Galaxy described the fund as: “The Fund will not invest directly in cryptocurrencies or crypto assets directly and will not invest in initial coin offerings. The Fund may, however, have indirect exposure to crypto assets by virtue of its investments in companies that use one or more crypto assets as part of their business activities or that hold crypto assets as proprietary investments” This investment strategy of offering exposure to crypto assets without investing directly into cryptos has been proposed by others; similarly Bitwise is looking to launch the Bitwise Crypto Industry Innovators ETF (ticker BITQ)  which has $45 million in assets less than a month after its launch. This fund holds companies exposed to cryptos such as MicroStrategy Inc., Coinbase Global Inc., and Galaxy Digital Holdings Ltd. Another firm using this strategy is the First Trust Indxx Innovative Transaction & Process ETF, which was launched in 2018 and currently has over $100million of assets.

If you are looking to invest in digital assets via a hedge fund there is certainly plenty of choice, with over 420 to select from. Interestingly, a recent survey carried out for Intertrust (a fund administration firm) found that potentially an additional $312 billion of cash from hedge fund managers could be allocated into cryptocurrencies. Claims from the 100 hedge fund managers surveyed included that they were looking to increase their holdings in cryptos to 7% of their portfolios. There is a risk, certainly in the UK, that, as hedge fund managers increase their exposure the FCA, and the press is doing all it can to prevent the general public investing in this asset class.

When asked about inflation and the Federal reserve Paul Jones, one of the world’s most successful hedge fund managers on the TV station, CNBC, said: ““If they say, ‘We’re on [the] path, things are good,’ then I would just go all in on the inflation trades,” adding, “I’d probably buy commodities, buy crypto, buy gold.” Meanwhile, Alan Howard, one of the most successful (and billionaire) fund managers in recent years has just invested in the successful and innovative crypto custody provider, Copper. Howard has been active in the digital assets sector since stepping down from the day-to-day management of one of Europe’s best known hedge fund managers, Brevan Howard, where he was co-founder and made his fortune. Latterly, Howard has established Elwood asset management, designed to make it easier for institutional mangers to get access to digital assets. One of Elwood’s products is an application programming interface (API) which enables an investor/fund manager to access thousands of cryptocurrencies being traded over 30+ crypto exchanges. Elwood also offers the Elwood Global Blockchain Index Fund which is designed to offer exposure to global companies in developed and emerging markets which participate, or have the potential to participate, in the blockchain ecosystem. Invesco has created an ETF to track this index and its Invesco Fund now has over $1 billion of assets.

However, Elwood is not the only firm to offer access to those companies exposed to blockchain technology and/or digital assets - quoted equities such as Mircostrategy, IBM, Microsoft, Tencent, Overstock, Argo blockchain being some, to name just a few. Here are five other ETFs which offer exposure to the blockchain and the fast-evolving digital assets sectors:

• Siren Nasdaq NexGen Economy ETF (BLCN) is $300m in size and was established in

January 2018, tracking the Nasdaq Blockchain Economy Index. The index invests in over 70 companies which are engaged in developing, researching, supporting, innovating or using blockchain technology for their proprietary use, or for use by others. 

• Amplify Transformational Data Sharing ETF (BLOK), is $1+billion in size and is an actively-managed ETF investing in approximately 50 firms which are engaged with/exposed to using blockchain technology. 

• VanEck Vectors Digital Transformation ETF (DAPP) launched in April 2021 with $24million under management, tracking the MVIS Global Digital Assets Equity Index. The ETF is very focused, investing in less than 30 stocks which are engaged in the ‘digital assets’ economies. 

• Capital Link Global Fintech Leaders ETF (KOIN) is $27 million in size. Previously called Capital Link NextGen Protocol ETF (change effective April 6, 2021), the fund now tracks the ATFI Global Fintech Leaders Index. The ETF invests into companies which are digital asset providers or solution providers. 

• Bitwise Crypto Industry Innovators ETF (BITQ) was established in May 2021 and has £39million of assets under management. It tracks the Bitwise Crypto Innovators 30 Index. At least 85% of the index is focused on pure-play crypto companies, including bitcoin and crypto trading venues, crypto mining and mining equipment firms, and service providers, while the remaining 15% is allocated towards large cap firms with at least one significant business line focused on the crypto economy.

Hence, one can see there are a variety of ways that it is possible to obtain exposure to companies engaged with blockchain technology and/or digital assets, and it does not have to simply be buying Bitcoin or a bag of other cryptos. The variety of passive and actively- managed funds makes it very easy for institutions (and wealth managers on behalf of private clients) to gain access to the investment opportunities that blockchain technology and digital assets offer.

If countries such as the UK are successful and manage to cause financial services companies to be excluded from the global tax proposals for the world’s 100 biggest companies (currently being discussed), how long will it be before we see these tech firms spin out their financial services subsidiaries? UK Chancellor of the Exchequer, Rushi Sunak, is striving to get the G7 to agree to exclude financial services firms in the global tax proposals. If this were to happen, there are concerns mounting that it would undermine the City of London as a location for banks such as HSBC and Standard Chartered to have their headquarters there, all the while deriving much of their income outside the UK. The stakes are high as it is estimated by the Institute for Public Policy Research that the global tax proposals could generate as much as £7billion p.a. purely for the UK treasury.

Some believe that Apple Pay, in the US alone, is generating $1billion of revenue p.a. and over 500 million customers globally Given how it is growing, as the world increasingly turns its back on cash and embraces digital payments, its outlook would appear to be very positive. Bearing in mind that, at $108 billion, PayPal is valued over 2.5 times the valuation of Goldman Sachs’ $130billion - so what would Apple Pay, with more clients than Paypal, be valued at? Will Apple Pay, Google Pay Samsung Pay, Amazon Pay etc be spun out too, in the same way Alibaba in China spun out AliPay to create Ant Financial in 2014? If big tech firms are to see their profitability challenged by the G7 governments as they scramble to repair their balance of payment post COVID-19, how long will it be for those astute accountants and tax advisors to the tech giants search for new ways to, once again, minimise the tech giants’ tax?

                     Apple Pay growth of users                                   Paypal growth of users

                                  Source: Statista.com                                                           Source: Statista.com                     

Although El Salvador currently imports 19.23% of the electricity it needs, mining Bitcoin (especially at times when demand for electricity is low) may prove to be an efficient way to harness volcanoes’ geothermal energy 24/7. Will Bitcoin mining using volcanoes prove to be not only an eco-friendly way to make money for El Salvador, but profitable too? No doubt other countries will be watching with interest to see if El Salvador’s embracing of Bitcoin can encourage those who are unbanked and typically excluded from the traditional financial services. If there is a significant uptake by the citizens of El Salvador to use Bitcoin, how long will it be before El Salvador also makes a stablecoin (such as Tether or USDC) legal tender? Will we see El Salvador issue its own digital colón, backed by US$, with deposits either held by the El Salvador government or, to make it potentially more attractive, have the cash held by the IMF or World Bank? Now that would be a coup….

As the below chart shows, according to data from the World Bank the informal economy is significant, not just in El Salvador, but many other parts of the world i.e., there is a considerable amount of cash being used to pay for transactions. The informal economy is estimated to be worth USD 10 trillion, employing about 1.8 billion people globally. As a result, this makes it difficult for governments to balance their books and claim the taxes required to meet the needs of their citizens when there are vast sums of cash being used and no records of what has been paid to whom. Perversely, crypto currencies such as Bitcoin were historically heralded as a way to make payments and by-pass the banks and other financial institutions, yet now we see governments increasingly embrace cryptos and digital assets such as stablecoins and CBDCs.

