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State Street Insiders Split Over Key Blockchain Use Case

There’s no shortage of breathless hype about blockchain.

What’s harder to find is a sober and nuanced discussion of the technology’s merits and drawbacks for a particular use case. For such a perspective, it can help to talk to different people at the same company who have been studying the matter and reached divergent conclusions.

It’s not a secret that State Street, the giant U.S. custody bank, is looking to streamline the complex business of securities lending using blockchain. A decades-old industry, securities finance today is a continual dance of manual reconciliation, involving a string of market participants and lending parameters, all of which has become even more complicated since the 2008 financial crash.

In theory, distributed ledger technology (DLT), with its shared view of the truth, removes the need for multiple processes and lots of intermediary players.    

But it was never going to be a simple transition – and that’s one thing at least that executives from different parts of the bank can agree on.  

In terms of how peer-to-peer securities lending could be deployed, people from the technology architecture and product teams are bullish about what they consider an inevitable change.

From the product development side, Nick Delikaris, head of global trading and algorithmic strategies, said that “the whole industry” is looking at a peer-to-peer version of securities lending, and blockchain based solutions are definitely on the cards.  

He also acknowledged the scale of the challenge, telling CoinDesk,

“It’s not an on-off button, like you can wake tomorrow and be doing everything peer-to-peer.”

Delikaris said he expects to see a mix of products and services. “Different counterparties will have different flavors, and to start with some of this tech may actually make things harder,” he said.

“I think that’s what we are going through right this second. But at the end of the day, we will have a better industry set up.”

Meanwhile, the pragmatists in the front office, who perhaps take more of a legacy marketplace position, remain wary of such a transformation.

Doug Brown, head of alternative financing solutions at State Street, said he sees potential value in using blockchain to enable P2P lending of securities, but cautioned that most of the market isn’t ready for it.

“If you look at that marketplace and the people who borrow securities, there are very few institutions that have the technology or the operational infrastructure in place to do that themselves today,” he said.

Brown added that “there is a real question about whether it’s worth their time to build that infrastructure, the cost to do it, the staffing to do it – or whether the model they are using today is efficient enough.”

Pros and cons

Taking a step back, “peer-to-peer” lending in this context means a client who wants to lend securities (typically a large mutual fund or pension plan) directly faces the borrower (normally a hedge fund), as opposed to having a broker-dealer in the middle managing the whole operation.

State Street has a panoramic view of the securities lending landscape; the bank has two components under its roof that most people don’t have, explained Delikaris.

“We have an arm called enhanced custody, which is basically akin to a prime broker,” i.e. a provider of specialized services to hedge funds, he said.

“We also have the biggest agent lender in the world,” he added, referring to State Street’s business of lending securities to institutions on behalf of its clients.

This means that testing out a blockchain idea – which State Street began doing in 2016 with a proof of concept (PoC) for digital tokens to post collateral – has evolved to a point where the bank is mapping out the entire securities financing ecosystem for potential transformation.

And this, in turn, has led to markedly different views inside the bank on the pros and cons.

From his front-office perspective, Brown conceded a P2P model might make it a little cheaper to borrow securities, while State Street’s traditional lending clients might make a bit more on the transaction.

But he also reeled off a list of challenges, and in so doing told a familiar story about the real benefits intermediaries and brokers bring to a market.

Prime brokers, for example, manage all aspects of liquidity and are charged with finding substitute collateral when required to do so. In addition, going P2P without anyone in between means counterparties would need to do credit due diligence on each other.

Plus there would no longer be borrower default indemnification, which is pretty much expected across the industry, noted Brown. In other words, if the borrower in a P2P transaction fails to return the borrowed assets, the lender is out of luck, whereas in today’s market an intermediary like State Street will cover the loss.   

“A P2P model, where everybody faces each other and negotiates contracts, where the protection is gone and both parties now need credit teams, would likely not be a broad industry solution,” said Brown.

“That model might work for a small subset of institutions. But if you only had a small number of institutions participating I think it might be challenging to convince people there was enough liquidity to really move that market in a large way,” he said.

