5 November 2017 – JoongAng Sunday

CRYPTOCURRENCIES: THE NEW TSUNAMI? Op Ed by Dr Rory Knight

JOONGANG SUNDAY

Dr Rory Knight, is Chairman of Oxford Metrica JoongAng Sunday is the Sunday edition and a member of the Board of the Templeton of the leading Korean language daily newspaper Foundations. He was formerly Dean of Templeton, JoongAng Ilbo. It is one of the three largest Oxford University’s business college. newspapers in South Korea. The paper also Prior to that Dr Knight was the vize-direktor publishes an English edition, Korea JoongAng at the Schweizerische Nationalbank (SNB) the Daily, in alliance with the International Swiss central bank. New York Times.

The recent banning of Initial Coin tralised known as a immaturity. The sector is basking in the Oferings (ICOs) by the Korean Financial which does not require a central author- heady glare of a gold rush. There will of Services Commission (KFSC) has thrust ity, repository or any other intermedia- course be losers. However, dismissing the firmly into the glare tion to verify transactions. The develop- total value of the sector as a price bubble of the spotlight. Korea is not the only ment of the cryptographic technology could be mistaken. Collectively, the mar- country to take such a step. China also has caused an explosion in digital cur- ket may be underestimating the value of recently banned the practice but went rencies. There are now nearly one thou- this disruptive sector. If - as seems likely - even further by closing down cryptocur- sand cryptocurrencies in circulation. Ta- cryptocurrencies signal the end of banks rency exchanges as well. These actions ble 1 lists the top ten cryptocurrencies by as we know them, the sector could be no doubt represent a well-intentioned market capitalisation. Although worth considerably more. How this value attempt to protect consumers. ICOs use is still the largest by value its competitors should be allocated across contenders is crowd funding and cryptocurrencies to are catching fast and as measured by vol- of course currently uncertain. There are raise funds directly from the public, and ume have overtaken Bitcoin. In ranks 2 early signs of consolidation and over the since the “coins” are not securities they and 3 are Bitcoin competitors Ethereum next 18 months the number of crypto- are not subject to the same regulations and Ripple. Ethereum is emerging as a currencies will inevitably reduce. Table 1 as traditional Initial Public Oferings standard in the ICO arena. Ripple with reports the price and market capitalisa- (IPOs). ICOs are based merely on a pro- its approximately $10bn capitalisation tions of the top 10, this list is likely to con- spectus or whitepaper where investor and alleged $15bn reserves aims to part- tain the two or three eventual winners as rights are at best ambiguous. There is ner with other systems. the battle for the top spots works itself therefore potential for abuse by the un- Ripple is by volume the most popular in out. Given this, regulatory intervention scrupulous. Despite these risks, ICOs are the Korean Won trades. The price of the may be premature. Providing the public the fastest growing source of new capital currency units is extremely volatile on a with accurate and adequate information for start-ups around the world. Banning daily basis but the trend is ever upwards. on the risks may be sufcient for now. them outright runs the risk of imposing The combined value of the top 10 is in significant opportunity costs on many excess of $136bn with Bitcoin on over The dangers of anonymity start-ups. $80bn which would place it in rank 115 of all companies. Its price is now approach- The anonymity of the blockchain The rise of cryptocurrencies ing $5,000 representing an increase of system represents both its strength and 378% in 2017, year to date. The price rally its weakness - a strength in that par- Bitcoin is the original and best- has proceeded unabated despite the deci- ticipants are protected which allows full known digital currency. Released as sions of the Chinese and Korean regula- transparency on the transactions but a an open source application in 2009 by tors. However many leading commenta- weakness in that there are nagging fears an anonymous group of developers, it tors such as Kenneth Rogof claim the that the system will be used by fraud- now operates as a cryptocurrency and a Bitcoin price is a bubble about to burst. It sters. Fraudsters have access to real cash means of digital payment. It operates as is obvious that the frenetic creation of so too, and that has not been banned yet – a peer-to-peer system based on a decen- many cryptocurrencies is a symptom of although Larry Summers is calling for cryptocurrencies: the new tsunami?

