Crypto Industry Report #27
Balzers (LI), 7 April 2020
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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France: Central bank launches experiment program on CBDC
The central bank of France announced an experimental program for CBDCs for which it is accepting applications.
The deadline to submit applications is the 15th of May and a maximum of ten candidates will be selected on the 10th of July.
In addition, the applicants need to be established either in the European Union (EU) or the European Economic Area (EEA).
The experiments will focus on CBDCs for interbank settlements and this project will contribute to the broader efforts in the Eurozone for the potential launch of a CBDC.
Assessment
Previously, France’s central bank mentioned an upcoming testing of a CBDC focused on financial institutions in early 2020.
However, this seems to have shifted from an internal testing by the central bank itself to different testing experiments by several external entities through the application program.
Since France is part of the Eurozone, a CBDC based on the EUR would need to be decided at the European level, therefore the central bank may have considered more useful a series of experiments rather than an internal testing.
Since Sweden has its own currency, the Swedish krona, and the cash usage is decreasing fast, the testing being done by the Swedish’s central bank is more focused on launching a CBDC for the general public.
This seems considerably different to the project of the central bank in France which is more focused on gathering knowledge to support the broader efforts at the European level to potentially launch a CBDC.
In addition, the focus of the testing in France will be a CBDC for interbank settlements and not a CBDC more complex for the general public as in the case of Sweden with the e-krona.
The goal of the project is to identify more innovative procedures for the clearing and settlement of tokenised assets and three different use cases of payments, against other central banks’ CBDCs, digital assets or financial instruments.
In addition, the different risks related to CBDCs will be analysed. France’s central bank mentioned that all transactions would be routed through its own books and there would not be any money creation with tokens destroyed regularly.
The central bank of France is not planning to continue such CBDC experiments or to increase their scope since the decision to issue a CBDC depends on the European Central Bank (ECB).
However, the current head of the ECB, Lagarde, previously mentioned an interest to develop a CBDC in the EU to remain at the forefront of innovation.
It was also mentioned that there is flexibility regarding the specific technology for the experimental program for applicants.
However, it seems that this refers to the specific blockchain or DLT platform, since the other CBDCs or global stablecoin projects are based on blockchain technology.
In addition, the proposal and idea of a CBDC emerged with the development of the blockchain technology.
With the experimental program, France’s central bank joins the central bank of Sweden and other central banks leading the innovation related to CBDCs.
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Telegram: Request to issue Gram tokens to non-US investors denied
US Judge P. Kevin Castel confirmed that the halting order for the issuance of the gram tokens applies to any person or entity and not only to US-based investors.
The Judge claimed that the information provided by Telegram of how it would prevent non-US investors distributing the gram tokens to US buyers on the secondary markets was not convincing.
Assessment
Telegram claimed that it would ensure that non-US based investors will not resell their gram tokens to US buyers and also that the digital wallets would be configured to exclude those based in the US.
However, the judge was not convinced since the TON network is designed to provide anonymity and ensuring that no gram tokens are transferred to US buyers would be challenging and difficult to track and verify.
Therefore, the conclusion is that Telegram cannot issue gram tokens to any initial investors, whether based on the US or not.
Since a majority of the initial investment came from outside the US, this will be an important negative impact for the project which Telegram may had not previously considered.
Moreover, the judge mentioned that in the initial injunction of the SEC in October 2019, it was already claimed that it applied to any person or entity, therefore the questioning of the SEC’s lack of jurisdiction by Telegram regarding non-US based investors was too late to consider at that stage.
Therefore, it seems that Telegram may had not considered in detail the risk that the halting of the issuance could be for all the initial investors.
While a partial refund to US investors may had allowed the launch of the TON blockchain and the issuance of the gram tokens with the remaining investors, in the current situation it seems challenging that the TON network will be able to launch as expected on the previously delayed date of April 30.
Since only around a third of the initial funds came from US investors, Telegram could had launched TON with the remaining investors.
However, since they are not allowed now to issue any gram tokens, it seems likely that a partial refund to all investors will be required.
In addition, if Telegram demands investors for a further delay of the launch date to appeal the judge’s decision, it is probable that they may refuse and demand the partial refund, in particular given the current market conditions.
Moreover, if Telegram issues certain gram tokens against the halting order of the US judge, there could be serious consequences therefore it is unlikely that Telegram would take that risk.
Since the TON blockchain is based on proof of stake (PoS) the gram tokens would be needed for the staking process to secure the network.
Therefore, although the judge’s order applies to the issuance of the grams tokens and not the TON network directly, since the tokens are needed for the network to function, the order seems to prevent the launch of TON.
