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: South Korea Officially Legalizes Bitcoin, Huge Market For Traders
Decrypted: South Korean has made Bitcoin legit. The South Korean government has decided to pass a bill that would make Bitcoin transfers legal and provide a regulatory framework for Bitcoin trading platforms and exchanges.
Mr. Park Yong-jin, a member of South Korea's ruling party, is leading the changes. He is working on revisions and amendments that will provide a foundation for digital currencies in the country. One of these revisions is for the existing Electronic Financial Transactions Act and will provide the necessary legal approval for cryptocurrency transactions. The new set of regulatory frameworks for Bitcoin will facilitate the growth of the South Korean Bitcoin market.
Our take: Not so long ago, the future of cryptocurrencies in South Korea was uncertain and whether the country would take steps towards regulating digital currencies. But the recent news made the intentions of the South Korean government are very clear. The future of money is linked to cryptocurrencies and South Korea understands it.
Recent news of cyberattacks on local cryptocurrency exchanges like Bithumb, have made a significant contribution and helped create awareness to the masses about digital currencies. Also, despite the lack of regulations, the South Korean cryptocurrency market has been growing by leaps and bounds. The country has seen an increasing number of fintech startups that are building services for remittance and finance, establishing South Korea as a regional fintech hub. To further fuel this growth, the government lowered the capital requirements for Bitcoin remittance companies. Additionally, researchers from the South Korean central bank recently released a report that described how virtual currencies can coexist with fiat currencies.
South Korea recently legalized Bitcoin remittances. Worldwide, 230 million people send $580 billion in remittances each year, and South Korea, with a population of over 50 million, has a large remittance market. The most recent World Bank estimates show remittance inflows of $6.5 billion and outflows of more than $5.9 billion for S. Korea. The new regulations will create more competition in the financial services market. Traditional banks will now have to compete with new crypto players that are offering cheaper and faster services.
While interest in Bitcoin is exploding all around the globe, the jump seems to have been particularly strong in South Korea. Bitcoin has become incredibly popular in the country, with trade volumes going through the roof in recent months. This year South Korea made it to the world’s largest Bitcoin trading markets. The South Korean Bitcoin market processes over 14% of global Bitcoin trades and its the third largest market behind the US and Japan. While the South Korean government continues to legislate Bitcoin and cryptocurrencies, we can expect trading volumes to increase and the South Korean Bitcoin exchange market to surge.
Even though the new bill in South Korea is big news, its only part of the larger picture that is positioning Asia at the forefront of cryptocurrency world. Earlier this year, Japan passed a new law that officially recognized cryptocurrencies, Singapore announced it had successfully digitized its currency using Ethereum and China begun testing a prototype of its own national digital currency.
Clearly, Asia is leading the adoption and defining the cryptocurrency future. Hopefully, the rest of the world and countries like the US. will start waking up and get in the game before it’s too late.
News Item 2: $7 Million Lost in CoinDash ICO Hack
Decrypted: CoinDash, an Israeli startup, opened its planned Initial Coin Offering on June 17, in order to raise capital by selling its own tokens. The site was hacked minutes before the ICO opened to the public and around $7 million in Ethereum was stolen. The hackers broke into the Coindash website and replaced the Ethereum address that was posted on the site with their own address, so instead of money going to Coindash, the funds ended up going directly to the hackers.
While CoinDash ICO still managed to raise $6.4 million in a pre-sale to early investors, the hackers stole 43,488 Ether, around $7 million at the time of the theft, before the company discovered what was going on and was forced to shutdown their token sale. When Coindash realized what happened, they took down their website and posted announcements on the site and social media, alerting investors of the hack and urging them to stop sending money to the fraudulent address. After the hack, in an announcement posted on their website, Coindash said they would give tokens to the investors that participated in the ICO, before it was shutdown.
