Crypto Industry Report #42
Balzers (LI), 28 July 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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The Bank of France announces eight applications selected for CBDC testing
Last week, it was announced by the Bank of France that eight applications have been selected for the CBDC testing program within the central bank.
The entities selected are Accenture, Euroclear, HSBC, Iznes, LiquidShare, ProsperUS, Seba Bank and Société Générale Forge. The focus of the testing will be CBDCs for interbank settlements, not for a retail use, and the experiments will extend for several months.
Assessment
The candidates sent their applications last May and the Bank of France chose eight entities among all the applications. Notably, two major banks are part of the testing program, Société Générale and HSBC. This further confirms that the interest in CBDCs is gradually increasing and commercial banks are willing to get involved through the testing and pilot programs.
Both HSBC and Société Générale are among the largest commercial banks globally, therefore it seems likely that other major banks could also decide to get involved in CBDC testing in order not to lose a competitive advantage.
While certain financial institutions seem to have doubts about the blockchain technology, there are many indications such as the Libra project or CBDCs that are showing important use cases.
Therefore, there might be a risk for those financial entities that choose to ignore technological developments such as blockchain, because they could have an important impact in their industry in the coming years.
Another selected applicant is Seba bank, a crypto-focused bank based in Switzerland which obtained a banking licence from FINMA similarly to Sygnum bank. It seems that the idea of the central bank of France to collaborate with other participants could prove valuable to share knowlege and to accelerate the development and use cases of CBDCs.
While not directly clear from the list of selected applicants, some major US banks seem to be also involved to a certain degree. For example, Iznes will be reportedly supported also by Citi.
In addition, Euroclear which is specialised in the settlement of securities transactions and their custody, was founded by JP Morgan.
While Facebook’s Libra received strong criticism from regulators and certain financial entities, it seems that CBDCs are more welcomed and commercial banks are willing to support the testing.
Nevertheless, there is a risk for commercial banks if central banks take certain roles of commercial banks, thus creating a potential monopoly situation. However, several CBDC reports seem to indicate that CBDCs that exist in parallel to the current systems would be ideal, therefore reducing the risk for commercial banks.
This design of CBDCs that would still preserve the role of commercial banks might encourage these banks to support and accelerate the development of CBDCs to reduce the risks of private projects such as Libra that might have an important impact for them and their business model.
The Bank of France is leading regarding CBDCs, including also a trial with Société Générale announced recently and it is part of one of the upcoming BIS Innovation Hubs. In addition, other central banks such as the Bank of Jamaica are also planning to start a similar CBDC testing program within a fintech regulatory sandbox.
Since CBDCs for the general public are more complex and challenging, it seems a good strategy to begin the testing of a CBDC that would be used only among financial institutions before considering a CBDC focused on the retail sector.
The advantages of a CBDC focused on financial institutions that will be tested within the Bank of France are improvements of executing conditions for cross-border payments, additional ways to exchange financial instruments for central bank money and also analysing further methods regarding the availability of central bank money.
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OCC is allowing all US banks to provide crypto custody services
According to a letter from the Senior Deputy Comptroller and Senior Counsel of the US Office of the Comptroller of the Currency (OCC), Jonathan Gould, all nationally chartered US banks can provide crypto custody services.
This is significant since previously only specialist entities were able to provide crypto custody services in the US. The OCC is headed by Brian Brooks, who was previously an executive at Coinbase.
Assessment
It seems that since Brian Brooks was previously at Coinbase, his influence at the OCC is being positive for the crypto industry. This is significant since OCC is the office of the US Treasury handling banks, and as described in the letter any national US bank can keep the unique cryptographic keys thus enabling the offering of crypto custody.
Nevertheless, regulators in other major economies such as Germany were ahead of the US. BaFin clarified the crypto custody in Germany and this attracted several major crypto custodians to the country.
The main benefit for blockchain and the crypto industry of these developments is the legitimisation of the technology and the crypto asset class. It seems that the crypto industry is reaching a certain level of acceptance and awareness by central banks, governments and regulators that can no longer be ignored.
While those leading major regulatory or government entities might not be familiar with crypto or willing to support the industry, there are certain influential people who are supporters of the blockchain technology and are teaching and even joining certain institutions, such as the OCC in the case of Brian Brooks from Coinbase, to further accelerate the development of the crypto industry.
Nevertheless, it seems that major banks are likely to get exposure first to crypto-assets through low cost strategies such as partnering with a sub-custodian entity.
However, once tokenisation of traditional assets with blockchain gains importance, then this would then likely impact their standard sources of revenues and business models and therefore banks might need to allocate larger investments.
In addition, while generally it is thought that these developments may take ten years or more, it might happen significantly sooner. There are several major blockchain projects launching this year solving most of the technical issues that were holding back the technology until now.
Therefore, it seems possible that several blockchain use cases may be realised and implemented sooner than generally expected.
Moreover, the upcoming elections in the US, the potential launch of the Libra project or the effect of the last bitcoin halving on its price later this year are significant events.
If the technology follows an exponential growth curve, then those countries or corporations ignoring the blockchain and crypto trend may find themselves in a challenging situation at a competitive disadvantage.
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Polkadot officially in mainnet as governance removes admin rights
Polkadot achieved officially its mainnet last week following the previous launch phases.
With a Council and a Technical Committee in place, through governance the admin rights of the Web3 Foundation to coordinate the launch process were removed and therefore Polkadot became a permisionless network governed by the DOT token holders.
Assessment
Given the complexity of Polkadot, which consists of a central relay chain and other chains connected to benefit from shared security and interoperability, the launch process was designed in several phases. Firstly, the Web3 Foundation had certain rights, so the network was not fully decentralised and therefore not yet in the mainnet, but as a mainnet candidate.
