Blockchain Bitcoin & Crypto Weekly CXO Briefing

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 offer one expert opinion.

This is week two. For week one and the intro, please go here.

News Item 1: Bitcoin Pool ViaBTC says no to Segwit

News Decrypted: Last week we reported that a major Bitcoin miner (Bitmain) who has been backing the breakaway group (called Bitcoin Unlimited) has filed for a patent to a technology called ASICBOOST that would be harmed if Bitcoin used a technology called SegWit. For explanations/glossary please go to last week’s post. Our take on last week’s news was that this signaled the last bloody battle in the Bitcoin Civil War and that Bitcoin Core was winning.

The news this week is that another Bitcoin miner is saying no to Segwit.

Our Take: This week’s news seems to indicate the opposite of what we reported last week, but we hold to our conviction. Our take this week is that there are always skirmishes after a war is over. You could also say “it ain’t over till the fat lady sings” and that there is always some risk, but that does not invalidate that there is more upside than downside. If you read this week’s news item below the headline, it is more “not yet” than a no, despite the headline. You often get “headline negotiations” ie making a tough public statement followed by private negotiations.

News Item 2: Billionaire investor holds 10 percent of his life savings in bitcoin predicts price to hit 2000

News: Billionaire hedge fund investor Mike Novogratz, who made it into the Forbes billionaire list in 2008, revealed that he holds 10 percent of his net worth in Bitcoin and Ethereum.

Decrypted: Bitcoin price continues to rise and so we get forecasts that it will continue to rise. There are many more stories like this that are along the lines of “follow the brilliant investor leader”. Novogratz also invested in Ether. Another high profile investor making bullish statements is Tim Draper.

Our take: These investors are talking their book and they bought when the price was much lower, but that does not invalidate what they are saying. With the Bitcoin Civil War nearly over, there is more upside than downside, but nothing goes up in a straight line. A major Bitcoin hacking story is likely in 2017 and that will be a buying opportunity. It depends on your time horizon. If you view buying Bitcoin like a 10 year bet on a startup, these fluctuations are irrelevant.

News Item 3: Criminals who deal in bitcoins in Florida could soon be busted for money laundering.

News: Just because you use bitcoin to do something illegal, does not give you a defense.

Decrypted: This is only relevant as it drives mainstream sentiment and regulation. If the headline was “Criminals who deal in dollar bills in Florida could soon be busted for money laundering” it would not be significant.

Our Take: Regulators are in a quandary. On the one hand, bitcoin should be like cash – it is irrelevant as a defense for illegal activity. That is what this week’s news is about. On the other hand, banks and governments want to have control over cash and so don’t want bitcoin to be a legal currency and tax authorities prefer to see it like a commodity and to tax based on capital gains. The last sentence in the news article is interesting “But critics say the law could deliver a chilling effect on the bitcoin, which can be valuable in promoting commerce between Florida and countries such as Venezuela, where traditional banking systems have gone awry.” In short, money laundering out is bad, but money laundering in is good.

Opinion: Bitcoin continues to struggle ethereum looks strong

Why it is worth listening to: Ethereum is the only crypto currency with a market cap even comparable to Bitcoin and Ethereum is building the world’s first decentralized operating system.

Our take: Ether, like all Altcoins, have done well price-wise during the Bitcoin Civil War. If that is over, bitcoin price will rise and much of that will come from people converting Altcoins to Bitcoin. Ethereum could be the one exception to that. However, as a reality check it worth noting that few mainstream people have heard of Ethereum – this is reserved for crypto true believers . Also, the news last week was more about traction for Sidechains, which takes away some of the programmability benefits of Ethereum and to have a major differentiator, Ethereum needs to prove Proof Of Stake as an alternative to Proof Of Work and there is still real technical risk in that. If you love the idea of the world’s first decentralized operating system (I do), you may want to buy the Ether currency. As an investor, Ether at current price has a lot more risk than Bitcoin.

Bernard Lunn is a Fintech thought-leader and deal-maker. 

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.

 

 

Introducing The Blockchain Bitcoin & Crypto Weekly CXO Briefing

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.

Start your week with The Blockchain Bitcoin & Crypto Weekly CXO Briefing in your email by 7am CET. It should take you 5-10 minutes to read properly (and a minute or less to skim if it is one of those crazy Mondays).

You owe it to yourself to invest 5-10 minutes a week to learn about the technology that will change your company, your career and your world. Don’t get blindsided by important news from the Blockchain Bitcoin & Crypto world. Be in the know and in the flow – without getting stuck in the weeds.

Each week we select 3 news items that matter. We keep it to 3 because we know that you are busy. If it is a big news week, it is our job to find the 3 news stories that matter so that you get a high signal to noise ratio. We give you the news in one sentence and link to the announcement.

For each news item we offer News Decrypted,  which explains why investors, bankers and entrepreneurs should take notice. We include a Glossary if we have to mention some critical jargon (which will be marked in red like this). Finally we offer Our Take on the underlying trends represented by this news and “where the puck is headed”.

In addition to 3 news items, we select one analysis/opinion/insight piece each week that we think is excellent or a controversial subject that is being debated in some forum.

Our point of view is that all three are important – Blockchain Bitcoin & Crypto. There can be private, permissioned Blockchains without any Bitcoin or any other Cryptocurrency. There can also be Cryptocurrencies other than Bitcoin (Altcoins) and distributed ledgers that use some form of Crypto other than Blockchain. We cover them all.

