Colin Platt here again, time for another blog, exploring some of the topics that Zeth, Shaun and I found interesting.

On the 30 September, several of the largest and most prominent US-based companies in the cryptocurrency space, including Coinbase, Kraken, Circle and Genesis, came together to announce the launch of their latest initiative, the Crypto Ratings Council.

The members of the Crypto Ratings Council believe that they found an opportunity to offer further clarity to companies working with digital assets, with regard to their treatment under US laws. To this end they developed the Asset Rating Framework (the “Framework”) which specifically focused on the likelihood that a US Federal court may find specific digital assets to be classed as securities under the benchmark “Howey Test”.

This test comes from a landmark 1946 court case, whereby it was decided that an instrument could fall under rules that would require that they, amongst other things, need to register as a security. This test is comprised of four factors: “(i) whether crypto purchasers invested money, (ii) in a “common enterprise”, (iii) with a reasonable expectation of profit, (iv) based on the efforts of others.”

Looking at the four components of the Howey Test, the Framework is used to assign a ranking of 1 (least likely to be a security) to 5 (most likely to be a security). The Crypto Ratings Council does not rate all tokens and does not release the names of tokens which it determined to have a 5 ranking.

The Block investigated the initially released ratings, which showed that Maker, Polymath and XRP were all rated as more likely to be considered securities:

Bitcoin, stablecoin DAI, Litecoin and Monero, however were seen as the least likely to satisfy the Howey Test.

It is worth noting that on the day that the ratings were released, the US Securities and Exchange Commission (which governs securities registration in the US) announced a settlement with EOS issuer Block.one, which alleged that the EOS ICO had been an unregistered securities sale. The Crypto Ratings Council had rated EOS a 3.75, on par with Augur, Decentraland, FOAM, Hedera Hashgraph, Loom Network, Stellar and Tezos, and less than Maker, Polymath and XRP.

Ether, the native token of Ethereum, was rated a 2, suggesting that it was more likely to be considered a security than Bitcoin, but still relatively low. Details for this were not made public, but some have speculated that ETH 2.0 and a move to PoS may have prompted an increased score.

Legal experts have commented that the release of these ratings, while a positive sign that such companies are conducting due diligence, could have negative repercussions, including attracting unwanted attention. It’s hard to say if, or how a court might use the Crypto Ratings Council Framework if one of the rated projects was challenged.

Given the SEC action it is unclear whether the Crypto Ratings Council will amend their Framework.

What we can draw from this, is an appetite from many involved in the cryptocurrency space to have clear cut guidance on challenges facing them, including regulatory treatment. This is perhaps not a surprise, given their desires to build new things which may not always neatly fall into an existing bucket. However, for that same reason, it may also be difficult to offer such guidance in a useful manner.

As always, nothing here should be construed as financial advice, recommendation or endorsement of any project or cryptocurrency.

Colin Platt here again, time for another blog, exploring some of the topics that Zeth, Shaun and I found interesting. It has been a while since we did a deep dive, happy to be back to it.

Scaling has always been the elephant in the room for all blockchains. From debating block sizes, to layered approaches, the issue has consumed a lot of bandwidth.

Amongst the more audacious approaches is that of Ethereum. A full rewrite of the Ethereum specification, aiming to bring a lot of new functionality designed to help it scale to handle more transactions/data, confirm faster, and not rely on Proof-of-Work (PoW). The practical, but non-exhaustive, list of changes between Ethereum now and the future are:

– Proof-of-Stake (PoS) – Replacing PoW (and thus its carbon footprint) to ‘stake’ ETH as a means to impose financial skin-in-the-game for transaction validators in a permissionless blockchain,

– Sharding – Removing the requirement to have every transaction stored by every node and allowing for some transactions to be processed in parallel to other transactions,

– EWASM – Rewriting the Ethereum Virtual Machine (EVM) in WebAssembly. Developers claim that it will make it faster, more secure and more interoperable.

Together, the plan is called ETH 2.0, let’s have a look at how it will be rolled out. In short, the roadmap is comprised of 7 phases:

0) Proof-of-Stake Beacon chain, without sharding – Beacon chain will act as a chain-of-chains that eventually coordinates the actual transactions on sharded blockchains; this is when Casper gets trialled

1) Basic sharding, without EVM (Ethereum Virtual Machine) – Allows for testing the interaction between the Beacon chain and each sharded chain, with limited functionality

2) EVM state transition function – Starts EWASM, and the long depreciation process for EVM; Storage rent (paying to keep static data, e.g., balances)

3) Light client state protocol – Allows clients to not hold all of the shards + Beacon chain

4) Cross-shard transactions – Different sharded chains can talk to each other, this is a very important thing to get right

5) Tight coupling with main chain security – Makes each shard more secure

6) Super-quadratic or exponential sharding – Shards within shards

The implementers expect that phases 0-2 should be online at some point in 2020.

Phases 0 & 1 will be interesting to watch, but are very technically heavy and don’t actually allow anyone building applications to glean any real indication of what will change for them.

Phases 2-4 are where things become more concrete and I suspect that these are the areas where we will start to see if they’ve really been successful from a technical point of view for the average dApp developer. EWASM is of course one of the main areas where applications need to potentially be changed and migrated, but the cross-sharding functionality could arguably be a bigger headache for the current crop of Ethereum developers. Let’s quickly look at this.

