In this issue

  1. Jack Dorsey’s Bitcoin exchange: Time for a tune-up
  2. NFTs: What’s that hissing sound?
  3. China’s digital yuan: Banks buy in

From the Editor’s Desk

Dear Reader,

As summer draws to a close and fall approaches, many investors will be taking a moment to reflect on a year that’s blown hot and cold on the digital asset industry.

Yet although the weather may be cooling, activity in the non-fungible token space is at fever pitch. That’s a boon for sellers of NFTs as they set sales records, but some observers suggest that the frenetic pace of trading activity is generating more heat than light amid stubborn questions regarding the value, purpose, uses and ownership rights of NFTs.

Some even say the market may boil over if the clamor continues.

There are fewer such concerns when it comes to Bitcoin, which appears to have settled into a comfortable trading range — at least for now. Indeed, compared to NFTs, the original cryptocurrency is positively establishment — so rock solid that Twitter founder Jack Dorsey is building a decentralized exchange based on it.

Dorsey’s enthusiasm for Bitcoin is well-documented, but devotion and determination aren’t the sole ingredients required for success. Simply because Bitcoin enjoys enviable credibility these days doesn’t mean its technology has the cutting-edge capabilities required to support Dorsey’s ambitious plans.

As we suggest in this week’s Current Forkast, without some serious re-engineering, @jack’s latest endeavor may blow a gasket if its engine overheats.

Meanwhile, a sense of cool superiority may be prevailing in China as the country’s banks reveal that Beijing’s state-backed digital currency project has already pumped tens of billions of yuan into circulation — an achievement unmatched by any other government.

Human rights groups and others may be hot and bothered about the potential uses of e-CNY for snooping and suppression. But millions of Chinese are clearly warming to the idea of having the People’s Bank of China in their pockets — news that might light a fire under central banks elsewhere as they drag their currencies into the digital age.

Until the next time,

Angie Lau,
Founder and Editor-in-Chief

1. The bourse that Jack built

Jack Dorsey in Bitcoin Conference Miami
Twitter CEO Jack Dorsey may have something to smile about if he pulls off his Bitcoin exchange plan.
Image: Getty Images

By the numbers: TBD — over 5,000% increase in Google search volume.

Twitter founder Jack Dorsey is building a decentralized Bitcoin exchange platform through TBD, a new business venture by Square, his financial services and digital payments company. TBD, the meaning of whose identifying initials remains unknown, aims to “make it easy to fund a non-custodial wallet anywhere in the world through a platform to build on- and off-ramps into Bitcoin,” according to TBD project leader Mike Brock. TBD has its own Twitter account with the handle @TBD54566975.

  • The platform that TBD is building will be Bitcoin-native, open source, open protocol, permissionless and developed entirely publicly. It will have no foundations or governance model controlled by TBD.
  • Ethereum co-founder Vitalik Buterin is sowing seeds of doubt when it comes to the new platform. In a recent appearance on Bloomberg Television, Buterin said Dorsey’s plan to create a decentralized finance-like ecosystem on the Bitcoin network could backfire as it lacked the necessary functionality to support it. He also said Dorsey might have to create a new ecosystem from scratch.
  • According to a tweet by Brock, TBD’s main hurdles are cost and scalability. It also needs exchange infrastructure to span digital assets such as stablecoins.

Forkast.Insights | What does it mean?

It has been an incredible year for crypto overall, with two dominant narratives taking hold and propelling the industry’s value to over US$2 trillion. 

For Bitcoin, the world’s first cryptocurrency, the story has been one of ascent, thanks to its store-of-value function, its potential as a hedge against inflation, and the freedom it provides its holders through its decentralization.

The second story has been decentralized finance (DeFi), an ecosystem that has grown atop smart-contract blockchains — mainly Ethereum, with newcomers such as Solana and Cardano attempting to capture some of the market. DeFi focuses on innovation using products typically associated with traditional finance, such as derivatives, and on creating products that resemble equity or debt through the use of complex smart-contract functionality.

As DeFi has exploded over the past year, Bitcoin “maximalists” have acquired a reputation analogous to that of “gold bugs” in traditional investment markets — individuals who are extremely bullish on the yellow metal as an investment and/or a standard for measuring wealth — and some are questioning whether cryptocurrencies more broadly may be outgrowing the coin that started it all.

