Category: Blockchain

Will Three Bank Regulators Kill Cryptocurrency in 2023?

Posted on by phoffman@channelchek.com
Image Credit: Fredrik Klintberg (Flickr)

Lack of Crypto Governance, Oversight, Standards, and Risk Management Frightens Feds

Three Federal Agencies have warned banks about the dangers of dealing with digital assets. On the first banking day of the new year, the Federal Reserve (Fed), the FDIC, and the Office of the Controller of the Currency (OCC), the three banking regulators in the US, issued a three-page joint warning to banks. It points to eight risks that banking organizations should not let migrate to the US banking system. And highlights processes to mitigate these risks while the three agencies develop frameworks to oversee the ever-changing asset class.

The Joint Statement on Crypto-Asset Risks to Banking Organizations is for the consumption of banks of all types and sizes through the US that have or may adopt policies. It warns the events of 2022 have “been marked by significant volatility,” and that vulnerabilities in the crypto-asset sector have surfaced.

Source: Federal Reserve

The joint statement explains that banking organizations that have in the past seeked to engage in activities that involve crypto-assets. Have been taken on a case-by-case basis. “The agencies continue to build knowledge, expertise, and understanding of the risks crypto-assets may pose to banking organizations, their customers, and the broader U.S. financial system.”  The statement says that the  significant risks “highlighted by recent failures of several large crypto-asset companies,” will cause the three agencies to take a careful and cautious approach.

The agencies highlighted eight risks that they wanted banking organizations engaged in crypto-assets to understand may not be in accordance with safe and sound banking practices:

  • Risk of fraud and scams among crypto-asset sector participants.
  • Legal uncertainties related to custody practices, redemptions, and ownership rights, some of which are currently the subject of legal processes and proceedings.
  • Inaccurate or misleading representations and disclosures by crypto-asset companies, including misrepresentations regarding federal deposit insurance, and other practices that may be unfair, deceptive, or abusive, contributing to significant harm to retail and institutional investors, customers, and counterparties.
  • Significant volatility in crypto-asset markets, the effects of which include potential impacts on deposit flows associated with crypto-asset companies.
  • Susceptibility of stablecoins to run risk, creating potential deposit outflows for banking organizations that hold stablecoin reserves.
  • Contagion risk within the crypto-assetsector resulting from interconnections among certain crypto-asset participants, including through opaque lending, investing, funding, service, and operational arrangements. These interconnections may also present concentration risks for banking organizations with exposures to the crypto-asset sector.
  • Risk management and governance practices in the crypto-asset sector exhibiting a lack of maturity and robustness.
  • Heightened risks associated with open, public, and/or decentralized networks, or similar systems, including, but not limited to, the lack of governance mechanisms establishing oversight of the system; the absence of contracts or standards to clearly establish roles, responsibilities, and liabilities; and vulnerabilities related to cyber-attacks, outages, lost or trapped assets, and illicit finance.

Take Away

In 2022 the young crypto asset class took a beating similar to high-tech stocks. There is a reason banks are limited to their stock market activity. It seems that these three federal agencies, which do not include work being done by the SEC (or CFTC), are now working hard to regulate what banks can do involving these assets; in the meantime, they want to let banking organizations know that crypto-assets need to be dealt with extreme caution, perhaps moderation, and know that as far as the regulators are concerned, if they still want to serve crypto customers, they should discuss all planned activities with the appropriate regulator prior to filing an application and should ensure that risk management, including board oversight, policies, procedures, risk assessments, controls, gates and guardrails, and monitoring, are in place to effectively identify and manage risks.

Paul Hoffman

Managing Editor, Channelchek

Source

Joint Statement on Crypto-Asset Risks to Banking Organizations

The Microstrategy Plan for Bitcoin is to Hold “Forever”

Posted on by phoffman@channelchek.com
Image Credit: Marco Verch (Flickr)

Bitcoin’s Largest Corporate Owner Sold But Remains a net Buyer

“Bitcoin is the exit strategy,” says Michael Saylor, the Executive Chairman overseeing Microstrategy (MSTR), a company he founded. The comment was to a question in a Twitter Space interview with Eric Weiss of Bitcoin Roundtable. During this insightful interview, it becomes clear that the enterprise analytics company stands behind its commitment to the cryptocurrency and is investing in the ecosystem in other ways. Saylor also addressed his recent sale of 704 bitcoin, explaining it created tax benefits that serve stockholders.

The Company is a Bitcoin Maximalist

Bitcoin owners are “Either traders, technocrats, or maximalists.” Explained Saylor in the podcast-style interview.

Accordingly, Saylor says, traders don’t have any opinion on it long-term other than it’s an asset that moves enough to trade. Holding times may be minutes or months.

Technocrats view bitcoin as a digital monetary network like Google or Facebook. It’s a big tech network to them, so if they are bullish on big tech, they will hold bitcoin. And they may try to time their investments based on economic trends.

