Fed Vice Chair: Cryptocurrencies Threaten Financial Stability

Digital currencies may pose a threat to financial stability as they gain popularity, said U.S. Federal Reserve vice chairman for supervision Randal Quarles.

Speaking at the 2017 Financial Stability and Fintech Conference on Thursday, Quarles warned against the rise of cryptocurrencies, saying private decentralized currencies could have “spillover effects” on the broader financial system if they grow too big.

Their volatility, and the fact that they are not backed by any institution or physical assets, make them difficult to get a handle on, which means it is unclear what would happen in an emergency situation, he said.

During his speech, he said:

“Risk management can act as a mitigant, but if the central asset in a payment system cannot be predictably redeemed for the U.S. dollar at a stable exchange rate in times of adversity, the resulting price risk and potential liquidity and credit risk pose a large challenge for the system.”

While Quarles warned against digital currencies, he explained that the note of caution reflected a lack of understanding as to how they would react to times of adversity, saying “it is not clear … whether the payment system would be able to function, in times of stress.”

Fedcoin? Go slow

He also suggested “extensive reviews and consultations” before any central bank issues its own homegrown cryptocurrency, especially in nations where cash is prominently used.

Rolling out such currencies too quickly could also spook residents and lead to a drop in economic activity, Quarles warned. And deployment of “unproven technology” could potentially cause other issues.

While Quarles is wary of using cryptocurrencies as any sort of federal monetary system, he does support the idea of using digital currencies as “secure limited-purpose” tools for settlement processes.

He recommended further research into cryptocurrencies to establish use cases.

Randal Quarles image via C-SPAN

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ICE Agent: Cryptocurrencies Increasingly Used in Money Laundering

Criminal organizations are increasingly using digital currencies to launder money or otherwise pay for illicit activities, according to one U.S. Immigration and Customs Enforcement agent.

Child exploiters, drug smugglers, illegal firearm sellers and intellectual property rights violators are all beginning to use cryptocurrencies for their transactions, said Matthew Allen, ICE’s special agent in charge of Homeland Security Investigations (HSI).

Allen testified to the Senate Judiciary Committee on modernizing anti-money-laundering laws to limit both laundering and terrorist financing on Nov. 28, explaining that virtual currencies are the newest major method for hiding criminal proceeds.

In his testimony, he said:

“HSI agents are increasingly encountering virtual currency, including more recent, anonymity enhancing cryptocurrencies (AECs), in the course of their investigations. AECs are designed to better obfuscate transaction information and are increasingly preferred by [transnational criminal organizations].”

Some exchanges are beginning to design services specifically to thwart tracking by use of mixers that anonymize virtual currency addresses, making it even more difficult to determine which user conducted a particular transaction, Allen said.

Drug arrests

The department has had some success in identifying criminals who use bitcoin, however. Allen pointed to the November 2016 arrest of Utah resident Aaron Shamo, who allegedly ran a Xanax and fentanyl manufacturer group.

Shamo allegedly took his profits in bitcoin, and HSI seized approximately $2.5 million from him at the time.

Another alleged fentanyl vendor, Pennsylvanian Henry Koffie, was arrested this past July and had $154,000 seized. Allen said Koffie sold nearly 8,000 orders of the drug, “most of it paid for with bitcoin.”

Lady Justice image via Shutterstock

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Almost Half of ICO Funding Goes to Europe, Report Finds

Startups in Europe raised more capital through initial coin offerings (ICOs) in the last three years than any other region on the planet, according to a study released Thursday.

More than a third of all ICOs – 40% – are based in the European Union (EU), according to the analysis by venture capital firm Atomico. These 446 transactions raised $1.76 billion, nearly half (46%) of the worldwide total from token sales. The second biggest region for this activity was North America, with 244 campaigns raising $1.076 billion.

The report, entitled “The State of European Tech,” cited data collected by Token Data, a startup that tracks ICOs, as well as Atomico’s own survey of investors and startup founders.

What’s more, the EU might become the global leader in cryptocurrency and blockchain development over the next five years, according to the report. An increasing number of startups on the continent focus exclusively on blockchain development, accounting for a much higher share of companies founded in 2016 than in 2012.

Sprawling teams

Notably, the report found that roughly 25% of ICOs had some sort of decentralized team, where the company launching a campaign was headquartered in a different location than the founder or chief executive.

Ricky Tan of Token Data said he expects this figure to increase in the coming years.

In the report, he said:

“We see a pattern of geographical diversity between ICO founding teams and also within the teams themselves. If the future of business ideas lies in decentralisation, then decentralised founding teams will be a key aspect of it.”

