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.
Story 1: Bancor Says Only Smart Contract Breached, “Our Wallets Have Been Battle-Tested”
Decrypted: Bancor, a decentralized exchange, suffered a security breach a few weeks ago that resulted in the loss of $23.5 million. Last year Bancor, got a lot of attention when it raised over $150 million in three hours during its ICO.
In a tweet, Bancor, a decentralized exchange, stated that a vulnerability was exploited to steal 24,984 ETH (approx $12 million), $1 million worth of NPXS and $10 million worth of BNT.
Our take: Exchanges are growing rapidly, with hundreds popping up all over the world. Three years ago, we had 70 exchanges, and now we have over 200. There are two categories of exchanges; centralized and decentralized exchanges. Each has their own advantages and disadvantages. The centralized vs. decentralized debate has been ongoing for some time now.
The list of centralized exchanges is long: Bithumb, Binance, Bittrex, Poloniex, Kraken, GDAX, Coinbase, Gemini, just to name a few. However, centralized exchanges are subject to a whole range of problems like hacking and scaling, and are beholden to a centralized perspective that does not fall entirely in line with the decentralized character of digital currencies and blockchain. Vitalik Buterin, co-founder of Ethereum and head of the Ethereum Foundation, recently said he hopes centralized exchanges “burn in hell.” His reasons were the potential they have abuse and that the power of centralization goes against the very nature of cryptocurrency.
But, the most pressing issue with centralized exchanges is security. Every week it seems, there is a new report of a major hack at a centralized exchange, with stolen funds ranging in the of millions of dollars. These hacks are made possible due to the vast amounts of users’ digital asset holdings being stored in hot wallets.
In theory, hacking decentralized exchanges should be impossible due to the spread-out nature of the nodes. Security is one of the major selling points of decentralized digital exchanges. Because in a decentralized exchange, there is no single point of entry, just like a blockchain. A hacker would need to compromise more than half of the network to be able to command control the system. However, this recent Bancor incident has showed us that this is not the case. Hackers walked away with $23.5 million.
Bancor is a platform that facilitates wallet-to-wallet trading via smart contracts. Users can trade ERC20 tokens from their web wallets and do not have to deposit funds onto an exchange. Companies can also issue their own “Smart Tokens” on the Bancor Network.
The Bancor Protocol uses a formula to constantly recalculate the prices of tokens based on supply and demand. To purchase smart tokens, users deposit ETH into a Bancor smart contract. The smart contract creates tokens based on the formula and issues them to the user. When a user liquidates tokens for ether, the tokens are deposited into another smart contract and are burned.
These two functions are what make Bancor centralized. It basically allows Bancor to destroy BNT tokens from a specific Ethereum wallet, or issue new BNT tokens into an ethereum wallet.
Charlie Lee tweeted: A Bancor wallet got hacked and that wallet has the ability to steal coins out of their own smart contracts. An exchange is not decentralized if it can lose customer funds OR if it can freeze customer funds. Bancor can do BOTH. It’s a false sense of decentralization.
While the growth of exchanges is encouraging and the development of decentralized exchanges is a sign of what’s to come, most are still too early stage. Being so new, we are bound to see growing pains, regardless of centralized or decentralized. Code has bugs and it breaks. And because in this case, there is huge potential for financial gain, hordes of hackers are making rounds and will continue to do so.
Story 2: Telegram launches Passport for services that require real-life ID
Decrypted: Telegram has launched the new feature called Telegram Passport on Thursday. Using this service user can upload their identification documents in the cloud storage and share the information with any platform which needs a real-world ID such as finance, ICOs, etc. The team says that this is the second phase of the Telegram Login project and initially it was introduced back in February.
Telegram Passport, encrypts a user’s personal ID information and let’s users securely share their ID data with third parties. You can think of it as the “Know Your Customer” for ICOs. The documents are said to be protected by end-to-end encryption. Users’ ID data will currently be stored on the Telegram cloud, but iIn the future, Telegram plan to move users’ data to a decentralized cloud.
Our take: If you’ve ever had to identify yourself online using actual IDs like passports, driving licenses, and whatever else, you know how much of a hassle it can be. You have to scan those documents and then upload them or email them to sites without fully understanding how your sensitive data will be protected.
With the release of Telegram Passport, the messaging app has integrated some features that use blockchain technology, starting with a digital ID service.
Telegram’s vision behind the ICO is to build an eco-system comprising of messaging, digital identification, payments and a platform for dApps to be developed to service its growing user base, that currently numbers over 200 million.
In fact, it’s exchanges and crypto as well as other finance-related companies that may benefit from this type of user authentication, as many countries now require crypto businesses to know the real identities of their customers. The first use case was announced by ePayments, a UK electronic payment provider, that allows users to send and receive money from around the globe. ePayments has an e-money license by the UK FCA and is part of SEPA and SWIFT networks, and has 500 thousand users in over 100 countries.
