Crypto Liquidity aggregators in need for institutional trading

liquidity

Liquidity is one of the main attributes of an asset class that deserves an allocation in a retail or institutional portfolio. Clashing indicators that measure liquidity especially for over-the-counter financial assets, are nothing new. Corporate bonds or stock options, for example, are largely traded over the counter; liquidity fluctuates and measures are more than one (e,g, issue size, bid-ask spread, trading block size, price impact from trade, etc).

Naturally, the emerging crypto asset class cannot escape the liquidity conundrum. With this year’s increase in the overall market capitalization and with more than 5,000 tokens now issued on the blockchain ecosystem; we start paying attention. We have already witnessed the first flash crashes on exchanges, like GDAX run by Coinbase, simply because a large order came in that resulted in wild price swings.

On June 21st, 2017 around noon EST: “Within seconds the price of ETH crashed from ~$320 to as low as $0.10. While the price recovered quickly, the rapid price movement caused many traders to experience margin calls or stop loss orders, resulting in potentially severe losses.” Source; Coinbase is reimbursing losses caused by the Ethereum flash crash

 This recent flash crash was caused by a multimillion dollar sell order ETH/USD. Given the crowded pipeline of crypto-hedge funds (see more details in Shapes and colors of the booming US crypto hedge fund space) we expect an increased need for liquidity providers in the crypto asset class. Add on to this, the additional emerging appetite from asset managers (fund managers, family offices, pension funds, governments etc) there is a pressing need to create liquidity pools for institutional trading of cryptos.

I see a significant risk for the crypto asset class because there are too many startups building software and apps to facilitate the evolution of the crypto market, but there won’t be enough liquidity to accommodate the users of these technologies (especially for institutional appetite) once they grow out of the MVP-beta phase. I am worried even more because this pipeline of technology is also congested and we will be flooded with such tech-tools in the next 3-4 quarters.

Crypto Liquidity aggregators in need. The race is on!

Who’s who in the crypto liquidity aggregation space at the institutional level

 To trade large quantities of crypto assets, there are few established businesses:

Cumberland is a US mining company offering two-way markets for institutional size transactions (probably the largest). Genesis Trading and Itbit is based out of NY; Circle Financial, out of Boston (the money transfer company); and Gemini Exchange (the Winklevoss Brothers). Bitcoin Suisse from CryptoValley Switzerland.

The biggest problem institutional clients face is that each exchange operates in isolation and has its own cumbersome agreement requirements.

There is a pipeline to address the problems around the liquidity for crypto-assets, that really needs to be filled up. I have identified the upcoming platform, code-named “Project Omni,” that is being designed to serve as “the first large-scale institutional infrastructure specifically targeted towards crypto assets” from an ex-State Street executive.  The B2Broker who is building liquidity and brokerage software for the crypto space; a broker and a B2B liquidity enabler with a business focus towards the East (from the Arab world all the way to Japan).

Who else did I miss, operating in the crypto institutional space?

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Efi Pylarinou is a Fintech thought-leader, consultant and investor. 

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Blockchain Bitcoin & Crypto Weekly CXO Briefing for week starting 21st August 2017

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 Cash Price Nears $1,000 as Breakout Continues

Decrypted: Three weeks ago we had Bitcoin’s hard fork, that resulted in the creation of Bitcoin Cash. This week we have Bitcoin Cash reaching a record high near $1,000 and market cap of around $16 billion.

While Bitcoin’s price has rallied to new highs since the hard fork, reaching $4,500, Bitcoin Cash appears to be finding some support with significant gains this week. Bitcoin Cash has showed its potential for significantly increasing transaction speeds and it looks like miners have found it increasingly profitable to mine Bitcoin’s new offspring.

Our take: Bitcoin Cash (BCH), an alternative version of the original Bitcoin (BTC) that was launched by a minority of developers on August 1st, climbed to $972.55, according to CoinMarketCap. This is the highest Bitcoin Cash has ever reached in less than three weeks, a jump of almost 374% from its first day of trading.

Bitcoin Cash differs from the original Bitcoin. It supports an 8 MB block size, but does not address the malleability issue, which is supported by Segregated Witness.

When Bitcoin Cash became available, most investors started dumping what they considered to be free coins. The current price surge shows that investors are betting on faster processing speeds, and miners demonstrated that the new digital currency can support an 8MB block size, a huge advantage over the current 1MB block size of Bitcoin.

Miners often switch their mining power between different currencies depending on their profitability. Currently, Bitcoin Cash is more profitable for miners. Bitcoin Cash is now 69% more profitable to mine than the original Bitcoin. The rising price and reduced difficulty to mine the digital currency has created the incentive for miners to dedicate more horsepower to the new digital cash. The Bitcoin blockchain charges higher fees for transactions, in comparison to Bitcoin Cash that has very low fees.

Today, Bitcoin Cash does not have Bitcoin’s reach and only a few major exchanges are supporting it. In this recent price surge, more than half of the trading volume came from three South Korean exchanges, Bithumb, Coinone and Korbit. This growth indicates confidence that the price will keep moving up and could be a sign that more exchanges will soon see a value in mining Bitcoin Cash.

More and more investors, banks and institutions are adopting Bitcoin and providing methods for investing in cryptocurrencies. Only time will tell if this is a battle with only one potential winner or whether both versions of Bitcoin can coexist.

Right now its still be too early to compare Bitcoin Cash to other digital currencies like Bitcoin and Ethereum, yet traders are proving it might have staying power.

News Item 2: Twitter Investor Helps Develop Blockchain-based Social Media Platform

Decrypted: Last year, Naval Ravikant tweeted“Today’s social media, payment, identity, & application platforms will ultimately be replaced by distributed, uncensorable, open source ones.”

A few days ago, he revealed a plan to sponsor a prize to create a Blockchain-based alternative to Twitter, using the Blockstack platform. With this plan the co-founder of AngelList, proposed an edition of Twitter that will have no central authority and the users will be able to monetize their contributions.

Ravikant is not the only one with plans to support new blockchain content platforms. Albert Wenger, a partner with Union Square Ventures has revealed plans to fund a new prize aimed to incentivize blockchain-powered blogging platform.

Our take: Blockchain is the most disruptive idea since the Internet. The disruptive potential of Blockchain has proven to be limitless, not just to currencies like Bitcoin, but to every industry around us. The potential applications of blockchain will be disrupting everything, and one the industries that is ripe for disruption is social media.

Today’s social media are centralized networks, made up of users that give up their personal privacy, data protection and ownership of the content they create. Most social networks collect information, interests and habits of their users in order to monetize the data through advertising. They heavily guard this data and many of the big social networks, like Google, Facebook, Twitter and Linkedin, act as identity providers for other sites and apps that use OAuth-based authentication and single-sign-on mechanisms.

Facebook’s algorithms control the news that reaches 2 billion people, in many ways creating censorship and potential bias that prevents people from encountering new and interesting ideas.

The content on social networks produces a massive financial gain for the platform, rather than the user that creates it. Users produce quality content, but their work is consumed by the platform, leaving them with no real financial gain. Also users have no control over the ads that appear with their content, and many feel that advertising may diminish the value of their work.

Blockchain technology can provide a more democratic and secure way to share content, preventing many of the problems that social networks have been criticized for in the past. The use of blockchain technology can enable users to control their data, escape the censorship imposed by platforms like Facebook and Twitter and get paid for the content they create.

There has been lots of talk around the idea of using blockchain to build the social networks of the future and numerous of projects have sprang out. Most of these new services are still their early stages.

Steemit is a content-sharing site where posts are ranked by popularity, similar to Reddit, it allows private messaging and the ability to follow specific users.  It was launched in March 2016 and since its user base has grown significantly. The most interesting feature is the way it rewards users. When users produce or share content, they receive Steem tokens. These tokens can be exchanged for fiat currency or used to vote on how the platform will evolve, giving users power over the future of the platform. The content users see is not filtered or controlled by an algorithm, preventing any form of censorship. Also because the data is on blockchain, Steemit doesn’t control or own any of the data created by its users and cannot use it to sell advertising.

AKASHA is like a decentralised Twitter, that uses the Ethereum blockchain to store the content created by users. The content is broadcasted across Ethereum’s decentralized network and votes are bundled with Ethereum microtransactions. When content gets votes, the content creator can earn some Ethereum from it.

