On Wyoming, Beating Gold's ROI, and Alibaba's Patent Cache
Off The Blocks, Vol 124, September 23, 2020
The COVID-19 pandemic is still amongst us and shows no signs of life returning to normalcy anytime soon. We are working with our partners, clients, and portfolio companies, creating strong ecosystems for their mutual growth. Simultaneously, we are trying to resolve some of the most complicated and challenging issues to create a trusted environment for people to go back to work and get the economy back on its feet. You can read about our efforts in a 4 part series here. To be a part of the solution, reach out.
Wyoming’s Crypto Friendliness Can be Contagious
Last week, the biggest news from the crypto universe came from Wyoming, a rather inconspicuous state when it comes to financial regulations and innovation in Fintech.
Wyoming approved Kraken’s application to form the world’s first Special Purpose Depository Institution (SPDI). Kraken Financial will be the first digital asset company in the U.S. to receive a bank charter recognized under federal and state law and will be the first regulated, U.S. bank to provide comprehensive deposit-taking, custody, and fiduciary services for digital assets.
The implications of this are humungous. At a bare minimum, for those with crypto holdings, this provides an on/off-ramp to integrate their digital assets with their financial institutions. Mundane things like receiving a salary, remittance to and from the U.S., paying bills, etc. using crypto just got a whole lot easier for everyone. So far, with the exception of Silvergate, traditional banks have mostly turned a blind eye to serving the crypto market. Looking further, this is a vertical integration for Kraken and reduces its reliance on financial intermediaries and cost structures which have played a role in discouraging mass adoption and throttling innovation. The tokenization of security and commodity assets or non-fungible tokens (NFTs) just got a huge boost. This also starts to pave the path for decentralized finance, DeFi, to come out of the shadow banking experience and create value by unlocking the power of mining, staking, and transacting digital assets.
A glimpse of the changes can be seen in how the banking charter is structured. Traditional banks accept deposits from customers and loan it to borrowers while maintaining a reserve that is a fraction of the deposit liabilities. Small customer deposits are insured by the FDIC up to $250K. In Kraken’s case, WY has created a Special Purpose Depository Institution (SPDI) banking charter, under which Kraken cannot loan customer deposits and is not required to have FDIC insurance. Instead, 100% of customer deposits will be backed by assets. The ability to custody both fiat and digital assets provides an added competitive advantage to Kraken.
Most crypto businesses have struggled with finding an easy on/off ramp with the existing economy for their operational needs. The craziness of incorporating such businesses in Caymans, Gibraltar, Malta, etc in the past was driven partly by easier access to fiat and supported by lower tax incentives. The US has always been a hotbed of innovation with access to capital. Having a legitimate US banking interface to cover the operational requirements of crypto businesses will provide a much-needed impetus for this sector to grow. The thinking seems to be that bringing FIs into the equation should smooth out the financial risk associated with new token launches. We saw a similar arc in the 1980s when banks were allowed to trade derivatives and over a period of time risk models have evolved to account for the risks inherent in that business.
The ‘business of banking’ is on the move and bringing the banks to play in a decentralized financial world is a step in the right direction. FIs today are largely super intermediaries and are increasingly using their perch to charge fees that are no longer commensurate with the value they provide. Injecting lower cost structures for payments and settlements for example is a boon for consumers and small businesses globally. From an industry perspective, this comes close on the heels of an announcement by the Office of the Comptroller of the Currency (OCC) that banks can provide digital asset custody services. Collectively, these should start to accelerate the transition into digital banking services as something more than an ability to check your balances or paying your bills.
Moving forward, banks and crypto companies will benefit from a symbiotic relationship. Having an ‘account’ at either should provide seamless access to both crypto and fiat and should be baked in as part of the user experience when accessing financial services. Banks should leverage their experience serving vertical markets to create industry-specific ecosystems where tokenized assets and digital experiences will create more value for their clients. Coupled with the emergence of DeFi products, new business models will start emerging from the shadows.
There's going to be a phased approach to this … in phase two or three we will begin offering new services and products.
