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The Power of Private Blockchains Is Beginning to Show

Michael J. Casey is the chairman of CoinDesk’s advisory board and a senior advisor for blockchain research at MIT’s Digital Currency Initiative.

The following article originally appeared in CoinDesk Weekly, a custom-curated newsletter delivered every Sunday exclusively to our subscribers.


Cryptocurrency purists often dismiss private blockchains as overly expensive undertakings for projects that are better served with a traditional database.

Yet these distributed ledger solutions keep being rolled out by enterprises in various settings – mostly still in experimental phases, but, increasingly, with real money at stake. And while they fall short of the public blockchain ideals of censorship resistance and permissionlessness, these contained, private experiments are extremely useful to the development of the overall blockchain industry.

While crypto investors lick their wounds in a bear market and developers plug away at scalability fixes for public blockchains, we can learn a great deal from how economic actors behave in these controlled situations where transactions involving multiple non-trusting parties are collectively recorded in a shared ledger.

One example came last month, with a first-of-its-kind blockchain bond issuance by the World Bank. In partnership with the Commonwealth Bank of Australia, the international development institution used a private Ethereum blockchain to sell a two-year bond worth 110 million Australian dollars ($79 million) to seven investors.

This was hardly the disintermediated, peer-to-peer securities sale that crypto finance disrupters dream of – the Commonwealth Bank played the role of dealer, essentially that of an underwriter. And the two institutions were the only ones running nodes, of which there were just four in total.

But the fact that they could both witness and confirm the investors’ purchases in real time removed the need for time-consuming reconciliation and offered real efficiency gains, says Paul Snaith, Head of Operations for Capital Markets, Banking and Payments at the World Bank Treasury.

“The experience we’ve had so far is already demonstrating that we may be able to rethink some of the functions that current markets require,” Snaith said in an interview.

Cutting the cost of issuance

For full, seamless, real-time settlement, operations like these will need to integrate some form of digital currency. And while progress is being made on that front, a digital fiat currency or stablecoin that’s acceptable to major financial institutions is still some way off.

Nonetheless, in enabling “atomic settlement” of the security transfer side of these transactions, the World Bank’s experiment showed that a blockchain bond could “potentially reduce the settlement problem to seconds rather than days,” Snaith said.

The cost savings could be significant. The World Bank issues $50-$60 billion in bonds every year. The potential reduction in underwriting costs and, just as important, in settlement and counterparty risk could be a significant funding advantage to the institution, which leaves it with more money to pursue its mandate of supporting development in low-income countries.

Moreover, the concept’s relevance goes beyond the World Bank’s bottom line. The model could be of benefit to the governments of those same countries, too.

“It could result in a much lower cost for developing countries to issue, or to borrow for a project, and that might be interesting,” Snaith said. “I think there is potential for this type of platform to be used by issuers who might otherwise be pushed aside for cost reasons.”

Multilateral agencies: unlikely blockchain experimenters

The fact that the World Bank, which last year launched a blockchain lab to explore a variety of development-focused use cases for the technology, is taking a leading role in experimentation with it is significant – if perhaps a surprise, given its reputation for heavy bureaucracy.

As I’ve argued elsewhere, I also see its engagement – along with the International Monetary Fund and the United Nations – as an opportunity for everyone, including even libertarian crypto developers intent on bypassing such centralized entities, to learn about the real world impact of blockchain technology on our global financial system.

Some form of distributed ledger architecture will eventually become the norm for all forms of capital raising – bonds, stocks and commodity futures, not to mention the new “asset class:” crypto utility tokens – with trillions of dollars in potential payoffs. International development agencies are in as good a place as any institution right now to drive progress toward that end.

Unlike government officials, who face constant political demands, and company executives, who worry about shareholder reactions to quarterly earnings, the people who run these international development institutions have fewer such conflicts. They can’t take radical steps – Snaith’s team has been unable to carry out once-planned experiments in cross-border payments with cryptocurrencies, for example – but they have greater freedom to test out new approaches in the pure pursuit of efficiency.

And while this model used a narrowly defined distributed ledger and a “proof of authority” consensus mechanism, people at the World Bank, the IMF and

UN frequently tell me they see the longer-term advantages of fully permissionless systems once they can handle large-scale capacity with much less price volatility. In the meantime, during this lull period for crypto assets, in which developers are being encouraged to “BUIDL,” much progress could be made in working with these institutions in these controlled settings.

