2017 November 6 - Volume.1 Issue.2

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2017 November 6 - Volume.1 Issue.2

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This Week's Headlines:

Digital Currency Could Address Russian Shadow Economy

Power Consumption of Bitcoin Network (MW)

Total Raise From Initial Coin Offering Jan-Oct 2017 (Mn USD)

Continental Monopolies Rein Cryptocurrency Visa Cards

With the rapid increase in price for Bitcoin, holders are reluctant to spend, which pushes down demand from consumers on merchants to accept the currency. Cryptocurrency debit cards provide a way to seemingly eliminate fiat currencies in adopter’s daily lives. But there is a clear chokepoint for cryptocurrency spending as only two significant Money Services Businesses issue Visa Cards ­– WaveCrest in Europe, and Metropolitan Commercial Bank in the US.

Bitcoin, along with other cryptocurrencies, are only accepted by a handful of merchants around the world and even that has been decreasing. According to a recent report by Morgan Stanley, Bitcoin is only accepted by three of the top 500 online merchants, down from five merchants last year. Overstock.com, Expedia and Newegg accept Bitcoin. Overstock reportedly generates as much as $5 million of revenue per year from Bitcoin.


There are several adoption problems facing Bitcoin as a currency. With the price of Bitcoin having grown by more than 600% in 2017, holders are reluctant to spend it in the hope of further gains against the Greenback and other fiat currencies. And unlike with credit card transactions, the consumer rather than the merchant covers the transaction fees of Bitcoin payments.

Bitcoin is also dealing with scalability issues, which only deepens the problem. In the past quarter, the average transaction fee has oscillated from about $2 all the way to $9.

Most smaller transactions are currently unfeasible with Bitcoin which turns some merchants to alternative cryptocurrencies such as Litecoin or DASH. Most often, Bitcoin is being used as a store of value and as a speculation vehicle. Thus there is a lack of demand from consumers, which consequently doesn’t put pressure on merchants to invest in Bitcoin infrastructure.

For users that want to use cryptocurrencies for everyday transactions, there is an option to use one of the cryptocurrency debit cards. Cryptocurrency enthusiasts are mostly skeptical of cryptocurrency debit cards because they introduce a third party, which leads to centralization of the ecosystem. But until more merchants are willing to accept cryptocurrencies directly, there is no other option to function without fiat currencies.

All of the cards can be bought online from a company for a flat fee after fulfilling Know-Your-Client (KYC) checks and location requirements - either as virtual or plastic card. After the delivery, the card is then activated and can be loaded with funds by sending the supported cryptocurrency to the online wallet associated with the card. Most of the cards only support Bitcoin but some also support Litecoin, Ether and Dash. TokenCard is developing a debit card that will support payments with ERC20 tokens. Uquid, which is currently still running an ICO and has yet to release a card, promises to work with 90 different cryptocurrencies. Wirex and Bitwalla have ShapeShift support allowing for instant swap across multiple currencies.


Spot-Rate vs Fiat-On-Deposit

Some debit cards allow holding cryptocurrencies and only after a payment is made, the cryptocurrency is sold for the amount paid in fiat currency. Some other cards need to be loaded with cryptocurrencies, which is then immediately converted to fiat (See Table). Each company has little different but similar fees for ATM withdrawal, foreign exchange conversion and sometimes also charge a monthly service fee and a transaction fee.

EU: WaveCrest Issuer Monopoly

Currently, all the widespread debit cards are issued by Visa, none by Mastercard. Moreover, the majority of cards are issued by the same issuing company - WaveCrest Holdings Limited. WaveCrest is a prepaid access provider working under license from Visa International. The company is FinCEN-registered Money Services Business (MSB) based in Gibraltar.

Reportedly due to the new Visa regulations, WaveCrest announced in September that it will no longer issue or maintain cards outside of the European territory (EEA, Turkey, Switzerland and Israel).
It added that all the existing cards outside of the European territory will cease to function from October 15. Before this announcement, WaveCrest allowed shipping their cards globally. On the back of this announcement, already issued cryptocurrency debit cards (TenX, Xapo, Cryptopay.me, Coinsbank, Wirex, Bitwala, Shakepay, SpectroCoin and Mobi) stopped working for people outside of the European territory.

