Battle of The Central Banks: China Declares ICOs Illegal

As I have been writing in this space of late, the days of the Wild West for cryptocurrency are absolutely at an end. The writing has been on the wall all summer.

The latest news to hammer the point home? As September dawned last week, six more major banks joined a UBS-led effort to create the Utility Settlement Coin (USC).  This looks set to be a new form of digital cash for clearing and settling financial transactions using blockchain, the technology behind bitcoin.  Unlike bitcoin, however, the USC will not be a new standalone digital currency. It will instead be the digital cash equivalent of major real world currencies backed by central banks.  It is unclear whether the USC project is intended to compete or cojoin with Ripple. However, UBS is in discussions with central banks and regulators. They are aiming to release an initial version of the USC by the end of 2018.

What does all this mean?

The big western banks have formally conceded that cyber currency is here to stay and they are now taking active steps to stake their claim within the quickly evolving cyber currency landscape.

Less than a week later, however, came another piece of news.

The Central Bank of China has now banned all Initial Coin Offerings (ICOs) – including ones that are in the process of raising money. ICOs are essentially a way of fundraising using cryptocurrency.  They are a financial digital hybrid, a cross between crowdfunding and an initial public offering that involve the sale of virtual coins mostly based on the ethereum blockchain.  Interest in ICOs and funds invested in them have exploded in 2017, and so has the price of bitcoin.  There are many who believe that these events are not unrelated. In fact, the gains bitcoin made earlier in the year when the new fork in its code was announced might well be wiped out by the new Chinese decision to ban ICOs. Beyond bitcoin specifically, China’s decision to ban ICOs has negatively affected the value of all cryptocurrencies.

Given the huge amounts of money at stake, it is no surprise that ICOs have attracted cyber criminals and attention from regulators.  According to Chainanalysis, cyber criminals have stolen as much as 10% of the money intended for ICOs in 2017 (more than $100 million). Governments are keen to put a stop to this kind of activity.  And so, the Chinese ban is not wholly unexpected.  Jehan Chu, managing partner at Kenetic Capital, believes China will allow ICOs in future on approved platforms.  Perhaps future ICOs in China will also need to use an officially sanctioned cryptocurrency issued or controlled by the Chinese government.

It is unclear whether the Chinese government will create their own cryptocurrency. If it does, this will raise new questions that have to date been much posed but never definitively answered. In fact, Chinese dominance of the bitcoin market has been one of the biggest boogeymen in the vertical since its inception.

What further developments can we expect in the fourth quarter of 2017?

Regulations Are Coming Fast

Cybercurrency is not at risk of disappearing, and it is becoming increasingly clear that it will play a pivotal role in the transformation of finance over the coming decade.  However, the key institutions responsible for steering development of the technology, and the laws, regulations and policies that govern the space are in the process of changing.  As a result, cyber currency will not be able to replace central banks, nor sidestep regulations. And that is an important milestone to reach.  Especially as the conventional wisdom in the world of cyber currency has long predicted that this would never happen. Or that if it did, it would be the “end of bitcoin”.

The world of cyber currency has entered a new phase. It’s not the end of the world. And its future will be much more regulated.

Marguerite Arnold is the founder of MedPayRx, a blockchain healthcare startup in Frankfurt. She is also an author, journalist and has just obtained her EMBA from the Frankfurt School of Finance and Management.

Image: Pexels

How Can The SEC Suspend A Currency? Bitcoin Goes Through New Woes

The regulation of the Bitcoin industry is getting even stranger. Not only are Initial Coin Offerings (ICOs) and token sales now subject to federal securities laws, in late August the SEC announced the temporary suspension of trading of First Bitcoin Capital Corp (BITCF). The trading ban on the Canadian company will be in effect until September 7 at 11:59.

According to the SEC, “The Commission temporarily suspended trading in the securities of BITCF because of concerns regarding the accuracy and adequacy of publicly available information about the company including, among other things, the value of BITCF’s assets and its capital structure.”

The company’s goal is to not only acquire and invest in Bitcoin start-ups but also to invest in mining equipment and bitcoin only online stores. It also has its own digital currency exchange and plans to offer its own cryptocurrency exchange called Coinqx.com.

So far, so good. What is the SEC’s beef with BITCF?

The price of BITCF on the OTC (over the counter) markets jumped 7,000% this year. At the beginning of 2017, shares were trading at $0.045, rising to a high of $3.15 in early August, before falling to a price of $1.79 at the time of suspension.

Because BITCF is an OTC security, it is not required to file information with the SEC. However, the OTC Market’s inter-dealer quotation system called OTC Link is registered as a broker-dealer. OTC Link is also a member of the U.S. Financial Industry Regulatory Authority (FINRA).

There are not a lot of ways, in other words, to completely avoid the regulated banking and securities system. Even for companies dealing in cryptocurrency.

In the meantime, since the suspension, at least three law firms are looking into class action liability issues.  Specifically, losses suffered by investors who might have been misled by the company’s claims.

The Rosen Law Firm announced its investigation on August 24. A second law firm, Gewirtz & Grossman, announced that they are investigating whether the company broke the Securities Exchange Act of 1934. A third firm, Faruqi and Faruqi is now investigating claims of those who lost more than $100,000 as a result of the large price fluctuations.

In other words, Bitcoin is becoming regulated just like any other security and for reasons that have nothing to do with the “decentralized” authority of Bitcoin, but rather the larger financial system into which it is becoming integrated.

