Interestingly, Germany has drafted a new law which will enable its banks to be more engaged with digital assets. However, the new bill is insisting on the need for ‘separation’, which means digital assets must not originate from the same legal entity as other banking transactions. This may help to explain why several numbers of global custody providers such as Fidelity, BNY Mellon, State Street and Northern Trust are gearing up to offer digital asset custody, as many banks will have to use these types of custodians.

If we are to see banks starting to trade and hold digital assets for clients, there is a concern that it will encourage people to switch from traditional stocks and shares into more volatile Cryptocurrencies. Indeed, Economist, Fabio de Masi, was reported as saying, “The banks are hot on profits from crypto transactions. But financial consumer protection must not be undermined”. However, as we see other countries (like Switzerland) changing their law to allow digital versions of publicly listed companies, such as Unilever and Novartis, the new German laws being proposed will allow banks to offer these types of Digital Assets to their customers too. Elsewhere in France, Blockchain technology is being embraced as in Paris we saw the launch of “The Garage”. This is a group of Blockchain-interested start-ups joining forces aiming to enhance Europe’s position in the global Blockchain sector. Switzerland is changing its laws, like Germany, as it is looking at proposals to alter nine federal acts, covering both civil law and financial market law. A press release from the Swiss Federal Department of Finance stated Switzerland wants “to create the best possible framework conditions so that Switzerland can establish itself and evolve as a leading, innovative and sustainable location for fintech and DLT companies”.

Bitcoin continues to dominate the Cryptocurrency market, accounting for over 63% of the entire capitalization of this Asset Class.

This figure is potentially underestimating the significance of Bitcoin, as many of the 5,200 tokens that have been created from ICOs were funded by Bitcoin and Ethereum. Therefore, if you excluded the value of Bitcoin from those tokens that were initially funded using Bitcoin and rise and fall on its “coattails”, the real impact and importance of Bitcoin would be revealed. However, as we see more Security tokens being issued, which will be backed by real assets such as property, equities, commodities and bonds, the dominance of Bitcoin is likely to lessen. 

The European Central Bank (ECB) published a report, entitled ‘Understanding the crypto-asset phenomenon’. The report outlines the ECB's plan to develop a monitoring framework of the cryptocurrency market. 

Will we see statistical reporting and analysis by organizations, like the ECB, dividing their reporting on Cryptocurrencies between the current largely unregulated digital assets, that were mainly created as a result of an Initial Coin Offerings (ICOs), and the new regulated Security Token Offerings (STOs).

Source: Cryptocompare and ECB calculations

We continue to see trading volumes grow, as illustrated above, and greater institutional involvement as Facebook, Walmart, JP Morgan, etc announce the potential launch of their Cryptocurrencies. There is going to be a need for higher quality analysis and reliable data for regulators, investors and institutions alike.

The FCA has categorised Digital Assets into four groups, broadly in line with the guidance that it gave in its consultation paper CP19 in January 2019, as to the way tokens will be regulated, giving the industry much-needed clarity. However, be assured all Digital Assets will need to comply with FCA money laundering regulations - which is to be welcomed:

• Exchange tokens – will be treated as being “unregulated” and therefore will not be under the remit of the FCA e.g. Bitcoin ought to be an Exchange token, but there is some doubt if Ethereum is one too.

• Security tokens – are classified as “specified investments” and will be under the FCA’s domain, which means that any organisations dealing in security tokens will need to be regulated.

•  Stablecoins – for those tokens backed by “Fiat”, these are to be treated as e-money and fall within the FCA’s remit to be regulated. This is consistent with current regulations, as one does not need to be authorised to trade bank deposits i.e. if you offer a service whereby you manage someone’s “cash” by moving it between say $,€, Yen CHF, £, etc, but all held within a multi-currency deposit account, you do not need to be authorised by the FCA!

• Utility tokens – these, in “most circumstances”, will not be regulated and therefore not the responsibility of the FCA. 

Many tokens, especially during the ICO mania of 2017/18, claimed to have been utility tokens but may find that the FCA now classifies them as security tokens, which could prove a regulatory challenge for the firms that issued them and their advisors.

