All posts by Tucker Spillane

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Everything You Need to Know About Cryptocurrency Regulation

Originally posted on UpCounsel by Gary Ross.

The meteoric rise of cryptocurrencies has taken the world by storm. Innovators, investors, users, and governments are scrambling to wrap their heads around cryptocurrencies and the blockchain technology that they rely upon. The emergence of a new market and business model has created great opportunities for participants, but it also carries significant risk.

Cryptocurrencies present an inherently unique challenge to governments because of their new technology, cross-jurisdictional nature, and frequent lack of transparency. Governments are struggling to develop new ways to regulate cryptocurrencies, adapt existing regulations, and identify fraudulent schemes. Cryptocurrencies and their regulations are evolving before our eyes, and this article will provide a brief background on cryptocurrencies and an overview of where cryptocurrency regulations currently.

What are cryptocurrencies?

Cryptocurrency is, by any other name, a currency—a medium of exchange used to purchase goods and services. Or, as some have suggested, cryptocurrency is a “peer-to-peer version of electronic cash.” However, this currency has two qualities that distinguish it from traditional bills and coins.

First, cryptocurrency is a virtual currency that is created through cryptography (i.e. coding) and developed by mathematical formulas through a process called hashing. Second, unlike traditional bills and coins that are printed and minted by governments around the world, cryptocurrency is not tied to any one government, and thus is not secured by any government entity. The fact that cryptocurrencies are not secured by a government authority has led to concerns from critics that this is the second coming of Tulipmania, because we are ascribing value to an otherwise valueless item. However, the potential for cryptocurrencies as a medium of exchange remains enormous.

What is blockchain?

Blockchain is the technology at the heart of most cryptocurrencies, and explaining the technology in detail would require a blog post of its own. What is important to know is that blockchain is a record of peer-to-peer transactions categorized into blocks on a distributed ledger. Despite the obtuse terminology, blockchain functions similarly to a local bank authorizing and recording a transaction, but instead of only one party holding the entire ledger book, the transactions are recorded communally by member nodes, with each node being a computer in a peer-to-peer distributed network.

The blockchain can confirm a transaction within minutes, removing errors that exist when trying to reconcile and audit separate ledgers and transactions. Whenever a transaction takes place, the miners on the blockchain develop a new hash and digital signature to update the ledger and create a new “block.” This block, or recorded transaction, is time-stamped and encrypted and will remain on the blockchain for life.

Regulation in the US – Utility Tokens v. Investment Tokens

In the United States, there has been no federal regulation of cryptocurrencies. Instead, cryptocurrencies are often grouped into two non-binding categories: (1) investment tokens that fall under the purview of already existing U.S. securities laws like the Securities Act of 1933 and the Securities Exchange Act of 1934, and (2) utility tokens, which remain largely unregulated (for now).

Security Tokens

Whether the tokens being offered in connection with a particular cryptocurrency are security tokens is decided on a case-by-case basis that even experienced securities lawyers can disagree upon. Tokens are usually analyzed under the four-part Howey Test below to see if the token is in fact a security. Securities must meet the following criteria:

  1. An ​investment of money
  2. in a ​common enterprise
  3. with an ​expectation of profits
  4. predominantly from the efforts of others

Each characteristic of the token is analyzed against this framework to see if the cryptocurrency is in reality functioning as a new-age security. If it is, then regulators treat it as such, and cryptocurrencies must then be registered and handled with all of the same disclosures and precautions as any other security sold in the United States or to U.S. investors.

 

Utility Tokens

Cryptocurrencies can also be categorized as non-security utility tokens. These tokens purport to offer intrinsic utility and value, and are typically instrumental in powering the blockchain technology. These tokens function more like commodities than securities, and while they may act like currency in a fully functional network, they also have other values.

However, having a utility token with a properly formed and functioning network does not preclude said token from being labeled a security by the SEC. In In the Matter of Munchee, Inc., a purported utility token with a non-functioning network was labeled a security by the SEC. While labeling a token without a functioning network as a security – as it has no present utility – is not unexpected, the SEC also concluded that: “even if [Munchee] tokens had a practical use at the time of the offering, it would not preclude the token from being a security.”