In this first post, we are tracking news for a bit longer than a week as we are in catch up mode:

News Item 1: Is a Mining Manufacturer Blocking SegWit to Benefit from ASICBOOST?

News Decrypted: This could be the last bloody battle in the Bitcoin Civil War. A major Bitcoin miner (Bitmain) who has been backing the breakaway group (called Bitcoin Unlimited) has filed for a patent to a technology called ASICBOOST that would be harmed if Bitcoin used a technology called SegWit.

Glossary. SegWit is shorthand for Segregated Witness. It enables signatures to be kept outside the Bitcoin block (which matters if you don’t want to increase the block size and that is the technical issue at the heart of what is referred to as the Bitcoin Civil War). Think of this like keeping signatures on a check outside the core banking system (which only records that a signature was received and points to the system where evidence of that signature is stored). This becomes more important now that MultiSig means more signatures.

Glossary.  MultiSig is shorthand for Multiple Signatures. This is critical to fraud prevention. It means that more than one person is needed to release a transaction (payment or other value exchange), just like in old-fashioned banking/payments systems.

Our Take. The ASICBOOST patent is filed in China (which raises doubts about its enforceability). More importantly it raises doubt about the intellectual credibility of those opposing Segwit and other Bitcoin Core approaches to scaling (for our decrypted take on Bitcoin scaling challenges please read this).

This could be the last bloody battle in the Bitcoin Civil War. The war has to end for Bitcoin to move forward. A hard fork would be “game over” for Bitcoin, Blockchain and Crypto. Obviously this news can be interpreted in different ways. The Bitcoin price action in the weeks and months to come will be the wisdom of the crowd that will tell us who is winning this argument. I am putting my belief on the line by launching The Blockchain Bitcoin & Crypto Weekly CXO Briefing this week. If I thought that a hard fork was likely and that everything Blockchain Bitcoin & Crypto would be relegated to the dustbin of history, I would be foolish to do this.

News Item 2: Blockstream Launches New Confidential Assets Feature for Enterprise Blockchain Customers

News DecryptedMany Bitcoin enthusiasts love the transparency that is enabled by every transaction being publicly visible on the Blockchain. That transparency does not work for enterprises that thrive on proprietary data, secrecy and control. Nor does it work for those individuals who, for whatever reason, don’t want anybody being able to see their transaction. Blockstream, a VC funded venture, offers “cryptographically-enforced confidentiality” (translation = hard to hack). Blocksteam is a driving force behind the idea of Sidechains, which is an alternative to a Turing Complete Blockchain platform such as Ethereum. Blockstream, via Confidential Assets, aims to offer the benefits of transparency – that transactions can be publicly verified to be accurate – without losing the benefits of privacy, by  giving control to individuals who can selectively disclose the hidden asset values and types.

Glossary. Sidechains is the idea of taking a Bitcoin transaction and sending it off to anther system where some additional processing can be done. The idea is to keep the core Bitcoin transaction processing simple (which tends to mean cheap, fast and reliable) while enabling each transaction to be programmable.

Glossary. Turing Complete means you can run application code on a platform.  That is why Ethereum is such an ambitious project; it is a decentralised operating system.

Our Take

  • This could be a blow to Z Cash, Monero and other Altcoins selling anonymity.
  • This could be a blow to Ethereum as it will boost the idea of Sidechains as an alternative way to have programmable transactions.
  • This could be a boost for Bitcoin as it will overcome one of the perceived weaknesses (lack of privacy).
  • This signals a more commercial Bitcoin, with VC funded companies like Blockstream making the big moves. The price for this commercialisation is greater centralization and less control by individuals (unless they invest time and money to get that control), but the commercialisation is probably needed for Bitcoin to go mainstream.

News Item 3: Japan Officially Recognises Bitcoin as Currency Starting April 2017

News DecryptedLegality is essential to any move to the mainstream. The issues are complex and this has been debated a lot in many countries. It is natural for politicians to fear the lack of control, but there is also the increasing recognition that being bitcoin friendly can drive innovation, productivity, jobs and a higher standard of living. So when one of the biggest economies in the world does this, it is a seriously big deal.

Our Take: This is another sign of something that took most people by surprise, which is that Bitcoin adoption is happening first in countries with strong currencies and fairly good governance. Many people were drawn to Bitcoin by dreams of stateless trust based on math replacing more authoritarian governance. So the meme got established that Bitcoin would first go mainstream in countries like Argentina; we debunked that theory here.

We spotted the trend towards wealthy countries adopting bitcoin first in Switzerland and now the news from Japan indicates that exactly the opposite of what pundits expected is coming to pass – mainstream adoption happens first in a country where citizens have an unusually high amount of trust in their currency and the government that issues the currency. Here is our review of Bitcoin in Japan.

Opinion of the week

VC Fred Wilson Thinks Coinbase Is the Goldman Sachs of Bitcoin

Why pay attention: because Fred Wilson is a VC with a great track record, who is very thoughtful and who has made many bets in Bitcoin ventures, including Coinbase.  Cynical counterpoint: he is just talking his book

Bernard Lunn is a Fintech thought-leader and deal-maker

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.

 

2017 is the year bitcoin starts to move from Darknet niche to Clearnet mainstream

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One of our 10 Fintech predictions for 2017 (in December) was:

Bitcoin moves from its Darknet phase (illegal) to the early adopter Clearnet phase. This is when legitimate people charge in bitcoin for legal transactions. This will start with cross border digital products. Because this brings new bitcoins into “circulation” with owners who also then want to pay in bitcoin, this starts a sustainable move to mainstream use which supports the price.”

