Award-winning cryptocurrency writer Gary McFarlane talks us through the big trends in crypto land and why blockchain isn't sexy anymore.
The crypto market has pretty much continued where it left off last year, with the bears still growling.
With bitcoin at one point falling below $3,500 this week and other coins continuing to shed value - Ethereum suffered after its Constantinople software upgrade was delayed - it is safe to say that hopes that the crypto downtrend may be nearing its end-game has been dashed again.
However, at the beginning of the year, crypto watchers tend to look beyond the immediacies of short-term price movements to consider the trends and themes that will be in play this year.
Aside from exchange hacks, dying coins, and more 51% attacks on blockchain networks that lack computing power to verify transactions, which make it easy for a single entity to take control such as recently happened to Ethereum Classic, there are plenty of other trends developing.
Many expect the financial authorities in the G20 countries and beyond to finally make decisive moves to clampdown on the crypto Wild West.
In the UK the crypto task force will bring forward its recommendations, with legislation to follow.
The European Union's European Securities and Markets Authority and the European Banking Authority have both this month urged the EU's executive arm - the Commission - to bring forward regulation.
Stefan Kovach, the chief commercial officer at UK-based betting-focused crypto project FunFair Technologies, welcomes greater regulatory certainty for the industry. He says:
"Regulatory bodies across geographies and industries will push through crypto-focused legislation that will allow all relevant stakeholders to be clearer and more effective in carrying out the game-changing innovation that they have been founded on."
"This is especially important for highly regulated industries where the technology shows much promise like finance and gambling."
Crypto-friendly jurisdictions in Europe such as Lichtenstein, Switzerland, Malta and Gibraltar could find their regulatory frameworks trumped by those of the EU. Malta currently has the most comprehensive legal framework for crypto assets, helping it to attract a growing list of crypto companies to its shores.
The current lack of legal clarity has also helped to bring to the fore two more developing trends: tokenisation, and more specifically security token offerings (STOs) and, secondly, a possible looming regulatory threat to so-called privacy coins.
Tokenisation describes the process whereby assets – from securities to art – become tradeable on blockchain systems, bringing greater liquidity, transparency, efficiencies and cost savings to markets and even creating markets where none previously existed.
Interest in security token offerings (STO) as a compliant alternative to initial coin offerings (ICOs) is on the rise.
However, that doesn't mean there's going to be a flood of STOs coming down the line just yet. Richard Foster, the chief executive of Hong Kong-based Security Token Network, told interactive investor "that a significant amount of work is still required" before STOs really take-off.
Foster explored how ICOs and STOs differ. "The great thing about an initial coin offering was that (providing a lawyer had issued a legal opinion stating that the token was a utility token and not a security) the issuer could market the token almost globally.
"With an ICO the country of incorporation was more important than where they raised funds. With an STO where the company fundraises is of more importance."
But will STOs end up raising costs for projects? "Over time straightforward STOs will become commoditised, whereas more complex offerings will still require expensive legal work," Foster explains.
“The view by many law firms is that tokenised assets are no different to their paper equivalents. The complexity arises when transferring tokens and trading on secondary markets.”
Underscoring the potential universality of security tokens, Foster said:
"Security tokens are applicable to assets at almost every level; from a start-up raising Series A to large enterprises; from a basket of residential properties to commercial buildings; from a gold bar to a gold mine."
He thinks that STOs will offer different strokes for different folks. "For smaller assets the main benefit is liquidity… For banks and national exchanges, the benefits are efficiencies, cost reductions, and the ability to create new financial products."
He also expects tokenisation to spread to the capital markets.
"Once the technology, legal frameworks and processes are battle tested the tokenisation of the public stock markets will be possible."
Developing that theme, Ruslan Gavrilyuk, the co-founder and president of Kepler Finance, which maintains a global database of active blockchain businesses says, hype aside, STOs will revolutionise capital raising.
"Reaching out to the public can now happen much earlier in a company's life thanks to regulatory-compliant security tokens."
Gavrilyuk sees STOs adding value long after a token offering closes.
"Even after going public, the effects of blockchain technology will be continually felt. Corporate events such as reporting, dividend payments and voting can be built into the blockchain protocol and automated."
Security token platform tZero has just won a patent for its technology to integrate digital assets with legacy trading systems.
