Julius Baer is one of the leading Swiss wealth managers with a focus on personal advice for wealthy private clients. This asset manager’s advisory service for “Ultra / High Net Worth Individual (HNWI)” is now also for digital assets.
The customer segment of wealthy private individuals has been a large target group in the crypto space for several years. Different products are being offered by asset managers such as Vontobel, AMUN or GenTwo.
Although there exists a plethora of cryptocurrency investment opportunities. Professional and accredited investors appear to be unable or unwilling to invest. The best performing regulated alternative investment funds (AIF) for cryptocurrencies, the Systematic Distributed Ledger Technology Fund managed by CAIAC Fund Management AG in Liechtenstein and advised by Crypto Finance AG, had over a 100% return since inception in March 2019. Despite the phenomenal return, the fund has only managed to attract €14.36 million in assets under management.
This HNWI target group does not belong to the so-called “digital natives” that grew up with smartphones and the internet. This group is also not part of the “decentralized natives” that are skeptical of centralized institutions because of the 2008 banking crisis. In contrast to the generation of millennials, this target group is not tech-savvy and often has no interest in dealing with blockchain technology. In addition, there is no major loss of trust in central institutions. They grew up with them and perceive government and financial intermediaries to be secure.
Even more, this target
group still has a high level of trust in long-term investment experience and
established companies like Julius Baer. If a HNWI now has the opportunity to
easily integrate a completely new asset class with attractive returns into its
portfolio allocation, it even offers
many advantages for the customer:
Long-term
trust in the asset manager through existing client relationship
No new
KYC process necessary (as with a new provider such as Grayscale)
No
responsibility regarding private keys of crypto assets
Diversification
within the existing overall portfolio
Monthly
analysis of overall risk and return metrics by asset managers
No
technical know-how (about blockchain, hash function etc.) necessary for
investment
Contact
person digital assets available via asset manager
Liquidity
of the assets due to the cooperation between Julius Baer and Seba Bank
Not only the customer,
but also the asset manager can benefit from this new offering, since in
comparison to new providers in the market, they can already draw on an existing
and above all wealthy customer base. Therefore they have lower acquisition and
marketing costs and may even attract new customers from this offering of
digital assets. As a traditional asset manager, this expansion from traditional
to digital assets can therefore be a great opportunity for Julius Baer.
The cooperation with
SEBA Bank AG, which is licensed under FINMA in Switzerland, is a great
advantage here. SEBA is considered a dynamic FinTech and has been one of the
pioneers in the financial industry since its foundation in November 2019.
Julius Baer benefits from the following services from SEBA:
Custody storage
Trading and liquidity
management
Asset and wealth management
Transaction banking
Tokenization
Offering of bitcoin, ether, litecoin,
stellar and ethererum classic
In the press release of
January 21, 2020 Julius Baer states:
“Julius Baer now
gives its customers access to various solutions for storing and transacting
digital assets to meet increasing demand.”
Julius Baer increased
its total mandate penetration around advisory business from 24% in 2013 to 52%
in 2019 and plans to increase this number to above 70% for the future. In
return, the proportion of self-directed orders and execution only business
shall be reduced.
The switch to an
increase in advisory services goes hand in hand with an expansion of advice in
alternative asset classes. At the end of December 2018, the proportion of
assets invested in alternative investments, which should also include crypto
assets, was only 1%.
AuM breakdown by asset mix as of Decmber 31, 2018 of around CHF 400
bn
The current focus target
group is wealthy private individuals who have little knowledge about digital
topics such as crypto and blockchain technology. There is a potential risk that
this client base might cease, if the new generation of “digital natives” manages
their assets themselves. However, the offering of digital assets by Julius Baer
could also be interesting for younger investors who have no time to deal with
the technology or who are generally not interested in the technology and only
participate in this new asset class due to reasons of return generation and
diversification aspects.
Can cryptocurrencies become embedded in the fabric of our shopping habits? As the world embraces digital payments, cryptocurrencies face a unique opportunity to revolutionize the way we transfer money. Several companies around the world are on a mission to find a perfect payment solution for the digital future, but two projects in the DACH region may be the closest to starting a financial revolution. Will they manage to write cryptocurrencies into our grocery receipts?
With the progressing digitalization of the financial sector, the way we shop constantly changes. Cash is losing importance, as mobile payments are revolutionizing the market. In fact, by 2022 mobile transactions are predicted to become the second most popular payment method, just after debit cards. Experts estimate that the total transaction value of digital payments may continue to rise with an annual growth rate fixed at 12%, reaching its all-time high of US $6,699,201 million ($6.7 trillion) by 2023.[1]
Several companies are developing a secure digital payment method, which allows people to pay with digital currencies. Ready to address the needs of the changing market and take advantage of the shift in people’s purchasing habits, they set out to create a tool, which would support effortless Bitcoin and Ethereum transactions in numerous supermarkets and shops. One major project of such kind is Ingenico’s and Salamantex’s collaboration aimed to create the software for various types of digital currency payments.
Ingenico, an expert
in providing seamless payment solutions, has been on the market for over 30
years successfully adapting to the evolving financial landscape. Salamantex, on
the other hand, was founded in 2017 and has been dedicated to creating
crypto-friendly fintech software ever since. Ingenico’s and Salamantex’s
project is designed to encourage cryptocurrency use in everyday life by
authorizing payments in Bitcoin, Ethereum, and Dash in the supermarket
terminals. How does it work? You can choose to pay in a cryptocurrency as you
settle your bill. After your payment’s been authorized, the transaction amount
is simply converted to the sellers’ preferred currency just as it is
transferred to their accounts.
The companies presented the first POS terminal at the
EuroShop 2020 trade fair in Düsseldorf, Germany. Their collaboration combines Salamantex’s
digital enthusiasm and appetite for innovation with Ingenico’s vast experience
and secure solutions. Over the years, Ingenico’s built a reputation of a
reliable terminal producer: there are
over 30 million of their terminals around the world. Integrated with
Salamantex’s software, which also works as a mobile & web application and
plug-in for online shops, they may start the brand-new era of digital payments,
especially in the DACH region, where they mainly operate. According to
Statista’s new reports, the German digital payment sector is set to generate a
total transaction value of US $127,443 million ($127 billion) in 2020[2],
compared to Austria’s US $15,082 million ($15 billion)[3] and
Switzerland’s US $20,927 million ($20 billion).[4] These
numbers are expected to gradually rise in all the mentioned countries, which is
promising for Ingenico, whose terminals
are approved by all major German payment network operators.
As German and Austrian companies are on their quest to
revolutionize payment systems in the European Union, Switzerland is undertaking
its own mission to offer a cryptocurrency payment option for Swiss merchants
and customers. Worldline, the popular financial services provider, and Bitcoin
Suisse, Switzerland’s largest crypto company, announced they would cooperate to
enable digital transactions in cryptocurrencies in brick and mortar stores and
on online stores across Switzerland. Worldline operates in 30 countries and has
85,000 payment terminals in Switzerland alone. In 2018, Worldline generated
$2.2 billion in revenue from their payment services.
Bitcoin Suisse’s CEO, Dr Arthur Vayloyan, called their
collaboration “a major step forward on the journey to bring crypto payments
into broader adoption”, adding that “Bitcoin Suisse is proud to serve as the
processor of cryptocurrencies in Worldline’s payment service system”.
So who will win the race to bring crypto payments to our
local grocery store? Well, first it’s not a race anymore, because Worldline is
buying Ingenico for a valuation of $8.6 billion. However, the problem with
crypto payments is that cryptocurrency users do not want to spend their
cryptocurrencies. They believe the price will go up further, so they only spend
their monthly return from staking or lending. However, this infrastructure will
be used by some, especially die-hard crypto fans.
In that sense, Switzerland’s project will most likely gain
more traction initially, because Switzerland is undoubtedly one of the most
crypto-friendly countries in the world. The Swiss city of Zug accepted Bitcoin
as a valid payment method for public services in 2016 when public trust in
cryptocurrencies was much lower. In addition, the Swiss Central Bank has an
ambitious plan to launch its own pure digital currency. Although there is
progress in Germany on the custody side, all countries in the European Union
are still under pressure from the European Banking Association to steer clear
of crypto assets.
Will cryptocurrencies win people over once they become
relevant everyday payment methods? Whose project will make history and whose
idea will bite the dust? Whatever awaits our digital kingdoms, one thing is
sure: innovation will always find a way to redefine who we are and how we shop.
“There are a lot of investors where custodianship was the final barrier. Over the next year, the market will come to recognize that custodianship is a solved problem. This will unlock a big wave of capital.”
Kyle Samani Hedge Fund Manager at Multicoin Capital
In the January 2019 edition of the Crypto Research Report, we extensively covered institutional grade cryptocurrency custody. We interviewed three firms in the space including Crypto Vault AG, Crypto Storage AG, and Coinfinity. This article explains custody from the perspective of a user, including information on how to store keys privately, and what questions to ask when considering using a storage company.
