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Jeffrey Anthony Synaptic Blockchain Graphic

Jeffrey Anthony Synaptic Partner & CTO's
Lecture on Recent Applications in the
Blockchain and Cryptocurrency Space

Every year for over a decade, Jeffrey Anthony, Synaptic co-founding partner and CTO, has taught the two semester Capstone Course in Product Development and Project Management at Lehigh University in the Computer Science and Business (CSB) program as part of Synaptic’s commitment to education and community.

Recently, in addition to teaching Capstone again this year, he was invited to deliver a lecture for a course on Blockchain and Cryptocurrencies jointly offered the the College of Engineering and College of Economics and Business.

Below is the script Anthony wrote for the lecture, and though he used it only as notes, the script captures the basic flavor of his lecture. Alas, it doesn’t capture the lively Q&A session that ensued.

Overview
Thanks for having me today.

My name is Jeff Anthony, and I’m a co-founding partner and CTO at Synaptic Consulting in Allentown PA.

Also, for the last decade, I’ve taught 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 that are also part of the Blockchain Capstone. See you guys in that class after this one...

I was delighted to be invited to speak with you today about what I and my associates 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.

There are three Synaptic clients and a few organizations with which I’m engaged outside of Synaptic that I’d like to tell you about today. I can’t name them specifically, because we’re under the usual Non-Disclosure Agreements (NDA) so universal throughout FinTech, but I do have their blessing to share with you the fundamentals of the work we’re doing together.

The first client I’ll discuss 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 them, though, because somehow we had never heard of them when they called us. Talk about Jeffrey really falling down on the marketing job, huh? Finally, we advise a national financial magazine on FinTech in general, and, lately, Blockchain / Cryptocurrencies to a great degree, and I’ll share with you some things I and others at Synaptic have learned and “picked-up” there.

Looking at this from the 50,000 foot perspective, it seems to us at that the Blockchain / Cryptocurrency buzz in the press is a *lot* bigger than the Blockchain buzz within financial institutions, industrial and consumer product manufacturers, and more mainstream, diversified tech companies -- the places we as Synaptic most commonly engage. It seems to us that what’s 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 it cleanly and neatly solves.

I cannot stress enough, however, that I say that not at all pessimistically -- I really believe, as do our clients, that Blockchain in general and Cryptocurrencies in particular are the wave of the future -- but I say it simply to recognize that mainstream industries and businesses and our clients are *really* early on the adoption curve.
Credit Card Issuer Client
Near Term
So the credit card issuer. When we first started talking about our Blockchain / Bitcoin engagement with them, they were *extraordinarily* clear and specific about their intent. “We don’t want to lag, and we don’t want to lead.”

You know the old joke about how to tell who the pioneers are? They’re the guys with the arrows in their backs. That’s sort of what our client wants to happen to the other two credit card issuers.

But there is one application in 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. Well, 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 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, and particularly if you forget about it and *never* use it, well, they’re *really* rubbing their hands together in joy.

So, how does Bitcoin, 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 greatly diminished $9,000-ish value -- they realize that if they capture even a small percentage of it, they’re sitting on *a lot* of float they wouldn’t otherwise have. Moreover, they’ll probably require a minimum transfer value, so they’ll have a bit more control.

Given the many studies -- our client’s and third party independent studies -- that show a great many mid- to high-level net worth individuals have some impressive Bitcoin holdings, our client is eager to help them spend it -- through *their* card. In the spirit of their “don’t lag, don’t lead” instructions, Synaptic has come up with the idea, and is now working on the implementation of it, of allowing cardholders to transfer Bitcoin holdings into the account -- at the Bitcoin’s value at the moment of that transaction so they don’t have to worry downstream about the Bitcoin volatility we’ve been seeing so very much of.

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 the float they love so much.

Outside of the scope of our 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.
Outlying Plans
From there, Synaptic and our client credit card issuer have identified two downstream intentions.

Loyalty Points Phase I
Loyalty points, often in the form of travel miles, are a very important component of all issuers’ marketing efforts. It costs them little, and 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 and move to another issuer’s card just because they offer you a little break on annual fee or shave a fraction of a point off your Annual Percentage Rate (APR) -- especially if you’re not carrying a balance. Why would you give up the points?

So, in a “while we’re at it” spirit, we said, “Why not use the 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 expansion. The other thing is, given all the buzz about 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 than ever before!” Yada, yada, yada.

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

As I said, loyalty points cost them 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 keep you as a cardholder, but not a ton of them driving up the liability side of their balance sheet.

