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Blockchains And The War on Cash

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Currently, India faces devastating cash problems, unique and unprecedented especially for a country of its size. Governments of countries with highly developed financial systems too have proposed to scrape bank notes or at least decommission the highest denominations.

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In India, the government announced overnight their two largest denominations, worth roughly US$15 and 7.5 respectively, would cease to be legal tender immediately.

Citizens had about one month to convert their cash reserves into new notes, with many problems being reported around the availability of notes and long queues at the bank tellers.

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As Bloomberg points out, less than 10% of all Indians have ever used another payment method other than cash, and only two percent have ever used a mobile phone to pay for something.

Other countries too consider stepping in India’s footsteps. There is a debate in Australia over whether the AU$100 note should be withdrawn from circulation, the European Central Bank has already made the decision to phase out the EUR500 bill, and in the United States Professor Kenneth Rogoff of Harvard University has made a name for himself by campaigning for the abolishing of cash altogether.

The arguments are always similar. Cash enables illicit transactions such as drug trade or illegal prostitution, its anonymous nature encourages tax evasion and bribery, and ever since we have entered the epoch of negative interest, there is concern that too much cash usage reduces the effects of central bank policy.

Blockchain as a proposed solution

Blockchain, the technology underpinning cryptographic tokens such as Bitcoin and Ethereum, has increasingly caught the eyes of central banks. China, for example, is rumoured to be building its own virtual currency on top of a blockchain-like system.

When central banks, or any banks for that matter, speak about Blockchain, they often do not refer to systems that work exactly like Bitcoin does. It is hard to imagine how a bank would favor building a system that they, in the long run, have no control over, and which they would not be able to derive profits from.

Private, permissioned blockchains are intended to keep serving the interests of the banks and governments, and will in effect function similarly to existing systems, requiring identification, being subject to seizure and monitoring.

There is natural demand for cash

Cash is not only popular because of its use as a private and discrete mechanism to transfer value. Its reach goes far beyond that of money laundering, drugs, and bribery.

Most importantly, cash can be received by anybody. An undocumented immigrant can receive cash in the same way as a small child, a machine, a felon or someone who recently declared insolvency.

Additionally, cash payments are highly reliable. While it may not be trivial to validate their authenticity, a cash payment never fails due to electricity outages, account irregularities or software glitches. Cash never gets stuck in the system, requiring “additional documentation” or repeated trips to the bank to unfreeze the payment.

Banning cash and replacing it with a private blockchain or government issued e-currency does not remove the demand for cash, nor will it be able to replace it.

Without making onboarding trivial and allowing those without legal documentation to safely and reliably bank on the new systems, the removal of cash from an economy removes certain activities in the short run, which is undesired in case these activities are legal. For many people, it is equivalent to a loss of their job.

In the long run, their prospects, and with them the prospects of the black market, depend on whether they can move their transactions into a space that functions quite like cash.

We might see the return of gold coins in commerce, or the rise of cryptocurrencies and their public, permissionless blockchains. Barter, too, can for a short time offer relief from unavailability of cash.

Conclusion

The demand for cash in an economy can be fulfilled by other mediums of exchange that a government has a hard time cracking down on. A move away from cash does not necessarily eliminate the undesired activities associated with it. Instead, gold, foreign currency and cryptocurrencies like Bitcoin are ready to fill the void.

Author: David Lang is Communications Manager at ExpressVPN, a Bitcoin accepting VPN provider. Images from Shutterstock.

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Fidelity Investments is Mining Cryptocurrency

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Fidelity Investments is a multi-billion dollar brokerage  that just so happens to be mining cryptocurrency. In fact, it has been at it for three years, using its own computers to harvest bitcoin and Ethereum.

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Profitable Experiment

CEO Abby Johnson recently told Fortune that its U.S.-based mining operation is “making a lot of money.” This comes despite running a relatively modest operation.

Hadley Stern, Senior VP of Fidelity Labs, described his company’s venture as an “experiment.”

The real reason we began mining, and still do, is to learn how the network works, how consensus works, how difficulty levels work,” he said in reference to the mining process.

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The key to profitability has been the dramatic rise in cryptocurrency over the past year. Bitcoin and Ethereum are the world’s No. 1 and 2 cryptocurrencies by market capitalization, and no-one else comes close.

Well Ahead of the Pack

The fact that Fidelity has been at this for three years speaks volumes about the company. Other, much bigger players are still dipping their toes in the market, but are unsure about how to proceed. Goldman Sachs is reportedly on the fence about starting a cryptocurrency trading operation, while J.P. Morgan has already begun handling customer orders for bitcoin-based instruments.

Fidelity is doing a lot more than just mining tokens. Earlier this year, it reached an agreement with Coinbase to let customers view cryptocurrency prices alongside other assets on their Fidelity homepage.

Coinbase is the world’s most funded cryptocurrency exchange with more than 7.4 million users.

Cryptocurrency Prices

The cryptocurrency market ended the week on a firm note, with bitcoin (BTC/USD) reaching a session high of $4,425.00. At press time, the index was up 1.6% at $4,368.

Ether is also trading higher against the dollar, with the ETH/USD rallying more than 3% to $305.

Ripple (XRP) lost momentum on Friday, but still managed a weekly gain of 21%.

