blockchain

CRYPTO: GAFA doubles down on a crypto future, whilst regulators bite down on a crypto past

A few things here. Firstly, this week at its Worldwide Developer Conference Apple announced the launch of a mightily powerful computer deemed “the cheese grater”, a monitor stand costing as much as an iPhone X...just for the stand, and more importantly CryptoKit . Essentially, CryptoKit is a cryptographic developer tool that allows developers to build more security functionality into their apps with improved support and ease-of-use. Such functionality comes in the form of hashing, public and private key generation, and encryption needed to be integrated into iOS applications. Not to be confused with Samsung and HTC's phones that come with native crypto wallets. Yet, it goes without question that these companies (Apple now included) are reacting to the rising demand for crypto-focused products.

This is not the first time we are seeing the tech giant embrace crypto either. Last month it was announced that debit card and payment app ‘Spend’ -- which supports over 16 different cryptocurrencies -- now has integrated Apple Pay functionality. How this works is cryptocurrencies, such as Bitcoin or Dash that have been bought in / sent to the integrated wallet, will get converted at the point-of-sale for instant purchases through the ApplePay network. 

Another GAFA giant we know is embracing crypto is none other than Facebook with their soon-to-be-launched cryptocurrency GlobalCoin. What’s interesting is that, over the past few months, the social media giant has been hard at work trying to win over financial institutions and tech companies -- such as the Bank of England and crypto-firm Gemini -- around formalizing an independent foundation -- much like the Ethereum Foundation -- to govern the digital asset. We know that the coin will most likely be a stablecoin i.e., pegged to a fiat currency / basket of currencies / or other, making it desirable and easily marketable in emerging markets where local fiat currencies are economically unstable -- such as in Venezuela. The required funding will come from the fees Facebook charges partnering firms to run a node on the network. Essentially, these firms will need to stake their interest and commitment, and tie them into supporting the network. Facebook aims to have 100 nodes at the launch of GlobalCoin, with each node costing partnering firms as much as $10 million. Based on their tarnished reputation to safeguard the privacy and security of the social network's users, we think this is ambitious to say the least.

Facebook is not the only tech firm embracing crypto with a suspect reputation. Just last week, the US Securities and Exchange Commission (SEC) took legal action against social messaging app Kik -- regarding its 2017 sale of one trillion “Kin” tokens to over 10,000 investors, raising around $100 million. The premise being that the sale was not registered with the SEC -- a requirement under US securities laws. As such, the sale is deemed an “illegal securities offering of digital tokens.” 

It is not only the SEC that are leading the fight against previous instances of cryptocurrency-powered crimes. The Joint Chiefs of Global Tax Enforcement or J5 - a team of five criminal intelligence communities from Australia, Canada, the Netherlands, the United Kingdom and the United States whose purpose is to fight against international and transnational tax crime and money laundering. Currently, J5 has opened 60 different investigations specifically related to cryptocurrency-powered crimes. One of these is a Netherlands-based cryptocurrency “mixing service” called Bestmixer.io whose primary function was to hide the ownership history of cryptocurrencies, raking in 27,000 bitcoins ($200 million) over one year alone.

As many would consider the institutionalization of crypto by GAFA and the clamp down by global regulatory bodies a negative, its important to note that if adoption is key to ensuring the prosperity of these mechanisms, then such action needs to be taken to safeguard those vulnerable to exploitation and those that consider the inherent illicit activity too great a barrier to enter.

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Source: Apple Cryptokit (via Apple), Facebook Globalcoin (via The Information), Bestmixer.io (via Europol), J5 crime unit (via IRS)

CRYPTO: Are Stablecoins still poised to be crypto's saving grace?

With all the noise and hype around the recent large price movements of core cryptos like Bitcoin (BTC) and XRP, it's easy to forget the ones hard at work to minimise volatility risk in order to encourage crypto adoption among the skeptics. These are stablecoins of course. The core thesis behind them is that BTC was not used as a transactional currency because of its volatility, and therefore merchants and individuals would not rely on it as a unit of account or medium of exchange. This premise is not entirely true -- volatility is only partially explanatory of why BTC is not being used by consumers. In our view, the main barrier is not volatility but ease of use and form factor. It's just too hard to figure out how to actually pay with BTC or any other digital currency for real (i.e., non-digital) goods and services. And while there are attempts to put Bitcoin and other currencies into debit or credit cards, these are still early in market penetration. 

If you look at stablecoins themselves, there are two narratives to note. (1) Any floating currency needs to be collateralized, whether or not it is printing money algorithmically or has bots arbitrating itself against exchanges. Otherwise you cannot fund redemptions (and if you can't fund redemptions, then you are just printing specious moneys). Holding the peg to your desired currency basket, whether USD, yuan or Euro, requires being able to defend the currency with capital reserves. Any private capital reserve can be broken by a larger private capital reserve -- or even by a government actor. Consider Soros and the Bank of England. As a result, these coins are fragile and ripe honeypots for attack and manipulation. In the case where the reserve becomes so large as to be unbreakable, and where the currency is meaningfully used as a medium of exchange, it becomes a threat to the world's actual reserve currency, the USD. The US sovereign is unlikely to allow private parties to issue and own a digital dollar at scale -- though they may be catalyzed to do so publicly (i.e., central bank coins). These are not farfetched ideas either, with over 20 governments such as Brazil, Canada, Israel, and The Bahamas all considering the prospect of a Central Bank issued digital currency.

The second narrative is much more narrow -- private company networks that ride the blockchain rails need the equivalent of a Cash Sweep. Imagine opening up a Schwab brokerage account. Your free cash in a portfolio -- let's say 1.5% -- would get invested into a cash sweep vehicle, which could be a money market fund, or a trust company cash account, or something similar. For a crypto financial company, you are unlikely to want to hold a financial license for traditional banking or investment services. But you still need to manage the cash somehow. So efforts like UBS settlement coin, or any of the recent stablecoin projects, could fill in the gap of moving USD around within a limited sized network in order to reduce friction between going in and out of fiat. If the network gets so big as to include the entire economy, then it again pops up on the Treasury's radar. That's not to say it's a dead end. Banks print money by issuing credit all the time, they are just massively regulated to do so.

