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Davos Elites Still Don't Get Blockchain

Every year at the World Economic Forum, a handful of timely, hot-button issues overshadow the myriad other topics consuming the chatter of the attending businessmen, government officials, development professionals, celebrities, journalists and multiple other breeds of wannabe “Davos men.”

This year, as with last, a guy called Trump was on everyone’s mind. But that was hardly unexpected.

What was truly remarkable, at least for anyone who has been interested in blockchain technology since its relative obscurity only a few years ago, was the degree to which it became one of the uber-themes of #WEF2018.

In the wake of last year’s huge price surge for bitcoin, ether and many other digital tokens, and amid high-profile media coverage of the “crypto boom,” everyone wanted to know what all the fuss was about.

The newly curious trudged through piles of fresh snow to the various “blockchain lounges” set up outside the security perimeter of the main conference by outfits such as the Global Business Blockchain Council and ConsenSys.

There, they were served valuable insights into how this technology works but also, perhaps, a realization that blockchain technology’s promises of decentralized record-sharing and disintermediated trust have sweeping implications for everything from payments, international development and financial markets to the Internet of Things, energy, environmental management and identity.

But while light bulbs went off in some people’s heads, there were equally strong signs in the lead-up to and during the World Economic Forum that these concepts are still far from wide acceptance among the broad financial, economic and political establishment.

The many recent instances of people from the economic powers-that-be dismissing this technology’s relevance and over-emphasizing its risks over its potential are a reminder that those of us who believe in it still have work to do to get these influential people into the comfort zone.

Krugman’s myopia

In an interview with Bloomberg in Davos, U.K. Prime Minister Theresa May said she was looking “very seriously” at taking action against cryptocurrencies “precisely because of the way they are used, particularly by criminals.” In South Korea that same week, the government announced new rules requiring cryptocurrency traders to identify themselves.

But what struck me most was a pre-Davos tweet storm by Paul Krugman, one of a triumvirate of high-profile Nobel laureate economists who’ve been highly critical of cryptocurrencies and blockchain technology, the others being Joseph Stiglitz and Robert Shiller.

Predictably, the crypto community immediately dismissed the economist as an ignorant dinosaur. The favorite put-down was to remind him of his now notorious 1998 prediction that the “Internet’s impact on the economy [would be] no greater than the fax machine’s.”

Let’s make one thing clear: Paul Krugman is no idiot. Let’s forego the ad hominem. I think it’s more constructive to think about the ingrained mindset of otherwise intelligent mainstream economists that leads people like him to misunderstand the new social structures created by open-source communities, distributed consensus models and programmable tokenized incentive systems.

Krugman and his cohort are trapped by a rigid worldview, one that remains entrenched within the economics fraternity, despite the crisis of 2008, which painfully revealed the deep flaws of the profession’s quasi-scientific models of “rational” human behavior.

When it comes to understanding the value proposition of blockchain technology and drawing conclusions that “it’s not useful for anything,” the biggest problem of this blinkered mindset is that it fails to recognize the cost of trust.

Let me explain what I mean by that, because I think it’s key to getting skeptics to see why these ideas are so important. A few of us in the crypto community started playing with this logic in Davos. See if it works for you.

Hidden cost of trust

First, Krugman is right to say that expensive mining and the need to retain multiple copies of the same transaction record across distributed networks are “clunky” and “costly” aspects of blockchain technology. One answer to that is to say that innovations such as the Lightning Network will eventually fix the problem, but I think the better rejoinder is: “Compared to what?”

The “what” in this case is defined as the explicit and implicit costs that organizations pay to resolve shortfalls of trust. It turns out that that the cost of trust, which is passed onto consumers via higher prices and access restrictions, is very high indeed.

I don’t have a dollar number for it, but just think about the world’s skyscrapers, each filled with accountants doing endless checks and audits of other companies’ invoices, purchase orders and financial reports, and you get the idea.

They’re all trying to reconcile across each other’s separate, centralized ledgers, and all because they don’t trust each other’s records. That’s a cost of trust.

The cost of trust can also be conceived of via the old adage about electricity blackouts: that the highest cost of energy is the energy you can’t access. There are all sorts of potentially enriching transactions that we aren’t able to conduct because we can’t resolve the trust problem.

