Month: February 2021

Kiffmeister’s #Fintech Daily Digest (02/20/2021)*

~ kiffmeister

Non-technical analogy to explain the security and resilience of an ideal offline token-based CBDC

WhisperCash‘s Razvan Dragomirescu provided this great Twitter thread to push back on claim of the recent Riksbank staff memo that, in order for a central bank digital currency (CBDC) to be cash-like, it would require verification by a remote ledger in order to avoid double spending. It dismissed the possibility of using local devices that cannot be tampered with and programmed so that a token cannot be spent more than once, claiming that such 100% tamper-proof devices do not exist. And here’s Razvan (slightly edited by me):

A purely offline CBDC would not come without rules. They would be enforced by a trusted agent of the central bank, in the form of software running inside a TEE or secure element. These would include rate limits on transactions, maximum balances, unique keys per card, etc. In the event of a complete compromise of one card (however unlikely or expensive), the attacker can theoretically mint or double spend any amount. However, she cannot force other legitimate users to bypass the issuer rules on their cards.

For instance, a per-transaction limit of EUR 500 means she can only spend it in increments of EUR 500. A maximum limit of 10 transactions per day or 3 transactions from the same user per day means she can only spend the newfound fortune slowly and in small denominations. You can double spend but you cannot impersonate another user, so you have to use your real (KYC-ed) identity when paying. Maximum balances and maximum offline transaction values mean high value items cannot be bought/sold this way.

It would be like counterfeiting quarters to try and buy a Lamborghini, or buying $10 worth of grocery at the checkout counter by minting a thousand counterfeit pennies one by one. It would be hard to pay for anything meaningful (fast enough to avoid detection), hard to carry in large enough volumes and can still put you in jail for currency counterfeiting if caught. This is better than counterfeit physical cash that can be spent in any volume, to anyone and leaves no trace.

A Third Bitcoin ETF Takes Aim at North American Market

CI Global Asset Manager filed a preliminary prospectus for its CI Galaxy Bitcoin ETF Bitcoin exchange-traded fund (ETF) with the Ontario Securities Commission. The ETF, if approved, would be Canada’s third after Evolve and Purpose launched their own this week. Purpose’s ETF launched yesterday on the Toronto Stock Exchange.  

What Is a Non-Fungible Token (NFT)?

“A NFT (non-fungible token) is a special cryptographically-generated token that uses blockchain technology to link with a unique digital asset that cannot be replicated. Non-fungible tokens differ from popular cryptocurrencies such as Ether (ETH), Bitcoin (BTC) and Monero (XMR), which are fungible; for example, you can exchange one Bitcoin for any other Bitcoin. Although the usage of NFTs has spread in various industries, they’re synonymously associated with the gaming and digital collectibles sectors and are most commonly found as a specific Ethereum token built on the ERC-721 standard. However, in 2021, their use is starting to spread to other blockchains like Binance Smart Chain’s BEP-721 protocol.” 

* 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 (02/19/2021)*

~ kiffmeister

Crypto markets continue to surge ahead with Bitcoin hitting new all-time highs ($54,828 so far today) and its total market capitalization spiked through the $1 trillion level!

Bermuda to Pilot Digital Dollar for Rum Sales

Canadian fintech firm Bidali has reportedly launched a pilot to test a digital Bermuda dollar with the support of the Bermuda government. Under the pilot program, popular local rum company Gosling’s Limited will be accepting digital Bermuda dollars through the Stellar network. From there it hopes to expand to other businesses in Bermuda. Bermuda is a British island territory that does not have a central bank and the Bermuda dollar is pegged one-to-one to the U.S. dollar – it’s effectively a non-digital government-issued stablecoin with one USD in reserve for every Bermuda Dollar that’s issued. Also, since 2019, Bermudans have been able to pay taxes with USDC stablecoins. 
DeFi Money Market (DMM), one of the earliest projects aiming to bring real-world assets on-chain, has ceased operations as a result of U.S. Securities and Exchange Commission (SEC) inquiries. Users deposit DAI, USDC, USDT, or ETH to the DMM smart contract in exchange for DMM mTokens that offered over 6% interest rates on the real-world car loans that backed them. DMM runs off a custom-built Chainlink oracle. The SEC subpoena requested information about the mTokens, the DMG governance tokens, and other details surrounding DMM’s operations and governance.     
According to David Gerard (Mr. “Attack of the 50 Foot Blockchain“) “the obvious comparison is when the SEC first started noticing that ICOs were unregistered offerings of securities, in late 2017 — in particular, the administrative order against Munchee in November 2017.” And we all know what happened to ICOs… 
And speaking of David Gerard, this post on 19th century stablecoins is pretty cool! “The U.S. wildcat banking era, more politely called the “free banking era,” ran from 1837 to 1863. Banks at this time were free of federal regulation — they could launch just under state regulation. Under the gold standard in operation at the time, these state banks could issue notes, backed by specie — gold or silver — held in reserve. The quality of these reserves could be a matter of some dispute. The wildcat banks didn’t work out so well. The National Bank Act was passed in 1863, establishing the United States National Banking System and the Office of the Comptroller of the Currency — and taking away the power of state banks to issue paper notes.” Read on here for more fascinating details!

