Crypto Industry Report #32
Balzers (LI), 12 May 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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Bitcoin’s third halving is activated reducing by half miners’ block rewards
The third halving event of Bitcoin happened at block 630k on May 11th.
Following the activation of the halving, the rewards for bitcoin miners were reduced from 12.5 BTC to 6.25 BTC per block.
The previous halving events happened in 2012 and 2016, and each halving happens after 210k blocks which is around four years.
The bitcoin halving process will continue until all BTC are mined with a maximum supply of 21 million BTC.
Assessment
With the design of the reduction by half of the rate of supply production around every four years, bitcoin is deflationary.
This is in contrast with the current inflationary environment with central banks injecting large amounts of liquidity due to the Covid-19 pandemic.
Several hedge funds have mentioned that bitcoin could be part of a hedging strategy for the current inflationary environment, therefore following the third halving bitcoin may be considered further as an inflation hedge.
While the rate of new supply production of commodities is complex, changing and depends on several variables, in the case of bitcoin it was defined since the bitcoin network was launched as part of the protocol.
In the code it was stated that every 210k blocks the reward for miners in each block would be reduced by half.
Within the bitcoin network there are many stakeholders, and while the reduction of block rewards could negatively impact most miners, generally the deflationary mechanism is accepted by most stakeholders since according to historical data and economics the price could be positively affected.
If some miners or developers try to modify the code to change the halving design, it would be challenging to receive consensus and a large support for this change.
If the change becomes a fork and they still receive the same block rewards, their value may be lower than continuing mining bitcoin with the reduced block reward.
In addition, if miners or developers were able to modify the rate of supply production of bitcoin or the maximum amount of bitcoin, they would become like a central bank and therefore it is likely that bitcoin would lose its value as a deflationary store of value.
Therefore, while the halving may have a negative impact on miners, especially the least efficient, the overall bitcoin community and stakeholders would oppose any potential changes to the design of bitcoin in terms of the maximum supply or the halving events.
New blocks are produced in the bitcoin network at around 10 minutes intervals, however since the hashrate within the networks changes frequently there is a difficulty adjustment mechanism in order to keep the average block production time at around 10 minutes.
The difficulty adjustments happen around every two weeks, when the hashrate in the network increases then the difficulty will also rise and vice versa.
Therefore, even if certain miners obtain more efficient devices, since new blocks will still be produced every 10 minutes, the overall rewards will be reduced by half.
In order to compensate this reduction of rewards, becoming more efficient would not be sufficient and miners would need to gain a larger percentage of the overall hashrate to produce more blocks so that they can earn more rewards.
This competition among miners may increase the overall hashrate of the bitcoin network, thus increasing its security and data integrity.
The bitcoin halving process will continue to happen around every four years and it has been estimated that the total supply of 21 million bitcoin will be mined around the year 2140.
While the average block production time is kept around 10 minutes, since the difficulty adjustment mechanism happens every two weeks, the exact time when the total supply of bitcoin will be mined is likely to differ from current estimations.
In the next four years bitcoin may become a part of the portfolio of several institutional investors as an inflation hedge and thus it may establish itself as an alternative asset class, especially if the actions of major central banks lead to a raising global inflation.
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HSBC’s Chief Legal Officer will join the Libra Association as CEO
The Libra Association announced last week that its first CEO, Stuart Levey, will join this summer.
Levey is currently the Chief Legal Officer at HSBC and previously he served the US government regarding anti-money laundering regulations and combating illicit finance.
Levey will work closely with regulators and other authorities to develop the Libra project while ensuring compliance and addressing regulators’ concerns.
Assessment
Since the announcement of the Libra project, given the pressure observed globally from regulators it seems that the focus of the project has shifted to collaborating with regulators to design and build Libra ensuring that regulatory concerns are addressed.
While the initial whitepaper presented the technology and concept, given the criticisms from regulators, particularly in Europe and the US, it seems that Libra is increasing the efforts to ensure that regulators are assured of the limited risks of launching the project.
Since Levey will be reportedly based in Washington, the goal seems to be to remain close to the US government and regulators.
In addition, it may be possible that Libra will compromise part of the innovation or the technology by prioritising regulatory compliance.
Given Levey’s background and his appointment as CEO of the Libra Association, this confirms that Libra is accelerating its efforts to reduce all the concerns and identified risks of regulators and governments.
However, in parallel to these regulatory efforts, the Libra Association recently released an updated whitepaper and it was also announced that the payment system licensing process had been started with the Swiss Financial Market Supervisory Authority (FINMA) in Switzerland.
