This Week's Headlines:
Major Exchanges Face Parallel Outage-Trend During Price Surges
As the Bitcoin frenzy and fear-of-missing-out continues to show no end, major crypto exchanges have been riddled with problems handling the massive amounts of traffic from people looking to access various trading platforms. The problem isn’t isolated to a single exchange in particular – but in fact – incident logs show that during peak prices and volume surges, major exchanges across the world stop operating almost in-concert.
One of the more popular exchanges used to buy Bitcoin, Coinbase, faced growing pains last week as the price of Bitcoin surged within hours of its previous all-time high, to a new one clocking in at above $19,000. The Coinbase app has become the most convenient method of purchasing popular cryptocurrencies and was listed as the top downloaded app on the iPhone App Store. The irony is not lost that Coinbase is a victim of its very own success with people facing outages and not being able to buy, sell or move their Bitcoins.
And because of Coinbase’s popularity, the outages received a great deal of attention on social media. However, such outages aren’t isolated to Coinbase – other major exchanges, including Bitfinex, Bittrex, Kraken and the Winklevoss brothers Gemini exchange stopped operation during the very same peak periods as well. As a measure of transparency, some of the major exchanges have incident logs that show the status of their systems – and what may or may not be functioning at the time.
In multiple incidents in 2017, various crypto exchanges have experienced outages – many at the same time when Bitcoin showed a new all-time high. The problem of outages appears, from the data, to be more a casualty of the velocity and speed of the price change rather than the price change itself as the exchanges have operated normally during other times of peak prices.
Cold Storage & Network Woes?
In late November at the Consensus Invest 2017 Conference, GDAX General Manager Adam White said that Coinbase holds $10Bn in cryptocurrencies for its customers. And a blog post by Coinbase co-founder Brain Armstrong said that the New York Stock Exchange backed outfit holds 98% of Bitcoins in cold storage.
Exchange Outages During Price Surges
In terms of security, Coinbase has been notoriously fine-tuned to secure client funds from the very start avoiding the pitfalls of previous exchanges that have been hacked like Mt.Gox and Bitfinex. And this security method seems to be the main practice of most exchanges.
However, with almost all reserves being effectively offline, this also means that during high volume trading and price surges, exchanges could be caught off guard and need to quickly bring back the assets online into the exchange or run the risk of ponying-up the spread gaps should the price fall dramatically as traders flip back into fiat on the exchange taking profits. And with the network being congested at record levels, this could result in hours of delay on the trading platform before any actual bitcoins and other cryptocurrencies are ready to be sold, bought or withdrawn.
A day after outages on December 7 on Coinbase, Mr Armstrong posted a friendly disclaimer titled “Please invest responsibly” were the co-founder of the exchange preemptively warned people of possible degraded performance on Coinbase due to high demand. The friendly reminder also pointed out that while people have been slowly purchasing assets on the exchange, their sell limits might be lower than their stored assets and will not be able to sell beyond that limit.
US Securities and Exchange Commission File Charges Against PlexCoin
In late September, the SEC announced that they are launching a Cyber Unit that will target cyber-related misconduct. The Cyber Unit is responsible for coordinating information sharing, risk monitoring, and incident response efforts throughout the agency. Amongst others, the focus will be on market manipulation, violations involving Distributed Ledger Technology (DLT) and Initial Coin Offerings (ICOs), misconduct on the dark web and cyber-related threats to trading platforms. Stephanie Avakian, Co-Director of the SEC’s Enforcement Division said that “cyber-related threats and misconduct are among the greatest risks facing investors and the securities industry.”
Warning Shots Fired
Earlier last week, the SEC announced that it is filing its first charges against PlexCoin, an ICO that raised up to $15Mn from thousands of investors since August. In a press release, the SEC stated that PlexCoin falsely promised a 1,354% profit in less than 29 days. An emergency court order was obtained to freeze all assets of PlexCorps, the company behind PlexCoin. Robert Cohen, Chief of the Cyber Unit, said that this case “hits all of the characteristics of a full-fledged cyber scam and is exactly the kind of misconduct the unit will be pursuing.” Earlier in October, PlexCorps disobeyed the orders of Autorité des marchés financiers (AMF), Quebec’s financial regulator, which barred it from holding an ICO. PlexCorps responded with a statement on social media claiming that they are not a scam because they haven’t stolen any money, all of the tokens were distributed and are now listed on many cryptocurrency exchanges.
