Why Cryptocurrency came, its promises and clash with economics and monetary policy

1. A LESSON IN ECONOMICS, HISTORY,
SOFTWARE, DATABASE, BLOCKCHAIN,
CRYPTO CURRENCY, NFT, CYBERSECURITY
CONNECTING COMPUTER SOFTWARE WITH ECONOMY AND CYBER SECURITY
SUMIT SENGUPTA - SOFTWARE ARCHITECT AND MICROSOFT TEALS VOLUNTEER

2. ECONOMICS
• We have neither the time nor the money to do everything we might want to do.
• Economics is the study of how people make these decisions
• Incentives and their impact on behavior – either at a
• Small scale – individual person or company
• Large scale – country, or specific sector – manufacturing, service,

3. MICROECONOMICS
• Micro – Small
• Examines “markets” where buyers and sellers transact – products and services
• Question – how much of candy would you buy ?
• At what price ?
• What factors affect the quantity and the price ?
• Demand and Supply

4. DEMAND SUPPLY CURVE
Demand goes up, price goes up
Supply goes up, price goes down

5. CURRENCY VALUE
• Why is it a currency note valuable?
• Because it is trusted – we can exchange it for good or services anywhere
• No double spending - once spent, that money is for someone else to spend again
• Guaranteed by the central bank of a country

6. MACROECONOMICS
• Macro – Large
• Effect on Society on aggregates – sectors like housing, manufacturing or national/global
economy
• Economic growth, unemployment, interest rates, inflation, Monetary Policy
• Monetary policy – how national central banks controls money supply
• The Federal Reserve Bank monitors and supervises other banks
• It can increase money supply by
• Reducing "reserve requirements" for banks allowing them to lend more money out
• Purchasing gov. securities or bank assets,
• Reducing short-term interest rates
• A rise in interest rate, borrowing ( house mortgage, company purchase ) spending slows,
and price drops to control inflation
• A drop in interest rate, borrowing and economic activity rises in times of recession

7. BANK RUN – AND GREAT DEPRESSION
• Banks are in the business of keeping deposits – at a certain interest rate, lending some money at higher
rates, making some as investments and some as cash as “liquid”.
• A bank run – when many customers withdraw cash from the bank simultaneously
• If the bank does not have enough cash it has to sell some investments
• During great depression there were bank runs – and 9000 banks folded along with $7B deposits (
• That is $110B in today’s amount
• In order to prevent bank run, FDIC was created
• It insures deposits up to an amount – $250K in 2023.

8. 2008 FINANCIAL CRISIS – DOUBLE SPENDING
• House prices kept on going up, and mortgage rates getting lower by year
• People kept buying them, even if pricey
• Banks offered loans to people even with poor credit histories
• These “high risk” mortgages were sold as investments – Collateral Debt Obligation / CDO
• Property values at different places were considered “independent” i.e. price cannot go down in all
places, and these were considered “Low risk” investments.
• In reality, housing price dropped nationwide – starting a domino effect

9. TIMELINE OF 2008 FINANCIAL COLLAPSE
• January 11: Bank of America buys the struggling Countrywide.
• March 16: Fed forces the sale of Investment Bank (IB) Bear Stearns to JPM
• September 15: IB Lehman Brothers files for Chapter 11 bankruptcy.
• September 15: BA offers to buy troubled Merrill Lynch at $50B ($29 a stock – 70% premium )
• September 16: Fed bails out American International Group (AIG) for $85 billion.
• September 25: Washington Mutual fails.
• September 29: Dow Jones fell 777.68 points and the whole system was on the brink of collapse.
• October 3: U.S. government authorizes $700 billion for bank bailouts.
• November: Bitcoin paper titled “Bitcoin: A Peer-to-Peer Electronic Cash System,”

10. LINGERING EFFECT OF 2008 CRISIS
• 2009 Dodd-Frank regulations
• 2013 JPM pays $13B to federal regulators for mishandling of CDO, including some of Bear Sterns that it
bought in 2008.
• WEO report – worst decade of economy since the great depression of 1929
• 2018 – Some of the DF regulations rolled back

