Lending stable coin threatens traditional banking

Crypto seems to look more and more like the banking sector, as more projects launch and mature that resemble bank activities.  Recently we have written about security service Blackwatch Digital and their secured and insured custody service.  Now we are researching a unique stable coin and lending platform known as MyConstant.

What we like about this is that it truly resembles a platform, the way Crypto was intended to be designed.  In the platform lenders can choose their own terms, no credit check, and no nonsense – and find borrowers.  It’s all backed by a stable coin like the US Dollar so there’s no volatility worries in loan calculation.  This is really a micro-finance product they are just using Crypto as the underlying technology.  Frankly, programming a system like this using the US banking system, would be expensive, cumbersome, time consuming, and who knows what it might look like after all the regulatory approvals.

We should note that Constant began as a stable coin and evolved into the lending platform it is now – a healthy and normal evolution.  Borrowers need money and lenders want return on their money.  The platform charges a reasonable 1% fee on all transactions.

Pre IPO companies like Circle are snapping up startups, according to Crunchbase Unicorn Circle has already purchased SeedInvest, Poloniex, and Trigger Finance.  Are companies like MyConstant next?  As the platform proves itself, it may be an easy acquisition target for some of the Crypto ‘big boys’ to integrate into their existing ecosystem.  That’s what companies like Circle are likely waiting on.  Why invest in R&D when you can let the market do that, and then swoop down with boatloads of cash for a quick sale and acquisition? 

That’s the Microsoft strategy, who bought more than 10,000 companies in their lifetime.  It may be the strategy used by many of the larger firms in Crypto, copying the success of Microsoft.  It has always been a big question, why don’t firms engage in more R&D.  Perhaps this is why.

In case you don’t know what are stable coins, here’s a great explanation from Coin Telegraph:

Stablecoins are a new type of cryptocurrency that often have their value pegged to another asset. These coins can be pegged to fiat currencies such as the United States dollar, other cryptocurrencies, precious metals or a combination of the three. Fiat seems to be the most popular option in the marketplace right now, meaning one unit of a stablecoin equals $1. Stablecoins are designed to tackle the inherent volatility seen in cryptocurrency prices. They are normally collateralized, meaning that the total number of stablecoins in circulation is backed by assets held in reserve. Put simply, if there are 500,000 USD-pegged coins in circulation, there should be at least $500,000 sitting in a bank.  With bitcoin suffering abrupt crashes and sudden gains, advocates believe stablecoins help eliminate doubt about conversion rates — making cryptocurrencies more practical for buying goods and services.  Examples of the best-known stablecoins include tether (USDT), trueUSD (TUSD), gemini dollar (GUSD), and USD coin by Circle and Coinbase (USDC). Demand for such coins has been growing. In December, Cointelegraph reported claims that four major stablecoins had clocked up $5 billion in on-chain transactions within just three months — enjoying a 1,032% surge in November compared with two months earlier.

The reasons to use stable coins are clear – and it’s also a logical obvious fit for a lending platform.  There’s no reason to mention that lending is a growth business; lending is the main service of the banking environment in the world.  Only in the US, personal loans equal $138 Billion with a “B” according to CNBC:

Total outstanding U.S. consumer loans hit a record last year, driven by digital-first lending options. Financial technology, or fintech, companies now make up 38 percent of the personal loan market — up from just 5 percent five years ago, according to new data from TransUnion. “The rapid growth in consumer loans sits squarely on the shoulders of fintechs,” says Jason Laky, senior vice president and leader of TransUnion’s consumer lending line of business.

Fintech makes up 38% of that, and Crypto certainly is Fintech.  So what’s next?  It’s a simple move, to start using Crypto for your borrowing needs.  Bitcoin has already been used to purchase real estate.  There are even services that will facilitate Crypto purchases of real assets.  So Crypto lending isn’t so far-fetched after all.  Perhaps, as explained in Splitting Bits in 2017, we are all just one byte away from a Blockchain based financial system.

Crypto market paradigm shift – Enterprise Grade projects enter the market

From Zero Hedge 8/27/2019:

The Crypto market has seen a dichotomy of change; on the surface, we’ve seen a drop in retail popularity and a general loss of hope in the Bitcoins of the world.  But in the background, in parallel, a number of companies are developing institutional grade products that are going to change Crypto forever.  We’ve outlined some of them in other articles here on Zero Hedge.

Our hope is that these projects will create a solid foundation that will foster institutional investment in Crypto.  That’s the world we come from, the world we know – and when it happens it will legitimize Crypto.