Mikko Ohtamaa, chief technical officer at London-based TokenMarket, makes the point that there is no 'STO' as such and it is best to see it as a format. So instead, he discerns specific forms of fundraising which he divides into three areas:
"What we are discussing is: private placement (private funding) with tokenised equity; retail crowdfunding with tokenised equity (Reg CF in US); and a security offering that is not equity (shares), but debt like revenue participation note or a bond."
"There are a lot of benefits over ICOs, as investors are getting a better deal: real rights to profits, control, information and so on."
On the cost issue Ohtamaa said: "The compliance cost is the same for raising capital using the same underlying financial instrument regardless if there is a token or not. Having your shares (your equity) does not increase the compliance cost, though it makes the deal a little bit more complex."
TokenMarket has exited the ICO space and is currently developing a regulated tokenised equity crowdfunding platform in the FCA's regulatory sandbox.
He sees the ICO model continuing to decline, although they have their place, such as "funding a new blockchain or other Decentralised Finance (DeFi) projects that are run by a non-profit foundation".
But beyond that the use cases are limited. "However, when applied to generic business funding they do not work that well and we are now seeing a lot of fallout of ICO abuse but there will be “some good decentralised finance model that can use ICOs".
Coins such as Monero and Zcash provide their users with much greater anonymity than bitcoin. Monero has become a favourite with criminals and the cryptojackers who surreptitiously mine the coin by installing malware on the computers of unsuspecting consumers.
Highlighting governmental concerns, a current case in Norway has seen kidnappers demand ransom payment in Monero.
The year ahead, then, could see regulators focus on cutting off the oxygen to privacy coins, although how successful such a move might be is open to question.
We asked Iqbal Gandham, the managing director of investment platform eToro's UK business, about possible prohibition. "The government will always aim to prevent anonymous use of coins/payment mechanisms . With cryptoassets it might not be as easy as they think," he said.
"Even if banned/illegal, those who choose to use them will still do so."
Gandham also notes that we already have a privacy currency of much longer standing: "Look at cash – largest anonymous currency there is."
However, Aria Sabet, the chief executive and founder of Aurora IT Solutions, while agreeing with Gandham on cash, insists that "with cash there is no on and off ramp".
Unlike with Monero, "you can take cash to the shop and buy milk", says Sabet.
Sabet thinks the authorities could certainly do a lot to prevent coins such as Monero ever reaching a mass audience.
"If privacy coins are outlawed, then the majority aren't going to want to break the laws. Most on/off ramps will be closed to it, meaning it'll be a lot harder to actually do anything with the privacy money or buy anything or even exchange it for cash or other money.
"That would crash the value of Monero eventually as it would only be used by a niche and it would lose a lot of its use as a form of money.
"So no, they can't crush Monero and the like, but they can stop mass adoption and usage."
Max Tannahil, a consultant at a software vendor, disagrees. He thinks it is "rather irrelevant" what governments do as "you can't stop the on and off ramps".
"Let's say an exchange such as Coinbase was banned from offering ZEC [the Zcash token], you would still be able to buy BTC [bitcoin] and swap it for ZEC on a decentralised exchange or even a centralised exchange in another location."
Crypto tech improvements
This year should see more software upgrades to improve the functionality and efficiency of the various blockchains. Hopefully crypto will also become a little easier to use for ordinary folk. As FunFair's Kovach puts it, "cryptocurrency will become friendlier".
The so-called sidechain or second-layer solutions developed for bitcoin are already starting to gain traction, notably the Lightning Network payment channels and to a lesser extent the Liquid payment rail. RSK is another sidechain to look out for this year.
We may also hear more about the Schnoor signature proposal, which would improve wallet security among other things and could even bring smart contracts to bitcoin, as proposed by Bitcoin core developer Gregory Maxwell with his Taproot proposal, but that won't happen this year.
Ethereum, the original smart contract and decentralised application platform, is moving forward with its upgrade plans to improve scalability. The developers want to ditch proof-of-work mining in favour of a proof-of-stake system. A first step in that direction was the collection of improvements dubbed Constantinople. However , that didn’t get off to a good start when this week's uncontentious fork was delayed after a serious bug in the code was found.
Kovach expects to see more projects launching live products. "2019 will be the year that adoption finally begins to take hold," he predicts.
"Blockchain companies have become increasingly focused on usability and customer experience as an essential layer on-top of the wider security and transparency benefits that decentralised technology allows for, and as a result we will see the first break through crypto-uses amongst early adopters and a clearer sense of where and how adoption of the technology will take hold over the coming years."