In these circumstances it is likely that the community will organise to launch their own version of TON since the software is open-source, however before that network can be widely accepted, trusted and hold value it will require support from Telegram and major investors and participants in the blockchain industry.
Also, bootstrappring and launching the PoS network will require an initial number of professional and reliable validators, which could be an additional challenge.
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Bitmain’s Antminer E3 will continue mining Ether until October
Bitmain officially announced last week that they will provide an update to extend the usability of their Antminer E3 until October.
Previous reports indicated that the E3 devices would stop mining ETH in April or their performance would be significantly reduced.
Bitmain also claimed in the announcement that there will not be further updates for the Antminer E3.
Assessment
Recently, there were reports that the Antminer E3 devices, one of the leading mining devices for Ethereum with a significant percentage of the hashrate, were expected to stop mining ETH around the 8th of April.
According to the analysis, the limited memory capacity of the E3 devices was the reason for the decrease in performance and ultimately the stop of mining.
This limited capacity was known previously, similarly to other mining devices, and it had been estimated before that in 2020 the E3 devices would stop mining Ethereum.
The announced update by Bitmain will extend the memory capacity of the devices so they will not stop mining in April. Instead, this update will extend the usability until October 2020 according to the calculations done by Bitmain.
However, Bitmain also mentioned in the announcement that after October no further updates will be provided, meaning that the E3 devices will stop mining ETH in October.
This could have an important impact on the Ethereum hashrate depending on the percentage that the E3 devices represent for the total hashrate in October.
Moreover, given the shift to Ethereum 2.0, which will be based on proof of stake (PoS), it is unlikely that Bitmain or other competitors will continue their focus on Ethereum since eventually all operations are expected to migrate to Ethereum 2.0.
In addition, given the upcoming halving event of bitcoin in May and the halving events of Bitcoin Cash and Bitcoin SV in April, Bitmain and other mining device manufacturers and mining pools are likely to be more concerned regarding these halving events than updating certain mining devices of Ethereum or other networks.
However, until Ethereum 2.0 is fully operational, the current Ethereum chain needs to continue running and be secure for a few more years.
Therefore, it is important that the hashrate remains high until then and since the proposed Programmatic PoW (ProgPoW) to reduce the advantage of ASIC miners was finally rejected, it is possible that new Ethereum ASIC mining devices will be developed.
Given that currently large decentralised (defi) projects like MakerDAO and Dai or stablecoins like USDC are based on Ethereum, as well as certain institutional projects, ensuring the security of the network through a high hashrate will remain important until Ethereum 2.0 is fully operational.
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Coinbase moves Tezos staking service from the US to Ireland
According to an official announcement of Coinbase, the migration of the Tezos staking service from the US to Ireland was completed successfully with a low downtime of one minute.
Coinbase Custody International was recently launched in Ireland to be closer to European clients and also to manage all the staking activities.
The migration option chosen by Coinbase optimised the prevention of double signing over a minimum amount of downtime.
Assessment
Coinbase provides not only custody for certain European clients of tokens like Tezos, but also staking of the tokens.
Since staking involves complexities regarding the taxation of the staking rewards for example, with the staking service based in the US this may add additional challenges and uncertainty for clients based in Europe.
Moreover, certain Coinbase clients in Europe like Amun offer products which are exposed to both the price and the staking returns of Tezos.
When Coinbase launched Coinbase Custody International recently, it had already announced that all staking activities would be shifted to the new entity, therefore the migration of the Tezos staking to Ireland was expected.
A similar migration of a bitcoin mining farm for example, which is equivalent to a validator in proof of stake (PoS), would be significantly more difficult since it would involve the set up of a new physical location and the migration of all the physical mining devices.
However, although for staking there are certain hardware components like servers in data centres for example, the tokens themselves are equivalent to mining devices which facilitates the transition of validators, or bakers in the case of Tezos, to other locations.
This example of Coinbase indicates that shifting a validator service from one jurisdiction to another is a relatively simple and low risk process, therefore in case of unfavourable regulations validators are likely to move their operations to other countries.
This flexibility to migrate operations could be seen as an advantage of PoS networks.
There were three main options that Coinbase considered for the migration of their Tezos staking service.
The first option was focused on ensuring no risk of double-signing, but it would had involved around one hour of downtime because the US validator would had been stopped and then the Ireland validator would had been started.
Since both would not had run at the same time, there was no risk of double-signing but one hour of downtime was significant and not acceptable.
The second option was to first start the new validator based in Ireland and then once it was closed to synchronising, stop the US validator.
