Crypto Custody Provider Ledger Extends Reach in Asia With New Institutional Client

Digital asset storage provider Ledger is partnering with FLETA, a South Korea-based block chain platform for decentralized applications (dapps) to provide custodian services compliant with local laws.

The French startup has been trying to extend the reach of its institutional-level services with Ledger Vault, building on the success of its nano wallets which primarily targeted retail crypto holders. 

“Ledger does not just offer the security of storing crypto, it also allows financial institutions to build customized governance rules,” said Glenn Woo, Ledger’s managing director leading business expansions in the Asia-Pacific region. 

Founded in 2018, FLETA launched its mainnet in November and has partnered with the government to build a proof-of-concept network for the nation’s healthcare system, hoping to let hospitals share private data such as research and medical records.  

The firm confirmed to CoinDesk it held a private token sale in August 2018 and a public sale in 2019, but declined to disclose specific figures for the two funding rounds.     

Scaling up

Woo said the partnership with FLETA reflects Ledger’s shift in Asia towards helping large-scale institutional clients be compliant with regulators across different jurisdiction in the region. 

“We are helping crypto companies, such as exchanges, funds and custodians, to basically abide by the regulations when it comes to wallet management,” Woo said. “Our biggest priority is Ledger Vault.” 

Ledger is in progress of building a joint venture with the U.S.-based investment firm Global Advisors and Japanese financial services giant Nomura. The new firm, named Komainu, will offer digital asset managemnet services to institutional investors while helping clients integrate crypto with traditional investments instruments such as mutual funds.

According to Woo, one of the biggest concerns for financial institutions is regulatory risks, particularly at a time when many governments are still developing their guidelines for the emerging industry. 

Institutions that choose to be fully compliant may spend large sums of money securing legal opinions and setting up the proper infrastructure and reporting tools. 

Regulatory challenges

Two major issues regulators have with crypto companies are how to secure digital assets and how to protect investors’ interest when these assets are lost. 

Ledger claims its Vault offering requires multiple layers of authorization, which in turn requires a greater degree of involvement from a client’s operations team to withdraw assets. 

“One of the big themes when it comes to regulating crypto institutions on the wallet side is to remove the central point of failure where the CEO of an exchange knows everything,” Woo said. “With this infrastructure, we aim to go into more of the regulations jurisdiction where the crypto institutions are struggling to meet the requirements of the regulations.”

Woo said Ledger further backs up its clients’ assets with a customized insurance policy, referencing the company’s partnership with Lloyd’s of London syndicate Arch.

In November, insurance broker Marsh arranged a $150 million insurance policy from Arch for users on the Ledger Vault technology platform. 

“My experience is that insurance is actually very hard to get for many crypto startups because they don’t have a track record,” Woo said, noting insurance could be critical when a crypto company seeks approval for financial regulators.  

Bitcoin Outshines Gold for First Time Since June

Bitcoin logged double-digit gains in October, outperforming gold for the first time since June.

The world’s biggest cryptocurrency by market value ended last month with a gain of 10.26 percent, snapping a three-month losing streak, according to Bitstamp data.

Meanwhile, gold gained just 2.74 percent in October, having dropped 3.17 percent in September – the biggest monthly drop since June 2018.

Bitcoin scored gains for five straight months from February to June – its longest winning streak since August 2017.

Gold, however, registered losses in February, March and April. The yellow metal did inch higher by 1.7 and 7.9 percent in May and June, respectively, although gains were meager compared to bitcoin’s 62 percent and 25.89 percent rise in the same months.

While BTC outshone gold by big margins in the five months to June, the tide turned in favor of the yellow metal in the third quarter.

Bitcoin fell by 6, 4 and 13.5 percent in July, August and September, respectively. Experts associated the sell-off with fears of Facebook’s Libra fast-tracking regulation for cryptocurrencies in general, overbought technical conditions and other factors.

Gold gained 0.23 percent and 7.65 percent in July and August, respectively, as markets priced in heightened prospects of aggressive monetary easing by the U.S. Federal Reserve and other major central banks amid escalating China-U.S. trade tensions.

The metal dropped by 3.17 percent in September, but the decline was restrained as compared to BTC’s double-digit sell-off.

Looking forward, gold may underperform bitcoin in November, as the optimism on the U. S.-China trade front may reduce haven demand for the metal.

Further, on Oct. 31, the Fed signaled that it would pause rate cuts to assess incoming data before considering lowering borrowing costs again, in part because of a potential easing of trade tensions, according to The New York Times. Gold, a zero-yielding asset, usually cheers dovish Fed policy and faces selling pressure when the central bank signals a pause or rate hikes.

Meanwhile, the seasonality is positive for bitcoin – the cryptocurrency has gained in November in six out of the last eight years. More importantly, BTC tends to pick up a strong bid six months ahead of the mining reward halving, according to historical data. The next halving event is due in May 2020.

