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Blockchain-as-a-Service: accelerator for adoption

| 04-06-2019 | Carlo de Meijer | treasuryXL

Blockchain technology has attracted growing interest from various businesses from large corporates to SMEs. But a large scale adoption by corporates and others has long time been hindered by the lack of options. But that is changing.

When interacting with the blockchain they have now two options. They can either set up their node directly, thereby removing the “invisibility cloak” of blockchain. Or they can decide to let someone else do that for them. And here comes BaaS or Blockchain-as-a-Service in scope. BaaS or Blockchain-as-a-Service is comparatively a new blockchain technology, that can be easily integrated in existing corporate infrastructures.

The global Blockchain-as-a-Service Market is set for a rapid growth. According to a recent survey, the Blockchain-as-a-Service is expected to register a CAGR (Compound Annual Growth Rate) of over 15%, during the forecast period (2019-2024), reaching around USD 30,6 billion globally by 2024.

We are not surprised by the emergence of Blockchain-as-a-Service. This overall Blockchain-as-a-Service market has seen accelerated growth with the coming up of creative innovations for blockchain and a faster growing customer demand. The growing demand for this new way of delivering blockchain services is attracting a wide field of new providers in the BaaS market, offering gigantic entryways for advancement.

Why BaaS?

Why do businesses need Blockchain-as-a-Service? Blockchain technology is on rise and business are increasingly willing to adapt to this technology. So far, however, the impact of blockchain disruption has been rather limited.

The companies that really want to use it, may encounter a number obstacles. The resources and expertise needed to develop new blockchain technologies has been a major hurdle for businesses that want to adopt the blockchain.

Blockchain technology is rather knew and relatively unknown. The technical complexities and operational overhead involved in creating, configuring, and operating the blockchain, and maintaining its infrastructure, often act as deterrents to its mass adoption.

Corporates are still far away from understanding the future of blockchain technology and the complexity of setting up of blockchain networks. Its implementation in terms of any technological change entails organizational risks.

Blockchain requires huge investment when it comes to setting up infrastructure and maintaining it. It is much more resource intensive, as compared to traditional databases.

 What is BaaS?

A Blockchain-as-a-Service platform is based on, and works similar to, the concept of Software as a Service (SaaS) model. It is a full-service cloud-based offering that enables customers including corporates to leverage cloud-based solutions to build and use their own blockchain applications and smart contracts and functions that will be hosted on the BaaS platform.

The BaaS platform would deal with the always confusing and labour-intensive back end activities for corporates and/or their business. They will provide all the necessary infrastructure and operational support to ensure that the blockchain applications run smoothly.

The platform will manage all the necessary tasks and activities to keep the infrastructure agile and operational. In other words, it allows the blockchain part of the technology to be relatively invisible for corporates.

Blockchain-as-a-Service providers are, therefore, key for large-scale blockchain adoption across businesses as they enable companies to adopt the blockchain without having to spend as much money as they would have to if they were to develop blockchain solutions on their own.

How does BaaS work?

BaaS would work similar to that of a web hosting provider. BaaS is like a blockchain module toolkit and utility system under the Blockchain Engine for which their users pay a fee.

In BaaS, an external service provider sets up all the necessary blockchain technology and infrastructure for a customer. By paying for a fixed BaaS subscription or consumption, a client pays the BaaS provider to set up and maintain blockchain connected nodes on their behalf. A BaaS provider thereby handles the complex back-end for the client and their business.

The BaaS operator also takes care of support activities like bandwidth management, suitable allocation of resources, hosting requirements, and provides security features like the prevention of hacking attempts.

Leveraging BaaS model, the client can now focus on their core job – the functionality of their blockchain – instead of worrying about infrastructure and performance related issues.

BaaS for who?

Blockchain-as-a-Service is ideal for organizations that wanted to outsource their technological aspects, and are not involved in understanding the working mechanism of the blockchain.

According to the earlier mentioned survey, the financial services industry is expected to occupy the largest market share. Blockchain-as-a-Service offerings are already revolutionizing this industry, as banks and financial service companies are among the most heavily invested enterprises exploring blockchain technology.

This is due to the many, highly valuable decentralized applications of blockchain technology, thereby giving rise to new business models in various areas, such as cross-border payments, remittance, exchanges, internet banking, trade finance, Know Your Customers (KYC), and risk and compliance.

The market is also gaining traction with SMEs that have not the sources to do that on their own. As these are increasingly working online, efficient blockchain services are increasingly required to secure the identity of digital entities and online authentication of personal identities, which drives the demand for Blockchain-as-a-Service offerings.

What may BaaS bring?

Allowing someone else to take care of the complex backend of blockchain ecosystem for corporates, allows corporates or their business to benefit from blockchain technology without really having to deal with blockchain technology.

Instead of creating and running their own blockchains, a business, large or small, can now simply “outsource” the technical complex work and focus on its core activities.

The BaaS format allows companies to familiarize themselves with blockchain technology before making conclusive business decisions about its use.

With BaaS as a cloud-based service, users will be able to develop their own blockchain based products like smart contracts, various applications and services without any setup requirement of the complete blockchain based infrastructure.

If BaaS speeds up, it can lead to real savings for companies. A study by Accenture found that blockchain technology could help banks reach cost savings to reach as high as 38 per cent, or around $12 billion.

 Top BaaS providers

The potential of Blockchain-as-a-Service has been recognized by some of the world’s largest software and technology companies. The interest of many businesses in implementing blockchain and the real difficulties of doing so have triggered several tech companies and cloud providers to now offer Blockchain-as-a-Service (Baas) to businesses that prefer to outsource the development of blockchain solutions.