After analyzing the Munchee Tokens under the Howey test, the SEC concluded that they were investment contracts because purchasers of the tokens had an expectation of profits predominantly from the efforts of Munchee and its staff. The SEC further concluded that Munchee had primed such expectations through its marketing efforts.

While this new case does not eliminate the distinction between utility and security tokens, it does caution that, when deciding whether a given token is a security, the SEC will look beyond utility at the character of the instrument, and base their conclusion based on the terms of the offer, the plan of distribution, and the economic inducements held out by the token issuer.

State Regulation

So far only the state of New York has issued any kind of regulation specifically regarding cryptocurrencies: the BitLicense. The BitLicense is New York’s attempt to control cryptocurrencies within its borders by requiring cryptocurrency businesses to register and comply with several different disclosure and financial obligations. The regulation has been divisive, and many businesses have rallied against its high costs. While a few companies have applied for and received the license, most other companies have simply left the state or stopped offering services to its residents.

Regulation Abroad – The Ever-Shifting Jurisdictional Question

The United States is not the only country grappling with how best to regulate cryptocurrencies. Many cryptocurrency businesses face daunting questions regarding in which jurisdictions to form and to do business in. In the end, the question is quite difficult and fact-specific, requiring communication between legal counsel in different jurisdictions and taking into account nebulous and piecemeal country-by-country regulations. It is impossible to do a detailed analysis without knowing how a country’s existing securities laws, financial regulations, and banking regulations will operate (or will be adapted to operate) with cryptocurrencies. The fact that cryptocurrency-specific regulations are still developing does little to add clarity, and makes the analysis even more challenging. Yet a few global trends are noticeable:

Suspending Cryptocurrencies

Some notable countries, like China, and South Korea, have suspended cryptocurrencies. These countries have cited the risk of fraud and the lack of adequate oversight in suspending cryptocurrencies and their exchanges, forcing cryptocurrency companies and exchanges to relocate.

 

Regulating Cryptocurrencies

Other countries, like Japan and Australia, have adopted disclosure and regulatory measures, or have companies register with the applicable government authority. Several countries have also tried to implement disclosure or registration regulatory regimes when it comes to cryptocurrencies, but such regimes are cumbersome and expensive to fledging companies.

Cryptocurrencies as Commodities

On the other hand, Switzerland and Singapore, two of the countries at the forefront of the cryptocurrency market, have simply stated that cryptocurrencies are assets not currency, and that they will treat them as such under existing regulations.

Conclusion

Ultimately, cryptocurrency regulation remains in its infancy. Piecemeal regulation has already begun around the world as governments enact new regulations to control and legitimize cryptocurrencies, fold cryptocurrencies into existing regulations, or ban them outright. These splintered attempts at controlling a global phenomenon will keep the cryptocurrency market volatile, and pose a challenge to innovators, investors, and users. They will continue to work in the cryptocurrency space while pushing for legislation and regulation that will remove ambiguity and legitimize cryptocurrencies. At the same time, they must grapple with the possibility that new regulations may be confusing, detrimental, or have negative inadvertent effects.

Don’t Sleep – Robinhood Adding Crypto to Their Popular Mobile App Platform

Robinhood is a mobile stock market trading app. It has gained wide popularity because it allows you to buy and sell stocks and securities for no fees. The platform will soon allow stocks, options, ETFs and cryptocurrencies. I have owned this app, which required me to be on a waiting list for a long time for over two years now, and I am very happy with the integration and progression of the company. The app has a very simple and stylish design with 4 colors total and is completely mobile. A desktop version is coming soon.

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The mobile app has just announced that they will be adding Cryptocurrencies in their new ad “Don’t Sleep” relating to the fact that currencies especially cryptocurrencies trade on a 24/7 global market around the world. This is very different from the American market which runs from 9:30a to 4:00p. According to news outlets and their site they will allow users to track 16 of the top cryptocurrencies and they will allow you to trade the top two “bitcoin” and “Ethereum”. This is largely due to the recent craze among these investment vehicles and gaining popularity around the world. It seems like these days, mobile companies are trying to capitalize and keep up with the times. They will still allow trading to be commission free even on the new cryptocurrencies. This is interesting because lately Bitcoin has been having issues with its high transfer fees and transfer speeds.

