Global Cryptocurrency Benchmarking Study

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GLOBAL CRYPTOCURRENCY BENCHMARKING STUDY Dr Garrick Hileman & Michel Rauchs 2017

With the support of:

Cambridge Centre for Alternative Finance 10 Trumpington Street Cambridge CB2 1QA United Kingdom E: [email protected] T: +44 (0)1223 339111

Global Cryptocurrency Benchmarking Study

CONTENTS FOREWORDS

2

RESEARCH TEAM

4

ACKNOWLEDGMENTS

5

EXECUTIVE SUMMARY

8

METHODOLOGY AND STUDY STRUCTURE

9

GLOSSARY

10

SETTING THE SCENE

12

EXCHANGES

26

WALLETS

46

PAYMENTS

66

MINING

84

APPENDICES

104

REFERENCES AND ENDNOTES

108

1

Forewords

FOREWORDS The world o’ money and inance is trans’orming be’ore our eyes. Digiised assets and innovaive inancial channels, instruments and systems are creaing new paradigms ’or inancial transacion and ’orging alternaive conduits o’ capital. The Cambridge Centre ’or Alternaive Finance, since its ’ounding in , has been at the ’ore’ront o’ documening, analysing and indeed criically challenging that digital inancial trans’ormaion. This Global Cryptocurrency Benchmarking Study is our inaugural research focused on alternaive payment systems and digital assets. Led by Dr Garrick Hileman, it is the irst study o’ its kind to holisically examine the burgeoning global cryptocurrency industry and its key consituents, which include exchanges, wallets, payments and mining. The indings are both striking and thought-provoking. First, the user adopion o’ various cryptocurrencies has really taken of, with billions in market cap and millions o’ wallets esimated to have been acive in 6. Second, the cryptocurrency industry is both globalised and localised, with borderless exchange operaions, as well as geographically clustered mining aciviies. Third, the industry is becoming more luid, as the lines between exchanges and wallets are increasingly blurred and a mulitude o’ cryptocurrencies, not just bitcoin, are now supported by a growing ecosystem, ’ulilling an array o’ ’uncions. Fourth, issues o’ security and regulatory compliance are likely to remain prevalent ’or years to come. I hope this study will provide value to academics, praciioners, policymakers and regulators alike. We thank Visa very much ’or its generous support o’ independent academic research in this important area. Bryan Zhang Co-’ounder and Execuive Director Interim

Blockchain has received a signiicant amount o’ analyst and press atenion over the last ’ew years as this emerging technology holds signiicant potenial. Use cases are many and varied: ranging from programmable cryptocurrencies to property deeds management to provenance tracking to voing records. Cryptocurrencies were the irst applicaion o’ this technology, and in doing so introduced an enirely new set o’ businesses, jobs and vocabulary to the world o’ payments. Visa has been exploring the impact o’ these technologies to determine how this new ecosystem will coninue to grow and evolve. Amongst all the excitement and enthusiasm in the press there has also been some hyperbole, and any eforts to provide a realisic snapshot o’ the industry should be welcomed. Visa welcomes opportunity to sponsor research ’rom a respected organisaion, the Judge Business School at Cambridge University, which we trust, the reader will ind objecive, in’ormaive and insighful. Jonathan Vaux VP, Innovaion & Strategic Partnerships

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Global Cryptocurrency Benchmarking Study

It is my great pleasure to present the irst global cryptocurrency benchmarking study. The indings ’rom our study are based on the collecion o’ non-public data ’rom nearly companies and individuals, and this report ofers new insights on an innovaive and rapidly evolving sector o’ the economy. Cryptocurrencies such as bitcoin have been seen by some as merely a passing fad or insigniicant, but that view is increasingly at odds with the data we are observing. As o’ April 7, the combined market value o’ all cryptocurrencies is $ 7 billion, which represents a level o’ value creaion on the order o’ Silicon Valley success stories like AirBnB. The advent o’ cryptocurrency has also sparked many new business plaforms with sizable valuaions o’ their own, along with new ’orms o’ peer-to-peer economic acivity. Next year will mark the ten-year anniversary o’ the publicaion o’ Satoshi Nakamoto s paper describing how a new digital inancial instrument could be created and operated securely with a blockchain. The growing usage and range o’ capabiliies we document in this study indicate that cryptocurrencies are taking on an ever more important role in the lives of a growing number o’ people and machines around the world. As we show in this study, the number o’ people using cryptocurrency today has seen signiicant growth and rivals the populaion o’ small countries. By our count, over academic aricles have been published on various aspects o’ bitcoin and other cryptocurrencies over the past several years. However, these works tend to take a narrow ’ocus. To our knowledge this is the irst global cryptocurrency study based on nonpublic of-chain data. We designed the study to present an empirical picture o’ the current state o’ this sill maturing industry, and to explore how cryptocurrencies are being used today. The indings ’rom this study will be use’ul to industry, academics, policymakers, media, and anyone seeking to beter understand the cryptocurrency landscape. This study would not have been possible without the support and paricipaion ’rom nearly cryptocurrency companies and individuals that contributed data, many o’ which have elected to have their logos displayed in this report. This study also greatly beneited ’rom suggesions and support we received ’rom many individuals and irms we recognise in the Acknowledgements. We are grate’ul ’or the trust placed by study paricipants in the University o’ Cambridge research team. We are looking ’orward to coninuing and expanding our cryptocurrency and blockchain research program. In a ’ew weeks, we will also be publishing the results o’ a separate study ’ocused on the use o’ distributed ledger technology DLT , which examines the use o’ DLT by more established industry players as well as at public sector insituions such as central banks. Thank you ’or your interest in this study. We will be conducing these benchmarking studies on an annual basis, and I welcome your comments and ’eedback. Garrick Hileman [email protected]

3

Research Team

RESEARCH TEAM DR GARRICK HILEMAN Dr Garrick Hileman is a Senior Research Associate at the Cambridge Centre ’or Alternaive Finance and a Researcher at the Centre ’or Macroeconomics. He was recently ranked as one o’ the most inluenial economists in the UK and Ireland and he is regularly asked to share his research and perspecive with the FT, BBC, CNBC, WSJ, Sky News, and other media. Garrick has been invited to present his research on monetary and distributed systems innovaion to government organisaions, including central banks and war colleges, as well as private irms such as Visa, Black Rock, and UBS. Garrick has years private sector experience with both startups and established companies such as Visa, Lloyd s o’ London, Bank o’ America, The Home Depot, and Allianz. Garrick s technology experience includes co-’ounding a San Francisco-based new venture incubator, IT strategy consuling ’or mulinaionals, and ’ounding MacroDigest, which employs a proprietary algorithm to cluster trending economic analysis and perspecive.

MICHEL RAUCHS Michel Rauchs is a Research Assistant at the Cambridge Centre ’or Alternaive Finance. Cryptocurrencies and distributed ledger technologies have been the topic of his academic studies ’or the last two years, and his Master s thesis visualised the evoluion o’ the Bitcoin business ecosystem ’rom using a unique longitudinal dataset o’ companies and projects. He holds a Bachelor in Economics ’rom HEC Lausanne and recently graduated from Grenoble Ecole de Management with a Master s degree in Internaional Business.

4

Global Cryptocurrency Benchmarking Study

ACKNOWLEDGMENTS We would like to thank the Asia Blockchain Foundaion, 8btc.com, Coin Center, CoinDesk, The Coinspondent and the r/bitcoin ’orum on Reddit ’or helping to build awareness and supporing the study. We would also like to speciically thank Jelena Strelnikova Asia Blockchain Foundaion , Neil Woodine Remitsy , Dave Hudson PeerNova , Philip Marin and David Farmer Coinbase , Peter Smith Blockchain , Jez San, Jon Matonis Globitex/ Bitcoin Foundaion , Roger Ver Bitcoin.com , Jill Carlson Chain , Christopher Harborne, Sveinn Vall’els Flux , Cathy Lige, Jonathan Levin and Michael Gronager Chainalysis , George Giaglis Athens University o’ Economics and Business , George Papageorgiou University o’ Nicosia , Vitalii Demianets Norbloc and CoinATMRadar ’or their generous help and assistance throughout the research process. Special thanks go also to Alexis Lui, Alex Wong and Hritu Patel Judge Business School ’or the design o’ this study. Finally, we would like to express our graitude to Kate Belger, Hungyi Chen, Raghavendra Rau, Nia Robinson, Robert Wardrop, Bryan Zhang and Tania Ziegler o’ the CCAF ’or their coninued support and help in producing this report. Special thanks also go to Jack Kleeman.

Acknowledgments

We would like to thank the following cryptocurrency organisaions for paricipaing and contribuing to this research study:1

6

Global Cryptocurrency Benchmarking Study

SatoshiTango

7

Execuive Summary

EXECUTIVE SUMMARY This is the irst study to systemaically invesigate key cryptocurrency industry sectors by collecing empirical, non-public data. The study gathered survey data ’rom nearly cryptocurrency companies and individuals, and it covers 8 countries ’rom ive world regions. The study details the key industry sectors that have emerged and the diferent eniies that inhabit them.

KEY HIGHLIGHTS OF THE STUDY • The current number o’ unique acive users o’ cryptocurrency wallets is esimated to be between .9 million and .8 million. • The lines between the diferent cryptocurrency industry sectors are increasingly blurred: % o’ cryptocurrency companies surveyed are operaing across two cryptocurrency industry sectors or more, giving rise to an increasing number o’ universal cryptocurrency companies. • At least ,876 people are working ’ull-ime in the cryptocurrency industry, and the actual total igure is likely well above two thousand when large mining organisaions and other organisaions that did not provide headcount igures are added. • Average security headcount and costs ’or payment companies and exchanges as a percentage o’ total headcount/operaing expenses are similar, but signiicantly higher ’or wallets. EXCHANGES • The exchanges sector has the highest number o’ operaing eniies and employs more people than any other industry sector covered in this study; a signiicant geographical dispersion o’ exchanges is observed. •

% o’ small exchanges hold a ’ormal government license compared to only

• On average, security headcount corresponds to WALLETS • Between .8 million and

% o’ large exchanges.

% o’ total employees and 7% o’ budget is spent on security.

. million wallets are esimated to be currently acive.

• The lines between wallets and exchanges are increasingly blurred: % o’ wallets surveyed provide an integrated currency exchange ’eature, o’ which 8 % ofer a naional-to-cryptocurrency exchange service. In contrast with exchanges, the majority o’ wallets do not control access to user keys. PAYMENTS • While 79% o’ payment companies have exising relaionships with banking insituions and payment networks, the diiculty o’ obtaining and maintaining these relaionships is cited as this sector's biggest challenge. • On average, naional-to-cryptocurrency payments consitute two-thirds o’ total payment company transacion volume, whereas naional-to-naional currency trans’ers and cryptocurrency-to-cryptocurrency payments account ’or 7% and 6%, respecively. MINING • 7 % o’ large miners rate their inluence on protocol development as high or very high, compared to

% o’ small miners.

• The cryptocurrency mining map shows that publicly known mining ’aciliies are geographically dispersed, but a signiicant concentraion can be observed in certain Chinese provinces.

8

Global Cryptocurrency Benchmarking Study

METHODOLOGY AND STUDY STRUCTURE METHODOLOGY The Cambridge Centre ’or Alternaive Finance carried out ’our online surveys ’rom September 6 to January 7 via secure web-based quesionnaires. Each survey was directed at organizaions and individuals operaing in a speciic sector o’ the cryptocurrency industry as deined by our taxonomy speciically exchanges, wallets, payment service providers, and miners . All surveys were writen and distributed in English, and the exchanges survey as well as the mining survey were translated and distributed in Chinese with the generous help o’ 8btc.com. The research team collected data ’rom cryptocurrency companies and organisaions across 8 countries and ive world regions. Over one hundred cryptocurrency companies and organisaions as well as individual miners paricipated in one or more o’ the ’our surveys. During the survey process, the research team communicated directly with individual organisaions, explaining the study s objecives. For cases in which currently acive major companies did not contribute to our study, the dataset was supplemented with addiional research and web scraping using commonly applied methodologies.

cryptocurrency organisaions and individual miners are included in the research study sample The collected data was encrypted and sa’ely stored, accessible only to the authors o’ this study. All individual company-speciic data was anonymised and analysed in aggregate by industry sector, type o’ acivity, organisaion size, region and country. We esimate that our benchmarking study captured more than 7 % o’ the ’our cryptocurrency industry sectors covered in this report. REPORT STRUCTURE The remainder o’ this report is structured as ’ollows: • Seing the Scene provides a global overview o’ cryptocurrencies, introduces the industry and its key consituents, and discusses cryptocurrency usage and acivity. • The Exchanges secion presents an overview o’ the cryptocurrency exchange sector and the diferent types o’ exchange aciviies, with a paricular ’ocus on security. • The Wallets secion explores the diferent types and ’ormats o’ wallets, as well as widely ofered ’eatures including currency exchange services. • The Payments secion ’eatures a taxonomy o’ the ’our major payment acivity types, and compares naional and cross-border payment channels and transacion sizes. • The Mining secion describes the mining value chain and ’eatures a map with publicly known mining ’aciliies across the world; miners views on policy issues and operaional challenges are also presented. • Appendix A: Brief introducion to cryptocurrencies highlights the general concept of cryptocurrencies and presents their key properies and value proposiions. • Appendix B: The cryptocurrency industry ofers a more detailed introducion to the emergence o’ the cryptocurrency industry. • Appendix C: The geographical dispersion of cryptocurrency users discusses the geographical dispersion of cryptocurrency users and acivity. • References and Endnotes provide in’ormaion on where outside in’ormaion was gathered and ’urther explanaion o’ how some igures were calculated e.g., employee igures by sector .

9

Seing the Scene

GLOSSARY GEOGRAPHY • Asia-Paciic: region that comprises East Asia, South Asia, South-East Asia and Oceania • Africa and Middle East: region that comprises the A’rican coninent as well as the Middle East • Europe: region that comprises Western Europe, Southern Europe and Eastern Europe including Russia • Lain America: region that comprises South America and Central America including Mexico • North America: region composed of Canada and the United States EXCHANGES • Order-book exchange: plaform that uses a trading engine to match buy and sell orders ’rom users • Brokerage service: service that lets users conveniently acquire and/or sell cryptocurrencies at a given price • Trading plaform: plaform that provides a single inter’ace ’or connecing to several other exchanges and/or ofers leveraged trading and cryptocurrency derivaives • Large exchange: exchange with more than

’ull-ime employees and/or a non-negligible market share

• Custodial exchange/custodian: exchange that takes custody o’ users cryptocurrency ’unds WALLETS • Incorporated wallet: registered corporaion that provides sotware and/or hardware wallets. • Custodial wallet/custodian: wallet provider that takes custody o’ users cryptocurrency holdings by controlling the private key s . • Self-hosted wallet: wallet that lets users control private key s , meaning that the wallet service does not have access to users cryptocurrency funds • Large wallet: incorporated wallet that has more than

’ull-ime employees

• Wallets with integrated currency exchange: wallets that provide currency exchange services within the wallet inter’ace using one o’ three exchange models: • Centralised exchange/brokerage service model: wallet provider acts as central counterparty • Integrated third-party exchange model: wallet provider partners with a third-party exchange to provide exchange services • P2P exchange/marketplace model: wallet provider ofers a built-in P P exchange that lets users exchange currencies between themselves

Global Cryptocurrency Benchmarking Study

PAYMENTS • Naional currency-focused: services that use cryptocurrency primarily as a payment rail ’or ’ast and cost-eicient payments, which are generally denominated in naional currencies • B2B payment services: plaforms that provide payments ’or businesses, oten imes across borders • Money transfer services: services that provide primarily internaional money trans’ers ’or individuals e.g., tradiional remitances, bill payment services • Cryptocurrency-focused: services that facilitate the use of cryptocurrencies; generally payments are denominated in cryptocurrency, but can also be exchanged to naional currencies • Merchant services: services that process payments ’or cryptocurrency-acceping merchants, and provide addiional merchant services e.g., shopping cart integraions, point-o’-sale terminals • G’n’ral-purpos’ cryptocurr’ncy plaform: plaforms that per’orm a variety o’ cryptocurrency trans’er services e.g., instant payments to other users o’ the same plaform using cryptocurrency and/or naional currencies, payroll, bill payment services MINING • Mining value chain: the cryptocurrency mining sector is composed o’ the ’ollowing principal aciviies: • Mining hardware manufacturing: design and building o’ specialised mining equipment • Self-mining: miners running their own equipment to ind valid blocks • Cloud mining services: services that rent out hashing power to customers • R’mot’ hosing s’rvic’s: services that host and maintain customer-owned mining equipment • Mining pool: structure that combines computaional resources ’rom muliple miners to increase the ’requency and likelihood o’ inding a valid block; rewards are shared among paricipants • Small miners: registered companies acive in the mining industry, but operaing with limited scale; individual miners operaing as sole proprietors • Large miners: mining organisaions that engage in medium-to-large scale mining operaions and occupy a signiicant posiion in the industry TECHNICAL • Blockchain: record o’ all validated transacions grouped into blocks, each cryptographically linked to predecessor transacions down to the genesis block, thereby creaing a chain o’ blocks • Keys: term used to describe a pair o’ cryptographic keys that consists o’ a private secret key and a corresponding public key: the private key can be compared to a password needed to unlock cryptocurrency ’unds while the public key i’ converted to an address can be compared to a public email address or bank account number • Muli-signature: mechanism to split control over an address among muliple private keys such that a speciic threshold o’ keys are needed to unlock ’unds stored in that paricular address

11

SETTING THE SCENE SETTING THE SCENE

12

Global Cryptocurrency Benchmarking Study

Figure : Bitcoin's genealogical tree

Innovaive New blockchain systems

dApps/Other

Litle to no innovaion

Altcoins

CRYPTOCURRENCY OVERVIEW

Cryptocurrency and Blockchain Innovaions

BITCOIN, ALTCOINS, AND INNOVATION Bitcoin began operaing in January 9 and is the irst decentralised cryptocurrency, with the second cryptocurrency, Namecoin, not emerging unil more than two years later in April . Today, there are hundreds o’ cryptocurrencies with market value that are being traded, and thousands o’ cryptocurrencies that have existed at some point.1 The common element o’ these diferent cryptocurrency systems is the public ledger blockchain that is shared between network paricipants and the use o’ naive tokens as a way to incenivise paricipants ’or running the network in the absence o’ a central authority. However, there are signiicant diferences between some cryptocurrencies with regards to the level o’ innovaion displayed Figure . The majority o’ cryptocurrencies are largely clones o’ bitcoin or other cryptocurrencies and simply ’eature diferent parameter values e.g., diferent block ime, currency supply, and issuance scheme . These cryptocurrencies show litle to no innovaion and can be re’erred to as altcoins.2

13

Seing the Scene

Figure : The total cryptocurrency market capitalisaion has increased more than x since early reaching nearly $ billion in March 7

6,

Data sourced from CoinDance3

Bitcoin

In contrast, a number o’ cryptocurrencies have emerged that, while borrowing some concepts ’rom Bitcoin, provide novel and innovaive ’eatures that ofer substanive diferences. These can include the introducion o’ new consensus mechanisms e.g., proo’-o’-stake as well as decentralised compuing plaforms with smart contract capabiliies that provide substanially diferent ’uncionality and enable nonmonetary use cases. It can be use’ul to disinguish between altcoins lacking any signiicant innovaion and what we re’er to as cryptocurrency and blockchain innovaions , which can be grouped into two categories: new (public) blockchain systems that ’eature their own blockchain e.g., Ethereum, Peercoin, Zcash , and dApps/Other that exist on addiional layers built on top o’ exising blockchain systems e.g., Counterparty, Augur .4

14

Other cryptocurrencies

It should be noted that Figure 1 only captures cryptocurrencies built on public and permissionless blockchains. It does not include private or permissioned blockchain systems that restrict the number o’ network paricipants, and do not require a naive asset ’or running the network. The combined market capitalisaion i.e., market price muliplied by the number o’ exising currency units o’ all cryptocurrencies has increased more than threefold since early 6 and has reached $ 7 billion in April 7 Figure . A relaively low, but not insigniicant share o’ value is allocated to duplicaion i.e., altcoins , while a growing share has been apporioned to innovaive cryptocurrencies cryptocurrency and blockchain innovaions .

