In a recent rally, Bitcoin briefly surpassed the $35,000 mark, marking a significant milestone not seen since May 2022. This resurgence has breathed new life into the world’s foremost cryptocurrency and left many wondering if Bitcoin is poised for a remarkable comeback.
A Rally of Remarkable Proportions:
The year 2023 has unfolded with tremendous vigor for Bitcoin enthusiasts. The cryptocurrency has ascended over 100% since the year’s inception, igniting optimism among investors and speculators alike. This remarkable rally could, in part, be attributed to a phenomenon known as a “short squeeze.” In essence, some investors who had bet against Bitcoin found themselves in a precarious position, compelled to buy Bitcoin to cover their short positions, thus driving its price higher.
Short Liquidations and Regulatory Hopes:
A staggering $167 million in short liquidations, predominantly on offshore exchanges, serves as evidence of the short squeeze’s impact. However, the Bitcoin market’s dynamics extend beyond short-term speculation. The recent decision by the U.S. Securities and Exchange Commission (SEC) not to appeal a ruling in Grayscale’s lawsuit has sparked optimism in the cryptocurrency community. The hope is that this decision could pave the way for the approval of a Bitcoin-related exchange-traded fund (ETF) in the coming months. Momentum has been building as firms vying for a Bitcoin ETF updated their filings, and prominent investors such as Ark’s Cathie Wood and Galaxy’s Mike Novogratz have highlighted a shift in the SEC’s tone. The regulatory body appears to be engaging more positively with the cryptocurrency industry, increasing the odds of a Bitcoin ETF receiving the green light.
The Significance of a Bitcoin ETF:
A Bitcoin ETF would represent a pivotal development for both seasoned and novice investors. It would provide a structured and regulated way for individuals to gain exposure to Bitcoin’s price movements without the need to directly own the cryptocurrency. Such an ETF could bridge the gap between traditional financial markets and the digital asset realm, further legitimizing Bitcoin as a viable investment.
Bitcoin’s Checkered History:
To understand the significance of this potential resurgence, it’s crucial to reflect on Bitcoin’s journey. Since its inception in 2009, Bitcoin has weathered numerous storms, experiencing extreme volatility and wild price swings. It reached its all-time high of nearly $65,000 in April 2021 before experiencing a sharp decline.
Regulatory Scrutiny and Industry Challenges:
Bitcoin and the broader cryptocurrency industry have faced increasing regulatory scrutiny in recent years. The high-profile FTX bankruptcy case and Terraform’s legal troubles, where they are charged with defrauding investors, serve as stark reminders of the challenges the industry faces. Furthermore, the SEC has been actively cracking down on cryptocurrency companies. Firms like Coinbase and Ripple are currently embroiled in legal battles with the SEC, accused of violating securities laws. These legal skirmishes, along with others in the crypto space, have underscored the pressing need for regulatory clarity in the United States. As the industry navigates these challenges, the question that looms is whether Bitcoin is indeed primed for a resurgence. The recent rally, the prospects of a Bitcoin ETF, and the evolving regulatory landscape all point to a cryptocurrency with the potential for a triumphant return, promising exciting times ahead for Bitcoin enthusiasts and investors.
The bankrupt cryptocurrency exchange FTX has taken a surprising legal step by launching a legal battle against Allan Joseph Bankman and Barbara Fried, the parents of its former CEO and founder, Sam Bankman-Fried. The lawsuit aims to recover both luxury property and millions of dollars in what FTX alleges to be “fraudulently transferred and misappropriated funds.”
FTX, once a rising star in the cryptocurrency world, faced financial turmoil amid allegations of extensive financial misconduct. The exchange’s new leadership has been working tirelessly to locate the billions of dollars in missing assets. Their latest move is an attempt to hold Bankman and Fried accountable.
Legal representatives of the FTX bankruptcy estate assert that Allan Joseph Bankman and Barbara Fried “exploited their access and influence within the FTX enterprise to enrich themselves, directly and indirectly, by millions of dollars.” This stunning accusation suggests that Bankman and Fried might have played a significant role in the financial irregularities that led to FTX’s collapse.
One of the most notable claims in the lawsuit is that Bankman and Fried discussed transferring a $10 million cash gift and a $16.4 million luxury property in The Bahamas to their son, Sam Bankman-Fried, despite FTX’s precarious financial situation. This raises questions about whether Bankman and Fried were aware of the exchange’s dire financial straits.
The lawsuit doesn’t stop there. It also alleges that as early as 2019, Allan Bankman actively participated in efforts to cover up a whistleblower complaint that could have “exposed the FTX Group as a house of cards.” The lawsuit cites emails written by Bankman in which he complained about his annual salary being only $200,000 when he believed he was “supposed to be getting $1M/yr.” The suit portrays this as Bankman lobbying his son to significantly increase his own salary.
Shockingly, within two weeks of these discussions, the suit claims that Sam Bankman-Fried collectively gifted his parents $10 million in funds from Alameda. Within three months, Bankman and Fried were deeded the $16.4 million property in The Bahamas. The timing and circumstances of these transactions raise serious questions about their legality and ethical implications.
Moreover, the lawsuit alleges that Bankman-Fried’s parents urged substantial political and charitable contributions, including significant amounts to Stanford University, seemingly aimed at enhancing Bankman and Fried’s professional and social status. Barbara Fried is also accused of encouraging her son and others within the company to avoid or even violate federal campaign finance disclosure rules by engaging in straw donations or concealing the FTX Group as the source of the contributions.
The involvement of Bankman-Fried’s parents in these activities is particularly noteworthy. Both are accomplished legal scholars who have taught at Stanford Law School. Barbara Fried specializes in ethics, while Allan Bankman’s expertise is in taxes. Their involvement in the alleged misconduct at FTX raises questions about their awareness of the situation and their potential role in enabling it.