Employment in the informal economy as a % of total non-agricultural employment

Source: Indexmundi.com

Another possibility is that other countries and renewable energy producers will increasingly come to realise that Bitcoin mining has the ability to help remove some of the risks associated with renewable energy projects. This possibility exists because surplus energy can be diverted to mine Bitcoin, whereby creating a valuable additional source of income. Mike Colyer, chief executive of Foundry, claims: “This could enable proposed renewable energy projects to havce a faster quicker return on eco-friendly investments, according to the head of one of North America's biggest crypto miners”. Citizens from El Salvador, Guatemala and Honduras are all sources of migrates into the USA. Therefore, instead of spending $millions on a wall between the US and Mexico, the Americans could do well to start investing in green renewable projects whereby enabling these countries to be less reliant on importing energy and, instead, turning them into cheap producers of renewable energy. The use of Blockchain technology could easily track the power being produced and the number of Bitcoins being mined. If the income from the mined Bitcoins could be identified as being spent appropriately, as opposed to being siphoned-off to government ‘cronies’, this would offer greater transparency and therefore encourage further capital for more renewable energy projects. Who would have thought that cryptos could potentially have such a positive impact, not only on a country’s power supply, but the cost of this power, global climate change and also be of help in reducing illegal migration?

As we mentioned in last week’s Digital Bytes, how soon will other countries follow El Salvador’s lead and make digital currencies legal tender? The answer is, potentially very quickly if it helps those countries crack down on the informal economy and support them to become more self-sufficient in terms of electricity production. Indeed, according to Euronews.net: “Following the vote in the Salvadoran assembly, politicians in Argentina, Paraguay, Brazil and Panama took to social media to endorse the decision”. 

Expect to see other countries follow suite …..!

Value from your imagination, selling imaginary sculpture. Salvatore Garau

Source: Oddity Central

In the world of digital assets there are two types, real and imaginary - we will explore what differentiates real digital assets compared to imaginary ones. The difference between the two defines how they store value, when they are used in direct exchange, and the differences they have under the law. By understanding fully what these assets are, then the real and imaginary values can be defined, risks segregated, and their inherent uses identified.

Imaginary Digital Assets

Imaginary digital assets can be broadly defined as having no intrinsic, inherent or intuitive value (without 3i value). Generally, the only source of value is extrinsic and only therefore what other people believe the value to be based solely on their personal feelings of the asset’s worth. This opens up the value of the asset to be viewed very differently and widely by a multitude of people (example: ‘beauty is in the eye of the beholder’). The asset’s capability to be used as a storage of value, its perceived appreciation, its tradability / liquidity and the protection of the asset under the law are all very subjective. These traits lead to a trader’s dream of rampant speculation, uncertainty in value, uncertainty in protection of the law, and this ‘tradability’ (volatility) ultimately resulting in an asset becoming unsuitable for use in long term contracts or for commerce. Some examples of these imaginary digital assets are with us now in the form of Bitcoin, Ethereum and Dogecoin. 

Breaking down such imaginary digital assets’ traits into their constituent components helps us identify their value. Firstly, all of these assets in some jurisdictions (such as England and Wales) are protected by law for possession. However, the law cannot enforce ownership since no court can currently compel transfer upon these assets. No central authority or case law yet exists to control ownership. This uncertainty, therefore, creates questions as to whether the assets are truly suitable for institutional investors seeking the benefit and surety of long-term protection of the legal jurisdictions in which they operate.

The value of the above assets has no independent value other than what another person is willing to pay for them. This has led to wild swings in their perceived value. Interestingly, some of these Imaginary Digital Assets do attract considerable daily trading volumes in which billions of dollars can trade hands in just a few days or weeks. The challenge remains of using such Imaginary Digital Assets as a form of payment in a contract, as the value of such assets over the short to medium term is highly unpredictable. Such assets, then, have very limited utility value and, to add to the challenge that most of these assets are not backed by any tangible real-world assets, their value could plausibly go to zero at any time.

Source: Signet Classics

In summary, Imaginary Digital Assets would only appear to be suitable for speculative trading. This is not conducive for long term contracts or even short-term use in daily commerce.

Liquidity and musical chairs

The proverbial fountain of youth that sustains the value of these invisible assets is simple. Liquidity is the true and only heart of their value. As long as the invisible asset can be traded for another asset at any moment then the invisible asset is useful in trading and others will attribute value to it. Invisible assets are akin to musical chairs. As long as the assets are kept moving between people, and the music keeps playing, then no one person believes that he/she is taking even a short-term risk. Once the music (liquidity) stops, only the person holding the ‘wrong’ digital asset loses.

Source: TrustMe™ Property Exchanges

In conclusion, invisible digital assets are only truly given value through their liquidity. Blockchain technology allows them to be fungilised into digital assets that can be traded. Their value is determined by the velocity of their movement and is akin to keeping a hula hoop rolling around your waist. Once it slows down, it hits the ground and stops.

Source: TeamBlockchain Ltd

On 3rd February 2021, Switzerland’s financial regulator, FINMA, finalised what had been negotiated for a while with the UK and Switzerland, allowing Swiss shares to trade in London (given the UK’s departure from the EU). As a result of this, UK-based ETC group has announced that it will be offering Exchange Traded Products (ETP), so giving exposure to Bitcoin. This Bitcoin ETP (BTCE) is listed on the Swiss SIX exchange and will be available to trade as of 7th June on the Aquis Exchange in London and Paris. This will be the first time a cryptocurrency as an ETP has been available for trading in the UK or any other European exchange.

The Swiss and its Crypto valley for a while has seen to be more embracive of digital assets and a number of organisation have established foundations (a legal structure that it not able to be formed in the UK). While the Swiss and the UK are relatively small in terms of population both are globally renowned for their robust legal and financial service. If we are to see further collaboration between UK and Switzerland especially in the field of digital assets, we could well see these two jurisdictions attract considerable capital and talent thus tax revenues. It could also see more accommodative regulation and legal clarity. We have already seen the Swiss change their law to allow the issuance of digital securities without the need for paper based documentation. The UK continues to attract investors. According to Coinidol:  “Start-ups plus growth firms including blockchain and fintech companies operating within London attracted funding worth more than $10 bln which makes over a quarter of overall investments within Europe and is about 3 times the level in Paris (France), Berlin (Germany), Stockholm (Sweden) according to the data by Dealroom”.

% Change in deep tech investment by country/region (2019/2020)

Source: Tech Nations, Dealroom2021 

Number of Digital assets globally 2013-2021

Source: Statista

Digital Assets have been issued by governments (Chinese digital Yan – which is currently being tested in more villages and towns around China), publicly traded companies (J.P. Morgan -JP Coin) but the fast majority have been issued by private companies many of which are start-up firms from all over the world.

CBDC

Central Bank Digital Currencies (CBDC) or as the Economist are calling them “govcoins are a new incarnation of money. They promise to make finance work better but also to shift power from individuals to the state, alter geopolitics and change how capital is allocated.” The Chinese are well on their way rolling out the Chinese digital Yan and recently Mastercard has  announced that it is in talks with the Chinese authorities to have the Digital Yan accepted on its payment platform.

