Bubble

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Blockchain and cryptocurrencies represent two halves of a maturing digital asset class.   While Blockchain projects continue to grow in volume, velocity and value, cryptocurrency markets have shed 90% of their market capitalization during 2018. What does this mean for a company’s digital asset strategy?

Blockchain and cryptocurrencies in 2018: a tale of further divergence

Blockchain was designed as the structure within which Bitcoin could operate as a cryptocurrency. It was devised at a time when trust in established institutions was low following the 2008 financial crisis. Since then thousands of other cryptocurrencies have been spawned, and blockchain projects have begun to earn value through the establishment of decentralised trust in sharing societies.

In 2017 I wrote two blogs purely on digital assets; one explaining the 6 business benefits of blockchain and the other framing the question of whether cryptocurrency prices would rocket or burst. In 2018, the commercial benefit from the former has been clearly established and the question posed by the latter has been answered.

Blockchain roars on…

Of the many blockchain projects piloted in 2018, three notable projects have established a benchmark for blockchain value;

Instant and secure financial transacting

Banco Santander piloted and launched a new international payments service using blockchain technology to improve speed and transparency—winning Fintech awards in the process. Many other banks are following suit with blockchain projects of their own, such as Korea’s Shinhan Bank, as the benefits of digitizing internal and external processes are clear.

Shared commercial documentation

The Port of Rotterdam joined forces with ABN AMRO and Samsung SDS to launch a container logistics blockchain pilot to create a complete, paperless integration of physical, administrative and financial streams within international distribution chains. The clear added value of bringing together documentation from multiple external parties is to speed up and reduce the costs of multi-party transacting through digitization and automation.

Asset control & traceability

De Beers and Fura Gems are piloting a blockchain project to maintain control and traceability for diamonds, to bolster the gaps inherent in the Kimberley process. Blockchain asset tracking (in this case diamonds) provides sellers and owners alike with assurance about the validity of the ‘journey’ taken by the asset during it’s lifetime.

…while cryptocurrencies take a lesson in commercialism v purism

The first commercial digital asset transaction was on May 22nd 2010 (known as Bitcoin pizza day) when 10,000 Bitcoins were paid for two pizzas. While many more cryptocurrency transactions have occurred since then, the spread of users has been slow.

The main reasons for the slow commercial uptake is the lack of consumer understanding, accessibility and trust. The latter is ironic as it was due to a lack of trust in institutions that lead to Satoshi Nakomoto’s original design.

This year has further exasperated the lack of trust with hash wars, 51% hacks, exchange collapses, stolen coins, lost keys and regulatory reluctance, all of which has led to a 90% reduction in cryptocurrency market capitalization from its highs at the beginning of the year.

Cryptocurrency pricing is driven by a pure & unregulated free market. While this satisfies the principles of a decentralized and unfettered currency, it allows large players (whales) to dominate price direction and provides a breeding ground for digital crime. It is a classic example of how human behavior often skews purist economic theories.

 

Trust, communities and regulation will boost adoption

BalanceTo boost trust and provide stability, communities must work together to establish trust-based relationships, creating diverse communities intent on delivering positive value from the ecosystem.

Helping these communities would require enforceable regulatory control—enough to curb the worst of human behavior in free markets, but not enough to stifle innovation.

What about the successes?

It has not been all bad for cryptocurrencies during 2018 though, exchanges have started to trade Bitcoin futures with Nasdaq planning to pursue bitcoin futures in early 2019.

More commercial outlets than ever before are accepting cryptocurrency as payment, from the state of Ohio for the payment of taxes to KFC, Subway and Papa Johns for payment of fast food.

The Securities and Exchange Commission (SEC) is likely to rule on the asset class during 2019, providing a much-needed start to regulatory control.

Where does that leave digital asset planning?

Blockchain project planning is clearly taking off with the benefits being proven through pilots which provide multiple parties with a process that works within a secure digitized platform.

Cryptocurrencies need to mature further as a market, with customer value as a key driver. We will also need to see supportive regulations before adoption becomes wider. When this happens, it may be that we will again see the market capitalizations of early 2018, but this time based on a mature and trusted market that adds value for its customers, rather than hype and FOMO.

OK I’m interested, where do I start?

At IFS we actively consider the relevance and impact of modern technologies to our customers, and convert awareness into solutions that add value. IFS Blockchain connector is a prototype allowing information to be recorded within a digital asset ecosystem, while cryptocurrency settlements within our solutions remains an area of great potential.

Go onto the IFS website www.ifsworld.com to find out more, or contact me as below.

  Twitter: @stevetreagust

 IFS website: www.ifsworld.com

 Email: steve.treagust@ifsworld.com

 Blog: http://blog.ifsworld.com/author/steve-treagust

 LinkedIn: https://www.linkedin.com/in/stevetreagust

I welcome comments on this or any other topic concerning Finance, HCM, CSR & business strategy

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