Author: Rahul

Yesterday came news that the world’s largest custodian bank, Bank of New York Mellon Corp (BNY Mellon), had invested in the cryptocurrency custody company Fireblocks. That investment of USD 133 million, which other funds also participated in, nearly makes Fireblocks a unicorn.

BNY Mellon invests in cryptocurrency storage firm Fireblocks

Bank of New York Mellon Corp has invested in Fireblocks, a platform that allows banks and other financial institutes to store, move and issue …

Cryptocurrency custody is a whole sub-industry by itself.

Just like with an individual, when a company/institution buys cryptocurrency, it is responsible for storing it.

When you lose access to your crypto wallet – either because your wallet was hacked or because you lost your access key, there’s no central authority you can turn to, as we saw in a previous post on this channel:

As institutions hold large amounts of cryptocurrency, several players have gotten into the business of safekeeping and third-party access. Fireblocks is one of them. Other crypto players are also in the custody business, such as Coinbase and Gemini, both major exchanges.

Then there are specialist custody players: Anchorage, BitGo, Komainu, and, of course, Fireblocks. PayPal, whose bet on crypto we’ve seen a few times, also got into the space recently via the acquisition of the firm Curv.

Finally, traditional financial industry institutions also offer custody services, though these are few.

• Fidelity Asset Management was a major early entrant. It is now using its custody expertise to extend loans backed by bitcoin collateral.
• BNY Mellon, which we saw earlier on, is another entrant.
• Now Deutsche Bank, among the world’s largest financial institutions, announced plans for “a fully integrated custody platform for institutional clients” in a December report
• And Kingdom Trust, a regulated custodian of traditional assets like commodities, real estate and other alternative investments, also got into digital asset custody in a big way.

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I got a few questions yesterday about the nature of Paypal’s crypto checkout feature we saw yesterday.

One question was how Paypal planned to perform the crypto to dollar/other currency conversion for every single purchase. It’s a legitimate question. Bitcoin transaction fees are notoriously high. See this article from Feb this year:

A Guide to Saving on Bitcoin’s High Transaction Fees – CoinDesk

There are ways to cut down on high bitcoin transaction fees if you’re patient enough and know some of the right tools to use.

Since “the average bitcoin transaction fee has fluctuated between $24 and $31”, how could Paypal possibly do this economically? The answer lies in what your PayPal crypto holdings actually are:

Paypal’s crypto wallet is super-closed. In effect, you don’t hold actual crypto in your wallets – not in the way you would with blockchain.com (which we read about last week) or other wallets – you don’t own the private key (you don’t see your public key), and you can’t sweep it into a 3rd party wallet whose private key you do own.

When you buy say USD 1000 of bitcoin, it’s like Paypal gives you credit towards the number of bitcoins that USD 1000 would buy on that day. The value rises and falls according to the price of bitcoin.

If you sell it (back to Paypal; you can’t withdraw to another wallet at the moment), you’ll sell in USD. If you use it to buy things, your balance is debited for the corresponding amount of crypto and Paypal’s own balance is updated.

It’s all within Paypal’s books.

From their own terms and conditions:

PayPal Cryptocurrency Terms and Conditions – PayPal US

PayPal Cryptocurrency Terms and Conditions

You will not hold the digital Crypto Assets themselves in your Crypto Asset balance. All custody of and trading in Crypto Assets is performed for us by our licensed service provider, Paxos Trust Company, LLC (“Paxos”), or other appropriately licensed provider of trading and/or custody services that we identify from time to time..

And as for the limitations we discussed? This is also as clear as can be:

You currently are NOT able to send Crypto Assets to family or friends, or withdraw Crypto Assets from your Cryptocurrencies Hub to an external cryptocurrency wallet. You also CANNOT use Crypto Assets directly as currency to pay for goods or services. If you want to withdraw the value from your Cryptocurrencies Hub you will need to sell your Crypto Assets and withdraw the cash proceeds from their sale…

So, in conclusion, you hold a claim to bitcoin and other crypto within Paypal’s closed ecosystem. A friend described it as proxy crypto, which is not wrong.

In balance, I think personally that the benefits of bringing crypto to a large number of people outweigh the way in which Paypal has gone about this.

But there should be a time when people are educated about how cryptocurrency actually works, and what true ownership actually means.

A few months ago, Paypal added the ability for its US customers to buy, hold and sell cryptocurrency in their Paypal mobile wallets. Yesterday, it introduced the ability for people to actually pay for stuff online using those cryptocurrency holdings, when using the Pay with PayPal option:

PayPal rolls out crypto checkout feature in the U.S.

PayPal Holdings Inc. will start letting its U.S. customers purchase items with cryptocurrencies in the latest embrace of digital assets by a traditional…

This is a big deal.

Why? Because overnight, millions of people are now able to buy things with their Bitcoin, Ethereum, Litecoin and Bitcoin Cash holdings.

