Founder of Astral Crypto.

G20 Countries Agree to Support Virtual Currencies

Over 55 Senior Finance Ministers and Central Bank Governors met on July 21 and 22 to discuss economic cooperation in global economic policies. Digital currencies and cryptocurrencies were among the topics on the agenda. The participaants for the U.S. were Steve Mnuchin, Secretary of the Treasury, and Jerome Powell, Chairman of the Federal Reserve, who both report directly to the U.S. President. In the G20 press conference on July 22, the President of the Central Bank of Argentina gave a statement about how the G20 countries expressed their full support for digital currencies during the meetings. They focused on how digital currencies provide technological benefit, increase financial inclusion (especially in less developed countries), and do not represent a global risk to the financial system. The G20 countries also expressed their desire to reduce digital currency use for illegal activities (presumably for things like fraud and terrorist activities).

Read the full statement below (translated to English):

“We discussed a lot about financial regulation and financial inclusion, and here we really focused on the new technologies with all the benefits entailed, and also of course to monitor the eventual risks. We talked about the crypto assets and the cryptocurrencies. The consensus showed that they don’t represent a global risk on the financial system, but of course, as I said before, we really took into account that given the fact that these are technologies that are only beginning, that are in their infancy, we have to really control them and also survey everything that has to do with illegal activities. Now, regarding the financial inclusion, there was full consensus reached, and of course that financial inclusion contributes to growth and the improvement of the standard of living of all the citizens. There is full support of this topic and we focus especially as the Minister said on the digitalization and the benefits entailed by it, especially in less developed countries where the informal economies represent an important percentage of the economy. So digitalization will be a first step towards formality, and also always under the assumption of monitoring everything that has to do with customer protection, and as I said before, also check in any kind of illegal activity. That is essentially the summary.”

In the Past Year, U.S. Congress Has Taken a Serious Interest in Cryptocurrency and Blockchain

The United States Congress is taking a fast growing interest in cryptocurrency and blockchain technology. In the past year alone, Congress has:

  • Formed the Congressional Blockchain Caucus (“CBC”) to help the development of blockchain technology and  leverage the benefits of blockchain for the American people;
  • Introduced a bill to encourage every-day cryptocurrency transactions;
  • Published a detailed economic report in support of blockchain technology;
  • Passed two laws and introduced numerous bills regarding the use of blockchain and cryptocurrency in cybersecurity and illicit financial activities.

Congressional Blockchain Caucus

The most recent 114th Congress founded the bi-partisan Congressional Blockchain Caucus with a foundational belief in the future and advancement of blockchain technology. The CBC wishes to guide Congress to play a hands-off regulatory approach in order to encourage natural technological development of blockchain. The group is interested in blockchain’s potential to significantly improve identity management, asset tracking and ownership, healthcare records management, intellectual property rights, and much more. The CBC’s main focus is on data ownership, healthcare, and government applications of blockchain technology. Congressmen David Schweikert [R-AZ6] and Jared Polis [D-CO2] are co-chairs of the CBC. Fourteen other Congressional CBC members and are listed on the CBC website.

Financial Transactions

On September 7, 2017 Schweikert and Polis also introduced Congressional bill H.R. 3708. The bill aims to amend the Internal Revenue Code of 1986 to allow cryptocurrency transactions under $600 to be tax-free. Currently, cryptocurrency transactions in the U.S. are treated as taxable income which makes it expensive and impractical for people to use cryptocurrencies for every-day transactions such as buying coffee, paying for an Uber ride, or paying a friend back for concert tickets.

2018 Joint Economic Report Supports Blockchain Technology

Congress also published a Chapter on blockchain technology in its 2018 Joint Economic Report titled, “Chapter 9: Building a Secure Future, One Blockchain at a Time.” The report encouraged Congressional support for blockchain technology. It covers topics such as the cryptocurrency economy, blockchain technology, regulatory challenges, and blockchain’s uses in cybersecurity, critical infrastructure, digital infrastructure, medical records, and supply chain management.