CBDC such as the Bermudian Sand Dollar- the worlds’ first national wide CBDC- use Blockchain technology, others such as the Chinese Digital Yuan do not use a Blockchain.

DeFi tokens

CNBC define DeFi as: “Decentralized finance, or DeFi, refers to a system of applications that aim to recreate traditional financial instruments with cryptocurrency”. 

Size of the DeFi market

Source: Coingecko

There have been a range of tokens created for the DeFi sector with the objective to enable decentralised financial services, without the need of a third party, such as a bank or the other intermediaries. DeFi tokens are rely on smart contracts i.e., computer coding and are designed to offer participants the ability to earn interest, get loans, trade etc without relying on any third party. This is a fast-moving sector and DeFi Tokens can fall and rise very fast which is what we are now seeing firms such as Novum Insights being set up to offer insight to the challenges and opportunities. With returns being offered as high as 84,000% p.a. which means that in a day your £1,000 becomes worth £3,300, (i.e., 230% per day), it is of little surprise that DeFi tokens have attracted so much interest. 

NFT

NonFungible Tokens (NFTs) in their simplest form can be described as digital collectibles. Typically NFTs are tied to art, photographs, pictures, music, or videos. 

They are called Non-fungible” as they are unique therefore can’t be replaced with something else.

NFT volume statistics in the last month

Source: NonFungible.com

NFTs have recently been in the news with the auction house Christies selling a NFT for $69million making the artist Beeple the third highest living artist ever. In Q1 2021 it is claimed that over $2billion of NFTs have been sold.

Security tokens

Investopedia’s definition of traditional securities is: “financial instruments that hold some type of monetary value and represent ownership (stock), a creditor relationship (bond), or the representation of rights to ownership (option). They can provide a variety of financial rights to the owner of the securities, such as equity, dividends, or interest”. Security tokens are digital representations including fractions of an asset such a real estate, commodity, an equity, a bond, and non-physical assets such as data, AI. Traditional securities and security tokens value is linked to an underlying asset and subject to existing security regulations. 

Examples of traded publicly quoted equities available digitally

Source: Bittrex

We are already seeing equities such as Coinbase, Tesla, Twitter etc that are traded on traditional stock exchanges being offered in a digital format. The reason for this is digital security offer:

• Instant transaction settlement

• Lower fees due to the removal of intermediaries

• Greater transparency and therefore potentially stronger compliance controls and reporting

• 24/7 trading

• Ability to pay dividends based on the time period held as opposed to arbitrary interim and final dividend payments dates

• Access potentially to global investors not restricted to national stock exchanges.

Stablecoins

Stablecoins are typically linked/pegged to a fiat currency such as $, €, £ or Yen but instead of being issued by a government are issued by a company. The most well know but yet to be issued stablecoin is Facebook’s Diem which is awaiting approval from Swiss authorities and is meant to be linked to a basket of global fait currencies. Although as a trial The Diem association are now expected to launch a $ backed stablecoin later this year. As we see more security tokens being issued there will be a growing demand to pay the income generated from property, the coupons from bonds and the dividends from equities to be paid digitally using stablecoins. The biggest three stablecoins are Tether, USD and Binanace Coin.

The three biggest stablecoins by market capitalisation

Source: Coingecko 

Utility tokens

Utility tokens can be seen as similar to loyalty points such as Airline rewards or credit card points and often offer access to a company’s (future) product or service — similar to a voucher. Utility tokens are not meant to be investments, otherwise they would be a security token, but as purchases. Therefore, the more demand for the utility the token gives access to more valuable the token will be. The majority of Initial Coin Offerings (ICOs) in order to avoid security regulations structured themselves, or at least tried to, as utility tokens. People often get confused between what is a security token and a utility token so the following example may help. If you assume you owned a theatre and want to encourage more customers so you carried out an ICO and the buyers were entitled to free drinks, discounted tickets, priority booking or extra comfy chairs you would be selling a utility not a security. However, let’s assume that you owned a building and wanted to convert it into a theatre and issued an ICO to pay for the building works there is a strong possibility that regulators could claim that the money you had raised was in fact a security as it had been used to invest in to building, equipment, furnishing a theatre. EOS which raised $4+ billion has raised more money than any other ICO to date, but the biggest utility token still remains Bitcoin.

Source: Flickr

Imaginary Digital Assets

Imaginary digital assets can be broadly defined as having no intrinsic, inherent or intuitive value. Generally, the only source of value is what other people believe the value to be based solely on their personal feelings of worth. This opens up the asset to be widely viewed differently by a multitude of people. Storage of value, perceived appreciation, tradability and protection under the law are very subjective. These traits lead to rampant speculation, uncertainty in value, uncertainty in protection of the law, tradability ultimately resulting in an asset unsuitable for use in commerce. Indeed one of the earliest units of account (exchange) as we more commonly known money were  Yap stones, yes stones “money of Yap, a small group of islands in the South Pacific. The Yapese have used giant stone wheels called rai when executing certain exchanges. The stones are made from a shimmering limestone that is not indigenous to Yap, but quarried and shipped, primarily from the islands of Palau, 250 miles to the southwest”.

Some examples of imaginary digital assets are Bitcoin, Ethereum and Dogecoin. Breaking down their traits into constituent components helps us identify their value. Firstly, all of these assets in some jurisdictions such as England and Wales are protected by law for possession, however the law can not enforce ownership since no court can enforce a judgment upon these assets. No central authority exists to control ownership. This uncertainty, therefore, creates questions as to whether they are unsuitable for long term protection from institutional investors seeking the benefit of legal jurisdictions in which they operate.

The value of the above assets have no independent value other than what another person is willing to pay for them. This has led to wild swings in perceived value although interestingly some of these Imaginary Digital Assets do attract considerable daily trading volumes. A challenge of using such Imaginary Digital Assets in a contract is the value over the short to medium term is totally unpredictable. Additionally, since these assets are not backed by tangible real world assets their value could plausibly go to zero.

Source: The British Museum (Money Gallery 68)

In summary, Imaginary Digital Assets would appear to be more suitable for speculative trading. This is not conducive for long or even short term use in daily commerce. So what can substitute them?

Real Digital Assets

As described above, Imaginary Digital Assets are just that, imaginary with no intrinsic value. Real Digital Assets are the polar opposite of imaginary assets e.g., real assets. They are protected in a court of law with enforceability of ownership globally. They have intrinsic value, e.g., oil, gold, diamonds, real estate, etc. They are relatively stable over a short to long term. More importantly, ownership can be moved easily and as swiftly as Imaginary Digital Assets with the same level of confidence and using cryptographic security. 

The key difference in Real Digital Assets is they represent claim to title on real world objects. Today in the gold market, gold certificates are issued representing a claim on gold stored in a vault. These certificates can be traded with all of the efficiencies of Imaginary Digital Assets, however, the real asset (gold) can be claimed at the issuer of the certificate (bank). The risks involved are the reliability of the issuer to redeem the gold when presented with the certificate. Since the actual gold on deposit can not be 100 percent guaranteed, there is substantial risk involved, especially today since twice as many gold certificates are created then the amount gold mined every year, demonstrating an obvious example of systemic fraud.