Sam Bankman-Fried himself is independently facing multiple wire and securities fraud charges related to the alleged multibillion-dollar FTX fraud. Federal prosecutors and regulators have accused him of orchestrating “one of the biggest financial frauds in American history.” Bankman-Fried has maintained his innocence and pleaded not guilty to all charges. His criminal trial is scheduled to commence on October 3 in Manhattan.
The lawsuit against Bankman and Fried asserts that they “either knew or ignored bright red flags revealing that their son, Bankman-Fried, and other FTX Insiders were orchestrating a vast fraudulent scheme.” This suggests that FTX believes the parents played a more significant role in the alleged fraud than previously thought.
In their legal action against Bankman and Fried, FTX seeks various forms of compensatory relief, including punitive damages. The exchange aims to hold them accountable for their alleged “conscious, willful, wanton, and malicious conduct” that contributed to FTX’s financial woes. Additionally, FTX is looking to recover any property or payments made to the couple from the exchange.
The outcome of this legal battle remains uncertain, and it raises questions about how any potential clawbacks may affect Bankman and Fried’s ability to support their son’s legal defense as he faces criminal charges. The legal counsel for Allan Joseph Bankman and Barbara Fried has vehemently denied the allegations, characterizing them as “completely false.” They view FTX’s legal action as an attempt to intimidate their clients and undermine the upcoming trial of their child.
The implications of this legal showdown extend beyond the immediate parties involved. FTX’s efforts to recover lost assets and hold those responsible accountable are a crucial chapter in the cryptocurrency industry’s ongoing struggle with regulatory scrutiny and legal challenges. The outcome of this case may set a precedent for how authorities and stakeholders deal with alleged fraud and financial misconduct in the rapidly evolving world of cryptocurrencies.
As the legal battle unfolds, it will be closely watched by industry observers, legal experts, and cryptocurrency enthusiasts alike. The allegations and accusations against the parents of Sam Bankman-Fried have added another layer of complexity to a case that has already drawn significant attention and could have far-reaching consequences for the cryptocurrency ecosystem.
The International Monetary Fund (IMF) and the Financial Stability Board (FSB) have jointly released a new policy paper laying out recommendations for regulating cryptocurrencies and crypto assets. The paper comes at the request of India, which currently holds the presidency of the G20 intergovernmental forum.
The policy recommendations aim to provide guidance to various jurisdictions on addressing risks associated with crypto activities, particularly those related to stablecoins and decentralized finance (DeFi). However, the paper does not set any new policies or regulatory expectations itself.
Stablecoins have emerged as a major focus area. The IMF and FSB warn that stablecoins pegged to hold a stable value can suddenly become volatile. This may pose threats to financial stability, especially as adoption of stablecoins grows.
The paper also examines risks from the fast-growing DeFi ecosystem. It argues that while DeFi aims to replicate traditional financial functions in a decentralized manner, it does not substantively differ in the services offered. Furthermore, DeFi may propagate similar risks seen in traditional finance around liquidity mismatches, interconnectedness, leverage, and inadequate governance.
However, the IMF and FSB continue to argue against blanket bans on cryptocurrencies. They state that policy should instead focus on understanding and addressing the underlying consumer demand for digital assets and payments.
Take a moment to look at Bit Digital Inc., a sustainability focused generator of digital assets.
The policy recommendations could have significant impacts on crypto companies. Stablecoin issuers and DeFi platforms would likely face greater regulatory scrutiny and standards around risk management. Exchanges may see heightened AML/CFT rules, while custodial services could get more consumer protection and security requirements. Miners and infrastructure providers may also face new oversight on risks and energy usage.
Crypto firms would likely need to invest substantially in compliance to meet new regulatory mandates. While this could raise costs, it may also boost institutional confidence in the emerging crypto space. As crypto adoption grows globally, regulators are trying to balance innovation with appropriate safeguards.
A different play in the Bitcoin space, Bitcoin Depot (BTM) provides its users with simple, efficient and intuitive means of converting cash into Bitcoin, which users can deploy in the payments, spending and investing space. Users can convert cash to Bitcoin at Bitcoin Depot’s kiosks and at thousands of name-brand retail locations through its BDCheckout product.
Bitcoin and Ethereum had a bad day. After gaining a lot of upward momentum from late June after Blackrock, Fidelity, and Invesco filed to create bitcoin-related exchange traded funds (ETFs), the volatile assets have shown cryptocurrency investors that the bumpy ride is not yet over. What’s causing it this time? Fortunately, it is not fraud or wrongdoing creating the turbulence. Instead, three factors external to the business of trading, mining, or exchanging digital assets are at work.
Background
On Thursday, August 17, and accelerating on August 18, the largest cryptocurrencies dropped precipitously. Bitcoin even broke down and fell below the psychologically important $26,000 US dollar price level before bouncing. While some are pointing to CME options expiration on the third Friday of each month, most are pointing to a Wall Street Journal article, and blaming Elon Musk, as the reason the asset class was nudged off a small cliff. There are other less highlighted, but important, catalysts that added to the flash-crash; these, along with the WSJ story, will be explained below.
Smells like Musk
What could SpaceX, the company owned and run by Elon Musk, possibly have to do with a crypto selloff? On Thursday, the crypto market had a downward spike around 5 PM ET. It was just after the Wall Street Journal revealed a change in the accounting valuation of SpaceX’s crypto assets. Reportedly, SpaceX marked down the value of its bitcoin assets by a substantial $373 million over the past two years. Additionally, the company has executed on crypto asset divestitures as well. When the reduction took place is uncertain, but cryptocurrency holdings have been reduced both in terms of the amount of coins and the value each coin is held for on the books.