So where does this leave us? Non-financial companies such as Facebook and Samsung have admitted to considering their own blockchains for future native stablecoins. Facebook's reason for this is to provide its 2 billion user base with a centralised medium for international remittances, payment for premium content (e.g. games), and your attention (e.g., advertisements) across its website, Messenger, Whatsapp and Instagram. Samsung, on the other hand, wants your mobile phone to be your crypto wallet. Such non-financial companies are likely to be less risk-averse than traditional financial companies, and have greater incentive to disrupt the payments industry, with the added ability to execute at a faster, scalable pace. As a result, these companies may help defining future key growth drivers for both the global payment and the digital asset industry. But this doesn't mean that this won't create a red ocean where other big banks, social media networks and consumer electronics companies issue their own stablecoins to compete, adding "about as much competitive advantage as having your own .com address" - Bernard Lunn of Daily Fintech.

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Source: Autonomous NEXT Analysis

FINTECH: Greentech and Fintech are a match made in heaven

Here me out here. Decarbonisation and sustainability are becoming buzzwords within the hallways of big venture. Why? Because -- global warming tensions aside -- financial services companies both big and small are coming to the realisation that they are the end customer for energy startups focused on operations, management, and analytics platforms. Bloomberg backed this up in a recent report indicating that investments into the Global clean energy totaled $332.1 billion in 2018 -- with Solar and Wind receiving the lion's share of investment at 39% each.

Politics aside, renewable resources have grown more cost competitive as a direct result of production economics -- sourcing cheaper and more efficient methods and resources to harness energy in more sustainable ways. For example, Tesla's solar roof is deemed to be 20% cheaper than a normal one. So where does Fintech fit in all of this? Since alternative energy generation sources like wind, solar, and fuel cells have become more cost competitive and popular, financial players have stepped in to source the tools and platforms necessary to maximize the return profiles of these alternative energy generating assets -- specifically using technology to inform the operational and financial performance of such assets. For example, blockchain enabled energy trading platform -- Electron, insurance and risk management platform -- Energetic Insurance, or renewable energy finance plans and services platform -- Sunrun

Ultimately, it is without a doubt that what Fintech brings to the table is customer centricity -- creating enjoyable user experiences via friendly graphical interfaces and having an obsession with cost efficiency where it matters most for the customer. Case in point is what Transferwise did for cross-border payments, or Robinhood for stock trading, or Venmo for payments. Yet, it will be up to the greentech startups as to whether the inherently dirty financial services players have cleaned up their act enough to join them on their journey. For more on this, read here.

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Source: BloombergNEF Report, Chubb Cleantech's Global Balancing Act Report, Electron (via Etondigital),Sunrun (Plans & Services)

BLOCKCHAIN & CRYPTO: DLT consortia are racing for the lion's share of the $1.5 Trillion Trade Financing Gap

Financial products -- including their embedded processes and inherent risks -- are transforming from legal paper to software. And as that happens, it is technology companies that are best positioned to manage, analyze, report on, and safekeep our money. The latest victim of this is Trade Finance - a practice that facilitates $16 trillion of trade around the globe on an annual basis. In short, trade finance covers the financial products, processes, and instruments involved in financing domestic and international trade and commerce. Each transaction often involving multiple actors (+20 in some cases), such as importers, exporters, banks, carriers, customs officials, and insurers. The juicy bit is the potential to digitize and modernize the manual, paper-intensive, and prone-to-risk processes involved in each transaction e.g., managing the cost and time implications of a trade war between two countries -- US v China showdown.

Enter distributed ledger technology (DLT), which has taken aim at the 1-2 week long paper-pushing documentary credit process. Essentially, a documentary credit is a commitment of liability by the issuing bank (representing the buyer/importer) assuring the seller/exporter that payment will be made once the goods have been received -- reducing the credit risk associated with the trade. The immutability of data and speed of distributed ledgers helps reduce the need for manual verification, as well as the risks associated with fraud, human error, and credit. Essentially, reducing the time it takes to execute the process of documentary credit to just 24 hours using smart contracts, and a purported 35% reduction in overall costs.

Interestingly, the first live end-to-end trade finance transactions on a scalable application for a fully digitized documentary credit using DLT took place in May last year, involving HSBC, ING, BNP Paribas, and Bangkok Bank. A year later, and trade finance is the 3rd most targeted sector for DLT use, involving industry consortia such as Voltron and Marco Polo -- built on R3's Corda DLT Platform, we.trade and eTrade Connect -- built on IBM's Hyperledger Fabric platform, and komgo -- built on JP Morgan's Quorum platform, all of which are after the lion's share of the $1.5 trillion trade financing gap and a piece of the $1.1 trillion of increased trade volumes by 2026.

This week at IFLR's Fintech Europe 2019 conference, we learnt that Voltron - a consortia of 12 banks building a single platform to digitize all document collection, tracking, and the facilitation of exchange for Documentary Credit via its network - has recently completed global trials which saw over 50 banks and corporates participate in the simulation of multiple digital Documentary Credit transactions across 27 countries, covering a range of goods traded including soybeans, plastic derivatives, metals and wool.

So what does this mean for the future of Trade Finance? Firstly, it's likely that the International Chamber of Commerce (ICC) will release a governance framework consisting of technology standards and business rules to oversee the practices of industry consortia. Secondly, interoperability of industry consortia platforms will be critical to how they integrate with existing bank systems. Finally, it's easy to relate what Voltron is trying to achieve in trade finance to what the SWIFT Network did in cross border payments -- transferring digital data between banks and corporates, although without the help of DLT. Given this, the possibility of a platform like Voltron to become the next generation SWIFT network -- adding a payments mechanism to its Documentary Credit platform is highly likely. Such a payment mechanism could use tokens enabled by smart contracts linked to IoT devices (See Project Forcefield) tracking the goods traded. In effect, removing the need for multiple intermediaries (e.g., Issuing Bank) required to alleviate risk exposure. We can dream.