Some recent failures in redeemability of real digital assets, highlights the risks in the issuer. Case in point,  Venezuela, the government issued a petroleum digital asset redeemable for barrels of oil - the Venezuela "petro" cryptocurrency. However, since the Venezuela government was challenged in its perceived credibility in upholding contracts, it failed immediately. This illustrates Real Digital Assets are only as real as the government where the jurisdiction of the issuer is located and redeemability takes place.

How to use imaginary and real digital assets in contracts

As in the Wizard of Oz story, we can substitute the yellow brick road (gold) for Real Digital Assets. We discussed previously in another article, substituting gold clauses in contracts for specific tradeable Real Digital Assets such as property (real estate), this enables an almost direct substitution of gold clauses for real digital assets in contracts. The value of the contract is denominated in the number and type of digital assets. Just as with gold, as monetary inflation occurs, Real Digital Assets maintains its constant value relative to all other units of account. The other key point is the absence of fiat units of accounts in the contract e.g., USD, GBP, EUR, etc. These units of accounts bring the contract enforceability on payment back to the legacy monetary system and all of its capriciousness. Additionally, since specific amounts of money are not being denoted in contracts, usury laws may or may not be applicable.

In conclusion, the difference between Imaginary Digital Assets and Real Digital Assets condenses down two basic differences, legal enforcement of ownership by a court of law and does it represent physical/tangible objects. Another way to look at it, could a court of law in London enforce the ownership of Dorothy's shoes in the Wizzard of Oz. The answer is absolutely not, it's fictitious ownership. Secondly, Dorothy's shoes are not real. A court would have no legal mechanism to enforce ownership on such an imaginary asset. And before we go, who do you think the Wicked Witch of the West was, central banks or the ever threat of economic misery INFLATION?

More recently, the Celo Blockchain has been designed to allow the transfer of money internationally via a mobile phone at a fraction of the cost of usual global money transfers and offers the Valora app. In February 2021, Celo announced it had raised $20million,  positioning itself as a way to expand and enable financial inclusion and even managing to attract Andreessen Horowitz as an investor. Then, in April 2021, Deutche Telecom announced it had joined the 130 other firms which were part of the Celo Alliance, as well as purchasing an unspecified number of Celo’s tokens. Interestingly, when making this latest announcement, Celo also reminded readers that “the resources used to run the Celo network are carbon-neutral”, once again demonstrating the importance organisations place on proving their ESG credentials.

In June 2019, Facebook grabbed the attention of not just the crypto market but central bankers when it announced that it, too, was looking to create its own digital coin (subsequently re-named Diem) to enable people to send money faster and cheaper than by using a bank. Facebook, with its 2.6 billion active monthly clients (more than three times the total population of the G7 economies), has the scale and the balance sheet to sponsor a digital coin. It is of no surprise that Diem has yet to obtain authorisation, and central banks the world over have been frantically researching how they could also have their own CBDC.  Meanwhile, Diem has decided to relocate from Switzerland and move back to the US and set up a JV with the US bank Silvergate, which has agreed to start using Diem. If Diem were able to launch and tap into the Facebook users and firms which advertise on its platform, this could have the potential to seriously undermine the use of many other national currencies. So how long might it be before Facebook starts offering Diem as a payment method to its 2.6 billion customers?

The Facebook-backed Diem coin

Source: Finance Magnates

In the past, money transfer services were traditionally carried out by banks but these days there now exist a range of other money transfer firms. Of interest, included here is just a small selection. Competition from companies such as Electroneum or Celo, which charge as little as $0.01 per transaction, means that businesses need to use technology and automate as much as possible to stay competitive - hence the attraction of Blockchain technology and the use of digital currencies with their smart contracts. The elimination of much of the paper-based documentation and manual checking is replaced by almost real-time record keeping on an immutable ledger, available for all those who are authorised to check, if so required. 

(*disclosure: J Fry, CEO of TeamBlockchain Ltd, holds Celo tokens)

The value of government money (such as US Dollars, English Pounds or Euros) depreciates in value and has negative interest rates when combined with monetary inflation. In an uncertain economy, people and businesses tend to hold on to their money while the economy improves. However, this behaviour weakens the economy further, as a lack of spending causes further unemployment, a drop in prices and lowers profits. This reinforces economic uncertainty whereby giving individuals and companies even more incentive to hoard their money. As spending continues to slow, prices drop again, creating incentives for people to wait as prices fall further. This deflationary spiral is counteracted with monetary policies e.g., quantitative easing from central banks, debt monetisation, social spending and, more recently, negative-interest rates. With negative interest rates, government money deposited at a bank forces depositors to pay the bank to hold their money. This means that depositors are penalised whilst borrowers enjoy earning money by taking out a loan. This has the perverse effect of penalising responsible behaviour (e.g., saving your money), instead promoting irresponsible behaviour i.e., borrowing for speculation (also known as ‘shorting the currency’).

The original hamster money

Source: TPX

Depreciating or ‘Hamster Assets’

Some Digital Assets share the same value attributes but with much more volatility. Dogecoin is a good example. The coin has no inherent control over the money supply, so from an inflationary perspective its relative value as a unit of account can be capriciously increased in an uncoordinated method. Its rampant speculation, based solely on demand, leads to massively gyrating values of hundreds of percent in a short period of time. This type of asset can only be used in the moment as a unit of payment based on another unit of account e.g., USD, GBP, EUR. It cannot be relied upon for constant purchasing power in an employment, mortgage, or commercial contract.

Appreciating or ‘Squirrel Assets’

Some Digital Assets are used almost exclusively for storage of value, with Bitcoin being a good example. The coin has control over its supply so, from an inflationary perspective, it’s relative value as a unit of account can be predicted and modelled precisely. Its speculation, based solely on demand, leads to gyrating values of hundreds of about 10 percent in a 24- hour period. Long term, its value has been increasing relative to government money. This type of asset can only be used in the moment as a unit of payment based on another unit of account e.g., USD, GBP, EUR. It is not useful in long term contracts due to its price instability but is very useful as a unit of payment at time of payment.

Conclusion

Gresham’s Law ,which has its origins back in medieval times, is a simple way of summarising ‘Hamster and Squirrel’ assets. Gresham’s law is the concept of a ‘good’ Digital Asset (an asset which is undervalued, or an asset that is more stable in value) versus a ‘bad’ Digital Asset (an asset which is overvalued or loses value rapidly). The law holds that bad assets drive out those good assets in circulation. Bad Digital Assets are considered to have equal or less intrinsic value compared to their current value. Meanwhile, good Digital Assets are believed to have greater intrinsic value or more potential for greater value than their current value. One basic assumption for the concept is that both types of assets are treated as generally acceptable Digital Asset currencies, are easily liquid and are available for use simultaneously. Logically, people will choose to transact using bad Digital Assets and hold balances of good Digital Assets, by virtue of good Digital Assets having the potential to be worth more than their current value.

Gresham’s digital asset law can be seen in the marketplace of Digital Assets. Currently (May 2021), Bitcoin and Ethereum have maintained constant rising value with respect to government monies. They are being held for their storage of value and their appreciating value, whereas lesser-known Digital Assets have either stagnated or disappeared from the marketplace on account of their lack of staying power value.

