Crypto Industry Report #21
Balzers (LI), 26 February 2020
This week, our blockchain experts assessed the following headlines:
Our weekly Crypto Industry Report news ticker provides you with the latest information on the global crypto industry – picked and analysed by our blockchain experts.
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Riksbank announces the launch of a one-year testing of the e-krona
It was announced last week that the central bank of Sweden has started the testing of the e-krona, which would be a central bank digital currency (CBDC) based on the blockchain technology.
The testing is planned for one year until February 2021, although there could be an extension of the testing period.
The goal of the pilot program is to improve the understanding of the e-krona by the Riksbank, since the CBDC would be used for payments and banking activities in Sweden, and also to develop a technical design proposal for an e-krona.
The testing is being done in collaboration with Accenture, and the pilot will be carried out in an isolated test environment. While the Riksbank has not decided or confirmed whether to issue the e-krona, following the testing phase, Sweden’s central bank may become one of the first to issue a CBDC.
Assessment
While other central banks have announced that they are researching CBDCs, and some testing programs were also announced for 2020, the need for a CBDC in Sweden, not just for financial institutions but for the general public, seems to be increasing due to the reduced use of cash in the country.
Sweden is one of the most cashless countries in the world, for example in 2018 it was estimated that only 1% of Swedish GDP was in the form of banknotes, while this number was 11% in the euro zone or 8% in the US.
Moreover, while in 2010 it was reported that around 40% of people in Sweden used cash for a recent purchase, this number decreased to 13% by 2018. Other studies show that in the US 70% of the population use cash still every week.
Therefore, the reduction of cash in Sweden is accelerating. Other examples of how Sweden is becoming a cashless society is that buses and trains are not accepting cash, and local banks are not letting people deposit or take out cash.
Furthermore, by 2023 it is expected that retailers may stop also accepting cash. The popularity of the mobile payment app Swish is also contributing to digital payments and the further reduction of cash payments in Sweden.
If the cashless trend continues or accelerates in Sweden this could lead to several important risks.
Firstly, the general public would not have access to central bank money and they would be dependent on failures of digital payment systems.
In addition, certain groups of society not familiar with digital payments could have difficulties to make transactions and therefore they could be excluded.
Furthermore, by not having access to central bank money, the trust of the general public in the monetary system may decrease and their transactions would be tracked by players within the private sector. If global stablecoins such as Libra launch, their adoption could be faster in countries such as Sweden where cash usage is quickly decreasing.
Therefore, the Riksbank may be anticipating these risks and through the e-krona it would be ensured that the general public still has access to central bank money, with the value guaranteed by the state.
Given the magnitude and complexity of the project, which unlike other central banks’ pilots it would focus also on a CBDC for the general public, the decision whether to finally launch the e-krona would involve the Swedish public, the government and other relevant stakeholders.
The central bank has asked lawmakers and the Swedish Parliament to research the need for an e-krona and to review the concept of legal tender.
Notably, the central banks of Switzerland and France previously mentioned that a CBDC for financial institutions mav be interesting and the French central bank announced testing in early 2020.
However, they mentioned that a CBDC for the general public would involve a lot more technical and regulatory complexities.
The Riksbank is part of a group of central banks created to research CBDCs, which includes also the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank (ECB), the Swiss National Bank and the Bank for International Settlements (BIS).
Therefore, the results of the testing in Sweden could be shared with the other central banks and this could increase the development and potential launch of a CBDC in other countries.
The goal of the testing is to simulate users, which could hold e-krona in a digital wallet and then through a mobile app be able to make payments.
In addition, the users should be able to utilise smart watches or cards for example for payments and it will also be researched how to make offline payments with the e-krona. Moreover, e-krona payments should be instant and always available.
A key implication of the general public holding money in central bank accounts is that this could affect the differentiation between commercial and central banks.
In the testing environment, the Riksbank would issue e-krona to the participants such as banks in the e-krona network, which is a private network and participants are added and approved by the Riksbank.
These participants would then distribute the e-krona to the general public or end users. Only the central bank will be able to redeem or issue e-krona and the e-krona network would be independent and not connected to any existing payment networks.
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South Korea’s central bank is building a new blockchain system for the bond market
It was reported last week that the central bank of South Korea is testing a blockchain-based system for the bond market in the country.
