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Crypto wallets: An important battlefront to gain wallet share and mind share

Crypto wallets must replace and reform our relationship to current (financial) services and institutions — not mimic them.

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Digital wallets are software constructs that mimic physical wallets and provide the functionality of storing, using and categorizing payment instruments. The journey of digital wallets started with payments and morphed to other forms of stubs such as digital passes, tickets and boarding passes. However, crypto wallets attempt to redefine the digital wallet landscape as something more than safe storage of payment and crypto instruments.

With more than 100 crypto wallets and growing, this sector in the cryptosphere is getting crowded and adding further complexity to an already fragmented blockchain and digital asset space. As I study this space and try to make sense of the complexity of new blockchains, layer-one protocols decentralized finance (DeFi) and nonfungible token (NFT) projects emerging with exponential growth, I think crypto wallets will be the next battlefront as the wars of layer-one protocols eventually cool down. The core issues of scale, security and speed of transaction processing and layer-two protocol consolidate and morph as layer-one superiority aims for processing efficiency and security. Crypto wallets will not only provide an avenue to gain wallet share but will also represent the battle for mind share.

Related: This time it’s different: When DeFi meets NFTs

Today, most crypto wallets provide software constructs that, for the most part, provide the following services at a very basic level:

  • Store public and private keys;
  • Interact with various layer-one blockchains;
  • Send and receive crypto assets and cryptocurrencies;
  • Monitor balance.

Crypto wallets should be more than better key management

In my opinion, we need to broaden the definition of a crypto wallet and view it as an avenue to participate in the crypto economy. It can provide the wallet holder with a choice framework for participating in a regulated network that emphasizes digital identity and requires third-party validation, for example, Know Your Customer.

Related: Authorities are looking to close the gap on unhosted wallets

At the same time, it also can be part of emerging networks that preserve anonymity and emphasize the confidentiality and privacy preservation of the participants. This choice framework will enable the regulatory and compliance conversation, shifting towards the network and activities as opposed to individuals, just like the choice frameworks our current wallets provide at an analog level.

A wallet would be modeled to be an extension of our identity constructs within the current identity frameworks that are issued by authoritative agents (like a government-issued ID) to an evolving digital identity that represents our (credit) history, reputation and incentive-driven history. It would not only promote transparency and good behavior but also preserve privacy. The notion of identity is important because digital identity (which today is tied to every wallet and every network) is foundational technology to ensure the trade, trust and ownership of digital assets.

Related: Concerns around data privacy are rising, and blockchain is the solution

A wallet’s ability to control participation and the choice framework for enabling users to choose wallet attributes will allow for a flexible design and encourage participation. These wallets are traditionally containers of all types of asset classes such as NFTs, DeFi assets, cryptocurrencies and crypto assets. In addition, they also contain existing payment instruments, stored value accounts and other forms of digital stubs, allowing participation and inclusion by a registration process for existing financial services platforms and both current and future blockchain and crypto-economic driven networks. The registration could involve either sharing crypto primitives, say a public key, or providing the wallet identified for traditional centralized platforms.

In the Web 3.0 era

The question we should be asking is how to design a crypto wallet that can be a conduit to a new decentralized internet (Web 3.0) and the entire cryptosphere, and replace and reform our relationship with current services and institutions.

The new design of these wallets should enable engagement in (crypto) economic activities — whether Web 3.0 or otherwise — for example, file storage, NFT custody and simply storing data or instruments that let a wallet serve as an account receptacle for all our earnings and engagements in the cryptosphere and existing institutions.

Related: How NFTs, DeFi and Web 3.0 are intertwined

Whereas website payment standards and web payments at World Wide Web Consortium (W3C) aim to define technology standards. MetaMask, although confined to Ethereum (layer-one protocol), provides an impressive view into what could be a clean way to provide a browser and wallet integration, known as a browlet. MetaMask has been doing this since early 2016 and now defines institutional access with MetaMask Institutional (MMI). Currently, the technology design of wallets focuses on layer-one or platform-specific wallets and key management, which is necessary for the durability and long-lasting growth of Web 3.0. With a model like MetaMask’s, however, wallet provisioning can be a new business model.

Institutional context and considerations — An institutional wallet?

Exponential growth in digital assets and related ecosystems, such as decentralized finance, native crypto assets and NFTs, has not only given rise to massive innovation in technology and finance products but also attracted the attention of many innovators, technologists, investors and, more recently, institutional investors.

