to compromise the election server in 48 hours and change all the vote tallies, according to their report afterward. They also found evidence of foreign operatives already in the DC election server. This kind of testing is now considered best practice for any online voting implementation, according to Eckhardt. Voatz’s trials have been in real primaries.

"West Virginia is handing over its votes to a mystery box."

David Dill, Stanford University

Voatz's use of blockchain itself does not inspire security experts, either, who dismissed it mostly as marketing. When asked for his thoughts on Voatz’s blockchain technology, University of Michigan computer scientist Alex Halderman, who was part of the group that threat-tested the DC voting portal in 2010, sent WIRED a recent XKCD cartoon about voting software. In the last panel, a stick figure with a microphone tells two software engineers, “They say they’ve fixed it with something called ‘blockchain.’” The engineers’ response? “Aaaaa!!!” “Whatever they’ve sold you, don’t touch it.” “Bury it in the desert.” “Wear gloves.”

“Voting from an app on a mobile phone is as bad an idea as voting online from a computer,” says Avi Rubin, technical director of the Information Security Institute at Johns Hopkins, who has studied electronic voting systems since 1997. “The fact that someone is throwing around the blockchain buzzword does nothing to make this more secure. This is as bad an idea as there is.”

Blockchain has its own limitations, and it’s far from a perfect security solution for something like voting. First of all, information can be manipulated before it enters the chain. "In fact, there is an entire industry in viruses to manipulate cryptocurrency transactions before they enter the blockchain, and there is nothing to prevent the use of similar viruses to change the vote," says Poorvi Vora, a computer scientist and election security expert at George Washington University.

She adds that if the blockchain is a permissioned version, as Voatz’s is, “It is possible for those maintaining the blockchain to collude to change the data, as well as to introduce denial of service type attacks.”

Sawhney pushes back against this last critique, telling WIRED that the blockchain verifiers in the Voatz system is a collection of vetted stakeholders such as Voatz itself, election officials, nonprofit voting auditors, and politicians.

And even though the transaction is through an app rather than a browser, Vora says previously identified risks of internet voting remain. "Both the browser and the app run on the operating system underneath, and both, hence, inherit the vulnerabilities that go with relying entirely on software," she says.

Sawhney admits the concern about malware on a person’s device is legitimate but thinks that creating a program to manipulate votes would be so hard as to be impractical. “It’s theoretically possible, if that malware had been specifically written to intercept votes passing, to reverse-engineer our application, break all our keys, specifically modify if somebody marks oval A change it to oval B, and then bypass the identifier and send it to the network, but that is so, so hard to do in real time," he says. "It is possible, but we haven’t found a way to do it.” He adds that the app checks the phone for malware before downloading on a device, though he admits it could be possible for malware to go undetected.

The role of facial recognition in authenticating voter identities is another thing that concerns experts. Schneider worries that there could be ways to trick that technology using videos available elsewhere on the internet, for instance. And Vora notes that facial-recognition technology has known racial biases that could affect who even is able to access Voatz.

Sawhney tells WIRED that Voatz has people manually check the facial-recognition authorization. This is possible at the moment but could become an issue if the technology were to be introduced to a wider electorate, as Voatz states on its website is the ultimate goal. In fact, Voatz has already encountered a scaling problem. When Utah GOP voters tried to use the app during their caucus in April, many couldn’t get it to work. You can read about many voters’ experience in bad reviews of Voatz they left in Apple’s App Store. Sawhney tells WIRED that the issues stemmed from voters attempting to download the app and authenticate themselves minutes before polls closed, which didn’t give Voatz enough time.

Though Voatz has answers for much of the criticism it has faced this week, none of its responses are likely to convince security experts that the smartphone voting app is ready for November. At the very least, the security world's reaction to Voatz underscores how important transparency is in the rollout of any new voting system. “West Virginia is handing over its votes to a mystery box,” Dill says.

But election officials in West Virginia are enthusiastic about the app. “They used it in the primary in a couple of the other counties to do a test drive, and they said it was wonderful,” says Kanawha County Clerk Vera McCormick, who oversees voting in the state capital of Charleston and plans to allow the 60 overseas military members registered in her county to use Voatz to vote. “We're excited and my understanding is the security is wonderful, so we'll find out.”