The list of leading Blockchain-as-a-Service providers is growing, illustrating the growth in the dynamic on-demand tech sector. End 2015, Microsoft became one of the first companies to develop this service. The company has been adding BaaS modules to their cloud-computing platform, Azure, that is  focused on the Ethereum blockchain.

The Linux Foundation last year released Hyperledger Fabric 1.0, a collaboration tool for building blockchain distributed ledgers, such as smart contracts, for vertical industries. IBM has also built their own BaaS service, a Hyperledger Fabric BaaS system based on the Bluemix Cloud Platform. They are focused more on private consortium blockchains.

There are other big names as well that are betting on Blockchain-as-a-Service. Like Oracle Autonomous Blockchain Cloud Service, Amazon Web Services (AWS), HPE Mission Critical DLT and SAP Cloud Platform Blockchain. Of special note in this field is the work being done by R3. R3 has created Corda, a Distributed Ledger Technology (DLT) designed specifically to respond to the needs of financial institutions that use this technology.

Most recent BaaS platforms

Microsoft Azure Blockchain Service (ABS)
Microsoft this month announced the launch of Azure Blockchain Service, which is aimed to simplify the formation, management and governance of consortium blockchain networks. Azure, basically, offers Blockchain-as-a-Service (BaaS) by providing several easy-to-deploy, enterprise-ready templates for the most popular ledgers, including Ethereum, Quorum, Hyperledger Fabric, Corda and more.

Azure BaaS, in a nutshell, represents not just a public cloud hosting provider for distributed ledgers, but an organic and integrated low-cost, low-risk platform for building, delivering and deploying decentralized blockchain applications technology.

“Azure Blockchain Service deploys a fully-managed consortium network and offers built-in governance for common management tasks such as adding new members, setting permissions and authenticating user applications.” Microsoft

J.P. Morgan’s Ethereum platform, Quorum, will be the first ledger available in Azure Blockchain Service, giving both companies’ customers the ability to deploy and manage scalable blockchain networks in the cloud.

“Because it’s built on the popular Ethereum protocol, which has the world’s largest blockchain developer community, Quorum is a natural choice. It integrates with a rich set of open-source tools while also supporting confidential transactions, something our enterprise customers require.” J.P. Morgan

“Quorum customers like Starbucks, Louis Vuitton, and their own Xbox Finance team can now use Azure Blockchain Service to quickly expand their networks with lower costs, shifting their focus from infrastructure management to application development and business logic.” Mark Russinovich, chief technology officer at Microsoft Azure

Amazon Web Services (AWS)
Launching a managed blockchain service late last year, Amazon is now opening Amazon Web Services (AWS) for general availability. This new service is developed on top of open-source frameworks like Hyperledger Fabric and Ethereum.

Customers simply choose their preferred framework, add network members, and configure the member nodes that process transaction requests. Its Amazon Managed Blockchain takes care of the rest.

“Amazon Managed Blockchain takes care of provisioning nodes, setting up the network, managing certificates and security, and scaling the network. Customers can now get a functioning blockchain network set up quickly and easily, so they can focus on application development instead of keeping a blockchain network up and running.” Amazon

It is a fully managed service designed to help companies quickly set up blockchain networks of their own that can span multiple AWS accounts that are scalable and easy to create and manage and configure the software, security and network settings.

“This can be done with a few clicks in the AWS Management Console, doing away with the typical cost and difficulty of creating a company network”. Amazon

Already companies like AT&T Business, Nestlé and the Singaporean investment market the Singapore Exchange have signed on to use the company’s services.

Ardor (ARDR)
Ardor is one of the latest in the growing field of contenders for Blockchain-as-a-Service (BaaS) providers. It provides the blockchain infrastructure for businesses and institutions to leverage the strengths of blockchain technology without having to invest in developing custom blockchain solutions.

Ardor is a BaaS platform that will allow corporates and others to use the Nxt blockchain, an advanced blockchain platform. It separates security from functionality by creating multiple chains. Ardor offers a main chain that handles blockchain security and decentralization. It provides customizable child chains that come ready to use, out of the box, for various business applications.

When customers want to implement a new project on Ardor, they can create a child chain. The child chain holds all the functionality and customizability supported on the Nxt blockchain. However, it is still linked to the main chain and derives its security and decentralization from using the main chain for verification.

The developers of Ardor are the same company behind the open source Nxt project. Ardor however goes beyond Nxt to solve critical issues of blockchain growth, scalability, and customization. Ardor includes every feature supported by the Nxt blockchain, but it changes the architecture of how new blockchains get implemented.  

Towards decentralised BAAS solutions

BaaS however has some limitations though. An inherent tension seems to exist between the decentralized promise of blockchain and the more centralized nature of Amazon’s and other providers fully managed BaaS services.

BaaS should be seen as a means to an end, and necessarily involves adding some centralization to blockchain, which is never ideal. The purpose of blockchain is however to have decentralized solutions to centralized problems. This could be the banks as much as it could be any trusted middleman.

What does the ideal version of BaaS look like? BaaS is an essential step to be able to bring blockchain mainstream. But in a perfect blockchain world, we would not have centralized BaaS.

