I Love it When a Plan (Eventually) Comes Together!

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Headline: What is NCET?

Body:    So, I grew up in the 1980s, and I loved watching the A-Team.  Each team member would have different skills, and added up, all of the efforts would serve to magnify their effect.   This seems to be the idea behind National Cryptocurrency Enforcement Team (NCET) with respect to the $2 Trillion cryptocurrency area.

Do they ride around in a black van, or did they have jobs before?

They all worked for the Federal Government before.   Specifically, they come from a few sources:

  1.  Money Laundering and Asset Recovery Section (MLARS) within the DOJ
  2. Computer Crime and IP Section
  3. Personnel detailed from the U.S. Attorneys’ Office

The leader within NCET will report to the Assistant Attorney General (Criminal Division.)

Interesting…

Yes, it is interesting.   The mission statement for the NCET is full of the verbiage you might expect, but it interestingly focuses upon recovery of ill-gotten gains.  NCET will also focus upon providing specialized assistance to State and local municipalities to help them as they struggle to control these technology-linked crimes.    Later in the Press Release, the exact functions of the NCET is discussed and all the bullet points are kind of as expected.  But the last one is special.  It says that NCET personnel will be working with many different cryptocurrency firms to help understand and guide the self-governance of the industry.  So, they seem to have a rather intriguing portfolio.  They have to  prosecute crimes perpetrated by people who are almost their colleagues.      I know that this might not pass the sniff test.   But, with any nascent technology, I think government really has to begin in this posture.  Before we had the FAA, pilots and executives  from the small airlines were doubtless advising the regulators.

BREAKING NEWS!!!

The DOJ announced the appointment of the Director of NCET, Eun Young Choi.   She is a prosecutor with almost 10 years experience within the DOJ.  She seems to have been genetically engineered for the job.   She attended Harvard Law and served as a Cryptocurrency coordinator within the Courts.    She also has a Bachelor’s Degree in Economics.  She certainly has the technical chops for the job, and seems to have the leadership experience.  Beyond this, colleagues refer to her as “EYC” which sounds akin to a WWF wrestler’s moniker.  So, she seems especially prepared to put the smackdown on cryptocurrency schemes.

So, it’s ALL good?

Well, maybe not.  Admittedly my research is not canonical, but, it seems like the small team might have a portfolio out of proportion with their size.   The information I read talked about going after narcotics, hacking exploits and ransomware in addition to the enforcement of more standard Federal Regulations.  This seems like a very unfocused mandate that could quickly become unmanageable.  I think Ms. Choi will have her hands full.

The A-Team had an almost equivalent squad of Army MPs chasing them.   Is this happening here?

Yes.    The FBI is in the process of creating their Virtual Asset Exploitation Unit.  The particulars of this office also seem to be in a developmental phase.  But, even now, it appears that the FBI team will be focusing on the  state actors like North Korea and Iran, and tumbling or mixing companies in cryptocurrency.  (Mixing and tumbling are just ways to help disguise the source of funds used in cryptocurrency.) Regardless of the focus of each group, they both appear to be well-designed for effectiveness, as the Federal Government has a pretty good record overall.  The Government recovered almost all of the money paid to the perpetrators of the Colonial Pipeline incident.

The Verdict

“The department has been at the forefront of investigating and prosecuting crimes involving digital currencies since their inception,” said Director Choi. “The NCET will play a pivotal role in ensuring that as the technology surrounding digital assets grows and evolves, the department in turn accelerates and expands its efforts to combat their illicit abuse by criminals of all kinds.”   This quotation is what is expected from a leader within the Federal Government.   But, I am a little concerned about the latter portion.  “Grows and evolves…accelerates and expands.”  It’s always something of a sport within the Federal Government to engineer your mandate to be very broad and command a larger portion of the budget.  Unless carefully shepherded, this ambiguity in mission could either provide them the flexibility that they need, or, such a large portfolio, that they are courting disaster.  I sincerely hope it’s the former, and not the latter.

REFERENCES

https://www.justice.gov/opa/pr/deputy-attorney-general-lisa-o-monaco-announces-national-cryptocurrency-enforcement-team

https://www.justice.gov/opa/pr/justice-department-announces-first-director-national-cryptocurrency-enforcement-team

https://www.cooley.com/news/insight/2022/2022-02-24-us-justice-department-appoints-first-national

https://news.bloombergtax.com/daily-tax-report/doj-amps-up-crypto-scrutiny-naming-head-of-new-enforcement-team

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.

 

How Sleazy was C.Z?

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Headline: Was Binance involved In Money Laundering?

Body:  Remember that old fable where father and son are trapped in a tower, and the father uses wax an feathers and fashions wings to safely bring him and his son to the Earth surface?  Son was having so much fun, he flew too high, the wax melted, and his wing fell apart, and he crashed.  Remember that one from High School?  It appears that Binance, also, might’ve flown a bit too close to the sun.  This whole thing might be funny, except many people lost real money.  In fact, not so long ago, FTX applied for Bankruptcy, but before that, Binance was thinking of purchasing FTX.

The subpoenas do not lead directly to charges being filed, but it should be noted that Binance is negotiating with the Federal Government to come to a settlement.    In my opinion, this should probably not be a surprise for any cryptocurrency exchange.   Think of how new cryptocurrency is: the laws are barely keeping up with it.   And then, somebody puts up a website, willing to trade one currency to another?  This, of necessity, must live near the edge of the envelope of the Law.  This makes it unsurprising to hear critics saying that the business operations of Binance are difficult to completely understand.

For their part, Binance is doing everything they can to foster better relationships with regulators:

  1.  In 2022, Binance increased the size of its compliance staff 500%.  According to some reports, Binance specifically tried to hire personnel away from agencies like the IRS.
  2. Developed a global advisory board, headed by a former Senator.
  3.  Became very active in lobbying for crypto firms, and educating Washington politicians.