Purpose Bitcoin ETF, North America’s first Bitcoin exchange-traded fund (ETF), got off to a stellar start in its debut on the Toronto Stock Exchange, with investors exchanging $165 million worth of shares. “The U.S. currently has several active filings for a Bitcoin ETF, including the ones from VanEck Associates and Bitwise Asset Management, but the price swings notorious in cryptocurrenies and allegations of industry manipulation remain hurdles to regulator approval.” 
* 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.

The Best of the Centralized and Decentralized Worlds

~ kiffmeister ~ 2 Comments

There is a perception that decentralized finance (DeFi) and central banks are worlds apart. However, these two worlds should explore common ground that can unlock the best possible solution for the end-consumer – the transparency and efficiency of the DeFi space paired with safe and reliable liquidity and reduced compliance burden provided by central banks. After all, it should be about working towards one common goal – to provide the safest, most efficient, and reliable user experience in payments.

A lot of existing and prospective initiatives are looking into enabling faster, cheaper, more transparent and more inclusive cross-border payment services, while maintaining their safety and security. Improved cross-border payments translate into widespread benefits such as supporting economic growth, international trade, global development and financial inclusion. Cross-border payments are particularly relevant for emerging and developing economies given the central role of remittances and the large number of unbanked citizens in these countries.

The emergence of distributed ledger technology (DLT) has added new momentum to efforts to improve cross-border payments initiated both by the private and public sector. While the private sector has focused on developing decentralized peer-to-peer (P2P) solutions in the retail domain, the public sector has aimed at enabling direct exchanges between participating financial institutions through centrally operated DLT-based networks in the wholesale domain.

For the private sector, the use of DLT eliminates the need for trusted third parties and intermediaries like commercial banks for processing, clearing and settlement. DLT has spurred the growth of DeFi that recreates traditional functions of financial systems using smart contracts in place of middlemen. DeFi operates via decentralized, permissionless DLT-enabled applications called DApps. Currently, the primary DeFi platform is Ethereum, but in principle these ideas can be implemented on any smart contract platform. The main building blocks of DeFi are fiat currency-pegged stablecoins that can be exchanged seamlessly and most DApps are designed to fully interoperate with each other.

Public sector activity in the cross-border domain has focused on exploring DLT-enabled private permissioned wholesale CBDC networks as an alternative to existing real-time gross settlement (RTGS) systems. The broadcast of transactions in real-time across the network of participants eliminates the need for reconciliation or intermediation, allowing designated financial institutions to transact directly without relying on correspondent banks. The Inthanon-LionRock research project carried out in collaboration between the Hong-Kong Monetary Authority and the Bank of Thailand in 2019 created a Thai Bhat and Hong-Kong Dollar cross-border corridor network prototype, which allowed participating banks in Hong Kong and Thailand to conduct funds transfers and foreign exchange transactions on a P2P basis reducing settlement layers.

At a first glance, these two types of initiatives appear worlds apart. But the potential convergence holds promises for the best of two worlds in cross-border payments – a robust solution leveraging the competitive advantage of both. For example, DeFi relies on liquidity pools to meet its liquidity needs. Liquidity pools are crypto-assets that facilitate trading on decentralized exchanges. The tokens are locked into smart contracts and serve to provide liquidity in decentralized exchanges. Those exchange typically make use of an automatic market maker, which obviates the need for an order book and a counterparty in the traditional sense. For the buyer to compete a transaction, there does not need to be an available seller, only sufficient liquidity in the pool against which the trade is executed.

