EUROPEAN ASSOCIATION OF CORPORATE TREASURERS
TRUST AND THE DISTRIBUTED LEDGERS CREATIONS
On the last day of 2017, there would be 1 372 “cryptocurrencies” with a theoretical value in circulation (incorrectly called “market cap”) of USD 574 bio.
For the remaining of this article, I might write using the indicative tense rather than the conditional for convenience, but the reader should not be fooled, we are dealing with a fluid world, promising with innovation but full of uncertainty. The technologies are evolving, using partially tested structures and the specialised mathematics of cryptography. It might not be so different from the derivatives world decades ago before the subject was taught in universities and knowledge spread.
Two years ago, I made a presentation to the board of the EACT about blockchain. Few people in the room raised their hands when asked if they knew what it was. No doubt there was a healthy dose of humility in the audience, but today, it is widespread, a buzzword in finance. This month, the stock price of a company (Long Island Iced Tea Corp) surged 500 percent after changing its name to Long Blockchain Corp… There is a taste of the dotcom bubble.
Bitcoin, the most traded cryptocurrency is priced around USD 13 000 after peaking at USD 19 666 on December 17. It represents 38% of traded cryptocurrency volumes with a daily volume of USD 13 bio and all bitcoins mined so far (close to 17 mio) represent a value of USD 220 bio. Ripple recently soared with 18% of volumes. The third most traded, Ethereum, represents 8% of volumes (source: www.coinmarketcap.com).
The real value of such instruments is assessed when they are sold and go from the virtual world to the real one. The prices and volumes quoted reflect trades from digital coin exchanges and OTC desks. I wonder how much of these volumes were physically settled fully into “real” (though fiat) currencies and how much was cash settled for differences in speculative trading.
Converting theoretical virtual wealth in cryptocurrencies to their real world’s counterparts was always an issue. Initially, the value of cryptocurrencies was difficult to realize because of the anonymity: think about the founder of Silk Road who never had a chance to spend any of its fortune in Bitcoins but is serving a life sentence. Now, even the legitimate cryptocurrency proceeds might be difficult to realize without moving the market.
I hesitated to write the trading codes (BTC, XRP, ETH...), as each time I wonder what they describe. Are they currencies, financial or digital assets? Tokens, maybe, to use a more virtual and less precise word.
Assets like stocks and bonds entitle the owner to cash flows, or property of tangible asset. This is not the case for cryptocurrencies. Some will argue that gold does not either provide cash flows, but it is used by jewellers and in other industries, and is recognized as scarce on earth (the estimated 160 000 MT mined so far would fill a cube of 21 meter of edges).
Currencies are means of payment, used to label the value of other assets and facilitate trade. But with a monthly realized volatility of more than 130%, Bitcoin might be suitable for speculation but not for commercial use in normal businesses. It doesn’t yet fit in my definition of currency.
Bitcoin, created in 2008 became popular because of its libertarian philosophy: it brought new freedom to all, including criminals, anonymity (well pseudonymity). But mostly it introduced the world to blockchain, and more generally to Distributed Ledger Technology (DLT).
The revolution of DLT is a challenge to the concept of TRUST, and underlying trust is the concept of identity.
We used to trust central authorities like central banks, banks, governments, and recognised their creations as the truth (coins, banknotes, accounts, passports...), even if we did not have all the ability to identify a forged bank note or passport, we knew forging them was a crime severely punished. Should trust be now granted through a network by consensus or an algorithm?
In the ridesharing service BlaBlaCar, one gains trust capital by uploading one’s passport or by showing numerous contacts in LinkedIn or Facebook.
The network, of nodes, agents, relationships is the new source of trust.
Among other things, Bitcoin was successful to create an ecosystem because miners are financially rewarded. It is a true open public DLT but has flaws that are consequences of its requirements: it is slow, consumes significant computing resources and there have been reports of hacks (Yapian a few days ago in South Korea, BitFinex in Hong Kong in 2016). Some Exchanges have filed for bankruptcy. Some governments have warned of speculation, some are about to or have forbidden exchanges on their territory (China, Israel...), others seem to ride the wave like Venezuela which announced the creation of the Petro.
An interesting idea linked to blockchain is “smart contracts”, the ability to write contracts as software that will automatically execute if some conditions are met. This seems immediately useful for documentary credit processes. But a real-world example of “smart contracts” in investing, DAO, was hacked in 2016 just 2 months after inception and the issue had to be resolved by humans. Are we replacing lawyers by code-writing lawyers?
DLT (blockchain or not) and cryptocurrencies/tokens are promising and should be considered by anyone who implements an information system, whether for payment, accounting, transaction, logistics...
It is disruptive and like most new technologies (although it is more than 10 years old), the market still needs to sort out what is truly bringing innovation and additional value vs. existing solutions. In particular, one should assess the benefits and costs of a technology and its suitability to specific needs. If we probably all agree that Treasurers want faster, cheaper and safer transactions systems, we may wonder if we want also a permission-less (public) system, since this feature brings the issues of computing power, scalability and security.
The 1970s and 1980s saw the emergence of financial derivatives and computers, and treasurers thrived on these innovations.
Today, with Fintechs in general and Distributed Ledger Technologies in particular, our community is faced with new disrupting factors. The adage remains true, study the term sheet and only transact what you understand.
Jean-Marc Servat chairs the EACT and has worked in his career for Cisco Systems, Nokia and Apple Computer.