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Blockchain prospects beat bitcoin bubble

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Bubble territory: bitcoin's dollar value has risen sixfold this year

Bitcoin has become an investable asset class rather than a digital currency — and it’s a bubble all set to burst.

And while the initial coin offerings (ICOs) that launch new cryptocurrencies can potentially be vehicles for fraud, the blockchain technology behind them has a bright future in the financial-services industry and beyond.

Those were some of the views expressed at a panel on blockchain technology at the World Alternative Investment Summit last week.

Stafford Lowe, chief administrative officer of Bermudian-based DrumG Financial Technologies, said this year’s more than sixfold increase in the dollar value of a bitcoin — yesterday it was trading at above $5,600 — suggested it was an investable asset class as opposed to a currency.

“Bitcoin is not a currency any more,” Mr Lowe told delegates at the Fairmont Southampton. “Cryptocurrencies are inherently deflationary, because there’s a finite amount and if you can’t find a way of chopping it up into smaller and smaller pieces to allow normal people to get hold of it, then you’re going to get the situation you have with bitcoin.

“And then you wonder — is 90 per cent of the value of bitcoin owned by about ten people? It’s entirely possible and that’s a fairly common conspiracy theory about it. So that just screams bubble.”

Michael Murphy, the founder and chief executive officer of Rosecliffe Ventures was also dubious about bitcoin’s real value.

“There’s a lot of money to be made by trading bitcoin. But I feel that it’s a mania that’s going to end poorly — maybe I side with Jamie Dimon on this.”

Mr Dimon, CEO of JP Morgan Chase, has described bitcoin as a “fraud” and people who invest in it as “stupid”.

Mr Murphy added: “I think that the rise and the press coverage of bitcoin recently and a few get-rich-quick stories that are out there are hurting the overall usefulness of the platform.

“People will work out a way to use blockchain to make things better, whether it’s just in financial institutions or whether there’s a broader base there.”

Kirill Gourov, portfolio manager for Full Node Capital, a New York-based hedge fund investing in the digital currency space, was more positive about cryptocurrencies.

“You’re looking at entirely new business models designed around digitised transfer of value,” Mr Gourov said.

“It’s changing the way that consumers interact with each other and how they do commerce with one other.”

He conceded that there are issues with the initial coin offerings that were launching a host of new cryptocurrencies.

“There’s definitely a lot of noise out there and I think that most ICOs are absolute garbage,” Mr Gourov said. “ICOs have more of a crowdfunding methodology than a unique crypto focus.

“It definitely has its problems from a regulatory standpoint. You have the issuers not being fiduciaries to their token holders. You have the issue of people without a product raising millions of dollars.”

Steven Rees Davies, a partner with law firm Appleby Bermuda, was concerned by the lack of regulation of ICOs and the lack of tangible value of bitcoins.

“ICOs are really just unregulated ways to raise funds, but because of the buzz around cryptocurrency and everybody thinking, ‘it’s the next big thing, I must get into it’, it’s an easy way to raise money that could be fraudulent,” Mr Rees Davies said.

In the conventional world, an investor buys into something with tangible value, he added, but not in an ICO.

“Not many countries have identified what cryptocurrency is,” Mr Rees Davies said. “Is it a security? Is is it something that is covered by the Investment Act in Bermuda? In most cases, it isn’t.

“So in effect, you’re buying into something and not getting an interest in the company, not getting a note with a promise of a return, you’re buying a new token that’s been created out of software.

“Over time we’ll understand the technology and get some regulation around it.”

Blockchain is technology based on a decentralised and shared database. No centralised version of this information exists for a hacker to corrupt. Hosted by millions of computers simultaneously, its data is accessible to anyone on the internet.

Mr Lowe said it was important to decouple blockchain from cryptocurrencies to understand the value of the technology for financial services and other industries.

He said that big banks spent enormous amounts on running their technology — and that blockchain could help them slash such expenses.

“Wall Street identified that the ability to create a shared database was a very obvious way of stripping out tens of billions of dollars of costs,” Mr Lowe said.

“Blockchain is like an engine. But it’s up to somebody to build the car. That’s what we at DrumG are trying to do, to take that next step to create real-world applications for actually doing stuff.”

Stafford Lowe: bitcoin is an investable asset, not a currency
Steven Rees Davies: regulation is needed for ICOs