Off the Blocks | Vol 62, Apr 9, 2019
|Apr 9||Public post|| 3|
This newsletter is our weekly roundup of some of the significant blockchain news, that provides an overview of the rapidly changing blockchain landscape to help you map your blockchain strategy and be aware of regulatory announcements globally. Get your friends to Subscribe Here.
Introducing 9th Gear Technologies
This week’s newsletter introduces 9th Gear Technologies. The financial markets needed an update and 9th Gear is providing the tools for on-demand payment liquidity and same day trading and settlement for forex markets. 9th Gear’s new trading method eliminates delivery risk, redefines and reduces credit risk and decreases capital requirements while providing closer adherence with Dodd-Frank, EMIR and MiFID II. We sat down with Kathy Maher, EVP of Operations for a brief Q&A about the company, its culture and what it means to invent a new business model in a traditionally conservative industry. 9thGear recently won the Monarch Innovation Awards for the Overall Most Innovative Company.
Disclosure: 9th Gear is a Proteum portfolio company.
Q: It is rare to see women leading blockchain companies. What is the 9th Gear story? How did it all get together?
Kathy Maher: Maryanne Morrow, the founder and CEO of 9th Gear, had the vision to bring solutions to the financial services industry using blockchain technology as an enabler. With her deep startup/FinTech and financial services network, she attracted industry veterans with a track record of excellence and results. From the onset, company culture has been a priority with diversity a core tenet to this mission. The executive team is currently 55% women and 9th Gear thrives on the diversity of ideas through this unique combination of executives.
Q: Is there a long-held belief in foreign exchange (FX) markets that 9th Gear is challenging?
KM: Today’s FX trading process dates back to the 1970’s. It still takes two business days from trade execution to settlement, creating credit and operational risk and inefficiencies. Same day settlement of trades is possible and 9th Gear is tackling this challenge. Most trades (>75%) are executed as “naked shorts” meaning that the trade is executed without the funds on hand to settle. Funding is obtained over this two day settlement period. 9th Gear combines access to a marketplace that provides on-demand liquidity with innovative blockchain technology to solve for the barriers that inhibit immediate settlement in the market today.
Q: How does this impact FX exposure and exchange rate risk?
KM: Credit must be extended to the trade counter-party through the settlement of the trade, creating credit risk as there could be a counter-party failure between execution and final settlement of funds. Closing this window of time significantly reduces the credit risk. In addition, there is delivery risk as payments are made through the traditional correspondent banking network. To illustrate, Japanese yen payments are paid the day before US dollar payments due to the 13-14 hour time difference. As a seller of Japanese yen, the customer must pay a day in advance without surety that the US dollars will arrive the next day. PVP (peer versus peer) payment allows for the simultaneous payment of Japanese yen and receipt of US dollars. 9th Gear eliminates this Herstatt Risk (also called Delivery Risk).
Q: How does blockchain fit in with and uniquely enable your vision?
Blockchain offers two key benefits:
a. Blockchain provides a mutual immutable distributed ledger – in short, a single source of truth. This record, along with the immediate settlement of payment, eliminates the often tedious process of comparing trade details recorded in each counter-party’s FX system. The mutual ledger brings transparency and a common source for the trade detail.
b. Blockchain enables high speed payment rails to make immediate PVP settlement between counter-parties as opposed to moving funds through a complex network of correspondent banks. This efficient method eliminates cost, payment delays and errors and, of course, is much faster as payments move in seconds as opposed to hours.
Q: Why not just use Ripple or join R3?
KM: Ripple’s solution is very different. Ripple provides a remittance solution to make payments by buying their XRP with the currency that the customer is looking to sell and then using the XRP to buy the currency that the customer is looking to obtain. Each movement creates a buy/sell spread typical of retail spreads that are well over 100 basis points and can be much wider. The institutional market trades on spreads of around .05 basis points. The liquidity demands of the $5.1T/day FX markets, requires the liquidity of the global central banks as opposed to the more limited liquidity that XRP provides. 9th Gear takes a different approach for this immense market and taps fiat currency liquidity globally.
R3 is a consortium of banks and while it offers a blockchain protocol, 9th Gear’s on-demand liquidity marketplace is developed using Quorum which is the enterprise/banking version of Ethereum that was developed and used by JP Morgan; it is well suited for this type of FinTech solution.
Q: Are the banking, clearance and settlement systems ready? Is there any pushback from the regulatory side?
KM: The 9th Gear solution operates hand in hand with, and relies on, custodial banks to hold the collateral to support the customer account balances. Customers use their existing protocols to deposit and withdraw to/from their 9th Gear accounts. Cryptocurrencies and the liquidity and volatility issues inherent in these currencies are avoided. 9th Gear then takes advantage of the high speed payment rails to drive down credit and operational risk – outcomes welcomed by regulators.
Q: Where do you go from here?
