Off the Blocks | Vol 77, July 23, 2019
|Jul 23||Public post|| 7|
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Bitcoin and Libra - A Regulatory Perspective
Since Facebook announced Libra, its own cryptocurrency, it as gathered non stop attention from the media, businesses and government regulatory bodies across the world. It has been touted as the practical alternative to Bitcoin, shilled as the perfect on ramp for bringing almost 2 Billion unbanked people into the folds of financial security and of course ushering in world peace as a unified global currency. All of these are noble aims, but the reality is far removed from the hype. While Facebook has taken the first steps, the framework of building a truly decentralized platform has yet to be established, without which, the Libra will be regulated and relegated to yet another project that succumbed to corporate hubris.
To help regulate the emerging digital payments ecosystem and distinguish between bitcoin and private currencies like Libra, the the US Congress heard testimonies from those in the industry including Libra’s creator David Marcus. There was an interesting panel on Examining Facebook’s Proposed Cryptocurrency and Its Impact on Consumers, Investors, and the American Financial System.
As was borne out in the conversations, it is very hard to regulate bitcoin and Libra on any common framework. Bitcoin is an open, permission-less technology and the pioneering cryptocurrency. While the services built on top of top of the protocol can and will be centralized and controlled by ever innovative businesses, the platform itself remains free of control. While Bitcoin (and some other native cryptocurrencies) is an asset, Libra is asset backed. From a regulatory perspective, this is a big distinction in trying to bucket Bitcoin with the likes of asset backed currencies like the Libra.
Libra, in its current iteration, is fundamentally different. For all its future ambitions of being a decentralized system, Libra today remains a digital asset backed by traditional currency reserves and operates in a closed network. It will require identity verification and standard background checks such as know your customer to hold the currency. It is therefore puzzling why Facebook chose to launch without any banks as partners, specially when its aim is to provide banking services to unbanked people. Surely, Facebook did not miss the fact that unbanked people would eventually want to trade with entities that are tied into the banking system of today. Secondly, asset management is a highly regulated industry, so it is unclear why Libra should not be subject to similar regulations. The cost of compliance with these regulations will inevitably add to transactional costs - this directly undercuts the narrative of providing cheap financial services. So, it may be in Libra’s interests to disassociate itself from traditional financial services.
Or perhaps it is just power play and if so, that should be a big concern. Facebook’s reach extends to over 2B people. Even assuming that a fraction of the participants on the network may use Libra, it is set to become one of the largest banks in the world. This can be a source of custodial and systemic risks particularly when transferring money in lopsided financial markets such as “one way” remittance corridors. Since Libra relies on assets to back itself, it does little to dis-intermediate the incumbent third parties for custody, insurance and record keeping etc. As such Libra is subject to similar market risks as other currencies. Libra does expect that it will be licensed, regulated, and subject to supervisory oversight by the Swiss Financial Markets Supervisory Authority (FINMA). While it may not have an intention to compete against sovereign currencies, Libra’s sheer size, access and power will eventually blur the lines and provide a compelling argument to do so.
It will be interesting to see how countries react to regulating Libra. The German Bundesbank in its monthly bulletin “Crypto tokens in payment transactions and in securities settlement” is calling for a wait and watch approach ensuring that a number of important standards such as security, monetary and financial stability are not negatively affected, and payment transactions are not compromised. It also stressed:
A government should be as technology neutral as possible, so that the benefits of innovation can be made available for the financial sector.
Now some significant news form the world this week:
Markets | Bakkt Begins Testing Bitcoin Futures Platform Following Hype and Delays: Bakkt, the long-awaited Bitcoin (BTC) futures platform from the Intercontinental Exchange (ICE), has begun testing the delivery of BTC futures. Bakkt’s Bitcoin futures are physically delivered via a process called warehousing, which will purportedly bode well from a price discovery standpoint, but cause some concern among regulators. Bakkt has experienced several delays regarding its launch as regulators like the United States Commodity Futures Trading Commission investigated the platform’s compliance procedures and its possible effect on markets.
There appears to be a critical mass of adopters ready to come on board on Day 1 of the Bakkt launch, with the sales team gaining traction among brokers, market makers, prop trading desks and liquidity providers.
