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96. 20/12/2018 10:39
The Herd and the HODLers: Recovering from Crypto’s Two-Year False Start

“It is a False Start if the ball has been placed ready for play, and, prior to the snap, an offensive player who has assumed a set position charges or moves in such a way as to simulate the start of a play, or if an offensive player who is in motion makes a sudden movement toward the line of scrimmage.”

Before we can begin to look into our crystal ball and see what our magical internet money is potentially going to do for the world and investors in the coming year, I believe we need an honest and thorough review of the past 12 months and the narratives that played out.

This does NOT mean I am going to discuss how bitcoin was X price in December 2017 and that it has since lost Y percent since then – that, in my opinion, helps no one.

As Winston Churchill said: “Those that fail to learn from history, are doomed to repeat it.”

The talent before ‘the herd’

In February 2018, TechCrunch wrote that: “requests for on-demand blockchain talent are skyrocketing.” Last year (2017), freelance talent marketplace Upwork saw blockchain rise to the fastest-growing skill out of more than 5,000 skills in terms of freelancer billings — a year-over-year increase of more than 35,000 percent.

These requests span ICO advisory services, engineering projects and overall blockchain consultancy. Since January 2017, the demand for blockchain engineering talent on Toptal has grown 700 percent, and 40 percent of the fully managed software development projects requested in the last month require blockchain skills.

In regards to investment talent, there has been no shortage of institutional professionals that have left to pursue careers in the asset class, especially from Goldman Sachs: Juthica Chou, the COO of LedgerX, spent seven years as a derivatives trader within the Securities Division of Goldman Sachs, where she specialized in algorithmic trading.

Mike Novogratz has hired several high profile people from Goldman including Richard Kim, the new COO of Galaxy Digital who joined Luka Jankovic, another former Goldman Sachs hedge-fund analyst. Esther Babb, a former Goldman Sachs executive, was recently hired by Gemini to become their Director of Business Development.

Babb’s illustrious Wall Street career started nearly two decades back with Goldman Sachs, where she worked with the firm’s data intelligence team. BlockTower Capital recruited former Goldman executive Michael Bucella in January. Former Goldman vice president Matt Goetz founded BlockTower last year.

James Radecki was a managing director at Goldman and left in 2016 to work in strategic investing at another cryptocurrency firm, according to his LinkedIn page. He’s now global head of business development at Cumberland Mining, one of the largest traders of cryptocurrencies.

Yet, at the same time, ICO fundraising, based on the $279 million raised last month, is now down by more than 90 percent since from its January 2018 all-time high. Since peaking in January, fundraising figures have consistently declined with only one break in the trend occurring in May 2018. What I find deeply interesting here is that this elongated decline, the “crypto winter,” has not stopped these highly touted professional investors and experienced engineers searching for employment in the asset class.

The herd is…circling

Have you been on a plane heading into a crowded airport, only to find you’re forced to circle around in the sky because the runway is full?

In my opinion “the herd” is circling – yes, Fidelity spent four to five years reviewing crypto because launching FDAS (Fidelity Digital Assets); yes, TD Ameritrade invested in a new cryptocurrency exchange called ErisX in a bid to offer clients digital asset investment options beyond bitcoin. Yes, NYSE/ICE launched Bakkt, a platform for trading, storing, and spending digital assets.

And yes, Yale Endowment, and in some ways the godfather of the endowment investment model, David Swenson, invested in two crypto funds, Paradigm and A16z Crypto. It seems Institutions and Institutional Investors began to understand that investing in crypto provided uncorrelated, enhanced returns compared to traditional investment instruments.

As noted in research prepared by Matt Hougan from Bitwise: “examining the impact that a 1 percent, 5 percent, and 10 percent allocation to bitcoin would have had on a traditional 60 percent equity/40 percent bond portfolio since Jan. 1, 2014 they found that allocating to bitcoin would have significantly increased the portfolio’s risk-adjusted returns assuming the portfolio was systematically rebalanced over time.

The potential impact was large: With a 5 percent allocation, for instance, the Sharpe ratio of the portfolio nearly doubled, total returns more than doubled, and the maximum drawdown was substantially reduced.”

Now shifting gears, as Mary Poppins sang: “A spoonful of sugar helps the medicine go down…here comes the medicine.”

The two-year penalty

Do you remember last year around this time when that hot new ICO was able to raise $100 million in 30 minutes? Do you also remember all these dapps, with all their 80+ page white papers that no one really read, telling you they were going to reinvent the wheel?