However, these pools can put the deposited funds at serious risk such as impermanent losses, smart contract exploits or malicious actions by pool administrators. Given their decentralized nature, there is no recourse when funds or data is lost as the counterparty is not easily identifiable. Instead of relying on crypto-assets in the liquidity pool, stablecoin providers could purchase central bank reserves issued “on-chain”. These reserves can be used to back the issuance of their coins in different currencies. Another advantage of linking up with central banks is that it could ease the regulatory and compliance burden of DeFi providers and participants which can be particularly heavy when working across different sectors and jurisdictions. Central banks, on the other hand, would have more regulatory oversight over DeFi providers holding their reserves.

Also, rather than having to venture out in the retail space to operate and manage their own networks, which can be time and resource intensive, central banks could benefit from the continuous enhancements of decentralized public networks. In addition, central banks would not need to run consumer-facing operations, like hosting wallets, handling consumer complaints, maintaining superior user experience and integrating with other functional applications beyond payments, which are traditionally outside their mandates. Plus, central banks would have real-time insights into how DeFi providers are using these on-chain reserves and whether they are achieving desired policy goals.

The oracle middleware of decentralized data systems provides a unique opportunity for central banks (or international regulatory and standard setting bodies) to impose technical and regulatory standards that govern the interaction with external DeFi providers. Oracles are third-party services that enable data and transaction sharing between disparate environments in a secure and authoritative manner. Information shared by oracles is digitally signed and hence is considered non‑repudiable (assurance that the signature cannot be denied by the party who signed it). For example, only parties that have completed required financial integrity checks would be authorized to purchase the central bank liability discussed above. Oracles can transmit real-time exchange rate data for DeFi cross-border payments systems and continuously validate and monitor data usage in the downstream applications. Oracles can also be used to achieve interoperability with private enterprise blockchain networks and existing legacy payment systems.

The marriage of the decentralized P2P solutions and centrally governed and organized networks can catalyze mutual benefits beyond cross-border payments. Linking central platforms with decentralized marketplaces would allow for a better integration of the retail and wholesale domains thereby unlocking a variety of use cases for DeFi providers that could be aligned with a country’s strategic policy objectives such as expanding financial inclusion. At the same time, central banks can rely on the continuous improvement of the public networks underlying DeFi while ensuring access to liquidity and regulatory compliance.

Kiffmeister’s #Fintech Daily Digest (02/18/2021)*

~ kiffmeister

Public and Private Money Can Coexist in the Digital Age

According to this IMF blog, if and when countries move ahead with central bank digital currencies, they should consider how to leverage the private sector. Today’s dual-monetary system can be extended to the digital age. Central bank currency—along with regulation, supervision, and oversight—will continue to be essential to anchor stability and efficiency of the payment system. And privately-issued money can supplement this foundation with innovation and diversity—perhaps even more so than today. Where central banks decide to end up on the continuum between private-sector and public-sector involvement in the provision of money will vary by country, and ultimately depend on preferences, technology, and the efficiency of regulation.

Central Bank of Russia to present new concept of national digital currency

The Central Bank of Russia reportedly received detailed feedback from the banking community in its October report on the possible possible issuance of a digital ruble. new form of national currency. Most banks support a two-level business model that would  allow banks to open wallets for their clients on the central bank’s platform and conduct operations. The central bank will reportedly develop a more detailed concept and start discussing it with the public, market participants, and banks at the beginning of summer. The next step will be launching a proof of concept. 

Chinese bank tests biometric hardware wallet for digital yuan payments

The Postal Savings Bank of China has reportedly created a biometric hardware wallet for the People’s Bank of China central bank digital currency (CBDC) pilot. The new wallet enables easy identity verification for users via fingerprint sensors on the card to provide easier access to the CBDC and healthcare services for the elderly without needing to use smartphones. 

