2018 February 05 - Volume.2 Issue.5

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2018 February 05 - Volume.2 Issue.5

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Tether, Traders Unfazed by US Regulators Subpoena  

Cryptocurrency community concerns were answered by the the US Commodities and Trade Commission who on 6 December 2017 subpoenaed Tether and Bitfinex. With scant details besides this very fact having emerged as of date, the news did very little to hamper the trading of USDT. And with markets taking a bearish turn, the stablecoin might continue to be used by traders who aim to profit from fluctuations.


The US Dollar pegged cryptocurrency, Tether, which is used by some of the largest exchanges has now issued a whopping $2.2Bn of the stablecoin. The company claims that all issued Tethers are fully backed in US Dollars, however, a lack of professional audit has raised concerns in the community (Diar, 29 January).

Last week, more fuel was added to support the fire when Bloomberg reported that the company had been subpoenaed on 6 December 2017 by the US Commodities and Trade Commission (CFTC). The subpoena was also sent to the largest cryptocurrency exchange, Bitfinex, whose CEO was revealed to be that of Tether also after the release of the Paradise Papers (Diar, 29 January).

While the community reveled about the potential case against Tether – or at least bringing some transparency to the matter – it’s business as usual at Tether and Bitfinex. Bitfinex continues its operations – including real US Dollar withdrawals without hiccup.

The stablecoin hasn’t been sidelined by traders on the back of the news either. In fact, there was over $19Bn in transacted volume since the subpoena was announced by Bloomberg on 30 January (See Chart 1).

And Tether, since the US Regulator called upon the company, has issued an additional $1.4Bn to its $845Mn – an increase of 62% (See Chart 2). $30Mn was also destroyed, but no confirmation has been made on if this was related to a quarantined hack that happened last year of the same amount.

Tether Traded Volume Before/After Subpoena 

62% ($1.4Bn) of Supply Issued Before/After Subpoena


Source: OmniExplorer, Diar

SEC Continues Course Against Questionable ICOs

The SEC halted AriseBank for misleading investors in a fraudulent ICO. The Commission made clear that using terms like cryptocurrency and ICO will not escape the regulatory oversight or its efforts to protect investors.


The SEC in coordination with the Enforcement Division’s Cyber Unit (Diar, 11 December 2017) halted a fraudulent ICO AriseBank, which claimed to be the world’s first decentralized bank. Arisebank allegedly developed an algorithmic trading application that was supposedly able to automatically trade 700 different cryptocurrencies. AriseBank claimed that it raised $600 million of its $1 billion goal in just two months, which would make it the largest ICO in history. However, such claims are unconfirmed.

According to the SEC, AriseBank misled investors when it stated that it purchased FDIC-insured banks that would enable them to offer customers FDIC-insured accounts and AriseBank-branded VISA card. Moreover, AriseBank failed to disclose the criminal background of key executives and also used celebrity endorsements.

The SEC said: “Attempting to conceal what we allege to be fraudulent securities offerings under the veneer of technological terms like ‘ICO’ or ‘cryptocurrency’ will not escape the Commission’s oversight or its efforts to protect investors.” The court approved an emergency asset freeze over AriseBank and its co-founders and appointed a receiver to immediately secure various cryptocurrencies including Bitcoin, Litecoin, Bitshares, Dogecoin, and BitUSD.

|| SEC Gunning A New Norm?

Earlier in January, the Texas Securities Board issued an emergency cease and desist against BitConnect for selling unlicensed securities. Bitconnect promised to deliver annualized returns of 100% or more despite providing no information on how it will make money for investors – including the algorithms behind the Trading Bot. Bitconnect was also accused of using online advertising to recruit "affiliates" that earned commissions for referrals that resulted in investments in BitConnect. The North Carolina Securities Division soon followed with a cease and desist letter of their own.

Recent SEC Statements

Date Notes
25/07/2017 Some tokens may be securities and are thus subject to the federal securities laws.
29/08/2017 Issued a warning about public companies making ICO claims and suspended trading of four companies.
26/09/2017 Announces creation of a Cyber Unit targeting cyber-related misconduct including ICOs.
29/09/2017 Charges ICOs REcoin and DRC with defrauding investors.
01/11/2017 Celebrity endoresments of ICOs might be unlawful without the proper disclosure.
04/12/2017 Emergency asset freeze to halt fraudulent ICO PlexCoin as Cyber Unit takes its first action.
11/12/2017 Calling a token a “utility” token or structuring it to provide some utility does not prevent the token from being a security.
30/01/2018 Attempting to conceal what we allege to be fraudulent securities offerings under the veneer of technological terms like ‘ICO’ or ‘cryptocurrency’ will not escape the Commission’s oversight or its efforts to protect investors.


Source: Diar


Subsequently, Bitconnect announced that it is shutting down due to “continuous bad press” surrounding the platform and continuous DDoS attacks. In December, price of BitConnect’s token traded at more than $400. Since then, its price has dropped to a little more than $5 where it is being traded now.

