Hi all!
This week we have, as usual, a ton of compelling links and updates, including some hefty product news, what could be the beginning of a shift in Libra sentiment, and some intriguing metrics analysis.
In THE BRIEFING, I look at what could make a token a security or not in the eyes of the SEC and conclude that it’s best to work on making registration and listings faster and cheaper.
And we have an announcement: we are launching a NEW SERIES of WEBINARS. My colleague Galen Moore will host a discussion with seasoned OTC traders on hedging, derivatives, liquidity and market structure. Join us on October 28 at 12pm ET – you can sign up for free HERE.
With that, read on…
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Crypto Convergence: From Decentralization to Direct Listings
Ever since U.S. Securities and Exchange (SEC) commissioner William Hinman said last year that a digital asset could start out a security but cease to be one when it was “sufficiently decentralized,” token issuers and investors have been eager for a quantification of what that means.
The recent SEC action halting the distribution of Telegram’s TON blockchain tokens may finally have shed light on that – just not in the way we expected. The end result could be a new type of token financing that mirrors an emerging trend seen in traditional markets.
Decentralize everything
In a speech given in June of 2018 , SEC Commissioner Hinman sought to answer the question: “Can a digital asset that was originally offered in a securities offering ever be later sold in a manner that does not constitute an offering of a security?” In his opinion, the answer was yes. Bitcoin, he explained, “appears to have been decentralized for some time,” and “over time, there may be other sufficiently decentralized networks and systems where regulating the tokens or coins that function on them as securities may not be required.” He used a variant of the word “decentralized” seven times.
This use of the word “decentralized” in a regulatory context has worried industry observers. In February of this year, Angela Walch published a compelling paper which highlights the complexity of elevating such an abstract concept to the realm of legal definition.
She points out that the term covers both logistical distribution of the nodes and the procedural distribution of governance – and that quantifying either is extremely difficult and somewhat meaningless. Systems, especially decentralized ones, tend to be fluid over time.
It’s almost as if regulators read her paper and sent around a memo, because since then the word has been largely absent from official communications.
Not quite
Last year, messaging platform Telegram funded the construction of its TON blockchain with a private placement which guaranteed future allocation of Gram tokens, which of course would be decentralized enough to not need to go through a securities registration. The SEC was not convinced.
In early October, it filed an injunction against Telegram and a subsidiary to halt the token issuance. The official statement appears to focus on the for-profit intentions of the issuers and original investors, not on the nature of the token itself. Interestingly enough, the word “decentralized” is only mentioned four times in a 31-page document – twice in quotes extracted from the TON marketing materials, and twice as evidence that the issuers never intended for the investors to hold onto and use the tokens:
“Indeed, by definition, the TON Blockchain can only become truly decentralized (as contemplated and promoted in the Offering Documents) if Grams holders other than the original Grams purchasers actually stake Grams… Stated differently, if the original Grams purchasers alone all immediately staked their holdings, the TON Blockchain would be centralized rather than decentralized and, therefore, subject to misuse and majority attacks.” [original emphasis]
This relative absence of decentralization discussion should not have been a surprise.
In March of this year, SEC Chairman Jay Clayton confirmed Commissioner Hinman’s opinion that a digital asset could cease to be a security, depending on the network conditions. While he repeated much of the same phrasing, there was one important difference: he did not use the word “decentralized.” Not once.
And earlier this month, the Chairman of the U.S. Commodity Futures Trading Commission (CFTC) officially declared that, in his view, ether was not a security. He didn’t use the word “decentralized,” either.
Straight to the source
Token issuers that were hoping their digital asset would escape securities requirements through “decentralization” are almost certainly in for a disappointment, as the Telegram action and recent statements show that intent is more of a barometer. SEC Chairman Jay Clayton basically said as much when last year he declared that “every ICO I’ve seen is a security.”
Rather than fight this, the sector could embrace the emerging clarity and work with regulators to smooth registration requirements. The current Reg A+ registration process, chosen by some projects as a path to broader and more liquid token distribution than the less onerous but more restrictive Reg D, is slow and expensive. Regulators do adapt with the times – often late, and usually at an excruciatingly slow pace. But that is largely due to structural limitations, not a lack of interest in the potential contribution to the economy of an innovative yet sound financing funnel.
Even working within current rules, a new type of distribution method could emerge. As an example of what this could look like, we need look no further than an emerging trend in traditional finance: direct listings.