Cybersecurity and Illicit Financial Activity

As of now, there are two laws referencing the topic of blockchain technology and cryptocurrency. Both laws focus on cybersecurity and illicit financial activity. There are currently twelve more bills circulating through Congress that reference blockchain technology, digital currency, and cryptocurrency in relation to cybersecurity and illicit financial activity.

The Countering America’s Adversaries Through Sanctions Act (“CAATSA”) was signed into law on August 2, 2017. CAATSA, in part, tasks the President to develop a comprehensive national strategy to prevent illicit financial activities within the U.S. financial system. Section 262(8) requires discussion, data, and analysis of cryptocurrencies used for illicit financial trends.

The National Defense Authorization Act for Fiscal Year 2018 (“NDAA”) was introduced on June 7, 2017 and signed into law on December 12, 2017. Section 1239A of the NDAA tasks the

Secretary of Defense and Secretary of State to develop a strategy to counter the threat of malign influence by the Russian Federation. Part of the strategy will counter the potential coercive use of cryptocurrency by the Russian government.

Section 1645 of the NDAA tasks the Secretary of Defense and other appropriate federal departments and agencies to provide Congress a briefing on the cyber applications of blockchain technology by June 10, 2018 (180 days from enactment). The briefing will be provided to intelligence, homeland security, and financial committees of Congress. It will be unclassified, but may include a classified supplement.

The blockchain briefing will include:

1) A description of potential offensive and defensive cyber applications of blockchain technology and other distributed ledger technologies (“DLT”);

2) An assessment of efforts by foreign powers, extremist organizations, and criminal networks to use blockchain and DLT;

3) An assessment of the use or planned use of blockchain and DLT by the federal government and critical infrastructure networks; and

4) An assessment of the vulnerabilities of critical infrastructure networks to cyberattacks.

Congress is quickly learning of the benefits of blockchain technology, and is more interested now than ever to harness its power. The interest and support of U.S. Congress is a positive sign for the future of blockchain and cryptocurrency.

Binance Listing Effect on Cryptocurrency Price

This article analyzes the effect of Binance listings on a cryptocurrency’s price. During 2018, Binance has generally been the first or second highest overall volume cryptocurrency exchange in the world. Such high volume can increase demand for a cryptocurrency and thus increase the price of the cryptocurrency, especially on the day of the Binance listing.

General findings:

  • The average maximum profit potential from Binance listings is 109%.
  • The average percentage price change from a week before Binance listing to a week after Binance listing is 32%.
  • All 15 cryptocurrencies increased in value on the day of Binance listing compared to the day before Binance listing.
  • 13 of the 15 cryptocurrencies decreased in value on the day after Binance listing. Profits are usually highest buying before Binance listing and selling on the same day of Binance listing.
  • 8 of the 15 cryptocurrencies maintained an increase in value from a week before Binance listing to a week after Binance listing. 7 of the 15 cryptocurrencies decreased in value from a week before Binance listing to a week after Binance listing. This could be attributed to overall crypto market sentiment. Cryptocurrencies generally maintained the most value over the two week period when Bitcoin prices were rising or stable.

Data analysis:

The data contains fifteen cryptocurrencies listed on Binance from February 2018 to May 2018. There are five data price points for each cryptocurrency: 1 week before listing; 1 day before listing; day of listing; 1 day after listing; 1 week after listing. There are two data percentage points for each cryptocurrency: Maximum % Gain (how much total profit could be made from buying low and selling high) and; 2 Week % Change (the difference in price from 1 week before listing and 1 week after listing). Each data set contains a Bitcoin 2 week change percentage to help people identify the overall crypto market sentiment during the 2 week period. Each data price point uses the cryptocurrency daily high price.

 

U.S. Congress Officially Supports Blockchain Technology

The March 2018 United States Joint Economic Committee Report officially endorses the future of blockchain technology and cryptocurrency in the U.S. Chapter 9 of the report discusses blockchain, and is titled “Building a Secure Future, One Blockchain at a Time.” Chapter 9 begins by saying Blockchain is “not only nearly invulnerable to cyberattack but is revolutionizing the way the world conducts commerce and shares information.”

