Crypto Industry Report #29
Balzers (LI), 21 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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The Libra Association initiates FINMA licensing process
The Swiss Financial Market Supervisory Authority (FINMA) announced last week that it had received an application from the Libra Association, which is based in Geneva, for a payment system license under the Financial Market Infrastructure Act (FMIA).
While the licensing process has started, FINMA will not provide information regarding the timeline of the process or the ongoing status of the application.
The application has been done following the publication of an updated Libra whitepaper, which includes some significant changes from its original design such as the support of single-currency stablecoins in addition to the Libra payment token backed by several stablecoins.
Assessment
Given the international scope of the Libra project, it seems that FINMA will be discussing and collaborating not only with the Swiss National Bank (SNB) but also with a large number of other central banks and supervisory authorities globally.
Therefore, the licensing process may take longer than usual to be completed and it is likely that additional requirements related to money laundering risks for example will be imposed.
It seems unlikely that FINMA would take a decision without extensive discussions with international authorities and central banks, therefore the licensing process and a positive outcome may be a challenging process for the Libra Association, in particular with the clear criticism that the project faced previously in Europe or the US.
While the updated whitepaper was designed to address regulators’ concerns, some lawmakers have already mentioned that the recent updates have not changed Libra stablecoin’s status as a security.
Therefore, if the updated whitepaper does not still address all regulators’ concerns, the licensing process with FINMA may take significantly longer than usual.
Some important updates to the whitepaper include the creation of fiat-backed stablecoins in major currencies like the USD or the EUR, which will be used as the underlying stablecoins of the Libra Coin (LBR).
The LBR will be a smart contract based on Libra’s Move programming language, which will track and calculate the value of LBR based on the underlying single-currency stablecoins.
This differs from the original model in which several fiat currencies in a bank account would had backed the Libra Coin.
Since there are already successful fiat-backed stablecoins like USDC for example, Libra may have considered that they could also issue similar single-currency stablecoins, which would be regulated and feasible, and then they could link together these different stablecoins to back the LBR.
However, in the previous model users would send different fiat currencies to receive Libra Coin tokens, while in this new model it seems that users would first need to send fiat to get a fiat-backed stablecoin and then send these stablecoins to get Libra Coins in a two-step process.
Another important update is that unlike previous plans to make Libra fully decentralised in a few years, now the aim is to make the network more competitive and market-driven, only accessible by regulated entities at the beginning. In addition, certain wallets will have transaction and balance limits as well.
Fiat-backed stablecoins have shown an important growth recently, in particular Tether (USDT) and USDC. While USDT exists in several networks, UDST in Ethereum has been increasing and now it captures the largest percentage of the USDT supply.
USDC is also issued in Ethereum, therefore this growth of stablecoins has led to the transfer value within Ethereum to equal the amount on the Bitcoin network.
As stablecoins’ market capitalisation in Ethereum keeps growing, the impact of the upcoming shift to Ethereum 2.0 of these stablecoins will also become more relevant.
In addition, regarding the proposal of a digital dollar, while it has not been clearly mentioned yet whether it will be based on blockchain technology or not, discussions continue in the US with proposed bills for a digital dollar that would facilitate the distribution of stimulus payments to US residents given the major increase of unemployment in the recent weeks due to the Covid-19 pandemic.
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MicroBT announces three new mining devices ahead of the upcoming bitcoin halving in May
With the bitcoin halving event less than a month away, MicroBT announced the launch of three new bitcoin mining devices with higher efficiency to compete with rivals such as Bitmain.
The new devices are called WhatsMiner M30S+, M30S++ and M31S+ and they are already available with a delivery expected in up to thirty days. With the bitcoin halving event reducing the block rewards by half for miners, higher efficiency devices are demanded by mining companies to remain competitive.
Assessment
Bitmain recently announced the launch of new mining devices as well, therefore it seems that as the bitcoin halving event is approaching the demand is rising for more efficient devices as well as the competition among bitcoin mining devices manufacturers.
MicroBT reduced significantly the market dominance of Bitmain recently, however due to the current pandemic it is likely that there will be delays delivering the new mining devices.
Several mining firms are already concerned about this and the impact expected if they need to keep mining with less efficient devices after the halving event for an extended period until the new efficient devices are received.
The mining efficiency of the devices is measured in watts per terahash (W/T). A lower W/T ratio indicates less electricity consumption for each terahash of computing power. Therefore, a lower W/T ratio shows higher mining efficiency.
The new MicroBT mining devices have comparable mining efficiency to the new miners announced by Bitmain recently.