Stablecoins and CBDC update

It has been particularly interesting to listen to a presentation from Sir Jon Cunliffe, Deputy Governor of the Bank of England for Financial Stability. In his speech on 13th May 2021 about Central Bank Digital Currencies (CBDC) and stablecoins, Cunliffe expressed that: “The demand for CBDC/stablecoins is unknown but the Bank of England does not have a responsibility to preserve the current status quo BUT to ensure financial stability going forward. Post BREXIT there is a huge opportunity to reduce wholesale and retail cross broader payments". (i.e., digital currencies).

The Bank of England

Source: Bank of England

There are a number of initiatives currently occurring with HM Treasury and the Bank of England as regards establishing a Taskforce to examine a UK CBDC. There has also been the UK government’s “Regulatory approach to cryptoassets and stablecoins: consultation and call for evidence on investment and wholesale uses” which closed for submissions on 26th March 2021 - so no doubt the findings and recommendations will be released later this year.

Recently we have seen many of the major payment platforms, such as Visa, agreeing to begin accepting stablecoins onto their platforms, so surely this will only pave the way for greater adoption of digital currencies. The need for sterling-backed digital stablecoins are likely to grow as we begin to see greater distribution of digital-issued equities and debt instruments. Furthermore, these digital securities will need to have the facility to pay dividends and coupons (income) using digital currencies, as opposed to using the traditional banking services since this will prove to be faster and cheaper to do so. 

Expect to see a lot more of the Dfinity logo

Source: Dfinity.org

Other blockchains, such as Bitcoin or Ethereum, rely on cloud-based computing services from technology bemouths such as Amazon, Google, IBM, Microsoft, Oracle etc. Dfinity will use a global network of data centres in France, Japan, Burkina Faso and Jamaica as it looks to break the strangle hold that a handful of big tech firms have on the internet, and potentially on Blockchain technology. Dfinity uses smart contracts and is following several other Blockchain firms, such as Binance smart chain, Cardano, Polkadot and Stratis now challenging Ethereum (which, due to its popularity, has become slow and expensive on which to carry out transactions).

In conversations Digital Bytes has with people from all over the world (who are typically over 35 and have business experience outside of crypto and the blockchain sector), a constant question arises: “How can some of these crypto businesses be worth so much?”, equally bemoaning: “I don’t understand how these cryptos attract the valuations that they do!” What we are seeing is the creation of a whole new infrastructure and way of doing business. Organisations such as Bitcoin, Cardano and Dfinity have been established as foundations and, instead of offering shares, they have issued tokens whereby enabling the buyers of such tokens to use their blockchain/services. The buyers believe that these foundations’ services offer tremendous growth opportunities and will become so popular that the value of the token prices will appreciate as they attract new buyers and users. It is not profitability that is driving the token price but faith that a limited number of tokens being issued by these foundations will result in the token price being driven up. 

To old-fashioned investors relying on balance sheets and earnings, they often overlook the fact that, in reality, stock markets are largely driven by sentiment. Indeed, they believe that certain companies’ products and services will be more popular than others in the future. Subsequently, even in the UK FTSE 100 index, we see long-standing, so-called secure and trusted companies, such as IAG (owner of British Airways) and British Telecom have Price Earnings (PE) of 2.68 and British Telecom a PE of 9.24 respectively. Conversely, the software computer services business, AVASAT, has a PE of 2,228 and OCADO a PE of 12,415. However, the one thing that many of the best-known publicly traded equities in the world yearn is the amount of turnover that many cryptos enjoy. In its first few days of trading, even a newcomer such as Dfinity attracted a 24-hour turnover of its tokens i.e., buyers and sellers had traded over $3billion worth of tokens in just a day. Since Dfinity, alongside other cryptos, can be traded globally 24/7/365 (subject to those jurisdictions that ban crypto trading), it would confirm there is no shortage of interest in this fast-growing new asset class. 

Meanwhile, who would have thought that 20 years ago a firm selling books would spawn the richest person in the world, Jeff Bezos? Furthermore, how many of you older readers derided the ‘yuppies’ in the 1980s and 1990s clutching their mobile phones the size of a house brick? Yet the popularity of mobile phones has given birth to the most valuable company in the world, Apple, and is the first firm ever to be valued at over $2 trillion. No doubt, in the same way that Amazon and Apple have grown by executing acquisitions, crypto companies will be looking out for M&A opportunities - presumably using their highly rated equity and tokens to buy companies with proven revenue and customers. Many companies are loss-making and many more survive under piles of debt. Ultimately, for all businesses to survive, they require a means in which to pay their bills and grow, whether that be with cash or a crypto currency that third parties are happy to accept as payment. Probably many crypto firms will fail as, after all, 90% of new starts -ups do not survive. Andy Herriot, CEO at Monsas (a specialist UK regulated firm that offers a range of technology and support services for traditional and digital assets providers), believes: “The sentiment is growth versus value and current achievement, growth must always be priced sensibly and not simply a ‘hope’. The digital market has a lot of ‘hope’ within it, but the seamless, instant and traceable transmission of value would revolutionise global trading and money flows. There are legitimate concerns surrounding the media frenzy and the focus towards retail investors, so investors should be aware.”  

However, surely by having a loyal band of supporters/token holders packed full of belief and positive sentiment this can bolster a crypto currency to ‘ride high’ and bamboozle all those old fashion sceptics ..…..? 

Improving efficiency of inter-company roaming settlements 

Mobile phone customers travelling abroad are a source of revenue for mobile operators. Roaming revenues are estimated by Juniper research to be at approximately 6% of total operator-billed revenue (in 2019, prior to the COVID-19 pandemic). Within the industry there are roaming settlement processes to ensure the foreign mobile network is compensated for calls made and data used.  

In 2020, three operators (Deutsche Telekom, Telefonica, and Vodafone) successfully finalised a trial of automated settlement of roaming discount agreements using a solution developed by blockchain-based settlement company, Clear. Founded in 2018, Clear’s aim is to “remove friction in complex B2B trade and to make partnerships better.” As reported by Enterprise Time, the VP of Commercial Roaming Services for Deutsche Telekom Global Carrier stated the challenge it was facing, was that: “Roaming discount agreement reconciliation is a complex, costly process prone to errors. The benefits of the Clear solution included an ability to “transact seamlessly with an ecosystem of partners.” In view of this, Clear would appear to have achieved what it set out to do.

Other industry players, such as Syniverse, have projects underway in the same arena. In 2020, Syniverse launched the “industry’s first live mobile roaming solution for the IoT and 5G that is fully compliant with the new GSMA Billing and Charging Evolution standard ” - a new roaming settlement process built on the IBM blockchain platform and called Universal Commerce. Syniverse’s blog on the topic states that the solution uses Blockchain technology to replace manual processes and delivers “an enhanced level of security, transparency and rapid validation.” The blog also mentions that Universal Commerce enables smart contracts between mobile operators (or other partners), whereby improving efficiency.  

Enhancing digital procurement 

According to a recent article published by Zawya, the Vodafone Procurement Company (VPC) and Block Gemini are collaborating on a blockchain-powered solution to enhance digital procurement. VPC is responsible for purchasing and supplier management for Vodafone, managing a spend of more than €25 billion. Founded in 2017, Block Gemini is a consultancy, blockchain and software development firm headquartered in Dubai. Block Gemini’s case study on the project highlights the challenges faced: “Manual updates became very time consuming; updates were vulnerable to human errors; multiple versions of the same contracts existed; a lack of digital price repositories.” According to the case study, the approach was to use a blockchain-based Commercial Contract Management platform, integrated with existing legacy systems and providing multi-stakeholder access. Block Gemini claims an impressive “90% increase in catalogue back-office efficiency; savings on multi-million Euro procurement spend; security using Blockchain technology and greater transparency; less disputes and greater overall efficiency.” Following the VPC and Block Gemini collaboration, Tomorrow Street (a joint venture between Vodafone and Luxembourg’s national incubator, Technoport) has announced a partnership with Block Gemini, confirming the success of using a blockchain-powered platform in the telecoms sector.

