Day: January 5, 2018

Yesterday, January 4, 2018, the three prominent figures of the U.S. Securities and Exchance Commission (SEC) endorsed the concerns raised in the North American Securities Administrators Association (NASAA)’s cautionary directive on cryptocurrencies, ICOs, and other “Cryptocurrency-Related Investment Products.” Jay Clayton, the Chair of the SEC; Michael Piwowar, the former acting Chair of the SEC; and Kara Stein, a prominent figure in the SEC and an author of the 2010 Dodd-Frank Act, joined NASAA, the association that is the voice of state securities agencies in the U.S.,  in urging “Main Street investors” to go beyond the headlines and hype to understand cryptocurrency investment risk.

While this is not the first SEC commentary we have seen on cryptocurrencies, this iteration of caution raises the imminent possibility of the SEC and NASAA intervention into the space, as the SEC-lauded directive showed that 94 percent of state and provincial securities regulators (or roughly 63 of the 67 securities regulators under NASAA) believe there is a “high risk of fraud” involving cryptocurrencies and that all of the securities regulators believe “more regulation is needed for cryptocurrency to provide greater investor protection.” 

Of note: Membership in NASAA not only comprises all 50 state securities regulators in the U.S. but also includes securities regulators in Canada and Mexico (as well as the U.S. Virgin Islands and Puerto Rico. According to Bob Webster, Director of Communications for NASAA, the survey referenced in the directive included NASAA members from the U.S., Mexico and Canada.

The SEC statement by the three most prominent figures in the organization called the NASAA release “a timely and thoughtful reminder,” reminding investors themselves that “when they are offered and sold securities, they are entitled to the benefits of state and federal securities laws.” From a legal standpoint, this comment implies that some or all cryptocurrencies, ICOs and other cryptocurrency-related investment products will be deemed by the SEC as “securities” and that those offering these products may be soon facing accusations of selling unregistered securities in violation of U.S. Securities Laws.

There is a possible point of disparity between the NASAA directive and the coinciding SEC statement: whether cryptocurrencies are “currency.” The usual definition for currency includes the requirements they serve as an accepted medium of exchange and can be a store of value for market participants.

NASAA’s directive states that, “Cryptocurrencies are a medium of exchange that are created and stored electronically in the blockchain, a distributed public database that keeps a permanent record of digital transactions” (emphasis added).

The SEC statement, however, has a slightly different interpretation of the NASAA Directive: that cryptocurrencies “lack many important characteristics of traditional currencies, including sovereign backing and responsibility.” The SEC went further, stating that cryptocurrencies “are now being promoted more as investment opportunities than efficient mediums for exchange.”

This view, unchecked, would allow the SEC to step in to regulate these “investment opportunities.” Whether there was a differing view the SEC wished to convey, or the statement was meant to convey support of the NASAA directive while opening the door for broader SEC intervention into the space, only time will tell.

One final note: FINRA, the non-profit organization authorized by Congress to be regulator in charge in the U.S. for oversight and enforcement actions against broker/dealers on behalf of investor protection, was noticeably silent in joining the SEC and NASAA in issuing a new statement (the previous two warned investors not to fall for cryptocurrency-related stock scams and gave a primer on ICOs).

FINRA Media Relations Specialist, Dylan Menguy, responded to inquiry on FINRA’s view of the statements by the SEC and NASAA by referring Bitcoin Magazine to this press release where FINRA warned investors of cryptocurrency-related stock scams.

NASAA’s Bob Webster clarified the survey inclusion as referenced above in the article, and, when asked about the potential disparity discussed above, stated, “…I don’t see a discrepancy between the two views.  Cryptocurrencies are a medium of exchange and they are being promoted as investment opportunities. For clarification on the SEC’s position, you should contact the SEC.”

At the time of this writing, the SEC has not responded to a request for comment.

In a report published on January 3, 2018, Royal Bank of Canada (RBC) Capital Markets analyst Mitch Steves confidently stated that the cryptocurrencies and blockchain technology applications market could increase thirteenfold in 15 years, reaching $10 trillion.

Steves’ report, titled “Crypto Currency & Blockchain Technology: A Decentralized Future — A Potential Multi-Trillion Dollar Opportunity,” has been sent to RBC’s clients. A short summary has been shared on Twitter.

