 | It's not the size that matters Bitcoin's $156 'Lightning Torch' is a way bigger deal than even trillions of JPM Coins, writes Michael J. Casey.
Read more in THE TAKEAWAY below. | | |
 TOP TRENDS ON COINDESK | | |
BankcoinsOne of the world’s largest banks, JPMorgan Chase (which moves more than $6 trillion daily), is launching its own cryptocurrency, sort of.
This week, the bank announced JPM Coin, an internal distributed ledger-based settlement system. As outlined by JPMorgan blockchain lead Umar Farooq, the dollar-pegged bank token could potentially replace wire transfers for international payments by large corporate clients, cut settlement times from days to mere moments and provide instant settlement for securities issuance.
JPM Coin could also replace U.S. dollars held overseas by major firms using JPMorgan's treasury services, he said.
“Money sloshes back and forth all over the world in a large enterprise,” Farooq said. “Is there a way to ensure that a subsidiary can represent cash on the balance sheet without having to actually wire it to the unit? That way, they can consolidate their money and probably get better rates for it.”
JPM Coin will initially run on top of Quorum, the private ethereum network the bank developed, though an FAQ added that it will later be “extended to other platforms,” and can be operated on “all standard blockchain networks.”
Still, not everyone was impressed by JPM Coin.
Signature Bank, a pipsqueak compared to JPMorgan in terms of asset size but a significant player in the crypto ecosystem, told CoinDesk that it is already running a private ethereum-based stablecoin network used for internal settlements.
Signet, Signature Bank's system, has more than 100 clients who transfer millions of dollars every day, executives said.
Signature CEO and president Joseph DePaolo went as far as to claim that “We can say there are trades going on in the millions some days and tens of millions other days and I would say the number of clients we have is in the triple digits.” |
Mt QCX, continued
QuadrigaCX, the Canadian crypto exchange which can't access $137 million in cryptocurrencies after founder and CEO Gerald Cotten died without sharing his private key information, also can't seem to catch a break.
The exchange lost another $378,000 after “inadvertently” transferring 103 bitcoin to cold wallets – the ones it can’t access – last week, court-appointed monitor Ernst and Young (EY) said in an initial report published Tuesday. The company did not explain how this happened, but said it was “working with Management to retrieve this cryptocurrency from the various cold wallets, if possible.”
While EY did not share the wallet addresses these bitcoin were transferred to, blockchain analysis conducted by Reddit users and other firms may have uncovered at least some of the addresses that Quadriga uses. Reddit user Decoze published a list of five addresses which received a combined 104 bitcoin on Feb. 6 – the same day EY said Quadriga had its mishap.
Further supporting this connection is the fact that one of the addresses on the list received a small amount of bitcoin from an address listed by Quadriga as one of its hot wallets.
That being said, while there is evidence linking these five addresses to Quadriga, Laurent, a developer at blockchain analysis site OXT, warned that "blockchain analysis is far [from being] 100 percent reliable."
As such, the analysis connecting these five addresses with Quadriga is not yet conclusive.
EY and Quadriga have so far not shared any information confirming any wallet addresses, outside the exchange's initial filing.
Meanwhile, the potentially 115,000 creditors who are collectively owed more than $190 million are still waiting for a representative counsel to be appointed.
Whichever legal team gets the nod will be tasked with identifying and contacting every potential creditor, as well as handling communications between the exchange’s former users and EY. A hearing was held Thursday to appoint the law firms, though no immediate decision was made.
Instead, Nova Scotia Supreme Court judge Michael Wood said he’d have a decision before the end of this coming week.
In the meantime, another hearing is being held Friday to help facilitate the transfer of Quadriga’s fiat holdings from its payment processors to the exchange, to help pay for lawyers and EY’s monitor work.
High-profile departures
A number of high-profile executives at major crypto firms have departed this week, starting with Ripple chief market strategist Cory Johnson, who left the firm after roughly a year, though it is unclear whether the split was amicable.
In a statement, Ripple spokesperson Tom Channik told CoinDesk that “Cory helped Ripple with strategy internally and overall industry education. But due to changes in market conditions, we’ve chosen to eliminate the role of chief market strategist.”
Canaan Creative, which designs and builds the Avalon crypto mining equipment, also lost a key leader after co-founder and board member Xiangfu Liu stepped down at the end of last month due to disagreements with the company's strategy.