The Bank of Korea would develop the solution with a technology partner, which is currently being searched, with the aim of issuing government bonds and improving the keeping of records by storing them on a blockchain.
Bond transaction records are currently maintained by the Korea Securities Depository and through this project, those records would be moved to a blockchain that would be accessible by a number of approved participating nodes such as financial institutions, the regulatory authority in South Korea or the Korea Fair Trade Commission.
Moreover, the central bank is also researching central bank digital currencies (CBDCs) with a dedicated team established recently.
Assessment
It is not clear at this stage whether the project will focus only on government bonds or also include corporate bonds. Moreover, if the Bank of Korea launches a CBDC even only for financial or other institutions, the blockchain-based bond platform may also integrate the CBDC.
The blockchain system for the bonds would be a permissioned set up in which only the relevant regulatory, financial or government entities would participate and have access to the information.
In particular, there would be a shift process of the bond records from the Korea Securities Depository into a permissioned blockchain and the advantage would be the shared of the information in a secure way among the different participants.
While some test projects could be developed, until the bond market in South Korea is fully integrated with blockchain would still likely take considerable time.
Moreover, regulatory issues surrounding the issuance and record-keeping of government bonds through blockchains would need to be clarified as well. In the case of the Korea Securities Depository, which is a centralised system, accountability is simple in the case of any transaction errors or problems.
However, this would be more challenging in a permissioned blockchain system with several participants, therefore legal clarity is necessary.
While South Korea’s bond market is significant within Asia, the country is leading in the issuance of green bonds, which increased a lot recently.
If the green bond issuance is made more efficient and trusted with blockchain technology the effect could be positive for green bonds. The impact or goals achieved of green bonds is challenging to be quantified or reported, therefore blockchain could also be applied to improve the impact analysis of the green bonds and to safely record the data.
The Bank of Korea mentioned the project done by the World Bank as a reference and valuable example of bond issuance using blockchain technology. For the two-year bond, two sales were carried out on a private version of Ethereum.
In May 2019, secondary bond trading was also enabled and the trading is recorded as well in the blockchain, therefore this was the first bond that involved blockchain technology for the issuance, secondary trading and transaction recording.
Given the large magnitude of the bond market globally, it would be positive for the overall blockchain industry if the technology is gradually applied in the bond markets. Moreover, other use cases enabled by blockchain such as tokenisation could facilitate additional efficiency improvements in the bond markets.
While currently the blockchain technology may not yet be advanced enough to support the complexities of a large bond market, several major technology improvements related to scalability or interoperability for example are expected and this could facilitate new use cases of the technology.
While CBDCs have been the main focus of central banks since the announcement of the Libra project, this blockchain system for the bond market in South Korea indicates the flexibility of the technology and the demand for trustless solutions in systems that involve many intermediaries.
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Coinbase becomes direct Visa card issuer
According to an official announcement from Coinbase, a principal Visa membership was received, which enables Coinbase to issue their own debit cards without the requirement of a third intermediary party.
By being a principal member of Visa, Coinbase will have additional benefits apart from direct issuance of cards. While Coinbase already offers a debit card, their customers could now benefit from more features or advantages such as potentially reduced fees or support in more markets.
Coinbase mentioned that it has been the first pure crypto business to become a principal member of Visa.
Assessment
While the principal membership will provide Coinbase with more flexibility, they previously launched debit cards through intermediaries.
The Coinbase cards are widely used in certain European countries like the UK, Italy or France, and they can be used globally although only those customers from the supported countries are able to order the Coinbase card.
By having to rely on intermediaries previously to issue the Coinbase card, the risks were higher since the intermediaries could become unavailable to provide services due to regulatory or strategic changes regarding the support of crypto assets.
Therefore, it seems that the previous Coinbase card was a temporary solution or implementation while Coinbase was aiming to become an issuer with the principal membership.
However, the management of all the existing cards and the change to the new cards issued directly by Coinbase may be challenging and the process should be well designed for the customer experience.
The debit card linked to crypto assets seems to be in demand and this could be due to several factors.
Firstly, those not familiar with trading crypto assets or doing self-custody may find it challenging to use their crypto assets for daily payments. In contrast, by holding the crypto assets at Coinbase and obtaining a debit card it is a simpler process to pay anywhere where Visa cards are accepted.
