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Ripple Vs SEC: Discussions Opened For Defining Crypto As Securities

April 7, 2021 by Blockchain Consultants

The US Securities and Exchange Commission (SEC) and Ripple Labs have had a very long, very interesting relationship. Recently, however, Ripple Labs has been granted access to the documents of the SEC that express the interpretations and views of the SEC when it comes to crypto assets.

Playing The Technical Game

Law360 showed that one Sarah Netburn, a US Magistrate Judge, had granted Ripple Labs the motion “in large part.” The Judge had concluded that the memos and minutes of the SEC regarding cryptocurrencies are likely discoverable but asserted that staff-to-staff email communications are not to be produced. Another detail Netburn allowed is for either RIpple or the SEC to raise disputes with the ruling if they wished.

It was back in December of last year when the SEC filed its lawsuit against Ripple. In this lawsuit, the regulator accused Ripple Labs, including Christian Larson, the Chairman, and Brand Garlinghouse, the CEO, of raising a total of $1.38 billion by way of an unlicensed security offering, which they did all the way back in 2013.

A Crack Legal Team Is Severely Versatile

Not to give the jig up just yet, Ripple promptly challenged the SEC’s lawsuit, claiming that an asset expressly used for online settlements is more akin to Ether or Bitcoin. Both of these assets have been declared commodities by the SEC. Another important factor Ripple hammers home about is the 8-year time gap the agency took in terms of filing a complaint against RIpple as a whole.

Matthew Solomon stands as the Counsel of Garlinghouse, with Law360 reporting that Matthew Solomon is convinced that the SEC’s lawsuit could be “game over” should they manage to find any evidence that the regulator had compared XRP to ETH or BTC. Through this technicality, XRP would be classified as a commodity instead of security, and thus be outside of the jurisdiction of the SEC.

The Legal System Is Always Complex

Another point lawyers are hammering home on, is the fact that the SEC has taken a whole of 8 years to file the complaint. As such, the law firm is doing its best to undermine the claims of the regulator should they find any documentation that is counterintuitive to the official classification of XRP by the SEC.

Solomon declared that this sort of discovery is needed in order to defend the client in question

Time will tell how successful this antic will be. Many in the crypto space already see RXRP as a security and are simply waiting for them to be caught out for it

Ripple Vs SEC: Discussions Opened For Defining Crypto As Securities

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Filed Under: blockchain, cryptocurrency Tagged With: Bitcoin, btc, ceo, chairman, commodity, crypto, Cryptocurrencies, cryptocurrency, data, ETH, ether, exchange, Law, lawsuit, Market, ripple, ripple labs, SEC, Securities and Exchange Commission, security, Space, Trading, us, xrp

Control-Finance Scam Mastermind Hit With $570M Fine By CFTC

March 27, 2021 by Blockchain Consultants

Benjamin Reynolds stands as the mastermind behind one of the biggest Bitcoin Ponzi schemes out there. While the man hasn’t been located yet, the US Commodity Futures Trading Commission (CFTC) has enacted a default judgment against him. He will be mandated to pay a fine of $572 million in restitution and penalty after a federal New York judge made the default judgment against him.

Around 22,800 Bitcoin Stolen

The CFTC had accused Reynolds of operating a pyramid scheme that went by the name of Control-Finance. The scheme itself had fraudulently promoted a cryptocurrency investment company based within the UK, and the complaint itself was filed all the way back in 2019.

The complaint itself saw the agency go into detail about how this fictional CEO had, through fraudulent means, obtained 22,800 Bitcoin, which is worth an excess of $1.24 billion. He stole this Bitcoin from more than 1,000 investors, and promptly misappropriated it.

Usual Tactics Involved

Control-Finance made use of the typical promises of daily returned in order to lure in their unsuspecting investors. Promises were made of a 45% monthly returns, 1.5% a day. As is the norm in these types of scams, Control-Finance fabricated weekly trade reports to feed the investors further false information.

bitcoin etf

New participants within the program were given the typical promises of annual returns, but the entire operation was, in fact, just a big Ponzi scheme.