Proposed Legislation for the Regulation of the provision and use of Central Bank issued Electronic Bahamian Dollars

The Central Bank of The Bahamas (CBOB) has released a consultation paper setting out its proposals for legislation to regulate the provision and use of central bank digital currency (CBDC). It summarizes the key provisions of the draft Central Bank (Electronic Bahamian Dollars) Regulations 2021. These include qualification of wallet providers, interoperability, consumer protection, financial stability and financial inclusion. The CBOB is also proposing other consequential amendments to the Payment Systems Act (No. 7 of 2012) & the Computer Misuse Act (Ch. 107A). These legislative amendments are set out in the draft Payment Systems (Amendment) Bill 2021 and the draft Computer Misuse (Amendment) Bill 2021. The consultation period will end on 31st March, 2021.  

Swiss canton of Zug starts accepting tax payments in cryptocurrency

The Swiss canton of Zug now allows local companies and indivduals to pay taxes in crypto-assets Bitcoin and Ethereum. Local crypto broker Bitcoin Suisse enabled the new opportunity in partnership with the canton. Zug initially announced its plans to accept crypto for tax payment in September 2020.  

Robinhood announces plans to offer crypto deposits and withdrawals

Robinhood intends to implement crypto-asset deposits and withdrawals. While customers have been able to buy and sell crypto-assets via the platform for some time, they are unable to access the coins themselves to transfer them to other wallets.  

Clearing Infrastructure Is Under Scrutiny After The Robinhood GME Debacle; The Alternatives Include Various Flavors Of dFMI.

The most important facets of dFMI are the removal of systemic risk, a 24/7 market, confining risk to just the counterparties, resilient infrastructure, ambient legal and regulatory compliance, faster but liquidity preserving settlement, the preservation of anonymity and privacy and the removal of asset silos. Most projects focus on a subset of these facets. The choice is to do incremental transformation or a more radical change. It is evident that the dominant FMIs and market players are resistant to change as their very existence and fat margins are threatened by the new world and they will be compelled by a combination of forces to transform or be replaced. 

Survey Finds Many Finance Managers Are Not Planning to Hold BTC— Volatility Cited as Key Concern

A new poll of finance managers by Gartner Finance finds that a majority are not planning to hold bitcoin as a corporate asset. In their responses, most of the 77 finance leaders interviewed cite bitcoin’s volatility as one characteristic of the crypto asset that is “extremely difficult to mitigate.”

BlackRock has started to ‘dabble’ in crypto, says CIO

Chief investment officer Rick Rieder said Blackrock has “started to dabble a bit” into crypto investments. He described the volatility of cryptocurrencies like Bitcoin (BTC) as “extraordinary” but acknowledged that many investors were looking for “places that appreciate under the assumption that inflation moves higher as debts are building… Holding some portion of what you hold in cash in things like crypto seems to make some sense to me, but I wouldn’t espouse a certain allocation or target holding.” 

Algorithmic stablecoins aren’t really stable, but can the concept redeem itself?

Amid much fanfare, many algorithmic stablecoins have not been stable. For example, Empty Set Dollar’s all-time high and all-time low are $23.88 and $0.174, respectively. Ampleforth’s reading shows a high of $4.07 and a low of $0.1558. By contrast, Dai’s lifetime trading range has been between $0.90 to $1.22. Is the problem intractable, or it’s the just the algorithms that aren’t good enough?

* 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 (02/17/2021)*

~ kiffmeister

Bitcoin continuing to hit all-time highs after it was reported that MicroStrategy upsized a convertible-note offering to $900 million from an originally announced $600 million, with plans to use the proceeds to purchase more bitcoin. 

Mastercard and Island Pay Launch World’s First CBDC-Linked Card

Under a new program from Mastercard and Island Pay, the Bahamas Sand Dollar prepaid card gives people the option to instantly convert the digital currency to traditional Bahamian dollars and pay for goods and services anywhere Mastercard is accepted on the Islands and around the world.

NYDIG joins the list of Bitcoin ETF applicants

New York Digital Investment Group (NYDIG) joined the crowd and registered with the U.S. Securities and Exchange Commission (SEC) for a Bitcoin exchange-traded fund (ETF). The firm, a Bitcoin-centric subsidiary of Stone Ridge Asset Management, joins Valkyrie Digital Assets and Vaneck that have already submitted their bitcoin-based ETF filings. Morgan Stanley would act in the capacity of an initially authorised participant and the Delaware Trust Company would be the trustee. However, the SEC is yet to approve a Bitcoin ETF on concerns around Bitcoin’s volatility, and its high potential for price manipulation.  