Maximalists view bitcoin as an instrument of economic empowerment that is just good for the human race. If you’re a maximalist, you don’t try to time it, and you have a much longer time horizon. While the technocrats are looking out 3-5 years, and they think that’s long, maximalists are looking out 10-100 years. Part of that is believing this is good for the human race.

“We’re maximalists, we think bitcoin is more than a digital monetary network; we think it is the digital monetary network. It’s good for the human race, and anything we can do in order to encourage adoption of bitcoin, and help with the adoption, is going to be good for the world.” Saylor while discussing Microstrategy.

Saylor’s company is the largest owner of bitcoin, costing Microstrategy a little more than $4 billion, the crypto assets are now valued just above $2 billion. Saylor says how we acquire bitcoin is less market-driven, as this is permanent capital that flows into the bitcoin ecosystem. Permanent capital that becomes part of the Microstrategy enterprise. Capital that is ongoing and may be held as a base forever.

In Response to December Selling

Michael Saylor recently took some criticism for selling 704 bitcoin after previously repeating he won’t sell bitcoin. He put the confusion to rest by explaining the benefit to stockholders of tax loss harvesting. With crypto the selling is treated as property so you can take the capital loss, “so we have some capital gains we pay taxes on, and then we have some capital, losses in bitcoin, so by selling the bitcoin, and taking the capital loss, we’re able to use that to offset some capital gains.” He added, it’s very tax efficient for the corporation.” Which is good for shareholders.

Lightning Network

Lightning allows “lightning-fast” blockchain payments without worrying about block confirmation times. Payment speed measured in milliseconds to seconds.Security is enforced by blockchain smart-contracts without creating an on-blockchain transaction for individual payments.

Microstrategy has said they will be offering bitcoin Lightning solutions in the first quarter of 2023. This tech investment in the growth of Microstrategy is another way Saylor and company support the bitcoin ecosystem.“If bitcoin is the underlying base layer, I think that Lightning is money over IP.” He said it’s an open permissionless protocol to let eight million people move money and monetary assets at the speed of light.

“We want to make it possible for any enterprise to spin up Lighting infrastructure in an afternoon” and onboard thousands of employees or customers, Saylor explained. “We want to plug it into enterprise technology and make it a marketing strategy for any forward-thinking CMO.”

Areas that MicroStrategy is exploring for Lightning services include online content monetization, enterprise marketing, web paywalls, and internal corporate controls. Every chief marketing officer should be able give away satoshis –– Bitcoin’s smaller denomination unit –– as incentive for customers

Take Away

Bitcoin still has its perma-bulls. Michael Saylor of Microstrategy is solidly in that category. He is not necessarily bullish on other crypto or digital currencies, bitcoin is the digital currency in his mind, and he intends for the ongoing holding of bitcoin and growth of the company in other ways that support its adoption.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://twitter.com/i/spaces/1mrGmkzmmbDxy?s=20

https://cointelegraph.com/news/microstrategy-bitcoin-purchase-divides-the-crypto-community

https://www.microstrategy.com/en/investor-relations

C-Suite Caroline, Who is She?

Posted on by phoffman@channelchek.com
Image: Caroline Ellison (Twitter)

Caroline Ellison Now Enters a New Stage of Her Young Life

Caroline Ellison, the 28-year-old former CEO of Alameda Research, pleaded guilty to seven criminal charges, including wire fraud and conspiracy to commit securities fraud, according to her plea agreement, signed Monday. Caroline, the former chief executive of Alameda Research, a trading firm with close ties to FTX, is said to face up to 115 years in prison. Her admitted role in allowing customer funds to flow through an electronic “backdoor” to be used by Sam Bankman Fried (SBF) of FTX tells us a little bit about her recent past, but who is Ms. Ellison, and how did she get to be CEO of Alameda?

What is Alameda Research?

SBF’s portfolio of crypto companies started with his founding of Alameda research in 2017.  Alameda Research was, until very recently, a cryptocurrency trading firm known to specialize in quantitative research and providing liquidity to cryptocurrency and digital assets markets.

Ellison joined the Alameda team as a trader in 2018 and became its co-CEO in 2021.

Bankman-Fried had started Alameda Research as a high-risk, high-reward crypto trading firm using high-risk tactics. He has admitted he included “research” in the name to give it a better vibe. In an NPR podcast in 2017, he was shown to be aggressively taking advantage of the “wild west” crypto playing field. SBF grew his crypto-related business into more complex cryptocurrency trading, accessible to the masses, with his founding of FTX, a crypto exchange, in 2019. He did this by leveraging his image as highly experienced in crypto, which helped him to raise money from firms like BlackRock.

Who Is Caroline Ellison?

