Crypto Industry Report #12
Balzers (LI), 10 December 2019
This week, our blockchain experts assessed the following headlines:
Our weekly Crypto Industry Report news ticker provides you with the latest information on the global crypto industry – picked and analysed by our blockchain experts.
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Kraken accepting CHF – strengthening position in Europe
Kraken announced that in collaboration with Bank Frick, the Swiss franc (CHF) has been added to the exchange and the trading pairs BTC/CHF and ETH/CHF will be supported, with additional trading pairs considered to be included in the future.
Bank Frick is also a EUR funding partner of Kraken and the Swiss franc will be the sixth fiat currency offered by the exchange. The other fiat currencies supported are USD, CAD, EUR, GBP and JPY. The trading began on December 6 for the new CHF trading pairs.
Assessment
Kraken is one of the oldest crypto exchanges and while it is based in the US, it has served European clients for several years through the support of the Euro.
With the introduction of the Swiss franc, Kraken could also become a leading exchange for Swiss customers. The maximum deposit or withdrawal amount allowed depends on individual Kraken account limits, with a maximum amount per transaction of CHF 10 million.
In addition, Kraken recently announced that it was joining the Silvergate Exchange Network (SEN) in order to facilitate its clients the deposit and withdrawal of US dollars from Silvergate accounts with no fees. Moreover, Silvergate Bank went public on the New York Stock Exchange (NYSE) in November, which could allow further growth of its crypto services.
Kraken’s expansion to serve CHF clients through Liechtenstein-based Bank Frick follows the recent opening of offices in Liechtenstein by Bittrex exchange and Bitcoin Suisse among other leading blockchain companies. The recent growth of companies relocating or opening offices in Liechtenstein may be encouraged by the upcoming entry into force of the Blockchain act, which will be the first comprehensive blockchain regulations covering the whole token economy and all the different service providers.
The geographical region covering Zurich, the Crypto Valley in Zug and Liechtenstein is becoming one of the leading global hubs for the blockchain industry.
Furthermore, close countries like Germany or France are also accelerating their efforts to become pioneers with new regulations and projects, like the recently announced central bank digital currency (CBDC) project in France, which will be tested in Q1 2020.
While some major exchanges are focused on other jurisdictions, Kraken seems to be aiming to remain among the leading exchanges serving European clients and now also clients based in Liechtenstein and Switzerland with the support of the Swiss franc.
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France to test CBDC in Q1 2020 in attempt to remain competitive
The governor of the Bank of France, François Villeroy de Galhau, officially announced last week that a CBDC will be tested for financial institutions in Q1 2020.
The announcement was made during a conference that was hosted by the two main French financial regulators, the French Prudential Supervision and Resolution Authority (ACPR) and the Autorité des marchés financiers (AMF).
The project will only target private financial institutions and it will not involve any retail payments or customers, since according to the central bank’s governor a digital currency for retail customers would require additional supervision.
In addition, the governor mentioned that France should provide an example to other countries and become the first in the world to issue a CBDC. Moreover, he claimed that the project is aimed at maintaining the sovereignty of France over certain private digital currencies such as Facebook’s Libra stablecoin.
Assessment
The French Finance Minister, Bruno Le Maire, previously claimed that due to concerns about monetary sovereignty, projects like Libra should not be allowed to launch in Europe. The central bank governor of France also agrees with Le Maire, since the CBDC project seems to be an attempt to remain competitive in the event of the launch of Libra or other similar digital currencies in Europe.
France, together with other European countries like Germany, has been leading the efforts to prevent the launch of Libra in Europe. Since they may not succeed and there is a possibility that Libra could be launched in 2020, the CBDC project may be a further attempt to reduce the risks posed by Libra.
The goal of the project is to improve the efficiency of the French financial system and to maintain trust in the currency. The governor said that being a leader globally in the issuance of a CBDC could provide benefits and therefore there is an interest to accelerate the development of a CBDC in France.
Since the announcement of the Libra project in June, several central banks have started to research and analyse in detail the possibility of issuing a CBDC. However, the French central bank is the first one in Europe to officially confirm the upcoming testing of a CBDC.
This project could encourage other central banks in Europe and globally to also start testing their own CBDCs. Therefore, it seems likely that in 2020 several central banks will start issuing CBDCs, which would be positive for the blockchain industry.
However, issuing CBDCs for individuals may take more time to develop since the complexity would be higher compared to issuing CBDCs for financial institutions for example. Nonetheless, the French central bank governor said that some thresholds on the amount of anonymous transactions and other requirements could be designed to allow a CBDC for retail customers also.
CBDCs could have an important impact for commercial banks, since their role as intermediaries would be reduced given the direct access of businesses and individuals to central banks.
