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The State of Blockchains Q2 2018


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Our latest quarterly "State of Blockchains" report on developments in the blockchains space, across startups, government and corporate adoption. This information has been provided to help build knowledge and understanding in the emerging blockchain and DLT space.

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The State of Blockchains Q2 2018

  1. 1. The State of Blockchains Q2 2018 Lead Analyst: Joel John Head of Research: Lawrence Lundy-Bryan
  2. 2. Outlier Ventures proprietary information This research is private and confidential and has been provided to you to help build knowledge and understanding in the emerging blockchain and DLT space. This information is provided ‘off the record’ and we would appreciate it if this content is not quoted directly without our prior written consent. We would be glad to prepare comment for publication, please contact Lawrence Lundy or Charlotte Baker using the details below. Research enquiries Lawrence Lundy-Bryan Media and communication enquiries Charlotte Baker Partnership enquiries Catherine Thomas
  3. 3. About Outlier Ventures Outlier Ventures is a venture platform focused on building the infrastructure for the next phase of the Web. As the first European venture firm dedicated to blockchain technology, we’ve developed an industry-leading investment thesis, based on the convergence of decentralised technologies such as blockchains and distributed ledgers, with ‘deep tech’ such as artificial intelligence, robotics, the Internet of Things, and 3D printing. We are an LLP partnership, we invest our own money as long-term investors who intend to hold investments for several years. We focus on early stage, seed and pre-seed projects where direct support to investee founders and creating value post-investment is integral to our business model. We have consistently proved our ability to identify exceptional projects, allowing us to constantly expand. Our team is 30 people strong, with a new office in the US, and with specialists in crypto-economics, research, legal, marketing, and tech, we bring a powerhouse of support to founders. Investing in both equity and crypto-tokens we have invested and partnered with some of the most impressive projects in the decentralised space including, IOTA, Ocean Protocol, Fetch.AI, SEED, Sovrin and most recently Haja Networks.
  4. 4. About the authors Lead Analyst: Joel John Joel's interest in blockchains primarily stems from its potential applications in developing economies .Prior to joining Outlier Ventures, he was the Blockchain analyst at Tracxn. Former involvements in venture capital include working with GSF Accelerator (India) and Rebright Partners (Tokyo). At Outlier Ventures, Joel leads research that feeds into management and portfolio decisions. He is currently focused on the building of a knowledge repository founders can reference as they work on community building and token generation. Head of Research: Lawrence Lundy-Bryan Lawrence is exploring the intersections of artificial intelligence, blockchains and the internet of things. He is Partner and Head of Research at Outlier Ventures and pioneered the funds’ investment thesis leading to investments in Ocean, Fetch, SEED, Haja Networks, IOTA, and Sovrin. He helps inform the UK and EU on technology policy as an expert advisor to the UK All Party Parliamentary Group (APPG) on Blockchain; steering committee member for the AI Global Governance Commission; community member of the UK All Party Parliamentary Group (APPG) on AI; and member of the European Commission Observatory on Blockchain. He is a regular speaker and commentator on a range of emerging technologies having been quoted on the BBC, Bloomberg, The Economist, and The Wall Street Journal.
  5. 5. Contents • Executive Summary • The OV Quarterly View • Startups: Numbers • Startups: Trends • Startups: Insights • Corporates: Numbers • Corporates: Trends • Corporates: Insights • Government & Regulation: Numbers • Government & Regulation: Trends • Government & Regulation: Insights
  6. 6. Executive Summary
  7. 7. Executive Summary The market has continued to be in its “winter” in terms of price action in the token markets and fund raises. Barring a few events such as the EOS launch, there have been few reasons for hype and excitement in the market. However, regulatory bodies, enterprises and venture capital inflow to the ecosystem continues at a sustained rate. We aren’t in public token sale winter, but we might be soon… Contrary to public reports, removing the outsized fundraises by EOS ($4 billion) and Telegram ($1.7 billion) would reveal that token markets have seen a dip in the total amounts raised through token generation events. The sustained bear market means a lower risk appetite from retail capital which has converted to lower raises. If Bitcoin or Ethereum see a sustained rally in Q3, the result will likely be smaller token sales as retail investors hold on to their existing tokens. This could mean a boom in SAFT based raises as teams raise funds from more sophisticated backers. Regulatory clarity inching ever closer More nations are beginning to come through with classification for tokens and the general meaning of “decentralisation”. The SECs landmark statement on Ethereum not being a “security” due to it reaching sufficient levels of decentralisation will prove to be crucial as the industry looks for more clarity from governments around what would be deemed legal or otherwise. Enterprises are fully on-board and driving adoption IBM, Walmart, JD, Google, Facebook, the list goes on across sectors and regional markets. Blockchain specific teams are increasing within organisations and hiring for individuals with relevant skill sets are continuing at a sustained rate. Rising enterprise interest in the sector would convert to a higher number of individuals interacting with blockchains without necessarily requiring the technical know-hows of private keys and personal wallets. We are interacting with the beeping modems of the blockchain era. Broadband is right around the corner.