US: Metropolitan Commercial Bank Monopoly

BitPay is the only card that currently ships to both Europe and the United States because they use two different issuers - WaveCrest for Europe and Metropolitan Commercial Bank for the United States. Shift uses Metropolitan Commercial Bank as their only card issuer and their card is thus only available to the U.S. citizens.

The only cryptocurrency card that currently ships globally is WageCan Golden Card. It is unclear which card issuer WageCan uses but they charge a $162 issuance fee and also have a 2.5% ATM withdrawal fee.

Monaco, which raised $25Mn in their ICO in June, has recently announced that they reached an agreement with Wirecard AG to issue Visa cards for Singapore residents. It is currently unclear whether Monaco will also be allowed to issue cards elsewhere and if so, when.

TenX raised $80Mn in an ICO and is reportedly working to obtain a license to issue their own debit cards. Moreover, TenX announced that they are onboarding alternative card issuers who can issue cards outside of Europe with a target date of November.

It remains unclear how the other companies will overcome the current limitations by WaveCrest. And whether the new card issuers won’t also be affected by the new regulations of Visa. Currently, only customers with a residence in the European Territory and the United States have access to the reputable cryptocurrency debit cards.


Cryptocurrency Visa Card Issuers

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Source: Diar Note: Europe In Table Context Includes EEA, Turkey, Switzerland and Israel.

Bitcoin Financial Instruments Continue Gaining Traction

In the biggest institutional endorsement of Bitcoin yet, the Chicago Mercantile Exchange (CME), following CBOE, announced the Q4 2017 start of a cash-settled future contracts for the cryptocurrency. LedgerX has been trading Bitcoin Swaps & Option. And in Europe, Saxo Bank, following XBT Provider, has been trading Exchange Traded Notes (ETN) which now exceeds a whopping $100Mn in Assets Under Management. Talks of Exchange Traded Funds (ETF) have already started.

CME, the largest futures contracts institution announced that they will start trading Bitcoin Futures on the back of what CME CEO Terry Duffy called “pent up demand” by investors by year end. While details such as contract size, leverage limits and volatility limits were not disclosed, CME did say that the futures will be based on its own CF Bitcoin Reference Rate (BRR) which “serves as a once-a-day reference rate of the U.S. dollar price of Bitcoin.” The BRR aims to represent the global price of Bitcoin from its list of approved constituent exchanges – Bitstamp, GDAX, itBit and Kraken which, at current volumes, trade 30% of the BTC/USD Transactions (See Graph). The US Dollar currently trades 30% of the total volume of Bitcoin.

Both Sides Of The Trade

Speaking to Bloomberg, Mr Duffy reiterated that their role as a contracts exchange is to help clients manage their risk in an effective way, under a regulated platform. Mr Duffy also said that while some investors are driven by the speculative nature of the volatile cryptocurrency, CME has seen interest by some who wish to use Bitcoin on the commercial side also.

This could signal larger transactions on Bitcoin exchanges as institutions owning the underlying asset, Bitcoin, will be able to hedge against any sudden volatility during holding periods, transfer windows and closing back into fiat. Should more institutions adopt Bitcoin as a method of commerce, this could effectively drive up the demand for Bitcoin on the back of CME Futures Contracts hedging. For larger investors who can access the CME minimum requirements though, it could be an opportunity to take advantage of leverage – driving demand for real Bitcoins, and potentially price, down.

Volatility could continue to be an issue until larger adoption and use, but, as more liquidity enters the market, the futures contracts may tighten prices and bring down the volatility of Bitcoin on the back of the pricing markers.

The BRR is not the first to do be a reference point for pricing; the Winklevoss Brothers Index also serves this purpose, as does Coindesk’s Bitcoin Index Price and a handful of Japanese Exchanges that have been officially licensed and provide pricing point markers that brings the delta price disparity closer as the cryptocurrency becomes more widely accepted.