Delikaris took on board the very real concerns of his colleague, agreeing “this can’t simply be done in a lab” but involves talking to clients to find out “what keeps them up at night.”

However, he defended a P2P model which he said could be offered to lenders with an appetite for more risk, who might not care about the indemnity – adding that things could be priced differently because of that.

“My own personal feeling is that if some things get transformed because of this technology I think what you’ll see are other products and services that will come and piggyback off that to help where those issues arise,” he said.

Evolution, not revolution

Meanwhile, other banks are forging ahead with securities lending using blockchain, but like State Street, they expect a long transition period.

Back in March this year, ING and Credit Suisse completed a live securities lending transaction using a collateral-lending blockchain application co-developed by HQLAx and R3.

Herve Francois, blockchain initiative lead at ING, said that for now his bank is “leveraging the existing infrastructure of tri-party agents and custodians in order to go to production faster, as this constitutes a legal framework by itself.”

Francois acknowledged that market participants might be left with missing services if they moved to a P2P model, and in the event may need to outsource to the current intermediaries.

“That could be a way for those actors to still play a role in the short- to medium-term,” he said. “It’s a step in the blockchain evolution which in the long run should be able to disintermediate them.”

Guido Stroemer, CEO of HQLAx, which is focused on tokenizing baskets of securities to help bank treasurers manage and transfer liquidity better, agreed the legacy marketplace requires many operational stages to be carried out in a well-established manner

Going forward, Stroemer said some assets lend themselves to DLT better than others, with securities first, then cash, and maybe gold.

“Successful use cases will only thrive in the real world when they have relatively low barriers to entry,” said Stroemer, concluding:

“Anything that requires a market user to go through a ‘big bang’ change has no chance of creating market wide adoption.”

State Street image via Shutterstock

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

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Despite NYSE’s ‘Biggest News of the Year’ for Bitcoin, Crypto Markets Plummet in a Blink

Crypto markets have taken a vertiginous plunge today, August 4, with Bitcoin (BTC) losing almost $500 in the six hours before press time to dip below $7,000, and all of the top ten cryptocurrencies by market cap in the red, as data from Coin360 shows.

Market visualization from Coin360

Market visualization from Coin360

Bitcoin (BTC) is trading around $7,028 to press time, having lost almost $500 on the day to plummet to a price point not seen since July 17. The leading cryptocurrency has seen an intra-day low of $6980, with some crypto analysts today noting that $6,800 has become its short-term critical support level. Bitcoin’s price percentage loss on the day is near 7 percent, with a weekly loss of about 15 percent and monthly gains squeezed to just 5 percent.

Bitcoin’s 7-day price chart

Bitcoin’s 7-day price chart. Source: Cointelegraph Bitcoin Price Index

Ethereum (ETH) has seen a markedly less pronounced drop on its daily chart, losing just over 2 percent over a 24-hour period to press time to trade around $404. The altcoin’s fortunes have been shaky much of the week, having seen jagged losses since July 29, when the asset was still trading as high as $470. On the week, Ethereum is down over 13 percent, with monthly losses at nearly 15 percent.

Ethereum’s 7-day price chart

Ethereum’s 7-day price chart. Source: Cointelegraph Ethereum Price Index

On CoinMarketCap’s listings, none of the top ten cryptocurrencies are in the green to press time.

Taking an even heftier hit than Bitcoin, Stellar (XLM) and IOTA (MIOTA) have seen losses of as high as around 9 and 10 percent respectively on the day. To press time, Stellar is trading around $0.24 and IOTA around $0.84.

Among the top twenty coins by market cap, Ethereum Classic (ETC) is the major outlier, up almost 9 percent over the 24-hour period to trade at about $16 to press time. The altcoin’s solid gains kicked off late August 3, probably due to news of the asset’s imminent listing on major U.S. crypto exchange and wallet service provider Coinbase as of August 7. Since its spike, the coin has traded sideways most of today, seemingly immunized from the major losses in the wider crypto markets.

Ethereum Classic’s 24-hour price chart

Ethereum Classic’s 24-hour price chart. Source: CoinMarketCap

Total market capitalization of all cryptocurrencies has plunged down to around $253 billion –– over $13 billion lost in the six hours before press time, and a staggering $50 billion lower than their July 26 surge to $303.7 billion.