As a result of their efforts, and the complexities of the case, prosecutors within the DOJ appear to be split on further steps.  In addition to these challenges, there appears to be a turf war within the Federal Government regarding who needs to sign off on which prosecution.  It would appear that defense attorneys are already in talks with the DOJ.  (In case you were concerned about the well-being of the executives involved, their attorney did previously work for the Federal Government.    So, don’t let it bother you too much.)

Is there really a fire here?   Or is it all just smoke?

Reuters has investigated Binance’s financial crime compliance over the course of 2022. The reporting showed that Binance kept weak anti-money laundering controls, processed over $10 billion in payments for criminals and companies seeking to evade U.S. sanctions, and plotted to evade regulators in the United States and elsewhere.  Binance is clearly a leader in crypto now, having processed trades of about $1.6 Trillion in October, alone.  Their second problem seems to be that a Mexican drug cartel successfully laundered between $15-40 Million of proceeds.  To make things even worse for Binance, they are having problems producing the evidence asked for.    This difficulty is primarily due to CZ’s company-wide policy of not often using e-mail.  This policy, taken together with other behavior of Binance (such as allowing account holders to open accounts with only an e-mail address) suggests to me that there may be much more than smoke in the air.

More officially, Binance and their executives are being prosecuted under the Bank Secrecy Act, which requires Binance to make many regulatory filings and become part of the Treasury Department’s FINCEN network.   It would appear that Binance might have failed to do either.  Currently, the DOJ is looking mostly for e-mail that gave directives such as “destroy evidence” or “remove evidence from U.S.”  We’ll see how this goes.

The Verdict

Binance told Reuters, “We are proud to have in our ranks some of the most celebrated cyber investigators representing virtually every single major international law enforcement agency across the globe.” Binance said they have around 300 investigators working “to protect users from illicit actors.”  Add to this the fact that Binance just hired a law firm featuring a former chief of one of their main regulators (the Money Laundering and Asset Recovery Section, MLARS) and I think we have the makings of a typical (depressingly) government/private enterprise “very special hug.”  We have seen this pattern hundreds of times before, notably within the EPA, where the government worker will only be moderately paid by the Federal Government for 5 years, then they are given the keys to their new Mercedes when they accept a new compliance department job at a coal mining company.  I just wish that cryptocurrency would have been different.

REFERENCES

https://www.coindesk.com/business/2023/01/07/us-investigators-subpoena-hedge-funds-in-binance-money-laundering-probe-report/

https://www.reuters.com/markets/us/us-justice-dept-is-split-over-charging-binance-crypto-world-falters-sources-2022-12-12/

https://www.forbes.com/sites/thomasbrewster/2022/12/19/mexican-drug-gang-money-laundering-over-binance-crypto-exchange/?sh=47e2b054a595

https://www.thestreet.com/investing/cryptocurrency/crypto-problems-grow-binance-might-face-charges

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.

 

Sybiling Rivalry?

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Headline:  What is a Sybil attack?

Body: 

In the field of psychology, there is a disorder called dissociative identity disorder, or more commonly, multiple personality disorder.  These poor people have almost uniformly experienced an elongated period of physical and psychological trauma, and it is very serious.  One of the best known case studies is “Sybil” (a.k.a. Sybil Dorsett.)  The outfall is that, seemingly randomly, different portions of her personality would come forth, out of proportion with the situation.  This is the crux of dissociative identity disorder.    In cryptocurrency, some people have taken over several nodes within the network (like multiple personalities in our example) and this has become known as a Sybil attack.

Can this really cause problems?

Yes, it can.   People who take over several nodes on the blockchain, can artificially expand their voting power.   They can even extend to refuse validation  of transactions, and this can be harmful to the currency.  If they control over half of the nodes on the network (a 51%  attack) they can significantly affect the order of transactions being validated or even reverse  some of the already validated transactions.  Scientists have been working diligently to come up with a solution to not allow these attacks, but, their attempts have yet to be successful.

Are there defenses to prevent Sybil attacks?

Yes, there are defenses.   Primary is the consensus algorithm used with that cryptocurrency.  Whether it be Proof of Work, Proof of Stake or some other model, they are all designed to make Sybil attacks expensive enough to be unfeasible.

Do these consensus models really work to keep people honest?

I think it does.    Not long ago, a University of Michigan professor did a study of the impact of reputation upon E-bay results.  The Swansons sell vintage postcards, and have an exceedingly high score for customer satisfaction.  Professor Resnick asked them to set up several fake accounts that would later go on to have either neutral or negative reputations.   During the period of the experiment, their main page made an average of 8.1% more than even the best of the fake accounts.  The point is that a good reputation tends to maximize your profit, snf  you would be wise to do what you could to preserve your good name.    This belief underlies the whole idea of decentralized finance.

Similar gaming of reputation has happened all over the Web.   Yahoo shopping had a store that had many reports of bad experiences, but they still had a stellar score since their network was setting up fake sales, attached to glowing recommendations.  They booted the vendor from the network, they changed names, and came right back.  A news aggregator called Digg also had a similar artificial reputation boosting problem, and this affected which stories were placed on the valuable front page.  Would anybody be surprised that there are businesses that make their money helping people to game these systems?   Yes, there are many of these.

The Verdict

Sybil attacks appear to be very real, and we need to strive to find ways to make them less effective.   This is all true.   What strikes me, though, is how similar this attack is to the others we have discussed.  Yelp has been attacked in a similar manner.   There are 2 restaurants, Restaurant A and Restaurant B, and they are the only 2 within one town, so they are competing.    The owners of Restaurant A might contact their friends and say, “Please give us a glowing review on Yelp.   At the same time, please give Restaurant B a terrible review.  Thus, through no fault of their own, the reputation of Restaurant B will go down.  My point is that you have to be very careful when considering investment into a cryptocurrency.  They could be artificially hyping their own currency (think FTX) or downgrading another currency.   Read the whitepaper, read the trustworthy blogs about this cryptocurrency, investigate the management team, and then ask yourself if you feel comfortable to give them some of your hard-earned money.