Take a look at CPI Tech from Germany:

CPI Tech, based in Germany, was founded by Marvin Steinberg & Maximilian Schmidt, two successful entrepreneurs with leading roles within the blockchain industry.  The CPI Tech mission is to build the best possible solution for asset holders and companies by tokenizing the asset and to create a new and more advanced way for investors to invest in assets.   Apart from creating highly scalable and rock-solid blockchain software, CPI Tech also specializes in creating extremely lucrative software for their clients to sell on autopilot - without them having to worry about IT, promotion, or marketing. CPI Tech handles all of the process, providing a full solution from A to Z.

What’s revealing about this is that they are targeting the enterprise, not the consumer.  Let’s face it, Bitcoin was a consumer product, and a poor one at that.  With clients like CEOs, Entrepreneurs, Pre IPO founders, and others – we’re seeing a new audience for Crypto which is no longer the tire kickers with $10 to their name.  Bitcoin was cool and it provided the needed exposure to bring a real paradigm shift, but by itself, Bitcoin is not a store of value or an easy transactional currency.  Try paying your employees in Bitcoin and see their reaction (Action Item).

And of course, we’re assuming that many of these new startup coins will have robust security solutions for their Crypto that are insured, such as we have recently written about in articles.  There’s a simple reason that the Fidelity’s and the Schwab’s are not in the market: They are afraid of being hacked.  So if that is now ‘solved’ as it says in the above article, then what are we waiting for?  It’s not going to happen overnight, but it seems to be the beginning of the end of the Crypto-meltdown.  New coins may be more stable and less exciting than Bitcoin, but also more credible and sustainable.

One can make many statements about the Crypto bubble but there’s one we can all agree with – It just wasn’t sustainable.  There were too many fly by night ICO frauds, too many unscrupulous exchanges, too many projects that invested in marketing instead of R&D.  Overall, we learned lessons but from the ashes we are seeing the rise of companies that may last 100 or 1000 years.   Now, even banks are taking a deep look at Crypto:

Just as recently as March 2019, IBM announced 6 banks to issue stablecoins and use the Stellar XLM platform: Announced Monday, six international banks have signed letters of intent to issue stablecoins, or tokens backed by fiat currency, on World Wire, an IBM payment network that uses the Stellar public blockchain. The network promises to let regulated institutions move value across borders – remittances or foreign exchange – more quickly and cheaply than the legacy correspondent banking system.  So far three of the banks have been identified – Philippines-based RCBC, Brazil’s Banco Bradesco, and Bank Busan of South Korea – the rest, which are soon to be named, will offer digital versions of euros and Indonesian rupiah, “pending regulatory approvals and other reviews,” IBM said.

As explained in Splitting Bits, the US Dollar has been used and traded electronically since the 1990s.  So the idea of electronic currency is nothing new.  What’s new is currencies are no longer created exclusively by central banks.  Now many new currencies are being created almost on a daily basis.  Many of them will fail, but the ones that survive the test of the markets, may be the next G8 currencies traded on the Forex market.

That means as banks are getting into Crypto so are all their clients and friends.   Most people don’t know that IBM actually develops and maintains the hardware and software for a great majority of the banking sector.  Their Cryptocurrency, Stellar, is a major player in the Crypto space.  Although Stellar hasn’t received the media attention that Bitcoin has, it is being chosen as the underlying framework for many projects.

CPI Tech is making a plug-n-play solution for the enterprise.  The ramifications for such use are astounding.  Imagine for a moment if Bitcoin had the same momentum but with institutions behind it, not your small retail investors.  It would really be transformative, just like Bitcoin originally promised.  Perhaps one of the flaws of Bitcoin and it’s lack of success were the fact that it didn’t have the ecosystem attached to it.  They didn’t make a development environment, or something similar to how Ethereum has ‘dapps.’

Companies such as Circle can offer more stable coins and Enterprise grade services.  This will attract more investment capital into the companies like Circle offering these products, which will create a positive upward cycle (not a bubble.)  In that case, and only in that case – we will see a real bull run and not a bubble.  Here’s hoping!

Secure and Insured Crypto Custody

What the future of money will look like: Secured Gold Backed Crypto

Back a few years ago before Bitcoin was all the talk, as if Bitcoin is going to be the new money of the future, or a one world currency.  Obviously that hasn’t happened but the Crypto market is growing by leaps and bounds.  We’re going to take a look at a few exciting projects and let readers decide for themselves.  But at first glance, projects are taking shape they are just taking longer than usual.  We’re not going to get into a discussion about tZero, the first regulated securities token, which is still delayed.  But we are going to look at what some on the fringe have been doing, and their tokens and products are just launching.  We’re going to look at how these solutions solve major problems. 