France is becoming one of the leading countries in Europe within the blockchain industry. It was previously announced that over thirty French retailers will launch support for bitcoin payments in early 2020 at over 25,000 sales points.
In addition, the first deputy governor of the Bank of France mentioned in November that a blockchain-based settlements and payments system should be introduced in Europe.
Moreover, France announced recently the PACTE law, which allows non-security token issuers and digital asset service providers to obtain an optional licence from the AMF to provide legitimacy to their activities in France. Those token issuers that do not register will be subject to marketing restrictions.
In addition, the registration will not be optional for custodians of crypto assets and those providing services of purchase or sale of digital currencies against fiat, due to anti-money laundering (AML) concerns as indicated in the 5th Anti-Money Laundering Directive (AMLD 5) or the last recommendations of the Financial Action Task Force (FATF).
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Bakkt CEO Kelly Loeffler appointed to US Senate seat: awareness about blockchain will increase
The governor of Georgia, Brian Kemp, has appointed Kelly Loeffler, who is the CEO of Bakkt, to fill a soon-to-be-vacated US Senate seat, as reported last week. Loeffler will replace Senator Johnny Isakson at the end of the year.
Bakkt offers physically-settled bitcoin futures and recently the Bakkt Warehouse was authorised by the New York Department of Financial Services (NYDFS) to provide bitcoin custody for any institution and it offers a $125 million insurance.
In addition, Bakkt will soon launch additional products like options contracts, cash-settled bitcoin futures or a consumer app to facilitate bitcoin payments
Assessment
The CEO of Bakkt will soon join the US Senate, which is the upper chamber of the US Congress located in Washington DC. Together with the lower chamber, the US House of Representatives, they are responsible for making US laws and they represent the legislative branch of the federal government.
The presence of Loeffler in the US Congress could increase the awareness about blockchain and institutional bitcoin products with lawmakers. This may be positive for the blockchain industry since it could further legitimise and provide trust for the industry.
Loeffler’s influence on the US Senate could accelerate the introduction of more comprehensive blockchain regulations in the US as well as improve the understanding about the developments in the industry.
Bakkt is one of the leading platforms for institutional investors to get exposure to bitcoin. With the upcoming launch of new products in 2020 and the growing amount of trading volume, the influence of Bakkt in the blockchain industry could become significant.
Therefore, the fact that Bakkt’s CEO will have a seat in the US Senate would further amplify the influence of Bakkt and provide institutions with an additional level of trust. The developments of the Bakkt platform and the impact that Loeffler may have on the US Senate, are likely to be important factors in the growth of the blockchain industry including the potential diversification of large asset managers into the crypto asset class.
Bakkt Bitcoin Daily Futures and Bakkt Bitcoin Monthly Futures contracts are not fully collateralised in bitcoin. According to information released by Bakkt, these contracts are backed 37% by USD or US treasuries.
However, this partial collateralisation with the underlying asset is typical in traditional finance with the collateralisation of commodity futures for example. Therefore, although Bakkt contracts are not completely backed by bitcoin, the development of institutional bitcoin products facilitates the gradual inclusion of institutional investors within this new asset class.
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Ethereum’s Istanbul providing improvements ahead of Berlin hard fork
Ethereum successfully completed the scheduled Istanbul hard fork last week. Following the activation process in the testnet, the hard fork was finally activated on the Ethereum mainnet with support from the major exchanges and node operators. Some of the exchanges restarted already the deposits and withdrawals of Ethereum and ERC20 tokens.
Since the Istanbul hard fork was part of the roadmap and a planned update, all ethereum clients and participants agreed and supported the new upgraded network.
The hard fork included the following six Ethereum Improvement Proposals (EIPs): EIP-152, EIP-1108, EIP-1344, EIP-2028, EIP-2020 and EIP-1884. Among the six EIPs, the EIP-1884 required the upgrade of certain smart contracts due to important changes regarding the gas costs of some opcodes, which are instructions for the ethereum virtual machine (EVM).
Assessment
The Istanbul hard fork has introduced a series of improvements to the Ethereum network. EIP-152 allows better interoperability with Zcash and EIP-1108 makes zk-SNARKs cheaper. With the EIP-1344, contracts including those used by layer 2 solutions could follow and track the correct layer 1 chain during a hard fork.
In addition, layer 2 solutions will be able to increase throughput and transactions with a large amount of input data will become significantly cheaper thanks to EIP-2028.
In the previous Constantinople hard fork, there was a bug found in the EIP-1283. This EIP was disabled through an additional hard fork called St. Petersburg, which happened on the same block height as the Constantinople hard fork and disabled the EIP-1283.