It could possibly look like Ardor and Nxt, where BaaS is front-loaded into the fundamentals of the blockchain. Alternatively, MIMIR Blockchain Solutions are creating the world’s first Decentralized Ethereum Service Provider (DESP). They are using Proof of Stake mechanics to allow for decentralized BaaS. Instead of having one entity set up all the blockchain infrastructure for a corporate, MIMIR creates a system where the multitude of nodes can work together to share blockchain access to the growing number of corporates and others  who want access to blockchain. Instead of relying on a centralized party to share blockchain access, MIMIR relies on a distributed model where all connected nodes can get paid to do the heavy lifting for people.     

Forward thinking

The arrival of Blockchain-as-a-Service or BaaS is an interesting development in the blockchain ecosystem that is indirectly aiding the blockchain adoption across businesses. Definitely, creating, maintaining and managing a new blockchain solution will be easier with BaaS.

Though BaaS does still require one to rely on a centralized third party, it is a strong step towards bringing blockchain technology to the world. BaaS may be the necessary catalyst that can lead to a much wider and deeper penetration of blockchain technology across various industry sectors and businesses.

BaaS will set the blockchain future trends by making it more feasible and solving the existing problems of the industry. As more businesses look for convenient and cost-effective ways to leverage blockchain technology, it is likely that BaaS offerings will continue to proliferate.

“Taking the burden of difficulty out of the equation” will allow a wide range of businesses and industries to adopt blockchain into their existing platforms.

Though there is still a long way to go, for many companies, BaaS is – at this moment – the best way to begin the blockchain journey. Keeping an eye on the space can help corporates to  choose the right BaaS provider for their business needs.

 

 

Carlo de Meijer

Economist and researcher

 

Blockchain and Stable Coins: opening the crypto markets?

| 20-05-2019 | Carlo de Meijer | treasuryXL

In my recent blog about IBM’s Blockchain World Wire I mentioned the use of Stable Coins as settlement instrument for global payment transactions. Not many are familiar with the term Stable Coins, because it is a relatively new type of cryptocurrency.

The Stable Coin market is however hotter than ever. In recent months, Stable Coins have seen remarkable growth in both size and variety. Today, with over 120 projects on the market, there is growing thinking that Stable Coins may trigger the mass adoption of cryptocurrency payments, thereby opening the crypto currency market. Facebook recently came with its WhatsApp Stable Coin. Even a traditional bank like JP Morgan has entered this market, with their own Stable Coin-like product named JPM Coin.

Why is there such a hype in talking about this phenomenon? And what are Stable Coins? How do they work and what should you know about it in terms of use cases, benefits and risks.

Why Stable Coins? 

But first of all: why Stable Coins? The cryptocurrency market such as for Bitcoin, Ether and others suffers from high volatility and unpredictable price fluctuations. They are struggling to maintain a decent valuation against the fiat. Last two years we have seen the market capitalization of the crypto reaching a high of almost 1 trillion USD before bouncing back to less than 200 billion USD. Most of the coins are down 80% from their all-time highs.

This volatile nature is one of greatest criticisms directed towards the crypto market. Because of this high volatility, Bitcoin and most cryptocurrencies are inconvenient for daily transactions. The demand for cryptocurrency is mainly fuelled by speculation and trading. Retail merchants on the other hand are sceptical of accepting the crypto as a medium for financial transactions. 

There is however a growing desire to bring stability to the cryptocurrency market. The  current market sentiment is turning more towards less price-volatile options. It is thus not surprising  that interest in Stable Coins is on the rise.

“Unlike cryptocurrencies such as Bitcoin, which are highly volatile, stable coins provide people with the pragmatic, helpful benefits of a cryptocurrency, without having to worry about distressing price changes since they are grounded in the real world.” Brigitte Luginbühl, CEO of SwissRealCoin

What are Stable Coins? 

A Stable Coin is a cryptocurrency with all its intrinsic functionality, but does not suffer from the vulnerabilities of market fluctuations and price volatilities. They fall into the category of payment tokens, whose main purposes are store of value, medium of exchange, or unit of account. Like other cryptocurrencies, Stable Coins aim to become global, fiat-free money that is programmatically issued and tracked with the use of blockchain technology.

A Stable Coin refers to a class of  cryptocurrencies that is pegged to a tangible, or stable, asset such as fiat money (which is specifically USD) or precious metal (which is generally gold). The idea of backing a cryptocurrency with a tangible asset is to reduce the price volatility associated with standard cryptocurrency. Since the Stable Coin is correlated to the gold or fiat, its valuation is fixed in relation to that underlying asset.

In theory, this makes Stable Coins ideal and usable as a store of value and a basic medium of exchange. They provide cryptocurrency traders and investors with an easy and simple way to keep value without losing to price swings. In doing so, digital coins may become far more practical for everyday use, and it may encourage global adoption.

Models of Stable Coins

To “get rid” of the volatility of the cryptocurrency market, different variations of Stable Coins have been introduced. Thereby a number of alternative types have emerged, backed by a multiplicity of assets, ranging from baskets of cryptocurrencies to physical assets. Most Stable Coins fall into one of the following models: fiat-collateralized, asset-based, crypto-collateralized, or algorithmic.

A. Fiat-collaterised

Fiat-collaterised Stable Coins are the most popular form of Stable Coins. They are fully backed i.e. on a 1:1 ratio by existing fiat currencies in real bank accounts such as the USD that is held in reserve by the Stable Coins’ issuers. The coins represent a claim on the underlying fiat currency.

How do they work?
Stable Coin working is quite simple. They are backed by a company or a central entity. This company or central entity manage the acceptance of new fiat and issues a corresponding amount of the fiat backed tokens. The issuing company holds assets in a bank account or vault (or works with a third party provider that does so on their behalf.  The company or the central entity is the custodian of the fiat reserves, and it backs all the tokens.