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Read more: https://www.wired.com/story/smartphone-voting-is-happening-west-virginia/

Filed Under: cryptocurrency Tagged With: blockchain, Elections, security, voting

SoundCloud on the blockchain? Audius raises $5.5M to decentralize music

August 9, 2018 by Blockchain Consultants

Audius wants to cut the middlemen out of music streaming so artists get paid their fair share. Coming out of stealth today led by serial entrepreneur and DJ Ranidu Lankage, Audius is building a blockchain-based alternative to Spotify or SoundCloud.

Users will pay for Audius tokens or earn them by listening to ads. Their wallet will then pay out a fraction of a cent per song to stream from decentralized storage across the network, with artists receiving roughly 85 percent — compared to roughly 70 percent on the leading streaming apps. The rest goes to compensating whomever is hosting that song, as well as developers of listening software clients, one of which will be built by Audius.

Audius plans to launch its open-sourced product in beta later this year. But it’s already found some powerful investors that see SoundCloud as vulnerable to the cryptocurrency revolution. Audius has raised a $5.5 million Series A led by General Catalyst and Lightspeed, with participation from Kleiner Perkins, Pantera Capital, 122West and Ascolta Ventures. They’re betting that Audius’ token will grow in value, making the stockpile it keeps worth a fortune. It could then sell chunks of its tokens to earn revenue instead of charging artists directly.

Audius co-founders (from left): head of product Forrest Browning, CEO Ranidu Lankage, CTO Roneil Rumburg

“The biggest problem in the music industry is that streaming is taking off and artists aren’t necessarily earning a lot of money. And it can take three months, or up to 18 months for unsigned artists, to get paid for streams,” says Lankage. “That’s what crypto really solves. You can pay artists in near real-time and make it fully transparent.”

The big question will be whether Audius can use the token economy to crack the chicken-and-egg problem of getting its first creators and listeners on a platform that might be less functionally robust than its traditional competitors. There are a lot of moving parts to decentralize, but there are also plenty of disgruntled musicians out there waiting for something better.

From Sri Lankan hip-hop star to serial entrepreneur

Most startup guys don’t have Billboard charting singles on their bio, but Lankage does. Born in Sri Lanka, his hip-hop songs in his native tongue of Sinhalese were the first of the language to be played on the BBC and MTV. He got signed to Sony and even went platinum, but left the label seeking greater control over his work. After going to Yale, he applied his music business knowledge to build a Reddit for dance music called The Drop with Twitch’s Justin Kan back in 2015.

The two teamed up again on a video version of Q&A app Quora called Whale, but that fizzled out too. Lankage’s next venture Polly, a polling tool built as a complement to Snapchat, inspired the now super-popular Instagram Stories polls and questions stickers. But after an acqui-hire by Reddit fell through, he returned to his first love: music.

“I’ve always been passionate about building tools for creators,” says Lankage. But this time, he wanted to focus on helping them turn their art into a profession. He teamed up with CTO Roneil Rumburg, an engineering partner at Kleiner Perkins who’d build a crypto wallet called Backslash, and head of product Forrest Browning, who’d sold his software metering startup StacksWare to Avi Networks.

Their goal is to build a blockchain streaming music service where listeners don’t have to understand blockchains. “A user wouldn’t even know that they have a wallet,” says Rumburg. They’ll just hear an ad every once in a while, get a subscription, or pay per stream. Since Audius is open sourced, developers will be able to build their own listening clients on top, which could specialize in discovery of certain types of music or offer their own payment schemes.

“I have known Ranidu, Forrest and Roneil for a long time, and have always been impressed with their ability to blend art, technology and business together,” says investor Niko Bonatsos of General Catalyst. “In Audius, they bring together all three skills, with a deep technical heart and a compelling solution for a very big marketplace.”

Tokens, not record labels

For starters, Audius is focusing on signing up independent electronic musicians. These are the types that might be popular on SoundCloud but actually have to pay for hosting there while not getting much back due to the platform’s weak monetization options. Don’t expect U2 and Ariana Grande on Audius, at least not yet. But the startup could differentiate by offering access to content you can’t find elsewhere.

To get artists on board, Lankage tells me Audius plans “to use token incentives.” Those willing to jump on first before there are many listeners could get a bonus allotment of tokens that might be worth more if they help popularize the service. And where artists go, their fans will follow. Audius is hoping artists will share its links first because that’s where they’ll earn the most money.

Audius has also lined up a legion of big-name advisors to help it develop its blockchain product and artist relationships. Those include Augur co-founder Jeremy Gardner, EDM artist 3LAU, EA co-founder Bing Gordon and more it can’t announce just yet.

