Unintended consequences

Our weekly opinion piece and overview View this email in your browser March 19th, 2017 Bigger than we thought The launch of a new blockchain-based P2P lending platform is likely to affect far more than supply chains. It could end up changing the nature of finance in China. (Find out more in THE TAKEAWAY below.)      **CONSENSUS 2017** Plan your Consensus journey with more than 64 things to do May 22-24, New York City  ☀️️️ REGISTER HERE ☀️️ TOP TRENDS ON COINDESK New applications Among the many blockchain implementations to come to light this week, a few stood out for originality. Decentraland hopes to use the technology to show us that it is possible to really own something in virtual reality. Nasdaq is helping to build a blockchain marketplace for trading digital media advertising contracts. And eight Chinese banks have teamed up to reduce fraud and increase speed in the receipts transaction market.   State steps US states continue with their tentative steps toward blockchain implementation and regulation. Delaware has proposed legislation that would amend the state's General Corporation Law to account for blockchain use in business record-keeping. Alaska wants to bring companies that handle digital currencies under the state's money transmission laws, and require them to apply for a license.  Illinois, on the other hand, went all out this week, announcing a comprehensive multi-agency program to educate private businesses and public organizations on the technology's potential.   Fast-track Dubai The Emirates city is getting closer to becoming the world's first "blockchain-powered government", with some pilots expected to be operational by next year. The task is daunting, but this week Dubai named IBM and ConsenSys as blockchain partners and advisors. The high level of expertise, combined with strong government support and a relatively thin bureaucracy, should help to accelerate the migration of official processes to blockchain systems.   Ethereum surge The price of ether, ethereum's token, more than doubled in price this week to reach an all-time high. According to market analysts, possible reasons include bitcoin's scaling troubles. CoinDesk spoke to OTC traders, who point out that institutional investors are taking an interest. The Enterprise Ethereum Alliance continues to attract attention, with blockchain startup Bloq the first new addition since the launch last month.   See all CoinDesk stories QUOTE OF THE WEEK "The searching-for-the-new-new-thing, what-have-you-done-for-me-lately mindset of so much of the tech industry tends to equate a period of slow grinding with stagnation and death. This is not so." – Jon Evans, "Bittercoin: true blockchain believers versus the trough of disillusionment", for TechCrunch   THE TAKEAWAY  When one of the world's largest corporations gets together with one of its largest P2P lenders to develop a blockchain project, you can almost hear the market sit up. Chinese conglomerate Foxconn has joined forces with P2P lender Dianrong to launch a blockchain platform for working capital. The benefits to supply chains are clear: smoother cash flows for suppliers will strengthen their liquidity, lower their costs and avoid delays in delivery due to lack of funding. What is being largely overlooked, however, is the potentially huge impact this development could have on a different sector: finance.   According to Dianrong, millions of small suppliers do not have access to bank finance and have traditionally had to rely on invoice payments or private loans to fund working capital. The massive latent demand for alternative financing (combined with investors' hunger for returns greater than the meager rates paid on deposits) partially explains the country's explosive growth in marketplace lending. China has the largest P2P sector in the world, with over 2,400 platforms. The industry is currently undergoing a shake-up, however. A combination of high-profile scandals, intensifying regulation and an increasing default rate is encouraging a contraction in the number of platforms. A multi-agency government report released last month warned that as many as 90% are likely to close over the coming months.  As investment migrates to the stronger P2P lenders, the pool of potential borrowers shrinks. Unlike most of their younger and smaller peers, reputable marketplace finance providers rely on credit scores, a practice that tends to exclude small businesses with little data and no collateral. More funds chasing fewer opportunities will lower the potential returns and weaken the profitability of the sector as a whole. Introduce a new segment of borrowers, though, and the outlook changes. The opportunity to lend to entities with a better-than-average risk profile at a reasonable return is the 'holy grail' of marketplace lending. Businesses are generally safer bets than individuals, especially if they have validated invoices in hand. The appearance of a platform that not only gathers these borrowers but can also verify their activity and projected income will open up new opportunities for lenders. In addition, the ripple effects of smoothing cash flows all along a supply chain are bound to boost performance and production, which should further increase the demand for financing. The result will probably be an even greater inflow of funds into the sector as its reputation improves. Furthermore, a greater concentration of marketplace lending activity and a more reliable flow of available data will make it easier for regulators to shine a light on 'shadow banking'. This could accelerate the inexorable shift away from traditional finance and eventually blur the boundaries between the two. The emergence of a new outlet for funds could even end up affecting international capital flows. The central bank has long been struggling to stem the tide of money moving outside China in search of better returns. An appealing domestic alternative that has the added benefit of boosting Chinese manufacturing is likely to attract the support of the authorities, ushering in a slew of financial and strategic incentives for platforms and borrowers. And, of course, for blockchain development. The alternative lending sector is still a tiny part of the overall economy, and blockchain investment is still a miniscule part of that. However, there are no small numbers in Chinese finance. Although the project was designed for supply chains, its eventual effects could follow the law of unintended consequences, shaping trends in finance and beyond. - Noelle MORE BACKGROUND: IBM Tests Blockchain for Supply Chain With India's Mahindra Group Why a New Small Business Blockchain is Actually a Big Deal IBM's Biggest-Ever Blockchain Trade Finance Trial Could Go Global The World's Largest Shipping Firm Now Tracks Cargo on Blockchain   Share Tweet Beyond CoinDesk... OTHERS ARE TALKING ABOUT Yet again, another packed week in blockchain content. TechCrunch reviewed the state of the blockchain industry after the setbacks of 2016, and concluded that great stuff is happening, but slowly. MIT Technology Review published a profile of the recently launched Congressional Blockchain Caucus. American Banker helpfully detailed the difference between blockchains and distributed ledgers. Quartz profiled Deep Mind's need for trust, and the use of bitcoin as a means of payment. Wired covered the growth and ramifications of ICOs The Harvard Business Review upped its game, this week publishing four good articles that look at the potential impact of blockchain technology on the sharing economy, loyalty programs, global supply chains and digital identity. Bloomberg also got busy, with an updated account of the scaling debate, an overview of the blockchain scene in India, and a discussion of the (possibly) upcoming bitcoin fork. UPCOMING EVENTS March 20 – Critical and Emerging Issues in Blockchain – Toronto, Canada March 20-21 – The Healthcare Blockchain Summit – Washington, DC March 21 – Blockchain: Debt Capital Markets – London, UK March 28 – The Blockchain Summit 2017 – London, UK March 29-30 – World Exchange Congress – Budapest, Hungary April 6 – BlockShow Europe 2017 – Munich, Germany   WHAT WE'VE BEEN UP TO   Our research team has been burning the midnight oil, and you've probably noticed the results in our broader product range. We're inserting snippets of our exclusive content in the Daily Newsletters (including timely insights and cool charts that aren't in any report), so be sure to check them out. And, as always, we welcome your feedback! Just hit "Reply" to any of the Newsletters and let us know what you think. Copyright © 2017 CoinDesk, All rights reserved. You're receiving this email because you subscribed for updates on our website. 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