June 21, 2018 . 12 min read
Crypto Chat #46
After what felt like centuries of uncertainty, the U.S. Securities and Exchange Commission (SEC) has issued a statement declaring that the Ethereum network has reached a level of decentralization such that its native digital asset, Ether (ETH), should not be regulated as a security.
In the same speech, the SEC’s Director of the Division of Corporate Finance, William Hinman, suggested that Ethereum’s 2015 ICO will be viewed as an unregulated securities offering, although it remains unclear as to whether the SEC will take any action against the Ethereum Foundation.
As many commentators have pointed out, the SEC only interprets the law, and Hinman’s declaration was a statement rather than an official ruling: the existing law itself has not changed and federal judges may still take a different view in court.
However, the statement is still incredibly significant, as it is the first time any representative from the SEC has publicly stated that Ether should not be regulated by securities law. Moreover, the President and COO at the Chicago Board of Options Exchange said in a statement that the SEC’s announcement clears a key stumbling block for ETH futures.
The range of reactions from the crypto-asset community was varied, to say the least.
Marco Santori, President and Chief Legal Officer at Blockchain (the company), provides his thoughts here. Key takeaways:
- “SEC included a footnote about SAFTs, saying that each token is a unique and beautiful snowflake so there's no way to say a SAFT was legal or illegal. Every transaction is different”
- “You Might Be Selling A Security If: a) someone is artificially setting the price, influencing the secondary market, or influencing trading *cough*BUYBACKS*cough* b) if you're selling them in mass quantities that far outstrip potential use c) if there are baked-in incentives for use, and discourage holding for price appreciation."
- “SEC announcement was helpful clarity for the industry as a whole, it is really, remarkably, exceptionally bad news for a) custodial providers, b) exchanges and c) OTC desks who trade tokens today.”
- "A bit about 'decentralization'. I can’t imagine SEC is directly concerned with the number of nodes, likelihood of a sybil attack, etc. Instead, decentralization seems to ask the question 'What is primarily responsible for any expected increase in value of the token?'"
Aaron Wright, Professor at Cardozo Law and co-founder of OpenLaw, gives his thoughts here. Key takeaways:
- “Token networks that were at one point in time "decentralized" could "centralize" and fall under the scope of the securities law regime. (Consider what this means for Ripple or if another fork of Bitcoin that consolidates it operation further.)”
- “My sense is that these questions will clog courts for years as part of litigation. We'll probably only gain clarity in 5 years or so as these litigations wind their way through district and Circuit Courts.”
- “Those that argued for this test may soon recognize that they should be careful what they ask for! A test around amorphous, technology specific terms like 'decentralization' may enable the government to pick and choose winners.”
Preston Byrne, professional crypto-asset skeptic and English-qualified solicitor, gives his thoughts here. Key takeaways:
- “Where I struggle is in understanding how tokens issued by a scheme start life as investment contracts, and then, because the scheme successfully evades enforcement action for 4 years, the tokens issued by the scheme somehow lose their character as investment contracts.”
- “'Decentralization' is, accordingly, not a good measure for deciding whether securities laws should apply to a scheme, as a scheme can become functionally decentralized fairly quickly merely by choosing an appropriately decentralized consensus algorithm. Today, that means proof-of-work.”
- “The term 'decentralization' has no legal meaning, at least not yet. We should therefore avoid entirely use of the term and look to processes the law understands – issuance and sale – to inform our regulatory approaches.”
And finally, Fred Wilson, Partner at USV, provides his thoughts here. Key takeaway:
“We don’t want Bitcoin and Ether to have the advantage of being the only tokens that are not deemed to be securities. We want a hyper-competitive market where the best protocols win on the merits, not because some regulator likes them better.”
As always, several important announcements from leading U.S. crypto asset exchange, Coinbase.
First, Coinbase will be adding support for Ethereum Classic (ETC) in the coming months.
This is a highly controversial move for the following reasons: 1. Despite its $1.6bn market cap, it is well known that there is next-to-no development activity on the Ethereum Classic network 2. As @econoar points out, Digital Currency Group, one of Coinbase’s earliest investors, has been promoting ETC since its inception. This is a clear conflict of interest.
Second, Coinbase has officially launched its Index Fund, which is open to investors willing to commit a minimum of $250,000.
Third, recent Coinbase acquisition, Paradex, has re-launched, although it remains closed to U.S. investors. Paradex offers the following 8 ERC20 tokens: Basic Attention Token, Maker, Numeraire, OmiseGo, Augur, Request Network, Status, 0x. SPANK, decentralized-cam site SpankChain’s native asset, is conspicuously absent, despite having been listed on pre-acquisition Paradex.
