2019/05/13

China strikes back at United States with higher tariffs on American goods

By Julia HorowitzCNN Business

China is striking back at the United States as the trade war between the world's two biggest economies continues to escalate.
Beijing said Monday that it will increase tariffs on roughly $60 billion worth of US goods on June 1, including American cotton, machinery, grains and aircraft parts. More than 4,000 items are affected, most of which will carry tariffs of 25% — up from 10% when they were first levied last September.
The move follows Friday's increase in US tariffs on $200 billion worth of Chinese exports from 10% to 25%. The Trump administration, which has accused China of backtracking on previous trade commitments, sought to turn up the pressure on Beijing after months of talks failed to produce a breakthrough.
    But it's not clear whether the return of tit-for-tat penalties will push Beijing toward a deal.
    US and Chinese negotiators ended another round of talks on Friday without an agreement to resolve American concerns on market access and intellectual property theft.
    It's up in the air when they'll meet again. Larry Kudlow, President Donald Trump's top economic adviser, said Sunday there is a "strong possibility" Trump will meet Chinese President Xi Jinping at the G20 economic summit in Japan next month. Liu He, China's top trade negotiator, said last week there would be another round of talks in Beijing.
    Meanwhile, the Trump administration has begun the process to apply tariffs of 25% to the remaining $300 billion worth of goods China exports to the United States.

    High stakes

    The trade dispute, which began last July, has hurt Chinese exporters, damaged companies on both sides and slowed global growth.
    Apple (AAPL) partially blamed the trade war for a revenue decline in the first three months of 2019, and construction company Caterpillar (CAT) said that Chinese tariffs cost it more than $100 million in 2018.
    The latest actions are poised to make things worse. Experts have said that tariff hikes could hit growth in both economies, and that Beijing may be forced to step in with new stimulus measures.
    Global markets have also been whipsawed by the trade fight. The Dow on Monday fell by more than 600 points.
    Last week, the S&P 500 and the Nasdaq posted their worst weekly drops since December, while the Dow had its worst week since March. Analysts fear there could be worse to come if the trade war escalates further.
    If the US presses ahead with its plan to apply tariffs to all of China's exports, Beijing's options to respond are limited as it has already targeted the vast majority of American exports.
    China could, instead, choose to make life harder for American companies operating within its borders with hurdles like customs delays and heightened scrutiny by regulators. Big names like Boeing (BA)Nike (NKE)Tesla (TSLA)General Motors (GM)Intel (INTC) and many others are all hugely dependent on the Chinese market.
    In response to speculation that its sales to China could suffer, Boeing (BA) said Monday it was "confident the US and China will continue trade discussions."
      Still, further disruption and additional cost is likely as more companies get caught in the crosshairs.
      "While companies have managed to work around the previous rounds of tariffs — tweaking supply chains and rerouting goods — this would become harder if the scope of tariffs widens," UBS analysts said in a note Monday.

      What Slows Urban Mobility in India — and How to Fix It


      Wharton professor Gilles Duranton explains why congestion pricing won't improve mobility in urban India.

      Urban economic development indicators such as higher income levels and higher motorization rates are generally associated with better overall mobility, chiefly because people can spend their time more productively than idling away in traffic snarls. Among the tools urban planners typically use to increase mobility is congestion pricing, such as New York City’s recent decision to impose tolls on vehicles entering its busiest areas.
      However, such mechanisms will not work in urban India, where planners must focus more on so-called “uncongested mobility” than on reducing actual congestion caused by vehicular traffic. Uncongested mobility essentially refers to the speeds vehicles can reach after navigating everyday obstructions, such as pedestrians, hawkers, stray dogs and cattle. That is the central finding of a research paper titled “Mobility and Congestion in Urban India.”
      “One thing that surprised us the most is that on average, across urban India, there is not actually that much congestion,” said the paper’s co-author, Wharton real estate professor Gilles Duranton. “Traffic flows are slow, but they are slow all the time.” The paper’s other co-authors are Prottoy A. Akbar from the University of Pittsburgh; Victor Couture of the University of California, Berkeley; Ejaz Ghani, lead economist at the World Bank; and Adam Storeygard of Tufts University.
      Notably, they found that urbanization and rapid growth don’t have to lead to gridlock. Indeed, economic development can bring better infrastructure and also improve mobility. And while India does have “a big mobility problem,” in nearly all cases, the authors said, it is not congestion but other hurdles — bad roads, bad design and potholes — that slow people down. As such, vehicle speeds within the cities showed little variation at different hours of the day — rush hour or not.
