176. 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.

177. 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.

178. 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.”

179. 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.

180. 16/12/2018 17:49
Coinbase and the Awkwardness of Growing Up

Coinbase’s recent announcement that it was considering another 31 tokens for listing was greeted with a potent mix of vindication, disappointment, query and speculation.

The exchange’s decisions generally spark a heated discussion, but this one seemed particularly controversial, with detractors and supporters taking totally different interpretations of the move.

Many expressed shock that Coinbase would degrade its brand by supporting what some deem low-quality assets; others celebrated that a broader range of options would soon be on offer; some liked the general plan but disapproved of the details.

Whether you agree with the strategy or not, the important part is not which tokens were chosen, or even whether the exchange should be considering tokens at all.

Rather, the big takeaway is a subtle yet significant shift in what we mean by “exchange,” and in what that says about infrastructure development.

You’re everything to me

In the early days of bitcoin, an “exchange” was where we could buy cryptocurrencies with fiat. Choices were limited, volumes were relatively low and all were operating under the radar of the financial regulators.

Fast forward to today, and the landscape is barely recognizable. “Exchanges” of all shapes and sizes are dotted around the world, and many enable trading of a bewildering array of assets, and some offer licensed services.

Yet, technically, none of them are “exchanges” in the traditional sense of the word.

In traditional finance, investors interact with exchanges through their broker-dealers or similar. There is a buffer between the trading platform and the end client, which – in typical “middleman” fashion – adds a layer of cost but also of regulatory protection and convenience.

In crypto-land, the exchange often is also the broker-dealer. And the custodian. And the clearinghouse. And sometimes also the prop trader, the investment bank and an issuer.

This is complicated for regulators, who need to monitor potential conflicts of interest. It’s also complicated for the users, especially those used to dealing in traditional securities.

Move with the times

What does this have to do with Coinbase’s evolution?

The client-facing nature of crypto platforms makes investors’ choice of trading venue a much more important part of their crypto strategy. And the need to capture and retain clients is fundamental to an exchange’s survival.

In the traditional equity world, investors tend to not care (or know) where the stock they want to buy is traded. They give instructions to their broker-dealer, and the broker-dealer executes in its clients’ best interests.

In the young world of digital assets, the services offered by exchanges have a material impact on new investors’ choices. But, as in life, clients eventually “grow up” and start to want more complicated options.

Coinbase, with its relative reach and ease of use, has done a great job of bringing new participants into the crypto space. But the users that it has today are more sophisticated than they were a year ago.

All are familiar with the basics; many now want to diversify into lesser-known altcoins, especially given the need for return and the bleak performance by the large-cap cryptos.

What’s more, setting up accounts on other exchanges has gotten easier over the past year, even with stricter identification requirements. Switching costs are low.

So, in the light of intensifying competition and an increasingly demanding client base, as well as the difficulty of bringing in new investors in this bear market, Coinbase has taken what seems like a sensible business decision: diversify the offering, and give existing clients what they want.

Stumbling block

Where the strategy seems more questionable is in the transmission of this information, and the potential consequences.

Leaving aside the negative feedback on the chosen coins (few of which meet the criteria that Coinbase published back in September), the decision to reveal which are under consideration could be interpreted in several ways.

The company maintains that it would rather dispel suspicions of insider trading by letting the public know which ones might get listed. This sounds prudent, but does not fully remove the risk of unintended consequences.

In crypto land, much more so than with traditional securities, where a token is listed is fundamental to its value, especially given the lack of liquidity in the market for newer issues. Just the possibility of listing on Coinbase is enough to send a token’s price up.

If Coinbase then decides to not support a particular asset and its price falls, the company could find itself – fairly or unfairly (I am not a lawyer) – vulnerable to an investigation by the U.S. Securities and Exchange Commission and/or investor lawsuits for market manipulation.

What’s more, since employees could have accumulated a coin before the initial reveal and sold before the rejection, the specter of insider trading does not necessarily go away.

A lot at stake

So, Coinbase’s strategy is a departure from its previous public image of “crypto blue chip,” but it does make sense in the broader evolution of the market.

By widening its offering to cater to an increasingly sophisticated client base, Coinbase is highlighting the deepening maturity of the sector.

However, in its rush to get ahead of (or even keep up with) market trends, it is possible that it has overlooked a deeper shift: a widening disconnect between the sector’s roots and its current status.

The crypto asset sector started out retail. That implies different priorities and tactics, as well as a different client-first mindset.

Yet few sectors, if any, are as regulated as capital markets. The increasing attention from media, official organizations and institutional investors requires a shift in standards.

Juggling the need to navigate this roadmap with that of growing a business in a challenging sector is tough, and fraught with confusion and conflict over what is expected – especially when it comes to communication.

What is fine in a consumer business is not necessarily fine for a financial enterprise, where the wealth of others and the appearance of market integrity are at stake.

This is a big risk: Coinbase getting into regulatory trouble would be a blow to the industry as a whole. No doubt it has a legion of qualified lawyers advising it on its every move. Let’s just hope that internal structural issues don’t blind it to the needs of the new world into which it is evolving.