What’s more, the ongoing rally in the US stocks may bode well for bitcoin. “Prior bitcoin bull runs were characterized by a gradual decline in equity market volatility. For example, we’ve noted its, albeit imperfect, inverse relationship with the VIX Index over longer time horizons (i.e. 2017 run-up),” analysts at Delphi Digital wrote in their monthly report.

The S&P 500 clocked a record high of $3,066 on Friday and the bull market is expected to continue on the back of three big buyers – corporations, foreign investors and US households – according to Goldman Sachs.

Bitcoin’s technical charts are also biased bullish, as seen below.

Daily, three-day and monthly charts

BTC is currently changing hands at $9,170 on Bitstamp.

Prices jumped 28 percent in the three days to Oct. 27 (above left), with trading volumes hitting the highest level since February 2018.

Additionally, the recent pullback from $10,350 to $9,000 was accompanied by a drop in volumes. A low-volume pullback is often short-lived. The 200-day MA has restricting downside since Oct. 30 (above left).

All-in-all, the path of least resistance appears to be on the higher side and prices look set to revisit resistances at $9,600 and $10,000.

The bullish case would weaken if the 200-day MA at $9,106 is breached to the downside. That would validate the bearish view put forward by the descending 5-month MA at $9,268 (above right) and will likely yield a big drop to $8,500.

Note that, BTC repeatedly failed to keep gains above the 5-month MA over the weekend. The bulls, therefore, need progress soon.

Disclosure: The author holds no cryptocurrency assets at the time of writing.

Microsoft Unveils Platform for Minting Enterprise-Ready Crypto Tokens

Microsoft wants building blockchain tokens in the cloud to be as easy as plugging in a printer.

So says Marley‌ ‌Gray, principal architect at ‌Microsoft, following the announcement Monday of the Azure Blockchain Tokens platform.

Just like printers were once a pain to set up – with a mishmash of printer types and their respective device-specific drivers – Gray says enterprise-oriented crypto tokens currently suffer from the same pitfalls.

“You can go and buy a printer or any type of device [now] and just plug it in and it works,” Gray told CoinDesk. “It’s the same analogy here for tokens and that is what we are building in Azure.”  

Announced at the Microsoft Ignite conference in Orlando, Fla., the platform allows businesses to choose from a growing set of token-building templates that conform to the Token Taxonomy Initiative (TTI) – a standards push and enterprise consortium spearheaded by Gray. 

So far there have been a number of TTI-compliant tokens built for uses like loyalty rewards, or to incentivize software teams to meet stated goals, as well as traditional financial instruments like letters of credit in trade finance. 

The TTI has already gone further than other enterprise plays in getting different and competing blockchain factions – from IBM to R3 to ethereum variants – under one roof.

“We are creating a platform in the cloud where any token within the TTI framework can snap into place,” Gray said. “So you can build applications where you want to use tokens with, for example, Dynamics, SAP, applications in the [Microsoft] Office suite or some other business automation process.”

Token taxonomy

The Azure Blockchain Tokens platform is being released alongside a host of example tokens.

They range from a Hyperledger Fabric FabToken built by IBM to Santander’s BOND token to a REWARD token from Intel and ConsenSys and many more. 

A spokeswoman for the Enterprise Ethereum Alliance (EEA), which is where Gray kicked off the token taxonomy, said that while these examples are not yet in commercial production, all the specs are there to download. A tech team can basically say, “I want one of these,” the spokeswoman said.

Gray, who is also the chair of the TTI, was keen to point out that Azure Blockchain Tokens is not just “a Microsoft thing.”

“It is definitely not,” he said. “This includes IBM, R3, Digital Asset. We are partners with them all.”

So how does interoperability work among the giants of Web 2.0?

It’s obviously the case that the IBM Blockchain Platform, for example, runs on IBM Cloud. However, Gray said there should be “portability” of these token types across clouds and networks, depending on whatever infrastructure people need.

He concluded:   

“The industry has suffered from an IBM versus Microsoft thing, Hyperledger versus ethereum, and so on. We are trying to break down those barriers.”

DX.Exchange Halts Operations, Seeks Buyer 10 Months After Launch

DX.Exchange is hitting pause as it seeks a new owner.

The firm, which offered tokenized shares in companies listed on the Nasdaq stock exchange, announced the move following a vote by its board on Monday to discontinue operations as it pursues “a merger or outright sell of the company.”

Should a buyer not be found, “the exchange may not resume operations,” the company wrote. Deposits have been suspended and customers have until Nov. 15 to withdraw funds.

“The costs of providing the required level of security, support and technology is not economically feasible on our own,” the firm said in the announcement.

During its January 2019 launch, customers could buy tokenized shares in Google parent company Alphabet, Apple, Amazon.com, Facebook, Microsoft, Tesla, Netflix, Baidu, Intel Corporation and Nvidia.