Who can forget Useless Ethereum Token (UET) and Whoppercoin? Hint: me. More bad news: According to deadcoins.com there are now 934 coins that, as the websites name should give it away, are dead.

There’s a few problems aside from these I see overall: one, we have around 2,100 tokens in the market right now, many of who registered as a “utility” and in my opinion will have difficulty passing the Howey Test (*note: I am not an attorney nor have conferred with regulators but am reading the tea leaves given to the general public).

Chairman Clayton gave us the “laundromat” analogy this year in a way to discern if an entity is a
security or a utility:

“If I have a laundry token for washing my clothes, that’s not a security. But if I have a set of 10 laundry tokens and the laundromats are to be developed and those are offered to me as something I can use for the future and I’m buying them because I can sell them to next year’s incoming class, that’s a security. What we find in the regulatory world [is that] the use of a laundry token evolves over time. The use can evolve toward or away from a security.”

From observation a majority of the 2,100 tokens in the market currently may have a very hard time passing the laundromat/Howey Test. This has already begun to play out and will continue to in 2019.

Take the SEC’s order that AirToken and Paragon refund ICO investors.

According to the federal agency, both companies conducted their ICOs in 2017 despite the SEC’s warning that the their tokens are considered as securities, which are defined in the DAO Report of Investigation.

Then there’s the issue of a little thing called treasury management.

Many of these new projects did not have great plans for how to execute their ideas with their new capital, and most assumed they had five years of runway to figure it out. Projects raised funds in ether over the last year but forgot to plan any coherent treasury management vision or foresight.

Let’s say project X raised $30 million in ETH around Nov 2017–Jan 2018 at the all-time high price around $1,432. This would have minted the project roughly around 21,000 ETH. If the team did not understand or exercise proper treasury management, overspent on marketing and traveling around the world those 21,000 ETH (assuming they still haven’t spent them) are now worth $2.3 million.

This has already beginning to happen and will accelerate for the first few quarter of 2019: ETCDEV, the startup that led development on Ethereum Classic, which is among the top 20 coins with a market capitalization of about $400 million, announced this week that it’s shuttering operations due to a funding crunch.

Are we fast or decentralized?

Ethereum currently can handle around 15 transactions per second (TPS), although its creator Vitalik Buterin believes testing out zk-snarks could improve that to 1 million TPS. Bitcoin is still hovering around seven TPS.

Due to dAPPs such as CryptoKitties flooding the network with transactions, it has been proven that scalability needs to be improved across the network. The amount of transactions per second in the cryptocurrency space is often benchmarked against the amount of transactions Visa or MasterCard can handle, which is set at around 2,000 transactions per second.

Generally speaking, I believe we are in the Friendster-Myspace era right now; Facebook is a few years away and this relates to TPS and scalability as well. I think 2019 will see a real focus on what zero-knowledge proofs, DPOS or some newer iterations like proof of history can add to the ecosystem.

Many argue no, not yet.

Many of the blockchain space’s projects — Metamask, CryptoKitties, UJO, Radar Relay, Cipher Browser, uPort — utilize Infura’s APIs to connect their applications to the ethereum network.

In doing so, Infura provides the fundamental infrastructure required to handle both the short-term spikes that can often occur during token launches and essential, longer-term scaling solutions. An average of 6.5 billion JSON-RPC requests per day on the ethereum network are channeled through Infura infrastructure, making the project an essential pillar of the ecosystem.

A dream that is crypto

As Marcus Aurelius is quoted as saying in the movie “Gladiator”: “There was a dream that was Rome. You could only whisper it. Anything more than a whisper and it would vanish, it was so fragile.”

Well, 2017 going into 2018 the dream and promise of crypto was definitely not whispered – it was shouted from the tops of buildings and trading floors throughout the world. But was it ready? In my opinion, no. It was used and abused by those, who after 10 years of a drug-induced quantitative easing coma in the public markets, realized the party was coming to an end and needed a new kick.

From an institutional investor perspective, the signal-to-noise ratio was quite high this year; I expect with research and news firms coming online this year and into next that will improve.

On Jan 1, 2016, bitcoin was trading around $420. Even with a significant downturn that we’ve bore witness to over the last few weeks that still represents an 8x over the last two years if you employed the HODL mantra.

Crypto wasn’t ready for prime time, but it most certainly will not die. It will rise from the ashes, stronger, more durable and cautious of who it lets in. It will change the world we live in, providing censorship-resistant protection of assets, new ways to validate identity that don’t rely on antiquated technology like SSN.

