newsletter

How can “title” add value to the crypto markets?

466

Since the advent of virtual currencies, the concept of anonymity has been a hallmark of crypto assets. After all, the crypto space initially emerged from the ideas of libertarian thinkers who were unsettled about the centralised government control of economic activity. But on the other hand, anonymous transactions have increasingly attracted the attention of governments and regulators, too. For many, crypto is, arguably unfairly, perceived as the asset that finances and facilitates illegal activities, such as drug trafficking and money laundering. This is despite the fact that the criminal share of all cryptocurrency activity fell to just 0.34% in 2020.

Partly as a result of such narratives, crypto’s feature of anonymity – though undoubtedly attractive to some – deters many from investing in the space. For many, anonymity is associated with disreputableness and raises questions raises questions about the security of blockchain transactions. The most widespread concern stems from the infamous notion that if some of your crypto is stolen, it is usually gone forever.

This is the stigma that Eric M. Jackson, CEO and co-founder of TransitNet, wants to address. A Stanford graduate, Eric entered the financial services industry in the late 90s. He departed from Arthur Andersen a couple years before the company went down in an accounting scandal and ended up at PayPal. Hired directly by Peter Thiel, Eric ran Product Marketing at the company and developed the transactional revenue model that PayPal still uses today. The ideas, visions and technologies he worked with in the early days of PayPal profoundly impacted his thinking and approach to the crypto markets. It also influenced him as he launched TransitNet, an initiative that aims to establish the first offchain title registry for cryptocurrency.

Eric shared with us his thoughts on the similarities between the visions of early-PayPal and the current crypto movement, the benefits that title for crypto can offer both individuals and businesses, and how title can be a preferable alternative to stringent regulation.

Should all crypto always be anonymous?

The late 90s were infamous for currency contagions, the most notable being the Asian Financial Crisis of 1997. Exchange and interest rate manipulations led to a poor and uncertain economic environment, in which governments locked-up savings, checked accounts and limited withdrawals. The ensuing inflation eroded the purchasing power of money.

“Governments had effectively stolen wealth from their citizens,” Eric argues. “We saw PayPal as the answer to that. That it could empower people around the world to move their money and not be victims of what a government might do, and it could offer a greater degree of autonomy for people in their financial management.

“Now, obviously, PayPal didn’t end up fulfilling all of that vision. It ended up being much more of a commerce mechanism. It turned out to be a great company, though. It is a big platform used everywhere, but it was highly regulated and therefore highly limited in terms of what it could do.”

Almost two decades later, Eric sees signs that the vision he had encountered at early PayPal might finally be fulfilled. Eric believes that the emerging crypto space has the potential to bring about many useful changes in finance but the infrastructure around the market still requires much more development. Eric sees his innovation as providing some extra value to the market and contributing to this development. This is why he founded TransitNet in 2018.

“What I saw in crypto, broadly, was that it was still in its early days and still needed infrastructure. With the right infrastructure around, crypto could actually begin to achieve some of that life-changing potential that could really make it extremely useful for the world. And part of that, I think, is just being able to be part of the everyday economy and be approachable – to be useful and accepted in more places. That realisation was kind of the roundabout route that led me to think ‘Well, what about title?’”

The precise definition of “title” differs in different countries and jurisdictions. In broad terms, however, it is commonly defined as a trusted document representing legal ownership of an asset. Wrapping title around an asset means linking it to an owner. Cash, for instance, is a pseudo-anonymous asset because it does not have a title. Putting cash in a bank, however, wraps title around the asset, as the bank account is linked to an owner. If you can put title on your cash, why couldn’t you do that with your cryptocurrency?

As Eric asks: “Should all crypto always be anonymous, or pseudo-anonymous? What do you give up when you don’t have optionality around title for some of your crypto?

“As we dug into that, the realisation we came to is that you actually give up quite a lot. And that’s got to be holding back the willingness of players throughout the economy – not just individuals, but also businesses and service providers that they would interact with – from using crypto.

“So we realised that title could be one of those key pieces of infrastructure, that could add a lot of value across the ecosystem.”