When Ethereum introduces shards (smaller bits of the distributed ledger which ultimately tie back to the main Beacon chain), the idea is that some dApps will do lots of transactions with their local shard, and occasionally need to relay to a foreign shard (another local shard). A few keys areas to know are:

1) How usable this is,

2) Whether transactions actually remain as local as this model presupposes, and

3) How you will manage “gas” across shards.

Point 3 is currently being discussed, as without significant improvements you may need to pre-fund transactions for a dApp in chains that you use only occasionally, which could get expensive. Personally, I would not be surprised if entire areas of economics research are dedicated to optimising this.

Phases 5 & 6 seek to massively productionise the features brought in with previous phases. Many of these areas still have kinks to work out, but these are the areas that should allow the hard yards gained, particularly in Phases 2-4, to really pay-off.

Even with the massive potential uplifts in scaling introduced under the ETH 2.0 improvements, it probably should be little surprise that there have already been discussions about ETH 3.0. One to watch.

As always, nothing here should be construed as financial advice, recommendation or endorsement of any project or cryptocurrency.

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It’s always impressive to meet the talented people building in the blockchain ecosystem. This week I got to chat with two of the co-founders at Tenderly, Andrej (CTO) and Bogdan (Distributed Systems Engineer) following their win at the ETHBerlin Zwei hackathon last week for their entry, sol.tty. It was a great chat, and an awesome project, hope that you enjoy learning about it as much as I did. 

Colin Platt (CP): Hey guys, hope that you had a good trip back from Berlin, and were able to rest-up after the week. Thanks for taking the time to speak with me.

Andrej Bencic (AB): Hi, good to talk to you. Yes it was an intense trip, it was a very packed agenda and we were super busy the whole time. It was a really good and was good to meet people you know from the internet in real life.

Bogdan Habic (BH): Yeah, we met a lot of people and I don’t think that I’ve ever shaken so many hands. A great event.

CP: So tell me a bit about yourselves. How did you get into this space?

AB: We’ve worked together for about six years now. We met in high school in Serbia and have been working together ever since. We started doing software development together back then and done several hackathons together.

BH: You could say that the hackathons have become a benchmark of our friendship. If we don’t win our friendship is over.

AB: We’ve started two companies together, while working together at four altogether, doing software engineering.

BH: Guess that because we’ve been working together, sometimes it’s hard to add in the intro. I’m a distributed systems engineer and have always enjoyed working with scaling issues. Previously I’ve been in “traditional” software engineering, with a focus on cloud. I became a fan of cloud because of the ability to leverage it to build huge systems with a small team and make a large impact. The Ethereum ecosystem is interesting because it is very young, and are still working to bring scaling. I became interested with the challenge of how to bring better visibility into the blockchain. Before launching Tenderly we worked together as part of a startup called ManageWP, a WordPress management platform, which got acquired by GoDaddy in 2016.

AB: About a year ago, we entered an Ethereum hackathon. We wanted to build a trustless, public tender project for governments to get bids for projects. That’s where the name “Tenderly” came from. We continued to build the project out after the hackathon, and talked to the people at GovTech Pioneers in Vienna for potential projects, but then discovered two things. First it was hard to talk to governments, and secondly there was a lack of tooling in Ethereum. We really enjoyed building dev tooling more than talking to government procurement teams. We liked the name though, so kept that and open sourced our internal dev tooling.

CP: So tell me about Tenderly.

BH: Tenderly is a smart contract monitoring platform focused on bringing visibility to the development and deployed phases of Ethereum smart contracts. We bring dev tools to help successfully manage deployed smart contracts, as well as help developers deploy faster. Debugging smart contracts is time intensive so we built human readable stack traces for solidity which can cut 30-60 minutes of debugging time. In addition to helping fix errors, which are just a part of the smart contract lifecycle, we also have a platform for monitoring the load on deployed smart contracts, and VMs for extracting data. We can help visualise the full execution cycle of all transactions on smart contracts, which can help developers see unexpected and strange behaviour on a method-by-method basis. This can help understand what is actually happening, and let the developer tell whether the contract is doing what it is “supposed to be doing”, or what it is “meant to be doing”.

AB: There are also tools for monitoring how smart contracts are behaving, who is using them, how money is being spent and how the contract is being used. This helps respond to unexpected behaviour, and identify entities trying to use it in ways that weren’t intended. We don’t just offer templates, the tool is highly configurable because the developer is in a better position to know what needs to be monitored.

CP: Beyond Ethereum, do you work with other blockchain networks currently?

AB: Currently we’re focusing on Ethereum as the ecosystem is the largest, but we’re building a platform to expand with Ethereum and eventually scale out to other platforms. In our view, in a future on ETH 2.0, it will be particularly important to monitor what is going on with smart contracts inside of Ethereum. We’re also believers in sidechains and permissioned chains networks. Projects like Polkadot and Cosmos also interesting for us.

CP: You were just in Berlin for the ETHBerlin Zwei conference, where you were one of the hackathon winners with your entry “sol.tty”. Can you tell us a) how to pronounce sol.tty and b) give us a brief explanation of what it does, and what inspired you to build it?

AB: Haha, I think that we’re going with “solty”, like salty, but with an “o”. We knew we wanted to do something with solidity and thinking of a name I thought of a TTY which is a term from the Unix world. Once we heard how sol.tty sounds, we couldn’t pass on the opportunity for a pun.