DX.Exchange’s temporary closure comes on the heels of Circle’s spin-off of Poloniex two years after the fintech firm purchased the exchange for $400 million. Circle co-founders Jeremy Allaire and Sean Neville said they plan on shifting focus towards its USDC stablecoin and SeedInvest crowdfunding platform. An undisclosed Asia-based investment group, Polo Digital Assets, Ltd., purchased the exchange.

Stellar’s Foundation Just Destroyed Half the Supply of Its Lumens Cryptocurrency

MEXICO CITY – The Stellar Development Foundation has burned 55 billion of its XLM tokens, over half the cryptocurrency’s supply, CEO Denelle Dixon announced from the stage of the Stellar Meridian conference Monday.

Previously, there had been 105 billion XLM in existence, with 20 billion in circulation. With this burn, the supply has shrunk to 50 billion.

“We didn’t start by wanting to burn. We started by asking, ‘What do we need?’” Dixon told the room of roughly 200 attendees. “As much as we wanted to use the lumens that we held, it was very hard to get them into the market.”

The organization decided instead it was better to project how much it could actually use over a 10-year period and calibrate to that number. “To derive a plan from an arbitrary number serves no purpose,” Dixon said.

The news was greeted warmly by the crowd, many of whom likely own the token. One participant in the packed room stood up and asked everyone to give Dixon a round of applause, which they did.

In the hour following the announcement, XLM’s price jumped about 14 percent, to $0.08, according to data provider Nomics.

XLM price chart. (Screenshot via Nomics)

Dixon told CoinDesk that she couldn’t anticipate how the crypto market might react, saying:

“I don’t know. I really just don’t have a sense at all of what the market response is. From my standpoint, it’s how the ecosystem feels about it. We got a lot of positive response from the ecosystem because we are rightsizing what the foundation has and the foundation holds.”

The foundation now controls 30 billion XLM, divided into several buckets. It has 12 billion XLM in the direct development fund (formerly called “operations”), to support the organization.

In “ecosystem support” it has 2 billion XLM remaining (1 billion for currency support, and 1 billion for infrastructure grants).

Stellar has 10 billion XLM set aside to make investments (with 2 billion XLM for new products, and 8 billion XLM in its enterprise fund).

Finally, under user acquisition, the foundation has 6 billion XLM (2 billion for marketing stellar and 4 billion for in-app promotions).The supply of XLM is fixed now because the community of token holders voted to discontinue inflation on Oct. 28.

“SDF will not burn any additional lumens,” Stellar said in a blog post.

FATF Releases Guidance on Global Digital IDs as Use Cases Grow

The Financial Action Task Force (FATF) wants financial institutions to prepare for the global expansion of digital identification systems.

FATF published its draft guidance on digital identity Thursday, for governments, regulated entities and other stakeholders to enforce anti-money laundering (AML) and counter financing terrorism (CFT) regulations.

The intergovernmental organization aims to address emerging security and transparency issues as the process of financial transactions become more digital, according to the guidance.

On its website, FATF listed a number of questions acting as “areas of focus,” requesting private stakeholders to provide feedback via email by Nov. 29, 2019.

The areas include the specific risks digital ID might pose to AML/CFT enforcement; how it might support financial inclusion; how a system might aid in transaction monitoring; and the potential impact on implementing FATF’s record-keeping requirements.

Notably, the guidance specifically lists distributed ledger technology (DLT) as a tool that can aid in the growth of digital ID networks. A number of blockchain companies have already set their eyes on this particular area, such as Civic.

In its guidance, FATF called on authorities to “develop clear guidelines or regulations allowing the appropriate, risk-based use of reliable, independent digital ID systems by entities regulated for AML/CFT purposes.

Meanwhile, FATF suggests regulated institutions, such as cryptocurrency exchanges (referred to as virtual asset service providers, or VASPs), “take an informed risk-based approach to relying on digital ID systems for Customer Due Diligence.”

The 77-page draft guidance details many issues related to digital ID systems, including their reliability and independence, and how they might be used in performing customer due diligence.

The draft guidance is also part of FATF’s effort to the money laundering and terrorist financing risks due to the rise of stablecoins across international financial systems.

The organization stressed the importance of digital identity in payment systems, which could be used to identify stakeholders in stablecoin-related transactions.

FATF has been increasingly active in the blockchain space this year. In June, the organization published its guidance for crypto exchanges and other VASPs, urging countries to implement strict KYC protocols around the transfer of digital assets.

