Blockchain can be catalyst for a more inclusive world (as published in South China Morning Post on May 18, 2019)
South China Morning Post
Blockchain can be a catalyst for a more inclusive world
By Emir Hrnjic and Nikodem Tomczak
May 18, 2019
A lack of financial inclusion is a significant cause of social inequality in the world. The World Bank considers access to useful and affordable financial products key to reducing extreme poverty and the Group of 20 economies recently committed to efforts aimed at advancing financial inclusion worldwide.
But while 2 billion people in the world are unbanked and lack access to financial services, two-thirds of them have access to a mobile phone with internet connection. This enables access to blockchain technologies, which may in turn provide some unique and promising solutions to creating a more inclusive world.
Blockchain is an open and decentralised technology that enables electronic transfers of value without intermediaries and is, by design, transparent, inclusive and censorship-resistant.
In fact, blockchain has the potential to eliminate traditional divisions across societies, age and gender, whilst also erasing geographical, cultural and jurisdictional restrictions and strengthening economic resilience.
A lack of proper personal identification and documented property rights remains one of the main reasons for financial exclusion.
However, blockchain technology can overcome this by holding tamper-proof information about individuals, thus unlocking access to financial services. Furthermore, the ability to register and retrieve property rights in developing countries should increase social mobility and improve living standards.
On a global level, blockchain technologies should increase transparency and fraud detection, while reducing corruption and poor management of resources in developing economies.
This will be of even greater importance in the era of global projects such as the China-led Belt and Road Initiative that spans dozens of underdeveloped countries. Such projects demand improved coordination of economic activities.
In these contexts, promoting accountability and transparency can reduce problems with trade disputes while lowering barriers to entry for parties from many different countries.
Many developing nations have near-universal access to 3G mobile networks. Coupled with high mobile phone ownership rates, this offers the potential to enable many people to interact with blockchain technology and boost financial participation.
Since the cost of traditional money transfers can be as high as 20 per cent, bypassing the banking system significantly reduces transaction costs.
An example of this is Kenya’s M-Pesa mobile payment system, which has opened access to banking and financial services to anyone with a mobile phone.
This access to mobile money has had a profound impact, helping to lift almost 200,000 Kenyan households out of extreme poverty.
However, the impact of blockchain on financial inclusion is not without potential pitfalls.
Running the decentralised blockchain can be very costly, demanding resources, such as dedicated equipment and high electricity consumption to secure the network.
Furthermore, a full understanding of how the technology works may be necessary to build up a true trust-based relationship, which can be built through education. However, this presents an obstacle to financial inclusion as underprivileged and underserved communities usually experience the largest educational gaps.
Finally, if blockchain is to become a vehicle for financial inclusion, there is a need for internationally agreed regulations.
The Business Times
Centralised money in a decentralised world
By Emir Hrnjic and Nikodem Tomczak
May 2, 2019
AT the Singapore Fintech Festival in November last year, Christine Lagarde, managing director of the International Monetary Fund (IMF), called on the world's central banks to consider issuing digital currencies.
Although no central bank has yet done so, many - including those in Sweden, Canada and China, as well as the European Central Bank and the Bank for International Settlements (BIS) - have been carefully studying and experimenting with different distributed ledger technologies (DLT).
According to a recent study by the Cambridge Centre for Alternative Finance, a fifth of central banks will soon be using DLT and more than a third will have active applications within a decade.
IMPACT OF DISTRIBUTED LEDGER TECHNOLOGIES
Traditionally, central banks control the supply of money, administer interbank payment systems, maintain public confidence in the value of national currencies and generally support a nation's economic stability.
Recently, however, the emergence of cryptocurrencies and the underlying DLT have opened up new possibilities for the secure digital transfer of money while other financial innovations are facilitating the establishment of cashless societies.
Bitcoin, the highest profile of the new cryptocurrencies, appeared poised to compete with national currencies and effectively created trust-minimised banking. However, its extreme volatility and low transaction processing capacity have cast doubts on the notion that cryptocurrencies can become a workable medium of exchange.
This leads to the question: can any of the features of cryptocurrencies - such as the public ledger, immutability, and its decentralised nature - be incorporated into centralised banking? If they can, what would be the benefits and costs of a central bank digital currency (CBDC)?
No universal definition of a CBDC exists, but were such a currency to launch, it is generally agreed that it would be a direct liability of the central bank and should result in wider accessibility to central bank money.
In this context, DLT could support faster, auditable, and in general more transparent interbank settlement systems, while avoiding issues like single point of failure and decreased settlement costs.
A leading advocate for incorporating cryptocurrencies into the central banking system has been Dong He, deputy director of the International Monetary Fund's Monetary and Capital Markets Department. He recently suggested that central banks should adopt some of the concepts from cryptocurrencies to maintain demand for central bank money.
Attitudes from the banks themselves have been somewhat mixed. South Korea's Central Bank, for example, openly opposed issuing a CBDC saying that whilst such a currency could significantly transform the banking system, there are risks associated with "credit, liquidity and legal management" and market stability.