This post expands on that thesis. But first we have to look at an ugly backdrop which is the Bitcoin civil war. If we get a hard fork, all bets are off. Spoiler alert, I think the probability of that is now low (around 10%) so planning for the future makes sense. The bad news if you hold bitcoin – a 10% chance of total loss. The good news if you hold bitcoin – a 90% chance of a big appreciation.

Talking about a glorious future during a civil war is strange

We have about a 10% chance of apocalypse now in Bitcoin.

Nobody can say exactly when the Bitcoin Civil War will be over, but it will be over soon one way or another. It is a % game as I write. I rate the chance of a hard fork relatively low, around 10%. Assigning a % smacks of false certainty. All I mean is that the probability is low and investing is all about assessing probability (anybody selling a “sure thing” probably also has a bridge to sell you).

My reasons for saying this are based on my reading of the Bitcoin scaling challenges and solutions (see here). I think that Segwit makes sense technically and a move to a more commercial Bitcoin via Lightning network is just the way the world works, whether you like it or not. The pure P2P vision, where everybody runs their own node, will turn into a more commercial reality. Today we could all run a server in our closet, but most of us choose to trade control for convenience by using some cloud services for things we like to do like email, social media and blogging. The same thing is likely to happen in Bitcoin, with some centralized services within a free permissionless network. This will still be a free market, where anybody can connect and offer a new service. The permissionless genie will never go back into the bottle of control.

There is lot at stake in this civil war. If there is a hard fork, Bitcoin may not recover. I do not see this as just another Mt Gox. The damage to reputation among mainstream people will be too severe.

If Bitcoin dies, it will also drag Altcoins into the same shallow grave. Sorry to strike a morbid note, but I don’t buy the idea that a better Crypto Coin will arise like a phoenix from the ashes from the death of bitcoin. Yes this may happen in the really long term, but “in the long run we are all dead”. Try telling your average Joe/Josephine who is already skeptical of bitcoin “I know that bitcoin failed, but this one is better, really I promise”.

We will know when bitcoin is forked; there will be a lot of sound and fury. What is harder to know is when we can declare the civil war over; that event may be accompanied by silence. I asked @tonevays on Twitter and he responded with:

Screen Shot 2017-04-03 at 09.57.14

Hopefully peace will soon be declared.

Bitcoin’s Darknet phase was critical and will remain

To see how big the Darknet is, go to DeepDotWeb. The Darknet is a perfect early adopter market for bitcoin. The market may be a niche, but it is a big enough niche to prove the technology. There are plenty of people who do things that are illegal in some jurisdiction or another. They may live in a dictatorship or believe that what they want to do (such as use drugs) should be none of their government’s business. Crooks and good people co-exist in these markets.

Bitcoin needed Darknet users because they are motivated. Traditional payment methods don’t work for them, so they use bitcoin even if it takes a bit more effort.

Reality check in one chart – bitcoin is a tiny, tiny part of the world economy. That is why bitcoin needs to move to the Clearnet phase.

I am not suggesting that the Darknet will disappear. It will coexist with the Clarinet. It serves a real purpose.

Why Bitcoin will move to Clearnet phase

Clearnet does not mean that some big retailer adds bitcoin as a payment option. We had lots of Press Releases about that and it is not much more significant than adding some obscure Fiat currency.

The Clearnet phase will be when thousands or even millions of free agent knowledge workers charge for their digital products (code, writing, designs, movies, music, etc) primarily or entirely using bitcoin. They will price in bitcoin (or in Satoshi, depending on the price point) and offer conversion to Fiat and an option to pay using legacy payment rails (maybe for an additional fee). This is the bitcoin-first option.

The more radical is bitcoin-only. You are invited to pay in bitcoin and those who do not already have a bitcoin wallet are given links to help them get into the bitcoin economy. That network effect will drive adoption.

This will happen first in free agent, digital knowledge workers offering products/services cross border. Let me break that down:

  • Free agent. This means an individual or micro business, which accounts for an increasingly large share of global GDP.
  • Digital knowledge workers. The bitcoin Clearnet will happen first in digital products, because the no return irrevocability of bitcoin is easier in digital products where delivery and payment can be concurrent.
  • Cross Border. If somebody in Swaziland wants to pay somebody in Sweden (very close in the country pick list), what currency do they choose and what payment rail? Bitcoin is simply the easiest option, particularly if you get a more complex transaction such as Swaziland Bob pays 1 bitcoin to Sweden Alice with 20% automatically going to Ted in Tokyo who then buys something from Carol in Copenhagen.

Three reasons why this will happen in 2017.

  • Price move. The correlation of searches for “bitcoin” and a rising price are clear. When the price goes up, the mainstream notices.
  • Increasing Respectability. This varies by country. Switzerland is one where you can buy bitcoin at any train station, pay your taxes and speeding fines and it is all totally legal and normal. Japan is another country where bitcoin is legal and increasingly mainstream.
  • Real need. The highly educated knowledge worker gig economy is real. In Fintech that market is becoming bigger as managers leave incumbents (voluntarily or involuntarily) to set up shop as consultants. The bitcoin Clearnet means that highly educated knowledge workers  don’t have to trade their expensive education for a “career” driving a car for Uber.

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Bernard Lunn is a Fintech thought-leader and deal-maker. 

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.

