WHAT'S NEW: FTX's aftermath, an interoperable digital money platform for US banks, Bank of England Gov. praised blockchain tech and regulation...

What is important to know right now in the world of?#crypto?#web3?#blockchain...

REGION:? NORTH AMERICA

In Texas, the crypto industry is trying to overcome the impact of FTX

The aftermath of the FTX crash is still painful, but the crypto industry is trying to recover and looking at a brighter future. It was sensible during the Texas Blockchain Summit which took place at the AT&T Hotel and Conference Center at the University of Texas on Nov. 17-18. Hundreds of people (investors, legislators, professionals and enthusiasts) were there to talk about bitcoin mining to cryptocurrency regulations to blockchain innovations… but there was an elephant in the room, and Lee Bratcher, president of nonprofit trade association Texas Blockchain Council, didn’t wait to point it out: “The obstacles we face as an industry have just expanded significantly as a result of FTX’s incompetence and potentially fraudulent activity. It’s time to roll up our sleeves and get to work.”?

Many of the attendants shared this feeling. Sam Padilla, a member of ATX DAO, a volunteer group working to “make Austin the crypto capital of the world”, explained : “Frankly, this sucks. But the actions of a few at FTX do not speak for and do not represent the values of what crypto is actually about. There’s something really special about this technology, there’s something really special about this community. We’re really working to do something good.” For Chad Harris, chief commercial officer of crypto miner Riot Blockchain, “this industry needs to change, and it needs to change rapidly… I think what’s going on today is a clearer sign and message that this industry… it’s time for us to mature.” Vice chair to the executive committee of the Texas House’s Innovation & Technology Caucus but also the Democrat representative, John H. Bucy is already turned to solutions: “Any conversation I’ve had in response to FTX, it’s been what do we do to make sure we’re not like them. It’s how do we have common sense policies to protect people without stopping progress. This is the oil boom of this generation.”?

The comparison with the oil boom is all the more valid as Texas is presented a promised land for the crypto industry. For 10 years, the state has been touted by political leaders as a destination for digital currencies’ miners, counting on low taxes and cheap power to attract them. And it worked! In the past decade, thirty came in and dozens more expressed their interest in moving to Texas. “Following the 2021 crypto crackdown in China, many crypto miners came to Texas,” assures Alexander Hernández Romanowski, a crypto research analyst. Interestingly, instead of settling in Texan urban areas, cryptocurrency companies prefer moving in rural areas who are offering them huge tax breaks (Riot Blockchain received for instance a 45% discount on local taxes for 10 years). Given the benefits in tax revenue and job creation, it is worth the stake.

That is why, even if some doubt remains about the stress put on the Texan power grid by the cryptocurrencies industry, and even if this stress slowed down the issuance of new permits for miners to connect to the grid, the mood was globally optimistic among the Summit participants. Something we could feel in the words chosen by Lee Bratcher: “The industry will be slowed down, but it’s not going to be stopped by these obstacles.” This optimism inspired Cointelegraph’s Rachel Wolfson this final thought: “It was interesting to hear insights from speakers about how the FTX fallout will shape the industry moving forward. While the event wasn’t as heavily attended as last year, there were a number of high level speakers that had valuable insights to share regarding the FTX fallout and how Texas will continue to advance the industry forward with strong support for Bitcoin mining and blockchain innovation.”?

U.S. Banks test an interoperable digital money platform

November 15, members of the U.S. banking community launched a proof of concept project to test an interoperable digital money platform within existing laws and regulations, more commonly known as Regulated Liability Network (RLN). Based on distributed ledger technology, the RLN offers a creative way to improve financial settlements by seamlessly connecting central banks, commercial banks of various sizes and regulated non-banks. As you can read in this enlightening white paper: "Its purpose would be to create a new shared ledger substrate for the sovereign currency system that is “always on”, “programmable” and “multi-asset”. (...) RLN would deliver “on-chain” finality of settlement between the participating institutions in sovereign currencies and be compliant with all existing rules and regulations." Here is how its transaction flow works:

Based on a technology provided by SETL, This proof concept will last 12 weeks and will operate exclusively in U.S. dollars. Commercial banks will issue simulated tokens to mirror the deposits of their customers and settle through simulated central bank reserves on a shared multi-entity distributed ledger. Beside the main core of the project, a programmable digital money design will also be tested that is potentially extensible to other digital assets. In addition to the New York Innovation Center that is part of the Federal Reserve Bank of New York, this project is run by the most important financial institutions and payments organizations: BNY Mellon, Citi, HSBC, Mastercard, PNC Bank, TD Bank, Truist, U.S. Bank and Wells Fargo (let us add that Swift will support interoperability across the international financial ecosystem).?

