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Sunday, April 29, 2018

Are Cryptos the Dot-Com of this Stock Market Cycle?

by Amy Erixon, Toronto

Many investors are scratching their heads over the mania around crypto-currencies.  In 2017, the number of new crypto initial coin offerings soared as the spot price of Bitcoin rose from $726 the day following Donald Trump’s election (all figures in this blog in USD) to near $20,000, one year later.  (As of this writing Bitcoin is trading at $9302, up from $7000 just a month prior).  Amidst this dizzying apparent tulip bulb market for Bitcoin, it is easy to miss the importance of  the distributed ledger technology that underpins the currency, and the increasing legitimization of Initial Coin Offerings (ICO’s) in the form of digital tokenized securities.  Token sales representing, for example, limited partnership interests in properties, oil or venture capital pools are growing rapidly - and like internet-based technologies that preceded them, offer the promise (but not necessarily the reality) of improved democratization and integrity of the investment industry. 

Properly designed, these investments look like any other form of security investment, except that they is traded on a distributed ledger technology platform (vs conventional public or private regulated market exchange).  Many of these tokens have hard asset backstops (ranging from gold to oil, to property limited partnerships or actual securities), while others don’t, which makes the space very confusing.   For a look at how quickly, and globally, this market is growing, refer to this interactive chart from    The size of offering is shown in size of the circle and region in which the offering originated is shown by color. 

Did you do a doubletake?  You read that right, as of November of last year, ICO’s had raised more than $6 billion, and the volume continues to rise exponentially, (a whopping $1.2 billion was raised in December 2017 alone).  For context, the worldwide supply of gold is estimated at a current market value of $6 Trillion, so even at this growth rate these ICOs are a long way from dominating securities markets.   Even so, the wild volatility of various crypto-currencies and the fact they trade largely on unregulated exchanges has banks and regulators scrambling to understand what should be done about the space.    In March 2018 the G-20 meeting included as agenda item #2 (following denuclearization of North Korea) discussion of the need for harmonizing regulations in this sector.   Canada and Luxemburg are two of the early adopter countries. 

According to a report published by International Data Corporation, worldwide spending on blockchain solutions is forecast to grow with a five-year compound annual growth rate (CAGR) of 81.2% to $9.7 billion in 2021.    Everywhere you look symposiums are being organized to discuss distributed ledger technology, its cybersecurity, and the wide range of utility for these software platforms – from identity to title registries, from health care to supply chains.   Proponents, such as Bill Fearnley, research director of Worldwide Blockchain Strategies, suggest: "Interest and investment in blockchain and distributed ledger technology (DLT) is accelerating as enterprises aggregate data into secure, sequential, and immutable blockchain ledgers, transforming their businesses and operations."  

Blockchain technology records transactions digitally, and uses software techniques to validate, secure and save transaction information in a distributed database in the form of a ledger.  The more distributed the information storage is, the more difficult it is to alter.  This represents an innovative way to keep track of many types of assets, commodities, currencies and smart contracts, bypassing conventional market exchanges and “market makers” (often costly intermediaries).    This technology is important for numerous reasons, among them: optional confidentiality, improved cybersecurity, and its potential technological integrity against revealed problems with our current centralized clearing systems - such allegations of “rigging” (LIBOR), manipulation (currency), and stock market latency inequality (highlighted in books like Flash Boys: A Wall Street Revolt, by Michael Lewis).   

Money has been digitized for 40 years in the form of wire transfers.    Why not investment securities, commodities and ultimately fiat currencies?  The digital revolution for commerce began in earnest in 1996 with the development of the hypertext transfer protocol (HTTP).  The commercialization of PayPal as a non-bank digital payment protocol came in 1998 – the very same year Google incorporated to market it’s search engine, designed to organize the rapidly increasing world of digital information on the world-wide web.   E-commerce app developers leaped into action, and poorly designed products gave us the bust.    But e-commerce didn’t go away, it simply learned from these failures how best to serve consumer demand. 