1-day chart of the total market capitalization

1-day chart of the total market capitalization of all cryptocurrencies from CoinMarketCap

The markets’ nosedive today is in stark contrast to yesterday’s major news that Intercontinental Exchange (ICE) –– the operator of 23 leading global exchanges including the New York Stock Exchange (NYSE) –– plans to create a global ecosystem for digital assets that would cover the spectrum from federally regulated markets and warehousing to merchant and consumer needs.

ICE moreover plans to launch physically-delivered BTC futures contracts this November, distinct from those currently offered on CME and CBOE that are ultimately settled in fiat.

The likes of Starbucks and Microsoft are on board for the new venture, dubbed “Bakkt,” which will begin by offering Bitcoin-fiat conversion for consumers to purchase everyday goods with crypto.

ICE’s unveiling of Bakkt prompted CNBC’s Brian Kelly today to suggest that this is “the biggest Bitcoin news of the year,” advocating that now is a good “point of entry” for investors ahead of crypto’s impending institutionalization.

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Bitcoin Dips Below $7,500 аs Crypto Markets See Second Day of Losses

August 1: Crypto assets have seen a second day of losses, with Bitcoin (BTC) now well below the $8,000 psychological price point and most of the major crypto assets in the red, according to data from Coin360.

Market visualization from Coin360

Market visualization from Coin360

Bitcoin (BTC) is trading around $7,490 to press time, having lost almost 3 percent on the day. Since the coin’s July 25 peak at $8,431, the leading cryptocurrency dipped down below $8,000 yesterday for the third time this week. The coin saw another sharp drop this morning, before trading sideways.

Bitcoin’s 7-day price chart. Source: Cointelegraph Bitcoin Price Index

Bitcoin’s 7-day price chart. Source: Cointelegraph Bitcoin Price Index

Bitcoin’s weekly price performance is now down by around 9.3 percent, but monthly growth remains a solid 17.74 percent.

Ethereum (ETH) has seen heftier losses on the day, down a solid 5 percent to trade around $411 at press time. The leading altcoin lost around $19 in value during early trading hours, traded sideways around $425, and then dropped to see an intra-day low of $410 an hour before press time. Ethereum’s weekly price performance is around 13.61 percent in the negative, having seen a more gradual but sustained downward trend than Bitcoin over the same time frame. Ethereum’s monthly losses are almost 11 percent.

Ethereum’s 7-day price chart. Source: Cointelegraph Ethereum Price Index

Ethereum’s 7-day price chart. Source: Cointelegraph Ethereum Price Index

On CoinMarketCap’s listings, most of the top 10 coins by market cap are down between 1 and 5 percent on the day.

Ripple (XRP) is the only outlier, up 1.6 percent and seeing a spike in price earlier today, despite trading downwards most of the week. The coin is currently trading at $0.44 to press time. The asset’s relatively strong performance has perhaps been buoyed by yesterday’s news that the 42nd President of the United States Bill Clinton will be the keynote speaker to kick off Ripple’s global payments tech conference, Swell, this fall.

Ripple’s 7-day price chart. Source: CoinMarketCap

Ripple’s 7-day price chart. Source: CoinMarketCap

After Ethereum, Litecoin  (LTC) and EOS (EOS) have seen the most losses of the top ten coins, both down 3.45 percent on the day to press time.

Among the top twenty coins by market cap, Dash and Monero (XMR) are trading the most stably, both currently up less than 1 percent.

Total market capitalization of all cryptocurrencies has inched yet further downwards on the day, at $268.4 bln to press time –– $8 bln lost over the 24-hour period.

1-day chart of the total market capitalization of all cryptocurrencies from CoinMarketCap

1-day chart of the total market capitalization of all cryptocurrencies from CoinMarketCap

While the markets have seen their second, faltering day of continued losses, recent news indicates that the distance between the crypto industry and major institutional players continues to narrow.

Yesterday, Northern Trust Corp., a global asset management firm with $954 billion in total assets under management, revealed its plans to start a custody service for digital assets.

