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"Buckle Up" For Bitcoin's Next Bull Run, Cameron Winklevoss Says

Gemini CEO and co-founder Cameron Winklevoss believes that the next Bitcoin bull run coming up will be “dramatically different,” due to the innovative financial resources that crypto investors have access to nowadays and to the current economic infrastructure.

Winklevoss Anticipates Next BTC Bull Run

Compared to previous bull markets, the billionaire crypto philanthropist said that with the rise of infrastructure, the influx of capital, and better projects at hand, Bitcoin (BTC) is set for its next bull run:

“The next Bitcoin bull run will be dramatically different. Today, there’s exponentially more capital, human capital, infrastructure, and high-quality projects than in 2017. Not to mention the very real specter of inflation that all fiat regimes face going forward. Buckle up!”

The Winklevoss brothers are on the same page regarding Bitcoin. Last week, Cameron’s twin brother and co-founder of Gemini, Tyler Winklevoss, commented on the US Federal Reserve’s economic stimulus strategy having a positive impact on Bitcoin and its pricing on the crypto market. Winklevoss stated that the Federal Reserve had set the stage for BTC’s next bull run. He referred to the fact that the US government is actively printing money in bulk in order to deliver an economic stimulus package to its citizens, to provide pandemic relief.

Americans Use First-Time Stimulus Check for BTC

What seems to be interesting however, is that according to a report by Coinbase CEO Brian Armstrong, instead of using their funds towards goods and services, many Americans directd their first-time stimulus checks of $1,200 towards investing in BTC funds.

So despite coronavirus and the economic downfall happening worldwide, things appear to be looking up for the cryptocurrency market. Data points hint that crypto investors’ capital have been on the rise. Furthermore, with the increase in regulatory policies and the clarity of them, the infrastructure of the crypto market has been improving considerably.

Why Was More Money Involved In the Last BTC Rally?

Researchers looked at two key points to explain why more money has been involved in the latest Bitcoin rally, where the dominant cryptocurrency underwent a huge surge.

First of all, Tether(USDT), the market capitalization of Tether, the biggest stablecoin on the cryptocurrency market, has surpassed $10 billion in assets. Secondly, Grayscale Investments, the big-time cryptocurrency investment firm, has recently achieved a new high in the Assets Under Management (AUM) department.

Stablecoin Tether On Top of Its Game

Tether has been up to now the biggest stablecoin on the crypto market. Investors worldwide have therefore relied a lot on the stablecoin to trade crypto. Countries with poor regulatory policies revolving around cryptocurrency regulation have favored Tether, as it is a stablecoin. With the rise in market cap of Tether to $10 billion, this may mean that cryptocurrency exchanges might be on the brink of a huge money influx, with more funds being used on them.

As to further explain why more money has been involved in the latest BTC bull run, researchers turn towards Grayscale’s crypto-asset trusts as an explanation. The crypto asset trust funds of the large-scale investment firm are arguably the most utilized investment vehicles employed by businesses and networks looking to gain exposure to cryptocurrencies.

Grayscale Investments Reaches $5.1 Billion

Recently, the assets under management by Grayscale Investments have achieved a new record, reaching an all-time high of $5.1 billion.

On the subject matter, CEO of Grayscale Investments, Barry Silbert, said that Bitcoin has too much support from US government officials to ever be dismissed and shut down. The CEO thinks that blockchain firms’ success with regulatory policies put forth by officials can be attributed to pro-blockchain groups, such as Blockchain Association. The latter is a group who has advocated for digital firms by appealing to the US Securities and Exchange Commission in the past.

Silbert thinks that the blockchain industry has come a long way, with more and more investors looking at Bitcoin as an interesting hedge. In a Twitter post, he spoke about his own personal experience with his cryptocurrency investment firm. Silbert said that in 2013, when his company launched a Bitcoin investment fund, everyone thought they were crazy. “Well, look at us now…,” he added.

This Week’s Bitcoin Bull Run

Overall, projects and companies in the Bitcoin and crypto industry seem to be increasing in quality. With the latest Bitcoin rally that happened earlier this week, there seems to be an indication that the cryptocurrency industry is on the rise. Bitcoin surged past the $10,000 mark on Monday, creating a buzz in the financial industry.

CEO of financial consultancy firm deVere Group, Nigel Green, was even bold enough to state that the cryptocurrency is set to potentially “knock gold from its long-held position” of being a safe-haven asset.

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AI bias: how blockchain can ensure its safety

As artificial intelligence (AI) becomes increasingly integrated into our daily lives, concerns about bias within AI systems have garnered significant attention. Bias in AI refers to the systematic errors or inaccuracies in decision-making processes, often resulting from the unconscious prejudices of its developers or the data used to train the algorithms. Addressing bias in AI is crucial to ensuring fairness, equity, and safety across various applications, from hiring processes to judicial systems. In this context, blockchain technology emerges as a promising solution to mitigate bias and enhance transparency in AI systems.

According to a post by CyberGhost, human biases can significantly influence AI algorithms, leading to discriminatory outcomes. For instance, if AI systems are trained on biased datasets, they may perpetuate and amplify existing societal inequalities. This highlights the urgent need for innovative approaches to address bias in AI and uphold ethical standards.

Blockchain technology, known primarily for its association with cryptocurrencies like Bitcoin, offers a decentralized and transparent framework that can effectively combat bias in AI. Unlike traditional centralized systems, blockchain operates on a distributed ledger, where transactions are recorded across a network of computers. Each transaction, or in the case of AI, each decision made by the algorithm, is transparently recorded on the blockchain, making it immutable and tamper-proof.

One way blockchain can ensure the safety of AI systems is through the concept of a decentralized autonomous organization (DAO). In a DAO, decisions are made collectively by a community of stakeholders rather than a single centralized authority. By integrating blockchain into AI governance models, decisions made by AI algorithms can be subjected to community scrutiny and consensus, reducing the likelihood of biased outcomes.

Moreover, blockchain enables the creation of transparent and auditable datasets for training AI algorithms. Data provenance, or the ability to trace the origin and history of data, is crucial for identifying and mitigating biases in AI. By recording data transactions on the blockchain, stakeholders can verify the authenticity and integrity of datasets, ensuring that they are free from bias or manipulation.