  8. 8. Startup Ecosystem With 343 deals raising $1.8 billion in the year, we have surpassed funding levels of all previous years. However, this was driven by a few large rounds in existing organisations that had found product market fit. It remains to be seen whether the interest sustains over the year. The era of mega rounds are here Bitmain raised $400 million with plans of a possible IPO this quarter in what may be one of the largest series B rounds in the ecosystem. There were multiple raises that crossed $100 million in the industry leading to sustained capital concentration among a handful of companies that are now profitable and beginning to find product-market fit. Tokens now acquire companies Tron’s acquisition of BitTorrent marks the beginning of blockchain companies acquiring traditional, web 2.0 entities to accelerate growth and establish brand names. In a similar move, Coinbase acquired over 7 companies in the past quarter alone. As entities within the ecosystem turn “hungry” for growth, we will see a rise in exit opportunities for early stage investors in smaller companies. The seeds for mainstream adoption are being sown Bitmain invested $50 million into opera, influencing the browser towards an integration of token wallets into their android app. Similarly, HTC launched a mobile device that integrated CryptoKitties into their core offerings. Over the coming two quarters, we’ll see a rising number of companies with access to large customer bases using their reach to on-board individuals to tokens that are cash rich but are struggling for distribution.
  9. 9. Corporate Ecosystem Corporate venture capital in the ecosystem has not necessarily risen over the past quarter. However, early stage investments made by enterprises have provided great follow on rounds to organisations that raised capital from them. This could convert to heightened risk appetite from corporate entities in the near future. Exchanges are trending A rising number of financial organisations have expressed interest in offering token exchanges and associated services in the coming quarter. Notable amongst these is SBI Holdings own token exchange venture which launched last quarter. Line launched Bitbox and Robinhood app integrated a number of altcoins into their system to allow individuals to trade a rising number of crypto-assets. Key use cases are evolving Although the financial sector continues to dominate the use cases for blockchains by enterprise, alternative systems such as supply chain management, identity and even stable currencies are being explored by enterprises. Interestingly, due to a rising market demand, we are witnessing briefer times between plans of launching a project and actual implementation. But open source is yet to be embraced Enterprises continue with their age old practices of working behind walled environments. Although consortiums are on the rise, the high number of consortiums within each sector represent how fragmented the ecosystem is amongst enterprises. Notably, the quarter witnessed R3’s Corda’s open-source version (Cordite) being announced out of stealth mode. It will allow for the creation of digital assets that are much like ERC-20 tokens on Ethereum.
  10. 10. Government & Regulatory Ecosystem It has been a quarter of caution, calm and exploration for regulatory bodies around the globe as they consult experts about the ecosystem. Banks turn sensitive to government instructions Regional governments have begun instructing banks to avoid working with token exchanges with the interest of enforcing regulatory control over the ecosystem. This could however backfire as individuals move to peer to peer, cash based exchange mechanisms. There has been a rise in token oriented crimes in regions without permissive token exchange regulations in place. Regulatory arbitrage will continue Binance made headlines when the exchange shifted to Malta due to rising regulatory requirements. The region in exchange “welcomed” the organisation and has since used the opportunity to attract more blockchain start-ups. As regulatory environments around the world continue to fail to provide clarity, we will see both capital and entrepreneurs moving between ecosystems to avoid rising scrutiny. Governments are embracing blockchains Governments across the globe have begun embracing blockchains as a viable mechanism to raise efficiency and provide citizens with better services. Think-tanks, start-ups and enterprises are being increasingly consulted upon for the implementation of blockchains for purposes varying from voting to maintenance of educational records and issuance of subsidies. The first, truly large-scale implementation of a blockchain maintained by governments may go live by as early as mid 2019. However, amidst concerns of a lack of authority around truly decentralised, public blockchains and financial risks that stem from token volatility, governments have restricted their focus on blockchains and not empowered the use of tokens yet.