The linchpin of Audius will be the user experience. If the system feels too complicated, listeners and artists will stay elsewhere. A DJ might earn more per stream from Audius, but if Spotify or SoundCloud offer better ways for fans to subscribe to them and generate more plays long-term, they’ll still direct supporters there. But if Audius can hide the nerdy bits while solving the music industry’s problems, it has the potential to be one of the first mainstream consumer blockchain projects that treats the tech as a utility, not just a new stock market to bet on.

Read more: https://techcrunch.com/2018/08/08/audius/

Filed Under: cryptocurrency Tagged With: Audius, soundcloud, streaming music

How to End Japans Deflation? Abolish Cash

August 8, 2018 by Blockchain Consultants

Monetary medicine in Japan is keeping the economy alive, but with nasty side effects. The search for a new cure should begin with a simple question: What if the Bank of Japan were to throw out its money-printing presses?

Instead of pushing more yen into an economy that has already absorbed a threefold increase in cheap central-bank funds in five years without any sign of the much-awaited 2 percent inflation, maybe it’s time to abolish cash altogether. 

Tired Yet?

The Bank of Japan has tripled its monetary base in the past five years but the goal of 2 percent inflation has remained elusive

Source: Bank of Japan, Bloomberg

While previous BOJ chiefs were rightly blamed for not acting aggressively enough to prevent the country’s slide into deflation, timidity is not a charge that can be leveled against Haruhiko Kuroda. Starting with his first policy meeting as governor in April 2013, Kuroda has expanded the central bank’s holdings of government bonds and bills to 48 percent of outstanding securities, from just 12 percent. He has also made the BOJ one of the top 10 shareholders in 40 percent of Japanese publicly traded companies, according to Travis Lundy, an analyst who publishes on Smartkarma.

Then, in early 2016, Kuroda embarked on an even bigger adventure to expunge the deflationary mindset of Japanese firms. Following the lead of Denmark, Sweden, Switzerland and the euro area, the BOJ embraced a policy of negative policy interest rates.

A year and a half of that experiment — not to mention more than 20 years of zero interest rates preceding it — has gone nowhere. Core inflation excluding fresh food came in at 0.8 percent in June. With the jobless rate standing at a 26-year low of 2.2 percent, as Bloomberg’s Japan economist Yuki Masujima notes, inflation should in theory be hurtling toward 1.5 percent.

Not only are prices off target, a side effect of negative interest rates is now obvious in worsening profitability of Japanese banks. The reason is simple: Even if the BOJ forces commercial lenders to park more of their surplus funds with it at minus 0.1 percent, it’s not so easy for banks to pass on negative interest rates to depositors. That’s because people have an alternative that pays a guaranteed rate of zero percent: cash. 

Too Many Banknotes

More than 20 percent of the Bank of Japan's monetary base comprises currency notes

Source: Bank of Japan

*Lenders' current account balances held with Bank of Japan but not counted in reserves.

Japan is a highly cash-dependent society. The cashless payment rate is only 20 percent. As long as people’s preference to hold physical yen isn’t forcibly changed, it may not be possible for the BOJ to continue its policy of negative interest rates indefinitely, given what it’s doing to the banks. Last week’s tweaks in monetary policy showed that fatigue is setting in. If pessimism gains ground, Prime Minister Shinzo Abe’s anti-deflation campaign will be over.

To rescue it, Abe must go beyond private-sector initiatives such as the soon-to-be-launched, QR-code-based “PayPay” smartphone payment service, a joint venture of SoftBank Group Corp. and Yahoo Japan Corp. What’s required is a public-sector push to replace physical cash with a national digital currency. Sweden may stop using cash by 2023. There’s no reason why technologically savvy Japan can’t get there even sooner.

A state-backed digital currency would make it easier for the BOJ and the finance ministry to run “helicopter money” experiments. The BOJ would create new electronic money and give it to the government against a perpetual bond sold by the finance ministry to the monetary authority. 1  The ministry would then credit the electronic money to people’s bank accounts with the proviso that every month that the gift is saved — and not spent — its value will go down by, say, one-twelfth of 1 percent.

Thus a part of Japan’s money supply would be effectively under negative interest rates. Higher spending would spur inflation. Should people try to get around the problem by swapping the yen gift into dollars, the Japanese currency would weaken. That, too, would be inflationary. The interest rate on bank reserves could then be raised to zero, giving banks much-needed relief. The BOJ could eventually make helicopter money its main policy tool, and unwind purchases of dated government securities, ETFs and corporate bonds, allowing asset markets to function normally again.

