[header date=”25 January 2019″]The government shutdown hampers a promising bitcoin ETF, a crypto exchange strategizes for a public listing, and Davos discusses currency innovation.[/header]
What you need to know—and why
A bitcoin ETF is tabled. As the SEC operates with a skeleton staff due to the US government shutdown, the Chicago Board Options Exchange withdrew a proposal which sought the agency’s approval for listing and trading of shares in SolidX Bitcoin Shares. Gabor Gurbacs, director of digital assets strategy for VanEck—the company behind the VanEck SolidX Bitcoin Trust—said the withdrawal is temporary.
[takeaway]At the moment, the SEC doesn’t seem to have the bandwidth to address the proposed rule change, and rather than risk a meritless rejection, Cboe and VanEck would prefer to fight another day. Although this is a frustrating setback for bitcoin advocates, a delay is certainly better than an outright denial. Jake Chervinsky, a securities litigation attorney, noted that the SEC’s rulemaking clock will restart upon resubmission and the agency will have 240 days to make a decision on the proposed change. ↘️[/takeaway]
Ethereum upgrades rescheduled for late February. After a bug derailed the latest round of network updates—collectively referred to as Constantinople—Ethereum’s core developers have announced a new target date: Feb. 27. You can anticipate the Constantinople hard fork at block number 7.28 million.
[takeaway]Ethereum’s processing speed is slowing by design, as the project’s creators built in a “difficulty bomb” to kill off vestigial versions of the network after they change its consensus algorithm. It’s like intentionally drinking a slow-acting poison, then frantically developing an antidote. Kudos to the project for coordinating a (somewhat) timely upgrade, but perhaps the delay shouldn’t have happened in the first place. ➡️[/takeaway]
Bithumb plans reverse merger for US listing. Bithumb, a South Korean-Singaporean cryptocurrency exchange, has signed a letter of intent to merge with Blockchain Industries, a Puerto Rico-based holding company whose shares currently trade over-the-counter. The reverse merger—a maneuver used by private companies to sell shares without the hassle of an IPO—would allow Bithumb’s shares to trade in the US market, a first for any crypto exchange. It’s even possible Bithumb could end up with a Nasdaq or NYSE listing.
[takeaway]Blockchain and cryptocurrency companies have readily employed reverse mergers to get listed in the US, often with little evidence they are actual functioning businesses. Past examples include UBI Blockchain Internet and The Crypto Company. As an active exchange, Bithumb seems more legitimate, but it’s also been accused of faking its trading volume. The company denies those allegations. For more on Blockchain Industries, see the Chart Interlude below. ➡️[/takeaway]
Small businesses can benefit from ICOs. In a recent report, the Organization for Economic Cooperation and Development said initial coin offerings can be useful for small- and medium-sized businesses in limited circumstances. However, the financing mechanism, which frequently attracts capital from retail investors in the form of bitcoin and ether, has also been employed by projects that clearly do not require or utilize distributed ledger technology.
[takeaway]Love them or hate them, ICOs have allowed entrepreneurs to solicit and raise money from a virtually “unlimited investor pool.” The OECD rightly acknowledges how ICOs have lowered the barriers to global fundraising, and realizes this advance comes with “significant risks,” including misaligned incentives for project founders and potential scams. ↗️[/takeaway]
[supplemental headline=”Chart interlude”]
The share price for Blockchain Industries jumped 30%, or $1.25, after the company announced its intent to merge with BTHMB Holdings.
[img src=”https://cms.qz.com/wp-content/uploads/2019/01/Blockchain-Industries-share-price.png”]
Blockchain Industries is traded on the off-exchange OTC Markets platform, where retail investors bet on thinly traded stocks that typically make few disclosures. BTHMB has a controlling interest in cryptocurrency exchange Bithumb, and will become the largest shareholder in Blockchain Industries.
Blockchain Industries, so-named since 2017, has had other names: It started out in 1995 as Interactive Processing, became Worldtradeshow.com in 1999, switched to Business.vn in 2007 (a Vietnamese company directory), and then Omni Global Technologies in 2016. The company acknowledged in October that its latest line of business could run afoul of watchdogs: The chairman of the SEC has “warned that it is not acceptable for companies without a meaningful track record in the sector to dabble in blockchain technology, change their name and immediately offer investors securities without providing adequate disclosures about the risks involved.”
[mailto filter=”Chart” subject=”Here’s a chart idea…”]Got a killer chart idea? Let us know[/mailto]
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Crypto-meets-finance: View from Davos
Crypto was sizzling at the World Economic Forum in Davos, Switzerland, in 2018. But this is 2019, and bitcoin prices have fallen about 70% since then. A representative from Swift, the cross-border payment cooperative, noted that there were empty seats in the audience for the crypto panel discussion—something that wouldn’t have happened last year.
The Davos elite may be preoccupied with other things these days, but crypto debate continued. Harvard economist Kenneth Rogoff, author of The Curse of Cash, noted that, just as when paper money began circulating in China around 800 AD (it was originally used by merchants and then adopted by the government), currency innovation has always come from the private sector. He was optimistic about the potential for some sort of crypto-esque technology to catch on.