  11. 11. The OV Quarterly View
  12. 12. Jamie Burke, CEO • As usual, the industry continues to develop at breakneck speed. What is now clear is that the space has broken free of much of the idealistic dogma and is now pragmatically laying down important foundational infrastructure like dApp tooling, stable coins, and interoperability protocols . • A key macro-trend we are observing is the increasing levels of M&A. We are seeing protocols launch venture funds and accelerators as well as acquire equity-backed companies and teams to scale development or buy network-market-fit. We are calling this 'The Hungry Protocol' and understanding what M&A looks like in a decentralised Web will be one of the most important things for investors and protocol foundations to understand and master. • The Hungry Protocol is in reference to, and an extension of, Joel Monegro’s ‘Fat Protocol’ thesis: the idea that unlike Web 2 value in Web 3 will primarily be captured at the protocol layer rather than the application / market layer. So in effect, The Hungry Protocol is how tokenised protocols gets fat through M&A. “This quarter it has become clear that M&A is becoming a vital tool in the toolkit of a successful protocol. We are calling this the Hungry Protocol.”
  13. 13. Lawrence Lundy-Bryan, Head of Research • Facebook to get two billion people using blockchain technology? This quarter Facebook beefed up its blockchain team appointing one of its senior engineers, Evan Cheng, as its first "director of engineering, blockchain”. This follows the announcement early in the year that the company would create a blockchain team led by David Marcus, who has served as the company's vice president for Messenger and was formally President of PayPal. With the recent 19% share price drop, Facebook will need to take drastic steps to address failing user growth. In order to assuage users concerns around privacy and data protection, it is conceivable that Facebook could build a blockchain-based tool that enables users to ’own’ their own data and use third-party self-sovereign identity services like Sovrin (a portfolio company). • The battle to own the customer in crypt—investing. Line, Robinhood, Coinbase and Revolut are all coming for millennials money. While all of these messaging and investing services had a different starting market (all except Coinbase are not from the crypto industry) they are all battling to make it easier for millennials to trade crypto-assets. This is one of the most interesting stories in the market at the moment. The consumerization of finance continues apace and for millennials crypto-investments don’t appear to be any different from any other type of investment like stocks and shares. “This quarter has proven beyond doubt that interest in blockchain technology and crypto-assets goes beyond price and trading. Big consumer-facing businesses like Facebook and LINE are entering the game and will on-board millions if not billions of users”
  14. 14. Q2 2018 market capitalisation • Markets staged a temporary recovery in early may as market capitalisation returned to a high of ~$492 billion. • The figure tumbled to a low of $234 billion in June amidst fears of hacks on Korean exchanges. • The market capitalisation stays at ~$290 billion at the time of publishing. Anticipation of a Bitcoin ETF may lead to a rise in market capitalisation.
  15. 15. Q2 2018 transaction volume • Bitcoin continues to lead in terms of volume, peaking at close to $40 billion in volume in a single day in late April. • Bitcoin’s market dominance rose from 36% to close to 47% in late July. Token prices seem to have decoupled from a rise in Bitcoin prices indicating that a higher number of traders may be selling their altcoins for Bitcoin in the short run.
  16. 16. Startups: Numbers
  17. 17. Venture capital wants more blockchain • At 343 deals and ~$1.8 billion raised for the year, VC funding in the ecosystem has set new all time highs. • A key reason fueling the surge is rounds consisting of $100million+ raises with the intention of conducting an IPO or merging or acquiring with competitors. • With a single Series B raise of $400 million, Bitmain has raised close to the entirety of the sum the ecosystem raised in 2014 with the intention of conducting an IPO. • Capital spillage from over- capitalized firms will lead to a series of M&A activity providing more early stage investors exits in the coming months.