Global Cryptocurrency Benchmarking Study

As o’ April

7, the ’ollowing cryptocurrencies are the largest ater bitcoin in terms o’ market capitalisaion:

ETHEREUM ETH Decentralised compuing plaform which ’eatures its own Turing-complete programming language. The blockchain records scripts or contracts that are run and executed by every paricipaing node, and are acivated through payments with the naive cryptocurrency ether . Oicially launched in , Ethereum has atracted signiicant interest ’rom many developers and insituional actors.

DASH Privacy-’ocused cryptocurrency launched in early that has recently experienced a signiicant increase in market value since the beginning o’ 7. In contrast to most other cryptocurrencies, block rewards are being equally shared between miners and masternodes , with % o’ revenues going to the treasury to ’und development, community projects and markeing.

MONERO XMR Cryptocurrency system that aims to provide anonymous digital cash using ring signatures, conidenial transacions and stealth addresses to ob’uscate the origin, transacion amount and desinaion o’ transacted coins. Launched in , it saw a substanial increase in market value in 6.

RIPPLE XRP Only cryptocurrency in this list that does not have a blockchain but instead uses a global consensus ledger . The Ripple protocol is used by insituional actors such as large banks and money service businesses. A ’uncion o’ the naive token XRP is to serve as a bridge currency between naional currency pairs that are rarely traded, and to prevent spam atacks.

LITECOIN LTC Litecoin was launched in and is considered to be the silver to bitcoin s gold due to its more pleni’ul total supply o’ 8 million LTC. It borrows the main concepts ’rom bitcoin but has altered some key parameters e.g., the mining algorithm is based on Scrypt instead o’ bitcoin s SHA- 6 .

Seing the Scene

Figure : Bitcoin BTC has ceded signiicant market cap share to other cryptocurrencies, most notably ether ETH % o’ total cryptocurrency market capitalisaion

Bitcoin BTC

Ether ETH

DASH

Monero XMR

Ripple XRP

Litecoin LTC

Other

Data sourced from CoinMarketCap5

Although bitcoin remains the dominant cryptocurrency in terms o’ market capitalisaion, other cryptocurrencies are increasingly cuing into bitcoin s historically dominant market cap share: while bitcoin s market capitalisaion accounted ’or 86% o’ the total cryptocurrency market in March , it has dropped to 7 % as o’ March 7 Figure . Ether ETH , the naive cryptocurrency o’ the Ethereum network, has established itsel’ as the second-largest cryptocurrency. The combined other cryptocurrency category has doubled its share o’ the total market capitalisaion ’rom % in to 6% in 7. Privacy-’ocused cryptocurrencies DASH and monero XMR have become increasingly popular and currently consitute a combined % o’ the total cryptocurrency market capitalisaion.

6

Figure shows that both DASH and monero have experienced the most signiicant growth in terms o’ price in recent months. While monero s price already began skyrockeing in the summer o’ 6, the price o’ DASH has increased exponenially since December 6. The price o’ ether has also recovered since a series o’ atacks on the Ethereum ecosystem, staring with the DAO hack in June 6, and increased 8x since its 6 low o’ less than $7 in December. All listed cryptocurrencies have increased their market value in this ime window.

Global Cryptocurrency Benchmarking Study

Figure : Market prices o’ DASH, monero XMR and ether ETH have experienced the most signiicant growth since June 6

Data sourced from CryptoCompare6 Not’: th’ pric’ mulipli’r variabl’ shows th’ pric’ ’voluion of ’ach cryptocurr’ncy sinc’ th’ b’ginning of Jun’ 6. A valu’ abov’ m’ans that th’ pric’ has incr’as’d by this factor, wh’r’as a valu’ b’low indicat’s that th’ pric’ has d’cr’as’d during th’ sp’cii’d im’ window. Bitcoin BTC

Ether ETH

Monero XMR

DASH

Ripple XRP

Litecoin LTC

Figure : Are ETH and DASH becoming the pre’erred sa’e haven assets as Bitcoin s scaling debate heats up or is their price rise a sign of growing interest in other cryptocurrencies?

Data sourced from CoinDance7 and CryptoCompare Number of Bitcoin Unlimited Nodes

DASH

Ether

Bitcoin

let axis

right axis

right axis

right axis

7

Seing the Scene

Table : Average daily number o’ transacions ’or largest cryptocurrencies Bitcoin

Ethereum

DASH

Ripple

Monero 79

Litecoin

Q

6

, 9

,

, 8

N/A

Q

6

,

,89

, 8

N/A

Q

6

9,6

,

9

,

9

N/A

,

,

Q

6

6 ,7

,9 8

,

8

N/A

, 98

,

N/A

,6

,

January February

86,

7

8

9

7,79

,8

, ,

Data sourc’d from mulipl’ block ’xplor’rs8

Figure 6: Bitcoin is the most widely supported cryptocurrency among paricipaing exchanges, wallets and payment companies 98%

33% 26% 16%

13%

Bitcoin (BTC)

Ether (ETH)

Litecoin (LTC)

Ripple (XRP)

11%

Dogecoin (DOGE)

When comparing the average number o’ daily transacions per’ormed on each cryptocurrency s payment network, Bitcoin is by ’ar the most widely used, ’ollowed by considerably distant second-place Ethereum Table . All other cryptocurrencies have rather low transacion volumes in comparison. However, a general trend towards rising transacion volumes can be observed ’or all analysed cryptocurrencies since Q 6 except Litecoin, whose volumes are stagnant . Monero and DASH transacion volumes are growing the ’astest. I’ signiicant price movements and on-chain transacion volumes relect the popularity o’ a cryptocurrency system, it can be established that DASH, Monero and Ethereum have

8

10%

9%

8%

Ether Classic (ETC)

DASH

Monero (XMR)

Other

seen the greatest increase in popularity in recent months. Nevertheless, Bitcoin remains the clear leader both in terms o’ market capitalisaion and usage despite the rising interest in other cryptocurrencies. Bitcoin is also the cryptocurrency that is supported and used by the overwhelming majority o’ wallets, exchanges and payment service providers that paricipated in this study Figure 6 . As a result, the report will be mainly ’ocused on bitcoin although we atempt to consider other cryptocurrencies whenever it is relevant to do so and suicient data exists.

Global Cryptocurrency Benchmarking Study

Table : The ’our key cryptocurrency industry sectors and their primary ’uncion

Industry sectors

Primary ’uncion

Exchanges

Purchase, sale and trading o’ cryptocurrency

Wallets

Storage of cryptocurrency

Payments

Facilitaing payments using cryptocurrency

Mining

Securing the global ledger 'blockchain' generally by compuing large amounts o’ hashes to ind a valid block that gets added to the blockchain

THE CRYPTOCURRENCY INDUSTRY

EMERGENCE OF A BUSINESS ECOSYSTEM A mulitude o’ projects and companies have emerged to provide products and services that facilitate the use of cryptocurrency for mainstream users and build the in’rastructure ’or applicaions running on top o’ public blockchains. A cryptocurrency ecosystem, composed o’ a diverse set o’ actors, builds inter’aces between public blockchains, tradiional inance and various economic sectors. The existence o’ these services adds signiicant value to cryptocurrencies as they provide the means for public blockchains and their naive currencies to be used beyond in the broader economy. CRYPTOCURRENCY INDUSTRY SECTORS While the cryptocurrency industry is composed of many important actors and groups, this study limits the analysis to what we believe are the four key cryptocurrency industry sectors today: exchanges, wallets, payments companies, and mining Table .9

9

Seing the Scene

Figure 7: The geographical distribuion o’ study paricipants

North America

Total paricipants

7%

Exchanges

8%

Wallets

9%

Payments

9% %

Mining

Lain America Total paricipants

6%

Exchanges

%

Wallets

%

Payments

%

Mining

%

Number o’ paricipants >

6–

–

1–2

Global Cryptocurrency Benchmarking Study

Europe

Total paricipants Exchanges

9% 7%

Wallets

%

Payments

%

Mining

%

Asia-Paciic

Total paricipants

6%

Exchanges

7%

Wallets

9%

Payments

%

Mining

%

A’rica & Middle East Total paricipants

%

Exchanges

%

Wallets

%

Payments

%

Mining

%

21

Seing the Scene

Exchanges can be used to buy, sell and trade cryptocurrencies ’or other cryptocurrencies and/or naional currencies, thereby ofering liquidity and seing a re’erence price. Wallets provide a means to securely store cryptocurrencies by handling key management. The payments sector is composed of companies that provide a wide range of services to facilitate cryptocurrency payments. Finally, the mining sector is responsible ’or conirming transacions and securing the global record o’ all transacions the 'blockchain' .

The lines between the diferent cryptocurrency industry sectors are increasingly blurred and a growing number of cryptocurrency companies can be characterised as universal plaforms Each o’ these sectors has its own working taxonomy that subdivides actors and aciviies into more reined categories to account for the diversity of services within each industry sector. These taxonomies are presented at the beginning o’ each o’ the report secions. While we have organised this report in a way that suggests disinct industry sectors, it should be noted that the lines between sectors are increasingly blurred. Some companies provide a plaform ’eaturing products and services across muliple industry sectors, whereas others are operaing in muliple industry segments using diferent brands. In ’act, 9% o’ cryptocurrency companies that paricipated in the study provide services that span two industry sectors, % are acive in three industry sectors, and some eniies operate across all ’our industry sectors. A growing number o’ companies in the industry can thus be considered universal cryptocurrency plaforms given the diverse range o’ products and services they ofer to their customers. It can be observed that wallets are progressively integraing exchange services within the wallet inter’ace as a means to load the wallet, while exchanges oten also provide a means to securely store newly acquired cryptocurrency within their plaform. Similarly, payment companies increasingly ofer ’ullyledged money trans’er plaforms that enable the storage and trans’er o’ cryptocurrencies, and oten include an integrated currency exchange service. As a result, puing cryptocurrency companies into ixed categories can represent a challenging task in some cases.

22

THE GEOGRAPHY OF THE CRYPTOCURRENCY INDUSTRY Our sample covers cryptocurrency companies, organisaions and individuals across 8 countries. The United States leads with study paricipants, closely ’ollowed by China where 9 paricipants are based Figure 7 . Ater a signiicant gap, the United Kingdom comes third with 6 paricipants, ’ollowed by Canada where 7 paricipants are based. In terms o’ regional distribuion, most study paricipants come ’rom the Asia-Paciic region 6% . Europe and North America ’ollow with 9% and 7%, respecively. Only a small proporion o’ study paricipants are based in Lain America 6% as well as A’rica and the Middle East % .

Global Cryptocurrency Benchmarking Study

Figure 8: Cryptocurrency companies based in AsiaPaciic and North America have the highest number of employees

Figure 9: North American cryptocurrency companies have the highest median number of employees 12

720 676

10 9

7

7

346

105 29

Total Number of Employees Asia-Paciic

North America

Lain America

Africa and Middle East

Median Number of Employees by Company Europe

EMPLOYEES

At least ,876 people work ’ull-ime in the cryptocurrency industry

North America

Asia-Paciic

Europe

Africa and Middle East

Lain America

Combining the paricipaing eniies o’ all industry sectors reviewed in this report with the excepion o’ miners, ’or which no employee data was collected , the lower bound o’ the total number of people employed in the cryptocurrency industry can be established at ,876 employees. Signiicant diferences between regions can be observed Figure 8 . Most ’ull-ime employees o’ the cryptocurrency industry are employed by companies based in Asia-Paciic, ’ollowed closely by North America and more speciically the US . With a considerable gap ’ollows Europe, while the total number o’ people working ’or cryptocurrency irms based in Lain America and especially A’rica and the Middle East are comparaively low. However, it should be noted that many companies have oices in several regions and not all employees work in the region where the employer is based. Companies surveyed have ’ull-ime employees on average, but the existence o’ several large companies with considerable headcount makes it use’ul to also examine the median number o’ employees, which is nine. Figure 9 shows that study paricipants based in North America have the highest median number o’ employees , whereas paricipants ’rom Africa and the Middle East as well as from Europe have the lowest seven .

23

Seing the Scene

USE CASES AND ACTIVITY

USE CASES As discussed in more detail in appendix A, the use cases ’or cryptocurrencies can be grouped into ’our major categories: * * * *

Speculaive digital asset/investment Medium o’ exchange Payment rail Non-monetary use cases

Some evidence exists that as o’ today the main use case ’or cryptocurrencies is speculaion. A 6 joint report ’rom Coinbase and ARK Invest esimates that % o’ Coinbase users use bitcoin strictly as an investment. Global bitcoin trading volumes have been signiicantly higher than network transacion volumes, a igure that is even higher ’or most other cryptocurrencies. However, it must also be noted that a rising number o’ cryptocurrency transacions are not per’ormed on-chain i.e., directly on the blockchain network , but ofchain via internal accouning systems operated by centralised exchanges, wallets and payment companies. These of-chain transacions do not appear on a public ledger. Esimates o’ the use o’ cryptocurrency ’or payments has varied signiicantly across diferent sources. For example, a 6 report ’rom the Boston Federal Reserve has esimated that 7 % o’ US consumer who own cryptocurrencies have used them ’or payments within a month period, while the Coinbase/ARK Invest report indicates that 6% o’ Coinbase users use bitcoin as a transacional medium deined as making at least one payment per year .11 While a growing number o’ merchants worldwide are acceping cryptocurrency as a payment method, it appears that cryptocurrencies are not primarily being used as a medium o’ exchange ’or daily purchases.12 This is due to several ’actors, including price volaility and the lack o’ a closed loop cryptocurrency economy, in which people or businesses would get paid in cryptocurrency and then use cryptocurrency as a primary payment method ’or everyday expenses. As will be discussed in more detail in the Payments secion, a considerable number of companies have emerged that use cryptocurrency networks primarily as a payment rail to make ’ast and cheap cross-border payments. However, ’ollowing the recent surge in bitcoin transacion ’ees, some are reconsidering this strategy and shiting transacions towards private blockchain-based soluions. Ripple s payment network is being used by large inancial insituions, with o’ the world s largest banks working with Ripple s global consensus ledger. Finally, Ethereum has established itsel’ as a major blockchain system ’or non-monetary applicaions, with nearly

24

Global Cryptocurrency Benchmarking Study

Figure since

: The esimated number o’ unique acive users o’ cryptocurrency wallets has grown signiicantly to between .9 million and .8 million today

Lower Bound

projects building on its decentralised compuing plaform.13 Ethereum is also increasingly being used as a plaform ’or launching new cryptocurrencies that are powering applicaions built on Ethereum (dApp tokens . Non-monetary use o’ Bitcoin has also increased. For example, the use o’ the OP_RETURN ’eature in the bitcoin scriping language ’requently used ’or embedding metadata in bitcoin transacions, ’or enabling e.g., ime-stamping services and overlay networks has increased roughly x since January .14 USERS Esimaing both the number o’ cryptocurrency holders and users is a diicult endeavour as individuals can use muliple wallets ’rom several providers at the same ime. Moreover, one single user can have muliple wallets and exchange accounts ’or diferent cryptocurrencies and thus be counted muliple imes. In addiion, many individuals are using centralised wallet, exchange or payment plaforms that pool ’unds together into a limited number o’ large wallets or addresses, which ’urther complicates the picture.

It is impossible to know precisely how many people use cryptocurrency

Mid-Point

Upper Bound

According to the earlier re’erenced 6 report ’rom the Boston Federal Reserve, .87% o’ US consumers are esimated to have owned cryptocurrency in , which amounts to around .8 million people in the US alone. Based on calculaions using their own user data, Coinbase and ARK Research esimate that in 6 around million people around the world have owned bitcoin. Using data obtained ’rom study paricipants and assuming that an individual holds on average two wallets, we esimate that currently there are between .9 million and .8 million unique users aciv’ly using a cryptocurrency wallet. This igure has signiicantly increased since Figure . It is important to note that our esimate o’ the total number o’ acive wallets does not include users whose exchange accounts serve as their de ’acto wallet to store cryptocurrency, nor users ’rom payment service providers or other plaforms that enable the storage o’ cryptocurrency. In other words, the total number o’ acive cryptocurrency users is likely considerably higher than our esimate o’ unique acive wallet users. For a variety o’ reasons, determining the geographical distribuion o’ cryptocurrency users is challenging. Appendix C contains a discussion of the geographical dispersion of users based on data we collected and public data sources.

Wallets

EXCHANGES Exchanges provide on-of ramps ’or users wishing to buy or sell cryptocurrency. The exchange sector is the irst to have emerged in the cryptocurrency industry and remains the largest sector both in terms o’ the number o’ companies and employees.