REFERENCES

https://academy.binance.com/en/articles/sybil-attacks-explained

https://www.wired.com/2007/03/herding/

https://www.sciencedirect.com/topics/computer-science/sybil-attack

https://coinsbench.com/having-difficulty-understanding-consensus-and-sybil-attacks-on-the-blockchain-read-this-1b112845a8b1

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.

 

Blockchain is Growing Like Weed.

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Headline: What is Mile High Labs and how do they use blockchain?

Body: 

What is Mile High Labs and how are they using blockchain for compliance?

Body:  OK, time for complete honesty.   I was attracted to this topic most quickly by the title.  But, as I thought about it a  little, it made a lot of sense that blockchain might be used in this application.   Mile High Labs is based in Colorado, where pot is legal, and this company was formed to help growers track their products from seedling to plant to dispensary to customer.  Given that marijuana is so tightly controlled in most states, it seems clear that there should be some sort of evidence that certain products were grown, dispensed and enjoyed in a jurisdiction where it was legal to do so.  Customers would feel better knowing where the products came from.   Banks would be more likely to make loans to farmers and dispensaries if the provenance of the products could be proven.  Regulators could feel better that they made a good decision (and justify it to taxpayers) if there were some way to prove where the product came from and was used.  Everybody would benefit. 

Are they serious?

Most of the time, yes.   But, some of the language used in the articles mentioned have some very entertaining turns of phrase.    I thought I might just quote one piece

Supply chain transparency provides yet another example of blockchain applications in the cannabis industry alongside financial services, which are currently difficult to come by for cannabis enterprises. According to a joint (no pun intended) press release, the budding cannabis industry leaves many consumers for want of information on how their products were grown, transported and handled.

OK, back to business

When you’re in the grocery store, do you ever wonder  the difference between “organic” produce and the “non-organic” produce?  Many times, I have stood in the grocery store and looked at 2 displays of bananas.    One had a large sign that says, “Organic” and these bananas are significantly higher in price.    The ones to the right are not labeled organic.   Both look identical to me, and a taste test came to the same result.  Some people would probably appreciate knowing where the bananas were grown, picked, their  shipping history, and how long they had been at the store, among other details.  (I don’t, but some people do.)  And there is some logic behind their demand for more information about their fruit; If your body is a temple, you want to make sure that only true believers are admitted.     If this is true of bananas, what if somebody is contemplating the rather expensive purchase of an herb that will temporarily change their neurology?   I can easily imagine the desire to understand the purity of this product, even more than bananas, which normally do not change your neurology (If they do, I suspect monkey business.)

Are there other firms doing this work?

Of course there are, God Bless capitalism.  Within the U.S. alone, there are at least 2 others trying to do the same thing.   One is TruTrace Technologies and the other is Paragon in Los Angeles.  At the bottom of the globe, there is an Australian company, Parsl, doing nearly the same thing.

Does the blockchain record information related to purity?

Yes, the results of many state-mandated lab tests are encoded into the blockchain.  Those lab tests speak to the processes and ingredients found in every batch of cannabis from every grower, producer, and dispensary. The cannabis has to be tested for heavy metals, pesticides, mold, and other contaminants, combined with potency and terpene levels.   In an ideal system, all of this information could be encoded into a QR code and scanned by the customer.  This technique was originated by the TruTrace company with their StrainSecure technology, applied to “cannabis water.”  A consumer can walk into the dispensary, scan the code, and learn everything about the product.  

Are there problems to be solved?

Certainly there are problems yet to be solved.  Apparently one issue is that the product information should be accessible 24/7,  and apparently uptime can be less than 100%.  Regulators not keen on legalization of pot have often seized on this perceived weakness.  As we speak, ‘Rhode Island is thinking of legalization and sent out an RFP to companies who maintain blockchains related to marijuana.   In that debate, uptime percentage was a major point of contention.

There is a second problem, too.  Standardization of dosage, knowledge of duration of effect and side effects, etc. are linked to a drug’s NDC number within the U.S.   Cannabis-products have no   similar index to help patients understand what to expect from their experiences.

In my research, I came across a Press Release from Mile High Labs announcing their new Innovation Lab.   Each of the problems I have already identified facing the industry were addressed within the body of the release.  The gist is that Mile High Labs is looking for up to 10 partners to take on all of these problems together, in a collaborative manner.

The Verdict

“The novel consumer products that will define the next phase of this industry are waiting to be made, and the Mile High Innovation Lab exists to bring these innovations to life,” adds Hilley. “I’m excited to see what magic we create together.”  This encapsulates the need for blockchain to reasonably regulate this market.    There is great enthusiasm for the growing and dispensing of these products, largely because of the “magic” they impart to the user.   But, to do so safely, we must have a system to inform the consumer of exactly what they are purchasing and putting into their body.    Given that the uptime problem mentioned before can be solved, it seems to me that blockchain represents a good compromise.  It would allow us to reap the many very real benefits of cannabis, but do so with complete transparency.  I think that this solution is pretty spliffy.  

REFERENCES

Huobi Adds TRON Derivatives Trading – Crypto Briefing

Can Blockchain Solve Some Of The Aches Of The Cannabis Industry? (yahoo.com)

Cannabidiol (CBD) Logistics Service Market Size, Share, Growth Statistics, Latest Trends, and Forecast 2030 – MarketWatch

Mile High Labs and Brightfield Group Launch Innovation Platform to Fuel Next Generation of Novel Consumer Products — Mile High Labs

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.

 

Caution is Always Warranted!!

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Headline: How to prevent hackers from intruding on your crypto wallet.