Synereo is another decentralized, next-generation social networking and content delivery platform. Synereo has created tools that lets users monetize original content, get rewarded for sharing quality content with others and also discover the best content on the Internet.

A new breed of social media networks is emerging. Blockchain can radically shift social media to a new level. Its introducing decentralization that encourages free speech and has the power to reinvent the very basics of how content is shared and profitably distributed.

News Item 3: Government Agencies Adopting Bitcoin and Blockchain Technology

Decrypted: Cyber warfare is an emerging new threat that can be used to achieve strategic superiority, destabilize states, and cause large-scale economic damage. Breaches of sensitive data, mass disinformation campaigns, cyber-espionage and attacks on critical systems can affect individuals, businesses and governments.

Until recently, cyber-espionage was mostly used by large corporations with the goal to gain an unfair advantage over their competitors. The main risks, from a business perspective, were intellectual property infringements, disclosure of trade secrets, and economic espionage.

But now government organizations are looking very closely at the potential of blockchain, as a technology to build systems that will prevent data theft and tampering and provide secure communications.

Our take: High-profile attacks, such as those against the German Parliament in 2015, against Chancellor Angela Merkel’s Christian Democratic Union party in 2016, or against the US Democratic National Committee are a clear sign that politically-motivated cyberattacks are gaining in scale, hostility and sophistication. In 2016, the United States accused Russia of cyberattacks against the Democratic National Committee in order to interfere with the outcome of the US. Presidential election, while media reported a record year for data breaches.

Cyberattacks are a growing problem for western countries and the timeline below shows us just how big the problem really is:

  • December 2015 & December 2016 – Power grid in Ukraine: 230,000 people were left without power for up to 6 hours. Its the first time that a cyber-weapon was successfully used against a nation’s power grid.
  • February 2016 – Central bank of Bangladesh: USD 81 million were lost and a further USD 850 million in transactions were prevented from being processed.
  • February 2016 – FBI and Homeland Security: Personal details of over 20,000 employees of the Federal Bureau of Investigation and 9,000 of the Department of Homeland Security were accessed.
  • April 2016 – Philippines’ Commission on Elections (COMELEC): Personal information of every single voter in the Philippines, approximately. 55 million people.
  • April 2016: Democratic National Committee Publication of 20,000 e-mails stolen from the Democratic National Committee.
  • October 2016 – Domain name provider Dyn: A distributed denial of service attack resulted in the break-down of some of the biggest websites in the world including Twitter, The Guardian, Netflix, Reddit, Airbnb and CNN.
  • October 2016 – Australian Red Cross: Personal data of 550,000 blood donators stolen.
  • November 2016 – Deutsche Telekom: 900,000 people suffered Internet outages over two days.
  • November 2016 – Tesco Bank: Around £2.5 million was stolen from around 9,000 customers in this hack, the largest on a UK bank.
  • November 2016 – NHS hospitals: Hospital machines were frozen to demand ransom cash. At least four NHS funds were attacked.
  • November 2016 – Yahoo: Data breach of 1 billion accounts.

The cost of cyberattacks is enormous. A 2014 study estimated the economic impact of cyberattacks in the European Union to be around 55 billion euro, with Germany being most affected. The study forecasts that the economic cost of data breaches globally will quadruple by 2019, reaching 2 trillion euro, almost four times the cost of 2015.

A recent memo by the Foundation for Defense of Democracies outlines several potential scenarios in which outside forces attack or infiltrate America’s national security industrial base.

The US. government apparently sees the potential in blockchain technologies. This past May, the Department of Homeland Security (DHS) listed several blockchain companies that received innovation grants.

An article in the Washington Times suggests that the Pentagon and NATO have been exploring blockchain technology as cybersecurity shield.

A few decades ago, the Defense Advanced Research Projects Agency (DARPA) helped create the Internet and now its exploring how blockchain can help create a secure messaging platform, that will eventually be used for communications in the battlefield.

Cybersecurity relies on secrets and trust to maintain security, but neither can be guaranteed. Blockchain operates independent of secrets and trust. Its a shared, distributed, tamper-resistant database that every participant on a network can share, but that no one entity control. Blockchain can preserve the “truth” in couple of ways. First, it ensures that digital events are widely witnessed by transmitting them to other nodes on the blockchain network. But it also use consensus. These events are secured in a database that can never be altered. Blockchain enhances the cyber defense’s perimeter, not by helping to hold up the walls, but by monitoring the walls and everything within them.

Blockchain provides a fundamentally different approach to cybersecurity, potentially improving the defense against cyberattacks, as the it can secure, prevent fraudulent activities through consensus, and detect data tampering based on its underlying characteristics of immutability, transparency and data encryption.

OpinionJohn McAfee: Bitcoin Price Bubble Talk “Absurd”

After a gargantuan leap last week, the price of Bitcoin hit a record high above $4,500 on Thursday and the total value of the cryptocurrency reached an astonishing $74 billion.

The media is once again abuzz with the self-proclaimed experts telling anyone that will listen, that crypto is a classic bubble. This is worrying and fascinating at the same time. Everyone is jumping into the market, fuelling a spectacular bubble that Goldman Sachs predicts will burst within months.

Since the beginning of the year, we’ve seen a lot of volatility, mostly due to the scaling debate that was going on for the past couple of years. With the SegWit activation locked in, good things will happen. It looks like they already are happening, the first being the uncertainty is reduced.

The second important thing that’s happening, is institutional acceptance. Institutions are starting to come into the market. High net worth individuals, fund and assets managers, private funds and institutional investors are one of the main reasons we are seeing the price of Bitcoin rising. They are starting to realize that this is a non-correlated new asset class with very high returns. Since its launch in 2009, Bitcoin has consistently outperformed every stock and currency in existence, by incredible margins. There are so many institutions looking to get into this space, there is a mountain of money ready to come into the market.

The third was the hard fork on August 1, with the Bitcoin network splitting in two, creating the new Bitcoin Cash. Everybody that already owned Bitcoin, got a bunch of Bitcoin Cash, kind of like a dividend. There was plenty of fear that the fork would hurt Bitcoin, but now with the split completed these fears have evaporated.

Perhaps more importantly, the Bitcoin and cryptocurrency markets have matured significantly in a span of 12 months, as the cryptocurrency market cap increased from a mere $11 billion to over $120 billion. Overseas markets have evolved, and an increased number of governments have legalized Bitcoin.

All these factors combined have caused a bull market. But can the market turn into a bear? It certainly can, if for example the government of major economy, lets say the US., passed regulations that are not crypto-friendly.

Bubbles are exhausting and people can easily get hurt, but all bubbles are not bad. Bubbles laid out railroads, built the telegraph and ships, created alternative energy, and brought the Internet to everyone around the world. Bubbles are moving Bitcoin the and cryptocurrency market fast forward.

But what creates a bubble, does not disappear when the bubble goes away. Not tulips, not railways, not the Internet. Nor will blockchain or cryptocurrencies disappear.

Bitcoin has laid out the path for decentralization. Decentralized money is better than fiat money. Decentralized social networks will be better than Facebook and Twitter. Decentralized search engines will be better than Google.

I think John McAfee said it best: “Bitcoin critics will point to temporary Bitcoin price declines as proof of their understanding, but it won’t matter in the end. The blockchain revolution will not be stopped. Those who understand the revolutionary potential of cryptocurrency, will be the leaders of this new world.”

Ilias Louis Hatzis is a Blockchain entrepreneur who writes the Blockchain Bitcoin & Crypto (BBC) Weekly CXO Briefing each Monday.

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Why I am closing my Steemit account and why I am a bear on EOS

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TL:DR. Steemit feels like a cross between a popularity contest and a work from home hustle. And the EOS ICO turned me into a bear on Dan Larimer who is also the man behind the curtain for Steemit (and EOS and Bitshares).

Clearly I  don’t expect this post will get a good reaction from Steemit fans! That is part of the point. Media should be independent. A post on Steemit slamming EOS is probably not a good way to earn Steem.

This was an experiment that had reached a natural conclusion for me. Steemit enthusiasts will tell me I should persevere, but there are only so many hours in a day. 

