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The People’s Bank of China and a district of Shenzhen are to hand out 10 million digital yuan (worth around $1.5 million) as “red envelope” gifts to citizens.

• The initiative comes as another pilot of the in-development digital currency, which has been in trials with commercial entities and state-owned banks.
• Red envelopes are a traditional way of gifting cash in China on holidays or for special occasions such as weddings.
• According to a report from Sina.com.cn, the pilot will see 50,000 successful applicants each receive 200 of the digital yuan.
• They can be spent at 3,389 stores that are set up to transact in the digital currency.
• Anyone living in Shenzhen can apply for the gift from Oct. 9.
• The pilot is being help by the central bank in partnership with Luohu District, Shenzhen, which is funding the effort.
• The report suggests the pilot is an indication that the digital yuan is close to being launched.

Also read: China Central Bank Official Reveals Results of First Digital Yuan Pilots

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The former chief technology officer of the troubled BitMEX exchange has been released from custody after a bond for $5 million was paid in the U.S.

• The news was made public in a document from the District Court of Massachusetts, first reported by The Block.
• In the document, Reed pledged to appear in court and comply with sentencing or risk the loss of the bond.
• He was arrested in Massachusetts on Oct. 1, as the U.S. Commodities Futures Trading Commission (CFTC) and the Department of Justice both announced charges against BitMEX, one of the biggest crypto derivatives trading platforms, and its senior executives.
• The charges include offering illegal trading of derivatives to U.S. retail investors and violating the Bank Secrecy Act.
• Thursday, BitMEX’s parent firm 100x Group announced that its CEO Arthur Hayes and Reed – both founders – had both stepped down from their management positions following the charges.
• Greg Dwyer, the head of business development, would take a leave of absence, the exchange said.

Also read: Crypto Trading Platform BitMEX ‘Attempted to Evade’ US Regulations, CFTC, DOJ Charge

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A group of seven central banks along with the “central bank for central banks” has released a report setting out initial principles for how national digital currencies can help implement monetary policies.

• Issued Friday, the report – “Central bank digital currencies: foundational principles and core features” – was prepared by the central banks of Canada, the U.K., Japan, Sweden and Switzerland, as well as the U.S. Federal Reserve, the European Central Bank and the Bank for International Settlements (BIS).
• It sets out several “core principals” for central bank digital currencies (CBDCs) and how they should be designed.
• Firstly, a CBDC should work alongside cash and other current payment types “in a flexible and innovative payment system.”
• Secondly, it should support “wider policy objectives” and “do no harm” to monetary and financial stability.
• Thirdly, it should “promote” innovation and efficiency.
• In the report, the group says that, while central banks have been providing money to citizens for hundreds of years, “the world is changing.”
• In an increasingly digital world, central banks have started researching the benefits and risks of offering a “general purpose” digital currency as a way to “evolve” and pursue public policy objectives.
• The group has now agreed that to move to an issuance of a CBDC, a nation must meet the three core criteria.
• “A CBDC robustly meeting these criteria and delivering the features set out by this group could be an important instrument for central banks to deliver their public policy objectives,” the report states.
• While the group pledged to continue with research and collaboration on this topic, it said that study is not a commitment to any actual issuance.
• In a separate report Thursday, the Bank of Japan said it would move on to tests looking at the technical feasibility of the core functions and features required for CBDC. That proof-of-concept may then be followed by a pilot program “if necessary.”
• South Korea’s central bank also said this week it would conduct tests of a digital won through 2021.
• The sudden spate of announcements from global central banks regarding CBDCs comes as China appears to be fast moving closer to a launch of its digital yuan.
• The People’s Bank recently revealed some of the results of real-world tests of the initiative, indicating that 3.1 million digital yuan transactions had been made in a commercial setting, for an amount worth $162 million.

Also read: ‘It’s Something We’re Studying’: Deputy Treasury Secretary Discusses US CBDC Plans

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• Inside the Estonian CBDC Experiment That Could Shape the Digital Euro
• CBDC Design Needs to Address Risk to Users, Says Bank of Canada

A group of seven central banks along with the “central bank for central banks” have released a report setting out initial principles for how national digital currencies can help implement monetary policies.

• Issued Thursday, the report – “Central bank digital currencies: foundational principles and core features” – was prepared by the central banks of Canada, the U.K., Japan, Sweden and Switzerland, as well as the Federal Reserve, the European Central Bank and the Bank for International Settlements (BIS).
• It sets out several “core principals” for central bank digital currencies (CBDCs) and how they should be designed.
• Firstly, a CBDC should work alongside cash and other current payment types “in a flexible and innovative payment system.”
• Secondly, it should support “wider policy objectives” and “do no harm” to monetary and financial stability.
• Thirdly, it should “promote” innovation and efficiency.
• In the report, the group says that, while central banks have been providing money to citizens for hundreds of years, “the world is changing.”
• In an increasingly digital world, central banks have started researching the benefits and risks of offering a “general purpose” digital currency as a way to “evolve” and pursue public policy objectives.
• The group has now agreed that to move to an issuance of a CBDC, a nation must meet the three core criteria.
• “A CBDC robustly meeting these criteria and delivering the features set out by this group could be an important instrument for central banks to deliver their public policy objectives,” the report states.
• While the group pledged to continue with research and collaboration on this topic, it said that study is not a commitment to any actual issuance.
• In a separate report Thursday, the Bank of Japan said it would move on to tests looking at the technical feasibility of the core functions and features required for CBDC. That proof-of-concept may then be followed by a pilot program “if necessary.”
• South Korea’s central bank also said this week it would conduct tests of a digital won through 2021.
• The sudden spate of announcements from global central banks regarding CBDCs comes as China appears to be fast moving closer to a launch of its digital yuan.
• The People’s Bank recently revealed some of the results of real-world tests of the initiative, indicating that 3.1 million digital yuan transactions had been made in a commercial setting, for an amount worth $162 million.

Also read: ‘It’s Something We’re Studying’: Deputy Treasury Secretary Discusses US CBDC Plans

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• South Korea’s Central Bank to Test Digital Currency in 2021
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• CBDC Design Needs to Address Risk to Users, Says Bank of Canada

A cryptocurrency service operating in the Netherlands has become the first such entity to register with the country’s central bank.

• Per a company press statement on Wednesday, the Amsterdam Digital Asset Exchange (AMDAX) said the registration with De Nederlandsche Bank (DNB) meant it could now go ahead and process crypto transactions.
• The firm will also be allowed to store and provide custody of digital assets under the European Union’s (EU) newly implemented AML5 guidelines that came into effect on May 21.
• Those guidelines, which some argue are killing crypto firms across the country, passed the Dutch Parliament earlier this year.
• Amsterdam-based AMDAX said it will support private investors with portfolios beginning at 2.5 bitcoin (about $27,000 or €23,000 at press time).
• The Dutch implementation of the regulations is very strict, usually including additional criteria for client assessments and for tracing the origin of money users want to invest.
• DNB “justly applies” these regulations, said Valentino Cremona, co-founder and director at AMDAX.
• With bitcoin often being associated with crime, the market needs a “clear legal framework,” Cremona said.
• The exchange’s registration with the central bank demonstrates to investors that cryptocurrency is “a mature asset class, not for criminals, but for smart investors,” he added.

See also: The Netherlands’ AMLD5 Interpretation Appears to Be Killing Crypto Firms

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Ripple, the payments startup with a multibillion-dollar valuation, an IPO in the cards and a complex relationship with the XRP cryptocurrency, is branching out into the lending business.

