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Bank of America Analyst: Blockchain as a Service Market to Reach $7 Billion

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A recent analysis by Bank of America’s Kash Rangan suggests that blockchain adoption will become a multi-billion dollar business.

Tech giant Microsoft already offers BaaS (Blockchain as a service) tools and services through Microsoft Azure which launched in 2015. Microsoft’s Azure includes a ‘sandbox’ where developers can test their apps before launch as well as various tools designed to streamline the development process.

Azure customers have access to the Ethereum blockchain after Microsoft partnered with ConsenSys, a decentralized collective of Ethereum coders launched by Ethereum co-founder Joseph Lubin. ConsenSys works to create blockchain businesses and DApps with the goal of developing the ‘Web 3.0’ infrastructure required to foster mass-adoption of blockchain and decentralization.

Amazon’s AWS also launched Ethereum and Hyperledger blockchain templates to aid developers in blockchain creation. Amazon’s BaaS launched in April 2018 and is aimed at providing a fast and easy way to create and deploy secure blockchain networks with open source frameworks.

With more and more industry titans rolling out their BaaS products, the potential market value grows increasingly more lucrative. BoA analyst Kash Rangan believes $7 billion to be the future value, although was hesitant to provide a set time as to when that value would be reached due to adoption limitations. However, Rangar did point out that the beneficiaries could merge cloud computing with blockchain solutions to improve supply chain operations, a major use case for blockchain technology.

“Amazon will benefit from incremental cloud services demand from Blockchain implementation, while improved supply chain tracking should make Amazon’s retail operations more efficient,” Rangan wrote to BoA clients on Tuesday.

Rangan’s analysis is based on the assumption that 2 percent of servers will be used to run blockchain, at $5,500 per server, per year. Given that Bank of America’s preliminary list of companies that could benefit from blockchain adoption includes Oracle , IBM , Salesforce.com , VMware , and real estate and mortgage players like Redfin , Zillow , LendingTree, this figure does not seem overly ambitious, and more applications are being discovered and tested every day.

“Many blockchain use cases have been identified, but full products/services have not yet been built out and are not used in production,” Rangan said.

The announcement follows a WEF report that indicates blockchain technology could generate an additional $1.1 trillion in world trade, while the IHS Market thinktank released a report suggesting that blockchain business could reach an overall value of $2 trillion by 2030. The latter report includes blockchain value generation in areas like banking, supply chain tracking and logistics, advertising and media, government auditing and bureaucracy, e power and energy industries, regulation, software development, telecommunications, and more.

https://www.ccn.com/bank-of-america-analyst-blockchain-as-a-service-market-to-reach-7-billion/

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Cryptocurrency Exchange ShapeShift Bites Back at Money Laundering Claims.

Wall Street Journal report recently alleged that blockchain firm ShapeShift was one of the largest recipients of illicit funds. Now the firm hits back on the criticism.

Posted on the company’s official blog, ShapeShift said that the overall article contains factual inaccuracies and has omitted significant details regarding how ShapeShift operates. The piece shows a misunderstanding of blockchain transaction operations, it added.

As CCN reported, the WSJ article titled “How Dirty Money Disappears Into the Black Hole of Cryptocurrency”, traced funds from more than 2,500 wallets that has faced accusations on courts for their involvement in criminal activities. The report alleged that ShapeShift has been processing $9 million out of the suspected $88 million over a two-year period.

“A North Korean agent, a stolen-credit-card peddler and the mastermind of an $80 million Ponzi scheme had a common problem. They needed to launder their dirty money. They found a common solution in ShapeShift,” the article stated.

To this, the firm has reverted back saying that ShapeShift has been working with WSJ for five months, accommodating their queries, while the media giant has misrepresented their intentions. Erik Voorhees, CEO ShapeShift said,

“Of the many things I communicated with them over the past months, they included not a single statement from those lengthy discussions, preferring instead to include out-of-context remarks I’d made elsewhere.”

Also, Voorhees, co-founder of the bitcoin company Coinapult and one of the top-recognized serial Bitcoin advocates, condemned that WSJ journalists have omitted key information that ShapeShift has shared. “The WSJ decided to exclude from their article; facts such as, $9m (even if it was true) is 0.15% of ShapeShift’s exchange volume during the described time period,” he said in the post.

Few other facts including ShapeShift’s strong record of complying with law-enforcement requests, offering assistance in more than 30 investigations in different countries; ShapeShift blacklisting suspicious addresses upon learning of them; the firm having an internal anti-money laundering program that uses more advanced blockchain forensics; were neglected, he added.

The WSJ report showed factual information from security researchers proving that criminals used ShapeShift to exchange bitcoin for monero, an anonymity-centric cryptocurrency. The journal mentioned that ShapeShift didn’t change its policy even one year after the WannaCry ransomware attack, and that the exchange has continued to launder illicit funds that cannot be traced.

That said, Voorhess clarified that the journalists of WSJ have withheld information for months regarding the suspicious accounts in order to build their story, “rather than communicating it to the appropriate exchanges and ShapeShift immediately so that funds could be frozen or blocked.” Also he confirmed that every single transaction performed on ShapeShift is made public, making it traceable and that the exchange does not transact in fiat.

Blaming WSJ for not having sufficient understanding of blockchains and ShapeShift’s platform in particular, the CEO stated that there is inaccuracy and ambiguity in those facts presented by WSJ that alleged $70,000 was laundered by ShapeShift, while in reality $0 was laundered by ShapeShift.

He finally confirmed that ShapeShift has an industry-leading Anti-Money Laundering compliance firm checking all its transactions.

With more confidence and facts, Voorhess concluded that the company will push forward in suggesting WSJ, a better title that is more appropriate, being, “Less than two tenths of one percent of ShapeShift’s business might be illicit.”

https://www.ccn.com/cryptocurrency-exchange-shapeshift-bites-back-at-money-laundering-claims/

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China to Drafts for Three Domestic Blockchain Standards in 2018

The China Electronics Standardization Institute (CESI), a government organization under the country’s Ministry of Industry and Information Technology (MIIT), plans to release three blockchain standards for smart contracts, privacy and deposits as a way to improve the country’s development of the blockchain industry.

The standards, which would be association based, were announced by Li Ming, a director of the research lab, during a recent presentation to Deep Tech, a Chinese media outlet, according to China Money Network.

The standards, which include basic standards, information security standards, process and method standards, business and application standards, and credible standards, will provide the basis for national and global standards according to Li. He said the standards will be released by the end of next year.

Standards To Be Drafted This Year

CESI’s Blockchain Technology and Industry Development Forum (CBD Forum) hopes to draft the three blockchain standards by the end of this year. The Ministry of Industry and Information Technology of China launched CBD Forum in October 2016 and published the “China Blockchain Technology and Application Development White Paper (2016)” and the “Reference Architecture of Blockchain” standards.

Craig Dunn, chairman of the International Standardization Technical Committee for Distributed Ledger Technology, said during a recent blockchain conference in Shangai that international standards are needed as blockchain investment and acceptance are increasing but many people are still skeptical.

 

IT Ministry Cites Urgency

China’s IT ministry earlier this year stressed the need to develop standards as soon as possible, and cited “positive progress” in the group ISO effort to create seven standards covering core blockchain facets such as smart contracts. The ministry has emphasized the need to develop a full blockchain standard system domestically.

The standards are recommended standards and not mandatory, Li said, and are intended as a reference guide.

https://www.ccn.com/china-to-drafts-for-three-domestic-blockchain-standards-in-2018/

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Zaif Delays Customer Compensation Plan after $60 Million Crypto Theft.

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Tech Bureau, operator of Japanese cryptocurrency exchange Zaif, is yet to reveal a compensation strategy for customers who suffered losses from an infamous $60 million theft three weeks ago.

Osaka-based Tech Bureau has already halted new user registrations to focus on reimbursing customers who collectively lost ¥4.5 billion ($40 million) from the ¥6.7 billion ($60 million) theft of bitcoin, bitcoin cash and monacoin from Zaif’s custody. After initially suggesting it would reveal its framework to repay victims by September’s end, the operator stressed it required more time to finalize its compensation plan, as reported by the Nikkei Asian Review.

Hackers stole the three cryptocurrencies in a two-hour period from Zaif’s online hot wallets on September 14. As reported by CCN previously, Tech Bureau did not learn of the hack until September 17, at which point it approached the Financial Services Agency (FSA), Japan’s financial regulator, to report the breach.

The breach and the sizable theft of cryptocurrencies were finally disclosed publicly on September 20.

In a move to appease victims who suffered losses, Tech Bureau also revealed it had already entered a ‘basic agreement’ with the a publicly-listed Japanese corporation, the Fisco Digital Asset Group, which will receive a majority of the exchange operator’s shares in exchange for ¥5 billion yen ($44.59 million) in cash. The funds will directly be used to compensate customers, the Osaka-based cryptocurrency exchange said at the time.

However, the two firms continue to discuss the terms of the majority stake deal.

The Zaif hack is the second-biggest crypto exchange theft in Japan this year, after the $530 million NEM hack from Tokyo-based exchange Coincheck earlier in January. Now the largest crypto theft in history, Coincheck outlined its compensation strategy a day after disclosing the theft, dispersing refunds in Japanese yen on March 12 – nearly 6 weeks after the hack. A month later, the embattled exchange was acquired by major Japanese online brokerage Monex.

Tech Bureau is also facing scrutiny with a ‘business improvement order’ from the FSA after it was struck by administrative penalties from the financial regulator. The use of hot wallets to store customer funds, in particular, has drawn fire from government regulators. Japan’s own self-regulatory industry body, the Japan Virtual Currency Exchange Association, is looking at mandating norms that enforce a ceiling of 10% of 20% of customer assets in exchanges’ hot wallets, the report added.

https://www.ccn.com/zaif-delays-customer-compensation-plan-after-60-million-crypto-theft/

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Bitcoin Opinion: Mixed Signals Arising. When Moon?

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Bitcoin price continues to move side-ways and there isn’t much volume coming into cryptocurrency. There are some catalysts that could potentially kick-start another bull-run, however, uncertainty is an important characteristic of any market; it becomes quite hard to predict the best time-frame to put some fresh cash into cryptocurrency.

My non-professional advise? Don’t try to time the market perfectly. Sure, there’s an underlying risk which is Bitcoin’s price dropping even lower, to around $4500 levels; nonetheless, history also shows us what usually happens during the last quarter of the year, and that is a nice pump in price. Not only in the cryptocurrencies market but namely on traditional assets, commodities and fiat-currencies markets.

How’re Things Looking?

As we can see, there have been some minor gains on some cryptocurrencies such as Tron and IOTA, nonetheless, the general view is a bit depressing. While the broader trends in the segment are still clearly bearish, and odds still favor a larger negative momentum move in the coming weeks, the current quiet market conditions are encouraging, at least form a very short-term standpoint.

