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Consensus 2019: SEC Talks IEOs and Bitcoin ETFs as Ethereum and Polymesh Offer New Visions for Blockchain Enterprise

A raft of headline-making news has emerged from the Consensus 2019 conference in New York City as leading players in blockchain and cryptocurrency have shared their visions for the fields’ development.

Some of the big news to emerge from the summit includes:

  • New client specifications were announced by the Enterprise Ethereum Alliance, intended to boost enterprise use of Ethereum.
  • Cardano and Ethereum cofounder Charles Hoskins will act as “co-architect” with security token platform Polymath to create Polymesh, a platform that intends to better suit the needs of security tokens than blockchains such as Ethereum.
  • SIMBA Chain announced it will combine the Stellar payment network with a private Ethereum-based supply chain system.
  • Securities and Exchange Commission (SEC) officials variously said that the time for a Bitcoin ETF had come “over a year ago,” and that exchanges engaging in Initial Exchange Offerings (IEOs) may be opening themselves up to legal issues.
  • In a press release timed to coincide with the summit on Monday, Bakkt announced long-anticipated plans to launch physically-settled Bitcoin futures would begin testing in July.

Each of these announcements may have a major impact on the development of blockchain and cryptocurrency in the coming months and years. They emerged at a summit which Bloomberg characterized as showing a more mature and sober face of the cryptocurrency industry than past years’ events, with less flashy cars and ostentatious displays of crypto-wealth. With meditation sessions and sound baths replacing yacht parties, Consensus 2019 and the surrounding New York Blockchain Week has focused on serious reflection of where the sector is heading.

Enterprise Ethereum Alliance Announces New Client Specs

The Enterprise Ethereum Alliance (EEA) is a consortium of over 500 entities, including tech heavyweights IBM, Intel, and Microsoft, banking giants JPMorgan Chase and Banco Santander, Big Four accountancy firm Ernst & Young (EY), and many other major players from across tech, finance, and blockchain. The EEA issued the first version of its client specification in May 2018, with the updated specifications announced on Monday at Consensus being version 3.

The EEA’s newly-issued client specifications mainly focus on using off-chain transactions to deliver what Santander digital investment banking head and EEA chairman John Whelan described as ‘the three ‘P’s’ crucial to enterprise use of Ethereum: performance, permissioning, and privacy demands. Speaking with CoinDesk, Whelan described the latest raft of client specifications as a key step toward getting Ethereum to a point where it can “legitimately claim to be enterprise ready.”

A key component of the latest client specifications are the first iteration of specifications for trusted off-chain computation. This is seen as key to getting Ethereum enterprise-ready, as it allows for sensitive data to be transferred via blockchain without being broadcast openly on the Ethereum network. Elements contained within the “Off-Chain Trusted Computed Specification V1” include the use of trusted multi-party computation, trusted execution environments, and zero-knowledge proofs to allow enterprises to protect sensitive data while interacting within the Ethereum blockchain. “Attested oracles” will then be used to update smart contract data on the public Ethereum blockchain based on off-chain transactions.

In a press release accompanying the new specifications, EEA Executive Director Ron Resnick writes:

“Many enterprise blockchain use cases have demanding requirements for privacy, security, throughput, and latency that are difficult to achieve. Temporarily moving some transactions off-chain for computation elsewhere, and then returning a summary to the main chain is a promising method for achieving such requirements.”

Both the update client specification document and the off-chain computation specifications are freely downloadable from the EEA’s website. It’s noted within the latest client specifications that its contents are continually being reviewed and improved upon, with the next update expected in Q4 2019. Areas identified as being likely to be updated in Version 4 include privacy improvements and greater interoperability within the Ethereum ecosystem.

The focus on “privacy” and “interoperability” is shared by the announcements concerning Polymesh and SIMBA Chain.

Polymesh Building “Layer One Blockchain Solution” for Security Tokens

Ethereum co-founder Charles Hoskinson has often been outspoken against the platform’s governance and development since leaving to found Cardano in 2015. And in announcing Polymesh, Hoskinson and Polymath co-founder Trevor Koreko both described Ethereum as being inherently unsuited to security tokens.