“Custodians are necessary as the next step towards crypto-assets being seen as a safe and attractive financial asset option for large FIs and perhaps for market confidence in general… Major institutional custodians providing a secure place to store large amounts of crypto-assets could provide the protection necessary to reduce the risk of hacks and increase the trust of the investing public in crypto-assets.” Attorneys at Perkins Coie
Storing your gold or other physical assets comes with two
options: either at a facility you completely control in all aspects (self-custody)
or at a service provider, who holds the assets in your name secured in a
facility you have no access to (service custody). The same principle applies
for storing your digital assets like bitcoin. However, digital assets require a
digital vault to provide the highest security standards. But what exactly needs
to be stored safely in case of digital assets? It is the so called “private
key” which provides access and control over the digital asset and thus the
right to transfer it to someone else. In the case of Bitcoin, the private key
is a 256-bit number represented in hexadecimal form. Storing these keys is
basically a physical issue as they could be simply written on a piece of paper
or engraved in metal and put into a safe deposit box to limit physical access
and digital exposure to the internet where they could potentially be accessed
and copied by a hacker. As a private key is needed to sign a transaction (prove
ownership), software is required to execute the signature generating process
and the key needs to be revealed to this software. In order to facilitate this
procedure, specific hardware wallets were introduced which enable not only a
hardware secured environment for generating the necessary signatures without
exposing the key to the internet, but also can handle an infinite amount of keys
deriving from a master private key following a standardized process. This
standardization of key derivation enables users to backup just the master
private key and recover all necessary keys on a new device in case of
malfunction or loss.
Using only N of M private keys makes it possible to store e.g. another key somewhere as a backup. Should one of the keys be stolen or lost, the secured Mth key can be retrieved.
The next step to attain an even higher level of security
would require one to build something which could be described as a digital
vault. A digital vault typically involves the creation of multiple master
private keys and storage of them on special hardware wallets with secure
elements at different geographic locations.
The transaction then needs to be signed by N out of M
private keys depending on the spending rules implemented when originally
receiving the funds. This concept is called multisig – short for “multi
signature scheme”.
In order to deal with malfunction of key storage hardware, a
proper backup plan is crucial. The most common practice is to either perform a so-called
key rotation or to securely store encrypted backups to be able to recover the
master private keys. Both methods come with advantages and drawbacks.
Figure : Example of a “Multisig-Scheme”
Source: Incrementum AG, Daniel Wingen
The execution of a key rotation becomes necessary if one decides that the master private key should never leave the secure element of the hardware wallet, which makes backups impossible. This is great for reducing attack vectors as long no device malfunctions, but if there is an incident, all funds need to be moved to a setup of completely new generated master private keys. Moving millions or even billions worth in digital assets is a very critical and expensive endeavor which takes time and introduces a lot of attack vectors if not planned and executed accurately. Backing up the master private keys on the other side also opens a new attack vector for collusion or social engineering to extract the private keys.
Figure: Two Major Ways of Protecting Against Hardware Malfunctions
Source: Incrementum AG, Daniel Wingen
A key rotation scheme means that you have to replace the entire set of keys. This is because if you lose one of three and you need two out of three keys to sign a transaction, you have to act quickly. The coins need to be moved to a new address where you again own all three keys, because if one additional key would be lost, all the coins are lost forever.
Social engineering can be described as a psychological strategy in which attempts are made to gain access to digital safes through targeted manipulation. Attempts in this context means that company employees come together internally to gain access to digital safes.
This means a well-functioning digital vault for digital
assets requires an elaborate technical solution for:
key
generation
signing
procedure
the
storage of private keys (and backups) at different geographic locations.
Social engineering can be imagined as a psychological strategy in which attempts are made to gain access to digital safes through targeted manipulation. But apart from that, a well-designed digital vault should have further features to make it more secure. First, we have a closer look on how the private key is stored ideally before we go into more details on the signing of transactions.
“From the perspective of IT security, the aspects of recognition performance and security are of particular importance when considering biometrics.”
Federal Office for Information Security, Germany
In general, it is very common to secure devices which hold
the private keys in a physically secured bank vault which is similar to gold
storage, however, there are some important differences. To begin, the devices
on which the private keys are stored should be protected with additional
digital security measures. Only specific predetermined persons may access the
device with identification through biometric data such as fingerprint. In
addition, entry is only allowed at specific predefined times or else if
specifically authorized by the board of directors of the company operating the
digital vault. This reduces the probability of unwanted signature generating
events virtually to zero.
Cold vs. Hot Storage Custody of Cryptocurrencies: If the wallet is connected to the Internet, this private key is exposed to potential hacker attacks. Because of the online connection to internet, this type of storage is called hot storage. A cold wallet, in contrast, is a storage space that is not connected to the Internet. The keys with which you can manage your digital money are stored offline. This of course reduces the risk of DDoS attacks and hacker attacks considerably.
Most importantly, only transactions authorized by a predefined quorum of decision makers may be signed with the corresponding private keys. In order to achieve that, typically an additional cryptographically secured authorization layer is put in place. This layer is an addition to the cryptography securing the digital asset itself. Each digital vault operator defines its own authorization processes which can be adapted to different internal processes or client needs. For example, one could agree that the authorization process of a transaction must involve at least three people on the client side signing a transaction approval with their individual authorization keys stored on personal security devices. The authorization process should involve biometric data or other second factors like chip and pin. In order to prevent theft by colluding employees within a custodian, it is reasonable to include a business logic that technically requires the authorization by the client. However, the board of directors could mutually change the business logic of the authorization layer to access the digital assets without authorization by the client. They could even just access the master key backups directly if not properly secured through profound business continuity management (BCM). This is why it is important to rely on a custody provider with trustworthy management that is audited by regulatory authorities. Also, the custody provider must show a thoughtfully implemented segregation of duties since human interaction is the most critical point of failure.
An example of such a BCM rule could be this: Nobody can access the safe deposit box which stores the backups without having registered with the safe company a week in advance. Upon this “one-week in advance registration”, everyone in the company would receive an email/SMS message announcing the registration. Then, only one person with biometric data and/or two-factor authentication can access it on that day at that specific time. In addition, in order to change this rule with the vault company, a quorum of management approvals through formal request and verification would be required. A similar approach could be established for hardware wallets to access them for firmware updates. This could be in the form of a certain quorum of signatures from managers that would be required to overwrite the bootloader and allow firmware updates etc.
If you plan to store your digital assets at a custody
service provider, it is of utmost importance to check their technical solution
on whether it is designed according to industry standards which reduces risk
for loss, theft and fraud of private keys to the lowest possible. A good custody provider should provide the
following:
A digital vault (cold storage) with at least 2
out of 3 multisig.
Distribution of partial keys on
different geographic locations in countries which are considered to have a
stable system in regard to respecting proprietary rights (USA, Singapore,
Switzerland, Germany, etc).
Safe
backup of the private key which should again be distributed geographically, or
alternatively, a sophisticated key rotation scheme.
Trustworthy
management audited by regulatory authorities.
Authorization
layer that requires customers’ consent to sign transactions.
“James Howells is a multi-millionaire – and somehow not. Thousands of Bitcoins are slumbering on his hard drive, which is now worth 75 million euros. The catch: The hard disk is buried in a dump.”
N-TV.de
The obligation to hold the assets under management means no more than that the funds must be placed externally within a depositary.
The above chapter showed that the process of setting up and maintaining a
digital vault to secure a significant amount of digital assets does require a
lot of specialized knowledge and well thought through security procedures. Such
a complex setup is currently hardly feasible for a private person or small
company without investing a significant amount of resources in research and
development. This will very likely change in the future, but currently self-custody
always comes with reduced security if proper knowledge and secure technical
implementation is absent. To achieve a certain level of security, one has to
know the technology quite well and understand the digital assets specific
mechanics of the public private key methods used. Then, one needs to store the
private key safely in a way that it cannot easily be stolen or lost. If the
private key is lost, then the digital assets cannot be accessed by anyone
anymore which equals a total loss of the assets. Understanding the technical
mechanisms of accessing digital assets with a private key requires time and can
be very difficult to grasp for the less tech savvy people. In addition, one
needs to make sure that one’s heirs may obtain access but only when the time
has come. This problem can be easily solved with serviced custody, but it is
rather difficult to solve in self custody. Self-custody for corporations is
even more complex since access to the private keys must be split and
distributed to several people to ensure that no single person has access to all
funds. If only one person had access and this person gets involved in a deadly
accident, then all funds of the corporation would be gone – a situation which
shall never occur. Depending on the jurisdiction, financial service providers
are even obliged by regulation to store their assets under management in
custody. In Germany, however, the separation between financial service
companies and custody was eliminated by law.
The idea behind Bitcoin, however, is decentralization and
censorship resistance. Bitcoin technology hands people back their financial self-sovereignty
and creates a level playing field where every individual, company or bank has
the same entry barriers to transfer the asset globally with near instant
settlement – but only if one controls the private keys. In line with this,
there is a common perception of “not your keys not your bitcoin” which
encourages self-custody.[1] We see it
as reasonable to have a balanced perspective on self-custody and serviced
custody by looking at the pros and cons of both. Deciding on the custody
solution for your digital assets should include:
your
knowledge on the technical solution,
the
general pros and cons of the options as well as
the
amount of funds to be stored
and
the specific use case.
Private individuals can simply store smaller amounts of digital assets
with consumer grade hardware wallets which are easy to use and provide
reasonable security if handled with care and a basic knowledge of the mechanics
involved.
“New obligated parties (of the 5th AML Directive) are platforms for exchanging virtual currencies and providers of electronic purses (wallets) for virtual currencies (e.g. Bitcoin) etc.”
Paytechlaw.com
The 5th Anti-Money Laundering (AML) Directive is the most
important regulation for digital assets in the European Union so far. The
directive lays out the anti-money laundering obligations imposed on
cryptocurrency businesses which includes the requirement for Know Your Customer
(KYC) processes to identify customers. This legislation provides more clarity
for national states and businesses on how digital assets are regulated.
Germany pioneered the issuance of crypto custody licenses
that came into effect on the 1.1.2020. Crypto custodians now have to apply for
a “Kryptoverwahrer” license to provide custody services for digital assets,
however, existing custodians are allowed to keep up their business until a
decision on the license application is made by the BaFin, the German financial
market authority.