However, while this option would had reduced the downtime, if there was any error and both validators run at the same time, there could be double-signing and slashing which was considered too risky by Coinbase.
In Tezos, validators need to produce new blocks which could be every few minutes or hours and vote for new blocks, which happens around every minute, and these functions are separately performed by the baker and the endorser.
The strategy chosen by Coinbase was to first ensure that the endorser in the US was down with the confirmation of a vote missed and the one minute downtime, and then activate the endorser in Ireland.
The baker was still producing blocks in the US and once a two-hour window was identified when no blocks had to be produced, Coinbase migrated also the baker to Ireland.
In PoS, the quality and performance of the validators, in particular the largest ones, is very important to ensure the security of the network, therefore the successful migration by Coinbase of their Tezos staking service from the US to Ireland is positive for the Tezos network.
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Bitcoin Cash and Bitcoin SV halving events will happen one month before Bitcoin’s halving
The Bitcoin Cash network is expected to have its first halving event on the 8th of April and Bitcoin SV’s halving is scheduled for the 9th of April.
Depending on the block times, the exact time for the halving events may differ although not significantly.
Bitcoin Cash introduced an emergency difficulty adjustment (EDA) algorithm following the contentious hard fork on August 2017 until November.
This initial algorithm is related to the earlier halving events of Bitcoin Cash and Bitcoin SV compared to Bitcoin.
Assessment
Following the contentious Bitcoin Cash hard fork from Bitcoin on August 1st 2017, both networks had the same mining difficulty level but bitcoin’s price was significantly higher and hence it was more profitable to mine on the bitcoin chain.
The difficulty adjustment algorithm in Bitcoin ensures that the average block generation time remains at around ten minutes, and as the hashrate changes this algorithm is updated regularly every two weeks.
Therefore, Bitcoin Cash had to implement an early mechanism to incentivise mining and block generation in the Bitcoin Cash network.
This mechanism was called the emergency difficulty adjustment (EDA)
algorithm and it was running from the day of the Bitcoin Cash hard fork on August 1st until the 13th of November 2017.
The EDA algorithm decreased the mining difficulty of Bitcoin Cash and therefore attracted hashrate to the network.
However, during these initial months, Bitcoin Cash became ahead of Bitcoin by a large number of blocks due to the EDA algorithm and certain instabilities in mining difficulty.
The EDA algorithm was finally stopped on the 13th November 2017, but this difference in the number of blocks remained, which is the reason why the Bitcoin Cash halving event will happen around one month before Bitcoin’s halving.
Bitcoin SV was a hard fork from Bitcoin Cash, therefore this is the reason why both Bitcoin Cash and Bitcoin SV halving events are around a month before Bitcoin’s halving, on the 8th and 9th of April respectively.
Proof of work (PoW) miners optimise their profitability and return on investment, therefore, following the halving events of Bitcoin Cash and Bitcoin SV, certain miners may decide to switch to other chains which are also based on the SHA-256 mining algorithm.
This would impact the hashrate and mining difficulty of both networks. While the total hashrate of both Bitcoin Cash and Bitcoin SV is significantly smaller than Bitcoin’s hashrate, both cryptocurrencies are well-known, established and among the largest by market capitalisation.
Therefore, the upcoming halving events as well as the dynamics of miners could have an important impact.
For example, there are comments that bitcoin.com, a major supporter entity of Bitcoin Cash, is laying off a significant amount of the workforce.
The current situation in both the traditional and crypto markets, combined with the halving events, are likely to add an important pressure to the mining industry and only the most efficient miners may be able to continue operations.
Nonetheless, a high amount of hashrate should be ensured in both the Bitcoin Cash and Bitcoin SV networks to maintain the integrity of the data and to protect against 51% attacks.
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Crypto Market Update
During the last week there was a certain recovery in the crypto markets with the total market capitalisation increasing from around $175 billion to $200 billion.
Bitcoin’s price raised from values close to $6.3k to over $7k and ether’s price showed also an important gain increasing from $130 to $153.
The CME Bitcoin futures also showed an improvement during last week with higher volumes.
With the major measures taken by central banks to support the economy during the Covid-19 crisis, Bitcoin could continue gaining importance as an inflation hedge, especially following the halving event in May.
The traditional markets did not show a similar recovery last week, although the VIX index has decreased to values around 40 from the recent peak above 80, which is positive although this value is still quite high.
The upcoming halving events of Bitcoin Cash, Bitcoin SV and Bitcoin around a month later, are likely to introduce additional volatility in the crypto markets until the mining industry is adjusted with the most efficient miners remaining.
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