CryptoAM: A Stellar IBM, Citi's Loss and CBOE Abdicates
3 things you need to know:
One: IBM + Stellar = Global Payments
IBM announced Monday the launch of a global payments network powered by the Stellar protocol, with six international banks already having signed letters of intent. The new network is called IBM Blockchain World Wire and attempts to help financial institutions improve the services they deliver to their clients in foreign exchange, cross border payments, and remittances. The launch follows a pilot program that IBM had begun in 2017.
Beyond the marketing glitz the World Wire is comprised of two key parts. IBM’s role is as a payment API and providing the software that handles accounts and money flow for participants. Stellar provides the pipes for this, ensuring money can be sent in a secure way using its blockchain protocol. Working together you have a system that can handle the messaging, clearing and settlement of financial transactions simultaneously. Here’s a simplified example of how it works:
1. Institutional A (based in USA) wants to transfer a client’s money to Institution B (based in New Zealand).
2. Institution A sends money in the local currency (USD) which is then converted by World Wire to an agreed upon digital currency that runs on the Stellar network. This currency can be a stablecoin, central bank digital currency, or a digital asset such as a Stellar Lumen.
3. World Wide then automatically converts the digital currency into Institution B’s local currency (NZD) and ensures that B receives this payment.
4. The transaction is recorded onto the Stellar blockchain, using the Stellar Consensus Protocol.
IBM sounds like an intermediary…and that’s because it is. To my mind the reason why this could gain traction is because it’s IBM and banks and their shareholders trust IBM. IBM is making the case that they can help make international payments real time, reduce costs, and (perhaps most importantly) do this while making sure financial institutions comply with AML/KYC laws.
IBM’s revenue model for this is worth mentioning. According to Coindesk, participants can join World Wire for free and don’t pay a subscription to use the software either. Instead IBM makes money on the transactions, charging on a basis point value so that as volumes increase, so too does IBM’s revenue. The benefit for Stellar lies in demand for Stellar Lumens; if this system scales then you potentially reach a situation where there is consistent, non-speculative demand for Lumens. However most signs so far point to banks issuing their own stablecoins on the network as the digital currency of choice instead of using Lumens.
Why Stellar? According to IBM’s Lund the choice was made because of the:
“…capacity to issue tokens and have scalability…we needed to support the transaction volumes we were looking at, which is thousands of transactions per second.”
The key takeaway: There’s plenty of noise about different institutions trialling various blockchain payment platforms. Given IBM’s reputation with large institutions and relative success on the enterprise blockchain side, I wouldn’t be surprised if this was successful over time. World Wire is actually a pretty clever way to ensure banks can benefit from cryptocurrency without really having to change their existing behaviors or interfaces.
Two: Citi Scraps Bank-Backed Crypto
In an interesting contrast to JP Morgan, Citi announced that it was scrapping its plan to introduce its own digital currency, apparently nicknamed ‘Citicoin’. The project was first announced in 2015 yet failed to progress to even a proof of concept stage. As reported by Coindesk Citi concluded that there were better avenues to achieve efficiencies outside of creating its own coin, such as through traditional fintech and improvements to SWIFT.
The main problem, according to Citi’s Gulru Atak, was that for the currency to be successful in changing the cross-border payment network they would have to onboard all the world’s banks.
Let’s take a step back to examine that statement. Already we’ve seen a different approach to cross-border payments as seen by IBM’s announcement yesterday. IBM doesn’t require all the world’s banks for this system to work and doesn’t require them to transact in one specific digital currency.
The difference between this and JPM Coin is that JPM Coin is intended to be for internal use only. As we wrote last week, it’s more for internal accounting purposes and internal clients rather than transforming cross-border payments for a number of different stakeholders. Citicoin on the other hand had aspirations to be used by a number of different external stakeholders. This is hard to achieve because it’s unlikely that many stakeholders, especially other banks, would want to accept Citicoin as settlement. Citi’s announcement then is likely less about the infeasibility of a blockchain backed cross border payments network, and more to do with a flawed strategic approach.
