2018 March 26 - Volume.2 Issue.12

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2018 March 26 - Volume.2 Issue.12

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Kraken' the Key to the Next Coinbase Listing

While many parts are up for interpretation from Coinbase's Digital Asset Framework that lists the prerequisites a cryptocurrency requires to qualify for listing on the popular exchange, one measure can help hone down possibilities. Whether or not a cryptocurrency has a fiat trading pair on the market filters down possibilities remarkably. Can listings by cross-town exchange Kraken provide further insight? 


A correct outlook as to the next cryptocurrency that could get listed on Coinbase could bring speculators massive gains, as the regulatory conscientious exchange would give the newly added coin a bulls run. This has been very evident with Ripple whose price shoots up on every tiny little rumour of potential listing on the exchange.

Coinbase has had to deal with a myriad of criticism from the crypto community because of customer service issues, delays in implementing SegWit support, lack of transaction batching, and the abrupt listing of Bitcoin Cash, which resulted in a class-action lawsuit for insider trading.

But the digital currency exchange has been as transparent as a business can be with their Digital Asset Framework that lists, in 6 sections and 45 points, the criteria a coin must meet to qualify for listing on the exchange.

|| FIAT SHALL RULE

The irony is not lost on anyone that one criteria for a potential listing of a coin by the cryptocurrency exchange would require a fiat trading pair to exist on the market (section 4.2). This requirement markedly brings down the potential cryptocurrencies, for now atleast, as there remain few regulated exchanges with fiat trading pairs (see table).


1: Key Exchanges with Fiat/Crypto Trading Pairs1

wdt_ID Exchange HQ # of Coins with fiat
1 Upbit South Korea 125 35
2 Bithumb South Korea 12 12
3 Kraken USA 16 13
4 Bitstamp UK 5 5
5 Coinone South Korea 9 9

Notes: 1. Excludes exchanges with same cryptocurrencies as Coinbase and are within the top 20 exchanges in trading volume. 


10% of Exchanges Near 50% of Total Crypto Trading Volume...


Top 20 Exchanges Volume: Crypto Only vs. Exchange with Fiat Pairs


Number crunching shows that exchanges outside the top 20 account for less, each, than 0.3% of total global trading volume. And with only a handful of exchanges in the top 20 with fiat possibilities, coins outside of them would face poor liquidity.

|| SLIM PICKINS

Of the top exchanges who support fiat only 38 possible coins with a fiat/crypto trading pair exist, including the 4 on Coinbase. This represents a meagre 2% of all the coins that are currently traded on all cryptocurrency exchanges.

|| THE KOREAN DIVIDE

Coinbase makes a point as to where the cryptocurrency is available to trade, saying the asset must not be "limited to a single geographic region." This puts a bit of a question mark on cryptocurrencies traded on South Korean exchanges where regulators only allow its nationals to trade on the platforms.

The caveat could be a stopgap to reduce potential volatility should a region fall out of its love affair with a certain cryptocurrency. Cardano, which impressively fluctuates within the top 5 coins by market cap is a prime example. A whopping 65% of global volume traded is on a single South Korean exchanges alone, albeit, with a fiat/crypto pair.

The prerequisite could also be aiming to mitigate the risks of potential regulatory issues that may arise in a single country. And not without reason. Earlier this year, South Korean regulators caused a market selloff with conflicting statements from various agencies about banning cryptocurrencies (Diar, 22 January).


Kraken Trading Distribution in US, Europe Almost Evenly Split

Notes: *7% Crypto/Crypto volume, under 1% CAD, JPY & GBP


Outside of South Korea, and UK based Bitstamp who offers Ripple as well as the other majors, Kraken is the only fiat exchange that has leaped into a larger offering, with an additional 12 coins – 9 of which have a fiat trading pair (see table 2).

And in terms of regional distribution of traded volume, Kraken has captured both major markets in the US and Europe, based on its fiat trading numbers (see chart above). The added benefit that Kraken could be setting a precedent as a regulated exchange on US soil.

