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What did Silicon Valley’s ICO bubble create?

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Three years ago, when the blockchain start-up Filecoin raised $257m with nothing more than a promise to build a decentralised marketplace for data storage, it looked like another example of the mania that was sweeping through the cryptocurrency world.

At the time, investors were pouring an estimated $20bn into so-called Initial Coin Offerings — sales of new digital tokens by projects which, like Filecoin, claimed to be building important new digital infrastructure. Many have since sunk without a trace, and ICOs quickly went out of fashion.

But in recent weeks, the Filecoin marketplace has finally seen the light of day. People vying to earn its tokens have already committed a combined 1.3 exabytes of storage capacity, according to Juan Benet, the project’s founder. An exabyte is equivalent to 500 times the data stored in all US research libraries.

Demand from customers looking to buy storage is still only a small fraction of this, but Filecoin’s first goal was to attract capacity, and progress has been ten times ahead of expectations, claimed Mr Benet.

The activation of Filecoin’s network is part of the belated emergence of a handful of blockchain projects, financed by the ICO bubble, that set out with big ambitions to change online activity.

Polkadot, a platform others can use to create their own blockchains, is close to completing the phased launch of its network. Others, like Cosmos, which provides a way to connect different blockchains, and Tezos, a “smart contract” competitor to Ethereum, have also gone live.

The founders of some of these projects admit that their ideas benefited from the wave of financial speculation. Gavin Wood, a founder of Polkadot, said that much of the money pouring into ICOs in 2017 represented the recycled profits from investments in Ethereum (which he also co-founded) and Bitcoin.

“Ultimately I think a lot of people viewed this as a sort of accumulator bet,” Mr Wood said. “They won a lot of money on Ethereum and they wanted to see if they could carry on rolling.”

Yet he and other crypto entrepreneurs claim that the technical innovations from a handful of survivors will prove more lasting than the financial mania surrounding the ICOs.

“These projects have built pretty significant things,” said Mr Benet. “I think the total capital organised [by ICOs] in the last three years is not — if you look at the rest of technology — out of the ordinary.”

Though some of the blockchain networks have gone live, the applications they were built to support have yet to be developed, making it hard to judge their ultimate impact.

The Tezos blockchain, for instance, was designed for “any place where you’re trying to create a digital economy”, like purchases made inside a video game, said Kathleen Breitman, one of its founders.

Other potential uses are in online “creator economies”, said Alison Mangiero, president of TQ Tezos — places where individual artists, entertainers and influences might see a benefit in “cutting out the middleman and working out ways to monetise their fan bases.” They promise applications like this will start to appear in 2021.

Meanwhile, a recent surge in interest in DeFi — decentralised finance applications that cut out traditional intermediaries — has also drawn attention to the blockchain platforms that could support it.

Polkadot has been one of the main beneficiaries of developer attention: its platform for interlinked blockchains could be well suited to DeFi, supporting a large number of simple applications that could be combined to create new and more complex financial products.

Platforms like this are not designed to simply deliver an existing set of services at marginally lower cost, said Mr Wood. Rather, they could support entirely new services, or ones that could only be provided with “orders of magnitude more overhead” using older methods, he said.

The same is true of data storage delivered over a blockchain, according to Mr Benet. Though it might sound like the ultimate undifferentiated service, the storage services sold by a handful of giant cloud companies like Amazon Web Services are highly complex and “anything but a commodity”, he added.

Opening up Filecoin’s network to smaller players, as well as developers who can build specialist services to make use of the raw capacity, will be as disruptive to the cloud companies as Airbnb has been in the hotel world, he said.

If new applications are still largely theoretical, the financial gains are all too real. The price of Filecoin’s tokens have risen 14-fold from the average price paid during its ICO, while Dots — the tokens used on the Polkadot network — are up nearly 20-fold.

Line chart of Price ($) showing Filecoin

The promoters of some of these projects also stand to be big winners. Filecoin, for instance, reserved 300m tokens for itself at its inception. That haul is currently worth around $7bn, though Mr Benet said the tokens will not fully vest for six years.

The recent Bitcoin boom has also cast some of the less successful veterans of the ICO bubble in a new light. Most accepted payment in Bitcoin and Ether in exchange for their own tokens, leaving them with a potential windfall. The Tezos Foundation took in $232m through its 2017 ICO — an amount that had risen to $652m by July this year. With more than 60 per cent of its reserves held in Bitcoin, it is now likely to be worth well over $1bn.

