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Crypto Industry Report #38


Balzers (LI), 30 June 2020

This week, our blockchain experts assessed the following headlines:
 

+++ Sweden's central bank releases a detailed CBDC report +++

 

+++ Bitmain co-founder Micree Zhan offers to buy $4 billion in shares +++

 

+++ PayPal reportedly planning to integrate Bitcoin and other crypto-assets within months +++

+++ The US Supreme Court limits SEC's power to seek fines on crypto firms +++

 

+++ ING develops a pioneer FATF-friendly protocol for tracking crypto transfers +++

 

+++ Crypto Market Update +++


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.


Sweden's central bank releases a detailed CBDC report

CBDCs and in particular the e-krona was the focus of Sweden’s central bank second issue in 2020 of its Economic Review report.

Four different designs of the e-krona are analysed in the report considering their advantages and also the associated risks and challenges.

Previously, in December last year, Sweden’s central bank announced a pilot program in partnership with Accenture for the e-krona. Sweden’s Sveriges riksbank is the world’s oldest central bank
.


Assessment

While several central banks are researching CBDCs to follow international developments and improve their expertise, in Sweden there is a more pressing need to develop and launch the e-krona.

Since the cash usage in the country is decreasing considerably, the e-krona will be required to ensure that the general public still have access to central bank money.
 
In the case that cash is no longer used in Sweden, it seems that without a CBDC the general public would not have direct access to the central bank, but only through commercial banks as intermediaries.

Other countries like the Netherlands are also trying to accelerate the development of a CBDC in the EU. Globally, the topic of CBDCs is gaining awareness and the research and testing is accelerating.

Therefore, further pilot programs are likely and the first CBDC may be launched in the near future.
 
The first e-krona design would involve a centralised solution without intermediaries.

However, Sweden’s central bank could assume a role similar to commercial banks and therefore there could be a monopoly risk.

In addition, the costs to keep millions of accounts of users, and also the hiring and training of a large number of employees for example, would be significant.
 
Regarding the designs with intermediaries, both centralised and decentralised, they would also involve significant costs and resources for the central bank.

In particular, the infrastructure for millions of users would also need to be provided by the Riksbank. Moreover, in the decentralised design the central bank would have to act as a lender of last resort.
 
The three designs mentioned above would imply an important amount of costs and changes for the Riksbank.

A fourth design is mentioned in the report called the synthetic e-krona. In this design, lower costs would be required and it would be easier to implement the synthetic e-krona, however it would be similar to the existing system and it would not be a direct claim on the central bank. Therefore, the synthetic e-krona may not be classified as a CBDC.
 
A further development related to CBDCs is the announcement of the Italian Banking Association (ABI), consisting of more than 700 banking entities in the country, claiming that they are willing to participate and support pilot programs of a Euro CBDC backed by the European Central Bank (ECB).

The ABI mentioned that the Euro CBDC would need to ensure financial stability, full compliance with European regulations and protection of personal data.
 
Moreover, the Bank for International Settlements (BIS) recently mentioned that CBDCs are being researched by central banks for the potential benefits of the technology, not as a reaction of private stablecoin projects likely referring to Facebook’s Libra.
 
CBDCs are becoming one of the leading potential use cases of the blockchain technology. Given the major role of central banks, the launch of CBDCs may significantly increase the awareness of the benefits provided by the blockchain technology.

In particular, if the central banks of the US or China launch a CBDC, it is likely that a large number of other central banks could decide to also launch their own CBDCs.

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Bitmain co-founder Micree Zhan offers to buy $4 billion in shares

Micree Zhan, the ousted co-founder of Bitmain, informed Jihan Wu and other shareholders that he is willing to buy Bitmain’s shares valued at $4 billion to resolve the internal power struggle within the company.

Zhan reportedly currently owns 36% of the shares. In the letter sent, Zhan claims that he is willing to buy shares from Wu who holds around 20%, from the employee option pool of around 19%, from outside investors who hold 10% and from three other founding members that have 15%.


Assessment

Since being ousted last year, it seems that Zhan has made significant efforts to retain control of Bitmain. Before this offer to buy Bitmain’s shares valued at $4 billion, he reportedly took control of Bitmain’s Beijing office recently.

