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Europe
A smaller market in comparison to the largest hubs in the United States and South-East Asia, Europe is not at the centre of the crypto world, yet it holds a significant position.
Fitting their conservative approach, European institutions have remained on standby regarding crypto regulation during the last decade. As mentioned in the first part of this series, Switzerland is an exception — since it has adopted an open and pro crypto policy. Gibraltar and Malta have also tried to create favourable conditions for businesses in the crypto arena and have become known as “crypto havens.”
Recent developments also reflect a growing interest in crypto and blockchain among local European governments. Germany and France, in particular, have taken a few steps towards clarifying the crypto status quo, as have some institutions in the European Union. It will be interesting to see whether Brexit will prompt the United Kingdom to adopt its own individual policy regarding crypto.
The United Kingdom and Gibraltar
The United Kingdom’s approach towards Bitcoin and the crypto world can be described as “neutral.” While it has not implemented any special restraints on this market, at the same time, it has also not promoted any initiatives to support it. The UK has published a relatively clear framework outlining its policy on the crypto arena, even though it still hasn’t fully developed this framework.
Remarkable Views About Crypto from the Bank of England
Mark Carney, Governor of the Bank of England — an entity right at the heart of England’s establishment — has expressed extraordinary and unprecedented views about crypto. Like his colleagues around the world, Carney has often expressed skepticism about cryptocurrencies, yet, he has also presented pro crypto positions.
Last August, Carney said that a digital currency “could dampen the domineering influence of the US dollar on global trade. By reducing the influence of the US on the global financial cycle, this would help reduce the volatility of capital flows to emerging market economies.” It was reasonable for Carney to focus on issues such as the trade war between the US and China and he was, of course, promoting a very institutionalised form of crypto. Yet, it was a real precedent for the head of the Bank of England, representing one of the largest economies in the world, to suggest that digital currencies were a potential solution. In addition, Carney and the heads of central banks in countries such as Switzerland, Sweden and Japan have recently formed a research group that will examine the use cases of Central Banks Digital Currencies (CBDC).
Regulating Bodies and Crypto
The Financial Conduct Authority (FCA) is the responsible regulator of crypto, and has divided the crypto arena into three main categories, similar to the regulations in other countries. The first category includes “exchange tokens” — cryptocurrencies, such as Bitcoin and Ethereum, that are described as tokens that “tend to be a decentralised tool for buying and selling goods and services without traditional intermediaries.” Cryptocurrencies are explicitly unregulated. Activities in crypto exchanges are not officially restricted, but face problems vis-à-vis local banks.
The two remaining categories are utility tokens and security tokens which fall under the heading of “regulated tokens” or cryptoassets. Only those utility tokens which are defined as e-money are regulated, while all security tokens are regulated. According to certain interpretations, such e-money tokens might include stablecoins that are traded against fiat money. Security tokens are described as “cryptographically secured digital representations of value or contractual rights that use some type of distributed ledger technology (DLT) and can be transferred, stored or traded electronically”. Cryptoassets are subject to FCA regulations and must follow Anti-Money Laundering (AML) and Know Your Customer (KYC) laws. Taxation on cryptocurrencies comes under the category of capital gains tax for individuals or under income tax for traders and other businesses.
Gibraltar – Small But Mighty
Gibraltar, the tiny British Overseas Territory on Spain’s southern coast, has taken advantage of its position of self-governance and adopted a policy that aims to attract crypto businesses. In 2018, The Gibraltar Financial Services Commission (GFSC) activated regulation for Distributed Ledger Technology (DLT), which covers many businesses in the crypto and blockchain sectors. As a result, Gibraltar has become popular among crypto exchanges and businesses and even the local stock exchange has allowed the issuance of tokenised securities.
The European Union and new laws Governing Crypto
The European Union (EU) and the European Central Bank (ECB) usually look at the crypto and blockchain markets from afar. Trade in cryptocurrencies is considered “legal,” but there are hardly any initiatives in the arena. This somewhat distant attitude has left these issues to the discretion of the various countries, and each has adopted a different policy.
Recent developments may indicate a change in attitude in EU institutions, for better or worse. It may be the maturing of long-term processes or the recognition that they cannot sit on the sidelines any longer regarding this developing industry. In January, the EU amended new legislation that is expected to have a significant effect on crypto exchanges in member countries. The new law, which is part of the Anti-Money Laundering directive, requires exchanges to follow strict and comprehensive KYC regulations. It requires many adjustments on the part of crypto exchanges and may put an extra burden on their activities.
Another recent development had its source in the ECB. After a few declarations about a lack of interest in issuing CBDC, the ECB recently joined a multinational group that is researching the issue, clearly understanding the growing importance of digital and distributed forms of money.
Germany
Germany went through many years of ambiguous policies regarding the status quo of crypto. However, new regulations which are being implemented in 2020, add both clarity as well as difficulties for business in the arena. A newly proposed law is expected to enable German banks to sell and store Bitcoin and other cryptocurrencies, activities that were previously banned and are still the exception in the traditional financial system around the world.
Another new policy will require crypto businesses to be licensed by the local financial watchdog, the federal financial supervisory authority (BaFin). Similar licences already exist in countries with advanced crypto policies, such as Switzerland or Japan. While local crypto exchanges are expected to meet stringent requirements, the new regulations also give them a more stable status than before.
Taxation, for the most part, comes under income tax, although cryptocurrencies are exempted from capital gains tax if they are not sold for at least 12 months. In 2018, after years of discussion, the German Ministry of Finance clarified that cryptocurrencies are exempt from VAT. At the same time, it also defined them as a means of payment, but not as currencies or legal tenders. In general , German authorities see cryptocurrencies as investment assets.
France — a Crypto Enthusiast?
