coinbase - Pwim.Net

Exclusive: Why are Independent Third Party Crypto Custodians so Important?

Exclusive interview with Alexandre Kech: Part 1

The needs of crypto custodians caught public attention again with the recent hack of 250 million Japanese Yen from Bitpoint exchange in Japan. While certain exchanges such as Coinbase launched their own custodian services, to what extent they can safeguard the assets at the exchange?

Alexandre Kech, CEO of Onchain Custodian shares with us the importance of independent third-party custodial solutions. He identifies three grey areas for assets under custody by the exchanges and how Onchain Custodian identified the custodial needs for crypto players and traditional financial giants.

Prior to being the CEO at Onchain Custodian, you have been working at SWIFT for 17 years. Which pain points does SWIFT have in the system? What are the reasons that inspire you to enter into the blockchain industry?

I believe think SWIFT does not have any major pain points in terms of what they do in the banking space, they might have some challenges for the retail type of payments. Because in that space, the banks using SWIFT realize that it is not necessarily the most agile, easy, and cheapest to use.

“Most of the domestic as well as cross border retail remittance payments in the future will be off-bank.”

It will be done either by crypto companies or other means than banks.

The reason why I left SWIFT to join Onchain Custodian is that I believe in the tokenization of the economy.

“I think that, in the future, everything will be tokenized on blockchain. As I mentioned during the panel in Next Block Asia, Bangkok, real estate, fine arts, traditional equity – like private but also public investments – will be tokenized on blockchain, and I want to be a part of it.”

Can you share with us how you met Da Hongfei, founder of NEO on the journey of Onchain Custodian?

Da Hongfei wanted to create a custody business here in Singapore, Onchain Custodian. He was clearly looking for someone from the traditional capital market space who knows about the traditional custodian business. I went through a series of interviews, with him and Raymond Cheong our CSO, first via video, then I had the opportunity to meet them in Singapore in October. We had an hour discussion on the strategy and how we wanted to see this business going. In November 2018, I was hired as CEO of Onchain Custodian.

Crypto exchanges are starting to explore custodial solutions. Most of them are developing custodial solutions themselves. As a third party independent custodian solution, how would you compare Onchain Custodian against them? Why are independent third party custodial solutions so important?

I think what we bring to the industry is focus and dedication with regards to custody. Crypto exchanges can develop custody solutions by themselves. Nevertheless, their business focus will always be on the exchange itself and the custody business will be their second choice. That’s a challenge for them because history has proven that exchanges are the most hacked players in the industry. This is because many do not focus on custody as it is not part of their core business.

What we want to do as a third-party custodian is to build infrastructure, an operational environment that is secure and evolves with technology. Our R&D is dedicated to custody because that is our core business. That is what we offer to crypto exchanges but also investors who do not want to leave their assets in exchanges and prefer them in a separate third-party custodian.

What we also bring is transparency and neutrality. When you have your assets in an exchange, there are three transparency issues:

1) Whether those assets are in segregated accounts or commingled;

2) What part of the assets is in cold versus hot storage;

3) How easy is it to transfer those assets to another exchange for trading.

What we bring as a custodian is complete neutrality as we are independent of exchanges. If our customers want to withdraw their assets and transfer them to different exchanges, we can facilitate those processes for them.

As Onchain Custodian solution caters for different kinds of customers, such as central deposit repository, hedge funds as well as miners. What are the differences in custodian among these customers you have just mentioned?

There are two main types of customers, the first type of customers is crypto-centric. They have been in the crypto space for the last two to three years and are familiar with the crypto world. For instance, they are crypto exchanges, crypto funds, family offices, and high net worth individuals. They participate in token investments.

The second type is leaning towards the more traditional players such as hedge funds, asset managers, central depositories and custodians. In order for asset managers and hedge funds to go into the crypto space, there is a need for custodians. They would generally rely on traditional custodians such as State Street, Bank of New York, or DBS in Singapore. However, these giants are not ready. They are not geared up technically but also in terms of operations to manage those assets for their customers.

