Paramita: Hello and welcome to PwC Luxembourg TechTalk. Today we continue our discussion on blockchain technology and look at crypto-assets with Thomas Campionne, Senior Manager and Mike Delano, blockchain and crypto leader.
Paramita: OK Hello. So we have one new face but one old face today.
And this is going to be a kind of continuation of our last podcast when we spoke about blockchain but today and Thomas stresses "do not say crypto currencies say crypto-assets."
Mike: I think we'll try to make the distinction between crypto currencies, crypto assets talk a bit about tokens etc.
Paramita: OK so who wants to start first? Thomas?
Thomas: Well I can maybe make the bridge with the previous one. Because again I think we will never stress enough that crypto-assets are an application of block chain because there is a lot of confusion out there like bitcoin is blockchain, blockchain is bitcoin. Well I know you already covered that but I think it's important to stress it again.
So crypto assets are an application of block chain meaning that it comes with the benefits of the blockchain technology. So we will not enter into again the analysis but transaction immutability, transparency, security, no single point of failure because of the decentralization. All of that is embedded into the crypto-assets.
Paramita: So it's basically again blockchain is the infrastructure and the crypto assets are the vehicles. So since we are going to really put focus on the crypto-assets today let's talk about a little bit of you know history. When did this bitcoin craze start? Is there just bitcoin? Are there other kinds of crypto assets and then we'll probably go into all of you know the names.
Mike: Yeah. It all started back in 2008, Halloween 2008 actually... It all started with the bitcoins as such and it has been bitcoin for a long time because I think that between 2008 and 2014 there was nothing other than bitcoin.
Then ethereum popped up in 2015 and then starting from there you had all the crazy frenzy around ICOs (Initial Coin Offering), ERC20 tokens, utility based and then you had now today thousands of different crypto out there. But for a long time you had only bitcoin.
Mike: And I think you know from a crypto-asset or crypto currency perspective, bitcoin is still 51- 52 percent of the overall market cap of crypto assets. So it's still the biggest. But as Tom (Thomas) mentioned you have over 2000 different crypto-assets that are available now... multiple different types. And I think we'll cover some of the taxonomy of crypto assets a bit later to try to make it clearer the different types and what they are, what they do etc.
Thomas: Because that's another challenge. There is no globally accepted definition, categorization of crypto-assets. So depending on the countries where they may or may not have a regulated framework they might define it. But there is no globally accepted... So we think that if you look at the crypto assets globally you can at least split it in two main categories: so the coins like the bitcoin and the other what we call alt coins which are just coins as a means of payment. They have no alternative use. You can invest in it but mainly it's a means of payment. And then you have all a universe of tokens.
Paramita: Sorry to interrupt... So now we are really getting into the taxonomy but before going into that I know you said last time that there's no silly question but I mean it sounds silly to me... So you just said there are numerous, various crypto-assets. You have bitcoin and ethereum and whatever litecoins...
How... I mean can I tomorrow wake up in the morning and say you know what I'm going to start a crypto asset. How does it work?
Mike: I mean it's a good question. Good place to start. I think you know from a... We've seen as Tom mentioned there is an explosion of all these crypto-assets that we are coming about. And effectively it's launched by white papers. You write a white paper, you put it out there. People either like it or not. And they you know they invest in your ICO so your initial coin offering. So that's how all the coins to date have started... either ICOs or STOs.
Paramita: OK so it's just like I don't know a scientific proposal or something like that right?
Mike: I mean it's like an "IPO (Initial Public Offering) lite". So it's not as official or regulated a process as an initial public offering for a company if you think of a traditional way to raise capital in the market.
Start-ups are looking at this as an alternative and they've raised quite a bit of money I think we'll get into some of the numbers to date using these white papers and the regulators have taken... they've woken up, they've looked at this, they've actually gone after a few of the people who have written white papers. It's fraudulent right so what they said they're going to do is they they're not going to do. But you also have some white papers out there that's really quite interesting to read because you know effectively they say you know this this token is worthless. It gives you rights to nothing. You will get nothing. You know it never is going to be anything and still you have people sending them hundreds of thousands of dollars.
And so the ICO market overall has come down a bit. But that's in general that's how the process of all these coins get started. All the alt coins got started was through these ICOs.
