Crypto Market Recap 01/24/18

Global Regulation Shakes Crypto Markets

Adoption And Free Enterprise

A combination of increased South Korean regulation and PTSD after last weeks crypto dip has given way to more unpredictability in the markets. Despite this, Wall Street’s interest in cryptocurrency trading continues to rise. Morgan Stanley is now clearing Bitcoin Futures contracts and a recent partnership between Blockstream and the parent company of the NYSE will offer a coinmarketcap like experience for traditional investors.

• Coinbase Blasts Through 2017 Expectations: Over the past year, Coinbase has become the latest darling of Silicon Valley, and a recent report suggests that the love is only growing. According to Recode, Coinbase blew past their 2017 revenue projections by 66%, fueling a frenzy to get in on Coinbase equity. Despite fervent interest from investors, the exchange is not currently taking any additional capital infusion. At the time of writing, Coinbase officially has more user accounts than Charles Schwab.
• The End of Bitconnect?: Citing two cease and desist letters, “bad press”, and “DDos attacks on platform [sic]” from “outside forces”, Bitconnect announced the shutting down of the their lending and exchange program, leading to the former top 20 market-cap coin to drop in value by over 95%. While the plunge is surely a difficult blow to Bitconnect holders, many in the cryptocurrency community who have been tirelessly warning traders that Bitconnect has all the signs of a ponzi scheme — including Ethereum founder Vitalik Buterin — are surely breathing a sigh of relief. While active, Bitconnect used investors’ money to buy and trade Bitcoin, claiming to guarantee 40% gains per month based on a four tier investment system, and offering rewards to users for getting others to invest. The US Commodity Futures Trading Commission has filed a lawsuit against the company for defrauding customers.
• Brazil Loves Their Crypto: Local reports in Brazil indicate that the nation reached 1.4 million Bitcoin investors last year, putting the number of Brazilian Bitcoin investors at twice that of stock investors. Warnings from President of the Central Bank Ilan Goldfajn about “risk of bubble, pyramid and illegal activities” associated with cryptocurrency haven’t slowed things down. Many have pointed to Brazil’s high taxes, bureaucratic inefficiency, and ongoing economic crisis, coupled with Bitcoin 2017 Q4 price surge, as the source of the recent activity. Brazil was recently on the crypto-radar for considering using the Ethereum network to track votes for electoral petitions.
• Crypto Markets Dip Again: Crypto markets have not fully recovered after last week’s “dip.” Over the weekend, it seemed like markets were stabilizing, but as recently as yesterday the total crypto market cap dipped back below the $500 bln mark and Ethereum dropped below $1000. Insiders have given a variety of reasons for the dip, including skittish investors attempting getting their money out as soon as there was a slight recovery and the action of the South Korean government spooking investors with regulatory measures. As this is the wild world of crypto markets, it’s hard to say what is truly causing these price movements.
• Taxes Coming To South Korea Crypto Exchanges: As South Korea continues to roll out its regulatory framework, cryptocurrency exchanges will be required to pay taxes in line with the exorbitant gaines they’ve accrued over the past year. The government will be collecting a 22% corporate tax and a 2.2% local income tax. As a point of reference, popular South Korean exchange Bithumb will pay 60 mln Won off of 317.6 bln Won in revenue. While many crypto evangelists have been worried by the governments regulatory actions, it is more likely that the government is simply looking for its share of the pie and wants more controls over the wild wild west atmosphere. In the long run, this should help foster growth within the South Korean crypto market.
• Morgan Stanley Joins The Bitcoin Futures Game: Morgan Stanley has joined Goldman Sachs as one of the primary Wall Street firms clearing Bitcoin Futures contracts. The decision stemmed from demand related to institutional accounts’ desire to enter the market. Morgan Stanely’s Chief Financial Officer stated, “I wouldn’t say it’s been a lot of activity, but it’s for core institutional clients who want to participate in a derivatives transaction.”
• Wall Street To Get Its Own Coinmarketcap: The likelihood of heavy institutional investment entering the crypto space continues to increase as Wall Street seems to be getting its crypto house in order. Recent news suggests Intercontinental Exchange (parent firm of NYSE) has partnered with Blockstream to bring cryptocurrency price information to Wall Street investors. The plan is to import data from as many as 15 exchanges. The tool is on track to be released in March and could prove a pivotal moment in bringing cryptocurrency data to big name traditional investors.
