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.
News Item 1: Bitcoin splits as new currency takes off
Decrypted: On August 1st, Bitcoin split in two, as miners agreed to split Bitcoin's blockchain into two chains. The split comes after a much heated discussion, that's been going on for years, about the future of Bitcoin. The Bitcoin community has been divided in two camps that debated how to solve Bitcoin's scaling issue. With over 90 percent of the community voting in favor of SegWit2x, it looked like the hard fork would be averted. Instead, roughly 15 percent of the BTC mining community launched their own alternative to Bitcoin, Bitcoin Cash. Many hope that this upgrade will end the scaling debate, and eventually help establish Bitcoin as the leading global digital currency.
Our take: Bitcoin split into two coins. While the original Bitcoin (BTC) continues to exist, Bitcoin Cash (BCH) was officially born when block 478559 was mined on Tuesday.
Bitcoin is built on something called a blockchain. The Bitcoin blockchain is a public ledger containing all the transaction data from anyone who uses Bitcoin. Transactions are added to blocks that make up the chain, and each transaction must be recorded on a block. But these blocks are full, and it is slowing down transactions. Currently, there are an average of about 1,700 transactions that can be saved on a Bitcoin block, about three transactions a second. The Bitcoin blockchain has become too congested. Someone could pay for something with Bitcoin, but it wouldn't be approved for hours. That hinders Bitcoin’s wider acceptance, which partly explains why speculation remains Bitcoin's main use.
Bitcoin Cash is an attempt to solve Bitcoin's scaling issue and speed up digital transactions, by increasing the block size from 1 megabyte to 8 megabytes.
Bitcoin Cash is only worth a fraction of its parent, but its been extremely volatile showing signs of life. On the first day of trading Bitcoin Cash was around $360, reaching a high around $800. Overnight, Bitcoin Cash became the third largest cryptocurrency. But since Wednesday the new digital currency fell by 57%. On the other hand, Bitcoin's price was roughly $2,700 ahead of the split, with stable trading and ranging from $2,700 to $3,000. Still, many traders can't believe the rapid price rise for Bitcoin Cash.
Now, if you owned Bitcoin during the split, its very possible that you own Bitcoin Cash. Most Bitcoin users received an equal amount of the new currency, doubling the total amount of their Bitcoin. Even though many cryptocurrency exchanges around the world are accepting Bitcoin Cash, some popular exchanges like Coinbase and GDAX, initially decided not to support Bitcoin's new twin. But late on Thursday, they announced that they will indeed support Bitcoin Cash, giving Bitcoin holders an equal amount Bitcoin Cash. But there's a catch. Customers will not be able to access their Bitcoin Cash until 2018. The exchanges said they are safely storing Bitcoin Cash for their customers, and when they are ready to support the new token, users will be able to withdraw their Bitcoin Cash. But its very possible it might not be worth much by then. As far as trading goes, Coinbase and GDAX customers will not be able to trade until January 2018 either. The reasoning behind their decision is that they don't know how long it will last.
Bitcoin Cash's success lies in the hands of miners, that mine the blocks of the Bitcoin network. Currently, only a fraction of miners have moved over to Bitcoin Cash. In the time it took Bitcoin Cash miners to create a single block of transaction data for their public ledger, Bitcoin had created dozens, which indicates that Bitcoin Cash doesn't yet have the horsepower to take on Bitcoin.
Bitcoin Cash has yet to articulate its value proposition in a clear way. Bitcoin Cash solves transaction delay issues that have plagued Bitcoin up to now. But security has been a major concern. The Bitcoin Core camp fears that larger block sizes could lead to major problems, which is the primary reason they are not willing to endorse such a radical increase to block size. The long-term future for Bitcoin Cash depends on its ability to create utility and value for the ecosystem that grows around it.
For now its not clear what the future holds. But, regardless whether Bitcoin Cash is ultimately successful, cryptocurrencies need to make technological progress and move past their current status as glorified poker chips. To become actual money, that is accepted everywhere for any transaction, cryptocurrencies must become convenient and allow instant processing.
Decrypted: Blockchain startup Billon Group received almost two million euros from Horizon 2020, the EU’s biggest research and innovation program. The blockchain company announced the successful closing of its first round of funding. The new injection brings total funding for the company to $5 million.
The company plans to use the money to expand its blockchain technology beyond instant corporate payments, support the launch of e-commerce and content monetization solutions, and provide additional investment in sales, marketing, compliance and operation.
Our take: Billon Group disrupts fundaments behind money, changing the way its stored and moved between people and organizations. They have created an instant payments system based on distributed ledger technology that supports all national currencies. Their platform is compliant with financial regulations, eliminating time and distance barriers.
