Cointelegraph By Dominik Schiener
Face-to-face transactions are starting to seem quaintly archaic as many countries continue or even expand lockdowns due to the ongoing COVID-19 pandemic. Since the start of the crisis in early 2020, digital transactions have surged, particularly in e-commerce and digital banking. In contrast with face-to-face transactions, such as a direct payment of cash in exchange for a product or service, digital financial transactions typically require an intermediary, such as a credit card agency, payments processor or bank. This intermediary slows the process and, naturally, adds a cost to the transaction.
Distributed ledger technology is taking on a greater role in the handling of digital transactions. Decentralized finance applications that make use of DLT stand to disrupt and replace traditional financial intermediaries. Of course, transactions that occur on most DLT networks — and on blockchains, in particular — also require a fee for every transaction. While people may be accustomed to fees for digital payments, those fees are the elephant in the room when it comes to the full range of potential use cases on DLT networks.
A recent report from Forrester noted that 2020 was an important year for growth in the DLT space. However, despite the promise of greater speed and increased security, DLT is not taking off the way it should. Basically, no one is adopting blockchains for industrial use cases. Why? The Holy Grail of mass adoption has so far been elusive due to some sizable barriers to entry, chief among them being fees.
Barriers to entry at the individual level
For individuals, the initial barrier to adoption for using DLT is the fact that digital assets — and cryptocurrencies, specifically — are a completely new paradigm. Transactions on a blockchain require engaging with digital tokens, and people are not familiar with how to acquire, store and use them. There is a significant cognitive load involved.
People can readily understand that they pay X amount per month for access to the internet. The cost goes on their credit card or gets deducted from their bank account, and they can then surf the net. But with cryptocurrencies, they need to know many more things, like where to buy digital tokens, the difference between various tokens, and what a crypto wallet is and how to use it properly. It’s a different way of thinking. Additionally, many individuals are reading horror stories of cryptocurrency owners getting locked out of access to their funds, and that sends up a big red flag: If seasoned crypto users are having problems like this, what chance does a novice have?
Barriers to entry at the business level
Businesses have many similar concerns to individuals, particularly with regard to the fact that digital assets and transactions using DLT are completely new to most. Company executives are asking themselves if they have the infrastructure within their organization to buy and hold cryptocurrencies.
Instead of being required to use a completely new currency for data transactions, companies would rather use digital infrastructure that integrates easily into the traditional business technical stacks they’re familiar with. They’re also asking themselves whether it really makes sense for a business to create a new infrastructure, jumping through so many hoops, in order to use a completely new currency just for data transactions.
Another major issue is that companies aren’t yet prepared to think about how to integrate digital assets into accounting processes. There isn’t really any existing, standardized guidance on how businesses should acquire, store and use tokens. Additionally, before being able to truly embrace cryptocurrencies, companies will need to learn how to keep tokens secure and to develop a variety of protocols around the digital assets.
Levels of complexity also present barriers to businesses using DLT. Even the smallest amount of cryptocurrency transfer results in extra steps that must be taken for transaction fees, which means extra time and energy spent, extra server space required, and extra overhead. Of course, any change of this magnitude requires the training of entire departments, especially with the level of security necessitated.
Barriers to entry at the large-scale ecosystem level
Where there are large-scale uses, there are also large-scale barriers. Imagine the number of transactions occurring each minute as the world moves toward smart cities and smart homes. Now imagine that there is a mining fee for every single one of those transactions on a blockchain. This becomes prohibitively expensive. On top of that, those transaction fees fluctuate and are unpredictable. It’s hard to build a massive, sustainable ecosystem if you can’t reliably estimate transaction costs for the underlying network. It’s not sustainable.
Then there’s the issue of whether it makes sense to be paying third parties — the crypto miners — that have nothing to do with the applications themselves. Further barriers to adoption arise with each additional question. In the case of smart cities and smart homes, who incurs the cost of each transaction? The homeowner? The apartment resident? The city? The building? The government?
DeFi applications that leverage blockchain networks are on the rise thanks, in part, to the transparency and security of the financial transactions on the networks.
Feeless is the answer
The quickest way to eliminate these barriers is by offering a feeless alternative to blockchain. Individual users and businesses would not have to worry about learning how to buy, store and use digital currencies for traditional “data-based” applications. Corporations would not have to send their accounting department back to school to learn how to handle a completely new currency system. And ultimately, feeless DLTs could speed the shift to smart cities, smart roads, smart homes and dozens of other promising ecosystems that require the swift, secure transfer of data and payments.