6

Global Cryptocurrency Benchmarking Study

KEY FINDINGS Services/Operaions

Security

• O’ all industry sectors covered in this study, the exchange sector has the highest number o’ operaing eniies and employs the most people •

% o’ small exchanges hold a ’ormal government license compared to only % o’ large exchanges

• 7 % o’ small exchanges have one or two cryptocurrencies listed, while 7 % o’ large exchanges provide trading support ’or two or more cryptocurrencies: bitcoin is supported by all exchanges, ’ollowed by ether % and litecoin % • A hand’ul o’ large exchanges and ’our naional currencies USD, EUR, JPY and CNY dominate global cryptocurrency trading volumes • Study paricipants reported cryptocurrency trading in diferent naional currencies •

% o’ exchanges support naional currencies other than the ive global reserve currencies USD, CNY, EUR, GBP, JPY

• Exchange services/aciviies ’all into three categories order-book exchanges, brokerage services and trading plaforms: 7 % o’ small exchanges specialise in one type o’ exchange acivity brokerage services being the most widely ofered , while the same percentage o’ large exchanges are providing muliple exchange aciviies • 7 % o’ exchanges take custody o’ user ’unds, users control keys

• On average, security headcount corresponds to % o’ total employees, and 7% o’ budget is spent on security; small exchanges have slightly higher igures than large exchanges • 8 % o’ large exchanges and 69% o’ small exchanges use external security providers; large exchanges use a larger number o’ external security providers than small exchanges • Opional two-’actor authenicaion FA is ofered ’or customers by a majority o’ exchanges and required ’or employees ’or most operaions; small exchanges tend to use FA less than large exchanges • Exchanges use a variety o’ internal security measures; diferences in approaches are observed between small and large exchanges • Only % o’ small custodial exchanges have a writen policy outlining what happens to customer funds in the event o’ a security breach resuling in the loss o’ customer ’unds, compared to 78% o’ large custodial exchanges • 79% o’ exchanges provide regular security training programs to their staf • 9 % o’ exchanges use cold-storage systems; on average 87% o’ ’unds are kept in cold storage • Muli-signature architecture is supported by 86% o’ large exchanges and 76% o’ small exchanges

% let • Frequency o’ ’ormal security audits varies considerably between exchanges; large exchanges tend to per’orm them on a more regular basis • 6 % o’ large exchanges have external paries per’orming their ’ormal security audits, while 6 % o’ small exchanges per’orm them internally. •

% o’ custodial exchanges have a proo’-o’-reserve component as part of their formal security audit

7

Exchanges

Table : Taxonomy o’ exchange services Type o’ acivity

Descripion

Order-book exchange

Plaform that uses a trading engine to match buy and sell orders ’rom users

Brokerage service

Service that lets users conveniently acquire and/or sell cryptocurrencies at a given price

Trading plaform

Plaform that provides a single inter’ace ’or connecing to several other exchanges and/or ofers leveraged trading and cryptocurrency derivaives

INTRODUCTION AND LANDSCAPE

INTRODUCTION Exchanges provide services to buy and sell cryptocurrencies and other digital assets ’or naional currencies and other cryptocurrencies. Exchanges play an essenial role in the cryptocurrency economy by ofering a marketplace ’or trading, liquidity, and price discovery. Throughout this secion, we deine a cryptocurrency exchange as any enity that allows customers to exchange buy/sell cryptocurrencies ’or other ’orms o’ money or assets. We use the taxonomy in Table ’or categorising the three main types o’ aciviies provided by cryptocurrency exchanges. LANDSCAPE Exchanges were one o’ the irst services to emerge in the cryptocurrency industry: the irst exchange was ’ounded in early as a project to enable early users to trade bitcoin and thereby establish a market price. The exchange sector remains the most populated in terms o’ the number o’ acive eniies. One data services website alone lists daily trading volumes ’or 8 diferent cryptocurrency exchanges, which suggests that the total number o’ operaing exchanges is likely considerably higher.1 We collected data ’rom exchanges based in 7 countries and represening all ive world regions Figure . Our sample contains more exchanges ’rom Europe than any other region, ’ollowed by Asia-Paciic. With regards to individual countries, the United Kingdom and the United States are leading with 8% and %, respecively, o’ all cryptocurrency exchanges. However, the market share in terms o’ bitcoin trading volume is substanially diferent: although there are a hundreds o’ companies providing cryptocurrency exchange services, ’ewer than a dozen order-book exchanges dominate bitcoin trading Figure .2

8

Global Cryptocurrency Benchmarking Study

Figure

: Europe has the most number o’ exchanges in our study sample, ’ollowed by Asia-Paciic

Asia-Paciic

Lain America

Europe

North America

Africa and Middle East

UK

Canada

Japan

US

China

Other

Figure : Trading volumes across the top exchanges are more evenly distributed ’ollowing increased regulaion o’ Chinese exchanges in early 7 Bitcoin trading volume market share o’ major exchanges

Average market share February-March 7

Data sourced from Bitcoinity3

9

Exchanges

Figure : USD is the most widely supported naional currency on exchanges; many specialise in local currencies % o’ Exchanges Supporing Naional Currencies

In terms o’ trading volumes by naional currencies, there are major diferences as well between the top-traded currencies and the most widely supported currencies. The US dollar USD is the most widely supported naional currency, ’ollowed by the Euro EUR and the Briish Pound GBP Figure . While reported trading in the Chinese Renminbi CNY appeared to represent an oten signiicant majority o’ global bitcoin trading volumes ’rom to 6 ranging ’rom % to 9 % 4, bitcoin trading denominated in CNY has plummeted in early 7 ater the ightening o’ regulaion by the People's Bank o’ China Figure .

While global cryptocurrency trading volume is dominated by four reserve currencies, trading in at least other naional currencies is supported The data demonstrate that the exchange market is dominated by a hand’ul o’ exchanges that are responsible ’or the majority o’ global bitcoin trading volumes, o’ which the lion share is

denominated in a small number o’ internaional currencies. In contrast, the majority o’ exchanges mostly small specialise in local markets by supporing local currencies: % o’ all exchanges support naional currencies other than the ive reserve currencies. Trading volumes at most small exchanges are insigniicant compared to the market leaders, but these exchanges service local markets and make cryptocurrencies more available in many countries. TYPES Using the taxonomy o’ the three types o’ exchange aciviies introduced above, indings show that there are major diferences between the services that small and large exchanges provide. While 7 % o’ small exchanges specialise in one type o’ acivity, the same percentage o’ large exchanges are providing muliple types o’ exchange aciviies Figure . The most popular combinaion o’ two aciviies are order-book exchanges that also ofer a trading plaform. % o’ large exchanges and only % o’ small exchanges ofer a plaform that includes an order-book exchange, trading

Global Cryptocurrency Benchmarking Study

Figure

: Trading in renminbi has plummeted since Chinese authoriies ightened regulaion BTC Exchange Trading Volume Share by Naional Currency

Data sourced from Bitcoinity

Figure : The majority o’ small exchanges specialise in a single type o’ exchange acivity while large exchanges are generally engaged in more than one acivity Small Exchanges

Order-book exchange

Trading plaform

Brokerage services

Two aciviies

Large Exchanges

All three combined

Order-book exchange

Two aciviies

Brokerage services

All three combined

31

Exchanges

Figure 6: Bitcoin is listed on all surveyed exchanges; ether and litecoin are also widely supported % o’ Exchanges Supporing the Listed Cryptocurrencies

plaform and brokerage services. Over % o’ small exchanges specialise in the provision o’ brokerage services, compared to only 7% o’ large exchanges. % o’ small exchanges provide a stand-alone trading plaform, while large exchanges generally combine this acivity with an order-book exchange. Despite many cases of internal fraud and bankruptcies of centralised exchanges, P P exchanges have yet to gain more popularity: o’ the exchanges represented in this study, only provide a decentralised marketplace ’or exchanging cryptocurrencies. SUPPORTED CRYPTOCURRENCIES All exchanges support bitcoin, while ether and litecoin are listed on % and % o’ exchanges, respecively Figure 6 . Only a minority o’ exchanges make markets ’or the exchange o’ cryptocurrencies other than the above three. While 9% o’ exchanges solely support bitcoin, % have two listed cryptocurrencies, and 6% o’ all eniies enable trading three or more cryptocurrencies. We observe that 7 % o’ large exchanges provide trading support ’or two or more cryptocurrencies, while 7 % o’ small exchanges have only one or two cryptocurrencies listed. 6% o’ survey paricipants also provide cryptocurrency-based derivaives, and 6% are ofering margin trading.

32

EMPLOYEES There are , 7 total employees at paricipaing exchanges, making exchanges the largest employer in the cryptocurrency industry.6 Even though 7% o’ all exchanges are based in Europe, the total number o’ employees at European exchanges is considerably less than the total headcount at companies based in Asia-Paciic, where almost 6 % o’ large exchanges are based Figure 7 .

The exchange industry sector employs more people than any other cryptocurrency sector On average, cryptocurrency exchanges employ people. However, the distribuion reveals that nearly hal’ o’ exchanges have less than employees Figure 8 , indicaing that the majority o’ exchanges are small companies. Indeed, % o’ all exchanges have less than employees. However, 9% o’ exchanges have more than employees, with the largest employing around people.

Global Cryptocurrency Benchmarking Study

Figure 7: Asian-Paciic exchanges have the highest number o’ employees

Total number of employees by region Average number of employees by exchange

Not’: th’s’ igur’s includ’ ’mploy’’s from univ’rsal cryptocurr’ncy compani’s that ar’ also aciv’ in industry s’ctors oth’r than ’xchang’s.

Figure 8: Nearly hal’ o’ exchanges have less than

employees

Number o’ Employees per Exchange -

-

-

>

33

Exchanges

Figure 9: More than hal’ o’ small exchanges hold a government license compared to only large exchanges Small Exchanges

% o’

Large Exchanges

52%

35%

65% 48%

License

No License

LICENSE One notable observaion is the diference between the share o’ small and large exchanges that hold a government license o’ some kind: % o’ small exchanges have a ’ormal government license or authorisaion compared to only % o’ large exchanges Figure 9 . 8 % o’ all exchanges based in Asia-Paciic do not have a license, whereas 78% o’ North American-based exchanges hold a ’ormal government license or authorisaion. 7% and % o’ European and Lain American-based exchanges, respecively, hold a license as well. However, not having a ’ormal license does not necessarily mean that the exchanges are not regulated, as appears to be the case now with many o’ the China-based exchanges.

34

License

No License

OPERATIONAL CHALLENGES AND RISK FACTORS We presented a list o’ operaional challenges to paricipaing exchanges and asked them to rate these ’actors according to the level o’ risk that they currently pose to operaions. Findings show that while small and large exchanges rate certain ’actors approximately similarly, there are substanial diferences with regards to other ’actors Table . Generally, small exchanges have a tendency to rate risks higher than large exchanges. The highest risk ’actor ’or small exchanges and second highest risk ’actor ’or large exchanges are security breaches that could result in a loss o’ ’unds. One inding that stands out is that large exchanges rate challenges posed by regulaion in general as posing the highest risk to their operaions – a ’actor that is rated lower by small exchanges.

Global Cryptocurrency Benchmarking Study

Table : Operaional risk ’actors rated by exchanges Respondents Scored these Categories on a : Very low risk

: Low risk

: Medium risk

Lowest average score

-

Scale : High risk

: Very high risk

Highest average score

Weighted average

Small exchanges

Large exchanges

IT security/hacking

3.70

.9

. 7

Deterioraing banking relaionships

3.45

.79

.67

Fraud

3.08

.

. 8

Regulaion in general

3.08

.89

.

Compeitors/business model risk

2.88

.

. 8

Reputaion risk

2.88

.9

.7

AML/KYC enforcement

2.68

.6

.7

Insuicient demand ’or services

2.58

.8

.

Lack of talent

2.46

.

.

Small exchanges seem to have considerable diiculies with either obtaining or maintaining banking relaionships, while large exchanges appear to have this risk ’actor under control. Small exchanges are also substanially more concerned about ’raud than large exchanges, which suggests that they are either targeted more oten than large exchanges or simply that ’raud has more a more severe inancial impact due to the limited scale o’ their operaions and budget.

Exchanges

Figure : 7 % o’ exchanges take custody o’ users cryptocurrency ’unds by controlling the private keys

Figure : Order-book-only exchanges spend x more on security as a share of total budget than pure brokerage services and trading plaforms Exchanges Engaged in a Single Type o’ Acivity

4%

73%

28%

17% 15% 14%

23%

Order-book exchanges

Exchange controls keys User controls keys

SECURITY

6

14%

13%

Brokerage services

Trading pla orms

Customers have the opion Average Security Headcount

Average Security Cost

EXCHANGES CONTINUE TO BE POPULAR TARGETS FOR CRIMINALS Cryptocurrencies are digital bearer assets that once transferred cannot easily be recovered i.e., the payment cannot be reversed unless the recipient decides to do so . The surge in market prices o’ cryptocurrencies in recent years has made exchanges a popular target for criminals as they handle and store large amounts o’ cryptocurrencies. Numerous events have led to the loss o’ exchange customer ’unds, and a wide variety o’ schemes have been employed ranging from outside server breaches to insider thet. In many cases, exchanges where losses occurred were ’orced to close and customer ’unds were never recovered. One study analysing the survival rate o’ bitcoin exchanges ’ound that over % o’ exchanges had experienced security breaches, ’orcing 6% o’ afected exchanges to go out o’ business.7

Global Cryptocurrency Benchmarking Study

Figure : Large exchanges are realising economies of scale as they spend less of their total budget on security than small exchanges

Figure : Small exchanges have a higher percentage o’ employees working ’ull-ime on security than large exchanges

14%

29%

13%

28%

14%

13%

74%

32% % of Exchanges

% of Exchanges

17%

55%

Small exchanges

Large exchanges

39%

Small exchanges

% o’ Employees Working Full-Time on Security -

%

-

%

72%

Large exchanges

% o’ Total Budget Spent on Security -

%

7 % o’ exchanges control customers private keys, making them a potenially atracive honeypot ’or hackers as these exchanges have possession o’ user ’unds denominated in cryptocurrency Figure . % o’ exchanges do not control customers private keys, thereby prevening exchanges ’rom accessing customer holdings or not being able to return funds to users in the event the exchange ceases to ’uncion.8 Large exchanges act more oten as custodians than small exchanges: only % o’ large exchanges let users control keys compared to % o’ small exchanges. SECURITY HEADCOUNT AND COST On average, exchanges have % o’ their employees working ’ull-ime on security and spend 7% o’ their total budget on security. Order-book-only exchanges i.e., eniies not engaged in brokerage services and trading plaforms spend two imes more of their budget on security than companies providing solely brokerage services or pure trading plaforms Figure .

-

%

-

%

-

%

Findings show that on average, small exchanges have slightly higher headcount + % associated with security than large exchanges. The distribuion indicates that the security headcount ranges ’or both small and large exchanges ’rom % to % o’ their total employees Figure . % o’ small exchanges and 7 % o’ large exchanges have between % and % o’ employees working ’ull-ime on security. In ’act, more than hal’ o’ large exchanges have less than 6% o’ headcount associated with security. Similar to security headcount, we observe that small exchanges have on average a slightly higher cost +7% as a percentage o’ their budget associated with security than large exchanges. 7 % o’ large exchanges spend less than %, while 6 % o’ small exchanges spend more than % Figure . The upper limit that both small and large exchanges spend on security cost is % o’ their total budget.

7

Exchanges

Percentage o’ Exchanges That Use External Security Providers

Figure : Large exchanges use a greater number o’ external security providers than small exchanges

Small exchanges

EXTERNAL SECURITY PROVIDERS Over 7 % o’ exchanges secure their systems with the help o’ external security providers, including external code reviewers, muli-signature wallet service providers and two-’actor authenicaion FA service providers. However, there are diferences between small and large exchanges: 8 % o’ large exchanges use external security providers as opposed to 69% o’ small exchanges. While the majority o’ small exchanges that use external security providers place trust in one to two providers, hal’ o’ large exchanges make use o’ three or more external security providers Figure . More than hal’ o’ exchanges indicate that they have not come to rely more on external security providers over ime. USE OF TWO-FACTOR AUTHENTICATION 2FA Muli-’actor authenicaion is an access control method that grants access to a computer system only i’ the requester can supply muliple ’actors e.g., password and a unique one-ime generated token .9 The most widely used form in everyday

8

Large exchanges

li’e is two-’actor authenicaion FA which requires the user to provide two ’actors in order to ideni’y himsel’. 7 % o’ exchanges ofer customers the opion to enable FA ’or logging into their exchange account, and 77% ofer users FA ’or withdrawing ’unds Figure . Only % o’ exchanges provide opional FA ’or trading. % o’ exchanges that control users private keys do not ofer FA ’or trading, as they suppose enabling FA ’or login is enough to prevent an unauthorised person from gaining access to the exchange account ’eatures. It is important to note that FA is an opional security ’eature that most exchanges ofer to their customers and encourage use, but that users are not required to acivate FA. 8% o’ exchanges enable FA ’or all listed acions, but there are notable diferences between small and large exchanges: 8 % o’ large exchanges have FA enabled ’or all listed acions compared to % o’ small exchanges Figure 6 .

Global Cryptocurrency Benchmarking Study

Figure

: Majority o’ exchanges enable opional FA ’or customers ’or logging in and withdrawing ’unds Customers - Opional FA

Not Applicable

Enabled

Not Enabled

Not’: th’ not applicabl’ opion has b’’n chos’n for a vari’ty of r’asons, that includ’ ’xchang’s that do not of’r accounts and do not hold customer funds

Figure 6: Large exchanges enable opional FA ’or nearly all customer acions Number o’ FA-Enabled Acions ’or Users

enabled

1 enabled

2 enabled

All 3 enabled

Not’: th’s’ r’f’r to th’ custom’r acions list’d in Figur’

9

Exchanges

Figure 7: The majority o’ exchanges require employees to use FA ’or sensiive operaions Employees – FA Required

Not applicable

Required

Not required

Not’: som’ ’xchang’s hav’ chos’n th’ not applicabl’ opion for various r’asons, including s’curity for ’mploy’’s b’ing classii’d, and privat’ k’ys not b’ing acc’ssibl’ to staf

While the use o’ FA is mostly an opional ’eature ofered to security-conscious customers, it is oten required by exchanges ’or internal operaions Figure 7 . In ’act, 8 % o’ exchanges have mandatory FA ’or at least one internal operaion acion: 8 % require FA ’or administrator login, and 7 % have mandatory use o’ FA ’or producion access. 7 % require FA ’or accessing private keys, which roughly matches the percentage o’ exchanges that do hold customer keys.

9 % o’ large exchanges and 8 % o’ small exchanges use sotware to create a complete record o’ all internal processes and acions which allows them to quickly discover potenial inconsistencies. The largest diference between small and large exchanges is observed regarding the use o’ special hardware dedicated to a single purpose e.g., air-gapped device ’or cold storage o’ cryptocurrency ’unds , which are used by 9 % o’ large exchanges compared to only 9% o’ small exchanges.

Some exchanges also indicate that they are using three-’actor authenicaion FA internally ’or access to all systems and require hardware devices such as YubiKeys or even hardware wallets as one ’actor. 8 % o’ large exchanges and over 6 % o’ small exchanges require the use o’ FA ’or all o’ the listed operaional acions Figure 8 .

8 % o’ large exchanges and 6 % o’ small exchanges also use physical site locaion security systems or devices to monitor access to ’aciliies. 7 % o’ large exchanges use various types o’ consensus mechanisms that require several employees to authorise a speciic acion e.g., access to customer ’unds , as opposed to % o’ small exchanges. 6 % o’ large exchanges and 8% o’ small exchanges use all ’our security measures.

SECURITY MEASURES Exchanges use a variety o’ internal security measures to monitor producion access and restrict access to sensiive in’ormaion. However, large exchanges use them considerably more oten than small exchanges Figure 9 .

8 % o’ exchanges require that employees must be over a certain threshold of seniority within the company to get access to the producion environment Figure . Fingerprining is only used by % o’ exchanges. Some exchanges also

Global Cryptocurrency Benchmarking Study

Figure 8: 8 % o’ large exchanges require FA ’or employees ’or all listed acions; diferences between small exchanges can be observed Number o’ acions where FA is required ’or employees

All

required

required

required

required

Not’: th’s’ r’f’r to th’ ’mploy’’ acions list’d in Figur’ 7

Figure : Measures used by exchanges to vet staf ’or producion access

Figure 9: Large exchanges use more internal security measures than small exchanges % o’ Exchanges Using Security Measure 91%

% o’ Exchanges Using Security Measure

91%

Exceed speciic treshold o’ seniority 83%

82%

85% 73%

Criminal record checks 62% 59%

70%

55%

Re’erence checks 60%

Credit history checks 30%

Fingerprining Audit trail

Single-purpose dedicated hardware

Small exchanges

Physical site locaion security systems

"Consensus mechanisms"

15%

Large exchanges

41

Exchanges

Figure : Nearly hal’ o’ small exchanges acing as custodians do not have a writen policy that outlines what happens to customer funds in the event of a security breach

Measures Taken with Regards to Customer Funds in the Event of a Security Breach

Small custodial exchanges

53%

47%

Large custodial exchanges

78%

Writen policy

commented that ’ull credit history checks might consitute a breach o’ employee privacy and be diicult to de’end be’ore a tribunal, and also quesioned whether such checks are e a good measure for deciding whether employees should be trusted with producion access. Other exchanges indicated that personal relaionships would play an important role as well. As ’or the internal security measures discussed above, large exchanges do make considerably more use o’ the re’erenced acions than small exchanges: 7 % o’ large exchanges use three or more compared to 8% o’ small exchanges. Only % o’ small exchanges that act as a custodian by controlling customer keys have a writen policy that outlines what happens to customer funds in the event of a security breach that could lead to the loss o’ customer ’unds Figure . In contrast, 78% o’ large custodial exchanges have such a writen policy. 8 % o’ large exchanges and 6 % o’ small exchanges have a writen policy on which employees and paries have access to sensiive in’ormaion, such as private keys and user data Figure . A major diference between small and large

42

22%

No writen policy

exchanges can be observed with regards to producion access: only 6 % o’ small exchanges have a writen policy on who has access to the producion environment compared to 9 % o’ large exchanges. Having the most sophisicated security measures in place does not necessarily prevent malicious actors from successfully breaking into the exchange, as the human element is oten the weakest link in any security system. It is essenial that staf are well trained and familiar with popular social engineering atacks. 79% o’ exchanges do provide security training programs to their staf to educate them on security issues Figure . Some exchanges provide ongoing educaion and training e.g., daily or weekly case studies about possible atack vectors while others ofer periodic training sessions and best security pracices reminders. We do not observe a substanial diference between small and large exchanges with regards to staf training programs. KEY STORAGE This secion re’ers to the key management systems that exchanges use to secure both customer and exchange keys.