Facilitating Next Generation 5G and IoT services 

The telecoms industry body, GSMA, is forecasting that 5G will account for as many as 1.2 billion connections by 2025. Using Blockchain technology to facilitate 5G services is a concept that has been around for a while - the idea being that data captured remotely by Internet of Things (IoT) devices can be transferred via 5G (or Wifi, etc) and placed into a blockchain for storage, reading and analysis. The concept is mentioned in a recent article in Maxbit, which states that: “Smart devices have turned homes into smart homes, offices to smart offices, in fact, cities to smart cities. Everything in today’s age is connected digitally. Management of these devices…can be securely done using blockchain.” 

Additionally, GSMA has issued a recent press release highlighting a collaboration in this space. According to the release, Telefónica Tech (a holding of Telefonica Group), has collaborated with Fibocom (a global supplier of wireless communication solutions) and aitos.io (a start-up focusing on integrating IoT and Blockchain technology). The press release announced the three companies had: “Collaborated to develop the first 5G Blockchain IoT module, that natively record information gathered by devices to blockchain networks”. The key benefits of the solution are cited as increased transparency, and that it is “an efficient way of tracing and verifying information gathered by the [IoT] sensors”. The Head of Blockchain in Telefonica Tech has furthermore reported that: “the convergence of two technologies such as IoT and blockchain plus 5G connectivity is inevitable. As connected devices multiply, it is critical to demonstrate the trustworthiness of the information that devices exchange.  Blockchain can play a relevant role to build trust in these ecosystems.”

In summary, it seems that the main benefits of adopting Blockchain technology in the above three telecoms use cases are: 

• cost savings - because of reduced manual processing, streamlined processes, improved efficiency, and overall simplification 

• greater transparency - as information is now easily accessible (but only by authorised parties) 

• quicker time to market – due to easier access to information, reduced complexity 

Adoption challenges 

Nevertheless, there remain challenges, such as:  

• all potential use cases are not well understood

• financial business case not always clear 

• other higher-priority projects take precedence 

• blockchain is still a relatively new technology

Crypto/Blockchain venture funding by size

Source: Block Research

In 2020, there were just four venture capital-funded deals worth $100 million, and three deals worth between $50 million and $100 million. Already in the first three months of 2021 there have been six deals worth more than $100 million: BlockFi, NYDIG, Dapper Labs, FireBlocks and Blockchain.com (twice). Seven more were worth $50 million to $100 million. But not all institutions are bullish on crypto since HSBC now prohibits customers from buying quoted companies which hold Bitcoin, such as Square or Microstrategy. The image below is proof of HSBC’s current sentiment towards crypto-related assets.

Message from HSBC to its clients

Source: HSBC

Surely such a dictate from HSBC to its clients flies in the face of a freewheeling capitalist bank, such as HSBC? Maybe HSBC is now taking a much more cautious stance, having once been found moving vast sums of dirty money and been forced into paying record anti- money laundering fines. One wonders how long HSBC will continue pursuing such an aggressive stance towards crypto or will it, like JP Morgan, end up ‘eating humble pie’ and even begin to back organisations engaged with crypto assets? Afterall, HSBC clearly understands the benefits of Blockchain technology, which gave birth to the asset class of crypto currencies since, back in September 2020, it published a report: “How blockchain could revolutionise bonds”. Furthermore, HSBC’s Digital Vault offers custody of assets including assets such as equity, debt or real estate. HSBC digitises its clients’ holdings whereby enabling customers to check their records without the need to request the paper documentation that maybe required, for an audit, or to check an interest payment for tax returns, for example. The benefit of using Blockchain technology and the digitisation of the records are a lower cost for HSBC and give clients faster access to information.

Undoubtedly, there continues to exists a blurring between traditional institutions and those organisations engaged in crypto assets and, as the size of both the cryptocurrency market and digital assets grow, the boundaries are likely to blur even more. The amount of money being invested into these sectors is ever-expanding as we see the likes of crypto, DeFi, NFT, and the digitisation of real assets (such as equities, bonds, commodities and real estate) become more popular. It is not simply the private sector but the governments with their CDBCs which are equally looking to be part of this new growing ecosystem. This is likely to lead to more and more M&A activity by traditional and more native crypto organisations.

The real estate sector is estimated by Savills to be worth over $200 trillion globally with approximately $185 trillion as residential property and $15trillion as commercial real estate. More up-to-date figures from Associated Press last year claimed that the value of real estate world-wide was almost $270 trillion and expected to grow to over $330 trillion by 2023. In the UK alone, the residential property sector is valued at $8.7 trillion. Therefore, it ought to come of little surprise that many organisations are looking at how technology, including Blockchain, could improve the efficiency of how real estate is bought and sold and managed on an on-going basis. Much has been written about the tokenisation of real estate yet, to date, there have been relatively few examples - possibly because tokenised real estate creates a digital security which is subject to the same regulatory restrictions of any publicly offered equity or debt instrument. This means that issuing a digital security in multiple jurisdictions is not a straight forward process given one would need to comply with a range of different regulatory listing requiremnets.

It was therefore interesting to see that Binance, the world’s largest digital exchange, recently began offering tokenised equities i.e., an asset-backed security, but sold as a token. The offer from Binance gives investors the ability to buy a digital version of Tesla and Coinbase, yet it didn’t issue a prospectus (the normal requirement), but issued a one page document instead. This has stirred the German Federal Financial Supervisory Authority (BaFin) into action, cautioning Binance by stating that a prospectus would have to be published if they (who/what??) are to be “transferable, can be traded at a crypto exchange and are equipped with economic entitlements like dividends or cash settlements.” However, in Binance’s defence, the German-based digital platform, CM-Equity (where Binnace has listed its Tesla and Coinbase tokenised version) has already listed (what??) and is trading similar tokenised assets issued by FTX and Bitterex. 

Bitterex, itself, is offering access to the following equities for investors in various countries where it is usually not possible to trade such stock. Hence, it is easy to understand the attraction of creating tokenised stocks if the process is, indeed, legal:

• Tesla 

• SPDR S&P 500 ETF 

• Alibaba 

• Beyond Meat Inc 

• Pfizer 

• Apple 

• BioNTech 

• Facebook 

• Google

• Netflix

• Amazon 

• Bilibili 

As an aside, the demand for more digital fiat-backed stablecoins will no doubt increase if tokenised stock trading demand grows, since how will investors be paid the dividends they are entitled to? Surely not in fiat? As has been mentioned in previous editions of Digital Bytes, expect to see more organisations creating stablecoins in all the major currencies across the world. The creation of a host digital €, Yen, £, CHF and $ (of which there are a number already) will then enable real estate to start paying rental income in a digital format. The ability to pay dividends on equities and rental income from property in a digital format also offers the opportunity for companies and landlords to begin making distributions to investors more frequently. Most payment platforms, such as Apple, GooglePay, Mastercard and Visa, all accept various crypto currencies so therefore ought to have no issues accepting these new digital currencies/stablecoins - yet another example of how traditional banks are likely to be by-passed since payments can be processed more efficiently.