Abe rode to power in December 2012 by promising muscular leadership, and by selling voters the idea that Japan’s demographics didn’t have to be its destiny: An aging, shrinking population is no reason to accept a smaller economy every year. To his credit, Abenomics did manage to arrest a 15-year slide in nominal GDP, which was pulling the country into irrelevance against a resurgent China.

Bulking Up Again

Prime Minister Shinzo Abe's policies have stopped a 15-year decline in Japan's nominal GDP

Source: Bloomberg

But the job is far from done. Relentless pressure on Beijing from the Trump administration’s belligerent trade policies will push it to seek more influence in the region and beyond by stepping up belt-and-road financing. Now is not the time for Kuroda to walk away from the medicine chest, nor is it the time to persist with the current dosage – that would only weaken Japanese lenders to a point where they can’t compete against Chinese rivals for financing infrastructure projects.

So what if outlawing cash is still an experimental drug. It may be worth a try.

  1. This latter idea was suggested in 2016 to Abe’s advisers by former Federal Reserve Chairman Ben Bernanke.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Andy Mukherjee at amukherjee@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net

Read more: https://www.bloomberg.com/view/articles/2018-08-05/how-to-end-japan-s-deflation-abolish-cash

Filed Under: digital currency Tagged With: BANK OF JAPAN/THE, Currency, Government Bonds, Haruhiko Kuroda, Interest Rates, Japan, Japanese Yen Spot, Monetary Policy, Shinzo Abe, Sweden, view

Russia picks Steven Seagal to help its relationship with the U.S.

August 8, 2018 by Blockchain Consultants

Yes, that Steven Seagal. Meet Russia's new special representative to the U.S.
Image: Paul Archuleta/Getty Images

In an unconventional pick, action star Steven Seagal has been named as Russia’s special representative to the U.S.

The once-prolific actor has been recruited to deepen ties with the U.S. in the humanitarian field, assisting “cooperation in culture, arts, public and youth exchanges,” according to Russia’s foreign ministry.

SEE ALSO: The next Russian attack on U.S. elections could be more serious than Facebook memes

While the 66-year-old star of ’90s martial arts flicks like Under Siege and Hard to Kill might come across as an odd choice, Seagal has been courted by Russian President Vladimir Putin in the past few years.

Seagal received Russian citizenship back in 2016, where he’s been outspoken in his defence of Putin, even calling him a “great, great, great world leader, maybe, the greatest.” 

It’s not the first time Russia has tried to give Seagal some sort of semi-official status. In 2013, Putin pitched Seagal to be the country’s honorary consul in California and Arizona. 

“Our reaction was, ‘You’ve got to be kidding,'” an official with the Obama administration told BuzzFeed in 2015.

In response to the notably unpaid engagement, Seagal said he was “deeply humbled and honoured” on Twitter.

“I hope we can strive for peace, harmony and positive results in the world. I take this honour very seriously,” he added.

I am deeply humbled and honoured to have been appointed as a special representative of the Russian Foreign Ministry in charge of Russian and American Humanitarian ties.
I hope we can strive for peace, harmony and positive results in the world.
I take this honour very seriously pic.twitter.com/LTuUxsk1aZ

— Steven Seagal (@sseagalofficial) August 5, 2018

Aside from his engagements with Russia, Seagal has endorsed questionable cryptocurrency schemes and has been accused by several women, including Portia De Rossi and Bond actress Rachel Grant, of sexual harassment and abuse.

Amid strained relations between the two countries due to alleged interference in the 2016 presidential election, perhaps Russia is hoping the nostalgia of Seagal may help to ease things up. 

Maybe.

WATCH: Tasty-inspired mac ‘n’ cheese: We’re doing it wrong

Read more: https://mashable.com/2018/08/06/steven-seagal-russia-envoy/

Filed Under: cryptocurrency Tagged With: celebrities, Culture, politics, Russia, steven-seagal, vladimir-putin

Apple Added Another Digit

August 7, 2018 by Blockchain Consultants

You know what’s cool? A trillion dollars.