It will enable suppliers and buyers to improve their relationship and begin to chip away at the billions of dollars of food we humans throw out each year while people starve and so much more. All the talent it’s brought in this year is building right now as you read this article. It has only just begun and it needs us to give it some time to mature.

97. 19/12/2018 17:55
Venezuela Isn’t the Crypto Use Case You Want It to Be

Cryptocurrency enthusiasts love to talk about Venezuelan users – wracked by political oppression, economic collapse and food insecurity – as a prime example of bitcoin’s subversive potential. But the reality is far more complicated.

Venezuelan expat David Díaz of the Blockchain Academy in Buenos Aires told CoinDesk that many Venezuelans are learning about cryptocurrency through forced exposure to the state-issued petro, in addition to aggressive outreach strategies from projects like dash. Many don’t even know that bitcoin is useful itself, beyond its ability to ease the transfer of assets like dash or dollars.

That’s why Díaz is teaming up with fellow expat Jorge Farias of Panama-based startup Cryptobuyer to offer a free educational course about bitcoin to Venezuelans, including online programming and in-person classes in Argentina, Venezuela and Panama. News of the program was revealed exclusively to CoinDesk.

The course, which starts in February, will be very similar to the paid programs Díaz has already run for roughly 2,000 students in Buenos Aires, including a few hundred Venezuelan migrants. But now the focus will be on providing free information that is useful in a Venezuelan context, where cheap Android phones and censored internet access impact usability.

Díaz told CoinDesk:

“The main benefit for Venezuela is the knowledge, what to do with bitcoin, how to escape from the power the Venezuelan government has placed there, not only economically but also for information. There is a lot of censorship there.”

Fellow expat Eduardo Gomez, the head of support at the crypto startup Purse who recently moved to Argentina, now uses the peer-to-peer exchange LocalBitcoins to help his mother pay bills.

“The government has [told] the private banks and government-run banks that external IPs should not be able to access their bank accounts,” Gomez told CoinDesk. “The government wants to control remittance businesses.”

Díaz and Gomez are among the many Venezuelans connecting with their homeland through the bitcoin-centric diaspora. WhatsApp groups and Instagram communities help expats coordinate financial transactions on the ground. LocalBitcoins usage surged throughout the year and now facilitates weekly volumes worth billions of bolivars.

According to a recent report by the United Nations, a whopping 17 percent of the country’s population has fled Venezuela in recent years.

There are now many Venezuelan expats working on various projects to help their countrymen, including Alejandro Machado, co-founder of a San Francisco-based nonprofit called the Open Money Initiative that aims to create fintech products and tools for Venezuela. Machado has helped several Venezuelans use exchange platforms like LocalBitcions and AirTM, since the latter is blocked inside Venezuela.

The challenges Machado experienced helping crypto newbies highlights the discrepancy between the tech-savvy intelligentsia and low-income communities.

“They trust me and I can do it for them, but they don’t trust themselves doing it,” Machado said. “The level of technical sophistication among everyone [in Venezuela] is not the same, and it’s lower than you’d expect.”

Migration risks

Some Venezuelans fleeing the country do so with their assets held in bitcoin, to avoid being harassed at the airport or the border. Both Díaz, who moved to Argentina in 2015, and Gomez, who moved in September 2018, are among them.

“Carrying around cash is so risky, any valuables, jewelry, whatever, it’s so risky,” Gomez told CoinDesk. “Bitcoin helped a lot because we didn’t need to carry anything physical around. We came here to Argentina and all our savings were in crypto.”

Gomez was unbanked in Argentina for several months, until Tuesday, and relied entirely on the Buenos Aires bitcoin community to help him liquidate crypto assets as needed. (Bitcoin’s price volatility can feel negligible when compared to the Venezuelan bolivar, which the IMF predicted could hit an inflation rate of 1,000,000% by 2019.)

“This is a real use case, but it’s not something that a lot of people are doing because a lot of people don’t know it’s possible,” Machado said, adding that if crypto UX “doesn’t get any easier, we won’t see this operating at scale.”

Díaz said expats become more involved with the broader bitcoin ecosystem when they leave Venezuela. In part, this is due to fear that public association with crypto inside Venezuela could attract attention from corrupt government officials.

“There was a big community in Venezuela, but we were mostly underground,” Díaz said. “In Argentina, I could find a more open community. We could have regular meetups.”

Although some local projects like EOS Venezuela have so far managed to provide liquidity to small groups of local users without such conflicts, those use cases are both nuanced and nascent.

Borderland economy

Some migration experts compare the Venezuelan crisis to the Syrian civil war, a mass forced-migration movement that leaves many unbanked and desperate for basic necessities.

