Bitcoin – to fork or not to fork?

Anyone following the crypto-currency markets this past two weeks will be fully aware that this has been a turbulent time for Bitcoin and other blockchain assets. First, the SEC published its Report on the DAO.  Second, there was a significant arrest in connection with the Mt Gox failure. And third, Bitcoin underwent a fork which has resulted in a new version, known as Bitcoin Cash. Meanwhile, at the time of writing, the price of Bitcoin itself is testing renewed highs, and continues to enjoy a 3-month long rally.

What implications do each of these developments have for the digital asset industry?

Photo by Andre Chinn – Image sourced from Flickr under Creative Commons

The Mt Gox-related arrest came as Japanese authorities began separate criminal proceedings against the former head of the failed exchange. These developments underscore two things: 1) as with any complex financial fraud investigation, bringing the culprits to justice takes time. 2) exploiting the financial system for ill-gotten gain is not exclusive to crypto-currencies – just ask investors in Australia’s CBA bank how they feel about losing nearly 4 per cent of the value of their shares in one day on the back of a money laundering scandal.

It also means that as regulators play catch-up, exchanges, brokers and other participants in the crypto-currency markets will need to ensure that they are updating their security and privacy systems (to prevent future hacks) while ensuring they comply with AML/KYC/CTF provisions. No bad thing, to instil confidence and trust in this emerging asset class, which is entering a new phase of maturity.

The SEC Report on the DAO, meanwhile, has put ICO’s (Initial Coin Offering) and TGE’s (Token Generation Event) on notice that in some cases, these products will be treated as securities, and will be subject to the same regulation as public offers of shares etc. As a result, token issuance programs will need to structure their sale processes to be either fully compliant with, or exempt from, the regulations; at the very least, they must remove any suggestion that these tokens are capable of creating security interests in financial or dividend-bearing assets, unless that is the express intention. (In some cases, these tokens are sold as membership services, software and IP licenses, or as network access permits. Any “return” to the buyer comes from the network value effects, service discounts or user rewards, similar to frequent flyer schemes and customer loyalty programs.)

Again, this suggests a coming of age for digital assets, and a growing maturity in the way token sales can be used as an alternative to VC funding and other traditional sources of raising operating capital and project financing.

The Bitcoin fork was hugely anticipated, with a mix of fear and excitement – fear because of the unknown consequences, excitement at the prospect of Bitcoin holders getting “free money” in the form of “Bitcoin cash“, via a 1:1 issue. Without getting into the technical details, the fork was prompted by the need to increase Bitcoin’s blockchain processing speed and transaction capacity; and while nearly everyone connected to Bitcoin’s infrastructure agreed on the need to accelerate block performance, there was a schism as to how this should be achieved. Some exchanges said they would not recognise the new currency, and only some Bitcoin miners said they would engage with it (especially as the cost of mining the new asset was more expensive than Bitcoin core). In addition, most exchanges were advising their customers not to attempt performing any Bitcoin transactions for several days, before and after the fork, until the system settles down again.

In the aftermath of the fork, at least one more exchanges has said it will probably offer some support Bitcoin cash; while due to the nature of the fork, Bitcoin cash’s own block processing time was something like 6 hours – meaning transactions could not be confirmed, and holders of the new asset could not easily transfer or sell it, even if they wanted to. It feels like a combination of a liquidity squeeze, a trading halt, and a stock split resulting from a very complex corporate action.

So far, the value of Bitcoin has held up, while the value of Bitcoin cash has steadily declined (despite an early spike), almost flat-lining to less than one-tenth of the value of Bitcoin:

Relative value of Bitcoin cash (BCH) to Bitcoin (BTC) – Market Data Chart sourced from Brave New Coin

I’m not a “Bitcoin absolutist“, as I think different currency designs and technical solutions will continue to emerge based on specific use cases. These products will continue to co-exist as markets come to understand and appreciate the different attributes and functionality of these digital assets.