Plenty of state channel development and drama this week. For those new to state channels, check out CoinFund partner Jake Brukhman’s overview here.
Liam Horne of L4 published an overview of his Generalized State Channel research. Jeff Coleman, one of the authors of the L4 paper, gives his commentary here.
Ameen Soleimani, CEO at SpankChain, criticized L4 for their unwillingness to collaborate with other state channel researchers. His thoughts are succinctly captured by the following:
“The moral of this story is - if we want to grow our collaborative potential exponentially, we should publish our code/research early and often. This isn't PvP. We're all trying to take down the Big Bad Boss that is Ethereum's Scalability Issues.”
Joe Kendzicky published a technical primer to Bitcoin’s Lightening Network.
Tether, the company behind the ostensibly fiat collateralized stable-coin, Tether (USDT), released a statement claiming that its bank deposits of $2.55bn were confirmed by the law firm co-founded by FBI director Louis Freeh.
In recent months, Tether has been dogged by claims of insolvency and market manipulation, culminating in a December subpoena from the CFTC. This recent announcement should help ease market concerns.
Another week, another set of problems for EOS.
As @econoar notes out, EOS trading volume has fallen off a cliff since the ERC20 was frozen, giving added weight to the theory that Block.One, the coordinators of the EOS ICO, were pumping their own token.
Dean Eigenmann published Meditations on EOS, which addresses the arbitrary EOS arbitration process and the network’s inherently broken governance process. Of particular note is that a randomly elected 3rd party arbitrator is now ordering EOS Block Producers to lock several user accounts. So much for censorship-resistance!
Nic Carter, founder of CoinMetrics, details three implications of the EOS block producers (BPs) freezing balances. @econoar’s analysis suggests that collusion among BPs has already taken place. Nic also provided a nice overview of the top 21 EOS BPs.
The EOS network was frozen over the weekend due to a bug in the blockchain’s consensus mechanism. A blow-by-blow overview can be found here. Lucas Nuzzi, Lead Tech Researcher at Digital Asset Research, expects more consensus failures in the near future.
Bitcoin (BTC) saw some much-needed growth this week, bouncing off a local low of $6,130 before rising up to the $6,700-$6,800 range.
Fundstrat’s Tom Lee notes that BTC sees dramatic price changes around CBOE futures expirations — on average, BTC has fallen 18% in the 10 days prior to CBOE contract expiration.
Chris Concannon, President and COO of CBOE Global Markets, has downplayed the influence of CBOE futures on the BTC spot market: “The fall of Bitcoin can be more easily explained by other factors such as the recent regulatory scrutiny around the globe, steps by government tax collectors, the rise of other cryptocurrencies, and declining media interest in the asset."
Ether (ETH) recovered from lows of $450 to the $520-$530 range, primarily boosted by the SEC interpretation (see above). The ETH/BTC ratio also saw good growth from 0.072 to the 0.079-0.080 range. Check out this site for ETH/USD short/long data visualizations.
Redditer arsonbunny published a quantitative valuation model for ETH, which suggests a conservative valuation of $1,827.38. Of course, as always, this is not financial advice.
Meanwhile, Bloomberg reports that 1,100 square foot plots in the Decentraland world are selling for as much as $200,000.
On the protocol development front:
Vyper, an alternative language to Solidity, is now in Alpha. According to the GitHub description, it should be possible and natural to build secure smart contracts in Vyper and the code should be maximally human-readable.
Kent Barton, founder of Ethereum Denver, looks at the five key takeaways from the Ethereum ‘Shared Values’ survey featured in last week’s Crypto Chat.
Grayscale has published A New Frontier: How Digital Assets Are Reshaping Asset Allocation, which looks at crypto assets in the context of Modern Portfolio Theory.
Crypto-Twitter personality, BambouClub, has published a list of 10 questions for Blocktower Capital founder, Ari Paul, following the publication of private messages between Paul and another Twitter personality in which Paul suggested he had access to insider information regarding the upcoming acquisition of Chain by Stellar.
The Ministry of Finance of the Republic of Lithuania has released detailed guidelines for ICOs, which defines the various scenarios whereby tokens would fall under either securities or currency regulations.
The Canadian Securities Administrators similarly published new guidance on ICOs and their relationship with securities law. The key takeaways:
- Most ICOs/SAFT utility tokens are securities
- The CSA will take the same approach as the SEC
- No new regulation: existing securities rules apply
- Enforcement is coming.
