Bitcoin ETF Rejection Sparks Firm’s Public Protest
Bitcoin EFT Rejected Firm Van Eck Protests Publically to SEC
In a letter to Dalia Blass, the SEC’s go-to on investment management and someone well familiar with the Bitcoin ETF quest prior to her tenure at the agency, Van Eck, one of the firms impacted by rejection, issued a public protest. It was written just prior to the latest SEC denial of the Winklevoss Bitcoin Trust.
Van Eck’s detailed response was recently published on the SEC’s website, and it pains in detail over issues often cited by agency leaders such as Ms. Blass, five in particular. “For the reasons stated above,” Van Eck concluded in the 13-page missive complete with graphs and charts, “we believe that our proposed ETF will operate consistent with the rules and requirements of the 1940 Act. Further, by offering investors exposure to bitcoin through a regulated investment product, we believe the proposed ETF will be consistent with the Commission’s mission to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.”
Ms. Blass was appointed by Chair Jay Clayton, himself new to the job earlier that same year (2017), having been tapped by President Trump. Though with the agency during a previous stint, Ms. Blass re-emerged from the private sector.
In fact, she was counsel to the Winklevoss’ first failed ETF attempt at the hands of the SEC. Notice of her appointment in December caused at least one media outlet to dub her an “ETF specialist.” She would go on to have quite an impact on the current discussion, especially her Staff Letter: Engaging on Fund Innovation and Cryptocurrency-related Holdings of 18 January 2018, as it is the document Van Eck is addressing.
Valuation, Liquidity, Custody, Arbitrage, Manipulation
Van Eck takes on essentially five main issues in its response to the SEC. Regarding valuation, regulators really fear Bitcoin ETF prices will be screwy if, say, more forks of the digital asset continue. To that end, Van Eck explains, “Some rules that should be employed are using meaningful liquidity and infrastructure tests to assess forks and pricing issues. If prices are just displayed on a website but do not reflect sufficient volume, then those prices can be de-emphasized for valuation purposes. Forks that do not trade with sufficient volume or have adequate infrastructure (wallet or exchange support) can be excluded from indices that are meant to be investable.”
Liquidity is yet another worry for the SEC. Here, Van Eck relies on a steady increase in futures markets. The firm details, “We expect that the futures market will grow proportionally to our proposed ETF and that such growth will fuel additional interest by other investors, thereby adding additional liquidity. Additionally, since the launch of the U.S. bitcoin futures contracts, unregistered futures contracts have traded on Bitmex, a non-U.S. exchange, with a consistent volume of greater than $2 billion per day. Moreover, to the extent other futures-based bitcoin ETFs follow our proposed ETF into the market, we anticipate that such other ETFs would have a similar impact on the futures market, thus increasing liquidity in the market and benefiting fellow market participants.”
The issue of custody is a serious one both for regulators and institutional investors, and it seems to be already addressed by the current market. Coinbase is just the latest example, and so Van Eck doesn’t really dwell on the issue too much. Arbitrage, however, is a serious concern as well for regulators. Using stoppages in recent contract history, Van Eck notes, “To date, there have been 7% and 13% halts for the CME contracts and 10% halts for the CBOE contracts. Each halt lasted for 2 minutes; markets then re-opened trading in an orderly fashion. During a halt, ETF market makers will continue to have access to underlying real-time futures reference prices as well as prices in the underlying physical markets. These prices are publicly available. Furthermore, because bitcoin trades globally, the closure of a single bitcoin exchange should not affect the arbitrage process, although the market price may be affected for a number of reasons based on the nature of the closure,” the firm readily concedes.
For Van Eck, price manipulation is almost nulled by the definition of an ETF. “While one cannot rule out manipulation in the underlying spot market,” they soberly remind regulators, “we believe that, due to the diversified ownership and volume of trading, the market does not have major, structural vulnerabilities. Therefore, the Commission’s increased enforcement and regulatory actions can reduce the number of bad actors in a basically sound market.” As of this writing the SEC has not responded.
Written by Bitcoin.com
TRON (TRX) Chrome Extension Beta Arrives, Project Marks First Anniversary
Compiling a Lightning Network Node
The Lightning Network is a second layer payment protocol that many people believe can solve Bitcoin Core’s (BTC) scalability problem. The reason for this is because the LN system works on top of the BTC chain and because of this factor there would be fewer on-chain transactions. Essentially the system comprises a great number of participating nodes that can send transactions through bidirectional payment channels. Alongside this, there’s been a ferocious debate over the years because people have touted LN as the solution for BTC’s congested mempool, even though the network is very much in its infancy.
