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.


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. 


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.


Source: Autonomous NEXT data sets, ICO Rating, Kepler Finance,, 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.


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


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.


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.


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?


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.


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.


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

BIG DATA: The Beauty of Global Networks of Data Exhaust

As the human world becomes more digital, our connections and interactions are recorded and shared. We go from knowing 150 people and analyzing a few stories a week to 2 billion people sharing hundreds of millions of stories constantly. But humans still need to understand what's going on underneath. In this entry, we want to highlight how massive, machine scale systems are visualized through mathematical methods to tell new stories. These charts -- giant sprawling data webs like airplane traffic patterns etched onto the globe -- are the future of literacy in the machine age.

In the first example, we borrow two images from Google. The Google Cloud team created a service which grabs the entire Ethereum blockchain, backs it up on Cloud, and makes it easier to analyze. The first image shows the Crypto Kitty universe, with color attached to owner of the contract (kitty whales!) and size of the bubble ranking the quality of the asset. We can certainly imagine this done on regular old financial assets. The second visualization is for transactions: points are wallets and lines are asset movement. You can immediately seen wallet clustering, which shows entities that have more frequent transactions between each other closer together. In this way, one can ferret out exchange wallets or bots. Hey there Bitfinex!


The second source is a ConsenSys write up on decentralized exchanges, and is truly a spectacular chart. Do yourself a favor and click to zoom in. The dataset comes from IDEX, EtherDelta, Bancor, 0x, OasisDex, Kyber Network, and Airswap Protocol -- today's decentralized exchanges. Each point is a trading pair, the width of the line is number of normalized trades, and the line colors signify the exchange used. You can immediately see the most popular trade contracts, as well as exchanges where trading hops through an intermediate token, rather than through ETH itself. We'd love to see this for traditional FX markets, or maybe all trading period!


The last chart is from Geoff Golberg, who mapped out all Twitter accounts engaged in the Ripple XRP community with the purpose of identifying bots. And yep, the 40,000 point cloud has multiple bot armies across the world used to manufacture opinions and drive social engagement. It takes a robust mathematical approach to visualize this information, and a detailed article written by a human to infer the relationships and their activities within the data network. This is a flavor of future skillsets required to thrive in a machine world.


Source: Google (Ethereum), ConsenSys (Decentralized Exchanges), Medium (XRP Bots)

CRYPTO: Can Stablecoins jumpstart the digital economy?


We are bummed with the SEC's rejection of pretty much every effort to launch a Bitcoin ETF, which is at the top of the wish-list for normalizing crypto currencies and assets. The investment management value chain is now caught in a weird race: (1) either crypto custody will become regulated and build tendrils to plug into existing infrastructure, or (2) a regulated wrapper, like an ETF, must contain underlying crypto assets, and then travel along into asset allocations of regular investors. Neither is going to change the mood of the market tomorrow. So instead of focusing on financial progress, could the crypto economy show some economic progress? 

A recurring thesis for spurring on that economic activity, supported by continued investment from crypto funds and ICOs, is the emergence of stablecoins. The argument goes that if you have a virtual currency that stays pegged to the US dollar, for example, then the currency can be used to buy and sell goods without the fear of volatility (or capital gains on buying a sandwich). It can also work as a unit of account in which other assets are traded. And if we can figure out how to dampen volatility in the markets, perhaps that will also be seen as a positive by the SEC. A lot of ink has been spilled on how different projects are different -- but at the core, this is an automated macro banking algorithm that must maintain price parity, backed by assets, leverage, or fraud. One that can be manipulated or broken (e.g. below, Nubits).

We see stablecoins as incrementally helpful, but not sufficient. You still need a fiat/crypto equilibrium mechanism, and if a stablecoin becomes large enough to maintain a digital economy, it comes into direct competition with the United States government, its monetary policy, and its police force. It is highly unlikely that the US will let a decentralized or private actor print the equivalent of dollars. Who knows, maybe a central bank issued coin is still a reality -- take for example,Thailand, which is working with R3 on interbank transfers. While this isn't what most Bitcoin enthusiasts would want, the USD is the best peg to USD. Let's just get people to hold it in a Bitcoin wallet -- which is why rounding your change into crypto using Revolut, or getting a blockchain-native phone once it's out, could be so meaningful.