What’s Next in the Securities Case Against Ripple Over XRP

The Takeaway:

  • Monday is the deadline for an XRP holder to file a response to Ripple’s motion to dismiss his suit against the company.
  • That motion largely sidestepped the plaintiff’s argument that Ripple sold XRP as an unregistered security, instead contesting the case on procedural and evidentiary grounds.
  • The suit is unlikely to settle the security question.
  • While Ripple presented a strong defense, the case is likely nowhere near complete, and the company will remain at risk of further lawsuits, legal experts say.

Monday will bring the next chapter of a long-running and closely watched lawsuit against Ripple.

The plaintiff, Barry Sostack, has until the end of the day to file a response to the startup’s Sept. 20 motion to dismiss. Assuming it isn’t dismissed in its entirety, the case, which seeks class action status, may move into discovery next year.

At the heart of the dispute is an almost existential question: Whether XRP, the cryptocurrency that Ripple periodically sells to fund its operations, is a security that should have been registered under U.S. law. If it is, as the plaintiff’s complaint argues, Ripple could be at risk of possible enforcement actions by regulators.

But the suit is not likely to settle the matter, legal experts said.

“No one’s finding out whether XRP is a security anytime soon, if ever, at least through this proceeding,” said Rebecca Rettig, a partner at FisherBroyles.

For starters, Ripple’s last motion largely sidestepped the issue. It simply argued that Sostack waited too long to file the complaint and that he did not adequately demonstrate that he bought XRP during the initial sale or from Ripple.

And the company may never need to tackle the question – at least, not to win this case.

The defense team crafted “a solid motion,” said Stephen Palley, a partner at Anderson Kill.

“The defense lawyers have done a good job so far,” he said. “They’ve shown some good tactical skills, they could win but even if they do there are a lot of other things that could happen.”

Ripple’s general counsel did not respond to a request for comment for this article.

Denial without details

While Ripple’s motion to dismiss touched on the question of XRP being a security, it did so as a footnote rather than an argument.

Paul Godfrey, a Florida-based attorney, said that Ripple made “both a statement and a legal conclusion in its introduction,”  noting that the introduction to the filing stated flatly, “the crux of [plaintiffs’] claims is the false assertion that XRP is not a currency, but rather a security.”

The question of whether XRP is a security is a legal conclusion, said Godfrey (who clarified he has not litigated in federal court and does not practice securities law). While Ripple does make the conclusion, it does not actually argue the fact.

“Ripple does not advance any argument to prove such a denial … Accordingly, it is addressed, but not argued,” Godfrey explained.

Arguing that XRP is not a security would be “too risky of a strategy,” Rettig said. Trying to make this point in court would require a fact-intensive analysis at the least.

Focusing instead on “straightforward legal defenses” allowed Ripple to avoid having to fight this point, she said:

“If you have independent grounds for a dismissal, [and] you don’t have to get into a fact-intensive analysis, why do it?”

Moreover, Ripple’s statement that XRP is not a security because it is a currency may not necessarily hold up.

Something can be a currency and still be a security or investment contract under securities law, Palley said.

“Basically just because it’s one thing doesn’t mean it can’t be another. It can be a security for one purpose and currency for another. The application of one framework doesn’t exclude another,” he said.

He pointed to the U.S. Securities and Exchange Commission’s ongoing legal battle with Kik Interactive, the company affiliated with the kin cryptocurrency.

Kik has argued in court that kin is a currency and therefore cannot be a security, Palley said (the SEC disagrees with this assessment).

Defensive tactics

Rettig said Ripple’s use of the “statute of repose” argument – meaning the company argued the defendants are too late in filing the lawsuit – was interesting, and has been used successfully in other cases.

The statute of repose is a period of time after a sale begins where parties can file suit for alleged wrongdoing. It differs from a “statute of limitations” in that the latter only starts after “the victim learns of the misconduct,” according to a New York Times column by law professor Peter Henning.

“The statute of repose argument … was used successfully a number of times in cases bringing Securities Act claims relating to mortgage-backed securities six or seven years ago, which provides precedent the defendants could rely on,” Rettig explained.

Ripple’s use of the facts presented in the plaintiff’s August complaint also bolstered its motion.

“When plaintiff first filed the amended complaint, there was a lot of discussion about how novel and interesting it was that plaintiff cited extensively to websites, to social media and the like,” Rettig said. “It was an interesting tactic and it made for a robust [complaint].”

Ripple was able to piggyback off of this tactic to introduce additional facts of its own, though. Rettig explained:

“Usually defendants can only use the facts alleged in the complaint itself or the facts incorporated by reference in a complaint in defending against claims on a motion to dismiss. Here, however, defendants were able to use all of the facts in the documents, websites and social media posts to which the complaint cites in rebutting plaintiff’s claims.”

She cited Ripple’s use of a wiki page to support its statute of repose argument, noting that the plaintiffs originally introduced other details on the same wiki page to support their own original argument.

Godfrey added that Ripple “strikes a seemingly fatal blow” at part of the plaintiff’s amended complaint by using the facts the plaintiff provided.

