Silvergate, Meet the Pearly Gates.

Headline: So, what DID happen with Silvergate Capital?

Body:  OK, I am going to ask you to step in the Wayback Machine with me here, and set the destination for the later 1930s.    Ok, see that long, long line of people, all queued up before that substantial looking building?  This is likely NOT an architectural appreciation society.    This is a  bank run.  In short, there were some challenging economic conditions… and then contagion took over.   One neighbor went to talk to another, “You know, Shirley down the street, she barely got out all of her money.”  Then neighbors #1 and #2 spread the word further, as they both sprint to the Bank to get their savings out.   Multiply by a few thousand people, and this is the crux of a bank run.  Yes, nowadays, the FDIC will serve to manage this, somewhat, but please note the word “manage.”   Largely, this means that the contagion will not spread to many other banks.  For the ones directly affected, FDIC can only do so much.

So, why am I telling you about bank runs that were happening about 100 years ago?  Well, they provide a decent intuitive model for what happened to Silvergate Bank.  Only, this time, Silvergate was not just a bank.   And then again, cryptocurrency was involved.  (I will tackle Silicon Valley Bank in a future article.  That one’s kind of interesting too.)  So, let’s get started.

OK, who’s on first?

As happens so often, the media has generally gotten some things wrong or, at least incomplete and somewhat confusing.   The entity that went into “voluntary liquidation” was Silvergate Bank.   In turn, Silvergate Bank is owned by a holding company, Silvergate Capital Corporation.

What happened?

Things were good, at first. In 2013, Silvergate Bank began to help the first companies within the cryptocurrency industry.   In November 2018, it filed to go through an IPO, and they revealed that they had just under 500 cryptocurrency clients.   By the time the IPO was accepted, they had over 750 cryptocurrency clients.

Just a cursory view of the news would suggest that there are multiple headwinds buffeting the cryptocurrency industry.  In response to these confitions, Silvergate Bank took a $4.3 Billion loan from The Federal Home Loan Bank in San Francisco.   These loans themselves, did not seem to unduly concern the FDIC.

Just a few weeks ago Silvergate Corporation announced that its annual financials would be delayed due to questions from its independent auditors.   (Score one for the good guys?)  Just after this, Silvergate announced that they would be hiring a law firm and a different accounting firm to help guide them through its transition.   According to Silvergate management, all depositors would receive full and complete refunds of their deposits.  (I have to wonder how they’re going to do this, given the FDIC limit of $250,000 per customer account.) ,

Within this announcement, Silvergate admitted to concerns that Silvergate Bank might have “going concern” issues.   No, this is not something that should llead to a conversation with a friendly urologist.   “Going concern” is a term of art within accounting, and when you see that phrase on an Audit Report, it means that there are things going on that concern them so much, that they believe that the company being audited will not be surviving the next 12-month period of time.   Silvergate said that they would be “voluntarily liquidating’ its assets in response to “recent industry and regulatory developments.” One of the major industry developments is the bankruptcy of FTX and its conjoined corporate twin, Alameda Research.  Silvergate (SI) sold securities and derivatives at a loss of $718 million as customers withdrew about $8.1 billion of digital deposits during the fourth quarter. This amount is far in excess of the bank’s profits since 2013, the Journal reported.

Shares of Silvergate Capital Corp., a crypto-focused California bank, lost almost half their value after the Wall Street Journal reported it spent the equivalent of a decade’s profit and fired 40% of its workers after investors scrambled to redeem $8.1 billion in the wake of crypto exchange FTX’s collapse.  Now, the FDIC has forced them to stop operations and help make good on as many of the customer demands as they can.

Is this different from what happened at other cryptocurrency-adjacent companies?

This is a very good question.  At the beginning (of the end) FTX tried to say that the problem was a “bank run” when actually, the crux of the issue was fraud being perpetrated upon unsuspecting clients.    Silvergate appears to be more of a bank run, one caused by and made worse by external factors.

Why was Silvergate at such enhanced risk?

Mainly because they held a substantial amount of their assets in cryptocurrency.  But, have faith; things can get MUCH worse, even at a traditional bank.   One main issue is how banks report bonds that they hold.   Most bonds are traded actively and are considered to be “trading  investments.   The value of these must be tested, regularly to see if their value had declined in value within the market.    If so , they have to be “written down”  to reflect market values.  But, if a bank reports them as “Held to Maturity” investments, this “mark to market” protocol does not have to be used.   The outfall of this is that the bonds held by the bank can be massively over-valued, and the bank itself can now be described as “under-capitalized.”  Silvergate was involved in a lot of this investment activity, so when the bank run began, they had very little liquidity cushion to use to satisfy customer demanded withdrawals.

What’s the outfall likely to be?

I think the predicament of the marijuana growers and retailers is comparable.   Even though these products are legal under state law, no traditional banks will touch them.  I think that a similar situation faces crypto firms.  What they do is legal, but getting financing from “TradFi” (traditional Finance, I had to look it up too) is becoming more and more complicated.  This will likely lead to a very few cryptocurrency financing companies with a lot of power.   (Think OCP for cryptocurrency.)

The Verdict

According to industry expert a Mr. Bianco, “I still think crypto is going to win the day at the end of all of this.”  I have opined on this before, and in short, I agree with him.  Within the marketplace, there are many evolving metaverses which each have their own native currencies.    But, the “on-ramp” to playing in these metaverses appears to be purchasing cryptocurrencies to trade for the native currency.   Because of the draw of these metaverses (which are getting more and more immersive each day,) I believe that cryptocurrency in some form is here to stay.  So, if cryptocurrencies are here to stay, what happened to Silvergate?   I think it comes down to a human failing.  Greed.