In a direct listing, existing shareholders of a private company release all or some of their holdings for public sale on a designated exchange, at considerably less expense than a traditional IPO. Spotify, the first company to come to market via this method, estimates that it saved about $30 million in bankers’ fees.
Imagine that Telegram had registered its Gram tokens as securities and distributed them to initial investors, employees and developers. In a direct listing, existing token holders could sell them on a designated exchange without restriction. While not cheap, it would most likely cost less in time and money than extensive litigation; and costs could come down in line with increasing demand and standardization.
It is clear that the legacy IPO market is ripe for innovation, as its stubbornly high costs in spite of waning demand shows. Yet traditional finance moves slowly, and so far only one other high-profile company – Slack – has chosen the direct listing route.
Yet Wall Street, no doubt sensing change in the air, seems to be getting behind this evolution. Both Morgan Stanley and Goldman Sachs have organized direct listings events, the first of their kind, in Silicon Valley this month.
A gesture from the SEC and lawmakers in smoothing the direct listing process for token issuers would give a welcome dose of clarity to a sector eager for direction. Crypto finance moves relatively quickly, and a burst of token listing activity would attract attention from traditional players. Investment bankers could end up taking a leaf out of crypto’s playbook, and push for smoother listing regulations on traditional exchanges that encourage participation while protecting investors, thus breathing life back into new public listings.
Finance overall would benefit from the emergence of new token-based business models, less reliance on private equity and debt, and more fluid capital markets. We could also start to see a convergence of the new and the old as boundaries and participants start to overlap – then we will definitely be able to say that the crypto ecosystem is reaching a new level of maturity.
– Noelle Acheson
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* six especially interesting entries - I'm all about saving you time, but do at least skim the rest.
BIG IDEAS
*Investors are giving institutional crypto platforms the cold shoulder, but there is a silver lining (The Block, paywall) – Uptake of institutional-grade services on the newer exchanges is turning out to be slow, but that’s ok – careful building and belief in the long term are keeping the fires burning.
*No Way, Twitter Can’t Help Predict Crypto Price Movement (The TIE) – Is sentiment a valuable investment tool, or is it too confusing and easily manipulated?
Bitcoin is Not a Pyramid Scheme (Unchained Capital) – A sweeping paean to bitcoin’s hard supply cap.
Crypto Derivatives: On Misleading Measurements (CoinDesk) – My article from last week’s newsletter that talks about how looking at notional volumes to compare crypto derivatives to the spot market is meaningless – but we don’t yet have a better alternative.
MARKETS
*Why Tether Dominates in China (Chainalysis) – A comprehensive overview of crypto asset activity in China – some surprising finds, a riveting read, and insight into how quickly crypto markets adapt.
*What to Make of the SEC’s Latest Bitcoin ETF Rejection (CoinDesk) – Industry insiders agree that a bitcoin ETF approval is probably a while away, as the SEC appears convinced that the spot market is still too small, immature and vulnerable to manipulation.
September 2019 Exchange Review (CryptoCompare) – Top-tier exchange volumes declined by over 30% in September; institutional product volumes were also lower, down almost 20%.
The 26 Best Cryptocurrency Trading Tools (SFOX) – An extremely useful list for crypto traders of popular tools for charts and analytics, trade execution, custody and accounting.
What Centralized Exchanges Tell Us About Crypto Investors (IntoTheBlock) – Around 40% of the daily volume in major cryptocurrencies is processed through centralized exchanges; analyzing their order book and blockchain data records provides unique insight into the behavior of crypto markets.
Circle to Spin Out Poloniex Less Than 2 Years After $400 Million Takeover (CoinDesk) – The crypto exchange will be renamed Polo Digital Assets Ltd., will stop servicing U.S. clients at the end of the year, and will be spun out as an independent company backed by an Asian investment firm.
eToro Launches Crypto Portfolio Weighted by Twitter Mentions (CoinDesk) – Investors can now bet on Twitter sentiment delivering returns, via a product launched on social investing platform eToro that tracks crypto assets with positive tweet metrics.
KuCoin’s derivatives platform launching bitcoin monthly futures in ‘few weeks’ (The Block) – The crypto exchange’s derivatives arm, KuMEX, which launched in July and already offers a bitcoin perpetual contract, will soon also offer bitcoin monthly futures contracts.
CRUNCHING NUMBERS
10 Hard Truths About Social and News Media Analytics for Crypto-Assets (IntoTheBlock) – The challenges go beyond noise and news neutrality; they also include the limited scope of assets covered, and the fact that sentiment is often a lagging, not a leading indicator.
