Preface and Acknowledgments

David LEE Kuo Chuen

The year 2008 has left a deep and lasting impression on the Millennials, also known as the Millennial Generation who are born in the early 1980s to early 2000s. It was the year of the financial market crash that started in the United States and soon spilled over to Europe and Asia, thereby triggering the global financial crisis in a time-compressed manner. While governments responded with unprecedented monetary policy expansion and fiscal stimulus, many Millennials have to contend with high unemployment and scarce economic opportunities at a time when they are establishing their careers. But few realize their lives have been shaped not only by happenings in Wall Street and Main Street but also by technology. They will remember 2008 as the beginning of the peer-to-peer decentralized cryptocurrency called the Bitcoin protocol. The white paper by Satoshi Nakamoto first appeared on the Internet via the Cryptography Mailing List in November 2008 (archived in http://www.mail-archive.com/cryptography%40metzdowd.com/msg09959.html) after the global financial crisis as a significant contribution to the world without actually first being published in an academic journal.

Since then, the white paper (https://bitcoin.org/bitcoin.pdf) has generated a lot of interest. First, the timing of the release was a direct response to a crisis of confidence in a reserve currency, and there was no better time than 2008. Faced with an era of disquiet and a gradual loss of trust in the fiat currency system introduced in 1971, as well as the prospect of massive printing of money known as quantitative easing, the white paper offers a set of feasible alternative solutions to those who have little faith in a centralized monetary system. Cryptocurrency was first introduced in the early 1990s by an academic entrepreneur David Chaum in the form of eCash and DigiCash. The National Security Agency released an analytic report of great significance on the same subject over the Internet in 1996. But few in the financial world paid much attention to the development of cryptocurrency until the global financial crisis. It only caught the attention of many financial experts when successive quantitative easings pushed up asset prices. Given that the reversal of quantitative easing has unknown consequences and that China has started its bilateral swap agreements, the BRICS Development Bank and the Asian Infrastructure Investment Bank begin to challenge the conventional international institutions, and interest has begun to center on alternative monetary systems that include the digital currency system. Cryptocurrency, a special class of digital currency, continues to generate interest among those who are uncomfortable with national currency beleaguered by huge liability, rather than backed by assets, of some central governments.

Second, the white paper of Satoshi was the first paper that proposed a distributed monetary system and challenged the central authority that controlled money supply. The proposed system was designed to address some of the issues that a centralized system could not. In particular, the control was decentralized and the supply of money was predetermined. Given the open-source nature of the Bitcoin protocol, there are too many participants for anyone to effectively monitor and regulate single-handedly. For the first time, governments realize the decentralized nature poses great problems for anyone who intends to regulate a legal entity or small number of entities, let alone to hold them responsible for any wrongdoing.

Third, there are a lot of unanswered questions about the Bitcoin system, thus creating curiosity among those who follow the development. In particular, the identity of the creator or group of creators of Bitcoin remains a mystery. While there have been many attempts to uncover the mystery surrounding Mr. Nakamoto, including at least one hacker who claimed to know the identity of Mr. Nakamoto after gaining access to his e-mail account, Mr. Nakamoto's identity is still unknown to the public. The mysterious nature surrounding Bitcoin has generated even more following. The community remains amazed at the foresight of the creator(s) and respects the reason for remaining under the radar.

Fourth, the Bitcoin invention has put regulators on the spotlight. Any attempt to regulate the cryptocurrency protocol has proved to be extremely difficult. However, regulators have managed to study the issues carefully in regulating the intermediaries and have focused in the areas of consumer protection, antimoney laundering, and counterterrorist financing. The balance between regulation and entrepreneurship has proved to be most challenging to achieve. This has therefore attracted a lot of attention from tax authorities, central bankers, and crime busters. Never before has technology invention attracted so much attention and posed so many challenges as it involves international finance, monetary system, and innovative financial technology with cyber security.