In a now-removed YouTube video and podcast, Caroline discussed her background and upbringing in an FTX public relations-type interview dated July 2020.

The 28-year-old Ellison grew up outside of Boston in a town called Newton. Her parents are professors, Glenn Ellison, her father, is a professor of economics at the Massachusetts Institute of Technology (MIT), and Sara Fischer Ellison lectures at the prestigious school.

Ellison said in the podcast that she inherited a natural aptitude for math and entered math competitions at a young age. She further would demonstrate that she was some kind of prodigy by telling people that by age five, she read a Harry Potter book by herself. “I refused to wait for my parents to read it [to me],” she said.  

She went on to major in math at Stanford. After applying for trading internships, a field that is very competitive for new graduates, she landed at Jane Street Capital, a well-respected firm on Wall Street. After her internship, she worked there for a year and a half.  

Is Caroline Elliman or was Caroline Elliman Sam Bankman Fried’s girlfriend? There are sources that say that Ellison met Bankman-Fried at Jane Street. He worked there from June 2014 to September 2017, according to his LinkedIn, which is still live and has 28,250 followers.  

Ellison said she learned about Alameda over coffee with then-CEO Bankman-Fried while visiting the Bay Area and decided “it seemed like too cool of an opportunity to pass up.” She joined the company in 2018.

Bankman-Fried would then resign as CEO of Alameda but retained his role as CEO of FTX. In October 2021, Ellison became co-CEO with Sam Trabucco, a former trader at Susquehanna International Group.

Trabucco resigned in August 2022 to “spend a lot of time traveling,” according to one of his tweets, saying he “bought a boat.”

Was There Romance Between Ellison and SBF?  

When a book about this is written, and the movie is out, it will include sex.

There have been rumors of polyamory. This is a relationship behavior that involves connections with more than one person. According to a Coindesk article from November, among the FTX executives, in the Bahamas,  “All 10 are, or used to be, paired up in romantic relationships with each other.”  There have also been suggestions that FTX employees and Bankman-Fried spent lavishly on the island, from yachts to thousands of dollars a day on catering.

Take Away

Financial fraud comes in many forms. Often it starts out innocently when a bad trade happens, someone tries to cover it up, and the markets don’t cooperate to bail out the bad trade, then more illegal actions are taken to cover that up. There have also been situations where unqualified, not experienced persons are in charge and either unaware of the magnitude of their deceptive actions or are following orders, perhaps just going along because others are doing it too. Then there are those that enjoy the attention they get by being out front and sharing wealth and buying fame. Another more common deceit is someone who is just plain old greedy. All are criminal.

I am not sure what the driver was in the Alameda/FTX, SBF Caroline Ellison (and others) case, but I am sure we will hear much more about this. As we do, remember the importance of trusting those you conduct business with and questioning them anyway.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.linkedin.com/in/sam-bankman-fried-8367a346/?originalSubdomain=bs

https://www.npr.org/transcripts/1137054976

https://cointelegraph.com/news/alameda-ex-ceo-caroline-ellison-spotted-in-new-york-twitter-users-claim

https://www.cnbc.com/2022/11/13/sam-bankman-frieds-alameda-quietly-used-ftx-customer-funds-without-raising-alarm-bells-say-sources.html

https://www.wsj.com/articles/alameda-ftx-executives-are-said-to-have-known-ftx-was-using-customer-funds-11668264238?mod=article_inline

Would it Be Possible at This Point to Ban Non-CBDC Crypto?

Posted on by phoffman@channelchek.com
Image Credit: ByBit (Flickr)

Senate Banking Committee Chairman Could Support Difficult Crypto Ban

Most new and revolutionary innovations go through growing pains – and at times fraud and deceit. Cryptocurrency and all the ancillary services are no different. One common reaction to some crypto problems is for legislators or regulators to swoop in and show they are protecting citizens from the newly discovered dangers. The cryptocurrency market is now 13 years young and not yet mature. This is evidenced by the meltdown of crypto exchange FTX, which has just placed the entire crypto industry in the crosshairs of the head of the Senate Banking Committee as well as others in Washington. Will crypto survive?

Killing Crypto?

With swirling allegations of fraud, misuse of customer funds, and negligence, the bankruptcy of cryptocurrency exchange FTX has caused lawmakers to try to take action to protect US citizens from activity that largely takes place outside of the States. The chairman of the Senate Banking Committee went as far as to suggest a total ban on cryptocurrencies.

When asked on NBC’s Meet the Press this past weekend whether regulation only gives legitimacy to crypto, rather than a ban, Senate Banking Committee Chair Sherrod Brown said that an immediate course of action is to have the Treasury Department embolden federal agencies such as the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC).

 “We want them to do what they need to do,” the Senator said, “at the same time, maybe banning it—although banning it is very difficult because it will go offshore, and who knows how that will work.”  

