The Blockchain Bitcoin & Crypto Weekly CXO Briefing is all you need to know, each week, jargon free for CXO level business leaders and investors who will use this technology to change the world. Each week we select the 3 news items that matter and explain why and link to one expert opinion.
For the intro to this weekly series, please go here.
News Item 1: Bitcoin at crossroads after shedding more than $27 billion in value
Decrypted: Announcements over the past couple of weeks have set off Bitcoin’s price tumble. After its all-time high in the beginning of the month, China notified local Bitcoin exchanges to cease and desist. China ordered Bitcoin exchanges to shutdown, because they operate in the country without an official license
The shutdown of the exchanges coupled with the pressure that was created another announcement by China’s central bank earlier in the month, to ban Initial Coin Offerings (ICO), triggered huge price drops to the entire crypto market.
Our take: Chinese regulators have dealt a huge blow to the cryptocurrency market. These announcements have sent the cryptocurrency markets into a free fall. Early in the month the total value of cryptocurrencies was over $170 billion, while all this news caused panic and pushed it below $100 billion.
One of China’s largest Bitcoin exchanges, BTC China, announced that it will shutdown its operations at the end of the month, after considering the announcement made by Chinese regulators in early September. The BTCChina announcement was followed by OkCoin and Huobi that said they were shutting down their yuan-based trading operations by Oct. 31.
Investors in China have been using Bitcoin as a way to protect themselves should the yuan fall in value. Trading their yuan in for Bitcoin can allow Chinese investors to move funds outside of the country. Traditionally, China’s government has set a $50,000 annual limit on how much its citizens can move outside of the country. Buying Bitcoin was a way to bypass those rules.
The news has sent Bitcoin’s price plummeting. Last Thursday, the cryptocurrency dropped about 9% trading just below $3,500. That’s a significant drop from its all-time high of $5,013.91 on September 2. Along with Bitcoin, all crypto’s were affected. Ether dropped by 11% to around $240, Bitcoin Cash crashed by 17% to $417, Ripple fell 10%, Litecoin dipped to $46, while Dash and Monero each fell about 10%. So far, Bitcoin has lost more than 20% of its value since the Chinese regulators announced the ban on ICOs on September 4.
It is likely that panic-driven traders in China, South Korea, US and Japan caused the sell-off and the sudden price drop. But, I think its important to note that the ultimate plan of the PBoC and Chinese regulators is to provide and offer a licensing program for exchanges, not ban trading platforms. China’s central bank has been testing a prototype digital currency with mock transactions between it and some of the country’s commercial banks. China is seriously exploring the technical, logistical, and economic challenges involved in deploying digital money, something that could ultimately have broad implications for its economy and for the global financial system.
A ban on crypto exchanges won’t necessarily mean the end of trading in digital currencies. Major Chinese exchanges could make significant changes to their trading and offer peer-to-peer trading, instead of centralized exchange services.
Even though Bitcoin’s prices sharply dropped this week, Bitcoin has climbed more than 250% year to date, outpacing many other assets. Also over the weekend the price was relatively stable and rebounding to around $3,580.
News Item 2: Broken Hash Crash? IOTA’s Price Keeps Dropping on Tech Critique
Decrypted: IOTA’s price fell by double-digits due to cryptographic vulnerabilities found by researchers at Boston University and MIT.
Specifically, the researchers claim they were able to break the homegrown hash function “Curl” that IOTA was using as part of its digital signature scheme to secure user funds. The researchers were able to demonstrate how an attacker could forge a user’s digital signature and use it to steal funds.
IOTA in a blog post did not deny its Curl hash function was breakable, and the company has already issued a patch to the cryptocurrency’s code.
Our take: IOTA is a revolutionary new transactional settlement and data integrity layer for the Internet of Things. Its a new cryptocurrency that is focused on Machine-2-Machine (M2M) transactions. The main purpose of IOTA is to serve the machine economy by enabling M2M payments without fees.