Global Cryptocurrency Benchmarking Study

Figure

: Do you have a writen policy on the ’ollowing acions? Producion Access

Access to Sensiive In’ormaion 18%

36%

37%

8% 92%

82%

64%

63%

Small exchanges

Large exchanges

Small exchanges

Writen policy

Figure

:

Large exchanges

No writen policy

% o’ exchanges do not provide security training programs to their staf 79%

21%

Staf training programs

No staf training programs

43

Exchanges

Average % o’ Funds Held in Cold Storage

COLD STORAGE 9 % o’ exchanges indicate that they are using some type o’ cold storage system i.e., generaing and keeping keys oline to secure a porion o’ both customer and their own ’unds. Only 8% are not using any type o’ cold storage system and instead keep ’unds in hot wallets that are online. These igures are approximately the same ’or both small and large exchanges.

9 % o’ exchanges use some type of cold storage system On average, exchanges keep 87% o’ total ’unds in cold storage median corresponds to 9 % o’ total ’unds . There is no signiicant diference between small and large exchanges with regards to the proporion o’ ’unds held in cold storage. All large exchanges and 9 % o’ small exchanges that use a cold storage system have their cold storage ’unds air-gapped , meaning that they reside on storage devices that are physically

44

Median % o’ Funds Held in Cold Storage

isolated ’rom a network connecion. All large exchanges have muliple cold storage locaions, as opposed to 68% o’ small exchanges. 78% o’ large exchanges also use external paries as part o’ their cold storage system, compared to only % o’ small exchanges. MULTI-SIGNATURE AND PRIVATE KEY STORAGE Muli-signature is supported by 86% o’ producion systems ’rom large exchanges, but only by 76% o’ small exchanges. All exchanges that do not use cold storage systems have mulisignature support. 8 % o’ large exchanges and 7 % o’ small exchanges that have cold storage systems in place also have muli-signature support. Large exchanges that support mulisignature architectures also more oten use external thirdparty muli-signature plaforms than small exchanges 6 % compared to % . While all large exchanges distribute keys o’ muli-signature wallets among muliple holders, 9% o’ small exchanges do not. All large exchanges encrypt private keys when they are not in use, but 9% o’ small exchanges do not. % o’ large

Global Cryptocurrency Benchmarking Study

Figure : Large exchanges appear to per’orm more ’requent ’ormal security audits than small exchanges

Figure : Large exchanges have more oten external paries per’orm their ’ormal security audits 65%

40%

Frequency o’ Formal Security Audit 33%

25%

25%

25%

60%

% of eExchanges

22%

22%

15% 35%

12%

11% 10%

Annually

Bi-annually

Quarterly

Small exchanges

Monthly

Other

Large exchanges

exchanges and 9 % o’ small exchanges store key back-ups in disinct geographical locaions. FORMAL SECURITY AUDITS AND PROOF OF RESERVES We observe that the ’requency o’ ’ormal security audits conducted at exchanges surveyed varies considerably ’or both small and large exchanges Figure . It appears that large exchanges per’orm ’ormal security audits on a more regular basis than small exchanges. However, it is not always clear what exchanges deine as ’ormal security audits, as many exchanges also reported that they would per’orm standard security checks and audits on an ongoing basis. 6 % o’ large exchanges have their ’ormal security audit per’ormed by external paries, while 6 % o’ small exchanges per’orm the audit internally Figure . Findings also show that custodial exchanges are more likely to use external paries ’or their ’ormal security audit. Two-thirds o’ large exchanges and over 9 % o’ small exchanges do not publicly share in’ormaion about their ’ormal security audits e.g., public announcement that it took place .

Small exchanges

Per’ormed by external party

Large exchanges

Internally performed

One third o’ custodial exchanges indicate that the ’ormal security audit also encompasses a proo’-o’-reserve mechanism to prove whether the exchange has suicient ’unds; usually auditable by customers . Some exchanges commented that they would regularly have their reserves reviewed and ceriied by audiing irms, but that there would not be enough customer request ’or a ’ormal proo’-o’-reserve to jusi’y the costs and complexiies o’ implemening such a system. Noncustodial exchanges do not per’orm a proo’-o’-reserve audit as they do not control customer ’unds. All large exchanges that per’orm a proo’-o’-reserve audit indicate that an independent third-party was used, while only 7% o’ small exchanges use a third-party. However, many o’ the exchanges that do not use a third party ’or proo’-o’reserves instead rely on providing cryptographic proof of reserves through various means that can be independently veriied by the customer.

Wallets

WALLETS Wallets have evolved ’rom simple sotware programs handling key management to sophisicated applicaions that ofer a variety o’ technical ’eatures and addiional services that go beyond the simple storage o’ cryptocurrency.

6

Global Cryptocurrency Benchmarking Study

KEY FINDINGS Compliance and Operaions

Use and Features

% o’ incorporated wallets hold a ’ormal government license; all o’ them are wallets that ofer naional-tocryptocurrency exchange services

• The percentage o’ acive wallets ranges across diferent providers ’rom a low o’ 7. % to a high o’ .9% o’ total wallets, but wallet providers deine acive diferently

•

• Between .8 million and to be acive today

• 7 % o’ wallets providing naional-to-cryptocurrency exchange services using the centralised exchange model hold a formal government license

. million wallets are esimated

• The lines between wallets and exchanges are increasingly blurred: % o’ wallets surveyed provide an integrated currency exchange ’eature, o’ which 8 % ofer naionalto-cryptocurrency exchange services using one o’ three exising exchange models

• Large wallets providing centralised naional-tocryptocurrency exchange services spend over x more on compliance than small wallet providers and have more than x the headcount associated with compliance

• 8 % o’ wallet providers are based in North America and Europe, but only 6 % o’ wallet users are based in these two regions

• All wallets providing centralised naional-to-cryptocurrency exchange services per’orm KYC/AML checks; the pre’erred method is internal checks

• 7 % o’ wallets do not control private keys meaning they do not have access to user ’unds ; % o’ wallets let the user decide whether to have sole control over private keys

• Average IT security headcount for wallet providers amounts to 7% o’ total employees, and average IT security cost consitute % o’ total budget, both o’ which represent highest percentage spent on security of any sector in this study; considerable diferences on these measures are observed between wallets providing naional-tocryptocurrency exchange services and those that do not, as well as between custodial and non-custodial wallets

•

% o’ wallets are closed source; all custodial wallets wallet provider holds private keys are as well

• Mobile wallet apps are the most widely ofered ’ormat, followed by desktop and web •

9% o’ wallets already ofer muli-cryptocurrency support, and nearly one third o’ those currently without mulicryptocurrency support have this feature on their roadmap

• Only % o’ small wallet providers ofer muli-signature support compared to 86% o’ large wallet providers

7

Wallets

Figure 6: 8 % o’ wallet providers are based in North America and Europe

Figure 7: 69% o’ incorporated wallet providers have less than 11 employees

% of Incorporated Wallet Providers

34%

22%

9% 26%

27% 17%

8% 26%

15% 8% 8%

Number of employees per wallet provider US

Germany

China

-

UK

Switzerland

Other

-

INTRODUCTION AND LANDSCAPE

6-

> -

DEFINITION A wallet generally is a sotware program that is used to securely store, send and receive cryptocurrencies through the management o’ private and public cryptographic keys.1 Wallets also provide a user inter’ace to track the balance o’ cryptocurrency holdings and automate certain ’uncions, such as esimaing what ’ee to pay to achieve a desired transacion conirmaion ime. LANDSCAPE Each cryptocurrency has a re’erence implementaion that includes basic wallet ’uncionality e.g., Bitcoin Core ’or Bitcoin, Mist browser ’or Ethereum . However, ’or a variety o’ reasons the re’erence implementaion wallet is simply not pracical ’or many users.2 As a result, a mulitude o’ wallet providers have emerged in recent years to ’acilitate the storage o’ cryptocurrencies and make wallets easier to use. These wallets range ’rom open-source projects run by volunteer developers to ones created by venture capitalbacked registered corporaions.

8

Global Cryptocurrency Benchmarking Study

Majority o’ Wallets are Provided by Registered Corporaions

REGISTERED CORPORATIONS

VOLUNTEER PROJECTS

The ’ollowing igures are based on a dataset o’ 6 wallets that paricipated in our wallet survey. We deine a wallet provider as any volunteer project or company that provides a standalone wallet that anyone can use. The wallet ’uncionality is clearly separated ’rom other commercial oferings and explicitly branded as such. Based on the total number o’ wallet providers meeing this deiniion, we esimate that the sample in this study represents over 9 % o’ the total cryptocurrency wallet sector.

There are a total 8 ’ull-ime employees working at incorporated wallets, with an average o’ 9 employees per wallet provider.3 However, more than a quarter o’ incorporated wallet providers have less than three employees, and 69% have less than ’ull-ime employees, which suggests that the average wallet provider is a relaively small company Figure 7 . Only % o’ surveyed wallets have more than ’ull-ime employees. It should be noted that some wallet providers are also acive in other cryptocurrency industry sectors and that the exact number o’ employees working ’ull-ime on the wallet service cannot be established.

Almost hal’ o’ all wallet providers are located in the United States and the United Kingdom Figure 6 . I’ we break down origin by world region, Europe is leading with % o’ wallet providers, ’ollowed by North America with 9% and AsiaPaciic with 9%. Registered corporaions with limited liability represent 8 % o’ wallet providers, and % are open-source/volunteer projects. For the rest o’ this secion, we will re’er to wallets provided by registered corporaions as incorporated wallets .

Incorporated wallets employ 8 people, with an average o’ 9 employees per wallet provider

9

Wallets

Figure 8: The current number o’ esimated acive wallets ranges between .8 million and m

. m

m m

Esimated Number o’ Acive Wallets

. million

9.7m

9m

8.7m

8m 7m

7m 6m

.8m

.8m

m

m m m

. m

. m

m .6m

.6m

. m

.6m

. m

m

.6m

m 2013

2014

Lower Bound

2015

Mid-Point

Not’: no wall’t data availabl’ for som’ wall’t provid’rs prior to

USERS

Data obtained ’rom study paricipants suggests that the number o’ acive wallets ranges ’rom 7. % to .9% o’ the total number of wallets

2016

2017 YTD

Upper Bound

6

NUMBER OF WALLETS The total number o’ wallets can be esimated using data collected ’rom study paricipants as well as including the number o’ sotware downloads o’ major wallet providers and Bitcoin s re’erence implementaion. It is esimated that the total number o’ wallets has increased more than x ’rom 8. million in to nearly million in 6. We used the conservaive assumpion that one sotware download is the equivalent o’ one wallet created, although in theory a potenially ininite number o’ wallets could be created ’rom a single sotware download. No data is available ’or download igures ’or some open-source wallets, and so these igures can be viewed as a lower bound . As some o’ the wallets also ofer muli-cryptocurrency support, these igures do also include users storing cryptocurrencies other than bitcoin. NUMBER OF ACTIVE WALLETS Publicly reported cumulaive wallet igures generally do not relect whether these wallets are aciv’ or not. Data obtained ’rom study paricipants suggests that the number o’ acive wallets ranges ’rom 7. % to .9% o’ the total number o’ wallets.

Global Cryptocurrency Benchmarking Study

Figure 9: Daily on-chain transacions per’ormed by users o’ large wallets generally range between and % o’ total bitcoin on-chain transacion volume, but are trending down slightly o’ late

%

40%

70,000

25% 40,000 20% 30,000 15% 20,000

10%

However, the term acive is ambiguous as wallet providers use diferent deiniions ’or determining acive wallets: some consider acive wallets to be wallets owned by users that login in at least once a week or less ’requently, while others deine acive wallets as wallets that transact at least once a week or less ’requently. Based on these deiniions, long-term holders who do not ’requently transact are thus usually considered inacive, although many consider long-term inacive holders o’ cryptocurrency as sill playing an important role in the cryptocurrency ecosystem.

Wallet providers use diferent methods ’or reporing total number o’ wallets and determining acive wallets A rough esimate o’ the total number o’ acive wallets can be provided by applying the observed range 7. %- .9% to the esimated number o’ total wallets. The number o’ acive wallets is thus esimated to have increased ’rom between .6 million and .6 million in to currently between .8 million and . million in 7 Figure 8 .4

01 /2 03

02

/2

01

7 01

/2

01

01 /2 12

01 /2 11

01 /2 10

Daily large wallets on-chain transacion volume let axis

7

0%

7

0

6

5%

6

10,000

% o’ total Bitcoin on-chain transacion volume

30% 50,000

6

Daily large wallets on-chain transacion volume BTC

35% 60,000

Proporion o’ total daily on-chain transacion volume right axis

It is important to recall that these igures do not necessarily relect the total number o’ acive wallet users. Esimaing the total number o’ unique individuals using a cryptocurrency wallet poses signiicant challenges as there is no limit on the number o’ wallets any one individual can create, and the number o’ addiional wallets held by an individual is unknown to any paricular wallet provider. For these reasons, the actual number o’ cryptocurrency wallet users acive and long-term holders is likely signiicantly below the total number o’ wallets in existence. ON-CHAIN WALLET TRANSACTION VOLUMES The daily transacion volume per’ormed by users o’ large incorporated wallets on the bitcoin network has increased from an average 7% o’ total network volume in October 6 to an average o’ % in December 6 Figure 9 . Wallet share of transacion volume has recently decreased again and currently amounts to approximately %- % o’ total transacion volume. It can be observed that the wallet share o’ total daily on-chain transacions increases during the weekends, when total transacion volumes are generally lower.

Wallets

Figure : Greatest number o’ wallet users are based in North America and Europe

Figure : Small diferences in user share by region can be observed between small and large wallet providers 5%

6%

8%

15%

30%

9% 25%

17%

Users Domiciled

13%

33% 26%

32%

30%

31%

20%

Small wallets

North America

Europe

Lain America

Africa and Middle East

Asia-Paciic

GEOGRAPHY Based on user data obtained ’rom incorporated wallets, we can make a rough esimate o’ the origins o’ wallet users by segmening the data by world region. 6 % o’ wallet users are domiciled in North America and Europe, while % o’ users come ’rom Asia-Paciic Figure . Lain America is the next largest region, ’ollowed by A’rica and the Middle East which lag behind. The relaively small proporion o’ wallet users ’or some regions may stem ’rom the ’act that there are sill a considerable number o’ people in certain countries e.g., China that use exchange accounts as their de facto wallet to store cryptocurrency.

8 % o’ wallet providers are based in North America and Europe, but only 6 % o’ wallet users are based in these two regions

Large wallets

North America

Europe

Lain America

Africa and Middle East

Asia-Paciic

We observe some minor diferences when segmening between small and large wallets.6 Users ’rom Asia-Paciic as well as A’rica and the Middle East tend to use large wallet providers, whereas Lain American and European users seem to pre’er small wallet providers Figure . The user share o’ North American wallet users is approximately equal ’or both small and large wallets. Similarly, we can also analyse i’ there are divergences between the locaion o’ wallet providers and their users. In general, the customer base o’ incorporated wallet providers is diversiied and includes users ’rom all world regions. However, it appears that in some markets, there is a relaionship between the locaion o’ wallet providers and their customer base Figure . European and North American users seem to pre’er using local wallets, as they consitute the largest share o’ users ’rom wallet providers located in these regions. Somewhat surprisingly, Lain American users appear to pre’er European and Asian-Paciic wallets over North American wallets.

Global Cryptocurrency Benchmarking Study

Figure : European and North American wallet users seem to prefer using local wallets

Figure : Over 7 % o’ wallet providers do not control user funds

Customer Share by World Region 4% 15%

6% 9%

73%

8% 15%

12%

18% 17%

Customer Base Domiciled

26% 26% 36%

29%

15%

41%

28% 22%

North America

Europe

Asia-Paciic

Wallets Based North America

Europe

Lain America

Africa and Middle East

WALLET TYPES

Asia-Paciic

User controls keys

Wallet provider controls keys

Users have the opion

In contrast with exchanges, the majority o’ wallets do not control access to user keys: 7 % o’ surveyed wallets do not take custody of user funds but let the user control private keys Figure . Moreover, % o’ wallets ofer users the possibility to choose whether they want to control their private keys themselves – at the risk of losing them and not being able to recover their funds – or to let the wallet service provider handle key management. Only % o’ wallets take ’ull custody o’ user ’unds. We do not observe major diferences between small and large wallet providers.

All custodial wallets surveyed are closed source % o’ surveyed wallets are closed source, which means the wallet source code is not freely available for outside developers to inspect ’or vulnerabiliies. All custodial wallets services that control private keys and have access to user ’unds are closed source. An interesing observaion is that % o’ sel’-hosted wallets individual controls private keys, wallet provider does not have access to user ’unds are closed source as well. These igures are approximately the same ’or small and large wallet providers.

Wallets

Figure : Mobile wallet app is the most widely ofered wallet ’ormat Over

% o’ Wallets are Closed Source

% o’ wallet providers supporing the listed ’ormats 65%

42% 38%

31%

23%

Mobile

Most wallet services support muliple ’ormats e.g., web, mobile, hardware and allow users to easily switch between diferent devices, and most wallets support diferent operaing systems. The most common wallet ’ormat ofered is a smartphone wallet applicaion Figure . Many ind smartphone wallet apps to be one o’ the most convenient ways to use cryptocurrencies on a daily basis as the wallet is readily available and easily transportable. An increasing number o’ companies specialise in the development o’ hardware wallets, which store private keys in a secure hardware device. This development coincides with the observed increase in the value o’ cryptocurrencies and the greater incenives ’or criminals to target cryptocurrency holders. SUPPORTED CRYPTOCURRENCIES 9% o’ wallets providers ofer the ability ’or users to store more than one cryptocurrency in the same wallet, and 9%

Desktop

Web

Tablet

Hardware

allow users to store more than three cryptocurrencies. The vast majority o’ wallets support bitcoin Figure . Litecoin, ether and dogecoin are the next three most commonly supported cryptocurrencies. Wallets coninue to support more and more diferent cryptocurrencies: % o’ wallets that currently only support storing a single cryptocurrency indicate that their current roadmap includes ofering support ’or more cryptocurrencies. 78% o’ muli-cryptocurrency wallets plan to also add more cryptocurrencies to their current ofering.

9% o’ wallets already ofer mulicryptocurrency support, and % o’ wallets that currently do not ofer muli-cryptocurrency support have this feature on their roadmap

Global Cryptocurrency Benchmarking Study

Figure

: Litecoin, ether and dogecoin are the most widely supported cryptocurrencies ater bitcoin % o’ Wallet Sample Supporing the Listed Cryptocurrencies 96%

Bitcoin (BTC) Litecoin (LTC)

23%

Ether (ETH)

23%

Dogecoin (DOGE)

23%

Ripple (XRP)

8%

DASH

8%

Ether Classic (ETC)

4%

Monero (XMR)

4%

Other

19%

Figure 6: Majority o’ wallets support mechanisms to easily back up and migrate keys % o’ Wallet Sample Supporing the Listed Technical Features Hierarchically determinisic HD key generaion 88% Mnemonic word sequence 72% Muli-signature support 56% Watch-only 44%

WALLET FEATURES

TECHNICAL FEATURES Wallets have evolved ’rom simple sotware programs handling key management to sophisicated applicaions that ofer a variety o’ ’eatures. Signiicant innovaion at both the protocol level and amongst wallet providers has led to the emergence o’ several technical standards that are considered state-o’-theart, such as muli-signature.7 While 6% o’ wallets ofer mulisignature support Figure 6 , there are notable diferences between small and large wallets: only % o’ small wallet providers ofer muli-signature support compared to 86% o’ large wallet providers. While 79% o’ smaller wallets and all large wallets support hierarchically determinisic HD key generaion, only 7% of large incorporated wallets have implemented mnemonic word sequences to date.8 This may be due to custodial wallet services that store user keys on their servers and do not there’ore ofer a passphrase ’or backup.

