The Future of Money: The 3 New Ideas You Need to Know this Week (Issue 29 - 7 February 2021)

Dear Friends, 

Welcome back to my weekly newsletter where I share some of the major developments on the future of money that you need to know about!

Make sure to subscribe (and join the 22,000+ others who have done so) to receive your Future of Money newsletter in your inbox every weekend! 

If you enjoy this content, you will also love what I post on Twitter (@HenriArslanian) and the library of videos on my YouTube channel.

Here we go!

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1. Where Does the Name Blockchain Come From?

To the surprise of many, the term “blockchain” is not even mentioned once in Satoshi’s famous white paper, the de facto birth certificate of Bitcoin.

In fact, the closest Satoshi comes to saying the word “blockchain” in his whitepaper comes via references to terms like “blocks are chained” or “chains of blocks.” 

But if Satoshi never used the term “blockchain” in the Bitcoin white paper, then where did it come from?

Many argue that the first outright references to “blockchain” appeared on Bitcoin Talk, a bitcoin forum, in July 2010, over a year after Bitcoin’s release. 

Whilst some claim that the term “block chain” (used as two separate words) can be found in some cryptography mailing lists around 2008, the term did not enter the mainstream until around 2015.

According to some researchers, a couple of media articles that appeared towards the end of 2015 catalyzed the use of the term “blockchain.” 

The first article appeared in Bloomberg Markets under the title “Blythe Masters Tells Banks the Blockchain Changes Everything.”

The article prominently featured the aforementioned Masters, a financial innovator who helped develop the credit default swap markets. 

And the second article appeared in the 31 October 2015 issue of The Economist, entitled “The Trust Machine,” which featured blockchain and used the term blockchain extensively throughout the piece. 

Google searches for the term “blockchain” are reported to have risen over 70% in the days following those articles.

Since then, the term has been widely adopted and was finally added to the Merriam-Webster dictionary in March 2018.

So there you have it! The long and windy origin story of the “blockchain!”

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Tweet of the Week

Elon Musk was back in full force on Twitter last week, changing his Twitter bio to Bitcoin and subsequently promoting Dogecoin!

2. What Are the Challenges With Tether?

Launched in 2014, Tether was one of the earliest stablecoins to hit the market.

It has since grown into easily the most popular and widely held stablecoin in the ecosystem, judging by market cap. 

Tether tokens exist as digital tokens built on most of the large blockchains networks, including Bitcoin (Omni and Liquid Protocol), Ethereum, EOS, Tron and Algorand, to name just a few.

Tether also supports several of the world’s major currencies, including US dollars (USD), euros (EUR), and the offshore Chinese yuan (CNH), although USD is by far the most popular. 

Whilst Tether is not regulated, it has nearly 27 billion of supply at the time of writing, more than any other stablecoin out there. 

There have been numerous allegations against Tether over the years, but the three most serious claims are that its tokens are not fully backed by reserves, that its reserves were used to cover the shortfall of Bitfinex (a related crypto exchange), and that Tether coins have been used to manipulate the price of Bitcoin. 

The allegations that its tokens are not backed by reserves have always been lingering around Tether due to the fact that it is not regulated.

Tether tried to address this issue by having a law firm confirm that the U.S. dollar balances are indeed in accounts owned or controlled by Tether at its bank.

Tether also started publishing its balances as part of its transparency efforts on its website.

But these allegations resurfaced in March 2019 when it changed its terms and conditions to stipulate that it can hold additional reserves beyond just cash or cash equivalents.

The following is an excerpt from the Tether website:

“Every Tether token is always 100% backed by our reserves, which include traditional currency and cash equivalents and, from time to time, may include other assets and receivables from loans made by Tether to third parties, which may include affiliated entities (collectively, “reserves”).” 

This statement raised a number of eyebrows from those who’ve always held doubts or suspicions about the company’s claims.

Whilst most would expect Tether to hold all reserves in cash or cash equivalents, the fact that the company was now openly giving itself the option of including other assets or other receivables was seen by many as problematic.

For instance, in the event of a black swan phenomenon, a large number of users (or exchanges) could try to redeem their Tether tokens for the underlying cash and the lack of liquid cash fully backing these assets could be a concern. 

In addition, many believe that a stablecoin issuer should not be in the business of speculating or using those assets that are backing the stable coin for other purposes. 

In early 2020, Tether came under the spotlight once again.

Tether’s bank, Deltec, which is based in the Bahamas and holds the reserves backing Tether tokens, had to confirm that each and every Tether is backed by reserves and that its reserves are greater than what was in circulation.

Tether has also repeatedly reaffirmed that its tokens are fully backed.

The second allegation is that Tether reserves were used to cover losses at a sister company, the crypto exchange BitFinex.

This came under the spotlight in April 2019 when New York’s Attorney General announced that her office had obtained a court order against the team behind crypto exchange Bitfinex, which shares a parent company with Tether (iFinex).

The court order alleged that Bitfinex used funds from Tether to cover up $850 million in losses stemming from challenges that BitFinex was having with a Panama-based firm.

This matter is still being litigated today. 

However, Bitfinex announced this past Friday that it has repaid the remaining balance of the outstanding revolving loan facility to Tether.