BH: Coming from the Web2.0 world we have experience with other tools for other platforms, and one of the things that we saw as missing in Ethereum was a REPL. Right now if you want to test a contract you need to write the contract, deploy it, call it, then destroy it. This can use a lot of gas and cost a lot.

AB: Our work on Tenderly has given us quite a bit of low-level operating knowledge of the EVM, so we decided to try to implement an EVM in the EVM. We spent about 40 hours during the hackathon with a table of the EVM opcodes trying to implement them in solidity. When you run a code it checks against the table and executes the method. You can then use a wallet like Metamask to run sol.tty and spin up your own local version of an EVM to check code before deploying it to the network.

CP: Let’s talk about how it can be used and the problems that sol.tty could solve.

BH: An example of where this might be useful is when you want to write a smart contract to arbitrage across multiple decentralised exchanges. Right now you’d need to query the DEXs, pulling from web3 and then implement the strategy to call the DEXs. But this means that you need to wait for transactions to be mined and the prices may have moved when you go to run your smart contract. With sol.tty you write the strategy in your wallet, ensure it works and execute it directly. In a way this now gives us some of the functionality that exists in Libra’s Move, where there are transactions and mini scripting programs that act as transactions. It allows you to orchestrate multiple smart contracts, and gives you more flexibility.

AB: We also implemented it as an identity contract, so that the functions can be called from a single contract acting on your behalf and allows you to control the originator of the call. This makes it cleaner to write code and add functionality later. It also allows your contract to do arbitrary things where the owner is an onchain entity.

BH: It is really flexibility to the extreme. It allows you to do anything that the EVM can do. We hope that it should open new functionality and allow people to experiment. We’ve looked at how it could be helpful for rapid prototyping without the need to deploy. You just run trials hammer at the end point. This might even be helpful for penetration testing on other contracts. Send a lot of tries at once and see what happens.

CP: So an EVM in an EVM is cool. Could you also do something similar for other VMs?

AB: In theory, and I stress in theory, we could do eWASM in the EVM but it is more complicated, or really go extreme and do a JVM in EVM but there would be lots of issues there and extra functions that wouldn’t really work or be necessary. For the eWASM in the EVM it might be useful for checking new eWASM opcodes to check support on contracts as well as the usefulness of implementing them.

CP: Could you talk to me about some of the challenges of developing sol.tty, and what you learnt?

BH: You can think of the EVM as composed of a few parts, stack, memory, storage and loop logic. Implementing the loop was easy, for-loops with switches. Biggest challenge was working in an environment that already had a stack without blowing up something. In theory it was possible to do it in one stack, but it was easier and more flexible to re-implement everything in memory.

AB: Our second issue was whether we would have corrupted memory. Initially we thought, “nah”, that’s not going to happen, but in the end, of course, we ran into corruption issues. Sectioning memory was something we constantly had to keep in mind.

BH: While implementing opcodes, a tricky problem to get right was positioning all data correctly on our stack. The EVM needs everything to have fixed widths, but sometimes appends values on the left, sometimes on the right. We had to go back to the GETH code to see how it was done. There isn’t a ton of documentation on it, outside of the Yellow paper which was a bit harder to decipher and would have taken too much time, so having a reference implementation was good.

CP: What’s next? Do you plan on further evolving sol.tty?

AB: It would be cool to continue to work on it, doing more optimisation on gas costs and adding more opcodes. It was cool when we arrived back in Serbia to see that we already got PRs for new opcodes. We’re just back so we’ve not given it too much thought but maybe we’ll look for grant funding to keep going.

BH: I’m interested to try having other languages for more defined use cases optimised for exactly what you’d wanted. This could make it easier for someone that doesn’t want to deal with all of solidity and could act as a bridge for what is executed onchain. Right now, without optimisation it isn’t really suited for using frequently because of the additional gas costs, but maybe this is something that could be brought down to say 5% more gas than going directly and might be worth using. It could also be useful for simplifying complex operations like swaps. Lots of transactions are straight-forward but others are a pain.

CP: Any other cool projects that we should know about?

AB: Check out Tenderly! We’re pretty heads-down focused there. Personally, I’m also interested in Uniswap because of its simplicity and flexibility.

BH: Decentralised identifiers are something that interests me personally. I also like the work around onchain wallets like Argent. The Gas Station Network (GSN) Alliance is also quite interesting because you can imagine how it brings adoption to the next level. Combine it with the iOS Shortcuts app to write code that is sent to GSN, and sol.tty. It would allow you to do walletless, gasless transactions from Siri.

CP: Alright, now you’re getting into sci-fi. Thank you so much guys, it was a pleasure talking with you. I wish you the best of luck, hopefully we’ll be hearing a lot more from you soon.

AB: Thank you, it was good chatting with you.

BH: Thanks for reaching out.

Colin Platt here again, time for another blog, exploring some of the topics that Zeth, Shaun and I found interesting and noteworthy. It has been a while since we did a deep dive, happy to be back to it. As always, nothing here should be construed as financial advice, recommendation or endorsement of any project or cryptocurrency.

Just when you thought that crypto had exhausted every possible permutation of three letter acronyms they surprise you once again.

Today we look at one of the latest trends in using tokens to fundraise, IEOs.

