Crypto Industry Report #8
Balzers (LI), 12 November 2019
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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Council of EU and European Commission draft joint statement on stablecoins
As reported by Reuters last week, an EU draft document mentions that the European Central Bank (ECB) should assess the benefits and costs of issuing a central bank digital currency in collaboration with payment businesses.
The draft also suggests the development of a common regulatory framework for crypto assets. The document was prepared by the Finnish EU presidency since Finland holds currently the rotating presidency on the EU Council, which lasts six months. The initial text was discussed last week by EU finance ministers and further discussions regarding the adoption of the draft law, which is still subject to amendments, are expected during the next meeting on December 5.
The draft document mentions that EU regulators must ensure that new laws will cover and be applicable to all potential global stablecoins. It is also discussed that it was not possible for lawmakers to identify whether existing EU regulations would apply to some recent global stablecoin projects due to the lack of clarity. The draft requests that those entities intending to issue stablecoins in the EU must urgently provide adequate information for a proper assessment against the applicable existing EU regulations.
Assessment
The current draft could be approved next month, which could have important consequences. France, Germany and other European countries have already stated that they would not allow a global stablecoin such as Libra in the EU, therefore if the draft law is approved it would be possible to implement stricter measures against Facebook’s Libra or other similar stablecoins.
While European lawmakers recognise certain advantages of stablecoins, in particular for fast and cheap cross-border payments, they are concerned with keys risks such as consumer privacy, taxation or money laundering among other issues. In fact, the draft document states that until all those risks are properly addressed global stablecoins will not be allowed to launch in the EU in order to protect the monetary sovereignty in the European Union.
In addition, given the large user base of Facebook for example, EU regulators claim that those risks are greatly increased. It is likely that Libra triggered the concerns of regulators, since before Libra’s announcement the market capitalisation and magnitude of existing stablecoins, including Tether, was not significant for lawmakers.
In parallel to regulating global stablecoins, the EU is considering also the benefits of their own digital currency, which could be directly deposited at the ECB. This could have a significant impact for banks, since financial intermediaries would no longer be so relevant. Nonetheless, this might not happen soon given the large impact it could have on the financial system.
Although the existing European legislative framework does not include specific rules about stablecoins, there are some EU legal frameworks that could apply to stablecoins. The E-Money Directive may apply and could allow certain stablecoins to be offered across the EU market. However, e-money issuers have to comply with strict safeguarding requirements in order to protect customers.
Other European regulatory frameworks that may apply to stablecoins are the Payment Services Directive (PSD) depending on the use and the environment in which a specific stablecoin is operating. In addition, under the Alternative Investment Fund Managers Directive (AIFMD), stablecoins might qualify as units in an alternative investment fund (AIF).
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Crypto-friendly Silvergate bank goes public on the New York Stock Exchange (NYSE)
Silvergate bank’s shares started trading last week on the New York Stock Exchange (NYSE). The crypto friendly bank filed for its Initial Public Offering (IPO) a year ago and it received last week the approval from the SEC for the IPO. The shares are trading under the ticker ‘SI’ and Silvergate is planning to offer 3,333,333 shares of Class A common stock. Silvergate shareholders are offering around 2.5 million of the shares while the rest are being offered by Silvergate. Underwriters were granted a 30-day option from selling shareholders to buy up to an additional amount of shares close to 500k. The initial price per share was $12 and the shares are expected to be sold by November 12. The sale of shares by the shareholders will not provide any proceeds to Silvergate.
According to an IPO prospectus filed by Silvergate in September 2019, over 750 crypto related firms are clients of the bank. In addition, the Silvergate Exchange Network (SEN) facilitates efficient and real-time transfers of USD to exchanges continuously for institutional investors without the need of wire transfers since USD are sent between Silvergate bank accounts belonging to different clients.
Assessment
Silvergate’s IPO on the NYSE will provide certain advantages including efficient access to capital, improved liquidity, better recognition, public awareness and prestige. The capital raised could help Silvergate to further expand its activities as a crypto friendly bank.
However, as a public company, Silvergate may need to focus more on short-term results due to the market pressure instead of the long-term strategy and growth. Moreover, detailed audits and financial statements will need to be provided on a regular basis. This could be a disadvantage compared to private companies, which have more autonomy without thousands of external shareholders. Nonetheless, private companies offer less liquidity to investors and raising additional capital is more challenging than for public companies. Silvergate is planning to use the IPO proceeds to continue its growth, to repay long-term debt or for acquisitions.
Silvergate has three main types of crypto clients including crypto exchanges, hedge funds and VCs with a focus on crypto assets and other firms like miners or protocol developers. The number of clients has been raising significantly and currently Silvergate serves over 750 crypto related firms. Initially, Silvergate was planning to price each share for the IPO at $15 and was aiming to raise around $65 million. However, with the final price of $12 per share, Silvergate may raise a lower amount of around $40 million.
Silvergate has claimed that a large part of their business revenue is coming from non-interest bearing crypto deposits from their clients that they invest into interest-earning deposits at other banks or they provide lending opportunities. While Silvergate is one of the leading crypto friendly banks in the US, new crypto banks in Switzerland have recently received banking licences in both Singapore and Switzerland and there are other private banks in Liechtenstein and Switzerland which have served crypto firms for several years. Silvergate’s IPO seems to indicate that there is an important demand for crypto friendly banks and therefore a significant growth could be expected in the coming years.
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Coinbase introduces staking rewards for US retail customers
Coinbase announced that it will start offering staking rewards to retail customers simplifying the process of staking, and the first supported token will be Tezos. Previously in March 2019, Coinbase Custody already started offering this service for institutional investors, claiming to be the first regulated and insured staking provider. US customers, excluding residents of New York and Hawaii, will receive an estimated 5% annual return for holding Tezos tokens on the Coinbase exchange. Following an initial holding period of 30-45 days, customers will receive staking rewards every three days. Clients can either acquire the tokens on Coinbase or send them from an external wallet to start earning the staking rewards immediately. Coinbase will keep a commission of the staking rewards before distributing them to clients.