The bitcoin volatility index, which tracks the cryptocurrency’s price variance over time using the standard deviation of daily open prices, has declined in the past 30 days, proving the trend in volatility has been steadily declining for much of 2018. Interestingly enough, this trend is somehow attributed to the rise of futures trading. Contrary to popular belief, the introduction of bitcoin futures last December has been accompanied by a decline in large price swings for the digital asset. As historical prices show, when volatility is low it usually means there’s an entry point as prices are moving side-ways; high volatility is commonly associated to both bull and bear runs.

 

Following the reports from Hacked, “Bitcoin could provide a strong bullish signal in the coming period, should the triangle consolidation pattern in the most valuable coin get broken on the upside, but for now, BTC is still stuck in the formation. The $6500 price level is in the center of attention yet again, as the coin recovered above without testing the support zone near $6275 (…)”. Bitcoin’s value reached a high of $6,648.80 on Bitfinex having gained 1.3% from the previous session. The leading digital currency fluctuated within a $155 range on Thursday.

To better understand price swings and the drivers behind adoption, we should take a quick look at the recent past and try extrapolating what could have been the main catalysts for such increases as we’ve seen throughout December 2017.

Interestingly enough, as we’ll see below, my conclusions are not that surprising. After all, there aren’t that many factors which can promote 100-fold gains.

What Drives Adoption?

The first concept to understand is that prices can only grow in proportion to volume. This is, the more volume we see, the higher the chances of achieving record highs. Secondly, high volumes are typically associated to institutional investors and smart-money in general. Because there are price barriers created by bots and short-sellers, there is an underlying need to see huge quantities of fresh cash pouring into Bitcoin so that those barriers are broken. For instance, when a bull-moment is about to happen we see a bunch of short-sellers getting wrecked, in epic short-squeezes.

Right, the key point here is then to try finding causes for smart-money to come into the market.

Before we dive into those, I would like to spot out there seems to be a biological factor behind adoption, meaning we could try to compare Bitcoin’s macro price trend with bacterial growth. The three phases of bacterial growth, repeatedly sequenced together, mimics the Bitcoin supertrend.

There is a lag phase, during which the bacteria are acclimatizing to the conditions in a Petri dish; an exponential phase, where the bacteria are growing through rapid, exponential multiplication, and phase of stagnation, where the bacteria exhaust the resources in the Petri dish and cannot grow any further. Left in that state, the fourth phase of retardation would then ensue. However, if more resources are provided, say by way of a larger Petri dish, the process continues anew.

The parallel to the Bitcoin super trend is easy to imagine: the more money it goes into Bitcoin, the more price grows, hence the impact a few million dollars can have in the overall marketcap.

The above reasoning, although interesting from a scientific perspective, does not answer the question posed. What could be the drivers for a bullish market? The first, and most obvious one I might add, is regulation; followed by traditional markets’ growth expectations and, finally, the usual hype cycles promoted by media channels.

ETFs

The U.S. Securities and Exchange Commission (SEC) is asking for more comments surrounding a rule change that would deliver the first bitcoin ETF to the market. The Wall Street watchdog filed several amendments today inviting comments either in support or opposition of several crypto trading products, which the agency rejected in August to the dismay of the crypto community, particularly since some ETFs were targeting bitcoin futures and not the underlying asset.

As it was reported by Hacked “On the heels of that rejection and several others, including the regulator’s disapproval of the Winklevoss bitcoin ETF, the SEC decided to “stay” its orders in favor of a “Commission review.” SEC Commissioner Hester Peirce, who supports a bitcoin ETF, previously explained that the SEC Commission would review the “staff orders”, which is the process that is currently unfolding (…)”. 

 

SEC Commissioner Hester Peirce has criticized the agency recently for denying past bitcoin ETF applications due to concerns over the underlying bitcoin spot markets, rather than problems with the ETF products themselves. She says that this represents an expansion of the SEC’s authority beyond its lawful mandate.

However, given the commission’s recent rulings, Peirce is in the minority on this point; we shouldn’t expect the SEC to treat cryptocurrencies as conventional financial instruments, more accessible to retail investors.

Traditional Markets

Maybe timing couldn’t be better for cryptocurrency investors, as due to a possible bubble burst in traditional markets we could finally see a hefty sum of money shifting towards crypto-based assets.

At the moment of writing, the broader S&P 500 Index declined sits at 2,901.00 while the Nasdaq Composite Index sold off 1.8% to close at 7,879.00. While most sectors finished lower, information technology and the newly formed communication services were the biggest decliners. The CBOE Volatility Index, aka the VIX, surged as much as 32% on Thursday to its highest since early July. It would later settle at 14.22 for a gain of 22.5%. VIX typically rises when the S&P 500 Index falls.

Regarding bonds, the yield on the benchmark 10-year U.S. Treasury note peaked at 3.202% on Thursday, the highest since 2011. Short-term government bond yields also rose, with the two-year yield reaching its highest in a decade. Please remember that yields and bond prices move in inverse fashion.

What really peaks my interest is the current trade talks between China and the U.S. President Trump moved ahead with a new round of tariffs targeting $200 billion of Chinese goods. A full-on scale trade-war between the two most powerful economic powers would surely weaken most markets; the problem being the price of goods would rise both in US Dollars and Chinese Yen.

Hype Cycles

With the low volumes Bitcoin is experiencing (I’m obviously discounting fake volume, as it appears to be a constant so far), it’s not surprising a few good news, here and there, can indeed spice things up. Especially when there are coordinated actions between institutional investors and news sources like CNBC, Bloomberg and the likes. Whenever you see a roll of *amazing* news being shared by traditional agencies, you should definitely pay attention to the charts. What you’ll notice is hordes of dumb-money flowing into the market. That’s when you know things are about to heat up.

For how long will we have to endure this terrible bearish cycle?

Until the big money decides to move.

Just wait patiently and take this opportunity to average your losses. When the time comes to be prepared: start moving some of your funds to exchanges as it’s important not to miss the best days of trading.

https://www.ccn.com/bitcoin-opinion-mixed-signals-arising-when-moon/

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Opinion | What is a Security Token Offering (STO) and Why You Need an Advisor.

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About the Author: Jaron Lukasiewicz is the CEO and founder of Influential Capital. Jaron has been an executive in the industry since 2012, previously serving as CEO of Coinsetter, one of the first bitcoin exchanges in the US, and Cavirtex, a leading exchange in Canada. Both companies were acquired by Kraken in 2016. He runs a YouTube channel focused on blockchain and STOs. 

What is a Security Token Offering (STO)?

Among the acronym soup of digital currency phrases, one term is being heard more often: security token offering (STO). The STO is emerging as a powerful and valuable alternative to private equity and venture capital financing for companies globally. It is such a powerful alternative that Polymath estimates will grow to a $10 trillion opportunity over the next two years.

For companies seeking to raise capital, an STO is worth a closer look for a few good reasons I’ll share shortly. If your specific goal is to raise a large amount of capital and your company matches three or more of the profile points below, keep reading.

It is worth considering an STO if your firm is:

  • Generating in excess of $10 million in annual revenue
  • A high growth company
  • Operating a global business
  • Preferring to issue a transferable asset
  • Interested in a funding method that connects with your customer base
  • Desiring greater liquidity for stakeholders

Before diving into why STOs are becoming more compelling for investors and companies raising capital alike, let’s step back to recap what security tokens are and how they function.

In simple terms, a security is a financial instrument representing a real asset. Stocks, bonds and managed real estate trusts are examples of securities. Historically, when a security is purchased, the transaction is signed on paper. A security token performs the same function, except it confirms ownership through blockchain transactions. Security tokens can offer many financial rights to investors including equity, dividends, revenue shares, profit shares, voting rights and other financial instruments.

What makes an STO so compelling for business owners?

1. Access to global capital

Historically, accessing foreign investors has largely been the domain for established companies who could afford the associated costs and risks. However, security token offerings are not limited by geographic borders. This means companies, large and small, can present themselves to more investors over the internet. We saw the impact of this phenomenon in the recent ICO boom. Many service providers have since emerged to help companies market their offerings in foreign markets and different languages. This flexibility gives start-ups and growth businesses entry to deeper funding pools and broader brand awareness. The global nature of tokens also means a wider marketplace of buyers and sellers can interact post-STO, which can translate into greater market liquidity.

2. New ways to market your offering

Traditionally, fundraising in a global environment included an almost limitless price tag and mind-bending complexity. Some challenges have included facing localized securities laws and the need for language translations. The advent of the ICO brought about services and tools to support global token offerings. Advertising to the corners of the earth in multiple languages has become easier, and new techniques such as bounty programs enable companies to offer rewards to people globally in exchange for performing certain tasks, such as being active about a brand on social media. Translating content into foreign languages and posting to communities on Telegram, WeChat, and KakaoTalk is also becoming a successful marketing strategy for raising capital. Experienced agencies with specific skills to support global token offerings are emerging, and investor onboarding programs such as the services offered by groups like Lexico can enable an easy conversion funnel.

3. Better terms

STOs offer enhanced terms when compared to raising capital from VCs. Firstly, companies do not have to give up control of their company or a board seat. This puts management teams in a stronger position to make business decisions, and it reduces the risk of being removed from their own company. Next, for equity STOs, companies can sell common stock instead of preferred stock. This effectively lets management and other common stockholders retain a higher percentage ownership in their company, especially in downside scenarios. While dividend rights will be granted to common stock security token holders, STOs can be accomplished without offering voting rights to these investors. Again, this is another advantage that gives management teams more control over their company. Finally, STOs generally raise at higher valuations.

4. Low cost of entry

A security token offering can be used to tokenize many assets, commodities and financial instruments. That means smaller companies have the opportunity to raise large amounts of capital from a global investor pool quickly without necessarily having to absorb large costs, particularly in legal fees. Imagine, for a moment, raising capital from a global investor pool using traditional means. You’d be required to engage a new lawyer in every country where an investor wanted to buy into your offering. Security tokens remove that requirement because compliance is integrated into the token itself. In the US, frameworks such as Reg D and Reg A+ are used by companies seeking to raise capital, and compliance with their requirements can be guaranteed without the use of lawyers.

5. Uses beyond a traditional security

By incorporating utility token-like features into security tokens, additional value can be created. For example, if Hotel Crypto released a security token, customers of the hotel who purchased tokens could be entitled to a 10% discount on their room rate or free access to VIP areas. With tokenized offerings, companies have the opportunity to use their imagination to offer new benefits to their customers. In another example, companies could offer benefits with financial value to customers who hold their tokens for more than three years, for example, discounted meals, spa treatments, in-room entertainment or reduced room rates. Essentially, companies offering security tokens have an option to reward customers for buying and holding their securities over time. These rewards go beyond an appreciation of the value of the underlying security.

So what’s the catch?

While there are many benefits of STOs, its true this style of raising capital is not suitable for everyone. To begin, this is a nascent market. With the first STOs being completed less than two years ago, we do not yet have extensive precedent (legal or otherwise) to reference. Second, without the benefit of time, insights around how STOs will perform over the long term are still being formed.