SEC Still Weary On ETFs

One of the concerns that the Securities and Exchange commission cited after reviewing, and ultimately, denying two ETFs this year was the lack of a viable futures market. The other, and more important concern was the lack of regulated Bitcoin exchanges that would have, at the current status quo, ample room for market manipulation. Coindesk published the SEC ordering the disapproval of SolidX ETF application stating:

"The Commission believes that, in order to meet this standard, an exchange that lists and trades shares of commodity-trust exchange-traded products ("ETPs") must, in addition to other applicable requirements, satisfy two requirements that are dispositive in this matter. First, the exchange must have surveillance-sharing agreements with significant markets for trading the underlying commodity or derivatives on that commodity. And second, those markets must be regulated."

CME Constituent Exchanges For BRR Kraken, itBit, GDAX & Bitsamp Trade 30% of BTC/USD Volumes

Source: CoinMarketCap - As on 5 Nov 2017

Facing Hurdles

Mr Duffy has said that CME going forward with this product doesn’t mean it's going to work. CME has quite a few issues to address. First and foremost it has to receive approval from the Commodity Futures Trading Commission (CFTC). This is only the first regulatory hurdle it faces. It must continue proving that the contract serves a US economic interest. While CME does have the regulatory option of moving its contract to CME Europe out of London, it would be hard to imagine that the United Kingdom wouldn’t follow US should any adverse policy on Bitcoin arise from US regulatory authorities.

They must also answer how CME will address future forks of Bitcoin. And most critically, which has seen other Futures Contracts fail in the past, is enough competitive participants – speculators and hedgers, to create a proper futures market.

CME’s Deeper Ties To Cyrpto

While CME has criticized Bitcoin in the past, their own investment arm, CME Ventures has invested in various digital assets companies, one of which being Barry Silbert’s Digital Currency Group (DCG) which has funded a plethora of companies. Most notably, one of DCGs subsidiaries is Grayscale which applied, and then withdrew their application for an ETF.

After CME's announcement to start Bitcoin Futures, an article written by CME in-house economists, Bluford Putnam and Erik Norland, believe that the cryptocurrency is actually undervalued in compassion with the wave of constant supply of gold into the market (Link).

Should market conditions allow for more transparency within the exchanges, and a strong lobby by CME, more financial instruments may come into the market, and ultimately overcome SEC objections.

Bitcoin Exchange-Traded Fund Applications

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Source: Bloomberg


StartEngine, tZero Steer Towards SEC Regulated ICO Market

With over $3.5Bn in capital raised so far by Initial Coin Offerings (ICO) in 2017 and a record raise in October to the tune of $829Mn (See Chart), cryptocurrencies continue to garner the attention of the US Securities and Exchange Commission (SEC). StartEngine and tZero aim to address two possible upcoming eventualities ­– SEC Regulated ICOs and the trading platform for these very securities.

While companies looking to raise funds through an ICO are excluding US citizens and residents, such as DFinity, equity crowdfunding platform StartEngine looks to the Jumpstart Our Business Startups Act (JOBS Acts) to include the de facto excluded nation in the new economic paradigm under an SEC Regulated model.

StartEngine has set its eyes on the new financing model of Initial Coin Offerings (ICOs). Following the SEC announcement in July 2017, StartEngine has been working to bring ICOs to its platform, adhering to SEC regulations under the JOBS Act that was signed off by then President Barack Obama in an effort to allow funding of smaller enterprises. And while there are multiple routes to SEC regulated investment vehicles, most ICOs, up-to-date, would fall under Regulation A+ which would allow for a cap of $50Mn a year, and would be open to everyone to participate, not only accredited investors.

The Old Defining Securities Conundrum

A recent opinion piece by California based Law firm Wilson Sonsini Goodrich & Rosati (WSGR), states that “tokens that are issued before they can be used generally are securities, even if eventually they may not be securities.” StartEngine CEO Howard Marks shares the very same view; as these tokens currently have no utility, they are an “option to later receive a utility token in exchange.” Through StartEngine, Gab, a free-speech social network, aims to be the very first regulated ICO (Diar, 30 October). The SEC announcements earlier this summer however has still left a lot of interpretation on their official stance.

