InnOvation Capital & Management, LLC
IntelDigest
LAW – POLICY – FINANCE – MARKETS
INFORMATION FOR THE ENTERPRISE AND INVESTOR
OCTOBER 11 , 2017
Contact Richard Power with comments or questions. IntelDigest is intended for the use of our clients and colleagues. Material may not be reproduced, forwarded or shared without express permission.
This week in IntelDigest, we continue Part One of our essay on Cryptocurrencies; we use the shorthand designation, Cryptos, to refer to these digital currencies. As we reported last week, the underlying technology for most digital currencies is known as Blockchain.
Although purchasing any digital currencies, such as Bitcoin, should be considered very speculative at this time, Blockchain technology has great and widespread promise for the future, so we consider this technology as suitable for investment.
We continue the discourse on Blockchain in this issue; next week, we will go on to Part Two to discuss digital currencies.
What is Blockchain?
Simply put, Blockchain is a form of “distributed ledger” system … a decentralized database which records each transaction. Records of transactions and payment details are spread across a massive public database. The process is transparent, and transactions are verifiable. There is no centralized database; rather, the records appear on thousands (or millions) of databases. As a result, no one can hack or change the records because they are “backed up” in multiple locations.
Ascension of Blockchain Technology
When Blockchain burst onto the scene just a few years ago, the immediate question was: Will this new technology upend traditional financial institutions, such as multinational banks, credit card and merchant payment networks, and money-transfer companies? The answer is: Yes, it has that potential. As a result, many of these “legacy” institutions are exploring ways to leverage the Blockchain.
They are attracted by the potential for lower processing costs and stronger security for a range of transactions, from equities trading and securities clearing/settlement procedures to cross-border payments.
High-Profile Adopters
The biggest names in finance are not ready to overtly commit to the Blockchain and Cryptocurrencies, but their actions speak volumes. Several of the largest institutions … including Bank of America and Goldman Sachs … have filed patent applications in the space.
Even members of the “Old Guard” understand that companies must innovate in the 21st Century if they want to succeed.
The number of merchants and credit card companies which enable Bitcoin transactions grows on a weekly basis … this now includes American Express!
Central banks around the world are making initial infrastructure investments to support cryptocurrency payments. Considering that central banks are most threatened by the emergence of decentralized cryptocurrencies, it is telling that even they are willing to adopt … and profit from … a technology with such a potential for disruption.
Uses of Blockchain
The developer of Blockchain, Nicolas Cary, espouses his belief that this technology can improve society through global, transparent digital payments and IoT applications (the Internet of Things). Cary is the co-founder of Blockchain.info.
Blockchain technology has the potential to alter the nature of every transaction in the world, by eliminating the middleman in many business relationships. Cary describes Blockchain as a “… live spreadsheet available for all the world to see.” This “distributed ledger” includes all information on a transaction, available equally to all parties in the transaction, and fully encrypted.
Blockchain offers transparency, security, and a permanent, unalterable record. This allows the parties to transactions to deal directly with each other, without middlemen, in an environment of trust.
Consider the process of buying a house. If real estate transactions were moved to a Blockchain, Buyer and Seller could complete the transaction without brokers or lawyers or a title company. Using Blockchain would save a large portion of transaction costs, which currently amount to 8-11% of a typical transaction.
Viability of Blockchain
Cary estimates that the size of the entire Blockchain universe today is roughly $160 Billion, equivalent to the market capitalization of Cisco Systems (CSCO). And, Blockchain is still in its infancy.
One can compare Blockchain and Cryptocurrencies to the Internet in its infancy. The World Wide Web was the Coolest New Thing in the 1990s, and has grown into an industry worth many Trillions of Dollars. A few companies are, individually, worth more than One-half-of-$Trillion each … Amazon, Apple, Facebook, Google (Alphabet), Microsoft … and are in a race to see which can reach One Trillion Dollars first.
There is currently over $150 Trillion in money in the world. If Cryptocurrencies can grab even a small percentage of that market in the next few years, then Cryptos will be a multi-Trillion Dollar market by 2020.
Challenges
The challenges facing Blockchain and Cryptos begin with:
* Development of the Blockchain application
* Adoption by the legacy financial institutions
* Government intervention
Recently, the Chinese government closed a Bitcoin trading platform; the new Cyber Unit of the U.S. Security and Exchange Commission (SEC) charged two Bitcoin-based initial coin offerings (ICOs) with fraud; and, the U.S. Office of the Comptroller of the Currency recommended regulation of Bitcoin companies, exchanges and trading platforms.
Meanwhile, other jurisdictions … such as Hong Kong, Singapore, Dubai and Luxembourg … have embraced Cryptos as the wave of the future.
The Best Case Scenario … taking the long view … is that decentralized Cryptocurrencies offer a viable alternative and competitor to fiat currencies (established by government decree, such as the Dollar, Euro, et al) and commodity currencies (such as Gold). And, governments adopt Blockchain technology, for efficiency and keeping up with innovation; as a result, public money … and public expenditures … become more transparent and easily auditable by any citizen.
Next Week in IntelDigest
Blockchain is the wave of the future. We will discuss the economic opportunities in Blockchain next week, as well as the prospects and dangers of speculation in Cryptocurrencies, which now number almost 1,000 and have attracted investments of up to $200 Billion!