Third, regulators could weigh in at any time and influence the market with compliance rulings. As it stands, the closer scrutiny given to security tokens can make compliance more burdensome. Fourth, there is still uncertainty around when a token should be treated as a security, although the SEC is attempting to address this. Finally, running an STO demands that businesses create and manage tokens. Security tokens are not immune to the threats of hackers. Having access to the right cybersecurity skills and technology is critical for success.

Want to know if an STO is right for you?

There’s no doubt the STO funding avenue offers a persuasive alternative to private equity and venture capital funding. While there are many advantages to an STO, it is important that this strategy makes sense for your business.

I have found that many executives looking into STO financing originally say something like: “Hey, companies are raising crazy amounts of money this way – it must be easy.” The truth is that outsiders only see the tip of the iceberg, and there is much that happens behind the scenes which many don’t understand. Knowing what happens behind the scenes and the partners to bring into an offering are critical insights that an advisor can provide to make the difference in an STO’s success.

Disclaimer: I am not a lawyer, this is not legal advice and you should consult an attorney before proceeding with any STO/ICO methodology.

https://www.ccn.com/opinion-what-is-a-security-token-offering-sto-and-why-you-need-an-advisor/

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‘Rehypothecation’: More about the Wall Street Practice that Could Ruin Bitcoin.

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Note: This is part 4 in a multi-part article series exploring rehypothecation and commingling in bitcoin and other cryptocurrency markets. Part 1 and part 2 are interviews with Caitlin Long and parts 3 and 4 ask the question, “How did we get to a place that where laws look like this?”

The Problem with Clearing

Beyond costs to the issuers themselves, this system has resulted in a huge rise in brokerage costs with over $100 billion in post-trade servicing fees every tear. Finally, there’s the issue of ownership, something that should be hugely familiar to cryptocurrency enthusiasts who chant the mantra, “If you don’t own your private key, you don’t own your bitcoins.” This is familiar thanks to the oh-so-painful experiences of millions of bitcoin being stolen over the course of 30+ hacks. It turns out that shareholders don’t own their stocks either, with the DTCC owning 99 percent of shares. Instead what most people own and trade are “security entitlements” or the “rights and property interest of an entitlement holder with respect to a financial asset.” Shares traded today are not securities, but entitlements to underlying securities. These shares also go through a complex settlement system through the “National Securities Clearing Corporation,” yet another DTCC subsidiary. The process is outlined in the graphic below but basically consists of debiting and crediting accounts inside the DTCC. It is notable that the process is different within the new Direct Registration System (DRS), but not in a significant way for the purposes of this article.

The important thing to notice in the above diagram is that the broker, not the investor, has an account with the Depository Trust Company (DTC), a subsidiary of the DTCC. This difference is crucial because it means that the “security entitlement” owned by the investor is from the broker, not the DTC. This has some serious implications in the event of broker insolvency because action against an intermediary may be taken only in a very, very rare set of circumstances.

You might be thinking, “That’s easy if a broker goes bankrupt just take the shares and redistribute them to customers.” Well, it’s not quite that simple. The DTC holds shares in “fungible bulk,” the implication being that (as we’ve established) an individual share held with the DTC is not going to be associated with an individual shareholder. As a result of the complexity of the system we’ve spent nearly 4,000 words exploring thus far, the SEC says “imbalances can occur.” The obvious issue that arises is two-fold:

  1. When “imbalances” do occur, and the broker enters bankruptcy proceedings, who gets the shares?
  2. How does voting occur?

To take one egregious example, that’s been used repeatedly by Caitlin Long, we need to look no further than an article CCN wrote about Dole Foods earlier last year. Essentially, Dole had issued just under 37 million shares. The total number of shares outstanding ended up being around 49 million. There was no litigation surrounding this case, but Long made the point in a recent interview that “people lost money here” — and she’s right.

As for the voting question, firms “simply decide which of their customers will be allowed to vote.” This has resulted in one lawyer proclaiming that “in a contest closer than 55 to 45 percent, there is no verifiable answer to the question ‘who won?'” This has rendered voting on some of the closest (and most important) decisions in Wall Street history almost useless and destroyed corporate governance.

2008: Moving Beyond the Brokers

This is an issue that goes far beyond the brokers — especially today. The reason goes back to something we talked about with the introduction of multilateral netting of stocks (not other types of securities) and how it reduced counterparty risk. This was not the case for the financial instruments that caused the 2008 financial crisis. These instruments led to a large amount of counterparty risk via the introduction of collateralized debt obligations (CDOs). Ultimately, the events outlined below led to the prevalence of rehypothecation in modern markets.

Originally, mortgage lending was very simple. A buyer would go to a bank and ask for a mortgage so they could pay off their house over the course of 15-30 years. Then, residential mortgage-backed securities (RMBS) came along and were able to dramatically increase the yield without the risk going up (at the time they were introduced mortgage default rates were 0.5 percent as opposed to well over 5 percent at the peak of the 2008 subprime mortgage crisis).

This also allows for much higher liquidity and profits in banking. As opposed to waiting 15-30 years for a payoff, banks could now give a mortgage and sell it in no time as part of a mortgage-backed security. Even better, because of the insanely low default rates on mortgages, these bonds were AAA rated. The banks were hungry for more — and to compete and sell more mortgage-backed-securities lowered their interest rates. This wasn’t enough — there simply weren’t enough qualified people buying houses to satisfy the institutional need for RMBS.

In step 1 what you see is a series of residential mortgage-backed securities. All the cash flow from the underlying mortgages are pooled, and AAA gets paid first, then AA.
Lower-rated RBMS are then pooled together in CDOs

The bankers working on Wall Street were clever people and figured out that the way to solve this problem was to give loans to less qualified people. This started with people that had less of a cushion — but could still pay their mortgage — but ultimately ended in stories like a housekeeper owning five townhouses in Queens. The problem was that once interest rates went up, these “homeowners” couldn’t come close to covering payments on these houses and ultimately defaulted. Luckily, the financial system has a way of dealing with this by calculating risk in the form of a credit rating. If the underlying assets were bad, the RMBS should have received a bad credit rating.

The system handled this by introducing a system of “tranches” with investors being able to invest in different levels of the RMBS to receive different yields. The most “senior” level of the tranch had the lowest yield but was the safest. The lowest level of the bond had the highest yield but was most likely to fail. The bankers once again faced a problem — as subprime loaning increased and RMBS’ starting being made up of more and more lower-rated securities, the demand was not sufficient enough. Making matters worse, because of the amount that rating agencies were paid to rate these bonds (one source suggests $250,000 compared to $50,000 for municipal bonds),  this meant you would have loans with mostly high-risk mortgages that were still 65 percent AAA rated.

Even with grossly inflated ratings, the banks were not happy. The lower tranches weren’t selling. Many institutional investors have rules on what credit rated bonds they are allowed to buy. Rather than taking the loss on these loans or holding them themselves the banks created what came to be known — infamously — as a collateralized debt obligation (CDO). The idea behind a CDO was that if you took enough of these lower-rated bonds — BBB, BB, and more it suddenly became “diversified.” These CDOs were still tranched, but you could repackage more subprime mortgages into AAA bonds by combining multiple lower tranche loans with some other assets resulting in 80 percent AAA ratings. Michael Lewis, the author of The Big Short: Inside the Doomsday Machine, used this analogy to explain how ridiculous this process was:

“In a CDO you gathered a 100 different mortgage bonds—usually the riskiest lower floors of the original tower … They bear a lower credit rating triple-B. … If you could somehow get them rerated as triple-A, thereby lowering their perceived risk, however dishonestly and artificially. This is what Goldman Sachs had cleverly done. It was absurd. The 100 buildings occupied the same floodplain; in the event of flood, the ground floors of all of them were equally exposed. But never mind: the rating agencies, who were paid fat fees by Goldman Sachs and other Wall Street firms for each deal they rated, pronounced 80 percent of the new tower of debt triple-A.”

Any assets that were not AAA in a bond were usually bought up by other CDOs and combined into a CDO² and ultimately ended up being rated as AAA. This process is pretty well illustrated in the diagram below.

The supply still was not enough to meet demand. In the first seven years of the 21st century, international fixed income investment hit $70 trillion compared to around $35 trillion just years earlier. There simply weren’t enough financial instruments to satisfy this need (which led to the plummeting interest rates mentioned earlier). Bankers were under pressure to sustain growth and so created what is known as a “synthetic CDO.” A synthetic CDO took advantage of a derivatives instrument known as a “credit default swap.” Essentially, it allowed third parties to bet on the outcome of specific tranched CDOs without owning the underlying assets. More significantly, it allowed them to bet by paying premiums rather than pooling money and distributing it based on the outcome. When the underlying asset went up “short” investors had to pay premiums to the “unfunded investors,” but when the CDO deteriorated (as default rates increased), the “unfunded” investors had to pay the short investors.

The issue with these “unfunded” investors is what they were really betting against was the failure of the lower-rated tranches. No one (including most of the shorts) thought that the AAA securities would fail. This resulted in higher payments to the shorts than the longs since the asset was likely not to default. More substantially, though, it meant that in the event of default there was no guarantee that the “unfunded investors” could pay. As the Financial Crisis Inquiry Commision put it:

“In the run-up to the crisis, AIG, the largest U.S. insurance company, would accumulate a one-half trillion dollar position in credit risk through the OTC market without being required to post one dollar’s worth of initial collateral or making any other provision for loss.”

AIG did not set aside reserves in the case of failure, and this resulted in a $180 billion government bailout. This cannot be blamed entirely on AIG, as AIG trusted a rating system in which the banks were essentially paying the rating agencies for good ratings. On paper, the failure of all those AAA CDOs should have been the result of a black swan event. Instead, it was just a matter of an incentive structure skewed in favor of the banks and against AIG. The sale of these shorts created a further sense of “moral hazard” with the banks. The banks, who did have visibility into the underlying assets of the CDOs they were betting against, were some of the biggest buyers of these shorts. As one expert told the New York Times, “When you buy protection against an event that you have a hand in causing, you are buying fire insurance on someone else’s house and then committing arson.”

Later on, JPMorgan was fined $296.9 million, and Goldman Sachs was fined $550 million, for their actions. The investment banks were also telling key clients (namely key hedge funds) about the composition of the CDOs, resulting in several criminal prosecutions. It’s important to note that both CDOs and Synthetic CDOs are traded bilaterally. Going back to our example above this meant that basically, every bank in the system had massive loans, liabilities, and assets in collateral with each other. This introduced an entirely new concept to the world of finance, namely, “Too Big to Fail” (TBTF). It’s important to note that the phrase TBTF does not mean banks cannot (and do not) fail. What it means is if any of these TBTF banks did fail, the contagion might bring down the entire global financial system with it. There were far more companies and individuals with exposure this time than during the paperwork crisis of 1968 (where 100 firms went bankrupt or merged), and that absolutely dwarfed the panic of 1873 (where 57 firms went under). In 2008, if the financial system failed, the world failed.