Like Germany, France has also recently started to implement its crypto policy. New initiatives by the French government even suggest it is almost becoming a crypto enthusiast. The local financial regulator, the Financial Markets Authority (AMF) has published new regulations for crypto businesses, including AML and KYC demands. The AMF has also specified requirements for a non-mandatory licensing process for digital asset service providers (DASPs), including “custody of digital assets for third parties; purchase or sale of digital assets against legal tender or other digital assets (broker/dealer); operation of a digital assets trading platform (stock exchange); other digital assets services such as the reception and transmission of third-party orders, third-party portfolio management, advice, underwriting and placing on or without a firm commitment basis.” The requirements include a well-defined business framework, sufficient insurance and technological capabilities.
The Central Bank of France has announced a pilot plan for CBDC that will be launched in the course of 2020, and its leaders state that they want to become the first major economy to issue CBDC — meaning they will have to move quickly to overtake China which is already in an advanced stage in this project. Taxation comes under the category of capital gains tax, but recently the French Finance Minister announced that crypto-to-crypto trading will be tax free.
Malta – A Crypto Haven
This island in the Mediterranean situated between Sicily and the North African coast, and the smallest member of the EU, is among those territories around the world that have gained the reputation of a “crypto haven.” The country’s leaders, including the prime minister, are constantly advertising crypto businesses and expressing their willingness to support them. In addition, a low tax policy is applied on crypto businesses.
Malta was the first country in the world to adopt clear and positive guidelines for crypto businesses. The Malta Financial Services Authority (MFSA) is responsible for the registration of crypto businesses, including AML and KYC requirements. But as a member of the EU, Malta is also required to follow the new restrictive EU demands that took effect this year and are expected to make life a little harder for local crypto businesses.
Institutional investment is a core driver of cryptocurrency adoption, an outcome that has been expected by many in the financial community. Fresh from the sharp market downturn of cryptocurrency prices in 2018, institutional investment rose steadily into the cryptocurrency market in 2019; a trend expected to spill over into 2020.
Is Institutional Presence in Cryptocurrency Here?
In recent years, institutional participation within the cryptocurrency market has been a widely discussed point. On the one hand, there was massive appreciation where coins jumped in value from cents on the dollar to thousands of dollars within a short span, and this appealed to the natural ‘profit-maximization’ focus of institutions. On the other hand, the infancy of the market saw considerable (relative) illiquidity, which resulted in extreme price volatility. This caused a natural impediment to institutional investors, given the inclination to only invest in established and liquid markets.
It was clear that in order to facilitate institutional involvement, the industry needed to mature, and 2019 saw a rapid upturn in the professionalisation of the cryptocurrency space. The launch of physical Bitcoin futures by Bakkt, a subsidiary of Intercontinental Exchange (ICE), the world’s third-largest financial exchange group, was an important (and formal) step in legitimising cryptocurrency in the traditional financial market. Oliver von Landsberg-Sadie, CEO of BCB , one of the world’s leading digital asset brokers, analysed various market cycles over the short lifespan of the cryptocurrency market and explained that today the market has the maturity it needs to attract institutional investments:
“The 2013 bubble was driven by technocrats and dark web trawlers and the 2017 rally was led by the whims of speculative retail traders, 2019’s growth belongs to financial institutions who are diversifying stale portfolios and finally have the professional machinery to do so.”
Money Inflow into the Cryptocurrency Market
Institutional investment into cryptocurrencies saw a major boost in 2019, which is expected to continue into 2020. Grayscale Investments, the largest asset manager for Bitcoin and other cryptocurrencies, reported that capital inflows into their fund totaled more than $600 million, marking an unprecedented milestone. Even more astounding: total deposits in 2019 surpassed the cumulative inflows from 2013 and 2018.
(Source: Grayscale)
Grayscale’s Bitcoin Trust, the organisation’s most popular publicly tradeable bitcoin investment vehicle, recorded the highest quarterly inflows, which amounted to over $171 million. Across all of Grayscale’s products, dollar-denominated deposits reached $255 million, achieving the highest level ever in the third quarter of 2019. This represented 200% quarterly growth relative to the inflows recorded in the second quarter (84 million in Q2, 2019).
A promising statistic from the report came in the form of new clients. $147 million invested in 2019 came from new investors, more specifically, institutional investors. This accounted for 71% of the organisation’s investments, up from 66% in 2018. Institutional investors included hedge funds, pension funds, and endowments. These numbers reflect a changing sentiment of institutional players towards digital currencies, which occurred even during a recessionary market.
The official launch of Bitcoin and cryptocurrency offerings by major players within the traditional financial space, including Fidelity and TD Ameritrade, further propels the narrative that the professionalisation of digital assets is creating a conducive environment to foster institutional participation.
Institutional presence was also evident when Bakkt Bitcoin futures reached a daily record of 1,756 trades in early November, and two weeks later, on November 22, witnessed over 2,400 futures contracts traded. This showed a value of $20.3 million in monthly futures contracts, a significant increase of more than 66% from its previous high. Additionally, open interest – which measures the number of open contracts on the market – increased by more than 42% in November, signalling new or additional capital flowing into the cryptocurrency markets.
(Source: BakktBot)
Cryptocurrency Fundamentals Suggest Upside in 2020
Financial experts are fast substantiating the role of cryptocurrencies as a viable asset class in traditional media outlets. Thomas Lee, a Managing Partner and the Head of Research at Fundstrat Global Advisors, recently discussed the correlation between the cryptocurrency market and the US equities market, in an interview on CNBC. He noted that the substantial gains in US equities – currently at all-time highs across the board – created a conducive environment for institutional investors to add Bitcoin (and other assets) which were once considered risky. The S&P 500, which measures the performance of the top 500 stocks in the US market, rose 2.6% in December and 8.3% for the entire quarter, putting it on pace for its best performance on an annual basis in the past six years. Lee’s assertion of Bitcoin’s best performance compares with that of S&P 500 over the past decade, implying a risk-on appetite for institutional investors.