The difficulty low-income families have in buying food is precisely what the nonprofit GiveCrypto sought to address with its campaign to distribute EOS tokens to 100 families living in the Venezuelan border town of Santa Elena de Uairen.

GiveCrypto’s executive director, Joe Waltman, told CoinDesk that EOS Venezuela provides fiat liquidity to a local merchant while participants use the EOS wallet Bonnum, which does not support bitcoin nor offer users their private keys.

On one hand, this allows several families to use the same phone to access EOS donations. Plus, Bonnum CEO Edmilson Rodrigues told CoinDesk from Brazil that the startup aims to someday offer a blockchain-agnostic wallet.

However, for now, Venezuelan merchants appear to be more interested in using EOS to access fiat than holding crypto itself.

Waltman explained:

“You go to this person and say this dumb foreigner is going to be dropping a bunch of money into this town and it’s only going to be redeemable in a couple of locations. Do you want to be one of those locations?… It hasn’t been a hard sell.”

This experiment originally grew out of Bonnum’s closed beta in Brazil, where the startup discovered a few dozen families were using EOS to buy necessities from a local merchant close to the border who accepts EOS. Those families then routinely trekked across the Venezuelan border, delivering goods to Santa Elena de Uairen. This type of crypto-fueled borderland economy is increasingly widespread.

Jose Antonio Lanz, a Venezuela-based reporter at EtherWorldNews, told CoinDesk he used Facebook and Telegram groups to learn about cryptocurrency. Then he sent bitcoin to a Colombian black market dealer who brought medicine across the border for Lanz’s mother, who was battling cancer.

“Now I can say that my mom is alive thanks to bitcoin,” Lanz said, adding that he tried local hospitals and pharmacies but in the end was forced to turn to the black market.

“The important thing is to be able to give the sellers the money as they want. Some wanted bolivars, some wanted PayPal,” he continued.

Crypto limitations

All things considered, there is still a long way to go until crypto is used for its own merits in Venezuela. At the moment, it’s often used as a tool for acquiring or liquidating fiat.

Machado, of the Open Money Initiative, told CoinDesk that daily crypto usage is “not a widespread phenomena” on the ground. Waltman agreed, saying:

“There’s a sad irony. The poorer you are, the less you can actually use cryptocurrency.”

Díaz disagreed, saying that almost every Venezuelan he knows now uses bitcoin for remittance and international transfers. He conceded, however, that most are using it as a tool to get goods delivered to Venezuela or acquire and then store dollars in an offshore bank account.

Dash and EOS may have more merchant adoption inside Venezuela, according to Díaz, but they rely on sponsored liquidity networks and local ambassadors converting new users who often lack a basic understanding of cryptocurrency.

As such, Open Money Initiative co-founder Jill Carlson said that there’s a dire need for more research on the ground in Venezuela. Otherwise, cryptocurrency distribution initiatives run the risk of becoming mere marketing stunts.

“Maybe we find that cryptocurrency is actually, in its current form, not suitable at all for a situation like the one inside Venezuela,” Carlson said. Waltman agreed that GiveCrypto is still figuring out what a long-term strategy in Venezuela would look like.

Speaking to how middle-class households use crypto to store value and buy basic goods like shampoo, Carlson added:

“It’s not just a single experience or situation. And then for us, as entrepreneurs working with technology and crypto, we need to recognize that the person who is worrying about shampoo and the person worrying about how they are going to feed their kids tonight are so, so different.”

As Carlson’s and Rodrigues’ respective projects collect data, Díaz’s upcoming Blockchain Academy program aims to bridge the knowledge gap inside Venezuelan so that newbies can choose which cryptocurrency and storage solutions work best for them.

Meanwhile, the underground migration network continues to spread.

“I know other projects that are helping people to get out of the country with bitcoin,” Díaz said.

98. 18/12/2018 13:34
Humans on the Blockchain: Why Crypto Is the Best Defense Against AI Overlords

As governance becomes more and more prevalent in discussions around consensus protocols, it is clear that Satoshi Nakamoto’s original vision of “one-CPU-one-vote” shaped the entire crypto industry into thinking governance centered around machines, not people.

But if artificial intelligence (AI) is indeed a threat to humanity as Elon Musk and Sam Altman frequently warn, why are we risking giving AI the political power of distributed networks?

Guaranteeing a fundamental right to privacy bent early blockchain design toward anonymity. While that approach helps fight financial corruption (political corruption is exploiting the internet in ways that can also be fought back with decentralized computation), the menace of AI is less abstract than it seems. The fact that social algorithms thrive on memes helps explain today’s political reality.