The value of their crypto holdings means that many of the less successful blockchain projects are now sitting on reserves worth more than their “market caps” — or the total value of their outstanding coins. That is likely to bring intervention from activist investors “holding projects’ feet to the fire” and forcing them to pay out some of their surplus cash, said Ryan Zurrer, a crypto investor and entrepreneur.

Tech history has seen this before. In the aftermath of the dotcom bubble, cash rich companies without viable business models sometimes lingered for years while investors agitated to get their cash back.

The dotcom period also produced a small number of big winners, including Amazon and Yahoo. The survivors from the ICO bubble still have a long way to go to prove they have anything like the staying power.



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ExxonMobil proposes carbon storage plan for Texas port

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ExxonMobil is pitching a plan to capture and store carbon dioxide emitted by industrial facilities around Houston that it said could attract $100bn in investment if the Biden administration put a price on the greenhouse gas.

The oil supermajor is touting the scheme ahead of the US climate summit starting on Thursday, where President Joe Biden plans to announce more aggressive national emissions targets and hopes to spur world leaders to increase their own carbon-cutting goals.

Carbon capture and storage, or CCS, “should be a key part of the US strategy for meeting its Paris goals and included as part of the administration’s upcoming Nationally Determined Contributions”, said Joe Blommaert, head of Exxon’s low-carbon focused business, referring to the targets that countries are required to submit under the 2015 Paris climate agreement.

Oil and gas producers have sought to highlight their commitments to tackle emissions ahead of this week’s climate talks, which promise to heap pressure on the fossil fuel industry. BP pledged to stop flaring natural gas in Texas’ Permian oilfields by 2025, while EQT, the country’s largest natural gas producer, said it backed federal methane regulations.

The International Energy Agency has called carbon capture and storage, which uses chemicals to strip carbon dioxide from industrial emissions, “critical for putting energy systems around the world on a sustainable path”.

But the technology has struggled to gain traction as costs have remained persistently high. The most recent setback in the US came last year with the mothballing of the Petra Nova project, the country’s largest, which captured carbon from a Texas coal-fired power plant.

Many environmental groups have been critical of the oil and gas industry’s focus on carbon capture, arguing it is used to justify continued investment in oil and gas production and is not economical, especially as the costs of zero-carbon wind and solar power have plummeted.

Exxon said that establishing a market price on carbon — which has been attempted by a handful of US states, Texas not among them — would be important. The US government should “implement policies to enable CCS to receive direct investment and incentives similar to those available to other efforts to reduce emissions”, Blommaert said.

Exxon declined to comment on the carbon price it thought was needed to justify the investment, but said its plan would generate $100bn of investment from companies and government in the Houston region.

The company’s plans call for a hub that would capture emissions from the 50 largest emitting industrial facilities along the Houston Ship Channel, such as oil refineries and petrochemical plants, and ship the carbon by pipeline to reservoirs for storage deep under the sea floor of the Gulf of Mexico.

The project could capture and store about 100m tonnes of CO2 a year by 2040 if developed, Exxon said. That is 2 per cent of the roughly 4.6bn tonnes of US energy-related carbon emissions in 2020, according to the Energy Information Administration.

Exxon has been under intense pressure from investors, including a proxy fight with the activist hedge fund Engine No 1, to bolster its strategy for the transition to cleaner fuels. In February, it created a low-carbon business line that it said would spend about $3bn over the next five years.

Biden’s $2tn clean-energy focused infrastructure plan would expand carbon capture and storage tax credits. The administration said it would back 10 projects focused on capturing carbon from heavy industry, but it did not endorse a price on carbon.

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Where climate change meets business, markets and politics. Explore the FT’s coverage here 



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European stocks hit record after strong US earnings and economic data

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European equities hovered around record levels, the dollar dropped and government bonds nudged higher on Monday as markets continued to cheer strong economic data while also banking on continued support from the US Federal Reserve.

The regional Stoxx Europe 600 index gained 0.3 per cent during the morning to set a new record, before falling back to trade flat.

This follows a week of upbeat earnings from US banks as investors await results from big businesses including Coca-Cola and IBM later on Monday. Data released last week showed US homebuilding surged to a near 15-year high in March while retail sales increased by the most in 10 months.

The dollar, as measured against a basket of currencies, fell 0.4 per cent as bets on higher interest rates receded. The euro rose 0.4 per cent against the dollar to buy at $1.203. Sterling also gained 0.4 per cent to €1.389.

Federal Reserve chair Jay Powell told the Economic Club of Washington DC last week that the central bank would not taper its $120bn of monthly asset purchases until it saw “substantial further progress” towards full employment.

