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.
Decrypted: Sam Altman, the president of Y Combinator, expressed his interest in adopting blockchain for investment purposes, while speaking at the recent TechCrunch Disrupt conference. Altman said that he wants to democratize the process: “We are interested in how companies like Y Combinator can use the blockchain to democratize access to investing”.
Y Combinator wants to give people another way to invest in startups that it works with, using the blockchain and cryptocurrency to offer wider access.
Our take: Y Combinator has helped numerous Silicon Valley giants get started. In recent years it has also invested in several startups in the crypto space: Coinbase, Blockstack, Serica, Bitaccess, Shift Payments, Buttercoin, TradeBlock, SFOX, Filecoin, Zenbox.
Now, Y Combinator is looking at ways they can leverage the power of cryptocurrency and blockchain, to get investors to back their startups and broaden the investment pool. The accelerator has shown interest in adopting blockchain and is currently working out legal factors that need to be taken into consideration before such a system can be put in place.
While Y Combinator showed interest in blockchain, when Alman talked about ICOs, he expressed reservations: “Do I think ICOs are silly, bordering on scams? Yes, they are, but, there are a few that are important, and the blockchain is more important than not… ICOs need to be regulated.”
Y Combinator is not the only one looking at blockchain for investments. Sequoia and Andreessen Horowitz and other large VCs have backed Polychain and MetaStable.
In recent weeks ICOs have been in the eye of the storm, with China’s ban on ICO funding in early September. Several regulators around the world have commented and issued warnings and are looking at ways to control ICOs: Japan, Singapore, Canada, South Korea, Hong Kong, Russia, England, and the United States,.
Everyone is taking a closer look at ICOs. Canada wants to create a middle ground that allows ICOs to exist within current regulatory structures, while countries like the Isle of Man and Gibraltar want to create frameworks that allow ICOs to be legally compliant.
In May of 2017, Gibraltar’s Digital Currency Summit explored ideas to grant legal status to companies with a focus on blockchain, as well as to companies conducting ICO’s. In early September, the Isle of Man opened up its doors to entrepreneurs looking to launch Initial Coin Offerings. In 2014 and 2015, it outlined rules and legislation for businesses that handle or exchange digital currencies and continued to develop a regulatory framework which will allow token sales to be compliant with anti-money laundering (AML) and know-your-customer (KYC) regulations. Having completed an ICO test case launched by Adel, a fintech incubator which incorporated on the island, the Financial Services Commission has put their principles of regulation into action.
But competition may also come into play between regulators. We already saw an example of cantonal competition in Switzerland, where the municipality of Chiasso recently announced it would be accepting Bitcoin for some tax bills, as the mayor hinted at competition with the nearby Swiss canton of Zug. Another example are the statements made by the Isle of Man’s Department of Economic Development, where one official was quoted as saying “Our understanding and analysis of the ICO market is that it represents a massive vertical market for us”.
Its clear that cryptocurrencies, blockchain and ICOs have tremendous potential and can drive economic development. We can expect to see further regulatory development and competition between nations, regions, and municipalities, as everyone tries to get a better grasp of things.
Decrypted: The Raiden Network has now entered live testing, the final stage before it’s deployed into production. The Raiden Network is an essential part of the Ethereum ecosystem and one of the most important scaling solutions.
The Raiden Network is similar to the Lightning Network. It’s an off-chain scaling solution, enabling near-instant, low-fee and scalable payments. It’s complementary to the Ethereum blockchain and works with any ERC20 compatible token.
Also, its been posted that the Raiden Network plans to launch an Initial Coin Offering (ICO) this October, to further fund the development of the payments protocol.
Our take: As the market cap for blockchain assets is around $130 billion, blockchain platforms have been plagued with scaling problems.
Blockchains don’t scale well because they need a global consensus on the order and outcome of all transfers. Every participant needs to know about all the updates to the shared ledger. Hardware and bandwidth constraints set a limit on the number of updates per second, that can be shared in a decentralized network. The basic idea of the Raiden Network is to avoid the blockchain consensus bottleneck. This is done by leveraging a network of payment channels which allow to securely transfer value off-chain, without involving the blockchain for every transfer.
