Posted on

CFTC: We’re ‘Diligently’ Working on All Crypto-Related Applications, Including Bakkt’s

The U.S. regulator continues to liaise with representatives despite repeated delays over Bakkt’s launch.

United States regulator the Commodity Futures Trading Commission (CFTC) is actively working to approve multiple crypto-related applications, including for Bitcoin (BTC) futures from institutional trading platform Bakkt. A CFTC commissioner revealed the news in remarks to cryptocurrency news network Blocktv in an interview on March 19.

Answering a question about the status of Bakkt’s application, which has seen multiple delays, commissioner Dan Berkovitz avoided a direct update on the project, instead saying that the CFTC was trying to assist all cryptocurrency-related products in obtaining the necessary approval for launch in the U.S.

“We have a very interactive process with all the entities that come before us and [are] working diligently with all the applicants to process their applications and get their products on the market,” he said, adding:

“But we need to ensure that a crypto product, just like any other product that’s traded on our markets, meets all the standards.”

Asked whether Bakkt was now receiving special treatment from the CFTC, however, Berkovitz declined to suggest previous hold-ups had resulted in pressure to move forward. “All of the applications before us we’re working very hard on with the applicants, including that one,” he added.

As reported today, the Wall Street Journal wrote that Bakkt was facing more difficulties in its road to getting the green light from regulators. Following a lack of consensus over how the platform would handle its Bitcoin futures, discussions nonetheless do remain ongoing.

“We are working through the regulatory review process and are looking forward to updating the market soon,” the publication quoted an unnamed ICE spokesperson as saying.

Bakkt, the brainchild of New York Stock Exchange owner Intercontinental Exchange (ICE), was originally slated to debut in December, but regulatory compliance hurdles saw the date pushed back several times.

At present, a vague juncture sometime in 2019 is in the cards, as regulators seem highly wary of approving related offerings, specifically a Bitcoin exchange-traded fund (ETF).

Posted on

Swiss Federal Council Initiates Blockchain Law Consultation Period

As announced in late 2018, the Swiss Federal Council proposed specific adjustments in the existing federal law for the blockchain industry.

The Swiss Federal Council has started its consultation period on the adaptation of federal law for blockchain development, according to an official press release published on March 22.

By initiating the consultation, the Federal Council intends to improve legal certainty over blockchain applications in order to build a basis for regulatory framework for the industry in Switzerland, particularly in the financial sector.

According to the document, the Federal Council’s consultation will last until the end of June 2019.

In mid-December 2018, the Swiss Federal Council adopted a report on the legal framework for blockchain in the financial sector, stating that the existing financial law in the country is suitable for the blockchain industry, but needs some specific adjustments. The authority advocated for better legal clarity for rights holders on a blockchain network and ensuring that decentralized trading platforms are subject to the country’s Anti-Money Laundering (AML) Act.

Following the announcement, the Council has now released a draft consultation document, proposing a number of adjustments, including the establishment of digital registration of rights in the Swiss Code of Obligations, as well as the segregation of crypto assets in the event of bankruptcy in the Federal Law on Debt Collection and Bankruptcy.

The Council also proposed creating a new authorization category for distributed ledger technology (DLT) trading facilities in the market infrastructure law in order to provide a regulated financial market. Apart from that, the authority suggested an adaptation of the future Financial Institutions Act in order to set up a licence for operating a trading facility as a securities firm.

The Swiss Federal Council stated that AML policies are set to be incorporated into the planned amendment of the Anti-Money Laundering Ordinance as part of the ongoing revision of the Anti-Money Laundering Act.

Earlier this week, the Federal Assembly of the Swiss government approved a motion to instruct the Federal Council to adapt existing legislation for cryptocurrency regulation.

Posted on

Bakkt Delay Due to CFTC Concerns Over Its Planned Custody of Clients’ Bitcoin: WSJ

The CFTC’s delay in issuing Bakkt an approval for its Bitcoin futures is in part due to the fact that Bakkt wanted to hold clients’ funds, according to WSJ sources.

Much-anticipated crypto platform Bakkt’s plans to store customers’ Bitcoin (BTC) from its Bitcoin futures could cause further delay on obtaining approval from United States regulator the Commodity Futures Trading Commission (CFTC). The news was reported by the Wall Street Journal (WSJ) on March 21, citing anonymous sources.

