2018 January 22 - Volume.2 Issue.3

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2018 January 22 - Volume.2 Issue.3

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Lightning Network Inches Forward, With Caution, on Bitcoin Mainnet

In a move to showcase the scaling solution for Bitcoin, Blockstream, the influential outfit that houses many of the core Bitcoin developers, pushed forward with an online store testing payments on the highly awaited Lightning Network. Many are heralding the move as a step forward in bug testing the scaling protocol in real-time but the stride doesn't come without caution. We reach out to the Lightning Network development teams.

Three Bitcoin development teams, Blockstream, Lightning Labs, and Acinq, have been working on a scaling solution for Bitcoin – the Lightning Network (LN) – a scalable off-chain instant payment protocol that was first proposed over two years ago. The development teams announced in a joint statement and demonstration that they had released the 1.0 spec for Lightning in December of last year.  The test confirmed the interoperability of each teams own Lightning implementation – Blockstream’s c-lightning, Lightning Labs lnd, and Acinq Eclair – on the Bitcoin mainnet.

It didn’t take long for a zealous open-source Bitcoin community to begin accepting payments using the Lightning Network on the mainnet, albeit the risks of a buggy platform. TorGuard, an anonymous VPN service announced at the start of the year that they had begun accepting payments on the Lightning Network. The announcement came with a disclaimer – “c-lightning is not production ready. TorGuard will cover loss of funds when sending us LN payments.”

And last week Blockstream announced that they too had opened up an online store accepting Lightning payments on the Bitcoin mainnet. But not without caution also – “This store is for testing and demonstration purposes only. Lightning is still very new and contains known and unknown bugs. In particular, be warned: You may lose funds!”

An announcement of the store on Twitter caused mixed emotions. Elizabeth Stark, Co-founder and CEO of Lightning Labs, said “bug testing should be on testnet, not mainnet.” Ms Stark said that this was a “bad move” by Blockstream.

Ms Starks concerns were acknowledged by Blockstream Lightning Developer Rusty Russell who told Diar that “Elizabeth is right: there are numerous safety guards we all want to have before we see widespread use. But people have found their own way to mainnet already, and I'd rather make a prominent announcement so our cautions are heard before it gets out of hand.”

Mr Russell continued saying that “Lightning Charge is vital for the health of bitcoin. The norm for websites accepting Bitcoin on-chain payments has been to use an intermediary: that is not peer-to-peer cash (see story below). To change that we need to spread the word, and a mainnet test site achieved that in a way testnet wouldn't.  And of course, the extra experience we gain hastens the day when we can all benefit from a battle-tested Lightning stack.”

Slow and Steady Wins the Race?

Acinq CEO Pierre-Marie Padiou was of similar mind. He told Diar that “the logical next step was to release and/or encourage use of mainnet versions of our respective software. Each team is responsible for its decision, keeping in mind that user's fund are at stake, as well as the reputation of the Lightning Network as a whole.

We congratulate Blockstream for their announcement, and we think the process of building and using their software is sufficiently involved to only be accessible to users who know what they are doing."

While congratulatory on the step Blockstream took, Acinq is treading more lightly – "releasing a mainnet version of eclair-wallet (our mobile app) would be a much tougher decision to make, because it would immediately be used by thousands of potentially less-experienced users.

Overall, we believe that a conservative and slow approach is the way to go for developing software of this kind, and that we should collectively take a great care not to damage the brand we all contributed to build during the last few years.”

But.....So Far, So Good

TorGuard founder Ben Van Pelt told Diar that there haven’t been any hiccups – “So far we have not lost any funds from the test and we were able to successfully withdraw a small amount. At this time no customers lost any funds during payment so there has been no need to issue any refunds. However, it should be noted that sending LN payments over mainnet is still very risky and only recommended for experienced users.”

And in grand Bitcoin support style, TorGuard plans on keeping their “Lightning Network node up permanently to help support the network.”

Bug testing should be on testnet, not mainnet....Bad Move, Blockstream.

Elizabeth Stark, Co-Founder & CEO, Lightning Labs


Elizabeth is right: there are numerous safety guards we all want to have before we see widespread use....The norm for websites accepting Bitcoin on-chain payments has been to use an intermediary: that is not peer-to-peer cash.  To change that we need to spread the word, and a mainnet test site achieved that in a way testnet wouldn't.