Likewise Australia and New Zealand have both ruled out pursuing a central bank digital currency citing low demand and "significant implications for the bank's financial stability mandate".
A research study by the Bank of England in 2016 examined the risks and benefits of a CBDC and concluded that a properly designed CBDC may actually "strengthen the transmission of monetary policy changes to the real economy" and would not harm the private banking sector. However, the study also warned that any mismanagement of transition from physical to digital cash could pose a major threat to the financial stability.
The main challenges for the introduction of a CBDC stem from potential credit contraction and possible abuse of power.
The head of Germany's Bundesbank, Jens Weidmann, argued that when the economic situation becomes uncertain, existing commercial bank customers would decide to keep their money in the form of a CBDC, since it would be essentially risk-free and more secure than in commercial banks.
This may pose a problem for commercial banks as they would partially lose access to deposits, automatically leading to a sudden and severe contraction of consumer credit harming the real economy.
Alternatively, banks would have to rely on more expensive and risky funds such as issuing securities, which would increase the rates on consumer credits. Either of these scenarios - credit contraction or more expensive credit lines - would risk economic recession or, in extreme cases, the possibility of a bank run.
Another potential drawback of a CBDC is giving a central bank power to observe and control individuals' finances. This would likely raise eyebrows among many proponents of personal freedom.
Furthermore, an effectively centralised ledger could give rise to a corrupt or monopolistic intermediary - the exact issue that cryptocurrencies developers have tried to avoid.
Despite many potential challenges, the Bank of England's study concluded that CBDC issuance "could permanently raise GDP by as much as three per cent . . . could substantially improve the central bank's ability to stabilise the business cycle".
As suitable secure DLTs emerge and countries adopt proper regulatory frameworks, central banks will have to consider issuing their own digital currencies or risk losing relevance in the global market.
Likewise, commercial banks will need to replace deposits with other sources of funding, likely disrupting the current fractional reserve banking system as well.
Any transition from the current system to the new decentralised world of central banks would have to happen without undermining the very primary role of central banks - maintaining trust in money.
How Initial Coin Offerings Can Reinvent Themselves (as published in The Straits Times on January 27, 2019)
The Straits Times
How Initial Coin Offerings Can Reinvent Themselves
By Emir Hrnjic and Nikodem Tomczak
January 27, 2019
In late May Singapore regulators clamped down on Initial Coin Offerings (ICOs), ordering one issuer to stop the offering of its digital tokens and eight exchanges to cease trading these tokens.
Although the Monetary Authority of Singapore did not publicly name the issuer involved, it said the move was to halt the issuing of digital tokens that resembled securities or futures contracts, but which did not follow the legal procedures required of regular securities and futures.
This has caused some observers to wonder about the future of this innovative fund-raising method in what had become the largest ICO market in Asia.
In 2017 start-ups raised roughly US$5 billion worldwide through ICOs, surpassing traditional venture capital funding and transforming the early stage fund raising landscape. Yet in the same period roughly half of the attempted ICOs failed to get off the ground.
Many blockchain companies have focused solely on developing the technology, hoping that the tech alone will drive market adoption. However, as it became clear that a sizeable majority of ICO companies either could not deliver on their promises or simply never had any intention of doing so, disgruntled investors have led calls for stronger regulations.
To meet these demands and reduce the risk of fraud and failure, how can ICOs reinvent themselves to win investor confidence?
The long history of finance theory and practice provides useful hints. For example, securitization, loan procurement, and staged financing have been successfully used for public and private companies for decades.
Can these well-established methods serve as prototypes in blockchain environment? What are the pros and cons of these security designs? Finally, can they be modified and adapted to blockchain companies?
The answer is simpler than it seems.
Based on the concept of securitization of assets, profits, or revenues generated by blockchain companies, the Security Token Offering method represents a regulated ICO that strictly complies with finance laws. The benefits are improved efficiency, liquidity, and transparency, and often include certain features such as proxy voting.
Since any investment including real estate, stocks, bonds, commodities, and even infrastructure projects can be securitized (or tokenized), the market value for tokenized securities could potentially reach hundreds of trillions of dollars.
While securitization provides investors with more assurance, as securities have clearly defined intrinsic value and the company is required to disclose investment risk, newly issued tokens require an underwriter as well as compliance with laws and legal requirements.
Another innovative way to raise funds for blockchain companies is through Initial Loan Procurement – a method that allows blockchain start-ups to enter loan agreements with creditors through smart contracts.
Just like in a typical loan agreement, the issuer has a legal obligation to return investor funds plus pre-determined interest over the maturity of the loan.
Unlike other methods, they are typically more tax efficient and compliant than ICOs and token holders become creditors since they lend money to a company.
It has other advantages in that it is regulatory compliant and the loans are not subject to tax. Further, the immutability of blockchain technology provides confidence to creditors.
Well-known in venture capital playbook, staged financing method consists of two different phases: the fundraising phase, where the start-ups raise funds; and the fund disbursement phase, in which the funds are released to entrepreneurs after reaching predetermined milestones.
