Month: January 2021

Kiffmeister’s #Fintech Daily Digest (01/31/2021)*

~ kiffmeister

Some big news. I’ve just launched an experimental Global Fintech Monthly Monitor that rolls up all of the news that I’ve been reporting here into a thematically organized summary. It and the new Global Fintech Intelligencer blog are still very much works in progress, they’re still a bit rough, and comments and suggestions will be greatly appreciated. Going forward I plan to post these monthlies there, plus long-form more analytic articles, written by me and others, so stay tuned!

Indian parliament to consider issuing central bank digital currency and banning private crypto-assets

On January 29, the Indian government announced that it will introduce The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, during the next session of the lower house of parliament (Lok Sabha). The Bill will “create a facilitative framework for creation of the official digital currency to be issued by the Reserve Bank of India. The Bill also seeks to prohibit all private cryptocurrencies in India, however, it allows for certain exceptions to promote the underlying technology of crytptocurrency and its uses.” 

Visa May Add Crypto-Assets to Its Payments Network, Says CEO

Visa CEO Al Kelly said his firm is in a position to make crypto-assets more “safe, useful and applicable” and may add them to its payments network. Speaking on the company’s fiscal first-quarter 2021 earnings call, Kelly described crypto-assets like bitcoin as “digital gold” which are “not used as a form of payment in a significant way at this point.” “Our strategy here is to work with wallets and exchanges to enable users to purchase these currencies using their Visa credentials or to cash out onto our Visa credential to make a fiat purchase at any of the 70 million merchants where Visa is accepted globally.”  

Ripple Responds to SEC in Court, Alludes to Bias in Ether Classification

Ripple introduced a detailed response that addressed allegations surrounding the U.S. Securities and Exchange Commission (SEC) lawsuit filed against the firm in December. It states that there is no significant differences between XRP’s function and that of Bitcoin and Ethereum. But, while the SEC recognized the two most popular digital currencies as non-securities, the agency turned around and said the opposite was true for its own token. Ripple has also filed a Freedom of Information request with the SEC, asking the agency to explain why it said ETH was born a security, but eventually evolved into a non-security. 

* The views expressed herein are those of the author and should not be attributed to the International Monetary Fund, its Executive Board or its management.

Kiffmeister’s #Fintech Daily Digest (01/30/2021)*

~ kiffmeister

Is XRP having a GameStop moment? It’s currently up about 45% to $0.41! And decentralized exchanges (DEXs) are on track to facilitate $56 billion in monthly volume – more than 2x the previous record: 

This Crypto Exchange Is Listing Every Stock Booted From Robinhood

Seattle-based Bittrex today launched tokenized stocks for GameStop and other companies that have been booted off Robinhood. The listings include AMC Entertainment, Nokia, BlackBerry, Nokia Corporation, and iShares Silver Trust—all companies which are being eyed-up by internet traders who want to give the finger to Wall Street. And Bittrex isn’t the only exchange capitalizing on the restrictions: FTX announced today that it was listing a WallStreetBets (WSB) index quarterly futures contract in light of Robinhood’s move. And on Thursday it made GameStop’s stock for tokenized futures and spot trading.

CipherTrace: Majority of 2020’s crypto thefts occurred in the DeFi space

Volume on decentralized finance (DeFi) platforms was at an all-time high in 2020 — and so were the number of attacks and thefts in that arena, according to blockchain analysis firm CipherTrace’s Crime Report. Over 50% of crypto thefts in 2020 stemmed from DeFi attacks, adding up to $129 million. That’s more than 25% of the year’s total volume from hacks and other incidents. 

Security and Convenience of Digital Currencies

Digital currencies store balances in anonymous electronic addresses. This Bank of Canada paper analyzes the trade-offs between the safety and convenience of aggregating balances in addresses, electronic wallets and banks. In its model, agents balance the risk of theft of a large account with the cost of safeguarding a large number of passwords for many small accounts. Account custodians (banks, wallets and other payment service providers) have different objectives and trade-offs along these dimensions. It analyzes the welfare effects of differing industry structures and interdependencies. In particular, it examines the consequences of “password aggregation” programs, which, in effect, consolidate risks across accounts. 