That being said, Liu remains a major shareholder of the firm, with 17.6 percent of the company’s shares.
Digital Asset CTO of engineering and chief information officer James Powell also left the firm in January, after just six months on the job. He left due to differences with the firm’s startup culture, an individual with knowledge of the situation told CoinDesk.
Powell’s departure comes just two months after the company’s former CEO, Blythe Masters, also left, though the two events are unrelated.
Stay up to date with departures, entrances and job postings in the crypto space with CoinDesk Movers & Shakers.
ETF watch
Reality Shares ETF Trust made waves at the start of the week by announcing a new exchange-traded fund (ETF) product which would invest in a combination of sovereign debt instruments and bitcoin futures.
But Reality Shares then withdrew the filing the very next day at the request of U.S. Securities and Exchange Commission (SEC) staffers.
A securities lawyer told CoinDesk that Reality Shares’ ETF proposal was filed under the Investment Company Act of 1940, which the SEC expressly forbade in a January 2018 letter. Under the Act, the proposal would have been automatically approved after 75 days, without going through the extended discussion and approval process that other bitcoin ETFs are subject to.
Speaking of which, Bitwise Asset Management’s bitcoin ETF is now undergoing the maximum 240-day approval process, after the firm’s proposal with NYSE Arca was published in the Federal Register Friday. The general public has three weeks to provide an initial response to the filing.
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 QUOTE OF THE WEEK | |  | "It's hard when someone comes to you and says, 'I'd like to deposit $350 million' but we can't take you.”
– Joseph J. DePaolo, CEO of Signature Bank, one of the few U.S. institutions that bank crypto companies, on turning down prospective clients from the sector. | | |
The Takeaway |  | | |
Michael J. Casey is the chairman of CoinDesk's advisory board and a senior advisor for blockchain research at MIT's Digital Currency Initiative.
Will the crypto community torch Jamie Dimon?
Now, before I get “deep-stated” off social media, I need to clarify that I am most definitely speaking metaphorically here. Actual violence is never an option, kids.
I am referring to twin occurrences in the world of blockchain technology that offer competing visions of how it will develop.
The first was the widely reported news that that JPMorgan, whose CEO is the notoriously anti-bitcoin Dimon, will issue a JPM-branded digital currency, managed by its own permissioned distributed ledger, for use by its large-scale corporate and institutional clients operating within the bank’s $6 trillion daily wholesale payments operations.
The second was the growing interest within the crypto community around the Lightning Torch, an experiment launched on January 19 that’s revealing aspects of both the technical and social functionality of the nascent Lightning network. As communicated over Twitter using the hashtag #LNTrustChain, users who receive the torch’s growing pool of bitcoin are asked to add 10,000 satoshis (0.0001 BTC, or approximately 35 cents) and pass it onto someone who they trust will send the torch to someone else.
After 199 hops and only a few snafus, the torch on Friday afternoon was still alive in the hands of Meltem Demirors, Chief Strategy Officer at CoinShares, and it contained 3.35 million satoshis. Once the total reaches a hard limit of 4.39 million satoshis, or around $156, the community has resolved to donate the funds to a charity.
A tale of two ‘crypto’ projects
There you have it: One centrally managed, corporate initiative to improve global transfers for a business that moves the equivalent of almost a third of U.S. GDP every day, and a second, separate project that’s led by a decentralized community, and which, after almost a month, is yet to reach its top value of $156.
Naturally, what JPMorgan is doing is getting more attention in the mainstream press, not just because of the sums involved but also because the apparent disjuncture between Dimon's disdain for bitcoin and the bank's embrace of what it's calling a "cryptocurrency" makes a good headline. (For the record, I concur with Coin Center's Jerry Brito: JPM Coin is not a cryptocurrency.)
But notwithstanding the sophisticated cryptography and protocol design behind JPMorgan’s Quorum distributed ledger system and this digital currency implementation, I’d argue that the Lightning Torch users are working on a much bigger and more important problem.
They are mapping out the framework for a radically different peer-to-peer, instantaneous payments system that involves no intermediaries. It’s a model for global, digital cash.
That’s a much bigger deal than a bank using a distributed ledger, one that it controls, to enable large institutions it already works with to more efficiently shift money around within the same intermediated banking system.