Haven assets such as government debt remained in demand. As prices ticked up, the yield on the benchmark 10-year US Treasury note fell 0.02 percentage points to 1.557 per cent, while the yield on the equivalent German Bund slid 0.01 percentage points to minus 0.271 per cent.

Investing convention assumes that US Treasuries and global equities move in opposite directions to cushion against falls in either asset class, but both have now rallied in tandem for an unusually sustained period.

The S&P 500, the blue-chip US stock index, has risen for four consecutive weeks to set new records. The yield on the 10-year Treasury has fallen from about 1.74 per cent at the end of March to just under 1.56 per cent on Monday as investors bought the debt. Treasuries and US stocks not have risen together for so long since 2008, according to Deutsche Bank.

Futures markets indicated the S&P would drift 0.2 per cent lower as Wall Street trading opens.

“I am not saying it’s a rational time in the markets,” said Yuko Takano, equity fund manager at Newton Investment Management. A reason for caution, she added, was signs of “bubbles” in alternative assets such as cryptocurrencies and non-fungible tokens. “There is really an abundance of liquidity. There will be a correction at some point but it is hard to time when it will come.”

“Markets may have become temporarily overbought,” strategists at Credit Suisse commented. “For now, we prefer to keep equity allocations at neutral” rather than buying more stocks, they said.

In Asia, Hong Kong’s Hang Seng index closed up 0.5 per cent and Japan’s Topix slid 0.2 per cent.

Global oil benchmark Brent crude fell 0.3 per cent to $66.57 a barrel.



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EU split over delay to decision on classing gas as green investment

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The European Commission is split over whether to postpone a decision on classifying gas generated from fossil fuels as green energy under its landmark classification system for investors.

Brussels had planned to publish an updated draft of a taxonomy for sustainable finance later this week. The document is designed to guide those who want to direct their money into environmentally friendly investments, and help stamp out the misreporting of companies’ environmental impact, known as greenwashing. 

The commission was forced to revamp its initial proposals earlier this year after the text was criticised by member states which want gas to be explicitly recognised as a low-emission technology that can help the EU meet its goal of becoming a net-zero polluter by 2050. 

Now the publication of the draft rules could be postponed again as the commission seeks to resolve the impasse. According to a draft of the text seen by the Financial Times, the commission proposed to delay the decision in order to carry out a separate assessment of how gas and nuclear “contribute to decarbonisation” to allow for a more “transparent” debate about the technologies.

But officials told the FT that some commissioners were pushing for gas to be awarded the green label now, rather than delaying the decision until later this year. 

“There are a sizeable number of voices in the commission who want gas to be included in the taxonomy,” said one official. A final decision on whether to approve the current text or delay it again for further redrafting is likely to be made on Monday.

The EU’s taxonomy is being closely watched by investors as the first big attempt by a leading regulatory body to create a labelling scheme that will help guide billions of euros of investment into green financial products.

But the process has proved divisive, as several EU governments have demanded recognition for lower-emissions energy sources such as gas. 

Coal-reliant countries such as Poland, Hungary, Romania and others that are banking on gas to help reduce their emissions do not want the labelling system to discriminate against them. France and the Czech Republic, meanwhile, are also pushing for the recognition of nuclear as a “transitional” technology in the taxonomy.

A leaked legal text seen by the FT earlier this month paved the way for gas to be considered green in some limited circumstances. That has since been removed along with other sensitive topics such as how best to classify the agricultural sector, according to the latest draft the FT has seen.

EU governments and the European Parliament have the power to block the draft if they can muster a qualified majority of countries and MEPs against it. 

Environmental groups have hailed the exercise, and urged Brussels to stick to science-based criteria in defining the thresholds for sustainable economic activity.

Luca Bonaccorsi from the Transport & Environment NGO said delaying decisions on gas and nuclear risked allowing pro-nuclear countries like France and the Czech Republic to join up with pro-gas member states “to forge an alliance that will obtain the greening and inclusion of both energy sources”.

“Should they ally, it will be impossible to resist the greenwashing of these two unsustainable energy sources,” said Bonaccorsi. 

The delays in agreeing the taxonomy have forced Brussels to abandon an attempt to use it as the basis for EU green bonds that will be issued as part of the bloc’s €800bn recovery and resilience fund. About €250bn of debt will be issued in the form of sustainable bonds over the next few years, which will make the commission one of the world’s biggest issuers of sustainable debt.



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