Circle Wants to Become a Bank

What you need to know today in crypto and beyond

August 9, 2021

Sponsored by

Welcome to The Node.

If you were forwarded this newsletter and would like to receive it, sign up here.

Questions? Feedback? We'd love to hear from you! Simply reply to this email.

–Daniel Kuhn

Today's must-reads

Top Shelf

BANK BUSTER: Circle plans to become crypto’s first “full-reserve national commercial bank.” If its various applications are successful, Circle’s digital asset bank would be the first crypto-native institution to operate under the supervision of the U.S. Federal Reserve, U.S. Treasury, Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corp. (FDIC).

UNLICENSED EXCHANGE: Meanwhile, former Circle subsidiary Poloniex has agreed to pay $10 million settlement charges with the U.S. Securities and Exchange Commission for operating an unregistered digital asset exchange. The regulator did not specify which cryptos represented securities or investment contracts.

SENATE SITUATION: Attempts to update the U.S. Senate’s infrastructure bill, which contained a tax provision that would hamper the domestic blockchain industry, stalled at the procedural level this weekend. Two competing amendments were put forward, though it appears the original language of the bill will mostly likely pass.

BROOKS BACKS AWAY: Brian Brooks has resigned as Binance.US CEO after just four months on the job. He announced the move on Twitter Friday afternoon, and told CoinDesk it was due to “differences over strategic direction” between him and his colleagues. Before joining the U.S. arm of the Binance global crypto exchange, Brooks served as comptroller of the currency for the top U.S. banking regulator. There’s no word yet who will step up as interim CEO.

BUILDING BRIDGES: Chainlink has collaborated with Google Cloud to offer a decentralized weather data feed. Solana built a “wormhole” between Ethereum and Binance Smart Chain. Oscar Mayer is doing crypto with a Dogecoin-themed hot dog offering.

–D.K.

A message from Nexo

Your digital assets deserve a savings account in their BEST INTEREST. Leading crypto lender Nexo treats you, your crypto and your fiat to industry-best Crypto & Fiat services, featuring:

* Up to 12% interest on digital assets, paid out daily!

* Yields available on BTC, ETH, LTC, BCH, XRP, XLM, EOS, TRX, LINK, BNB, PAXG, USDT, USDC, TUSD, PAX, DAI, HUSD, GBP and EUR.

* No minimum or maximum limits on funds deposited, offering infinite opportunities to earn.

* #ZeroFees on all transactions.

* Military-grade wallet security and top-tier insurance on all custodial assets with SOC 2 Type 2 certified crypto custodian BitGo.

Get started at nexo.io

Overheard on CoinDesk TV

Sound Bite

“The worry is that it would hit anyone who plays any part in making any transfer happening in crypto and that’s just really broad in crypto.”

–FTX CEO Sam Bankman-Fried on the infrastructure bill, on CoinDesk TV’s “First Mover.”

A message from CoinDesk

A Paradigm Shift in Mining

The dynamic crypto mining industry has been even more active following China's crackdown. The global hashrate has largely shifted to North America, making the U.S. a key mining hub where institutions now take central stage.

In this sponsored webinar on Aug. 10, Foundry CEO Mike Coyler explains how this new demographic of miners has special requirements that the company has been catering to through its rapidly growing Foundry USA Pool and other services. Register for free.

What others are writing...

Off-Chain Signals

–D.K.

Putting the news in perspective

The Takeaway

Why Enterprises Should Build on Public Blockchains

Spoiler alert: Private blockchains have no compelling value proposition. If you and a bunch of other companies could agree upon a single vendor to build and run a blockchain, you could just as easily agree upon the rules of setting up a centralized server. Blockchains, as just about any technical expert will tell you, are complicated and expensive to build and run. If you just need a database and a web server, they don’t make a lot of sense.

Defenders of private blockchains will cite the decentralization of decision-making, distribution of data and redundancy as benefits, but all of these capabilities are easily replicated at a lower cost with existing fault-tolerant, disaster-resistant services that have proven track records of 99.999% uptime and a more mature development ecosystem.

Indeed, most enterprises have come to that conclusion. A survey commissioned by EY and Forrester in 2019 showed that for each company that was willing to join another company’s private blockchain, two companies started their own. There is no path there to sustainable network scale. Nearly 75% of private blockchain users believe the best future path is on a public network.

So why is it that so many companies continue to invest in private blockchains? The answer is that large enterprises are deeply risk-averse. They want to get to the real thing: public blockchains; they just want to get there in the lowest risk manner possible.