Banning crypto would be difficult. Most transactions in the world’s digital currencies and tokens take place outside of the US, including major platforms such as Binance and Deribit.

Does Regulation Help?

While crypto is becoming a topic of scrutiny among lawmakers, the push to regulate digital assets has in some ways served as a safer opening for institutional investors to involve themselves in the asset class. A ban would seem catastrophic to publicly traded, US based Coinbase (COIN), and also halt some investment but could be largely ineffective, chasing transactions offshore. “One in six American households own crypto, a domestic ban at this stage would only lead to more FTX-like situations where Americans are forced to interact with off-shore exchanges that have no regulatory oversight,” a Coinbase spokesperson told investment publication Barron’s, adding, “Congress should focus on passing workable, comprehensive federal crypto legislation that protects consumers, enables innovation, and bolsters American competitiveness.”

A ban in place since 2021 on mining or trading cryptocurrencies in China has not prevented the country from being number two worldwide in crypto mining with 20% of the market share. The country also is ranked 10th in terms of transactions.

Take Away

New investment products have ups and downs. Regulations are clearly on their way in the crypto asset class, but an outright ban would seem to be more lip service from the Senate Banking Committee chair than something that may be implemented. The asset class has now become so entrenched in portfolios of so many in the US, including retirees, and so available outside US jurisdictions that it would seem that any measure to protect investors would be regulatory and implemented slowly.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.barrons.com/articles/bitcoin-prices-crypto-markets-today-51670584352?mod=article_inline

https://www.barrons.com/articles/sherrod-brown-cryptocurrency-ban-ftx-sec-51671471539

Meet the Press

https://www.deribit.com/

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

The Darknet Supply Chain Creates Risk for Most All Online Transactions

Posted on by phoffman@channelchek.com
Image Credit: Richard Patterson (Flickr)

Darknet Markets Generate Millions in Revenue Selling Stolen Personal Data, Supply Chain Study Finds

It is common to hear news reports about large data breaches, but what happens once your personal data is stolen? Our research shows that, like most legal commodities, stolen data products flow through a supply chain consisting of producers, wholesalers and consumers. But this supply chain involves the interconnection of multiple criminal organizations operating in illicit underground marketplaces.

The stolen data supply chain begins with producers – hackers who exploit vulnerable systems and steal sensitive information such as credit card numbers, bank account information and Social Security numbers. Next, the stolen data is advertised by wholesalers and distributors who sell the data. Finally, the data is purchased by consumers who use it to commit various forms of fraud, including fraudulent credit card transactions, identity theft and phishing attacks.

This trafficking of stolen data between producers, wholesalers and consumers is enabled by darknet markets, which are websites that resemble ordinary e-commerce websites but are accessible only using special browsers or authorization codes.

This article was republished with permission from The Conversation, a news site dedicated to sharing ideas from academic experts. It represents the research-based findings and thoughts of, Christian Jordan Howell

Assistant Professor in Cybercrime, University of South Florida and David Maimon, Professor of Criminal Justice and Criminology, Georgia State University.

We found several thousand vendors selling tens of thousands of stolen data products on 30 darknet markets. These vendors had more than US$140 million in revenue over an eight-month period.

The stolen data supply chain, from data theft to fraud. Christian Jordan Howell, CC BY-ND

Darknet Markets

Just like traditional e-commerce sites, darknet markets provide a platform for vendors to connect with potential buyers to facilitate transactions. Darknet markets, though, are notorious for the sale of illicit products. Another key distinction is that access to darknet markets requires the use of special software such as the Onion Router, or TOR, which provides security and anonymity.

Silk Road, which emerged in 2011, combined TOR and bitcoin to become the first known darknet market. The market was eventually seized in 2013, and the founder, Ross Ulbricht, was sentenced to two life sentences plus 40 years without the possibility of parole. Ulbricht’s hefty prison sentence did not appear to have the intended deterrent effect. Multiple markets emerged to fill the void and, in doing so, created a thriving ecosystem profiting from stolen personal data.

Example of a stolen data ‘product’ sold on a darknet market. Screenshot by Christian Jordan Howell, CC BY-ND

Stolen Data Ecosystem

Recognizing the role of darknet markets in trafficking stolen data, we conducted the largest systematic examination of stolen data markets that we are aware of to better understand the size and scope of this illicit online ecosystem. To do this, we first identified 30 darknet markets advertising stolen data products.

Next, we extracted information about stolen data products from the markets on a weekly basis for eight months, from Sept. 1, 2020, through April 30, 2021. We then used this information to determine the number of vendors selling stolen data products, the number of stolen data products advertised, the number of products sold and the amount of revenue generated.

