Busting top 7 myths of Blockchain

Busting top 7 myths of Blockchain

Blockchain has become the most “glorified” database of the 21st century. While there is some proven value of Blockchain (example Bitcoin application) and great future potential; its existing value is being taken out of proportion by the Blockchain “enthusiasts”, “experts” and “advisors”, who do a “lot of conferences”.

Lets look at some of the Blockchain hypes, myths and examine them by “first principle” analysis why they are unlikely to work.

  1. Anything on Blockchain means truth

Blockchain achieves truth (transactions validity) in Bitcoin transactions with the help of 1000s of mining nodes, with up to 1000s of servers supporting each node. Miners are incentivized by Bitcoins to perform the mining exercise.

For any Blockchain use case, worth asking the following,

  • Are all transactions going to be public? (example, Banks Blockchain use cases won’t like this)
  • You will allow decentralization in the workflow? i.e. Some consensus algorithm (say majority of miner votes), will make final decision in transactions validity (example, Governments or any Central authorities won’t like this)
  • Miners understand and can help in validating transactions (example in supply chain finance, how can miners validate any facts about fake invoices, workflows or multiple discount loans?)

“Blockchain is not the magic wand that generates immutable truth”. Its just a means to an end.

  1. Private or Enterprise Blockchain makes sense

Among many stakeholders, IBM has been promoting and selling enterprise blockchain use cases. Several Banks have formed use cases for Blockchain consortiums, to improve inter bank data management, operation process improvements.

For any enterprise to use Blockchain internally, or with other enterprises, we have had proven, scalable and efficient technologies for decades, including shared databases (SQL, Oracle, SAP).

Please note that Blockchain is an expensive technology (in terms of resources, as multiple nodes need to be setup, multiple entities need to validate all transactions since the beginning (no concept of end of day final records, so next day’s transactions begin from next day only and not from the first ever transaction like in Blockchain). Decentralization by definition slows down things and introduces security concerns. For a single enterprise with already trusted internal groups, or a hand full of external enterprises, private blockchain is not the best solution. And for Inter-Banks’ transactions, payments, trade settlements; several existing efficient workflows, platforms, protocols like Swift, FIX etc. exist and work fine. Blockchain as a magic wand will not help at all.

– As an example, if some bank says that they can reduce the current trade settlement cycle from 2 days to 1 second, they should ask themselves that why is it 2 days in the first place. It’s not that they were all waiting for the Blockchain technology to be invented for solving this problem.

If you do not believe this, ask any bank who announced any use case, proof of concept (years ago), if they actually scaled on it or not? Do you recall reading any such “scaled up transactions by banks” PR (press release) after the POC (proof of concept) announcement? I guess not. And I rest my case.

  1. Transparency / Digitization is best achieved by Blockchain

Several POC’ed or Advocated use cases are nothing but digitization of some data. Examples below,

  • Land registry on Blockchain is done by several states, governments etc. Whereas none of them has allowed for independent miner validations (i.e. only states can decide who owns which property and when they approve the transfers), so it just makes online record keeping instead of offline. Such processes by Governments and Companies have been digitized for decades, without blockchain, and more efficiently.
  • Invoice discounting If a supplier sends an invoice to a client, that gets accepted, then they can take say 70% loan against that invoice from a bank to develop the products, or get some cash-flow while the products are shipped (say from China to US) which takes weeks. Typically in such loan, supplier, supplier’s bank, client and client’s bank are involved in confirming the transaction and supplier’s bank gives loan after that. This approval process can take days.

The challenge in this loan issuance is that there can be fake invoices, or companies can take bank loan from multiple banks against the same invoice, or that the counterpart client does not exist. Hence banks are cautious in giving such loans.

Now independent miners are bank’s risk departments who can help validate the authenticity of the transactions. And no bank will open their client data to other banks for validation (in fear of losing the client to other bank).

So all that can be achieved is that document transfer between the 4 entities, can be made faster from days to hours, by using digital signing and digital documents transfer. Such solutions exist, and work well without Blockchain.

Most problems advocated here are typical digitization problems that can achieve transparency by making the steps in the workflow public. Think about DHL or any other courier service tracking the package in transit, or Uber’s car driver and trip details. People, who need to know, can know it online very easily, and without needing any Blockchain technology implementation.

  1. Blockchain is an efficient way of managing data and transactions

Bitcoin gets around 300,000 transactions per day. To achieve these transactions, there are millions of servers running around the world, consuming more electricity than several countries, to validate these transactions. It takes seconds if not minutes to confirm the transactions. This is of course slow and inefficient.