However, AI is leading us to even deeper questions and challenges. The most salient fact from contemporaneous politics is the growing shadow of doubt cast over the democratic process in the U.S.: did foreign influence win the most expensive election on the planet? Since the Peace of Westphalia in the 17th Century, nation-states have been a political construction based on the idea of non-domestic intervention.

What Mark Zuckerberg didn’t dare to say in Congress when he had to testify about Russian influence exploiting Facebook is that the internet is no longer compatible with the nation-state.

Today’s internet AI is governed with our likes, retweets, upvotes and links — tokens we don’t own. These tokens own us as they constantly survey society in benefit of the network’s owners. To remain competitive with each other, Facebook and Google have incentives to become even more Orwellian.

What made them incredibly successful was their ability to formalize humans on the web. But the steep price is the privacy of a society that no longer connects via dial-up but lives online 24/7.

The question we now face is how can we formalize humans online in a decentralized way, hence guaranteeing a voice and a vote for everyone without making them subjects of corporate propaganda?

Turing-impossible Proofs

In order to establish a frontier between ourselves and internet AI, we need a decentralized protocol for singular human identities.

Unlike Facebook, a network of this kind must not be limited to the logic of media and attention-grabbing algorithms. Instead, a human consensus should be the source of legitimacy, effectively constructing a one-human-one-node graph to unlock the full potential of blockchain governance.

Legitimate influence over cryptographic budgets can transform a social network deployed over the internet into a living democracy. But this is far from a trivial task: formalizing humans in decentralized networks requires preventing bots, Sybil attacks, bribes and a Big Brother from emerging.

Let’s begin with bots. A machine’s perception threshold can be measured using Turing tests, tasks designed to tell robots and humans apart. So, a human-based consensus by definition requires Turing-impossible proofs, hard for computers but easy for brains to process. To illustrate this, the birth certificate for my daughter Roma was made using video, a simple format for a fellow human to decode, but still very hard for any machine to understand.

The proof can remain private and secret — only a hash goes on a blockchain. This string of numbers is able to certify the contents and timestamp the original proof, letting nodes get validated without the need of broadcasting all the information. We can expect Moore’s Law catching up with the Uncanny Valley, so the format of the proof should be always open up for debate.

In order to ensure an identity is singular, we need to fight Sybils (in this context: humans aiming to get control of more than one node). A reputation-based graph must be put in place giving attestation rights to those able to gather more trust from the network. At Devcon4 Sina Habib introduced the idea of building a “trust graph” using well-known reputation algorithms like PageRank. My own experience implementing PageRank to weight retweets on Twitter led to a virtual currency project named Whuffie Bank back in 2009; it does work.

But the stake from validating nodes should also be a bounty for those able to detect false-positives in the consensus. Network policing cannot be strictly algorithmic if we want the humans to be in charge.

The risk of reputation algorithms is that they are really centralization algorithms.

This leads to nodes that can use their excess influence to buy others or be targeted and bought. To prevent bribes and monopolies from forming, a node’s ability to validate new Turing-impossible proofs should be based on a cryptographic lottery that introduces randomized voting to the consensus.

If the lottery’s entropy is based on a node’s stake, it can aim to equalize attestation chances across all nodes in the long term. As a validating node, the higher your stakes the less likely you’ll be given a chance to validate again. This creates an incentive to focus on validating family first.

Today, Tomorrow and the Future

At Democracy Earth, we are designing our consensus protocol using ERC-20 tokens with staking logic designed to validate Turing-impossible proofs. When the score for a given hash reaches the consensus threshold, a check on the claim “Are you Human?” is issued for a provided ERC-725 identity.

These open specifications allow the quick prototyping and deploying of these ideas on top of any EVM-compatible blockchain. Recent research and new protocols, such as the work by David Chaum of DigiCash on randomized voting, and AlgoRand led by zero-knowledge proof co-inventor Silvio Micalli, signal the relevance of cryptographic lotteries in keeping governance fair.

In our initial work implementing web-based digital democracies it became clear that whoever controls the registry of voters can manipulate the outcome of an election. Providing a decentralized consensus on human rights can replace this point of failure also present in traditional elections.

Why not simply use the legacy reputation of established institutions for human identities?

According to the World Bank there are 1.1 billion people in the planet lacking identity and the International Rescue Committee has identified over 65 million refugees. In Latin America, I have personally met with organizations of excluded workers that estimate 10 to 15 percent of their members lack an identity because their parents never registered them or have been abandoned during childhood.