Don't get me wrong: what JPMorgan is doing may well unlock a huge amount of value in the massive, friction-filled world of cross-border fund movements. For the time being, multinational businesses will continue to use what they are used to: dollars and banks. When one of the biggest banks comes up with a more efficient way to send and receive dollars, why wouldn't they use it?
But, let’s face it, trillions of dollars or not, JPMorgan, by building a system that intrinsically depends on its own intermediation, is not doing anything nearly as radical as peer-to-peer transactions in bitcoin over the Lightning Network.
The proof of that, ironically, lies in the fact that Lightning Torch is dealing in in small amounts. The overhead-heavy, trust-intensified, middleman-laden infrastructure of the banking system makes it prohibitively costly to send tiny amounts through it, regardless of whether the instrument of exchange is digital or not.
But people, if not large corporations, need to send small amounts to each other, all the time. The same will go for billions of devices on the Internet of Things. Efficient, decentralized, electronic micropayments will be vital to the online economy of the future.
It's one reason why Jack Dorsey, CEO of Twitter, sees bitcoin eventually being the “native currency” of the Internet and why, as an investor in Lightning development company Lightning Labs, he was one of the participants in the Lightning Torch relay.
Why Lightning Torch matters
There’s no guarantee of success for Lightning, a so-called “Layer 2” solution to bitcoin’s scaling and cost challenges that achieves greater efficiency by opening smart contract-controlled, peer-to-peer payment channels operated off-chain. Some worry that the only way the technology can foster a viable global network of interlinked payment channels is for profit-making companies to take charge of ever-growing hubs in what would be a de facto centralizing solution.
That's why experiments like the Lightning Torch relay, as trivial as they might seem to outsiders, are vital. People involved in Lightning's development need to experience real-world functionality. This has always been the case for the evolution of bitcoin itself, which, beyond finding bugs in the code, also required community leaders and entrepreneurs to figure out the social and economic components of the overarching exchange system.
No wonder people have drawn comparisons to this event and past community initiatives to test bitcoin's real-world value, such as Laszlo Hanyecz's 2010 purchase of two Papa John’s pizzas for 10,000 BTC. (There's even a nod to that with a new Lightning app that lets you buy pizza.)
These kinds of low-stakes transactions matter, both because they are a risk-minimizing way to demonstrate real-world functionality and because engaging people in all the complex aspects of exchange systems can help designers come up with better solutions. Andreas Antonopoulos told CoinDesk that because payment routing is not yet automated, as the size of the torch gets larger, users have been challenged to find workable routes to get money to new recipients through their interlinked networks of payment channels. This will help people unearth bugs in the system until it can be more automated, he noted.
Bitcoin’s initial success in building out a real-world community of users on the basis of similarly small-scale experiments is what ultimately put cryptocurrency, and later blockchain technology, onto the radar of the world’s banks, and led them to explore aspects of that technology for their own usage – albeit by stripping out the more threatening, decentralized components.
There’s a straight line from Hanyecz’s bitcoin pizza purchase to JPM Coin, in other words.
As a community of users emerges around Lightning's decentralized payments model, how will banks and other incumbent institutions respond? — Michael J. Casey |
 BEYOND COINDESK... | | |
COIN CENTER: The Commodity Futures Trading Commission is taking a “pro-innovation posture ” when it comes to smart contracts and other code written by developers, but cannot ignore software specifically designed to facilitate unlawful activity, writes Commissioner Brian Quintenz. In an op-ed published by Coin Center, he outlines how the CFTC may approach regulating the still-young blockchain world without stifling up-and-coming projects.
AMERICAN BANKER: It’s implied that the 157 banks that are part of JPMorgan’s interbank communications network will use JPM Coin right off the bat, but the question remains whether this is a true contender to fight Ripple and SWIFT, according to American Banker’s Penny Crosman.
BLOOMBERG: Security token offerings are getting a lot of play as the hot new fundraising model in 2019. The idea of an initial coin offering (ICO) that complies with relevant securities regulations seems attractive to many. This Bloomberg piece by Olga Kharif outlines step-by-step just how we got from ICOs to STOs – and how the latter far more greatly limits who can purchase tokens. |
 WHAT WE'VE BEEN UP TO | | |
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On February 21st at 11:00am EST, CoinDesk’s Noelle Acheson will talk to Lucas Nuzzi, Director of Technology Research at Digital Asset Research, on the role of cryptoasset analysis in the shaping of the market.
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Thanks for reading! |
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Lightning > JPM Coin