Related: Institutions appear bullish on crypto despite record Bitcoin outflows

While blockchain, as a distributed ledger infrastructure and transaction processing system, aims for efficiency for dematerialized assets (assets in a ledger entry), the emergence of crypto and digital assets changes the landscape and the participants, essentially altering the market infrastructure. Thus, it makes digital (and crypto) assets unique and differentiated due not only to inherent characteristics of the assets but also to the resulting changes in the digital (crypto) assets market infrastructure. Digital (crypto) assets are generally bearer assets, and the claim to these assets is generally governed by a public-private key infrastructure. Digital assets are bearer assets, raising implications for trading and safeguarding, and surfacing considerations for institutional asset managers looking to allocate capital to a digital asset fund.

The notion of a wallet in an institutional context has a few more nuances and considerations that include (but are not limited to):

  • Know Your Customer/Know Your Transaction requirements.
  • Asset allocation and token deployments.
  • Interaction with crypto-custody services and service providers.
  • Collateral management and lending.
  • Liquidity management and treasury considerations.

Unlike traditional finance with a unique institutional market infrastructure, specialized asset classes, dematerialized assets, licensed gating criteria and much more — the core constructs of digital assets like DeFi tokens, tradable NFTs, cryptocurrencies of layer-one protocol and so on — do not significantly differ for institutional investors. The dematerialized assets, centralized security depositories (CSDs), collateralized lending and trading models for traditional finance are not the same in DeFi and other emerging asset classes. The issue and emergence of institutional-grade custody solutions, digital asset trading desks, etc., apply the systemic traditional finance apparatus and risk models to tame a fast-growing technology and crypto-economic led ecosystem.

The issues from an institutional perspective are scale, risk and alignment with traditional organizational controls and governance. For instance, the institutional situation around digital asset custody is similar to the traditional service provided by a custodian bank, which is the physical possession of financial assets on behalf of a client. Despite being conceptually similar, however, the practice of digital asset custody requires significant considerations about technology design. It is also necessary to pay attention to business and transaction considerations such as liquidity, treasury and collateral management, as well as fostering a deeper understanding of an evolving regulatory and compliance framework for digital assets, which may represent diverse asset classes.

Applying the traditional finance lens not only adds a cost component but also puts institutional investors at a disadvantage. This makes a case for using wallets in an institutional context to address the nuances discussed previously.

Perhaps the impact of DeFi on traditional business models, liquidity (capital adequacy) and treasury and related services offered to fund managers and administrators may drive the design of institutional wallet requirements from “institutional custody” of core assets to the “point of deployment, disbursement and allocation.” This changes the lens and focus from institutional custody and extends the institutional wallet as a conduit to providing allocation instructions to crypto-capital deployment, participation instructions in automated market makers (AMMs) and liquidity pools and an interface to “custody” for long-only assets.

Related: The rise of DEX robots: AMMs push for an industrial revolution in trading

And again, here is the most important question we should be asking: How can a crypto wallet be designed that can be a conduit to Web 3.0 and the entire cryptosphere, and replace and reform our relationship with current services and institutions? The promise of crypto assets only comes to life with their use, circulation and velocity, but if we create a market structure that only mimics or replicates an existing system, what have we solved?

I think crypto wallets will be the next battlefront as the wars of layer-one protocols eventually cool down. As the core issues of scale, security and speed of transaction processing and layer-two protocol consolidate and morph, layer-one superiority aims for processing efficiency and security. Crypto wallets will not only provide an avenue to gain wallet share but will also represent the battle for mind share.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.

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.

Nitin Gaur is the founder and director of IBM Digital Asset Labs, where he devises industry standards and use cases and works toward making blockchain for the enterprise a reality. He previously served as chief technology officer of IBM World Wire and of IBM Mobile Payments and Enterprise Mobile Solutions, and he founded IBM Blockchain Labs, where he led the effort in establishing the blockchain practice for the enterprise. Gaur is also an IBM-distinguished engineer and an IBM master inventor with a rich patent portfolio. Additionally, he serves as research and portfolio manager for Portal Asset Management, a multi-manager fund specializing in digital assets and DeFi investment strategies.

Source: https://cointelegraph.com/news/crypto-wallets-an-important-battlefront-to-gain-wallet-share-and-mind-share

Cointelegraph

PayPal logs its largest Bitcoin volume since May BTC price crash

Bitcoin volumes on PayPal reaches their highest levels since the May 19 crash. A retail boom ahead?

