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: Delaware House Passes Historic Blockchain Regulation
Decrypted: Delaware passed a landmark blockchain legislation that recognizes the trading of stocks using blockchain technology. Delaware is the home to more than 66% of Fortune 500 companies, 85% of IPOs, and where many private companies and startups incorporate.
This new bill, legally recognizes stock ledgers and other business records on blockchain, for companies incorporated in Delaware. When this is implemented, it would allow everyone to know with absolute accuracy, who owns what and in real time, trades being settle right away and investors directly owning their shares with no possibility of a company having more shares issued and outstanding, than were actually authorized.
The new law is big news. Its a first step towards a formal recognition of blockchain and creating the right environment for new blockchain innovations, while putting Delaware at the forefront of regulating this emerging space in the United States.
Our take: The Dutch East India Company gave birth to the practice of issuing and trading shares of stock in 1602. It’s considered to be the world’s first company to issue shares of stock to the general public and to be listed on an official stock exchange. Today, just about every economy in the world has a stock exchange. The practice of trading shares and payment settlement still remains archaic, even though electronic and Internet technologies has changed the means by which trading is conducted.
For startups, a blockchain distributed ledger could be a perfect fit, for keeping track of a company’s ownership structure. Many companies manage their own data in spreadsheets and pay lawyers to validate the information every time the table changes.
Mostly, its perfect for public companies, with thousands of investors and millions of executed trades every day. In 2015, Nasdaq announced the launch of an enterprise-wide blockchain initiative to expand and enhance equity management, ultimately to be used to record trades of stocks for public companies. Stock trading usually happens on an exchange, matching buyers and sellers of equities and reducing the risks associated with each trade. Nasdaq intends to use blockchain to streamline financial record keeping, making it cheaper and more accurate.
But beyond Nasdaq, some of the largest stock exchanges around the world are looking at ways to leverage DLT and change traditional trading processes.
The Australian Stock Exchange is working with Digital Asset Holdings to develop distributed ledger based solution for clearing and settling trades. Japan Exchange Group and IBM are working on testing blockchain technology for trading in low transaction markets. Korea Exchange has launched Korea Startup Market (KSM), using blockchain technology to enable equity shares of startup companies to be traded in the open market. In November 2016, Deutsche Börse and Deutsche Bundesbank presented a functional prototype for the blockchain technology based settlement of securities. In early 2017, India’s National Stock Exchange and a group of local banks collaborated on a KYC (know-your-customer) trial involving blockchain. The Luxembourg Stock Exchange has already introduced a security system using blockchain. As part of the PDTL Group, the London Stock Exchange is involved in ways to improve the post-trade using the blockchain technology.
Blockchain technology gives regulators and securities commissions, a new and more efficient way of managing stock trades, reconciliation, payments and settlements, clearing, and share registration. Distributed ledger technology is ideal for the equity trading ecosystem, allowing the exchange of instruments with no risk to either party, and in the shortest time possible.
Just like the Illinois Blockchain Initiative, Delaware is passing laws and working with blockchain companies, to create the regulatory framework and infrastructure to drive blockchain innovations.
The new Delaware legislation is an important piece of law, but remains a small step, especially when you compare it to regulations in countries like Japan and Australia that recognize Bitcoin as a legal form of payment. The federal government’s disconnect from Bitcoin and blockchain technology, can only drive individual states to push their own regulations, potentially creating future challenges for businesses that to build their operations on the the laws of any single state. Whatever avenues the federal government pursues, it will have to move quickly if it wants to be relevant.
News Item 2: Hackers Steal Billions in S.Korean Won by Hacking 4th Largest Bitcoin Exchange
Decrypted: Big news this week was the recent Bithumb hack. Bithumb, one of the largest Bitcoin and Ether exchanges in the world, was hacked resulting in a loss of hundreds of thousands of dollars worth in Bitcoin, Litecoin, Ethereum, Ripple and Ethereum Classic. Roughly 30,000 customers’ data was compromised and over $870,000 of coins stolen.
The company claims that its core servers were not compromised, and the personal information, user mobile phone numbers and email address, were leaked from an employee’s personal computer.
Even though Bithumb is planning to reimburse its customers that lost money in this breach, once again this incident raises serious questions about security and how exchanges and users, that hold bitcoin and other altcoins, can protect themselves.
Our take: Over the years, major Bitcoin exchanges have been hit again and again by hacks. You can find a ever growing list of Bitcoin exchanges that have been hacked at the Blockchain Graveyard. While these incidents can be damaging to the reputation of the company being hacked, ultimately they hurt the credibility of the entire industry and the people that end up loosing their money. No exchange or service provider is immune to security hacks. As the cryptocurrency market continues to get bigger, the attempts to steal will become more frequent and elaborate. Prevention is key.
Bitcoin makes it easy to transfer value anywhere and be in control of your money. But with great freedom comes great responsibility, primarily when it comes to security. You wouldn’t leave your wallet unattended, would you? Every day we make sure to keep safe our physical wallets, credit cards and other personal information. We need to take the same measures when it comes to our cryptocurrency. We need to make sure that our digital wallets are secure and not just rely on exchanges to keep our Bitcoins safe.
When we choose to store our Bitcoin in a custodial wallet or exchange, we are giving the exchange control over our bitcoins. Historically, 99% of stolen coins were never recovered. Unlike a credit card transaction, a transfer of a cryptocurrency is irreversible. Therefore, I think the responsibility needs to be a shared between users and exchanges.
