Bitcoin & Blockchain

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Bitcoin & Blockchain, Blockchain, Central Banks, cross-border, digital currencies, MAS, Payments

World’s first Central Bank Digital Currency payment successful- MAS lead the way

The Monetary Authority of Singapore (MAS) have been piloting several Blockchain use cases over the past few years. Central Bank Digital Currency (CBDC) was one of the key focus areas of Project Ubin – MAS’ Blockchain initiative. In September 2018, I had published my post on Singapore and their efforts around Blockchain.

With the five phased approach to Project Ubin, we may soon see a state issued digital currency. That would not only put Singapore ahead of its Asian peers, it may be a Global first.

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We now have a global first. Just over a week ago, MAS and the Central Bank of Canada made an announcement that a transaction between digital currencies of the two central banks was executed successfully. The trial was performed with the help of Accenture and J.P.Morgan.

As the Blockchain narrative developed over the years, one of the key buzzword was decentralisation and disintermediation. However, in the last two years, we have seen permissioned Blockchains gain popularity.

The three dimensions of the Blockchain Trilemma proposed by Vitalik Buterin were, Scalability, Security and Decentralisation. Designers of Blockchain systems have to choose between these three dimensions. The rise of permissioned Blockchain indicates that Decentralisation would be the first to be compromised amongst the three dimensions.

There are several reasons why a central bank would launch a digital currency. In the case of the Petro, the rationale was largely to stay clear of sanctions and raise capital to pay back some of their debt.

Reserve Bank of India on the other hand is exploring CBDC as it would be a low hanging fruit after the mass (forced) adoption of the nation’s identity system – Aadhaar. A good model would be to link a CBDC to Aadhaar verified wallets to create accountability and traceability of cash in the economy.

RBI was also spending 7 Billion Rupees ($100 Million) per year in just creating and managing the Rupee. There would be huge savings if they launched a CBDC.

Getting back to the SGP digital currency. Some key points to note are the following,

  • The exchange transaction happened between SGD and CAD.
  • The MAS network was built on the Quorum Blockchain and the Canadian network was on Corda.
  • The principle of Hash Time Locked Contracts (HTLC) was used to ensure an all-or-nothing guarantee. If one leg of the transaction fails to complete, the entire transaction is rolled back.
  • Interledger protocols can be used if parties were on different Blockchain networks.
  • Off-Chain transfer of hash were performed to initiate and complete the transactions.
  • The asset swap was performed using an intermediary, and a multi-currency support option was modelled in using this infrastructure.
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The picture above explains the HTLC framework used by this model. A report was published at the back of this initiative, describing several models that cross border settling systems could use.

The next wave of central bank blockchain projects can make further progress by bringing technology exploration together with policy questions about the future of cross-border payments

Sopnendu Mohanty, Chief Fintech Officer, MAS

The report also goes into the depths of the challenges in using HTLC and the potential alternatives being worked on by the Blockchain community. Like in most other Financial Services use cases of Blockchain, this transaction was also executed in a controlled environment.

CBDC are still in their infancy. This pilot could be followed up by collaboration across several central banks at the policy, governance, process and infrastructure levels. This would benefit the global economy at a scale never seen before. Let’s take stocks in a year. Watch this space.

Arunkumar Krishnakumar is a Venture Capital investor at Green Shores Capital focusing on “Sustainable Deeptech Investments” and a podcast host.

I have no positions or commercial relationships with the companies or people mentioned. I am not receiving compensation for this post.

Subscribe by email to join the 25,000 other Fintech leaders who read our research daily to stay ahead of the curve. Check out our advisory services (how we pay for this free original research).

Bitcoin & Blockchain

Bitcoin price is picking up steam; 2019 is the year of the IEO

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Last week our theme was “Will Bitcoin go from Crypto Winter to China Crisis?.“ Our theme for this week is “Initial Exchange Offerings: 2019 is the year of the IEO.”

TLDR. After a brutal 2018, it is becoming nearly impossible for investors to lose money this year. A couple of days ago Bitcoin market capitalization broke $100 billion. If it sounds too good to be true, it just might be, especially with IEO’s picking up steam.

It has been almost a year, since the Bitcoin market was at $100 billion. While Bitcoin’s price remains down by 70 percent from its 2017 all-time high, the market cap for the world’s most valuable digital asset exceeded $102 billion. It’s certainly time to cheer!

With cryptocurrencies on the move again, everyone is making predictions of what will follow. An online platform called Bitcoin Forest, attempts its own predictions using market data and an AI algorithm to produce forecasts for the prices of cryptocurrencies.

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We are out of the prolonged bear market and prices will start rising, but on much sounder ground.

Since the lows in January, the number of addresses on the Bitcoin network are by 20 percent. In early April, Bitcoin recorded its 400 millionth transaction, in just a year after it passed 300 million transactions, showing continued growth in popularity. Lightning Network’s capacity has increased to over 8000 nodes with a capacity of $5.6 million. This is a 7.8 percent over the last 30 days. Fidelity’s Bitcoin Custody was launched to reel in high profile investors.

A recent survey by Harris Poll for Blockchain Capital, showed that 43% of US Adults are familiar with cryptocurrencies with 20% between the ages 18-35 owning Bitcoin.

Bitcoin is gaining a lot of traction across the board. The report shows that 21% prefer BTC over government bonds, 17% over stocks, 14% over real estate and 12% would invest in BTC before investing in gold.

Along with the rising prices of cryptocurrencies we are also seeing a rising trend in Initial Exchange Offerings (IEOs). It’s becoming clear that will IEOs will be the theme for the cryptocurrency industry in 2019.

In 2017, 875 ICOs raised $6.2 billion. In 2018, 1258 ICOs raised about $7.8 billion USD. Already this year, 12 exchanges have announced IEO platforms and 39 projects have participated in an IEO.

In 2017, ICOs are raised using smart contracts with Ethereum. It was as simple as sending ETH to a smart contract to purchase your tokens in ICO, and immediately you will receive your tokens. In 2018, things changed. Most ICOs performed KYC before a participant could contribute, and the release of tokens usually is not immediate.

IEOs are like ICOs, except that the fund raising takes place on a specific exchange. From exchange to exchange, IEOs may slightly differ, but the basic idea is the same. The exchange performs, marketing, fundraising, and distribution and is paid a fee in the given token. When the IEO completes, the token is listed on the exchange for trading.

Binance was one of the first to introduce IEOs in 2017, and in 2019 reintroduced its Launchpad platform with the success of the Bittorent token generating interest from the crypto community.

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IEOs also offer numerous benefits to the parties involved. Investors are theoretically better protected against fraud, because there is an exchange that approved and rejects projects. It’s expected that serious exchanges, will likely conduct better due diligence before offering to act as the counterparty for a project that want to raise money with an IEO.

Crypto is heading towards the same VC and private equity to IPO exclusivity game. The model isn’t all that different to a conventional IPO. Exchanges, like NASDAQ or the New York Stock Exchange, approve listings based on the quality of the offering and a whole host of regulatory compliant guidelines. An IEO merely replaces equity with a digital asset.