Source: Medium (Nathan Sexer on Stablecoins), WSJ  (SEC rejection), CoinDesk (Thailand bank coin)

BLOCKCHAIN: $100 Million for Hashgraph, Doubling Down on Fat Protocol Thesis

Investors are still chasing the fat protocol thesis of crypto assets, trying to own the public highway on which everyone builds applications, and take tolls in the form of capital gains. The latest symptom is a reported $100 million investment into Hedera Hashgraph at a $6 billion valuation, with the sources of capital being institutional investors and employees. Another $20 million is planned for a public ICO. The project claims that the hashgraph, which is not a Bitcoin blockchain fork, but instead a directed acyclic graph like IOTA and Byteball, will be able to process hundreds of thousands of transactions per second while being as cryptographically robust. The pedigree of the founding team from an academic perspective makes those claims at least initially credible.

There is no shortage of contenders for Ethereum's throne, despite a good number of Crypto funds deciding together that a public smart contracts platform isn't worth its $40 billion valuation (a decision based on some very questionable math, might we add). Many platforms now claim to do better and faster what Ethereum does today -- from EOS to NEO to Cardano to Dfinity and others. And yet, we think, too many are focused on optimizing technical performance rather than user experience. Getting a functional proof of concept out is better than over-engineering something that doesn't end up working on launch at all and needs a re-write of core ideas (hi there EOS). Of course, these things were never valued at $6 billion at Seed stage before.

The other part of Hashgraph worth mentioning is the 39 company governance council that owns equity in the company, according to Forbes. This reminds us of Hyperledger and other enterprise blockchain approaches that reinforce oligolopistic outcomes. But that may be a good thing! Institutional attraction to crypto assets is steadily increasing, which validates the software even as crypto markets melt away in value. For example, look at the Intercontinental Exchange launching their crypto trading platform Bakkt, which is a collaboration between the exchange, Microsoft, BCG, Starbucks and others. The effort will convert Bitcoin into fiat, and vice versa. Whether or not we prefer public companies getting into the space is up for debate, but public companies are getting into the space.


Source: Hedera Hashgraph (CrowfundInsiderCoindeskVenture Beat), Forbes (Crypto funds shorting ETH)

CRYPTO: $20 Billion in Cumulative ICO Funding, 300+ Funds

Let's start with our macro bread and butter. Through June of 2018, we saw $12 billion of funding flow through into token offerings. Our numbers track only those ICOs with $1 million or more raised, so the numbers could be slightly higher, but the magnitude is correct. That's still 4x the amount of equity investment from venture capitalists going into blockchain-related companies (a number that now includes Robinhood and Revolut's pivots into crypto). So overall the trend appears healthy, until you really dig into the deals themselves. As you can see on a monthly basis, EOS and Telegram have been the elephants in the room for token fundraising. Now that they have been pulled out from active fund-raising, the underlying trend is less enthusiastic, cutting the monthly numbers in half.


Both of those exceptions have something to teach us. In the case of Telegram, the lesson is that private institutional investors are now the major driver in pre-sales, and often lead to closed rounds. In the last 2 months alone, we see a $500 million raise for video production platform Tatatu, and another $750 million to a gambling company in Asia. That means that there is not an opportunity for a crowd to participate, which in turn has led to the prevalence of Airdrops as a way to get people to hold the token. See Tatatu giving away $50 million of its tokens; in our full paper we highlight the Airdrops trends. The case of EOS teaches about the cyclical nature of capital flows between these projects. Token offerings appear to be a fairly steady function of their parent networks, sitting around 2% of monthly Ethereum reinvestment. That was a surprising finding.

On the manager side, we see 312 crypto funds controlling approximately $7.5 to 10 billion in assets. If we add in traditional instruments, like the Bitcoin Investment Trust or Bitcoin Futures, that's likely another $3 billion of exposure. So while the absolute number of entities is not exploding like last year, the asset they hold do seem to be increasing (based on extremely selective self-reporting). This has been buoyed by the entry of ecosystem funds from exchanges like Binance and Huobi, or networks like EOS. In a sense, that's recycled money from offerings, but it may still fund the right entrepreneur to build her company.