For this reason, Bitcoin and other cryptocurrencies are well on the path towards regulation. In terms of exchange. And in terms of price. Not to mention price manipulation.

What Will This Mean Down The Road?

While cryptocurrency will continue to develop, the idea of a freewheeling, unregulated monetary or securities exchange is likely to go the way of the Dodo. As cyber currencies of all kinds as well as tokens become integrated into not only daily life but machine-to-machine operations, they will inevitably be more controlled and regulated. They will have to be. For example, in the case of token exchanges between inanimate objects, the stability of the value of these tokens will have to remain relatively stable. Otherwise, running the dishwasher or the electric car will become an almost impossible value arbitrage.

Where is this going in the land of currency? The value volatility that is a hallmark so far of all cyber currency exchanges and currencies may continue for some time. It may be that the token and currency markets will diverge. Or it may mean that all will eventually settle down into a world that is far more like the traditional securities and currency markets that exist today.

That appears to be the direction in which we are now heading. And that, despite the dreaded “R” word (regulations) may be exactly the thing that investors really want.

Can Bitcoin Be Regulated?

One of the attractions of Bitcoin and other cryptocurrencies is the idea that they are not regulated by a central banking authority. It has led to some spectacular jumps in the price of Bitcoin, which is controlled by a relatively small number of global investors. The volatility in the market was even more obvious this summer with the price of Bitcoin rising more than 50% since the start of August, and hitting an all-time high on August 15th before crashing by more than 13% shortly thereafter. The heightened interest in the cryptocurrency has been driven by an agreement reached to finally update the rules governing the software. With the new rules in place, transactions over the network should now run much faster.

This incident shows that Bitcoin is in fact “governed”, if not by a central authority, then by a small group of developers. Further, those who govern the market are insiders who know ahead of time when a change will happen.

This is not how a regulated currency is supposed to work, and can inevitably lead to problems. For example, one of the largest cryptocurrency exchanges – BTCe – has now gone down in flames. For those unfamiliar with the ongoing scams and thefts, it appears that many of them, including the stunning theft of 800,000 Bitcoins via the now defunct Mt Gox exchange, used the BTCe exchange to launder their stolen Bitcoins. The indictment of BTCe’s founder appears to show that he was responsible for most of the largest thefts of Bitcoins globally for most of this decade. As you can imagine, regulators are now taking a serious and ongoing look at Bitcoin. And so as Bitcoin establishes itself as a globally recognized currency, or taxable asset, it is slowly becoming more and more regulated.

Most Bitcoins are regulated in some way – and for a very simple reason. It is necessary to have access to conventional money, via an online bank account, in order to buy cryptocurrency in the first place.

Recognition of Cryptocurrency

Is a cryptocurrency like Bitcoin a “currency” or is it really an “asset” that can gain or lose value? Or is it both? Nobody is sure and the uncertainty is likely to continue for some time. Cryptocurrencies are currently being defined and recognised on a country-by-country and sometimes regional basis.

Australian senators have recently called for Bitcoin to be recognized as a currency in the country. They are not the only ones. In the EU, Bitcoins may be used to buy goods and services, and are designated as a “digital presentation of the value not confirmed by the central bank”. Similarly, Japan has also legalized Bitcoin as a payment method. Other countries take a different view. Israel and the U.S. generally treat Bitcoin as a taxable asset subject to capital gains tax. In China, Bitcoin is also generally treated as a taxable asset.

Concerns about what can be bought with cryptocurrency is on the mind of regulators and politicians in many jurisdictions. One of the places this is currently showing up is in locations where cannabis is being legalized, particularly in the United States. The reason is that the U.S. banking industry is still subject to federal rules on financial transactions relating to the sale or purchase of marijuana. Buying weed using Bitcoin is a logical alternative, and a number of branded sub-currencies like Potcoin have stepped into the breach. However, this is being blocked in places like Washington State due to concerns around financial transparency and money laundering. Legislators are considering banning the purchase of cannabis with any cryptocurrency.

Given all of these developments, it is clear that while cryptocurrency may not be regulated by old fashioned means – with value calculations being performed by a central authority – governments are in fact beginning to find ways to regulate this “currency” by controlling how it should be used, taxed, and what products people can buy with it.

No matter what else it may be, this clearly amounts to “regulation” of the market. Even if in its first and earliest stages.

Marguerite Arnold is the founder of MedPayRx, a blockchain healthcare startup in Frankfurt. She is also an author, journalist and has just obtained her EMBA from the Frankfurt School of Finance and Management.

Image: Pexels

Blockchain as Monetized Infrastructure

 

For those struggling to understand blockchain, think of it this way. It will be the digital connection between people as well as between machines – starting with your cell phone.

It will be used to tell your washing machine when to run. It will also be used to bill you for the electricity and water it uses. In turn, it could also deduct that amount from your solar positive mortgage.

Blockchain tends to be easier to understand if you think of it as a piece of infrastructure than as the backend ledger for all cryptocurrency. However, questions about payments are always present when talking about blockchain. In particular, blockchain is a system which enables micro-payments, in some cases in increments of less than a penny.

Why is this important?

Basically, in an Artificial Intelligence and Internet-of-things world, the transfer of digital tokens is what will make the system go. Machine processing does not happen in a vacuum. There are costs involved. Who pays and how is a fascinating part of the banking system, which will very soon incorporate blockchain.

