Another fintech year is over. Even a fintech decade. A lot of things happened last year and in good tradition, I’d like to look back at 2019. In this article, I’ll recap the highlights of the crypto scene from my point of view. It has been a year full of victories and drawbacks, as usual.
The beginning of the crypto year was quite turbulent.
The 51 Percent Attack
Bitcoin, father of the crypto industry and most prominent and popular cryptocurrency, started the year below the 4.000 USD mark, achieved a yearly high in July at approx. 12.000 USD and then fell back to 7.000 USD at the end of the year.
In the meantime, the start of the new year wasn’t much better for Ethereum Classic. The blockchain experienced a 51% attack. The attack began on January 5th, went on for three days, finally ending on January 8th with estimated losses of 1.1 million USD. The attack could be stopped due to the collaboration of blockchain analytics companies and exchanges, who halted the ETC transactions and provided data to the analytics companies. Even though the possibility of a 51% attack on a proof-of-work blockchain was known it was scary to see it becoming reality on a blockchain that ranks in the top 20 crypto assets list.
The Cryptic Death of Gerald Cotten
And then another nightmare of cryptocurrency investors and traders came true. On January 14th, 2019, Canadian company Quadriga running the cryptocurrency exchange QuadrigaCX announced that their CEO, Gerald Cotten, had died one month prior in India. According to the CEO’s widow, Quadriga owed 115.000 customers approximately 250 million CAD (190 million USD). Most of the funds were cryptocurrency held in QuadrigaCX’s cold wallet in the laptop that only the CEO had access to. Quadriga was not able to pay its debts and went bankrupt.
The circumstances around the death of the CEO were a bit mysterious: e.g. Cotten’s will was signed twelve days before he died. It left his widow Jennifer Robertson the entire 9.6 million CAD estate and named her as the trustee. Moreover Ernst & Young found five Quadriga cold wallet addresses, but they were empty, containing no cryptocurrencies since April 2018. Other wallets were used as hot wallets.
More facts can be found for example in the NY Times article about the investigations around Gerald Cotten’s death. Finally, some of the victims who lost their funds wanted definitive proof that Mr. Cotten was actually dead and asked for his exhumation. So the story is not yet over…
The lessons learned are clear, however: Don’t use an exchange as a storage for your funds, move the funds, that you are not trading, to your own wallets and of course, have a safe procedure for sharing the private keys with your family should the worst case happen.
Elon Musk and government’s positions
Hence it was quite a lousy start to 2019. But the crypto community rolled with the punches and remained firmly on its feet.
For example, Elon Musk, one of the most popular tech entrepreneurs and influencers, said in an interview that Bitcoin technology is brilliant (I’m skipping the second part of the sentence about energy costs to not diminish the positive message).
After the big ICO hysteria with several exit-scam scandals in 2018, the international crypto community was unsure how their respective governments would react and how they would view the legal status of the cryptocurrencies and especially of the token economy being built mostly on Ethereum.
And governments reacted.
In March 2019 Jay Clayton, the Chairman of US Security and Exchange Commission, published a letter, responding to a request made by a representative Ted Budd in cooperation with Coincenter. Basically, Jay Clayton confirmed the statements of Director of Corporate Finance, William Hinman. In his speech, in June 2018 Hinman had argued that Ethereum was not a subject to the security law “in its present state”. As Ethereum did an initial coin offering back in 2014, many experts wondered why it was not considered to be a security while other ICOs are. Jay Clayton tried to explain: “A digital asset may be offered and sold initially as a security because it meets the definition of an investment contract, but that designation may change over time if the digital asset later is offered and sold in such a way that it will no longer meet that definition”. The Ethereum community perceived this very positively as clear government support for innovation.
As a financial hub of the EU Great Britain didn’t stay unconcerned. Its financial regulator, the Financial Conduct Authority (FCA), issued updated guidance on crypto assets at the end of July 2019 and stated that both main important cryptocurrencies Bitcoin and Ether do not fall under the regulatory scope of the FCA as they are “exchange tokens”. Exchange tokens are defined as “not issued or backed by any central authority and intended and designed to be used as a means of exchange”. Moreover, exchange tokens “tend to be a decentralized tool for buying and selling goods and services without traditional intermediaries. These tokens are usually outside the perimeter”. Furthermore, FCA declared that security tokens as well as utility tokens and stable coins that are “emoney-like” will become a subject of regulation.
Also, Germany’s government started to do its homework and prepared a national blockchain strategy aiming “to reinforce Germany’s position as a leading technology hub”. The strategy draws on the feedback from a broad public consultation process that took place in Spring 2019. Germany’s government tried to keep the balance between becoming an attractive hub for innovative blockchain application development and providing a clear regulatory framework to protect state sovereignty and consumer rights. The official strategy was released to the public in September 2019 and can be accessed here (in German).