- Sam Doctor, managing director and quant strategist at Fundstrat Global Advisors
Telecom | KPMG Partners With Microsoft, R3: KPMG, is partnering with software firms TOMIA, Microsoft, and R3 to develop a blockchain for telecom settlements. KPMG has pursued industry-specific blockchain pilots in the past, with an eye to settling cross-border, or network, complexities. The latest partnership, with two distributed ledger (DLT) industry leaders, Microsoft and R3, continues in the vein of resolving the issues that arise from multi-party connections. Specifically, KPMG is looking to address the hard data issues that will arise from 5G connectivity. The company states that “international mobile data roaming revenues are expected to reach $31 billion in 2022, with an average annual growth rate of eight percent.”
While we will be able to consume more data more quickly and across more locations than ever before in this next wave of telecom advancement, it is becoming increasingly complex for telecom companies to track and settle interchange fees.
The blockchain being piloted aims to reduce the future costs, number of disputes, and time involved in telecom settlements caused by “billions of mobile interactions flow[ing] through hundreds of connected networks managed by dozens of customers and suppliers.”[… Read More on Coindesk]
Tech | Blockchains Done Right Are the Next Evolution in Open Source: Open source code is more than just a way to create new technology. It’s a disruptive force that changed the way software is built, from taking individual developers and turning them into thriving communities to changing how enterprises do business–building open ecosystems versus restricted walled-gardens. Businesses have gained major advantages through the use of open source software. In the same way, decentralized blockchain infrastructure offers businesses increased security, robustness and most importantly, guaranteed transparency with its customers. [… Read More on DevOps]
Fintech | As Facebook Struggles For Blockchain Support, A Truly Decentralized Challenger Emerges: The prevailing belief is that at some point the inherent contradictions in Facebook’s blockchain strategy and the Libra project are going to become too much to overcome. Of course, this assumes that the project launches at all, which is not certain given the regulatory scrutiny it faces around the world. This creates an opportunity for companies and projects like Celo, which are building pure blockchain-based financial services aimed at linking the nearly 2 billion people in the world that do not have access to bank accounts or the ability to verify their identity. [… Read More on Forbes]
India | Govt Committee Recommends Ban on Cryptocurrency: India seems all set to ban private cryptocurrencies after an inter-ministerial committee (IMC) suggested outlawing private cryptocurrencies, like Bitcoin, apart from declaring any activities related to virtual currencies as a criminal act. The report lays down that all private cryptocurrencies except the ones issue by the state be banned in India and endorses the stand taken by the RBI to eliminate the interface of institutions regulated by the central bank from cryptocurrencies. Cryptocurrency has been defined as:
any information or code or number or token not being part of any official digital currency, generated through cryptographic means or otherwise, providing a digital representation of value which is exchange with or without consideration, with the promise or representation of having inherent value in any business activity which may involve risk of loss or an expectation of profits or income, or functions as a store of value or a unit of account and includes its use in any financial transaction or investment, but not limited to, investment schemes.
EnCirca announced that it is the first ICANN Accredited Registrar accepting applications for Ethereum's .ETH domain names. The deadline for applications is August 10, 2019. Ethereum is the world's second largest blockchain (after Bitcoin). Ethereum's .ETH was created to map human-readable domains names to blockchain wallets, facilitating ease of use. [… Register Now on EnCirca]
Billions of internet users will soon have blockchain wallets for sending and receiving crypto-currencies. In response, EnCirca has made it easy for brand owners to protect their trademarks on the blockchain.
- Tom Barrett, President of EnCirca
The Ethereum Naming Service has two different application processes, depending upon the length of the desired domain name.
Short Character .ETH Domain Names (3 to 6 characters) Short names, such as Apple.ETH, are expected to be in high demand and will attract multiple applicants. To ensure that these short domain names are allocated to those who have already used the same string in a pre-existing domain like .COM or .US, Ethereum will award registrations to the applicant demonstrating the longest continuous use of the same name in an existing domain name extension, such as .COM, .US, .ORG etc.
Long Character .ETH Domain Names (7 or more characters)
Long character names, such as Microsoft.ETH are available now on a first-come, first-served basis. These long strings have been publicly available since May, 2017 and nearly 300,000 names have already been registered.
Proteum is a global blockchain advisory firm that works with public, private and start-up companies to help them transition into the world of blockchains and decentralized applications. We help companies strategically build their ecosystem and unique capabilities so that they can own and control their future. ProteumX, our accelerator program, invests in and accelerates the time to market for companies building blockchain solutions.