Furthermore, blockchain-based smart contracts can be utilized to enforce fairness and accountability in AI systems. Smart contracts are self-executing contracts with the terms of the agreement directly written into code. In the context of AI, smart contracts can specify fairness criteria and penalties for biased decisions, thereby incentivizing developers to prioritize ethical considerations in algorithm design.

Implementing blockchain technology in AI systems is not without its challenges. Scalability, interoperability, and energy consumption are among the technical hurdles that need to be addressed. Additionally, regulatory and legal frameworks surrounding blockchain and AI integration require careful consideration to ensure compliance with data protection and privacy laws.

Bias in AI poses significant risks to individuals and society at large, undermining trust and perpetuating discrimination. Blockchain technology offers a promising avenue for mitigating bias in AI systems through transparency, decentralization, and accountability. By leveraging blockchain’s inherent features, we can foster more equitable and safe AI systems that uphold ethical principles and serve the greater good.

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Most European Regulators Have Scrutinized Facebook's Libra, Except One: Who’s the Odd One Out?

What happened recently with the Libra Association?

Made up of more than two dozen companies and based in Geneva, a few of the founding members, including PayPal, Mastercard, Visa, Stripe, Booking Holdings, and eBay, decided to leave the Libra project. A five-member board governance board was formed after the Libra Association reaffirmed its commitment by holding its inaugural meeting in Geneva, Switzerland, on Oct. 14.

However, the Libra Association quickly defended, saying, “we’re better off knowing about this lack of commitment now, rather than later.”

Libra announced that the launch was planned for June 2020; however, the global watchdogs stated, “we are surprised and concerned that this further detail is not yet available.” On Sept. 16, Libra representatives met with the Committee on Payments and Market Infrastructure (CPMI), a part of the Bank for International Settlements (BIS) – a group for 60 central banks and monetary authorities across the globe to discuss the regulatory hurdles around stablecoins developed by large corporations.

Despite the global uncertainty of the stablecoin, the Libra Association will continue with its plan to launch with the 100 members initially envisaged when it was announced in June. The association also believes that new financial and banking partners will be joining.

The European Union

Benoit Coeure, an executive at the European Central Bank, warned that regulators are cautious of cryptocurrencies by large corporations similar to Libra. He mentioned, “as a new technology, stablecoins are largely untested, especially on the scale required to run a global payment system. They give rise to a number of serious risks related to public policy priorities.” He believes that Libra needs to be well understood and thoroughly tested in a real-world environment to see whether it is scalable to run a global system for its official launch.

The executive branch of the European Union sent a questionnaire to Facebook and the Libra Association regarding clarification about the stablecoin. These questions come after the European Union antitrust regulators’ preliminary investigation into Facebook’s plans. The EU regulators were concerned about the use of information and data, along with the integration of Libra wallets with WhatsApp and messenger services.

However, Dante Disparte, Head of Policy and Communications for the Libra Association, stated, “the Libra Association welcomes this public policy dialogue and multi-stakeholder process that will help unleash the economic and social potential of digital currencies.”

Valdis Dombrovskis, the European Union’s finance commissioner, pledged to propose new rules to regulate cryptocurrencies similar to Libra. Dombrovskis’ served as Latvia’s prime minister and finance minister and was a member of the European Parliament from 2004 to 2009. If reappointed as the Executive Vice President of the European Commission, Dombrovskis would be handling “An Economy that Works for People” and will be working to “deepen Europe’s economic and monetary union.” Dombrovskis advocated for the EU’s need to address “unfair competition, cybersecurity, and threats to financial stability.”

The European Commission

Margrethe Vestager, the Executive Vice President-Designate of the European Commission, questioned the motives behind Facebook’s Libra stablecoin. Vestager addressed competition as a possible impact from Libra’s launch due to Facebook’s multimillion user base and a distortion of competition in the payment services market.

Vestager added:

“It’s a pretty new thing that we are starting to question something that does not exist yet. But it is so far in the future that we cannot tell if this is going to be a problem. And the problem may be that you get a completely closed ecosystem that has nothing to do with the rest of the economy.”

Vestager further questioned, “What does it mean that you have your own currency that works within this space — and which can only be used within this space? So, what about the values that get caught there? Those who sell with the Libra as a means of payment then get a special advantage over those who come and want to pay in all sorts of other ways?”

France

France said in September that it would be blocking the development of Facebook’s Libra in Europe. Bruno Le Maire, French Finance Minister, said that plans for Libra could not move ahead unless concerns over consumer risk and governments’ monetary sovereignty were addressed. Le Maire commented on virtual currencies:

“I want to be absolutely clear: In these conditions, we cannot authorize the development of Libra on the European soil.” He added, “the monetary sovereignty of countries is at stake from a possible privatization of money… by a sole actor with more than 2 billion users on the planet.”

Le Maire also mentioned that there is a risk of countries having to bail out the currency if it goes under and facing other risks such as money laundering on a more challenging level, and terrorism financing. He suggested that Facebook could look at creating another separate “public digital currency.” Another concern that Le Maire expressed was that Libra might “substitute itself as a national currency” and potentially cause financial disruption. He said, “I don’t see why we should dedicate so much effort to combating money laundering and terrorist financing for so many years to see a digital currency like Libra completely escape those regulatory efforts.”

However, Disparte said that Le Maire’s comments emphasized the importance of the project’s backers working together with global regulators. He clarified, “We recognize that blockchain is an emerging technology and that policymakers must carefully consider how its applications fit into their financial system policies.”

Germany

Along with the French, Germany’s finance minister has also been against private currency projects like Libra, although support the digitization of the euro. Olaf Scholz, German Federal Minister of Finance, stated that he would be keen on developing an “E-euro,” claiming:

“A payment system like that would be good for Europe as a financial center and its integration into the world financial system.”

However, he also commented by saying he is “very, very skeptical” of Facebook’s stablecoin, and added, “a core element of national sovereignty is currency issuance; we would not leave that to private businesses.”

Portugal

Ricardo Mourinho Felix, Portugal’s Secretary of State for Finance expressed concerns about Libra in early October, announcing that it should not circulate in the market until the risks it could pose for the current financial system are mitigated.

Felix addressed Facebook’s stablecoin at a conference, “it is clear from the outset that is a high-risk phenomenon with systemic implications. It is essential that no ‘stable currency’ project like Libra – is launched until all concerns have been duly addressed.” He further highlighted that Portugal also shares the same concerns as stated by other European countries regarding Libra.