So will central banks ever adopt some form of blockchain architecture for their national currencies? For Rogoff, that would only be possible with some sort of back door that gives governments access to identities and other information. Governments already create anonymous money in the form of paper cash and coins, and Rogoff sees no chance that policymakers will create a truly anonymous digital version that would make tax evasion and money laundering even easier.
Rogoff also argued that governments “never have in history” allowed a private currency to pre-empt their own. His book describes Genghis Khan’s regime, which printed paper money and prohibited the use of gold or silver by the “highly credible threat of death.” Governments maintain control over their currencies to collect taxes, wage war, and respond to financial crises.
Even so, the former IMF chief economist’s own book points out that Khan eventually did lose control of his own currency because of rampant inflation: “No matter how powerful the emperor, the system would ultimately self destruct as the gain from defiance became too great,” he wrote.
This of course fits neatly with arguments from the libertarian element of the bitcoin community. But one lesson of the Mongol Empire is that specialized technology isn’t necessary to destroy fiat currency, as consumers will adopt whatever is convenient—gold, cigarettes, or more likely, another country’s currency—when their own legal tender has been too deeply debased. Governments do indeed have the power to enforce the use of their currencies within their economy—as long as they don’t abuse that power too much.
“I would see them as [buying] a lottery ticket on dystopia,” Rogoff said of private crypto currencies. “As long as governments reign, we’re not going to see this.” —John Detrixhe
[supplemental headline=”Reasonable Doubt”]
Bitcoin is terrible for the environment and it isn’t a currency. Jeff Schumacher—founder of BCG Digital Ventures, the venture arm of the Boston Consulting Group—shared a grim prediction for bitcoin while speaking on a panel in Davos.
“I do believe [bitcoin] will go to zero,” said Schumacher. “I think it’s a great technology but I don’t believe it’s a currency. It’s not based on anything.”
However, bitcoin’s lack of government backing isn’t his only concern. Schumacher suggested bitcoin’s reliance on proof of work mining makes it untenable at a larger scale. If it was pegged against gold—which has an approximately $7 trillion market cap—he said, “[bitcoin] would be responsible for about 20% of the world’s CO2 production.”
“[That] tells you it’s not going to be the go-forward thing,” he said.
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Regulatory Watch
In Pennsylvania, bitcoin isn’t money. The Pennsylvania Dept. of Banking and Securities has determined cryptocurrency exchanges and crypto ATM operators are exempt from the state’s requirement that money-transmitting businesses post a $1 million surety bond.
At the heart of the agency’s decision was its conclusion that bitcoin isn’t money, at least according to the state’s definition, and therefore crypto exchanges can’t be money transmitters. “Only fiat currency, or currency issued by the United States government, is ‘money’ in Pennsylvania. Virtual currency, including Bitcoin, is not considered ‘money’ under the [money transmitter act],” according to the department’s guidance (pdf), published Jan. 23.
[takeaway] The development is good news for crypto businesses in the Keystone State, who are free of a burdensome requirement. Compliance consultant Amber Scott notes the ruling aligns Pennsylvania with Canada in its views on crypto. But other states may take another view, and ultimately, any Pennsylvania exchange will have to follow federal law as well. ↗️[/takeaway]
[supplemental headline=”Hacks, scams, and capers”]
Icelandic thieves receive prison time. Seven people have been sentenced to prison time for stealing approximately 600 bitcoin mining rigs near the height of the cryptocurrency market in December 2017 and January 2018. The machines—which have not been recovered—were valued at around $2 million at the time of the theft.
Sindri Stefánsson, who infamously—and easily—escaped from the minimum security jail where the suspects were kept, received the harshest sentence: four and a half years. Oddly, Stefánsson didn’t receive any additional time for his escape, as the police apparently didn’t have the legal authority to detain him originally.
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Calendar
🗣 January 30-31 Japan Blockchain Conference 2019. The event in Yokohama is supported by Japan’s Ministry of Economy, Trade and Industry as well as the Economic Affairs Bureau of Yokohama. Speakers include John McAfee, crypto entrepreneur Brock Pierce, venture capitalist Tim Draper, and Charles Hoskinson of IOHK.
🗣 January 31 Wall Street Blockchain Summit. The one-day event in New York will include discussion of market infrastructure, legal and regulatory considerations for blockchain & digital assets, and accounting matters related to crypto assets.
🗣 February 7-8 Advancing Bitcoin Conference 2019. In London, developers will gather to discuss the latest technical advances for bitcoin. The event includes Patrick McCorry, assistant professor at King’s College London, and bitcoin advocate Jimmy Song, among others.
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Please send news, tips, and Mongol emperors to privatekey@qz.com. If this email was forwarded to you, click here to sign up for your own subscription, which includes a free two-week trial. Today’s Private Key was written by Matthew De Silva and John Detrixhe, and edited by Oliver Staley. Whenever you find yourself on the side of the majority, it is time to pause and reflect.