  18. 18. But retail investors are only asking #whenmoon? • The impact of the prolonged bear markets have begun wearing the token generation markets. Reducing risk appetite in the industry from retail investors has become evident in the second quarter raising a little more than half of what was raised in comparison to Q1. • The peak in Q1 may have been largely fueled by individuals hedging gains from the rally of December 2017. A high number of $100 million+ raises contributed to the surge in the quarter. • If markets believe Bitcoin prices will recover in the coming quarter, we may continue to see a ‘winter” in public token generation markets. This is why an increasing number of projects have been raising in VC and SAFTs.
  19. 19. M&A(turity) in the market is increasing substantially • It’s official: the blockchain ecosystem now has more M&A activity this year than any other year with 30 acquisitions already. • Startups and protocols have begun seeing acquisition of Web 2.0 companies and start-ups from 2014-2015 as an alternative approach to attain scale. • Tron’s acquisition of BitTorrent for $140 million raised eyes earlier in the year. Stellar’s (claimed) acquisition of Chain for $500 million is another major protocol acquiring a start-up to accelerate growth. • Coinbase has been a leader in terms of providing M&A opportunities to smaller players. Of the nine companies acquired by the exchange, seven occurred this year including Paradex, a well-known decentralised exchange Source: Crunchbase
  20. 20. Start-ups: Trends
  21. 21. Power laws emerging in decentralised exchanges Source: DappRadar • Decentralised exchanges have begun to gain momentum as increased scrutiny on centralised exchanges due to changing regulatory environments has pushed some users away. • Lack of AML/KYC requirements combined with assets being held in smart contracts attracted early volume into the space. • However, lack of liquidity combined with heavy slippages, poor UX, and steep learning curves have hindered growth of the space. Idex has seen a 80% dip in daily average users. • The top three decentralised exchanges for ERC-20 tokens: Idex, Bancor and ForkDelta, collectively hold 91% of the market. We expect power laws to continue to hold as exchanges gain more users and liquidity leading to stronger network effects.
  22. 22. Decentralised applications are struggling to gain traction Source: DappRadar • Stickiness in decentralised applications (dApps) are at an all time low. Average percentage draw-down of users across the apps mentioned is at 85%. • While fear of a potential hack may have driven off users from Forkdelta, it may be the lack of sustained utility and sticky game dynamics that drove users away from Crypto-Kitties. • Given that it is the early days of dApps, users are yet to form habits around projects in the ecosystem and we may see users continue to flow from app to app in the coming months.
  23. 23. Gaming and gambling continue to dominate dApp growth Source: DappRadar • Decentralised applications continue to focus and innovate in gaming and gambling. The ability to trade in-game tokens and smart contract based speedy settlements amongst ERC-20 tokens are the key reasons. • However, in terms of volume, exchanges continue to dominate the space. All dApp based games collectively see only 400 Ethereum in volume on an average day in comparison to Idex alone handling 8000+ Ethereum every day and Fomo3D’s (gambling app) volume of 3700+ Ethereum. • Marketplaces struggle to see traction. The sector had a collective volume of 50 Ethereum over a week, of which 39 Ethereum came from a single dApp (TradePasS).
  24. 24. Start-ups: Insights
  25. 25. Stable coins are the hot new thing for investors What are stable coins and why do they matter? High volatility in the token economy has pushed traders towards considering alternatives that allow them to hedge in the event of wild swings. Stable currencies (hypothetically) allow an individual to hold and transfer dollar pegged tokens between wallets without the need for a banking intermediary. This brings the speed, efficiency and reliance of a blockchain in place of the long verification times banks take and reduce the requirement for verification and documentation. Secondary solutions built on a stable currency could lead to insurance, escrow and trade settlement solutions in the future. Where are we? There are over 10 live blockchain based stable currency implementations. Tether leads the market segment with a current market capitalisation of $2.7 billion. Daily volume for tether paired altcoins currently run over $2.5 billion. The token is claimed to be backed by dollar deposits in a bank and runs on the Omni and Ethereum blockchains. Alternative approaches to providing stable tokens include issuing gold backed tokens and algorithmic adjusting of the token’s issuance (Basis). What next? Enterprises and banks may soon provide stable currencies for inter-bank transfers. IBM has partnered with Stellar’s uphold project to provide a dollar backed stable-currency. Similarly, Circle is working towards the issuance of USDC, a stable currency alternative that will plug into Poloniex. The most notable fundraising in the segment over the past quarter happened when Basis raised $133 million from backers including Google Ventures and Stanley Druckenmiller. we may see state issued “digital fiat” being deployed in the future.