• On Friday, the Silicon Valley-based fintech unveiled its Line of Credit for customers using its On-Demand Liquidity (ODL) service, per a company blog post.
• “This is our first time testing a product offering in the lending space,” a company spokesperson confirmed to CoinDesk. “We may decide to build out a more robust offering in the future.”
• According to Ripple, the credit line will enable small-to-medium enterprises to expand their business where they would otherwise face “stalled growth,” inhibiting their ability to compete with larger companies.
• Those companies using ODL on RippleNet, a network of payment providers, will be able to buy XRP from Ripple on credit and will be charged a fee on the amount borrowed.
• The service is designed to facilitate lower-cost financing for cross-border payments compared to traditional means and has been trialed by RippleNet customers via a pilot program, the company said.
• ODL uses XRP as a “bridge currency” to facilitate cross-border payments. For example, a Canadian business that needs to pay a supplier in Israel but can’t find a foreign exchange dealer willing to exchange loonies for shekels can instead convert the money into and out of XRP, quick snap.
• In that same example, the credit line means that the Canadian firm doesn’t have to front the money – it locks in a rate at the time of payment and then repays Ripple “when it’s convenient,” the company says.
• Ripple holds 6.2 billion XRP (worth about $1.55 billion at current prices). Its stash accounts for 6% of the total XRP supply when counting both the 45 billion in circulation and 48.6 billion in escrow. The company periodically sells XRP into the market.

See also: Ripple Chairman Says Firm Could Leave US if Regulatory Environment Doesn’t Change

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A vulnerability in LND versions 0.10.x and below has been disclosed to the Lightning Labs team, according to engineer Conner Fromknecht in the Lightning Network developer channel Thursday. In light of the disclosure, the firm is urging node operators to upgrade to versions 0.11.0 or higher as soon as possible.

• No known exploitations of the vulnerability have been found to date, but “circumstances surrounding the discovery resulted in a compressed disclosure timeline,” Fromknecht said.
• The vulnerability was “partially” disclosed with a detailed publishing of the findings promised Oct. 20.
• Lightning Labs – one of three major implementations of the Lightning Network – released its newest v0.11.1-beta on Oct. 1.
• Lightning Labs did not respond immediately to a request for comment.

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Crypto exchange bitFlyer Japan announced Wednesday that its assets under custody exceeded 161.8 billion yen ($1.5 billion) in August, the highest level in two years.

• According to the announcement, the rise in bitcoin price and the exchange listing four new crypto assets at the end of last year led to the increase in assets under custody, or the total value of financial assets the firm manages for its clients. 
• In the period from December 2019 through now, bitFlyer Japan listed XRP (XRP), Basic Attention Token (BAT), Stellar Lumen (XLM) and Nem (XEM) on its exchange.
• CoinDesk Japan reported that according to latest statistics from the Japanese crypto asset trading industry, the physical transaction volume of domestic cryptocurrencies was down this year: July (in-kind trading) was approximately 604 billion yen, well below the 1.1 trillion yen recorded in July 2019.
• Earlier this year, bitFlyer conducted an internet survey which revealed that during the first half of the calendar year, most people who opened new accounts with the exchange were in their 20s. 
• Midori Kanemitsu, a market analyst at bitFlyer, explained in the same report that the attitude towards bitcoin had changed significantly as global monetary easing progressed during the COVID-19 pandemic, shifting the cryptocurrency from an investment target to an asset class that institutional investors can hedge against inflation.
• The exchange’s bitcoin rewards program also hit a record high last month.

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Crypto exchange bitFlyer Japan announced Wednesday that its assets under custody exceeded 161.8 billion yen ($1.5 billion) in August, the highest level in two years.

• According to the announcement, the rise in bitcoin price and the exchange listing four new crypto assets at the end of last year led to the increase in assets under custody, or the total value of financial assets the firm manages for its clients. 
• In the period from December 2019 through now, bitFlyer Japan listed XRP (XRP), Basic Attention Token (BAT), Stellar Lumen (XLM) and Nem (XEM) on its exchange.
• CoinDesk Japan reported that according to latest statistics from the Japanese crypto asset trading industry, the physical transaction volume of domestic cryptocurrencies was down this year: July (in-kind trading) was approximately 604 billion yen, well below the 1.1 trillion yen recorded in July 2019.
• Earlier this year, bitFlyer conducted an internet survey which revealed that during the first half of the calendar year, most people who opened new accounts with the exchange were in their 20s. 
• Midori Kanemitsu, a market analyst at bitFlyer, explained in the same report that the attitude towards bitcoin had changed significantly as global monetary easing progressed during the COVID-19 pandemic, shifting the cryptocurrency from an investment target to an asset class that institutional investors can hedge against inflation.
• The exchange’s bitcoin rewards program also hit a record high last month.

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Bitcoin is flashing green as Square converts some of its cash to crypto while ether options traders are making lots of bets for December expiration.

• Bitcoin (BTC) trading around $10,890 as of 20:00 UTC (4 p.m. ET). Gaining 2.1% over the previous 24 hours.
• Bitcoin’s 24-hour range: $10,532-$10,962
• BTC above its 10-day and 50-day moving averages, a bullish signal for market technicians.

Bitcoin’s price popped Thursday, led higher almost immediately following the announcement that payments firm Square had invested $50 million to purchase 4,709 BTC. The development pushed the price per 1 BTC to as high as $10,962 before settling to $10,890 as of press time. 

Read More: Square Puts 1% of Total Assets in Bitcoin in Surprise $50M Investment

Related: The Market Reacts to Square’s $50M Bitcoin Buy

“News that Jack Dorsey’s Square has purchased about $50 million worth of bitcoin is a definite positive that appears to have driven markets higher on the back of positive sentiment,” said Guy Hirsch, USA managing director of multi-asset brokerage eToro. “Dorsey has long been an advocate of the largest cryptocurrency, and this move reaffirms his bullish stance, and Square’s.” The stock price of Square (NYSE: SQ) also rose Thursday, in the green 1.8% at the close of trading today.

“Seeing traditional institutional firms such as Square invest into bitcoin to hold on their balance sheet after a publicly traded company such as MicroStrategy purchased $250 million worth of bitcoin as a ‘hedge against inflation’ brings significant credibility to bitcoin,” said Michael Gord, chief executive of trading firm Global Digital Assets. “The CEO of MicroStrategy even went so far as to call bitcoin superior to cash”. 

If indeed these investments are a bet against fiat, the U.S. Dollar Index (DXY), a measure of the greenback versus a mix of other currencies, is one metric to watch. Though it has picked up since a late-August low, it’s still in the relative doldrums for 2020 and was flat, in the red 0.02% as of press time Thursday.

The positive market sentiment has certainly translated into higher-than-average bitcoin daily spot volume. Major exchanges already have $332 million in volume so far Thursday, higher than the $284 daily average in the past month.

Related: Square Puts 1% of Total Assets in Bitcoin in Surprise $50M Investment

While bitcoin volume is up Thursday, volatility remains low. In the options market, six-month at-the-money (ATM) volatility, the difference between option strikes to the price of bitcoin, is at 65%. The last time it was that low was back on July 31.

“The buy pressure from institutional investors is increasing, so we are seeing a nice ramp up,” said Marc Fleury, CEO of Two Prime, a crypto asset management firm. “We seem to be entering an era of a low-volatility bull market.”

Lots of ether options for December expiration

Ether (ETH), the second-largest cryptocurrency by market capitalization, was up Thursday trading around $351 and climbing 3.3% in 24 hours as of 20:00 UTC (4:00 p.m. ET). 