When Bakkt was first announced back in August, the platform had revealed that its first product would be Bitcoin futures that are physically delivered daily, subject to CFTC approval. Bakkt also said that it planned to hold Bitcoin on behalf of its clients via its “physical warehousing.”

According to “people familiar with the matter,” in February, the CFTC told the platform that if it were to have custody over its customers’ crypto, it would have to take additional steps to comply. In particular, the CFTC would “require disclosures of the venture’s  business plan and a public comment period, which would have further delayed approval.”

The WSJ reported that the plan for Bakkt to custody its clients’ Bitcoin then “ran aground” that month to avoid said further delays.

Bakkt and the CFTC are reportedly now considering other ways the platform can handle the futures contract so that it is compliant with the regulator.  According to the report, the CFTC has outlined various alternative options for Bakkt, including having the firm register as a trust company. However, other sources told the WSJ that such a process could also be time consuming.

Meanwhile, a spokesperson for the Intercontinental Exchange — the operator of the New York Stock Exchange, which is launching Bakkt  — told the WSJ:

“We are working through the regulatory review process and are looking forward to updating the market soon.”

Bakkt was first slated to debut in November, but delays around obtaining approval from the CFTC pushed back the deadline several times.

Nonetheless, according to CFTC commissioner Dan Berkovitz  in an interview this week, the regulator is currently “diligently” working on issuing an approval for multiple crypto-related applications, including for Bakkt.

As Cointelegraph wrote today, March 22, Bakkt has reportedly earned a $740 million valuation after it raised over $180 million in funding last year.

Posted on

US Missoula County Considers Requiring Crypto Miners to Use Renewable Energy

Proposed regulation in the United States Missoula County would require mining operations to produce or purchase renewable energy.

The official website of the United States Missoula County in Montana reports that the country commissioners have discussed regulation of cryptocurrency mining on March 14.

The county website contains two drafts, one being the Cryptocurrency Mining Resolution and the other one the Cryptocurrency Mining Zoning Overlay District Regulations. The county’s commissioners will hold a public hearing concerning both the regulation drafts on April 4.

The latter draft “establishes locations where cryptocurrency mining operations may be sited in Missoula County and conditions that must be met in order to protect the public health, safety, morals, and general welfare of county residents.” In particular, the document puts an emphasis on the possible effect on global warming and electronic waste.

The proposed regulation also sets a number or requirement for crypto mining operations. More precisely, mining operations can be located only in light industrial and heavy industrial districts, they need to be reviewed as a conditional use and verification must be provided that all electronic waste generated will be handled by a DEQ-licensed recycling firm. Lastly:

“These facilities shall be required to develop or purchase sufficient new renewable energy to offset 100 percent of the electricity consumed by the cryptocurrency mining operation. To meet this condition, the cryptocurrency mining operation must be able to establish that their actions will introduce new renewable energy onto the electrical grid beyond what would have been developed otherwise.”

The document also specifies that mining operations that existed before the draft becomes effective, which would not be allowed under this regulation, may continue as long as they remain otherwise legal. Still, those operations won’t be authorized for expansion or moving if they don’t conform with the regulations, and other conditions are set for such instances.

As Cointelegraph recently reported, blockchain specialist at Big Four auditing company PwC Alex de Vries said that renewable energy will not solve Bitcoin’s (BTC) sustainability problem.

Also, at the beginning of the current month, experts from United States-based tech consultancy firm Booz Allen Hamilton have said that blockchain can make the infrastructure of new renewable energy markets across the Gulf Cooperation Council more secure, resilient and cost-efficient.

Posted on

Swiss Federal Assembly Approves Instructions on Cryptocurrency Regulation

Switzerland’s Federal Assembly has approved proposals to instruct lawmakers on cryptocurrency regulation.

The legislative body of the Swiss government, the Federal Assembly, has approved a motion to instruct the Federal Council to adapt existing legislation for cryptocurrency regulation. Coitelegraph auf Deutsch reported on the development on March 20.

The motion introduced by Liberal assemblyman Giovanni Merlini intends to instruct the Federal Council to adapt existing provisions on procedural instruments of judicial and administrative authorities, so that they can also be applied to cryptocurrencies. The Council approved the motion introduced with 99 to 83 votes in favor and 10 abstensions.