Interview with Soul Htite of Dianrong to understand the intersection  of Supply Chain Finance and Blockchain

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Both subjects, Supply Chain Finance and Blockchain, get a lot of attention on Daily Fintech. So when we saw a solution combining them (called Chained Finance) we were intrigued. When we saw that the venture behind this initiative (Dianrong) is in China and that the Founder & CEO (Soul Htite) was a co-founder of Lending Club, we reached out to him to understand more.

I asked the questions that occurred to me. What questions should we have asked Soul? (tell us in comments).

 Soul please tell us about your professional journey and what Dianrong does?

As a technologist and entrepreneur, I’m constantly looking out for new opportunities to harness the potential of fintech to solve every day financial challenges.  This is what led me to co-found, firstly, Lending Club in the US and, more recently, Dianrong in China.

Dianrong has quickly grown into a leader in online marketplace lending in China, originating more than $300 million in monthly assets for 3.7 million retail lenders. We offer individuals and small and medium sized enterprises a comprehensive, one-stop financial platform supported by industry-leading technology, compliance and transparency.

We developed a sophisticated and flexible infrastructure that enables us to design and customize lending and borrowing products and services, based on industry-specific data and insights, all supported by online risk-management and operation tools.  Dianrong’s specific offerings include loan originations, investment products and marketplace lending solutions.

 As I understand it, Chained Finance is designed to provide financing to the vendors who are further down the supply chain. Supply Chain Finance works well today for the vendors who supply to the corporates who are investment grade. As I understand it, Chained Finance will get financing to the vendors who sell to that vendor. Can you give us an illustration about how this will work?

The complexity and scale of supply chain finance has posed major challenges in ensuring adequate funding and efficient operations.  Chained Finance creates a unique ecosystem that will provide supply chains with easier access to funding at competitive rates. In return, supply chain operators will gain greater visibility of their suppliers and the many layers of finance embedded in the process.

 Is it only one link in the chain (i.e. vendor to vendor of investment grade corporate borrower) or multiple links in the chain?

Chained Finance’s ecosystem provides a better link between supply chain operators and their vast network of suppliers.  Additionally, new loan assets generated by Chained Finance will be available to Dianrong’s 3.7 million investors, expanding the company’s portfolio of diversified investment options.

How is the credit priced? Is it based on the buyer’s credit rating (as in traditional Supply Chain Finance)? Or is it based on the seller’s credit rating as in Factoring, Receivables Financing and other SME lending?

The Chained Finance pricing model is proprietary.

 What stage is Chained Finance? Have transactions already been completed. Can you share what sort of APR % the SME companies are getting and how this compares with other SME lending?

 Chained Finance successfully completed a successful six-month pilot with FnConn, which originated US$6.5 million (RMB45 million) in high-quality loans for supply chain operators, many of whom were unable to secure needed financing in the past.

The pilot was only recently completed, so it is premature to disclose representative APR data.

Please tell us why you use blockchain technology as opposed to some other distributed database technology and a bit about the technology?

 Blockchain technology allows both lenders and borrowers to gain unprecedented control and transparency of their records.

Lenders gain greater transparency of the financial history of borrowers, enabling them to make better lending decisions. This capability enables financial institutions to lower the risk of potential bad debts and problematic financial sources.

For borrowers, the technology provides a comprehensive track record of their financial history, which increases their creditability when applying for a loan. Borrowers also have greater control over who has access to their records, because borrower data can only be obtained with their approval.  That efficiently avoids borrowers’ personal information being abused by third parties, e.g. lead generation companies.

The primary benefit of blockchain is the transparency, and thus security, of the data transacted within the system.  At Dianrong, compliance and transparency are part of our DNA. This is why we are integrating blockchain technology across our entire platform.

Is this a permissioned or permissionless system?

Permissioned.

What blockchain technology do you use (e.g. Ethereum, Hyperledger). Please tell us why you chose this technology

Chained Finance was designed to be technologically (and geographically) agnostic.  That said, Dianrong is an active participant in the Hyperledger project.

 Soul, please give us your vision of where Chained Finance could go in the future.

By harnessing the power of blockchain, the Chained Finance platform is geographically agnostic. So, while Dianrong’s initial focus is on China, where 85% of SMEs have no effective access to funding, the potential for the platform goes far beyond China’s borders.

Blockchain for supply chain finance extends to any large company that has a complex supply chain and, as such, is enormous.  The electronics, garment and auto industries are a natural fit.

Chained Finance offers large multinational manufacturers unprecedented transparency and risk control capabilities for their supply chain finance ecosystems.

Thank you, Soul

What questions should we have asked Soul? (please tell us in comments).

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Bernard Lunn is a Fintech thought-leader and deal-maker. 

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.

 

Crypto equity via ICO and the other innovation chasm

 

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Are you a bull or a bear on this question?

– Crypto equity via ICO is the secret to unlocking innovation capital and is the bridge across the chasm between crowdfunding and public market liquidity. This is the bull case.

Or:

– Crypto equity via ICO is a haven for scamsters and needs to be heavily regulated. This is the bear case.

Today we shine a light on that question. First we outline the bull and the bear case. Then we ask some experts to give their views. Bias disclosure: I am a bull, but having seen a few waves of disruptive change I know that change takes a LOT longer than people think and that the early unregulated wave of any disruptive change has a lot of what are politely referred to as “sketchy characters” and less politely as scamsters.

The other innovation chasm

The old saw is “if it ain’t broke, don’t fix it”.

The corollary, for entrepreneurs, is “if it is broke, find a way to fix it”.

The innovation capital business is broken.