More to come

The good news is that there is more to learn from the life cycle of the newly issued World Bank bond. Though only a two-year issuance – unlike the Bank’s usual five- and ten-year bonds – there are still four more “events” to study: three six-monthly payments of interest coupons and the final maturity of the instrument when the principal repayment and final interest disbursement will be made.

Moreover, Snaith and his staff expect to see secondary market trading emerge in the bonds, which means more investors will be on-boarded, and it plans to bring on TD Securities as a market maker running a full node on the system. They have also had discussions with the Reserve Bank of Australia, the country’s central bank, about it potentially running an observer node.

All of this will provide valuable learning – not only for the World Bank, its government partners and direct financial counterparties – but for any entity involved in capital markets.

There’s still much to be done before these distributed solutions become the norm.   But with hundreds of trillions of dollars locked up in a global securities market that’s rife with trust problems, burdened with massive middlemen costs and prone to wealth-destroying crises, developments such as this one are welcome.

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Pantera Capital Raises $71 Million for Third Crypto Venture Fund

Blockchain investment company Pantera Capital has launched its third new crypto fund with over $71 million already committed, according to public documents.

A filing submitted by the company to the U.S. Securities and Exchange Commission (SEC) on Wednesday indicates that the new investment scheme, called Venture Fund III, started its first offering on July 31 and has raised $71.44 million from 90 investors.

It’s still unclear at this stage how much more, if any, Pantera is seeking to raise for the fund, although a report from TechCrunch said on Thursday that the firm is targeting as much as $175 million in total.

Prior filings with the SEC show that the firm at least raised $13 million for its Venture Fund II in 2016 and $25 million for its ICO Fund in 2017.

Pantera also wrote in a blog post on Wednesday that Venture Fund III has already made its first blockchain bet, investing in Bakkt – a cryptocurrency trading platform launched early this month by ICE, the parent company of the New York Stock Exchange.

As reported, the investment firm recorded a 10,000 percent return over the last five years from its stakes in various cryptocurrency projects. Pantera has invested in crypto exchanges such as Bitstamp, Korbit and Shapeshift, as well as payments startups like Circle and Ripple.

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$1 Billion Chinese Blockchain Fund Denies Report of Government Pull-Out

A $1 billion Chinese blockchain fund launched in April has denied a report that local government will pull out its originally planned funding support following a recently leaked recording involving a former partner of the fund.

A news report from China Business Journal on Thursday said the Hangzhou city government has required Xiong’An (or Grandshores) Blockchain Fund to stop promoting itself by using the name as a government-backed fund.

The report said the local government has also decided it will not pour in new capital anymore, making a notable withdrawal from the original plan made in April where the government agreed to back 30 percent of the fund. So far the government has allocated 30 million yuan (or around $4 million) for the project, the report said.

Citing an anonymous source close to Li Xiaolai, a well-known Chinese crypto investor and a former managing partner of the fund, the report indicated the government’s decision came after a recording of Li’s private meeting was leaked early this month which brought negative impact on the company and the government.

Yet, in the report, Li responded that the fund “is not suspended.” And he further clarified to CoinDesk that by saying that he means the government has neither suspended Grandshores’ operations nor pulled out its future funding support.

Hours later on Thursday night, Grandshores Blockchain Fund also issued a statement to deny the report, saying they have not yet received any kind of suspension notice from the government.

As previously reported by CoinDesk, Li resigned from his role as the fund’s managing partner on July 9 following the leak of a recording where he took aim at various individuals and companies in the industry with vulgar languages.

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A Crypto Exchange Is Buying Back $24 Million-Worth of Its Own Tokens

FCoin, a new cryptocurrency exchange that saw spiking trading volume recently due to its controversial revenue model, has revealed a plan to buy back millions of its own tokens to provide capital for a new fund of funds.

The exchange announced last Friday that the new fund will be backing a group of selected token funds to further invest in blockchain and cryptocurrency projects. The funds invested in will all be accredited sponsors, it added.

During an initial phase, it will allocate 100 million of its own FT tokens – worth around $24 million at press time – to fund the project. However, instead of providing the amount from its own reserves, FCoin said the the capital will come from a buyback of tokens on the secondary market.

The move accompanies FCoin’s addition of a new “FT trading zone,” also announced on Friday, which includes trading pairs between FT and other tokens.