There had been multiple reports as early as July that PlexCoin is displaying all characteristics of a scam and yet $15 million was still poured in by crypto investors. There is a schizophrenic marketing stigma that because Bitcoin was called a scam in its early days, new coins proclaimed scams have somehow a higher chance of success because they are going against the mainstream once again. The biggest red flags for ICOs is the promise of massive returns, profit sharing and distributing the tokens unevenly skewed to benefit the pre-sale investors.
The SEC has ruled in July that some tokens are considered securities and are subject to the regulations, especially those that promise profit sharing similar to dividends. The DAO, which raised more than $117Mn was pronounced a security by the SEC and therefore subject to the federal securities laws. Since then, many ICOs stopped holding the sale for investors from the United States and started explicitly stating that the tokens are used for utility instead of a security. Exchange Bitfinex no longer allows U.S. investors to purchase some tokens on its exchange. In September, the SEC charged a businessman from defrauding people that invested in his two ICOs REcoin and DRC. REcoin and DRC raised funds for investing in real estate and diamonds while promising high returns but SEC stated that no assets were ever bought and there were no company operations.
The SEC has started to actively investigate the ICO space. Howard Marks, the CEO of StartEngine, believes that “the ability for a company to raise capital with an ICO inside a legal framework and for investors to trade these tokens in regulated marketplaces is key for the future.” ICOs that will function within a legal framework will need to submit disclosures required by the SEC that will be closely reviewed, which would gravely improve the due diligence and presence of scams in the space. The existing crypto exchanges would have to become broker-dealers in order to trade the securities tokens in the United States. Two new platforms T-Zero and StartEngine Secondary that are both registered as broker-dealers will start offering trading marketplaces for the new security tokens.
According to Mr. Marks, ICOs are already spending hundreds of
US Securities and Exchange Commission ICO Statements/Actions
|July 25, 2017||Some tokens may be securities and are thus subject to the federal securities laws|
|August 29, 2017||Issued a warning about public companies making ICO claims and suspended trading of four companies|
|September 26, 2017||Announces creation of a Cyber Unit targeting cyber-related misconduct including ICOs|
|September 29, 2017||Charges ICOs REcoin and DRC with defrauding investors|
|November 1, 2017||Celebrity endoresments of ICOs might be unlawful without the proper disclosure|
|December 4, 2017||Emergency asset freeze to halt fraudulent ICO PlexCoin as Cyber Unit takes its first action|
|December 11, 2017||Calling a token a “utility” token or structuring it to provide some utility does not prevent the token from being a security|
ICO Projects by Region of Legal Entity or by Region of Founder
thousands of dollars for create a framework that will classify them as non-securities, which is counter productive since legal frameworks that will classify them as securities will be cheaper and safer. Regulation A+, which is a part of JOBS Act, allows companies to raise up to $50Mn from the general public every year. A startup Gab was the first to raise money through a Reg A+ ICO but has since been followed by other companies such as RideCoin, WeDemand and WENN. Simple Agreement for Future Tokens (SAFT), which was created by Protocol Labs, aims to streamline the securities compliance of ICOs to make it easier for companies to legally accept funds from accredited investors.
The increased activity from the SEC along with the developments to make ICOs a part of a legal securities framework in the United States will make the space a lot safer for smaller investors, which do not posses the necessary resources to perform their own due diligence. The SEC will require submitting financial disclosures, which is not possible now. Unregulated ICOs raise a lot of money by a top-notch marketing that’s based on promises and people behind the project rather than a proof of concept or realistic applications. It is only a matter of time before the majority of ICOs are unable to execute their ideas and the market will stumble. According to Cambridge Associates, around 60% of startups fail. And none of these startups are listed on exchanges where their tokens are publicly traded. When publically traded tokens start failing, it will also reflect on the rest of the companies as uncertainty will soar.