Meanwhile, news of Morgan Stanley’s recruitment of a self-described crypto trading expert and 12-year veteran of Credit Suisse as its new head of digital asset markets suggests that the trend of figures leaving the traditional financial sector for crypto continues.

A major new report from the U.S. Treasury Department published yesterday revealed a strong concern that the U.S. keep pace with innovation and tailor its regulations to accommodate disruptive financial technologies, including cryptocurrencies and blockchain.

Skeptics remain, however, with Nobel Prize winning economist Paul Krugman suggesting in a New York Times Opinion piece yesterday that “total collapse” for “un-tethered” crypto-assets “is a real possibility.”

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Morgan Stanley Hires Credit Suisse Crypto Expert as Head of Digital Asset Markets

Multinational investment bank Morgan Stanley has hired a self-described crypto trading expert and 12-year veteran of Credit Suisse as its new head of digital asset markets, eFinancialCareers reported July 31.

The new appointment, Andrew Peel, spent his last three years at Credit Suisse as vice president of sales and trading innovation, in which role he acted as “trading subject matter expert for Bitcoin and cryptocurrencies” according to his LinkedIn profile. His page also includes an independent position as “advocate of crypto markets” as of June 2013.

Nabbing a crypto enthusiast for its team aligns with Morgan Stanley’s evolving stance towards the nascent industry, which has been notably more moderate than that of other traditional financial sector behemoths.

In fall 2017, JPMorgan CEO Jamie Dimon scathingly characterized Bitcoin (BTC) as a “fraud” that is “worse than tulip bulbs,” a sentiment closely echoed with somewhat less vitriol by Credit Suisse CEO Tidjane Thiam’s claims that Bitcoin is “the very definition of a bubble.”

In contrast, Morgan Stanley’s CEO James Gorman remarked around the same time that while Bitcoin is undeniably “highly speculative,” the privacy it offers is an “interesting” challenge to the central banking system, further considering the asset to be a “natural consequence” of blockchain innovation.

Morgan Stanley has also notably been clearing Bitcoin futures for its clients as of mid- January 2018, just a month after their December 2017 debut on CME and CBOE.

A rising tide of figures who have decamped from the traditional financial sector to become crypto and blockchain industry front runners was recently revealed in the first-ever crypto-focused version of Fortune’s “40 under 40” honor roll for the most influential young disruptors in global finance and technology.

Among these were Goldman Sachs’ Rana Yared and Justin Schmidt for spearheading the Wall Street giant’s future Bitcoin trading operation, as well as Amber Baldet, who left her former position as blockchain program lead at JPMorgan to co-found her own blockchain venture.

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German Securities Exchange Deutsche Börse Group Partners With HQLAx For Blockchain Platform

Deutsche Börse Group, a German marketplace for securities trading, will release a Blockchain-based platform for securities lending in collaboration with HQLAx using R3’s Corda Blockchain platform, the company announced in a press release today, March 26.

Finance Magnates writes that the partnership will create a “fully integrated front-to-back operating model” in order to “facilitate more efficient collateral management of high-quality liquid assets.”

According to Philippe Seyll, the Executive Manager at Deutsche Börse Group, the collaboration between the German securities trading exchange and HQLAx will be able to: “address some of the major issues in today’s securities lending markets through innovate means.”

“With the creation of a neutral custody agnostic control layer, Deutsche Börse is embracing distributed ledger technology and complements it with a neutral and trusted market infrastructure role open to multiple custodians and collateral agents. This way Deutsche Börse supports market participants to deal with the global regulatory framework whilst reaping the benefits of the leading edge distributed ledger technology.”

At the beginning of March, Credit Suisse and ING completed the first live transaction of securities using the HQLAx Corda-based collateral lending application.

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European Banks Complete First Live Securities Transfer On R3’s Blockchain Platform

The Swiss-based Credit Suisse and Dutch-based ING financial service groups have successfully completed the first live transaction of 25 mln euros (around $30 mln) in securities on R3’s Corda Blockchain platform, according to Credit Suisse’s March 1 press release.

Credit Suisse and ING transferred the legal ownership of Dutch and German government securities using HQLAX Digital Collateral Records (DCRs) on the HQLAX Corda-based collateral lending application.