The move aims to close perceived gaps in protecting cryptocurrency users from illicit activities like extortion and money laundering. The legislation is set to determine how to stifle cryptocurrency-associated risks, as well as whether entities operating crypto trading platforms should be equated with financial intermediaries, and thus be subject to financial market supervision.

Following the approval, Swiss finance minister Ueli Maurer reportedly stated that the proposed developments exceeded the scope of the planned regulation.

Last December, Maurer indicated that instead of a specific blockchain or cryptocurrency legal framework, Switzerland should tweak existing laws to allow for the new technology and its financial application.

Earlier in March, the Basel Committee on Banking Supervision (BCBS), a Swiss-based international banking authority, warned that the robust growth of the crypto industry could potentially “raise financial stability concerns and increase risks faced by banks.” The BCBS also argued that crypto assets are “unsafe to rely on” as a medium of exchange or store of value — two of the main functions of money — implying that “cryptocurrency” is a misnomer.

Posted on

Did the SEC Chairman Confirm Ethereum Isn’t a Security? Not Quite, but It’s Optimistic

Ethereum is most likely not a security under U.S. laws, but a statement by the SEC chairman did not confirm it.

Ethereum is most likely not a security under existing United States laws, as previously said by U.S. Securities and Exchange Commission (SEC) Division of Corporate Finance head William Hinman.

“Based on my understanding of the present state of Ether, the Ethereum network and its decentralized structure, current offers and sales of Ether are not securities transactions,” Hinman said on June 14, 2018.

But, while the statement of SEC Chairman Jay Clayton released on March 12 is certainly positive for the cryptocurrency sector, it did not directly confirm that Ethereum is not a security.

Indirect comment on Ethereum

In a letter, Clayton said that he agrees with Hinman’s explanation when a cryptocurrency transaction does not represent an investment contract or the transfer of a security.

“I agree with Director Hinman’s explanation of how a digital asset transaction may no longer represent an investment contract. If, for example, purchasers would no longer reasonably expect a person or group to carry out the essential managerial or entrepreneurial efforts. Under those circumstances, the digital asset may not represent an investment contract under the Howey framework.”

However, according to Marco Santori, the president of Blockchain.com, one of the largest cryptocurrency wallet operators in the global market, the statement by Clayton does not directly confirm the regulatory nature of Ethereum to Congress.

Clayton said that he agrees with Hinman’s explanation on the point in which a token can no longer be accurately characterized as a security but did not directly and conclusively state that Ethereum is not a security under existing laws, Santori explained:

“Clayton didn’t say that ‘Ether is no longer a security.’ He said he agreed with Hinman’s explanation of when a token is no longer a security. Hinman can say stuff like that but for the Chairman to say it in a letter to Congress is another matter entirely. It would be construed as binding, and the SEC isn’t trying to have that.”

Although Santori said that he does not think Ethereum is a security — and so did other industry executives and regulators, including Hinman — there is a gap between an SEC official offering his thoughts on the regulatory nature of the SEC and the chairman of the commission stating it to Congress.

“Okay but is Ether a security? No, I don’t think it is,” Santori said.

Does it change the ICO market?

In recent years, the initial coin market (ICO) market has adopted the Simple Agreement for Future Tokens (SAFT) contract to target accredited investors over anonymous or unaccredited investors.

As such, most SAFT contracts, which are considered an issuance of security, do not allow investors based in the U.S. to participate in token sales, due to the ambiguity surrounding ICO regulation.

More importantly, unless it obtains the approval of the SEC, an ICO project prefers to not risk being classified as a security within the U.S. and run into conflict with U.S. regulators rather than target U.S.-based investors.

Santori emphasized that the SEC Chairman did not endorse the SAFT framework in any manner nor reject Ethereum as a security:

“Did Clayton endorse the SAFT framework? Lolno [sic]. Nor did he say that Ether is not a security. Words have meaning, though, and so does diction. It’s tough to ignore these letters and everything that goes into them. Best predictive value we have, for now.”

Clayton’s recent statement, which could be viewed as a positive step toward cryptocurrency and ICO regulation, does not provide enough clarity on the regulatory nature of most tokens and does not definitively show that Ethereum is not a security.

