In December 2017, it was recognized that in “the same way that the World Wide Web was never defined solely by Pets.com, the benefits of blockchain technology should never be defined solely by the latest price of Bitcoin.” Now that the mid-2018 crypto bloodbath is well in everyone’s rearview window, it is clear that blockchain and DLT technologies have firmly taken corporate root and may actually someday bear some real fruit.
No one can deny 2019 has seen great strides in the implementation and corporate adoption of enterprise DLT solutions as well as proactive growth in the regulatory oversight of blockchain technologies:
In July, the SEC and FINRA issued a joint statement providing their position on the application of federal securities laws and FINRA rules to the potential custody of digital asset securities.
As exemplified by current projects emanating from the likes of J.P. Morgan and Fidelity Digital Assets, financial institutions will continue in 2020 taking calculated risks deploying blockchain and DLT technologies.
Even though it may still may be another year or two before any consumer products hatched from these new technologies ever reach mass markets, 2020 may eventually be known as the year blockchain and DLT went mainstream in corporate America.
On October 24, 2019, Chinese President Xi Jinping was reported to lavish praise on the promise of blockchain technology arguing that it is imperative for China to accelerate its development. According to a local Chinese news agency, he said: “We must take the blockchain as an important breakthrough for independent innovation of core technologies, clarify the main direction, increase investment, focus on a number of key core technologies, and accelerate the development of blockchain technology and industrial innovation.” He also emphasized “the role of blockchain in promoting data sharing.”
Despite the obvious self-serving nature of his China references and likely disdain for China given Facebook has been banned in China for over a decade, Zuckerberg is correct in recognizing a potential long-term threat from China. Tied to its clear lead in 5G – by way of Huawei, achievements in AI computing, and long-ago implemented digital payment ecosystem, China is developing a real-time tracking system for all of its citizens – with the potential of exporting such capabilities to other countries and even deploying them outside of China to non-citizens. Setting up its own national digital currency may actually be beside the point.
Indeed, blockchain technology may not even be needed by President Xi Jinping to create a permanent record of all citizen interactions. China may possibly use blockchain technology or distributed ledger technology for grandiose tracking plans, or it may ultimately not bother given possible security and scalability challenges with such nascent technologies.
Whatever the direction ultimately taken by China, the takeaway from President Xi Jinping’s recent comments is clear – China will invest nationally in new technologies such as blockchain whereas the United States will largely stay on the sidelines and rely on private companies to innovate and deploy new technologies – which is actually Zuckerberg’s argument for allowing Libra to proceed.
Using a tone that permeated for much of the hearing, Sen. John Kennedy ignored Facebook’s participation in a Swiss Association that purportedly leaves Facebook with little control over Libra and instead mocked: “Facebook wants to control the monetary supply. What could possibly go wrong?” Sen. Sherrod Brown (D-OH) reinforced this lack of trust when he said that Facebook was dangerous because it did not “respect the power of the technologies they are playing with, like a toddler who has gotten his hands on a book of matches, Facebook has burned down the house over and over, and called every arson a ‘learning experience.'”
Sen. Brian Schatz summed up the mood nicely when he recognized: “You’re making an argument for cryptocurrencies generally. The question is not, ‘Should the U.S. lead in this?’ Why in the world, of all companies, given the last couple of years, should [Facebook] do this?”
On a more substantive side, the hearing was driven by a concern for privacy rights. As reported in The Wall Street Journal, Mr. Marcus suggested that Facebook would not monetize users’ data related to Libra because no financial or account data from the Libra network would be shared with Facebook: “We’ve heard loud and clear from people, they don’t want those two types of data streams connected.”
Even though it did not garner much public analysis, Chairman Crapo’s Statement provides an important privacy perspective that may also set the table for future legislative action: “Individuals are the rightful owners of their data. They should be granted a certain set of privacy rights, and the ability to protect those rights through informed consent, including full disclosure of the data that is being gathered and how it is being used.”
And, despite all of his protestations to the contrary, in his own prepared testimony, Mr. Marcus actually provides a rough roadmap detailing how the financial and transactional data obtained by Calibra could directly bolster Facebook’s data surveillance revenue.