Will year 2019 be the year of IEO?

2019 is the year of the IEO. Exchanges will handle project vetting for retail investors and tokens will be tradable in weeks. Being vetted by an exchange and immediately tradable, IEOs address two of the key problems with ICOs. Tokens are immediately listed on the exchange, giving holders immediate access to a trading platform. An exchange that acts as a counterparty, providing an additional layer of assurance for investors.

The new race will be investing in companies that are guaranteed an IEO, which can be interpreted as a very positive signal for the industry, in general.

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Ilias Louis Hatzis is the Founder & CEO at Mercato Blockchain Corporation AG. He writes the Blockchain Weekly Front Page each Monday.

I have no positions or commercial relationships with the companies or people mentioned. I am not receiving compensation for this post.

Subscribe by email to join the 25,000 other Fintech leaders who read our research daily to stay ahead of the curve. Check out our advisory services (how we pay for this free original research).

Bitcoin & Blockchain, bitcoin price, capital allocation, everything bubble, family offices, negative interest rates

Why #GetOffZero Gets Sensible Investors To Look Seriously At Improbable Bitcoin Based Solutions

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TLDR We used to think of positive interest rates like the law of gravity or the law of supply and demand – immutable. Yet negative interest rates is a very real phenomenon/problem today. In this topsy turvy world, even sensible  investors look seriously at improbable bitcoin based solutions. (The hashtag should be #getoffnegative but that is not getting traction like #getoffzero).

This update to The Blockchain Economy digital book covers:

  • Why sensible people pay to lend their money

 

  • Gold and the hope you are wrong story

 

  • The other obvious solutions look jaded at end of everything bubble

 

  • The improbable Bitcoin solution

 

  • Context & References

Why sensible people pay to lend their money

Paying money to lend money (aka Negative Interest Rates) is crazy. So why do sensible investors do this? The answer is simple. They aim to avoid a worse problem. 

With Negative Interest Rates you are guaranteed to lose a little. You do this to avoid the risk of losing a lot in some other asset.

The more secure the currency, the higher the interest rate that the Central Bank controlling that currency can charge. For example, the Swiss National Bank (SNB), caretakers of the famously stable Swiss Franc, can charge a premium for the right to lend them money. If you pay 1% a year, you will only lose 1% a year. if you earn 15% interest on a currency depreciating by 17% you do worse.

Gold and the hope you are wrong story

One investor suggests an allocation to Gold but in the hope that Gold price goes down. His logic is that if you allocate say 10% to Gold and it goes up 2x, that is probably because 90% of your assets have declined a lot. You can paint a scenario where Gold is valuable but Bitcoin is worthless (eg if there is no Internet or electricity) but that scenario is so awful that you hope it is wrong (even if you have some physical gold just in case).

Bitcoin has no obvious parallels as an asset class. Bitcoin is a bit like a currency and a bit like a commodity and a bit like a stock – yet different from all of them. If you want an analogy, Bitcoin is like gold but a) before gold had a long history of value and b) with a fixed hard limit to how much could ever be mined. Imagine somebody pitching gold before gold had an established monetary value and you come close to understanding Bitcoin by analogy.

Gold and Bitcoin are both anti-fragile bets. If the current macro story ends badly, both will do well. Gold is definitely a hope you are wrong story. Bitcoin is more nuanced.  A scenario where Bitcoin goes up 100x is likely to be scary and disruptive and bad for many assets, but there is also a hopeful scenario where Bitcoin gives people greater sovereignty over their data and other assets.

The other obvious solutions look jaded at the end of the “everything bubble”

The simplest way to avoid paying a bank to take your money on loan is to loan money to a Government or a Corporate. The more stable the Government or Corporate, the lower the interest rate. You also avoid bank counterparty risk. So risk-off capital floods into sovereign and corporate bonds. What happens when excess capital flows into an asset type – yes, you get bubbles and that means returns go down and risk goes up. So the bond workaround is not a good one.

Equities at the end of the everything bubble seem dangerous, valuations are high and highly dependent on central banks. 

Hard assets also suffer from the storage cost problem. For physical goods this is a very real issue; think of vintage cars, wine, art etc. There is the additional shelf life problem as any wine lover knows who has opened an old wine that got better as decades went by and then suddenly was “off” ie horrible to drink and worthless. 

So, looking at the alternatives to Bitcoin, none are looking that good at this stage of the cycle. One veteran investor was asked to come up with reasonably priced assets to buy. The best he could come up with was that labor is undervalued vs capital. 

That lack of obvious alternatives is pushing some investors to look at the improbable Bitcoin solution.

The improbable Bitcoin solution

Investors are like detectives, on the hunt for truth – preferably contrarian truth. The most famous fictional detective,  Sherlock Holmes says:

“When you have eliminated the impossible, whatever remains, however improbable, must be the truth”.

The improbable Bitcoin solution has 3 parts to it:

  • Safe low cost storage. This is a tough problem, but with such a big prize motivating so many upstarts and incumbents it will be fixed. It should be possible to deliver this at low cost as Bitcoin is a digital product; this is not like storing vintage cars/wine/paintings.
  • Allocation. You place an anti-fragile with maybe 1% of your capital into Bitcoin. If the everything bubble ends badly for other assets, Bitcoin will do well. If you lose 40% on 99% of your capital, you will need a 40x return on Bitcoin. That is feasible if there really is that level of disruption to legacy finance. As some wealthy people enjoy comparing themselves to other wealthy folks, that Bitcoin win will get them bragging rights on their yacht (as well as more yachts for sale at bargain prices). 
  • Use Bitcoin as collateral. Lombard loans have been a tool of the wealthy for a long time. A lombard loan (or lombard credit) is a type of secured loan, in which the entire loan amount is secured by a deposit at the bank that is providing the loan. Lombard loans can be secured by money held in bank accounts, life insurance policies, securities (like stocks or bonds) or other assets. For more go here. Today, Bitcoin would be considered far too risky for lombard loans and most legacy finance won’t offer Bitcoin deposits. This leaves the market open to upstarts. If it is an asset, it can be used as collateral. The only calculation is collateral to loan % and that is based on volatility; so Bitcoin as collateral is still an emerging story.

No investment is without risk. Bitcoin has risk. That is why 1% allocation is what some investors/advisers suggest. AIl risk is comparative. If other assets look risky, maybe that 1% allocations to Bitcoin starts to look a bit more sensible.

Context & References

Why Bitcoin Is Surprisingly Valuable And Stable As A Chair With Only One Leg

A Bitcoin Maximalist describes a real issue to worry about – it is not what the Bitcoin sceptics tell you.

The Path To Mainstream Adoption Of Bitcoin Is Not Through Legacy Finance Institutions, It Is Through The Excluded.

How Family Offices AKA Muppets On Steroids Are Writing The Future Of Fintech Blockchain And Wealth Management

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Bernard Lunn is a Fintech deal-maker, investor, entrepreneur and advisor. He is CEO of Daily Fintech and author of The Blockchain Economy.

