Who owns bitcoin?

In another busy week for cryptos, award-winning writer Gary McFarlane discusses whether cryptocurrencies are securities, looks at a new ETF, coin offerings and the possible launch of EOS.

Bitcoin continues to be rangebound, although the price has nudged up 2% on a week ago, trading at $7,576 on Coinbase. Ethereum is up 4.5% over that period. 

The relative calm in crypto markets comes at a time of stirrings in the well-worn themes concerning mainstream adoption and regulation, while the stalled launch of EOS continues to occupy crypto watchers. Cryptocurrency total market cap now stands at $338 billion, down from $433 billion a month ago, a drop of 21%.

US SEC says bitcoin not a security  

Jay Clayton the chairman of the US Securities and Exchange Commission (SEC) confirmed in an interview with CNBC that initial coin offerings (ICOs) used by blockchain projects to raise funds by selling tokens are in fact sales of securities. 

The attempt by industry leaders to differentiate "utility tokens" that provide access to goods or a service as something distinct from securities tokens doesn’t seem to have impressed the SEC. Clayton stated in no uncertain terms: "If you have an ICO or a stock, and you want to sell it in a private placement, follow the private placement rules. If you want to do any IPO with a token, come see us."

However, the SEC does accept that cryptocurrencies such as bitcoin, whose primary use case is as "digital cash", are not securities.

"Cryptocurrencies are replacements for sovereign currencies…[they] replace the yen, the dollar, the euro with bitcoin. That type of currency is not a security." 

Clayton explained.

The SEC is not outlawing ICOs but instead seeking to regulate them, which should be seen as a positive development, especially when taken alongside the statement about fiat replacement coins. The SEC's stance has meant that those ICOs that do not abide by US securities law, such as complying with strict accredited investor rules and reporting requirements, are increasingly forced to bar US investors, as was the case with the largest ICO to date from EOS. 

The SEC uses the Howey Test from 1946 to decide whether a financial product is a security, where "a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party". 

Clayton continued:

"We are not going to do any violence to the traditional definition of a security that has worked for a long time. There's no need to change the definition. A token, a digital asset, where I give you my money and you go off and make a venture, and in return for giving you my money I say 'you can get a return'… that is a security and we can regulate that. We regulate the offering of that security and regulate the trading of that security."

The chairman's remarks came on the heels of the announcement by the SEC that Valerie Szczepanik has been appointed associate director of the Division of Corporation Finance and the senior advisor for digital assets and innovation. 

She is charged with responsibility for advising on the very subject of Clayton's remarks, namely whether crypto assets are securities. Szczepanik has been employed at the SEC since 1997.

Exchange traded fund hopes rekindled

Hopes that an exchange traded fund (ETF) may be approved by the authorities in the US rose this week on news that a new product has been submitted for consideration. Unlike previous applications to the SEC, this product is not aimed at retail investors given that the effective minimum investment in the proposed VanEck SolidX Bitcoin Trust is set by a single being composed of 25 bitcoins, which is roughly $200,000. 

The proposed ETF will use physical replication which means it will hold bitcoin directly and not synthetically through, for example, futures exposure, as the VanEck’s previous bitcoin ETF listings did. VanEck has funds undermanagement of $45 billion and 70 listed exchange traded products. The firm has teamed up with SolidX, a crypto services company, to issue the ETF. SolidX will be providing the custody services for storing bitcoin.

SolidX chief executive Daniel Gallancy is optimistic about the prospects for the filing's success:

"Based on various comments, it seems that regulators are concerned right now about having an ETF that is available to retail investors… We think that will change over time, but right now a good place to start is with a product geared purely toward institutional investors."

The ETF market is valued at $3.4 trillion and a crypto ETF is seen as an essential element for attracting mainstream funds.

Leading crypto exchange Huobi has launched a fund investing in a basket of crypto, which it describes, confusingly, as an exchange traded fund. The fund, called the Huobi 10 (HB10), opened for investor subscriptions on 1 June. As its name suggests, it invests in the top 10 traded coins on the Huobi exchange. The exchange created an index a week before the launch that tracks the 10 most-traded assets against Tether, the "stablecoin" crypto pegged to the dollar. The Huobi fund is not listed or tradeable on a public exchange and as such is not an ETF as commonly understood. Investment in the fund is by crypto-only deposits for now.

Huobi and Binance venture funds

Huobi has also announced that it has launched a venture fund to invest in blockchain start-ups in partnership with NewMargin Capital of China, and South Korean institution Kiwoom Securities, with the Korea Development Bank and Industrial Bank of Korea lined up as early investors in their capacity as limited partners. The fund has $93 million to disburse. 

Huobi's move seems to be part of a developing trend among exchanges and other well-endowed players in the crypto ecosystem, as they seek to kickstart development of blockchain applications. 

Binance has also set up a fund to funnel capital into blockchain start-ups but on a much larger scale by allocating $1 billion to its fund, led by Ella Zhang who heads up Binance Labs, the exchange's incubator. The first investment is thought to be in a blockchain-based taxi service being planned by Chen Weixing, the founder of Kuaidi Dache which went on to merge with Didi Chuxing and today dominates Uber-like ride-hailing services in China.