The technology behind IOTA is based on a new distributed ledger architecture called the Tangle, which overcomes the inefficiencies of current Blockchain designs and introduces a new way of reaching consensus in a decentralized peer-to-peer system. For the first time ever, through IOTA people can transfer money without any fees. This means that even infinitesimally small nano-payments can be made through IOTA.
Currently IOTA with a market cap of approximately $1.4 billion, counts among its partners VW, Bosch, Innogy and Microsoft, has ambitions of becoming a standardized protocol that becomes embedded into the everyday life activities of users. IOTA also recently made its way into the cryptocurrency casino arena, with BitDice choosing IOTA’s Tangle for its platform.
But IOTA’s price suffered a heavy blow, after Boston University and MIT researchers claimed to have found vulnerabilities to IOTA’s proprietary hash function. DCI Director Neha Narula explained the findings in a post on Medium. She says the DCI reviewed the IOTA source code in July and were concerned when they found that IOTA developers had invented their own hash function:
“We found that IOTA’s custom hash function Curl is vulnerable to a well-known technique for breaking hash functions called differential cryptanalysis, which we then used to generate practical collisions. We used our technique to produce two payments in IOTA (they call them “bundles”) which are different, but hash to the same value, and thus have the same signature. Using our techniques, a bad actor could have destroyed users’ funds, or possibly, stolen user funds.”
The IOTA developers had written their own hash function, Curl, and it produced collisions, when different inputs hash to the same output. Cryptographic hash functions are important for cryptocurrencies because usually a transaction is hashed before it’s signed. If you can break a hash function, you can potentially break signatures as well, meaning that the mechanism used to determine if a transaction is a valid and authorized spend is broken. The mathematical integrity that cryptocurrencies provide hinges on this relationship being secure.
The cryptocurrency is still new, making it vulnerable, and creating price volatility especially when news like this break. But despite the price drop, on a monthly basis, it is still up 16%. Considering that the error was detected and reported by reputable researchers, and the flexibility and speed the IOTA team shown in fixing the bug, will eventually boost confidence. In the long run, robust and useful technologies will emerge from the use of IOTA.
News Item 3: Bitcoin in the Browser: Google, Apple and More Adopting Crypto-Compatible API
Decrypted: Initially conceived in 2013, the World Wide Web Consortium (W3C) has been working with Microsoft, Google, Facebook, Apple and Mozilla, to create a currency-agnostic web payment standard.
The new browser crypto API will allow browsers to easily support cryptocurrencies directly in the browser.
Our take: These days the majority of online shopping is happening on mobile devices and more than 66% are through mobile browsers, not native apps. This is a pain for most users, because each web site has its own flow, and most require users to manually type in their information (addresses, contact information, and payment credentials) over and over again. In most cases, people don’t complete their purchases, and conversion rates on mobile are much lower when compared to desktop purchases. Also, on the development side, its difficult and time-consuming to create and maintain checkout pages that support various payment methods.
With W3C’s Payment Request API, online merchants will be able to use simple standard ‘in-browser API’ to initiate payments from their checkout pages, regardless of what payment method consumers may prefer to use from their side. This exciting browser innovation clearly simplifies merchant-side integration requirements, but at the same time, it completely changes the dynamics on the consumer side as well. W3C’s Payment Request API streamlines the checkout process, making the experience consistent and faster for users.
How does it work? Its pretty simple. The browser saves the user’s personal information, billing address, shipping address and payment information in a safe way. When a shop requests the data the user gets prompted to allow transfer of data. This is done on the client side, meaning there is no communication to third-party providers needed and the data , once approved by the user , is just passed from the browser to the site. A website using Web Payments can request the user’s stored data, provide a list of accepted payment methods, process that data and send it to its server , entirely skipping the checkout.
