Kiffmeister’s #Fintech Daily Digest (12/31/2020)

The price of Bitcoin hit a new all-time high of $29,280.05 overnight (ET) before falling back to trade between $28,500 and $29,000 for most of the day. 

US exchanges are suspending or delisting XRP left and right

Binance.US and eToro are the latest platforms to suspend XRP trading in the U.S.. U.S. customers will not be able to trade XRP on eToro on January 3. Customers with existing trades at the time will have three weeks from that date to close all open positions. For Binance.US, the effective date of its XRP delisting is January 13. They join Coinbase and many other exchanges to halt XRP trading for American traders, plus Coinbase is the subject of a lawsuit from a disgruntled trader accusing the platform of knowingly selling XRP as an unlicensed security to its users. 

Chinese regulators probe Ant Group’s equity investments

The China Securities Regulatory Commission (CSRC) is reportedly reviewing equity investments held by Ant Group in dozens of companies, intensifying a crackdown on billionaire Jack Ma’s financial technology empire. Regulators are considering whether to instruct Ant to divest some of its investments, mainly in technology and fintech start-ups, if they violate any rules such as creating unfair competition in the market. 

Kiffmeister’s #Fintech Daily Digest (12/30/2020)

The price of bitcoin (BTC) set a new all-time high of $28,580 early this morning (ET). And Nouriel Roubini posted a cool graphic illustrating the circular Tether fiat scam that he believes feeds and manipulates Bitcoin. 

Japanese Internet Giant Licensed to Issue First JPY-Pegged Stablecoin in New York

The New York Department of Financial Services has issued a trust charter to GMO-Z.com Trust Company Inc., allowing it to issue, administer, and redeem Japanese yen and U.S. dollar-pegged stablecoins in New York. Including the charter granted to GMO, to date DFS has approved 27 charters and licenses for companies engaged in virtual currency business activity.  

Simplex Named Principal Member of Visa in Europe

Simplex, an EU-licensed financial institution that provides the fiat infrastructure for the cryptocurrency industry was approved for principal membership to the Visa network. Founded in 2014, Simplex processes credit card payments with a 100% zero chargeback guarantee. Simplex joins Coinbase in the ranks of crypto-native companies obtaining principal membership status. The exchange had previously achieved the same milestone in February 2020.  

Kiffmeister’s #Fintech Daily Digest (12/29/2020)

The price of XRP continued to plummet in the wake of the U.S. Securities Exchange Commission lawsuit alleging that Ripple sold over $1.3 billion of XRP through an unregistered, ongoing digital asset securities offering. When I posted this, XRP is off about 40% on the day at about $0.18, and off 75% from its recent (November 24) peak of about $0.72. Today’s down gap was fueled by the decisions by Coinbase and Crypto.com to delist and suspend trading of XRP, joining OKCoin.

2020: The year bitcoin went institutional

In 2020, bitcoin finally got the attention of institutional investors. The broad financial markets have been volatile amid the COVID-pandemic, but the central banks have intervened pushing monetary stimulus and governments have launched large fiscal stimulus packages. The backdrop of the intervention has been a sharp increase in M2 (+25%) and looming fears of inflation. This in turn brought institutional attention to Bitcoin, due to its store of value properties. The increased institutional presence is clear. Both in terms of esteemed investors publicly commenting on bitcoin allocations to hedge against inflation, but also in terms of market data, most notably the rise of CME’s Bitcoin futures. As of December 29th, CME is now the largest contributor to the open interest in the BTC futures market. (Click here for the Arcane Research report and a nice graphic illustrating all of this.) 

The Problem with Calling Bitcoin a “Ponzi Scheme

Neither “ponzi” nor “pyramid” are perfectly accurate descriptions for how crypto-asset systems like Bitcoin and Ethereum actually work. Ponzi schemes are usually administered by a central operator, and they fall apart when demands exceed deposits and the scheme promoter is unable to satisfy investor requests, causing a loss in confidence or a run which first ruins the scheme’s liquidity. In contrast, pyramid schemes are more decentralized in character. Each victim of the scheme, to recoup their funds, is required to become a principal in the scheme and recruit further victims, who then pay the principal and earlier principals above him. The Nakamoto Scheme is an automated hybrid of a Ponzi scheme and a pyramid scheme which has the strengths of both and (currently) the weaknesses of neither. 