In total, there were 2,158 vendors who advertised at least one of the 96,672 product listings across the 30 marketplaces. Vendors and product listings were not distributed equally across markets. On average, marketplaces had 109 unique vendor aliases and 3,222 product listings related to stolen data products. Marketplaces recorded 632,207 sales across these markets, which generated $140,337,999 in total revenue. Again, there is high variation across the markets. On average, marketplaces had 26,342 sales and generated $5,847,417 in revenue.

The size and scope of the stolen data ecosystem over an eight-month period. Christian Jordan Howell, CC BY-ND

After assessing the aggregate characteristics of the ecosystem, we analyzed each of the markets individually. In doing so, we found that a handful of markets were responsible for trafficking most of the stolen data products. The three largest markets – Apollon, WhiteHouse and Agartha – contained 58% of all vendors. The number of listings ranged from 38 to 16,296, and the total number of sales ranged from 0 to 237,512. The total revenue of markets also varied substantially during the 35-week period: It ranged from $0 to $91,582,216 for the most successful market, Agartha.

For comparison, most midsize companies operating in the U.S. earn between $10 million and $1 billion annually. Both Agartha and Cartel earned enough revenue within the 35-week period we tracked them to be characterized as midsize companies, earning $91.6 million and $32.3 million, respectively. Other markets like Aurora, DeepMart and White House were also on track to reach the revenue of a midsize company if given a full year to earn.

Our research details a thriving underground economy and illicit supply chain enabled by darknet markets. As long as data is routinely stolen, there are likely to be marketplaces for the stolen information.

These darknet markets are difficult to disrupt directly, but efforts to thwart customers of stolen data from using it offers some hope. We believe that advances in artificial intelligence can provide law enforcement agencies, financial institutions and others with information needed to prevent stolen data from being used to commit fraud. This could stop the flow of stolen data through the supply chain and disrupt the underground economy that profits from your personal data.

FTX, What Happened and Should Non-Crypto Investors Care

Posted on by phoffman@channelchek.com
Image Credit: Phillip Pessar (Flickr)

Dramatic Collapse of the Cryptocurrency Exchange FTX Contains Lessons for Investors but Won’t Affect Most People

In the fast-paced world of cryptocurrency, vast sums of money can be made or lost in the blink of an eye. In early November 2022, the second-largest cryptocurrency exchange, FTX, was valued at more than US$30 billion. By Nov. 14, FTX was in bankruptcy proceedings along with more than 100 companies connected to it. D. Brian Blank and Brandy Hadley are professors who study finance, investing and fintech. They explain how and why this incredible collapse happened, what effect it might have on the traditional financial sector and whether you need to care if you don’t own any cryptocurrency.

What Happened?

In 2019, Sam Bankman-Fried founded FTX, a company that ran one of the largest cryptocurrency exchanges.

FTX is where many crypto investors trade and hold their cryptocurrency, similar to the New York Stock Exchange for stocks. Bankman-Fried is also the founder of Alameda Research, a hedge fund that trades and invests in cryptocurrencies and crypto companies.

Sam Bankman-Fried founded both FTX and the investment firm Alameda Research. News sources have reported some less-than-responsible financial dealings between the two companies. Image via The Conversation.

Within the traditional financial sector, these two companies would be separate firms entirely or at least have divisions and firewalls in place between them. But in early November 2022, news outlets reported that a significant proportion of Alameda’s assets were a type of cryptocurrency released by FTX itself.

A few days later, news broke that FTX had allegedly been loaning customer assets to Alameda for risky trades without the consent of the customers and also issuing its own FTX cryptocurrency for Alameda to use as collateral. As a result, criminal and regulatory investigators began scrutinizing FTX for potentially violating securities law.

These two pieces of news basically led to a bank run on FTX.

Large crypto investors, like FTX’s competitor Binance, as well as individuals, began to sell off cryptocurrency held on FTX’s exchange. FTX quickly lost its ability to meet customer withdrawals and halted trading. On Nov. 14, FTX was also hit by an apparent insider hack and lost $600 million worth of cryptocurrency.

That same day, FTX, Alameda Research and 130 other affiliated companies founded by Bankman-Fried filed for bankruptcy. This action may leave more than a million suppliers, employees and investors who bought cryptocurrencies through the exchange or invested in these companies with no way to get their money back.

Among the groups and individuals who held currency on the FTX platform were many of the normal players in the crypto world, but a number of more traditional investment firms also held assets within FTX. Sequoia Capital, a venture capital firm, as well as the Ontario Teacher’s Pension, are estimated to have held millions of dollars of their investment portfolios in ownership stake of FTX. They have both already written off these investments with FTX as lost.

Image: OTPP

Did a Lack of Oversight Play a Role?

In traditional markets, corporations generally limit the risk they expose themselves to by maintaining liquidity and solvency. Liquidity is the ability of a firm to sell assets quickly without those assets losing much value. Solvency is the idea that a company’s assets are worth more than what that company owes to debtors and customers.