We can’t yet do peer-to-peer microtransactions between devices on the internet of things, for example, without passing them through some gatekeeping institution, be it a bank or a major cloud-service company like Google or Amazon. That not only adds costs and friction, it also constrains innovation.

And if you step outside the bubble of the developed world and consider the pervasive financial exclusion of the developing world, the cost of trust for 2 billion “unbanked” is especially high. (This is where Krugman is at his most myopic. Unable to leave the developed-world bubble, he claims that the only reason you would want to conduct electronic transactions in cryptocurrencies rather than via a bank account or some other third-party-trusted tool such as a debit card or PayPal is if “you’re buying drugs, assassinations, etc.”)

The perfect moment?

But the developed world is not at all immune from trust shortfalls.

The results of public releations firm Edelman’s “Trust Barometer,” which were released during the World Economic Forum, were scary, at least for Americans.

This annual survey showed that trust in the U.S. among the general population plunged 9 points, the largest-ever fall in the survey’s history, and by 23 points for the so-called “informed public” to post the lowest level of all 28 countries surveyed, below even Russia and South Africa.

As for what this means, let’s go to Breitbart, which many liberal Americans might argue is partly responsible for this breakdown.

It cited the PR firm’s CEO, Richard Edelman, as saying that the main factor behind the drop in trust was that “we lack common facts and have a fundamental difference of interpretation of facts.”

Common facts requires a common record of truth. I know a technology that can help with that….

Japanese Electronics Retail Giant Launches Bitcoin Payments

Major Japanese consumer electronics retailer Yamada Denki has partnered with cryptocurrency exchange bitFlyer to add a bitcoin payments service in two of its stores.

Launched this weekend, according to a press release, one of the stores to receive the new service is based in Shinjuku, an area of Tokyo that attracts large numbers of foreign visitors. The other store is adjacent to Tokyo’s main business district.

The company said:

In addition to diversifying [our services], we will implement initiatives to improve bitcoin recognition and usage promotion.

With the launch of the bitcoin payment system, the company indicated it aims to respond to the diverse needs of its customers both in Japan and overseas. “We believe that we can provide improved service and convenience,” it said.

Yamada Denki has set the settlement limit of bitcoins equivalent to 300,000 Japanese yen ($2,760) per account. Bitcoin is trading around $11,200 (1,218,016 JPY) at the time of writing, according to CoinDesk’s Bitcoin Price Index.

The moves comes after another Japanese electronics retailer, Bic Camera, said last April that it will test a new point-of-sale system (PoS) that will allow customers to purchase goods with bitcoin, also in partnership with with bitFlyer. Later in July, the firm said that it is expanding a bitcoin payment option to all of its stores nationwide.

And, in August, Tokyo-based Marui, a department store chain, tested bitcoin payments at one of its locations in Shinjuku. The trial set a cap of ¥100,000 (about $900) on bitcoin transactions.

Bitcoin Exchange BTCC Just Got Acquired

Bitcoin startup BTCC has been acquired by a Hong Kong-based blockchain investment fund.

While details remain scarce on the deal, BTCC said in a press release that the move will help its efforts to expand internationally following its recent closure in mainland China.

Bobby Lee, BTCC’s co-founder, said:

Today’s acquisition is an incredible milestone for BTCC. … I’m very excited about the resources this gives BTCC to move faster and aggressively grow our businesses in 2018 and beyond.

According to the statement, the company now aims to “lead every segment of the digital currency ecosystem,” expanding into the international market after Chinese authorities forced the closure of all cryptocurrency exchanges at the end of September 2017.

While its DAX cryptocurrency exchange is no longer in operation, BTCC will focus on its three main products: a mining pool, its Mobi bitcoin wallet and a USD/BTC exchange service.

According to BTCC, which is now registered in the U.K., its exchange business traded over $25 billion in bitcoin in 2017, while its mining pool produced almost $900 million-worth of bitcoin in the same year.

CoinMarketCap data indicates that trading volumes for USD/BTC on the BTCC exchange was $123 million over the last 24 hours. It is currently in eighth place in the global volume rankings.

The BTCC mining pool accounts for 3.2 percent of bitcoin’s hashing power at press time, according to blockchain.info.

Another Blockchain ETF has Launched

An exchange-traded fund focused on companies that are working with blockchain or are eyeing applications of the tech has launched today.