The most common road map is the creation of a separate Ethereum-based private blockchain with the intent to connect and migrate to the public Ethereum main network in the future once the entities involved are comfortable with the technology. The problem is that permissioned systems are much too easy to customize in ways that make them unsustainable in the long-term.

The result is private blockchains that, while operating in the Ethereum ecosystem, are designed for a world where all the participants are carefully vetted, and the security risks are low or manageable and there’s no such thing as an irreversible transaction. Private blockchains can be rolled back and restored from backups, and rules and systems can be changed. They store sensitive user and customer data, run hugely complex smart contracts and never charge anyone gas fees. It’s like blockchain technology without everything that’s scary about blockchains – irreversible transactions, total transparency, aggressive hackers and per-transaction gas fees.

From a technical standpoint, building private networks is entirely manageable. But very quickly, companies come to see the limitations and start thinking about migration to the public ecosystem. Once that happens, the trouble begins.

These delicate ecosystems, built in a safe, cozy world of design-by-committee with only nice people at the table, would be slaughtered if exposed to the real Ethereum blockchain ecosystem. Even worse, over time, these sheltered ecosystems drift ever further from the public standards. Migrating these systems to the public Ethereum network would be so costly it would just be cheaper to rewrite and redo the whole thing.

There’s a better way: Instead of building a fully private blockchain, companies that cannot bring themselves to go all the way public from day one should look at building connected, permissioned sidechains to the Ethereum network. Though still permissioned, these connected side chains would be much more closely linked to the standards and tooling of the public Ethereum main network. They can and should use the same token and security standards as the public networks, even if all the participants are permissioned.

In this model, migrating to a public network would be a much faster and actually viable path forward with lower risk of stranded investment. And in the interim, as an integrated layer 2 sidechain, these permissioned systems could still have interactions with the liquidity and user base in the main network.

Blockchains offer some compelling advantages for a lot of enterprises and processes, and these advantages are worth braving the risks, provided companies have a careful road map toward the future. For some use cases, like product traceability, going directly to public blockchains is easy and low risk. There are no privacy concerns in many cases; the whole point is public transparency and accountability.

For more advanced business processes, such as procurement, the risks and the rewards are bigger. Smart contract-based procurement systems offer a future where companies can not only negotiate discounts and rebates, they can also be sure they actually get those incentives.

Putting procurement agreements on a blockchain means getting comfortable with the privacy and payment technology on-chain. Initiatives like the Baseline Protocol have gone a long way toward enabling privacy using zero-knowledge proofs and off-chain data storage. There’s no risk of exposing private data if it is never stored on-chain in the first place.

Building these products on permissioned side chains first will allow enterprise users to get comfortable with the challenges and issues, while staying close to the public Ethereum network. So, is it still necessary to go all the way to public? I think yes for a very simple reason – to access the full range of services available on public blockchains.

Nearly all permissioned systems suffer from a lack of supplier and partner diversity. It’s hard enough getting several companies to agree upon the rules. Now imagine trying to get your financial partners, insurance companies, logistics providers and others on the same page. It is not going to happen. Throwing the ecosystem open to the public infrastructure and adhering to open standards means it also isn’t necessary. More competition, more choice and more services immediately become available when networks open.

For all the same reasons that the open, public internet has become our dominant networking technology, public blockchains, most probably Ethereum, will take up a similar role in the economy. And private networks, a lot like corporate private intranets, will never go away, but they will become ever-less strategic to the ecosystem or the companies involved.

–Paul Brody, CoinDesk columnist and blockchain lead at EY.

The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.

Sponsored Content

YouHodler: Positive returns in negative markets

There are other ways to make money in crypto markets that don’t follow the basic buy-low, sell-high mantra of day traders. Money can still make money, even in falling markets.

YouHodler has a range of products and services that allow crypto holders to monetize their assets, without having to sell out at low prices.

Crypto State 2021: Middle East

Even though many countries in the Middle East restrict or outright ban activities related to blockchain technology, the region is having its crypto moment. From Dubai’s first-of-its-kind Bitcoin Fund listing to the Bank of Israel’s trial of a digital shekel, interest is picking up in the region as crypto companies work closely with regulators in the Middle East and North Africa (MENA) to gain some clarity about oversight of digital currencies.

Join us as we jet-set through the Middle East on our #CryptoState2021 virtual tour and explore how different markets are thinking about crypto, their roadblocks and challenges, and crypto’s impact on the region. Register for the Crypto State: Middle East virtual tour on Aug. 11.

The Chaser...

The Node

A newsletter from CoinDesk

See Previous Editions

Copyright © 2021 CoinDesk, All rights reserved.

250 Park Avenue South New York, NY 10003, USA

You can manage your preferences here or unsubscribe from all CoinDesk email.