Time after time (especially FTX), hedge funds have worked to get people into cryptocurrency, and other firms provide marketplaces where these cryptocurrencies can be traded.   The kiss of death appears, once again, when the hedge fund works through the same corporate structure as the cryptocurrency exchange.   In the case of FTX, they began making loans to Alameda, and trading their requests on a prioritized schedule. Silvergate started providing services to the industry in 2013, with no apparent problems.  Then they instituted their own “internal settlement tool” the Silvergate Exchange Network, and now, they are defunct.   Same rhythm, same chord structure.  Not a melody I like to hear.

REFERENCES

https://www.coindesk.com/business/2023/03/09/silvergate-bank-had-to-be-perfect-but-now-pays-a-heavy-price-strategist/

https://www.coindesk.com/policy/2023/03/08/crypto-bank-silvergate-announces-voluntary-liquidation/

https://www.investopedia.com/silvergate-plunges-45-7091740

https://www.forbes.com/sites/genegrant/2023/01/25/silvergate-shows-what-may-happen-if-community-banking-crisis-arrives/?sh=213ed9b63744

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

Keep Mama Safe. Data, too.

Headline: Is data theft a real problem in cryptocurrency?

Body:  For as long as there have been human beings on this Earth, there has been theft.   As time went on, and our systems of scrip and other physical tokens turned to 1s and 0s on a screen, theft did continue to be a problem.   Only, now, instead of an unobservant watchman making a pile of silver or gold vulnerable, it is physically easier to break into a computer and steal the data that underlies that account.   In this case, there was the Federal Government backstopping the banks, in the guise of the FDIC.   Now, there is cryptocurrency, and people are worrying that the blockchain and the organizations that control it might inadvertently open up people  to additional scams.  Only, this time, there is no Federal Government to insure (at least part of) your account balance.  So, this leads us to a question.

Does investing in cryptocurrency place my personal data at risk?

To be frank, yes, you are more at risk.  Just a few illustrative examples:

Just recently, a French cryptocurrency firm fell victim to a hacking exploit, and as a result, e-mail addresses for many of their customers were compromised.   Reportedly, 9,500 of these customers also had their physical addresses, phone numbers and names exposed as well. 

Intuit is accused of “failing to take adequate and reasonable measures to ensure that its data systems were protected.”  In a subsidiary of Intuit, one employee clicked on a link they didn’t know the source of, and POOF thousands of accounts were potentially exposed.  (It appears that several hundred were exposed, but only a subset of these have been maliciously used.

In 2022, a very organized extortion gang (Lapsus$) started to become very active by stealing source code and other data from world-renowned companies.   At its height (depth?) they leaked a significant amount of Bing source code and compromised a contractor important to their authentication standard.  After the 7 arrests, the group has gone underground.

Also in 2022, Conti, a Russian cybercrime gang launched ransomware attacks against the government of Costa Rica, and as a result, the president declared “national emergency” as a result of the attack.  Some say that these attacks were merely a diversion, allowing the gang time to loudly down=play their association with the Russian government.

Decentralized Finance Platform Hacks

As the cryptocurrency ecosystem has evolved, tools and utilities for storing, converting, and otherwise managing it have developed at breakneck speed. Such rapid expansion has come with its share of oversights and missteps, though. And cybercriminals have been eager to capitalize on these mistakes, frequently stealing vast troves of cryptocurrency worth tens or hundreds of millions of dollars. At the end of March, for example, North Korea’s Lazarus Group memorably stole what at the time was $540 million worth of Ethereum and USDC stablecoin from the popular Ronin blockchain “bridge.” Meanwhile, in February, attackers exploited a flaw in the Wormhole bridge to grab what was then about $321 million worth of Wormhole’s Ethereum variant. And in April, attackers targeted the stablecoin protocol Beanstalk, granting themselves a “flash loan” to steal about $182 million worth of cryptocurrency at the time.

Why are these cryptocurrency firms having such difficulty with security?

There are a lot of ideas about what makes these cryptocurrency firms so vulnerable to these attacks.   But, they all seem to boil down to inexperience.  Most of the firms that are selling cryptocurrencies are directed by people who are very young.  Given their youth, they have energy  but lack the longstanding experience that confers upon older companies some ability to display wisdom.   For instance, many cryptocurrency concerns were started in 2021 and 2022, at a time when the economy was doing pretty badly.  Because of this, they have learned how to behave in these market conditions.   But, as the business cycle goes, there are bound to be other times when fortunes change.   Given the realities of this new market condition, they might not have sufficient resources to adapt to the new reality.  Furthermore, security seems to be less of a priority, because of an organizational culture emphasizing FOMO, or “Fear of Missing out.”

The Verdict

Data theft is a large problem as it relates to cryptocurrency  But, it seems like we should be more able to wrap our arms around it.  Each cryptocurrency seems to have an excellent “why” as spelled out  in their whitepaper.  But, it seems that the questions of “how” are rarely answered.   How are you going to protect the cryptocurrency not yet sold?  How are you going to handle your ICO?  How are you going to keep fraudsters from hawking counterfeit versions of your currency?  These are all valid questions and if not answered to your satisfaction, perhaps you would reconsider your investment.

REFERENCES

https://www.coindesk.com/markets/2020/07/29/crypto-wallet-maker-ledger-loses-1m-email-addresses-in-data-theft/

https://www.thestreet.com/investing/cryptocurrency/intuit-sued-after-hackers-stole-crypto-from-customers

https://www.wired.com/story/worst-hacks-breaches-2022/

https://www.forbes.com/sites/forbestechcouncil/2022/07/11/how-to-protect-your-cryptocurrency-from-cybercriminals/?sh=9e6b90849c3d

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

Did Solana Fly Too Close to the Sun?

Headline: What are the problems with Solana?  And are “hot wallets” and “blockchain bridges” partially to blame?