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Source: Digital Innovation in Trade Finance (BCG), Trade Finance & Blockchain ReportRebooting a Digital Solution to Trade Finance (Bain&Co)

BLOCKCHAIN & CRYPTO: Part 1 - Crypto Whales, IEOs, and the US-China trade war take Crypto to new heights

Its very difficult to ignore the noise when cryptocurrencies increase in value, especially since the crypto-apocalypse of 2018 which saw $400 billion in value wiped from the market #NeverForget. And as of Saturday May 11th, the noise has been deafening with Bitcoin rallying to price levels around $8,300 which we hadn't seen since late July 2018. So what exactly happened here? Well, to answer this we need to look at a few things:

Firstly, lets look at what triggered the rally in the first place. As recorded by Whale-Alert.io, 47,000 Bitcoins at a value of $340 million were moved in a single transaction on the evening of May 11th. According to coinmarketcap, such a large movement of the digital currency resulted in a 13% increase in bitcoin's price from $6,378 to $7,204, and an almost 50% increase in volumes traded. Transactions of this magnitude or made by "Whales" -- entities with large sums of the cryptocurrency -- who often use such transactions to "burn margin traders" who use money they don't have to stake out long or short positions in hopes of hitting it big or "riding a lambo to the moon" as they like call it. As of Monday, $84 million worth of shorts had been liquidated on Bitmex, with some affected parties announcing crippling losses (see pic below).

Secondly, let's touch on the rise of Initial Exchange Offerings (IEOs). An IEO is different to its Initial Coin Offering (ICO) sibling, in that funds are raised and administered by an exchange on behalf of the startup, whilst an ICO is completely independent of any major entity to enable its fundraising activity. This is important because participants in the IEO need to be registered on the specific exchange's platform in order to get access to the startup's tokens. Regulators obviously love the idea of this as (1) the exchange needs to screen every project it lists on its platform -- eliminating any scams from happening (see how Bittrex cancelled RAID IEO), (2) from a security standpoint, KYC/AML is conducted on each participant by the exchange, and (3) token issuer startups receive better support on marketing initiatives and credibility from exchanges. An increasing number of cryptocurrency exchanges have started to embrace IEOs. One of the first in line was Binance, which launched its IEO platform Binance Launchpad, swiftly followed by Bittrex, BitMax, Huobi, OKEx, and KuCoin. Whilst it's still too early to quantify the significant impact of IEOs, we can report a 220% increase in overall token sales from February this year, IEOs contributing to this are: Celer Network raising $4M, Matic Network with $5M, and Newton Project with $28.5M.

Lastly, such a rally couldn't have happened at a better time for Crypto evangelists. The news of the trade war between the US and China resulted in the fall of the Dow Jones Industrial Average by as much as 696 points on Monday the 13th, and MSCI's index for emerging markets by almost 300 points. Whilst this was taking place, Bitcoin's price was still increasing, and closed 12% up for that day -- unaffected by global markets. Although this is not sufficient evidence to conclude that cryptocurrencies are good hedges against global market volatility, the sentiment towards such a reality is progressing, especially with enhanced institutional support from large incumbents and the launch of regulator-friendly IEOs. 

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Source: Whale Alert (via Twitter), Bitmex Forum (via Twitter), CryptoPotato (IEOs vs ICOs), Autonomous NEXT Analysis

BLOCKCHAIN & CRYPTO: Part 2 - From Main Street to Wall Street, institutions are the key to mainstream Crypto adoption...oh the irony

As we know, one of the aims of cryptocurrency was to provide a means to anonymously and securely transfer value between transacting parties i.e., removing the power away from financial intermediaries whose distribution channels exploit fees from those wishing to transact in the current system. Funnily enough, it seems that the very same institutions that crypto sought to disenfranchise, are key to its success. Success here being widespread adoption.

Let's start with mainstream adoption in retail where Flexa -- a payments network startup is partnering with New York-based exchange Gemini to enable crypto payments to be made at an estimated 30,476 stores, including Wholefoods, Nordstrom, and Gamestop. Flexa works by processing the payments made on its platform using its custodial wallet and mobile app called 'Spedn' which enables spending of specific cryptocurrencies -- Gemini Dollars, Bitcoin, Ether, and Bitcoin Cash. Flexa uses its own native coin -- Flexacoin as collateral to secure payments until the transaction is approved on the blockchain, and custody is taken care of by Gemini. Spedn is custodied with Gemini who provide security for this new payment technology. Finally, adoption is enhanced by (1) ensuring merchant's payment processing costs are reduced whilst the blockchain maintains security, (2) no changes are needed to the existing payment hardware, and (3) revenue can be received in fiat as opposed to crypto.

This institutionalization of crypto is also echoing in larger public companies. See NYSE’s partnership with Bakkt. Or XRP being launched on securities marketplace Deutsche Boerse and Coinbase. And lets not forget the likes of JP Morgan's coin, and Fidelity set to launch its crypto Trading service. According to Fintech Analyst Efi Pylarinou Wall Street institutions are looking at crypto as a new structured product business i.e., ETP’s linked to baskets of cryptos (low-hanging fruit) and tokenised real-estate (main focus) which is good if it democratizes exposure to the real-estate market, but bad if we see a reformat of the 2008 mortgage crisis. We will leave this gem for you to make up your mind – Banco Pactual issuing an STO in distressed Brazilian real-estate. 

As the institutionalization of crypto and blockchain continues to gain traction, it is likely to see the services and products they offer provide the gateway into the crypto markets, which may ultimately result in a surge in fresh capital making its way into these markets, and possibly kindling the flame that ignites the next price rally.

