Crypto Industry Report #1
Balzers (LI), 11 February 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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USA: CBDCs are being researched and the Fed is collaborating with other central banks
Last week, Lael Brainard, a member of the US Federal Reserve board of governors, said that the central bank was analysing whether a US CBDC could be beneficial to reduce the impact of private projects such as Libra.
In fact, she claimed that the sudden announcement of the Libra global stablecoin project by Facebook created urgency to discuss and research CBDCs, since Facebook’s user base is around a third of the worldwide population.
Brainard mentioned that the Fed is collaborating with other central banks in the research and analysis of CBDCs and that given the importance of the dollar, the US must remain at the forefront regarding the development of a CBDC.
Assessment
Brainard said that while other countries were claiming that the reduced usage of cash, weak financial institutions or underdeveloped payment systems were key reasons for launching a CBDC, she mentioned that in the US these motivations do not apply as advantages or reasons for a CBDC. This is because cash in circulation is increasing, there is a strong banking system and the dollar plays a major role globally.
Some potential advantages of a CBDC that the Fed would like to analyse are whether payments could be safer with reduced operational costs. However, she said that whether new risks would be introduced in the financial system should be researched in detail as well.
The recent claims of Brainard are especially important since previously she denied any comments about the Fed launching a CBDC. In fact, she said previously that there was no clear need for a CBDC issued by the Fed.
Nonetheless, the announcement of Libra seems to have led central banks to consider CBDCs seriously and to start and accelerate the testing, researching and collaboration. The magnitude of the Libra stablecoin with its planned global reach, the Facebook user base and the major corporations that joined the Libra Association, had a very significant effect on how central banks including the Fed are approaching CBDCs.
Other central banks announced recently a group to research CBDCs including Sweden, Canada, Switzerland, the UK and Japan.
In addition, the European Central Bank (ECB) and the Bank for International Settlements (BIS) are also part of the group. Recently, they announced that their first group meeting will be held in April.
The Fed has not joined the group, but Brainard stated that the US central bank was also collaborating with other central banks regarding the research and experimentation about CBDCs.
Brainard also claimed that before the Fed can decide whether to issue a CBDC, there are several key legal, policy and design issues that would need to be addressed first.
Also, it has to be confirmed that some expected benefits of CBDCs will provide the results like reducing complexities in payments, improving end-to-end processing or simplifying record-keeping.
In addition, the requirements regarding cooperation for cross-border CBDC payments should be clarified as well as the intermediaries that would provide CBDC transaction accounts for consumers. Some central banks are considering CBDCs only for financial institutions, but other intermediaries could require additional or new supervision.
Moreover, risks have been mentioned if commercial bank deposits are converted into CBDCs since the public could withdraw the funds faster and this may lead to a higher bank run risk and therefore affect the financial stability.
Other issues to be considered are whether the CBDC would have legal tender status or how the existing provisions of the Federal Reserve Act would apply.
Therefore, it seems that the announcement by Facebook of the Libra global stablecoin led to an important consideration by central banks of CBDCs and increased research and cooperation.
In 2020, the first tests of CBDCs could be launched although it seems that other countries may begin the testing before the US.
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CME bitcoin futures crossed $10k and the open interest is at a five-month high value
The price of bitcoin last week crossed the $10k level both in the spot and the futures markets. This represents the highest value since the end of October 2019 and the price so far in 2020 is showing around 40% gains.
Moreover, other major crypto assets like ethereum also raised significantly to prices last seen in August 2019.
The overall crypto market capitalisation, at around $285 billion, was also not observed since early August last year. Several factors may be influencing the current positive momentum in the crypto markets such as the upcoming halvings of BCH and BSV before the BTC halving in May, and also the expected launch of Ethereum 2.0.
Assessment
The weekly moving average convergence divergence (MACD) indicator recently moved above the zero line, which shows a trend change unless it is a ‘bull trap’.
The weekly MACD was accurate according to historical data for indicating major trend changes. While in late 2018 the MACD cross was finally a bull trap since the overall macro conditions at that time were not positive, in April 2019 the MACD move above zero indicated the beginning of the raise of the crypto markets until the peak in late June 2019.
The recent MACD cross above the zero line seems unlikely to be a bull trap given the positive macro factors such as the upcoming bitcoin halving event for example. Therefore, according to technical indicators, as well as fundamental factors, a new trend may have started.
The Chicago Mercantile Exchange (CME) bitcoin futures reached last week implied values above $10k, which is a major resistance. This represents a 3.5-month high value and the spot prices also briefly increased to values near the $10.1k level.
Similar prices were seeing in late October 2019 after the positive comments of the Chinese president about the blockchain technology. Prices at the CME bitcoin futures failed to remain above the $10k resistance but it seems that the overall momentum is becoming positive.
Apart from bitcoin or ethereum, the overall crypto market capitalisation increased significantly recently to levels not seen since August 2019. Notably, from the June 2019 peak of around $13.8k for bitcoin, it took 25 weeks to reach the bottom at $6.4k on December 18, however around 45% of this price decline was recovered in just the last seven weeks, which is a significant raise in a short time period.