Just recently we reported on the owner of Shitcoin.com, Andreas Brekken, when he initially freaked everyone out with a couple hundred grand worth of BTC sitting within his LN node. Both the BTC and Bitcoin Cash (BCH) communities had discussed the subject heavily during the first few days, and Brekken’s story made headlines in multiple news publications and podcasts. Since then Brekken wrote four reviews about his experience being the largest node on the Lightning Network. In Brekken’s first review “Lightning Network #1 Can I Compile and Run a Node,” the review gives some comprehensive insight to successfully installing and configuring the ‘lnd’ protocol. The author notes that the ‘autopilot’ feature helps establish a connection and provides funding to the payment channels.
Brekken explains there are a few reviews online that detail the Lightning Network’s probability of finding routes, but people who experience issues may be making a simple error. Furthermore, even though the installation process took a lot of time because it requires compiling a BTC full node installation, Brekken details the process was fairly simple to configure.
“Writers critical of Lightning Network claim the probability of finding routes between two random nodes is very low for amounts over $10. I suspect this is because they are choosing random nodes and not peering properly,” Brekken explains.
Compiling, installing, and running Lightning Network Daemon, lnd, was straight forward. I look forward to using payment channels for sending and receiving bitcoin.
Shitcoin.com Becomes the Lightning Network
In part two of Brekken’s review, he says maintaining a payment hub is becoming stressful and routing doesn’t make that much money. “When I started writing the review the total capacity of the Lightning Network was slightly over 20 BTC (around $130,000) — I decide to shake things up,” Brekken notes. “Reactions to my experiment on social media are mixed. The increase in capacity of the Lightning Network is celebrated by some.”
“My Lightning Network node has established over 200 payment channels with 250 peers. The node capacity is exceeding 40 bitcoin. The month_fee_sum comes to 4289 satoshis, or 0.00004289 bitcoin ($0.31). I also wonder how any payments have been routed,” he adds.
The node has routed 260 payments for other users, averaging a profit of $0.0012 USD per transaction. I doubt that this will cover the costs of running the node, but leave the node running for now.
LN Impractical Even for Highly Technical Users
Brekken’s third review, called “Lightning Network #3 Paying for Goods and Services,” shows his experiences sending payments through the network. First Brekken heads over to a website called Satoshitweet to pay a small microtransaction for a posted tweet on the platform. However, after clicking the ‘Pay 2020 satoshis’ to tweet button he gets an error. “I click the button a few more times — The error remains the same — I look in the Google Chrome network inspector and SatoshiTweet is returning a generic 500 Internal Server Error response.”
The review then discusses trying to use an LN-based dice game called ‘Lightning Spin’ but Brekken has issues with the site glitching and invoices changing rapidly. After resetting his browser and getting a stable invoice Brekken sends some funds. “The payment will be sent through two hops and pay 1800 msats (0.00000002 BTC or 0.000135 USD). Back in the web browser the spin has been detected and I have won 400,000 sats (0.004 BTC or $30 USD).”
After playing around with Lightning Spin, Brekken tests out various other LN web portals like the Blockstream store, Bitrefill and Satoshi’s Place while experimenting with both the Eclair and Zap wallets. Minus an order for Reddit Gold on the website Bitrefill and Brekken’s win on Lightning Spin, most of the attempts had errors. Brekken concludes in his third review:
Sending payments using the Lightning Network is cheaper than the regular Bitcoin network, but suffers from routing errors and wallet bugs that make it impractical even for highly technical users.
Stressing Out About a Possible Lightning Network Exploit
Brekken wraps up his final review in his Medium article called, “Lightning Network #4 What Happens When You Close Down Half of the Lightning Network Capacity?” Brekken says operating the largest nodes within LN was fun, but also “terrifying” at times. Brekken’s node has routed 389 payments in total which added up to a profit of USD$0.34 cents. But a portion of the funds didn’t come from routing as Brekken notes, “I suspect the increase is mostly from the recent increase in bitcoin’s price.” Brekken also tries to close the connected channels manually but ran into some more errors making some channels unable to close.
So Brekken ‘force closed’ all his channels unilaterally which locks up his funds until a predetermined amount of time ends. “The amount of time the funds are locked up depends on the channel policy — This policy is negotiated when the channel opens. Most channels will release the funds to me in between 1440 and 20180 minutes,” Brekken emphasizes.
The Shitcoin.com owner concludes his fourth review by saying he looks forward to trying LN when it matures more and says that leaving funds on the network can be trying.
“Running a large Lightning Network node has been quite stressful — An exploit such as we saw with heartbleed could allow an attacker to drain all funds from the node while I’m sleeping. It’s time to end the experiment,” Brekken concludes.
Operating the largest node on the Bitcoin Lightning Network has been educational, frustrating, fun, and at times terrifying. I look forward to trying it again once the technology matures.
Written by Cryptovest.com
Bitcoin’s Second-Ever Developer Is Back (With a Big Vision for Crypto)
There are early adopters, then there are early early adopters.