This past March, Telegram completed two $850 million closed funding rounds via the sale of the platform’s pending cryptocurrency TON, raising a total funding to $1.7 billion. In late May Telegram’s the planned public ICO was halted, due to the fact that the company had raised enough money via the two private ICO rounds.
Telegram has become popular in the world of blockchain and cryptocurrency for its blockchain and cryptocurrency messaging groups. According to Combot, every one of the top five groups on Telegram (English) is a cryptocurrency related group. On Telegram, groups can hold up to 100,000 people, messaging is fast and secure, and Telegram provides an API that developers can create with.
There are plenty of messaging and social media platforms available today, but Telegram has captured the minds of this globetrotting generation, and is the single most popular messaging platform in the cryptocurrency space. When it comes to the crypto ecosystem, Telegram is absolutely vital.
Telegram’s vision of end-to-end encryption naturally appeals to privacy-focused, authority-skeptic crypto fans. As a messaging platform, Telegram combines features from Twitter, Whatsapp, and traditional discussion forums. While most others are primarily used for communication, Telegram goes beyond that and helps grow crypto communities.
Story 3: Winklevoss twins bitcoin ETF rejected by SEC
Decrypted: The Securities and Exchange Commission rejected a request from Tyler and Cameron Winklevoss to run a bitcoin-related exchange traded fund.
In a 92-page decision released Thursday, the SEC was not persuaded that the twins and their company could protect investors from abuse and fraud. The agency said it would not approve the first-ever bitcoin ETF because the digital currency isn’t “resistant to manipulation.” The Winklevoss twins own cryptocurrency exchange Gemini Trust, where the ETF would’ve been traded on.
Our take: Over the last few months the SEC has been reviewing Bitcoin ETF applications. To this date every application submitted has been rejected. Last Thursday the SEC announced that it is rejecting the Winklovess’ Bitcoin Trust application again.
The Winklevoss proposal was rejected by the SEC because the proposal failed to satisfy SEC concerns regarding “prevent[ing] fraudulent and manipulative acts and practices and to protect investors and the public interest.”
Specifically, the SEC was concerned about the potential for price manipulation in BTC. The Winklevoss proposal argued that due to the size of the BTC spot market, and the large number of exchanges and means of trading BTC available, that the price of BTC was inherently resistant to manipulation.
The SEC rejected that argument, and was concerned about the lack of oversight in many of the markets trading BTC. The SEC then determined that the proposal lacked a sufficient “surveillance-sharing agreement” to detect and deter fraud and manipulation in the BTC spot market, and ultimately rejected the proposal.
The SEC notably highlighted a recent study which claimed that USDT, the dollar-tied ‘stablecoin’ operated by Tether and is linked to the cryptocurrency exchange Bitfinex, has been used to support the price of bitcoin during market downturns.
This was not the first time, the SEC decided not to approve Bitcoin ETF. In March 2017, SEC once again rejected the Winklevoss brothers, due to concerns on transparency and regulation of bitcoin exchanges.
If the recent Bitcoin ETF application was approved by SEC, it would have likely led to boost on the price of Bitcoin. Right after the SEC announcement for the Wiklevoss Bitcoin ETF, around $6 billion was shaved off the total cryptocurrency market cap, and Bitcoin dropped 3% to $7,880.
Bitcoin ETF’s would have attracted many new investors that are currently unable to invest in Bitcoin directly. A history of popular ETFs shows that investments in that underlying asset improved, once the ETF was launched. In the early 2000s, new ETF products were popping up left and right, covering a variety of asset classes, geographical regions, and management styles. Today, the ETF market has grown to well over $3 trillion in assets. Bitcoin ETFs would provide a convenient and cost effective way for individuals to hold Bitcoin stakes with small amount of money.
With this rejection, the SEC did not look out for the best interest of investors who want exposure to Bitcoin, whose current market cap over $140 billion. The SEC chose the easy way out by rejecting the ETF application by the Winklovess brothers. Instead of dealing with the challenges and asking for additional requirements in order to approve the ETF application, they decided to reject it flat out.
The crypto digital assets market is gaining velocity and it cannot be ignored for much longer. There is no doubt that a Bitcoin ETF could bring in an incredible amount of capital at an unprecedented rate, as well as give credibility and maturity to a market that is seeing increased adoption among institutional investments. I hope that we will soon see an ETF approval that will give small retail investors exposure to cryptocurrencies.
Ilias Louis Hatzis is the Founder & CEO at Mercato Blockchain Corporation AG. He writes the Blockchain Bitcoin & Crypto (BBC) Weekly CXO Briefing each Monday.
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