Felix highlighted the “risk that Libra could limit the reach of traditional monetary policy tools,” and could have a significant effect on the policies which today promote the stability of the financial system.”

Switzerland

Mark Branson, the Head of the Swiss Financial Market Supervisory Authority (FINMA) has concerns with the crypto projects that develop without being thoroughly questioned by the officials rather than about Facebook’s Libra.

Branson stated at a Bloomberg event in Zurich, “I am much more nervous about projects which develop in a dark corner in the financial system somewhere, spread themselves out through cyberspace and one day are too big to be stopped.”

He mentioned that Switzerland would not be putting up “extra hurdles” in front of the project. However, Libra will be under strict rules that typically apply to banks and on top of unbending anti-money laundering laws. “We are not here to make such projects impossible. We will respond to them with an open mind, with an attitude that same risks require same rules,” said Branson.

United Kingdom

Mark Carney, Governor of the Bank of England, has been defending Facebook’s decision to create a new currency. According to news outlet TheStar, Carney highlighted the limitations of the current traditional financial system. Carney believes that Facebook and other similar firms should be involved in projects like Libra.

With the high costs of transactions, small businesses are charged as much as 200 basis points per transaction, Carney further explained, “that’s not good enough in this day and age. Those payments should be instantaneous; it should be the same as us exchanging a banknote online. It should be virtually costless, and it should be 100 percent resilient.”

The United Kingdom’s central bank also presented its latest Financial Policy Summary and Record at a Financial Policy Committee (FPC) meeting that was held on Oct. 9. The document presented the resilience of the UK Financial system, discussed the innovative developments in the payments sector while highlight Libra has a great chance to become “a systemically important payment system.”

Images via Shutterstock

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India Taking a Step Towards CBDC After the Debut of its Blockchain-Based Payment System Vajra?

India has been taking multiple stances when it comes to blockchain and cryptocurrencies, as cryptocurrency has not been deemed legal, but not considered illegal either. The National Payments Corporation of India (NPCI) recently designed and adopted a blockchain-based system for automating payment clearing and settlement processes.

Earlier this year, the Bank for International Settlements (BIS) published a report stating that over 70% of central banks were exploring central bank digital currencies (CBDCs). The Reserve Bank of India (RBI) said that it would be investigating the issuance of a CBDC. The central bank has created a group to examine the potential of a rupee-backed digital currency. Since the emergence of private digital tokens, the aim of issuing a CBDC is to reduce the costs of creating paper and metallic money.

Shaktikanta Das, the central bank governor, revealed the central bank had held discussions with other governments and central banks regarding CBDCs. “It is very early to speak on a central bank issuing digital currencies. Some discussions are going on. Technology has not yet fully evolved. It is still in the very nascent stage of discussions, and at RBI, we have examined it internally,” he added.

‘Too early’ for CBDCs

However, the Indian government considers the trading and issuance of cryptocurrencies illegal in the nation.

Das said it was ‘too early’ to talk about a CBDC, as technology has not matured enough. Das made it clear that the central bank is entirely against private digital currencies, as he believes that the sovereign has the right over this function.

Shaktikanta Das, Governor of the Reserve Bank of India. Image via Bloomberg

“The world over, central banks and governments are against private digital currency because currency issuance is a sovereign function, and it has to be done by the sovereign,” he explained. “As and when the technology evolves with adequate safeguards, I think it is an area where the Reserve Bank will certainly look at seriously at an appropriate time.”

The blockchain-based payment system, Vajra

Although the Indian government is still skeptical about the use of cryptocurrency, the National Payment Corporation of India (NPCI) officially announced its permissioned blockchain-based platform, Vajra, to make payment processes more efficient and transparent.

As a permissioned blockchain-based platform, only registered parties under the network administrator are allowed to be part of the blockchain network. The three types of nodes on the platform consists of:

1) Clearing House Node, which has the administrative rights to the platform and is directed by the NPCI. It also has the right to add a new node on the platform.

2) Notary Node, which validates transactions only of the Aadhar biometric, is used for the authentication process, receiving transactions only from the clearing house node.

3) Participant Node, which is represented by the banks, and has the ability to post, receive, and view transactions.

The NPCI highlighted some of the key benefits of blockchain, stating that the distributed ledger technology will help the payment industry with higher resilience, and efficiencies through automation and transparency. The NPCI said, “DLT is an incorruptible decentralized ledger that not only provides a transaction medium but also acts as a repository for all transactions in hashed digital packets called blocks. The availability of transaction in the distributed ledger will reduce reconciliation steps and also increase transparency among participants.”

The platform allows for a system of self-executing contracts under the rules of the smart contracts. The Vajra platform aims to ensure zero to minimal processing time and efficiency for dispute resolution.

Unfriendly towards cryptocurrency?

In April 2018, the Reserve Bank of India banned financial institutions from providing services to crypto firms, including exchanges, which put them out of business. The ban was effective in July 2018, although several crypto industry stakeholders filed writ petitions with the supreme court to challenge the ban. The court has been scheduled to resume the hearing on Jan. 14.

The bill drafted by the interministerial committee (IMC) reflected on Das’ statements. Subhash Chandra Garg, the former head of the Secretary of the Department of Economic Affairs, submitted the draft bill entitled “Banning of Cryptocurrency and Regulation of Official Digital Currency Bill 2019” to the Ministry of Finance in February 2019.

Image via Shutterstock

However, the draft bill has a section on CBDC and its proposed legal framework. The IMC advised of an open mind when introducing an official digital currency in India.

The IMC recommended the government, “In consultation with the Central Board of the Reserve Bank, may approve [the] digital rupee to be legal tender with effect from such date and to such extent as may be specified.” There were reports of the Indian government considering issuing a state-run digital currency called Lakshmi in 2017.

The RBI also stated to have considered the potential launch of its own centrally controlled cryptocurrency. Deputy Governor, BP Kanugo, said, “RBI will produce a report, and they will explore the feasibility and desirability of issuing a digital currency by the central bank. These are issued by central banks; they constitute the liability of the central bank, and they will be in circulation in addition to the paper currency. It also holds the promise of reducing the cost of printing of the notes.”

The Income Tax Department of India has also been secretly training its officials to look into cryptocurrencies. As cryptocurrencies have been seen as a gray area for the Indian community, the Income Tax Department sent notices to various cryptocurrency investors. Crypto investors were previously doubtful of how to show their investments in their tax returns.

