Crypto Watch 7/25/17

Deloitte Loves Blockchain, Bill Miller Loves Crypto, The IRS Wants Your BTC…

Adoption

Deloitte this week has said it continues to invest in its S3 group which is tasked with finding the best and most investable blockchain opportunities. Notable NYU finance professor Aswath Damodaran has purported that people are starting to prefer Cryptocurrency to Gold as an alternative investment and hedge against Fiat currency. Deloitte, KY, KPMG, and PWC all report that clients are increasingly asking questions about ICOs and Cryptocurrency, signalling a spike in interest among generally more conservative investors. In keeping with the increasing involvement of consultancy groups, MRI has announced the launch of a new blockchain assessment system.

The Hashed Health Blockchain consortium has announced further expansion with a new member, Change healthcare. The healthcare sector seems to be garnering more interest than ever in the Blockchain. The technology could be quite helpful in monitoring patients electronic medical records, as well as dealing with privacy and billing concerns.

Russia’s largest airline, S7, has announced that it is now issuing tickets on the Ethereum blockchain while French automaker Renault trials using the blockchain to gather service and maintenance data on its automobiles. American Express has announced that it is trialing a service that will allow buying Bitcoin directly with a credit card via the Bitcoin app Abra.

Notable wall street investor Bill Miller announced that he’s held 1% of his portfolio in Bitcoin since 2014, jumping on the bandwagon of more and more high net worth investors purporting their cryptocurrency investing prowess, which has potential trickledown effects on normal investors.

Ultimately, adoption and real world use serve as perhaps the most reliable indicators of the performance and potential of digital currency and distributed ledgers. Every day more institutions are finding it prudent to explore these powerful new tools, showing with increasing confidence that Cryptocurrency has real use and efficacy, with long term economic implications.

Regulation

The headlines continue to be abuzz with many countries and agencies hastening their efforts to decide how to deal with the inevitable influx of blockchain technologies. As governmental action lags behind the explosive growth of activity on distributed ledgers, advocacy groups and large private entities are continuing to get increasingly involved in their push for for regulation and adoption. Some of the weeks highlights include:

• World federation of Exchanges has cited Jurisdictional issues as the biggest inherent challenge for the winder adoption of cross country cryptocurrency commerce. In a new report on the matter, the WFE notes “It is important to have certainty regarding the legal status of digitized assets as a means of transferring and granting security over interests of such an asset, as well as treatment in insolvency, and applicability of insolvency protection”.
• An anonymous coinbase user has been granted judicial permission to challenge the recent IRS tax summons of coinbase users on the grounds of being able to demonstrate “a sufficient showing of abuse of process to support intervention as of right”. The IRS wants personal information tied to accounts of coinbase users purportedly to monitor and tax trading activity.
• Texas congressman Roger Williams is calling for anti-money laundering and know your customer regulations to be applied to cryptocurrency startups. The congressmen claims that there are national security and terrorism implications, stating that terrorists may use virtual currency unless there are governmental controls.
• An Indian IT trade association group (NASSCOM) announced a partnership with Blocksmith and Quattro in forming a special interest group focused on blockchain technology. The group aims to inform the public and private sectors on the various uses of Blockchain technology.
• The European Central Bank President Mario Draghi stated in a letter to European parliament that though growing in adoption Cryptocurrencies are still having a limited effect on the financial system, stating “…There is no evidence to suggest that the connection of VCS to the real economy has strengthened significantly”
• The Federal Reserve’s Faster Payments task force has received 5 proposals that utilize blockchain technology to speed financial transactions.
• The Monetary Authority of Singapore revealed a 3 step plan to connect the world’s central banks via distributed ledger technology. Dubbed “Project Urban”, the plan would see global banks selling cross border transactions in real time via self executed smart contracts.
• Kosovo’s first bitcoin ATM has sparked an official government warning into the safety and security of bitcoin/cryptocurrency
• The governor of Delaware has signed a bill making it explicitly legal for entities to use the blockchain for stock trading and record keeping
• The Belarus Central Bank has approved blockchain use for Bank Guarantees stating “The new mechanism of maintenance of the register of bank guarantees will ensure the mutual access of the economic entities of the states being members of the Eurasian Economic Union to the procedures of the government procurements of goods (works, services).”
• The US government department of homeland security has granted $794,000 in funding to Evernym for a new blockchain Key Management tool. The DHS joins other government agencies such as the National Science foundation in funding blockchain initiatives signalling government support of blockchain technologies.
• The US commodity Futures and Trading commision has granted permission to a private company to exchange cryptocurrency futures contracts.
• The SEC has said Digital Token sales are subject to federal securities law

Security

More than $18MM of Etherium was stolen as part of the Multisig breach. The breach took advantage of a small vulnerability in the Multisig wallet contract that allowed the Hacker to send use two contracts simultaneously contracts thus draining the entire wallet. From the coin telegraph article “The first transaction, called an initWallet, was used to cause all public functions from the library to be callable by anyone using delegatecall, including initWallet, which then allowed the hacker to change the owner of the contract. The hackers then made their address the only owner, and required only one conformation to execute any transaction. Finally, they were able to simply send a transaction to a wallet owned exclusively by them, and drain the entire contents of the wallet. The hack could have been prevented simply by not using the ‘delegatecall’ function to allow for all library functions to be invoked externally on the wallet.”