Innovation Shares LLC’s NextGen Protocol ETF (ticker symbol: KOIN) went live on the NYSE Arca exchange this morning. As of press time, price data via though NYSE shows that trading has begun. The information, as of 9:46 a.m. EST, shows a volume of 2,100 and a price of $24.88 per share.

The firm backing the ETF said it is deploying artificial intelligence in a bid to track and include notable companies, with an emphasis on stocks that have a “current or future economic interest in blockchain technology.”

Exchange Traded Concepts, an ETF provider, is acting as the advisor for the fund.

The Innovation Shares launch represents the latest instance of an investment product aimed at taking advantage of the interest – and hype – around the technology.

As CoinDesk previously reported, the first blockchain-based ETFs were launched on both Nasdaq and the NYSE Arca, respectively, earlier this month. Those developments came months after the fall of 2017 saw a flurry of filings from ETFs firms, including from those that have since gone live on the market.

Demand among traditional investors has also led, in recent months, to the creation of futures contracts dedicated to bitcoin markets. Whether they lead to the launch of a long-sought-after bitcoin ETF – as some have suggested – remains to be seen.

Coincheck Must Report on Security Failures, Says Finance Watchdog

Following the recent major hack of Japanese cryptocurrency exchange Coincheck, the country’s financial watchdog is taking measures to ensure and improve the industry’s security.

The intrusion, which was revealed Friday after the exchange had abruptly ceased most services, saw the theft of about 500 million XEM – the token of the NEM network – worth roughly $420 million at the time.

According to the latest update from Coincheck, Japan’s Financial Services Agency (FSA) has ordered the exchange to launch an investigation into its security vulnerabilities that led to the hack, and to submit a report for management improvement to the authority by Feb. 13. The FSA said the firm is also required to report details regarding the facts and causes of the issue.

According to a report from Nikkei today, the authority announced the order during a press conference, saying, “Inappropriate management of system risks had become the norm at Coincheck.” That sloppiness led to a loss even larger than that stolen in the notable Mt. Gox hack.

Nikkei also indicated that the agency is expanding its investigations, including on-site inspections at other cryptocurrency exchanges in the country to prevent a reoccurrence of the issue.

In an earlier statement issued to CoinDesk, the NEM.io Foundation also suggested a lack of security precautions at Coincheck may have resulted in the hack.

“We would advise all exchanges to make use of our multi-signature smart contract which is among the best in the landscape. Coincheck didn’t use them and that’s why they could have been hacked. They were very relaxed with their security measure.” said Lon Wong, president of the foundation.

Over the weekend, Coincheck also issued a statement stating that the exchange will compensate the exchange’s 260,000 NEM holders who lost funds, although no detailed plan for repayment has yet been released.

Ripple Vets Raising Money for Crypto Hedge Fund

Two former employees of distributed ledger startup Ripple are raising money for a cryptocurrency hedge fund, public records show.

Twin filings to the U.S. Securities and Exchange Commission (SEC) dated Jan. 25 and 26 show that co-founders Tim Lewkow and Eli Lang are seeking funds to back Fractal Investments, which invests in crypto-assets, per its official website. The company dates back to last summer and has maintained a public profile primarily through its Twitter account.

Lang is formerly creative director for Ripple, having begun working for the San Francisco-based startup in 2012. Lewkow worked for Ripple from December 2013 until June of last year, most recently serving as integration engineering manager, according to his LinkedIn account.

The filings detail two vehicles, Fractal: Virtual Currency Investment Fund I LP and Fractal: Private Investment Fund LP, both of which are incorporated in Delaware. Neither filings indicate how much money is being raised for either entity.

The developments perhaps highlight the continued drive to establish hedge funds and other financial entities amidst a period of heightened activity in cryptocurrency markets and development around the tech more broadly. Like others, Fractal is looking to invest in the growing ecosystem of digitized assets.

And even as traditional investors move to invest in the space, others are pushing even further. As reported last week, a group of former Wall Street vets has raised as much as $50 million to create a fund of funds focused on cryptocurrencies.

Bitcoin Could Alter the World - Says Former US Senator

Former New Hampshire governor and three-term senator Judd Gregg has said he believes bitcoin could alter how the world views currency.

In an opinion piece published by The Hill yesterday, Gregg outlined why he thinks people believe in bitcoin, how bitcoin could be used and what it could mean for the global economy.