The less infrastructure is attached to digital payment options — and, ultimately, non-payment-related data transactions — the freer companies and people will be to truly lean into innovating while using decentralized technologies. Additionally, use cases such as DeFi will only be able to take off with the introduction of feeless transactions.
The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Dominik Schiener is a co-founder of the Iota Foundation, a nonprofit foundation based in Berlin. He oversees partnerships and the overall realization of the project’s vision. Iota is a distributed ledger technology for the Internet of Things and a cryptocurrency. Additionally, he won the largest blockchain hackathon in Shanghai. For the past two years, he has been focused on enabling the machine economy through Iota.
Crypto in a post-pandemic world
Cointelegraph By Diogo Monica
Everyone knows the story. When the first block of Bitcoin (BTC) was mined, the protocol itself entered a world of grave economic uncertainty. Not long before the market would hit its lowest point of the 2009 recession, Bitcoin was quietly created, dropped like a life raft alongside a then-sinking economy. The now infamous phrase “Chancellor on brink of second bailout for banks” was cribbed from the headlines, immortalized in code in the origin story of one of the most compelling, innovative, best-performing assets of the last decade.
But Bitcoin did not immediately take root beyond a small community of true believers. Bitcoin and digital assets, in general, have been a lot of things in their relatively short histories, from purely speculative investments and “magical internet money” to a crisis-time safe haven and an attractive hedge against “the great monetary inflation.”
In the face of the COVID-19 pandemic, an associated market meltdown and huge amounts of central bank stimulus, cryptocurrencies have proved themselves to be remarkably resilient.
But as we watch vaccines being distributed around the country, cautiously optimistic that the end of the pandemic is within reach, where will crypto fit in a post-pandemic world? If its history of resilience shows us anything, we expect crypto to adapt to whatever the next few years will bring — crisis or not.
Related: How has the COVID-19 pandemic affected the crypto space? Experts answer
Just three years ago, leaders of some of the largest banks in the world refused to even talk about Bitcoin in interviews, calling the asset itself a “fraud” and referring to those who would buy it as “stupid.”
Today, the general sentiment across banks is markedly different. On the heels of the United States Office of the Comptroller of the Currency’s Interpretive Letter #1170, which made explicitly clear that federally chartered banks can provide banking services to legally operated companies in the digital asset space and custody digital assets on behalf of their clients, banks have been looking for the best way to get their clients the crypto exposure they demand. We anticipate legacy financial players’ interest in crypto to only grow in the coming years, with crypto becoming a mainstream requirement of financial services.
In the short term, banks will almost certainly rely on subcustody relationships with digital asset specialists to safely and effectively get crypto into their clients’ hands. And this is because the complexity is easier to address from the crypto-native side than the other way around.
Related: The need for a dialogue between crypto businesses and regulators
We also anticipate some number of acquisitions to occur, with some crypto service providers being swallowed up by banks with pockets deep enough to buy them. As demand for crypto services grows, and as regulatory clarity comes, more and more institutions will enter.
Proliferation of decentralized apps
Just as Bitcoin was built in response to the failings of a legacy system, decentralized finance has emerged as crypto’s answer to financial intermediaries. Until recently, though, entire portions of this ecosystem have been unavailable to institutions, mostly for lack of a secure means to participate.
Slowly but surely, institutional-grade DeFi tools are coming to market, and we anticipate this trend to continue. Not only will we see a continued proliferation of DeFi growth, but institutional-grade tools will make institutional participation far more accessible.
Related: Was 2020 a ‘DeFi year,’ and what is expected from the sector in 2021? Experts answer
Despite its significant growth, the DeFi space is still very much fragmented. Cross-chain interoperability — or lack thereof — is still a problem. Institutions want to be able to put their assets to use across the DeFi ecosystem. We anticipate significant growth in this area, with more and more layer-one protocols being bridged to DeFi and the broader Ethereum ecosystem — a development that also has the potential to improve liquidity along with market stability and efficiency.
Corporate treasuries and lowered barriers to entry
Against a backdrop of seemingly endless monetary stimulus, a significant number of private companies are treating digital assets as an inflation hedge. Some of these, like Square and MicroStrategy, have taken significant positions in recent months. We’ve seen MassMutual buy up $100 million in Bitcoin. And with Tesla’s $1.5-billion dollar Bitcoin purchase this month, the trend shows no signs of slowing. In the coming years, we expect digital assets to become an instrumental part of private-company balance sheets.
