TY - JOUR T1 - Cryptocurrency and Blockchains: <em>Retail to Institutional</em> JF - The Journal of Investing SP - 18 LP - 30 DO - 10.3905/joi.2019.1.102 VL - 29 IS - 1 AU - Rand Low AU - Terry Marsh Y1 - 2019/11/29 UR - https://pm-research.com/content/29/1/18.abstract N2 - A reduction in cost of traditional financial intermediation was one of the main motivations cited by Satoshi Nakamoto in a 2008 proposal for “… an electronic payment system based on cryptographic proof instead of trust.” We begin here with some back-of-the-envelope calculations of these potential cost savings and benefits from the customer perspective. We then discuss the public blockchain ledger and various solutions to two important problems that are constraints on the public blockchain’s trustless consensus, viz. “mining” costs in proof-of-work and governance issues. We speculate that foreseeable institutional implementations will often involve integration of permissioned blockchains with public blockchains. We then discuss exchanges for trading cryptocurrencies, the second component of the crypto blockchains, and in particular their “teething problems,” along with the evolution of a subset of them into increasingly “industrial strength” entities. We suggest that with a more industrial strength infrastructure in place, self-executing smart contracts are virtually natural counterparts for more traditional passive investment products. We end with a discussion of Security Token Offerings (STOs) and the newer Initial Coin Offerings (ICOs): STOs are an interesting hybrid between the ICOs and traditional IPOs; they could conceivably pave the way to a long-time-coming “direct electronic IPO” market.TOPICS: Currency, indexing exchange-traded, exchanges/markets/clearinghousesKey Findings• A set of crypto exchanges is evolving into institutional-strength entities with law-of-one-price, clearing and settlement, custody services, and user algorithms to deal with fake inflated trade volumes.• Pure public blockchains with well-known “blockchain trilemma” problems like high energy consumption, low performance, governance shortcomings, and no clear “how-to-pay” mechanism for ledger-updating in non-crypto applications are inexorably leading toward hybrid public/permissioned blockchain networks.• Despite their rocky start, STOs and ICOs are leading to direct or electronic IPO markets while smart contracts running on blockchains with securities trading identifiers and data seem ideal vehicles for administering passive investment products. ER -