Ripple Responds to SEC in Court, Alludes to Bias in Ether Classification

Ripple introduced a detailed response that addressed allegations surrounding the U.S. Securities and Exchange Commission (SEC) lawsuit filed against the firm in December. It states that there is no significant differences between XRP’s function and that of Bitcoin and Ethereum. But, while the SEC recognized the two most popular digital currencies as non-securities, the agency turned around and said the opposite was true for its own token. Ripple has also filed a Freedom of Information request with the SEC, asking the agency to explain why it said ETH was born a security, but eventually evolved into a non-security. 

* The views expressed herein are those of the author and should not be attributed to the International Monetary Fund, its Executive Board or its management.

Kiffmeister’s #Fintech Daily Digest (01/29/2021)*

~ kiffmeister

Diem Scam Alert

Bitcoin.com, usually a reliable news source, posted a story about Diem offering a pre-sale discount for early investors at projectdiem.io. It claimed that now everyone “can participate in the birth of diem and be one of the first buyers. Buy diem coins now with cryptocurrencies like bitcoin, ethereum, and bitcoin cash.” And if you follow the link and sign up, this is what you will see. Looks pretty good, eh! But it’s a scam. Don’t go there!

Grayscale is buying BTC 54% faster than it is mined so far in 2021

Grayscale bought 40,000 Bitcoin (BTC) between January 13 and 29, around $1.36 billion worth in 16 days according to Glassnode. That compares to 26,000 BTC that have been mined into existence since the start of the year. 

* The views expressed herein are those of the author and should not be attributed to the International Monetary Fund, its Executive Board or its management.

Kiffmeister’s #Fintech Daily Digest (01/28/2021)*

~ kiffmeister

Grayscale has incorporated six more trusts

Grayscale has incorporated six more trusts, tied to Polkadot (DOT), Aave (AAVE), Monero (XMR), Cardano (ADA), Cosmos (ATOM), and EOS.IO (EOS). All the six trusts were formed Wednesday by Delaware Trust Company, Grayscale’s “statutory trustee.” The new trust formations come a week after Grayscale incorporated six more trusts, including for Chainlink (LINK) and Tezos (XTZ) tokens. However, trust formations do not mean the firm will launch these products.

Binance survey finds that ‘hodlers’ still dominate crypto

Most crypto-asset users prefer to hold their crypto as part of a long-term investment strategy, according to a Binance Research global survey (61,000 crypto users across 178 countries and regions from September 15 to October 25, 2020. 39% of respondents stated that their “usage” of crypto is dominated by hodling, 28% prefer to use most of their crypto for buying other cryptos, and 22% said that they mainly use their crypto for staking and lending. The remaining 11% said that they mainly use their digital coins for payments.  

Facebook’s Diem Testnet Hits 50 Million Transactions

The testnet for Diem reached over 50 million transactions on January 27, data from blockchain explorer inDiem shows. It operates at an average throughput of over 3 transactions per second (tps). While sounding fast, this is much slower than transactions on both Bitcoin (4.6 tps) and Ethereum (15 tps), and much slower to the speeds on upcoming networks like Solana (65,000 tps). In terms of testnet users, over 221,000 individual addresses have interacted with Diem in some capacity. 

The Tokenization of Assets and Potential Implications for Financial Markets

The OECD published a paper on asset tokenization; the digital representation of real (physical) assets on distributed ledgers, or the issuance of traditional asset classes in tokenized form. It examines the benefits of tokenization and the challenges to its wider adoption, and the potential disruptive effect on trading, liquidity, pricing, clearing and settlement. It also highlights the increased importance of a trusted and credible central authority in a tokenized environment (such as a custodian), and sheds light to the possible necessity for a tokenized form of central bank digital currency or stablecoin for the payment leg of security settlement on DLT-based trading venues. 

* The views expressed herein are those of the author and should not be attributed to the International Monetary Fund, its Executive Board or its management.