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The Sixteen Currencies that you can track include: Bitcoin, Ethereum, Bitcoin Cash, Litecoin, XRP, Ethereum Classic, Zcash, Monero, Dash, Stellar, Qtum, Bitcoin Gold, OmiseGo, NEO, Lisk, and Dogecoin. This implementation will begin in February 2018. Stay Tuned.

 

Sources:

http://blog.robinhood.com/news/2018/1/24/dont-sleep

 

 

Crypto Mining: A Short Intro

Most all cryptocurrencies record transactions by using blockchain technology or a similar DAG Directed acyclic graph technology to record transactions. To operate with the blockchain, cryptocurrencies use miners to link each transaction or block into a chain. This allows for each transaction to be accounted for on the same platform, making everything uniform. This is what creates the decentralized nature of the currencies. Bitcoin is the coin that made people aware of the possibility of mining; however, any coin that uses the bases of blockchain on a proof of work chain can be mined the other alternative is Proof Of Stake (we’ll talk about this later).

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Mining is just verifying the list of transactions on the blockchain. Someone who verifies that the transactions are accurate is rewarded with a specific currency. Set up the computers to solve the verification equations and complete the chains. When a transaction is made, miners first began by making sure the transaction is valid through running it through a series of tests. Next the data is put into a memory pool where the miner then pulls the information from. Once the miner has the data, the race begins to race to solve a set of complex equations through a computer called a hash function. In simplicity, a hash function is a algorithm that takes different length inputs (which are the transactions) and creates an output that is of all the same lengths. Here is an example of a simple hash function:

hello   ==> 2cf24dba5fb0a30e26e83b2ac5b9e29e1b161e5c1fa7425e73043362938b9824
goodbye ==> 82e35a63ceba37e9646434c5dd412ea577147f1e4a41ccde1614253187e3dbf9

In order to solve one of these functions, the computer just keeps making guesses until it is correct.

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For a person to mine cryptocurrencies, it takes more than a computer. In order to successfully mine, many people create mining rigs. Each rig consists of five to six graphic cards. The mining rigs take a lot of power/electricity, which can be quite expensive. The power of a graphic card is determined by the hash rate and power consumption. The hash rate is determined by how fast the graphic card can solve the hash functions. Miners have a decision to make between conserving power, while still having a fast hash rate. It is all about finding the perfect balance. In addition to power and hash rate,  it is important to run them in a cool environment. The colder the environment the faster the processing power.

In addition to miners, the process also needs nodes to double-check and validate. Nodes are important members that move data, such as payments and additions to the blockchain, around the network. While the information is passed around, it is checked by other nodes on the network. Nodes differ from miners because the miners are doing the raw work of attacking the transactions to the blockchain, and the Nodes are the validators. When a transaction is validated and a block is complete all the nodes around the system in the web are updated, which creates the decentralization and the data is held in all the seperated locations instead of in one central location.

 

https://www.coindesk.com/bitcoin-hash-functions-explained/

https://chrispacia.wordpress.com/2013/09/02/bitcoin-mining-explained-like-youre-five-part-2-mechanics/

https://cryptosrus.com/ethereum-mining-rig/

 

https://www.google.com/amp/www.coinminingrigs.com/how-to-build-a-6-gpu-mining-rig/amp/

https://bitsonblocks.net/2015/09/09/a-gentle-introduction-to-blockchain-technology/

 

Monero: The Dark Coin

Lately I have been investing more and more into some of the popular alt-coins. One of my favorite websites is called coinmarketcap.com. This site allows me to look up a list of the top currencies on the market right now and sort with different filters. The list is defaulted on the market cap of the coin. This is important because this is basically the valuation of the entire currency in the default of USD after conversion. You can also sort by price, volume, circulating supply and 24 hour change. Numbers are updated in real time. This is a very powerful tool for doing swap research.

While on this site I kept seeing a coin called Monero(XMR). It has been in the top 10 for a while now and currently has the 11th highest market cap of all the coins around $7b and a coin price of $460.