Rusty Russell, Lightning Developer, Blockstream


The logical next step was to release and/or encourage use of mainnet versions of our respective software. Each team is responsible for its decision, keeping in mind that user's funds are at stake, as well as the reputation of the Lightning Network as a whole.

Pierre-Marie Padiou, CEO, Acinq

Lightning Network Funds & Open Channels (January 2018)

Source: p2sh.info

Bitcoin Median Transaction Fees January 2018 (USD)

Source: BitInfoCharts

Total Bitcoin Transactions Per Year - Over 100Mn in 2017

Source: Bitcoinity

Cryptocurrency Payment Processors Sole Viable Option For Retailers

With current volatility spikes and scalability issues, merchants are avoiding Bitcoin payments directly and using an intermediary to process the transaction to avoid the currency exchange risk. Most of them never even hold Bitcoin or other cryptocurrencies but rather receive the fiat amount in their bank accounts. And while Bitcoin is currently unfeasible for smaller transactions, merchants have nothing to lose by implementing it.

Bitcoin is experiencing the highest volatility in the last three years (Diar, 8 January) while simultaneously dealing with scalability issues where median transaction fee hasn’t been under $10 for more than a month (see chart above). The Lightning Network, a proposed off-chain scaling solution, has recently been deployed to Bitcoin’s mainnet for testing and some real transactions have already been completed, which indicates that the protocol is getting closer to full implementation. Before the Lightning Network is thoroughly tested, used by enough people and actually proven to be effective, accepting Bitcoin directly does not make sense for merchants. Therefore, the overwhelming majority of merchants that are still accepting Bitcoin as payment are using Bitcoin payment processors.

These services are useful for merchants because they essentially eliminate the volatility risk by guaranteeing the bitcoin exchange rate for a certain amount of time. The customer has to complete the transaction in that time and the processor then immediately converts the bitcoins to a fiat currency and sends the money directly to the merchant’s bank account. For this service, the payment processors are charging a fee, which is usually 1% of the amount. Thus, the merchants never directly hold the cryptocurrency and the fee is often smaller than what the credit card issuers are charging. Refunds are always processed in fiat currencies. The problem is that customers currently have a very small motivation to pay in bitcoins because they have to cover the transaction fees themselves making the smaller purchases completely infeasible. Steam, which was also accepting Bitcoin through a payment processor, stopped accepting it in December citing problems with high transaction fees and volatile price (Diar, 11 December).

The most widely known payment processors in the United States are BitPay and Coinbase but there are many other companies on the market (see table). BitPay, which has handled more than $1 billion in bitcoin payments in 2017, processes payments for Microsoft, Newegg, Shopify and Zynga amongst others. Coinbase says that they are processing Bitcoin payments for 48,000 businesses including Expedia and Overstock.com. It’s worth noting that most of the large companies restrict the products that can be purchased with Bitcoin. For example, Microsoft only allows purchasing digital content on their store and Expedia only enables Bitcoin purchases for hotels.

Overstock.com board member Mr Jonathan Johnson says that the company is bringing in "as much as $5 million per year" from bitcoin. 

Bitcoin Standard Deviation of Daily Returns

Source: Bitcoin Volatility Index

Overstock’s revenues were $1.8Bn in 2016 resulting in maximum of 0.3% of revenue coming from payments in Bitcoin. CEO Patrick Byrne, an avid bitcoin enthusiast, stated that the company holds half of the bitcoin and the rest is immediately converted to US Dollars. A strategy that could prove costly in the bear market.

Recently, there has been an increased demand for alternatives to BitPay and Coinbase as both services have yet to implement SegWit support, which would in turn decrease the transaction size and ease off the pressure on the network. Moreover, BitPay only furthered the community’s concerns when it announced in December that it will be implementing Bitcoin Cash as an option for payments.

The lesser known alternatives that provide a comparable service to BitPay and Coinbase are Stripe, GoCoin and CoinPayments for the businesses in the US.

CoinPayments is particularly interesting as they support 110 cryptocurrencies on top of Bitcoin support. The payment processors that mostly focus on the European market include BitcoinPay, Coinify, CoinGate, CoinsBank, SpectroCoin, SpicePay and Cryptopay.me. Coinify, which is a danish startup, is the only payment processor that doesn’t charge any fees to entrepreneurs and smaller businesses.