• First Purchase Completed On Lightning Network: Reddit user btc_throwaway1337 used Bitcoin to purchase a VPN router on the Lightning Network, marking the first time the network has been used to buy a physical product. The Lightning Network is a nascent system for scaling Bitcoin transactions, enabling higher transaction frequency without latency or increased fees. The network allows users to send payments without having to broadcast them all onto the blockchain itself; this is achieved by relaying the payments through a graph of off-chain private channels set up between users. While many Bitcoin enthusiasts are looking to the Lightning Network as the potential savior to their scaling woes, others are less certain. Skeptics point out that the Lightning Network necessitates Segwit, which so far Bitcoin users have been slow to adopt. They also point out the network requires users to initially stake funds within the network, and depletion of such funds within channels could be a decisive limitation on generating payment paths between users.
• Ethereum Alliance Announces Executive Director: Ron Resnick has been appointed as the first Executive Director of the Ethereum Alliance, the world’s largest blockchain initiative. Resnick took part in the development and rollout of 4G wireless broadband technology, and predicts that blockchain technology is the next area with similarly paradigm shifting potential. Says Resnick: ““My focus is to drive the further development of Ethereum-based technology best practices, open standards and open-source reference architectures to evolve Ethereum into an enterprise-grade technology.”
• Nvidia Limiting Sales To Crypto Miners: Although Nvidia has benefited handsomely from the use of their graphics card towards cryptocurrency mining, they are not so ready to hop on the crypto bandwagon. Over the past year, the GPU manufacturer has experienced supply shortages as cryptocurrency miners snatch up all they can get there hands on. In an effort to ensure their products end up in the hands of gamers (their intended customer), limits have been placed on the number of cards per order. The current belief is that miners typically buy in bulk while gamers do not need such an overabundance of graphics cards. In the long run it seems Nvidia is keen to appease their longest serving customers versus the whims of opportunistic miners.
• Microsoft And Others Join Blockchain Identity Initiative: The ID2020 alliance, a partnership aiming at developing more universal and secure systems for establishing personal digital identity, has added to its partnership Microsoft, Blockchain Tech Alliance Hyperledger, and U.N. affiliated association World Economic Forum. Founded in 2014, ID2020 has increasingly investigated Blockchain based solutions for identity management; last June, they released a functional prototype built on a private fork of the Ethereum blockchain. Blockchain offers powerful benefits for identity management, particularly trustless security and minimizing single points of failure.
• Tether Outpaces Federal Reserve: As of writing, controversial cryptocurrency Tether (UDST) has printed 800 mln USDT in 2018, surpassing the amount of US dollars issued this year by the Federal Reserve ($621 mln). Tether promises a currency whose value is directly pegged to the US dollar by offering redemption of USDT for actual US dollars. This, in theory, provides a bridge to a stable fiat currency for alt-coin traders using exchanges that aren’t supported by traditional banks. Tether has drawn increasing scrutiny and suspicion for a number of reasons: their claim that users can redeem their tethers for US dollars is belied by their vague and evolving terms of service; the Tether team has yet to allow a public audit of their reserves; the Tether team and the team behind the Bitfinnex exchange has been revealed to be one of the same, raising questions about artificial market manipulation. Trade carefully.
• Korbit Shuts Down International Accounts: Arbitrage is often used by crypto traders to exploit premiums in specific markets. This is extremely common in South Korean markets where cryptoassets often trade at an increased rate. In a move to hinder such activity, South Korean exchange Korbit has shut down access to international accounts, stopping international traders from exploiting arbitrage opportunities. This is likely connected to larger changes within South Korea’s cryptomarkets, as users are no longer allowed to have anonymous trading accounts. As part of the government’s regulatory crackdown, the financial services commision has imposed a ‘real-name’ verification system required for all domestic trading platforms.