But the crypto world has generally operated with much less caution than the traditional financial sector, and FTX is no exception. About two-thirds of the money that FTX owed to the people who held cryptocurrency on its exchange – roughly $11.3 billion of $16 billion owed – was backed by illiquid coins created by FTX. FTX was taking its customers’ money, giving it to Alameda to make risky investments and then creating its own currency, known as FTT, as a replacement – cryptocurrency that it was unable to sell at a high enough price when it needed to.

In addition, nearly 40% of Alameda’s assets were in FTX’s own cryptocurrency – and remember, both companies were founded by the same person.

This all came to a head when investors decided to sell their coins on the exchange. FTX did not have enough liquid assets to meet those demands. This, in turn, drove the value of FTT from over $26 a coin at the beginning of November to under $2 by Nov. 13. By this point, FTX owed more money to its customers than it was worth.

In regulated exchanges, investing with customer funds is illegal. Additionally, auditors validate financial statements, and firms must publish the amount of money they hold in reserve that is available to fund customer withdrawals. And even if things go wrong, the Securities Investor Protection Corporation – or SIPC – protects depositors against the loss of investments from an exchange failure or financially troubled brokerage firm. None of these guardrails are in place within the crypto world.

Why is this a Big Deal in Crypto?

As a result of this meltdown, the company Binance is now considering creating an industry recovery fund – akin to a private version of SIPC insurance – to avoid future failures of crypto exchanges.

But while the collapse of FTX and Alameda – valued at more than $30 billion and now essentially worth nothing – is dramatic, the bigger implication is simply the potential lost trust in crypto. Bank runs are rare in traditional financial institutions, but they are increasingly common in the crypto space. Given that Bankman-Fried and FTX were seen as some of the biggest, most trusted figures in crypto, these events may lead more investors to think twice about putting money in crypto.

If I Don’t Own Crypto, Should I Care?

Though investment in cryptocurrencies has grown rapidly, the entire crypto market – valued at over $3 trillion at its peak – is much smaller than the $120 trillion traditional stock market.

While investors and regulators are still evaluating the consequences of this fall, the impact on any person who doesn’t personally own crypto will be minuscule. It is true that many larger investment funds, like BlackRock and the Ontario Teachers Pension, held investments in FTX, but the estimated $95 million the Ontario Teachers Pension lost through the collapse of FTX is just 0.05% of the entire fund’s investments.

The takeaway for most individuals is not to invest in unregulated markets without understanding the risks. In high-risk environments like crypto, it’s possible to lose everything – a lesson investors in FTX are learning the hard way.

This article was republished with permission from The Conversation, a news site dedicated to sharing ideas from academic experts. It represents the research-based findings and thoughts of D. Brian Blank, Assistant Professor of Finance, Mississippi State University and Brandy Hadley, Associate Professor of Finance and the David A. Thompson Professor in Applied Investments, Appalachian State University

Blockchain and Web 3 Communities Get More Visibility Into Their Networks

Posted on by phoffman@channelchek.com
Image Credit: Dejan Krsmanovic (Flickr)

Helping Blockchain Communities Fix Bugs

Zach Winn | MIT News Office

If the crypto enthusiasts are right, the next decade will see billions of people begin using applications built off distributed, user-owned blockchains. The new paradigm has been dubbed Web 3. But Web 3 still has some significant challenges to overcome if it’s going to replace the digital world as we know it.

Blockchain networks, for instance, are going to need an efficient way of detecting and resolving performance problems. Current analytics tools are built for companies to monitor their websites and apps. Such services need only be designed for one user. In the decentralized world of the blockchains, however, the users are the owners, turning the traditional model of maintenance and bug fixes on its head.

The company Metrika, founded by an MIT alumnus, has developed a suite of tools to help the distributed communities of the blockchain world monitor and improve their networks. The company allows users to create alerts, access reports, and view real-time community dashboards that visualize network performance, problems, and trends over time.

“Metrika is a community-based monitoring and collaboration platform,” founder and CEO Nikos Andrikogiannopoulos SM ’06, MBA ’11 says. “We’re making [blockchain network] telemetry a public good for everyone. These applications are holding billions of dollars in assets, so it’s unimaginable that we wouldn’t have service assurance and deep visibility of what is happening in real-time.”

Metrika is currently providing services for popular blockchain protocols including Ethereum, Algorand, Flow, and Solana. The company plans to expand that list as other networks grow in popularity in hopes of enabling the much-hyped shift to Web 3.

“Our vision at Metrika is to become a critical layer of the Web 3 world,” Andrikogiannopoulos says. “Ten years from now, kids will be interacting with assets on their mobile phone. The idea of a bank account will be foreign to them. There will be no corner banks. The whole idea of finance will not go through physical stores and bank accounts — you’ll have assets on every application you use. In that world, where everything is happening on a blockchain, how can Metrika help provide the observability, reliability, and visibility of the blockchain network?”