Speaking with Forbes, Koverko describes Polymesh as “a new security token layer one blockchain.” Polymath has so far issued more than 120 security tokens on Ethereum, but adoption has been slow due to what Koverko and Hoskinson characterize as Ethereum’s unsuitably as a security token platform.

Referencing the many regulatory and compliance issues associated with security tokens, Koverko asserted that Ethereum’s best features “are actually bugs for security tokens.” While Ethereum is well-suited to what Koverko calls “unstoppable applications,” the founders of Polymesh argue that it cannot provide a suitable regulatory and compliance environment for security tokens. Hoskinson explains many of the issues with public blockchains like Ethereum that Polymesh is hoping to solve:

“All kinds of data are associated with a security that you wouldn’t want associated with a cryptocurrency. It’s not a good idea for security tokens to live in a completely open system. For instance, every time something is done in an open system it becomes a shared resource. However, security tokens are data intensive protocols, which means operating costs will be high, and this won’t scale if we are talking about millions of securities, which we will eventually see. Moreover, things need to be done that you wouldn’t want to be done on Ethereum, like freeze or reverse transactions. So we are at odds with the standard Bitcoin ethos here.”

Polymesh is designed as a hybrid between an open public blockchain and a private permissioned network, specifically designed to meet the requirements of making security tokens freely tradeable whilst offering the protections such tokens require.

If successful, Polymesh could capture an enormous market. Hoskinson talks of “trillions of dollars of assets in emerging economies that are illiquid right now” but are likely to be securitized in the next 10 to 15 years, along with “quadrillions of dollars” that already exist as financial securities.

SIMBA Chain Combining Stellar Payments with Ethereum-Powered Supply Chain Management

Interoperability is at the core of what SIMBA Chain described in a press release prior to Consensus as an “ingenious coupling of the Stellar blockchain payment network for cross-asset transfers with SIMBA Chain’s private permissioned Ethereum network for supply chain.”

SIMBA Chain is a name many within the cryptocurrency space may not recognize, but there is no doubting the scale of its operations. Describing itself as “the premier source of Cloud-based, blockchain as a service (BaaS) solutions,” SIMBA Chain has been developing permissioned supply chain blockchains for the U.S. Navy and U.S. Air Force.

SIMBA Chain was founded in 2017 by ITAMCO and the University of Notre Dame from a grant given by the Defense Advanced Research Projects Agency with the intention of creating a secure and unhackable messaging platform for the U.S. military. In September 2018, SIMBA Chain announced it had secured a contract to monitor the supply of aviation parts for the United States Naval Air Systems Command. Two months later, it announced it would similarly provide a blockchain solution for monitoring the global distribution of aviation parts for the United States Air Force.

The latest project will provide enterprise and government with a means to combine real-time cross border payments with supply chain tracking on a private permissioned version of the Ethereum blockchain. SIMBA Chain’s press release references Stellar’s ability to facility cross-currency transfers, which we discussed in more depth in a previous article on Stellar and IBM’s World Wire project.

The Time for Bitcoin Futures is Now

Bitcoin briefly broke up above $8,000 as the SEC’s Hester Pierce’s comments in a Consensus panel discussion added to the optimism of its recent upward trajectory. Pierce spoke of the challenge that the United States faces in keeping pace with the development of cryptocurrency in Europe and the Far East. Pierce stated the EU, Japan, Korea, and even China are all moving faster than the US in establishing a regulatory environment that encourages the development of cryptocurrency and blockchain. When one audience member asked whether the time was right for the launch of a Bitcoin ETF, Pierce answered that “the time was a right a year ago.” However, she added that there were many questions that the cryptocurrency community itself needs to answer first, citing market manipulation among concerns the SEC still harbors toward the industry. Pierce summed up her thoughts with the pithy line: “You don’t want the parents in the sandbox building the sandcastle. You want the kids to figure it out themselves.”