Human consensus over the internet should be able to be deployed anywhere and provide tools able to measure the inclusive capacities of blockchain economies. If a consensus for human nodes gets widespread adoption, social applications that range from borderless democracies to encrypted peer to peer lending to Universal Basic Income can become a reality.

When John Perry Barlow wrote “A Declaration of the Independence of Cyberspace” in 1996, he ended his plead asking for a “…more humane and fair civilization of the mind.”

Here, humane is a powerful word, one being used to describe the aspirations of an age giving rise to digital governance. Decentralizing democracy matters as the nation-state keeps failing a growing global society. It is worth remembering the last words published by Saudi journalist Jamal Khashoggi:

“Through the creation of an independent international forum, isolated from the influence of nationalist governments spreading hate through propaganda, ordinary people in the Arab world would be able to address the structural problems their societies face.”

The real risk of formalizing humans on the blockchain is not doing it.

99. 17/12/2018 19:40
Hong Kong Exchange ‘Hesitant’ to Approve Bitmain IPO, Says Source

The Hong Kong Stock Exchange (HKEX) is reluctant to approve the initial public offering (IPO) applications of Chinese bitcoin mining equipment manufacturers, according to a person involved in the talks.

Following the 2017 cryptocurrency market boom, mining giants Canaan Creative, Ebang and Bitmain applied in MayJune and September of this year, respectively, to sell shares on the HKEX. Bitmain’s bid, in particular, was seen as a watershed moment, as it marked the first time a major crypto startup sought to go public.

But the 2018 bear market has underscored the sharp ups and downs of the crypto space, making the exchange nervous about listing such companies, the source told CoinDesk. Canaan Creative’s application has already lapsed, and the other two face a high bar in convincing HKEX.

“The exchange is very hesitant to actually approve these bitcoin mining companies because the industry is so volatile. There’s a real risk that they could just not exist anymore in a year or two,” said the person, who requested anonymity because the information is private, adding:

“The HKEX doesn’t want to be the first exchange in the world to approve this and have one die on them.”

An HKEX spokesperson said the exchange does not comment on individual companies or individual listing applications. Bitmain declined to comment, citing its pre-IPO quiet period, while Canaan Creative and Ebang did not respond to CoinDesk’s inquiries by press time.

Stepping back, the IPO process in Hong Kong starts with a company filing a draft prospectus with the HKEX. Then the exchange will begin back-and-forth talks and questions with the applicant.

If the application is approved by both the HKEX and the Securities and Futures Commission (SFC) – Hong Kong’s financial regulator – the case will proceed to a listing hearing, during which the offering size and share price are decided and then made public.

However, if an applicant does not make it to a listing hearing after six months from filing, the application will lapse, meaning the case is no longer active, though the applicant could choose to later reactivate the case if it still wishes to pursue the fundraising.

Canaan’s application lapsed in November after the firm failed to make it to the listing hearing six months from its May filing. Ebang, which submitted on June 24, is only two weeks away from the six-month window ending. Bitmain, the best known of the bunch, is almost halfway through the six-month period.

“Right now, I don’t think that any of them could make it to the listing hearing,” said the source, noting that both HKEX and the SFC must sign off. “If either one doesn’t approve it, you can’t make it to the listing hearing.”

High hurdles

Lawyers familiar with the HKEX’s IPO process called its hesitance to list mining firms understandable.

Apart from basic listing requirements such as financial track records, the HKEX also focuses on “suitability and sustainability of the business and how risky the business is for retail investors,” said Ivy Wong, a partner at the law firm of Baker McKenzie in Hong Kong.

“I have seen cases where the applicants could satisfy the basic listing requirements for the three years’ track record, but did not manage to convince the HKEx that its business is sustainable, and the HKEX was reluctant to grant a listing approval,” she said.

Frank Bi, a partner at international law firm Ashurst in Hong Kong who regularly works with public companies, echoed that point.

“HKEX will be particularly cautious and concerned over the regulatory uncertainty arising from bitcoin mining makers’ IPOs in Hong Kong,” he said. “Coupled with the potential market speculation which has been reflected over the price of bitcoin recently, it is even more difficult to present a sustainable business model of this industry.”

Neither Ebang nor Bitmain has disclosed its financial data for the third quarter of this year when the cryptocurrency market started to take a notable dip.

“If there’s a significant drop of their revenue, profits or loss, they have to disclose that. It’s something that worries the exchange,” the source familiar with the talks said.

The source went on to explain the exchange is actually taking the advantage of the fact the crypto market is down right now because while it doesn’t want to approve the applications, it doesn’t have the grounds to reject them outright.