Thomas: And to complement what Mike said, indeed you can wake up and decide to launch your own currency. And this is what actually happened because a lot of currencies have been based on the bitcoin protocol but just improving a bit the existing bitcoin and fixing some of the inherent issues of that currency whether it is scalability, settlement all these stuff. You can just tweak a bit and improve the existing one. And this is what happened for litecoin for example. It's based on bitcoin but it's doing things in a better way.
Paramita: So now going into the listing and the names of the various things... When we started you said that you know we'll talk about crypto assets and not crypto currency.
And believe me I started reading a little bit... was not a good idea. It's all a little confusing... What's the difference between a crypto-asset and cryptocurrency first and then we can go into tokens and coins...
Thomas: Let's say just for a global picture that cryptocurrencies are a subset of the crypto-assets. So you have crypto-asset as an umbrella. And one of the types of crypto-asset that exists out there are the cryptocurrencies and they're only used as a means of payments.
Paramita: And bitcoin is an asset or a cryptocurrency?
Thomas: Bitcoin is a cryptocurrency.
Paramita: Can you give me an example of a crypto-asset which is not a cryptocurrency?
Thomas: Sure. You can have asset backed tokens which are crypto-assets.
Mike: You could have a utility token. In the way that Henri... Henri Aslanian is the global crypto leader. He was at our event. The way that he described it the other day is you think about a utility token it's almost in easier terms if you think about a rollercoaster. You have a ticket to ride the rollercoaster.
There's only going to be so many tickets that are printed to ride this rollercoaster. The demand for how many people want to ride this rollercoaster drives the value of this utility token. So it doesn't give you anything other than a right to ride the rollercoaster. That's effectively you know an easy way to think about a utility token it's a right to use something.
Paramita: OK so tokens are a form of crypto-assets. OK so I'm going to just leave you explain all the different...
Thomas: Well again looking at the global picture you have the coins, bitcoins, classic... means of payment. And then you have the family of tokens which can be as we mentioned utility which has been used in ICOs over the last couple of years. And now we are moving away from utility token and we have what we call a security token. Which if you want is a serious version of the utility token.
Mike: More regulated...
Thomas: Yeah, more regulated. Because in this case, the underlying is not value or utility it's really for example a stake in a company like an equity, classic equity, an asset maybe real estate might be a piece of art, any kind of asset that you can tokenise. And then it would become a security token.
Thomas: Tokenization, yeah that might be the topic of a third episode.
Paramita: Oh really? Can you just explain a little bit in very simple terms?
Thomas: So we had actually during the event a dedicated session on tokenization and to make it short tokenization is a process of digitising any kind of asset you know and you make it completely fractionable. So instead of having like a piece of real estate you can have... you can take the piece of real estate, divide it in 1000 pieces and you issue a token representing 1000th of the real estate.
Mike: Yeah. So if you think about it, instead of buying an apartment like if you were going to invest in real estate instead of buying a whole apartment for a million euros, you could buy a token which represents a certain number of square metres of that apartment.
Thereby you know you have a much lower ticket to get into it, to buy it. You as an investor can have you know diversify your portfolio and actually get into some real estate whereas you know pre-tokenization it was it was prohibited. It was very expensive to get in. And your token represents you know again a certain square metres of that. So it's easier to get in. It's you know one of the hopes and dreams of tokenizing these assets is to make it much more liquid. So instead of having to sell the whole apartment you can sell your token so you may have other investors who want to buy that token.
Paramita: So it's basically a virtual asset a crypto-asset, is it?
Mike: It's a digital way to represent a physical asset.
Paramita: So it's actually a virtual kind of... And let's say OK fine I want to invest, I want to buy a token of an apartment. Who do I buy it from? It's the company that manages... the real estate company?
Mike: It will be a similar process to going through and buying an apartment. So if you are getting into the ICO or the token for tokenizing this apartment you would still have to pay for it. So you'd still have to send money in a bank and transfer wires etc. So the money would instead of getting a deed you would have a deed that's embedded in your token that says you own so Mike Delano owns two square metres of this apartment. And that's represented on the blockchain.