Losing Contact: The Impact of Contactless Payments on Cash Usage

This study investigates whether contactless credit cards are an important contributor to the decline in cash transactions, based on Canadian panel data from 2010 to 2017. It shows that unobserved factors influence cash use, and these must be controlled for when estimating the impact of contactless credit cards on cash use. It also shows the different effects that contactless credit cards have on the choice to pay with cash (the extensive margin) and on how much cash is used (the intensive margin). The study finds that the use of contactless credit cards negatively influences how much cash is spent but not whether to pay in cash. Overall, the impact of contactless credit cards on the transactional demand for cash in Canada is small over the 2010–17 period, at about 3 percent. These results are in line with previous findings for Canada and elsewhere. 

Markets for Crypto Tokens, and Security under Proof of Stake

(Co-written by Christian Catalini, Chief Economist of Diem.) Cryptocurrency systems based on proof of stake (PoS) grant governance rights to the holders of currency tokens and therefore are vulnerable to attack by adversaries who buy tokens in order to gain control. To evaluate the robustness of PoS cryptocurrencies to such attacks, we model the market for tokens and determine how the cost of attacking the system depends on the level and shape of token supply and demand. We show that, contrary to popular belief, the appreciation of tokens in response to demand by attackers plays a small role in securing the system. In particular, stablecoins can be less vulnerable to attack than cryptocurrencies that are freely floating. Moreover, PoS cryptocurrencies that primarily function as mediums of exchange are vulnerable to attack if the velocity of money is high. 

Kiffmeister’s #Fintech Daily Digest (12/28/2020)

BlackRock Looking to Hire a VP-level Blockchain Lead

BlackRock Financial Management posted a job ad for a VP-level blockchain lead to create and implement strategies designed to drive demand for the firm’s offerings and enhance the value proposition to clients of the firm’s investments and technology offerings. The candidates must have experience in: articulating the technological foundations of blockchain technology  including cryptographic hash functions, distributed network consensus mechanisms, and public-private key cryptography; devising and articulating fundamental valuation methodologies for crypto-assets; evaluating game theory and decentralizing governance models associated with blockchain technology; and working with key drivers of blockchain networks’ design and their impact on the four key dimensions of blockchain performance including speed, scalability, privacy, and security.

Binance Launches European-Style Vanilla Bitcoin options contracts

Binance launched European-style “vanilla” Bitcoin options contracts. The options are priced and settled in Tether (USDT). American-style options contracts, which Binance launched in April 2020, allow traders to purchase the Bitcoin at any point up until the contract expires. European-style contracts can only be exercised on the expiration date. The term “vanilla” refers to how the contract arrangement is generally simple, in contrast with more “exotic” products. 

Kiffmeister’s #Fintech Daily Digest (12/27/2020)

Bitcoin price crashes by 6.5% in minutes after hitting $28.4K sell wall

Bitcoin (BTC) hit an all-time high of about $28,400 before running into heavy selling pressure and crashing to $26,500. Since then it’s been fluctuating around the $27,000 level.

Stablecoin Market Capitalization Continues to Increase

Stablecoin market capitalizations continue to increase (up 13% since December 1 at $28.0 billion). Almost all are USD-pegged, and Tether remains the dominant stablecoin ($20.8 billion), followed by USD Coin ($3.6 billion), DAI ($1.1 billion) and Binance USD ($0.9 billion). Number six is Empty SetDollar (ESD) one of the first algorithmic stablecoins to come to market. An algorithmic stablecoin adjusts its supply deterministically to maintain the peg to its price target (U.S. dollar in the case of ESD). ESD was launched in September 2020 and its market capitalization is currently $0.5 billion (up $0.4 billion since December 1).

Dynamic Set Dollar USD Stablecoin Has Fallen Off the Rails

The Dynamic Set Dollar (DSD), launched in November, is a fully decentralized stablecoin that unlike centralized coins, e.g. USDT, has no 1:1 backing through a centralized USD treasury. To be highly capital efficient it does not use any collateral, like the main competitors DAI or sUSD. The voluntary elastic supply mechanic is different from Ampleforth (AMPL) and Based (BASED). It is inspired by Empty Set Dollar (ESD), but is supposed to respond faster to market demand through more frequent epochs, extended supply caps, and a modified supply extension/contraction formula. However, it’s been having trouble sticking the peg as it recently traded down to 41 cents.