2: Cryptocurrencies with Fiat Pair Available on Kraken

wdt_ID Crypto Exchanges Traded on Top 15* Trading Pairs Currencies
1 Dash 64 12 32 12
2 Ripple 61 14 32 16
3 Eth. Classic 50 14 19 8
4 EOS 45 9 27 7
5 Zcash 46 13 22 10
6 Monero 35 10 22 9
7 Stellar 26 9 25 7
8 Augur 25 6 12 5
9 Gnosis 12 6 8 3

Notes: *5 of the Top 20 Exchanges deal only with current Coinbase offerings. Coins also traded on Upbit (bar EOS, Gnosis) and Bithumb (bar Augur,Gnosis & Stellar) .


While the measures highlight the importance of a healthy global cryptocurrency market, the data is no more than a "yes or no" metric that filters down the possibilities as of date. The potential listings have many more requirements to fill, and not all fit the bill for a potential add on the exchange. But they do make for an interesting case, especially considering Coinbase's bigger picture plans (see story below).

|| PRIVACY HURDLES?

Dash, one of the oldest cryptocurrencies which celebrates top spot on the number of exchanges it can be traded on, has repositioned itself from the cryptocurrency for dark matter. Its crowning feature, the option to transact privately, alongside other privacy coins ZCash and Monero, could give Coinbase the jitters however, from fear of Anti-Money Laundering scrutiny by regulators.

Last week saw all three coins booted from Japanese exchange Coincheck following the biggest heist in crypto history that brought total crypto thefts to over an eye-watering $1.1Bn (Diar, 29 January).

Nonetheless, all three cryptocurrencies are widely available on regulated operations, including US based Kraken, which indicates that exchanges are able to place relevant compliance measures.

|| TO SETTLE, OR NOT TO SETTLE...

Only bested by the majors listed on Coinbase, Ripple pairs up with a whopping 16 currencies. A mark of success as a settlement focused coin. Ripple Labs has been winning over central banks to test their technology, and major money transfer businesses Western Union and Moneygram to test remittance settlement with their native cryptocurrency. Its clear that Ripple is open for business.

|| BUT....

A Coinbase requirement states that "the ownership stake retained by the team is a minority stake" (Section 6.2). Ripple, however, holds 61% of the XRP supply, albeit having placed 90% of their stash in an escrow account with a release schedule. Stellar is only slightly better in this regard were the developers hold 30% of the supply.

And if Digital Currency Group (DCG) CEO Barry Silbert has any clout – and he does –  Stellar would face an uphill battle to be listed with DCG being vested in both Ripple and Coinbase.


3: Major Investment Firms Backing of Select Coins & Companies

wdt_ID Token DCG Blockchain Pantera
1 Ripple + + +
3 Zcash + +
4 Eth. Classic +
5 EOS +
6 Augur +

Coinbase Section 5.1 - External stakeholders with experience in crypto companies.


|| YOU KNOW WHAT THEY SAY WHEN YOU ASSUME...

While many believed the original Ethereum chain, now represented by Ethereum Classic would wither away, the cryptocurrency found an audience backed by the protocols strict adherence to its original governance principles following the Ethereum fork as an answer to the DAO hack. And spearheading the growth initiative for the cryptocurrency is DCG's investment arm Grayscale, who are the sponsors of the Ethereum Classic Trust. Coinbase, however, may find concern with the Ethereum Foundations holding of 10% of the supply. And if that's not a concern, the 40-45% trading volume on exchange OKEx alone, might be.

|| THE INTERESTING CASE FOR AUGUR

Whether or not Augur, having launched an ICO, would pass the Howey Test is up for Coinbase to decipher. But the project, a forecasting platform, ticks a lot of boxes. It's an open-source project and has a proven track record in improving security (Section 2.1). Ethereum co-founder Vitalik Buterin, as well as Lightning Labs Elizabeth Stark sit on the board of advisors (Section 2.2). And the token also meets the economic incentives criteria set by Coinbase. "There are mechanisms which incentivize miners, validators, and other participants to exhibit 'good' behavior. Conversely, there are mechanisms which deter 'bad' behavior" (Section 6.1) - a statement that could have been pulled from Augur's White Paper and none would be the wiser.

