Our weekly list of announcements about how capital markets and regulators are engaging with digital assets.
The Finanser: fear and loathing in financial blockchain development
Most of the uses of blockchain and DLT technology are in areas that are far more complex than just a technology solution required. The use cases are in digital identity, clearing and settlement, trade finance and more, and these all require agreements between governments, financial institutions and corporations before the technology can be applied. It’s not a technology solution fix but an agreement fix first that then allows the technology to be applied. That’s why it’s taking so long to come to fruition and prove its value.
Maybe this is why two of the stand-out start-ups in the financial DLT space are struggling. Digital Asset Holdings (DAH), led by Blythe Masters, was a stellar company that gained lots of traction, support, finance and publicity when it launched. Almost everywhere I looked, Blythe was there talking about the blockchain revolution. Three years later, Blythe has left DAH and a spokesperson for DAH says: “The market is evolving to a place where we see the ledger platform becoming a place that is going to be very difficult for us to compete in.”
R3, the bank consortia funded and operated start-up was meant to revolutionize banking with Corda, their blockchain-inspired ledger platform. Three years later, and the leadership and developers of R3 are at war. According to The Block, engineers have lost faith in the tech, saying it lacks scalability and “doesn’t perform well”. Engineers have also complained about the five-figure monthly bills R3 has to pay for cloud services, undermining viability even further. The Block notes that this is potentially something true of all DLT and blockchain firms where there is a cultural conflict between those bringing blockchain enterprises to market and the engineers working on delivering the products being promised.
It is also interesting to consider that the 50 or so banks funding R3 are in it for near seven figure numbers annually. To have funded a consortia to the tune of millions of dollars and see no results after years must be frustrating for the banks. A former ING employee told The Block that the bank was not seeing the value creation for the money it had spent to engage in a five-year revenues agreement for an unlimited number of Corda Enterprise licenses. ING claim this is not the bank’s view.
Bloomberg reports that Germany’s central bank president Jens Weidmann found a trial project to transfer and settle securities and cash using blockchain had turned out more costly than the old-fashioned method and there are many other examples. And McKinsey makes three use cases for blockchain but none of them in the clearing and settlement space: all of them for retail banking in the areas of remittances, know your customer (KYC) and risk scoring for the underbanked. Even then, there are the sceptics.
ASX, Digital Asset and VMware join forces on DLT
The Australian Securities Exchange (ASX) has signed a three-party memorandum of understanding (MOU) with Digital Asset (DA) and VMware to work together on distributed ledger technology (DLT) initiatives in Australia and New Zealand. Under the principles in the MOU, ASX plans to provide its DLT offering with the support of DA and VMware.
This will include the development of the application to replace CHESS (ASX’s equities clearing and settlement system), the support of DAML (the open source smart contract programming language used to build distributed applications), and the provision and support of the distributed ledger and associated infrastructure, which delivers ASX’s data privacy, confidentiality and security requirements at greater scale.
DA is the creator of DAML and ASX’s CHESS replacement technology partner. VMware is a New York Stock Exchange-listed server virtualization and cloud computing software provider, as well as an existing supplier of virtualization and infrastructure solutions to ASX.
While ASX remains initially focused on the replacement of CHESS, the partnership will strengthen its ability to support the financial services industry using the infrastructure to create new services and innovations beyond clearing and settlement. It will also enable ASX, DA and VMware to work together to provide and support DLT solutions to other customers in Australia and New Zealand.
Software for the new system to replace CHESS is being progressively deployed within ASX’s Customer Development Environment, where customers and their service providers have begun exploring the clearing and settlement functionality of the new system. Peter Hiom, ASX Deputy CEO, said in a statement: “This new partnership is a very positive development that will help us support a wider range of DLT solutions developed by the industry. It confirms our belief in the potential of DLT as we remain on track to deliver the CHESS replacement system in March-April 2021.”
Swiss regulator releases money laundering guidance, licenses two blockchain firms
The Swiss Financial Market Supervisory Authority FINMA has published guidance on how it applies Swiss anti-money laundering rules to financial services providers supervised by FINMA in the area of blockchain technology. FINMA has also issued banking licenses to two new blockchain service providers.
