Insurance is Always a Good Bet.

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Headline: Who provides Insurance to crypto exchanges?

Date:

As cryptocurrency markets mature, they are attracting players from other industries. The insurance industry is one of them.   Before you fall asleep, this is actually really important, as the insurance markets will likely form the vanguard of normalization of cryptocurrency.  And you, dear reader, may stand to make a tidy profit in USD from buying very real shares of ownership in these companies.

Why Does the Cryptocurrency Ecosystem Need Insurance? 

Why do you need health insurance?   In case you have any catastrophic incident that lands you in the hospital, you need insurance to keep you from going bankrupt.  So often, this is because of (at least partially) the uncontrollable actions of others, you need insurance.  With rug pulls, heartbeat schemes and many others, the need for insurance seems axiomatic for the individual.    So it is for businesses who deal with cryptocurrencies.

OK, so, what is the problem?   Why can’t we see products of all types aimed towards the cryptocurrency markets?  There are a few reasons for this.  First, the insurance markets depend a lot upon track record   Facts being facts, cryptocurrency doesn’t have too much of a track  record.  Second, the volatility involved is insane.

Is this really a big deal?

Yes.  Per a report from Aon/Lloyd’s of London, this segment reflects $500 Million in business already, and it is quickly growing.  As it turns out, Lloyd’s of London just put together a $255 Million policy to cover Coinbase.  Even in the world of games, this is serious.  Axie Infinity suffered a $615  Million hack.  Per a report from Chainalysis, $14 Billion reached illicit addresses, and this was 2022.   So, yes, it IS a big deal.

So, what insurance do they usually use?

Most cryptocurrency concerns opt for theft insurance, covering them both against crime and cyberattack.  (Sounds pretty good, huh?  I thought so too.)  Specifically  not included is coverage for “hacks.”  My first question is what is the difference between a hack and a cyberattack?  The boilout is that the startups are forced to assemble their own syndicates to under-write this risk of loss from hacks, or they might be forced to fund 5-10% of their own insurance.  Coinbase goes even further in its agreement with a customer, and explicitly tells them that they have NO insurance against them losing their personal credentials.

Unfortunately, there will always be hackers, so, many companies in this area have set up Secured Asset Fund for Users (SAFU.)  Think of this as a bond sinking fund, only, instead a debt instrument maturing, the funds are used to make whole anybody who had their account hacked.   About 5 years ago, Binance had such a $40 Million problem, and paid it all out of SAFU.  One might be excused for saying that a cryptocurrency firm sets up a SAFU to deal with a SNAFU.

The Verdict

Insurance is not a sexy topic, usually, and it likely shouldn’t be  But, it cannot be denied that it rules our lives.   Health insurance, car insurance, life insurance, each plays their part to making life better, or more predictable.  But, the ground truth is this: Just before any industry is ready to really make it big, there is an insurance product built such that participants do not lose everything if there is a catastrophic failure.  So really, it is a function of the market to tell authorities when another type of coverage is needed, and how it should work.  It’s just that this conversation is slow and nuanced, and cryptocurrency has come on the scene, talking like an auctioneer.  But, I have faith in capitalism; People will sense the money to be made, and soon thereafter, a decent insurance product will emerge.

 REFERENCES

https://www.investopedia.com/news/cryptocurrency-insurance-could-be-big-industry-future/

https://www.insurancebusinessmag.com/us/news/breaking-news/aon-provides-insurance-to-cryptocurrency-exchange-232041.aspx

https://www.insurancejournal.com/news/international/2022/01/31/651543.htm

https://coingeek.com/aon-lloyds-of-london-lead-growing-crypto-insurance-industry/

https://www.investopedia.com/crypto-insurance-5441920

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.

 

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Headline: What is Uniswap and Sushiswap, and what part do they have to play in DeFi?

Body:  A reminder of terms is in order (I promise, it will be brief.)  Cryptocurrency is part of a movement called decentralized finance, (DeFi) and it is aimed at democratizing finance by eschewing a central authority.  One particularly well-known exchange for these currencies is Coinbase, but they are a centralized exchange, so, it is relatively expensive and has a central authority, even though it is not a state.  Uniswap and Sushiswap are examples of de-centralized exchanges where some knowledge of coding is very helpful (really DIY environment) and it is very cheap, and bereft of any centralized authority.  But, there are some differences that make Uniswap and Sushiswap optimal for different people.  Let’s learn just a little about each.

What is Uniswap?

Uniswap is a leading decentralized (est. 2018) crypto exchange that runs on the Ethereum blockchain, and instead of a centralized order book, relies upon an automated liquidity protocol.  One advantage is that each user of this exchange retains their own private key, so, even if the exchange is hacked, the damages can be minimized.  Uniswap is currently the 4th largest decentralized exchange, with over $3 Billion in assets.

Key to their success is the automated liquidity pool, taking the place of the centralized order book.  When a person invests in Uniswap, they become a portion of one of many pools of assets.   When they exit the pool, they receive a proportional amount of the fees earned by the pool members.   For instance, say a liquidity provider (investor) provided $100,000 to a pool worth $1,000,000, they would be entitled to receive 10% of the fees received for the pool’s  liquidity-providing activities, when they decided to leave.  So under this system, if the pool is deep enough, any transaction can be consummated nearly immediately.