I have no positions or commercial relationships with the companies or people mentioned. I am not receiving compensation for this post.

Subscribe by email to join the 25,000 other Fintech leaders who read our research daily to stay ahead of the curve. Check out our advisory services (how we pay for this free original research).

Bitcoin & Blockchain

Will Bitcoin go from Crypto Winter to China Crisis?

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Last week our theme was “Governments with weak currencies may overcome their fear of Bitcoin and so usher in a new global currency.“ Our theme for this week is “Will Bitcoin go from Crypto Winter to China Crisis?”

TLDR. Bitcoin’s popularity has grown over the last decade and has become an increasingly attractive target for adversaries of all kinds. One of the most powerful potential adversaries is China, which has used its capabilities to influence it. This time around China is considering a ban on Bitcoin mining in response to environmental concerns, about the process of creating cryptocurrencies. It has been suggested that a Bitcoin mining ban in China could have a profound impact on the Bitcoin network, as China is home to the majority of global Bitcoin mining operations. But the result of a ban might be completely different than what you might expect.

Earlier this month, China’s National Development and Reform Commission (NDRC) released a revised list of 450 industrial activities making suggestions to promote, restrict and eliminate various sectors. Bitcoin mining was labeled as one of the industries that needs to be “eliminated”, citing environmental issues as the primary reason.

Most media outlets that covered this story, leaped to the conclusion that China wanted to ban cryptocurrency mining, just like it did in 2017 with ICOs and domestic spot trading. The reality is that there is no set timetable for Bitcoin mining to be eliminated. A public consultation is be open until 7 May, giving the citizens the chance to give their input. Even if the agency’s proposal is finalized in its current form, this would not automatically amount to an outright mining ban. When finalized, and assuming mining remains in the elimination section, some Chinese provinces may choose to avoid prioritizing this motion.

Today, China has 70 percent of the world’s crypto-mining capacity. China’s cheap energy, that’s largely powered by coal fueled power plants, make the cost per kilowatt the one of the cheapest in the world. This makes China a very cost effected and profitable place to mine Bitcoin.

With Bitcoin’s price hovering around $5,000, mining is not a profitable endeavor for many places around the world. According to research by JPMorgan Chase, in the fourth quarter of 2018, the production-weighted cash cost to create one Bitcoin averaged around $4,060 globally. For Bitcoin mining operations, electricity generally accounts for more than 60 percent of the total costs. Cryptocurrency mining requires huge amounts of electricity and costs vary from place to place, depending in the cost per kilowatt. Here is a list of countries and the cost to mine Bitcoin:

  • Albania: $3894
  • Ireland: $11103
  • Australia: $9913
  • Brazil: $6741
  • China: $3172
  • Canada: $3965
  • Chile: $9120
  • Norway: $7784
  • USA: $4758

There are various studies that analyze the power consumption that’s required to run the Bitcoin network. Currently, it is estimated that we need 54 TWh. Cryptocurrency mining consumes around 3 times more than the whole of Ireland, which uses as much as 18.1 TWh/year. These numbers sound shocking, and many journalists use them to scare the public.

The proof-of-work (PoW) consensus mechanism that is used in the Bitcoin network, is very energy-intensive due to the increasing mining difficulty. PoW has many properties, and it is the main innovation behind many cryptocurrencies. In simple terms, PoW makes sure that the network stays online and secure at all times. In order for PoW to work an intense hardware activity is required. PoW is performed by special nodes in the system called miners.

Bitcoin isn’t issued by governments or banks. It’s created by a decentralized network of miners, who mint about 3,500 new coins a day. Miners play a crucial role validating transactions. They allow the network to operate without a coordinating authority, like a central bank. The miners compete for the right to validate transactions to the Bitcoin’s universal ledger.

The best way to imagine how how a Bitcoin mining operation works, is to imagine thousands of computers rushing to solve a difficult math problem. The first computer that actually solves the problem, earns the next coin.

Mining consumes a tremendous amount of electrical power.  Companies and organizations in the industry are considering many alternatives to tackle the power consumption issue. One solution is to use cleaner forms of power, such as hydropower stations, burning trash or solar-powered mining. Others include changing PoW with other protocols like Proof of Stake (PoS). The new protocol like PoS would replace the PoW used on both Bitcoin and Ethereum, and reward miners in coins, not for solving cryptographic puzzles, but with transaction fees for helping to maintain the integrity of the network

Today, every time a miner verifies a block they earn 12.5 coins. In 2020, verifying one block of transactions to the blockchain will be worth only 6.25 coins. The next halving will see Bitcoin’s inflation reduced by 50%, and judging from past BTC halvings, Bitcoin is expected to rise in price in because of this.

Many countries around the world are looking favorably towards cryptocurrency mining and many Chinese Bitcoin mining companies are already moving their operations overseas.

Most recently, Bitmain Technologies set up a subsidiary in Switzerland, which will extend its branches, currently in Amsterdam, Hong Kong, Tel Aviv, Qingdao, Chengdu, Shanghai and Shenzhen. Bitcoin miners have also been attracted to the Canadian province of Québec because of its cheap electricity. Belarus is the latest on the list. This year, Georgia sold 45 acres of land to Bifury and established tax-free zones to allow crypto-centric businesses to commence operations. The San Francisco company aided the government to make use of blockchain for their land registry system.

China would prefer to take blockchain without Bitcoin. China may also hope to replace Bitcoin with its own digital currency. China’s crackdown has demonstrated that no one country can stop Bitcoin. That’s the beauty of the decentralized network. If one participant bows out, others pick up the slack. After China clamped down Bitcoin trading, much of it moved to Japan and South Korea.

If China decides to ban cryptocurrency mining, it will probably have a positive impact on prices. Historically, with news of this kind, we’ve seen price surges. When China created seemingly harsh regulations regarding the industry, banning its citizens from investing in ICOs during September 2017, prices were hit hard temporarily, but rebounded to record highs. History has shown that every time you try to whack Bitcoin and it doesn’t die, it becomes stronger.

A potential mining ban in China could be a good thing. It will address the Bitcoin energy consumption problem and its reliance on non-renewable energy to power mining operations. Being forced out of the nation by a ban will likely drive more miners to explore locations where renewable power is cheap and abundant.

Most importantly, it would make Bitcoin mining more decentralized. With China no longer able to dominate Bitcoin mining, the network will become more decentralized and safer. While China may still have motives to destroy Bitcoin, if the NDRC proposal goes through, it will not have the means.

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Ilias Louis Hatzis is the Founder & CEO at Mercato Blockchain Corporation AG. He writes the Blockchain Weekly Front Page each Monday.

I have no positions or commercial relationships with the companies or people mentioned. I am not receiving compensation for this post.

Subscribe by email to join the 25,000 other Fintech leaders who read our research daily to stay ahead of the curve. Check out our advisory services (how we pay for this free original research).