As a consequence of recent events, some new token projects are refining the design of their issuance programs, more legal opinions are being commissioned, and raise targets are being adjusted in light of the current climate. But the number of new projects coming to market shows no sign of abating, and the better projects will have successful and sustainable sales. The total market cap of all digital assets is now well over $100bn (although the data reveals something of an 80:20 scenario – the top few assets account for the bulk of that value); and more institutional investors and asset managers are taking a greater interest in this new asset class.

NOTE: The comments above are made in a purely personal capacity, and do not purport to represent the views of Brave New Coin or any other organisations I work with. These comments are intended as opinion only and should not construed be as financial advice.

Next week: Bringing Back Banter   

 

 

#Blockchain heralds a new railway age?

Last week, I suggested that digital currencies might be the new portals. Reflecting further on my work with Brave New Coin*, it also occurs to me that the growth of Blockchain resembles the railway mania of 19th century Britain. Hopefully it won’t end in the same over-investment and asset bubble – but there are some interesting similarities.

“Railway Mania” – Image sourced from Business Pundit

First, the railways displaced the canal system, just as canals overtook roads as the key means of transportation. For these purposes, if we compare roads to the Internet, and canals to the World Wide Web, then Blockchain is the next generation of the “information superhighway”. Blockchain and distributed ledger technology, along with crypto-currencies, digital assets and smart contracts are powering the “new” internet – the Internet of Things, the Internet of Money, the Internet of Value Exchange.

Second, and in a similar vein, the Internet was designed primarily as a means of communication. Then, the web enabled e-commerce, content distribution and on-line interaction. Now, Blockchain technology is supporting a range of new activities – such as tokenizing tangible and intangible assets; securing personal data and financial accounts; decentralizing networks, exchanges and registries; and validating immutable transaction data.

Third, the proliferation of public, private and permissioned Blockchains is prompting the development of technical standards for the design, architecture, security and taxonomy associated with this technology – as railway systems have implemented common safety and operating standards. There is also the need for interoperability between Blockchains, just as railway networks have had to address different track gauges among competing operators.

Of course, on the downside, railway mania led to heightened speculation, failed or over-optimistic prospectuses, and duplication of competing networks as developers sought to secure the most lucrative routes.

And let’s not overlook the issue of forking, which Blockchains are having to address in order to meet the demand for increased processing capacity and/or to iron out potential design weaknesses. In some ways this resembles the creation of railway branch lines – in some cases, these subsidiary routes would become more important than their parent main lines; and may even have outlived them, following the Beeching restructures in the 1960s.

Finally, for all the benefits that Blockchain undoubtedly holds, challenges remain with “on-ramp / off-ramp” access – a bit like disconnected transport interchanges or uncoordinated train timetables.

*Note: the opinions expressed here are my own, and do not represent the views of Brave New Coin or their clients.

Next week: Long live experts….

 

 

 

Digital currencies are the new portals

Once described as “The Internet of Money”, Bitcoin is much, much more: it’s software, it’s a store of value, and increasingly it’s being recognised as a legal form of payment. In its wake have come a multitude of other crypto-currencies, alt. coins, digital tokens and programmable assets. Each of them built on one or other blockchain protocol or using distributed ledger technology (DLT), and each of them seeking to serve a specific use case or to drive disruption in traditional markets and business models.

Based on my work with Brave New Coin (a market data vendor for these new asset classes)*, I was recently asked my opinion on all these “Initial Coin Offerings” (ICOs – although I prefer to call them Token Issuance Programs). My response was that digital currencies are becoming the new portals.

How?

First, they are building dedicated communities of interest. Many of them are designed for a specific audience or for a particular purpose. They are leveraging network effects to drive engagement and participation, such as MobileGo, for the online games community.

Second, they are becoming “destinations” in their own right, such as Steem for publishing, or CalcFlow, a market place for mathematical models. They are acting as repositories and resources for specialist content. They are also curating this content, and enabling users to contribute to the community, and get rewarded for doing so.