that too. A more sensible approach may well for users. The extraordinary demand haps a more comprehensive approach be to ensure that market participants are as reflected in the high trading volumes to regulating the whole cryptocurrency identifiable if not identified by some sort indicates a healthy future for cryptocur- ecosystem could be created that would of KYC (Know Your Customer) arrange- rencies. Its success, however, will depend give Korea a competitive advantage and ment. However such a scheme would be on the emergence of well-structured and secure its position as a global financial self-defeating if it burdened the new sys- cost efcient trading platforms. centre with an innovative approach to tem with the same regulations that hold regulating cryptocurrencies. Korea is back innovation in mainstream banking. ICOs dominate venture funding well placed to lead the field in this arena This is a new world and requires new if it acts thoughtfully to create an envi- rules. The current SWIFT system of in- The emergence of cryptocurrencies ronment which protects investors with- ternational payments, for instance, takes hand-in-hand with exchanges on which out smothering innovation. two to three days to complete a transac- to trade them has enabled the prolifera- tion at exorbitant cost with some opac- tion of the ICO. An ICO allows any cor- Bankers beware ity on exchange rates. This compares to poration - usually a start-up - to raise 15 to 20 minutes at almost no cost at an capital using crowdfunding by issuing JP Morgan CEO Jamie Dimon de- observable exchange rate using a cryp- its own coins (tokens) for pre-existing nounced Bitcoin, the leading cryptocur- tocurrency. Given this, how long can traded cryptocurrencies. In turn these rency by value, as a fraud that will be SWIFT hope to survive? proprietary tokens may themselves be closed down. His concern is understand- traded on the cryptocurrency exchanges. able though his conclusion is likely to be Crypto exchanges proliferate In addition many of the cryptocurrency wide of the mark. In fairness, his con- exchanges have been funded by ICOs cerns about some aspects of Bitcoin are The rise of cryptocurrencies in turn and so the is complete. The current well founded as mentioned above. How- has generated a demand for exchanges year has seen an explosion in ICOs with ever this tsunami of innovation cannot on which to trade them. The market 175 year to date. These have raised $2.7bn be willed away by bankers or regulators. has not disappointed and has provided worth of capital which is more than that Many luddite bankers will no doubt call these by the dozen. There are now re- raised by early stage venture capital fund- for the protection of the regulators to ported to be more than 113 active cryp- ing. Table 3 lists the top 10 ICOs so far this shut down the rise of this new technol- tocurrency exchanges trading in excess year. The largest have raised over a quar- ogy. The more enlightened such as UBS of 5,000 currency pairings with a daily ter of a billion dollars each in a very short will seek to embrace the new world. volume approaching $3 trillion. Crypto- time interval or duration. The two largest UBS has invited a consortium of banks currency exchanges allow participants FileCoin and Tezos raised the funds as to join their blockchain initiative Utility to trade a cryptocurrency for another Bitcoin and Erethreum. The fastest raise Settlement Coin (USC). The USC is not cryptocurrency or a real currency. These in the top 10 by size is Bancor in Switzer- designed to be a new cryptocurrency as bilateral trades are known as pairings. land which raised $153 million in 3 hours. such but digital currency for settling and The top 10 exchanges by recent trading Ethereum is emerging as the standard in clearing transactions. It is expected to be volume are reported in Table 2. The two the ICO market both in terms of the issu- launched in 2018. largest volume exchanges are Korean ing currency and the underlying block- although traders are able to participate chain for trading the newly issued coins Cryptocurrencies, the blockchain from anywhere in the world. The most created by the ICO. Further evidence of cryptography technology underlying popular pairwise trading on the Ko- the competition that Bitcoin faces. The them and the exchanges on which rean exchanges is the Ripple/Won (XRP/ major concern about ICOs expressed they are traded represent the most sig- KRW). It is interesting that the Korean by many financial regulators is the pro- nificant financial innovation since the Won/Ripple pairing is the most traded tection of investors. Typically, investors invention of money itself. They are the pairing followed by the Bitcoin/US dol- in ICOs receive some right to services most powerful force for financial disin- lar (BTC/USD). Bithumb and Coinone, or other benefits which are very often termediation, and their emergence is the top two, are Korean and both allow poorly defined. Clearly, these are risky unstoppable. trading of many pairings. In third place bets with almost no consumer protec- is Bitfinex a Hong Kong exchange where tion. Korea, as stated, is on the leading In the decade since the financial the BTC/USD is the most traded pairing. edge of the emergence of cryptocurren- crisis banks around the world have been The most popular trade on Hitbtc, the cies, hosting three of the top ten most drowned in regulation. Banks have been Hong Kong exchange ranked 5th, is an active cryptocurrency exchanges. It is neither innovative nor customer friendly. all cryptocurrency pairing of Ethereum understandable that the Korean Finan- Now they face a new nemesis in the shape and Bitcoin (ETH/BTC). The other Korean cial Services Commission was concerned of a technological innovation emerging exchange in the top 10 is Korbit on which enough to ban ICOs. Japan, by contrast, outside banking. They have been signally the Bitcoin/US Dollar is the most traded has recently adopted a more welcoming unresponsive. Banks should be worried. pairing. It is likely that only a few of policy in recognising Bitcoin as legal ten- The signs are clear. Cryptocurrencies are these exchanges will survive in the face der and allowing the formal registration here to stay. - perhaps they should be of such intense competition. This augurs of eleven cryptocurrency exchanges. Per- treated as a new asset class. 5 November 2017 – JoongAng Sunday