A good example comes from the oil business. The first commodity trading blockchain to go live comes from Vakt, which launched at the end 2018. It already has customers on its oil trading platform and yesterday (16 January) it emerged that Chevron, Total and Indian oil refiner Reliance Industries have jumped onboard too.
In a statement, Thomas Wayme, Total's head of trading and shipping, said:
"Total has been supporting industry initiatives to digitize cargo post-trade processes for some time."
"We view them as a major step forward towards safer, faster and cheaper logistical operations. We are committed to contribute to the roll out to various markets of the VAKT blockchain platform."
Vakt was formed in 2017 by a consortium that includes BP and Royal Dutch Shell.
The Tron platform led by Justin Sun has been attracting decentralised application (dapp) builders at a steady clip. It recently bought peer-to-peer filesharing service BitTorrent, and is holding an event in San Francisco this week at which it will be announcing the winners in its $1 million accelerator contest to encourage developers to work on Tron. Despite controversy about some of its marketing practices, it is definitely one to watch.
Big tech should also be on the radar this year, with Facebook already declaring its intention to integrate a stablecoin cryptocurrency into its forthcoming Whatsapp-based remittance service, initially targeting an Indian audience.
Also, Google has been quietly working on blockchain technology, although little concrete is known about its plans.
Elsewhere, the popular Telegram messaging app will complete the reconfiguration of its network based on its TON (Telegram Open Network) blockchain technology, having announced the release of a test version in October last year.
Bitcoin futures is already an established theme for this year, following the announcement from CoinFLEX we reported on last week and its launch of the world’s first physically backed bitcoin futures product.
However, the one everyone has been waiting for is the offering from Intercontinental Exchange's Bakkt. Its physical bitcoin futures should be out of the blocks in the next few weeks, although the launch date was put back following the US government shutdown and delays relating to the speed at which the CFTC moves in these matters. Bakkt will also be launching a payments platform and has Starbucks onboard as a partner.
Bakkt recently acquired "certain assets" Rosenthall Collins to build out its competency in compliance and risk management.
Nasdaq is also planning to launch a crypto futures product.
This year will see talk of a bitcoin ETF continue but approval by the US Securities and Exchange Commission is still some way off. That won't stop the speculation continuing.
Central bank crypto
The central bankers' bank, the Bank for International Settlements, published a report last week, which showed that 70% of central banks were working on a central bank digital currencies (CBDCs) or considering doing so.
But, that doesn't mean that a central bank will actually be issuing one any time soon.
The same report found that 85% of the banks surveyed said it was unlikely they would issue a CBDC in the next three years. Notwithstanding that, at least two countries may be on the verge of issuing their own general purpose crypto: Sweden (where cash is fast disappearing) and Uruguay.
As far as adoption goes, central banks are much more likely to deploy the technology in their real-time gross settlement (RTGS) service. Indeed, the Bank of England (BoE) is re-engineering its RTGS with distributed ledger tech. RTGS is effectively the backbone to national payments systems. The BoE’s revamped system will also allow private businesses to plug directly into the system.
Adoption of cryptocurrencies may get a boost in distressed economies with collapsing fiat currencies such as Venezuela. It has already launched the Petro but is having difficulty getting anyone to accept it, including ally Russia and Venezuelans have so far only been issued with paper certificates of purchase.
More widely, an emerging market debt crisis would turbo-charge crypto adoption.
Attempts to circumvent US sanctions could also spur crypto use as a currency in countries such as Russia and Iran. Rumours that Russia is planning to buy large amounts of bitcoin as it 'de-dollarises' its reserves persist, but there is no hard evidence for this as yet.
China has designated blockchain as a key technology in its Fourth Industrial Revolution plan and a number of cities are drawing up "smart city" plans involving blockchain deployment and integration with Internet-of-Things (IoT) rollouts.
China Mobile last week announced that its IoT arm has developed a water purifier that collects data on its users and in return pays them in crypto.
With the advantage of a strongly centralised economy, China is able to lay down standards and regulations that could help it to overcome more quickly the interoperability and legal obstacles faced by western-based projects. It is worth noting that EOS is consistently rated as the number one project/coin by China's Centre for Information and Industry.
Blockchain not so sexy anymore
Given the crash in crypto markets, blockchain is no longer the buzzword it was in corporate circles. So look out for 'blockchain' companies rebranding by dropping the blockchain bit in their name as they seek to distance themselves from the unfulfilled hype the blockchain moniker is currently associated with.
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