Read More: As DeFi Deflates, Ethereum Users Get Reprieve From Soaring Fees

Ether options traders are heavily betting on the asset’s price at the end of the year. Over 473,500 ETH in open interest is set for expiration on Dec. 25, which is approximately $166,023,00 worth of options at Thursday’s spot prices.

Vishal Shah, an options trader and founder of derivatives exchange Alpha 5, says traders started piling up ether options positions for December a while ago. “It really started gearing up with DeFi a few months back,” he said. There’s two main reasons for the options bets, Shah added. “It’s either a levered play on DeFi doing well, or as a tail hedge against impermanent losses,” he said. Impermanent loss is when an investor contributes to a liquidity pool and can temporarily be worse off than actually just holding the asset due to protocol imbalances.

Other markets

Digital assets on the CoinDesk 20 are mostly green Thursday. Notable winners as of 20:00 UTC (4:00 p.m. ET):

• chainlink (LINK) + 6.4%
• bitcoin cash (BCH) + 5.7%
• tezos (XTZ) + 4.2%

One notable loser as of 20:00 UTC (4:00 p.m. ET):

• eos (EOS) – 0.46%

Read More: BitMEX CEO Arthur Hayes Leaves Role After US Charges

Equities:

• Asia’s Nikkei 225 closed in the green 0.96%, boosted by investor optimism after U.S. President Donald Trump tweeted support for further economic stimulus.
• Europe’s FTSE 100 ended the day climbing 0.53%, led higher by gains in telecom firm TalkTalk Group, up 17% amid talks of a shareholder takeover.
• In the United States the S&P 500 ended the trading day up 0.80% as policymakers continued talks on fresh economic stimulus.

Commodities:

• Oil was up 3%. Price per barrel of West Texas Intermediate crude: $41.23.
• Gold was in the green 0.37% and at $1,894 as of press time.

Treasurys:

• U.S. Treasury bond yields all fell Thursady. Yields, which move in the opposite direction as price, were down most on the two-year, dipping to 0.147 and in the red 8.5%.

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Ethereum miners are signaling their disapproval of a technical proposal advocated by top Ethereum developers, a new survey shows.

Eight of the nine mining projects partaking in a community survey on Ethereum Improvement Proposal (EIP) 1559 had a negative impression of the proposal, with seven of the nine saying they would refuse to implement the EIP if it were included in a future hard fork.

EIP 1559 swaps Ethereum’s current bid-based transaction market for a set fee, BASEFEE, with a small tip for miner compensation. The EIP gained steam over the summer months as the cost to send even a basic transaction broke $10 multiple times. 

Related: JPMorgan’s Blockchain Lead Is Now in Charge of Ethereum-Based Interbank Information Network

Read more: Ethereum Developers Consider New Fee Model as Gas Costs Climb

The survey included 25 Ethereum projects, with most choosing to remain anonymous, Tim Beiko, ConsenSys product manager and survey implementor, said in the Medium post. The survey lacked participation from exchanges or wallets, according to Beiko.

Overall, positive and negative responses both garnered 42% of the vote, with the remainder being neutral or having no opinion.

First proposed in 2018 by Vitalik Buterin, among others, EIP 1559 is expected to make the blockchain’s fee market more predictable and relieve congestion.

Related: Ethereum Is the Frontier of Financial Innovation

What EIP 1559 does not do is promise lower transaction fees. Miners would still garner profits under the new model, but they would be restricted compared to the current setup as the BASEFEE would be burnt to the network. Doing so would add a deflationary mechanism to the Ethereum network’s native currency, ether (ETH).

Unhappy Ethereum miners

Yet, Ethereum miners have the most to lose from the proposal becoming the new standard because transaction fees would be limited to a smaller range. It’s never been more lucrative to be a miner, with profitability hitting all-time highs throughout 2020, according to BitInfoCharts.

“It has been a very misleading EIP, and a majority of the supporters are some Twitter thought-leaders (sic) who believe it will moon the price. lol,” BitFly technical writer Butta said in a private message to CoinDesk. BitFly’s Ethermine is the second-largest Ethereum mining pool by hashrate, according to Etherscan.

Conversely, the largest Ethereum mining pool, Sparkpool, is in favor of the change, according to statements made to CoinDesk in June. Sparkpool did not return a request for comment by press time.

Post-Berlin hard fork

As of now, Ethereum developers are still kicking the tires on the EIP. They will not include it until after the Berlin hard fork, which has yet to be scheduled for execution after it was postponed in June.

Read more: Ethereum Developers Delay Berlin Hard Fork to Stem Client Centralization Concerns

Moreover, the survey and EIP 1559 developer call Thursday morning raised separate concerns over the EIP itself. While miners are worried about their pocketbooks, decentralized applications (dapps) worry about implementing the EIP, its effectiveness and changes to developer tooling. 

Some Ethereum clients such as Nethermind and Besu have begun implementing the EIP on testnets. But other clients, including Geth and OpenEthereum, are waiting for a finalized specification before releasing the EIP on testnet.

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Pantera Capital, a cryptocurrency investment firm known for its blockbuster bitcoin returns, has been on the upside when investing in startups, though the returns have been falling below or closer to other types of equity investors.

The venture funds Pantera Capital raised in August 2013 and August 2014 have returned 46.5% and 15.9% from their inception to September 2019, respectively, according to firm data obtained by CoinDesk. The returns underperform index funds most retail investors can buy into and outperform venture funds limited to smaller pools of accredited investors.

Read more: Pantera Crypto Funds Report 100% Returns Amid DeFi Craze

Related: Pantera Crypto Funds Report 100% Returns Amid DeFi Craze

Up to September 2019, the S&P 500 index, for example, has returned, adjusted for inflation, 62.6% over the first Pantera venture fund and 40.8% over the second Pantera venture fund. United States funds included in the 2019 Cambridge Associates Venture Capital Index have returned on average 12.08% on a five-year timescale and 14.55% on a 10-year time scale.

Why the drop?

Paul Veradittakit, a venture partner at Pantera Capital, attributed the dramatic gap in performance to the different focus and size of the funds. The closely aged funds’ returns slid as the second fund ramped up investments in 36 companies and counted in diverse companies building mostly supplemental cryptocurrency products — a more than fourfold rise from the first fund’s eight companies dedicated to cryptocurrency services catering to the bare essentials. 

While the first Pantera venture fund has invested in digital asset developers like Ripple Labs and basic exchanges and payment processors like Bitstamp, Xapo, Circle and Ripio (formerly known as BitPagos), the second venture fund has invested in exchanges with peripheral financial instruments like cryptocurrency options broker ErisX, scattered cryptocurrency platforms that include Shapeshift, Abra, Brave, Civic, Starkware, BitOasis and BitPesa, and even another cryptocurrency fund manager, Polychain Capital.

Read more: Pantera Crypto Hedge Funds Are Losing Double Digits, Bitcoin Fund Is Up 10,000% to Date

Related: Ex-Pantera Partner’s New Crypto Fund Is ‘Not for the Faint of Heart’

Information was not provided on Pantera Capital’s third venture fund, which has raised $164.7 million as of August, just slightly under a $175 million ceiling sought since 2018. But if strategy and volume is any indication, the third Pantera venture fund has mirrored the approach of the second fund, putting more money into ErisX, Starkware and at least 16 in-the-weeds companies. Among these newer startups are The Block, a cryptocurrency research site; and Bakkt, a New York Stock Exchange corporation-connected bitcoin futures exchange.