What we are currently doing is engaging with existing custodians, private banks, and central securities depositories to assess areas of collaboration. We also work with asset management firms in the traditional capital market space. While they have licenses and knowledge on the traditional market, we have the knowledge of crypto and blockchain so we can work together to offer strong solutions for our and their customers.

How does the SAFE™ Digital Asset Custody Platform fulfill the different needs of different customers? Can the platform be customized to meet different customer needs?

Very good question. We have a version one and are working on a version two of our SAFE™ Digital Asset Custody Platform.

Version one is multi-sig cold storage-based, meaning that you need multiple signatures to sign transactions on the blockchain. This version will evolve quickly to version two because we want to be able to fulfill the requirements of multiple types of customers.

The version one today allows for co-managed and full custody, co-managed means that a customer has a hardware device that will be used for signing transactions and we have the other hardware devices to complete the transaction.

Full custody means we take care of everything. You just need to go on our user interface, authenticate yourself, and authorize the transaction, then we take care of the rest. This is still in cold storage, meaning that they will be multi-signature processing of transactions, which is a manual process. What we are doing is evolving the platform towards something that is fully automated, though remaining fully secure, that will cater to warmer storage solutions to cater to the needs of exchanges and different types of customers.

Version two is being built based on the feedback of our customers. We created a very simple version one on purpose three months ago to allow us to build a version 2 based on customer feedback. In parallel, we have explored different solutions to make version two more dynamic and automated such as a hardware security module and multi-party computation solutions.

Our version two will likely be based on a multi-party computation system. Multi-signatures are still used allowing the signing of transactions from different players who needs to act on the transaction. But it can be automated without necessarily the need for a human being to intervene.

New York State Trust License – Fidelity’s Step Towards Mass Crypto Adoption?

Fidelity’s cryptocurrency investment arm, Fidelity Digital Assets (FDAS) has filed for a trust license in the state of New York according to several sources. An approved application with the New York Department of Financial Services (NYFDS) will mean that FDAS will be able to offer custodial services for digital assets in the state of New York. FDAS was launched in October 2018, with the aim of providing institutional solutions for the digital asset class.

Earlier this year in May, Bloomberg reported that Fidelity will be offering more than just custodial services such as crypto trading. The crypto arm of one of the largest asset managers in the world will now be able to compete with rivals such as Coinbase, Gemini, Paxos and other large players in the crypto custodial market.

Arthur Long, a lawyer from Gibson Dunn mentioned that a trust license is “more expansive” than the BitLicense of the state of New York which is a license for crypto firms, according to The Block. By obtaining a trust license, the firm will be allowed to execute a wider range of services in the financial services industry.

What does this mean for crypto investors?

The International Crypto Exchange (ICE)’s cryptocurrency trading platform, Bakkt is also waiting for approval from the NYDFS and will also be competing with FDAS. Institutions are willing to take the step to go through substantial processes to allow regulators to get a more in-depth understanding of crypto businesses.

Image via bitcoinexchangeguide.com

Crypto, Tax, and the IRS: The Good, The Bad, and The Downright Ugly

They used to say that Al Capone feared the Internal Revenue System (IRS) more than he feared the FBI. This fear proved to be well-founded, as tax affairs did precipitate Capone’s downfall.

Capone’s troubles with the IRS illustrates this piece well, but with a 21st-century twist. We’re not talking about ill-gotten gains made through bootleg alcohol, gambling, or protection rackets. We are talking about cryptocurrencies, and how the IRS is insisting that any income arising from crypto deals is indeed taxable. And it wants its tax dollars pronto.

The IRS is watching you

The IRS is a government agency whose sole task is to ensure that millions of Americans pay their taxes on time and in full. Or else.

Cryptocurrencies have hitherto posed a problem for the IRS, as Bitcoin (and any other cryptocurrencies, for that matter) existed in a completely unregulated space that was, for a long time, beyond the reach of the IRS’s claws. The agency did not like the fact that millions of dollars were flowing freely under their hawkish noses, and there was not a single tax dollar that could be taken for Uncle Sam.

