Sunday, July 30, 2017

On Crypto-currencies, the S.E.C., Howard Marks and more

  • Last week, the U.S. Securities and Exchange Commission said it “is aware that virtual organizations and associated individuals and entities increasingly are using distributed ledger technology to offer and sell instruments such as DAO Tokens to raise capital. These offers and sales have been referred to, among other things, as “Initial Coin Offerings” or “Token Sales.” … 
  • "Those who offer and sell securities in the United States must comply with the federal securities laws, including the requirement to register with the Commission or to qualify for an exemption from the registration requirements of the federal securities laws. The registration requirements are designed to provide investors with procedural protections and material information necessary to make informed investment decisions. These requirements apply to those who offer and sell securities in the United States, regardless whether the issuing entity is a traditional company or a decentralized autonomous organization, regardless whether those securities are purchased using U.S. dollars or virtual currencies, and regardless whether they are distributed in certificated form or through distributed ledger technology… 
  • "Distributed ledger and other emerging technologies have the potential to influence and improve the capital markets and the financial services industry. Interest in and funding for these technologies appears to be growing at a rapid pace. We welcome and encourage the appropriate use of technology to facilitate capital formation and provide investors with new investment opportunities. We are particularly hopeful that innovation in this area will facilitate fair and efficient capital raisings for small businesses. We are also mindful of our obligation to protect investors and recognize that new technologies can offer opportunities for misconduct and abuse."
  • Separately, Howard Marks (manager of $99 billion in assets at Oaktree Capital) said, “it is my firm view that the ability of these [digital currencies] to gain acceptance is just one more proof of the prevalence today of financial naiveté, willing risk-taking and wishful thinking … 
  • "In my view, digital currencies are nothing but an unfounded fad (or perhaps even a pyramid scheme), based on a willingness to ascribe value to something that has little or none beyond what people will pay for it. But this isn’t the first time. The same description can be applied to the Tulip mania that peaked in 1637, the South Sea Bubble (1720) and the Internet Bubble (1999-2000)."

  • It is likely that some (perhaps many) organizations currently pursuing an Initial Coin Offering (ICO) strategy will need to comply with SEC regulations if their tokens are sold and/or purchased within the U.S.
  • While still at an early stage of their evolutiondigital/virtual/crypto currencies along with distributed ledger and “smart contract” technology represent the next stage in how we purchase and exchange products and services.
  • However, long-term success will require 1) executing transactions in a secure and timely fashion, 2) providing services that are easy to use and access, 3) adapting to a growing community of users, 4) addressing the challenges of cyber-crime, 5) complying with various laws and regulations and 6) confronting competition from incumbent financial players as well as payment service introductions by firms such as AlibabaAmazonAppleGoogleFacebookPayPalSquareTencent and others.
  • Regarding Howard Mark’s comments – His concerns about  “financial naiveté, willing risk-taking and wishful thinking” in today's market seem valid.