Most entrepreneurs understand the chasm between MVP (Minimum Viable Product) and PMF (Product Market Fit). The low cost to build MVP increases supply, but real demand does not change that fast, so lots of MVP ventures fall into the chasm (i.e. they fail).

The next chasm is less well understood. This is the chasm between PMF and Liquidity (via an IPO on the Public Markets and failing that via trade sale).

Today, we don’t see this chasm so clearly because there is a very expensive bridge across it – in a few locations. The very expensive bridge is provided by the big PE/VC Funds. Uber has raised over $8 billion and is still supposedly not ready for an IPO. That is an expensive bridge a) for the Limited Partners (aka the LPs aka the real investors who pay the PE/VC Fund Manager their 2 and 20 cut) and b) for the entrepreneurs (faced with all those preferential equity terms that toss founder and management equity to the bottom of the stack).

Not only is the bridge very expensive, but it is only available in a few choice locations. If you are in Silicon Valley, no problem, there are lots of expensive bridges. If you are in New York, London, Singapore, you have a few bridges. Outside those centres you are scrambling and doing so in the knowledge that some entrepreneur in Silicon Valley just raised 10x what you raised and is planning on using that to crush you.

It gets worse. Unless you do your IPO on NASDAQ or NYSE, you will face a discount. Look at the valuation discount of great companies trading on reputable stock exchanges all around the world. So now you have a second very expensive bridge operated by the “bulge bracket” investment bankers (such as Goldman Sachs and Morgan Stanley) who you use to “take you out to IPO”.

So, yes it is broken. The innovation capital business does need fixing. Whether some variant of the ICO is the fix is what we now turn our attention to.

Crypto equity via ICO 101

ICO = Initial Currency Offering.

It makes you think of IPO. That means it also makes regulators think of IPO.

Yet it is C for Currency, not company shares. You buy a Crypto Currency Token that you can use on the network.

Some examples of ventures that have been funded in this way include:

  • Storj
  • Lykke
  • Ethereum
  • ZCash

In all cases, traditional VC were not in control. Sure they could invest alongside everybody else. But they had no information advantage.

The Howey test (from an SEC legal case from 1946) is basically – if it looks and acts like an equity it probably is. Many ICOs fail this test, putting them in the regulatory cross hairs.

Crypto Equity Bear Case

It is very simple to raise money via an ICO. This will bring out honest entrepreneurs who are fed up with the current way of raising capital. It will also bring out crooks. It already has. So far the losers have been people playing with found money. For example if you invested in Bitcoin in 2009, putting some of those profits into Ether in 2014 seems pretty easy, even if you follow it up by losing on the DAO in 2016. It is quite different when Joe Q Public is invested from earnings that took 40 years to accumulate and which he is banking on for a comfortable retirement. If ICO scales, more crooks and more Joe Q Public actors get involved.

Crypto Equity Bull Case

Crypto Equity – done right helps ventures get across both chasms:

  • Chasm 1 between MVP and PMF. The investors are often also the users. They use the tokens on the network. So they help get the venture to PMF.
  • Chasm 2 between PMF and Liquidity. The Crypto Currency Token is traded. Speculators provide liquidity.

The fat protocol thin app thesis

This thesis was articulated by Fred Wilson of Union Square Ventures in August 2016. I urge you to read the whole post and the very informed comments from the community. If you don’t have time, these two pictures paint a thousand words:

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The original thinking, from 18 months earlier and, amazingly prescient being  a few months even before the Ethereum ICO, was from Naval Ravikant (founder of Angel List who we have written about here, here and here).

What do the experts say?

The experts we reached out to are in what I call the “Other BBC” space (Bitcoin Blockchain Crypto), so they will be inclined to a bullish case. If you have an alternative view, please let us know in comments.

My questions to them are:

  • Use Case Suitability. Is ICO only suitable to businesses at what USV call the fat protocol layer? This will be very few companies. Or could the ICO, with some modifications and regulations, be used for any company? If yes to the latter, what do you see as the essential modifications and regulations?
  • ICO Lessons. What key lessons should entrepreneurs, bankers and regulators draw from the ICOs that have happened so far?

Use Case Suitability

From Fabio Federici

“I think we need to distinguish between two types of tokens. On one hand, we have the tokenization of equity, where the token does not serve any specific purpose in the product/protocol but rather represents a digital form equity as we know it today. While this will improve liquidity and efficiency, I don’t believe this to be a paradigm shift.

On the other hand, we have decentralized blockchain-assets, ranging from currencies (BTC), over commodities (ETH) to application-specific tokens like Golem (a decentralized AWS) or Storj (a decentralized Dropbox) (see @ARKblockchain). These are just some examples blockchain-based assets, where the value of the network is captured by its users, rather than a centralized entity – and that is what will power the next phase of the Internet. I believe that the most exciting use-cases are yet to come. Just like it was hard to imagine Google, Snapchat or Uber in the early days of the Internet, it is impossible to predict the applications that decentralized blockchain protocols will enable.”

From Oscar Jofre  (see our review of his Korecox venture here).

“I am a bull/bear crossover on this subject because of the lack of oversight even by the industry to make sure proceeds are used in a manner that will not cause a domino affect of disgruntled coin holders in an empty network.

Not everything needs regulations but given that the retail market is just learning of the crypto currency, the industry needs to mature so this can be a very viable method for companies to utilize.  Unfortunately at the moment we are not seeing that and my bear comes out because I am seeing first hand, how companies are using ICO as a form of equity raise and not having a care if the person purchasing their coins makes any return on that investment.”