Moreover, Coinify supports Bitcoin, Bitcoin Cash, Litecoin, Ether and 11 other cryptocurrencies. All the companies that are listed support withdrawals in fiat where merchants don’t have to come in contact with cryptocurrencies if they don’t want to. Of course, there are also services that only provide a solution to accept cryptocurrencies without the conversion to fiat but those are quite impractical because of the volatility risks especially for smaller merchants.

Bitcoin Payment Processors

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

Source: Diar, Company Websites. Notes: *Planned

Illicit Bitcoins Funneled Through European Fiat Off-Ramps Increasing

A recent report that was co-authored by Bitcoin analytics firm, Elliptic, and the Center on Sanctions and Illicit Finance, a program funded by Washington based Think Tank, the Foundation for Defense of Democracies, found that only a small portion of the cryptocurrency, under 1%, entered conversion to fiat services.

While the report looked at a narrow dataset, it concluded that mixing services used to obfuscate transactions, and online gambling sites were the largest culprits. European exchanges saw an increasingly disproportionate amount of illicit Bitcoin conversions (See Chart).

The study that aimed to look at how dirty money moved through the system looked at half a million illicit Bitcoins over the period of 2013-16 that ended-up in fiat-off ramp exchanges as well as other conversion services. Considering the amount of Bitcoin thefts off exchanges alone (Diar, 19 December 2017), the report stated that “actual volume of illicit Bitcoin transactions is almost surely to be significantly larger than represented in our sample.”

While exchanges actually ended up processing 45% of laundered Bitcoins, due to the actual volume of transactions seen on the platforms, the actual proportion of their total activity that can be construed as illicit is low.

And while there is a major problem facing authorities’ due to unknown jurisdictions of many conversion services, two European exchanges accounted for a whopping 50% of all the bitcoins that where laundered through a total of 120 exchanges. The report did not identify which exchanges.

Distribution of Illicit Bitcoin To Conversion Service By Region (%)

Source: Elliptic

How the U.S. Treasury’s Financial Crimes Enforcement Network (FinCen) defines money laundering – A three-step process of making “illegally-gained proceeds (i.e. ‘dirty money’) appear legal (i.e. ‘clean’),” by 1) placing dirty money in the legitimate financial system, 2) layering it within additional transactions to obfuscate its origins, and 3) integrating it into the financial system with more transactions so the funds appear licit.

South Korea Sows Confusion in Markets, Announces Strict AML Oversight

South Korea caused large cryptocurrency sell-offs after the justice minister said that the ministry is “basically” preparing a bill that would ban trading on cryptocurrency exchanges. The statement caused an outrage of public who joined their forces in a petition that has since been signed more than 220,000 times. The government has since decided to take the regulatory approach instead of banning all the cryptocurrency trading. Starting from January 30, it will require the cryptocurrency exchanges to share transaction data with banks to eliminate anonymous trading. Trading will be subject to strict AML and tax oversight.

There has been a lot of confusion and misinformation about South Korea’s intention to regulate the cryptocurrency exchanges. On January 11th, Justice minister Park Sang-ki said “There are great concerns regarding virtual currencies and the justice ministry is basically preparing a bill to ban cryptocurrency trading through exchanges.” Accompanied by a report that the largest Korean cryptocurrency exchanges such as Coinone and Bithumb were raided by police and tax agencies, the market started panicking and prices started dropping.

Soon after the news broke, the spokesman of South Korea’s presidential office said that “Justice Minister Park’s comments related to shutdown of cryptocurrency exchanges is one of the measures prepared by the Ministry of Justice, but it’s not a measure that has been finalized.” An outrage by the South Korean public turned into a petition against regulation of cryptocurrencies and has since collected over 220,000 signatures. Since the petition reached more than 200,000 signatures, officials are obliged to respond within 30 days.

Trading cryptocurrencies has been popular in South Korea to say the least as more than 10% of the global traded volume of Bitcoin is traded against the Won. Bitcoin’s high demand in South Korea resulted in premiums of upwards of 20%. The local exchanges don’t allow trading by foreigners, which resulted in limited arbitrage opportunities and therefore a wide price gap. The difference was so high that it forced the popular cryptocurrency price tracker CoinMarketCap to remove South Korean exchanges from its listings because it was skewing the averages too much. The market further plummeted after the adjustment.