“By showing no relief was available for count 1, Ripple was able to demonstrate there was a failure to state a cause of action for count 2,” he said.

Next steps

In the filing expected Monday, the plaintiff can try to move the case forward in a few different ways.

Rettig said she thinks the plaintiff might either “try to make a ‘relation back’ argument, which means they’re going to try to ‘relate back’ to the first filed case alleging that Ripple violated securities laws.” Ripple has been facing lawsuits alleging it sold XRP as an unregistered security since at least May 2018.

However, this may not be a winning strategy, given that Ripple has already argued in its motion that the plaintiff would lose under the statute of repose, Rettig said.

“Plaintiff also relies on a ‘continuing sale’ theory and they may apply that argument to the statutory requirement that the statute of repose runs from the date the security was ‘first bona fide offered to the public,’” she said.

Godfrey said the eventual discovery process could help the plaintiffs verify whether or not they actually bought XRP from Ripple, saying:

“If I were Plaintiff’s attorneys … I would focus on the fact that while the inference could not be maintained in the past, with present technology and some well-aimed discovery, it would be quite easy to determine whether or not XRP was purchased by Plaintiffs from Defendants.”

Palley noted that because some of the claims are based on secondary market transactions, there could be no privity, or legal relationship, between the plaintiff and Ripple with Sostack’s actual purchase of XRP.

Godfrey pointed to self-proclaimed bitcoin creator Craig Wright’s recent legal fight with the estate of Ira Kleiman, noting that the magistrate judge presiding over that case cited the “evidentiary trail” bitcoin transactions provide.

XRP and the Interledger protocol also allow for every transaction to be traced, Godfrey said.

Procedurally, Palley pointed out that a class would need to be certified at some point as well, which would also include a class certification briefing.

The neverending story

One concern for Ripple is the fact that it will likely remain a target for lawsuits even if it wins in this case, Palley said.

Many companies in the crypto space are difficult to sue because they have no money. Ripple does not have this issue, given its XRP holdings and business.

“[With] ICO class action litigation from an economics perspective, you have to ask … how much money can you recover? Ripple, you have a solid [chance] of money,” Palley said, adding:

“Even if Ripple wins, it’s not necessarily the end, and that’s what’s interesting and people don’t understand the relationship between civil litigation and regulatory enforcement and criminal, and class actions … it would mean something [if the case was dismissed] but it doesn’t necessarily mean it’s the end.”

Tobacco companies have a similar issue, where they have to win every case brought against them. If they lose a single case, other parties can use that loss in lawsuits of their own.

“It’s not like winning this case means that nobody else can sue them for securities violations,” Palley said.

He also noted that, at least in the current litigation, the claim is limited to a “you didn’t register here” argument, but there might also be fraud or securities law claims.

This isn’t to say that parties can sue Ripple and win, just that they can file suit.

Meantime, blockchain industry lawyers will be following the Sostack case closely.

“It’s not going to end for a long time,” Rettig said.

Regulated ETH Futures? Not So Fast

Earlier this month, Heath Tarbert – the new chairman of the U.S. Commodity Futures Trading Commission (CFTC) – declared that ether, the token of the ethereum blockchain, was a commodity.

This is significant, coming from the regulator of one of the largest derivatives markets in the world. Why? Because it opens the door to the possibility of regulated ether derivatives in the near future. The chairman was even more specific: “I’d say it is likely that you would see a futures contract in the next six months to a year.”

The market got excited because this would enhance the token’s appeal to institutional investors. Derivatives enable hedging, which is a significant part of portfolio management and a solid support for long positions. A lively derivatives market, the reasoning goes, will encourage more investment, which will boost the price, which will encourage more investment, and so on.

Yet, with respect, I believe the chairman is mistaken. We will not see ether futures in significant volume on a regulated U.S. exchange any time soon. If ever.

Reputation risk

Although it’s not just about the lack of demand, let’s look at that first.

Ether futures currently trade on exchanges based outside the U.S., but volumes have been thin relative to the spot market. On BitMEX, Huobi and Deribit, three of the largest crypto platforms that offer ether futures, the average 24-hour volume is less than 10% that of bitcoin, while the equivalent ratio in the spot market is almost 25%.

The difference could be due to ethereum’s relative youth, and the gap could close as the network matures. Or it could be that bitcoin will always be the institutional-grade asset of choice, rendering ether derivative demand too insignificant for major markets to profitably develop.

Either way, demand can be flexible. The real barriers to a successful launch of ether derivatives go much deeper.

Underlying risk

Last week ethereum developers announced the target date for the next system-wide upgrade: December 4. This will be executed via a hard fork, in which the entire ecosystem needs to change – blocks processed on the old version will not be valid on the new. There are several of these coming up.