Sunday, July 23, 2017

Busted on the Dark Web

  • Last week, the U.S. Department of Justice announced “the seizure of the largest criminal marketplace on the Internet, AlphaBay, which operated for over two years on the dark web and was used to sell deadly illegal drugs, stolen and fraudulent identification documents and access devices, counterfeit goods, malware and other computer hacking tools, firearms, and toxic chemicals throughout the world.
  • The international operation to seize AlphaBay’s infrastructure was led by the United States and involved cooperation and efforts by law enforcement authorities in Thailand, the NetherlandsLithuaniaCanada, the United Kingdom, and France, as well as the European law enforcement agency Europol
  • AlphaBay operated as a hidden service on the “Tor” network, and utilized cryptocurrencies including BitcoinMonero and Ethereum in order to hide the locations of its underlying servers and the identities of its administrators, moderators, and users. Based on law enforcement’s investigation of AlphaBay, authorities believe the site was also used to launder hundreds of millions of dollars deriving from illegal transactions on the website.
  • Separately, the Netherlands Police said “As part of an extensive international investigation, the Netherlands Police and the Public Prosecution Service have dismantled, seized control of, and shut down one of the biggest illegal market places on the internet today. It is Hansa Market, currently the most popular dark market in the ‘anonymous’ part of the internet, the so-called darknet … 
  • The investigation in question is being carried out in close cooperation with the police and judicial authorities in GermanyLithuania, and the United States, and also with Europol.
  • This week, a Hansa top-seller was arrested in Krimpen aan den IJssel, the Netherlands. Accounts with a total of more than 1,000 bitcoins, representing a value of some two million euros, were seized. The bitcoins were transferred to an account of the Public Prosecution Service. 
  • The darknet markets enable large-scale trading in chiefly illegal goods, such as drugs, weapons, child pornography, and ransom software.
  • Well-known examples of such market places are Silk Road (taken down by the FBI in 2013) and Alpha Bay (shut down within the framework of an international police operation earlier this month).
  • No weapons or child pornography were sold on Hansa Market."
  • Note: Tor is free software used to provide anonymous on-line communication. It is based on technology developed by the United States Naval Research Laboratory and DARPA to provide secure network communications for U.S. intelligence efforts. Users include journalists corresponding with confidential sources and citizens in repressive regimes accessing content on the Internet.
  • Suppliers of illegal goods (mostly drugs) will adapt  to the efforts of law enforcement - and the dark web (and postal services) will remain a part of their sales and distribution process
  • Effectively addressing the illegal drug problem will remain a challenge and will require a stronger focus of what drives demand.
  • Uses of Tor and other encryption based technologies will continue to expand  - and will support of both legal and illegal activities.
  • Debates over digital privacy rights and appropriate use will continue.

Sunday, July 16, 2017

On the Opioid Epidemic in the United States

  • Last week, comments in the report “Pain Management and the Opioid Epidemic” from the National Academy of Sciences included:  “Rates of opioid use disorder and opioid overdose deaths have reached unprecedented levels over the past two decades, and have risen much faster in the United States than in most other countries …  
  • U.S. Department of Health and Human Services data suggest that at least 2 million Americans have an opioid use disorder involving prescribed opioids and nearly 600,000 have an opioid use disorder involving heroin ...
  • about 90 Americans dying every day from overdoses that involve an opioid … 
  • the professional societies, insurers, health care organizations, pharmaceutical manufacturers, and state and federal agencies collectively responsible for shaping prescribing practices should attend to the multiple weaknesses in the nation’s health system that led to this epidemic …  
  • Trends indicate that premature deaths associated with the use of opioids are likely to climb and that opioid overdose and other opioid related harms will dramatically reduce quality of life for many people for years to come … 
  • Years of sustained and coordinated effort will be required to contain the current opioid epidemic and ameliorate its harmful effects on society."
  • Note: The chart below presents the number of overdose deaths from prescription and illicit opioids in the United States from 1999-2015

  • Separately, Federal Reserve Chair Janet Yellen (during testimony to U.S. Senate) said there are  “a variety of adverse trends related particularly to technological change that has eliminated many middle income jobs … 
  • I do think [the opioid epidemic] is related to declining labor force participation among prime-age workers … 
  • I don’t know if it’s causal or if it’s a symptom of long-running economic maladies that have affected these communities and particularly affected workers who have seen their job opportunities decline.” 


  • While law enforcement efforts will likely be highlighted as a way to address the opioid crisis, the challenge is broad and will also require assistance from insurershealth care organizations, government agencies, pharmaceutical firms and educators.
  • contributing factor to the problem is that the U.S. (unlike many other countries) allows aggressive marketing by pharmaceutical companies - which includes prescription opioids.
  • Regarding Yellen's comments - as technological change reduced the number of good paying jobs,  it may turn out to be another contributing factor to the opioid epidemic. 

