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Crypto Industry Report #20


Balzers (LI), 18 February 2020

This week, our blockchain experts assessed the following headlines:
 

+++ BitGo launches crypto custody subsidiaries in Germany and Switzerland  +++

 

+++ Coinbase Custody receives SOC 1 and SOC 2 certifications from a major accounting firm +++

+++ Cryptocurrencies mentioned in the 2021 US budget: emerging risks are addressed +++

 

+++ Know Your Transaction (KYT) compliance tool announced for Tether +++

 

+++ TON Community Foundation (TCF) launched by ecosystem participants ahead of TON’s first court hearing +++

 

+++ Crypto Market Update +++



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.


BitGo launches crypto custody subsidiaries in Germany and Switzerland 

BitGo announced last week that following raising demand from clients, two new custody entities were launched in Germany and Switzerland.

The German subsidiary called BitGo Deutschland GmbH will apply for a licence in November 2020 and the interest to apply for the licence has to be notified to Germany’s Federal Financial Supervisory Authority (BaFin) by March 31, 2020.

BaFin mentioned recently that a large number of applications from 40 banks, which are aiming to become regulated crypto custodians, were received  already and the volume of applications exceeded previous expectations.

Regarding the Swiss entity called BitGo GmbH, it will be regulated by the Financial Market Supervisory Authority (FINMA).


Assessment

The launch of the subsidiaries in Germany and Switzerland by BitGo is relevant since BitGo processes around 20% of all the bitcoin transactions and it is one of the leading crypto custodians.

BitGo mentioned that during 2019 there was an increasing demand to offer crypto custody in Europe in order to better serve firms regulated within certain European jurisdictions.

Through the establishment of international subsidiaries in chosen jurisdictions that are favourable towards the blockchain industry, BitGo would be able to provide better flexibility for their clients regarding their specific requirements including regulatory compliance.

The region around Crypto Valley, including Germany and Liechtenstein, is attracting crypto businesses and becoming a leading global blockchain hub.

While the blockchain regulations in Germany followed the requirements from 5th EU Anti-Money Laundering Directive (AMLD5), the Blockchain Act in Liechtenstein is a comprehensive legal framework and pioneer since it covers the different service provider roles as well as the tokenisation of any rights through a token container model.

Moreover, at the European level there is a consultation regarding unified blockchain regulations in order to avoid regulatory arbitrage among different European countries.

Following adjustments to the initial bill in Germany regarding the transposition of AMLD5, it was not finally required to offer crypto custody in a separate entity, which may be the reason for the high volume of applications received by BaFin from banks registering their interest to apply for the licence in November 2020.

These new crypto regulations in Germany or Liechtenstein provide additional trust and legitimise the industry, therefore banks may be aiming to enter the sector by applying for the licence.

Firms that would like to benefit from reduced capital requirements could launch the custody service in an independent entity that does not offer other financial services.

Institutional regulated crypto custody with insurance is a major component of the blockchain industry, and it is important to professionalise the sector and to attract additional institutional investors.

Moreover, custody will also be a relevant part of the raising staking trend since regulated custodian services with staking support will be required by institutional holders of staking tokens.

The expansion of BitGo to European jurisdictions indicates a growing client demand and favourable blockchain regulations, which may attract other leading crypto businesses.

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Coinbase Custody receives SOC 1 and SOC 2 certifications from a major accounting firm 

An announcement was published last week informing that Coinbase Custody had obtained SOC 1 Type 2 and SOC 2 Type 2 certifications from the accounting firm Grant Thornton.

These certifications allow Coinbase Custody to verify to their clients compliance with a number of reporting and security standards. The certifications cover the period from July 1 until December 31, 2019, and Coinbase Custody mentioned that these certifications will be renewed.


Assessment

Coinbase Custody, similarly to other crypto custodians, is providing the SOC reports to offer better transparency and assurance to their clients.

However, these certifications are voluntary, so certain custodians are deciding to provide these reports in order to differentiate themselves and to provide an additional security and quality assurance for their customers.

Both SOC 1 and SOC 2 certifications obtained by Coinbase Custody are type 2, which is an analysis over a minimum period of six months, while type 1 certifications cover just an specific point in time.

Type 1 reports identify the controls in place while type 2 certifications confirm the effectiveness of those controls during a minimum period of several months. In addition, SOC 2 reports differentiate from SOC 1 since their focus is on non-financial reporting controls and processes.

Before Coinbase Custody, other leading custodians also received similar reports from major audit firms. BitGo announced that they had obtained SOC 2 certifications, first type 1 and then also type 2.