Elon Musk’s reputation is that of a forward thinker, and one that embraces, if not leads, technology. He has significant influence over cryptocurrency valuations, often instigating pronounced market fluctuations brought about by Musk’s influential posts on his social media company, X. The reduction coincides with a similar crypto reduction on the books of publicly held, Musk-led, Tesla (TSLA). The electric car manufacturer had previously disclosed in its annual earnings report that it had liquidated 75% of its bitcoin reserves.
While it should not be surprising that two companies stepped away from speculation on something unrelated to their business or lowered support for the still young blockchain technology, it gave a reason for a reaction to this and other festering dynamics.
Wary of Gary
The Chairman of the Securities and Exchange Commission (SEC), Gary Gensler, is viewed as a “Whack-a Mole” to crypto stakeholders that prefer more autonomy than regulation. Every time the SEC gets knocked down as a potential regulator, it resurfaces, and crypto businesses have to deal with the agency again.
Last month, Judge Analisa Torres made a pivotal decision in a case involving payment company Ripple Labs and the Commission. Her verdict declared that a substantial portion of sales of the token XRP did not fall under the category of securities transactions. The SEC claimed it was a security. This judgement was hailed as a triumph for the crypto sector and catalyzed an impressive 20% uptick in the exchange Coinbase’s stock in a single day.
On the same Thursday as the WSJ article, the SEC showed its face again with a strong response to the earlier ruling. Judge Torres allowed the SEC’s request for an “interlocutory” appeal on her ruling. This process will involve the SEC presenting its motion, followed by Ripple’s counterarguments. This is slated to continue until mid-September. Afterward, the Judge will determine whether the agency can effectively challenge her token classification ruling in an appellate court.
The still young asset class, its exchange methods, valuation, and usage techniques, once they are more clearly defined, will serve to add stability and reduce risk and shocks in crypto and the surrounding businesses. The longer the legal system and regulatory entities take, including Congress, the longer it will take for cryptocurrencies to find the more settled mainstream place in the markets they desire.
Rate Spate
The eighteen-month-long spate of rate hikes in the U.S. and across the globe is providing an alternative investment choice instead of what are viewed as riskier assets. Coincidentally, again on Thursday, August 17, the ten-year US Treasury Note hit a yield higher than the markets have experienced in 12 years. At 4.31%, investors can lock in a known annual return for ten years that exceeds the current and projected inflation rate.
Take Away
The volatility in the crypto asset class has been dramatic – not for the weak-stomached investor. On the same day in August, three unrelated events together helped cause the asset class to spike down. These include an article in a top business news publication indicating that one of the world’s most recognized cryptocurrency advocates has reduced bitcoin’s exposure to his companies. The SEC being granted a rematch in a landmark case that it had recently lost, where the earlier outcome gave no provision for the SEC to treat cryptocurrencies like a security. And rounding out the triad of events on crypto’s throttleback Thursday, yields are up across the curve to levels not seen in a dozen years. Investor’s seeking a place to reduce risk can now provide themselves with interest payments in excess of inflation.
But despite the ups and downs, bitcoin is up 56.7% year-to-date, 11.1% over the past 12 months, 110.5% over three years, 300% over five years, and astronomical amounts over longer periods. Related companies like bitcoin miners, crypto exchanges, and blockchain companies have also experienced growth similar to that found in few other industries over the past decade.
Worldcoin Crypto Project Launched by OpenAI’s Sam Altman
In a revolutionary move, OpenAI CEO Sam Altman began rolling out Worldcoin on July 24. The cryptocurrency project aims to reinvent the way the world identifies living, breathing humans compared to AI bots. The core offering of Worldcoin is its innovative World ID, often described as a “digital passport” that serves as proof of a person’s human identity. But that is just the beginning of the project goals.
To obtain a World ID, users must undergo an in-person iris scan using Worldcoin’s revolutionary ‘orb.’ This silver ball, about the size of a bowling ball, ensures the legitimacy of the individual’s identity, subsequently creating the unique World ID.
The brains behind this revolutionary project are the San Francisco and Berlin-based organization, Tools for Humanity. During its beta phase, the project amassed an impressive 2 million users, and with the official launch on Monday, Worldcoin is rapidly expanding its ‘orbing’ operations to 35 cities across 20 countries.
In select countries, early adopters will be rewarded with Worldcoin’s own cryptocurrency token, WLD. This incentive has already driven WLD’s price to soar after the announcement. On Binance, the world’s largest, WLD reached a peak price of $5.29 and continued to trade at $2.49 (from an initial starting price of $0.15) as of 11:00 AM ET. Notably, the trading volume on Binance has reached a staggering $25.1 million.
The Role of Blockchain
Blockchains play a crucial role in this project, as they securely store World IDs while preserving user privacy and preventing any single entity from controlling or shutting down the system, according to co-founder Alex Blania.
One key application of World IDs is its ability to distinguish between real individuals and AI bots in the age of generative AI chatbots like ChatGPT, which are adept at mimicking human language. By leveraging World IDs, online platforms can effectively combat the infiltration of AI bots into human interactions.
Economic Implications of AI
Altman emphasized the economic implications of AI, stating that people will be profoundly impacted by AI’s capabilities. “People will be supercharged by AI, which will have massive economic implications,” he said.
One interesting example of what Altman believes AI can eventually provide is universal basic income (UBI), a social benefits program aimed at providing financial support to every individual. According to Altman, as AI gradually takes over many human tasks, UBI can play a vital role in mitigating income inequality. Since World IDs are exclusive to genuine human beings, they can act as a safeguard against fraud in UBI distributions.
Though Altman acknowledged that a world with widespread UBI is likely in the distant future and the logistics of such a system are still unclear, he believes that Worldcoin paves the way for experiments and solutions to tackle this societal challenge.
The launch of Worldcoin marks a significant step in the convergence of cryptocurrency and AI technologies, with potential far-reaching effects on how we identify ourselves and interact in the digital age. As the project gains momentum, financial market professionals should closely monitor the developments surrounding Worldcoin and its impact on the future of money.