There was a lot to like about Steemit. The idea of a social network where content creators get paid by other content creators is appealing. 

Right objective, wrong implementation.

I can see how to make Steemit work as a creator. It is similar to points systems on venues such as Hacker News and Reddit. That is what makes it a popularity contest. If you write something that the top influencers like, you collect Steem. That feels like a PR game of “you scratch my back, I will scratch your’s”. Yes that is similar to the “if you follow me, I will follow you game on Twitter” which I don’t do either.

The Internet has been brilliant at enabling everybody to write as well as read. It has been less good at providing an income for creators. For a long time, Advertising was the answer, but with ad fatigue and adblockers that model is challenged. However Steemit does not look like the answer either – which is the subject of today’s post.

The blockchain part of the Steemit story seems like contrived PR – a bit of a random buzzword generator. You don’t need blockchain to rate content – hello Reddit, Hacker News and Fintech Genome. Nor do you need blockchain to pay content creators – hello Patreon. 

The blockchain part of the Steemit story seems to be designed to sell a narrative that EOS is the Ethereum killer platform. I do not buy this story either. The technology advantage is totally unclear. I can see a pitch that you can program Smart Contracts in any language not just Solidity, but no clue how they will do this, let alone a MVP.  There are lots of blogs and vlogs along the lines of “I don’t understand the technology but Dan Larimer is a genius so I am sure it will be an Ethereum killer”. Steemit is proof that Dan Larimer is a genius and thus why investing in EOS is a winner. Does that translate to “I bought some EOS coins and I hope somebody will buy them for a good price”? The pitch is a bit like for a super expensive car – “if you have to ask the price, you cannot afford it”. In this case “if you have to ask what the technology advantage is, you are probably too technically illiterate to understand it”.  Who knows, but without a convincing technical explanation of why EOS is better than Ethereum, one should note that the EOS ICO is done using….Ethereum. 

I onboarded onto Steemit using standard two factor authentication. Then I was told that my application was “awaiting approval”. I was not the first to find this seemingly manual process step strange, but I was approved after a few hours. So I will probably remain as a statistic around “inactive registered users” along with all the other social networks where one is inactive.

This apparently manual process step was a red flag for me.

What happens if I recommend Steemit to someone and they cannot sign up? I think there are better ways to trap spam accounts. Maybe this is a pragmatic entrepreneurial “do things that don’t scale” that is life-stage appropriate, or maybe not. I don’t know but it is a red flag. 

Steve Jobs managed two companies successfully. Dan Larimer is managing 3 – Bitshares, Steemit and EOS – and I doubt he is in Steve Job’s class as an entrepreneur. No professional investor would back an unproven entrepreneur with three parallel ventures. Is the crowd being smart or dumb?

I imagine that Dan Larimer is brilliant, probably a visionary who is far ahead of his time. Some of his experiments may appear as a footnote in history along the lines of “back in 2017 there was an attempt at a similar idea that failed…”. I like experiments, I just choose not to be part of this experiment by donating either my time or my money.

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

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Shapes and colors of the booming US crypto hedge fund space

hedge fund

At the end of March, I covered Polychain Capital which caught my attention since Andreessen Horowitz and Union Square Ventures funded them with $10million. In Polychain Capital: A hedge fund investing at the Protocol layer of Web 3.0, I started with the motto: “Today is the slowest day of the rest of our lives”, and just 4 months later Polychain Capital is proof of accelerated growth. They have already accumulated already $200mil in assets under management.

Over the past year, despite the stricter regulatory pre-positioning towards the crypto world (digital “currencies” or “assets” and tokens) in the US, the growth of dedicated hedge funds aiming to capture the boom is stunning. In early July Forbes reported Crypto Boom: 15 New Hedge Funds Want In On 84,000% Returns

“43 projects raised $1.2 billion in initial coin offerings since May 1, according to Nick Tomaino’s The Control, and with stratospheric returns for so many ICOs — 82,000% for Ethereum, 56,000% for IOTA, 44,000% for Stratis, 21,000% for Spectrecoin” excerpt from Forbes.

There is clearly a summer boom in investment vehicles that are only suitable for accredited investors in the US and are deployed a variety of strategies to gain exposure in the booming space.

“From July 1, 2016, the value of bitcoin rallied from $680 inch-close to the $3,000 mark in mid-June and is now trading around the $2,650 mark. This impressive 12-month rally caught the attention of institutional investors who want their piece of the pie in this new high-performing asset class.” excerpt from “How Big Money Investors Will Boost the Price of Bitcoin

There are some investment vehciles taking the buy-and-hold Buffet style approach, that end up in retirement accounts. There are others that are closer to the approach of futures and commodities trading, and could end up in the “alternative” allocation of HNW portfolios, since the 90s alternatives can’t promise anything close to the spectacular returns of the crypto asset class.

There is a mesh of digital currencies of sorts of capitalizations and of tokens of all kinds (utility, or equity or hybrid). And more recently, there are investment companies that are issuing or plan to issue their own token (ICO) that gives exposure and liquidity to various of their fund vehicles.

This is my categorization of the US crypto hedge fund space right now. If I have missed any hedge fund and if the strategy changes in the future, please let us know in the commentary below.

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US crypto hedge fund space – more details

Mestable Capital was founded by Lucas Ryan, Josh Seims and Naval Ravikant, the chief executive officer and cofounder of Angel List, in late 2014 and has $45 million in assets under management.

Crypto Assets Fund (CAF) invests in bitcoinetherzcash, ripple, litecoin and dash. It is the first fund focused on Latin American family offices and is co-founded by former senior manager at Bain, Roberto Ponce Romay. The first tranche has raised $10mil and aims to grow to $50m.

The BKCM Digital Asset Fund is an investment fund for institutional clients that so far has invested in bitcoin, ethereum, litecoin, ripple and Zcash, among others. It strategy is hybrid: Buy-and-hold for about 50% of the tokens, ICOs for 20% and actively managed for the remaining. Investments consist of foundational protocol tokens such as Bitcoin and Ethereum, currencies such as Litecoin, XRP, Zcash and Stellar, plus tokens such as Golem Network Tokens (GNT), Augur’s REP and Siacoin.

Alphabit is a Cayman Islands-based fund with $13 million AUM aiming to raise $300 million and also offer an ICO. Its uses a mix of manual trading, algorithmic trading, and ICO investing. It has so far invested in Ethereum, Ark, Ethereum Classic and PeerCoin, as well as ICOs MetalPay, Blocktix, Matchpool, Aeternity, and Skycoin.

Blockchain Capital is a unique case because it is the first VC that in 2013 started investing on blockchain companies, like Bitnet (sold to Rakuten) and Coinsetter (sold to Kraken). This spring, they raised a third round ($50mil) to invest not only in blockchain startups but also tokens. Then they tokenized $10 mil of this fund, selling BCAP tokens to the public (but only accredited investors in the U.S.).

Auryn Capital will launch this month with a $12.5 million. It will be the holding company for a crypto hedge fund that is actively managed with a mix of technical and fundamental strategies. It will also launch a decentralized exchange, and ICO incubator, and token called Karma (to launch this September).

SuperBloom launched in July with both a $10 million hedge/venture fund as well as an accelerator/investment bank. SuperBloom plans to hold a $30 million pre-ICO crowdsale for the Seed token this month for both accredited and non-accredited investors to fund its accelerator companies. Seed holders can exchange the token for an individual company’s pre-sale token for a 20% discount.

The BlockTower Capital fund, will also launch this month with about $50 million, and uses a mix of strategies: Event trading; new coin listings; “activist” investing in smaller cryptocurrencies and helping them gain traction with developers and on exchanges; and invest in themes such as decentralized file storage.

Coinshares 1 LP is the 2nd fund that Masters’ Global Advisors launched in June with $5 mil. In AUM. It is a Jersey-based fund investing in protocol tokens like Ether, Tezos and EOS. Its first company investment will be in decentralized ticketing platform, Aventus.

Pollinate Capital is a new hedge fund with more than $100mil committed for actively trading digital assets with strategies similar to Long/Short quantitative trading of futures and commodities trading.

Pantera Capital is launching a new hedge fund, Pantera ICO fund, focused on investments solely in tokens that power public blockchain protocols. Pantera was the first US Bitcoin investment firm in 2013.

