Crypto-digest 05.17: The SEC Just Launched a Fake ICO Website to Educate Investors; Jack Dorsey Hopes Bitcoin Will Become Web’s ‘Native Currency’; Axoni, Clearmatics Claim Milestone for Blockchain Interoperability; ICO Project Polymath Is Trying to Buy a Stake In a Real Stock Exchange; Sberbank Buys Commercial Bonds Issued Over Blockchain Platform; Capital Markets Blockchains Are Finally Getting Go-Live Dates.
The SEC Just Launched a Fake ICO Website to Educate Investors
The U.S. Securities and Exchange Commission wants to ensure investors can identify fraudulent initial coin offerings – even if it has to launch its own to do so.
The regulator announced Wednesday it has launched a mock ICO called HoweyCoin, presumably named after the Howey Test, which “touts an all too good to be true investment opportunity.”
However, the company notes, “the offer isn’t real.” Users who try to invest in the token sale will instead be redirected to the regulator’s education tools, which are aimed at pointing out the signs of fraudulent token sales.
According to the HoweyCoin website, most travel businesses “require processing, centralized currency, and most importantly, nickel and dime fees that add up to literally billions.”
HoweyCoin is different, the fake site says, because:
“HoweyCoins utilize the latest crypto-technology to allow travelers to purchase all segments without these limitations, allowing HoweyCoin users to buy, sell, and trade in a frictionless environment – where they use HoweyCoins to purchase travel OR as a government-backed, freely tradable investment – or both!”
The website goes on to report that investors will receive 1-2 percent returns, and advises them to “HODL,” mimicking websites for existing fraudulent or potentially fraudulent token sales.
The site similarly features Twitter testimonials and list of its team members, though whether any of them are real is debatable – there are no social media or professional profiles linked to the names.
In a press release, the SEC also noted that the site includes “a white paper with a complex yet vague explanation of the investment opportunity, promises of guaranteed returns, and a countdown clock that shows time is quickly running out on the deal of a lifetime.”
In a statement, Owen Donley, chief counsel of the SEC’s Office of Investor Education and Advocacy, said that the site incorporates many of the hallmarks of fraudulent token sales – pertinent information for investors looking to avoid financial pitfalls.
“Fraudsters can quickly build an attractive website and load it up with convoluted jargon to lure investors into phony deals,” said Donley. “But fraudulent sites also often have red flags that can be dead giveaways if you know what to look for.”
Jack Dorsey Hopes Bitcoin Will Become Web’s ‘Native Currency’
Is bitcoin destined to become the default currency of the Internet?
At least one well-known business executive – Jack Dorsey, the CEO of Square, who previously predicted bitcoin’s future dominance back in March – hopes that’s the case. Dorsey sat down with Elizabeth Stark of Lightning Labs at CoinDesk’s Consensus 2018 conference in New York City to talk more broadly about his company’s goals for the digital currency.
“I’m just approaching with the principle that the Internet deserves a native currency. It will have a native currency. I don’t know if it will be bitcoin,” said Dorsey said during Wednesday’s fireside chat, adding:
“I hope it will be bitcoin. I’m a huge fan.”
Dorsey admits the idea that bitcoin will someday be the basis for all payments made on the Internet remains a topic of debate at Square.
“We’ve led with that mindset. But there’s still a lot of skepticism and a lot of debate and a lot of fights. But that’s where the magic happens, where creativity happens,” he explained.
Despite the controversy, Dorsey argues that the vision of open access that bitcoin inspires is fundamental to the role Square has always played in the payments industry. “Any payment that comes across our table, the seller should be able to accept,” he remarked.
When Dorsey first began contemplating how to implement bitcoin payments into the Square platform with Mike Brock, an engineer at the company, the two initially settled on a goal that was grandiose in its simplicity.