The CFTC explained that the big promise made by Reynolds was that he would return all Bitcoin deposits to the various Control-Finance customers by October of 2017’s end. As we all know now, he didn’t do that, retaining the deposits for his own personal use instead. As a result of this scheme, almost all of the customers managed to lose their entire Bitcoin deposits, with only a few managing to get an inkling of their initial investment

Stealing The Money Of Others

As one would imagine, the watchdog claimed that Control-Finance did no trading for its customers’ behalf, and didn’t earn any profits, to begin with. Instead, the scheme managed to launder the stolen funds by way of thousands of circuitous blockchain transactions. Reynolds even managed to transfer segments of these stolen assets to various bank accounts spread across tax havens, the Seychelles islands being a prime example.

The court paper went as far as accusing Reynolds of forging documents from the UK Companies House in order to convince the victims of this scam that the entire operation was legitimate.

As it stands now, the CFTC has failed to locate Reynolds, but the agency has managed to make a ruling through the New York court to settle his accusations in his absence.

Control-Finance Scam Mastermind Hit With $570M Fine By CFTC

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Filed Under: blockchain, cryptocurrency Tagged With: Bank, Bitcoin, blockchain, ceo, CFTC, commodity, Commodity Futures, Companies, crypto, cryptocurrency, data, ETF, Futures, Go, information, investment, Market, money, New York, scam, scams, tax, Trading, uk, us

Blockchain: The Technology Making Fashion Industry Transparent

March 24, 2021 by Blockchain Consultants

Codezeros

Sustainability and transparency largely remain as two significant topics in the realm of the global fashion industry. Brands and retailers are slowly beginning to pay improved attention to the social and environmental impact. This is done by adopting improved new ways of introducing more transparent norms which remains more of a challenge.

Thanks to the emergence of new technologies such as blockchain in the fashion industry, retailers are able to improve the traceability of the supply chain and offer a more transparent and streaming policy.

How does Blockchain Technology Make the Fashion Industry Transparent?

Due to globalization and its impact, most brands are not aware of their products, and hence communicating this information seems to be the need of the hour. The advent of blockchain technology serves the cause and helps to make the industry a lot more transparent and easy to access.

Here is how the technology meets the present challenges in the retail industry.

Resolves counterfeiting issues:

According to the Global Brand Counterfeiting Report of 2018, it is estimated that online and offline counterfeiting has reached a few billion. There is no such way to prove a claim as offered by a seller to the customer, unless and until the customer browses the transaction history to review the same.

However, thanks to Blockchain Technology Development and its presence throughout the supply chain, it helps the consumers to acquire reliable information about the product. This helps customers to acquire the necessary information and reject the counterfeit products from the ones which come from questionable units. This has already been tested by several eminent brands and received a valuable impression in the industry.

Supports sustainability:

The technology is equipped to offer the capability of tracking digital and physical products throughout the lifecycle. This transparency helps to offer producers a deep insight into the value chain and offers them the guarantee of a credible third-party goods handoff. Through tracking the progression, the companies come with the right potential to expand a sustainable and ethical creation along with the consumption of a commodity and on a global scale.

Improved tracking:

The technology is enabled to efficiently track royalty payments. Not only does it allow the designers to create an unalterable proof of producing the designs, but it also allows the creation and tracking of trademarks, license designs, and royalty programs or sales that originate through the designs.

Improved business functioning:

Presently, the total number of stakeholders present in the production as well as the distribution line holds several standalone datasets. However, blockchain brings the supply chain to a digital platform. As a result, it helps to save the weeks required to identify and scrutinize the origin and the supply line.

It ensures that the record is not lost or destroyed when it is added to the network. It also helps to lower down the operational costs by offering a three-fold benefit, including improved data management, lowered risks pertaining to counterfeiting, and a transparent supply chain.

Transfers ownership:

With the passage of time, digital clothing is largely becoming popular. In this scenario, the garment gets transferred through eminent blockchain technology which makes it difficult to counterfeit the design.

Tips to get started with it:

There are a number of businesses looking forward to combining blockchain and fashion to maximize its benefits and opportunities. This is when it is ideal to get in touch with the best company providing Blockchain Technology in Fashion Industry. Discuss designing a product that would help you gather information from the right individuals.

Moreover, investing in the development process helps you attain details about the raw materials used, the fabrics, and the chemicals. Do not forget to ask the developers how the information will be accessible by the consumers.

The next step will need you to decide the level of trust you intend to operate in. Plan on opting for a blockchain platform, and with a varied platform being present with unique characteristics, it is a must to choose the right one.

The future is beyond traceability:

Blockchain in the realm of fashion is all about supply chain traceability for the near future; however, it can offer a lot more. Improved technological advancement such as sensors in the fabric allows the piece to get scanned. This facilitates all information to appear on the screen, and much beyond the supply chain.