Source: Autonomous NEXT (Crypto Utopia)

FINTECH: Crypto Browser Wars between Opera and Brave


Is it time for the Crypto browser wars?  The once beloved Opera browser is now a scrappy underdog. It holds a 3.2% market share today, behind Firefox at 5.4%, Internet Explorer at 6.1%, Safari at 13.5%, and Chrome at 55.2% . Those numbers could see some change, as Opera has just released a Crypto wallet built into the browser itself. This would allow users to interact with decentralized applications natively, store, send, and receive crypto and ERC20 tokens in the browser,  and does not require third-party plugins or wallets. For the mobile version, biometrics could function as a password.
The crypto theme for Opera seems related to its Initial Public Offering (not ICO, how quaint!), in which the company wants to raise $115 million. Of that amount, $50 million is set to be acquired by none other than hardware manufacturer Bitmain. As a reminder, Bitmain themselves had recently completed a $400 million series B funding round at a $12 billion valuation. While it’s hard to know exactly Bitmain’s motivations, reasons could range from in-browser crypto mining, to lowering the barrier to entry for crypto in general, to hardware devices. The other interesting angle is that this is a private company leading one of the most recent tech waves (blockchain) investing into an older software company from a prior tech wave (browsers). We expect to see many more such examples, as easy capital and high crypto valuations have allowed projects to amass war chests. Sometimes that capital is better spent on existing users and infrastructure, than building from scratch.
Such a project seems on a direct collision course with the Brave Browser. Brave had run a $36 million ICO last year in a proprietary token BAT, meant to replace the economics of advertising on the web. The browser blocks ads and third party trackers, but rewards users with BAT tokens if they allow advertising from permissioned publishers. It has amassed 3 million users and 18,000 of those publishers, of which 4,500 are websites and the rest are Youtube/Twitch creators. Rewards for creators on traditional platforms fueled by advertising are highly asymmetric, so perhaps a crypto-intermediated model will better fund web-native content. But even if Brave now has a well-funded Opera as a competitor, there’s finally a spotlight on this alternative model which empowers the user.


Source: Coin Telegraph (Opera Wallet), Finance Magnates (Bitmain/Opera), Opera Software, CCN (Brave)

BLOCKCHAIN: HTC, Huawei building Blockchain-Native Phones

News about blockchain-first mobile phones have been making the rounds again, so we wanted to give it a bit more structured thought. A core premise of why Crypto matters is the ability to have digital goods that are scarce. This means, that these things are unique just like physical goods, and thereby support real economic activity. Two concerns, however. The first is that today’s Internet is free, and does not have the friction of costs. A blockchain-based Internet that does have built-in tolls everywhere is akin to buying music with built-in Digital Rights Management – just a frustrating, pointless experience. The music labels were never able to get consumers to adopt DRM. And second, using a DApp is really hard. Not only do you have to know how to buy cryptocurrency, but you need to buy tokens for particular apps, figure out how to store those tokens, and how to spend them. While yes, Metamask can do much of this, such an experience is still far worse than downloading an App from the App Store with one thumbprint.
Usability could be solved by blockchain-native devices. HTC, Huawei and Sirin Labs are each working towards this goal. HTC is building a phone model called “Exodus”, which will be able to serve as a node for Bitcoin and Ethereum networks, act as a cold storage device, process crypto payments, hold personal identity, and support decentralized applications natively. Other HTC phones already support games like Crypto Kitties today, and the company has partnered with Animoca and Bitmark on future developments. There’s some speculation that these initiatives are just a publicity grab for HTC after the sale of its design team to Google, but we still think that the direction of travel matters. Landing a major handset with crypto functionality in the pockets of consumers everywhere is compelling.


As for Huawei, the world’s third largest handset maker, it is rumored that they are partnering with Sirin Labs to license Sirin’s operating system. Sirin has already been working on a blockchain-enabled smartphone called “Finney”, manufactured by Foxconn and sold for about $1,000. It also supports blockchain applications, such as a crypto wallet, secure exchange access, encrypted communications, and a P2P resource sharing ecosystem for payment and apps. The caveat for Sirin is that the phone requires a proprietary token, SRN. Which of course goes back to our initial points about DRM – the things most likely to succeed is the one that has the fewest barriers.