Tezos Debacle

At the forefront of potential ICO failures, which could ultimately bring the SEC to take more actions, is Tezos, which raised a whopping $232Mn in July 2017. An investigative report by Reuters in October 2017 revealed internal bickering to the legal structure of the organization between the two founders, and the foundation representative whose role was to establish the Initial Coin Offering.

This has led, to what is understood, to be the pause in development of the platform. With no platform, no tokens can be issued either. Participants in the ICO were told that “they were making a donation and may never receive any.”

Total Raise From Initial Coin Offering Jan-Oct 2017 (Mn USD)

Source: TokenData

This of course didn’t bode well with US investors who last week on November 3 filed a class-action lawsuit against the organizers of Tezos. It remains unclear if the SEC will start an investigation as Tezos structure is registered under a Swiss foundation, a popular legal ICO vehicle, while the software is owned by a Delaware registered company.

Takes Two To Tango

While StartEngine aims to spearhead regulated ICOs and curtail problems that are facing US investors such as in the case of Tezos, tZero, a subsidiary of Overstock.com, aims to be the first regulated Alternative Trading System (ATS) which will allow the trading of SEC regulated security tokens which StartEngine aim to tackle first-hand. Overstock.com CEO Patrick Bryne believes that all securities will take on the token model - “It’s a cleaner, more efficient, less expensive market. It will start with ICOs, but all the forces of economics will drive blue-chip issuers to this, and eventually we’ll see the first McDonalds or GM tokens. This isn’t going to stay a novelty." he said to Bloomberg.

GDAX Digital Asset Framework: To Little?

GDAX released their own Digital Asset Framework, a guideline for how the major crypto exchange assesses which assets they will allow on their platform. What remains to be seen however, is should the SEC throw down the gauntlet and brand ICOs as securities, what measures would GDAX be required to take in order to be compliant. WSGR points out that holders of tokens would be able to use them on the related platform, but wouldn't be able to resell those SEC unregistered tokens.

Government Digital Currency Could Address Russian Shadow Economy

Russia is planning to issue a government-backed digital currency, the CryptoRuble. It will not be mined but rather issued by the Central Bank. While details are scant, its value will be pegged to Rubles, which will aim to be a stable digital medium of exchange. CryptoRubles will not be private or resistant to inflation but they can present an opportunity for the government to tax the underground economy by slowly phasing out cash.

Vladimir Putin has officially given presidential orders to Prime Minister Dmitry Medvedev, and the Central Bank Governor Elvira Nabiullina, to create a framework that will regulate cryptocurrencies in Russia. The regulations will pertain to the legal status of cryptocurrencies “based on the obligation of the Ruble as the only legal tender in the Russian Federation”, the official document stated. The Initial Coin Offering (ICO) process will be evaluated and appropriate regulations will be determined. Russia also intends to tax miners and make their registration to authorities mandatory. And, Putin has gone further and requested the apparatus to establish a “single payment space” within the Eurasian Economic Union.

Russia has had a rocky relationship with cryptocurrencies. Just last year, the Russian Finance Ministry was considering a legislation that would make the use of digital currencies illegal with fines as high as 2.5Mn Rubles (Approx. $42,000) and prison sentences of up to seven years citing the risks of money laundering and other criminal activities.

In June, Mr Putin met with Ethereum founder Vitalik Buterin to discuss Ethereum’s potential to diversify the Russian economy beyond oil & gas and to discuss the potential implementation of Blockchain technology in Russia. Two months after the meeting, a consortium of the country’s biggest banks led by Russia's two largest financial institutions VTB Group and Sberbank, developed a Blockchain solution dubbed Masterchain, based on an Ethereum protocol, which complies with the security standards and is supported by the Central Bank. The project's goal is to innovate the undeveloped banking market in Russia. It should improve the exchange of information about the customers and transactions between banks while increasing the security and transparency.

On October 10, state-owned RT reported that Mr Putin has taken a stand against cryptocurrencies in general because of their unregulated nature. He cited the reasons as “opportunities to launder funds acquired through criminal activities, tax evasion, even terrorism financing, as well as the spread of fraud schemes.” He furthered his concerns about determining liability if any problems were to arise because decentralized cryptocurrencies are “issued by an unlimited number of anonymous sources”.