The exchange stated that only projects that have raised over 3 million FT through the fund of funds and have been recommended by at least two sponsors will be eligible for listing in the new trading section.

As previously reported by CoinDesk, FCoin saw soaring trading volumes after launch due to the adoption of a new business model called “trans-fee mining,” which reimburses users’ transaction fees with the exchange’s FT tokens.

While the model has drawn industry criticism over its long-term sustainability, data from CoinMarketCap shows that the platform recorded some $3.8 billion in trading volume over the last 24 hours.

That said, FCoin’s plan to buy back its tokens from the secondary market also follows a continuous decline in the price of the FT token, which has plunged by around 80 percent over a month, from $1.25 on June 13 to around $0.24 at press time.

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Huobi Partners on $93 Million China-South Korea Blockchain Fund

Hot on the heels of its recently announced cryptocurrency ETF offering, Huobi has revealed a new partnership that will see it launch an investment fund dedicated to blockchain startups in China and South Korea.

According to a report by the China Money Network on Friday, the cryptocurrency exchange has teamed up with Chinese investment firm NewMargin Capital and South Korean securities firm Kiwoom Securities on the joint effort. Banks from South Korea, including Korea Development Bank and Industrial Bank Of Korea, are to invest in the fund as limited partners, the report adds.

The companies are hoping to raise the local equivalent of $93 million to be invested in blockchain startups in China and South Korea, as well as to encourage cooperation between blockchain projects in the two nations.

The news comes on the same day that Huobi launched an exchange-traded fund (ETF) based on cryptocurrencies – aimed to allow retail investors to gain exposure to a basket of assets instead of just one at a time. The investment instrument, called HB10, is now open for subscriptions, though the firm will only accept funding using cryptocurrencies.

Also announced today, was a fund set up by rival crypto exchange Binance, which said it was launching a $1 billion “Social Impact Fund” to boost the growth of blockchain and cryptocurrency startups.

Binance aims to use $1 billion of its own capital to create a combination of a fund of funds and a direct fund that invests in blockchain projects.

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Binance Reveals Plan for $1 Billion Blockchain Startup Fund

Binance, one of the world’s largest cryptocurrency exchanges, has announced it is launching a $1 billion “Social Impact Fund” to foster the growth of blockchain and cryptocurrency startups.

Ella Zhang, head of the exchange’s incubator program Binance Labs, said during an online meetup Thursday that the capital for the fund will be coming from Binance’s own reserves as a way to contribute to the industry ecosystem.

Binance will pour in the $1 billion over 10 phases of $100 million each and, in essence, will create a combination of a fund of funds (a fund that invests in other funds) and a direct fund that invests in blockchain projects.

For the fund of funds, the incubator chief further explained that Binance is seeking 20 funds to invest in, which each must manage a pool of at least $100 million in order to be eligible. Investments will be made through Binance’s own BNB token, she said.

The first project to be supported is a blockchain-powered ride-hailing initiative that was recently announced by Chen Weixing, CEO of app developer Funcity and former founder of Chinese ride-hailing app Kuaidi Dache. As previously reported, Chen revealed the initiative at a Big Data expo in Guizhou, China, last week together with Yang Jun, co-founder of Meituan, one of the largest group discount apps in China.

“We believe it’s a disruptive social experiment. Binance Labs hopes to work with more aspirational projects to explore blockchain applications and together move forward the growth of the industry,” Zhang said.

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Crypto Hedge Funds Face Tough Choices on Tax Day

Jon P. Brose is a partner and Brett R. Cotler is an associate in the blockchain and cryptocurrency practice at the law firm of Seward & Kissel.

The following article is an exclusive contribution to CoinDesk’s Crypto and Taxes 2018 series.

Like so much else in cryptocurrency taxation, the rules for crypto funds – pooled investment vehicles that seek above-market returns from digital asset investments – are far from straightforward.

In some instances, a tax law concept may include (or not include) crypto assets as securities or commodities for tax purposes. In other instances, existing interpretation of U.S. tax law predates the advent of cryptocurrency (thus not considering unique characteristics of crypto as an asset class).

Such discrepancies may lead to non-intuitive outcomes for crypto funds. Here’s a quick overview.

US investors

U.S. investors in crypto funds (other than tax-exempt investors) will typically invest in domestic partnerships or LLCs. Onshore funds could stand alone but could also be part of larger structures, incorporating one or more entities accommodating tax-exempt and non-U.S. investors (e.g., mini-master, master-feeder and side-by-side structures). 