Blockchain adoption in India

Blockchain adoption in India has been increasing as officials in the country are trying to put together a regulatory framework to govern the technology. The Minister of State for Electronics and IT (MeitY), Sanjay Dhotre, said that a strategy is currently being put together by regulators to research into blockchain applications in the financial industry, cybersecurity, and government agencies since November 2019.

The country has been using blockchain in its renewable energy sector, with the blockchain-based energy trading platform Power Ledger pioneering in the industry.

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IRS Hoping to Deanonymize Monero and ZCash Privacy Coins to Prevent Cybercrime

The Criminal Investigation Division (CID) of the Internal Revenue Service (IRS) is actively hiring private contractors to study and analyze privacy coins, as there has quite been a lot of fraudulent activities revolving around their usage.

Monero — a Popular Choice for Fraud

While the world has undergone coronavirus cybercriminals have been hard at work conducting their habitual illicit operations with the help of privacy coins.

Monero (XMR) and Zcash (ZEC) are quite an attractive option for cyber scammers, as they offer more anonymity and privacy than Bitcoin. The IRS is hoping to eventually deanonymize these privacy coins in order to put a halt to cyber fraud.

Why is Monero in Cybercrime?

XMR currently stands at the top of the list, for the most private cryptocurrencies on the market. Monero transactions operate on blockchain technology and are harder to trace, due in part to its ring signature and stealth addresses. Also, since Monero’s ledger is easy-to-access and is public, it is a popular choice that cybercriminals choose in order to carry out their illicit activities.

Zcash a Close Second

Another privacy coin that IRS is hoping to further investigate is Monero’s counter rival, Zcash. ZEC operates by using an anonymity tool called Zero-Knowledge-Proof, which allows users to transact with each other without revealing their true addresses to anyone.

In other words, this makes it hard for the receiver to trace and figure out the identity of the sender, and vice-versa. Because of its end-to-end-encryption property, Zcash users can remain anonymous despite conducting numerous online transactions.

Privacy Coins and Cybercrime

Privacy coins, such as Monero and Zcash, are common cryptocurrencies used in cybercriminal rings. In contrast, Bitcoin, which offers no anonymity, is less attractive to cyber scammers.

Depending on the privacy coin, anonymity levels differ. This type of cryptocurrency is attractive to cybercriminals, because it obfuscates the transacted amount, wallet addresses, the identities of both sender and receiver; it is also hard to trace the transaction trail.

Because of the anonymity offered by privacy coins, fraudulent activities such as tax evasion and money laundering are common with Monero and Zcash.

How the IRS Hopes to End CyberCrime

Based on the Request for Information (RFI) posted by the IRS Criminal Investigation program, private contractors working for them have developed software used to detect suspicious online transactions.

Illicit activities reported by various law enforcement agencies in the past will be gathered and analyzed in detail to prevent future cases of phishing and fraudulent behavior.

US law enforcers are also looking to come up with more innovative technological strategies to trace privacy coins, layer 2 off-chain protocol networks, and side chains.

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Yonghui, Hema among supermarkets singled out by China's food safety watchdog for breaches

Photo by Fancycrave on Unsplash
Market regulator highlights 11 cases where supermarkets and online platforms sold food products that did not meet national food safety standards

Zen Soo

Celia Chen

China’s market regulator has highlighted 11 cases of supermarkets and online platforms selling food products that did not meet national food safety standards, some of which are operated by the country’s largest technology giants like Alibaba and JD.com.

In a formal notice issued Tuesday, China’s State Administration for Market Regulation singled out companies including two outlets from Tencent-backed Yonghui Superstore, and a Hema supermarket outlet in Guangzhou, operated by Alibaba.

Certain batches of eggs sold in a Beijing Yonghui Superstore exceeded safe levels of enrofloxacin, a type of antibiotic commonly used to treat animals. Another Yonghui store in Hebei, as well as the Hema supermarket in Guangzhou, sold squid that also exceeded safety levels for an antibiotic.

Other merchants selling products that did not meet the food standards include a Carrefour store in Beijing with yogurt waffles containing excess levels of sodium, as well as an online merchant selling crunchy rice snacks on JD.com’s e-commerce platform with too much peroxide. An online store on Taobao was also singled out for selling seaweed that exceeded acceptable lead levels.

Neither Alibaba, Yonghui Superstore or JD.com responded to requests for comment.

China has struggled with food safety issues over the years. The government stepped up oversight following a widespread incident in 2008 involving Chinese milk and infant formula being tainted with melamine. Stricter food safety requirements were imposed across the supply chain, from producers to retailers, and outdated national food safety laws were updated in 2015.

The regulator’s latest notice comes even as Alibaba and JD.com have unveiled initiatives to better track food safety. Both companies operate their own chain of supermarkets, Hema and 7-Fresh respectively, with each emphasising product safety and quality of their produce as a selling point to consumers.

In both Hema and 7-Fresh stores consumers can scan QR codes on the products to see their origin. Companies like Alibaba and JD.com have also launched their own blockchain initiatives to better monitor food safety.

Last month, a Hema Supermarket employee was caught in the act of changing the expiration date labels on a package of carrots in one of its outlets, with the new label showing a later date.

The scandal prompted outrage from consumers. Hema chief executive Hou Yi apologised in a statement and pledged to step up supervision in the stores, including recruiting consumers as inspectors and issuing severe punishments to any staff violating food safety regulations.

Alibaba is the parent company of the South China Morning Post.

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Blockchain.News Interview with Managing Partner of HEX Alessio Quaglini on Digital Asset Custody

We conducted an interview with Alessio Quaglini, the Managing Partner of HEX Trust who has extensive experience in Investment Banking, Financial Services, and regulation. He shared with us his views on the digital asset custody sector.

What is the difference between custody of traditional vs digital assets?

To answer this question, we can look at the problem from two different perspectives: (1) From a user perspective there should actually be no difference at all. In theory, as platforms evolve into more enterprise solutions, customers should be able to access any type of assets independently of the underlying protocol complications. (2) From a custodian perspective, however, there are a number of differences. First of all the underlying technology that is completely different from the way traditional assets are transacted. Secondly, the market structure where the depository institutions disappear and are replaced by the blockchain itself. Lastly, the complications of the specific protocols, such as voting, staking, forking, upgrading, which have different processes and representation than in the traditional world.

