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Summary: Everyone knows that when you give your assets to someone else, they always keep them safe. If this is true for individuals, it is certainly true for businesses. Custodians always tell the truth and manage funds properly. They won't have any interest in taking the assets as an exchange operator would. Auditors tell the truth and can't be misled. That's because organizations that are regulated are incapable of lying and don't make mistakes. First, some background. Here is a summary of how custodians make us more secure: Previously, we might give Alice our crypto assets to hold. There were risks:
Alice might take the assets and disappear.
Alice might spend the assets and pretend that she still has them (fractional model).
Alice might store the assets insecurely and they'll get stolen.
Alice might give the assets to someone else by mistake or by force.
Alice might lose access to the assets.
But "no worries", Alice has a custodian named Bob. Bob is dressed in a nice suit. He knows some politicians. And he drives a Porsche. "So you have nothing to worry about!". And look at all the benefits we get:
Alice can't take the assets and disappear (unless she asks Bob or never gives them to Bob).
Alice can't spend the assets and pretend that she still has them. (Unless she didn't give them to Bob or asks him for them.)
Alice can't store the assets insecurely so they get stolen. (After all - she doesn't have any control over the withdrawal process from any of Bob's systems, right?)
Alice can't give the assets to someone else by mistake or by force. (Bob will stop her, right Bob?)
Alice can't lose access to the funds. (She'll always be present, sane, and remember all secrets, right?)
See - all problems are solved! All we have to worry about now is:
Bob might take the assets and disappear.
Bob might spend the assets and pretend that he still has them (fractional model).
Bob might store the assets insecurely and they'll get stolen.
Bob might give the assets to someone else by mistake or by force.
Bob might lose access to the assets.
It's pretty simple. Before we had to trust Alice. Now we only have to trust Alice, Bob, and all the ways in which they communicate. Just think of how much more secure we are! "On top of that", Bob assures us, "we're using a special wallet structure". Bob shows Alice a diagram. "We've broken the balance up and store it in lots of smaller wallets. That way", he assures her, "a thief can't take it all at once". And he points to a historic case where a large sum was taken "because it was stored in a single wallet... how stupid". "Very early on, we used to have all the crypto in one wallet", he said, "and then one Christmas a hacker came and took it all. We call him the Grinch. Now we individually wrap each crypto and stick it under a binary search tree. The Grinch has never been back since." "As well", Bob continues, "even if someone were to get in, we've got insurance. It covers all thefts and even coercion, collusion, and misplaced keys - only subject to the policy terms and conditions." And with that, he pulls out a phone-book sized contract and slams it on the desk with a thud. "Yep", he continues, "we're paying top dollar for one of the best policies in the country!" "Can I read it?' Alice asks. "Sure," Bob says, "just as soon as our legal team is done with it. They're almost through the first chapter." He pauses, then continues. "And can you believe that sales guy Mike? He has the same year Porsche as me. I mean, what are the odds?" "Do you use multi-sig?", Alice asks. "Absolutely!" Bob replies. "All our engineers are fully trained in multi-sig. Whenever we want to set up a new wallet, we generate 2 separate keys in an air-gapped process and store them in this proprietary system here. Look, it even requires the biometric signature from one of our team members to initiate any withdrawal." He demonstrates by pressing his thumb into the display. "We use a third-party cloud validation API to match the thumbprint and authorize each withdrawal. The keys are also backed up daily to an off-site third-party." "Wow that's really impressive," Alice says, "but what if we need access for a withdrawal outside of office hours?" "Well that's no issue", Bob says, "just send us an email, call, or text message and we always have someone on staff to help out. Just another part of our strong commitment to all our customers!" "What about Proof of Reserve?", Alice asks. "Of course", Bob replies, "though rather than publish any blockchain addresses or signed transaction, for privacy we just do a SHA256 refactoring of the inverse hash modulus for each UTXO nonce and combine the smart contract coefficient consensus in our hyperledger lightning node. But it's really simple to use." He pushes a button and a large green checkmark appears on a screen. "See - the algorithm ran through and reserves are proven." "Wow", Alice says, "you really know your stuff! And that is easy to use! What about fiat balances?" "Yeah, we have an auditor too", Bob replies, "Been using him for a long time so we have quite a strong relationship going! We have special books we give him every year and he's very efficient! Checks the fiat, crypto, and everything all at once!" "We used to have a nice offline multi-sig setup we've been using without issue for the past 5 years, but I think we'll move all our funds over to your facility," Alice says. "Awesome", Bob replies, "Thanks so much! This is perfect timing too - my Porsche got a dent on it this morning. We have the paperwork right over here." "Great!", Alice replies. And with that, Alice gets out her pen and Bob gets the contract. "Don't worry", he says, "you can take your crypto-assets back anytime you like - just subject to our cancellation policy. Our annual management fees are also super low and we don't adjust them often". How many holes have to exist for your funds to get stolen? Just one. Why are we taking a powerful offline multi-sig setup, widely used globally in hundreds of different/lacking regulatory environments with 0 breaches to date, and circumventing it by a demonstrably weak third party layer? And paying a great expense to do so? If you go through the list of breaches in the past 2 years to highly credible organizations, you go through the list of major corporate frauds (only the ones we know about), you go through the list of all the times platforms have lost funds, you go through the list of times and ways that people have lost their crypto from identity theft, hot wallet exploits, extortion, etc... and then you go through this custodian with a fine-tooth comb and truly believe they have value to add far beyond what you could, sticking your funds in a wallet (or set of wallets) they control exclusively is the absolute worst possible way to take advantage of that security. The best way to add security for crypto-assets is to make a stronger multi-sig. With one custodian, what you are doing is giving them your cryptocurrency and hoping they're honest, competent, and flawlessly secure. It's no different than storing it on a really secure exchange. Maybe the insurance will cover you. Didn't work for Bitpay in 2015. Didn't work for Yapizon in 2017. Insurance has never paid a claim in the entire history of cryptocurrency. But maybe you'll get lucky. Maybe your exact scenario will buck the trend and be what they're willing to cover. After the large deductible and hopefully without a long and expensive court battle. And you want to advertise this increase in risk, the lapse of judgement, an accident waiting to happen, as though it's some kind of benefit to customers ("Free institutional-grade storage for your digital assets.")? And then some people are writing to the OSC that custodians should be mandatory for all funds on every exchange platform? That this somehow will make Canadians as a whole more secure or better protected compared with standard air-gapped multi-sig? On what planet? Most of the problems in Canada stemmed from one thing - a lack of transparency. If Canadians had known what a joke Quadriga was - it wouldn't have grown to lose $400m from hard-working Canadians from coast to coast to coast. And Gerald Cotten would be in jail, not wherever he is now (at best, rotting peacefully). EZ-BTC and mister Dave Smilie would have been a tiny little scam to his friends, not a multi-million dollar fraud. Einstein would have got their act together or been shut down BEFORE losing millions and millions more in people's funds generously donated to criminals. MapleChange wouldn't have even been a thing. And maybe we'd know a little more about CoinTradeNewNote - like how much was lost in there. Almost all of the major losses with cryptocurrency exchanges involve deception with unbacked funds. So it's great to see transparency reports from BitBuy and ShakePay where someone independently verified the backing. The only thing we don't have is:
ANY CERTAINTY BALANCES WEREN'T EXCLUDED. Quadriga's largest account was $70m. 80% of funds are in 20% of accounts (Pareto principle). All it takes is excluding a few really large accounts - and nobody's the wiser. A fractional platform can easily pass any audit this way.
ANY VISIBILITY WHATSOEVER INTO THE CUSTODIANS. BitBuy put out their report before moving all the funds to their custodian and ShakePay apparently can't even tell us who the custodian is. That's pretty important considering that basically all of the funds are now stored there.
ANY IDEA ABOUT THE OTHER EXCHANGES. In order for this to be effective, it has to be the norm. It needs to be "unusual" not to know. If obscurity is the norm, then it's super easy for people like Gerald Cotten and Dave Smilie to blend right in.
It's not complicated to validate cryptocurrency assets. They need to exist, they need to be spendable, and they need to cover the total balances. There are plenty of credible people and firms across the country that have the capacity to reasonably perform this validation. Having more frequent checks by different, independent, parties who publish transparent reports is far more valuable than an annual check by a single "more credible/official" party who does the exact same basic checks and may or may not publish anything. Here's an example set of requirements that could be mandated:
First report within 1 month of launching, another within 3 months, and further reports at minimum every 6 months thereafter.
No auditor can be repeated within a 12 month period.
All reports must be public, identifying the auditor and the full methodology used.
All auditors must be independent of the firm being audited with no conflict of interest.
Reports must include the percentage of each asset backed, and how it's backed.
The auditor publishes a hash list, which lists a hash of each customer's information and balances that were included. Hash is one-way encryption so privacy is fully preserved. Every customer can use this to have 100% confidence they were included.
If we want more extensive requirements on audits, these should scale upward based on the total assets at risk on the platform, and whether the platform has loaned their assets out.
There are ways to structure audits such that neither crypto assets nor customer information are ever put at risk, and both can still be properly validated and publicly verifiable. There are also ways to structure audits such that they are completely reasonable for small platforms and don't inhibit innovation in any way. By making the process as reasonable as possible, we can completely eliminate any reason/excuse that an honest platform would have for not being audited. That is arguable far more important than any incremental improvement we might get from mandating "the best of the best" accountants. Right now we have nothing mandated and tons of Canadians using offshore exchanges with no oversight whatsoever. Transparency does not prove crypto assets are safe. CoinTradeNewNote, Flexcoin ($600k), and Canadian Bitcoins ($100k) are examples where crypto-assets were breached from platforms in Canada. All of them were online wallets and used no multi-sig as far as any records show. This is consistent with what we see globally - air-gapped multi-sig wallets have an impeccable record, while other schemes tend to suffer breach after breach. We don't actually know how much CoinTrader lost because there was no visibility. Rather than publishing details of what happened, the co-founder of CoinTrader silently moved on to found another platform - the "most trusted way to buy and sell crypto" - a site that has no information whatsoever (that I could find) on the storage practices and a FAQ advising that “[t]rading cryptocurrency is completely safe” and that having your own wallet is “entirely up to you! You can certainly keep cryptocurrency, or fiat, or both, on the app.” Doesn't sound like much was learned here, which is really sad to see. It's not that complicated or unreasonable to set up a proper hardware wallet. Multi-sig can be learned in a single course. Something the equivalent complexity of a driver's license test could prevent all the cold storage exploits we've seen to date - even globally. Platform operators have a key advantage in detecting and preventing fraud - they know their customers far better than any custodian ever would. The best job that custodians can do is to find high integrity individuals and train them to form even better wallet signatories. Rather than mandating that all platforms expose themselves to arbitrary third party risks, regulations should center around ensuring that all signatories are background-checked, properly trained, and using proper procedures. We also need to make sure that signatories are empowered with rights and responsibilities to reject and report fraud. They need to know that they can safely challenge and delay a transaction - even if it turns out they made a mistake. We need to have an environment where mistakes are brought to the surface and dealt with. Not one where firms and people feel the need to hide what happened. In addition to a knowledge-based test, an auditor can privately interview each signatory to make sure they're not in coercive situations, and we should make sure they can freely and anonymously report any issues without threat of retaliation. A proper multi-sig has each signature held by a separate person and is governed by policies and mutual decisions instead of a hierarchy. It includes at least one redundant signature. For best results, 3of4, 3of5, 3of6, 4of5, 4of6, 4of7, 5of6, or 5of7. History has demonstrated over and over again the risk of hot wallets even to highly credible organizations. Nonetheless, many platforms have hot wallets for convenience. While such losses are generally compensated by platforms without issue (for example Poloniex, Bitstamp, Bitfinex, Gatecoin, Coincheck, Bithumb, Zaif, CoinBene, Binance, Bitrue, Bitpoint, Upbit, VinDAX, and now KuCoin), the public tends to focus more on cases that didn't end well. Regardless of what systems are employed, there is always some level of risk. For that reason, most members of the public would prefer to see third party insurance. Rather than trying to convince third party profit-seekers to provide comprehensive insurance and then relying on an expensive and slow legal system to enforce against whatever legal loopholes they manage to find each and every time something goes wrong, insurance could be run through multiple exchange operators and regulators, with the shared interest of having a reputable industry, keeping costs down, and taking care of Canadians. For example, a 4 of 7 multi-sig insurance fund held between 5 independent exchange operators and 2 regulatory bodies. All Canadian exchanges could pay premiums at a set rate based on their needed coverage, with a higher price paid for hot wallet coverage (anything not an air-gapped multi-sig cold wallet). Such a model would be much cheaper to manage, offer better coverage, and be much more reliable to payout when needed. The kind of coverage you could have under this model is unheard of. You could even create something like the CDIC to protect Canadians who get their trading accounts hacked if they can sufficiently prove the loss is legitimate. In cases of fraud, gross negligence, or insolvency, the fund can be used to pay affected users directly (utilizing the last transparent balance report in the worst case), something which private insurance would never touch. While it's recommended to have official policies for coverage, a model where members vote would fully cover edge cases. (Could be similar to the Supreme Court where justices vote based on case law.) Such a model could fully protect all Canadians across all platforms. You can have a fiat coverage governed by legal agreements, and crypto-asset coverage governed by both multi-sig and legal agreements. It could be practical, affordable, and inclusive. Now, we are at a crossroads. We can happily give up our freedom, our innovation, and our money. We can pay hefty expenses to auditors, lawyers, and regulators year after year (and make no mistake - this cost will grow to many millions or even billions as the industry grows - and it will be borne by all Canadians on every platform because platforms are not going to eat up these costs at a loss). We can make it nearly impossible for any new platform to enter the marketplace, forcing Canadians to use the same stagnant platforms year after year. We can centralize and consolidate the entire industry into 2 or 3 big players and have everyone else fail (possibly to heavy losses of users of those platforms). And when a flawed security model doesn't work and gets breached, we can make it even more complicated with even more people in suits making big money doing the job that blockchain was supposed to do in the first place. We can build a system which is so intertwined and dependent on big government, traditional finance, and central bankers that it's future depends entirely on that of the fiat system, of fractional banking, and of government bail-outs. If we choose this path, as history has shown us over and over again, we can not go back, save for revolution. Our children and grandchildren will still be paying the consequences of what we decided today. Or, we can find solutions that work. We can maintain an open and innovative environment while making the adjustments we need to make to fully protect Canadian investors and cryptocurrency users, giving easy and affordable access to cryptocurrency for all Canadians on the platform of their choice, and creating an environment in which entrepreneurs and problem solvers can bring those solutions forward easily. None of the above precludes innovation in any way, or adds any unreasonable cost - and these three policies would demonstrably eliminate or resolve all 109 historic cases as studied here - that's every single case researched so far going back to 2011. It includes every loss that was studied so far not just in Canada but globally as well. Unfortunately, finding answers is the least challenging part. Far more challenging is to get platform operators and regulators to agree on anything. My last post got no response whatsoever, and while the OSC has told me they're happy for industry feedback, I believe my opinion alone is fairly meaningless. This takes the whole community working together to solve. So please let me know your thoughts. Please take the time to upvote and share this with people. Please - let's get this solved and not leave it up to other people to do. Facts/background/sources (skip if you like):
The inspiration for the paragraph about splitting wallets was an actual quote from a Canadian company providing custodial services in response to the OSC consultation paper: "We believe that it will be in the in best interests of investors to prohibit pooled crypto assets or ‘floats’. Most Platforms pool assets, citing reasons of practicality and expense. The recent hack of the world’s largest Platform – Binance – demonstrates the vulnerability of participants’ assets when such concessions are made. In this instance, the Platform’s entire hot wallet of Bitcoins, worth over $40 million, was stolen, facilitated in part by the pooling of client crypto assets." "the maintenance of participants (and Platform) crypto assets across multiple wallets distributes the related risk and responsibility of security - reducing the amount of insurance coverage required and making insurance coverage more readily obtainable". For the record, their reply also said nothing whatsoever about multi-sig or offline storage.