Similarly, its blockchain counterpart – Decentralized Autonomous ICO (DAICO) – serves to mitigate some of the shortcomings of standard ICOs by enabling investors to influence how the ICO funds are spent. It does this by including provisions that the ICO company would have to reach agreed targets before accessing portions of raised funds. In cases where it does not, investors would be able to vote on a refund.
By giving investors control over the funds, this approach limits the possibility of a scam and ensures that the project developers sustain both their motivation and accountability.
Finally, just like staged financing, DAICO alleviates risks for investors.
With many ICO start-ups failing to deliver on their promises, the crypto community is focusing its attention on how to eliminate fraud, comply with regulations and boost investor confidence.
At the same time, the growing interest of institutional investors in ICOs is fuelling demand for better regulations and improved governance.
This increased scrutiny is pushing potential ICO issuers to strengthen their technical development teams with legal, finance and business professionals.
The likely consequence is further development and adoption of improved methods of raising capital for blockchain start-ups such as ICO versions of securitization, loan procurement, and staged financing.
While these methods are still in their infancy and examples of start-ups choosing these alternatives are limited, innovations like these represent the future of fund raising for blockchain start-ups.
For investors, keeping abreast and informed of these rapidly evolving models will be the key to success.
How Small Firms Reap Benefits from Blockchain Switch (as published in South China Morning Post on January 19, 2019)
South China Morning Post
How Small Firms Reap Benefits from Blockchain Switch
By Emir Hrnjic and Nikodem Tomczak
January 19, 2019
A recent research study conducted by the World Economic Forum and Bain & Company estimated that blockchain technology could boost global trade by US$ 1 trillion, much of it benefitting small and medium-sized enterprises (SMEs).
With this in mind, blockchain offers great potential for China’s SMEs, which account for over 90 percent of market entities there and generate over 90 percent of the country’s GDP. These SMEs can use blockchain to simplify internal processes, and in the long run, grow their businesses.
Blockchains are designed to enable transactions without the need for an intermediary or for transacting parties to trust each other. The public nature of many blockchains also offers greater levels of transparency.
Immutability of data on the blockchain also provides finality for transactions and a fully auditable record for regulators, helping to prevent fraud, mitigate risk, and decrease accounting costs. For retailers, provenance and supply chain auditability increases transparency and boosts consumer confidence.
Among many notable blockchain-enabled uses for SMEs, most significant is the enabling of fast, efficient, and low-cost solutions for interbank transactions.
In traditional financial systems, many intermediaries exploit their position to charge inflated transaction fees, even if they provide meaningful service and reduce transaction risk. Moreover, traditional international bank transfers can take days, whereas transfers on blockchain take minutes.
Blockchain also dramatically simplifies cross-border payments allowing SMEs to easily collaborate and pay partners and employees residing in different countries.
Blockchain-based payments are also especially cost-efficient for transfer of so-called micropayments – a key consideration for businesses relying on such transfers, such as emerging subscription-based services and microloans.
Another important feature of blockchain for SMEs is the ability to develop and apply smart contracts. These are blockchain versions of traditional contracts with transparent and guaranteed execution. Funds sent to the smart contract are locked and are only automatically released once until all the required conditions to finalize a transaction are fulfilled.
As companies are built on contracts, smart contracts can be used to expedite, secure, and automate business operations. At the same time, they cut operational and transactional costs by removing intermediaries such as lawyers, bankers and auditors.
For SMEs, smart contracts can speed up payments and reduce cash flow problems as they are executed as soon as the predefined conditions are met. Furthermore, smart contracts allow for interaction of multiple parties ensuring transparency and increasing trust and security.
Examples of potential smart contracts for SMEs include creating and enforcing contracts with merchants and customers, handling invoicing and transfer of assets.
Implementing blockchain technologies for SME owners that have never had any experience with this technology can be a daunting task. Until recently, the only option was hiring expensive blockchain developers to provide in-house solutions.
However, with more software companies providing affordable and practical blockchain implementations, the prospects for SMEs integrating blockchain technology into their business processes is becoming a reality.
The range of potential applications of blockchain technology offer vast scope for exploration that could reward first movers. For SMEs the most promising applications include supply chains, proof of provenance, digital identity verification, and safe distributed data storage. SMEs that are currently using or offering these with any other technology should seriously consider migration to blockchain-based solutions.
The blockchain is about much more than bitcoin or other cryptocurrencies. Among many applications, it offers fast, efficient, and cost-effective solutions, helps in preventing fraud, reduces costs and automates business operations. This opens the way for SMEs to compete with much larger players on a more level playing field.
The Straits Times
Mind the Blockchain Knowledge Gap
By Emir Hrnjic and Nikodem Tomczak
October 7, 2018
In recent years, new technologies disrupted the finance sector’s status quo and created a wealth of opportunities worldwide. In Singapore alone, in 2016 – 2017, the fintech industry created 2,000 jobs, and thus, met the target of Singapore’s Financial Services Industry Transformation Map.
Within the fintech arena, blockchain technologies led a surge in demand for skilled manpower especially in software development. Blockchain turned into the fastest growing job skill while salaries for blockchain-related jobs jumped above those for software developers in non-blockchain companies.