Why is the custody of digital assets crucial?

I would answer this question looking at two aspects: (1) Custody, whether in traditional or digital assets, is important for several reasons: mainly it simplifies certain processes such as settlement, clearing, as well as handling of corporate actions. In addition, regulatory frameworks usually require the segregation of funds assets from the manager to minimize counterparty risk and prevent companies from using client’s assets for their own purposes. (2) In the case of digital assets, there are additional important aspects to consider. Digital assets are basically bearer assets. Leaking or losing the private keys inevitably results in the loss of assets. In addition, blockchain is an unforgiving protocol where transactions cannot be reversed. Lastly, blockchain protocols quickly change, improve, there are needs to handle forks, staking, voting, etc.. Hence, the concept of being your own bank might be too complicated and risky, not viable for certain players.

How will custodians in the digital assets space influence the blockchain ecosystem?

At HEX we believe that several parts of the blockchain ecosystem are still premature to ignite widespread adoption. Custodians will play a pivotal role in building the infrastructure to allow higher-level value-added services to run on blockchain protocols seamlessly. Only when market players will feel protected from security, regulatory, and operational perspective, will we experience more adoption for real-life use cases.

Are there any licensing requirements needed to become a custodian for digital assets?

Regulatory regimes are different in every country. If we talk about Hong Kong from a regulatory perspective custodial activities are not SFC regulated. However, any entity that provides in Hong Kong by way of business a custodial service acting as a trustee, is required to obtain a trust or company service provider (“TCSP”) license under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (the “AMLO”). However, should an entity be willing to qualify as a custodian for SFC authorized funds, there are other conditions to be complied with, such as minimum paid-up capital and being either a bank or a trust.

What are the typical challenges of a digital assets custodian?

In December we did an educational seminar to the PWC team in Hong Kong about the ‘10 challenges’ of digital asset custody. If I had to choose the most critical, I would say: (1) Striking the best balance between security, availability, and recoverability. (2) Authorization schemes: Enterprise platforms require complex authorization schemes. Complex authorization schemes are usually based on hierarchies of authorized signatories, where a minimum number of approvals are required in order to process a transaction. (3) Trading and settlement: The current process is very inefficient as assets have to be moved continuously across trading venues and custodians. Basically DVP does not exist and settlement has to be done before the trade. The role of custodians is to break this complexity by creating settlement protocols that allow clients to trade efficiently avoiding moving assets around. (4) Asset diversity: The number of blockchain protocols is continuously increasing and every protocol is technologically different from the others. (5) Auditability: Assigning separate private keys for each client and each sub-account versus commingling funds similarly to how it is currently done by exchanges.

What are the different types of solutions for custody?

We can look at this problem from several perspectives. To simplify I would say that a key difference is between cold and hot storage solutions, and we can talk more about this. Another key difference is between first-party and third-party solutions. The former basically means self-custody and the institution is relying on a technology solution to self custody the assets. The latter involves a third party, the custodian, who is control of the private key.

How is security guaranteed?

We can look at security as a multi-dimensional problem. In addition, there is always a trade-off between security, ease of use, and complexity of the solution. Each security layer or measure adds complexity, latency, and increases the probability of errors. To summarize, we look at three layers of security: cryptographic, cyber, and physical. In addition, it is pivotal to have the right security processes around it.

Why did you choose to start this business?

For us it was a once in a lifetime opportunity to have a completely new asset class and to have the perfect team to deliver the right solution to the market. We have a stellar team with significant expertise in all relevant of the business, together with a number of advisors who further inspire our vision.

What is so special about HEX? How do you position yourself in the market?

I believe what makes HEX special is our positioning and technology. If we take the traditional financial market universe and divide it into front office and back-office functions, HEX’s objective is to provide full service and deployment flexibility for the full stack of back-office functions.

What is the long term vision of HEX?

We strongly believe that blockchain technologies will be the underlying infrastructure for future financial instruments, assets, contracts, and currencies. All financial institutions and corporations will have to be able to manage this type of asset in the future and integrate blockchain technologies into their operations. At HEX we currently provide institutions and corporations with a platform to create, safekeeping, transact and manage blockchain-based digital assets. Our long term vision is to create the necessary infrastructure for institutions to adopt and integrate blockchain-based assets in their business operations.

Who are the existing companies that are using your services?

We have a number of clients from different industries: traditional players, OTC desks, digital asset exchanges, family offices, and corporations.

Where do you see the opportunities for partnership and collaborations for your custody services?

Firstly with traditional financial institutions that intend to adopt our technology to bring to market innovative products through their well-established platforms and distribution channels. Secondly, we believe it is important that current blockchain players come together and collaborate to create a more efficient ecosystem. Thirdly with other service providers, such as fund administrators and audit firms.

What is your competitive advantage compared to larger traditional financial players that offer institutional custody solution?

First of all, I would not talk about competitive advantage as we do not aim to compete with traditional financial institutions. Conversely, our main objective is to collaborate and partner up with traditional financial institutions that intend to adopt this new technology and integrate it with their well established platforms and distribution channels. If we then talk about the specific advantages of our solutions, I would like to highlight three points: (1) Our ZeroKey technology is the best in class solution to provide clients with the security of cold wallets and the accessibility of hot wallets. HEX ZeroKey wallets cannot be hacked by intruding our servers and allows us to transact in a matter of seconds. (2) Our platform is flexible enough to allow both first party and third party key management solutions. In the former case, HEX basically acts as a software solution provider, while in the latter we become the custodian of our client’s assets. Hybrid solutions are also possible. (3) This market changes at an impressive pace. While traditional financial institution have the resources to build solutions, they often lack the agility to keep up with fast-paced technologies.

What is cold storage and how will your company cope and compensate with the growing demand of hot storage?

Cold storage basically means that keys are kept in an offline wallet, which prevents any online attacks. Common types of cold storage solutions are paper wallets and hardware wallets. Conversely, in hot storage solutions, keys are kept in online devices or servers and are exposed to hack threats. However, hot wallets allow faster access to funds in a scalable way. At HEX we decided to turn the problem around and developed a hot wallet where keys are not stored online. Instead, keys divided into shards through a secret sharing algorithm and cryptographically distributed to authorized signatories. Shards are recomposed into private keys only for a split second when a transaction needs to be signed and are erased after that happens to avoid any record of keys on online servers. Hence the name HEX ZeroKey Wallet ®, which provides the security of cold storage and the accessibility of hot wallets. Multiple authorization schemes and hierarchical solutions can also be implemented in line with the client’s requirements.