From recent actions by the SEC, it is clear that the regulatory bodies are paying closer attention to the cryptocurrency space. However, the SEC hasn’t taken action against projects that don’t clearly demonstrate that they are a scam. The mission of the SEC is to “protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation”.

Decentralized Exchanges Remain on Far Outskirts of Trading Volumes

While centralized cryptocurrency exchanges are prone to thefts, they provide a faster, more user-friendly experience. They are also fiat on and off ramps. A key element that decentralized exchanges cannot provide due to Anti-Money Laundering (AML) and Know-Your-Client (KYC) regulations. And while decentralized exchanges provide more control and security they continue to lack liquidity.


Last week’s CoinCheck exchange hack continued to highlight the security vulnerabilities with centralized exchanges. With cryptocurrency exchange thefts nearing $1Bn (Diar, 29 January) more new decentralized exchange projects are popping up. Most of the cryptocurrencies are built on the principle of decentralization, yet the vast majority is still traded on centralized exchanges that have been subject to internal or external thefts. The vulnerability, high regulatory risk and lack of transparency of centralized exchanges has fueled the developments of the decentralized exchanges (DEX).

Centralized exchanges currently act as an escrow as they control the users’ private keys. The transactions on the exchanges are processed off-chain. Decentralized exchanges only serve as Peer-to-Peer matchmakers where all orders are processed on-chain thus the exchanges never actually hold any funds in custody. This means that the risk of theft is shifted to the users and there is no single point of failure. However, the order books of DEX are still hosted on servers, which means that there is  the potential of denial-of-service (DDoS) attacks and potential overload.

Since the decentralized exchanges are only facilitators of orders, they are technically not required to comply with KYC/AML regulations like traditional exchanges. This means that most of the DEX allow to trade anonymously without disclosing any personal information. Less than 1% of cryptocurrency trades are facilitated on decentralized exchanges (see chart). 

A key barrier is that decentralized exchanges make it technically impossible to offer fiat on and off-ramps. If users were to trade cryptocurrency tokens in exchange for a fiat currency of more than $1,000, they would, by definition, be considered money transmitter subject to Money Services Business (MSB) compliance in the United States. Money transmitters require a licence to operate. If users can’t buy cryptocurrencies with fiat on DEX, they will have to purchase on a centralized exchange and then transfer their cryptocurrency on a decentralized exchange and trade there.

Top 10 Exchanges vs Decentralized Exchange 24h Volume


Source: Diar, CoinMarketCap, Bitcoinity


Bisq, which is one of the first decentralized exchanges, currently allows trading for fiat but its users are, by definition, considered money transmitters and Bisq’s daily volume is less than $40,000. Localbitcoins also allows trading with fiat but it states that it’s user’s responsibility to adhere to KYC/AML laws. Thus, the DEX that allow fiat trading are shifting the regulatory responsibility and compliance to its users.

And since DEX orders are processed on the blockchain, mostly on Ethereum, all orders are affected by the scalability problems. This means that the speed of fulfilling orders is affected by the current congestion of the underlying blockchain. Decentralized exchanges are also logically way more complicated to use thus less user-friendly, which could change when the projects mature. Lastly, since DEX are still not widely used, they are severely limited by liquidity. This is a problem that will take a long time to solve as large traders require liquidity levels that are sometimes hard to get even on centralized exchanges.

Currently, the risk of losing funds is perceived to be smaller than the inconvenience of trading on DEX. Decentralized exchanges are unlikely to replace the centralized exchanges that provide user-friendly fiat on and off ramps. But Decentralized exchanges do provide more control and potentially anonymity.

US Based Square Cash Opens Bitcoin Purchases – PayPal and Venmo contendor Square Cash announced that users will be able to purchase Bitcoin from their Cash App following trials that opened last November. An interesting feature in Cash is that it allows people to send others anonymously.
Russian Sberbank to Open Crypto Exchange – Russian state-owned giant Sberbank announced last week that they plan on opening a cryptocurrency exchange in Europe based out of Switzerland. But with a new Russian Legal Framework in place – will there be a need to move abroad?
Gab SEC Reg A+ ICO – A first of its kind, Gab, a social network has completed its filing with the SEC to kickoff their $10Mn ICO under the Jobs Act that allows for non-institutional investors to partake in the raise. Gab will be offering a 16.6% stake in the business making it a clear cut equity token.
Bank of Indonesia Announces Trial CBDC – The Bank of Indonesia has announced that they will begin trialling a Central Bank Digital Currency dubbed as the Digital Rupiah. The Ethereum based token will be aimed at servicing the tourism sector to rein-in any possible corruption.

Record USD Raise in ICO's In Jan-18 of $1.359Bn...


Source: TokenData.io, CoinMarketCap, Diar

...But ETH Raise on Decline Month-on-Month


Source: Diar

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