Deep Dive - Trends in Blockchain Technology and Cryptocurrencies

A blockchain is a type of distributed ledger. Instead of just relying on one database, a blockchain is spread between different people in a similar way to how bit torrents work. Once data is written to a blockchain, it’s stored there forever. It effectively makes it a trustworthy and (in theory) a hack-proof way to store inter operable data.

Although Blockchain technology has been around since 2008, until recently, it was a niche technology. In the past 2 years, blockchain has moved into the mainstream (in part due to cryptocurrency).

The following are some trends we are following in the blockchain and cryptocurrency space.

Blockchain will be a key enabler of the Internet of Things

The Internet of Things is growing dramatically. Within 5 years, there will be billions of IoT devices and sensors collecting data on everything from the smart-watch on our wrist to advanced manufacturing facilities. All these devices will require a system that ties them together and enable interoperability. Blockchain technology offers manufacturers a way to create a new set of industry standards to enable secure data transfer and interoperability.

Older, traditional companies will begin to implement blockchain-based applications on a limited scale.

A recent Deloitte study indicated that 74% of traditional business could envision use cases for blockchain, but very few are implementing it. Those companies that are implementing blockchain-based applications are using them primarily in support of existing business models, not to innovate on new business models.

Startups are driving faster adoption and disruption.

It is no surprise that the wave of blockchain-enabled applications coming from startups are driving faster adoption and are potentially disrupting industries.

One such company that is worth watching is Storj. Storj has developed a distributed file storage system that has the potential to disrupt cloud storage providers such as Dropbox or Traditional cloud storage solutions, like Dropbox or Google Drive, have a privacy issue. These companies have control over your files, including the ability to access them.

The Storj project uses blockchain (based on Etherum) and peer-to-peer networks to solve these problems. Individuals and corporations can “opt-in” to Storj and allow Storj to store files on excess disk capacity. Storj also maintains redundant copies of the files there is no single point of failure. And because the data is encrypted, it guarantees you’re the only one who can access your files.

Legacy Financial Institutions Embrace Cryptocurrencies

Until the last 18 months, cryptocurrencies were the outside of the mainstream of the financial services sector. But the rise of Bitcoin and Ethereum has legacy financial institutions getting involved. Major players such as Goldman Sachs are looking at ways to insert themselves into this emerging market. Goldman has been working on a custody offering for cryptocurrency investors that would provide a higher degree of safety and confidence allowing institutional investors such as pension funds to bet on the asset class.

In May, Nomura Holdings Inc. joined crypto firms Ledger and Global Advisors to create a custody consortium called Komainu. And at least three giant Wall Street custodians -- Bank of New York Mellon Corp., JPMorgan Chase & Co. and Northern Trust Corp. -- are working on crypto-custody services or exploring it.

The Intercontinental Exchange (ICE) in partnership with Starbucks, Microsoft and BCG (Boston Consulting Group) announced the launch of Bakkt which will offer a regulated market for Bitcoin.

Expect to see more of the legacy financial institutions launching products and services to the cryptocurrency market.

Government Regulators Start to Clarify the Rules

Like any innovation, it takes a while for government regulators to catch up with the changes. The borderless nature of cryptocurrencies poses a huge challenge for regulators attempting to prevent money laundering, financing of weapons and drugs, and tax avoidance.

Today, most governments view cryptocurrencies as an asset not as a security. The US taxes cryptocurrencies as such. In the last tax year (2017), the Internal Revenue Service forced the major crypto-exchanges to report crypto-trading related profits and losses to the government – so the government could tax those profits.

This is also significant because if it was classified as a security, the full body of the US Securities Code and associated regulations would now apply and every crypto-exchange in the world would be in violation of US Securities Law.

This is in line with a broader, international trend that cryptocurrencies are neither currency, nor securities, but some new class of asset. Here are some examples:

  • France reclassifies cryptocurrency holdings as “moveable property” instead of “commercial or individual profits” thereby lowering the maximum effective tax rate from 45% to 19%

  • Russia has reclassified cryptocurrencies as “digital rights” as opposed to “digital money” or “digital currency.”

Other governments are taking a more cautious approach, such as the United Kingdom and the Republic of Korea. And others, like India, have banned cryptocurrency exchanges completely.

In the next 12-24 months, we should see more definitive rulings for government regulators on cryptocurrencies, exchange-traded funds and other crypto-financial instruments.


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