2018 July 30 - Volume.2 Issue.30

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2018 July 30 - Volume.2 Issue.30

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Stock Exchanges Eye Internal Efficiencies with Blockchain Trials

"Blockchain, not Bitcoin", the not-so-old adage, continues to make its rounds, increasingly within the global bourse industry also. Eyeing internal efficiencies and cost reductions, major stock exchanges have teamed up notably with IBM, Chain, R3 and Digital Asset to build platforms that might deliver on such promises. But tokenized securities remain a far reality, with only few daring to foray into the prospect.

Nasdaq is one of the first stock exchanges that took note of blockchain's potential for solutions back in 2013. Since then the second largest exchange has been developing its own platform dubbed Linq, and has been working with Digital Currency Group backed Chain (Nasdaq themselves have a stake) and financial behemoth Citi for payments clearing. The solutions being tested out of New York could have a profound effect on global trading ease as Nasdaq technology is run on over 90 exchanges world wide, 31 of which it owns and operates.

Nasdaq CEO Adena Friedman argues that Blockchain will assist the stock exchange in its settlement of transactions, and speed up the back office of an "outdated administrative system."

And other stock exchanges have taken note, many partnering up with Blockchain companies in an effort to advance possible solutions (see table).

While for the most part, stock exchanges all have varying interests as to what they want to achieve with the use of the technology, the focus, it seems, is heavily on addressing internal bureaucracy, sharing and reconciliation. Clients would benefit from faster clearing.

But ownership of assets, akin to what crypto enthusiasts have become accustomed to, remains to be a distant prospect with few discussions. The big players however, who charge anywhere between $125-250,000 for listing, and IPOs costing north of $1Mn, might find competition with new models that are being developed to raise funds (see box).

Key Stock Exchanges with Blockchain Interest

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IPO Turn-off?
Berlin-based Neufund has been actively working with German regulators BaFin to smooth out the process for the prospect of legally binding equity tokens. And the process is no more than a business prospectus and a 6-week waiting period for the approval from Bonn.

Recently the blockchain company announced a partnership with the Maltese government, alongside mega exchange Binance, to begin the development and testing of trading security tokens on the Malta Stock Exchange (MSX).

IBM, Bank of America Stealing Blockchain Patent Show

Companies active in blockchain development  have now over 500 patent applications pending approval. 10% of which have already been approved. And it's not only tech focused outfits but financial institutions who are eyeing efficiencies. But despite all the motion, there is still limited deployment of Blockchain applications.

Open source is ideologically rooted in the development of blockchain technologies. All of the major cryptocurrencies, digital assets and even blockchain enterprise software are developed as open source projects. Instead of being built as closed source by for-profit companies, blockchain projects are collaboratively created and transparently published, which allows anyone to propose modifications or fork to a new project altogether.

The for-profit software has traditionally been protected by copyright or patents depending on whether it is the code itself being protected or rather the idea itself. Most of the companies use the combination of both. Decentralized protocols developed by independent parties don’t have access to these protections by design. All open source software can be used for commercial purposes as well. Rather than the code or the idea itself, the strength of decentralized blockchain protocols lies in the network effect, which is then sustained by a strong development team as well as the community.

R3 and Digital Asset, companies that are developing enterprise DLT, have both filed patent applications in 2016. While R3’s software Corda is open source, the patent application and open source represent complementary strategies to R3. The Hedera hashgraph, a DLT platform developed by Swirlds, is also patented to prevent forking. Ripple has applied for 12 blockchain patents through 402 Technologies, a patent holding company based in Luxemburg.

Large non-blockchain companies are now rushing to patent different implementations of blockchain technologies. According to Diar’s research, there are now more than a thousand of blockchain-related patent filings worldwide with 54% coming from the United States and 21% from China. The leading sectors for filing blockchain patents are the technology and the financial sectors, which both file about 27%.

Bank of America currently has the most patent filings approaching its 50th (see table). Catherine Bessant, COO and CTO at Bank of America, clarified that the strategy is more of a hedge for the future developments. She said: “While we’ve not found large-scale opportunities, we want to be ahead of it we want to be prepared.” IBM, arguably the most active tradition company involved in blockchain development, holds the second place with 42 filed patents. Other large companies that filed for many patents are Dell, Mastercard, Intel and British Telecom.

Getting a blockchain patent granted is quite a time consuming process that takes 2-3 years on average. The largest patent holder is nChain, research and development firm, with 21 patents already under its belt. The company, whose chief scientist is Craig Wright, has been accused of patent hoarding and it is possible that some patents would be cancelled if their validity was challenged. IBM has already been granted four blockchain-related patents. Accenture trails with three, Bank of America and Mastercard with two and Dell, Coinbase, Ripple, Netspective and NASDAQ each have one patent granted (see table).

Patenting blockchain implementations is also problematic because of a Supreme Court ruling in 2014. The Supreme Court concluded that "merely requiring generic computer implementation fails to transform [an] abstract idea into a patent-eligible invention." In the EU, under the European Patent Convention, "programs for computers" are not regarded as inventions for the purpose of granting patents.

Select Granted Patents

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US Leads Blockchain Patent Applications, China Follows...