Meanwhile, on the other side of the world: In China, ICOs and cryptocurrencies, in general, remain illegal. On the one hand, China wants to stay at the same innovation level as the USA. So it has started developing a digital version of the Yuan. Recently, President Xi Jinping said that China should accelerate the development of blockchain technology. And even more than that: China’s National Development and Reform Commission has removed cryptocurrency mining from the list of industries they want to eliminate.
On the other hand though, on December 27th, 2019, a group of government officials in Beijing, issued a warning against the use of cryptocurrencies. Chinese officials warned against companies participating in cryptocurrency activity. The authorities (The Beijing Local Financial Supervision and Administration Bureau, the Business Management Department of the People’s Bank of China, the Beijing Securities Regulatory Bureau, and the Beijing Banking and Insurance Regulatory Bureau) referred to the guidance published in 2017, which banned Initial Coin Offerings (ICOs) among other digital asset activity. We will see where the crypto journey will take China this year.
The Birth of Facebook’s Libra
Speaking about innovation and government regulations we should, of course, talk about Facebook’s Libra. It’s probably the most famous cryptocurrency project in 2019 that created buzz all around the world. Libra was formally announced by Facebook on June 18, 2019 with the plan to be launched in 2020. Facebook revealed its plans to issue Libra as a cryptocurrency, a stable coin, backed by financial assets and enabling unbanked people all over the world to execute payments in a convenient way. Facebook established the Libra Association to oversee the new currency. The Association was founded in Geneva, Switzerland and included many big names from different industries like Lyft, Spotify, Uber, PayU, Vodafone, Bison Trails, Coinbase, Xapo, Andreessen Horowitz, Union Square Venture and so on.
But the following participants left the Libra Association already in October: PayPal, eBay, Mastercard, Stripe, Visa, Mercado Pago, and Bookings Holdings. The most obvious reason was the pretty negative reaction not only from the US government and US banks but also from banks, politicians and regulators in EU and other countries. All of them warned of huge risks for public monetary sovereignty with Facebook potentially becoming a “shadow bank”, and even of threats to society and democracy stability. And also from the side of decentralization fans, Facebook earned criticism for being a centralized, permissioned blockchain with the Libra Association as a de facto central bank.
Last but not least, some people who examined the code of Libra implementation released on Github were also disappointed about the code quality and the development state. For example, the blockchain engineer and Bloomberg columnist Elaine Ou wrote that “Make it up as we go along” is reasonable for a seed-stage startup, but not something one would expect from a half-trillion-dollar tech company — especially not one that’s collecting $10 million checks from prospective members.”
It was a very bumpy start with quite a slashing criticism, but Libra is not yet dead. Mark Zuckerberg held a speech at the United States House of Representatives Committee on Financial Service defending the project, but promising not to release Libra until it complies with US laws and regulations.
I’m really keen to see how Libra will develop in 2020.
The Rise of DeFi
We can label 2019 as the Year of the DeFi. DeFi is short for Decentralized Finance. Decentralized Finance includes digital assets, open protocols, smart contracts, and dApps (decentralized applications) built on a blockchain. While cryptocurrencies are issued and stored decentrally, they are often accessed and used in centralized applications like exchanges or other third-party applications. That means that a central instance still has control over your assets. And DeFi wants to remove these intermediaries and give users full control over their financial assets.
Other important concepts of the DeFi are interoperability between dApps. To achieve this DeFi wants to use open protocols and open-source software. Actually DeFi would like to offer all the financial instruments that we know from the traditional financial system but without the need to include a central controlling instance. Everyone can join the DeFi Movement and build the future of the financial system.
The rise of DeFi began at the end of 2018 and sped up in 2019. Applications, frameworks, and protocols like MakerDAO, Compound, Uniswap, Dharma, and others appeared on the scene and are now building the foundation of the future Open Finance System. You can find a good overview of all important projects in this area at DeFi Pulse.
A Potpourri of Crypto
What else happened in the crypto scene in 2019? Let me share some more quick facts:
- Coinbase crashed a couple of times, driving down the price of Bitcoin by more than 1000 USD
- Binance got hacked (Bitcoin loss worth 40 Mio USD), reminding all of us one more time about the importance of security
- Telegram Open Network (TON) made negative headlines due to the SEC announcement they would sue Telegram for an illegal GRAM token sale during their TON ICO in 2018
- Bitcoin remains unimpressed by all the negative headlines and delights its enthusiasts with a growing hashrate. The Bitcoin’s hashrate (trillions of hashes per second) which describes the computing power of the Bitcoin surpassed a new record number of 100 Quintillion hashes, proving the instantly growing power of the Bitcoin blockchain. The more power, the more secure the Bitcoin network is.
All in all events in the crypto scene in 2019 were quite diverse.
We see big companies and banks trying to participate in the innovative cryptocurrency market and the blockchain projects space. We see positive government movements in the area of regulation to reduce consumer risks and increase protection while trying not to choke the innovation. It might be the next step in the right direction on the rocky path leading to the mass adoption of cryptocurrencies.
Let’s see what 2020 will bring us.