Blockchain as a form of infrastructure has become a serious topic in a world filled with cybercurrencies and fundraising networks. One example of a company making interesting choices in this area is a Dutch innovator called Quantoz. They got their start as experts in decentralized energy and transportation. They have subsequently branched out in several intriguing directions, winning not only recognition for their innovations but also industrial clients.

Quantoz has developed their own cryptocurrency exchange called happycoins. However, they are absolutely not interested in cryptocurrency speculation, nor are they aiming to raise vast sums via a crowdfunding sale – known as an Initial Coin Offering. Their sights instead are set on a part of the market that is still coming into its own but where blockchain and cyber currency are likely to have their biggest influence.

Digital Payment Networks

Quantoz recently launched a new consortium to create something they are calling QPN. The Quasar Payment Network is intended to enable a peer-to-peer micro transaction network between consumers, enterprises and IoT. In other words, the firm is using blockchain not to become a traditional bank but to build a payment gateway that enables enterprise.

QPN creates a gateway between traditional bank accounts and digital wallets required for interacting with blockchain controlled systems.

It means that there is a direct two way exchange between traditional cash and the tokens that power the network. For example, an automobile could pay a sensor to understand current driving conditions. This information could then be used by the car to help the driver handle the road better. In turn, this safety feature and the driver’s use of it could be factored into insurance premiums, even if you are only renting a shared automobile.

In this kind of scenario, the digital tokens that are being transferred in the system are valued by the cost of machine time, which itself depends on the cost of electricity. They are a kind of currency, although the best way to understand them is as digital tokens.

Automated, controlled environments are coming fast. By looking beyond short term speculation, and understanding blockchain as an enabling infrastructure for a connected world, firms like Quantoz will have an important role to play.

Marguerite Arnold is the founder of MedPayRx, a blockchain healthcare startup in Frankfurt. She is also an author, journalist and has just obtained her EMBA from the Frankfurt School of Finance and Management.

Image: Pexels

The Rise of a Fossil Fuel Backed Cryptocurrency?

One of the most important things to remember about a digital currency is that it is just a way of transferring ownership and assets electronically. In fact, for those who are scrambling to understand both cryptocurrency and blockchain, this idea is the first, and unfortunately all too often, the only port of call. That said, it is a decent place to start.

Cryptocurrency uses a decentralized digital communications “protocol” called blockchain to facilitate value transfer extremely efficiently. As a result, the largest banks and governments are now taking it seriously. There are also multiple ideas being developed about how this technology should be used, and what types of assets can be valued and transferred, which has also attracted the interest of the largest energy companies and telcos.

It was inevitable, then, that someone would come up with a way to align the world’s existing fossil fuel reserves with a form of cryptocurrency, enabling a new form of digital currency backed by energy as collateral, rather than gold or any other kind of asset.

In today’s global economy, the US dollar acts as a global currency because that is what barrels of oil are priced in and have been since 1971. It is also why some OPEC states, such as Venezuela, have tried to change the “oil-currency” from dollars to euros. The impact of the current setup is that U.S. monetary policy can have a huge influence on the rest of the world.

This is no doubt one of the reasons, beyond the implications of Brexit and England’s search for a new place in the world, that inspired the London-based entrepreneurs behind Bilur, and helped them attract funding.

Bilur, as described in industry press in early May, is a “new Ethereum-based cryptocurrency that wants to compete with Bitcoin.”

According to founder Ignacio Ozcariz, the CEO of RFinTech, the company behind Bilur, he hopes to create an oil-based cryptocurrency. In his words “[c]rude oil and its derivatives … have been running [the world] during the last wave of the industrial revolution. All of them are primarily energy vectors that, jointly, with the flow of energy in the form of electricity, have driven the unstoppable 20th-century technological revolution. So why not consider energy as the new monetary standard, as it is the base for the technological world.”

This is already a key issue at the heart of existing cryptocurrencies like Bitcoin and Ethereum. Many people support the use and development of these cryptocurrencies because they are theoretically beyond the control of government. In order to control a cryptocurrency, a government would need to invest substantial energy, time, money and programmers in order to fundamentally change the rules of the system. And this illustrates the key issue clearly. Cryptocurrency and blockchain cannot be divorced from a concept of energy as currency. It takes energy to allow the computations to occur. This system cost is then priced into all cyber currency transactions. It is like a minimal processing fee, or ATM charge, for accessing the system.

Energy backed cryptocurrency is entering a new phase because of the debate about global warming. Bilur’s value is tied to oil, but solar is already a considerable player in many parts of the world. That includes in OPEC countries that are struggling to wean their economies off fossil fuel (starting with Saudi Arabia). It also includes India, China and Germany. Connected to blockchain technology, solar energy can be monetized efficiently. This is a field that is taking off, particularly in Europe and China. As a result, a solar-backed cryptocurrency would make a lot of sense. Rather than selling “carbon credits” to allow firms to emit pollution, a “clean currency” might be a better solution for both consumers and investors.

What Does This All Mean?

Regardless of the feasibility of a fossil-fuel backed or gold backed cyber currency (there is a high profile effort afoot in the UK to create a gold-backed UK Royal Mind Gold token), these examples illustrate one thing: cryptocurrency creates a new platform for the next phase of value exchange in a tech-driven globally-connected world.