Wallets

Figure 7: More than hal’ o’ surveyed wallet providers ofer integrated currency exchange services % o’ Wallet Providers Supporing the Listed Addiional Features Integrated currency exchange

52%

Linked credit card

20%

Key recovery service

16%

-’ee of-chain transacions

16%

Send via e-mail

16%

12%

Linked debit card

Insurance

8%

-’ee on-chain transacions

8%

Send via SMS

8%

Integrated mixing service

8%

ADDITIONAL FEATURES 6% o’ all wallet providers ofer addiional ’eatures and services that go beyond the basic storage o’ cryptocurrencies. All o’ the wallets ofering addiional ’eatures are incorporated wallets.

6% o’ wallets ofer addiional features and services that go beyond the basic storage of cryptocurrencies The most popular addiional ’eature is an integrated currency exchange service that lets users and customers conveniently exchange cryptocurrencies ’rom the same wallet inter’ace. % o’ all wallets provide an integrated currency exchange service, supporing our observaion that the disincion between wallets and exchanges are increasingly blurred Figure 7 . % o’ wallet providers have also stated that they have plans to expand their services and add more ’eatures in the near ’uture.

6

It can be observed that already very ’ew wallets 8% ofer -’ee on-chain transacions to their users, and i’ the recent spike observed in transacion ’ees persists we expect that number to decline even more. Again, we observe diferences between the ’eatures ofered by small and large companies: 86% o’ large wallets provide integrated currency exchange services compared to only 9% o’ small wallets. Similarly, addiional inancial services, such as linking a debit and a credit card to the wallet account, are more oten provided by large companies. INTEGRATED CURRENCY EXCHANGE SERVICES In general, there are three diferent models used by wallets to provide currency exchange services Table . % o’ all incorporated wallets ofering currency exchange services provide a built-in P P exchange/marketplace, while % use the centralised currency exchange model Figure 8 . 6% have integrated a third-party exchange within the wallet inter’ace to provide currency exchange services to users.

Global Cryptocurrency Benchmarking Study

Table : Taxonomy o’ currency exchange models used by wallet providers Exchange Model

Descripion

Centralised exchange/ brokerage service

Tradiional model that implies a central exchange operator taking deposits and ofering a price ’or the purchase and sale o’ currencies. The central party, in this case the wallet provider, directly handles currency exchange by acing as the counterparty to users wishing to acquire and/or sell cryptocurrencies.

Integrated third-party exchange

Model that sees the wallet provider integraing the services o’ an independent exchange within the wallet interface so that users can purchase and sell cryptocurrencies through a partnership with a third-party exchange.

P P exchange/ marketplace

Emerging model that enables users to make currency exchanges between themselves without having to use a centralised exchange operator. The wallet inter’ace acts as a secure environment ’or a decentralised marketplace that connects buyers to sellers. The wallet provider does not act as a central counterparty, but only provides the in’rastructure ’or the P P exchange. Some wallets ofer to hold ’unds in escrow during the trade, while others ofer a built-in trustless escrow ’uncion based on the muli-signature ’eature. This means that in the ’ormer case, the P P element re’ers only to the marketplace aspect users trading with each other , while the later consitutes a truly decentralised exchange that lets users in control o’ their ’unds during the enire trade process.

Figure 8: Nearly hal’ o’ wallets providing currency exchange services integrate a third-party exchange

31%

23%

46%

Centralised exchange

Integrated third-party exchange

P P exchange

7

Wallets

Figure 9: 8 % o’ wallets providing currency exchange services enable the exchange o’ naional currency 62%

23%

15%

NaionalCrypto

8 % o’ all wallets providing currency exchange services enable the purchase and sale o’ naional currencies Figure 9 . % provide only cryptocurrency-to-cryptocurrency exchange services, and % provide both naional-to-cryptocurrency as well as cryptocurrency-to-cryptocurrency exchange services. All surveyed wallets providing cryptocurrency-only exchange services have integrated a third-party exchange which is responsible ’or providing the exchange services. Wallet providers ofering naional-to-cryptocurrency exchange services use diferent models: 8% are providing the in’rastructure via their wallet environment ’or a P P exchange/ marketplace between users, while 6% are operaing a centralised exchange/brokerage service themselves and another 6% have integrated a third-party exchange Figure .

8

CryptoCrypto

Both

It turns out that only 7% o’ wallets ofering naional currency exchange services take custody o’ users cryptocurrency ’unds. 8% let users choose whether to hold private keys, and over hal’ do not control private keys Figure .9 No wallet ofering cryptocurrency-only exchange services has access to customer ’unds.

Half of all incorporated wallets surveyed provide currency exchange services that involve the use o’ naional currency.

Global Cryptocurrency Benchmarking Study

Figure : 8% o’ wallets ofering naional-to-cryptocurrency exchange services are using the P P exchange model 36%

28%

36%

Centralised exchange

Integrated third-party exchange

P P exchange

Figure : Only 7% o’ wallets providing naional currency exchange services take ’ull custody o’ users cryptocurrency funds 55%

18%

27%

User controls keys

Wallet service controls keys

User has the opion

9

Wallets

Figure : 76% o’ incorporated wallet providers do not have a license

Figure : 7 % o’ wallets providing centralised naional-to-cryptocurrency exchange services have a license Wallets Ofering Centralised Naional-To-Cryptocurrency Exchange Services

Incorporated Wallet Providers

24%

75%

25%

76%

License

No license

REGULATION AND COMPLIANCE

License

No license

In contrast with exchanges and irms designated as money trans’er operators, the compliance requirements ’or the cryptocurrency storage ’uncion per’ormed by wallets are less clear. The ’act that wallet providers are oten operaing globally, which again contrasts with exchanges and money trans’er operators which tend to limit services to paricular jurisdicions, ’urther muddies the wallet compliance waters. For example, i’ cryptocurrencies are legally considered to be money , does that require companies providing basic cryptocurrency storage services to be compliant with exising banking regulaion, or does this only apply to wallet providers that take custody of user funds and/or provide integrated currency exchange services? LICENSE % o’ incorporated wallets have a ’ormal license ’rom a regulatory authority, and all o’ them are wallet providers that ofer naional-to-cryptocurrency exchange services Figure . % o’ wallets providing centralised naional-tocryptocurrency exchange services do not have a government license Figure .

6

Global Cryptocurrency Benchmarking Study

Figure : Large wallets providing centralised naional-to-cryptocurrency exchange services have more than x higher compliance headcount and cost than small wallets

Figure : KYC/AML checks are predominantly performed internally by wallet providers

% o’ Wallets Per’orming KYC/AML Checks Using the Listed Methods

Wallets Providing Centralised Naional-To-Cryptocurrency Exchange Services 23%

83%

18%

5% 4%

Small wallets Average compliance headcount

17%

Large wallets Average compliance cost

COMPLIANCE PROGRAMS 78% o’ incorporated storage-only wallets do not per’orm any user compliance, but 8 % o’ wallets providing currency exchange services do. However, it is important to make a disincion between the compliance requirements or lack thereo’ ’or the three types o’ currency exchange models used by wallet providers as discussed above.

Compliance programs are observed at all wallets ofering centralised naionalto-cryptocurrency exchange services, and less oten at wallets with P P or third-party exchange services All wallets that provide centralised naional-to-cryptocurrency exchange services i.e., directly execuing currency exchange have a compliance program. In the case o’ wallets that integrate a third-party exchange, the third-party exchange may be responsible ’or user veriicaion and compliance

Internally per’ormed

Tradiional third-party KYC/AML service provider

17%

Third-party blockchain analyics specialist

requirements, while there is no clear legal ’ramework that applies to wallets with built-in P P exchange services as trades are happening directly between users. As a result, these wallets generally have less compliance programs than wallets providing centralised exchange services. COMPLIANCE HEADCOUNT AND COST There are diferences with regards to the compliance programs o’ small and large wallets providing centralised naional-tocryptocurrency exchange services. Large wallet providers have more than ’our imes the headcount and cost associated with compliance than small wallets Figure . All wallets providing centralised naional-to-cryptocurrency exchange services per’orm KYC and AML checks.11 The pre’erred KYC and AML method are internal checks, which are in some cases complemented with tradiional thirdparty KYC/AML service providers Figure . Third-party blockchain analyics specialists are only used by 7% o’ wallets per’orming KYC/AML checks. All small wallets per’orming KYC/AML checks only do so internally.

6

Wallets

Figure 6: Wallet providers percepion o’ the current regulatory environment is mixed, and no clear trend is observed for both small and large wallets

29%

12%

18%

41%

Adequate

Excessive and too strict

CURRENT REGULATORY ENVIRONMENT In terms o’ the percepion o’ exising regulaions, over % o’ wallet providers indicate they perceive no exising regulaions speciic to their aciviies and that they are not needed, while only % o’ all wallets see the lack o’ speciic regulaions as problemaic and believe they are needed Figure 6 . Almost % o’ wallets deem the exising regulatory environment to be adequate and appropriate. When breaking down the views of wallet service providers on regulaion by wallet acivity, it turns out that hal’ o’ wallets that provide naional currency exchange services believe that regulaion is adequate, while the percepion o’ the other hal’ is divided between excessive and not needed . An interesing observaion is that % o’ large wallets deem the current regulatory environment excessive and too strict, while 6% o’ small wallets perceive no speciic exising regulaions and state that they are not needed. No wallet provider selected the opions "Cryptocurrencies are illegal in my country" and "Regulaion is too relaxed". Not a single North American wallet provider thinks that exising regulaions are adequate and appropriate, but 7% 6

No regulaion and not needed

No regulaion but needed

o’ European wallet services and % o’ Asian-Paciic wallets appear to be saisied with the current level o’ regulaion Figure 7 . On the opposite end o’ the spectrum, % o’ North American wallet services perceive exising regulaions to be excessive and too strict, a seniment that is only shared by % o’ European providers Figure 8 . However, also % o’ North American wallets perceive no exising regulaions that speciically apply to them and indicate that they are not needed – as do 6 % o’ wallets ’rom Asia-Paciic Figure 9 . No European wallets perceive a lack o’ exising regulaions and advocate ’or more regulatory clarity, but % o’ both Asian-Paciic and North American wallet providers do Figure 6 . Overall, responses suggest that the majority o’ wallet providers based in Europe and Asia-Paciic are saisied with the exising regulatory environment or the lack thereo’ , but that North American wallet providers are divided in how they perceive exising regulaions.

Global Cryptocurrency Benchmarking Study

Figure 7: Regulaion is adequate and appropriate

Figure 8: Regulaion is excessive and too strict

57% 40%

20%

Asia-Paciic

14%

Europe

0%

0%

North America

Asia-Paciic

Figure 9: No speciic regulaion and not needed

Europe

Figure 6 : No speciic regulaion but needed 20%

60%

North America

20%

40%

29%

0% Asia-Paciic

Europe

North America

Asia-Paciic

Europe

North America

6

Wallets

Figure 6 : Security headcount varies considerably between small and large wallets

45%

Figure 6 : Wallets providing naional-tocryptocurrency exchange services have on average considerably higher security headcount and cost than those that do not

17% 49% 46%

% of incorporated wallet providers

66%

28% 10% 23% 45%

17%

Small wallets

Wallets providing naionalcrypto exchange services

Large wallets

Other

% o’ Employees Working Full-Time on Security - %

SECURITY

6-

%

>

%

Average security headcount

Average security cost

SECURITY HEADCOUNT AND COST Average headcount dedicated to security as a share of total employee headcount is 7%, and security costs as a percentage o’ total budget are approximately the same at %. Both o’ these igures are signiicantly higher than those ’or exchanges and payments companies. Small wallet companies have on average slightly more security headcount in percentage of total employees than large companies +9% , but there is no signiicant diference between large and small wallets in terms of average security costs as a percentage o’ total budget. A look at the distribuion reveals that there are also considerable diferences between wallet providers within the small/large categories: % o’ small wallet providers have only between % and % headcount working ’ull-ime on security, suggesing that employees o’ these companies per’orm muliple roles at the same ime and are thus not strictly assigned to security Figure 6 . Another % o’ small wallet providers have more than % o’ employees working ’ull-ime on security, which indicates that these companies employ at least one ’ull-ime security pro’essional. In contrast, two-thirds

6

Global Cryptocurrency Benchmarking Study

Percentage o’ Wallet Providers That Use External Security Providers

o’ large wallets have between 6% and working ’ull-ime on security.

% o’ employees

In terms o’ security costs, the picture looks slightly diferent: all incorporated wallet providers spend at least % o’ their budget on security. % o’ small wallets spend between % and % on security, and 8% allocate over % o’ their budget to security. The dispariies between small wallets are substanial as the proporions o’ the budget associated with security range ’rom % to %. For large wallets, there are also considerable discrepancies with budgets allocated to security ranging ’rom % to 8 %.

Security costs at large wallets range ’rom % to 8 % o’ the overall budget Custodial wallets spend on average % o’ their total budget on security, which is % more than non-custodial wallets.12 We do not observe a signiicant increase in security headcount at wallet providers that control user keys.

Custodial wallets spend % more o’ their budget on security than noncustodial wallets

Average Number of External Security Providers

exchange services to those that do not: the ’ormer spend more than twice as much of their budget on keeping their wallet secure Figure 6 . On average, wallets that provide naionalto-cryptocurrency exchange services also have 8% more headcount working ’ull-ime on security. We do observe that wallets providing P P naional-to-cryptocurrency exchange services have the highest security headcount as a percentage of total employees and spend the most on security as a percentage o’ total budget.

Wallets with built-in P P naional-tocryptocurrency marketplaces have the highest headcount and cost associated with security of all wallets EXTERNAL SECURITY PROVIDERS O’ all surveyed wallets, % use external security providers. 8 % o’ large wallets use external security providers compared to only % o’ small wallets. 7 % o’ wallet providers ofering naional-to-cryptocurrency exchanges make use o’ external security providers, and even 8 % o’ wallets operaing centralised naional-to cryptocurrency exchanges use the services o’ at least one external security provider. On average, wallets use diferent security providers. O’ all wallets using external security providers, 89% state that they have not come to rely more on them over ime.

However, the most striking diference becomes apparent when comparing wallet providers ofering naional-to-cryptocurrency 6

Wallets

PAYMENTS Payment companies generally act as gateways between users o’ blockchain value-trans’er systems and the broader economy, bridging naional currencies and cryptocurrencies.

66

Global Cryptocurrency Benchmarking Study

KEY FINDINGS Aciviies and Operaions

Payments

• While 79% o’ payment companies have exising relaionships with banking insituions and payment networks, the diiculty o’ obtaining and maintaining these relaionships is cited as the sector's biggest challenge

• Cross-border payments generally have a higher transacional value than intra-country payments: 6% have a transacion size between $ and $ , , and % have a transacion size that exceeds $

• A signiicant geographic dispersion o’ cryptocurrency payment companies can be observed, in-line with the dispersion observed with exchanges

• The average business B B payment has a transacion size o’ $ ,878, whereas P P trans’ers $ have higher average transacion sizes than consumer C B payments $

• Asian-Paciic and Lain American payment companies ’ocus primarily on local users, whereas European and North American payment companies have a signiicant user share in non-local regions • Nearly two-thirds o’ payment companies are specialising in a single payment acivity e.g., B B payments ; 8% are engaged in three aciviies or more • Merchant services, which mainly consist o’ processing payments ’or merchants that accept cryptocurrencies, is the most widely ofered payment service % o’ survey respondents •

6% o’ all payment companies surveyed are also operaing a stand-alone cryptocurrency exchange themselves in addiion to their payment services

• On average, naional-to-cryptocurrency payments consitute two-thirds o’ total payment company transacion volume, whereas naional-to-naional currency trans’ers and cryptocurrency-to-cryptocurrency payments account ’or 7% and 6%, respecively •

% o’ payment companies exclusively process naionalto-naional currency payments, whereas hal’ o’ payment companies do not process any naional-to-naional payments at all

• The bitcoin network is used by 86% o’ surveyed payment companies as main payment rail ’or cross-border transacions

• Payment service providers employ a total o’ , 7 people, with an average o’ ’ull-ime employees per company •

% o’ payment companies have a ’ormal government license; o’ all payment type aciviies, plaforms providing B2B payment services are most likely to have a license 8 %

• The average compliance headcount of payment companies is 8% o’ total headcount, and an average o’ % o’ the total budget is spent on compliance • 86% o’ payment companies per’orm KYC/AML checks; internally performed checks are the preferred method

67

Payments

Figure 6 : Geographic dispersion o’ payment companies in the study sample 15%

15%

10%

4%

44% 4%

4%

4%

US

South Korea

Australia

Argenina

UK

China

Mexico

Other

LANDSCAPE

INTRODUCTION All cryptocurrency systems have an integrated payment network to process transacions denominated in the naive token. While the promise o’ these systems is that users can independently transact on these networks, there are a variety o’ reasons why users pre’er using services provided by thirdparty payment service providers.1 GEOGRAPHY We collected data ’rom a sample o’ 8 companies ’rom 7 countries that are providing payment services that involve the use o’ cryptocurrencies Figure 6 . All ive world regions are represented, with one third o’ paricipants based in the Asia-Paciic region and another third based in Europe. In terms o’ countries, the US and the UK are leading with each country serving as home to % o’ payment service providers, ’ollowed by South Korea %.

68

Global Cryptocurrency Benchmarking Study

Table 6: Taxonomy o’ main cryptocurrency payment plaform types

Use case

Payment acivity

Descripion

Money transfer services

Services that primarily provide internaional money trans’ers ’or individuals denominated in naional currencies. These include among others tradiional remitances and bill payment services.

Payment rail 'naional currency-’ocused' B2B payments

Plaforms that provide payments ’or businesses, denominated in naional currencies, oten imes across borders.

Merchant services

Services that process payments ’or cryptocurrency-acceping merchants. May provide addiional merchant services such as shopping cart integraions and point-o’-sale terminals.

Cryptocurrency payments 'cryptocurrency-’ocused' General-purpose

Plaforms that per’orm a variety o’ cryptocurrency trans’er services

cryptocurrency plaform

including instant payments to other users on the same plaform using cryptocurrency and/or naional currencies, payroll, and other services. In general, payments are denominated in cryptocurrency but can be easily exchanged to naional currencies.

TAXONOMY The use of cryptocurrencies by payment service providers can be grouped into two broad categories: a Payment rail: use o’ cryptocurrencies as a channel ’or ’ast and cost-efecive trans’er o’ naional currencies mainly cross-border/internaional payments, but also intracountry payments b Cryptocurrency payments: provide services to ’acilitate the use of cryptocurrencies For service providers ’rom category a , cryptocurrency is not the primary ’ocus o’ the transacion but rather a means to an end: trans’ers are generally denominated in naional currencies and users do not necessarily know that a cryptocurrency system is used on the back-end naional currency-’ocused . This is what is meant when bitcoin and other cryptocurrencies are described as a payment rail .

In contrast, companies ’rom category b provide a plaform to facilitate the use of cryptocurrencies for users and generally brand or market their services as cryptocurrency-’ocused . While trans’ers are usually denominated in cryptocurrencies, they can also be denominated in naional currencies.