Body:  Just like so many other firms, Solana is beginning to have its own problems.  Solana decentralized finance (DeFi) platform Friktion is shutting down its user interface and urging customers to withdraw their assets from the protocol, according to a statement on Jan. 26.   Only withdrawals will be permitted and new money cannot be invested.  (I note, with interest, that their cryptocurrency is abbreviated  SOL.)

So, what is a “hot wallet”?   Are they sold with hot pants?

No, they are not.  A hot wallet is a place where you can store digital assets, but they are always connected to the Internet.   This is advantageous and disadvantageous.  On one hand, it does mean that your entire balance of cryptocurrency is always available for trading.  Given the price volatility, this accessibility of your assets is likely good.  On the other hand, it also means that hackers have constant access to the defenses guarding your cryptocurrency investments.   Let’s be honest, sometimes they do get lucky.    To access them, there are both public and private keys.   To send money to a hot wallet, one needs the public key.   To get money out of a hot wallet, one needs the private key.

Some people prefer hot wallets because of their constant connection with the Internet.   Some prefer to use a particular hot wallet because it synchs so well with the web applications for a particular cryptocurrency.  Common wisdom seems to be to place a small amount of cryptocurrency in a hot wallet, and the majority of your digital assets should be kept in a very secure cold wallet.

 What is a blockchain bridge?

A blockchain bridge is a tool that lets you port assets from one blockchain to another.   Say, you open up an Ethereum wallet, and then purchase some Cardano coin.  There is a bridge between these 2 blockchains (making them inter-operable) but, the asset resting in your Ethereum wallet is essentially a derivative instrument.  There are unidirectional and bi-directional bridges that allow you to make the transaction and reverse the procedure.  Bridges are either custodial (centralized thru something like Coinbase) or non-custodial.

Trusted Bridges	Trustless Bridges
Depend upon a central entity for their operations.	These bridges operate using smart contracts.
Users have to rely upon the reputation of the bridge operator.	The security of the bridge is the same as the security of the involved blockchain.
Users need to give up control of their assets.	Users maintain sole control of their digital assets.

One might want to use a bridge because denominating a transaction in a different cryptocurrency might be far more profitable.  (Think of exchange rates between countries.  Due to exchange rates, it might be cheaper to pay for goods in Euros as compared to USD.)  Further, these small pieces of code used to be difficult to use, but they are becoming increasingly user-friendly.  Currently, the largest bridge is the “Wrapped Bitcoin” bridge with $10.2 Billion in assets.  Like any bridge, it provides opportunities, but entails risk.  The opportunities entail the easy cross-chain transfer of assets, and allows one to use d’apps seen on other chains.

What are the problems Solana is facing?

Well, remember that this is a very small community, including not too many exchanges and hedge funds.   So many firms have gone down, that the remaining firms are doubtlessly affected.

The Solana system has suffered more than their fair share of hacking exploits.(Hackers destroyed nearly $200 Billion in value.)  This makes people leery of trading on their platform, and causes other problems like outages.   These outages encourage other investors to consider using a different cryptocurrency.  Both blockchain bridges and hot wallets are targets for a constant line of hopeful hackers.  This is why most experts recommend that if you have a hot wallet, keep it in the custody of a reputable firm.

In the recent past, Solana has been a very popular option when buying or selling NFTs.   But as of late, the bottom has fallen out of that portion of the industry, and the usage of Solana coin has also decreased markedly.

Is this really a big deal?

Just recently, one day’s value of trading in Solana coin was over $3 Billion (USD).

Is there any relationship to other cryptocurrency firms?

In a word, yes.   Many cryptocurrency exchange firms sit on their Board of Directors, including Alameda Research and Genesis Trading, among others.  They are especially tied to FTX and their founder SBF.  SBF helped create Serum for Solana.   Serum is a centralized order book that serves to increase transactional speed and increase liquidity.    Serum is central to Solana.  By any measure, Serum is a very effective piece of software, executing more than $32 Billion of transactions in 2022.

Are there services helping these cryptocurrency firms?

Yes.   There are all manner of government agencies  offering advice in addition  to issuing new regulations.   Besides the government agencies, there are for-profit  services too that seem to serve as consultancies for these companies.   The largest of these that I have come across are TRM and Elliptic.  (Elliptic is really interesting as they are based in London, and the U.K. has been quite busy  in its work to attract cryptocurrency firms to the U.K. and especially London.)  In fact, the chief scientist of this company, a Mr. Tom Robinson, was quoted in the Washington Post.  “To date, approximately $1.8 billion has been stolen from these services and it’s worrying that their security standards don’t seem to match the huge amounts of capital being entrusted to them.”

The Verdict

Solana faces difficulty in many areas that include hot wallets and blockchain bridges  Solana might serve as a very useful reminder to do your own research thoroughly when making any investment in cryptocurrency.

REFERENCES

https://cointelegraph.com/news/solana-defi-project-friktion-shuts-down-its-user-platform

https://www.fool.com/investing/2023/01/29/better-buy-cardano-vs-solana/

https://www.washingtonpost.com/technology/2022/08/03/solana-nomad-hacks-security-questions/

https://www.thestreet.com/investing/cryptocurrency/cryptocurrency-solana-collapses-in-ftx-scandal

https://www.coindesk.com/learn/what-are-blockchain-bridges-and-how-do-they-work/

https://ethereum.org/en/bridges/

https://www.investopedia.com/terms/h/hot-wallet.asp

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

 

At the water’s Hedge.

Headline:  Can cryptocurrency be used as an inflation hedge?

Body:  OK, this one seems pretty relevant, but it also seems pretty complicated.   We might think we know what this means (gut feeling) but, your gut might be incorrect.  Maybe.