Conclusion:

Blockchain technology thus facilitates improved retail functioning by offering flexibility to the customers to evaluate the complexities involved in a product and its process to be brought to the market. This is largely helpful to alter their perception and minimizes wastage.

With this technology, you can easily determine the number of times the laundry is washed; assess the durability issues, and more. This is not too futuristic and with further development in the field, this kind of technology can be one of the best tools for implementing a rather circular economy, with blockchain being just the beginning.

Blockchain: The Technology Making Fashion Industry Transparent

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Filed Under: blockchain, blockchain development, blockchain technology Tagged With: blockchain, blockchain-development, blockchain-technology, Business, commodity, Companies, data, design, developers, Digital, economy, fashion, fashion-trends, information, Investing, IP, LINE, Market, payments, supply chain, Technology

Crypto Businesses Granted Liberty to Operate at DMCC in Dubai

March 22, 2021 by Blockchain Consultants

According to the recent announcement, crypto businesses have been granted the freedom to operate in Dubai Multi-Commodities Centre (DMCC) once registered licenses are admitted.

The report mentions that DMCC has entered into a memorandum of understanding (MoU) with the SCA (Securities and Commodities Authority) to build a regulatory framework for corporations endeavoring, issuing, and trading crypto assets in Dubai city.

This strategic alliance intends to foster growth and development by bringing Blockchain and cryptographic technologies ecosystem in Dubai city.

The Dubai Multi Commodity Centre (DMCC) was founded in 2002 as a government body tasked with improving commodity exchange flows across Dubai, involving approximately 18,000 businesses from various areas and industries.

Agreement to Foster Growth and Promote the Development of Blockchain Applications in Dubai

According to the announcement, the SCA will grant permits for crypto-related companies seeking to set up in DMCC, collaborating closely with the onboarding departments at DMCC. Following that, the SCA would control crypto operations in compliance with their policies, which were declared last year in October 2020, in order to create an interconnected environment for the crypto and Blockchain industries.

Ahmed bin Sulayem, Executive Chairman and Chief Executive Officer of DMCC, also talked about the agreement. According to him, this collaboration builds the foundation for coming partnerships in the crypto domain. Furthermore, he believes that this is a big step toward the opening of the DMCC Crypto Centre, which we will bring to the market in the upcoming years.

Bin Sulayem appears delighted with the partnership with SCA as he mentioned that cutting-edge developments are at the core of our policy, and they will play a vital role in future trade development across Dubai. In his words, “We are able to develop and grow the centralized supervision of the crypto sector to our business district in Dubai by partnering with SCA.” 

DMCC is making it simpler for crypto and blockchain enterprises to set up and operate in Dubai city. In 2020, it was reported that DMCC established an agri-commodity trading and sourcing platform named Agriota E-Marketplace based on Blockchain technology to link Indian farmers with the UAE food sector.

To get instant updates about Blockchain Technology and to learn more about online Blockchain Certifications, check out Blockchain Council. 

Crypto Businesses Granted Liberty to Operate at DMCC in Dubai

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Filed Under: blockchain, blockchain technology, cryptocurrency Tagged With: bitcoin-news, blockchain, blockchain news, Business, chairman, chief, chief executive officer, commodity, Companies, Compliance, crypto, cryptocurrency, Developments, Dubai, Environment, exchange, executive, Food, government, Market, Technology, Trading

The Token Taxonomy Act of 2021: Preemption of inconsistent state laws

March 14, 2021 by Blockchain Consultants

In these hyper-partisan times, any bill that includes sponsors from both sides of the aisle is noteworthy. There is one pending now that is particularly important in the crypto space. On March 8, 2021, H.R. 1628, the Token Taxonomy Act of 2021, was introduced by representative Warren Davidson. It was co-sponsored by representatives Ted Budd, Darren Soto, Scott Perry and Josh Gottheimer.

Terms of the Token Taxonomy Act of 2021

Among other provisions, the bill would exempt “digital tokens” from the definition of security, and it would also preempt inconsistent state regulation. Crypto assets would need to meet certain specified requirements in order to count as “digital tokens” under this act:

  • First, the interest must be created either in response to the verification of proposed transactions, or pursuant to rules for creation that cannot be altered by any single person or persons under common control, or “as an initial allocation of digital units that will otherwise be created in accordance” with either of the first two options.
  • Second, the assets must have a transaction history recorded in a distributed digital ledger or data structure on which consensus is reached via a mathematically verifiable process.
  • Third, after consensus is reached, the transaction record must resist modification by any single person or persons under common control.
  • Fourth, the interest must be transferable in peer-to-peer transactions, and fifth, it cannot be a representation of a conventional financial interest in a company or partnership.