Bouncing Ideas Off MIT

Andrikogiannopoulos first came to MIT as a graduate student in 2004 and he likes to say he never really left. To this day he lives in Cambridge with his wife, who works at MIT, and returns to campus often.

After earning his second MIT degree, an MBA from the Sloan School of Management, Andrikogiannopoulos began a telecommunications consulting job. During lunch breaks, he’d return to MIT to work with the Venture Mentoring Services (VMS), where entrepreneurs from the MIT community can connect with mentors and receive advice. While kicking around telecommunications startup ideas, a VMS mentor connected him to internet entrepreneur Rubin Gruber, who suggested he explore the blockchain space instead.

It was mid 2018 — what many remember as the “crypto winter” for the lull in blockchain hype and the corresponding crash of crypto prices. But Andrikogiannopoulos began researching the industry and networking with people in the blockchain space, including an MIT alumnus working at the blockchain company Algorand, which was founded by Silvio Micali, the Ford Foundation Professor of Engineering at MIT.

A few months after their initial talk, Andrikogiannopoulos returned to Gruber’s office and told him blockchains were lacking monitoring and operational intelligence.

The problem stems from the decentralized structure of blockchains. Each user operates as a node in the system by creating, receiving, and moving data through their server. When users encounter a problem, they need to figure out if the problem lies within their node or involves the network as a whole.

“They might go on Twitter and Discord and ask other users what they’re experiencing,” Andrikogiannopoulos says. “They’re trying to triangulate the problem, and it takes several hours for them to figure out the issue, coordinate a response, and resolve it.”

To build Metrika, Andrikogiannopoulos set up open-source nodes across the globe that pull data from the nodes and networks, then aggregate those data into easy-to-understand reports and other tools.

“We act as public infrastructure, so users get visibility through dashboards, alerting, and reports, and then we add collaboration tools on top of that,” Andrikogiannopoulos explains.

By 2019, Metrika had begun detecting problems with node performance, staking, network latency, and errors like blocks not being produced at the right rate. Andrikogiannopoulos showed his progress to employees at Algorand, who expressed interest, so he continued building out Metrika’s suite of tools.

“You can see the idea of Metrika bounced across the entire MIT ecosystem,” Andrikogiannopoulos says. “It’s crucial when you start companies that you have these kinds of insight and resource-rich environments like MIT, where you can iterate on your ideas and find team members to join you.”

Enabling Web 3

Blockchains are no longer a niche technology. Around the world, companies in finance and logistics, as well gamers and other creatives, are adopting the technology.

“The blockchain world up to today has been a large experiment,” Andrikogiannopoulos says. “A lot of this infrastructure just hasn’t been built. But Bitcoin proved this can work outside of the traditional finance world, and Ethereum is bringing it to another level with applications, smart contracts, and by creating essentially a decentralized, smart computer. We think about enabling that world we see coming.”

As Metrika continues building out solutions to monitor blockchains, it also wants to offer services for the many applications being built on top of that infrastructure.

“In the future, if a blockchain transaction doesn’t go through and you’re Goldman Sachs or JP Morgan, you need to know why that transaction didn’t go through and what happened,” Andrikogiannopoulos says. “Or if you’re an application playing a game or buying assets and the transactions are lagging, you need to understand why the user experience is being impacted. In Web 3 these things are every important because of the scale and the flow of value we’re talking about.”

For Nikos, improving blockchain performance is not just about optimizing networks. It’s also about helping to usher in the world of open finance and open applications that Web 3 promises.

“We’ve reached 17 hours of outage on blockchain networks in some cases, but what’s even more important to me is not the outages themselves, but the infrastructure needed to avoid them as the industry continues maturing,” Nikos says. “These problems can compromise trust as we’re onboarding users into the Web 3 world. Metrika’s mission is to enable a compelling Web 3 ecosystem.”

Ready or Not, Here Come CBDCs

Posted on by aweinsoff@channelchek.com
Image Source: usfunds.com

Central Bank Digital Currencies May Be Inevitable, And That’s a Problem

Readers of a certain age will remember Carnac the Magnificent, Johnny Carson’s recurring alter ego. As Carnac, the late-night host would list off three seemingly unrelated words, all of which answered a question that was sealed in an envelope that he held to his forehead.

Today we’re going to play the same game, with the answers being PayPal, Kanye (or Ye, as he’s now known) and central bank digital currencies (CBDCs). And the question: What are the consequences of financial hyper-centralization?

Some of you will make the connections immediately. For everyone else, let me explain.

PayPal, the financial technology (fintech) firm cofounded over 20 years ago by Peter Thiel, Elon Musk and others, was roundly criticized last week after an update to its terms of service showed that the company would fine users $2,500 for, among other things, spreading “misinformation.” A PayPal spokesperson was quick to walk back the update, even claiming that the language “was never intended to be inserted in our policy,” but the damage was done. #DeletePayPal started trending on Twitter, and the company’s stock tanked nearly 12%.

