Blockchain Bitcoin & Crypto Weekly CXO Briefing for week starting 27th November 2017

btc-11

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 Is 15 Times More Expensive to Keep Safe Than Gold

Decrypted: After buying precious metals, most investors are faced with the pivotal question of how to store and protect their investments. Finding the proper storage for gold or silver can be a very important decision, given their significant value.

The same holds true for Bitcoin and other cryptocurrencies. Today, with more and more people and organizations investing in Bitcoin, security is paramount.

A few days ago, Coinbase announced the creation of Coinbase Custody, a digital currency custodial service that is targeted at hedge funds and other institutional investors. The timing of the announcement is not surprising, given the meteoric rise of Bitcoin and ICOs.

But the current fees for Coinbase Custody are significant. Based on the article published by Motley Fool, that cost of storing Bitcoin is 15x more expensive, when compared to storing physical gold bars.

You would expect it to be a lot cheaper. When you consider that Bitcoin doesn’t take up any physical space, it exists only in digital form, the high cost of custody and storage sounds mind-blowing. But storing Bitcoin securely is infinitely more complicated than holding traditional securities.

The price for any product or service is usually set based on what the market is willing to pay. With the current price of Bitcoin over $9,000,  it’s easy for custodians to command high fees from investors, that are dreaming of huge gains and too busy to worry about the high cost of keep their digital wealth secure. We can expect fees to drop over time, as more players take the field.

Our take: Custodial wallets are services offered by an exchange, broker or other third party holds your Bitcoins in trust.

Safeguarding digital assets is of great interest to a lot of institutions. Coinbase is taking a big step toward attracting institutional investors, that  is certain to create a lot of new opportunities over the coming years. The aim of Coinbase Custody is to ease the mind of those that, up to now, have remained hesitant to invest in the crypto markets, primarily due to concerns over asset security and regulatory compliance.

At its core, Coinbase Custody will serve as a digital asset custody service. The service will adhere to strict financial controls and secure storage tailored to institutional investors of all stripes. They hope that institutions with an interest in Bitcoin, Ethereum, and other currencies will see the benefit in the service right away.

The service will only be available to funds willing to store $10 million or more of digital currency with Coinbase, and will have a $100,000 initial set up fee along with a storage fee of 0.10% per month. In return, institutional investors will get features like the ability to have multiple signers, audit trails and withdraw limits. They’ll also get dedicated account representatives (with phone support) and, in some cases, the option to insure their holdings.

According to Coinbase CEO Brian Armstrong, the absence of a trusted digital asset custodian is preventing major investors from getting exposure to crypto-currency:

“Over 100 hedge funds have been created in the past year exclusively to trade digital currency. An even greater number of traditional institutional investors are starting to look at trading digital assets,” said Armstrong in a blog post. “By some estimates there is $10B of institutional money waiting on the sidelines to invest in digital currency today.”

While there is no shortage of companies that provide vault and wallet services to hold crypto-currency, the majority of them would not qualify as custodians for the purposes of hedge funds and organizations entrusted with managing the money of others.

Currently, Xapo is the leading custodian in the crypto-world, but its limited because it can only hold Bitcoin and not Ethereum or other cryptocurrencies.

Also, Shinhan Bank in South Korea is next to launch a custodian service for digital assets. To entice customers into signing up for the service, Shinhan Bank is offering zero fees for deposits and storage, but a small fee for withdrawals.

The current market cap of Bitcoin is only about 1.5 percent of the market cap of gold, but we can expect that to change, with the massive inflow of institutional money into cryptocurrencies. We can also expect that it will become more difficult for the Jamie Dimon’s of the world to call Bitcoin a fraud, given that they were recently found guilty of money laundering and fraud.

News Item 2: Tether crypto-currency operator reports $31m raid

Decrypted: Hackers stole more than $30 million worth of cryptocurrency this week from a platform called Tether. This incident is the latest in a long list of hacks that have dented confidence in the security of cryptocurrencies

Tether is a Hong Kong based startup, the issuer of the USDT, that allows users to trade and use digital tokens backed by fiat currencies like the dollar, euro, and yen. According to a post on its website, Tether said the hack, by an external attacker, resulted in the theft of close to $31 million worth of tokens.