Related: Tesla, Bitcoin and the crypto space: The show Musk go on? Experts answer
Another factor at play is the lowered barrier to entry on the retail front. With tools like Celo’s Valora coming to market, Diem expected to launch in 2021 and firms like PayPal making it easy for their clients to buy crypto, we expect to see more of crypto as a tool for banking the unbanked — for putting financial tools into the hands of the millions without access to traditional banking services.
Related: Will PayPal’s crypto integration bring crypto to the masses? Experts answer
Beyond the crisis narrative
By virtue of being built in response to one economic crisis, crypto seems to be locked into a crisis narrative. In reality, digital assets have more than proved to be resilient in even the most challenging economic times. Just this past year, crypto proved itself in the grips of a once-in-a-century global emergency, earning a place in the portfolios of institutional and retail investors alike.
As the pandemic (hopefully) fades into the rearview, it’s exciting to think about what crypto can do without being forced into a defensive posture — without being defined against legacy assets like gold. It would be naive to say that crypto will never face another crisis — it almost certainly will. But from here, at what feels like the tail end of the pandemic, it’s exciting to think about what crypto can do in whatever “new normal” comes next.
The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Diogo Monica is a co-founder and the president of Anchorage. Before co-founding Anchorage, Diogo was the security lead at Docker — an open platform for building, shipping and running distributed applications. He has a B.Sc., an M.Sc. and a Ph.D. in computer science, has published several papers in peer-reviewed security conferences on the topic of distributed systems and information security, and is the author of several patents in secure communications, encrypted hardware and payment systems.
While Washington dithers, Wyoming and other US states mine for crypto gold
Cointelegraph By Andrew Singer
The United States is divided politically these days into red states and blue states, and increasingly, it seems to be fracturing into cryptocurrency-friendly and crypto-wary locales, too. On Feb. 21, it was revealed that San Francisco-based Ripple Labs had registered as a Wyoming business. Wyoming is arguably the most blockchain and cryptocurrency-welcoming state in the United States.
Meanwhile, several days later, New York State’s attorney general announced a settlement of the office’s long-standing investigation into crypto trading platform Bitfinex for illegal activities. As a result, Bitfinex and affiliated Tether must pay $18.5 million for damages to the state of New York and submit to periodic reporting of their reserves.
Wyoming and New York — poles apart on the crypto regulatory spectrum — were both making industry headlines in the same week in other words. The irony wasn’t lost on Timothy Massad, former chairman of the U.S. Commodity Futures Trading Commission and now a senior fellow at Harvard University at Kennedy School, who told Cointelegraph:
“Federal regulation of crypto assets is like swiss cheese — full of holes — and that has meant a smorgasbord at the state level, with Wyoming actively luring crypto businesses and the New York attorney general bringing aggressive enforcement actions as we saw this week with Tether and Bitfinex.”
Whether this “smorgasbord” is a good thing is a matter of some debate. Crypto havens like Wyoming can be centers of innovation, pushing a potentially revolutionary technology further forward, as Wyoming’s recently elected U.S. Senator Cynthia Lummis emphasized this week in a Chamber of Digital Commerce panel discussion with Miami’s Mayor Francis Suarez, another crypto enthusiast.
A complex fabric
But it also leads to regulatory uncertainty that gives entrepreneurs a case of hypertension. As Stephen McKeon, an associate professor of finance at the University of Oregon, told Cointelegraph: “Our regulatory system is a complex fabric of multiple agencies at both the state and federal level.” He further emphasized that “they need to coordinate on the topic of crypto assets because this asset class doesn’t map cleanly to the existing regulatory structure.”
Asked if, from a business standpoint, Ripple and others were making a smart business move registering in crypto-warm states like Wyoming with a higher degree of regulatory certainty and freedom — as well as lower taxes — McKeon added: “Businesses strive to reduce regulatory uncertainty. If moving to Wyoming helps to achieve that objective, then it’s a smart move.”
Others could follow Ripple. Zachary Kelman, managing partner at Kelman Law, told Cointelegraph: “Many crypto projects fled New York after the introduction of the onerous BitLicense back in 2015. I expect more projects to relocate in Wyoming, as well as other crypto-friendly states like New Hampshire.”
Wyoming created a stir in 2019 when its legislature authorized the chartering of special purpose depository institutions, or SPDIs, that can receive both deposits and custody assets, including cryptocurrency. The state’s banking division itself acknowledged that “it is likely that many SPDIs will focus heavily on digital assets, such as virtual currencies, digital securities and utility tokens,” though they could also deal with traditional assets. SPDIs can’t make loans like traditional banks, however.