Either one of them, he reasoned, should be able to walk over to the Blue Bottle across the street and buy a cup of coffee with bitcoin without the transaction looking any different than a regular dollar-denominated payment, perhaps without the cashier even knowing that bitcoin was being used.
According to Dorsey, the team had a working solution within a week.
“It felt amazing. It felt electric. And it felt like something we needed to explore a lot more,” he said.
More work to come
Square has yet to build a full bitcoin payments solution for merchants and consumers, as it quickly changed direction to work on a buying-and-selling service to be integrated into its Cash App. But Dorsey said that the goal is same as it has always been.
“We want to go back to that original idea of being able to purchase a coffee with it. And that’s why we’re working with [Lightning Labs],” said Dorsey. “Whatever it takes to get there, we’re going to make sure it happens.”
Dorsey – who counts himself as a fan of the hacker ethos surrounding bitcoin’s rise to fame – claimed that whatever path Square takes to pushing mass adoption of bitcoin payments, it will do so without threatening the openness of the network.
“There’s so much openness in the community, and I want to make sure nothing in the corporate world threatens that,” he stated, going on to say:
“We cannot risk hurting what made this possible to begin with … We can’t do any of this without the technology being strong and available for everyone.”
Axoni, Clearmatics Claim Milestone for Blockchain Interoperability
Two of the most prominent startups in enterprise blockchain are teaming up to tackle the hard, but now seemingly inescapable problem of interoperability.
At Consensus 2018 this week, Clearmatics and Axoni demonstrated how a financial derivative can be issued via a smart contract, trigger a payment and then instigate a cross-chain atomic transfer of value between two distinct networks. This marked the first time a derivatives contract has been originated on one enterprise blockchain and settled on another.
The milestone is important because interoperability is now emerging as a key design goal of distributed ledger technology (DLT).
While the financial world may be moving from a state of many ledgers to fewer ones, blockchain architects have come to realize that trades, deals and transactions will probably never be originated, processed and settled by a single, monolithic system.
Robert Sams, the CEO of Clearmatics, told CoinDesk:
“Facilitating end-to-end processing from point of trade to settlement, we need to make the assumption that that process is going travel through multiple systems, rather than a single monolithic settlement system, distributed or otherwise.”
The collaboration is significant also because of the clout of the players involved.
Axoni, based in New York, is working with a wide range of leading financial institutions and infrastructure providers to move trillions of notional value in U.S. dollars onto blockchain tech across a variety of asset classes.
Meanwhile, its partner in the demo, Clearmatics of London, is working with a consortium of banks and financial institutions to create digital fiat that is fully collateralized by cash at the corresponding central bank and transferable on a distributed ledger.
Axoni has also been doing a lot of work in the derivatives space and other areas of post-trade processes, while Clearmatics is focused on the settlement side of things, so the pairing was an obvious fit (both are building technology based on ethereum-derived architecture).
“If we can collaborate appropriately and facilitate linkage between those networks, what you end up with is a highly automated, highly transparent process all the way from trade agreement through to settlement finality,” said Greg Schvey, the CEO of Axoni.
Lessons from crypto
Stepping back, it’s fair to say blockchain interoperability is at the R&D stage.
To make sense of the problem involves a lot of requirements based on use cases and the domain applications, which all have to be considered together. Sams emphasized that the interoperability demo was just a proof of concept – but an important one, because it drives the spirit of open source collaboration.
“Interoperability needs to be tackled in a open and collaborative fashion and built around open standards and open source implementations,” he said, adding:
“There will probably be multiple types of interoperability solutions – not many, but more than one.”
The same spirit extends to the public blockchain community, where a lot of cutting-edge work is being done on the very technical aspects of the topic.
“There’s a lot of overlap between cross-chain atomic swaps in the cryptocurrency space and the stuff that we are doing,” said Sams. “Even though the domain application is entirely different, the underlying technological primitives are very similar.”
The contract in question was modeled using Axoni’s domain-specific language, AxLang, and then settlement finality of the resulting cash payments was achieved across different permissioned, ethereum-compatible ledgers.
