2018 June 11 - Volume.2 Issue.23

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2018 June 11 - Volume.2 Issue.23

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Competition Ramps Up for US Cryptocurrency Exchanges

Popular cryptocurrency exchange Coinbase announced last week that it is seeking the approval of the US Securities and Exchange Commission to become a regulated exchange offering blockchain securities. While Coinbase made a sweeping buyout of three companies gearing it towards this goal, Goldman Sachs backed Circle also revealed the same plan. And while the step was and is inevitable for cryptocurrency operations post SEC warnings and guidlines issued earlier this year, the two exchanges are now seemingly in the same path with similar planned offerings.


While Bitcoin's popularity and new money coming into the industry has greatly diminished from December-17 highs, cryptocurrency exchanges are now eyeing new expansion models to compliment their existing, and profitable exchange businesses.

Coinbase and Circle are both making moves with the US Securities and Exchange Commission (SEC) in order to become approved by the watchdog to trade tokens that are deemed to be securities - which would be most cryptocurrencies at least according to SEC chair Jay Clayton.

But that's only the start of a very close path the two exchanges are taking. Circle is also, much like Coinbase, seeking a federal banking license (Diar, 28 May). This would assist the cryptocurrency operation in being able to offer fiat trading pairs on its professional trading platform Poloniex.

Coinbase said "If approved, these licenses will set Coinbase on a path to offer future services that include crypto securities trading, margin and over-the-counter (OTC) trading, and new market data products." Circle currently operates a cryptocurrency OTC arm raking in over $2Bn in monthly volume. And offers margin trading.

Coinbase BTC/Fiat Volume Drops 73% from December-17 High...


Source: Bitcoinity, Diar Calc.


|| PARADEX VS. POLONIEX?
Where things do start to diverge however is in how the two operations will scale their business models. Circle, who purchased cryptocurrency exchange Poloniex earlier this year already has an established token exchange. And the Circle app already offers 7 cryptocurrencies - 3 more than Coinbase.

However, Paradex which Coinbase purchased earlier last month could be an interesting differentiator. With Paradex being built on the 0x protocol that has a large ecosystem and community support behind it, Coinbase might be able to leverage other protocols, such as tokenized debt protocol Dharma to its offering.


Big Banks Remain at Large as Small Outfits Take on Crypto Risks

Only a handful of exchanges have been able to secure banking facilities, which allow them to list fiat pairs and accept deposits and withdrawals in fiat currencies. And that's primarily due to the fact that there are also only a handful of banks that give cryptocurrency companies access to their services as Big Money continues to stand on the sidelines.


Binance, the largest crypto exchange by volume, announced that it has set up a bank account in Malta. The exchange has confirmed that it will also soon allow for traders to cash out in Euro. 

The large mainstream banks remain reluctant to provide banking as the reputation risk is higher than the potential benefits. Cryptocurrencies are still often associated with criminal activities because of their inherent anonymity. Executives at ING, UBS and Credit Suisse all reiterated that they they would not get involved in cryptocurrencies or other digital assets even if clients asked them to. The largest bank that partnered with a cryptocurrency based business is Barclays, which partnered with Coinbase who historically complies with all applicable laws and regulations in each jurisdiction.

Small banks look to cryptocurrencies as an opportunity to attract new customers in a competitive banking market. Even then, any cryptocurrency business that wants to get banking must comply with robust anti-money laundering (AML), know your customer (KYC) and counter-terrorist financing (CTF) processes as well as due diligence of the entire business model. 

They must also make sure that they are not breaching any financial sanctions put in place.

|| UNITED STATES

Metropolitan Commercial Bank, Silvergate Bank, Cross River Bank and Signature Bank are the only four banks in the United States that provide banking services to companies that deal with cryptocurrencies (see table). They each have less than $2Bn of total assets, which is a drop in the ocean when compared to JPMorgan Chase, the largest bank in the U.S., with total assets of more than $2.5Tn.

|| EUROPE

Hypothekarbank Lenzburg, LHV Pank and Fidor Bank let cryptocurrency businesses use their services in Europe while Vontobel, Falcon Private Bank and Bank Frick even provide cryptocurrency based services such as asset management, trading, cold storage, tracker certificates and futures and even initial coin offering (ICO) advisory. Before Malta’s entrance, the crypto friendly banks were based in either Germany, Liechtenstein, Estonia or Switzerland.

Silvergate Bank, which now banks about 250 crypto companies increased its total assets from $978Mn in 2016 to $1.9Bn in 2017 mainly of business coming from crypto companies. Metropolitan Commercial Bank surpassed $1Bn in total assets in March, 2016 and now, the bank has approximately $2Bn in total assets. It’s clear that the growth of popularity of cryptocurrencies is not only helping exchanges but also the banks that are providing facilities for these outfits.

