Section 5: Trend by cryptoasset class
As BQIntel is developing, we engage in providing tools to compare crypto-assets with each other, thanks to the creation of a database and of a suite of tools to exploit it. A primary added value is to use our classification as a criterion to isolate classes of tokens and study them as such.
As an evolution to fine-tune our classification framework, we are now refining by creating sub-categories for each of the functionalities. As part of this move, the E (Execution) functionality becomes a subcategory of the I (Infrastructure) function.
Just one remark worth mentioning as far as the classification is concerned, when designing and proposing DLT-based processes within corporations, the question arises within the Finance Departments of how to enter crypto-assets in the books. Accounting standards have not yet thoroughly thought and published principles for this, so that companies can follow in which accounting category they have to put Ether, Bitcoin, Tokenized gold, not to mention depending if they proceed from mining, from received proceeding of activities, from speculative acquisition, or whatever. Here again, the consideration through mapping of the 5 categories could prove very interesting for accounting researchers to work with.
A – ANONYMITY CHARACTERISTIC
Prices of anonymous cryptocurrencies have been struck at the end of 2019. Compared with mainstream Bitcoin, or even native mainstream infrastructure tokens, Monero, Dash, ZCash, MimbleWimble and the like are losing momentum.
Of course, governments are likely to resolutely fight these crypto assets, because they support the anonymous movement of the value, and hence would be the preferred medium of exchange for offenders in parallel economies. However, it is precisely this that makes the sluggish situation surprising, if not worrisome: there is a clear use case for anonymous cryptocurrencies, yet they are not following their usual tendency to resist downturns.
I INFRASTRUCTURE NATIVE CRYPTO-ASSETS
I(Ē) – Pure accounting infrastructure functionality
Bitcoin’s Proof of Work reward will be halved around May 2020. This is written in the protocol, and is, therefore, no surprise, just the previous occurrence in mid-2016, which reduced the price paid by the network to winning miners from 25 to 12.5 BTC per block. This time, the reward will be reduced to 6.25 BTC per block. This means that all of a sudden, the number of “fresh” bitcoins being created and brought to the market by miners is going to be halved, causing a significant supply shock.
When examining the BTC price history and attempting to identify the potential impact of the halving, it is quite apparent to any observer that the price usually increases after the halving, and continues for some time after. The price history indicates that increases have occurred after previous halvings. This is why, today, many commentators believe that this may very well again be the case, and in the coming months, a bull run could develop in the same way it did in 2016-2017.
This is one of the strong arguments we see again and again these days, supporting the idea that the price of BTC may soon skyrocket. However, others claim that the price adjustment related to the halving has already been taken into account; the rally in the spring of 2019 was just that. So, speculation is on!
Even though it may have been forgotten since 2018, the primary problem for Bitcoin is still, of course, the war that the most powerful governments on the planet will wage against it. J.P. Morgan’s Chief Executive, Jamie Dimon, once told a group at a Fortune Global Forum that “Bitcoin would likely be stopped by the U.S. government before it became a true currency of use.”
In other words, there is nothing more specific than the fact that the US government will defend the USD as the world’s currency, which is a fantastic tool of foreign policy power. Whether the US government can stop Bitcoin remains to be seen, despite Dimon’s apparent faith in the almighty Washington administration. However, at least the fight over pure cryptocurrencies, should they gain acceptance worldwide, is going to be paralleled by the Chinese and probably the Indians, which together are a nice chunk of the world’s population and business.
So, even if we are confident that nodes will continue to run indefinitely, and that there will always be a jurisdiction that will brave the rest of the world by allowing this for the sake of attracting crypto businesses (and money), major governmental crack-downs on non-official currencies that could undermine their power, is a sure thing. The question we should be asking ourselves is this: where is the equilibrium point of mutual acceptance, beyond which governments will attack cryptocurrencies, and below which the appeal to populations shall cause their increased usage? We do not have the answer.
The experiments with deflationary cryptocurrencies are failing miserably. Even if one can argue that it is due to the turmoil in crypto prices, it is difficult to find a fundamental difference between these and asymptotic money creation, such as bitcoin. It looks to us that the size and security of the network is the prime parameter for broader adoption; the actual mechanism of money creation might ultimately matter little.
(I)E – Execution environments platforms
Please refer to the section on the technical development of infrastructure platforms.
F – FINANCING FUNCTIONALITY FAMILY
“Utility tokens” 2017-style ICOs
ICO tokens, issued in 2017, which skyrocketed in 2018, continue to collapse on the markets. Quite clearly, this shows, in financial markets, very low liquidity (even for utility titles, if you prefer to name them that way) is a source of pressure on the actual price of the asset. Regardless of how the teams are performing (some are still active and struggling to deliver a product), the fact is that some tokens are vulnerable to investors who are willing to exit, putting downward pressure on the price. Even if this is perhaps just an artifact of having a continuous quotation, as opposed to no transaction in classical venture capitalism, the r
eality is that it endangers the company, which is then under scrutiny and unable to raise further capital if it needs to.
