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Bitcoin and Blockchain: A WILD Opportunity

Bitcoin is not at the dizzying high it was back in December, but interest in cryptocurrencies and blockchain is still strong. The world of crypto and distributed ledger technology keeps expanding, with CME and Cboe now trading bitcoin futures, companies getting into initial coin offerings, cryptocurrency meetups forming, and the list of cryptocurrencies getting longer every week.

Women In Listed Derivatives (WILD) and Morgan Lewis jointly hosted a panel on the future of blockchain and cryptocurrencies Tuesday evening to a packed house.

The main takeaway on cryptocurrency from the panel was that, although crypto is a new and very speculative investment, it’s a significant opportunity in the financial markets, where there are currently not many of those.

For the semi-uninitiated, Jennifer O’Rourke of the Illinois Department of Commerce and Illinois Blockchain Business Liaison said the main purpose of  blockchain (or distributed ledger technology) is record keeping. She made an analogy with using Googledocs, in that with both entities everyone can see all the changes made, people have to have permission to take part, and no one person is in control. There is also the inherent security fundamental to blockchain. The main attribute of both blockchain and bitcoin is that they enable trust, O’Rourke said, connecting people to companies all over the globe that they would not otherwise be able to do business with.

The crypto world “is changing so rapidly, you constantly have to question what your team is doing,” said Julie Winkler, chief commercial officer at the Chicago Mercantile Exchange, said. “The CME blockchain team is constantly learning and experimenting.”

She said the best use case for digital ledger technology is in the post trade business, where people are still reconciling some transactions manually.  

Amy Lawson, first vice president, product development at The Options Clearing Corporation, said OCC is trying to find where the corporation can provide cost reduction in services as well as new services to its members. She said a major attribute of blockchain is the interconnectedness with customers, clearing, regulators, et al.  She doesn’t see the whole clearing system moving to blockchain, precisely because of that interconnectedness – but “there are pieces of the clearing system that can go to blockchain.”

A big question almost since bitcoin began is what regulation is going to look like. Jennifer O’Rourke said “we have had regulators at the table from the beginning.”  

“When a market event happens – and it will happen – we want to be in a position to take it in stride,” she said.

The Illinois Blockchain Business Liaison has been exploring the architecture and protocols of distributed ledger and looking at a number of blockchain companies, and asking the question, “Could my mom use this?”  O’Rourke said they have found that the best form for the end user is an app you can access on your phone.

Although there is a long list of cryptocurrencies, the top three currently are Bitcoin, Ethereum and Litecoin. They are not all the same. For instance, Ethereum offers “smart contracts,” which can enable ICOs (initial coin offerings), the latest crypto category that seems to be getting the attention. O’Rourke defined an ICO as bringing a private company to the public by selling coin shares. “It’s an equity holding in a venture,” she said.

But, she cautioned, “Ninety-five percent of ICOs out there are absolute garbage.”

An ICO is not a utility, she added, but only a speculative asset. It is “venture capitalism brought to the masses,” because it allows investors with only relatively small amounts of money to buy in to what a company is doing .  But the level of risk is high, and “we will see companies fold and people lose their money.”

When it comes to risk management, the new futures markets in cryptocurrency have enabled hedging, but only in one direction – people can short the futures to hedge a long position in the underlying, but not the reverse.

Women are not holding bitcoin as heavily as men, which is really just part of the tendency for tech-based products in general to attract more men, according to Winkler, but this is changing. She is a big advocate of bitcoin and blockchain technology for empowering women (and men as well), saying that the way to become powerful is to go where the money is.  “If you don’t have it – get crypto! That is the way to get a seat at the table!”

Addendum: After the panel last night news broke from Reuters that U.S. District Judge Jack Weinstein in Brooklyn ruled that virtual currencies can be regulated as commodities by the CFTC. The ruling came in a lawsuit against New York resident Patrick McDonnell and his company Coin Drop Markets.  The CFTC first determined that virtual currencies are commodities in 2015. What this means as far as actual regulations is still up in the air, as the U.S. has not yet passed any laws regulating the products.

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Rudolph is the managing editor and head of editorial operations at John Lothian News (JLN).