The ability to generate, transfer, swap and monetize “energy” will be very valuable in the world we are entering. This is also known loosely as the “shared” or “peer-to-peer” economy. There will be multiple attempts to create new currencies. There already have been. Many of those new cryptocurrencies will be backed by an asset in the real world in order to give them a tangible value. However, as with Bilur, the idea that such endeavours are based on ether serves to put a dollar value on “energy/computing time” already. This is because most holders of ether buy them in dollars, and energy or calculated computations of machine time are the basis for Ethereum in the first place.

It is easy to understand why this will be so important. Blockchain connected devices are powered by energy. That energy has to be paid for, and calculating what that energy is worth is going to be the first, most basic discussion. Why? Well, you cannot hook up a block of gold or a barrel of oil to a digital network and get it to work. You can, however, hook up an electric car, washing machine, mobile phone, or solar charging device.

With shifting global currents, unstable national governments, and economic flows of capital between different parts of an increasingly globalised world, it is clear that initiatives to create a new global currency (or several of them) will continue to attract attention, and venture funding.

Here is what investors, market commentators and regulators need to remember. The value of Bilur is tied to oil. Despite Trump’s call to return to a world driven by fossil fuel, however, energy markets and cryptocurrencies based on them are meeting a new age. Questions about valuation and worth of assets – taking into account negative externalities like carbon emissions and the energy cost of accessing the system with them – will dominate market formation, rules and the digital networks upon which all will depend.

Marguerite Arnold is the founder of MedPayRx, a blockchain healthcare startup in Frankfurt. She is also an author, journalist and has just obtained her EMBA from the Frankfurt School of Finance and Management.

Image: Pexels

Blockchain For Managers

No matter one’s professional background, these days it is almost impossible to escape at least a very basic introduction to “blockchain.”

At its core, blockchain has the potential to give every individual access to data, processes, and the ability to transact with others on a scale that was never before possible. From a strictly mid-20th century point of view, the introduction of blockchain is the next step in a future foreseen by Peter Drucker. Many individuals will be self-employed, and the value creation process will be overseen and managed in a way that no longer requires multiple layers of other human beings to be part of the process. It is likely to be implemented by HR departments for employee record and compensation management, and will almost certainly be the final nail in the coffin of mandatory centrally located physical workplaces. It could also be used for proof of work, and as a means of payment using virtual currency such as Bitcoin.

For professional managers, a discussion about blockchain opens up several landmines, none of which are easily dealt with. The reason? The technology will wreak havoc on the managerial class. Many things managers do – and in many industries – are about to be automated out of existence.

Blockchain will create the same kind of career obsolescence for managers in many industries as the self-driving car, automated manufacturing, and automated supply chains will produce for “blue-collar” workers.

Unlike the less educated, lower skilled part of the workforce, however, managers will be tasked with planning their own extinction.

How to embrace that future?

Firstly, as a manager, you need to become an expert on how blockchain can be implemented in your industry. And secondly, you need to step up to the plate, and lead the change in whatever area it is that you work.

For anyone who comes from a non IT background, this might sound like a daunting proposition. However, for the current batch of MBA graduates, usually somewhere between their late twenties and early fifties, this is the task currently at hand. It will be impossible for this group to escape further formal education or work experience that requires them to understand, deal with, or implement blockchain in some form or fashion.

While a good technical background will of course be helpful, understanding how blockchain will impact your industry is much more about understanding your industry, the needs of your customers, and how this new technology might be able to solve problems in new and more efficient ways.

One of the most important things to remember about blockchain is that it is uniquely suited to tracking, monitoring and creating data in process-heavy parts of an industry. As a result, blockchain will initially be useful in banking and financial services, but will also quickly take hold in supply chain management.

Digital natives and those who have adopted this new technology because of the demands of working life (Gen X in particular), will have little trouble understanding how blockchain can be applied to these kinds of use cases.

What Are Concrete Steps I Can Take Now?

Human work and organization is in the early stages of being redesigned in a way that will be every bit as transformative as the industrial revolution was in the 19th century.

Revolutions, by definition, cannot be managed. Change, however, certainly can be.

One of the first steps to riding the wave of change is to accept that the world is rapidly transforming and that blockchain is one of the key drivers.

To that end, there are a few things you can do to prepare yourself.

  1. Take a course on blockchain. Consider a specialized course offering for managers in a banking or finance center where you will have access to the best teachers and thought leaders in this space including but not limited to IT experts (which often include lawyers, academics, regulatory agencies, and people in leading industries) where this is hitting first.
  2. Look on Meetup for groups interested in tech. This is a good way to meet other professionals who have a common interest.
  3. Think about vital processes in your industry and how blockchain might be used to improve them.
  4. Design a flow chart with one process you believe can be improved by a blockchain application.

Embracing blockchain will help you to understand the technology and identify ways that you can manage change within your industry, and be a positive driving force for innovation.

Marguerite Arnold is the founder of MedPayRx, a blockchain healthcare startup in Frankfurt. She is also an author, journalist and has just obtained her EMBA from the Frankfurt School of Finance and Management.

Image: Pexels

What Does Blockchain Mean For HealthCare?

There are many people who cringe when they think about what is going to happen to healthcare under a Trump administration. Healthcare is a subject which has wormed its way into everyday conversation since Ronald Reagan was in office. Back then “entitlements”, specifically social security, were a supposed “third rail” that could not be touched, whittled down or even frozen.