  26. 26. Non-fungible tokens are the hot new thing for devs What are they? Non fungible tokens (NFT) are non divisible tokens that are unique in the network. Conventional tokens like Ethereum or Bitcoin are non-distinguishable from one another as they all represent the same thing in their respective networks. A non-fungible token on the other hand is unique, non-divisible and representative of a certain character or asset on the network. They draw value from their uniqueness, rarity and demand. Where fungible tokens often derive value from demand on their network as an aggregate, non-fungible tokens have prices that are independent of one another as their rarity varies much like baseball cards or similar antiques. Where are they being used? NFTs are currently primarily used in the context of gaming for tracking in-game assets. Notable amongst these were cryptokitties, a dApp that saw over 15,000 daily users at its peak. The use of the token mechanism is also becoming relevant in order to represent physical property such as real estate, antiques and vehicles. The application of the token may soon be ported to identity in the future. What next? NFTs will find mainstream adoption as the infrastructure for their storage and transfer evolves. Gaming giants including ones like Tencent in China have begun implementing NFT based games into their product like. In addition, the implementation of token wallets in mobile browsers such as that of Opera’s will pave the way for an ever increasing number of users engaging with non fungible tokens in the near future. Marketplaces for non-fungible tokens will evolve to be exchanges for a new class of digital assets.
  27. 27. Now tokens have their own funds.. and funds have their own tokens • The rise in M&A activity within the sector is not fueled by institutional capital alone. One of the means through which companies are expanding is through issuing tokens tied to exchange fees and using those as a mechanism to fund emerging projects. • Token based funds that issue capital in the form of tokens, eventually pass on the “risk” to the markets where the tokens are exchanged. Markets perceive investments made by the fund as good reasons for premium due to (potential) ecosystem growth. • This does not mean a lack of interest in traditional venture capital backing. It is only the source of capital that is changing. Ecosystem funds are handled by individuals with prior experience as investors and venture builders. • Native token funds (e.g. Tezos, EOS) are set up with the intention of attracting developers to their ecosystem and incentivizing individuals building infrastructure (e.g. wallets) for the tokens. Project Name Size (millions $) Ontology Accelerator 1,500 Binance 1,000 Huobi 1,000 Reflective Ventures (Rchain) 100 Community Fund DAO (NEM) 54 EOS 50 Tezos 50 The Stable Fund (MakerDAO) 45 Bitfury Capital 20 Coinbase 15 Source: DappRadar
  28. 28. Corporates: Numbers
  29. 29. Corporate VC is great for follow on rounds Note : Logos at the top indicate major enterprise backers in each company • Corporate venture capital continues to prove highly attractive for organisations that seek to do large follow on rounds. Industry networks combined with niche expertise that comes with corporate venture capital may be a key part of the reason. • A major notable investment for the past quarter has been Xiaomi’s investment in Xunlei, a Nasdaq listed company providing networking solutions including blockchains as a service. • Most venture capital rounds for startups with corporate investors have come at series B, indicating that corporate capital backs enterprises that have found product-market fit and are now ready for scale.
  30. 30. But continue to invest in just a few sectors • Corporate venture capital continues to back a handful of niche sectors where their value add is most evident. In terms of frequency of investments trading, financial services and infrastructure (e.g. blockchains as a service) continue to dominate the space. • Although consumer facing apps as a percentage of total companies backed have increased in count, capital raise has not substantially risen for the sector. Internal teams and acquihires at enterprises catering to the segment may be a key reason. • We continue to see investments into on- ramps such as exchanges and wallets for the quarter. Most notably, Bitmain’s $50 million investment into Opera (backed by Sequoia) could prove to be a crucial moment for retail adoption of tokens. Note : N = 40, percentage figures indicate frequency of investments and not size of investment dollars
  31. 31. Corporates are trying to hedge risk through consortia • Corporate entities have begun collaborating through data share agreements and shared infrastructure using blockchains for the purpose of providing clients better experiences and reducing costs. • The advantage consortiums provide is in terms of shared R&D. Leading consortia such as R3 have raised (and deployed) over a hundred million dollars towards sector-specific blockchain solutions. • However, consortiums are yet to prove to be substantially advantageous than in-house solution. A high number of consortiums within a sector can further dilute network effects. • Emergent sectors such as mobility currently have single consortiums that capture bulk of the value from the large players in the ecosystem. E.g. MOBI. • However as consortia grow in participants they often struggle to meet the broader and often diverging needs of the value chain, especially as blockchains are often a catalyst for a shift in value capture within a market.Note : Study sourced from Deloitte Report on Consortiums. Source :
  32. 32. Corporates: Trends
  33. 33. For corporates, exchanges are the new cool • Japanese messaging app Line launched an exchange (Bitbox) for over 30 tokens and support in 15 languages With close to 165 million monthly average users (MAU) in the platform, this could be one of the largest on-ramps for tokens in the near future. • Renown fee-less stock trading app Robinhood announced intentions of integrating tokens into their offerings in Q4 2017. Over a million users signed up for the waitlist in January. In Q2 2018, the product also integrated options to trade Bitcoin Cash and Litecoins into the platform. Israel based E-Toro opened its token offerings to US investors in a similar move. • Nasdaq CEO Adena Friedman has also indicated interest in listing tokens on the exchange provided regulations around the industry attain more clarity. For the moment however, this remains only an indication of interest.