Date:

Body:  So, what’s the safest car to buy?   Well, it depends.   Do you mean in resale value?  Do you mean safest in rollover accidents?    Perhaps you mean the most inexpensive to insure?   Many different issues.    In a similar manner, discussions of how to keep your cryptocurrency wallet safe will depend upon what form of wallet you have.  You might have a hot wallet (custodial)  stored with CoinBase.  You might have a cold wallet (or paper wallet) at home and the procedures to keep these safe could differ as well  Whatever type of wallet you have, it is certainly worth your time to consider how to secure it.    In fact, in just 6 months, as 2020 turned to 2021, the FTC  estimates that nearly $82,000,000 was stolen in cryptocurrency scams.

Problems with Custodial wallets:

Hackers are trying 24/7 to get into these.  But, if you have your wallet hosted by Coinbase or Kraken, there is a well-educated team dedicated to keeping them out of your wallet.

Problems with Cold wallets (non-custodial)

  1.  More often than you might believe, people either misplace or forget their password to open their cold wallet.  As a  result, the currency inside the wallet doesn’t exist.
  2. A cold wallet must be held in a safe (or something similar)

General Guidelines

  1.  Don’t put all your eggs in one basket.  Likewise, don’t place all of your cryptocurrency into one wallet.   Experts usually seem to suggest keeping just enough in a hot wallet to do  normal transactions, and keep the majority of your cryptocurrency offline in a cold wallet.
  2. Always backup your wallet.
  3. Beware of phishing scams.  (Wow, that band from the 90s must be REALLY upset by this name of an attack.  Sorry )
  4. Double check all addresses you are sending cryptocurrency to.   Remember whitehouse.com?  Yup, that’s a porn site.  Be careful.  Beyond the extension, be sure to check out the domain name too.   There are some hackers out there who make a very convincing copy of paypal or other sites, and often the domain would be like “paypai” or something like that.
  5. Never use Public Wi-Fi when transacting with cryptocurrency.  Hackers appear like sharks  to a wounded fish.
  6. Password protect your mobile devices.
  7. Always store your private key OFFLINE!!
  8. If you do well with cryptocurrency, CONGRATULATIONS!!  Don’t, uh, muck it up by bragging about is to friends and associates.  You never know:
    1. Who is listening or
    1. Who your friend might innocently disclose to.
  9. Be sure to use a different password in all  applications related to cryptocurrency.   Make these passswords strong using upper and lower case letters, numbers and special characters.
  10. Consider using a password management function.

The Verdict

Everything comes down  to  don’t be rushed and don’t be greedy.  If something is truly a good investment, it will remain so for at least a day or two to consider it.  Similarly, if a deal is too easy, and you get an unbelievable value, look carefully at who is offering it.  Read the contract a few times.  If you don’t understand it, please consider having a lawyer look it over.   If it is not worth the cost of an attorney, it might not be  worth your hard-earned money.

 REFERENCES

https://www.cnbc.com/2021/06/11/tips-to-help-keep-your-crypto-wallet-secure.html

9 Tips For Securing Your Bitcoin and Crypto Wallets You Must Follow (Updated 2022)

https://www.investopedia.com/tech/ways-protect-your-bitcoin-investment-against-theft-and-hacks/

https://www.coinbase.com/learn/crypto-basics/how-to-secure-crypto

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.

Delegated Proof of Stake.

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Headline: What is consensus within the realm of cryptocurrency?

Date:

Body:  We live in a democracy (OK, a democratic republic, feel better now?)  For anything to be passed into Law, a majority of legislators must agree, and consensus must be reached.   Cryptocurrency is really no different.  Several different people (miners) must agree upon the correctness of the transaction, then it is added to the blockchain.  But, in a democracy, this is simple to understand: The concept of “majority rule” has been around for millennia    But, in cryptocurrency, since there is no central authority, it is even more important that the miners all agree: otherwise, an invalid transaction will affect the blockchain forever. 

There’s a story, of a cryptocurrency…

In the Bitcoin world, the Proof of Work (PoW) consensus model is followed.  This model is very secure but requires an unimaginably large amount of electrical power to operate and cool the supercomputers used to make guesses at the correct hash total.  (Unlike school, the “wrong” answers don’t matter at all, thus one can easily imagine the arms race in finding faster computers to spit out hashes faster than the competition.)  Unsurprisingly, the time to corroborate transactions can be quite extensive.  This model is extremely resource intensive, and many want to eliminate it altogether in view of its resource inefficiency.   (Please note, though, that it was fantastic at keeping the first blockchain secure, that that was its primary job.)

So, in the Ethereum  world, the consensus model is different.   In this world, the minters go are chosen with a POS (Proof-of-Stake, hey, what kind of blog do you think this IS?) model.  This model is very much more efficient in terms of resources used.  For instance, if a very large  transaction came through the network, owners of several large wallets would be notified to act as potential minters (the people who verify the blocks of transactions.    (The more tokens are staked, the higher probability of being asked to be a minter.  Interestingly, the age of the tokens staked also matters: The longer unspent, the more likely to be asked to adjudicate the new transaction.  )    The theory goes that the person who is willing to stake a large number of tokens is unlikely so validate a set of invalid transactions.     As I see it, this system is still problematic, as it still boils down to whoever is most wealthy first, gets the most impact upon the blockchain.     Unless I have seriously misread the literature on decentralized finance, this is exactly the kind of thing they were attempting to avoid.  So, I was very intrigued when I came across a new concept (to me at least) called delegated proof of stake (d-PoS).   In this system, the people who put up coins to stake, are the voters, and they elect an evaluator of a transaction block (i.e. the delegate.)  The advantage of the d-PoS system over normal PoS system is that delegates are more directly encouraged to be efficient.   Thus, d-PoS has faster transaction times and is more scalable.

So, is delegated proof of stake the Holy Grail?