In addition to the fact that the $40m hack represented only one "hot wallet" of Binance, and they actually had the vast majority of assets in other wallets (including mostly cold wallets), multiple real cases have clearly demonstrated that risk is still present with multiple wallets. Bitfinex, VinDAX, Bithumb, Altsbit, BitPoint, Cryptopia, and just recently KuCoin all had multiple wallets breached all at the same time, and may represent a significantly larger impact on customers than the Binance breach which was fully covered by Binance. To represent that simply having multiple separate wallets under the same security scheme is a comprehensive way to reduce risk is just not true.
Private insurance has historically never covered a single loss in the cryptocurrency space (at least, not one that I was able to find), and there are notable cases where massive losses were not covered by insurance. Bitpay in 2015 and Yapizon in 2017 both had insurance policies that didn't pay out during the breach, even after a lengthly court process. The same insurance that ShakePay is presently using (and announced to much fanfare) was describe by their CEO himself as covering “physical theft of the media where the private keys are held,” which is something that has never historically happened. As was said with regard to the same policy in 2018 - “I don’t find it surprising that Lloyd’s is in this space,” said Johnson, adding that to his mind the challenge for everybody is figuring out how to structure these policies so that they are actually protective. “You can create an insurance policy that protects no one – you know there are so many caveats to the policy that it’s not super protective.”
The most profitable policy for a private insurance company is one with the most expensive premiums that they never have to pay a claim on. They have no inherent incentive to take care of people who lost funds. It's "cheaper" to take the reputational hit and fight the claim in court. The more money at stake, the more the insurance provider is incentivized to avoid payout. They're not going to insure the assets unless they have reasonable certainty to make a profit by doing so, and they're not going to pay out a massive sum unless it's legally forced. Private insurance is always structured to be maximally profitable to the insurance provider.
The circumvention of multi-sig was a key factor in the massive Bitfinex hack of over $60m of bitcoin, which today still sits being slowly used and is worth over $3b. While Bitfinex used a qualified custodian Bitgo, which was and still is active and one of the industry leaders of custodians, and they set up 2 of 3 multi-sig wallets, the entire system was routed through Bitfinex, such that Bitfinex customers could initiate the withdrawals in a "hot" fashion. This feature was also a hit with the hacker. The multi-sig was fully circumvented.
Bitpay in 2015 was another example of a breach that stole 5,000 bitcoins. This happened not through the exploit of any system in Bitpay, but because the CEO of a company they worked with got their computer hacked and the hackers were able to request multiple bitcoin purchases, which Bitpay honoured because they came from the customer's computer legitimately. Impersonation is a very common tactic used by fraudsters, and methods get more extreme all the time.
A notable case in Canada was the Canadian Bitcoins exploit. Funds were stored on a server in a Rogers Data Center, and the attendee was successfully convinced to reboot the server "in safe mode" with a simple phone call, thus bypassing the extensive security and enabling the theft.
The very nature of custodians circumvents multi-sig. This is because custodians are not just having to secure the assets against some sort of physical breach but against any form of social engineering, modification of orders, fraudulent withdrawal attempts, etc... If the security practices of signatories in a multi-sig arrangement are such that the breach risk of one signatory is 1 in 100, the requirement of 3 independent signatures makes the risk of theft 1 in 1,000,000. Since hackers tend to exploit the weakest link, a comparable custodian has to make the entry and exit points of their platform 10,000 times more secure than one of those signatories to provide equivalent protection. And if the signatories beef up their security by only 10x, the risk is now 1 in 1,000,000,000. The custodian has to be 1,000,000 times more secure. The larger and more complex a system is, the more potential vulnerabilities exist in it, and the fewer people can understand how the system works when performing upgrades. Even if a system is completely secure today, one has to also consider how that system might evolve over time or work with different members.
By contrast, offline multi-signature solutions have an extremely solid record, and in the entire history of cryptocurrency exchange incidents which I've studied (listed here), there has only been one incident (796 exchange in 2015) involving an offline multi-signature wallet. It happened because the customer's bitcoin address was modified by hackers, and the amount that was stolen ($230k) was immediately covered by the exchange operators. Basically, the platform operators were tricked into sending a legitimate withdrawal request to the wrong address because hackers exploited their platform to change that address. Such an issue would not be prevented in any way by the use of a custodian, as that custodian has no oversight whatsoever to the exchange platform. It's practical for all exchange operators to test large withdrawal transactions as a general policy, regardless of what model is used, and general best practice is to diagnose and fix such an exploit as soon as it occurs.
False promises on the backing of funds played a huge role in the downfall of Quadriga, and it's been exposed over and over again (MyCoin, PlusToken, Bitsane, Bitmarket, EZBTC, IDAX). Even today, customers have extremely limited certainty on whether their funds in exchanges are actually being backed or how they're being backed. While this issue is not unique to cryptocurrency exchanges, the complexity of the technology and the lack of any regulation or standards makes problems more widespread, and there is no "central bank" to come to the rescue as in the 2008 financial crisis or during the great depression when "9,000 banks failed".
In addition to fraudulent operations, the industry is full of cases where operators have suffered breaches and not reported them. Most recently, Einstein was the largest case in Canada, where ongoing breaches and fraud were perpetrated against the platform for multiple years and nobody found out until the platform collapsed completely. While fraud and breaches suck to deal with, they suck even more when not dealt with. Lack of visibility played a role in the largest downfalls of Mt. Gox, Cryptsy, and Bitgrail. In some cases, platforms are alleged to have suffered a hack and keep operating without admitting it at all, such as CoinBene.
It surprises some to learn that a cryptographic solution has already existed since 2013, and gained widespread support in 2014 after Mt. Gox. Proof of Reserves is a full cryptographic proof that allows any customer using an exchange to have complete certainty that their crypto-assets are fully backed by the platform in real-time. This is accomplished by proving that assets exist on the blockchain, are spendable, and fully cover customer deposits. It does not prove safety of assets or backing of fiat assets.
If we didn't care about privacy at all, a platform could publish their wallet addresses, sign a partial transaction, and put the full list of customer information and balances out publicly. Customers can each check that they are on the list, that the balances are accurate, that the total adds up, and that it's backed and spendable on the blockchain. Platforms who exclude any customer take a risk because that customer can easily check and see they were excluded. So together with all customers checking, this forms a full proof of backing of all crypto assets.
However, obviously customers care about their private information being published. Therefore, a hash of the information can be provided instead. Hash is one-way encryption. The hash allows the customer to validate inclusion (by hashing their own known information), while anyone looking at the list of hashes cannot determine the private information of any other user. All other parts of the scheme remain fully intact. A model like this is in use on the exchange CoinFloor in the UK.
A Merkle tree can provide even greater privacy. Instead of a list of balances, the balances are arranged into a binary tree. A customer starts from their node, and works their way to the top of the tree. For example, they know they have 5 BTC, they plus 1 other customer hold 7 BTC, they plus 2-3 other customers hold 17 BTC, etc... until they reach the root where all the BTC are represented. Thus, there is no way to find the balances of other individual customers aside from one unidentified customer in this case.
Proposals such as this had the backing of leaders in the community including Nic Carter, Greg Maxwell, and Zak Wilcox. Substantial and significant effort started back in 2013, with massive popularity in 2014. But what became of that effort? Very little. Exchange operators continue to refuse to give visibility. Despite the fact this information can often be obtained through trivial blockchain analysis, no Canadian platform has ever provided any wallet addresses publicly. As described by the CEO of Newton "For us to implement some kind of realtime Proof of Reserves solution, which I'm not opposed to, it would have to ... Preserve our users' privacy, as well as our own. Some kind of zero-knowledge proof". Kraken describes here in more detail why they haven't implemented such a scheme. According to professor Eli Ben-Sasson, when he spoke with exchanges, none were interested in implementing Proof of Reserves.
And yet, Kraken's places their reasoning on a page called "Proof of Reserves". More recently, both BitBuy and ShakePay have released reports titled "Proof of Reserves and Security Audit". Both reports contain disclaimers against being audits. Both reports trust the customer list provided by the platform, leaving the open possibility that multiple large accounts could have been excluded from the process. Proof of Reserves is a blockchain validation where customers see the wallets on the blockchain. The report from Kraken is 5 years old, but they leave it described as though it was just done a few weeks ago. And look at what they expect customers to do for validation. When firms represent something being "Proof of Reserve" when it's not, this is like a farmer growing fruit with pesticides and selling it in a farmers market as organic produce - except that these are people's hard-earned life savings at risk here. Platforms are misrepresenting the level of visibility in place and deceiving the public by their misuse of this term. They haven't proven anything.
Fraud isn't a problem that is unique to cryptocurrency. Fraud happens all the time. Enron, WorldCom, Nortel, Bear Stearns, Wells Fargo, Moser Baer, Wirecard, Bre-X, and Nicola are just some of the cases where frauds became large enough to become a big deal (and there are so many countless others). These all happened on 100% reversible assets despite regulations being in place. In many of these cases, the problems happened due to the over-complexity of the financial instruments. For example, Enron had "complex financial statements [which] were confusing to shareholders and analysts", creating "off-balance-sheet vehicles, complex financing structures, and deals so bewildering that few people could understand them". In cryptocurrency, we are often combining complex financial products with complex technologies and verification processes. We are naïve if we think problems like this won't happen. It is awkward and uncomfortable for many people to admit that they don't know how something works. If we want "money of the people" to work, the solutions have to be simple enough that "the people" can understand them, not so confusing that financial professionals and technology experts struggle to use or understand them.
For those who question the extent to which an organization can fool their way into a security consultancy role, HB Gary should be a great example to look at. Prior to trying to out anonymous, HB Gary was being actively hired by multiple US government agencies and others in the private sector (with glowing testimonials). The published articles and hosted professional security conferences. One should also look at this list of data breaches from the past 2 years. Many of them are large corporations, government entities, and technology companies. These are the ones we know about. Undoubtedly, there are many more that we do not know about. If HB Gary hadn't been "outted" by anonymous, would we have known they were insecure? If the same breach had happened outside of the public spotlight, would it even have been reported? Or would HB Gary have just deleted the Twitter posts, brought their site back up, done a couple patches, and kept on operating as though nothing had happened?
In the case of Quadriga, the facts are clear. Despite past experience with platforms such as MapleChange in Canada and others around the world, no guidance or even the most basic of a framework was put in place by regulators. By not clarifying any sort of legal framework, regulators enabled a situation where a platform could be run by former criminal Mike Dhanini/Omar Patryn, and where funds could be held fully unchecked by one person. At the same time, the lack of regulation deterred legitimate entities from running competing platforms and Quadriga was granted a money services business license for multiple years of operation, which gave the firm the appearance of legitimacy. Regulators did little to protect Canadians despite Quadriga failing to file taxes from 2016 onward. The entire administrative team had resigned and this was public knowledge. Many people had suspicions of what was going on, including Ryan Mueller, who forwarded complaints to the authorities. These were ignored, giving Gerald Cotten the opportunity to escape without justice.