Davidson has explained that the purpose of the bill is to improve regulatory clarity. In addition, in an interview, he suggested that if the bill had been passed in prior years, “it could have forestalled enforcement actions such as the Security and Exchange Commission’s (SEC’s) suit against Ripple Labs.” This comment examines in more detail how the bill might actually play out with regard to certain forms of crypto.

How would Bitcoin fare?

As virtually everyone in the crypto space is likely to know, Bitcoin (BTC) is issued exclusively in mining transactions. In other words, it is created “in response to the verification of proposed transactions,” meeting the first of the requirements to be a digital token. In addition, its transaction history is maintained on the blockchain, satisfying the second of the above requirements.

The entire process is set up to resist modification or change absent consensus among a large and decentralized community. The entire Bitcoin network was set up to be peer-to-peer although numerous exchanges now also exist to facilitate transfers. Finally, Bitcoin is not associated with any company or partnership, and it represents neither an ownership interest nor the right to share in revenues.

Given these facts, Bitcoin would clearly be a digital token. As such, under the new definition proposed in the act, Bitcoin would be excluded from the definition of security. Moreover, under section 2(d) of the act, state securities law regulations regarding registration or imposing limitations on the use of the asset would be precluded from applying to Bitcoin, with the sole proviso that states would retain authority to regulate and enforce actions based on fraud or deceit.

Because the United States Securities and Exchange Commission already excludes Bitcoin from the reach of the federal securities laws, this would not be a change in federal requirements. It would, however, create a uniform state system pursuant to which Bitcoin is excluded from regulation as securities except as to fraud claims.

Would Ripple’s XRP be a “digital token?”

It is not, however, accurate to assume that all crypto assets will count as digital tokens under the act. Consider Ripple’s XRP (and the pending action by the SEC against the company and its executive officers). For those not totally familiar with Ripple and XRP, the XRP ledger was completed by Ripple in December 2012, and the computer code set a fixed supply of 100 billion XRP. When launched, 80 billion of those tokens were transferred to Ripple, and the remaining 20 billion XRP went to a group of founders.

According to the SEC’s complaint, from 2013 through 2014, Ripple made efforts to create a market for XRP by having the company distribute approximately 12.5 billion XRP through bounty programs that paid programmers compensation for reporting problems in the XRP ledger’s code. From 2014 through the third quarter of 2020, the company sold around 8.8 billion XRP in the market and through institutional sales, raising approximately $1.38 billion to fund its operations. Resales, including resales from XRP previously distributed to the company’s founders, were also occurring at this time. So, would XRP be a digital token and thus exempt from regulation as a security under the act?

Related: SEC vs. Ripple: A predictable but undesirable development

The first requirement is actually the biggest problem for XRP. The bill contains three options for the first part of the test, but it is unclear that XRP meets any of them. Because all of the tokens were issued at the launch, there is no argument that XRP is created “in response to the verification or collection of proposed transactions.”

In addition, because all of the tokens were issued at launch, it is clear that Ripple or those in control of the company could have altered the terms under which XRP was to be issued. This leaves the argument that there was “an initial allocation of digital units that will otherwise be created in accordance with” one of the first two alternatives, and it is doubtful that this happened. XRP was never set up to be mined, and Ripple certainly had the ability to maintain control over the asset since it owned the vast majority of it. This makes it appear that XRP would not actually be a digital token, although the facts might be arguable.

It should be noted that the act also provides a very limited exemption for any “digital unit,” which is a much broader term that covers any “representation of economic, proprietary, or access rights that is stored in a machine-readable format.” The exemption covers any person who has acted with a reasonable and good faith belief that the digital unit is a digital token, but it only applies if all reasonable efforts are used to stop sales and return any unused proceeds to purchasers within 90 days of notice from the SEC that it has concluded the interest is a security. Ripple has obviously declined to follow this course, as it is fighting the current SEC enforcement action in court.

While this analysis and result may not disappoint everyone in the crypto community since some have long argued that XRP is not a “true” crypto asset anyway, it is a clear indication that the act does not create a free pass for all crypto offerings. It also would not be the end of the road for Ripple, which could still argue that XRP is not an investment contract under the Howey Test.