The 2016 Global Payment Report by Worldpay, shows that alternative payment systems are increasing in popularity in various markets around the world. Also, eMarketer reports that retail e-commerce sales are expected to grow from $1.915 trillion in 2016 to $4.058 trillion in 2020.
EU's investment in Billon makes sense. It as allows users to send money to people and organizations in real-time, capitalizing on the opportunities presented by these increasing trends.
Blockchain and distributed ledger technology has been one of the main topics the European Union has focused on, over the past year. Despite uneasiness with cryptocurrencies, the EU has a positive outlook on blockchain and digital ledgers, pursuing several initiatives.
A year ago, in July 2016, the European Commission adopted a proposal for legislation to amend the 4th Anti-Money Laundering Directive (4AMLD) that will bring virtual currency exchanges and wallet providers into the EU’s anti-money laundering framework.
In February, the EU released an in-depth analysis that stated regulation could provide innovators with guidance as they develop the digital ledger technology in the EU. The analysis acknowledged the increased risks from virtual currencies, but called for a moderate regulatory approach in order not to hamper innovation at such an early stage. The analysis also set forth a list of key areas currently associated with blockchain technology, such as currencies, digital rights management, patents, e-voting, smart contracts, and supply chains. Its also suggested that the European Union expects more member states to face questions regarding blockchain and digital ledgers, beyond Germany, UK, and Estonia, where blockchain technology is gaining traction.
Last year, the EU Commission announced an initiative to give as many of Europe’s fintech and blockchain entrepreneurs the opportunity to become world leaders, giving them access to potential investors, business partners, research centers and universities.
Horizon 2020 is part of EU's overall blockchain strategy. Horizon 2020 is the largest EU Research and Innovation program ever, with nearly €80 billion of funding available over 7 years (2014 to 2020). The goal of the program is to ensure that Europe produces world-class technology, removes barriers to innovation and makes it easier for the public and private sectors in creating innovation. An option offered within Horizon 2020 is the possibility for SMEs to apply without project partners. The grant can cover from 70% to 100% of the project costs and can amount to as much as €2.5-5 million for each project. In July, Horizon 2020 announced that it selected from 16 countries 64 SMEs for funding. It will be investing €97 million, to help these small businesses bring their innovations to the market.
Also, back in April the European Commission announced its plans to establish a European Union Blockchain Observatory, in response to a European Parliament mandate to strengthen technical expertise and regulatory capacity. The project, that was announced on the Commission's website, includes an observatory and a forum to gather input on distributed ledger and blockchain technology. The goal is to establish an EU expert resource for forward-looking blockchain topics and develop EU use cases. Another goal of the initiative is to assist the EC in determining what role government authorities can play to encourage the creation of such technologies and to develop policy recommendations.
Also, the ECB has been on the lookout for ways to improve the efficiency and lower the costs of its market infrastructure, in the fields of payment transfers, securities settlement and collateral management. Last year the Eurosystem, which comprises the ECB and the national central banks of the euro area, launched a central bank service called TARGET2-Securities (T2S). Just like DLT, it is expected to be a game changer. T2S aims to change the European post-trade landscape, not only by offering an integrated settlement service in central bank money for securities transactions, but also to bring post-trade harmonization beyond what has been seen before. Together with TARGET2, the Eurosystem’s cash transfer system, T2S forms the cornerstone of financial markets in Europe.
In June, the EU’s Financial Technology Task Force requested feedback from stakeholders on how technology like blockchain and DLT will impact the European financial services industry.
In addition, the European Securities Market Authority (ESMA) stated that it would closely monitor EU market activity related to DLT. ESMA recently released a consultation document on the DLT applied to securities markets, reviewing its possible applications, benefits, risks and how it maps to existing EU regulation. ESMA’s position is that regulatory action is premature, as technology is still in early stage of development. ESMA believes that DLT could benefit small-to-medium enterprises (SMEs) by enabling the issuance of securities by the firms. SMEs could potentially reduce the cost of access to finance. In addition, the regulator stated that DLT could potentially remove the need for duplicate records and multiple reconciliations by providing a “record of ownership of unlisted securities.
A few weeks ago, the European Commission announced the launch of its #Blockchain4EU. The project, plans to take a look at how blockchain technology and other distributed ledger technologies can be applied to non-financial sectors.
The EU has been taking important steps to become one of the leading economic blocks in the blockchain race. The EU’s strategy to invest on blockchain could just prove to be one of its best initiatives it has taken, in a long time.
News Item 3: Record ICO's Swiss Ties Raise Eyebrows
Decrypted: Last month, Tezos with its Initial Coin Offering (ICO) raised $232 million, the highest-grossing crowd sale of in the history of token sales.