Kiffmeister’s #Fintech Daily Digest (01/27b/2021)*

~ kiffmeister

I’ve dashed off quick summaries of a triplet of late breaking central bank digital currency-related papers/speeches from the Bank for International Settlements:

Third BIS annual survey on central bank digital currency

Most central banks are exploring central bank digital currency (CBDC) according to the third annual Bank for International Settlements (BIS) survey. Central banks are progressing from conceptual research to practical experimentation, but most have no plans to issue CBDCs in the foreseeable future. However, central banks collectively representing a fifth of the world’s population are likely to launch retail CBDCs in the next three years.

86% of the 65 central banks surveyed said they were at least considering the pros and cons of issuing CBDC (up from 80% last year). 60% of them are now conducting experiments or proof of concepts (versus 42%), while 14% are moving forward to development and pilots. Emerging market central banks are leading the way, citing financial inclusion and payments efficiency as top motivating forces. They’re also participating in higher numbers: seven out of eight CBDC projects are in emerging markets. 

Digital currencies and the future of the monetary system

BIS General Manager Agustín Carstens argues that CBDC will incorporate some element of identification, most likely with primarily account-based access. He believes that some form of identification is crucial for the safety of the payment system, preventing fraud, and supporting anti-money laundering and combating the financing of terrorism (AML/CFT). There are trade-offs between access and traceability. Socially, there are many benefits to having more information, for example to prevent money laundering or tax evasion. Good identification can help here, giving law enforcement authorities new tools to fulfil their mandate. He concludes that a purely anonymous system will not work, and the vast majority of users would accept for basic information to be kept with a trusted institution – be that their bank or public authorities. 

Permissioned distributed ledgers and the governance of money

A BIS paper explores the economics and optimal design of “permissioned” distributed ledger technology (DLT) in a credit economy. Designated validators verify transactions and update the ledger at a cost that is derived from a supermajority voting rule, thus giving rise to a public good provision game. Without giving proper incentives to validators, however, their records cannot be trusted because they cannot commit to verifying trades and they can accept bribes to incorrectly validate histories. Both frictions challenge the integrity of the ledger on which credit transactions rely. In this context, the examines the conditions under which the process of permissioned validation supports decentralized exchange as an equilibrium, and analyze the optimal design of the trade and validation mechanisms. It solves for the optimal fees, number of validators, supermajority threshold and transaction size. A stronger consensus mechanism requires higher rents be paid to validators. The results suggest that a centralized ledger is likely to be superior, unless weaknesses in the rule of law and contract enforcement necessitate a decentralized ledger. 

* The views expressed herein are those of the author and should not be attributed to the International Monetary Fund, its Executive Board or its management.

Kiffmeister’s #Fintech Daily Digest (01/27a/2021)*

~ kiffmeister

Bitcoin Investment Fund Inflows Hit New Highs: CoinShares

According to Coinshares inflows into crypto investment funds (like Grayscale, 3iQ, and 21Shares) last week reached $1.3 billion — a new weekly high. Grayscale is number with over $26 billion in assets under management, about $21.6 billion in the Grayscale Bitcoin Trust (GBTC). 

JPMorgan Chase to Launch U.K. Digital Consumer Bank

JP Morgan is launching a digital bank to offer consumer banking services in the United Kingdom, and has already hired 400 people. It enters a crowded digital marketplace in the U.K. for consumer banking. The market has flourished as regulators encouraged new startups, including Starling Bank Ltd. and Monzo Bank Ltd. JP Morgan previously tried to launch a digital bank in U.S. cities and markets where it didn’t have Chase branches, but closed the product, called Finn, in June 2019 after slow pickup. 

TransferWise taps new Visa cloud tech for global card programme

TransferWise is the first firm to pilot the Visa Cloud Connect platform, which provides a secure cloud-based connection to VisaNet, including a unified certification and testing framework, Visa-hosted security services such as transaction encryption and PIN key management, and simplified settlement in local markets. This will enable TransferWise to expand its debit card program that accompanies its multi-currency account. 

* The views expressed herein are those of the author and should not be attributed to the International Monetary Fund, its Executive Board or its management.