The founders of Koalah, a mobile app in which players can bet on the outcome of games using bitcoin, launched in July Grasshopper Capital an actively managed cryptofund with $25mil. They are using a mix of fundamentals, event-driven arbitrage trading and algorithmic trading. The fund has so far invested in Ether, Civic, Bitcoin, Singles and Storj.

Efi Pylarinou is a Fintech thought-leader, strategic consultant and investor. 

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.

Blockchain Bitcoin & Crypto Weekly CXO Briefing for week starting 7th August 2017

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 splits as new currency takes off

Decrypted: On August 1st, Bitcoin split in two, as miners agreed to split Bitcoin's blockchain into two chains. The split comes after a much heated discussion, that's been going on for years, about the future of Bitcoin. The Bitcoin community has been divided in two camps that debated how to solve Bitcoin's scaling issue. With over 90 percent of the community voting in favor of SegWit2x, it looked like the hard fork would be averted. Instead, roughly 15 percent of the BTC mining community launched their own alternative to Bitcoin, Bitcoin Cash. Many hope that this upgrade will end the scaling debate, and eventually help establish Bitcoin as the leading global digital currency.

Our take: Bitcoin split into two coins. While the original Bitcoin (BTC) continues to exist, Bitcoin Cash (BCH) was officially born when block 478559 was mined on Tuesday.

Bitcoin is built on something called a blockchain. The Bitcoin blockchain is a public ledger containing all the transaction data from anyone who uses Bitcoin. Transactions are added to blocks that make up the chain, and each transaction must be recorded on a block. But these blocks are full, and it is slowing down transactions. Currently, there are an average of about 1,700 transactions that can be saved on a Bitcoin block, about three transactions a second. The Bitcoin blockchain has become too congested. Someone could pay for something with Bitcoin, but it wouldn't be approved for hours. That hinders Bitcoin’s wider acceptance, which partly explains why speculation remains Bitcoin's main use.

Bitcoin Cash is an attempt to solve Bitcoin's scaling issue and speed up digital transactions, by increasing the block size from 1 megabyte to 8 megabytes.

Bitcoin Cash is only worth a fraction of its parent, but its been extremely volatile showing signs of life. On the first day of trading Bitcoin Cash was around $360, reaching a high around $800. Overnight, Bitcoin Cash became the third largest cryptocurrency. But since Wednesday the new digital currency fell by 57%. On the other hand, Bitcoin's price was roughly $2,700 ahead of the split, with stable trading and ranging from $2,700 to $3,000. Still, many traders can't believe the rapid price rise for Bitcoin Cash.

Now, if you owned Bitcoin during the split, its very possible that you own Bitcoin Cash. Most Bitcoin users received an equal amount of the new currency, doubling the total amount of their Bitcoin. Even though many cryptocurrency exchanges around the world are accepting Bitcoin Cash, some popular exchanges like Coinbase and GDAX, initially decided not to support Bitcoin's new twin. But late on Thursday, they announced that they will indeed support Bitcoin Cash, giving Bitcoin holders an equal amount Bitcoin Cash. But there's a catch. Customers will not be able to access their Bitcoin Cash until 2018. The exchanges said they are safely storing Bitcoin Cash for their customers, and when they are ready to support the new token, users will be able to withdraw their Bitcoin Cash. But its very possible it might not be worth much by then. As far as trading goes, Coinbase and GDAX customers will not be able to trade until January 2018 either.  The reasoning behind their decision is that they don't know how long it will last.

Bitcoin Cash's success lies in the hands of miners, that mine the blocks of the Bitcoin network. Currently, only a fraction of miners have moved over to Bitcoin Cash. In the time it took Bitcoin Cash miners to create a single block of transaction data for their public ledger, Bitcoin had created dozens, which indicates that Bitcoin Cash doesn't yet have the horsepower to take on Bitcoin.

Bitcoin Cash has yet to articulate its value proposition in a clear way. Bitcoin Cash solves transaction delay issues that have plagued Bitcoin up to now. But security has been a major concern. The Bitcoin Core camp fears that larger block sizes could lead to major problems, which is the primary reason they are not willing to endorse such a radical increase to block size. The long-term future for Bitcoin Cash depends on its ability to create utility and value for the ecosystem that grows around it.

For now its not clear what the future holds. But, regardless whether Bitcoin Cash is ultimately successful, cryptocurrencies need to make technological progress and move past their current status as glorified poker chips. To become actual money, that is accepted everywhere for any transaction, cryptocurrencies must become convenient and allow instant processing.

News Item 2: Blockchain startup Billion pockets EUR2 million EU grant

Decrypted: Blockchain startup Billon Group received almost two million euros from Horizon 2020, the EU’s biggest research and innovation program. The blockchain company announced the successful closing of its first round of funding. The new injection brings total funding for the company to $5 million.

The company plans to use the money to expand its blockchain technology beyond instant corporate payments, support the launch of e-commerce and content monetization solutions, and provide additional investment in sales, marketing, compliance and operation.

Our takeBillon Group disrupts fundaments behind money, changing the way its stored and moved between people and organizations. They have created an instant payments system based on distributed ledger technology that supports all national currencies. Their platform is compliant with financial regulations, eliminating time and distance barriers.

The 2016 Global Payment Report by Worldpay, shows that alternative payment systems are increasing in popularity in various markets around the world. Also, eMarketer reports that retail e-commerce sales are expected to grow from $1.915 trillion in 2016 to $4.058 trillion in 2020.

EU's investment in Billon makes sense. It as allows users to send money to people and organizations in real-time, capitalizing on the opportunities presented by these increasing trends.

Blockchain and distributed ledger technology has been one of the main topics the European Union has focused on, over the past year. Despite uneasiness with cryptocurrencies, the EU has a positive outlook on blockchain and digital ledgers, pursuing several initiatives.

A year ago, in July 2016, the European Commission adopted a proposal for legislation to amend the 4th Anti-Money Laundering Directive (4AMLD) that will bring virtual currency exchanges and wallet providers into the EU’s anti-money laundering framework.

In February, the EU released an in-depth analysis that stated regulation could provide innovators with guidance as they develop the digital ledger technology in the EU. The analysis acknowledged the increased risks from virtual currencies, but called for a moderate regulatory approach in order not to hamper innovation at such an early stage. The analysis also set forth a list of key areas currently associated with blockchain technology, such as currencies, digital rights management, patents, e-voting, smart contracts, and supply chains. Its also suggested that the European Union expects more member states to face questions regarding blockchain and digital ledgers, beyond Germany, UK, and Estonia, where blockchain technology is gaining traction.

Last year, the EU Commission announced an initiative to give as many of Europe’s fintech and blockchain entrepreneurs the opportunity to become world leaders, giving them access to potential investors, business partners, research centers and universities.

Horizon 2020 is part of EU's overall blockchain strategy. Horizon 2020 is the largest EU Research and Innovation program ever, with nearly €80 billion of funding available over 7 years (2014 to 2020). The goal of the program is to ensure that Europe produces world-class technology, removes barriers to innovation and makes it easier for the public and private sectors in creating innovation. An option offered within Horizon 2020 is the possibility for SMEs to apply without project partners. The grant can cover from 70% to 100% of the project costs and can amount to as much as €2.5-5 million for each project. In July, Horizon 2020 announced that it selected from 16 countries 64 SMEs for funding. It will be investing €97 million, to help these small businesses bring their innovations to the market.

Also, back in April the European Commission announced its plans  to establish a European Union Blockchain Observatory, in response to a European Parliament mandate to strengthen technical expertise and regulatory capacity. The project, that was announced on the Commission's website, includes an observatory and a forum to gather input on distributed ledger and blockchain technology. The goal is to establish an EU expert resource for forward-looking blockchain topics and develop EU use cases. Another goal of the initiative is to assist the EC in determining what role government authorities can play to encourage the creation of such technologies and to develop policy recommendations.