 

Lehman Brothers is just one example of this. Lehman, the biggest firm to go bankrupt during the crisis, ended up causing some very real damage to both retail investors and pension funds. One such investor, which ABC News reported on back in 2008, put $150,000 in a note. They were told that if the stocks performed well, they “would get a generous interest payout;” if the stock didn’t do well, “they might lose out on interest payments — but would end up holding some blue-chip shares.” This proved to be wrong, and in Hong Kong alone 43,700 people lost money in stocks that were supposed to be safe. The interesting issue here was that the issuer — Lehman Brothers — literally went out of business, and it took nearly five years to recover the shares. No one was sure that anything would be able to be recovered or how much money they would get back.

This bankruptcy, according to an Economist article written as the crisis was unfolding:

“Shredded the last remnants of confidence in American International Group, an insurer, and crystallised fears over the stability of the remaining free-standing investment banks, Goldman Sachs and Morgan Stanley. Alarm over “counterparty” risk—the risk of a borrower or trading partner failing to cough up—turned into outright terror, paralysing money markets.”

What’s interesting here is that, as you’ll remember from above, Goldman Sachs made money off the crisis. The issue was that the “unfunded” investors were defaulting left and right, and Goldman wasn’t able to collect what it was owed. This is the “counterparty” risk that directly led to the rise of today’s system. Despite the bailouts, nearly $400 billion was pulled from traditionally safe money markets and concerns over more banks defaulting led to hundreds of billions more being pulled from the markets in one of the worst recessions in history.

Reform and the Rise of the Intercontinental Exchange as a Central Counterparty Clearing House

All this background brings us to Intercontinental Exchange (ICE). It’s important to note that ICE is the company that now owns the New York Stock Exchange (in addition to several other large financial players). After the financial crash, the G20 leaders agreed to centralize credit risk. They did this through the creation of a “central counterparty clearing system” that implemented multilateral netting on all securities — OTC, foreign exchange, securities, and options. In the same way that multilateral netting reduced counterparty risk (and risk of contagion) through its introduction to the NYSE in 1892, it could also reduce counterparty risk in this system.

Multilateral netting differs in swap contracts, OTC products, and derivatives because of the introduction of “unfunded” parties and the need for collateral (rather than a mere transference of ownership for a set sum of money). Going back to the events preceding the great recession of 2008, you’ll remember that when the underlying asset went up “short” investors had to pay premiums to the “unfunded investors,” but when the underlying asset deteriorated (as default rates increased) the “unfunded” investors had to pay the short investors. You’ll also recall that because the bonds were (wrongly) AAA-rated, the firms did not put aside any kind of reserve in the case that the bond failed, leading to massive bankruptcies and companies like AIG accumulating positions in the realm of a half-trillion dollars without putting up a single cent in collateral.

 

To resolve these issues, central counterparties started requiring margin deposits. These deposits were not (usually) USD, and as such, could be any type of collateral. The collateral is now stored with the central counterparty, and the contract is in turn negotiated with the central counterparty. This has two effects. First of all CCP’s become “too big to fail” in a way far more severe than a bank during the 2008 financial crisis. If a CCP were to fail, it would quite literally be the end of the financial system as we know it.

Now that we understand ICE’s position on top of the financial pyramid, and how it got there, let’s explore some of the issues Caitlin Long and others have brought up when the principals on which ICE operates are brought to bitcoin.

Fractionally Reserved Banking and Rehypothecation

One of the biggest sources of counterparty risk in the modern financial system is rehypothecation. Recall that hypothecation is the pledging of shares as collateral to secure a loan (like Wall Streets firms were doing prior to the introduction of multilateral netting in 1892 to secure enough cash to meet obligations from trading). Rehypothecation, then, is the firms that shares were hypothecated to reusing the collateral they received as collateral to meet their own obligations.

Typically, rehypothecation plays out in the following manner:

  • In order to increase its leverage, a hedge fund pledges $100 million worth of a security to a prime broker in exchange for a cash loan
  • The hedge fund receives $95 million worth of cash (taking a 5 percent haircut) in exchange for the $100 million of securities pledged
  • The prime broker now posts the $100 million worth of securities to cover its own obligations

This can go on and on increasing the size of “collateral chains.” The problem here is that if the prime broker fails, the hedge fund’s collateral can be claimed by whoever the prime broker posted their securities to. This introduces a large amount of counterparty risk into the system and is at the heart of the financial system today. The other problem is how these rehypothecated assets are accounted for. As Long writes in her post, Two Wall Street Terms Every Bitcoin Trader Needs To Learn Now, “Repo accounting under US GAAP allows each of these parties to record that they own the same asset as long as each records a different dollar of debt on its balance sheet.” The implication here is that financial institutions seem to be far more solvent than they actually are.

It’s important to note that this is only possible because of the immobilization of shares. If shares were still physically settled with individual share certificates, this would not be possible because you would own a particular share, not just one share. In the same way, every dollar bill has a unique “serial number,” and if I recorded the serial number of the dollar before I gave it to you, I could know that you gave me a different dollar bill back. If dollars were immobilized (such as in a bank account) a dollar I deposit would not be the same one I withdraw. The implication here in banking is that banks can lend out more dollars than they have (as much as 10x) without me knowing it. The same thing occurs with rehypothecation without the customers’ knowledge and is the root of much of the systemic counterparty risk in the financial system today.

The Unique Problem with Cryptocurrencies

This counterparty risk is one thing when we’re talking about traditional securities. It’s a whole other thing when we’re talking about digital assets. It turns out that there are some things unique to digitally stored assets. Putting aside the risks associated with custodianship and the allocation of profits from staking coins in a Proof-of-Stake (PoS) model. There’s another issue: hard forks.

As we’ve seen above, counterparty risk is a fact of life in rehypothecated assets. Many different parties can lay claim to the same asset. So the question becomes, “In the event of a hard fork, who actually owns the asset?”Since every party has the private keys, it could be the custodian or someone along the collateral chain.

Another issue that comes into play is voting. In the case of rehypothecated assets, who will be able to vote on hard forks? The original holder of the asset, the custodian, or someone along the collateral chain could all lay claim to that asset. As we’ve explored extensively, Wall Street has evolved a complex system of immobilized shares that are not settled in real time. The system took hundreds of years to develop and works for traditional securities (even if it isn’t optimal). Trying to apply this antiquated system to a fundamentally different type of assets simply will not work.

https://www.ccn.com/rehypothecation-more-about-the-wall-street-practice-that-could-ruin-bitcoin/

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Bitcoin Price Close to Bottom, Will See $10,000 this Year: Hedge Fund Mgr.

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The cryptocurrency market capitalization has dropped by $575 billion since its all-time high, and the bitcoin price has dropped by two-thirds since it peaked near $20,000. But a hedge fund manager believes the trend is about to reverse.

Spencer Bogart, partner at cryptocurrency and blockchain venture firm blockchain Capital, predicted a bullish retracement for bitcoin and the rest of the cryptocurrency market on CNBC’s “Fast Money.” According to him, the recent week’s development in crypto-market could be the main reason why “bitcoin is close to bottoming.”

 

The week began with TD Ameritrade, a stock brokerage giant, announcing on Wednesday a strategic investment in ErisX, a cryptocurrency spot and futures exchange. High-frequency trading firm Virtu Financial will also give support to the New York bitcoin firm.

On Thursday, veteran financial advisor and billionaire Ric Edelman announced his investment in Bitwise Asset Management, a renowned cryptocurrency index fund. And on Friday, David Swensen, who oversees Yale’s $29.4 billion endowments and has earned himself the nickname of Yale’s “Warren Buffet,” reportedly spread his employer’s portfolio by investing in two cryptocurrency funds run by Andreessen Horowitz and Paradigm.

 

“Towards the end of last year, when we were at the peak of this bulls market, bad news seemed to have no effect on the markets […] Now we [see] the other side of that when we have a week of news with TD, Ric Edelman, and Yale, and it has almost no effect on price,” Bogart said.

The bitcoin analyst believed that the crypto market would not react immediately to these events, but the inbound institutional capital will prove to be the building blocks of the next bull run. The sentiments appear in line with the 54 percent institutional players who, according to a Fundstrat survey, also think bitcoin has bottomed out already.

Big Players Long on Bitcoin

Institutional investors under the threat of the mainstream market’s instability have started looking into the $220 billion cryptocurrency market as a part of their risk spread exercise. Big buyers have replaced individual investors by pouring in millions of dollars into the crypto space via over-the-counter trading. Under an ideal circumstance, this could mean cryptocurrencies like bitcoin could achieve more stability as larger capital gets distributed among a few players.

“What that’s showing you is the professionalization that’s happening across the board in this space,” Cho said. “The Wild West days of crypto are really turning the corner,” said Bobby Cho, head of trading at Cumberland, which handles OTC trading for cryptos.

Big money confirms a tight grip on the market action. Consequently, institutional players that have gone long at the bottom would not want to take their investment out anywhere below their entry position. Perhaps that is the only reason why financial experts like Bogart appears confident about the crypto’s much-awaited bull run.

https://www.ccn.com/bitcoin-price-close-to-bottom-will-see-10000-this-year-hedge-fund-mgr/

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Major Crypto Exchange Bitfinex Obtains Banking Partner in HSBC, Will it Last?

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On Oct. 6, Larry Cermak, former editor at Diar and head analyst at The Block, reported that leading crypto exchange Bitfinex obtained a banking partner in HSBC, a $133 billion banking giant based in London.

“Bitfinex is now banking with HSBC through a private account of Global Trading Solutions. Very good fit if you ask me. It’s also worth mentioning that all EUR, JPY and GBP deposits are paused but Bitfinex ‘expects the situation to normalize within a week’” Cermak said.

Why is HSBC Accommodating Bitfinex?

As one of the oldest cryptocurrency exchanges, Bitfinex has experienced some of the most difficult challenges an exchange could face, particularly before major cryptocurrency markets like Japan, South Korea, and the US offered clarity on cryptocurrency regulation.

The exchange’s conflict with Taiwanese banks is well-documented, and in April 2017, Bitfinex initiated a lawsuit against Wells Fargo, a US-based banking giant, for blocking deposits to the banking account of Bitfinex and disrupting operations of the business.

“The decision to initiate legal action is because we cannot allow precedents in this industry where clearing houses can disrupt businesses that are by all metrics complying with the rules in place. If we allow them to simply flip a switch and disrupt business, then there becomes a precedent in the bitcoin industry beyond just Bitfinex, so we believe it is the appropriate time to take action,” Bitfinex said at the time.

Since then, Bitfinex has moved out of Taiwan and relocated to the Caribbean and in May, Bloomberg reported that the exchange partnered with Noble Bank to process transactions sent by its clients.

However, Noble Bank has announced to file for bankruptcy following an in-principle deal to restructure debt in January and with that, the only banking partner of Bitfinex vanished.

bitfinex cryptocurrency exchange bitcoin

HSBC is really the first proper banking partner Bitfinex has obtained since Wells Fargo in 2017. If the deal between Bitfinex and HSBC can be sustained throughout the long-term, it will bring a level of stability to the operations of Bitfinex which the exchange failed to secure in the past four years.

