New research from financial services giant Credit Suisse seeks to analyze the impact of blockchain on 14 existing market participants and their stock performance.

Written in response to investor questions, companies examined include major exchanges (the Australian Securities Exchange and Nasdaq), incumbent business process facilitators (Computershare and Equiniti) as well as financial services providers (Experian and JPMorgan).

The 135-page report, released today, highlights four areas where the technology can potentially lead to disruption – payments, capital markets, financial services and media. Ultimately, however, the report concludes the stock performance of select firms in these categories will not be significantly impacted.

The report reads:

"Our broadest conclusion is that blockchain is less relevant in sectors where there has already been significant investment and innovation."

Overall, the report is more bullish on blockchain than bitcoin, a statement that echoes similar findings from research efforts commissioned by incumbents.

The report also sketches out 13 barriers to bitcoin, questioning the digital currency’s ability to scale to Visa-level transactions and noting its current slow transaction processing times.

The authors argue, however, that blockchain tech more generally is better positioned for a broader impact.

"We find blockchain more easily optimizable to different objectives than bitcoin and think three key properties – disintermediation of trust, immutable record and smart contracts – endow the technology with real advantages to legacy systems," it reads.

The biggest impact areas, the report said, would likely be financial services, exchanges and post-trade settlement.

Of all the public companies studied, Credit Suisse determined most faced no near-term threat from blockchain, and that the technology in fact offers long-term opportunities in four areas.

Payments

Though it acknowledges that it's impossible to know where blockchain will ultimately be used, the report argues changes provoked by blockchain are inevitable.

Payments, an industry that includes merchant acquirers, card issuers and financial payments processors, is one big, well-established industry that bitcoin and blockchain could potentially transform, according to the report.

But Credit Suisse thinks that the industry’s big players don’t need worry about being uprooted by blockchain.

"We think it unlikely that bitcoin will gain traction as a mainstream payments network, or that blockchain will disintermediate the globally trusted brands of the card networks such as Visa and MasterCard," the report reads, adding:

"On balance we view the existential threat to the industry as modest."

The report argues that this is also true of payment processing firm Worldpay, adding that the fears of blockchain overtaking the company are exaggerated. Fiserv, it said, is also "well positioned to compete".

Capital markets

For capital markets participants, Credit Suisse saw more opportunity than risk as well.

The report evaluated specifically how custodians, exchanges and registrars would be affected by blockchains, concluding they could offer a new approach to data management. The end result, the report posits, is that the way capital markets are constructed could change, but they would be more resilient and less costly.

Though the report argues the winners and losers will be difficult to predict, it said existing incumbents are “best positioned” to reap profits created by blockchain tech while suggesting some consolidation could occur.

As such, the report asserts exchanges such as ASX will see "little downside risk", while the London Stock Exchange’s and Japan Exchange Group’s exposure was similarly low. Business process facilitators were also evaluated in this section, though the report called concerns about their business models “overplayed”.

Financial services

On this topic, the report sought to describe how the use of a distributed ledger, or multiple distributed ledgers, could impact banking and financial services.

Ultimately, it described two market opportunities it believes are likely to occur. In one, a shared ledger cuts costs by processing securities trades and facilitating international payments. In the other, share ledgers result in more data on clients, boosting the ability of firms to sell to consumers.

The report argues that at least some adoption of blockchain by financial services is likely, based on its analysis of banks like Goldman Sachs Group, JPMorgan Chase, Experian and Santander, which have shown varying degrees of interest. But major impact is expected to take three to five years.

At the very least, according to the report, the rise of blockchain has motivated banks to take a closer look at their underlying IT structures.

“This means the future banking landscape and both the size and allocation of profits from banking may change substantially," it reads.

Notably, it calls Goldman Sachs "among best positioned" to reap blockchain benefits, and draws similarly positive conclusions about the outlook for JPMorgan Chase, Experian and Santander.

Media

The report also explores how blockchain could disintermediate non-financial companies, a hot topic especially since the rise of ethereum, the smart contract computing platform.

It focuses on media use cases, including music, TV, pay TV, digital video and publishing, arguing, the tech could come to reduce piracy.

As far as the music industry goes, this benefit would require "total adoption" of a blockchain-based platform, but the report argues that this sweeping change would require at least five years.

Alyssa Hertig co-authored this report.