Would Facebook’s stablecoins have been “digital tokens?”

One more illustrative example might also be important to understand how the act would work if adopted. Consider Facebook’s original proposal for Libra. On June 18, 2019, Facebook announced in a white paper that it was actively planning to launch a cryptocurrency to be called Libra in 2020. The entire proposal has been renamed and updated, but the terms of the original white paper are the ones that are considered here.

Libra was conceived by Facebook and designed to be a “stablecoin,” with its value pegged to a basket of bank deposits and short-term government securities for a group of historically stable fiat currencies. It was to be governed by the Libra Association, a Swiss nonprofit organization.

The Libra Association was conceived as a group of diverse organizations from around the world, including not only Facebook but also major investors such as Mastercard, Visa, eBay and PayPal. The original plan was to have approximately 100 members for the association by the target launch date, each of which was to contribute $10 million. In exchange, the association members would have the right to oversee Libra’s development, its real-world reserves and even the Libra blockchain’s governance rules. The group of 100 members would also be able to act as validator nodes for the asset.

Libra was not set to be mineable, but rather to be issued as and when the Libra Association determined. The white paper also described a system that would have allowed the association to change how the system operated and, in particular, set rules for the issuance of the assets. While the association would have a relatively large number of diverse members with their own objectives and interests, they would be acting through the association, which is itself a single legal entity. This means that the Libra coin (as originally conceived) would not have fit within the definition of a digital token as set out in the act.

Would that mean Libra would have been a security? As was the case for XRP, the answer is “not necessarily.” The next step would be to ask whether it would have qualified as an investment contract. Depending on how the association determined to issue the coin, and whether there was any possibility of appreciation (which seems unlikely, as it was supposed to be pegged to fiat currencies as a “stablecoin”), the Libra coin might or might not have been an investment contract. The determination would have been based on the same Howey Test that the act was reportedly designed to clarify.

Conclusion

Defining security to exclude digital tokens means that the SEC will retain no authority to regulate fraud in connection with transactions involving these interests, leaving the bulk of enforcement to agencies like the Commodity Futures Trading Commission. While the CFTC has sought enforcement against those who engage in fraudulent or deceitful conduct in the crypto spot markets (where transactions in crypto rather than those involving futures or other derivatives are involved), it lacks the resources available to the SEC.

For example, the CFTC just announced its first enforcement action involving a pump-and-dump scheme, while the SEC’s list of prior crypto enforcement actions includes a number of market manipulation claims in addition to claims against John McAfee, the target of the CFTC’s recent action.

This difference is explainable, in part, by the relative size of the two agencies. The SEC’s 2021 budget justification plan called for support in the amount of $1.895 billion. On the other hand, the CFTC’s 2021 budget request was a relatively modest $304 million. Moving fraud enforcement to the CFTC is, therefore, not necessarily prudent or wise.

In addition, while it is quite clear that the proposed definition of digital token is likely to be far simpler than the Howey test, it is not necessarily going to replace that analysis in all cases.

Does the Token Taxonomy Act offer increased clarity? Absolutely. Preemption of inconsistent state laws could be particularly helpful in this regard. Does it provide certainty in all cases? No, but that is not necessarily a bad thing. Is the act a good idea? Sadly, probably not. Providing a ready exemption from registration for digital tokens might be supportable. Removing them from the definition of security in the current climate where fraud continues to be a major concern is probably not.

The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Carol Goforth is a university professor and the Clayton N. Little professor of law at the University of Arkansas (Fayetteville) School of Law.

The opinions expressed are the author’s alone and do not necessarily reflect the views of the University or its affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

The Token Taxonomy Act of 2021: Preemption of inconsistent state laws

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Filed Under: blockchain technology Tagged With: analysis, arkansas, article, Bank, Bitcoin, blockchain, CFTC, commodity, Commodity Futures, crypto, cryptocurrency, Currencies, data, decentralized, derivatives, Digital, eBay, exchange, Exchanges, executive, facebook, fiat, format, fraud, Futures, government, information, investment, Law, Ledger, Libra, Libra Association, Market, Markets, mastercard, mining, opinions, other, PayPal, Regulation, ripple, ripple labs, SEC, Securities and Exchange Commission, security, Space, Stablecoins, Tokens, Trading, United States, visa, world, xrp

Searching deep: The quest for Bitcoin scalability through layer two protocols

March 7, 2021 by Blockchain Consultants

As the largest cryptocurrency by market capitalization, Bitcoin’s (BTC) effectiveness as a medium of exchange is still a matter for debate. Unlike fiat money that is inherently infinite in supply and must be managed by a central bank, Bitcoin is akin to gold in that it is commodity money with a finite supply of 21 million.