Also, the ECB has been on the lookout for ways to improve the efficiency and lower the costs of its market infrastructure, in the fields of payment transfers, securities settlement and collateral management. Last year the Eurosystem, which comprises the ECB and the national central banks of the euro area, launched a central bank service called TARGET2-Securities (T2S). Just like DLT, it is expected to be a game changer. T2S aims to change the European post-trade landscape, not only by offering an integrated settlement service in central bank money for securities transactions, but also to bring post-trade harmonization beyond what has been seen before. Together with TARGET2, the Eurosystem’s cash transfer system, T2S forms the cornerstone of financial markets in Europe.

In June, the EU’s Financial Technology Task Force requested feedback from stakeholders on how technology like blockchain and DLT will impact the European financial services industry.

In addition, the European Securities Market Authority (ESMA) stated that it would closely monitor EU market activity related to DLT. ESMA recently released a consultation document on the DLT applied to securities markets, reviewing its possible applications, benefits, risks and how it maps to existing EU regulation. ESMA’s position is that regulatory action is premature, as technology is still in early stage of development. ESMA believes that DLT could benefit small-to-medium enterprises (SMEs) by enabling the issuance of securities by the firms. SMEs could potentially reduce the cost of access to finance. In addition, the regulator stated that DLT could potentially remove the need for duplicate records and multiple reconciliations by providing a “record of ownership of unlisted securities.

A few weeks ago, the European Commission announced the launch of its #Blockchain4EU. The project, plans to take a look at how blockchain technology and other distributed ledger technologies can be applied to non-financial sectors.

The EU has been taking important steps to become one of the leading economic blocks in the blockchain race. The EU’s strategy to invest on blockchain could just prove to be one of its best initiatives it has taken, in a long time.

News Item 3Record ICO's Swiss Ties Raise Eyebrows

Decrypted: Last month, Tezos with its Initial Coin Offering (ICO) raised $232 million, the highest-grossing crowd sale of in the history of token sales.

Tezos is a self-amending cryptographic ledger, given that one of its central concepts is the ability for network-wide changes to be decided upon at the protocol level by stakeholders. While typical public blockchains solely reach consensus about their own state, Tezos reaches a meta-consensus around its own protocol. This enables innovation and the progressive development of a decentralized governance model.

Tezos is part of the current wave of cryptocurrency startups, that are raising money with ICOs, that might not be eligible for normal fund-raising through venture capital. Initial Coin Offerings are similar to crowdfunding. Blockchain startups offer investors the opportunity to invest in their projects by purchasing their cryptocurrency in advance. In exchange for financing the project, investors receive digital tokens at a very low purchase price. The investors expect the value of the tokens to rise over time, with the option to sell them on online exchanges, at a higher price than the initial purchase price. The entrepreneurs use the funds to continue developing their products and launch them.

But Tezos shareholders are going to get an  8.5 percent cut of the funds raised though the ICO, nearly $20 million,. This raises a lot of concerns and questions, about how the founders of projects like this might be exploiting regulatory loopholes for quick gains, before actually delivering a product.

Our take: Several weeks before the launch of the ICO, the founders of Digital Ledger Solutions, the company the owns the technology, created the Tezos foundation, a Zug-based foundation that would oversee fundraising, receive and manage all allocations, and assign token allocations.

With their Initial Coin Offering, Tezos coined the idea that founders should receive a percentage of the proceeds in fiat currency. The founders of Tezos will receive 8.5% of all the money contributed to the fundraiser and they will also receive 10% of the tokens through Digital Ledger Solutions (DLS). The money won't stay within the Tezos Foundation but will go to Digital Ledger Solutions, which basically owns and founded the Tezos Foundation, but operates independently. The Tezos Foundation then will also receive 10%, whilst the actual people behind DLS and the Tezos Foundation are the same.

The cash outflow will occur within 3 months of Tezos being successfully launched. I think its important for founders to get their fair share, but in the case of Tezos the payout, in cash and tokens, seems to be a quite high. Tezos has raised eyebrows as one of the few ICOs with an unlimited fundraising goal, and a structure of payouts designed to compensate the development team and early backers. Practically, this means that even if the entire project successfully launches, but fails, the founders will still walk away with a very handsome payout.

This raises a lot of questions about the ethics of an uncapped ICO that directly rewards developers with a portion of total funds raised. What is the incentive for the founders to continue working on project, if they are guaranteed an exit before they even start?

But, it looks like Initial Coin Offerings, are about to undergo a lot more scrutiny. With the recent announcement by the Securities Exchange Commission (SEC), US regulators are taking their first shot at deflating the mania surrounding ICOs, declaring that many of the digital tokens should fall under the country’s securities laws. The SEC is wants to remedy cases when companies issue tokens with the promise of delivering a product, and never actually deliver it.

In the case of Tezos, there are many conflicts of interest, unlike TheDAO. The largest ICO ever, solicited US investors and funneled cash to a US entity, while the founders will walk away from their ICO with a huge pay day.

Potentially, Tezos looks like it could be on the top of SEC's list. It's no surprise that Tim Draper, an investor in Tezos, called for the SEC to exempt certain ICOs from the repercussions of its ruling.

OpinionEvading Chinese Capital Controls 101, With Bitcoin Expert Dr. Joseph Wang

The Chinese government has had to address several different problems. One of their biggest is the growing number of capital outflows that is hurting the Chinese economy. Despite the government's best efforts to curb outflows, money is still leaving China at an accelerated pace.

Today, under China’s currency laws, a Chinese citizen is only allowed to make a single outgoing transfer of $50,000 USD per person, per year. Yet, Chinese investors have used severals tactics to move funds out of the country. They are buying foreign stocks, converting money to mutual funds, buying real estate overseas in countries like the UK and the US., and participating in the EB-5 program, by investing $1 million in US. based projects.

Contrary to popular belief, up to now Bitcoin was not one of the methods used to move money out of the country. Even though many people entertained the idea of using Bitcoin to circumvent China’s capital controls, in reality it was mostly media hype. But with the government crackdown on loopholes and other traditional methods, people are exploring new ways, which include the use of Bitcoin.

The biggest problem that Chinese investors face when using Bitcoin to evade Chinese capital controls, is that there’s no guarantee on the exchange rate. But its not the only problem. In the past exchanges halted the ability to withdraw coins and now withdrawals have daily limits and can only be withdrawn in yuan.

But, despite the country's tightening of capital controls, there are still more cost effective and efficient ways  to move money abroad, than buying and selling Bitcoin. Even though all of these methods have limitations and most are not even legal, people still use them.

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.

Blockchain Bitcoin & Crypto Weekly CXO Briefing for week starting 24th July 2017

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: South Korea Officially Legalizes Bitcoin, Huge Market For Traders

Decrypted: South Korean has made Bitcoin legit. The South Korean government has decided to pass a bill that would make Bitcoin transfers legal and provide a regulatory framework for Bitcoin trading platforms and exchanges.

Mr. Park Yong-jin, a member of South Korea's ruling party, is leading the changes. He is working on revisions and amendments that will provide a foundation for digital currencies in the country. One of these revisions is for the existing Electronic Financial Transactions Act and will provide the necessary legal approval for cryptocurrency transactions. The new set of regulatory frameworks for Bitcoin will facilitate the growth of the South Korean Bitcoin market.

Our take: Not so long ago, the future of cryptocurrencies in South Korea was uncertain and whether the country would take steps towards regulating digital currencies. But the recent news made the intentions of the South Korean government are very clear. The future of money is linked to cryptocurrencies and South Korea understands it.

Recent news of cyberattacks on local cryptocurrency exchanges like Bithumb, have made a significant contribution and helped create awareness to the masses about digital currencies. Also, despite the lack of regulations, the South Korean cryptocurrency market has been growing by leaps and bounds. The country has seen an increasing number of fintech startups that are building services for remittance and finance, establishing South Korea as a regional fintech hub. To further fuel this growth, the government lowered the capital requirements for Bitcoin remittance companies. Additionally, researchers from the South Korean central bank recently released a report that described how virtual currencies can coexist with fiat currencies.

South Korea recently legalized Bitcoin remittances. Worldwide, 230 million people send $580 billion in remittances each year, and South Korea, with a population of over 50 million, has a large remittance market. The most recent World Bank estimates show remittance inflows of $6.5 billion and outflows of more than $5.9 billion for S. Korea. The new regulations will create more competition in the financial services market. Traditional banks will now have to compete with new crypto players that are offering cheaper and faster services.