I don’t have anything interesting to say about the fact that Apple Inc.’s equity market capitalization reached a trillion dollars yesterday, but both Bloomberg and the New York Times have interactive online features about what numbers you could add to get to a trillion, and Bloomberg’s even includes some numbers you could multiply or subtract to get to a trillion, so perhaps I should list some numbers you could divide to get a trillion? Like, if you had a mole of  dollars, and you divided those dollars evenly among all of the stars in our galaxy, each star would have about as many dollars as Apple’s market cap. Or if you expressed Warren Buffett’s net worth in Mexican pesos, that would be approximately Apple’s market cap expressed in pounds sterling. Or if you had a googol of dollars and you divided them by the number of atoms in the universe, you’d have about enough dollars to give an Apple market cap to each person on earth. And then we’d all be rich.

What does it mean that Apple is worth a trillion dollars? I think there are two possibilities:

  1. The consensus expected future cash flows to Apple shareholders have a present value of $1 trillion; or
  2. Other.

You should not completely neglect “other.” There is something self-referential about corporate valuations, and I do not think it is ridiculous to believe some version of the idea that a company is worth a trillion dollars because it is worth a trillion dollars, and not because shareholders have a rational model of the expected future cash flows and those flows happen to add up to a trillion dollars. 

But the more conventional explanation is that people are willing to buy Apple shares at a $1 trillion valuation because they expect Apple to give shareholders back more than $1 trillion in the future. (Really, a present value of more than $1 trillion in the future, which means roughly $1 trillion very soon or much more than $1 trillion much later.) That is, not to belabor it too much, a lot of money. Usually when a company is worth $X, that can mean that it is currently generating lots of cash and paying it out to shareholders and that cash is expected to add up to about $X, that it is currently generating no cash at all and investing shareholder money in long-term projects, but that if all goes well and those projects pay off then it will in some distant future be able to pay out, like, $3X to shareholders. But as X gets really really really really big, then getting hypothetically even bigger in the future recedes as an explanation, and actually paying out cash in the present becomes more likely to dominate. 

And so in fact Apple has in the past few years initiated a dividend and a share buyback program, and has paid out a total of about $280 billion to shareholders. On the other hand there are few signs that investors treat it as a huge growth opportunity:

Comparatively speaking, its earnings don’t get anywhere near the respect of its megacap brethren. At $56 billion, profits in the past year are double the next biggest earner in the Nasdaq 100 Index. But its price-earnings ratio trails 70 percent of the gauge’s members.

Put it this way. If Apple’s income was treated with the same generosity bestowed on companies like Alphabet Inc. and Facebook Inc., its value would be closer to two trillion than just one.

The reasons it isn’t are well known. Apple’s bread and butter is hardware, unlike Google and Microsoft. And while nothing to sneeze at, its profit growth is running at about half the rate of Amazon. Creeping pressure on margins has raised concern about how booming future profits will be.

And my Bloomberg Opinion colleague Shira Ovide notes that Apple’s profit margins are shrinking as it spends more money on research and development. In some ways this is the opposite of the intuitive popular story of Apple, which is that it used its brilliance to invent superior products that it could sell at huge margins. I mean, that story is true: It did do that. (Cheaply: “Steve Jobs once said that ‘innovation has nothing to do with how many R&D dollars you have,’” Ovide notes.) But at some point, once you have invented the iPhone, you can simultaneously make a lot of money selling iPhones, and spend a lot of money trying to invent the next iPhone, and invent the next iPhone.

In 1997, Michael Dell famously said that Apple should “shut it down and give the money back to the shareholders.” Apple’s market cap was about $2.8 billion at the time, and it closed at about $1,001.7 billion yesterday, so that strategy would have left about $999 billion on the table and is high on the list of worst financial ideas of all time. But in the long run it, or something like it, is the right idea for almost all companies. You take money from shareholders, you use it to make some things, you sell the things, you make a profit, you reinvest the profit in making new things, you repeat for as long as that makes sense, and eventually you either run out of things to make, or—if things go very very well indeed—you have more profits than you can possibly invest in making those things. In the very long run, the way to reward the shareholders for giving you money in the first place is to (1) make as much money as possible with their money and then (2) give most of it back to them. The difficulty is in the details, and the timing. You want to return money to shareholders you’ve invented the iPhone, not 20 years . 

CBS.