Specifically, Mr. Marcus states: “The Calibra wallet will let users send Libra to almost anyone with a smartphone, similar to how they might send a text message, and at low-to-no cost. We expect that the Calibra wallet will ultimately be one of many services, and one of many digital wallets, available to consumers on the Libra network. We do not expect Calibra to make money at the outset, and Calibra customers’ account and financial information will not be shared with Facebook, Inc., and as a result cannot be used for ad targeting. Our first goal is to create utility and adoption, enabling people around the world— especially the unbanked and underbanked—to take part in the financial ecosystem. But we expect that the Calibra wallet will be immediately beneficial to Facebook more broadly because it will allow many of the 90 million small- and medium-sized businesses that use the Facebook platform to transact more directly with Facebook’s many users, which we hope will result in consumers and businesses using Facebook more. That increased usage is likely to yield greater advertising revenue for Facebook.”
To suggest that the mere ancillary use of Facebook’s platforms by Calibra users will alone cause an increase in advertising revenue makes little sense. The only way Calibra will yield greater “advertising revenue” to Facebook is directly related to the well-understood increase in value user data would have after alignment takes place between transaction data and the other data obtained from Facebook’s platforms and services. Indeed, advertisers have long recognized that personalization data is not nearly as useful as relevance data.
A long-term goal of Facebook’s Libra project, namely combining user data with associated financial and transactional data, should not be considered well-hidden. Mr. Marcus’ written testimony all but confirms Facebook will eventually harvest transactional and KYC data: “Calibra will not share customers’ account information or financial data with Facebook unless people agree to permit such sharing.” Indeed, Sen. Pat Toomey specifically asked Mr. Marcus whether Facebook intended to seek user consent to monetize Calibra-derived financial data and Mr. Marcus incredibly responded: “I can’t think of any reason right now for us to do this.” Really?
House Financial Services Committee Hearing of July 17, 2019
One major difference between the Senate hearing conducted on July 16, 2019 and the House Financial Services Committee hearing of July 17, 2019 was the sort of testimony provided by industry experts. Even though the Senate smartly sought testimony from Wall Street and blockchain industry expert Caitlin Long, unlike with the House, there were no one educating the Senate on Calibra’s privacy issues.
For example, MIT Professor Gary Gensler’s prepared House testimony lays out a number of questions regarding privacy that Facebook should answer at some point: “We know that many of the most intrusive privacy practices of concern to privacy regulators have actually been subject to some form of consumer consent. So, it will be essential to conduct a more thorough analysis of what uses of Libra data should be allowed and which uses should be prohibited. How would such restrictions be monitored and enforced? What are the limited exceptions and might Calibra broadly seek customer consent in the form of standard user agreements? It would be likely that Calibra would want to commercialize this data. At a minimum, without sharing the raw transaction data from customers’ Calibra Wallets, it would still likely analyze such data to earn money either through advertisements or by offering targeted services to wallet holders.”
As well, in the prepared written testimony of Robert Weissman, President of Public Citizen, there is a long discussion explaining why Facebook is a “Corporate Surveillance Leviathan” that cannot be trusted with the proposed Calibra wallet.
The House Hearing also raised the issue of whether Facebook would be able to pick and choose users of the Calibra wallet – potentially forcing persons to conform their behavior to Facebook standards. In one highlight of the House Hearing, Congressman Sean Duffy waved a twenty-dollar bill in the air while making the point that anyone, including persons who say horrible things, can use a twenty-dollar bill but: “Who can use Calibra?” In response, Mr. Marcus pointed out anyone who could satisfy Calibra KYC requirements – which then begged the loaded follow-up question from Congressman Duffy: “Could Milo Yiannopoulos and Louis Farrakhan use Calibra [given they are both banned from Facebook]?” In response, Mr. Marcus said that an applicable policy hasn’t yet been written but that it was “an important question that [Facebook] needed to be thoughtful about.”
Given Facebook’s poor track record – indeed, former Facebook executives readily acknowledge Facebook holds too much market power and should not be trusted going forward, these and other “important questions” must be answered as soon as possible.
Facebook’s crypto advertising ban and duopolistic reach pretty much sums up why potential users should be careful before jumping on the Libra bandwagon. In what can only be considered ironic, the “Libra Coin” is not even a true cryptocurrency or even built on a blockchain – it is apparently the token for a permissioned payment network that is partially decentralized while requiring the disclosure of sensitive authentication data as well as use of the Calibra wallet owned and operated by Facebook itself. Most importantly, as a node on the network Facebook will also have access to all consumer transaction data flowing on the network. Like icing on a global cake, by being part owner of a de facto bank, Facebook will also get to share in any float interest.
Those premier venture firms and companies who have anted up to align with Facebook’s project may believe in the collective end game but to align now with Facebook simply because of its tremendous reach will likely be a mistake for them as well as the consuming public.