No, it is not.  Though it is a vast improvement over PoW, it too can be “punked.”  There is a social media platform called Steemit, and they have a private blockchain to establish ownership of intellectual property.  To trade the properties on the site, they have a currency called STEEM.  In 2020, Justin Sun bought a large number of STEEM tokens and used them to add invalid transactions to the blockchain.  With this large number of tokens, he “hired” his own controlled group of “witnesses” and they did whatever they wanted to within the private blockchain.   Some community members became fed up with this behavior and instituted a hard fork, initiating their own new chain, called Hive.

So, which consensus model is best?

The short answer is that we don’t know.  We know that PoW has 12 years of success, undergirding the Bitcoin infrastructure.  Similarly, we know that this model has problems such as inefficiencies and the fact that an “arms race” of faster and faster competing computers inevitably results.   On the other hand, there is PoS which is still largely experimental.  Though it is more scalable and transaction time is better, it still has the problem that more money going in will make that person more powerful on that blockchain.   Delegated PoS seems like a wonderful improvement on this model.   But it is EXTREMELY experimental and can still be effectively co-opted by somebody wealthy enough (evidenced by the Steemit debacle.)  We have not yet come to a consensus.

The Verdict

I know that these might seem like castle on a cloud concepts, and they kind of are.   But, given the expansion of cryptocurrencies, it is undeniably an important conversation to have.  Who knows, you might come up with your own, improved consensus model.  If you do, please document it in your whitepaper.  And, if it’s not too large an ask, can you cite my blog?   Thanks.

REFERENCES

https://www.investopedia.com/terms/c/consensus-mechanism-cryptocurrency.asp

https://www.gemini.com/cryptopedia/proof-of-stake-delegated-pos-dpos

https://academy.binance.com/en/articles/delegated-proof-of-stake-explained

https://www.sofi.com/learn/content/delegated-proof-of-stake-dpos/

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.

 

Grayscale is Not Black and White.

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Body:  OK, as I was doing research on cryptocurrency, I kept coming across the term Grayscale Trust.   I thought that it might be interesting to find out exactly what this organization is.    Turns out, Grayscale is very colorful indeed, (sorry.)  Grayscale Investments is the world’s largest digital asset manager with $50 Billion in Assets under Management.  I didn’t get to see the Y-K-1, but this company has a number of related entities where Grayscale Investments owns several trusts.   Each trust owns a quantity of one type of cryptocurrency.  The big news here is that Grayscale Investments just became an SEC reporting entity.  Now they are required to give occasional reports to the SEC.  But, in compensation, they appear much more attractive to many new investors and the lockup period for new shares has been minimized from one year to 6 months.  (The lockup period is when you buy shares in some entities, there is a covenant that you can’t sell those shares for a certain period of time.   The idea is to provide stable ownership for a new entity.)  It would appear that Grayscale is going to add an ETF based upon cryptocurrency futures.

Can they really make this work?

This is uncertain.   With the advent of hundreds of cryptocurrencies, Bitcoin has been getting much less attention lately.    Having said that, the Bitcoin-based ETF might actually become a hedge against other cryptocurrency investments.  As for legalities, because only “sophisticated” investors are supposed to be involved, this Trust skirts the requirements of registering with the SEC.

Are they planning to monetize the metaverses?

In a  word, yes.  In point of fact, they have already begun this process.  They already launched the Grayscale Decentraland Trust which makes investments in virtual real estate.  (For those new to the sphere, Decentraland is a metaverse where groups of friends can gather and go see a concert, look at art, or many other activities.   But, some portions of the map are more traffic-dense than others, so, there has sprung up a rather intense marketplace for real estate.)  “A couple of years ago we began to notice that within the digital asset ecosystem, there was starting to be a convergence between virtual reality, gaming, and digital assets,” Michael Sonnenshein, CEO of Grayscale Investments, told Insider in an exclusive interview.   The pros are profiting in 3 ways:

  1.  The coins native to these metaverses are rising in value.
  2. The value of virtual real estate is rising.
  3.  As advertisers wise up to this new trend landowners can rent their land to showcase products for others.

So, how do I get a piece of this metaverse?

One direct way is to buy and hold the coin native to that universe.    (Axie Infiniti is another metaverse, this one in outer space, and economists have written whole papers about this economics system.)  And there seems to be room for profits.  Year to date, the MANA, native coin in Decentraland,  is up 4,000%.  Some are even squirreling these coins away in their IRAs.  But please be aware that Grayscale requires a minimum investment of $50,000 and requires fairly consequential fees.  The advantage is that Grayscale is quite large, comprising almost 46% of bitcoins held by private companies.   Also, the GBTC is overseen by the SEC, and storing quantities of Bitcoin securely can be quite challenging.  So, whether or not to invest involves a rather complex balancing test.

Is There Competition to the Grayscale Bitcoin Trust?

Yes, there are other bitcoin trusts to choose from.   But,  none are able to match its size or buying power.    In the alternate, there are a few firms (many not in the U.S) that are trying to institute a Bitcoin ETF, which will allow them to support the fund with very very low fees.

The Verdict

There is an old joke.   “Where does an 800-lb gorilla sit in a movie theater?  Answer: Wherever he or she wants to.”  And, there is some resonance to this situation.   The GBTC is so incredibly huge as  compared to the competitors, it really becomes quite silly to even consider a competitor that is available today.  But, please note the idea of “available today.”   Just like our Simeon forefathers and foremothers, evolution does exist: This evolution also exerts force upon the financial products offered within a marketplace.    Other more practical or sexier options will come around.  The question we are left with is, “How do we take advantage of cryptocurrency’s HUGE market splash without taking a bath ourselves?”  In view of the rather large minimum deposit and the rather large fees, it would seem advisable to wait to see what is coming around the mountain.\

REFRENCES

Grayscale Paves The Way For Ethereum Classic, Bitcoin Cash And Litecoin ETFs While The Fate Of Bitcoin’s First Lies In The Balance (forbes.com)

What Is the Grayscale Bitcoin Trust? (investopedia.com)

How to Buy Grayscale Bitcoin Trust tokenized stock FTX | Coinbase

Grayscale Bitcoin Trust (GBTC): What You Need to Know | ThinkAdvisor

CBDC? Has the Treasury Opened up a Dispensary?

