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Crypto Industry Report #16


Balzers (LI), 21 January Month 2020

This week, our blockchain experts assessed the following headlines:
 

+++ Bitcoin and the overall crypto markets achieve significant gains +++

 

+++ Bitwise plans to refile its bitcoin ETF application after addressing SEC’s concerns +++

+++ The Enterprise Ethereum Alliance launches testnet focused on improving interoperability +++

 

+++ Former CFTC chairman aims to accelerate the launch of a CBDC in the US +++

 

+++ SEC legal case about TON and the grams tokens’ sale: Telegram’s co-founder and CEO testifies for 18 hours +++


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.


Bitcoin and the overall crypto markets achieve significant gains 

Last week there was a significant increase in both the overall crypto market capitalisation as well as the price of most of the major crypto assets.

Bitcoin’s price raised from below $8k to above $9k, with a correction then to around $8.7k, and other crypto assets like ETH, BCH or BSV also achieved significant gains.

For example, ETH moved from trading below $140 to around $175 before decreasing to $165 following bitcoin’s price correction. In terms of the total market capitalisation, it increased last week from around $215 billion to values close to $250 billion, which was not observed since late October 2019 when bitcoin had the third largest daily increase in its history.

Towards the end of the week, the total market capitalisation decreased to $237 billion following bitcoin’s price correction. The recent price developments, despite the correction, seem to indicate a correlated positive momentum in the overall crypto markets and not an isolated increase in price of certain crypto assets.


Assessment

There are several factors potentially involved in the recent price increase and positive momentum.

Firstly, two of the best performing crypto assets last week were BCH and BSV, which have scheduled halving events before the expected bitcoin halving around mid-May this year. According to historical data, halving events had positive effects on the price since with the supply production reduced by half, and given a similar demand, the price is expected to increase.
 
Nonetheless, since both miners of BCH and BSV are able to switch to mine BTC, there is a concern that after the halving of BCH and BSV (a hard fork is also scheduled in February), which will happen before bitcoin’s halving, the miners may move to mine bitcoin at least until the bitcoin halving event in order to earn more rewards.
 
In addition, the successful launch of the CME bitcoin options had a positive impact as well, since the CME bitcoin futures’ open interest increased significantly before the options launch and now traders have better tools to manage risks and get exposure to bitcoin.

Since the CME bitcoin futures launched two years ago, the market is now liquid and mature, enabling the developing of the bitcoin options. Global institutional developments in terms of blockchain regulations, custody, insurance or government awareness are factors providing increased trust and credibility to the crypto asset class.

The geopolitical situation, in particular the US tensions with Iran, have also positively affected the price of bitcoin since like other assets such as gold, they benefit in times of political uncertainty and higher risks.
 
Furthermore, in 2020 there are several technological developments expected to be finalised and ready regarding scalability improvements, interoperability or accessibility of traditional developers through tools like Wasm. These developments could allow blockchains and dApps to reach mainstream adoption and be applied to several business cases facilitating significant costs savings and efficiency improvements.

Some examples of upcoming innovations are the launch of Ethereum 2.0, the increased adoption of the lightning network or new interoperability standards facilitating the communication and transfers between public and private blockchains.
 
Given the launch of professional tools for traders to better manage bitcoin exposure risks like bitcoin options, it is expected that the bid-ask spread will improve and more institutional investors may decide to allocate a percentage of their portfolio to crypto assets to improve their diversification.
 
In addition, previous halving events of bitcoin had a positive gradual effect on its price, therefore 2020 could be an important year both for the blockchain technological improvements as well as for the professionalisation of the crypto markets.

While there was a correction after bitcoin’s price moved above $9k, the hashrate of the network recently achieved another all-time high and the open interest for the CME bitcoin futures is also reaching its highest value since the launch of the bitcoin futures in 2017.

Therefore, the interest in bitcoin seems to be significant from both miners, as shown by the hahsrate, and from institutional investors, as indicated by the CME bitcoin futures open interest. The upcoming halving of bitcoin’s block rewards in May, combined with these positive fundamental variables of the network, may support the positive momentum for both bitcoin’s price and the overall crypto markets.

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Bitwise plans to refile its bitcoin ETF application after addressing SEC’s concerns

Last week it was announced that Bitwise Asset Management and NYSE Arca had withdrawn their bitcoin exchange traded fund (ETF) application with the SEC.

The bitcoin ETF proposal was previously rejected by the SEC in October, and then it was announced in November that the SEC was reviewing the rejection. Nonetheless, Bitwise claimed that after addressing the questions and concerns raised by the SEC in a 112-page response document to the original application, they plan to refile the bitcoin ETF application.