..But Race Split Between Blockchain, Financial and Tech Companies

Winkelvoss Bitcoin Exchange Traded Fund Gets Denied, Again

Last week the Securities and Exchange Commission (SEC) rejected a second attempt for a Winklevoss Bitcoin exchange-traded fund (ETF). Three more applications are up for review this year, as well as one earmarked for 1Q19 - all most likely to get rejected too.

The Winklevoss ETF was the first application for a Bitcoin ETF in 2013 and it was also the first one to be rejected in early 2017. The initial application was rejected mainly because the spot market was unregulated and there wasn’t a regulated derivatives market that the SEC could have a surveillance sharing agreement with. Following the initial rejection, Winklevoss brother filed a petition, which was now also rejected.

The Commission, which is comprised of the Chairman and four Commissioners, released a 92 page order detailing its decision. The order noted that the President and COO of Cboe recently acknowledged in a letter to the Commission staff that “the current bitcoin futures trading volumes on Cboe Futures Exchange and CME may not currently be sufficient to support ETPs seeking 100% long or short exposure to bitcoin.” Commission concluded that there is insufficient evidence to determine that the bitcoin derivatives markets are significant

More importantly, the order said that the central factor in approving an ETF is that the rules of a national securities exchange must be designed to prevent fraudulent and manipulative acts and practices and to protect investors and the public interest. The Commission concluded that the securities exchange has not established that these means of compliance are sufficient to meet the requirements.

The report reads that “the public blockchain ledger, even in combination with the other monitoring abilities, does not provide comprehensive customer trading or identity information, which is particularly important here because pseudonymous bitcoin account holding means, among other things, that the number of accounts or number of trades would not reveal whether a person or group has a dominant ownership position in bitcoin, or is using or attempting to use a dominant ownership position to manipulate bitcoin pricing.”

Bitcoin Exchange Traded Fund Applications

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The decision to reject the ETF was supported by three commissioners with one dissent coming from Hester Peirce. Mrs. Peirce said in a public statement that the decision “undermines investor protection by precluding greater institutionalization of the bitcoin market” and “demonstrates a skeptical view of innovation, which may have an adverse effect on investor protection, efficiency, competition, and capital formation well beyond this particular product.”

There are currently four other Bitcoin ETFs that are being considered by the SEC (see table). The one that is drawing the most enthusiasm by the Bitcoin community is an application from VanEck and SolidX whose shares would be traded on the Chicago Board Options Exchange (Cboe). The VanEck SolidX ETF would purchase bitcoin primarily in the OTC markets and track the price using the MVIS Bitcoin OTC Index. The final deadline to make the decision is set on March 4, 2019.

Digital Currency Group Pours into Exchanges, Wallets

By and far, Digital Currency Group (DCG) led by Barry Silbert, has been at the forefront of investing, not only in cryptocurrencies through its investment arm Grayscale, but in blockchain and crypto focused businesses. A whopping 1/3 of the outfits investments have poured into cryptocurrency exchanges, wallets and services. Blockchain development takes the second crown with 19% of its portfolio while 9-10% goes to payment focused operations and identity/compliance.

Digital Currency Group Investments Break Down

Google Goes Bipolar on Metamask Extension Store Listing

In a delisting and re-listing fiasco last week, Metamask, the popular ethereum and ERC-20 wallet application that links up to the Ethereum Mainnet, saw its extension pulled from the Google Chrome store as the tech giant looked to cleanup extensions focused on mining cryptocurrencies.

The event caused no problems to the safety of funds for users who had already installed Metamask.

The event now however has highlighted the risk of decentarlized applications who remain dependent on centralized bodies. But whilst Metamask works on all popular browsers, it would have been unlikely that the wallet would have found a large audience considering the near estimated 60% of users browsing the internet on Google Chrome.

Solutions are grim. Outside of developers and highly competent computer users, installing Metamask through websites like Github would be problematic. This puts another thorn in an already prickly user experience.

Galaxy Digital Suffers Devastating Loss in 1Q18
Investment bank Galaxy Digital headed by former ex-hedge fund manager turned Billionare Michael Novogratz suffered a whopping loss of $134Mn in the first quarter of the year from the plummet of cryptocurrencies. But the company is still full throttle in its intent to be listed on the Canadian Stock Exchange.
Swiss Market Authority Launch ICO Investigation
The Swiss Financial Market Supervisory Authority (FINMA) announced an investigation for possible banking infringements against Envion which raised over $100Mn in its ICO. This is not the first time Envion gets the spotlight - it was also in courts following a fallout between the Founder and CEO this year.
Iran Making Moves into CBDC
Iran announced their intent on issuing a digital currency to facilitate transactions within the country's banking sector. The Central Bank Digital Currency would be backed by the nations Rial, which has been facing a crisis. But the cosmetic change wouldn't be much help against sactions, just as a new Central Bank Chief takes the helm.
US Congress to Address FinCEN Crypto Oversight
Members of congress have put forth a bill that would seek to give US Department of Treasury run Financial Crimes Enforcement Network (FinCEN) powers on virtual currencies. The implications aren't small. Citing terrorism, along with the US Patriot Act, FinCEN can be judge and jury for banks it deems unfit.

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