However, since keeping crypto assets in exchanges is not recommended, and cold storage is the most secure custody solution, customers may not be interested in keeping large amount of crypto assets in the exchange.
They may fund their Coinbase account with a relatively low amount of crypto assets to make them liquid and useful for small payments through the Coinbase card.
While some e-commerce merchants are starting to accept bitcoin payments, spending other altcoins in physical stores for daily payments would be a complex process, therefore debit cards linked to crypto assets are providing a gateway for payments.
However, the premium for this service are significant fees so more experienced crypto customers may prefer to use the lightning network for example for certain supported payments. Nonetheless, facilitating the mainstream adoption of crypto assets by allowing daily payments similar to fiat currency payments is likely to have a positive effect on the overall blockchain industry.
If Coinbase adds support for a new crypto asset in the Coinbase card like Dai, which was recently announced, then Dai holders in Coinbase could spend their stablecoins in the entire merchant network that accepts the Coinbase card.
This process would be more efficient than each individual merchant adding support for a specific crypto asset. The additional liquidity provided by debit cards can be valuable for the supported crypto assets, in particular stablecoins.
The Coinbase card is focused on payments to merchants through the traditional Visa payment network.
However, there are other projects of CBDCs, which would involve payments in a new blockchain based infrastructure, or global stablecoin projects that would focus as well on peer-to-peer payments through a mobile app.
In addition, new revenues could be obtained by Coinbase through the issuance of cards for other companies, including crypto related businesses. The Coinbase cards could become more competitive since without the intermediary issuer fees, Coinbase may offer lower fees to their customers.
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First Telegram court hearing
The first court hearing involving the SEC and Telegram took place last week.
Previously, the SEC halted the planned TON blockchain launch in October and several members of Telegram testified in advance of this first court hearing.
The SEC said that Telegram violated Section 5 of the Securities Act since tokens could be sold by initial investors in the secondary markets.
However, the judge P. Kevin Castel of the US District Court for the Southern District of New York mentioned that in the initial purchase agreements with the investors there was a restriction included regarding the reselling of grams before the launch.
The judge also mentioned that before the new expected launch date for TON on April 30 there would be a judgement made of the case.
Assessment
While the judgement is still pending and it is expected to be announced before April 30, during the hearing there were several facts that may help Telegram finally launch the TON blockchain in the new previously postponed date on April 30.
While the discussion was expected to focus on whether grams were securities or commodities, it seems that a central part of the discussion was related to the potential reselling of grams tokens in the secondary markets.
The SEC insisted that initial accredited investors could resell their grams tokens in the secondary markets to unaccredited investors, thus violating Section 5 of the Securities Act.
However, in the initial agreements done by Telegram with the accredited investors, there were restrictions regarding the reselling of grams tokens before the launch of TON.
Therefore, while the SEC said that these restrictions were not sufficient to ensure that no secondary reselling of grams was possible, the judge may consider those initial stated restrictions as sufficient, since investors who do not respect the agreement and trade grams in secondary markets cannot lead to Telegram being responsible for these actions.
While the judgement will be announced before April 30, Telegram had to consent and accept this, otherwise the court would have needed to take a decision last week.
Therefore, Telegram may have considered a better strategy to provide enough time to analyse all the facts rather that demanding an immediate decision.
Some positive developments for TON was the recently launched community-led Foundation indicating an increasing decentralisation level of the project.
The TON Community Foundation also provided their support for the court hearing, which may play an important role in the final decision of the court.
Moreover, it was discussed during the hearing that the TON testnets running and the validators participating further show the decentralised nature of the project and the community being developed around TON.
If the grams tokens will play an important role in the proof of stake (PoS) mechanism once TON is launched, serving as the staking tokens, then they would have utility and therefore it could also support the ongoing legal case with the SEC.
Moreover, a division of the Commodity Futures Trading Commission (CFTC) was asked to provide an opinion of whether grams would be considered a security or a commodity for them. The division avoided any conclusion but they mentioned that Telegram claims that grams should be considered a commodity. In addition, they also mentioned that while digital assets are considered to be a commodity, the Commodity Exchange Act actually states that certain securities are considered commodities to which security laws would apply.