Why governments will likely back away from characterizing Ethereum as a security

As SEC official Hinman said last year, the definition of a token as a security will continue to be a case-by-case scenario that could differ based on time frames. The official noted that systems that directly rely on central actors or a centralized institution for success are considered securities.

Even if an ICO or a token sale starts off as a non-security, if the token begins to rely on a central institution, Hinman suggested that securities laws could be applied.

“Over time, there may be other sufficiently decentralized networks and systems where regulating the tokens or coins that function on them as securities may not be required. And of course there will continue to be systems that rely on central actors whose efforts are a key to the success of the enterprise. In those cases, application of the securities laws protects the investors who purchase the tokens or coins.”

Cryptocurrencies and public blockchain networks like Bitcoin and Ethereum are unlikely to be considered securities because there always have been open-source developer communities working to improve and develop the codebases of the two crypto assets.

But, once a token or a blockchain project begins to rely on a central group of developers or authorities, it could run into the risk of being described as a security in the U.S.

Characterizing Ethereum as a security could be detrimental to the growth of the global blockchain sector. Most blockchain projects and tokens are based on Ethereum in the form of ERC-20 tokens and utilize the smart contract standard to execute transactions and process information.

As such, industry executives do not expect the regulators in the U.S. or other key governments to consider Ethereum as a security.

How is the overall regulatory landscape in the U.S.?

With companies the likes of Gemini putting in the efforts of maintaining strictly regulated cryptocurrency trading platforms that are compliant with both federal and state-specific regulations, the infrastructure of the U.S. cryptocurrency market is strengthening at a rapid pace.

However, it is not likely to see an ICO-supportive and token-sale-adopting market in the U.S. anytime soon. Similar to Japan, where ICOs to the public are banned but are set to be opened to institutional investors and potentially accredited investors, the SEC is expected to continue encouraging blockchain projects to cooperate with the agency by receiving an approval.

In December 2018, as Cointelegraph reported, Chairman Clayton said that ICOs could be an effective way for entrepreneurs and teams to raise capital, but it has to be done in the right way — i.e., following the securities laws of the U.S.

“I believe that ICOs can be effective ways for entrepreneurs and others to raise capital. However, the novel technological nature of an ICO does not change the fundamental point that, when a security is being offered, our securities laws must be followed.”

The state of the ICO market in the U.S. remains more or less similar to the time before Clayton released his statement and the securities laws remain ambiguous for projects.

Could it change at all?

The SEC is an enforcement agency that interprets the existing securities laws in the U.S. If changes are made to the securities laws, it may alter the way the SEC characterizes tokens and cryptocurrencies in general.

In late 2018, a bipartisan bill entitled “Token Taxonomy Act of 2018” was introduced, which proposed the exclusion of cryptocurrencies from the securities laws because of the limit in which the laws govern or characterize cryptocurrencies:

“Direct the Securities and Exchange Commission to enact certain regulatory changes regarding digital units secured through public key cryptography, to adjust taxation of virtual currencies held in individual retirement accounts, to create a tax exemption for exchanges of one virtual currency for another, to create a de minimis exemption from taxation for gains realized from the sale or exchange of virtual currency for other than cash, and for other purposes.”

The time frame for a vote on the the bipartisan bill still remains unclear, and it remains highly unlikely that changes will be made to the existing securities laws in the U.S. in the near-term.

In the foreseeable future, the SEC is expected to go over ICOs and token sales in a case-by-case basis, evaluating whether certain tokens or crypto assets represent potential security transactions within the regulatory framework of the U.S.

Posted on

Most Respondents File Negative Comments for SEC’s Review of VanEck/SolidX Bitcoin ETF

Multiple respondents have filed comments with the U.S. SEC on the latest proposed rule change for the VanEck/SolidX Bitcoin ETF.

Multiple respondents have filed comments with the United States Securities and Exchange Commission (SEC) on the latest proposed rule change for the VanEck/SolidX Bitcoin (BTC) exchange-traded fund (ETF). Comments to date were submitted between Feb. 13 and March 12.