Europe also has the greatest number of bitcoin nodes, with more than 5,000, according to the Atomico report. The U.S. comes in second with just over 3,300 nodes.

While the number of ICOs and blockchain startups is increasing, interest in “blockchain” in general is increasing even more rapidly.

Data from Stack Overflow cited by Atomico shows an exponential growth in the number of searches for the term, jumping from 110 in January 2015 to 14,500 in September 2017.

European Union flag image via Shutterstock

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SF Fed President: No Plans to Put USD on a Blockchain

The Federal Reserve is not working on a cryptocurrency version of the U.S. dollar, the head of one of its regional banks said.

As first reported by Reuters, John Williams, president of the Federal Reserve Bank of San Francisco, offered his thoughts about the developments in distributed ledger technology and what its progress means for central banks. Speaking at the 54th annual Economic Forecast Luncheon in Phoenix, Williams took a question from the crowd about what he thinks bitcoin’s rise means for the economy, as shown in this Periscope video from the San Francisco Fed’s account.

He answered by first pointing to the underlying blockchain technology’s potential to improve the efficiency and security of payments, but then said:

“The other thing I think is interesting is this question of central bank-issued digital currency. Right now, the Federal Reserve is not developing its own digital currency, but there is a lot of research going on around the world thinking about this question.”

Williams told the crowd that his remarks should not be construed as a suggestion of what the Fed might or might not do, but he does think government-backed cryptocurrency will remain a hot topic among central banks.

“I think this will be a very exciting area over the next decade,” he said.

‘Very premature’

This follows similarly tentative comments yesterday by Williams’ counterpart at the New York Fed, William Dudley.

“I think at this point it’s really very premature to be talking about the Federal Reserve offering digital currencies, but it is something we are starting to think about,” Dudley said at a quarterly public engagement event in New Brunswick, New Jersey, according to Bloomberg.

But economists at the Fed have been keeping an eye on this space since long before the recent run-up in bitcoin’s price and media attention.

In a 2015 conversation with The Global Blockchain, David Andolfatto, a vice president of the St. Louis Fed, argued that bitcoin and the Fed are not really that different, saying that the central bank is in a sense open-source and all money is just a ledger of one form or another.

Portrait of John C. Williams via the San Francisco Fed website.

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ECB’s Yves Mersch: Banks Need Faster Payments to Counter Bitcoin

Commercial banks need to develop faster payment systems to counter the rise of cryptocurrencies, according to one European Central Bank executive.

Yves Mersch, who sits on the ECB’s executive board, made the argument even while dismissing the impact of cryptocurrencies during an event in Rome, according to a Reuters report.

Speaking this morning, Mersch said:

“Banks need to implement instant payments as soon as possible and provide an alternative narrative to the ongoing public debate on the alleged innovation brought by virtual currency schemes.”

Mersch reportedly added that the ECB would experiment with cash “on different digital technologies,” while more “adventurous applications” do not warrant attention.

The statements come a month after another ECB executive board member, Benoît Cœuré, indicated that the bank is not ignoring cryptocurrencies, but rather is monitoring their use.

At the same time, Cœuré maintained the bank’s long-held position that digital currencies are not a threat to the euro, saying “the amounts involved are marginal.”

Despite these claims, a 2015 report by the ECB noted that cryptocurrencies could impact monetary policy and financial stability in the Eurozone. At the time, the bank said bitcoin was more attractive than traditional financial institutions in certain areas, including remittances.

The ECB’s president, Mario Draghi, also recently said it cannot regulate bitcoin, although he did declare that EU member nations cannot launch their own cryptocurrencies.

Yves Mersch image via CoinDesk archives

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Coinbase Ordered to Hand IRS Data on 14,000 Users

Cryptocurrency exchange Coinbase has been ordered to disclose details of more than 14,000 customers to the U.S. Internal Revenue Service (IRS).

Following a lengthy legal battle between the two entities, the San-Francisco district court ruled Tuesday that Coinbase must hand over user accounts at the exchange that bought, sold, sent or received sums of $20,000 and higher between 2013 and 2015.

Coinbase must now provide the tax agency with the name, address, taxpayer identification numbers and date of birth of customers associated with these accounts, a court filing states.

The dispute over user records has been ongoing since November 2016, with the IRS proposing a reduced summons in July this year – down from an initial 480,000 customer accounts requested.

Back in July, Coinbase argued that the scope of the reduced summons remained too wide, labelling it a “fishing expedition.”

As a result, some of the data required has also been reduced from the initial order, which included information such as wallet addresses and public keys.

In a blog post on the ruling, Coinbase claimed a “partial victory” in having this scope reduced.

