Blockchain bucks, enterprise adoption, and sovereign struggles

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[header date=”14 September 2018″]The Winklevoss twins launch a tokenized dollar, enterprise blockchains hit a snag, and the IMF says the Marshall Islands is doing crypto wrong.[/header]

What you need to know—and why

There’s a rush to put bucks on the blockchain. This week, Gemini and Paxos both introduced reserve-backed representations of the US dollar on the Ethereum network. State Street will hold reserves to back Gemini Dollars, but Paxos did not disclose the names of banking partners backing the PAX token, per Bloomberg. “If you are creating a decentralized Uber, people aren’t going to want to pay with an asset that most of us believe could go up 10 or 20 times in the future,” Gemini co-founder Tyler Winklevoss told Business Insider.

[takeaway]With a stable value, a crypto-fied dollar with solid banking and regulatory support could encourage people to use blockchain-based products instead of hoarding tokens in the hopes their value will go up. Gemini Dollars and PAX could also give Tether a run for its money. But, be careful, these aren’t like bank accounts or money market funds. Like bitcoin, transactions are effectively irreversible: Gemini told Quartz that if Gemini Dollars are sent to the wrong address, the exchange “would still keep custody of the corresponding USD.” ↗️[/takeaway]

Bitcoin is bumping around $6,200 to $6,500, near the low for the year. Crypto bulls are likely to point out that prices are still about double what they were a year ago. B2C2 chief risk manager Scott Weatherill noted that bitcoin miners can still profit from creating and selling bitcoin at these prices, and are doing so. However, that could change if bitcoin falls below about $4,000, at which point the supply could wane.

[takeaway] Weatherill says he’s bullish in the medium- to long-term, but bitcoin hasn’t been adopted widely enough to justify current prices. ➡️[/takeaway]

The IMF takes a dim view of the Marshall Islands’ crypto plan. In its country report, the fund said the nation’s proposed cryptocurrency, the Sovereign (SOV), is a disaster waiting to happen. It would “increase macroeconomic and financial integrity risks,” the fund said in the report.

[takeaway]Based on the proposed coin’s name and patriotic statements issued by Marshallese politicians, it appears that the SOV is meant to assert the small country’s national identity. Its associated ICO, and the Marshallese government’s disregard for coin’s economic viability (never mind its technological challenges), make this a questionable—and implausible—experiment in state-issued cryptocurrency. ↘️[/takeaway]

ICOs aren’t democratizing startup fundraising anymore. Because of legal uncertainty and US regulations that preclude non-accredited investors from speculating on unregistered securities, crypto projects are returning to traditional funding pipelines by seeking money from venture capitalists, according to TechCrunch.

[takeaway]The shift back to VCs isn’t totally surprising, because it limits legal liability for entrepreneurs as crypto rules remain in flux. However, regulations vary widely around the world, so the retail-driven ICO boom isn’t over just yet—for better or worse. ➡️[/takeaway]

Walmart is getting into bitcoin, sort of. It’s selling a pack of gold foil-wrapped chocolate bitcoins for $1.

[takeaway]”Always low prices” indeed. ↗️[/takeaway]

[supplemental headline=”Reasonable Doubt”]

Wall Street Journal reporter Paul Vigna wrote the book (The Truth Machine) on the benefits of blockchain technology beyond bitcoin. After detailing Lightyear Corp’s acquisition of Chain—the two will form a new company called Interstellar—Vigna recently lamented the ongoing absence of live blockchain products:

“Wall Street began experimenting more than three years ago with efforts to take blockchain and tailor it for their own uses. Startups such as Chain, R3, and Hyperledger have been involved with established companies like Nasdaq, JPMorgan Chase & Co., Citigroup Inc., International Business Machines Corp. and Microsoft Corp. There are myriad pilot programs, but none have yet succeeded in launching a mainstream, commercial product.” [/supplemental]

Crypto meets finance

Citigroup’s Digital Asset Receipt will allow investors to speculate on bitcoin without taking the risk of actually holding bitcoin. Reports say the plan is still being formulated. If it goes forward, a bank would handle custodianship (holding) of the crypto, while Citi would issue a receipt to customers. Investors in the US already buy and sell foreign stocks using a similar process. This of course defeats the ideals of crypto, like decentralization, but it could allow institutions wary of hacking or falling foul of regulations to access digital assets.

