Thanks for having me today.

My name is Jeffrey Anthony, and I’m CTO and a co-founding partner at Synaptic Consulting. Synaptic’s service portfolio spans Financial Technologies (FinTech), Data Analytics, Business Intelligence, Project Management, Product Development, Lean Manufacturing, Enterprise-Wide Cost Reduction, and a variety of C-Level Services.

For the last decade, I’ve had the privilege and pleasure of teaching the Capstone Course here at Lehigh in the Computer Science and Business (CSB) program. I’m doing it again this year too, and, coincidentally, we’re building a Blockchain-based payment system for use here on campus. Wonder how we picked that, huh? I’m happy to see a few of you in this class who are also part of the Blockchain Capstone. See you guys in that class after this one...

I was delighted to be invited to discuss with you today what my associates and I at Synaptic are seeing in the way of Blockchain / Cryptocurrency applications and solutions in various industries in general, and in the work we’re doing with clients in particular.

I can guarantee you up-front that you will learn absolutely nothing whatsoever about Blockchain on the technical side from me today. I wouldn’t presume to talk tech-side with your brilliant Professor in the same room. He and I thought, though, that a sort of “state-of-the-industry” lecture might be interesting and useful, so here it comes...

I’d like to tell you today about two of Synaptic’s clients and a few organizations with which I’m engaged. I can’t name the clients specifically, because we’re under the usual very tight Non-Disclosure Agreements (NDA) so nearly universal throughout FinTech and the Financial industry in general and, especially, throughout the defense industry, but I do have these clients’ blessings to share with you the fundamentals and foundation of the work we’re doing together around Blockchain and cryptocurrencies.

The first client I’ll present is an internationally branded credit card issuer. The second is a defense contractor -- or, more precisely, a very substantial-sized subcontractor to a major defense contractor. You’ve probably never heard of the later, though, because somehow we had never heard of them when they called us. Talk about Jeffrey here, a Managing Partner, really falling down on seeing to the ol’ marketing function at Synaptic, huh? Finally, from time to time, I advise a nationally distributed financial magazine on FinTech in general, and, lately, Cryptocurrencies to an increasing degree, and I’ll share with you some things I and others at Synaptic have learned and just “picked-up” there in passing.

Looking at this from the 50,000 foot perspective, it seems to us at Synaptic that the Blockchain / Cryptocurrency buzz in the press is a lot bigger than the Blockchain implementation and deployment buzz within financial institutions, industrial and consumer product manufacturers, and more mainstream tech companies -- the areas in which Synaptic most commonly engages. It seems to us that much of what is going on in Blockchain / Cryptocurrency is happening because clients see the press buzz and feel they should be in the space, rather than because they have an immediate, clear-and-present need that Blockchain cleanly and neatly solves.

I cannot stress enough, however, that I'm not saying this in any way pessimistically; I really believe, as do our clients, that Blockchain in general and Cryptocurrencies in particular are the wave of the future. I say it simply to recognize that industries and businesses and our clients on the whole are really far on the left-hand side on the adoption curve -- if they’ve started climbing it yet at all.

So now for the credit card issuer.

When we first started talking about our Blockchain / Bitcoin engagement with them, they were extraordinarily clear and specific about their directional intent: “We don’t want to lag, and we don’t want to lead.”

But there is a Bitcoin application for which they have a really high level of enthusiasm in the near term.

Suppose you owe a grand on your credit card bill this month. Now, you would never have a reason to do this, but, hypothetically, suppose you wrote them a check for two grand. Until you burned down that $1,000 overpayment, your credit card would be functioning essentially as a debit card. Well, they would love if they could be collecting interest on that extra grand (or at least a continually diminishing amount) for as long as it lasted. That’s known in the industry as “sitting on the float.”

And that’s why all the issuers really love gift cards. Because that’s what happens. And, if you toss your gift card in a drawer and don’t use it for some time, they’re really rubbing their hands together in glee.

So, how does Bitcoin (or eventually perhaps other cryptocurrencies as well or instead), figure into this model? The thinking is if they let you move Bitcoin value into your credit card account, anything in excess of your current outstanding balance is float they’re sitting on. Given all the newly created Bitcoin value out there -- even at its current greatly diminished $9,000-ish value -- they realize that if they capture even a small fraction of that, they’re sitting on a lot of float they wouldn’t otherwise have. Moreover, they’ll probably require a minimum transfer value high enough to make all the effort worthwhile.