FINMA recognizes the innovative potential of new technologies for the financial industry. It applies the relevant provisions of financial market law in a technology-neutral way. However, blockchain-based business models cannot be allowed to circumvent the existing regulatory framework. This applies particularly to the rules for combating money laundering and terrorist financing, where the inherent anonymity of blockchain technology presents increased risks.
In addition, for the first time, FINMA has issued banking and securities dealers’ licenses to two pure-play blockchain service providers. The companies involved are SEBA Crypto registered in Zug and Sygnum registered in Zurich, which will offer services for institutional and professional customers.
BoE’s Carney talks about digital currencies as global reserve
Technology has the potential to disrupt the network externalities that prevent the incumbent global reserve currency from being displaced, said Bank Of England governor Mark Carney in a published speech at the Jackson Hole summit. The Bank of England and other regulators have been clear that unlike in social media, for which standards and regulations are only now being developed after the technologies have been adopted by billions of users, the terms of engagement for any new systemic private payments system must be in force well in advance of any launch.
It is an open question whether such a new Synthetic Hegemonic Currency (SHC) would be best provided by the public sector, perhaps through a network of central bank digital currencies. Even if the initial variants of the idea prove wanting, the concept is intriguing. It is worth considering how an SHC in the IMFS (International Monetary and Financial System) could support better global outcomes, given the scale of the challenges of the current IMFS and the risks in transition to a new hegemonic reserve currency like the Renminbi.
An SHC could dampen the domineering influence of the US dollar on global trade. If the share of trade invoiced in SHC were to rise, shocks in the US would have less potent spillovers through exchange rates, and trade would become less synchronized across countries. By the same token, global trade would become more sensitive to changes in conditions in the countries of the other currencies in the basket backing the SHC.
The dollar’s influence on global financial conditions could similarly decline if a financial architecture developed around the new SHC and it displaced the dollar’s dominance in credit markets. By reducing the influence of the US on the global financial cycle, this would help reduce the volatility of capital flows to EMEs (Emerging Market Economies).
Widespread use of the SHC in international trade and finance would imply that the currencies that compose its basket could gradually be seen as reliable reserve assets, encouraging EMEs to diversify their holdings of safe assets away from the dollar. This would lessen the downward pressure on equilibrium interest rates and help alleviate the global liquidity trap. Of course, there would be many execution challenges, not least the risk of fragmentation across Digital Currency Areas. But by leveraging the medium of exchange role of a reserve currency, an SHC might smooth the transition that the IMFS needs.
Binance exchange launches crypto lending for passive gains
Binance launched a new service called Binance Lending, that offers cryptocurrency lending products in exchange for interest. Binance Lending is limited to Binance coin and Tether, with support for more tokens expected in the future. It works by depositing BNB or USDT, then retrieving funds with interest after the designated subscription period. Funds can also be borrowed from Binance Margin to subscribe to Binance Lending. The main benefit of using Binance Lending is the opportunity for passive gains, and the product is aimed at buy-and-hold and frequent traders looking to take a break.
Forbes: taking stock of tZERO as Overstock CEO Patrick Byrne steps down
On Thursday, Patrick Byrne, the founder and longtime CEO of former e-tailing giant Overstock.com (not to mention famed naked shortselling adversary), resigned, saying his involvement as a federal informant in the investigation of infamous Russian spy Maria Butina made performing his duties impossible.
The company’s prized crypto offering, tZERO, is the subject of an SEC investigation, and a highly-anticipated private equity investment into the exchange has withered away. Its blockchain investment arm, Medici Ventures, has yet to generate meaningful revenues and racked up losses of $61 million in 2018. With many big companies now embracing blockchain technology — including a bold new plan from Facebook — Byrne’s strategy shift to blockchain suddenly looks as challenging as Overstock’s online retailing business.
Byrne began chasing crypto in late 2013 when he asked dozens of staffers to work over the holiday break to fast-track a bitcoin payment feature. The price of bitcoin had skyrocketed that year from about $13 to more than $1,000, and in January 2014, Overstock became the first major retailer to accept bitcoin as payment.