Whoa, what EXACTLY are they token?

Here’s where the arms race began.   At first, there was Uniswap, then, a “cell” broke off and produced Sushiswap.  At this site, the developers, from the beginning, had their own token called Sushi, which gives holders rights to vote on governance issues and profit from the transaction fees gained by the site.  Then, Uniswap became very threatened that everybody would leave their site, and launched UNI, and this token allows holders to vote on governance issues and fee structure issues.  Much like the Army Rangers, they airdropped 400 of these tokens to anybody who had ever used their site. (and this had a value of about $1,000.)  Just like any arms race, this too was quite expensive.

Uniswap users can participate in the decentralized exchange in several ways:

  • Create new markets: Uniswap users can use smart contracts to create new markets for exchanging new pairs of digital assets.
  • Swap assets via existing markets: Uniswap can use the platform to swap digital assets via decentralized markets that have already been created.
  • Provide liquidity and earn rewards: Uniswap users can provide liquidity by staking—agreeing to not trade or sell—their digital assets. Those who stake their digital currencies on the Uniswap platform are rewarded with UNI.2
  • Participate in Uniswap governance: UNI token holders are empowered to govern the Uniswap platform, with voting power distributed in proportion to users’ UNI balances.1

What is SushiSwap and how does it work?

SushiSwap is an Ethereum-blockchain DEX founded by pseudonymous open-source developers Chef Nomi and 0xMaki and initially launched as a copy of Uniswap.  (This is a really important thing to think of.  If these 2 sites are Tom and Jerry from cartoons, always trying to hilariously and lethally hurt one another, Uniswap is Tom, and Sushiswap is Jerry.)

SushiSwap seems to work in the same way that UniSwap does, but,it seems that the initial ways to make money including staking transactions, and this was only available on the Ethereum blockchain as the consensus model moved away from the Proof of Work.  Other than that, the differences seem to relate to marketing.   The variety of ways to make money, are presented through a group of programs known as Bento box program, of course.  These methods of earning a return include staking, yield farming and many others.  (They also seem to use some brand names, and I have to wonder why this has been allowed, by the companies that own the intellectual property.)  But, by far, the easiest way to make money here is to become a liquidity provider.  (SushiSwap also seems to support more cryptocurrencies, currently trading 11,700 distinct pairs of currencies.)  Also different is how gas fees are charged.  UniSwap has several categories of different gas fees, and SushiSwap seems to have a much more uniform (though often lower) gas fee being charged.  Finally, UniSwap handles 10 times the trading volume that SushiSwap does.

The Verdict

OK, quick caveat here.   The sources used to write this column are all aimed at explaining how incredibly “easy” it is to use a decentralized exchange.  In all other trusted sources of information, using these exchanges are often “janky” and require at least some elementary level of coding knowledge.   (Though this, like the word “janky” might be a bit out of date.)  Point is, if you aren’t trading cryptocurrencies at a very high rate (read as multiple times per day) it might behoove you to stick to the centralized exchanges.  The gas fees are a little higher, but, the “hand-holding” provided is probably worth it.

REFERENCES

https://www.coindesk.com/business/2021/02/04/what-is-uniswap-a-complete-beginners-guide/

https://www.investopedia.com/uniswap-uni-definition-5217463

https://www.coindesk.com/learn/what-is-sushiswap-how-to-get-started-on-the-crypto-exchange/

https://www.investopedia.com/sushi-token-5248641

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 the Storm Over for Tornado?

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Body:  Wow!!  Tornadoes.   The word conjures images of flipped over mobile homes, people clamoring to be the MOS interview, and the ambulance-chasing crew parachuting in to capitalize on other peoples’ suffering.  They do however, follow a pretty clear rhythm: There’s a certain excitement pre-storm, and it often ends in disaster.  So, it begs the question, Wasn’t Tornado Cash REALLY well-named?

So, what was (or is?) Tornado cash?

Tornado cash was a mixer.    Recall that a mixer will  take bits and pieces of different transactions and mix them together, in an effort to occlude the source and target of the funds.  The Office of Foreign Assets Control (OFAC) claims that Tornado helped to launder over $7 Billion, including $455 Million for the North Korean elite.  One official said the following:

“Today, Treasury is sanctioning Tornado Cash, a virtual currency mixer that launders the proceeds of cybercrimes, including those committed against victims in the United States,” said Under Secretary of the Treasury for Terrorism and Financial Intelligence Brian E. Nelson. “Despite public assurances otherwise, Tornado Cash has repeatedly failed to impose effective controls designed to stop it from laundering funds for malicious cyber actors on a regular basis and without basic measures to address its risks. Treasury will continue to aggressively pursue actions against mixers that launder virtual currency for criminals and those who assist them.”

So, what was the sentence?