There are multiple issues with the SOC II model including the prohibitive cost (you have to find a third party accounting firm and the prices are not even listed publicly on any sites), the requirement of operating for a year (impossible for new platforms), and lack of any public visibility (SOC II are private reports that aren't shared outside the people in suits).
Securities frameworks are expensive. Sarbanes-Oxley is estimated to cost $5.1 million USD/yr for the average Fortune 500 company in the United States. Since "Fortune 500" represents the top 500 companies, that means well over $2.55 billion USD (~$3.4 billion CAD) is going to people in suits. Isn't the problem of trust and verification the exact problem that the blockchain is supposed to solve?
To use Quadriga as justification for why custodians or SOC II or other advanced schemes are needed for platforms is rather silly, when any framework or visibility at all, or even the most basic of storage policies, would have prevented the whole thing. It's just an embarrassment.
We are now seeing regulators take strong action. CoinSquare in Canada with multi-million dollar fines. BitMex from the US, criminal charges and arrests. OkEx, with full disregard of withdrawals and no communication. Who's next?
We have a unique window today where we can solve these problems, and not permanently destroy innovation with unreasonable expectations, but we need to act quickly. This is a unique historic time that will never come again.
It is no doubt Grayscale’s booming popularity as a mainstream investment has caused a lot of community hullabaloo lately. As such, I felt it was worth making a FAQ regarding the topic. I’m looking to update this as needed and of course am open to suggestions / adding any questions. The goal is simply to have a thread we can link to anyone with questions on Grayscaleand its products. Instead of explaining the same thing 3 times a day, shoot those posters over to this thread.My hope is that these questions are answered in a fairly simple and easy to understand manner. I think as the sub grows it will be a nice reference point for newcomers. Disclaimer: I do NOT work for Grayscale and as such am basing all these answers on information that can be found on their website / reports. (Grayscale’s official FAQ can be found here). I also do NOT have a finance degree, I do NOT have a Series 6 / 7 / 140-whatever, and I do NOT work with investment products for my day job. I have an accounting background and work within the finance world so I have the general ‘business’ knowledge to put it all together, but this is all info determined in my best faith effort as a layman. The point being is this --- it is possible I may explain something wrong or missed the technical terms, and if that occurs I am more than happy to update anything that can be proven incorrect Everything below will be in reference to ETHE but will apply to GBTC as well.If those two segregate in any way, I will note that accordingly.
ETHE is essentially a stock that intends to loosely track the price of ETH. It does so by having each ETHE be backed by a specific amount of ETH that is held on chain. Initially, the newly minted ETHE can only be purchased by institutions and accredited investors directly from Grayscale. Once a year has passed (6 months for GBTC) it can then be listed on the OTCQX Best Market exchange for secondary trading. Once listed on OTCQX, anyone investor can purchase at this point. Additional information on ETHE can be found here.
So ETHE is an ETF?
No. For technical reasons beyond my personal understandings it is not labeled an ETF. I know it all flows back to the “Securities Act Rule 144”, but due to my limited knowledge on SEC regulations I don’t want to misspeak past that. If anyone is more knowledgeable on the subject I am happy to input their answer here.
How long has ETHE existed?
ETHE was formed 12/14/2017. GBTC was formed 9/25/2013.
How is ETHE created?
The trust will issue shares to “Authorized Participants” in groups of 100 shares (called baskets). Authorized Participants are the only persons that may place orders to create these baskets and they do it on behalf of the investor. Source: Creation and Redemption of Shares section on page 39 of the “Grayscale Ethereum Trust Annual Report (2019)” – Located Here Note – The way their reports word this makes it sound like there is an army of authorizers doing the dirty work, but in reality there is only one Authorized Participant. At this moment the “Genesis” company is the sole Authorized Participant. Genesis is owned by the “Digital Currency Group, Inc.” which is the parent company of Grayscale as well. (And to really go down the rabbit hole it looks like DCG is the parent company of CoinDesk and is “backing 150+ companies across 30 countries, including Coinbase, Ripple, and Chainalysis.”) Source: Digital Currency Group, Inc. informational section on page 77 of the “Grayscale Bitcoin Trust (BTC) Form 10-K (2019)” – Located Here Source: Barry E. Silbert informational section on page 75 of the “Grayscale Bitcoin Trust (BTC) Form 10-K (2019)” – Located Here
How does Grayscale acquire the ETH to collateralize the ETHE product?
An Investor may acquire ETHE by paying in cash or exchanging ETH already owned.
Cash: The investor pays the subscription amount in cash and the Authorized Participant will use that cash to purchase ETH.
ETH: The investor transfers the ETH to the Authorized Participant, which will contribute the ETH in-kind to the Trust.
Source: Creation and Redemption of Shares section on page 40 of the “Grayscale Ethereum Trust Annual Report (2019)” – Located Here
Where does Grayscale store their ETH? Does it have a specific wallet address we can follow?
ETH is stored with Coinbase Custody Trust Company, LLC. I am unaware of any specific address or set of addresses that can be used to verify the ETH is actually there. As an aside - I would actually love to see if anyone knows more about this as it’s something that’s sort of peaked my interest after being asked about it… I find it doubtful we can find that however. Source: Part C. Business Information, Item 8, subsection A. on page 16 of the “Grayscale Ethereum Trust Annual Report (2019)” – Located Here
Can ETHE be redeemed for ETH?
No, currently there is no way to give your shares of ETHE back to Grayscale to receive ETH back. The only method of getting back into ETH would be to sell your ETHE to someone else and then use those proceeds to buy ETH yourself. Source: Redemption Procedures on page 41 of the “Grayscale Ethereum Trust Annual Report (2019)” – Located Here
Why are they not redeeming shares?
I think the report summarizes it best:
Redemptions of Shares are currently not permitted and the Trust is unable to redeem Shares. Subject to receipt of regulatory approval from the SEC and approval by the Sponsor in its sole discretion, the Trust may in the future operate a redemption program. Because the Trust does not believe that the SEC would, at this time, entertain an application for the waiver of rules needed in order to operate an ongoing redemption program, the Trust currently has no intention of seeking regulatory approval from the SEC to operate an ongoing redemption program.
Source: Redemption Procedures on page 41 of the “Grayscale Ethereum Trust Annual Report (2019)” – Located Here
What is the fee structure?
ETHE has an annual fee of 2.5%. GBTC has an annual fee of 2.0%. Fees are paid by selling the underlying ETH / BTC collateralizing the asset. Source: ETHE’s informational page on Grayscale’s website - Located Here Source: Description of Trust on page 31 & 32 of the “Grayscale Ethereum Trust Annual Report (2019)” – Located Here
What is the ratio of ETH to ETHE?
At the time of posting (6/19/2020) each ETHE share is backed by .09391605 ETH. Each share of GBTC is backed by .00096038 BTC. ETHE & GBTC’s specific information page on Grayscale’s website updates the ratio daily – Located Here For a full historical look at this ratio, it can be found on the Grayscale home page on the upper right side if you go to Tax Documents > 2019 Tax Documents > Grayscale Ethereum Trust 2019 Tax Letter.
Why is the ratio not 1:1? Why is it always decreasing?
While I cannot say for certain why the initial distribution was not a 1:1 backing, it is more than likely to keep the price down and allow more investors a chance to purchase ETHE / GBTC. As noted above, fees are paid by selling off the ETH collateralizing ETHE. So this number will always be trending downward as time goes on. Source: Description of Trust on page 32 of the “Grayscale Ethereum Trust Annual Report (2019)” – Located Here
I keep hearing about how this is locked supply… explain?
As noted above, there is currently no redemption program for converting your ETHE back into ETH. This means that once an ETHE is issued, it will remain in circulation until a redemption program is formed --- something that doesn’t seem to be too urgent for the SEC or Grayscale at the moment. Tiny amounts will naturally be removed due to fees, but the bulk of the asset is in there for good. Knowing that ETHE cannot be taken back and destroyed at this time, the ETH collateralizing it will not be removed from the wallet for the foreseeable future. While it is not fully locked in the sense of say a totally lost key, it is not coming out any time soon. Per their annual statement:
The Trust’s ETH will be transferred out of the ETH Account only in the following circumstances: (i) transferred to pay the Sponsor’s Fee or any Additional Trust Expenses, (ii) distributed in connection with the redemption of Baskets (subject to the Trust’s obtaining regulatory approval from the SEC to operate an ongoing redemption program and the consent of the Sponsor), (iii) sold on an as-needed basis to pay Additional Trust Expenses or (iv) sold on behalf of the Trust in the event the Trust terminates and liquidates its assets or as otherwise required by law or regulation.
Source: Description of Trust on page 31 of the “Grayscale Ethereum Trust Annual Report (2019)” – Located Here
Grayscale now owns a huge chunk of both ETH and BTC’s supply… should we be worried about manipulation, a sell off to crash the market crash, a staking cartel?
First, it’s important to remember Grayscale is a lot more akin to an exchange then say an investment firm. Grayscale is working on behalf of its investors to create this product for investor control. Grayscale doesn’t ‘control’ the ETH it holds any more then Coinbase ‘controls’ the ETH in its hot wallet. (Note: There are likely some varying levels of control, but specific to this topic Grayscale cannot simply sell [legally, at least] the ETH by their own decision in the same manner Coinbase wouldn't be able to either.) That said, there shouldn’t be any worry in the short to medium time-frame. As noted above, Grayscale can’t really remove ETH other than for fees or termination of the product. At 2.5% a year, fees are noise in terms of volume. Grayscale seems to be the fastest growing product in the crypto space at the moment and termination of the product seems unlikely. IF redemptions were to happen tomorrow, it’s extremely unlikely we would see a mass exodus out of the product to redeem for ETH. And even if there was incentive to get back to ETH, the premium makes it so that it would be much more cost effective to just sell your ETHE on the secondary market and buy ETH yourself. Remember, any redemption is up to the investors and NOT something Grayscale has direct control over.
Yes, but what about [insert criminal act here]…
Alright, yes. Technically nothing is stopping Grayscale from selling all the ETH / BTC and running off to the Bahamas (Hawaii?). BUT there is no real reason for them to do so. Barry is an extremely public figure and it won’t be easy for him to get away with that. Grayscale’s Bitcoin Trust creates SEC reports weekly / bi-weekly and I’m sure given the sentiment towards crypto is being watched carefully. Plus, Grayscale is making tons of consistent revenue and thus has little to no incentive to give that up for a quick buck.
That’s a lot of ‘happy little feels’ Bob, is there even an independent audit or is this Tether 2.0?
Actually yes, an independent auditor report can be found in their annual reports. It is clearly aimed more towards the financial side and I doubt the auditors are crypto savants, but it is at least one extra set of eyes. Auditors are Friedman LLP – Auditor since 2015. Source: Independent Auditor Report starting on page 116 (of the PDF itself) of the “Grayscale Ethereum Trust Annual Report (2019)” – Located Here As mentioned by user TheCrpytosAndBloods (In Comments Below), a fun fact:
The company’s auditors Friedman LLP were also coincidentally TetheBitfinex’s auditors until They controversially parted ways in 2018 when the Tether controversy was at its height. I am not suggesting for one moment that there is anything shady about DCG - I just find it interesting it’s the same auditor.
“Grayscale sounds kind of lame” / “Not your keys not your crypto!” / “Why is anyone buying this, it sounds like a scam?”
Welp, for starters this honestly is not really a product aimed at the people likely to be reading this post. To each their own, but do remember just because something provides no value to you doesn’t mean it can’t provide value to someone else. That said some of the advertised benefits are as follows:
Access to trading within a tax advantaged retirement account
Institutions can easily and safely get exposure to crypto in a more legal-friendly manner
Ease of use for those who are not very technologically savvy
Ease of access for someone who doesn’t want to set up a Coinbase account
Perceived trust in institutional platforms over something like Coinbase or Kraken
Degen traders who just want access to the volatility ETHE provides that have no interest in crypto beyond that
So for example, I can set up an IRA at a brokerage account that has $0 trading fees. Then I can trade GBTC and ETHE all day without having to worry about tracking my taxes. All with the relative safety something like E-Trade provides over Binance. As for how it benefits the everyday ETH holder? I think the supply lock is a positive. I also think this product exposes the Ethereum ecosystem to people who otherwise wouldn’t know about it.
Why is there a premium? Why is ETHE’s premium so insanely high compared to GBTC’s premium?
There are a handful of theories of why a premium exists at all, some even mentioned in the annual report. The short list is as follows:
ETHE is NOT redeeming shares and as such doesn’t have an effective arbitrage mechanism
ETHE has a 1 year wait to be sold on the secondary market, again negating the ability to effectively arbitrage the premium
People may simply be willing to pay a premium for the benefits stated above.
Why is ETHE’s so much higher the GBTC’s? Again, a few thoughts:
ETHE hasn’t been around as long, so there is less secondary market supply to go around
ETHE was listed at an insanely high premium to begin with
ETHE might simply be more popular at the moment
Could just be sheer stupidity (investors think ETHE is a 1:1 ratio not 1:11)
Are there any other differences between ETHE and GBTC?
I touched on a few of the smaller differences, but one of the more interesting changes is GBTC is now a “SEC reporting company” as of January 2020. Which again goes beyond my scope of knowledge so I won’t comment on it too much… but the net result is GBTC is now putting out weekly / bi-weekly 8-K’s and annual 10-K’s. This means you can track GBTC that much easier at the moment as well as there is an extra layer of validity to the product IMO.
