bookmark_borderTokenization of assets is not taking off, but it really should

For years, tokenization has been hyped to be one of the most interesting use cases of blockchain, but it hasn’t gained its momentum yet.

For years, experts have been talking about how tokenization — the act of creating a digital representation of an asset on a distributed ledger — of a financial or real asset can unlock trillions in illiquid assets, giving retail investors access to investments with previously high minimum capital requirements thanks to fractional ownership or settle trades on a distributed ledger instantly. 

But if we investigate the current tokenization offerings, none is truly taking off and attracting the masses. If the theoretical advantages are true, millions of investors must be onboarding on exchanges that offer tokenized assets. However, this is not the case.

What is the problem of most tokenization offerings?

Let us take the example of tokenized equity to showcase the current issues and hurdles. The tokenization lifecycle of an equity consists of multiple steps. The first is the legal structuring followed by the minting (creation) of the tokens, in most cases with ERC-20 tokens on the Ethereum blockchain. Contrary to many beliefs, minting is one of the easiest parts of tokenization — the bigger challenges follow. As the purpose of the equity tokens is to be traded, we need to have a marketplace. With this comes the questions of token custody, liquidity, settlement and regulatory compliance.

If we look at the current service providers in this space, there is nearly no one who can offer all the steps of issuance, custody, marketplace, liquidity, settlement, etc. in one integrated offering. This has some major implications for why tokenization is not taking off — namely, that issuers and investors must deal with multiple service providers. Most probably these service providers are also located in different jurisdictions, which adds a whole new dimension to it, as equity tokens should ideally be able to be traded internationally just like traditional equity. And that is not possible as regulation differs from country to country.

Another major problem of tokenization marketplaces is liquidity. Currently, there is very low liquidity on tokenized marketplaces if we are to look at the trading volumes while the volumes of cryptocurrencies are currently reaching new all-time highs on a weekly basis. A reason for this is that the few exchanges that are on the market cannot attract enough investors. The easiest solution to solve this issue is for tokenized asset marketplaces to be connected to traditional exchanges and to leverage their customer base as they already have the desired liquidity.

This is only possible if the UI/UX is equal to traditional exchanges, and the investors do not see and interact directly with the blockchain. If investors need to set up their own wallet and deal with the blockchain directly, then we will never see a big inflow of mainstream investors into tokenized assets, as this makes the whole process more difficult and inconvenient, which is the exact opposite of the end goal.

A good UI/UX is very important in tokenization offerings as opposed to crypto applications such as DeFi platforms, where the UI/UX may not be the best. But despite the fact that the product is revolutionary, the masses are unwilling to deal with tokenization because it’s inconvenient and not seen as a groundbreaking innovation.

Another big topic in tokenization is regulatory clearance. If we continue with our example of tokenized equity, there is the question of how to deal with a digital representation of a security. In most jurisdictions, a token is not a security by itself. Rather, the token just represents the right to own the equity, but the equity still also exists in its “traditional” form. In other jurisdictions, however, there is even less clearance.

While tokenization is without question one of the most promising use cases of blockchain technology, the current setup is in most cases worthless, as it renders things more complicated rather than effective. To change this, we need a clear regulatory environment, such as in Switzerland, for example, to integrate all elements of the tokenization lifecycle into one offering, and have a “traditional” UI/UX for the investors. If we can get these three elements right, there is nothing to stop tokenization to become a major game-changer and open many new asset classes to the market. I believe that tokenization marketplaces should partner up with traditional exchanges to offer liquidity, especially for tokenized equity.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.

The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Darius Moukhtarzadeh is in the sales and clients team of Sygnum Bank. Sygnum is a digital asset bank that received a Swiss banking license from the Swiss Financial Market Supervisory Authority in August 2019. Prior to Sygnum Bank, Moukhtarzadeh worked for Ernst & Young in blockchain consultancy and for several startups in the Swiss Crypto Valley.

bookmark_border‘Cryptocurrency is not legitimate money,’ says Nigeria’s central bank governor

Nigeria’s central bank is doubling down on its anti-cryptocurrency stance.

Godwin Emefiele, governor of the Central Bank of Nigeria, has defended the apex bank’s decision to ban banks from servicing cryptocurrency exchanges in the country.

Appearing before a joint Senate Committee on Banking, Insurance and Other Financial Institutions; ICT and Cybercrime; and Capital Market, Emefiele remarked that the CBN ban was in the best interest of Nigerians.