Ok, first a definition that I had to look up.  The word “blocked” does not mean constipated in this forum.    If a n account is blocked (because of association  with a blocked person)  then that money is held, inert, in an interest-bearing account.  Then, the person can directly petition the OFAC to be “unblocked.”  That said,largely, the sanctions say that a lot of assets are essentially frozen.     Any assets of Tornado Cash are blocked, and if any corporate assets are held by an individual, these too are blocked, and must be reported to the OFAC.  It even makes it illegal to provide any goods or services to any “blocked” individuals. (Ostensibly, if they own a dog, their kibble is blocked too.)  If the petition is successful, they are removed from the Specially Designated Nationals l(SND) list.  In other countries, some individuals were arrested for unknown charges

One professor, Dr. Matthew Green, was sanctioned for his holding of Tornado Cash.   In support for his petition, the authors sent OFAC a letter explaining that Professor Green uses this account to explain the impact of anonymity on cryptocurrency transactions.  This letter did not get him out of sanctions, but, OFAC did issue some new  guidance in the form of an FAQ   (answering some of  their questions, and leaving others unanswered) and the correspondence in timing did seem suggestive.  Answer #1076 seemed particularly on-point when they specifically made provision for the underlying code to be discussed in an academic setting, so, Professor Green might be spared here.

OFAC is not the only one who  arrived guns a-blazing.   CoinBase and CoinCenter brought separate actions against the OFAC.  Their claim is that OFAC violated the Constitution when they sanctioned TornadoCash.  Several other suits revolve around similar issues.  The OFAC opined that the illicit usage of this coin out-paced the permissible reasons.  The supporters of cryptocurrency say that these prosecutions serve to stifle financial innovation, and cite for proof, how the code itself was banned.

Is this really a big deal?

Yes, it is.   According to a report by Chainalysis, 23% of monies received by mixers come from accounts associated with illicit activities.  This is why the U.S. Government is clamping down so hard on these services.   But, as they do, they inevitably affect other perfectly legal money sources.  

The Verdict

The only verdict I can see here is to make sure that your investments pass the “smell test.”  If you are interested in investing in a cryptocurrency that prides itself on privacy over everything else, understand that this might draw the ire of officials, and this does act as a source of risk (“rightly” or not.)  The reality is as it is, and you have to make investment plans with both eyes wide open.

REFERENCES

U.S. Treasury Sanctions Notorious Virtual Currency Mixer Tornado Cash | U.S. Department of the Treasury

An Update on Tornado Cash | Electronic Frontier Foundation (eff.org)

Tornado Cash Sanctions By U.S. Treasury Draw Outrage, Suits From Crypto Community (forbes.com)

Tornado Cash Sanctions: What Crypto Investors Need to Know – NerdWallet

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.

 

Taking the Measure of CoinMetrics.

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Headline: What is Coin Metrics and what do they do?

Body:  Sometimes, you can run into a company or small group of companies, and they are so dominant within one field, that speaking of them becomes synonymous of speaking of the whole field.   Case in point, the tech industry.   Over the course of a few years (definitely including the pandemic) there were just a few tech stocks that did tremendously well, even in the turmoil.  They began to be termed the FAANG (Facebook, Apple,Amazon, Netflix, Google) and began to serve as some sort of stand-in for all of the tech stocks.  That seems also to be happening within cryptocurrency as well.  The companies going through well-publicized ICOs are pretty well-marketed, but, there are a lot of companies who offer utilities for  those networks, or consulting to the management teams.  This is why I did an article on Chainalysis, and just recently heard of another company called Coin Metrics, and it seems to be coming up in many different articles.  So, who are they, and what do they do?

So, what do they have to say for themselves?

Not much, really.   The company was founded in 2017 and seems to focus upon developing products that will allow their clients to take advantage of the blockchain, and retain part of their privacy.    The corporate website is pretty bland with boilerplate all over it.  Apparently, their values are Open, Pioneering, Elucidating and Neutral.   This really doesn’t tell us much, these management-speak type things can be profitably knitted on a pillow, not a whole lot of other value.

More profitably, I think we need to consider the management team and the products they offer.

Management Team

NamePosition
Nic CarterCo-founder, Board Chief
Tim RiceCo-founder/CEO
Chris OvertonCTO
Katie ChaseCOO
Shmuel BulkaGeneral Counsel
Matt HagelCFO

          The Products

One of their more interesting products is called ATLAS.  This product is billed as the search engine of the blockchain.  CM Network Data Pro is a piece of software that allows users to look at a variety of metrics on a variety of cryptocurrencies (Thus, you can see patterns evolving in volume, and take educated guesses where value is going.)  High Performant Cryptoasset Market Data allows the user to see patterns in historical pricing patterns of different cryptocurrencies.    All are highly useful information sources to traders of cryptocurrencies.

And, now, the rest, of the story…

According to the CEO, there are many large banks who wish to take advantage of the blockchain but are hesitant because the regulations are not yet clear.  He goes further to note that with a blockchain, if there is a large shock of a major intermediary going bankrupt, the cleanup would be much faster, and more efficient.  The products they are developing could help guide proposed regulation.  Since the beginning of the company, they have added many new people, and 2 of the newer hires seem to indicate that Coin metrics is thinking of expanding their offerings of Software as a Service(SaaS.)  And, it would appear that they are aiming at European countries, as they just won an award at Hedgeweek’s 2022 European Digital Asset Awards.

On June 7, 2019, Coin Metrics announced that they had acquired digital asset index firm Bletchley Indexes. This acquisition is part of a move by the cryptocurrency analytics company to launch its own smart beta index.  This is interesting because Coin metrics seem to be interested in offering something like ETFs within the cryptocurrency space, in form of passive portfolios.   They also seem keen to have a few actively-managed portfolios.

