All posts in “blockchain”

How should cryptocurrency be regulated?

Image: Lili Sams/Mashable

Does Facebook know something about blockchain that we don’t?

Probably. If there’s one thing we can all agree on about blockchain tech and cryptocurrency, it’s that most people don’t understand them. Facebook, which recently re-organized itself to make blockchain one of its major focuses, clearly has something up its sleeve with regard to crypto. But even if Facebook revealed what it is, users would likely react with a head scratch.

The financial world is already a mystery to many. Add to that a layer of novel technology involving a digital “immutable ledger” that runs on a peer-to-peer network, decoupling the currency from any central authority, and even an interested person will start to resemble the Confused Lady meme.

To those folks, this week must have been especially troubling. It was Blockchain Week in New York City, headlined by CoinDesk’s Consensus Conference. Besides the Lamborghinis on display and the bizarre crypto-inspired stunts, there was clear progress in bridging the world of cryptocurrency with that of real-world finance, including a new suite of investor tools and a new “stablecoin” for jittery crypto investors. HTC even debuted a blockchain-based phone.

But does any of that matter in light of crypto’s Wild West reputation, with shady startups and scams dominating most of the headlines? How should the field be regulated? And what is Facebook’s crypto team up to anyway?

On this week’s MashTalk podcast, Mashable Senior Editor Stan Schroeder and Tech Correspondent Jack Morse give a status report on the state of cryptocurrency and answer some of the fundamental questions around the space around regulation, energy consumption around “mining,” and whether or not all these tokens will be worthless in the end.

You can subscribe to MashTalk on iTunes or Google Play, and we’d appreciate it if you could leave a review. Feel free to hit us with questions and comments by tweeting to @mashtalk or attaching the #MashTalk hashtag. We welcome all feedback.

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The SEC creates an educational ‘token’ to stop scammers

“Travel is expensive, but we are at the cusp of a revolution that will democratize travel and leisure for everyone,” reads the breathless whitepaper for HoweyCoins. “The Internet was the first part of the revolution. The other part is blockchain technology and cryptocurrencies.”

“I’m all about HoweyCoins – this thing is going to pop at the top!” writes @boxingchamp1934, an official celebrity backer of the token. The website is full of beautiful beaches, features a handsome team of international men and women and the technology is nowhere to be seen, buried under a sea of excitement. The whitepaper is complete and well-written, focusing on the upside that is to come. Riches await if you invest in HoweyCoin, the latest ICO opportunity from trusted folks.

Or do they?

They don’t. All that breathless optimism is a site created by US Securities Exchange Commission to warn investors of scams and issues associated with token sales. The site features all the trademarks of a scammy security token, including tiered pre-sale pricing and an urgent countdown clock.

The site features a number of red flags that the SEC encourages users to watch out for, including, most importantly, claims that tokens can only go up in value. They write:

Every investment carries some degree of risk, which is reflected in the rate of return you can expect to receive. High returns entail high risks, possibly including a total loss on the investments. Most fraudsters spend a lot of time trying to convince investors that extremely high returns are “guaranteed” or “can’t miss.”

The SEC also notes that “it is never a good idea to make an investment decision just because someone famous says a product or service is a good investment,” and that it is never a good idea to invest with a credit card.

They also warn against pump and dump language found on many ICO pages. “Our past two pumps have doubled value for the period immediately after the pump for returns of over 225%,” wrote the HoweyCoins “creators,” a giant no-no in the world of investing.

You can read the rest of the red flags here.

While the site is fairly comical, it is sufficiently complete and would fool the casual observer. The SEC also posted a real-looking whitepaper that makes it clear that anyone can string together a few buzzwords and write a passable investment prospectus. That this is now a service available to anyone — for a price — makes things even scarier.

The site is part of the SEC’s outreach efforts to help investors understand ICOs.

“Strong investor protection is part of what makes American markets so strong…and striking the balance, [between innovation and investor protection] is very important,” said Chief of the SEC Cyber Unit Robert Cohen at Consensus this week. During the same panel the SEC claimed its doors were always open for questions.

Ultimately there is little separating the scams from the real token sales. This is a problem. The SEC is framing this problem in their own way based on decades of dealing with pink sheet pump and dumps and bogus get-rich-quick schemes. While HoweyCoins may not be real, there are plenty of scammers out there, and at least something like this bogus website makes it easier to spot the warning signs.