I’m looking for some statistics on ETHE… such as who is buying, how much is bought, etc?
There is a great Q1 2020 report I recommend you give a read that has a lot of cool graphs and data on the product. It’s a little GBTC centric, but there is some ETHE data as well. It can be found here hidden within the 8-K filings.Q1 2020 is the 4/16/2020 8-K filing. For those more into a GAAP style report see the 2019 annual 10-K of the same location.
Is Grayscale only just for BTC and ETH?
No, there are other products as well. In terms of a secondary market product, ETCG is the Ethereum Classic version of ETHE. Fun Fact – ETCG was actually put out to the secondary market first. It also has a 3% fee tied to it where 1% of it goes to some type of ETC development fund. In terms of institutional and accredited investors, there are a few ‘fan favorites’ such as Bitcoin Cash, Litcoin, Stellar, XRP, and Zcash. Something called Horizion (Backed by ZEN I guess? Idk to be honest what that is…). And a diversified Mutual Fund type fund that has a little bit of all of those. None of these products are available on the secondary market.
Are there alternatives to Grayscale?
I know they exist, but I don’t follow them. I’ll leave this as a “to be edited” section and will add as others comment on what they know. Per user Over-analyser (in comments below):
As asked by pegcity - Okay so I was under the impression you can just give them your own ETH and get ETHE, but do you get 11 ETHE per ETH or do you get the market value of ETH in USD worth of ETHE?
I have always understood that the ETHE issued directly through Grayscale is issued without the premium. As in, if I were to trade 1 ETH for ETHE I would get 11, not say only 2 or 3 because the secondary market premium is so high. And if I were paying cash only I would be paying the price to buy 1 ETH to get my 11 ETHE. Per page 39 of their annual statement, it reads as follows:
The Trust will issue Shares to Authorized Participants from time to time, but only in one or more Baskets (with a Basket being a block of 100 Shares). The Trust will not issue fractions of a Basket. The creation (and, should the Trust commence a redemption program, redemption) of Baskets will be made only in exchange for the delivery to the Trust, or the distribution by the Trust, of the number of whole and fractional ETH represented by each Basket being created (or, should the Trust commence a redemption program, redeemed), which is determined by dividing (x) the number of ETH owned by the Trust at 4:00 p.m., New York time, on the trade date of a creation or redemption order, after deducting the number of ETH representing the U.S. dollar value of accrued but unpaid fees and expenses of the Trust (converted using the ETH Index Price at such time, and carried to the eighth decimal place), by (y) the number of Shares outstanding at such time (with the quotient so obtained calculated to one one-hundred-millionth of one ETH (i.e., carried to the eighth decimal place)), and multiplying such quotient by 100 (the “Basket ETH Amount”). All questions as to the calculation of the Basket ETH Amount will be conclusively determined by the Sponsor and will be final and binding on all persons interested in the Trust. The Basket ETH Amount multiplied by the number of Baskets being created or redeemed is the “Total Basket ETH Amount.” The number of ETH represented by a Share will gradually decrease over time as the Trust’s ETH are used to pay the Trust’s expenses. Each Share represented approximately 0.0950 ETH and 0.0974 ETH as of December 31, 2019 and 2018, respectively.
How To End The Cryptocurrency Exchange "Wild West" Without Crippling Innovation
In case you haven't noticed the consultation paper, staff notice, and report on Quadriga, regulators are now clamping down on Canadian cryptocurrency exchanges. The OSC and other regulatory bodies are still interested in industry feedback. They have not put forward any official regulation yet. Below are some ideas/insights and a proposed framework.
Typical securities frameworks will cost Canadians millions of dollars (ie Sarbanes-Oxley estimated at $5m USD/yr per firm). Implementation costs of this proposal are significantly cheaper.
Canadians can maintain a diverse set of exchanges, multiple viable business models are still fully supported, and innovation is encouraged while keeping Canadians safe.
Many of you have limited time to read the full proposal, so here are the highlights:
Effective standards to prevent both internal and external theft. Exchange operators are trained and certified, and have a legal responsibility to users.
Regular Transparent Audits
Provides visibility to Canadians that their funds are fully backed on the exchange, while protecting privacy and sensitive platform information.
Establishment of basic insurance standards/strategy, to expand over time. Removing risk to exchange users of any hot wallet theft.
Background and Justifications
Cold Storage Custody/Management After reviewing close to 100 cases, all thefts tend to break down into more or less the same set of problems: • Funds stored online or in a smart contract, • Access controlled by one person or one system, • 51% attacks (rare), • Funds sent to the wrong address (also rare), or • Some combination of the above. For the first two cases, practical solutions exist and are widely implemented on exchanges already. Offline multi-signature solutions are already industry standard. No cases studied found an external theft or exit scam involving an offline multi-signature wallet implementation. Security can be further improved through minimum numbers of signatories, background checks, providing autonomy and legal protections to each signatory, establishing best practices, and a training/certification program. The last two transaction risks occur more rarely, and have never resulted in a loss affecting the actual users of the exchange. In all cases to date where operators made the mistake, they've been fully covered by the exchange platforms. • 51% attacks generally only occur on blockchains with less security. The most prominent cases have been Bitcoin Gold and Ethereum Classic. The simple solution is to enforce deposit limits and block delays such that a 51% attack is not cost-effective. • The risk of transactions to incorrect addresses can be eliminated by a simple test transaction policy on large transactions. By sending a small amount of funds prior to any large withdrawals/transfers as a standard practice, the accuracy of the wallet address can be validated. The proposal covers all loss cases and goes beyond, while avoiding significant additional costs, risks, and limitations which may be associated with other frameworks like SOC II. On The Subject of Third Party Custodians Many Canadian platforms are currently experimenting with third party custody. From the standpoint of the exchange operator, they can liberate themselves from some responsibility of custody, passing that off to someone else. For regulators, it puts crypto in similar categorization to oil, gold, and other commodities, with some common standards. Platform users would likely feel greater confidence if the custodian was a brand they recognized. If the custodian was knowledgeable and had a decent team that employed multi-sig, they could keep assets safe from internal theft. With the right protections in place, this could be a great solution for many exchanges, particularly those that lack the relevant experience or human resources for their own custody systems. However, this system is vulnerable to anyone able to impersonate the exchange operators. You may have a situation where different employees who don't know each other that well are interacting between different companies (both the custodian and all their customers which presumably isn't just one exchange). A case study of what can go wrong in this type of environment might be Bitpay, where the CEO was tricked out of 5000 bitcoins over 3 separate payments by a series of emails sent legitimately from a breached computer of another company CEO. It's also still vulnerable to the platform being compromised, as in the really large $70M Bitfinex hack, where the third party Bitgo held one key in a multi-sig wallet. The hacker simply authorized the withdrawal using the same credentials as Bitfinex (requesting Bitgo to sign multiple withdrawal transactions). This succeeded even with the use of multi-sig and two heavily security-focused companies, due to the lack of human oversight (basically, hot wallet). Of course, you can learn from these cases and improve the security, but so can hackers improve their deception and at the end of the day, both of these would have been stopped by the much simpler solution of a qualified team who knew each other and employed multi-sig with properly protected keys. It's pretty hard to beat a human being who knows the business and the typical customer behaviour (or even knows their customers personally) at spotting fraud, and the proposed multi-sig means any hacker has to get through the scrutiny of 3 (or more) separate people, all of whom would have proper training including historical case studies. There are strong arguments both for and against using use of third party custodians. The proposal sets mandatory minimum custody standards would apply regardless if the cold wallet signatories are exchange operators, independent custodians, or a mix of both. On The Subject Of Insurance ShakePay has taken the first steps into this new realm (congratulations). There is no question that crypto users could be better protected by the right insurance policies, and it certainly feels better to transact with insured platforms. The steps required to obtain insurance generally place attention in valuable security areas, and in this case included a review from CipherTrace. One of the key solutions in traditional finance comes from insurance from entities such as the CDIC. However, historically, there wasn't found any actual insurance payout to any cryptocurrency exchange, and there are notable cases where insurance has not paid. With Bitpay, for example, the insurance agent refused because the issue happened to the third party CEO's computer instead of anything to do with Bitpay itself. With the Youbit exchange in South Korea, their insurance claim was denied, and the exchange ultimately ended up instead going bankrupt with all user's funds lost. To quote Matt Johnson in the original Lloyd's article: “You can create an insurance policy that protects no one – you know there are so many caveats to the policy that it’s not super protective.” ShakePay's insurance was only reported to cover their cold storage, and “physical theft of the media where the private keys are held”. Physical theft has never, in the history of cryptocurrency exchange cases reviewed, been reported as the cause of loss. From the limited information of the article, ShakePay made it clear their funds are in the hands of a single US custodian, and at least part of their security strategy is to "decline to confirm the custodian’s name on the record". While this prevents scrutiny of the custodian, it's pretty silly to speculate that a reasonably competent hacking group couldn't determine who the custodian is. A far more common infiltration strategy historically would be social engineering, which has succeeded repeatedly. A hacker could trick their way into ShakePay's systems and request a fraudulent withdrawal, impersonate ShakePay and request the custodian to move funds, or socially engineer their way into the custodian to initiate the withdrawal of multiple accounts (a payout much larger than ShakePay) exploiting the standard procedures (for example, fraudulently initiating or override the wallet addresses of a real transfer). In each case, nothing was physically stolen and the loss is therefore not covered by insurance. In order for any insurance to be effective, clear policies have to be established about what needs to be covered. Anything short of that gives Canadians false confidence that they are protected when they aren't in any meaningful way. At this time, the third party insurance market does not appear to provide adequate options or coverage, and effort is necessary to standardize custody standards, which is a likely first step in ultimately setting up an insurance framework. A better solution compared to third party insurance providers might be for Canadian exchange operators to create their own collective insurance fund, or a specific federal organization similar to the CDIC. Such an organization would have a greater interest or obligation in paying out actual cases, and that would be it's purpose rather than maximizing it's own profit. This would be similar to the SAFU which Binance has launched, except it would cover multiple exchanges. There is little question whether the SAFU would pay out given a breach of Binance, and a similar argument could be made for a insurance fund managed by a collective of exchange operators or a government organization. While a third party insurance provider has the strong market incentive to provide the absolute minimum coverage and no market incentive to payout, an entity managed by exchange operators would have incentive to protect the reputation of exchange operators/the industry, and the government should have the interest of protecting Canadians. On The Subject of Fractional Reserve There is a long history of fractional reserve failures, from the first banks in ancient times, through the great depression (where hundreds of fractional reserve banks failed), right through to the 2008 banking collapse referenced in the first bitcoin block. The fractional reserve system allows banks to multiply the money supply far beyond the actual cash (or other assets) in existence, backed only by a system of debt obligations of others. Safely supporting a fractional reserve system is a topic of far greater complexity than can be addressed by a simple policy, and when it comes to cryptocurrency, there is presently no entity reasonably able to bail anyone out in the event of failure. Therefore, this framework is addressed around entities that aim to maintain 100% backing of funds. There may be some firms that desire but have failed to maintain 100% backing. In this case, there are multiple solutions, including outside investment, merging with other exchanges, or enforcing a gradual restoration plan. All of these solutions are typically far better than shutting down the exchange, and there are multiple cases where they've been used successfully in the past. Proof of Reserves/Transparency/Accountability Canadians need to have visibility into the backing on an ongoing basis. The best solution for crypto-assets is a Proof of Reserve. Such ideas go back all the way to 2013, before even Mt. Gox. However, no Canadian exchange has yet implemented such a system, and only a few international exchanges (CoinFloor in the UK being an example) have. Many firms like Kraken, BitBuy, and now ShakePay use the Proof of Reserve term to refer to lesser proofs which do not actually cryptographically prove the full backing of all user assets on the blockchain. In order for a Proof of Reserve to be effective, it must actually be a complete proof, and it needs to be understood by the public that is expected to use it. Many firms have expressed reservations about the level of transparency required in a complete Proof of Reserve (for example Kraken here). While a complete Proof of Reserves should be encouraged, and there are some solutions in the works (ie TxQuick), this is unlikely to be suitable universally for all exchange operators and users. Given the limitations, and that firms also manage fiat assets, a more traditional audit process makes more sense. Some Canadian exchanges (CoinSquare, CoinBerry) have already subjected themselves to annual audits. However, these results are not presently shared publicly, and there is no guarantee over the process including all user assets or the integrity and independence of the auditor. The auditor has been typically not known, and in some cases, the identity of the auditor is protected by a NDA. Only in one case (BitBuy) was an actual report generated and publicly shared. There has been no attempt made to validate that user accounts provided during these audits have been complete or accurate. A fraudulent fractional exchange, or one which had suffered a breach they were unwilling to publicly accept (see CoinBene), could easily maintain a second set of books for auditors or simply exclude key accounts to pass an individual audit. The proposed solution would see a reporting standard which includes at a minimum - percentage of backing for each asset relative to account balances and the nature of how those assets are stored, with ownership proven by the auditor. The auditor would also publicly provide a "hash list", which they independently generate from the accounts provided by the exchange. Every exchange user can then check their information against this public "hash list". A hash is a one-way form of encryption, which fully protects the private information, yet allows anyone who knows that information already to validate that it was included. Less experienced users can take advantage of public tools to calculate the hash from their information (provided by the exchange), and thus have certainty that the auditor received their full balance information. Easy instructions can be provided. Auditors should be impartial, their identities and process public, and they should be rotated so that the same auditor is never used twice in a row. Balancing the cost of auditing against the needs for regular updates, a 6 month cycle likely makes the most sense. Hot Wallet Management The best solution for hot wallets is not to use them. CoinBerry reportedly uses multi-sig on all withdrawals, and Bitmex is an international example known for their structure devoid of hot wallets. However, many platforms and customers desire fast withdrawal processes, and human validation has a cost of time and delay in this process. A model of self-insurance or separate funds for hot wallets may be used in these cases. Under this model, a platform still has 100% of their client balance in cold storage and holds additional funds in hot wallets for quick withdrawal. Thus, the risk of those hot wallets is 100% on exchange operators and not affecting the exchange users. Since most platforms typically only have 1%-5% in hot wallets at any given time, it shouldn't be unreasonable to build/maintain these additional reserves over time using exchange fees or additional investment. Larger withdrawals would still be handled at regular intervals from the cold storage. Hot wallet risks have historically posed a large risk and there is no established standard to guarantee secure hot wallets. When the government of South Korea dispatched security inspections to multiple exchanges, the results were still that 3 of them got hacked after the inspections. If standards develop such that an organization in the market is willing to insure the hot wallets, this could provide an acceptable alternative. Another option may be for multiple exchange operators to pool funds aside for a hot wallet insurance fund. Comprehensive coverage standards must be established and maintained for all hot wallet balances to make sure Canadians are adequately protected.