Speaking to The Block, Kasper Rasmussen, director of communications at Bitfinex said that the firm cannot comment on the nature of the partnership between the exchange and HSBC.

“Bitfinex does not, and has never, commented on actual or potential business relationships and this is not subject to change now,” Rasmussen stated.

Given the the $200 million dollar daily trading volume of Bitfinex and the amount of fiat deposits the exchange receives from its international customers, it is not possible for the exchange to unilaterally announce its dependence on HSBC as a banking partner through a private banking account.

It is highly probable that the exchange, with strict Know Your Customer (KYC) and Anti-Money Laundering (AML) requirements, obtained the banking service of HSBC through a strictly regulated channel.

Positive Impact on the Industry

Already, most exchanges in major markets like Japan and South Korea have obtained banking services by large financial institutions and commercial banks in their respective countries. If Bitfinex can sustain its partnership with HSBC, it will have a positive impact on the stability of the crypto market.

https://www.ccn.com/major-crypto-exchange-bitfinex-obtains-banking-partner-in-hsbc-will-it-last/

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Blockchain Startup Inks Sponsorship Deal with British Masters Tournament.

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A blockchain startup is going to be an official sponsor for a professional golf tournament in the United Kingdom.

LIFElabs, a philanthropy-based crypto company, has entered into a sponsorship deal with the Sky Sports British Masters tournament, which is scheduled to begin next week. The partnership would mark LIFElabs as the first digital currency firm that backed a mainstream golf tournament alongside major corporations including Adidas, TaylorMade, and Ladbrokes.

LIFElabs says that it will utilize a globally-covered platform like the British Masters to advance the use of its institutionalized LIFEtokens. The firm has orchestrated a hole-in-one competition in which “the first player to hole an ace on the 222-yard hole” will win a bonus of £12,000. The prize money will be converted from LIFEtokens to GBP and will be further matched with a donation from LIFElabs to support Cancer Research UK Kids & Teens and The European Tour Foundation.

“We partnered with the European Tour because it is an innovative brand within the golfing world, with one eye firmly fixed on the future,” Luke Chittock, the chief executive of LIFElabs, said. “As such, both LIFElabs and the British Masters are looking to make a real difference to people’s lives, both here in the UK and across the rest of the world.”

The partnership also expects to serve clear evidence of the growing collaboration between crypto and sports organizations. Earlier this year, famous football club Liverpool won its official foreign exchange partner in TigerWit, a blockchain-based trading app. The industry also witnessed mainstream football clubs launching their crypto tokens for the purposes ranging from crowdfunding to reward distribution among fans.

Max Hamilton, Head of Commercial Partnerships at the European Tour, said that he is “delighted” to have LIFElabs as the firm’s main sponsor.

“This is an exciting time for the Sky Sports British Masters, and we’re delighted to welcome LIFElabs as an Official Sponsor for the event,” he said. “Following on so soon after The Ryder Cup, this year’s British Masters promises to be a fantastic occasion, with a popular and worthy host in Justin Rose. LIFElabs is a progressive business and a great fit for the Sky Sports British Masters.”

https://www.ccn.com/blockchain-startup-enters-sponsorship-deal-with-british-masters-tournament/

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Bitcoin Price Intraday Analysis: BTC/USD Undergoes False Breakout

Bitcoin spent its Sunday reclaiming its support near $6,500 after witnessing a false breakout action yesterday.

 

The BTC/USD, in reality, is stable like it was the previous week. The pair kicked off today by correcting lower from the last short-term upside and false breakout range as discussed in this analysis. It eventually formed lower lows towards 6525-fiat and reversed up to 25-pips in an upside correction action. The price behavior throughout yesterday and today once again confirmed the presence of trading bots on crypto exchanges. However, BTC/USD returned to its stable range and is once again retesting its previous support/resistance levels.

 

BTC/USD Technical Analysis

 

 

The latest price action has brought BTC/USD inside its current triangle pattern. We have adjusted the upper trendline to make it precise with the recent lower highs formed during the pullback action from 6741-peak. We are now seeing bulls finding a stable support level above 6500-fiat, and a clear upside target in sight on a pullback is the upper trendline of the triangle formation, coinciding with 6600-fiat for now.

 

The RSI indicator and Stochastic oscillator both are looking at a smooth near-term uptrend ahead, which could mean BTC/USD will attempt a breakout action again. If it does, the pair will also go above its 100H and 200H SMAs to indicate a positive bias in the market. The only catch is low volume, which means Bitcoin will remain in a bias conflict while bringing intrarange opportunities in near-term.

 

BTC/USD Intraday Analysis

The range we are watching today has 6525-fiat acting as interim support and 6606-fiat acting as interim resistance. We have already entered a long position towards resistance on a bounce from support, and a close above resistance will also have us enter a long entry towards 6638-fiat, the upside target in our false breakout area. On both the upside positions, our stop loss will be maintained 4-pips below the entry position to minimize our risks in case a pullback action appears.

 

Looking the other way, a pullback action, as mentioned above, will have us put a short position towards the support as a part of our intrarange strategy. A close below the support level will also open a decent short position towards 6500-fiat. In these positions, a stop loss somewhere 4-5 pips above the entry position will define our risk management perspective.

 

 

 

Meanwhile, we’ll be watching a newly formed ascending trendline in black as a potential pullback level. We could see its use in our future updates.

 

Trade safe!

https://www.ccn.com/bitcoin-price-intraday-analysis-btc-usd-undergoes-false-breakout/

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EOS Takes a Vow, Malta at the UN, and an $8 Billion Valuation: This Week in Crypto

Make sure you check out our previous edition here, now let’s go over what happened in crypto this week. Also, make sure you subscribe for this week’s edition of The CCN Podcast on iTunes, TuneIn, Stitcher, Google Play Music, Spotify, Soundcloud, YouTube or wherever you get your podcasts. Also make sure you check out our interview with Caitlin Long.

 

Price Watch:

Bitcoin is down 1.11% this week following a stable few weeks. Bitcoin is up 1% this month and continues to oscillate around the $6,500 level.

Ethereum is down 4% this week to $222, despite the negativity around some of Ethereum’s fundamentals, analysts are gaining confidence that Ethereum  bottomed out at $170 after a long slide backward from over $1,000 at the peak of the great bull run of 2017.

The entire coin market capitalization is down around 1.8% in what’s been a slow week on price movements. Ripple declined precipitously this week 

Bulls & Bears:

Bitcoin Will Not Challenge Gold as a Safe-Haven Asset: Equity Analyst – Writing in Morningstar Research Services’ short-form investment commentary series, the “Morningstar Minute,” equity analyst Kristoffer Inton noted that if bitcoin did begin to replace gold as a safe haven asset, it would represent a “seismic shift” in the investment case for the precious metal as 40 percent of gold demand comes from investors. For this reason, Intron thinks the shift is unlikely.

Cryptocurrency is ‘Here to Stay’ – CTFC Chairman Giancarlo, the chairman of the Commodity Futures Trading Commission (CFTC) stated in an interview with CNBC that cryptocurrency is “here to stay,” even if it never achieves the ultimate goal of becoming the world’s leading currency, as Square CEO Jack Dorsey said that he believes it will.

 Tokens:

Tether Dominates 98% of Stablecoin Trading Volume – In a  report titled The State of Stablecoins, digital assets tech firm Blockchain Luxembourg SA estimates that approximately 98% of the total daily trading volume of stablecoins is dominated by Tether. On a daily basis, this translates to approximately 60% of the daily trading volume of Bitcoin.

Chinese Billionaire Bitcoin Investor ‘Done’ Investing in Blockchain Projects  – Li Xiaolai, the founder of Beijing-based venture capital firm BitFund and a widely recognized billionaire Bitcoin investor in China, has publicly stated that he will personally move away from the blockchain and initial coin offering (ICO) space.

Block.one Vows to Use its EOS Tokens to Prevent Voting Cartels – When cryptocurrency development firm Block.one concluded its initial coin offering (ICO) and released the first version of the EOSIO software, it didn’t just raise a record ~$4 billion in crowdfunded contributions — it also received 100 million of the 1 billion EOS tokens distributed through the network’s Genesis block. Now, the well-funded blockchain startup is vowing to use those tokens to stave off any block producer voting cartels, whether they are present now or arise sometime in the future.

XRP is ‘Very Clearly Decentralized’: Ripple CEO – Ripple CEO Brad Garlinghouse in a recent interview with financial news outlet Cheddar spoke to some of his critics concerns this week. Garlinghouse, who was speaking on the sidelines of the Ripple-sponsored industry conference “Swell” in San Francisco, said that he believes XRP is “very clearly decentralized.”

Governments:

Malta PM Talks Crypto at UN General Assembly – At the UN General Assembly,  Malta Prime Minister Muscat emphasized that recognizing the potential of the blockchain, Malta has openly embraced the crypto market and businesses within it, leading the global cryptocurrency sector with favorable regulations and practical policies. The island has been rewarded with investments from the likes of Binance and endorsements by its CEO Changpeng Zhao.

TechCrunch Founder Outraged at US SEC – Michael Arrington, the co-founder of TechCrunch, announced that his venture capital firm has decided to move out of the US and relocate to Asia after the SEC sent two subpoenas to XRP Capital. Outraged by the decision of the SEC to crack down on local companies and investment companies, Arrington added: “the U.S. has already been left behind.”

 Exchanges:

Will Coinbase Achieve $8 Billion Valuation? – Tiger Global, a U.K. hedge fund that invests mainly in global consumer brands, is reportedly considering a $500 million investment in Coinbase, which would boost the startup’s valuation close to $8 billion and strengthen the cryptocurrency market’s legitimacy, according to sources that spoke to Recode. The investment would make Coinbase one of the highest valued U.S. startups.

BitMEX Taps Former Hong Kong Regulator as Chief Operating Officer – BitMEX, one of the largest cryptocurrency trading platforms, has named Angelina Kwan, formerly managing director and head of regulatory compliance for Hong Kong Exchanges and Clearing Limited (HKEX), as its chief operating officer. Kwan, who joins the company as it rides exceptional growth, will work with regulators worldwide to develop rules that will support cryptocurrency’s continued growth.

https://www.ccn.com/eos-takes-a-vow-malta-at-the-un-and-an-8-billion-valuation-this-week-in-crypto/

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Ripple Drops 8% as Volume Drops 50% in 1 Week, Bitcoin Remains Bearish

On October 6, CCN reported that the volume of Ripple has declined by more than 50 percent within the past four days. Since then, XRP has declined by around eight percent against the US dollar.

 

The volume of Bitcoin has slightly recovered to $2 billion on CoinCap.io and $3.3 billion on Coinmarketcap, but the dominant cryptocurrency has not recorded any significant increase in volume and price to suggest that a short-term rally is in play.

