I'd like to express my sincere gratitude to
ChainDD & TMT-Post Media Group for the invitation.
It's a pleasure to be here in T-EDGE-X Summit,
sharing my viewpoint about Financial and Capital
Markets and Blockchain.
My name is Naoyuki Iwashita, and I teach FinTech
at Kyoto University.
I mainly lecture to graduate students on the
fintech from the various viewpoints, such
as economics, legal, and information technology.
Bitcoin and other crypto-assets received worldwide
attention in 2017 as they soared.
They went through a series of market swings
since then.
Still, even now, in July 2020, it maintains market
capitalization of about 270 billion dollars.
Facebook published a white paper on Libra
in June 2019, which attracted worldwide attention.
China's Digital Yuan demonstration began this
year.
Countries around the world are researching central bank digital currency or CBDC.
The change from fiat currency to virtual currency or crypto-assets,
and the shift from legal tender confined to
one country
to an internationally available digital currency,
people's understanding of money is changing dramatically.
Yet, when we think about it,
these changes seem to be somewhat of an exaggerated sales talk.
People are still receiving their paychecks
in traditional bank deposits.
Bitcoin touted as the "money in the future," is still not being used in stores.
A digital currency that can be used for international payment
has not yet been issued in reality.
I do not say that these are merely all falsehoods.
Instead, there might be a significant technological
innovation and a social transformation that
cannot be reversed.
In my speech, I will discuss how information
technology innovation will change the financial
and capital markets in the future.
Blockchain is the underlying technology crypto-assets
such as Bitcoin.
In 2008, a mysterious person claiming to be
Satoshi Nakamoto published a paper titled
"Bitcoin: A peer to peer Electronic Cash System."
Satoshi began an experiment in 2009 by releasing
an actual working program.
Bitcoin was an experimental project
that aimed to enable anonymous money transfers between individuals.
Rather than start a company,
Satoshi invited volunteers to participate in the experiment over the Internet.
And the Bitcoin community naturally expanded.
Bitcoin is a decentralized system by using
a P2P network.
Financial institutions use a server-based
network.
Financial institutions store electronic data of outstanding balances of bank deposits and securities in
a dedicated central server system and strictly protect it.
The banking system and the central securities
depository or CSD play a role in this process.
However, Bitcoin is built on about 10,000 computers all over the world connected to the Internet.
The sharing of the same data in 10,000 machines achieves the same stability
as a strictly protected central server system.
Since Bitcoin is decentralized,
there is no need for an expensive central server.
This was a revolutionary idea.
If this technology replaces the existing financial system,
it will change the financial and capital markets dramatically.
Nevertheless, a system without a central server
would find it challenging to prevent double
transfers of assets effectively.
A central server could be put in place to
check double transfers, but it violates the
decentralization philosophy.
It would also be costly to maintain that central
server securely.
That wouldn't be much different from the current
system of financial institutions.
Bitcoin has uniquely solved this problem.
They have decided to allow any user who joins
the network to participate in the verification
of their transactions.
However, in that case, the user who has made
the double transfer might become the verifier
himself, approving his own unauthorized transactions.
As a countermeasure to that risk, Bitcoin
is using a method called "competitive mining."
Anyone seeking to verify a transaction must
solve a computationally intensive task about
once every ten minutes.
The first one to answer correctly would be
the verifier.
The mining companies in various countries
have set up mining factories to compute the
task.
They compete with each other.
Satoshi thought that such a participant could
be trusted as a verifier if he could carry
such a load.
This is called "Proof of Work."
The winner of the competition generates a
new block chained to the block created by
the previous verifier.
At the same time, he gets a certain amount
of new bitcoin.
Bitcoin has been operating for more than a
decade with no support from anywhere, although
it has no corporate structure and an unknown
central figure,
If you look at the inside of these technologies,
you'll see that the blockchain technology
employed by Bitcoin is not a magic wand that
can be used for any purpose.
The bitcoin blockchain is often called "PermissionLESS
Blockchain."
Anybody who wants to take part in the bitcoin
blockchain network, no permission is needed.
There have been proposals for permissioned
blockchain.