Trying to raise money in the 2017 fashion is not convincing many investors, to say the least – teams that are still trying to do so, do not appear to be very
serious. The financing scheme of 2017-style ICOs has not converged and will need to be appropriately reworked (if this is feasible) to succeed.
Ripple’s CEO has stated that he believes that the vast majority of cryptocurrencies have no future,and foresees that 99% will fail and that only a few key projects will be able to solve an actual problem and be able to scale. This analysis, no doubt, apply to tokens that were issued to finance dubious platforms, and, with reason, are being wiped out by the market.
Securities tokens offerings
Very few ‘use-cases’ appear more evident than the management of financial titles as tokens on distributed ledgers. Importantly, there is no real technical issue here, at least not in terms of algorithms. The feasibility is purely a matter of regulatory acceptance and the legal infrastructure to ensure the enforcement, in the real world, of an on-chain title.
The start-up, BnkToTheFuture, estimates that as early as 2020, 50% of the security offerings will be digital and on a blockchain. It might not be that fast, but we observe that things are moving:
A theme park in Thailand has issued its security tokens with the help of Via East West Capital.
Fundament, a German company, has received approval from the BaFin (German regulator), authorizing the tokenizing of real estate. The company intends to use the Tezos technology.
Securitize has received Japan’s SBI Investment funding.
Harbor, a security token platform, has received a “transfer agent license” from the SEC. Before that, the startup Blockstack was the first to receive the
go-ahead from the SEC for a $23 million capital raising under Regulation A+.
Initial Exchange Offering (IEO)
During the summer of this year, there was a race between exchange platforms to position themselves as partners for the introduction of start-up fundraising – that is, after all, what it is.
IEOs have been successful so far: reportedly, 1.5 billion euros were raised this way in the first half of 2019. An important observation is that this money has gone to quite a limited number of companies because serious exchanges are not accepting all projects – their reputation will be at stake if the money vanishes in a scam, or if the team behind the project is so weak that nothing eventuates.
But of course, changing the logistics and adding an intermediary does not immediately improve the quality of projects available; as of now, IEOs are not
occurring to the extent one could have expected.
Rather than regarding this as proof that Binance, Bittrex, and the like are unsuited for the initial offering of tokens and other securities, we believe that it is, instead, an indication of the moderate dynamism of the cryptosphere as of the second half of 2019. Fundamentally, and provided some due diligence can be delivered efficiently to investors, IEOs can succeed. And, by the way, the essential characteristic of a successful listing is likely to be liquidity, which in turn will be higher for large, well known and expected projects. So, just like today, for established companies, financing on the markets is much easier than when you are a small, unproven business. Things are not changing that much!
The evolution of IEOs will result in a pure listing of the issued tokens. An initial listing, true, but in practice, that is relevant to how it works. Behind the scenes, the fundraisers will ensure supply, as this will be in their best interests, and according to established best practices, that will enable efficient price discovery. But market mechanisms will prevail as soon as the tokens are released to the public.
For liberal observers, this will be good news; for less liberal-minded people, there is obviously an urgent need to prevent market manipulation. Again, regulations will have to adapt, but only marginally in order to accommodate and support the management of crypto assets.
O – OWNERSHIP REPRESENTATION
Importantly, tokenized financial securities can only gain momentum, and ultimately replace the way they are currently managed if the infrastructure to handle them is in place. In this respect, development is ongoing.
Deutsche Bank, jointly with various companies, has recently announced the successful implementation of distributed ledger technology for the settlement of tokenized securities. Swisscom and Zürcher Kantonalbank were part of the trial. It convincingly demonstrated that DLTs could provide an instant and secure means of settling trades involving securities.
Another initiative by Paxos in New York (USA) is geared in the same direction. Wall Street has not yet shown much enthusiasm in embracing the technology, but the SEC has just authorized Paxos to “conduct a two-year pilot project for settlement and clearing of securities on a distributed ledger.” So, this opens the door for blockchain experimentation in the infrastructure of money markets in the US.
J.P. Morgan has also reported it has developed a distributed ledger-based solution to manage margins for derivatives trading.
All of these privately-proposed systems add to other projects, such as those undertaken by the Australian Stock Exchange and the Swiss Stock Exchange (SIX), of Gibraltar, etc. to manage ownership of securities on the blockchain.
Of course, there is nothing very technical here. Nevertheless, it is essential to observe corporation transitioning to the new IT infrastructure. The benefits are numerous: faster and more efficient business processes that currently can take days, reduced operating costs, elimination of errors, reduction in labor costs – and all of this accessible worldwide.
