Competing regulators, non-volatile’ish tokens and process efficiencies.
By Joel John
Stability is perhaps the one word that defines the last few months. Between regulators seeking to create less hostile environments for startups, a barrage of stability-oriented tokens and enterprises seeking to use blockchains to improve operations, it has become evident that the ecosystem is growing beyond the wild swings of the past year. The price of Bitcoin mostly stayed around $6500 and while concerns around exchanges and Tether have been matters of active discussion, the volatility of tokens for the most have come to a standstill. In fact, towards the end of last month, as legacy financial markets went for a tumble, tokens stayed relatively stable with Bitcoin holding price over $6000.
1. Banks may warm up to token startups in 2019
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Projects struggling to find banking partners to help with their day to day operations may soon see relief. Regulators around the globe have been making moves to attract and retain token oriented startups as regulatory arbitrage between different jurisdictions is the only option many startups are currently left with. UAE’s financial regulator – Securities and Commodities Authority (SCA) announced plans of creating a proposed framework to regulate crypto asset activities including token generation events. In a similar move, the Monetary Authority of Singapore’s Managing Director Ravi Menon, recently suggested that the organisation is looking to bring banks and regional crypto-currency based fintech startups together to explore how the issues parties on both side of the table face can be resolved. Singapore’s lax approach to tokens may be helping the nation as August witnessed more TGE’s occurring from Singapore than America. Facing an increasing number of startups leaving the region, the Swiss Bankers Association also issued guidelines to banks that wish to do business with startups from the ecosystem. While regulatory clarity may not be here yet, it is becoming evident that legacy financial institutions and regulators are warming up towards the idea of enabling an ecosystem that ensures token based startups have a fair and equal grounds to compete from against more traditional ones.
2. Do virtual markets have integrity?
The New York Attorney General’s office launched what may be the most comprehensive study on exchanges to date. The organisation reached out to over 13 prominent exchanges including Binance in Q1 2018 to gather data around policies for insider trading, possible market manipulation and steps taken to protect user funds. The report suggested that a high number of platforms are ill-prepared to handle risks of manipulation but noted that a few (eg: Gemini ) was taking steps to reduce occurrences The integirty initiative also discovered that a handful of exchanges drove volume from their own trading. Coinbase for instance revealed that upto 20% of their volume comes from their own operations. Concerns around the lack of process for gathering Know Your Customer (KYC) documentation was also flagged. As larger players like FIdelity begin offering trade execution for institutional clients, it becomes increasingly important to ensure these markets become less susceptible to manipulation by a handful of players. The report offers an interesting look at the functioning and risks associated with each exchange. Read it here.
3. The House of Lords issues a report
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It has not been only financial regulators taking a deeper look at what blockchains can offer our economy. The upper house of the UK Parliament, the House of Lords published their inquiry on crypto-assets. It starts with a tone of caution and a call for regulation citing the interests of investors. Concerns regarding the nature of different token generation events as well unresolved issues with a number of trading platforms were cited. The report maintained a fine tone of balance by also highlighting the need for the British government to explore the advantages offered by a blockchain. Interestingly, it also mentioned that DLTs have the potential to redefine government-citizen interactions as it fundamentally upends trust in systems they are integrated to. Much like many of their counterparts, Britain’s Parliament has suggested that if the UK develops a proportionate regulatory environment, UK could be well placed to become a global centre for the blockchain ecosystem. Grab the entire report here for an inside look at what worries and excites British government officials about blockchains.
4. JPMorgan enters the payment business
A payments network launched by JP Morgan in collaboration with the Royal Bank of Canada and Australia’s ANZ bank saw over 75 new banks as participants. Named Interbank Information Network (IIN), the platform is built on Quorum. Partner banks include large names such as Societe Generale and Santander. A key issue with enabling cross-bank payments is the collection, retrieval and storage of the user’s information across different banking systems. By connecting them together in a single network, banks will be able to verify and meet compliance requirements in a fraction of the time. The partner network will see around 14,500 transactions per day and is expected to scale as more partner banks join the network. In case you are wondering why a cross-bank compliance network is necessary, we suggest you watch this video on how a billion dollar heist was carried by relying on broken banking systems.