List of Bank Providing Services to Cryptocurrency Operations

wdt_ID Bank Based in Services Total assets
1 Barclays UK Provides banking services to Coinbase $1.1Tn
2 Vontobel Switzerland Bitcoin tracker certificates and Short Mini Futures $19.7Bn
3 Hypothekarbank Lenzburg Switzerland Accounts for blockchain and crypto companies $5.0Bn
4 Falcon Private Bank Switzerland Crypto asset management services $2.9Bn
5 Metropolitan Commercial Bank USA Provides services to BitPay and Shift Card $2.0Bn
6 Silvergate Bank USA Offers banking to crypto companies (Gemini, bitFlyer, etc.) $1.9Bn
7 VersaBank Canada Virtual safety deposit box for cryptocurrencies $1.7Bn
8 Cross River Bank USA Offers banking to crypto companies $1.2Bn
9 Bank Frick Liechtenstein Crypto trading, cold storage, ICO advisory $1.1Bn
10 LHV Pank Estonia Provides banking services to Coinbase $1.1Bn


Crypto-Progressive Swiss Give Vote of Confidence to Banking Sector

The Swiss took to the polls on the weekend to reject, overwhelmingly, the Vollgeld (Sovereign Money) plan that proposed a new central bank model to curb commercial banks power of creating money through fractional reserves. What was deemed to be a possibly “dangerous experiment” was rejected to the rejoice of bankers in what could have been the start of a new monetary model – at least in theory.


As discussions and research on Central Bank Digital Currency (CBDC) has ramped up in the past year, Switzerland took to the ballot to vote on a proposal to curb the commercial banks influence on being an intermediary on “printing money” due to the fractional reserve system that most financial systems around the world currently operate under.

With little backing from the strong and influential Swiss banking sector, the proposal was rejected. The question effectively posed was should the Central Bank have a larger mandate in issuing money? And during times of crisis when it would need to tighten, would popular opinion sway required austere measures to keep the economy afloat?

Regardless of the outcome, however, the seed has been planted across Central Banks that a digital format of their fiat currency is on the brink of reality – and with it a mass amounts of questions on how it would be designed. The Bank of England, who has a firm understanding of the macroeconomic prospects of a CBDC seems to favour a model that would continue to steer commercial banks into safety under the currency economic status quo (Diar, 4 June).

The possibility of introducing a CBDC for social good remains a possibility and Central Banks do have the opportunity to introduce digital money that is in the benefit of its citizens rather than the commercial banks . Professor Gersbach at the ETH in Zurich told the Financial Times that a CBDC and reforming the current financial system go hand in hand. Mr Gerbach believes that “If a central bank issued a cryptocurrency, and it became enormously popular — perhaps because it paid interest — then it would substitute for bank deposits created by banks as a means of payment. The whole system would move towards a system in which there was only central bank-issued money — it would be a type of Vollgeld.”


US Securities and Exchange Commission Amps Up Crypto Oversight

It seems very difficult for the US Securities and Exchange Commission (SEC) to stay outside the news in the cryptocurrency industry as of late. The regulator has now moved forward with a permanent staff position that will assist with the Digital Assets oversight. Does the emphasis on Digital Assets and DLT show that the watch dog has an inkling of a feeling that tokenization of securities is a mid-term prospect? 


Jay Clayton, Chairman of the the Securities and Exchange Commission (SEC), spoke to CNBC and reiterated that the SEC will not change the definition of a security for digital assets. By Mr Clayton's definition, any token that was used in a fundraising process and can give investors a return, or investors can get a return on the secondary market by selling the token to someone else, qualifies as a security. Mr Clayton said that these tokens can be sold in both private placement or public offering but issuers must take the responsibility SEC laws require.

The SEC will regulate both the offering and selling of these tokens. Under Clayton’s definition, even Ethereum would be considered a security but it is unclear whether projects that started as a “security” and evolved into decentralized projects would be affected. Cryptocurrencies, which Clayton defined as replacements for sovereign currencies, will not be affected.

Prior to the interview with Jay Clayton, the SEC announced week that it will appoint Valerie A. Szczepanik to the position of Associate Director of the Division of Corporation Finance and Senior Advisor for Digital Assets and Innovation. Ms Szczepanik, who previously served as Assistant Director in the Division of Enforcement’s Cyber Unit as well as the head of the SEC's distributed ledger working group, will be responsible for coordinating SEC’s efforts regarding the application of securities laws to emerging digital asset technologies and innovations, including Initial Coin Offerings and cryptocurrencies.

Following her appointment, Ms Szczepanik spoke at SINET Innovation Summit in New York where she said that while ICOs are a relatively cheap and frictionless way to raise a lot of capital with a liquid secondary market, the market lacks investor protection from fraud or cyber attacks. Ms Szczepanik added that the SEC is always eager to meet crypto companies. Ms Szczepanik added “We never turn down a request for a meeting. We have met dozens and dozens of entrepreneurs and lawyers. We’re not going to do the innovating for people but we want people to come in and propose solutions they want to accomplish.” Ms Szczepanik also believes that with proper guidance from regulatory attorneys, regulations can potentially be programmed into smart contracts and distributed ledger technology (DLT).