The largest crypto asset exchange by daily volume, Binance, will offer Euro trading pairs later this year, having secured banking relationships in Malta. According to CEO Changpeng Zhao, sterling pairs will likely come next. To date, Binance has not supported fiat pairs.
As a reminder, Binance’s quarterly profits are 36% higher than Deutsche Bank’s, despite having a workforce just 0.2% the size of DB.
Bloomberg reports that the financial services industry spends about $1.7bn annually on blockchain technology research and development.
Blockchain budgets increased 67% last year, with 1 in 10 banks and other firms reportedly spending in excess of $10m. The number of employees working on blockchain initiatives doubled last year.
Digital payments firm Square has received a BitLicense from regulators in the state of New York, allowing the firm to offer Bitcoin-buying options to New York residents through its Cash app.
In May, Square reported that it had booked a $34m profit in crypto-related revenue through Cash.
Xapo, a crypto-asset custody service, also received a BitLicense last week. The New York Department of Financial Services has now approved a total of eight firms for virtual currency charters or licenses.
Leading South Korean crypto-asset exchange suffered a hack to the tune of $31m, despite spending $9m annually on security measures. According to CoinDesk, hackers specifically targeted XRP.
The exchange confirmed that it will pay back victims using its own reserves.
Chris Dannen, founder of Iterative Capital, appeared on the CoinTalk podcast last week.
Among other topics, Dannen discusses: his journey into crypto asset mining; the biggest risks for BTC; his thoughts on Ethereum and Vitalik, and the cult-like atmosphere engulfing the blockchain community.
You can find my summary notes here.
The Mimo mission is to power a standard upon which dApps can build new social networks and games centered around users without holding user information. Each profile on the Mimo network will take the form of a ERC-721 non-fungible token.
You can check out the Mimo GitHub here. Also worth checking out the following Twitter threads from Weldesselaisie: Making Cheaper Smart Contracts; Proposed Upgradeability & Storage Standard for Smart Contracts, and Monetization in Mimo & Social Media Projects.
Distributed Computing Landscape:
Dani Grant, a new addition to the USV team, has published an overview of the distributed computing landscape.
The article looks at projects including: Enigma, SONM, Golem, FREEDcoin, and KingsDS.
Verge Attack Part 2:
Conclusion? “This level of irresponsible negligence would be deemed unacceptable in an undergraduate’s comp-sci 101 midterm project, let alone a project giving rise to a digital asset worth (by at least one metric) hundreds of millions of dollars.”
On the topic of 51% attacks, Zubair Zia argues that Decred is 20x more expensive to attack than BTC.
Notes from a Q&A session with one of the lead developers of Grin, the first project implementing Mimlewimble, a blockchain format that provides confidentiality built into the protocol.
In Liston’s words: "We're incentivizing mindsharing, and eventually mind upload to use consensus to form a structure of collective consciousness. And then, we'll elevate an individual interaction with a religious structure as a group participation in a collective consciousness where the structure itself is god." Sign me up!
A great new resource providing analytics for the MakerDAO ecosystem.
Crypto-asset Self Regulatory Organization, Messari, has launched the Agora Beta, a data library for the crypto-asset ecosystem covering various projects, people and organizations.
Quantstamp, a project that raised over $30m in an ICO last November, has come under fire from investors for accepting payment in USD and ETH, rather than its native token, QSP.
The company quickly issued a response, suggesting that the community’s concerns stem from a lack of clarity regarding the difference between two of its projects: an auditing protocol, which remains under development, and its web product, which it currently uses for smart contract auditing.
Meanwhile, Quantstamp’s Head of Security Auditing has left to start his own venture, Soho Token Labs, which will work with community members to develop an open standard for smart contract security.
A fantastic long-form feature on Tezos, my favourite failed blockchain project to date.
Author Gideon Lewis-Kraus provides insight into founders Arthur and Kathleen Breitman’s courting process, including their mutual love for Milton Friedman(!), and their protracted battle with former Tezos Foundation President, Johann Gevers.
As discussed last week, Tezos has instituted a new, retroactive KYC requirement before investors are able to receive their tokens from last summer’s $232m token sale.
Vitalik Buterin has since offered a script to ease a hard-fork of the project. For a project that promised to solve on-chain governance, it is beyond ironic that the network may be forked pre-launch.
US Dollar Audit:
Smart contract auditing firm, Zeppelin Solutions, has published a parody audit of the US Dollar, identifying: two issues of critical severity; two issues of high severity; three issues of medium severity, and one issue of low severity. Worth the read.
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