News of the hack led to increased volatility within the markets, due to the wide use of USDT as a substitute for fiat USD on cryptocurrency exchanges. The Bitcoin price endured a temporary correction after the announcement, but has since recovered to hit new highs.

Our take:  Tether’s hack marks the latest in a long line of reported cryptocurrency thefts. Other major victims of thefts from exchanges include Japan-based Mt. Gox and Taiwan-based Bitfinex. Bitfinex, the largest Bitcoin exchange platform, lost 119,756 Bitcoins, estimated to be worth over $979 million today, over a year ago.

In the past few months, Tether has been criticized for providing unaudited, artificial liquidity to the Bitcoin markets and inflating the price. The latest hack has increased the scrutiny about Tether, as well as Bitfinex, the largest user of USDTs.

Its believed that the two have to have common ownership, with long-standing allegations that the exchange has used the asset to engage in fraud and market manipulation. This recent hack has furthered speculation and rumors, that the pair has been working together to manipulate the market and that this latest attack on Tether was an inside job.

Tether, with a market capitalization of $676 million, is the world’s 21st most-valuable digital currency. The tokens are pegged to fiat currencies, allowing users to store and transfer globally and instantly.

So what happens now?

The company lists its next steps to deal with the matter and calls on Tether integrators to support its actions to prevent further ecosystem disruption. These include temporarily suspending the tether.to back-end wallet service, opening an investigation to find the cause of the attack to prevent similar actions in the future and do an emergency hard fork.

The team explains that they are providing new builds of Omni Core, the software used by Tether integrators to support transactions, that should prevent any movement of the stolen coins from the attacker’s address. This will cause a consensus change to currently running clients, meaning that it is effectively a temporary hard fork. They also announced that they will not redeem any of the stolen USDT for USD.

The risks of trading cryptocurrencies are well-known, and so are the rewards. Bitcoin has risen more than 800% in volatile trade this year, with three separate corrections of more than 25%, all giving way to subsequent rallies. Today Bitcoin’s current price is over $9,000, and its total market capitalization is around $151 billion. But recent volatility has come from investors switching to alternative cryptocurrencies, most notably Bitcoin Cash, sending it surging to recent record highs.

While Tether’s hack has done little to halt Bitcoin’s march, the next big attack might not be as easy to digest, especially with the arrival of Bitcoin futures trading, that will make it easier to pile on bearish bets.

News Item 3: New Bill Paves Way For Adoption of Blockchain By US Government

Decrypted: Approval of the Defense Spending Bill, known as the National Defense Authorization Act (NDAA), may lead to the mainstream implementation of Blockchain technology by the U.S. government agencies.

A provision in NDAA, includes an amendment that calls for the Department of Defense to conduct a study on the potential cybersecurity and critical infrastructure applications of blockchain technology. The MGT provision, allows is for government regulatory agencies to move their saved funds into an internal capital funds account, which can be used to help sophisticated their IT capabilities.

The bill could serve as a springboard for blockchain adoption across U.S. government agencies. Blockchain fits exactly into the letter of the law, giving government agencies the ability to invest in distributed ledger technology, at their own discretion.

Our take: Blockchain is a distributed database and the innovative technology behind cryptocurrencies like Bitcoin and Ethereum, Many people believe it has a myriad of other applications, that go beyond cryptocurrencies, ranging from supply chain management to digital identity verification.

The Senate wants to explore the potential offensive and defensive applications of blockchain technology, as well as the extent that terrorist and criminal organizations have begun to utilize blockchain-based protocols.

From the amendment text:

“… potential offensive and defensive cyber applications of blockchain technology and other distributed database technologies and an assessment of efforts by foreign powers, extremist organizations, and criminal networks to utilize these technologies.”

Has the time come for government agencies to join the blockchain conversation? The short answer is yes.