Fund management giant Fidelity hiring for crypto products and services?

Fund management behemoth Fidelity, the first among its peers to allow its US clients to link their crypto holdings to their portfolio account and with a famously pro-crypto chief executive Abigail Johnson, is hiring crypto developers. 

Internal documents revealed by Business Insider suggests Fidelity may have decided to start building out crypto infrastructure to support as yet unknown products and services. A post to recruit software developers is seeking staff who could "engineer, create, and deploy a Digital Asset exchange to both a public and private cloud". Other snippets from the Fidelity recruitment efforts show that the company is seeking to fill positions for "first-in-class custodian services for Bitcoin and other digital currencies".

Johnson has been a long-term advocate for the efficiencies and costs savings she believes blockchain can deliver, and the company has been running trials and pilots with the technology at its Fidelity Labs for several years.

"Blockchain technology isn't just a more efficient way to settle securities. It will fundamentally change market structures, and maybe even the architecture of the Internet itself." 

She said last year when extolling the virtues of blockchain.

A company spokesperson asked by financial news outlet Barron’s for comment said: “It’s no secret that we are actively exploring cryptocurrencies, including bitcoin and other digital assets in our Blockchain Incubator at Fidelity. We see the future of financial services taking place on open and permissionless ledgers, with technologies like digital assets, currencies and Blockchains and we are very actively exploring what this may mean for Fidelity. We are hiring to meet the demand for this exploration, but we have nothing to announce today.”

Fidelity is among the largest fund management firms in the world with $2.4 trillion of assets under management.

EOS to launch in next 24 hours… maybe

The end of the EOS’s year-long token sale we reported on last week, which has raised a mammoth $4 billion, has not seen the network go live yet. Infighting among the “block producers”, made up of the largest token holders and who will be in charge of block verification on the network, has delayed the launch. 

Because the network is not live yet, the two block producer votes that have taken place so far were organised on the Telegram messaging app in a process that some in the community say lacks transparency. However, the EOS block producers are in the Catch-22 position of not being able to vote on the blockchain until the mainnet goes live. The votes had majority support for launching but not the two thirds + 1 apparently required to flick the switch.  The delays in the launch has been grist to the rumour mill that is swirling about the different interests behind the competing block producer groups.

One group which goes by the handle EOS Mainnet Launch Group (EMLG) is thought to represent the majority of block producers but has a competitor in the EOS Core group. There are 21 block producers in total and when the network goes live voting will take place on the blockchain in a continuous process updated every two minutes. However, it is highly likely there will be more than one blockchain as the different groups and developers compete to build the most popular chain. The network is expected to finally go live in the next 24 hours, but we’ve heard that before.

The EOS code is now public and there are 593 issues outstanding on the Github software repository (Github was acquired by Mircosoft this week) where it is hosted. There have been two major updates to the code, which is now at version 1.0.2. One security consultant has been busy this week bug hunting to earn the $10,000 bounty for each bug found. Guido Vranken has earned $120,000 in the space of a week and was offered a job by the developers of EOS, Block.one, although has turned them down, for now.

Exchange and mining news and who owns bitcoin

In exchange news this week, Bitfinex was forced offline by a distributed denial of service attack a couple of days ago but is up and running again now. Elsewhere, US exchange Coinbase announced that it was planning to open up shop in Japan, the world’s largest market for crypto. The exchange is also seeking to obtain various broking and trading licences as it continues its push into the mainstream. As part of that mission it has bought Keystone Capital, Venovate Marketplace and Digital Wealth.

Mining giant Bitmain is talking about doing an initial public offering (IPO not ICO) in the near future, according to a Bloomberg report. Chief executive Jihan Wu had previously told the financial news service that Bitmain revenues last year totalled $2.5 billion. Canaan, a mining competitor, recently filed for an IPO in Hong Kong. 

Bitmain is the largest manufacturer of application-specific integrated circuits (ASIC), which are specialised chips for the processor-intensive proof of work consensus system required to mine bitcoin. The supposed waste associated with bitcoin mining has been subjected to withering criticism and so too has the centralisation of mining in the hands of big players such as Bitmain.

A major report by the Financial Times, based on research by Chainalysis, says that longer-term holders of bitcoin offloaded $30 billion worth of the cryptocurrency on shorter-term speculative traders entering the market at the end of last year. Other findings were decidedly bearish for future bitcoin prospects. 

The research found that speculation remains the primary use case for bitcoin, with most transactions involving funds being moved in and out of exchanges with no growth in merchant adoption. Other findings concluded that bitcoin was "not a rational market" and was "thinly traded and manipulated".

Finally, Jump Trading of Chicago has set up an electronic-based over-the-counter (OTC) trading system for bitcoin. This is a big step forward in the world of trading firms where OTC crypto deals are more often than not conducted over the phone or on Skype due to the immature nature of the marketplace.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.