Kiffmeister’s #Fintech Daily Digest (01/26/2021)*

~ kiffmeister

I’ve updated my retail central bank digital currency (CBDC) tabulation with the latest from the Reserve Bank of India, and some tidying up of links here and there. 

Signal Is Experimenting With Stellar-Based Cryptocurrency

Messaging app Signal, which now has around 40 million users, is reportedly exploring the addition of payments into the app. Significant engineering resources have reportedly been devoted to integrating privacy-focused Stellar blockchain-based payment platform MobileCoin into Signal. Adding credence to this story is that Signal CEO Moxie Marlinspike serves as a technical adviser to MobileCoin, although he played it down, saying that the company had only done some “design explorations” around the idea.

FinCEN Further Extends Comment Period for Unhosted Wallet Crypto Rules

The U.S. Financial Crimes Enforcement Network (FinCEN) is extending the comment period for its recent proposed rulemaking regarding certain crypto-asset transactions. The proposed rule would impose new know-your-customer requirements on crypto-asset transfers to personal (“unhosted”) wallets. Users would have to provide detailed personal information for transactions greater than $3,000, and exchanges would be required to report either individual or groups of transactions that add up to more than $10,000 during a day to FinCEN. The deadline has now been extended to 60 days. 

Crypto Hedge Funds Underperformed Bitcoin During Rally Last Year

Actively managed cryptocurrency hedge-funds underperformed Bitcoin during the largest digital asset’s bull run last year, according to Crypto Fund Research. The funds’ average rate of return was 166%, compared with a more than 300% increase in Bitcoin. While the funds as a whole significantly underperformed, a few breakout managers that made long bets and invested in decentralized-finance projects exceeded the average. 

Bahrain Issues First Shariah-Compliant Crypto Exchange License to CoinMENA

CoinMENA, a Bahrain-based soon-to-launch cryptocurrency exchange, reportedly acquired a crypto-assets services company license from the Central Bank of Bahrain. The exchange is certified by the Shariyah Review Bureau.  

Filipino Central Bank Mandates Crypto Company Licensing

The Bangko Sentral ng Pilipinas (BSP) released new guidelines for the virtual asset service providers (VASPs) operating in the country, imposing many new restrictions and mandating licenses for operations. The new framework aims to curb money laundering and terror financing using digital currencies. The document highlighted that the regulations are in line with the recommendations of the Financial Action Task Force (FATF).  

Why Polkadot is the Future of DeFi

The sudden growth of DeFi on Ethereum has pushed the blockchain to its limits, leading to transaction delays and inordinately high fees — making many Ethereum DeFi platforms simply unusable to regular users. As a result, many developers are opting to build their DeFi applications on other Platforms such as Polkadot. Polkadot is highly interoperable other blockchains (including Ethereum). Also, Polkadot has a block time of just six seconds and most transactions are considered final after less than a minute, and it can currently handle more than 1,000 transactions per second (tps). 

* The views expressed herein are those of the author and should not be attributed to the International Monetary Fund, its Executive Board or its management.

Kiffmeister’s #Fintech Daily Digest (01/25/2021)*

~ kiffmeister

RBI releases Booklet on Payment Systems in India

According to the Reserve Bank of India’s “Payment Systems in India — Journey in the Second Decade of the Millennium” it is exploring the possibility as to whether there is a need for a digital version of fiat currency and in case there is, then how to operationalize it. 

Chengdu is said to give away 50 million digital yuan in latest CBDC test

Chengdu is reportedly the next place to roll out another city-wide test of China’s central bank digital currency (CBDC). The local government will give away 30 million digital yuan and JD.com will give away another 20 million that can be spent on online shopping. The free digital yuan will be issued via a lottery, which is the same with what the Shenzhen and Suzhou have done in previous tests since last October. The lottery is expected to start on January 27 while lottery-winners will be able to spend the free digital yuan in local merchants from February 4 to February 26 throughout the Lunar New Year festival.  