Stock market report image via Shutterstock

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Bitcoin's most innovative merchant has a new blockchain lead.

E-commerce giant Overstock announced this week that chairman of the board and former candidate for Utah governor Jonathan Johnson will take a role as president of Medici, the division launched in 2014 to explore potential applications for blockchain technology. Johnson will also remain chairman of the board.

In statements, CEO Patrick Byrne lauded Johnson as the right choice for the role, while praising Medici as an effort that would pioneer innovations in capital markets.

Byrne said:

"Jonathan shares my pro-freedom instincts, and therefore also shares my excitement about the blockchain revolution’s potential to reduce society’s dependence upon certain rent-seeking and capture-prone centralized institutions."

With the announcement, Johnson will oversee Medici projects including its signature effort tØ, as well as its various investments in bitcoin and blockchain firms including Bitt and Peernova.

The move is perhaps not surprising given Johnson’s past public appearances on behalf of the company. In January 2014, he appeared before regulators in New York as part of hearings that would result in the creation of the BitLicense.

The event saw Johnson discuss the opportunity bitcoin might provide for mainstream retailers, while showcasing the benefits bitcoin payments could bring to consumers.

Image via Hire JJ

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The price of bitcoin fell sharply today exacerbating an already ongoing decline as global market participants reacted to news that one of the largest digital currency exchanges had been hacked.

Earlier this afternoon, Hong Kong-based exchange Bitfinex halted trading after discovering a security breach, which included taking its website offline and pausing all withdrawals and deposits. Representatives from the exchange told CoinDesk engineers were seeking to uncover issues at press time, though the company had confirmed roughly 120,000 BTC (more than $60m) was lost or stolen via social media.

In response, bitcoin prices fell to $560.16 by 19:30 UTC, $530 by 23:30 and $480 at press time, CoinDesk USD Bitcoin Price Index (BPI) data reveals.

This price was roughly 20% lower than the day’s opening of $607.37 and 27% below the high of $658.28 reached on Saturday, 30th July, when the digital currency began pushing lower.

Arthur Hayes, CEO of bitcoin leverage trading firm BitMEX, emphasized that this event had a clear and measurable effect on bitcoin prices.

He told CoinDesk:

"A high profile hack is not good for sentiment and curtails the ability for market makers to keep an orderly market."

Market observer and trader Jacob Eliosoff provided similar input, telling CoinDesk that the event had sparked a new wave of uncertainty.

"The big question will be how much was stolen and whether Bitfinex will make customers whole," he said.

Market participants traded more than 600,000 BTC via Bitfinex during the 30 days through 2nd August, Bitcoinity data reveals. This figure represented represented 1.6% of the more than 39m BTC transacted through various exchanges during the 30-day period.

The halving's impact

However, the price decline does not appear to be the sole result of the issues at Bitfinex.

Bitcoin prices experienced a gradual, downward movement over the course of several days, with market observers pointing to the halving of rewards on the bitcoin network as the cause. This event – which saw a 50% reduction in the mining subsidy on the network – generated significant visibility when it took place 9th July.

At the time, there was no major change in bitcoin prices, despite expectations that such a move may have been probable.

"It looks like traders got a bit ahead of themselves thinking that the price would go in a straight line after the halving," said analyst Tuur Demeester. "The halving is real and will have real effects."

One such effect is profit taking. Petar Zivkovksi, director of operations for full-service bitcoin trading platform Whaleclub, spoke to this development, noting his belief this trend was "in full effect" after the halving.

Still, he suggested the impact could be limited due to existing market support.

"There are still plenty of ‘stubborn’ longs open," he added.

Search for meaning

The drop below $600 may also indicate a change from the bullish sentiment that has so far characterized 2016.

For example, Joe Lee, founder of leveraged derivatives trading platform Magnr, stated that bitcoin's drop below $600 could indicate that the currency's long-term fundamentals are weak.

He emphasized that market observers would be watching bitcoin prices "to see how much of bitcoin’s steady growth has come from long-term holders".

Going forward, market observers also offered predictions on where bitcoin prices will go next. Now that the digital currency has breached $600, it will test $550, its low before the Brexit vote, said Hayes.

Tim Enneking, chairmain of cryptocurrency investment manager EAM, interpreted the recent price decline as evidence of a post-halving fallback, further stating that bitcoin will find support above $500.