Bitcoin & Blockchain, Regulation & Compliance, SEC, security token, tkj, utility token

The SEC TKJ No Action letter re Utility Tokens – takeaways & questions for entrepreneurs

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TLDR On 3rd April 2019, the US Securities Regulator, SEC, issued a public response to TKJ (TurnKey Jet Inc) that stated unequivocally that the Tokens issued by TKJ are not securities. This may offer regulatory clarity for Utility Tokens, but the devil is as always in the details. This post is one entrepreneur’s attempt to parse these details to understand the legal landscape around Tokens.

Here is the original SEC announcement.

IANAL Disclaimer. I Am Not A Lawyer. Get proper legal advice. This is just one entrepreneur talking to other entrepreneurs.

This update to The Blockchain Economy digital book covers:

  • Takeaways from each of the points in the SEC notice
  • Case Law is different from Civil/Code Law
  • Choose your playing field – Regulated or Unregulated
  • Context and References

Takeaways from each of the points in the SEC notice.

Our takeaways in italics

  • TKJ will not use any funds from Token sales to develop the TKJ Platform, Network, or App, and each of these will be fully developed and operational at the time any Tokens are sold;

Don’t use Utility Tokens to raise capital. For that, use Security Tokens. TKJ was not raising capital. In venture terms, you need to at least have working code ie MVP (Minimum Viable Product).

  • the Tokens will be immediately usable for their intended functionality (purchasing air charter services) at the time they are sold;

In short, use Utility Tokens for marketing, not for capital raising. PrePaid Tokens work when supply is limited. This is clearly true for air charter services (which is what TKJ offers) and most analog physical world services. If supply is limited, customers are motivated to order ahead. This is very different from most digital services which are defined by being unlimited supply (because of almost zero cost to copy). Smart entrepreneurs will figure out how to create premium digital services with limited supply but with digital efficiency. An example might be a physical artefact with some special branding for fans.

  • TKJ will restrict transfers of Tokens to TKJ Wallets only, and not to wallets external to the Platform;

The term wallet is confusing here. The SEC definition seems to assumes open source crypto wallets that anybody can use. No problem, plenty of choice here. This is not like physical wallets where we can have multiple tokens (cash, loyalty cards, credit/debit cards) in a single wallet. In the digital realm, the equivalent to that physical wallet is our mobile phone. The term wallet as used by SEC is more like a combination of loyalty card with pre-paid card.

  • TKJ will sell Tokens at a price of one USD per Token throughout the life of the Program, and each Token will represent a TKJ obligation to supply air charter services at a value of one USD per Token;

SEC jurisdiction is America where USD is the currency, so their reference currency is USD.  For other jurisdictions the token will need to be priced in other currencies. The more fundamental point is that these tokens are non-fungible. You can ONLY use them to buy air charter services.

  • If TKJ offers to repurchase Tokens, it will only do so at a discount to the face value of the Tokens (one USD per Token) that the holder seeks to resell to TKJ, unless a court within the United States orders TKJ to liquidate the Tokens

This is a sensible precaution against ponzi schemes, where the issuer gives early buyers a guaranteed profit. Note the words “unless a court within the United States”. Our mantra at Daily Fintech is “bits don’t stop at borders but money has to show its passport”; financial regulation is jurisdiction dependent.

  • The Token is marketed in a manner that emphasizes the functionality of the Token, and not the potential for the increase in the market value of the Token.

Note that TKJ is NOT a cryptocurrency business; they are a business in the physical world that is using cryptocurrency technology to grow their business. This would be like selling Taxi Medallions as Tokens. The Medallion/Token buyer aims to offer a taxi service and may or may not be able to sell the Token/Medallion for a profit later. Utility Tokens are about marketing not capital raising. For a brief moment in 2017, entrepreneurs got a two for one deal in ICOs that enabled both marketing AND capital raising. Those days are over. Although the new rules seem like a limitation, the biggest issue for most ventures is marketing, not capital raising. So using Utility Tokens to reduce Customer Acquisition Cost (as we explore in this related chapter) is a big deal.

Case Law is different from Civil/Code Law

The SEC letter is no guarantee and the SEC staff reserves the right to change positions.

This is just how case law works.

The law in the USA & UK and many countries is case law (aka common law), where the law is established by the outcome of former cases (aka precedent). This is very different from what is sometimes called civil law (which I call Code Law for reasons explained below) in countries such as China, Japan, Germany, France

For more background on Case Law vs Civil/Code Law please read this.

Civil/Code law originated in the code of laws compiled by the Roman Emperor Justinian. Civil law has codified statutes. I prefer the term Code Law to Civil Law as this style of law is what developers/coders prefer and instinctively assume. You can turn Civil/Code law into computer code in Smart Contracts. It is much harder to do this with case law where you will often be told “well, it depends” or “it will be judged on a case by case basis”. This is why you must consult a lawyer and why the SEC announcement has this boilerplate language:

”This position is based on the representations made to the Division in your letter. Any different facts or conditions might require the Division to reach a different conclusion. Further, this response expresses the Division’s position on enforcement action only and does not express any legal conclusion on the question presented.”

Choose your playing field – Regulated or Unregulated

Fintech Entrepreneurs have 3 basic regulatory strategies to choose from:

  • A. Full stack regulated. You ask for permission upfront. Budget for big legal and compliance bills. Compete directly with banks. Do this in every jurisdiction you want to do business in (state by state in America and country by country in Europe).
  • B. Full stack unregulated. This is what Uber, AirBnB and Skype did. You act boldly without upfront permission and either seek forgiveness or fight (depending on how powerful the regulator is). Banking is far more protected/regulated than taxis, lodging or telecoms, so this is a dangerous strategy in Fintech, but can work for some types of user for Bitcoin related services.
  • C. Lower in stack unregulated. Provide services to regulated companies north of you in the stack.

Bitcoin is C.  Companies northward in the stack provide the user facing functionality and can choose either A or B.

Context & References

Investing in Utility Tokens.

Entrepreneurs who use Utility Tokens to reduce CAC (Customer Acquisition Cost) will create the most valuable Security Tokens

Bernard Lunn is a Fintech deal-maker, investor, entrepreneur and advisor. He is CEO of Daily Fintech and author of The Blockchain Economy.

I have no positions or commercial relationships with the companies or people mentioned. I am not receiving compensation for this post.

Subscribe by email to join the 25,000 other Fintech leaders who read our research daily to stay ahead of the curve. Check out our advisory services (how we pay for this free original research).

bitcoin, Bitcoin & Blockchain, bitcoin bonds, first the rest, imf, sovereign bonds

Governments with weak currencies may overcome their fear of Bitcoin and so usher in a new global currency

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TLDR. For Governments, the only thing more scary than Bitcoin is getting their country destroyed by sanctions and other heavy-handed behaviour by bigger Governments. Bottom up traction for Bitcoin as a global currency is coming from sovereign countries with weak Fiat currencies; the people are taking action despite what the Government is saying/mandating. This is no surprise because innovation always comes from the edge, from those excluded from wealth & power by the current system. What is interesting now is how this innovation is coming both bottom up (by the people despite what their government tells them to do) and from top down (initiatives from governments to use Bitcoin). The recent news that shows that this top down innovation may be happening is that 3 countries (Afghanistan, Tunisia and Uzbekistan) are telling the IMF that they want to issue Bitcoin bonds.