General Report

In the report’s general opening, Congress acknowledges, “it is important to proceed with prudence and provide proper guidance to the market… and not prejudge or hinder technological developments.” They continue, “The new technology also may be attractive for Government to use, improving efficiency in its own operations.” See p. 20-21. It appears Congress is looking to regulate Blockchain in a way that allows technological innovation to flourish and become integrated with already existing markets. That is incredible news for the future of crypto and blockchain in the U.S.

Congress sees valuable uses for blockchain in the medical sector. The report acknowledges that blockchain could help coordinate health records by reducing paperwork burdens and preventing medical errors. p. 22. It also acknowledges blockchain technology could provide powerful solutions for portability, enabling medical records to be carried on smartphones and mobile devices with very little risks of vulnerability to cyberattacks. p. 198.

Congress sees Blockchain’s revolutionary uses for enabling global economic participation. The report views blockhain as “a secure transmission and recordkeeping technology in its infancy with vast potential to revolutionize the forms in which we transact and document commercial activity of virtually any kind around the world.” p. 166. 

Chapter 9 Report

The Ch. 9 report lays out three main points about blockchain. p. 201

  1. Blockchain is a potential tool for securing America’s digital infrastructure, protecting against economic losses, cyberattacks, and threats.
  2. Blockchain technology became mainstream in 2017, and provides both cybersecurity and many other potential benefits.
  3. Blockchain technology could revolutionize the world’s digital landscape and economy. Blockchain innovations and markets present U.S. institutions with unique regulatory challenges.

Growing Public Interest In Cryptocurrency

The report calls 2017 “The Year of Cryptocurrencies.” It shows how “Bitcoin” searches skyrocketed, while “blockchain” and “Ethereum” moved out of relative obscurity. The report also shows how the Dow Jones Industrial Average (DJIA) grew over 24% and the S&P grew over 17%, but that cryptocurrency growth made stock market gains seem meager in comparison. p 202-203

 

Pages 205-207 impressively and accurately define blockchain technology and cryptocurrencies. “Blockchain is the distributed ledger technology that underlies digital currencies such as Bitcoin. A ledger is the accounting tool that tracks the movement of money from one person or account to another. Conventionally, such records are stored in central locations like banks, headquarters, and Paypal servers. Blockchain revolutionizes ledger technology with a network of distributed ledgers. Instead of one central, authoritative record of all transactions or information, blockchain creates potentially thousands of identical ledgers in computers and servers all over the world.” The definition goes on to define Proof-of-Work (PoW) consensus, and discuss the differences and uses of Bitcoin and Ethereum.

Cryptocurrency As Actual Currency

Pages 207-209 discuss the challenges cryptocurrencies face to be accepted as actual currency. The report’s conclusion is that cryptocurrencies resemble real assets or commodities more than currencies, though their future role could expand to include functioning as mediums of exchange. Currency must serve three functions: medium of exchange, unit of account, and store of value. The report shows Bitcoin’s limitations as a medium of exchange, citing long transaction times and high fees, and further acknowledging that protocol improvements and off-chain solutions could speed up processing times and reduce transaction fees to help move cryptocurrency into the realm of actual currency. The report also mentions that extreme volatility impairs cryptocurrencies’ use as money. Compared to the annual U.S. dollar loss value of about 2% to inflation, cryptocurrency values are much more unpredictable. The report suggests decreasing volatility would help cryptocurrency be used more successfully as actual currency.

Initial Coin Offerings (ICOs)

Pages 209-212 discuss ICOs and their recent explosion in growth. It acknowledges that “[a]n ICO consolidates two important elements of building a new economic ecosystem, obtaining funding and creating a network.” The report says how ICOs do not offer equity and are much less expensive than an Initial Public Offering (IPO). The report also estimates that most ICO projects will likely fail, as most startups do, but the ones that survive could transform the way the internet and technology works for decades to come.

Blockchain Innovations

Pages 212-215 discuss blockchain innovations and uses. The article importantly distinguishes that cryptocurrency headlines often only focus on financial applications but miss the digital revolution with blockchain’s technological applications. The report again mentions how blockchain could be used for health care providers, patients, and policymakers to store medical records digitally and securely. New blockchain products help coordinate payment (healthnexus), monitor and reward patients for following clinical recommendations (RoboMed Network), track pharmaceuticals along the supply chain (MediLedger), identify specific supply chain problems such as those associated with the opioid crisis (BlockMedx), and protect Americans’ private medical data. As a side note, I find the report’s mention of these specific blockchain projects interesting. Maybe the government is considering moving towards adopting and using specific blockchain projects.