Fast forward to the present.

Regardless of what you think about immigrants, poor people, old people, sick people or children, there is one fact that is inescapable. The basic notion of the “welfare state” is being re-examined. It is not just the United States where this is a hotly contested issue.

The drivers? Exploding costs and aging demographics along with creaky infrastructure and outdated service models.

The scandal facing the NHS in mid May over a massive hack made possible by outdated software is just one example of how fragile established western healthcare systems currently are.

That the system needs to be fixed is not controversial. How to fix it is another issue.

In the United States, there is huge pressure on Republicans to overhaul Obamacare. And it is fair to say that there are no easy fixes to a system in the United States that is unbelievably complex, expensive, and which has gaping holes in it. Out of desperation, one proposal to cut costs in the United States is to incorporate blockchain technology. In Europe, where the social state as a concept has not died, blockchain has already begun to be examined as a cost-saver in both the public and private insurance industry.

Blockchain could help to reduce healthcare costs. One of the biggest drivers of healthcare costs in the United States and other places is the administrative time, cost and paperwork necessary to run a regulated industry. A key benefit of using blockchain will be lower costs of healthcare administration due to economies of scale that will provide much needed relief to state and national budgets. This means that the forecast explosion of costs might be better contained.

Rising healthcare costs are further complicated by privacy laws that aim to protect health related information. In the United States, this falls under HIPAA. Otherwise known as the Health Insurance Portability and Accountability Act, this Clinton-era legislation has very strict rules about how health records can be shared. Blockchain in this environment provides a secure way for databases to talk to each other, and offers a solution to the privacy conundrum laid out for IT professionals in this space since 1996.

For this reason, introducing blockchain represents one of the first true opportunities to “fix” a horribly broken system – in the U.S. and elsewhere.

In Europe, where the concept of inclusive healthcare is akin to a sovereign right, this conversation has already started.

Implementing blockchain will not simply be a matter of sending “bitcoins” to doctors for payment. It will be about the widespread use of “smart contracts”. The earliest use cases across the industry are mostly related to health record management and access, as well as insurance claims.

Blockchain may be a secure technology, but creating a fully digitised healthcare system raises serious privacy concerns. If people are enrolled in systems where they can be tracked for life, what happens to that information and who has the right to access it? How will such interactions be designed to protect the individual in a world where nothing, suddenly, is truly private. How can people with pre-existing medical conditions be sure that their information won’t fall into the hands of insurance companies who will use the information to charge higher insurance premiums or to deny coverage?

These new healthcare systems will need to be designed with privacy issues kept firmly in mind. An old and crumbling system is about to be replaced with a technology whose impact is as yet largely unfelt. And for the most part, it will be Generation X and Y who will be tasked with building these systems. The privacy rights of young people and many voiceless individuals on the fringes of the system will be affected. This could serve as a clarion call to those who have long been left out of the healthcare debate, but more likely it underlines the importance of safeguarding the privacy rights of groups who are presently unaware that their fundamental rights are hanging in the balance.

In sum, blockchain will absolutely play a defining role in healthcare reform. How and where it will be applied is still unclear. However, it is likely to play a central role in redesigning healthcare systems for the 21st century in America and beyond.

Marguerite Arnold is the founder of MedPayRx, a blockchain healthcare startup in Frankfurt. She is also an author, journalist and has just obtained her EMBA from the Frankfurt School of Finance and Management.

Image: Flickr

Investing In Cryptocurrency

Cryptocurrencies are digital assets or “tokens” – akin to the idea of money – specifically designed to take advantage of the architecture of the Internet. Unlike traditional currency they have value not because of the guarantee of a financial institution or government. Instead, they have value for three reasons: their ability to be accurately “confirmed” by the computers on a particular network, the value that is placed (or misplaced) on them by the market, and as a consistent way to measure the price of goods within a blockchain network.

Cryptocurrency versus traditional currency

In some ways, cryptocurrency works very similarly to a traditional currency or a precious metal like gold. The worth of the US dollar, for example, as a means of exchange, is valued not only in term of what a dollar can buy in real terms, but also by its relative worth against other currencies.

A key difference, however, between traditional currency and cryptocurrency, despite Bitcoin’s recognition as an “asset” by the IRS and as an accepted currency by the EU, is that the supply of cryptocurrency is not controlled by a central bank, but rather reflects the actions and perceptions of many independent individuals across a large number of jurisdictions. This has the potential to upend basic models of political economy of the last century (if not the last several hundred years of Western history).

Bitcoins, for example, are mined at a predetermined rate each time a user of the network discovers a new block (currently 12.5 bitcoins are created approximately every ten minutes) and the number of bitcoins generated per block decreases over time. Ultimately, the total number of bitcoins in existence is never supposed to exceed 21 million.

The real impact of Bitcoin beyond the hype is that it has the potential to diminish the need for central banks. It also has the potential to reduce the role of financial intermediaries like retail banks. Cryptocurrency was designed as a form of electronic cash to allow individuals to transact without going through a financial institution. This is likely to have a profound impact on the global financial system, financial markets, and the banking industry.

When it comes to buying other kinds of cryptocurrency, such as Ether, which was not created as a traditional “currency” but rather to pay for computations along the Ethereum network, the investment analysis becomes more complicated. In a very real sense, the “value” of Ether is more like the cost of a barrel of oil, a watt of electricity or any other mineral that must be “mined” or processed in some way, and then used to make a piece of machinery function – in this case a computer.