Initially, Bitwise filed its first application with the SEC in January 2019, and in October the SEC mentioned that the rejection was due to not meeting legal requirements to prevent certain illicit activities like market manipulation.


Assessment

So far, the SEC has rejected all the bitcoin ETF proposals due to concerns mainly about market manipulation.
 
A bitcoin ETF would offer retail investors a regulated product to get exposure to bitcoin with certain advantages compared to investing directly in bitcoin.

For example, those investors not familiar with buying or safely storing crypto assets could obtain exposure to bitcoin, which could bring additional investors to the crypto markets since they could invest in bitcoin ETFs through traditional exchanges. Also, as a regulated investment, if a bitcoin ETF is approved it would be positive for both bitcoin and the overall crypto industry.
 
Following the initial rejection, the SEC then announced in November that they were reviewing Bitwise’s application again. Bitwise said that they had not requested the review, but under the federal law the SEC can grant a review either following a petition or at their own discretion. There were no set deadlines for the review and there was also a period of comments for the general public as part of the review.

However, Bitwise took the same decision as previously VanEck/SolidX in September to voluntarily withdraw their application in order to address SEC’s concerns, and then later refile an improved application with the goal of bringing the first bitcoin ETF to the markets.

Previously, Bitwise undertook an extensive research about the real bitcoin trading and markets to address the SEC’s market manipulation concerns, but the efforts were unsuccessful. Following the initial rejection, the SEC released a document of over hundred pages clearly explaining all the reasons for the rejection.

Bitwise mentioned that such a response from the SEC was positive since it indicated that they were seriously reviewing the bitcoin ETF application and detailing all their concerns. Therefore, it seems that Bitwise decided to withdraw their application despite the rejection review by the SEC, in order to properly improve the application for the next filing and increase the chances of an approval.

Following the application withdrawal by Bitwise/NYSE Arca and previously by VanEck/SolidX, there is one remaining application with the SEC filed by Wilshire Phoenix. In December, it was announced that the SEC had postponed the decision about Wilshire’s application until February 26. Wilshire claims that they have found a way to address SEC’s concerns.

With the increased professionalisation of the bitcoin markets with the launch of bitcoin futures and options, and the improved bitcoin ETF applications following SEC’s feedback after the rejections, it may be possible that in 2020 the first bitcoin ETF could be approved.

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The Enterprise Ethereum Alliance launches testnet focused on improving interoperability

As it was recently announced, the Enterprise Ethereum Alliance (EEA) has launched a testing environment to improve the interoperability among the different private versions of Ethereum.

The objective is to improve the standardisation and thus the business cases enabled by the end of 2020. The EEA will aim to coordinate the testing program with the Ethereum Foundation, which is supervising the upcoming Ethereum 2.0 launch.

However, it was mentioned that the current focus of the EEA is not significantly concerned with the switch to proof of stake (PoS) introduced by Ethereum 2.0.


Assessment

The EEA is an industry group for exploring and developing private versions of ethereum.

Currently, there is a large number of companies developing private ethereum versions. Also, new businesses are joining through Hyperledger Besu, which is an ethereum client built to be enterprise friendly and for both public and permissioned business cases.

Without standardisation, the different ethereum based protocols and clients cannot communicate with each other. The goal of the EEA testnet is to standardise the different versions of ethereum to facilitate the interoperability amongst them and thus improve the potential business cases.

The EEA members will be able to cooperate in testing and designing more advanced ethereum enterprise dApps. For example, the testnet could facilitate the communication between Quorum and Hyperledger Besu, which currently cannot interoperate.
 
Furthermore, the EEA said that the shift to Ethereum 2.0 and proof of stake (PoS) will be analysed and the test program will be coordinated with the Ethereum Foundation. However, the EEA claimed that the testing program is focused on applications that follow current EEA specifications and not on the complex shift to Ethereum 2.0.
 
In addition, a project called Kadena, which was launched by JP Morgan alumni, announced last week a public blockchain with interoperability support with its private chain and its smart contract language Pact.

Therefore, it seems that in 2020 the trend of standardisation among different blockchains, both public and private, will continue in order to facilitate more business cases.

Previously, the standardisation provided by the erc-20 token standard brought an important period of innovation and growth, so a similar standardisation trend of blockchains may be observed, leading to increased innovation regarding the potential business cases enabled by blockchains.

Currently, ethereum is the leading network for enterprise projects and dApps, therefore the EEA testnet to improve the interoperability among different enterprise versions of ethereum may be positive for the overall ethereum ecosystem if successful, ahead of the Ethereum 2.0 full launch expected in 2021.

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Former CFTC chairman aims to accelerate the launch of a CBDC in the US

As reported last week, J. Christopher Giancarlo who was until recently the chairman of the Commodity Futures Trading Commission (CFTC), has launched a non-profit foundation called the Digital Dollar Foundation in partnership with Accenture to accelerate the development of a CBDC in the US.