(Source: Fundstrat Global)
Looking at the Chaikin Money Flow (CMF) indicator, which measures buying and selling pressure over a set period of time, one can assume that the smart money, demonstrating itself in institutional fund inflows, is flowing only into the cryptocurrency market. This would further indicate a positive momentum towards the general market heading into 2020.
Scale of Institutional Presence Goes Beyond Official Numbers
Analysing institutional inflows into the cryptocurrency market is a difficult endeavour given the lack of transparent reporting of cryptocurrency exchange transactions, especially on exchanges that support fiat gateways. Fiat-supporting exchanges represent the crucial point of entry for retail and institutional investors to access cryptocurrencies. Given the absence of regular or standardized reporting, it is nearly impossible to approximate institutional inflows.
However, a key metric could provide insights of institutional presence. Over-the-counter (OTC) cryptocurrency transactions, which represent the private trading between two parties outside the purview of an official exchange, are currently the main mechanism for institutions to gain direct access to digital assets. This is because the liquidity in cryptocurrency exchanges is usually too small to support the ticket size of institutional players, which can range from hundreds of thousands to millions of dollars. Transactions of this scale in a cryptocurrency exchange would heavily move the market and create tremendous slippage fees for institutional investors. Therefore, private transactions through the OTC market ensure a veil of obscurity and avoid the inherent issues of trading in exchanges.
In the second quarter of 2018, Bloomberg reported that the daily transactions in the OTC market ranged from $250 million to $30 billion, which is much greater than the $15 billion daily trading volume on cryptocurrency exchanges. TABB Group, an international research company, estimates that the cryptocurrency OTC market is valued at $12 billion a day. Given the inherent opacity of the OTC market, these numbers serve as a credible benchmark to measure institutional participation, which seems promising.
General Economic Outlook Increases Cryptocurrency Prospects
The inclination of central banks across the world to drive down interest rates could further fuel short-term economic expansion. Many countries have employed monetary policies that favour a zero-interest rate or even a negative interest rate environment in pursuit of ‘cheap money’ to fuel the economy, and we can also add quantitative easing to the mix, which refers to the central bank’s monetary policy of essentially printing more money to the economy. The European Central Bank has now pushed its interest rates into the negative territory, with Denmark, Sweden, and Japan following suit.
Government monetary policies have a direct impact on equity markets and subsequently the cryptocurrency markets. In September 2019, the US Federal Reserve injected billions of dollars into the market by acquiring short-term treasury bills in the repo market in a bid to maintain its benchmark interest rate within a targeted range of 1.5% to 1.75%. This resulted in a $175 billion expansion of the Fed’s balance sheet. At the same time, the US stock markets rose 4% and were at an all-time high, creating a direct impact on global financial markets. Given the recent market expansion of the cryptocurrency market, it is clear that government policies could boost inflows towards the general cryptocurrency market.
Conclusion
Institutional participation into the cryptocurrency market has soared in the past year, whether in the form of direct capital flows to digital assets or investments towards blockchain development initiatives. Recent reports by Grayscale have validated the increasing capital flows towards digital assets, despite the market’s two-year recession. Bitcoin, which is often seen as a more efficient form of gold, has strengthened its status as a credible safe-haven asset, which has only further legitimised it as an asset class worthy of investment and placement in institutional portfolios.
Previously, we described the state of regulation in the crypto market from a global perspective, and specifically in two important countries: the US and Switzerland. In this article, we will look at the situation in Southeast Asia.
China
China is spearheading a careful strategy in the cryptocurrency and blockchain market. It is aiming to become a world leader, and may well achieve that goal, yet, at the same time, it is developing regulation designed to maintain tight control over the market. Individuals are allowed to hold Bitcoin, a “virtual commodity,” or other cryptocurrencies, but most institutionalised activities are prohibited. This includes payment services, the creation of financial institutions, or exchanges, or the operation of existing financial institutions, such as banks. According to reports, cryptocurrency mining is rumoured to be banned, however China remains a main hub for mining, thanks to its low electricity prices. In general, the gap between lack of affirmative regulation and the high level of activity on the local market, leaves a wide grey area., We see over-the-counter trading (OTC) and crypto-to-crypto exchanges face occasional raids by financial authorities, but they never actually stop operating.
Encouraging Crypto R&D
At the same time, China’s central government is encouraging research and development in blockchain and distributed ledger technology (DLT) and is advancing certain projects, the intentions of which is to make China a global leader in the field. In 2019, the Cybersecurity Administration of China implemented blockchain regulations and published a list of over 500 blockchain projects that have been registered accordingly. The businesses have been instructed to collect full information about users’ identity and provide data to the authorities in case of illegal activities.
Digital Yuan
Last year, China announced its intention to launch a yuan-based digital currency in 2020. The project has been in the development phase for a few years, but Facebook’s announcement about its Libra project allegedly pushed the Chinese to move forward with their plan. If the initiative is implemented, it will be the first Central Bank Digital Currency (CBDC) in the world — and China will be making a huge leap forward in the crypto and blockchain arena, as well as in the monetary and financial markets. The digital yuan is expected to be distributed through commercial financial institutions, just like traditional fiat money, yet, it will give the government the capability to track its use. .
New Law
China has also amended a new cryptographic law that took effect at the beginning of January. This law aims to promote commercial initiatives in the field, while, at the same time, defining strict governmental supervision and security demands. It will unify the encryption standards in China and is supposed to lay the necessary groundwork for the distribution of CBDC. There are no taxation laws governing cryptocurrencies in China, and the ban on any institutional activity in the field makes it difficult for the authorities to collect taxes on cryptocurrencies.
