Sunday, 15th January, 2017
| Bring it on
Two separate announcements this week reveal how blockchain will go mainstream. What are they? What do they have in common? What do they imply? (Answers in THE TAKEAWAY below.)
TOP 5 STORIES ON COINDESK Fighting back. Jeffrey Berns explains the motivation behind his attempt to block the IRS's request for access to Coinbase's customer information. He highlights the dubious legality of the summons, and points out the security risk of having personal trading information in the government’s hands. Furthermore, he believes that we should all be concerned about the consequences the IRS actions could have on future innovation and growth. Read more.
Calling China. We spoke to several China-based bitcoin traders and exchange representatives to get a feel for how its cryptocurrency sector was recovering from the central bank's decision to more actively oversee industry businesses. All expressed their conviction that increased regulation would be a boon for the sector, and confirmed that they are not concerned about potential government action. They did, however, acknowledge a decline in customer growth and trading activity. Read more.
Déjà vu. Along the lines of “you can never step in the same river twice”, we compare the 2013 and 2017 bitcoin price rallies. While on the surface they may appear similar, they were actually very different. And Chris Burniske, blockchain products lead at ARK Invest, goes into more detail on the lower volatility this time around.
What’s in a name? Bitcoin exchange BitX is rebranding as Luno. CEO Marcus Swanepoel confirmed that the company remains focused on bitcoin, but wants to broaden its services beyond that of an exchange. As part of an expansion into Europe, Luno will join the regulatory sandbox set up by the UK’s Financial Conduct Authority. Read more.
Big bucks. R3’s founder and CEO David Rutter told CoinDesk that his firm is close to finalizing the blockchain sector’s largest funding round to date. While the amount has not been confirmed, the target was $150m. Rutter also revealed that he will be relocating to the London office, to be closer to the hub of the tech development team. Read more.
Just over two weeks to go until CONSTRUCT, our summit for developers and senior engineers!
With exclusive in-depth talks from founders and high-level execs from Zcash, Hyperledger, MIT, the Ethereum Foundation, Blockstack, IBM and more, CONSTRUCT gives you the opportunity to hear first-hand how the sector is evolving. Join us in San Francisco, USA from January 30-31, and network with industry leaders to discuss network security, access management, and financial services.
😎 APPLY TO ATTEND 😎
QUOTE OF THE WEEK “If you announce that you are updating the database software used by a consortium of banks to track derivatives trades, The New York Times will not write an article about it. If you say that you are blockchaining the blockchain software used by a blockchain of blockchains to blockchain blockchain blockchains, The New York Times will blockchain a blockchain about it.” – Matt Levine, “ Bank Blockchains and an Alibaba Box”, for Bloomberg |
THE TAKEAWAY
This week we caught a glimpse of how blockchain technology will go mainstream.
It won’t be through killer apps developed by startups, consortia rolling out a consensus solution, nor breakthroughs in privacy or security.
Rather, it will happen when large incumbents in the financial sector cautiously roll out blockchain adaptations of existing processes.
While that may not sound exciting, it is as big a deal as we’re going to get in the short term. We need to remember that financial institutions are not generally known for their flamboyance or risk-taking. And we need to bear in mind that only the incumbents have the reach to test the technology at scale in the short-term.
Two recent events indicate that this process has already begun.
Earlier in the week the Depository Trust & Clearing Corporation (DTCC) announced its intention to pass the post-trade processing of credit derivatives onto the blockchain in 2018.
A few days later, the bank-owned cooperative SWIFT revealed that it was launching a proof-of-concept to test the blockchain’s impact on real-time reconciliation of international accounts.
The two announcements have remarkable similarities. - They both come from structural giants owned by their members or users, ensuring buy-in from most of the main sector participants.
- Both instigators dominate their respective activities. DTCC is the largest central securities depository in the world, and provides processing services for about 98% of all credit default swaps. Swift is the world’s largest electronic payment messaging system, used by more than 11,000 financial institutions.
- Both SWIFT and DTCC are founding members of blockchain consortium Hyperledger, which indicates an interest in experimentation and collaboration.
- Both announcements may seem bold and sweeping, but they are actually exercises in caution.
This last point merits further consideration, as it is likely to be a key factor for success. - Both DTCC and SWIFT plan to combine the new technology with existing systems. Even after the new platform goes live in 2018, DTCC will continue to run its old one in parallel. SWIFT plans to combine the blockchain under trial with its current identity protocol and public key infrastructure.
- Both plan to make adoption optional. This should reassure those members and users who prefer a “wait-and-see” approach, and allows for gradual roll-out across their respective sectors.
- In neither case are we looking at new, innovative services. We’re looking at potential improvements on current processes.
- In both cases, blockchain technology will not initially be used for actual settlement or payments, to mitigate systemic risk. The focus will be on the handling and reconciliation of information, not money.
While blockchain enthusiasts may be disappointed at the limited scope of the applications, we need to bear in mind that for the technology to have significant real-world impact, it needs broad implementation in a conservative industry. Also, it needs regulators to be comfortable with the pace of change.
Assuming DTCC migration goes as planned and/or the SWIFT project produces good enough results to enter production, one thing is certain: we are looking at a tipping point.
Whichever becomes a reality first, a large portion of the financial sector will be using blockchain technology to simplify processes and reduce costs. This is likely to trigger a domino effect, with other securities markets and clearing services adapting to keep up.
Increased confidence will trickle over into further blockchain applications for payments and settlement. Substantial amounts of capital will be freed up. And millions of users will get used to the subtle efficiencies of a new technology as it quietly and cautiously powers the beginning of a fundamental structural change.
– Noelle
More background:
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OTHERS ARE TALKING ABOUT...
The fuss over China seemed to die down a bit in the mainstream press this week. Still, it was refreshing to read CNBC’s editorial on how this really is no big deal.
Elsewhere, VentureBeat published an overview of the blockchain’s impact on clean energy. TechCrunch saw a future of decentralized internet. And the Wall Street Journal showed how the US Department of Homeland Security is testing a blockchain application that will secure borders by making cameras and other data-gathering devices tamper-proof.
The Economist provided a good overview of the fraught field of blockchain patents. The FT trumpeted that bitcoin was the best performing currency of 2016. And Quartz helpfully clarified bitcoin trading jargon (in case you want to hodl without being #rekt because of the Choyna news).
UPCOMING EVENTS SECTOR REPORTS
WHAT WE’VE BEEN UP TO Just a couple more weeks to go before we head out to sunny California (where I hear it’s been raining cats and dogs) for the launch of our Construct conference. We have an impressive line-up of founders, CTOs, CEOs and other really smart people for two intense days of workshops, panels, demos and networking.
So far we’re expecting about 400 developers, engineers and industry leaders – if you’re one of them, we’re really excited about seeing you there!
(Plus, a couple of days out of the office won’t hurt…)
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