Monero has been around since April 2014 and has a heavy focus on Privacy and decentralization. The coin is mineable and records transactions publicly via ledger. Monero’s main objective is to obscure the sender to receiver and the amount transferred. This gives a more traceless system. Some argue that this could be dangerous giving the transaction agents a mask. This brings controversy because people assume it will be used for illegal activities.

Monero basically blew up in 2016 and experienced a ton of growth in its market cap and volume because it was adopted in the darkNet site MarketAlphaBay, which was later closed in July 2017 due to criminal activity.

How it works: Monero uses uses uses stealth addresses, confidential transactions and stealth hidden ring signatures to hide the origins, transaction amounts and destinations of coins. A holder still gets all the benefits of a normal decentralized cryptocurrency just with an added layer of anonymity. The coin also cannot be blacklisted based in its previous activity and can be mutually interchangeable.

Monero has been accepted in many dark places on the web due to its attraction to dark/illicit activity. Because of its visibility in the marketplaces and ability to shield users identity it is less speculative than other popular and similar coins. Monero will be capped at 18 million coins and will rely on supply and demand of the coin to determine price and mining will take another 8 years to reach total coins mined.

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Lately the coin has had tremendous growth during the past few weeks. There have been many rumors in the US about which coins are contenders to be added to the widely popular coin exchange app Coinbase and Monero due to its market cap and volume definitey seems to be a contender.

Smart-Bridging the Cryptocurrency Gap, What ARK Coin is All About.

Being a college student, the need for money is quite high; however, we want it fast. With Bitcoins $4,882 rise just last week, everyone is pouring there money into the cryptocurrency. Bitcoin this, Bitcoin that; however, the new thing in the world of cryptocurrency investors are alt currencies. These are a set of cryptocurrencies that have specialized features, but are far less known mainstream. The next crypto on the radar of many crypto users is ARK.

ARK is a fork of Lisk, which started out as a cryptocurrency with the goal of creating side chains. ARK still uses the blockchain; however it is utilizing it in a very different way. The potential is very high for ARK because of the ambition behind the team of developers. There is a team of 27 developers that work to fix the problems that mainstream cryptocurrencies have. A few things that the developers have done are increasing speed, the Delegated Proof of Stake, and the notorious SmartBridge.

To start off, the developers of ARK have increased the speed of confirmation time. The confirmation time for ARK is around 8 seconds. The developers were able to achieve this by allowing microtransactions to be done through off-chain processing. This allows the transaction to be much faster because it prevents blockchain bloat. Blockchain bloat is when the blockchain gets filled up with test/fake/small transactions that slow down the network; however, with the use of off-chain processing, this can be avoided.

Another change ARK has made to their cryptocurrency, which is a problem the top cryptos have, is a modified Delegated-Proof-of-Stake. Many cryptocurrencies, like bitcoin, would select people to put together the blocks. However, the same people keep on getting it. With the new DPoS system, 51 active forging Delegates are selected by vote mechanism built into DPoS. These people have voting power; however, it changes each time. This allows the cryptocurrency to be more decentralized. This decision making process makes is very easy to upgrade the currency. This means it is good for investing in because of the continued improvements that the developers are able to do with ease.

ARK is also experimenting with a homogenous codebase. This means that connecting other services off the main code is very easy since it all contains the same “format” of code. “The potential to provide service bridges in the form of Lisk blockchain apps, along with any other additional systems provided by their Blockchain administrators.”

And Finally, the greatest thing ARK has brought to us: the SmartBridge. SmartBridge is the bridge that connects all cryptocurrencies together. To convert cryptocurrencies into a different type you have to use a wallet that has both currency pairs, convert it, and then move it to where you wanted it to go; however, this process is way faster with ARK. For example, a user that has ARK currency and needs to send it to another user that wants bitcoin. The user with ARK can simply send the ARK currency and while on its way it will convert to Bitcoin. This allows all cryptocurrencies to be easily converted. ARK is trying to become the centralized crypto, the one cryptocurrency that connects them all.