“What they are doing is they are just dragging the case right now,” the source said, adding:

“If the market continues going up, the exchange may be pressured to approve the cases because how well the entire industry is doing. But because the market is down, these companies really have to justify [how] this industry is sustainable.”

Bi said two common reasons for IPO delays in Hong Kong are a failure on the applicant’s part to provide due diligence and disclosure to HKEX’s satisfaction and market conditions where a realistic valuation is different from what existing investors want for their exit.

“HKEX has always been known to be cautious about scrutinizing applicants’ businesses and their sustainability,” Bi said.

More than mining?

One approach bitcoin miner makers have tried to justify their business models to HKEX is to brand themselves as having diverse lines of business, such as research and development in artificial intelligence, telecommunication and blockchain, according to the draft filings.

For instance, Bitmain claimed to be a “strong contender in the AI chip industry” in its draft prospectus, potentially joining the ranks of technology giants like NVIDIA and Google.

“Riding on our success and expertise in ASIC chip design and powerful research and development capabilities, we have extended our focus to the revolutionary field of AI and have achieved promising results,” the firm stated in the filing.

Bitmain said it launched its pilot AI chip BM1680 in the second quarter of 2017, which “functions as a tensor computing acceleration processor for deep learning, applicable to training and inference on artificial neural networks.”

But such arguments are not going over well at HKEX, according to the source involved in the talks.

“Actually what they are is they are just manufacturers who focus primarily on bitcoin mining machines. If this whole mining thing tanks, these companies will probably tank as well,” the source said.

Bi agreed, telling CoinDesk while these companies have made statements about expanding their business models beyond crypto mining, “it is likely that crypto mining-related activities and crypto holdings still comprise a majority part of their revenue.”

Another factor that can could make hurt these companies chances of approval is their vast holdings of cryptocurrencies whose value has steeply fallen in the past six months.

“Combined with a limited track record of business operations and the substantial recent decline in crypto values, likely means that regulators will be especially closely scrutinizing their businesses,” Bi added.

Bitmain, for example, disclosed that as of June 30 this year, it had US$886.9 million in crypto assets, including bitcoin, bitcoin cash, ether, litecoin and dash, among others.

Although it didn’t disclose a coin-by-coin breakdown, data from CoinDesk’s Crypto-Economics Explorer shows all of the mentioned cryptocurrencies have seen a major decline by at least 50 percent. Among them, bitcoin cash has seen the most significant drop after the recent hard fork war, in which Bitmain has played a vocal part in leading the Bitcoin Cash ABC camp.

“It [the crypto holding] certainly doesn’t help with the case, because you are just adding more risks. Now it’s not just your revenue that’s at risk, but also your balance sheet,” the source said.

Status symbol

To be sure, going public is not necessarily a life-or-death matter for the Chinese mining companies.

“These companies – Ebang, Bitmain and Canaan – want the regulatory approval and status of being a listed company. But as far as the genuine funding needs, they actually have quite a lot of money because they have made a lot in the past year,” said the source familiar with the discussions.

Indeed, the 2017 boom helped the miner makers in China to generate exponential revenue and profit growth.

Bitmain, Cannan and Ebang made $1.2 billion, $56 million, and $60 million, in profits last year, respectively. Further, the significant growth also led to a whopping increase in the firms’ compensation for their key executives.

According to the filings, Bitmain’s founders Ketuan Zhan and Jihan Wu, for instance, received $22.7 million and $20.4 million as discretionary bonuses for 2017, respectively, while their annual salaries were both $27,000.

Wong said companies’ reasons for seeking IPOs may vary – some do it for profile and presence in the market while others do it for fundraising and realizing gains.

“My guess is that their [miner makers’] reasons are likely mixed, coupled with a desire to set market precedent and be the first mover in the market,” she said.

More broadly, Wong said it may be too early to tell the success or failure of any of these crypto companies as the market is still relatively young and we have yet to see how they emerge and develop.

She concluded:

“It is, in any event, an exciting thing to see that it is able to provide investors with more investment options and satisfy the different risk appetites in the market.”

100. 17/12/2018 11:30
The Intrinsic Value of Crypto (What the Bubble Hasn’t Changed)

At the inaugural Consensus Invest last year in New York City, I was on stage with a host of notable names in the crypto world to discuss what 2018 would hold.

That event, in November 2017, would also mark the first time I announced the formation and funding of Omniex, the first institutional investment and trading platform focused on crypto-assets, following my departure from State Street Bank & Trust.