The cryptocurrency developer Ripple Labs just won a legal victory against the U.S. Securities and Exchange Commission (SEC) that should provoke cheers from the entire industry, at least those that prefer that digital currency not be treated as a security. If crypto is not viewed as a security, the jurisdiction which the SEC has been pushing hard to cement, may fall apart. This ruling may eventually lead to any future legal framework for digital tokens being designed by the U.S. Congress.
Background
Ripple is a technology company that uses cryptocurrency and blockchain technology to offer financial solutions. Ripple and XRP are two distinct entities. Ripple is a fintech company that builds global payment systems, while XRP is an independent digital asset that can be used by anyone for a variety of reasons.
In 2020, Ripple was charged by the SEC on the grounds that the company illegally raised $1.38 billion in unregistered securities offerings. In a ruling on July 13 of this year, it was decided by a Federal court that Ripple Labs did not violate securities law by selling its XRP tokens on its exchange. This is being seen as the first major setback for the SEC in a decade of enforcement against the cryptocurrency industry. Other crypto firms accused of illegally operating digital asset exchanges can now explore ways to take advantage of the ruling.
This is an important decision that may alter the expected path of the entire industry. The SEC and the cryptocurrency industry which includes exchanges, crypto-mining, and the tokens themselves, have been at odds, with increasing heat on the industry, mainly by the SEC. Gary Gensler, who chairs the SEC, has described the crypto market as a “Wild West” riddled with fraud. He claims that most crypto tokens are securities. The regulator has been cracking down on crypto exchanges, including the top U.S. exchange Coinbase. If crypto is considered a security, it will fall under the commission’s oversight.
What this Means for the Crypto Industry
Crypto firms have long disputed the SEC’s jurisdiction but until last week had no supporting precedence from a court. This win provides much needed ammunition for the industry to reassert its claims.
U.S. District Judge Analisa Torres in New York ruled that sales on public cryptocurrency exchanges were not offers of securities because purchasers did not have a reasonable expectation of profit that depended on anything Ripple did. This profit expectation was used as a key in determining if XRP was a security at the time.
Crypto supporters are viewing the decision as a watershed and the judge’s reasoning as a new line of defense for the others being targeted by the SEC, such as Coinbase, Binance, and Bittrex.
SEC APPEAL?
It remains to be seen whether the SEC will challenge the ruling in the 2nd U.S. Court of Appeals which could cause judges to delay hearing other pending and new cases that other crypto assets sold on exchanges are not securities.
Ripple Chief Legal Officer Stuart Alderoty said in an interview with Reuters that the company “wouldn’t shy away from an appeal, because the judge was right on her core findings,” adding: “I believe any appellate court looking at this would amplify and endorse those rulings, which would certainly be welcome.”
An appeal is somewhat risky for the SEC. If the 2nd Circuit, whose rulings are binding on federal courts in New York, Connecticut and Vermont, adopts the logic in the Ripple ruling, other cases like the SEC vs. Coinbase case would leave the SEC without much of an argument. This could permanently eliminate any claim the Commission has to regulation over the industry.
With the district court having taken a sledgehammer to the main claim the SEC had to oversight, the industry may find itself subject to a legislative agreement. Especially with an SEC deprived of the argument that their legal cases were sound, there’s nothing to stop an acceleration of efforts to find a bipartisan agreement on a regulatory framework for crypto assets by the legislative branch.
Is Bitcoin Cash More Functional as a Currency than Bitcoin?
What cryptocurrency is performing better this year than Bitcoin?
The other Bitcoin, that’s what.
Recent headlines related to BlackRock’s application for a Bitcoin ETF, followed by Citadel, Schwab, and Fidelity’s plans to create a joint crypto exchange, further legitimized the digital asset class at a time when it seemed under fire from the SEC. The combined news of such big players caused an epic rally in BTC. But it also put BCH (the lesser-known Bitcoin “step-child”) on the radar of crypto investors. Bitcoin Cash (BCH) experienced price gains far greater than BTC.
About Bitcoin Cash
Bitcoin Cash sprang to life in 2017 as the Bitcoin blockchain developers were torn between two directions. The divide was resolved with a split in order to address the disagreement. At issue was the scalability and transaction capacity of Bitcoin “classic”. There were two different schools of thought, the big blockers and the small blockers, each with different solutions. The big blockers felt strongly that larger blocks of transactions were best, in August 2017, a separate ledger for Bitcoin Cash was created, it has its own development team and uses big block design.
The split is often referred to as the Bitcoin Cash fork, it resulted in two separate blockchains, Bitcoin (BTC) and Bitcoin Cash (BCH). The larger block size of BCH allows for more transactions per second.
Recent plans to include Bitcoin Cash on a new platform, owned by big Wall Street firms has ushered in a shift in market perception of the “step-child” cryptocurrency. Despite its being born out of dispute, Bitcoin Cash’s recent performance suggests that it is gaining traction in the eyes of investors.
The ticker symbol is “BCH”. However, some exchanges use the ticker symbol “BCH.X” to distinguish between Bitcoin Cash and other cryptocurrencies with the BCH ticker symbol, similar to “BTC” and “BTC.X” for Bitcoin.
Bitcoin Cash is up 138% so far in 2023, with much of that gain coming since the BlackRock SEC filing for a spot ETF, and the Citadel/Schwab/Fidelity exchange announcement. The exchange, called EDX Markets, backed by financial giants, is not registered with the SEC but carries significant weight due to its powerful partners. The platform lists only four cryptocurrencies: Bitcoin, Ether, Litecoin, and Bitcoin Cash.
This exclusive list has been interpreted by the market as a vote of confidence or an ordaining of sorts of those digital assets that will endure. This confidence has become even more important as the SEC has intensified its scrutiny of other blockchain projects.