The payments sector can be broadly split into two categories – cryptocurrency-’ocused and naional currency-’ocused Based on these categories, we can establish a simple taxonomy o’ the ’our main types o’ acivity in the cryptocurrency payments segment Table 6 .

69

Payments

Figure 6 : The cryptocurrency payment sector

Figure 6 : More than hal’ o’ payment companies provide merchant services

52% Business users

46%

Merchant services Cyrptocurrency-’ocused

Naional currency-’ocused

B B payments

Money transfer services

29%

19%

General purpose cyrptocurrency plaform

Individual users

Merchant services

It should be noted that in some cases, the lines between these categories are blurred as some general-purpose cryptocurrency plaforms also enable all payments being denominated in naional currencies, and some B B payment service providers also enable payments being denominated in cryptocurrencies. Nonetheless, this working taxonomy provides a basic ’ramework to categorise the diferent types o’ payment aciviies as depicted in Figure 6 . ACTIVITIES % o’ study paricipants provide merchant services as deined above , making it the most widely ofered cryptocurrency payment acivity Figure 6 . Processing payments ’or merchants that accept cryptocurrencies as a payment method consitutes the most ’requently ofered merchant services. 6% o’ payment service providers ’eature a ’uller-’eatured plaform that lets users

7

General-purpose cryptocurrency plaform

Money transfer services

B2B payments

buy, store and trans’er cryptocurrency, oten providing addiional services such as insured accounts and bill payment services. 9% o’ companies are operaing a plaform ’or personal remitances and money trans’ers, while 9 % o’ payment service providers ofer a plaform ’or B B payments targeing business customers. Nearly two-thirds o’ payment service providers are specialising in a single type o’ payment acivity, whereas 7% o’ payments companies are providing two payment acivity types and 8% are per’orming three or more Figure 66 . Companies that specialise in a single payment acivity are most oten providing merchant services %. It is worth noing, however, that 6% o’ all payment companies surveyed are also operaing a stand-alone cryptocurrency exchange themselves in addiion to their payment services.2 In

Global Cryptocurrency Benchmarking Study

Figure 66: Nearly two-thirds o’ payment companies specialise in a single payment acivity, o’ which merchant services are the most ’requent

Figure 67: Over hal’ o’ payment service providers have more than ’ull-ime employees 10%

65%

8%

15%

29%

27%

Single payment acivity

Two payment aciviies

>2 payment aciviies

46%

23%

SINGLE ACTIVITY

19%

35%

% of Payment Service Providers

Number of Employees per Payment Company

23% Money transfer services

B2B payments

General-purpose cryptocurrency plaform

Merchant services

’act, 8 % o’ companies providing merchant services also operate a cryptocurrency exchange, as do 76% o’ companies ofering a general-purpose cryptocurrency plaform. This shows that many cryptocurrency exchanges have expanded their product line to provide addiional services to merchants as well as consumers.

-

-

>

employees. Nonetheless, over hal’ o’ payment service providers surveyed have more than ten ’ull-ime employees, and % employ even more than . In most cases, these companies are also acive in other cryptocurrency sectors and it cannot be clearly established how many employees are working ’ull-ime on the payment services.

EMPLOYEES The total number of people employed by payment service providers acive in the cryptocurrency industry amount to , 7.3 Payment companies have on average ’ull-ime employees, which is more than wallet providers 9 on average but less than exchanges on average . A look at the distribuion shows, however, that 6% o’ payment service providers have only between and employees Figure 67 . In ’act, % have less than ive

7

Payments

Figure 68: Origin o’ customers segmented by payment acivity types

Money transfer services

82%

4%

14%

38%

13%

B B payments

35%

14%

Merchant services

36%

31%

20%

6%

7%

10%

6%

General-purpose cryptocurrency plaform

37%

Asia-Paciic

USERS

Europe

Lain America

29%

18%

North America

Africa and Middle East

GEOGRAPHY We have segmented users to explore whether diferences exist between companies per’orming diferent types o’ payment aciviies, as well as any diferences between companies located in diferent regions. Segmening by type o’ payment aciviies, indings show that money trans’er services are most popular in Asia-Paciic, and that B B payment plaforms are mostly used by customers based in Asia-Paciic and Lain America Figure 68 . Findings also suggest that companies engaged in cryptocurrency’ocused aciviies have a more internaional customer base. The customer share proporions by world region are approximately equal ’or both general-purpose cryptocurrency plaforms and merchant service providers. In contrast, companies providing naional currency-’ocused payment services appear to have a less broadly distributed customer base in geographical terms and focus more on local markets – this applies especially to money trans’er services. A signiicant relaionship between the locaion o’ payment service providers and their customers can be observed for Asian-Paciic and Lain American payment companies Figure 69 .

7

Global Cryptocurrency Benchmarking Study

Figure 69: Payment companies based in AsiaPaciic and Lain America serve primarily local customers 1% 6%

Figure 7 : Payment companies based in Europe and North America have a signiicant share o’ customers that are based in other regions

76%

4% 10%

7%

10%

30%

CUSTOMER SHARE OF ASIAN-PACIFIC COMPANIES

CUSTOMER SHARE OF EUROPEAN COMPANIES

56%

1% 5% 4%

11% 90%

39%

CUSTOMER SHARE OF NORTH AMERICAN COMPANIES

CUSTOMER SHARE OF LATIN AMERICAN COMPANIES

48% 2% Asia-Paciic

Europe

Lain America

North America

Africa and Middle East

76% and 9 % o’ customers ’rom companies based in AsiaPaciic and Lain America, respecively, are based in the same region as the payment service provider. This indicates that payment companies based in these regions primarily serve local markets.

There is not enough data available from companies based in Africa and the Middle East to make a more detailed breakdown. It appears that users ’rom this region are mainly served by European payment companies when excluding local payment companies.

In contrast, payment companies based in Europe and North America appear to be serving more diverse markets since a signiicant share o’ their customers are based in other, nonlocal regions Figure 7 . % o’ customers ’rom European payment companies and over half of customers from payment service providers based in North America are not domiciled in the same region. Surprisingly, only % o’ customers ’rom North American companies are based in Lain America.

It is not surprising that the majority o’ customers ’rom payment companies are based in the same region. In contrast to most wallet providers whose users are oten widely distributed around the world, payment companies generally provide services that involve the use o’ locally-used naional currencies. This is ’urther evidenced by Figure 7 , which shows that surveyed payment companies support over diferent naional currencies.

Signiicant diferences with regards to the customer share by region are observed between payment companies based in diferent regions

While the major global reserve currencies US dollar, euro, Chinese renminbi, Japanese yen, and Briish pound sterling are not surprisingly the most widely supported currencies, many regionally used naional currencies are supported as well. We can presume that the ’act these naional currencies are supported means that there is local demand in these countries ’or the services provided by payment companies.

7

Payments

Figure 7 : Naional currencies supported by surveyed cryptocurrency payment companies NGN: Nigerian Naira

15%

KES: Kenyan Schilling

8%

ZAR: South African Rand

6%

UAE: Emirai Dirham

6%

ILS: Israeli Shekel PKR: Pakistani Rupee

4% 2%

CNY: Chinese Yuan

33%

AUD: Australian Dollar

27%

PHP: Philippine Peso

23%

JPY: Japanese Yen

23%

HKD: Hong Kong Dollar

19%

VND: Vietnamese Dong

15%

KRW: South Korean Won

15%

IDR: Indonesian Rupiah

10%

THB: Thai Baht

6%

SGD: Singapore Dollar

6%

NZD: New Zealand Dollar

6%

INR: Indian Rupee MYR: Malaysian Ringgit

5% 4%

EUR: Euro

56%

GBP: Pound Sterling

42%

PLN: Polish Zloty

15%

CHF: Swiss Franc

15%

SEK: Swedish Krone

10%

RUB/RUR: Russian Ruble

10%

DKK: Danish Krone

10%

NOK: Norwegian Krone

8%

MXN: Mexican Peso

23%

BRL: Brasilian Real ARS: Argenine Peso CLP: Chilean Peso

10% 6% 4%

USD: US Dollar

56%

CAD: Canadian Dollar

21%

Other naional currencies

Africa and Middle East

7

13%

Asia-Paciic

Europe

Lain America

North America

Other

Global Cryptocurrency Benchmarking Study

Figure 7 : The Bitcoin network is the most widely used payment rail ’or cross-border transacions

3%

3%

86%

8%

Bitcoin

OPERATIONS

Other

Ripple

Tradiional payment network

PAYMENT RAIL 86% o’ paricipaing payment companies indicate that they use bitcoin as their primary payment rail ’or cross-border transacions Figure 7 . Ripple as well as tradiional payment networks are only used by % o’ payment service providers as the main payment rail. 8% o’ payment companies indicate that they use other payment rails, including combinaions o’ various payment networks as well as the use o’ Ethereum contracts. CURRENCY MIX There are three opions in which trans’ers can be denominated: • Naional-to-naional currency using cryptocurrency strictly as a payment rail 4 • Naional-to-cryptocurrency or vice-versa • Cryptocurrency-to-cryptocurrency

7

Payments

Figure 7 : Majority o’ transacions are naional-to-cryptocurrency and vice-versa Currency Mix

% o’ Total Transacion Volumes

67%

27%

68%

26%

6%

Naional Naional

Naional Cryptocurrency and vice-versa

Transacion Volume $

% o’ payment service providers state that all their transacions are naional-to-naional trans’ers. By contrast, half of payment service providers do not process direct naional-to-naional currency trans’ers. % o’ payment companies indicate that all their transacions are naional-tocryptocurrency or vice-versa payments.

% o’ payment companies exclusively process naional-to-naional currency payments, whereas hal’ o’ payment companies do not process any naional-to-naional payments at all Naional-to-cryptocurrency or vice-versa payments consitute on average 99% o’ all transacions processed by payment companies that do not provide direct naional-to-naional currency payments. Cryptocurrency-to-cryptocurrency payments only account ’or roughly % o’ total transacion

76

6%

Cryptocurrency Cryptocurrency

Transacion Volume number o’ tx

volumes both in terms o’ USD-value and by the number o’ transacions .

99% o’ transacion volumes ’rom payment companies that do not process naional-to-naional payments are consituted o’ naional-tocryptocurrency payments When analysing the currency mix o’ payment companies that provide all three opions, indings show that on average, two-thirds o’ transacions are naional-to-cryptocurrency or vice-versa payments Figure 7 . In terms o’ transacion volumes in USD-value, naional-to-naional currency payments account ’or 7% o’ all transacions, while cryptocurrencyto-cryptocurrency payments only amount to 6% o’ both transacion volume in USD-value and transacion volume measured by the number o’ transacions.

% of intra-country / cross-border payments

Global Cryptocurrency Benchmarking Study

Figure 7 : Cross-border transacions are generally higher-value transacions

Figure 7 : Average transacion sizes by payment channel

% o’ Intra-Country / Cross-Border Payments

Average Transacion Size $ USD $2,000 $1,878

46% 44%

$1,600 36% 34%

$1,200

$800 17% 14%

$400

$351

6%

$210 3%

$1,000

P2P transfers (C2C)

Consumer payments Business payments (C2B) (B2B)

Cross-border payments

The proporion o’ naional-to-cryptocurrency transacions in terms o’ the number o’ transacions is slightly higher than the proporion in terms o’ USD-value, although the diference observed is minuscule. This might suggest that the average naional-to-cryptocurrency transacion size is slightly smaller than the average naional-to-naional transacion. For cryptocurrency-to-cryptocurrency transacions, no diferences can be observed. TRANSACTION SIZE Findings show that the average cross-border payment is generally a higher-value transacion as % o’ cross-border payments have a transacional value exceeding $ , , and 6% o’ transacions have an average size o’ between $ and $ , Figure 7 . In contrast, naional i.e., intracountry payments ’acilitated by payment service providers tend to be rather lower-value transacions, since % o’ all naional payments have a transacional value o’ between $ and $99.

Interesingly, 6% o’ naional payments and % o’ cross-border payments have a transacion size that is less than one USD, indicaing that a not-insigniicant number o’ micropayments facilitated by cryptocurrency payments companies are taking place today. Findings also show that the average transacion size o’ P P trans’ers i.e., payments between individuals amounts to $ Figure 7 . Consumer payments i.e., consumers buying goods and services ’rom merchants and paying bills have an average transacion size o’ $ , whereas business payments between corporaions have an average transacional value o’ nearly $ ,9 .

77

Payments

Figure 76: Customer acquisiion is cited most oten by payment companies as highest operaional cost factor 4% 7%

% o’ Payment Service Providers

Figure 77: Nearly 8 % o’ payment companies have exising relaionships with banks and local payment networks Banks 79% Local payment networks

11% Forex ’ees

11%

15%

Regulatory costs e.g. licenses Compliance KYC/AML

79% Credit card networks 25% Mobile money networks 25%

Last mile delivery

22%

Billing/accouning systems 21%

Customer support

E-commerce plaforms Other

21%

30% Customer acquisiion

ATM networks 21% Point-of-Sale (PoS) systems 17%

COST FACTORS Findings show that customer acquisiion consitutes the major operaional cost ’actor ’or payment companies Figure 76 . Costs associated with the development of the IT infrastructure underlying the payment plaform were most oten cited by payment companies in the Other category. Expenses related to customer support as well as compliance and regulatory costs are most oten cited as second- or thirdhighest operaional expenses. Operaional cost ’actors ranked highest represent on average % to 6 % o’ total operaional expenses, whereas the expenses ranked second range between 8% and 8% o’ total operaional expenses. Costs associated with security consitute on average % o’ the total budget, but security costs range considerably ’rom one payment service provider to another: while 8% spend between % and % o’ their budget on security, 9% o’ payment companies have security costs that range between % and % o’ their total budget. It can be observed that payment companies operaing cryptocurrency exchanges themselves tend to have higher costs as a percentage of total budget associated with security. 78

EXISTING PARTNERSHIPS Payment companies generally act as gateways between businesses, tradiional inancial services, and cryptocurrency systems. They thus need to interact at some point with other payment systems and networks to bridge naional currencies and cryptocurrencies. Findings show that 79% o’ payment companies have exising partnerships with banks and local payment networks Figure 77 . The later include among others pawnshop networks and local remitances networks in Asia as well as tradiional banking in’rastructure such as the Single Euro Payments Area SEPA . A quarter o’ companies have partnerships with credit card and mobile money networks e.g., MPesa , while a smaller percentage of companies are partnering with services providers that specialise in merchant soluions to enhance the uility o’ their products and services, such as ’or example integraing online shopping cart systems. % o’ payment companies have partnerships with one or two o’ the listed systems and networks in Figure 77, whereas 9% have integrated three or more. 9% o’ payment companies even have partnerships with seven o’ the eight listed networks.

Global Cryptocurrency Benchmarking Study

Table 7: Challenges currently ’aced by cryptocurrency payment companies Respondents Scored these Categories on a : Strongly disagree

: Disagree

: Somewhat disagree

: Indiferent

- 7 Scale

: Somewhat agree

Lowest average score

Risk factors

6: Agree

7: Strongly agree

Highest average score Weighted average

Money transfer services

Diiculty o’ obtaining banking/ money trans’er operator MTO relaionships

5.85

. 9

High cost of regulatory compliance

5.11

.

Low liquidity in local currency markets

4.56

.6

Customer acquisiion costs

3.96

Proitability

B2B payments

Merchant services

General-purpose cryptocurrency plaform

.8

.9

.9

.

. 6

.

.

. 7

. 8

.7

.

,

.

3.82

.6

.8

.

.9

Exchange rate risk

3.80

.7

.7

.6

. 8

Last mile costs

3.76

.7

.

.67

.8

Compeiion ’rom FinTech irms

3.20

.

.

.7

.67

Compeiion ’rom tradiional MTOs e.g., Western Union

3.00

.

. 7

.

.

This suggests that for cryptocurrencies to be useful to users they cannot live in a closed vacuum, but require inter’aces and bridges to the broader economy. CHALLENGES Paricipaing payment service providers were asked to rate the challenges presented in Table 7 according to the level o’ urgency that they currently pose to their operaions. The biggest challenge for nearly all cryptocurrency payment service providers consitutes the diiculty o’ obtaining and maintaining relaionships with banking insituions and money trans’er operators MTOs . Only companies that provide money trans’er services as deined by the taxonomy introduced be’ore indicate that the high cost o’ regulatory compliance poses the biggest challenge to their operaions. An interesing observaion is that naional currency-’ocused money trans’er services and B B payment plaforms are more concerned by exchange rate risk than cryptocurrency-’ocused merchant services and general-purpose cryptocurrency plaforms. An explanaion could be that the later oten also operate a cryptocurrency exchange in addiion to their

payment aciviies that can be used to help manage exchange rate risk. O’ all payment categories, companies providing B B payments are most concerned with compeiion ’rom both FinTech irms and tradiional MTOs, whereas eniies providing merchant services and general-purpose cryptocurrency plaforms show no paricular concern with regards to these ’actors. Companies providing money transfer services seem to be slightly concerned by the compeiion ’rom tradiional MTOs. Another interesing observaion ’rom a geographical perspecive is that low liquidity in local currency markets is cited as the main challenge by Lain American payment service providers, whereas payment companies ’rom all other regions are only moderately concerned about this ’actor. This could pose a signiicant challenge to companies using cryptocurrency systems as payment rails as they ’ace diiculies convering cryptocurrencies back to naional currencies.

79

Payments

Figure 78: Proporion o’ budget spent on compliance is higher than the proporion o’ employees working ’ull-ime on compliance

% o’ Payment Service Providers

Compliance headcount

60%

Compliance cost

38%

12%

16%

25%

12%

29%

8%

% o’ Total Employees/ Budget

-

%

REGULATION AND COMPLIANCE

6-

%

-

%

-

%

LICENSE % o’ payment service providers surveyed have a ’ormal government license or authorisaion. While 86% o’ payment services providers based in North America and all payment companies ’rom A’rica and the Middle East hold a license, only % o’ Lain American payment companies have a license. The proporion o’ companies based in Asia-Paciic and Europe that have a license is approximately similar at % and 6%, respecively.

Less than half of payment companies based in Asia-Paciic, Europe and Lain America hold a formal government license

8

Global Cryptocurrency Benchmarking Study

Findings show that companies providing B2B payment services are most likely to have a government license 8 % , whereas companies providing merchant services are least likely to hold a license %.

payment service providers spend between % and % o’ their total budget on compliance Figure 78 . This suggests that a considerable number of payment service providers do not have employees working ’ull-ime on compliance, but spend a part o’ their budget on compliance.

COMPLIANCE HEADCOUNT AND COST Payment service providers have on average 8% o’ their total employees working ’ull-ime on compliance, and spend % o’ their total budget on compliance. Compliance headcount igures range ’rom % to an upper limit o’ % o’ total employees, and compliance cost igures range ’rom % to % o’ total budget. 6 % o’ payment companies have between % and % o’ their headcount working ’ull-ime on compliance, but only 8% o’

8

Payments

Figure 79: Internal checks are the pre’erred KYC/AML method o’ payment service providers

84%

56%

28%

Internally performed

Tradiional third-party KYC/AML service provider

KYC/AML CHECKS 86% o’ payment service providers surveyed indicate that they are per’orming KYC and AML checks. Those that do not perform KYC/AML checks cited a variety of reasons for not doing so, which include some B B payment plaforms outsourcing KYC/AML requirements to business customers, and some cryptocurrency plaforms not directly holding customer ’unds. 8 % o’ payment service providers that per’orm KYC/AML checks do so internally, while 6% use the services o’ a tradiional third-party provider Figure 79 . 8% o’ companies surveyed also use third-party blockchain analyics specialists

8

Third-party blockchain analyics specialist

who screen the blockchain to ideni’y suspicious transacions. While % o’ payment companies use one o’ the listed methods, 8% use two methods and % use a combinaion o’ all three. CURRENT REGULATORY ENVIRONMENT With regards to the current regulatory environment, a noteworthy observaion is that over % o’ payment service providers perceive no exising regulaions that speciically apply to cryptocurrencies and their aciviies, but would like to have more regulatory clarity Figure 8 . While % o’ payment companies state that they are saisied with what they perceive as a lack o’ speciic regulaions, % deem

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Figure 8 : Payment service providers percepion o’ the current regulatory environment 15%

15% 18%

11%

41%

Adequate and appropriate

Excessive and too strict

No speciic regulaion but needed

Cryptocurrencies are illegal in my country

exising regulaions adequate and appropriate. However, 8% o’ payment service providers believe that the current regulatory environment is too strict, whereas % perceive cryptocurrencies to be illegal in their countries mainly companies based in Asia-Paciic and Lain America .