Regulation And Government

South Korea continues to become the most central example of cryptocurrency regulation as the government there continued to implement various changes. The SEC is having cold feet with a set of expected Bitcoin ETF’s hitting a wall.

• U.S Rating Agency To Issue Crypto Grades: Weiss Ratings, a company that has provided ratings for a variety of financial institutions since 1970, is adding cryptocurrencies to their list, planning to release letter grades for various currencies on Wednesday. Weiss claims: “Many cryptocurrencies are murky, overhyped and vulnerable to crashes… We’re proud to help [investors] cut through the hype and identify the few truly solid cryptocurrencies. Our ratings are based on hard data and objective analysis.” As many speculate on what effect these rating will have on market prices, one thing you can count on is controversy among the crypto-diehards, who are already alleging ignorance, recalling credit rating agencies role in the financial crisis, and even suspecting collusion. Strap in.
• Bitflyer Exchange Receives EU Operational License: Japanese cryptocurrency exchange Bitflyer is officially the most compliant crypto exchange in the world. The Japanese exchange already has licenses in North America and Japan and was most recently granted a Payment Institution License in Europe. The company’s european exchange will begin with a BTC/EUR pairing with the intent of offering access to other cryptos in the future. At this rate Bitflyer could become one of the largest international crypto exchanges in the world.
• SEC Puts The Kabosh On Bitcoin ETFs: Following a raft of requests sent to the SEC by entities trying to create new Bitcoin ETF’s, the SEC has released a staff letter relating to their inability to comply with SEC regulations. In the letter SEC director of investment management Delia Blass states, “We appreciate that proponents of cryptocurrencies and related products have identified a range of potential benefits. We are also aware that critics of cryptocurrencies have raised various concerns…In light of these considerations, we have, at this time, significant outstanding questions concerning how funds holding substantial amounts of cryptocurrencies and related products would satisfy the requirements of the 1940 Act and its rules.” Blass goes on to mention the difficulty of cryptocurrency portfolio valuation in light of the current market volatility and the nature of the protocol, mentioning concerns about how value can be ascertained when one cryptocurrency forks. The SEC also levied its standing concerns regarding liquidity should investors wish to pull out in a manner that would outpace availability of funds. Ultimately, Blass concluded that “we do not believe that it is appropriate for fund sponsors to initiate registration of funds that intend to invest substantially in cryptocurrency and related products, and we have asked sponsors that have registration statements filed for such products to withdraw them.” Perhaps as the large investment banks such as Goldman Sachs begin to enter this space (as they have previously suggested), issues like liquidity will be addressed in a way as to facilitate the creation of various financial instruments relating to cryptocurrency.
• IMF Calls For Global Crypto Regulation: The IMF has called for global cooperation and coordination regarding cryptocurrency in response to surging cryptocurrency prices. IMF spokesman Gerry Rice stated, “When asset prices go up quickly, risks can accumulate, particularly if market participants are borrowing money to buy. It’s important for people to be aware of the risks and take the necessary risk-management measures.” In the past, the IMF has suggested a balanced approach to cryptocurrency regulation, warning that cryptocurrency could bring “massive disruptions” to markets and governments.
• Indian Banks Suspending Bitcoin Accounts: In an ongoing struggle amidst an increasingly hostile environment, exchanges in India have found many of their accounts suspended or limited. Institutions like the State Bank of India, Axis Bank, HDFC Bank, ICICI Bank, and Yes Bank have cited the risk of “dubious transactions” in response to their actions. Previously, public interest litigation had been filed in Calcutta beseeching the government to impose immediate regulation on cryptocurrency. The mood in India leaves exchanges and crypto users in an increasingly difficult position as certain members of the government and various banking officials strobe the flames of anti Bitcoin/crypto sentiment for various and often heretical reasons.
• SEC Indicates Blockchain Naming Crack Down: Over the past few months, various publicly traded companies have added blockchain to their name in a successful effort to boost their respective stock prices. In many of these cases, including our personal favorite, “Long Island Tea Corp” becoming “Long Island Blockchain Corp”, the companies have no utilizing blockchain tech. It seems like the SEC will attempt to hinder this type of frenzied activity with SEC Chariman Jay Clayton announcing, “The SEC is looking closely at the disclosures of public companies that shift their business models to capitalize on the perceived promise of distributed ledger technology and whether the disclosures comply with the securities laws, particularly in the case of an offering…”
• Onecoin Offices Raided In Bulgaria: The Sofia, Bulgaria offices of increasingly controversial OneCoin have been raided and their servers sized this week as part of ongoing international investigations. The raids were requested by a German based prosecutor and carried out by Bulgarian authorities and EU crime fighting units. OneCoin, which operates under the mantra of a “centralized model…protecting its members safety [and] ensures compliance on Anti money laundering” has been called out by the crypto community for being centralized, run on private software, and operating without a public ledger.