A degree of trust in the central entity is created by third-party audits – validating that fiat reserves are kept equal to the token supply. If the holder wishes to redeem cash with his tokens, the company or central entity will wire transfer the fiat money to the holder’s bank account and the equivalent coins will be destroyed or taken out of circulation.

Pros and cons
Stable Coins have a fiat backed structure and their operations and working are simple to understand. Since these are backed by a stable fiat currency, there is not much fluctuation in the prices.

But, these fiat-based Stable Coins are issued by centralized entities with their own governance protocols and, in the case of full custody integration, can be vulnerable  to fraud activities. This is very much against the concept of decentralized crypto. Additionally, not all fiat currencies are stable, as the fiat that underlies them, may not be stable itself.

Examples
Most known examples of fiat money-backed Stable Coins are dollar-based including Tether (USDT), TrueUSD (TUSD), USDCoin (USDC) and Gemini Dollar (GUSD).

 B. Asset-based

Asset-based Stable Coins are backed by some type of commodities. The most common commodity which is collateralized is gold. Gold backed Stable Coin represents a specific value of gold. The physical gold in itself is stored in a trusted third party’s vault.

How do they work?
Asset-based Stable Coins work similarly in cases where the coin is backed by fiat money (see above).

Pros and cons
As these Stable Coins are backed by real assets they provide stability. In a way, the commodity has been tokenized. This brings greater liquidity and price discovery. The coin holder has the advantage of recoursing to the underlying asset. They can redeem these assets at the conversion rate to take possession of the real assets.

Just as in fiat money backed Stable Coins, they are governed by centralised entities. So some of the very concepts of crypto and digital currencies are defeated in this type of stable coin. The holder is dependent on the vendors and custodians. This can result in a single point of failure at some time. This system is also dependent on the audit and assessment by the third party, underscoring the purpose of cryptocurrency.

Examples
Examples of commodity-backed Stable Coins are Digix gold (DGX) and Petro Coin. DGX is dependent on the market value of gold and is fully redeemable at any point in time.  The ownership/custodianship status is tracked on the Ethereum     Blockchain. Petro Coin is a Stable Coin backed by the oil reserves of Venezuela.

C. Crypto-collateralised

Crypto-collateralized Stable Coins are backed by a mix or basket of other digital currencies like Bitcoin or Ether.

How it works
Crypto backed Stable Coins require holders to stake a certain amount of cryptocurrencies into a smart contract which will then result in the creation of a fixed ration of Stable Coins.

In this type of coins, the volatility risk of a single cryptocurrency is reduced and distributed in a group of cryptocurrencies. The Stable Coins are over-collateralized to withstand the extreme price fluctuations.

Pros and cons
The benefit of this method is that it is decentralized and as a result adhere to the trustless, transparency and secure structure of the crypto world. Therefore they are not vulnerable to a central point of failure.

Crypto backed coins are considered transparent because transactions are recorded on the public blockchain with full transparency and accountability. They are efficient in the sense that conversion from one crypto to another is quick as it occurs on the blockchain.

On the other hand they are volatile and complex. Since the underlying asset is a cryptocurrency itself, it is inherently much more volatile as compared to other types of Stable Coins. Also, there are multiple complex elements which can trouble the minting process of these stable coins.

Examples
The most prominent example of crypto backed Stable Coins is Dai. DAI does not rely on any central entity and lives on the blockchain. Its  face value is pegged to the USD. It achieves stability by using an autonomous system of smart contracts.

 D. Algorithmic (or Seignorage) Stable Coins

The most complex and less popular model are algorithmic Stable Coins. These Coins are not backed by collateral at all. Instead, they use various mechanisms to expand or contract their circulating supply as necessary to maintain a stable value.

Algorithmic Stable Coins are based on smart contracts (and other mathematical -based algorithms) where people put up collateral in a cryptocurrency (like Ethereum). This to back the value of a Stable Coin pegged to a fiat currency. With this method, there is no need for know your customer (KYC) measures to be put in place because there is no need for a counterparty to maintain reserves or redeem money from.

How it works
These types of Stable Coins maintain stability using an algorithm. This means that the Stable Coins are not actually backed by real-world assets. Instead, trust in the system is reliant on the expectation that the coins will gain a certain amount of future value (similar to Bitcoin).

These models are generally created with two tokens: the first is a Stable Coin, and the second is related to a bond, thus promising income if the Stable Coin rises in price. By purchasing the bond with the Stable Coin, supply is decreased. As the total demand for the coin increases, a new supply of stable coins are created to reduce price back to stable levels. The main objective is to keep the coin’s price as close as possible to USD 1.

Pros and cons
The advantages of these type of Stable Coin are that they are decentralized, they have an absence of collaterals and lastly, they are kept at stable prices.

On the other hand, these are the most innovative of Stable Coins but also the most complex and thus difficult to create these successfully.

Examples
Basis (formerly known as Basecoin) is an example of this type of Stable Coins. Basis is pegged to the value of USD through algorithmic adjustments of the coin supply. Prices are monitored using the Oracle system.

Use cases for Stable Coins

Stable Coins promise many of the same benefits as other cryptocurrencies – like cheap transactions and rapid settlement – without the price volatility typically found in the crypto markets. Through that combination, Stable Coins could satisfy the demand for high-quality fiat currencies in parts of the world with limited access to the global financial system.