Let’s start with a quick explanation of what these things are. Most readers will know what ICOs, or Initial Coin Offers, are: teams selling crypto tokens to investors to finance the development of a project. Generally ICOs have worked somewhat like crowdfunding, where the ICO seller announces the amount of tokens to be sold, a price (in USD or crypto), and a start date for the sale. Some projects opt for more complex processes where the price increases over time, or after a certain amount is sold, still others go through a more complex auction process. One of the main selling points of ICOs as an investment was that they commonly offered investors liquidity shortly after the completion of the token sale. However, things were not always so simple.

Though ICO teams usually had exchange listings as part of their token sale roadmaps, would enter into partnerships during and after the sale it was always a risk that they would have no, or only minor -exchanges willing to list them. Listing on the more prestigious, larger exchanges, usually meant higher returns for early investors and greater liquidity when it came time to sell. Many exchanges understood this and sought fees from ICOs looking to list after a sale, which could often measure in the hundreds of thousands of Dollars.

While exchanges initially found listing fees profitable, they quickly understood that by accepting them, clients would no longer see the fact that listing on a large exchange was a mark of distinguishment, thus degrading the overall perception of the exchange itself. In addition, while generous, these fees could also end up leaving the exchange with large potential legal liabilities should regulators decide to clamp down. In an effort to maintain this source of revenue, their brand perception and try to take the heat off themselves, exchanges pivoted to become involved significantly earlier in the fundraising cycle.

Enter the IEO.

The IEO process looks somewhat similar to the ICO, however with one critical difference. Teams looking to fundraise with a token work with a potential exchange in the early stages, going through due diligence on their idea, team and plan, and structure the details of the fundraise with dedicated teams at the exchanges. During the token sale itself the token uses tools provided by the exchange and accepts funds, which have gone through the normal KYC processes of the exchange. Having provided these services, exchanges can charge a fee in good conscience. And although simply running a token sale through an exchange doesn’t guarantee listing on that exchange, there are reassurances for the exchange that the team would have passed the basic levels as part of that process. More reputable exchanges will generally segregate the IEO team from the teams which decide which tokens get listed, though this is not a universal process.

In addition to third parties raising funds via IEO, the exchanges themselves have used the tools and customers they already have to raise funding. Some examples are Binance Coin (BNB), Bitfinex’s Unus Sed Leo (LEO) -which raised more than $1bn, Huobi Token (HT), as well as more recent FTX token (FTT).

Despite their success, having effectively replaced ICOs, IEOs have not been without their controversies. Investors have complained that many IEOs have given preference to insiders, selling out millions in seconds, or otherwise employed unequal terms that favoured some groups. Teams have reported paying money for the IEO process only to be hit with unanticipated fees, and receiving less than they had expected. As with ICOS, questions around the legality of IEOs still abound. Still others question how real the raises are, pointing to the fact that with ICOs you can at least see the sales via the transactions on the blockchain themselves.

Post launch IEOs have also had questionable returns, despite common jumps on day one, returns have not always fared well. This continues to pose the question about the suitably of IEOs as investments for the retail investing public, which may not have the time to properly research the prospects of the investment, or be able to withstand the risk of capital loss.

Despite this, IEOs present an interesting evolution in the token-based fundraising space, and help answer some of the basic questions, as well as giving some level of assurance about projects. The current incarnation may be ephemeral, ultimately giving way to the next iteration of this trend. It is clear though that fundraising leveraging crypto assets is a trend that is not likely to disappear in the short term.

One thing that I absolutely love about this industry is meeting new people, meeting Charlie Hayter, CEO and Co-founder of CryptoCompare, was doubly great because we got to chat about crypto over tapas in sunny Barcelona.

Colin Platt (CP): Hi Charlie, good to finally meet you after months of trading emails.

Charlie Hayter (CH): Hi Colin, glad we could connect.

CP: Charlie, I’m a huge fan of data around cryptocurrencies and blockchains, so naturally am interested in your product. Can you tell me a bit about how you got into cryptocurrencies and what got you to launch CryptoCompare?

CH: I think that I originally saw it in 2012 but was dubious about the idea of a currency that wasn’t backed by anything. Truth be told, I didn’t really know much about money at the time, so did not really see the value in something like Bitcoin. It was about a year later when the price crossed $1000 that a friend got me to look back into it, and quickly thereafter I started dreaming up the idea behind CryptoCompare. A year later, along with my co-founder Vlad, we launched CryptoCompare. I come from a financial services background, so financial data was something that I saw value in having. The idea behind CryptoCompare was to set up a unified data platform, somewhat like a live research report, much like Bloomberg for crypto to give a more holistic view. I also have a background in digital marketing and knew how to get ad revenue to grow the business, and saw the long term value of the data that we would be collecting.

CP: So you launched in 2014, what’s the journey been like?

CH: This is a fast moving industry, and we as a company have been evolving as well. When we first set up in 2014 we were a very thin team, classic startup, I wasn’t taking a salary and we focussed on getting the right elements in place. Later in the year we raised our first funding round from angels and officially launched. The next year we were able to get a version two off the ground which greatly improved our offer. From the beginning I knew that we liked the name CryptoCompare but didn’t have the URL, we negotiated and finally were able to buy it in 2015. In 2016 we had grown a lot and were able to get our second round of funding, the following year we managed to be cash flow positive which was a great achievement. In 2017 we were able to grow the team to set up the business, and 2018 was about making everything work. This year we have really been concentrating on growing up as a company and becoming more efficient. We never did a token sale, so our journey may look different from some others.