I wrote yesterday morning that “sexual-harassment diligence is on its way to becoming a routine part of M&A due diligence.” And then yesterday afternoon CBS Corp. had its earnings call, led by Chief Executive Officer Les Moonves, days after a giant New Yorker story by Ronan Farrow about allegations of sexual misconduct against Moonves. And, somewhat embarrassingly, nobody asked about those allegations. The word “elephant” is popular. “The elephant in the room went unmentioned,” is the first sentence of this Wall Street Journal article. “Not one analyst asked Moonves or the rest of the management team to address the elephant on the call,” wrote my Bloomberg Opinion colleague Tara Lachapelle. “CBS Ignores Ronan Farrow-Shaped Elephant in the Room on Earnings Call,” wrote Bess Levin. The Journal notes:

On Twitter, reporters and other observers mocked what they said was the cowardice ofthe analysts for failing to ask about the scandal.

One analyst, Rich Greenfield of BTIG Research, said on Twitter, “Shame on the CBS analysts who were allowed to ask questions and failed to use the opportunity.”

I don’t know. Presumably the analysts didn’t ask because they didn’t think they’d get a useful answer, which was a reasonable assumption given that (1) Moonves was the one running the call and (2) CBS began the call by saying those questions would be off limits. The function of a stock analyst is not primarily journalistic. If a reporter asks a public figure a question that he doesn’t want to answer, and he sputters and refuses to answer, then that has value: The public has learned something, even without an actual answer to the question. The comfortable have been afflicted. If an analyst asks a company a question that it doesn’t want to answer, and the company doesn’t answer, then he’s wasted a question; there’s no field in his financial model for “angry CEO sputtering.” And in any case the analyst’s job is as much about maintaining access to management—to update his own models and also to help his clients get access—as it is about asking penetrating questions. Losing favor with management, getting your questions answered, seems like a strictly negative outcome. 

This is not to say that the sexual misconduct scandal is irrelevant to the financial model! Quite the opposite: In general, if a scandal might bring down a long-serving powerful CEO, that is going to be material to a company’s results, but it’s particularly important here because Moonves and CBS’s board are  fighting a very strange battle against CBS’s controlling shareholder. Anything that weakens Moonves’s position—whether it’s financial results, legal arguments in that fight, or an a personal scandal—matters in that fight, and might affect CBS’s future. It’s just that asking Moonves about it, in public, on an earnings call, is probably not the way to find out. 

Elsewhere, nobody asked about Carl Icahn’s activist position on the Cigna Corp. earnings call yesterday, either.

Oops.

The average annualized daily volatility of Bitcoin against the U.S. dollar, over the past year, is about 90 percent. That implies, loosely speaking, that about one day out of every 20, Bitcoin will move by more than about 11 percent against the dollar. In fact, Bitcoin has had daily moves of 10 percent or more on 22 days over the last 12 months, including 10 so far in 2018; seven of the 10 big moves in 2018 have been  10 percent or more.

OKEx is a Hong Kong-based exchange that lists Bitcoin futures and allows . Leverage of 20x means that for every $1 you put up as margin at the exchange, you can buy $20 worth of Bitcoin futures. If the price of Bitcoin goes up by 5 percent, then those futures will be worth $21, and you will make $1 on your $1 investment. If the price of Bitcoin goes down by 5 percent, then those futures will be worth $19, and you will lose your whole dollar. If the price of Bitcoin falls by 10 percent in a day, which, again, has happened on average this year, then those futures will be worth $18, and you will lose your whole dollar, and also there will be a dollar missing. Like, you were supposed to pay $2 to the person who sold you the futures, but you only put $1 into the exchange. Someone has to come up with the other dollar.

Anyway:

A massive wrong-way bet on Bitcoin left an unidentified futures trader unable to cover their losses, burning counterparties and threatening to dent confidence in one of the world’s largest cryptocurrency venues.

The long position in Bitcoin futures listed on OKEx, a Hong Kong-based exchange, had a notional value of about $416 million, according to an OKEx statement on Friday and data compiled by Bloomberg. While OKEx moved to liquidate the position on Tuesday, the exchange was unable to cover the trader’s shortfall as Bitcoin’s price slumped. Because OKEx has a “socialized clawback” policy for such instances, it will force futures traders with unrealized gains this week to give up about 18 percent of their profits.

“It’s a weird mechanism,” says a crypto trader who used to work at Morgan Stanley, in a significant understatement. OKEx “requires traders to pass a quiz on its rules before they can begin investing in futures,” which you can try here, and there is forced liquidation if you get too close to wiping out your margin, but … there are simpler and more effective ways to make sure that this doesn’t happen? Like Cboe and CME Group list Bitcoin futures contracts, and they require 40 percent and 43 percent maintenance margin, respectively. That’s leverage of a bit more than 2x. If Bitcoin prices fall by 40 percent in a day, then your margin will be wiped out and Cboe and CME will have a problem. But that never actually happens. The margin is set high enough that it’s not at too much risk of being wiped out in a day.