The world-wide web and e-mail, are technologies that work over internet infrastructure, but those two applications - now integral to personal and business life - are by no means the only platforms for utilization of the internet.   E-commerce is another and distributed ledgers are yet another internet-based platform.  We are just at the beginning of understanding the internet’s transformative potential. 
Crypto currency has great potential if it can be made more immune to counterfeit and fraud, less vulnerable to political manipulation, and function as a globalized store of value and basis for trading.  Poorly designed cryptos, like the dot.coms will surely fail along the way.  But distributed ledgers and crypto-tokens as a platform for trading securities, commodities, properties and even stocks may become significant exchange players in the medium future.   Betting against this may turn out to be akin to betting against Google and Amazon in 2003. 

For more information concerning distributed ledger networks, refer to my July 2017 paper entitled Distributed Networks and ArtificialIntelligence, Architecture of the Fourth Industrial Revolution. 

Thursday, April 19, 2018

Steering the Future of Mass Transit

By Rand Stephens (Houston)

Mass transit in major metropolitan areas may be reaching a fork in the road. Over the last few years, ridership has declined in both rail and bus services across the country. Factors such as lower gas prices, increased telecommuting, rising car ownership, and of course, Uber and Lyft have all contributed to this national trend. Commuter cities, including Houston, are now faced with either continuing to invest in their current transportation infrastructure, or, preparing for a variety of scenarios and outcomes that include fast-approaching technology such as autonomous buses and driverless ridesharing vehicles. 

Although Amazon has not publicly stated why they dismissed Houston for their second headquarters, its dismissal has spurred an internal reflection of what this great city has to offer and what can be improved upon. Lack of digital talent and relative lack of public transportation are two factors that many believe kept Houston off the shortlist. ­Our last blog addressed the first claim. This month, public transportation is our focus.

Rapidly-changing transportation technology is headed towards a disruption in the transportation industry that can translate into huge opportunities down the road. Arizona’s relaxed driving laws has put them at the forefront of driverless testing with companies such as Google’s Waymo and Intel’s Mobileye. Keolis, a transportation company, has already begun public transit service on open roads in Nevada, and Transdev is launching operations of their autonomous shuttles on open roads this year. The advancements are happening fast and furious. How will public transportation agencies respond?

Investing in traditional modes of public transportation and infrastructure is pointless when the future of transportation is shifting towards driverless technology. Houston Metro recently spent $2.1 billion dollars on the expansion of the Houston light rail system, including new park-and-ride lots and new buses for “controversial dedicated lanes along Houston’s posh Post Oak Boulevard.” (“Metro drawing up long-term Houston regional transit plan”, Houston Chronicle, Feb. 17, 2017)  The Woodlands Express is also planning to add new routes to accommodate increased population growth and increased job dispersal. Yet, ridership is down for both The Woodlands Express (18.7% decrease from the daily average in 2014) and for the Houston Metro  (7% decline from last year for all mass transit). In fact, nationally, the trend is the same, with 31 of 35 major metropolitan areas in the U.S. reporting a drop in public transportation ridership. (“Falling transit ridership poses an ‘emergency’ for cities, experts fear”, Washington Post, March 24, 2018)  Alternative forms of mobility are undoubtedly a factor, and mass transit systems should embrace the innovations and get onboard the transportation revolution.
   To remain relevant, transit agencies must have a vision for the future, including the role that driverless technology will play.”   - Lauren Isaac, Director of Business Initiatives for the North American Operation of EasyMile
When you’re the fourth largest city in the country, with a population of 2.4 million, you’re going to have traffic issues. However, Houston’s freeways overall are very well-designed with multiple lanes that are spacious and have lots of access roads for convenient turnarounds. This makes it perfectly positioned to support a system of ACES (Autonomous, Connected, Electric and Shared) vehicles. The technology for them to communicate with each other is already here. (“Self-Driving Taxis, Electric Trucks Arrive in 2019”, Houston Chronicle, Nov. 21, 2017)  The fact that Houston does not have a heavily equipped mass transit network may turn out to be a blessing. It is an opportunity for transit agencies to keep their eye on the road and work toward producing pilot programs and plans that re-imagine public transportation. The traditional public transit business model has already been disrupted. It seems senseless to continue investing in what will soon-be an outdated infrastructure…even if it means we lose an Amazon HQ2 in the process. 

(Rand Stephens is a Principal of Avison Young and Managing Director of the company’s Houston office.)

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