CP: It seems very disciplined and more sustainable. Tell me a bit about your product offerings today.

CH: We have three main activities. First is our data business, where our APIs sit. Our APIs receive 20 million calls per hour on average, having peaked at 180 million calls from 14 million unique IP addresses, Our second line of business is our data products, this includes our cryptocurrency indices business, which provides to companies like VanEck, Reuters, Yahoo! Finance, and underpins the Nasdaq Cryptocurrency Futures. Our third line of business is media, we run the CryptoCompare Digital Asset Summit, which took place last June in London. We also do affiliate marketing, the CryptoGlobe news site and research. Within research we do our taxonomy work, as well as exchange rankings.

CP: I saw those exchange rankings, those are extremely useful. I do want to talk about indices, in crypto we don’t have closing rates or official “fixings”, how do you construct indices?

CH: Absolutely right, a lot of the design in indices is making sure that we have robust methods which reduce the risk of manipulation. This is particularly important for tracker funds and futures. We spend a lot of time on methodology and benchmarking. Our indices are based on VWAP (Volume-weighted average price) and include fade-outs, if exchanges haven’t had trades in a certain amount of time we reduce their contribution to the price. We also do a lot of work to evaluate how robust exchanges are, and if the prices are reliable. The statistics from the VanEck report to the SEC are well known for their work on this, we’ve found that when you look at other pairs things become more complex. Looking at exchanges for good management practices and generally trying to do the right thing is highly important, and helps us ascertain our weightings. Less liquid currencies can add more complication as we often need to go to the extra step of passing their prices by BTC or ETH then back into fiat.

CP: That’s great insight, surely regulators and investors must be interested in your findings.

CH: Yes, we are founding members in GDF (Global Digital Finance) and share a lot of our findings via their working groups to help inform global regulators about best practices. We’re also members of the CryptoUK self-regulatory organisation and do advocacy work in the industry on these aspects as well.

CP: You brought up a point earlier about originally not having seen the value of Bitcoin. Popular topic nowadays is Libra. Where do you see that fitting in?

CH: I look at money as coming in three forms, the first is issued by nation-states, like the Dollar or Sterling. The second is natural money and algorithms that we collectively agree to treat as money, things like gold on the one hand and bitcoin on the other. The third type is issued by companies, this is where Libra fits in. It’s money more or less because a company, or group of companies, have put it out there and will accept it. These types of money have existed for a while, and are popular in video games. Libra is a new form of that. There are pros and cons, but this is how I see it fitting in.

CP: My favourite question, but the one that interviewees always hate. If you could go back five years and give yourself advice, knowing what you know now, what advice would you give yourself?

CH: That is a tough one. I think that I would tell five year younger me to not create such a scramble in the early days, and hire and raise more earlier on. I would also have wanted to focus more on the leverage and derivatives aspects of the industry sooner, as that is clearly a large trend which we would have liked to be involved in earlier. I probably would have also started our conference in November 2017. I still don’t think that I would have done a token.

CP: Charlie, thank you very much, it has been a pleasure speaking with you.

CH: Thank you, great to meet you.

Coinscrum, the UK’s largest & longest running Bitcoin & Blockchain networking group is proud to have partnered with Blockchain.com to launch the first of the regular Coinscrum_markets seminars where they’ll be introducing the key influencers & innovators who are driving the future of the digital asset market ecosystem.

Whether a crypto veteran or traditional market pro looking to expand your knowledge of this fast-evolving sector, Coinscrum_markets will provide an opportunity for you to learn from, and converse with, the people at the coal-face of the industry.

To kick things off, they will welcome three seasoned professionals who carry a wealth of experience drawn from Investment Banking, Venture Capital, Technology and the crypto-assets markets.

:: Charles McGarraugh : Head of Institutional Markets at Blockchain.com
:: Iqbal Gandham : MD at eToro
:: Simon Cowell : Head of Corporate Development at Bitstamp

They’ll each be sharing their experiences in terms of how they’ve seen the crypto markets evolve in comparison with others; their view on where they’re at now and; their thoughts on where they need to go during their next stage of maturity.

Register now at coinscrum.com/register and follow the link in the confirmation email to register for this event.

Follow  @coinscrum

This week I had the good fortune of catching up with John Salmon technology lawyer at Hogan Lovells, we had an interesting and wide ranging talk on what’s going on in crypto-land, new forms of raising money, and the laws and regulations that affect them.

Colin Platt (CP): Hi John, it’s been a little while since we last spoke, great to finally be able to catch up again. Thank you for taking the time.

John Salmon (JS): Hello Colin, yes it has been, and great to be involved.

CP: John, before we get too in-depth, would you mind sharing a bit about your background?

JS: Sure, I’m a London-based partner at the law-firm Hogan Lovells, and have worked as a technology lawyer, advising on digital and online legal issues for more than 20 years. For the last 15 years, I’ve focused on financial institutions and technology companies working in innovative areas, which we now call FinTech. As you can imagine, I have spent quite a bit of time looking at cryptocurrencies and blockchain technologies.

CP: Great place to start actually. I’m really curious about your take on this raft of acronyms that have been flying around, ICOs, STOs, IEOs. Projects are using tokens and cryptocurrencies to raise money, what are some of the challenges that you see?