  34. 34. Financial institutions are moving beyond ‘blockchain not bitcoin’ and experimenting with crypto-assets • Japan’s SBI Group announced the launch of SBI Virtual Currencies (SBIVC), a platform specific to Japanese traders earlier in the year. The platform had over 20,000 individuals in its wait list. The exchange currently supports Ripple, Bitcoin and Bitcoin Cash. • 9% WEG Bank AG was acquired by Litecoin Foundation through a collaboration with TokenPay. The move is anticipated to provide banking infrastructure for token based startups that otherwise find it difficult to find banking partners. • NYSE’s parent organization – Intercontinental Exchange is reported to be working on a Bitcoin exchange to cater to the needs of institutional investors. However, much news on the matter has not been revealed. • Goldman Sachs has also started a trading desk to provide exposure to clients seeking to trade contracts that derive their price from Bitcoin.
  35. 35. While also exploring new use cases • Payment Networks - Mitsubishi UFJ Financial Group, or “MUFG” partnered with Akamai to create a blockchain that is capable of one million transactions per second with two second latency times. The system is anticipated to replace conventional systems currently used for online payments. It is being further developed to enable micro-transactions (e.g. paying for an article) and payments between IoT devices. • Trade Finance Settlement - HSBC and ING used Corda for a live trade finance transaction for a shipment of soya beans this quarter. The letter of credit transaction involved a buyer and seller and their respective banking partners processing the transaction on a single application. This digitization of the process has reduced the settlement times from five to ten days to a mere 24 hours. • Insurance - Chinese InsurTech giant ZhongAn Insurance on boarded over 100 hospitals to streamline record verification and accelerate claims. The organization also use blockchains to store all insurance policies from its parent company ZhongAn Online securely.
  36. 36. Corporates: Insights
  37. 37. Emerging applications are finding product/market fit • Supply Chains - Walmart and a number of other major companies including Nestle and Kroger have partnered with IBM to track food supply chain globally on a blockchain. The system will be used to identify issues that lead to food recalls and tracing outbreaks quickly to limit customer risk. • Identity - IBM has joined the Sovrin network (an Outlier portfolio company) as a founding steward to enable self sovereign identity. The enterprise will be dedicating hardware, security and network capacity towards maintaining the foundation’s decentralised digital identity network. IBM join other large corporates as stewards including Workday, Veridium, • Energy - Centrica in partnership with LO3 energy has developed a blockchain based local energy market with an investment of £19 million. The system will test energy transactions in a peer to peer trading model across 200 businesses and residents. The trial follows an investment last year from Centrica’s investment arm, Centrica Innovations.
  38. 38. More players joining the BaaS game • JD - Chinese ecommerce giant announced plans of entering the blockchains-as-a-service (BaaS) space in March of 2018. Key applications of the blockchain would involve government services, tracking charitable donations, supply chain tracking and taxation. The organization has also partnered with leading exchange, Huobi for exploring opportunities in enabling IoT payments and exploring opportunities in financial services. • LG - A subsidiary of LG has launched an enterprise blockchain platform that is claimed to be developed for use in finance and manufacturing. Feature additions are being designed around enabling local governments to issue local currency and sending of welfare payments. This was trailed by the UK Government back in 2016. • Hitachi – Hitachi announced the launch of a fingerprint based payments authentication system on the July 25. The organisation has also partnered with Japan based Tech Bureau to create a loyalty points management system on NEM-based Mijin blockchain.