As reported, CBOE’s BZX Equity Exchange — the exchange that would prospectively list the Bitcoin ETF — had temporarily withdrawn its application for a rule change on the ETF in January, citing the negative impact of the U.S. government shutdown on the SEC’s operations. CBOE then resubmitted the application for the SEC’s consideration at the end of the month.

On Feb. 19, the SEC announced that it would shortly be commencing the formal countdown period to approval or disapproval of the product, soliciting feedback from the public.

Among the seven comments filed thus far, six strongly urge the regulator not to approve the VanEck/SolidX proposal.

The sole response that affirms the positive value of the Bitcoin ETF approval is from respondent Sami Santos on March 12, who engages with the SEC’s previously given rationale for disapproving other ETF proposals:

“[Disapproval of] an ETF because of manipulation and […] the protection of investors is contradictory, because without an investment fund the investor is susceptible to buy bitcoins in deregulated exchanges and lose their investments.”

Noting that VanEck “offers insurance to cover possible losses,” Santos argues that ETF approval would create greater market security in providing more “liquidity, transparency and safe custody of assets that will have credibility for large investors.”

The lengthiest negative comment — from respondent Sam Ahn on Feb. 13 — focuses on Bitcoin’s lack of intrinsic value. Ahn accuses the ETF applicants and the 2008 Bitcoin white paper itself of “grand[ly] exaggerat[ing]” the mathematical complexity involved in Bitcoin mining. The applicants’ wording, he claims, “works like a moat around the castle of bitcoin mining, keeping us away from the reality of bitcoins.”

Other, more concise comments — echoing Ahn in part — focus on Bitcoin’s alleged lack of value as a financial product, its volatility and market manipulation “by the very few.”  One respondent, D. Barnwell, does provide an argument that proposes:

“I would ask the SEC […] to take a ‘watch and wait approach’ […] [t]he true game changer is the underlying technology Blockchain, not the cryptocurrency. And to make inroads into this industry-changing technology, one does not need to have a financial product based on the cryptocurrency.”

As previously reported, SEC chairman Jay Clayton has recently stated that there “may be a case where a Bitcoin ETF could satisfy our rules.”  He suggested the technology is “demonstrating significant promise in the places where it’s consistent with our approach to capital raising in the past.”

As Cointelegraph reported yesterday, the SEC is also soliciting industry input as it potentially reconsiders existing custody rules in specific cases of digital asset trading and settlement.

Posted on

Winklevoss Capital Partner Sterling Witzke: Dollar Is Not Designed for the Internet, but Stablecoins Are

Winklevoss Capital partner Sterling Witzke spoke to Cointelegraph about the future of stablecoins, regulatory clarity in U.S. and a fair price for Bitcoin

Sterling Witzke has been working at Winklevoss Capital — a venture capital firm set up by the famous Winklevoss twins — for five years now. As a professional investor, she is very interested in financing early stage crypto and blockchain projects. She believes that stablecoins are perfectly designed for the needs of internet payments and will steadily gain popularity as the industry evolves.

We talked to Sterling Witzke about the future of fiat-pegged cryptocurrencies, the necessity of proper legal frameworks and the future of the maturing crypto industry.

Clarity is always good for an ecosystem

Ana Berman: How do you think, what will 2019 bring in terms of regulation? The question is related to the ads that Gemini recently launched, which said, in particular, “Crypto needs rules.” Don’t you think it undermines the whole idea of decentralization?

Sterling Witzke: The short answer is no. As you know from the slogans, Gemini is very pro-thoughtful regulation and believes that consumers in the crypto space deserve the same protection as consumers in other industries.

It’s all about making fair outcomes for all. It doesn’t undermine the original ethos of crypto to have regulations. The distinction comes with the companies that are built on top of the protocol. So, at the protocol level, it’s absolutely correct that you don’t need any more regulation and rules, because those are already built in.

You’ve got the math and the cryptography that dictates the rules on the protocol. The difference is that the applications and companies built on top of those protocols are run by humans, and we all know they are fallible. That’s where the oversight comes into play.

AB: The United States Securities and Exchange Commision (SEC) has recently claimed that crypto will be its top examination priority in 2019. Do you believe the SEC will take some important steps this year?