Blockchain and decentralization by definition slow things, make them inefficient. They should be used only if the “real” benefits of decentralization are likely to be achieved. In most Blockchain use cases, centralized non Blockchain implementation will work best.

  1. All crypto-currencies make sense

Bitcoin is owned and run by the community. There is no “known” majority Bitcoin holder. It makes sense for community to adopt it as decentralized currency, as an alternate to fiat currencies.

But different countries like Venezuela launching their crypto currency, or centralized crypto currencies like Ripple make no sense. All they need maybe is a digital currency instead of fiat currency, or digital payment mechanism like Paypal, which has worked well for years.

But if the transaction validation is done by Government or 1 company like Ripple, its not decentralized and is not a crypto currency.

  1. Smart contracts are perfect and legally enforceable

Smart contracts on Blockchain maybe useful for achieving conditions based trigger conditions in the Blockchain. Some known challenges with smart contracts must be understood,

  • It’s debatable whether such contracts should be coded within the Blockchain, or at the application layer on top of the Blockchain.
  • Many smart contracts are poorly coded and hence end up hurting the use cases rather than helping them.
  • Very few proven scaled up use cases of smart contracts exist till date. The most successful ones so far are ICO tokens and Crypto-kitties.
  • If smart contracts go wrong, good luck. And also, they are not legally enforceable in any jurisdiction so far.

The above challenges maybe overcome over time, as the Etherium alike protocols mature improve and become scalable, making them more accepted widely. And smart contracts shall be more relevant as automation & Iots grow, leading to more “machine interacting with machine” scenarios.

  1. All new discounted ICO tokens will rise in value

 ICO (Initial coin offering) is the advance sale of a project’s crypto-currencies or tokens, to be used within their platforms or outside, in advance, to fund the development of their platforms. These tokens can be easily sold and traded at anytime, on all crypto-currency exchanges depending on their demand. So, an ICO is when a company raises money in Bitcoin or other crypto-currencies for the technical development of their projects. These tokens are essentially the incentives, for several market participants to use and grow the platform in a decentralized manner. Such incentives are paramount in making a decentralized eco-system operate sustainably. This allows for formation of new economic systems; possibly even capable of transforming / improving wider systems like “capitalism”.

Majority ICOs unfortunately don’t and won’t work because,

Many ideas don’t need blockchain or ICOs at all. They are centralized, or don’t need community, or have no real business models. As explained above, you cannot “decentralize everything”.

Team behind ICOs have nothing to lose; Once they raise millions to billions on an idea, basic prototype at best, proven or unproven team, “self-proclaimed experts” or “larger than life celebrities lending their names”, there is no major pressure to execute their idea well. There is no governance on the use of funds. Compare this to typical startups, where entrepreneurs get modest valuation, and have to be “all in” the project to see any returns after 5-10 years or hard work. They are “on the hook”, forever.

And, lack of regulation, accountability and legality of structures; makes it the “wild west“ of finance and reduces the probability of success.

So where does Blockchain work then? Lets take the most successful Blockchain app. How Bitcoin Blockchain REALLY worked, see below the key factors in its success.

  1. Shared Beneficial Ownership– Bitcoin Blockchain is owned by the public, striving to build a decentralized financial system where trust is built in a democratic fashion. While Bitcoin was initiated by smart hackers, it was scaled by the tech community and eventually became mainstream, because it seemed to help the whole world and everyone had an equal opportunity to build their businesses around it (like all miners, bitcoin exchanges, etc.). Wikipedia, Linux and several other open and crowd-sourced platforms have scaled in a similar fashion.
  2. Independent mining achieves trust– Blockchain does not create trust inherently. Several nodes independently validating all transactions, for some incentive, build trust in a Blockchain. If the Blockchain app did not have enough independent miners, Bitcoin transactions would not have been so trustworthy.
  3. True decentralization – Bitcoin is truly decentralized. There is no central point of failure. There is no dependence on 1 person, 1 node, 1 company, 1 Ceo, 1 nation, or 1 leader.
  4. No contract among transacting parties– While doing a Bitcoin transfer, payee and payer do not need to know each other. They do not need to have a legal agreement between them defining terms and conditions of their transaction.
  5. Some other factors –There are other factors that need consideration, including, multiple parties executing the transactions, transparency of transactions acceptable to all parties, public or private blockchain, etc.

If you can see several / all of the above factors in your Blockchain use case, maybe it can work.

 

In my humble opinion, majority use cases being developed on Blockchain do not qualify for, or need Blockchain at all.

 

PS: I truly believe in Bitcoin and the potential of Blockchain and potential of ICOs to disrupt the corporate structures. I am not even too bothered by inefficient or un-scalable Blockchain protocols yet; those would become better in time, for sure. My concern is that Blockchain is taken out of proportion to solve problems that it’s not meant to and never will.