Bakkt has long been behind one of the most promising moves to make a Bitcoin ETF a reality. In a blog post published yesterday, Bakkt CEO Kelly Loeffler wrote that Bakkt’s Bitcoin futures will enter user testing in July, with exchange listings to follow within months. While Bitcoin futures have been tradeable for some time now on the Chicago Mercantile Exchange (CME) and Chicago Board Options Exchange (CBOE), neither of these entities actually hold or distribute actual bitcoin. The Bakkt Bitcoin Futures will differ from the CME and CBOE offerings by conducting settlements in bitcoin, with both daily and monthly futures contracts available.

The SEC Warns Against Initial Exchange Offerings (IEOs)

While Pierce’s comments show the SEC has no problem with cryptocurrency in general, a fellow SEC official warned at Consensus on Monday that it still has a major problem with initial coin offerings (ICOs). Recent months has seen many exchanges follow in Binance’s wake by facilitating initial exchange offerings (IEOs), were new token sales are conducted directly on an established cryptocurrency exchange’s platform. Valerie Szczepanik, senior advisor for digital assets and innovation at the SEC, told a Bloomberg reporter that IEOs were legally to fall afoul of securities regulations in the United States:

“Platforms seeking to list these tokens for a listing fee or bring buyers to the table for issuers are probably engaging in broker-dealer activity. If they are not registered they will find themselves in trouble in the U.S., if they have a U.S. issuer or U.S. buyers, if they are operating on the U.S. market.”

 

TokenLot, which uses the tagline “your ICO superstore,” was charged in an SEC filing from September 2018 with “operating as unregistered broker-dealers.” Szczepanik told the Bloomberg reporter that TokenLot’s case was “instructive” with regards to how the SEC would treat other exchanges similarly becoming directly involved with token sales:

 

“There was a platform that was assisting to bring buyers to ICOs. In this case, there was an enforcement action, as the platform was acting as a broker-dealer and participating in the distribution with a violation of the registration provisions.”

 

While a number of leading exchanges have followed Binance in the IEO craze, Szczepanik’s warning coincided with the completion of one of the largest ever token sales. Bitfinex, which is facing investigation in New York relating to an $850 million hole in their finances that was allegedly papered off by issuing more of its US Dollar-pegged Tether stablecoin, completed a $1 billion private token sale for its new LEO token on the same day that Szczepanik spoke at Consensus. Because the exchange was conducted privately among major investors, it is unlikely to face the scrutiny that Szczepanik has implied is awaiting the open crowd sales that have become popular among other exchanges. Writing on Twitter, Bitfinex Chief Technical Officer Paolo Ardoino wrote that the money had been raised from individuals contributing more than $1 million and enterprises contributing upwards of $100 million each.

Binance has been careful to exclude US investors from token sales on its Binance Labs platform, so will also be unlikely to run into trouble with the SEC for its IEOs.

 

The Consensus

The news that has emerged over the past several days of Consensus and New York Blockchain Week has been almost uniformly positive for the cryptocurrency space. It shows that the space is maturing and that there is much to be hopeful of in the near future. Markets have reacted positively, with a majority of major cryptocurrencies in the green, and many experiencing double-digit increases over the past 24 hours. Most of the top 50 cryptocurrencies which are in the red are stablecoins, with USD Coin (USDC) and True USD (TUSD) both trading at under $1. Having traded at below $1 recently, Tether (USDT) is currently back at parity with the dollar, while Paxos Standard (PAX) is trading at $1.01.

Bitcoin, XRP, and Binance Coin (BNB) are the biggest gainers among the top 10, with all posting more than 10% increases. While its always difficult to attribute exact causes to market movements in the volatile cryptocurrency space, the sea of green is reflective of the waves of optimism which have flowed out of New York in the past few days.

About Christopher Williams

Christopher Williams is a British writer based in South Korea with a strong interest in emerging technologies, cryptocurrency, and the development of decentralized apps.

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