Christian Noyer, SETL Director Assistant Secretary of the Treasury for Financial Stability, describes the RLN technology as a way to capture the technological value created by crypto industry and unit all the finance institutions around it: “It is unavoidable to move towards a certain degree of currency digitalization, but awkward that the policy debate today is focused on two extremes: CBDC for retail payments, and non-regulated tokens like stablecoins. It is critical to look towards models of currency digitalization that are based on the tokenization of regulated money. There is no reason why DLT should be a tool only wielded by unregulated finance. In this regard, the RLN is a solution that warrants close attention, and could provide an answer that unites the regulated community.”

A Bank of America's report underlines the potential benefits of blockchain technology

Like the city of Singapore (see our news below), Bank of America (BofA) stated in a report that it is important to appreciate the potential benefits from blockchain technology, and not equate that to speculative crypto trading. This report emphasizes that despite the backlash following the crash of crypto flagship “the development of applications that leverage distributed ledger and blockchain technology continues to advance”. As an illustration, the authors of the study mentions as an example the 12-week proof of concept collaboration project exploring the feasibility of a Regulated Liability Network (see our news just above).??

BofA’s document also underlines the benefits of a wholesale central bank digital currency (wCBDC), as part of the DLT and blockchain technology, adding a wholesale CBDC may be issued before a retail CBDC “due to less complexity related to design, privacy and banking system disintermediation.” Importantly, BofA identifies that innovation and creation of new revenue streams are larger in distributed ledger platforms, cloud storage, cybersecurity, digital asset custody/wallets and telecom for offline access. Therefore, this report highlights a point that is not evident in the light of the recent crypto crashes and current bearish market, and is the disruptive and value creation innovation that blockchain technology represents. Their use cases are multiplying and the perspectives are truly astounding, and goes beyond cryptocurrencies.??

New York Fed collaborates with Singapore to explore CBDCs

The Federal Reserve Bank of New York and the Monetary Authority of Singapore (MAS) will collaborate in a project to investigate the use of wholesale central bank digital currencies, wCBDCs (central bank liabilities used for wholesale interbank payment and settlement transactions) for cross-border, cross-currency transactions. The collaboration is called ‘Project Cedar Phase II x Ubin+’, and one of its main goals is to reduce settlement risks (risk that a settlement in a transfer system will not occur as expected), and advance connectivity and interoperability in such transactions. This joint effort builds on the experience gained from MAS’s Project Ubin (found that inter-bank transactions can be settled with DLT, while preserving transactional privacy) and New York Fed’s Project Cedar Phase I (found that using blockchain supported wCBDC could improve speed and safety of cross-border wholesale payments).

This joint initiative will examine in particular how a prototype wCBDC could improve atomic settlement (instant exchange of two linked assets, so that the transfer takes place only upon the transfer of the other one) of cross-border cross-currency transactions, exploiting wCBDCs as a settlement alternative. The project although has no specific policy outcome and definitively should not serve as a signal for the Fed to decide on the issuance of a retail or wholesale CBDC. However, it does highlight the versatility of the DLT technology, which in this case could have important implications towards a faster, less risky and more efficient cross-border and multiple currency payments.?

REGION:? EUROPE

Bank of England Deputy Governor praised blockchain tech and its need for regulation

Sir Jon Cunliffe, the Deputy Governor of Bank of England, in a recent speech given at Warwick Business School’s Gilmore Centre Policy Forum Conference on DeFi & Digital Currencies, should have talk about the work the Bank of England is doing on the regulation of crypto stablecoins and on a potential central bank digital currency in Sterling. But the most spectacular failure to date in the crypto ecosystem changed all his plans: "So I thought it might be worthwhile to start with a brief look at the FTX implosion to frame some of the points I intend to make on regulation of the use of crypto-related technologies to provide financial services and on why, as a central bank, we are actively exploring the issuance of a digitally native Pound sterling."