“A firm can issue security tokens without needing a regulatory license, in the same way, that issuing shares do not require a license. But in many scenarios in which the tokens are traded, the advisers and brokers handling the tokens, and the financial promotions regime, will need authorization”, it was stated by the FCA. It then went on add, “If a security token is tradeable on the capital market, it will further be considered transferable security under the European Union’s Markets in Financial Instruments Directive (MiFID), and that regime will apply too”.

It is worth noting that if an asset is not regulated and falls outside the scope of the FCA’s regulation, then investors will not be covered by the Financial Services Compensation scheme or be able to take any complaint they have about such an investment to the Financial Ombudsman!

The FCA guidance is a positive step forward for the Digital Asset industry as it would appear that there is, without doubt, interest in the digitisation of many asset classes, enabling markets to operate more efficiently. The FCA’s latest guidance gives compliance staff in banks, brokers, asset managers and professional advisors greater clarity to position themselves, as they increasingly become more engaged with Digital Assets.

The independent statistical research company, Statitsica, claims there are only 40 million Digital wallets in existence globally. Can Coinbase really have 75% of all wallets?

Source: www.Statitsica.com

According to the website Blockchain.com, as at 22/07/2019, there were just over 40.6 million Bitcoin wallets so it would appear that potentially Statitsica’s stats may be a little out of date. 

One has to be careful when looking at statistics, as according to Finder.com, 97% of Brits are yet to buy a cryptocurrency and 31% have not bought because they believe it’s too high a risk. However, the figures Finder.com is quoting in its June 2019 article were taken from a survey carried out in 2018!

Nevertheless, Digital Assets continue to be a niche asset class although, with Facebook’s announcement wanting to launch its own Digital Currency, Libra will potentially massively increase the number of digital wallets.

This idea is now being considered by Club Atlético Peñarol, in Uruguay, that could be used by fans to pay for tickets, as a type of loyalty scheme, as well as getting access to discounted club merchandise.

Also, in South America, two Brazilian football teams, Atlético-PR and Corinthians, have reportedly signed partnerships with Hong Kong-based crypto start-up Inoovi, which recently launched its “IVI” token, specifically for football clubs. Inoovi is looking at offering fans access to Virtual Reality and 360º streaming technology, so allowing fans an experience as if they were actually attending the match.

Meanwhile, in the USA, The Miami Dolphins football team have recently agreed to adopt Litecoin, which has a market capitalisation of over $6 billion, as its official cryptocurrency coin. Charlie Lee, Litecoin’s founder and managing director, said “This collaboration propels Litecoin in front of an audience of millions of people around the world at a time where adoption of cryptocurrencies continues to gain momentum and the ecosystem is able to support real-world use cases in ways previously not possible. We see this as a powerful way to raise awareness and educate people about Litecoin and cryptocurrencies on a tremendous scale.”

These examples of how Cryptocurrencies are being used globally by sporting clubs illustrate how sentiment is turning more positive to this New Asset class, and organisations are understanding how they can use them!

This will also offer comfort to buyers that the honey is from sustainable sources as it will provide full transparency of the honey-supply chains. This is welcomed by those involved in buying and selling honey due to the recent concerns over fake honey in Australia, as it has been found that some honey has had sugar syrup from cane or corn added.

Fake honey has proved to be a real challenge in Australia, but an Israeli firm, called Security Matters, has developed a solution using both Blockchain technology and an innovative process that can track honey at the molecular level. Security Matters has created a commercial version of a technology that was developed at a nuclear research facility by the Israeli government. This innovation can introduce a permanent and irremovable marker, or code, to any matter be it gas, liquid, or solid, thus enabling a product to be tracked. To further enhance provenance, Security Matters will record all the details in a Blockchain. This will ensure that every step in the supply chain of the honey is visible and traceable.

Meanwhile, in Brazil, coffee farmers will soon have access to a Cryptocurrency called “coffeecoin”. According to a report on Bloomberg, coffeecoin is being launched by one of Brazil’s biggest arabica-coffee co-operatives, Minasul. The coffeecoin will enable coffee farmers to buy machinery and fertilizer as well as non-farm products like cars and food. 