Given the many studies -- Synaptic’s, our client’s internal studies, and third-party independent studies like Gartner -- that show a significant number of mid- to high-level net worth individuals have some impressive Bitcoin holdings, our client is eager to help them spend it -- through their card before the other issuers’ cards. The implementation we’re working on will allow cardholders to transfer Bitcoin holdings into their account -- at Bitcoin’s value at the moment of the transaction, so our client the issuer doesn’t have to worry downstream about the Bitcoin volatility we’ve been seeing so very much of lately.

This represents a minimal change to their existing account infrastructure, and no change at all to payment systems downstream (upstream?) from Point-of-Sale (POS) terminals.

And it promises to give them more of the float they love so much.

Outside of the scope of Synaptic’s technically-oriented engagement with them, there are likely to be regulatory requirements to be addressed and resolved, but that’s their lawyers’ problem and not Synaptic's. And I’m awfully glad about that, because, as I’ll address later, global governments and their financial regulators really aren’t sure what to make of cryptocurrencies or what to do about them beyond early, exploratory thinking.

From there, Synaptic and our client credit card issuer have identified two downstream intentions -- and some vague follow-on thoughts.

Loyalty Points Phase I
Loyalty points, often redeemable for consumer goods or other benefits, are a very important component of all issuers’ marketing efforts. It costs them little, but it has the enormous benefit to the issuer of making their card what they call “sticky.”

What do they mean by “sticky?” Well, if you have a big wallet of loyalty points on their card, it’s much less likely that you’re going to dump it -- thus abandoning your points -- and move to another issuer’s card just because they offer you a little break on the annual fee or shave a fraction of a point off your Annual Percentage Rate (APR) -- especially if you’re not carrying a balance in the first place. Why would you give up the points?

So, in a “while we’re at it” spirit, we said, “Why not use Blockchain’s Smart Contract capability to implement loyalty point redemption? Standardization is a good thing inherently, so, eventually, having the payment side work essentially like the redemption side (i.e. via a Blockchain solution) streamlines maintenance and subsequent extensibility. The other thing is, given all the buzz around Blockchain and Bitcoin, their marketing folks could say things like, “Using the power of Blockchain to bring you your next set of free airline tickets faster and easier than ever before!” Yada, yada, yada.

Loyalty Points Phase II
So, once we’re doing loyalty points that way, why not Smart Contract auctions?

As I said, loyalty points cost issuers little, but they cost them something, and, if you have a lot of points, and everyone else has a lot of points, carrying that liability on their books for a long time is unattractive. Basically, they want you to have enough loyalty points to keep your card “sticky” and thus keep you as a cardholder, but not a ton of them driving up the liability side of their balance sheet.

Loyalty point auctions, probably with “Buy It Now” price caps the way eBay does it, could help issuers steer cardholders into a sweet spot (not too many points, not too few). In other words, entice cardholders to regularly spend some loyalty points in pursuit of a good deal, but not all of them. Put yet another way, the goal would be to incent a regularized turnover in cardholders’ loyalty point accounts, optimizing the level of points.

The main idea here is, if the issuer wants to conduct loyalty point auctions -- which they don’t have the infrastructure to do now -- they’ve got to build a significant infrastructure to do it. Why not do it via Blockchain?

Vague Notions
This last point is an outgrowth of only maybe two or three hours of discussion with our client (over dinner), so I don’t want to overstate its likelihood of happening (or when), but it does seem to make sense, at some point, to replace their account maintenance infrastructure with a largely Blockchain approach. Traditional RDBMS solutions, while absolutely necessary in many applications, are very heavy from a maintenance and extensibility perspective (and a real bear from a unit and regression testing standpoint). Blockchain (or some form of a Blockchain / RDBMS hybrid) seems much more supple (to avoid using the word “Agile” and creating confusion) in this regard. Sure, there is going to be a need for some degree of hybridization with SQL for Data Analytics -- the Risk Management and Marketing departments wouldn't stand for anything less -- but Blockchain may be able to engender a greatly streamlined infrastructure.