KM: The FX spot market is immense with huge potential for growth, but this concept is readily extendable to additional markets including FX swaps and forwards, and various types of securities transactions where 9th Gear has the potential to also transform the securities lending industry with on-demand securities liquidity.
Kathy Maher is responsible for the smooth operational flow and processing of all transactions across the 9th Gear marketplace. Kathy has a wide array of business and management experience in capital markets, asset management and wealth management. She has held senior technology and operations leadership positions at Columbia Management and Fleet Boston Financial (now Bank of America). She also held lead product and solution roles at FundQuest, Citibank, and Genpact. Kathy holds an MBA from Boston University and an AB with a major in mathematics from Dartmouth College.
Now for some other significant news form the world this week:
Regulations | SEC Just Released Its Long-Awaited Crypto Token Guidance: The guidance focuses on tokens and outlines how and when these cryptocurrencies may fall under a securities classification. The framework itself outlines a number of factors that token issuers must consider before evaluating whether or not their offerings qualify as securities. These factors include an expectation of profit, whether a single or at least central group of entities are responsible for specific tasks within the network, and whether a group is creating or supporting a market for a digital asset. The criteria for this reevaluation include whether:
The “distributed ledger network and digital asset are fully developed and operational” (meaning individuals can immediately use the token for some function);
The token is focused on a specific use case rather then speculation;
Prospects for appreciation” in the token’s value are limited; and
If billed as a currency, the token actually operates as a store of value.
Payments | Facebook Seeking $1B for its Crypto Project: Facebook is reportedly seeking support from various venture capital (VC) firms to develop its supposed digital token. The reported project is a stablecoin that would be pegged to a basket of foreign currencies held in bank accounts. Rumors of a “Facebook Coin” surfaced last December in a report from Bloomberg. The publication then reported that the token would be used for money transfers made within the WhatsApp messenger service, and would focus on the remittances market in India. […Read More on CoinTelegraph]
Given that one of the big allures of blockchain projects is the decentralization, getting outside investors could help Facebook present the project as more decentralized and less controlled by Facebook
Mining | China Says it Wants to Eliminate Bitcoin Mining: China’s state planner wants to ban bitcoin mining, according to a draft list of industrial activities the agency is seeking to stop in a sign of growing government pressure on the cryptocurrency sector. The National Development and Reform Commission (NDRC) said it was seeking public opinions on a revised list of industries it wants to encourage, restrict or eliminate. The list was first published in 2011. The draft for a revised list added cryptocurrency mining, including that of bitcoin, to over 450 activities the NDRC said should be phased out as they did not adhere to relevant laws and regulations, were unsafe, wasted resources or polluted the environment. […Read More on Reuters]
Technology | Connecting Bitcoin Hardware Wallets to Full Nodes: It’s a moment true bitcoin nerds have been waiting for. In the coming release of Bitcoin Core, the 18th major version of the cryptocurrency’s most widely used software, the code will finally, natively allow users to connect bitcoin full nodes to hardware wallets. It sounds technical, but it’s a big step for the security for users. Bitcoin full nodes allow users to verify that transactions actually took place, meanwhile, hardware wallets are considered one of the most secure ways to store bitcoin. Thus, making it easier to join the two together is a big win for users who don’t want full control of their bitcoin – and don’t want to lose it. [… Read More on Coindesk]
Cybersecurity | World Economic Forum’s Report: As leaders around the globe investigate how to leverage the benefits of blockchain technologies, security is often a primary concern. They may be aware of the many security benefits inherent with a blockchain, such as cryptography, immutability, decentralization. But questions remain, such as: what is the best approach to blockchain as a technical problem? How are attackers compromising blockchain technologies? Given its inherent security qualities, how would an attacker even compromise a blockchain? Leaders today must challenge conventional wisdom and think differently, in order to achieve the highest possible security in the context of blockchain. Here are three key considerations, each with a series of insights based on security research and other data, to empower leaders to act on these challenges. [… Read More on WEF]
Security is not just a technical problem, it is a leadership problem
Exploitation is not just a result of attacker capabilities, but also of developer errors
While attackers do compromise a blockchain itself, they more commonly exploit the configuration of the technology leveraging a blockchain
Gambling is becoming a primary use case for the TRON blockchain, new data shows. Dapps on the TRON network facilitated $1.6 billion in activity in the first quarter of 2019, with more than 432,000 estimated users. In total, 64 percent of Dapps on the TRON network now facilitate gambling, the study said. These days, TRON gambling apps range from digital dog racing to a “farm investment game” that promises players up to 100 times their initial token investment. On the strength of such games, TRON dapp volume surged to a new high in March 2019, according to Dapp Review’s data, with more than $102 million worth of transactions on March 15 alone – compared to roughly $16 million worth of volume the same day on EOS Dapps and just under $4 million in daily volume on ethereum Dapps. [… Read More on Coindesk]
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.