[takeaway] On the bright side, these types of plans suggest Wall Street is gradually coming up with ways to offer bitcoin to its customers, ETFs be damned. On the less bright side, trading pros think big institutions will remain wary of virtual tokens for a long time. ➡️[/takeaway]

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Who’s laughing now?

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[mailto filter=”Chart” subject=”Here’s a chart idea…”]Got a killer chart idea? Let us know[/mailto][/supplemental]

Regulatory watch

In a closely watched case, a New York federal judge ruled that cryptocurrency offerings can be subject to US securities laws. Though the defense argued that cryptocurrencies—as currencies rather than securities—were not covered by the Securities Exchange Act, the judge determined that a flexible interpretation of federal securities law was appropriate. The case at hand dealt with two cryptocurrencies—REcoin and Diamond—which prosecutors say were not backed by the diamonds and real estate that the defendant claimed.

[takeaway]The case could set a precedent. In the words of one fintech attorney, “if it walks like a duck and quacks like a duck, it’s a security.” And when it comes to prosecuting crypto fraud, in addition to the SEC, “other agencies will likely jump into the mix soon,” Jake Chervinsky of Kobre & Kim told Quartz, citing the CFTC (wash trading, pump and dumps), FinCEN (money laundering), and the IRS (tax avoidance) in particular. ↗️[/takeaway]

Crypto’s regulatory limbo in India continues. Cryptocurrency exchanges and traders need to wait longer for a verdict in their legal battle against the country’s central bank. The final hearing in the supreme court on cases filed by the bourses against the Reserve Bank of India’s virtual currency crackdown was pushed back three time this week. Now, the hearing is scheduled for Tuesday, Sept. 18. On the central bank’s orders, commercial banks have halted relationships with crypto exchanges since July.

[takeaway] It is likely that the Internet & Mobile Association of India, which represents bitcoin exchanges, will ask the court for even more time before the hearing can begin, according to lawyers. In the meantime, the country’s digital currency ecosystem remains largely frozen. ↘️ [/takeaway]

[supplemental headline=”Hacks, scams, and capers”]

FINRA smokes out HempCoin’s promoter. The self-regulatory US organization charged Timothy Ayre with securities fraud and unlawful distribution—no, not of cannabis—of HempCoin, an unregistered cryptocurrency security. This marked FINRA’s first crypto-related action.

When it pays to attack a blockchain hosting securities trading. According to Bruce Fenton, a cypherpunk and CEO of Chainstone Labs, “securities tokens are only as good as the blockchain they are issued on.” If a chain has less value than the securities trading on it, “then it’s more economical to attack.” Traditional stock exchanges have been targeted by cyber attacks before, but hosting equities on a public blockchain network could create different risks altogether, like 51% attacks.


Crypto calendar

🗣 Sept. 19-20: Consensus Singapore. The CoinDesk-led event will feature conversations on gaming, mining, and blockchain forensics. Quartz reporter John Detrixhe will interview Don Wilson, founder of trading powerhouse DRW, on stage. If you’re there, say hello!

🤝 Sept. 25: Capitol Hill Round TableWarren Davidson, a Republican Congressman, will meet with blockchain and crypto industry figures, such as VC Andreessen Horowitz, crypto advocacy group Coin Center, and exchange operator Kraken. The discussion will focus on fostering “light-touch” ICO regulation.

🗣 Oct. 1-2: Ripple’s Swell Conference. Bill Clinton is a keynote speaker at the San Francisco event this year. At last year’s gathering, ex-Fed chairman Ben Bernanke told attendees, “Bitcoin is an attempt to replace fiat currency and evade regulation and government intervention. I don’t think that’s going to be a success.”

🗣 Oct. 5-6: Scaling Bitcoin. The Tokyo event is geared toward the “engineering and academic community.”

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