The transaction was executed by transferring the proprietary rights of HQLAX DCR-linked accounts containing “baskets of securities,” instead of the traditional way of transferring the individual securities themselves.

The press release writes that this use of DCRs for transferring securities can “ultimately help enhance regulatory transparency, mitigate systemic risk, reduce operational risk, and help financial institutions manage capital more efficiently.”

Credit Suisse’s press release mentions that law firm Clifford Chance was also involved by developing a legal framework for a DCR-based transfer of the ownership of securities.

Ivar Wiersma, head of ING’s Wholesale Banking Innovation, said in their press release:

“What’s really different is that [using digital ledger technology] gives the regulator the opportunity to get direct access to the ledger and see the entire digital history of the transaction, from where it originated to its ownership and attributes. In the over-the-counter environment, which is traditionally not that transparent, it could make the entire financial system more resilient.”

Charley Cooper, a managing director at R3, told Reuters that the successful transaction was “far more than a proof of concept in a fenced lab.”

“These are regulated institutions in a real market and it is a unique demonstration that blockchain solutions are being deployed in commercial settings.”

According to Reuters, a ING Blockchain initiative representative said that the application will be live by the end of the year.

Amazon Web Services (AWS) announced a partnership with R3 in December of last year for using the Corda platform’s distributed ledger technology. In November of last year, ING released a “Wall Street friendly” zero-knowledge proof that can confirm the accuracy of a transaction without losing its anonymity.

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Banking Giants Send $30 Million in Securities over DLT Platform

Two major banks say they have successful sent securities worth €25 million ($30 million) over a blockchain-powered platform.

In an announcement today, Credit Suisse said it completed the live securities lending transaction with Dutch bank ING, adopting a collateral-lending blockchain application co-developed by a financial resource management firm HQLAX and enterprise blockchain consortium R3.

Credit Suisse said the application, built on R3’s Corda distributed ledger platform, enables the two banking groups to swap legal ownership of Dutch and German government securities in a more efficient manner than with traditional systems.

According to a previous release, HQLAX launched the application in April 2017, in a joint effort with R3 and five of its member banks, including Credit Suisse and ING.

Romain Dumas, head of Rates Repo and Collateral Optimization at Credit Suisse Securities said of the trial:

“The success of this first live transaction speaks to the potential for blockchain technology to help improve collateral fluidity by creating a more efficient, transparent, and cost-effective marketplace for liquidity transfers.”

While it’s currently at the testing phase, Herve Francois, a blockchain initiative lead at ING, said in an interview with Reuters that the firms are expecting to see the application go live by the end of this year.

Credit Suisse image via Shutterstock

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Bitcoin Hits All-Time Highs As Banks Hail Blockchain Equity ‘100% Success’

Both Bitcoin and Blockchain made history Tuesday as prices hit a new all-time high and Wall Street completes new integrations.

As Bloomberg reports, a group of major banks including Goldman Sachs, JPMorgan and Credit Suisse saw a six-month Blockchain trial for equity swaps achieve “100% success.”

In partnership with startup Axoni, Blockchain allowed any changes in swaps to be immediately visible and is now on its way to becoming mainstream.

“We’re on a path to take this forward,” Axoni CEO Greg Schvey told the publication in an interview. “We know the thing works now.”

The move is all the more remarkable given the highly skeptical stance towards cryptocurrency by some of its participants. As certain jurisdictions such as Russia continue to underline, Blockchain in certain adapted forms is gaining traction across traditional finance in ways Bitcoin and decentralized principles still struggle to compete with.

Nonetheless, Bitcoin is healthier than ever. Data from across exchanges confirms a new all-time price high around $8,350 as of press time, capping a remarkable transformation in the last week.

Turbulence at Tether, issuance of which was thought to have hugely influenced Bitcoin’s price run, has done nothing to deflate markets.

In a further sign of the optimism from the small but rising sector of Wall Street enamored with Bitcoin, investor Mike Novogratz told Bloomberg TV that 2017 would finish with a $10,000 price and $500 for Ethereum.