In all, Pantera Capital’s assets were valued at over $448 million in financial filings this year, covering $249.3 million in the venture funds. The venture funds take at least $50,000 and $100,000 sums from investors and spend about $1 million to $3 million on 10% to 20% equity stakes in seed-stage investments. For Series A venture investments, Pantera Capital commits somewhere from $3 million to $8 million to 3% to 15% stakes in companies.

Hits and misses

Exits – mergers, acquisitions and listings on public stock exchanges – are how venture capital funds realize returns, positive or negative, on their investments, depending on company financials and investment timing. The seven-year-old cryptocurrency investment firm has had 14 exits make $66 million on $16 million of capital invested in its venture companies, according to the firm data dated to this month a year ago. 

While not counted in realized returns, companies that do not exit still contribute to a venture fund’s value. All companies considered by last September, Pantera Capital grew the value of capital in the first venture fund from $12 million to $92 million, in the second venture fund from $26 million to $41 million.

Read more: Crypto M&A and Fundraising Dropped Sharply in 2019: PwC Report

In the first fund, the venture data says Pantera Capital in 2018 took away $50.5 million from a $9.2 million investment and 6% stake in Bitstamp when 80% of the bitcoin exchange sold to Belgian investment holding company NXMH. Pantera Capital also stands to make $22.3 million from the remaining 20% Bitstamp equity should it be bought, making it one of the fund’s more lucrative investments.

Less remarkable than the Bitstamp exit, the second Pantera venture fund drew in one of its notable exits in Korbit – $6 million from a $603,205 investment –  when the Korean digital currency exchange was acquired in 2017 by Korean gaming developer NXC Corp.

Unlike the second fund, the first Pantera venture fund has not had a company end in a bankruptcy or a closure that did not involve a buy-out. At least two cryptocurrency apps backed by the second fund have shut down, bringing its value down along with them: Basis, a $133 million-funded coin that planned to back itself with fiat currency, and TruStory, a crowd-sourced crypto-offering fact-checking site that raised $3.3 million. 

Exits with unknown returns

Five other acquisitions have also contributed to Pantera’s venture returns, but the data does not specify how much money they made, if any. Acquired in the first fund was promotional site Earn.com. In the second fund, there were security token issuer Harbor, trading platform Paradex and virtual currency portfolio tracker Blockfolio. The third fund invested in Blockfolio again and the digital currency brokerage Tagomi.

What is known is that two of the acquisitions, Harbor and Earn.com, sold for around or below the respective $38 million and $121 million they raised, suggesting some investors may have lost money or written them off. Many investors backed Earn.com when it was a bitcoin mining chip producer, 21 Inc., a business model and name that was subsequently scrapped and rebranded. Virtual currency exchange Coinbase in 2018 acquired Earn.com for about $100 million and Harbor sold for around $38 million to cryptocurrency custodian BitGo in 2019.

Read more: Coinbase In Talks to Buy Bitcoin Startup Earn.com

On the flip side, Blockfolio sold at significant premiums for some investors from the $17 million it raised and Paradex’s acquisition was profitable for most, if not all, investors, according to investor data from other sources seen by CoinDesk. Coinbase bought Paradex in 2018 for more than its seed-only funding, and it added Tagomi for about $150 million in May. Cryptocurrency derivatives trading market FTX Exchange purchased Blockfolio for about $150 million in September.

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JPMorgan Blockchain Lead Christine Moy has been promoted to lead the bank’s Ethereum-based Interbank Information Network (IIN), according to a memo sent to employees on Thursday.

• The network was developed to solve some of the challenges in interbank information sharing, and rivals upstarts including Ripple and Transferwise. It’s powered by Quorum, the permissioned-variant of the Ethereum blockchain acquired by ConsenSys in August.
• According to JPMorgan, more than 400 banks have joined the network, including more than half of the top 50 banks. 
• Moy will take the IIN lead from the bank’s global head of clearing, John Hunter, who helped create IIN in 2017. 
• Hunter is now exclusively focused on clearing but will be a senior adviser to the IIN team, bank spokesperson Jessica Francisco said in an emailed statement.
• Moy will continue to helm the Blockchain Center of Excellence, where she has led initiatives around digital assets, tokenized payments and digital identity. 
• Moy started her career in the bank’s syndicated loans business and has experience across a range of assets and divisions within the bank.

Read more: JP Morgan’s New DLT Lead: We’re Not Done With Blockchain Innovation

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U.K. based fintech bank Revolut has partnered with Fireblocks, a digital asset transaction and storage platform, to provide a secure payments infrastructure for the digital bank’s new cryptocurrency services. 

Announced Thursday, Revolut will use Fireblocks’ wallet and network infrastructure when it offers new crypto services for its 13 million global retail customers.

• The firm did not share any details on what its new crypto products will be.
• However, its statement said using Fireblocks’ crypto management solution would help Revolut streamline liquidity settlements and help guarantee the best price to customers, while also reducing counterparty risk.
  
• Fireblocks uses a patented multi-party computational (MPC) technology for its wallet, and said that so far it has helped with the transfer of $70 billion worth of digital assets.

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U.S. Attorney General William Barr’s Department of Justice (DOJ) believes cryptocurrencies pose an emerging challenge to law enforcement activities, according to a new publication filed Thursday.

The DOJ’s “Cryptocurrency: An Enforcement Framework” document, published by the Attorney General’s Cyber-Digital Task Force, outlines what cryptocurrencies are and their potential use cases, including sections on both legitimate and illicit uses (though the “legitimate uses” section was shorter and more skeptical). Crypto has been used to support terrorism, purchase illicit items, conduct blackmail and extortion, cryptojacking and launder funds, according to the document, and the DOJ has spent the last two years determining how best to address these issues.

“Those efforts are paying off,” wrote Sujit Raman, the task force’s chair, referencing recent cases against Telegram, Welcome to Video, sanctions designations and other efforts. And while the report was published by the DOJ, it encompasses efforts by all parts of the federal government, including civil regulatory agencies.

Related: US Charges 3 With Vast ‘Crypto Jacking’ Computer Fraud Scheme

In a statement, Attorney General William Barr said, “Cryptocurrency is a technology that could fundamentally transform how human beings interact, and how we organize society.  Ensuring that use of this technology is safe, and does not imperil our public safety or our national security, is vitally important to America and its allies.”

The report itself is split into three sections: an overview of the cryptocurrency space and its current illicit uses; the laws and regulatory agencies that oversee the space; and the current challenges and potential strategies to address them. 

The report warns that cryptocurrencies are more difficult for investigators to learn about than previous tools for executing crimes, citing pump-and-dump schemes as one example. 

Cryptocurrency is a technology that could fundamentally transform how human beings interact, and how we organize society. Ensuring that use of this technology is safe, and does not imperil our public safety or our national security, is vitally important to America and its allies.

Related: US Antitrust Chief Says Protecting Blockchain From Competitive Abuses Is Top Priority

Investigators must learn to use “specialized communications applications,” the report said. Further, the markets being used evolve rapidly, with the report pointing to how the initial coin offering boom has given way to decentralized finance markets. The fact that blockchains are borderless, allowing anyone from any part of the world to interact with the markets, “adds a further layer of complexity.”

“Finally, decentralized platforms, peer-to-peer exchangers, and anonymity-enhanced cryptocurrencies that use non-public or private blockchains all can further obscure financial transactions from legitimate scrutiny,” the report said.

In short

Much of the first section of the report simply provides an overview of cryptocurrencies, blockchain, distributed ledgers more broadly and how they’ve been used over the past few years.

The report distinguishes between virtual currencies, which are a “digital representation of value,” and cryptocurrencies, which it describes as being in a subset of virtual currencies that are decentralized and based on blockchains. 

