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: Forget bitcoin. Here come the blockchain ETFs.
Decrypted: With the total market cap for cryptocurrencies around $556,105,119,524, earlier this week two blockchain ETFs were launched on Nasdaq and the New York Stock Exchange. The Reality Shares Nasdaq NexGen Economy () and Amplify Transformational Data Sharing () ETFs both launched this week.
Before their launch, the Securities and Exchange Commission requested they remove the word “blockchain” from their names. The SEC did not want to allow the use of the word “blockchain” in the name of the ETFs with the cryptocurrency craze sweeping the market.
Many stocks have seen tremendous runs when changing their names to include the word “blockchain”. The most well known examples are Long Island Iced Tea Corp. changed its name to Long Blockchain Corp. and Riot Blockchain (RIOT) that saw their stock prices rise suddenly after including “blockchain” in their names.
Our take: Over the past year, we have witnessed how blockchain technology has been growing in different fields. Governments, enterprises, institutions, start-ups are using this technology to offer better products and services. The blockchain ecosystem presents one of the most profound, long-term investment opportunities. While its still in its infancy, it will have far-reaching and disruptive effects in nearly every industry.
Cryptocurrencies like Bitcoin and Ethereum have generated a lot of excitement among investors, but many believe the underlying blockchain technology, not cryptocurrencies themselves, is the real gold mine for investors.
The new ETFs do not own Bitcoin, Ethereum, Ripple or other cryptocurrencies, instead they comprised of companies committing material resources to developing, researching, supporting, innovating or utilizing blockchain technology for their proprietary use or for use by others.
These two funds hold some important companies like Overstock, IBM, Intel, NVIDIA and others. BLCN will focus less in Small Cap enterprises but more International corporations. At the same time, BLOK will have a slightly different strategy by investing more in small cap businesses than BLCN, but less focused on international corporations.
As investors look at the future of technology, these ETFs offer investors a good opportunity to place their bet in these enterprises and technology.
In December, the Chicago Mercantile Exchange and the Chicago Board Options Exchange launched Bitcoin futures. Its expected that Nasdaq will also launch these Bitcoin futures in the first quarter of 2018.
Up to now the SEC so far has put on the brakes on the launch of Bitcoin-linked ETFs. Many companies, including Rafferty Asset Management, ProShares, and VanEck have put off their plans to launch Bitcoin related ETFs.
With the new blockchain ETFs, investors have the choice to invest in different blockchain companies and in cryptocurrencies. As institutional money keeps flowing to cryptocurrencies and the blockchain world this year, we will see whether the industry gets more mature or it will require longer time to achieve its goals.
News Item 2: Shell Buys Into Blockchain Company
Decrypted: According to OilPrice, Shell has bought up a minority share in Gartner-listed startup Applied Blockchain. While, details of the deal have not been disclosed, the move will enable the London startup to help Shell explore how the technology might be applied to its business.
In 2017, Shell was also a member of a consortium that involved BP, and Statoil to develop a blockchain-based energy commodity trading platform, along with three large commodity traders, Gunvor, Koch Supply & Trading, and Mercuria.
Our take: In some of the world’s more dynamic industries, like the oil and energy sector, companies face huge challenges on a minute-to-minute basis. Daily fluctuations in supply and demand, paired with geopolitical changes accompanied by regulatory complexities, and the overriding need for a management system that tracks purchases and services in a volatile market, are industry-wide issues facing oil and gas producers.
The potential for disrupting energy is vast. There have been a number of stories in the news about the use of blockchain that would allow “Big Oil” to ditch cumbersome paper contracts and instead use smart contracts, that can be secured and authenticated by the distributed ledger technology.
The latest in the lineup to join blockchain is Shell, but not the only one.
Three of BP’s blockchain consortium partners, ING, Societe Generale and Mercuria, carried out a test of a live oil trade between parties with Mercuria at the start of 2017.
Dutch bank ING developed an oil trading pilot built on the Ethereum blockchain and conducted live transactions. The successful experiment involved a shipment of African crude, which was sold three times on its way to China, and included traders, banks as well as an agent and an inspector, all performing their role in the transaction directly on the prototype Easy Trading Connect blockchain platform, Mercuria said in February.
In March, banking group Natixis, IBM and Trafigura pioneered the first blockchain trade for US crude oil. They used a distributed ledger platform, built on the Linux Foundation open source Hyperledger Fabric, which they said was designed to be adopted at scale across the entire crude oil trading industry.
European electricity and gas companies also tested pilot blockchain trading projects. In June, BP and Italy’s Eni completed a pilot program for processing European gas trades using blockchain technology developed by Canada’s BTL Group. This focused on gas trade confirmations, and the plan is to look at expanding it to other back office processes, including netting and generating invoices.
In May, over 20 European energy trading firms joined forces to develop peer-to-peer blockchain-based trading using Hamburg-based IT company Ponton’s Enerchain framework. In October, E.ON and Enel completed a first power trade using the system.
As of now, blockchain offers an opportunity for large utilities and commodity traders. Individually or in consortia they move to blockchain solutions, benefit for a range of applications, from optimizing efficiency to transparency in business transactions to securely storing inventory data on the blockchain.
Over the last years, the industry has struggled with price volatility and production levels, which has led to cost-cutting efforts, reduced outputs and layoffs. These challenges have prompted many companies to rethink how they operate and to identify new ways to optimize supply chain management and transaction processing. Blockchain is gaining traction and broader acceptance by oil and gas industry for its potential to fundamentally change the way certain transactions are conducted.
Decrypted: The Central Bank of Indonesia has issued a warning to investors not to sell, buy or trade any cryptocurrencies due to the bubble risks and the risk that it could be used for money laundering and terrorist financing.