Before long, Byrne began tapping Overstock’s balance sheet to fund bigger and bigger blockchain initiatives. The crown jewel: a digital stock exchange called tZERO, which is seeking to allow investors to trade so-called security tokens that represent traditional securities, like stocks, bonds, real estate, private equity and art on the blockchain. Proponents say this will improve access and liquidity for certain investments, plus cut down settlement times for stocks and bonds from up to two days to mere seconds. A bonus: The system would make naked short-selling impossible because there is no longer a lag time between a buy and sell order.
On the plus side, tZERO has satisfied a set of fearsome regulatory requirements, most notably acquiring a company licensed as an alternative trading system. The problem is, with just two tokens — representing Overstock’s and Tzero’s own shares — available to trade on tZERO’s platform, almost no one uses it. The company says it is aiming for five to 10 tokens by the end of the year. In May, it announced partnerships with Saudi real estate giant Emaar Properties, to list $2 billion in real estate, and Securitize, a startup that packages regular assets into digital tokens that can be traded on the blockchain. While it hopes to generate revenues from listing fees, trading commissions, interest on lending assets and more, it first needs to create liquidity by attracting quality issuers and investors to its platform.
Byrne was also developing a securities lending platform as part of tZERO, which would connect asset-rich institutional investors directly with short sellers. Both parties stand to benefit from lower fees, plus will receive a blockchain-enabled digital locate receipt that proves the shares have actually changed hands. The service takes dead aim at banks like Goldman Sachs and Morgan Stanley, which currently sit in the middle of these transactions. It’s been tried before: a company called Quadriserv created a similar stock lending platform named AQS in 2006, but alleged in a recent lawsuit that banks conspired to “boycott AQS and starve it of liquidity.” In 2016, AQS was sold in a fire sale for $4 million.
At the company’s annual shareholder meeting in May, Byrne fielded tough questions from investors. While the price of bitcoin had climbed some 60% in the last five months, Overstock’s shares continued to slide. And after months of delays, Overstock just dropped a bombshell: tZERO would receive a measly $5 million in the form of Chinese renminbi, US dollars and other Hong Kong-traded securities from Asian investment firm GSR Capital, after the company originally touted a deal size of as much as $404 million.
Overstock began exploring a sale of its retailing business in 2017, but to date no buyers have materialized. There was also tZERO’s troubled “initial coin offering,” which set out to raise $250 million but, ultimately as crypto prices were dropping, generated $105 million in August 2018 at an expense of $21.5 million to corporate parent Overstock. The offering is now being investigated by the SEC as part of a broader ICO crackdown.
Meanwhile, Overstock’s original business is running on fumes. And yet, to his blockchain staffers, Byrne was like Daddy Warbucks. tZERO CEO Saum Noursalehi was paid $4.8 million last year, while his brother and tZERO vice president Nariman earned $1 million. Tzero chief technology officer Amit Goyal made $1.8 million and his brother Sumit earned an additional $765,000.
Byrne never showed much respect for Wall Street or small-minded shareholders—and maybe that’s what got him in the end. “We’re like a Russian icebreaker trolling across the Arctic ice field. It’s three or four yards at a time and enormously expensive,” says Byrne. “When you’re talking about the kinds of numbers we’re talking about and freeing up trillions of capital … I think there is going to be so much money in it it’s kind of silly to try and model it.”
Securitize becomes first blockchain-focused SEC-registered transfer agent
Securitize announced it can act as a transfer agent for digital securities registered with the SEC, as well as for issuers of Reg A+ and Reg CF digital securities who wish to exempt their digital securities from the mandatory registration requirements of Section 12(g) of the Securities Exchange Act of 1934. It is the first and only SEC-registered transfer agent with a working blockchain protocol, active issuers, and integrations that allow digital securities powered by Securitize’s DS protocol to be traded on SEC-registered alternative trading systems (ATS), including Open Finance Network, tZERO, and Sharespost.