This update to The Blockchain Economy digital book covers:

  • Innovation always comes from the edge aka the Excluded
  • Bitcoin is totally different from a Central Bank Digital Currency (CBDC)
  • Commodities other than Gold as collateral
  • The critical role of the IMF
  • The dreaded v word – volatility
  • Context from other Chapters

Innovation always comes from the edge aka the Excluded

I have been a fan of John Hagel for a long time. I first talked to him 10 years ago when I was COO of ReadWriteWeb (here is an interview from that era). John Hagel, perhaps best known for his book The Only Sustainable Edge, has been one of the leading strategic thinkers for decades. Today he edits The Edge Perspectives blog as a driver for Deloitte’s Center for Edge Innovation.

Hagel focusses on the importance of the edge as a source of value creation and strategic advantage. This insight – that traction comes from people who have been excluded from the current system – may seem obvious, but so many companies do the exact opposite (they compete to win market share among those who have lots of alternative services).

In the Blockchain Economy, innovation comes from people, businesses and countries that have have not done well from Legacy Finance – the excluded.

Bitcoin is totally different from a Central Bank Digital Currency (CBDC)

A Central Bank Digital Currency (CBDC) means a) government controls supply (ie can still print as much as they like b) transaction verification is done using DLT (Distributed Ledger Technology) rather than in a ledger in the central bank’s core accounting system. There may be some efficiency advantages for the central bank from using DLT and some PR boost, but no real advantage for citizens.

The much more radical alternative is a government issuing bonds denominated in Bitcoin. That means they have no control over supply. Although that loss of  control is scary for governments, it is better than issuing debt using two alternatives as currency:

  • their own Fiat currency which investors don’t want (whether it is settled using DLT or traditional methods).
  • the Fiat currency of another Government (eg USD or EUR) that may be imposing sanctions or taking other actions they deem harmful. 

Commodities other than Gold as collateral

In ye olden days, money was an IOU backed by gold as collateral. In 1971, Nixon changed all that and money became Fiat currency backed by nothing more than a promise to pay.

So a poor country issuing a bond denominated in a currency with a fixed supply like Bitcoin is a really big deal for some investors. Rather than getting paid back in a depreciating currency that could spiral into hyperinflation, investors are repaid in a strong currency.

This begs the question, what if the country does not repay the loan aka sovereign debt default.

In ye olden days, investors simply presented their IOU (aka paper currency) and demanded repayment in Gold.  If you are a poor country with a weak currency, such as Afghanistan, Tunisia and Uzbekistan, you cannot simply buy a lot of gold as collateral for your currency. However you may have other tradable commodities that can be used as collateral. For example:

– Afghanistan can use lithium as collateral

– Uzbekistan can use cotton as collateral

The critical role of the IMF

Sovereign Bond Investors have historically demanded very high interest rates to compensate for the risk of a Sovereign Bond from a country such as Afghanistan, Tunisia and Uzbekistan. The idea of issuing a bond denominated in a currency with a fixed supply like Bitcoin and backed by a tradable commodity as collateral is a big innovation.

Last week’s news is only that these three countries are discussing issuing Bitcoin Bonds with the IMF; it is not yet a done deal.

The IMF has a critical role to play because Bitcoin is a global currency so investors will look to a global institution to give the bond issuance some credibility.

Stay tuned – this will be interesting to watch.

The dreaded v word – volatility

The devil is as always in the details, which in this case are:

  • What if Bitcoin increases dramatically in value?  A small increase in value is good news for investors and manageable for issuers. A  dramatic increase in value is, on paper, great news for investors, but such a disaster for issuers that default is likely.
  • What if Bitcoin declines in value? Investors may demand too much interest to compensate for this.

In short, this use case for Bitcoin falls foul of the dreaded v word – volatility

A stablecoin pegged to a basket of currencies could offer a better alternative.

Context from other Chapters

For context please read these chapters of The Blockchain Economy digital book

Some Governments Want To Shut Down Bitcoin But They Don’t Know How

The Path To Mainstream Adoption Of Bitcoin Is Not Through Legacy Finance Institutions It Is Through The Excluded.

Bernard Lunn is a Fintech deal-maker, investor, entrepreneur and advisor. He is CEO of Daily Fintech and author of The Blockchain Economy.

I have no positions or commercial relationships with the companies or people mentioned. I am not receiving compensation for this post.

Subscribe by email to join the 25,000 other Fintech leaders who read our research daily to stay ahead of the curve. Check out our advisory services (how we pay for this free original research).

Bitcoin & Blockchain, Blockchain, data, Decentralization, governance, math, Strategic Viewpoint, trust

Ready for a dynamic, digital, and unstable world, like in nature?

Last week Christine Lagarde moderated a panel with two Central bankers (European Central Bank and CB of Kenya), an incumbent (JPMorgan) and a disruptor (crypto fintech company Circle). The topic was “Money and Payments in the Digital Age.”

CCN covered the panel discussion with a narrative of `In crypto we trust`. Coindesk covered it with a rhetorical question narrative of `In Math we Trust?`.

It is already six months since I covered Blockchain from a policy angle in `In the EU Blockchain Resolution we Trust`. Building Trust through disintermediation is the line of thinking behind the Blockchain Resolution which is still a work in progress. Europe continues to be the thought leader at the policy level with this initiative which has immense potential. During the same period, I had the privilege of attending the talk of Dr. Zhang on the topic “In Math we Trust” and moderating a session with him at the LCX Blockchain Series, in Vaduz, Liechtenstein. Dr. Zhang, was a renowned Chinese American scientist, a physics professor at Stanford and I remain inspired by his narrative.[1]

network

The powerful origin of the narrative `In Math we could Trust`

Let’s go back to the Greeks where thought leadership of all theoretical and foundational concepts started. Dr. Zhang spoke about Archimedes, his Eureka moment which permitted gold to become a medium of exchange. He spoke about the 2nd law of thermodynamics which states that the natural world is mostly in disorder and rarely in order (consensus state). In nature, order and consensus can only exist in subsystems. And when this happens it happens at a cost. In physics parlance, in order to reach order and consensus in nature, there needs to be some entropy (disorder) produced and dumped outside the subsystem for it to reach consensus.

Let’s tie this to the computing world. In distributed computing, the Fischer-Lynch-Patterson theorem is the analog of the 2nd law of thermodynamics and proves that there is No deterministic algorithm that can be a master algorithm for the system to reach consensus. So, once again science like in nature, proves that to reach consensus we need to pay a cost. This is where the Proof of Work, an old cryptographic concept, comes into play.

One way we can reach consensus regarding transactions is by using Proof of work. This is a way, to reach consensus on the Temporal Order of transactional data. The cost we pay is the amount of electricity we burn to solve the puzzle (which is on the other hand easily verifiable). Consensus on time-stamped verification of transactional data, can be reached through this process that dumps entropy (electricity in the case Bitcoin Blockchain) outside the system.