Now, to understand the IRS’ predicament, you must first know that the anonymity granted by crypto transactions enabled many to make a hefty profit without exposing any personal details. Ergo, the person or persons behind the gains could not be traced. However, anonymity and decentralization were at the heart of Bitcoin’s very raison d’etre.

So starting back in 2016, the IRS launched a broadside into Bitcoin’s ship and blew a hole wide open in its thus far watertight blockchain compartment. The IRS asked Coinbase, one of the world’s largest crypto exchanges, to hand over transaction-related data for over 14,000 customers who had engaged in crypto activity through the site. Particularly, the IRS was interested in 13,000 customers who had reportedly traded in about $20,000 worth of Bitcoin between 2013 and 2015.

The move signified the first step on the IRS part to assert dominance over Bitcoin, and begin collecting what the agency believed it was owed.

Cue to 2019, when the IRS is flexing its tax-collecting arms hard by sending thousands of warning letters to crypto owners and traders.

The IRS and the letters of doom

If you are an American taxpayer who omitted to declare any income arising from crypto deals on the side in your last few tax filings, you may have reason to worry indeed.

The IRS has dispatched around 10,000 letters to as many taxpayers who are believed may have failed to disclose crypto profits. The IRS says that the names of these people were obtained through ‘compliance efforts’ on the agency’s part.

The letters come in three equally ominous flavors with a big IRS stamp on them: Letter 6173, Letter 6174 or Letter 6174-A. In order of severity, 6173 is the more lenient, and 6174-A demands immediate remedial action. Or else.

Letter 6173 provides some degree of leniency and assumes that the taxpayer may have acted in good faith due to ignorance of the tax implications surrounding cryptocurrencies. In this scenario, the IRS asks you politely that you file your correct tax returns with a good explanation, and the IRS may not pursue further action.

The other two letters bear a certain degree of urgency and will expose the recipient to a tax audit if the tax situation is not rectified in time. The deadline of August 30th is approaching fast, so any affected taxpayer is in line for a few stressful days.

The bottom line

The infamous John Doe Coinbase affair sort of negated the whole concept of decentralization and anonymity that is supposed to be at the core of the cryptocurrency ethos. With one quick smite of its legal sword, the names and addresses of about 10,000 people were disclosed to the prying and hungry eyes behind the IRS visage.

Cryptocurrencies are having a troubled upbringing. Think of them as the problem child of the financial family. Banks and tax agencies are the ‘good’ brothers, cause they live in harmony with each other and collude to inflict treachery on their problematic sibling, who was seemingly born to disrupt the traditional fiat family’s status quo. And the ‘good’ brothers cannot cope with that, as the rebel sibling threatens their very future.

Image via Shutterstock

BTI Report Reveals Kraken and Coinbase as the Cleanest Crypto Exchanges

The September issue of the Blockchain Transparency Institute’s market surveillance report shows that the cryptocurrency exchange volumes of Kraken and Coinbase are the cleanest in the industry.

The institute is also primarily responsible for filtering these volumes through its proprietary algorithm.

“Since the start of 2019, global wash trading has reduced by 35.7% among the real Top-40 exchanges. The process of sharing our data reports with many of these exchanges has resulted in enhanced mechanisms for detecting wash trading accounts and shutting them down.”

Evidence in the report reveals that the cleanest exchanges continue to stand with Kraken, Coinbase, Poloniex, and Upbit. In contrast, the exchanges with the highest rates of wash trading are: OKEx and Bibox.

Globally, the report shows that Japan and the United States are in the lead of exchanges with accurate volume reporting. The report claims:

“This can be due to several factors, the main of which is the legal and regulatory standards in these countries. However, stricter regulatory frameworks do not always produce the cleanest exchanges.”