Moreover, Gemini also announced SOC 2 type 2 reports, but both for their exchange and their custody solution. Therefore, while other custodians had previously received some of these certifications, it seems that Coinbase Custody is the first to have obtained both the SOC 1 and SOC 2 type 2 reports.

Coinbase also announced recently important developments regarding their Coinbase Commerce business as well as additional trading tools in Coinbase Pro. The stablecoin Dai was added as a supported payment method to Coinbase Commerce.

Given the collaboration of Coinbase Commerce with merchants such as Shopify or WooCommerce, which have a large network of stores and e-commerce webs, the integration of Dai may accelerate the adoption of crypto payments by merchants since the volatility risks are avoided.

In addition, if merchants choose to hold Dai instead of exchanging the stablecoins to fiat, they could earn and benefit from the Dai savings rate.

Stablecoins for payments are a growing use case for blockchain with major projects such as Libra currently under development.

Regarding Coinbase Pro, while previously certain margin trading of 3x was supported, it was then removed.

Recently, Coinbase announced that retail and institutional clients from certain US states or jurisdictions could benefit from the margin trading if some conditions are met like for retail clients their level of account activity for example.

Coinbase seems to be diversifying into several business cases such as trading, custody or crypto payments for commerce among others.

Recently, Forbes published a list of the 50 most innovative fintech companies in 2020, which included some blockchain firms, and in terms of total funding Coinbase was ranked in the eighth position of all the listed companies.

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Cryptocurrencies mentioned in the 2021 US budget: emerging risks are addressed

In the proposal for the 2021 US budget, there were several mentions of cryptocurrencies regarding certain risks that may be introduced.

The Secretary of the Treasury, Steven Mnuchin, mentioned during a US Senate hearing held to discuss the 2021 budget, that certain new requirements also related to cryptocurrencies would be included at the Financial Crimes Enforcement Network (FinCEN) to facilitate innovation while also preventing and reducing potential risks.

Moreover, to further prevent risks introduced by the raising technological complexity and innovation that includes cryptocurrencies, it is proposed in the budget that the US Secret Service should return to Treasury in order to improve efficiency and better prepare the US for emerging threats and risks.


Assessment

The budget is currently a proposal and the final federal budget will be confirmed through a resolution process in the Senate and in the US House of Representatives.

The US President previously mentioned cryptocurrencies via Twitter citing certain risks, so the proposed budget seems to plan a resource allocation for this type of potential emerging risks related to new technologies such as cryptocurrencies.

Tether announced recently that a compliance solution will be provided through the crypto analytics firm Chainalysis. This may indicate that crypto firms are anticipating enhanced anti-money laundering requirements (AML) and therefore increasing their efforts to remain compliant.

In the budget proposal, it is expected that Treasury, the Secret Service and FinCEN could coordinate with other entities as well such as regulators or financial institutions to reduce terrorist financing and other financial crimes.

The budget proposal includes the reconsolidation of the Secret Service with the Treasury Department with the goal of improving both cyber and financial investigations, related also to new technologies.

The budget proposal aims to improve the prevention of money laundering and terrorist financing, including due to emerging risks of new technologies like cryptocurrencies.

Moreover, the discussions about a digital dollar and the potential impact of central bank digital currencies (CBDCs) launched by other central banks, are increasing in the US within the Senate or the Federal Reserve for example.

While the Fed is not planning to launch a digital dollar, they mentioned that most central banks are researching and analysing CBDCs and the Fed was also collaborating with other central banks.

In particular, certain projects like China’s CBDC or Facebook’s Libra could pose a threat to the USD and therefore it is an important topic for the Fed.

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Know Your Transaction (KYT) compliance tool announced for Tether

A compliance solution for Tether was announced last week for real-time anti-money laundering (AML) provided by Chainalysis.

The solution, called Know Your Transaction (KYT), will be used for monitoring the usage of the Tether stablecoins from the token issuance to their redemption.

The KYT compliance tool will allow continuous tracking and identification of any high-risk or suspicious transactions. Moreover, as part of the KYT, an API and a user interface with several filtering tools are included to better track suspicious activity.


Assessment

There are growing requirements of enhanced AML compliance by regulators globally for crypto asset transactions, including for stablecoins.

Therefore, the KYT solution may be in anticipation of additional AML requirements for stablecoins. The European Union (EU) previously claimed that until all risks are addressed including AML risks, stablecoins may not be allowed to launch in the EU.

Ensuring AML compliance for stablecoin issuers could be challenging because the whole network activity requires tracking, therefore Tether may be aiming to include an AML compliance solution that would meet the requirements of regulators.