Forbes Cryptocurrency Awards 2020: The $3 Trillion Bitcoin Marketing Campaign

For the first time ever, Forbes published its Crypto Awards. Fed chairman Jerome Powell takes the honors as the crypto person of the year: In a pandemic year when the Fed printed so much stimulus money that the central bank saw its balance sheet nearly double in size, Forbes Awards judge Anthony Pompliano of Morgan Creek Digital credits Powell with running a “$3 trillion marketing campaign for bitcoin.” 

China Tells Ant to Return to Its Roots, Imposes Curbs

The People’s Bank of China ordered Ant Group to return to its roots as a provider of payments services, threatening to throttle growth in its most lucrative businesses of consumer loans and wealth management. The central bank summoned Ant executives over the weekend and told them to “rectify” the company’s lending, insurance and wealth management services. They also blasted Ant for sub-par corporate governance, disdain toward regulatory requirements, and engaging in regulatory arbitrage. The central bank said Ant used its dominance to exclude rivals, hurting the interests of its hundreds of millions of consumers. 

Why Exactly Does the World Need a Smart Banknote?

A smart banknote is a traditional banknote on a paper or polymer substrate that has the added ability to communicate with an electronic network. Like current banknotes, a smart banknote can work completely offline, without a network or electricity. It is denominated and has all the physical properties of a traditional banknote in size, feel, appearance, etc.  But, this hybrid banknote also bears a chip and electronic ink. These attributes allow the smart banknote to interface with an electronic network and record the value of the note (the result of the electronic transaction) on its surface, making this information visible offline.

A smart banknote could bridge the gap between a traditional banknote and a purely electronic currency. In some sense a smart banknote is like a digital currency cold wallet that would show the value it contains when offline. A smart banknote provides all the advantages of cash and all the advantages of digital currency in one device. The still many people who do not have the bank accounts and depend on cash for their daily transactions could periodically use a smart banknote’s electronic capabilities perhaps at a retailer or public kiosk. There are places and times when there is no internet access, or even electricity, rendering electronic money and payment methods useless. A smart banknote might fill the gap. https://www.franklinnoll.com/smart-notes

For more on smart banknotes, including a detailed white paper, check out Franklin Noll’s Smart Banknote Research Hub.

Kiffmeister’s #Fintech Daily Digest (12/26/2020)

Bitcoin Hits $25K for First Time Ever

Bitcoin blew through $25,000 and is pushing towards $26,000 driven by a Binance Futures short squeeze. Institutional investors are perceived to be driving this record-setting run. Among them: Anthony Scaramucci’s Skybridge Capital ($25 million in December); MassMutual ($100 million in December);  and Guggenheim (up to 10% of its $5 billion macro fund). 

Turkey to Pilot Digital Currency Next Year

Central Bank of the Republic of Turkey Governor Naci Ağbal reportedly told members of parliament on Friday that the country plans to pilot a central bank digital currency (CBDC) in the second half of 2021. In 2019 the Bank announced that it was starting up a CBDC research and development program, and it reportedly established the Directorate-General Financial Innovation in November 2020 to carry it out. Ağbal said that the conceptual phase of this project has been completed.  

China’s latest central bank digital currency pilot doubles down

China’s latest central bank digital currency (CBDC) pilot doubles down on the previous pilot, nudging merchants and consumers to embrace e-yuan. First the new system is easy to set up and use. Merchants simply download and app to their smartphones and connect the app to their bank accounts. Then they display a QR code that customers scan to make payments. Or, merchants can use point-of-sale machines that are updated to be compatible with the e-yuan. Either way, payments via e-yuan go directly into the merchant’s bank account without any fees nor commission, while WeChat Pay or Alipay charge a fee when withdrawing from the accounts. Also, payments can be made even without an internet connection. In addition, users are compelled to use the new currency because spending in e-yuan is connected with their social credit system scores. 