Our world historically has been oscillating between centralization and decentralization.

big bangLooking back in history for more evidence: The circuit switch technology created the then seemingly indestructible monopoly of ATT. This monopoly was only destroyed form the decentralized TCP/IP protocol that gave birth to the internet and to the gradual adoption of VOIP. As the internet became the dominant technology, several other monopolies grew out of the content generated on it; e.g. Google and Facebook. And now, we are in the beginnings of what Paul Nunes coins as the next Big Bang disruption.  Blockchain is threatening the powerful giants built on the first open source protocol, the internet, with a wave of data decentralization.

The internet has evidently increased connectedness. However, its design is not a collaborative one. The world that is built on top of this open protocol, the internet, is not a world that is more fair and that builds trust. The “trading” or any exchange of information on the web, is not collaborative. The central entities, the Googles and Facebooks, are the ones that are organizing the information and the data on the web. The first, step in the process of decentralizing the web, is to break these data monopolies.

Blockchain is a decentralized mechanism in which trust is built-in with mathematical formulas. As Plato preached, mathematics is the ONLY internally consistent language. As Nick Szabo preached, in his God protocols, mathematics is the language of God. God in this context is the entity that acts in the interest of everybody.

Blockchain protocols are presenting us with an opportunity to build on protocols with built-in consensus mechanism governed by math. Mathematics governance guarantees fairness and trust.

Dr. Zhang argued in this speech that we humans have developed languages and law in our attempts to organize and collaborate in societies and reach consensus on various issues. He now believes that we are stepping into the most advanced era in which Mathematics will be trusted in order to reach consensus. Admittedly from all the sciences (social, political, physics etc.) mathematics is the branch of knowledge with the highest level of consensus and in which we trust.

Dr. Zhang emphasized that we live in a world that is based on theoretical mathematics that were developed with no real-world application in mind and are now being used in all sorts of experimentations as we are in the early stages of the blockchain development. From hash functions to more such `abstract first` math concepts.

  • Public/private key based on elliptic curve
  • Cryptographic hash function
  • Zero-knowledge proof. Zk-snark and Zk-stark
  • Secure multi-party computation, differential privacy
  • Formal verification
  • Homomorphic encryption
  • Dag, directed acyclic graph: money grows on trees!

Source: from Dr. Zhang`s talk; see full video here.

The choice we have is to `Trust in Math`

 Look at the 2nd law of thermodynamics, nature, and the lessons from the earlier tech disruption waves. Once we embrace the dynamic, digital, and unstable world we live in; we will realize that we have a great opportunity to embrace theoretical mathematics in designing governance and the Internet of value.

It will be a trustworthy design with inherent instabilities as in nature and as outlined in the 2nd law of thermodynamics. We have to move away from the belief that forced consensus mechanisms like regulations can provide stability.

[1] I delayed this post because of the unfortunate and sudden passing away of Dr. Zhang late last year.

Efi Pylarinou is the founder of Efi Pylarinou Advisory and a Fintech/Blockchain influencer.

I have no positions or commercial relationships with the companies or people mentioned. I am not receiving compensation for this post.

Subscribe by email to join the 25,000 other Fintech leaders who read our research daily to stay ahead of the curve. Check out our advisory services (how we pay for this free original research).

Bitcoin & Blockchain

SEC reducing signal to noise ratio for ICOs

1_RGTPvD9z6idguv5RP2Ijsg

Last week our theme was “Is a 51% attack a real issue?“

Our theme for this week is “SEC reducing signal to noise ratio for ICOs.”

Bitcoin’s price has jumped close to 30 percent since last weekend, peaking at $5,300 on several big crypto exchanges. Reports in the news attest that the recent surge was triggered because of buy orders for 20,000 Bitcoins, worth $100 million. With 412 days to go until the block reward halving, some analysts are claiming this is normal and historically Bitcoin price tends to surge a year before its halving starts.

Last year was a brutal for everyone in the space. The free fall we witnessed, truly tested our beliefs in cryptocurrencies and their potential. While I think that at some point we’ll see Bitcoin and other cryptocurrencies go far beyond December 2017 prices, I don’t think that we’ll see it happen the same way it did before. I expect that we’ll see some bullish runs, followed by selling pressures that will make us take a couple of steps back, but always settling on higher ground, each time.

Despite the fact that most of the news this week is focused on crypto prices, the big story is about the SEC clearing the air about ICOs, that want to sell their tokens in the US. The SEC issued its first “no-action” letter, allowing ICOs to sell tokens in the US, under certain conditions.

TurnKey Jet, a jet-leasing business, got the SEC’s “approval” to sell its token in the US, without having to register with the regulator, as long as:

  • Token holders won’t be granted an ownership stake in the company.
  • Any funds raised from the token sale will not be used develop the platform or app.
  • When the tokens they are sold,  they must be usable immediately for their intended functionality.
  • Transfers of the TKJ tokens are restricted only to TKJ wallets. External wallets are not allowed.
  • TKJ tokens will be priced at 1 USD per token. Each token will essentially function as a pre-paid coupon for TurnKey’s air charter services. If TurnKey wants to buy back the token (coupon), it must do so at a discount (less than 1 USD).
  • The token must be marketed in a way that emphasizes its functionality, and not its potential to increase in value, over time.

The SEC’s letter resolves some uncertainty about ICOs, but at the same time hugely limits them. You won’t see TKJ tokens on an exchange like Binance or Coinbase. The non-transferable nature of TKJ tokens, makes their actual utility extremely limited.

Earlier this week, the SEC also released “Framework for ‘Investment Contract’ Analysis of Digital Assets.” The framework is interesting, because it gives some guidance to new token issuers, whether a token is or isn’t a security.

The crypto industry has been pressing the SEC for a set of rules that companies can follow. Both the No-Action Letter and the Framework are reasons only for reserved optimism, if that. They are non-binding, as far as future decisions are concerned. The Framework states: “… it is not a rule, regulation, or statement of the Commission, and the Commission has neither approved nor disapproved its content …”.The crypto market in the US can be harmed by lack of or bad regulations.

Does it make sense to do an ICO, STO or IEO?

In 2018, 1,132 Initial Coin Offerings (ICO) and Security Token Offerings (STOs) were successfully completed, twice as many as in 2017 (552 in total), as shown in the fourth ICO / STO report by PwC Strategy in collaboration with Crypto Valley Association (CVA). ICOs raised $11.4 billion in 2018!

Fundraising for Initial Coin Offerings in Q1 of 2019 has been declining, based on data from TokenData. ICOs only raised $118 million so far in 2019, a huge drop when compared to the $6.9 billion raised in 2018, in the same period. Dropping prices and volatility have been deadly for ICOs.

1_uOX1R5ivQKRSMq2fZn7Yhg.png

The declining prices of cryptocurrencies, were not the only reason people did not invest in ICOs. People found other vehicles… STOs gained popularity in the cryptocurrency industry. Although, STOs are not fundamentally different from ICOs, they are a more regulated version. In the end it boiled down to regulation.