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Source: Flexa Spedn App (via news.bitcoin)

BLOCKCHAIN: Why China's ban on all cryptocurrency mining activity is a good thing

Ever since decentralized currencies came into fruition, they have posed an existential threat to a government's ability to control the purse strings of its citizens -- which is important to prevent illicit activities such as money laundering. In China, this lack of control coupled with the growing rate of crypto-induced bankruptcies led to the swift imposition of sweeping reforms. All trades of legal tender (i.e., Yuan) into cryptocurrencies and vice versa, as well as all Initial Coin Offerings (ICOs) were made illegal. The resultant lack of legal exchanges and ICO activity meant crypto-mining was the last remaining pillar propping up this intangible edifice. Today, China holds around 70 percent of the world's crypto-mining capacity, predominantly due to: easy access to the hardware (i.e., Nvidia processors which are locally manufactured) essential to crypto-mining operations, cheap cost of labor, and crucially, cheap and bountiful energy via massive coal and hydroelectric power plants.

A recent report now suggests that the Chinese government, more specifically the National Development and Reform Commission (NDRC), intends to ban all crypto-mining activity as well. The report lists cryptocurrency mining as one of 450 activities slated for elimination, citing “wasting resources, polluting the environment, being unsafe, or not adhering to law” as the primary reasons, and they wouldn't be wrong on the pollution front -- a study in the journal Nature Sustainability suggests bitcoin alone was set to consume more energy in 2018 than the country of Denmark.

So does this spell disaster for crypto as we know it? Well, not quite, and here's why: (1) China's largest and most visible miners, such as Bitmain's Antpool, will be forced to explore new locations for mining operations specifically where renewable power is cheap and abundant to keep costs low and win favor with the regulatory entities governing these jurisdictions, (2) Mining activity is more likely to become more decentralized and safer, as large Chinese mining pools who dominated the networks, are dismantled into smaller factions, (3) Crypto-miners could use this as an opportunity to pivot into work that is deemed more crucial to the overall success of the ecosystem i.e., blockchain scalability (speed of the network) and interoperability (cross chain information movement) solutions. Such benefits could catalyze adoption rates by addressing the underlying environmental, safety, infrastructural, and centralisation issues that have plagued crypto since its inception. Additionally, a recent survey by Harris Poll for Blockchain Capital suggests, the overall sentiment towards crypto relative to other investable assets is positive with 21% of respondents preferring Bitcoin over government bonds, 17% over stocks, 14% over real estate and 12% would invest in Bitcoin before investing in gold. Finally, although it is still argued whether the NDRC was implying a outright ban or more oversight on mining activity, the resultant benefits fueled by positive market sentiment towards crypto could mean great things to come.

Source: Hans Moeller Illustration, Divvy (homepage), Divvy (Brex comparison)

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Source: CoinDance (BTC Mining Data), OVOEnergy (Electricity Cost per country

BIG TECH & BLOCKCHAIN: SamsungCoin & Blockchain protocol distract us from foldable phone fiasco

Earlier this year, we admittedly took a hard stance on two seemingly meaningful pieces of news from South Korean tech giant Samsung: (1) the launch of the Galaxy Fold, the likeness of which we compared to a pizza box, and (2) Galaxy S10 phones confirmed to be crypto-native, allowing for private key storage (here). To catch you up on the Fold, Samsung have found themselves in the hot seat with their $2000 foldable phone barely lasting a week in the hands of reviewers before experiencing a multitude of battery and screen issues (here). More importantly, Samsung is said to be developing its own Ethereum Blockchain (ERC20) Token or "SamsungCoin" and blockchain protocol. Previously we noted -- having a mobile experience that allows you to interact with the decentralized web and its applications without downloading or thinking about software management is massive. Additionally noting that there should be no difference -- from the customer view -- in using a credit card in Samsung Pay wallet, and using a self-custodied digital asset. Same use case, same ease of use. And this is truly groundbreaking when every merchant that takes Samsung Pay takes crypto, especially if that crypto is native to Samsung itself. But there are some concerns here, mainly surrounding South Korean regulations preventing the issue of tokens via Initial Coin Offerings (ICOs) and banning investors to invest in domestic ICO projects. Whilst rumors suggest that these regulations are likely to be revised by authorities, there is no idea when this would take place. Such policies may lead to the company considering a private blockchain with a B2B approach -- remember what we said about those walled gardens? Yet, there is still the possibility that Samsung could circumvent South Korean regulatory frameworks by establishing subsidiaries in overseas crypto-friendly jurisdictions to conduct its token sales. Doing so without clarification from the authorities, however, may land it in even hotter water than its foldable phone fiasco.

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Source: CNET (Samsung Fold), Blockboard (Samsung Blockchain Wallet), Cointelegraph (South Korea ICO ban)

BLOCKCHAIN: Pay no attention to that Chain behind the curtain...

Enterprise blockchain, is a cost-cutting effort by an oligopoly of financial firms to mutualize processes and costs around the front, middle, and back offices. As we deduced in our Crypto Utopia keystone deck, nearly $250 billion of industry cost across payments, banking, capital markets and insurance is available for transformation. But let's not get ahead of ourselves, it's difficult to ignore that blockchain and its true value to enterprise is, now more than ever, met with the same level of skepticism that cryptocurrency now receives post the 2018 crypto-apocalypse. 'The Finanser' - Chris Skinner does a good job at teasing the reasons why this is the case in a recent blog post. In contrast, it's difficult to ignore the significant growth projections forecasted by the IDC -- specifically the 88.7% increase in worldwide spending on blockchain to nearly $2.9 billion in 2019. Such projections make sense when looking through a recent publication by Forbes which lists 50 large enterprises with minimum revenues or valuations of $1 billion, that are leading the way in adapting decentralized ledgers to their operating needs, leveraging industry consortiums and other proprietary projects to do so. Examples include the likes of Spain's second-largest bank - BBVA issuing the first blockchain-based syndicated loan, or Chinese chip manufacturer - Foxconn using blockchain to streamline its supply chain, or US restaurant supplier - Golden State Foods using the blockchain to reduce food spoilage. It is clear that it is becoming more and more difficult to ignore the significant value behind the application of distributed ledger technology on large enterprises, just as much as it was for Dorothy to ignore the man behind the curtain in the Wizard of Oz. The real question for today's skeptics is when they'll realise they had the heart, brain, and courage to believe this reality the whole time?