Hong Kong
As an integral part of China, Hong Kong holds a unique position with some level of autonomy under the “one country, two systems” regime, and a long-standing reputation as a global financial centre with minimal intervention by the authorities. The crypto and ICOs boom that occurred in Hong Kong presented authorities with a challenge to which they reacted cautiously and ambiguously at first, leaving investors and entrepreneurs with a high degree of uncertainty. The authorities emphasised that Bitcoin cannot be considered as money and warned about the risks involved in using cryptocurrencies.
Regulatory Framework
Recent events have given the crypto market a relatively more stable operating structure. In 2018, Hong Kong’s Securities and Futures Commission (SFC) started to build a regulatory framework for exchanges or fund managers, while defining cryptocurrencies or security tokens as “virtual assets”, or a “digital representation of value.” In 2019, the new regulations came into effect, giving crypto exchanges guidelines similar to those for securities brokers.
Singapore
Singapore is considered one of the friendliest countries to the crypto industry. This status is not surprising, given its prestige as an advanced and open hub for businesses and financial institutions. Here too, cryptocurrencies are referred to as a “digital representation of value.” Considered an enabler for the industry’s activities, cryptocurrencies are not regulated by a specific law. The main regulator involved in the crypto market is the Monetary Authority of Singapore (MAS), the local central bank and financial regulator. Any financial institution that is supervised by MAS, including crypto businesses, must comply with Anti-Money Laundering (AML) and Know Your Customer (KYC) regulations. Singapore is experimenting with the idea of issuing CBDC, but it does not yet have a schedule.
Three main frameworks were defined:
- The Securities and Futures Act (SFA) refers to crypto exchanges, stablecoins and fundraising (such as STOs or ICOs), while giving special conditions for accredited investors.
- The Payment Services Act (PSA), which took effect this January, sets the guidelines for currencies that are considered widespread enough to be eligible to be used as tools for payment, such as Bitcoin and Ethereum.
- The Commodities Trading Act (CTA) in case of tokens that are pegged to other commodities.
Japan
Crypto and blockchain enjoy a special position in Japan, with support from users and enterprises, including the largest corporations in the country, as well as guidance by the authorities. Japan is considered a super crypto-friendly country, however there are claims that the tough regulation drives away businesses. Japan also holds the world record for the number of cryptocurrency holders, estimated to be about 6% of the entire population. The yen is the second largest fiat currency to be traded against Bitcoin (after the dollar), and Japan has the second largest volume in crypto exchanges trade after the United States.
Post-Hack Regulation
After experiencing two of the largest hacks in cryptocurrency history, Japan’s regulatory status took a few steps forward. However, in 2017, Japan achieved a world precedent by recognising payments in Bitcoin and other cryptocurrencies, through the amended Payment Services Act (PSA). Japan was also the first country in the world to relate specifically to a cryptocurrency by law. It was first described as a “virtual currency” and later as a “cryptoasset.”
Under Careful Supervision
The Japanese Financial Services Agency (FSA) supervises crypto exchanges and grants licences to those who comply with the detailed regulations. Crypto businesses are required to identify and register all of their users. For taxation purposes, cryptocurrencies are considered miscellaneous income and are taxed at a rate of between 15%-55%. Japan has been considering issuing CBDC and recently joined a global group of central banks who are researching the idea.
South Korea
Similar to other developed economies in South-East Asia, South Korea is on the global front in establishing an active crypto market, although government policies are still somewhat ambiguous and are criticised by the crypto industry. On the one hand, government officials emphasise their desire to create the relevant infrastructure for the crypto industry; on the other, especially when crypto prices rocketed at the end of 2017, some government officials considered boycotting crypto trading. The bottom line is that trading cryptocurrencies and the operation of exchanges have been permitted since 2018, under specific conditions. South Korea is still hesitating to create specific regulations for crypto, and yet, it is the third largest market for crypto exchanges, after the United States and Japan.
Conditions and Requirements
As in other countries, there are requirements for full identification of traders who wish to deal in crypto assets. Another condition is that all e-wallets be connected to bank accounts, which are managed under specific rules. For example, clients can withdraw anonymous cryptocurrencies, but are forbidden to make new deposits. The Korean Financial Intelligence Unit (KFIU) has ordered the banks to report on suspicious trading according to specific guidelines. While these conditions might be considered restrictive, one should remember that in many countries it is nearly impossible to make transactions with cryptocurrencies in banks. Crypto trading is taxed like capital gains, by various rates of up to 42%. There were recent reports that the government is considering taxing cryptocurrencies as a sort of special income, according to a fixed rate of 20%.
India
India is considered a relatively restrictive country when it comes to crypto. As in most other countries, there are no specific rules regarding cryptocurrencies, and people are allowed to hold them and even to operate exchanges. Yet, there are firm restrictions on the industry. For example, India’s central bank (The Reserve Bank of India — RBI) forbids all commercial banks and financial institutions from dealing with cryptocurrencies. There are ongoing discussions and rumours of a total ban on the industry. Last year, a governmental committee recommended such a ban, and lawsuits were filed against Bitcoin businesses. Crypto businesses and organisations have reacted — embarking on a long struggle at public and legal levels, to confront the RBI and overturn this government policy.
In contrast to the restrictive policies regarding crypto, blockchain technology has enjoyed a more positive approach. Among the various governmental plans to promote the use of blockchain, the RBI has constructed a “sandbox” (a software device to test new programming code) to explore the field with relevant businesses, although in the context of fintech innovation rather than that of the the crypto market. Given the crypto-unfriendly environment, this offers the huge potential of a 1.2 billion-strong market with a strong digital edge. Facebook even considered launching its Libra currency in India, but later withdrew the idea.
Coming Soon in Part Three: Europe and the rest of the world.
2019 was a year of recovery for crypto. We saw the end of the long, cold crypto winter, with an increase in crypto prices and a far more mature industry. From the bird’s eye view of early 2020, which opened with an extraordinary hike in crypto prices, it seems that 2019 may have just been a prelude to the new decade. We are now faced with an extraordinary hike in crypto prices and many intriguing questions about the next steps in the world of digitised, decentralised and globalised currencies and tokens. One of the major issues that will determine the market this year and in the years to come, is the relationship between crypto and governments: Will the crypto industry continue to advance? Will governments accept them with greater openness and create better frameworks and regulations regarding the assets? Or could they stay out of the game completely?