Legal research and advocacy group Coin Centre has spoken out against the ruling, saying it is “deeply unsatisfied with the lack of justification provided by the IRS” and that the case “sets a bad precedent for financial privacy.”

As previously detailed by The Global Blockchain, the investigation in concerned with locating cases of tax avoidance on transactions involving cryptocurrencies.

In the blog post, Coinbase stated it is in the process of reviewing the order, and assured users:

“In the event that we ultimately produce the documents under this Court order, we intend to notify impacted users in advance of any disclosure.”

See the full court filing below:

365893210 US v Coinbase Order by CoinDesk on Scribd

Tax documents image via Shutterstock

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Down, Not Out? Dash Price Likely to Defend $600

Dash is shedding gains at press time, but looks set to defend $600 levels.

As per CoinMarketCap, the world’s fifth largest cryptocurrency by market capitalization is trading at roughly $685 – down 9.3 percent on the day – after rising to an all-time high of $826.95 at 09:59 UTC.

Also notable is that trading volumes have hit a record high of $4.84 billion, suggesting the rally might be here to stay.

A look at the individual markets shows that the rally is being fueled by Korean desks. Trading volume in DASH/KRW pair offered by Bithumb, one of the largest exchanges in South Korea, has gone up 30 percent in the last 24 hours.

One reason may be the asset’s positioning in the news, with groups associated with the protocol announcing earlier this week they would partner to help solve Zimbabwe’s economic crisis.

But whatever the reason, price chart analysis also favors further upside, albeit after a healthy technical correction to $600 levels.

4-hour chart

The above chart shows:

  • A bearish price-relative strength index (RSI) divergence.
  • 50-MA, 100-MA, and 200-MA are sloping upwards and positioned one below the other in favor of the bulls.
  • The rising trendline (blue line) could offer support at $583 levels.

Daily chart

On the chart above:

  • 5-MA and 10-MA are curled upwards in favor of the bulls.
  • The RSI is overbought.
  • Two consecutive candles with higher shadows (big gap between the close and intra-day high) indicate bull market exhaustion.
  • Prices are struggling to hold gains above $696 (161.8% Fib extension).

View

Dash could drop to $600-$580 levels, courtesy of the bull market exhaustion on the daily chart and the bearish price RSI divergence on the 4-hour chart.

The base appears to have shifted higher to $600 levels – i.e. dips below $600-$580 could be short-lived as indicated by a pattern of higher lows (rising trend line on the 4-hour chart) and upward sloping moving averages.

Trampoline image via Shutterstock

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Source: The Global Blockchain

Disclaimer: This article should not be taken as, and is not intended to provide, investment advice. Please conduct your own thorough research before investing in any cryptocurrency.

PwC’s Hong Kong Office Accepts Bitcoin Payment

“Big Four” auditing and accountancy firm PwC has accepted its first ever payment in cryptocurrency.

According to a report by The Wall Street Journal, out today, the firm’s Hong Kong office indicated that it accepted the payment in relation to its work with local companies working with cryptocurrencies and blockchain technology.

The transaction was reportedly made using bitcoin in exchange for advisory services.

Explaining that the move demonstrates how PwC is “embracing new technology,” PwC Asia-Pacific chairman Raymund Chao said:

“It is also an indication that bitcoin and other established cryptocurrencies have now developed into more broadly accepted forms of settlement.”

An early mover in its industry, PwC has a history with cryptocurrencies and blockchain technology going back as far as 2014.

From early statements on bitcoin’s role in driving innovation in a number of industries, the company has moved into conducting research and offering its own consultancy services around the technology.

PwC image via Shutterstock

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Regulation, Taxation Loom Over Crypto Investors

The legacy of the W.J. Howey Company lives on, though not in a way the owners of the Florida citrus grove would have likely envisioned.

Seven decades after its legal battles with the SEC, the company has been enshrined with near legendary status in the cryptocurrency space, as the investment contract test every initial coin offering token is being judged by.

“Many of us lawyers studied this Howey case when we were in law school, and we couldn’t have, in our wildest dreams, imagined going into a room like this where it could be recited like it’s the Pledge of Allegiance,” joked Lewis Cohen, a partner with Hogan Lovells, during a legal panel Tuesday at Consensus: Invest in New York.

As the world of cryptocurrencies and ICOs continues to race ahead, the lingering questions the test elicits in the ICO community about how these tokens will fit within existing legal and regulatory frameworks remains the elephant in the room.

Perhaps the most pressing question is whether there is a distinction to be made between tokens that function as securities and those that have a broader utility for a future platform.

In that regard, the Simple Agreement for Future Tokens (SAFT) framework, which sought to advance the dialogue of what a two-tiered token sale that separates the primary and secondary markets might look like, has received a good deal of optimism.