Current Draft Proposal
(1) Proper multi-signature cold wallet storage. (a) Each private key is the personal and legal responsibility of one person - the “signatory”. Signatories have special rights and responsibilities to protect user assets. Signatories are trained and certified through a course covering (1) past hacking and fraud cases, (2) proper and secure key generation, and (3) proper safekeeping of private keys. All private keys must be generated and stored 100% offline by the signatory. If even one private keys is ever breached or suspected to be breached, the wallet must be regenerated and all funds relocated to a new wallet. (b) All signatories must be separate background-checked individuals free of past criminal conviction. Canadians should have a right to know who holds their funds. All signing of transactions must take place with all signatories on Canadian soil or on the soil of a country with a solid legal system which agrees to uphold and support these rules (from an established white-list of countries which expands over time). (c) 3-5 independent signatures are required for any withdrawal. There must be 1-3 spare signatories, and a maximum of 7 total signatories. The following are all valid combinations: 3of4, 3of5, 3of6, 4of5, 4of6, 4of7, 5of6, or 5of7. (d) A security audit should be conducted to validate the cold wallet is set up correctly and provide any additional pertinent information. The primary purpose is to ensure that all signatories are acting independently and using best practices for private key storage. A report summarizing all steps taken and who did the audit will be made public. Canadians must be able to validate the right measures are in place to protect their funds. (e) There is a simple approval process if signatories wish to visit any country outside Canada, with a potential whitelist of exempt countries. At most 2 signatories can be outside of aligned jurisdiction at any given time. All exchanges would be required to keep a compliant cold wallet for Canadian funds and have a Canadian office if they wish to serve Canadian customers. (2) Regular and transparent solvency audits. (a) An audit must be conducted at founding, after 3 months of operation, and at least once every 6 months to compare customer balances against all stored cryptocurrency and fiat balances. The auditor must be known, independent, and never the same twice in a row. (b) An audit report will be published featuring the steps conducted in a readable format. This should be made available to all Canadians on the exchange website and on a government website. The report must include what percentage of each customer asset is backed on the exchange, and how those funds are stored. (c) The auditor will independently produce a hash of each customer's identifying information and balance as they perform the audit. This will be made publicly available on the exchange and government website, along with simplified instructions that each customer can use to verify that their balance was included in the audit process. (d) The audit needs to include a proof of ownership for any cryptocurrency wallets included. A satoshi test (spending a small amount) or partially signed transaction both qualify. (e) Any platform without 100% reserves should be assessed on a regular basis by a government or industry watchdog. This entity should work to prevent any further drop, support any private investor to come in, or facilitate a merger so that 100% backing can be obtained as soon as possible. (3) Protections for hot wallets and transactions. (a) A standardized list of approved coins and procedures will be established to constitute valid cold storage wallets. Where a multi-sig process is not natively available, efforts will be undertaken to establish a suitable and stable smart contract standard. This list will be expanded and improved over time. Coins and procedures not on the list are considered hot wallets. (b) Hot wallets can be backed by additional funds in cold storage or an acceptable third-party insurance provider with a comprehensive coverage policy. (c) Exchanges are required to cover the full balance of all user funds as denominated in the same currency, or double the balance as denominated in bitcoin or CAD using an established trading rate. If the balance is ever insufficient due to market movements, the firm must rectify this within 24 hours by moving assets to cold storage or increasing insurance coverage. (d) Any large transactions (above a set threshold) from cold storage to any new wallet addresses (not previously transacted with) must be tested with a smaller transaction first. Deposits of cryptocurrency must be limited to prevent economic 51% attacks. Any issues are to be covered by the exchange. (e) Exchange platforms must provide suitable authentication for users, including making available approved forms of two-factor authentication. SMS-based authentication is not to be supported. Withdrawals must be blocked for 48 hours in the event of any account password change. Disputes on the negligence of exchanges should be governed by case law.
Continued review of existing OSC feedback is still underway. More feedback and opinions on the framework and ideas as presented here are extremely valuable. The above is a draft and not finalized. The process of further developing and bringing a suitable framework to protect Canadians will require the support of exchange operators, legal experts, and many others in the community. The costs of not doing such are tremendous. A large and convoluted framework, one based on flawed ideas or implementation, or one which fails to properly safeguard Canadians is not just extremely expensive and risky for all Canadians, severely limiting to the credibility and reputation of the industry, but an existential risk to many exchanges. The responsibility falls to all of us to provide our insight and make our opinions heard on this critical matter. Please take the time to give your thoughts.
[EU] [FIAT GATEWAY] Bitvavo.com is a new fiat ramp for NANO!
Hello dear NANO'ers, I come with great news. Bitvavo - a DUTCH exchange, secretly has fully implemented NANO on their exchange! This means you can buy AND sell NANO for Euros! Bitvavo is a DUTCH exchange, under Dutch/European law, having its HQ within the Netherlands. This is AMAZING. I made a post about Bitvavo adding nanos last year, back then you couldnt send/withdraw NANO (so it was fully artificial), but now its fully operational! Why is this a big deal? Its an European exchange, falling under European laws (Dutch to be precise). Since i live in the Netherlands, this to me is just amazing. The dutch are a meticulously kind of folk. Dutch laws are quite strong and complicated and regulations are strong here. To have a working fiat ramp exchange that hasnt been shutdown by authorities, means it has a certain degree of Trustworthiness (at least for me and Dutch laws, which are stricter then European laws mostly). Is it any good? Well, i first deposited euro's on the website (which you cant hold for longer then 5 days, since it isnt a bank and certain laws are preventing that), which went 'pretty' fast. I bought nano's with it (which was instant), and then i withdrew NANO's from it...which went through in SECONDS. Yes. Seconds. I put the order in, went to Binance to check things out and literally a few seconds later i heard the ping from CANOE. I couldnt believe it lol. I actually was in awe and suddenly became extremely enthusiastic, and immediately bought more lol. What about fees? They take maketrader fees of 0.25%. In my eyes, that isnt much. For withdrawal they also have fee, but its around 0.00025 nano if im right. Its crazy low. And crazy fast. Are there any negative parts? Well, its a dutch company but it isnt coinbase. If the whole world flocks towards it, i can see the website going down because the server can't hold that weight. This is theoretically, but those who experienced the 2017 run know that a lot of exchanges either went down (for a few hours/days) or stopped accepting new registrations because their servers couldnt handle it. I feel the same is with Bitvavo, its a small dutch exchange, not a big one. Other negative parts? I don't think they have much nano lol. After my first purchase i was SO impressed with the speed and low cost of it, i bought more. The second time i bought, i received a message that this was going to be processed manually. For the long run i cant see this being a problem, it just means they have to buy more NANO, which will only help NANO :) Now besides those, you do need to do a KYC, and i havent read in about any international KYC. The KYC is necessary for you to trade on the exchange. For me, i had to link my bank account to my account on Bitvavo (the same way you do it with Paypal). You can only send/receive money from/to your (linked) bank account to Bitvavo (if through IDEAL, not sure about SEPA etc). I find this acceptable to be honest for a EUROPEAN/trustworthy fiat gateway. Payment methods (including fees):
SEPA Overboeking (0%)
It has been a while since i sold crypto for Euro's on the site, but it worked pretty fast. The next day, the money was sitting in my bank account :) it wasnt much though (around 100 euros), but it passed the test for me back then. Unless we go in to a massive bullrun, i prob wont be selling my NANO for fiat anytime soon anyways. I am more searching for ways to pay internet services for NANO :) Hopefully one day we can pay for everyday things with NANO, like groceries or liqueur etc. Bitvavo has many many other coins too (besides btc,eth, xrp) like ADA, ICX, IOTA, Vechain, NEO etc. So if you want to trade your NANO with other crypto's, it is another way besides Binance (though i would still use binance for it). THis is a huge step. For very low cost, and extremely fast speed, we (Europeans in general) have an amazing gateway towards NANO. Together with Coingate integration of NANO, and NANO amazing ease of use - i cant see any other way besides NANO becoming a smashing succes. The only weird thing about this is Bitvavo own marketing. They did this all in silent, for reasons unknown to me since this is HUGE news for me (and a lot of Dutch/European citizens that have access to IDEAL). Now, i have to SHILL NANO a bit more here, because i am really getting hyped once again. I feel even more positive about NANO then back in dec 2017 to be honest. Remember guys, NANO is just at #48 in CMC. 48! While its utility is much better then 99% of ALL crypto! Infact, NANO is the ONLY usuable crypto RIGHT NOW besides maybe Eth for Dapps. Look at the marketcap of LTC, which in EVERY aspect is a worse coin then NANO. Then calculate how much a single NANO would be worth if it would have LTC marketcap... NANO has STILL SO MUCH to grow, its crazy. Its like getting Bitcoin back in 2011/2013. Pay for your products online FASTER and more reliable AND cheaper then Paypal (conversation rate), credit card (% rate per month/year) or bank. Since V18 has come out i have been EXTREMELY impressed by NANO. So much that i have doubled my (relatively small) stack and i have (once again) started to accumulate slowly. News like this (Bitvavo) just makes me more hyped for NANO. Together with a website where i can actually buy their services with NANO - and i am planning to use it more, i cant be more positive. NANO may have had a hard time in 2018 price wise, but DAMN the team has done an amazing job with its tech throughout the bear market. Mad props to you Colin AND your amazing team. Props to Coingate for having an amazing service too! Once NANO has been proven to scale to 1k+ (with 7K being a nicely goal) + an automatically representative node assignment through wallets (to make NANO more decentralized), i cant see nano NOT becoming a top 10 - or even a top 5 coin. As a payment coin, NANO truly knows no equal! EDIT: a MAJOR edit here, before you guys get TOO excited. PLEASE look in to the exchange pricing too! Bitvavo might be selling (or probably IS) NANO for a higher rate then for example Binance (this is apart from maketaker fee and withdrawal fee!). It isnt the same price as you pay on Binance, with the conversion rate. So for the same EUUSD, you will get less NANO compared to Binance (if you could pay directly for it). So keep that in mind, u/dotcoml said it actually was 2%. I personally didnt bother doing the math nor do i mind a 2% fee to exchange my fiat for NANO (it still is better then credit card, and for its speed/usability, i dont mind paying 2% more compared to FIAT either), but it still is 2%. Keep this in mind! EDIT2: other users are reporting Bitvavo actually having LOWER prices then Binance :) please check it out for yourself!