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The world’s leading payment services provider processed $145.60 million worth of Bitcoin trades on the day BTC rallied to its record high of $67,000.

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PayPal logs its largest Bitcoin volume since May BTC price crash

Bitcoin (BTC) trading volumes on global payment service provider PayPal reached $145.60 million on Oct. 20, just as the benchmark crypto rallied toward its record high near $67,000.

The latest spike in volumes came out to be the highest since the May 19 Bitcoin price crash from around $43,500 to as low as $30,000. On the day, some $304 million worth of BTC changed hands, almost double the volumes logged on Oct. 20.

Bitcoin PayPal volumes. Source: ByBt.com

Nonetheless, in both instances, it was unclear if the volumes were due to the increase in purchasing during the Bitcoin price rally or selloffs near the newly-achieved highs. Whatever may be the reason, the PayPal readings reflected a rise in retail activity on Oct. 20, further attested to by a spike in internet queries for the keyword “Bitcoin.”

Bitcoin interest on internet peaked on Wednesday. Source: Google TrendsRetail boom?

Notably, PayPal allows users to start investing in Bitcoin by putting as little as $1. As a result, the payment service firm has emerged as a viable platform for retail investors, a move seen by the industry as a cue for wider crypto adoption.

Interestingly, since PayPal’s push into the crypto sector, the sum count of unique addresses holding at least $1 worth of BTC has surged from 26.83 million on Nov. 20, 2020, to 33.89 million at press time. Meanwhile, on Oct. 20, the count was 34.12 million, an all-time high.

BTC addresses with balance greater than $1. Source: CoinMetrics, Messari

Alexander Vasiliev, co-founder/chief customer officer of crypto payment service Mercuryo, saw PayPal’s foray into the crypto industry as a sign of retail boom. He expected Bitcoin to end the fourth and final quarter of 2021 in profits as everyday traders look for safety nets against a persistently rising inflation.

Related: Bitcoin extends correction as Ethereum sees ‘picture perfect rejection’ at all-time highs

“The increased buying pressure from PayPal users and its corresponding impact on the price of Bitcoin may stir a notable up-shoot this fourth quarter and as the year runs to an end,” Vasiliev told Cointelegraph, adding:

“The company has millions of customers and a massive buy-up of BTC can effectively push Bitcoin to new highs […] With the ATH at $67k, we may see a worse case price hit of $80,000 by year-end and a best-case scenario of $100,000.”

PayPal has around 392 million active users worldwide, but its crypto services are available only in the United States and the United Kingdom. Meanwhile, the company is also eyeing an entry into the decentralized finance (DeFi) sector, signaling expansion outside the Bitcoin sector.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading move involves risk, you should conduct your own research when making a decision.

Nonetheless, in both instances, it was unclear if the volumes were due to the increase in purchasing during the Bitcoin price rally or selloffs near the newly-achieved highs. Whatever may be the reason, the PayPal readings reflected a rise in retail activity on Oct. 20, further attested to by a spike in internet queries for the keyword “Bitcoin.”

Source: https://cointelegraph.com/news/paypal-logs-its-largest-bitcoin-volume-since-may-btc-price-crash

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Sri Lanka appoints committee to implement crypto mining and blockchain

The Sri Lankan committee will report its crypto and blockchain-related findings to the Cabinet of Acts, Rules and Regulations.

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The committee plans to propose a suitable framework for Sri Lanka after studying the regulations followed by international markets.

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Sri Lanka appoints committee to implement crypto mining and blockchain

Sri Lanka joins the global crypto adoption drive after setting up a committee for exploring and implementing blockchain and crypto mining technologies.

A letter shared on Oct. 8 by Sri Lanka’s Director General of Government Information, Mohan Samaranayake, shows that the authorities have approved a recent proposal that aims to attract investments in the country’s blockchain and cryptocurrency initiatives.

According to Samaranayake, the Sri Lankan authorities have identified the need of developing “an integrated system of digital banking, blockchain and cryptocurrency mining technology” as a means to stay on par with global partners and international markets. He added:

“This committee will be mandated to study the regulations and initiatives of other countries such as Dubai, Malaysia, Philippines, EU and Singapore etc, and propose a suitable framework for Sri Lanka.”

The proposal was made by Namal Rajapaksa, Minister of Project Coordinating and Monitoring, which requires the committee to report its crypto and blockchain-related findings to the Cabinet of Acts, Rules and Regulations.

