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: The art market has been facing the issues of counterfeiting and fraud for decades. We’ve seen some very big art forgeries in the 20th century, like the $79.6 million Austrian case of forged certificates and replicas by Pablo Picasso and Claude Monet.
Up to 50% or even 70% of art pieces circulating the global market is being faked or forged.
In museums and art institutions, where experts or connoisseurs usually do have the appropriate knowledge and means to judge the art piece’s authenticity before exhibiting it, still up to 10% of collections is estimated to be inauthentic. Recently, the art community learned about a French museum finding out over half of its entire collection being forged. A few years ago, the famous Knoedler Gallery case with 80 million worth of art pieces being confirmed as fake rocked the New York and international art collector community.
Blockchain is really great for registering, controlling, and transferring assets. Blockchain is great for digital assets. Blockchain creates an immutable, traceable record of every transaction, whether it’s art changing hands or Bitcoin.
But, how do you create a the physical link that connects the real world object with the authenticity data stored on blockchain?
Our take: Fine art is a 3 trillion dollar industry. The market can be illiquid and difficult for collectors to not only find pieces they’re looking for, but difficult for owners to sell.
Tokenizing physical assets on the blockchain makes it more transparent who owns what. It creates a central source of truth for things like commodities trading, auctions, or property development. Owning a physical asset like a painting, car or land is a matter of trading legal documents. These documents can get confusing, and it can be difficult to determine the real owner of an asset. Putting physical assets on the blockchain would mean tokenizing them so they can become part of smart contracts. Selling a painting or an ounce of gold could be as simple as transferring the digital token to the new owner.
But before tokenizing art, before building decentralized auction houses, before incentivizing artists and galleries with royalties, we need to represent a physical object on a blockchain with confidence that it exists and is authentic.
Some of the approaches is to connect the actual product to the data on the blockchain, is by attaching an inexpensive chip to the product’s package. Using NFC PKI microchips, the same chips in passports and credit cards, to authenticate works of art.
Seal one of the companies offering solution in this space. Seal’s proprietary technology utilizes NFC compatible Seal chips which can be effectively, securely and discretely incorporated with any physically manufactured product. Upon integration of the Seal chip, the product is paired with the digital counterpart on the blockchain. Verification of authenticity is instantaneous with a simple tap or scan with any smart device.
The Global Center for Innovation at the State University of New York at Albany is experimenting with ingenious ID science. The project was initially funded to the tune of $2 million by ARIS Title Insurance, a company that specializes in underwriting fine art. ARIS recently purchased the technology, and spun off a company called Provenire Authentication to market it.
The idea is for artists to authenticate their work immediately upon completion—right after the paint on a canvas has dried or a sculpture has left the foundry, by attaching a DNA sample to it the size of a postage stamp.
Rather than using the artist’s personal DNA, which might raise privacy issues and could conceivably be stolen and embedded in forgeries, synthetic DNA is made in a laboratory. Each artwork is inconspicuously tagged with a unique strand of bioengineered material that provides an encrypted link between the artwork and a secure database containing the definitive information about the artwork. This DNA data, retrieved by a scanner, will be available to gallery dealers, museum employees, and anyone else who needs to verify the piece.
The DNA meets archival standards. It doesn’t come in contact with the art and isn’t susceptible to environmental conditions or tampering. Moreover, deciphering and copying the DNA would be virtually impossible.
Essentially ablockchain offers a secure means of digitizing authentication, provenance and ownership history. Artists would register their work into the Blockchain to create a digital certificate of authenticity. Through a unique cryptographic ID, each artwork can be authenticated and ownership rights securely transferred to galleries or collectors. Once a transaction is verified, the Blockchain ledger is updated and cannot be removed or altered.
Art is a currency or a commodity in a way. With the issues of forgery and theft in the traditional art world, however, blockchain’s ability to prove ownership and verify transfer from seller to buyer is invaluable. Blockchain has huge potential for trading physical assets such as art, which can be pegged to a token representative of its value and transferred without leaving the vault it’s stored in.
Decrypted: While speaking at Yahoo Finance’s All Market Summit, William Hinman SEC’s Director of Corporate Finance said the SEC would not be classifying Ether or Bitcoin as securities.
“The network on which Bitcoin functions is operational doesn’t seem to involve a central third party whose efforts are a key determining factor in the enterprise. Putting aside the fundraising that accompanied the creation of Ether, the Ethereum network and its decentralized structure, current offers and sales of Ether are not securities transactions,”
Our take: Finally, one of the biggest questions and debates in crypto has been answered by the SEC. This was one of the hot topics in the cryptocurrency community.