  39. 39. Government & Regulation: Numbers
  40. 40. Regulation is becoming increasingly favourable Regulatory Index In order to better understand the nature of regulations around the world, we rated nations on a scale of 1 to 5 for their approach to tokens and ICOs for 50 countries. The map represents the sum of the scores allocated across the 3 parameters. Note: Data is qualitative and measured on a relative basis. Favourable Encouraging Under Discussion Hostile Unknown
  41. 41. Trading bitcoin has become a global phenomenon • Concerns around capital flight enabled by token transfers have lead a number of regulators in South-East Asia to consider outright bans on tokens. • A key approach taken to reduce capital inflow towards the token economy is by strangling banking relationships for token based startups. India’s Reserve Bank issued a statement requesting banking entities in the region to stop providing banking services to exchanges in the region. • However, Bitcoin is being increasingly used as a currency hedge in inflation stricken regions such as Venezuela. We will see the trend sustain in certain economies regardless of token volatility. Favourable Encouraging Under Discussion Hostile Unknown Note : Map represents relative stance of the government to token trading on a scale of 0 to 5, where 0 would represent a ban and 5 would represent favourable regulations
  42. 42. Nations want a piece of ICO action (with caution) • A large number of countries had initially taken hostile positions to crypto-assets that stemmed from a public token generation event. However, capital flight combined with the rise in startups moving abroad has forced regulators to reconsider. • Regions such as Russia have begun enabling startups to work within sandboxes with strict government oversight. Companies receive temporary reprieve from regulations in exchange for additional transparency with the government. • A key focus for nations have been to define categorization of tokens. The Swiss Government’s FINMA took the early lead in this regard. • For the moment, protecting investors from outright fraud and Ponzi schemes remains the key focus areas for governments worldwide. Favourable Encouraging Under Discussion Hostile Unknown Note : Map represents relative stance of the government to token trading on a scale of 0 to 5, where 0 would represent a ban and 5 would represent favourable regulations
  43. 43. Everyone likes blockchains though • Countries globally have begun embracing blockchains as a means to increase operational efficiency within government. Key use cases vary from land records to voting to welfare payments. • A major reason for the difference in approaches towards tokens and blockchains is that while the former requires leniency in capital flow, the latter is simply a technological integration that can be censored and restricted at will. • Government contracts for blockchain projects have begun concentrating around a handful of enterprises providing blockchains as a service leading to a risk of rising vendor lock-in as we saw with Oracle and SAP SQL databases, this problem is especially acute in developing economies. Favourable Encouraging Under Discussion No Known Initiatives Unknown Note : Map represents government interest in implementation of blockchains for key functions within national boundaries. A 5 would represent live implementations or PoC Testing.
  44. 44. Government & Regulation: Trends
  45. 45. Banks are increasingly playing a key role in enforcing regulations • National banks have begun using banks as a medium to throttle and limit the rise of token markets within their jurisdictions. This is primarily due to reasonable concerns of capital flight. Even in the presence of high levels of AML/KYC integrations, banks currently have little control over where individuals move their capital once they receive their tokens. The increased usage of decentralised exchanges also makes it even harder for national banks to manage and track capital flows in and out. • Notable examples for this include the Reserve Bank of India, Reserve Bank of Zimbabwe and the Central Bank Of Indonesia. Startups in these regions were given an interim period within which client deposits were asked to be returned. These moves from regulatory bodies are likely to lead to a rise in peer to peer transactions in cash that fall outside the purview of regional regulators resulting in larger shadow banking systems in those countries. • Regional authorities in Switzerland have taken a completely different approach. They are pushing towards ensuring token based startups receive full-fledged banking support by the end of the year. These differences in banking services provided to token oriented startups should lead to heightened capital inflow to regions that provide banking services. Setting up bank accounts is still a challenge from crypto-related projects, and Switzerland can expect to attract a lot of demand from startups struggling in more challenging jurisdictions like the United States and the United Kingdom.