While not a financial security, real estate is another obvious application of blockchain that has excellent potential. In countries that include Germany, China,
and Hong Kong, there is an ever-increasing number of projects holding discussions with regulators to confirm the suitability of managing property titles
on distributed ledgers.
Commodities, including precious metals
However, there is not much momentum by pure players towards the tokenization of commodities.
What we observe, though, is that commodity exchanges are showing a willingness to build new infrastructures, hopefully, based on blockchain, thereby creating alternative exchanges with a clear objective to exclude brokers. So, to an extent, this is arriving at the same destination, but the other way around: instead of having new companies provide the service of tokenizing the physical assets and ensuring redemption, we are talking about established traders and financial institutions being qualified immediately to take positions, even virtually, and coming together to define the protocol according to which these tokens are going to be exchanged and managed in the ecosystem.
Loyalty program points
Here the frontier between privately emitted money and coupons is becoming really blur. As Walmart is studying the opportunity to introduce its cryptocurrency, we see how the continuum in the qualification of crypto-assets managed on the blockchain is getting impossible to separate.
Collectibles (art, luxury or historic objects, etc.) There has not been much progress in the tokenization of collectibles since we last discussed this topic. Technically, there is no complication; it all depends on the related logistics and the management of tokenized assets, which, at this stage, is not mature, hence preventing the transition to blockchain platforms.
P – PAYMENT FUNCTIONALITY
Acceptance in retail As of today, marginal acceptances keep popping up now and then, but not much more. The usage of cryptocurrencies for everyday purchases is still almost non-existent, and not growing. Why is that? Let us see if we can find reasons for this lack of growth, and identify what it would take.
First, of course, as always, is the issue of scalability. As long as scalability is not resolved and no pressure emerges on the use of traditional cash (such as a crisis triggering generalized quantitative easing), there is no fundamental reason for the mass adoption of pure cryptocurrency usage.
This is true, all the more, while cryptocurrencies remain volatile. Egg or chicken; the big question is, will volatility decline first, or is it the consequence of broader adoption of cryptos? The only thing we can be sure of is that mass adoption and stable volatility will coincide.
Regulatory uncertainty is a brake for conservative merchants, large and small. States enforce the acceptance of their official fiat, which is not the case with cryptocurrencies. This is seen by businesses as a risk that is not acceptable, and with few advantages to balance the risk. Existing payment systems work sufficiently well; so, there is zero pressure for retailers to change!
A layer of service providers to facilitate the use of cryptocurrencies is desperately missing. TenX, Crypto.com and the like have failed to deliver or gain momentum, which is a real pity. Indeed, it is evident that a facility for the live conversion of crypto assets to fiat money, acceptable by merchants, is vital for adoption. Strictly speaking, then, if using such services, the customer would be paying with cryptos, even if at a (limited?) cost. Note that one alternative would be to install a conversion facility on the merchant’s side in a seamless way (this is the PundiX approach, and Cardano has recently attempted to launch its system to allow merchants to accept its currency, ADA).
Crypto-collateralized and decentrally managed stablecoins continue to gain momentum.
In this respect, MakerDAO is a notable flagship: it has now issued $100M worth of DAI, collateralized by $300M worth of Ether. This amount was a limit established by the organization, but there is now a proposal to lift it to $120M, and it will then be subject to an on-chain vote. So, all in all, we are seeing that the Maker/Dai system works as expected and that it is continuously extending its reach. This is quite good news, showing that Ether can be valid collateral, when appropriately handled, to base value management on-chain for use in, notably, automated settlements of smart contracts. Already, the intent is to offer some loans on the platform, with an interest rate that will be voted on by holders of the Maker token.
Objectively, the MakerDAO system, its competition, is quite simple and cannot be considered an ultimate usable system. The over-collateralization mechanism is quite huge, and the entries and exits are not very dynamic – although, the wider the adoption, the more efficient it will become. Hence, the platform functionality is likely to evolve or be replaced by a more elegant and practical alternative. However, the principles are there and are valid.
As a side note, tokenized-fiat stablecoins can be expected to fade away when central bank-issued digital currencies are available.
The Libra project has encountered problems. PayPal is the first to withdraw from the association. Other partners in the project, Visa, Mastercard and others, have received a letter from the US Senate, stating, “Facebook appears to want the benefits of engaging in financial activities without the responsibility of being regulated as a financial services company. If you take this on, you can expect a high level of scrutiny from regulators not only on Libra-related activities but on all payment activities.”
Some senators have prepared a bill, tailor-made so that Libra would qualify as a ‘security.’ It is unclear to us, though, how knowledgeable and honest regulators can believe that Libra is comparable to a financial instrument that is invested in, with the hope of an outstanding return. USD would then be considered a security under such an approach (note that governance tokens of the foundation may well be securities, but that is another debate). This proves just how lost these politicians are in understanding the profound nature of what is happening.