Ontario securities regulator grants approval to second bitcoin ETF in less than a week

The Ontario Securities Commission (OSC) has approved the Evolve Bitcoin ETF Bitcoin ETF just days after the regulator greenlit the Purpose Bitcoin ETF. The approval paves the way for a listing on the Toronto Stock Exchange (TSX). As is the case with Purpose, Cidel Trust Company, a subsidiary of Cidel Bank Canada, is the Evolve’s custodian, and Gemini is serving as sub-custodian.   

Bitwise Launches World’s First Decentralized Finance (“DeFi”) Crypto Index Fund

Bitwise launched a DeFi Crypto Index Fund that will track companies and securities involved in decentralized finance (DeFi). The Fund’s custodian is Anchorage Digital Bank, and initial constituents and weights of the index at inception were:

 * 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 (02/16/2021)*

~ kiffmeister

Yesterday was the first day in a very long time that there was no fintech news worth reporting. Hence the absence of a post. However, we’re back in business today, as Bitcoin hits another all-time high price of $50,585 before drifting lower to trade between $48,000 and $49,000.

Central Bank Digital Money Won’t Replicate Cash, Sweden’s Riksbank Says

According to a Sveriges Riksbank staff memo, it would be misguided to expect cash-like features of a central bank digital currency (CBDC). In order for a CBDC to be cash-like, it would need to be both anonymous and usable off-line, but the paper claims that the technical construction of digital currencies requires that they be verified by a remote ledger, in order to avoid double spending. It dismisses the possibility of using local devices that cannot be tampered with and program them such that a token cannot be spent more than once, claiming that such 100% tamper-proof devices do not exist. However, this is untrue. Mondex used tamper-resistant hardware to do exactly what the paper says is impossible. It failed due to a flawed business model, and not any technical shortcomings.

Diem Stablecoin Prepares for Liftoff With Fireblocks Custody Partnership

Crypto custodian Fireblocks and payments platform First Digital Assets Group are providing connectivity and support to Diem, the global stablecoin and payments system formerly known as Libra. They will provide the digital plumbing to allow financial service providers such as banks, exchanges, payment service providers (PSPs) and eWallets to plug into Diem on day one. Diem plans to emerge around the end of this quarter, with a modest minimum viable project based around a U.S. dollar stablecoin.    

MicroStrategy Announces Proposed Offering of $600 Million Convertible Senior Notes to Buy More Bitcoin

MicroStrategy intends to offer, subject to market conditions and other factors, $600 million aggregate principal amount of convertible senior notes due 2027 in a private offering to qualified institutional buyers. MicroStrategy intends to use the net proceeds from the sale of the notes to acquire additional bitcoins. 

Ripple, SEC Say Settlement Unlikely Before Trial Over Alleged Securities Violations

The U.S. Securities and Exchange Commission (SEC) and Ripple said that there’s little chance of settlement ahead of the expected trial over alleged securities infractions. In a discovery letter addressed to Federal Judge Analisa Torres at the U.S. District Court for the Southern District of New York, the parties said that having previously discussed the matter, they “do not believe there is a prospect for settlement at this time.” They further noted that previous settlement discussions took place under the Trump administration and were mainly conducted with division directors who have since left the SEC.  

Osprey Fund’s Bitcoin Trust Is Now Available to Retail Investors via OTC

Osprey Fund’s bitcoin trust is now available to retail investors via the over-the-counter (OTC) market. The fund was formed two years ago, and Osprey applied to register the trust with the U.S. Securities and Exchange Commission (SEC) in the middle of last year. This fee structure makes the fund cheaper than Grayscale Bitcoin Trust but more expensive than other new funds like CrossTower’s master-feeder bitcoin fund.  

CrossTower Launches Bitcoin Fund to Compete With Grayscale’s GBTC

CrossTower, based in Bermuda, is launching a hedge fund in a bid to compete with Grayscale’s Bitcoin Trust (GBTC) and other bitcoin funds for accredited investors. The minimum investment amount is $100,000 and CrossTower has $20 million in AUM from early investors to start. The product has seen the most interest from family offices. 