Matt Levine is a well-respected and followed reporter for Bloomberg, so no doubt his recent comments on Coinbase will not fall on deaf ears throughout Wall Street: “Cryptocurrency exchange Coinbase Global Inc. goes public today, and I remain amazed at what a good business it is, compared to regular finance. Almost $1 out of every $1,000 in the entire crypto market - not $1 out of $1,000 traded, but $1 out of $1,000 of all the crypto that exists - went to Coinbase. Another way to look at it is that Coinbase touched $335 billions of crypto trades in the first quarter and took about 0.54% of the value of those trades for itself. Just for being the exchange, the platform where cryptocurrencies were traded.” Indeed, on the same day that Bloomberg printed this article from Levine, Goldman Sachs announced its latest earnings, with its CEO highlighting the growing importance of digital currencies and, in particular, cryptos such as Bitcoin: “Central banks are looking at digital currencies, working to apply this technology to the local markets and determine the longer term impact on global payment systems. Also, significant focus on cryptocurrencies like Bitcoin, where the trajectory is less clear as market participants evaluate their possibility as a store of value”.

Without a doubt, crypto currency volatility and ‘hype’ has dissuaded many traditional banks and asset managers from being involved in this new asset class. However, as we see organisations such as State Street's partnership with Gemini Trust, Fidelity Investments and BNY Mellon are now offering institutional-quality custody for cryptocurrencies. Thus  questions regarding crypto’s legitimacy are beginning to recede. 

BTC as a share of the cryptocurrency market

Source: Trading view

Historically, Bitcoin has attracted much of the attention when people talk about crypto assets but, as the above chart indicates, in the last year Bitcoin’s dominance over the crypto assets class has been falling. This is, in part, down to the fact that the next five most valuable crypto currencies (excluding Tether, which is a stablecoin) have performed so strongly in the last year compared to Bitcoin, as the table below shows.

 Performance of the six largest cryptos in a year

Source: Coingecko

• citizens and professionals alike value privacy most for a possible future digital euro.

• preference for a digital euro being integrated into existing banking and payment systems.

• public consultation to provide valuable input for Eurosystem’s decision in mid-2021 regarding commencing formal investigation for a digital euro.

Interestingly, the consultation paper attracted “8,200 responses - a record participation for an ECB public consultation. A large majority of respondents were private citizens (94%)”. This indicates the interest in a digital Euro/ CBDC and what we believe is inevitable being that it is not if, but when, the EU will follow China’s lead and issue a Euro CDBC. On the very same day, Christine Legarde, head of the EU Central Bank, called for regulation on Bitcoin saying, “the digital currency had been used for money laundering activities in some instances and that any loopholes needed to be closed”, although she did not detail any specific examples on which to base her concerns about how and where crypto currencies had been used.

Destination of funds leaving illicit services in 2020

Source: Chainanlysis

However, in a report released earlier this year from Chainanalysis it would seem that the EU is not, itself, a hot spot for nefarious actors using crypto, but Russia and America appear to be where such activity is concentrated. The Chainanlysis report claimed that only 270 digital wallet addresses accounted for over 55% of crypto currency money laundering. The United Nations estimates, $800 billion to $2 trillion is laundered globally each year, accounting for 2%-5% of the global gross domestic product. The UN has not quantified the exact size of the crypto laundering market. However, a report published by MIT (in the US) has claimed criminals laundered US$2.8 billion through crypto exchanges in 2019, compared to US$1 billion in 2018. As of 2019, total Bitcoin spending on the dark web was US$829 million, representing 0.5% of all Bitcoin transactions. 

In 2014, Canada became the first country to pass regulation on crypto currencies with respect to anti-money laundering. The first real global response was not until June 2019 when the Financial Action Task Force (FATF) published its guidance for virtual assets and virtual asset service providers (VASP) having stated, “The FATF strengthened its standards to clarify the application of anti-money laundering and counter-terrorist financing requirements on virtual assets and virtual asset service providers. Countries are now required to assess and mitigate their risks associated with virtual asset financial activities and providers; license or register providers and subject them to supervision or monitoring by competent national authorities.” Following on from this, the Monitory Authority of Singapore Payment Services Act (covering firms which were involved in handling crypto currencies) stated that such firms needed to have a license and were required to comply with Anti Money Laundering (AML) regulations. In July 2020, the MAS proposed another set of regulations to control the crypto currency industry in the country. 

The European Union (EU) has also introduced legislation designed to tighten controls over the handling of crypto currencies - the Fifth Anti-Money Laundering Directive (AMLD5). This requires companies which have handled or are involved with crypto currencies to register with their local regulator. The EU’s AMLD5 also demands that those companies registering have thorough know-your-customer (KYC) and anti-money laundering AML policies and procedures. This introduction of AML legislation has led to a number of firms offering AML services such as Blockpass, Coinfirm, Jumio, Kompany,  ShuftiPro, Tookitaki and Veriff, to name just a few.

CBDCs understandably attract considerable attention as their introduction is bound to impact much of our day to day lives. Their issuance is being spurred on by a relentless drive to digitise our lives and invoke a retirement of paper-based analogue systems and procedures. We continue to witness a decline in the use of cash and electronic transfer of money (which is what we currently have) and instead see them superseded with a digital replacement which offers central banks and governments another tool with which to control their economies - not to mention potentially more insight as to what is being spent, by whom, and where. This enables governments to confront money laundering which is often carried out by drug dealers, traffickers of child labour, prostitution, and illegal arms dealers etc, as well as being able to collect more taxes, more efficiently, as cash-based transactions become less and less. 

The question is, does every society wish for its government to have such in-depth insight into the way its citizens spend their money and, indeed, do they trust that their governments will be able to store this information securely and only use this new potential treasure trove of data for the correct purposes?

The connected food chain 

Source: FoodLogistics.com

If restaurants and shops are able to generate better trust regarding what they sell, then this is likely to lead to greater loyalty and increased business. But the key is, how to generate more trust based on facts, as opposed to shallow advertising slogans and marketing spin? Well, as beforementioned, the facts as to how, where and when the food sold in the shops or served in a restaurant is grown or reared, and how sustainably produced it is, is all eminently possible using simple QR codes and Blockchain technology. With a quick scan using a mobile phone customers are able to gain a detailed insight to the provenance of the food they are about to consume.

In an article in Food Engineering Mag.com, Herain Oberoi, General Manager of database, analytics and Blockchain marketing at Amazon Web Services (AWS), believes: “The lack of data compatibility exposes supply chains to problems like visibility gaps, inaccurate supply and demand predictions, manual errors, counterfeiting and compliance violations. This is where blockchain can allow organizations to gain real-time, end-to-end visibility into their supply chains. Transactions are always time-stamped and up to date, so companies can query a product’s status and location at any point in time”. Nestlé Australia Ltd is one of AWS’s clients which uses Blockchain technology for its ‘Chain of Origin’ coffee brand. Armin Nehzat, digital technology manager at Nestlé Australia Ltd., asserts that the following characteristics of Blockchain help to ensure that the company delivers on its mission. “The combination of these blockchain characteristics is what helps us better collaborate with our suppliers and ultimately connect consumers with the provenance of their products”:

1. Transparent - members on the blockchain network can see everyone’s activities whereby ensuring everyone is held accountable to their deliverables.