Cryptocurrencies are not immune from market forces or monetary policy, starting with the fact that you still need traditional currency to buy them. Ultimately, the buying power and inherent value of a cryptocurrency will be affected by the real economy including by things like inflation, exchange rates, global electricity prices, and the speed of the computing networks through which the cryptocurrency is created, traded and transferred. In the case of Bitcoin, for example, a market price is created against traditional currencies like the US dollar and renminbi because the main buyers of Bitcoin do so in dollars and yuan. To the extent that the value of these traditional currencies continue to fall with inflation, the price of Bitcoin will continue to rise over time.

Investment risks

The value of cryptocurrencies are not controlled the same way that fiat currencies are, for example by a decision of a central bank to increase the money supply. However, the cost of the resources that are used to create, price and transfer cryptocurrency may still be controlled on a national basis.

Potential investors should carefully consider the risks of cryptocurrency investing, some of which are listed below:

  1. Lack of Adoption: There are many cryptocurrencies in existence. The more people that use a particular cryptocurrency, the more likely it is that other people will be willing to use it also. In short, this means that cryptocurrencies benefit from “network effects”. Investors need to be aware that if a cryptocurrency fails to gain critical mass, or if it is superseded by a technically superior or more popular cryptocurrency, then its value may decline rapidly.
  2. Market Volatility: Potential investors in bitcoin would be wise to tread cautiously given the high levels of volatility in bitcoin’s market price over the last few years. This means that even if you are correct about the long term direction of bitcoin’s market price, you could still lose money in the short run. As John Maynard Keynes noted “the market can remain irrational longer than you can remain solvent.” Potential investors should keep in mind that purchasing bitcoin with the hope of achieving short term capital gains is a form of high risk speculation, similar to gambling. Professional traders manage this kind of market risk by following the “2% rule”; a trading practice which suggests that an investor should never commit more than 2% of her total capital to any one trade. Further, manipulations of the price and supply of bitcoin have occurred regularly.
  3. Security Risk: Cryptocurrency is digital, and so there are risks posed by hackers, malware, or system failures. For example, anyone who has the private key to a bitcoin account can transfer bitcoins in that account to any other account. This poses a significant risk since all bitcoin transactions are permanent and irreversible. Many experts recommend storing bitcoin in a digital wallet that is not connected to the Internet.
  4. Increased Regulation: Cryptocurrency could be a competitor to traditional currency, and may be used for black market transactions, capital flight or tax evasion. There is also no reason why a government could not move to control the supply of a cryptocurrency in the future either by passing legislating, buying up enough of it to change the rules, or by incentivising programmers to change them.
  5. Lack of Liquidity: Liquidity refers to how easy it is to quickly convert an asset into cash without a significant drop in the market price. The more difficult it is to buy and sell a cryptocurrency, the greater the risk for an investor if they need to sell in a hurry. Bitcoin can be traded on various bitcoin exchanges, which makes it easier to buy and sell, however it has still not achieved mainstream adoption.

So, where should you invest?

The question of what cryptocurrency to invest in is a loaded one. It depends what one’s goals are. If the aim in buying cryptocurrency is to use it to buy specific goods and services, or to transfer money from one place to another, then the purpose is very different from someone who is merely trying to make money by speculating in the short term volatility of a cryptocurrency’s market price.

As the above discussion indicates, there are many issues to consider. For that reason, investing in a cryptocurrency is a far more complicated decision than investing in other kinds of assets – and the risks of the same are also not yet fully and widely understood. Tread cautiously.

Marguerite Arnold is an entrepreneur, author and third semester EMBA candidate at the Frankfurt School of Finance and Management.

Image: Pexel

What Is Cryptocurrency?

While “Bitcoin” has become a household word over the past several years, the concept of what cryptocurrency actually is goes far beyond traditional concepts of “money”.

First invented by the individual or group of people known as Satoshi Nakamoto in 2009, the original concept was to create a decentralized automated cash machine (in very simplified form) that would allow anyone to send assets of value to any other person whereby those assets would not need to pass through or be controlled by any financial intermediary. In other words, it was an attempt to build another kind of currency uncontrolled by any central bank or government. Further, such transactions would be recorded by the computers connected to the network so that they could be verified by anyone who had access to it.

When seen as “money” cryptocurrencies pose a very real challenge to the role of central banks in that they essentially establish a new way for value to be created and transferred – globally.

How many cryptocurrencies are there?

At this point, there are too many to count.

Cryptocurrency is given value both by its creation (or mining) and by the other tools that are used to store, access, transfer, trade and transact with it. For example, Bitcoin, which is the oldest form of digital currency, is now traded on exchanges. Its reflected value is usually calculated either against the dollar or the yuan (which most people use to “buy” Bitcoins).

However, it is also not quite that simple. The inherent monetary value of Bitcoin as expressed in traditional currency terms is also impacted by how many people want to hold Bitcoins at a certain point in time (for whatever reason) and further by how many people are using Bitcoin for some other purpose (for example, transferring Bitcoin to another place or using it to buy another asset).

That said, the way that institutional entities (such as the IRS in the United States or the European Union) recognize Bitcoin as a form of “asset” is very much reflected in their understanding of cryptocurrencies as a form of “cash” or monetary asset, valued by reference to local currency. In other words, the inherent value of Bitcoin as understood from the perspective of agencies and governments who recognize and use fiat currency is to treat Bitcoin’s value as an asset understood in terms of local fiat currency – as if Bitcoin’s entire “value” was like dollars, gold or oil.