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Big Things in Square’s Bitcoin Future: Credit Suisse

Square’s decision to incorporate Bitcoin payments into its app could be a real cash cow for the company according to Wall Street firm Credit Suisse. An analysis from the firm believes that a $30 mln revenue bump is completely possible in the next two years.

Square recently announced a rollout to a limited number of customers, using pooled wallets to allow Bitcoin payments without the current high fees. This news sent Bitcoin’s price tearing towards $7,000 about a week ago.

This high-level adoption from a major payment app is both a positive for Square, who are taking the plunge, but Credit Suisse see it as an even bigger win for the crypto-asset industry.

‘Confers legitimacy’

There have been some recent barriers that Bitcoin has broken, leading to new all-time highs almost daily. In terms of adoption, the other big news was that CME announced it would be offering Bitcoin futures soon.

Now, with a payment app like Square joining the party, aiming at streamlining Bitcoin’s possibility to be a functioning currency, there is further legitimacy being placed in Bitcoin especially among traditional companies and investors.

“While we are positive on Square’s strategy, to the extent it confers legitimacy on Bitcoin and prompts adoption by other providers the biggest beneficiary may be the crypto-asset industry,” Credit Suisse analyst Paul Condra said.

Big boom coming

Doing a little predicting of their own, Credit Suisse added that they believe that if Square can accumulate a good amount of users, they will be turning over a lot more revenue.

“We estimate that if Square can accumulate 10 mln Bitcoin buyers over two years, this could drive an incremental $30 mln in revenue,” Condara added.

Condra said the company may charge a fee of 1.5 percent per transaction and the average customer could spend about $200 a year in Bitcoin purchases, according to his estimates.

Seeing if it’s real

Square’s CFO, Sarah Friar, in their own way, are listening to the growing noise that is coming from the regular consumer. She explains that their foray into Bitcoin is still an experiment, but it is driven by demand.

“The only way to get people invested in figuring what is the what of something new is to create a product and get it out there,” Friar explained. “We spent a lot of time listening, and what we heard from our customers is individuals, using Square Cash to make payments, saying they want an easy way to buy and sell Bitcoin, so we are doing an experiment to say: ‘okay, is this real?’”

Things look positive already for something that is meant to be just an experiment. But the attitude of Square could see them extend the experiment if things continue on that path.

Then, there could be further adoption as many companies are adopting a ‘wait and see’ approach. If this becomes a success, as Credit Suisse is predicting, it could spark off a much bigger adoption wave for payment networks to utilize Bitcoin.

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Credit Suisse CEO Has No Appetite for Bitcoin, Cries “Bubble”

While the lack of regulation and use by criminals once formed the basis of attacks on Bitcoin, “bubble” is the latest condemnation used by skeptics. Credit Suisse CEO Thiam used the same logic to attack Bitcoin. Speaking at a news conference in Zurich, Thiam said:

“From what we can identify, the only reason today to buy or sell Bitcoin is to make money, which is the very definition of speculation and the very definition of a bubble.”

He went on to add that in the history of finance, such speculation has rarely ended well.

Banks have no appetite

Tidjane also pointed out that banks are regulated entities, with strict know your customer (KYC) norms and anti-money laundering (AML) regulations. Hence it would be difficult for them to deal with Bitcoin directly. Banks have in the past shut down accounts of Bitcoin-based businesses because of the increased scrutiny such accounts entail. According to Thiam:

Most banks in the current state of regulation have little or no appetite to get involved in a currency which has such anti-money laundering challenges.

Why are banks bothered?

Banks may have valid reasons, including strict regulations, which may prevent them from entering the Bitcoin space. However, this is no reason for them to attack Bitcoin, like Jamie Dimon and other bankers have done. Bitcoin threatens to disrupt the existing model, where bankers and regulators have a cozy relationship.

Banks which have a larger-than-life reputation and are too big to fail pose far higher systemic risk than cryptocurrencies. By trying to build hysteria about a Bitcoin bubble, its use in criminal activity, or the threat it poses to economic stability, Bitcoin opponents aim to goad regulators into taking action. The market seems to be ignoring the Bitcoin opponents, scaling new peaks regularly.