At OKEx … ????? The margin is set low enough that it’s at risk of being wiped out all the time, and when it is, they take money from everyone else on the exchange to make up for it. “It’s a weird mechanism”! I suppose the point is that if you want to gamble on Bitcoin, you want to gamble on Bitcoin, and just buying two Bitcoins for the price of one isn’t exciting enough for you; you want to lever up 20 times, while also gambling a bit that your winnings might be taken away from you. 

Or maybe not? Maybe the point of a Bitcoin futures exchange is to allow fun but not-too-serious gambling on Bitcoin. Having 20x leverage and socialized clawbacks is, in a certain light, a way to volatility, as experienced by your customers. If Bitcoin prices drop by more than 5 percent, then the people who were long only lose 5 percent, while the people who were short make more than 5 percent, but have to give up a chunk of it in “clawbacks.” Both wins and losses are trimmed a bit. It’s a way to bet on Bitcoin but not exactly mean it.

Elsewhere, “Korean Authorities Investigate Alleged Crypto Scam That Promised Investors Shipwreck Gold,” why not. When I read about financial scams I often think about the “Linda problem,” in which people hear a description of a woman named Linda (“single, outspoken and very bright”) and are asked if it is more probable that “Linda is a bank teller” or that “Linda is a bank teller and is active in the feminist movement.” The former is strictly more probable, but people tend to choose the latter, because it has a story, a personality, a coherence; they are swayed not by bare facts and rational analysis but by wanting to create a vivid picture of who Linda is. Similarly, is it more likely that if you give someone money they will pay you back with gold from a Russian shipwreck, or that if you give someone money they will pay you back in gold from a Russian shipwreck ? If you’re into shipwrecks, and you’re into crypto, and you’re into getting your money stolen, then combining all three is somehow extra satisfying.

Disclosure.

There is a popular belief that being a professional investor and trying to find out information about companies is, somehow, cheating. Like if you are a hedge-fund manager and you do lots of research and pay for proprietary data sources and go to private one-on-one meetings with corporate executives, then you have advantages that regular retail investors don’t have. There is no level playing field for the retail investors. It’s unfair.

But there is a contrary belief that is less popular but more entertaining, which is that actually the retail investors are cheating. After all, any random hobbyist can read a public company’s annual report and find out lots of detailed information about the company’s finances and strategy. And she didn’t need to put in any work to get that report; it was just made freely available to her online by Securities and Exchange Commission disclosure rules. By making all this good stuff available to just anyone off the street, those rules unfairly the value of professional investors’ skills and hard work. This makes high-skill professional investing less rewarding than it would otherwise be, reducing the differences in results between good and bad investors. And that reduces the incentives to become a good investor, which makes markets less efficient.

I mean, you don’t frequently see quite it expressed quite that way, but you can get pretty close. Here is “Is Silence Golden? Negative Effects of Mandatory Disclosure,” by Sudarshan Jayaraman and Joanna Wu of the University of Rochester:

Disclosure regulation is a cornerstone of modern securities markets. Its economic consequences have been extensively studied and heavily debated. A widely recognized benefit of mandatory disclosure is that it levels the playing field by publicly disclosing to everyone what is known only to sophisticated investors. This leveling reduces trading costs and consequently reduces the firm’s cost of capital.

In our recent paper, available here, we show that this reduced informational advantage of sophisticated investors is not unambiguously desirable. In particular, when sophisticated investors stop trading in a firm’s stock, there is a reduction in the ability of firm managers to glean decision-relevant information from the stock price. In other words, mandatory disclosure impedes the feedback effect of stock prices on managerial decisions, which in turn could harm investment efficiency. In documenting such an effect, we demonstrate that the economic consequences of mandatory disclosure are broader than often thought and, under certain conditions, mandatory disclosure can crowd out informed traders’ ability to acquire information, resulting in less managerial learning from the stock price. This in turn lowers the efficiency of the manager’s investment decisions.

Things happen.