Richard Olsen of Lykke:

“In future, any company will be able to take advantage of the ICO route. No regulatory changes will be necessary, because Lykke will acquire the necessary legal licenses and future ICOs can happen under the Lykke umbrella, www.lykke.com

ICO Lessons

From Fabio Federici:

“I think it is important to distinguish between the tokens representing pure equity, and blockchain-based assets that serve a purpose in a protocol. While the first is just a digital version of what we know today, the latter represents a new type of asset class.

Also, one should always take a close look at each asset before making a decision, whether it’s building on it, investing in it or regulating it. Many factors play into the evaluation of these assets, from the aforementioned purpose to the fundamentals, the code, the team and many more. We are still in the early days – ontologies and (e)valuation methods have yet to be developed.

The main lesson for me is to keep an open mind and evaluate each token or asset individually. We are in the midst of the rise of a new asset class that will change the world.”

From Oscar Joffre

“ICO’s are here and need guidance. They are not used to harm but to really bridge the large funding gap we have globally for companies.  The industry can choose to be proactive and self-regulate, which in the end will be better than regulators injecting in.”

Richard Olsen of Lykke:

“The new future has started – entrepreneurs, bankers and regulators have understood that ICOs are a new reality and are essential funding tools. They combine cost efficient funding with building a motivated network of supporters.”

 Conclusion

Crypto Equity is a gamechanger – if done right.

Those three little words –  if done right – cover a lot of complex detail.

We can leave that to regulators in each jurisdiction to create their rule books. That can take a lot of time and will devalue the frictionless cross border nature of ICOs today. Or the community can create a self-regulatory code of conduct as Oscar Jofre suggests. We have opened a thread on Fintech Genome where this initiative can be crowdsourced.

http://genome.dailyfintech.com/t/crypto-equity-via-ico-self-regulation/965

 

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Bernard is a Fintech thought-leader & deal-maker.

Get fresh daily insights from our amazing team of Fintech thought leaders around the world. Ride the Fintech wave by reading us daily in your email.

Blockchain needs to become technically boring

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Clay Shirky, in Here Comes Everybody, writes:

“Communications tools don’t get socially interesting until they get technologically boring.”

Two examples of boring technologies having a big impact on Fintech are QR Codes and Prepaid Cards.

Blockchain is definitely not boring. It will probably have a bigger impact than QR Codes and Prepaid Cards, but it may still fade into the sunset of overhyped technologies. It is exciting because that is a huge delta – change the world or dustbin of history.

I incline to the former – that Blockchain will change the world.

However, that promise won’t be fulfilled until Blockchain becomes technologically boring. This post looks at why that is true and at efforts to make it technologically boring.

War is exciting too, but not productive

The internecine wars among Blockchain technologists are really exciting for those on the front lines. For the rest of us, who cannot say anything technically profound about SegWit and Lightning Network and Proof Of Stake, it is alienating. Could we just get a product we can use?

The answer is no, not really, not yet. In this post we looked at the scaling challenges. TL:DR: there is still technical risk here. Or to put this another way, build a proof of concept, attend hacktahons and conferences, issue Press Releases, but don’t bet your company’s future on this – just yet.

The technical debates are pretty ugly. It is like watching Blue and Red states in America. There is no middle ground and a lot of dialogue of the deaf – if I shout louder maybe you will hear me and agree with me. The Bitcoin scaling debate has rightly been compared to a Civil War within the Bitcoin community.

The reason that there is so much heated debate is that this is no longer just a cool computer science open source project. Real money is at stake. That makes people cautious. Yet it is broken today – as it stands, Bitcoin cannot scale.  So there is technical debt and legacy code and innovators dilemma. Welcome to the real world.

Boring is good for employer, not employee

Java, the Cobol of the modern era is a good example. It is boring and for an employer that is a good thing. Java coders are abundant and inexpensive. As an employee, the words abundant and inexpensive signal bad news. It is much more profitable to be an expert in an obscure but hot language. Even better to be an expert in Blockchain. So few people really understand it technically and yet because the upside & downside for huge enterprises is massive and existential they have been spending multi-million $$$$ on Proof Of Concept projects.

The Multi-Million $ Proof Of Concept

Blockchain will make tea for you in the morning. Blockchain will also make you a better lover. Back in the real world, most of the systems that Blockchain is being proposed for could use standard database technology (aka boring technology).

The reality is that in 2016, just the word “Blockchain” unlocked enterprise budgets.

It is a good time to be a Blockchain guru. For companies looking to avoid the Blockbuster fate a pitch that “this could be how we become the next Netflix” is beguiling enough to unlock multi-million $$$$ budgets for Proof Of Concept projects. These projects cannot grow beyond POC, because there is still technical risk around scaling, but the prize is big enough so the budgets get unlocked. The POC is simply an option on the future.

You can take two views on this:

A. It is all nuts, all the money going into POCs is wasted because Bitcoin/Blockchain will never scale.

B. The scale of the opportunity/risk is so great that some wastage is normal and the cost of doing nothing is worse.

I incline to B but also think it could be done more efficiently.

Three Months and Six Figure POCs

Three months and budget in 6 figures is the normal rule for a POC if you cannot use the magic B word to unlock multi-million $$$$ budgets for projects lasting 12 months or more. Coding a prototype to show stakeholders is easy – it can be done in days or weeks. Before that some work to determine business strategy and the level of technical risk is needed. The key job is EAU (Education Awareness Understanding) for senior stakeholders. The ones making the big decisions need to understand Blockchain beyond the simplistic “it’s a distributed ledger” mantra. There is too much at stake to simply leave these decisions to technical people without any understanding of how it really works.