Kiffmeister’s #Fintech Daily Digest (12/25/2020)

The price of Bitcoin set a new all-time high of $24,667.63 although it has since drifted back to the low $24,000s. XRP was up about 50% from its Friday low of around $0.25, but it gave up most of those gains after Bitstamp announced that it would halt XRP trading of XRP due to the U.S. Securities and Exchange (SEC) lawsuit launched earlier in the week. Immediately after that it traded in the $0.30 area after hitting about $0.38 earlier in the morning (NY time). 

Historical Echoes: Santa Claus as Legal Tender

During the unregulated 19th century, a variety of U.S. banks issued their own holiday-themed currency. One popular figure featured on many bills was Santa Claus. These became very popular as keepsakes, because denominations were typically small. However, one motivation for the banks to release these and other collectible currencies was to dissuade people from redeeming the bills for their underlying gold value. Banks stopped releasing Santa Claus currency once the U.S. Treasury took over the production of legal tender. After that, these currencies became known as obsolete bank notes and lost all value outside of their worth as collectibles. 

SEC legal papers reveal R3-Ripple settlement was more than $240 million

In September 2016 Ripple and R3 entered into an agreement whereby R3 would promote Ripple to its consortium of banks in return for an option to buy 5 billion XRPs at $0.0085 until September 2019. In June 2017, Ripple tried to terminate the agreement on the basis that R3 had not upheld its side of the bargain. In September 2017, R3 sued Ripple to re-instated the option, when its value would have been about $1 billion. According to legal papers filed by the U.S. SEC in its lawsuit against Ripple, a September 2018 settlement reduced the option amount 1.04 billion XRP that R3 exercised in September 2019, when it was worth between $240 and $480 million. 

Six Firms Test Offline Retail Payment Services in the RBI Regulatory Sandbox

There are now six firms testing offline retail payment services in the Reserve Bank of India (RBI) regulatory sandbox.

Kiffmeister’s #Fintech Daily Digest (12/24/2020)

Bank of Canada is Hiring Cryptographers for its Central Bank Digital Currency Research

It’s looks like the Bank of Canada is super serious about developing *CBDc* (central bank digital *cash*) as well as CBDC (*currency*).  The Bank of Canada aims to design a CBDC with cash-like properties in digital form. While not aiming for cash-like anonymity, CBDC should be highly private yet meet the obligation to be compliant with anti-money laundering and other regulations. Regardless of their circumstances, CBDC should be usable by all Canadians, even by those without a bank account or access to a cellular phone, in remote communities not well served by cellular networks, and/or those with sensory, motor and cognitive impairments. And the CBDC should continue to work even during electrical power and network outages. 

U.S. Warns Crypto Stablecoins on Money Laundering, Risk Controls

The President’s Working Group on Financial Markets provided an initial assessment of key regulatory and supervisory considerations for participants in significant retail stablecoin arrangements with a U.S. nexus. Stablecoins should be designed to be resilient enough to handle large-scale redemptions, including ensuring a 1:1 reserve ratio and adequate financial resources to absorb losses and meet liquidity needs. Their backers should also be able to obtain and verify the identities of all parties conducting transactions, including those involving so-called unhosted wallets. 

MoneyGram Clarifies its Relationship with Ripple

It looks like Ripple’s much ballyhooed relationship with MoneyGram was just for show. “MoneyGram has had a commercial agreement with Ripple since June 2019; this agreement represents the use of Ripple’s foreign exchange (FX) blockchain trading platform (ODL) for the purchase or sale of four currencies. MoneyGram has continued to utilize its other traditional FX trading counterparties throughout the term of the agreement with Ripple, and is not dependent on the Ripple platform to accomplish its FX trading needs. As a reminder, MoneyGram does not utilize the ODL platform or RippleNet for direct transfers of consumer funds – digital or otherwise.” 

And a spokesperson for Coinbase said it is currently “considering [its] options” when asked how it will respond to the SEC lawsuit against Ripple. While some exchanges, market makers and funds have already begun delisting XRP or exiting positions and transactions with the cryptocurrency, it may not be a black-and-white question for larger exchanges like Coinbase. 

