Crypto Industry Report #51
Balzers (LI), 10 June 2021
This week, our blockchain experts assessed the following topics:
Our bi-weekly Crypto Industry Report provides you with valuable information on the global crypto industry – picked and analysed by our blockchain experts.
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Is a Bitcoin-OPEC a solution to its energy issue?
Controversies around Bitcoin and its energy consumption won’t stop. The latest éclat that caused quite a lot of outrage with some of the people within the Bitcoin industry was a private meeting of various miners. In a Zoom call, Elon Musk and Michael Saylor – by now known to almost anyone within the crypto sphere – gathered up representatives from different mining facilities to talk about Bitcoin’s energy consumption.
As indicated by Saylor and Musk, this newly formed Bitcoin Mining Council with miners from all over North America was formed to promote energy usage transparency as well as accelerate sustainability initiatives worldwide. An initiative that was surely started with the best of intentions, didn’t resonate with everyone. Fears about a newly forming mining cartel were passed around on Twitter. Some even considered this a remake of 2017 situation, when various miners met in New York to band together in the blocksize war. So while a group of adamant Bitcoiners interpreted this move as an attack on Bitcoin’s decentralised setup, others cherished the hope that because of initiatives like these Bitcoin could finally become more ESG-compatible.
After all, the debate around Bitcoin’s energy consumption is a hard one to wrap one’s head around. As a matter of fact, Bitcoin’s energy mix is partly coming from burning fossil fuels. There are some estimates on how big Bitcoin’s fossil foot print is but because not every single miner is known we cannot determine it with certainty. In comparison with the world’s biggest countries, Bitcoin’s electricity mix does not look bad at all. Also, Bitcoin miners are location-independent energy consumers, which means that they can search the plant for the cheapest energy sources. With renewables getting cheaper each year, it is plausible that Bitcoin’s energy mix will turn greener as well.
Because of these incentives, a Bitcoin-OPEC for a sustainable version of Bitcoin might not be needed in the long-run. As the saying goes: If it does not help, it does not hurt either and the Bitcoin Mining Council might not be such a big deal after all. As some observes indicated, miners do not control Bitcoin and they are more like serfs rather than masters. Some even argued that the miners that got together represent merely 10 percent of the hashrate and they agreed to disclose basic information that many miners were already disclosing anyway.
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CBDCs on the move
It’s happening rather quietly and pretty much behind closed doors, but it’s happening. The year 2020 has really been the accelerator year for exploration of CBDCs. According to the annual study by the Bank for International Settlements (BIS) out of 65 central banks, 50 are currently actively engaging in retail CBDC work. While some are still in the conceptual research stage, others have moved into experimentation and pilot projects.
Most notably, the US Federal Reserve has recently announced that it will publish a discussion paper this summer focusing on the implications of fast-evolving technologies for digital payments. In this paper, the issue of a central bank digital currency will be discussed in depth as well. One of Africa’s thought leader countries, South Africa, has also begun exploring the possibility of creating its own central bank digital currency in a preliminary study. Countries like these are still in the research stage.
A little more concrete seem the steps by South Korea’s central bank. Its representative put out an announcement that they are looking for a technology partner that can help them build a pilot platform for a central bank digital currency. Once a technology partner is found, things could move quickly as is usually the case with Asian countries like South Korea. A South Korean central bank digital currency in a test environment shouldn’t be that far off in time.
In Northern Europe, the Swedish Riksbank has already started the next phase of its R3 Corda-based distributed ledger technology-based e-krona pilot project. While the previous phase has only simulated participants, this current phase will have external actors involved that act as participants in the test environment. This way, the Swedish central bank can test, how its DLT-based infrastructure functions and integrates with the existing systems of real-world market participants.
The most advanced CBDC projects come out of small countries as they can move much more quickly. The African island country Mauritius and its central bank have signalised that they are targeting a year-end rollout of a central bank digital currency pilot project. Already in the Caribbean, the central bank of Bahamas has been running the Sand dollar project for quite a while now.
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Tiding up some ICO scams from 2017
Regulators still got their hands full cleaning up issues from the 2017 bull run. During that time, the ICO bubble was in full force and among many legitimated projects, there were also some outright scam coins. Often dubbed as the biggest heist from that time is BitConnect. At its climax, the multi-level Ponzi scheme siphoned off $2 billion from investors all around the world.