According to a report by media outlet Punch, while addressing the Senate committee, Emefiele remarked:

“Cryptocurrency is not legitimate money. Cryptocurrency has no place in our monetary system at this time and cryptocurrency transactions should not be carried out through the Nigerian banking system.”

The CBN governor also reiterated that despite the ban, the central bank was doing its due diligence to better under the emerging digital asset space.

As previously reported by Cointelegraph, the Nigerian Senate had summoned the CBN governor along with other heads of federal regulatory agencies to a hearing on the way forward for crypto regulations.

Other participating regulatory chiefs in the hearing also echoed the CBN’s negative stance, with Bolaji Owasanoye, chairman of the Independent Corrupt Practices and Other Related Offences Commission, linking cryptocurrencies to the activities of terrorist and kidnappers.

Owasanoye echoed the well-worn, inaccurate rhetoric that crypto transactions are opaque in nature. However, the industry is dotted with robust forensic capabilities under the aegis of blockchain intelligence firms like CipherTrace and Chainalysis.

Indeed, these organizations have aided law enforcement agencies in many countries to apprehend criminal syndicates involved in crimes like drug trafficking and child pornography.

According to its 2020 crime report, Chainalysis revealed that only 0.34% of all crypto transactions for the entire year were involved in criminal activities. Meanwhile, a September 2020 report by the United Nations Department of Economic and Social Affairs estimated that money laundering in mainstream finance amounted to 2.7% of the global gross domestic product.

Also appearing before the Senate committee was Lamido Yuguda, director-general of Nigeria’s Securities and Exchange Commission. According to Yuguda, the SEC has decided to pause its planned regulatory framework for digital assets following the CBN ban.

Earlier in February, the SEC had declared that the crypto market was too big to ignore. At the time, Timi Agama, an SEC executive, stated that the commission was working with other relevant agencies to create a legal framework for digital assets in Nigeria.

Senator Uba Sani of the Kaduna Central Senatorial District, who heads the committee, promised that the panel would work to accommodate all the guidance received from relevant stakeholders without any preconceived recommendations.

Since the CBN ban, the Bitcoin (BTC) price premium in Nigeria has steadily increased. As of the time of writing, this premium has risen to more than 67%.

bookmark_borderTotal estimated crypto users worldwide tops 100 million, survey finds

Bitcoin’s runaway growth in January boosted the global crypto user base by close to 16%, according to an analysis from Crypto.com.

Crypto exchange and debit card provider Crypto.com has published a new report estimating that the total number of crypto users globally rose from 66 million in May 2020 to 106 million by January.

Given the complexity of mapping unique crypto wallet addresses onto the number of persons, Crypto.com’s methodology combines on-chain data with several blended parameters to calculate separate estimates for the two largest cryptocurrencies by market capitalization, Bitcoin (BTC) and Ether (ETH). These then yield an aggregate that can be used to track trends in the growth of global users over time.

Number of cryptocurrency users worldwide in millions. Source: Crypto.com

Over the past eight months, June 2020, August 2020 and January 2021 were the strongest for growth. As a general rule, Crypto.com note that this growth correlates with price strength for Bitcoin, but breaking down the data between the two coins can provide more specific insights.

In particular, adoption in August 2020 was largely led by Ether due to the popularity of decentralized finance. Moving into the autumn and winter months, PayPal’s launch of support for crypto purchases for United States-based users in November 2020 and institutional adoption from Grayscale and Microstrategy intersected with strong Bitcoin price performance to spur yet wider adoption.

By January, the global number of Bitcoin users was estimated to be 71 million, as compared with 14 million for Ether. Each coin saw a tremendous surge in users that month — 30.2% and 13.1%, respectively.

Monthly growth in Bitcoin and Ether users. Source: Crypto.com

While the trends appear to be clear, Crypto.com has noted some of the limitations and caveats that should be kept in mind regarding its findings. The methodology draws on Bitcoin and Ethereum’s on-chain data, survey analysis and Crypto.com’s own internal data, but will likely not capture over-the-counter users and off-chain transactions effectively.