The final allegation asserts that Tether tokens were used to artificially pump up the price of Bitcoin.

This theory entered the mainstream following the publications of a study from professors John M. Griffin, from the University of Texas at Austin, and Amin Shams, from Ohio State University.  

The academics concluded that Tether was indeed used during the 2017 Bitcoin boom to manipulate the Bitcoin price, and that this activity was linked to an account at Bitfinex.

The authors allege that Bitfinex must have been aware of what was going on, although these claims were subsequently denied by Bitfinex. 

Yet despite all of these issues, the reality is that at the time of writing, Tether is by far the biggest and most widely used stablecoin, with over $27 billion in assets.

That's far more than any other stablecoin, including all of the regulated ones combined. 

There are a couple of ways to explain this. 

First of all, many traders do not believe that these allegations hold any weight.

Being the leader in any field obviously makes you a target, and Tether is the undisputed leader when it comes to stablecoins.

As a case in point, many large exchanges have shown that they have been able to consistently deposit and redeem Tether. 

Second, Tether is essential for anyone actively trading, as most trading pairs use Tether.

For instance, between half to two thirds of trading pairs use Tether, which makes it an essential for trading. 

Source: The Block

And finally, many argue that Tether is the only liquid asset that gives access to US dollars without touching the US, as seen when compared to the other US regulated stablecoins on the market (USDC, PAX, TrueUSD).

This is why it is estimated that over 90% of stablecoin volumes are conducted in Tether in certain parts of the world, like Asia.

However, it should be noted that some of these other stablecoins are quietly closing the gap. 

So definitely keep an eye on the stablecoin market in the coming months!

Money Quote of the Week

“I made my money the old-fashioned way.

I was very nice to a wealthy relative right before he died.” 

Malcolm Forbes

3. Spot Volumes on Crypto Exchanges Surpassed US$900 Billion Last Month

As we noted a few weeks back, January was a record month for many aspects of the crypto industry, including volumes at crypto exchanges. 

Source: Henri Arslanian GIF page 

Volumes of spot transactions (excluding derivatives) surpassed $900 billion.

By way of comparison, volumes of spot transactions were below $65 billion last year and less than $35 billion 2 years ago. 

Source: The Block

A big winner of this surge in volume are the crypto exchanges that charge a transaction fee for each trade. 

The same phenomenon was visible with crypto derivatives, with volumes on Bitcoin futures alone surpassing $2 trillion. 

Source: The Block

As we have seen in traditional financial markets in recent weeks, especially in the case of the Gamestop saga, retail investors can play a big role.

But then again, that has always been the case in the crypto industry. 

For example, the number of people with an account at a crypto exchange has skyrocketed from 5 million in 2016 to over 100 million in 2020, according to a study from the University of Cambridge. 

Source: University of Cambridge

This data does not take into consideration the December 2020 bull run that saw millions of new people enter this space.

Nor does it include the millions of others who have been flocking to platforms like PayPal nd Square to buy their Bitcoin, either.  

Watch this space!

My Crypto Capsule This Week

My Upcoming (Virtual!) Speaking Engagements

25 February - Hubbis (Digital Assets: Now Too Important To Ignore for Asset Managers?)

1 March - UBS (The Future of Money)

18 March - Blockchain Africa Conference (Latest Global Institutional Crypto Trends)

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See you all next week!! 

Henri Arslanian

*Please note that this newsletter reflects Henri’s personal views and not those of any organisation he is involved with.

Who is Henri?

Passionate and focused on the future of finance and money, Henri Arslanian is the PwC Global Crypto Leader, the former Chairman of the FinTech Association of Hong Kong and an Adjunct Professor at the University of Hong Kong, where he teaches the first FinTech university course in Asia.

Henri advises many of the world’s leading crypto exchanges, investors, financial institutions and tech firms on their FinTech and crypto initiatives as well numerous governments, regulators and central banks on Fintech and crypto regulatory and policy matters.

 With over 500,000 LinkedIn followers, Henri is a TEDx and global keynote speaker, a best-selling published author and is regularly featured in global media, including Bloomberg, CNBC, CNN, the Wall Street Journal and the Financial Times.

Henri was named by LinkedIn as one of the global Top Voices in Economy & Finance and is the host of the FinTechCapsules? and CryptoCapsules? social media series.

Henri was recently named by Onalytica as the #1 most influential individual on Finance globally on LinkedIn out of 50k+ individuals working at the top professional services and management consulting firms in the world. 

Chambers Global also named Henri the “highest profile FinTech consultant in Hong Kong” and Asian Private Banker awarded him the “FinTech Changemaker of the Year” award.

Henri’s latest book, The Future of Finance: The Impact of FinTech, AI and Crypto on Financial Services, published by Palgrave Macmillan, was ranked as one of Amazon’s global top 10 best-sellers in financial services and was recognized as one of the “Best FinTech Books of All Time” by Bookauthority.

Before joining PwC, Henri was with a FinTech start-up and previously spent many years with UBS Investment Bank in Hong Kong. Henri started his career as a financial markets and funds lawyer in Canada and Hong Kong.

You can learn more about Henri on his website (www.henriarslanian.com) and you can reach him at [email protected]