It goes on to explain addresses, wallets, miners and other aspects, noting that while some transactions are private and easy to query on the blockchain, some cryptocurrencies emphasize privacy (the DOJ does not appear to be a fan of these currencies).

“As discussed in Part I, a wide range of criminal activity may involve or be facilitated by the use of cryptocurrency. On numerous occasions, the Department of Justice has used available legal tools to pursue successful prosecutions of such activity,” the report said in the opening to its second section.

Read more: The DOJ Wants to Hire a Crypto Crime Attorney Adviser

It summarizes the U.S. government’s actions over the past few years. In addition to criminal cases brought by the DOJ, civil cases brought by the Securities And Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) were highlighted, such as the SEC’s case against Telegram, which raised $1.7 billion in an initial coin offering but ultimately had to refund investors.

Agencies with oversight or enforcement power in the space include the Financial Crimes Enforcement Network (FinCEN), the Office of Foreign Assets Control (OFAC), the Office of the Comptroller of the Currency (OCC), the SEC, the CFTC and the Internal Revenue Service (IRS). The Financial Action Task Force (FATF), an intergovernmental organization that provides standards and recommendations for international money laundering rules, also received a mention.

Enforcement

It is the third section, “Ongoing Challenges and Future Strategies,” however, the DOJ noted that some exchanges and entities play “jurisdictional arbitrage,” looking for the friendliest jurisdiction to operate in. This can harm law enforcement agencies’ efforts to “investigate, prosecute and prevent criminal activity” that involves virtual assets, the report claimed.

“In the United States, AML/CFT standards have been in place for MSBs engaged in virtual asset activities since 2011, and yet many VASPs still are operating in ways that do not comply with the BSA and other regulatory requirements,” the report said. 

This concern is exacerbated with companies that operate across different countries. A VASP might apply a different standard within the U.S. than it does outside it, or use different standards for crypto-to-fiat transactions compared to crypto-to-crypto transactions, the report claimed.

“Such behaviors are flatly inconsistent with VASPs’ BSA obligations and can create significant financial intelligence gaps,” it said.

Read more: US Antitrust Chief Says Protecting Blockchain From Competitive Abuses Is Top Priority

The DOJ report also took particular aim at privacy coins, mixers, tumblers and other tools that are intended to conceal aspects of transactions.

Any website that offers mixing or tumbling services is “engaged in money transmission,” meaning it is subject to the Bank Secrecy Act. Websites that don’t follow the BSA or similar international regulations might face criminal prosecution, the report said. 

As part of this section, the DOJ maintained its right and ability to prosecute violations conducted by entities based outside the U.S. should those entities still involve U.S. persons or services.

“The Department also has robust authority to prosecute VASPs and other entities and individuals that violate U.S. law even when they are not located inside the United States,” the report said. “Where virtual asset transactions touch financial, data storage, or other computer systems within the United States, the Department generally has jurisdiction to prosecute the actors who direct or conduct those transactions.”

While the DOJ most recently filed charges against BitMEX, it has in the past also gone after other non-U.S. based entities, such as 1broker.

‘Response strategies’

The report similarly had an emphasis on national security concerns created by cryptocurrencies in its conclusion, saying rogue states and terrorists could take advantage of decentralized assets to undermine financial markets, avoid sanctions and fund harmful activities.

“As the use of cryptocurrency evolves and expands, so too will opportunities to commit crime and to do harm by exploiting cryptocurrency technology,” the report said. “Ultimately, illicit uses of cryptocurrency threaten not just public safety, but national security, as well … Current terrorist use of cryptocurrency may represent the first raindrops of an oncoming storm of expanded use that could challenge the ability of the United States and its allies to disrupt financial resources that would enable terrorist organizations to more successfully execute their deadly missions or to expand their influence.”

Current terrorist use of cryptocurrency may represent the first raindrops of an oncoming storm of expanded use that could challenge the ability of the United States and its allies to disrupt financial resources that would enable terrorist organizations to more successfully execute their deadly missions or to expand their influence.

A large part of the DOJ’s future efforts will depend on education around the cryptocurrency space, bringing regulators and government officials fully up to speed as the space evolves.

The report stressed that private stakeholders in the industry must work with regulators and elected officials.

Federal authorities must also work with state officials, the report said, to ensure de-confliction while conducting investigations.

“Indeed, for cryptocurrency to realize its truly transformative potential, it is imperative that these risks be addressed,” the report concluded.

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Coinbase has lost 60 people from its 1,200-person staff after an updated mission statement from CEO Brian Armstrong sparked fierce debate over how companies should respond to today’s charged politics.

In a companywide memo obtained by CoinDesk, Armstrong informed employees that 5% of the company’s workforce had accepted the severance package offered last week. The deadline for employees to signal their interest in the package was Wednesday, and Armstrong said he expects the number to be higher after a “handful of other conversations” are completed. 

“I know there have been many difficult conversations happening to help clarify what our apolitical culture means in practice,” Armstrong wrote. “It’s been great to see the whole team come together to reach understanding here, and support each other through it. It’s not easy to get through, but I think it will result in us having a stronger and more united team.”

Related: Reading Between the Lines of Brian Armstrong’s Mission Memo

Armstrong said the company could have done a “better job” helping Coinbase’s operating group and managers understand the new mission. He also said the exit package had been taken primarily by people who were not part of Coinbase’s “under-represented minority population” and that Coinbase would “continue to keep a close eye on this to ensure we are building a diverse, inclusive environment where everyone feels they belong.”

Coinbase employees speak

One employee at the firm, who spoke with CoinDesk on the condition of anonymity, said the severance package was taken mostly by engineers – as opposed to less-mobile employees like customer support. Another source speaking on the condition of anonymity said the departures were pretty evenly distributed.

I’m worried that the severance package was too good.

Another employee was surprised to hear the number of people who had left. “I’m worried that the severance package was too good,” he said. 

Related: Coinbase’s ‘Mission’ Violates the Spirit of Bitcoin

Read more: Coinbase Offers Severance Package to Employees Unsatisfied With ‘Apolitical’ Mission

In his Thursday memo, Armstrong also clarified that the new mission would not mean employees don’t have to “pretend politics don’t exist.”

“We support each other through tough times and also have conversations about recent events like any team,” Armstrong wrote in the memo. “We have just made a decision to not engage in broader activism as a company outside of our mission.”

While it’s clear that employees are not allowed to talk politics in general Slack channels and have to set up separate non-general channels to talk politics, it’s not clear what counts as political and what counts as apolitical. As CoinDesk reported Friday, employees were told a #spaghetti-monster-for-president Slack channel would be in keeping with the new policy.

Read more: Coinbase Employees Have Begun to Take Severance Packages

“There’s not been any real clarity since last week,” one engineer said. “No one in leadership seems to be able to define it since they’re in the same boat as the rest of the employees, trying to pull meaning from Brian’s limited statements.”

Armstrong said in the memo he recognizes that what counts as politics is “a blurry line.”

“Our goal is not to look for violations, but rather to support employees in adapting to these clarified expectations,” he wrote.

Armstrong also said the cultural norms at Coinbase will be re-articulated and clarified in the future as the company scales. 

“I’m excited to be moving forward as #OneCoinbase to pursue our vision of economic freedom for every person and business,” he concluded.

Zack Seward contributed reporting.

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U.S. Attorney General William P. Barr announced Thursday the release of “Cryptocurrency: An Enforcement Framework,” a roadmap for policing the cryptocurrency landscape.