Loyalty point auctions, with “Buy It Now” price caps the way eBay does it, could help them steer cardholders into a sweet spot (not too many points, not too few) from the issuer’s perspective. In other words, entice cardholder to spend *some* loyalty points in pursuit of a good deal, but not *all* of them.

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

Vague Notions
This is an outgrowth of only maybe two or three hours of discussion with our client (during dinner, after cocktails), so I don’t want to overstate its likelihood of happening or when, but I does seem to make sense, at some point, to replace their account maintenance infrastructure with a purely Blockchain approach. Traditional RDMS solutions, while absolutely necessary in many applications, are *very* heavy from a maintenance perspective. And heavy from an upgrade perspective (and a real bear from a unit and regression testing standpoint). Blockchain seems much more supple (to avoid using the word “Agile” and creating confusion) in this regard.

But, again, that’s all just talk at this point -- and not even very much talk at that.
Defense Contractor Client
Here I’m going to be a *little* vague on some details, because it *is* a defense contractor, and I *do* have a security clearance, and best practice is to veer to the “less” side over the “more” side when speaking publicly on matters such as this.

Every company 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, 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. 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 service men and women, so that’s a great thing, and it shouldn’t be any other way.

What has 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 *parts* is not all there is. There is tracking the usage and maintenance of factory floor equipment like lathes and drill presses and laser cutters and pick-and-place devices and robotic equipment of all kinds, and… and… and.

So the next wave is 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 more the CIO’s problem than it is the COO’s problem.

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 as well.

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 produce a selected device or two doomed to being scrapped (because, lacking all the certifications, it 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.

The Press and Other Things
Our Magazine Client
Synaptic has an ongoing retainer relationship with a national financial magazine in a “House FinTech Explainer” role of sorts, and I’ll share a few random things I’ve learned through that.

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 targeted 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 Fortune 1000 and 500, and those readers want quotes from managers and executives of 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 uses and successes our readers are looking for.” So, again, I think that speaks pretty clearly to where we are in aggregate with respect to the adoption curve beyond just a few notable early adopters in “household name” businesses.
My Work on the International Side
From time-to-time, I -- outside of Synaptic because of long-standing relationships -- occasionally do some work for the World Bank and the IMF. I’ve had discussions around cryptocurrencies (more informal than formal) with people there who know what they’re talking about, so we can chat a bit about that today too.

Their BIG concern, nationally and internationally, is the anonymity potentially offered by cryptocurrencies. Central banks are worried about laundering by Narco-cartels and terrorists (and, to some extend, by extremely high net worth individuals) getting easier. Governments are even more worried about tax avoidance by a broad swath of their citizens. So, I think -- and this is *purely opinion* -- 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 civilian “cypher punks” in the ‘80s. 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 of technologies of which they a fearful *really* tough, they *really* know how to do it.

So those are some of the headwinds. Just one more along those lines, though I’m not an economist, so take this with a grain of salt. It seems to me that currencies can’t be currencies *and* asset classes at the same time. Sure, I guess to a small degree they’re asset classes in that there are ForEx traders in the world who make a few pennies on blips of the Dollar or the Pound or the Yen or the Euro, but, for the most part, major currencies and their ratios to each other are pretty stable. 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 (a basket of world currencies? a basket of commodities? perhaps some function of its own 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 any training in the discipline.

If you’re interested in the international monetary issues around Cryptocurrencies, I’d highly recommend to you the Nobel prize winning Friedrich Hayek's book "The Denationalization of Money." What’s amazing about it is that he was writing about the very challenges confronting cryptocurrencies today 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 but their citizens supportive of a denationalized -- though not entirely non-governmental -- 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 a myriad of languages, so it ain’t an easy or quick read. But it is indispensable for an understanding of the policy issues facing cryptocurrencies.
Many thanks again for your kind patience and attention. If I can be of any help to any of you, I’m easily reached at Synaptic (www.synaptic-sdlc.com) or up on Mountaintop every Wednesday afternoon when I teach Capstone.

Questions?
This publication contains general information only and is based on the experience and research of Synaptic Consulting practitioners. It is not a substitute for professional advice or services, nor should it be used as a basis for any action that may affect your business. Synaptic Consulting and related entities shall not be responsible for any loss by any person who relies on this publication.

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Synaptic Consulting offers Consulting, Training, and Business Process Outsourcing services throughout The Americas and the E.U. though its Finance and Technology practices. For more service portfolio information, see www.synapticconsulting.info

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