Out of the eight members in the committee, two members represent international fintech giants including Mastercard’s Sandun Hapugoda and PricewaterhouseCoopers’ (PwC) Sujeewa Mudalige. Members from traditional finance include Colombo Stock Exchange CEO Rajeeva Bandaranaike and the Central Bank of Sri Lanka Director Dharmasri Kumarathunge.

The remaining four members represent various national authorities including Sri Lanka Computer Emergency Readiness Team (SLCERT), Department Of Government Information, Information and Communication Technology Agency (ICTA) and the President’s Council.

Supporting this initiative, the committee will also monitor laws and regulations implemented by other nations to establish rules against Anti-Money Laundering (AML), terror financing and criminal activities.

Related: Crypto transactions surge 706% in Asia as institutional adoption grows — Chainalysis

A recent Cointelegraph report highlighted a 706% surge in Central and Southern Asia and Oceania between July 2020 and June 2021. Based on data shared by Chainalysis, the value of the transactions in the region amounted to 14% ($572.5 billion), with India representing the highest global transaction value.

Back in April, Sri Lanka’s central bank issued a public notice against the risks associated with cryptocurrency investments, citing a lack of legal or regulatory recourse. However, just a month after the notice, the central bank shortlisted three banks for developing a proof-of-concept for a shared Know Your Customer facility using blockchain.

Related: Crypto transactions surge 706% in Asia as institutional adoption grows — Chainalysis

Source: https://cointelegraph.com/news/sri-lanka-appoints-committee-to-implement-crypto-mining-and-blockchain

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Crypto and pension funds: Like oil and water, or maybe not?

Pension funds, the most cautious of institutional investors, are now giving the booming crypto and blockchain sector a closer look.

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There are good reasons why pension funds should not invest in the crypto and blockchain space. The industry is too new, too volatile, and stultifyingly technical. Moreover, the rules and regulations to govern the sector have yet to be settled.

But the fixed-income financial instruments that pension funds typically favor — like long-term government bonds — are scarcely paying anything these days, so the traditional caretakers of employees’ retirement funds have a dilemma: Where to find investment yield in a world where inflation is looming?

It may not be entirely surprising, then, that pension funds — the most cautious of institutional investors — are now giving the booming crypto/blockchain sector a closer look.

“Family offices led the charge into crypto funds several years ago, but we’ve seen increasing interest from pensions, and there are many pensions that now have exposure to crypto,” Stephen McKeon, a finance professor at the University of Oregon and a partner at Collab+Currency, told Cointelegraph.

“We’ve seen increased interest from pensions” in the past year, added Christine Sandler, head of sales, marketing and research at Fidelity Digital Assets — part of an uptick among all institutional segments — “which we believe reflects the growing sophistication and institutionalization of the digital assets ecosystem, combined with a strong macro narrative driven by response to the pandemic.”

Pension funds tend to be “more conservative, risk-averse investors relative to other segments,” according to Sandler, and they mostly favor investments that have exhibited long-term growth and low volatility, which might arguably make them leery of the crypto/blockchain space.

An early adopter

One of the first United States-based pension funds to invest in blockchain firms was the Fairfax County Police Officers Retirement System, based in Fairfax, Virginia. It tested the waters back in 2018 with an 0.5% allocation in a fund that was investing in blockchain-related enterprises, Katherine Molnar, the fund’s chief investment officer, told Cointelegraph at the recent SALT conference in New York City.

The fund raised its allocation to 1% in 2019, and in spring 2021, it added two new blockchain-related investment funds. The current target allocation is 2%, but because crypto and crypto-based companies have been rising in value, 7% of overall fund assets are now crypto-related — again, mostly “pick-and-shovel” type enterprises that support the industry — like crypto exchanges and custodians.

The pension fund can’t rebalance because it is invested in venture capital funds, Molnar explained, but in mid-September, Fairfax signaled its intent to invest $50 million with Parataxis Capital, a crypto hedge fund that invests in digital tokens and cryptocurrency derivatives. “It’s not a directional bet, but it’s not totally illiquid either,” she told Cointelegraph.

The fact that the police officers’ pension fund has invested until recently in crypto-related companies as opposed to cryptocurrencies — Coinbase rather than, say, Bitcoin (BTC) — isn’t uncommon, either. U.S. institutional investors surveyed by Fidelity Digital indicated a greater propensity for digital asset investment products rather than direct ownership of cryptocurrencies, Sandler told Cointelegraph, adding:

“From our study, we also know that pension funds and defined benefit plans, like many other institutional investor segments surveyed, favor active management of an investment product containing digital assets.”

