[header date=”8 January 2019″]The narrow path to a bitcoin ETF, a plan for physically delivered futures, and a conversation about privacy with Dawn Song of Oasis Labs.[/header]
A vocal minority
What will it take for the SEC to approve a bitcoin ETF in 2019?
The US government shutdown makes approval even less likely in the short term. Still, there are reasons to think it may happen this year. The taming of the bitcoin price, the existence of a bitcoin futures market (however small), and the changing composition of the SEC’s commissioners suggest that a bitcoin-linked financial product might still have a shot.
When the SEC rejected a bitcoin ETF proposed by the Winklevoss twins in July 2018 (pdf), the commission cited price manipulation in the bitcoin spot market among its chief concerns. If traders are influencing and exploiting the bitcoin price, the commission said, then the market simply doesn’t have the appropriate systems in place to prevent “fraudulent and manipulative acts and practices.”
But whether the commission should have considered the bitcoin spot market at all is up for debate. Republican SEC commissioner Hester Peirce argued that such consideration went beyond the scope of section 6 of the Securities Exchange Act of 1934, which focuses on national securities exchanges. According to the law, Peirce said, the SEC should have only looked at potential manipulation of the proposed financial product, not the underlying bitcoin spot market.
Peirce’s eloquent dissent and unusual support for a bitcoin-linked exchange-traded product have helped set the stage for some contentious votes in 2019, especially given the turnover at the highest ranks of the SEC.
In September, a month after the agency rejected an additional nine proposed bitcoin ETFs on similar grounds, another Republican—Elad Roisman—was sworn in as the newest SEC commissioner. Roisman previously served as counsel to ex-commissioner Daniel Gallagher, who joined the board of directors for blockchain startup Symbiont in 2016. It’s possible Roisman could be amenable to a bitcoin ETF. In fact, he was even briefed on bitcoin ETFs by representatives from SolidX, a crypto startup, and investment firm VanEck in October.
The remaining members of the commission include Robert Jackson Jr., a Democrat, and Jay Clayton, who also serves as the agency’s chairman and has shown no indication of supporting a bitcoin ETF.
Kara Stein, the other Democrat on the commission, was opposed to a bitcoin ETF. Stein’s term officially expired in 2017, but under SEC rules she was allowed to continue serving until this month.
According to Bloomberg, Donald Trump is likely to name Allison Lee, a former SEC enforcement attorney and aide to Stein, to the open Democratic seat (under SEC rules, there can be no more than three commissioners from the same political party. Clayton is registered as an independent).
With the commission’s current makeup, there are potentially two votes for a bitcoin ETF, and two opposed. With Lee or another new commissioner joining the commission this year, there could be an opening for a bitcoin-linked exchange-traded product. The majority of the commission would still need to either accept Peirce’s reasoning that spot market manipulation is immaterial or determine that the market is no longer full of fraud and manipulation. Those are both tall orders. —Matthew De Silva
[supplemental headline=”Market chatter: Let’s get physical”]
Physically delivered bitcoin futures are coming. Hong Kong-based Coin Futures and Lending Exchange, or CoinFLEX, announced plans to offer this type of derivative contract. Intercontinental Exchange says its Bakkt futures will also allow physical delivery, as will Eris Exchange.
Why does physical delivery matter? Futures—whether for sugar, oil, or bitcoin—give traders a way to hedge or speculate on an asset’s price at some later date. Cash delivery means a trader or investor can bet on bitcoin without the related money laundering and private-key protection concerns. For example, if a trader buys a March bitcoin contract from CME Group or Cboe and holds it until it expires, the trader will receive cash linked to an auction price (Cboe) or an index (CME), instead of an unregulated bitcoin.
But indexes and auctions create their own kind of risk. The auction or index could be manipulated. It also makes arbitrage more complicated for speculators as well as those who might want to hedge (like miners).
Say bitcoin trades at $4,000, and the March futures contract is available for $4,500. A market maker could, for example, lock in the $500 “risk free” difference between the two prices by borrowing to buy bitcoin in the spot market and selling bitcoin in the futures market (minus the costs of financing and holding the assets):
1️⃣ Trader borrows $4,000 to buy a bitcoin
2️⃣ Trader simultaneously agrees to sell a bitcoin in March for $4,500
3️⃣ In March, trader delivers the bitcoin for $4,500 and repays the $4,000 loan
4️⃣ Trader pockets $500 (minus financing and other expenses)
That simple arbitrage doesn’t have the same clean match-up when dealing with cash delivery. With physical delivery, you know exactly what you’re getting or delivering at expiration—a bitcoin. With cash delivery, it’s a to-be-determined cash amount based on an auction or index, which injects added uncertainty.