Kraken Bank was the first business to receive a Wyoming SPDI bank charter in September 2020, followed by Avanti Bank and Trust in October, and there are “three more [SPDIs] in the pipeline” said Lummis at the Chamber of Digital Commerce’s Feb. 25 event. Avanti founder and CEO Caitlin Long had earlier suggested that Wyoming’s SPDIs potentially were “a solution to the #BitLicense problem” faced by crypto companies because “New York law exempts national banks from the BitLicense.”
But even though the Wyoming SPDI’s are state-chartered institutions, not national banks, “federal law protects parity of national banks and state-chartered banks,” continued Long, and following that logic, she concluded that SPDIs represented “a passport into some 42 U.S. states without the need for additional state [crypto] licenses.”
An accident waiting to happen?
Not all are enthralled by Wyoming’s new special-purpose banks, though. The Bank Policy Institute suggested that Wyoming’s SPDIs could be an “accident waiting to happen.” The BPI noted in September that Kraken was “the first digital asset company in U.S. history to receive a bank charter recognized under federal and state law” but warned that its business model “is inherently unstable under stress” because the new bank is funded by uninsured, demandable retail deposits “and relies on a pool of assets such as corporate bonds, munis and longer-term Treasuries to fund redemptions under stress.”
David Kinitsky, CEO of Kraken Bank, in a conversation with Cointelegraph, said that he believes the BPI blog post “comes from a lobbyist group funded by, and working on behalf of, the world’s biggest banks” and rests “on a slew of faulty assumptions,” adding further:
“[It’s] comical and hypocritical that they think their fractional reserve model along with its total reliance on asset exposure and interest rate environment is somehow less risky than a full reserve custodian bank that won’t do any lending and has a diverse set of adjacent revenue streams.”
Others have opined that innovation centers like Wyoming were merely filling the void left by the federal government, which has yet to take a coherent stance vis-a-vis the burgeoning crypto market. Benjamin Sauter, a lawyer at Kobre & Kim LLP, told Cointelegraph: “Wyoming is showing that individual states can play a meaningful role in crafting a coherent legal framework for the crypto/blockchain industry — particularly when it comes to state taxation as well as commercial and some banking issues.”
By comparison, according to him, the U.S. federal government “hasn’t really made an effort to create such a framework, and this has led to a lot of regulatory inefficiencies and general confusion.”
Innovator or loophole?
So, what about the notion that Wyoming merely created a means for its new banks to lure firms and investors based in more regulated states like New York? Kelman told Cointelegraph on the matter: “Many institutions operate entities all over the world, not just the United States. New York has jurisdiction over New Yorkers — but not any company related to a company that has had operations there.”
“Wyoming can and is becoming a center for crypto business and innovation,” Kinitsky told Cointelegraph, adding: “Certainly, there are ready similar examples within financial services like the credit card industry in South Dakota and ILC banks in Utah….SPDI banks have similar frameworks for being able to operate across the country and indeed internationally.”
McKeon agreed that Wyoming was following the South Dakota playbook: “South Dakota created favorable legislation for banks around interest rates and fees in the 1980s and now has one of the highest concentrations of bank assets in the U.S.,” adding further:
“By creating an environment that allows crypto projects to operate with a higher degree of regulatory certainty and freedom, Wyoming is likely to attract similar relocation within crypto.”
Will others join in?
Of course, other states could follow Wyoming’s lead. Kelman said: “I also expect larger states, like Florida, to follow suit with more crypto-friendly guidance, especially after Miami Mayor Francis Suarez’s overtures to the crypto community.” However, he further stressed that “given Wyoming’s small size and relative obscurity, I don’t know if it will remain a haven for an entire industry in the way Delaware has been for incorporations and corporate governance.”
As reported, Mayor Suarez is looking to develop some of “the most progressive crypto laws” and proposing within his jurisdiction innovations like paying city workers’ wages in Bitcoin (BTC) and purchasing BTC for the municipality’s treasury. Senator Lummis applauded the mayor’s initiatives at the Chamber of Digital Commerce’s panel, inviting him to “look at Wyoming’s legislative framework as a template and then build on it” by developing new Bitcoin “components,” including a pension plan for Miami workers that includes Bitcoin — something Suarez is looking into.