Our take: The CoinDash hack was not the only one this week. On a smaller scale, the InsureX ICO suffered from a similar type of hack, which caused people to send around 1,100 ETH to a bogus Ethereum address. Also hackers discovered a vulnerability in Parity's Wallet and exploiting the vulnerability they were able to steal approximately 153,000 Ether, estimated at $32 million. With the cryptocurrency market estimated at $100 billion, the concept of anonymous wealth is raising questions about the right to anonymous identity.
These hacks certainly raise a lot of questions about the state of readiness and security measures these companies are taking with their ICOs. The most important question they raise is how can you trust unknown companies to build the product they are claiming, when they cannot secure their website? Governance and trust are issues that are coming up more and more lately, when people talk about ICOs.
The CoinDash hack was very simple to execute and could of been easily prevented.
While rumors have surfaced and angry investors expressed that CoinDash ICO theft was an inside job (1, 2, 3, 4), it will be interesting to see how the CoinDash team handles credibility from this point forward, by reimbursing investors and not only, as CoinDash’s image is significantly damaged. I don't know and I don't really care if the rumors are true. The CoinDash hack could have been prevented or minimized if investors knew in advance the address where they were going to send funds to. Startups planning ICOs should publish their funding address in advance on multiple platforms, including news outlets and social media. Even if hackers mess with one site, it becomes hard for them to hack all of them.
I also read some posts about the Insurex hack, that questioned the use of a WordPress template for an ICO: "Hacks like these demonstrate why using a basic WordPress template for a company website -especially one with ICO plans- is absolutely unacceptable right now". Why? WordPress or WordPress templates are not the problem with these hacks. Its the people running them and using these technologies. They are the ones that need to make sure they plan their ICOs correctly. Sometimes when people start to see dollar signs, their vision gets blurred. Technology was not the problem with the CoinDash and InsureX ICOs hacks, instead it was blatant mismanagement and lack of proper planning. And that's why people are talking about governance, regulation and trust when it comes to ICOs. These kinds of attacks will occur more often and are proof of the lack of diligence behind some ICO projects.
Hopefully one of the items on future ICO planing checklists, will be the use of ENS. For most people, using 160 bit hexadecimal encoded hash string is not ideal. The Ethereum Name Service (ENS), brings human readable names to Ethereum, just like DNS addresses did for the Internet. ENS eliminates the need to copy or worse type, long hexadecimal addresses. With ENS, users can send money to someone at "someone.eth" instead of "0x4cbe58c50480…", and interact with a smart contract at "smartcontract.eth".
The Achilles' heel of cryptocurrencies has been the protection of private keys, that control someone's cryptocoins. Bitcoin and Ether transactions are completely transparent, and all transactions are recorded on the blockchain, a global, public and immutable ledger. On the other hand, blockchain wallets are completely anonymous. Until someone turns their cryptocurrency into fiat currency, it’s almost impossible to know who actually owns the digital wallet. Unlike fiat currencies, cryptocurrency theft is instantaneous, irreversible, and typically anonymous.
Yet, hackers have already found workarounds for turning cryptocurrencies to fiat currencies. For example, the hackers involved in the Petya/NotPetya ransomware attack used a bitcoin tumbler to basically launder the money through high-volume addresses, mixing stolen bitcoins in with legitimate transactions, making the stolen funds nearly impossible to trace.
Hacks like these make us question the security and legitimacy of ICOs and trusting unknown startups with our money. It remains to be seen if these hacks will curb the enthusiasm for ICOs, but certainly public perception is not improved by hacks like these.
News Item 3: Interview with Vinny Lingham of Civic.com
We are starting a series of interviews with people from the crypto ecosystem and today we’re kicking off with Vinny Lingham from Civic.com. Vinny Lingham is a South African Internet entrepreneur who is the co-founder & CEO of Civic and previously the founder and CEO of Gyft & Yola. Last month with Civics’ ICO, he raised $33 million and I thought it would be interesting to get his take on Bitcoin, Blockchain and the current state of ICOs.
Tell us a little bit about yourself, what you’ve been up to in the past and what led you to create Civic?