“Physical delivery requires a separate knowledge base (how to custody crypto assets safely) as well as knowledge of futures trading, but it does allow for better hedging strategies and no-risk arbitrage trading, which both need to exist for price discovery,” said Kyle O’Connor, product development specialist at Nasdaq.
The bottom line: a clear arbitrage opportunity for professional traders could help rev up buying and selling, making the bitcoin market more liquid. At least, that’s what CoinFLEX is betting on.
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On the record: Dawn Song
[img src=”https://cms.qz.com/wp-content/uploads/2019/01/Dawn-Song-Oasis.jpg”]
Dawn Song is CEO of Oasis Labs, a blockchain startup which last year raised $45 million from backers including a16z crypto, Andreessen Horowitz’s dedicated crypto fund. She is also a professor in the electrical engineering and computer science department at UC Berkeley, where she received her PhD. Song was named a MacArthur and Guggenheim fellow in 2010. She spoke with Quartz’s Matthew De Silva.
Quartz: What problems is Oasis addressing?
Song: The internet has fundamentally changed our lives. With great advances, we also see a lot of challenges. Over time, the challenges are becoming more and more severe. We hear a lot about data breaches—you are probably familiar with those. We also see that a lot of valuable data is being siloed. We think data is the new oil and it can help us gain valuable insight and make better decisions. But a lot of this data is very sensitive, like medical and financial information. Oftentimes, it’s being locked up.
For example, it’s difficult for researchers to gain access to medical data to find better cures for diseases. This is because of the lack of security and privacy technology to help protect data, [while also allowing others] to extract value. At Oasis, we are building a new computing paradigm that we call privacy-first, cloud-computing on blockchain.
What type of privacy protections does the Oasis system use?
The Oasis blockchain platform has a new architecture that helps with scalability and privacy preservation. At the computing layer, we utilize technologies for secure computation. Most of today’s blockchain platforms provide no privacy protections. All of the data and smart contracts are public, so anybody can see them.
Oasis is the first public blockchain platform that provides confidentiality-preserving smart contracts, where data is stored in encrypted form. We enable smart contract execution with encrypted data. So, in this way, nobody outside can see the actual data or smart contract states. With this, we provide privacy for user data and smart contract execution.
Can you give me an example of how Oasis is used?
One dapp developer is building a healthcare application on the Oasis platform. With this application, patients can upload their medical data to Oasis and the data will be stored in encrypted form. Oasis provides a primitive [a building block of programming] called “privacy-preserving smart contracts.” Basically, it’s a way to automatically enforce privacy protections for a smart contract. Medical researchers can use this primitive and the smart contract can also specify terms of use.
For example, it can specify that user data will only be used for training privacy-preserving machine learning models, and [nothing] else. It can also specify how users will get compensated for contributing data to the smart contract.
Essentially, with this type of approach, it aligns everybody’s incentives so user data can be used for societal good. This approach both provides better, [more] secure privacy protections than existing solutions and also enables better data accessibility.
Is there an Oasis token?
We have not issued any token.
Is there a plan to?
Given that it’s a blockchain platform, a token can be an important incentivization mechanism. So, yes, we’re exploring that aspect.
In the future if users are compensated for sharing their medical data, would they be compensated in an Oasis token?
That is one example. We are also exploring other possibilities as well. That very much depends on the applications themselves.
Any predictions for the upcoming year?
2019 is going to be the year of privacy.
Song’s recommended reading, listening, and more:
- Books: Thinking, Fast and Slow by Daniel Kahneman, High Growth Handbook by Elad B. Gil, and Sapiens by Yuval Noah Harari
- Podcasts: Unchained by Laura Shin and Token Talks with Zach DeWitt
- Projects that deserve more attention: Keystone Project, an academic initiative led by researchers from UC Berkeley and MIT
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[supplemental headline=”De-jargonizer: TestNet”]
A TestNet, or test network, is a practice version of a blockchain network where developers can experiment on applications.
TestNets don’t necessarily play by the same rules as an actual, live network where real transactions take place—known as a MainNet. Sometimes, a TestNet allows for faster mining or even complete resets.
Although TestNets have their own tokens, these typically aren’t regarded as valuable. Indeed, TestNet tokens are only useful within the TestNet itself. To get these practice tokens, you’ll have to request some through a developer channel or another source. It might be easiest to think of a TestNet like a stock market simulator where you trade Monopoly money.
[mailto filter=”Jargon” subject=”De-jargonize this…”]Heard a new crypto term? We can tell you what it means.[/mailto]
[/supplemental]
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