Thomas: And in the future actually you may even imagine that maybe you are owner of your own apartment and you have a liquidity need. In the future you may even imagine to tokenize 10 percent of your flat. And to sell it on the market. So fractionability is really on both sides - issuer and seller.
Paramita: I think I get it. It's just that I think I get what a token is and kind of get what tokenization means. What are crypto coins?
Mike: Crypto coins cryptocurrency... Well it's different because it's not they're not representing an actual asset. Right. So it's not representing a square metres of an apartment or a piece of art or whatever you want to tokenize.
It's a currency like money.
Currently you know there's not as many uses or accepted uses for cryptocurrency that you would have of regular fiat currency. But that's effectively what it is. That's crypto coins or cryptocurrency that's effectively you know used as a means payment.
OK. So the currency is the means of payment. The coins are the same, the crypto coins are the same?
Mike: Yeah I mean you have like alt coins...
Thomas: But there's a lot of different terms. Stick to crypto-assets again, coins which bitcoins are part of and used as a means of payment and token. Let's keep coins and tokens. Coins are a means of payment like you just want to transact, you just want to send me some bitcoins. That's just a coin. And then there are the tokens.
Paramita: I think so. You know when you read about this stuff I mean I think there are experts who are writing about these topics and sometimes you in the sense one idea gets overlapped onto the other and you're just you know...
Thomas: Confusion. And that's a point on this topic because you were mentioning experts. Our crypto leader Henri Arslanian who went to this event last week said that if you come across someone who's presenting himself as an expert on the topic you use the door that you see in front of you and you run. So it's a so fast moving area that someone who is presenting himself as an expert... No way.
Everything you read just cross-check the source because there's so many crap that are written on the topic that you'll get easily confused.
Paramita: And I think it's also because it can be so confusing that there's so much of mistrust. That people when you talk about bitcoin or when you talk about cryptocurrency people go you know what keep your ideas to yourself.
Mike: And to be honest I mean I think you know we've definitely seen a lot of evolution in the space because initially a lot of the ICOs that are coming out you know there are clearly some frauds.
It was people just you know it was fraudulent offering. You have pictures of these websites that the coins are based on that has... One of them had like Prince Charles's picture under a fake name. So I mean you had really some good examples of fraudulent people raising money. And you know to be honest they did get money. So some of them several hundred thousand, some of them a few million.
So yeah I mean I think that's what's gotten a lot of the regulators attention is just pure fraud because it still is by large parts of an unregulated space.
Paramita: Talking about regulation you know we see the price fluctuations. You know we were saying in our last episode how the price of bitcoin just changed and increased within a couple of years and people just became billionaires.
Who regulates that?
Thomas: Supply and demand.
Mike: Nobody's regulating the price of bitcoin itself.
It's the market. It's supply and demand as Tom said. There can be some... there had been some allegations of market manipulation in terms of price of bitcoin but you know that's still working itself through the various regulatory reviews.
But yeah I mean still the overall price of it is driven by demand.
Thomas: Yeah and actually keep in mind that's also the flip side of having a currency which is 100 percent immune against any monetary policy in the world. So the supply is not governed by any government. The relative price of the currency is not impacted by any tax or fiscal policy in the world. Only driven by supply and demand. And on the volatility stuff, well I think we need to put that into perspective. Because this is something that is 10 years old. Usually short term volatility is really higher than long term volatility so let's have this discussion in 50 years. Probably the current price will seem very small compared to the long term average. And on top of that we need to... OK it's volatile... but we need to compare. It should be relatively volatile to something. Compare it to small caps or emerging markets maybe it won't be that volatile.
Paramita: I know that we are talking about blockchain and cryptocurrencies but speaking of business why you think the crypto-assets can be an opportunity for businesses today?
Mike: I think a lot of businesses are still looking at it and there are you know to be honest I mentioned earlier there are a few frauds. There are a lot of legitimate businesses out there that are using the tokenization, these ICOs, STOs to raise money.
Paramita: STOs you mean the secured...
Mike: So security token offerings. It's the new upgraded if you will ICO.
So they're looking at that as a viable way to go to investors to raise capital for their business. So if I have a fantastic idea I need capital. I know you know I can't go to any business angels or go to you know Goldman Sachs to get money because I'm just Mike Delano, I'm a small business guy. I have a fantastic idea. So you can launch a white paper to go through this process and give future investors a future stake in your in your business as it develops right.