      Fast and Slow Cities
      Differences in urban mobility, or traffic speeds, also vary widely across large cities. Indeed, a factor of nearly two separates the fastest and slowest cities. Chandigarh, a planned city that is the joint capital of the northwestern Punjab and Haryana states, is “a particularly fast city,” while Kolkata (formerly Calcutta), capital of West Bengal state in the east, is “a particularly slow city.”
      Another interesting finding was that mobility is better in cities with a more grid-like network such as in Chandigarh. “We were the first to provide the result that the shape of the road network determines how fast you can move,” said Duranton. That’s what the authors call “uncongested mobility.”
      “On average, across urban India, there is not actually that much congestion.”
      The study also noted that travel is generally slow in Indian cities, even outside peak hours. “Even the central part of Chicago — considered a slow city and one of the most congested locations in the U.S. — is generally faster than one of the fastest Indian cities, Chandigarh,” the paper stated.
      Moreover, the researchers found that traffic is slower in denser or more populated Indian cities. Such cities display “a hill-shaped relationship between city per capita income and mobility,” which means that even as per capital income rises, mobility tends to rise up to a point, after which it declines. That means “a city’s mobility is related to characteristics of its road network” and not income levels, the paper said.
      When Congestion Pricing Doesn’t Work
      The study noticed that wide variations in mobility across Indian cities were primarily due to uncongested mobility, not congestion. As such, congestion pricing would have little impact. That’s why a 10% improvement in uncongested mobility, for instance, could bring more gains than implementing congestion pricing in urban India. Here’s another case: “Due to slow uncongested mobility, a very poor city like Varanasi (Benares) is slower than average at all times, even at night in the absence of traffic,” the paper said.
      Duranton said it was not entirely clear to him why urban India has slow mobility in the middle of the day or later in the day. “In most parts of the world when traffic is slow, it is because there are lots of vehicles,” he said. “In India, you have many users on the roads — not just vehicles, but those that use them for parking, for selling and consuming stuff, children playing, and animals, which is a nontrivial issue.”
      The paper’s findings challenge conventional wisdom that traffic congestion is the main reason why some cities are slow and some are fast. In fact, Kolkata showed up as the least congested of the four big metros (the others are Mumbai, New Delhi and Chennai), but it was also the slowest because of low uncongested mobility.
      “This distinction has important policy implications, because uncongested speed cannot be improved by congestion pricing, ride-sharing promotion or restriction, or other policies often proposed to combat congestion,” the study said. Added Duranton: “Kolkata is extremely slow even at 3 a.m. in the morning. There is no way you can go more than 25 km an hour even when there is nobody on the roads.”
      However, congestion-alleviating policies do work in some cases. Duranton said they could be useful in some of the most congested cities, such as Bangalore and Mumbai, but they are unlikely to make much of a difference in cities where traffic is chronically slow, such as Varanasi. “Uncongested speed in the slowest cities cannot be improved by ride-sharing, congestion pricing or other restrictions, and it may be more beneficial to invest in infrastructure,” he said. While the study did not isolate the exact causes of slow traffic, it pointed to poor infrastructure as the likely culprit. “Cities with more primary roads and those laid out in a more regular grid are faster,” he added.
      Improving Urban Mobility
      Duranton examined some ways in which urban mobility could be improved in India. “First, there is a case to be made for improving roads in urban India — improving mobility irrespective of congestion,” he said. “The low-hanging fruits are probably better management of roads, better traffic management and making sure people are not blocking intersections.”
      Subways and rail will bring higher carrying capacity, Duranton said. However, subways are expensive to build. Ambitious subway projects (called the ‘Metro’) are underway in New Delhi and Mumbai. But there is no guarantee that they will decongest the roads by any meaningful degree. “The problem is, as soon as you free up space on the roads, there are 20 cars waiting to use it,” he said. Increased transit options such as subways and rail don’t necessarily reduce congestion because “if you improve travel conditions, more people will travel,” he noted.
      “Kolkata is extremely slow even at 3 a.m. in the morning.”
      Building new roads is a costly proposition, so a far cheaper option might be fixing potholes and “preventing people from parking everywhere,” Duranton added. However, the economic gains from those measures are probably limited, he said. For example, traffic in New Delhi moves at 15 km an hour, but reduced congestion will not increase speeds to more than 18 km or 20 km an hour, as evidenced by speeds “even in the middle of the night,” he added. “It is not a huge gain.” By contrast, traffic speeds in the center of Chicago average 30 km an hour.