They issued a press release this weekend, and this has resulted in the voluntary closure of two different cryptocurrency exchanges; BitBayar and TokoBitcoin.
In the statement, they wrote: “The ownership of virtual currencies is high risk and prone to speculation because there is no authority who takes responsibility, there is no official administrator and there is no underlying asset to be the basis for the price. Virtual currencies are vulnerable to bubble risks and susceptible to be used for money laundering and terrorism financing, therefore can potentially impact financial system stability and cause financial harm to society.”
Our take: Indonesian authorities have been stepping up their warnings and last month issued a regulation banning use of cryptocurrencies by financial technology companies involved in payment systems, and said it is examining whether there’s a need to regulate trading on virtual currency exchanges.
Indonesia is Southeast Asia’s largest economy, and home to the biggest concentration of Muslims in the world. It also has an enormous unbanked population, whereby as late as 2014 little more than a third of adults held bank accounts. And figures for the country’s poorest point to only 20 percent having access to banking capital. The government in recent years has launched campaigns and initiatives to increase institutional financial literacy.
These basic facts might provide clues as to why its government is working hard to ban bitcoin. Bitcoin effectively limits the need for dependency on state notes as well as state minders.
The move highlights the challenge faced by regulators as they seek to manage potential risks from the global cryptocurrency mania while lacking the authority to prohibit its use.
Last week, South Korean authorities this week sent global Bitcoin prices temporarily plummeting and cryptocurrency markets into turmoil, when the justice minister, Park Sang-ki, said regulators were preparing legislation to halt cryptocurrency trading.
The United Kingdom’s Financial Conduct Authority (FCA) warned consumers in November regarding contracts for differences (CFDs), including financial spread bets, with cryptocurrencies as the underlying investment.
Over the years, the Reserve Bank of India has cautioned “users, holders and traders” of virtual currencies regarding the potential economic, financial, operational, legal and security related risks associated.
In September 2017, the Central Bank of the Russian Federation said crypto-currencies were issued by anonymous entities. As a result of their anonymous nature, citizens and legal entities may be involved in illegal activities, including legalization (laundering) of proceeds from crime and financing of terrorism.
In recent news, Algeria’s government has also taken steps towards a crypto ban, with reports that the 2018 Finance Bill will make Bitcoin ownership and trading illegal within the country.
Also, in early January, Egypt’s top Religious Official, Grand Mufti Shawki Allam, declared Bitcoin unlawful according to Sharia law citing concerns about money laundering and terrorism funding as well.
There is a great deal of variation in regulations of cryptocurrencies around the world. The good thing is that the leading global economies have more favorable regulation because the population has the demand for cryptocurrencies. If governments are smart, like Japanese to let the people enjoy financial freedom, they can benefit, otherwise they just create black market and drive the price up. The cryptocurrencies are spreading fast around the world and no one can stop this process. It’s a one way street!
Decrypted: Bitcoin transaction fees have surged from about $0.69 in January 2017, to over $30. Also, Bitcoin network traffic has become so clogged, due to the rising demand for transactions per block, resulting in Bitcoin transactions taking an extremely long time to confirm.
Everyone is anxious to get Lightning Network deployed. Lightning Network promises to reduce Bitcoin’s transaction fees dramatically, and achieve near-instant transactions.
To speed up things, 26 universities will test the Lightning Network for vulnerabilities, as well as increasing productivity and application in trade. This was announced by the group Bsafe.network. The BSafe.network is a neutral and open research network for Bitcoin, blockchain and distributed ledger technologies established by academic researchers
Among the members of the Bsafe.network are such well-known universities as the Massachusetts Institute of Technology, the Federal Polytechnic School in Lausanne, the University of Tokyo, the London Imperial College.
Our take: Two of the main obstacles keeping Bitcoin from legitimacy as a mainstream currency are its regular transaction fees for adding payments to the blockchain and the lengthy delays in between payments and their recording on the blockchain.
The Bsafe.network announced a competition among researchers, where the main topics will be proposals for scalability, increased privacy and security, as well as methods of attacks on second-tier networks, which include the Lightning Network. Submission of results will be completed by March 31, their verification and evaluation will take another 3 months.
The task of the contest participants is to assess the security of the network, using a self-created attack model, similar to what hackers can use to steal payments passing through the Lightning Network.
Lightning Network is believed to be the best way to scale the Bitcoin network, reducing fees and transaction processing speed. While the size of the prize pool is not set, but a similar interest in the audit is due to the fact that both users and developers are interested in the successful launch of Lightning.
Now, the developers of Lightning Network recommend using the technology only in a test network with counterfeit coins, although some active users and developers have tried to use the technology with real Bitcoins. Some of these fearless devotees even lost some money in the testing process.
The Lighting Network, originally conceived by Joseph Poon and Thaddeus Dryja, allows two users to open up a private channel for however long they want, and only after the users close the channel do their transactions get added to the blockchain. Users pay only two transaction fees, one when they open the channel and one when they close it.
Legacy payment networks like Visa and MasterCard are capable of processing many thousands of transactions per second, in the order of 50,000. Obviously, with the current throughput of the Bitcoin blockchain is not able for it become a global payments network.
It’s clear that the Lightning Network is an innovation that would not only make small transactions affordable and feasible, but it would also remove a lot of the daily pressures on the blockchain, making everything quicker. It adds important layers onto the Bitcoin blockchain, allowing transactions to occur at a rate exceeding leading payment processors like Visa and MasterCard. Combine that with the fact that Bitcoin is a worldwide currency and you’ve disrupted the existing financial system, exactly the same way the Internet disrupted society.
Ilias Louis Hatzis is a Blockchain entrepreneur who writes the Blockchain Bitcoin & Crypto (BBC) Weekly CXO Briefing each Monday.
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