The report also mentions that ” [f]rom applications ranging from management of the electrical grid and utilities to how companies manage global supplies, the potential for blockchain is truly revolutionary. Pages 214-215 continue to give examples of blockchain’s technological value.

Problems and Misuses

Pages 215-218 discuss issues with blockchain and cryptocurrency, along with potential misuses. The report acknowledges theft from centralized exchanges as a potential issue, citing Coinbase as a potential vulnerable storage space for cryptocurrency, and using the Mt. Gox exchange hack as a historical example of the risk. The report also mentions that some economists estimate that about 25% of all users conduct illegal transactions on Bitcoin. The report continues to mention how rapid appreciation in value of cryptocurrencies and ICOs contributed to unease about blockchain technology, causing wild volatility and speculative bubbles to arise in the market. The report also mentions DogeCoin as a “warning sign” in the market, because it is a “joke,”, but fails to realize that 1 DOGE always equals 1 DOGE.

Regulations

Pages 218-225 discuss the future of Cryptocurrency and Blockchain regulations.

Securities Regulation

The SEC has recently started pursuing more enforcement actions against new tokens for both securities registration issues and fraud. Securities as defined by the Securities Act is a contract, transaction, or scheme whereby a person: 1) invests her/his money in 2) a common enterprise, and is led to 3) expect profits 4) solely from the efforts of the promoter or a third party. Tokens can be classified as securities, but can also be exempt under the definition and qualify instead as utility tokens. Regulations may be needed to further clarify how cryptocurrencies fall under the Securities Act.

Taxation

The report acknowledges that questions remain about how to tax cryptocurrencies. It makes distinctions between the U.S. dollar and foreign currency (taxed as property rather than currency). Currently, cryptocurrency is taxed as property under U.S. tax laws, making transactions and appreciations in value subject to income and capital gains taxes. The report acknowledges that the current tax structure could freeze investment and exploration into new virtual currencies, especially for smaller transactions such as coffee purchases (people apparently really want to buy coffee with cryptocurrency). Congressional representatives Schweikert and Polis introduced a bill proposing a solution – the Cryptocurrency Tax Fairness Act of 2017 – that would exempt taxation for virtual currency purchases under $600. The bill has yet to become law, but the report estimates that as virtual currencies continue to become more popular, more bills on the topic will be introduced.

Money Transmission

The report discusses the issue of transmitting money for virtual currency, and that it currently could require money transmitters to obtain licenses to operate separately in every U.S. state (except Montana). The report presents solutions, such as the Uniform Law Commission, a nonpartisan commission to create consistent state laws that could draft and approve legislation that would clearly and uniformly define what virtual currency businesses need to file to become money transmitters. However, that solution could take years for the legislation to be enacted in all U.S. states. The report encourages Congress to look at many solutions to this problem, and will present a rigorous cost-benefit analysis. As a side note, money transmitting for virtual currency is incredibly important to allow mass-adoption of cryptocurrency. It is often difficult to transfer fiat money into cryptocurrency. There are many steps involved in the process, and it can be slow, technical, challenging, and uncertain. Finding a good solution to the money transmission problem is going to be a major step in opening the cryptocurrency market, bringing down barriers of entry, and increasing market-place demand.

Future Regulatory Questions

The report encourages Congress to find solutions that balance the needs of consumer protection, security, and entrepreneurship. It pushes for a common and coordinated regulatory framework that creates clarity in the industry. It recommends regulations that are not overly prescriptive or constraining, so blockchain technology will be allowed to reach its full potential.

Conclusion

The conclusion on pages 225 and 226 makes four recommendations:

  1. Policymakers and the public should become more familiar with digital currencies and other uses of blockchain technologies, which have a wide range of future application.
  2. Regulators should continue to coordinating with each other to guarantee coherent policy frameworks, definitions, and jurisdictions.
  3. Policymakers, regulators, and entrepreneurs should work together to ensure developers can quickly deploy blockchain technology to protect Americans from fraud, theft, and abuse, while ensuring compliance with relevant regulations.
  4. Government agencies at all levels should consider and examine new uses for blockchain technology to help make the government function more efficiently.