Revealed exclusively to CoinDesk, the first coder to work alongside bitcoin’s pseudonymous creator Satoshi Nakamoto, Martti ‘Sirius’ Malmi, is joining a team of developers launching a new cryptocurrency called AXE. The project, which is combining Malmi’s Identifi online reputation system with decentralized database system GUN, is taking on the long-desired mission of decentralizing the Web.
And Malmi’s history in the cryptocurrency space should pique the interest of plenty of enthusiasts.
An amateur college developer in 2009, Malmi played a crucial role in bitcoin’s early days as the only active developer working alongside Satoshi – and even striking up a bit of a friendship. He earned Satoshi’s trust enough to be given admin access to the website Bitcoin.org, and most of the changes in bitcoin’s second code release are attributed to him.
But a couple years in, Malmi followed Satoshi’s lead and left the project, thinking bitcoin didn’t really need him anymore.
“I felt like bitcoin had already gone from zero to one, so to say. It was already up and running with a growing community and had lots of great developers working on it,” he told CoinDesk.
In 2014, then, he started Identifi, with a decentralized architecture that didn’t include a cryptocurrency at first.
But as he built – with his eyes on reducing the control web companies like Google and Facebook have – he decided something else was needed that hadn’t been tried before and that a crypto token could incentivize its use.
Malmi told CoinDesk:
“Most of the giant online businesses, such as Google, Facebook, eBay or Airbnb are basically centralized indexes – searchable lists of stuff. If we want to disrupt them, we need decentralized indexing.”
And that’s where GUN, which has been in the works since 2014 as well, comes in.
Two projects as one
To tie it all together, the decision was made to launch a new company called ERA.
“Martti and I were discussing how governments can still blacklist bitcoin miners’ IP addresses. Telecom companies, Google, Amazon or others can throttle or reroute our traffic without net neutrality,” ERA CEO Mark Nadal (also the CEO of GUN) told CoinDesk.
“This is a huge vulnerability that could affect everyone, thus why we’re building AXE,” he continued.
GUN, which is known for using simple stick-figure comics to explain how its tech works, scored a $1.5 million round led by Draper Associates earlier this year, and has already built a decentralized Reddit and YouTube.
While those services are a bit slower than their centralized counterparts, Nadal argues both have been taking off “like crazy.” And according to Malmi, Identifi can help decentralize the system further by offering a censorship-resistant identity layer.
While digital reputation systems can conjure up images from the “Black Mirror” episode “Nosedive,” whereby a mobile reputation system goes awry, Malmi says he’s been careful to improve on older attempts and keep these unintended consequences in mind.
In the context of ERA, Identifi provides a crucial role.
“You could have users digitally sign all their posts and use Identifi to fetch the identity profile (name, avatar, feedback etc.) that corresponds to the public key,” Malmi said. “You could use your Identifi web of trust to filter out spam, trolls and other kinds of unwanted content without resorting to centralized censorship. That is useful for decentralized social media.”
But to be truly decentralized, ERA needs people from around the world running the database systems – which is where the new crypto token comes in.
Reminiscent of older blockchain storage projects like Filecoin and Storj, ERA with AXE is supposed to incentivize users on the network to store data. But it takes a slightly different approach by paying servers to move encrypted data around (instead of paying them to store data).
Since the data is encrypted, the data won’t be readable by the servers moving it around.
Although Malmi is about to head a new cryptocurrency project, he’s still skeptical of the promise of blockchain tech as it’s been advertised recently.
“Blockchain technology is overhyped and pushed for applications where it is not useful,” he said. “If you don’t need a distributed ledger with no trusted parties, you don’t need a blockchain.”
Yet, he thinks ERA is going about incorporating cryptocurrency into a decentralized web in the “right” way. “Crypto should be given credit for incentivizing the decentralization of infrastructure,” Malmi continued.
Indeed, he and Nadal make a big deal about this tech being more “scalable” than other tech.
“The missing piece [to a decentralized web] was a decentralized database that could handle CryptoKitties scale traffic,” Nadal said, pointing to the blockchain-based cat app that earlier this year clogged the ethereum network to the point users were having trouble using other decentralized apps on the network.
To create that scalable system, ERA is only using its cryptocurrency as a decentralized money, and will not be using a blockchain to store people’s data.
In this way, they argue they’re on a better track to building something that people might actually want to use.
Though, admittedly, the apps built using GUN today are not nearly as large as the companies they hope to replace. Yet, they have big hopes the project will go beyond that, since like so many others in the industry they believe decentralization is the way of the future.
“One of the things I learned is that it is better to do what is meaningful, not what is expedient,” Malmi said, adding:
“I believe that decentralization of digital identity and other basic infrastructure of our society are the some of the most meaningful things a developer can work on these days.”
Martti Malmi image from ERA
Written by Bitcoin.com