Coffeecoin is part of Minasul’s strategy to encourage farmers to embrace new technology. As a result, they will be able to sell coffee beans via a mobile phone thus cutting out unnecessary intermediaries and, by using coffeecoins, allow farmers greater transparency of the price of coffee beans.

Coffee beans are the second most traded commodity globally after crude oil, with estimated market size of $100 billion, and this is due to grow by a further 4.7% in 2019! The fact that a Cryptocurrency is being introduced into Brazil (which is the world’s largest producer of coffee) will no doubt mean other major coffee-producing countries, like Vietnam and Columbia, will be looking with interest to see how successful coffeecoin will be in making the coffee market more efficient and how much it helps Brazilian farmers.

If coffeecoin is a success, other commodity producers will probably look to create their own version - “wheatcoin”, “corncoin”, “tobaccocoin”, etc. - which, provided there is sufficient liquidity for these coins, could this then offer an alternative way for commodity traders and investors to get exposure to these commodities?

Potentially, Cryptocurrencies (backed by commodities), which could trade 24/7, could form part of the asset allocation for a global digital currency. Facebook’s Libra is reportedly going to be linked to a selection of just fiat currencies. However, a global currency may prove to be more appealing to different jurisdictions if the digital currency was linked to a variety of different assets, with less reliance on the US$!

According to a study by the Harvard Business School, increasing your customer retention by just 5% can have outsized benefits on profits of up to 95%! However, low redemption rates are a big problem for providers of loyalty schemes, as it can result in a lack of engagement. Loyalty schemes are often not that popular with companies’ accounts’ departments as they can create a large, intangible liability on a company’s balance sheet. Loyalty scheme members that do not redeem their rewards are not actively engaged but, on the flip side, members who do redeem points typically spend more and have greater satisfaction with loyalty programs.

According to Mckinsey, US companies spend $50 billion a year on loyalty schemes alone, and if you get it right, loyalty programs can generate as much as 20% of a company’s profits! However, with increasing online shopping, and particularly shopping on mobile devices, consumer retail behaviour has been changing dramatically and reward schemes seem to have lost some of their appeal. Customers often cite the difficulty of being able to redeem rewards and the fact that they may have many different loyalty schemes with few of them operating together. This is where Blockchain technology is able to help bring multiple brands together, offering a wide range of products to consumers in order to redeem their reward points.

Blockchain technology allows a customer to store all points in a single wallet rather than trying to manage these multiple schemes. It would be possible to create a solution enabling all schemes to have compatible rules for acquiring and redeeming points from different loyalty schemes. It is thought that Facebook’s proposed Digital currency, Libra, could be a real boost for loyalty schemes, as it may allow some form of global standard to develop for smaller schemes to then adopt. One challenge Facebook has is that regulators do not like the collection of data from individuals without the user being compensated. However, if Facebook started to pay it’s 2.3 billion users in Libra for clicking on content, it could be a way to satisfy regulators and, in turn, create the world’s BIGGEST loyalty scheme overnight! 

Loyalty schemes using Blockchain technology and Smart Contracts can automate many of the transactions, making the running of loyalty schemes autonomous. Data can be stored in a highly secure manner using a Blockchain platform, enabling the privacy of users’ information, which will increase the trust of the brand among these users. Implementing joint loyalty schemes with other brands becomes easier because Smart Contracts can handle the transferring and converting of reward points while validating users and redeeming these points. Furthermore, the brands/ retailers are not giving up control or access to their most important asset – their customers’ data!

Facebook is valued at $550 billion and, as at March 2019, it had over 2.38 billion users and generated $15.08 billion of revenue. Blackrock only has $6.49 billion of net cash and short term investments, compared to Facebook’s $41.12 billion of cash and short terms investments. 

Despite Blackrock’s size and global reach - having offices in over 100 countries- it is still very dependent on the Americas, as they make up 62% of the firm’s funds under management. Compare this to Facebook, where it is estimated that more than half of the US population (169.5 million people) use Facebook out of its 2.3 billion user-base. It is obvious that Facebook not only has greater distribution i.e. more direct clients that Blackrock, but Facebook has far greater penetration in faster-growing markets outside of the USA. 