Uncategorized

Headline: Central Bank Digital Currency

Date:

Body: 

What Is a Central Bank Digital Currency (CBDC)?

Central bank digital currencies are digital tokens, similar to cryptocurrency, issued by a central bank.(This is important, they are not cryptocurrencies as they are controlled directly by a centralized authority and each unit has an individual identity, like a serial number.) They are not pegged to the value of that country’s fiat currency, rather, they are that country’s fiat currency..  Fiat money is a government-issued currency that is not backed by a physical commodity like gold or silver.  (Please remember that we are not on the gold standard any more.)  If you look at any banknote that you happen to have, it is now backed by “the full faith and credit of the United States.” It is considered a form of legal tender that can be used to exchange goods and services. Traditionally, fiat money came in the form of banknotes and coins, but technology has allowed governments and financial institutions to supplement physical fiat money with a credit-based model in which balances and transactions are recorded digitally.  (Today, you can call TreasuryDirect and over the phone, invest in government bonds, and you do not get a contract for each one.)  This has been going on for a while now, so, a digital currency was frankly, to be expected. 

So, what are the objectives of having a CBDC?

The stand-up goal of the CBDC is essentially to help the unbanked and under-banked in our society   In the U.S. and many other countries, many people do not have access to financial services. In the U.S. alone, 5% of adults do not have a bank account. An additional 13% of U.S. adults have bank accounts but use expensive alternative services like money orders, payday loans, and check-cashing services.  The main goal of CBDCs is to provide businesses and consumers with privacy, transferability, convenience, accessibility, and financial security. CBDCs could also decrease the maintenance a complex financial system requires, reduce cross-border transaction costs, and provide those who currently use alternative money transfer methods with lower-cost options.

Other objectives would be obtained too:

  1.  The CBDC facility would allow the nation’s regulators another way to implement monetary policy.   This would be good to provide more control over price stability and modulating inflation.
  2. The CBDC would also encourage many other new investors to adopt the digital currency as it would much more stable in its pricing than say Bitcoin or Ethereum.
  3. Transferring money to other countries would be made much easier.
  4. The one central digital ledger would increase transaction speeds.
  5. Illicit activities would be nearly impossible with a CBDC as all transactions are routed thru a central ledger.  Money laundering concerns (a concern with cryptocurrency) would be eliminated.
  6. Much of the current banking infrastructure within this nation could be eliminated, and the labor and capital used in a more productive manner.  Currently, it requires about $600 Bilion per year to maintain this infrastructure.  So, we’re talking about real money here.
  7. The CBDC would lead to a direct payment system, and this would allow the U.S. to enjoy its status as a world reserve currency for just a little while longer.  

Are there different flavors of CBDC?

Yes, there are 2 main types: Wholesale and retail.   The wholesale variety is mainly held by financial institutions, and are like holding reserves in the Federal Reserve.  Retail CBDCs are used by consumers and businesses.  They can be token-based or account-based.

All of this sounds great, what are the problems?

The issues largely boil down to uncertainty and privacy concerns.  First, it is important to realize that, as humans, we really don’t handle change that well, and this could be a seismic shift in our approach to money.  Any time that there is such extensive change, there are unintended consequences, and people are understandably concerned about this.  Second are privacy concerns.   There will have to be some facility for the Fed to regulate the CBDC, but at the same time, the system has to be hardened and protected against hackers.    This is a very difficult balance to achieve and maintain.

Not for nothing, if there is one central authority, the remaining banking institutions could be motivated to try and influence the decision-making processes of this Central Body.  Perhaps there would be undeniable political connections to what institutions get loans on great terms, and what banks get just normal terms.  Corruption would almost guaranteed, and this is antithetical to a smoothly-functioning financial system.

Are there examples of CBDCs that are being tried?

It would appear that Canada is trying to implement such a system.   It would also appear as if China is preparing to use such a system (digital Renminbi)  to further empower citizens to make payments from their phones.  Europe has announced the creation of a digital euro and the U.S. Federal Reserve is working hard to design its own version.  The Bank of Japan and the Bank of England are also working on digital versions of their fiat currencies.

Researchers have been hard at work exploring the technical issues raised by a CBDC. One of these efforts is Project Hamilton, an MIT/Boston Fed collaboration. Their recent Phase 1 report suggests that simple dichotomies such as token-based vs account-based and centralized vs. decentralized are only a starting point for understanding the design issues. In their view, these categorizations aren’t enough to encompass “the complexity of choices in access, intermediation, institutional roles, and data retention in CBDC design.” It cited the example of a digital wallet, which “can support both an account-balance view and a coin-specific view for the user regardless of how funds are stored in the database.” In a similar vein, a central bank can maintain a centralized ledger while delegating much of the system’s customer-facing work to private sector intermediaries, such as banks.

The Verdict

The world is going digital, there is no real doubt of that.  So, it would seem that we are left with a choice of involving the State or excluding the State.  I would suggest that the CBDC is a pretty good negotiation of this  question.  For years now, the question has been raised in many courts, “Is our cryptocurrency a security?  Unsurprisingly, there are experts lined up on each side, but one argument really was convincing to me.  In order to be a security, the investment must be a stable store of value.   The extreme volatility in pricing for cryptocurrencies suggests strongly that it fails the “store of value” part of the definition.   But, the CBDC would be issued by the government, and this would be a very stable form of currency (hopefully.)  I think that the CBDCs of several governments worldwide are inevitable, but perhaps the Treasury Department can study the success and challenges in other smaller countries before they get the holographic presses running.