While interest in Bitcoin is exploding all around the globe, the jump seems to have been particularly strong in South Korea. Bitcoin has become incredibly popular in the country, with trade volumes going through the roof in recent months. This year South Korea made it to the world’s largest Bitcoin trading markets. The South Korean Bitcoin market processes over 14% of global Bitcoin trades and its the third largest market behind the US and Japan. While the South Korean government continues to legislate Bitcoin and cryptocurrencies, we can expect trading volumes to increase and the South Korean Bitcoin exchange market to surge.

Even though the new bill in South Korea is big news, its only part of the larger picture that is positioning Asia at the forefront of cryptocurrency world. Earlier this year, Japan passed a new law that officially recognized cryptocurrencies, Singapore announced it had successfully digitized its currency using Ethereum and China begun testing a prototype of its own national digital currency.

Clearly, Asia is leading the adoption and defining the cryptocurrency future. Hopefully, the rest of the world and countries like the US. will start waking up and get in the game before it’s too late.

News Item 2: $7 Million Lost in CoinDash ICO Hack

Decrypted: CoinDash, an Israeli startup, opened its planned Initial Coin Offering on June 17, in order to raise capital by selling its own tokens. The site was hacked minutes before the ICO opened to the public and around $7 million in Ethereum was stolen. The hackers broke into the Coindash website and replaced the Ethereum address that was posted on the site with their own address, so instead of money going to Coindash, the funds ended up going directly to the hackers.

While CoinDash ICO still managed to raise $6.4 million in a pre-sale to early investors, the hackers stole 43,488 Ether, around $7 million at the time of the theft, before the company discovered what was going on and was forced to shutdown their token sale. When Coindash realized what happened, they took down their website and posted announcements on the site and social media, alerting investors of the hack and urging them to stop sending money to the fraudulent address. After the hack, in an announcement posted on their website, Coindash said they would give tokens to the investors that participated in the ICO, before it was shutdown.

Our take: The CoinDash hack was not the only one this week. On a smaller scale, the InsureX ICO suffered from a similar type of hack, which caused people to send around 1,100 ETH to a bogus Ethereum address. Also hackers discovered a vulnerability in Parity's Wallet and exploiting the vulnerability they were able to steal approximately 153,000 Ether, estimated at $32 million. With the cryptocurrency market estimated at $100 billion, the concept of anonymous wealth is raising questions about the right to anonymous identity.

These hacks certainly raise a lot of questions about the state of readiness and security measures these companies are taking with their ICOs. The most important question they raise is how can you trust unknown companies to build the product they are claiming, when they cannot secure their website? Governance and trust are issues that are coming up more and more lately, when people talk about ICOs.

The CoinDash hack was very simple to execute and could of been easily prevented.

While rumors have surfaced and angry investors expressed that CoinDash ICO theft was an inside job (1, 23, 4), it will be interesting to see how the CoinDash team handles credibility from this point forward, by reimbursing investors and not only, as CoinDash’s image is significantly damaged. I don't know and I don't really care if the rumors are true. The CoinDash hack could have been prevented or minimized if investors knew in advance the address where they were going to send funds to. Startups planning ICOs should publish their funding address in advance on multiple platforms, including news outlets and social media. Even if hackers mess with one site, it becomes hard for them to hack all of them.

I also read some posts about the Insurex hack, that questioned the use of a WordPress template for an ICO: "Hacks like these demonstrate why using a basic WordPress template for a company website -especially one with ICO plans- is absolutely unacceptable right now". Why? WordPress or WordPress templates are not the problem with these hacks. Its the people running them and using these technologies. They are the ones that need to make sure they plan their ICOs correctly. Sometimes when people start to see dollar signs, their vision gets blurred. Technology was not the problem with the CoinDash and InsureX ICOs hacks, instead it was blatant mismanagement and lack of proper planning. And that's why people are talking about governance, regulation and trust when it comes to ICOs. These kinds of attacks will occur more often and are proof of the lack of diligence behind some ICO projects.

Hopefully one of the items on future ICO planing checklists, will be the use of ENS. For most people, using 160 bit hexadecimal encoded hash string is not ideal. The Ethereum Name Service (ENS), brings human readable names to Ethereum, just like DNS addresses did for the Internet. ENS eliminates the need to copy or worse type, long hexadecimal addresses. With ENS, users can send money to someone at "someone.eth" instead of "0x4cbe58c50480…", and interact with a smart contract at "smartcontract.eth".

The Achilles' heel of cryptocurrencies has been the protection of private keys, that control someone's cryptocoins. Bitcoin and Ether transactions are completely transparent, and all transactions are recorded on the blockchain, a global, public and immutable ledger. On the other hand, blockchain wallets are completely anonymous. Until someone turns their cryptocurrency into fiat currency, it’s almost impossible to know who actually owns the digital wallet. Unlike fiat currencies, cryptocurrency theft is instantaneous, irreversible, and typically anonymous.

Yet, hackers have already found workarounds for turning cryptocurrencies to fiat currencies. For example, the hackers involved in the Petya/NotPetya ransomware attack used a bitcoin tumbler to basically launder the money through high-volume addresses, mixing stolen bitcoins in with legitimate transactions, making the stolen funds nearly impossible to trace.

Hacks like these make us question the security and legitimacy of ICOs and trusting unknown startups with our money. It remains to be seen if these hacks will curb the enthusiasm for ICOs, but certainly public perception is not improved by hacks like these.

News Item 3: Interview with Vinny Lingham of Civic.com

We are starting a series of interviews with people from the crypto ecosystem and today we’re kicking off with Vinny Lingham from Civic.com. Vinny Lingham is a South African Internet entrepreneur who is the co-founder & CEO of Civic and previously the founder and CEO of Gyft & Yola. Last month with Civics’ ICO, he raised $33 million and I thought it would be interesting to get his take on Bitcoin, Blockchain and the current state of ICOs.

Tell us a little bit about yourself, what you’ve been up to in the past and what led you to create Civic?

I am a serial entrepreneur. I was born and grew up in South Africa and got started in search marketing and the search economy. From there I moved to software as a service, then I got into mobile gift cards and now identity. The rational of what I’ve done is an evolution of my way of thinking of things. Initially, I started a company to make money, then as I developed a bigger view of the world, I moved to Silicon Valley and started to think of bigger problems. With my last company, Gyft, we solved the problem of physical assets, gift cards and codes, and through this process I learned a lot about identity, identity theft, how the payment world was under attack and the identity problem has not been solved. Before Civic, I had done three startups. Building companies is very satisfying, so this time around I wanted to build something big, strong, something long lasting that solves a long-term global problem and I picked identity as the space. Because I love Bitcoin and Blockchain, with my co-founder I started Civic, and eventually we want to use blockchain for voting to solve problems around democracy as a big global challenge for the world.

Growing up in South Africa, how did that impact your thinking and how did it drive you to do the things that you’re doing now?

Without doubt, being born in South Africa and witnessing the challenges, the Apartheid, the injustices, the debasement of currency, inflation and all these societal issues that you have in Africa and then coming to America and having a different view of the world, gave me a lot of insights for some ways to fix the world and make it a better place. I had a lot of drive being an underdog, and going to place like Silicon Valley you want to prove yourself. So here I am.

If personal data is immutable on a Blockchain, one cannot simply change it, what are the security risks that worry you and how do you protect against threats and hacks at Civic?

Well we don’t store the data on the blockchain, all that is stored on blockchain is verification hashes, that make sure that you can prove that you are who you say you are, and the actual data is stored on your device. If you lose your device, it’s the same as your files at home being raided. So, because every user stores their own data and the blockchain just keeps a record of verifications of that data, the risks individually are medium to low and the risks to the network are virtually non-existent. You would have to steal every person’s phone to get their data. So, if a billion people use it, you would have to steal a billion phones, and that’s not going to happen. The biggest potential risk to us, is quantum computing in about 10-15 years, but at that point we can just change the algorithms and produce some quantum resistant techniques to counter. I think there are enough people working on the quantum problem, but right now it’s not an issue and everyone believes it will be solved in time.

Civic is in a crowded space and there are lots companies trying to solve the same problem. How do you view your competition, who do you think your competitors are and how do you differentiate?