Crypto.com also had to assume and estimate how many on-chain users still own crypto today, versus the number likely to have already sold their holdings. In addition, sampling bias (due to some use of internal surveys and data) should be taken into account, as well as possible differences between exchanges’ deposit sweeping flows. However, the report notes that an effort was made to remove those exchanges that use different flows from its list of 24 analyzed platforms.

bookmark_borderSam Bankman-Fried: The crypto whale who wants to give billions away

“The brutal or inspiring truth… is that the more you put in, the more you get out.”

Like many people in crypto, Sam Bankman-Fried is in it for the money. As the founder of quant trading firm Alameda Research, exchange FTX and DeFi protocol Serum, the curly haired 28-year-old has amassed a $10 billion fortune in just three years in the industry.

Unlike most people in crypto though, he’s building up a fortune in order to give half of it away. An effective altruist hes essentially robbing from the rich, via his preternatural crypto trading strategies, in order to give to the poor.

“Maybe without the robbing part,” he says. “In the end my goal is to have as much impact as I can, however that is. And right now, I think that’s flowing through donations, so figuring out how I can be able to make as much as I can and donate as much as I can.”

SBF, as hes sometimes referred to, has been walking the walk for some time now. He spent a couple of months as the director of development at the Centre for Effective Altruism in 2017 and before that, gave away half of his income during his stint on Wall Street. He plans on giving away around 50% of his crypto billions too but only after hes finished reinvesting in his ever-expanding empire.

He does donate to causes as they come up however. He was the second largest donor to President Joe Biden’s campaign, after former New York mayor Michael Bloomberg, tipping in $5.2 million.

“I was excited about the impact it might have. I basically thought that it mattered what happened in the election.”

Also, the FTX Foundation launched recently. Itll give away 1% of the platforms fees and match user donations dollar for dollar up to $10,000 a day. In its first couple of weeks the Foundation has raised more than $2M, mostly in user contributions, with users able to vote on the recipient charities from a carefully curated list.

The old bean bag

SBF’s growing public profile was given a shot in the arm when he was named on Forbes 30 Under 30 finance list for this year. “I’m honored, he says. I tend to be fairly forward looking instead of backward look and so it was cool for a bit but it sort of wore off pretty quickly.

He also came in at number three in the recent Cointelegraph Top 100.

 

 

Famous for sleeping on his bean bag at his Hong Kong office so he never misses a trade, and it seems a key reason SBF makes more money than anyone else is that hes barely ever off the clock.

“I’m at the office, well usually 24 hours a day. I’ll sometimes just nap on a beanbag here and obviously shoot the shit with coworkers and sometimes with people online, but mostly its work.”

He doesn’t have a girlfriend or even see many people outside of work, though he makes time to speak with his family back in the U.S. “a few times a week on the phone.” It’s safe to say SBF isnt the type of person desperate to strike the perfect work/life balance or who even accepts that productivity decreases after the first 11 hours or so at work.

“I think that sort of narrative is substantially oversold and the brutal or inspiring truth, depending on how you think about it, is that the more you put in, the more you get out,” he says. “It’s motivating for me and it’s fulfilling, but you know, another piece of it is that, it’s how I think I can have the most impact.

How did I get here?

The child of two Stanford Law professors, SBF discovered the Effective Altruism movement during his Physics degree at the Massachusetts Institute of Technology.

Popularized by philosophers and ethicists including Toby Ord and Peter Singer the movement is focused on pragmatic ways to help others using science and reason to ensure the benefits are maximized, rather than the good intentions and poor outcomes that characterize some charitable organizations. This practical approach also extends to a hard headed examination of the best way an individual can help.

“Imagine the amount of good that you could do working directly for some cause, versus the amount that you could do working on Wall Street and donating to it. In a lot of cases you could probably actually help them out more with the donations. And so basically I checked out Wall Street.”

Friends whod interned at quant trading firm Jane Street Capital gave him the pathway to Wall Street, and he began working there straight after college in 2014. Why did they hire a physics major with very little financial experience straight out of school you ask?

It turns out quant trading strategies are “super valuable trade secrets which means no one teaches the successful ones in Uni degrees. Instead, firms recruit people with raw talent: maths whizzes or people with strong backgrounds in physics or computer science.

“What you need to know about markets, they’ll teach,” he says. He traded a variety of ETFs, futures, currencies and equities and designed an automated OTC trading system. While there he became interested in the insanely profitable arbitrage opportunities in the inefficient crypto markets and set up crypto quant trading firm Alameda Research to profit from it in late 2017.