Duality
In the crypto market, there is an inherent duality vis-à-vis governmental regulation: on the one hand, a lack of regulation can lead to uncertainty and a lack of stability — resulting in difficulties in establishing businesses, opening bank accounts and communicating with customers; on the other, the crypto market can enjoy the freedom of less governmental intervention, enabling it to express its fully decentralised and censorship-resistant nature.
The regulators themselves find themselves in a kind of dilemma: the crypto arena is accelerating at a dizzying pace, with prices peaking, increased interest from the public, growing involvement by big businesses and even the academic world. However, financial regulators are acting in their usual conservative and cautious way, afraid of taking risks, and focusing on defending investors based on their own specific experience.
Various Approaches
One approach by regulators would be to ban crypto activity completely, but most countries are careful not to actually block technological and financial innovations. Another approach is risk management, which is the route that most countries take. Both regulators and countries block unwanted activity and let the market move at its own pace. There are only a few jurisdictions that allow cryptocurrencies as a tool for payments, but most of them allow, explicitly or implicitly, the use of cryptocurrencies, albeit with certain restrictions. A report by the US Library of Congress in 2018 emphasized that some countries have already recognised the innovative potential of crypto and the opportunity it represents to attract investment. Despite the warnings about the risks in investing in cryptocurrency and the dangers of money laundering and terrorism funding, this has prompted many governments to change their laws accordingly.
The crypto world is subject to frequent changes in law and regulation. Crypto businesses are learning to function under these conditions, and several are flourishing, despite the inherent limitations. In the sections that follow, we will review the current regulatory status quo for crypto in various countries.
United States
In the US, crypto policy is a combination of well-publicised raids on crypto businesses, restrictions on exchange and fund activity; and frequent warnings about the risks in the market — while continuously advancing the crypto industry. As the largest economy in the world, which also has the largest crypto market, each step taken by the US has a very noticeable global ripple effect. It is reasonable to estimate that any policy adopted in the US will also be later adopted in many other countries.
The distribution of power among various US authorities — including federal and state governments — hinder the creation of a uniform regulatory policy. It also seems likely that regulators prefer to advance slowly and carefully. Meanwhile, they hold regular discussions on the issue, and according to recent reports, are planning to introduce a crypto bill that will add stability and clarity to the field. When? That’s a good question.
Seats of Influence
The major regulators involved in the field are the Securities and Exchange Committee (SEC), the Commodities and Futures Trading Committee (CFTC), the Federal Trade Commission (FTC) and the Treasury Department’s Financial Crimes Enforcement Network (FinCEN). Among the many disputes, it is still unclear which cryptocurrencies should be regulated as securities (by the SEC), as commodities (by the CFTC) or as payment tools (by FinCEN). Another seat of influence is the US Congress, which has held several intriguing discussions regarding the cryptosphere, including public investigations of the SEC and the CFTC managers about their policies, and of Facebook’s CEO, Mark Zuckerberg, regarding the Libra project.
One of the SEC’s significant actions in the field was the battle against Initial Coin Offerings (ICOs), when they became more prevalent in 2017-2018. Following a few investigations of projects that were suspected to be fraudulent, most of the ICOs were viewed as securities offerings. This meant that they would be kept on a “tight leash” and subsequently, the SEC practically dried out this market worldwide. However, at the same time, the SEC declared that currencies that are already in wide circulation as a medium of exchange, such as Bitcoin and Ethereum, could be exempted from being classified as securities – granting them huge support.
CFTC’s most notable move was to allow the issue of crypto derivatives on both crypto and non-crypto exchanges. Yet many requests for the issue of Exchange Traded Funds (ETFs) of Bitcoin or other cryptocurrencies, which could bring major financial institutions into the market, have been rejected. The regulators are still highly cautious about creating an gateway for the ordinary “investor on the street” into the world of crypto.
Independently Operating States
Some US states enjoy a wide range of independent operations. Wyoming in particular seems to take the most crypto-friendly attitude. In moves unprecedented worldwide, Wyoming has passed more than a dozen laws in the last few years related to crypto. It has separated the crypto assets into three groups: Virtual currencies (such as Bitcoin and Ethereum), digital securities, and digital consumer assets. The laws aim to facilitate the issue, ownership and trading of cryptoassets, and even defines the structure of a crypto bank. Wyoming has not yet attracted significant commercial activity, and may turn out to be more influential in establishing the guidelines for regulations in other places.
Other US states are more restrictive, most notably New York State, which, being a giant financial hub, is especially dominant. Under tight regulations, New York was a pioneer in introducing a framework for crypto activity, when it introduced BitLicence as early as 2015. Since then, 25 crypto enterprises have started operating in the city. Recently opened was Bakkt, a new crypto exchange owned by the New York Stock Exchange (NYSE).
Switzerland
Switzerland is probably the most welcoming country among strong western economies for crypto and blockchain business, and has already attained a proven record in this. Its current policy on crypto continues its long tradition of supporting the financial establishment and giving priority to property rights and confidentiality. These moves have clinched Switzerland’s reputation as “ the ultimate tax haven for the richest people in the world.” Today, crypto and blockchain have become a legitimate part of the financial industry — which is quite unusual compared to other countries.
Swiss Precedent
As far back as 2014, when most countries were not even considering a policy formulation regarding crypto, the Swiss federal government had already published a report on virtual currencies, describing them as a “digital representation of a value which can be traded on the Internet.” This precedent-setting report also made a statement in the prolonged debate regarding the classification of cryptocurrencies, stating that they are not money, nor legal tender, and should therefore be defined as “assets.”