How is your company prepared to be ready to be a qualified custodian and become a trusted institution?

There are two parts to this question: (1) From a regulatory perspective, custodial activities are not regulated by the SFC in HK, but entities acting as trustees need to obtain a TCSP license. In order to become a qualified custodian for SFC authorized funds, there are specific requirements, such as being registered as a bank or a trust company. (2) From a pure trust perspective, I see two nonexclusive approaches: The first one is obviously to partner up with an established financial institution. The second is to build our own reputation in the market. This can be done by acting as a proper institution and doing what institutional investors, regulators, and other observers expect proper institutions to do.

What are the key takeaways of SFC’s new regulatory approach for digital assets and how does the circular affect the role of custodians for virtual assets?

The framework set out by the SFC in November aims to extend the regulation of the traditional market to the new virtual currency market. I think it is a very smart approach that, on one hand, fosters technological innovation in Hong Kong, and on the other hand protects investors, especially retail investors.

Generally, how do you see the regulatory trend and development of digital assets in Hong Kong?

We believe the trend is very positive both from a technology innovation and investor protection perspective. This is just the beginning of the journey. The market is still very young and solutions are premature. Our plan is to collaborate with other players and with the regulatory body to build a complete infrastructural framework that includes all core custodial services such as safekeeping, settlement, clearing and asset servicing, as well as a number of complementary products, such as asset borrowing and lending, escrow, and collateral management.

Blockchain.News Interview with Co-founder and CIO of CryptAM, David Demmer on Digital Asset Management

Since the launch of the Bitcoin in 2008, interest in cryptocurrencies continue to increase exponentially over the years. As the space matures, investors are increasingly eager to add cryptocurrencies into their portfolios for more diversification, whether it is for long-term value investing or short-term profit maximization. Investors can no longer afford to ignore the impact of digital assets.

We conducted an interview with Founder and CIO of CryptAM, David Demmer, who has years of experience in traditional banking and financial industry. He is also a Co-founder of HKDAIA (Hong Kong Digital Asset Investment Association) charged with setting active and proper regulatory standards within the Asian crypto community.

What is the difference between cryptocurrency investment solution vs traditional investment solution?

Traditional markets are very different from the digital asset space. Traditional market construction risk factors are academically proven and have been around for a long time. While in the cryptocurrency market you use different risk and return factors. That mean basically only sentiment and momentum generally work well. Recent studies show that those risk factors have nothing in common compared to the traditional asset space. The digital asset space is still new. Its return drivers are uncorrelated to the traditional markets.

That said, this is a volatile market and has risk levels of around 100%. Comparing that to the return volatility of equities, 15-25%, and bonds, 4-10%, there is a meaningful gap between the digital asset space and traditional markets.

Trading in digital assets is a whole different game, when compared to traditional investing. A simple example will be that digital assets trade on a 24/7 basis where traditional markets trade only 5 days a week during pre-defined/required hours. This has a big implication on risk measurement and trading behaviors. Simply put, when calculating risk (standard deviation), 365 days is used in the calculation for the digital asset market, whereas 255 trading days are used for traditional markets. As you can see, there is a significant increase in risk associated with the digital asset market.

In addition to market risk, the digital asset market requires you to place a large emphasis on operational risk and counterparty/credit risk when dealing with exchanges. Operationally, as institutional investors get involved, the regulatory standards of digital assets will continually try to mirror those of traditional market as regulation increases.

Why is having a digital asset portfolio crucial for traditional investors?

For traditional investors that have equities, bonds, real estate and commodity exposure, we believe that it is crucial to continue to diversify. For example, an investor that holds the S&P500 (US stocks), the US’s most mature equity and liquid market, they would have seen an improvement of their longer-term risk-adjusted performance numbers by adding digital assets in small amounts, such as Bitcoin. By doing this you can significantly improve the return/risk efficiency of your long-term asset allocation portfolio.

The nature of the crypto market means that it is generally uncorrelated and hence, by adding this to your portfolio, especially now at the current state of the market, the overall asset allocation return profile can be improved. As investors gain access to this market in the future, they should be on the lookout for asset managers that can control the risk to levels they are comfortable with.

Because of the technologies driving blockchain-related digital assets, this market presents a market big opportunity as more people are looking to invest. They are all doing their homework, and they now recognize it as a new asset class. This is the reason we are a very strong believer in the cryptocurrency space, and we are excited to be here.

What are the typical challenges when creating a well-diversified digital asset portfolio compared to traditional assets?

To meet the challenges of trading in this market, we created several market timing models within our multi-strategy offering. Given the high levels of inefficiencies in this market we believe that an active management/trading approach is warranted.

It generally comes down to one thing, the correlation between different asset pairs within the crypto market. At present, crypto markets are very correlated and the intra-correlation between coins is very high. This means when the market rises/falls, most coins tend to move together in the same direction. This was true in 2018 but less so in the run-up of years 2016/2017. The only way to hedge against the risk of falling prices is to use futures as a hedge or sell out completely and re-enter at a cheaper level.

Within the crypto market, we firmly believe in diversification in the long term as this will get exposure to those potential massive outperformers. However, for the medium to short term, we expect Bitcoin to remain a top coin because of its position as a coin of liquidity and a relatively large network, which provides dispersion and distribution of power to avoid any one government controlling its fiscal and monetary characteristics.

What are the different types of digital asset portfolios?

They are the same as in traditional markets – you have active and passive management approaches. With passive funds, you track the market, and here at CryptAM we built standardized index methodologies. Examples include the FTSE and MSCI indices covering equities in the traditional markets. Digital assets are a multi-billion-dollar industry that the market does not recognize yet and we have yet to truly monetize the area of market indices.

In terms of the active approach, CryptAM focuses on delivering value through a quantitative bias. We have techniques using relative overweight/underweight approaches and/or using various market timing approaches. There are also market-making and arbitrage funds, in addition to the pure venture capital style funds, which invest into projects and companies

We are an asset management company rather than just a fund. An asset management company requires many more components such as compliance, front office, back office, proper managing directors.