First, the problem of Crypto not being ‘backed’ by anything.  A token is being launched called Kinesis (KVT) that is backed 1:1 by gold and silver.  By itself that’s not a new idea or so novel – but how they are doing it is looking that this launch can be successful.  The founder has explained more about this in a Forbes article:

Kinesis Money is fully operated by the Allocated Bullion Exchange (ABX), an institutional marketplace set up in 2011 for the trade of physical precious metals, gold and silver, being two of the most stable and definable stores of value, across seven global locations.  For the benefit of Kinesis Money, ABX provides the comprehensive infrastructure with the advent of blockchain technology - and the introduction of cryptocurrencies. This gives it a firm advantage over other cryptos in the gold space which simply do not have this backing.

So this isn’t just a couple of kids in the garage – this is a serious commodity backed exchange.  What other types of players have entertained the idea of Gold backed currency?  Russia’s Central Bank has even considered a gold backed Crypto Currency:

“As for mutual settlements, we will consider, of course, [the] proposal on … a gold-backed cryptocurrency.

As most people know, the fundamental difference between Crypto currency and fiat currency is that fiat currency is backed by banks, which are backed by central banks, so it’s notable to watch what central banks are doing in the crypto market.  And what’s ironic about a Gold backed currency – Gold is used as a reserve by some central banks as a physical commodity that always has value.  This has become unpopular in the last 10 years, but China and Russia are hoarding Gold.  In particular, Russia

There’s even a long list of Cryptocurrencies that are backed by gold in some form.  But also the fact that there are so many novel approaches to the same concept solidifies the idea. 

“There’s no monopoly on Great Ideas” Randall S.

Of course, this is all digital so the big risk is going to be getting hacked.  If your ‘digital’ gold get’s hacked it’s the equivalent of your Gold storage being looted.  That’s where Dark Vault comes into play, a new custodial and security service launched by Crypto startup Blackwatch.  Just like in the example with Gold tokens, there are secure custodial solutions out there, but this one seems to be unique.  If it’s as good as it looks, this can create a situation where once again fiat investment dollars will be flowing into Crypto. 

We interviewed a former employee of tZero who wishes to remain anonymous, and this is what he said:

“There’s an unknown number but in the billions of dollars waiting to invest in Crypto if someone can solve the security issue.  Everyone is afraid of being hacked.”

So as institutional investors feel safer, we believe they will start investing in coins like Kinesis, just like investors hold cash.  When you are holding cash you are actually in a Forex trade, that’s denominated in US Dollars (if you are in the US).  Stablecoins are the future, not wild volatile tokens like Bitcoin.   What Bitcoin did was attract attention of the world and get the Crypto market started, which was great – Bitcoin was the prime mover.  But you can’t pay your salaries in Bitcoin nor is it really a good ‘investment’ as due to the mining feature it requires more and more US Dollars to flood into it in order to support the price.

Actually banks and central banks have been thinking of issuing their own coins for a long time.  Just as recently as March 2019, IBM announced 6 banks to issue stablecoins and use the Stellar XLM platform (just as Kinesis):

Announced Monday, six international banks have signed letters of intent to issue stablecoins, or tokens backed by fiat currency, on World Wire, an IBM payment network that uses the Stellar public blockchain. The network promises to let regulated institutions move value across borders – remittances or foreign exchange – more quickly and cheaply than the legacy correspondent banking system.  So far three of the banks have been identified – Philippines-based RCBC, Brazil’s Banco Bradesco, and Bank Busan of South Korea – the rest, which are soon to be named, will offer digital versions of euros and Indonesian rupiah, “pending regulatory approvals and other reviews,” IBM said.

Clearly, Crypto is not just a fad – it’s changing the underlying architecture of the global financial system.  But this is something that’s been happening over a long time frame.  Crypto is a technology, not a form of money.  But that technology was utilized in the ultimate use case to be a form of money in a Crypto currency. 

As explained in Splitting Bits, the US Dollar has been used and traded electronically since the 1990s.  So the idea of electronic currency is nothing new.  What’s new is currencies are no longer created exclusively by central banks.  Now many new currencies are being created almost on a daily basis.  Many of them will fail, but the ones that survive the test of the markets, may be the next G8 currencies traded on the Forex market.