But, again, as far as such a massive overhaul, it’s all just talk at this point -- and not even very much talk at that.

Here I’m going to be a little vague on some details, because it is a defense contractor, and best practice is to veer to the “less” side over the “more” side when speaking publicly on matters such as this.

Every contractor that makes anything for the Department of Defense has an enormous Materials Provenance, Quality Control, and Chain-of-Custody burden. Enormous.

This requires that you track where every ounce of raw material comes from, your own internal testing results, how it moves through your factory from the moment it hits the loading dock (and before), what machines touch it and how, what people touch it and how, which specific part is mated with which other specific part, etc, etc, etc. Etc. Basically it means keeping track of which “shinbone is connected to which thigh bone” for every part, sub-assembly, and finished good. Screw up once, and you’re in trouble. Screw up a few times and you’re in danger of being decertified. But this is about the lives and safety of our nation’s service men and women, so it’s a great thing to be that obsessively careful, and it shouldn’t be any other way.

What really revolutionized, in a first wave, all of these tracking requirements has been things like RFID and barcode scanning. So, parts that can accommodate an RFID tag have one, and ones that can’t have a machine readable barcode or other encoding printed or etched on them (usually etched because it is more durable in harsh environments). That makes it all a lot easier, because everything can be machine read and plugged into SAP or some other ERP system. (Anyone here take the supply chain course?).

But tracking just parts is not all there is by a long shot. There is tracking the usage and maintenance of factory floor equipment like CNC lathes and drill presses, laser cutters, pick-and-place devices, and robotic equipment of all kinds -- and… and… and...

So the next wave has been around production equipment, and the way to do that is via the Internet-of-Things (IoT). Most modern production equipment is already IP-aware (especially in the defense industry), so it’s now as much the CIO’s bailiwick as it is the COO’s bailiwick.

The first thing is keeping track of all this stuff. A layer below the Internet of Things (IoT) is the Identity of Things (IDoT). Well, Blockchain is real good at sorting out identity issues.

Then there’s the “whats.” What operation did this machine perform on what part with what serial number?

Then there’s the “when.” When did it do it? And when was the machine maintenanced? And what were the serial numbers of any replacement parts installed? And so on... and on... and on... So, even though they’re not financial in nature, these events are transactions nonetheless, and that fits in extremely well with Blockchain too.

Of course, Synaptic’s client already has a (rather cumbersome) DB-based system for dealing with all this, but they find it to be a maintenance hog -- and a bear to regression test when it is maintained or upgraded. So the thinking is that a Blockchain solution should streamline that considerably.

And, when it comes to The Pentagon, it’s always way easier to get budget for “wizzbang geewizz” technologies than it is for the bread and butter stuff that’s been done for years and is done every day. So that’s why together Synaptic and our client are developing a parallel, proof-of-concept, Blockchain-based tracking system.

Of course, this new Blockchain-based system is going to require a big load of all sorts of certification, and that ain’t happening next month -- or probably next year either. Our goal right now is to produce a Proof-of-Concept system to monitor the manufacturing of a selected device or two doomed to being scrapped (because, lacking all the certifications, the product can’t be sold up the chain and, ultimately, to DoD). But it is an essential first step in where Synaptic and our client want to go prior to chasing all the approvals and certifications.

Synaptic has a longstanding retainer relationship with a national financial magazine in a sort of “House FinTech Explainer” role, and I’ll share a few random things we’ve learned through that with you.

One of the things that speaks to my early point about the Blockchain / Cryptocurrency adoption curve is that folks at the magazine have a hard time finding Blockchain / Cryptocurrency experts of exactly the type they want. Sure, there are a lot of them out there in general, but the magazine’s problem is that their readership is largely drawn from the major industrials (S&P 500, basically), and their readers want quotes from managers and executives in large scale national and international businesses like their own. There’s the rub.

As one editor told me, “Sure, we’ll do an article here and there about Bobby Undergraduate who made half a mil mining Bitcoins out of his dorm room last year, but that’s just interesting. It’s not the sort of authoritative comment on Blockchain / Cryptocurrency applications and successes in industrial applications that our readers are looking for.” So, again, I think that speaks pretty clearly to where we are overall with respect to the adoption curve beyond just a very few notable early adopters in “household name” businesses.

