Crypto infrastructure opportunities: Security, reliability, scaling | marketrealtime.com


Good morning, and welcome to Protocol Fintech. This Monday: building crypto infrastructure, the Fed eyes Marcus, and the Biden executive order gets results — sorry, reports.

Off the chain

Cryptocurrencies are like securities in a crucial way: The prices move in inexplicable fashion and people constantly try to graft on explanations after the fact. Ethereum’s Merge took place last week without much of a hitch, yet the price of ether didn’t rally, which led some to conclude that the technical transition was somehow a failure. That assumes that the Ethereum blockchain exists purely to enrichen holders of ether, which — hate to break it to you — isn’t the case. More likely, savvy traders had already priced in the long-planned Merge, and the only ones buying ether on the day were the naïfs that the smart set loves to fleece. What was I saying about crypto being just like the stock market?

— Owen Thomas (email | twitter)

Build it and they will come

Despite a drop in token prices, more companies are taking the plunge into blockchain. And a host of startups are building infrastructure to accommodate them. Venture investors looking for a breakout hit — like the kind they’ve scored in traditional infrastructure in the past decade — think they have another shot with this blockchain wave.

Custody is a big opportunity. Multiple multibillion-dollar companies have already gotten started in the business of safeguarding customers’ digital assets.

  • One startup benefiting from this move is Fireblocks. Founded in 2018, Fireblocks has been known for its custody service and its wallets, particularly multiparty computation or MPC wallets, which don’t rely on a single private key and require multiple people’s approval to access funds, an enterprise-friendly feature.
  • There are several other large companies providing custody and helping manage crypto assets for large institutions, including Anchorage, which was recently valued at $3 billion, and BitGo, which recently had its deal to be acquired by Galaxy Digital fall apart amid a legal dispute. Others such as Alchemy, recently valued at $10 billion, help companies manage crypto node infrastructure.
  • Fireblocks, valued at $8 billion in January, has reached $100 million in annual recurring revenue, the company recently said. Revenue grew 600% last year and the company expects to see 300% growth this year, said Michael Shaulov, its co-founder and CEO.

Security, reliability and performance are big problems that need solving. Blockchains are largely still too slow and vulnerable for enterprise needs.

  • One example of a novel security need is automated auditing of smart contracts, which is typically done manually now. Smart contracts have seen large-scale hacks, prompting concern over holes in code and operational vulnerabilities. Companies like OpenZeppelin and Tenderly monitor smart contracts and other parts of a product to let engineers know in real time about problems, while others such as Chaos Labs focus on scenario planning to prepare for problems.
  • New methods are emerging of doing verification and compliance to determine if people are who they say they are through KYC and AML checks — a keen area of interest for regulators, Lux Capital investor Grace Isford said, and hence an opportunity for startups.
  • To scale crypto networks, new technologies such as zero knowledge proofs are expected to be critical. While zero knowledge proofs are expected by many in the industry to eventually provide a strong method for scaling Ethereum, current ZK rollups on Layer 2 blockchains are not yet compatible with the Ethereum Virtual Machine at scale at a reasonable cost. That means it’s still hard for most applications to run on ZK rollups, Isford said.

While consumer apps and NFTs tend to get the most press and consumer interest, infrastructure is what will make the industry thrive, investors say. “What is under the hood is way more important than what’s built on top if you are looking for real maturity and long-term viability,” Arrington Capital partner Keli Callaghan said.

— Tomio Geron (email | twitter)

A version of this story appeared on Protocol.com. Read it here.

A MESSAGE FROM VERSAPAY

With a rocky economy and high inflation, cash flow is key. Check out our exclusive report in partnership with Wakefield to learn what’s really slowing cash flow—and what you can do about it.

Learn more

On the money

Goldman Sachs’ Marcus unit is under scrutiny by the Federal Reserve. Fed officials have been peppering Goldman management with questions about the consumer-focused online banking division.

U.K. regulators issued a warning about FTX. The Financial Conduct Authority published a warning to consumers about Sam Bankman-Fried’s crypto exchange, saying it isn’t authorized by the regulator to offer financial services or products in the country.