In a video published by CNBC, Steves, who often covers high technology stocks including Nvidia, whose value has been boosted by cryptocurrency mining, defends his bullish expectations on blockchain technology and its applications. According to Steves, cryptocurrencies represent only a part of the $10 trillion pie, the bulk of which is in the rest of the ecosystem existing around blockchain technology and cryptocurrencies.

“I think what people misunderstand about the cryptocurrency space is that it’s not only a store of value, but it also allows you to secure the internet,” says Steves. Blockchain-based cryptocurrencies will permit creating decentralized versions of value storage services like Dropbox or iCloud. The $10 trillion figure represents one third of the current size of the market for value storage.

Steves argues that blockchain technology will permit creating a “Secure World Computer,” a decentralized world computer without a third-party intermediary, intrinsically more secure because there won’t be centralized servers that can be hacked, and suggests that next-generation killer apps will be built on top of this secure layer.

The smart move for investors, according to Steves, is to get involved with cryptocurrencies directly. As far as traditional stocks are concerned, Steves mentions public companies like AMS and Nvidia, whose chips power cryptocurrency mining hardware, and the private companies that make ASIC chips for bitcoin mining. At the same time, Steves warns that cloud service providers are likely to be the most impacted from blockchain technology, with negative results if they don’t manage to adapt.

According to Steves, the value of the blockchain technology market is also growing due to international remittances — the sending of payments overseas is currently estimated at half a trillion dollars per year — “fat protocol” layers that increase in value as the applications grow, and throughput scaling efforts, such as the Lightning Network, which “appear on track to deliver scaling that accommodates higher transactions/second, ultimately driving higher utility and network value.”

While warning that the cryptocurrency space has many risks, Steves argues that the opportunity appears vast, with constant technology updates, and a multi-trillion dollar market will likely emerge.

In a recent, related article published by the RBC, Frédérique Carrier, managing director and head of investment strategy for RBC Wealth Management in the British Isles, argued that, while cryptocurrencies are unlikely to replace traditional money, blockchain technology could have wide-ranging implications in many industries and for investors in the medium-to-long term.

The potential of blockchain technology “makes it a technology well worth watching closely, which we intend to do,” notes Carrier, adding that RBC is experimenting with blockchain technology in its personal, commercial and capital markets businesses. RBC recently announced the implementation of a blockchain-based shadow ledger for cross-border payments between the U.S. and Canada.

2017 has seen its spate of both good and bad stories for all sides of the cryptocurrency space. Whether you believe in dutch tulips or you worship at the altar of Satoshi Nakamoto, there were reaffirming and disheartening stories for evcxzxeryone. Below are five of the stories that darkened an otherwise positive year for the industry.

Segwit2x vs. #No2x

Bitcoin supporters and detractors alike acknowledged that scalability was an issue in the cryptocurrency. It triggered stakeholders in the currency and surrounding ecosystem to come together on May 23, 2017, and announce a scaling agreement before
the Consensus 2017 Meeting in New York  (sometimes called the “New York Agreement”). The agreement dictated parallel upgrades to the bitcoin protocol, activating a Segregated Witness at a 80% hash power threshold and activating a hard fork to
double the block weight limit within six months. Here’s some analysis on
the implication of the forks.

That hard fork, also referred to as Segwit2x, was meant to occur on November 16, 2017, but was cancelled on November 8, 2017. While the first half of the agreement was carried out successfully in August, support for Segwit2x fell through for a number of reasons.

Recently, there was a supposed “implementation” of
the now defunct Segwit2x fork, but the development team related to this new Segwit2x is unknown and there is no association to those that were behind the New York Agreement.

Ransomware Hacks Remind Public of Criminals’ Preference for Bitcoin

Although Ransomware hacks have been around for years, 2017 was particularly nasty (see our article here for
four things you should know about the viruses). In May, a ransomware called WannaCry shocked
the world by holding Microsoft computers hostage using an operating system exploit, encrypting the files on infected computers and demanding a $300 payment in bitcoin for their release. The hack had debilititating implications for users running
outdated Microsoft operating systems around the world, striking particularly hard at the United Kingdom’s government healthcare provider, the NHS.

The choice of payment in bitcoin seemingly caused a negative shock to the price.
Finally on August 3, 2017, the wallets belonging to the hackers were emptied. All
told, those responsible jettisoned $143,000 worth of bitcoin, leaving a much larger amount of damage in their wake.