Various use cases have been proposed for Stable Coins, including mobile app payments, alternative currencies in emerging markets and global payment systems. Currently, the most common use of Stable Coins is for crypto traders to move between investment positions seamlessly and create leveraged positions, without added volatility.

Stable Coins also could be useful for crypto exchanges that want to offer fiat-based trading pairs while reducing their engagement with legacy financial institutions. Another interesting use case, is one of coupon and dividend payments in the up and coming digital securities space. This may enable to receive coupon payments in real time via a Stable Coin directly into a smartphone’s digital wallet.

Benefits of Stable Coins

Just like any other cryptocurrency, Stable Coins may offer both benefits and risks  connected to each alternative governance and price-stability models. The main goal that Stable Coins strive to create is an optimal currency in terms of  price stability, scalability, privacy, decentralization and redeem ability.

Unlike Bitcoin or other cryptocurrencies, Stable Coins are more immune to price fluctuations because they are pegged to tangible and more stable assets, like the US dollar (USD).

“An optimal cryptocurrency should have the following four traits: price stability, scalability, privacy, and decentralization.” “Short-term stability is important for transactions and long-term stability is important for holding.” Forbes

“Stable coins are one of the keys to bringing the benefits of cryptocurrencies to everyday people, both in terms of price stability and decentralization of capital.” Rafael Cosman, founder and CEO of TrustToken,

These benefits give it a better chance of mass adoption, compared to existing crypto currencies. This will be especially relevant for people living in countries with unstable monetary systems, where residents are often exposed to hyper inflation and uncertainty.

Stable Coins development could also be of help for the general population in economic and/or political uncertain countries. If the fiat money is converted into Stable Coins it will ensure that the value of money is preserved.

The adoption of Stable Coins may also  support capital market formation and can be used in new applications for decentralised finance on the blockchain. These include lending and derivatives markets because without borders and volatility, it becomes easier to lend money.

Traders and investors can change between cryptocurrencies, without being exposed to  asset volatility. Stable Coins enable traders to keep value stable against a fiat currency, usually the dollar, while they’re in-between trades.

Finally Stable Coins may help in reducing the risk of high price movements. They can be used in the cryptocurrency market as a hedge against bitcoin and other top cryptocurrencies.

 Main risks of using Stable Coins

There are however a number of bottlenecks that could limit the adoption of Stable Coins. First of all, there is the counter-party risk. By trusting a third-party keeping a cryptocurrency stable, the dollars or other fiat currencies could be fractionally reserved instead of fully backed. In this case, a bank run could cause the price of the coin to drop dramatically.

There is also the centralisation risk. Centralisation risks mean the same monetary issues that fiat-currencies face when a central authority has the power to print money without oversight. Accounts can be subject of misappropriation, being blocked, or accessed by unauthorised third parties.

In the case of algorithmic based Stable Coins there is the risk of algorithm manipulations. As most decentralised Stable Coins are embedded  within smart contracts, there is a risk the algorithm which keeps the currency stable fails. Algorithms could even be manipulated by a third-party.

Stable Coins and Regulation

Thus far, Stable Coins have largely been got attention from regulatory agencies. There hasn’t been much discussion in the crypto industry about how U.S. securities and commodities laws might apply to Stable Coins. But also in Europe Stable Coins has got less scrutiny from a regulatory point-of-view up till no. But that may change.

As Stable Coins are seeing greater industry adoption, the US SEC and CFTC will likely take a harder look at their compliance status. But the main question is: how will those Stable Coins be characterised?

Given how dollar-backed Stable Coins are redeemed, the SEC might characterize them as “demand notes,” which are traditionally defined as two-party negotiable instruments obligating a debtor to pay the noteholder at any time upon request. Demand notes are presumed to be securities.

For its part, the CFTC might take the position that Stable Coins are “swaps” under Commodity Exchange Act Section. Under that definition, the CFTC might characterize Stable Coins as options for the purchase of, or based on the value of, fiat currencies.

If Stable Coins are classified as regulated securities or swaps, there could be serious consequences for a large segment of the crypto industry. For example, Stable Coin issuers might have to register their offerings and comply with all the ensuing regulatory requirements. Similarly, a company or fund that conducts or facilitates Stable Coin transactions might have to register as a broker-dealer.

The SEC and CFTC aren’t the only regulators that may take an interest in Stable Coins. Only time will tell how other regulators worldwide will approach the regulation of Stable Coins, particularly if they’re used to avoid trade sanctions or other transaction reporting obligations.

 Asia ripe for Stable Coins

Stable Coins are looking to become a more attractive crypto solution, particularly in the Asia  Region. And that for various reasons.

According to a recent report by Remitscope, more than 50 percent of remittance flows worldwide could be attributed to countries from the Asia Region. Current traditional money transfers however are far from instantaneous or frictionless and often result in the end customer paying unnecessary transaction costs.

With interest growing, a Stable Coin with a well-developed user experience built into the remittance solution would greatly appeal to these markets. In Asia’s emerging markets, the technology’s application in the remittance sector is especially promising. Stable Coins via blockchain technology can improve the speed and stability of these transfers—particularly in countries where financial infrastructure is still in development.

Asian countries are well placed to adopt Stable Coins. It is encouraging that cryptocurrency ATM usage has grown and more cryptocurrency ATMs means improved access to Stable Coins, which will only help the ecosystem mature and evolve for the better.

It is also very likely that we will see more non-USD Stable Coins being tailor-made for Asia. The emergence of more non-USD Stable Coins will signal that the market is maturing further and ready for the benefits of Stable Coins globally.

