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Data Shows US Dollar, Not Japanese Yen, Is Dominating Bitcoin Trade

Japan may not be quite the cryptocurrency powerhouse that the world thinks it is.

A deep dive by CoinDesk has found methodological flaws in widely-cited bitcoin exchange data that appear to overstate the importance of the Japanese yen as a trading pair. Our analysis of trading data collected from July 26-30 suggests that the U.S. dollar, not the yen, is the dominant currency traded for bitcoin by a wide margin.

Currently, analytics sites CryptoCompare and Coinhills offer a breakdown of bitcoin trading by currency pair, and until recently the data from both sites indicated that over 50 percent of bitcoin trading is denominated in Japanese yen.

The problem is that the vast majority of yen-denominated transactions are not “spot” trades of actual bitcoin for yen. Instead, they are derivative products: contracts that derive their value from the performance of an underlying asset.

In other words, the parties to these transactions are betting on the price of bitcoin, but no bitcoin is actually changing hands. While there’s nothing inherently wrong with these contracts, selectively mixing derivative and spot volumes can paint a misleading picture.

Specifically, Coinhills and CryptoCompare, whose data has been cited by major outlets such as Bloomberg and the Wall Street Journal, did not distinguish between the spot and derivative volumes of Bitflyer, Japan’s largest exchange. In other words, both types of trading were counted toward the total for yen-bitcoin activity.

However, their calculations did exclude equivalent dollar-denominated derivative markets such as those on Bitmex.

As a result, the yen and dollar totals were not an apples-to-apples comparison, since the former includes derivative trades and the latter does not. When correcting for the misclassification, the data compiled by CoinDesk paints a starkly different picture.

To be sure, Japan remains a global hotspot of cryptocurrency interest, thanks in part to a law that took effect early last year recognizing bitcoin as legal tender and regulating the country’s exchanges. And the CoinDesk analysis covers only a five-day period, so it isn’t quite conclusive evidence that the U.S. dollar underpins most cryptocurrency trading.

Still, after being contacted by CoinDesk, CryptoCompare changed its methodology, and its data now shows the dollar out-trading the yen.

Further, the inconsistencies in how different types of transactions are counted across exchanges, and the wildly different results when these are addressed, underscore the nascent state of the cryptocurrency industry’s data practices.

Devilish details

As mentioned, the issues with currently available data stem from the classification of Bitflyer’s various exchange markets.

Bitflyer handles both spot trades and derivative trades, but it is the sheer scale of these derivatives trades that can distort market data.

During the time period of CoinDesk’s snapshot, Bitflyer’s Lightning FX derivatives service processed the equivalent of nearly $2 billion in yen-denominated trades every day. These derivative trades accounted for 90% of CryptoCompare’s observed yen trading and 85% of Coinhills’ yen trading.

By itself, the inclusion of derivatives volume would not necessarily be a problem if  CryptoCompare and Coinhills also counted dollar-denominated derivatives markets when tallying the total volumes. Trouble is, they don’t.

For perspective, Bitmex, the largest dollar-denominated derivatives market, recently set a record of over $8 billion of contracts traded in a single 24-hour period (July 23-24), dwarfing Bitflyer’s volumes. These derivative trades are uncounted in CryptoCompare’s and Coinhill’s respective measures of total USD-BTC trading.

To create a more balanced comparison of global trading activity, CoinDesk took a snapshot of both the spot market, which excludes all derivative trading, and the total market, which includes all spot trading and the dollar and yen volume at the four major derivative exchanges: Bitflyer’s Lightning FX, Bitmex, CME and Cboe.

Both these measures indicate that the U.S. dollar dominates worldwide, with the yen a distant second.

For example, the dollar accounted for only 17 percent of CryptoCompare’s tally and 21 percent of Coinhills’ figure for those five days in July. In CoinDesk’s apples-to-apples snapshot, by contrast, the dollar makes up 56 percent of spot market trading and 68 percent of total trading when including major global derivative markets.

Regulatory implications

The findings are notable as the spot market is particularly relevant to officials concerned about potential illicit uses of cryptocurrency.

Any unsavory actor attempting to make use of ill-gotten gains today must rely on spot exchanges to convert cryptocurrencies into fiat currency.

The dollar’s role in this exchange ecosystem extends the reach of the U.S. government. Just as the dollar’s preeminence in the international financial system gave U.S. regulators the leverage they needed to shape global anti-money laundering (AML) practices in the wake of 9/11, the dollar’s importance in global fiat-to-cryptocurrency trade could give them outsized influence as governments around the world mull new regulatory frameworks for cryptocurrencies.

For example, Japanese officials have thus far led the push for global cryptocurrency AML standards in international forums like the G20 and the Financial Action Task Force, but continued dollar dominance of cryptocurrency trading could inspire a more active U.S. presence.

Yaya Fanusie, director of analysis at the Center on Sanctions and Illicit Finance at the Foundation for Defense of Democracies and co-author of a report on bitcoin laundering, told CoinDesk:

“If your assumptions are correct and the dollar in fact dominates on crypto exchanges around the globe, this data could prompt U.S. regulators to take a more active role.”