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CRYPTO: Coinbase's new Visa debit card wants to assimilate cryptocurrency and fiat accounts

We still believe that the absolute largest roadblock to economic activity using cryptocurrency is the barrier to entry in user experience (followed closely by financial instrument packaging and bank buy-in). And in our write-up of Samsung's crypto phone gamble, we stressed that there should be no difference -- from the customer view -- in using a credit card in a digital wallet, and using a self-custodied digital asset. Well it seems the folks over at Coinbase were paying attention, as last week the crypto trading website unveiled a Visa debit card that lets users buy things with fiat money converted from cryptocurrency stored in their online Coinbase wallets. Users can take advantage of the full neobank treatment with Coinbase's app providing nifty visualisations on your spending behaviour, and security controls such as disabling the card if it gets lost or stolen. The card will only be available in the UK, with a wider European release to come later this year. UK users can expect to be charged a 1 percent transaction fee and a 1.49 percent conversion fee, totalling 2.49 percent for every transaction using the card (2.69 percent in Europe and 5.49 percent elsewhere). These fees seem high when we compare them to the C2B credit card transaction fees for US-based retail and online merchants at 2.2 percent and 2.52 percent respectively, per $100 transaction -- as outlined in our latest Payments keystone report. The big question is -- is this new? and our answer is not really. Revolut, amongst others, has offered the ability to make transactions using cryptocurrency for well over a year, however, the merchant doesn't actually receive bitcoin, rather the app does a conversion back to fiat to make payment. From a transaction standpoint, we see Coinbase as no different, as they are simply taking exchange custodied wallet holdings and converting them at the spot rate to make payments. Cryptocurrency-native transactions are difficult because the distributed ledger (Blockchain) requires each transaction be verified through network consensus before it is finalized, which for Bitcoin is 10 minutes -- imagine waiting 10 minutes for the credit card machine to print the transaction slip?. What is notable about Coinbase's card is that it helps cryptocurrency adoption by assimilating one's crypto holdings at Coinbase with their fiat holdings at a bank, promoting a better user experience than before.

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Source: Coinbase (Coinbase Card via Twitter), ComputerWorld (Coinbase Card)

CAPITAL MARKETS: Winners-take-all as CBOE Futures discontinued and 60 Crypto Exchanges shut down

CBOE has decided not to list any new Bitcoin futures, with the last contracts expiring in July. Does this mean that BTC futures are dead? Not at all -- CBOE's biggest competitor, the CME, has simply won the game. You can see in the charts at the end of this entry a competition in volume over the last year, with CME's product steadily taking the lead. Why did this happen? The short answer is product quality and network effects. The decision to use an auction price from Gemini, rather than CME's approach of building a reference rate from several constituent exchanges, was a primary cause of poor product quality. And once traders shifted away from the product, network effects at the other venue kick in, creating lock-in and returns to scale.

More broadly, we have seen network effects around the top 10 crypto exchanges wreak havok on the rest of the industry. Of the 250-500 exchanges out there, 20% had no trade volume of any kind in the last 24 hours, and less than 1% had volumes over $1 billion. Over the last 8 years, 60 exchanges (and likely more) have been forced to exit the industry. While 75% of those exits are due to forced shut-downs by authorities, hacking, or outright scams -- 20% have exited due to a lack of liquidity. A lack of liquidity is a synonym for losing on network effects, akin to a social media app not bootstrapping enough users. Further, 5% of the exited exchanges have been acquisitions for others, like Circle and Coinbase. This again points to the winner-take-all nature of the market.

What's the solution? In social media, the answer was a Facebook, Twitter or Google identity, which created a portable social graph across the Internet. While those companies may no longer allow the full copying of the graph, they do allow apps to quickly connect users that are already entangled. In finance, brokers are the user platforms that provide best execution across exchanges, playing an analogous role. Distributors aggregate consumers, manufacturers create product, and the two functions are integrated through FIX APIs, processing software, and various other value chain intermediaries. If we want portability across liquidity pools in crypto capital markets, and especially over decentralized exchanges, understanding the separation and empowering each function (rather than vertically bundling everything) is the key.

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Source: Trading View (XBT vx BTC), Wall Street Journal (CBOE), Messari (CBOE)

BLOCKCHAIN: JP Morgan mints crypto JPM-coin, exposed to $10 trillion opportunity

You know by now that JP Morgan launched a crypto asset called JPM coin. You've probably seen the self-satisfied memes showing Jamie Dimon publicly hating on Bitcoin, contrasted with his own massive bank launching its proprietary, closed cryptocurrency (leveraging open source software created by others) within a year -- and claiming it is a meaningful invention. Perhaps you've read that this is a first-of-its-kind symptom demonstrating that banks are finally coming into crypto. Cool, huh! Yet all of these reactions are mostly irrelevant to thinking about what's happened.  

First things first. JPM has started production deployment of an internal blockchain (i.e., for its clients and divisions), which they have been developing openly for years, applied to multiple use-cases from international payments, to corporate issuance, to trading and other capital markets businesses. This is a no-brainer, and the totality of such projects should create $250 billion of industry-wide enterprise value in cost-savings over the next 10 years. The new thing is that they have added a token into this blockchain that carries digital scarcity, and can therefore be used for international value transfer. As an aside, the UBS utility settlement coin pioneered this type of asset over a year ago, led at the time by Alex Baitlin, who has since left to found smart crypto-custody company Trustology (backed by ConsenSys and Two Sigma).

Who should worry about the inevitable but welcome growing competitive landscape of bankcoins? First of all, consortia players like Ripple and SWIFT (partnered with R3) cannot be happy with the development, since JPM funnels a meaningful portion of the cross-border B2B money movement flow already -- $6 trillion per day. What's odd also is that half a year ago JPM was planning to spin out another proprietary blockchain project (Quorum), since other banks were refusing to use it. The internal value generation within the firm of essentially having a cloud-like solution for value transfer must be sufficiently large to alienate others.