So that is certainly a very good way and I think that aspect of crypto-assets I think is going to be here to stay. Similar to like crowdfunding... if you think about crowdfunding for certain projects this tokenization or issuing tokens that represent future equity or rights to an income stream of your business... it's a good thing.
Paramita: I'm going to be the devil's advocate here. There must be risks. What are the risks?
Mike: Of course. Yes. Yeah I mean there's lots of risks involved in investing in small businesses whether it be through tokenization or good old fashioned just giving them money, giving them money for an interest in their business.
I would say investing through tokens or investing you know just buying a share of the company, there's no more or less risk in one or the other.
Thomas: As an investor you still need to pay attention and look at what you're investing in. Well there was a famous case. The name of the ICO I cannot remember but in the white paper, which is the so-called offering document for investors to access and to understand what they are investing in, it was clearly written like black on white if I can say so that there was no right attached to the tokens. So nothing... wind. They still raised 60 million. So people were reading it. It was clear that there were nothing as a compensation for the investment but they invested in it and that you you can regulate it won't change anything.
Mike: Yeah I mean you have to have some sense when you're looking at these things and but you don't you also have again going back to one of the examples I was thinking of... You had a token sale that was advertising themselves as the first legitimate Ponzi scheme. So clearly the SEC (the US Security and Exchange Commission) didn't like that so much that they gave those guys a call and shut it down.
So yeah I mean I think there are definitely risks involved in investing in businesses whether it's tokenized or not.
Paramita: I mean I'm speaking from a very common man perspective. I mean let's be honest you can't see these things. These are virtual you know.
Mike: Yeah but I'd argue you also can't see a share. You know if you're buying a share of IBM or you know they're all it's all electronic as well. You're not getting a paper based share and even if you've got the paper based share what does that really mean. You know just because you have a piece of paper in your hand what does that really represent you know. Well I think that the technical aspect of you know going into opening a wallet and interacting with the blockchain, I think that scares people a little bit. But I think once you start, once you get into it and you start playing with it you realize that it's not that overly technical. You know it's pretty easy to do.
Paramita: Yeah. Apparently a friend told me the other day that in Switzerland there's a village...
Thomas: Yeah. Zug, the crypto valley.
Paramita: Apparently they do everything...
Thomas: They have a very developed ecosystem with a very supporting government. So everything was there to have a burgeoning ecosystem. And it's doing great.
Mike: Nice place. I was there last year...
Paramita: Talking about countries and what do you think about Luxembourg? What's happening here and do you think Luxembourg can maybe one day become Zug?
Mike: Yeah I mean I think you know the Lux government and the regulator are looking at this. Government is supportive of it, supportive of certain aspects of it.
There was recently a law issued on the blockchain which gave legal certainty to transactions that were carried out over the blockchain. That was well received by the community.
So yeah I think it is something that will be supported by Luxembourg. I think you know from a risk perspective again they're looking at it to say you know we don't want to jump in... you see some of the smaller jurisdictions or smaller countries that are more advanced in this.
But I think with the overall size of the financial services market here the regulators definitely, the regulator being CSSF, is looking at it from a very cautious perspective to say you know we don't want to get into something that's going to harm the reputation of Lux overall.
Paramita: Yeah. And businesses are they open to it, to the idea?
Mike: Yeah. So I think there's over 20-25 or so local businesses which are purely focused on you know blockchain, ICOs, STOs etc. So that they're you know the ecosystem is building in Lux. There are businesses which are looking at utilizing blockchain - businesses and government - utilizing blockchain technology.
So yeah I think it is something that we will see develop over the next year and a half, two years.
Thomas: Yeah. And this is relating to one of the trends that we can see at the moment is the need for regulatory clarity. And this is what's actually at the moment probably preventing Lux to really boom into this ecosystem because you know very small countries as Malta or Gibraltar did it, a lot of companies have settled down over there. But as their next step they want to enter a more, I wouldn't say more serious countries, but countries with really established financial system infrastructure. And Luxembourg is really coming up fast, it's about to expand. At the moment we probably have less regulatory clarity than those countries. But as soon as we could get this clarity I'm 100 percent sure that it's going to boom.