Austria made amendments to their Austrian Financial Markets
Anti-Money Laundering Act (“FM-AMLA”) and the Beneficial Owners
Register Act (“BORA”). Crypto Custodians need to be registered with
the Financial Market Authority since 10.1.2020. In Austria, no license is
needed to provide crypto custody service. The AML amendments merely require
enhanced due diligence measures if a high-risk third country is involved in a
transaction.[2]
The 5th AML directive does not apply to Switzerland since
the directive is EU law. According to the Swiss Financial Market Supervisory
Authority FINMA, “Switzerland has always applied the Anti-Money Laundering Act
to blockchain service providers”.[3] In 2019,
FINMA granted SEBA Crypto AG and Sygnum Bank AG a full banking and securities
dealer license.[4]
“[Custody] is the missing piece for infrastructure – it’s a treacherous environment today. Hedge funds need it, family offices need it, they can’t participate in digital currency until they have a place to store it that’s regulated.”
Mike Belshe, Co-Gründer & CEO von BitGo
We have identified more than 20 custody providers
operating at the end of 2019 with Coinbase, BitGo and Bakkt being the largest.
Coinbase has become famous with its exchange services. The company is managing
assets with a value of USD 7bn in 2019.[5]
Bakkt is created by CE the company behind NYSE and known for introducing
Bitcoin futures that are fully backed with “physical Bitcoins”- in line with
the company’s name. This means that the
bitcoin to fulfill a buy position that is scheduled for the future is already
available by Bakkt. BitGo provides clearing and settlement services that are
connected to several exchanges, OTCs, hedge funds and more. The customer may
decide which party to choose and to settle a trade with while the funds are
locked during settlement which minimizes counterparty risk.
Figure: Projected Tokenized Market Volume until 2027
In Germany, ING Diba, the most famous direct bank, announced to apply for the crypto custody license[7] as well as Solaris Bank, the banking as a service provider for startups[8]. According to Finoa, a Germany based custody provider, the amount of tokenized assets under custody will reach 1 trillion by 2020 and 24 trillion by 2027. However, these statistics mostly focuses on equity, debt and tokenized real estate, neglecting the expected increase of Bitcoin market capitalization according to the Stock-to-Flow model.[9]
Bitcoin is a technology that has only existed for 12 years and has risen to prominence in an even shorter period of time. As such, there is still a lot of confusion regarding many of its facets, from its economic status, to its monetary status, to its long-term viability.
One under-explored facet of bitcoin is its legal status. Specifically, how can ownership be determined for bitcoin (or other cryptocurrencies)?
The reason we care about this is because there has been increasing scrutiny on regulating bitcoin. In order to have effective regulation, there must be a deep understanding of what is being regulated. If regulators thought the first airplane was able to travel faster than the speed of light, it’s very possible that regulators would have put rules in place that would have crippled the industry.
Similarly, everyone must be on the same page when it comes to understanding the very basics of bitcoin, lest we might see some unnecessarily confusing, contradictory, and industry-destroying patterns of regulation.
Before we can begin to answer the question of how to determine ownership in bitcoin, we must understand what ownership means, review how bitcoin works, and then combine the two concepts together. The short answer is: it’s complicated, but there is a case to be made that nobody owns your bitcoin.
First, a review of what ownership means. There are two
senses in which the word is used: economically, and legally. Economically, ownership
refers to physical possession—the ability to physically control a good.
Legally speaking, ownership entails certain rights and responsibilities. You
may or may not need to be in physical control of a good to retain legal
ownership.
This distinction was also noticed by the eminent Austrian
economist Ludwig von Mises in his 1922 book, Socialism: An Economic and
Sociological Analysis:
“Thus the sociological and juristic concepts of ownership are different. This, of course, is natural, and one can only be surprised that the fact is still sometimes overlooked. From the sociological and economic point of view, ownership is the having of the goods which the economic aims of men require… The Law recognizes owners and possessors who lack this natural having, owners who do not have, but ought to have. In the eyes of the Law ’he from whom has been stolen’ remains owner, while the thief can never acquire ownership. Economically, however, the natural having alone is relevant, and the economic significance of the legal lies only in the support it lends to the acquisition, the maintenance, and the regaining of the natural having.”[1]
The distinction can be made clear with an example: you may
own a car legally even if you have lent it to a friend for an hour. However,
during that hour, your friend is the person who owns the car economically. If
your friend does not return your car within the specified amount of time, you
can seek legal action against him for theft.
Furthermore, there are some things you cannot own. Economically, you cannot own something that isn’t physical. When we talk about “manipulating ideas”, we are speaking in metaphor. Ideas, information, patterns, etc., are not physical things, and so they are not scarce. As they are not scarce, they cannot be subject to economization: there is no need to economize on the idea that two plus two equals four, as infinitely many people can hold the same idea and it would not diminish in my mind.
It is also crucial to note that economic ownership has nothing to do with “value”. Value can be ascribed to both physical and immaterial things. Diamonds are valuable, but so is a sense of accomplishment. A mosquito has very little value, as does the thought of an alternative reality where everything is the same except we refer to red as “blue” and blue as “red”.
Similarly, legal ownership also has nothing to do with value.
You may have legal ownership in objects with little value, such as a stack of
dusty old newspapers. You may also be legally prohibited from owning scarce
goods that are highly valuable, such as the surface of the ocean.
The key for determining whether something can be owned economically is only whether it is a physical object. On the other hand, while the law can only ascribe rights to economic goods in a fundamental sense (how can you have a legal right to something that you can’t physically control?), the law may ostensibly declare a right to anything.
This discussion may strike some as academic hairsplitting. However, in lieu of strict definitions and rigorous logic, we may end up with analysis by metaphor, simile, and figures of speech—in other words, fantasy storytelling instead of dealing with reality seriously. When these confusions are then applied to cryptocurrencies, serious issues can arise. As all metaphors are imperfect, bad metaphors will give rise to bad arguments in favor of bad regulations, leading to bad results.
Hence, the necessity of wielding the sword of logical consistency against the chaotic dragon of analogy. Armed with this new terminology, we can now analyze what it means to own a bitcoin.
A bitcoin is not a concrete, discrete physical thing. It is a pattern of information, first and foremost, and (just as crucially) it is stored on a distributed, virtual ledger. Specifically, the ledger is distributed among millions of other computers, which share updates about changes in the ledger with each other over the internet.
So immediately, we can know that there can be no economic ownership of bitcoin. Even if you have a “paper wallet”, the paper is not your bitcoin. If your wallet is on your computer, it is a convenient metaphor to say that your bitcoin is “in” your computer. Your bitcoin is a pattern of information; a set of instructions to a computer.
Furthermore, you do not have full control of what you can do with your bitcoin: you require consensus from other nodes in the network. Those other nodes are other people using their own computers on their own property. They can be located anywhere in the world.
You do not physically own their computers, their property,
or the individuals. To “own” bitcoin in any sense would necessarily require
your economic ownership of the computers, property, and even minds of other
individuals.
What would it mean to legally own bitcoin? To repeat from
above, legal ownership gives certain rights to you that creates certain
obligations in others. Specifically, it is about returning to the legal owner
property that is in the physical possession of someone else.
So let’s say you had one bitcoin, stored on a wallet on your
laptop. Then, late one night, Sneaky Suzan breaks into your house, opens your
laptop, gets access to your wallet, and transfers your bitcoin to her wallet,
then carefully places are your stuff back to their original locations before
running out of the house.
Suzan is clearly guilty of breaking and entering, trespass, computer trespass, and other property crimes. But did she steal “your” bitcoin? To figure out if she stole something, we need to figure out who the original owner was. To say you “own the bitcoin”, says patent attorney and legal theorist Stephan Kinsella, implies:
“you have some legal right to control how the ledger is represented on many people’s private computer memory devices. And because they own their computers, and you don’t own your computers, you have no right to tell them how to update the ledger stored on their computer.”[2]
Naively, it would mean that Suzan would have to give you
back “your” bitcoin (plus other damages). But what if she spent it already?
Would bitcoin miners be obligated to revert back to the point in the blockchain
before the theft, creating a new fork? In the view outlined in this article,
this is an untenable idea. A much better solution is to give the cash value of
the bitcoin at the time to the victim. (The “cash value” approach would also
work even if bitcoin became the most commonly accepted medium of exchange.)
A final problem: what if someone, by sheer luck, guesses your private key and is able to access the wallet on your laptop and spend the bitcoins at will. They have not committed any property crime; but neither have they committed a bitcoin crime. They followed the rules of the protocol, and the result was exactly the same as though you had your bitcoin “stolen”.
The legal theorist Konrad Graf has an interesting approach
to this: this problem is analogous to a businessman who copies a competitor’s
business plan and wins market share as a result. As Graf tells it:
A businessperson Dan sees rival
Tim’s more efficient work method by observing from across the road and then
begins to emulate it. This increases Dan’s competitiveness. Tim claims he has
lost sales, market share, and business value due to this “idea theft.” Tim had
a reputation as the market leader. Now, he has been rendered one competitor
among others, next to Dan, and it is Dan’s fault. Not only has Tim’s market
share dropped, but also his reputation value.
Tim’s legal claim would have to be dismissed according to principles of action based property theory, because the work method that Dan observed and then emulated is not itself ownable. An idea or opinion is not a rival good. Dan did not otherwise trespass or infringe on Tim’s property. Dan observed from a location that Tim did not own and later emulated certain practices that he observed. None of these acts violated a valid property right of Tim’s.[3]
In a sense, “your” bitcoin is only yours because you know the password for transferring it. Nothing else about bitcoin is ownable in the economic sense: it is a pattern of information, it is distributed across many other properties, and those properties necessarily are owned by other people. As a result, it is impossible to legally own bitcoin, as it seems it would require obligations to people you have not met or contracted with. And, as a shocking but necessary conclusion: if no one can legally own bitcoin, then no one can be charged with stealing it, either.