With this context in mind, Sir Cunliffe emphasized the importance of regulation in the cryptocurrency and blockchain sector, as well as in the rest of the finance industry. He was cautious to remind investors, sometimes implyingly, that the sector is still riddled with firms having substandard internal controls and risk management procedures, resulting in losses to client assets. "Regardless of the financial service activity – be it banking, insurance, exchanges, clearing houses – regulation in the conventional financial sector imposes stringent/substantive requirements. (...) These requirements reflect the risks inherent in financial services – risks to the users, risks to other financial firms and risks more broadly to the financial system. Technology in and of itself does not change the need for transparency in corporate structures, governance, audit and systems and controls – for example to protect customers’ funds. (...) In this respect, transparency in corporate structures and the relationships between them is the key foundation."

Some of the critical issues he noted when making a case for regulations in the crypto sector were: over leverage, fraud (using client funds as collateral) and promoting tokens with no utility. The recent collapses in the crypto industry, such as 3AC/Terra LUNA/Celcius/FTX/Voyager to name a few, have all been an amalgamation of one or more of these factors resulting in bankruptcy and huge losses to investors. For him, the problems encountered by the crypto industry ensue all from one basic fact:? "The experience of the past year has demonstrated that it is not a stable ecosystem. Part of this is because its foundation is completely unbacked instruments of extreme volatility that can swing wildly in value. But part is also because the crypto institutions at the center of much of the system exist in largely unregulated space and are very prone to the risks that regulation in the conventional financial sector is designed to avoid. It is in part for this reason that, since September, the FCA has warned publicly on FTX that 'this firm may be providing financial services or products in the UK without our authorization… you are unlikely to get your money back if things go wrong.' "

However, despite his critics about the crypto sector's short-comings, the deputy governor acknowledged and praised the innovations that blockchain has brought to fintech and finance, and believes that tokenization, atomic settlements and smart contracts are here to remain and be an even bigger part of consumers' daily lives. "A potential example of this is the integration of functions in ‘smart contracts’ that I mentioned earlier, he insisted. A possible use case for such integration, which has been pioneered in the DeFi world is the combining the functions of trading, clearing and settlement of tokenized financial assets into a single, instantaneous contract, rather than being carried out in sequence by three separate institutions over a number of day. This, if applied to ‘real world’ assets, like equities, could offer a substantial improvement in the efficiency of financial market infrastructure and reduce risks by enabling instant settlement."

Not only does he thinks that it is time for traditional finance to capture the technological value created by crypto, but he even argued that regulatory framework is paradoxically what the crypto industry needs right now to mature, drive innovation further and finally scale: "My third reason for bringing the activities of the crypto world within the relevant regulatory frameworks is to foster innovation. This may appear counterintuitive to those who see regulation as opposed to innovation. But, as I have said before, ‘people do not fly in unsafe aeroplanes’. Innovation may start in unregulated spaces. But it will only be developed and adopted at scale within a framework that manages risks to existing standards."

He conclusively mentioned that a new piece of legislation - currently in the parliament - aims to extend existing regulation to cover the use of stablecoins and that the Bank of England is working towards a consultative report on a digital native pound (in other words: a Central Bank Digital Currency). And, even if things seem to move quickly on this matter, he was clear his main objective is to ensure that these innovations meet high-level standard of regulation: "In the case of stablecoins used as money to make payments, he started, the regulatory outcome has been expressed by the Financial Policy Committee of the Bank as an expectation that stablecoins used in systemic payment chains should meet standards equivalent to those expected of commercial bank money." Before continuing: "Our work on a digitally native pound is driven by the trends we now see both specifically in payments, including the reducing role of cash, and more generally in the increasing digitalization of daily life. It is motivated by two primary concerns. First, that in a world in which new, tokenized forms of money emerge, enabled by new technology, we remain able to ensure that all forms of money that circulate in the UK are robust, interchangeable without loss of value and denominated in our unit of account – the pound sterling. (...) Second, to ensure that there can be competition and innovation in the development of new functionalities using tokenized money."