One of the drivers of the increased demand is the large amount of money raised via Initial Coin Offerings (ICOs) – an innovative method for early stage financing. A typical blockchain company spends a large portion of its ICO war chest on hiring new talent to deliver on the promises made during the ICO.
In response to a surge in labour demand, a brain migration from related industries, such as software development, increased the labour supply. Additionally, the global labour market has been experiencing talent flight into early adopting nations where blockchain companies are thriving in part due to mild or non-existent crypto-related regulations. Nevertheless, a gap in labour supply-demand remains.
HOW TO PREPARE?
So how does one prepare for the possible disruptions in the labour market that technologies such as blockchain are causing?
One important aspect is that this new technology is a combination of a multitude of diverse fields like many other currently emerging technologies. Blockchain uniquely amalgamates cryptography, computer science, economics and finance. Although one does not need to have an in-depth education and knowledge in all these fields to start a career in blockchain, a firm grasp of all the important concepts as well as an understanding of how they fit together is highly desirable.
Adding to the complexity, the path to a career in blockchain is hindered by the lack of proper certification programmes. Top finance companies such as JPMorgan Chase, Citigroup, and NASDAQ recently advertised multiple positions related to blockchain that require accreditation, though, it is not entirely clear what would constitute a proper certification. One can’t currently have a formal education in blockchain as arguably no official standards exist yet.
WHO SHOULD FILL THE GAP?
So, if blockchain skills are in high demand, who should fill the gap?
The Institute of Banking & Finance (IBF) seems like a natural authority to initiate the standards, since IBF has a mandate to establish competency standards in Singapore’s financial sector.
On a country level, the Monetary Authority of Singapore (MAS) typically takes a hands-on approach in talent development. MAS supports bringing in international talent for transfer of knowledge as well as building a local pipeline of IT talent for the financial services sector. Finally, MAS works with key financial institutions to help their staff get retrained for new jobs.
At the university level, blockchain is an integral component in education such as the Executive Masters for Investments and Risk Portfolio Management (EMIR) at the National University of Singapore (NUS) Business School. Globally, major universities such as Stanford, Princeton, and MIT have also developed blockchain-related courses as part of their finance, computer science or law curricula.
But self-learning appears to hold the most appeal. In a fast-paced field such as blockchain, where new technology solutions appear almost every week, traditional learning resources like books become outdated quickly.
In fact, abundant blockchain knowledge resides in white papers, blogs, public Slack or Telegram channels, online tutorials, or code repositories such as GitHub. Learning by doing, immersing oneself in the technology, networking with diverse people from company founders to cryptoenthusiasts by attending multitude of workshops and social events, and perhaps, ultimately contributing to the code base may be the best approach.
Combining self-learning with formal university courses may offer a means to build a learning culture suitable for this new technology. Competitions for students are hands-on and exciting. At a recent Bank of China-sponsored competition with the NUS Business School, students from 12 countries were invited along with xxx Singapore teams to propose blockchain innovations, culminating in a hackathon to develop the corresponding app architecture. Such competitions give students opportunities to be part of a “live” blockchain case, experience blockchain at work, and learn as they analyse the case for solutions. Such competitions can also be extended to practitioners to motivate them to learn more about blockchain.
Experience is, indeed, the best teacher, and being at the forefront of the research and development is always gratifying in the long term and may clearly differentiate anyone from their peers in the job marketplace.
In the short to medium term, a plethora of jobs await suitable candidates. Acquiring blockchain knowledge may eventually lead to a well-paid and satisfying job in technology and finance start-ups, as well as established companies.
Self-motivation, keeping pace with the rapidly changing technology landscape and careful planning for a blockchain career can be very fruitful in the nascent field with numerous job opportunities.
The Straits Times
Five Common Bitcoin Myths Demystified
By Emir Hrnjic and Nikodem Tomczak
August 5, 2018
Misinformation, myths and misnomers abound in the world of technology, frequently amplified on social media due to a lack of credible sources.
The emergence of crypto-currencies, and Bitcoin in particular, is no exception, with the promise of fast fortunes to be made helping to fuel the speed with which these myths spread.
Yet misinformation about how a technology works can hamper its adoption and use, and expose users to significant risk.
Here are five common Bitcoin myths demystified:
Bitcoin transactions are anonymous
Perhaps one of the most ubiquitous myths about Bitcoin is that it is anonymous nature, and hence is widely used for illegal activities.
In fact, in any transaction, the addresses of Bitcoin senders and receivers must be revealed, allowing law enforcement to easily track and trace them. Bitcoin therefore would more accurately be described as pseudonymous, since all the transaction records, including times, amounts, and addresses are traceable.
In addition, any illegally acquired Bitcoin has to be eventually cashed out via real-world transactions typically connected to a cryptoexchange or a bank account.
Since banks and most of the popular exchanges follow strict anti-money-laundering and know-your-customer laws, these “cash-out” transactions effectively reveal Bitcoin holders.
