Cryptocurrencies surge, authorities crack down, central banks consider issuing own currencies
Myriad ‘real world’ blockchain use cases emerge: ASX & SWIFT post-trade services, B2B cross-border payments, blockchain smartphone
Have we reached a tipping point with blockchain technology?
Point of View
Cryptocurrencies have been the story of 2017. In particular, the meteoric rise of Bitcoin, concerns of a bubble and its energy consumption, crack down on cryptocurrencies by authorities, and emergence of the concept of ‘central bank-issued cryptocurrencies’ (CBCCs).
In mid-December, the price of Bitcoin peaked at nearly US $20,000, up more than 2,000% in 12 months. Bitcoin is not alone in seeing incredible price growth and volatility. Other currencies, such as Ethereum and Ripple have had similar experiences, not to mention ‘CryptoKitties’. The bizarre online cat-breeding game became so popular in early December that it caused congestion on the Ethereum network.
While there is much hype that the price of bitcoin could continue to soar, there is also no shortage of reports slating that a bitcoin bubble is brewing with frequent comparisons to the tulip mania of 1637. Indeed, the Reserve Bank Governor referred to the phenomenon as a ‘speculative mania’. While it is unclear what the fundamental value of bitcoin might be, at least in 17th century Europe, those left holding the bulb could grow flowers.
There are also serious concerns about the amount of energy consumed by Bitcoin, and its impact on the environment. According to Digiconomist, Bitcoin uses 0.21 per cent of the world’s energy, with annual consumption equal to that of Denmark.
In mid-December, CME and CBOE launched long and short Bitcoin futures. The latter giving Bitcoin ‘bears’ an opportunity to profit from a falling market, which could push down Bitcoin’s spot price. In parallel, the Commodities and Futures Trading Commission has developed a ‘heightened review process’ for cryptocurrency futures products, including requiring sufficient margin. (The initial margin of Bitcoin futures is currently around 40 per cent of the contract price.)
Increasing scrutiny of cryptocurrencies by authorities has led to the introduction of new legislation and regulations, over concerns around crime, tax evasion, AMLCTF, privacy, price instability and risks to users. Asserting control, China instigated outright bans on initial coin offerings (ICOs) and exchanges, in September, and is planning to shut down mining as well. Bank Indonesia has affirmed that virtual currencies are not legitimate payment instruments and has forbid use for making payments. Russia looks set to ban mining of cryptocurrencies by mid-2018.
On the other hand, Malaysia has announced that it will not make cryptocurrencies illegal, although it considering regulations. Also taking a more moderate approach is South Korea, where cryptocurrency traders will no longer be able to trade anonymously.
In Australia, amendments to the AMLCTF Act were passed in early December. The new legislation brings digital currency exchanges under the remit of Austrac, requiring exchanges to report transactions of $10,000 or more and register with the new Digital Currency Register. Furthermore, in September 2017, ASIC published guidance on ICOs, to help issuers with their legal obligations and to inform investors of risks.
The notion of a central bank-issued cryptocurrency (CBCC) emerged over 2017, as a possible alternative to physical cash. Central banks have expressed a range of views on the matter; all have noted that implications for financial stability and monetary policy need to be thoroughly understood. Neither Deutsche Bundesbank nor the Federal Reserve are convinced that CBCCs are a good idea. Both the European Central Bank, the Bank of Canada and the Reserve Bank of Australia have presented possible ways a CBCC might be issued. Actively researching what a CBCC might look like are the Sveriges Riksbank of Sweden and the Bank of England. The People’s Bank of China apparently has plans to issue its own CBDC.
Blockchain: the underlying technology
What is more interesting is the blockchain technology that underpins cryptocurrencies, which is merely one use case of the technology. Blockchain has the potential to revolutionise the way we live, bringing value to any transaction-based ‘thing’ that requires traceability, record-keeping, verification, transparency, trust and/or security.
In its Blockchain Technology Overview, published in January 2018, the National Institute of Standards and Technology (NIST) describes the technology:
“Blockchains are immutable digital ledger systems implemented in a distributed fashion (i.e. without a central repository) and usually without a central authority. At their most basic level, they enable a community of users to record transactions in a ledger that is public to that community, such that no transaction can be changed once published.”
The report provides a detailed explanation of the technology. It defines components of the architecture (such as ‘blocks’, ‘hashes’, ‘transactions’ and ‘ledgers’), describes how new blocks are added to the blockchain, and discusses, inter alia, consensus, smart contracts, permission models, example use cases and limitations of the blockchain.
While there is a range of possible ‘real world’ applications for blockchain – such as cross-border payments, smart contracts, digital identity, loyalty, supply chain, electronic voting and ensuring ownership – success in this space has been limited to-date. However, ISO standards are under development, and more use cases are beginning to emerge.
ASX announced at the beginning of December 2017 that it would indeed employ blockchain technology to replace CHESS, its incumbent equities clearing and settlement system. In parallel, SWIFT and a number of central securities depositories are working together to explore how blockchain technology could be used in post-trade services, e.g. corporate actions processing, including voting and proxy-voting.
Canada and Singapore have separately demonstrated that distributed ledger technology can be used to settle wholesale interbank payments, with experimental projects Jasper and Ubin. However, the technology is not yet ready to underpin the payments system.
Ripple is disrupting the correspondent banking market using blockchain. Members of RippleNet, its global payment network of banks and payment providers, can send near-instant cross-border payments to each other with best-price execution. In response, SWIFT has launched global payments innovation (gpi), which will involve blockchain at a later stage. In late 2017, Visa, MasterCard and American Express began to provide business-to-business cross-border payments using blockchain.
SIRIN LABS is launching a secure blockchain-enabled smartphone. Collectively FINNEY devices (which also include PCs) form an independent blockchain network. The FINNEY network supports a person-to-person resource-sharing ecosystem, where users can securely buy, sell, or share battery power and computing power with other users, and send and receive payments.
The Perth Mint plans to offer a gold-backed cryptocurrency, to make it easier for consumers to buy gold, and improve confidence in the origins of the gold.
The House of Lords in the UK released a report, in late 2017, setting out a range of key areas where distributed ledger technology could be used to improve public service. These relate to immigration and trade, national security, policing, taxation, heath, food standards, privacy and cybersecurity, and public spending.
Estonia is already well down a similar path. The Baltic nation’s e-society is underpinned by the government’s blockchain-based data platform, X-Road, which has been operational since 2012. It is used in national registries, such as health, judicial, legislative and security systems, with plans to extend to other areas.
Blockchain is being embraced by governments, central banks and the private sector across the globe as a technology that could solve myriad problems. At home, could ASX’s commitment to using blockchain for post-trade services – after considerable deliberation – indicate a tipping point in the use of blockchain technology by the broader payments community in Australia?