Adding more to the confusion, Choi Hyung-sik, a director of Financial Supervisory Service (FSS), confirmed that the regulator is investigating a claim that one of the members of their task force was using internal information to profit on market swings.

However, according to the FSS, the investigation is unrelated to the recent situation as the employee supposedly profited off the regulation that was announced on December 13. According to the reports, the employee who made the profit of 7Mn KRW ($6600) pleads that he was not aware of the upcoming regulation because he was on vacation at the time.

Because insider trading of cryptocurrencies is not currently regulated by the FSS, it is more probable that the employee will be accused of misuse of internal information. The government has since introduced a bill to add cryptocurrency holdings of 10Mn KRW or more (~$9300) to the list of public disclosure items.

On January 18, South Korea’s chief of the Financial Services Commission (FSC) said that “[the government] is considering both shutting down all local virtual currency exchanges or just the ones who have been violating the law.” The minister of the Office for Government Policy Coordination added that the government remains very divided on the issue but promised to make a decision during the parliamentary session on Thursday.

Since then, the FSC announced that it intends to “require cryptocurrency exchanges to share users’ transaction data with banks” in an effort to eliminate anonymous trading of cryptocurrencies. The new system will come into effect from January 30 starting with six commercial banks. FSC also stressed that the anti-money laundering (AML) obligations will be strengthened in order to “block illegal funds from money laundering as well as to filter out minors for whom virtual money investment is prohibited”. The government will have access to any transactions to or from the exchanges, which will also speed up taxation procedures.

Despite being divided on the issue, the South Korean government has clearly decided to take the strict regulatory approach instead of a complete ban on cryptocurrency trading. The future regulatory involvement of the different government bodies should be done in a more coordinated way to prevent confusion and uncertainty.

Succinct Joint-Statement By
SEC & CFTC on Cryptocurrencies

"When market participants engage in fraud under the guise of offering digital instruments – whether characterized as virtual currencies, coins, tokens, or the like – the SEC and the CFTC will look beyond form, examine the substance of the activity and prosecute violations of the federal securities and commodities laws. The Divisions of Enforcement for the SEC and CFTC will continue to address violations and bring actions to stop and prevent fraud in the offer and sale of digital instruments."

Source Link: SEC

Cuallix: xRapid Demonstrates Savings Potential

Beyond the headline splashes that Ripple Labs cryptocurrency XRP made at the end of 2017, it has also entered 2018 with encouraging support from its very first xRapid client, Mexican financial firm Cuallix.  Nicolas Palacios, CFO of the financial outfit whose focus is on cross-border payments between the US and Mexico took to twitter to announce that Cuallix is indeed benefiting in both time and money with the adoption of xRapid and the use of XRP. Transactions used to take "2-3 hours with an estimated fee of $30. Through Ripple, it takes around 3-5 seconds and practically no fee." Ripple and Moneygram announced earlier this year that they will be pilot testing xRapid and XRP (Diar, 15 January).

France, Germany Bitcoin Regulation Proposal –  French Finance Minister Bruno Le Maire said that the two European nations, France and Germany, will submit a joint-proposal at the G20 Summit in Argentina this upcoming March that will provide a framework for Bitcoin regulation.
$2Bn ICO Target By Telegram – Encrypted messaging service Telegram, upped its ICO target to a cool $2Bn. A hopeful and ambitious wish of competing with Visa/Mastercard as a payment platform. 2017 saw a total of approximately $6Bn raised from ICOs.
Royal Dutch Shell, BP Enter Blockchain – A consortium of Big Oil and Big Banks are looking at adopting blockchain solutions to address cargo ownership and to mitigate the risks involved in physical trading. Accurate timestamps will assist in correctly pricing oil shipments. .
Blockstream, ICE Partnership – NYSE-Operator Intercontinental Exchange announced a consolidated cryptocurrency feed partnership with Blockstream covering 6 main pairs from 17 different exchanges. Alongside the main cryptocurrencies, Dash has entered the stage.

Bitcoin Cash Fees Remain Lowest Against Majors...

...But Daily Transactions Also Markedly Lower

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