Bitcoin “miners” are discovering or creating Bitcoins
Mining refers to the process of recording, validating and adding new blocks of transactions to the Bitcoin blockchain. This process prevents double spending, secures the network, and in return incentivizes the miners by paying them for their work with newly created Bitcoins.
Currently, the Bitcoin code generates 12.5 Bitcoins every 10 minutes, awarded to the miner that is first to validate the most recent block of transactions. In 2020, this award will reduce to 6.25 Bitcoins per block, after which it will then halve every four years until the supply reaches a maximum of 21 million.
What this means is that, as more miners emerge and competition heats up, the chances of winning newly created Bitcoins will diminish.
Security of the network notwithstanding, increasing or decreasing the number of miners has no influence on the Bitcoin creation process since all the Bitcoin miners compete for the same reward. But only one miner can be rewarded at a time.
As such, the miners are not discovering or creating Bitcoin – the news coins are simply a reward for securing the network. Therefore, rather than modern day versions of Wild West gold prospectors, this makes Bitcoin miners more akin to competitive accountants.
Bitcoins are scarce
The perceived gold-like scarcity of Bitcoin stems from the fact that its computer code will generate Bitcoins at regular intervals until the total number reaches a maximum of 21 million Bitcoins.
Nevertheless, Bitcoin’s code properties are not rigid and the maximum coin supply can potentially be raised by majority consensus among miners, especially since newly minted Bitcoins are crucial to incentivize mining.
Furthermore, Bitcoin spinoffs such as Bitcoin Cash, Bitcoin Gold, and Bitcoin Private – essentially new currencies – have been created by a so-called “fork” in the blockchain. These forks result from a radical change in the protocol, resulting in a group of miners creating a new offshoot of the chain.
These forks effectively increase the supply since they create additional Bitcoin-like currencies. More importantly, there are already almost perfect Bitcoin substitutes available such as Litecoin - a tweaked Bitcoin protocol with 84 million coins - effectively increasing the supply.
Bitcoin wallets hold Bitcoins
While real-world wallets hold real-world banknotes, crypto wallets hold only the keys needed to access cryptocurrency that itself resides on the blockchain.
To be able to initiate a transaction, a user needs to know the public account address (derived from the public key) and sign the transaction using the corresponding private key, without revealing it.
In this context, wallets are software applications that hold the user’s keys to access their Bitcoin. Since Bitcoin is virtual, the balance does not reside in the wallet but on the blockchain.
Furthermore, since losing access to the wallet means losing access to the monetary value stored on the blockchain, misplaced private keys account for a significant fraction of lost coins. In 2013, for examples, one early Bitcoin miner accidentally threw away a hard drive with keys to 7,500 Bitcoins, losing roughly SGD 70 million at current prices.
Bitcoin is impossible to hack
The Bitcoin network itself has never been hacked or compromised unlike more traditional and well-established financial platforms such as SWIFT or Visa.
In fact, Bitcoin’s underlying software and consensus protocols are so secure that the closest potential threat lies in the development of quantum computing, and even that remains some time off.
But this is beside the point. Due to the way Bitcoin is transacted, the real weakness in the system lies with careless Bitcoin owners, incompetent app developers, poorly designed cryptocurrency exchanges and dishonest crypto-companies.
Together these account for nearly all of the hacked or lost Bitcoin to date.
Get your information straight
The rapid emergence of Bitcoin and other cryptocurrencies has been accompanied by an explosion of misinformation about them.
Correcting these and narrowing the knowledge gap is vital to improving understanding, strengthening user security and protecting novices from manipulation and exploitation.
As with all new technologies, learning the associated jargon and sorting fact from fiction is key to avoiding potentially heavy financial losses.
Deciphering the cryptic world of Initial Coin Offerings
By Emir Hrnjic
May 30, 2018
In the frenzied, rollercoaster world of cryptocurrencies, a new term has been grabbing investors’ attention: Initial Coin Offerings or ICOs.
Last year, according to Forbes magazine, ICOs raised almost US$5bn; a huge leap from just US$101m in 2016. In 2018 some analysts expect upwards of US$18bn to be ploughed into ICOs, with Singapore fast becoming a leading Asian ICO market.
To the uninitiated ICOs might sound like IPOs (Initial Public Offerings) – but they are vastly different. Despite the massive funds being channeled at them and the feverish interest surrounding them, most retail investors have little understanding of this innovative fundraising method.
The ICO process typically begins with issuers publishing a white paper describing the product or service they are typically promising to build. Investors then buy coins or tokens which promise access to this product or service.
Unlike IPOs, ICOs take place at a very early point in the life cycle of the company. Whilst the vast majority of IPOs are issued by well-established, profitable corporations (notable exceptions being during the Internet bubble of the late 1990s), ICO projects are in the development phase and have not made any profit.
Moreover, ICO white papers generally do not reveal company financials and tend to be inconsistent and unreliable. IPO prospectuses on the other hand contain carefully audited financial statements and follow well-established regulatory procedure.
As a consequence, the due diligence process with ICOs is simpler and shorter, without the armies of bankers, lawyers, and auditors typical of IPOs. This, however, is a double-edged sword as ICOs also have less transparency, less regulation, and offer essentially nothing in the way of protection for investors.