• The framework provides a comprehensive overview of the emerging threats and enforcement challenges associated with the increasing prevalence and use of cryptocurrency, Barr said.
• An 83-page document accompanying the release included three sections – threat overview, law and future strategies – to guide DOJ’s handling of the space.
• The document’s release comes two years after former Attorney General Jeff Sessions convened a “Cyber-Digital Task Force” to study the ramifications of technological advances.
• “Despite its relatively brief existence, this technology already plays a role in many of the most significant criminal and national security threats our nation faces,” said Associate Deputy Attorney General Sujit Raman, chair of the Cyber-Digital Task Force, which wrote the report. 
• There are a number of instances where the DOJ will exert its authority over foreign actors, the report said, namely when “virtual asset transactions touch financial, data storage or other computer systems” with the U.S., if they use crypto to import illegal goods into the country and if they provide illegal services” to defraud or steal from U.S. residents.
• The report at times sounds an almost apocalyptic note: “Current terrorist use of cryptocurrency may represent the first raindrops of an oncoming storm of expanded use that could challenge the ability of the United States and its allies to disrupt financial resources that would enable terrorist organizations to more successfully execute their deadly missions or to expand their influence.”

Read More: The DOJ’s ‘Crypto Enforcement Framework’ Argues Against Privacy Tools and for International Regulation

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U.S. Attorney General William P. Barr announced Thursday the release of “Cryptocurrency: An Enforcement Framework,” a roadmap for policing the cryptocurrency landscape.

• The framework provides a comprehensive overview of the emerging threats and enforcement challenges associated with the increasing prevalence and use of cryptocurrency, Barr said.
• An 83 page document accompanying the release included three sections – threat overview, law, and future strategies – to guide DOJ’s handling of the space.
• The document’s release comes two years after former Attorney General Jeff Sessions convened a “Cyber-Digital Task force” to study the ramifications of technological advances.
• “Despite its relatively brief existence, this technology already plays a role in many of the most significant criminal and national security threats our nation faces,” said Sujit Raman, chair, Attorney General’s Cyber-Digital Task Force, which wrote the report. 
• There are a number of instances where the DOJ will exert its authority over foreign actors, the report said., namely when “virtual asset transactions touch financial, data storage, or other computer systems” with the U.S., if they use crypto to import illegal goods into the country, and if they provide illegal services ” to defraud or steal from U.S. residents.
• The report, at times, sounds an almost apocryphal note: “Current terrorist use of cryptocurrency may represent the first raindrops of an oncoming storm of expanded use that could challenge the ability of the United States and its allies to disrupt financial resources that would enable terrorist organizations to more successfully execute their deadly missions or to expand their influence.”

Read More: The DOJ’s ‘Crypto Enforcement Framework’ Argues Against Privacy Tools and for International Regulation.

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• Winklevoss-Founded Crypto Exchange Gemini Hires Former Morgan Stanley Exec

CoinDesk is preparing for the invest: ethereum economy virtual event on Oct. 14 with a special series of newsletters focused on Ethereum’s past, present and future. Every day until the event the team behind Blockchain Bites will dive into an aspect of Ethereum that excites or confuses us.

The Top Shelf news you subscribed to is down below. 

Now, a few words from CoinDesk markets reporter Daniel Cawrey.

Increased usage 
One of the best metrics of increased usage in the Ethereum economy comes via wallet adoption, the entry point for anyone wanting to interact with decentralized finance, or DeFi. 

Wallets are a key part of the discussion around DeFi adoption and a focus of the CoinDesk invest: ethereum economy panel “Unlocked: TVL and Beyond – Measuring the DeFi Economy” on Oct. 14. Total value locked, or TVL, may measure the top-line numbers, but wallets are where investors park their crypto.

The MetaMask wallet, a browser extension that allows users to interact with the Ethereum network and its multitude of smart contract-based DeFi applications, has surpassed 1 million users. That’s a fourfold increase for the wallet since 2019, which is developed and maintained by New York-based software firm ConsenSys. 

Chasing juicy returns in the DeFi space, which can sometimes provide double- or triple-digit returns for lending crypto, is one of the reasons for MetaMask’s growth, said John Willock, CEO of Tritium Digital Assets, a crypto liquidity provider. “I think we can all recognize that a lot of the adoption of MetaMask is through the recent DeFi craze and interest in short-term returns that has been perceived to be out there to chase,” he said.  

However, that speculation is bringing real adoption, Willock added, as he compared MetaMask to a web browser, which is the piece of software that has on-boarded almost everyone to the internet. 

“I look at the MetaMask numbers as the same sort of early adoption indicator the uptake of Netscape browser use was in the 1990s. It is exciting,” he said.  

What’s even more interesting: Developing countries lead in MetaMask adoption. India, Nigeria and the Philippines are the countries with most MetaMask usage after the United States. 

“Metamask passing 1 million users is an impressive feat. It’s by far the most used browser wallet and gives the community a best-in-class balance between security, functionality and usability,” said Brian Mosoff, chief executive of investment firm Ether Capital.

“I expect MetaMask will continue to dominate as DeFi and other Ethereum applications flourish over the coming months and years,” Mosoff added.  

It’s simple: More wallet users means more adoption of the Ethereum economy. Although MetaMask requires some knowledge of mnemonic seed storage by users, it’s actually a pretty delightful wallet for an increasingly growing DeFi ecosystem.

– Daniel Cawrey

Featured panel

Related: First Mover: Bitcoin ‘Comatose’ Under $16K for Rest of 2020, While Ether Traffic Eases

Stablecoins, Hyper-Collateralization and the DeFi Economy
The rise of fiat- and algorithm-backed stablecoins has largely put crypto’s volatility narrative to rest. Now, they have become the bridge into the DeFi economy as well as an engine of hyper-collateralization and “money games.” How will these tools evolve as DeFi matures? What risks do these systems create, and how can they be managed as the stakes get higher?

Circle CEO Jeremy Allaire, Aave CEO Stani Kulechov and cryptorati Maya Zehavi will go live at 4:30-5:00 p.m. ET on Oct. 14 as part of invest: ethereum economy.

Weird DeFi
Ethereum’s highly anticipated 2.0 upgrade is poised to bring the network ever closer to fulfilling its original vision to be a “world computer” that plays host to a parallel, decentralized financial system. 

At invest: ethereum economy on Oct. 14, we will address the ramifications for investors as decentralized finance takes the crypto world by storm. 

Related: Blockchain Bites: Crypto’s Top Universities, Bitcoin’s New Addresses, MetaMask’s Token Swaps

In a run-up to the event, our two-part CoinDesk Live: Inside the Ethereum Economy virtual miniseries on Oct. 8 and Oct. 12 introduces trending narratives we will break down at the main event: Why all the hype behind yield farming and food-inspired tokens? Should investors take them seriously or are they a fading trend?

On Oct. 8, CoinDesk senior business reporter Brady Dale hosts Priyanka Desai of Open Law, Mason Nystrom of Messari and Sam Bankman-Fried of FTX to assess the newest crazes sweeping the DeFi landscape.

Watch DeGeneration: How Ethereum Is Making Finance Weird on Oct. 8.

Ethereum 101

Just as MetaMask has become an important on-ramp to the Ethereum economy, so, too, are the narratives that capture people’s attention. 

This past year has seen the rise of new memetic trading strategies – ways to both interact with and discuss Ethereum applications – that have set the pace for development. 

Yield farming, “the rocket fuel of DeFi,” is one such strategy. A silly name, but an important concept. CoinDesk’s Brady Dale explained in July how it all works.

Minding fields
The hot new term in crypto is “yield farming,” a shorthand for clever strategies where putting crypto temporarily at the disposal of some startup’s application earns its owner more cryptocurrency.