This introduces an additional element of risk into the market. Earlier this year, an upgrade was delayed just 48 hours before it was due to launch, due to a “critical vulnerability.” And while it is extremely likely that bugs will be found and fixed in time, there is always the “what if?” that risk-takers have to focus on.

Even more worrying for ether derivative watchers is the upcoming consensus algorithm shift. Ethereum currently runs on a proof-of-work consensus algorithm similar to that of bitcoin. It has long been working on a migration to a different system, called proof-of-stake, in which the amount of ether you “stake” gives you the credentials to validate transactions and append new blocks on the blockchain.

This is like changing the motor of your car while it is speeding along the highway. No matter how much testing is done and no matter how many parallel systems are in operation, it’s risky.

True, risk is precisely what derivatives were invented to mitigate – but the creators of derivative products like to have that risk reasonably quantifiable. While derivatives can help investors control risk, they don’t eliminate it; they redistribute it. The extra risk for exchanges will need to be compensated, and uncertainty of this magnitude could make ether derivatives prohibitively expensive.

What’s more, when ethereum hard forks over to its new algorithm, there is always a risk that not all miners will switch. The current ethereum network could continue to exist and perhaps even thrive if enough participants wish it. Which token would derivative contracts track?

Existential risk

Another risk looming over ethereum is that of a network rewind. In 2016, in response to a ~$60 million hack of an ethereum-based application, ethereum’s core participants decided to rewind the blockchain to its pre-hack state, restoring the stolen funds and creating a split in the ecosystem that persists to this day.

This was a few years ago, when ethereum was still young and many believed that such a large hack would stunt its growth prospects – few expect it to be able to successfully execute something similar today. But last weekend, ethereum’s creator Vitalik Buterin posted the following poll on Twitter:

Thankfully, the “never rewind” majority should reassure the market of the blockchain’s integrity and stability. But almost 40% of voters think ethereum should be able to, and the fact that Vitalik is even asking the question is a reminder that it is possible.

Ether may be a “commodity” in the eyes of the CFTC – but, traditionally, commodities can’t change their history or their characteristics. Has the regulator ever approved derivatives based on such a malleable asset? How would you even start ensuring that there is no information asymmetry and the risk is fairly priced in?

But there’s an even more existential question.

Regulatory risk

Ethereum’s proposed algorithm change could lead to a bigger adjustment: ether could stop being a commodity and become a security.

Under proof-of-stake, ether holders can “stake” their tokens in order to influence transaction validation and block creation. In exchange for doing so, they earn an income.

This exchange isn’t dissimilar to how miners earn rewards on a proof-of-work blockchain such as bitcoin. In proof-of-stake, however, the rewards are distributed as annualized interest as opposed to randomized payout making for more regular and predictable returns on ether.

Is this enough to make ether a security rather than a commodity? Maybe.

This would not invalidate any outstanding ether derivatives. It would, however, move them into the joint jurisdiction of the CFTC and the U.S. Securities and Exchange Commission (SEC).

This becomes significant when you compare the two securities regulators’ views towards crypto assets. The CFTC has long championed the innovation behind cryptocurrencies – former chairman Chris Giancarlo is affectionately known in the blockchain sector as “Crypto Dad” – and the new chairman’s recent comments referenced earlier show that he seems to feel the same.

The SEC, on the other hand, has repeatedly blocked the issuance of ETFs based on bitcoin, on the grounds that it is too immature a market. If it thinks bitcoin is not ready, it’s a stretch to conclude it will think differently about ethereum.

This is likely to give any regulated derivative platform pause.

Investment risk

So, given ethereum’s development stage and outlook, as well as little evidence of unsatisfied demand, ether derivatives on a U.S.-based regulated exchange are unlikely any time soon. There are a lot of issues to work out, in a sector that is already giving regulators and infrastructure providers more than enough to worry about.

This shouldn’t affect the phenomenal amount of work underway on the platform. It is, however, likely to affect broad institutional acceptance of ether as an investment asset. Large investors rarely take unidirectional bets.

Does that matter? Not necessarily – development will continue, and ethereum could still end up being a new operating system for the economy. Ether was not created as an investment asset.

Then again, nor was bitcoin. Markets have a way of latching on to and commoditizing ideas, and ethereum may one day become the darling of the alternative investment world. It’s still very young, though, has many teething pains ahead of it, and a while to go before traditional financial infrastructure supports its entrance into the mainstream.

Disclosure: The author holds a small amount of bitcoin and ether.

After Painful 2018, Chinese Blockchain VCs Are Getting Back Into the Market

The Takeaways:

  • After the 2018 crypto crash, up to 90 percent of blockchain-focused Chinese venture capital firms left the market.
  • Now, as China’s central government pushes for greater blockchain adoption, some are returning and deal-flow is increasing.  
  • Surviving funds are retooling and diversifying into fields such as secondary trading and bitcoin mining. 