Coinbase’s first investment, Compound, earns you interest on crypto

Compound wants to let you borrow cryptocurrency, or lend it and earn an interest rate. Most cryptocurrency is shoved in a wallet or metaphorically hidden under a mattress, failing to generate interest the way traditionally banked assets do. But Compound wants to create liquid money markets for cryptocurrency by algorithmically setting interest rates, and letting you gamble by borrowing and then short-selling coins you think will sink. It plans to launch its first five for Ether, a stable coin, and a few others, by October.

Today, Compound is announcing some ridiculously powerful allies for that quest. It’s just become the first-ever investment by crypto exchange juggernaut Coinbase’s new venture fund. It’s part of an $8.2 million seed round led by top-tier VC Andreessen Horowitz, crypto hedge fund Polychain Capital and Bain Capital Ventures — the startup arm of the big investment bank.

While right now Compound deals in cryptocurrency through the Ethereum blockchain, co-founder and CEO Robert Leshner says that eventually he wants to carry tokenized versions of real-world assets like the dollar, yen, euro or Google stock. That’s because Leshner tells me “My thesis is that almost every crypto asset is bullshit and not worth anything.”

How to get Compound interest on your crypto

Here’s how Compound tells me it’s going to work. It’s an “overnight” market that permits super-short-term lending. While it’s not a bank, it is centralized, so you loan to and borrow from it directly instead of through peers, alleviating you from negotiation. If you loan, you can earn interest. If you borrow, you have to put up 100 percent of the value of your borrow in an asset Compound supports. If prices fluctuate and your borrow becomes worth more than your collateral, some of your collateral is liquidated through a repo agreement so they’re equal.

To set the interest rate, Compound acts kind of like the Fed. It analyzes supply and demand for a particular crypto asset to set a fluctuating interest rate that adjusts as market conditions change. You’ll earn that on what you lend constantly, and can pull out your assets at any time with just a 15-second lag. You’ll pay that rate when you borrow. And Compound takes a 10 percent cut of what lenders earn in interest. For crypto-haters, it offers a way to short coins you’re convinced are doomed.

“Eventually our goal is to hand-off responsibility [for setting the interest rate] to the community. In the short-term we’re forced to be responsible. Long-term we want the community to elect the Fed,” says Leshner. If it gets the interest rate wrong, an influx of lenders or borrowers will drive it back to where it’s supposed to be. Compound already has a user interface prototyped internally, and it looked slick and solid to me.

“We think it’s a game changer. Ninety percent of assets are sitting in people’s cold storage, or wallets, or exchanges. They aren’t being used or traded,” says Leshner. Compound could let people interact with crypto in a whole new way.

The Compound creation story

Compound is actually the third company Leshner and his co-founder and CTO Geoff Hayes have started together. They’ve been teamed up for 11 years since going to college at UPenn. One of their last companies, Britches, created an index of CPG inventory at local stores and eventually got acquired by Postmates. But before that Leshner got into the banking and wealth management business, becoming a certified public accountant. A true economics nerd, he’s the chair of the SF bond oversight committee, and got into crypto five years ago.

Compound co-founder and CEO Robert Leshner

Sitting on coins, Leshner wondered, “Why can’t I realize the time value of the cryptocurrency I possess?” Compound was born in mid-2017, and came out of stealth in January.

Now with $8.2 million in funding that also came from Transmedia Capital, Compound Ventures, Abstract Ventures and Danhua Capital, Compound is pushing to build out its product and partnerships, and “hire like crazy” beyond its seven current team members based in San Francisco’s Mission District. Partners will be crucial to solve the chicken-and-egg problem of getting its first lenders and borrowers. “We are planning to launch with great partners — token projects, hedge funds and dedicated users,” says Leshner. Having hedge funds like Polychain should help.

“We shunned an ICO. We said, ‘let’s raise venture capital.’ I’m a very skeptical person and I think most ICOs are illegal,” Leshner notes. The round was just about to close when Coinbase announced Coinbase Ventures. So Leshner fired off an email asking if it wanted to join. “In 12 hours they researched us, met our team, diligenced it and evaluated it more than almost any investor had to date,” Leshner recalls. Asked if there’s any conflict of interest given Coinbase’s grand ambitions, he said, “They’re probably our favorite company in the world. I hope they survive for 100 years. It’s too early to tell they overlap.”

Conquering the money markets

There are other crypto lending platforms, but none quite like Compound. Centralized exchanges like Bitfinex and Poloniex let people trade on margin and speculate more aggressively. But they’re off-chain, while Leshner says Compound is on-chain, transparent and can be built on top of. That could make it a more critical piece of the blockchain finance stack. There’s also a risk of these exchanges getting hacked and your coins getting stolen.