While blockchain technology has been around for almost 10 years, up to now most federal agencies in the United States have been cautious or not even aware of blockchain. Blockchain has not really been adopted by in the US., but the new bill could accelerate things.

So far, other countries around the world have been leading the pack. The United Kingdom is taking a measured approach to adoption with pilot programs like the one proposed by the Department for Work and Pension to use blockchain technology to implement a social welfare payments distribution trial. Dubai has invested a vast number of resources to go all-in and has pledged to deliver all government services on blockchain by 2020. In Estonia, a country often cited as a leader in tech literacy and e-services, the government is piloting blockchain-based solutions for voting, identity management, and health care.

To fully understand blockchain’s impact, US. government agencies must start developing relevant use cases, proofs of concepts and pilot projects. And testing is only the start. Federal agencies need to clear some hurdles, before they are able to utilize blockchain. Some of the biggest challenges they face is identifying the right situations in which to apply the technology and dealing with the potential impact on process and culture.

Analysts predict that blockchain will save $15–20 billion annually in the financial services industry by 2022, and others have advanced similar predictions for other industries, including government, insurance and health care.

This is significant moment for the US. federal government. With shrinking budgets, blockchain and other open source technologies can create enormous cost savings and enhance the government’s ability to verify and trust data. MGT provides a tremendous window of opportunity for blockchain within government modernization projects, to deliver services to citizens, without the security issues that currently plague most digital interactions.

Opinion: Vitalik Buterin Lays Roadmap for Ethereum Visa Levels Quadratic Sharding

This is one of the strongest quotes I’ve read from Vitalik Buterin: “The ethereum killer is ethereum, the ethereum of China is ethereum, the ethereum of Taiwan is ethereum… 2.0.”

There is no question about the innovative nature of the Ethereum blockchain. Before Ethereum, blockchains were designed with limited functionality. Originally, Vitalik wanted to build a smart contracts on Bitcoin, but the Core developers, made it clear that his ideas and project weren’t welcome, so he decided to build Ethereum and the rest is history.

Buterin’s breakthrough with Ethereum was designing it in a way that it could operate as a platform for other developers, allowing them to add their own functionality through applications, that run on the Ethereum network. Its smart contracts functionality has facilitated the growth of decentralized applications and Initial Coin Offerings.

Despite Ethereum’s success, there have been concerns about scalability.  Currently, depending on the type of transactions, the Ethereum can handle anywhere between 5-20 transactions per second. This well behind VISA, which processes around 2,000 transactions a second.

The reason for this low volume of transactions, is due to how transactions are validated. Currently, participating nodes on the network, must maintain a copy of the Ethereum blockchain and process each transaction on it. While this setup provides vigorous security, it does it at the expense of scalability.

The good news is that Ethereum has built scalability into its roadmap, and is developing Plasma, which is similar to the Lightning Network, to verify transactions off the main chain. There have been various suggestions about how to tackle Ethereum’s scalability problem, from increasing the block size to sharding. For Buterin, the most probable solution is sharding.

Sharding is a type of database partitioning, that separates very large databases the into smaller, faster, more easily managed pieces called data shards. The word shard means a small part of a whole.  In the context of blockchain, the Ethereum blockchain would be separated into different shards and stored by different nodes on the network. Each node would process only a small part of the blockchain, and would do so in parallel with other nodes on the network.

As thousands of new users enter the crypto space daily, the scaling issue has become the top concern among development teams. Although Bitcoin’s price has reached record highs, the network is struggling to keep up with the increasing transaction volume. Other cryptos are also seeing substantial growth, and teams are taking proactive steps to ensure that their networks can scale to meet demand.

The reality is that solving the scaling challenge will be the most significant factor in a crypto’s survival and mainstream, adoption.

What is interesting about Vitalik’s proposal is that, if properly executed, it will enable Ethereum to scale well past the size limits it is facing now.  I think that its important that Vitalik is upfront about the scaling issues with Ethereum. Right now, no blockchain solution is perfect. The fact is, that a well defined path to solve shortcomings is encouraging. It definitely gives Ethereum a brighter future ahead.

Image Source

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.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s