April 20, 2016

पृथ्वीश उवाच - Prithwis said

As a prolific user of Twitter, I have more than 11K tweets on my timeline but I realised that in most cases I have either retweeted others' tweets or at best forwarded or commented upon the contents of various websites. How many times have I said anything original? Actually not a trivial number! I have nearly 4000 original "words of wisdom" that I hereby bequeath to posterity!

How did I arrive at this list? Well I downloaded all my Tweets till 5 March 2016 into a spreadsheet and then using some simple text processing commands, I eliminated retweets and any tweets that contained a reference to any URL. Unfortunately that eliminated tweets referring to my own work as well but that was the price I had to pay to create this.

Finally, here it is ... a collection of my pure and original thoughts from the last seven years!

April 18, 2016

Smartcontracts : Cryptocurrency : Blockchain

Rise of the digital autonomous corporation

Think of a company that offers a service that helps people track their assets and transfer the same to others on the basis of validated instructions -- similar to a current account with cheque facility. Think of the same company as hiring people to do this and paying them for their effort with shares in the company -- sweat equity. Think of this company as being in operation since 2009 and the value of its shares spiking to US$ 1200 before stabilising at around US$ 200 over the past two years. Think of this company having a current market capitalisation of around US$ 5.5 billion.

Now what if this company were to have to no human managers and but only programs on multiple computers interacting with each other!  Is such an unmanaged company possible? Strangely enough, it is possible, it does exist today and it is called Bitcoin. The only twist in the the tale is that the only asset being tracked by the company also happens to be the shares in the same company, that is Bitcoins!

Bitcoin, that hit the headlines in 2013 when its price surged to US$ 1200 in international markets, has been viewed, and promoted, as a new kind of currency called cryptocurrency. Thanks to its features that guarantee anonymity, it was quickly adopted by the underworld and used in massive cross-border, illegal transactions until regulators caught on and imposed strict KYC norms. After the regulatory shake-up, it is now viewed and legally treated as any other  commodity, like gold or crude oil.

The commodity analogy is reinforced by the name, mining, given to the process that regulates the creation of new Bitcoins and their entry into the economy. But this association is misleading. The actual goal of the process is to validate asset transfer - to check whether the transferor owns the asset and is entitled to transfer it to the transferee as per the conditions under which the transferor acquired the asset. This process is labour intensive, or rather CPU intensive, and so the entity, or computer, that carries out the validation is rewarded with a few units of the asset as an incentive. Hence the mining process that generates a reward is actually a by-product of the validation process that is essential for the success of the original book-keeping service that was on offer.

The genius of Satoshi Nakamoto, the anonymous creator of Bitcoin, lies in establishing the equivalence between (a) the validation process and the reward process  and (b) the asset under management to the equity of the company itself. He then built the software that does all this and released it into the public domain in 2009 and since then it has been running on multiple computers connected in a peer-to-peer network. The software running on these machines is controlled by humans but the resultant entity or phenomenon, the network of peer-to-peer nodes is independent of any specific node. Its existence and the validation service that it delivers is an emergent phenomenon that (a) depends on the existence of multiple nodes that adhere to the bitcoin protocol of data exchange and yet (b) is independent of the existence of any specific node. This is where Bitcoin transcends its earlier identification by being neither a cryptocurrency nor a commodity but becomes instead, a digital autonomous organisation (DAO).

But how does all this really work? The mathematics behind this is rather cumbersome, to say the least, but it has been tested by the best minds in academia and industry and there is complete consensus that this is no scam. As an analogy, consider Einstein’s General Theory of Relativity that has been in the limelight because its spectacular prediction of gravitational waves was recently validated by scientists. None of us really understand the mathematics behind relativity but we are confident that had it been erroneous, the scientists whom we trust would have exposed the flaw. So is the case with the bitcoin network. Cryptography, the mathematics behind bitcoin, ensures that not only is the value of the assets under management preserved but the cost of any effort to subvert or defraud the network is far higher than the asset value that can be obtained through the subversion! Hence there is an economic motive for everyone in the network to make sure that the system continues to operate as designed and that is why the system has been working smoothly since 2009. In fact, this is true for any society of rational humans where a stability, or rule of law, is ensured when the cost of breaking the law is higher than the benefits that accrue by breaking the law.

If  bitcoin is indeed a digital autonomous corporation then the corporate office that it works out of is the blockchain. Blockchain is the underlying technology platform and bitcoin is just one of any number of DAOs that can operate on it. This is similar to the Internet, a hardware platform of networked computers based on the TCP/IP protocol, that supports many applications of which, only one is the well known http-based World Wide Web. In fact if the blockchain is in place, creating a DAO like bitcoin is not difficult and many alternate DAOs ( or alternate coins) exist though none has reached the level of popularity or market capitalisation as bitcoin. In fact, Ethereum has created an open, publicly accessible blockchain and the Mist browser that makes the creation of DAOs so simple that the author created and deployed indiCoin, a bitcoin lookalike that is just as robust but a little less sophisticated, in less than thirty minutes.