Really, we are the only company focused on building a global consumer identity brand and we’re going to continue to focus on that. Now, if someone decides to come and build a global consumer identity brand, then we’ll have a competitor to talk about. But for now, no one is doing it, we are the only ones and we’re going to keep doing what we do. Again, my guess is that doing B2B or selling to governments is kind of easy, it’s a well-defined space, but to capture the hearts and minds of consumers, well that’s not easy. We have a first mover advantage, we have a token out there, stronger than any other crypto token, from our initial coin offering and token sale. So, I think we’re in a good spot and we will continue on out exiting course and not spend a lot of time with our competitor’s products, as we are in different markets.

Being a serial entrepreneur that has raised money from VCs, what do you think of ICOs in comparison with fundraising though the traditional venture capital model?

Look, I think the venture capital model provides forms of governance and support at a micro level and what ICOs and token sales provide is lack of governance at a macro level. You go from having one or two VCs funding the business, to something like 10,000 people. The flip side is there is no real governance, so these people must really trust you. It’s all about the team. Can you trust the team to execute by themselves or do they need parental supervision? And that’s where the big time is going to happen in the space. So, I don’t think venture capital is going to disappear, but I think it’s going to be really diminished for crypto companies, to an extent. I think we will see a hybrid, where you’ll see VCs are moving earlier in the process to help smaller companies build their products and provide governance. But I think the bigger raises, the series A and B funds are going to be disrupted in this space. They can’t really compete with a crowd sale on crypto right now. I think this will become the general way of funding. The industry is going to respond negatively to these uncapped, egregious token sales, where ICOs are raising hundreds of millions of dollars, without a plan to use the funds. Pure greed to an extent. The market has reacted violently to that already and the Ethereum market is down massively because of as these uncapped projects, which create a liability towards the Ethereum ecosystem. We’ll see what happens, but I think the market will self-regulate by price and we’ll find people being a lot more circumspective of where they put their money, and hopefully slower and steadier growth will prevail. I really think, we can’t have people raising a billion dollars when they haven’t proven anything yet. It’s very harmful.

What other problems to do you see and what can be done?

Well, the I think it’s the hard fork situation of Bitcoin right now, the whole scaling debate, that’s the biggest impediment to stability in the space. With Bitcoin stable, everything else can sort of function, but it’s not stable and that presents some serious existential risks for Bitcoin now. I think the ICO mania has put a damper on the space, it’s a function of supply and demand and a matter of people disciplining themselves. Right now, even a professional trader or someone that’s in the space heavily can’t keep up with the number of ICOs and token sales happening every day. You can’t do the due diligence on all these projects, it’s just too much of a crapshoot and you don’t know what you’re going to get. As a result, you’re going to have market expense to research all these projects, even for the best of us it’s not easy to keep up, and giving people more money than they know what to do with is not a healthy situation.

I am sure you heard about today’s Coindash ICO hack. What suggestions would you make to projects planning their ICOs?

First, contact Civic, because it would impossible to happen with our technology. You must scan a QR code using a mobile app and the code can only be generated and released from our servers at Civic. We’ve done it very securely and we’re playing around with the idea of making what we did available to more companies. So, we are open to being the identity vendor and partner for preventing that sort of thing.

What do you think we can expect on August 1st with SegWit and the possible fork? Are we going to have a fork with Bitcoin?

I’ve been Mr. Doom and Gloom for six months, and nothing I’ve seen so far has made me change my mind. We may have a hard fork, but there’s definitely going to be chain split.

Opinion: Pathological BIP91/UASF Scenarios

BIP91 is locked in on the Bitcoin network, but to put things in perspective, its only the first step towards Segregated Witness (SegWit) being activated. Even though we've reached an important milestone, there are several more things that need to happen before SegWit actually activates and increases the capacity of the network.

The sole purpose of BIP91 was to lower the threshold for SegWit activation. The BIP141 proposal, which was released more than a year ago, required 95% of the miners to support it, in order to activate SegWit. In a sense, BIP91 is simply a vote on whether the existing SegWit proposal should be lowered from a 95% threshold, to an 80% threshold.

Even though more than 80 percent of the miners have signaled BIP91, that doesn’t actually guarantee anything and it doesn’t necessarily mean that these miners will finally activate SegWit.

The BIP91 lock-in is just the first step to activating SegWit on the network. The BIP91 lock-in was achieved with relative ease. The steps that follow are much more complex. So for now, there is no reason to get your hopes up just yet, as this lock-in period means nothing, until change actually happens on the network. Signaling intent for a solution and effectively supporting it, are two very different things. The number of nodes signaling for BIP148 has actually increased at a faster rate over the past week. Miners might be signaling for SegWit, but that does not mean that they are actually running the right software for Segwit2x. Things can still take a very different turn. BIP91, BIP141 and activating SegWit are only part of the equation. And let not forget November, when SegWit2x’s built-in hard fork happens.

There is a lot of speculation about that is finally going to happen, but for now we'll just have to be patient and see how things develop. But given the extremely positive reaction for BIP91, we are already seeing people who were holding off on Bitcoin entering the market again.

The market is gaining confidence, in light of a positive outcome to the scaling debate, which drove the price of Bitcoin over $2,800 this past week. I think when SegWit is activated around the end of August, we'll see the price of Bitcoin go well over the $3,500 and the entire cryptocurrency market turn bullish again, with prices surging across the board.

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.

Blockchain Bitcoin & Crypto Weekly CXO Briefing for week starting 17th July 2017

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.

buy-bitcoin_1280-770x421.jpg

News Item 1: The guy who photobombed Janet Yellen with a “Buy Bitcoin” sign has received nearly $16,000 in donations

Decrypted: As Federal Reserve Chairman Janet Yellen was speaking to the House Financial Services Committee last Wednesday, something interesting happened. Almost perfectly placed behind her right shoulder a sign appeared telling people to buy Bitcoin. A young man wearing a suit and pink tie, the “Bitcoin Sign Guy”, drove news around world and maybe even caused the price of Bitcoin to go up, as a frenzied group of traders did exactly what the sign said, they bought Bitcoin.

Our take: The timing was perfect. As Janet Yellen was saying she would oppose almost any attempt to audit the Federal Reserve, he put up the sign and reminded us that Bitcoin can replace central banks, as the first decentralized global reserve currency.

It was exciting, just like the early days, when someone would post something of reddit and Bitcoiners would rally to support it. It was like the College GameDay sign, that said “Hi Mom Send Bitcoin”, with the QR, and the guy ended up raising $25,000.

The “Bitcoin Sign Guy”, created a huge buzz in the news and drove the price up. But not matter how exciting the fireworks may be, it also showed us you can’t change an overall bearish trend with a cool story in the news. News stories like this can bump up the price for a while against the trend, but ultimately the trend always wins. Now we are back to new price lows with the upcoming possible user activated fork. The “Bitcoin Sign Guy”, was a nice break from the scaling debate that’s been going on.

Since the start of 2017, cryptocurrencies have had a phenomenal rally. But in recent weeks, they have been bleeding, as speculators are jittery, waiting to see how Bitcoin’s scaling debate will conclude on August 1st. The total market cap has dropped by $9 billion, almost 11% percent, with Bitcoin prices dropping below $2,100.

The “Bitcoin Sign Guy” reminded us why everyone got interested in Bitcoin in the first place. I was really happy to see that he did not hold up a sign for some other coin, like when Dennis Rodman wore a t-shirt for PotCoin, and it was Bitcoin.

Bitcoin has the power to replace the archaic, centralized banking system. Bitcoin has turned upside down everything we know about money, how its stored, who should control its production and how it is transmitted and managed.

Now, is the “Bitcoin Sign Guy” an important moment in Bitcoin history or will this kick off a series of aggressive and annoying copycats? Are we going to see a spree of similar events at stadiums, concerts or the next Trump speech? Hopefully not. It would of been better if the”Bitcoin Sign Guy” held up a QR code, instead of an actual Bitcoin address. So far his action has gone viral and spurred several attempts online, with photoshopped versions of the original picture, and copycats changing his address to their address.

News Item 2: uPort Announces Zug Digital Ethereum ID Pilot

Decrypted: Zug is known for being at the forefront of blockchain and crypto innovation, being the home to many companies that are innovating in this space. The most recent step in Zug’s journey, was the announcement to implement blockchain technology for digital identities, in order to offer its citizens innovative access to both local and international services.