PROFILES
A deep dive into Circle: What's the game plan now that Poloniex has been axed? (The Block, paywall) – The spin-off of its main exchange, the shrinking OTC desk and a lack of news out of its crowdfunding platform SeedInvest, it appears that the next move for the company might be crypto lending.
REGULATORS AT WORK
CFTC Chairman Confirms Ether Cryptocurrency Is a Commodity (CoinDesk) – Speaking at an event, The new chairman Heath Tarbert hinted that we could soon see ether derivatives trading on U.S. regulated markets.
SEC Restarts Clock on Proposed ‘Bitcoin and T-Bills’ ETF (CoinDesk) – Investment management firm Wilshire Phoenix and the NYSE Arca exchange have filed an amendment to their bitcoin and T-bill ETF proposal earlier this month, specifying the custodian (Coinbase) and addressing SEC concerns about market manipulation.
SEC’s Court Hearing on Telegram Token Delayed Till Next Year (CoinDesk) – In spite of Telegram’s request to expedite the hearings, the U.S. regulator has pushed them back until February 2020.
FATF Joins BIS in Calling Stablecoins ‘Global Risk,’ Citing Money Laundering Concerns (CoinDesk) – In documents released after its latest meeting, the intergovernmental organization referred to cryptocurrencies as a “major strategic initiative,” and said cryptos whose values are pegged to fiat currencies could have a particularly big impact.
French Central Banker: The World Needs to Standardize Crypto Regulations (CoinDesk) – In a speech at an Official Monetary and Financial Institutions Forum meeting in London, Denis Beau, a deputy governor of Banque De France, insisted on the need for overall consistency in order to prevent regulatory arbitrage in the trading of digital assets.
SECURITY TOKENS
Wave and Vertalo start by tokenizing yield, with race horses and whiskey as long term possibilities (The Block) – Reportedly the first bitcoin-based yield fund, which pays out a yield funded by selling call options on the cryptocurrency.
Digital Securities Exchange Taps R3’s Blockchain for Post-Trade Activities (CoinDesk) – Archax, a London-based startup developing an exchange for digital assets, will use Corda Enterprise for settlement, reporting and other post-trade functions.
LIBRA WATCH
The pendulum of sentiment seems to be reversing its strong anti-Libra momentum. While some senators wrote letters to the large payment processors “suggesting” they step back from Libra, U.S. Senator Mike Rounds (R-SD) sent a letter to founding member Anchorage praising the company for its role in the project. And Terry Gou, Taiwan’s richest man and the founder of manufacturing giant Foxconn, believes that Taiwan could boost its status as an international financial hub by embracing Libra, rather than approaching the project with skepticism as other governments have done.
What’s more, the Financial Times ran an editorial that argued that, although the project may need some retooling, it is trying to push the boundaries of finance in important ways. Both Mark Carney, governor of the Bank of England, and Gabriel Soderberg, senior economist at Sweden’s central bank, have separately said that they believe that Libra reveals both a gap and an opportunity in central bank services. And the central bank’s governor Stefan Ingves pointed out that Libra has been a “catalytic event”, pushing central bankers around the world to reconsider their primary product: money.
The naysayers are not yet done, however. Bruno Lemaire, the French Minister for the Economy and Finance, argued in an op-ed in the Financial Times that even a coordinated regulatory response would not be able to address all the risks inherent in the Libra project, because it is asking sovereign states to share monetary policy with a private company. And in a speech in Washington, D.C., Lael Brainard, a member of the U.S. Federal Reserve's Board of Governors, outlined how Libra could put consumers, central banks and the international banking order at risk by being “too successful.”
The work continues, regardless. The recent departure of the main payment processors from the founding group is not a problem, according to Libra Association representatives – there are many other interested parties, including some banks. And in an interesting twist, co-creator of the Libra project David Marcus reportedly said at an event that the stablecoin could be pegged to national fiat currencies rather than the “basket” of currencies and securities currently in the plan. Watch this space…
PODCASTS
THE SCOOP: Frank Chaparro chatts with Michael Sonnenshein of crypto investment manager Grayscale about their “Drop Gold” campaign, what institutional investors ask about and what types of funds are investing in bitcoin.
FYI BY ARK INVEST: Yassine Elmandjra talks to Ark Invest CEO Cathie Wood and Ric Edelman, founder and chairman of Edelman Financial Engines, about bitcoin and the eventual role it could play in investment portfolios.