Two things to make Blockchain technologically boring

One should be able to:

A. Create smart contracts aka Blockchain apps as easily as building a mobile app with lots of free components and standard tools that millions know how to use.

B. Deploy to any Blockchain with any cyber currency with any validation scheme (Proof Of Work, Proof Of Stake etc) as easily as deploying to AWS or Azure or any other cloud service.

I can see enough progress both within Bitcoin (Segwit, Sidechains and Lightning Network) and Ethereum to feel confident that this will happen and while I cannot see exactly when this will happen, I do believe it will mostly happen in 2017. If not, then Bitcoin and Blockchain will disappear into the dustbin of history. Yes, there is a lot at stake in those technical debates!

It’s OK, we are Blockchain not Bitcoin

Then there is the enterprise wing of the Bitcoin party. Their line is:

“We don’t need Bitcoin.  That can be a failed experiment and it won’t matter to us because we just need to scale to enterprise level and that is easy”.

Yes, it is easy to scale a Blockchain system to enterprise level, but why bother? This handy decision chart helps you figure out whether you need a Blockchain.

Blockchain Decision

In the vast majority of cases, the answer is no. In those cases, enterprise tech companies like Oracle will happily sell you the technology that gives you what you need without any Blockchain. For a skeptical take on Blockchain by Oracle, read this. Moving from POC to enterprise deployment puts $ billions at risk. That won’t happen while there is technical risk.

That is why the “we don’t need Bitcoin because we are enterprise” line is baloney. If Bitcoin fails, it will drag Blockchain along with it. Technically we can insert a “better cyber currency” but if Bitcoin fails, the sentiment crash will kill Blockchain projects and Altcoins as well. The naysayers on the project approval committee will have a field day.

Google Deep Mind AI and Immutable trust without Blockchain

Boy is that a tough headline guaranteed to lose clicks! The headline where I saw this was in the Guardian and it did draw me in with “Bitcoin-like” in the headline. The use case is healthcare, but it applies also to banking as we will see later.

“Google’s DeepMind plans bitcoin-style health record tracking for hospitals”

Hat tip to famed Femtech leader Efi Pylarinou for sharing this in her Twitter feed.

However when you dig below the surface of the headline, as is our habit at Daily Fintech, you get a more nerdy conclusion that reflects back to our core thesis that enterprise Blockchain is a passing phase that will lead to maybe 1% of the current enterprise Blockchain POCs turning into large-scale deployments.

This was great tech reporting by the Guardian. They related some deep tech to a concern shared by millions – privacy of medical records.

“Google’s AI-powered health tech subsidiary, DeepMind Health, is planning to use a new technology loosely based on bitcoin to let hospitals, the NHS and eventually even patients track what happens to personal data in real-time.

Dubbed “Verifiable Data Audit”, the plan is to create a special digital ledger that automatically records every interaction with patient data in a cryptographically verifiable manner. This means any changes to, or access of, the data would be visible.

DeepMind has been working in partnership with London’s Royal Free Hospital to develop kidney monitoring software called Streams and has faced criticism from patient groups for what they claim are overly broad data sharing agreements. Critics fear that the data sharing has the potential to give DeepMind, and thus Google, too much power over the NHS.”

To understand the tech, dive into the blog post by the Google Deep Mind team to understand how verifiable data audit sounds like Blockchain but does not use a decentralized trust-less consensus mechanism to verify transactions.

What you will see sounds like Blockchain:

– immutable, append only: check

– Verifiable aka transparent in real time: check

– Merkle like tree structure: check

But it does not use a decentralized trust-less consensus mechanism to verify transactions. This makes it more efficient. There are no proof of work miners. Nor are there any as yet unproven consensus mechanisms such as Proof Of Stake.

The cost is some level of trust in institutions.

That pitch will resonate with the CXO suite at these institutions.

This is why I was writing as far back as November 2015 that the permission enterprise blockchain was a mirage beguiling both banks and IT vendors. This is like the Intranet phase of the Content Internet.

Commercial break: get these kind of insights ahead of the pack by subscribing to Daily Fintech – its free.

The big debate about PSD2, which we cover a lot on Daily Fintech, is who owns your banking data – you or the bank. Translate that to healthcare – where consumers care more about personal data and you have what Google is offering. Google is smart to launch first in Europe where consumers (and regulators) are more concerned with data privacy.

It’s binary. Bitcoin (and Blockchain) will either change the world or fade into the dustbin of history. When it does change the world (I think it will), then being a Blockchain guru will be about as exciting as being an HTML or TCP/IP guru today.

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Japan is another rich developed country where Bitcoin is becoming respectable

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Respectable is a prelude to mainstream. Bitcoin needs to seem normal, legal and safe before it can go mainstream. In this post we look at the signs of that happening in Japan.

Switzerland is another example of a rich developed country where Bitcoin is becoming respectable. Switzerland and Japan also have strong currencies. This is the opposite of the theory that Bitcoin adoption would happen first in countries with failing currencies. Many people were drawn to Bitcoin by dreams of stateless trust based on math replacing more authoritarian governance. So the meme got established that Bitcoin would first go mainstream in countries like Argentina; we debunked that theory here.

Japan is the third largest economy in the world (after America and China), so Bitcoin adoption here is a big deal.