This wasn’t the only major ransomware attack of the year of course: On June 27, 2017, one ransomware attack using a variant of the ransomware known as “Petya” took down computers in over 80 companies. Some notable victims of the attack included British Media Advertising Conglomerate WPP plc,
global law firm DLA Piper, international commercial shipping company Maersk,
pharmaceutical juggernaut Merck and FedEx.
While this ransomware attack also demanded $300 in bitcoin, they received far less than
the WannaCry hackers, roughly $10,000 USD (almost 4 BTC at the time of the attack). However, the damage done to the affected companies far outstripped the gains of the hackers, with Merck, Maersk and FedEx all announcing estimated
revenues lost due to the hack at $300 million for each company.

Bcash/BCH/Bitcoin… What’s in a Name?

The debate over Bitcoin Cash will likely be the most controversial topic covered in this
article. Roger Ver has been very vocal in promoting the idea that Bitcoin Cash is the real bitcoin. So does the subreddit /r/btc,
which he moderates. This forum is often at odds with /r/Bitcoin, and one needs to look no further than to these two
different trending posts on each forum, respectively, to see the animosity. Bitcoin Cash is the result of the August 1, 2017, SegWit fork, which allowed holders of BTC to inherit a second cryptocurrency that inherited
the transaction history of bitcoin on that date but allowed all future transactions to be separate.

The enthusiasm behind relative newcomer BCH is obvious as CoinMarketCap cites BCH as currently the fourth largest cryptocurrency by market capitalization, sometimes trending as high as 2nd.
While exchanges from Kraken to Bitfinex have adopted BCH into the fold, some, such as Coinbase, have been initially resistant to granting wallet users access to the BCH portion of the fork (Coinbase has since adopted BCH
onto its platform but not without the controversy discussed below).

Whether its advocates are right in the belief that BCH will supplant BTC or anti-BCH proponents are right that a usurper is not in the making, the drama and infighting show no signs of waning for these cryptocurrency stakeholders.

China’s Central Bank Bans ICOs

On September 4, 2017, the Chinese government’s central monetary authority, the People’s Bank of China (PBOC), said “so long” to ICOs.
In a statement released by the PBOC’s Chinese Insurance Regulatory Commission (CIRC), token sales in the country, “should
be stopped immediately,” noting that, “organizations and individuals that have completed the financing of tokens issuance should make arrangements such as clearance to reasonably protect the rights and interests of investors and properly handle
the risks.”

While China has, in the past, had tightly controlled potential exits
for capital leaving the country, ICO entrepreneurs remained optimistic as the country with the largest population of bitcoin
miners sought to crackdown on the new asset class.

Supporters of ICO offerings were dismayed as the world’s 2nd largest economy closed its doors to the new asset class, many cited the actions by the PBOC to be reasonable and
view the news as good for anti-scamming activities and also as temporary. This may be one of those short-term negative/long-term positive stories.

Exchange Woes Plague Coinbase, Bitfinex and Youbit.

Cryptocurrency exchanges found both great success and major setbacks in 2017. Among the setbacks:  

• In a Northern District of California Federal Court, Coinbase lost a court battle with the IRS which forced
  the company to disclose identifying records of all users who received more than $20,000 in a single year between 2013 and 2015. The November 28, 2017, loss signals a likely attempt by the IRS to collect data on unreported or undisclosed gains
  by U.S. taxpayers and may hint at heightened scrutiny of cryptocurrency investors’ reported returns in future years. Coinbase also closed the year on a sour note when the company disclosed it was investigating possible insider trading claims related to the company’s onboarding of Bitcoin Cash for use in its wallet and trading on its subsidiary platform, GDAX.
  
• Bitfinex also faced a rollercoaster year, recovering in early 2017 from a $72 million
  hack in August 2016. However, the exchange has since halted services to U.S. investors on November
  9, 2017, and come under scrutiny for its management of its Tether tokens. The company eventually lawyered up in early December to explore potential defamation lawsuits against its more vocal critics.
  
• South Korean Exchange Youbit shuttered its doors after a second
  successful hack in 2017 resulted in a loss of 17 percent of its assets. Other exchanges have survived successive hacks in a single year, but the Youbit closure shows that not all exchanges can recover.
  

These are a few of the dark spots on an otherwise remarkably positive year, so it’s important to keep in mind all the fantastic progress that has been made in the space. Check out our top “Good News” stories of 2017.