An in-depth interview with Coss founder, Rune Evensen:
Hey guys! About two weeks ago I decided to book tickets to Singapore to pay a visit to the COSS team. I was and still am heavily invested in COSS and I thought it was my duty to push the do your own research idea to the maximum and actually go there and meet them! So, today was my first day in Singapore and it's been very busy! I spent the morning preparing my first official meeting with Rune and I headed to their offices around 2pm. They are a little bit outside of the city center, about 10 minutes drive. They look quite nice and leave a lot of room for growth, which is good cause a lot of people are coming in house in the next few weeks. The meeting went for about 2 hours and we talked about almost everything regarding COSS. Rune has been incredibly welcoming so far, I landed yesterday night and as soon as he knew I was in town he invited me to have dinner with him, so today was our second meeting, first official one. After the meeting, I headed back to my hotel caught a bit of sleep and started redacting the interview. Tomorrow I have a meeting with their head of compliance and will do the same thing, only much shorter. I'll also start vloging my adventures in Singapore :) Here is the 1st part of the interview: *Hi Rune, thanks for having me, how did you come up with the COSS idea? * Rune Evensen: Originally, back in 2013, I to develop a one stop solution for social media. I was looking at the current platforms and realized twitter is undersharing, facebook is oversharing and LinkedIn is for professionals. You needed a different account for everything so I started building a solution. Unfortunately it was all 3d rendered and way too heavy. It was designed like a house with different rooms. I spent two years on that project and we were supposed to build-in something like facebook credits as an internal currency, but not a cryptocurrency because at that time I did not know about them. But when I showed my idea to people, especially here in Singapore, more and more of them asked me why don’t you make it as a cryptocurrency instead of credits? Then I started to look into it, that was in 2015 but I found it quite complicated with a lot of hurdles especially for a beginner. So instead of working on a one-stop solution for social medias I figured I should build one for cryptos, because everybody talks about mass-adoption, but it is mostly IT guys, nerds and traders who are into cryptos. It is still way too complicated for people to get into it. So I started to plan my one stop solutions, many long nights of work. To get a better understanding I signed up for a FinTech course at MIT. During one of the weekly sessions there, we were supposed to submit a business idea that we had and could implement into blockchain. That was the first time I publicly presented my idea. We 1200 people in this course, and the average score for the assignment was 25, my project got the best rating, 100. They described it as a great business idea with real potential to take COSS to the masses. That was quite an endorsement! I needed this endorsement to actually build this idea. I had a consultancy company in Singapore with some staff. First I brought some of them in the project, then I met Dan from Romania and some months later we had the first drafts of the white paper. In November 2016 we moved to our offices in Singapore, in April 2017 we went live with the beta. Until then we were 100% self-funded, and that was the time all the ICOs were popping up. At first we started looking at institutional investors, but they wanted too many shares of the company for money that would last us a year at best. I did not want sell a majority stake of my company in which I already put so much time, efforts and money. The next natural step was to do an ICO and this is why we created our COSS token and came-up with the idea of the fee split allocation. We had to come-up with a clear use case. We then built our advisory board, we picked our advisory board according to our road map and not specifically for the ICO. For example Anson Zeall who is the president of ACCESS, Singapore’s Cryptocurrency and Blockchain Industry Association. So we chose them so that they could help us to complete our roadmap. We did every possible mistake during the ICO because we had no experience in it, none of us had done it before. We did not realize the power of community at the time, we did not even have Telegram at the time! You need to start building a community months before the ICO, you need thousands of people on Telegram and people being active in the community. This is the key to a successful ICO. Nowadays we are actually asked for advices by companies doing their own ICOs because we did everything ourselves during ours. We did not do proper marketing too, we thought we could push it through social medias, that was a big mistake. Nowadays, you need at least half a million to start your ICO for marketing budgets etc… Some companies even offer funding to ICOs! I remember we were approached at the time by TokenMarket and they offered us to take care of everything in our ICO. For 4 months of their work we were asked between 30 and 40k USD. Nowadays they do not work for less than a million. It’s been a bumpy road, that’s why we call it the RollerCOSSter! We raised 3.2M during our ICO. How much did you estimate you needed? Rune Evensen: We were very ambitious because we made an audit through ICO ranker and at that time they scored us the highest they had ever done. So we thought we would reach our 50M hardcap really easily. We were asked by the community what we were going to do with the unsold tokens, we did a community vote and the result was that everybody that joined the token sale would get 10x more token than expected. We decided to stay on Ether with the ICO money as opposed to go to FIAT. We only convert as we go and we still have two third of ETH we raised, which at today’s market price are worth 6M USD. For those who believe we have not hired more staff yet because of financial reasons, that is absolutely not true. We are very careful with the way we use our money, yes we have a big office but we decided to rent it a little bit outside of Singapore’s center cause it is a lot cheaper. We got a big office because we know we want to hire a lot. We are 7 persons working at the office at the moment and 4 more will arrive in February. Three persons for compliance and one developer, Jay. That was actually my follow-up question, how many people are on the current staff? Rune Evensen: We have a very decentralized team. We currently have 7 people in house, then we have the core dev team in Romania, which is Dan’s (one of COSS shareholders) team. It’s a 20 people team but only two of them are working a 100% on COSS. Then we have the UI team in Amsterdam, with 5 people working on COSS. We have our content manager also in Europe, we have our graphic designer in Indonesia, we have our internal security expert and our lawyer (also a shareholder) here in Singapore. So we have a big team, but people need to understand the difference between team and staff. For instance we have Gary here in house for support but he’s managing a four people team that we outsource. They all came here for training but do not work here. We are also planning to add 6 or 7 more in house developers. Mong (COSS’s 1st in house dev) has determined what kind of team she needs and she has free hands to hire and build the team. Just to clarify, if she finds someone that would fit the team, she is allowed to hire him/her immediately? Rune Evensen: Of course, we still need to discuss it together. She cannot sign the contract all alone. But yes, she is free to hire! We want it to be as quick as possible. The very good ones often have a job, then we need to make good offers to convince them and once they accept they need to give notice to their former employers so that takes a bit more time. If there are some devs out there that can start immediately and fit our needs, then we will bring them in immediately. Is it fair to say that Mong is COSS’ CTO? Rune Evensen: Yes, her contract does not say CTO but she is definitely acting CTO. It’s the same for me, I am leading the company but I do not have the CEO title. What does your typical day look like? Rune Evensen: I’m normally at the office between 8 and 9, sometimes I try to hit the gym before coming there, not too much lately. At the office I spend a lot of my time acting as support role on Slack and Telegram, I help everybody that DMs me with issues. Maybe I made myself too available because now I am getting a lot of them everyday. Of course we have meetups with compliance team and the devs. Mong has taken over a lot of communications with the dev teams oversea. She is coordinating and leading the Amsterdam and Romania team. Before she came on board that was also part of my job. I also took part on the KYC process, which is now the compliance team’s responsibility. I’m also the one negotiating when a coin wants to be listed. The priority is to get off your support role? Rune Evensen: Yes, as soon as support is up to speed, and can handle all the issues as fast I as I want to I will get off this role and go back to only leading the company. You announced FIAT will be introduced by the end of Q1 can you give us more details? Rune Evensen: We will introduce FIAT through credit card for Bitcoin and ETH. We will add more FIAT pairs as soon as the engine is up and running. I do not have an exact date for the engine. We are in the process of designing the architecture we need and want to use. Once that is done I will be able to give a more precise timeline. This should happen by the end of the week or next week. One question that comes up a lot, why don’t you buy the same engine as Binance? Rune Evensen: We want to build something from scratch for a few reasons. One reason is security, we want to have full control of the code. But mostly we want the engine to fit our business model, that requires different solutions than a standard exchange. So even if we bought Binance’s engine we would need to build a lot on top. We will speed up as much as possible the release of the engine, as long as that does not jeopardize security or quality. There are now over 80 devs on the Trello board, what is their role? Rune Evensen: They are giving us feedbacks and come up with solutions. For instance what can be done to increase the speed of the site. Some of them are working for Microsoft, Facebook and other Fortune 500 companies. Of course they are already very busy with their job and they are only helping us because they have an interest in COSS. Some of them reached out and sent their CVs to us. That’s something I always rejected before because we did not have in house devs. I did not want to get more outsourced devs and put them under an already outsourced dev team. Now that we have a leading team in Singapore, I’m passing those CVs, of highly qualified people looking to contribute more, to Mong. Some of them will become COSS team members. That’s really the true power of community that I talked about in my Medium update. Yes we have the FUD, from time to time, but to see the activity we have on Telegram and Slack, I really believe we have an amazing community. I know you guys also have a huge french community. France is actually our second biggest market behind USA. Let’s talk about security, it’s always an important concern from users. How do you improve and assess the exchange’s security? Rune Evensen: We are doing regular penetration testing, you can never say that something is 100% hack proof. My personal recommendation is to leave on exchanges only what you intend to trade and send the rest to your hardware wallet. You can get your fee split allocation on Ledger very easily. We do our due diligence and have never been breached, but some users have through their emails. I’m also amazed by how many people have not yet set-up 2FA. We might make it mandatory. You mentioned earlier that you still have 6M worth of ETH from your ICO. How much volume does the exchange need to cover your costs? Rune Evensen: Right now, when we have 2 to 3M daily volume, we are paying weekly to COSS holders between 70 and 100k. That means we get the same amount for ourselves and that’s almost enough to cover our expenses. If we reach 10M daily volume we should be very healthy financially.
Hi Bitcoiners! I’m back with the 23rd monthly Bitcoin news recap. For those unfamiliar, each day I pick out the most popularelevant/interesting stories in Bitcoin and save them. At the end of the month I release them in one batch, to give you a quick (but not necessarily the best) overview of what happened in bitcoin over the past month. You can see recaps of the previous months on Bitcoinsnippets.com A recap of Bitcoin in November 2018 Adoption
What are the best sites to exchange cryptocurrencies?
8 Best Crypto-Trading Websites 1. Binance Binance exchange now needs no introduction as it has been ruling the crypto market for months. This exchange is good for beginners and advanced users alike. They also have an inbuilt option in their UI to switch between the two modes, a feature that makes their UI very user-friendly. Also, you will never face a liquidity issue while using Binance because it constantly ranks in top 5 exchanges on CMC by volume. In addition to that, if you use their native BNB tokens while trading you can have a discount of up to 50% in your trading fees, which is a big amount if you’re looking to become a full-time crypto trader. The sooner you start via BNB, the more you will save in the longer run. (Buy BNB tokens now) And the coolest thing that I found was that they have the most advanced and easy to use mobile apps for trading cryptocurrencies on Android as well as iOS.(Android App | Download iOS App)
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2.BtcNewz Btcnewz is comes in top 10 websites. As a beginners view, their website is user friendly and easy to use. They also offers bitcoin faucets by the name ESFaucets to make bitcoin for the newbies.
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3. KuCoin KuCoin is a brilliant crypto exchange that has been receiving a lot of traction over the last 6 months. The traction comes as no surprise given the team behind it and an easy to use & navigate UI. In terms of volume too, it ranks in top 25 exchanges on CMC and has a programme in which they keep adding new coins/tokens on their exchange regularly. Also, from a beginners point of view, KuCoin’s native token i.e. KuCoin Shares is good to HODL because that gives you extra smart passive income in the form of exchange fee. (Buy KCS Coins Now) One unique thing that many newbies miss i.e. KuCoin is one of the few exchanges that pays you NeoGAS for holding NEO on it.
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Use KuCoin Now 4. Changelly Changelly is, without a doubt, one of the easiest to use cryptocurrency exchanges in the market. Via Changelly, you can simply send one currency and swap it for another supported currency. It doesn’t require you to undergo the tedious KYC process but it does require you to sign-in with your email ID. Currently, it supports more than 35 cryptocurrencies along with fiat pairs such as USD/EUR. Also, It is one of the best and easiest to use exchanges out there if you are looking to buy cryptocurrencies through debit/credit cards. If you want to know more, check out Harsh’s review on Changelly. Lastly, Changelly charges a commission fee of 0.5% on each trade, which is minimal in exchange for the volatility and risk that they bear on behalf of their users. If you want to use Changelly, head towards CoinSutra’s Cryptocurrency Exchange – Changelly, and follow the steps given in this guide. Use Changelly Now 5. Coinbase Coinbase is another popular Bitcoin and cryptocurrency exchange that one can use for buying/selling cryptos like Bitcoin, Bitcoin Cash, Ethereum, and Litecoin. You can deposit your fiat currency (USD, EUR, GBP etc) into Coinbase and easily collect your cryptocurrencies that you can later withdraw in a Ledger Nano S or Trezor-like device. Coinbase also becomes handy because it allows you to buy cryptocurrencies via credit/debit cards. You can buy cryptocurrencies on Coinbase by following these simple steps: (However, check if their service is available in your country here.)
Register at Coinbase.
Complete photo ID verification.
Go to the payment methods page.
Click on +Add Payment Method on the right-hand side.
Choose Card and add the credit/debit card.
Accept and allow Coinbase to make two small transactions.
Coinbase will make two very small test transactions between 1.01 and 1.99 in your local currency. Log in to your card statement account and note the amount of those transactions.
Enter the amounts transacted in the Coinbase app.
Use Coinbase Now 6.CEX.io Bitcoin Exchange, Trading BTC USD, BTC EUR - CEX.IO is another reputed website for buying/selling cryptocurrencies for beginners because their UI is very easy to use and their past track record has been pretty good too. CEX is a UK-based exchange and has been operating since 2013. Similar to Coinbase, you can deposit fiat currencies like EUR, GBP, USD, RUB etc on CEX too and buy/sell cryptocurrencies like Bitcoin, Bitcoin Cash, Ethereum, Stellar, and Ripple. In terms of liquidity too, they are doing well, not to forget that their main traffic is from fiat currencies. (They are in top 35 cryptocurrency exchange as per CMC). Their feature of letting users buy cryptocurrencies via debit/credit card also makes it an easy to use option for many beginners. You can buy cryptos by following these simple steps (taken an example of Ethereum):
Register at CEX.
Go to Cards.
Configure your credit/debit card.
Verify your credit/debit card.
Select the amount of Ethereum to buy/sell.
Exchange your currency for Ethereum.
The card verification takes 24-48 hours, but post that, you can buy ETH instantly. That’s why we recommend you that you keep your card configured in CEX even if you don’t have immediate plans to buy ETH. Here is a video guide to help you on how to link a credit/debit card on Bitcoin Exchange, Trading BTC USD, BTC EUR - CEX.IO: Also, they have wider coverage of countries than Coinbase with mobile apps for both Android and iOS versions. 7. BitMEX BitMEX exchange is run be professional algo traders, developers and economists and hence is the busiest exchange you will find in the cryptocurrency realm. Moreover, it provides all the tools and techniques for advanced as well as beginners to start trading cryptocurrencies. On BitMEX you can trade following cryptocurrencies (& contracts) for these fiat currencies like US Dollar, the Japanese Yen, and the Chinese Yuan:
The registration process on BitMex is quite simple where you just need to register through your email ID and their fee structure is also quite straightforward as shown below.