BlackRock‘s application to the SEC isn’t the only one. It apparently has set off a wave of Bitcoin spot ETF applications. Bitcoin ETFs will allow greater participation in the asset class. Thus the sudden bullish sentiment across cryptocurrencies
Key Differences
Block size: Bitcoin Cash has a block size of 32 MB, while Bitcoin’s block size is 1 MB. This means that Bitcoin Cash can process more transactions per second than Bitcoin.
Development team: Bitcoin Cash is developed by a different team than Bitcoin. The Bitcoin Cash team is focused on increasing the scalability of the blockchain and making it more user-friendly.
Roadmap: Bitcoin Cash has a different roadmap than Bitcoin. The Bitcoin Cash roadmap includes plans to implement features such as Schnorr signatures and Segregated Witness.
Overall, Bitcoin Cash is a different cryptocurrency than Bitcoin. It has a larger block size, a different development team, and a different roadmap. Whether or not Bitcoin Cash is a better investment than Bitcoin is a matter of opinion and what it is to be used for.
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.
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
The United States Oldest Bank Embraces Safekeeping Cryptocurrency Alongside Other Assets
The nation’s oldest bank, founded in 1784, began taking deposits of cryptocurrency today. BNY Mellon, with roots in the Bank of New York and Alexander Hamilton, is now the first large U.S. bank to custody client’s bitcoin and ether.
The bank will store the keys required to access and transfer crypto and provide the same bookkeeping services on digital currencies it offers for stocks, bonds, commodities, and other assets. BNY Mellon is one of the largest and most trusted in the business of traditional safekeeping; they now have made history by adding this additional service for investment managers to clear, service and safe keep digital assets.
As America’s oldest bank, BNY Mellon has a 238-year legacy on which to build. As a company it provided the first loan to the U.S. to fund the Revolutionary War and has weathered as many different financial eras as the country that it has helped build. Back in February 2021, BNY Mellon formed its enterprise Digital Assets Unit to develop services for digital asset technology. The goal was to launch the industry’s first multi-asset platform that provides safekeeping for digital and traditional assets.
“Touching more than 20% of the world’s investable assets, BNY Mellon has the scale to reimagine financial markets through blockchain technology and digital assets,” said Robin Vince, Chief Executive Officer and President at BNY Mellon. “We are excited to help drive the financial industry forward as we begin the next chapter in our innovation journey.”
Image Credit: Mark Holler (Flickr)
BNY Mellon recognizes the significant institutional demand for a resilient, scalable financial infrastructure designed to accommodate digital assets alongside traditional ones. The bank had previously surveyed money managers that use their safekeeping services and found almost all institutional investors (91%) are interested in investing in tokenized products. Additionally, 41% of institutional investors hold cryptocurrency in their portfolios today, with an additional 15% planning to hold digital assets in their portfolios within the next two to five years. Safekeeping them all under one system will benefit clients.
BNY Mellon has been working closely with market-leading fintech firms. The firm tapped digital asset technology specialists Fireblocks and Chainalysis to integrate their technology in order to meet the present and future security and compliance needs of clients across the digital asset space.
BNY Mellon is a global investment company helping its clients manage and service their financial assets throughout the investment lifecycle. Clients include institutions, corporations, and individual investors. It delivers investment management, wealth management, and investment services in 35 countries. As of June 30, 2022, BNY Mellon had $43.0 trillion in assets under custody and/or administration and $1.9 trillion in assets under management. BNY BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation (NYSE: BK).
“As the world’s largest custodian, BNY Mellon is the natural provider to create a safe and secure Digital Asset Custody Platform for institutional clients,” said Caroline Butler, CEO of Custody Services at BNY Mellon. “We will continue to innovate, embrace new technology and work closely with clients to address their evolving needs.”
“With Digital Asset Custody, we continue our journey of trust and innovation into the evolving digital assets space, while embracing leading technology and collaborating with fintechs,” said Roman Regelman, CEO of Securities Services & Digital at BNY Mellon.
Take Away
The world is changing, and even the oldest bank in the U.S. is getting on board with the changes. The addition of BNY Mellon as a holder of cryptocurrency keys is a big nod to the crypto management industry. Portfolio managers of all sizes are now able to provide statements with a wider variety of asset classes held. Does this mean the newcomers that now transact and hold cryptocurrency will either be bought or lose potential large customers? That remains to be seen.
Voyager Digital Ltd.’s (TSX: VOYG) (OTCQX: VYGVF) (FRA: UCD2) US subsidiary, Voyager Digital, LLC, is a fast-growing cryptocurrency platform in the United States founded in 2018 to bring choice, transparency, and cost-efficiency to the marketplace. Voyager offers a secure way to trade over 100 different crypto assets using its easy-to-use mobile application. Through its subsidiary Coinify ApS, Voyager provides crypto payment solutions for both consumers and merchants around the globe. To learn more about the company, please visit https://www.investvoyager.com.
Joe Gomes, Senior Research Analyst, Noble Capital Markets, Inc.
Joshua Zoepfel, Research Associate, Noble Capital Markets, Inc.
Refer to the full report for the price target, fundamental analysis, and rating.
Auction Completed. Voyager announced the completion of the Company’s auction process. The Company has selected West Realm Shires Inc. (“FTX US”) as the highest and best bid for its assets. The Official Committee of Unsecured Creditors supports FTX US’s winning bid.
The Winning Bid with a Caveat. FTX US’s winning bid for Voyager’s assets was for $1.422 billion, which comprises the fair market value of all Voyager cryptocurrency at a to-be-determined date in the future, which at current market prices is estimated to be $1.311 billion, and additional consideration that is estimated as providing approximately $111 million of incremental value. However, FTX US has the potential to be outbid over the next couple of weeks, as the objection deadline is the final day of allowing higher bids to be placed.