No speciic regulaion and not needed

companies based in these two regions are saisied with the current regulatory environment. There is not enough data available for making a more detailed breakdown for Africa and the Middle East as well as ’or North America.

From a geographical perspecive, we observe that Lain American and Asian-Paciic companies are most concerned about the current regulatory environment 67% and %, respecively, would like to have more regulatory clarity with regards to their operaions . 8% o’ both European and AsianPaciic payment service providers deem exising regulaions excessive and too strict. However, also 8% o’ payment

8

Wallets

MINING The mining sector has evolved in a short ime ’rom a hobby acivity per’ormed on personal computers into a pro’essional and capital-intensive industry with its own value chain.

8

Global Cryptocurrency Benchmarking Study

KEY FINDINGS Governance and Operaions • 7 % o’ large miners rate their inluence on protocol development as high or very high, compared to % o’ small miners

• Tighter regulaion to create barriers to mining and/or cryptocurrency adopion as well as increased taxaion of mining proits are considered the highest regulatory risks by both small and large miners

• Scaling cryptocurrency transacion capacity is cited by small and large miners alike as a signiicant concern

• Small and large miners prefer cryptocurrency to be treated as commodity over currency for tax purposes, although a considerable proporion of miners are indiferent

• 8 % o’ large miners per’orm muliple mining value chain aciviies e.g., pool operator, hardware manu’acturing, etc.

• The vast majority of both small and large miners believe cryptocurrencies should be exempt from VAT

•

7% o’ large miners engage in three or more value chain aciviies, while all small miners specialise in a single acivity

Risk Management and Challenges

• Nearly three-quarters o’ all major mining pools are based in just two countries: 8% o’ mining pools with greater than % o’ the total bitcoin hash rate are based in China, ’ollowed by the US with 6%

• Small and individual miners are concerned that mining fees will not be able to compensate for decreasing block rewards in the long run; data shows that the proporion o’ transacion ’ees as a percentage o’ total bitcoin mining revenues have signiicantly increased in 6, and are projected to reach % at the end o’ 7

• Mining pools are seeking to atract internaional users: all mining pools with greater than % o’ the total bitcoin hash rate ofer an English language version o’ their website, and 6 % have two or more language versions available

• Small miners are generally more concerned about operaional risk ’actors than large miners

Regulaion/Policy • Only a small minority of miners believe that the negaive environmental externaliies from proof-of-work PoW mining are not an important issue; large miners in paricular are aware of the environmental impact of their aciviies • Overall, miners are not paricularly concerned at present about legal and regulatory risk factors • Regional diferences can be observed with regards to how miners perceive the current regulatory environment: more than half of miners based in Asia-Paciic do not report any signiicant impact from regulaion but would like to have more regulatory clarity, while the majority of North American and European miners seem to be saisied with exising regulaions or the lack thereof

• The biggest concern ’or large miners is the ierce compeiion amongst miners o’ the same cryptocurrency, while small miners are most concerned by sudden large cryptocurrency price drops • Total bitcoin mining revenues in 6 have increased compared to despite the July 6 bitcoin block reward halving • Miners are worried about the centralisaion o’ hashing power, as well as the centralisaion o’ hashing power in a paricular geographical area • Centralisaion o’ mining hardware manu’acturing in paricular geographical areas is not a major concern

8

Mining

Table 8: Taxonomy o’ mining industry actors and their aciviies Type o’ aciviies/actors

Descripion

Mining

Individuals and organisaions using their own mining equipment to process transacions and earn the mining reward and transacion ’ees

Mining pool

Combines computaional resources ’rom muliple miners to increase the likelihood and ’requency o’ inding a new block, and then distributes mining rewards among paricipaing miners based on the proporion o’ contributed computaional resources

Mining hardware manufacturing

Organisaions designing and building specialised mining equipment

Cloud mining services

Organisaions rening out hashing power to customers

Remote hosing services

Organisaions hosing and maintaining customer-owned mining equipment

INTRODUCTION AND LANDSCAPE

INTRODUCTION Miners play a crucial role in any cryptocurrency system as they are responsible ’or grouping unconirmed transacions into new blocks and adding them to the global ledger the 'blockchain' . They provide the necessary compuing power to secure a blockchain by compuing vast numbers o’ hashes to ind a valid block. Each valid block added by a miner to the blockchain generates a reward ’or the miner and makes it more diicult ’or an atacker to reorganise the ledger and doublespend already conirmed transacions. ACTIVITIES Mining has grown ’rom a simple hobby per’ormed by early adopters on ordinary PCs into a capital-intensive industry that uses custom hardware equipment and ’eatures a specialised value chain, which can be summarised into ive categories Table 8 .

86

Global Cryptocurrency Benchmarking Study

Figure 8 : The mining industry value chain

Mining hardware manufacturers

‘Mining’

Cloud mining services

Self-mining

Pool operators

Remote hosing services

Figure 8 : Cumulaive bitcoin mining revenues block rewards & transacion ’ees i’ immediately converted to USD Cumulaive mining revenues Millions, USD $2,073 $2,000 $1,511

$1,500 $1,136 $1,000

$500

$0

$350 $0.2

$19

$41

2010

2011

2012

2013

2014

2015

2016

Data sourc’d from Blockchain.info

A BRIEF HISTORY OF CRYPTOCURRENCY MINING As more compuing power is added by miners, the diiculty o’ solving the puzzle that allows miners to earn a reward increases. This led to the emergence o’ the irst bitcoin mining pools in , which apporion rewards across pool paricipants based on the share o’ compuing power contributed to the pool by each miner. Coupled with the price increase and surge in general interest in cryptocurrencies, early adopters and engineers were incenivised to develop increasingly eicient mining hardware that vastly outper’ormed previous generaions o’ mining equipment.1 This led to further increases in the diiculty o’ solving the puzzle and accelerated an arms race amongst miners to use the cheapest energy sources and the most eicient equipment to keep operaions proitable. Today, mining has become a compeiive and resource-intensive industry that ’eatures its own value chain.

The mining value chain is depicted in Figure 8 . A small number of large mining hardware manufacturers supply the industry with the newest and most eicient equipment. Remote hosing and cloud mining services have emerged to ofer customers the possibility to paricipate in the mining process without having to run equipment themselves. Large mining organisaions build and maintain vast mining ’aciliies and data centres all over the world. Individual and corporate miners alike point their hashing power towards the mining pools o’ their choice to increase the likelihood and ’requency o’ inding new blocks and smooth earnings . Mining pools have become increasingly pro’essionalised, with some ofering customer support phone numbers and addiional services to their customers. Figure 8 shows that bitcoin miners alone have earned over $ billion to date.2 This ’urther evidences the evoluion o’ cryptocurrency mining ’rom a hobby acivity in the early days to a professional industry where large amounts of capital are at stake. It is worth noing that these igures do not include revenues generated from the sale of mining hardware

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Mining

Figure 8 : Over 8 % o’ large miners are per’orming muliple mining value chain aciviies

Figure 8 : Over hal’ o’ miners consider their ability to inluence protocol development to be high or very high Ability to Inluence Protocol Development 4%

18%

21%

4%

55%

34%

27%

37%

Pool operator

Two aciviies

More than two aciviies

equipment, nor ’ee revenues generated ’rom the provision o’ cloud mining and remote hosing services, or gains realized ’rom bitcoin's price appreciaion. As a result, the total revenues generated by all actors of the cryptocurrency mining industry are likely signiicantly higher. The ’ollowing igures are based on a sample o’ 8 miners that paricipated in our study. O’ the 8 paricipants, 8 are mining organisaions 8% o’ sample and are individual miners 6 % o’ sample . For the purpose o’ this analysis, paricipaing organisaions have been designated as large mining organisaions.3 We esimate that the large mining organisaions in this study cover over % o’ the total professional mining sector in terms of global hash rate as well as the scale of mining hardware manufacturing and cloud mining operaions. For the rest o’ this secion, we will re’er to small mining organisaions as small miners and large mining organisaions as large miners . The small miner category includes both small mining organisaions which have a registered legal personality and individual miners operaing as sole proprietors. While all

88

Very high

High

Low

Very low

Medium

small miners specialise in a single secion o’ the mining value chain running small mining ’aciliies being the most common , large miners have a much more diversiied range o’ aciviies and oten per’orm muliple value chain aciviies: 8 % o’ large miners surveyed are performing more than a single mining acivity, and 7% are engaged in more than two aciviies Figure 8 . Some large miners even cover the enire mining value chain by producing their own hardware, running their own pool and mining ’aciliies, and providing addiional services to individual customers. The 8% o’ large miners that are per’orming a single mining acivity are all specialising in running mining pools.

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Figure 8 : Large miners believe they have a much greater ability to inluence protocol development than small miners Ability to Inluence Protocol Development

Small miners

16%

35%

41%

5% 3%

Large miners

40%

Very high

High

THE POLITICS OF MINING Over ime, more and more miners have connected to mining pools, meaning that pool operators largely decide which transacions to include in a new block. Mining pool operators also hold considerable power in terms of which protocol rules they want to support by running pre’erred client implementaions. However, ’ull nodes and especially economically relevant ’ull nodes run by major cryptocurrency businesses ensure that only valid blocks as deined by the protocol implementaion they are running are added to the blockchain. This means that i’ a miner runs a protocol implementaion that en’orces diferent rules than the majority o’ ’ull nodes, the later may reject the blocks produced by such miners. This may result in a scenario o’ two incompaible networks in which there is one chain backed by a considerable amount o’ compuing power but not accepted by the economic majority , and a second chain that is considered valid by the economic majority but not backed by as much compuing power as be’ore the chain '’ork'.4

30%

Medium

Low

20%

10%

Very low

INFLUENCE ON PROTOCOL DEVELOPMENT We asked survey paricipants about how they perceive their ability to inluence protocol development Figure 8 . Although more than half believe that their decision power is high or very high, nearly % o’ miners indicate that they think they only have medium inluence on protocol development. We can observe diferences in percepions between small and large miners, with large miners not surprisingly raing their inluence higher than small miners: % o’ large miners rate their inluence over protocol development as very high, compared to only 6% o’ small miners Figure 8 . In contrast, % o’ small miners consider themselves to only have medium inluence on protocol development.

89

Mining

Table 9: Mining pool market share - evoluion o’ average hash rate distribuion o’ major mining pools in 6 Mining pools

Q

6

Q

6

Q

6

Q

6

AntPool

6%

6%

%

%

F2Pool

%

6%

%

%

BTCC Pool

%

%

%

%

BitFury

%

%

%

%

BW.com

7%

%

6%

%

Slush Pool

%

%

7%

8%

KnCMiner

%

%

%

Closed

BitClub Network

%

%

%

%

GHash.io

%

< %

< %

Closed

Eligius

%

< %

< %

< %

< %

%

%

< %

ViaBTC

-

-

Launched

%

HaoBTC/Bixin

-

-

Launched

%

BTC.com

-

-

Launched

%

Telco 214

Data sourced from BitcoinChain5

MINING POOLS Mining is a very compeiive industry characterised by the ’requent entry o’ new mining pools and the exit o’ previously success’ul pools. The market share o’ mining pools is generally calculated as the number o’ blocks mined divided by total number o’ blocks ’ound during a speciic period.6 There are a number o’ organisaions that have established themselves as leading pools that occupy a dominant posiion in the industry, although it appears that mining has become more distributed in 6 with the entry o’ new pools that have taken some o’ the large players market share Table 9 . Looking at the geographic distribuion o’ the major mining pools, nearly three-quarters o’ all major mining pools are based

9

in just two countries, China and the US. 8% o’ mining pools are based in China, ’ollowed by the US with 6% Figure 86 . The locaion o’ the mining pool operator does not necessarily coincide with the locaion o’ miners contribuing compuing power to the pool: individual miners and organisaions can easily switch between diferent mining pools, making pool locaion largely unimportant. In ’act, all major mining pool websites have an English version and 7 % have a Chinese version Figure 87 . Moreover, 6 % o’ mining pools have two or more languages available on their website, which suggests that their customer base is internaional and not limited to domesic miners.

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Figure 86: More than hal’ o’ the major mining pools are based in China 58%

26%

16%

China

US

Other

Figure 87: Most commonly available languages on major mining pool websites

English 100%

Chinese 74%

Spanish 21%

Russian 16%

9

Mining

MINING FACILITIES Determining where to set up a cryptocurrency mining facility is generally based on three key ’actors: miners need to have access to low-cost electricity to run their operaions proitably, they need to have a suiciently ’ast internet connecion to quickly receive and broadcast data with other nodes on the network, and mining equipment must be kept ’rom overheaing to ’uncion opimally, which is why locaions that have low temperature zones ofer substanial advantages as cooling costs can be kept low.

Figure 88: Global Cryptocurrency Mining Map

The cryptocurrency mining map in Figure 88 shows that mining ’aciliies are mainly concentrated in locaions where most o’ the key drivers discussed above are saisied.7 Mining ’aciliies are primarily located in North America, Northern and Eastern Europe as well as in China. In ’act, China is the country that hosts most mining ’aciliies and uses the highest power consumpion o’ all countries ’or cryptocurrency mining. A zoom into China shows that mining ’aciliies are concentrated in remote areas where both electricity and land are very cheap. A signiicant concentraion can be observed in the Sichuan province, where miners have struck deals with local hydroelectric power staions to access cheap electricity. The cryptocurrency mining map shows an esimate o’ the locaion o’ medium-to-large scale mining operaions around the globe.8 We were able to map mining ’aciliies consuming a total o’ 88 megawats MW to power cryptocurrency mainly bitcoin mining. However, as a substanial ’racion o’ the cryptocurrency mining capacity is not reported and the locaion o’ many mining ’aciliies across the globe are kept secret, the 88MW igure should be considered as a lower-bound. Using a botomup approach that takes into account the current network hash rate close to , Petahashes/second and assuming that all miners are using the most eicient hardware in the most eicient seing, it can be esimated that at least 6 MW are consistently being consumed to secure Bitcoin s blockchain alone.9 This would mean that Figure 88 captures the origin o’ more than hal’ o’ the enire bitcoin hash rate.

Low-cost electricity

Fast internet connecion

Low temperature zones Low cost electricity/ Low temperature zones Low-cost electricity / Fast internet connecion Low temperature zones / Fast internet connecion Low-cost electricity / Low temperature zones / Fast internet connecion

REPORTED MINING FACILITIES Megawats MW esimate not available

Megawats MW or less

-

>

Megawats MW

Megawats MW

M’gawats MW ar’ low’r bound ’simat’s of known mining facilii’s

9

Global Cryptocurrency Benchmarking Study

China Cryptocurrency Mining Map

Heilongjian Neimonggu Liaoning

Xinjiang

Jiansu Tibet Xizang

Sichuan Anhui

Guizhou Yunnan

9

Mining

Figure 89: No signiicant diferences can be observed between small and large miners with regards to how they perceive the current regulatory environment

Small miners

19%

11%

28%

31%

8% 3%

Large miners

27%

9%

Adequate and appropriate No speciic regulaion but needed

REGULATION AND POLICY

27%

37%

Excessive and too strict

No speciic regulaion and not needed

Too relaxed

Cryptocurrencies are illegal in my country

TAX TREATMENT 87% o’ small miners and 9 % o’ large miners state that cryptocurrencies should be exempt ’rom value-added tax VAT . While nearly all miners both small/individual and large based in Europe, North and Lain America indicate that no VAT should be applied to cryptocurrencies, % o’ small/individual miners and 7% o’ large miners based in Asia-Paciic believe it should.

The vast majority o’ both individual and corporate miners believe cryptocurrencies should be exempt from VAT We asked miners whether cryptocurrencies should be treated as currencies or as commodiies ’or tax purposes, and responses varied between individuals, small miners and large miners, and across diferent world regions. One observaion that stands out is that nearly 6 % o’ Asian-Paciic individual miners are indiferent. In contrast, a slight majority o’ individual miners ’rom other regions indicate they would like to see cryptocurrencies being treated as currencies ’or tax purposes. Asian-Paciic individual miners that are not indiferent would

9

Global Cryptocurrency Benchmarking Study

Figure 9 : Majority o’ European and North American miners are saisied with exising regulaions or the lack thereof Asia-Paciic

13%

9%

13%

13%

52%

Europe

17%

17%

49%

17%

North America

38%

Adequate and appropriate No speciic regulaion but needed

12%

38%

Excessive and too strict

No speciic regulaion and not needed

Too relaxed

Cryptocurrencies are illegal in my country

pre’er cryptocurrencies to be treated as commodiies ’or tax purposes. For mining organisaions, the picture looks diferent: 9% o’ large miners and one third o’ small miners are indiferent. Those who are not indiferent, however, ’avour the commodity tax treatment over the currency tax treatment, and no signiicant diferences between world regions can be observed. Overall, indings show that a considerable number o’ miners seem to be indiferent as to how cryptocurrencies should treated ’or tax purposes, but that individual miners who are not indiferent would like to see cryptocurrencies being treated as currencies ’or tax purposes except Asian-Paciic individuals who pre’er the commodity opion , as opposed to both small and large miners who pre’er the commodity tax treatment.

6%

6%

CURRENT REGULATORY ENVIRONMENT Miners are divided with regards to how they perceive the current regulatory environment Figure 99 . There are no substanial diferences between small and large miners, except that 7% o’ large miners deem current regulaions adequate and appropriate compared to only 9% o’ small miners. However, signiicant regional diferences can be observed when combining all miners together.11 In Asia-Paciic and China speciically , more than hal’ o’ miners are concerned about what they perceive as a lack o’ speciic cryptocurrency-related regulaions, and would like to see more regulatory clarity Figure 9 . In contrast, the majority o’ European and North American miners seem to be saisied either with exising regulaions or the lack thereo’.

Both small and large miners prefer cryptocurrencies to be treated as commodity over currency ’or tax purposes; a signiicant number o’ miners are indiferent 9

Mining

Table

: Legal/regulatory risk ’actors rated by miners Respondents Scored these Categories on a

: Very low risk

: Low risk

: Medium risk

Scale : High risk

Lowest average score

: Very high risk

Highest average score

Weighted average

Small miners

Large miners

Tighter regulaion to create barriers to mining and/or cryptocurrency adopion

3.00

. 9

.7

Increased taxaion o’ mining proits

2.98

.

.8

Government ban of cryptocurrencies

2.55

.8

.7

Energy price hikes targeted at miners

2.57

.67

. 7

Seizure o’ mining ’aciliies

2.48

.6

. 9

Mining becoming money transmission service

2.40

.