REFERENCES

What Is a Central Bank Digital Currency (CBDC)? (investopedia.com)

What are CBDCs? A beginner’s guide to central bank digital currencies (cointelegraph.com)

What If Central Banks Issued Digital Currency? (hbr.org)

Fed Eyes Central Bank Digital Currency | Richmond Fed

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.

The Good, the Bad and the Regulation.

Uncategorized

Headline: Cryptocurrency Regulation?

Senators Gillibrand and Lummis introduced a till to help regulate cryptocurrency transactions.

The Wild West was known that way because presence of law and order were thin on the ground, most of the time.  Land owners had to patrol their own property, sometimes the sheriff had to call together a posse (they still do this today, in some places.)  Point is that there was very little legislation affecting citizens in the Wild West, and very little in the way of protections for them either.  This is kind of how cryptocurrency is today.  There is no limit on how much money you could make and no limit on how much you might lose either.  Well, 2 Senators, from opposite sides of the aisle, are trying to change this.  Senators Lummis and Gillibrand have co-sponsored the Responsible Financial Innovation Act (RFIA).

OK, we’re back to the same question.   Is this tranche of cryptocurrency a security?

This is an important question because it helps decide which federal agency oversees it, and helps decide which pieces of legislation apply.  In the past, the Howey Test was applied, to see if something was a security or not.  Believe me when I say that there are thousands of pages of legal decisions based on this, but, fundamentally, there is a 4-part test.   The attributes examined are the following:

  • The existence of an investment contract
  • The formation of a common enterprise
  • A promise of profits by the issuer
  • The use of a third party to promote the offering

If the subject at issue fails any one of these 4 tests, then it is a commodity.  Interestingly, if it is a security and it’s some kind of cryptocurrency (like a virtual token) it is now called an ancillary asset.  If an ancillary asset is not decentralized enough, then they have to make semi-annual disclosures to the SEC.  But, in observance of the new pressures on the much smaller CFTC, the agency can now charge fees to help support them.

So, what else does the bill propose?

  1.  $200 exclusion on your taxes if that cryptocurrency is used on goods and services.
  2. Mining and staking profits would be taxable when they are realized.
  3. The bill orders and investigation on using digital assets in retirement accounts.
  4. Establishes that a DAO is a taxable business entity and now must be organized under the Laws of a state or foreign country.
  5. The bill demands another set of  mandatory disclosures about the issuer of the currency, and how previous cryptocurrency experiences went for them.
  6. The bill would set up a “sandbox” where cryptocurrency firms could try different products and approaches for a set period of time.

So, what else can you tell me about the bill?

The RFIA begins like any other bill, by providing definitions.   But, since digital assets are so new on the scene, it seems appropriate

Ancillary Assets. Ancillary assets in compliance with U.S. Securities and Exchange Commission (SEC) disclosures are considered commodities. Under the bill, an ancillary asset is an intangible asset provided to a person in connection with the purchase and sale of a security through an investment contract, as defined by the Howey test. This may include a digital asset that is used to facilitate the governance of a distributed ledger technology network or DAO.

Digital Asset: A natively electronic asset that grants economic, proprietary, or access powers and is recorded using cryptographically secured distributed ledger technology. Includes virtual currency and payment stablecoins, and may comprise other financial assets, such as ancillary assets and securities.

  • Digital Asset Intermediary: A person who holds a license, registration, or other similar authorization as specified by the related legislature that may conduct market activities relating in digital assets. Includes a person who holds a license, registration, or other similar authorization under state or federal law that issues a payment stablecoin, but not a depository institution.
  • Distributed Ledger Technology: A digital ledger or database that is maintained on multiple nodes using a consensus mechanism that facilitates a means for users to independently verify the recording and ordering of data or any similar analogue.
  • Payment Stablecoin: A digital asset that is denominated or pegged to the value of legal tender or in the legal tender of a foreign country (excluding cases in which a foreign country has adopted virtual currency as legal tender).
  • Smart Contract: Computer code deployed to a distributed ledger technology network that executes an instruction based on the occurrence or nonoccurrence of specified conditions. Includes taking possession or control of a digital asset and transferring the asset or issuing executable instructions for these actions.
  • Virtual Currency: A digital asset that: (1) is used primarily as a medium of exchange, unit of account, store of value, or any combination of such functions, (2) is not legal tender, (3) does not derive value from or is backed by an underlying financial asset (except other digital assets). Includes a digital asset or the reasonable expectation or denominated or pegged value will be maintained and be available upon redemption from the issuer or other identified person, based solely on a smart contract.

So, is this legislation going to work well for the American people?

I think I would characterize this bill as a good first step.  But, I am rather confident that the cryptocurrency industry will work very hard to find the loopholes.  The industry has hired more than 200 officials and staff from the White House, Congress, Federal Reserve and political campaigns, according to the Tech Transparency Project. Meanwhile, crypto executives have contributed more than $30 million toward federal candidates and campaigns since the start of the 2020 election cycle, according to Federal Election Commission data. 

There is also a good deal of concern about whether or not the CFTC has the horsepower to do the regulation it would be mandated to do.  Many point to how small the CFTC is and how little budgetary authority they are granted, and ask whether or not they have the staff and other resources to do a good job.  Even though they would be empowered to take some fees, Wall Street lobbyists have been working diligently for decades in an attempt to keep this agency under-powered.  There is concern that the fees taken would not be sufficient to make up the shortfall.

There are additional fears that this bill could suffer a similar fate as others.   Just recently Senator Toomey (R-PA) sponsored a bill to enact rules related to stablecoins.  This legislation was stalled in Congress.