Crypto Trust Supply Sinks

A key feature of Grayscale trusts is that there is no way to redeem the underlying crypto, at least for now. So when BTC or ETH is deposited into the trusts it stays there indefinitely. The lack of redemption options plus high institutional demand has created an interesting side effect: crypto trusts are becoming large supply sinks that lock up crypto-assets and effectively take them out of circulation, reducing the overall liquid supply. 

BitPay Adds Support For Apple Pay

BitPay Mastercard holders can now add Apple Pay as an option to pay for goods and services, and the Bitcoin payments firm say they will be adding Google Pay and Samsung Pay later this quarter. BitPay cardholders will be able to make online and in-store purchases and spend BTC wherever Apple Pay is accepted. 

Further details on South Africa’s launches second wholesale CBDC trial

The South African Intergovernmental Fintech Working Group (IFWG) launched ‘Project Khokha 2’ to explore the use of tokenized money, blockchains and wholesale central bank digital currency (CBDC) in South Africa. The CBDC will use R3’s Corda enterprise blockchain, and the settlement token and debenture will use a variant of Cosmos blockchain interoperability solution. Accenture will be responsible for tokenizing the wholesale CBDC on Corda. Block Markets Africa will help with distributed ledger technology, tokenizing the bonds and the wholesale payment token using its custom Cosmos-based solution. And Deloitte will document the insights. Other participants in the trials will include commercial banks Absa, FirstRand, Investec, Nedbank, and Standard Bank, the Johannesburg Stock Exchange (JSE), and Strate, South Africa’s central securities depository. 

Bitcoin miners are hodling while long-term investors take profits

According to Glassnode data Bitcoin miners are accumulating while long-term investors are taking profits. Despite January seeing heavy selling from miners, Glassnode’s report shows that miner outflows have dried up during February so far. 

Verge of disaster: 200 days transactions wiped from blockchain

Privacy-focused blockchain network Verge (XVG) has experienced a significant block reorganization, replacing transactions dating as far back as July 2020. Despite being described as potentially “the deepest reorg that has ever taken place in a top 100 cryptocurrency,” analysts are yet to confirm that the incident comprised a coordinated attack. As a result of this roll-back, any user who received or purchased XVG tokens since July 2020 may have lost their entire balance, with Deribit Insights’ researcher “Hasu” tweeting that “thousands of balances have simply evaporated.” 

* 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 (02/14/2021)*

~ kiffmeister

Bitcoin hit a new all-time high of $49,716 after a week of positive developments regarding its increased big banks and institutional investor acceptance. From Coindesk:

According to Morgan Stanley’s Chief Global Strategist Ruchir Sharma, “even if Bitcoin’s price pops, as it has before, the rush of 2020 can’t be dismissed as an irrational mania. Cryptocurrencies are still young, they still face growing pains. But they also promise speed, transparency, and low fees that traditional payment channels cannot match. They satisfy a growing demand for a digital alternative to gold, an asset likely to protect investors from massive money printing and the threat of inflation. To younger investors, “crypto” already evokes digital, stable and good, not shadowy and sinister. The rest would be well advised to recognize that the currency world is changing, or risk being left behind.” 

* 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 (02/13/2021)*

~ kiffmeister

Riksbank extends test of technical solution for the e-krona

In partnership with Accenture, the Riksbank is conducting a pilot project to develop a proposal for a technical solution for an e-krona that can work as a complement to cash. The main aim of the pilot is for the Riksbank to increase its knowledge of a central bank-issued digital krona. The project is now being extended to the end of February 2022. The aim for the coming year is to continue developing the technical solution, with the focus on performance, scalability, testing of off-line functions and bringing external participants into the test environment. There is currently no decision on issuing an e-krona, how an e-krona might be designed or what technology might be used. 

Deutsche Bank Plans to Offer Crypto Custody, Prime Brokerage

It has come to light that Deutsche Bank is developing a fully integrated custody platform for institutional clients and their digital assets providing seamless connectivity to the broader cryptocurrency ecosystem. It will introduce a secure connected bridge between digital assets and a customer’s traditional banking services, manage the array of digital assets and fiat holdings in one easy-to-use platform, and create the gateway for value added services either supplied by the custodian or via third-party providers, and ensure the safety and accessibility of assets for clients by offering an institutional-grade hot/cold storage solution with insurance-grade protection. A  proof of concept has been completed and the bank and is aiming for a minimum viable product in 2021, while exploring global client interest for a pilot initiative.  