DeFi products have not yet been built on the Bitcoin network because the network is designed to do one thing: be a store of value, a secure form of digital money. Bitcoin does not currently offer support for complex smart contracts. Moreover, simple contracts that can be executed on the Bitcoin blockchain are often cumbersome to design and very costly to execute.

Jack Dorsey comfortably fits the description of a Bitcoin maximalist. The Twitter and Square Payments founder has said in the past that he believes Bitcoin will be the native currency of the internet. He cites the crypto’s “principles,” its “creation story,” and its “resilience” as reasons why. So it comes as no surprise that he is now pursuing a completely decentralized exchange for the original cryptocurrency.

But like many Bitcoin maximalists, Dorsey appears to be struggling to come to terms with the realistic limitations of the Bitcoin blockchain. The fact that Bitcoin was the first use of a blockchain does not mean its blockchain is best for everything — a fundamental truth that applies to any type of technology.

Many in the industry, including Ethereum co-founder Vitalik Buterin, remain skeptical as to whether DeFi can be built on Bitcoin’s blockchain, because it lacks the native functionality of specifically designed smart-contract blockchains that are created to accommodate DeFi and other innovations.

If Dorsey is to achieve his goal of putting DeFi on the Bitcoin network, he and his developers will need to implement a major upgrade to the sophistication of the blockchain’s principles of decentralization and permissionless architecture in order to create an entirely new level of functionality. The task is akin to taking a 1908 Ford Model T — one of the first vehicles to be mass produced — and redesigning it to offer the same level of sophistication as a Tesla, all the while keeping the Ford on the road. It may not be impossible, but it might be far more economical and sensible simply to buy the Tesla.

2. NFTs: Courting disaster?

Golden State Warriors v Los Angeles Lakers - Play-In Tournament
Sports stars like Stephen Curry have touted NFTs as a slam-dunk, but the truth about their value is nuanced.
Image: Getty Images

By the numbers: Bored Ape — over 5,000% increase in Google search volume.

The market for non-fungible tokens continues to heat up as multiple NFT trading volumes hit all-time highs in the past week. Bored Ape Yacht Club, the fifth most popular NFT collection to date, rose by 69% to reach a trading volume of more than US$131 million over the past seven days. Over the weekend, Bored Ape Yacht Club released Mutant Ape NFTs, which set off such a buying and resale frenzy that Mutant Apes recorded a trading volume of US$186 million in the past seven days, behind only Art Blocks and CryptoPunks, two of the four highest-grossing NFT collections of all time.

  • Mutant Ape Yacht Club is a collection of 20,000 NFTs, 10,000 of which were airdropped for free to Bored Apes holders as Mutant Serums, which could be used to generate Mutant Ape NFTs from Bored Apes while keeping original Bored Apes NFTs intact. Another 10,000 were sold at an auction, bringing in US$96 million within an hour.
  • OpenSea, the world’s biggest peer-to-peer NFT marketplace, reached a trading volume of US$1.58 billion over the past seven days, up 72.88%. OpenSea’s daily trading volume hit an all-time high of $302.6 million on Aug. 29.
  • CryptoPunks, one of the first NFT ever created, exceeded US$1 billion in total sales, becoming only the second NFT project to do so. CryptoPunks has reached a trading volume of more than US$301.7 million over the past seven days, the highest volume among all NFTs over the same period, surpassing Axie Infinity, which is still the highest-grossing NFT project but achieved a trading volume of US$150.6 million in the past 7 days.

Forkast.Insights | What does it mean?

NFT sales surged in August, according to the largest platforms associated with the hot digital asset class. Speculators continue to pile in, betting that burgeoning public interest in digital sports, art and media collectibles will continue driving up the prices of tokens.

Although the growth of the DeFi ecosystem has heated up over the past year, NFTs have gone full supernova. They’re now the most popular items on the Ethereum network, and NFT marketplace OpenSea is now the network’s biggest gas-guzzler, according to Etherscan, accounting for one-fifth of all transactions on the blockchain.  

Decentralized exchange Uniswap had been the clear leader in Ethereum usage for most of the year, but has now fallen to the fourth spot, accounting for just 4.78% of total transaction fees on the smart-contracts platform. Even if you add Uniswap V3 — another 2.32% — to that figure, it doesn’t come close to what OpenSea consumes in the way of network fees.