JS: You’re right, they have been popular and we have had a number of discussions with clients on what is, and isn’t allowed, and the implications of what they are looking to do. There are still several areas which need further clarity from policy makers and regulatory bodies. This is an important distinction to make, while people like to group policy makers and regulators together, they have very different roles, and levels of understanding. By and large, policy makers have historically seen cryptocurrencies and using these assets to raise funds as a way for people to get around the rules. Regulators focus more on AML, terrorism funding prevention, investor protections, and increasingly cyber privacy issues like hacks. In addition to working with clients, my role has also been to educate policy makers, and regulatory bodies about these markets.

CP: I often hear people in this space say that the rules are unclear, or the existing rules unfit for crypto. What is your take?

JS: This is a complex area. To some extent there are teams that simply don’t like what the rules say, or don’t want to hear the truth, others are confused about how they apply. The fact is that while many of the existing rules do work, 10-20% don’t really work at all or were designed for an analogue, centralised world. We see wording in the rules where it was assumed that a single regulated entity could sit in the middle and act as gatekeepers. Ultimately rules, like those around money laundering, put the job of policing at the banks. In cryptocurrencies, this may not always work. We can very much look to the roots of bitcoin, which grew up in the wake of the 2008-2009 financial crisis, and found supporters who were disillusioned with the existing system and often used bitcoin as a way to get around failures.

CP: So this is an interesting point. Today we’re talking about tokens and rules, but as you point out, the early roots of cryptocurrencies, in many instances, could be seen as rejecting the rules. How does this square up?

JS: Really good point, ICOs are generally looking for clear rules rather than breaking the rules. Clients that come to us generally want to follow the law, they often just don’t know how. We talk a lot about the Howey test in the United States, but in Europe things are different, and what’s quite interesting is that European regulators have opened up the possibility of utility tokens. They have gone one step further and stated that utility tokens may completely fall outside of regulated parameters, these things are very unclear and it is currently very easy to get pulled back into a regulated area in one way or another. This can be because of the way that it was issued, or the lack of actual utility, or the way that it is marketed or promoted. It’s also important to note within EU regulations, that while EU countries are adopting more complex sets of rules for cryptocurrencies, they still also need to respect EU regulations like MIFID II, which can be complex for those working in this area.

CP: I am always fascinated by the notion of utility tokens, and personally feel like a lot of the project purporting to be utility tokens are just trying to hide what is actually a security. What are some of the things that you might look at to determine if it is actually a utility token?

JS: As I said, doing it right is really hard, and there aren’t clear tests yet, but areas like marketing, issuance and utility are important. The Swiss regulator, Finma, have expressly talked about utility at the point of issuance. Take for example a “blog token”, you sell a token that gives you access to read this blog, that’s useful today. Maybe you use that money to pay yourself and expand the blog, so in time that token could become more useful, even more valuable than the money you paid today. It’s pretty clear in this example that anyone that bought the token did so for the purpose of the underlying utility and not on the basis of trading a security.

CP: I like it, I should start charging everyone to read this blog. You did mention something important, the potential value going up over time. What about secondary markets, are those important factors?

JS: There are varying views on this. Having a secondary market for a utility token isn’t a non-starter, but some regulators may look at this as an indicator of whether the token is an investment or not. Intentions are very important, and the things that issuers do and say will have an impact. For instance, paying listing fees to cryptocurrency exchange venues could, in some circumstances be seen as a negative. Simply having a secondary market however, isn’t necessarily definitely negative, Wimbledon sold debentures to fund the development of its stadium and these are tradeable on a secondary market. Stamps are another excellent case, all postage stamps have a defined utility, but some have collector value and trade on platforms, this doesn’t detract for their utility. It is similar if we look at investors buying houses off plan and then reselling them.

CP: John, thank you very much this has been fascinating. I think that we’re going to need you to come back again soon to discuss more of these areas and look into how things evolve.

JS: It would be my pleasure to come back. Thank you.

It was rumoured that Rome was founded when the moon was in Libra. I’m not into astrology so I don’t really know what that means, but in this newsletter we look at this week’s unveiling of the new Facebook-supported Libra.

If you follow cryptocurrency at all, even in the slightest –frankly even if you don’t– you’ve no doubt heard of Libra. You may even have heard so much that you’re sick of it. I wanted to recap what I’ve read and offer a few predictions (which will likely be proved wrong, but will be interesting to come back to).

There was a lot of news on Tuesday, so let’s start with being very clear on what exactly happened. Facebook and a host of other well known companies finally released details on their intended consortia, whitepapers for their plans, as well as open source technology, named Libra. In addition to this, they launched a testnet for their Libra technology.

The Libra Association (the Geneva-based consortia) announced a fairly impressive list of founding members, below:

The announced goal, is to move from the 27 founding members to 100 members in time, with each retaining no more than 1% (this includes Facebook). The hope is that this diversified set of members will allow for an independent and distributed (both by industry and geographically) group of sponsors. What was notable, is the lack of banks. The unsaid hope, is that in doing this, Libra will be able to move away from its current unofficial moniker “FaceBucks” or “Zuckbucks” with the intention of actually being independent.