Clearmatics’ contribution to the demo was Ion, an open source interoperability protocol, designed to perform atomic cross-chain transactions.
The AxLang smart programing language used here was developed by Axoni to make working with smart contracts in an enterprise setting a sure thing, so to speak.
Axlang is based on Scala and enables formal verification of smart contracts, a rigorous mathematical method used to prove the correctness of computer programs. It can also compile to both the Java and the ethereum virtual machines.
However, developers are often asked, why another programing language?
Schvey said that doing lots of work with large-scale application design on blockchains revealed certain requirements not being met by Solidity, the first step into programming smart contracts among the ethereum community.
In particular, Solidity lacks formal verification, which is the ability to have mathematical proofs that the code written has compiled properly, Schvey said.
“Being able to check for certain error vectors is a very powerful concept, especially if you are deploying a large scale multi-party infrastructure with a lot of value going through it,” he said.
Indeed, the proof of concept marries two hard technical challenges: interoperability and formal verification. And there’s an important connection between the two, Sams pointed out.
“Imagine an end state of distributed market infrastructure where you have an end-to-end process flow, occurring through multiple systems,” he said.
“It’s obviously going to be very important that at the semantic layer, a system taking over a process from another system, and vice versa, understands and can demonstrate exactly what the business logic is that they are consuming or producing for another system to consume.”
ICO Project Polymath Is Trying to Buy a Stake In a Real Stock Exchange
If one announcement summarizes the ambitions of crypto project Polymath, it might be Wednesday’s acquisition of the domain Tokens.com.
One of its several this week, it cuts to the heart of the project’s aims to dominate the issuance of tokenized securities. But the plans go beyond just the acquisition of potentially popular domain names.
In the run-up to the company’s Wednesday morning appearance at CoinDesk’s Consensus conference, Polymath also revealed it’s in the process of closing a deal to acquire a large stake in the Barbados Stock Exchange and that it’s working on a deal with the alternative trading system tZero.
With those two partnerships, it believes it will have the platform to create tokens that can actually trade and dominate the coming transition of traditional equity to crypto. Neither deal is done, but Polymath CEO Trevor Koverko projects that they should be closed by early June. (Polymath raised $58.7 million in a private placement of tokens to accredited investors, according to Business Insider.)
Koverko sees a crisis of liquidity in security tokens. As CoinDesk previously reported, many of the tokens issued so far are under a lockup period required by U.S. securities regulations, but Koverko argues that’s not the whole story.
“It’s also because everyone’s scared to release them in the wild because you can’t prevent unaccredited people from getting them,” Koverko told CoinDesk. “What we’re doing is we’re bringing a measure of restraint and typical Wall Street-like compliance.”
Polymath has built a system that makes a whitelist of accounts that have gone through the know-your-customer, anti-money laundering (KYC/AML) and investor accreditation checks that make them viable to trade with. That way, once a token has been issued on Polymath, it shouldn’t be possible for an unaccredited investor in the U.S. to acquire it.
It’s calling this ST20, which it describes as a new standard for security tokens. For now, these tokens will be issued on the ethereum blockchain (it is not actually an ethereum standard). The company has partnered with SelfKey, IdentityMind and Shyft as its KYC/AML partners.
Polymath is one of several companies that have jumped into the token issuing space, which grows more crowded by the week. The firm describes itself as a platform, one that brings in companies and guides them through the process of issuing a security token. The companies with the strongest proposals will get access to elite consultants, legal counsel and possible investment from Polymath’s new security token fund, which it also announced this week.
One of Polymath’s partners, Gabriel Abed, founder of Bitt, a Caribbean platform for mobile money, explained the value of a crypto exchange in the country. “Barbados has the most double tax treaty agreements in the world.”
That means that if a company pays tax in one country, it doesn’t have to pay tax in the other. “It’s quite cool as well when you look at the China relationship that Barbados has,” because so many Chinese companies have needed to look abroad as domestic regulations have banned new token issuances, he said.