Shopify will let staff choose a mix of cash and stock pay. Employees can adjust their mix of cash, restricted stock units and stock options, with the ability to withdraw equity immediately.

Celsius is asking a bankruptcy court for permission to sell its stablecoin holdings. The crypto lender disclosed that it has $23 million worth of stablecoins held by three of its corporate entities.

Bitcoin dropped to its lowest level in three months. The cryptocurrency dropped 5% early Monday to a low of $18,276 as investors dumped risky assets in anticipation of higher interest rates.

Do Kwon could face an Interpol red notice. South Korean prosecutors have asked Interpol for help in arresting Do Kwon, founder of the company behind the collapsed UST and luna coins, as they seek to charge him with alleged crimes including breaking capital markets laws. Kwon denied that he is on the run.

Overheard, the Biden crypto EO edition

The Biden administration fleshed out details of its crypto strategy in new reports from key departments. Here are some of the most crucial points.

The Treasury Department, which issued three reports, cited the potential benefits of a digital dollar but also said “there could be unintended consequences of a U.S. CBDC, including runs to U.S. CBDC in times of stress.”

“As with any financial asset, CBDCs could be used by criminals, including terrorists, for illicit activity,” the department also said.

The department stressed the need to “coordinate and promote consumer education efforts on crypto-assets” to “ensure that consumer-friendly, trustworthy, and consistent education materials are accessible and inclusive, to the maximum extent possible.”

“Same-day automated clearing house transactions and permissioned blockchain based payment systems are examples of the rapid pace of innovation that appears to be reshaping domestic and global transfers,“ the department said.

“Darknet markets — which facilitate the exchange of cryptocurrency for criminal purposes — remain a significant focus of law enforcement efforts,” the Justice Department also pointed out in a separate report.

“The scale of the challenge presented by digital assets also requires partnerships between government actors and the private sector,” the DOJ added.

“Tokenization, or the digital representation of real-world objects other than for assets issued by traditional financial institutions or entities, has potential utility in applications such as manufacturing, health care, Internet of Things (IoT), and supply chain tracking,” the Commerce Department report said.

Coming up

The Bank Automation Summit started Sunday and continues through Tuesday in Seattle. Session topics span everything from how to develop for cloud technology to budgeting strategies for automation.

The U.S. House Committee on Financial Services will host a hearing Tuesday on alternative payment systems and national security. The hearing will feature representatives from Chainalysis, TRM Labs, the Atlantic Council, the Center for a New American Security and the Wilson Center.

The same committee will have another hearing later in the day on diversity and inclusion at insurance companies. Witnesses include representatives from Allstate, Evolution Advisors, the American Council of Life Insurers and the Congressional Research Service.

InsureTech Connect happens this Tuesday through Thursday in Las Vegas. The event claims to be the world’s largest event for insuretech leaders and hosts speakers from Google, Deloitte, ServiceNow and more.

MarketWatch’s Best New Ideas in Money Festival happens Wednesday and Thursday at Center415 in NYC. The first-of-its-kind event features speakers like Bridgewater’s Ray Dalio, AOL co-founder Steve Case and Nyca Partners’ Jasleen Kaur.

The NextGen Payments and RegTech Forum is also this Wednesday and Thursday in Athens, Greece. The event covers how to advance businesses amid technological and regulatory changes.

On Thursday, the U.S. House Committee on Financial Services will hold a hearing on the impact of wildfire risk on the insurance market. Insurers need to adapt to growing risk as wildfires burn with increasing frequency, especially on the West Coast.

Don’t miss Protocol Enterprise’s event “Securing the Enterprise” on Oct. 4 at 10 a.m. The online event will cover cybersecurity threats facing every online business, and best practices for protecting companies against them. Reserve a spot now.

A MESSAGE FROM VERSAPAY

With a rocky economy and high inflation, cash flow is key. Check out our exclusive report in partnership with Wakefield to learn what’s really slowing cash flow—and what you can do about it.

Learn more

Thanks for reading — see you tomorrow!





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