Source: Techcrunch (HTC), Bloomberg (Huawei), TNW (Foxconn)

CRYPTO: Ethereum not a Security Because it is Decentralized

Let's parse today's state of regulation for crypto assets, and the glimmers of what the future will look like. Ethereum and Bitcoin are not securities, said a senior SEC official a week ago. Why? The argument rotates around decentralization -- not because regulators care about decentralized networks, but because you need an entity to lead an offering. The Howey test demands a common enterprise that gives purchasers an expectation of profit solely from the efforts of others. Does that make sense in the world of (1) decentralized networks set up by communities for mutual gain, and (2) changing expectation about tokens as platforms are built? Probably not, but until the courts create a new model, it's what we got, and it is beneficial for Ether.

What's probably not really beneficial for Ether as a development platform are ICOs (vs DApps). Yes, they are still the killer app for crypto, but they have also sapped ETH of its role as a currency for DApps. Instead of a single currency that can power a digital smart contracts economy, we have thousands of disparate tokens of questionable liquidity and value. And while Ethereum itself may have avoided being a security, the tokens launched using it as an offering platform are exposed to continued regulatory risk. The CBOE president, for example, expects to see SEC prosecution of many large token offerings, and potential class action lawsuits against projects that fail to deliver. No amount of disclaimers and structuring will help against an angry mob. 


To reiterate the point, ICOs have been narrowing Ethereum towards a crowdfunding offerings platform. Compare an entrepreneur's choice of Ether vs Stellar, for example, as the choice between the corporate law of Delaware or New York. In choosing a state, you have access to all the common law that has emerged from centuries of litigation. This is like choosing a programming language that has the best code libraries. Regulating this choice for financial disclosure makes no sense. When looking at a particular use case, however, regulatory approval will still be a gate. Square needed to get the BitLicense in New York in order to process crypto payments. The same type of regulation may come to Canada for exchanges and payments companies (KYC/AML for $1k transactions, reporting to regulator for $10k transactions). For a sovereign regulator, the best strategy is to control the choke points.


Source: CNBC (SEC on Ether), CrowdfundInsider (CBOE), Autonomous NEXT (Howey test), Coindesk (Square), Cointelegraph ($10k transactions), Techrunch (Square cash), NY State (Bitlicense), (creating a token)

SOCIAL MEDIA: For $7.5 Billion, GitHub is now Microsoft, and what that means for Fintech.


Remember when Microsoft got left in the dust by Apple's iPhone? Or when Bing tried to beat Google? If you're a tech firm, missing a platform shift like search, mobile and social is profoundly painful. Well, no more. The enterprise tech giant is in cloud, blockchain, and augmented reality. And it's in enterpise social media -- big time. Microsoft is putting up $7.5 billion to purchase GitHub, which has 28 million developers in the community, and over 60 million code repositories. Think of that as shared documents on a massive cloud drive, but those documents are executable and the people doing the sharing are engineers with razor sharp skillsets.

This is an interesting turn for Fintech and Crypto. To be honest, we always thought of GitHub like a community resource, similar to Wikipedia, and not a corporate entity with founders that want to get monetized. But like LinkedIn, this asset found its way to Redmond. While Facebook is still cleaning off the hangover from Cambridge Analytica and selling customer data, Microsoft has positioned itself as a developer- and open source-friendly ecosystem catalyst. Which is ironic, given its history as a monopolist, open source antagonist, and start-up crusher. 

GitHub has tendrils into every startup team in the world. If you write code, you use GitHub for version control, collaboration, and sharing. Where do you think all the crypto code sits? If you're Ethereum or Bitcoin or anyone else in the world, code commits to GitHub are a fundamental indicator that crypto funds use to evaluate the health of your project. Or, if you're trying to work out crypto governance and decide which proposals to include or exclude in the main codebase, again, you are using GitHub to manage decisions. Or if you're a teenager wunderkind interested in using open source Artificial Intelligence frameworks to build your machine -- e.g., Tensorflow or PyToch -- you use GitHub to learn and get started. Welcome you tired, poor, huddled masses yearning to breathe free; welcome to Microsoft.


