The Future of Money: The 3 New Ideas You Need to Know this Week (Issue 55 - 8 August 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!

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1. What Is the Ethereum London Fork and the EIP-1559 Upgrade?

Last Thursday was a historic day for crypto markets, particularly for Ethereum, the second largest crypto asset, as the much expected London fork took place (for a primer on hard vs soft forks, you can check out this issue of our newsletter).

Such upgrades have become necessary, as the number of transactions on the Ethereum network have increased in the past year.

The most important component of the London upgrade is known as EIP 1559 (EIP stands for Ethereum Improvement Proposal), as it significantly revamps how Ethereum fees are paid.?

Under the current approach, miners receive fees for processing transactions in a supply and demand auction format.

But if the network has a bottleneck, fees can quickly skyrocket.

Over the first half of this year alone, average gas fees on the Ethereum network have ranged between $4 all the way to $44!

This level of unpredictability is obviously not ideal.

The volatility in crypto markets can make it challenging for users to plan for the appropriate level of fees to be inputted so that their transaction can go through.?

Even when a transaction fee is inputted by a trader, there are no guarantees, as market conditions can quickly change.

This means that users may need to wait a significant amount of time for a confirmation.

But EIP-1559 addresses this by separating the fee into two components: the base fee and the priority fee.?

Let’s start with the base fee amount, which is adjusted up and down by the protocol based on how congested the network is.?

When the network exceeds a certain target per-block gas usage, the base fee increases slightly.

Likewise, when capacity is below the target, it decreases slightly.?

Because these base fee changes are constrained, the maximum difference in base fee from block to block is predictable.

This allows wallets to auto-set the gas fees for users in a highly reliable fashion.?

Then there’s the priority fee, which some have been calling a “tip” to the miners.?

For most users, the base fee will be estimated by their wallet and a small priority fee will be automatically set.

Users can also manually set the transaction maximum fee to limit their total transaction costs.

An important aspect of this fee system is that miners only get to keep the priority fee.

The base fee is always burned (i.e. it is destroyed by the protocol).

Whilst the upgrade is welcome news to users, many Ethereum miners are not happy with this upgrade.

Ethereum miners in the current proof of work consensus mechanism are rewarded by block rewards and transaction fees.?

But transaction fees have made up a significant percentage of their revenues in recent months.?

However, most in the crypto ecosystem would agree that the EIP-1559 change is generally very positive for the Ethereum network in the long term, as it fixes the high and unpredictable gas fee problem.

And whilst it may not reduce the average gas fees to make transactions on the Ethereum blockchain, it will at least make them more predictable and less prone to volatile swings.?

Separately, many have been pointing out that the fact that the base fee will be burned may positively impact the price of Ethereum as it reduces the supply and may even make ETH a deflationary currency.?

Whilst that is a valid argument, it will be difficult to know what the supply will be, as we don’t know today how much ETH will be burned via base fee transactions since the future volume of transactions is unknown.

But it can be meaningful.

For example, since the London fork last Thursday, around 2.3 ETH has been burned per minute. That is around $400,000 worth of ETH being burnt each hour.?

Based on existing data, we can assume that around 800,000 to 2.4 million ETH will be burned in 2021. And that can have an impact on the price of Ethereum if demand goes up especially if you consider that around 6 million ETH are already staked and out of circulation.

Definitely a development to follow!

Source: Henri Arslanian GIF page

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Pic of the Week

2. What’s Behind the Crypto Controversy in the US Infrastructure Bill?

A massive lobbying effort has been taking place in recent weeks in crypto circles in which crypto aficionados are being asked to call their senators and sign petitions.

This all began following President Joe Biden’s introduction of the 2700+ page infrastructure bill.

Within the massive piece of legislation is a crypto specific provision that proposes raising $28 billion dollars to partly finance the $1 trillion needed for a nationwide infrastructure revamp.

You may wonder why an infrastructure bill focused on highways and bridges is concerned with crypto??

The reason is that in the US, bills that seek to offer new government services need to explain how the government will pay for those services.

This can be done, amongst many other options, by improving tax compliance and collection.

The government believes that by having better tax compliance within the crypto industry, it will be able to recoup roughly $28 billion, money that would then go towards paying off that looming $1 trillion bill.

Most of the controversy comes down to one specific technical detail: the definition of the term “broker” and who qualifies as a “broker.”

In the original bill, the provision defined a “broker” as any person who is responsible for and regularly provides any service “effectuating transfers of digital assets on behalf of another person.”?

This has raised several red flags within the crypto industry, with fears that a “broker” could be expanded to include non-custodial companies like decentralized exchanges and mining pools that would be unable to file broker-specific tax reporting forms.

Last week an amendment proposal to the bill was made by Senators Ron Wyden (D-Ore.), Cynthia Lummis (R-Wyo.) and Pat Toomey (R-Penn).