. 9

8% o’ North American miners perceive exising regulaions to be adequate compared to only 7% o’ European miners, whereas nearly hal’ o’ European miners perceive no exising regulaions and believe that they are not needed, as opposed to 8% o’ North American miners. Only a minor proporion o’ miners deem exising regulaions excessive and too strict, a seniment that is most prominent in Europe. % o’ miners based in Asia-Paciic indicate that they perceive exising regulaions as too relaxed, while 6% o’ miners based in North America perceive cryptocurrencies to be illegal all being small miners . LEGAL/REGULATORY RISKS AND CHALLENGES Survey paricipants were presented with a list containing various legal and regulatory challenges that the mining industry may be ’acing, and asked to rate them Table . In general, it appears that miners are not paricularly concerned at present about potenial legal and regulatory risk ’actors, as weighted average raings merely range ’rom low to medium risk. It is worth noing that small miners including individuals rate risk ’actors consistently higher than large miners.

96

-

The two highest ranked factors by both small and large miners are the possibility that governments will increase taxes on mining proits, as well as the potenial introducion o’ ighter regulaions that create barriers to either mining and/ or cryptocurrency adopion in general. Large miners are least worried about a potenial government ban o’ cryptocurrencies, a scenario that small miners rate as third highest risk ’actor. Miners are not concerned about mining becoming a money transmission service, which would require them to hold a money transmission license.

Tighter regulaion to create barriers to mining/cryptocurrency adopion and increased taxaion o’ mining proits are considered the highest regulatory risks by both small and large miners There are geographical diferences as well: in general, large miners based in Asia-Paciic and North America are

Global Cryptocurrency Benchmarking Study

Figure 9 : Negaive environmental externaliies o’ proo’-o’-work PoW algorithm are recognised by the mining industry

Minor issue compared to ’ossil ’uels extracion and mining o’ precious metals 44% 64% Necessary cost for maintaining a secure distributed computer system 39% 73% Might be alleviated by switching to more environmentally-friendly power sources 50% 36%

It may be necessary to switch to another consensus algorithm in the future to address environmental concerns 25%

Not an issue at all 17% 9%

Small miners

considerably less concerned about legal and regulatory risk ’actors than large miners ’rom Europe and Lain America. With regards to small miners, the opposite is true: miners based in North American and Asia-Paciic tend to be more concerned about legal risks and challenges than small miners ’rom Europe and Lain America. Interesingly, the two highest ranked risk ’actors are inversely correlated: small miners based in Asia-Paciic consider a government ban o’ cryptocurrencies as well as the seizure o’ mining ’aciliies to be the highest risks, whereas small miners ’rom North American rank these as lowest risks. At the same ime, small miners based in North America believe increased taxaion o’ mining proits to be the highest risk ’actor, while this is the ’actor that small miners ’rom Asia-Paciic are least concerned about. ENVIRONMENTAL EXTERNALITIES OF PROOF-OF-WORK ALGORITHM Most cryptocurrency systems are currently using an energyintensive proo’-o’-work PoW algorithm that serves as a

Large miners

lotery to determine which miner gets the right to add his block to the blockchain and earn a reward. When mining diiculty rises a larger amount o’ electricity is required to generate a valid PoW. As a re’erence, it is esimated that Bitcoin alone currently consumes about . TWh per year, which is close to the yearly energy consumpion o’ Uruguay, a country with . million inhabitants.12 The large energy ’ootprint o’ PoW cryptocurrency systems has atracted criicism ’or wasing electricity to per’orm useless calculaions. Proponents, however, argue that this is a necessary cost ’or maintaining a secure, distributed computer system. In ’act, 9% o’ small miners and 7 % o’ large miners state that the beneits o’ having a secure distributed computer network outweigh the environmental costs Figure 9 . Similarly, % o’ small miners and 6 % o’ large miners believe that cryptocurrency mining represents a minor issue when compared to the environmental damage caused by the extracion o’ ’ossil ’uels and the mining o’ precious metals.

97

Mining

Hal’ o’ small miners believe that the negaive environmental efects ’rom PoW mining could be alleviated by using more environmentally-’riendly power sources such as hydroelectric and solar power, an opinion that is shared by 6% o’ large miners. An interesing observaion is that a quarter o’ small miners are open to the possibility o’ switching to another, less energy-intensive consensus algorithm in the ’uture – no large miner agrees with this statement, though. Changes to the consensus algorithm may lead to a loss o’ investment in mining equipment that is speciically designed to only per’orm the calculaions required by the current PoW algorithm.

Large miners in paricular are aware of the environmental impact o’ their aciviies Findings show that only a minority o’ miners think that the negaive environmental externaliies ’rom PoW mining do not consitute an issue at all. Small and large miners alike

98

have commented that they are thinking about ways to reduce mining s signiicant carbon ’ootprint, although ’or now most agree that this is a minor concern compared to other challenges that cryptocurrency systems currently ’ace. It should be noted that several energy companies are leveraging energy overcapaciies in some regions in China oten ’rom coal plants and hydroelectric dams that had been built to supply large industrial projects that never materialised to mine cryptocurrencies in order to prevent energy ’rom geing enirely wasted.13

Global Cryptocurrency Benchmarking Study

Table

: Operaional risk ’actors and challenges rated by miners Respondents Scored these Categories on a

: Very low risk

: Low risk

: Medium risk

Scale : High risk

Lowest average score

: Very high risk

Highest average score

Weighted average Sudden large price drop e.g.,

-

%

Small miners

Large miners

3.30

.

.

Fierce compeiion among miners o’ the same cryptocurrency constant arms race

3.20

. 7

.

Insuicient availability o’ capital to coninually replace/upgrade mining infrastructure

3.00

.

.

Unexpected market-driven increase in electricity costs

2.98

.

.9

Regularly scheduled reducions in block rewards

2.89

.9

.7

Cyber atacks e.g., DDoS

2.83

.77

.

Lack o’ immediate availability o’ state-o’-the-art mining hardware

2.82

.9

.

Natural disasters e.g., looding, lightning

2.50

.

.

Compeiion with other cryptocurrencies than the one s they mine

2.30

. 6

.6

Unexpected change to protocol e.g., change away ’rom SHA- 6

2.30

.

.6

OPERATIONAL CHALLENGES

OPERATIONAL RISK FACTORS There are a variety o’ ’actors that can have a negaive impact on both the operaional ’uncioning and the proitability o’ mining aciviies. Paricipaing miners were presented with a list o’ potenial risk ’actors that they were asked to rate according to the risk that they might pose to miners daily operaions Table . Findings show that small miners tend to rate operaional risk ’actors slightly higher than large miners, but in some cases there are divergences as well. One noteworthy observaion is that large miners consider the ierce compeiion among miners o’ the same cryptocurrency to pose the highest risk to their operaions, while small miners deem a sudden large price drop of the cryptocurrency they are mining a higher risk than the constant arms race between miners.

The ierce compeiion among miners of the same cryptocurrency poses the highest risk to large miners, whereas small miners are more concerned about sudden large price drops

99

Mining

Figure 9 : Total bitcoin mining revenues per year block reward + transacion ’ees i’ immediately converted to USD Total Mining Revenues per Year Millions, USD $786

$ 800

$ 600

$563

$375

$ 400 $309

$ 200

$0 2013

2014

2015

2016

Data sourc’d from Blockchain.info The largest discrepancy between small and large miners can be observed with regards to the insuicient availability o’ capital that is needed to coninually upgrade and/or replace mining equipment: this poses a major risk to small miners, while large miners tend to have suicient capital available to invest in their mining in’rastructure. Large miners appear to run the risk o’ geing atacked more oten than small miners e.g., DDoS atacks against mining servers . They rate an unexpected change to the protocol e.g., changing the current PoW algorithm so that their equipment will be worthless as well as the compeiion with other cryptocurrencies than the ones they mine considerably lower than small miners. Natural disasters do not pose a major risk to both small and large mining operaions. There are regional diferences as well: North American and Lain American miners tend to rate risk ’actors lower than AsianPaciic and European miners. One interesing observaion is that there are no major regional diferences in terms o’ the risk o’ not immediately having access to the latest state-o’-the-art mining

equipment, although small miners ’rom Asian-Paciic rate this ’actor higher than miners ’rom other regions. This suggests that the locaion o’ mining hardware manu’acturers the majority are based in China is not a crucial issue at present.

North and Lain American miners tend to rate operaional risk factors lower than miners based in Asia-Paciic and Europe The regularly scheduled reducions in cryptocurrency mining rewards e.g., Bitcoin s reward halving that occurs roughly every ’our years are considered a medium risk by both small and large miners, probably because these events are well known in advance and preparaions can be taken to smooth the transiion. When comparing total bitcoin mining revenues per year, we can observe that they have been higher in 6 compared to despite the block reward being reduced ’rom BTC to . BTC in July 6 Figure 9 .14

Global Cryptocurrency Benchmarking Study

Table

: Level o’ concern regarding general challenges afecing the cryptocurrency industry Respondents Scored these Categories on a

: Not concerned at all

: Concerned

: Moderately concerned

Lowest average score

-

Scale

: Highly concerned

: Extremely concerned

Highest average score

Weighted average

Small miners

Large miners

Centralisaion o’ hashing power in the hands o’ a ’ew control

3.77

.89

.

Centralisaion o’ hashing power in a paricular geographical area locaion

3.59

.7

.

Scaling

3.41

.

.

Mining ’ees not compensaing ’or decreasing block rewards in the long run

3.17

.

.

Centralisaion o’ mining equipment producion in a paricular geographical area

3.09

.

.

Implementaion bugs in mining irmware/ hardware

2.98

.

.

Design bugs/weaknesses at the protocol level

2.83

.9

.

Lack o’ liquidity in cryptocurrency markets

2.57

.7

. 9

VIEWPOINTS In addiion to purely operaional risk ’actors, we also asked paricipaing miners to rate a number o’ higher-level issues that in most cases also apply to the cryptocurrency industry as a whole Table . Again, it can be observed that small miners are generally more concerned than large miners with regards to the listed ’actors. One o’ the main concerns in any PoW-based cryptocurrency system is the potenial centralisaion o’ hashing power that could efecively undermine the censorship-resistance property that is considered an essenial ’eature o’ many cryptocurrencies. In essence, there are three diferent types o’ potenial mining centralisaion that are rated diferently by paricipaing miners. As expected, the centralisaion o’ hashing power in the hands o’ a small number o’ pool operators is the highest ranked ’actor, ’ollowed by the centralisaion o’ hashing power in paricular geographical areas. An interesing observaion is that miners are less worried about the centralisaion o’ mining hardware manu’acturing within a paricular geographical area, although

a substanial diference between small and large miners can be observed with regards to the level o’ concern. Miners based in Europe as well as North and Lain America appear to be more worried about the three types o’ centralisaion than Asian-Paciic miners.

O’ the three potenial types o’ mining centralisaion control o’ hashing power, locaion o’ hashing power, and locaion o’ mining equipment manu’acturing , miners are least concerned about the last Implementaion bugs in mining hardware and irmware are slightly more of a concern to miners than design weaknesses at the protocol level. The later would consitute a major debacle to the enire cryptocurrency industry and system depending on the severity o’ the bug, but is less likely to happen thanks to the thorough codebase review o’ numerous developers.

Mining

Figure 9 : Total bitcoin transacion ’ees have signiicantly increased in

6

Total Transacion Fees per Year Millions, USD $13.6

$ 14

$ 12

$ 10

$8

$6

$4 $2.2

$2.4

$2.3

2013

2014

2015

$2

$0 2016

Data sourc’d from Blockchain.info On average, miners are not much concerned about the lack o’ liquidity in cryptocurrency markets used to convert their minted cryptocurrency ’or naional currencies to ’und operaions , but signiicant regional diferences between small miners can be observed: small miners ’rom North America and Europe seem to be able to easily convert their mined cryptocurrencies to naional currencies, but small miners based in Asia-Paciic are concerned about apparently illiquid cryptocurrency markets in their region. A major concern o’ both small and large miners is the debate about how a cryptocurrency system should scale, and what methods should be used. This is exempliied by the smouldering block size debate that sees opposing camps advocaing diferent scaling soluions and efecively stalls any signiicant protocol update. Moreover, small miners are concerned that mining ’ees will not be able to compensate for decreasing block rewards in the long run. However, transacion ’ees are becoming a growing source o’ revenue ’or miners. While transacion ’ees have been low ’or most o’ Bitcoin s li’e cycle, they have signiicantly increased in 6 Figure 9 . Transacion ’ees have historically represented only a very small proporion o’ total bitcoin mining revenues: on average, they consituted .6 % o’ total mining revenues ’rom . However, ater the bitcoin block reward halving event in July 6, transacion ’ees have increased over three imes as a proporion o’ total mining revenues, which indicates that transacion ’ees are increasing more than what would have been expected solely as a consequence ’rom the block reward halving Figure 9 .

The unsolved mater o’ how to scale transacion capacity is cited as a major concern by both small and large miners The major surge in transacion ’ees is also likely a result o’ the increasing number o’ daily transacions compeing to be included in a block whose size is limited to MB, which is the most contenious issue o’ the scaling debate. Based on current growth igures, bitcoin transacion ’ees are projected to consitute nearly % o’ total mining revenues at the end o’ 7 Figure 9 . While this poses signiicant challenges to cryptocurrency payment companies and users who perform a considerable number o’ on-chain transacions, the emergence o’ a ’ee market might be necessary to maintain bitcoin s security model in the long run. As block rewards decrease miners will need to have economic incenives in order to coninue providing hashing power to secure the system.

Global Cryptocurrency Benchmarking Study

Figure 9 : Growth in the proporion o’ bitcoin transacion ’ees as a % o’ total mining revenues

Data sourc’d from Blockchain.info Daily total mining revenues in USD let axis

Transacion ’ees as % o’ total revenues right axis

Figure 9 : Transacion ’ees as a % o’ total bitcoin mining revenues are rising % o’ Total Mining Revenues

Data sourc’d from Blockchain.info

Appendices

APPENDICES

APPENDIX A: BRIEF INTRODUCTION TO CRYPTOCURRENCIES CONCEPT Cryptocurrencies are the result o’ a combinaion o’ muliple achievements in various disciplines that include, but are not limited to computer science P P networking , cryptography cryptographic hash ’uncions, digital signatures and economics game theory . In short, a cryptocurrency is a digital token that exists within a speciic cryptocurrency system which generally consists o’ a P P network, a consensus mechanism and a public key in’rastructure. There is no central authority that governs the system; instead the rules governing the system e.g., deining what consitutes a valid transacion, speci’ying the total

Table

supply o’ the digital token and its issuance scheme, etc. are en’orced by all network paricipants also called nodes . The enire transacion history can be independently veriied by each node as everyone has a copy o’ the shared ledger. This shared ledger, generally taking the ’orm o’ a chain o’ blocks comprised o’ transacions blockchain , is constantly updated via a process called mining , through which new units o’ the naive token i.e., the cryptocurrency are created. Anybody is ’ree to join and leave the system at any ime, and there are no ideniies atached to users.1

: Key properies o’ cryptocurrencies

Property

Descripion

Digital bearer asset

User who controls the private key owns the cryptocurrency, which can be used as a sp’culaiv’ ass’t as well as a medium of exchange. Funds cannot be seized and transacions cannot be censored.

Integrated payment network

Generally ofers ’ast, cheap, global and irreversible payments.

Non-monetary use cases

Enable use cases that go beyond currency and assets, and provide them in a decentralised, censorship-resistant manner without a central authority.

The main property of a reasonably decentralised cryptocurrency is that the naive token consitutes a censorship-resistant, digital bearer asset Table . It is a bearer asset in the sense that the person who controls the respecive private key controls the paricular amount o’ cryptocurrency associated with the corresponding public key, and censorship-resistant in the sense that, in theory, nobody can ’reeze or coniscate cryptocurrency ’unds nor censor transacions per’ormed on the integrated payment network.2

As cryptocurrency systems are not bound to a paricular locaion or jurisdicion, the integrated payment network has a global reach and can be used to transfer funds within a short ime ranging ’rom seconds to several minutes depending on a variety o’ ’actors all over the world.3 In general, transacions ’ees are substanially lower than ’ees charged by tradiional payment network operators, and ’ees are not based on the amount trans’erred, but generally on the transacion size measured in bytes. This means that a muli-million dollar transacion can be processed ’or the same ’ee as a $

Global Cryptocurrency Benchmarking Study

transacion. As a result, cryptocurrency systems can be used ’or cost-efecive micropayments.4 Payments are irreversible once funds have been transferred and received enough conirmaions. This poses signiicant advantages ’or merchants as they can beneit ’rom lower ’ees and avoid chargebacks. In addiion, no personally ideniiable in’ormaion such as contact details, credit card numbers and passwords need to be stored on insecure servers that can be subject to security breaches, as users are only ideniied by their cryptocurrency address derived ’rom the public key. Finally, some cryptocurrency systems have addiional properies and ’uncionality that enable non-monetary use cases that go beyond digital assets and currencies. Bitcoin,

’or example, can be used as an immutable data store by embedding speciic metadata usually in the ’orm o’ hashes into transacions that carry special meaning outside o’ the bitcoin network and can serve as a decentralised imestamping service. This mechanism also enables the creaion o’ overlay networks or embedded consensus systems that are built on top o’ the core network and have disinct ’uncionality and use cases, oten ’eaturing their own naive token or cryptocurrency dApp tokens . Some cryptocurrency systems have also been developed with the explicit aim o’ enabling speciic nonmonetary use cases e.g., a decentralised domain name registry, a decentralised compuing plaform, etc. . These systems use a naive cryptocurrency primarily as a monetary incenive ’or paricipants to keep the system running.

APPENDIX B: THE CRYPTOCURRENCY INDUSTRY EMERGENCE OF A BUSINESS ECOSYSTEM/INDUSTRY For each o’ the properies and value proposiions introduced in Table in appendix A, a mulitude o’ projects and companies have emerged to provide services that facilitate the use of cryptocurrencies for mainstream users and take advantage o’ the innate properies o’ the systems that power them. A cryptocurrency ecosystem has emerged that is composed of a diverse set o’ actors ranging ’rom volunteering developers, academics, non-proit and media organisaions to registered companies, among others. This study primarily ’ocuses on the evolving business ecosystem that features economic actors providing products, services and applicaions that involve the use o’ cryptocurrency.

price volaility, act as gateways and provide bridges between cryptocurrencies and the global economy.

Iniially, a cryptocurrency exists in a vacuum; a closed system that has no connecions to other systems e.g., other cryptocurrency systems, tradiional inance, the real economy . In order to paricipate, users need to start mining in order to earn the cryptocurrency, which can only be used ’or transacing with users o’ the same system as there is no way to spend or sell them.

In parallel, a variety o’ actors emerge to provide supporing services, such as data services e.g., block explorers, market data sites , media and consuling. Moreover, projects emerge that build complex overlay networks on top o’ exising cryptocurrency systems and expand the uility o’ these systems by enabling non-monetary use cases. Fuller-’eatured cryptocurrency plaforms are launched to remove the inherent complexiies o’ using cryptocurrency and make it easier ’or mainstream users to use cryptocurrencies. The sheer range o’ projects, aciviies, products, services and applicaions in the cryptocurrency industry make it diicult to comprehensively catalogue everything taking place.

To counter this, exchanges are established that let users trade cryptocurrency ’or other cryptocurrency and/or naional currencies. As a result, a price can be established ’or these tokens and they become digital assets that have a certain value. Exchanges provide on-of ramps ’or new users to join the system and thereby opening up the iniially closed system by connecing it to tradiional inance. With increasing transacion volumes, merchants begin acceping cryptocurrency as a payment method, thus making the token a medium of exchange. Payment companies that emerge to help merchants ’acilitate cryptocurrency payments and reduce exposure to

Cryptocurrency industry actors build interfaces between cryptocurrency systems, tradiional inance and the global economy, thereby establishing and boosing the value of the cryptocurrency

The cryptocurrency industry builds the infrastructure and services to make cryptocurrencies more accessible to mainstream users

Appendices

Figure 96: Bitcoin ATM share by region