As for Ye, he and his apparel brand Yeezy were reportedly dropped last week by JPMorgan Chase. In a letter widely shared on social media, JPMorgan says Ye has until November 21 to move his business finances elsewhere.

No reason was given by the bank to cut ties with the billionaire rapper, but it’s easy to surmise that Ye was targeted for his political beliefs and outspokenness. I don’t agree with everything he says, nor should you. He’s a controversial figure, and his comments are often erratic and designed to get a rise out of his critics. I’m not sure, though, that this should have anything to do with his access to banking services.

The two cases of PayPal and Ye represent what I believe are legitimate and mounting concerns surrounding centralized finance. Admittedly, Ye is an extreme example. He’s a multiplatinum recording artist with tens of millions of social media followers. But there’s a real fear among everyday people that they too can be fined or have their accounts frozen or canceled at any time for expressing nonconformist views.

This article was republished with permission from Frank Talk, a CEO Blog by Frank Holmes of U.S. Global Investors (GROW). Find more of Frank’s articles here – Originally published October 19, 2022

CBDCs Are Inevitable

That brings me to CBDCs. I was in Europe last week where I attended the Bitcoin Amsterdam conference, and I was honored to participate on a lively panel that was aptly titled “The Specter of CBDCs.”

As I told the audience, I believe CBDCs are inevitable, ready or not. There are too many perceived benefits. These currencies offer broad public access and instant settlements, streamline cross-border payments, preserve the dominance of a nation’s currency and reduce the operational costs of maintaining physical cash. Here in the U.S., millions upon millions of dollars’ worth of bills and coins are lost or accidentally thrown away every year. CBDCs would solve this problem. 

An estimated 90% of the world’s central banks currently have CBDC plans somewhere in the pipeline. As I write this, only two countries have officially launched their own digital currencies—the Bahamas with its Sand Dollar, and Nigeria with its eNaira—but expect many more to follow in the coming years. China, the world’s second largest economy, has been piloting its own CBDC for a couple of years now, and India, the seventh largest, released a report last week laying out the “planned features of the digital Rupee.” A pilot program of the currency is expected to begin “soon.” And speaking at an annual International Monetary Fund (IMF) meeting, Treasury Secretary Janet Yellen said that the U.S. should be “in a position where we could issue” a CBDC.

CBDCs Improve Bitcoin’s Use Case

Due to the centralized nature of CBDCs, however, there are a number of concerns that give many people pause. Unlike Bitcoin, which is decentralized and anonymous, CBDCs raise questions about privacy, government interference and manipulation.

In the White House’s own review of digital currencies, issued last month, policymakers write that a potential U.S. coin system should “promote compliance with” anti-money laundering (AML) and counter-terrorist financing (CFT) laws. Such a system should also “prevent the use of CBDC in ways that violate civil or human rights.” Further, it should be sustainable; that is, it should “minimize energy use, resources use, greenhouse gas emissions, other pollution and environmental impacts on local communities.”

Nothing about this sounds inherently nefarious, but then, some of us may have said the same thing about PayPal’s “misinformation” policy (whether intended or not) and JPMorgan’s decision to end its relationship with a polarizing celebrity.

I believe this only improves Bitcoin’s use case, especially if we’re headed for a digital future.

Worst 60/40 Portfolio Returns In 100 Years

With only a little over 50 trading days left in 2022, it looks more and more likely that this will be among the very worst years in history for investing. Since World War II, there have been only three instances, in 1974, 2002 and 2008, when the S&P 500 ended the year down more than 20%. If 2022 ended today, it would mark only the fourth time.  

Here’s another way to visualize it. The scatter plot below shows annual returns for the S&P 500 (horizontal axis) and U.S. bonds (vertical axis). As you can see, 2022 falls in the most undesirable quadrant along with the years 1931, 1941 and 1969. Not only have stocks been knocked down, but so have bond prices as the Fed continues to hike rates at an historically fast pace.   

What this means is that the traditional “60/40” portfolio—composed of 60% stocks and 40% bonds—now faces its worst year in 100 years, according to Bank of America.

My takeaway is that diversification matters more now than perhaps in any other time in recent memory. Real assets like gold and silver look very attractive right now. Real estate is an option. And Bitcoin continues to trade at a discount. Diversification doesn’t ensure a positive return, but it could potentially spell the difference between losing a little and losing a lot.

You can watch the panel discussion at Bitcoin Amsterdam featuring Frank Holmes by clicking here!

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link(s) above, you will be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.

The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. Diversification does not protect an investor from market risks and does not assure a profit.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. None of the securities mentioned in the article were held by any accounts managed by U.S. Global Investors as of 9/30/2022.