The Verdict

This is an interesting company when you look at the sequence of what they invested in.    They started with a very focused technical  product and  morphed into a more definitely financial firm.    Is this the lifecycle of many cryptocurrency  consultancies and firms?    No doubt, it will be interesting to watch.

REFERENCES

https://decrypt.co/111839/coin-metrics-ceo-big-banks-want-in-on-crypto-when-its-more-regulated

https://www.prnewswire.com/news-releases/coin-metrics-expands-management-team-with-three-key-hires-301784164.html

https://cointelegraph.com/news/who-cares-about-privacy-not-crypto-users-says-coin-metrics

https://coingeek.com/coin-metrics-acquires-digital-asset-firm-bletchley-indexes/

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.

 

Are NFTs Nifty or Knot?

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Headline: How are NFTs and AI being used in Fine Art?

Body: We’ve spoken before about NFTs.   As you might remember, some examples of these include user-designed weapons and armor for use in a game environment, and others include dressed up apes or moments in sports history on video.  But, there is one large area that I forgot to mention because it didn’t occur to me that “real” artists would do this; The fine arts market for NFTs is large and thriving.   I thought a shallow dive into this already deep pool was in order.  The questions that occurred to me are many.    Can people really create money for themselves doing this?  What protections are there for the artists?  There are several others too, so, let’s sketch out a primer, together.

Why might an artist want to create fine art NFTs?

Well, the first reason is easy; money.  These sketches and pictures can garner quite a hefty price tag, and this can fund an artist’s journey into other avenues of art.   Perhaps they are happy creating NFTs and they can go on to create more.    Remember; The pictures of apes are pretty rudimentary and sell for hundreds of thousands of dollars.   So  much to say that this is not monkey business.   The other financial arrangement that is interesting is that each time an NFT is sold, (even on a secondary market) the original artist gets at least a small amount of money in the form of royalties.  This is an important distinction when compared to the selling of other forms of art.  In a related vein, the NFT allows artists to sell their work directly to an excited buyer, cutting out the middleman of gallery or auction house.    The lack of commissions makes things more approachable for the artist, and the sale is consummated in minutes, not weeks.

The other reason is that people might get exposure that they might otherwise not receive.  Just to take one example.    Let’s say that an artist developed a really cool design, he or she might  consign it to the owner of a piece of digital real estate in a metaverse like Decentraland.  People “walk” by the  “windows”  where their art resides, and the people might then go to the artist’s website and order other works for sale there.  But for the NFT, this sale would not have happened, so exposure is very important.  (In point of fact, the artist’s website I cited down below explains that NFTs can be seen as yet another potential revenue stream for the artist.)  In a related manner, the NFT minting process can help foster a more direct and bi-directional conversation between artist and audience.

Back to basics: what IS an NFT?

An NFT is essentially a receipt on the blockchain, proving that a particular person owns or has licensed a work of intellectual property.  So, what trips many people up is the unfamiliar “non-fungible.”   Think of oil.   Billy, Bob & Joe (all from Texas, and not one person) each have some oil, and store it all in one tank.  Is Billy’s oil any different from Joe’s oil?   No, they are identical, they differ only in regard to what proportion belongs to who.  Thus, the oil is fungible because your Honda or Cadillac will run identically  with any oil that you pull from this containment.  Now, let’s say they each held paintings in the same secured warehouse.   Are the paintings identical and interchangeable for one another?   No, each one is unique and has qualities that are unique, thus these are fungible.  Just a weird word for a very understandable concept.

OK, so down to business, where can I do business?

There is one very important distinction to draw between  Open platforms and curated platforms.  Open platforms ( such as Opensea or Rarible) are permissionless, and allow anybody to mint an NFT there.  So, anybody can mint an NFT, and that is good.   But, anybody can mint an NFT, and sometimes copied works are used by nefarious actors.   Buyer beware.  The other platform is the curated one.  To get into the curated platform, a certain artist must be invited.  (Examples include SuperRare and NiftyGateway.)  With these sites and ones like them, the potential buyer can feel slightly more secure of their rights in an NFT after purchase.  (Think of other visual art.  Somebody might put up their art at Starbuck’s and another artist walks by and sees their work and is impressed.  They can then find the artist and offer them a spot in an upcoming show, somewhere  in  the real world.)  This is essentially the same process for a curated platform.

It should also be noted, that some of these platforms offer art that is both Physical and digital, or “Phygital.”   In this type of art, an NFT is purchased and may include a map or set of directions to follow.  When they do follow these  directions, they also get a physical work of art that may or may not be subject-related.  It is important to note that the link between the NFT and physical item weakens quickly in this type of art.  There is even a Professional Artist’s Accelerator program, to help artists understand the NFT market quickly, and soon begin to mint their own works.

The Verdict

The usefulness of employing blockchain in sales of art is manifold and I think  helps to solve what might seem to be mutually exclusive problems.  First, by  utilizing a blockchain, forgeries will be much more difficult to pass off as originals.   Through the blockchain, the truth of digital scarcity can be observed directly.  Using blockchain also serves to democratize the process of selling art.  The price walls are coming down, and people who were on the fence to become artists are, and the works that unfold will be quite diverse.   This seems very good to me.

The only reason I would not own an NFT is that it is that the law has not caught up with the technology yet.   First, when somebody makes payment for an NFT, are they buying the concept, outright?   Or, are they leasing the rights to the work of art for a definite term, as an equivalent to licensing?   Do they now have the right to use the image to sell as merchandise?   In preparing for this discussion, I have read a variety of sources on this topic, and the only consistency is inconsistency.    So, tread lightly, friends.  