Once there was a sufficient number of validators and DOT tokens staked, ensuring the security and proper functioning of the network, a Council and a Technical Committee were selected to enable the governance functions within Polkadot.
Then, the admin rights of the Web3 Foundation were removed and now Polkadot is in the mainnet as a permisionless network governed by the DOT token holders, the Council and Technical Committee.
It is expected that the next governance proposal will be to enable the transfers of DOT tokens and this may happen towards the end of August.
From that moment, further governance proposals will continue improving Polkadot and the significance of this is that there is a clear governance mechanism unlike other major blockchain networks.
In addition, on-chain updates are possible without any forks, so this indicates that Polkadot may have larger implications than expected when all the pieces are brought together regarding what the project brings to the blockchain industry.
Moreover, the bridges to Ethereum, Bitcoin and other blockchain networks could strengthen further the whole ecosystem.
Considering the technological breakthroughs that Polkadot brings, it could be considered among the most important blockchain projects being launched this year.
While usually such highly technical and innovative projects are at a certain risk of issues in the code for example, the founders and team behind Polkadot provide a significant assurance. The co-founder and CTO of Ethereum as well as Parity Technologies have built and led the project.
Therefore, given the previous success of Ethereum which was written mainly by Polkadot’s founder Gavin Wood, it seems probable that Polkadot may follow a similar success like Ethereum and the two projects may collaborate to bring and enable more business uses cases.
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The Bank of Japan announces the launch of a new CBDC research team
According to news released last week, the Bank of Japan (BoJ) has announced a new CBDC research team that will take over the activities from a previous team.
The new team will be part of the BoJ’s payment and settlement systems department. The announcement follows recent news regarding the inclusion of CBDCs in the official economic plan of the Japanese government.
Assessment
It seems that Japan is accelerating the efforts related to CBDCs. The Japanese government is considering that CBDCs are of a significant importance and that they could have a major impact.
The evidence is the inclusion of CBDCs in the official economic plan of the country and the developments in other countries related to CBDCs may also be adding pressure to remain at the forefront of the knowledge and technical skills.
While there was previously a similar team researching CBDCs at the BoJ, it seems that the efforts are being increased now with a new dedicated team.
Since Japan is a major economy and also significantly advanced technologically including within the blockchain industry, it is positive that resources are being allocated to the research of CBDCs.
Nevertheless, it seems that currently both the BoJ and the Japanese government are mostly monitoring and researching CBDCs and global developments rather than planning to launch their own CBDC.
It seems that Japan is aiming to be ready in case it is needed to issue a digital yen, for example if countries such as China or the US launch a CBDC.
The interest of Japan in CBDCs is further confirmed since the BoJ joined a group of global central banks to research CBDCs. The group includes the central banks of the UK, Canada, Sweden, Switzerland, the European Central Bank (ECB) and the BIS.
Other central banks in Asia such as those from South Korea or Thailand are also increasing the research, testing and resources related to CBDCs projects.
Nevertheless, a digital yuan launched by China would have the largest impact in both Asia and globally. Considering the weekly developments related to CBDCs, it seems likely that the first CBDCs, both for the general public or for financial institutions, might be launched in the near future.
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Russian lawmakers pass a major crypto bill
A bill called ‘On Digital Financial Assets’ was passed in Russia. The bill was initiated in 2018 and now it is expected to be adopted at the beginning of 2021.
While this bill will provide the foundation for crypto regulations in Russia, the comprehensive legal framework is expected to be introduced through another bill called ‘On Digital Currency’.
Assessment
It seems that while it is positive that the DFA was passed, the main legal framework will be introduced with the DA bill. This bill is expected to be passed later this year although it seems that all the details are not yet confirmed.
The DFA bill will introduce a certain legal status in Russia for crypto-assets with definitions and legitimisation. Nevertheless, crypto-assets are not still allowed to be used as a payment method. This is likely to be related to the volatility of crypto markets, however stablecoins might be allowed as a means of payment or a CBDC if it is implemented in Russia.
The crypto regulations being developed could also facilitate the launch of stablecoins in the country. Given the developments in other countries such as China or the US, it could be expected that Russia may also accelerate the efforts related to crypto such as CBDCs for example.
In addition, an important authority seems to be planned for the Bank of Russia related to crypto-assets in the country. For example, the Bank of Russia would be involved in supervising crypto issuers, crypto exchanges, and the purchasing of crypto-assets by certain investors.
The crypto trend currently is no longer isolated in certain countries or regions but it is spreading globally. Considering the upcoming developments this year, notably CBDCs or Facebook’s Libra, crypto is likely to become a central topic of discussion for governments, regulators and other authorities soon.
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Crypto Market Update
The overall crypto market capitalisation showed a significant improvement last week raising from around $276 billion to over $305 billion. Similarly, bitcoin’s price increased from values near $9.1k to around $10.2k, nevertheless the price may slightly decrease to fill the CME BTC futures price gap.
The price above $10k is well above both the 100-day and the 200-day exponential moving averages (EMAs), at around $9.1k and $8.8k respectively. It seems likely that the effects of the last bitcoin halving event are gradually being observed.
Ethereum’s price also raised significantly from around $238 to over $320 ahead of the upcoming launch of the first phase of Ethereum 2.0. Nevertheless, there are some concerns being discussed about the raising ETH fees in the network.
Traditional markets are showing as well positive signs with the Cboe VIX index remaining stable around 25 and the S&P 500 index is now close to the values before the major drop due to the Covid-19 pandemic.
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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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