Zivkovksi told CoinDesk that the digital currency’s decline below $600 “could signal the start of a medium term bearish trend powered by a strong long squeeze and a lull in bitcoin interest by the general public.”

While these analysts pointed to future weakness in the digital currency and potential declines, Demeester emphasized that not only did he not "see any sign why this bull market is over,” but he expected the price would "go a lot higher over the next 12 months".

Price image via Shutterstock

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More than $60m worth of bitcoin was stolen from one of the world's largest digital currency exchanges yesterday, and nearly 24 hours later, the event is still shrouded in mystery.

What is clear, though, is that the impact is far-reaching.

The Bitfinex theft represents the largest loss of bitcoins by an exchange since Japan's infamous Mt Gox lost 744,408 BTC in early 2014 (worth $350m), a breach that would ultimately cause it to cease operations.

At press time, the value of the 119,756 BTC stolen from Bitfinex stands at roughly $66m, or about 18% of what was lost by Mt Gox.

Given the size, the theft has sparked confusion and frustration among market traders and observers since it was announced.

Sources close to the exchange have largely avoided offering comment on whether the 119,756 BTC stolen represents the full extent of the hack, and Bitfinex itself has yet to publish any findings from its ongoing internal investigation.

Here’s what we know (and what we don’t know) so far:

What we know

Multi-signature accounts were impacted

The source of the vulnerability appears to lie in how Bitfinex structured its accounts and its use of bitcoin wallet provider BitGo as an additional layer of security on customer transactions.

Announced in 2015, Bitfinex and BitGo created a system whereby multi-signature wallets, those where keys are divided among a number of owners to manage risk, would be provided to each customer.

The exchange declared at the time:

"The era of commingling customer bitcoin and all of the associated security exposures is over."

As referenced in the quote, the companies sought to find an alternative to the standard process used by exchanges at the time that saw customer funds co-mingled in larger offline wallets and connected or "hot" wallets used to meet liquidity demands.

Rather, each Bitfinex user has their own set of keys created on the platform, using a 2-of-3 key arrangement whereby Bitfinex held two of the keys (including one offline) and BitGo used the third to co-sign transactions.

In order to withdraw such a large amount of funds, BitGo would likely have had to sign off on those transactions.

Bitfinex customer losses significant

While the full extent of customer losses on an individual basis is unclear, signs indicate a significant subset of the bitcoin trading community was impacted.

In the hours following the news, community members took to Twitter and Reddit to report that their accounts had been drained.

Some users expressed exasperation despite having security measures like two-factor authentication in place, in which secondary devices (like a mobile phone) are used to provide an additional passkey layer.

On the other hand, funds transferred to the exchange following the hack are said to be secure, but the exchange has yet to release details on both when and how withdrawals will be managed.

Bitcoin prices have fallen sharply

One of the most direct impacts of the Bitfinex hack could be seen in the price of bitcoin, which plunged after the news broke.

Prices fell by nearly 20%, tumbling as low as $480 USD before recovering.

At press time, the price of bitcoin is approximately $552, according to the CoinDesk Bitcoin USD Price Index, up roughly $70 from yesterday's low.

Bitfinex remains offline

Alos at press time, Bitfinex remains offline, with its message announcing the hack still visible to users.

Statements from Bitfines suggest that the company is looking to initially bring the site online so that users can check their balances and determine whether their accounts have been drained.

What we don’t know

Who is to blame?

Given the amount of money involved, many in the community have been searching for a scapegoat.

One obvious target has been Bitfinex itself, which had possession of two of the three private keys needed for the funds lost from multi-signature accounts. Others have questioned whether weaknesses in BitGo's model were exposed in the incident as well.

Yesterday, BitGo took to social media to state that an internal investigation had turned up no evidence of a server breach on their end.

Yet despite the assurances, some observers have blamed the service for "blindly signing" the withdrawal of nearly 120,000 BTC and wondered why no potential countermeasures were in place in the event of a movement of funds of that size.

With 30-day transaction volumes just above 600,000 BTC, the hack was roughly one-sixth of the size of the exchange's monthly orders.

When will fiat funds be accessible?

One prevailing question among customers is the status of deposits not denominated in bitcoin. Since the hack was first revealed, Bitfinex stated that only its bitcoin holdings were impacted.

More than a few customers are now taking to social media to ask when they’ll be able to access or withdraw those funds.

