Bits and stuff: reports, rejections and restructuring – July 29th, 2018

This is why I didn’t post anything last week:


Also, much less pleasant, this:


Almost done.

I re-read Dalia Blass’s letter to representatives of the asset management community. The head of the SEC’s Division of Investment Management spelled out, in easy-to-understand detail, why ETF approval was unlikely to happen any time soon.

To summarize:

  • Valuation – how can we be sure that the price reflected on the exchanges is accurate, given the often wide discrepancy between venues? How will forks and air drops be accounted for?
  • Custody – how do cryptoassets fit into the 1940 Custody Act, which requires that investment advisors and funds use “qualified custodians” for “securities and cash”, or submit to random inspections in the event of “self custody”?
  • Liquidity – do cryptocurrencies meet the new fund liquidity rule, which says that “illiquid” assets cannot account for more than 15% of a mutual fund or ETF portfolio?
  • Manipulation risk – how can cryptocurrency markets address the issue of investor protection?

While the sector is making progress on all of the above fronts, it’s a slow process and it doesn’t look like we’re anywhere near answers with the level of confidence and clarity that would make the SEC comfortable.

This week the bitcoin price started to rally on rumours that a bitcoin ETF was about to be proved by the SEC. Given the above, that conclusion seemed like a long shot, because the underlying issues have not been addressed, and it is unlikely that the SEC would backtrack on its requirements.

And sure enough, on Thursday the SEC ruled against the rule modification that would allow the listing of the Winklevoss Bitcoin Trust, for reasons very similar to its first rejection.

But one of the commissioners published a strongly-worded dissent, urging the SEC to “let the markets decide” (I paraphrase, but that was the gist). The letter accused the SEC of being:

1) inconsistent (other approved commodity funds had as little market transparency and risk of market manipulation),

2) anti-innovation (by insisting on waiting for market maturation, it is delaying that very market maturation), and

3) overstepping its remit (the SEC should not be deciding on the validity or suitability of the underlying markets, investors should be able to do that).

While it’s exciting to see such a liberal (and public) dissent, on re-reading, some things start to niggle.

Peirce accuses the SEC of making a call on the underlying market. This may be partially true, but not in the way it is implied – the “worth” of bitcoin is not under scrutiny. What the SEC objects to is the opacity of exchanges and the vulnerability to manipulation (which even the crypto community suspects).

We are told that other commodity-based ETFs have been approved without liquid or manipulation-free markets, yet we are not told how big those ETFs were, how systemic the markets are and what other regulation is in play.

Peirce’s dissent should not be a surprise – before being appointed to the SEC by President Trump, she was a Senior Research Fellow and Director of the Financial Markets Working Group at the libertarian-leaning Mercatus Center, where she often spoke out against excessive financial regulation.

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Bloomberg ran an article profiling a US government official’s stance that Congress needs to bump cryptocurrency regulation up the list of priorities.

It cointained what is definitely my favourite quote of the week:

“Everyone’s trying to figure out whether it’s fish or fowl,” he said. “It turns out it might be a platypus.”

— x —

Edan Yago published a powerful op-ed on CoinDesk, in which he asks if the cost of KYC/AML regulation – which goes beyond the monetary expense of compliance to include the lost potential in abandoned (= unprofitable for banks due to the onerous requirements) markets.

“Perhaps they do frustrate the odd terrorist or oligarch (though apparently not very much). However, the question that is never asked is, at what cost?

Is it worth the more inconvenient, more expensive service we are all subjected to? Is it worth the exclusion of poor or marginalized people? Is it worth the entrenchment of the banking system?

Is it worth the massive troves of private information collected by every financial company and frequently stolen by hackers? Is it worth the creation of a massive, semi-privatized, global surveillance system?

It had better be. Otherwise, what a tragic, heart-breaking waste.”

— x —

This deep and thought-provoking report by research boutique Autonomous Next is definitely worth going through. A cornucopia of interesting titbits and observations, backed up by empirical data that highlights intriguing trends.


Some of my favourite slides:

Slide 6:

autonomous next 6

Slide 18 – token technology is evolving:

autonomous next 18

Slide 21 – an unusual taxonomy:

autonomous next 21

Slide 30 – my favourite part, the philosophy:

autonomous next 30

I could go on, because there is just so much in this report to digest… but that would take up too much space.

You can download the report here.

— x —

CoinDesk’s State of Blockchain Q2 was also released this past week. It contained some gems such as slide 22:

SOB slide 22

You can view the whole report here.

— x —

Mind-bending. And all sorts of other bending as well. (By Vladimir Tomin, via Colossal.)

Bits and Stuff: personal, private and puzzling – July 15, 2018

The past few weeks I’ve been moving my Dad into a full-time care residence, and packing up the family home. Oh, and packing up and moving out of my home because the floor caved in and needs reconstructing (the joys of living in an old building). So I’m sure you understand that I haven’t been really “in the zone” – hence the sporadic inputs here and the absence from Twitter.