As partnerships, onshore crypto funds are generally not subject to tax, but rather their investors are taxed on the funds’ profits. Each year, investors receive “K-1s” reporting their respective shares of the crypto fund’s items of income, gain, loss, deduction and credit for the prior year, regardless of whether profits were distributed.  

Investors may be limited when claiming certain deductions or losses, including passive activity losses, business losses, business and investment interest expenses, and miscellaneous itemized deductions, which are currently non-deductible (including for alternative minimum tax purposes).

In addition, crypto funds should restrict withdrawal rights or limit the number of investors to avoid classification as publicly-traded partnerships, which are taxable as corporations. Unlike partnerships, corporations are taxed on their income, and shareholders, on distributions.

Funds that do not limit withdrawal rights or number of investors rely on the “qualifying income” test to avoid publicly-traded partnership classification. It is unclear whether 90 percent of a crypto fund’s income would be “qualifying income” to avoid publicly-traded partnership classification.

If crypto funds allow investors to contribute cryptocurrency (rather than fiat) when subscribing for fund interests, investors may be required to recognize gain (but not loss) on the contribution. If contributions in-kind can be made tax free, crypto funds must track the contributors’ bases in the contributed cryptocurrency and allocate any pre-contribution gains or losses to such investors.

Investor or trader?

Different U.S. federal income tax rules apply to investors, traders and dealers. Generally, dealers make a market in an asset class by being willing to buy and sell assets at certain prices, profiting from bid-ask spreads. Most crypto funds will not be dealers.

Crypto funds will be traders if their trading activities are substantial, seeking to profit from short-term market swings (rather than “hodling” for long-term appreciation). In determining a fund’s status as a trader, relevant factors include the total number of trades in a year, frequency of trading activity, and portfolio turnover.

Unlike traders, investors are not engaged in a trade or business. Crypto funds that are not traders in crypto will be investors.  

Classifying crypto funds as traders or investors affects whether expenses (other than investment interest expenses) of the funds are deductible for U.S. federal income tax purposes.

Traders in commodities, which may include crypto for this purpose, can elect to mark-to-market their open commodities positions (other than those identified as held for investment) at the end of each year, recognizing gains or losses as ordinary income or losses. Funds with significant mismatches between long-term capital gains and short-term capital losses may want to make this election, since recognition of short-term capital losses may be limited.

In addition, crypto futures that are “1256 contracts” and remain open at year end must be marked-to-market. Any gains or losses will be treated as 60 percent long-term capital gains and 40 percent short-term capital gains.

This tax treatment carries through to the general partner as part of their carried interests. However, straddle rules might delay recognition of losses if crypto funds hold, for example, crypto long and crypto futures short.

Other investors

Non-U.S. persons and tax-exempt investors in crypto funds will typically invest in an offshore corporation formed in a no- or low-tax jurisdiction.

Offshore funds will either invest into a master fund (master-feeder), into an onshore fund (mini-master) or alongside an onshore fund (side-by-side). Unless an offshore fund’s activities is limited to certain investments, the offshore fund (but not its investors) may be subject to U.S. federal income tax to the extent the offshore fund is engaged in a U.S. trade or business.

Generally, offshore funds will not be treated as engaged in a U.S. trade or business if the funds only buy and sell stocks, securities and certain commodities for their own account (and certain other requirements are met). These are known as the “securities trading safe harbor” and the “commodities trading safe harbor.” For purposes of the securities trading safe harbor, securities generally means debt instruments.

For purposes of the commodities trading safe harbor, the commodities must be “of a kind” that is customarily dealt in on an organized (i.e. CFTC-regulated) exchange and the transaction is “of a kind” customarily consummated at such place. For this purpose, “commodities” generally means commodities in the ordinary financial sense. The CFTC, which generally regulates commodities markets, has stated that cryptocurrencies are commodities.

The commodities trading safe harbor may apply to crypto trading if the crypto is “of a kind” that is customarily dealt in on an organized commodities exchange. Currently, only bitcoin futures are traded on an organized exchange. While non-U.S. persons’ bitcoin trading activity in the U.S. should fall within the commodities trading safe harbor, it is not entirely clear if trading other cryptocurrencies (e.g., ethereum, litecoin and altcoins) come within the commodities trading safe harbor.