Bitwise Asset Management published Bitcoin trading figures and admitted up to 95% of Bitcoin trading volume was due to wash trading.  

In a report published earlier this year by Bitwise Asset Management, revealed that up to 95% of Bitcoin trading volume seen on CoinMarketCap was due to wash trading.

Coinbase Secures an E-Money License From the Central Bank of Ireland

US-based cryptocurrency exchange, Coinbase, has just been granted an e-money license in Ireland by the Central Bank of Ireland as it continues its expansion into Europe. This marks Coinbase as one of the few companies who have been able to obtain such a license and thus serve as Coinbase’s second landmark achievements in its European journey.

According to its blog on Medium, Coinbase was happy to have been granted such an offer and it noted that the approval from the Central Bank of Ireland will now enable them to expand their Irish operation and “deliver a better product to their customers across some of their fastest-growing markets. It will also enable them to secure passports for their customers across the EU and EEA.”

Following the claim from Coinbase that their ability to gain the “approval of a second European regulatory authority demonstrates their position as the world’s most trusted cryptocurrency platform, it then pledged to ensure that their “customers have the same safeguarding and security as any regulated financial institution.”

Coinbase report noted that Martin Shanahan, CEO, IDA Ireland – an agency responsible for attracting foreign investment into the country, appreciated the company for achieving such a feat. Shanahan commented, “Coinbase’s choice of Dublin for this operation reinforces the strength of Ireland as a destination for financial services companies, providing a consistent, certain, pro-enterprise policy environment for businesses to grow and thrive.”

This comment complimented his previous note when Coinbase first permeated into Ireland by establishing a new office in Dublin which was reported in October 2018. He said, “Dublin is a talent hotspot for companies like Coinbase as they scale and internationalize critical business operations. We look forward to welcoming Coinbase into the Irish economy, and helping them access our talented pool of young professionals from the technology and financial services sectors.”

Coinbase’s expansion into Europe continued, especially Ireland could be viewed from the angle of Coinbase’s perception as “one of the capitals of Europe’s burgeoning crypto economy,” and Coinbase’s general utterance that “European expansion will create new jobs and grow the burgeoning Irish crypto economy.”

The whole decision of Coinbase’s journey into Europe if viewed from the perspective of Michael D’Arcy T. D, Ireland’s Minister for Financial Services and Insurance, highlights the competitive offering and attractiveness of Ireland for financial services.

Pertaining to the obtainment of the license, Coinbase said, “The license is another important step toward our mission of creating an open financial system for the world.”

Image via Shutterstock

Coinbase Landed Patent for a New Compliance System to Root Out Non-Compliant Accounts

US cryptocurrency exchange Coinbase has been awarded a new patent from the US Patent and Trademark Office for an automated system to flag and remove non-compliant user accounts.

The filing was published on Nov. 19, detailing a new system with a model that “determines a compliance score for each one of the accounts based on the respective factors associated with the respective account.”

According to the patent, the automated system will be accompanied by a scoring mechanism that would be ruling out non-compliant user accounts, ones that are suspected of trafficking in illegal activity in particular. The scoring system consists of user-inputted or executed data points, including the user’s age, account balance, transaction volume, location, verification history and the number of devices with access.

The accounts that are suspected of illegal activities would be suspended and referred to law enforcement authorities if the transaction involves more than $2,000. On the other hand, good accounts are allowed to pass through the system untouched.

The filing read: “An investigator may be able to determine whether an account is being used for illicit activities by doing research on the parties of the transaction who receive or send payment and determining whether such parties are regularly involved in illicit activities. It may, for example, be relatively easy to determine that a party sending or receiving payment is in the business of conducting online services that may be illegal.”

Image via Shutterstock

Coinbase Custody Launches New International Institutional Grade Crypto Service to European Clients

With its operations based in Dublin, Ireland, Coinbase Custody launched its institutional-grade crypto asset storage service to clients in Europe.