In the Istanbul hard fork, an updated version of that EIP-1283 has been added with the EIP-2200, which changes the calculation cost of storage in the EVM and enables contracts to include some new functions.
EIP-1884 has introduced changes that required the upgrade of certain smart contracts before the hard fork happened. Some EVM opcodes had become more resource intensive than before but they were still cheap. Therefore, in order to prevent certain spamming attacks and to balance blocks better, the gas costs were increased for three opcodes, the main change in particular was the gas cost of the SLOAD opcode, raised from 200 to 800.
Due to variable block times, while the official date for the Istanbul hard fork activation was December 7, it was finally activated on Sunday, December 8.
Another hard fork called Berlin is planned for 2020 and it will introduce eight tentatively accepted EIPs, including EIP-1057 which will change Ethereum’s proof of work (PoW) mining algorithm with programmatic proof of work (ProgPoW).
Through ProgPoW, the advantage of ASIC miners over GPU miners will be reduced from 2x to 1.2x, thus decreasing the possible risk of centralised mining with ASICs.
In addition, it was recently announced that another hard fork called Muir Glacier is expected to happen before the Berlin hard fork on December 31, although the exact date depends on the block times.
The goal of this hard fork is to delay the so-called Ethereum’s Ice Age or Difficulty Bomb, which is a mechanism to slowdown the network and encourage the shift to Ethereum 2.0.
With the Difficulty Bomb, block times would exponentially increase making the network slower and more costly to use. Therefore, the Muir Glacier suggests the delay of this mechanism until Ethereum 2.0 is closer to the full launch.
The aim was to encourage miners to move to the new Ethereum 2.0 PoS chain, however the existing implementation of the Ice Age is too complex and it is challenging to model the exact effects that it would have on the Ethereum mainnet.
Therefore, the recently announced Muir Glacier hard fork will delay the Ice Age mechanism significantly to ensure that Ethereum remains functional and useful during the transition to Ethereum 2.0, which will take several years until 2021 when in Serenity phase 2 the ETH2 will become transferable and smart contracts will be reintroduced.
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Staking trending – but not as secure as Bitcoin PoW
Binance officially announced that support for Tezos staking has been added. The staking rewards will be estimated on a daily basis using snapshots and then they will be distributed monthly.
In the announcement, it was confirmed that distributions would be finalised before the 20th of every month. The minimum amount would be 1 XTZ in order for users to be eligible to receive staking rewards.
Binance supports several staking tokens and it is expected that more will be added. While Tezos holders are able to independently stake their tokens, Binance facilitates the process as well as the reward distribution mechanism. Other exchanges like Coinbase have also started to support staking tokens of certain proof of stake (PoS) networks.
Assessment
With the upcoming launch of Ethereum 2.0, which will be based on PoS and will likely be the largest PoS-based network, there is a growing trend of staking tokens.
The percentage of the total market capitalisation of crypto assets based on PoS is gradually increasing, and this trend is expected to continue. Holders of staking tokens have the possibility to participate in securing the networks and therefore earn a percentage of the rewards.
In the case of proof of work (PoW) based tokens, only the miners participate in the block production and security mechanism, while in PoS the token holders are able to participate in securing the network.
If the holders of staking tokens do not stake their crypto assets, then they would lose value since in PoS there is an inflation mechanism to encourage staking, and those who do not stake get their tokens diluted.
Staking can be challenging for some users, therefore with the staking option offered by Binance and other large exchanges, this would allow token holders to easily receive rewards while also being able to trade their staking tokens.
This may be beneficial also for Binance since they could earn a percentage of the staking rewards received from the token holders. Coinbase was previously offering staking only through Coinbase Custody for institutions, however it recently added staking support also for international retail customers. In addition to Tezos, Binance supports as well staking of additional networks like Stellar or Qtum among others.
For exchanges, supporting staking is more challenging regarding the custody and overall infrastructure, because exchanges have to either partner with certain validators or develop the validator nodes themselves for each staking network they support.
Usually, when tokens are staked they are locked and it is not possible to trade them, with the unbonding period being often several weeks. This could be a risk for token holders in the case of quick market movements.
Exchanges can differentiate themselves by allowing both the trading of the tokens and possibility to receive the staking rewards through liquidity mechanisms.
In 2020, exchanges may continue competing with the commission rate or other advantages for token holders in order to gain market share of staking tokens.
Once Ethereum 2.0 launches, it will likely be the largest PoS network and it may increase significantly the awareness about the growing staking trend. Nonetheless, the amount of hashrate in the bitcoin network provides the highest security currently for the integrity of the data, so PoS networks would still require further improvements and developments before their security level could become closer to that offered by bitcoin.
Staking can enable also for token holders the participation through governance for example, which is expected to improve and accelerate the upgrade processes of PoS networks.
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