On top of that, let's clarify what bankcoins are. Money supply is divided into M1 (cash and checking), M2 (very liquid cash equivalents), and M3 (more engineered cash equivalents). Bitcoin wants to be cash/M1, which is very hard given that to print money is to be sovereign -- see David Siegel's primer on money in the links below. So in the US, M1 is around $3 trillion. But the delta to M3 is another $10+ trillion, and includes things like money market funds, overnight obligations between investment banks (hey there corpse of Lehman Brothers), repurchase agreements, and other gargantuan liquidity instruments manufactured by banks. In fact, M3 is so obtuse and large that the Federal Reserve stopped publicly tracking it in 2006, and the data only exists on a synthetic basis from ShadowStats. This is what JPM coin is at its core. This is what all stablecoins -- tethered as cash sweep into their respective proprietary exchanges -- can ever become. A paltry $10 trillion.

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Source: CNBC (JP Morgan), Shadowstats (US M3), Wikipedia (Euro Money Supply), Medium (David Siegel on Money), Federal Reserve (M3 Data)

BLOCKCHAIN: Public Crypto searches for meaning, inventing new narratives for bear market

We have seen an unusual amount of soul searching in the Crypto community in the beginning of 2019. Crypto assets, which the more detail-oriented thinkers in the space see as fundamentally improving, continue to bleed out. Nearly 90% of decentralized applications have less than 1000 users. In response, the priesthood of the movement must find new language to motivate global open source development and continued investment. Given the type of person that has a following in the crypto space (Millennial, male, developer, international, math/econ overindexed), their stories and investment theses are rooted in Bayesian thinking, macro economics, and formal logic. The stories create a sense of data-backed philosophical inevitability, but as Nic Carter and Felipe Pereira point out (links and charts below), these are just meta-stories for why followers should keep following, and the direction in which they should go. You can think of these stories as marching orders for the army of disruption.

The two examples we will call out are (1) Pantera Capital's Open Finance and (2) the debate around crypto law. In the former, the argument is that the "primitives" (i.e., Lego pieces) of the financial system are being open sourced and built in a permissionless, global manner. New generation versions of timeless services like banking, lending, and investing will grow outside finance on parallel rails and be better than the existing system. We agree with the vector of change, though deeply question short term practicality and the framing from which the argument is made (i.e., protocol maximalism). A symptom of this change can already be seen in the repurposing of ICO offering platforms and liquidity into STO brokers and exchanges -- e.g., $400M marketcap biotech company Agenus is using Atomic Capital to launch a token that gets a royalty payment on a cancer treatment which is still in clinical trials. Or take SWIFT's trial implementation of R3's Corda to combat Ripple.

The second discussion is around norms that have emerged in the ecosystem, harking back to questions about whether "Code is Law". As we have seen from the regulatory blowback and the application of sovereign power, Law is Law (and jail is jail). The crypto-anarchist revolutionary fervor ended up being statistically incorrect in the short term, and a new narrative is needed to keep marching. We see these debates as similar to a Constitutional Moment, with online personalities jockeying to be Jeffersonian-framers of how the future should be negotiated and governed. Linked below is a piece by Vlad Zamfir on proposed norms (like keeping Crypto within the legal bounds of the real world and not intentionally breaking blockchains), and it is worth reading to understand what this community believes and how it reasons. No other part of Fitnech, but for AI ethics perhaps, does this much thinking and narrative building about itself. This is why it is a fundamental Black Swan threat to the financial industry, whose narrative has been rotting since 2008. 

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Source: Token Economy (Decentralized Finance, Visions of Ether), Pantera Capital (Open Finance), Agenus (STO), Vlad Zamfir on Crypto Law, Fluence on Dapp Usage, Unrelated but interesting (Narratives of Economic Catastrophe)

CRYPTO: Blockchain lands at $24B in 2018 funding, $1B in STOs coming

Crypto is dead, long live Crypto. We've tried to update our token offerings and blockchain financing figures to see the state of the market. On a monthly basis in December, there continues to be an almost even split between (1) weird internet crowdfunding at $490 million, and (2) traditional venture funding into blockchain-first companies at $310 million. We think the first figure is inflated despite our attempts at scrubbing it, and reserve the right to revise. Quality of the data keeps going down, and several projects self-reported raises in December that they may have finished earlier in the year. If anything, our intuition is that real (rather than aspirationally self-reported) ICO funding is below the venture number. 

As an example, take the largest December self-reported ICO: Jinbi, supposedly raising $47 million for a gold/blockchain token in China. The screenshot is below, but we are pretty sceptical. On the other hand, the $180 million raise from venture into institutional exchange Bakkt is well documented and known. So let that flavor the story for you. Still, when you zoom out on an annual basis, 2018 saw $5.2 billion of venture activity and $19 billion of token offerings -- not bad for a sector in decline. Future activity is indeed trending into Security Token Offerings, with several conferences focused on the space early in the year, as well as players from across industry types competing. Whether you are an equity crowdfunding platform, an ICO developer, or a Wall Street capital markets firm, chances are that tokenizing securities and distributing them globally in a solid regulatory framework is top of mind.

So will this be the saving grace of the sector? Hard to say, but it seems that tokenizing securities is about packaging (1) risky startup equity or (2) a share in some mall in Wyoming and plugging that into the equity crowdfunding theme. That may or may not result in better capital markets infrastructure, democratization and roboadvisor-led asset allocation. Or it may just be left-over junk that nobody else would buy. And second, the crypto economy needs non-financial activity to succeed. People should be building software using the global decentralized computer of Ethereum (or EOS or Dfinity) and paying for it using the global decentralized currency Bitcoin. More crowdfunding ain't that.

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Source: Autonomous NEXT data sets, ICO Rating, Kepler Finance, Securities.io, Inwara, among several others.