Chinese Blockchain Service Network set to onboard ConsenSys’ Quorum

Ethereum studio ConsenSys will integrate Quorum into the China state-sanctioned Blockchain Service Network (BSN). The BSN is a service infrastructure that allows developers to build decentralized applications on top of blockchains that it supports, like Hyperledger Fabric, Ethereum, and Polkadot. It is backed by the State Information Center of China, a think tank under the country’s cabinet-level economic planning agency, the National Development and Reform Commission. Beijing-based Red Date Technology oversees the operations and development of the platform. 

USDT Transactions on Tron Surpassed Ethereum Tether Transactions Every Day in 2021

Tether (USDT) transactions on the Tron network have outpaced the number of USDT transfers on the Ethereum blockchain. Despite a lot more ERC20-based USDT in the wild, USDT transaction counts using the TRC20 standard have been much higher all year long, likely due to rising ETH network fees. Fees on the Tron network are near zero, whereas ETH transaction fees can exceed $5. However, the aggregated dollar volumes of ERC20 USDT is still 2x higher than those using TRC20. USDT is also issued on Ethereum, Tron, Bitcoin Cash, EOS, Liquid, Solana, and Algorand, among others. 

Collateralized Debt Obligations Make Their Way Into DeFi Lending

Opium Finance has released collateralized debt obligation products (CDOs) for Compound Finance’s automated lending markets. Opium is a decentralized finance (DeFi) protocol that allows for creating, settling, and trading decentralized derivatives. Compound Finance is an algorithmic, autonomous interest rate DeFi protocol that allows for the creation of money markets on the Ethereum blockchain. Investors can put up the Compound debt token cDai – and soon Uniswap tokens – to diversify exposure to DeFi lending markets. Opium’s product pays out structured returns to both a senior and junior risk tranche in exchange. The former tranche offers a 7% fixed return on DAI (a crypto-backed USD-pegged stablecoin) at maturity, while the latter pool offers a variable rate paid out after filling up the senior tranche’s return.   

A Record Pace for SPACs

Special Purpose Acquisition Companies (SPACs) are shell companies that raise capital in order to search for a private company that it will bring public in the future. Although SPACs have been growing over the past five years, last year they represented nearly 50% of all capital raised by operating companies, with more than $70 billion in proceeds raised. Because SPACs are typically smaller than operating companies, they accounted for more than half of all new listings in 2020. 

This paper analyzes the structure of SPACs and the costs built into their structure. It finds that costs built into the SPAC structure are subtle, opaque, and far higher than has been previously recognized. Although SPACs raise $10 per share from investors in their IPOs, by the time the median SPAC merges with a target, it holds just $6.67 in cash for each outstanding share. For a large majority of SPACs, post-merger share prices fall, and these price drops are highly correlated with the extent of dilution, or cash shortfall, in a SPAC. This implies that SPAC investors are bearing the cost of the dilution built into the SPAC structure, and in effect subsidizing the companies they bring public. 

* The views expressed herein are those of the author and should not be attributed to the International Monetary Fund, its Executive Board or its management.

Kiffmeister’s #Fintech Daily Digest (01/24/2021)*

~ kiffmeister ~ 2 Comments

Valkyrie Digital Assets Files for Bitcoin ETF

Valkyrie Digital Assets filed an application with the U.S. Securities and Exchange Commission (SEC) on January 22 for a bitcoin exchange-traded fund (ETF), the second such filing in the last 30 days. At the end of December 2020, VanEck re-submitted an application to the SEC for a VanEck Bitcoin Trust ETF. Over the years the SEC has rejected bitcoin ETF proposals due to market integrity concerns. Now, with a new administration causing a changing of the guard at the SEC, it is widely hoped by crypto advocates that such an ETF will be approved in 2021.

Brixton Pound Team Selects Algorand Blockchain to Launch it’s Tokenized Version

Brixton Pound (B£), a local currency used in the Brixton district of London, has selected the Algorand blockchain platform to launch the blockchain-version of the “complementary” currency. B£ is only accepted by merchants the Brixton area of London and it is 1:1 pegged and backed by British pound sterling (GBP). The sterling goes into the Brixton Credit Union, and because the B£ organization isn’t making loans, the U.K. Financial Conduct Authority apparently treats the currency as a voucher scheme and thus it avoids being regulated as a deposit-taking financial institution.