Whilst shares in IPOs represent equity in the firm and votes to shareholders, ICOs generally represent tokens sold at a discount and are an asset rather than a security. ICO entrepreneurs maintain full control over the venture.
Furthermore, whilst IPOs involve listing on an exchange - meaning companies need to satisfy various requirements including issuing audited quarterly financial statements and other disclosure - ICO listing requirements are almost non-existent.
SUBSTITUTE FOR VENTURE CAPITAL FUNDING?
There are several other differences, but in short ICOs are much riskier than IPOs. That does not mean however that they should be dismissed outright.
Misleading name notwithstanding, it could be argued that ICOs are a useful substitute for Venture Capital (VC) funding due to similarities in the stage of company’s life cycle and risk profiles.
This brings with it a different set of implications.
The key function of the VC industry is funding start-ups, the overwhelming majority of which fail. It is a high-risk business, yet those few that do succeed often do so spectacularly and more than compensate for the many failures – think of Facebook, Google or Amazon.
Famously, SoftBank’s US$20m VC investment in a start-up named Alibaba in 2000 grew to roughly US$58bn at its IPO fourteen years later – a mind-boggling 300,000 percent return.
So why should these spectacular returns be reserved only for rich VC companies. Shouldn’t a regular guy get a shot? The answer is more complex than it seems.
First, ICOs generally do not have a working product, making them even riskier than a regular start-up. VCs typically demand a “proof of concept” and a knowledgeable and/or experienced management team.
Second, VCs often get a seat on the board in return for their investment, allowing them to advise as well as to monitor the company. They also provide much-needed connections to ambitious and energetic - but often inexperienced - entrepreneurs.
ICO companies however do not entitle investors to any input in governance, even though they provide cheaper and quicker funds compared to VC investors.
Finally, unlike illiquid VC investment, ICO tokens are typically liquid, which provides an easy exit strategy for ICO investors. However, this liquidity can also lead to short-termism as investors may pressure firms to focus on short-term results at the cost of more significant long-term benefits.
ATTRACTED BILLIONS IN FUNDING
ICO disadvantages notwithstanding, fueled by rapid advances in technology and headlines about exceptional returns, hundreds of promising crypto-related products have attracted billions of dollars via ICO funding.
As a case in point, Ethereum’s ICO raised around US$20m in 2014 and has since evolved into the platform of choice for other ICOs. Meanwhile its market capitalization reached US$60bn. More recently, a WhatsApp–like chat platform, Telegram, raised a record US$1.7bn via ICO.
However, as billions of dollars have poured in ICOs and scores of novice investors entered the ICO arena, so too have fraudsters, scammers and charlatans eager to exploit naïve investors.
Perhaps the ultimate example of investors gullibility is PonziCoin, which was launched as “the world’s first transparent, decentralized Ponzi Scheme built on the blockchain.” Yet even this obvious parody attracted inexperienced investors.
According to a recent survey, regulators most commonly identified ICOs and cryptocurrencies as high risk. Furthermore, while millennials were deemed most likely to use fintech products they were also most at risk of fraud from fintech products.
Since millennials have the highest cryptocurrency ownership rate among different age groups, they seem most likely at risk from cryptocurrencies as well.
A recent academic study from NUS Business School found that several common factors lead to more innovations in companies, the most important of which is access to capital. Since many ICO ventures would not be able to raise comparable money via traditional sources, this implies that better-funded start-ups will likely lead to more innovations with potential benefits to economy and society.
So whilst ICOs differ dramatically from IPOs or VC investments, a role is emerging for them to help fund projects that would not have received financial support from traditional sources. In turn there is a case for expecting that the better access to capital that they offer will likely lead to more innovations benefitting economy and society.
Indeed, as more funds pour in crypto-related products and blockchain technology’s acceptance continues to spread, we can expect to see the proliferation of innovative blockchain applications.
However, recent report found that almost half of ICO projects have already failed, while cryptocurrencies recently plummeted, thus, renewing concerns about overvaluation. Additionally, regulators ramped up warnings about suspicious ICO projects, while some ICOs were target of class action lawsuits.
Indeed, Monetary Authority of Singapore (MAS) directed an ICO issuer to cease offering digital tokens that represented equity ownership in a company and warned eight exchanges in Singapore to stop trading in digital tokens that resemble securities.
These negative developments may potentially cool off exuberant investors and deflate the hype over ICO which will eventually affect the demand for ICOs and, most likely, increase due diligence of ICO backed projects. As competition heats up and investors become more selective, we will witness a further evolution of the process, which will likely include standardization of carefully vetted and better organized white papers including more comprehensive risk disclaimers.
Retail investors however should still be aware that despite the headlines and the hype, investing in ICOs at present is opaque, high risk, and offers little to nothing in the way of protection.
On track towards the next crypto regulatory frontier
By Emir Hrnjic
May 16, 2018
A recent G-20 summit acknowledged the blockchain as an innovation that will likely improve the efficiency and inclusiveness of financial systems and economies. As the technology becomes more pervasive, so will crypto assets. Globally, blockchain applications may have reached an inflection point on its march toward adoption and further expansion – and Asia may hold the key.