      The researchers believe their new approach to studying traffic conditions may be useful throughout the developing world, where there has been a lack of comprehensive data about urban transportation. Urban planners would find useful pointers in the study. “Often we find large shopping malls or industrial parks coming up with scant regard to the traffic density their locations could take, creating congestion,” said Duranton. “Other options such as dedicated lanes for freight traffic, bike trails, pedestrian sidewalks and well-planned traffic signals could also help.”
      However, some of those solutions also bring challenges. “Better traffic management is a no-brainer,” Duranton said.  However, reserving roadways for different uses have pros and cons, he noted. Having dedicated bus lanes and bike lanes, for example, has drawbacks as well because of enforcement issues.
      “People are likely to use them as temporary parking spots, so it needs to be enforced, and that needs to be designed,” Duranton said. “Bus lanes could increase the carrying capacity of the roads but if you keep one lane free for one bus to go every 30 minutes, I am not going to be convinced that that is a solution. In order to be used efficiently, you need 2,000 travelers per hour. Unless you are able to do that, your bus lane is not potentially efficient.”
      The same challenge applies to dedicated bike lanes. “If you kill one traffic lane so you can have 20 bicycles an hour, I am not sure it is a good idea,” Duranton said. “Bike lanes should be on smaller streets; it will also be safer for them.”
      “As soon as you free up space on the roads, there are 20 cars waiting to use it.”
      A big challenge in India and across the developing world in Latin America and Asia is the increased use of motorcycles, which Chinese manufacturers have made more affordable. But he said the bikes also cause pollution and accidents. For instance, in Bogota, their number has shot up “from zero to a third or half the number of all vehicles” over the past decade, he noted.
      Significance of the Study
      The study’s findings are based on data culled from more than 22 million trips in 154 large Indian cities over two months in 2016. The authors say their research provides the first systematic investigation of urban mobility across cities in a developing country. In a first, the study’s researchers used a novel data infrastructure to obtain “systematic views” of the actual mobility of people, which Google Maps provided at a low cost.
      The study is important for three reasons. “First, there is an extreme paucity of useful knowledge about urban transportation, especially in developing countries,” the authors said. As a first building block towards a more serious knowledge base on urban transportation, some “stylized facts” are needed, they noted.
      For instance, there is a need to know how slow is travel in developing cities beyond anecdotal evidence offered by travelers. Policymakers also need a clear understanding of the differences between cities, between different parts of the same city and across times of day within the same city. They hope their results, methodology and data sources can help guide policy and future research on urban transportation in developing countries.
      The study’s findings challenge the popular view that urbanization and economic development lead to ever larger cities and increased rates of motorization, which eventually lead to complete gridlock. To be sure, it found evidence of congestion in the largest Indian cities and a strong association between congestion and household access to motorized vehicles. “However, economic development also brings about better travel infrastructure, which facilitates uncongested mobility,” it stated.
      Another takeaway for policymakers from the study is that better mobility is associated with a more regular grid network and more primary roads. That clarity helps because “providing an assessment of the determinants of mobility to guide policy is fundamental,” especially when urban transportation in developing countries is prioritized for massive investments, the paper said.
      “In India, you have many users on the roads — not just vehicles.”
      Indeed, transportation is the largest sector of lending by the World Bank and represents more than 20% of its net commitments as of 2016, the authors pointed out. “The lack of sufficient urban land for building roadways is widely perceived to be the chief cause behind slow mobility and urban congestion, and much of the investments try to address that,” they stated.
      Future Research
      The study raises three challenges, the authors said. One, there is a need for a new methodology, or a new approach, to measure various forms of mobility from trip information, and to decompose them into uncongested mobility and delays caused by congestion.
      Second, they highlight the unavailability of a comprehensive source of data about urban transportation in Indian cities. For their study, they designed a trove of trips and sampled each trip at different times on different days, or what they call “counterfactual trips.” Those were not actual trips, but they mimic some characteristics of trips taken by households in other countries. As it happens, they found that their city mobility indices showed little variance from those they mimicked.
      Another challenge was in consistently defining and measuring the cities they tracked for trips. Their solution was to rely on a wide variety of sources including the Census of India, the free OpenStreetMap and satellite imagery. However, a shortcoming of their methodology was its inability to capture the “richness” in the data they would have gained through a survey, Duranton said.

      How Modern Monarchies Are Evolving


      Wharton's Mauro Guillen discusses his research on monarchies.

      When Prince Harry married American actress Meghan Markle last year, their wedding was lauded for bringing modernism to that most traditional of institutions, the British monarchy. Their first child, a son, was born Monday morning, and the world’s eyes are once again on the couple and how their approach to parenting might buck conventionality for the British royal family.