However, there were certain confrontations and he had to use guards when entering the office for security.
 
Although it seems that Zhan has recovered control of the Bitmain Beijing office, the parent company owns Bitmain Hong Kong and also it has control of the Beijing office.

According to the announcement, Bitmain’s parent company in the Cayman Islands seems to be controlled by Wu.
 
The proposed offer of Zhan to buy $4 billion in Bitmain shares may indicate difficulties to resolve the internal power struggle at Bitmain.

Depending on whether the offer is accepted or not, the strategy and development of Bitmain might be significantly different.
 
Given the issues between Wu and Zhan it does not seem likely that Wu would accept the offer. However, other founding members, external investors or employees may accept Zhan’s offer at least for a percentage of their shares.

It is unclear whether Zhan is offering only to buy the whole amount for $4 billion or whether he would also accept to acquire a partial amount of the shares.
 
If Zhan manages to gain a larger amount of shares then he would be in a stronger position to regain control of Bitmain after being ousted by Wu last year.

Nevertheless, it seems important that the internal power struggle at Bitmain is resolved soon since client orders of new ASIC mining devices are being delayed.
 
Other major proof of work mining pools like F2pool are leading now in several proof of stake networks. However, Bitmain seems to remain focused on proof of work so if they lose an important number of clients due to delayed orders their revenue may be affected with the raising proof of stake trend.
 
While a significant raise of bitcoin’s price would be positive for Bitmain, it might be possible that they decide to diversify and enter also the proof of stake sector.

In particular, the upcoming launch of Ethereum 2.0 is likely to attract several major proof of work mining pools and ASIC mining devices manufacturers to the proof of stake industry.

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PayPal reportedly planning to integrate Bitcoin and other crypto-assets within months

According to several sources, PayPal may integrate crypto-assets including bitcoin for its around 325 million users.

The sources mentioned that it would be possible to buy and sell crypto-assets directly from PayPal and the peer-to-peer (P2P) payment app Venmo.

Moreover, the sources claim that the crypto services could be expected within the next three months.


Assessment

According to the information provided, PayPal may search for liquidity via several exchanges but it is not clear yet which crypto-assets will be supported or the participating crypto exchanges.

It seems that the crypto services may be integrated in PayPal’s Venmo P2P payment app, and providing access to crypto-assets including bitcoin for the over 325 million PayPal users could be significant and help bitcoin and other crypto-assets to become mainstream.

The large amount of currencies supported at PayPal and its major user base is likely to be positive for bitcoin and other crypto-assets to increase adoption and awareness.
 
PayPal was initially part of the Libra Association, however it then left the association like other members such as Visa or Mastercard. It seems that PayPal is aiming to launch their own crypto services rather than participate in Facebook’s Libra project.
 
WhatsApp, which is owned by Facebook, recently announced WhatsApp payments, which might be related to the upcoming Libra stablecoin.

However, the central bank of Brazil has recently ordered both Mastercard and Visa to suspend the processing of transfers related to WhatsApp with risks of receiving important fines.

It seems that the central bank wants to first understand the risks involved before allowing WhatsApp payments. The news are significant since Brazil is the second largest market of WhatsApp with over 100 million users.
 
The information provided by the sources seem to be confirmed by several crypto-related job openings of PayPal in locations such as the US or Singapore.

In some of the job descriptions, it is mentioned that the crypto services are aimed at improving PayPal’s scalability, performance and accessibility.
 
Moreover, PayPal’s founder Peter Thiel is related to the Bitcoin mining corporation Layer1 which is aiming to accumulate 30% of the hashrate of the bitcoin network with a major bitcoin mining farm in Texas.

It seems that rather than being a participant in the Libra Association, PayPal might have decided to shift the strategy towards developing their own crypto services.

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The US Supreme Court limits SEC's power to seek fines on crypto firms

As announced last week, the US Supreme Court ruled that the SEC does not have authority to seek fines from defendants, including crypto businesses, that exceed the total amount of net profits from illicit activities minus the legitimate business costs.

In addition, the funds received from the fines will have to always be returned to the affected investors and not transferred to the US Treasury.