Bitt is in the family of companies, like tZero, that have investments from Patrick Byrne and Overstock.com. Abed is working to negotiate the use of TZero’s backend to run a crypto specific exchange out of the Barbados Stock Exchange.
Once the exchange is running, it will be a ready place for new tokens to trade, with guarantees built into the ST20 platform that no one will be able to hold them that shouldn’t. Koverko anticipates equity and real estate to begin quickly moving onto the platform. He also sees opportunities for people in the developing world with capital but without local financial infrastructure to make investments.
Just as Africa skipped the landline phase and went straight to mobile, Koverko envisions a mobile-based capital market there as well.
The Barbados Stock Exchange and tZero had not confirmed the deals in process at press time.
Sberbank Buys Commercial Bonds Issued Over Blockchain Platform
Russian bank Sberbank CIB and telecoms firm MTS have conducted what they say is the country’s first commercial bond transaction made using blockchain.
MTS announced Tuesday that it had placed commercial bonds of 750 million rubles ($12.11 million), with the primary buyer being Sberbank, using a proprietary blockchain platform provided by the National Settlement Depository (NSD) and based on Hyperledger Fabric 1.1.
The bonds issued have a maturity of 182 days with an annual coupon rate of 6.8 percent and were placed on OTC market, according to a press release. The transaction used the “delivery versus payment” (DVP) method of settlement and was compliant with Russian legislation, it adds.
Andrey Kamensky, VP of finance, investments and M&A at MTS, commented that the successful blockchain transaction was carried out through “the entire settlement chain, from security placement and cash receipt to fulfillment of all obligations to the investor.”
“MTS intends to continue employing blockchain-based solutions, primarily in financial markets, due to [the technology’s] clear advantages in increasing transaction transparency and the participants’ confidence, while substantially reducing transaction costs.”
As reported by CoinDesk, the NSD, the central depository for Russia’s largest securities exchange group, announced trials of its Hyperledger-based commercial bond trading platform in October 2017. At the time, Raiffeisenbank Russia had already tested the system with the purchase of $10 million-worth of bonds in a mobile phone network.
According to Eddi Astanin, chairman of the board at NSD: “The pioneering transaction with Sberbank and MTS confirmed blockchain’s status as an efficient industrial technology providing confidentiality and speed during securities settlement.”
Capital Markets Blockchains Are Finally Getting Go-Live Dates
If minimum viable products (MVPs) have so far proved elusive for companies building blockchain solutions for capital markets, Consensus 2018 marked a notable change in the narrative.
Assembled in New York this week, a handful were even confident enough to give firm timetables for production. For those tired of blue-sky talk, it was refreshing to hear large-scale financial infrastructure projects discussed openly and frankly, in clear terms of where they are and when we can expect to see things going live.
“We are now starting to see at Consensus, examples of where financial services are taking this technology into production with real timelines that they have committed to,” Chris Church, the head of business development at Digital Asset, said.
He told CoinDesk:
“I think that’s a very important proof point for the industry.”
Indeed, DA, a blockchain startup founded by former JP Morgan executive Blythe Masters, has itself been making headway with its overhaul of the Australian Securities Exchange’s (ASX) Clearing House Electronic Sub-register System (CHESS).
Underscoring the seriousness of the undertaking, ASX recently produced an 87-page progress report. Roll-out is targeted for late 2020 or early 2021.
“A lot of people have talked about hype and reality,” Church said. But with the ASX’s commitment, at the end of last year, to replace CHESS with DA’s technology, “we now have evidence that a systemically consequential, highly regulated, national market infrastructure has made the decision to take this technology to put it into production for their marketplace.”
Church stressed that this project is not simply “adding something on,” but rather, taking out a chunk of the CHESS system and replacing it.