How did Paypal make this possible? Well, it’s not a direct crypto purchase. The online store (or “merchant”) doesn’t need to accept cryptocurrency. Paypal converts their customers’ crypto holdings into the corresponding fiat currency (US dollars, Euros, and so on) right before the purchase. For the merchant it’s like any other online purchase:

The company plans to settle all of the transactions in U.S. dollars and convert payments to the applicable currencies of its various merchants at its usual conversion rates.

So it’s not really the buyer sending the seller crypto in exchange for goods. But the upside of this indirect method is PayPal opening up millions of customers and millions of merchants to the idea of crypto-based payments.

“We think it is a transitional point where cryptocurrencies move from being predominantly an asset class that you buy, hold and or sell to now becoming a legitimate funding source to make transactions in the real world at millions of merchants,” said Schulman (the PayPal CEO)

Earlier this month, we’d read on this group about Paypal’s plans to set up a new business unit focused solely on cryptocurrency & digital assets. And on its Investors day, the company had said that “it will be investing a lot of money into blockchain and digital currencies.”

Yesterday was a big step forward.

A blog I follow linked to this great analogy to describe what makes simple JPGs, PNGs, tweets worth hundreds of thousands, perhaps millions of dollars when represented as non-fungible token or NFTs:

This is a link to the entire article:

What Does It Mean To Buy a Gif?

Making sense of the NFT craze.

It describes the big differences (and some similarities) between traditional art markets and what is happening in the NFT world. It also dives into what we can expect in the future.

Once you realise that, it’s easier to be comfortable with building your own portfolio of natively digital artwork.

With marketplaces like Masterworks, you can own a fractional piece of real-world artwork.

Masterworks

Purchase shares in great masterpieces from artists like Pablo Picasso, Claude Monet, Andy Warhol, and more.

But one would argue that this artwork is being by Masterworks on your behalf. With NFTs, you truly own the address in the blockchain at which the artwork is available, so your collection is truly yours.

The VC Nick Grossman expands on a concept we have seen before on the group: the concept of bitcoin as battery.

Iceland has vast amounts of accessible, inexpensive renewable energy in the form of geothermal. But you can’t build power lines in every direction under the Atlantic. So instead of selling it directly, you convert the electricity into aluminum and you ship that around the world… In a sense, the aluminum coming from Iceland is like a battery.

Crypto mining converts electricity into value, in the form of crypto assets (BTC, ETH, etc). Those assets, like the aluminum produced in Iceland, can then be moved, transferred and transformed. But unlike aluminum, which must be physically shipped to its final destination, crypto assets are programmable, and can move there instantly via an internet connection.

Nick then goes on to describe a number of ways in which renewable energy could store value in the bitcoin battery. Here is the very first idea:

Interconnection queues: when you develop new energy resources, you must apply to get them connected to the grid. Texas alone has over 100 GW of renewables in its queue. These queues can take years to clear. In the meantime, these assets could be online and earning Bitcoin.

The whole article is simple, short and eminently worth reading.

Today: the management of several companies are surreptitiously parking part of their company assets in bitcoin – mostly in secret:

unbeknownst to most shareholders, companies, in particular listed firms, have been accumulating Bitcoin under the radar and in ways that wouldn’t attract regulatory scrutiny or require regulatory filings.

Cryptocurrencies Are Keeping Corporate Secrets

More companies are holding on to Bitcoin then you may know about and they’re using tricks worthy of the Panama Papers.

The secrecy is because, according to these CEOs and CFOs, the mainstream view of bitcoin is still one of an unreliable, volatile, renegade entity:

Ultimately these employee-CEOs have to tread a fine line.

Declare that their companies have Bitcoin on the balance sheet and risk shares of the firm riding along with Bitcoin’s volatility, distracting investors from the business case of the company, and drawing unnecessary focus to a firm’s balance sheet.

But don’t buy any Bitcoin and risk being fired when five years down the road the board of directors hauls in the CEO and CFO and asks them why they didn’t buy Bitcoin when they had the chance.

So what do they do? Use the same techniques as those described in the Panama Papers to hide cash from tax authorities:

Offshore entities and trusts own other offshore entities and trusts in a convoluted web of holdings that make it almost impossible to determine who owns what and how much what is owned is valued at.

To me the most interesting part is this:

in a Gartner Survey conducted last month, a full 5% of finance executives and CFOs surveyed said that they intended to acquire Bitcoin for their companies before the end of the year.

Which means that the number of such CFOs who are already doing this, in secret, may well be higher.

Finally, here is an attempt to catalog some major public and private companies that are known to hold bitcoin.

They include companies we have discussed before: the Canadian ETFs, Stone Ridge Holdings, whose management bought so much bitcoin they created tools for auditing and compliance that spun out into a new company, and of course Tesla and Square:

As more and more people start holding and trading cryptocurrency, I think companies that are building dull but important crypto infrastructure for enterprises and financial institutions don’t get enough coverage.