What are the key components to look for when choosing a secure and well-diversified digital asset portfolio?

The key component is to know all different types of portfolio construction methodologies. There are only two things that add value – liquidity and risk. This is key because without these, we would not be different from any other fund and this is where we truly add value for our customers.

Why did you choose to start this business?

Very early on, we realized that digital assets are new asset class. And now, digital assets are also recognized by institutional investors and this is a key factor for everyone in the game. We see this trend continuing even though the market is down and filled with negative news and sentiment. Banks are continuing to work with digital assets, and this is great for everyone in the game. I am also here trying to help educate all the readers out there about digital assets and this is an essential part of the game as this is still such a new area. We need to all get out there and continue to have meaningful discussions about digital assets to promote further growth and innovation.

What is so special about CryptAM? How do you differentiate yourself in the market?

We are trying to become an institutional-grade player and that is why we are still here, while many other players have dropped out since they were not conservative enough and grew too quickly. Many members in the management team are well experienced, which results in a more conservative approach overall. This is the main reason why we are different.

We welcome regulation and are open to educating and working with various jurisdictions on how to make this space more proper. Here at CryptAM, we understand that digital assets will be around whether we exist or not, but our purpose is to make this market a more professional marketplace. We add value to our customers because we:

1. provide easy access solutions for investors wishing to get broad exposure into digital assets

2. work closely with custodians to strengthen governance measures

3. aim to work closely with external administrators to ensure all the investment vehicles have proper accounting

4. work with OTC providers to access the best liquidity possible

5. have our own indexing methodologies which gives us better access to the market and risk measurement tools

What is the long-term vision of CryptAM?

Delivering value to all our clients who wish to diversify their traditional portfolios.

What types of companies or individuals use your services?

Anyone with multi-asset allocations and wants more access to diversification would be potential clients. This typically means high net worth individuals or any professional type of investor such as big institutions or multi-family offices. Digital assets will be able to provide more diversification in the future through new coins, and this includes stable coins, public coins and interesting technology projects.

How is security guaranteed and cryptocurrency hacks prevented? And how your company can balance the trade-off between security and efficiency?

Security is key. One thing to take note is that blockchains generally cannot be hacked. There have been a lot of companies that have been hacked, but you don’t read much about it. It doesn’t matter how great the fund is, without security everything falls apart. We work together with credible partners and IT security professionals to help make our company more secure. It all comes down to identity management and password management. When you talk about password management, you want to make sure that your password is not easily accessible. And in terms of identity management, you want to take active precautions such as making sure your intern doesn’t have access to trading.

Therefore, we are very strict with security. We have routines and security checks, but there is a trade-off between security and efficiency. Some things must be done manually and there is no way everything can be automated. You must make sure that the right people have the right controls at the right time. Therefore, one can not be completely efficient.

How your company deal with the extreme price differences across different platforms for the same cryptocurrency?

We see that there are more and more arbitrage deals as the market is getting more efficient. We are assuming that the market will soon eliminate this pricing differential. We have our best execution, which is driven by liquidity because we trade in large amounts and we need to make sure that we trade those amounts efficiently in the favor of our clients. That means we are naturally accessing the most liquid and efficient exchanges, and inevitably, we will experience very small price variances between exchanges.

As liquidity increases, the market becomes more efficient and, as a result, arbitragers and market makers will make less money. We see experienced market makers from traditional markets entering the digital asset market and we are not trying to compete with them. We would much rather focus on the area we’re better at, which is portfolio construction and generating alpha for our clients through quantitative research.

What are the main implications for the current trends in digital asset investment?

Prices in the digital asset market are not yet news-driven as they are in traditional markets. The digital asset market is more driven by liquidity and can be very event-driven, but not news-driven. For example, if Apple has a product release, everyone trades upon the news, and because of this reason the price will eventually fall as a result. When dealing with the digital asset market, participants are not trading based upon the news yet, as this often is not readily available for regular market participants.

Going back to your question, STOs (security token offerings) are a big topic. Stablecoins are a type of STOs. They are a type of asset backed security. Currencies such as the USD and HKD, and commodities such as gold and oil are being tokenized as asset backed securities. As a portfolio manager, I look at the underlying asset and this provides me with a lot of diversification. Digital assets will be a key component for accessing the most diversification possible. We consider digital assets the final asset class because everything will be tokenized onto the blockchain. Not only currencies and commodities, but also funds and indices are also being tokenized, which opens access to a wide range of assets and makes diversification much easier. Therefore, we support the community since we see that the community will continue to make advancements and grow in the future.

How do you see the trends and developments of digital asset investments in Hong Kong?

This is mostly a question related to regulation. Hong Kong follows common law and because the HKD is pegged to the USD, Hong Kong tends to follow what the US is doing. As a government, you decide to create a currency and have a monetary authority to govern it or you peg it to another currency, which provides you with a lot of advantages, and yet has its risks at the same time.

So far, this strategy has helped Hong Kong significantly and Hong Kong is striving to become more relevant in the fintech sector and innovative, but at the other end it has a legal counsel. Regulation of exchanges and asset managers will be the key for the future.

In November 2018 the SFC provided a sandbox for exchanges and regulation for asset managers, and slowly Hong Kong is working towards better regulation in this area. That said, cryptocurrency is a global game. We actively search for a regulatory environment that works for us and our prospective client base. We would like to work closely with global regulators. As entrepreneurs, we strive to make social impact to make the world a better place, increasing financial inclusion, and creating value to all clients and stakeholders alike.

What are the typical concerns for individuals when they choose to invest in digital assets?

Customers are usually concerned about factors such as custody, market manipulation, credit risk, lack of regulation, licensing, KYC and AML. KYC and AML are special ones, because with Bitcoin you can see where the money is coming from up until the origination. Money is inherently anonymous so you wouldn’t know if the money originated from illegal transactions such as drug dealing, but with Bitcoin you do know. With the added transparency, which is an advantage to many people, comes new issues that arise.

What are the challenges for cryptocurrency’s transition from simply a mining process to a mature and mainstream investment option?

We want to be an exclusive asset management company for exclusive and explicit people. At the same time, we happily provide education to the public, our main purpose is to provide custom tailored solutions for specific needs. We are more like an asset management boutique because we custom-tailored solutions for eligible people. As mentioned earlier, we have provided a risk averse portfolio for one customer reducing the market risk from 97 to 37, to allow for him to manage drawdowns in crypto and wanted to have a low beta. As asset managers coming from the traditional space, this is where we feel we truly add value.