Whitepapers, Libra took the well-trodden cryptocurrency route of jotting down all their plans in a whitepaper. In fact they did the really-too-crypto-thing of writing two. The first paper is a more technical whitepaper which discusses the planned functioning and operations of the technology and network. The second is the 2017-crypto-brand “business whitepaper”, which talks about use-cases and their goals of the project. The latter was, expectedly, heavily cited and criticised by a wide audience, including in the press. The technical whitepaper received some further analysis, from my perspective more thoughtful and balanced. What was clear is that it’s still early days, and there is a lot to be done. This point, too, was heavily litigated with many expecting the announcement to showcase a ready, or nearly ready, solution. One of the fun debates was whether the Libra blockchain, was in fact a blockchain. For a purist, the answer is probably a resounding “no”, for someone that is looking at the end result, you could understand the argument.

The Libra product: Libra boils down to two assets. The first is a stablecoin which is backed by a basket of real currencies (deposits and short term bonds), simply called “Libra”. The second asset is the “Libra Investment Token” (LIT) which will be a security owned by the 100 Libra Association members. Eventually the goal is to move from a permissioned (known) set of validators to Proof-of-Stake, and LIT will likely become the asset that is that staking asset. Because it is a staking asset, LIT will likely move up and down in price like other cryptocurrencies. In addition to holding a stake, LIT holders will also receive fees from Libra transactions, as well as coupon/dividend income from the underlying assets backing Libra (the fiat basket).

One thing that I found to be commonly misunderstood was what exactly was launched this week (in addition to papers): a testnet. Libra’s code base on Github went public about the same time as the release of the whitepapers and press releases, and with it was a preconfigured network that lets anyone play around with a “pretend-version” of Libra, and it’s new contracting language, Move. I set it up, it was pretty easy, and the functionality was limited. You can mint test-Libra on the network (currently I have about 14 million), which have no real world value. Libra have announced their intention to use this network to get solution providers to build and test eventual solutions, as well as putting the network through security and functionality testing. It’s very common in open source cryptocurrencies.

Despite the fact that Libra just came as a list of intentions and a play-network they got some pretty strong reactions from governments and regulators. Bank of England Governor Mark Carney, was perhaps the most welcoming, but noted that should Libra ever take off, it would likely face heavy regulations like any other financial services’ product. Reactions in Europe were more cautious, even defiant, with French Finance Minister, Bruno Le Maire saying that it was “out of the question that Facebook should create its own sovereign currency.” US lawmakers have also voiced their concerns, and have scheduled a hearing for mid July in Washington D.C. to review it, with some members of Congress calling on Facebook to halt plans until a time in which their plans can be reviewed. Pretty strong reactions for a few whitepapers and a testnet.

My take: I am generally pretty sceptical about a lot of things, and think that Libra has a long way to go on the technology front. That said, I really like the approach of walking up to the edge and letting some plans and a git repo of technology speak to the power of changing finance. Many people that have worked in, or followed cryptocurrencies and DLT are likely familiar with the press grabbing headlines of CEOs making bold statements about these technologies, only to find out that there aren’t many concrete actions going on one or two steps down. While there are lots of people in innovation labs or technology divisions trialling it at big companies, or startups trying to invent the future, the decision makers aren’t there yet. The picture is often even bleaker in government and regulatory agencies, with outsiders complaining that things are “moving too slow”. The fact is, most of the time, things weren’t moving at all. Libra may be that wake up call for mid-level business leaders and government and regulatory officials that this stuff is coming, whether they like it or not.

I am not fully convinced that Libra will be a success, but I do firmly believe that this week could be the best opening for the industry to get clarification and forward movement beyond hype and press releases. If we are able to do that, things may start to get even more exciting because of some crazy ideas from Mark Zuckerberg’s teams.

On my end, I am going to try to digest a bit more about Move and plan on coming back with a bit more information on what that looks like.

On 12th June, Plexus were lucky enough to exhibit at the first CryptoCompare Digital Asset Summit in London.

It was an excellent day bringing together institutional, retail and regulatory crypto experts.

There were great opportunities for networking and sharing ideas, with a chance to put faces to names. It was a pleasure to catch up with clients and see so many candidates we have placed flourishing in their new roles!

The speakers brought real insight into the current state of crypto.

Get in touch and let us know what you thought of the event if you were there.

Despite the fact that the team over at Plexus make this regular newsletter possible and have a fascinating insight on the industry from a completely different angle, insight not commonly discussed in publications, we don’t often get to cover them directly.  This week however, I cornered them for a chat about their trip to Consensus 2019, the showcase event at New York’s annual Blockchain Week.

For those of you who aren’t aware, Consensus is the largest and most well-known conference in the blockchain and cryptocurrency calendar. Now in its 5th year, the event is a global gathering which mixes some of the largest companies in the world, with scrappy start-ups, and features stunts from made-up protests by “bankers against Bitcoin”, to hired Lambos lining the street in front of the Midtown Manhattan venue. Given its prominence, the event has spawned a host of other events before and after, as well as numerous parties.

Zeth and Shaun went out to join in the fun and ended up doing some business as well as getting into some interesting conversations. I got the lowdown for us.

CP: Hi, welcome back, hope that you’ve gotten over the jet-lag. Thank you for taking the time to sit down and talk to us about Consensus. First question, did you get me any good crypto swag?

Zeth Couceiro (ZC): Thank you for getting us here to talk about it, it was a great trip.

Shaun Potts (SP): Yes, thanks for this. And no, we didn’t get you any shirts, next time.

CP: Too bad, but I’ll survive. Zeth, a lot of crypto events noted that numbers were down over the last year, how did you find it at Consensus?