There is someone in the center of permissioned
blockchain.
He or she limits the participants, and plays
the sole role of a verifier.
They do not involve competitive mining, although
they use chaining blocks like Bitcoin.
There isn't so much different than a system
with an existing central server system.
Because of the lack of a central system, Bitcoin
has been able to overcome the differences
in regulatory and political systems worldwide.
Unlike Bitcoin, digital currencies such as
Libra and CBDC employ permissioned blockchain.
It may not be trusted across borders.
If any country holds the central system, the
country's government might freeze a particular
user's assets for a political reason.
This makes it challenging to create something
between Bitcoin and legal tender.
Next, I would like to talk about ICO and STO.
As Bitcoin soared, thousands of crypto-asset
projects were proposed from around the world.
Among those new crypto-assets, a number of
them soared.
In particular, Ethereum became the second-largest
crypto asset.
It was used as a platform to issue ERC-20
token.
The method of raising funds by issuing these
tokens is ICO or Initial Coin Offering.
Tokens do not have the right to receive dividends
or participate in management like stocks.
Nor are tokens redeemable at maturity like
bonds.
They are a type of crypto-asset that has no
known value.
Let's take a look at the ICO's growth in this
an impressive animation created by Elementus.
Each balloon of different sizes represents
each ICO project.
The size of each balloon shows the amount
of money it raised.
You can see the bar chart at the bottom of
this screenshot.
This bar chart indicates the value of ICO
fundraising for each month.
ICO increased rapidly in 2017, and by mid-2018,
ICO had successfully raised some 28 billion
dollars worldwide.
But, from mid-2018, ICO declined dramatically.
For these 15 months, ICO projects have been
mostly unsuccessful.
The reason why ICO has declined is that it
has failed to meet the expectations of investors.
This table shows a comparison of "Advanced
Returns" at Tokendata.io.
Here's the top ten ICO Token, which is still
in circulation today.
According to this site, except for infrequent
success stories like "Tezos," in many ICO
projects, token prices dropped around 80 or
90 percent, and investors lost much money.
The term ICO was coined from the word IPO.
At first glance, they look alike.
However, IPO is regulated by the Securities
Law in each country.
There is a framework for listing examination
in each stock market.
On the other hand, such regulations and frameworks
do not exist for ICO.
Anyone who published his business plan as
a white paper might have raised funds even
though his project has no substance.
If ICO token issuers developed a superior
product or service, then we can consider that
ICO would have a raison d'être.
But in reality, they didn't do that.
Many of the issuers that got a lot of money
just for writing a white paper did not make
any effort to get their business off the ground.
Investors also thought only about reselling
tokens at a higher price in the secondary
market.
They are not interested in whether the ICO
business plan would succeed in or not.
As a result, many ICO projects didn't develop
anything and just disappeared.
Eventually, the ICO boom was gone.
In response to these various problems, regulators
in many countries have begun to regulate ICO.
In the U.S., the SEC has announced that some
ICO projects constitute an offering of securities
under the U.S. securities laws.
Some token issuers have admitted to the SEC
that their tokens are securities, and asked
SEC to apply for exemption under Regulation D.
This kind of token issuance is called STO
or Security Token Offering.
China's financial authorities issued a directive
banning ICO in September 2017.
Japan had similarly tightly regulated ICO
in 2017.
From the viewpoint of investor protection,
I believe that the efforts of China and Japan
are appropriate.
In Japan, the amended "Financial Instruments
and Exchange Law," which incorporates ICO regulations,
came into force this May.
Under the amended law, "profit-sharing-ICO"
is subject to the securities law.
Some people call this the "Japanese version of STO."
In new Japanese law, token intermediaries are required to examine
the issuer's business
and financial status.
The amendment to the law in Japan was intended
to solve the problem of ICO with securities regulation.
But as a result, it has made it possible to
introduce the blockchain technology to traditional
securities markets.
Nevertheless, blockchain technology is not
a magic wand in this area, either.
We need to carefully consider whether this
new technology will lead the financial market
to real convenience and efficiency, rather
than regulatory arbitrage.
Thank you very much for your attention.
