2018 was a monumental year for digital/crypto-assets. Of course, the headlines were dominated by price action, particularly in terms of the digital/crypto-asset market capitalisation decrease from USD 611,278,000,000 in January 2018 to USD 128,378,146,413 in December 2018 (approximately -79%). But price action alone — despite its importance for many, and its relevance as an indicator of mainstream interest — barely scratches the surface of the fundamental changes that took place, and are in the works. Here, we look at a few highlights:
1. Crypto Futures Contracts Launch:
When Bitcoin futures were first launched in 2015 on BitMEX, it was touted as an indication that Bitcoin was maturing as a trading commodity. This development evolved further in late 2017 when the Chicago Mercantile Exchange & Chicago Board of Trade (CME Group) and Chicago Board Options Exchange (CBOE) Global Markets — both major regulated exchanges — launched Bitcoin futures too. Fast forward into 2018, NASDAQ has now said that they will launch Bitcoin futures in 2019 “no matter what”. In fact, Intercontinental Exchange Inc (the owner of New York Stock Exchange) has announced the launch of its own contracts on its new exchange, Bakkt.
But why are crypto futures drawing such attention? The very fact that these traditional public exchange operators are keen to list “transparent, regulated and surveilled” crypto derivatives boosts investor confidence, invites liquidity and expands the investor base for Bitcoin. CME has reported that Bitcoin futures average daily volume (ADV) has increased 41% to 5053 contracts in Q3 2018, compared to Q2. The growth of Bitcoin futures contracts in 2018 is indicative of a growing appetite for such financial derivatives — a development that seemingly parallels the fact that in traditional markets, derivatives dwarf the spot markets. With that in mind, CBOE has plans to launch Ethereum futures. Although no firm date for this launch has been announced, it is rumoured that CBOE already has the product ready, and is awaiting regulatory clearance. ErisX and Bakkt, both with big name backers (such as Brokerage giant TD Ameritrade and Intercontinental Exchange Inc respectively), are also planning to launch Ethereum futures.
2. Ethereum’s consensus protocol switch to Proof of Stake (PoS):
Vitalik Buterin’s tweet “storm” in August 2018 drew renewed attention to Ethereum’s Casper project, a consensus mechanism to transition Ethereum to a PoS protocol. This switch promises greater energy-efficiency, decentralization and better scalability. This would potentially facilitate widespread Ethereum adoption — something long hoped for by ETH HODLers. Vitalik’s Ethereum 2.0 timeline, revealed in Taiwan, is estimated to be 3–5 years to transition. Thus, 2019 might be the year we see a prototype of a PoS Ethereum or a hybrid PoW/PoS system.
3. Singapore: Adoption and Accessibility:
QCP’s home ground, Singapore, is often seen as a relatively friendly regulatory environment for the blockchain industry. True enough, locally initiated projects by CapBridge, and the ongoing Project Ubin are raising eyebrows with the speed of their progress.
CapBridge is a private capital raising platform licensed by the Monetary Authority of Singapore (MAS) and supported by the Singapore Exchange (SGX). Currently developing a private exchange, 1exchange, they aim to provide options for shareholders of private companies to exit hitherto relatively illiquid positions. This potentially creates an entire secondary market, encouraging capital recycling and improving liquidity. Capbridge has also announced a strategic partnership with ConsenSys, to utilize blockchain technology for 1exchange. From this partnership, Joseph Lubin, co-founder of Ethereum and founder of ConsenSys, expects to build a product “to trade regulated instruments globally with reduced or zero counterparty risk” on a trustworthy platform.”
The Singapore government has also showed a distinct keenness to utilise blockchain technology (more specifically Distributed Ledger Technology, DLT) for clearing and settlement of payments and securities through Project Ubin. Project Ubin, supported by the MAS, is a collaborative project involving a consortium of major financial institutions in Singapore (including Bank of America Merrill Lynch, Credit Suisse, DBS Bank, The Hongkong And Shanghai Banking Corporation Limited, J.P. Morgan, Mitsubishi UFJ Financial Group, OCBC Bank, R3, Singapore Exchange, UOB Bank, and BCS Information Systems). In harnessing blockchain to make financial transactions cheaper, more transparent and more resilient, MAS aims to “developing simpler to use and more efficient alternatives to today’s systems based on digital central bank issued tokens.” The platform is being developed with technology partners Anquan, Deloitte, and NASDAQ.
4. Increasing Clarity in Imminent Regulations
Although regulation is oft-painted as a deterrent to this industry, regulations forge a safer ground for development and progress. Traditional financial players and retail investors alike gain confidence in the industry and are encouraged to participate. The United States’ Commodity Futures Trading Commission (CFTC) and Singapore’s MAS, among many other regulators , have been rolling out guidelines governing virtual currencies through 2018. Though the CFTC has long declared that virtual currencies like Bitcoin are “commodities”, subject to oversight and regulation, 2018 saw the CFTC’s prominent optimism about blockchain technology,
“Virtual currencies mark a paradigm shift in how we think about payments, traditional financial processes, and engaging in economic activity.”
In Singapore , the MAS has re-framed the Payment Services Bill to bring virtual currency activities and digital payment tokens under regulation. This legislation is an important step towards mainstream adoption of these tokens and blockchain technologies as a whole. While this Bill obligates players to ‘be regulated’, it serves to create a safer ecosystem for the community, cultivating trust amongst the public in this new technology and sector. Secure systems encourage innovation in the space, instead of stifling it. Christine Lagarde, IMF Managing Director summarised the perspective of regulators succinctly during Singapore FinTech Festival 2018:
“Of course, challenges remain. My goal, at this point, is to encourage exploration.”
Looking back on 2018, blockchain technology has definitely and clearly progressed, indeed, in spite of the negative price action. Negative price action and a bearish market are not the easiest things to accept, but with positive fundamental developments, and a plethora of hopeful news over the horizon there is much to look forward to in 2019 — and beyond.
Happy New Year from all of us at QCP!