Chinese venture capital firms are taking another look at blockchain. After the 2018 crypto crash, up to 90 percent of blockchain-focused VCs left the market. Now, as China’s central government pushes for greater blockchain adoption, some are returning. 

During the first six months in 2019, Chinese blockchain startups raised $368 million via 71 funding deals, according to Chinese financial data tracker 01Caijing

VCs are finding it easier to raise money. Hong Kong-based Kenetic, which started in 2016 with a few partners trading their own capital, is on track to close an eight-figure fund next month, said managing partner Jehan Chu. NEO Global Capital, a fund backed by the NEO crypto project, has also been raising a second fund of about $50 million since June. 

It is among numerous funds that are raising new vehicles this year because of a renewed sense of optimism. At the same time, VCs firms are diversifying away from equity plays in startups towards areas such as secondary trading and bitcoin mining. 

These include Sora Ventures, an early-stage blockchain investment firm that entered the secondary market trading earlier this year. Its trading activities include swap, futures of mostly mainstream cryptocurrencies, which takes up about 20 percent of its asset-under-management, said founder and managing partner Jason Fang.

Fundamental Labs, a $500 million-under-management blockchain fund that has backed Coinbase, Canaan Creative and Binance, invested $44 million in bitcoin miners in May that could increase the bitcoin network’s total hash rate by at least 1,000 peta hashes per second (PH/s).

And Parallel Ventures, a blockchain VC founded by Yizhou Zhu, a former investment director at FreeS Capital, also invested in bitcoin mining equipment this year via a separate unit. The investment boasts a computing power of about 300 PH/s that’s worth about $15 million. FreeS has backed Chinese and U.S. tech startups including Uber. It also manages assets for other investors who are interested in the crypto space and completed raising a 200 million yuan ($28 million) new blockchain fund in August.

Big crash

Still, the deal flow is not what it was in 2018. The 71 deals in 2019 represent a drop of 67 percent in deal dollar value compared to 2018, and a 47 percent fall in deal volume. And there are far fewer firms than there used to be.

“Probably less than 10 percent of Chinese crypto investment funds have survived today [since early 2018],” estimates Howard Yuan, managing partner of Fundamental Labs.

By Yuan’s count, there were probably nearly 1,000 early-stage blockchain investment funds during the peak in 2018, including non-institutionalized individual vehicles and informal cryptocurrency capital pool. Of those, 150 to 200 were of a significant size and focused on early-stage investments, according to research from Frank Li, who was an investment director at blockchain venture firm Node Capital that backed the Huobi exchange.

“There are [now] probably around 20 to 30 blockchain venture funds today [in China],” estimates Ren of Consensus Lab, adding:

“At blockchain parties in Beijing last year, you could see people from over 50 funds mingling. Now, I can count all the funds in Beijing with less than my two hands.”

Fundamental Lab’s Yuan echoed that sentiment, estimating there are only “dozens of funds” left. Bonnie Cheung, a venture partner of 500 Startups, told Coindesk “less than 50” blockchain early stage funds are based in China while Parallel Ventures’ Yizhou Zhu puts the number at “around 20.” 

Many funds were established by blockchain veterans who made money from mining, trading, and operating exchanges. Their venture vehicles tended to be add-on capabilities. Shifting back to mining, trading and exchanges is natural for them. 

Other investors are simply staying on the sidelines. Junfei Ren, founding partner of Redbank Capital and formerly founder of Huobi Labs, said her newly established investment fund is just storing value in bitcoin, rather investing in any startups making use of the underlying technology. 

Blockchain investment firm Consensus Lab is focused on incubating just five to six projects right now. “We don’t think of venture investment as an isolated business any more. It must be combined with other businesses to leverage our unique resources, creating a product matrix that can endure the bear market,” said the firm’s partner Kevin Ren.

Funds are struggling to find good investment targets, despite falling valuations for blockchain startups. Simply relying on equity or token investments this year would mean funds are likely in a standstill.

“We only invested in a handful of new token projects in the past two months. At the peak last year, we were doing one to two investments per week,” said Kenetic’s Jehan Chu.

Deal size is shrinking too as startup valuations nosedived and investors are becoming more cautious. Consensus Lab’s Ren told CoinDesk that the average deal size in China is around $100,000 this year, while deals worth half a million dollars are rarely found. Token deals, on the other hand, have mostly become quiet except a few bright pockets like those issued by exchanges.

Age of maturity

After the baptism by fire of the last market cycle, Chinese blockchain venture firms are maturing and evolving to find more sustainable paths, investors say. Valuations are becoming more reasonable and speculative players have left the market.

Funds are becoming more professional, said Jason Fang, managing partner at Sora Ventures. When his fund started in late 2017, it was among the first institutionalized funds in China with a recognized fund administrator and auditor. Now that practice is more standard.