      The birth of their baby also makes it a good time to examine the overall state of the modern monarchy, says Wharton management professor Mauro Guillenwho has conducted research on this form of government and how the economies of countries that employ it stack up against those without monarchies.
      Guillen recently sat down with Knowledge@Wharton to discuss his research. An edited transcript of the conversation follows.
      Knowledge@Wharton: Your research on this topic focuses on the relationship between property rights and the economy for monarchies compared with republics. What are some of your key findings?
      Mauro Guillén: What I found was essentially that monarchies tend to protect property rights in the contemporary world much better than republics in general — and in particular, than dictatorships. That, in the end, results in better economic performance as measured by living standards. So in other words, people who live in countries that have a monarchy tend to enjoy higher standards of living than those in republics, precisely because monarchies protect property rights to a greater extent.
      Knowledge@Wharton: Was there a distinction between different types of monarchies in those findings?
      Guillén: Absolutely. What we also found is that constitutional monarchies, such as the British monarchy, perform much better than non-democratic monarchies or simply absolutist monarchies, of which there are three or four in the world right now as we speak.
      Knowledge@Wharton: Monarchies are a pretty traditional form of government. What does your research say about how they function in the contemporary world?
      Guillén: Well, the contemporary world is not only modern, it’s actually a mix of modernity and tradition. And we see this in many spheres of life. One of them is in the economy, of course, where we have, for example, family firms. But we also see this in the political system, where we have constitutional monarchies and also other types of monarchies. Essentially what we see in the world is that some people in some parts of the world try to cling to their traditions. They prefer to incorporate some elements. It’s not that they live under Middle Ages conditions — no, not at all. It’s just that for whatever set of reasons, to a very large extent cultural and historical, they have preserved some aspects of tradition — especially in their political system.
      Knowledge@Wharton: Do you think the world, and Americans in particular, often have too narrow a view of monarchies?
      “People who live in countries that have a monarchy tend to enjoy higher standards of living than those in republics, precisely because monarchies protect property rights to a greater extent.”
      Guillén: I think Americans are a little bit schizophrenic about the topic of the monarchy. So on one hand, Americans obviously are against monarchies, because this country was founded — it became independent — as a result of a war of independence against a monarchy, against an empire, the British Empire which was, of course, closely identified at the time with a monarchy.
      But on the other hand, Americans also have this fascination with the monarchy. We see this in Hollywood movies. We see this in the kinds of bedtime stories that parents tell their children. We see this in, for example, what happened in this country when Meghan got married to Prince Harry. That is to say that the entire country was mesmerized, and that there was talk of an American princess and all of that. Now, this is not the first time that an American woman has married either a prince or a king. So we’ve seen this not just most recently with Meghan and Harry, but also decades ago in Jordan — or in Monaco with our own Grace Kelly, who was, if you remember, born here in the Philadelphia area. So there is a long tradition of Americans marrying foreign princes and kings. And this is something that I think is very much a part of the American psyche.
      Knowledge@Wharton: What issues do you think are brought up by the fact that Meghan and Harry are having their first child?
      Guillén: I think this is going to be an important moment for many reasons. One of them is that this is a unique marriage. It is a unique marriage because while it is true that Harry is unlikely to become king — although you never know, because look at what happened nearly a hundred years ago in the U.K. — a lot of people are excited about learning about this magical couple and about their baby.
      I think it is, by the way, a sign of the modernization of the monarchy itself that we continue to see that princes are getting married to people who do not belong to royal families, and they are even willing to go to other parts of the world, like the United States, to find a suitable spouse.
      Knowledge@Wharton: This news is coming about a year after Prince Harry and Meghan got married, and it seems like they’ve been bucking a lot of traditional norms just in their couple-hood in general.
      Guillén: Oh, absolutely. I think they have been coming across over the last few months as a couple that could be your next-door neighbors — so very youthful, very authentic, very direct — and just a happy couple who just got married. And now they’re having a baby. So I think given all of the bad news coming from all four corners of the world, they actually send a very uplifting message.
      Knowledge@Wharton: What do Meghan’s experiences over the past year say about the modern monarchy and what we can expect from monarchies in the future?
      Guillén: Monarchies and the families are very complicated in terms of the behavioral code that they have and all of the traditions and all of that. I think Meghan has struck a very good balance. She has to observe the rules, but at the same time, she comes across as being completely natural and completely accessible. And I think that is a very good message and is one of stability in the midst of all of this bad news that we have in the world.