The idea of TransitNet was forerun by another of Eric’s companies, CapLinked, which he founded in 2010. CapLinked provides secure cloud-based sharing tools, specialising in B2B sharing use cases. These include M&A transactions and financial due diligence processes, where parties need to share data with one another but cannot keep it permanently. The first use cases of title, later applied to the crypto markets, were related to the products offered by CapLinked.

“We had a core competency, security, and identification of who the other party is. That led us to realise we can apply these core competencies to this concept of title. We intentionally decided to build a very simple beta product that we called the Asset Collision Identifier. We focused on B2B use cases, so we marketed this to just a handful of audit firms and other service providers in the industry to give them an additional tool to verify titles. This was not yet a full blown title registry.

“There was a lot of enthusiasm for it. The tool is very simple and lets you register and confirm if anyone else in system also has a client that would be claiming the same address – a specific use case that would illustrate a problem, and probably fraud.

“We built that and got great feedback. It showed a willingness on the part of players in the ecosystem to want to have tools around title. And we took that as encouragement that we should actually go full-blown, build TransitNet, and spin it off as a separate company, raise funding for it, and build a title registry that we’ll be launching later this year.”

The many use cases of title

Eric explains that title essentially represents a high likelihood of ownership, as recorded by a third party. Think about title insurances. Although you bought your house and pay your mortgage, you probably still purchase a title insurance just in case there is a claim against it. The third party recording is often a government entity. Now TransitNet is taking this practice of title registry into the crypto space, taking over the role of the third party.

“So how do you apply that to a world where everything is built to be pseudo-anonymous? Well, what we are doing is building this title registry where you can actually go and register your wallet address, and perform a variety of actions around it to confirm that it belongs to you.

“If, using title, you can establish a third party record-keeping system, then you can actually add some value – or at least the option of some value – to a lot of people. Really what we’re looking to build is the option – and I think that’s important to stress, the option – of establishing title around a crypto wallet address. This would mean people are able to tie that back and wrap title around any assets associated with that address. So this immediately is clearly differentiated from anything that’s tracking people, that’s big-brother-like. That’s quite the opposite. This is a an optional, voluntary system that’s going to enable the establishment of title for situations where that would be beneficial.

Title around crypto wallets could dismantle the concerns of individuals who are not getting involved in crypto because of fears regarding security. This development could, therefore, potentially mean a larger base of crypto users. Even though crypto is undoubtedly becoming more and more popular, stories like this continue to deter many from entering the realm of decentralised finance:

“In cases like that,” Eric argues, “the legal system can only be assisted by having title. So being able to prove that, “oh, this was mine, and this is my address.” With title, you can therefore seek a legal remedy in some cases.”

Perhaps more importantly, title around crypto assets can also facilitate the asset’s introduction in a greater range of financial activity. This is because it can serve as collateral or a proof of reserve, for instance. Crypto as a collateral on a loan does already exist as a concept, but it usually requires one to lock up their crypto assets. This sounds unimaginable with traditional collaterals, such as a house or a car, doesn’t it? The lender, such as a bank, might have a legal claim on the collateral if you fall behind on your debt payments and your loan gets cancelled. But otherwise, you can of course make proper use of your house or car while you are fulfilling your debt payments.

Title could be the missing link that would correct the crypto-as-collateral phenomenon. Proving with legal documents that the crypto (collateral) is linked to a wallet, titled with your name, might serve as a viable alternative to locking up the assets. Furthermore, title could possibly introduce further use cases for cryptocurrency in industries such as auditing and insurance.

“If you’re a company preparing your financial statements, being able to demonstrate all the accounts and wallets that are owned by the company becomes a lot easier and a lot more clear,” Eric argues.

“Or think about where the insurance market could go in the years to come. You could produce a simple report. It would come from TransitNet, and it would show levels of documentation and levels of certainty around title claims. It would be generated by you, and the permission would be granted by you, so there is no privacy concern. It is going to a party that you wanted to have it. The insurance underwriter would receive that and have a great level of certainty that all those wallets are indeed yours. They could then commence writing a policy for you.”