This comes in conjunction with the Parity wallet breach this week that saw 150,000 ETH stolen (around $30MM USD). These breaches highlight the severe vulnerability in current Cryptocurrency online wallets. Inevitably, with anything scaling as quickly as Cryptocurrency has, there will be errors in the code creating this kind of susceptibility. Prudence, caution, and cold storage remain the best tools for the common investor to protect their digital currency. Exchanges like Gemini have gained a lot of popularity for using well established security protocols more typical to Fiat exchanges and further assuage doubt by being FDIC insured.

On the topic of Security, many politicians like to bring up the potential for Cryptocurrency to be utilized by terrorists, perhaps as a method of averting attention away from something they don’t fully understand. A new EU report, however, signals the obvious, going into detail in explaining that for terrorists and terror organizations, fiat currency is still king. The report goes on to say that it may be easier to launder money with no trace than to deal with having transactions take place on a transparent blockchain. The report goes on to suggest that if anything, movement away from Fiat paper currency would be the best thing to help curb the financing of global terror organizations.

What the BTC

By July 21st, about 55% of Bitcoin miners were using the new protocol implemented by the Segwit2x changes and by July 23rd, BIP 91 was locked in, resulting in a near 40% price increase of BTC. Investors and users felt confident that consensus would be met, but those thoughts were interrupted by the announcement of Bitcoin Cash, which is essentially a hard fork of the Bitcoin protocol. The spit is signalled to begin on August 1st, with all Bitcoin users receiving an equal amount of Bitcoin cash to their current BTC holdings. Bitcoin cash futures trading has already begun and though the price looks promising at this moment, color this author extremely skeptical. Let’s go over a few things.

One of the primary issues of scalability was the hash size of 1MB for Bitcoin. Segwit2x was an effort by the community to come up with a solution that would be equitable to both the miners and the users/community. Segwit 2X thus came along and promised 2MB hash sizes among with a number of other changes that would make it easier for parallel blockchains to interface with the BTC blockchain, enabling third parties to build solutions on BTC that could finally allow for things like Smart Contracts.

While it looked like everyone was going to play ball and adopt the new regulations, at the last minute, a hard fork has resulted in the out of nowhere issuance of Bitcoin Cash, which some are saying is akin in effect and scope to what happened with Etherium and Etherium Classic.

Basically, everyone who has Bitcoin will automatically receive an equal amount of bitcoin cash. Concern stems from the fact that while Bitcoin Cash will use an 8MB has size, in terms of usefulness to the average party, it’s an outdated system. Bitcoin Cash will still use proof of work, will still not allow for many of the third party integrations and solutions afforded by other coins like ETH, and won’t generally solve many of the existing problems with BTC, some of which are addressed by BTC’s adoption of Segwit2x. In a world of better, more dynamic coins, it appears the only thing Bitcoin Cash might have going for it is an immediate circulation, but only time will tell if that translates to useage. If the coin proves not to have use to outsiders, those who hold it may have a hard time finding a party to sell to. Remember, Bitcoin Cash won’t be the golden intermediary coin that BTC is, and thus won’t have the ingrained adoption and significant use case that we see in BTC. At the end of the day, what we must ask ourselves is if Bitcoin launched today, would it have a reasonable chance of success? Of course granting Bitcoin cash to every holder of BTC means it will be one of the most widely held digital currencies overnight, but short of real world use cases, will that be enough, or will Bitcoin Cash prove to be an oft forgotten detail in the Segwit2x adoption saga? Because of the amount of holders alone, it seems very plausible that Bitcoin Cash may gain some permanent traction, but to what long term effect?

The story of the the BTC soft/hard fork and fight for consensus revolved around the fact that BTC has no central authority. Being managed by a community is often cited as one of the strong suits of BTC and indeed is central to the concept of decentralization. But in light of strong management teams like the one at Etherium or well established voting and management protocols like we see with Dash coin, it is only a matter of time until the next need for change potentially stymies BTC as the market continues to mature and expand. While BTC doesn’t appear to be going anywhere and likely won’t be weakened by this fork, it’s an important concept to keep in mind.