But yesterday at the conference, multiple speakers poured cold water on the concept and suggested a return to the drawing board.

Matthew Roszak, co-founder and chairman of blockchain startup Bloq, said:

“I’m not a huge fan of [SAFT]. I think trying to hermetically seal that pre-ICO financing is not as democratized and open as you’d like it to be.”

‘Too many hands’

But regulatory uncertainties in the space extend well beyond the SEC.

Numerous agencies at the federal level are still determining their approaches toward these new assets, and with additional state authorities likely to get in on the action, jurisdictional complications could make the space even more confusing, argued Gary DeWaal, special counsel with Katten Muchin Rosenman LP.

DeWaal explained:

“Too many hands in the pot are never a good thing for the development of an asset class.”

Especially since many regulators are under inaccurate impressions about tokenized assets, according to Lee Schneider, a partner at Will McDermott & Emery.

He noted that many are making the mistake of juxtaposing the existence of liquidity with whether or not the underlying asset meets the definition of a commodity or a security.

“The nature of the token is hugely important here. You can’t divorce the regulation of the thing from what it is just because you’ve digitized it,” he said, adding that he’s been pushing back against these misperceptions.

Taxation is … coming

Another legal gray area within the cryptocurrency space relates to taxation, and with the price of bitcoin eclipsing $10,000 per coin Tuesday, the IRS will be paying greater attention in the coming year.

“If you hold large positions and you’ve been moving in and out of a lot of these tokens and coins, the IRS is probably going to start digging into this stuff,” said Kelsey Lemaster, a partner specializing in taxation at Goodwin Procter.

And the advent of ICOs only complicates matters further, as the IRS has not issued guidance there, but according to Lemaster, investing in an ICO token is most likely a taxable event.

“I’m sure it’s not reported in 99 percent of transactions, but I’m sure that’s what the IRS would say,” he contends.

But the taxation issue could become more manageable as a slew of cryptocurrency-focused tax software products, including a new app rolled out by Libra, are beginning to hit the market.

Such products, which look to bring automated tools to traders instead of them having to manually input data into Excel spreadsheets, better enable traders acting in good faith to comply with IRS requirements, and could springboard cryptocurrency activity.

On why tax tools are so important, Jeremy Drane, chief commercial officer at Libra, said:

“At some point in time, you reach a level of complexity in your operations where you can’t scale.”

Legal scales image via Aaron Stanley

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Source: The Global Blockchain

Topped Out? Bitcoin Flirts with Bearish Reversal

Bitcoin prices are taking a hit at press time, and could suffer a deeper pullback over the weekend, the price charts indicate.

Notably, it’s only been a day since the cryptocurrency clocked an all-time high of $11,363.99, before falling more than 15 percent to $9,295.79, as per CoinDesk’s Bitcoin Price Index (BPI).

In the Asian hours, bitcoin regained some poise, moving to a high of $10,681 today, before starting to drop again at around 05:00 UTC. The cryptocurrency was last seen trading at around $9,666.

The decline to below $10,000 comes despite news that Nasdaq plans to launch bitcoin futures in 2018, perhaps indicating that bitcoin’s coming move towards the investment mainstream has been priced in by the markets.

Further, the price action analysis suggests an increased risk of a deeper pullback in the short-run.

4-hour chart

The above chart shows:

  • High volume bearish doji reversal
  • Falling tops or lower highs pattern
  • The relative strength index favors the bears (below 50.00)
  • Strong support at $9,132 (confluence of 50-MA and rising trend line).

A doji candlestick forms when asset’s open and close are virtually equal. A bearish doji reversal occurs when the doji candle is followed by a big red candle, as seen on the above chart, and indicates a bullish-to-bearish trend change.

Adding credence to the bearish scenario is that volumes have shot up during the price drop over the last 24 hours. A high volume drop could be an indication that bulls are losing control.

View

The doors look open for a drop to $9,000. A close below $9,202 (38.2 percent Fibonacci retracement) could yield a sell-off to $7,793 (61.8 percent Fibonacci retracement). However, the 10-day MA (seen today at $9,000) is still sloping upwards, thus losses below the same are likely to be short-lived.

Also, a weak close today would confirm a bearish doji reversal on the daily chart. It would indicate a long-term bullish-to-bearish trend change.

Bullish scenario: Consolidation above the $10,000 mark for a next couple of days would improve the odds of bitcoin moving to fresh record highs.

Funfair ride image via Shutterstock

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Source: The Global Blockchain

Disclaimer: This article should not be taken as, and is not intended to provide, investment advice. Please conduct your own thorough research before investing in any cryptocurrency.