Russia’s increased activity in the cryptocurrency space and the recent banking innovation efforts are going hand in hand with the reports that Putin approved a development of a state-controlled cryptocurrency. According to local news sources, in a closed-door meeting, Mr Putin officially stated that Russia will issue its own cryptocurrency dubbed ‘CryptoRuble’. The details still remain to be seen but Nikolay Nikiforov, Minister of Communications and Mass Media of Russia, disclosed that CryptoRuble will not be mined but rather issued by the authorities. The cryptocurrency will be pegged to a fiat Ruble and interchangeable at any time thus instantly making it extremely stable in terms of other cryptocurrencies, which still suffer from high levels of volatility (See Graph 1 & 2.)

Nikiforov also added that any realized profits obtained by trading the cryptocurrency will be taxed at a common 13% income tax rate. Russia is also planning to introduce a controversial 13% tax on CryptoRubles when the owner is unable to explain the source of his CryptoRubles. Nikiforov concluded with: “I confidently declare that we run CryptoRuble for one simple reason: If we do not, then after two months our neighbors in the Eurasian Economic Union will.” In fact, Kazakhstan, one of the members, also announced that they plan to launch a state-issued cryptocurrency, which will be backed by fiat.

“Your Keys, Your Bitcoin”

Money cannot be seized on a decentralized network if users hold their own private keys. But there are users, which use bitcoin because of its practicality - cryptocurrencies are capable of fast, cheap and borderless money transfers while not relying on a third party. For users that are looking solely for practicality, a stable government-backed cryptocurrency will be a welcomed option.

CryptoRubles, and other government-backed cryptocurrencies, can potentially present a problem for financial institutions as users can store their funds on their digital wallets instead of a checking account. As this then will be legal tender, governments will require all merchants to accept cash along with the new digital currency.

Russia has a huge underground economy, which results in a massive amount of unrecorded and thus untaxed income for the government (Graph). By having a state-controlled digital currency, the government will be able to slowly start phasing out cash, which will allow for a better control of where the money is going and will consequently increase their tax income.

The government will have a direct oversight of money flows with better control of capital flight without the necessity to request information from third parties such as banks or card issuers.

1: Absolute Returns US Dollar / Ruble (2015-To Date)

2: Absolute Returns US Dollar / Bitcoin (2015-To Date)

Russian Shadow Economy: $500Bn In Untaxed Revenue

Source: Association of Chartered Certified Accountants

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Assuming that Russia wants to tackle their enormous shadow economy, it’s also probable that the government will have the digital wallets directly connected to a physical identity.

In decentralized cryptocurrencies, the exchanges must perform the necessary Anti-Money Laundering (AML) and Know-Your-Client (KYC) checks because governments have no authority or power to regulate the decentralized cryptocurrencies.

When the cryptocurrency is controlled by the government, the most effective way would be to connect each wallet to a government ID and thus have all the transactions linked to identities only visible to them.

Moreover, even widely-used cryptocurrencies such as Bitcoin are having difficulties in being accepted by a lot of merchants. Merchants are not motivated to accept them because of the volatility and uncertainty regarding future regulations.

Another potential advantage will be the ability for non-Russians to use CryptoRuble as a tether in between their own cryptocurrency trades in uncertain times. This would be the first time that a real foreign currency backed by the government was tradable on cryptocurrency markets. By increasing the foreign demand for rubles, its value may increase.

Russia is attempting to issue their own cryptocurrency to take back the control that they are losing. By combining the strengths of conventional cryptocurrencies such as transaction speed and low-cost combined with an increased oversight of money flows, there is potential for this project to be successful. Russia could increase their tax income and set a precedent for other governments that are struggling to figure out what to do.

Power Consumption of Bitcoin Network (MW)

Note: Data assumes the power efficiency of the newest Antminer S9. Thus the actual power consumption is higher. These numbers represent the minimum power consumption assuming that every miner uses the most efficient hardware.

Total Raise From Initial Coin Offering Jan-Oct 2017 (Mn USD)

Source: TokenData


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