I am a serial entrepreneur. I was born and grew up in South Africa and got started in search marketing and the search economy. From there I moved to software as a service, then I got into mobile gift cards and now identity. The rational of what I’ve done is an evolution of my way of thinking of things. Initially, I started a company to make money, then as I developed a bigger view of the world, I moved to Silicon Valley and started to think of bigger problems. With my last company, Gyft, we solved the problem of physical assets, gift cards and codes, and through this process I learned a lot about identity, identity theft, how the payment world was under attack and the identity problem has not been solved. Before Civic, I had done three startups. Building companies is very satisfying, so this time around I wanted to build something big, strong, something long lasting that solves a long-term global problem and I picked identity as the space. Because I love Bitcoin and Blockchain, with my co-founder I started Civic, and eventually we want to use blockchain for voting to solve problems around democracy as a big global challenge for the world.
Growing up in South Africa, how did that impact your thinking and how did it drive you to do the things that you’re doing now?
Without doubt, being born in South Africa and witnessing the challenges, the Apartheid, the injustices, the debasement of currency, inflation and all these societal issues that you have in Africa and then coming to America and having a different view of the world, gave me a lot of insights for some ways to fix the world and make it a better place. I had a lot of drive being an underdog, and going to place like Silicon Valley you want to prove yourself. So here I am.
If personal data is immutable on a Blockchain, one cannot simply change it, what are the security risks that worry you and how do you protect against threats and hacks at Civic?
Well we don’t store the data on the blockchain, all that is stored on blockchain is verification hashes, that make sure that you can prove that you are who you say you are, and the actual data is stored on your device. If you lose your device, it’s the same as your files at home being raided. So, because every user stores their own data and the blockchain just keeps a record of verifications of that data, the risks individually are medium to low and the risks to the network are virtually non-existent. You would have to steal every person’s phone to get their data. So, if a billion people use it, you would have to steal a billion phones, and that’s not going to happen. The biggest potential risk to us, is quantum computing in about 10-15 years, but at that point we can just change the algorithms and produce some quantum resistant techniques to counter. I think there are enough people working on the quantum problem, but right now it’s not an issue and everyone believes it will be solved in time.
Civic is in a crowded space and there are lots companies trying to solve the same problem. How do you view your competition, who do you think your competitors are and how do you differentiate?
Really, we are the only company focused on building a global consumer identity brand and we’re going to continue to focus on that. Now, if someone decides to come and build a global consumer identity brand, then we’ll have a competitor to talk about. But for now, no one is doing it, we are the only ones and we’re going to keep doing what we do. Again, my guess is that doing B2B or selling to governments is kind of easy, it’s a well-defined space, but to capture the hearts and minds of consumers, well that’s not easy. We have a first mover advantage, we have a token out there, stronger than any other crypto token, from our initial coin offering and token sale. So, I think we’re in a good spot and we will continue on out exiting course and not spend a lot of time with our competitor’s products, as we are in different markets.
Being a serial entrepreneur that has raised money from VCs, what do you think of ICOs in comparison with fundraising though the traditional venture capital model?
Look, I think the venture capital model provides forms of governance and support at a micro level and what ICOs and token sales provide is lack of governance at a macro level. You go from having one or two VCs funding the business, to something like 10,000 people. The flip side is there is no real governance, so these people must really trust you. It’s all about the team. Can you trust the team to execute by themselves or do they need parental supervision? And that’s where the big time is going to happen in the space. So, I don’t think venture capital is going to disappear, but I think it’s going to be really diminished for crypto companies, to an extent. I think we will see a hybrid, where you’ll see VCs are moving earlier in the process to help smaller companies build their products and provide governance. But I think the bigger raises, the series A and B funds are going to be disrupted in this space. They can’t really compete with a crowd sale on crypto right now. I think this will become the general way of funding. The industry is going to respond negatively to these uncapped, egregious token sales, where ICOs are raising hundreds of millions of dollars, without a plan to use the funds. Pure greed to an extent. The market has reacted violently to that already and the Ethereum market is down massively because of as these uncapped projects, which create a liability towards the Ethereum ecosystem. We’ll see what happens, but I think the market will self-regulate by price and we’ll find people being a lot more circumspective of where they put their money, and hopefully slower and steadier growth will prevail. I really think, we can’t have people raising a billion dollars when they haven’t proven anything yet. It’s very harmful.