For a more comprehensive look at U.S. federal tax issues affecting digital assets, see our white paper entitled “Hand Over Your Digital Wallet: Yes, Cryptocurrency Transactions are Taxable.”

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Vitalik Buterin Hopes New Ethereum Fund Will Deliver on Hype

Notable ethereum stakeholders are joining forces to create a fund for projects building on the world’s second-largest blockchain.

Called the Ethereum Community Fund (ECF), the effort is the result of a collaboration between Cosmos, Golem, Global Blockchain Labs, Maker, OmiseGo, Raiden and Tendermint, with those involved agreeing to work to connect ethereum projects with companies that could benefit from the blockchain services they offer.

It will also support the projects in the form of a grant program that will function as “a permanent financial endowment” for selected projects, according to a release.

Perhaps most notably, however, the fund boasts the involvement of ethereum creator Vitalik Buterin, who confirmed he is an advisor in an email to CoinDesk..

“Ethereum has grown beyond my expectations over the last few years, but the work is clearly not finished,” Buterin said in a statement.

He continued:

“Delivering value that matches the hype should be the mantra of 2018; efforts such as the ECF which help organize the development of the ecosystem are going to help make that possible.”

More broadly, the ECF is not the only project of late to seek to bolster the ethereum blockchain and its surrounding ecosystem.

The Ethereum Foundation, the non-profit that oversees the platform’s development, announced two subsidy programs in January which will serve to incentivize developers to implement scaling solutions. Likewise, the Enterprise Ethereum Alliance provides resources to businesses hoping to adopt ethereum and links Fortune 500 enterprises with startups.

As such, those involved in ECF expressed optimism their project would encourage others to join what they see as a wider effort.

“One project in isolation can create a product to disrupt an industry,” Jun Hasegawa, founder of OmiseGO said, “but by working together we can create a framework that will change the world.”

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State Retirement Funds in Tennessee Could Face Bitcoin Restriction

Tennessee lawmakers have put forward a new bill that would bar state government retirement funds from investing in cryptocurrencies.

Introduced on Jan. 30 and sponsored by Representative Michael Curcio, the House bill, if enacted, would amend the existing Tennessee Code Title 8 that relates to post-employment benefits for public officers and employees.

According to the latest Tennessee Code, trustees are assigned from members of the state’s Department of Finance and Administration, as well as the Senate and the House of Representatives, to oversee investment plans for the schemes.

While the trustees are granted powers to invest in financial instruments in which the Tennessee retirement system has permission to invest, the new bill seeks to exclude cryptocurrency from those options.

“Notwithstanding any law to the contrary, the trustees shall not invest in any cryptocurrency,” states the proposed bill. It goes on to request that the act would take effect as soon as it becomes law.

The proposal, perhaps, signals that lawmakers in Tennessee are becoming wary of investments associated with cryptocurrencies given the market’s high volatility.

Yet the opposite stance is being taken by another legislative action that is eyeing a role for cryptocurrency’s underlying blockchain technology.

As reported previously, Tennessee joined Florida and Nebraska in January in filing a new bill that aims to recognizes blockchain signatures as legal electronic records.

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IBM, Comcast Back New Blockchain Startup Fund

Tech giant IBM and the venture arm of telecoms conglomerate Comcast are backing an investment fund focused on scaling early stage startups that help enterprises use blockchain technology.

MState, a startup accelerator, aims to invest in blockchain startups globally and ultimately connect them with Fortune 500 customers, co-founder Rob Bailey told Bloomberg.

The accelerator is seeking to invest $25,000–$50,000 each in five or six companies in the next six months, he added.

Bailey said:

“There’s a massive opportunity in Fortune 500 companies. They don’t know which companies to work with.”

Under the arrangement, Comcast is offering funding, while IBM will provide services to MState.

Janine Grasso, vice president for blockchain strategy and ecosystem development at IBM, said that the tech company might also help entrepreneurs who “don’t make the cut for MState.”

MState is also backed by Boldstart Ventures and Galvanize, a press release states.

“In 2018, we will see a growing number of enterprise blockchain use cases go mainstream from healthcare applications to government, supply chain and retail to the real estate and transportation industries,” Bailey stated.

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The leader in blockchain news, CoinDesk is an independent media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. Have breaking news or a story tip to send to our journalists? Contact us at news@coindesk.com.