The Raiden Network has been in development for almost two years. Along with the Raiden Network, there have been a few other innovative projects attempting to ensure that decentralized applications can run as easily and at scale, as centralized apps run today. Truebit and Plasma have emerged as innovative ways to solve Ethereum’s scaling problems.
Plasma, which is the brainchild of Joseph Poon (co-author of Bitcoin’s Lightening Network) and Vitalik Buterin (founder of Ethereum), is trying to solve the scaling problem, using “baby” blockchains”. The system connects child blockchains to the main blockchain, with something called fraud proofs. This concept is similar to the Lightning Network, an idea Poon described a couple years ago for Bitcoin.
While Raiden’s ICO hasn’t been officially announced yet, a couple of days ago on their blog, Raiden Network developers announced that they decided to create a special token (RDN), that will be used for fees paid on the Raiden Network. The existence of this Raiden Network Token means that for most users, every transaction on the Raiden network will require the users to pay a fee that that can only be paid using these special tokens.
The Coindesk article says that the funds raised by the ICO in October, will be used to further develop the network. The ICO will be performed in a dutch auction manner, similar to Gnosis, meaning the price of the tokens would decline in cost over the course of the token sale.
Scalability remains the holy grail of blockchain technology and one of the main challenges faced by distributed ledger technology. The transaction throughput of blockchain technologies is still orders of magnitude behind that of mainstream financial networks. This hinders their widespread adoption. In order to challenge traditional payment networks and assume a key role in the decentralized future, blockchains must find ways to radically improve their throughput, measured in number of transactions per second.
We need to be working more on protocol layers for both scaling transactions and also scaling security protocols. Technologies like Raiden and Lightning can help change that.
Decrypted: The prosecutor’s office in Russia summoned Burger King to explain the issuance of its cryptocurrency, the Whoppercoin. A month ago, the fast food giant launched its blockchain token with a supply of 1 billion Whoppercoins. Customers receive one Whoppercoin for every ruble they spend. With 1,700 Whoppercoins, they can buy a Whopper burger.
While the Whopper cryptocurrency is a bit of a gimmick, customers can still trade and transfer the coins, just like any other cryptocurrency.
Our take: The WhopperCoin concept is an out-of-the-box approach to a rewards program but not without some risk. A proposed Russian legislation last year included possible jail time for Bitcoin users. Within the territory of the Russian Federation the turnover of any currency other than Russian rubles is banned.
Burger King in Russia issued a cryptocurrency called Whoppercoin in August, entering crypto market with a blockchain loyalty program, that allows customers in Russia to earn a coin for every ruble spent at BK. The cryptocurrency is hosted on the Waves blockchain platform and lets users trade the token with other users on a peer-to-peer exchange, for other cryptocurrencies as well as fiat currencies.
A study by Colloquy suggests, US consumers alone held 3.8 billion memberships in customer loyalty programs. More than 75% of adults in the United States participate in customer loyalty programs, like those offered by credit card companies, hotel chains and retailers and more than $50 billion in reward points and miles are issued by businesses annually. Loyalty programs are one of the most effective ways for merchants to boost customer retention.
While part of the WhopperCoin initiative seems like a fun and clever marketing ploy, cryptocurrency offers the perfect use case for reward tokens. It has the potential to be truly disruptive and reshape the way brands interact with consumers and consumers interact with each other. These tokens can effectively become private currencies issued by businesses or non-profit organizations, that would reward people’s loyalty.
Building a loyalty program on blockchain means anyone can send to someone else, the tokens they have received from the brand, potentially opening up a secondary market. You could trade on an exchange the tokens you’ve received from Brand A, with anyone willing to buy them, for tokens from Brand B or for fiat currency. In a sense exchanging your Burger King tokens, for Starbucks tokens, BTC, altcoins or US. dollars.
Applications like this present serious potential for building long-term loyalty, as these token can then be easily exchanged with other customers, creating repeat purchases of products. Blockchain can streamline the execution and administration of loyalty rewards programs, giving all participants near-real-time transparency, within the permissioned constraints set by the program provider. And besides integrating with, and enhancing, legacy systems that currently operate loyalty rewards programs, loyalty rewards providers can control exactly how they and their customers interact in the interlinked network to which blockchain provides them access.