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8. Bitfinex Bitfinex is one of the oldest players in the race of crypto exchanges for beginners. It is much like Bittrex but unlike it deals in fiat currencies like USD, EUR & GBP. Bitfinex always has enormous volume so one need not worry about liquidity while buying or selling on this exchange as it always ranks amongst the top 10 on CMC. Plus the exchange UI is clean and has sufficient instructions on each page that will help any noob to use it efficiently. Also, to get started on Bitfinex, you need to register, verify your ID, and authenticate yourself. It typically takes 15-20 business days after submitting valid ID proof before you’re accepted into the platform. Lastly, do check out their mobile apps (Android App | iOS App) because they are good enough to be used while trading on the go.
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Fees: 0.1% to 0.8% (details here).
Accessible Globally [Bitfinex serves all countries with the exception of the United States; Bosnia and Herzegovina; Democratic People’s Republic of Korea (North Korea); Ethiopia; Iran; Iraq; Syria; Uganda; Vanuatu; and, Yemen.]
Hello! My name is Vladimir Hovanskiy. I am a Google Adwords manager at Platinum, a business facilitator of new generation, providing STO and ICO marketing services. We already created best STO blockchain platform on the market and consulted more than 700 projects. Here’s the proof 😎 Platinum.fund We are more than proud that we not only promote but also share our knowledge with the students of the UBAI. Here you can learn how to do security token offering and initial coin offering! Now I want to share some cool info on the purpose and role of tokens within the Blockchain ecosystem at the ICO stage. Initial Coin Offerings (ICOs) History Initial Coin Offerings (ICOs) are a means of fundraising for the initial capital needed to get new projects off the ground within the cryptocurrency ecosystem. More often than not, Bitcoin and Ethereum, are used to buy a quantity of project tokens. However, new projects are also being launched on alternative Blockchain platforms such as NEO or WANchain, wherein the “parent” chain’s tokens will be used to fund these ICOs. Pre-launch, ICO tokens are endorsed as functional currency in the project ecosystem. After a project’s ICO, it is available on exchanges, and then the market determines the value of those tokens. The main benefit of using the ICO funding system is that it avoids the prohibitive amount of time and expense incurred by launching a startup in the conventional method, by way of Initial Public Offering (IPO). The lengthy and costly process of ensuring regulatory compliance in different jurisdictions often makes the IPO format unfeasible for small companies. Thus, the ICO method of fundraising is far more attractive as a means of crowd funding for the project. But at the same time, an ICO is certainly riskier for the investor. It is important to note the different stages of the token sale. Token prices generally escalate the closer the token gets to its listing date. Projects often seek funding from angel investors even before the date of the private pre-sale is set, though some ICOs do go straight to pre-sale. After potential initial investment has been sought from angel investors, pre-sale begins. Usually there will be a 15–30% discount from the public sale price. The main-sale begins after the pre-sale has concluded. At that time, normal everyday crypto enthusiasts, with no connections to the team, may buy into the project at pretty close to the ground floor price. Angel investors and pre-sale investors sometimes receive quite large discounts from main sale prices, but their tokens are locked up for varying amounts of time, to prevent dumping, or selling all their tokens for a quick profit at the time of listing. Today the vast majority of ICOs make use of the Ethereum blockchain and the ERC-20 token. The very first token sale was arranged by Mastercoin, a Bitcoin fork, in July 2013. Ethereum soon followed in early 2014, raising 3700 BTC in only 12 hours (equivalent to $2.3 million at that time, and just under $35 million today). Before late 2015 there were sporadic ICOs, with Augur, NXT and Factom all successfully raising funds. 2016 was the year that the ICO format grew to truly disrupt the Venture Capital industry. There were 64 ICOs in 2016 which cumulatively raised $103 million USD. Tremendous Success & Why Real World Case Study The ICON (ICX) Initial coin offering is an example of a project that reaped the rewards of a token sale done with precision of execution and clarity of vision. The project promised to build a world-wide decentralized network that would allow Blockchains of different governances to transact with one another without a centralized authority, and with as few barriers as possible. ICX offered fair and clear tokenomics, with 1 Ether buying 2500 ICX, and with 1 ETH costing approximately 250 dollars when the ICO began on September 18th. 50% of the total amount of tokens were put up for public sale, 400,230,000 out of a total of 800,460,000, equating to a fundraising goal of 150,000 Ether. One of the core reasons for the project’s spectacular success was the incredibly distinguished background of those involved, and the foundation the project had in many years of stellar achievement. ICON was originally a project developed by “The Loop”, a joint venture between DAYLI financial group and three Korean Universities. They lead the Korea Financial Investment Blockchain Consortium, one of the largest organizations of its kind in the world, boasting members including Samsung Securities. The Loop had already implemented Blockchain solutions for high profile clients well before ICX was born, including completing a KYC/AML authentication smart contract platform for Korea Financial Investment Consortium. Real World Example of Failure & Why Case Study The risk involved in starting your own company is huge. Over 75% of startups eventually fail, according to the Harvard Business School study by Shikhar Ghosh. The study’s findings show the rate of failure for new companies is roughly 50% after 5 years, and over 75% after 10. Shikhar Ghosh identifies the following issues as the most common factors in start-up failure: -Insufficient Market Demand -Insolvency -Wrong Team -Got beat by competition -Pricing/Cost issues -Poor Product -Need for or Lack of business model -Ineffective Marketing -Disregarding Customer desires The statistics concerning rate of failure for conventional business startups pale in comparison to the number of crypto startups that fail according to Tokendata. They are one of the most rigorous ICO trackers, recording 46% of the 902 ICO crowdsale projects initiated in 2017 as failing by the time of writing. Of these 46%, 142 collapsed before the end of the funding stage, and a further 276 had either “exit scammed” (took the money and ran) or slowly faded into eventual obscurity. With no shortage of failed and abortive projects to look into, we thought it would be more helpful to look into an ICO that was mismanaged and unsuccessful in terms of its execution, rather than being fraudulent, or terminally mismanaged. Real World Example of Failure & Why §3 Tezos was designed as a “new decentralized Blockchain that governs itself by establishing a true digital commonwealth”. The project was a partnership between the husband and wife team of Kathleen and Arthur Breitman, and a Swiss foundation run by Johann Gevers. They had a novel idea of “formal verification”, a technique that mathematically proves the veracity of code governing transactions and heightens security of smart contracts. That idea was wholeheartedly endorsed by investors, resulting in $232 million USD raised in the 2017 crowdsale. Trouble arose after the Breitmans asked the head of the Swiss foundation they were in partnership with to step down. In Gever’s words, the Breitman’s were attempting “to bypass Swiss legal structure and take over control of the foundation”. The resulting 6 class action lawsuits that were spawned from the wreckage of one of the most successful ICOs of all time have yet to be fully resolved at the time of writing, though Gevers has stepped down and a new leadership team is in place. The Tezos Network has a prospective launch date of somewhere around Q3 2018. The debacle, though not terminal to the prospects of the Tezos network, provides a cautionary tale about the need for a clearly defined leadership structure and plan for the allocation of funds after an ICO. It is entirely possible that the Tezos project could have ridden the late 2017 market euphoria to sit near the top of the cryptocurrency hierarchy if boardroom strife could have been avoided. Real World Example of Failure & Why §4 Projects often also “pivot” from one focus or project to another. More often than not, teams change the project name entirely, even while retaining the same core team, to try for a successful venture one more time. One such project is Chain Trade Token (CTT) which, while technically speaking, not yet a “deadcoin”, shows all the signs of shutting down operations within a few months, and “pivoting” into a new project. The CTT project aimed to be the “first blockchain-based platform for the trading of futures and options on food and raw materials (aka commodity derivatives)”. But through a combination of a non-existent social media presence, and a distinct lack of urgency in securing listings beyond decentralized exchanges, the lofty ambitions of the top-level team were left unrealized. The team has supposedly split their operations from solely Chain Trade, to a former business endeavors, and the Nebula Decentralized Exchange. The project leaders then offered a 1-for-1 token swap which has been accepted by the vast majority of CTT holders. The ICO Process Before even researching the particular strengths and weaknesses of any specific project in which you may want to invest, it is important to know the overall processes of the ICO crowdfunding method. This will allow you to avoid any potential pitfalls if you do decide to move forward and invest money into a particular idea or project. How does an ICO happen? Stage One: Token sale details are set: This takes place usually after release of the whitepaper, and the presentation of a project to prospective investors in forums and on social media. Stage Two: Whitelisting for private sale begins: The vast majority of all ICOs have instituted KYC checks for investors which usually involve uploading a photograph of your passport or driving license along with a selfie holding the ID. Did you know? Participation in ICOs has proven to be a regulatory nightmare in some localities. Most token sales restrict contributions from investors in China and the USA entirely, though accredited investors may participate in the USA in some cases. Stage Three: Private/Pre-sale states: Typically, 10% of tokens will be offered to early investors at a 10–30% discount. These select few investors will likely have a close association with the team. But not all projects have a pre-sale round, some go straight to public sale. Stage Four: Whitelisting for Public/Main sale starts: The same format used for pre-sale investors is used for public sale investors, though it is a regular occurrence to see main sale KYC checks closed early due to overwhelming demand. An investor must then register a contribution wallet address. That is the address used to send cryptocurrency from, to buy the ICO tokens, and then also into which you will receive your purchased tokens. This wallet address must be a non-exchange wallet, like Blockchain.info bitcoin wallet, or MyEtherWallet for ERC-20. You already understand from the prior lesson that making a mistake with your wallet address may mean you lose the tokens forever as well as the BTC or ETH you used to purchase them. Copying and pasting your cryptocurrency public key into the whitelist wallet form is the next task to complete. And then, as the investor, you wait for confirmation of successful ICO registration from the team. Stage Five: Public sale starts: Commonly on a specific date, though sometimes for a specific period of time. If you are interested in participating in an ICO, it is important to make your contribution as quickly as possible, or you risk sending your ETH or BTC after the hard cap has been reached, resulting in your funds being sent back. This refund can sometimes take many days, or even weeks in times of high market activity. Did you know? In 2017 it was not unheard of to find ICOs that had originally scheduled their ICO period for many weeks, but then they met with such high demand that they could close their crowdsale in a matter of hours or even in just a few minutes! Stage Six: Tokens are allocated to successful participant investor wallets, and trading can begin on some decentralized exchanges like IDEX, or EtherDelta in the case of Ethereum based tokens. Tokens will be sent to and received by the wallet addresses from which the investor contributions were made. Stage Seven: Tokens are listed on mainstream exchanges: The tokens will then be listed on the exchanges with which the teams have negotiated listing, prior to or during the sale. It can cost huge amounts of money to list on large exchanges like Bitfinex Bittrex, Huobi or Binance, so usually smaller projects will not be listed on top 10 exchanges so quickly. As tokens are listed on more and more exchanges, their price usually rises because more and more investors are exposed to opportunities to buy that particular token. Evaluating a Blockchain Use Case Evaluating a particular use case for Blockchain technology, and thus how successful an ICO project’s ambitions might be in a particular market, is not a simple endeavor. As demonstrated in the graphic below, Blockchain technology has nearly limitless potential to be applied to a great variety of business areas, but as an ICO investor, you are looking for projects that have the potential to deliver significant long-term success. In the currently saturated ICO environment, some use cases have more potential than others. Ascertaining which use case is likely to have long term success is a key distinction. Also, we must recognize that businesses and corporate entities may be overeager to experiment with this new Blockchain technology, whether or not usage of the technology is actually advisable or profitable for their particular purpose. The main questions to ask when analyzing specific solutions proposed by the project are: What are the problems posed and the solutions offered? Does this particular area of business need a Blockchain solution? That is, is a Blockchain solution in fact superior to the current way this particular business operates? Is the use of Blockchain in this specific instance feasible and applicable? What are competitors doing about Blockchain projects in this same area? A Blockchain network provides a shared, replicated, secured, immutable and verifiable data ledger. The implication for use case analysis: Shared and replicated: participants have a copy of the ledger and many people can view it or work on it Secured: Secured through cryptography Verifiable: Business rules are associated with all interactions that occur on the network Immutable: Transactions (records) cannot be modified or deleted, therefore a verifiable audit trail is maintained by the network So, with all this considered, what should we look for with regard to a possible business use case that would be best solved using Blockchain technology? 1. Data exchange that has trust issues i.e. businesses transacting with one another. Trust must be established through a multitude of verification processes with regards to employees and products. These processes increase operational cost. Example: Digital voting. 2. Any potential business process involving data storage, or compliance and risk data that get audited. Blockchain solutions would provide the regulators a real-time view of information. Example: Supply chain solutions like VeChain or WaltonChain. The possibility of close to zero operational loss would of course be attractive to any business. 