This Company Sponsored Research is provided by Noble Capital Markets, Inc., a FINRA and S.E.C. registered broker-dealer (B/D).
*Analyst certification and important disclosures included in the full report. NOTE: investment decisions should not be based upon the content of this research summary. Proper due diligence is required before making any investment decision.
Voyager Digital Ltd. (“Voyager” or the “Company”) (OTC Pink VYGVQ; FRA: UCD2) announced today that after multiple rounds of bidding in a highly competitive auction process that lasted two weeks, its operating company Voyager Digital LLC, selected West Realm Shires Inc. (“FTX US”) as the highest and best bid for its assets. The Official Committee of Unsecured Creditors (“UCC”) participated actively in the competitive auction and supports FTX US’s winning bid.
FTX US’s bid is valued at approximately $1.422 billion, comprised of (i) the fair market value of all Voyager cryptocurrency at a to-be-determined date in the future, which at current market prices is estimated to be $1.311 billion, plus (ii) additional consideration that is estimated as providing approximately $111 million of incremental value. The Company’s claims against Three Arrows Capital remain with the bankruptcy estate, which will distribute any available recovery on such claims to the estate’s creditors.
FTX US’s bid maximizes value and minimizes the remaining duration of the Company’s restructuring by providing a clear path forward for the Debtors to consummate a chapter 11 plan and return value to their customers and other creditors. FTX US’s market-leading, secure trading platform will enable customers to trade and store cryptocurrency after the conclusion of the Company’s chapter 11 cases.
The asset purchase agreement between Voyager Digital LLC and FTX US will be presented for approval to the United States Bankruptcy Court for the Southern District of New York on Wednesday, October 19, 2022 and the objection deadline to the transaction is October 12, 2022 at 4:00 p.m. prevailing Eastern Time. The sale to FTX US will be consummated pursuant to a chapter 11 plan, which will be subject to a creditor vote and is subject to other customary closing conditions. FTX US and the Company will work to close the transaction promptly following approval of the chapter 11 plan by the Bankruptcy Court.
The auction follows Voyager’s July 5, 2022 entrance into a voluntary restructuring process aimed at returning maximum value to customers. Since the Company’s chapter 11 filing, in furtherance of this objective, Voyager has engaged in a dual-track process, considering both a potential sale and a standalone reorganization. In-line with the process outlined in court filings, Voyager received multiple bids contemplating sale and reorganization alternatives, held an auction and, based on the results of the auction, has determined that the sale transaction with FTX is the best alternative for Voyager stakeholders.
Additional information about the timeline and customer access to crypto will be shared as it becomes available. A copy of the Bidding Procedures, Bidding Procedures Order, Bidding Procedures Motion and other pleadings filed in this case may be obtained free of charge by visiting the Voyager case website https://cases.stretto.com/Voyager.
The results of the auction do not change the Bar Date nor the need for customers to determine whether to file a claim. More information can be found here. Customers can file a claim on Voyager’s case website here. The deadline for filing a claim is October 3, 2022, at 5:00 PM ET.
Voyager was advised by Kirkland & Ellis LLP, Moelis & Company LLC, and Berkeley Research Group. FTX US was advised by Sullivan & Cromwell LLP. The UCC was advised by McDermott Will & Emery LLP and FTI Consulting.
Forward Looking Statements Certain information in this press release, including, but not limited to, statements regarding future growth and performance of the business, momentum in the businesses, future adoption of digital assets, and the Company‘s anticipated results may constitute forward looking information (collectively, forward-looking statements), which can be identified by the use of terms such as “may,” “will,” “should,” “expect,” “anticipate,” “project,” “estimate,” “intend,” “continue” or “believe” (or the negatives) or other similar variations. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause Voyager’s actual results, performance or achievements to be materially different from any of its future results, performance or achievements expressed or implied by forward-looking statements. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties, and assumptions, the future events and trends discussed in this press release may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. Forward looking statements are subject to the risk that the global economy, industry, or the Company’s businesses and investments do not perform as anticipated, that revenue or expenses estimates may not be met or may be materially less or more than those anticipated, that parties to whom the Company lends assets are able to repay such loans in full and in a timely manner, that trading momentum does not continue or the demand for trading solutions declines, customer acquisition does not increase as planned, product and international expansion do not occur as planned, risks of compliance with laws and regulations that currently apply or become applicable to the business and those other risks contained in the Company’s public filings, including in its Management Discussion and Analysis and its Annual Information Form (AIF). Factors that could cause actual results of the Company and its businesses to differ materially from those described in such forward-looking statements include, but are not limited to, a decline in the digital asset market or general economic conditions; changes in laws or approaches to regulation, the failure or delay in the adoption of digital assets and the blockchain ecosystem by institutions; changes in the volatility of crypto currency, changes in demand for Bitcoin and Ethereum, changes in the status or classification of cryptocurrency assets, cybersecurity breaches, a delay or failure in developing infrastructure for the trading businesses or achieving mandates and gaining traction; failure to grow assets under management, an adverse development with respect to an issuer or party to the transaction or failure to obtain a required regulatory approval. Readers are cautioned that Assets on Platform and trading volumes fluctuate and may increase and decrease from time to time and that such fluctuations are beyond the Company’s control. Forward-looking statements, past and present performance and trends are not guarantees of future performance, accordingly, you should not put undue reliance on forward-looking statements, current or past performance, or current or past trends. Information identifying assumptions, risks, and uncertainties relating to the Company are contained in its filings with the Canadian securities regulators available at www.sedar.com. The forward-looking statements in this press release are applicable only as of the date of this release or as of the date specified in the relevant forward-looking statement and the Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after that date or to reflect the occurrence of unanticipated events, except as required by law. The Company assumes no obligation to provide operational updates, except as required by law. If the Company does update one or more forward-looking statements, no inference should be drawn that it will make additional updates with respect to those or other forward-looking statements, unless required by law. Readers are cautioned that past performance is not indicative of future performance and current trends in the business and demand for digital assets may not continue and readers should not put undue reliance on past performance and current trends.