The first 2 STOs that started the idea in 2017, raised around $22 million. In 2018, STOs grew exponentially to 28 and $442 million in funding. In 2019, the dominant trend is STOs and asset tokenization, the conversion of real-world assets to the blockchain.

But, the biggest problem for most STOs, is finding an exchange capable and verified to list security tokens. Imagine an STO by a company in Asia, listed on an exchange in the US and a trader from Europe that wants to buy or sell the security token… A regulatory nightmare!

We are seeing even more changes to the ICO landscape, because of the problems with both ICOs and STOs. Initial Exchange Offerings (IEOs) are like ICO’s, with one difference, fundraising takes place directly on a crypto exchange. At its core, an IEO is basically an ICO but run through an exchange, as the intermediary conducting the sale. The first ever IEO was Tron’s BitTorrent, that raised $7.2 million in 15 minutes on Binance’s Launchpad platform.

In 2018, a staggering 58% of ICOs did not manage to raise $100,000 and only 2% of all ICOs announced their token was listed on an exchange. Potentially IEOs could be a game changer for the crypto market.

The long-awaited SEC ICO framework and its impact on the ICO landscape (and IEOs), potentially makes it easier for startups to raise capital. But it has left many questions unanswered, so we’ll have to see how it plays out. There are plenty high-quality projects and teams in the crypto market right now. Clearly defined rules and regulations, make the process much more transparent, credible and let crypto investors sort through all the noice.

For now… baby steps, slow and steady!

Image Source

Ilias Louis Hatzis is the Founder & CEO at Mercato Blockchain Corporation AG. He writes the Blockchain Weekly Front Page each Monday.

I have no positions or commercial relationships with the companies or people mentioned. I am not receiving compensation for this post.

Subscribe by email to join the 25,000 other Fintech leaders who read our research daily to stay ahead of the curve. Check out our advisory services (how we pay for this free original research).

 

Bitcoin & Blockchain

Blockchain Front Page: SEC reducing signal to noise ratio for ICOs

1_RGTPvD9z6idguv5RP2Ijsg

Last week our theme was “Is a 51% attack a real issue?“

Our theme for this week is “SEC reducing signal to noise ratio for ICOs.”

Bitcoin’s price has jumped close to 30 percent since last weekend, peaking at $5,300 on several big crypto exchanges. Reports in the news attest that the recent surge was triggered because of buy orders for 20,000 Bitcoins, worth $100 million. With 412 days to go until the block reward halving, some analysts are claiming this is normal and historically Bitcoin price tends to surge a year before its halving starts.

Last year was a brutal for everyone in the space. The free fall we witnessed, truly tested our beliefs in cryptocurrencies and their potential. While I think that at some point we’ll see Bitcoin and other cryptocurrencies go far beyond December 2017 prices, I don’t think that we’ll see it happen the same way it did before. I expect that we’ll see some bullish runs, followed by selling pressures that will make us take a couple of steps back, but always settling on higher ground, each time.

Despite the fact that most of the news this week is focused on crypto prices, the big story is about the SEC clearing the air about ICOs, that want to sell their tokens in the US. The SEC issued its first “no-action” letter, allowing ICOs to sell tokens in the US, under certain conditions.

TurnKey Jet, a jet-leasing business, got the SEC’s “approval” to sell its token in the US, without having to registered with the regulator, as long as:

  • Token holders won’t be granted an ownership stake in the company.
  • Any funds raised from the token sale will not be used develop the platform or app.
  • When the tokens they are sold,  they must be usable immediately for their intended functionality.
  • Transfers of the TKJ tokens are restricted only TKJ wallets. External wallets are not allowed.
  • TKJ tokens will be priced at 1 USD per token. Each token will essentially function as a pre-paid coupon for TurnKey’s air charter services. If TurnKey wants to buy back the token (coupon), it must do so at a discount (less than 1 USD).
  • The token must be marketed in a way that emphasizes its functionality, and not its potential to increase in value, over time.

The SEC’s letter resolves some uncertainty about ICOs, but at the same time hugely limits them. You won’t see TKJ tokens on an exchange like Binance or Coinbase. The non-transferable nature of TKJ tokens, makes their actual utility extremely  limited.

Earlier this week, the SEC also released “Framework for ‘Investment Contract’ Analysis of Digital Assets.” The framework is interesting, because it gives some guidance to new token issuers, whether a token is or isn’t a security.

The crypto industry has been pressing the SEC for a set of rules that companies can follow. Both the No-Action Letter and the Framework are reasons only for reserved optimism, if that. They are non-binding, as far as future decisions are concerned. The Framework states: “… it is not a rule, regulation, or statement of the Commission, and the Commission has neither approved nor disapproved its content …”.The crypto market in the US can be harmed by lack of or bad regulations.

Does it make sense to do an ICO, STO or IEO?

In 2018, 1,132 Initial Coin Offerings (ICO) and Security Token Offerings (STOs) were successfully completed, twice as many as in 2017 (552 in total), as shown in the fourth ICO / STO report by PwC Strategy in collaboration with Crypto Valley Association (CVA). ICOs raised $11.4 billion in 2018!

Fundraising for Initial Coin Offerings in Q1 of 2019 has been declining, based on data from TokenData. ICOs only raised $118 million so far in 2019, a huge drop when compared to the $6.9 billion raised in 2018, in the same period. Dropping prices and volatility have been deadly for ICOs.

1_uOX1R5ivQKRSMq2fZn7Yhg.png

The declining prices of cryptocurrencies, were not the only reason people did not invest in ICOs. People found other vehicles… STOs gained popularity in the cryptocurrency industry. Although, STOs are not fundamentally different from ICOs, they are a more regulated version. In the end it boiled down to regulation.

The first 2 STOs that started the idea in 2017, raised around $22 million. In 2018, STOs grew exponentially to 28 and $442 million in funding. In 2019, the dominant trend is STOs and asset tokenization, the conversion of real-world assets to the blockchain.

But, the biggest problem for most STOs, is finding an exchange capable and verified to list security tokens. Imaging an STO by a company in Asia, listed on an exchange in the US and a trader from Europe that wants to buy or sell the security token… A regulatory nightmare!

We are seeing even more changes to the ICO landscape, because of the problems with both ICOs and STOs. Initial Exchange Offerings (IEOs) are like ICO’s, with one difference, fundraising takes place directly on a crypto exchange. At its core, an IEO is basically an ICO but run through an exchange, as the intermediary conducting the sale. The first ever IEO was Tron’s BitTorrent, that raised $7.2 million in 15 minutes on Binance’s Launchpad platform.

In 2018, a staggering 58% of ICOs did not manage to raise $100,000 and only 2% of all ICOs announced their token was listed on an exchange. Potentially IEOs could be a game changer for the crypto market.