Since then, Switzerland has taken yet further steps towards constructing an official framework for the crypto market. While it has not created any special laws regarding cryptocurrencies, it has defined relatively clearly how to act within the existing laws and continues to develop this framework. One example is that it has exempted small and medium businesses in the crypto field from having to secure banking licences.
The supervising regulator in Switzerland is the Swiss Financial Market Supervisory Authority (FINMA), which requires that the relevant businesses comply with Anti-Money Laundering (AML) and Know Your Customer (KYC) regulations. FINMA divides the crypto market into three categories: Payment coins, such as Bitcoin or Ethereum, which are intended to be used for money transfers; Utility tokens, which are used for gaining access to services; and Asset tokens which are attached to specific assets such as real estate, commodities or stocks.
CDBC
The Swiss National Bank has recently joined a global group of central banks to explore the pluses and minuses of issuing Central Bank Digital Currency (CBDC). The group includes the Bank for International Settlements (BIS), which is located in Basel, and is considered the “central bank of all banks” . Taxation for individuals is based on wealth tax regulations, and for entities, on capital gain tax. In specific cases, income taxes are collected from individuals dealing in cryptocurrencies.
Zug (one of 26 Swiss cantons and the name of the town) is focusing on becoming a local and global hub for crypto and blockchain, and could even be nicknamed “Crypto Valley.” It has already attracted a number of businesses in the field and offers convenient conditions, and a wide range of relevant financial and juridical services. While crypto and blockchain have received a warm welcome in Switzerland, the general conservative environment and relatively high costs in the country are considered deterrent factors for many enterprises.
Coming Soon in Part Two: Crypto regulations in Southeast Asia.
Why Bitcoin is Continuing to Climb, from More Solid Ground Than Ever
Last night saw Bitcoin once again soaring up the market, with a 6% increase over the course of three hours. This continues a fantastic start to the year for the world’s largest decentralized currency, which is up 30% since January 1st, and pulling along with it several other primary cryptocurrencies, including Ether, Litecoin, Ripple and Dash.
A Significant Moment for Bitcoin
January 2020 is certainly proving highly significant for Bitcoin. The sharp increases and painful falls of the past pale into comparison with now, as the current increase seems to come from a far better established position with much more stability. Furthermore, the activity around Bitcoin is expanding in exchanges, banks and other financial institutions, together with its legitimacy and relevancy.
World Economic Forum
Last week, at the World Economic Forum annual summit at Davos, Switzerland, Bitcoin, cryptocurrencies and blockchain technology were honoured guests. Many of the billionaires, bankers and treasury ministers who gathered in Davos are still fairly skeptical about the decentralized economy, but despite this, they also realize that they cannot stop it.
The World Descends into Chaos, And Bitcoin is on the Rise
It seems that the more agitated the world agenda, the more Bitcoin’s popularity grows, and strengthens its status as a hedge against the traditional markets. The continuous climb of the stock exchanges is increasing concerns of a coming crisis, but in January there were new worries blending with the slow growth in the global economy, the unstoppable printing of fiat money, and the huge debts in the balance sheets of the biggest countries.
Crisis as a Catalyst
Things happen so fast in today’s world that it’s hard to remember that the geopolitical turmoil between the United States and Iran was only three weeks ago. These led to plummeting world exchanges, and a flood of investors running to safe havens, such as Bitcoin whose price jumped sharply in early January – initiating the strong trend for the month. The latest potential crisis is the coronavirus, which is causing the spread of red screens in stock exchanges all over the world, as the number of victims increases. The concern regarding a global epidemic grows – a situation which is seriously hurting China, but more importantly, an effect that far transcends its borders.
The Age of CBDC
One important sign of the growing recognition in the crypto market are the discussions about national digital money, dubbed Central Bank Digital Currency (CBDC). The Chinese are continuing to prepare for a launch of a digital Yuan later this year. As expected, from the moment China announced its intention to launch CBDC in 2020, many countries that had previously been at a standstill on the issue, have now stepped up their efforts. Canada, England, Japan, Sweden, Switzerland and the EU have set up a CBDC launch group, and other countries are also moving towards this.
While CBDC is not a cryptocurrency, and in some ways is actually the opposite of crypto due to its centralized control by governments, it has a very positive effect on the decentralized market. CBDC speeds up the understanding among users and decision-makers at the government and financial level about the digitization process that is underway in the investment and payments world.
One of the clear, albeit somewhat concealed, motivations driving central banks and governments to issue CBDC is to compete with the usability and innovation of crypto. They fear the moment when the public will increase the usage of the cheap and efficient solutions that the crypto world can offer.
Furthermore, the platforms that will be built to distribute CBDC are expected to enable collaboration with blockchain platforms, thereby accelerating their use. The existence of government-controlled digital money is sharpening the need for financial tools that are censorship resistance, private and safe, much like Bitcoin and other cryptocurrencies.
The crypto market is a source of worry for regulators around the world. Their worries are due, not only to the speculative aspects, but also to the tracking of anonymous money transfers, opportunities for money laundering, and tax evasion. Even the most conservative regulators have begun to realise that they will be forced to deal with the financial revolution which, until now, they have chosen to ignore. Faster, more efficient and cheaper money transfers and payments are closer than ever to becoming mainstream, and under these circumstances, traditional fiat money could eventually become an ancient relic.
These changes are already evident in some countries. In August, China announced the launch of a yuan-based digital currency. Other countries are still being cautious, but are exploring the potential of Central Bank Digital Currency (CBDC).
Evidence of the growing awareness of governments and financial institutions of these changes, can be found in The Rise of Digital Money, a recent article by the International Monetary Fund (IMF), by Tobias Adrian, Director, and Tommaso Mancini-Griffoli, Deputy Division Chief, of the IMF’s Monetary and Capital Markets Department. The article offers insights into the ways these establishments might be able to adapt to the radical changes of the digital world.