Japan is where we go for some of the early history of Bitcoin. Magic The Gathering Online Exchange became MTGox. From trading cards beloved by nerds, they went to trading a currency beloved by nerds. When MTGox went bust and lots of people lost lots of money, it became a byword for the lawless dangerous world of Bitcoin.

That could be the end of the story, but it turns out it is only the first chapter. In chapter two, Japan has made three moves to encourage Bitcoin adoption:

  • Regulated Exchanges
  • Legal currency status
  • Elimination of sales tax

This has led to some good business results:

  • No 2 in trading volume
  • 5,000 merchants accepting Bitcoin
  • Strong VC funding (in a generally weak environment)

Regulated Exchanges and Insurance

The MTGox failure was explained by a simple old fashioned problem – commingled accounts. When you buy IBM shares on NYSE, you don’t worry that the NYSE can get your IBM shares. That is an easy fix; but it still needs to be policed/regulated.

In 2016, Japan passed a bill that mandates that virtual currency exchange operators have to register with the Japanese Financial Services Agency and submit to on-site inspections and KYC practices.

This level of regulation encourages insurance companies to step up the plate and offer insurance to bitcoin exchanges (a subject we first covered in this post).

Mitsui Sumitomo Insurance cover ranges from ten million yen (US$88,500) up to one billion yen (US$8.85 million). It also covers loss from internal and external threats, including employee theft, mistakes, cyberattacks, and other unauthorized access.

The first customer is Japan’s largest bitcoin exchange, Bitflyer. By working with a highly professional exchange, Mitsui Sumitomo Insurance can also offer best practice advice. After a number of bitcoin exchange blow ups, the best practices are now well established. If a bitcoin exchange follows these, the risk of loss goes down (which is good for the Insurer) and being insured will help bitcoin exchanges to gain consumer confidence.

Fear of getting ripped off is no longer a deterrence to bitcoin trading. Now it comes down to standard risk/reward calculations that traders make every day. Today bitcoin offers two things that traders love – volatility and wide spreads. However, none of this could happen until the exchanges became safe.

Legal Currency status

The new law defines bitcoin as a legal currency that can be used to make payments and an asset that can be transferred digitally. That is simple but game-changing. You may pay for illegal things using bitcoin, but the currency itself is just as legal as a suitcase full of cash in a parking lot.

No sales tax

Later in 2016, Japan defined plans to drop sales tax on Bitcoin.

This is not yet a done deal, but could take effect as early as July 2017, according to CoinDesk. This means customers don’t have to pay tax for each transaction. This is similar to the early days of e-commerce when no sales tax was levied. This will make paying with bitcoin more attractive, by making it cheaper for the buyer and lower admin for the seller.

So much for what has been done to encourage adoption, here are the signs are that adoption is happening:

  • No 2 in trading volume
  • 5,000 merchants accepting Bitcoin
  • Strong VC funding (in a generally weak environment)

No 2 in trading volume

While China is easily the leader in Bitcoin trading volume, Japan is the silver medalist. As in China, a lot of the volume can be attributed to the fact that Bitcoin trading on exchanges is zero cost in China and Japan, encouraging frenetic trading that does not mean that much. Many say that real volume is less than 30% of headline volume.

While the trading volumes may be misleading, there is a wall of money ready to move into bitcoin trading if Mrs Watanabe steps seriously into the game. Mrs Watanabe is the archetypical retail investor in Japan. Culturally, Japanese retail investors have sought safe investment options. However, perpetually low interest rates since the 1990s led many to become active in the carry trade (in which investors borrow a low-cost currency like the yen and buy high-growth currency, netting a profit). It is a short step from that to trading in bitcoin, which is attractive to traders because of volatility and wide spreads.

The real proof of the bitcoin pudding is whether it is being used to buy and sell goods and services.

5,000 merchants accepting Bitcoin

Today more than 5,000 merchants and websites in Japan accept Bitcoin as payment.

We still cannot see merchant transaction volume, a subject we covered in our latest bitcoin ecosystem health check.

Some speculate that the Olympics, due in Tokyo in 2020, will give bitcoin a boost as visitors can pay in bitcoin rather than converting to Yen. This is where the sales tax could be critical.

Strong VC funding

In a generally weak environment for bitcoin VC deals in 2016, Japan saw two significant deals – bitFlyer and Techbureau.

bitFlyer

The third largest VC investment in 2016 happened at the end of April for US$27 million to Tokyo-based Japanese bitcoin exchange bitFlyer. It was a Series C round, bringing their total funds raised to $33.94 million. Investors include Venture Labo Investment and SBI Investment.

TechBureau

TechBureau, which operates a bitcoin exchange called Zaif and a permissioned blockchain platform named Mijin, raised $6.5m in a Series A. Participants in the round included Arara, a financial services firm; online information portal OKWAVE; VC firms Nippon Technology Venture Partners and Hiroshima Venture Capital; and FISCO, a corporate analysis firm. TechBureau bill themselves as a ‘Crypto-FinTech Laboratory.’ Many Japanese startups and projects were born in the lab including the popular Zaif bitcoin exchange.

Regulation does matter – ask Coinbase

Compare Coincheck which has the lion’s share of bitcoin merchant processing in Japan to Coinbase which has that position in America.  While Coincheck operates in a relatively benign regulatory environment, Coinbase is in legal battles with the IRS.

The key part of merchant processing is off ramp ie converting to Fiat. This a function of an exchange. Lots of traders also make for liquidity and price discovery which will be good for merchant adoption and mainstream use. So the Japanese focus on exchanges makes total sense.

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