However, the supply cap is not the major stumbling block for BTC as a medium of exchange, but rather, the transaction throughput. While Satoshi Nakamoto envisioned Bitcoin as a peer-to-peer electronic cash system capable of facilitating online payments without a central counterparty, seven transactions per second on average is hardly the standard for scalability.

Indeed, scalability is only one of three major metrics required for any currency system to succeed as a medium of exchange along with adoption and liquidity. There is an argument to be made of Bitcoin’s growing adoption around the world across several strata of the global economy.

Price volatility that has seen Bitcoin peak at $58,000 and then briefly fall below the $30,000 mark within the first two months of 2021 likely indicates lingering issues with liquidity. However, it’s important to note that the current period is being characterized by a bullish advance that began in October 2020. Ultimately, some analysts expect Bitcoin’s volatility to level out as more institutions take up positions in the market.

What do the critics say?

Bitcoin’s scalability problem is even older than the network itself. Indeed, upon first proposing the system back in 2008, James A. Donald replied to Satoshi Nakamoto with: “The way I understand your proposal, it does not seem to scale to the required size.”

This astute observation has been at the heart of some of the more contentious and controversial debates within the Bitcoin ecosystem. Disagreements over how to solve the problem have even resulted in multiple hard forks.

These days, when Bitcoin critics cannot definitively dismiss BTC’s store of value proposition, scalability seems to be a low-hanging fruit with which to craft some anti-Bitcoin soundbite. Speaking during the 2021 Daily Journal annual shareholders meeting, Berkshire Hathaway vice-chairman Charlie Munger remarked that Bitcoin will never become a global medium of exchange due to its price volatility.

The 97-year-old billionaire investor is no stranger to espousing anti-Bitcoin sentiments. Indeed, together with Warren Buffett, the two Berkshire Hathaway chiefs have been responsible for some of the more colorful negative remarks among Bitcoin. From being “rat poison squared” to “trading turds,” Munger once slammed BTC investors for celebrating the life and work of Judas Iscariot.

Munger, like Buffett, is among a class of Wall Street Bitcoin critics who have often claimed that Bitcoin has no intrinsic value. However, with the price of BTC continuing its relentless upward advance over the past decade while attracting significant institutional interest, detractors now seem to be left with only the scalability argument.

Even among mainstream crypto adopters, Bitcoin’s inability to scale at the base protocol level also seems to be a significant issue. In an address during the Future of Money conference back in February, Mastercard executive vice chair Ann Cairns declared that BTC was not suited to its crypto payment plans.

According to Cairns: “Bitcoin does not behave like a payment instrument […] It’s too volatile and it takes too long to transact.” As previously reported by Cointelegraph, Mastercard recently announced plans to offer support for cryptocurrency payment on its network.

Lightning Network node count rises, but slowly

Together with the 10-minute block creation time, the one-megabyte block size acts as the actual transaction throughput constraint for the Bitcoin network. The block size debate of 2017 that ultimately led to the Bitcoin Cash hard fork proved the adamance of Bitcoin purists to the 1MB block size ethos.

With the “big blockers” now firmly on their own Bitcoin forks like BCH and Bitcoin SV, the question of how to get BTC to scale without changing a thing on the protocol level still lingers. From Bitcoin banks to sidechain protocols, and even deferred settlement infrastructure layers like the Lightning Network, several developmental projects are currently ongoing to make Bitcoin more suitable for microtransactions like paying for coffee.

At a high level, these scaling solutions involve the creation of trustless, centralized (pardon the oxymoron) entities or layer-two networks that maintain lightweight versions of the BTC ledger to handle the actual “coin” transfers without having to maintain the full Bitcoin ledger. These sidechain implementations then transmit the transaction data for final settlement on the actual Bitcoin network.

LN is one of the major Bitcoin scaling solutions under active development by several organizations including Blockstream and Elizabeth Stark’s Lightning Labs. The Lightning Network is perhaps the most popular of the “defer-reconcile” scaling implementations that allow users to create payment channels that offer instant coin transfers at minimal fees.