To echo the opening of this article, there is still a lot of
work to be done in understanding the legal principles behind bitcoin.
For several years legacy financial
companies have started to integrate blockchain technology in their existing
business model. While digital-native and decentral-native start-ups have been
able to directly build on public blockchains like Cosmos, Tezos or Ethereum,
legacy finance firms with their complex IT infrastructure started to test
private blockchains in order to become familiar with the technology, remain regulatory
compliant and experiment in a controlled and surveyed environment with their
clients. R3 Corda for example has become the primary permissioned blockchain
platform for the legacy financial service industry.
While many companies believe that this
is the ultimate goal, several banks, like Goldman Sachs for example, have
already left the Corda platform. They belonged to the early joiners, but
already left in 2016. However, just last week, Goldman Sachs and Citi announced
to conduct the first blockchain equity swap on an Ethereum inspired platform. To conduct
this swap, they are collaborating with a new market player called Axoni.
Developments in the Permissioned Blockchain
Space
Axoni gave an interesting talk in Prague at DevCon 4 in 2018.
They introduced AxLang as a new programming language for secure and reliable
Ethereum smart contracts. The
speech can still be viewed on Medium. Similar to Hyperledger or Corda,
their approach is to use a permissioned distributed ledger platform based on
open source software in order to help legacy firms use blockchain technology to
operate more efficiently with their customers. Axoni specifically focuses on
derivative markets.
The big advantage is that their infrastructure is built on Ethereum,
which is still the largest used blockchain for DeFi applications. According to
Defi Pulse, the total value locked in Defi surpassed USD 1 billion on February
9, 2020.
Figure 1: Top 5 DApps on Ethereum
Apart from the Lightning Network, which builds on Bitcoin, all DeFi applications
are based on the Ethereum blockchain. This finding is confirmed by State of the
Crypto Report, which shows the
strong developments and progress around Ethereum and Bitcoin.
Previous market players have struggled to implement Ethereum based
permissioned applications. Bank Vontobel, previously a Premium Partner of
the Crypto Research Report, for example wanted to launch a certificate on
ethereum as well, but there was one main problem. The legal situation and
the lack of a payment token recognized between banks has prevented them from
conducting the complete process exclusively on the blockchain.
Hence the news around the US investment banks Goldman Sachs and Citi
using the Ethereum blockchain is even more positive. Especially with regards to
the status of US crypto regulation, where the SEC is extremely reluctant and
causes many roadblocks.
While there are just a few crypto
advocates in the US, like the so called “crypto mom” Hester Peirce, the EU is
overall much more crypto friendly, especially in Germany. Since the Money
Laundering Act came into force on January 1, 2020, in which BaFin financial
institutions were allowed to conduct crypto asset transactions, more than 40
institutes have shown interest in crypto custody business.
Solaris Bank for example has taken a similar approach
to Fidelity with cryptocurrency custody. The young German bank Solaris AG
founded the subsidiary Solaris Digital Assets GmbH in December 2019 as digital asset
custody service provider. They consider themselves as tech company with a
banking license. Alexis Hamel, Managing Director of Solaris Digital Assets
says:
“We commit ourselves to become the leading infrastructure provider for the European digital asset ecosystem. We trust that by lowering the hurdles for digital asset pioneers, we are contributing to the development of a functional and secure decentralized world, which will transform the way we exchange value around the globe.”
Alexis Hamel
Private blockchains can constitute the perfect testing environment for legacy firms in order to learn about the technology and make their clients familiar with it. However, in order to unlock the full potential of DLT solutions, the ultimate goal should be the use of public blockchains and full business integration of digital assets.
Are digital currencies the wave of the future? Sweden, Switzerland, and Brazil move towards digitalized financial systems, exploring new possibilities of adapting to the ongoing FinTech revolution. E-krona, Swiss franc stable coin, and Pix system are all national responses to the growing cryptocurrencies’ market.
The potential of digital currencies is undeniable: the number of Blockchain wallets has grown over 4 times in the span of the last 3 years, from 10,98 million in late 2016 to 44,69 million by the end of 2019.[1] Powered by people’s enthusiasm, the planet of digital currencies attracts the attention of national banks all around the world. This month, Swedish and Swiss national banks decided to step into the future with the plan to create their own digital currencies, while Brazil came up with its own payment network Pix to lower costs of the national financial system and smoothly transition into the world of Fintech. Governments can no longer ignore the technological revolution, so they join it instead.
Inspired
by Blockchain technology, Sweden has started working on its own version of
digital currency: e-krona. The pilot project is expected to run for a year and
finish by the end of 2021.The Riksbank’s goal is to discover how e-krona could
function in Swedes’ everyday life. Envisioned as a user-friendly, secure
alternative to cash, it is set to work with cards and smartwatches to guarantee
maximum comfort at minimum difficulty. The technical aspects of the project draw
from Distributed Ledger Technology (DLT), used also by Blockchain. The exact
process of creating e-krona is yet to be decided, and there is no fixed date
for its debut. The Riksbankwants to
understand the inner working of e-krona before issuing it, so the one-year
project is mainly the market research. In all certainty, there is a need for a
fintech solution in Sweden, where cash is slowly fading into obscurity,
replaced by smartphone applications.
Sweden is not the only country, which announced the creation of
its own digital financial system this week. Brazil, where 18% of surveyed
people have already had experience with cryptocurrencies[2], is an immense market for
fintech innovation. The central bank of Brazil decided, however, to take
matters into its own hands and test a brand-new payment network – Pix. To offer
the optimal coverage and easily blend into the Brazilian financial landscape,
the system will be used by all major financial institutions, including the
country’s biggest banks, effectively becoming integrated into 90% of all active
bnks accounts in the country.
Pix is set to operate through an application, which allows for
instant money transfer and QR code scanning. The tests have just officially
begun, but in nine months’ time – November 2020 – Pix may be open to the public
for the first time if things go right. The officials’ plans are definitely
ambitious: the mass adoption of the system is scheduled for 2021. In fact, the
president of the Brazil’s central bank, Campos Neto, acknowledged the need for
the new payment methods in the digital age, saying that “the world demands a payment
instrument that is cheap, fast, transparent and secure” and he called Pix one
of the most important projects of the year, stating that it would be the Brazilian
answer to bitcoin and cryptocurrencies. Designed to enable a wide range of
transactions, including paying government fees, and mandatory for the country’s
major financial players, Pix might be Brazil’s digital future in the making.
In
the midst of the fintech revolution, Switzerland doesn’t remain a passive
bystander. Swiss Central Bank announced plans for its pure digital currency to
dive into the digital future on its own terms. While the project’s exact
details and likely launch is unclear, Swiss transition into to the digitalised
banking continues in 2020, with the launch of Swiss Digital Exchange (SDX)
planned for the end of the year.
As the increasing number of
governments acknowledge the need for new banking systems, the future of digital
currencies looks bright. With Brazil’s ambitious plans to accelerate its own
fintech transformation, Sweden’s hopes to offer its citizens the institutional
replacement of obsolete cash, and Switzerland’s slow but inevitable financial
adaptation, the world is ready to move into the post-cash era and redefine the
way we view money.
The price of Bitcoin, by far the biggest player among all cryptocurrencies, fell more than 10% within the last few days. Other major cryptocurrencies, such as Ethereum, Litecoin and Bitcoin cash, have also decreased in value, but Bitcoin’s decline generates the most headlines, as earlier this year, it noted the record $10,000 per bitcoin and was showing no signs of slowing down. In the course of the last few days, Bitcoin lost $30 billion in value, going down 0,22% within the last 24 hours. Created by unknown individual(s), Bitcoin was designed to enable fast, cheap transactions without using traditional banking, and when its price went up at the beginning of the year, many started to regard it as a ‘safe-haven asset’ and the answer for the global trade crisis connected to coronavirus. China’s participation in the cryptocurrencies’ market is enormous, so given the latest course of events regarding the virus, the cryptocurrencies’ decline seems natural for some, while other industry experts, such as Vitalik Buterin call it “rationalised bullshit”.
Despite Bitcoin’s drop in value, many remain positive about its future, as it is driven by demand, rather than GDP. The entire business model of Bitcoin is based on scarcity, much like the former monetary programs, which only allowed printing the amount of money corresponding to the actual amount of gold. To ensure such scarcity, Bitcoin invented the process of halving, or simply reducing the total supply over time to boost the value of the cryptocurrency. Typically, Halving takes place every four years and the next one is set to take place in May 2020. Experts predicted that the price of Bitcoin would increase several times and reach up to $70,000 per bitcoin. Whether it is wishful thinking or an accurate prediction, only time will tell.
Nevertheless, it is without a doubt that Bitcoin continues to develop and improve its services, particularly in terms of privacy and scalability. In the first half of 2020, we can expect the launch of a consumer application for Bitcoin and cryptocurrency purchases. The app will be supported by Starbucks, Microsoft, and Boston Consulting Group. Despite a sudden decline in value, Bitcoin’s market capitalization equivalent is substantial. According to Statista’s database [1], between the first and last quarter of 2019, it increased by over 57%, from 72,37 billion dollars in the 1st quarter to 169,44 billion dollars in the 4th quarter. Square, one of the companies, which included Bitcoin in their payment methods, observed a 60% rise in the number of active users in the last quarter of 2019. The company’s revenue increased by 41% within a year, reaching over $1,3 billion dollars. Why is their success attributed to the Bitcoin adaptation? Half of $361 millions produced by Square’s Cash app were generated by Bitcoin transactions – in just 3 months. Numbers seem to be in favour of cryptocurrencies, even when investors are not. During the meeting with crypto representatives, the famous investor Warren Buffet was reported to have donated all cryptocurrencies he was given to the charity, stating that “I don’t own any cryptocurrency. I never will.” Regardless of the current crypto landscape, Bitcoin’s kingdom is yet to fall, but will it quickly recover? Remains to be seen.