Answers may be coming soon, however. Representative Zane Tackett, who has been responding to queries via social media since the incident first came to light, said that more updates are forthcoming.

Were other exchanges impacted?

Other market observers were quick to speculate on whether the outage could lead to complications at other exchanges that may have been using Bitfinex as a source of liquidity.

It is known that Bitfinex did offer an API and that it was at one time used by exchanges, though the primary end markets appeared to be brokers and traders.

Such an issue was exposed by a hack at Bitstamp in early 2015, when exchanges, merchants and ATM providers connected to the exchange experienced a notable disruption.

At press time, it’s unclear if any smaller exchanges were impacted, and smaller exchanges contacted by CoinDesk reported no disruptions.

In statements to CoinDesk, however, exchanges Kraken and Bitstamp indicated that their approaches to implementing BitGo's multisig technology differed from that of Bitfinex.

"For now I can already say that Bitstamp's implementation of BitGo's MultiSig technology is fundamentally different from the one at Bitfinex," Vasja Zupan, head of business development for Bitstamp, told CoinDesk.

In an email, Kraken CEO Jesse Powell said that while he couldn't offer details on the exchange's security measures, he remarked that "we're confident in our configuration" in light of the Bitfinex breach.

Is BitGo's business model at risk?

Whether BitGo is deemed at fault, it may be losing the battle of public opinion.

Sources suggest BitGo's business model was primarily based on charging enterprise clients for services, and that bitcoin exchanges were the company's primary target market.

One major exchange representative said that the incident had raised issues with the multi-sig security model and that further rollout was likely be delayed as a result of the breach.

Yet statements from exchanges about the viability of their own BitGo implementations suggest that at least some of the service's customers aren't looking to make any changes, at least for now.

Is the CFTC to blame?

Bitfinex settled with the US Commodity Futures Trading Commission (CFTC) earlier this year over alleged trading violations, paying a $75,000 settlement while neither admitting or denying the charges.

At issue, the CFTC said at the time, was how the exchange held control of bitcoin private keys tied to user funds connected to financed trading. The agency’s view was that these bitcoins weren’t actually "delivered" following the purchase of them, but rather remained under the control of Bitfinex.

Since the hack, some critics pointed to that language in the CFTC settlement as creating the ideal conditions for the theft by prohibiting Bitfinex from using cold storage for customer funds.

Advocacy group Coin Center, however, moved to dismiss the claim that the CFTC was to blame, arguing that multi-sig is one of a number of security approaches and, like others, is prone to vulnerability or failure.

Press materials from last year also indicate that Bitfinex's relationship with BitGo predates the CFTC's investigation.

Image via Shutterstock

Disclosure: CoinDesk is a subsidiary of Digital Currency Group, which has an ownership stake in BitGo. 

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Andrew "Drew" Hinkes is counsel at Berger Singerman LLP, a business law firm in Florida. Hinkes represents companies and entrepreneurs in state and federal commercial litigation matters, representation of court-appointed fiduciaries and electronic discovery issues.

In this opinion piece, Hinkes looks at the potential impact of the recent court decision in Florida that centered in part on the definitions of both bitcoin and money transmission.

Michell Espinoza had a good Monday.

On that day last week, the South Florida bitcoin exchanger saw money transmission and money laundering charges against him dismissed. Espinoza was arrested in 2014 for selling bitcoins to an undercover law enforcement agent, and he has again been thrust into the spotlight due to the potential impact of the case.

The court's eight-page opinion, discussing the application of Florida money transmission and money laundering statutes to sales of bitcoin, was the first of its kind, and it suggested that certain notions of how the law views transactions made in bitcoin may be revisited.

All told, the Espinoza opinion may have only triggered a policy fight that will redefine Florida’s position on cryptocurrencies, as it reached a somewhat controversial conclusion when interpreting Florida’s money transmission statute.

For example, it is clear that the sale of bitcoin by a person to another person in exchange for US dollars is not a three-party transaction as required for money transmission, as the court outlined. But while it could have stopped its analysis there, concluding that the facts did not support the government’s charge, it determined that bitcoin was not "currency, monetary value or a payment instrument".

The surprise wasn’t only that the court addressed the issue at all, but also its conclusion.

Past precedent

Although the court did not need to reach the issue, there was ample support for it to rule either way.