      Knowledge@Wharton: Currently in the U.K., there’s a lot of uncertainty surrounding Brexit, and your research actually talks a little bit about the continuity that monarchies provide. How is the British monarchy impacting both the current Brexit negotiations and also whatever happens next?
      Guillén: I think there are many lessons to be learned from this process that started two years ago when the Brexit referendum unexpectedly resulted in the desire of a majority of the British people to leave the European Union.
      The first thing I would observe is the absolutely incredibly good behavior on the part of the Queen, who is the head of state. But she is a queen who doesn’t really rule, right? She reigns over her citizens but is not the executive in the country. That’s the prime minister. She has adopted a clearly neutral stance, you know — not intervening in saying what she prefers the outcome to be. And she has continued to do that during the negotiations, except for a couple of occasions last year when some people interpreted a few comments that she made as implying that she was more in the “remain” camp.
      “Monarchies and the families are very complicated in terms of the behavioral code that they have and all of the traditions and all of that. I think Meghan has struck a very good balance.”
      The other important thing is that, as you know, the situation in the U.K. has become increasingly chaotic because there is no agreement with the European Union as to exactly what the terms of the exit will be and what’s going to happen the day after in the relationship between the United Kingdom and the European Union. And the Queen, again, has been essentially neutral in that debate that has, as you know, divided parliament and divided the entire country.
      What I would also say is that, yes, if the U.K. were a republic and didn’t have a queen — who is a symbol of national unity — I think Britain would be having a much harder time because as you know, the country is bitterly divided, and parliament is also split…. So I think that, yes, that Britain is having a slightly better time with this whole Brexit business because they have a monarchy. They have a unifying symbol as the head of state.
      Knowledge@Wharton: And unlike the U.S., their elections are a little more fluid, so they’ve cycled through several leaders other than the Queen in the past couple of years. And it looks like they may be getting another at some point in this process.
      Guillén: Yes, absolutely. This is a parliamentary system, so you do not elect the prime minister directly. You elect a parliament, and then parliament elects the prime minister. But by that same token, parliament can also get rid of a prime minister, and that happened with David Cameron a few days after the referendum. And now, as of today, it seems as if Theresa May may also be on her way out very quickly.
      So yes, parliamentary systems — this is not just unique to the United Kingdom — tend to be more fluid, and governments get replaced and prime ministers get replaced very quickly. In the United States, of course, we have a presidential system, and we tend to stick to our four-year electoral calendar for presidents of the country, of our republic. So yes, I think from that point of view and also the fact that in a parliamentary system you had a head of state who is somebody — a monarch — who stays there for life and provides a measure of stability and continuity.
      Knowledge@Wharton: In the U.K., they’ve had the same head of state in Queen Elizabeth for a very long time, and it’s unclear when that’s going to change or who would be taking over for her when that happens. Do you feel like there could be some instability created by that, just because she has had such longevity? Are there things that they could do to mitigate that — even though we don’t know whether it would be Prince Charles or Prince William — or like you said, maybe it would be Prince Harry.
      Guillén: Well, we’re all hoping that it will be Prince Charles. We all hope that he lives a very long life.
      “If the U.K. were a republic and didn’t have a queen — who is a symbol of national unity — I think Britain would be having a much harder time.”
      Knowledge@Wharton: Right.
      Guillén: But yes, women in his family — in the British royal family — have proved to die at a very advanced age. And that, of course, includes most famously Queen Victoria. But Queen Elizabeth has already broken the record, in that she is the one of the longest-serving monarchs in the world, in world history — as far as recorded history goes. So yes, that would be a huge transition, because she became queen in the 1950s, so it has been a long time. A lot of things have happened in the world, over such a long period of time.
      But again, the British are used to these long reigns. It happened with Queen Victoria, and it seems to me that when Queen Elizabeth II passes, this will be a very, very important turning point in British history, and I would also say in world history. And let me tell you, billions of people are going to be watching that funeral on TV. Hopefully it will be Prince Charles who will become king at that point after, as you know, having been a prince for a very, very long period of time, as well.
      So that will definitely be — whenever that happens, in the next years, I guess, or hopefully a decade or more — that will be an event of global proportions which is likely to attract a lot of attention.
      Knowledge@Wharton: Looking beyond Britain a little bit, are there other monarchies around the world that you think are interesting to keep an eye on?