The cryptocurrency exchange launched Coinbase Custody in 2017 for institutional clients such as hedge funds and family offices. Its assets under management have over $7 billion in cryptocurrency assets, with its acquisition of Xapo’s institutional custody business in August 2019.

According to the press release, Coinbase Custody International will be serving broad digital asset coverage to its European clients in a “localized way, with local staff, localized SLAs, and in compliance with local laws.”

The report read, “By offering our services from the same region in which our clients are located, it’s our goal that they will benefit from greater legal and regulatory clarity.”

The international launch is said to meet the demands of institutional investors in Europe and beyond. Due to client demand, the company expressed that Europe is its fastest-growing geographic segment. The company is planning to support more digital assets in the future, along with new features.

Coinbase has also been awarded a new patent from the US Patent and Trademark Office for an automated system to flag and removes non-compliant user accounts. According to the patent, the automated system will be accompanied by a scoring mechanism that would be ruling out non-compliant user accounts, ones that are suspected of trafficking in illegal activity.

Coinbase was awarded an e-money license in October 2019 in Ireland by the Central Bank of Ireland and has allowed the company to expand its Irish operation and “deliver a better product to its customers across some of their fastest-growing markets. It will also enable them to secure passports for their customers across the EU and EEA.”

Image via Shutterstock

Huge Worries As Some Coinbase Customers Express Dissatisfaction Over $10 Maximum Daily Limit

According to ongoing reports and speculation from some quarters in the cryptocurrency world, as regard allegations being brought against Coinbase, the United States San Francesco based cryptocurrency giant exchange and wallet service of restricting some clients to a maximum withdrawal of $10 per day.

A Coinbase user first reported this issue on Reddit about the restriction from Coinbase on Feb. 2. The post on Reddit with the handle of the owner showing Unholy_Crab1 claiming that he reached out to Coinbase to ascertain the reason for the restrictions and to seek an increase for his withdrawal limits, which was duly turned down by the exchange giants.

While sharing proof to back up his claim via screenshot of his transactions and previous attempts to make a withdrawal, The screenshot clearly shows that the maximum withdrawal allowed to him in Bitcoin (BTC) gateway was actually $10.

As at the time the claim was reported,the thread of the post from the Redditor has garnered 40 plus comments, although the majority of comments from other Redditors seem to be tilted in support of the claim while also expressing doubts and skepticism towards Coinbase terms of service so far.

Some users are showing signs of inconvenience as they speculate Coinbase might put into place more related restrictions if prices of cryptocurrency continue to cross the all-time high (ATH) threshold. Other users commented that a withdrawal limitation capped at a meager $10 per day is quite outrageous and could be seen as a total rip off by customers or users of the titanic cryptocurrency exchange.

Coinbase has been duly asked to provide an official statement of their side of the stories to gain clarity into the matter. The Coinbase representatives are yet to respond as users continue to wait to bring the report to closure.

Image via Shutterstock

Coinbase Becomes the First Crypto Firm to Be Awarded Visa Principal Membership

The Coinbase cryptocurrency exchange is now a principal member of the credit card giant Visa. This will allow the San-Francisco based crypto exchange firm to issue debit cards without the reliance on third parties.

By becoming a Visa principal member, the crypto firm will be able to offer additional services. Principal members of Visa are financial institutions, which are authorized to act as “issuing bank,” implying they can provide transaction processing services and issue cards. Coinbase is the first cryptocurrency firm that has reached such a level of certification.

This is not the first time Coinbase is dealing with Visa. The two firms have been working together since 2019 when the crypto exchange company introduced its Coinbase card (“a visa debit card, funded by your balance”) in the UK. But now the membership will make it possible to bring the visa debit card and additional services accessible to more markets around the world. Just nine months after the launch of Coinbase card in the UK, the debit card has spread to 29 European countries.

The debit card now enables users to spend 10 different cryptocurrencies as cash everywhere Visa is accepted. The debit card has been made available to consumers residing in 29 European countries to spend multiple cryptocurrencies.