Third, they are building platforms that support e-commerce and other online transactions, such as SPHRE’s Air solution, and its XID token. In Air’s case, they are creating a paradigm shift in digital ID management: in contrast to most social media and old-school portals that monetize our personal data, our content and our search behaviour through the sale of advertising, Air is giving individuals more power over the use of their own data.

Finally, token issuance programs are creating new registries and alternative distribution networks for a range of tangible and intangible assets, such as MyBit for energy, and bitNatura, for natural capital.

So, as well as supporting P2P payments, facilitating cross-border remittances and enabling the purchase of electrical goods in Japan, Bitcoin and the like are becoming key tools in the new digital economy, just as AOL, CompuServe, Lycos, Yahoo!, Google and MSN were once the main public gateways to the internet.

*Note: the opinions expressed here are my own, and do not represent the views of Brave New Coin or their clients.

Next week: #Blockchain heralds a new railway age?

More on #FinTech, #Bitcoin and #Blockchain in Melbourne

The Melbourne FinTech community brought together a bunch of interested parties recently to find out what’s happening locally in Bitcoin and Blockchain. Organised by the Melbourne Bitcoin, FinTech and Silicon Beach Meetups, and hosted by the Melbourne Bitcoin Technology Centre (MBTC), the evening was part open house, part info sharing, and part pitch night.

BitcoinThe MBTC is now a recognised hub for Bitcoin and Blockchain activities, and currently hosts around a dozen startups within its co-working space. Offering a “full service” facility (it even has a Bitcoin miner on site), complete with staffed reception, meeting rooms, event space, a pod cast studio and an outdoor barbecue area, it’s something of a hidden gem in Melbourne’s Southbank. Regulars also get to attend Bitcoin “swap meets”…..

Last week’s event also featured a number of micro-pitches from Bitcoin and Blockchain startups, a few of the MBTC staff and tenants, and a couple of student projects from RMIT.

Given this was almost “speed pitching“, it’s probably not appropriate to go into too much detail:

  • Toodles – a dating app on a decentralized network, using a Blockchain solution for additional security and privacy
  • Blockfreight – the Blockchain for global freight, enabling cargo containers to be shipped around the world with minimal legacy documentation, based on smart contracts, RFID and Blockfreight tokens
  • blockTRAIN – a training provider and consultancy on Blockchain, smart contracts and digital currencies
  • Bitcoin Buskers v2 – sort of MySpace/Bandcamp/SoundCloud for Buskers, to promote their merchandise and to secure international festival bookings, all powered by Bitcoin
  • ACX – Australian Crypto Exchange, offering the largest single Bitcoin order book in Australia
  • Bitcoin Group – explaining that most Bitcoin mining is currently done in China due to cheaper electricity
  • Antstand – portable laptop stand (which you can buy with Bitcoin!)
  • Think Bitcoin – providing consulting and education services, particularly in schools
  • Lyra – an app to track and reduce your personal environmental impact, sort of Fitbit and Smart Meter combined
  • ImagineNation – innovation consultancy, backed by training and coaching, and featuring a 2-day startup game to help organisations transform cultural mindsets around agile, lean, design thinking, UX and incubator/accelerator concepts
  • Brave New Coin – the “Bloomberg for Bitcoin”, providing market data (prices, rates, indices, news) for Bitcoin and other digital currencies*

With the next Bitcoin halving due soon, and a significant uptick in FinTech, Blockchain and Digital Asset investments announced during Q2, this sector is going to look very interesting for some time to come, and it’s good to know that Melbourne, whose fortunes were founded on gold, is staking a claim in these new asset classes.

* Declaration of Interest: I have recently joined the team at Brave New Coin as Head of Business Development – more news to follow….

Next week: University Challenge – Startup Victoria’s Student Pitch Night