So, what causes inflation?

In the broadest sense, inflation is an oversized number of dollars chasing an undersized flow of goods and services.    Between September and November 20089 the number of U.S. dollar bills increased sharply, but the inflation rate went down.   (The over-printing of currency makes inflation worse, but is not the proximate cause.)    It seems much more important that there is distrust in the central monetary system.   Throw in some supply chain disruptions, the war in Ukraine and some profiteering in the corporate world, and inflation was almost a fait’ acompli. 

What is an inflation hedge?

A hedge is a smaller investment made in a different item than our main ones, on the theory that if we are wrong on the primary investment, the error will be partially made up on this other investment.   For instance, in a period of rapidly rising prices (like we will ever see this?) a person might feel that the inflation rate is so high that the return earned on most investments will not keep up with the inflation.    So, they buy something like gold which will likely rise in price faster then the rest of the market.  Then, they can sell this investment when the price is significantly higher than their purchase price.  This is the idea of an inflation hedge.

Why do many believe that Bitcoin (primarily) and other cryptocurrencies are great inflation hedges.

According to its proponents, Bitcoin was designed from the start with inflation in mind.  There will always be a maximum of 21 million Bitcoin.   In a process  known as “halving” miners used to be paid 50 BTC to substantiate one  block of transactions.   As time went on, they were instead paid 25 BTC for the same type of substantiation.  Because of this planned halving, it was anticipated that inflation would be worked against by the rules of mathematics.  Furthermore, as there is no central authority, monetary maneuvers like quantitative easing, wouldn’t even be an option for cryptocurrency, and thus they would be protected from the consequent inflation.   It’s easy to access 24/7 and there is no central authority to manipulate it. All in all, it makes for a good surface story.

But, as the Fed begins to remove liquidity from the market, this narrative is changing.  (By raising key interest rates, the Fed can effectively remove liquidity by requiring a much higher interest rate to make a project go.  So few projects qualify for this high standard that fewer projects are undertaken, and the economy re-stabilizes at a lower level.  Or, so goes the textbook theory.)  In both economic conditions, “risk-on” (high liquidity  and “risk-off” (low liquidity), many different investments offer a more lucrative  rate of return.  Still, there were enough advocates of cryptocurrency as an effective inflation hedge, that it kind of became one.  But, contrarians claim that given its price volatility, it cannot be seen  as  a “store” of value, and thus cannot be considered an inflation hedge.  Add to this  the insecurity of this cryptocurrency ‘ ($1.2 billion hacked just last year) and the whopping amount of electrical power needed to mine cryptocurrency, the hedge hypothesis develops some holes.

Might this be something else entirely?

I don’t know if anybody else has REALLY bad sinus problems.   If you do, I’m sorry, but you’re in excellent company.  Problem is, in the drugstore, decongestants and specialty sinus medications are  in the exact same space, on the theory that they are related.  It’s true: they are related, in symptoms addressed.   But decongestants will not help your sinuses and your misery will continue.   In a similar vein, we have inflation hedges and then hedges for a drop in the value of the dollar.  They too are related, but it s quite possible that cryptocurrency could serve very well for one purpose and not so well for the other.

The Future’s so Bright… I gotta [be]-ware, shades!!

OK, the famous modern Western movie is called The Good, The Bad and The Ugly.  We’ve observed the Good, seen the Bad, what of the Ugly?   Or, in our case, crypto might be Ugly now, but it might ride glorious into the future.  Well, maybe.  The authors seem to argue here that cryptocurrency will become a more potent hedge  against inflation as more and more people begin to treat it that way.  Well, yeah, not really an earth-shaking prediction here.  What is interesting here is the idea of blockchains “maturing.”   What does that look like?  I think this mainly revolves around sensible regulation and the large institutional investors seeing cryptocurrency as a valid investment.  (I admit, these are NOT independent events.)  But the major point being made remains the same: When enough people feel secure enough, enough people will buy enough to make people truly secure.  As to timeline for this to happen, and how to kick-start this virtuous cycle, I have no idea

The Verdict

The more responsible and diligent the crypto community becomes, the more every sound protocol will benefit, and crypto will become a genuine hedge against inflation. Because cryptocurrencies currently follow growth stock patterns, they act as a good hedge against inflation during periods of stable growth but fail during times of financial crisis. As cryptocurrencies evolve, they’ll become an effective bulwark during these downturns too. 

I ran into many sentiments like this one in my research.  But I feel that I must ask, when do you NEED a hedge against inflation?  Most likely it is during those times of fiscal and monetary stress.    Given this, it seems most prudent to not assume cryptocurrency to be a good inflation hedge.  This might force us to confront  the inconvenient truth that we need to keep searching.

REFERENCES

https://www.fool.com/investing/2022/10/17/is-bitcoin-a-hedge-against-inflation/#:~:text=One%20that%20might%20come%20to,of%20a%20hedge%20it%20seems.

https://www.coindesk.com/business/2022/11/10/what-bitcoins-inflation-hedge-narrative-needs-more-time/

https://cointelegraph.com/news/crypto-will-become-an-inflation-hedge-just-not-yet

https://www.yahoo.com/now/cryptocurrency-inflation-hedge-135115613.html

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

 

Porn To Be Wild!!

Headline: Is cryptocurrency used in the porn industry?

Body:  OK, this one is a little kinky.   On a lark, I threw out the idea that cryptocurrency might  be a  part in the “adult entertainment” industry.    Well, as it turns out, it is involved, intimately.  I suppose this shouldn’t have been too much of a surprise because porn is often on the leading edge of many technologies.   (How do you think we began to have coinage?}  Yet, still, I was somewhat surprised.  Perhaps you will be too.

Why might the porn industry want to embrace cryptocurrency?