Multiple innovative centers like Miami and Wyoming, among others, could advance technological progress generally, she suggested. Suarez, for his part, said: “One of the things that we want to do is imitate Wyoming’s very successful integration of crypto into their community.”
Meanwhile, Avanti’s Long remains an ardent booster for her state: “Why should crypto companies redomicile to Wyoming?” she asked rhetorically on Feb. 21 following the news that Ripple Labs had registered as a Wyoming limited liability company, adding:
“No state corp tax, no franchise tax, crypto exempt from property & sales tax, our commercial laws clarify crypto legal status, crypto-friendly banks opening soon, access to crypto-open gov/legislators/US senator — all laws open-source.”
Is Wyoming good for BTC adoption?
What exactly do these tech-friendly states and cities mean for cryptocurrency adoption? Sauter was cautiously optimistic: “It’s possible that Wyoming’s efforts will have some trickle-up effects, should the federal government ever get its act together.” He stated further that there is also a major risk as businesses may be “lulled into a false sense of security and potentially conflating Wyoming’s regime for compliance at the federal level.”
Kinitsky told Cointelegraph that the convergence between crypto and banking, as is happening in Wyoming, “portends an important step toward mainstream adoption,” while McKeon added that crypto users “are primarily concerned with access to products and features. Better products translate to increased adoption.” Therefore, if Wyoming-type legislation enables crypto projects “to provide new and desirable features by mitigating regulatory risk for the providers, then it will be a positive force for general public adoption.”
Many, though, still seem to be treading water until the federal government acts to provide some legislative/regulatory structure to the nascent blockchain and cryptocurrency industry. According to Sauter, “as great and encouraging Wyoming’s recent actions are, there is only so much one state can do.” Massad also told Cointelegraph:
“This regulatory confusion creates higher costs and uncertainty. There’s still plenty of money and talent in this country flowing into crypto innovation, but we need greater regulatory clarity to ensure investor protection, financial stability and responsible innovation.”
NFTs based on STARZ show ‘American Gods’ coming soon from Curio
Cointelegraph By Benjamin Pirus
Curio, a platform which sells non fungible tokens, is helping to bring to life NFTs based on the TV series American Gods. The show is based on a novel of the same name by author Neil Gaiman.
“We are working with Fremantle on creating officially licensed digital collectibles for the hit TV show American Gods, which airs on STARZ in the U.S. and Amazon Prime Video internationally,” Curio’s CEO, Juan Hernandez, told Cointelegraph, adding:
“This is a first-of-its-kind use of NFTs with mainstream media, and it shows how larger marquee brands are starting to embrace them as an integral piece of their broader digital strategy. Curio enables Fremantle to modernize how they engage with fans, to develop emotional connections for a more digital native generation of viewers who are hardwired to do more with the things they love. Now they can own a piece of the action wherever they go, in a manner that is certified and authentic.”
Fremantle, a media production company, and Canada Film Capital serve as the producers behind the American Gods tv show, according to IMDB.
What is an NFT though? NFTs are non-fungible tokens, meaning they provide a provably unique sense of ownership over the property they represent. Fungibility refers to an item’s uniqueness, or lack thereof. If something is fungible, it can be traded or act interchangeably one-for-one with another item of its kind.
“Technically speaking, an NFT uses blockchain technology to prove that a digital item is unique (scarcity), or that it is what it says it is (verifiable authenticity),” Hernandez explained, adding:
“But many people simply think about NFTs as ‘digital Beanie Babies,’ with limited utility outside of collecting. However, we see the potential for NFTs to create unique digital experiences that weren’t previously possible before the advent of the technology; to modernize fan engagement. This is what we’re excited to enable for our brand partners.”
Last fall, a digital artwork NFT called “Right Place & Right Time” by artist Matt Kane fetched over $100,000. In the months since, NFTs have become an even hotter market. Bidders recently paid millions of dollars for NFT’s based on a former Major League Baseball second baseman’s artwork. Other NFTs have also recently hit multi-million dollar price tags as well.
Why is the crypto market’s interest in NFTs on the rise? Hernandez said the world is going more digital. “There are generational trends on the shift away from physical to digital, and certainly the COVID pandemic accelerated these trends as people have been forced to stay home,” he said.
“Philosophically, the same elements of verifiable scarcity and immutability that have given rise to Bitcoin’s market dominance are at play with NFTs,” he added. “The ability to have full sovereignty over a digital asset is a new experience for many, and it causes you to truly rethink your ‘ownership’ of goods within the digital economy.”
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