What other problems to do you see and what can be done?
Well, the I think it’s the hard fork situation of Bitcoin right now, the whole scaling debate, that’s the biggest impediment to stability in the space. With Bitcoin stable, everything else can sort of function, but it’s not stable and that presents some serious existential risks for Bitcoin now. I think the ICO mania has put a damper on the space, it’s a function of supply and demand and a matter of people disciplining themselves. Right now, even a professional trader or someone that’s in the space heavily can’t keep up with the number of ICOs and token sales happening every day. You can’t do the due diligence on all these projects, it’s just too much of a crapshoot and you don’t know what you’re going to get. As a result, you’re going to have market expense to research all these projects, even for the best of us it’s not easy to keep up, and giving people more money than they know what to do with is not a healthy situation.
I am sure you heard about today’s Coindash ICO hack. What suggestions would you make to projects planning their ICOs?
First, contact Civic, because it would impossible to happen with our technology. You must scan a QR code using a mobile app and the code can only be generated and released from our servers at Civic. We’ve done it very securely and we’re playing around with the idea of making what we did available to more companies. So, we are open to being the identity vendor and partner for preventing that sort of thing.
What do you think we can expect on August 1st with SegWit and the possible fork? Are we going to have a fork with Bitcoin?
I’ve been Mr. Doom and Gloom for six months, and nothing I’ve seen so far has made me change my mind. We may have a hard fork, but there’s definitely going to be chain split.
Opinion: Pathological BIP91/UASF Scenarios
BIP91 is locked in on the Bitcoin network, but to put things in perspective, its only the first step towards Segregated Witness (SegWit) being activated. Even though we've reached an important milestone, there are several more things that need to happen before SegWit actually activates and increases the capacity of the network.
The sole purpose of BIP91 was to lower the threshold for SegWit activation. The BIP141 proposal, which was released more than a year ago, required 95% of the miners to support it, in order to activate SegWit. In a sense, BIP91 is simply a vote on whether the existing SegWit proposal should be lowered from a 95% threshold, to an 80% threshold.
Even though more than 80 percent of the miners have signaled BIP91, that doesn’t actually guarantee anything and it doesn’t necessarily mean that these miners will finally activate SegWit.
The BIP91 lock-in is just the first step to activating SegWit on the network. The BIP91 lock-in was achieved with relative ease. The steps that follow are much more complex. So for now, there is no reason to get your hopes up just yet, as this lock-in period means nothing, until change actually happens on the network. Signaling intent for a solution and effectively supporting it, are two very different things. The number of nodes signaling for BIP148 has actually increased at a faster rate over the past week. Miners might be signaling for SegWit, but that does not mean that they are actually running the right software for Segwit2x. Things can still take a very different turn. BIP91, BIP141 and activating SegWit are only part of the equation. And let not forget November, when SegWit2x’s built-in hard fork happens.
There is a lot of speculation about that is finally going to happen, but for now we'll just have to be patient and see how things develop. But given the extremely positive reaction for BIP91, we are already seeing people who were holding off on Bitcoin entering the market again.
The market is gaining confidence, in light of a positive outcome to the scaling debate, which drove the price of Bitcoin over $2,800 this past week. I think when SegWit is activated around the end of August, we'll see the price of Bitcoin go well over the $3,500 and the entire cryptocurrency market turn bullish again, with prices surging across the board.
Ilias Louis Hatzis is a Blockchain entrepreneur who writes the Blockchain Bitcoin & Crypto (BBC) Weekly CXO Briefing each Monday.
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