Asia has been the most exciting region for trade and business for decades and one of the hottest crypto environments in last few years. As digital assets gained in popularity, a wide variety of crypto eco-systems has emerged across the region. In North Asia, China and Japan have dominated Bitcoin mining and cryptocurrency trading, while smaller Southeast Asian countries have punched far above their weight. Singapore is now one of the biggest markets for initial coin offerings (ICOs).
DIVERSE REGULATORY LANDSCAPE
With adoption of crypto growing, Asian countries are employing different regulations to manage these new financial instruments across the region. Known as one of the most crypto-friendly countries in the world, Japan recognized Bitcoin as legal tender in April 2017, paving the way for more than 10,000 companies to accept payment in Bitcoin.
Regulators there have also approved 11 exchange operators in 2017 that led to Japanese dominance in cryptocurrency trading. The Japanese crypto environment grew despite having seen some of the most infamous scandals in the crypto world, including theft of almost US$ 1 billion to hackers.
Singapore is emerging as one of the most active markets for ICOs in Asia thanks to its crypto-friendly regulations and pro-business environment. According to Deputy Prime Minister Tharman Shanmugaratnam, the city state will continue its support of experiments in the blockchain and cryptocurrency space “because some of these innovations could turn out to be economically or socially useful”. But equally, he added, “we will stay alert to new risks”.
In fact, the Monetary Authority of Singapore (MAS) has said ICOs will be regulated only if they resemble securities or if they represent “a debt owed by an issuer”. MAS, together with a consortium of banks, have also developed a digital Singapore dollar that replicated the existing financial payment system without a centralised clearing system.
In contrast to Japan and Singapore, China has taken a different approach.
Although it was one of the most active markets for Bitcoin mining and Chinese investors once accounted for the majority of global transactions, regulators banned ICOs and restricted trading in cryptocurrencies last September, citing concerns about scams and money laundering.
This did not stop disgruntled crypto-traders, who soon drove crypto trading underground by using alternative methods. It also triggered an outflow of crypto business to other countries.
At the same time, the Governor of People’s Bank of China said it was working on developing a state-backed digital currency – the digital renminbi. This initiative suggests that China’s crypto – related activities are moving from private to public sector. Other Asian countries have adopted regulatory practices that lie somewhere in-between.
WHAT IS NEXT?
With all eyes on Asia, the natural question is – what’s next given the risky reputation of crypto assets and ICOs.
To be truly effective, regulations will have to be coordinated globally, since crypto businesses tend to relocate to countries with friendly regulatory environment. As a case in point, crypto-friendly Malta and Switzerland recently poached Binance and Bitfinex, two major Asian cryptocurrency exchanges. In that spirit, at their meeting in Argentina, G-20 Finance Ministers agreed to monitor development of cryptocurrencies, while just stopping short of coordinated regulatory action.
Countries taking a liberal approach should be careful about possible reputation issues. While Singapore and Japan have been extremely ICO-friendly, possible future scandals and potential investors’ losses may change their attitude and approach to regulation. In that light, reasonable regulations will likely evolve through meaningful consultation with industry participants.
More stringent prosecution of frauds and scams can also be expected. Just as the Securities and Exchange Commission in the United States started prosecuting fraudulent ICOs, we can expect similar action in Asia.
Finally, self-regulatory bodies will emerge to promote accountability, monitor members and enhance customer protection.
While risk of overregulation remains a great concern, sensible regulators will likely create better frameworks to protect investors, while not undermining or hindering entrepreneurial spirit and innovation.
Behind the cryptocurrency mania, the secret sauce is Bitcoin’s blockchain technology (as published on Channel NewsAsia)
Behind the cryptocurrency mania, the secret sauce is Bitcoin’s blockchain technology
Forget Bitcoin - the world will be revolutionised by blockchain, not necessarily cryptocurrency, says one observer from the NUS Business School.
By Emir Hrnjic
March 13 2018
SINGAPORE: The furore over the future of cryptocurrencies such as Bitcoin has reached ever more frenzied peaks since the start of the year.
Goldman Sachs recently predicted that most cryptocurrencies will inevitably crash to zero and the head of the World Bank has warned that most resemble Ponzi schemes.
Meanwhile internet entrepreneurs turned venture capitalists the Winklevoss twins have said they expect Bitcoin to soar to 40 times its current value.
But such feverish debate over valuations of cryptocurrencies like Bitcoin has obscured the real story: That blockchain - the underlying technology behind Bitcoin and other cryptocurrencies - is poised to revolutionise the way the world does business in much the same way email and the internet did.
But the trouble is there hasn’t been a high-profile use case that has shown how blockchain can fundamentally alter the way companies do business or touch a facet of life the man on the street can relate to.
THE POWER OF BLOCKCHAIN
The innovative power of blockchain is that it creates a platform allowing any two parties to digitally transact with each other using an immutable, continuously-updated, distributed ledger.
In the case of Bitcoin, with no central authority overseeing the system, the task of updating the ledger relies on miners (“competitive bookkeepers”) who verify transactions and get rewarded with Bitcoins.