5. More Stable currencies are here.
Stablecoins are the new altcoins. Over 150 stablecoins relying on mechanisms varying between backing them with fiat to algorithmically controlling their supply have been found in the wild in the recent past. A16Z’s $15 million investment into Maker Dai may be what made a lot of heads turn towards stablecoins over the past month. September witnessed prominent players like Paxos, Gemini and Circle launch their own stable tokens. Given that volatility in tokens routinely lead to investors losing their gains or even worse, initial capital, stable tokens offer them an alternative that allows them to hold on to a store of value that does not fluctuate wildly. In addition, the efficiencies of a blockchain (transparency, speed, cost efficiency ) used to transfer these payments are often far better than relying on traditional banking systems to transfer capital each time a trader decides to take or offload exposure to more volatile asset classes. Even members of the big four from the accounting world like PwC are getting involved in the stable coin ecocystem through a partnership with Cred, a decentralised lending startup. Once a large enough user base adopts these tokens, it is likely that we see more complex instruments like derivatives and insurance being offered atop these tokens without the involvement of a bank. A decentralised, censorship resistant banking infrastructure may not be far from reality. For more on Stablecoins, we suggest referring to this incredible report from the folks at Blockchain.
6. Enabling $1 trillion in trade with blockchains
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Exporting is hard business. Compliance requirements, foreign exchange and keeping proof of the value chain can be tough business. Improving these systemic inefficiencies with technology could lead to more opportunities in developing economies without necessarily spending much on them. A recent study involving IBM and Maersk showed that the costs associated with processing and administration of trade documents could be up to one-fifth of the cost of the physical transportation costs. The World Economic Forum recently published a paper exploring how digitisation and blockchains can help tackle these challenges. It is an interesting look at what each stakeholder could do to enable the transition and the opportunities that lie ahead. Read it here for more.
7. Going Interplanetary with Cloudflare
In what may be a big win for Web 3.0 Cloudflare announced their gateway for IPFS (Interplanetary File System) that functions without requiring installation of any specific software. Where the current, centralised version of the web largely relies on information stored in servers in remote locations, IPFS functions by storing and retrieving information on a peer to peer file system composed of thousands of computers around the world. Currently the system has over 5 billion files ranging across cat pictures to 3D models and even entire websites. Combining cryptographic hashes to find data with a peer to peer network helps create websites that are far more resilient to attacks and distributed in architecture. Cloudflare released an incredible brief on what IPFS is and why this would matter going forward. Read it here to understand about a major leap towards the decentralised web
Although markets have been relatively stable, there has been no dearth for opinions and outright attacks within the ecosystem (Hi Roubini). We end our briefing with 3 incredible write-ups that left us thinking.
8. What does the decentralised web need?
It is important to be able to quantify and compare what “success’ of a decentralized web would look like. For perspective, estimates suggest that the decentralised apps ecosystem has only about 8500 daily users. Compared to behemoths like Facebook which has over 2.3 billion users, decentralized applications still have a long way to go. David Rosenthal quantifies one way of defining what success would look like for decentralized apps. He suggests that even at 1% of the user base mainstream platforms like Youtube, Google or Facebook currently hold, the decentralized web would have made its impact. He explores how business models, antitrust enforcement and a “killer” app would look like in this new ecosystem. Read it here
9. Tesla Software and Disruption
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Does being a first mover or a disruptor always guarantee profitability? The first movers may not always be the ones to benefit from their innovation. For example, Apple pioneered the PC market but lost it to a non-PC company – Microsoft. Conversely, Nokia was the incumbent with excellent phones, but quickly got pushed out by Apple, who introduced the software making the devices smart. This history makes us think about Tesla. If it only fixes the production issues, then it is just another car company. Tesla needs to do what the OEMs will struggle to learn. To do so, Tesla’s disruption needs to be fundamentally important and enough to change the basis of competition and the way a car company looks like. To protect itself from the new entrants Tesla should be able to do things they cannot learn too. Like Apple does things Google cannot. More on the matter in Ben Evan’s piece here.
10. The EU vs The Internet
Internet tech giants including Google and Facebook could be made to monitor, filter and block internet uploads under amendments to the draft Copyright Directive approved by the EU Parliament. Under this proposal, they would have to proactively filter uploaded content for copyright violations (the so-called “meme ban”), as well as obtain a license to include any text from linked sites (the “link tax”). The Copyright Directive requires internet platforms to act as de facto enforcement mechanisms of this directive. Issues could arise in this heavy-handed approach. Small companies that need the exposure may be the worst hit. Ben Thompson covers the proposed directive in his blog post here
Make sure you sign up for our newsletter to receive these updates frequently in your inbox! Also if you haven’t read it yet we’ve launched a new report on the concept and practice of developing effective tokenized crypto-assets. This is driven by our strong belief in the potential power of decentralised systems to provide a new and important evolution in how our economy and society can be organised, but in order to achieve this, effective ecosystems must be created that align the incentives of all the participants in a new model economy. We welcome the contribution and feedback of the whole community, you can do that either by tagging @OVioHQ on Twitter or using the hashtag #TokenEcosystem. Download the full report here.