Change is the only constant in the world of cryptocurrencies. Although Bitcoin lost $30 billion in value within just a few days, it continues to attract customers across numerous applications, having generated half of Cash app’s revenue in just 3 months. Powered by demand, it may rise again, once scarcity’s in play.
Several blockchain-based companies are publicly listed on stock exchanges throughout the world. Some of them are trading at an unwarranted price given their revenues and earnings potential. Some have even already gone bust like Riot Blockchain Inc. (RIOT) that dropped 97% from an all time high of $46 in 2017 down to the current price of $1.33, or they have switched business models like Fortress Blockchain Corp. now called Fortress Technologies Inc. (FORT) after quarters of consecutive million dollar losses.
This article is a sneak peek of the Crypto Research Newsletter published every week to our subscribers. We do not often publish these posts publicly, so if you would like to receive professional financial analysis of crypto assets weekly subscribe here: https://cryptoresearchnewsletter.substack.com/
In this week’s edition of the Crypto Research Newsletter, we discuss how to value publicly listed blockchain stocks, and how some investors with deep pockets are turning overvaluation into an opportunity.
There are several ways to value a publicly listed stock. This week, we wanted to evaluate if Michael Novogratz’s Galaxy Digital Holdings Ltd. traded on the Toronto Stock Exchange with ticker GLXY was a good buy or not. Galaxy Digital does venture capital, they sell investment products, they do lending, and they do market making, amongst other activities.
The market capitalization of Galaxy Digital is $88.56 million Canadian Dollars (CAD). The stock price is $1.32 CAD. Is this a good buy at $1.32 or not? There are many ways to answer this question, but a simple way is just to compare Galaxy Digital’s price to comparable firms.
Comparable blockchain firms that are listed on the Toronto Stock Exchange include Hive Blockchain Technologies Ltd., Bitfarms Ltd., Cryptostar Corp., Neptune Dash Technologies Corp., Fortress Technologies Ltd., and AnalytixInsight Inc. The market capitalization, revenue and Price to Sales Ratio (P/S) are listed in the table below.
Table 1: Price to Sales Ratio of Publicly Listed Blockchain Companies
Just a quick glance at the table shows that Galaxy Digital is relatively low priced compared to other blockchain firms. Galaxy Digital’s Revenue in 2019 was $156 million, higher than the company’s $92 million CAD market capitalization. This gives Galaxy Digital a P/S Ratio of 0.59 compared to the group average of 13.9. Galaxy Digital’s stock has increased 26% since the beginning of this year from $1.05 to $1.33. However, the company is still not turning a profit after costs.
A quick glance at Table 1 also shows a humungous outlier. Namely, Neptune Dash Technologies Corporation. Neptune Dash is a company that hosts masternodes on the Dash network. They currently have 16 masternodes, or approximately 16,100 Dash worth around $1.7 million USD and they have invested in Cosmos (ATOM). Even though everyone says that Tesla is overpriced, Tesla (TSLA) is still only trading at a P/S Ratio of 6.5x their annual revenues. Apple (AAPL) trades at 5.5x their annual revenue.
Figure 1: Neptune Dash Stock and Dash are Highly Correlated
Figure 2: Grayscale GBTC Stock and Bitcoin Are Even More Correlated!
So how can a 73x P/S Ratio be warranted? One interpretation is that 73x could be a very early stage startup multiple meaning that investors expect for Neptune Dash to earn a lot more in the future than they are currently earning.
Another interpretation is that institutional investors cannot easily hold privacy coins directly in their portfolio, and are therefore, willing to pay more for a publicly listed stock that gives them access to privacy coins. There is some evidence of this with stocks like Grayscale’s GBTC Bitcoin tracker that has more often than not traded at a 20%-30% premium over the spot price of Bitcoin during the past few years.
Grayscale has 303,363,800 outstanding each worth $11.72 USD, and each share is backed by 0.00096645 Bitcoin, worth approximately $9.33 USD. This means that GBTC shares are trading at approximately 25.6% premium over the spot price of Bitcoin. An obvious trading strategy would be shorting GBTC and holding Bitcoin long, but this has not worked well in the past for traders, because GBTC’s premium has persisted month after month. Grayscale has approximately 293,185 Bitcoin under management and charges a 2% annual fee on a passive investment strategy, which at first glance, seems high, but is actually quite reasonable given the fact that cryptocurrency custody is not that straightforward.
When comparing the Neptune Dash stock price to the Dash price, an average 90-day rolling correlation of 70% is found over the past two years since Neptune Dash was listed on the Toronto Stock Exchange. The only time that these two assets had a negative correlation was during December 2019 and early January 2020, when the price of Dash was going down and the price of Neptune Dash stock was going up. This can most likely be explained by the fact that the drop in Dash’s price triggered a massive selloff of Dash masternodes, which meant that the existing masternodes earned more. Since Neptune Dash runs masternodes, this means that their earnings went up on each node.
In contrast, the GBTC average 90-day rolling correlation with Bitcoin is much higher, at 83% over the past five years and 92% over the same time span that the Neptune Dash and Dash correlation was calculated over.
One final note on this peer group of blockchain firms: there is an unfortunate back story to Fortress Technologies Ltd. The company was listed on the stock market in 2018, and is currently trading at $0.12 CAD. This is the epitome of a crypto penny stock. The company has basically no information on their website and the last post that Fortress Technologies Ltd. made on their Twitter account was in 2018 shortly after being publicly listed. We were surprised to find that Roy Sebag and Josh Crumb from Goldmoney are part of the Fortress team. Apparently, their attempts at Bitcoin mining did not pan out as expected, as they officially removed “blockchain” from their name in April of 2019 after consecutive quarters of layoffs and losses.
In conclusion, Grayscale and Neptune Dash seem grossly overvalued when comparing their share price, number of shares outstanding, and earnings. This is most likely a symptom of all stock prices being grossly overvalued because the Fed’s faucet of money is flooding the market and investors are betting on scarce crypto assets as being a hedge against fiat inflation. This will not last forever, but as Keynes said, “markets can remain irrational a lot longer than you and I can remain solvent.”
This Week’s Top Cryptocurrency News
Wyoming’s Blockchain lady, Caitlin Long, is starting the first Bitcoin Bank called Avanti. We are personally excited at the CryptoResearch.Report, because Caitlin is one of the few people in the Blockchain space that combines competency, hard-work, and honesty – all qualities needed for a company to have long-term success in the crypto world! Read more.
Tomorrow, Wednesday the 26th of February, the U.S. Securities Exchange Commission will decide if the Wilshire Phoenix exchange traded fund (ETF) on Bitcoin will be approved or not. If approved, the ETF will have fees of 68 basis points (0.68%) per annum and a maximum share price of $2,500 USD. Read more.
No Central Bank Digital Currencies (CBDCs) have been officially launched so far, but Sweden will probably win the race with their e-krona. Read more.
Winners and Losers
Everything that goes up must come down, and this week was not very kind to Chainlink or the crypto asset market in general. Chainlink is down – 13.64% this week, but is still up 116% year to date with a current price of $3.91 compared to $1.81 on January 1, 2020.
The past week’s largest cryptocurrency winners from the top 50 market capitalization are Cosmos (3.02%), Litecoin (1.63%), and MKR (0.73%).
The biggest losers were Chainlink (-13.64%), Bitcoin Cash SV (-11.82%) and Dash (-10.96%).
Figure 3: Largest 7-Day Returns for Top 50 Market Capitalization Coins
Bitcoin has had a second week of losses, and is down 1.21%. Due to the wide diversification of the assets held in the Crypto Research Portfolio, the weekly return for the portfolio was positive. This is mainly do to our gold coin Pax Gold shooting up 8.2% in value after the stock market sell-off. As of February 25th, 2020, the portfolio’s value increased by 205 basis points or 2.05% in the last six days since the last edition of the newsletter was published on February 19th, 2020. Gold is an interesting asset given the economic uncertainty surrounding the Corona Virus.
Facebook’s Libra coin is meeting strong resistance from governments and central banks. But there is also a lot happening in the “traditional” crypto sector. Several players are laying foundations for a regulated market that could attract institutional investors. And Bitcoin reacted to the recent rounds of easing by central banks.
The year 2019 is slowly coming to an end. What was the best place for an investor’s money this year? Prices for Bitcoin have more than doubled since January – even though they have recently fallen sharply again. From April 1 to June 24, they rose by 250 percent – from just under $4,000 to just under $14,000. At the time this report was prepared, Bitcoin was priced at around $9,000.[1]
Figure 1:Almost 1 Million Active BTC Addresses Per Day
Source: Coinmetrics.io, Incrementum AG
“Facebook’s digital currency, Libra, is a mixed blessing for Bitcoin and other digital currencies.” Forbes
Forbes
Whichever way you look at it, Bitcoin beats the second-best asset of the year, namely US technology stocks, by far. This year, they have risen by about 30 percent. Even gold, which is experiencing a quite respectable year, is just up 17 percent. The broad S&P 500 index gained 21 percent. All this fades in comparison to Bitcoin’s growth by more than 140 percent – from $3,300 in January to about $8,200 per coin in October.