      Guillén: Well, I think one that fascinates me, of course, is the Japanese monarchy. Japan, like the United Kingdom, has been a parliamentary democracy since the end of World War II. And if you remember, General Douglas MacArthur initially had instructions to remove the monarchy. But then he actually asked Truman if it would be possible to keep the emperor in place — Hirohito at the time — because he thought that it would be, again, an instrument of stability in post-war Japan, a country that needed to be reconstructed from all points of view. So it’s again another monarchy that stretches centuries back in history, a monarchy that has, yes, in some periods of time been a force for evil. There’s no question about it. It did justify the atrocities and the abuses that Japan committed during World War II and prior to World War II, especially in China. But since 1945, it has been a force for continuity and stability, and I think it has helped turn Japan into the prosperous democracy that it is today. So that’s one that I find particularly fascinating.
      “We think of monarchies as if they were anchored in the past, but in fact they do change, and they do adapt, and they do evolve.”
      Knowledge@Wharton: And they’re at a time of transition right now, as well.
      Guillén: Oh, absolutely. You see, this is the thing about monarchies. We think of monarchies as if they were anchored in the past, but in fact they do change, and they do adapt, and they do evolve. Sometimes they’re clumsy, and it seems as if they’re not changing quickly enough. But let’s not forget that for every monarchy that gets into trouble or that doesn’t do the job well, there are at least two or three presidents of republics that also misbehave, or they happen to be corrupt, or they make decisions for the country that are disastrous. So I don’t think that one can generalize and say, “Oh, monarchies are traditional forms of government, and they’re all bad because it’s anachronistic for us to have monarchies in the 21st century.” And it’s equally inaccurate to say that all republics and all elected officials are just wonderful, right?
      So I think once again, some parts of the world — some countries — prefer certain forms of government over others. And I think it’s perfectly OK that a few more than 40 countries in the world right now continue to have the monarchy as the form of government. But again, in most of them, these are democracies, and therefore the monarch — the king or the queen — is purely a constitutional monarch who doesn’t have any power. It’s just a figure, a head of state that helps bring the country together and provides for continuity and stability.

      Are Cryptocurrencies Ready to Break Out of Their Niche?



      Ten years after the mysterious figure or group of people known as Satoshi Nakamoto introduced the world to bitcoin, cryptocurrencies are still largely seen as an exotic invention that most regular folks view with skepticism. While the bitcoin’s underlying ledger technology, the blockchain, is enjoying greater experimentation and adoption by companies and countries, cryptos are still tough for most people to fathom. It doesn’t help that the biggest headlines tend to be about theft of these assets.
      “Cryptocurrency — no one owns any and no one uses it. That’s kind of where we are today,” said Ari Paul, chief investment officer of BlockTower Capital, a crypto-asset investment firm, during a keynote speech at the second annual Penn Blockchain Conference held at Wharton. By no one, he meant relatively few people. He estimates that around 35 million people globally own cryptos — less than 1% of the world’s population. Among these crypto owners, Paul believes that fewer than 2 million actually are active users. Most hold it for speculation. “This is an incredibly tiny niche industry with very little usage and adoption.”
      But developments are afoot. There are people who are working to solve the problems that have hindered wider acceptance of cryptos, especially by institutional investors. “They are quietly building infrastructure,” Paul said. They are also seeking solutions to problems ranging from the straightforward — such as lack of institutional-quality trading software — to much deeper concerns like security of assets. Issues of governance are being hammered out, as is dealing with differing regulations among nations.
      Paul recalled that just six months ago, his firm had to build its own crypto trading software because there were no institutional-quality ones on the market. BlockTower Capital also had to “self-custody” or act as a disinterested protector of assets because there weren’t any viable options, he said. In such a setup, a firm could potentially steal the assets it is in charge of protecting. “That wasn’t by choice. We didn’t have trustworthy, third-party custodians.”
      Crypto Asset Management
      Now, a few firms are getting into the crypto custodian business. Investment behemoth Fidelity Investments has soft-launched a bitcoin custody solution and plans to roll it out in scale, Paul said. Other firms are also in beta tests. He added that Fidelity offers a key feature that could go a long way in assuaging the jitters of crypto owners: “Their security solutions are stronger than intelligence agency grade.” That’s needed because unlike shares of stock, cryptos are a “very easy thing to steal. It’s a very easy thing to launder, so security is really important,” Paul said.
      “The exchanges are quite amateurish, even the big [ones].”–Ari Paul
      Several “meaningful” crypto investment funds also have hit the market, Paul said. These are not the reported 100 or 200 funds managing about $5 million of assets and “run out of a 25-year-old’s apartment,” he said. (Their assets got to $5 million because of the stratospheric rise in crypto prices in 2017.) The new crop of crypto funds is heftier: There are about 30 of them in the U.S. with median assets under management of $25 million. Two venture capital funds focused on cryptos also have emerged — spinouts from tech VCs Andreessen Horowitz and Sequoia Capital.