Their amendment essentially asks that some players in the crypto industry, from miners and node operators to developers and other non-custodial crypto industry participants, be exempt from the tax reporting provision within the infrastructure bill.

However, a competing amendment was shortly released by Senators Mark Warner (D-Va.) and Rob Portman (R-Ohio), who proposed to exempt only proof-of-work miners or those selling, de facto, unhosted wallets.

This created an uproar in the crypto community as it favored proof-of-work consensus mechanisms compared to the various other consensus mechanisms (e.g. proof-of-stake).

Whilst Senator Warner amended once again its latest amendment on Saturday afternoon to no longer limit it to proof-of-work, it was criticized for not protecting developers.

This crypto references in the infrastructure bill are important for many reasons.?

First the definition of “broker” that includes anyone who “effectuates transfers of digital assets” is far too broad and could include many in the crypto ecosystem (e.g. open source software developers, crypto start-ups not custodying client assets, miners, smart contracts coders) who would then have to comply with the requirements imposed on brokers.?

The issue is that due to the nature of blockchains, even if they wanted to comply, it would not be feasible for them to do so, as they don’t even have such information on users to begin with.?For example, a DeFi smart contract developer does not know who is using a certain DeFi platform.?

On the other hand, asking that centralised exchanges provide customer reports is a different story and should be welcomed.

In fact, many of the largest US crypto exchanges, from Coinbase to Square, have come out in favor of working within the guidelines of this reporting provision.

If such reporting requirements are required from traditional brokers, then there is really no reason why crypto exchanges should be exempt, especially as the lines between both become more and more blurred.

There is a real risk here that if the bill is adopted without an amendment, it may drive crypto innovation away from the US, as developers would definitely not want to be subject to rules with which they cannot comply with.?

Many are hopeful that amendments will be proposed in the coming days to fix this gap.?

This is despite media reports that Secretary Yellen and others have been lobbying against any of these amendments.

As of the time of writing, the vote had still not taken place.

One positive development from this infrastructure bill is that it brought together the crypto community in the US and around the globe. The community quickly and efficiently rallied to lobby against these inconsistencies and have their voices heard.?

This is yet another example of the industry becoming increasingly more mature in how they are approaching and dealing with such issues.?

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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

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3. Are Banknotes Sexist?

Despite my undying passion for cryptocurrencies and CBDCs, I still can’t help but love good old paper banknotes.

Anyone who has stopped past my office in Hong Kong has seen my wide ranging paper banknote collection, from my Zimbabwean 100 trillion dollar bill to the demonetised Indian 500 Rupee banknote.

On a personal note, my biggest hobby growing up was stamp collecting. In fact, I still have my precious collection at my parents’ place back in Canada.?

At the end of the day, despite all the benefits of digital currencies (and the vast potential of non-fungible tokens), I truly believe that it will be difficult to recreate the visual beauty of so many of these banknotes.?

So it was interesting to revisit a study that analysed banknotes from over 150 countries, a study that was full of some very interesting takeaways.?

For example, the most widely used colour on banknotes today is green.?

Source: money.co.uk

Fun fact: The US used the colour green for its dollar in the 1860s as an anti-counterfeiting measure used to prevent photographic knockoffs, since the cameras of the time could only take pictures in black and white.

The analysis of over 1,300 banknotes revealed that politicians and royalty are the most common figures depicted (with Queen Elizabeth II clinging to the title of most popular figure, with her visage featured on 45 different note designs across 11 countries!)

Somewhat ironically, economists only figure on 6 banknotes around the world! But also somewhat sad that sports figures appear more than inventors or pioneers in science and medicine...

Meanwhile, it seems that birds and castles are the most commonly featured animal and structure to appear on banknotes around the globe.?

However, it’s important to note that there is a serious lack of gender representation across banknotes, with only 7% of the notes featuring a female figure…So definitely an area that needs to be improved.

Actually, only the United Kingdom, Denmark and Jersey have a balanced or female favoured representation on banknotes.?

Ultimately, whilst the future of money is very exciting, the history of money can be just as interesting!

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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 Crypto Leader and Partner, 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.

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 and 35,000 newsletter subscribers, 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 named Henri the “highest profile FinTech consultant in Hong Kong”, Blockchain Asset Review named him the “Most Influential Crypto and Blockchain Thought Leader in Asia”, 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.

Henri speaks five languages including English, French, Armenian, Spanish and Mandarin Chinese.

He holds a Masters in Chinese Law from Tsinghua University; a joint Global Executive MBA from Columbia Business School, London Business School, and Hong Kong University; a Bachelor of Law from the University of Montreal (Dean’s List of Excellence) and a Masters in Transnational Law from the University of Sherbrooke, where he was awarded the Governor General of Canada Gold Medal for Academic Excellence for having graduated with the highest grades of the university.

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