In particular, the M30S+ and the M30S++ have respectively 34 W/T and 31 W/T. In terms of hashrate, they offer 100 TH/s for the M30S+ and 112 TH/s for the M30S++.
The other model announced, the M31S+, offers 42 W/T however it is possible to improve its efficiency below 40 W/T. In comparison, the new Bitmain mining devices are in the range 34-30 W/T and 95-110 TH/s. Therefore, the new devices are comparable so the competitive advantage may be in the strategy to deliver the devices to clients faster in the current pandemic situation as well as the price of the mining devices.
In addition, both Bitmain and MicroBT have strategies to partially refund customers who bought devices at higher prices than at the time of delivery or to compensate for delays in the delivery.
Since there is no significant advantage in terms of mining efficiency comparing the new devices of Bitmain and MicroBT, their management of the delivery of devices as well as the partial refunds related to changes in the price or for extended delays in delivery may be the main differentiator for customer attraction and retention.
Since the expected mining capacity of the bitcoin network in megawatts is expected to increase significantly with major mining developments in places like Texas, the demand for efficient mining devices is expected to be high, in particular due to the bitcoin halving event in May.
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Andreessen Horowitz aiming for its second crypto investment fund3
As reported in the media last week, Andreessen Horowitz
also known as a16z, is aiming to launch its second crypto focused fund and the goal is $450 million in capital. This amount is higher than its first crypto fund of $350 million.
Moreover, the firm is part of the Libra Association and it is involved also in its funding. The exact details regarding the new fund are expected to be released in the coming weeks.
Assessment
If the amount of the new crypto fund is confirmed to be $450 million and the target is reached, this would mean that the crypto fund would be larger than its first fund.
Given the current macro environment with the pandemic, this would indicate a strong conviction in the crypto asset class and its future potential, including technical developments of the blockchain technology.
In addition, the injection of capital in the crypto markets would be positive since it is challenging to bring traditional fiat to the blockchain environment due to the requirement of fiat gateways.
Andreessen Horowitz is also involved with the Libra Association and similarly to the other members it has contributed to the funding of the project.
With the recent announcement by Libra of the updated whitepaper and the application to FINMA, it seems that the blockchain industry keeps progressing despite the current macro environment.
The upcoming halving event of bitcoin may also positively influence the industry, since according to historical data previous halving events had a positive impact on the price although not directly after the halving but around a year later.
Moreover, other crypto related funds are showing positive signs. For example, Grayscale raised over $500 million in Q1 2020, which is significant since during the whole year 2019 it raised a total of $600 million.
The most demanded products are bitcoin-weighted and ether trusts. According to Grayscale, its clients took advantage of the market volatility and low prices to increase their exposure.
Therefore, it seems that crypto investors are confident on bitcoin, ethereum and crypto-assets in general ahead of the bitcoin halving event and the upcoming launch of Ethereum 2.0.
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A $10 billion hedge fund is allowed to access CME Bitcoin Futures
As announced last week, the Medallion fund which is part of the well-known hedge fund Renaissance Technologies, was allowed to access the CME cash-settled bitcoin futures as part of its investments according to a SEC Form ADV.
The assets under management of the hedge fund are around $166 billion while the total assets of the Medallion fund are near $10 billion.
While it is unclear whether the fund has already invested in the CME cash-settled bitcoin futures, it seems that the investment may be considered given the information included in the Form ADV.
Assessment
The ADV form is used by investment advisers to register with the US Securities and Exchange Commission (SEC) and with state securities authorities.
In addition, it is required to provide to clients annually an update with changes to the initial form.
In the latest ADV form, Renaissance Technologies included information regarding Bitcoin futures for its Medallion fund, and although it is unknown whether the fund has already invested in the CME bitcoin futures, it seems likely that at least a small allocation would be added to this asset class given its inclusion as part of the allowed investments of the fund.
Even if an investment has not been made yet, the fact that the $10 billion Medallion fund is considering investing in bitcoin futures is significant given the track record of the fund.
Since the Medallion fund was created in 1988, it has reportedly offered an average of 66% annual return.
Moreover, up to the 14th of April 2020, the fund had a year-to-date return after fees of 24% while both the traditional and crypto markets showed important price drops.
In the month of March, the Medallion fund still provided a positive 9.9% return. These returns, in particular the average 66% annual return since the fund creation, are an exception since not many other hedge funds have provided returns similar to those levels.
Therefore, if this fund is considering investing in bitcoin futures it indicates that the asset class has become mature enough to have the consideration of this hedge fund.
