Here’s what happened in the cryptosphere this week
1. Bitcoin Futures Get Regulatory Approval
The Commodity Futures Trading Commission (CFTC) has approved bitcoin futures contracts for the CME Group and CBOE Global Markets. CME Group will begin trading the contract on its CME Globex platform from December 18th. Both exchanges will operate under a self-certified system requiring each to monitor, share data with the CFTC and report any market manipulation and abrupt changes.
Why It’s Important
Regarding the futures contract, “it can be purchased by lots of institutional investors who wouldn’t buy bitcoin itself”, and short sell bitcoin “with relative ease” says Bloomberg’s Rob Urban. Institutional investors will now be able to bet on bitcoin’s volatility. CFTC chairman Christopher Giancarlo said the regulator “has limited statutory authority” over cryptocurrency markets. The market is expected to remain largely unregulated.
As interest rates remain continually low, investors are turning towards riskier assets and with bitcoin’s astronomical return of almost 1500% since the beginning of the year. Bitcoin’s price has increased hugely since the announcement. However, many big names in finance maintain that the cryptocurrency is in a bubble and should be avoided as an investment.
Cantor Fitzgerald is creating a bitcoin binary option that will trade on its Cantor Exchange. The company said they too will cooperate with the regulator.
2. “Abandon Hope All Ye Who Enter Here”
RBS Chairman Sir Howard Davies has warned the cryptocurrency is in a “frothy investment bubble”, saying “it’s hard to see any solid rationale for that move,” as the cryptocurrency hit $15,000 this morning. Davies lamented the fact that central banks can only dissuade users from using bitcoin:
“All the authorities can do is put up the sign from Dante’s Inferno – ‘Abandon hope all ye who enter here’.
That’s what’s needed, and it need to done by the Federal Reserve, the SEC, and the Bank of England and the European Central Bank at the same time.”
Sir Howard Davies, RBS Chairman
Previously Nobel Laureate Joseph Stiglitz has gone so far to say the cryptocurrency should be “outlawed” as “it doesn’t serve any socially useful function. Davies thinks this is unlikely but firmly warns against investing in bitcoin.
3. Tether Cannot Account for $814m
Cryptocurrency company Tether is being questioned over whether $814m of its digital tokens actually exist. The cryptocurrency prides itself on being a stable alternative to bitcoin, as Tether’s asset (USDT) is pegged one-to-one with the US dollar. However, a lack of evidence and recent revelations suggest the company may not have anywhere near this amount, meaning it would be unable to guarantee the tokens exchange for US dollars.
How Tether Works
The cryptocurrency enables users to dampen the volatility of bitcoin, by tethering their cryptocurrency (USDT) to the US dollar. A small business owner could take payments in bitcoin, and then transfer the bitcoin into USDT, to avoid bitcoin’s price fluctuations. This allows them to stay clear of bitcoin’s volatility. The company claim every USDT token is backed by a US dollar, which it holds in reserves. There are currently $814m USDT tokens outstanding, so there should be $814m in the company’s bank accounts.
Why It’s Important
Whether the crypto firm can account for these reserves is now being questioned. USDT owners are not guaranteed their tokens can be redeemed for dollars, according to their website and the company has not disclosed who it banks with.
In March 2017, Tether lost American bank Wells Fargo, who acted as the correspondent between the US and Taiwanese banks, where the company has banked in the past. Back in March, Tether “said they had about $50m worth of Tether outstanding, they now say it’s $814m, so you can see the jump there without US banking,” said Bloomberg’s Matthew Leising. This colossal jump has drawn attention to the company’s lack of transparency.
Oguz Serdar, a USDT user who encountered issues when attempting to convert $1m USDT into dollars said he, regarding the company, “I don’t think they have even $100m or $200m in a legitimate country.” On declining his request, Tether told Serdar that “due to ongoing banking difficulties we are only able to process requests for verified corporate customers.” Serdar was unable to transfer his funds directly from USDT to dollars. Whether Tether’s claim is legitimate is unclear, but commentators suggest the company may not be able to account for its liabilities.
Tether has not disclosed where its dollar reserves are held.
4. SEC Charges PlexCoin over Fradulent ICO
The US financial regulator has changed cryptocurrency company PlexCorps and its owners with defrauding investors during the company’s initial coin offering (ICO). Charges were filed against the company for marketing and selling PlexCoin, their cryptocurrency, as an asset that would net a return of 1354% within 29 days.
Why It’s Important
ICOs have been accused of providing investors with valueless tokens and offering meaningless value propositions. The novel fundraising tool offers investors digital tokens in exchange for funds used to develop their proposed software. PlexCoin’s website, while rather flashy, is vague about what it hopes to construct; something the SEC has picked up on.
This is the first time the SEC’s Cyber Unit has filed charges since its creation in September. However, earlier this year two companies, who also raised funds through an ICO, were charged with fraud for selling tokens supposedly backed by real estate and diamond investments. The move signals a government commitment to dealing with fraudulent ICOs.
What to Look Out for
The first ICO was held in July 2013, but the trend really took off in early 2017. Almost $2.3bn has been raised in this way. The worry is that many ICOs provide investors with little real value.
Fiverr, the global online marketplace for tasks has several users willing to write “professional blockchain ICO white papers”, from as little as a £74.52. Those looking to invest in an ICO should tread carefully.
5. Crypto Traders “Burned” During NEO Flash Crash
Traders using the Bitfinex platform had their positions liquidated after a 90% flash crash struck NEO, OMG and ETP last Wednesday, leading to individuals losing thousands of dollars. The traders were using Bitfinex’s margin funding facilities, which allow them to borrow money to increase their exposure in order to deliver outsized gains (or losses) relative to their deposits.
Bitfinex customers, however, are incensed. They claim that the platform was suffering from technical troubles during the flash crash, which prevented traders from exiting positions. So far, the crash appears only to have occurred on Bitfinex, leading many to be suspicious about the cause of the price drops. Many traders also say that their stop losses were executed far below the levels reached during the nadir of the flash crash – a claim that Btifinex denies.
@bitfinex Hey Bitfinex, yesterday you cheated on me and pushed neo price to 5 USD to break my margin position 🙁 Can you advise?..I lost 40k.
Neo Adress: AQaAfFwbMUdcqom2zNhugigDLonUMNubbm pic.twitter.com/2um80tDjci
— Markusyt (@Markusyt93) 30 November 2017
Bitfinex is the world’s largest cryptocurrency exchange by daily volume and set itself apart from rival Coinbase because of its wider offering of digital currencies and advanced trading facilities. The company is adamant that they have done nothing wrong and has highlighted the inherent risks not merely of cryptocurrency trading but also of leveraged trading. So far, Bitfinex has refused to pay any compensation to those affected by the flash crash.
An Unwelcome Throwback?
The incident also highlights the risks of individuals placing their finances in the hands of cryptocurrency exchanges. Bitfinex is unregulated and has been fined by US regulators in the past. It has also been the victim of two hacking incidents that saw millions of dollars stolen from customer accounts. For some – including advocates of cryptocurrencies – Bitfinex is increasingly reminiscent of Mt. Gox, the first cryptocurrency exchange, which collapsed in 2014 after $500m was stolen by hackers.
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