Briefly comparing bitcoin to gold, Gregg noted that the latter has value because it is rare and widely accepted by banks, while the former is supported primarily by the belief of its holders. The key difference is that bitcoin is not held by central banks at this time, he wrote.

Since bitcoin is not controlled by any nation, government or central bank, Gregg said, “it sounds so good that one is tempted to say, ‘Throw in some pixie dust and it is off to never-never land.'”

He continued:

However, that would be too traditional a view. Bitcoin could indeed alter the entire world of commercial transactions.

Should people have sufficient belief that bitcoin or subsequent cryptocurrencies have real value, then it could usher in “a new era,” he said, one that would have a “staggering” potential as a world currency.

However, Gregg also noted the importance of the dollar in the world economy today, saying it was “difficult to project a time when the dollar will not stand as a core element of world commerce.”

The ex-senator’s comments come at a time when U.S. politicians are awakening to the technological and fiscal possibilities of cryptocurrencies and blockchain technology.

In June 2017, Nevada Senator Ben Kieckhefer sponsored a new law paving the way for the state’s broad bid to attract new blockchain startups. The bill prohibits the taxation of blockchain technology in Nevada, while at the same time recognizing the legality of blockchain signatures.

And in March last year, a legislative proposal submitted to Maine’s Senate, and sponsored by sponsored by the state’s senator, Eric Brakey, was aimed to create a commission dedicated to studying the use of blockchain alongside paper ballots in elections.

Hong Kong to Educate Public on ICOs and Crypto

Hong Kong authorities have launched a campaign to educate the public on the risks associated with ICO and cryptocurrency investment.

Kicking off yesterday, the campaign started on Jan. 29 and was launched by the government’s Financial Services and the Treasury Bureau (FSTB) and the Investor Education Centre (IEC), a subsidiary of the Securities and Futures Commission (SFC).

Aiming to reach citizens via a range of channels, including the city’s metro system, TV and social media, the campaign comes as the latest government-led initiative in offering the public a holistic understanding of ICO and cryptocurrency investment following the recent rise in market interest.

“Through this series of public education initiatives, the government aims to provide the public with a correct and comprehensive understanding of ICOs and ‘cryptocurrencies’, so that they can thoroughly assess the risks before making transactions or investment decisions,” said Joseph Chan, the under secretary of the FSTB.

In addition, the IEC has made ICO- and cryptocurrency-related resources available to the public through its website, called the Chin Family.

The initiative also follows recent warnings from the SFC which specified in September last year that tokens issued through ICOs could be regarded and thus regulated as securities. The financial regulator also stated last month that only licensed firms are allowed to offer bitcoin futures and other cryptocurrency-related financial instruments.

Investment Fund Moves to Capitalize on Ethereum Ecosystem

One of Canada’s largest investment funds is hoping to leverage the ethereum ecosystem through a new venture.

Ethereum Capital, a recently incorporated entity formed primarily by Canadian investment group OMERS, is raising $50 million and preparing for a reverse-takeover procedure. When the funding round is completed on Feb. 16, the company will invest the funds in both ether tokens and blockchain startups, according to a press release.

The ultimate goal, the firm said, is to become “the central business and investment hub for the ethereum ecosystem.” To that end, the company will also purchase controlling stakes in companies using ethereum-based tokens.

The company explained it would sell 2 million subscription receipts, valued at $2.50 each, in order to achieve its funding goal.

Once this goal is accomplished, each share of the company, called Ethereum Shares, will be later replaced with a share in Movit Media Corp., which will subsequently take over Ethereum Capital. The company will keep the Ethereum Capital name.

The new firm’s advisors include both traditional investors and representatives from blockchain startups. Notably, Liam Horne, a member of ethereum creator Vitalik Buterin’s L4 Ventures, will serve as an officer of Ethereum Capital’s board.

Joey Krug, a director of Ethereum Capital and co-founder of decentralized oracle startup Augur, said ethereum’s potential is largely untapped, according to a statement.

Krug said:

The Ethereum network is just beginning to demonstrate its potential, with a greater number of transactions and applications being created almost daily. I believe it has the potential to disrupt many existing industries and am excited to advise Ethereum Capital due to its position to capitalize on the most promising of these resulting companies through strategic acquisitions.