Looking ahead, Church said that DA is now working with a bunch of other financial market infrastructure providers, including exchange groups in all three major regions – Europe, North America and Asia/Pacific.
Though he wouldn’t name names, Church indicated that these conversations were not about doing more proofs-of-concept.
“A science experiment is not what we are interested in,” he said.
In the weeds
But DA isn’t the only company that’s actually finally getting somewhere with DLT for financial market rails.
For example, the re-platforming of the DTCC’s trade information warehouse is one of the highest profile financial infrastructure blockchain projects bitten off by anyone. Robert Palatnick, DTCC’s chief technology architect, confirmed that coding is expected to finish at the end of this quarter; what will follow and take until year-end, is a complex process of integration, testing and data migration.
Palatnick told CoinDesk:
“It’s exciting, but we are currently in the weeds and learning new and interesting things about working with this nascent technology as we progress.”
He went on to explain that changing to a blockchain isn’t a “magical flip of a switch.” It involves a migration of all the data that is currently in the legacy system into the blockchain before anything can go live.
The enormity of such a project may not be obvious to those unfamiliar with the creaky plumbing of the capital markets.
“It’s hard to explain how you connect to legacy systems, for example, if you don’t have legacy systems,” Palatnick said. “We don’t have any benchmarks to compare to when it comes to blockchain, so while this is unchartered territory, we continue to be pleased with our progress.”
In the third quarter of this year, DTCC expects user acceptance and the migration process to start in earnest, with an expectation of going live in next year’s first quarter.
“We are comfortable we can meet that schedule,” said Palatnick.
Drilling down a little, the very first phase involves running the ledger nodes inside of DTCC’s environment. So firms will not be running nodes themselves in the first instance until the whole challenge of managing those nodes is understood.
At the completion of phase one, DTCC will have nodes set up internally for every firm that it knows will run one, plus some general nodes that will take care of supporting the transactions and processing for the firms that do not wish to support a node of their own.
For this project, DTCC has taken a multi-vendor approach. Ethereum-inspired startup Axoni is providing the technology, with IBM helping to manage the project, and R3 providing best practice guidance on areas like selecting the right data models.
‘Changing a whole industry’
Meanwhile, in Europe, a blockchain project involving the Luxembourg Stock Exchange and a growing contingent of buy-side firms is now scheduled to go live in January 2019. Professional services firm KPMG picked the clearing and settlement of exchange-traded funds (ETFs) on the Luxembourg exchange as a use case for blockchain – which, it turns out, is a very big deal.
Luxembourg is the largest fund management hub outside of the U.S. The jurisdiction holds many trillions of dollars worth of assets under management.
“This is not just about changing the Luxembourg exchange – it’s about changing a whole industry,” Eamonn Maguire, a managing director in charge of advisory banking services at KPMG, told CoinDesk. “The primary netting point, if you will, for funds trading in Europe is Luxembourg.”
Explaining the impetus for such a change, Maguire pointed out that the charging of commissions for the distribution of funds is going to end under the European Union’s second Markets in Financial Infrastructure Directive (MiFID II). The hit to revenue means costs must be cut somewhere.
As part of its response, Luxembourg is embracing a newer “fintech” approach using apps and mobile devices for direct-to-consumer distribution.
But combining this front-end revamp with blockchains in the back office will mean a roughly 60% reduction in costs for the exchange, said Maguire.
The KPMG-led project includes banks like BNP Paribas, Crédit Agricole and others, as well as over 400 asset managers. The technology used is ethereum-based Quorum, the popular open-source project run by JP Morgan.
KPMG found that Quorum in this private deployment was achieving a throughput of 800 transactions per second, and that would need to be ramped up for production, especially considering Luxembourg’s direct-to-consumer funds-picking model.
Maguire is proud of the magnitude of the project, which started out as a kind of garage idea inside KPMG. He concluded:
“There are different strategies. Sometimes people go for something that’s easier or smaller – but we are not doing that.”