1.  Digital payments are difficult to stopà Sometimes there are politicians who claim to want to “clean up” this district  (Remember Larry Craig?)  Digital payments would make sex workers less dependent upon the whims of the latest politics.
2. There is already history here.  Litecoin can be used on Pornhub, and there is some evidence of other porn-related cryptocurrency like $SPANK.  On the $SPANK blockchain, one can purchase sexually-explicit NFTs.  
3. Porn is fairly specialized , so, the same guy is likely to go to the same sites.    Thus, if each site has their own coinage, this would still be practical for both the  user and the website owner.
4. Even a place like Pornhub has some sexual-related fetishes that they won’t display.  (This is difficult to fathom, but then I watched Law & Order SVU and I was then informed that I was niave.)  If a performer wanted to do these things, they could accept payment in cryptocurrency themselves, and be completely independent.
5. Use of cryptocurrency allows for a certain degree of ‘anonymity. 
6. Within a democracy, it seems to be a good thing most of the time, to “push the envelope” of what is legal v. what is not.
7. Venmo, Paypal and Square can decide suddenly not to process payments.   There was one sex worker (who is now a major cryptocurrency advocate) who was red-flagged from all 3, and she began to accept  only cryptocurrency.  In another episode, a porn actress had all of her credit cards declined.  When she called customer service, they wouldn’t reveal the problem until they received a written letter from the performer.
8. When one bank decides to stop transacting with a performer, they go to Bank #2.  Then, when Bank #2 decides to stop transactions, they go to Bank #3.   This is called “platform hopping” and gets the attention of the government FINCen computer network.
9. Porn is significantly attractive from a renumeration standpoint.   One ICU nurse (making $84,000 per year) left the profession to make $1.3 Million thru OnlyFans.
10. Recently, OnlyFans rolled out a new policy to not allow sexual content.   Due, ostensibly, to loss of business, blowback and potential loss of business, they reversed their policy a few days later.  If the performers accepted cryptocurrency, they could neatly sidestep these policy whip-lash changes.
11. One very large challenge when accepting credit card payments is “chargebacks”.  In this case, a cardholder will claim that they never received a good or service.   Given the ephemeral nature of porn, it is not surprising that many people suggest they never received services.   But, when using cryptocurrency, these transactions are on the blockchain and are immutable.
12. In 2 enigmatic tweets, Elon Musk has appeared to back one porn site that offers its’ own NFTs.

Why might the porn industry NOT want to embrace cryptocurrency?

1.  There is a rather steep learning curve for the performer to learn how to use cryptocurrency.   Interestingly, there also seems to be a wide-spread feeling that Bitcoin should not be used to pay for porn.  These are 2 major problems that the performers are facing now.
2. Coinbase cannot be used because, due to KYC restrictions, these accounts have to be associated with a real bank account, and these performers often cannot get them.

There is a kind of cryptocurrency that rewards people for both creating and  consuming porn.   This is called the Vice Industry Token.  Some might initially laugh when considering that somebody is paid for watching porn (I laughed), it kind of makes sense.  Producers of porn make less than half of their revenue from subscriptions and make the majority from in-place advertisements.  Given this reality, it makes sense that the audience might be rewarded for allowing themselves to be “exposed” to advertising.  Further, by rewarding them in this manner, keeping metrics on the consumers is much easier, and advertisers like this.

Congress passed a law in 2018, called FOSTA, largely in response to the Backpage debacle.    This is an Act that aims to minimize sex trafficking, but many performers complain that they are caught up in the restrictions too.  This is a real problem because it drives the entire industry even further underground, and makes even more abuse more possible.

 The Verdict

“They’ve attacked our banking; our ability to operate like the rest of the world,” explained DiAngelo. “You don’t exist if you can’t use the banking system.”  These are the words of a very well-known porn performer.  And, she is right.   In this country, just think of the cannabis dispensaries who have to spend so much on vaults and security largely because no bank will take their money.   For a larger example, look at Russia.  They were deleted from the SWIFT network and now, they have to look very hard to find people who will do any sort of business with them.   Point is, she is right.

It is a difficult thing to wrestle with.   Our capitalistic society can become so moralistic.    I think the point is well-taken.   If something is not illegal, it is therefore legal.   If the politicians want to outlaw something, they should.    Of what’s left, they should probably be equally accepting.  Once again, I think it comes down to fear.   Mastercard has a fear that sex work on the internet could become illegal, and they are afraid of being associated with the stigma against porn.  Personally, I think they need to take a stand.   Either you’re against porn (and willing to pass up a LOT of money), or ok with porn, and you can enjoy a large new revenue stream.   To do anything in the middle would be to trap a lot of people underwater, financially.

REFERENCES

Should Crypto and Porn Get Intimate? (coindesk.com)

What’s the Vice Industry Token—A Crypto for Porn? (investopedia.com)

Bitcoin a lifeline for sex workers, like ex-nurse making $1.3 million (cnbc.com)

Italian Cryptocurrency Project Plans to Pay Users to Watch Porn (cointelegraph.com)

REFERENCES

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

Is “iot” just the ending to “idiot” or is there something here?

Headline: What is the Internet of Things?

Date:

Body:  I love the commercials with the touch screen on the fridge.   With a stylus, you can write a virtual grocery list, and then have your fridge e-mail it to you when you’re at the store.    I was reading an in-flight catalog (remember those?) and I saw a toaster that would toast the weather forecast on your bread in the morning.  A buddy of mine got an e-mail from his car reminding him that it needs an oil change.     All of these examples are the Internet of Things (IoT).  BTW, there is a fascinating history of the IoT, reaching back into the 1970s where they had dreams of the “pervasive computing.”   I encourage you to read this wonderful (brief) timeline showing that scientists have been wrestling with IoT for decades.  I have decided to not share it here for the attribute of brevity.

