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Slumbering cryptos, which have been stuck in a trading range since the steep decline from December’s highs, have awoken. Bitcoin broke its months-long downtrend, breaching the $7000 mark, and then the $8000 mark in short order.
Source: Bloomberg Finance L.P.
What’s driving the rally? Some of it may be due to increasing pressure on developing-world currencies, particularly the Chinese yuan and the Indonesian rupiah — not to mention the Turkish lira and the Argentine peso. The continued strength of the U.S. dollar will thus drive retail buyers to Bitcoin (and Ether) who would otherwise have difficulty exchanging their local currency for some alternative. The relative ease of transacting could also attract such buyers to cryptos more than to gold.
However, we’ve noted another trend. Bitcoin saw a big price spike on July 17, which was the day that a new crypto-related patent was announced from Mastercard [NYSE: MA].
New Mastercard Patent Takes Aim At Crypto Inefficiency
In our coverage of cryptos we have often pointed out that one of the major challenges facing many of the current major crypto ecosystems is the high latency of their networks — which just means that transactions are extremely slow (and expensive). They can be hundreds of times slower than traditional credit-card networks.
This is a barrier to broader crypto adoption as an actual medium of exchange. Many crypto platforms and programmers are working on solutions to the problem — for example, Lightning Network in Bitcoin. But these solutions are slow to roll out and their stability remains unproven. Many crypto analysts and programmers believe that these speed-boosting solutions may come with unforeseen problems and create new systemic vulnerabilities.
The new MA patent takes aim squarely at this problem. It aims to integrate blockchain-based cryptocurrencies with its own transaction network. MA writes: “Payment networks may be able to evaluate the likelihood of fraud and assess risk for blockchain transactions using existing fraud and risk algorithms and information that is available to payment networks, such as historical fiat and blockchain transaction data, credit bureau data, demographic information, etc., that is unavailable for use in blockchain networks.” Thus, for example, a MA crypto-enabled account could apply the same risk and fraud prevention technologies that secure their fiat-currency credit card transactions to allow them to conduct crypto transactions — likely at the same speed.
This will meet opposition from “crypto purists” who believe that businesses such as MA will bring unwanted centralization to the cryptocurrency ecosystem. But the voices of such purists are less and less relevant. As we have noted frequently, in our view, it is the integration of cryptocurrencies into the established financial and regulatory system that will allow the development of crypto and blockchain technologies to flower as creators of value for investors.
The Crypto “Patent Palooza” Is Underway
The MA patent is just one example of a recent flood of crypto and blockchain-related patents from major firms in the financial industry and beyond. It isn’t just “fintech” (financial technology) start-ups who are racing to integrate crypto and blockchain, it’s many names with which you are certainly familiar.
- JPMorgan [NYSE: JPM] applied for a patent in January that would allow them to “tokenize” assets, allowing those tokens to be traded on electronic exchanges. This could include stocks, bonds, and real estate. The tokenization would confer many advantages — for example, secure trading and the automated distribution of cash flows such as dividends.
- Barclays [London: BARC] filed two patents, one covering blockchain digital currency transactions, and the other applying blockchain technology to “know your customer” rules.
- Bank of America [NYSE: BAC] filed its own patent for blockchain-based data validation; Wells Fargo [NYSE: WFC] filed a security-related patent which would use blockchain to help secure sensitive information on electronic devices.
- Walmart [NYSE: WMT] filed a patent to apply blockchain technology to logistics and delivery — and this follows previous blockchain-related patents related to medical records and energy management. WMT is also partnering with IBM [NYSE: IBM] in the application of blockchain to logistics and chain-of-custody.
In other significant crypto adoption news, the Hong Kong Stock Exchange announced that it would have a live blockchain-based trading platform by September, and the Malta Stock Exchange announced that it was building a platform for the trading of security tokens (i.e., the same kind of “tokenized assets” described in the JPM patent we mentioned above).
And lastly, we noted that the “Big Four” accounting firms — Deloitte, Ernst & Young, KPMG, and PricewaterhouseCoopers would be working with a consortium of 20 Taiwanese banks to trial a blockchain-based platform for conducting audits. This is one area where the efficiency promise of blockchain is bight and easy to see.
Investment implications: The ebb and flow of cryptocurrency markets will respond to global market and currency dynamics. However, another key driver will be the ongoing integration of crypto and blockchain technologies into established systems of finance, commerce, and regulation. Significant patent filings can indicate the entry of important firms into the space, and crypto investors should be attentive to these events. Longer-term investors can also use patent activity to help gauge industry leadership, and which companies are pursuing it. Please note that principals of Guild Investment Management, Inc. (“Guild”) and/or Guild’s clients may at any time own any of the stocks mentioned in this article, and may sell them at any time. Currently, Guild’s principals and clients own MA and BAC. In addition, for investment advisory clients of Guild, please check with Guild prior to taking positions in any of the companies mentioned in this article, since Guild may not believe that particular stock is right for the client, either because Guild has already taken a position in that stock for the client or for other reasons.