Augur sits in the top 50 cryptocurrencies by market cap, and also has the most evenly distributed exchange volume - two factors Coinbase considers. And while not part of the assessment, quite notably, 75% of trading occurs on US based exchanges Kraken, Poloniex, Bittrex, and its South Korean extension, Upbit.

But this publication is not one for making guesses. We leave the predictions to the wisdom of the crowds - here.


Airdrops Worth Billions, But Adoption Success Rate Limited

Successful projects have airdropped what is now worth more than $4Bn of free tokens. But there is a very low success rate associated with airdrops - with no functioning use case, the tokens become essentially worthless. However, airdrops can evolve as an alternative fundraising method that are cunningly attempting to circumvent securities laws – but not all is what meets the eye.


The popularity of airdrops has been growing as they serve as an alternative or a supplement to initial coin offerings (ICOs) that have lately been under the regulatory scrutiny. The purpose of airdrops is not to raise funds as is the case with the ICOs but rather to distribute the tokens for free to members, which will actually want to use the token and increase the strength of their community.

With proof-of-work based blockchains, the distribution of new coins is always done by mining. But the blockchains that are not minable must choose an alternative distribution system for the users. All tokens built on top of Ethereum are premined, which is why the majority of the projects raise funds in ICOs where investors buy tokens and a promise of a future utility.

The airdrops allow developers to distribute free tokens to a predetermined group of people. Sometimes, the developers decide to give the tokens to holders of existing cryptocurrencies such as Bitcoin or Ether, sometimes they airdrop the tokens to users that fulfill some preset conditions.

|| SELLING THE COIN….FOR FREE

In the case of airdrops to Bitcoin holders, the developers take a snapshot of the blockchain at a point in time and then the users must sign a transaction that proves that they are indeed the holders of the private keys. Stellar and Byteball distributed their tokens to Bitcoin holders for example. Speaking to Diar, the Byteball founder Anton Churyumov said that he decided to do an airdrop simply for a marketing reason - “to reach more users and have them try the product”.

OmiseGo, which raised $20Mn from VC investors, and an additional $25Mn from an ICO, distributed 5% of the supply to all Ether holders that held more than 0.1 ETH in their wallet at the time. But the risk of giving tokens to existing Bitcoin and Ether holders is that the new distribution will mirror the existing wealth distributions of Bitcoin and Ether where the market is largely driven by speculators.

|| POURING MONEY

Another type of airdrop is to distribute the tokens to anyone who fulfills specific conditions. Even though not technically an airdrop, Nano initially distributed all of their tokens for free via a captcha-faucet distribution system. Diar spoke to Nano creator Colin LeMahieu who said that after considering the other distribution methods, Nano chose the faucet system because of the fair and even initial distribution of the coins as well as getting exposure to a lot of people who knew nothing about cryptocurrency.

|| THE PROOF IS IN THE PUDDING

As opposed to ICOs, airdrops work best for tokens that already have a functioning use case. By essentially giving away free tokens to early adopters, the value of the project is driven by network effect, which is artificially jumpstarted. But the airdropped projects can only be successful when there is a strong underlying product because otherwise, the free tokens would all just be sold and would never retain their value. 