OK, so, what is the IoT really?

Really, the IoT is a network of devices that speak with one another.  Your fridge might notice that you are running low on margarine, but, your wearable device notices that your body mass is increasing, and it decides not to e-mail you the idea of buying more margarine.    This really encapsulates both the good and the bad.  It’s good that the fridge will e-mail you a list of things you need to buy.  But, it is sort of creepy to know that  your devices might be changing their behaviors based upon a change in your behavior.   (Remember Furby?  That was a very simple device, but, people felt very odd even holding it upside down.)  This is itself  more than just a little creepy.

This is a little crazy, can you give me some examples?

1.  Wearable devices (like Applewatches) can be worn to monitor and manage diseases.
2. At home, robotic vacuums and security systems can be used to keep our homes clean and safe.
3.  In your vehicle, there are OED codes, and this is not far removed from your car e-mailing you about your car needing service
4. Cities can use these devices to help adapt traffic (charging different rates based upon  congestion.) and monitoring of environments, like earthquake sensors.
5. Outside cities, sensors placed inside railroad tracks can tell operators what routes are most direct and clear of traffic.

So where is the line?

Many people have suggested only allowing the IoT to connect to industrial machines.  For example, there is a vending machine, and it notices that the diet Coke  is getting low.   It can e-mail you with a reminder to buy more Diet Coke.  This system would both greatly increase efficiency and cut down on waste.

What are the challenges?

There are 3 main challenges.   First, to truly embrace the concept of IoT, many devices need to be connected and speak with each other.   Because many different devices use different protocols to communicate, connecting these devices logically, is not easy.   Second, and possibly more important, any time that you introduce a set of new connections, you have many new security risks.  Multiply that by MANY and you can begin to see just how big a problem this might be.  Third, this level of surveillance on your life is really creepy, even with the opportunities it brings.   Imagine that your Applewatch could reliably tell that you are having sex?  Might it contact a nearby camera, and SEVERELY interfere with your privacy?  On the other hand, a friend of mine just bought a new Applewatch for his wife.  She started wearing it, and the next day, the watch told her to call 911.   She was in A-fib.  The Applewatch she got the night before, probably saved her life.  These are complex issues.

What dynamics could affect adoption of IoT?

Direction of Likely Effect	Description of Dynamic
Encouraging Adoption of IoT.	Adoption will be faster if the regular citizens find value in the advantages offered by IoT.
	Adoption will be faster if technology underpinning IoT is more affordable.
	Adoption will be faster if more people have access to 4G and 5G networks.
Discouraging Adoption of IoT.	Adoption could be delayed if the changes required are not managed well.  (Especially important is managing the behavior of end users.)
	Interoperability issues could delay the adoption of IoT.
	If security issues are not solved, then installation will likely be delayed, and IoT advantages will be delayed.

So, are there new standardbearers?

Yes, there are hundreds of standards being worked on, per the IEEE.  There are 2 that appear to be farther along than the rest.  First, Microsoft is working on a standard, and many of the devices running their software will abide by it.   (How much will this add to their monopoly?)  There is another, Hypercat, which is already being utilized by Intel, BAE Systems and Accenture.  Interoperability is the watchword (and currently dream) of all of these standards.

The Verdict

We have traveled a great deal down this IoT road.   So far, in fact, that we are becoming cognizant of just how much further we have to go.  I predict that IoT will be rolled out slowly.   You might see some robust “pervasive computing” at some places like doctors’ offices and universities.   But, as normal citizens begin to see that the benefits are quite impressive, and the risks are beginning to be managed, adoption of IoT will happen.   I sense it.

REFERENCES

https://www.wired.co.uk/article/internet-of-things-what-is-explained-iot

https://www.mckinsey.com/featured-insights/mckinsey-explainers/what-is-the-internet-of-things

https://www.trendmicro.com/vinfo/us/security/definition/internet-of-things

https://www.kaspersky.com/resource-center/definitions/what-is-iot

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

Should Unhosted be Boasted?

Headline:  What is an unhosted wallet?

Date:

Body:  So, it should be said that in Europe, they do things differently.  Police sirens sound quite different, the approach to marijuana is often different,  and their approach to cryptocurrency and related matters is also, quite different.  Much has been made on their embrace of a “right to be forgotten” and roughly what that means, is that as time goes on, they instill safeguards to make it less and less probable that Internet surfers will uncover things from the distant past.   For instance, if you went to the 2022 office Christmas party and drank a little too much egg nog, I fear to say that the footage of you sitting on the Xerox machine will likely be quite easy to get to.   But, let’s say, that 5 years before, you got soused again at that party and did an acapella version of “When I think about you, I touch myself,” you might very well be protected by a law requiring content hosts to  make this MUCH harder to find.   Now, if only we could figure out how to erase it from our buddy’s cellphone…

So, in general terms, the Europeans tend to be fairly progressive.   And, in line with that, there was a piece of legislation that was recently rushed into Parliament that would require a certain set of disclosures with respect to any cryptocurrency ICO.  The stated reasons for these disclosure requirements is largely to avoid money laundering, and these regulations could make it impossible to have an “unhosted wallet.”  (In other news, there is a new bill that is looking for support, to not allow the U.S. government to issue a Central Bank Digital Currency (CBDC).)

So, what is an unhosted wallet?

OK, let’s approach this from the other direction.   Let’s say I went to Coinbase and setup an online wallet with them, this would be a hosted wallet, as they are, for a fee, holding my digital assets.  But, let’s say that we didn’t trust Coinbase or any other, and we wanted to keep all of our digital assets in a cold wallet that we had possession of.  This cold wallet would be an example of an “unhosted wallet” and they are easily used for money laundering activities.    You can think of unhosted wallets as being the same as anonymous bank accounts.  The regulation being considered would force an intermediary to report when there is a significant transaction using cryptocurrency entering or leaving an unhosted wallet.  This is not without precedent.  When there is a cash transaction over $10,000, the Bank has to report this transaction..

