I was in London this week for a bunch of reasons, one of which was the Global Digital Finance round table, in which representatives from the cryptoasset industry (entrepreneurs, executives, regulators) discussed how to bridge the gap between the “new finance” that blockchain-based assets promises, and the regulators who have to protect their constituents.
It was awe-inspiring to be in the room with such smart people, and there will be some interesting work emerging in the coming weeks. Watch this space.
You can find out more about our goals here – download our papers and offer constructive suggestions! Consultations are open until the 30th of August.
— x —
The news that Intercontinental Exchange (ICE), the owner of the NYSE, was developing a crypto asset platform caused a big stir in the media, but little movement in the bitcoin price.
The platform will offer a federally regulated marketplace for cryptocurrencies, that also takes care of clearing and storage. This is a potentially big deal for institutions, given ICE’s reach and reputation.
It is also developing a second layer to facilitate settlement. The idea is that bitcoin trades between Bakkt clients would settle instantly with a simple change of ownership on the ledger – not actually on the blockchain.
Yet the bitcoin price fell after the announcement. Why, when the press gushed that this would provide an outlet for the “flood of institutional money” that was waiting for regulated infrastructure?
Could it be that the market is so pessimistic that even this can’t generate some excitement?
Could it be that claims of a “flood of money” are not credible?
Or could it be that this news is not as good for the community as the media would have us believe? Rather than decentralized finance, not controlled by anyone and with no counterparty risk, bitcoin is becoming increasingly absorbed by the incumbent system. While that may be necessary to satisfy institutions’ requirements, it may at the same time make bitcoin less attractive as an investment.
Leaving aside the centralization and counterparty risk this implies, if bitcoin is to be “digitized” like share certificates, and ownership changes hands on a ledger rather than in “real life”, then what’s to stop it from becoming the base for lending, collateralisation and fractional reserve banking?
While this may inject liquidity, it will also increase fragility and risk, while lowering volatility and returns. In such a scenario, why would institutions want to invest?
Then there’s the involvement of Starbucks, that allegedly will encourage development of bitcoin-based consumer payment mechanisms.
This sounds like a totally different target and mechanism – not to mention the fact that there has not been a demonstrable demand for this service, at least not in most jurisdictions where Starbucks operates.
The press release says that “Starbucks will play a pivotal role in developing practical, trusted and regulated applications for consumers to convert their digital assets into US dollars for use at Starbucks.” I cannot fathom why clients would want to do that.
On the positive side, this could trigger a new wave of innovation – “standard” financial services could add breadth to bitcoin demand, and encourage development of a new type of ecosystem. Ever the optimist – but I can’t help but feel disquieted by this announcement.
(The New York Times reported back in May that Softbank was originally going to be involved in the deal, but they have since backed out – anyone know why?).
— x —
My colleague Adam Hart wrote an eye-opening report on how the main cryptocurrency data sites have been misreporting bitcoin volumes and origin. A deep dive into the numbers revealed that bitcoin trading in Japan had been grossly overstated, since Bitflyer and others were bundling cash delivery derivative trades into the bitcoin trading figures, while other exchanges were not.
Adam and his team pointed out their findings to CryptoCompare, who almost immediately changed their calibration.
The figures now show the US dollar easily in the lead as the highest volume pair when it comes to bitcoin trading.
Intriguingly, Adam’s report then goes on to ponder the possible effect this simple data change could have on the US regulatory approach to cryptocurrencies.
“The dollar’s role in this exchange ecosystem extends the reach of the U.S. government. Just as the dollar’s preeminence in the international financial system gave U.S. regulators the leverage they needed to shape global anti-money laundering (AML) practices in the wake of 9/11, the dollar’s importance in global fiat-to-cryptocurrency trade could give them outsized influence as governments around the world mull new regulatory frameworks for cryptocurrencies.”
Good reporting, interesting insight.
— x —
Caitlin Long published a compelling article on why cryptoassets cannot be “financialized” (ie. spun into new financial assets) – they’re bearer assets, not debt-based (which means they are usually held and controlled by the owners, vs. shares which are centrally deposited and the owners hold a digital IOU). This means that the financial system cannot use them to spin off other financial assets, because the financial system does not hold these assets – bitcoin investors do.
— x —
Goldman Sachs published a report that went negative on cryptocurrencies, predicting that they would not appreciate much in 2018.
The overall conclusion from the report (not just the part about cryptoassets) is that market sentiment rules, and market sentiment now is particularly fickle. Since we are in the unusual paradigm of having strong fundamentals that are equally positive (economic growth, controlled inflation) and negative (domestic politics, geopolitical tensions), the market moves according to whatever investors choose to focus on.
This is not new, and is generally how markets work. What is new is the unpredictability of the flip-flopping – market volatility is way up.
Back to the (brief) cryptocurrency comment, the negative outlook is based on the failure of bitcoin and peers to act as a good currency, since they are neither a medium of exchange, a unit of account nor a store of value. Some of that is debatable, but even if it were true, it overlooks that cryptoassets can (and most do) have value outside of the potential role as a currency. It also overlooks the underlying shift in what a currency is. Traditional definitions evolve, as do expectations.
What perhaps stung the most was this dismissal: “We believe that they garner far more traditional media and social media attention than is warranted.”
That reminds me of the story of the man on the hill who didn’t believe reports that the water was rising because he was still dry.
— x —
Bloomberg ran an intriguing hint at a shift in the hype cycle, pointing out the slowdown in corporate blockchain spending, and referring to unkept launch promises:
Notice that most of the big announcements these days are about infrastructure, not use cases.
— x —
There was an ear-shattering amount of great cryptoasset podcasts this week:
Blockchain Insider, with me! And Vinay Gupta and ING’s Stéphane Malrait – we discuss the SEC’s rejection of the Winklevoss ETF, BBVA’s blockchain trial, assassination markets, insider dealing and a whole lot more.
An Intelligence Squared podcast (always worth listening to) called Blockchain: Quantum leap forward or digital snake oil? – with Primavera di Filippi, David Gerard and others – some head-nodding parts and some eye-rolling parts.
The Bitcoin Knowledge Podcast, with Caitlin Long – with fascinating insight into good vs. bad financialization, the ICE platform and the culture clash between crypto and institutions.
Cryptonetworks and Cities: Analogies, by the a16z crypto team – intriguing thoughts about ecosystems and organic development.
Cryptonetworks and Decentralization: Building Blocks, also by the a16z crypto team.
Laura Shin’s Unchained, one of the best episodes so far, with Jill Carlson and Meltem Demirors.
— x —
I’ve just finished reading “The Watchmaker of Filligree Street” (charming), in which the protagonist has synethesia, which means that he “sees” sounds through colour. Running down a staircase was a yellow. A human voice is gold. Silence has a “silver hem”.
So I was transfixed by these paintings by Melissa McCracken that represent music genres and that hum with movement, life and what feels like a message.
This is jazz:
This is pop:
(by Melissa McCracken, via Colossal)