From time-to-time, I occasionally do some work personally for international financial organizations. This is because I’ve been involved in payment systems of all kinds for years and years and have served on standards bodies specifying them for most of my career. Lately, I’ve been having lots of discussions around cryptocurrencies (more informal than formal) with people in these arenas who know what they’re talking about, so we can chat a bit about that today too.

The BIG concern, nationally and internationally, is the anonymity potentially offered by cryptocurrencies. Central banks are worried about laundering getting easier for Narco-cartels and terrorists (and, to some extend, for extremely high net worth individuals). Banks are worried about keeping on top of regulations requiring them to identify, monitor, and report suspicious activity of this nature. Governments are even more worried about tax avoidance by a broad swath of their citizens. I saw this very same sort of concern swirling around the European side in the ‘90s with the advent of stored value Smart Cards. So, I think -- though this is purely conjecture on my part -- that governments are going to make the growth of cryptocurrencies a lot tougher moving forward unless/until they are satisfied that there are measures in place to allay their concerns.

This feels a lot like cryptography when I was first practicing it along with many other young civilian “cypher punks” in the ‘80s and early ‘90s. I can tell you from that painful experience that if governments (particularly the U.S. intelligence community and the IRS) want to make the adoption and proliferation of technologies they're worried about really tough, they really know how to do it. For example, cryptography -- or at least the import/export of products employing it -- was once regulated as a munition by the Bureau of Alcohol, Tobacco, and Firearms as if it were grenades or C4 or nasty stuff like that. That sort of thing certainly makes it tough for an emerging technology and its proponents.

So those are some of the headwinds into which cryptocurrencies are facing.

Just one more thing along those lines -- though I’m not a trained economist, so take this with a grain of salt -- it seems to me that currencies can’t be currencies and investment-grade asset classes at the same time. Sure, I guess to a small degree currencies are asset classes in that there are ForEx traders in the world who make a few pennies on blips of the Dollar vs. the Pound vs. the Yen vs. the Euro, but, for the most part, major global currencies and their exchange rates are pretty stable under normal economic conditions since way back to the '50s after Bretton Woods. With Bitcoin being so very volatile, though, I just don’t see how anyone can make an informed decision to buy something with it or accept it as payment. So, I don’t see this really taking off without being pegged to something (gold? a basket of world currencies? a basket of commodities? perhaps some damping function inverse to volume and velocity?). And, of course, there’s the matter of making central banks happy. Now, I definitely do think that’s going to happen, but not without considerably more agita than cryptocurrencies’ most enthusiastic supporters are expecting. But that’s just me, a guy who’s not an economist -- and who doesn’t have very much formal academic training in that discipline.

If you’re interested in the international monetary issues around Cryptocurrencies, I’d highly recommend to you Nobel prize winning Friedrich Hayek's book "The Denationalization of Money" (though not before exams, it’s a looooong, haaaaard read). What’s so amazing about it is that Hayek was thinking and writing about the very challenges confronting cryptocurrencies today way back in the early ‘70s! Of course, none of the technologies involved in Blockchain existed back then -- Hayek expected a denationalized currency to be a physical object printed or minted, but he talks about the reasons governments would be wary of their citizens supporting a denationalized currency. Hayek wasn’t writing for the layman, and, if I’m not mistaken, he was writing in German, and the book was translated into myriad languages, so, again, it ain’t an easy or quick read. But it is indispensable in understanding the global and national policy issues facing widespread acceptance of cryptocurrencies.

Many thanks again for your kind patience and attention today. I’ve really enjoyed our time together this afternoon.

If I can be of any assistance to any of you, my name again is Jeffrey Anthony, and I’m easily reached at Synaptic, or via my Lehigh email on the University web site directory, or up on Mountaintop every Wednesday afternoon when I teach Capstone.

Questions?

If any questions pop into your head later (some of my most insightful questions usually occur to me when I’m backing out of a parking space after a meeting) please feel free to contact me any time you like at jeffrey@synaptic-sdlc.com or via www.synapticconsulting.info