If not for money laundering or other nefarious purpose, why would one use an unhosted wallet?

One might be totally unconvinced of the safety of online storage of your digital assets and instead, prefer holding them in a cold wallet, locked away in your fireproof safe at home.  One might just feel it important not to flash one’s identity all over the internet.  That said, cryptocurrency is perfectly situated to be an ideal vehicle for money laundering, so, this fear is understandable.

In other regulatory news…

Options allow the investor to bet on the direction and timing of a security’s valuation change.  For instance, if you think that Stock A will have a large swing up soon, you might purchase an option that gives you the right to buy a quantity of this stock at the current price.  If executed, the difference between the strike price and the market price would be profit to you.  Some very smart bankers have even developed options on cryptocurrency.   Some have tried to offer their options for purchase on the well-known Chicago Board of Trade.  Regulators just said that they couldn’t do this because there isn’t a properly surveilled market for the underlying asset.     It seems that the Grayscale Bitcoin Trust is trying to offer its own set of options, meanwhile, arming themselves for what might an epic legal battle.

Meanwhile, in the U.K., there is a similar battle brewing.  The Exchequer  (roughly equivalent to our Treasury Department) commissioned a report, and in this report, the conclusion was that unhosted wallets were not a problem.   To quote the report, “The government does not agree that unhosted wallet transactions should automatically be viewed as higher risk… and there is not good evidence that unhosted wallets present a disproportionate risk of being used in illicit finance.”   Nobody likes the IRS which represents the bulk of our Treasury Department, but, I have to think that they and the Exchequer across the Pond are probably fairly credible independent sources, and these reasonable sources seem to disagree at some level.  The boil-out seems to be that anything could happen.   So, grab some popcorn, and then buckle up because this is going to be interesting.

The Verdict

So, we have a fundamentally different understanding of the potential of cryptocurrency as compared to the U.K.  The question of why must be raised.   Of all of the articles I have read, the U.K. is on a rather extensive campaign to enforce policies to entice cryptocurrency firms to their shores.  In view of this, I think it’s quite possible to see why their internal report turned out so differently than our understanding of cryptocurrency.  The question remains, who holds the more profitable position as it relates to cryptocurrency?   We shall find out.

REFERENCES

https://cointelegraph.com/news/law-decoded-unhosted-wallets-are-just-wallets-march-28-april-4

https://home.treasury.gov/system/files/136/2020-12-18-FAQs.pdf

HM Treasury rolls back proposal to collect data from unhosted digital currency wallets

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

Unhosted is the Most Best?

Headline:  What is an unhosted wallet?

Date:

Body:  So, it should be said that in Europe, they do things differently.  Police sirens sound quite different, the approach to marijuana is often different,  and their approach to cryptocurrency and related matters is also, quite different.  Much has been made on their embrace of a “right to be forgotten” and roughly what that means, is that as time goes on, they instill safeguards to make it less and less probable that Internet surfers will uncover things from the distant past.   For instance, if you went to the 2022 office Christmas party and drank a little too much egg nog, I fear to say that the footage of you sitting on the Xerox machine will likely be quite easy to get to.   But, let’s say, that 5 years before, you got soused again at that party and did an acapella version of “When I think about you, I touch myself,” you might very well be protected by a law requiring content hosts to  make this MUCH harder to find.   Now, if only we could figure out how to erase it from our buddy’s cellphone…

So, in general terms, the Europeans tend to be fairly progressive.   And, in line with that, there was a piece of legislation that was recently rushed into Parliament that would require a certain set of disclosures with respect to any cryptocurrency ICO.  The stated reasons for these disclosure requirements is largely to avoid money laundering, and these regulations could make it impossible to have an “unhosted wallet.”  (In other news, there is a new bill that is looking for support, to not allow the U.S. government to issue a Central Bank Digital Currency (CBDC).)

So, what is an unhosted wallet?

OK, let’s approach this from the other direction.   Let’s say I went to Coinbase and setup an online wallet with them, this would be a hosted wallet, as they are, for a fee, holding my digital assets.  But, let’s say that we didn’t trust Coinbase or any other, and we wanted to keep all of our digital assets in a cold wallet that we had possession of.  This cold wallet would be an example of an “unhosted wallet” and they are easily used for money laundering activities.    You can think of unhosted wallets as being the same as anonymous bank accounts.  The regulation being considered would force an intermediary to report when there is a significant transaction using cryptocurrency entering or leaving an unhosted wallet.  This is not without precedent.  When there is a cash transaction over $10,000, the Bank has to report this transaction..

If not for money laundering or other nefarious purpose, why would one use an unhosted wallet?

One might be totally unconvinced of the safety of online storage of your digital assets and instead, prefer holding them in a cold wallet, locked away in your fireproof safe at home.  One might just feel it important not to flash one’s identity all over the internet.  That said, cryptocurrency is perfectly situated to be an ideal vehicle for money laundering, so, this fear is understandable.

In other regulatory news…

Options allow the investor to bet on the direction and timing of a security’s valuation change.  For instance, if you think that Stock A will have a large swing up soon, you might purchase an option that gives you the right to buy a quantity of this stock at the current price.  If executed, the difference between the strike price and the market price would be profit to you.  Some very smart bankers have even developed options on cryptocurrency.   Some have tried to offer their options for purchase on the well-known Chicago Board of Trade.  Regulators just said that they couldn’t do this because there isn’t a properly surveilled market for the underlying asset.     It seems that the Grayscale Bitcoin Trust is trying to offer its own set of options, meanwhile, arming themselves for what might an epic legal battle.