According to data from LN data aggregator 1ML, there are over 17,300 public Lightning Network nodes and more than 38,400 channels. LN capacity is currently north of 1,100 BTC.

While LN adoption is yet to attain significant heights, layer-two implementation might be about to get a boost with Zap — a Visa-backed Lightning Network payments startup. In February, the company launched Strike — a payments and remittance app that utilizes the Lightning Network for payments.

Strike has also partnered with crypto exchange platform Bittrex to deliver LN-powered payments to over 200 countries around the world. The company plans to issue Strike Visa cards to users in the United States as well as in Europe and the United Kingdom before the end of the year.

What about Statechains?

There is a school of thought that argues Bitcoin scalability is only possible via layer-two solutions. Ruben Somsen, Bitcoin developer, crypto podcaster and founder of the Seoul Bitcoin meetup, is one of the proponents of this argument.

Somsen is an advocate of Statechains, another layer-two implementation but with a twist — transaction participants send private keys instead of actual unspent transaction output, or UTXO. The process involves loading a Statechain-compatible wallet with the exact BTC sum required for the trade followed by the transfer of the private keys from the sender to the recipient.

Since transferring private keys across the blockchain is fee-less and instant, the Statechain idea seems to have gained some traction within the Bitcoin scalability discussion. However, revealing private keys comes with significant security implications.

Thus, in recent times, the Statechain concept has been modified to include a third entity that acts as an intermediary between the transacting parties. Detailing the workings of this counterparty federation within the Statechain matrix, Somsen told Cointelegraph:

“Statechains allow you to take your coins off-chain (meaning cheap transactions) in a way that puts a minimum amount of trust in others. You have to trust a federation, but the federation won’t know that they are getting partial control of your coins, and they can’t refuse peg-outs (moving back to the Bitcoin blockchain).”

Blockchain infrastructure firm CommerceBlock is one of the companies actively developing Statechains as a viable scalability solution for Bitcoin. The firm is credited with introducing the counterparty federation or “Statechain entity” to improve the security of the system. In a conversation with Cointelegraph, CommerceBlock CEO Nicholas Gregory outlined how Statechains operate:

“At a high level, Statechains are simply a way to transfer your private key to another user. To facilitate this, you have to cooperate with a Statechain entity. However, at all times, the user has full control of their funds; at any anytime, they can withdraw their Bitcoin to their own custody. Therefore, the transfer is instant and private.”

While Statechains is a scalability solution on its own, some proponents agree that the system could integrate with the Lightning Network. With Statechains operating on the UTXO level, it is theoretically possible for another layer-two protocol such as the Lightning Network to be implemented on top of Statechains.

Such a hybrid integration could solve the limited node capacity issue of Lightning Network while ensuring the ability to facilitate multiple microtransactions via Statechains. Since the exact transaction amount is loaded into Statechain wallets, it’s impossible to split UTXOs making Statechain in its present iteration unsuitable for microtransactions.

According to Somsen, the Statechains can operate independently as well as function together with the Lightning Network: “Statechains complement the Lightning Network perfectly because opening and closing channels can happen off-chain. This removes a lot of the friction that exists in the current Lightning Network design.”

For Gregory, integrating Statechains with the Lightning Network is among the future developmental plans for CommerceBlock: “Statechains are instant and do not require liquidity lock up; however, you are sending the private key, so you can’t do small or specific denominations. This is where LN excels.”

With these developments and more, the quest for a workable Bitcoin scalability solution is still ongoing. While critics, like Munger, who have been consistently wrong about BTC, continue to drop soundbites, developers are hard at work to solve one of the longest-running operability issues concerning Bitcoin.

Searching deep: The quest for Bitcoin scalability through layer two protocols

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Filed Under: blockchain technology Tagged With: Adoption, Bank, Banks, BCH, Bitcoin, bitcoin cash, Bitcoin SV, blockchain, btc, Cash, Central Bank, ceo, Chair, commodity, Companies, Conference, crypto, crypto exchange, cryptocurrency, Currency, Custody, data, design, developers, Developments, economy, Europe, exchange, executive, Fees, fiat, Fiat Money, founder, Future of Money, gold, Infrastructure, Ledger, lightning network, Mainstream, Market, market capitalization, mastercard, money, payments, remittance, satoshi-nakamoto, security, Seoul, United Kingdom, United States, visa, Wall Street, world

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