REFERENCES

NFTs: The Ultimate Guide for Painters, Sculptors & Fine Art Photographers

https://www.coindesk.com/layer2/2022/11/17/nfts-web3-fine-art/

How Do NFTs Fit with Fine Art’s Traditional Gatekeepers?

https://www.gemini.com/cryptopedia/fine-art-on-the-blockchain-nft-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.

 

That’s Off the Chain!!

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Headline: What is Offchain Labs (Arbitrum) and what does it have to do with cryptocurrency?

Body:  When I first heard of Offchain  Labs, I have to admit, I was smitten with the name.   First, in cryptocurrency, this is akin to doing all of the complicated mathematics on “scrap paper” (This scrap paper is called Arbitrum) and only adding to the real chain, the final answer.   In this way, the main chain becomes more efficient in carrying information.  But, as I lived in Philadelphia for 5 years, I also learned that “off the chain” has a different meaning.  They might also say “out of pocket” and in both utterances, they refer to  an occurrence that is both unexpected and wondrous, in some way.  So, given its (at least) 2 meanings, I fell in love with the name.   So, who are they?   And, are they important to cryptocurrency?

Who are they?

Offchain Labs is a venture-backed entity that started with several leading characters from Princeton.  Felten, (a former White House advisor) along with a team of academics and PhD technologists, including Steven Goldfeder and Harry Kalodner, are responsible for leading the development of Arbitrum. Today, Offchain Labs announced it has raised a $3.7 million USD Seed Round led by Pantera Capital. The funding will be used to grow the team of developers to build Arbitrum.

Are they important to cryptocurrency?

Yes, they are very important.  First, they bought out Prysmatic Labs, which was itself, vital to the changing of Ethereum to the proof-of-stake network it is now.  After the acquisition, Offchain Labs stands a great chance at helping the new network to thrive and helps them in their efforts at scalability of the network.  The co-founder of Prysmatic Labs feels that they are most important as they can efficiently write the software needed to run the network.

Offchain Labs has the economic clout to pull off this acquisition due to the raising of more than $120 Million from investors.   Now, the combined headcount in the company exceeds 60.  The deal was announced in an October 13th blog post, but the financial terms remain undisclosed.  Despite this non-transparency, both entities appear happy about the deal.

“Merging with Offchain Labs made perfect sense to us as an Ethereum team because we develop software extensively in Go, are fully incentive-aligned with the success of Ethereum, and are focused on shipping quality software for others to use,” Jordan said.

So, what is holding them back?

In a word, it is belief.  Many entities believe that they will only achieve the  privacy they seek on a private blockchain.  Offchain Labs intends to demonstrate that they can utilize the public Ethernet blockchain, yet maintain the security they yearn for.  Arbitrum is being built to help integrate these 2 intentions, by making it so that only the digital  signatures of both parties need to be validated by miners.

When a smart contract is launched and a set of validators have been designated, Arbitrum provides an AnyTrust guarantee, which greatly reduces the cost of smart contracts. As long as one of those validators is behaving honestly, then correct execution of a smart contract is guaranteed.   Said one company official:

“With Arbitrum, we have invented a protocol that sits on top of any blockchain, with the ability to execute code and transactions off-chain through either sidechains or state channels. With increased privacy and scalability, as well as much lower costs to run a contract, Arbitrum adds immense value to developers and enterprises.”

The Verdict

Offchain Labs is certainly an entity to watch.  Admittedly, this whole Layer1 v. Layer 2 thing is a bit technical for me.  (perhaps leading to its own entry?) But, if it does make the Ethereum blockchain even more efficient (cutting time and gas fees) it seems to be a very valid thing to work on.  Per the company’s own website (probably a bit biased of course) the traffic on their part of the Ethereum blockchain has increased 550%, and that seems to be a truly  important vote of confidence.  Further, many of their investors as well as founders, seem well-positioned to have positive effects upon the company.  We shall have to wait and see.

REFERENCES

https://www.coindesk.com/business/2022/10/12/arbitrum-builder-offchain-labs-acquires-prysmatic-labs-a-core-team-behind-ethereums-merge/

https://cointelegraph.com/news/offchain-labs-acquires-ethereum-core-dev-team-prysmatic-labs

https://www.forbes.com/sites/rachelwolfson/2019/04/03/princeton-university-startup-offchain-labs-raises-3-7m-to-enable-enterprise-blockchain-adoption/?sh=574025e1a9f2

Offchain Labs Raises $3.7M In Seed Capital

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.

 

Insuring the Future of Cryptocurrency.

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Headline: Who provides Insurance to crypto exchanges?

As cryptocurrency markets mature, they are attracting players from other industries. The insurance industry is one of them.   Before you fall asleep, this is actually really important, as the insurance markets will likely form the vanguard of normalization of cryptocurrency.  And you, dear reader, may stand to make a tidy profit in USD from buying very real shares of ownership in these companies.

Why Does the Cryptocurrency Ecosystem Need Insurance? 