CBOE Bitcoin Futures Launched, Circuit Breakers Triggered
One of the most anticipated products in the Bitcoin community came of age on Sunday with Chicago based exchange CBOE launched the first Bitcoin Future. Within a short five minutes of trading, Bitcoin Futures spiked 10%.
Much like the pains of the bitcoin exchanges have suffered (see story above), the CBOE also was quickly the victim of also crashing on the launch of their Bitcoin Futures Contracts. The highly anticipated, and hotly debated institutional investment product began trading. Its cross-town rival, the Chicago Mercantile Exchange (CME), who will also be launching their bitcoin Futures Contracts (Diar, 13 November).
Speaking to Reuters last month, Leo Melamed, Chairman Emeritus of CME said that “We will regulate, make bitcoin not wild, nor wilder. We'll tame it into a regular type instrument of trade with rules” – but the futures markets today decided to that it had a different vision entirety. Opening at $15,000, the bitcoin contracts expiring in January quickly spiked 11% to $16,660 within a few minutes of trading. And while the price corrected, the surge continued later on in the day to a whopping $18,220 – at which point the circuit breakers, which are security measures to protect investors from extreme volatility and stop trading for a short period of time, were triggered. According to CBOE, 1000 contracts were exchanged during the first three hours of trading. At the end of trading day, it was no more than a mere $41Mn worth in contracts – or 3% of total Bitcoin trading - most of which was in favour of a bitcoin price upswing, trading even higher than spot prices.
Parity Proposes Difficult Suggestions To Salvage Stuck Ether
A month after more that 500 users where affected by a bug in the popular multi-signature wallet Parity, the company behind the software have made suggestions on how to rescue some 500,000 Ether.
Parity has released a statement that effectively proposed a hard fork a month after a developer deleted the code library that left some $230Mn inaccessible by their owners due to a bug in the popular wallet.
The statement, almost worded as an at attempt to spin-off the problem as an opportunity to better the echo system of the Ethereum network, proposed 4 different suggestions. "No one should be under any illusion that unlocking these stuck funds would be anything other than a rescue operation" the statement said, after it had started with a brief history of the growing pains and problems the network has faced in the past, and was met with solutions by the community.
However, following the DAO debacle, which resulted in the split of Ethereum and Ethereum Classic, such proposals will require the backing of the miners, and the community. “I’m skeptical there is any variant of this proposal that would sufficiently alleviate the risks involved to be worthwhile" said Nick Johnson, chief software architect of the Ethereum Name Service.
Bitcoin Loses Steam
As Bitcoin continues the bullish run, its usability for smaller purchases is quickly diminishing. According to JPMorgan, the number of merchants accepting Bitcoin is decreasing. Steam, the largest digital distribution platform for PC gaming, joined the party and announced on Wednesday that it will no longer support payments in bitcoins. Steam started accepting Bitcoin through a payment processor BitPay in April of 2016. It stated that the fees that initially started at $0.20, are now reaching close to $20 per transaction. Steam also added that the volatility has recently reached daily levels of up to 25%, which makes Bitcoin very impractical to use as a payment option.
Mining Farm NiceHash Hacked
Bitcoin mining marketplace NiceHash was hacked on Wednesday resulting in more than 4,700 BTC stolen. NiceHash, based in Slovenia, allowed users to rent their hashrate to mine Bitcoin for which they generated an income. The company started operating in 2014 and has paid over a billion dollars to its users. Co-founders Marko Kobal and Sasa Coh apologized on Facebook saying that it was an “incredibly coordinated and highly sophisticated attack”. Many users have speculated that the hack was an inside job but there is no evidence supporting these claims. Kobal added that NiceHash is working with law enforcement to determine what exactly happened.
Top 10 US Futures Clearing Brokers (By Customer Assets ($Bn)
Source: FT, CFTC
Number of Coinbase Complaints By Category
Source: 2017 CFPB
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