Looking ahead and the year in review

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[header date=”28 December 2018″]Predictions for 2019, and looking back at the year in crypto in India, Japan, and South Korea.[/header]

Predictions for 2019

It’s no secret that this past year was rough for cryptocurrency investors. The SEC still hasn’t approved a bitcoin ETF and mainstream adoption of cryptocurrency seemed to recede rather than grow. With prices falling virtually across the board and regulators clamping down across the world, 2018 has been, in a word, tough.

This year demonstrated just how much has been over-promised and under-delivered by blockchain believers. The pursuit of scaling solutions remains ethereal—pun intended—and there are very, very few non-currency projects (read: “decentralized applications”) that have attracted a meaningful number of users. While these reflections may seem a little dim, the good news is that we’re gazing in the mirror with a frank assessment. Much of crypto has been battered, but there are still reasons for hope.

Here are my bold predictions for 2019:

The CFTC will approve ether futures (sort of). With the US commodities regulator soliciting public comments on ethereum, it seems only a matter of time before an exchange like the CME or Cboe offers an ether futures product. The exchanges, which have expressed interest in ether futures, may try to self-certify one, employing the same process used to list bitcoin futures in late 2017. Self-certification lets an exchange vouch that a new product is lawful, and places the onus on the Commodities Futures Trading Commission to explain why it shouldn’t be allowed.

Of course, not everybody agrees that self-certification of bitcoin futures should have been approved in the first place. One prominent critic is Lee Reiners of Duke’s law school, who contends that the CFTC myopically focused on potential manipulation in the bitcoin futures market rather than the abuses in the bitcoin spot market. (Yikes.)

Privacy coins will make a resurgence. Although Coinbase and Gemini listed Zcash this year, the cryptocurrency created by Zooko Wilcox and company hasn’t received attention commensurate with the high-profile listings. Indeed, the coin now trades in the double digits rather than triple digits. While I’d encourage potential buyers to examine the allocation of Zcash—and specifically scrutinize the “founder’s reward,” which is distinctly un-egalitarian—the privacy-enhancing features afforded by Zcash’s zk-SNARKs crytography might be undervalued by the broader market.

At the time of writing, the Zcash market cap is just around $375m, and at least relatively speaking, that seems low compared to some of the names which rank above it. Another coin worth keeping an eye on is Monero—though it uses ring signatures, an older cryptographic method. As the value proposition of cryptocurrencies evolves, privacy coins may become the hottest segment of the market in 2019.

Proof of stake will continue to be a mess. Even among crypto crowds, the discussion of proof of work versus proof of stake (PoS) is vexing. From difficulty bombs to Casper and sharding to ethereum 2.0, it’s hard to keep your head straight.

As its stands, ether’s PoS, a new consensus algorithm that avoids the excessive energy-usage of proof of work, is still a work in progress. So far, it seems like participating is like playing poker:

If you want to participate in the hand—the confirmation process—you must have skin in the game.

There are still substantial concerns about PoS, including how the new approach could impact existing mining pools and increasingly centralized control of the ethereum network, where the the rich get richer.

Regardless of PoS’ shortcomings, even if the new consensus approach increases the network’s processing speed, I’m not sure that will be sufficient to draw in new users, or enable a fabled “killer dapp.” Just because you build a highway, that doesn’t mean it’s useful. Focusing on user interfaces seems at least as important as improved speed. So, if PoS rolls out in 2019, I anticipate upheaval within the ethereum community and maybe even some DAO-level shenanigans.

The SEC still won’t approve a bitcoin ETF. I’m sorry—well, not really. Since interested buyers can purchase cryptocurrency through dedicated exchanges and there’s an unspeakable amount of manipulation in the bitcoin markets,  I’ve never really understood the case for approving an exchange-traded fund. To do so would tacitly endorse the financial product and at this stage, that’s not justified.

Until there’s a serious reckoning and fairly robust oversight, I doubt an ETF will get the green light from the US Securities and Exchange Commission. And considering the global nature of the cryptocurrency markets, I don’t think that will happen anytime soon. —Matthew De Silva

The year in crypto

We asked Quartz reporters based in Asia to sum up the most interesting crypto currency developments of 2018. Here are the dispatches they filed from India, Japan, and South Korea.

India …

The past year was a roller coaster ride for Indian cryptocurrency exchanges and investors, albeit with more downs than ups.

The year started on an ominous note after India’s finance minister Arun Jaitley announced in February the country will not make bitcoin and other cryptocurrencies part of the payments system. Then, in April came the major blow: The Reserve Bank of India, the central bank, forbade lenders from dealing with any virtual currency exchanges or traders from July onward. In its aftermath, business has been drastically affected, and exchanges have been forced to shut shop.

Firms refused to give up without a fight, and dragged the banking regulator to India’s supreme court. Hearings began in April and there is still no resolution. The government also formed a committee to study these digital currencies and to recommend regulations for the ecosystem.