Figure 2: Non-Monetary Demand For Gold and Silver Declining (in Tonnes, 2010 – 2019)
Source: The Silver Institute, Refinitiv GFMS, Metals Focus, World Gold Council, Incrementum AG
Still the crypto space has been rather quiet lately. The rise in prices alone was not enough to satisfy the mainstream media hunger for new stories. In addition, Altcoins look rather bad at the moment. Take Ethereum, for instance. The second most important cryptocurrency rose by “only” 80 percent between January (around $100) and October (around $180). The focus of politicians and the media has for some months now not been Bitcoin or Ethereum but the Libra project initiated by Facebook.[2]
One almost has the impression that Libra has displaced Bitcoin from the podium of the most important crypto projects. Especially in the mainstream media, where many journalists have specialized in crypto. And they don’t seem to get enough of the drama around Libra. But: Libra does not yet exist. Worse still, the alliance around the project is already beginning to crumble. [3]
According to Szabo, Bitcoin is more secure that Ethereum.
The currency coins that Nick Szabo is interested in are Mimblewimble-based coins and some of the of the privacy coins including Monero, ZCash, and Dash.
Demelza Hays. Do you think Bitcoin is Turing-complete? What can Ethereum do that Bitcoin can’t? Nick Szabo: No, the Bitcoin main chain is not Turing complete. It does have a Turing-complete sidechain called RSK. Ethereum’s programming language can do open-ended loops for example (up to gas limits) and Bitcoin main chain (layer 1) can’t. Programming Ethereum or RSK gives you the full expressive power of programming whereas programming on the Bitcoin main chain does not. This makes Bitcoin safer and is more appropriate where the main functionalities are store of value and medium of wealth transfer but makes Ethereum and RSK better for smart contracts.
Nick Szabo speaking with Richard Olsen at Money Museum in Zurich, 2016. Source: Google Images.
Demelza Hays: Do you think Bitcoin is digital cash or digital gold? In ten years from now do you think that we will be paying for our coffees with Bitcoin or some derivative of Bitcoin? I think Bitcoin and gold are too inelastic to be used as a unit of account. As the coinbase reward tapers, do you think the Bitcoin main chain will have many transactions with a small fee or do you think there will be few transactions with large fees?
In my opinion, setting an artificial data size limit for each block is similar to the government setting a price ceiling or floor on a good or service. I would allow the block size to be determined each block by the miners. This would be more similar to the free market. If the miners make the size too small in an attempt to earn more from fees, then users will switch to other blockchains that are a substitute service. If the miners make the size too large and certain miners gain an advantage because they can propagate blocks faster then users will switch to a substitute service.
Nick Szabo: Layer 1 is digital gold and Layer 2 is digital cash (among other things it can be — RSK is an example of Layer 2 for smart contracts).
Demelza Hays: Over the past decade, the correlation between Bitcoin and gold has been between positive 0.2 and negative 0.2 and has a slightly positive uptrend at the moment. Since some of gold’s demand comes from non-monetary purposes such as jewelry and industry, we argue that gold will always be less volatile than Bitcoin in terms of purchasing power of real goods and services over time. We have an investment strategy which intends to arbitrage between Bitcoin and gold. As Bitcoin becomes relatively expensive to gold, we sell Bitcoin and buy gold, and vice versa. Do you think the correlation in returns between gold and Bitcoin will go up in the future?
Nick Szabo: Very probably yes.
Demelza Hays: Are there any blockchain projects that piqued your interest recently?
Nick Szabo: The various Mimblewimble-based coins, some of the other privacycoins (Monero, ZCash, Dash), RSK (an Ethereum-like sidechain for Bitcoin).
Demelza Hays: Where do you see the US in ten years from now? Do you see Libra and Bitcoin competing or do you see a David Crowley-style Gray State? Nick Szabo: I suspect Libra will get buried under a political blizzard and doesn’t stand much of a chance. It would compete far more with payment systems like PayPal, and is more akin to things like Tether, than it would compete with or is akin to Bitcoin.
“With a commitment in a structured product,
specifically a tracker certificate, one does not invest directly in the
cryptocurrency but follows the price movements like a shadow. Investment risk
depends on price losses and creditworthiness of the issuer (default risk).
However, the investor must remain vigilant. Just because he has purchased a tracker
certificate from a bank, it doesn’t mean that it’s iron-clad. Should the price
of his cryptocurrency crash or even disappear from the market, there is, of
course, a total default risk here as well.”
Jürgen Kob and Paweł
Sobotkowski
We want to sincerely thank Lucas Ereth and GenTwo Digital for contributing this chapter. Lucas is a managing member of GenTwo Digital (https://www.g2d.io). Our readers can sign up for a free newsletter at https://www.g2d.io/blog. Please note, that GenTwo is a premium partner of the Crypto Research Report.
Lucas Ereth
This chapter features a sneak peek into
the life of the Managing Partner of GENTWO Digital and Forbes DACH 30 Under 30,
Lucas A. Ereth.
What does your business do?
To put it simply, we’re securitization experts working to bridge
the gap between traditional finance and the emerging crypto market. While our
parent company GENTWO creates securities for all asset classes, GENTWO Digital
specializes in the securitization of digital assets. In other words, we convert
digital assets, like cryptocurrencies, into structured products. These products
are then outfitted with an International Securities Identification Number (or
ISIN, for short) ‒ the de facto standard for securities trading internationally ‒ which ensures that the product is “infrastructure
compatible” with every bank and large scale/institutional investor.
In doing so, we turn a digital asset into something that is
bankable and manageable within traditional investment portfolios inside the
global banking system. Why would we do that? Well, large private and
institutional investors were having quite a bit of trouble accessing the market
for digital assets due to different aspects of the traditional functional
framework. So, we set out to provide a service that would make crypto assets
accessible for qualified investors from around the world via GENTWO and GENTWO
Digital.
How are tokens different from
structured products?
Structured products are flexible investment instruments that offer
an attractive alternative to direct financial investments (such as stocks,
bonds, currencies, etc.). Thanks to their flexibility, structured products
allow for the creation of investment solutions that are suitable for different
risk profiles and market expectations, even in demanding market environments.
New, next-generation structured products can now be utilized to give access to
a myriad of digital assets.
Tokens, on the other hand, are digital assets themselves, and are
not necessarily considered financial instruments. Both structured products and
tokens can be used for similar purposes, but the two are not the same thing.
Tokens also live on the blockchain, while structured products are financial
products that live in the banking system, and asset managers, banks, and
professional investors use them in their daily lives to get access to assets
and markets.
What are advantages of securitization vs.
tokenization?
I think that within today’s investment
landscape, one could make use of both, as they are each tailored to different
purposes and clientele.
A token offering, for instance, is limited to investors that can
handle the complexity of crypto wallets. At this stage, most crypto wallets are
best suited for retail investors that usually invest in small ticket sizes.
With the help of securitization services (this is where we come into the
picture), you can now take a crypto portfolio or a portion of any token and
convert it into a traditional financial structured product. This “real”
security is now suddenly made available to banks, family offices, pension
funds, high-net-worth individuals etc. So, big investors who generally do not
make use of digital wallets are, thus, granted the opportunity to actively
participate within the crypto market.
What makes securitization attractive to
traditional market participants?
Institutional investors can invest in new assets with their proven
and compatible form of investment. Structured products are investment
instruments that are very familiar to traditional market participants. So,
institutional investors can finance a crypto venture, and serve as a strong,
key member of the project supporters’ community, all while using the same daily
financial instruments that they are already used to. This is a wonderful
example of how structured products and tokens complement each other. At GENTWO,
we firmly believe that this setup will not only grant access to but actively
attract investors of the highest caliber. We’re essentially allowing the
investor to choose which format he or she prefers: a fully digital asset that
lives on the blockchain and in a digital wallet or a traditional investment
certificate (structured product) that lives in your bank account and represents
a digital asset. Securities are issued through a tailor-made and segregated
issuance vehicle that is unique and stays off of a client’s balance sheet. With
this design, the so-called issuer risk is (by default) eliminated.
As someone who works with many
structured products on a daily basis, what would you personally invest in?
I personally currently hold 27
different coins and tokens in my crypto portfolio. If I were to create my own
structured product, I would most probably turn my portfolio into a so-called
Actively Managed Certificate (a structured product with an actively managed
strategy behind it) and make it available for qualified investors. This is
actually one of our most common use cases at GENTWO Digital – traditional or
crypto asset managers who utilize us to turn their strategy into an investable
asset. Our platform provides the tools to facilitate the process from start to
finish, from converting the AMC into a Swiss-compliant security to getting a
Swiss ISIN. All within 5 to 15 business days.
Just to be clear, this is my personal view; cryptocurrencies are
highly volatile, and it’s important to remember that while there are attractive
return opportunities, you have to be willing to expose yourself to high risk
and the chance of losing your principal if you choose to embrace crypto
investments.
What is the biggest opportunity for
entrepreneurs who want to make a successful business in the crypto space?
Today’s digital world is quite
literally at our fingertips. I would encourage entrepreneurs to try to look
into the future and play around with connecting the dots between what is
present and what is possible. Making use of and/or sometimes just breaking up
and reshuffling certain dots can make all the difference.
I also think that making crypto-based
services or applications so accessible that an individual user does not even
realize that he or she is interacting with a blockchain-powered product or
service still remains the biggest challenge for mass adoption, and therein lies
the biggest potential for entrepreneurs within the crypto space.
What should entrepreneurs be aware of?