Moreover, some additional members have joined the association recently as well. Previously, several major Libra Association members left and there were court hearings in the US including of Facebook’s founder Zuckerberg related to the Libra project.
However, it seems that the project is still progressing and instead of being stopped by regulators it is adapting itself to be able to launch while meeting all regulators’ concerns.
Levey was at HSBC since 2012 and apart from being Chief Legal Officer, he is also a member of the Executive Committee. Previously, he was part of the US government, in particular the US Department of Justice and the US Treasury department.
Within the US Treasury department, he served as the first Under Secretary for Terrorism and Financial Intelligence under the presidencies of both Bush and Obama.
As part of his role, he oversaw the enforcement of US sanctions by the Office of Foreign Assets Control (OFAC).
In addition, he oversaw the implementation of US anti-money laundering and counter terrorist financing regulations by the Financial Crimes Enforcement Network (FinCEN).
Moreover, Levey served in the US Department of Justice in several senior roles before joining the US Treasury department.
Therefore, the appointment of Levey as CEO of the Libra Association may improve the relation and collaboration with regulators and governments and this could facilitate the potential launch of Libra towards the end of 2020.
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A $22 billion hedge fund considers Bitcoin investment as an inflation protection
As announced last week, the Tudor BVI fund has been authorized and it may include Bitcoin futures as part of its investments with an initial exposure of a low single digit percentage of the fund’s assets.
Tudor Investment manages $38 billion and of this amount $22 billion are in the Tudor BVI fund.
The exposure amount to Bitcoin futures will be reviewed regularly and it was claimed that Bitcoin could be a hedge against the current inflation triggered by the Covid-19 pandemic.
Assessment
The hedge fund refers to the current macroeconomic situation as the Great Monetary Inflation.
Searching for ways to hedge against this inflation led the hedge fund to the consideration of Bitcoin to be part of the investments of the Tudor BVI fund.
According to the note sent to investors, Bitcoin reminds the hedge fund manager Jones to gold when he began investing in the 1970s.
Moreover, the recent price recovery of bitcoin since the major drop in March may have also contributed to an increased interest in the crypto asset, since other asset classes did not show such as recovery in a short timeframe.
In addition, the fact that another well-known hedge fund, Renaissance Technologies, recently mentioned that they may hold bitcoin futures could have also contributed to the decision to allocate part of the Tudor BVI funds to bitcoin.
This may lead to more hedge funds and institutional investors allocating a certain part of their portfolio to bitcoin, which could be positive for the overall crypto markets and the blockchain industry.
Institutional investors could provide additional trust and credibility in bitcoin, which could then bring more awareness regarding the advantages and potential of the blockchain technology.
While it was mentioned that the Tudor BVI fund may get exposure to bitcoin futures in the low single digit percentage, it is unclear whether the fund has already started to invest and whether it will be physically or cash settled futures or a combination of both.
However, similarly to the Renaissance Technologies hedge fund, it is likely that initially the allocation may be done to the more established cash-settled CME bitcoin futures.
A low single digit percentage of the Tudor BVI fund would be similar to almost all the open interest in the CME bitcoin futures contracts, and since the CME bitcoin futures open interest recently reached an all-time-high near $400 million, it seems that the Tudor BVI fund may have already started to get a certain exposure.
Another reason that may have motivated these hedge funds to get exposure to bitcoin is the third halving event.
According to historical data and to other commodities, once the rate of production of new supply decreases significantly, given a similar demand, then prices may increase.
In previous halving events of bitcoin the crypto asset was less established, without financial products like futures, options or professional investors.
Therefore, the magnitude of the third halving event could be significantly different and more important than in previous halving events.
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DNB announces a registration deadline on May 18th for certain crypto firms
The Dutch central bank (DNB) announced that crypto businesses in the Netherlands offering fiat to crypto conversion services or crypto custody have to register by May 18.
This announcement follows the decision on April 21 by regulators to implement enhanced anti-money laundering requirements in the country.
Assessment
According to the announcement, the fourth EU anti-money laundering directive is mentioned instead of the latest AMLD5 directive.
While requests have been reportedly made for clarification no information was provided so far.
Therefore, either the announcement incorrectly mentioned AMLD4 or the existing anti-money laundering laws have been amended until the implementation of AMLD5.
However, since it is mentioned that the Dutch Senate approved on April 21 the directive, it seems that this was related to AMLD5 since the deadline to implement it was in January 10 and the Netherlands previously missed this deadline.