Overall, this is an enormously positive endorsement from the U.S. Congress. We will likely see cryptocurrency and blockchain technology flourish throughout the United States. It is a bright future for Americans involved in blockchain technology and the cryptocurrency marketplace.

Risks of Centralization in Crypto – Ripple and NEO

The crypto community often praises decentralization as one of blockchain’s strongest features. According to Ethereum creator Vitalik Buterin, “Blockchains are politically decentralized (no one controls them) and architecturally decentralized (no infrastructural central point of failure) but they are logically centralized (there is one commonly agreed state and the system behaves like a single computer).”

While Bitcoin and Ethereum are widely considered decentralized networks, their Proof of Work (PoW) consensus leaves questions in the overall strength of their decentralization. Ethereum is moving toward further decentralization by implementing Proof of Stake consensus (PoS) through its Casper project. However, developers are now creating newer consensus protocols that offer even more solutions to problems with network centralization.

As  blockchain technology grows, we are beginning to see concrete examples of why decentralized networks offer more security and functionality than centralized networks. Centralization creates issues with both network control and functionality, and can have a negative impact on the value of the cryptocurrency itself.

Political Decentralization – Issues With Centralized Coin Control – Ripple

Lawsuit – R3 v. Ripple

In 2017, R3 sued Ripple in Delaware and New York for breach of contract. According to R3, Ripple violated its agreement with R3 to supply R3 with the option to purchase up to 5 billion XRP coins at a price of $0.0085 each ($42.5 mil total) at any time before the end of 2019. XRP coins are currently trading around $0.70.  5 billion XRP is now worth about $3.5 billion, an 82x increase in value from the contract price. Ripple responded to the lawsuit by convincing the Delaware court to dismiss the Delaware suit, and petitioned for the case to be heard in Ripple’s home state of California. However, a California court of appeals recently ruled that it would not hear the legal dispute. The final outcome will be decided by a New York court, where New York based company R3 will have a home court advantage. Ripple did file a counter-claim against R3 for entering the contract in bad faith and using the partnership to steal Ripple’s expertise in order to develop a competing product. It will be up to the New York court to resolve the claims between both parties.

Centralized Coin Management

Ripple maintaining centralized control over most of its coins and agreeing to sell them under contract could cause serious consequences for the value of XRP.

At launch, Ripple created  a total of 100 billion XRP. 20 billion XRP were given to the founders, and the remaining 80 billion were transferred to Ripple Labs to “incentivize market maker activity to increase XRP liquidity and strengthen the overall health of XRP markets.” In 2017, Ripple decided to commit 55 billion XRP (89.17% of its remaining 61.68B XRP holdings) into escrow in order to remove uncertainty that Ripple may liquidate its entire holdings – a move that would over-supply the market with XRP and dramatically drive XRP price value down. Ripple placed the 55 billion XRP in escrow, allowing 1 billion XRP to unlock on the first of each month until 55 months pass. All unsold, unlocked XRP would be replaced back into escrow until month 55.

While Ripple’s decision to lock most of its coins in escrow increased transparency and calmed XRP holders, it left billions of XRP under Ripple’s control and allowed Ripple to sell up to 12 billion more XRP each year. The overall issue of Ripple’s centralized coin management is now at play in a lawsuit that could be dangerous for the value of XRP. If Ripple loses its suit to R3, the possibility arises that the court could order Ripple to allow R3 to exercise its option to purchase 5 billion XRP for cheap. R3 could then liquidate its 5 billion XRP instantly, causing an over-supply of XRP in the market and decreasing XRP price – the problem that XRP holders were initially concerned about. Another possibility is that Ripple could end up liable for damages to R3 for the value of the contract. The New York court would have to decide if Ripple would be liable for the XRP’s current value or past value. A third possibility is that Ripple escapes R3’s suit altogether.