Morgan Stanley May Bet on Bitcoin in $150 Billion Investment Arm

Cointerpoint Global, a subsidiary of Morgan Stanley Investment Management with $150 billion in assets under management, is reportedly exploring whether the cryptocurrency would be a suitable option for its investors. 

Modernizing U.S. Financial Services with Open Banking and APIs

This Boston Fed paper discusses the key developments, drivers, and considerations in the U.S. market that support progress towards open banking and application programming interfaces (APIs) and how APIs offer a wide variety of new services. It finds that opening a bank’s platform to third-party applications can create synergies with innovative technology businesses to build a new generation of digital financial activities that enhance the consumer experience. Open banking can create a paradigm shift in how financial institutions (FIs) treat the issue of ownership, storage, and use of data. However, several risks and challenges need to be addressed. The industry is waiting for guidance from the Consumer Financial Protection Bureau (CFPB). Interoperability is lacking and many FIs struggle to replace legacy infrastructures with fully digital platforms, which can require considerable investment. FIs may be struggling to prioritize open banking and API permissioned data with competing projects. 

* 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 (02/12/2021)*

~ kiffmeister

What’s the deal with the Grayscale Crypto Investment Trusts? 

I explore some of the market dynamics associated with the Grayscale Bitcoin Trust in a new blog post. Most institutional investors participate in crypto-asset markets through investment funds like Grayscale Investment’s closed-end trusts. As publicly traded trusts that report to the U.S. Securities and Exchange Commission, they relieve investors of concerns about storage, custody and security of their holdings. Grayscale is the dominant crypto fund manager with over $37 billion assets under management.

And in more recent news, Grayscale Investments has reportedly filed to register a new cryptocurrency trust for decentralized finance platform Yearn Finance (YFI)!

Purpose Investments Cleared to Launch First Bitcoin ETF in North America

The Ontario Securities Commission has reportedly cleared the launch of the Purpose Bitcoin ETF, making it the first to gain regulatory approval in North America. 

Intent On Ban, India To Give Transition Time To Crypto Investors

India will go ahead with a complete ban on investment in cryptocurrencies, while providing existing investors a transition period to exit their holdings. its usage in all forms will be banned through the new law that will be introduced in Parliament, a senior Finance Ministry official said on condition of anonymity. The official, however, said the ban won’t be enforced overnight and cryptocurrency investors will be given a transition period of three-to-six months after the implementation of the new law to liquidate their investments.

Nouriel Roubini: bitcoin is not a hedge against tail risk

Nouriel Roubini predicted that “since the fundamental value of bitcoin is zero and would be negative if a proper carbon tax was applied to its massive polluting energy-hogging production… the current bubble will eventually end in another bust. He concluded by saying that “risky, volatile bitcoin doesn’t belong in the portfolios of serious institutional investors. Many of its retail backers are suckers being manipulated by an army of self-serving insiders and snake oil salesmen. Tesla’s Elon Musk and MicroStrategy’s Michael Saylor may be betting the house on bitcoin. That doesn’t mean you should.”

Nouriel Roubini: ‘Tether is a criminal enterprise,’ SEC should probe Elon Musk’s bitcoin tweets

Roubini also thinks Tether is issuing fake money. And that nothing short of an audit will prove the $30 billion in USDT the BVI-registered company has spewed out into the crypto markets thus far are even 74% backed. Tether is a “criminal enterprise,” he bluntly told reporters on Coindesk TV. In a 10-minute interview, Roubini predicted Tether’s looming demise, called for the SEC to look into Elon Musk’s bitcoin tweets, and claimed that central bank digital currencies will spell the end for crypto. 

Nigeria’s SEC Puts Plans to Regulate Crypto on Hold in Light of Central Bank Ban

Nigeria’s Securities and Exchange Commission (SEC) has put plans to regulate cryptocurrencies on hold in light of the central bank’s decision to ban them.  