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The ambition and drive that the ARK developers have is the biggest asset to the new cryptocurrency. The developers are taking all the small issues that blockchain based cryptos are having and adapting to ARK to avoid similar problems and issues.

Now what everyone wants to talk about, what are the returns on this coin. The crypto currency is trading for $4.16 as of 12/12/2017. ARK started on March 22nd, 2017 and started trading at .03 cents; however, it started to make major gains in August when it started to trade at .85. By September the coin saw a 311% gain and was up at $2.65. Now at the start of December, ARK started at $3.06 and saw a great increase until the 5th of December; however, it is making another climb and is trading at $4.16. That is still a dollar return on the coin within 12 days.

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The potential for this coin is quite high. The future of this coin looks bright.

 

 

Sources:

https://coinmarketcap.com/currencies/ark/

https://ark.io/

 

IOTA Moves to the Top 5 in Market Cap Thanks to Microsoft.

I have been fooling around with cryptocurrencies for a while now and a few days ago one really just caught my attention. IOTA. The coin a which is a play off the phase “IoT or Internet of Things” is a coin/cryptocurrencies created to be traded between different machines on the “Internet of Things”. This coin caught my attention because it does not use classic Blockchain technology that we have seen on other very popular cryptocurrencies such as Bitcoin, Ethereum or LiteCoin, instead it uses Directed Acyclic Graph technology, which is a blockless ledger. IOTA refers to its DAG technologie as “tangle”.  Confirmation times are fast and transactions are basically free. As of Dec. 2017. The market cap made it the 4th largest cryptocurrency by market cap, which is around $12 billion. IOTA was created in 2015. These coins are not able to be mined so there was a set amount that was created 2,779,530,283,277,761. In May 2017 IOTA was listed on its first exchange: Bitfinex and is now also listed on Binance as well.

I follow a lot of tech/coin personalities on Instagram and this was getting a lot of attention. At the time the coin was selling for approx. $3 dollars and in a day or two went to $5.5 and has since retracted to mid $3’s. Since I first started trading crypto I had only used the widely popular american exchange “coinbase”. Because this currency doesn’t sell as a fiat currency pair such as IOTA/USD I had to first convert my USD to ETH or BTC and then trade indirectly on a separate exchange “Binance” which is a UK based platform. Binance is one of the top 5 crypto trading platforms in the world according to Coinmarketcap.com.

Another big reason this coin has become popular is because in the past week Microsoft made a big announcement that they were going to collaborate and partner with IOTA coin. This made the currency grow in value with a 90% increase in market cap basically launching it into the 4th position. IOTA has previously partnered with large companies such as Samsung, Cisco, and Volkswagen. Tangle will help with the large process of trading information Business-to-Business between these large corporations using the technology. The tangle system is designed to allow users to create transactions by validation (making sure all transactions are secure, immutable and without fees). The no-fee part of the technology model is huge for information sharing between businesses because tiny micropayments for information between businesses cannot be handled well and complicates the transactions on a large scale. IOTA hopes their technology and the tangle structure will allow a widespread of micropayments for data between companies. This will allow for the transfer of data and information from all kinds of IoT devices with little to no fees to give a greater feeling of interconnectedness between smart technology machines.

Sources:

https://en.wikipedia.org/wiki/IOTA_(technology)

https://coinmarketcap.com/currencies/iota/

https://iota.org/

https://www.cryptocoinsnews.com/iota-price-explodes-after-microsoft-partnership-announcement/

https://cointelegraph.com/news/iota-partners-with-microsoft-fujitsu-others-for-iot-data-monetization

Top 5 Cryptocurrencies by Market Cap

The number one, I’m sure you’ve heard of it is Bitcoin. Bitcoin currently has a market cap of approximately $95 Billion as of today. The one that started it all. Created by the psyudenym Satoshi Yakamoto and released in 2009. Bitcoin is a cryptocurrency that allows for peer-2-peer payment transactions and built on the Blockchain ledger technology, a digital payment system and was the first currency with the ideal of a decentralized monetary platform. There are nodes around the world, mining these bitcoins by recording these transactions on a distributed public ledger called a blockchain. Miners are incentivized with more Bitcoins. Bitcoins can be exchanged for other currencies and in some places other products and services. Bitcoin has been gaining world popularity since the beginning. The currency has seen positive and negative reviews but as of lately has been gaining popularity and value as more companies and leaders are seeing new uses for this technology.