On average, a new block on a blockchain gets verified every 10 minutes and carries a reward of 12.5 newly created Bitcoins as a form of incentive. The entire supply of Bitcoins – which will peak at 21 million in 2140 – is pre-programmed by Bitcoin’s original developers.
Just as the invention of the underlying technology behind email enabled the transfer of information from one user to another, blockchain enables the transfer of value from one user to another without the need for an intermediary like a bank.
This has huge implications for traditional intermediaries such as auditors, lawyers or public notaries, and without radical transformation, entire industries face a very real existential threat.
For example, most e-commerce currently relies almost exclusively on third parties such as Visa or PayPal to process electronic payments, charging transaction fees of up to 5 per cent. Overseas money transfer firms like Western Union and MoneyGram charge even more – often over 10 per cent.
These industries seem ripe for disruption and with the growth of blockchain the fate of financial remittance companies may resemble the demise of travel agents in the 1990s.
At a national level meanwhile, a growing number of countries are exploring how to put their currencies on blockchain.
For example, the Monetary Authority of Singapore (MAS) recently partnered with a consortium of banks to develop Project Ubin, a pilot tokenised version of the Singapore dollar that replicated the existing financial payment system without a centralised clearing system.
It is now working on similar projects focused on fixed income securities trading and cross border payments.
It seems that certain banking functions, for instance payments and cross-border transactions may be put on a blockchain going forward, reducing infrastructure costs while enhancing transparency, traceability and security in the financial services sector.
But blockchain technology has applications well beyond the finance industry.
Indeed, a recent Harvard Business Review article said blockchain “could change the very nature of economic, social, and political systems.” The article’s authors, both Harvard professors, said they foresee a world where “every agreement, every process, every task, and every payment would have a digital record and signature that could be identified, validated, stored and shared”.
By allowing businesses to control their own data, ensuring immutability and transparency, it offers transformational potential in areas such as inventory control, food safety and record management, including medical records.
In January, IBM and Danish shipping giant Maersk announced a joint venture to use blockchain in shipping supply chain. In a sector which handles around U$4 trillion of goods per year, the firms said they expected savings of up to 15 per cent of this amount, mostly by eliminating the bureaucracy and corruption risk in manual procedures.
Another area where blockchain shows significant promise is food safety. Recently Walmart launched a pilot in China using blockchain to track and trace shipments of pork. Making food supply chains transparent and traceable brings a range of potential benefits – for example, while it normally takes days to recall a food product, blockchain can do it in seconds.
MINING INVOLVES A LOT OF ELECTRICITY
Before we become swept up in the excitement, it’s important to also bear in mind the challenges.
One often underreported downside of blockchain is the power consumption it accounts for. Mining Bitcoin alone, for example, has been estimated to account for 42 terawatt-hours per year – similar to the annual consumption of Hong Kong or New Zealand. This may potentially be alleviated by different mining processes, but these will likely raise different issues and challenges.
Another critical issue is security. Bitcoin is safe as long as honest nodes control more power than potential collaborating attackers. However, this can be undermined by the formation of mining syndicates since collusion among groups with more than 50 per cent of mining power could enable hacking of the system.
Scalability likewise needs to be urgently addressed as the reach and use of cryptocurrencies continue to grow. Bitcoin, for example, can currently only process roughly seven transactions per second whereas in contrast Visa can process more than 50,000 per second.
The most critical risk however comes from regulatory bodies and the response they take to this growing phenomenon.
Several governments including Bangladesh, Nepal and Vietnam have banned Bitcoin transactions outright. China and South Korea meanwhile have recently introduced strong regulatory measures such as restricting trading in cryptocurrencies.
Others like Hong Kong and Singapore have adopted a more measured approach – Singapore’s MAS announced that while it had no plans to regulate cryptocurrencies, it would come down hard on any money laundering and terrorist financing risks.
Perhaps one particularly significant sign came in recent testimony to a US Senate by J Christopher Giancarlo, Chairman of Commodity Futures Trading Commission.
His view, he told the panel, was that “distributed ledgers have the potential to enhance economic efficiency, mitigate centralised systemic risk, defend against fraudulent activity and improve data quality and governance.” As such, he added, the right regulatory approach to blockchain technology would be to “do no harm”.
This statement may go down as the moment that blockchain entered the mainstream.
Just like how people didn’t foresee the impact of e-commerce before Amazon arrived or that of social media before Facebook, it’s conceivable that blockchain may become the next big tech.
In fact, blockchain may have the potential to underwrite the very systems we depend on today for any sort of transaction.
So what does this mean for those investing in cryptocurrencies? Given their wild swings in price, the highly speculative environment and lack of pricing models, investing in specific cryptocurrencies such as Bitcoin or Ether remains a highly risky prospect for the vast majority of retail investors.
However, for a lot of businesses, investing in blockchain may be a prudent strategic investment.
Indeed, as the technology’s potential continues to grow, we will see the emergence of innovative companies with creative and disruptive applications that existing firms and industries cannot afford to ignore.