The Money Tree
When considering the disruption to the financial world, the article presents the following intriguing questions: “How should we think of these new digital forms of money? Are they money at all, and does that matter?” They argue that cash and bank deposits — the two most common forms of money today — will face tough competition from different forms of e-money, and may even be overtaken. However, they encourage traditional institutions to learn about the new forms of money and to consider how to deal with them. In order to better analyse the money market, they present an original classification of various types, organised as a money tree.
The first attribute of the money tree is the money type:
- Objects like such as cash, where the payment is executed immediately without any exchange of information.
- Claims such as debit cards or payment applications, where the transfer is executed via a value that exists elsewhere. This is the common payment type today, and hides a complex hidden infrastructure.
The second attribute is value, which is relevant only to claim based money:
- Fixed is a promise of redemption of a claim in a pre-established face value (of an agreed currency).
- Variable is an exchange at the going market value of the asset that backs the claim.
The third attribute is backstopped which is relevant only to claims in fixed value:
- Government promises to back up the redemption.
- Private in case the redemption relies only on business practices under legal structures.
The fourth attribute in the money tree is technology:
- Centralised transactions controlled by a central server — such as debit cards, payment applications, and CBDCs.
- Decentralised transactions making use of DLTs (Decentralised Ledger Technology) and Blockchains — either limited (“permissioned”) or public (“permissionless”) — such as cryptocurrencies, stablecoins and developing projects like Facebook’s Libra project. Cash also falls under this category.
One of the conclusions of the money tree is that while cash is a decentralised object, launching CBDC would transform national fiat money into a centralised object. This definition highlights the huge threat to users’ privacy as a result of such a governmental mechanism. The article suggests the option of protecting user data from third parties, but it is doubtful whether governments would desist from using such a powerful tool.
When it comes to cryptocurrencies, the difference is emphasized between variable object-based currencies, which are defined as public coins, such as Bitcoin or Ethereum, and fixed claim-based currencies, such as stablecoins, which are defined as managed coins. A cautious remark is added that these coins “use some variation of a simple system to stabilize value, which is not always credible.”
The crypto market has been waiting for the last couple of years for the general acceptance of “security tokens” — sometimes described as a powerful tool that can liquefy assets. The article defines such tools as asset-backed tokens — which may be relevant to Facebook’s Libra, since it is backed by a portfolio of assets, including bank deposits and government bonds.
To answer these questions, the article defines two main forms of money that are used today, which are both denominated in a specific currency and can be redeemed according to their face value:
- b-money — mostly bank deposits, which the government has promised to insure;
- e-money — digital payment instruments denominated in, and pegged to a common unit of account such as the euro, dollar, or renminbi, or a basket thereof.
E-money is managed by the private sector and does not enjoy deposit insurance by the government.
In addition to traditional e-money, and digitised e-money, the IMF article describes a new and controversial form of money, i-money. I-money is similar to e-money in many ways except for one crucial one: it is an equity-like instrument with variable value redemption. This fact raises a question: how can an equity-like instrument be considered money?
“If B owes A 10 euros, B could transfer 10 euros worth of a money market fund to A. To the extent that the fund is liquid, its market price should be known at any point in time. And to the extent the fund comprises very safe assets, A may agree to hold these with the expectation of using these to pay for future goods and services at approximately the same exchange rate with local currency. In other words, i-money could be sufficiently stable to serve as a widespread means of payment.”
Although e-money and i-money both suffer from higher instability risks, the article claims that they will be attractive to users, and may be faster and cheaper. Therefore, the adoption of these new forms of money could take place very quickly, with a growing network effect. In some countries, users trust e-money even more than they trust traditional banks.
The end of traditional banks?
If e-money has the potential for overwhelming success, will retail bank deposits migrate to it? There are three main scenarios suggested by the article regarding the potential effect of e-money on the banking sector.
Coexistence
Beginning the battle from a position of strength, banks will adapt themselves to the digital revolution and provide services that will attract customers, despite the competition. They will offer higher interest rates on deposits — even at the risk of lowering their profits; and they may be able to improve the quality of their services, making them faster and more efficient. At the same time, the e-money providers will probably use the banks to arrange their payments and exchanges. The key question is whether banks will adapt fast enough, and whether they will suffer from lack of liquidity during the transition period. In such a case, central banks might assist them.
Complementary
E-money providers will focus on poorer households, smaller businesses and weaker economies — enabling them to join the digital and global economy. They may be in a position to collect data about users and sell it to the banks. In this scenario, the banks and the e-money providers will share the market and each offer differentiated services.
Takeover
In the least likely scenario, the financial markets will go through a radical transformation in which the current model of the commercial banks will be split: deposits and payments will migrate to e-money, and private sector savings will be channelled through international capital markets. Traditional banks will focus mostly on funding the local wholesale sector. This shift will transform the banking model and limit fractional banking — in which banks hold only a fraction of their deposits in liquid assets. The article ponders whether this is a positive outcome: “How much liquidity would get locked up in e-money and no longer be available to extend loans to the private sector? Would credit to firms and households be limited or become more expensive as mutual and hedge funds are required to receive funding before they can extend a loan?” concluding that the answers to these questions are usually based on beliefs rather than on facts — and recommend further research on these issues.
The central bank of digital money
The article ends with an unprecedented suggestion — albeit somewhat centralised — that might boost the money revolution: a suggestion that central banks “level the playing field” for e-money providers, by protecting the public’s deposits, offering liquidity when needed, and settling payments between the commercial banks.