What are some of the factors that affects the cryptocurrency market and how does your company take these factors into account?

Liquidity and momentum. Liquidity is the money going in and out, the decision to enter the market. This is isolated and money either increases or decreases and because of this there is a trend of actions that follow as money flow follows the price action and creates a natural and organic momentu

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Disclaimer: The views and opinions expressed in this article are those of the interviewee and do not necessarily reflect the view of blockchain.news

This is one of several interviews coming up in the “Blockchain 2019: Industry Leaders and Voices” series aimed at raising awareness of the blockchain community. If you are interested and would like your project to be covered in one of our upcoming interviews, please contact Henry Chan at henry.chan@blockchain.news for more details

Common Blockchain Misconceptions – Part 2 of 3

THOUGHTS OF THE WEEK

Standard Kepler CEO David Tang recently authored a few articles on the subject of blockchain and cryptocurrency misconceptions. Last week in part 1 we had a look at the first 4 of a total of 8, and this week we will continue by taking a slightly deeper look at misconceptions 5 and 6.

5. “Use of blockchain increases system security”: I don’t know the origin of this misconception, but we often hear our clients saying that they want to improve their system’s security by “putting everything” on a Blockchain. They fail to realize that blockchain does not equate absolute security. In fact, only some blockchains are secure, a lot of blockchains are not.

Before we discuss whether using blockchain improves system security, we need to know how blockchain secures itself and its limitations in doing so. Blockchain secures your data in two ways: Firstly, it maintains data integrity by making sure that the data recorded on it can neither be altered nor removed. Secondly, it secures the ownership of your account with public/private key cryptography. This means that your account is secure as long as your private key isn’t exposed (normal password protection is significantly easier to crack compared to public/private key cryptography).

In the case of smart contracts, the above characteristics of blockchain makes it possible to achieve security on a new level: a program deployed on blockchain cannot be altered or removed, meaning that hackers cannot change your program code or make it misbehave. But there are also limitations. For example, if the deployed code has bugs then blockchain won’t allow you to fix these bugs as the program code cannot be changed once launched. Also, the public/private key encryption adds an element of user unfriendliness to your system, since users cannot choose their private key and the keys can be long and hard to memorise. Back to the question, can blockchain helps improving your system security? The answer is that it depends.

If you just want to secure the data integrity: Yes, blockchain can help. Putting your data on a public blockchain can make your data largely immutable.

If you want to make your program secure: Usually no, sometimes yes. Yes if your program is coded flawlessly; No if your program is not flawless, and most programs are far from perfect and do contain bugs.

If you want to hide your data from hackers: No, there are better ways to hide your data securely. Putting the data on a blockchain without lowering the data usability is impossible.

If you want to give your users the ability to store their encrypted data securely, and make sure that only they can decrypt their own data: Yes, you can do this with blockchain, but make sure you really need this level of security and that you are willing to make the relevant sacrifices in usability to users.

6. “Use of blockchain protects user privacy”: Well, using Bitcoin can protect your privacy, and so can many other cryptocurrencies. But here lies a very common misconception that start-ups, VCs and a lot of laymen (non-laymen as well) have been reiterating. Blockchain protects privacy because it can verify a transaction without needing your personal information. However, it does not protect your privacy by preventing other parties from misusing your information without your permission. Consider the following example from a project:

“A user installs an application that uses our platform for preserving her privacy. As the user signs up for the first time, a new shared (user, service) identity is generated and sent, along with the associated permissions, to the blockchain in a Taccess transaction. Data collected on the phone (e.g., sensor data such as location) is encrypted using a shared encryption key and sent to the blockchain in a Tdata transaction, which subsequently routes it to an off-blockchain key-value store, while retaining only a pointer to the data on the public ledger (the pointer is the SHA-256 hash of the data). Both the service and the user can now query the data using a Tdata transaction with the pointer (key) associated to it. The blockchain then verifies that the digital signature belongs to either the user or the service. For the service, its permissions to access the data are checked as well. Finally, the user can change the permissions granted to a service at any time by issuing a Taccess transaction with a new set of permissions, including revoking access to previously stored data. Developing a web-based (or mobile) dashboard that allows an overview of one’s data and the ability to change permissions is fairly trivial and is similar to developing centralized-wallets, such as Coinbase for Bitcoin.”

What projects such as this one suggest is that all user data is uploaded and stored on a blockchain platform, and that services (apps) can only access this data with user permission. Most importantly, you can revoke the permission at any time. Does this not sound like Facebook login? Apps can only access your data with your consent, and you can revoke this permission at any time. So, can these apps “steal” your data? Yes! And all they have to do is to create a copy.

This most obvious point of failure of the above proposal. The data you generate in the app can only be uploaded to blockchain by the app itself, so the app can steal it in the middle of the upload, or it can even outright prevent the data from being uploaded. The only way to make it work is through something like TouchID: your fingerprint is collected by your iPhone, and the app cannot touch the data, it can only ask iPhone to check whether your fingerprint is correct. The data from the point of being collected, to being processed and stored is in a closed loop. This is how Apple protects your privacy from everyone except themselves.

In short, cryptocurrencies can protect privacy because they don’t need your private information to verify transactions, nor do they require authorities that own your personal information to verify transactions. Blockchain can encrypt your data and store it securely and prevent anyone from using it, but it cannot protect your data from being misused.

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Disclaimer

The views and opinions expressed in this article are those of Standard Kepler and do not necessarily reflect the view of Blockchain.News

The World Economic Forum Forms Six Tech Policy Councils Including Blockchain

The World Economic Forum (WEF) launched six different “fourth industrial revolution councils” to help regulators working on the new technology policy guidance. The new technology included artificial intelligence, autonomous mobility, blockchain, drones, internet of things and precision medicine, as revealed on 29 May.

The councils gathered for the first time for the Fourth Industrial Revolution Network in San Francisco. The boards are allegedly comprised of over 200 leaders across public and private sectors, civil society, and academia, including leaders from the European Commission, Microsoft, Qualcomm, World Bank, Uber, Chinese Academy of Medical Science, and Dana-Farber.

The WEF claimed that the participating companies will facilitate international policy exchange, reach a consensus on best policy practices and offer strategic guidance.