The whale to rule all whales

Alameda Research has now grown to become one of the biggest companies in crypto with around $2.5 billion in assets under management, although as with his own fortune, SBF qualifies this with some provisos around liquid and illiquid assets.

Alameda is the Moby Dick of crypto whales, responsible for up to 10% of the cryptocurrency moving around the markets at any one time. “I think at particular times it can get up to about that fraction of the volume,” he says. “I think it averages a bit lower. It’s solidly in the group of the five to ten larger trading firms in the space.”

That means any trade Alameda takes has the potential to move markets and cause liquidations. In October last year, Alameda was widely blamed for crashing the price of YFI by shorting, though SBF has downplayed any impact. He believes that with great power comes great responsibility.

“It’s absolutely a responsibility,” he says, adding that he tries to follow the approach of TradFi quant firms. “Their role is to find profitable trades, but it’s also to provide liquidity and promote healthy markets, he says. “The biggest duty is the duty to do no harm. And to make sure that what you do is, on the whole, promoting liquidity in healthy markets and efficient trading, as opposed to intervening in it.”

He adds that arbitrage trades, for example, can have positive impacts as it makes markets more efficient and brings down prices where there are premiums. Identifying and working out how to profit from arbitrage trades was the whole reason Alameda was founded. “One of the first big ones that we actually made some money on was Litecoin, he recalls.

There was a week in late 2017 when Litecoin was trading at a consistent 20% premium on Coinbase GDAX [now Coinbase Pro]. There’s sort of this idea like Oh that’s cool, you just make 10% every half hour I guess you make infinity dollars? And of course, that’s not the answer.”

It turns out that trying to exploit the opportunity was hideously complicated and required, getting around trade size limits, and withdrawal limits of a million a day. “Especially a few years ago in crypto an enormous piece of the problem was figuring out the logistical steps,” he says.

Another arbitrage trade saw SBF and friends move up to $25M a day through a series of intermediaries and rural banks in Japan to take advantage of the famous Kimchee premium, which saw Bitcoin trading for up to a third more in South Koreas hard to access financial system than the U.S.

But it was dealing with the legacy financial system that threw up the biggest challenges. “The single hardest part of the arbitrage, the piece that was slowest and hardest and most expensive and most frustrating was the fiat,” he says, noting difficulties getting accounts, which could then be shut at any moment, the archaic procedures and bureaucracy and insanely slow wire transfers.

“We spent five man hours per day in physical bank branches for a good solid five months, because that’s what it took to send the wire transfers,” he says, adding:

“Like got there at 10am and stayed till 1pm with multiple people there, to have all the meetings we had to have every single f–king day of the week, in order to send the same wire transfer we sent yesterday.”

This is one reason SBF is so passionate about DeFi his vision is for it to one day replace the lumbering existing financial system. “The current payment rails are not efficient at all,” he says. There’s trillions of dollars of companies, which are just built around trying to abstract that away and you end up with this incredibly complex web of shit to make it usable for most people. They’re running on systems that are old and not designed even with the internet in mind.”

Crypto influencer

For many people SBF sprang fully formed as a major crypto and DeFi personality during the mid-2020 DeFi boom, as he began to make an impact on Crypto Twitter. This was a deliberate move: hed been happy to fly under the radar in 2018 because Alameda’s quant trading focus had: “Very little need for publicity, its sort of mostly downside. But when he launched the innovative crypto exchange FTX in 2019 he needed to build a community around it and he stepped up to become its public face on social media.

 

 

“With FTX as a retail facing business the more customers the better. You can build the best product in the world but if no one knows about it it’s not worth anything, he says.

One of the hardest and most interesting pieces has been figuring out how to get users, and increasing awareness was a big part of that.”

He seems to have figured it out as FTX became the fifth largest derivatives exchange by volume, with a $3.5 billion valuation. It’s launched a range of innovative markets, including tokenized fractional stock offerings of companies like Tesla, Apple and Amazon, as well as pre-IPO trading in Coinbase.

He’s also using his wealth and influence to try and overcome what he sees as the biggest blocker preventing the wide scale adoption of DeFi. He believes that Ethereum, including Eth2 can’t scale enough to allow crypto and DeFi to replace the existing financial system. DeFi can currently handle about 10 transactions per second, with second layer solutions enabling a few thousand TPS.

