Plus, why 20% yields will turn heads.
JPMorgan Chase surprisingly had what what would pass as high praise for Bitcoin this week, saying that it passed its first stress test, even if it was no safe haven. Meanwhile, others noted that as Ethereum turns to staking, its initial yields, perhaps as high as 20%, could grab the attention of traditional finance. Plus, Reddit and the Etherum Foundation solicit scaling proposals that could someday serve the social network’s 430 million monthly users.
On Unchained, Christopher Giancarlo, aka Crypto Dad, gives the scoop on his digital dollar project, plus talks about how it would handle privacy. And on Unconfirmed, Kain Warwick talks about how COMP tokens quintupled on the first day, and what this means for venture capitalists who may want to pivot from investing in Ethereum killers to funding DeFi projects.
This Week’s Crypto News…
The Washington Examiner has a tidbit on an excerpt from John Bolton’s new book, The Room Where It Happened, involving Bitcoin. The publication reports that, in May 2018, in a conversation about trade with China, President Trump told Treasury Secretary Steve Mnuchin that, instead of negotiating trade, he should “go after Bitcoin [for fraud].” Mnuchin’s response was, “If you don’t want me on trade, fine, your economic team will execute whatever you want.” Last July, Trump made his stance on Bitcoin known, tweeting, “I am not a fan of Bitcoin and other Cryptocurrencies, which are not money, and whose value is highly volatile and based on thin air.”
In a note to investor clients, JPMorgan Chase analysts said that Bitcoin is not uncorrelated to traditional investments such as stocks. They observed, “Bitcoin saw severe drops in liquidity around the peak of the crisis in March, but that disruption was cured much faster than other asset classes.” They conclude that cryptocurrencies passed their first stress test at this time, however made this caveat: “There is little evidence that bitcoin and others served as a safe haven (i.e., ‘digital gold’) — rather, its value appears to have been highly correlated with risky assets like equities. … This all likely points to the continued survival of the asset class, but likely still more as a vehicle for speculation than as a medium of exchange or store of value.”
ConsenSys Codefi announced an Ethereum 2.0 staking-as-a-service pilot with Binance, Huobi Wallet, Matrixport, Crypto.com, DARMA Capital and Trustology as participants. The target market for the staking API will be large exchanges, wallet providers, custodians and crypto hedge funds, who can use this as a white-label service.
Stefan Coolican, president and CFO of Ether Capital Corporation, tweeted, that ether is “about to become a yielding instrument with annual returns of up to 20%.” He further elaborated in a tweet storm, “Warren Buffett famously said he’d prefer all the farmland in the US instead of all the gold in the world. Why? Farmland is a productive asset on which you can earn cash flow. Cash is king. Understandably, Buffett doesn’t value bitcoin either. With staking, however, you can turn your cryptocurrency into a productive asset that generates a yield. … You’re now holding farmland not gold.” However, Stefan warns the yields of 20% would likely occur earlier when there’s more risk, and then drop to 2-3% as staking becomes more relevant. He concludes, “With staking as blockchain’s answer to a yield instrument, it’s just a matter of time before staking networks like Ethereum get the attention they deserve from traditional finance.”
Reddit and the Ethereum Foundation are inviting Ethereum scaling projects to show how their scaling solution can be used to bring Reddit’s Community Points to mainnet — first, to support the hundreds of thousands of users of Community Points, and then later, to scale to all of Reddit’s 430 million monthly users. They’d like for projects to share their demo in the comments of the post by July 31 as long as they meet certain requirements around scaling, decentralization, usability, interoperability and security.
The Ontario securities regulator took the unusual step of publishing the findings of its investigation into the collapse of Canadian cryptocurrency exchange QuadrigaCX, saying that it “resulted from a fraud committed by Quadriga’s co-founder and CEO Gerald Cotten.” The 10-part report details how, by the time it ceased operating, Quadriga owed 76,000 clients $215 million in assets, but only $46 million was recovered to pay out.
For a securities regulator’s report, it’s a riveting read, showing how Quadriga did not store clients’ crypto assets specifically for them, nor did it store them in secure offline, multi-sig wallets as Cotten claimed. Instead, most assets were held in hot wallets and placed on other crypto asset trading platforms. Even then, many of those were simply being traded and spent by Cotten, with $28 million worth of clients’ assets lost trading on those platforms.
But most of all, Cotten traded with Quadriga customers using fake money. 97% of this trading was through an account under the name Chris Markay, though others were called “Sceptre Gerry”, “Aretwo Deetwo” and “Seethree Peaohhh”. The regulators write, “Cotten credited these accounts with fake crypto assets and fake fiat currency through manual adjustments to Quadriga’s internal ledger. … For example, in 2017 and early 2018, he credited the Chris Markay account with single deposits of $100 million and $50 million.” By 2017, the exchange held 20,000 fake Bitcoins and Cotten had lost $115 million by trading fake assets and covering those losses with the assets of new clients’, effectively running a Ponzi scheme. And though Quadriga touted its high volumes, in reality, Cotten was party to at least 35% of all trades in Bitcoin settled in CAD on the platform. As if all that weren’t enough, he also siphoned $24 million of client funds to himself and his fiance.
ICYMI, be sure to check out my interview with Vanity Fair writer Nathaniel Rich, who dove into the downfall of the exchange for the magazine.
Christopher Giancarlo, aka Crypto Dad, who is now senior counsel at the New York law firm Willkie Farr & Gallagher, co-authored, with a Willkie colleague, a paper titled, “Cryptocurrencies and U.S. Securities Laws: Beyond Bitcoin and Ether.” It argues point by point that the cryptocurrency XRP, previously known as Ripples, does not qualify as a security, according to the four prongs of the Howey test. However, Ripple the company, which owns the vast majority of XRP, is a client of Willkie Farr & Gallagher, and the paper “relied on certain factual information provided by Ripple in the preparation of this article.”
Bancor found a vulnerability in its latest smart contracts deployed on Tuesday, putting $450,000 worth of user funds at risk. Though they were able to white hat migrate the funds to a safe wallet, blockchain engineer David Mihal pointed out that the issue stems from a fundamental design flaw with ERC-20 tokens, since he says, “the user makes 1 tx to allow the dapp to access their tokens, and another to run the action.” Due to current gas prices, many people just enable limitless transactions so as to do the call approve just once. As he says, “But now you’ve given unlimited control of your funds to another contract.” However, he notes, ERC-777 token standard make it so that the recipient can never access more tokens than the user sent. The drawback is that ERC-777 tokens are vulnerable to re-entrancy attacks, which is what happened with LendfMe. But, as he says, “at least these don’t put user-custodied funds at risk.”
On a podcast, Fred Ehrsam, partner at Paradigm, and Blake Robbins, partner at Ludlow Ventures, and Jesse Walden, founder of Variant, discuss what business models are working for creators today and how crypto can change that. They’re excited about people tokenizing themselves or an hour of their time, or using tokens to get others to promote them. It’s worth a listen if you’re interested in where this space might go.