As a transfer agent, Securitize is able to keep a real-time cap table of investors and facilitate corporate actions for issuers, including, among other things, the payment of dividends and interest, conducting shareholder votes and redemptions / share buybacks. Securitize has also created a tool, the transfer verification tool (TVT), that allows investors to pre-check the transfer of any digital security token powered by the DS protocol.
It’s expected that using blockchain will drastically decrease the number of intermediaries required to compliantly manage the lifecycle for both registered and unregistered digital securities on the blockchain, according to a company statement. Using blockchain technology and tokens representing ownership allows for an immutable, auditable, and traceable source of record of the lifecycle of a security and automates compliance, which allows for instant trades across multiple regulated marketplaces, materially reducing the time it takes to determine a trade for a security and ensuring the compliance of the trade.
“Becoming a registered transfer agent is the natural next step for Securitize as we continue to work toward making all securities digital; it opens up opportunities for issuers of registered securities to tap into the digital securities market in an efficient and trusted way, and also allows issuers of Reg A+ and Reg CF digital securities to use a blockchain-based transfer agent if they wish to exempt their digital securities from the mandatory registration requirements of Section 12(g) of the Exchange Act,” said Carlos Domingo, Co-Founder and CEO of Securitize.
The news comes after Securitize announced the 10th issued and outstanding digital security running on the Securitize platform and DS Protocol, five of which are actively trading on regulated ATS, with a total value of all issued and outstanding digital securities using its technology approaching $200 million.
FINRA approves blockchain-based securities issuance platform
IOI Capital and Markets, an SEC registered broker-dealer and a wholly-owned subsidiary of iownit capital and markets, announced that the Financial Industry Regulatory Authority (FINRA) has approved its membership application. This approval allows IOICM to be a placement agent for digital private securities issued on the blockchain-based platform developed and operated by its parent company.
The platform, accessible through its iownit.us website, has been in development since July 2017. Co-founders Rashad Kurbanov and Hamid Gayibov launched the development of iownit.us with the goal of bringing the latest technology to private securities markets and modernizing this large segment of the financial services industry.
Unlike many other implementations of blockchain technology that focus on cryptocurrencies and tokens, iownit.us is built on a permissioned, private blockchain that uses the immutable and secure elements of distributed ledger technology, while providing security and privacy to issuers and investors. It is built to allow issuance of private securities such as equities, debt or other financial instruments in compliance with all applicable federal and state regulations while providing a broad range of functionalities to investors, issuers and financial services intermediaries.
World Bank issues AUD$50mn tranche using blockchain bond managed by banks, CBA eyes custody next
The World Bank has raised an additional AUD$50 million ($33.9mn) for its Kangaroo bond due August 2020 using distributed ledger (aka blockchain) technology. The fundraising expands market participation with the Bond-i platform combining three joint lead managers, Commonwealth Bank of Australia (CBA), RBC Capital Markets (RBC) and TD Securities (TD), and brings together new market participants, including an offshore investor, and the existing investor community including ongoing support and input from TCorp (NSW Treasury Corporation).
“CBA now has tangible evidence from our first bond offering using blockchain technology and subsequent bond management, secondary trading and tap issue via the same platform, that blockchain technology can deliver a new level of efficiency, transparency and risk management capability versus the existing market infrastructure. Next we intend to deliver additional functionality to deliver greater efficiencies in settlement, custody and regulatory compliance,” said Sophie Gilder, head of Blockchain & AI at Commonwealth Bank of Australia.
In August 2018, CBA was mandated by the World Bank as arranger for the bond and following a two-week consultation period with the market, the two-year bond raised A$110 million. In May 2019, CBA and the World Bank, with TD acting as market maker, added additional capability to the platform by enabling secondary bond trading recorded on blockchain, making this the first bond whose issuance and trading are recorded using distributed ledger technologies.
Seed CX begins testing physically-settled bitcoin swaps for US customers
Seed SEF, the swaps trading platform subsidiary of Seed CX, announced the beginning of user acceptance testing of its physically-settled bitcoin derivatives. Brian Liston, Seed CX co-founder and president said in a statement that the team is at the final step: “With the successful completion of testing and regulatory review, we will be able to launch a much needed margined, physically-settled digital asset derivative to US customers.”