Whether Facebook survives as a social media platform may eventually hinge on a metric that has not been widely reported – which is ironic given what has recently been reported is hardly good news.
Almost comically, on April 29, 2019, Facebook, Inc. announced what it likely thought was a successful PR coup, namely the funding of privacy research shepherded by two partner organizations, Social Science One and the Social Science Research Council. Not surprisingly, there was no mention that Facebook would be provided specific recommendations from these organizations let alone have such recommendations eventually adopted by the company.
A different sort of threat to Facebook can be found in the decentralized Internet currently being built by start-ups such as Blockstack– which recently filed a SEC Reg A+ offering for $50 million by way of a subsidiary. Blockstack looks to leapfrog centralized platforms such as Facebook by building tools for a “decentralized computing network and app ecosystem” that includes decentralized storage allowing for porting of app data across social media platforms as well as self-sovereign user IDs that would allow for single user identities and passwords across every online application.
More than likely, however, the most damaging threat to Facebook in the near term is the platform’s continued drop in customer engagement. As recognized by Lou Kerner: “On April 24th, 2019, Facebook reported Q1 ’19 earning, and once again, Wall street applauded, sending the shares up 8%, adding another $45 billion in value. While some saw triumph, and others saw further reason to break Facebook up, all I saw was continued decline in the only metric that matters, engagement.”
Kerner’s graphic on the steady decline of daily and monthly active Facebook users is ominous:
Notwithstanding its many privacy transgressions and current regulatory/litigation challenges as well as the future advent of a decentralized Internet, what likely will be the most direct cause of Facebook’s downfall as a platform stems from the simple fact users have been steadily moving away from using it.
Apparently, users have taken the advice of WhatsApp co-founder Brian Acton and have chosen to “delete Facebook.” Even though Facebook, Inc.’s present cash reserve and its other popular applications would likely allow the company to continue as a viable entity for many years even without its eponymous platform, those present users who spend hours each day on Facebook – and have no desire to ever abandon it, might just not be enough to sustain the Facebook platform in the long term.
Simply put, with shrinking levels of engagement the Facebook platform may eventually go from a MySpace to Vine.
The SEC on April 3, 2019 issued a No-Action Letter to an ICO offeror – demonstrating that its Chairman’s prior promise to devote sufficient SEC resources toward better understanding initial coin offerings has been kept. In the April 2, 2019 no-action request to the SEC, TurnKey Jet proposed, “to offer and sell blockchain-based digital assets in the form of “tokenized” jet cards.” TurnKey plans to be the program manager for a membership program based on this token platform. The tokens would be pegged at the US dollar “throughout the life of the Program”. Apparently, the sole purpose in issuing tokens is to avoid financial transaction costs to the extent a credit card is used to book jet travel.
Even though there is certainly value in eliminating the middleman in high-cost transactions – card brands, Venmo, and Paypal take note, this is not the sort of blockchain-implemented ecosystem envisioned by the early ICO issuers. Nevertheless, this sort of use case provides a readily apparent benefit to its participants and is exactly what the blockchain/DLT community needs to move forward. As previously argued, it is certainly not the case that all ICOs are securities so this no-action move by the SEC should be welcome by all.
In a related positive move from the SEC, on April 3, 2019 the SEC released its Statement on “Framework for ‘Investment Contract’ Analysis of Digital Assets”. Doing an excellent job of parsing the existing statutory interpretation of what constitutes a security, i.e., the now famous Howey test, the SEC’s FinHub Framework is a must-read for those looking to issue a digital asset.
Notwithstanding some criticism of the SEC Framework, this release is a natural progression that should not be discounted. More importantly, by launching this Framework the same day of its No-Action Letter, the SEC has sent a clear message that blockchain ecosystems remain open for business and the SEC will not hurl unnecessary impediments to the implementation of those use cases that actually comply with regulatory law.
On Valentine’s Day 2019, J.P. Morgan gave a kiss to the blockchain/DLT community by announcing its JPM Coin– a branded stablecoin pegged to the dollar that will be used by its large institutional clients to settle payment transactions. Upon settlement, each coin would be burned and traded for a dollar. The ultimate benefits in the JPM Coin ecosystem will be found in the transaction speed and very low cost of execution. This is a noteworthy move given that there are obvious short term negatives to J.P. Morgan in that the launch of such an ecosystem might initially cut into some custodial profits.