 

 

 

Ripple (XRP), Basic Attention Token (BAT), and Decentraland (MANA) remain as the worst performing cryptocurrencies on October 7, recording losses in the range of five to seven percent against both the US dollar and Bitcoin.

 

Weak Volume Will be an Issue Throughout Next Week

Yesterday’s report on the cryptocurrency market by CCN emphasized the low volume of Bitcoin and the inability of the cryptocurrency market to initiate a meaningful increase in valuation in the short-term without a promising recovery by BTC.

 

“Given the low volume of Bitcoin and the weakening $6,500 support, in the short-term, it is highly likely for BTC to record a minor decline in value based on technical indicators and its price trend since mid-September,” the report read.

 

 

 

Eventually, the volume of Bitcoin dropped to a yearly low across all cryptocurrency exchanges, as technical analyst Edward Morra reported.

 

 

 

The decline in the volume suggests that Bitcoin is more biased to the bears than bulls in the market. With the Relative Strength Index (RSI) of Bitcoin at around 50, BTC is not demonstrating oversold conditions either, which decreases the probability of an upside movement.

 

Morra said:

 

“This is the lowest recorded daily volume in more than a year at least (as much as I could squeeze on the chart leaving chart readable) while hovering around the POC of the whole 2018. This is combined volume from various exchanges.”

 

The decline in the volume of Bitcoin, which occurred in the past 72 hours, portrays the intent of many traders in the cryptocurrency exchange market to simply observe the price trend of major cryptocurrencies and wait for a potential breakout in the higher region of $6,000.

 

 

 

Given that a decline in volume could also demonstrate intensifying seller fatigue and the lack of willingness of bears to continue the sell-off of BTC in a low price range, BTC could initiate an unpredictable short-term rally in the upcoming days as it had done in July.

 

Tokens Bleeding

The 50 percent decline in the volume of Ripple and the lack of momentum of tokens have shown that investors are not willing to take high risk, high return trades in a period of uncertainty.

 

Ripple has had two productive months in September and October, securing major partnerships with influential financial institutions including Banco Santander.

 

However, until the daily trading volume of the cryptocurrency exchange market recovers and exchanges begin to see a revival of trading activity, it is highly unlikely for any major cryptocurrency to initiate a short-term rally unless the market starts to demonstrate oversold conditions.

https://www.ccn.com/ripple-drops-8-as-volume-drops-50-in-1-week-bitcoin-remains-bearish/

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U.S. Senate Candidate Signs Clemency Petition For Ross Ulbricht

Silk Road founder Ross Ulbricht is currently serving a double life sentence plus 40 years for his role in operating the infamous Silk Road website. Ulbricht is not eligible for parole.

 

He is currently imprisoned at the high-security United States Penitentiary, Florence High, in Colorado.

 

 

 

In August, Maine State Senator and current U.S. Senate Candidate Eric Brakey tweeted how Ulbricht has “very clearly been treated unfairly by our criminal justice system.”

 

 

Senator Brakey said he signed a change.org petition asking President Donald Trump to grant clemency, and noted how he would like to visit Ulbricht the next time he was in Colorado.

 

On September 27th, Ulbricht ‘responded’ to the Tweet. He thanked Senator Brakey for signing the petition and said he was his “new favorite Senate candidate.” Ulbricht asked how people could get him elected.

 

 

In mid-July family and friends of Ulbricht created a Twitter account to help him “find my voice here after all these years of silence.”

 

Through the account, Ulbricht relays his thoughts about the clemency petition and shares other musings. He explained in late-July how he dictates his Tweets by phone and then they are posted on the account. The comments are printed out and mailed to him to read.

 

 

A Punishment That Shocks The Conscience?

In June, the Supreme Court of the United States denied a petition by Ulbricht for a writ of certiorani, which closed the door on him being able to appeal his punishment before the Court.

 

A growing number of organizations, people, and activists have expressed concern that Ulbricht’s Fourth and Sixth Amendment rights were violated during the investigative and sentencing process.

 

 

 

According to change.org, 84,465 people have signed the clemency petition as of September 29th. Its description notes how the criminal justice process for Ulbricht included “corrupt federal investigators (now in prison) who were hidden from the jury, as well as prosecutorial misconduct, constitutional violations and reliance on unproven allegations at sentencing.”

 

In July, the Libertarian Party of the United States passed a resolution at their convention asking President Trump to give Ulbricht a full pardon since his appeal to the Supreme Court was denied.

 

Later in the Twitter thread, Senator Brakey mentioned how it was “terrible to learn that the judge considered pending charges during sentencing that were later dismissed due to corruption by federal investigators — and his appeal was still dismissed.”

 

 

 

He said the issue would be raised with President Trump “when I win election to the U.S. Senate this November.”

 

 

Silk Road Proceedings Still Continue

Earlier in September, CCN reported on how Gary Davis pled not guilty in a New York court to a variety of charges. Davis has been accused of assisting Ulbricht in an administrative capacity to operate Silk Road.

 

Davis, who was extradited from Ireland, reportedly faces a life sentence if he is convicted.

 

He says he is a victim of mistaken identity, but authorities allege he received weekly payments from Ulbricht, listed drugs on the Silk Road, and also worked as a customer care agent for the site.

https://www.ccn.com/u-s-senate-candidate-signs-clemency-petition-for-ross-ulbricht/

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Hacked Bitcoin Exchange Zaif Discontinues New Registrations

Tech Bureau Inc., the owner of Zaif exchange, decided to suspend new account registrations at their trading platform temporarily.

 

The decision came on September 28, 14 days after a hacking incident took place at Zaif and caused the crypto exchange more than $60 million worth of damages. Tech Bureau said in its press statement that it would resume new registrations as they decide on a concrete strategy to compensate their customers. It has reached out to Fisco, another Japanese investment management company, for a $44 billion bailout agreement. The said financial support expects to back customers’ financial assets but, according to a new development on October 1, the deal is still under examination.

 

 

 

“After concluding the basic agreement, we are advancing consultation and negotiations for concluding a formal contract, there is no change in the policy to ensure thorough compensation for customer assets, and we are continuing to consider the details of specific response…As soon as the content is confirmed, we will report it promptly.” – Tech Bureau said.

 

As a clear reimbursement policy takes shape, Zaif believes it would be ideal to keep the new customers away from signing up on its Bitcoin exchange. The suspension, according to Tech Bureau, will not affect existing customers, including those whose identity verifications are still open.

 

FSA Launches Investigation

Japan’s Financial Services Agency (FSA) confirmed that it is investigating the security practices at Zaif exchange. The agency has already begun examining the user protection systems installed in Tech Bureau offices.

 

FSA had served two consecutive warnings to the company – in March and June – to improve their business operations. The agency had also reached out to other cryptocurrency exchanges with the same advisory, reportedly in the wake of Coincheck’s 509-million-dollar-hack that took place in January.

 

 

 

From January to June, Japanese police has already identified more than 160 cryptocurrency thefts totaling circa $532 million. More massive thefts received attention than smaller hacks. Nevertheless, the agencies never recovered stolen funds.

 

Hackers have remitted the stolen Zaif funds to exchanges offshore. The recipient wallets reportedly have not gone through any KYC/AML guidelines, which could make it difficult for Japanese police to recover the digital assets.

https://www.ccn.com/hacked-bitcoin-exchange-zaif-discontinues-new-registrations/

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Binance’ Astronomical Success is Motivated By Advertises Faced in China

The regulatory clampdown on cryptocurrency exchanges in China has been noted as a key factor in the sensational growth of Binance in 2018.

 

Launched in the middle of 2017, the rate of growth that Binance has experienced, both in terms of trading volume and capitalization has attracted a lot of attention within the cryptocurrency environment. In just a few months, the exchange grew from just a newcomer to one of the leading crypto exchanges in the world.

 

 

 

Even though the company started in 2017, its founder & CEO Changpeng Zhao has always been a major player within the crypto ecosystem and other related industries. Zhao founded Fusion Systems in 2005 in Shanghai, a company that specialized in building high-frequency systems for brokers. Down the road in 2013, he became the third member of the Blockchain.info cryptocurrency wallet team. Zhao also had a brief stint at OKCoin, where he worked as a CTO.

 

Despite his experience and expertise, Zhao notes that the force behind Binance comes from innovation that was born out of a supposedly adverse circumstance, speaking to the  South China Morning Post. The ban in China motivated Zhao and the entire Binance team to expand everywhere else, hence the subsequent growth that has established the company as a leader in the industry.

 

In September 2017, China shut down the activities of all domestic crypto exchanges. This move forced Binance to move its headquarters and servers to Tokyo. This kept the establishment outside the regions where the Chinese regulations could affect its activities.

 

 

 

Binance then embarked on its systematic expansion exercise, which saw the company encroach into other markets, including Singapore and Taiwan.

 

Zhao elaborates that while Chinese operators of cryptocurrency exchanges scrambled to keep up with new regulations on the mainland, Binance found the perfect opportunity to capture new regions and establish itself. This is a move that has proven to be rewarding, based on visible evidence.

 

Binance claims to have over 10 million users across the globe who engage in trading digital tokens. From transaction fees alone, the company claims to have generated a profit of $350 million between January and June 2018.

 

The expansion philosophy of Binance necessitates the nomadic lifestyle of Zhao, who is known by his constant travels across different parts of the world. During the past month alone, Zhao said he has visited eight countries which includes Switzerland and South Korea to hire new staff, attend industry events and forge deals. He has not traveled back to mainland China since the cryptocurrency crackdown a year ago, he said.

https://www.ccn.com/binance-astronomical-success-is-motivated-by-advertises-faced-in-china/

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Blockchain Use in the Life Science Organizations has Tripled Since 2017: Survey

Blockchain adoption in the life sciences has risen exponentially in the last one year despite the existence of significant barriers.

 

According to The Pistoia Alliance, a global nonprofit of life science firms, 60% of the professionals in the pharmaceutical and life science sector are either currently using blockchain technology or at least experimenting with it. This compares to a figure of 22% recorded when a similar survey was conducted in the sector last year by the nonprofit.

 

 

 

For the remaining 40% who have no plans of implementing blockchain, there were various barriers cited. Among 55% of the respondents, the lack of skilled blockchain personnel was the reason given for the ambivalence shown towards blockchain technology.

 

In our latest survey, 55% respondents said that the biggest barrier to implementing #blockchain is a lack of skilled personnel. Want to know what else we found out? https://t.co/1lxy3Robrq

 

— The Pistoia Alliance (@PistoiaAlliance) September 27, 2018

 

The survey also revealed that another 16% of the respondents viewed blockchain technology as being too difficult to understand and this was also serving as a barrier to adoption. But despite the perception that blockchain was a complex technology, awareness regarding the capabilities of the technology was increasing.

 

Best Features

Per the survey, 73% of the professionals in the pharmaceutical and life science sector are of the view that the immutability of data is the greatest benefit of blockchain technology. Another 39% held the opinion that the transparency offered by distributed ledger systems is the best feature of blockchain. Close to 20% of the respondents were, however, of the view that the distributed ledger technology offered no benefit that couldn’t be accrued from using a traditional database.