Airdropping Billions – Projects with Market Caps over $100Mn

wdt_ID Name Method % Airdropped Value Today ($)
1 Stellar BTC holders, anyone 70.0% $3.170Bn
2 Nano* Anyone 95.0% $1.017Bn
3 NEM* Anyone 8.0% $207Mn
4 Byteball BTC holders, anyone 64.5% $92.6Mn
5 OmiseGo ETH holders 5.0% $60.4Mn
6 Decred Newsletter 12.0% $45.8Mn
7 Ontology NEO holders 8.3% $26.3Mn
8 TRON** Binance, HitBTC users 1.0% $24.2Mn
9 Ripple Newsletter 0.1% $20.5Mn
10 ICON** Bithumb users 0.5% $6.8Mn

Notes: *Technically not an airdrop (see story). **Estimated Distribution


There would be no incentive to hold the token. And this is evident as there have been more than 300 airdrops in the past two years and only a measly 3% have a market capitalization of over $100Mn today.

If a token already has a functioning utility, the value is much less likely to be driven by speculation. Giving away tokens does not violate the securities laws but instead shifts the regulatory responsibility to the exchanges. It is technically possible to use airdrops as a fundraising method to circumvent securities laws where a company airdrops a certain portion of the supply and keeps the rest for themselves. If the underlying token has a utility, which proves to be valuable, the tokens would create an opportunity on secondary markets where the company can start selling a portion of the supply that they retained for future development.

|| WISHFUL THINKING?

But companies trying to out fox regulators isn't something new, and the US Securities and Exchange Commission experienced this with the Dot-Com bubble. Washington Based cryptocurrency advocates Coin Center point out to a similar method as Airdrops but using stocks in 1999, was attempted - but the SEC intervened and halted "Free Stock". "Through these techniques, issuers received value by spawning a fledgling public market for their shares, increasing their business, creating publicity, increasing traffic to their websites, and, in two cases, generating possible interest in projected public offerings."

Coinbase released a statement in earlier this month stating that even though airdrops can enable innovation and improvements to digital currency, supporting every airdropped asset is impossible because safely retrieving airdrops is difficult and time intensive from an engineering standpoint. Stellar’s airdrop was supported by Kraken but not Coinbase. Coinbase stresses that each airdrop is assessed on case by case basis but it would only add support for airdrops that pass the Digital Asset Framework (see story above) and mitigate other risks such as the security of the current infrastructure.

|| REGULATORS CAN’T CATCH A BREAK

Airdrops are also not accounted for in the tax legislation in the United States. It is unclear whether the free tokens can be taxed as property with a cost basis of zero or whether it should be reported as income after realizing the sale.


Tether Hampering Bitcoin, Cryptocurrency Decoupling?

Critics have been calling out the US pegged stablecoin Tether as being a systematic risk to the cryptocurrency markets due to the company's seemingly inability to release audited reports proving dollar for dollar reserves. Tether, which accounts for 1/4 of trade volume with Bitcoin alone, has been used by exchanges that haven't been able to find banking. Diar data crunching shows cryptocurrencies are less likely to be affected by Bitcoin's price fluctuations, should Tether be a small part of traded volume, along with fiat trading.


An impressive 64 exchanges carry Dash. But the private coin's price fluctuates with Bitcoin most closely (see chart). Data shows Dash is also most traded into Tether (USDT). And this isn't because of lack of options, but apparently, traders choice, as Dash pairs up with 13 currencies – more than any other cryptocurrency bar the top 5 majors.

|| A STELLAR POINT? MAYBE...

From ZCash, Augur to the other end of the spectrum, Stellar and Ripple, correlation with Bitcoin price fluctuations begin to decrease. And this may be in part due to a decrease in the coins trades into Tether. Stellar, which is the least price sensitive to Bitcoin's price fluctuations after Ripple, is also traded most into Bitcoin.

|| IS THE TAIL WAGGING THE DOG?

Trades into fiat also seem to be increasing, and clearly, in the case of Ripple who trades 49% of the time in Fiat, has the lowest sensitivity to Bitcoin's price fluctuations. Nonetheless, correlation remains high.