The regulatory environment, without overt regulatory guidance in jurisdictions,  in the Asia Region is particularly favourable to encourage such innovation.

 What is needed to drive adoption?

To drive Stable Coin adoption, further development is needed in both cryptocurrency exchanges and various cryptocurrency services.

First, making it easy to digitally deposit and withdraw fiat currencies into and out of exchanges remains a huge hurdle to widespread adoption of cryptocurrency as the process is slow and transactions can take a long time or, if they are fast, involve expensive fees.

There is also still a need to solve issues surrounding settlement and velocity in fiat deposits and withdrawals into exchanges. Top exchanges generally take weeks to process transactions and this often leads to increased customer service tickets.

Another issue is the margins on cash to cryptocurrency exchanges. These are very high, sitting at 7-10 percent globally. Not only is it expensive to transact and exchange cryptocurrencies on exchanges, but it is also less convenient when needing to withdraw cash. That is why there is a premium on cryptocurrency ATMs.

Cross-border payments and converting cryptocurrency to cash should be made more convenient for users across the world. Stable Coins could reduce friction when sending money between counterparties as its often quicker, cheaper, and far more convenient.

To improve the user experience, money transfer companies should be encouraged to start integrating cash to crypto features in their respective locations. Overall, consumers will benefit the most from this increase in competition with more options in providers and more locations to conduct their exchanges locally.

In the long term, with more Stable Coins from various other currencies being made available, exchanges could become more liquid, enabling greater efficiency in the crypto ecosystem. Risks for companies dealing with cryptocurrency to fiat gateways will also be reduced as they no longer need to worry about banking relationships and can instead just focus on maintaining a cryptocurrency wallet.

Forward Looking

Stable Coins may have a great potential. The total addressable market for Stable Coins is essentially all of the money in the world, or approximately $90 trillion. Stable Coins are a crucial element in the world of cryptocurrencies, as they can bring stability. They may pave the way for wider acceptance and real potential for global adoption..

The technology is however still relatively young and will continually evolve, but it is clear that demand is there. Before full adoption is reached, Stable Coin developers will need to address the various concerns still in the market. The key is to create the optimal cryptocurrency including features such as price stability, decentralization, scalability, and privacy.

“Stable coins will ultimately give people enough confidence to start using cryptocurrencies for daily transactions.” “Stable coins are trying to strike the balance of not being dependent on a central bank, while also securing price stability”. Brigitte Luginbühl, CEO of SwissRealCoin

Ultimately, decentralised Stable Coins may pave the way for a new and modern  financial infrastructure  that will remove inefficiencies, reduce risk stemming from centralised parties and change the way we transact.

For Stable Coins to be accepted as a viable alternative to fiat currencies, however, they must first intersect and integrate into our current financial infrastructure.

 

 

Carlo de Meijer

Economist and researcher

 

Corda Settler, Ripple and SWIFT: mariage à trois?

| 07-05-2019 | Carlo de Meijer | treasuryXL

My last blog was about the IBM World Wire, a blockchain based platform for global payments. Another competitor in the blockchain payments world I have written about regularly is Ripple. Both are thereby targeting centralised payments messages network SWIFT.

IBM and Ripple however are not the only players in the blockchain payments world. Late last year R3 launched its new Corda Settler platform using Ripple’s XRP. But here it comes. In January SWIFT announced a partnership with R3 were they are collaborating to test Corda Settler, specifically to “integrate gpi with Corda Settler.” However, as Corda Settler depends on the XRP token, the partnership puts SWIFT and Ripple, the two rivals in an indirect connection. Will that result in a love triangle or even a “marriage a trois”? And could that work?

But first: What is Corda Settler?

In December last year, R3 announced the launch of Corda Settler. Corda Settler is designed in such a way to give companies a new fast, secure and reliable way to move crypto and traditional assets on a distributed ledger. The Corda Settler app is an open-source decentralized application (DApp), that runs on the Corda blockchain. It is aimed to facilitate global (crypto) payments across enterprise blockchain networks with Ripple’s XRP as its base currency. Corda Settler thereby focuses on the settlement of payments transactions between crypto and traditional assets within enterprise blockchains.

Corda Settler uses XRP

Both Corda and Ripple are open-source blockchain platforms with a focus on serving enterprise businesses. Therefore, it makes sense that Corda selected XRP, the globally recognized cryptocurrency, as the first and only supported cryptocurrency for settlement on the platform.

“The deployment of the Corda Settler and its support for XRP as the first settlement mechanism is an important step in showing how the powerful ecosystems cultivated by two of the world’s most influential crypto and blockchain communities can work together.” “While the Settler will be open to all forms of crypto and traditional assets, this demonstration with XRP is the next logical step in showing how widespread acceptance and use of digital assets to transfer value and make payments can be achieved.” Richard Gendal Brown, CTO at R3

While Ripple’s XRP is the first cryptocurrency supported by the Corda Settler, in the future it is very likely that R3 will make settlement in other cryptocurrencies possible.

“The Corda Settler is agnostic to which payment method is used. Whether it’s JP Morgan coin, or Wells Fargo coin, or BAML coin, or HSBC coin, it doesn’t matter to us. We have no horse in that race.” “We don’t have any financial incentives one way or another. We’re just trying to get as many people onto our platform as possible.”David Rutter, CEO of R3

How does Corda Settler work?