I won’t pretend that all this is just something I take in my stride – you know, just get it done and move on. There have been days I spent weeping, days I couldn’t think, and sometimes they overlapped. Watching my father’s Alzheimer’s take over has been gut-wrenching, and the toxic combination of worry, anger and then guilt at being stupid enough to feel cross about something that’s nobody’s fault… I’ve always thought I was tough. It turns out that I’m not.

And while a family home of 40 years is just a combination of things, they are so imbued with memory that the unravelling and disposing of things that were once part of a loving environment… it’s hard. While they can be distributed amongst family, friends and charity, they lose their meaning when out of context, and represent a fragment of something, an unfinished sentence.

And dismantling my mother’s pride and joy – her beautiful apartment, with murals on the wall, lamps lovingly draped and ceilings tented with her favourite fabrics – has been like losing her all over again. Only this time it seemed more final. And while I don’t believe in ghosts or the afterlife, I can hear her anguish. Oh wait, maybe that’s mine.

Anyway, it’s almost over – the family home is now half empty, we have an offer for it, and my Dad seems happy. He called me last night, not long after I arrived back in Madrid, to say how lovely his residence is and how grateful he feels. My father is, and always has been, a profoundly good man. And when he told me that he’d played some cards with new friends (“although I’m not sure I’ll remember who they are,” he said jokingly), I felt a big weight lift off my shoulders.

While our building is being fixed, we’re temporarily living in a rented apartment just off the Plaza Mayor in Madrid. I’m writing this from a breakfast-strewn table in the country’s largest square, built in 1577. Early in the morning before the tourists and beggars descend, while the waiters are still putting out the tables and the mimes are getting into their garb, it’s peaceful and magnificent.

I’m looking forward to getting back to work next week with, for the first time in ages, a clear head. There is a lot about to go down in the blockchain world, so buckle up.

plaza mayor

— x —

In spite of total London gridlock, I did make it over to Aldgate to participate in this week’s Blockchain Insider podcast, with my colleague Joon, Simon Taylor and Sara Feenan – it’s a good episode, masterfully stewarded with fascinating topics. You can download the episode here.

— x —

Custody seems to be becoming one of the sector’s obsessions, at least from the pool I wade in. I often hear how the institutional investors are on the sidelines, eagerly awaiting reliable and regulated services that can custody their soon-to-be-massive crypto holdings.

And then we get breathless headlines announcing the launch of institutional solutions from the likes of Coinbase, and the bitcoin price doesn’t move. We also hear of smaller startups expanding their crypto offerings (Ledger and BitGo have both announced an ambitious expansion of assets to be included in their crypto solution.

While I’m sure many traditional investment institutions are interested in adding some crypto assets to their holdings, I doubt it’s as significant (yet) as is being implied.

And, I also doubt that the big ones will want to use the likes of Coinbase, Ledger and BitGo. To us in the blockchain world, those businesses are “blue chips”. But not to the traditional asset management world. They’re more likely to want to wait for names they feel comfortable with, like State Street and BNY Mellon.

And it is as yet unclear whether these firms will offer the additional services that traditional custody solutions provide: managing capital increases, dividends, stock splits and reporting, to name a few.

Will the traditional custodians set up crypto services? Probably – State Street is reportedly exploring the idea. But it’s complicated in terms of technology and regulation – while current rules in most cases can apply to cryptoassets, when it comes to custody, not so much.

And I worry that the enthusiasm for these necessary services is creating micro-bubble that will destructively explode when one supposedly “safe” option turns out to be not so reliable. The honey pot of billions in custody will be a temptation for brilliant minds, and technology can be slippery. Just ask any bank.

I hope I’m wrong, and that the rapid development of crypto infrastruture will further legitimize this nascent asset class. True, bitcoin was not born to be an asset class, and that saddens me a bit. But money flowing into the sector will support the development of new ideas and encourage a gentle nudge towards a financial system that looks increasingly different from the old one.

I fear, though, that unrealistic expectations will derail good intentions, and disappointment will slow down what is undeniably valuable research into a new type of financial plumbing.

— x —

This is interesting: crypto trading used as a loss leader for Robinhood, an online investment brokerage. Why not offer free crypto trading in the hopes of onboarding more users? A race to the bottom, with reliable exchanges getting squeezed, will end up with a less liquid market and less choice for consumers. Not ideal, and with crypto trading relegated to the status of “unprofitable perk”, Robinhood’s continuing interest in the business – once it has wiped out a lot of the competition – is not guaranteed.

A more optimistic interpretation is that a fast-growing investment platform that incorporates cryptoassets into its offering could lend legitimacy to the nascent asset class.

— x —

There were a couple of crypto-bank stories this week, although it’s too soon to claim that they indicate a narrowing gap between the two.

The Litecoin Foundation took a 9.9% stake in WEG Bank AG, a tiny bank based in a small town in Germany. The stake was acquired from TokenPay (a crypto-to-fiat payments firm which targets merchants), which itself has acquired another 9.9% and plans to acquire the rest of the shares if it gets regulatory approval.

Well, that’s one way to get a bank account.