More pension funds may now travel this road. “We’ve started to see participation not just from the hedge fund segment, which we’ve long seen participation from, but now it’s recently from other institutions, pensions and endowments,” Michael Sonnenshein, CEO of Grayscale Investments — the largest manager of digital assets — told Bloomberg earlier this year, adding he anticipated that pension funds and endowments would drive much of his investment firm’s future growth.

Even pension-fund giants like the California Public Employees Retirement System (CalPERS) have dipped a toe in the crypto/blockchain sea. CalPERS invested in Bitcoin mining firm Riot Blockchain LLC some years back and has since raised the stake to about 113,000 shares — worth about $3 million in early October — though that is minuscule compared with CalPERS’ $133.3 billion in equity assets under management, as of its 13F filing in August.

How much is enough?

What sort of crypto allocation is appropriate for a pension fund today? Jim Kyung-Soo Liew, assistant professor at Johns Hopkins University’s Carey Business School, co-authored one of the earliest academic papers on crypto and pension funds back in 2017. That paper found that a 1.3% Bitcoin allocation would be “optimal” to fully reap the cryptocurrency’s diversification benefit.

What is appropriate today? “Going forward, an institutional investor should be looking at a 10%–20% allocation,” Liew told Cointelegraph, and he expects large pension funds to be investing as much as one-fifth of their total assets in the crypto/blockchain space within the next three to five years.

98% of retirement accounts in the US can’t access #Bitcoin.

That’s $36,800,000,000,000.

What happens when they do?

— Dan Held (@danheld) October 7, 2021

“We’ll see more institutional investors,” Liew said, adding, “Their horizons are long.” Today’s $2 trillion in cryptocurrency market capitalization could swell to $20 trillion in the next three to five years, he added, assuming a favorable regulatory environment.

Asked if this doesn’t fly in the face of pension funds’ traditional conservatism, Liew answered, “Pension funds have boards; they have investment committees,” and yes, “they’re often accused of being overly conservative and wanting to understand things 100% before acting.”

From an education standpoint, it will take some time and effort to bring them along, but chief investment officers are quite intelligent as a group, and they will be able to grasp the concepts, Liew said. One problem, he allowed, “They’re not rewarded for risk-taking.”

Obstacles remain

There may be other impediments. “One challenge is that pensions tend to require large tickets,” McKeon told Cointelegraph, “so the space had to mature a bit to accept that amount of capital. As funds continue to scale up, we expect to see more participation by pensions.” Volatility remains a concern, said Sandler, pointing to data:

“‘2021 Institutional Investor Digital Assets Study’ found that 73% of U.S. pension funds, defined benefit plans, and endowments and foundations surveyed cited volatility as the top barrier to adoption.”

U.S. pension funds and defined benefit plans still hold a fairly negative view of digital assets, according to the survey, “but I think we’ll continue to see that negative perception decrease as the market continues to mature and these investors get more comfortable with the technology, infrastructure and channels for exposure and have a more fully developed investment thesis about these assets,” she added.

As such, pension funds, like other institutional investors, are striving to find investment opportunities. As The New York Times noted, “U.S. Treasuries have been the bonds of choice for safe retirement income. But they could deliver no real return for the next decade.”

Related: The long game: Institutional interest in crypto is just getting started

Meanwhile, on the positive side, pension funds have long horizons, and they can withstand short-term volatility. Another plus, “Crypto talent is spread uniformly around the world, and we can source that talent,” Liew added.

Fiduciary constraints won’t disappear, of course. Many pension funds represent municipalities, and they are holding many people’s late-life financial well-being in their hands. That’s a lot of responsibility. But you “can’t get a ton of reward if you don’t take on some risk,” Liew said.

A while back, the president of Molnar’s board said, “I understand the need to do this” — the police officers’ pension fund, like most institutional investors, was struggling to grow its money in a continuing low-interest-rate environment — but some officers “are off the reservation,” he claimed. With the fund’s recent 7.25% rate of returns on its crypto investments, it’s probably safe to assume that some of those officers are back on the reservation now.

Pension funds tend to be “more conservative, risk-averse investors relative to other segments,” according to Sandler, and they mostly favor investments that have exhibited long-term growth and low volatility, which might arguably make them leery of the crypto/blockchain space.

Source: https://cointelegraph.com/news/crypto-and-pension-funds-like-oil-and-water-or-maybe-not

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