Eric explained that TransitNet will be a chain-agnostic solution, allowing the user to claim title over a variety of different types of addresses, and pull all those records together:

“If you have ten different wallets on seven different chains, and if you need all those records to be pulled together, you don’t have to authenticate yourself more than once. Being able to associate with all those different accounts easily and having them in one place is actually quite beneficial. It might be very helpful securing a future loan that you might want to take out or, for example.

“So, to the extent that we can be a piece of the puzzle that helps create additional security and provide additional tools over time, I think that there’s a lot of value in TransitNet.”

Disarming regulatory concerns

Approaching the question of title from a more ideological perspective also underlines another fundamental benefit that TransitNet could bring to the table. Beyond attracting more individual investors and enlarging crypto’s potential use cases in the financial industry, title could also disarm regulatory concerns.

“I think that governments are going to get involved,” Eric notes. “That’s inevitable, especially if you’re successful. And to the extent that crypto has been successful – if you want to measure it by market cap – you can’t help but attract governments. Hopefully they make good choices and not bad ones.”

“Our view is that it is better to have an industry solution, that is established in the market and grows in the market, than something that’s imposed. In fact, building something like TransitNet could head off further regulation, particularly from the Securities and Exchange Commission (SEC). And where the SEC goes the world goes; simply because of the size of American capital markets. So I think there’s a real pro-libertarian, pro-free market argument for what we’re doing because, again, it’s optional, it’s not forced on anyone, and it is intended to be a market solution. It solves real risks that are out there, and to the extent it does that, I think it can head off and mitigate demands for regulation.”

To understand the importance of providing an alternative for regulation, one has to consider the possible impact of excessive regulation on the crypto space. In an era characterised by increased regulatory pressure, innovative market solutions such as the one offered by TransitNet might be vital for the development of the crypto movement. There is undoubtedly an increased appetite in the Biden administration to regulate the industry, in a manner that many fear could be damaging.

“I think, broadly speaking, you can only look at this directionally. It’s hard to predict exactly what will come out of the different regulatory bodies. But I think there’s a real impulse on the part of the new administration to regulate more. There’s scepticism of markets. The administration here is fairly centrist Democrat – or at least the president is. But he’s got a lot of pressure from the left-wing that’s very consumer friendly, and they fear that anything that causes the risk of loss for consumers is dangerous. So, I think there’s a real impulse and a lot of pressure to increase the amount of regulation.

“There was a proposal floated around at the end of last year under the last administration, by the Treasury Department, about additional identification around self-host wallets. They never really went anywhere. We’ll see if that returns, but we are also looking for signs that pressure for identity requirements will increase. So that’s just another place where, again, we think we could jump into this and add something positive that could be helpful for people, and mitigate harm that could be done by excessive regulation, which will be the gut instinct of Washington D.C for the next four years.”

Currently, TransitNet is primarily focused on the United States, and the regulatory environment there. Eric is, after all, planning to launch in the US soon. Nevertheless, Eric does not see many barriers to extending operations across the Atlantic. Complying with UK and EU laws, and these jurisdictions’ slightly different definitions of title, should not pose a particularly big challenge for TransitNet. More interesting could be extending their operations to other parts of the world to less economically developed countries. In some of these countries, the concept of title does not even exist yet. Introducing title in these places might be another area where TransitNet could add value.

“We anticipate making the product available to United States residents later this year, and we want to open it up broadly soon thereafter,” Eric shares. “We intend to have a product that has universal applicability. Obviously, the way title will be interpreted is going to vary region by region. In some parts of the world, the concept of title is much less advanced. People live in homes where they don’t necessarily have title to them. That is just a convention. But in situations like that, when you’re going into those sorts of markets, then you’re adding something new that didn’t exist before, that might be very desirable.”

The impact that TransitNet, and the introduction of title, could have on the crypto markets in the months and years ahead will be fascinating to watch.

Author: Benjamin Jenei

#Crypto #Bitcoin #VirtualCurrencies #Regulators #Anonymity #Blockchain #Offchain #Inflation #Title #Collateral #SEC #FreeMarkets