Why do you need health insurance?   In case you have any catastrophic incident that lands you in the hospital, you need insurance to keep you from going bankrupt.  So often, this is because of (at least partially) the uncontrollable actions of others, you need insurance.  With rug pulls, heartbeat schemes and many others, the need for insurance seems axiomatic for the individual.    So it is for businesses who deal with cryptocurrencies.

OK, so, what is the problem?   Why can’t we see products of all types aimed towards the cryptocurrency markets?  There are a few reasons for this.  First, the insurance markets depend a lot upon track record   Facts being facts, cryptocurrency doesn’t have too much of a track  record.  Second, the volatility involved is insane.

Is this really a big deal?

Yes.  Per a report from Aon/Lloyd’s of London, this segment reflects $500 Million in business already, and it is quickly growing.  As it turns out, Lloyd’s of London just put together a $255 Million policy to cover Coinbase.  Even in the world of games, this is serious.  Axie Infinity suffered a $615  Million hack.  Per a report from Chainalysis, $14 Billion reached illicit addresses, and this was 2022.   So, yes, it IS a big deal.

So, what insurance do they usually use?

Most cryptocurrency concerns opt for theft insurance, covering them both against crime and cyberattack.  (Sounds pretty good, huh?  I thought so too.)  Specifically  not included is coverage for “hacks.”  My first question is what is the difference between a hack and a cyberattack?  The boilout is that the startups are forced to assemble their own syndicates to under-write this risk of loss from hacks, or they might be forced to fund 5-10% of their own insurance.  Coinbase goes even further in its agreement with a customer, and explicitly tells them that they have NO insurance against them losing their personal credentials.

Unfortunately, there will always be hackers, so, many companies in this area have set up Secured Asset Fund for Users (SAFU.)  Think of this as a bond sinking fund, only, instead a debt instrument maturing, the funds are used to make whole anybody who had their account hacked.   About 5 years ago, Binance had such a $40 Million problem, and paid it all out of SAFU.  One might be excused for saying that a cryptocurrency firm sets up a SAFU to deal with a SNAFU.

The Verdict

Insurance is not a sexy topic, usually, and it likely shouldn’t be  But, it cannot be denied that it rules our lives.   Health insurance, car insurance, life insurance, each plays their part to making life better, or more predictable.  But, the ground truth is this: Just before any industry is ready to really make it big, there is an insurance product built such that participants do not lose everything if there is a catastrophic failure.  So really, it is a function of the market to tell authorities when another type of coverage is needed, and how it should work.  It’s just that this conversation is slow and nuanced, and cryptocurrency has come on the scene, talking like an auctioneer.  But, I have faith in capitalism; People will sense the money to be made, and soon thereafter, a decent insurance product will emerge.

 REFERENCES

https://www.investopedia.com/news/cryptocurrency-insurance-could-be-big-industry-future/

https://www.insurancebusinessmag.com/us/news/breaking-news/aon-provides-insurance-to-cryptocurrency-exchange-232041.aspx

https://www.insurancejournal.com/news/international/2022/01/31/651543.htm

https://coingeek.com/aon-lloyds-of-london-lead-growing-crypto-insurance-industry/

https://www.investopedia.com/crypto-insurance-5441920

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.

 

What happens in Puerto Rico Might NOT Stay in Puerto Rico.

Uncategorized,

Headline:  Is there a cryptocurrency fiesta in Puerto Rico?

Body:  How does any bank heist movie end?   The bad guys are kicking back on a beach, enjoying  drinks, looking at the well-endowed 20 year-olds frolicking in the sand, and loving life.    Well, what if this wasn’t EXACTLY fictional?  What if it weren’t even illegal?

OK, so, writ  large, what are we talking about?

Puerto Rico offers  its residents many tax breaks, but to qualify, the person must reside on the island for 183 days per year AND maintain “close local ties.”    When executed correctly, many types of passive income can remain untaxed.  Currently, there are more than 5,000 individuals who qualify for this treatment.  The program is called the “export service incentive” and can allow a corporation to pay a 4% tax rate.

But, those who do not qualify, and claim that they do, should watch out.   There are currently 2 such criminal investigations ongoing.   These investigations largely center around conspiracy and wire fraud, but each one involves a good many parties, including promoters, attorneys and accountants.  Further, many locals are unhappy with this arrangement; They claim that the policy advantages American investors who are not native to Puerto Rico.  Regardless of these remonstrations, the government of Puerto Rico just expanded these tax benefits to investors in cryptocurrency and digital assets and services.

Does Puerto Rico have future taxation plans?

At some point soon, Puerto Rico will begin to tax cryptocurrency that has been staked against another transaction.  They are looking toward, in the future, toward taxing transactions relating to buying and selling NFTs.

 A few warnings and pieces of advice.

A local CPA, Shehan Chandrasekera, suggests caution regarding this tax break.    He particularly warns potential clients, that any capital gains received prior to getting Puerto Rican residency are still likely to be taxed at the much higher rate.  Just after this, the text suggests that there is a way that cheats CAN get the benefit of the tax laws, by selling their investment and then re-buying essentially the exact same investment.  Puerto Rico is a  foreign territory, so laws are different, but within the U.S. there are “wash sale” rules that forbid exactly this behavior.  I did a brief research and Puerto Rico appears to have no such rules in effect, but, consultation with a local CPA is strongly encouraged.

This all sounds GREAT!!!  What the problem is?