The goal is to hold discussions and analyse potential designs to create a framework for testing and allowing USD transactions to be as simple and efficient as sending text messages for example. The project will be supported by several stakeholders including the Federal Reserve.


Assessment

Previously, the chairman of the Federal Reserve, Jerome Powel, said that while they were analysing the potential benefits of a CBDC and following the progress in other countries, there were no plans to launch a CBDC in the US. Other countries like China, Sweden or France will begin testing in 2020 a CBDC although initially mainly focused on financial institutions and not a CBDC for the general public.

Given the potential threat to the USD dollar introduced by these projects as well as other related projects such as global stablecoins including Libra, the Digital Dollar Foundation is aiming to accelerate the development in the US of a digital dollar in order for the US to remain competitive.

The advantages are expected to be cheaper and faster global transactions, or the ability to exchange the digital dollar within the upcoming tokenised securities markets.

Accenture will be the technological partner for the project, and they have already worked with several central banks in similar projects including those of Canada, Singapore or the European Central Bank (ECB). In addition, they have collaborated with Sweden’s central bank to design the ekrona.

Unlike other stablecoins pegged to the USD, the proposed digital dollar would need to be backed by the US central bank, therefore support from the Fed will be important for the success of the project.

The short-term aim of the project is to produce a set of principles and requirements for the digital dollar, including compliance requirements. However, ultimately the proposed digital dollar would need to be issued by the Fed, but the foundation is hoping to increase the awareness of the potential advantages and to accelerate its development.

In particular, there is a risk for the USD to lose part of its dominance with the upcoming launch of CBDCs by other major countries, as well as with the launch of global stablecoins by large corporations.

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SEC legal case about TON and the grams tokens’ sale: Telegram’s co-founder and CEO testifies for 18 hours

Last week, Pavel Durov, who is the CEO and co-founder of Telegram, testified in Dubai during two days for a total of 18 hours concerning the SEC legal case about the sale of grams tokens to US investors.

Apart from Durov, the Telegram lawyer Alexander Drylewski and the SEC official Jorge Tenreiro were also present.

The SEC claims that the $1.7 billion grams token sale involved unregistered securities and the court hearing regarding the case is scheduled for February 18-19. Moreover, the SEC also mentioned that the grams token sale was used as an alternative for equity financing.

In addition, following a filing from January 13, the US District Judge Castel said that Telegram will need to provide the bank records related to the $1.7 billion token sale, which were previously denied to the SEC, by February 26.


Assessment

According to certain documents, it seems that before the grams token sale Telegram was considering ways to raise capital such as an equity sale.

In addition, it seems that there was a need for Telegram to pay for equipment like servers. While Telegram pitched the token sale as an advanced blockchain network with several advantages compared to other competitors, the SEC claims that the sale may have been a substitute for traditional equity financing and that at the time of the token sale Telegram needed cash for further investment in servers.

Telegram insists that grams are not securities, nonetheless both the investors and the Telegram employees considered the tokens as an investment as mentioned by the SEC.

While the grams tokens may be used in the TON network as staking tokens, the investors did not initially invest to participate in the staking process but as an investment with expectations of certain returns.

In the scheduled court hearing in February 18-19, Telegram will need to justify and explain to the SEC why the grams tokens that were sold to US investors are not securities.

Durov also said during the recent testimony that 4% of the grams tokens may be distributed among the developers, although the exact number is still not confirmed.

However, he claimed that Telegram will not hold any grams tokens after the launch of the TON network, therefore he may be referring to external developers working on the TON project regarding the potential 4% grams token distribution.

Concerning the claim by the SEC that the token sale was an alternative for equity financing, Durov mentioned that Telegram was financed by him from the previous sale of VKontakte (VK), the largest social media network in Russia, which was previously founded by him before Telegram.

Following the $1.7 billion token sale and the large amount of Telegram users that could have access to the TON wallet and the grams tokens, it was expected that the TON project could have a significant impact in the blockchain industry and crypto markets after the previous scheduled launch date on October 2019.

Given that TON was claimed to be more advanced and scalable for example than other blockchain networks, it was perceived as an important upcoming competitor.

However, due to the SEC legal case, Telegram already announced that the TON wallet and the grams tokens will not be integrated into the Telegram app until the legal issues are clarified.

According to the progress of the legal case, Telegram may not succeed in justifying that grams are not securities. Therefore, around a third of the funds raised, which came from US investors, may need to be refunded and if finally TON launches, the US investors may not be included.

After the scheduled hearing in February, it may become clearer whether TON could launch as expected by the previously postponed date on April 30.

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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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