The blockchain is a public ledger or record of asset transfers that is both visible to all members of the network and yet guarantees anonymity of ownership. This incredible property of the blockchain is of immense interest of those who deal with publicly traded securities in global financial markets.

In January 2016, DTCC, the world’s largest central securities depository, the US version of India’s NSDL and CDSL, has floated a white paper,  stating that the blockchain offers a “a once-in-a-generation opportunity to reimagine and modernise its infrastructure” for trading of securities in the US. The change in the way financial securities can be stored and transferred is being compared to the change from physical securities to dematerialized securities that occurred in the 1970s in the US and in the 1990s in India. The staggering implication of this new way of dealing with securities will be explored in a symposium on the blockchain that the DTCC is organising in New York on March 29, 2016.

In a parallel development, the US Securities and Exchanges Commission has, in December 2016, given formal approval to Overstock [Nasdaq OSTK] to formally list its new equity shares on an “alternate trading platform”. Patric Byrne, Overstock’s visionary CEO, had, in June 2015 already floated private corporate bonds for qualified institutional investors on a blockchain based trading platform that they have created and it is widely expected that the equity shares will be released there as well. This, read along with DTCC’s strong interest in the blockchain means that there is a strong possibility that securities trading will move into the same blockchain environment that is currently being used to trade bitcoins.

Whether it is with bitcoins, equity shares or any other tradeable asset, the power of the blockchain lies in its ability to create mathematically enforceable smart contracts. Contracts are fundamental to any process that transfers ownership of assets and the idea of a smart contract was created by Nick Szabo (who was erroneously thought to be Satoshi Nakamoto, until he denied it) in 1997. Controlled by cryptographic keys owned by buyers, sellers, lenders, mortgage owners and anyone who could have an interest in an asset, smart contracts can be triggered by events like presentation of a key, receipt of money, the passage of time or by other contracts. For example the ignition  of a car’s engine that normally responds to the owner’s cryptographic key can instead respond only to the banker’s cryptographic key if mortgage payments are not paid in time. And in the case of cryptocurrency like bitcoin, a payment contract can be executed if and only if a previous receipt contract (or incoming transaction) can be activated. Similarly, smart contracts can be created where multiple signatures (or cryptographic keys) are needed to transfer an asset or to ensure that an asset cannot be transferred until certain escrow conditions are met -- and no human beings are needed to verify any of these conditions because they are all programmatically coded into the contract using the blockchain protocol.

The internet transformed communications by making exchange of information inexpensive, secure, decentralized and democratic. Similarly, the blockchain could transform finance by making it just as easy to exchange digitised assets. By linking assets like shares, bonds mortgages with cryptocurrencies through smart contracts, blockchain technology could convert the world of financial services into one gigantic digital autonomous organisation that is as resilient, robust and reliable as the World Wide Web.

This article originally appeared in Swarajya, the magazine that reads India right

April 01, 2016

Auditors, not Regulators, necessary for Higher Education

India has a glorious tradition in higher education that stretches back to the hoary antiquity of Nalanda and Takshila but today this tradition is under stress. We have too few colleges for our kids and most of these lack the infrastructure (“hardware”) or the faculty (“wetware”) necessary to deliver the kind of programs (“software”) necessary to be world class institutions. In an earlier article we had explored how inexpensive technology could address this problem and here we explore structural issues that may offer useful alternatives.
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There are different kinds of reasons why we do not have enough good colleges. In the case of government, or public-sector, colleges it is a combination of lack of money, mismanagement and political interference. Central universities and institutions are better off but they too are plagued by cronyism and inefficient use of money. Instead of creating multiple IITs and IIMs in far flung parts of the country we should have increased the seats, hostels and faculty at the existing institutes to create world class institutions. But then we have regional politics and lucrative cutbacks from civil construction! Ergo flood the country with new institutes without bothering to increase the effectiveness of the existing ones. Private sector investment in education is stuck between a rock and hard place - between the socialist obstinacy of not allowing profit in educational enterprises and the philanthropically challenged mindset of the Indian uber rich that precludes the kind of endowments that US universities enjoy.

This leads us to the third and final problem. Since one cannot be seen to be making profit from education, private entrepreneurs have to depend on irregular, backdoor techniques for making money and this allows “factory inspectors” of the license-permit raj -- in AICTE, UGC, MCI and elsewhere -- to take their illegal pound of flesh by approving institutes of dubious quality. This unholy nexus of unscrupulous investors and extortionary regulators operating under the malignant influence of the corrupt politician is too well known in educational circles to be described once again.

So is there any alternative?

Let us begin with some plain talk. Can government institutes be made more efficient in their usage of funds? Certainly, but that would be the subject of another article. Second, should we rethink our obduracy with not-for-profit education?  We could, but the philosophical issues are so divisive that we would end up with pointless polemics. So let us explore  structures that simply ensure that customers (students, guardians) get a fair return on their investment in education while vendors (faculty, staff) are adequately compensated for their effort. But the real challenge lies in executing this on a demonstrably not-for-profit platform.