Technical indicators show that the sentiment remains positive for bitcoin. There was a crossover of the 100-day and 50-day moving averages (MAs) recently, which is a positive indicator.
Moreover, the moving average convergence divergence (MACD) diagram shows gradually higher bars above the zero line and the relative strength index (RSI) still does not show overbought conditions.
This indicates that the positive momentum may continue, in particular given the implied value of the CME bitcoin futures above the $10k observed last week.
The bitcoin network also achieved a significant milestone by crossing the 500 million transactions since the blockchain went live over eleven years ago.
The open positions at CME, which is the number of open futures contracts, reached close to $250 million last week, which is a five-month high value. Regarding Bakkt, it also reached high volumes of around $13 million.
Apart from bitcoin, other crypto assets like ether for example raised significantly last week leading to an important raise of the overall market capitalisation. Some factors that may be affecting ethereum’s price raise could be related to the progress of Ethereum 2.0, which is expected to be launched by Q3 of 2020, and also due to some comments from the Commodity Futures Trading Commission (CFTC) mentioning that ether futures may launch before the end of 2020.
The futures markets have an important influence on the spot markets. As CME and Bakkt bitcoin futures, as well as bitcoin futures in other platforms, continue to increase their volume and attract more professional and institutional traders, the impact on the spot crypto markets may continue to raise.
Given the large bitcoin dominance, price movements of bitcoin have an impact on the overall crypto markets. Since CME bitcoin futures’ implied values showed levels above $10k, it seems that professional investors are factoring and anticipating the halving event in May.
How this halving event will be priced and traded on the futures markets is likely to affect spot prices, since generally when there is a gap between CME bitcoin futures and spot prices, the gap tends to be filled and converge towards the bitcoin futures price.
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Australia releases five-year National Blockchain Roadmap
The Australian Minister for Industry, Science and Technology, Karen Andrews, announced last week on February 7 that the national blockchain strategy was launched.
Previously, it was announced on March 18, 2019, that the country was developing the National Blockchain Roadmap. Therefore, there was a year of preparation before the launch of the national blockchain roadmap was announced last week.
The goal of the roadmap is to make the blockchain industry in Australia a global leader. The sectors that will be prioritised are the wine, banking and finance industries.
The roadmap covers the next five years and it will be relevant for the blockchain related work of regulators, researchers and startups. In addition, the Minister claimed that this sector is expected to be worth globally $175 billion by 2025 according to some estimations.
Assessment
The main goal of the announced roadmap is to improve Australia’s productivity over the next five years and therefore benefit from the opportunities provided by the blockchain technology.
A National Blockchain Roadmap Steering Committee was also introduced to supervise the strategies of the roadmap, including a model of collaboration between the government, research and industry sectors.
However, it is not clear whether the government has already allocated funds to implement the blockchain roadmap.
Several benefits of the blockchain technology seem to have motivated the development of the national blockchain roadmap.
In the supply chain sector, in particular in the wine sector that is one of the most successful export products in Australia, blockchain could improve the tracking of wine, the wine labelling and provenance and reduce costs as well. This could improve export opportunities of wine and other products.
Other relevant use cases of blockchain could be providing trusted university credentials and in general providing trust and reducing the risks of counterfeit products and certificates in different industry sectors.
Moreover, blockchain could facilitate reduction of costs, the creation of new jobs and businesses, and improve and contribute to the economic growth both in the public and private sectors.
Also, it was mentioned that blockchain, combined with other technologies, could further improve the benefits and the productivity of the country and add economic value.
Global advisory firms have done some research regarding the predicted business value of the blockchain industry. It has been estimated that by 2023 blockchain will support the global tracking and movement of $2 trillion worth of goods and services per year.
By 2025, the global business value of the blockchain sector is expected to reach $175 billion and by 2030 the value is estimated at above $3 trillion.
Moreover, regarding the cost reduction, by 2022 it is predicted that blockchain will contribute $15-20 billion in savings within the financial services industry and in particular in Australia $1.68 billion AUD in 2017 were the costs avoided by food and wine producers due to a reduction in counterfeiting.
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BaFin clarifies transitional provisions of new regulations for crypto custodians
BaFin, which is Germany’s financial regulator, clarified the transitional provisions related to the new blockchain regulations included as part of the 5th EU Anti-Money Laundering Directive (AMLD5) that went into force on January 1, 2020.
In particular, the transitional provisions are in section 64y of the German Banking Act (KWG). Companies related to crypto custody for which the transitional provisions apply would be subject to money laundering law from January 1, 2020, independently of the time of submitting the licence application.
Companies that were already providing crypto custody before the new regulations came into force will benefit from a grandfathering period and obtain the same protection that other firms have under the new law.
The requirements for the grandfathered crypto businesses are to announce their intent to apply for a licence by March 31, 2020 and then apply for the licence by November 30.
Assessment
The transitional provisions are required since firms already providing certain services when the law came into force require a certain time to prepare the application for the licence while still providing the same services to clients.
This type of transitional provisions exist also in other blockchain regulations which recently came into force such as the Blockchain Act in Liechtenstein, where companies providing crypto related services will have a period of time to apply for the required licences while continuing their services in parallel.