The debit card functions with any Visa-compatible payment terminals and ATMs. Customers can decide on the app that they want to use the visa card for various transactions.

Talking about the Visa approval, Coinbase commented: “We are excited to be the first company within the cryptocurrency industry to be awarded Visa principal membership. Such membership will allow us to provide more features for Coinbase card customers, offer additional services, and support more markets. All these are components that will assist us in evolving and enriching the crypto payment experience.” Coinbase revealed that the approval is part of its ongoing mission of mainstreaming cryptocurrency adoption.

Coinbase Also First Custodian to Pass Two Major Security Evaluations

As reported by Blockchain.News, Feb. 12, Coinbase Custody announced it had been awarded both Service Organization Control (SOC) 1 Type 2 and SOC 2 Type 2 reports by accounting firm Grant Thornton.

Coinbase Coinbase Custody has become the first cryptocurrency custodian to pass two new security evaluations.

For Coinbase Custody clients, these reports reinforce that the system requirements, service commitments, and data protection safeguards of the custodian meet the rigorous standards necessary to provide the safest custody solution in the crypto ecosystem.

Image via Shutterstock

What Can We Learn From Coinbase CEO Brian Armstrong's Coronavirus Outbreak Contingency Plan for Employees?

The coronavirus has dominated mainstream media coverage as countries outside of China has been seeing an increase of cases as the death toll reaches 2,700 worldwide.

Coronavirus cases in South Korea have reached 1,140, while the recent outbreak in Italy has caused more than 320 infections and 90 cases in Iran. The World Health Organization officials and US experts believe it is still too early to declare the novel coronavirus, known as COVID-19 as a pandemic.

US health officials from the Centers for Disease Control and Prevention stated that the coronavirus “is not recognized to be spreading in US communities.” Officials added that if the local transmissions are identified in the US, the US response strategy will “enhance implementation of actions to slow spread in communities.”

Hope for the best, prepare for the worst

US crypto trading firm Coinbase has been reportedly “planning for a really negative outcome” although the firm has kept an optimistic outlook.

Brian Armstrong, CEO of Coinbase published a shared document stating, “Our expectation is that the measured mortality rate (once low-severity cases are included in the overall count) will fall significantly and that we’ll see limited transmission in the west, where there will be fewer high-density multi-generational housing situations.”

Coinbase has offices in the US, Japan, UK, and Ireland, and the firm is taking measures to ensure safety for three phases of the disease, from phase one, consisting of more than 100 cases of the coronavirus to phase three, more than 5000 infections. Currently, all of the firm’s offices are in tier 0, Japan is in tier 1. Tier 0 also includes improved sanitation measures in the office.

Daily number of newly confirmed cases reported in Japan since January 10, 2020. Source: CHP Hong Kong

In cases where there are 100 or more infected people in the commuting radius of the Coinbase office, the firm will request some employees to work from home, while offering mask disposal bins and boost cleaning schedules for those in the office.

Phase two is when there are more than 1000 cases are within the commute range of the Coinbase office, with a mortality rate of 1% or above. If the situation leads to phase three, all employees will be required to work from home.

“We continue to believe the risk of COVID-2019 coronavirus to most employees is low, with a slightly elevated risk to our team in Japan,” said Coinbase. The firm has made restrictions on travel to China, Hong Kong, Japan, Italy, and South Korea.

Hong Kong blockchain events cancelled

The Hong Kong Blockchain Week 2020, hosted by NexChange Group and supported by Cyberport, which was initially scheduled for March 2-6, has been postponed due to security and safety concerns regarding the outbreak of the coronavirus.

Token2049, and StartmeupHK Festival 2020 have also been postponed to a later date, citing coronavirus developments creating uncertainty.

Hong Kong blockchain remittance startup Bitspark closure mildly due to coronavirus

Bitspark, a blockchain remittance startup based in Hong Kong, recently announced its closure, stating reasons due to internal restructuring issues, as well as the coronavirus outbreak and protests that led to the current deterioration of Asia’s financial hub.