Another term floating about is “liquidity mining.” The buzz around these concepts has evolved into a low rumble as more and more people get interested.

The casual crypto observer who only pops into the market when activity heats up might be starting to get faint vibes that something is happening right now. Take our word for it: Yield farming is the source of those vibes. 

Broadly, yield farming is any effort to put crypto assets to work and generate the most returns possible on those assets.

At the simplest level, a yield farmer might move assets around within Ethereum-based credit market Compound, constantly chasing whichever pool is offering the best APY from week to week. This might mean moving into riskier pools from time to time, but a yield farmer can handle risk.

“Farming opens up new price arbs [arbitrage] that can spill over to other protocols whose tokens are in the pool,” said Maya Zehavi, a blockchain consultant.

Because these positions are tokenized, though, they can go further.

In a simple example, a yield farmer might put 100,000 USDT into Compound. They will get a token back for that stake, called cUSDT. Let’s say they get 100,000 cUSDT back (the formula on Compound is crazy so it’s not 1:1 like that but it doesn’t matter for our purposes here).

They can then take that cUSDT and put it into a liquidity pool that takes cUSDT on Balancer, an AMM that allows users to set up self-rebalancing crypto index funds. In normal times, this could earn a small amount more in transaction fees. This is the basic idea of yield farming. The user looks for edge cases in the system to eke out as much yield as they can across as many products as it will work on.

Right now, however, things are not normal, and they probably won’t be for a while because liquidity mining supercharges yield farming. 

Liquidity mining is when a yield farmer gets a new token as well as the usual return (that’s the “mining” part) in exchange for the farmer’s liquidity.

“The idea is that stimulating usage of the platform increases the value of the token, thereby creating a positive usage loop to attract users,” said Richard Ma of smart-contract auditor Quantstamp.

The yield farming examples above are only farming yield off the normal operations of different platforms. Supply liquidity to Compound or Uniswap and get a little cut of the business that runs over the protocols – very vanilla.

But Compound announced earlier this year it wanted to truly decentralize the product and it wanted to give a good amount of ownership to the people who made it popular by using it. That ownership would take the form of the COMP token.

By giving away a healthy proportion to users, that was very likely to make it a much more popular place for lending. In turn, that would make everyone’s stake worth much more.

So, Compound announced this four-year period where the protocol would give out COMP tokens to users, a fixed amount every day until it was gone. These COMP tokens control the protocol, just as shareholders ultimately control publicly traded companies.

Every day, the Compound protocol looks at everyone who had lent money to the application and who had borrowed from it and gives them COMP proportional to their share of the day’s total business.

COMP turned out to be a bit of a surprise to the DeFi world, in technical ways and others. It has inspired a wave of new thinking.

“Other projects are working on similar things,” said Nexus Mutual founder Hugh Karp. In fact, informed sources tell CoinDesk brand-new projects will launch with these models.

We might soon see more prosaic yield farming applications. For example, forms of profit-sharing that reward certain kinds of behavior.

As this sector gets more robust, its architects will come up with ever more robust ways to optimize liquidity incentives in increasingly refined ways. We could see token holders greenlighting more ways for investors to profit from DeFi niches.

– Brady Dale

The ledger

This year, decentralized finance emerged as Ethereum’s best bet at finding mainstream attraction. While still a fraction of the activity on Ethereum, and an even smaller portion of crypto generally, DeFi has captured the public’s attention. 

The Financial Times, for instance, wrote a user’s guide to DeFi. But a few questions were left unanswered. CoinDesk contributor Alyssa Hertig responds to a few frequently asked questions, trying to filter the signal from the noise. 

How do I make money with DeFi?
The value locked up in Ethereum DeFi projects has been exploding, with many users reportedly making a lot of money.

Using Ethereum-based lending apps, as mentioned above, users can generate “passive income” by loaning out their money and generating interest from the loans.  Yield farming, described above, has the potential for even larger returns, but with larger risk. It allows for users to leverage the lending aspect of DeFi to put their crypto assets to work generating the best possible returns. However, these systems tend to be complex and often lack transparency.

Is investing in DeFi safe?
No, it’s risky. Many believe DeFi is the future of finance and that investing in the disruptive technology early could lead to massive gains.

But it’s difficult for newcomers to separate the good projects from the bad. And, there has been plenty of bad.

As DeFi has increased in activity and popularity through 2020, many DeFi applications, such as meme coin YAM, have crashed and burned, sending the market capitalization from $60 million to $0 in 35 minutes. Other DeFi projects, including Hotdog and Pizza, faced the same fate, and many investors lost a lot of money.

In addition, DeFi bugs are unfortunately still very common. Smart contracts are powerful, but they can’t be changed once the rules are baked into the protocol, which often makes bugs permanent and thus increasing risk.

When will DeFi go mainstream?
While more and more people are being drawn to these DeFi applications, it’s hard to say where they’ll go. Much of that depends on who finds them useful and why. Many believe various DeFi projects have the potential to become the next Robinhood, drawing in hordes of new users by making financial applications more inclusive and open to those who don’t traditionally have access to such platforms.

This financial technology is new, experimental and isn’t without problems, especially with regard to security or scalability.

Developers hope to eventually rectify these problems. Ethereum 2.0 could tackle scalability concerns through a concept known as sharding, a way of splitting the underlying database into smaller pieces that are more manageable for individual users to run.

How will Ethereum 2.0 impact DeFi?
Ethereum 2.0 isn’t a panacea for all of DeFi’s issues, but it’s a start. Other protocols such as Raiden and TrueBit are also in the works to further tackle Ethereum’s scalability issues. 

If and when these solutions fall into place, Ethereum’s DeFi experiments will have an even better chance of becoming real products, potentially even going mainstream.

– Alyssa Hertig

At stake

Despite the buzz surrounding DeFi, the risks are clear. Donna Redel, adjunct professor of law at Fordham Law School, and Olta Andoni, of counsel at Zlatkin Wong, are two lawyers who have soured on the field (so to say): Regulators are circling, they said in an op-ed published in August.

DeFi’s demise?
A corner of the crypto universe representing less than 1% of total market capitalization of crypto assets has been grabbing the headlines since June. This is the world of decentralized finance, or DeFi, which alternatively is referred to as the center of innovation, an experiment or the new wild, wild west where projects move fast and break things. 

A recent glance of articles on CoinDesk demonstrates the phenomenon. Once again, crypto headlines are focusing on the “craze,” the “frenzy of yield farming,” “investors pouring money into” and “another protocol going up in a fireball.” 

Will the nonstop headlines and framing around the “hot” new DeFi protocols chill the institutional adoption that is beginning in earnest for crypto, digital assets and blockchain technology? 

We believe that, at a minimum, the industry needs self-regulation. Without it, it is on a trajectory to serious regulatory scrutiny and reputational risk.

As with almost everything in crypto, the strong sentiments and opinions make it difficult to determine the true essence and reality around the majority of DeFi projects. For us, this refrain is reminiscent of 2017’s frothy initial coin offering (ICO) days that ended badly for the good names of blockchain and crypto. 

There are certainly similarities: trading frenzy; projects emerging with little or no testing and without audit; no clear regulatory guidance and the recycling of ETH now leading to inflated gas prices. Are we on the precipice of one of the regulatory agencies waking up and sending a missive similar to The Dao Report? 

On the legal front, there is a lack of clear consensus about which agency should be regulating. And, again, there is a lack of guidance from multiple agencies that could be responsible for DeFi projects or for the space generally. 