Source: Techcrunch ($7.5 billion), Wikipedia (infographic), Deloitte, Azeem Azhar (AI frameworks)

REGULATION: Why Coinbase would want an OCC bank license


What do you do if you business prints $1 billion per year (Coinbase) or $200 million per quarter (Binance), but people in suits still think what you do is at best a bubble and at worst a scam? Sure, you can hop from jurisdiction to jurisdiction trying to find a friendly regulator. Or, you can try to play by the existing rules and pay for the compliance overhang. While many Fintech companies complain about how expensive and time consuming licensing is (looking at you digital lenders and neobanks), crypto exchanges can afford it. Especially crypto exchanges that want to build out a custody business and make a spread on customer funds.

The WSJ reported that Coinbase approached the OCC earlier in 2018 about a banking license. This should not be a surprise, but a natural institutionalization of the crypto sector. Unlike Fintech, which still struggles to persuade customers that they need financial products over the web, crypto is actually something that consumers want. In an age where Millennials are saddled with record generational debt, everyone wants to buy lottery tickets. And if you accumulate a large enough consumer base, building from crypto to payments, from payments to deposits, and from deposits to financial advice is a natural path. We've written before about the links between regulatory custody and legitimacy -- and symptoms like Nomura partnering with Ledger to offer this, given the popularity of the asset class in Japan, prove the point.

Unlike Coinbase, which may cash in its chips into the traditional financial system, exchanges like Binance and Huobi have gone the other direction by pursuing token offerings to the crowd. For an upcoming analysis, we looked deeper into Huobi and again come away with a raised eyebrow. The token is a discount coupon on future trading fees, with a vague promise attached to exclusive access and events, and a promise to link to airdrops. It trades into other crypto currencies on the, you guessed it, Huobi exchange, which means that belief in its value can be monetized immediately. And there's now about $250 million of this belief, according to Coinmarketcap. That reflects very short-term thinking in our view, but such financial engineering isn't unique to crypto. Last we remember, JP Morgan and Goldman were called out for "laddering", i.e., manipulating the price trajectory of Initial Public Offerings during the tech bubble. Now laddering is built into software and promoted by bots. History rhymes!

Source: WSJ ( Coinbase ,  Laddering ), Cointelegraph ( Nomura custody ), Coindesk ( Huobi ), American Banker ( graphic ), Harvard Law School ( laddering )

Source: WSJ (CoinbaseLaddering), Cointelegraph (Nomura custody), Coindesk (Huobi), American Banker (graphic), Harvard Law School (laddering)

BLOCKCHAIN: Enterprise Blockchain Inching to Production


We give incumbents a hard time on innovation to motivate higher risk taking on technology and more investment in early stage software. But financial institutions already know that enterprise blockchain infrastructure is key to saving $20 billion across capital markets and nearly $200 billion in international payments (if you don't, ask us). While 2016 was full of constortia announcements and pilots, 2017 remained largely quiet on meaningful progress, but for ASX & Digital Asset. Seems like that's going to change.

A few examples. JPMorgan, Goldman, Legg Mason, and National Bank of Canada just tested a $150 million debt issuance on a platform derived from JPMorgan's Quorum, mirroring a transaction done traditionally. Quorum may end up getting spun out, but each bank likely has proprietary vertical software sitting on top, which plugs into existing architecture. Separately, BBVA just worked through a $90 million corporate loan issuance, reducing the negotiation time from days to hours. Credit Suisse and ING moved $30 million via R3's Corda. TD Ameritrade embedded their flag in ASCII into Bitcoin's distributed ledger. So it's not just unicorn Millennial technology or a libertarian utopia!

And the other angle is big tech. Amazon announced that it is introducing Ethereum and Hyperledger to AWS, a cloud storage business unit that just generated over $5 billion in revenue (good luck Filecoin!). That is a lot of out-of-the-box crypto that regular businesses can leverage. It matters what default technology comes pre-installed on these servers, since it will be the default choice for most of developed industry. Amazon joins Microsoft, IBM, and Oracle in building out an option in the space. How decentralized is our future again?

Source: Amazon, Microsoft, IBM

Source: Amazon, Microsoft, IBM