Paramita: And since you brought up trends, are there any other trends?
Thomas: Yeah well a couple of main trends that we actually already discussed last week but they're still applicable even if it's a moving fast moving area.
You have this growth of the ecosystem. I think that there is not a day in this market where you don't have a new player even if it's small but every day there is news... new players, new application of the tech all across the world and there is some sort of not a competition but there is an interest from certain jurisdiction to attract the biggest and best players in this field and it all comes down to this regulatory clarity that I was mentioning. Because these guys even if they are on the market they may feel like you know young guys in their garage. It's far from there. They're really serious and they look for regulatory clarity. They are more than open to play with the rules. The point is that if for the moment you have only two or three countries that have regulatory clarity they will go there.
Paramita: A couple of days back, it's a Lux start-up. I think it's Bitstamp? They got a breakthrough in New York?
Thomas: Yeah they got Bitlicense. And Bitstampt is a big player you know...
Paramita: It's one of the biggest I think.
Thomas: Yeah one of the biggest. They have something like three million clients and they have regulated exchange in lux. So yeah and I think they were one of the first to be regulated in Europe.
But then as a trend you also have as Mike mentioned because there were a lot of scams in the past. But the point is that you know they invested in ICO one or two years ago and then it's only now that you realize that at the end there is nothing. So there is a lot of regulatory enforcement because now we have realized that there were nothing behind the investment. So a lot of enforcement from the regulators. What else cybersecurity is still on top of the agenda. And there is a confusion about that because of these cyber issues a lot of people think that crypto is not safe or crypto is something that you can't trust but the cyber case that we see it's not about the underlying crypto. It's about the lack of infrastructure, lack of control and security over the infrastructure of the exchange, not the underlying. So there was kind of a confusion like crypto is not safe. No the place where you buy and trade crypto are not that safe because of the lack of cyber control framework, security applications. It's not like the traditional banks yet.
Paramita: Do you think that in the near future or maybe in long term money as we know it today is going to be replaced by crypto-assets?
Mike: Yeah I mean there's a bunch of different discussions you have you know that the diehard crypto fans say of course you know crypto is going to be the only way to go.
But I think if you look at the history of all fiat currencies or money that's been issued by a government they all have failed at one point in time or another every single one of them. So I mean it's an interesting question. You know it's interesting to look into the topic to see will crypto prevail or will something else prevail. To be honest, I have no idea where it's going. I mean I think it's fascinating to read some of these books and listen to some of the podcasts by talking about you know how it's all functioning and what the... You know especially if you look at monetary policy of governments today is it sustainable just to keep printing money, printing money with the ridiculously low interest rates we have now. What is it really going to mean. You see hyperinflation in certain economies. So I don't know where we're going to end up.
Thomas: But there are discussions at the level of central banks to consider central bank backed crypto but they're potentially at risk of stability to the classic banking system if they start issuing that. And the risk is that not the central bank but other players like very famous names who have a huge client base like Facebook or WhatsApp if they start to issue their own crypto. It's like that two billion customers playing with crypto and what's going to happen to the classic fiat currencies.
Mike: I mean imagine even like Amazon. You can now even buy your groceries on Amazon. If they issue their own currency… would you… I buy almost everything from Amazon now. It’s easier.
Paramita: There is one of these big companies that has their own currency, I’m forgetting...
Mike: I mean a lot of them are looking at it. So you have JP Morgan that recently announced that they’re issuing their own coin. It’s going to be used by their institutional clients. Lot of the big institutional players are looking at this space.
Thomas: It’s all about who’s going to shoot first.
Mike: Maybe we should a PwC coin…
Paramita: We did, didn’t we? On MAD (Make A Difference) Day, we had MAD coins… we are pioneers, we’re changemakers.
OK on that note, thanks you, both of you.
Mike: Thank you for putting up with us again.
Paramita: It was a pleasure, believe me. Thank you so much. I’m sure that as these things evolve, we’ll sit again to talk.
Mike: We’ll come back again.
Paramita: Well that was a very interesting conversation. I hope you enjoyed it as much as I enjoyed recording it. As always, don’t forget to comment with #PwCTechTalk. And I’ll see you next time.
Commmunication, PwC Luxembourg
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