      Pensions, endowments and family offices of high-net worth clans are looking at investing in crypto assets as well, Paul said. With more trusted money managers handling crypto investments, institutional investors have been gingerly testing the waters. “They did it indirectly via very, very trusted brands. They’re not investing in cryptos, they’re investing [with] Andreesen Horowitz,” he said. “They’re trusting the brand reputation and the people at the fund whom they’ve had a relationship with.”
      Other advances in cryptos are happening, too. Several folks are trying to build a “Bloomberg for cryptos” but they haven’t succeeded yet, Paul said. There’s innovation going on at the protocol layer of bitcoin and Ethereum, a blockchain platform. Others are looking into offering “innovation as a service,” he said. It could enable companies, for example, to create a separate internet for crypto miners to communicate block solutions to each other, which improves profitability at the margins, Paul added.
      Among crypto exchanges, though, more expertise and maturity are needed. “The exchanges are quite amateurish, even the big [ones],” Paul said. For example, even though Coinbase is a market leader, it doesn’t provide after-tax reporting on transactions. The level of expertise in the industry, however, is about to change. The former chairman of the New York Stock Exchange and other Wall Street veterans are launching crypto exchanges and “bringing their technical expertise, operational efficiency and regulatory compliance” experience, he said.
      Paul cited the case of Mt. Gox, a bitcoin exchange that folded in 2013 after a massive heist, as a failure exacerbated by a lack of business expertise. “It was run by a guy in his mid-20s back then, a team that was totally out of their element,” he said. It “didn’t have anyone who knew how to run a business.” That skills gap became a big problem after “massive consumer interest” quickly ballooned Mt. Gox into a billion-dollar bitcoin exchange that needed high security. But the team was not equipped to handle such a fast-growing business, he said.
      Cryptos Gaining Legitimacy?
      When bitcoin first emerged, people would say, “I can’t believe we’re involved in bitcoin. I thought that crap is illegal,” said Ron Quaranta, founder of Wall Street Blockchain Alliance, on the panel on investing in cryptocurrencies. People also dismissed bitcoin after lumping it together with other financial bubbles, added Bart Smith, head of Susquehanna’s digital asset group. Bitcoin’s 2017 trajectory did seem loopy: It jumped 2,400% from its intraday low to a peak of nearly $20,000 in 12 months. However, Smith said, “if you think bitcoin had a 1 in 20 chance of replacing gold globally, then buying $20,000 in bitcoin didn’t seem so stupid.”
      Besides, Smith pointed out, central banks today continue to make the same mistakes that led to the 2008 financial crisis. While people refer to cryptos as anonymous digital currencies used by outlaws or terrorists, they forget that established financial institutions have caused much economic harm, added Jonathan Boos, institutional sales and distribution director at SharesPost, a marketplace for tokens and shares of private companies. “You look at the amount of fines banks have paid, it’s staggering.”
      “I don’t know of major banks that are not looking at crypto assets in some shape or form. The worst thing … is to be left behind.”–Ron Quaranta
      Today, crypto assets are gaining legitimacy. “The exciting thing is that the tourists have left,” noted Albert Wenger, managing partner at VC firm Union Square Ventures. “The people who are in for the long haul are the ones sticking around.” As the get-rich-quick crowd has dwindled, the true believers in decentralization are busy building long-lasting infrastructure and applications for cryptos and the blockchain.
      Wenger said what’s particularly exciting about the blockchain is that for the first time, parties can reach consensus on transactions without a central authority — for example, everyone can see and agree that Jane transferred $100 from her account to Joe’s, instead of a bank validating the activity. “That’s sort of a fundamentally new capability,” he said.
      Meanwhile, financial institutions seem to have reached an inflection point in the wider adoption of crypto assets, said Quaranta, whose organization works with financial institutions. Most big banks have innovation teams looking at the blockchain, he said, adding that “I don’t know of major banks that are not looking at crypto assets in some shape or form.” They’re not blind to the existential threat posed by the blockchain and AI. “The worst thing [for incumbents] … is to be left behind,” he added.
      One area of interest is the “tokenization” of assets. “We’re doing a deal now where we’re selling real estate as a token,” said Adam Cole Jacobs, co-founder of Bitsdaq, a crypto exchange, in a panel on China, cryptocurrencies and the blockchain. For example, one property can have anywhere from 100 to 1,000 owners, each of whom buys a fragment of the real estate. “So if the property values go up, you can sell your token” and make a profit, he said.
