Markets Have A Neutral Day

Are The Bulls Or Bears Running Out Of Gas?

The market’s movement was largely neutral today, with several sharp corrections throughout the day and slow recoveries in between. It’s become clear that we’re back to a battle of attrition between the bulls and bears and we won’t see a resolution until a clear signal emerges.

Meanwhile, in today’s news, we learned that US federal regulators are quietly examining whether Ethereum should be classified as a security.

The Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) are investigating whether many well-known cryptocurrencies — not just initial coin offering (ICO) tokens as we knew already — should be regulated as securities under federal law.

The report is sparse on details, but it cites sources who assert that regulators are evaluating whether Ethereum’s creators, “exert significant influence over their value, in the same way, a company’s stock price depends on its managers and their strategy, performance, and investments.”

The CFTC chairman Chris Giancarlo, who became a hero in the cryptocurrency community after he gave positive remarks regarding crypto in front of a congressional hearing in February, said he doesn’t see crypto legislation coming from the federal level in the imminent future.

“The statutes we are operating, you know, were written in 1935. And it’s often hard to look at those statutes and find out where something as new and innovative as Bitcoin and many other cryptocurrencies, where do they fall into a regulatory regime which was written decades ago… we see elements of commodities that are subject to our regulation, but depending on which regulatory regime you are looking at, it has different aspects of all of that.”

He continued, “There are certainly aspects of this that you might call a virtual asset like gold, only it’s virtual, it’s digital,” he said. “But it is an asset that many find worthy of holding for a long time and that has aspects to it that might not be ideal as a medium of exchange, that might be more suited as a buy and hold strategy.”

He noted that the CBOE and CME, two major US exchanges, are successfully operating Bitcoin futures contracts.

Giancarlo said that the complicated nature of Bitcoin and Cryptocurrency makes them challenging to regulate:

“…Bitcoin and a lot of other virtual currency counterparts really have elements of all of the different asset classes whether a medium of payment, whether a long-term asset, and so as regulators we’ve come to grips with this just now in real time and it’s complicated. And I don’t see it being resolved any time soon.”

While the future of crypto in the US is a bit murky at the moment, there was certainly better sentiment on the global stage. As we learned in April, the International Monetary Fund (IMF) affirmed that cryptocurrencies “do not appear to pose risks to financial stability,” in a report.

The IMF continued, “It is impossible to know the extent to which crypto assets may transform the financial infrastructure and whether most new crypto assets are likely to disappear as in past episodes of technological innovation (as many tech companies did during the boom of the late 1990s, for example). Before they can transform financial activity in a meaningful and lasting manner, crypto assets will first need to earn the confidence and support of consumers and financial authorities.”

Similar to this sentiment, the Hong Kong Financial Services and Treasury (FSTB) released its Money Laundering and Terrorist Financing Risk Assessment Report today and briefly discussed cryptocurrency.

Specifically, discussing criminal activity, the number of suspicious transactions has quadrupled in the past six years, while convictions have gone down.

At the same time, businesses around Hong Kong have been complaining that they are being denied banking services because of the banks’ overreaching fear of money laundering risks. This has notably hit the cryptocurrency community hard.

The report assumes that a system of payment, such as cryptocurrency, only becomes a risk to money laundering and terrorist financing once it becomes commonly used. The report’s risk assessment of Stored Value Facilities (SVF), such as the popular Octopus Card, Paypal or Alipay is far higher.

All in all, the report affirms that cryptocurrencies pose little risk of criminal activity.

The Hong Kong Police Force supported the report’s opinion, expressing that they see absolutely “no apparent sign of organized crime or ML/TF [money laundering / terrorist financing] concerning the trading of cryptocurrencies”.

Also coming to light is the study by the Center for Sanctions and Illicit Finance of the Defense of Democracies Foundation, which indicated only 0.61% of the fiat currency that is introduced into cryptocurrency trading has been used against regulations.

Despite the facts stating otherwise, there has still been a trend of associating cryptocurrency with illicit activities.

Earlier in April, Mark Carney, the Bank of England’s governor, alleged that a ‘huge amount’ of illicit activity is run through cryptocurrency. Despite this, his own Treasury has released a report that stresses the ‘risks of digital currency used for money laundering to be relatively low’.

Iran, in a similar move of paranoia, issued a nationwide ban on cryptocurrencies that prohibited Iranian banks from handling cryptocurrencies. Money laundering was one of the principle reasons given for the ban but no hard facts were conferred to back up the claims.

Just today, the Financial Services Agency of Japan [JFSA] is putting a lot of pressure on the country’s various cryptocurrency exchange platforms to stop trading privacy focused coins such as Monero [XMR], Zcash [ZEC], and Dash [DASH] claiming that various investigations have revealed that these are favored by criminals.

Despite these setbacks, we are still very positive for the direction things are going. As an indication of that, Coinbase announced it is is preparing to open an office in Chicago and add support for block trading. Block trading allows traders to place large orders outside of the exchange’s normal order book. This is clearly Coinbase getting ready to build out its institutional client base and solve a key pain point. We clearly see this as the direction the market is taking, and this is just one more weathervane indicating to us that institutional investment is quickly coming.

Talk to you tomorrow.

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