CRYPTO: 190 Exchange License applications in Japan, $183 million in funding for ICE's Bakkt

We'd love to write about all the interesting decentralized applications that the crypto community has scaled to millions of users. But we can't, because it hasn't. So instead, the news cycle is still stuck on the financialization and securitization of tokens in the far reaches of the Internet. At least it is a re-thinking of capital markets from the bottom up -- and this being a financial technology newsletter, we will oblige with the theme. But what may seem obvious on the surface is really not. Blockchain-based exchanges are not about better systems today (they may be in the future), but about finding cash flow to survive the nuclear winter and later expand into adjacent verticals (e.g., Coinbase, Binance).

The first story is about Japan, where a crypto-friendly regulator has received 190 cryptocurrency exchange license applications. Pause on that. Financial instrument exchanges are not this popular organically, with just 16 stock exchanges accounting for 87% of total stock exchange market cap (see chart below). In Europe, a similar fervor is in place about starting up new banks -- something about the power of the Crown in the palm of your hand. So seeing a wave of small, uncoordinated capital markets infrastructure teams try to bootstrap into a licensed, centralized/monopolized venue for financial exchange across the world isn't a sign of positive progress. It is a sign of a meme echoing across Twitter.

Second, we point to the $182.5 million funding round just raised by Bakkt, owned by the Intercontinental Exchange (also owner of the NYSE). Microsoft, BCG, Galaxy, Pantera and others chipped in. This is a fat raise, and it reminds us of R3's bank consortium, Digital Asset's trading systems, and a bit of Telegram's $1.7 billion venture capital black hole. Wall Street is building infrastructure for Wall Street, expecting to be the owner of all crypto OTC and institutional flows -- the blue ocean opportunity is now gone. Yet Asian exchanges like Binance continue to be the life-blood of retail crypto finance, built for users trained on video game money. Dressing this stuff up in a suit and trading a lot of it is a meme as well.

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Source: Cointelegraph (Japan), Japanese FSA (Virtual Currency report), Visual Capitalist (Stock Exchanges), Coindesk (Bakkt)

2018 FINTECH PREDICTION IN REVIEW: Crypto Eighteen

Here's what we said would matter in the past year year:

If you thought 2017 was loud about crypto, just wait till 2018. Up or down, that doesn’t matter — what will certainly be in play is massive volatility as the crypto economy beats on against traditional finance, regulators and sovereign power. The largest mountains to climb are the development of institutional crypto custody and a vanilla ETF product to absorb the splurging demand, and we think this will happen. In terms of creative destruction, we expect one of the top ten 2017 currencies to collapse 80%, one of the enterprise blockchain consortia to fall apart. New technical solutions like the Tangle or Hashgraph to challenge our assumption that Bitcoin is the endgame.

How did we do? Pretty well overall. We predicted massive volatility and we got it. The massive market capitalizations of 2017, rounding up to $1 trillion, have deflated down to $100 billion and change. Many assets melted 80%+, but we will call out Bitcoin Cash specifically, which fell from $40 billion to less than $3 billion after yet another rough fork at the end of the year. On the other extreme, EOS raised $4 billion in ICO funds. New smart contract platforms indeed came to market – from EOS to Hashgraph to Dfinity – but Bitcoin dominance has stayed fairly flat at 40-60%. 

The negotiation against incumbent sovereigns and traditional banking moves forward; regulators across the world have placed many 2017 digital assets in a regulated “securities” bucket, with enforcement actions starting to target individuals and exchanges. At the same time, institutions like Fidelity have launched crypto custody divisions, the NYSE is launching crypto exchange Bakkt, and the number of enterprise players in the space has grown like weeds. While no ETF was launched due to SEC concerns around market maturity, an Exchange Traded Product did launch in Switzerland using VanEck index data.

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Source: 2018 Keystone Predictions Deck, Coinmarketcap (total capitalization, % BTC dominance), Fidelity, Amun ETP, Bakkt via ICE/NYSE

BLOCKCHAIN: $1 Trillion lost in Crypto since all-time-highs, but $700 million in November still flowed in

Ugh. Here's the monthly update on the crypto fundraising figures. Let's start with some good examples -- we are fans of Trustology raising $8MM in equity from Two Sigma and ConsenSys, and ErisX raising $28MM from Fidelity and Nasdaq. Those sound a lot like the institutional chassis needed for traditional players. However, from a retail perspective, the crypto markets are not holding their value in an overall downturn, and have been fairly correlated with traditional equities as everything nosedives together. This is in meaningful part, we think, driven by the availability of instruments to take short positions in the market. 

We took the ever excellent OnchainFX data from Messari, and looked at the total loss of market capitalization (i.e., "hopium") across their tracked coins from all-time-highs. The answer is that there has been nearly a trillion of burned down value in the last year. Millennials are going to be salty for a long time! But look, it's not all doom and gloom. November saw another $700 million or so in blockchain-first funding, again roughly split 50% between token sales and venture investment.  The sustained flow of venture is encouraging to the promise of this sector in the future.

Some conclusions from looking at the tokens in detail: (1) an Arizona offering stood out as an interesting jurisdiction, (2) a few EOS projects are going forward, (3) some projects are using the STO monicker to try and position more positively, and (4) there are still quite a few questionable business models in the mix. Looking at crypto funds, we continue to see new entrants in the space, even as 2018 funds face -80% performance profiles and shed employees. Crypto projects are also starting to downsize, and we projected for Bloomberg a contraction of 25-50% in the number of funded seats at the blockchain table for existing companies today. That doesn't mean there can't be new companies with new opportunities ahead -- it just means their journey will be more rational, and potentially more fruitful.

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Source: Messari (liquid coin data), Autonomous NEXT (crypto fund data set, ICO tracker leverages and cleans CoinSchedule, ICO Rating, ICO Bench, ICO drops and various others), Bloomberg (layoffs)

CRYPTO: Takeaways from Consensus:Invest and Overstock developments.

We moderated a panel on crypto funds (Pantera, Milticoin, Outlier Ventures) at Coindesk's Consensus:Invest conference, as well as appeared on a fun Coindesk Live segment. The general sentiment was that across strategies -- trading, passive, venture -- the funds are very optimistic about a long term horizon, ignoring short term volatility. Of course they have no choice but to tell that story! Second, the event felt very institutional and focused on financialization. That means that there were many security token, custody and exchange solutions, and that many people were garbed in formal dress. While retail peak may have been December 2017, enterprise solutions are coming to market now, and will be catalyzing a very different environment next year. Anecdotally, this New York event was more coherent in its finance vector than the recent European blockchain and token conferences that we have attended.