- Dave Kinitsky, CEO, Kraken Financial
Now for some news from the world this week:
Payments | How Walmart Solved Carrier Payment Woes in Canada With Blockchain: Before Walmart Canada deployed blockchain technology to pay trucking companies, the company and its carriers were often bogged down by invoice disputes. Up to 70% of invoices had some sort of issue where numbers didn’t align with company expectations. The results were not good. Walmart personnel would lose time sorting out the long list of charges that go into each load. Meanwhile, payments to carriers were delayed. The sheer abundance of data points has created an almost limitless potential for invoicing issues to arise. Each represents an opportunity for misunderstandings, miscommunications, and human errors. … Link
Investing | Blockchain Players Beat Gold and Bitcoin in the Pandemic: Instead of buying into either asset, those who threw their money behind a basket of companies with exposure to blockchain technologies would have returned 54% over the past year, even after the recent rout that’s hit global tech stocks the hardest.(1) Gold is up just 27% over that time, despite a boom since March, while Bitcoin is actually down 1.8%. Elwood Asset Management LLP’s Blockchain Global Equity Index — ticker: BLOCK — is a collection of 45 companies involved in the blockchain ecosystem, a technology that deploys cryptography to store information in distributed ledgers and is resistant to modification or manipulation. Its top-three holdings are Taiwan Semiconductor Manufacturing Co., Kakao Corp. and Monex Group Inc. … Link
Data | CB Insights Buys Blockdata to Build Out Blockchain Data Offering: Netherlands-based Blockdata, which provides qualitative insights into the range of large enterprises using blockchain technology, has been acquired by data provider CB Insights. The acquisition demonstrates large firms are still interested in deploying distributed ledger technology (DLT) within their firewalls, and are looking for fast and thorough insights into the complex ecosystem that has grown up around enterprise blockchain. …Link
It’s become something that our clients are increasingly talking about as big and practical. [They] were overwhelmed with the number of companies and projects that were going on, and were struggling to identify what exactly was happening and the best use cases.
- Anand Sanwal, CEO, CB Insights
Stable Coins | Algorand Becomes An Official Blockchain for USDC: Algorand is now an official blockchain for USD Coin (USDC). The newly released mainnet implementation of USDC for Algorand is available today, and becomes the second major blockchain after Ethererum with native support for USDC. The Algorand blockchain is often complimented for efficient and scalable transactions, both of which Ethereum has suffered with in 2020. Specifically, Algorand brings over 1,000 tps and transaction fees of 1/20th of a cent to the USDC ecosystem, and soon to be released innovations from Algorand offer the potential of scaling throughput by 8-10x on Layer 1, accompanied by new secure smart contracts that complement standard tokens such as USDC. This expanding support for USDC on new blockchains comes as USDC has rapidly grown to over 1.8 billion in circulation, experiencing more than 3x growth in the past six months. … Link
Automotive | Groupe Renault, Partners Develop XCEED Blockchain Project to Certify Compliance of Vehicle Components: Groupe Renault has developed the XCEED (eXtended Compliance End-to-End Distributed) blockchain project to certify the compliance of all vehicle components, from design to production. Designed and implemented in collaboration with leading automotive industry players, this tool enables greater responsiveness and efficiency at a time of ever-greater regulatory stringency. New market surveillance regulations came into force on 1 September, introducing enhanced regulatory controls for vehicles already on the market. The entire production chain thus has to adjust its structure to repond to the regulatory authorities within shorter timeframes. …Link
Alibaba is on track to supersede U.S. computer giant IBM as the single-largest holder of blockchain-related patents, according to a new study. A report from intellectual property consultancy KISSPatent Thursday found the Chinese tech conglomerate was "definitely running the show," having already published ten times more blockchain patents than IBM, its nearest rival. Should Alibaba continue at its current pace, the study predicted it would become the biggest patent holder in blockchain by the end of 2020. KISSPatent said this was part of a broader surge in the number of blockchain-related patents published. The first half of 2020 had more patents than the whole of 2019. In turn, 2019 had triple the number of blockchain patents compared to 2018. Another key point was that most of the patents were filed by traditional Fortune 500 companies rather than companies that exist wholly within the blockchain space. …Link
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