ZC: This was our first time at Consensus, but from speaking with people who were there previous years and comparing with what we saw this year, it felt pretty busy and was a pretty good atmosphere throughout the event. Apparently last year, it was rumoured that there were about 9,000 attendees and this year about half that. That said I would also note that there did seem to be a lot of activity outside the event in the bar and lobby. I also read an article talking about how there was quite few people who didn’t have tickets and were just networking in the lobby. I could definitely see this as there were people all over the lobby discussing their projects.

CP: Shaun, what was the overall atmosphere like at Consensus this year?

SP: There were stacks of enterprise businesses there, and relatively few traditional crypto business – the ones that were there were really focused around crypto as a vehicle for cash/trading (wallets, exchanges etc), rather than people building decentralised tech solutions. I saw more businesses trying to capitalise on that, rather than ERC20 type projects claiming they were going to change the world or be the “AirBNB of crypto” or similar grandiose/B.S statements. The space is growing up, and people are realising that they can’t spend/blitz investor/ICO cash at the rate they were in 2016-17, so more obvious use cases (stuff that makes money now) appeared most prominent. Come to think of it, the only time I really heard the term ‘decentralised’ was in the Maker talk. The session with Maker was also very interesting as they got challenged by the moderator about the stability fees shooting up to ~20%.

CP: Interesting, and that’s a great place for me to jump off on my next question. What were your highlights? Were there any moments in particular that stood out?

SP: We absolutely have to mention Andrew Yang’s interview. He was on relatively late, on Wednesday afternoon, by which point most people were conference-fatigued and the crowds had thinned, but what started as a small audience grew pretty rapidly. I had never heard of a presidential candidate speaking at a tech conference, though I’m sure they must have, but it may be a first for a crypto conference, especially when other senior politicians in the States have been bashing crypto recently. It’s a pretty risky position for him to stick his neck out and say he’s going to be crypto friendly – maybe he doesn’t really think he can win and was just being sycophantic to the crowd, who knows. But if he does win next year –even if he only wins the nomination– then that’s pretty big.

ZC: I felt that the conference overall felt a little more enterprise than I expected and with that naturally some of the talks were a little less controversial than previous years. I did like the Pete Rizzo interview with Justin Sun, the founder of Tron. Pete really seemed to be challenging him, to the point where he quoted Peter Todd [a controversial and opinionated figure in the Bitcoin community] saying why the industry doesn’t take Tron seriously.

CP: Looking back, what do you guys think could have been done better?

ZC: As a general trend, the conference showed that we have moved from ICO marketing to enterprise promoting. I feel like if Consensus wants to market itself as the go-to event in blockchain crypto then it should be an opportunity for these enterprises to make big announcements around what they are actually doing/achieved, rather than just appearing.

SP: Zeth made a great point, I’m not sure if it’s an American thing, or just a Consensus thing, but pretty much everyone we saw was just using it as a platform to push their own project which got old quickly. And it wasn’t just the enterprise guys, although they were generally more secretive, it was everyone, small and big projects alike. On the secrecy thing – you might argue that they were being secretive because they aren’t actually doing anything – ie “oohhh we can’t talk about that at this time…” read “yeah, we aren’t really doing anything but I want to make it sound like we’re doing some really cool shit in stealth mode”.

CP: I feel like Consensus is usually a pretty good “state of the industry”. What’s your TL;DR on the state of the industry right now?

SP: Shit projects who haven’t thought about how they’re going to actually generate income, like those just spending ICO cash, or worse watching it dwindle with the ETH price, are starting to fail or be cut back. All the interesting stuff is happening in enterprise with the exception of some of the DeFi [Decentralised Finance] stuff. Take the move from ICOs to IEOs – and it’s pretty much the same thing just repackaged and already on an exchange – why has this happened? I think that people still want to raise, but investors want immediate liquidity so they can jump ship if they want to. There are plenty of bitter bag holders out there, and I count myself in there – the bear market has increased levels of cynicism!

ZC: Having been in the space for years, I have noticed the flip flopping of “crypto bad; blockchain good” and vice-versa. At the moment it feels like we are moving back to the “crypto is good; blockchain is great”. By this I mean there is still a dichotomy of ideologies around this but both parties seem a lot more accepting of each other and in some instances the lines are starting to blur.

CP: And Zeth, how about specifically the state of the US crypto/blockchain industry?

ZC: In terms of a commentary of the US crypto market specifically the conference was in NYC, which generally lends itself to more finance use cases. That said I am sure this is completely different to San Francisco. I would say that generally a lot of these firms are doing business in New York but are perhaps their engineers building their platforms sit elsewhere – London, Berlin, Hong Kong. To me it this is mainly due to the sky-high salaries in the US versus Europe and the East.

CP: Ok, last question. Is it worth going to Consensus 2020?

ZC: I personally really enjoyed Consensus and it feels like ‘the’ place to be if you are working in the blockchain space. It remains to be seen if this changes, due to events like Deconomy or others. The US and in particular New York have not been particularly friendly in terms of regulatory environments, i.e. recent commentary from the SEC, as well as the [2015] introduction of the Bit License in New York state.

CP: Amazing, thank you both so much. Really interesting colour.

SP: Thank you.

ZC: Thanks for getting us on our own blog.

We also have a blog about the Deconomy 2019 event, get the lowdown here.