Why ICOs need to be regulated

In 2013, J.R. Willett unleashed the ICO concept — a fundraising system where companies sell their new cryptocurrency tokens in exchange for Bitcoin and Ether. Since Solomon vs Solomon ruling in 1896, segregating the liability of a person from the company, this ICO concept would be the biggest corporate structure innovation.

ICO (Initial coin offering) is the advance sale of a project’s crypto-currencies or tokens, to be used within their platforms or outside, in advance, to fund the development of their platforms. These tokens can be easily sold and traded at anytime, on all crypto-currency exchanges depending on their demand. So, an ICO is when a company raises money in Bitcoin or other crypto-currencies for the technical development of their projects. These tokens are essentially the incentives, for several market participants to use and grow the platform in a decentralized manner. Such incentives are paramount in making a decentralized eco-system operate sustainably. This allows for formation of new economic systems; possibly even capable of transforming / improving wider systems like “capitalism”.

Lets review the Good, Bad and Ugly of the ICO world.

The Good

ICOs have worked and grown due to several key factors, including,

  • The willingness among the community to decentralize control, away from large corporations, and have all stakeholders aligned to work towards a common goal with the economic incentive.
  • As a successful reference from the past, in open source movements like Wikipedia, Linux, crowdsourcing has worked well even without the economic incentive.
  • ICO is the advanced sale of a platform’s crypto-currencies or tokens, to fund the development of fund raising company’s platform and product. These tokens can be easily sold and traded at anytime, on all crypto currency exchanges depending on their demand, providing liquidity to investors and vital early stage funding for entrepreneurs. These tokens are essentially the incentives, for several market participants to use and grow the platform in a decentralized manner. Such incentives are paramount in making a decentralized eco-system operate sustainably. ICOs help blur the boundaries between stakeholders, leading to the Token economy as depicted below.

  • Investors are participating very early on in the process, hoping to repeat the success of early stage Bitcoin investors who saw its value rise from a few cents to $5,000+ within 7 years, creating generational wealth for some investors.
  • The surplus money people generated from early investments into crypto currencies are being re-invested into new crypto currencies.
  • A genuine desire to fund some interesting causes and projects that are closer to the crypto-investors’ hearts.
  • Limited liquidity (supply) of tokens means that as the use of token and platform grows, the value of tokens should grow as well, generating strong returns for the early-stage crypto-investors. ICOs are also beneficial to smaller investors as early stage crypto-investments are not limited to private investors or VCs, anyone can take part in a token sale, similar to the concept of Kickstarter, where people fund or support projects which they feel would be successful and effective.

    The Bad

    Inspite of their great advantages as highlighted above, 46% of funded ICOs from 2017 have already failed by Q1 2018. There are several reasons for this,

    Inexperienced investors
    (No disrespect, but) ICO investors are typically those who got lucky with the Bitcoin and Ether price boom in the last few years. Bitcoin and Etherium were most credible and honest attempts to disrupt the world for better. Hence, they did well over a number of years. And many early investors made a good return on their investment. And they got excited, when they saw other tokens in ICO opportunities in 2017; which were not well thought through, did not have the right business models, lacked a strong experienced committed team, and were doing ICOs because they could, rather than to solve a real underlying problem. It was hard for those investors to identify the value in such ICOs, and they would just invest in “well marketed” whitepapers, or celebrity / “influencers” endorsed ICOs, hoping to make a quick buck on their investment; without necessarily evaluating the business fundamentals before investing. Most ICO investors were not able to ask the following critical questions before selecting the ICOs to invest in

    • Do they have an MVP (minimum viable product), and team, and clients / users? This should help one differentiate from idea stage investing versus business scale up investing?
    • How “all in” is the team behind the ICO. Are they investing themselves? And locked in for returns in form of tokens?
    • How will the company use the funds in building / scaling their business / project?
    • Are the tokens integral to platform’s success?
    • Consider getting a third party crowd sourced technical reviews (Github for example) on token structures as well as token privacy / security
    • Are these tokens legal?

    This lead to not well analyzed investments, and failures later.

    Cryptocurrency news site Bitcoin.com has surveyed last year’s ICOs and found that of 902 tracked by TokenData, 142 failed before raising funding, and another 276 failed after fundraising, whereas another 113 projects “semi-failed,” because their teams have gone off the radar or their community has withered away. That jumps the failure rate to 59%. Many ICOs have ended up in litigations too.