The beginning of this year, there was much speculation as to what the US SEC would decide about cryptocurrencies, when it came to paying taxes and allowing investors to purchase crypto coins. The SEC were said to believe at the time that all cryptocurrencies were to be considered securities and should be treated as such. This was a blow to crypto investors and support for the market softened slightly, mostly from newer investors.
The SEC’s clarification regarding the regulatory state of Bitcoin and Ethereum provided the market with a breathing room. It allowed the market to rebound slightly, in what previously seemed to be a period of free fall.
The cryptocurrency market rebounded from $271 billion to $291 billion, by more than $20 billion after Hinman’s speech. The price of Ether spiked by 12 percent, from $464 to $524.
Bitcoin and Ethereum are both not considered securities because they have become sufficiently decentralized. Smaller, lesser known ICOs and crypto coins are not considered to be decentralized enough yet. Making the distinction between security and non-security is hugely important because securities are to be treated the same way stocks are treated.
This issue around the regulatory designation is not a new one. The matter became very public last year when the SEC declared DAO tokens to be a security after the debacle around the project made headlines worldwide.
The SEC ramped up its enforcement efforts against fraudulent ICO schemes in recent months. In December, the agency’s new cyber unit announced it had filed its first ever complaint, against the cryptocurrency PlexCorps, for allegedly swindling customers out of $15 million. A month later, it halted one of the largest ICOs ever, for the Dallas-based startup AriseBank.
While Bitcoin and Ether are commodities, many tokens are viewed as securities. The Howie Test determines whether transactions qualify as investment contracts and therefore fall under the US Securities Act.
What are the criteria a token would be considered a security? If a buyer invests money 1) in a common enterprise 2) expecting a profit 3) predominantly from the effort of others. Then whatever buyer is buying is a security, which comes under the compliance of SEC (in the USA) and anyone who’s offering it needs to be registered with SEC.
This announcement from the SEC is big news! It eases the minds of investors that were skeptical about the future of these major crypto-currencies. Now, they can buy without worrying a lot about sudden regulatory surprises or compliance issues. Potentially this will reduce the volatility in Bitcoin and Ethereum prices and opens up the road for Ethereum futures.
Decrypted: David Schwartz, Ripple’s chief cryptographer said that banks are unlikely to deploy blockchain to process international payments, because of low scalability and privacy problems.
“What we hear from many of our customers is that it’s imperative to keep their transactions private, process thousands every second, and accommodate every type of currency and asset imaginable”
Our take: Ripple is a Blockchain-based payment transfer network and settlement system, that aims to change the way banks and people around the world transfer money.
On the other had, Brad Garlinghouse, Chief Executive Officer of Ripple, a couple of weeks ago said that he believes dozens of banks to be using Ripple by the end of 2019, given its speed of transaction and low cost.
As for XRP, Garlinghouse said: “it’s very clear XRP is not a security.”
He argued that it exists independently of Ripple the company, which has built technology that uses XRP to facilitate cross-border payments. He said owning XRP doesn’t provide ownership or equity in his firm, which itself it sitting on a large amount of the crypto asset. The SEC may feel differently. For some investors, the rationale for buying the XRP crypto token is the hope that the company Ripple will succeed at convincing banks and other financial institutions to use Ripple, and the crypto token, as a transmission mechanism for payments.
In the meantime, SWIFT continues to compete with Ripple for leadership in the cross-border payments market. A new deal involving SWIFT and 10 Chinese banks represents the latest move in the global competition to facilitate cross-border payments.
While Ripple and SWIFT duke it out, another solution may not be far away. With several groups already working on stablecoins, the payments arena is about to get even hotter. Stablecoins are tokens on a distributed ledger backed by fiat currency on deposit at central banks. The goal of stablecoins is to manage the volatility that has affected cryptocurrencies, like as XRP.
Circle, the cryptocurrency and payments group in Boston, is creating the USD Coin. A group of economists including Jacob Frenkel and Myron Scholes launched the Saga token and three Princeton University graduates have raised $133m from investors to create Basis.
These developments are unlikely to lessen the rivalry between Ripple and SWIFT. While Ripple is much quicker, it still relies on intermediaries to exchange XRP into fiat currencies. SWIFT is certainly not out for the count, when it comes to being a frontrunner.
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