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December 17, 2017
'I Will Gladly Pay You Tuesday'

From secondhand anecdotes about people taking out mortgages to finance bitcoin purchases to highly leveraged margin trading at the major crypto exchanges, credit is creeping into a market that once frowned on it. That's worrisome for both philosophical and practical reasons.

Read more in the THE TAKEAWAY below.

TOP TRENDS ON COINDESK
Welcome to the Future(s)

Bitcoin futures trading kicked off on the Cboe on December 10, ushering in a new era for crypto and reviving hopes of a bitcoin ETF. Despite a website outage the first day of trading, things have mostly gone smoothly, according to the exchange, whose leadership is also pushing back against criticism of the move by futures industry incumbents.

The other shoe drops tomorrow when bitcoin futures are set to go live on the CME. To brush up on your knowledge of these forward commodity markets, read these explainers for bitcoiners by CoinDesk guest contributor Lanre Sarumi.

Eye on Ethereum

There's been a fair amount of news around the second-largest blockchain this week. New use cases range from helping with corporate compliance, as in a project led by global bank UBS, to jump-starting mesh networks that would keep the internet free and open, as some New York techies are trying to do.

But amid this creative energy there's also quite a bit of contention. For one thing, the ethereum-powered trading game CryptoKitties – already controversial for clogging the network – has come under additional fire for not being fully decentralized. Further straining the ethereum ecosystem, a technical document known as the Yellow Paper used by devs as a reference for coding is falling out of date, with no updates in more than a year.

Finally, Parity Technologies, the maker of a multi-sig wallet whose users' ether was frozen last month due to a bug, tried to rally community support for a rescue operation for the stuck funds – which, it admitted, would require a potentially disputatious systemwide software change. After receiving strong feedback, however, the company may drop the idea.

With all these balls in the air, 2018 should be an interesting year for ethereum to say the least.

That Was the Year That Was

CoinDesk's 2017 Year in Review series is in full swing. We've opened up a big tent of voices and perspectives, ranging from policy wonk Jim Harper's glum assessment of bitcoin's progress toward its social goals to trader Willy Woo's (really) long-term investing thesis to IBM executive Marie Wieck's call for blockchain adoption by governments worldwide. There's also a little bit of trolling from ardent skeptics if you're into that sort of thing.

You can find all these opinion and analysis pieces, written exclusively for CoinDesk by an all-star cast of innovators, builders and thinkers, right here. Check the page daily for new installments now through the end of the year.

See all CoinDesk stories

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QUOTE OF THE WEEK
"It'd be like if I sold you a cat, but then took away your ability to interact with it, see it, etc. For all practical purposes, you'd no longer have a cat."

– Bitcoin Core developer Peter Todd, on the centralized character of CryptoKitties

THE TAKEAWAY
“Neither a lender nor a borrower be.”

Polonius’ advice to Laertes in “Hamlet” might well have been a rallying cry for the early bitcoin adopters who sought an alternative to fractional reserve banking.

On a blockchain, an asset can be in your wallet, or it can be in my wallet. It cannot be in both at the same time. You can still lend it to me, but if you do, it’s like letting me borrow your lawnmower – you can’t mow your own lawn until I return it. Unlike banks as we know them, lenders of bitcoin cannot create money out of thin air, Jamie Dimon’s comments notwithstanding.

Quite apart from providing an alternative to central bank money creation, however, cryptocurrencies and blockchains imply liberation from more prosaic forms of credit.

For example, the peer-to-peer architecture of cryptocurrency means transactions are continuously settled on a gross, or one-to-one, basis, rather than waiting to net out a batch of debits and credits across the books of a central intermediary. Meanwhile, blockchain securities platforms such as T0 seek to collapse Wall Street’s Rube Goldberg assembly line of trade, clearing and settlement into something closer to “one and done.” And in an emerging type of crypto transaction called atomic cross-chain swaps, it is impossible for only one side of a trade to go through. It gets done, or it doesn’t.

All of these innovations should, in theory, reduce the need for credit to bridge the gap between trade and settlement, and lead us to a world without baffling distinctions on our bank statements like “current balance” versus “available balance.”

And yet – credit, in various forms, is creeping into the blockchain economy.

Consider the following:

With bitcoin’s price hitting new all-time highs and garnering mainstream media coverage, there are secondhand reports of U.S. consumers going into debt to buy cryptocurrency. “We've seen mortgages being taken out to buy bitcoin,” Joseph Borg, president of the North American Securities Administrators Association, said on CNBC. “People do credit cards, equity lines," said Borg, who is also director of the Alabama Securities Commission.
Most or all of the major crypto exchanges offer margin trading (including, ironically, Poloniex, which apparently did not heed its Shakespearian namesake’s advice). BitFlyer, based in Japan, for example, allows traders to leverage up to 15 times their cash deposit. To be fair, the lending on these platforms is often peer-to-peer, between exchange customers. “We don’t take any risk. The trading is between our customers,” bitFlyer’s CEO Yuzo Kano told the Financial Times recently.
At CoinDesk’s Consensus: Invest conference last month, there was much talk of bringing other forms of leverage, such as prime brokerage and securities lending-type services, into the crypto market to accommodate demand from newly-arrived institutional investors.
There is some speculation that Tether, the issuer of a dollar-pegged cryptocurrency, has been printing tokens to drive up the price of bitcoin on Bitfinex, an affiliated crypto exchange. For the record, Tether has said its tokens are fully backed and that a forthcoming audit should put the doubts to rest.
Some out there will say: Told you so. According to one school of thought, credit, be it net settlement or fractional reserve banking, is necessary for a functioning financial system, and to think otherwise is naive utopianism. Expressing this view, Perry Mehrling, an economics professor at Columbia University's Barnard College, exhorted techies to wake up and smell the interdependency in a September blog post:

“...[M]arkets are being made to convert one cryptocurrency into another, and especially the place where markets are being made to convert cryptocurrency into so-called fiat. Someone or something is making those markets, and in so doing expanding and contracting a balance sheet, in search of expected profit. ... Cryptos fear credit, but I suspect they will soon discover that credit is a feature not a bug, and that will require them to re-examine the implicit monetary theory that underlies their coding.”

But there’s another way to look at the situation, which might be summed up as: there goes the neighborhood.
In other words, an influx of get-rich-quick types, whether they’re individuals taking out loans to buy crypto or institutional investors seeking to juice returns with leverage, could encourage the sort of behavior that bitcoin was designed to escape. Like, say, a hosted wallet provider lending out customers’ bitcoin without telling them.

“I fear the financialization of bitcoin, in the sense that it may create phantom bitcoin that may not actually exist,” said Caitlin Long, the president and chairman of Symbiont, an enterprise blockchain startup.

As a Wall Street veteran, Long doesn’t fit the typical bitcoiner profile, but she’s been personally investing in the cryptocurrency since as far back as 2013, when her day job was running the pension business at Morgan Stanley.

“As more of the non-philosophical owners of bitcoin come in to bitcoin, where you’re seeing more and more of a push toward the financialization of it, I think that would be a shame,” she said. “Even though it would boost the price in the short term, it would remove bitcoin from being a true store of value.”

Switching back to the securities markets, Long said she doesn’t buy the argument that net settlement is necessary for a system to function. For one thing, the practice creates little-appreciated risks.

“As long as you’re allowing net settlement, you’re not forcing a true-up on every trade that there is one buyer and one seller,” she said. “If you’re allowing net settlement, what you’re really doing is allowing multiple buyers for only one asset.” Hence situations like the court case this year in which brokerage firms had sold more shares in Dole Food than the company had actually issued.

Further, Long said, the global financial markets have dragged their feet in speeding up settlement times not because the status quo is efficient but because it’s profitable for incumbents.

“The whole reason we have T+3, T+2 settlement is for securities lending,” she said. “It’s all about brokerage firms who want to be able to lend their clients’ securities to other clients and take a spread.”

In this light, blockchains are not the mere fantasy of a coterie of anarcho-capitalists and Silicon Valley propellerheads, as a number of skeptical academics, journalists and bloggers make the technology out to be.

Rather, if put into wider practice, blockchains might dispel many current, widely held fantasies.

This above all: To thine own trades be true. – Marc Hochstein

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Beyond CoinDesk...

OTHERS ARE TALKING ABOUT

The New York Times' Kevin Roose admits he was wrong about bitcoin when he predicted its swift demise years ago, and shows admirable epistemic humility about where it goes from here.

Another longtime bitcoin skeptic, The Washington Post's Matt O'Brien, is less contrite, and he is still convinced it's a Dutch tulip-like bubble. Blink and you might miss the part where he acknowledges it's also a "truly revolutionary technology."

Reuters covers the outages at crypto exchanges during the recent run-up. The article quotes one of our favorite curmudgeons, Tim Swanson, as saying he's "concerned that if the futures liquidity increases there could be an incentive for someone with a large bet against bitcoin to disrupt or attack the network." Just "concerned"? Why, Tim must be worried sick about the possibility!

The New Yorker offers an in-depth look at the Estonian government's world-leading efforts to digitize society, including (briefly) the use of Guardtime's KSI blockchain. The piece includes a memorably poetic analogy: "A blockchain is like the digital version of a scarf knitted by your grandmother. She uses one ball of yarn, and the result is continuous. Each stitch depends on the one just before it. It’s impossible to remove part of the fabric, or to substitute a swatch, without leaving some trace."

Last but not least, the Verge interviews a CryptoKitties day trader. The money quote: "When you’re trading currencies, there’s a lot of technical analysis that goes into the charting, but there’s no charting with kitties."

UPCOMING EVENTS IN 2018 (see more in our full listing)
January 15-19: Blockchain Cruise Asia, Singapore
January 17-19: The North American Bitcoin Conference, Miami
January 30: Unveiling Blockchain: Beyond Bitcoin & Cryptocurrencies, Japan Society, New York
February 1: Cryptoassets Conference, Vancouver, Canada
May 14-16: Consensus 2018, New York

WHAT WE'VE BEEN UP TO

We're taking a break for the holidays – well, as much as anyone can in a market that never sleeps.

CoinDesk Weekly will return on January 7. But we'll continue posting news updates and other content on CoinDesk.com every day, including the aforementioned 2017 Year in Review series. And be sure to look out for CoinDesk's 2017 Most Influential People in Blockchain series of profiles and videos to start off your New Year right.

What do you want Santa to airdrop into your crypto wallet? Got any New Year's blockchain resolutions? Send your feedback and suggestions for this newsletter to [email protected], or tweet @MarcHochstein. And follow us @CoinDesk.

See you in 2018...

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