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Chinese Government Eyeing Fresh Bitcoin Legislation?

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The Chinese government could roll out fresh cryptocurrency regulation in the coming months permitting licensed brokers to operate, based on recent information from Xinhua.

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The state-owned news publication recently revealed that the government is mostly concerned with stamping out illegal activity involving bitcoin and other cryptos. Government authorities could be planning to regulate the market by creating a licensing program with strict Know Your Customer (KYC) and Anti-Money Laundering (AML) systems.

The Case for AML

The need for KYC/AML protocols has long been raised by cryptocurrency proponents, especially in reference to initial coin offerings (ICOs). In response, the blockchain community has come together to create the Simple Agreement for Future Tokens (SAFT). The SAFT is both an instrument and open-source framework for token sales that vets accredited investors.

SAFT activity is quickly gaining traction, with the likes of Gizer recently issuing a presale of its ICO through SAFTLaunch.

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SAFT was officially created by Protocol Labs in close collaboration with AngelList and Cooley.

China’s Stance Looms Large for Cryptocurrency Market

Although digital assets have recovered from the China-induced flash crash of September, favorable regulations on the mainland could mean big business for bitcoin exchanges. Prior to the ban on ICOs and bitcoin brokers, Chinese investors were responsible for a quarter of all BTC trades.

According to Xinhua, China is likely to pursue a licensing program similar to Japan, a country that recently approved 11 cryptocurrency exchanges. CnLedger, a leading source of cryptocurrency news in China, recently had this to say:

“Xinhua News, official press agency of CN: Virtual currencies have become the top choices of underground economies. We shall adopt ‘0-tolerance policies’ towards crimes hidden underneath and take measures such as record-keeping, licensing, AML processes, real-name, limiting large transactions.”

Is China’s cryptocurrency ban temporary? It certainly looks that way. Regulators must already know that the ban hasn’t stopped mainland investors from buying cryptocurrencies next door in Hong Kong or Singapore. A saner approach to an all-out blanket ban is a tighter regulatory framework that will stamp out money laundering and other underground activities.

«Featured image from Shutterstock.»

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Tim Draper Has Made Over $110 Million Since 2014 With his Bitcoin Investment

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Tim Draper, the billionaire technology investor and prominent venture capitalist who has invested in some of the most successful technology startups in the likes of Coinbase, Patreon, SpaceX, Tesla, Box, FourSquare, has profited over $110 million from his investment in bitcoin less than three years ago.

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In 2014, Draper participated in the auction of 144,336 bitcoins by the US government and the US Justice Department, which were seized during the investigation into Silk Road, a dark web marketplace. Draper was granted the permission to purchase a batch of 30,000 at around $600 from the US government.

Upon securing 30,000 bitcoins, Draper told Fox Business:

“[I’m] very excited about bitcoin and what it can do for the world. Bitcoin is as big a transformation to the finance and commerce industry as the internet was for information and communications. If bitcoin were here in 2008, it would be a stability source for our world economy. Everybody should go out there and buy a bitcoin. Every investor who’s a fiduciary should at least be partially involved in bitcoin because it’s a hedge against all the other currencies. There’s a whole ecosystem being built that’s going to make commerce much easier with much less friction and safer.”

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Today, Draper’s 30,000 bitcoins are worth $129.9 million. Considering that Draper had spent $19 million purchasing the batch of 30,000 bitcoins in 2014, Draper has recorded a profit of over $110 million in less than three years.

While Draper held onto his investment in bitcoin, the US Justice Department was quick all of the 144,336 bitcoins seized during the Silk Road operation. According to various sources, the US government sold the majority of its 144,336 bitcoins at a price of $336, at $48 million. If the US government had sold its bitcoins in 2017, it would have generated an additional profit of around $573 million, as 144,336 bitcoins at today’s bitcoin price of $4,330 are worth $624.9 million.

Bitcoin price was below $350 in 2014. Today, it is over $4,330.

Since 2014, in addition to purchasing tens of thousands of bitcoins, Draper has funded some of the most successful bitcoin companies in the cryptocurrency market including Coinbase and Korbit. Earlier this year, Coinbase secured a $100 million investment at a $1.6 billion valuation, while Korbit was acquired by the parent company of a $10 billion gaming company in Nexon at a $140 million valuation.

Furthermore, Draper has not sold his stake in Coinbase and earlier this year, Brian Armstrong, the CEO of Coinbase, revealed that Coinbase is still at an early stage in terms of developing and scaling. Armstrong noted that it will evolve into the safest and most trusted exchange in the global market.

“Digital currencies are having their ‘Netscape’ moment. The pace of innovation has been accelerating and we are now seeing exciting projects and companies being built on top of digital currencies. We’re beginning to transition into phase three of our secret master plan. Our goal is to be the safest, most trusted and compliant, and easiest to use. Not the first to market with new assets. Especially at scale, it takes time to ensure any new asset we add is well tested and secure,” said Armstrong.

Coinbase is also one of the two exchanges in the US market apart from Gemini that is targeting institutional and retail investors by providing sufficient liquidity. As Coinbase and its flagship cryptocurrency trading platform GDAX continue evolve, Draper will position himself at the forefront of cryptocurrency innovation and disruption.

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