Our take: In 2011 the World Economic Forum recognized that personal data had become an important new asset class. Personal data in the 21st century is a valuable resource that will touch all aspects of society. But today, the way we create and manage our digital identities is broken. Digital identity is fragmented between various service providers like Google and Facebook, that require multiple registrations and logins, while most people use the same password for the services they use, in order to remember it. According to BBC News, a typical consumer has 26 different logins but only five passwords. These centralized servers are honeypots of data, making them extremely attractive targets for hackers.

Based on the data from the World Bank, about 2.4 billion people in the world today lack official identification and can’t prove their identity. At the simplest level digital identity is a supplement to the real identity of a person. Digital identity is a set of credentials or attributes that allow a third party to verify the identity of that person. Digital identity, will allow people to own their data and manage their identities.  Why should we give our identity to a centralized structure that could be compromised?  That is the whole reason why there are so many issues with identity today. When centralized organizations get hacked our details are stolen.

Building trusted and distributed identity networks is a big step towards a whole new world. Blockchain is well suited for managing both consent and control of information. Blockchain technology can empower consumers to control their own identity and share with trusted organizations, using smart contracts that will determine how they can manage and use their data.

Last year, Estonia offered digital identities through their e-Estonia program. Estonians can access public services, financial services, medical and emergency services as well as pay taxes online, e-vote, provide digital signatures, and travel within the EU without a passport. Another country exploring blockchain identity is Australia. In 2016, Australia Post tested a blockchain digital identity platform that allows people to verify their identity in just a few minutes, using biometric data, and apply for a passport or mortgage from their smartphone.

The space is crowded with many solutions, each offering their own flavor of digital identities: Averon, BlockAuth, Blockstack, Bitnation, BlockVerify, Cambridge Blockchain, Civic, Credits, CredyCo, Cryptid, DataCoup, Enigma, Evernym, ExistenceID, Guardtime’s BLT, HYPR, Identifi, Open Identity Exchange (OIX), KYC-Chain, Netki, Pillar project, ShoCard, Tierion, UniquID and uPort.

Digital identity present us with and tremendous opportunity for disruption that can help us solve significant challenges such fraud risk, KYC and AML.

News Item 3: Dispute could mean financial panic in Bitcoin

Decrypted: The clock is ticking, as we are coming closer to August 1st. The Bitcoin scaling debate has reached a climax, and we are seeing the results in dropping prices and market cap. When everyone thought the Bitcoin “civil war” was over and a consensus was reached that would activate SegWit, Bitmain in June announced UAHF (User Activated Hard Fork), a contingency plan in response to UASF, in order to wipeout the risk that comes along with it.

Our take: Support for SegWit2x has reached high levels with mining pools, not seen with previous proposals. The majority have already pledged to activate Segwit2x, thus activating the long-awaited Segregated Witness (SegWit). But Bitcoin’s UASF isn’t backing down from the August 1st deadline. A sizable group of Bitcoin users remains mistrustful, and still plans to move forward with the BIP 148.

Both sides have a lot to gain by reaching a consensus, but the lack of a central authority has made it difficult. While support for SegWit2x is high, the biggest concern the UASF side has is that SegWit2x seems rushed, mostly driven by anxiety that Bitcoin might loose its dominant position to Ethereum.

Fear and uncertainty have plagued the entire cryptocurrency market. In fact as Bitcoin prices have been dropping, we’ve also seen the prices of most cryptocurrencies suffer. The Bitcoin rocket has helped create value not just for Bitcoin, but for the entire cryptocurrency market. If Bitcoin forks, the resulting chaos will hurt the entire industry.

We’ll have to wait and see what happens. If 80% of the Bitcoin community adopts SegWit, everything should be fine. If it doesn’t, most likely UASF will be activated on August 1st. In this future, one I don’t want to imagine, its likely to have two bitcoins on August 1st. A Bitcoin Core coin (BCC) and a Bitcoin Unlimited coin (BTU). A hard fork would create two copies of the Blockchain, two networks and two versions of the software. This would leave it up to the miners and users to determine what version of the Blockchain they will support.

If the hard fork happens and the Bitcoin blockchain splits, users are at risk of losing their Bitcoin, which is why Bitcoin.org is urging everyone, to take a “bank holiday”. Bitcoin.org posted an announcement suggesting to take a few days off before the proposed changes take place and to wait for confirmation that the situation has been resolved, before users start trading again.

SegWit2x, UASF, UAHF… What’s going to happen?

I don’t think anyone knows how this will play out. For the time being, we can expect market volatility to continue, with prices dropping. This could be the best time to get in the market, with prices going low, while staying vigilant and ready to act once a clear outcome emerges and prices begin to surge again.

Opinion: ICOs are repeating the mistakes of crowdfunding

In 2016, $73 billion in venture capital was invested in U.S. startups, compared with $45 billion at the peak of the dot-com boom. A few days ago, Tezos hit a new record with its ICO, raising $232 million. Before that Block.One’s EOS raised $185 million and Bancor $153 million. These three ICOs racked in a whopping $570 million. So far the ICOs have had a phenomenal run.

ICOs are changing that way startups are raising money. They are letting startups from anywhere in the world raise money to fund their new innovative ideas. They give small investors the opportunity to get a seat at the grown-ups table and invest in new technology at the ground floor. But, just like any investment, there’s always a level of risk. Fraud is not new in tech and the hotter the business, the more scam artists will flock to it. And ICOs are super hot. But, in most cases, small investors don’t have technical knowledge or the understanding of the market dynamics for the startups they invest in, and very often they fail to see the difference between legitimate ICOs and those that are scams.

I don’t think the problem with ICOs has to do with the fact that people are paying upfront for a products that haven’t been built yet. By definition, entrepreneurship is about promoting the heck out of things that don’t exist yet, and convincing investors, staff, and customers to believe in the future they are describing. I think the problem lies with the lack of process, specifically the lack of a vetting process. Unlike IPOs or startups that go through the normal venture capital route, ICOs have not gone through a process where someone has evaluated the opportunity based on specific standards, to make sure that the ICO meets some basic requirements before it can start to take in investment capital. Unlike VC funded startups, ICOs don’t raise money from professional investors that spread risk across a portfolio, but from regular folk that want to make a buck. These smaller investors, need a level of protection. The lack of regulation, coupled with the fact that ICOs can raise all the money they need in a single round, removes any kind of accountability and allows scam artists to take the money and run. Historically, Silicon Valley forgives, even celebrates, failure. I am not sure how forgiving small investors will be, after they get scammed. In the end, who loses when someone get scammed? We all do! The entire ecosystem loses.

With ICOs surging in recent months, the Securities and Exchange Commission is taking a closer look at such offerings. The ruling in the recent case of SEC vs Traffic Monsoon, was very clear. Sellers beware! The federal courts authorized the SEC to take action against the Internet advertising company. Even though the Traffic Monsoon case did not involve an ICO, but a similar offering, it was indicative of how the SEC might approach ICOs.

Regulation cannot stop scam from happening. Even if the SEC or other organizations put in place regulations for ICOs, stupid day traders and ICO junkies will still get crushed. We still need to do our homework, understand what we are investing in, and be aware of potential signs of scam. A recent post in Fintech Genome, mentions a few signs, that investors should be aware of  before investing in an ICO:

  1. Short window to decide. This is a FOMO tactic.
  2. Uncapped raise. Imagine a traditional fund raise where investor asks “how much are you raising?” and the answer is “we won’t tell you”.
  3. Minimum Viable White Paper (MVWP). Term coined (sic) by Andreas Antonopolous. An empty GitHub is a bad sign.
  4. Lots of buzzwords and breathless hype on social media. You know the pitches that look like they were created by a random buzzword generator.

Initial Coin Offerings have unlocked a better way to raise money and create a network effect. Just like the dot-com bubble there is risk, but we can expect ICOs to give us the next Google’s and Amazon’s of the world.

Ilias Louis Hatzis is a Blockchain entrepreneur who writes the Blockchain Bitcoin & Crypto (BBC) Weekly CXO Briefing each Monday.

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