 

“However, almost one fifth (18 percent) of professionals believe using blockchain adds no value beyond a traditional database, showing there is some reluctance in the industry to use the technology,” The Pistoia Alliance wrote in a statement.

 

 

 

According to Steve Arlington, the president of The Pistoia Alliance – which boasts of founding members that include global pharmaceutical giants such as Pfizer, Novartis, GlaxoSmithKline and AstraZeneca – the benefits of blockchain technology to the pharmaceutical and life sciences industry cannot be ignored.

 

Life-Saving Benefits

“Blockchain provides an additional layer of trust for scientists and their organizations. We hope the security benefits of the technology help to lessen reticence over sharing and transferring data or information, and will facilitate further cross-industry collaboration and knowledge sharing,” Arlington said. “We believe blockchain will open up new opportunities for the industry to begin sharing data more securely to advance drug discovery, ultimately making patients’ lives better.”

 

The survey which was conducted on senior professionals in the sector last month also revealed that 30% of the respondents are of the view that the medical supply chain is the one area which stands to benefit the greatest from adopting blockchain technology. About 25% of the respondents, on the other hand, cited electronic medical records while 20% said clinical trials management. For 15% of the respondents, scientific data sharing stands to gain the most from blockchain technology.

https://www.ccn.com/blockchain-use-in-the-life-science-organizations-has-tripled-since-2017-survey/

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‘Rehypothecation’: Inside the Wall Street Practice that Could Ruin Bitcoin

Note: This is part 3 in a multi-part article series exploring rehypothecation and commingling in bitcoin and other cryptocurrency markets. Part 1 and part 2 are interviews with Caitlin Long and parts 3 and 4 ask the question, “How did we get to a place that where laws look like this?”

 

In order to understand why Wall Street veteran and cryptocurrency advocate Caitlin Long  thinks that “rehypothecation” and “commingling” are going to be much-discussed topics in the cryptocurrency industry, we must understand Long’s background. The best way to do this is to look at rehypothecation and commingling in the context that Long did — traditional securities — and to understand that we need to explore where the modern broker-dealer collateralized by the repo (repurchase) market and asset-backed commercial paper (ABCP).

 

 

 

At the beginning of our conversation, Long says that everyone’s “backgrounds bring them to who they are today and bring them the knowledge base for recognizing trends.” In Long’s case, this is definitely true and well explains why she is blowing the whistle on the wave of counterparty risk associated with Wall Street’s entrance into cryptocurrencies if they bring their current settlement practices with them. Beyond uncovering the introduction of risks from Wall Street’s, and particularly Intercontinental Exchange‘s (ICE) interaction with cryptocurrency, Long explains issues and costs associated with Wall Street’s current system.

 

This article reviews the risks and inefficiencies long brings up and uncovers how they came about. During my interview with Long, several questions continuously came to mind, but the foremost was, “How did we get here?” In order to adequately understand Long’s concerns, a (rather long) primer on the market’s evolution into the inefficient behemoth that it is today is necessary.

 

How We Got Here

The New York Stock Exchange was not always the towering behemoth it is today. Long before its market capitalization hit $21 trillion (larger than the U.S. GDP of  $18 trillion), before September 11th, two world wars, the Crash of 1929 and the Great Depression it led to, before even the SEC, 24 men stood around a buttonwood tree outside of 68 Wall Street in New York City in 1792 and signed an agreement to give each other preference in the trading of securities. Revolutionary war bonds and stock from Alexander Hamilton’s newly created bank dominated the “market,” and as the exchange grew, the number of traders grew, and the men moved around to bigger and bigger buildings until 1865 when the current NYSE building was adopted. In the decades immediately preceding the turn of the 20th century, the NYSE stood out for its relative primitiveness, especially with its daily trading volume.

 

The most jarring difference between the NYSE and its contemporaries in 1890 was its lack of a clearinghouse. A clearinghouse is an institution designed to settle transactions between a network of buyers and sellers. Those of us living in the 21st century might ask, “Why not just settle at the time of the transaction? I’ll send money, and you send the shares, and the transaction will be settled in real time.” This type of settlement was not possible before the digital system. Much like a private key today means a claim to the actual bitcoin associated with the wallet, paper certificates were claims in a company (not just representative of a claim to a company owned by an individual). As such, whenever a trade was made shares were delivered to the firm that bought them in exchange for money by a specified time the next day.

The Need for Centralized Clearing

Prior to the introduction of multilateral netting on the New York Stock Exchange clearing was done on a “bilateral basis.” This means that brokers were required to write checks and trade shares for every transaction at settlement time. This required much higher levels of liquidity than multilateral netting, which is shown below:

 

 

 

Take a look at Scenario A. Each letter (A, B, C, and D) represent a brokerage firm in a trading day. The arrows represent securities trades between the firms. In the example above all shares of securities cost $1 and so for every arrow going from one firm to another n shares (where n is the number next to the arrow) are transferred to the firm where the arrow is pointing, and $n is paid to the firm transferring the shares (share prices are kept the same for simplicity of the example). Although the transactions are made in the order explained below, settlements all take place at 2:15 PM the next day and every firm must have adequate capital and shares to fulfill the trades it made the previous day, or it will “fail to deliver” and risk bankruptcy. What follows is Broker “A”‘s trades for the day:

 

Broker A starts with 90 shares and $10

Broker A sells 70 shares to broker C for $70 and now has 20 shares and $80

Broker A buys 80 shares from Broker D and now has 100 shares and $0

Broker A sells 100 shares to Broker B for $100 and has 0 shares

The next day at 2:15 it’s time to settle. Because all settlements happen simultaneously, Broker A now needs to give 100 shares to Broker B (of which it only has 90) and give $100 to Broker B (of which it has $0). Obviously, there’s a problem here. Broker A is unable to fulfill its obligations for the sale of shares it made because it’s waiting on other firms to deliver shares (at 2:15 pm) and it can’t afford to pay it’s cash obligations because it’s waiting on payment for the sale of shares itself.

 

This required all firms to procure massive loans from banks (typically with other stocks as collateral for loans in a process called hypothecation) every day to meet their obligations before being paid by other firms. This process was called “over certification” and led to several problems for banks and brokers alike.

 

 

 

First of all, there was the variability of the interest owed on these overnight loans. The rate varied dramatically and hit as high as 125 percent leading to the failure of several brokerage firms who could not afford to pay back the wildly inflated loans. Even more, concerning was that this increased “counterparty risk” and caused a phenomenon called “contagion,” a domino-like effect where the failure of one brokerage firm would lead to the failure of others. For instance, in the example above, if any other firm on the web could not pay and defaulted, every other firm on the web would default. In reality, brokerages are much more complicated than this simple trading web and have other assets to use as collateral for loans, but the complexity of these webs necessitated more and more loans and caused dozens of brokerage failures when panics hit.

This “contagion” lead to catastrophes like the Panic of 1873 wherein 57 brokerage firms failed and the president of Bank of the State of New York threatened that lending to brokers for certification would be cut off entirely unless overnight borrowing was curbed. The solution, which had already been implemented by other exchanges, came in the form of multilateral netting. At the end of every settlement period, a Central Clearing Party (CCP) would net the asset obligations owed by each firm to one another. In the example above, rather than owing 100 shares and $100, Broker A sells its 90 shares and receives $90, with no borrowing required. According to one study, after the introduction of CCP’s, for every $25 million in securities trades just $5 million was transferred, a dramatic improvement over the system of bilateral netting. Papers have even argued that the increased counter-party risk associated with bilateral netting on the NYSE prior to the introduction of a central clearing party resulted in a 0.24 percent premium over other exchanges because default risk was so high.

 

The Paperwork Crisis

 

NYSE settlement time over time

As the years wore on, and trading volume slowly climbed, the crisis that would loom in the late 60’s and early 70’s begin to rear its ugly head. While multilateral netting dramatically reduced the paperwork required of banks, it did not eliminate it entirely. At the end of the settlement period (2:15 pm the next day), shares and checks were still transferred, and back office clerks labored away at forms to make sure the transfers were in compliance with all pertinent regulations. So long as the trading volume remained relatively low, this was not an issue.

 

Trading volume climbed rapidly until 1929 when the stock market crashed and the United States — and the rest of the world — entered  The Great Depression. The Great Depression did not see volume levels return to what they were even a few years earlier, with trading volumes in 1930 still nearly double what they were in 1926. Nonetheless, the crash had taken its toll on the securities industry, and it could not afford to simply hire its way out of the crisis. Clerks in the back offices of brokerages had to work harder and harder to keep up, and in 1933 settlement time was moved up to t+2 days. Settlement time increased several times for similar reasons, without much fanfare, until it hit t+4. The move to t+5 would not be so quiet.

 

 

 

Centralized clearing on the NYSE was the first step in the formation of the modern financial system. The development is significant because instead of exchanging shares for money directly, an intermediary who charged for their services was introduced. It’s important to remember that while this was a move away from decentralization, it was a necessary move because the technology for instant settlement had not yet evolved. At this point in our story brokers (and their customers) still hold their share certificates. Even if there is a party through which trades are settled after the settlement, one party would still walk away with stock certificates denoting ownership in the company.

 

This would all change 3/4 of a century later as a direct result of the success of the system. As the years wore on, increased advertising led to increased retail investment and the prospect of capital gains propelled by the increase in retail investment led to the entrance of the institutional players of the day into equities markets: insurance companies and pension funds, which according to Wyatt Wells, an expert on the period, had “traditionally put their money into bonds or real estate, started buying stocks in large quantities.” This, combined with the rise in popularity of mutual funds to such a degree that the number of mutual funds doubled in a matter of years, resulted in a dramatic increase in stock market volume and sent prices soaring.

This continued until the late 1960’s when the system hit “the paperwork crisis.” Wells says “certificates for more than 100 shares were rare.” He goes on to give the example of an investor who purchases 500 shares of a stock to receive five 100-share certificates. This doesn’t sound that bad until you realize that trading averaged over 12 million shares a day in 1968. While the introduction of the clearinghouse had reduced paperwork, no one at the turn of the 20th century could have anticipated this level of volume. The volume is even more astounding when you realize paperwork beyond the issuance of shares. Wells says that, “The purchase or sale of a security might require as many as 68 steps.” Another study found that brokers used an average of 33 different forms for a single stock transfer. The paperwork was unmanageable.

 

 

 

To cope with the crisis the NYSE’s member firms started massive hiring efforts. “Every week the New York Times contained 100 columns of ‘help wanted’ advertisements placed by securities firms,” Wells explains. In 18 months, the number of clerks increased from 22,000 to 28,000. Any level of hiring on this scale soaks up the talent pretty quickly, and clerks were described by many as incompetent, overworked (often working night shifts), and prone to mistakes. Millions of dollars were misplaced and firms went bankrupt under the pressure.