TABLE 1. Top 10 Cryptocurrencies Prices at 10th October, 2017.

Rank Cryptocurrency Code Price per coin $ Market Capitalisation $MM

1 Bitcoin BTC 4,808.70 80.41

2 Ethereum ETH 302.85 28.91

3 Ripple XRP 0.25 9.69

4 BCH 319.88 5.35

5 Litecoin LTC 50.89 2.71

6 Dash DASH 285.99 2.18

7 Nem XEM 0.21 1.94

8 Neo NEO 29.80 1.48

9 Iota MIOTA 0.48 1.34

10 Monero XMR 86.67 1.32

TABLE 2. Top 10 Cryptocurrency Exchanges Trading volume average rounded 1st to 10th October, 2017.

Rank Cryptocurrency Average daily volume Country Largest Volume Exchange $ MM pairing

1 Bithumb 500 Korea XRP/KRW

2 Coinone 495 Korea XRP/KRW

3 490 Hong Kong BTC/USD

4 Bittrex 200 US BTC/USDT

5 HitBTC 180 Hong Kong BCC/BTC

6 Poloinex 120 US ETH/BTC

7 115 US BTC/EUR

8 CoinbaseGDAX 100 US BTC/USD

9 80 UK BTC/USD

10 Korbit 75 Korea BTC/KRW cryptocurrencies: the new tsunami?

TABLE 3. Top 10 Initial Coin Offerings (ICOs) 1Source: coinschedule.com

Rank ICO Value raised1 Principal currency Duration weeks Country $ MM raised

1 FileCoin 257 BTC/ETH 4 US

2 Tezos 232 BTC/ETH 2 Switzerland

3 Eos 185 ETH 52 Cayman I.

4 Bancor 153 ETH 3 hours Switzerland

5 Kin 97 ETH 2 Canada

6 Status 90 ETH 17 hours Switzerland

7 TenX 64 ETH 7 minutes Singapore

8 MobileGo 53 ETH 4 US

9 Kybernetwork 48 ETH 2 days Singapore

10 Mcap 45 BTC On going Dubai

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