Meanwhile, in the U.K., there is a similar battle brewing.  The Exchequer  (roughly equivalent to our Treasury Department) commissioned a report, and in this report, the conclusion was that unhosted wallets were not a problem.   To quote the report, “The government does not agree that unhosted wallet transactions should automatically be viewed as higher risk… and there is not good evidence that unhosted wallets present a disproportionate risk of being used in illicit finance.”   Nobody likes the IRS which represents the bulk of our Treasury Department, but, I have to think that they and the Exchequer across the Pond are probably fairly credible independent sources, and these reasonable sources seem to disagree at some level.  The boil-out seems to be that anything could happen.   So, grab some popcorn, and then buckle up because this is going to be interesting.

The Verdict

So, we have a fundamentally different understanding of the potential of cryptocurrency as compared to the U.K.  The question of why must be raised.   Of all of the articles I have read, the U.K. is on a rather extensive campaign to enforce policies to entice cryptocurrency firms to their shores.  In view of this, I think it’s quite possible to see why their internal report turned out so differently than our understanding of cryptocurrency.  The question remains, who holds the more profitable position as it relates to cryptocurrency?   We shall find out.

REFERENCES

https://cointelegraph.com/news/law-decoded-unhosted-wallets-are-just-wallets-march-28-april-4

https://home.treasury.gov/system/files/136/2020-12-18-FAQs.pdf

HM Treasury rolls back proposal to collect data from unhosted digital currency wallets

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

 

NFTs in Healthcare

Headline: How are NFTs used in healthcare?

Date:

Body: 

Not too long ago, I found myself in the hospital with pneumonia.   While there, they had me constantly hooked up to a 12-lead EKG and all manner of other machinery.   Mainly for this reason, I was interested to read that they are now using NFTs in the healthcare area.  I thought this was worth a deeper dive, so, here it is.

Basic Training

Many might profitably ask, “What is an NFT?”  This stands for “non-fungible token” but that’s not too much help.  Have you ever purchased a gold or silver coin?  Probably commemorative of some occasion?   I have one of the Wright Bothers flying their “kite” in South Carolina, and in case you doubted it was silver, it came with a Certificate of Authenticity.  The NFT is like a digital representation of this certificate, along with some limited rights attached.   Given this understanding, I was curious what it might have to do with healthcare.

Can you provide some examples of how NFTs are used?

In one example, each person who donates blood gets assigned an NFT that represents them.  This is important because with this NFT applied, that blood can be tracked from donor to hospital to done.  So, if there is a problem found later with that blood, the people affected can be easily tracked down and consulted, and the damage  controlled.   This is sometimes called tokenized blood.   Further, a digital “twin” to an organ could be created, leading to less rejection and a much greater sense of safety.  

Both of these foregoing examples are pretty straightforward as positive.  The widespread use of NFTs is allowing patients to monetize their own health data.   Each year, there are $1.2 Billion USD of clinical documents produced, and 80% is still vulnerable to misuse and theft.  This is a great opportunity for drug companies AND patients because it represents a fantastic pool of trackable research subjects (AI is in heavy use here), and it could be easily used as an income stream for the patients, as they could see where their data went, and demand royalties at the appropriate institutions.  Clearly, that information is valuable. “In the era of big data, health information is its own currency; it has become commodified and profitable,” says Dr. Amy McGuire.

It has also been suggested that NFTs could make it more likely that people share lifesaving research.   These days, when people publish their work, they really give up a lot of control over it.  If an NFT could be applied to this research, ownership could be easily demonstrated, and people might be more likely to share research that could be used to save or extend lives.

It appears that the applications could be legion.

Not all people feel positively about NFTs in healthcare.

NFTs can be vulnerable to data security issues and disputes over intellectual property rights.  What if somebody claims that the incorrect NFT was paired with some blood donation?   There might be so much faith, that the sample is not appropriately tested.  Further, we mentioned in the beginning that the NFT was a Certificate of Authenticity.   This means that certain rights attach, and yet, some don’t.  The particularity of which rights attach is something that will, no doubt, be litigated.

And, they’re right, there are challenges using NFTs in healthcare.

The smart contracts related to Ethereum have to be carefully engineered to be interoperable from blockchain to blockchain and work in other systems.   To mitigate this risk, each NFT (and an NFT is at root, just a smart contract) needs to be tested within multiple environments.  Constant auditing of results is also necessary.

There are also privacy concerns.  The smart contracts aren’t always compliant with HIPAA or the E.U. legislation, GDPR.    Vastly oversimplifying, GDPR encodes a “right to be forgotten,” and these smart contracts are on the blockchain, so, they are indelible.   It is still unclear how the smart contracts should be written to accommodate the GDPR.

The final problem facing NFTs in healthcare is a human resources problem.  Frankly, experts are very thin on the ground.   As a result,  there is little to no knowledge transfer to the people who would have to run this program.  The fix will likely be provided by the market.   As NFTs become central to healthcare, there will be firms formed that will specialize in setting up workshops and implementing pilot programs.

The Verdict

I think NFTs within the Healthcare industry is interesting.   There could be many benefits, and most of the problems could be mitigated.     As of right now, I think it’s still a bit early.  But, I think it’s nearly inevitable that this is where it’s going.  The potential benefits are just too much to pass up.

REFERENCES

Tokenized Blood? How NFTs Are Transforming Healthcare (forbes.com)

NFTs in healthcare: Is it a hype or hope? | Netscribes

NFTs could revolutionize healthcare, bioethicists say (fastcompany.com)

NFT in Healthcare: Know Its 8 Game-changing Applications (thescientifictriangle.com)

 Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.