SW: I hope so. I think that regulatory clarity, especially on things like security tokens versus utility tokens, is needed to get us towards mass adoption. I know there are several companies that were thinking about raising capital, but are now a bit hesitant because they just aren’t quite sure how to operate in a gray area. Such firms want to ask for permission rather than forgiveness, which is our model also, and thus we appreciate that. But I think that clarity is always good for an ecosystem.

AB: Many entrepreneurs participate in crypto initiatives, like draft bills, round tables, etc. Is Winklevoss Capital interested in proposing some regulation or maybe discussing it with legislators?

SW: Tyler and Cameron are very involved and proactively working with regulators to help form the way that these rules are made, which I think is very important. We don’t want government to come down with a heavy hand, as they might not understand the intricacies of the ecosystem.

I am not involved in the regulatory side, but Tyler and Cameron have been very active in the space for a long time. One of the most recent initiatives is the Virtual Commodities Association [VCA], which is a self-regulatory organization started by Gemini. I believe that its current executive director, Maria Filipakis, is actually from the the New York Department of Financial Services [DFS]. So, there is a lot of ongoing communication and collaboration with regulators to try to move this case forward.

Investors are dipping their toes in crypto, no one is taking the plunge

AB: As far as we know, Winklevoss Capital is mostly focused on the investments and the institutional side of the business. Do you believe there will be more Wall Street involvement in 2019? What do you expect in terms of institutional investments?

SW: I don’t think that 2019 is necessarily the year. The end of 2017 was so crazy. People tend to think of the space as moving at lightning speed, but the underlying development doesn’t move that fast. I think it takes a while for institutions to get comfortable. There needs to be a better custody, and any kind of healthy debt and credit markets to get those institutions really excited.

So, I don’t think that I would make a prediction that 2019 is necessarily the year. I think that a lot of investors are thoughtfully dipping their toes in, but I don’t really see anyone completely taking the plunge.

Crypto markets face healthy corrections, as any emerging industry

AB: CNBC’s Brian Kelly once compared crypto regulations to a ski track. Someone has to put a warning sign on a dangerous one, and the skier then decides whether to take risk or not. Do you think it is a relevant description of what’s going on?

SW: I think that is a nice sentiment. The majority of me believes in free markets and free will. Everyone should be able to invest in what they want to invest in. But the fact is that we have some responsibilities to protect people.

I grew up in South Dakota, for example, and crypto has not really made a splash in the Midwest, yet. In the end of 2017, I had lots of friends who bought Bitcoin at $18,000 or $19,000 and kind of lost their shirts. For such a new market, we need the same protections as we do with public equities. The precedent is already here, and there is really no difference.

AB: You just mentioned the bubble of December 2017. Do you think it was a necessary process — let’s say, a sign of development?

SW: One hundred percent. I think that lots of new industries need irrational exuberance to garner excitement and really get the word out there. Thousands more people now know of Bitcoin. That said, there’s no reason why Bitcoin should have been $19,000.

That was all irrational exuberance, bubble — whatever you want to call it. You could maybe argue that this is an overly healthy correction, but I think that a healthy correction was 100 percent necessary. It’s part of the traditional cycle of a new industry emerging.

It was necessary to move this base forward, because it got rid of a lot of bad actors. From the end of 2017 to the beginning of 2018, we saw every Joe Blow creating an ICO [initial coin offering] just to raise, in some instances, hundreds of millions of dollars, and then take off and drink a Mai Tai on the beach. But their investors lost everything. The people that are left and active in the space are really in it for the long term. They see the fundamental effect that blockchain will have globally for the next 100 years. These people are in the industry for the long term.

Bitcoin is a store of value, not a speculative asset

AB: What, in your opinion, is a fair price for Bitcoin?

SW: I won’t make any price predictions, but I am happy where we are, because we’re in a build phase in the ecosystem. I think that the speculators that drove the price up are now sitting on the sidelines. And again, the people that are left truly believe in an ecosystem and think of Bitcoin as a store of value rather than a speculative asset.

AB: So, the ongoing price correction, let’s say, when Bitcoin hovers around $3,500, is more or less a fair process, right?

SW: I think it’s a fair process. And we’ll probably be at these price levels for a while. There is a lot of underlying infrastructure work to be done with things like scalability, user experience, etc. Maybe not on the underlying infrastructure part, but on the top layer. People aren’t going to use these applications if we can’t make it foolproof and extremely easy to use.