The long-awaited SEC ICO framework and its impact on the ICO landscape (and IEOs), potentially makes it easier for startups to raise capital. But it has left many questions unanswered, so we’ll have to see how it plays out. There are plenty high-quality projects and teams in the crypto market right now. Clearly defined rules and regulations, make the process much more transparent, credible and let crypto investors sort through all the noice.

For now… baby steps, slow and steady!

Image Source

Ilias Louis Hatzis is the Founder & CEO at Mercato Blockchain Corporation AG. He writes the Blockchain Weekly Front Page each Monday.

I have no positions or commercial relationships with the companies or people mentioned. I am not receiving compensation for this post.

Subscribe by email to join the 25,000 other Fintech leaders who read our research daily to stay ahead of the curve. Check out our advisory services (how we pay for this free original research).

 

Bitcoin & Blockchain, bitcoin mining, lightning network, Node operators

A Bitcoin Maximalist describes a real issue to worry about – it is not what the Bitcoin sceptics tell you

worry

TLDR. As somebody who is long term bullish on Bitcoin, I often speak to mainstream investors who are sceptical but interested. They want to know if the issues that famous  Bitcoin sceptics tell you about in the media should worry them. This chapter of The Blockchain Economy book tells you why these issues are not real worries. They are like straw man arguments – easy to knock down. However, this chapter describes another issue that few analysts talk about but which I believe is more of a real issue for a Bitcoin investor to worry about. This issue is how Node Operators are compensated.

Personal bias disclosure: I am a Bitcoin Maximalist, for reasons outlined in this chapter of the Blockchain Economy book.

This post addresses long term investors who look at the fundamentals of Bitcoin. Short term technical traders have many other resources.

The usual arguments from Bitcoin sceptics

  • Bitcoin does not have thousands of years of history as a store of value. So it cannot be worth anything. The first sentence is obviously true. The second sentence betrays a lack of understanding of disruptive technology. Many Tech giants, obviously worth a lot of money, have a lifespan of only a few decades.

 

  • Bitcoin cannot be stacked in physical piles like gold bars. So it will be useless if we no longer have the Internet. Both statements are true but in the unlikely event that we no longer have the Internet a) have a few gold bars/coins just in case (nobody says Bitcoin will totally replace gold) b) in that dark apocalyptic scenario you will have other worries that are much more pressing (such as shelter, safety, water, food). Lack of Internet is an extremely unlikely scenario. North Korea is an exception that proves the rule. Even when dictators attempt a shutdown (for example in Egypt in 2011) it is temporary.

 

  • Quantum Computing will make Bitcoin’s cryptography easy to crack. This can be fixed at the technical level using the same Quantum Computing technology, but there are some risks before Quantum Computing becomes commonly available. It is a nuanced issue, for a good discussion watch this video.

 

  • Nobody is in charge. Fierce battles and forks show that the governance of Bitcoin is totally broken. Ahem, nobody is in charge of the Internet. Trusting a free market is hard for some people. For more, please go to this chapter.

 

  • Bubbles prove that Bitcoin is a ponzi scheme. This also shows that trusting a free market is hard for some people (particularly those who have relied recently on Central Banks printing money to make sure market assets are kept at a high level). Bitcoin is like a startup where the market priced the startup’s valuation from day one. Imagine Facebook’s price volatility if the market had priced Facebook from the days when it was a Harvard dorm room project!

 

  • Bitcoin cannot scale. At Layer 1 this is true. Layer 2 technologies such as Lightning Network are now coming on stream which will enable scaling far beyond current payments rails. For more, please go to this chapter.

 

  • Bitcoin is not yet useful as a currency. This is true if you live in a country with a) a stable currency b) functioning bank payment rails. There are many countries where this is not true. For more, please go to this chapter

 

  • Lots of fraud. This also true in Legacy Finance (Madoff, Enron, Mortgages, etc, etc). Change is coming from a) the market (eg investors avoiding centralised exchanges) b) technology eg Decentralized Exchange protocols) c) regulation and insurance.

 

  • Wash Trading inflates trading stats. True, but even if you strip out all the fake trades you get a real number over $270m daily trading volume – not bad for an asset/technology that is only just over 10 years old!

Rear view analysis is not useful for investors

The Economist is a great magazine that I have been reading for decades. Occasionally they get it wrong – for example in their support for the second Iraq War. In their most recent edition, dated 30th March, their article on The madness of crowds gave a lot of reasons why cryptocurrencies are like tulip mania – worthless. A few days later the price started rising. Rear view analysis is not useful for investors, which is why our ambition at Daily Fintech is to be News Forecasters.

Lets see how many sceptic articles there are just before the next bear market appears.

The real issue to worry about is economic incentive for the people who run Bitcoin Nodes

Miners are  rewarded by receiving Bitcoin, but there is no similar incentive for running a full Node. This is a problem, because Nodes are vital to the Bitcoin network and, like mining, involve real costs. Bitcoin enthusiasts say that you “should” run a Bitcoin Node. The problem of course is that “should” does not work at scale. It worked during Bitcoin Phase 1 when the Cypherpunks, Anarchists & Libertarians (who created the early traction that got Bitcoin from an obscure message board to the possibility of mainstream adoption) were motivated by rewards other than money. Should is irrelevant to Bitcoin traders/investors today and to future mainstream users.

This is why Ethereum has Gas costs. When I first encountered Ethereum in 2014, just after starting Daily Fintech, I struggled to understand the difference between ETH and Gas. At that time it seemed like a needless complication. Now I can see that Vitalik Buterin had learned from studying Bitcoin. When you pay for something via the Ethereum network, you pay in ETH. That transaction is processed on a decentralized computer. You pay for that computation in Gas (and Gas is paid in ETH). If Bitcoin had something like that, then Node operators could get paid in fees. For more on how Ethereum Gas works, please go here.

Yes, Governance is a tough issue for Bitcoin.

This Chapter describes Why Non State Governance For Bitcoin Ethereum And Other Cryptocurrencies Is So Hard. Fixing some code in Bitcoin is relatively easy in comparison to fixing an economic incentive issue; there is a super competent team to fix code issues. The market will also fill in the gaps that Satoshi Nakamoto deliberately left in there (such as a User Interface). However it is possible that the economic incentive for full node operators was a mistake by that legendary founder(s). Many commentators say there should be fees for full node operators, but it is hard to see how such good exhortations get translated into reality.

This problem also applies to Lightning Network – which could fix it

Lightning Network also requires node operators to be compensated. The good news is that Lightning Network is a protocol where the governance allows the problem to be fixed at Level 2 (because Lightning Network is funded by commercial interests). It would not fix the problem at Level 1 but it would makes that problem smaller.

Do you trust the free market to fix this problem? How do you see this problem being fixed?

Image Source.

Bernard Lunn is a Fintech deal-maker, investor, entrepreneur and advisor. He is CEO of Daily Fintech and author of The Blockchain Economy.

I have no positions or commercial relationships with the companies or people mentioned. I am not receiving compensation for this post.

Subscribe by email to join the 25,000 other Fintech leaders who read our research daily to stay ahead of the curve. Check out our advisory services (how we pay for this free original research).