    Poor teams running the ICOs for unachievable projects
    ICO project founders focussed on attracting investors, and not enough on the underlying project or the security of the ICO platform. The projects were either created for the sake of raising money, or completely blue sky, or just plaigirised from existing ideas.

    Hackers successfully take advantage — the more hyped and large-scale the ICO, the more attractive it is for attacks. Putting a number on that amount, we’re talking $400 mln stolen by hackers. The smart contracts used to raise funds are themselves poorly coded. According to Fortune magazine, up to 10 percent of all the money raised by ICOs between 2015 and 2017 was either lost in the crypto ether or stolen in hacks.

    Larger than life celebrities following in the ICO scams

    Capitalize on the crypto craze that is sweeping the world has culminated in a number of weird and wonderful advertising campaigns, featuring some interesting celebrities and big businesses, including; world-renowned footballer Lio Messi was used to endorse a company producing Blockchain hardware, while flamboyant boxer Floyd Mayweather entered the fray with an Ethereum-based ICO last year, along with Paris Hilton and footballer Luis Suraez. Stevan Seagal promoted ICO was halted after a regulatory order

    These celebrities endorsed ICO in exchange of Hefty amount of money and ignore a major aspect of the project such as its viability and legitimacy.

    Besides celebrities, several entrepreneurs, corporate guys, became wannabe “ICO Advisors” and lent their profiles for ICO projects, in return for ICO tokens and other fiat / crypto currencies. This helped project a better image of the ICO project, and sort of mislead the retail investors.

    Not just retail investors, even Venture Capital firms got into the hype and invested millions of dollars into several ICOs, which did not lead to anything substantial. Besides, the corporate ownership of the ICO platform / project / company, still belongs to the shareholders, and not the token holders yet.

    No mechanism for fair pricing of the tokens

    Token prices were based on high random “finger in the air” valuation created by the ICO founders. Anybody could launch 100 million, or 10 billion tokens, and price them at $1 and discount it back with up to 70%. Its unbelievable how retail crypto investors psychology worked and they bought many such tokens. Some people even borrowed money to invest in cryptos in second half of 2017. There was no fundamental valuation of the project, no discounted cash valuation model with appropriate startup discount rate applied. Several average team ideas were priced at $100m or more. Investors fall for jargon and speculative mumbo jumbo. As a result such high-risk ICOs bank on investors fear of missing out (FOMO).

    The Ugly

    Lack of Regulation and Oversight

    Crypto issuance finds itself in a grey area of regulation. This is the biggest issue in terms of avoiding scam ICOs. Some jurisdictions like US are more advanced in classifying certain tokens as securities or utility tokens, in order to regulate them better. But most other jurisdictions like Korea etc. had been allowing for any ICO to happen.

    Lack of Accountability

    There is no formal process to audit ICO organizations. Many teams conduct token sales before making significant progress in building out a functional product. Coinist has ranked the 6 worst ICOs of all time, under the headline “Poor returns, failed technology and outright scams make ICO investors leery”. Given there is no accountability of the founding team, advisors, and other beneficiaries, several ICO projects have,

    • raised money and did not invest into the project appropriately
    • or syphoned off the money into their personal assets, away from the project
    • or even disappeared completely

    Illegal structures — investors are not even aware that they are breaking rules

    The risks of ICO and cryptocurrency investment are so high, that they warrant double warnings from governments including including Singapore, the UKIran, Germany and Ukraine.The Securities and Exchange Commission (SEC) has enforced actions against ICOs believed to be related to fraud. It is alleged that the tokens sold to US investors during Tezos’ ICO were actually securities.Tezos raised a record-breaking $232 mln during its Initial Coin Offering (ICO) in July 2017. The project has since been a subject of scrutiny and multiple lawsuits over the question of its compliance with the U.S. Securities and Exchange Commission (SEC) regulations, among other things. Since the company has not registered them with the SEC, this would constitute securities fraud.

    The Future — Light (regulation) at the end of the tunnel

    One obvious way that ICOs can achieve their full potential is if they get lightly regulated. This should not be confused with Blockchain, that is meant to be decentralised and not regulated; ICO is the fund raising process, which needs “some” regulation to make it “safer”. Easiest process would be to apply similar to Crowdfunding guidelines in UK or US, and the ICO platforms that help raise ICO funds to be regulated like Seedrs, for instance.

    Some jurisdictions have started the regulatory process.

    – In Switzerland, FINMA introduced new guidelines on ICOs, each falling within one or more categories: payment, asset, utility.

    – In Spain, the People’s Party is preparing legislation including possible tax breaks for companies using blockchain technology.

    – Gibraltar, Estonia and Japan are among few countries that have also simplified / allowed for ICO fund raising.