  46. 46. Regulators are focusing on raising investor awareness • In regions where token sales and investments are common, regulators have begun spending time and resources in raising awareness about red flags that can be detected in a fraudulent ICO. Tactics that generate a fear of missing out such as a count-down timer or heavy “bonus” / “discount” offerings have been cited as indicators. These sorts of approaches are valuable and are another tool in the toolkit of consumer protection measures that include regulation. These softer methods that target demand have the advantage of not quelling innovation but lack the force of regulations. • In May, the SEC launched a “HoweyCoin” website with the intention of showing retail investors how to detect scams in the crypto-asset ecosystem. The CFTC followed up in July with a warning for retail investors about the high possibility of “pump and dump” events in tokens with low market capitalization. • Canada’s Ontario Securities Commission has been proactive in conducting surveys within the region and engaging with investors to understand token preferences. A recent survey of over 2500 Ontario residents revealed that 5% of those surveyed held token assets and 42% of those within them did so with anticipation of making profit. • Demand-side approaches from regulators to increase retail investor understanding and awareness of the risks of tokens and token sales is expected to increase. However history suggests that regulators are likely to also address supply-side token issuers sooner or later regardless of the effectiveness of consumer education.
  47. 47. Government & Regulation: Insights
  48. 48. Rising hubs for pubic token sale activity • Although regulations around token sales are yet to attain much in the way of clarity, there are a few regions in the globe that are emerging to be increasingly attractive for token oriented entrepreneurs. Zug in Switzerland has been home to a high number of token-oriented enterprises following in the footsteps of the Ethereum foundation back in 2014. FINMA’s asset classification in the region further allows token oriented start-ups to have a safe haven. With a rise of banking services in the region later in the year, Zug will continue to dominate as a hub for token based projects. • Malta made headlines earlier in the year when Binance, a large crypto-asset exchange, was given a “warm welcome” to the region by their Prime Minister Joseph Muscat. The region has since passed a series of bills ( including the Virtual Financial Assets Bill) that provides a framework for token based projects to be set up in the region. Malta Stock Exchange has also partnered with Okex to build a securities oriented token exchange. • Gibraltar has also been emerging as an alternative jurisdiction for token entrepreneurs to consider while setting their organisations up. The Gibraltar Blockchain Exchange (GBX) has been set up by the Gibraltar Stock Exchange with the intention of enabling the trade of crypto-assets in the region. The region is also expected to pass further legislation governing token sales in Q3 2018. • Despite the progress and favorableness of these hubs, the crypto-asset industry is unlikely to go mainstream until a larger financial services market like the United Kingdom or the United States sets out a formal regulatory framework for crypto-assets. Much of the existing financial services industry would like to get access to a large growing new asset class but the risks are too high for most. Positive guidance and more clarity on utility-tokens and utility-token sales would lend credibility to the nascent public token sale market.
  49. 49. FSB and IMF will continue to influence policy • The G20’s Financial Stability Board (FSB) first made headlines in March when they suggested that crypto-assets do not necessarily pose a threat to the financial stability of global markets. The body has since published an assessment framework that tracks the key metrics to track as regional regulators assess the risks poised by tokens to their markets. The framework currently accounts for exposures of banks to the token economy, risks accumulated from futures and token sales. The Financial Stability Board has also asked the Financial Action Task Force (FATF) to clarify AML/KYC requirements in the context of token markets. • The IMF’s stance on tokens have been largely neutral. Christine Lagarde, Managing Director of the International Monetary Fund has pushed for the need to regulate the industry with an even-handed approach to maintain a balance between protecting investors and enabling innovation. She has also pushed for the need to explore blockchains as a mechanism to further attain efficiencies and transparency in financial markets. • Regional governments will continue to seek input and guidance from international bodies as they build the competencies required to regulate and monitor the space internally. The U.K. Government’s Crypto-asset taskforce led by the HM Treasury, Financial Conduct Authority (FCA) and Bank of England is leading the way in attempting to shape and define a taxonomy for crypto-assets. • However, considering the sensitive nature of crypto-assets especially related to their function as an alternative currency and potential risk to financial stability, it will be challenging for the U.K. government or any other national Government to fully articulate the transformative potential of self-sovereign ownership of a new class of digital assets. That said, those Governments that engage in an open way and find a balance between innovation and consumer protection will benefit in tax revenues and job growth from one of the fastest growing industries in the world.
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