As always, everything starts with a
good business case, a business plan, and a good execution strategy ‒ I’d say that applies regardless of
whether or not you throw blockchain into the mix. Once you’ve laid that
foundation, you now need to evaluate how to use and leverage blockchain
technology for your specific case. Also, and I can’t stress this enough, ask
yourself if it even makes sense, because in most cases blockchain alone
probably won’t be the sole, magic ingredient that will ensure your business’
success.
What is the biggest threat to the crypto space?
I would say a lack of
understanding and public disinterest. If people fail to recognize or
acknowledge the benefits, value and possibilities of cryptocurrencies, Bitcoin
and the like will eventually die out as the hype and fanfare of even the
starkest supporters begins to wane.
Where do you expect the sector to be at the end of 2020?
It looks as though 2020 is set to be
the year where blockchain technology may (for the first time) reach billions of
people at once, as big tech firms like Facebook become active participants
within the space. I think this will mark the real start of the Internet 2.0,
with the potential to usher in an era of trust and digitized value.
Decentralized services will definitely help shape the future development of
this planet.
“The only reason that cryptocurrencies exist is because of regulations that stop us from using gold as money.”
Peter Schiff
Key Takeaways
Similar to gold-ETFs, all of the gold-backed cryptocurrencies on the market are centralized. This means they have counterparty risk. Unlike storing your own physical gold, gold-backed cryptocurrencies require you to trust a company for storage.
There are three main types of centralized, collateralized stablecoins: fiat, commodity, and crypto. Gold-backed cryptocurrencies are considered to be centralized and “off-chain-backed coins.” The most famous gold-backed cryptocurrency is the Digix Gold Token (DGX). DGX has a market capitalization of approximately USD 4mn and a daily trading volume of approximately USD 240,000 over the past year. Even though Digix is backed by gold, it often trades at a discount to gold, and Digix’s return is extremely volatile compared to gold’s return.
Gold-backed cryptocurrencies have higher costs and risks than ETFs and managed gold funds. Investors can suffer loss of value due to faulty private key storage, double-spends from weak blockchain security, regulatory uncertainty, lack of liquidity, and non-transparent accounting of gold vaults.
The first version of this article originally was published in the sister report of this publication, the In Gold We Trust report 2019. Interested readers can download the publication here: https://ingoldwetrust.report/
Last
year in the sister report of the Crypto Research Report called In
Gold we Trust, we featured an article exploring the intersection between gold
and Bitcoin.[1]
The article focused on how gold impacts Bitcoin’s application as a global store
of value. Now an even newer competitor
to gold is emerging: stablecoins. Stablecoins promise to improve on gold by
being digital and to improve on Bitcoin by being stable. But can the companies
behind these stablecoins deliver or are they just modern alchemists? This
chapter gives a rundown of the stablecoin market with a focus on gold-backed
stablecoins, which are in many ways similar to gold ETFs. Bottom line: All of the gold-backed stablecoins on the market are
centralized, which means they have counterparty risk. Unlike storing your own
physical gold, trusting a company to store your gold is required.
Gold has fascinated mankind for thousands of years. So far, more than 190,000 tons of the precious metal have been mined.[2] How much is still underground remains unknown. One thing is clear, however: The extractable quantity is finite and subject to diminishing returns. Similarly, the number of bitcoins that can be mined is limited: The mysterious inventor of Bitcoin has set the maximum amount to 21 million coins.[3]Unlike fiat money, gold and Bitcoin cannot be created by central banks at will in response to demand shocks. While the average annual growth rate of the gold supply is around 1.7 % with a rather small standard deviation,[4] Bitcoin’s inflation rate is currently 3.69 % and on a downward trajectory.[5] As mentioned in last year’s In Gold We Trust report, the supply of newly mined bitcoins follows a preprogrammed, transparent, and predictable schedule, which remains unaffected by fluctuations in demand.[6]Their inelastic supply makes the prices of gold and Bitcoin dependent on their demand.
Overall,
the supply trajectories of Bitcoin and gold show that Bitcoin is expected to
have a lower inflation rate by 2021. Every
210,000 blocks, the reward the miners receive per block is halved. This
roughly corresponds to a four-year “half-life.” Observers pay very close
attention to the schedule, because the so-called “halving” is regarded as an
important indicator of price movement. There is only little experience so far,
since there have been only two such “halvings.” But they show that the price
has always risen in the months before the actual event. Specifically, the
Bitcoin price found its bottom in the first bear market that came 378 days
before the first halving and again in the second bear market, 539 days before
the second halving.[7]
This equals an average of 458 days, and we are currently approximately
350 days from the next halving, which will probably take place towards the end
of May 2020. If the pattern observed so
far is confirmed, the bottom should have occurred somewhere between December
2018 and May 2019.
Source: bitcoinblockhalf.com, World Gold Council, Incrementum AG.
When we compare the supply of gold to the supply of Bitcoin, we notice
that both are being mined, albeit in their own particular ways. Gold can be
found in soil, rivers, and rocks all over the world, regardless of borders.
Similarly, independently of their location, Bitcoin miners receive a reward for
providing the network with computing power to verify and settle transactions. The main difference when it comes to mining
is that mining is what secures the Bitcoin network and the price of Bitcoin on
the market. In contrast, gold mining does not secure the price of gold.Therefore, we would like to make the subtle
distinction that Bitcoin is not a bearer instrument in the same sense that gold
is. Paying with gold requires absolutely no dependence on a network for
settlement. However, Bitcoin transactions can take hours to settle; and
trusting the software, hardware, and internet that support Bitcoin is a type of
counterparty risk even though the “party” is not human.
To make Bitcoin and gold even more scarce, a certain amount of Bitcoin
and gold becomes unusable every year. Previously, gold was used in quantities
that made smelting and recovery cost-effective and common. For example, the
gold in your mother’s necklace may well have in it metal mined by the Romans,
then used by the Tudors, etc. Now we see gold used in tiny amounts in high-tech
goods, amounts that may not be cost-effective to salvage for a long time. The British Geological Survey estimates
that around 12% of current world gold production is being lost for this reason.[8]This means gold is being consumed in
an absolute sense for the first time in history. Again, this is similar to
Bitcoin’s annual loss of coins that are unspendable due to lost private keys
and fat-finger mistakes while typing cumbersome recipient addresses. Two
different cryptocurrency researchers, Chainanalysis and Unchained Capital, have created an upper bound of 3.8 million
for the total number of Bitcoins lost.[9]
Overall, the supply trajectories of Bitcoin and gold show that Bitcoin is
expected to have a lower inflation rate by 2021.[10]
Since many young investors consider Bitcoin to be
digital gold with a payment option, some may suspect that the demand for gold
is adversely affected by the success of cryptocurrencies. As of yet, the correlation between gold and Bitcoin returns is still
low and slightly positive, indicating that the demand for gold is not adversely
affected by cryptocurrencies.
Source: Coinmarketcap, Gold.org, Incrementum AG.
This
secure demand strength of gold is due to the unique advantages it has over
Bitcoin. First, gold is far less volatile than cryptocurrencies and will
remain so for the time being. In 2017, Bitcoin was about 15 times more volatile
than gold. In addition, gold is much more liquid. On average, USD 2.5bn in
Bitcoin is traded daily.[11]
This amounts to just 1% of the total gold market: The daily trading volume of
gold is around USD 250bn. Furthermore, gold trades in regulated and
well-established venues and has long been accepted by institutional investors
as an investment alternative. This is not the case for cryptocurrencies.[12]
The US dollar’s hegemony is under increasing
pressure from China and Russia, as US national debt reaches record highs. Instead of returning to a gold standard in
support of a fiat currency, the 21st century could witness the
emergence of a gold standard involving a cryptocurrency.
The notion of a monetary system based on a cryptocurrency may be
surprising, given the fact that cryptocurrencies are the most volatile asset
class. Many Bitcoin holders have experienced a ride from USD 1,000 right up to
USD 20,000, and then steadily back down, culminating in a long, choppy sideways
market followed by the recent rally to USD 8,000. Enter stablecoins. Stablecoins promise to offer all of Bitcoin’s
benefits while fixing the problem of volatility.
While the decentralized and independent nature of their supply makes
gold and Bitcoin good stores of value, there are major differences with respect
to other monetary features. Following Dobeck and Elliott[13]
and Berentsen and Schär[14],
the next table gives a quick overview.[15]
Source: Incrementum AG.
However, the promise is most likely to be optimistic, as promises often are in the cryptocurrency space. For several decades, countries around the world have tried to peg their exchange rates to other more stable currencies. Not a single fixed peg has lasted in the long run.
Take for example the European Exchange Rate Mechanism (ERM), which
attempted to keep the plethora of European currencies within a narrow band of
each other during the ‘80s and ‘90s. Since the UK could not keep their print
presses turned off, George Soros and other speculators were able to mount a
speculative attack and profit from breaking the peg. This is because whenever a currency holds fractional reserves,
arbitrage opportunities arise between it and other currencies. Therefore,
stablecoins that are not fully backed are trading off between stability in the
short run and blow-up risk in the long run, because keeping a fixed peg without
investing in the underlying asset makes the peg fragile to black swan events.
Source: Incrementum AG
However, Bitcoin is volatile, and many cryptocurrency users are now
demanding stability. To meet this
demand, the new stablecoins are combining the advantages of gold and Bitcoin.
Gold-backed stablecoins are similar to gold ETFs. For example, the most famous
gold ETF, SPDR Gold Shares (GLD), is a fund that buys physical gold and divides
the ownership of it into shares.