First, it can be well-argued that this tax break is not achieving the goals set for it.  The idea was to encourage entrepreneurs and that would lead to more and better jobs for the islanders.  Well, the entrepreneurs who came, did not produce products that require an assembly line, and the jobs created are quite thin on the ground.  Second, some just see it as unfair.  It has set up a situation where native Puerto Ricans are paying 15% tax on capital gains, and the newly-arrived invaders are only paying 4% tax.  Further, the new arrivals have served to massively increase property prices, pricing out most of the inhabitants already there.

So, why can’t they just repeal the law?

In theory, they can.   But, in practice, I suspect that the crypto-set has some pretty good lobbyists.  So, perhaps they can nibble around the edges and make Article 22 more palatable to local citizens.

The Verdict

One thing I keep reading is FOMO or “fear of missing out.”   It explains why a lot of people leave the continental U.S. even if the cost of living is substantially higher, when living on an island.          The only thing that makes some sense is that a few people mentioned how Puerto Rico, now, appears to be modeled after Austin around 10 years ago.    At this point, Austin was adding tech jobs by the bushel, and the  constant turnover and compression of many tech firms in one area  led to a supernova type event where “tech stars” are born.

There was a second issue that caught my attention.   In one of these articles, there was an anecdote about a crypto-bro who developed his own “training course” for cryptocurrency, and for only $1,000 USD, he’d hook you up with all of the material you’d need to make over 6 figures selling digital assets.  (Is anybody else experiencing their hackles being raised?)  I hate to put it in these terms, but they come to me so quickly, I can’t avoid it.  Just after the initial life-saving operations due to a huge storm, the fake contractors and other flim-flam men appear on the community.  Their objective, soak up as much cash as possible, then blow town, much like a second storm.  I get the feeling that these people are following in the same footsteps.  If he REALLY DID have such a great system, I think you have to ask yourself, why is he selling it?

REFERENCES

IRS investigating American crypto exodus to Puerto Rico

https://www.coindesk.com/policy/2023/03/01/puerto-rico-extends-4-tax-incentive-to-crypto-and-blockchain-activities/

https://www.cnbc.com/2022/01/16/puerto-rico-low-taxes-island-life-make-it-hot-for-bitcoin-fans.html

https://www.washingtonpost.com/technology/2022/01/13/crypto-puerto-rico/

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.

 

MoonPie? No, MoonPay!

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Headline: What is Moonpay and what do they have to do with cryptocurrency?

Body:  So, there are a few options on getting a wallet for use of your cryptocurrency.   You can get a hardware (cold) wallet  that you keep at home, get a wallet from Coinbase, or use some other wallet provider.   There really are a great many options.  Now, I heard about MoonPay as yet another option.  I had no idea who they were or why I would use THEM.   So, I did some research.

The Basics

Founded in 2018, Miami-based MoonPay’s software lets users buy and sell cryptocurrencies using conventional payment methods like credit cards, bank transfers, or mobile wallets like Apple Pay and Google Pay. It also sells its technology to other businesses including crypto website Bitcoin.com and non-fungible token marketplace OpenSea, a model CEO Ivan Soto-Wright calls “crypto-as-a-service.”  In short, MoonPay sees itself as an easier on-ramp to cryptocurrencies.

For now, it seems that their business model is to find as many celebrities as possible to act as brand ambassadors.  There are many, including Justin Bieber.  (Can Bieber Bucks be far behind?)  Per the CEO, MoonPay intends to have an IPO and be a public company in the future.

So who are they and what do they do?

MoonPay appears to be a service aimed at businesses who accept cryptocurrency and match them up with consumers who only want to pay cash.  Apparently, there are over 5,000,000 customers over 150+ countries using the service.  This service allows you to conveniently trade from ctypto to fiat currency, or in reverse.    Currently, transferring from one cryptocurrency to another is not supported.

There are Pros and Cons with everything.

ProsCons
Convenient purchases within a chaotic marketplace.Fees can be high.   Usually the HIGHER of $3.99 or 4.5%
MoonPay would open up a whole new market by catering to people who do not want to use cryptocurrency to use for NFTs.You have to link MoonPay to a credit or debit card, and some of them don’t play well with cryptocurrency.
MoonPay has 40 available cryptocurrencies.MoonPay will only integrate with a handful of different cryptocurrencies.  Currently, 40 cryptocurrencies can be purchased.
MoonPay can be used to more easily purchase NFTs.Finding customer support for the MoonPay system can be difficult.
 Apparently, there are only a few stablecoins that can be sold thru MoonPay.

OK, so how does MoonPay work?

First thing is that MoonPay is NOT a decentralized exchange, so provision of some rudimentary identification (e.g. name, e-mail address, DoB etc.) is required.  In fact, if you provide only the required identifying information, you will get a rather low balance that you can trade with.   But, as you provide more identification information, your freedom to trade larger amounts increases.

Is MoonPay Safe?

It appears to be fairly safe.   The last successful hack (that management will cop to) was back in 2020.  Currently, they use a Bank-level encryption standard for data transmission, and they have a “bug bounty” program to incentivize their users to monitor the site too.   For each programming weakness they find, they will receive an amount of cryptocurrency for their work.