Recently, a SEC commissioner proposed a safe harbor for cryptocurrencies, which could help avoiding similar legal cases as the one involving Telegram and the SEC.
However, even if this safe harbor is implemented, it would apply to new projects so Telegram would not be able to benefit from it. The legal case of Telegram may have also influenced the proposed safe harbor.
Following the expected judgement after the court hearing, TON may be allowed to launch at the end of April or if further investigations or hearings are required Telegram may need to postpone again the launch and some investors may prefer a partial refund this time if that happens, or they may still agree to a further postponed launch date.
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E-Commerce giant Shopify becomes first new member to join the Libra Association
There was an official announcement last week of Shopify joining the Libra Association.
Following the withdrawal of several key members of the association recently, Shopify became the first major corporation to join the Libra Association since its launch in October 2019.
Shopify claims that the reason to join the association is to improve commerce, in particular in areas of the world where banking or payments are under developed.
The goal of being a member of the Libra Association will be to collaborate in building a payment network facilitating better access to money and supporting both consumers and merchants globally.
Assessment
The announcement of Shopify is significant given the large amount of withdrawals of key members from the Libra Association.
In particular, some major members that initially were announced as part of the association subsequently left due to increasing pressure from regulators.
These major corporations like Visa, Mastercard, Paypal, eBay or Stripe among others left the association and then another member, Vodafone, also announced in January that they were leaving the Libra Association.
It was previously mentioned that there were many other corporations interested in joining the association, however Shopify is the first major announcement of a new member joining despite the regulatory concerns and pressure.
Shopify is integrated with Coinbase commerce, and Coinbase is part of the Libra Association.
Therefore, Shopify may have learnt the details about Libra through their collaboration with Coinbase commerce and they may have realised some potential advantages of Libra for commerce. Shopify claimed that the current financial infrastructure is not designed for the scaling requirements of internet commerce.
The expertise of Shopify by operating internationally could add significant value to the Libra project regarding its design and implementation.
Following the announcement of Shopify, other major commerce corporations or companies from related industries may also decide to join the Libra Association, which is the governing council of the Libra project.
While Facebook’s subsidiary Calibra is part of the council, Facebook is not on the association. Other large corporations like Uber still remain as initial members, which may indicate an important interest in the project and the potential benefits despite the global pressure from regulators, particularly from the EU and the US.
In parallel to the announcement of Shopify, regulators in the EU, and from other international government and regulatory groups, are claiming that Facebook has not provided enough details about Libra for regulators to assess how the project would fall under existing EU law.
Moreover, some warnings have been made that the speed of innovation and the effect in the global economy of digital assets, and stablecoins in particular, is accelerating and regulators are being slow to keep up with this pace.
The technical progress of Libra, including its Move smart contract language, is advancing while new members like Shopify join the Libra Association or regulators discuss the project and risks involved.
Therefore, a similar situation as the legal case of TON and the SEC could begin and Libra may only be allowed to launch and operate in certain jurisdictions.
However, the regulatory concerns in the case of Libra are more focused on the potential impact on the global economy given the large user base of Facebook for example, and it would involve a coordination of regulators from different countries.
In contrast, the Telegram case is more focused on the initial sale of TON’s grams tokens to US investors.
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Crypto Market Update
Bitcoin’s price volatility last week was significant, with the price raising close to $10.1k but then dropping to values around $9.5k.
This was followed by an increase to values around $9.7k, which was the price at the beginning of the week.
The main price drop last week was the largest observed since three months, but the positive momentum is expected to remain as long as the price stays above the $9k level.
The golden cross of the 50- and 200-day moving averages (MAs) happened recently and this type of correction was expected.
Moreover, the price gap with the CME bitcoin futures was filled, and according to historical data the spot price usually fills the futures price gap. Nonetheless, the prices observed at the CME bitcoin futures closer to the bitcoin halving event are above $10k.
Ethereum’s price was also volatile last week, first raising from around $245 to $280 and then correcting to values around $265.
The recent positive momentum of several altcoins has led to a decrease of the bitcoin dominance.
Regarding the overall market capitalisation, while it briefly recovered last week to values near the $300 billion level, it then decreased near $280 billion, which was similar to the total market capitalisation at the beginning of the week.
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