2. Verifiable - as the product moves across the supply chain, participants can verify each other’s activities and raise alarms when needed. 

3. Immutable - once an update is made on the network, it cannot be changed. This means that users can always go back and audit activities to detect anomalies and learn from their mistakes. 

There are many Blockchain-powered platforms offering solutions in the food supply industry for retailers and restaurants which, in effect, makes it easier to ‘plug and play’ as opposed to restaurants and/or shops selling food having to create their own bespoke solution. Meanwhile, one of the current challenges is the cost of transactions due to the gas fees on the Ethereum Blockchain, but there does exist a host of other Blockchains that organisations can use instead…..

Firms which are deeply engaged with crypto currencies such as Bitcoin, BitGo, BlockFi, Galaxy Digital and Genesis are increasingly targeting hedge fund managers, acting as lenders or, as some call them, shadow bankers. The hedge fund managers are exploiting pricing anomalies on Bitcoin between spot prices (the price offered on digital exchanges) and the futures price of Bitcoin, and executing trades that can generate annualised returns of 20%-40%. Meanwhile, many traditional banks are reluctant to engage with crypto currencies. Indeed, it can still be extraordinary difficult to even open a bank account in some jurisdictions if your company is involved in crypto currencies (although this is slowly changing). "The people with all the money - the banks, the brokerages - they're not in this space yet,” as has been reported by Jeff Dorman, chief investment officer for Arca Capital Management which specialises in digital assets. "Everyone wants to borrow dollars, but there's not enough dollars in the space. There is a huge cash shortage." Another indication of the lack of cash in this market is that most loans of stablecoins, which are typically backed by traditional currency reserves or a basket of other digital assets, also earn high yields. This is because stablecoins such as Tether and USD Coin are used, just like cash, to buy other crypto currencies.

So, how, in our so-called interconnected and sophisticated global financial services markets, can such pricing arbitrage opportunities occur? Well, it starts with the price difference between the spot price for Bitcoin and the value of a derivatives contract in a few months in the future. For example, on 30th March 2021 the Bitcoin spot price was US$56,925 while the July future’s price contract on an exchange in the US – CME - was at US$60,205. A hedge fund could buy Bitcoin at that spot price and sell the July futures, meaning the derivatives would gain value if Bitcoin were to fall. By doing so, a hedge fund could lock in a 4.9% spread between the cash and futures price and, annualising that between 30th March and July 30th (when the futures contract expires), could offer a profit of 19.6%. Therefore, hedge fund managers must have a means by which borrow from somewhere and, in theory, provided the cost of debt is less than the profit to be made, they will do these types of trades all day. 

But, you may say, what are the risks? The risk is shown in the above example that CME Group, quoting the futures price, goes out of business - which, if that happened, the hedge fund manager and the entire financial system would face more problems than a Bitcoin trade going wrong. Yes, it is possible (be it a remote one) that CME Group crashes, given how it is regulated it is. Meanwhile, the problem of banks not willing to engage with the crypto sector is well-known, in part due to a lack of regulatory and legal clarity over these assets and not helped by the perception that many of those involved in cryptos are potentially involved in nefarious activities. With this in mind, and according to Bitcourier, several UK banks better to avoid if you are dealing in crypto currencies include: 

• Lloyds

• HSBC

• Wells Fargo

• Starling bank

However, those UK companies more favourably disposed to offer crypto banking services include (some are well known, whereas the ones not as well-known have hyperlinks attached): 

• Barclays

• Royal bank of Scotland

• Monsas

• Standard Charter

• TSB

• Natwest

• Nationwide

• Orounda

• Revolut

• Fidor

• Xace

• Clearbank

Furthermore, if you are looking for a list of European banks offering crypto services, a web site from Jean Galea has recently produced one. Likewise, the publication Offshore Protection has also listed the “10 Best Crypto Friendly Banks In The World”. So, unlike a few years ago when it was almost impossible to find a company to offer banking services if your firm was involved in crypto currencies, there is now a much greater choice. In a similar way, pricing anomalies and the different rates of interest/yields available are very much the drivers behind the attraction and rise in yield farming. Automatic Market Makers (AMM), such as Uniswap, provide liquidity to crypto currency trading on DeFi exchanges. A quick and helpful explanation on AMMs can be viewed on this YouTube video. Essentially, AMM use automated algorithms and smart contracts to gain the best yield and return for investors who wish to borrow crypto currencies. But this is a topic for another day, since the DeFi market is potentially set to challenge and interact a lot more with different financial service companies, including banks.

The Woodford fiasco could have been averted had his fund been subject to the rigor and controls required for being on a Blockchain-powered platform, whereby making the fund’s holdings transparent for all to see. Smart contracts could have been employed to automatically inform the regulator, administrator, auditors, custodians, financial advisors, fund analysist and, most important of all, the investors. These parties could have been informed in real time that Woodford had continued to ignore the fund’s stated strategy and was holding too big a % of the fund in potentially illiquid, non-quoted equities. For a while PwC has been saying that Blockchain technology can help mutual funds improve the efficiency of the way that the back-office settlement processes are handled by:

• reducing costs - fewer reconciliation errors

• speeding up settlement - faster validation 

• increasing resilience - no single point of failure

• improving transparency - easier to monitor

There is arguably now a fourth criteria to determine the success in terms of the size of a mutual fund - Environmental Social corporate Governance (ESG). The ESG credential of a fund is a key criterion adopted by more and more investors when making investment decisions, whether it be the fund managers in their selection of assets, or by advisors (or investors) when purchasing a mutual fund. This helps to explain why companies that offer fund analysis for financial advisors such as RSMR, are seeing increased demand from investors for this type of information. Again, a report from PwC claims that 77% of institutional investors plan to stop purchasing non-ESG products and in this same report PwC states further that: “ESG fund assets will account for more than 50% of total European mutual fund assets by 2025 at an annual growth rate of 28.8%.” The added transparency that Blockchain technology offers can enable fund managers to assess the ESG credentials of an equity or a bond and, in turn, blockchains can be used to show investors’ ESG credentials for a fund and how these ESG scores have worsened or improved over time. As the Institutional Asset Manager publication pointed recently reported: “Capco says that new technologies could improve ESG ratings, noting the growing use of “impact tokens” on blockchain as a way of offering proof that a positive impact has been delivered and attributing it to a particular investment.”

When looking at mutual funds, Blockchain technology can help asset managers, regulators and investors bring greater transparency to what has been a complex investment surrounded by acronyms and technical language which many private investors struggle to understand (assuming the small print has been read). Possibly, and more importantly, the use of Blockchain technology can greatly assist in the on-going regulatory monitoring, thus helping investors decide whether to keep the fund or not. The use of smart contracts can identify anomalies and raise attention in real time meaning compliance managers are able to spend their time on managing risks and potential breaches, as opposed to checking data and records which may be days or weeks out of date. Blockchain technology also allows greater transparency as regards the ESG credentials of a fund and its underlying assets, which would appear to be a key demand for investors. Therefore, because of this, will we see the adoption of Blockchain technology being ushered-in by regulators and compliance departments since it offers the potential to reduce costs and improve an asset manager’s compliance regime? Now that combination is very valuable and difficult to ignore….