The two most widely recognized forms of cryptocurrency that are commoditized currently are Bitcoin, which is the oldest and most recognized form of cryptocurrency, and Ether – the “gas” as it were that makes the Ethereum network tick.

What is the inherent “asset value” of Cryptocurrency?

The short answer is that there isn’t one. It can be the value assigned to the currency by what is paid to acquire it, what kind of other asset worth it can be used to buy, how much it costs to create or “mine” such currency, or the perception of its worth based on its scarcity or expected future value.

Ether, as much as it is beginning to be traded, was not envisioned as a “currency” but rather a way to pay for computer processing power to effect another transaction along the Ethereum network. “Digital tokens”, of which Ether is an example, can be priced by the amount of electricity and computing time necessary to either create them or to perform a specific function along the network (such as recording a transaction). In other words, “cryptocurrency” is the juice which allows connected devices to do what they were programmed to do.

It remains to be seen how cryptocurrencies will affect national economies – in fact, the concept of what a traditional economy is could easily be upended (which is the fear of the central banks). Regulation of cryptocurrencies is still beyond the reach, if not ability, of traditional economic controls. This is part of the allure of cryptocurrency. What its ultimate asset value will be, however, is still very much an unknown and incalculable concept.

Marguerite Arnold is an entrepreneur, author and third semester EMBA candidate at the Frankfurt School of Finance and Management.

What Is Blockchain? A Beginner’s Guide

The year 2017, for everything else it may or may not be, is already heralded as “The Year of Blockchain.” But what exactly is “blockchain” – and why is it slated to be the debutante of the ball across multiple industries?

Essentially blockchain is a way of connecting distributed databases to each other. In other words, it connects databases on machines that are not otherwise connected to each other in one firm or location. Further, it is also a way for these databases to “talk” to each other – to issue and receive commands and data in both encrypted and hashed form to accomplish functions or tasks. Blockchain is, in effect, a new kind of database, which writes “ledger entries” in different locations, but which can then be accessed by the network of computers to confirm that transactions did occur and reconcile these transactions.

It creates what is widely known as a “trustless” network – in other words, it removes the need for trusted third parties like banks or financial institutions to “enter” or reconcile entries, however this is a bit of a misnomer. The role that was formerly played by trusted third parties is now being played by the blockchain network itself. The “trust” that is implied is that the network is stable and the code – or protocols – of the network can in fact function as they are intended to. While blockchain may remove the need for trusted third party institutions, some of the newer blockchains (including Ripple) are based on the idea of “trusted” or “authorized” parties transferring data to one another. This allows a preselected group of “trusted parties” – in this case banks – to lower transactions costs, reduce the chance of fraud and remain competitive while creating in effect a private network.

The most revolutionary aspect of blockchain is that it moves the role of verification (of a task, payment or other action) from a single entity (such as a government or corporation) to multiple computers along its network. While a government or corporate entity (or even single person with enough wealth and power) could conceivably buy the majority of Bitcoins on the Bitcoin network and then hire programmers to change the rules of the network according to its own mandate, this is currently seen as a remote possibility.

The medium of exchange in the world of blockchain is cryptocurrency – tokens that have some value determined either by (a) direct market forces as in the case of Bitcoin or Ether, or (b) by the cost of the computing power required to produce them – in which case they is known as either a “tokens” or “altcoins”.

The workhorse of blockchain is the “smart contract” – which is just another way of saying that after a token has been “paid” for a particular purpose, then a certain action or transaction is triggered. For example, if Jane wants to send Bob five Bitcoins, she can utilize the Bitcoin network to do so (as long as she and Bob both have “wallets” connected to the network) and further, a record of that transaction will be recorded in all the computers in the network. If Jane is expecting to receive, in exchange for those five Bitcoins, ten shares of Bob’s company stock, he will be required to send her the digital token assuring her that the shares have been transferred to her before he can accept the five Bitcoins.

According to Nick Szabo, a cryptographer and “father” of smart contracts, an idea which he explored in a paper published in 1998, smart contracts are “a set of promises agreed to in a meeting of the minds [which] is the traditional way to formalize a relationship.”

Said another way, smart contracts work within the protocols (or algorithms) created to link the chain of databases together, to execute how such computers communicate with each other.

There are many different use cases for this kind of technology – although it has made its first impact in the world of finance. According to the Chamber of Digital Commerce, which has just published a report “Smart Contracts: 12 Use Cases for Business and Beyond” the industries (beyond finance) which are likely to see rapid deployment of the technology in the near future range from a further development of the concept in the financial industry to insurance and the healthcare industry.

What deployment of blockchain technology really means in the immediate future, is that the world will become more interconnected, that manual processes in many industries will be automated, and that the “costs” associated with these transactions will fall dramatically.

That said, it is far too early to predict what the adoption of blockchain will accomplish – just as it was essentially impossible to see where and how the Internet would change the nature of communication and community.

Suffice it to say, however, that by 2020, the world will already be a very different place because of blockchain’s deployment. By 2025, according to top consultants like Deloitte [pdf], the banking industry (at a minimum) will be profoundly disrupted.