The Verdict

I think the idea of MoonPay is very good.  Essentially, it is trying to capture the majority of benefits of a decentralized exchange while keeping the majority of benefits of a centralized exchange.  But, I think this execution is clunky.   (Remember the TV with the VCR as one unit?   Remember what a GREAT idea THAT was???)  I think in a similar way, they are trying too hard to get the benefits of both, and they forgot that you also get the disadvantages of both.  Maybe MoonPay will pave the way for something truly revolutionary, but, for now, I think it has shortened to being revolting.

REFERENCES

https://www.nerdwallet.com/reviews/investing/brokers/moonpay

MoonPay Review 2023
Trust Wallet Teams up With Ramp and MoonPay to Enable Crypto-to-Fiat Withdrawals

https://www.cnbc.com/2022/05/17/moonpay-disruptor-50.html

https://www.nasdaq.com/articles/bitpay-announces-partnership-with-moonpay-removes-bitcoin-trading-fees-for-limited-time

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 it Possible for Insider Trading to Affect NFTs?

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Headline:  What’s happening with the Ex-manager of Opensea who has been convicted of NFT Insider Trading?

Body:  OK, let’s take a hypothetical.  There is a youngish woman (let’s make her a blonde), who had a pretty good career on Wall Street, but then wanted to do something else fulltime.  For the sake of this hypo, let’s say that she decided to start her own brand of home accents and cooking apparatus.  At the same time, she enjoyed managing her own portfolio of stocks and bonds, and maintained some relationships built up during her days on Wall Street.  One high-flying tech stock drew her eye, and she purchased a few shares.  Some time later, her friend at that company warned her of some very disappointing news about to be released.  She quickly opens her stock-trading app and sells her entire inventory of that stock.   The bad news breaks the next day, and that stock tanks 30%.   Great for her, she protected a bunch of money.   Not so great, she might’ve engaged in insider trading.

This fact pattern might be repeating itself with NFTs.   This is the crux of many of the articles I have read.   But, prosecution of insider trading on the stock market, seems to me, to be trying to provide a more even flow of information amongst potential investors.  NFTs on the other hand, (think of the bored ape yacht club) seems by its very nature to be unknowable.   Just think, you might know the date of the offering, and the price, but there is so much that you don’t know.   In the bored apes, you don’t know what eyes to expect, you don’t know what pose to expect, you don’t even know to expect the facial expression.  Further, you can’t know which combination of these and other traits will in the future bring  the highest price.  This is all a long-winded way of saying, that I don’t believe that traditional understandings of  insider trading can apply.  (In point of fact, the jury was warned that this wouldn’t look like a regular insider trading case at all.)  So, we shall see together.

So, what exactly happened?

Allegedly, a manager at OpenSea, Nathaniel Chastain, found out ahead of time which NFTs were to be featured, and purchased many of them on the theory that when they were featured, their prices would naturally rise a lot.   At that point, he would sell his at the now inflated price, and make a tidy profit.  Using this system, he made more than $50,000 in only 4 months, in 2021.  He is being charged with insider trading and wire fraud.   (Per a Special Agent I personally know, “wire fraud” is often a catch-all term used by the Federal Government for any illicit use of the Internet.)

“Nathanial Chastain exploited his advanced knowledge of which NFTs would be featured on OpenSea’s website to make profitable trades for himself,” U.S. Attorney Damian Williams said in a statement. “Although this case involved novel trades in crypto assets, there was nothing particularly innovative about his conduct – it was fraud.”

After 3 days of deliberation, the jury found him guilty on both counts.   He faces up to 40 years in prison.

OK, so why is the US government so interested?

Let’s get just a bit more exact with our diction.   The SEC is VERY interested in this topic, and we are asking why THEY are so interested in fighting in this arena.   The long and short of it is, I don’t know.   What I DO know is there is a proposed law called the Digital Commodity Exchange Act of 2022.   If this law passes, the lion’s share of regulation of cryptocurrency industry activities will fall under the purview of the Commodity Futures Trading Commission.  If this happens, the SEC misses out on the increasing budgetary sausage allocated to regulation of cryptocurrency.  But, if they can prove how incredibly “successful” they are in prosecution of novel cases, lawmakers might think twice before passing this law.  I’m not saying that this is the only consideration, but, the facts seem coincidental.  I leave it to you to use your own judgement.

The Verdict

The SEC took on  a difficult assignment here, no doubt about it.  To prove a new application of insider trading is really risky, and they did it.  So, we are left to interpret whether the outcome was good or bad.  I was not a member of the jury, but I do have a few thoughts.   First, when the prosecutor told them to focus on the wire fraud, I became instantly distrustful that the government had a good case for insider trading.  Second, something about OpenSea doesn’t make sense to me in this context.  Assuming that he was guilty of insider trading, one would be forced to presume that OpenSea holds enough of the cards (on a very opaque market) that a manager of the site is able to see what will be placed in the “featured” category AND the discernment needed to understand which examples will become valuable based upon consumer whim.  I don’t buy it.  What do you think?

REFERENCES

https://finance.yahoo.com/news/ex-opensea-exec-convicted-wire-211531049.html

https://www.binance.com/en/feed/post/486540

https://cointelegraph.com/news/sec-reportedly-launches-investigation-into-insider-trading-on-exchanges

https://today.westlaw.com/Document/I1939d37ce68d11ec9f24ec7b211d8087/View/FullText.html?contextData=(sc.Default)&transitionType=Default&firstPage=true

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.