We are alarmed and concerned with the apparent lack of 360-degree understanding of the potential role of the various actors or operators and their possible interactions with the projects, the governance and hence DeFi ecosystem. Tokens are appearing overnight. Projects are hesitant to use, or totally avoid, terminology that might infer “issue,” “issuance” or “issuer,” as these are hypersensitive words in the securities world. 

Calling a project an “experimental game” or an “innovation” is not sufficient to take it out of the regulatory ambit. The focus is shifting from securities regulation of “the issuer” and the Howey Test prevalent during the ICO days and after, to more complex analysis of the application of commodities regulation, questions relating to who is the “controlling stakeholder(s)” and whether liability or responsibility falls on them.  

Many questions, from a perspective of both securities law and commodities laws, should be examined anew to see how they may be applied to, as well as reimagined for, a disintermediated-decentralized financial model.  

The outstanding questions include whether the “controlling stakeholders” are determined by voting control on DeFi platforms, who among the investor group and founders who has voting control, and whether there should be standards for exchange listing. 

Furthermore, it remains to be seen whether defining these projects as  “decentralized” puts them outside of the regulatory reach or whether  the “centralized” ones should be referred to as “disintermediated finance” – aka the ability to conduct secure financial transactions directly, without the use of financial intermediaries. 

Despite the regulatory uncertainty, traders, projects and exchanges are going full steam ahead, with the result that tokens run high risks of unwarranted price changes, which impacts governance, liquidity and the well-being of the projects.

In our view, the DeFi experiment demonstrates the need for creating a new set of industry rules: audits, proper risk disclosures and planning to anticipate what could go wrong before it actually happens. DeFi self-regulation should normalize collateral sufficiency reviews, auditing standards, governance both on an ongoing and crisis basis as well as the distribution-centralized ownership of tokens. 

It remains to be seen how a regulatory loophole in which these tokens are created, distributed and traded all without regulatory supervision will play out. At least with a modified Safe Harbor, proposed by Commissioner Hester Peirce, and which we commented on earlier this year, the SEC would have some oversight. For the moment, tokens in the DeFi are appearing daily and the explosion of tokens is leading to a distortion of purpose and “investors” are getting burned as projects implode.

– Donna Redel & Olta Andoni

Top shelf

Square
Square, the payments company helmed by Twitter CEO Jack Dorsey, announced Thursday it has purchased 4,709 bitcoins, a $50 million investment representing 1% of the firm’s total assets. “Square believes that cryptocurrency is an instrument of economic empowerment and provides a way for the world to participate in a global monetary system, which aligns with the company’s purpose,” the company said in a statement. “We believe that bitcoin has the potential to be a more ubiquitous currency in the future,” said Square CFO Amrita Ahuja. “For a company that is building products based on a more inclusive future, this investment is a step on that journey.”

Options portend
Activity in bitcoin options listed on the Chicago Mercantile Exchange (CME) surged Wednesday as investors traded call options. According to data source Skew, the CME traded $48 million worth of options during the day, the highest daily volume figure since Jul. 28. The number marks a 300% rise from Tuesday’s figure of $12 million. “The CME options had a strong session, and the spike in the volume was mainly due to increased activity in call options,” Skew CEO Emmanuel Goh told CoinDesk over Telegram. The data suggests some traders foresee a bitcoin rally, but believe the upside will be capped near $16,000 until the end of December. Further, they expect prices to remain below $20,000 till the end of the first quarter of 2021.

Hayes steps down
The founders of BitMEX are stepping down from their executive roles at the parent firm of the crypto derivatives exchange soon after U.S. authorities charged the firm over allegedly illegal conduct. In a blog post Thursday, 100x – the holding group for BitMEX operator HDR Holdings – announced that founders Arthur Hayes and Samuel Reed have “stepped back from all executive management responsibilities for their respective CEO and CTO roles with immediate effect.” Vivien Khoo, current chief operating officer of 100x Group, will become Interim CEO, while Ben Radclyffe, commercial director, will take on a supporting role with greater management of client relationships and oversight of financial products.

Enter Google
Google Cloud is making moves to become an EOS validator, but not for the tokens. “Google Cloud is not getting into crypto mining. This is really an infrastructure play for us,” Google Cloud Developer Advocate Allen Day told CoinDesk’s Brady Dale. On Tuesday, Block.one, the company that runs the EOS blockchain, announced Google Cloud is mulling becoming one of the network’s 21 block producers. Day said the company is committed to supporting public blockchain infrastructure, as seen by previously forged relationships with Hedera Hashgraph and Theta Labs, a video content relayer.

FATF standards
The Travel Rule Protocol (TRP), a working group favored by banks and traditional financial institutions and focused on bringing crypto in line with global anti-money laundering (AML) standards, has released the first version of its API. The 25-member TRP working group, which includes Standard Chartered, ING Bank and Fidelity Digital Assets, said the product aims to offer a straightforward way for firms to swap identification data.  This includes data of originators and beneficiaries of crypto transactions, as per the requirements of global AML watchdog the Financial Action Task Force (FATF).

Quick bites

• KPMG Airs Blockchain Solution to Help Corporates Offset Carbon Emissions (Sebastian Sinclair/CoinDesk)
• Riot Buys 2,500 More Bitmain Miners in Latest Fleet Expansion (Danny Nelson/CoinDesk)
• Bitcoin Correlations Depend on What Phase It Is In (Lyn Alden/CoinDesk)
• Tim Draper Leads Targeted $5M Series A for India Crypto Exchange Unocoin (Daniel Palmer/CoinDesk)
• Over $26M Worth of Bitcoin Associated With 2016 Bitfinex Hack Is on the Move (Jaspreet Kalra/CoinDesk)

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Square, the payments company helmed by Twitter CEO Jack Dorsey, announced Thursday it has purchased 4,709 bitcoins, a $50 million investment representing 1% of the firm’s total assets.

• “Square believes that cryptocurrency is an instrument of economic empowerment and provides a way for the world to participate in a global monetary system, which aligns with the company’s purpose,” the company said in a statement.
• “We believe that bitcoin has the potential to be a more ubiquitous currency in the future,” said Square CFO Amrita Ahuja. “For a company that is building products based on a more inclusive future, this investment is a step on that journey.”
• Characterized by Square as a mission-driven investment, Square’s $50 million buy comes amid Dorsey’s very public spat over corporate responsibility with another crypto-friendly CEO, Coinbase’s Brian Armstrong.
• Dorsey chided Armstrong last week for discouraging his employees from engaging in activism in the workplace. Armstrong said it was a corporate imperative; Dorsey framed it as hypocritical.
• “Bitcoin (aka ‘crypto’) is direct activism against an unverifiable and exclusionary financial system which negatively affects so much of our society,” Dorsey tweeted in response to Armstrong’s blog post.
• Square is also now the second technology firm to go long on bitcoin in recent months after MicroStrategy, a business intelligence firm, crowned the crypto as its treasury reserve asset of choice.
• MicroStrategy invested $425 million into bitcoin, according to a series of disclosures that pumped the stock’s value and revealed its CEO, Michael Saylor, to be an unexpectedly vocal bitcoin maximalist.
• But Square’s bitcoin investment is far more in line with its corporate identity and business services than was the case for MicroStrategy.
• Square’s Cash App is a critical bitcoin entry point for many retail investors. It has become a major revenue driver for the publicly traded fintech.

Read more: Bitcoin Drove Half of Square’s Cash App Revenue in the 4th Quarter

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• Bungled Theft of Bitcoin ATM Puts Canadian Business Out of Action
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• Tim Draper Leads Targeted $5M Series A for India Crypto Exchange Unocoin