2018 October 29 - Volume.2 Issue.43

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2018 October 29 - Volume.2 Issue.43

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Coinbase Orchestrates Parallel Banking Network Corridors

Despite now having more than double the assets on their exchange versus a year ago, Coinbase's latest add, the listing of a dollar pegged cryptocurrency, inches the firm towards their 'Open Financial System' goals, akin to a suite of banking products. Having already secured multiple licenses through mergers and acquisitions, Coinbase seems to be orchestrating a second-layer banking infrastructure with on-chain channels. And the firm's alumni having started some of the most prominent financial products in the space could potentially play a pivotal role in what looks to resemble a parallel banking network.


When Circle announced the launch of the dollar pegged cryptocurrency USD Coin (USDC) late last month, it was readers of this publication who saw an immediate competitive threat to Coinbase's very own 'Open Financial System' (Diar, 1 October).

|| AT THE CENTRE OF IT

As it turns out, the two rivals have been in 'cahoots' and last week Coinbase announced their co-founding status of Centre, the consortium and protocol that the Dollar pegged cryptocurrency, USDC is founded upon.

And while the addition of a pegged cryptocurrency was a fairly anticipated move, especially considering upwards of $250Mn in investments that have poured into backing stablecoin-type projects, including many coming from Coinbase investors, what is telling is the very partnership with a rival exchange, as well as the bypassing of their own institutional investor goals (Diar, 25 July).

|| SKIP THIS STEP FOR NOW

“Our definition of critical mass [for institutional traders] is approximately the daily trading volume of ten large publicly traded companies, or $5B in daily trading volume” wrote co-founder Brian Armstrong in regards to the company’s strategy a little over a year ago. But Coinbase trading volumes have plummeted, and institutional goals faltered (Diar, 15 October).

|| KEEP YOUR FRIENDS CLOSE YOUR 'ENEMIES' CLOSER TYPE THING?

Considering Coinbase could have easily launched their own branded dollar-pegged cryptocurrency, their partnership with Circle highlights the modus operandi of the exchange –create a network effect and onboard as many users as possible within the ecosystem.

And with USDC, the exchange will be looking into developing payment channels in order to become a useful method of payment, not just a token used by traders alone, as other dollar-pegged cryptocurrencies and stablecoins. Onboarding merchants will be a challenge though, not only for Coinbase, but the entire cryptocurrency space with no real regulatory and tax framework in place.

|| MORE PIECES OF THE PUZZLE….

The stablecoin addition does signify an important step in terms of Coinbase holding onto fiat reserves. Should USDC gain traction and adoption, the move highlights the possible customer deposits that the exchange would be sitting on. It would make sense, then, that Coinbase does indeed seek a federal bank charter in order to secure more payment and institutional facilities, an intention seen earlier this year (Diar, 28 May).

USDC has come under fire by cryptocurrency adopters when it was seen that Centre will be able to freeze funds and blacklist addresses.

Still, for a regulatory conscientious exchange such as Coinbase, ensuring Know-Your-Client (KYC) and Anti-Money-Laundering (AML) compliance was not likely a discussion up for debate. It’s evident that Coinbase will be trying to tie-in digital identity into their platform. It was only in August when Coinbase acquired Distributed Systems in their effort to spearhead the validating and verification of identity on the blockchain. It’s highly likely, that this, much like USDC, will be part of an interoperable solution established by the members of the Decentralized Identity Foundation.

|| OPEN...JUST NOT BITCOIN ‘OPEN’

Coinbase’s moves and acquisitions highlight the keen intent of playing good with regulators, and more importantly, their requests, far removed from core tenant traits and capabilities that Bitcoin enthusiast have grown to love and preach.

The exchange's mission statement, however, neither mentions Bitcoin, nor cryptocurrency. For that matter, the word 'Decentralized" is also not in the company’s scope.

Coinbase's Multi-Pronged Growth Path Initiatives 

wdt_ID Function Company Growth Path
1 KYC / AML Distributed Systems Acquisition
2 - Abacus Coinbase Ventures
3 Deposits USD Coin Consortium Co-Founder
4 - Reserve Coinbase Ventures
5 Savings Compound Coinbase Ventures
6 Payments Coinbase Commerce -
7 - Celo Coinbase Ventures
8 - Spacemesh Coinbase Ventures
9 Loans Dharma Coinbase Alumni
10 Derivatives dYdX Coinbase Alumni

Coinbase Oct-18  BTC Volumes Stay In Decline, But Global Share Steady


"Did anyone actually think that the US government would possibly allow an asset-backed Stablecoin with no KYC whitelist *and* no blacklist? We need to be realistic about what we can shoot for. If you want full crypto-decentralization, DAI still exists and works great."
– Vitalik Buterin

|| ONE HAND WASHES THE OTHER

Former employees, many of whom have moved on to setup other cryptocurrency operations haven't been shy to share their corporate alma mater. And Coinbase has not been secretive with their ties to former employees. In fact, earlier this year it was Coinbase’s own President and COO, Asiff Hirji who said that the launch of Coinbase Ventures, the company’s investment arm is to back projects "primarily around founders that we know, part of the alumni network who are building compelling businesses that move the mission forward for a more open financial network" (Diar, 9 April).

