i3 | December 19, 2017

It's Not Your Father's 'Benjamins'

Gary Arlen
Benjamin Franklin smirking on a Bitcoin

Whether you call it cyber-, crypto- or digital currency, it’s the future of money.

At the opening session of the CES Digital Money Forum, conference organizer Robin Raskin asks the audience each year, “ Who has a $5 bill in your pocket?” Every year, fewer attendees raise their hands — a nonscientific reminder of the movement toward a “less cash” society, which many see as a step toward a truly “cashless” environment. Even casual observers recognize that people don’t carry much small currency now that mobile handsets and plastic cards can handle routine payments such as parking meters, vending machines and even flea market purchases.

Raskin cites the growth of cryptocurrencies and the underlying blockchain technology as vital factors in the evolution of payments. She says some automakers are looking at ways to monetize every seat in future self-driving cars like route information for the “driver” or entertainment fees for backseat passengers looking at a video screen — using digital micropayments to cover the charges.

“This is more than just a change in technology,” Raskin says. She also sees extensive opportunities for hardware, especially “a new life for PC sales” as people buy into cybercurrency mining — the term for using high-powered computers to approve cryptocurrency transfers in exchange for a sliver of payment. While mobile payments will play a big part in the evolving financial ecosystem, there are countless other factors also in play.

Although cryptocurrencies have been around for nearly a decade, updates inevitably require explanation. See the “Cryptocurrencies Explained” sidebar.

Internet pioneer, now tech-investing mogul, Marc Andressen, describes the process as enabling “one internet user to transfer a unique piece of digital property to another internet user, such that the transfer is guaranteed to be safe and secure, everyone knows that the transfer has taken place and nobody can challenge the legitimacy of the transfer.”

Not surprisingly, some of the first U.S. merchants to accept bitcoin for payments are digital-centric companies, including DISH, Intuit, Microsoft, Overstock.com and PayPal. Overstock was one of the first large online retailers to accept bitcoin in 2014, according to The Motley Fool, which also noted that Microsoft has accepted bitcoin as a “currency” in its Windows and Xbox online stores since the same year. Microsoft has adapted its Excel 2017 to enable users to calculate, format and analyze bitcoin on the platform, as well.

DISH customers began using bitcoin in 2014 as payment for content services. At Intuit, the company’s QuickBooks accounting software accepts bitcoin and has integrated a PayByCoin service in collaboration with BitPay, enabling next-day settlement into customers’ bank accounts. PayPal accepts bitcoin as payment via its integration with Braintree. Entrepreneur Richard Branson said that his commercial space flight venture will accept bitcoin as payment. Other online retailers, including Newegg, Tigerdirect, the Apple App Store, Dell, Target and Home Depot let customers make purchases by using bitcoin, although the value and volume of such transactions are not available.

Meanwhile, EY, the consulting arm of Ernst & Young Global Ltd. is setting up “Tesseract,” a blockchain venture to make it easier for groups of individuals or companies to share vehicle ownership and access. The car-sharing project uses blockchain technology to record vehicle ownership, log the use of vehicles and apportion insurance costs and other transactions to each “owner.”

“Cryptocurrencies are facing the same baby steps we saw in the evolution of the internet,” says Barbara Bellafiore, principal consultant at Bell Communications, a Connecticut firm that advises media, ecommerce and technology clients. She says the initial response to the blockchain explanations range from “fascinating” to “Are you kidding me?” Bellafiore describes the process by comparing it to the unregulated, intangible transactions for airline miles. “We have given them value and we use them for transactions that matter, although they have no tangible presence,” she says. “Cryptocurrencies have many layers and levels to understand, so most big companies and countries are exploring and studying before they roll out applications, products or, in the case of governments, regulations.”

Invisible But Quickly Everpresent

Blockchain and cryptocurrencies have attracted all sectors of the digital, financial and retail worlds. Much of the initial focus has been on supply chain management and ways to streamline the complex network that involves producers, brokers, distributors, processors and retailers.

For example, Walmart, working with IBM, recently ran a blockchain experiment to track two mangos through its food distribution system. The blockchain tracked the shipping history in two seconds, compared to the standard inventory monitoring method, which took six days, 18 hours and 26 minutes. The project was driven by the company’s recognition of the need for fast response in case of a food safety incident, but it showed how any retail item could be tracked from its origin to the customer.

At the transaction level, shoppers can transfer “value” from their account to a merchant. “Digital tokens,” which are a string of characters that authenticate the buyer, are used to create entries on the ledger, which is the blockchain. In the process, value is transferred to the seller’s account. Tokens or “coins” come in several varieties, including “intrinsic” and “asset-backed.” Both versions have alternative names. Intrinsic (also known as “native” or “built-in”) tokens of blockchain are called “BTC” on the bitcoin blockchain, “ETH” on Ethereum (another popular cryptocurrency), “XRP” on Ripple and other names on different platforms. The asset or property-backed versions can be converted to currencies (such as dollars or Euros) or to precious metals (gold or silver); and recently, collections such as diamonds and art have been used as assets on ledgers.

As new types of cryptocurrency emerge, now alternative coins, called “altcoins” (not bitcoin or Ethereum) are popping up, seeking to differentiate from the earlier cybercurrencies. For example, Litecoin intends to speed transaction confirmation time, and Ripple is being used by Merrill Lynch, UBS (Union Bank of Switzerland) and RBC (Royal Bank of Canada), to enable settlements among different currencies and payment systems.

Another venture, the Centra Card and Centra Wallet app enables the conversion of all the cryptocurrencies that they support (currently eight of the largest ones) thus letting customers spend assets in real time at any location worldwide that accepts Visa or Mastercard. Separately, the Rivetz Token has been developed to integrate cybersecurity into blockchain transactions. It uses hardware security to protect private keys and assure transactions are conducted as intended.