The DNB claimed that a draft application has to be submitted before May 18 in order to be able to use the transitional provisions.
Otherwise, crypto businesses offering fiat to crypto conversion or crypto custody will be forced to stop operations and they will be subject to enforcement actions.
However, the DNB clarified that companies offerng only crypto to crypto services are not required to register.
There has been criticism within the crypto industry in the Netherlands regarding the implementation of AMLD5 in the country, which will require important costs including the registration with the DNB that certain startups may not be able to cover.
However, recently the DNB released a report about central bank digital currencies (CBDC) suggesting that they could lead the research and development efforts within the EU to launch a digital Euro.
This seems to be related to the reducing usage of cash within the country similarly to Sweden. Nonetheless, unlike Sweden, the Netherlands depends on the European Central Bank (ECB) in order to develop a CBDC within the EU.
While the EU is aiming to create a blockchain regulatory framework to avoid regulatory arbitrage, currently crypto businesses are able to relocate to more friendly jurisdictions.
Certain crypto firms in the Netherlands previously announced that they were relocating, anticipating the high costs and requirements with the specific implementation of AMLD5 in the country.
Therefore, the short deadline to register with the DNB may lead to additional crypto firms leaving the country or certain crypto startups may have to stop operations.
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Free TON blockchain launches with the support of validators and developers
TON Labs, a startup that supported Telegram previously running a testnet for TON, launched last week a version called Free TON with the support of several professional validators that are already participating in other major staking networks.
The tokens are called ton crystals, there will be 5 billion tokens and the distribution will be 85% to partners and users, 10% to developers and 5% to validators. Free TON will have no relation to Telegram or its $1.7 billion token sale.
Assessment
According to TON Labs, the TON Community Foundation was not successful launching an alternative version of TON, but they could also join Free TON.
In addition, those entities or individuals from the US or Telegram itself will not be able to participate in the project.
Moreover, TON Labs will provide an open source release of the TON OS.
Telegram’s founder Durov recently published an article mentioning seven reasons why the Silicon Valley is not a good place to either live or do business.
It seems that following the ongoing legal battle with US regulators he is criticising the US and getting closer to Russia.
Regarding the refund to TON investors, those based in the US will be able to have only the option of an immediate 72% refund.
Those outside the US could choose a second option to lend their funds to Telegram for another year receiving 110%.
However, there will not be an option to receive the refund in crypto or in Telegram equity. Comments indicate that Telegram may reserve the option to repay investors at any time after a minimum period of three months.
Also, Telegram may need to sell equity to raise additional cash for the repayments. Given these conditions, some investors claim that lending the funds to Telegram is not an interesting option.
Regarding the ongoing legal battle with the SEC, Telegram will provide the requested documentation and communications by May 20 related to the token sale in 2018.
It seems that TON with its gram tokens will be unlikely able to launch even with the proposed loan option to some of the investors until April 2021.
However, since the technology was ready, a group of developers and validators launched Free TON.
While investors would have traded the gram tokens above the token sale price they received, it is unclear what the trading price of Free TON’s tokens will be.
If major exchanges list the ton crystal tokens and the network grows with additional professional validators and users, the tokens may capture a certain value.
However, it seems that reaching a valuation of $1.7 billion, as the amount that Telegram raised for the token sale, may be unlikely at least in the short-term.
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Crypto Market Update
While the overall crypto market capitalisation raised from around $240 billion to $270 billion, it then dropped towards $235 billion.
Bitcoin’s price last week increased to $10k but then there was a decrease to levels around $8.6k, a similar price as at the beginning of last week.
There are several variables indicating a positive sentiment for bitcoin.
Firstly, the open interest of bitcoin futures at CME reached all-time high values and the open interest on bitcoin options also increased above $1 billion.
In addition, google searches for bitcoin halving are significantly higher than during the previous halving event. Furthermore, the current inflationary macro environment is also positive for bitcoin as a hedge against this inflation.
A possible reason for the bitcoin price drop last week could be due to the 85% of addresses that are in the money following the price increase to $10k.
Ethereum’s price initially recovered from around $200 to near $215 last week, but it then decreased to $185.
However, the sentiment remains also positive with the upcoming launch of Ethereum 2.0 and a report from ConsenSys indicates that around two-thirds of investors are planning to stake their tokens following the launch of Ethereum 2.0.
Regarding traditional markets, the volatility index Cboe VIX decreased below 30, however the management of the pandemic and the restart of the economic activity is likely to impact both the traditional and the crypto markets.
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