Ethereum has a market cap of approx. $28 Billion, Ethereum has gained wide popularity especially this year. The currency was developed by Vitalik Buterin. A developer who used to work for bitcoin but left when he realized he wanted to create a more app friendly platform that users would be able to build off. Ethereum is open source, which means that the original source code is made freely available and may be redistributed and modified. The reason that this is important is because vitalik wanted other developers to use the ethereum platform to build other tokens and currencies based in the network. The platform is blockchain-based and features a smart-contract functionality that makes this currency widely popular. “Smart contracts are computer protocols intended to facilitate, verify, or enforce the negotiation or performance of a contract.” These enforces that proper inputs result in proper outputs in an exchange within the network. The ethereum blockchain also has its own token called “Ether” which can be traded on all main crypto exchanges. The Ether is also used to reward Ethereum Miners who complete and verify computations and hashes of other users. Ethereum was proposed in 2013 and the development was funded in late 2014 by a crowd sale.

Ripple has a market cap of approx. $9 Billion, which makes it the third largest in terms of market size. Ripple is the name for both a digital currency (XRP) and an open payment network within which that currency is transferred. The platform and currency is still in beta testing. Ripple was created to allow people to transfer money across the system seamlessly, through people, banks, Credit, etc. Many of the creators of the coin have a Bitcoin background. Ripple was Released in 2012, Ripple reports it enables “secure, instant and nearly free global financial transactions of any size with no chargebacks.” The tokens represent value in fiat currency, crypto, and many other units of measurement, even things such as mobile minutes or frequent flier miles. The Ripple network was built on a decentralized Blockchain ledger without a central hub for seamless transfer of currency along the network. Ripple became popular because it was endorse and used by companies such as UBS, santander. Ripple is advantages among other competitors because of its low currency price and its security

Bitcoin Cash is the fourth largest coin in terms of market size with a market cap of Approx. $5 Billion. Bitcoin Cash was created when On July 20, 2017, Bitcoin Cash (BCC) was created when there was a “Fork” or upgrade in the public ledger of the original cryptocurrency. The issue was the scaling of the original Bitcoin’s block size. Bitcoin Cash is a P2P electronic cash. The currency has different rules that were upgraded from the original bitcoin that allows “the continuation of the Bitcoin project as peer-to-peer digital cash. The currency has upgraded consensus rules that allow it to grow and scale differently from the original Bitcoin product.

Litecoin Is coming in at #5 in size with a market cap of $2 Billion. Lite coin is one of the three currencies that is trading on the widely popular exchange, Coinbase. The cryptocurrency is also a P2P  and an open source decentralized platform that was basically inspired by and very similar to that of bitcoin. In terms of differences Litecoin has also adopted SegWit technology and the lightning network. SegWit is the process by which the block size limit on a blockchain is increased by removing signature data from Bitcoin transactions. When certain parts of a transaction are removed, this frees up space or capacity to add more transactions to the chain.These both basically call for a larger number of transactions to happen with much greater speed. One major advantage that LTC has over bitcoin is its fees are close to zero and payment processing is much much faster. LTC was introduced in October 2011 by a man named Charlie Lee, who used to work for Google. As we mentioned earlier LTC became the first of the top 5 largest currencies (in terms of market cap) to adopt the SegWit technology. A few months later, The first lightning network transaction was completed sending 0.00000001 LTC from Zurich to San Francisco in under one second.

 

Sources:

https://en.wikipedia.org/wiki/Litecoin

https://litecoin.org/

https://www.bitcoincash.org/

https://coinmarketcap.com/coins/

https://en.wikipedia.org/wiki/Ethereum

https://ripple.com/

https://www.coindesk.com/10-things-you-need-to-know-about-ripple/

https://en.wikipedia.org/wiki/Bitcoin

. https://en.wikipedia.org/wiki/Ripple_(payment_protocol)