The Verdict

So, it would seem that we finish where we started.  “Currently, we just don’t have enough investor protection in crypto finance, issuance, trading, or lending,” Gensler told lawmakers in September. “Frankly, at this time, it’s more like the Wild West or the old world of ‘buyer beware’ that existed before the securities laws were enacted.”   Problem is, if the new sheriff in town doesn’t have the right deputies, and the right personal reputation, the bad guys will ride right over them.  I rather like the comparison to the Wild West, though, because it points us towards one of the only solutions that WILL work: personal responsibility.  In the Old West, if your mining stake turned out to be very profitable, you were very careful to find a reputable assayer and read your contracts VERY carefully to understand how much risk you had to take on.  I think that with cryptocurrency, these lessons are still relevant today.

REFERENCES

Lummis-Gillibrand crypto bill comprehensive but still creates division (cointelegraph.com)

Lummis-Gillibrand Bill Could Establish Cryptocurrency Regulation (natlawreview.com)

Bipartisan crypto regulatory overhaul would treat most digital assets as commodities under CFTC oversight (cnbc.com)

Key US Senators Introduce Crypto Bill Outlining Sweeping Plan for Future Rules (coindesk.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.

 

A True Legacy System.

Uncategorized

Headline: What happens to your cryptocurrency investment when you die?

Body:  OK, this one will be a little tough, but it is interesting and worthy of thought.  We are going to talk about death.

No, I swear, this will be interesting.   The facet we will be focused upon is: What happens to all of your social media posts and webpages when you die?  I spend an inordinate amount of time each week updating my website with new blog entries, announcing them on LinkedIn and Facebook, and then (for fun) watching TikTok videos. (No, I don’t make any videos there… yet.)  Point is, we have spent a vast amount of time and energy curating the digital face we show to the world.   Some spend thousands or millions of dollars on NFTs like the Bored Apes.  So, it seems logical and interesting to ask, what is their “end” when we meet ours?

My great Aunt’s tea set is awful.  Why would I want to inherit her digital assets?

Well, digital assets are becoming more and more valuable.  Between cryptocurrencies and NFTs alone, we could be speaking of millions of dollars, easily.  And, it is important to note that all of these thing CAN be inherited, assuming that they are in the Estate Plan.  If not, they become consigned to the digital flotsam of the Internet.  Please note that the Estate Plan should define these digital assets as precisely as possible, including URLs and passwords.   But, the reasons for  doing this management  are easy to understand.   For instance, let’s assume that there was a man, who died while committing a bank robbery.  Thing is, before that, he was a 20-year Navy veteran, and the only reason he did this thing is because he could not afford the cancer treatment that his long-time wife needed.  How is he remembered?   Was he a gun-toting thug who terrorized dozens of people?   Or, was he a loving family man, who did everything he could to support his family?  I am guessing that remaining members of his family would tell one story, and a very different one could be found in the press.  The family would want to do everything they could to ensure that he was remembered… for the right reasons.

Are there different types of digital assets?

Good question.   There are 2 major flavors of  digital assets, transferrable and non-transferrable.  The non-transferrable assets most often encountered include e-mail accounts, social media accounts and subscriptions.   Plus, there are some that within the governing contract, spell out that they are non-transferrable.  (This is most often the case with domain names.)  So, when I shuffle off this mortal coil, my adglibenterprises domain cannot be transferred to any of my writer friends.  But, please note that trusted people should have access to these sites and accounts if only to formally close them or send out a final e-mail that no more traffic is coming from them.

So, what’s so different about digital assets?

In short, not much separates your great aunt’s tea set from the Bitcoin that you own.  They are both assets, and when listed on a Will, they can both be bequeathed to whomever you choose.  The difference is that tea sets have been around for millenia, and we know that we have to account for them, and we are good at doing this.   Digital assets are a different kettle of fish entirely.  They are very new, and many people don’t think about them at all, and they can be VERY valuable.  The key here is specificity.  With  digital assets, you need to delineate carefully which assets go to which person or group.  Further, your instrument must have some reminder of usernames and passwords so that your heirs can gain the access they are entitled to.  Many people just forget to do this, and the digital assets then just… sit.  This is painful when it involves money like cryptocurrency, but it can be devastating if it includes family pictures or videos that live on the Web.  For this reason, it is a very good idea to share your private key with at least one other person you trust implicitly.

Are there any examples of this kind of digital asset planning?

Yes, there is a great example, even now.  Facebook has something called the “legacy contract” where somebody else can manage your account.   Once it has been “memorialized” that person can manage the account as they see fit, or delete it altogether.

So, ok, I have some planning to do.  What if my attorney doesn’t ask about digital assets, and I forget to list them in my Will?

Your legal advisor should have access to something like “Safe Haven” to help this information stay secure.  It transfers the details in “shards”  and by themselves, each shard is useless.  Each heavily encrypted piece of data is sent to a “cold wallet” which is pretty secure too.  If your attorney does not ask about your digital assets, make sure that you initiate the conversation, and if not comfortable, you might want to select a different lawyer.

The Verdict

For most people, this is not a huge deal.   If you die, the pictures of you at the office Christmas party or nana’s secret recipe for lemon bars could fall into somebody’s clutches.   No big deal.  But, what if you are a public figure ?  Perhaps it is very important to you and your family that your memory remain positive within the public realm.  Maybe you are the only one with the complete formula for Coke syrup?  This would be a digital asset that you would very seriously want to consider passing on carefully.  The point is, in the Information Age, some of the most important and valuable assets we have are digital.   There have to be plans for what happens to these assets in case of our death.   Because,  you could be involved in a car accident tomorrow that kills you, and you have no way to know, in advance.  This is made even more acute when you consider that the Baby Boom generation is getting into the later stages of their lives.  In short, our laws must catch up to our circumstances as a society.

REFERENCES

https://trustandwill.com/learn/digital-inheritance

https://www.forbes.com/sites/andrewrossow/2018/04/03/what-is-digital-inheritance-and-the-future-of-your-assets-after-death/?sh=169268937e3e

https://finance.yahoo.com/news/why-estate-planning-attorneys-worrying-152255583.html

http://www.eislerlaw.com/blog

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.