Marguerite Arnold is an entrepreneur, author and third semester EMBA candidate at the Frankfurt School of Finance and Management.

The Far Reaching Impact of Blockchain

Blockchain, the underlying technology used by Bitcoin, has implications that reach far beyond the financial services community and banks. This is where new development and implementation may have focussed so far. However, as the technology and its implications become better understood, it will rapidly expand to new industries and verticals.

Blockchain systems operate as a kind of distributed database that store immutable (that is, non-changeable and verifiable) transactional records stored as “blocks” of information. Each block contains a timestamp and is linked or referenceable to a previous block and hence forms part of a larger “block chain”. Blockchains can either be public, private, or a combination of the two, with information accessible to users via “keys”.

Blockchain also works very much like a large distributed, non-centralized network. Each “node” of the network is a processor (or computer server in other words) that stores each block of information processed by that node. Once processed or verified, a transaction record can then be shared with other nodes in the network. This could be anyone in the case of a public blockchain, or only authorized users in the case of a private blockchain.

Blockchain technology has been applied in the finance industry in the payments space. Ripple, for example, allows banks to transact between themselves and with individuals globally by creating a payment platform that allows banks to settle payments in different currencies in real time. Individual payments and currency settlement calculations are made by a decentralized network of processors located at the banks and clients all over the world using Ripple’s payment protocol.

However the technology has many other uses – starting with the ability to better monetize alternative energy to the digitisation of insurance contracts. The insurance industry, in particular, is starting to get serious about investigating, if not yet implementing, blockchain solutions in order to streamline paperwork, manage supply chain issues if not insurance contracts overall, accelerate the processing of insurance claims, and improve the auditability of transaction records.

In fact, the real juice behind blockchain is not bits and bytes, but in fact how events are triggered by electronic code that translates contractual relationships into action – or so-called “smart contracts” that are executed within blockchain networks.

Smart contracts – or the computer protocols that facilitate, verify and enforce agreements – are actually the heart of this revolution. They represent a unique blending of technology and law, usually with regard to payments – but not limited to them. Smart contracts are actually coded binary language triggers along the network that cause certain things to happen when specific conditions are met. For example, Customer A authorizes payment to buy a convertible bond. When market conditions warrant, the bond “smart contract” will then automatically pay Customer A the required coupon payment, convert the bond into a certain pre-determined number of shares, or take some other required action.

Despite the hype, however, there are still vast unknowns – namely the ability of coders to accurately translate legal requirements into transactions that can be understood and retranslated by people – starting with regulators. In terms of payment or other easily defined contractual obligations (such as trade confirmations), the concepts are relatively straightforward. However, as anyone who has looked at even the simplest contract knows, there are many parts of a contract that are not easy to translate into code from natural language – much less decipher downstream. This includes everything from indemnities, warranties, covenants, confidentiality, digital signatures and enforceability if not other pieces in between.

What happens, for example, when the convertible bond bought by Customer A does not react to the right market conditions? Or what happens if the electronic triggers in the smart contract for this convertible bond are activated by the wrong set of market conditions? How will lawyers without coding experience be able to catch such errors? And how will coders without a legal background know what to look for to find them?

While understanding whether payment has been made (for example) is relatively easy to understand by all parties, understanding whether a service has been correctly provided, particularly when translated into and out of digital code, represents a quagmire that is already coming – and with no easy answers.

The legal enforceability of at least part of what smart contracts represent is not far away. Payment and exchange of services or data is the easy part. Redefinition of contractual relationships, however, is where the entire conversation starts to get murky. That is nowhere more obvious when applied to a specific part of “contract” law – namely civil rights.

For those who do not believe that civil rights are in fact a contractual relationship relating to basic property rights (including payment), values, and perhaps even the meaning of citizenship itself, then look no further than perhaps one of the most overlooked parts of civil rights and contract law in the United States.

The Civil Rights Act of 1991, also known as 42 U.S. Code §1981, is a United States labour law and the most recent codification of civil rights in America. In effect, it equates the contractual value of minorities and people with disabilities with that of white men.

In other words, civil rights are the mandatory equalizing of the contractual value of individuals enforced by the state. But that state is only one country.

What happens if there is a contract, for example, between an English multinational and an American citizen for work being performed in Hong Kong?

Do American civil rights laws apply?

Which set of laws should govern a smart contract?

If smart contracts expressly choose New York law, for example, this could mean that the best of American labor and civil rights laws are automatically exported to other countries. But it could also mean that contractual inadequacies, due to a failure to expressly choose a governing law, lead to unexpected results and ultimately undermine basic notions of equality and civil rights.

Further, what is the appropriate forum for resolving disputes under a smart contract?

In a world where contracts that affect payments as well as the terms of employment are becoming increasingly undecipherable, will smart contracts, which can also be used to govern labour agreements, be literally rewritten to eviscerate the concept of equal pay, access to healthcare, and perhaps even the right to negotiate a contract in the first place? And if smart contracts hide or distort important contract terms, how will consumers actually be able to tell if they have gotten what they paid for?

These are some of the big issues which face the entire discussion around blockchain. They are not widely part of the vernacular so far. However, just as bitcoins are electronic “digital currency”, block chain, the master regulator of such systems, could easily become a place where the contractual elements of pay, consumer and civil rights are either enshrined, or eviscerated.

Marguerite Arnold is an entrepreneur, author and third semester EMBA candidate at the Frankfurt School of Finance and Management.