Although the investment strategy may be complex, the fact that the Medallion fund has invested or is considering investing in bitcoin futures provides additional credibility and a higher institutional level for bitcoin and for crypto assets in general.
The Medallion fund, given its reputation, could attract other hedge funds which would be positive. However, the CME bitcoin futures are cash-settled meaning that the hedge funds will not hold bitcoin.
Nevertheless, they may consider later the Bakkt physically-settled bitcoin futures for example. Currently, through the CME cash-settled bitcoin futures, they could gain an exposure to price movements of bitcoin and given the size of the Medallion fund and of the overall hedge fund at around $166 billion, they could have an important influence in both the bitcoin spot and futures markets.
The involvement of a professional and experienced hedge fund in the crypto markets, for now in the cash-settled bitcoin futures market, it is a positive development and it shows a growing awareness and interest in the asset class.
The upcoming halving event of bitcoin may have also influenced the decision to gain exposure to its price following the halving.
The hedge fund has included in the ADV form a comprehensive list of risks associated with bitcoin, indicating that they are analysing the crypto asset in detail.
Some of the main risks mentioned are: market risks like price volatility, correlation to other crypto assets or risks of manipulation of bitcoin spot exchanges, regulatory risks with undeveloped bitcoin regulations, no recognition of bitcoin as legal tender by any government and no central authority issuing or controlling bitcoin.
Other risks mentioned are its limited history and also the possibility of forking. Given all the mentioned risks, the fund may begin with a small allocation to bitcoin futures, however as regulations and trading improve the fund may consider larger investments and other hedge funds may follow Renaissance Technologies and begin investing also in bitcoin futures.
While the CME outstanding bitcoin futures contracts is still below the peak of 2020 at around $338 million, it has recently increased significantly following the drop in March, which may indicate that the Medallion fund or other investors may have started to invest.
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Dutch AMLD5 implementation introduces central bank’s supervision with significant costs for crypto businesses
According to certain reports, the specific implementation of the EU fifth anti-money laundering directive (AMLD5) in the Netherlands involves the supervision and monitoring of the central bank.
However, this supervision requires high costs that will be passed to crypto businesses in the country.
These additional compliance fees are reportedly higher than for other businesses such as credit card companies.
Therefore, the crypto industry has shown criticism to the AMLD5 proposed implementation in the country.
Assessment
The deadline to implement the AMLD5 was January 10, 2020. However, certain countries like the Netherlands were not able to meet the deadline.
Each country in the EU designed a specific and tailored implementation of the AMLD5, and certain nations included more stricter requirements that what was required in the AMLD5.
The Netherlands proposed implementation of AMLD5 previously led several crypto businesses such as options exchange Deribit to leave the country, in particular due to the high expected compliance costs.
Recently, more information was released indicating that the cost related to the central bank supervision for fifty mentioned crypto companies would be in total $1.8 million.
While it has been clarified that there will be a mechanism so that larger companies would pay more fees, the details are still not clear, and several crypto businesses are concerned that they may not be able to cover this additional cost.
In addition, while the Netherlands did not meet the AMLD5 deadline on January 10, 2020, there were comments that the implementation could have been ready by the end of February.
However, the current situation with the pandemic seems to have delayed the implementation. Discussions were being held at Netherlands’ first chamber, which is equivalent to the Senate in the US, regarding the AMLD5 implementation in the country and its entry into force as legislation.
However, with the pandemic, discussions are now being held through email and the progress is reportedly still unclear.
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Crypto Market Update
The crypto markets showed a certain recovery last week with the overall market capitalisation raising from around $191 billion to over $207 billion.
Bitcoin’s price also increased from $6.7k to $7.2K, although this is still below the 100-day and 200-day moving averages (MA), which are both around $8K.
However, the current price of near $7.2k is above the 50-day MA. Ethereum’s price also showed an important recovery moving from $152 to over $180.
In addition, the open interest of CME bitcoin futures raised around 70% to $181 million from the drop in March, although the number is still far from the 2020 peak at around $338 million.
The volume of bitcoin options trading also increased, although put options are showing higher demand indicating a concern of another potential drop in price.
However, in contrast to this, more investors are withdrawing their BTC from exchanges ahead of the halving event, indicating a positive sentiment since when investors are planning to sell more BTC is sent to exchanges.
Regarding the traditional markets, the Cboe Volatility Index (VIX) remains stable around 40, but this is still a high value. The global developments regarding the Covid-19 pandemic and the measures by governments and central banks are likely to have a major impact on the traditional markets which would also influence the crypto markets.
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