    – US SEC is also debating on easier regulations for ICOs

Decade in review and preview — “Cryptos String theory”

Decade in review and preview — “Cryptos String theory”

2016 was a black swan year, with key unexpected events including Brexit, Trump and Demonetization in India.

2017 clearly belonged to Bitcoin. Who could have thought in January that $1,000 virtual coin would become worth $20,000 before the end of the year. And market cap of cryptos will increase from $18bn to $600bn. These stats show why we are all talking about the cryptos, and trying to predict where it may go from here. Like it or hate it, you were involved in Bitcoin debates, and somewhere deep down you also feel you missed investing early.

Unfortunately though, the spotlight on Bitcoin is not so much for its potential usage as a global decentralised digital currency; but mainly as an investable asset. That has led us into a virtuous circle; more these cryptos rise in value, more people invest in it, and more people invest in it, more it rises in value.

Before we move on to predictions for rest of this decade, worth remembering that Bitcoin as a concept started to get away from existing centralized financial services world, into a decentralized peer to peer community driven immutable system. Here is a quick summary of how Bitcoin evolved so far in this decade. It was adopted by hobbyists and geeks between 2010–2013, subsequently by early adoptors including tech companies in 2014–2015, and became talk to the world due to Blockchain’s potential in 2016. The major inflection points for cryptos growth were,

  • Japan legalizing Bitcoin as a currency in April 2017, which led to a massive growth across the year.
  • The involvement of financial institutions (120+ crypto hedge funds cropping up in the year) led to institutionalizing of all Cryptos.
  • Several ICOs raising humongous amount of capital in 2017, especially in Q3.

Cryptos will continue to grow the “parallel” financial world in 2018, creating some friction, synergies as well as fundamental challenges for their existence. String theory of parallel-decentralized world, meeting the existing imperfect but well understood centralised world, through a black hole called the future is what I will try to take a peak at.

Lets project what may happen between 2018–2020.

  1. Bitcoin will stay — Bitcoin will continue to stay as a part of the growing cryptos market for the foreseeable future. Its value may fluctuate, and even in the case of a crash, it will be worth a few thousand dollars for sure. And in case of a Bull Run and supportive external environment, it can touch $50k soon.

– Bitcoin’s efficiency, to deal with transactions load shall be improved with some relevant community driven changes and forks.

– For other cryptos, typically the risk of survival remains when their value is a few dollars (assuming limited supply of a few millions), once they break $100 value mark, and have a sustainable strong reason to exist, they can continue to grow and create value for all stakeholders.

2. Institutionalization of Cryptos will catapult their valuation growth — As more banks, fund managers and other institutional investors get involved in cryptos adoption, investments, their valuation will continue to rise. Listing of Bitcoin futures on CME, and possibly adoption of other cryptos on exchanges shall catapult the investors access into cryptos.

Though there maybe short term conflicts of decentralization thesis of cryptos, versus involvement by traditional centralized financial services world.

  • For instance, CME Bitcoin futures are regulated, while Bitcoin trading, as a financial security is not.
  • Fiat currency conversions from Crypto currencies is challenging as several Banks have taken over-cautious approach of discouraging such transactions.

Such challenges provide opportunities for newer business models too. New OTC brokers, exchanges, fund managers, ICO platforms, and more efficient tokens will emerge and present great growth opportunities.

3. Governments will make a failed attempt to ban cryptos or regulate them, together — The whole idea of Bitcoin was to get away from centralization including Governments. If Governments try to regulate them in a coordinated fashion, so they retain control over the financial system; they will certainly fail. Some related examples and factors are listed below,

  • Europe tried for decades to make and grow Europe. Brexit is a classic example of how Europe is failing, trying to keep “only” 25 odd countries together. And Estonia is already outlier European country adoption cryptos at a large scale.
  • Japan and Belarus have also challenged the status quo.
  • US dropped out of Climate Change Convention, which is possibly the biggest threat to humanity on Earth. Keeping several countries in a global cryptos regulation will be a challenge.

So any attempts made by Governments to crackdown on decentralized currencies, tech platforms shall not work.

4. Globally fragmented regulations around Cryptos and ICOs shall continue — Since all countries are still trying to understand the Cryptos and ICOs, their regulations will continue to be fragmented.

– Cautious or Full Support, with regulation Japan, Australia, Canada, and Switzerland have been more positive in opening up to ICOs. Japan has accepted Bitcoin as a legal tender and has made Bitcoin transactions tax-free too, hence becoming the largest bitcoin trading volume nation within 2017. Several of these countries have cautiously started giving ICO approvals as well, through their regulatory frameworks, sandboxes, and new regulations.