Data deluge

To be fair, the uncertainty, complexity and constant churn of the exchange market leaves analytics sites like CryptoCompare, Coinhills and others struggling to keep up. In such an environment, errors are bound to occur, even with data from large, highly regulated exchanges like Bitflyer.

When contacted about the inclusion of Bitflyer’s derivative data, both CryptoCompare and Coinhills acknowledged that data from Bitflyer’s Lightning FX derivatives market was the root cause of their observed yen dominance.

“We do currently count Bitflyer’s Lightning FX volume, and thank you very much for pointing this out. We plan on excluding Bitflyer’s futures volumes from calculations at the end of this month,” Constantine Tsavliris, an analyst at CryptoCompare, told CoinDesk.

Subsequently, CryptoCompare, which recently announced a data partnership with Thomson Reuters, indeed removed Biflyer’s derivatives market data from its calculations.

A Coinhills representative stated that the company is exploring adding other major derivatives markets such as Bitmex.

While the industry continues to mature by the day, it remains the Wild West for all observers hoping to gather a clear image of the cryptocurrency exchange market.

For more data, research and analysis, check out CoinDesk’s recently released Q2 2018 State of Blockchain report.

Dollar vs. yen 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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Former Telegram Employee to Launch Crypto Token Platform

Anton Rosenberg, a former director of special projects at Telegram, announced a new blockchain trading platform Tuesday.

Mikado, a crypto derivatives trading platform, will provide a solution for projects planning an initial coin offering (ICO) but which want to avoid the price collapse that occur when an open sale begins and early investors drop their tokens. Rosenberg told CoinDesk that “many companies who are doing ICOs are trying to get investors’ attention by big bonuses and discounts without a understanding how it will affect the price after the ICO.”

Unlike traditional financial markets where underwriters and market makers are helping companies to structure their IPOs, ICO markets don’t have institutions and mechanisms to plan a gradual release of liquid tokens, so Mikado will do this job instead, Rosenberg said.

Mikado is going to issue a derivative for any tokens that are locked up, such as bonus tokens for early investors or tokens that are distributed among the project’s employees to stimulate their work. The project can transfer these locked tokens to a specially created escrow account, and investors will receive derivative Mikado tokens (MKT) instead which can be sold. After the lock-up period is over, the MKT tokens will be burnt and their holders will receive equivalent amounts of the original tokens they invested in.

“Locking up coins is a convenient tool, but not very efficient,” Rosenberg said. “They can plan several lock-up periods, gradually release their tokens and control the trading volume. Mikado is promising a tool to create a “stable commodity-based economy” on the crypto market.

Mikado does not plan to launch an initial coin offering for its own token, in order to avoid having MKT classified as a security, said chief executive Andrey Nayman. Right now the project is applying for a distributed ledger technology (DLT) license in Gibraltar. After, the company plans to register with the U.S. Securities and Trademark Commission.

Business miniatures 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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French Regulator Says No to Online Crypto Derivatives Ads

France’s stock market regulator released a statement about cryptocurrency-tied derivatives on Thursday, which includes a curb on the advertising of such products.

In its statement, L’Autorite Des Marches Financiers (AMF) said that trading platforms should not be allowed to market cryptocurrency derivative products electronically, per regulations that cover derivatives more broadly. The publication followed a months-long review process, according to the AMF.

The agency said:

“The AMF concludes that a cash-settled cryptocurrency contract may qualify as a derivative, irrespective of the legal qualification of a cryptocurrency. As a result, online platforms which offer cryptocurrency derivatives fall within the scope of MiFID 2 and must therefore comply with the authorisation, conduct of business rules, and the EMIR trade reporting obligation to a trade repository. Above all, these products are subject to the provisions of the Sapin 2 law, and notably the ban of advertisements for certain financial contracts.”

The EU’s Markets in Financial Instruments Directive (MiFID II) is an update to previous legislation, with the stated goal of providing greater transparency across asset classes in the name of investor protection. The initiative came into effect on Jan. 3.

The AMF’s missive is the latest from the agency on the topic of cryptocurrencies, coming months after it first weighed in initial coin offerings (ICOs). In October, the agency launched an ICO-focused initiative, dubbed the Universal Node to ICO Research Network (UNICORN).

The effort, according to statements at the time, was aimed at “offering to these carriers of projects a frame allowing the development of their operations and to ensure the protection of actors and investors wishing to participate.”

Other regulatory bodies within the EU have been looking into the issue of crypto derivatives as well.

The European Securities and Markets Authority (ESMA) is investigating if such contracts comply with MiFID rules, and announced in January that it was seeking public input on potential rule changes.

Bitcoin and French flag image via Shutterstock

The leader in blockchain news, CoinDesk is an independent media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. Have breaking news or a story tip to send to our journalists? Contact us at news@coindesk.com.

Disclaimer: This article should not be taken as, and is not intended to provide, investment advice. Please conduct your own thorough research before investing in any cryptocurrency.