It’s not by coincidence that derivatives protocol dYdX, founded by former Coinbase employee Antonio Juliano, has found the financial backing from the usual suspect – Andreessen Horowitz, Polychain Capital, 1 Confirmation (also founded by a former Coinbase employee). The same can be said about lending protocol Dharma. And both protocols are built atop 0X, whose network token was added to Coinbase a few weeks ago (Diar, 15 October).

|| TYING THE WEAVE TOGETHER….

The stablecoin addition by Coinbase represents a key component for their plan to take shape in a more approachable manner. Having now mechanisms for stable value deposits, secured licenses for security issuance, security markets, financial advisory, institutional custody, as well as the primary infrastructure for merchant adoption, Coinbase, alongside alumni products have a full suite of banking facilities.

Efforts however may remain contained, for the time being at the very least, to a closed-loop economy for early cryptocurrency adopters as Ethereum simply can’t come anywhere near global scale.


Global Cryptocurrency Trading Volumes Hit 1-Year Low

At current prices, Bitcoin is a few short days shy of hitting a one year low. But trading volumes have plummeted already reaching that mark, both in terms of US Dollar value, as well as Bitcoins. Average October Bitcoin trading volumes was a little under $1Bn; the remaining days in the month would not push volumes higher than a year ago. Versus last October, this month saw the trading volume for Bitcoins drop 38%. Despite an increase in activity from major marquee banks and investment outfits, from Fidelity to ICE-led Bakkt, cryptocurrencies have failed to pickup any new interest.

Bitcoin Trading Volume Drop 79% From Jan-18 High

Ethereum Hits 2018 Low

Bitcoin Cash Trading Volumes Hit 4-Consecutive Month Low...

...And Litecoin Not Fairing Much Better Than Bitcoin Cash


Underlying data has been provided by Nomics. Global volumes exclude no fee & transaction mining exchanges.

Volatility Continues Downtrend For Major Cryptocurrencies

Alongside the dramatic drop in trading volumes this year, volatility has also seen a continued downtrend for all major top traded cryptocurrencies (see story above). Bitcoin 30-Day volatility currently stands at under 1.5%, in stark contrast to the start of the year when it stood at 9%. Monero, the privacy focused cryptocurrency is now the least volatile following Bitcoin at 2.7%. What is quite telling are the "remittance" geared cryptocurrencies, Stellar and XRP which remain most volatile.

Bitcoin


Monero


Stellar

Ethereum


Zcash


XRP


Radar Relay Introduces Token to Short Ethereum
While traders have had limited exposure to shorting cryptocurrencies, mainly through taking out a collateralised loan on Dharma, dYdX has released a Short Ethereum token, now tradable on Decentralized Exchange Radar Relay. The minting and withdrawing of the tokens will be available on expotrading. The addition to the space give experience traders tools for better risk management, and ultimately, more opportunities on the down side.
Wrapped Bitcoin Set to Come to Ethereum Exchanges
Decentralized Exchange Kyper Network has partnered up with Polychain Capital backed Republic Protocol to introduce come January an Ethereum token that will be backed by Bitcoin. The Bitcoins will be required to have BitGo as the custodian, however, there will be a full proof-of-reserves on both blockchains. The project is set to also introduce a Decentralized Autonomous Organization voting structure for major upgrades, new custodians and merchants.
Japanese Regulator Accredits Association for Regulation
The Japanese Financial Services Agency (FSA) has formally accredited a self-regulation body, the Japanese Virtual Currency Exchange Association (JVCEA) to overview, regulate and hold accountable cryptocurrency exchanges moving forward. Reuters reports that the Japanese exchanges may be required to hold separate bank accounts for client funds, as well as hold government bonds to ensure deposits in case of hacks.
Binance Eyes Further Growth in Asia
Venture capital group Vertex Venture announced last week that it has made an investment with Binance in order to open a cryptocurrency exchange in Singapore. Last week also saw the live deployment of Binance's first fiat-to-crypto exchange out of Uganda, and Singapore is also slated to support fiat onboarding. The prospect of another centralized exchange does veer off from the decentralized stance that Binance had taken a few short months ago.

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