Perhaps driven by the fact no bank could ever really control Bitcoin, J.P. Morgan’s CEO previously said that Bitcoin was a fraud. It is likely no coincidence that this launch only took place after Bitcoin cratered by nearly 80% of its value. Moreover, this announced future use of a “digital coin” is very much something J.P. Morgan could exert some control over – hence its name, and would not even initially be made available to J.P. Morgan’s retail clients. It is assumed that would change over time after deployment and this coin’s usage matures – retail clients may eventually be able to use JPM Coins for mobile payment transactions or in lieu of a time-consuming wire transfer.
Even though one online reviewer called it “[a] random walk through Silicon Valley without any goal, valuable information, conclusions or anything other than what would fit a gossip magazine”, Gilder’s book provides a grand thesis with very deliberate underpinnings. There are certainly many other books and articles out there that better inform regarding blockchain. Nevertheless, Gilder explains exactly why blockchain will in the distant future help cause Google to lose its digital stranglehold. For that, his book largely stands alone.
Gilder has had close access to the elite tech digerati for decades. There is no denying he knows what and who he is talking about. The writing style, however, will not be everyone’s cup of tea. For example, applying a straw man style, he often builds up only to take down later in the book. This can easily be frustrating. Also, an imagined meeting with Satoshi Nakamoto – the pseudonymous founder of Bitcoin, can either be considered a highlight of the book or downright hokey based on one’s literary taste.
To Gilder, Google’s downfall largely rests on its giving away free products without fully understanding how this zero-sum system neglects the value and impact of consumer time on Google’s $30 billion dollar Siren Servers – a Jaron Lanier term used to convey the eventual death spiral of a company blinded by its 75,000 server farm. Gilder reminds: “Without prices, all that is left to confine consumption is the scarcity of time”.
Interestingly, Jaron Lanier as well as Peter Thiel feature predominately in this book as the existential fodder for much of Gilder’s musings. The true sparkle, however, remains pure Gilder – including his view that Google’s fall is precipitated on the behemoth’s not fully understanding true wealth can only be a product of knowledge and memories. As Gilder suggests, “wealth is not a thing or a random sequence. It is inextricably rooted in hard won knowledge over extended time.” How he eventually connects the many dots found in the book is worth the read despite the haphazard approach. And, despite valid style criticisms, given so few are walking down this exact path, Gilder’s trailblazing can only be lauded.
Using pokes and outright direct digs on failed exercises of socialism and a “World Saving” Artificial Intelligence fealty pursued by Elon Musk, Gilder’s libertarian bent expresses a slightly brighter vision where creativity and humanity win out. He is on to something – just ask Tim Berners-Lee about his startup, Inrupt to get additional perspective on Google. And, the decentralized web ecosystems exemplified by Blockstack and Hashgraph are certainly aimed at tearing down the current global ecosystems founded by the Tech Lords of Stanford. Ultimately, in futurist Gilder’s vision, individuals win when they can more easily trust and be secure in their interactions.
Those seeking an actual name for the specific Google killer app will be disappointed. Gilder does not reveal which business vision will launch the “killer app” required to actually break the status quo. Readers are provided with an abstract roadmap lacking in specific directions because no specific killer app has been publicly announced yet and will likely not be released for several years.
After attending the largest early adopter tech conferences conducted over the past thirty years – from Internet World, VR World, COMDEX, CES, RSA, Game Developers Conference, etc., it is easy to say Coindesk’s recent Consensus 2018 Conference – the foundation for NYC’s “Blockchain Week”, was one of the largest gatherings of early technology adopters and backers ever packed in a single location. Almost beside the point, Consensus 2018 was also easily the largest blockchain event to date.
Despite exceeding pretty much all expectations, it was not, however, without some controversy. Noticeably absent from the event was Vitalik Buterin as well as any Ethereum presence other than a scheduled announcement and booth presence for the Enterprise Ethereum Alliance. The visionary Buterin boycotted the event given disagreements with the sponsor and a purported grievance with the $2,999 price tag – despite the fact Mr. Buterin himself could have bought tickets for all 8400+ attendees if he wanted. Buterin’s thought leadership and insights were certainly missed so hopefully next year there will be some sort of peace accord that brings him back into the fold.
According to the emcee for the event – a Brit anxiously pacing up and down with the obligatory iPad seemingly issued to all tech conference emcees, half of the attendees hailed from outside the United States. In fact, meals and private meetings were enjoyed with folks visiting from South Korea, Australia, Finland, Switzerland, Portugal, Brazil, Berlin, Hong Kong, Vancouver, and Toronto – and that was only on the first of two attendance days. Unlike what was shown by the early days of the web ecosystem, this gathering more than anything concretely demonstrates that any decentralized ledger future will be shaped by those outside the United States as much as by persons located within its borders.