Three: CBOE Announces The Suspension of Bitcoin Futures Trading
CBOE, the issuer of the first ever Bitcoin futures contract, has decided to suspend trading due to lack of interest.
This can be explained nicely in the single chart:
Bitcoin Futures aren’t going away anytime soon, it’s just that the CBOE wasn’t particularly good at them. Despite what CNBC liked to claim, it’s less about the lack of interest in Bitcoin derivatives and more about the inability of the CBOE to offer a interesting and differentiated product. It also shows that just because a traditional institution enters the cryptocurrency space, doesn’t mean it will succeed. It also doesn’t mean it’s always good for the space either.
As of right now, the biggest exchange for Bitcoin derivatives is BitMEX — a crypto native exchange, showing that incumbents do have the potential to be displaced.
Also in the news:
Market Outlook:
Quick Take
Direction: Like we discussed last week, a break of the 3850 level sent us up an additional 2%. Hope you were paying attention. BTC is experiencing continued upwards momentum, with major indicators such as OBV pointing towards a healthy run. If we selloff here down past 3950 and end up at the 3900 level structure has been broken and we’re probably looking at further damage. If we break 4000 and stay there (there has been a lot of resistance) it’s more than likely we take out 4200 in the coming weeks.
Key Support: 3960
Key Resistance: 4000
Overall Market: Come back on Thursday for an in depth look at the overall market.
What I’m thinking today:
Infrastructure is Coming: Institutions Pt. 2
If you’d like to buy an asset, there are usually two questions that you have to answer before you become a proud owner. (1) Do I want to buy this asset and (2) where can I buy this asset. These are normally very easy questions to ask for someone buying a stock. (1) Is either a yes or no question. (2) is pretty simple.
You Google (Bing, DuckDuckGo, whatever) “where to buy X” and you go buy it. If it’s broccoli, you’re probably going to go to the grocery store near you. If it’s a stock, you’re probably going to use E-trade, Fidelity, Robinhood, etc.
Not once have I bought anything and thought to myself “well, what should I buy this with?” I know, as an American, that I’m going to buy it with my native currency, the U.S Dollar. An Australian would probably go buy their broccoli with Australian dollars and an Indian citizen with Rupees. Not very often do I go to the grocery store and think to myself, hmm are they going to accept these dried beans I never used? Because that’s not how it works.
Cryptocurrency is a bit different. Here’s a look at the different ways you can buy Ripple on Binance.
You can buy Ripple with Bitcoin.
Or maybe Binance Coin. Looks like you can get a good price.
Or actually how about Ethereum — an even better price!
Too many options? Okay, let’s just use a stablecoin. It’s basically the dollar. Only one choice.
God help me…
Cryptocurrency has a fragmentation problem. It has a choice problem. When you’re buying something like Ripple — all you care about is the price. You don’t care what you buy it with (usually). If you only held Binance Coin, but the price to buy Ripple with Bitcoin was 10% cheaper, you’d cash out to Binance. Now, for the active traders this can be nice. All sorts of price discrepancies. But most people don’t have the time or systems to take advantage.
This isn’t the only problem! Volumes and trading activity happen over HUNDREDS of exchanges. The biggest exchange in the world (Binance) doesn’t have anywhere close to the market share the biggest exchange in the US does (NYSE). In fact, there are only two relevant exchanges in the US. The NYSE and NASDAQ control 95%+ of all volumes. This is far from the truth in the cryptocurrency world.
This is the reason we are seeing platforms like Bakkt, ErisX, Tagomi and others spring up. They are all trying to create liquidity pools to make it easier for investors and consumers to buy into the market and be sure they’re getting fair price.
As for you, the intelligent CryptoAM reader, what does this mean?
One word: Mergers. Over the next 2 years, more and more exchanges will consolidate as market participants demand higher quality sources of liquidity. The ones with tokens will likely have their tokens exchanged for the buying exchange’s tokens or be worked into the model of the buyer. Some, I assume, will be dropped.
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