Notably, privacy cryptos, are traded most into Tether, while settlement tokens are on the flip-side of the coin with the least price sensitivity.

|| EXCHANGES FINDING ALTERNATIVES

A shift in stopping support for Tether by exchanges has been gathering pace in recent weeks. Bittrex announced that it will begin supporting a different stablecoin, TrueUSD. If this will address reserve concerns, or bring up new ones is yet to be seen. Bit-Z, a top 10 exchange announced it will stop supporting USDT all together by months end. And in no small part, the largest exchange, Binance is on the offensive to secure banking in its new home base, Malta (see story below).

Trading Pairs Volume Distribution (%)


Buyer's Choice: Pairing Options Across Exchanges Similar (%)


Bitcoin Trade Volume Distribution (%)


Source: Diar Calculations, Correlation Stats, CoinMarketCap


Coinbase Inching Closer Towards Ambitious Goals

Coinbase has been racking up a few wins in recent weeks. They launched their first institutional investor product, the Coinbase Index Fund, and announced approval by British regulators for an e-Money license that gives it reach in the UK and, for now pending Brexit negotiations, in Europe also. And Toshi, the company's Ethereum web-broswer was updated last week too, marking their entrance into what CEO Brian Armstrong has dubbed as Phase-4 of the exchange's plan.


Whilst Coinbase experienced massive growth in 2017 as the go to platform to purchase Bitcoin, the company has much more ambitious plans than being an exchange. It is by no means a coincidence that the very first point regarding a possible cryptocurrency being listed on the popular exchange requires it to fulfil the company’s overall mission in facilitating an “Open Financial System” – Phase-4 of the exchanges forward outlook (see table). Toshi, which includes an Ethereum and ERC20 token compatible wallet, might be the conduit to this very goal.

|| ON LOANS

A great deal of cryptocurrency start-ups have entered crypto collateralized loans on decentralized networks (Diar, 20 November 2017). And there has been demand. So much so, that Salt, whose gamma ranges from microloans to loans upwards of $1Mn, have had to stop accepting new applications due to high demand (Diar, 5 March). And there are other operations too – Ripio, ETHLend, Lendoit, Coinloan – all offering debt, one of the applications listed in Coinbase’s Phase-4 plan.

|| ON IDENDITY

Of course, to facilitate a healthy portfolio of performing loans, due diligence is of the utmost importance. While Toshi's identity platform is built on uPort, others, such as Bloom are gunning after the businesses of credit worthiness from old institution FICO, who currently control 90% of the market. The cryptocurrency operation also aims to address the security issues that have riddled companies like Equifax, were 143Mn US Social Security numbers and data was compromised last year. And identity focused cryptocurrency Civic is also looking to provide a decentralized solution in the space – one of the few tokens that mega investors Digital Currency Group have in their portfolio. As do Blockchain and Pantera Capital.

The Coinbase Secret Master Plan by CEO Brian Armstrong (Link)

wdt_ID Phase Phase Users Target Goal
1 1 1. Protocol 1Mn Develop the protocol
2 2 2. Infrastructure 10Mn Digital currency exchange
3 3 3. Consumer Interface 100Mn Consumer interface for digital currency apps
4 4 4. Decentralized Apps 1Bn Apps of an open financial system

wdt_ID Phase 4 Applications/Components
1 Loans (mortgages, small business lending, micro-lending, etc)
2 Identity & Reputation (IDs, authentication, credit scores, etc)
3 Remittance (sending money cross border)
4 Merchant Processing (point of sale, internet orders)
5 Venture Capital (seed, traditional vc, venture debt, etc)
6 Investing (stocks, index funds, savings accounts, etc)


Source: Brian Armstrong Medium, Coinbase


|| ON REMITTANCE

While it may seem slightly perplexing for a digital currency exchange that facilitates the purchase of coins that can be sent all over the world to list cross border money transfers as an application on its own, it does indicate the company’s outlook on regulation and compliance measures. Ripple dominates this space were central and commercial banks have taken on to test the company’s offerings, be it xCurrent or xRapid, the technology that uses XRP for final settlement. If Ripple would fit into the overall framework is difficult to pinpoint.