In most other traditional assets, physically-settled derivative contracts are margined to provide for capital efficiency, however, all digital asset derivatives being traded in the US today are either financially-settled, or fully collateralized. The bitcoin swap to be listed by Seed SEF will be both margined and physically-settled, which will therefore allow market participants to enter into a leveraged position to buy or sell bitcoin for physical delivery at a later date. Seed SEF will utilize a Value-at-Risk based margin methodology to calibrate initial margin requirements for the product.
Seed SEF has been licensed as a Swap Execution Facility by the Commodity Futures Trading Commission since 2016. The platform hopes to permit institutions and sophisticated customers to trade derivatives overlaying digital assets. Seed SEF has been working closely with regulators to ensure that its planned products meet all regulatory requirements. Delivery of Seed SEF’s derivative products will take place through its affiliate, Zero Hash, which serves as the calculation agent and delivery facility for a number of trading venues and was granted a virtual currency license by the New York Department of Financial Services.
UK’s Lendingblock given regulatory license from Gibraltar ahead of platform launch
Lendingblock, the open exchange for institutional borrowing and lending of digital assets has received its full license as a Distributed Ledger Technology (DLT) provider from the Gibraltar Financial Services Commission (GFSC) supported by blockchain law firm, ISOLAS. This license approval is an important milestone for Lendingblock as the company prepares for the launch of its platform in early September, which will bring a critical missing piece of regulated financial markets infrastructure to the digital asset economy, according to a company statement.
Receiving a DLT license involves an extensive process to create and evidence compliance with the nine principles set out by the GFSC. These principles are designed to ensure that regulated businesses meet and maintain high standards, including risk management, corporate governance, customer care, security, and prevention of crime. In gaining regulatory approval from the GFSC, Lendingblock will continue to work with several other regulators globally to ensure that the exchange meets its strategic aim to operate on a duly licensed basis for all territories in which it operates.
Steve Swain, CEO, Lendingblock, said in a statement: “Over the past 18 months, Lendingblock has set out on a journey to reinvent the traditional capital markets securities lending model by building something better that meets client needs through the digital asset lending market. We always put the needs of its institutional clients front and center, so it was important for us to take the proactive step in becoming a regulated entity.”
Malta consults on ethical AI in bid to become “springboard”
A strong ethical AI framework is a core component of Malta’s AI strategy to ensure that AI development is ethically
aligned, transparent and socially responsible. The following chapters of the document outline the proposed
ethical AI guiding principles and policy considerations that will form the basis of Malta’s Ethical AI Framework.
The Malta.AI Taskforce and the Parliamentary Secretary for Financial Services, Digital Economy and Innovation
within the Office of the Prime Minister invite members of the public, industry and academia to provide feedback
on this consultation document. The ambition is to create conditions for AI to springboard from Malta to the world. A necessary condition to achieve this ambition is for Malta to create a regulatory and innovation ecosystem that develops trustworthy AI.
NY authority grants charter to ICE’s crypto custody
In a first, the New York Department of Financial Services has authorized Bakkt to provide custody services for bitcoin in conjunction with the launch of physically delivered bitcoin futures contracts. Bakkt will serve institutional customers; its bitcoin futures contracts will be listed for trading on Intercontinental Exchange (ICE) Futures US and cleared through ICE Clear US. Both entities are affiliates of Bakkt.
NY DFS’ superintendent Linda Lacewell said in a statement that the “approval demonstrates New York’s competitiveness as a hub of innovation and leadership in emerging technologies.” This is the first virtual currency trust company application approved under Superintendent Lacewell. To date, DFS has approved 22 charters or licenses for companies in the virtual currency marketplace.
“With the comprehensive regulatory review and approval of Bakkt Trust Company complete, we are pleased to serve as a qualified custodian of bitcoin for physically delivered futures,” said Adam White, chief operating officer of Bakkt. “We appreciate the work that the DFS has undertaken to bring a standardized regulatory framework to digital assets, particularly in the area of secure custody. This now enables us to offer institutional-grade custody via the Bakkt Warehouse alongside the federally regulated Bakkttm Bitcoin Futures contracts.”