The platform is still in its first stages of development. Corda Settler supports payments of all sorts to be settled through “any parallel rail supporting cryptocurrencies or other crypto assets”. Also any traditional rail capable of providing cryptographic proof of settlement can settle payments obligations. In the next phase of development, the Settler will also support domestic deferred net settlement and real-time gross settlement payments.

In its current phase, when a payment obligation arises on the Corda blockchain during the course of business, any of the parties involved now have the option to request settlement using XRP. The other party can be notified that settlement in XRP has been requested and that they must instruct a payment to the required address before the specified deadline presented to them.

After they make the payment, an oracle service will ensure the validity of the payment and settle the obligation. Uniquely, the Corda Settler will verify that the beneficiary’s account was credited with the expected payment, automatically updating the Corda ledger.

What does Corda Settler mean for the parties involved?

It is clear that in the transaction initiated by Corda Settler, the receiving party doesn’t need to use Corda to receive the payment. At the same time, it is not mandatory for the sending party to use XRP or any other cryptocurrency.

This means that using the Corda Settler; one can send XRP or dollar and the receiver can accept the payment in an entirely different currency. “Settlement Oracle” will broadcast the actual settlement notification. It can be operated through different entities like exchanges, banks, and others.

It will thus allow banks and other financial institutions to build their blockchain networks with minimum overheads. They don’t need to integrate the R3 technology fully. All they need is to let their clients receive deposits via Corda-enabled services.

SWIFT partnership with Corda

End January SWIFT has announced its partnership with R3’s Corda Settler to launch a proof-of-concept (PoC). The trial would see the interaction of SWIFT’s payments standard framework GPI (Global Payments Innovation) with R3’s trade finance platform.

“Following the recent launch of our Corda Settler, allowing for the payment of obligations raised on the Corda platform, it was a logical extension to plug into SWIFT gpi. SWIFT gpi has rapidly become the new standard to settle payments right across the world. All the blockchain applications running on Corda will thus benefit from the fast, secure and transparent settlement provided through the SWIFT gpi banks.” David E. Rutter, CEO of R3

Global Payments Innovation (GPI)

This trial will integrate SWIFT’s GPI Link cross border payments gateway with R3’s Corda Settler platform to enable the continuous monitoring and control of payment flows, settle GPI payments through their bank, and receive credit information.

SWIFT’s GPI is a messaging system based on existing messaging standards and bank payment processing systems. It has rapidly become the new standard to settle payments right across the world. The integration will also support application programming interfaces (APIs), as well as SWIFT and ISO standards to ensure global integration and interoperability.

It aims to provide quick and cost-effective transfers between SWIFT members. Through GPI “SWIFT hopes to assist banks enhance their relevance within the fast-evolving international payments ecosystem – by delivering immediate value to SWIFT’s members’ customers”.

Goal of the SWIFT-Corda Settler PoC

The objective of the PoC-trial is to try out interlinking of trade and e-commerce platforms with GPI – SWIFT’s new standard for cross-border payments and is an extension of other SWIFT trials with blockchaintechnology. These platforms need global, fast, secure and transparent settlement, preferably using fiat currencies.

“With the gpi Link, banks will be able to provide rapid, transparent settlement services to e-commerce and trading platforms, opening up whole new ecosystems to the speed, security, ubiquity and transparency of gpi and enabling them to grow and prosper in the new digital economy. Given the adoption of the Corda platform by trade ecosystems, it was a natural choice to run this proof of concept with R3.” Luc Meurant, SWIFT’s Chief Marketing Officer

“SWIFT GPI will integrate directly to Corda Settler, the application that allows participants on the Corda blockchain to initiate and settle payment obligations via both traditional and blockchain-based rails. This will enable obligations created or represented on Corda to be settled via the large and growing SWIFT GPI network”.R3 co-founder Todd McDonald

While SWIFT is keen to experiment with the possibilities opened up by blockchain-based trades, they are much less enthusiastic about using cryptocurrencies such as XRP.

Objective

The SWIFT and R3 Corda Settler trial will enable corporates to authorise payments from their banks via a GPI link to their bank through the Corda Settler platform. GPI payments will be settled by the corporates’ banks, and the resulting credit confirmations will be reported back to the respective trade platforms via GPI Link on completion.

By enabling trade platform ecosystems using Corda to integrate ‘GPI Link’ into their trade environments, SWIFT hopes to extend its reach beyond member banks to include to a wider range of corporates and markets.

The first stage of the PoC will work with R3’s Corda blockchain platform, Corda. SWIFT says it will not limit ‘GPI Link’ to R3’s DLT-based trade environment. SWIFT has plans, if the Corda PoC is successful, to extend the trial to other DLT, non-DLT and e-commerce trade platforms. The results of the PoC will be demonstrated – as a prototype – at Sibos in London in September 2019.

Corda Settler: Fiat currencies versus XRP

Swift said it is not (yet) using XRP on Corda Settler!. And that for a number of reasons.

“All trade platforms require tight linkages with trusted, fast and secure cross-border payments mechanisms such as GPI. While DLT-enabled trade is taking off, there is still little appetite for settlement in cryptocurrencies and a pressing need for fast and safe settlement in fiat currencies”. Luc Meurant, SWIFT’s chief marketing officer

According to SWIFT CEO Leibbrandt banks simply are not prepared to use a cryptocurrency as a clearing unit due to its price volatility. It appears that most banks prefer to use Corda’s technology for rapid and transparent settlement services in fiat currency rather than cryptocurrencies. Most enterprises prefer to settle via traditional payment mechanisms, albeit wishing for greater visibility into what is happening to payments and receipts. This leads to the need for trade platforms to have fast and safe settlement in fiat currencies.