Decision To Switch Ethereum To Proof-Of-Stake May Have Been Based On Misleading Energy FUD
After countless delays, the Ethereum “Merge” finally took place last week, switching the blockchain protocol from proof-of-work (PoW) to proof-of-stake (PoS).
What this means, in brief, is that Ethereum’s native coin, Ether (ETH)—the world’s second largest digital asset following Bitcoin (BTC)—can no longer be mined using a graphics processing unit (GPU). Instead, participants can choose to “stake” their ETH on the network. The Ethereum network then selects which of these participants, known as “validators,” gets to validate transactions, and if such validations are found to be accurate and legitimate, participants are rewarded with new ETH blocks.
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 September 21, 2022
So what’s the catch? Well, there are a couple of big ones:
1) To become a validator, participants must stake at least 32 ETH, the equivalent of $43,000 at today’s prices, and
2) They must stake them for years.
You can see, then, how the Merge has transformed ETH from a decentralized asset, available to any young gamer with access to a decent GPU, to more of a centralized, oligarchic asset, controlled by a relatively few participants who already own tens of thousands of dollars’ worth of ETH.
In fact, as CoinDesk reported last week, two large validators were responsible for over 40% of the new ETH blocks that were added in the hours post-Merge. Those validators are crypto exchange platform Coinbase and crypto staking service Lido Finance.
PoS Puts Ether in Regulators’ Crosshairs
But wait, there’s more. By converting to PoS, Ether risks being seen by U.S. regulators as a proof-of-security asset. Last Friday, the White House published its first-ever crypto regulatory framework, just a day after the merge was completed.
Gary Gensler, head of the Securities and Exchange Commission (SEC), has said on numerous occasions that PoW assets such as BTC are commodities, not securities, and should therefore not be regulated as securities.
That’s not the case with PoS, according to Gensler. Last week, the SEC chief commented that digital assets that allow investors to stake their holdings in exchange for new coins may qualify them as securities. The implication, of course, is that oversight of these coins may end up being just as rigorous as that of stocks, bonds, ETFs and other highly regulated assets. Besides ETH, other popular PoS cryptocurrencies include Cardano, Polkadot and Avalanche.
The May crash of Terra’s Luna coin, which triggered the collapse of overleveraged crypto lenders such as Celsius, Voyager and Three Arrows Capital, was a major driver of this year’s crypto winter. Lenders’ promises of high returns on investment have landed them in financial and legal hot water. It’s very important that the Ethereum Foundation not make the same mistakes and invite the same level of scrutiny.
As we like to say at U.S. Global Investors, government policy is a precursor to change. But the change, in this case, may not turn out to be favorable. Regulatory pronouncements could add to volatility within the nascent cryptocurrency industry.
In the table below, you can see that ETH was one of the most volatile assets for the one-day and 10-day trading periods as of August 31—more volatile, in fact, than BTC and shares of Tesla. I can’t help believing that’s due to investors’ apprehension of the merge and the regulatory uncertainty that surrounds it.
The DNA of Volatility
Standard Deviation For One-Year, As of August 30, 2022
ONE-DAY
TEN-DAY
Gold Bullion
±1%
±3%
S&P 500
±1%
±4%
Bitcoin
±4%
±11%
Tesla
±4%
±13%
Ethereum
±5%
±15%
MicroStrategy
±6%
±19%
Energy FUD Contributed to Decision to Transition to PoS
If everything I’ve said up until this point is the case, why did Ethereum decision-makers choose to switch to PoS in the first place? Simply put, they folded under pressure from misleading charges that crypto mining, particularly BTC mining, consumes too much energy and is bad for the environment.
This is FUD, or fear, uncertainty and doubt. Yes, BTC mining requires electricity, but compared to nearly every other major industry—including finance and insurance, household appliances and gold mining—energy consumption is incredibly negligible, according to the Bitcoin Mining Council (BMC). What’s more, the BMC found that global BTC miners collectively use a higher sustainable energy mix than every major economy on the planet.
Supporters of the ETH Merge say that the move to PoS could cut the network’s energy usage by as much as 99.5%. None other than the World Economic Forum (WEF) praised the success of the merge last week, writing that crypto “has been waiting for a recalibration towards sustainability… for Web3 climate innovators, the new generation of environmental advocates, as well as U.S. climate efforts more broadly.”
But as many PoW proponents have rightfully pointed out, the GPUs that were previously used to mine ETH will likely now be used for other purposes post-merge, including mining other coins, high-performance computing and gaming. In reality, little to no energy will have been offset.
The question is: Who is funding the FUD about PoW and energy usage? It’s a complicated question.
Last week, a group of environmental activists, including Greenpeace and the Environment Working Group (EWG), announced that it plans to spend $1 million on a new campaign to encourage Bitcoin to follow ETH’s lead and move to PoS. The campaign, titled “Change the Code, Not the Climate,” falsely claims that BTC “fuels” the climate crisis.
This is the same covert tactic used by Russian president Vladimir Putin, who over the years has funded environmental groups and non-governmental organizations (NGOs) in the West in an effort to discredit and undermine the U.S. fracking industry.
Surprise! Gold Is Still One of the Best Performing Assets of 2022
Switching gears, I want to say a few words on gold. BTC’s analogue cousin hit its lowest price since 2020 last week even as inflation remains near 40-year highs and recession fears persist. As I write this, the yellow metal is trading at around $1,666 an ounce, approximately 19% off its peak in March this year.