If high-risk transactions or tokens are identified through the KYT tool, Tether would not be able to confiscate those tokens but it would be possible to block the wallets containing those tokens.

The KYT tool will provide certain advantages such as the ability to organise token holders according to their risk profile, which would then allow to filter them and to identify the transactions or token holders with the highest risk that require priority.

Through KYT, Tether could improve the trust from regulators or users, in particular since users’ privacy will also be ensured, as their identifying information will not be shared.

This enhanced AML process could lead other stablecoin issuers or crypto businesses to also decide to improve their AML risk management, which may be positive for the overall blockchain industry by increasing the trust, transparency and reducing the money laundering risks.

Tether remains the largest stablecoin by market capitalisation and trading volume, and last year there was an important migration from Omni to Ethereum as well as a significant raise of its market capitalisation.

Since Tether was involved with Bitfinex and other related companies in lawsuits, this enhanced AML tool could bring more trust to Tether. However, the pending lawsuits would also still need to be resolved by proving that the fiat reserve corresponds to the total Tether stablecoin supply.

The company providing the KYT tool, Chainalysis, has already participated in several projects with US government agencies and it is among the leading crypto data analytics firms.

AML requirements for cryptocurrency transactions are raising globally, so other crypto businesses or token issuers may be required to include similar tools such as the KYT announced by Tether. Moreover, some may decide to provide enhanced AML in anticipation of more strict AML requirements.

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TON Community Foundation (TCF) launched by ecosystem participants ahead of TON’s first court hearing

Last week the launch of the TON Community Foundation (TCF) was announced and the website was also released.

The Foundation is a non-profit association of different ecosystem participants of the TON project such as developers, validators or investors among others.

One of the aims mentioned for the foundation will be community governance, through an elected Governing Council to coordinate the different participants within the TON ecosystem.

In addition, support for the development and promotion of TON will be done through education, grants, research or lobbying. The association was started by a member of TON  Labs, which is the startup developing tools for developers. Telegram is not mentioned as a member of the TCF.


Assessment

The launch of the TCF is related to the upcoming court hearing of TON scheduled for 18-19 February, in which Telegram would need to justify that TON’s grams tokens are not securities.

The TCF already started to support TON by defending Telegram through a filing to the US District Court of the Southern District of New York.

The TCF is composed of various groups like brokers, wallet apps, communities of investors and developers from different countries and startups. The TCF has the goal of improving the decentralisation of TON and it was mentioned that the project is ready but not launched yet due to the ongoing case with the SEC.

According to different comments, it seems that the timing of the launch of the TCF was related to the upcoming first court hearing of TON. The TCF could provide additional support and show a higher level of decentralisation, which could be beneficial during the scheduled hearings.

Moreover, this type of association or foundation is important to support blockchain projects and accelerate their development. While the ongoing case with the SEC delayed TON’s launch, the development has continued and the TCF could coordinate and support the growth within the TON ecosystem.

While there was a Telegram Foundation mentioned in the TON whitepaper, the TCF is not related to that entity.

In addition, Telegram previously said that they were under no obligation to launch a TON Foundation and given the need to explain during the hearings that TON’s grams are not securities and that the project is decentralised, the TCF may facilitate this better than a TON Foundation established by Telegram.

The TCF will not develop TON, however it could support with the development of the required ecosystem around TON through coordination, research and education.

To organise the TCF, there will be a Governing Council composed of eleven members, elected for a period of two years and selected by the rest of the TCF members.

In addition, there will be an Observer Pool as part of the TCF for better transparency composed of twenty organisations that are not part of the TCF.

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Crypto Market Update

Bitcoin’s price raised last week from around $9.7k to close to $10.5k with an increasing volume and then there was a correction to a similar price level as at the beginning of the week.

Due to the price increase of other crypto assets such as Ether, there was a reduction of the bitcoin dominance from 64% to around 61.7%, which was the lowest level since July 2019, although the dominance raised again above 63% towards the end of the week.

There is a potential upcoming golden cross of the 50- and 200-day moving averages (MAs), and the last time this cross happened was in April 2019.

Indicators such as the 14-day relative strength index (RSI) are showing near overbought conditions, however as long as bitcoin’s price remains above the support around $9.1k, the positive momentum is expected to remain.

Ether raised to a seven-month high value, followed by a correction, and this was in parallel to an increase in active addresses and in number of transactions.

The important price raise of bitcoin and other altcoins last week brought the overall crypto market capitalisation above $300 billion, however following the correction the market capitalisation then dropped to values around $275 billion.

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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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