Since the Mt. Gox hack for $450 million in early 2014, Bitcoin security has come a long way. Today, many exchanges have adopted strict security processes and technologies, including cold storage, multi-sig wallets, segregated client accounts, external audits of systems and two-factor authentication (2FA). But its the customer’s responsibility to use them correctly, otherwise risk sophisticated forms of social hacking or the physical access and tampering of devices.
Most of the time the human factor puts wallets at risk. Users can protect themselves by selecting reputable vendors and holding their keys in multiple wallets, using hardware wallets or paper wallets, making sure their phone carrier has in place a “do not port” on their mobile phone number, and use password managers, 2FA and Google Authenticator for two factor on their phone.
This is a grey area that needs regulation, in order to define the rules for everyone involved and to define the obligations for exchanges and customers. On one hand there is no question that exchanges need to follow procedures to keep funds safe and impose deposit insurance in the case of hacks, but on the other hand, users also need to take security measures and keep their cryptocurrencies safe and sound.
News Item 3: Smart Contracts for Bitcoin? Lightning’s Tadge Dryja Is Working on It
Decrypted: Tadge Dryja, a well-known Bitcoin developer has published a new proposal for how smart contracts could be added to the blockchain network. He came up with a method of adding some smart contract functionality to Bitcoin in a way that he believes could preserve both privacy and scalability.
Over the last year, Ethereum has gained a lot of attention, because the platform enables the execution of smart contracts. Simply put, smart contracts are a digitized version of a traditional contract. Smart contracts are computer programs that run on a blockchain and can be programmed to self-execute when certain conditions are met. Initial Coin Offerings (ICOs) are usually built on top of Ethereum and have been one of the biggest stories in cryptocurrencies over the past few of months. Smart contracts provide a tremendous advantage, allowing us to automate many processes throughout e-commerce, finance, real estate, legal contracts and anything else imaginable.
Our take: Smart contracts are an integral part of the cryptocurrency and blockchain ecosystem. Most people know Ethereum for its smart contract technology, but there are projects out there focusing building smart contract technology on other blockchains, including Bitcoin as well.
As unlikely as it may sound, smart contracts have been available to Bitcoin for some time. Many researchers and experts have looked into a wide range of solutions and technologies to use the Bitcoin blockchain as the foundation of a smart contract platform.
Through the Bithalo project, we can effectively create contracts for Bitcoin, which auto-complete based on certain milestones and events. Another, Rootstock (RSK) is a smart contract platform that is connected to the Bitcoin blockchain through sidechain technology. Although the smart contracts aren’t actually deployed on the Bitcoin blockchain itself, RSK allows users to send Bitcoin directly onto the Rootstock chain, which are then converted into smart Bitcoins on the Rootstock blockchain.
Lightning Network is the most ambitious smart contract project the Bitcoin ecosystem has produced so far. Lightning takes the technology behind payment channels and creates a network of these channels, using smart contracts to ensure that the network can function in a decentralized capacity without counterparty risk. Lightning was modeled after former Bitcoin developer Mike Hearn’s work and Blockstream co-founder Matt Corallo’s payment channels. The basic concept behind the innovative Lightning Network is that by using Hashed Timelock Contract (HTLC) to multi-party contracts, it allows receivers to pre-determine the amount of transaction or the transaction itself before actually receiving it. Lightning can be fully utilized as a smart contract platform in the sense that users can agree to receive or send certain amounts of money prior to signing the actual transaction with a cryptographic proof.
Smart contracts are an exciting way to increase Bitcoin’s value proposition. Companies and projects will use the Bitcoin blockchain to integrate more smart contract functionality in the future. It looks like 2017 will be the year Bitcoin introduces them to the world, allowing enterprises and corporations to experiment with Bitcoin to settle smart contracts.
Opinion: Are cryptocurrencies about to go mainstream?
In 2008, a whitepaper was released under the pseudonym of Satoshi Nakamoto, describing the first modern cryptocurrency initiative. The idea combined concepts of decentralization, perfect anonymity, finite supply and blockchain technology to pave the way for what we know as Bitcoin.
Last week a message on 4Chan started a rumor that Vitalik Buterin, Ethereum’s founder, was killed in a car crash, but not before Ethereum’s market cap went down by $4 billion.
A lot has changed in the last 9 years and the crypto market is booming. Since the start of the year:
Bitcoin has tripled in value, reaching a market cap of $40 billion.
The Singaporean dollar was tokenized. Central banks are exploring the use of cryptocurrencies. The People’s Bank of China has run trials of its prototype cryptocurrency and the Danish central bank is considering a digital-only e-krone.
Japan recognized virtual currencies like Bitcoin as a legal method of payment that can be used as a means of payment.
The Digital Trade Chain Consortium is working with IBM to build a digital trade platform for SMEs.
A recent IMF report suggested that banks should seriously consider investing in cryptocurrencies.
Dozens of startups have already completed ICOs, with 30 raising about $540 million.
If 2015 was the year that financial institutions realized the power of blockchain technology, 2016 was the year that Bloomberg quoted Bitcoin as being the best performing currency and 2017 holds the promise to be a breakthrough year for cryptocurrencies and blockchain technology. While it remains to be seen how things play out, Bitcoin and altcoins have the potential to dramatically change how we conduct transactions on a global scale.
Ilias Louis Hatzis is a Blockchain entrepreneur who writes the Blockchain Bitcoin & Crypto (BBC) Weekly CXO Briefing each Monday.
Get fresh daily insights from an amazing team of Fintech thought leaders around the world. Ride the Fintech wave by reading us daily in your email.
BCH is a new crypto