“This is an absolute hard, immoveable barrier, in terms of growth, he says. DeFi just literally cannot grow as an ecosystem until that is addressed. And so no long-term plan that doesn’t address it is viable. [] That is just fatal.” Even Eth2s goal of 100,000 TPS isnt enough for what SBF has in mind.

“If your goal is to scale to 100 million or a billion users, [] if you want to have the upside of an application that might grow to the scale of the largest applications in the world, it needs to be able to scale up to about a million transactions a second. And so you can just sort of cross off the list permanently with no recourse and not even needing to consider any other factor, any scaling solution that doesn’t get there, if that’s your goal.”

Thats what led him to become one of the most vocal proponents for Solana, a blockchain that can currently process 65,000 TPS and whose team claim it can eventually scale up to astonishing levels: 710,000 TPS on a 1 gigabit link or 28.4 million TPS on a 40 gigabit link.

 

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He founded the Serum DEX on Solana and launched the SRM cryptocurrency in August 2020. Bankman-Fried say you can see Solana’s benefits in Serums on chain order book matching engine and fees of “100th of a penny to send an order and trades happen in seconds.”

“So you get a lot of juice out of having the higher throughput. And that’s really helped scale up that product base quite a bit. To the point where I think that, you know, our best guess is that, probably Serum DEX in six months of operation has, has consumed more transactions than all of the Ethereum blockchain in history.”

Ethereums network effects mean he faces an uphill battle getting DeFi projects and users to migrate to Solana. Even after he was handed control of SushiSwap by Chef Nomi, he was unable to convince the community to port over. “It ended up being way harder than we thought to get the existing projects to port over and way easier to just have new projects built,” he explains, adding:

“We would still be super excited for them to have an outpost on Solana. I think they still may at some point. But I also think that Serums gonna march on either way. In the end, like, I sort of want to have the best products and users, you know, however it gets there.”

(Following our interview, a new proposal emerged to build a version of SushiSwap on Solana and Serum, potentially called Bonsai.)

Although SBF says the network effects of having so many interconnected applications built on Ethereum are substantial, he points out that eventually each project will have to migrate and break composability and tooling with the existing options in order to switch to layer-two, Eth2, or some other scaling solution. In terms of user numbers he says ETHs network effects are overstated.

“The other part is that while the current DeFi user base is super devoted, super important and powerful, its not that large. Daily active users, I think it’s in the tens of thousands. I think FTX probably has more daily active users than all of DeFi combined.”

SBFs plan appears to be to embed the Solana blockchain as infrastructure in apps where its invisible to most users, in order to onboard millions into DeFi. At the start of 2021, Alameda led a $50 million funding round to embed DeFi style tools in Maps.me, a European offline mapping application with 140 million users. It’ll have a multi-currency wallet with staking and swapping facilities built on Solana. FTXs purchase of Blockfolio may follow a somewhat similar strategy.

I think it’s gonna be a really cool product and powerful product suite for the app, he says of Maps.me. I’m super excited about it. I think it might really kickstart adoption.

bookmark_borderCoinShares launches new physically-backed Ether ETP

Digital asset manager CoinShares is listing its second cryptocurrency exchange-traded product on the SIX Swiss Exchange.

Major European digital asset manager CoinShares is expanding its product portfolio with a new physically-backed Ether (ETH) exchange-traded product, or ETP.

Called CoinShares Physical Ethereum (ETHE), the new investment product is launching with around $75 million in assets under management. Announcing the news Wednesday, CoinShares said that each unit of ETHE is backed with 0.03 ETH at launch.

The news comes shortly after CoinShares launched its first cryptocurrency ETP, CoinShares Physical Bitcoin (BITC), in January 2021. Similar to BITC, the new ETH ETP will be initially listed on SIX Swiss Exchange. The new product intends to provide investors with passive exposure to Ethereum’s native asset at a base fee of 1.25%.

According to an announcement by Bloomberg, Nomura Holdings-backed digital asset custodian Komainu will serve as custodian for the new CoinShares’ product. Established in partnership with CoinShares, the custodian has already been servicing BITC as well.

ETHE is now listed on Bloomberg with an opening price of $47.30.

Source: Bloomberg

SIX Swiss Exchange is one of the world’s biggest exchanges providing its trading platform for various cryptocurrency ETPs, including 12 diversified crypto-asset ETPs by Swiss crypto ETP issuer 21Shares. The company is the first exchange in the world to receive regulatory permission to approve cryptocurrencies as underlying instruments for derivatives.

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