The caliber of the audience – more so than the speakers, also demonstrates that the financial and professional institutions who missed out on the web ecosystem’s early brick laying are avoiding past mistakes. Sensing just how disruptive things may soon get, they were out in full force – with Deloitte leading the Big Four charge and the purported naysayer JP Morgan having a sophisticated presence from New York and London. Notwithstanding the fact the exhibit hall was stacked with ICO and ICO-wannabee companies that will likely go away in a few years, foundational companies were front and center promoting the tools and business models needed before blockchain can be digested by the masses in any meaningful way.
While companies wait to “cross the chasm”, investors are taking sides by investing in token economies and novel ramp up technologies. And, after the speculative sheen has faded, the lasting result will be efficiencies in commerce one could only have dreamt about a few years ago. Simply put, the “trust protocol” that will eventually be layered on top of our current digital ecosystem will create new opportunities for pretty much any company willing to listen and adapt.
In his February 8, 2018 opinion piece, Santander’s Julio Faura suggests that “utility tokens are a bad idea” because it would be a “lie to ourselves” to suggest ICOs were not actually selling securities. Rather, in Mr. Faura’s opinion “we should collectively work on a framework to build a clearly defined scheme for ICOs, recognizing from the very beginning that they are securities.” And, this “ICO process should be designed in collaboration with regulators to comply with securities law.” Mr. Faura’s opinion piece does not exist in a vacuum. In a report dated February 5, 2018, Goldman Sachs Group Inc.’s global head of investment research suggests that investors in ICOs could possibly lose their entire investments – which ties to Mr. Faura’s underlying premise that ICOs should be regulated “to protect investors”.
It is not clear how his proposed hybrid solution would ever get implemented given it requires complete buy-in from capital markets and regulators so would be a non-starter from day one – why would existing financial institutions and regulators scuttle existing methods of raising capital or attempt to squeeze ICOs under traditional securities law even if considered a sale of securities? Answer: They would not. Ripple – a company partially funded by Santander InnoVentures, offers a glimpse on how traditional financial markets will compete using blockchain technology.
Mr. Faura paints all sales of cryptocurrencies with the same brush by claiming each one of them actually offers securities subject to SEC scrutiny. That is simply not the case. Indeed, does Mr. Faura wonder why the SEC has not knocked on Ripple’s XRP “digital asset” door even though it trades on numerous exchanges? Even though there was no formal ICO to launch that centralized token, it now trades on 18 platforms where “individual purchases” of the XRP coin can be made. Indeed, after raising over $93 million by September 2016, no ICO was needed.
One ICO left untouched by the SEC was “gate keeped” by Perkins Coie and involves an ICO for a utility token that raised $35 million in under a minute’s time. This “BAT utility token” creates a digital advertising ecosystem tied to consumer attention – which is why it is the “Basic Attention Token”. Such ecosystem would certainly be an upgrade from the current digital advertising scheme wedded to the Web ecosystem of 1995.
Recent public SEC statements seem to back this interpretation of their ICO position. On February 6, 2018, SEC Chairman Jay Clayton recently testified that the potential derived from blockchain was “very significant” – his co-witness, CFTC Chairman Christopher Giancarlo, went so far as to say there was “enormous potential” that “seems extraordinary” for blockchain-based businesses. Yet, during his testimony, Chairman Clayton said the SEC would continue to “crack down hard” on fraud and manipulation involving ICOs offering an unregistered security. This is consistent with prior messaging given that Chairman Clayton requested on December 11, 2017 that the SEC’s Enforcement Division “vigorously” enforce and recommend action against ICOs that may be in violation of the federal securities laws. The fact some 2017 ICOs raising hundreds of millions of dollars were not addressed by the SEC, however, provides a clear “nudge wink” that not all ICOs come under SEC regulatory control.
As with BAT, in the future, there will likely be many more utility tokens built on disruptive blockchain initiatives that escape SEC scrutiny given they are not perceived as securities. The fact that the SEC has not yet moved on them – despite moving against Munchee, Inc. weeks after the Munchee MUN offering, signals the SEC will temper its enforcement activities when faced with a disruptive blockchain initiative that begets true intrinsic value. In other words, utility tokens may very well be a good idea after all.