This institutionalization is also echoing also in larger public companies. See Amazon launching blockchain-as-a-service inside AWS. Or take Overstock -- a discount version of Amazon helmed by outspoken eccentric capitalist Patrick Byrne (not to be confused with Tim Draper, John McAfee or David Byrne) -- which is planning to sell its entire retail business in order to focus on tZero, the blockchain capital markets arm. The company's price is already highly correlated with Bitcoin, and it just feels like Patrick will have a lot more fun running a fintech company.

We dislike this for a few reasons. The first is that Overstock is a commerce destination, and it would be nice if cryptocurrencies, stablecoins or other Frankensteins, were actually used to buy stuff. So that maybe goes away. And second, we remember Overstock launching a roboadvisor, and claiming that the eCommerce footprint was going to be a distribution arm. Well, not if you don't have traffic. There is meaningful money to be made form institutional-grade capital markets on blockchain infrastructure -- but everyone from Nasdaq to Fidelity to JP Morgan is already chasing that dream. Who's going to sell cat food and crypto to the little guy?

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Source: Coindesk Live (video), CNBC (Overstock)

CRYPTO: Did ICOs raise $300 million or $2 billion in September? Depends who you ask.

Last week we published some grim ICO figures, which made the rounds in the media, suggesting that token offerings are 90% down on a monthly basis relative to the peak. We were challenged on our figures based on two sources: Elementus and Coinschedule (ICO Rating is another great reference). While our number floated down to $300 million, some of the others saw September as $1B+. As an aside, we want to show the largest number possible to frame the best story for a delicate and growing space. This is why we began adding venture capital equity investment into crypto companies. When looking at that particular chart, our trend is at over $1 billion in August. So let's explore the delta.

First, there are some chunky and problematic figures which we chose to treat differently. For example, CoinSchedule lists Rubi-X as a $1.2B ICO entry for the month of September, which we have not been able to verify otherwise and chose to exclude. The Venezuelan Petro ($700MM+) we also ignore, as it is at best a government-backed monetary unit, and at worst an experiment in sovereign fraud. Second, there are various timing differences. Take the $134MM into tZero, which we had already accounted for at announcement in July. Lastly, taking a closer look, many of the ICOs we chose not to include are self-reporting a "completed" ICO, and then a data spider is taking their softcap as the amount raised. We generally exclude data where the confirmation of a meaningful raise ($10MM+) is hard to pin down.

Further, Elementus tracks monthly flows as they happen. This means if an ongoing ICO is 40% through its time period, they will have counted accrued fund flow. We track data at period end, meaning that only closed offerings are counted. Such an approach will not give credit for capital in flight, and perhaps there are good months ahead if indeed flows are strong. But this methodology difference should generally wash out, unless large chunky and unusual things are happening (e.g., Telegram and EOS). 

Our final point on this is to revisit our data sources. We focus on analysis, and leverage other primary sources for much of the underlying gathering, which we then scrub. In looking at the process, we counted over 30 ICO trackers used in our aggregation process. The kicker though is the short half life of the sources -- charted below. We find ourselves swinging between various sites and their increasing and decreasing data quality! So if you ever think there's something we should pay attention to, do let us know. And without further ado, here are the adjusted figures, telling the same story as before.

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Source: Cryptoglobe (ICO data reporting), ElementusCoinSchedule

CRYPTO: Enterprise Blockchain Back in Vogue as SEC goes after ICO fraud

There was a moment in the development of peer-to-peer file sharing when the music labels, with cheerleading from Metallica, began to sue teenagers for millions in damages. We are ramping up to a similar period in crypto land. Davis Polk documents the bump in SEC enforcement actions targeting companies like TokenLot, Crypto Asset Management and FINRA registered brokers like Timothy Ayre. None of the violation descriptions are a surprise, especially if you've been listening to Preston Byrne: (1) TokenLot selling ICO tokens that qualify as unregistered securities without registering as a b/d and, (2) CAM raising a fund without registering as an investment vehicle while lying about having done so, (3) and Ayre brokering unregistered security tokens personally. Separately, the New York court in the ongoing United States v. Zaslavskiy has applied the Howey test in a motion to dismiss by the defendant, and found that a reasonable jury could conclude that the ICO was a securities offering.

This is good news, cleaning out the opportunists trying to sell everyone their fake lottery tickets. The flip side, however, is that we now have far more human and financial capital in the space, and it needs to be directed at something. And as far as we can tell, it is again directed at the enterprise blockchain space, which is morphing to become part custody, part digital assets, part OTC trading, part consulting implementations. Remember, enterprise blockchain is a cost-cutting effort by an oligopoly of financial firms to mutualize processes and costs around the back office. Now that ICOs posited scarce, functional digital objects into digital economies, the Security Token wave is re-running the traditional crowdfunding theme through token-based securitization on public blockchain rails.

Which is why the recently announced acquisition of Chain (a payments enterprise blockchain company) by Stellar (a public chain with a built-in exchange and strong throughput capabilities) makes sense. In this way, Stellar and Chain are moving closer to Ripple's model, owning both a public digital asset and a private enterprise software. This allows the firm to build both equity value in the company, and monetary value in the tokens. Not that we think Ripple's model is necessarily right, but it's right for this market, where token prices are collapsing and good news are scarce. As another example, we attended R3's CordaCon and were impressed by the progress of the bank consortium. There are over 50 apps and 200 different company implementations, including big tech, finance, and supply chain. One example is the ECB's TARGET Instant Payments Settlement for large payments and settlements. The borders between this world and the next are getting erased.

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Source: Davis Polk (SEC Enforcements), Reuters (Stellar / Chain), Preston Byrne (on ICOs), R3 (marketplace)