A storm is brewing between state regulators and the OCC over fintech licensing

The U.S. Conference of State Bank Supervisors (CSBS) filed a complaint in the U.S. District Court for the District of Columbia opposing the Office of the Comptroller of the Currency’s (OCC) creation of a new national bank charter for nonbank companies and its acceptance and impending approval of a charter application from Figure Technologies. The complaint asserts that by creating a national bank charter for nonbank companies, the OCC has gone far beyond the limited authority granted to it by Congress under the National Bank Act and other federal banking laws.   

Tokens and accounts in the context of digital currencies

This Fed paper reviews how the cryptocurrency community has approached the concepts of tokens and tokenization, and discusses “tokens” in the context of CBDC. By highlighting how the terms “tokens” and “accounts” are used by the cryptocurrency community and the central banking community, this note seeks to inventory the subtly and sometimes obviously different ways these common terms are being used by different people to reference different concepts. Misalignment of this ambiguous terminology could create issues for legal frameworks and oversight regimes for digital currencies and so-called tokenized financial markets. 

For Money Burners and Other Destroyers of Currency

I run into some very interesting people on Twitter. For example, in a discussion on cash-like features of CBDC I came across a group that advocates money burning as a kind of religious/sacrifice thing. They think it’s important that digital currency holders have the right to “burn” it. They even submitted an official response to this effect to the BoE CBDC consultation.  

Kiffmeister’s #Fintech Daily Digest (12/23/2020)

U.S. Securities and Exchange Commission Sues Ripple

The U.S. Securities and Exchange Commission (SEC) is suing Ripple over $1.3 billion of unregistered sales of XRP. The SEC alleges that Ripple failed to register its offers and sales of XRP or satisfy any exemption from registration as a securities offering. If the SEC proves that XRP is a security, U.S. exchanges that list XRP may have to register as securities exchanges. SEC officials have previously said that Bitcoin and Ethereum are not securities, because no person or company controls them. By contrast, 100 billion XRP were issued in 2012 to Ripple which has been selling them to the market in scheduled allotments.

According to CEO Garlinghouse, a securities designation by the SEC isn’t the end of the world for Ripple or XRP because more than 90% of RippleNet customers are outside of the United States. Nevertheless, such a designation would require that U.S-based investors complete broker-dealer registeration with the SEC in order to hold XRP, which is a possible hindrance to adoption. 

However, Messari’s Ryan Watson differs. “Many cryptocurrency exchanges would be forced to delist it, so liquidity would dry up, and XRP’s price would “crash hard” if the SEC proves in court that XRP is a security. Exchanges that continue listing XRP would run the risk of being asked to register as securities exchanges, or face penalties for allowing retail consumers to trade an unregistered security. 

In fact, three small exchanges have already de-listed XRP, and two large crypto-asset investment funds have liquidated their XRP holdings (Bitwise and reportedly Grayscale) as the price crashed.

The SEC shows some mercy to broker-dealers handling security tokens

The U.S. SEC also set forth for comments the circumstances under which broker-dealers can custody digital assets in compliance with Rule 15c3-3 and mitigate the risks of loss or theft. Rule 15c3-3 requires a broker-dealer to obtain and maintain physical possession or control of all fully-paid and excess margin securities it carries for the account of customers. The draft measures basically boil down to keeping security tokens the primary focus of the operation and doing due diligence in terms of cybersecurity and disclosures to clients, including making sure every potential customer is aware that the broker-dealer in question is handling digital asset securities. 

The Oyster Card & CBDCs

Can the London Underground Oyster Card help us sort out privacy issues with CBDCs? With it you need to register for an account, and all journey and transaction history is held for only 8 weeks. That’s so you can replace your lost card when needed and give the police and transit people the ability to track who was in a station to investigate crime, but just for a limited time. 

IOSCO publishes report on education of retail investors regarding risks of crypto-assets

The International Organization of Securities Commissions (IOSCO) published a report titled Investor Education on Crypto-Assets that seeks to help regulators inform retail investors about the risks and characteristics of crypto-assets. The risks include such things as lack of market liquidity, volatility, partial or total loss of the invested amount, insufficient information disclosure and fraud.