Just a few weeks ago, I was again in NYC for Consensus Invest. Now, with the eventful year of 2018 almost behind us, I’ve spent some time thinking about what has transpired and whether the intrinsic value of crypto has materially changed for institutional investors.

The Intrinsic Value Argument

I’ve always maintained the true intrinsic value of crypto is its ability to create decentralized networks that ultimately lead to new forms of businesses. In fact, in this article from one year ago, I made this exact argument.

The financial use case, beyond that of blockchain technology, is that of crypto as a new and standalone asset class in a multi-asset class portfolio, be it passive or active. A year later, I have not wavered in my thinking. What I have realized and adjusted to, however, is that a new asset class is not created in just one year.

The meteoric price increase in nearly all crypto assets a year ago has affected everyone from retail investors to institutions. While I externally maintained the price increase was not sustainable, there were nights when I thought to myself “Maybe this can go on,” even though I knew the fundamentals did not support it at the time.

I can’t help but think back to the 1996 speech of former Federal Reserve Chair Alan Greenspan during the rise of the Internet bubble, “How do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions…?” Well, with hindsight being 20/20, I think we can say we now know.

But does this come as a surprise? For someone like me who went to college and started his professional career during the height of the internet bubble, this really does not surprise me. In fact, many have equated the rise of blockchain and crypto to internet’s rise during the 1990s.

In other words, saying their use cases have yet to fully mature.

When I was leading the Emerging Technologies Center at State Street, I actually equated crypto and blockchain to the internet of the 1970s, which would imply it’s even further away from maturity. The asset pricing bubble, however, came quicker in crypto than for the internet. This is logical as both information dissemination and business model transformation are much faster post Internet.

A Post-Bubble View

Is the fall of crypto really that impressive?

Let’s put it in perspective with the dot-com. NASDAQ, at its peak in 2000, fell 72 percent. Cisco, a bellwether of the technology industry, was down about 86 percent from its peak. And finally, Amazon, the biggest story of the internet age, was down a massive 95 percent from late 1999 to late 2001, crashing from $107 to just $5.97.

The similarities I’m attempting to draw here aren’t about the crash, but rather its aftermath.

We learned post dot-com that for a company to have sustainable value, it must have real utility. An online pet store isn’t very interesting in the long run, but an online book store with path to become the online “everything store” is compelling.

Now is when we really need to focus on delivering on the true intrinsic value of crypto and blockchain, turning away from undue speculation and creating real use cases and value networks. As Michael Casey so clearly put it, we caused the current crypto-winter and we are the ones who should fix it.

What does fixing it mean? As stated earlier, I don’t believe the true intrinsic value of crypto has changed. It is the foundation of a new business and economic model, one in which a fully or partially decentralized network can provide similar value to those of centralized networks with fewer intermediaries. It also plays a vital role in demonstrating that centralized and decentralized models are not mutually exclusive.

I often hear people and panel moderators asking “Which model will win?”

The answer is quite simple, both. Just as we don’t expect one company to dominate a market sector, we should not expect centralized business models of today to be the only model going forward. This plays true for the inverse as well; decentralization will also have to share the market. So, to me, fixing it means proving the decentralized model will work, en-masse, over time.

A 2019 View

As we greet 2019, I look forward to two areas of advancement.

The first is moving beyond retail to create a crypto ecosystem that empowers institutional investors to participate in the crypto and blockchain revolution. Let’s not forget that crypto is the only asset class in history that didn’t start from the institutional front, and as a retail-first phenomenon we’ve been left with an ecosystem devoid of institutional infrastructure.

However, the infrastructure and uptake are well on their way.

2018 has also shown that crypto and blockchain have clearly caught the attention of institutions. With crypto moving beyond the retail market, companies like Fidelity, ICE (parent of NYSE), NASDAQ, Microsoft, Starbucks and a host of Ivy League endowment funds have all either started initiatives or invested in the space. Along with global regulators, this concerted effort is now laying down all the appropriate functions and a solid foundation for institutional fund managers to enter the space.

The second and perhaps more important area of advancement in 2019 is a broader adoption of decentralized networks at the protocol level. New opportunities are invitations to startups. The important thing to remember is that startups don’t all succeed. Despite the setback of the ICO boom, as true innovations succeeds in garnering wider adoption, the true intrinsic value of crypto will be realized – and that moment will be a great one.

For now, at Omniex, our goal for 2019 is to continue building a sustainable ecosystem for institutions to easily adopt crypto as a new asset class. Along with the other institutions mentioned earlier, I’m a firm believer the industry will regain its prior highs, built on a sturdier foundation, as broader protocol network adoptions continue into 2019.

 

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