To learn more about money, checkout Splitting Pennies - Understanding Forex

Bitcoin security risks SOLVED

We’re all too familiar with the story.  An exchange builds a respectable reputation in a dark and unregulated space, only to get hacked.  But unlike in the traditional banking system, there is no way to get your funds back.  Billions of institutional money is sitting on the Crypto sidelines for this single reason: they are afraid of getting hacked.  Now you must understand that it’s one thing when your own individual account is hacked and you lose your own money; and it’s quite another if it’s client money.  Let’s take Fidelity as an example, because they like Crypto.  Imagine Fidelity has $50 Million equivalent Bitcoin in client funds and it gets hacked.  Fidelity is liable for all the funds meaning it will have to cover the loss with cash.  But it wasn’t insurable, until now.  Digital security company Blackwatch has developed a product Dark Vault which adheres to AML/KYC controls and is ISO 27001 compliant.  But what’s cool about this solution is that not only is it more secure than the current alternatives, it provides real-time access to your Crypto (Competitive products require multi-day ‘withdrawal’ procedures as the solutions are heavy on physical security, not network design).

The strength of the Blackwatch solution is in the architecture.  The problem with most Crypto security solutions is they rely on a single ‘gateway’ so this can also be a single point of failure.  This is the same flaw in traditional network security, whereby a firewall can block 100% of outside hack threats but can’t stop an insider from copying files or accessing computers once inside the firewall (physically).  Studies have shown that the majority of major security breaches come from employees, not from outsiders.  That’s not to say the employees are the hackers themselves, they may be victim to a phishing attack and unwittingly bring Malware to their workplace on a thumb drive, or in case of the CIA contractor Booz Allen Hamilton, left “Sensitive government passwords exposed online” –

Earlier this month, a Booz Allen Hamilton employee accidentally left “sensitive government passwords exposed online,” according to The Washington Post. The worst part is that he didn’t even realize it. And neither did Booz Allen Hamilton.  It wasn’t until Chris Vickery, a cyber analyst at Upguard, accidentally stumbled upon them and wrote about it.  Booz Allen Hamilton isn’t some fly-by-night operation. They’re a big-time government contractor. And according the Post, it’s just the latest in a long line of recent “high-profile cases” where “top secret data was mishandled.”

Cyber security firms such as Black Watch Digital are addressing this issue with architecture described as ‘multi-secure’ which means multi-signature, multi-technology, and multiple levels of encryption are used throughout the platform.  Note though that this is an Enterprise solution, meaning it would be your exchange or Crypto Custodian that would implement the solution, not the individual user. 

When there are such obvious solutions like Dark Vault, one asks the question why someone didn’t do this before.  The answer is, you have to ask all the others.  But what’s certain is that Dark Vault is going to cause a major paradigm shift in Crypto.

Famous hacks

Mt. Gox is the most famous and technically the largest hack, although Bitcoin was worth much less at the time of the hack.  As early as January 2018, Coincheck was hacked for $530 Million USD.

On January 26, hackers compromised user accounts of Coincheck, a Japan-based cryptocurrency exchange. A whopping 560 million NEM tokens worth around $530 million at that time was stolen, making Coincheck’s hack one of the biggest the industry has ever seen, even surpassing the hack of Mt. Gox!  Upon further investigation, it was found that Coincheck exchange suffered from a security lapse that enabled the hack. Apparently, one of Coincheck’s internal computer systems was infected with malware that led to a data breach. The virus allowed attackers to collect many private keys a couple of weeks prior to the hack. Hackers successfully ran off with the stolen coins easily since the Coincheck kept their assets in hot wallets, which are more vulnerable to hacks than cold ones due to their connection to external networks.

One would think with the large quantity of hacks and large sums of money lost operators of exchanges would learn from their lessons.  But the issue isn’t always mistakes, the issue is that they didn’t have a solid design of their security architecture.  There have been 7 hacks already in 2019 totaling more than $800m in USD value of Crypto stolen, and some of the exchanges are big names like Cryptopia, Binance, and others.

What is it going to take for the operators of these exchanges to wake up?  As is the case with any risk scenario, one needs to weigh the cost of insurance vs. the risk of not taking it.  Here, we are looking at complete loss scenarios, if you’re hacked it’s usually a complete hack.  When banks get hacked, there are ways and means to recover lost funds and if they really get in a pinch the Fed can create fresh USD or CAD.  With Bitcoin that’s not the case.  So security needs to be a priority in the Crypto world.

Binance is the world leader in Crypto exchanges, and even they were hacked for over 7,000 Bitcoin or about $40 Million USD in value:

Hackers have stolen over $40 million worth of bitcoin from Binance, one of the world’s largest cryptocurrency exchanges, the company said on Tuesday.  Binance said the hackers ran off with over 7,000 bitcoin and used a variety of attack methods to carry out the “large scale security breach” which occurred on Tuesday.

If even Binance is getting hacked, clearly the current security systems aren’t working.  Fortunately we now have Blackwatch.  With the widespread adoption of Dark Vault, perhaps we will finally see institutional money flow into the Crypto space.

For more insightful analysis, checkout Global Intel Hub.