Meta and EU officials disagree on metaverse

The tech giant, Meta, and the European Union (EU) are having a disagreement over the metaverse centralization. On one hand, Meta is proposing one metaverse which would be centralized and where Meta would hold the ultimate power. While, on the other hand, the EU is supporting the idea of having multiple metaverses, which would give the ultimate power to the users itself, meaning that they would have control over their own digital lives, data, and content. While, we can’t say if the European metaverse will be centralized or not, however there are definitely good arguments on the side of decentralization, since the genesis of the metaverse and blockchain is supporting this concept, alongst with innovation, and creativity. Despite its differences of opinion with the EU, Meta still wants to commit to hiring 10,000 people in Europe to develop the metaverse even though the company announced a hiring freeze in September and is doing a massive layoff at this time.

?The European Union announced earlier this year that it is preparing its own strategy for the metaverse. This strategy focuses on three values: to develop metaverses that are centered on European values, that showcase European technical talent and technology, and that have a resilient connectivity infrastructure. In addition to the European Union, several countries are also preparing a plan for the metaverse. Indeed, a Pacific island, Tuvalu, also made an announcement at COP27, mentioning its plan to create a digital version of the island, in order to preserve its history and culture, while the island is threatened to be submerged due to the rise of the sea level. Amongst the European Union and Tuvalu, the South Korean city of Seoul, Barbados, and Abu Dhabi are also looking and planning to enter the metaverse. As we can see, the Metaverse could impact many more sectors other than fashion and gaming, which are still the two most popular use cases for these virtual worlds.?

REGION:?ASIA

"You can’t really have one without the other", said Ethereum's founder about Singapore's will to distinguish crypto from blockchain technology

Vitalik Buterin, the founder of Ethereum, believes that Singapore’s well intentioned attempt to regulate cryptocurrencies may not work as it may not be in the best interest of the industry for regulators to try to separate cryptocurrencies from blockchain technology and to establish blockchain’s without its own native token or cryptocurrency. According to Buterin, regulators generally encourage the growth and use of new technologies, but are wary of crypto-currencies, mainly due to a lack of understanding of how they work. Although Singapore, like India, is trying to prevent crypto-currency speculation rather than banning it outright, this may not work because the two are interconnected.?

"It’s interesting this regulator’s willingness trying to make distinction between blockchain usage and cryptocurrency…? explained Buterin to his interviewer, because, it is like, on the one hand, it’s sort of the mindset that every regulator has in that you want to be supportive of technology and making things easier for people, but you find cryptocurrency weird and scary ; but on the other hand cryptocurrencies do have this tight connection with each other. You can’t really have one without the other, right? (...) If you don’t have cryptocurrency, then the blockchains that you’re going to have are just fake and nobody’s going to care about them."

What Buterin explains is, as a decentralized public ledger that exists across a network, which is controlled by no single person and spread across the globe, the blockchain has the advantages of maintaining privacy, enabling faster transactions, peer to peer finance… but the operators of these blockchains need to be rewarded to keep the system running just like any other banking or software system and for that functionality a native token or cryptocurrency would almost always be required to reward the system operators.

Singapore has been a crypto friendly jurisdiction, but recent events in the industry, and especially the collapse of Terra Luna, which had its offices in Singapore, have made regulators wary of the risks and the need to protect investors. So, the city has started tightening regulations over recent months.

Bank of Japan will experiment a digital yen

On November 23, the Bank of Japan (BoJ) announced that it planned to experiment on a digital yen with three megabanks and regional banks in the country. Work will begin in the spring of 2023, where BoJ will work with banks and organizations to identify the various possibilities of Central Bank Digital Currency (CBDC). In particular, BoJ wants to identify problems with deposits and withdrawals, as well as to ensure that a CBDC would be operational even in the event of a natural disaster, as well as in locations without internet access. This experiment will last two years, and will allow for the BoJ to make a decision on whether to issue a CBDC or not in 2026.?

This experimentation follows an ongoing trend by several central banks around the world. Indeed, according to the BIS (2022), over 90% of central banks are currently researching or experimenting with CBDCs. While a few central banks are currently conducting an advanced pilot (i.e. China) or have already launched (i.e. Nigeria), most are taking an exploratory approach similar to the announcement of the BoJ. These exploratory steps are necessary for central banks to grasp the benefits and risks associated with CBDC, as the technology is relatively young and offers use cases beyond what central banks are currently able to do. Definitely, the next few years could be decisive for CBDCs, as several other central banks are investigating them and are expected to announce whether they will move forward with this financial instrument.?

BlockZero Advisors is a boutique consulting firm specializing in digital assets & blockchain. We support companies and organizations in the public and para-public sector through their digital transformation.

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