Acinq Goes Live with Lightning Network Payment Processing

Lightning Network (LN) developers Acinq, one of the three teams working on Bitcoin's second layer off-chain settlement solution has introduced a payment processing Application Program Interface (API) to assist businesses with easy off-chain-on-chain settlement dubbed Strike.

Unlike other cryptocurrency payment processing options which payout directly into a fiat conversion, Strike simply collects LN payments on behalf of the client, and then settles the collected amount to a Bitcoin wallet. There is third-party trust involved with the Strike as Acinq would be collecting a set amount of Bitcoins of the clients choosing before final 0n-chain settlement.

What this does mean is that it is possible that should Bitcoin and LN become mainstream use as a currency for retailers, Acinq would possibly become a massive hub of liquidity, centralizing it's power over the LN little further. It's unlikely that this opportunity would be left in the hands of Acinq alone, however.

Processor Cryptocurrencies Fiat Target Fees Support
BitPay BTC, BCH* USD, EUR, GBP, + USA 1.00% Microsoft, Newegg, Shopify, Zynga and others
Coinbase BTC USD USA 1.00% Expedia, Overstock, DISH, Dell, Reddit, Wikipedia and others
BitcoinPay BTC, LTC* USD, EUR, GBP, + Europe 0.80% Trezor, Alzashop, MoneyPolo, GoPay and others
Coinify BTC, LTC, BCH, ETH ,+11 USD, EUR, DKK Europe 0.00% Countr, QNET
Stripe BTC USD USA 0.80% Commerce plugins
CoinGate BTC, Shapeshift +44 USD, EUR Europe 1.00% Commerce plugins
CoinsBank BTC, LTC USD, EUR, GBP, + Europe 1-3.5% Commerce plugins
GoCoin BTC, LTC USD, EUR, GBP, + USA 1.00% Commerce plugins
SpectroCoin BTC USD, EUR, GBP, + Europe 0.25% Commerce plugins
SpicePay BTC USD, EUR Europe 1.00% Commerce plugins
CoinPayments BTC, +110 Alts. USD, EUR, GBP, + USA 0.50% Commerce plugins
Cryptopay.me BTC USD, EUR, GBP Europe 1.00% Commerce plugins

Cryptocurrency Markets Plummet on Exchange Hack News

"Your Keys, Your Bitcoin" mantra doesn't seem to bode very well as a concept for cryptocurrency traders as they fall victim to another exchange hack - this time claiming approximately an estimated $40Mn from South Korean CoinRail. Diar estimates put known cryptocurrency heists at over $1.1Bn (see table below).

Chainanalysis Co-Founder Jonathan Levin places over 80% of cryptocurrency transactions as having a counterparty that is a 3rd party service. The astonishing high number does highlight the sole current use of the cryptocurrency industry - speculative trading. And Bitcoin, albeit being a different use case to the ERC20 token markets, has been lumped into the speculative pact.

Markets took an immediate down turn on the news, bringing down the price of Bitcoin by a whopping 13% from a week ago. All other cryptocurrency markets fell inline with the market leader.


Cryptocurrency Exchange Heists Claim Over $1Bn

Period Exchange Cryptocurrency USD Value
Jun-18 CoinRail Various 40.000.000
Jan-18 Coincheck NEM 496.850.000
Feb-14 Mt. Gox BTC 357.500.000
Feb-18 BitGrail XRB 175.000.000
Aug-16 Bitfinex BTC 67.662.140
Other* BTC 31.336.884
Total 1.168.349.024

For Bitcoin Specific Thefts and Centralized Exploits Please See Vol.1 Issue 8 - Link

Coinbase Picks Up Where Kraken Left
Whilst Kraken found the Japan's Financial Services Agency (FSA) requirements for cryptocurrency operations too much of a burden for the low volume resulting in an exit from the country in April, Coinbase seems to believe in the opportunity announcing its move into Tokyo.
CFTC Subpoenas Exchanges Involved in Futures
The U.S. Commodity and Futures Trading Commission (CFTC) has subpoenaed Bitstamp, Coinbase, itBit and Kraken to analyze the trading data in another manipulation probe. The subpoenaed exchanges provide data as a base for the bitcoin futures prices at CME.
VanEck Joins SolidX to File for ETF
VanEck partners with SolidX in yet another attempt to launch bitcoin-linked ETF. Both companies have filed for bitcoin ETF separately but with no success. VanEck withdrew in January of 2018 and SolidX was denied in 2016. The risk disclosure section of newly proposed ETF is 19 pages long.
Canada Releases Proposed Crypto Regulation
Canada’s Department of Finance proposed new AML and KYC rules to manage virtual currencies. Under the new rules, entities dealing in virtual currency will be treated as money service businesses (MSB) and will be required to report every transaction over $10,000 CAD.

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