In theory, gold-backed cryptocurrencies are supposed to work the same
way. However, there are currently no
cryptocurrency exchanges that are licensed to trade tokenized ETFs. Even if
regulators eventually approve an application for such an exchange, they will
require KYC/AML on each transaction.[19]
This begs the question: How is a
centralized gold-backed stablecoin any better than a gold ETF?We have still not found a suitable answer
to this question. In fact, the solution seems inferior at first glance,
because investors still have to safely protect the private keys that control
the gold-backed stablecoins, and if the tokens are traded on a public
blockchain like Ethereum, then the coins will be subject to volatile and
increasing transaction fees when they send and receive the gold tokens. Then
there are all of the problems associated with public blockchains, such as
latency, lack of scalability, and security.
As shown on the next figure, there are three main types of
collateralized stablecoins: fiat, commodity, and crypto. Gold-backed cryptocurrencies are considered to be centralized “off-chain-backed
coins” because they generate value by a counterparty’s depositing gold, gold
certificates, or other gold-related securities into a vault. Similar to
fiat-collateralized coins like the infamous Tether, gold-backed
cryptocurrencies are supposed to be listed on cryptocurrency exchanges so that
gold positions can be opened and closed within seconds by retail and
professional investors alike.
Over 50 cryptocurrencies are
somehow backed to gold. The next section summarizes just a handful of the
gold-backed projects. The projects selected were drawn from responses to an official
@CryptoManagers tweet
on Twitter. We asked our followers what coins they wanted to learn more about.
We also selected a few coins from the German-speaking countries, including
Vaultoro, Novem, and AgAu. Finally, we have included an update on the
gold-backed tokens that we covered last year.[20]
Source: Incrementum AG.
*Please be advised that the table includes fees
such as transfer fees, custody fees, subscription fees, and redemption fees. We
included all information which was provided to us by the companies. However, a
substantial cost that investors will have to bear may be the spread between the
price of gold on the market and the price of gold that each company charges
investors. This markup on the price of
gold is often not stated clearly in the whitepaper. The table is not
complete because the information was unavailable. Readers are responsible for
their own due diligence on each firm, and this is not investment advice.
Digix
Gold Tokens (DGX)
There are two tokens
associated with this company: DGD and DGX. The DGD crowdsale in March 2016 was
the first crowdsale and major DAO hosted on the Ethereum network. A
decentralized autonomous organization (DAO) is a type of decentralized application
(dApp) that allows owners to make business decisions by voting electronically,
and execution of the business decisions is performed using smart contracts.[21]
The second is the DGX token, which equals one gram of standard gold.[22]
The company reportedly procures its gold from LBMA-approved refiners. The
tokens are issued by Pte. Ltd. in Singapore, and the gold is stored at The Safe
House in Singapore. As you can see in the next chart, the daily trading volume
is approximately USD 243,000 over the past year, and USD over the past month.
The next chart shows that the Digix Gold Token is not correlated with the price
of gold. The token is more volatile and often trades at a discount to gold.
AnthemGold
What makes
AnthemGold unique is that it is the first insured, fully gold-backed stablecoin
based in the US. The token is open to citizens of 174 countries, and the vault
where the gold is stored can be viewed on video, on the AnthemGold homepage.[23]
Currently, there are 20kg of gold there. The gold is insured through Lloyd’s;
there is zero FACTA reporting required for investors; and according to the
founder of AnthemGold, Anthem Blanchard, the gold has zero risk of bank deposit
freeze or closure. There is a 0.40 % storage cost per year, extracted from
metal (which is the same as the GLD gold ETF fee structure).[24]
AgAu
AgAu is a gold-backed token that is being developed by
Thierry Arys Ruiz and Nicolas Chikhani, the former CEO of Arab Bank in Geneva.
Their offices are located at the Zug-based blockchain incubator, Crypto Valley
Venture Capital (CV VC). Their coin will be audited by E&Y and built as an
ERC-1400 smart contract on the Ethereum blockchain. The gold is 1 kg LBMA bars
stored at Trisuna in Liechtenstein. AgAu will be engaging in a token generation
event (TGE) to raise the initial round of capital that will be used to buy the
gold required for backing the tokens. The storage fees are 0.2 % per annum, and
each transaction has a maximum total cost of 0.4 %.
HelloGold, a Malaysian-based company founded in 2015, offers a token
backed by 1 gram of 99.99 % investment-grade gold. The tokens can be converted
into physical PAMP Suisse gold, and the shipping is insured. The total GBT
supply is limited to 3,800,000 (representing 3.8 tons of gold). Users also have
the opportunity to convert their gold into a digital gold token (GBT) if they
have a “pro” account, which requires standard AML/KYC. This enables them to use
the stored gold as a value outside the HelloGold system.
In addition, people may use their gold as collateral for loans made available by Aeon Credit Services, giving them access to personal finance. Finally, HelloGold offers a Smartphone app with which users can trade their tokens and exchange them for their corresponding shares of investment-grade gold. When they redeem their GBTs for physical gold, they receive the corresponding amount in bullion, coins, or jewelry via recorded mail.
GBT accounts are charged an
annual fee of 2 %. Interestingly, the HelloGold blockchain operates on a
private network to reduce fees and transaction latency and avoid the risk of
independent developers adding their own contracts to the blockchain. This means
that HelloGold and its nodes control block times as well as the execution of
the gold transactions.
Due Diligence on Gold-Backed Stablecoins
Can the cryptocurrency be converted into physical gold on demand? How easy is the process?
Does the company disclose how it stores the gold?
Who is storing the gold that backs the cryptocurrency? Is that company trustworthy?
Is the gold insured?
Does the company have a well-known and reputable auditor? If the company is not audited, then it can easily issue more tokens than gold, thereby creating fractional reserves.
What happens if the company goes bankrupt? Is it a limited liability company that could leave investors empty-handed?
What blockchain are the gold tokens built on? Is that blockchain secure?
Do you know how to store the private key to the wallet that controls the gold tokens? What happens if you lose the key? What happens if the key is stolen?
Gold-backed cryptocurrencies are similar to ETFs, which may make them subject to securities laws in Europe and the US. Is the company selling the cryptocurrency regulated? Does it store the gold in a country that has approved their token?
Where can the gold-backed token be traded? Gold ETFs are traded on exchanges, but there are currently no cryptocurrency exchanges that are licensed to trade tokenized ETFs.
How much liquidity does the gold-backed cryptocurrency have? Can you really close a position in case of a liquidity trap? The largest gold-backed cryptocurrency, Digix Gold Token, has a small daily trading volume of USD 243,000 over the past year, and USD 27,000 over the past month.
What is the total expense ratio for the tokenized shares of the gold fund? The most famous gold ETF, SPDR Gold Shares, has a management expense ratio (total fund costs / total fund assets) of only 0.40 %.
What is the business model of the coin? How do the people who created the coin make money? If there is not a clear way that they are profiting, then be suspicious of indirect costs or high risk.
Conclusion
A gold-backed cryptocurrency promises to be digital gold: no
weight and stable. However, no one has figured out yet how to make a
decentralized gold-backed stablecoin. All gold-backed stablecoins are
centralized in the sense that you have to trust someone to store the gold for
you. Similar to an exchange-traded gold fund, gold-backed stablecoins have
counterparty risk. In the cryptocurrency world they say, “Not your keys, not your crypto.” Well, the parallel for gold would
be something like, “Not your vault, not
your gold.”
Backing a cryptocurrency in a way that an intermediary is required – a custodian or a bank for instance – actually conflicts with one of Bitcoin’s central tenets, namely, that users do not have to trust any intermediary. The security of Bitcoin and other cryptocurrencies is based on cryptographic technology. In contrast, the gold-token projects we have presented above are managed by real companies. They are responsible for the safekeeping of the gold. Therefore, the user has to trust that no state or private actor will be able to steal or confiscate the gold from the vaults.
Furthermore, the coins are often traded on a public blockchain structure such as Ethereum, which means the coins also suffer from all of Ethereum’s problems, such as scalability and security. Finally, there are over fifty gold-backed coins currently, and most likely, many of them will fail. It will take a few years for the market leaders to emerge, gain widespread exposure, and thus secure the standing of gold-backed tokens as a store of value. This year will be pivotal in identifying which projects are going to take the lead in this endeavor.
[3] In this context, we should note that the edge
length of the cube that could be cast from the total amount of gold already
mined is roughly 21 meters, which may have been Satoshi Nakamoto’s inspiration
for the arbitrary 21 million hard cap.
[12] This may change quickly, however, as more and
more countries open their financial markets to blockchain-related investment
vehicles. To give an example, the Liechtenstein Financial Market Authority
(FMA) has recently approved three alternative investment funds (AIFs) for
crypto-assets. See “Liechtenstein gives green light to crypto
funds“, Liechtenstein.li –
official website of Liechtenstein Marketing, March 6, 2018
[13] Dobeck, Mark F.; Elliott, Euel: Money.
Greenwood Press, 2008, pp. 2-3
[14] Berentsen,
Aleksander and Schär, Fabian: Bitcoin, Blockchain und Kryptoassets. 2017, pp. 16-17
[15] This table was inspired by a presentation
given by Frank Amato at the LBMA/LPPM Precious Metals Conference 2018 in
Boston, Massachusetts.
[17] Transfers within the Bitcoin network can be
tracked indirectly due to the transparent nature of account balances. Companies
such as Chainanalysis offer to analyze the entire Bitcoin blockchain in order
to forensically detect transfers between addresses and identify the owners of
the accounts. The US tax authorities are already using this service to track
cases of money laundering and tax evasion.
[18]
The counterparty of Bitcoin defined as functionality of the Network
[19] Know your customer (KYC) and anti-money
laundering (AML) are standard protocols that require a customer to verify their
identity in order to use specific services, such as bank accounts and
cryptocurrency exchanges.