 

As more and more firms went under, the NYSE scrambled for a solution. Computer systems showed promise — some firms had been using them but with limited success. The machines were far more complicated to implement than anyone had foreseen, and programmers were in very short supply. Additionally, many firms were under severe capital constraints that were exacerbated by the additional hiring of clerks and could not afford expensive computers that proved even more expensive to implement. Even when they could, there were cash flow issues: clerks could be elastically scaled to meet capacity by means of hiring and firing. With a computer, once you bought it, there was no getting rid of it.

 

The Rise of the CCS

The SEC began an investigation into the problem and landed on two different solutions that could be used to solve the problem. The first model was to create a “decentralized network” that would link transfer agents and allow them to transfer “uncertificated shares” (or shares not physically represented by a physical stock certificate) on electronic order books. This system had several implementation issues that caused it to be pushed aside.

 

First of all, we’re talking about 1971, the same year that the first microprocessor was introduced: a 4-bit, 740 kHz processor with the ability to address only 640 bytes of RAM. Apple and Microsoft wouldn’t be founded for another five years, and Steve Jobs, Bill Gates, and Steve Wozniak were all midway through high school. The second reason is that this model would require all shares be dematerialized (which would make them uncertificated shares) and “that shareholders have a psychological aversion to giving up their paper.” This sounds downright stupid now, but in an era where people did not use digital devices from the time they woke up to the time they went to sleep, it was understandable.

 

 

 

The alternative was to “create a centralized depository in which share certificates would be kept in custody.” Under this model, paper certificates would be preserved and put into a central place (a literal sealed vault). The centralized model would issue a representative instrument. As Wells said, “It would register all securities it held under its own name and direct dividends, voting proxies, and the like to the brokerage houses, which could then send them on to customers.” While this system had issues, it was far less ambitious than the decentralized system. As David Donald wrote in The Rise and Effects of the Indirect Holding System: How Corporate America Ceded Its Shareholders:

 

“The mood at this time was very far from the limitless trust in technology of 1969 when Apollo 11 had landed on the moon, and the computerized NASDAQ project had been set in motion. Under such circumstances, it is not surprising that Congress selected a safe, low-tech solution that shut out any future risk.”

 

So the centralized solution was implemented. The implementation of the solution, as it happened, was already underway in the form of the “Central Certificate Service” (CCS). The CCS was designed to immobilize shares by holding them for brokerage firms. This meant that rather than physically moving securities around, the CCS would transfer ownership on their books. The system had several issues.

 

First of all, the software was incredibly buggy and prone to failures. Modern software development standards around testing had not yet been invented, and because of the expensiveness of hardware, there were very few failovers. On top of the software issues, the legal system made an assumption that was incompatible with the rise of share immobilization. The laws of all 50 states used physical possession of the share as the only thing that constituted ownership in a company. The system also did not allow the use of shares as collateral in most cases. These issues would plague the system for years to come but failed to hinder its expansion entirely.

 

Toward the DTCC

By 1971 it was thought that they would have succeeded in cutting the transfer of certificates by as much as 75 percent. Yet at its peak, the CSS transferred just 10,000 shares per day. This was not the case because there were significant glitches and the system stopped accepting new shares for a while. There were other issues: the program was voluntary, and many brokers did not wish to give up their paper. To combat these issues banks and exchanges worked together to form the Banking and Securities Industry Committee (BASIC), which resulted in the creation of the Depository Trust Company and a central depository in New York.

 

The system had come far later than it should have and left the securities industry with some serious scars. As David Donald explained, “over 100 brokerage firms either entered bankruptcy or were acquired by stronger competitors.” The damage was done, and the firms that came out of this crisis through mergers and cheap acquisitions would rule Wall Street going forward. The damage was so severe, and so deeply impacted the institutions that underlie modern Wall Street, that the aversion to change would last until the current day. More significantly, the immobilization of shares would be written into the laws that govern the SEC, setting an already immalleable system into stone. In 1975, the SEC was required by the Securities Acts Amendments of 1975 to “end the physical movement of securities in certificates.” These words entrenched a system that had originated as temporary emergency measure.

 

The Cracks Begin to Show

A year after the SEC passed the aforementioned 1975 Amendments, they released a study concerning the consistency of the new law with the Securities Exchange Act of 1934 (which created the SEC) and to investigate the effectiveness of communication between companies and their shareholders under the current system. The study reported that the new system “makes communications between issuers and their shareholders more circuitous.” The report went on to show the enormous costs, both of time and money associated with the new system. Donald points out, though, that the benchmark the SEC measured the new regulation against was not the “utopian solution” of a “certificateless society” but was far superior to the system “that led to the disappearance of over 100 brokerage firms.” What was missing from the 1976 report was that this system was temporary. On the contrary, the new system was lauded as “the foundation of a national system for the clearance and settlement of…transactions.”

 

This foundation began to show some serious cracks that needed repair fairly quickly. Shareholder communication prior to the introduction of intermediaries had been a simple affair: every stockholder was listed on a “stockholder list” with their name and contact information. Issuers needed only go through the list and send information to everyone on the list. This is how shareholder communication looked after the introduction of intermediaries:

 

 

 

As you can see, the indirect holding system vastly increased the cost and complexity of communication with shareholders. As a result of this complexity, companies like ADP (and later Broadridge who now controls over 98 percent of the U.S. market for proxy voting services) were formed to handle shareholder communication for issuers who deemed it too expensive, or simply too complicated, to deal with the system where they “play blindfolded” and “cannot know what lies beyond the next wall in the intermediary pyramid before making an inquiry.” The amount of cost associated with this model is fiscally irresponsible. In 2012 it was estimated that issuers pay $200 million a year to communicate with their own shareholders (excluding costs associated with mailing and printing). This is bothering issuers, with the SEC reporting that this was among “the most persistent concerns expressed” by issuers. This system has also rendered shareholder lists useless, with Cede & Co. (a subsidiary of the DTCC) being the only shareholder on hundreds of corporations.

 

Stay tuned four part four in CCN’s series on rehypothecation and Wall Street.

https://www.ccn.com/rehypothecation-inside-the-wall-street-practice-that-could-ruin-bitcoin/

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BlackBerry to Launch Blockchain for Medical Data Sharing

BlackBerry Limited has now come up with a blockchain solution for secure data sharing among healthcare providers in order to improve patient outcomes.

 

The company is using its network operation center (NOC) to power a blockchain digital ledger that aims to create a secure global system for storing and sharing patient medical data, a release states. The blockchain  is provided by Onebio, a peer-to-peer marketplace for biodata.

 

 

 

BlackBerry, the longtime developer of smartphones and tablets, has recently unveiled BlackBerry Spark, an Enterprise of Things (EoT) platform, that aims to transform the global delivery of healthcare data. John Chen, executive chairman and CEO of BlackBerry, stated:

 

“We are applying our expertise in security, data privacy, and communication work in regulated industries such as automotive, financial services, and government to tackle one of the biggest challenges in the healthcare industry: leveraging healthcare endpoints to improve patient outcomes while ensuring security and data privacy.”

 

The new blockchain solution by BlackBerry would enable the data inputted by patients, laboratories, and IoT biometric devices to remain tamper-proof and anonymous, so that the data can be shared with researchers. The company is offering this secure distributed ledger solution for the first time to the Global Commission, which works to end the diagnostic odyssey for children with a rare disease, the report added.

 

A tech pilot by Global Commission is said to explore BlackBerry’s new solution on how it would provide real-time, actionable analysis to shorten the diagnosis time.

 

 

 

Also, BlackBerry has launched new QNX operating system for Medical 2.0. This OS aims to develop robotic surgical instruments, patient monitoring systems, infusion pumps, blood analysis systems, etc. With the announcement comes BlackBerry’s partnership with Mackenzie Innovation Institute, which is exploring the BlackBerry Spark EoT platform for its healthcare tech. Richard Tam, CFO of the institute said:

 

“By developing a deeper understanding and exploring how our ‘smart’ systems operate with BlackBerry Spark, we aim to uncover new ways to connect, protect and intuitively manage smart technologies in a hospital and positively impact high-quality patient care.”

https://www.ccn.com/blackberry-to-launch-blockchain-for-medical-data-sharing/

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Bitcoin Gradually Increased in Price in September, Case for a Bull Run in 2018

Since early September, the price of Bitcoin has gradually increased from $6,100 to $6,550, testing the $6,800 resistance level on two occasions.

 

Bitcoin experienced four dips in its price in the past 30 days and every consecutive drop in the price of the asset stabilized in a higher region than its previous decline in value.

 

 

 

On Sept. 9, the price of Bitcoin dropped to around $6,100 during its first fall in the month. On Sept. 16, a week after the initial drop followed by a corrective rally, the price of Bitcoin dropped to $6,250, at a higher point than its previous drop at $6,100.

 

 

Bitcoin price chart in September: data provided by Coinbase

On Sept. 26, around 10 days after the second dip, the price of BTC dropped to $6,400, $150 higher than the region BTC fell to on Sept. 16. On Oct. 4, it’s latest minor drop in price, Bitcoin dropped to the higher region of $6,400.

 

Is Bitcoin Undergoing a Gradual Recovery?

Given that Bitcoin has seen the $6,000 support level strengthen and the momentum of the asset at the $6,550 mark intensify, it is entirely likely that the asset will continue to engage in a gradual recovery throughout October.

 

A rapid increase in price from $6,000 to a higher region like $7,000 and $8,000 in the short-term, similar to its movement from $6,800 to $8,000 earlier this year, is not likely due to the decline in its volume.

 

 

 

On October 6, CCN reported that the volume of Bitcoin fell from $4 billion to $3.2 billion on Coinmarketcap and from $2.6 billion to $2 billion on ShapeShift’s CoinCap.io, suggesting that an exponential increase in price of Bitcoin is not in play in the short-term.

If Bitcoin continues to sustain its momentum it has demonstrated throughout September, it is possible that it can break out of the $6,800 resistance level and potentially eye an entrance into the $7,000 mark.

 

But, in consideration of the positive regulation-related developments in Japan, South Korea and the US, many analysts expected BTC to surpass major resistance levels at $8,000 and $9,000.

 

Masayuki Tashiro, a prominent Japanese market analyst, said in August:

 

“Personally I am bullish, and by the time the outline of the regulations will come together in October, those investors who will feel safer will come back. I hope things won’t get as overheated as last year, but I believe BTC can win back the value of 1 million yen (9,020$) in range.”

 

Gradual Recovery More Likely Than Explosive Growth

Bitcoin and the rest of the crypto market has dropped 69 to 80 percent of the valuation in the past nine months, recording some of the steepest falls in value in recent years.

 

A short-term bubble is often followed with a gradual recovery in value, volume, and market demand. Although the market has started to demonstrate sellar fatigue and clear signs of a bottom in the low range of $200 billion, a gradual recovery could be more beneficial for BTC in the long run.

https://www.ccn.com/bitcoin-gradually-increased-in-price-in-october-case-of-a-bull-run-in-2018/

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