Now after almost three years of investigations, the US Securities and Exchange Commission (SEC) has finally filed a lawsuit against five individuals that helped promote BitConnect. They have been accused of having sold securities to retail customers without registering with the regulator. Interestingly enough, the founder of BitConnect, an Indian citizen, does not seem to be among the defendants.
Other prominent ICO projects have also been sued. Behind the lawsuit are employees of an Israeli venture capital fund. According to them, three of Israel’s largest initial coin offerings of 2017 and 2018 must have been outright scams. The reason being, that the three companies did never really develop the product that was promised by them, although they all raised a lot of money. Sirin Labs alone, one of these projects, raised $158 million in July 2017 with the goal of producing a secure phone.
During the 2017 bull run, there were many companies raising a lot of money, of which a huge junk did never deliver on their promises. As of now, regulators are keep digging things up. Hilariously, the suing also works the other way around. In the US, some Tezos users have sued the IRS, requesting a refund for taxes paid on Tezos block rewards. This case is rather important as it goes to show the importance of the question, whether crypto assets earned through staking should be subject to taxation – especially in light of the fact that there are more and more serious proof-of-stake blockchains – most notably Ethereum 2.0.
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Did regulators force crypto prices down?
Price of all crypto assets have fallen quite significantly over the last few weeks. Around the same time, regulatory narratives around seemed to be changing. It’s not entirely clear whether prices dropped because of regulators’ more fierce actions against crypto or if it was the other way around: Regulatory bodies taking advantage of falling prices and adding fuel to the fire by coming out against cryptocurrency with new directives.
Be that as it may. It was China’s regulator that anted up the game. Chinese regulatory agencies have not only taken action against bitcoin mining, they have also allegedly banned financial institutions and payment companies from carrying out cryptocurrency transactions. On top of that, Chinese officials have warned investors and called out crypto trading as speculative. Although China has prohibited the use of Bitcoin more than once, this time it could be more serious as the hashrate outflow out of China indicates.
But not all state officials have seized the moment to bash cryptocurrencies. The Reserve bank of India has recently indicated that banks and other entities cannot use its 2018 order on digital currencies to caution and prevent customers from investing in crypto assets. This comes as a great relief to crypto investors as they are provided with more clarity towards the state of crypto trading India. Another regulator that has provided more guidance and clarity is South Korea’s.
With the latest clarifications, investors in South Korea now have a better understanding of which regulatory body is responsible for handling the various aspects of crypto-related activities. This is certainly a good move – one that crypto investors all around the world hope their government will make as well. Maybe something like this will be put forth by the Biden administration already as soon as next year, as the US president’s new budget proposal for 2022 includes new regulations for the crypto market.
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Market Update – Investors and Apple seem bullish
The crypto markets still feel like they are in limbo. Especially short-term traders are cautious as they don’t know where the market will go. While many of them are currently range-trading Bitcoin, more long-term oriented investors are stacking up. According to a weekly report by CoinShares, there was quite some institutional buying going on over the last few days as these investors were looking to buy the dip. Taking their actions at face value, this goes to show that many believe that the huge correction over the last few weeks was only a dip and crypto assets are here to stay.
As numbers also indicate, about 63 % of institutional inflows were going into Ether products. The second largest crypto asset by market capitalisation still seems to be in high demand, most likely because of Ethereum upgrade (EIP-1559), which is said to be just around the corner. At the same time, Ethereum transactions fees have come down significantly. Some of this drop might be due to less interest because of the ether’s price drop but certainly second-layer technologies like Polygon do play their part as well as traffic is off loaded to alternative chains and ecosystems within Ethereum.
Because of the alleged Chinese government clamp-down on mining, Bitcoin’s hashrate has come down from its all-time high. Fearing greater repression, Bitcoin miners are supposedly leaving China for other places. This might bestow Bitcoin a bumpy road in the short-term but in the long-term, greater geographic decentralisation among miners is certainly a good thing. Quite some curiosity was sparked by Apple that announced that the company is looking to hire a crypto-savvy business development manager. The new job offering has caught the attention of the crypto world, leading to rumours that the tech giant might be venturing into Bitcoin by bringing the official iWallet soon.
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