Stablecoins are designed for internet payments

AB: As per recent studies, the era of ICO craziness is now over. Many believe the future is in tokenized assets and stablecoins. Do you share this stance?

SW: The short answer is yes. The dollar has been a great form of payment for a long time, but it was not designed for the internet age we are currently in. We need a stable currency that works with the blockchain and the internet. Fiat-pegged stablecoins bring us ability to purchase assets or to be paid dividends in assets that are not volatile.

The craziest example of using something like Bitcoin as a form of payment is the pizza that was bought for 10,000 BTC back in the day. At that time, it was $20, and now it is about $3 million. So, we need something like a fiat-backed stablecoin to be able to facilitate transactions on the blockchain. It’s a currency designed for crypto.

That said, I’ll give my plug for the Gemini dollar [GUSD]. The Gemini dollar is 100 percent backed by the U.S. dollar, and it’s the only stablecoin that has actually released their banking partner, State Street, and are very upfront about that. State Street can say, “Yes, with 100 percent certainty we have 100 percent of the dollars that back GUSD.”

AB: Can you please tell us something about Winklevoss Capital’s blockchain plans for 2019?

SW: Winklevoss Capital invests in both blockchain and nonblockchain-related startups. So on the traditional venture capital side, we invest in early stage companies, both seed and Series A across industries. We’ve done a little bit of everything from e-commerce to IT hardware, and international logistics, and everything else.

On the blockchain side of things, we think about investing very similarly. We’re not trying to be a hedge fund, we’re not flipping public tokens. We sat out of the ICO craze, we’ve already discussed. We’re looking for a really long-term companies and founders that are trying to build a company for the next decades. We’re investing very patient capital with a seven to 10 years’ time horizon. We’re focused very much on infrastructure. As I mentioned, we think that scalability solutions for things like smart contracts are really interesting.

There’s so many interesting applications, like the ability to prove identity and bank the unbanked, which involves 2 billion people that don’t have an official form of ID or can’t get a bank account. If you think about 2 billion people coming online, not a single existing protocol can handle that.

You can also think of Bitcoin doing seven to 10 transactions a second, Ethereum doing 10 to 15, as a maximum — that’s just not feasible. So, we’re looking at solutions that can solve that problem.

Blockchain will be in focus next years

AB: Could you please name any particular companies you’ve already worked with or would like to invest into?

SW: Not yet, unfortunately. It’s something that I’m actively looking for but have not found, yet. We have not made any investments in this space. I think it’s an area of focus over the next year. I’m hopeful that more and more entrepreneurs will be focusing on that problem because it’s massive.

There are so many applications for a blockchain in the U.S. and in developed countries — to make markets more efficient, to fix what I would call First World problems, etc. But, at the end of the day, when we’re talking about addressing the bottom of the pyramid and applications for that, there is a huge quality of life difference that can be more impactful. I’m looking forward to more entrepreneurs focusing on those applications.

AB: Apart from the social application of blockchain, could you mention some areas that are interesting? What are the most promising industries for blockchain?

SW: I think that remittances are also interesting, but this is a social application as well. Gaming is an industry that is really promising. If you think about developers, they’ve been operating digital economies for a decade. Nobody understands the digital supply and demand economics better than gaming developers, and so that feels like a natural adaptation of blockchain — things like nonfunctional goods within games.

Imagine a kid that spends all his time developing this gaming character and another person that really loves playing a game like Fortnite, for example, but doesn’t have the same amount of time to dedicate to it. In that case, the kid could sell the character to someone who’s willing to pay. And, actually, that’s a good use case for stablecoins — defensible goods within gaming.

AB: How many years do we need for mass adoption?

SW: Most likely, several. There is a lot that needs to happen to the underlying infrastructure, and an amazing amount of things that needs to happen to usability before the average consumer is really using applications.

The interview was conducted at the sidelines of the Crypto Finance Conference in St. Moritz, Switzerland, in January 2019. The panel Sterling Witzke took part in was called “From anarchy to adoption — are we selling out or really creating a better world?”

Posted on

US SEC Solicits Feedback on Crypto Assets and Custody Rules

The US SEC is soliciting industry input as it potentially reconsiders existing custody rules for investment advisers regarding crypto.