– Countries with Limited or No Support US allows for bitcoin investment, trading, and use as a currency (as along as its used for legitimate purposes). At the same time, US has warned ICO issuers that if any US invests in an ICO, and their token seems like a security, then (strict) US securities laws would apply. As a result, most ICOs have started banning US investors completely. Countries like India

– Banned — China has banned ICOs in September this year, after a major surge in Chinese ICOs. China has pushed away crypto exchanges out of the country too.

5. Enterprise Blockchains (without decentralized control / consensus) will die — Blockchain had been overused in thousands of use cases, which do not need Blockchain at all, because they don’t need any consensus mechanism, crowdsourcing, or decentralized workflow. Such Blockchains will perish gradually. The Blockchain consortium R3 saying they don’t need Blockchain as such, or Hyperledger losing its members are early signals of this process. And no POC shall lead to any real live scalable project and rationality would prevail.

6. Litigations around ICOs and Crypto related matters will rise dramatically As cryptos go mainstream, the legal issues surrounding the business and civil matters will become challenging.

  • An Etherium smart contract will not hold as business contract in the court of law.
  • Funds raised via ICOs not giving ample returns, or turning out as scams, will continue to drive lawsuits against the ICO funded companies

7. ICOs will show potential to be a better alternate corporate structure, co-existing with the current one for a while

ICO is the advanced sale of a platform’s crypto-currencies or tokens, to fund the development of fund raising company’s platform and product. These tokens can be easily sold and traded at anytime, on all cryptocurrency exchanges depending on their demand, providing liquidity to investors and vital early stage funding for entrepreneurs. These tokens are essentially the incentives, for several market participants to use and grow the platform in a decentralized manner. Such incentives are paramount in making a decentralized eco-system operate sustainably.

Constructively curated regulation that encourages ICOs to challenge imperfect corporate

8Crypto platforms usage will become easier and secure (maybe like paypal / whatsapp, leading to big adoption) Currently is very hard for an amateur user to open a crypto wallet, secure its private keys, and do the transactions. This is likely to be simplified with simpler UIs, but Secure mechanisms.

  1. new killer apps and platforms shall emerge
  2. “keep it simple” UI will emerge
  3. privacy / security standards will improve
  4. global protocol standards will begin to emerge

9. Some Governments like Canada / Japan may use blockchain to decentralize wider consensus on several decisions by engaging their public / communities Inspired by cryptos, some countries may use similar technologies to truly crowd-source consensus mechanism in various decision making processes. Governments on Blockchain, crypto currencies rung by central banks etc. are the themes we will witness.

Though its debatable how much value will they create, especially if the control is centralized.

10. At least 5 firms in the bitcoin, cryptos, blockchain, icos, space will reach $ bn valuation

These firms may include,

  • Crypto investment fund
  • Crypto exchange / wallet
  • ICO led community project
  • Blockchain driven security, identity, or other internet tech platform
  • Blockchain platform allowing for easier development of applications

Happy cryptos 2018.

Appendix — what are we reading and writing

Here are a select few articles you may like to read.

You-dont-understand-bitcoin-because-you-think-money-is-real

Chasing-the-next-bitcoin-investors-shell-out-700-million-for-coins-with-no-purpose

Implication-of-bitcoin-futures-listing

Icos explained

Why-and-how-regulators-should-embrace ICOs

Bitcoin and Blockchain basics

Demystifying-the-blockchain-delusion — why it wont work

Can-governments-use-blockchain-to-be-more-efficient-and-regain-public-trust

ICO-explosion-in 2017

Bitcoin-mining-and-energy-consumption

Wikipedia-cofounder-to-put-the-encyclopedia-on-the-blockchain

Ten-years-in-nobody-has-come-up-with-a-use-case-for-blockchain

Greater-fool-theory-Bitcoin value rise

Implication of Bitcoin Futures Listing

Everyone is excited about Bitcoin futures being listed on US exchanges, and Bitcoin price keeps soaring.

Here is some analysis of this news.