The new payment API supports several currencies and browsers. On the currency side it will support Bitcoin, fiat digital currencies and other cryptocurrencies, and for browsers all the big ones: Google Chrome, Microsoft Edge, Apple Webkit, Mozilla Firefox, Samsung Internet Browser and Facebook in-app browser.
The long term potential of this API is exciting, because it will eventually allow users to ditch card numbers, for new, secure and open payment methods. It drastically decreases the steps from adding products to the basket to confirmation of the purchase. In the best case the user only has to grant access to the data, and in the worst case, when no data is stored yet, the user needs to be entered it once, just the first time, and then never again.
Opinion: Jamie Dimon: Bitcoin Is a ‘Fraud’
“Frenemy” is an oxymoron of “friend” and “enemy”. It refers to someone that combines the characteristics of a friend and an enemy. Someone with whom we are friendly and at the same time we dislike or rival. The term is used to describe personal, geopolitical and commercial relationships both among individuals and groups or institutions.
For banks, Bitcoin and other cryptocurrencies are frenemies. On one end banks and governments are exploring and experimenting with cryptocurrencies and blockchain, because they see the innovation and disruptive transformation they bring to the table, but on the other end they see them as a huge rival that can jeopardize their core businesses.
So here comes the head honcho of a major bank, that basically said Bitcoin is a fraud, not a real currency, and that he would fire any employee trading Bitcoin for being “stupid.” Jamie Dimon, JPMorgan’s CEO, has been a long time critic of Bitcoin, dismissing the digital currency’s survival, back in November 2015.
Not long ago, in February this year, JP Morgan Chase, joined a group of 30 big banks, tech giants, and other organizations to create a group, called the Enterprise Ethereum Alliance to demonstrate a pilot of the financial technology and show off a spot trade on the foreign exchange market for global currencies, using an adaptation of Ethereum as the settlement layer.
Banks seem to be far more interested in blockchain, the technology behind Bitcoin. The reason they are so interested in distributed ledger technology, is because they think its a way to respond to the competitive threat that Bitcoin poses to traditional money. Banks and the governments that regulate fiat currencies, recognize that cryptocurrency is one of the few innovations that can securely and efficiently create and handle money, far beyond their control.
Banks want to adopt the efficiencies without the decentralization, the global nature and the low cost without loosing control. But you can’t have Bitcoin’s revolutionary nature, while removing all the things that make it innovative. I think Andreas Antonopoulos explains it best when he talks about why you can’t separate Bitcoin from blockchain:
“The big invention behind Bitcoin is not the currency, but it’s also not the blockchain. The blockchain, as a hash-chain set of blocks, is really not that novel and not that interesting. What is really interesting is the combination of all four things together, and the important thing we haven’t mentioned is the Nakamoto Consensus. The Nakamoto Consensus being the ability to agree on a set of consensus validation rules for transactions and blocks that are then implemented through a competition using proof of work”.
The belief that you can separate Bitcoin and blockchain is flawed. If you remove Bitcoin (reward) and the Nakamoto consensus mechanism, what you have left is a slow database that needs central control and oversight to work. So how is this different from what is in place today? Sounds to me like an existing centralized system, where you need to trust someone, because they say you should trust them, and not the math (known as a proof-of-work calculation).
Sometimes it’s hard to tell true innovation from fraud. In 1903, the president of Michigan Savings Bank told Horace Rackham, an early stockholder in Ford, that the “the horse is here to stay but the automobile is only a novelty.”
The Internet has forever changed the world, and continues to transform our lives. Bitcoin and blockchain will restructure finance, even though most banks today see it as a big threat that can wipe out how they make money. Banks want to transform their industry, but in reality they can’t imagine disruption that changes the fundamental principles of what they do. Those that embrace change instead of fighting and calling it a fraud, will be the one’s that thrive in the new and emerging financial system.
Ilias Louis Hatzis is a Blockchain entrepreneur who writes the Blockchain Bitcoin & Crypto (BBC) Weekly CXO Briefing each Monday.
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