The United States Securities and Exchange Commission (SEC) is soliciting industry input as it potentially reconsiders existing custody rules in specific cases of digital asset trading and settlement.

The SEC launched its information gathering initiative in an open letter to Karen Barr, president and CEO of the Investment Adviser Association, on March 12.

Currently, the Custody Rule (Rule 206(4)-2) of the Investment Advisers Act of 1940 determines rules that aim to protect investors who delegate custody of their funds or securities to professional investment advisors.

As the letter outlines, such custodial authority carries an ”increased risk of misappropriation or misuse of [investors’] assets,” and investment advisors are thus legally bound to register with the SEC and to comply with a series of rules for sound custodial practices.

The SEC states that its appeal for input regards the application of the Custody Rule to digital assets, and more specifically as to whether any revisions to the rule might be necessary “regarding the regulatory status of investment adviser and custodial trading practices that are not processed or settled on a delivery versus payment (“Non-DVP”) basis.”

A DVP settlement procedure is where a buyer’s payment for a given security is due at the same time as that security’s delivery.

As Katherine Wu — director of business development at New York City-based crypto research firm Messari — has noted in her coverage of the SEC initiative, an example of DVP at work is the US DTC (Depository Trust Corporation) system. Here, the DTC clearing house acts as an SEC-registered custodian and intermediary that ensures the secure payment and transfer of securities between parties.

In cases of non-DVP settlement procedures — i.e. where payment is made after the delivery of a security —  the settlement risk is deemed to be higher.

The SEC is thus soliciting input on non-DVP settlement in the digital asset space, regarding both the settlement process of peer-to-peer digital asset transactions, as well as intermediated settlement that involve exchanges or over-the-counter trading platforms.

Among the questions in its letter, the SEC solicits information on what types of digital asset instruments trade on a non-DVP basis, what role custodians play in non-DVP digital asset trading and how they currently mitigate risks.

Wu, who worked as a legal intern at the SEC prior to her crypto industry involvement, has given her perspective on the agency’s first move:

“What’s interesting to me is that the SEC does not seem to be jumping the gun in subjecting all non-DVP trades as under the custody rule, but rather is posing this as an opportunity for them to assess the underlying custody risks.”  

As reported, the SEC’s chairman Jay Clayton has recently emphasized that custodial practices are a particular area of scrutiny as the agency mulls the regulation of new, prospective crypto investment instruments such as exchange-traded funds.

Posted on

Japan Introduces New Regulations for Cryptocurrency Margin Trading

The Cabinet of Japan has reportedly approved new regulations in regard to cryptocurrency margin trading.

Japanese financial regulators have reportedly introduced new regulations for cryptocurrency margin trading, local news agency Nikkei reported on March 18.

The Cabinet of Japan, the executive branch of the country’s government, has reportedly approved draft amendments to Japan’s financial instruments and payment services laws, limiting leverage in cryptocurrency margin trading at two to four times the initial deposit.

Margin trading is the use of borrowed funds from a broker to trade a financial asset, thus forming a collateral for the loan.

The new rules — which are reportedly et to come into force in April 2020 — will require cryptocurrency exchange operators to register within 18 months of that date, which will purportedly enable the Financial Services Agency (FSA) to introduce relevant measures in regard to unregistered cryptocurrency “quasi-operators.”

Following promulgation of the new regulations, entities dealing cryptocurrency will ostensibly be monitored similarly to securities traders in order to protect investors. Additionally, cryptocurrency operators will be divided into groups to identify those engaged in margin trading and those issuing tokens through initial coin offerings (ICOs).

With this move, regulators reportedly aim to secure investors from getting caught up in Ponzi Schemes, as well as encourage legitimate companies to practice offerings as fundraising tools.

In January, the FSA revealed that it was considering the regulation of unregistered firms that solicit investments in cryptocurrencies. The development is reportedly a bid to close a loophole in the country’s existing regulatory framework, in which unregistered firms that collect funds in crypto rather than fiat currencies remain in a legal gray zone.

Back in August 2018, the commissioner of the FSA said that the agency wants the cryptocurrency industry to “grow under appropriate regulation” in order to find the “balance” between consumer protection and technological innovation, noting:

“We have no intention to curb [the crypto industry] excessively. We would like to see it grow under appropriate regulation.”