Assessment
While Coinbase Custody previously started offering staking for institutional clients, now Coinbase will also offer staking services for the first time to US retail customers starting with Tezos tokens. The estimated 5% annual return is based on the previous 90 days of staking returns. Binance also recently started offering staking rewards for certain crypto assets, which indicates a growing trend of staking services and products. The commission from staking rewards would be an additional source of revenue for exchanges. The support of staking tokens in the major crypto exchanges globally like Coinbase and Binance could increase the awareness of staking and accelerate its adoption and expansion.
With the upcoming launch of Ethereum 2.0, it seems that the staking trend may continue to grow and become more relevant. While Ethereum 2.0 is not expected to be fully operational until 2021, from January 2020 holders of ether will be able to lock their assets and receive an equivalent amount of so-called ETH2 in the new Ethereum 2.0 proof of stake (PoS) blockchain.
The equivalent of hashrate in PoS blockchains is the amount of tokens staked and, instead of mining firms, validators will propose and validate blocks. The main implication is that retail holders of staking tokens could participate in the security of the networks and therefore earn staking rewards. Since holders of staking tokens also have voting and governance rights, it is expected that Coinbase, Binance and other exchanges may soon start offering voting for customers in addition to the staking rewards.
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President Erdogan: Turkey to finish testing digital lira in 2020
According to Turkey’s official national publication Resmi Gazete, trials of the digital lira, which would be a central bank digital currency (CBDC), should be conducted and finalized by the end of 2020. The Presidential Annual Program of 2020 mentioned the plans for the digital lira to be issued by the central bank.
It is claimed that the project will be carried out by both Turkey’s central bank and the Scientific and Technological Research Council of Turkey (TUBITAK). In addition, the Turkish government included a CBDC in its 2019-2023 Eleventh Development Plan, which was published and submitted to the Turkish Parliament on July 2019 and it is aimed as a roadmap for improving Turkey’s economy.
According to an official translation, the plan states that a blockchain-based digital central bank currency will be implemented, and that blockchain will be utilized for transport and customs and also Internet of Things (IoT) to improve public services.
Assessment
Turkey is not the only country that is considering issuing a central bank digital currency. In fact, the European Union, China, the US, Venezuela, Sweden and other nations are researching and analysing the possibility of creating a digital currency. A CBDC could have major implications for the financial system structure and in particular for the role of banks and other financial intermediaries.
Recently, Turkey’s president Erdogan fired the central bank governor following disagreements about interest rates. Erdogan had criticized the central bank for keeping the rates too high, however the actions of the Turkish president were not welcomed due to the supposed independence of the central bank as a separate entity. On the other hand, this might help the development of a digital lira if the government decides to accelerate and implement the required processes.
Turkey is already attracting major crypto businesses such as Huobi, which plans to launch a fiat gateway in Turkey through a partnership with a large local bank in order to develop the required infrastructure and compliance standards. Huobi claimed that the partnership is expected to be announced in December and it was mentioned as well that the clearer blockchain legal framework in the country was an important reason to start operations in Turkey.
Furthermore, Turkey is the third country globally bringing the most traffic to Binance website and the founder and CEO of Binance, Changpeng Zhao, will be speaking at the Turkish Capital Markets Summit 2019 in Istanbul, scheduled for November 19-20, 2019. This event will include important members from the Turkish government, which indicates that the country is accelerating its involvement with blockchain technology and it is aiming to be among the global pioneers.
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Hong Kong’s financial regulator publishes a new licensing scheme for crypto exchanges
The Securities and Futures Commission (SFC), which is Hong Kong’s regulator, released last week a position paper on virtual asset exchanges introducing a new licensing scheme for which exchanges can already apply to be regulated.
Crypto exchanges would be considered as traditional brokers if they offer security tokens. The new regulations provide guidance regarding Know Your Customer (KYC) and Anti-Money Laundering (AML) rules. Other requirements include the limitation to offer products only to professional investors, the obligation to file a monthly report, the need of an independent auditor and the limited possibility of either modifying existing products or offering new ones, which could only be done with regulatory approval.
In addition, all assets must be insured to reduce the risk of hacks and a maximum of 2% of the total funds can be held in hot wallets. Crypto exchanges that receive a licence would enter into the SFC Regulatory Sandbox.
Assessment
Crypto exchanges that do not trade any securities, for example Bitcoin is not considered a security, will not need an SFC licence. However, if a crypto exchange is trading at least one security token, then it would fall under the new regulation. On the other hand, decentralized or non-custodial exchanges would not be considered by the SFC since they involve direct peer-to-peer transactions.
A previous SFC regulatory scheme was introduced in 2018 for funds investing over 10% of their portfolios in crypto assets and only one fund was approved so far. Therefore, it is unclear how many crypto exchanges may receive the new licence or decide to apply to obtain the licence.
The new rules may help certain crypto exchanges to further differentiate themselves from competitors by receiving the new licence, and thus fraud could be reduced. Nonetheless, the political situation in Hong Kong with China may lead some exchanges to relocate to other crypto friendly jurisdictions like Singapore, Liechtenstein or Switzerland.
Regarding crypto derivatives providers, offering bitcoin futures and similar products, the SFC claimed that they have not authorised the offering or trading of such future contracts. In addition, the SFC mentioned that it is unlikely that a licence will be granted for such trading activities. Some crypto exchanges like Bitmex had already restricted access to their derivative products in Hong Kong.
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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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