Sunday, July 9, 2017

On the Video Game Market - Tencent, Addiction and more

  • Last week, in response to Chinese government comments that video games may be "harmful to the psychology of minors”, Tencent Holdings Ltd announced it would limit the use of its “Honor of Kings" smartphone app to one hour a day for players under 12 years old and two hours a day for users under 18 years old.  The firm also announced plans to introduce the game into the U.S. and European markets
  •  Note: Estimates suggest that Honor of Kings has over 163 million users each month.
  • Separately, in the study “Leisure Luxuries and the Labor Supply of Young Men”, which focuses on the U.S. market,  economists Mark Aquiar, Mark Bils, Kerwin Kofi Charles, and Erik Hurst suggest that computer gaming has led to a decline in workforce participation for men, ages 21 to 30, and said “As of 2015, men between the ages of 21 and 30 allocated 5.2 hours per week to recreational computer activities …
  • we can attribute the much greater increase in younger men’s computer time to a sizable improvement in technology for computer and video gaming, an improvement we would expect given declines in relative prices for computer and video games 
  • innovations to computer and gaming leisure may have dynamic effects on labor supply. It is possible that individuals develop a habit (or addiction) for such activities. …
  • Thus negative shocks to labor demand could have a persistent negative impact on labor supply via individuals first increasing their computer leisure, then developing a taste or skills for the activity.”
  • Regarding actions by the Chinese government - It is likely that younger players will figure out ways to continue playing Honor of Kings or other video games and business dynamics for Tencent and other video gaming firms will remain strong.
  • Regarding video game addiction – While research on this topic is still at an early stage, various studies suggest that 10% of video gamers may be addicted. 
  • Regarding the impact on workforce participation – A challenge for families, communities and policy makers will be dealing with gamers that are drawn to virtual worlds, as an alternative to low wage/stagnant growth job opportunities.

Sunday, July 2, 2017

On "Super-Monopolies" in the Technology Sector

  • Last Tuesday Facebook CEO Mark Zuckerberg said “As of this morning, the Facebook community is now officially 2 billion people! We're making progress connecting the world, and now let's bring the world closer together. It's an honor to be on this journey with you.”
  • Note:  Estimates suggest monthly users for YouTube: 1.5 billionWeChat:  889 millionTwitter: 328 millionSnapchat: 255 millionTwitch: 100 million.  Also, WhatsApp and Facebook Messenger each have about 1.2 billion monthly users. Instagram: 700 million.
  • Separately, as the European Union (EU) ordered Google to pay a €2.4 billion fine ($2.7 billion USD) for unfair, noncompetitive trade practices. EU Commissioner for Competition Margrethe Vestager said, “In Europe, companies must compete on the merits regardless if they are European or not.  What Google has done is illegal under E.U. antitrust rules. Google’s strategy for its comparison shopping service wasn’t just about attracting customers [or] about making its product better than those of its rivals…Google has abused its market dominance as a search engine.
  • Also, the PriceWaterhouseCoopers Entertainment and Media Global Outlook reported that two-thirds of all global advertising spending goes to Google, Facebook, Tencent, Baidu and Alibaba – of which 50% of total spending goes to Facebook and Google
  • Finally, Roger McNamee co-founder over venture capital firm Elevation Partners said, "Google, Facebook, Amazon are increasingly just super-monopolies, especially Google and Facebook. The share of the markets they operate in is literally on the same scale that Standard Oil had ... more than 100 years ago — with the big differences that their reach is now global, not just within a single country … I think it's a big policy question the world is going to have to deal with over the next few years,"

  • As Google, Facebook, Amazon and others provide low prices and/or attractive data services to consumers, their popularity and growth has negatively impacted some “traditional” businesses and likely prevented new entrants from coming into the market as well. 
  • While “super-monopolies” may exist, is unlikely that any actions will be initiated within the U.S. in the short-term given that 1) many of the technology firms are based there, 2) the U.S government currently is biased toward reducing regulatory oversight and 3) the trans-national nature of platform monopolies may have positive benefits. 
  • Note: Senator John Sherman, the author of the Sherman Act, which was signed into law in 1890 to address oil monopolies said, "Monopolies [are] inconsistent with our form of government. ... If we will not endure a king as a political power, we should not endure a king over the production, transportation, and sale of any of the necessaries of life. If we would not submit to an emperor, we should not submit to an autocrat of trade …"