Fifth, the income and wealth inequality of the world has risen rapidly since the quantitative easings. With six times wealth-to-income ratio, the highest since the late 1930s, governments are focusing on financial inclusion. Bitcoin provides a cheap form of payment system and that possibility has brought cryptocurrency into the limelight as an alternative payment system. Organizations such as Bill and Melinda Gates Foundation have made payment systems as one of its priorities, together with the Maya Declaration initiated by the Alliance for Financial Inclusion. We can see that Bitcoin will share the limelight of those serving the 2.5 billion unbanked and attracting the attention of those who are engaged in impact investing as advocated by the Global Impact Investing Network. Both financial inclusion and impact investing are areas of great interest and cryptocurrency is in the right space.

Sixth, cryptocurrency has contributed to innovation and we have seen many interesting developments. It is said that the best brains are in cryptocurrency because it is not only a currency but also a form of programmable money. The developers will be able to program in a way to serve the purpose intended. These innovations include smart accounting, smart contract, crowdsourcing, crowd funding, crypto-equity, and many others that can change the way business is done and managed. Consensus ledger, digital register, Blockchain are a emerging class of technology for the future. It is likely that there will be acceleration in the development of Bitcoin 2.0, blockchain 2.0, and sidechains, with new development only limited by our imagination.

Seventh, the emergence of the digital natives and smart cities has generated even more interest in the development of cryptocurrency. Cities such as Singapore will have its entire country connected to the digital world, with projected growth coming from the digital economy. Its citizens will be natives to the digital world. The technology that is developed in the cyberspace will be of great interest in these countries that spend millions or billions in getting the infrastructure up for a digital economy. Incentives for start-ups will get more interesting and the majority of the investment will certainly be focused on cyber security and connectivity, and that will involve investment in encryption, financial cryptography, decentralized storage, and mobile payments. Cryptocurrency will of course be of great interest given that it leads innovation in securing the payments, decentralized ledger, and encryption.

Given the interest in cryptocurrency, it is not surprising that there was encouragement all-round to start an interesting project on digital currency with special emphasis on cryptocurrency. The foresight of Scott Bentley, who saw the potential of this project, and McKenna Bailey's strong support motivated me to start working on the book in early 2014. I thank Elsevier for their encouragement and support. The title “Handbook of Digital Currency: Bitcoin, Innovation, Financial Instruments, and Big Data” was chosen to convey the idea that the focus is on Bitcoin, Bitcoin 2.0, and associated innovations.

This book would not have been possible without the support of the Sim Kee Boon Institute (SKBI) for Financial Economics, Singapore Management University. In particular, I would like to express my sincere appreciation to Mr. Lim Chee Onn, the chairman, and other advisers of the board, namely, Piyush Gupta, Magnus Bocker, Liew Heng San, Tham Sai Choy, Ronald Ong, Lim Cheng Teck, Aje Saigal, Sunil Sharma, Tan Suee Chieh, Jacqueline Loh, and Leong Sing Chiong, for their valuable counsel. The authors who contributed to the book were mostly guest participants in the Inaugural CAIA-SKBI Cryptocurrency Conference held at Singapore Management University in November 2014 that saw a large turnout. I am grateful to them and all those who had made extraordinary efforts to be at the conference. I would like to especially thank Mikkel Larsen, Tim Swanson, Donald Chambers, Neal Cross, Andrew Koh, Norma Sit, Gunther Sonnenfeld, Chan Hiang Taik, Ong Pang Thye, Jonathan Kok, Reuben Branabahan, Iris Tan, Jason Tyra, Zann Kwan, Peter Peh, Scott Robinson, Anson Zeall, David Moskowitz, and Andras Kristof for their vivacious participation in and substantial contribution to the discussions. The vigor and rigor of the discussions at the conference have spurred me to add new materials to the book. Peter Douglas of the Chartered Alternative Investment Association was instrumental in getting the conference going, and for that, I could not thank him enough.

I am indebted to Professors Arnoud De Meyer, Rajendra Srivastava, and Gerry George, the president, the...