Well, on Wednesday, crypto wallet and exchange Blockchain.com announced that they had raised a large round of funding, USD 300 million, that valued them at over USD 5 billion dollars.

Blockchain.com Raises $300 Million as Investors Find Other Ways Into Bitcoin

The investment round gave the company a $5.2 billion valuation and highlights venture capital’s growing willingness to jump back into the bitcoin frenzy.

I have had a Blockchain.com retail wallet for years, but the company has itself been laser-focused on building for institutions for even longer. This is unlike its more well-known and splashy competitor Coinbase.

Back in 2019, I had met one of the VCs who had invested in Blockchain.com in their early years. The VC had confirmed this enterprise focus (and had said therefore that Blockchain.com would probably not be interested in listing a set of tokenised assets that I was involved in building that that time).

That bet is paying off in a big way for them as cryptocurrency and decentralised finance becomes more and more mainstream among enterprises.

In 2018, the Blockchain.com CEO had appeared on a crypto-focused podcast and outlined the same vision that the company has since executed on: market makers, dark pools, bringing settlement times down, among others – in short, thinking like and hiring from top-level Wall Street institutions. The audio and the transcript is here.

Blockchain CEO Peter Smith on Its Dark Pool, Crypto Lending Operation and Plans to Go Public – Unchained Podcast

Peter Smith, the CEO of Blockchain, discusses how the company got started, why the company is focused on users owning their own private keys and how that is what enables[…]

In conclusion – Peter the CEO and the Blockchain.com team had anticipated and prepared for the institutional acceptance and mainstreaming that we’re seeing today. And the innovations in DeFI that we will continue to see (and discuss on this group).

Yesterday, Tesla turned on the option to buy their car using bitcoin. During a time when bitcoin’s almost exclusively been used to hold and trade, using it to actually pay for something is rare.

Here is how the payment option appears on Tesla’s website:

Tesla’s FAQs show how it’s not as seamless as credit card payments are:

It notes in all caps that “bitcoin transactions cannot be reversed” and “if you input the bitcoin address incorrectly, your bitcoin may be irretrievably lost or destroyed.”

Customers are also responsible for directly paying all bitcoin transaction fees associated with their purchase, and Tesla warns that although bitcoin payments typically take less than an hour to complete, this can extend to up to “one day or more.”

And

because of bitcoin volatility, Tesla warns that the value of any refund made in bitcoin “might be significantly less” than the value of bitcoin relative to US dollars at the time of purchase.

– You can now buy a Tesla with bitcoin in the US

And Bloomberg reports that using Bitcoin to buy Tesla is the equivalent of selling an asset, and will attract tax if you had bought it at a lower price than today’s.

If you got rich buying Bitcoin a year ago, Elon Musk is inviting you to purchase one of his cars with some of the proceeds. The taxman will be watching if you do.

That’s because cashing in the digital asset for a shiny, new Tesla will count as realizing a capital gain.

The inverse is also true. If you bought the token when it peaked at around $61,000 earlier this month and don’t want to hold on, converting part of it to a Model 3 would give you a tidy tax deduction next year

– Using Bitcoin to Buy a Tesla? Get Ready to Hear From the IRS

In the USA at least, this means that using bitcoin to buy something is like spending stocks or gold, not money. Because the market regulator, the SEC, currently classifies it as a commodity not currency. This is weird. And exciting.

We have discussed NFTs or non-fungible tokens before, mostly in the form of digital art and collectibles. Not only do some of them sell for millions of dollars, they can also be re-sold on secondary marketplaces for gains.

The Wall Street Journal reported on Monday that we’re now seeing pieces of virtual land inside games being sold as NFTs:

NFTs Are Spurring a Digital Land Grab—in Videogame Worlds

The market for digital real estate has been bolstered recently by a pandemic-fueled climb in electronic games and investor excitement around cryptocurrencies.

In some games, players can buy digital deeds for real estate in the form of an NFT, which proves the authenticity of a certain plot in a specific game.

The real estate will appreciate as more players join the game and scarce land is sold to other players who require the plots for certain tasks and missions.

It’s not just buy-and-hold. Those ‘assets’ are being put to ‘productive use’:

Players can then rent out their land to other gamers, charge others for using it or even sell it—either within the game or on a third-party exchange such as OpenSea.

That real estate, too, can be sold for large sums:

A group of people last month paid $1.6 million for Citadel of the Stars, a large kingdom in the unreleased fantasy role-playing game Mirandus

virtual world The Sandbox sold about $2.8 million worth of land in a pair of well-received sales that now have the company valuing its digital properties at about $37 million.

The sale of properties in games that are not even released reminds me of Bollywood/other Indian movies, which start making money through sale of music weeks before the movie’s release.

Finally, this quote in the article captures well the appeal of virtual assets such as this:

“It doesn’t matter what watch you have anymore to a lot of people, what car you drive, what shoes you wear—we can’t even go outside,” said Mr. Zirlin “What’s becoming increasingly more important are your digital items and identity.”

We live in interesting times.