To complicate the fiscal landscape, there are also “virtual currencies,” which are unregulated tender, usually issued and controlled by developers and accepted among members of a specific virtual community. These value-transfer systems are useful as in-game reward structures.

Securities Vs. Assets

Financial regulators worldwide are taking a deep look at how to deal with cryptocurrencies. The U.S. Securities and Exchange Commission says it will apply existing financial laws to the crypto market. In an investor alert, the SEC warned about the promotion of initial coin offerings (ICOs). Existing cryptocurrency companies fret that regulators’ approaches to cryptocurrencies will aff ect the value of existing cryptocurrencies.

Separately, regulators in Japan, China, Singapore and Australia have taken actions on blockchain technology. In particular, China has clamped down on bitcoin trading, starting in September when it banned commercial exchanges from trading digital tokens. A couple weeks later it stopped all bitcoin trading, including peer-to-peer connections. Analysts suggested Chinese authorities were concerned virtual currencies could become a potential threat to the yuan.

In Australia and Japan, as in the U.S., the focus is on prevention of moneylaundering and other undetectable fund transfers to evade taxes, support terrorism and other illicit purposes. The Australian plan is to bring digital currency exchange providers under the same regulations as conventional marketplaces. Japan, which was the first national government to require that “altcoin” exchanges came under regulatory supervision (in its case the Japan Financial Services Agency), cryptocurrency exchanges may face annual audits. At the same time, by regulating cryptocurrency, the government gave it official recognition as a legal payment method, a move that helped drive up bitcoin market price, according to analysts.

Moreover, crypto industry leaders have welcomed the government oversight. “It signifies the growing recognition of bitcoin and other cryptocurrencies as influential value transfer protocols by governments,” Aurélien Menant, founder/CEO of Gatecoin, a digital currency exchange based in Hong Kong, told CNBC. Government actions help the cryptocurrency economy mature, he said, and also encourage wider acceptance of digital currencies. It will also “weed out the crooks and ensure that only serious bitcoin businesses are able to serve the market.”

Yet, the worldwide regulatory outlook remains fuzzy. U.S. Senator Thomas Carper (D-DE) said three years ago, “Virtual currencies, perhaps most notably bitcoin, have captured the imagination of some, struck fear among others, and confused the heck out of the rest of us.” His comments came during hearings by the Senate Homeland Security Committee, which he chaired at the time.

Hidden Treasures; Winners/Losers

Cryptocurrency is producing unexpected results. For example, graphics processing units (GPUs), the specialized electronic circuits that accelerate the creation of images in computers, were a beneficiary of bitcoin adoption. NVIDIA, the largest GPU maker, saw a 56 percent sales increase this year versus 2016 and competitor AMD had an 18 percent bump. In both cases, the increases were traced to use by bitcoin miners. Subsequent technology has quelled that GPU appetite, with bitcoin now mostly mined using application-specific integrated circuits (ASIC). But other users are still accessing cryptocurrencies with off-the-shelf graphics cards, although there is a move toward hardware independent security.

To keep track of the fast developments in the industry, academic centers are being established. For example, Arizona State University’s engineering school, set up a “Blockchain Research Lab” this year to focus on scalability, best practices, network architecture, environmentally-friendly mining, latency and throughput. Princeton and the Massachusetts Institute of Technology already have blockchain projects underway, as do dozens of other institutions worldwide.

Amid all this activity, companies in every industry are trying to figure out when to enter the cybercurrency fray. A Deloitte study found that executives in the technology, media and telecommunications sectors were the most aggressive about blockchain deployment. Nearly 50 percent of the companies surveyed said they were now using or plan to implement blockchain technology, far ahead of financial services companies. The consumer products and manufacturing sector was slightly behind on current usage but farther ahead on blockchain plans than the tech/media companies.

With all this action, it’s hard to believe that only three to six million customers worldwide are active users of cryptocurrency today, according to the University of Cambridge’s Global Cryptocurrency Benchmarking Study early this year. Clearly, a lot of processes remain to be clarified. The volatility in cryptocurrency values poses a significant risk for merchants. For example, if a bitcoin payment is received but not processed until a day or two later, and the bitcoin value changes after the sale (up or down), the merchant might receive more or less than expected from the sale. Some retailers may not take that gamble.

Cryptocurrencies Explained

Purpose: Digital or crypto (encoded) currencies allow users to exchange online credits for goods and services.

Efficiency: Cryptocurrencies involve a decentralized technology, which removes the middleman (such as banks or financial institutions) and, according to advocates, improves transaction efficiency and lowers costs. The features can speed up the retail supply chain and add greater accuracy.

Capabilities: Core capabilities of the system are authentication (who are you?) and authorization (for example, do you have sufficient funds for this transaction?). The architecture to confirm these factors requires a distributed, peer-to-peer network that can handle recordkeeping and security.

Security: The underlying open-source software is controlled by a secure computer algorithm. These blockchain technologies enable “smart contracts,” decentralized cloud storage and dozens of other secure transaction features that have attracted immense attention from financial technology (fintech), retail, health care and other industries.

Value: Nearly 1,000 cryptocurrencies are available for purchase via the internet. The market value of the 10 largest companies was more than $116 billion in September, although volatility — and fear of a bursting investment bubble — has caused enormous market swings during the past year.

Regulation: Regulators worldwide are perplexed about how to deal with cybercurrency, including decisions on whether it is a security (subject to investment regulation) or an asset. The frequent introduction of new Initial Coin Offerings (ICOs) is adding to regulators’ concerns about how to handle them.

Specialization: Although bitcoin is the largest cryptocurrency, many specialized providers are emerging, some in collaboration with established financial institutions focused on specific industries.

November/December 2017 i3 Cover Issue

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