  1. Bitcoin value is likely to go up (in the near term), volatility should go down, and majority of Bitcoin investment flow would be in the futures — This should give recognition to the world that Bitcoin is real and not a fad, and this credibility along with rising Bitcoin prices shall increase.
  2. Typically when the future of any asset is launched, based on interest in the underlying asset, the volume typically goes to 10–20 times more in the futures market, compared to the underlying (cash) market. It’s likely to be the case with Bitcoin too.
  3. This means that Bitcoin futures maybe more than underlying Bitcoins (21million) and lead a crash faster
  4. Given the increased participation in Bitcoin, its value will rise again .. possibly reaching $20k in early 2018
  5. Volatility should come down as Futures market will be the major market and typically there are regulations around daily price moves, circuit limits that shall apply to Bitcoin Futures as well
  6. Bitcoin futures launch with catalyse structured products on Bitcoins and more liquidity across several more exchanges in 2018 — This is what bankers (financial services players) do. Expect more exchanges launching Bitcoin futures and its variants (like options etc.), Bitcoin / Crypto ETFs will come from fund managers, more crypto exchanges will also offer crypto variant products, margin, leverage and so on. Ether and other coins futures can be expected soon as well.
  7. Bitcoin was meant to be used as a peer to peer decentralised currency and it may lose that point Lets take a step back. While there maybe reason to cheer the Bitcoin future launch as validation of its credibility, but there maybe some fundamental issue it brings.
  8. If Bitcoin is not being used as a global currency (as it keeps rising in value, nobody spends it),
  9. and is only used as an investment commodity,
  10. and its value is determined by futures value on exchanges,
  11. typically by institutional investors,
  12. and in a regulated way
  13. then maybe we are losing the whole point of why Bitcoin was invented? The whole idea was decentralisation away from regulated and centralised financial system. was it not?

As an analogy, in several countries, there is a parallel economy run by cash / black money / gold / or any other asset. But nobody lists black money future on an exchange? (don’t necessarily focus on the negative point / comparison of black money with bitcoin .. but its just proving a point. maybe bitcoin was meant to be helping in a decentralised community driven parallel currency only)

Short term excitement is evident (in bitcoin price), long term rationality of this step may need a deeper reflection.

Why and how regulators should embrace ICOs?

The history of the financial investing world is full of innovations that created new avenues for opportunity but also encouraged fraud and ‘irrational exuberance’, forcing authorities and regulators to step in and protect citizens from the dangers of unregulated financial activities. Bitcoin, cryptocurrencies and ICOs are simply the latest in a long line of financial innovations that should and will be embraced by regulators to ensure they are conducted in the correct manor. Let’s take a look through some of the key events in financial history and how they have led us to where we are now.

The Solomon vs. Solomon ruling allows for future financial innovation-1896)

One of the largest events in the evolution of human innovation was the verdict in the landmark case of Solomon vs. Solomon Corporation in 1896 in the UK which meant that shareholder running the company were segregated from the liabilities of the company itself. Business owners and shareholders could become more enterprising, and if their business did not work, they will not have to be held hostage to the demise of that company. Arguably, if this ruling did not happen, we may not have witnessed the tremendous innovation we saw in the last 120+ years from millions of entrepreneurs.

The great depression leads to the SEC and the enforcement of regulation — 1934

In the early nineteen hundreds, ravenous, inexperienced investors were pumping money into the stock market which was growing in importance (sound familiar?). This inevitably led to Black Tuesday and the great depression. The US government responded by setting up the SEC and giving it far reaching powers to enforce financial regulation.

Regulation failures set the scene for the birth of Bitcoin — 2008

On the 15th September 2008 we witnessed the $653bn bankruptcy of Lehmann Brothers the largest corporate bankruptcy in history, despite being highly regulated by several global authorities.

This and other bankruptcies (eg Enron’s $60bn bankruptcy in 2001) lead some people to question whether the current corporate structures we find in large corporations are the right way to go. Let’s examine this.

There are various stakeholders involved in governing a company. Directors such as the CEO and CFO hold shares in the company and focus on short term profitability to satisfy their shareholders and their fiduciary duties. Then we have shareholders who hold great influence over company directors and are notoriously driven by short-term profits. The regulators seek to minimize the opportunities for companies to engage in unsavory tactics to generate profit. Most customers of the company have very little say in how things are run. It is this structure that led to the thinking around a different financial model after the 2008 financial crisis.

Disaffection leads to the foundation of Bitcoin — 2008

The world’s first cryptocurrency, Bitcoin was introduced in a whitepaper in November 2008, a few months after the Lehmann Brothers bankruptcy, for one major reason — to get away from a centralized system where financial institutions, states and regulators were not trusted and users had more say in how things are run. Bitcoin has been one of the major disruptions of the 21st century. Who would have imagined in 2009 that people would be giving away almost $5,000 of their real hard-earned money for 1 virtual coin of a digital currency which nobody owns, no central bank guarantees, is not backed by any gold or any other asset.

Enter the ICO — 2013

The incredible rise in the value of Bitcoin led to the creation of the most exciting funding innovation in recent history — the Initial Coin Offering (ICO). Simply put, an ICO is the advanced sale of a platform’s crypto-currencies or tokens, to fund the development of fund raising company’s platform and product. These tokens can be easily sold and traded at anytime, on all cryptocurrency exchanges depending on their demand, providing liquidity to investors and vital early stage funding for entrepreneurs. These tokens are essentially the incentives, for several market participants to use and grow the platform in a decentralized manner. Such incentives are paramount in making a decentralized eco-system operate sustainably.