In the guidance, several types of crypto businesses and their licence situation are discussed to identify to which of them the transitional provisions can be applied.
Companies that are providing crypto custody to the German market but that operate outside of Germany, would benefit from the grandfathering period as long as services to German clients were provided by the time the law came into force on January 1, 2020 and that they notify of the intent of applying for a licence by March 31, 2020.
Moreover, those businesses that do not have a KWG licence and are contractually bound intermediaries that provide crypto custody, would also benefit from the transitional provisions until the licence is obtained.
Similarly, the grandfathering would apply to companies that have a KWG approval and were already providing crypto custody once the new regulations came into force.
However, companies that do not have a KWG approval and did not provide custody for German clients before January 1, 2020, would need to obtain the licence before services can be provided since the section 64y KWG would not apply.
Finally, for companies that did not previously require any banking transactions or other financial services related to crypto, since the term financial instrument was expanded to include crypto values, the situation is different.
If the crypto values related to the activity provided were assigned to another financial instrument category by December 31, 2019, then the transitional provisions would not apply. In particular, this could include services related to bitcoin and other virtual currencies.
The anti-money laundering (AML) regulations for crypto businesses are increasing globally. In Europe, countries had to implement the AMLD5 although some like the Netherlands could not meet the deadline and are trying to create stricter requirements than those in AMLD5.
Other countries like Singapore are also improving the legal framework regarding AML for crypto businesses.
However, the additional legal requirements are leading certain crypto businesses and startups to other countries since they are not able to cover the additional costs introduced by the regulatory compliance.
Given the rapid development of the blockchain technology and the surrounding infrastructure, there are some cases or technologies that are not covered by the recently introduced German blockchain regulations.
For example, the multi-party computation (MPC) method for storing crypto assets seems not to be addressed by the regulations. Moreover, innovative topics such as staking services may also not be fully covered in the legal framework.
However, the introduced regulations in Germany are an important progress to legitimise and increase the trust in the blockchain industry and, gradually, new custody developments and technologies may also be introduced and covered in the legal framework once lawmakers analyse and determine how the regulations would apply or which additional regulations would be required.
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SEC Commissioner proposes a three-year safe harbor period for token sales
Hester Peirce, a SEC Commissioner, formally proposed last week a regulatory sandbox for token sales, which would involve a period of three years as a safe harbor.
The sandbox is called Token Safe Harbor Proposal and the goal of the three-year period is to give projects enough time to build and develop their networks and change the tokens sold as securities during the token sale to non-security tokens used within their decentralised networks with an utility.
While it is still a proposal, the possibility that the SEC could implement such a sandbox environment for token sales in the US is relevant given the significant implications it could have on the crypto industry.
Assessment
While some tokens may be initially sold as securities and therefore would encounter difficulties with US securities laws, once the network is finalised and launched, these tokens may be part of the network with a clear utility and therefore they would not qualify as securities.
For example, there is an ongoing legal case of the SEC against Telegram’s TON token sale to US investors. SEC claims that TON’s grams tokens were sold as unregistered securities while Telegram claims that the tokens are not securities and they will be an important part of the network with a clear utility.
Therefore, the proposed sandbox could avoid these types of legal battles if it is finally implemented.
The proposed regulatory sandbox could be useful since while some projects may initially raise funds through ethereum with an erc20 token for example, the goal may be to do a token swap to the native network later once it is ready.
Then, the tokens could have utility within the network like staking tokens to support with security and the consensus and block production mechanisms. Other countries have implemented regulatory sandboxes in order to facilitate innovation and avoid a significant slowdown of the innovative crypto startups due to regulations.
Some of the advantages of the sandbox would be allowing projects to develop enough so they could successfully pass some of the requirements like the Howey test.
Moreover, the sandbox is designed to also protect those participating in token sales by requiring certain disclosures and applying anti-fraud provisions of the federal securities laws.
The safe harbor proposal defines two main phases of token sales. Firstly, during the three years an initial development team would manage the growth of the network. Then, the second phase would be the network maturity, in which the platform is operational and not controlled by a single entity.
Moreover, the sandbox environment recognises secondary trading as necessary both to allow developers and participants to do crypto or fiat exchanges and to allow users of the network to access and obtain tokens.
However, any illicit activities that lead to enforcement actions would not be protected by the proposed sandbox.
In addition, if projects choose to register and operate under existing securities regulations that would be possible as well.
Another characteristic of the proposed sandbox is that it may not apply to already operational projects, and instead the focus would be new projects in their initial phases.
If the proposed safe harbor for token sales is implemented, this could attract more crypto startups to the US to carry their token sales and develop their networks.
Furthermore, other countries may also decide to implement similar sandboxes, which could facilitate the innovation of blockchain startups and avoid existing regulations to slowdown the speed of innovation.
Given the significant development rate within the blockchain industry and the launch of new networks and tokens, like proof of stake and staking tokens, regulatory sandbox environments may become increasingly important since existing regulations may not cover these new tokens and networks or it may be uncertain how to apply existing regulations.
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