Why is all this important? Well, quite simply, if you have the ability – cash and the type of global distribution and brand that Facebook has  - then even the biggest asset manager in the world needs to pay attention since Facebook has announced it wishes to launch an Exchange Traded Fund (EFT). The Facebook ETF will be based on Libra, which is a Digital Asset backed by a basket of currencies. Therefore it is not completely dependent on the fortunes of the US$, which it would be if it were backed by an asset that is priced in US$ (like gold), which is what the Editor of Forbes magazine is calling for.

Libra’s acceptance has received a boost from the third biggest economy in the world, Japan, as the Japanese Financial Services agency believes that Libra is unlikely to be a Cryptocurrency. It has stated that Libra will more likely be categorised “as general money transactions and remittances.”

The massive profits that fund managers have generated for years and their annuity style income (they earn a fee based on the funds that they manage, so having much greater visibility of their revenue) has meant that asset managers enjoy a high PE ratio. Blackrock’s PE is currently 16.8, although this pales into insignificance compared to Facebook’s current 23.35, as investors believe that Facebook is able to grow its revenue and profits faster than many other public companies!

If Facebook focuses more of its attention to asset management, and Libra is just the start of a series of products and services Facebook is going to offer its users, then traditional managers need to pay very careful attention. Facebook has both the cash and the followers to become a substantial asset manager extremely quickly, and also has massive exposure in parts of the world which are growing fast, and where its younger citizens are already digitally engaged!

Surely, Ripple has enough on its plate trying to replace the Society for Worldwide Interbank Financial Telecommunication (SWIFT), the platform that has been used by global banks since 1973 to make international payments? Ripple’s token price increased by over 35,000% in 2017, sparking a Cryptocurrency frenzy globally.

While MoneyGram can trace its roots back to the 1940’s, it was not until 2004 that it was trading as a separate entity. Unfortunately, despite its well-known brand internationally, it has been struggling of late as it looks to repay its $902 million of debt. It was also fined $120 million in the USA for failing to stop potential fraudulent payments. In January 2018, it had a $1.2 billion bid from the Chinese company Ant, blocked on the basis that it would enable the Chinese to have too much financial information on US citizens. MoneyGram’s share price has fallen from $17.81 in April 2017, to $1.67 in December 2018, although on the announcement of the investment by Ripple it did rise by 150% to $3.64.

While Ripple claims that it can help MoneyGram improve the efficiency of payments, cutting costs and reducing the time it takes to send money globally, I suspect it is MoneyGram’s existing distribution network that appealed to Ripple…..

Will we see more new Crypto firms buying into more “old money” companies as they look to introduce their new technology into existing customer-bases?

The Japanese equivalent to Amazon, Ratken has announced that it is going to provide the technology to help East Japan railway customers pay digitally, as opposed to using cash.

The Japanese government has been trying to encourage its citizens to use less cash and increase the amount people pay using digital methods to 40%. Currently, 20% of transactions in the Japanese economy are paid digitally, compared to South Korea where 89% of transactions are paid digitally, and in China, the figure is 60%. Indeed, some companies, like Paypal in Japan, have resorted to extreme measures such as giving away 10 billion yen ($91million) to encourage people to move away from cash and go digital.

The Ratken East Japan Initiative is looking to enable 5,000 trains stations and 50,000 buses, as well as 600,000 stores, all to be in a position to accept digital payments.

Given the growth in Chinese tourists (7.5 million in 2017), shops and restaurants are also looking to be able to accept cashless payments. These tourists are more likely to want to pay digitally, as in China only 40% of transactions are paid for by cash. Alipay and WeChat have had huge success in converting the Chinese population to pay digitally, so Chinese people typically to do not carry around large amounts of cash.

To meet this demand from merchants to go digital J-Coin, which is a new digital currency payment platform, has been launched in Japan by Mizuho Bank in conjunction with 60 other financial institutions.

Being able to pay digitally cannot come too soon for Japan as it welcomes the World Rugby Cup this autumn and then the Olympics in 2020. It is expected both sporting spectacles will attract a huge number of foreigner visitors, many of whom will prefer not to use cash simply because it is more convenient to pay digitally.