CPA Practice Advisor

SEP 2018

Today's Technology for Tomorrow's Firm.

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SEPTEMBER 2018 ■ 5 FROM THE TRENCHES to gain mainstream adoption but has the possibility to truly change the world. ■ It has the potential to change financial markets in the same way that the Internet changed communication and commerce in the last 20 years. ■ It is highly speculative, volatile, changing constantly, but is constantly improving. There are measurable successes every year. Cryptocurrency has evolved as a mechanism for organizations to launch new businesses by offering an Initial Coin Offering (ICO), similar to an IPO. An ICO is faster, less expensive and almost unregulated. ■ Filecoin ICO raised $257M ■ Tezos ICO raised $232M ■ EOS ICO raised $180M ■ Bancor ICO raised $153M What? Bitcoin ■ The oldest, most widely used, and highest market capitalization cryptocurrency. ■ Proposed by Satoshi Nakamoto in a 2008 white paper, the current blockchain for Bitcoin started in 2009 ■ A Bitcoin is a “store of value,” just like any other investment, security, or fiat currency. ■ It can be used to store wealth or conduct business transactions just like any other financial instrument. ■ The algorithm sets a hard supply limit of 21M Bitcoins, which should be reached around the year 2140, with about 16.8M currently in circulation. ■ Adjusts itself to generate a new block of transactions in its blockchain every ten minutes. ■ Uses “proof of work” to verify transactions and volunteer miners who are paid in “printed” bitcoins for their work maintaining the bitcoin ledger. ■ Is the “parent” currency to Bitcoin Cash and Bitcoin Gold, which were spun off in hard forks of the currency on 8/1/2017 and 10/24/2017. ■ Bitcoin was a novelty technology for the first several years of its existence. It was given away or traded for almost nothing in the beginning. It started gaining serious real-world value in 2015 and exploded in growth in 2017. ■ In 2010, a person purchased two large pizzas for 10K bitcoin. At its peak valuation in 2017, those pizzas were worth $180M. ■ The price has always been highly volatile and speculative, sometimes changing upwards of +/- 50% in a given day. ■ In the beginning, Bitcoin was the currency of choice for illegal goods, bribery, and other nefarious activities. ■ Bitcoin investors have been affected several times by large scale data breeches which resulted in the loss of millions of dollars. ■ Despite the significant ups and downs, Bitcoin’s valuation has consistently increased by a minimum of 200% year over year. A $10K investment in Bitcoin in 2010 would be worth upwards of $150M in 2018. ■ Bitcoin inspired additional blockchain and cryptocurrency technologies. Some of these technologies (e.g. Litecoin) were released to compete with Bitcoin, but others (e.g. Ethereum) were developed to fill a different need in the marketplace. Ether ■ Like Bitcoin, Ethereum is a store of value, but it is also a decentralized computational platform. Meaning, you can actually run applications or store data inside the Ethereum blockchain. ■ The transaction times and processing fees are considerably lower compared to Bitcoin. ■ Ethereum can be used in wide range of use cases from issuing insurance policies to performing supercomputer research for science discoveries. ■ Currently utilizes Proof of Work but will be transitioning to Proof of Stake in future releases. ■ There is not currently a hard supply limit of Ether, but that might change in future releases. There are approximately 100M currently in circulation. ■ Has wide adoption with technology, financial, healthcare and government agencies with the Enterprise Ethereum Alliance (EEA). ■ Historically, Ether is the cryptocurrency with the second highest market capitalization, and it runs on the Ethereum open source platform, which is also used for many “alt-coins”. ■ Proposed in 2013 by Vitalik Buterin, pre-seeded with funds from a crowd-sale in 2014 – system went live 7/30/2015. ■ Adjusts its algorithm to create a new block in its blockchain every 14-15 sec. ■ Miners are paid with transaction fees based on the complexity of the calculations needed – the units for this are called “gas.” ■ The Ethereum platform is configured to allow version updates through “soft forks” – the current version is called Metropolis (vByzantium). ■ There is an Enterprise Ethereum Alliance dedicated to the platform. Ripple ■ Ripple is a centralized real-time gross settlement system, currency exchange, and remittance network. ■ Offers secure, instantly nearly free global financial transactions of any size with no chargebacks. ■ Focuses on interbank payments between financial institutions. ■ Unlike Bitcoin, Ripple is a centrally managed blockchain with a US-based company behind the technology. ■ The hard supply limit is 100B units with approximately 39B currently in circulation. ■ A platform and a cryptocurrency (XRP), Ripple was created as a payment protocol to provide secure payments to members of an online network. ■ Originally founded as OpenCoin, but renamed Ripple Labs – funded by venture capital. ■ Has a smart contract platform as well. ■ Has been adopted by some financial institutions for cross-border fund transfers. Here are some of the financial institutions using RippleNet: Litecoin ■ Nearly identical to Bitcoin; in fact, it is a fork of the original codebase. ■ Main differences from Bitcoin: It uses a different hashing algorithm, increased total supply, and a decreased block generation time: 2.5 minutes compared to Bitcoin’s 10 minutes.

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