China

China’s Congress Proposes Blockchain Development Fund

NPC, China’s parliament suggests a government backed blockchain development fund to build a better governance system.

National People’s Congress, China’s parliament and Chinese People’s Political Consultative Conference, the most powerful political advisory body in the country, have recently begun their annual sessions. These are widely referred to as the “Two Sessions” or “lianghui” meetings. These meetings have been ongoing since May 22. 

The National People’s Congress, or NPC, is China’s top legislative body. Nearly 3,000 delegates from around the country meet once a year to submit proposals during the meetings. According to a Beijing News’ report on May 23, Jieqing Tan, deputy to the NPC, suggested setting up a special fund for blockchain industry development. If accepted, this fund would be led by the government. 

The aim of the fund is to support the development and growth of a number of promising blockchain enterprises, encourage blockchain technology innovation, and cultivate a number of unicorn enterprises in the blockchain space, says Tan.

Smart governance through blockchain

By supporting the development of the blockchain industry, Tan believes it will “modernize” the country’s governance system.  

Blockchain technology not only will be a great tool to push China towards smart governance and a high-trust society, it can also help China to gain an upper hand globally in the future development of the technology, according to Tan. He thinks by taking this technology innovation lead, China will be able to better protect its sovereignty and national security. 

Tan suggested that a clear national blockchain industry development plan should be defined. He explained that: 

“From the bottom technology standard, middle industry application development to the top-level system design, the national blockchain technology, industry and supervision three-dimensional strategic planning system should be well coordinated.”

Current challenges and initiatives 

The new economic potential and new job opportunities derived from blockchain technology is huge. However Tan pointed out that currently the number of limited blockchain enterprises, its scalability and lack of talent and information has been the main problems preventing the blockchain ecosystem from developing a well established ecosystem. 

As Cointelegraph reported previously, China’s central bank also secured $4.7 million in funding for its blockchain trade platform over the next three years. The tax bureau of Beijing announced its blockchain invoicing pilot application for a more eco-friendly, convenient and transparent future governance.

Bitcoin Miners Will Use Derivatives Like Traditional Commodity Producers

Miners need traditional financial products in order to hedge against the risk of increasing hash rate and difficulty.

Bitcoin (BTC) mining has become a multibillion-dollar industry. Pools, manufacturers and farms contribute to the growth and professionalization of the space. Financial service companies bring institutional-grade products and capital that increases liquidity for the biggest operators.

There’s a fundamental shortage of United States dollars available relative to the overall demand when the sector encounters certain market conditions. The dollar shortage is one of the contributing factors to volatility in the markets.

Just like traditional commodity producers, Bitcoin miners will likely become large users of derivatives — whether it’s with futures to lock in prices or options to hedge against losses. Everybody with a business that has relatively predictable cash flow is going to have an appetite for access to debt in order to reduce the capital requirements necessary to fund their growth.

For Bitcoin miners, it’s no different.

At their core, the Bitcoin lending markets have been supported by the proliferation of crypto derivatives — through BTC/USD swaps and futures — that people are now able to trade with. Derivative trading generates an implied interest rate on BTC, with which miners and other parties can use to borrow BTC against USD, or vice versa.

Finding scalable sources of low-cost capital and educating more institutional players about mining will lead to increased funding opportunities. Expanding access to capital is going to play a role in securing the Bitcoin network. Everything is becoming more sophisticated, and you don’t have to look far to find analogies for what we can expect will happen to this space over time.

The current state of play

The trend of miners opting to borrow fiat to pay expenses without selling their coins has been growing.

Financiers from Genesis Trading and Three Arrows Capital suggested that terms are getting tighter, but demand is increasing.

Su Zhu, the CEO of Three Arrows Capital, said:

“If firms can get a better understanding of where their yields come from, who and why is borrowing, and how people will pay for it, that will be a good step forward for this industry.”

For firms doing the arbitrage trade, we need a pledge for quality especially when we reflect on the consequences of the most recent price crash, in March 2020.

Recently, many counterparties, particularly in China, were completely wiped out through liquidations. There was a concept of false diversification where the thoughts were: Lending to many different firms doing the same thing is safer than lending to a few larger firms.

Six or seven years ago, on sites like BTCjam, people were simply lending money and hoping that they would get paid back. Fast-forward to today: People are now able to do things like look for different Loan-to-Values, or LTVs, as an arbitrage against the underlying market.

Zhu noted that firms sat back when the market crash occurred, even though it was a very profitable time to lend BTC. When the market became safe again, they wanted to lend again even though the LTVs became more burdensome and terms got tighter.

Counterparty risk

Leon Marshall, the head of institutional sales at Genesis Trading, said:

“The explosion of derivative markets and basis trading has been a key part of the recent growth in Bitcoin lending. Miners and institutions make up a fair amount of the dollar-borrowing demand at our firm.”

What miners think about the most is interest rates and collateral requirements. One thing that should be more on their radar is to also find trusted and reliable counterparties. Some financial services providers protect themselves by only providing lending to the best clients and highly rated counterparts. This makes it harder to get loans but safer in the long run.