MoviePass still exists. “Take money from venture capitalists, provide a below-market price for a popular service, and profit.” Wall Street Claims Success on Diversity— At Least With Interns. Uber Is Not Serious About Changing Its Toxic Culture. For Tesla’s Elon Musk, Twitter Is Sword Against Short Sellers. An inside look at how Trump’s infamous jobs day tweet roiled some government economists. Jeff Bezos, Style Icon. 6 Faces That Honestly I've Never Seen Leonardo DiCaprio Make Before. “What if the entire Earth was instantaneously replaced with an equal volume of closely packed, but uncompressed blueberries?”

    This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

    To contact the author of this story:
    Matt Levine at mlevine51@bloomberg.net

    To contact the editor responsible for this story:
    James Greiff at jgreiff@bloomberg.net

    Read more: https://www.bloomberg.com/view/articles/2018-08-03/apple-added-another-digit

    Filed Under: cryptocurrency Tagged With: ALPHABET INC-CL A, apple inc, Bitcoin, CBS CORP-CLASS B NON VOTING, Earnings, Investing, iphone, Les Moonves, TWITTER INC, US Dollar Spot, view

    Sagewise pitches a service to verify claims and arbitrate disputes over blockchain transactions

    August 6, 2018 by Blockchain Consultants

    Sometimes smart contracts can be pretty dumb.

    All of the benefits of a cryptographically secured, publicly verified, anonymized transaction system can be erased by errant code, malicious actors or poorly defined parameters of an executable agreement.

    Hoping to beat back the tide of bad contracts, bad code and bad actors, Sagewise, a new Los Angeles-based startup, has raised $1.25 million to bring to market a service that basically hits pause on the execution of a contract so it can be arbitrated in the event that something goes wrong.

    Co-founded by a longtime lawyer, Amy Wan, whose experience runs the gamut from the U.S. Department of Commerce to serving as counsel for a peer-to-peer real estate investment platform in Los Angeles, and Dan Rice, a longtime entrepreneur working with blockchain, Sagewise works with both Ethereum and the Hedera Hashgraph (a newer distributed ledger technology, which purports to solve some of the issues around transaction processing speed and security which have bedeviled platforms like Ethereum and Bitcoin).

    The company’s technology works as a middleware, including an SDK and a contract notification and monitoring service. “The SDK is analogous to an arbitration clause in code form — when the smart contract executes a function, that execution is delayed for a pre-set amount of time (i.e. 24 hours) and users receive a text/email notification regarding the execution,” Wan wrote to me in an email. “If the execution is not the intent of the parties, they can freeze execution of the smart contract, giving them the luxury of time to fix whatever is wrong.”

    Sagewise approaches the contract resolution process as a marketplace where priority is given to larger deals. “Once frozen, parties can fix coding bugs, patch up security vulnerabilities, or amend/terminate the smart contract, or self-resolve a dispute. If a dispute cannot be self-resolved, parties then graduate to a dispute resolution marketplace of third party vendors,” Wan writes. “After all, a $5 bar bet would be resolved differently from a $5M enterprise dispute. Thus, we are dispute process agnostic.”

    Wavemaker Genesis led the round, which also included strategic investments from affiliates of Ari Paul (Blocktower Capital), Miko Matsumura (Gumi Cryptos), Youbi Capital, Maja Vujinovic (Cipher Principles), Jordan Clifford (Scalar Capital), Terrence Yang (Yang Ventures) and James Sowers.

    “Smart contracts are coded by developers and audited by security auditing firms, but the quality of smart contract coding and auditing varies drastically among service providers,” said Wan, the chief executive of Sagewise, in a statement. “Inevitably, this discrepancy becomes the basis for smart contract disputes, which is where Sagewise steps in to provide the infrastructure that allows the blockchain and smart contract industry to achieve transactional confidence.”

    In an email, Wan elaborated on the thesis to me, writing that, “smart contracts may have coding errors, security vulnerabilities, or parties may need to amend or terminate their smart contracts due to changing situations.”

    Contracts could also be disputed if their execution was triggered accidentally or due to the actions of attackers trying to hack a platform.

    “Sagewise seeks to bring transactional confidence into the blockchain industry by building a smart contract safety net where smart contracts do not fulfill the original transactional intent,” Wan wrote.

    Read more: https://techcrunch.com/2018/08/03/sagewise-pitches-a-service-to-verify-claims-and-arbitrate-disputes-over-blockchain-transactions/

    Filed Under: smart contracts Tagged With: computing, Cryptocurrencies, distributed computing, Entrepreneur, ethereum, executive, lawyer, Los Angeles, managing partner, peer to peer, Sagewise, scalar capital, smart contract, U.S. Department of Commerce

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