The B£ is one of several community currencies that currently run in the UK. Other community currencies operating in the UK include Bristol, Cardiff, Cornwall, Exeter, Kingston, Lewes, Liverpool, Plymouth, Stroud, Totnes, and Worcester. The B£ is strangely devoid of any details about how the scheme is run; the Bristol Pound website has way more detail about how it works.  For example, only Trader Members can present Bristol Pounds for exchange back into sterling. Each Bristol Pound is backed by a sterling pound except where Paper Bristol Pounds have been sold outside the area to collectors as souvenirs. 

Kiffmeister’s #Fintech Daily Digest (01/23/2021)*

~ kiffmeister ~ 2 Comments

eCurrency and Crunchfish are partnering to offer an offline CBDC solution

eCurrency and Crunchfish are partnering to offer an offline central bank digital currency (CBDC) solution. The eCurrency retail CBDC platform enables central banks to issue  secure digital bearer instruments utilizing the Digital Symmetric Core Currency Cryptography (DSC3) technology and supporting tiered distribution through existing banking and fintech ecosystems. Crunchfish offers digital cash solutions where payments can be made completely offline without compromising personal privacy.  

Crunchfish’s Digital Cash Solutions are built on two-tier offline vs. online settlement architecture. The heart of the solution is an offline wallet that may either use the secure element provided by the mobile OS or run as a trusted applications in V-OS virtual secure element. The offline wallet securely maintains an offline balance that is utilised for offline transactions. The transactions are cryptographically signed by the payer, assigned to the payee and guaranteed as they are debited against the offline balance. The payee verifies the guaranteed offline payments in an application running on a mobile, card terminal or personal computer. Transaction logs are settled when either party goes online.

I highlight that last bit because the Crunchfish solution isn’t what I have in mind when I think about offline payment systems. What I have in mind is a stored value platform that would take the form of a card or a device on which prepaid values are stored locally and transferred peer-to-peer without ever having to be online. Such a platform would be of interest for countries or regions where large population segments are excluded from the formal financial sector or internet access. The concept is technically quite feasible – WhisperCash already offers such a credit card-sized device.

Attempts to implement such systems during the 1990s via rechargeable smart cards like MintChip, Mondex and VisaCash failed to develop enough customer acceptance to become viable (see Matonis, 2012 and Bátiz-Lazo and Moretta, 2016). Also, at the time, computer scientists argued that such smartcards could never be strong enough to support existing  currency schemes (Stalder, 2002). However, rapid technological progress since then is likely to have addressed some of these security concerns, such as the complex offline capable dynamic data authentication/combined dynamic data authentication security features for stored value cards.

In fact, the Bank of Canada is exploring such a custom universal access device (UAD) to securely store and transfer CBDC. Such a device would be manufactured at a low cost and issued by the Bank to ensure maximum inclusion, and be network-independent and operate for long periods on a local power source. If there is an infrastructure failure, a UAD may prevent the interruption of digital transactions.

Premium on Grayscale’s GBTC Drops

Following the recent bitcoin price pullback, the latest Skew data now indicates that the premium rate on Grayscale’s GBTC is under 10%. Institutional and accredited investors who placed an arbitrage trade on the premium (short the underlying bitcoin and buy GBTC) having to close out their positions (buyback bitcoin and sell GBTC) causing downwards pressure on the premium. Also, retail demand may be leveling off after the recent bitcoin dip, and competition is increasing (e.g., 3iq and Osprey’s Bitcoin Trust). 

Analysts warn of ‘institutional exhaustion’ with Bitcoin price back below $32K

Analysts at QCP Capital, a team of traders in Asia, see several signs of “institutional exhaustion.” They did a timezone analysis which broke down BTC moves into Asia hours vs. US hours (12 hours each). Since March last year, the clear pattern has been relentless US buying while Asian whales and miners have been on the offer. 

* The views expressed herein are those of the author and should not be attributed to the International Monetary Fund, its Executive Board or its management.