Regulators and banks are now testing a ‘digital currency’ system in South Africa

The South African Intergovernmental Fintech Working Group (IFWG) launched ‘Project Khokha 2’ to explore the use of tokenised money, blockchains and digital currency in South Africa. This comes after the group’s first Project Khokha test which looked at using blockchain technology to speed up payment systems in the country. As part of Project Khokha 2, the IFWG said it will further investigate the use of Distributed Ledger Technology (DLT) in the country’s financial sector.  

The Central Bank of Saudi Arabia announced the launch of its instant payments system

The Central Bank of Saudi Arabia launched its new instant payments system on February 21, after the successful completion of the pilot with a number of Saudi banks. The system will enable financial institutions, companies and individuals to complete transfers 24/7 between different banks instantly. 

NPS Bill to modernize Fiji’s financial system

Fiji’s National Payment System Bill was reportedly passed, paving the way for reforms being introduced by the Reserve Bank, including real-time payments. 

* 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.

What’s the deal with the Grayscale Crypto Investment Trusts?

~ kiffmeister ~ 5 Comments

Most institutional investors participate in crypto-asset markets through investment funds like Grayscale Investment’s closed-end trusts. As publicly traded trusts that report to the U.S. Securities and Exchange Commission, they relieve investors of concerns about storage, custody and security of their holdings. Grayscale is the dominant crypto fund manager with over $37 billion assets under management. This blog explores some of the market dynamics associated with the Grayscale Bitcoin Trust (GBTC).

For example, Grayscale Bitcoin Trust (GBTC) has accumulated more than 3% of total Bitcoin supply, and an even higher proportion of liquid supply.  (Glassnode analysis found that only 22% of outstanding Bitcoin are considered liquid, i.e., currently in constant circulation and available for trading.)  Grayscale also runs eight other single-asset crypto trusts and recently incorporated twelve more such trusts although they have yet to launch. However in this post we’ll focus on GBTC.

Although accredited investors can buy GBTC directly from Grayscale at NAV, many institutional investors cannot take this route because GBTC shares have a six-month lock up period. (According to SEC Rule 144, restricted securities issued by an SEC reporting company like GBTC are subject to a minimum holding period of 6 months.) Hence, these investors are forced to buy the shares at a premium over the native asset value (NAV) in the secondary market, and these premia can be significant:

Source: https://ycharts.com/companies/GBTC/discount_or_premium_to_nav

Price premia over NAV occasionally appear on exchange-traded funds (ETFs) but they rarely exceed about 3%. When they do, authorized participants step in to arbitrage the gap away by creating or redeeming shares of the ETF.

However, some have pointed to a scheme by which the premium could be arbitraged. It involves buying GBTC directly from Grayscale at NAV and shorting free-trading GBTC. Six months later, the two positions net out leaving a risk-free profit. This glosses over risks like not being able to borrow and fund GBTC for up to six months. JP Morgan analysts have estimated the cost of this premium monetization trade at 10-15% per annum. The GBTC long position could also be hedged with BTC futures contracts. However, the fact that the premium continues to exist, implies that such arbitrage is not consistently taking place.

That same JP Morgan analysis concluded that the introduction of a U.S. Bitcoin ETF would be positive for Bitcoin over the longer term but could be short-term negative. It would erode GBTC’s effective monopoly status and could cause a cascade of GBTC outflows and a collapse of its premium. This could have negative near-term implications for Bitcoin given the flow and signaling important of GBTC. And some think that the chances of the SEC giving the green light to a Bitcoin ETF is looking good.

There are  two active Bitcoin ETF filings with the SEC: VanEck Bitcoin Trust (submitted in December) and Valkyrie Bitcoin Funding (January 22). In the past, there have been many unsuccessful attempts, all of which were rejected by the SEC on the grounds that the underlying crypto-assets are too subject to market manipulation and liquidity is insufficient. However, some are heartened that SEC Director of the Division of Investment Management Dalia Blass, who oversaw the rejections, is stepping down, and Gary Gensler, President Biden’s nomination as SEC Chairman, is known as very crypto savvy.

Meanwhile, Grayscale competitors are sprouting up. Osprey Bitcoin Trust launched with a 0.49% management fee (versus GBTC’s 2%). BlockFi and Bitwise have followed suit with similar offerings. However, the business models of Grayscale and all such funds hang on whether the SEC will continue to push back on crypto-asset ETFs.