3. All kinds of asset transactions. A Blockchain network, with its tamper-proof ledger, validating traceable and trackable transactions, could save many different industries untold amounts of money. Example: Tokenization of assets e.g. Jibrel Network or Polymath Purpose of Tokens Within the cryptocurrency ecosystem, the definition and role of a token iswidely understood. They represent programmable units of currency that sit atop a particular Blockchain, and they are part of a smart contract “logic” specific to a certain application. In the business sphere, a token can be defined as a unit of value that a project or business venture creates to enable it to self-govern. And the business venture also allows token users to connect and collaborate with its business products, while facilitating the sharing of rewards to all of its stakeholders. A token can also be described in a more general sense as a type of privately issued currency. In the past it was solely within the purview of governments to issue currency and set the terms of its governance. With the advent of Blockchain technology we now have businesses and organizations offering forms of digital money over which they, not the government or central bank, have control of the terms of operations and issuance. Wide scale adoption of these mechanisms could fundamentally alter the global economy. This is like the creation of self-sustaining, mini-economies in any sector of business or life, via a specific token or currency. Fun Fact: Tokens of the particular Blockchain upon which the project is launched will usually have to be bought in order to be exchanged for ICO tokens, hence it is important for traders and investors to be aware of the schedule for upcoming ICOs. ETH is usually the token used for exchange because the majority of ICOs launch on the Ethereum Blockchain. But this is not always the case. During January 2018, two NEO token ICOs, both the Key TKY and Ontology ICOs, were being carried out, and this caused the NEO cryptocurrency to spike to its all-time high in excess of $160 USD. Since the product or project is more often than not in its embryonic stage at the time of the ICO crowdfunding process, the ICO token’s true function and purpose is in most cases yet to be realized. At the ICO stage the tokens can usually be grouped together into one of three categories. Knowing how to distinguish these categories involves determining the specific nature and function of the token around which the project is centered. The main and crucial distinction, is whether or not a token is a security, and therefore subject to securities registration requirements. ICO Stage Token Categories Howey Test: This is the test created by the US Supreme Court to ascertain whether certain transactions qualify as “investment contracts”. If they are found to fall within this classification, then under the Securities Act of 1933 and the Exchange Act of 1934, those transactions are considered “securities” and participants must adhere to registration and disclosure requirements. One of the most important and amazing considerations of the effect of Blockchain technology is that normal people with a computer science background are now empowered to make decisions and offer products and services that previously only licensed financial institutions were able to do. This is a very complex and complicated situation with serious ramifications for anyone involved. One thing to note well is that ordinary participants and actors in this arena can easily commit white-collar crime, violating serious securities laws, without even realizing it. If a token falls within the US legal definition of “Investment Contract” then you must adhere to US regulations. For that reason, many ICOs simply do not want to sell to US based investors, perhaps until all the rules and regulations are clarified. Security Tokens The broad and varying definition of the term “security” is a regulatory minefield. This has always been true for traditional financial products, and now it is especially true for the as yet unregulated cryptocurrency market. In the case of SEC V. Howey, parameters were established to determine whether or not a particular financial arrangement could be classified as a security and thus be subject to securities regulations. Cooley LLP Fintech Team Leader Marco Santori has said, an arrangement is a security if it involves “an investment of money, and a common enterprise, with the expectation of profit, primarily from the efforts of others.” Investors have the option of accessing a huge range of security tokens through ICOs. Prime examples are the gold backed DigixDao (DGD) and CProp (still in crowd funding stage). A security token is fundamentally different from the currently available ICO project tokens in that it provides a legal and enforceable ownership of a company’s profits and voice in its governance much like common stock traded on any exchange. If security tokens are the next step in the evolution of crypto-finance, real estate, stocks, venture capital, and commodities can all be tokenized. The traditional markets could be fully connected to the Blockchain. Financial assets would available to anyone in the world, not just licensed or accredited investors. That is one aspect of Fintech, the financial revolution taking place today, as Blockchain technology clashes with traditional finance. Equity Tokens One exciting application of smart contracts on the Ethereum Network is the potential for startups to distribute equity tokens through initial coin offerings. That would reduce the hurdles that an average person has to face in order to take part in the early stages of a company’s development. And, democratic governance of a project could be conducted in a transparent manner through voting on the Blockchain. As of yet, few startups have attempted to conduct equity token sales for fear of falling afoul of the Securities and Exchange Commission (SEC) in the US. But many Venture Capital insiders are bullish on the prospect of equity tokens taking a central role in the crypto finance industry, when and as the legal issues are resolved. For example, the Delaware State legislature recently passed a bill enabling companies to maintain shareholder lists on the Blockchain. That is one major step to enable Blockchain based stock trading. Lawyers also generally believe it is only a matter of time before the regulations are clarified. Did you know? Important consideration: The Sarbanes-Oxley Act of 2002 made it unfeasibly expensive for smaller companies to be listed on exchanges, causing a halving in the number of IPOs between 1996 and 2016 (7322 to 3671). In 2017 there was an almost 5-fold increase in the number of ICOs, from 43 to 210, with the 2017 volume already being eclipsed in the first 5 months of 2018. Utility Tokens However, given that this area is still a regulatory nightmare for people planning to issue security and equity tokens, many projects attempt to ensure that the tokens within their specific model fall under the definition of Utility Tokens rather than securities, so as to avoid the SEC regulations altogether. If a token is imbued with a certain functionality and use within the Blockchain infrastructure of that particular project, the token can avoid being labelled as a security, and thus render SEC regulations inapplicable. Just this week in fact, the SEC made the long-awaited and momentous decision that Ether was not a security. In the words of William Hinman, director of the Securities and Exchange Commission division of corporate finance, “Putting aside the fundraising that accompanied the creation of Ether, based on my understanding of the present state of Ether, the Ethereum network and its decentralized structure, current offers and sales of Ether are not securities transactions.” This means that Ethereum, in fact, fails the Howey test, which is exactly the decision the crypto world wanted. Hinman said, “When the efforts of the third party are no longer a key factor for determining the enterprise’s success, material information asymmetries recede,” Hinman said. “The ability to identify an issuer or promoter to make the requisite disclosures becomes difficult, and less meaningful.” We will now cover various use cases that projects have been adopting up to now in order to get their tokens classified as utility tokens rather than securities. Voting Rights Some coins portray themselves as a company with tokens being held in a way that is analogous to voting shares of a stock. One coin held is equal to one vote. This form of token utility has a major flaw in that so-called whales (people with huge amounts of a particular cryptocurrency) can manipulate any poll conducted. The cryptocurrencies Aragon and Lykke are examples of projects that have written voting rights into the structure of their code. In-App Reward: Another common tactic to evade the security label has been the addition of in-app rewards to the functionality of a particular token. The Basic Attention Token (BAT) is the unit of currency for use with the project browser named “Brave”. The BAT is a unit of account for the advertisers, publishers and users of the platform. Filecoin, the cloud storage project that raised a record $257 million through their ICO, pays other people or companies for use of their spare storage space. Some of the many rights afforded to token holders in various Blockchain projects are described by the graphic below. Token Roles Function The token can be used as a mechanism through which user experience is enhanced, enabling such actions as connection with users, or joining a broader network. It may also be used as an incentive for beginning usage or for on-boarding. Examples include Dfinity and Steemit. Value Exchange: In its most basic usage, a token is a unit of value exchange within a specific app or market. This usually is made up of features that allow users to earn tokens through real work or passive work (sharing data, allowing use of storage space) and to spend them on services or internal functions within the specific market ecosystem created by that organization. Augur and KIK, amongst countless others, are projects that have implemented this functionality into their tokenomics. Toll: The token can also be used for getting onto the Blockchain infrastructure, or for powering decentralized applications run on that particular Blockchain. This ensures that users have “skin in the game”. Tolls can be derived from running smart contracts, paying a security deposit, or just usage fees. Examples include Bitcoin and Ethereum. Currency: Seeing as the particular platform or app is designed with a view towards functioning in synergy with a particular token, the token is an extremely efficient means of payment and transaction engine, resulting in frictionless transactions. This means that companies can become their own payment processors and no longer have to rely on the often unwieldy stages of conventional financial settlement involving trusted third parties in the form of banks and credit card companies. Rights: Owning a token bequests certain rights upon the holder, such as product usage, voting, access to restricted markets, and dividends (e.g.: GAS for holding NEO). Though most businesses are trying to avoid fitting the definition of a security laid out in the Howey Test, the right to real ownership of a particular asset is sometimes granted as a result of holding a token, for example DigixDAO or Tezos. Comparison to Traditional IPO and Equity Capital Raisings Despite the similarity of the acronyms and the derivation of one from the other, Initial Coin Offerings and Initial Public Offerings are very different methods of fundraising. The distinction is not limited simply to the fact that IPOs are used in conventional business, and ICOs are associated with cryptocurrency. Through ICO’s, companies in their early stages issue digital tokens on a Blockchain and those tokens act as units of value for use within the ecosystem created by the project. They have many other uses, but it is also fair to say they are analogous to shares offered in an Initial Public offering. In an IPO, shareholdings are distributed to investors through underwriters, usually investment banks. But in the case of ICO token sales, companies often do not even have an actual product to show. Often, all that there is a whitepaper, evidence of the partnerships involved and the particular social-media infrastructure they have established. IPO’s take place when a more well-established company floats shares on a stock exchange. The company would have a well-established history of success and significant reasons to expect a bright future. In the vast majority of cases, an ICO is used for a new company with no such history, just trying to get off the ground. Another important difference is the expected return in exchange for the investment. Companies engaging in IPOs may offer participants dividend paying stocks which result in various levels of return depending on the success of the company after the shares are issued. An ICO however can offer no such guaranteed return. When buying tokens in an ICO, you do so with no promise of return. An investor who holds the tokens of a particular project does so with the promise, rather than an assurance, of future success. The main benefit to investors taking part in Initial Coin Offerings, compared to Initial Public Offerings, is the need for only basic Know Your Customer checks in the case of the ICO, compared to the costly, complex and time-consuming regulatory obstacles that must be traversed in an IPO. In the case of Initial Public Offerings, a business must obtain authorization from a number of entities before the act of “going public”. Prior to an IPO, companies are not obliged to disclose so much of their internal records or accounting. It is not so complicated to make a private company in the United States. But in the run up to going public, the company must form a board of directors, make their records auditable to the relevant authorities in one or more jurisdictions, and prepare to make quarterly reports to the SEC (or equivalent). Relevant Factors to Consider in ICO process When analyzing the chances of success for a specific project, and the likelihood of a favorable return on investment in the long term, it is essential to break down the project into its constituent parts, and evaluate the strengths and weaknesses of each part individually. An effective investigation and analysis would start with the team and white paper. Consider the stage the project is at,and VC investments in the project. That would lead to a good initial idea of the actual progress thus far. Next, evaluate the social media presence and the credentials of the community that has formed around the core team. If a compelling case is made by the team, (e.g.: via an in-depth dive into the use case), and the tokenomics, distribution schedule, potential competitors, as well as the team’s awareness of any future business or regulatory concerns all check out; then the ICO might present a good opportunity for investment. In the following slides we tackle each of these considerations in order so you will be able to evaluate an ICO’s worth and assign a grade for the success of each project. Relevant Factors to Consider in ICO process The Team First and most important, we need evaluate the background and experience of the team, the people involved in the project. Well-established developers, for example, will likely have LinkedIn profiles demonstrating their previous endeavors and occupations, from which we can judge their suitability to the project and the likelihood of the team’s success. The LinkedIn profile is a point of reference for professional accomplishments and official positions. But we can also learn more about a person from their personal accounts on Twitter, Facebook, and Medium etc. That is also a good way to follow along with the progress of the project. By investigating team members through as many means as possible, you will know how long they have been involved in cryptocurrency. If they have been around and active for a long time, they are that much more likely to be knowledgeable and capable of making better quality decisions in this business. It goes without saying that it is a huge red flag if it is too difficult to find information about the team members online, and worse still if the team members are anonymous. Relevant Factors to Consider in ICO process A good Whitepaper gives a detailed description of the project, the problems the team is going to solve, the timeframe projected, and methods to be used in the implementation of their ideas. If, in answering the question about what the project actually does, it seems the team is presenting ideas that are too complicated or advanced to understand, then you simply should not invest until you are satisfied you have been given the requisite level of insight to understand the concepts described. It is always possible that the whitepaper is nothing more than a salad of buzzwords and technical language intended to give the impression of competence while really doing nothing but obfuscate the truth. The whitepaper should clearly and concisely present the problems and the solutions needed. The whitepaper must give a solid and coherent answer as to who needs this project and why. Also, if the team have put no effort into explaining why a Blockchain solution is needed for this particular problem, or why such a solution is superior to its “real-world” equivalent, it is likely they are only in it for the money. We have more to say about red-flags later. While 2016 raised a comparatively small amount in comparison to the proceeding years, there were a few specific projects that raised significant amounts of capital. These are respectable amounts of money, even by today’s standards, and especially impressive when contrasted with the immaturity of the ICO market at the time, and relative to amounts raised in traditional IPOs. Waves ($16.4mill), Iconomi ($10.6mill) and Golem ($8.6mill) were the three largest fundraisings of the year. 2017 was the year of the ICO whales. Hdac ($258mill), Filecoin ($257mill), EOS Stage 1 ($185mill) and Paragon ($183.16mill) were the largest that year. To be able to raise so much money, so quickly, in such a new market, using such a new mechanism is truly incredible. 2017 was the year that proved ICOs are for serious individuals and institutional investors as well. We have also had some phenomenal amounts raised so far in 2018. Telegram ($1.7bill), Dragon ($320mill), Huobi ($300mill) and Bankera ($150mill). Telegram might be the first mainstream example of an ICO, not only by raising close to $2billion, which would be beyond incredible and impressive even by traditional IPO standards; but also, because it is one of the first ICO companies to tangibly put a product in the hands of hundreds of millions of users, and successfully compete against traditional companies such as Facebook (MessengeWhatsApp), Microsoft (Skype) and Tencent (WeChat). What is ICO main mechanisms and processes.? How to market STO? What are the best security tokens 2019? Follow the link to learn more: UBAI.co We can teach you how to do ICO and STO in 2019. Contact me via Facebook to learn more: Facebook
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