“Before the market crash, investors didn’t evaluate projects carefully because token prices kept going up,” said Xin Jiang, an investment manager at Fenbushi Capital, one of the earliest and biggest venture funds in China established in 2015. “Now investors need to truly find value through more vigorous research and due diligence.”

Expectations for returns are becoming more realistic. “Analysts are spending much more time researching and checking with each other about startups,” said Frank Li, who worked at Node Capital previously and recently joined Parallel Ventures. He added:

“Investor mentality is also more long-term as nobody [now] expects to realize return in a matter of months. The horizon is more likely years ahead.”

Building sustainable future will take time. “We struggle to define a reasonable investment logic and it’s difficult to explain how we should value startups,” said Ren of Consensus Lab. “It’s a deep paradox, because as we invest, we are unsure where future direction lies.”

Kenetic’s Chu is more optimistic. “Equity in blockchain startups will never be cheaper than it is right now,” he said. “We are excited about the companies in China, especially in crypto trading platforms, infrastructure, and defi [decentralized finance] space.”

Bittrex Target of Latest $1 Million Crypto SIM Hack Lawsuit

Crypto exchange Bittrex is being sued over a SIM swap that netted criminals 100 bitcoin, currently worth nearly $1 million.

The case resembles other recent high-profile heists in which a hacker seizes control of a victim’s cell phone to then loot online crypto accounts: the swap was from cellular carrier AT&T, money was taken from Bittrex, and the hack took control over the victim’s online identity.

The hack against Seattle-based angel investor Gregg Bennett, however, has not been resolved by criminal investigators, as others have before being made public in legal filings.

In this case, Bennett filed suit in Washington state’s King County Superior Court, alleging that Bittrex violated its own published security protocols and ignored industry standards, missing the chance to stop the high-stakes burglary. He also alleged that Bittrex failed to act as the April 15, 2019 hack was in process or respond quickly enough once notified by him directly.

The financial legal examiner for the Washington state regulator handling consumer complaints, the Department of Financial Institutions, concluded that Bittrex did not “take reasonable steps to respond” to Bennett’s notice and “appears” to have violated its own terms of service, in a signed letter dated Aug. 30, 2019 provided to CoinDesk by Bennett.

Though various legal entities were notified of the hack, they have not yet announced any criminal charges in the case, and as such, the whereabouts of Bennett’s bitcoin are unknown.

Bittrex’s response

Bittrex declined to comment specifically about the Bennett hack and the court case.

But CEO Bill Shihara, speaking to CoinDesk about other recent SIM hacks, said the exchange has robust security in place to prevent account breaches, including two-factor authentication and email verification when an unknown IP address logs into an account.

These “speed bumps” might result in some user complaints, he said, but “they actually save a lot of accounts from being hacked.”

But given a target’s email may also be breached, it’s best to never trust one’s phone as the last security stop – once it’s taken over, everything could be accessible, he said:

“I think this is a problem that requires a lot of solutions and a lot of layers of security. And unfortunately one of the mantras that we use and often publish articles about is that ultimately you can’t trust your phone. You have to be aware that you could lose control of your phone.”

AT&T’s role

Bennett told CoinDesk that he suspects his hack was “an inside job,” as he said that his account PIN and even Social Security number on the account were changed, which would imply that someone at the phone company played a role.

However, AT&T is not named in the Bennett suit, while it’s the focus of similar cases filed by Seth Shapiro and Michael Terpin.

While Bennett’s present case only focuses on the security lapses at Bittrex, he said the door remained open; AT&T “will not escape my wrath,” he said.

AT&T spokesman Jim Greer said he could only reiterate his prior responses to the SIM hacks: customers should avoid relying on their cell phones for security.

“Fraudulent SIM swaps are a form of theft committed by sophisticated criminals. We are working closely with our industry, law enforcement and consumers to stop and prevent this type of crime,” Greer said.

Red flags

Bennett says that Bittrex should have known something odd was afoot.

The hacks were coming from a Florida IP address and from an NT operating system, he said, neither of which he had never before used – both signs, in his mind, that it should be clear that he was not the one accessing the account.

Bennett alleges in the lawsuit that the hackers ultimately drained 100 bitcoin from his account – the maximum daily withdrawal allowed. In fact, he had a series of coins that the hackers dumped at below-market prices, converted into a further 30 bitcoin and made off with.

They even returned the following day for his 35 remaining bitcoin, but by that time, Bennett said he had succeeded in getting Bittrex to shut down the account and the unauthorized withdrawals.

Bennett’s suit alleges Bittrex failed to follow industry security standards in his case.

Beyond the different IP address and operating system, his lawyers asserted that Bittrex should have also imposed a 24-hour withdrawal hold after password changes, which he said other exchanges do.

“What I fault Bittrex for is their inability to see obvious suspicious activity,” Bennett said.