But there are other interesting projects that fit and have remained in the shadows, such as Basecoin, that is developing a price-stable cryptocurrency that would eventually peg to the Consumer Price Index rather than an exchange rate. Stability of a currency that allows for free trade cross border would be a welcome addition to developing economies who have suffered from hyperinflation because of bad central bank governance. Venezuela, Zimbabwe, and Argentina would be testaments to the fact.


Binance Shifts to Europe

Binance, the largest cryptocurrency exchange by volume, announced on Friday that it is expanding to Malta. Joseph Muscat, the country’s prime minister, welcomed Binance on and said that Malta strives to be “the global trailblazers in the regulation of blockchain-based businesses.” The news came a day after the Cayman Islands-based exchange received a warning from Japan’s Financial Services Agency (JFSA) for operating without having a license. JFSA has so far issued licenses to 16 exchanges to date including bitFlyer and Quoine.

Binance CEO Changpeng Zhao, confirmed that the exchange will soon start a fiat to crypto exchange and added that he is confident that Binance will announce a banking partnership soon. Since Binance started operating mere eight months ago, it has traded exclusively cryptocurrencies without any fiat pairs. In fact, Binance said that it had “no plans to support any fiat currencies” in the White Paper that was released before launch.

Binance’s change in strategy marks its entrance in becoming the largest cryptocurrency operation in Europe, its second largest market (Diar, 19 March).

US Executive Order Bans Petro

The president of the United States, Donald Trump, signed an executive order banning purchases of a Venezuelan cryptocurrency Petro (PTR). Mr Trump authorized the Secretary of the Treasury Steven Mnuchin to issue any necessary regulations to enforce his order. Petro, which is supposedly backed by Venezuela’s petroleum reserves, accepted transactions in U.S. dollars and euros, which was supposed to increase country's foreign reserves. Mr Mnuchin accused Venezuela of evading sanctions through Petro (Diar, 26 February).

On the same day, the US Department of the Treasury issued guidelines on how the Office of Foreign Assets Control (OFAC) may add certain cryptocurrency addresses to the Specially Designated Nationals (SDN) List. The SDN lists entities with whom U.S. citizens are prohibited from doing business with due to connections to illicit activities.

The OFAC strongly suggested that anyone who is aware of any cryptocurrency wallets associated with an SDN should block the cryptocurrency and file a report with OFAC. And OFAC said that it will use sanctions and law enforcement authorities against illicit actors that are abusing digital currencies.

Yahoo Japan Enters Crytocurrency Scene
Yahoo Japan announced its plans to open a cryptocurrency exchange next year. The company will acquire BitARG Exchange Tokyo, which already possesses a license to operate a cryptocurrency exchange from Japan’s Financial Services Agency (FSA). Yahoo Japan wants to start operating in April 2019 or later.
Regulators Go After Payza on Money-Laundering Charges
Payza, the cryptocurrency-friendly digital payment processor, has been charged by the U.S. government for running an unlicensed money transmitter business. The Department of Justice accused Payza of facilitating as much as $250Mn in money laundering on behalf of companies running illicit activities.
FSB: Crypto Doesn’t Pose Financial Stability Risk
In a letter to G20 government and central bank governors, the Financial Stability Board (FSB) said that crypto-assets do not pose risks to global financial stability at this time. It was agreed at the G20 meeting that very concrete recommendations on regulating crypto will be put forward by July in order to address the usual suspects.
Fujitsu's ‘Blockchain Innovation Center’
Another day, another company jumping on the Blockchain wagon. Fujitsu announced the opening of its "Blockchain Innovation Center" in Brussels, Belgium. The company claims that the new center will develop and research blockchain-based solutions amongst sectors of all kind, such as voting, audit and process automatization.

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