The court could have relied upon in SEC v Shavers, where it was concluded that bitcoin "is a currency or form of money", or followed other federal precedent. US v Ulbricht, for instance, suggests that cryptocurrencies are considered money equivalents.

Based on these precedents, the court could have concluded that bitcoin was "monetary value," under Florida’s money transmission statute.

Instead, it relied on the IRS classification of cryptocurrencies (called "virtual currencies" in the IRS Guidance) as property, and upon the Florida Office of Financial Regulation’s Declaratory Statement Final Order entered in In re: Moon Inc, which held that a bitcoin kiosk network that sold bitcoins to people was not engaged in money transfer.

In In re: Moon Inc, the petitioner explained that bitcoins were "a unit of digital property", and argued that their bitcoin kiosks that sold bitcoin for cash did not transmit money under Florida law.

The Court’s conclusion in Espinoza appears to be consistent with both IRS guidance and In re: Moon Inc. Although support exists for either conclusion, the court chose a more liberal approach.

Evaluating impact

What is clear is that the determination made was based upon analysis of Florida’s specific money transfer laws. (If other states laws materially vary, this precedent will probably not apply).

The court’s analysis of the money laundering claim did not relate to anything intrinsic about bitcoin.

To the contrary, the court presumed that a sale of bitcoin for fiat currency is a "financial transaction" under Florida's statute because US dollars were used. The specific statute at issue required the party selling the bitcoin to demonstrate its intent to conceal or disguise the nature, location, source, ownership or control of the property or to avoid a transaction reporting requirement, as opposed to mere knowledge of the other party’s intent.

Thus, the government would have to prove that Espinoza had the intent, along with the purchaser, to engage in an illegal activity. The Court ultimately treated Espinoza like (here comes the bad analogy) a bank that dispenses money through its ATM – whether the person receiving the cash uses it to buy dinner or illegal drugs, the bank is not responsible, absent some showing of the bank’s intent to facilitate the nefarious use of the cash.

This inquiry, critically, is fact specific. (It depends on facts to show the transacting party’s intent, and thus, likely not of presidential value).

As noted by Stephen Palley, even the legal conclusions of the Espinoza opinion are of limited precedential value; the conclusions may be reargued, or appealed.

Even if Espinoza is not appealed, another court in Florida could reach a different decision under similar facts, and it would be up to an appellate court to review both orders and resolve the conflict.

Judge Pooler directly called for Florida’s legislature to revisit its money laundering statutes in Espinoza. It is possible, given the attention created by the opinion, that Florida’s legislature may change its laws to establish its own policy on cryptocurrencies. One lawmaker has already said she intends to do just that.

Ultimately that may be Espinoza’s legacy – forcing Florida’s legislators to address bitcoin.

Hopefully, Florida’s Legislature will consider the impact of cryptocurrencies like bitcoin, and craft legislation to balance their potential for abuse with their potential to foster innovation, create jobs and generate wealth, and to toe the line of protecting consumers while still between permitting experimentation and innovation.

Image via Shutterstock

Disclaimer: The views expressed in this article are those of the author and do not necessarily represent the views of, and should not be attributed to, CoinDesk.

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Microsoft is now making its Blockchain-as-a-Service (BaaS) offering available to all users of its Azure testing environment.

Designed to allow developers to quickly create environments in Azure, DevTest Labs seeks to help companies control costs associated with development work. Other features include reusable templates, so developers don't have to design virtual machine environments from scratch, and artifacts, which tell apps what actions to take once deployed.

The add-on already supports 26 blockchains and allows developers to create and test blockchains with lower costs than a production platform.

Microsoft’s director of business development and strategy Marley Grey described it as an easy-to-use blockchain testing environment.

He told CoinDesk:

"With the Azure DevTest Labs integration, Microsoft has made it even easier for developers to get blockchain lab environments up-and-running."

Blockchain projects currently supported by Azure include MultiChain, Eris, decentralized file-storage platform Storj and prediction market Augur, among others.

Using Azure DevTest Labs, developers can create "labs" to experiment with private, permissioned, public or consortium blockchains, functionality that reflects Microsoft’s ambitions to add "every" blockchain to the platform.

The DevTest Labs offering was originally available in "preview" mode, meaning it was excluded from features such as warranty and customer support. Offerings in preview are also able to be discontinued without notice, according to an Azure support page.

Microsoft image via Shutterstock

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