Conclusion

While many cryptocurrencies are concentrated in a small group of wallets, the control and distribution mechanisms of the cryptocurrency is often decentralized to many individuals and entities. Ripple maintains centralized control over an overwhelming majority of coins, and its poor business decisions or legal liabilities could create a negative impact on the value of the coin. Even if Ripple wins its lawsuit against R3, Ripple may continue to enter into contracts and sell XRP, placing potential strains on the value of XRP for any missteps Ripple makes.

Architectural Decentralization – Issues With Centralized Infrastructure – NEO

NEO’s current centralized infrastructure is causing issues with the functionality of its network, also harming the value of the NEO coin. As mentioned above, a properly decentralized blockchain is protected from failing nodes by decentralizing infrastructural points of failure.

Network Failure

On March 4, NEO’s network froze completely because of a single failed node. The failed node caused all remaining nodes to wait indefinitely for a reaction from the failed node. NEO restarted the failed node, but it did not become part of the pending consensus immediately, requiring all nodes to restart through a “forced changeview.” The network failure caused a several hour delay before the network began working again. Currently, NEO’s consensus nodes are operated under NEO’s control, and not by the users themselves. NEO has a relatively small number of nodes compared to many other decentralized blockchains. In October, 2017, NEO was running only 13 nodes. It appears the number of NEO nodes has over doubled since then, but the centralization issues remain.

Synchronization Problems

On March 10, NEO’s network had more problems with block generations occurring long times apart, and network transactions never arriving at their destinations. Funds took much longer to transfer between addresses than usual. Node synchronization issues appeared to partially cause NEO’s second round of network issues. While synchronization issues can be common for a blockchain, a decentralized architecture with a high number of nodes usually prevents synchronization issues from ever causing legitimate problems for the network.

Conclusion

NEO plans to further increase its amount of nodes, and will allow users to run their own nodes in the near future. However, NEO is currently a good example of why decentralization plays a fundamentally important role in blockchain infrastructure. At the end of February, one NEO was trading for over $140. Two weeks later, after encountering numerous network problems, one NEO is trading for about $72, and at about  64.5% of its Satoshi value from the end of February.

Explaining the March Crypto Crash

Cryptocurrency markets are crashing and you may be asking why.

Update 2: Binance announces they have localized irregular trades and will reverse them. Funds are safe because of their alarm system.

Update: Binance announces all funds are safe. Irregularities in trading activity triggered automatic alarms. The investigation continues.

  1. Many user accounts on Binance have been compromised. Binance is one of crypto’s largest and highest volume exchanges. The compromised accounts executed trades at many times above market value for certain coins. Viacoin (VIA) specifically saw abnormal volume increases to over 9,675 BTC in a 24 hour period on Binance. For perspective, Ripple, crypto’s third highest market cap coin, (XRP) had a 24 hour BTC volume of 5,887 on Binance. VIA saw a temporary value increase of over 11,225% in just two minutes.  Currently, it appears someone has taken control of users’ accounts that use API software (usually to allow trading bots to buy and sell) in order to execute over-valued trades and steal cryptocurrency from Binance users. Binance has temporarily frozen cryptocurrency withdrawals and we are still waiting for an official announcement on this issue.
  2. Rumors that Japan will penalize many of its exchanges can create uncertainty in the market. Japanese Yen makes up over half of the entire cryptocurrency market’s trading volume.
  3. In the past few months, now-bankrupt cryptocurrency exchange, Mt. Gox, has sold and liquidated about $405 million in Bitcoin (BTC) and BitcoinCash (BCH), possibly over-supplying the market and driving prices down. Billions of dollars of BTC and BCH still may be liquidated, pending approval of Japanese bankruptcy courts.
  4. Since February, the U.S. stock market has experienced a sharp decline in value. Although the crypto market only has a weak positive correlation with the U.S. stock market, it may continue to drive fear and uncertainty in the crypto market as well.
  5. The United States Securities Exchange Commission (SEC) announced that many crypto exchanges may be operating unlawfully by allowing trades in unregistered securities. The SEC is concerned that many crypto exchanges may appear as SEC-regulated when they are not. The announcement may create uncertainty for the future of exchanges operating in the U.S.

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