Kiffmeister’s #Fintech Daily Digest (12/22/2020)

The Coin Metrics State Of The Network 2020 Year In Review

Coin Metrics reviews crypto’s tumultuous 2020 run. In Q1 crypto markets showed  signs of becoming more intertwined with the external world as, for example, the correlation between bitcoin and the S&P 500 shot up to historic highs and crypto prices plummeted. In Q1 crypto markets bounced back as central bank money printing presses went into high gear and bitcoin underwent its third halving. Crypto markets continued to surge higher in Q3 on decentralized finance (DeFi) mania, and then Q4 brought increasing signs of a growing institutional investor base, as bitcoin’s price broke through to new record highs. 

Ripple to Face SEC Suit Over XRP Cryptocurrency

The U.S. Securities and Exchange Commission (SEC) intends to sue Ripple over its sale of XRP, with Ripple cofounder Chris Larsen and CEO Garlinghouse also named as defendants alongside the firm. The lawsuit revolves around whether XRP, a digital asset that the company launched in 2012, is actually a security that should have been registered with the SEC. In recent years, the SEC has ruled that Bitcoin and Ethereum are not securities, partly on the grounds they are decentralized with no person or company in control of them. By contrast, 100 billion units of XRP were issued in 2012 for Ripple Labs which has been selling them into the market in scheduled allotments.  

In its counter to the SEC lawsuit, Ripple alleges that Bitcoin and Ether are “two Chinese-controlled virtual currencies that the SEC has stated are not securities,” and that “innovation in the cryptocurrency industry will be fully ceded to China” should the potential lawsuit brought by the SEC be successful. 

In the past, Ripple Labs has claimed that XRP has nothing to do with Ripple Labs the company, that XRP pre-existed Ripple Labs the company and was gifted to it, and that the protocol that runs XRP is totally decentralized, à la Bitcoin. However, this blog comprehensively shows that this is untrue. 

Circle CEO: Treasury’s Crypto Wallet Rule is a Potential Next Level of Financial Surveillance Never Seen Before  

The Treasury’s proposed crypto-asset wallet rule takes financial surveillance to a level never seen before in America according to Circle CEO Jeremy Allaire. He says the new reporting requirements that include blockchain addresses, essentially give law enforcement a data feed that includes identity, blockchain addresses and the ability to monitor, in real-time, all of the that customer’s flows, without any consent.  

Coinbase Pre-IPO Tokens Pump to $296 After FTX Launch

FTX launched its Coinbase Pre-IPO tokens (CBSE) on December 22 as part of its Tokenized Stocks product line. Coinbase is currently valued at $8 billion, although the company itself has no actual shares on the market yet. The CBSE tokens will convert to the equivalent share prices at the end of Coinbase’s first day of public trading (market capitalization divided by 250 million – the total number of shares).  

Huobi Secures Nevada Trust Company License

Huobi Technology’s U.S. subsidiary, Huobi Trust Company, has gained a license from the Financial Institutions Division of the Department of Business and Industry in Nevada. It will enable Huobi to offer crypto-asset services in the United States. The company is expected to launch its custodial services in 2021.  

Reimagining identity ecosystems in Sub-Saharan Africa with mobile

This GSMA report explores the digital ID landscape in selected markets in Sub Saharan Africa, key actors, policy challenges and opportunities, and the potential role of mobile-enabled digital IDs in enhancing service delivery in a socially impactful manner. 

COVID-19 shows why we must build trust in digital financial services

According to this WEF report the pandemic has proved that digital financial inclusion is crucial – and that it cannot depend on cash-out services. Weak financial infrastructure makes digital transactions difficult – and people often mistrust digital financial services. Governments and financial institutions can earn that trust by building a resilient and inclusive financial system. 

Big Tech, Fintech, and the Future of Credit

In places where banks are not doing their jobs in allocating credit and not innovating, bigtechs face a huge opportunity. Their informational and network advantages allow them to make vast numbers of loans that boost access, productivity, and growth. Moreover, with low default rates, they can offer cheap credit and remain profitable. In advanced economies, where banks are producing and using information, as well as integrating new technologies into their businesses, the evolution of financial services providers could be very different. Big tech firms generally are still shying away from obtaining their own banking licenses. Instead, we see them creating partnerships in which banks exploit their expensive compliance systems and knowledge of regulation, while big tech firms provide the data and a flow of customers. Meanwhile, banks are investing in technology to provide additional services, as well as capture and process data.