Assessment

While the ruling of the US Supreme Court covers all defendants, it is relevant for crypto firms given the large amount of cases related to illicit token sales.

With the new ruling, the SEC will not be able to seek fines exceeding the profits obtained by crypto firms defendants after deducting certain legitimate business expenses.
 
The fact that the SEC will be required to return funds to affected investors is positive since the legal action would be focused on protecting investors and covering their lost investment from investing in certain illicit crypto firms or token sales.

Before this ruling, the SEC usually charged important fines including interest and additional penalties.
 
The US Supreme Court verified certain sections of existing regulations and determined that the SEC does not have authority to seek fines higher than the net profits from defendants obtained from illicit activities.

In addition, it has to be verified that the fines charged are really for the benefit of the affected investors.
 
Following the ruling, this may affect SEC’s motivation to seek fines if the process would be challenging with higher costs in particular to identify all affected investors.

Nevertheless, the SEC could obtain again additional authority to seek fines if the H.R. 4344: Investor Protection and Capital Markets Fairness Act is approved by the Senate.
 
While certain illicit firms, both in the crypto industry or other sectors, may consider the ruling a lower risk for them, investors may be better protected since the SEC will need to identify them and return all collected funds from defendants to them.
 
There are certain ongoing changes at the SEC such as the intention of the US President to nominate SEC’s chairman Jay Clayton as US Attorney for the Southern District of New York.

If Clayton’s nomination is confirmed, then one of the remaining SEC commissioners could be nominated to act as SEC chairman until a successor for Jay Clayton is found and confirmed.
 
Hester Peirce, who previously proposed the three-year Safe Harbor period for token sales among other supporting initiatives to the blockchain industry, might be chosen to replace Clayton. That could be positive for the blockchain industry and may accelerate crypto related policy.

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ING develops a pioneer FATF-friendly protocol for tracking crypto transfers

According to the announcement, ING bank has designed a protocol to support crypto firms regarding the Financial Action Task Force’s Travel Rule requirement.

The developed solution is called Travel Rule Protocol (TRP) and it is backed by major crypto firms such as Fidelity Digital Assets.

The FATF’s Travel Rule recommendation was announced in October 2018 to include virtual asset service providers (VASPs) and crypto transactions with its anti-money laundering requirements.


Assessment

The announcement is relevant because ING seems to be a pioneer among banks to get involved in providing a Travel Rule solution for crypto firms.

Nevertheless, ING clarified that their focused is on security tokens and similarly regulated crypto-assets, rather than in payment tokens such as bitcoin.
 
The proposed solution of ING is positive for the crypto industry since it indicates increased interest by major banks in regulated VASPs and crypto-assets.

In addition, according to the announcement other participants in the TRP solution include crypto firms such as Crypto Broker or Metaco.
 
The Travel Rule is an update of the FATF Recommendation 16, related to domestic and international transfers. In order to include crypto-assets and crypto transactions in the Recommendation 16, the new rule was proposed by the FATF.

The focus is to require originators and beneficiaries of crypto transactions to exchange identifying information to improve AML related to crypto transfers.

In June this year, the FATF reviewed the progress made by member-states in the implementation of the Travel Rule.
 
The Travel Rule is related to identifying information travelling also with each crypto transaction. In crypto transfers, beneficiaries must provide to originators the beneficiary name and the crypto wallet address or account number.
 
Regarding the information that must be provided from originators to beneficiaries, it must include the originator name, the account number, the physical address, a national identity number as well as the date and place of birth.

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Crypto Market Update

The overall crypto market capitalisation remained stable last week with a slight decrease from $267 billion to around $258 billion.

Bitcoin’s price also drop from $9.3k to values near $9.1k, however the price still remains above both the 200-day simple moving average (SMA) and the 200-day exponential moving average (EMA) at $8.3k and $8.6k respectively.

Moreover, the amount of bitcoin options and futures contracts that expired last week was significant marking an all-time high volume.

Ethereum’s price similarly decreased slightly from $233 to around $225 but these values are still above the 200-day SMA at $188 and the 200-day EMA at $198.

Regarding traditional markets, the Cboe VIX index remained stable at around 35, which is still a significantly high value. In addition, major indexes such as the S&P 500 decreased last week.


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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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