STEPHAN LIVERA PODCAST: Mike Belshe of BitGo talks about the evolution of crypto custody, the need for checks and balances, the relative immaturity of crypto infrastructure and concerns over jurisdictional risk. Favorite quote: “We have decentralized bitcoin, and we trade it on the worlds most centralized marketplace ever known to man.”
THE DAVE CHANG SHOW: Celebrity chef David Chang chats to his friend Mike Novogratz, CEO of Galaxy Digital, about cryptocurrencies, wrestling and the U.S. prison system – a very enjoyable listen.
ON THE BRINK: Matt Walsh talks to Zac Prince, co-founder and CEO of BlockFi, about market structure, value accrual and the emerging field of decentralized finance.
A-HA!
*The Long Now, Pt. 3 – Is This Normal? Asking for a Friend (Epsilon Theory) – Parts of this march through cartoonification and incentives sound uncannily like the evolution of crypto markets.
*The Not-Com Bubble Is Popping (The Atlantic) – The crash-and-burn fate of over-hyped tech companies is not at all reminiscent of the dot-com bubble: that one affected public companies, investors of all types (not just VCs) and actually had to do with technology.
Mises vs. Marx (The March of History, video, rap battle) – Economics debate is getting even more fun.
The ownership of central banks (Bank Underground) – Interesting background, from the blog of the Bank of England.
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FIRMS & PRODUCTS
Fidelity Digital Asset Services is rolling out its custody and trading services to all clients, after starting to gradually onboard clients on a trial basis earlier this year.
CoinMarketCap now publishes interest rates on cryptocurrencies, drawing on information from major lending platforms.
Crypto data provider Nomics now publishes indices that track a token’s trading volume transparency.
Cryptocurrency exchange Binance will soon launch its first fiat-to-cryptocurrency trading pairs, starting with the Russian ruble.
Binance’s futures exchange has raised maximum leverage to 125x with the launch of bitcoin/tether contracts.
USD deposits on Binance U.S. are now FDIC insured.
Korean crypto exchange Upbit is working on a blockchain application to support the trading of unlisted securities.
Cryptocurrency exchange Bittrex has announced that it is moving headquarters from Malta to Liechtenstein.
PEOPLE
Investment management firm Arca Funds has brought on market infrastructure veteran Jerald David, formerly of the CME, NY Mercantile Exchange, EMX and others, as president of Arca Capital Management, a new division of dedicated to building blockchain-based investment products.
Have a tip? Drop me a line at [email protected]. |
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Our annual Invest: NYC is fast approaching. On November 12th, at the Marriott Marquis in New York City, you can hear institutional investors, infrastructure builders and sector participants discuss the trends in and outlook for crypto markets.
This year will focus on bitcoin’s role in institutional portfolios in an environment where macro indicators are telling conflicting stories and uncertainty seems to be the new normal.
Come join us! It would be great to say hi.
We are launching a NEW SERIES OF WEBINARS about crypto market trends and developments. Come learn with us as we talk to industry experts about their experiences and insight, and help us figure out where the sector’s going and what we’re overlooking.
We kick off on October 28 at 12:00pm ET. Join my colleague Galen Moore in a conversation with two experienced OTC traders: Martin Garcia of Genesis Trading, and YinFeng Shao of Reciprocity Trading. They’ll discuss derivative hedging strategies, the impact on liquidity and where risk could be building in the system. Don’t miss it! You can sign up for free HERE.
CRYPTO WEBINARS
Crypto podcasts have long been a staple of market education (see links above, for example), but I’ve noticed that there is a growing stable of informative webinars out there that don’t get enough air time in my opinion.
Here you have the crypto market webinars that I know about and that I think you might find interesting. If you’d like your webinar listed here, let me know at [email protected] (no guarantee of inclusion, though).
Crypto Market Data 101 – Nomics - Every weekday, 3pm ET
Analyzing Social Media For Crypto Assets: Myths Vs. Realities – IntoTheBlock – October 23, 12pm ET
3Q19 Webinar – Digital Asset Research – October 24, 5-6:30pm ET
Inside OTC: Liquidity, Risk & Derivatives in Crypto Assets – CoinDesk – October 28, 12pm ET
Distributed Systems, the Fintech Revolution and the Public Sector – Global Digital Finance (GDF) - October 29, 8am ET
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Previous newsletters: 44, 45, 46, 47, 48, 49, 50, 51, 52, 53, 54, 55
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CoinDesk is not an investment advisor. This newsletter is for informational purposes only, and any comments here do not constitute investment advice. |
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