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What’s it about? Stefan Teis on cryptocurrencies

08 Feb 2018

What’s it about? Stefan Teis on cryptocurrencies

Everyone is talking about blockchain, bitcoin, etc. – to learn more about the background and in what ways these topics are relevant and interesting for Deutsche Börse, we spoke to Stefan Teis, SVP, Group Business & Product Development, Deutsche Börse:

Bitcoin, ether, ripple and other cryptocurrencies saw extraordinary upward momentum in 2017; in 2018 the value diminished rapidly so far. What makes them so interesting, and what distinguishes them from ‘regular’ currencies?

In 2011, mostly ‘geeks’ warmed to the technology, which was deemed exotic at the time, along with the nonconformist ideology behind the currency, i.e. foregoing both government control and banks as intermediaries. So, they went ‘mining’ and acquired the virtual currency. This enthusiasm has not abated. The community has continuously grown and gone viral. Over time, a veritable hype emerged. We are now seeing the excesses in the high and extremely volatile prices.

‘Regular’ currencies (so-called fiat money) are regulated by the respective governments through their central banks. A currency’s value is therefore also always an expression of faith in a country’s – or monetary union’s – financial strength.

By contrast, investors in cryptocurrencies place their confidence in the current or future value or profitability of the idea underlying these currencies and the purpose of the blockchain infrastructure. In the case of bitcoin, this is a payment system. Ether, a further cryptocurrency, is a more interesting case, because it serves to enable decentralized processing power within the Ethereum network. 

Why are bitcoin transactions regarded as slow and energy-intensive. And what happens in a trade with crypto-units? 

The individual bitcoin transactions are verified, compiled into blocks and then added to the blockchain. The history of the transactions is unalterable. This sequence is called mining and conducted by so-called miners. As bitcoin is based on a so-called ‘public’ blockchain, basically anyone can participate in mining. However, as the blockchain’s orderly growth must be ensured, only a single miner is able to generate the next block. The first miner writes the block and receives the ‘mining reward’ from the network, i.e. he is rewarded with new bitcoins for successfully creating a new block. To prevent clashes, which would occur if a number of miners were to write a block simultaneously, a cryptographic puzzle must be solved before a submitted block is accepted into the chain. A large amount of processing power is required to solve these puzzles, which means that great mining activity also requires great processing power from the mining computers. The more active the users are along the blockchain, the more energy they consume. According to digiconomist.net, the estimated annual overall energy consumption for bitcoin activities currently is approximately 16.36 terawatt hours (TWh). If bitcoin were a country, it would rank 76th in global energy consumption.

Initial coin offerings (ICOs) represented another hype in the past year. What’s behind the trend?

Amid the general cryptocurrency hype, 2017 also saw a hype surrounding ICOs. Following 10 to 40 ICOs per month during the first half of the year, there was a steep rise in the second half, with over 400 ICOs in November. At the peak, investments per ICO were above $200 million. So, what are ICOs?

In an ICO, coins are issued, typically by a project or start-up. The coins or tokens raise funds for a particular project. The coins’ character can vary:

  • Equity token: the coin guarantees an investor shares in the issuing company
  • Asset token: the coin guarantees the investor shares in a specific project, including voting rights within the project governance framework
  • Profit token: The token holder participates in the success of the company/project, but does not hold any voting rights
  • License token: the token serves as a quasi-license to the holder to allow him to act on a platform.

ICOs are often compared to IPOs. But it isn’t that simple, because ICOs are conducted on public blockchains. This gives them an offshore characteristic. As they are, generally speaking, accessible to anyone, they also include crowdfunding elements. The investments always remain anonymous, but the distribution mechanism as well as the result of the distribution – typically an auction – are made public. Due to these characteristics, regulation on ICOs is still inconsistent. However, more clarity would be desirable!

Both phenomena are based on the distributed ledger technology, blockchain. Deutsche Börse is working on three prototypes. What is the current status of these projects? 

The prototype we are currently working on with Deutsche Bundesbank, the German central bank, is for the settlement of digital bonds against digital cash. We completed the first phase at the end of 2016 and are now in the second phase, with the prototype put to a performance test. This serves to verify whether blockchain technology is mature enough to process the standard market volumes, which are high. We expect the first results in the second quarter of 2018.

In cooperation with our three partners, LA Ledger aims at developing a blockchain solution for the cross-border transfer of collateral. We have already made a prototype available online for potential clients and partners to use for simulations. We are currently talking to clients and regulators and obtaining legal assessments.

The Collateralized Coin Project is at a similar stage. It is our concept for a collateralized digital currency, which enables payments in bank money on the blockchain, with settlement ensured through a clearing house. We already have a prototype. Eurex Clearing recently published an internal feasibility study examining risk management, process implementation and legal questions. The study concludes that the project should be carried forward.

Are services concerning cryptocurrencies and ICOs also of interest to Deutsche Börse? Are there plans to expand the offerings in these two areas? What are the conceivable scenarios?

Cryptocurrencies are becoming increasingly established – and even perceived as new asset classes. 2017 might have been a turning point in catapulting them from the tech niche into the mainstream. US futures exchanges, for example, have already launched futures on bitcoin, which has amplified the bitcoin trend.

Of course, the cryptocurrency sector is very interesting to us. Imagine cryptocurrency services along an entire value chain: ICO support on the primary market, secondary trading, indices and data offerings for cryptocurrencies, custody services for digital financial instruments or crypto assets. However, these ideas need to be closely analysed in light of the fact that regulation on this area is still lacking and entirely unclear, also considering the major uncertainties in the crypto market. I would like to also stress the fact that the underlying blockchain technology is still in a very early stage of its development.
Nevertheless, we take cryptocurrencies, blockchain and ICOs into consideration in many areas of our activity. But it’s way too early to make definite statements on initiatives or services to be introduced over the short to mid-term.

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