Tezos is a self-amending cryptographic ledger, given that one of its central concepts is the ability for network-wide changes to be decided upon at the protocol level by stakeholders. While typical public blockchains solely reach consensus about their own state, Tezos reaches a meta-consensus around its own protocol. This enables innovation and the progressive development of a decentralized governance model.
Tezos is part of the current wave of cryptocurrency startups, that are raising money with ICOs, that might not be eligible for normal fund-raising through venture capital. Initial Coin Offerings are similar to crowdfunding. Blockchain startups offer investors the opportunity to invest in their projects by purchasing their cryptocurrency in advance. In exchange for financing the project, investors receive digital tokens at a very low purchase price. The investors expect the value of the tokens to rise over time, with the option to sell them on online exchanges, at a higher price than the initial purchase price. The entrepreneurs use the funds to continue developing their products and launch them.
But Tezos shareholders are going to get an 8.5 percent cut of the funds raised though the ICO, nearly $20 million,. This raises a lot of concerns and questions, about how the founders of projects like this might be exploiting regulatory loopholes for quick gains, before actually delivering a product.
Our take: Several weeks before the launch of the ICO, the founders of Digital Ledger Solutions, the company the owns the technology, created the Tezos foundation, a Zug-based foundation that would oversee fundraising, receive and manage all allocations, and assign token allocations.
With their Initial Coin Offering, Tezos coined the idea that founders should receive a percentage of the proceeds in fiat currency. The founders of Tezos will receive 8.5% of all the money contributed to the fundraiser and they will also receive 10% of the tokens through Digital Ledger Solutions (DLS). The money won't stay within the Tezos Foundation but will go to Digital Ledger Solutions, which basically owns and founded the Tezos Foundation, but operates independently. The Tezos Foundation then will also receive 10%, whilst the actual people behind DLS and the Tezos Foundation are the same.
The cash outflow will occur within 3 months of Tezos being successfully launched. I think its important for founders to get their fair share, but in the case of Tezos the payout, in cash and tokens, seems to be a quite high. Tezos has raised eyebrows as one of the few ICOs with an unlimited fundraising goal, and a structure of payouts designed to compensate the development team and early backers. Practically, this means that even if the entire project successfully launches, but fails, the founders will still walk away with a very handsome payout.
This raises a lot of questions about the ethics of an uncapped ICO that directly rewards developers with a portion of total funds raised. What is the incentive for the founders to continue working on project, if they are guaranteed an exit before they even start?
But, it looks like Initial Coin Offerings, are about to undergo a lot more scrutiny. With the recent announcement by the Securities Exchange Commission (SEC), US regulators are taking their first shot at deflating the mania surrounding ICOs, declaring that many of the digital tokens should fall under the country’s securities laws. The SEC is wants to remedy cases when companies issue tokens with the promise of delivering a product, and never actually deliver it.
In the case of Tezos, there are many conflicts of interest, unlike TheDAO. The largest ICO ever, solicited US investors and funneled cash to a US entity, while the founders will walk away from their ICO with a huge pay day.
Potentially, Tezos looks like it could be on the top of SEC's list. It's no surprise that Tim Draper, an investor in Tezos, called for the SEC to exempt certain ICOs from the repercussions of its ruling.
The Chinese government has had to address several different problems. One of their biggest is the growing number of capital outflows that is hurting the Chinese economy. Despite the government's best efforts to curb outflows, money is still leaving China at an accelerated pace.
Today, under China’s currency laws, a Chinese citizen is only allowed to make a single outgoing transfer of $50,000 USD per person, per year. Yet, Chinese investors have used severals tactics to move funds out of the country. They are buying foreign stocks, converting money to mutual funds, buying real estate overseas in countries like the UK and the US., and participating in the EB-5 program, by investing $1 million in US. based projects.
Contrary to popular belief, up to now Bitcoin was not one of the methods used to move money out of the country. Even though many people entertained the idea of using Bitcoin to circumvent China’s capital controls, in reality it was mostly media hype. But with the government crackdown on loopholes and other traditional methods, people are exploring new ways, which include the use of Bitcoin.
The biggest problem that Chinese investors face when using Bitcoin to evade Chinese capital controls, is that there’s no guarantee on the exchange rate. But its not the only problem. In the past exchanges halted the ability to withdraw coins and now withdrawals have daily limits and can only be withdrawn in yuan.
But, despite the country's tightening of capital controls, there are still more cost effective and efficient ways to move money abroad, than buying and selling Bitcoin. Even though all of these methods have limitations and most are not even legal, people still use them.
Ilias Louis Hatzis is a Blockchain entrepreneur who writes the Blockchain Bitcoin & Crypto (BBC) Weekly CXO Briefing each Monday.
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