The industry’s heart skipped a beat in October when a communication from the government suggested that India may finally ban cryptocurrencies, but a glimmer of hope emerged in November when, according to certain legal documents, it appeared that the government was still in the process of choosing between regulation and an outright ban.

While debate over banning took center stage in 2018, the year will also be remembered as the one when bitcoin emerging as a popular ransom tool, while scams and hacks also forced some exchanges to shut down. The industry also experimented with its first bitcoin ATM, which went awry and landed the founders in jail.

The hope for 2019 is that there will finally be some clarity as the government’s stand becomes clear and the court case draws to an end at last. —Nupur Anand

Japan …

The year in crypto was marked by growing distrust in Japan’s exchanges.

Even supposedly reputable crypto-exchange services endorsed by the Financial Services Agency (FSA) were frequently inaccessible due to technical difficulties such as server issues.

Being denied access multiple times infuriated one ethereum developer and academic, who responded by issuing the 502 Bad Gateway Token, a niche altcoin that symbolizes Japan’s crypto-sector during 2018. As a form of protest, the anonymous academic began distributing the token, free of charge, every time the website of an exchange spat out a “502 Bad Gateway” error message. “Today, I’ll be giving away crypto-coins to commemorate Zaif becoming temporarily inaccessible,” he tweeted when a prominent exchange was unresponsive.

Through his joke coins, the developer spread awareness about just how vulnerable these exchanges were. It wasn’t long until Zaif fell victim to a serious hack in October, and $60 million worth of crypto was stolen by hackers. Then, without providing any explanation, the founder of Zaif disappeared.

The Zaif theft followed a $530 million hack of Coincheck in January. Through such negative events, public trust was lost, and the Japanese cryptocurrency market stopped growing. New services and projects were either abandoned or put on hold as a result of the FSA clamping down on the industry with stringent regulations. Giants from overseas such as Binance and Kraken left the Japanese market.

That’s not to say there is no positive, crypto-related news. The creators of LINE, Japan’s version of WhatsApp, are working hard to popularize a token economy concept through their settlement and payment features.

Even major companies like LINE, however, can’t take the cynical message embedded within the “502 Bad Gateway Token” lightly. The fan base of the joke coin is still increasing in Japan, which is certainly a telling sign of how some view the crypto market. —Naoyoshi Goto

South Korea …

Millions of Koreans hopped aboard the cryptocurrency bandwagon as bitcoin took off on its extraordinary run in late 2017. The momentum was such that, by late December, according to one survey, three out of every 10 salaried workers in Korea had invested in cryptocurrencies.

The party ended abruptly as the Korean government, belatedly, swooped in to tamp down on the unregulated speculative frenzy. The new year brought even more regulatory tightening, as KYC (know your customer) and anti-money laundering norms kicked in. The most effective damper, however, were the markets themselves, as prices went into a dramatic tailspin in 2018. Ordinary Koreans who poured money into crypto looking to turn a quick profit were left scrambling.

But while interest in cryptocurrencies was squashed, the mania helped create awareness on a massive scale which, in part, led to Korean businesses queuing up to try out blockchain projects. Leading the charge is ICON, an ambitious Korean project that intends to unite various blockchain networks into one.

In May, ICON announced it was building a blockchain ecosystem, complete with tokens, in collaboration with LINE, the Japanese messaging app. Then, in September, ICON unveiled a collaboration with SK Group, one of Korea’s largest conglomerates, to bring blockchain technology to OK Cashbag, a loyalty program that reaches some 37 million Koreans, about 70% of the country’s population.

ICON is also working with the government institutions on multiple initiatives, including a project with the National Election Commission to use blockchain to improve candidate registration, voting, and the counting of ballots.

For all the corporate investment and public-private bonhomie around blockchain, the Korean government retains its dislike for cryptocurrency. This complicates things for blockchain projects that rely on tokens to run, even if they are meant to facilitate transactions rather than be used for speculation in their own right. But with big money and big names getting into blockchain, some expect that there will be clarity sooner than later. —Devjyot Ghoshal


🗣 January 8 Israel Bitcoin Summit. The Tel Aviv gathering features Nick Szabo (creator of the term “smart contract”), Meni Rosenfeld (chairman of the Israeli Bitcoin Association), and Ittay Eyal (assistant professor at Technion), among others.

🗣 January 31 Wall Street Blockchain Summit. The one-day event in New York will include discussion of market infrastructure, legal and regulatory considerations for blockchain & digital assets, and accounting matters related to crypto assets.

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Programming note:

Private Key is taking off New Year’s Day. Look for us in your inbox Jan. 4.

Please send news, tips, and predictions to privatekey@qz.com. If this email was forwarded to you, click here to sign up for your own subscription, which includes a free two-week trial. Today’s Private Key was written by Matthew De Silva, Devjyot Ghoshal, Nupur Anand and Naoyoshi Goto, and edited by Oliver Staley. Take a right good-will draught, for auld lang syne.