Some investors may read this and jump to the conclusion that gold is no longer a valuable asset during times of economic and financial uncertainty, but they would be mistaken. Although gold is down for the year, it’s nevertheless outperforming most major asset classes including Treasury bonds, U.S. corporate bonds, the S&P 500 and tech stocks. The precious metal has therefore helped investors mitigate losses in other areas of their portfolio.
The latest report by the World Gold Council (WGC) also makes the case that gold could be a powerful investment in the face of a potential economic recession. The London-based group compared the performance of a number of asset classes during the past seven U.S. recessions going back to 1971, and it found that gold performed the best on average aside from government and corporate bonds.
That said, I still recommend a 10% weighting in gold, with 5% in bullion (bars, coins, jewelry) and 5% in high-quality gold mining stocks and funds. Remember to rebalance on a regular basis.
US Global Investors Disclaimer
The Bloomberg US Treasury Index measures US dollar-denominated, fixed-rate, nominal debt issued by the US Treasury. Treasury bills are excluded by the maturity constraint but are part of a separate Short Treasury Index. The Bloomberg US Corporate Bond Index measures the investment grade, fixed-rate, taxable corporate bond market. It includes USD denominated securities publicly issued by US and non-US industrial, utility and financial issuers. The NASDAQ-100 Index is a modified capitalization-weighted index of the 100 largest and most active non-financial domestic and international issues listed on the NASDAQ. The MSCI Japan Index is a free-float weighted equity JPY index. It was developed with a base value of 100 as of December 31, 1969. The MSCI Europe Index in EUR is a free-float weighted equity index measuring the performance of Europe Developed Markets. It was developed with a base value of 100 as of December 31, 1998. The MSCI USA Index is a free-float weighted equity index. It was developed with a base value of 100 as of December 31, 1969. Bloomberg Commodity Index is calculated on an excess return basis and reflects commodity futures price movements. The index rebalances annually weighted 2/3 by trading volume and 1/3 by world production and weight-caps are applied at the commodity, sector and group level for diversification. The S&P 500 is widely regarded as the best single gauge of large-cap U.S. equities and serves as the foundation for a wide range of investment products. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization.
Standard deviation is a quantity calculated to indicate the extent of deviation r a group as a whole.
Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of (06/30/22): Tesla Inc.
What is Proof-of-Stake? A Computer Scientist Explains a New Way to Make Cryptocurrencies, NFTs and Metaverse Transactions
Proof-of-stake is a mechanism for achieving consensus on a blockchain. Blockchain is a technology that records transactions that can’t be deleted or altered. It’s a decentralized database, or ledger, that is under no one person or organization’s control. Since no one controls the database, consensus mechanisms, such as proof-of-stake, are needed to coordinate the operation of blockchain-based systems.
While Bitcoin popularized the technology, blockchain is now a part of many different systems, enabling interesting applications such as decentralized finance platforms and non-fungible tokens, or NFTs.
The first widely commercialized blockchain consensus mechanism was proof-of-work, which enables users to reach consensus by solving complex mathematical problems. For solving these problems, users are commonly provided stake in the system. This process, dubbed mining, requires large amounts of computing power. Proof-of-stake is an alternative that consumes far less energy.
At its core, blockchain technology provides three important properties:
Decentralized governance and operation – the people using the system get to collectively decide how to govern and operate the system.
Verifiable state – anyone using the system can validate the correctness of the system, with each user being able to ensure that the system is currently working as expected and has been since its inception.
Resilience to data loss – even if some users lose their copy of system data, whether through negligence or cyberattack, that data can be recovered from other users in a verifiable manner.
The first property, decentralized governance and operation, is the property that controls how much energy is needed to run a blockchain system.
Voting in Blockchain Systems
Blockchain systems use voting to decentralize governance and operation. While the exact mechanisms for how voting and consensus are achieved differ in each blockchain system, at a high level, blockchain systems allow each user to vote on how the system should work, and whether any given operation – accepting a new block into the chain, for example – should be approved.
Traditionally, voting requires that the identity of the people casting ballots can be known and verified to ensure that only eligible people vote and do so only once. Some blockchain systems allow users to present a digital ID to prove their identity, enabling voting with negligible energy usage.
However, in most blockchain systems, users are anonymous and have no digital ID that can prove their identity. What, then, stops an individual from pretending to be many individuals and casting many votes? There are several different approaches, but the most used is proof-of-work.
In proof-of-work, users get votes based on the amount of computational power they have in proportion to other users. They demonstrate their ownership of this computational power by solving difficult mathematical problems. If one user can solve twice as many problems as another user, they have twice the computational power as other users and get twice as many votes.
However, solving these mathematical problems is extremely energy intensive, leading to complaints that proof-of-work is not sustainable.
Proof-of-Stake
To address the energy consumption of proof-of-work, another way to validate users is needed. Proof-of-stake is one such method. In proof-of-stake, users validate their identities by demonstrating ownership of some asset on the blockchain. For example, in Bitcoin, this would be ownership of bitcoins, and in Ethereum, it is ownership of Ether.
Though this does require users to temporarily lock their assets in the blockchain for a period of time, it is far more efficient because it requires negligible energy expenditure. By the company’s estimation, moving from proof-of-work to proof-of-stake will reduce Ethereum’s energy consumption by 99.95%.
Ethereum’s ‘Merge’
This improved energy efficiency is why many blockchain systems intend to transition away from proof-of-work to proof-of-stake. Ethereum plans to make this change during the week of Sept. 15, 2022. This is known as the Merge. During this merge, operations will shift from being voted on using proof-of-work to being voted on using proof-of-stake. At the completion of the merge, only proof-of-stake will be used to vote on transactions.
The hope is that this will set up Ethereum to be sustainable for the foreseeable future.
This article was republished with permission from The Conversation, anews site dedicated to sharing ideas from academic experts. It represents the research-based findings and thoughts of Scott Ruoti, Assistant Professor of Computer Science, University of Tennessee