      But Smith said some investors have pointed out that tokenization of assets don’t necessarily have to be on the blockchain, which has no central authority or regulator. “In the U.S., there are IP (intellectual property) laws that exceed [those] around the world. The protection the SEC provides is invaluable to investors,” he said. Moreover, the asset has a “liquidity stream that’s monthly. It’s not daily and you don’t need to put it on the blockchain.”
      Despite its issues, the blockchain is seeing greater adoption. “We’ve seen a lot more projects go into production,” said Karen Ottoni, director of ecosystem at Hyperledger, a group working to advance open-source blockchain technologies across industries. She said early doubts about whether blockchain can handle live transactions are being disproven. “We’re seeing live health care transactions taking place, [as well as in] trade finance, supply chain,” she said on a panel, talking about the network and ecosystem. “We’ll see more of that this year.”
      Autonocrats vs. Anthropocrats
      While companies and investors are figuring out how to profit from cryptos and blockchain, there is a more fundamental battle taking place within the community. It is a philosophical fight between the “autonocrats” and “anthropocrats,” said Lane Rettig, a core developer at the Ethereum Foundation, the nonprofit behind the Ethereum blockchain platform and the ether crypto. “Autonocrats are people who put maximal trust in autonomous systems,” he said during a keynote speech. “Anthropocrats … are people who don’t really trust autonomous systems. They want humans to be in charge and humans to have a layer of judgement.”
      At its most fundamental, the decentralized nature of cryptos and blockchain could ostensibly create a new kind of society because it has the potential to throw off the yoke of any central authority, whether it is a government, central bank, company or another entity. Indeed, Rettig sees Ethereum, as well as other blockchain platforms, as “an operating system for building better human institutions.” The engineers who are developing this technology can set the rules for this digital society. Hence the debate: Should they develop a decentralized, purely tech-run system, or should they make room for social, legal and ethical aspects as well?
      Autonocrats have this “platonic dream of the blockchain to be this neutral thing that has no social layer on top of it. It’s just code,” Rettig said. So, the only reason to make changes to the blockchain protocol is if they’re technically required for the network to function. Autonocrats don’t want to add a “social” layer such as a court system because once it’s added to the blockchain, “you begin reducing the benefits,” he said. That means a transaction can be voided if it violates some “social norm or law,” Rettig added. “At that point, what’s the difference if you use the bank or use PayPal where you already have those issues?”
      But anthropocrats argue that “without recognizing that blockchains are inherently social and … political things, and without engaging with real social systems in the real world, their appeal is going to be very limited,” Rettig said. They want blockchain to not only make sense for businesses and people to use, but also to dovetail “into existing legal and social systems.” The view is that if blockchain is “not able to engage with society, with the world, with existing legal systems, then they will just be ruled illegal in many jurisdictions,” he said.
      “If we don’t figure out governance of blockchain, then our hands are tied and we can’t build things on it because … those institutions of the future really require a very stable base offline.”— Lane Rettig
      Rettig is leaning toward the anthropocrat camp. “The problem is, increasingly, the questions that we face in Ethereum are less technical and more and more social,” he said. To build better human institutions, he said the new system must have good governance to root out such evils as corruption and collusion, which would be tough to accomplish merely using technology. “If we don’t figure out governance of blockchain, then our hands are tied and we can’t build things on it because … those institutions of the future really require a very stable base offline,” Rettig said.
      In a way, Rettig and his peers are facing the same dilemma as the Founding Fathers when they labored over the wording of the U.S. Constitution to serve as a framework for a young America. Rettig admits that he didn’t think about these fundamental beliefs until he was “trying to design better systems and got to this stage of ‘first principles.’” At Ethereum, the folks debating these principles are the core developers, or “coredevs.” They are the ones making decisions for the protocol, according to Rettig.
      These folks are “very technically brilliant” but “are not prepared to answer these social questions today” about philosophy, ethics and the social contract, Rettig said. “We don’t necessarily have training in this field. We don’t have confidence that we can make the right decisions, and core developers are very afraid of legal liability as well if they step in and start making these decisions.” Without the social layer, he said, “we can’t have nice, important things like sustainable funding for the public good.”
      So, Rettig is developing a solution that combines both views: “We have to find a happy medium here.” He is taking a “marbled approach” — adopting “strong, centralized leadership” in some areas that protect core beliefs and applying decentralization when it comes to allocating resources fairly. “We need to be very clear with ourselves and each other about things like our goals and our values and our vision for what blockchain can be,” Rettig explained. “A goal is to build these fairer, more open, transparent and just systems that work for humans everywhere.”


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