Meanwhile, there are plenty of peer-to-peer crypto lending protocols on the Ethereum blockchain, like ETHLend and Dharma. But interest rates, no need for slow matching, flexibility for withdrawing money and dealing with a centralized party could attract users to Compound.

Still, the biggest looming threat for Compound is regulation. But to date, the SEC and regulators have focused on ICOs and how people fundraise, not on what people are building. People aren’t filing lawsuits against actual products. “All the operations have flown beneath the radar and I think that’s going to change in the next 12 months,” Leshner predicts. How exactly they’ll treat Compound is up in the air.

One source in the crypto hedge fund space told me about forthcoming regulation: “You’re either going to get annihilated and have to disgorge profits or dissolve. Or you pay a fine and you’re among the first legal funds in the space. This is the gamble you take before asset classes get baptized.” As Leshner confirmed, “That’s the number one risk, period.”

Money markets are just one piece of the financial infrastructure puzzle that still needs to emerge around blockchain. Custodians, auditors, administrators and banks are still largely missing. When those get hammered out to make the space safer, the big money hedge funds and investment banks could join in. For Compound, getting the logistics right will require some serious legal ballet.

Yet Leshner is happy to dream big despite all of the crypto world’s volatility. He concludes, “We want to be like Black Rock with a trillion under management, and we want to have 25 employees when we do that. They probably have [tens of thousands] of employees. Our goal is to be like them with a skeleton team.”

Coinbase CEO Brian Armstrong to talk the future of cryptocurrency at Disrupt SF

Coinbase has come a long way since its launch in 2012. The company has raised more than $225 million and paved the way for cryptocurrencies to enter the mainstream by providing a digital currency exchange. Which is why we’re absolutely thrilled to have Coinbase co-founder and CEO Brian Armstrong join us on the main stage at TechCrunch Disrupt SF in September.

Armstrong worked as a developer for IBM and consultant at Deloitte before joining Airbnb as a software engineer in 2011. At Airbnb, Armstrong focused on fraud prevention, giving him the opportunity to learn about payment systems across the 190 countries Airbnb serves.

In 2012, Armstrong co-founded Coinbase and gave a budding demographic of cryptocurrency enthusiasts the opportunity to trade in their USD for bitcoins, and later the digital currency of their choice. Coinbase currently serves over 10 million customers across 32 countries, providing custody for more than $10 billion in digital assets.

In fact, Coinbase was valued at $1.6 billion following a $100 million funding round in August 2017.

In April, the company unveiled an early-stage fund for cryptocurrency startups, and acquired Earn.com for $100 million. As part of the acquisition, the company brought on Balaji Srinivasan as its first CTO.

There were also reports that Coinbase approached the SEC to become a licensed brokerage firm and electronic trading venue, which would allow the company to expand beyond the four coins (Bitcoin, Bitcoin Cash, Ethereum, Litecoin) that trade on the platform now.

Just yesterday, Coinbase announced that it would offer a new suite of services aimed at institutional investors, who are beginning to warm up to cryptocurrencies.

There is plenty to discuss with Armstrong come September, and we’re absolutely thrilled to have him join the stellar Disrupt SF agenda. You can head over here to buy yourself tickets. See you there!

Yes, HTC is working on a ‘blockchain phone’

A few weeks ahead of its latest flagship announcement, HTC just revealed another piece of hardware. While the Taiwanese company has consolidated much of its mobile offerings in recent years, it announced today at the Consensus 2018 blockchain conference in New York that its upcoming Exodus handset is embracing everyone’s favorite tech buzzword.

So, what makes a phone a blockchain phone, exactly? Security and cryptocurrency support, mostly. According to HTC’s Exodus landing page, “Our vision is to expand the blockchain ecosystem by creating the world’s first phone dedicated to decentralized applications and security. With the release of the HTC Exodus we can now make this a reality.”

The Exodus will support Bitcoin and Ethereum, among others, courtesy of a universal wallet, secure hardware and decentralized apps. According to The Next Web, HTC has also outlined plans to create a native blockchain network, whereby cryptocurrency can be traded amongst Exodus users. Naturally, users will also be able to purchase the phone itself using cryptocurrency. That price and the release date, however, have yet to be revealed.

There’s not really a lot of information beyond that and the above drawing, but HTC is clearly gunning to make a splash as its numbers have shrunk in overall proportion to a declining smartphone market. Even with rapidly increasing awareness and interest in the cryptocurrency space, however, it’s hard to imagine Exodus making much of a splash.