There are several platforms out there that anyone can use to create their own coins on top of their existing blockchain, saving all the trouble from building your own. These include platforms like NXT, Counterparty or Waves.
Burger King Russia is calling their coin a cryptocurrency: “Now Whopper is not only burger that people in 90 different countries love – it’s an investment tool as well. According to the forecasts, cryptocurrency will increase exponentially in value. Eating Whoppers now is a strategy for financial prosperity tomorrow“.
I’d probably end up dead long before, if I had to eat my way through all these whoppers to ensure financial prosperity with WhopperCoins. However, crypto loyalty programs can certainly offer unique opportunities, not just to incentivize customers to spend more money with a brand, but to also give them genuine rewards.
China’s actions reflect views that cryptocurrencies have no intrinsic value backing them, operate without any kind of government control and pose a risk of destabilizing the entire financial sector.
Jamie Dimon’s recent prose could have been written in China. His beef is with Bitcoin, not blockchain. He believes that Bitcoin and other cryptocurrencies are a fraud that will potentially hurt trusting investors. A couple of days ago, in another statement while in New Delhi, Dimon was quoted saying about cryptocurrencies: “It’s creating something out of nothing that to me is worth nothing“.
He’s not alone in this rhetoric. In the UK, Schroders, an investment company, backed China’s decision days after the ban was announced. Its strategist Huw van Steenis wrote “Why central banks should clamp down on cryptocurrencies“: “We should expect more central bankers to look to outlaw or crimp their use. This will be most acute in markets which are worried about capital flight and organized crime“.
China is a key center for cryptocurrencies and the home to the vast and lucrative cryptocurrency mining operations for Bitcoin, Ethereum and other altcoins. Chinese exchanges, Bitfinex, OkCoin, and BTCC, made up over 45% of the global market share over the last 30 days. Also, Bitmain, the largest manufacturer of Bitcoin mining equipment, is a Chinese company.
China is important. The extreme decisions by Chinese regulators are not a real problem for Bitcoin and other crypto in the long run.
The reality is:
- Large financial hubs around the world are supporting Bitcoin and other digital currencies (Japan, South Korea, Singapore etc).
- A day after China announced the ban on ICOs, Bitcoin’s price dropped from $4900 to below $4200 and prices of Ethereum and other cryptocurrencies also dropped. But, the impact was short-lived. Within two days of the announcement, prices climbed above $4600, suggesting that the market had brushed off the likelihood of a regulation-triggered tumble in prices.
- The global Bitcoin exchange market is adjusting. The vast majority of trading volume from the Chinese market has moved to Japan and South Korea. Earlier this week, the South Korean Bitcoin exchange market officially overtook China to become the third largest bitcoin market in the world, behind Japan and the US.
- China isn’t shutting down exchanges, they’re forcing them to get licensed and adhere stricter guidelines.
- The PBOC wants to introduce a digital yuan that will serve as a CNY tether.
Charlie Shrem, an early Bitcoin entrepreneur tweeted about China’s long-term impact on the crypto market:
“This China FUD is playing on all your fear, uncertainty and doubt. China has no real effect on the future of Bitcoin. Bitcoin is about censorship free and an alternative non government controlled financial system. China’s relevancy is diminishing by the day. They overplayed their hand and there is a reason they are being ambiguous. The only power they have over Bitcoin is the power you give them. Bitcoin puts a financial system back in our control”.
The reality is that China, understands the potential of cryptocurrency. The Chinese Government wants to know how its currency flows through the market, through regulated exchanges, and make crypto work in their own market.
Yes, China is an important market and the news about exchanges shutting down and ICO funding being banned, certainly has a short-term negative effect on the prices. While Internet businesses like Google and Facebook have been banned in China, they are still doing well. Bitcoin and digital assets are a global phenomenon. We can expect Bitcoin and the entire cryptocoin market to do well, regardless of the words and actions of the small-minded, that are trying to halt change.
Ilias Louis Hatzis is a Blockchain entrepreneur who writes the Blockchain Bitcoin & Crypto (BBC) Weekly CXO Briefing each Monday.
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