• Indonesia Cracking Down On BTC Use: After having issued a press release earlier in the month prohibiting Bitcoin use, the Indonesian government is cracking down in Bali, which has become a hotbed of crypto activity. Citing concerns of money laundering and the possibility for increased criminal activity, Causa Iman Karana, head of Bank of Indonesia’s office in Bali states, “We found out from some postings on social media that Bali appeared to have become a haven for Bitcoin transactions. The next step is we will ban them as mandated by the law. We ask them not to use it anymore. Along with the Directorate of Special Crime Investigation unit, we will enforce the rule that all transactions in Indonesia must use rupiah.”
• Former FDIC Chair Focuses On Bitcoin Regulation: Former US FDIC char Sheila Bair has come out with a refreshingly rational statement on Bitcoin following activity from nations all over the world scrambling to find an answer to cryptocurrency regulation. In an interview on CNBC’s “Fast Money” she stated there exists no precedent to ban new digital assets, but there does exist a need for regulation. On the addition of Bitcoin futures to the CME and CBOE exchanges, Bair stated, “I think that the fact that CME and CBOE launched futures actually could help because that will actually also give them [government regulatory bodies] a window into providing, getting more reporting from the underlying Bitcoin exchanges that are feeding prices into their futures products. It will give the CFDC a window and some information to make sure there’s no manipulation going on.” She went on to note that her main concern is that the public may become irrationally lured by the promise of sky high returns in a volatile market place that they may not understand. She reiterated, “I think there’s a lot of confusion between Bitcoin and blockchain technology.”
• CryptoRuble Gets Vague Launch Date: The Russian Association of Cryptocurrency and Blockchain (RACIB) has stated that the often discussed official Russian digital currency will launch sometime in the middle of 2019. There still seems to be something of an internal rif happening within the Russian government, with statements as recently as December coming from officials like the Deputy Minister of Finance that question Russia’s need for a digital currency. Arseniy Sheltsin, the head of RACIB, stated that details will come in July, with the coins issuance following roughly a year later. Further regulatory measures of ICOs and cryptocurrency mining are also expected around that time. The new Russian currency is set to be pegged to the Ruble, non-minable, and the only legal digital currency in the country. At a press conference on January 12th, Vladimir Putin remarked, “It is known that there is nothing behind the cryptocurrency, and it cannot be a store of value, it doesn’t have any material value, and it’s not backed by anything…”, perhaps meaning to suggest that the CryptoRuble would solve these issues.
• Canada Becomes Latest Gov To Test Ethereum: A Canadian government research initiative known as The National Research Council of Canada (NRC), is testing the use of the Ethereum blockchain for recording government contracts. Specifically, the pilot sees the network being used to publish information on grants and contributions, using the Catena platform from blockchain company Bitaccess. The government is touting this a move to increase transparency, with the trial also serving to test the technology for implementation into other areas. Of note, the Canadian Central Bank has already been experimenting with blockchain settlement systems, under “project Jasper”, now in the third phase of research into settlements and resilience during periods of high volume.

Conclusion

After months of unimaginable gains and mainstream adoption (in terms of investors not actual use) crypto markets have cooled and regulation has moved front and center. South Korea has taken constructive actions by issuing its “real name” verification policy, which could serve as a harbinger of laws to come around the world. While this may go against the original ethos of cryptocurrency, attaching verified identities to individual accounts will be necessary if crypto is to gain mainstream adoption in any form, especially beyond trading.

While the short-term may seem murky, conversations from national and international regulatory bodies (like the IMF) that place crypto in the limelight, force institutions and users to consider long term use cases. Without this moment it could argued that the future of crypto is at risk — as there would be a greyer path towards agreed upon use. Additionality, in order for these technologies to thrive the majority of those working on them need to be assured of their legality. While this was not true in the early stages of cryptocurrency many of today’s crypto entrepreneurs are heavily integrated within mainstream economies and depend on compliance with national laws in order to achieve success. This is especially true of the raft of tokens that have been released and continue to be released. Regulators should keep sprinting towards an agreed upon framework, preferably a global one, as cryptocurrency is a truly a global asset class. In the meantime developers will need to up the pace of scalability solutions in order to match the excitement of potential users around the world.

To speak with Abacus regarding ICO strategy and implementation please contact david@theabacus.io.