11. 2023 BANK COLLAPSE – SVB, SIGNATURE
• Banks have customer deposits ( insured to $250K ) and it loans out to customers and it has its own
investments. Some of the investments were in Gov bonds – that lost value with rise in interest rate.
• News on CNN – money beyond FDIC insurance $250K was safe – not a bail out ?
• How bank operates from 2022 Economics Noble winner Prof. Douglas Diamond
• Story on actual FDIC takeover – that happens almost every week
• Analysis on why SVB went down – banking 101 mistakes ?
• Justice Department and SEC investigation
• “Bail out” – government rescuing reckless, irresponsible banks?
• There was no sell out SVB to other banks like Bear Sterns to JPM?
• No time to wait for Monday?
• Feds do not want the big banks to get even bigger as they can be “too big to fail”
• Also banks like JPM do not want to buy

12. In terms of the absolute total size
2008 – Washington Mutual $307B +
others, $374B
2023 – SVB, Silicon - $319B
2009 - $171B
Bank failures between 2008,2015 – 500
@ roughly 1.4 every week
Between 2001-2008 - 25

13. 2008 NOVEMBER – BITCOIN PAPER
• Satoshi Nakamoto’s paper – “Bitcoin a peer-to-peer electronic cash system”
• Cryptography and Cryptography Policy Mailing List.
• Some had doubts –

14. DATABASE
• Server software to manage and store large volume of data
• Concurrent access by many ( thousands of people )
• Different Types
• Transactional ( think store transactions ) vs. Analytical ( what was sold most )
• SQL ( Relational – your bank account ) vs NoSQL ( Distributed - Facebook, Twitter )
• Data can be added, changed, deleted by “transaction” .
• All databases data kept in central database servers – in cloud ( large data centers ) or private data centers
• A fraction of this data can be downloaded locally on our laptop or mobile
• But the ”source of truth” or main database is always in cloud/data center

15. BLOCKCHAIN DATABASE
• A block – consists of a cryptographic hash of previous block, transaction data and timestamp
• Timestamp proves that the data existed when the block was created.
• Each block is ”linked” to previous block

16. GENESIS BLOCK IN BITCOIN
• The first transaction on bitcoin network - Satoshi “mined” at 01/03/2009 06:15:05 GMT
• It is the beginning – does not point to previous block
• Contains 50 bitcoins – they cannot be spent or awarded
• "The Times 03/Jan/2009 Chancellor on brink of second bailout for banks."
• Referring to a headline on Times, UK on that day

17. MINING BITCOIN
• Central idea of bitcoin protocol
• Process to add new bitcoins to the money supply with verified transactions in the distributed network
• Computationally intense
• As a reward of participation, you get bitcoin rewards

18. CRYPTOCURRENCY EXCHANGE
• Similar to stock exchange, digital marketplace to trade crypto
• There are many available – with different feature, fee, security measures, regulation by country
• Coinbase, Binance, Kraken, Bitfinex etc
• A public website that lists all transactions https://www.blockchain.com/explorer

19. CRYPTOGRAPHIC HASH EXAMPLE
• Sha256
• “One way” computation from a string to digest
• Not possible to decode it back to string
• A simple change in string value, hash changes drastically
• echo -n Elyria | shasum -a 256 | cut -d " " -f1
• “Elyria” ->b71aadb5be0342434ba414904346ad08702702a1746abd919627eddf380705e4
• “Elyrib” ->9c5572a6951ff87f097b3a2b9fd670a77d5c39749ed4f0910fcb3617e824b93e
• Drastically different but both are 64 bits

20. BITCOIN IS SAFE AND UNBREAKABLE ?
News - 03/21/2023

21. CRYPTO RUN – FTX
• Sam Bankman-Fried (SBF) – founder and CEO of FTX, world’s largest crypto exchange
• His personal net worth topped at $26B, before a sudden collapse in a week bankruptcy in Nov 2022
• FTX was headquartered in Bahamas
• Investigations on, out on $250M jail

22. ONECOIN FRAUD
• FBI Top Wanted Dr. Ruja Ignatova (video)
• Co-Founder of “Onecoin” a fake crypto
• No blockchain behind it (BBC story)
• Was running out of a SQL server database
• Missing since Oct 25, 2017

23. OTHER USE CASES FOR BLOCKCHAINS
• Reproducibility in scientific research
• Pharmaceutical drug tracking – preventing use of narcotics
• Tracking food safety
• Medical records of a patient
• NFT – own digital art in small fractions, affordable and secured for users
• NFT created on blockchain networks and are traded line crypto currency
• First tweet by Twitter CEO Jack Dorsey, sold to $2.9M