Fortunately such a platform already exists in the form of a Section 8 company. But while anyone can create a section 8 company, a Gordian Knot of Indian red-tape ensures that it cannot be used to deliver educational services until it is allowed to do so -- or accredited --  by one of the regulators like AICTE, MCI or the UGC. That is where all good intentions flounder in the quicksand of venal corruption.

The fundamental difference between a company registered with the Registrar of Companies and one accredited with a regulator for the purposes delivering educational services is that the latter is hobbled by a host of additional restrictions, many of which are evidently questionable but cannot be formally challenged. These were designed to ensure that students are not cheated but unscrupulous operators get past these restriction using time-tested practices perfected  during the license-permit-raj. However honest operators are squeezed out and the net result is that students in India are denied quality education at an affordable cost.

So what happens if we remove all regulators, along with the need for any kind of academic accreditation, and allow Section 8 companies to offer educational services leading to an academic degree. In a free market economy, customers and consumers purchase goods and services based on their perception of value for money. Why can we not trust them to have the same wisdom while choosing educational services. If students and their guardians can choose between rival coaching institutes and private tutors on the basis of their perception of quality and value for money then why can they not be just as prudent in choosing the final college? Why would they need a nanny-state and its regulators to tell them which college is good or bad? The real challenge is of information transparency.

Investors choose stocks of companies based on the disclosures that companies make to the stock exchange. Customers choose consumer goods based on feedback received by word of mouth and through reviews. Students choose colleges based on word of alumni but also track key parameters like placement. This where we need to ensure that all Section 8 companies that offer educational services make additional statutory disclosures every year, of key operational parameters that, like financial statements, have been audited for credibility by auditors accredited with the Institute of Chartered Accountants.

However the nature of disclosures and the way the metrics are calculated -- the equivalent of the GAAP -- must be clearly defined. For example, the educational audit must disclose information in these eight categories :

Income from students against various heads like tuition, lab fees, hostel fees and from other sources like grant, donation or corporate services.
Expenditure on faculty, staff, laboratory, sports, rent, electricity, other services and bank interest.
Number, qualifications and experience of teachers along with the number of hours or days that each faculty actually spends on the campus.
Number and size of classrooms, laboratories, libraries along with list of equipment.
Placements in terms of number of companies, number and profile of jobs offered along with actual, non-inflated salaries.
Published curriculum and the contact hours that were delivered against each subject along with attendance records for each class.
Record of examinations conducted, scripts evaluated, marks awarded.
Statistical distribution of marks and the number of pass-fail students along with their marks and attendance records.

All these records must be available in any case and hence professional auditors would have no difficulty in verifying and certifying the same.

Can an auditor be bribed or otherwise compelled to give false certificates? This is possible, but given the long history of the audit profession in India and the fact that lakhs of crores of rupees of investors money is riding on the veracity of the statutory audit process, the possibility of this happening is low. Nevertheless we have to be prepared for situations like Satyam or Enron.

To operationalise this concept, we need an additional sub-section to Section 8 of the Companies Act that explicitly recognises colleges, or “educational” companies, as being distinct from other similar companies and hence are required to provide additional disclosures as explained above. Moreover it must specify a minimum contact hours and minimum duration for each category of degree, namely BSc, B.Tech, B.Arch, MBA, M.Tech, LLB. etc., based on current UGC norms.

Now the process of starting any college would be no different from registering a new Section 8 company with the Registrar of Companies. Just as the end of industrial licensing meant that no company could be barred from manufacturing any product, so would this new approach ensure that no college can ever be barred from offering any degree. But just as the registration of a company does not guarantee either the quality or the sale of its product, the registration of a college is no guarantee of either quality or enrollment. Students, like customers, are no fools, and if the RoC and the statutory auditors can ensure stringency in the disclosure norms, then students and employers will be guided towards the better colleges by the invisible hand of the free market. If some people are still fooled by certain colleges, then all we can say is caveat emptor -- because a fool and his money is soon parted.

So what would the erstwhile regulators like AICTE and UGC do? Instead of micromanaging the unnecessary regulation of colleges, they can be converted into pure funding agencies that will train teachers, fund the development of new programs and hand out research grants to deserving colleges and their faculty. For this they could have their own rating criteria against which colleges may voluntarily agree to be evaluated if they want access to public funds. This way, public money that flows into education will be utilized more efficiently.

According to the Aspiring Minds National Employability Report 2015, 80% of engineering graduates from AICTE / UGC approved institutions are unemployable. So do regulators add any value? Does the government have the courage to disband its educational regulators and bring in the Registrar of Companies as the only supervisory agency? Can we trust the Institute of Chartered Accountants to audit educational statements correctly and honestly? Can customers in India be duped by vendors even if they have access to detailed information about the vendor’s services?

Despite, and perhaps because of, stringent regulation in the education sector, India faces the paradox of a drought of skills amidst an ocean of people! Replacing regulator by auditors will unleash entrepreneurs in education who could convert people into talented resources.

This article first appeared in Swarajya.