Or maybe not. Small banks generally don’t have great access to liquidity without depending on other financial institutions, who may baulk at the idea of helping to facilitate crypto payments. And the regulator’s stance on the deal is still unclear. (Leigh Cuen of CoinDesk wrote a good analysis of the deal’s complexities.)

And Binance took a stake in Malta-based Founders Bank – which isn’t a bank. That it is allowed to call itself one says more about lax financial regulation than about the increasing “professionalisation” of the crypto space.

Founders bank claims that it will “will become the first stable and high tech banking solution not only focused on founders, but also owned by them, bridging the gap between traditional financial world and innovative crypto companies.” Hunh??

— x —

This freaks me out, and yet I find it enchanting. (By Janaina Mello Landini, via Colossal.)

Janaina Melo Landini


Bits and stuff: moving, markets and more conferences – July 1, 2018

It’s been a crazy week so this update will be short because now that conference season is OVER (until September, anyway), I have to:

  • Pack up and move out of my apartment in Madrid (building work)
  • Help my dad move out of the family home in London (moving into a residence, sniff)
  • Pack up and sell the family home in London (heartbreak)

…not to mention start a new project at work (more information on that soon).

All within the next couple of weeks.

I’m not whining, but if you detect a note of overwhelm in there, you’re not wrong*.

(*reminds me of a phrase from the series “Billions” that stuck with me – “we are not uncertain”)

— x —

The Network Forum post-trade conference in Vienna was awesome. Low-key (no media) and high-level (all the major banks and FMIs were there), with a surprising depth of blockchain knowledge and exploration.

The Blockchain Expo in Amsterdam was diluted and haphazard. I chaired the Transforming Financial Services track, which had some good speakers (Richard Crook from RBS, Carlos Kuchovsky from BBVA and Ville Sotiu ?? from Nordea were excellent) and a couple of interesting panels (with representatives from BNY Mellon, Santander, etc.). But, there was also a fair amount of hype and superficiality.


I would love to participate in more of the former and less of the latter – but, going forward, will probably end up participating in less of both. Got some real work to do.

— x —

This article by Alexandra Scaggs for FT Alphaville is one of the most important that I’ve seen in a while, in that it addresses not only the increasing centralization of tech services, but also how we manage to delude ourselves that things will be different going forward.

It’s especially interesting given the parallels that can be drawn with the cryptocurrency world, vis. Coinbase and Circle’s recent expansion announcements.

Centralization is an inescapable feature of capitalism. Even stiff regulation won’t stop it, as – like life – the markets will find a way. Capital flows to where the efficiencies are (or will be), and that implies eventual centralization. Even well-meaning blanket rules like the new GDPR end up enhancing what they set out to avoid.

More on this later, so much to talk about here…

— x —

Nicholas Bette gave us an insight into some of the issues that blockchain applications for the real estate sector will have to overcome – and, no surprise, the list can be largely exported to other sectors as well.

— x —

If you were in any doubt as to how intertwined politics and the markets have become, take a look at this twist to the tale: Nigel Farage of the UK’s far-right UKIP party could be in trouble for market manipulation. It’s not so much that politicians manipulate markets (we sort of knew that), it’s that they can do so, intentionally, for financial gain.

And not just the politicians. Here we have hedge funds offering polling organizations vast sums of money for a sneak peek at polling results.

We knew that capital markets were never the fair, level playing field they purport to be – but this seems extreme, and insultingly blatant.

It’ll be interesting to see if this story goes anywhere.

— x —

The launch of a crypto fund by veteran venture capitalist firm Andreesen Horowitz sends an intriguing signal, but not one that most people think.

First of all, it’s not necessarily the boost that the bear market has been eagerly awaiting. $300m – the initial amount of the fund – is a lot of money, but still only just over 0.1% of the total crypto market cap. And, Chris Dixon’s post detailing the strategy emphasizes that it’s an “all-weather fund” that will invest “consistently over time, regardless of market conditions”. In other words, it’s not going to pour all of the capital into the crypto market within the first few weeks.

Second, they’re not pouring money into cryptocurrencies, with a view to acting like one of the many crypto hedge funds already out there (and which have been, on the whole, doing poorly so far this year). They’re not planning to trade crypto currencies to gain the maximum short-term return.

It turns out that the fund will invest in both tokens and the companies behind them. And the plan is to hold, not churn.

What’s also interesting is the reason behind the launch. Venture funds can’t invest more than 20% of their capital in “liquid” assets such as cryptocurrencies, which limits the number of investments a traditional fund can make.

Going around this limitation by setting up a dedicated fund is a strategy that other funds dabbling in crypto could imitate. With fewer constraints, it’s likely that the amount of institutional or family office money backing these ideas will increase. A rising tide and all that…

— x —

Game of Thrones fans, brace yourselves – this is chocolate sponge covered in silver chocolate filled with strawberry coulis that oozes which cut. By chef Ben Churchill (via MyModernMet).

by Ben Churchill, via MyModernMet
by Ben Churchill, via MyModernMet