Much like the cryptocurrencies that fund them, ICOs have experienced exponential growth in 2017 and in the past few months have raised more money than early stage VC funding has, a cool $1.5billion. Companies like Filecoin, Bancor, Tezos, EOS.io have each raised more than $150 million in a matter of hours making ICOs an incredibly successful instrument to raise funds for the development of a new application or platform.

Why ICOs make sense

These are the key reasons, why ICOs have enjoyed so much success:

  • There is a willingness among the community to decentralize control, away from large corporations
  • Investors are participating very early on in the process, hoping to repeat the success of early stage Bitcoin investors who saw its value rise from a few cents to $5,000+ within 7 years, creating generational wealth for some investors.
  • The surplus money people generated from early investments into cryptocurrencies are being re-invested into new cryptocurrencies.
  • A genuine desire to fund some interesting causes and projects that are closer to the crypto-investors’ hearts.
  • Limited liquidity (supply) of tokens means that as the use of token and platform grows, the value of tokens should grow as well, generating strong returns for the early-stage crypto-investors. ICOs are also beneficial to smaller investors as early stage crypto-investments are not limited to private investors or VCs, anyone can take part in a token sale, similar to the concept of Kickstarter, where people fund or support projects which they feel would be successful and effective.

Looking at ICOs from a regulator’s perspective

It is a regulator’s job to protect investors from unscrupulous activity and with ICO investments at record levels, it’s no surprise that regulators have stepped in to limit unsavoury activity and encourage best practice within the ICO community. The challenges regulators face include founders raising funds through ICOs with nothing but a whitepaper then disappearing, difficulty governing cryptocurrencies that are hard to track and companies choosing ICOs over traditional fund raising methods to avoid being regulated under the usual securities laws.

· Regulators have started to respond since July 2017:The SEC has said that if the token is a security, then it falls under the Securities Act

· Canada, Singapore, Hong Kong, have echoed similar statements with a warning to investors to be cautious in their investment process.

· China has banned all ICOs within the country. The ban is thought to be temporary while they figure out how to regulate ICOs. Sooner they come with guidelines, better it would be for removing such wide blanket bans.

But if we take a step back, the idea of Bitcoin was to get away from centralization, including regulation. If we introduce new coins / tokens in some regulated environment, are we not defeating the purpose of cryptocurrencies? Are we not trying to create new breed of tokens that can shift the economic structure of companies but then regulating them back so they become securities? Realistically, regulation is unavoidable as there is now far too much money involved in ICOs and cryptocurrencies, so much like the peer-to-peer funding industry actively sought out and encouraged financial regulation, the ICO industry should work with regulators to draft laws that protect investors and prevent illegal activity whilst still encouraging innovations in technologies and corporate structures. These would be my suggestions to regulators who would be considering regulating ICOs:

1. Introduce KYC processes within ICOs

This can be useful for various compliance requirements such as:

· Tax laws (helping tax authorities figure out if some investors had realized or unrealized profits on their tokens).

· Ensuring any country-specific compliance is met.

· Protecting against money laundering.

· Allowing for a certain accredited investor base for certain kinds of ICOs.

2. Introduce guidelines for ICO documentation and process

Potentially inspired by existing IPO and other fund raising processes:

· Clearer disclaimers marked in the ICO papers about investment risks.

· Ensuring company exists by including its registration / audit reports, etc.

· Including comprehensive details about the team, product and business.

· Post investment audits are periodically shared with the investors

3. Classify the tokens before regulating them

As Canadian regulation says, each token is different and should be evaluated independently (CSA staff notice, 46–307 “Crypto currency offerings” released by CSA Canada):

· Tokens that are cryptocurrencies like Bitcoin or Ether could be regulated in a similar way to the fiat currencies.

· Tokens that mimic securities — that give ownership in the company, are for profit investments, etc. may be regulated within existing or enhanced Securities laws.

· Tokens that are for in-platform use only may continue to be unregulated or lightly regulated if needed. In principal, they are very similar to loyalty points, frequent flyer miles, vouchers, or even tokens for games. These are typically not treated as securities and for now are generally not regulated.

ICOs have witnessed incredible growth in the last few months but may face some challenging times while regulators figure out what to do to them and certainty returns to the market. But I truly believe that constructively curated regulation that encourages ICOs to challenge imperfect corporate structures can lead us to a much better decentralized digital world.