“I think that the big part of Ripple’s value proposition is the cryptocurrency XRP. There we do find the banks are hesitant to convert things into a cryptocurrency right now because of the volatility in the currencies.” Leibbrandt, SWIFT CEO

Another reason why SWIFT is hesitant (not willing) to use crypto currencies is because the legal status of XRP and other cryptocurrencies remains unclear due to the current uncertain regulatory environment. Risk averse financial institutions are unlikely to adopt cryptocurrencies until regulations become clearer.

Ripple’s CEO Garlinghouse however argues back that “with SWIFT payments taking days and XRP payments clearing within seconds, SWIFT transfers are actually subject to much greater volatility due to fluctuating foreign currency rates”. At present, the banks take on that volatility risk by guaranteeing the amount sent will match the amount received. Because of XRP’s speed, which executes transactions in a matter of seconds, Ripple says it ‘eclipses’ volatility risk. With near-instant XRP-backed transfers, that volatility risk is actually completed eliminated.

“I hear people talk about volatility and I feel like they’re propagating this misinformation. Mathematically, there’s less volatility risk in an XRP transaction than there is in a fiat transaction.” Garlinghouse, Ripple CEO

Garlinghouse countered SWIFT’s legal arguments saying that every XRP transaction is vetted for Know Your Customer (KYC) and Anti-Money Laundering (AML) compliance. Finally, Garlinghouse added that XRP payments greatly reduce systemic risks to banks in smaller economies, which have to use large amounts of money to prefund international transfers.

Mariage à trois?

With the launch of a universal settler app for payments on the Corda blockchain platform, using XRP as its first crypto payment trail, this may bring the Corda and XRP ecosystems into closer alignment.

Now SWIFT has partnered with blockchain consortium R3, we are in the strange position wherein SWIFT will be possibly be trailing Ripple XRP-powered payments. Through its experimental integration with R3, SWIFT may be indirectly integrating with XRP, though Leibbrandt has no desire to work with XRP directly.

It is still to be seen whether SWIFT will move beyond the proof of concept stage. But that might change. The future of SWIFT and Ripple’s relationship will not lay in the hands of present CEO Leibbrandt, as he will be stepping down as SWIFT CEO in June. His successor may be more receptive for the new world.

It is still speculative  that the proof of concept — or a future trial — could see SWIFT being more interested in cryptocurrency settlement. On the other hand Ripple will do its utmost by leveraging its relationship with R3 to convince (SWIFT-related) banks to take the dive into cryptocurrency via the Corda Settler platform.

For now, the complex links between SWIFT, Ripple, and R3 are sure to trigger continued debate about the future of global finance.

Read the full article here

 

 

Carlo de Meijer

Economist and researcher

 

IBM Blockchain: growing competition in payments

| 30-4-2019 | Carlo de Meijer | treasuryXL

Last year October I wrote a blog about IBM’s World Wire project. In that month they announced to come to the market with a global blockchain network for cross-border payments and foreign exchange for regulated financial firms using digital assets. But at that time it was not yet ready for production.

A month ago the firm has announced that World Wire has been sent into limited production. According to IBM “this is the first blockchain-based network that integrates payment messaging, clearing, and settlement on a single network”. The World Wire network will support instantaneous foreign exchange payment and settlement in locations in more than 70 countries, supporting close to 50 currencies and 45 banking endpoints.

This will definitely lead to growing competition in the payments industry. What could that mean for institutions like Ripple and SWIFT?

Why is World Wire needed?

But firstly, why is World Wire needed? And other blockchain solutions? International money transfers especially remittances make up an important part of the global economy. According to the World Bank, migrants across the world sent an estimated $574 billion to relatives in their home countries in 2016.

Current global payment systems however are not adequate enough for the high number of transactions that are happening across the world. Nowadays banks have to go through inefficient processes involving many intermediaries for both the clearing and settlement to conclude these transactions. Sending money across borders today is as a result a time-consuming and costly process.

What is World Wire?

On March 18, IBM announced the launch of IBM World Wire, a global network for regulated financial institutions to simultaneously clear and settle cross-border payments in real time. First unveiled last year October, World Wire now has entered the production stage.

“We’ve created a new type of payment network designed to accelerate remittances and transform cross-border payments to facilitate the movement of money in countries that need it most.” “By creating a network where financial institutions support multiple digital assets, we expect to spur innovation and improve financial inclusion worldwide.” Marie Wieck, General Manager, IBM Blockchain.

The platform is designed for fast and easy cross-border payments, foreign exchange, and remittances, thereby integrating payment messaging, clearing, and settlement on a single, unified network. The aim of the IBM Worldwide Wire payment system is to remove the function of banking intermediaries to international payment options, thereby lowering the cost and at the same time the transaction speed.

“World Wire’s novelty in the blockchain space regarding settlements is that payment messaging and instructions for settlements can happen in real-time. Hence driving all sorts of efficiencies into the process mainly because you’re doing things on one network, i.e. reconciling information and post fact isn’t necessary.” Jesse Lund, VP Blockchain and Digital Currencies IBM

The platform is developed on the open-source Stellar’s blockchain network. This operates as the backbone of their payment solution, allowing cross-border payment settlements in near real time using digital assets as a bridge currency. It is said that the settlements can be done in five to 10 seconds.

Read the full article of our expert Carlo de Meijer on LinkedIn

 

Carlo de Meijer 

Economist and researcher