Those looking at NFTs as a component of an investment strategy must consider that the asset class is really just getting started. Yes, they are hyped by celebrities, and tens of millions of dollars are changing hands for them, but the market for them is still very much unproven, and we may very well be in the midst of an exponentially inflating bubble. Some tell-tale signs already exist.

Although every bubble in history has had its own characteristics, one common denominator — from the soaring price of Dutch tulips in the 1600s to the dotcom bubble of the late 1990s — is the willingness of investors to suspend disbelief and remain oblivious to increasing accumulations of warning signs.

The popularity of NFTs — blockchain-based records of ownership of digital items such as images and videos — has exploded since early this year, but skeptics remain confused as to why so much money is being spent on items that don’t physically exist, and which are often quite underwhelming.

Furthermore, it’s a fundamentally silly notion that in the digital world an individual can “own” an image that can be replicated in seconds. Perhaps the strangest aspect of NFTs is that they are digital creations that already exist somewhere else on the internet, which means that anyone can view them. Which begs the question of what ownership even means.

What NFTs have in common with traditional art is that their value is subjective. Although NFT prices and transaction volumes are soaring, the onus is on investors to ask themselves whether they think any piece they purchase will offer them value in the future.  

Once again, investors would be wise to enter the market only at their own risk, and only use disposable income to make purchases in it. The bigger the bubble, the bigger the bang when it bursts.

3. Chinese banks board the e-CNY express

Tourism Peak During China's National Day Holiday
China’s e-CNY is already coursing through the systems of the country’s state-owned banks.
Image: Getty Images

​​As China ramps up testing of its digital yuan, three big state-owned banks have released e-CNY usage data in their semi-annual reports, showing that tens of billions of yuan are circulating through the lenders’ financial conduits.

  • As of the end of June, China Construction Bank had helped set up 7.23 million personal e-CNY wallets and nearly 1.2 million corporate wallets, handling a total of 18.9 billion digital yuan (US$2.9 billion) of transactions, according to its interim report.
  • Bank of Communications had opened 1.16 million personal digital yuan wallets and 130,000 corporate wallets, with total e-CNY transactions reaching 2.5 billion yuan, Qian Bin, the bank’s executive vice president, told media on Friday following the release of the bank’s mid-year results.
  • Industrial & Commercial Bank of China also said in its semi-annual report that as of the end of June, it had opened 3.56 million personal digital yuan wallets and 700,000 corporate wallets, with the number of signed merchants reaching 140,000.
  • Postal Savings Bank of China had added a new department dedicated to e-CNY business at its head office, local media outlet Beijing Business Today reported.

Forkast.Insights | What does it mean?

China has been busily preparing the launch of its digital yuan, officially known as e-CNY, in what many see as a push to challenge the hegemony of the U.S. dollar.

The increase in e-CNY usage by the country’s big state-owned banks aligns with the central bank’s digital yuan development policy, which encourages wider adoption of the new currency. In a white paper released in July, the People’s Bank of China said e-CNY trials had seen nearly 21 million personal wallets opened and transactions worth a total of around 34.5 billion yuan (US$5.3 billion).

In August, an additional 13 banks started to allow customers to recharge their wallets directly in the e-CNY app, bringing the total number of banks supporting such a feature to 19. Banks offering a top-up feature now include China Merchants Bank, China Citic Bank, Shanghai Pudong Development Bank and Ping An Bank.

The rollout of the digital yuan is gaining huge momentum through the government and lenders, and the state’s push for e-CNY adoption is increasingly looking more like a soft launch of the new money than a test run. The central bank has no plans to ease the pace during the second half of the year — on the contrary, its operations office in Beijing says its plan is to accelerate efforts to develop e-CNY payment services for the upcoming Beijing Winter Olympics in 2022.

China’s high smartphone penetration rate, coupled with its digital-savvy population and favorable policies for those willing to use the new currency, appears to be truncating the test phase for e-CNY and moving its development rapidly toward a rollout.Although Beijing’s regulatory moves against the cryptocurrency industry and Big Tech, which are part of setting the stage of the flawless arrival of e-CNY, may have some negative effects on the economy, the pace of the new currency’s development is currently unmatched by any other government of an economically powerful nation, making the competition to roll out a major central bank digital currency China’s race to lose.