Reputable firms understand the wishes for low rates and low collateral and try to balance that with the need to reduce risk. Every party needs to protect themselves, and the best firms will try to ensure that miners are still alive when prices move lower.

The regulatory requirements and stringent collateral requirements for licensed financial services are a consequence of the fact that those firms deal with the capital of other parties when sending loans to miners and mining pools.

People have started to step back and ask: Okay, what do we actually know about these operators, and what funds do we think they would have available to meet a margin call? It comes down to how the counterparties think about risks and black swan events.

Increased liquidity

The other factor that will affect liquidity is that banks around the world, and in Europe in particular, have started to become comfortable working with crypto companies. JPMorgan recently announced it will bank Coinbase and Gemini. When banks start accepting Bitcoin as collateral, we will see new sources of capital entering the industry that will have a profound impact on lending rates.

One source of liquidity for the markets, up until now, has been Tether (USDT). The recent growth in the market cap of stablecoins is an indication of the increasing demand for liquidity for crypto assets. The demand for USDT trading is particularly strong in Asia where it makes up 70% of Bitcoin trades. The collapse of Tether would likely lead to a crash in crypto markets.

Yama Zhang, the host of the Crypto Tonight YouTube channel — where several of the leaders from the finance and mining world met in a livestream — reported that there is a big community of USDT users in Asia but that the people who have been in the space for a longer period of time are actually quite concerned about Tether. There is a feeling in the established Bitcoin community that it is a real threat. 

Hash rate futures

As players get more comfortable with mining futures, more products come onto the market. Earlier this month, FTX announced the launch of its hash rate futures. Its futures are priced by the average difficulty per quarter, meaning that as of May 2020, where the difficulty is roughly 16 trillion, the index is at 16.

Hash rate futures should allow miners to hedge their exposure to difficulty adjustments, letting them reduce their risk while maintaining operations.

Sam Bankman-Fried, the CEO of FTX, said:

“You could potentially buy hash rate futures to protect against difficulty changes and then sell BTC futures to hedge against market moves.”

Professionalization for miners

The current trend is for mining operations to scale up and become more professional. For mining pool operators without a deep financial background, it’s unclear for them how to assess the risk of certain financial products, or to even know who would be willing to take the other side of these trades. If the finance industry continues to work with trusted leaders from the mining industry, we will see liquidity increase and risks minimized. 

The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Malcolm Cannon is the head of communications at F2Pool, which has been proudly securing Bitcoin and other proof-of-work blockchains since 2013. As one of the oldest mining pools, F2Pool is busy decentralizing its team and infrastructure. Cannon currently lives in Berlin where he spent the past seven years leading startup growth teams through successful Seed and Series A fundraising rounds.

Ontology Partners With German Startup to Accelerate Supply Chain Identity Solutions

Ontology has partnered with digital identity specialist Spherity to expedite the development of ID solutions across the supply chain.

Ontology recently partnered with German digital identity and cloud wallet provider, Spherity, to collaborate on expediting development on digital identity solutions for products and enterprises.

The partnership will see Spherity’s Cloud-Edge wallet integrate with Ontology’s (ONT) blockchain, and allow Ontology to use Spheriy’s Decentralized Digital Identity solutions.

The two firms will work together on creating proof-of-concept pilots demonstrating applications for digital identity within the context of supply chain, mobility, and pharmaceuticals — leveraging Spherity’s existing customer base.

Ontology and Spherity will also collaborate on research and marketing initiatives.

Identity solutions target the supply chain

Spherity CEO, Dr. Carsten Stöcker, told Cointelegraph that most of the investment, research, and development into blockchain-based identity solutions is not directed at identifying individual citizens.

“[B]lockchains and distributed ledgers are mostly used to encode a myriad of other forms of information that goes into tracking goods and value as it moves across the planet,” said Stöcker. He continued:

“The technologies that we call identity systems don’t just identify individual citizens and correlate their legal, financial lives with their digital lives – they also identify machines, autonomous algorithms, corporate entities, product information, licenses, and many other things that need a strong identity and signing rights to enter into this system of auditable, yet private transaction information.”

“There are millions of use-cases that have nothing to do with KYC or human identity of any kind, and even in the KYC space there are many ways to build in pseudonymity, revocable anonymity, disposable identities, and other capabilities beyond merely asking crypto users to show their papers and peg their digital lives to their status as subjects in a nation-state,” he added.

Connecting Asian and European DLT platforms

Speaking to Cointelegraph, Ontology co-founder, Andy Ji, stated that the firms “are looking for partners to build a proof of concept showing end-to-end traceability of manufactured goods from birth in an Asian factory to sale in the European market.”

“Most likely, this would take the form of a Chinese manufacturer already using other Ontology services to make their transactions more auditable, and a German import sector with very high regulatory compliance needs or facing reputational risks,” he added.

The partnership will also allow both firms to access new markets, with Ontology having an established foothold in Asia while Spherity boasts a strong European presence — particularly within Germany, Switzerland, and Austria.

The firms hope to facilitate greater interoperability and collaboration between European and Chinese blockchain ecosystems.