It also suggests that the new players in the financial field should have the opportunity to hold central bank reserves, if they agree to be supervised:
“The Reserve Bank of India, the Hong Kong Monetary Authority, and the Swiss National Bank already offer special purpose licenses that allow nonbank fintech firms to hold reserve balances, subject to an approval process. The Bank of England is discussing such prospects. The People’s Bank of China requires the country’s large payment providers, Alipay and WeChat Pay, to hold client funds at the central bank in the form of reserves. ”
If such methods are adopted, e-money providers will have more power to overcome market and liquidity risks and promise better stability for themselves and the entire market. In this way, they could transform into narrow banks, while covering 100% of their liabilities with central banks reserve, as opposed to the fractional banking used today.
Other advantages would include the creation of a regulatory framework that would protect consumers, avoid monetary risks and promote competition between the e-money providers and avoid the growth of e-money monopolies, especially global ones. This scenario is quite far from the decentralised crypto dream – but is it more realistic? Only time will tell.
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Rebuilding Finance, one block at a time
Prof. Omri Ross, eToro Chief Blockchain Scientist: My 2019 in Review
As I look back on our achievements in the year past, I am proud and honoured by the skill and tenacity of my colleagues and friends with whom I share the vision of redefining finance for the decade ahead.
This year, I have been privileged with coordinating and observing multiple projects within the progressively maturing industry. I feel both humbled and privileged in serving a role in which I am encouraged to explore new synergies between commercial trade processing and public and permissionless transparent infrastructure.
For several years, I have maintained the view that real progress emerges not only through key commercial or academic achievements but through the exploration of new synergies challenging inherited preconceptions about what finance is – and for whom.
Last year, I had the fortune of supporting the progressive maturation of key technological advancements across my many personal commitments. I would like to take this opportunity to reflect on a few of my personal highlights in 2019:
Firmo was acquired by the eToro Group
At eToroX Labs, we are managing the core responsibility of shipping blockchain based products and improvements at the group level and integrating these advancements into the groups product offering.
We built and released 17 tokenized assets
Through the course of 2019 we have developed and released new infrastructural components for the issuance of digital assets on Ethereum, followed by the release of 15 currencies accompanied by silver and gold. This development makes eToro the only institutional regulated entity with such a broad offering of tokenized assets.
Immediately following the release of the Libra whitepaper and the Move IR, we released the first open source standard for tokenized assets on Facebook’s Libra, derived from the eToken implementation. Six months later, the post remains on the leader board for the Libra community and was forked 28 times in 2019.
We open-sourced Lira, a formally verified declarative DSL for financial contracts, compiling to the Ethereum blockchain. The release included a sophisticated demo enabling users to become familiar with the language prior to implementing it in their own decentralized applications or workflows. Lira is based on several years of prior development at the Department of Computer Science at the University of Copenhagen and saw critical acclaim in 2019, leading to presentations at DevCon5 in Osaka and the Ethereal Summit in Tel Aviv.
Alongside these achievements we were blessed with the opportunity of publishing work in leading academic proceedings, covering a variety of pertinent issues such as the governance mechanisms of the Ethereum ecosystem and our ongoing expose of tokenization, Assets under Tokenization.
In the effort of establishing new academic and commercial synergies, we organized a Blockchain and AI Research Seminar, inviting prominent researchers in the field, including Turing prize winner Silvio Micali, Michal Haut, Manuel Chakravarty and several other leading researchers.
We built and open-sourced the backend for the GoodContracts architecture for the GoodDollar project, a non-profit decentralized UBI initiative led by Yoni Assia.
The infrastructure includes building a DAO, forked an inspired by DAOstack with modifications allowing gradual decentralization of the system as the project scales.
For all of these achievements, and many more, I want to thank my incredible team: Johannes Rude Jensen, Peter Emil Jensen, Bassel Manaa, Mads Jørgensen, Nikolas Borrel-Jensen, Truls Asheim and Elia Bottega for their hard work and determination. I would like to extend my sincere gratitude to Doron Rosenblum for his exceptional leadership and to the entire eToroX team for kicking ass and building an amazing product.
Additionally, I would like to thank eToro’s management team: Yoni, Ronen, Doron, Yonash, Israel, Elad for their visionary leadership and trust in our mission and mandate at eToroX Labs.
At eToro, we are always looking for exceptionally talented colleagues. If you are a superhero and passionate about opening the financial markets, please contact me at omri@etorox.com
We remain committed to establishing thought-leadership within the fintech revolution. To this end, we have a PhD position on decentralised finance, with optional support from MakerDao and the eToro Group.
In extension, I would like to express sincere gratitude to the members of the Department of Computer Science at the University of Copenhagen including Mads Nielsen, Martin Lillholm, Pernille Bjørn, Jon Sporring, Jakob Grue Simonsen, Fritz Henglein, Martin Elsman, Cosmin Oancea, Marcos AVS, Boris Dudder and my colleagues from other universities including Michel Avital and Roman Beck.
Professor Ross leads eToroX Labs, and is an Assistant Professor at the University of Copenhagen, and the leader of the University Decentralised Finance Group.
The cryptocurrency market has started 2020 with a huge bang, expanding by an impressive 23% within the first two weeks of the year. The overall market capitalization of the cryptocurrency market – a measure of the size of the market – has grown from $192 billion at the start of the year, to well over $240 billion by the middle of January.
Bitcoin
Leading the pack is Bitcoin (BTC), which constitutes more than 65% of the overall market size. Going from just under $7,200 at the end of 2019 to a high of $8,800, Bitcoin recorded double digit gains within two weeks. January 14 saw a spike of more than 11% in Bitcoin’s price, fuelling speculation that the two-year long cryptocurrency recession could finally be over.
Among the many factors that contributed to Bitcoin’s price increase was the geopolitical upheaval emanating from increasing tensions between the USA and Iran, which led to a flight of safety capital by investors, to safe-haven assets such as gold. Already established as a manifestation of digital gold, it seems hardly coincidental that the prices of both gold and Bitcoin went up.
Another catalyst for the increase was the official launch of the CME Bitcoin options on January 13. The CME group represents the biggest derivatives marketplace in the financial sector. The trading volume of the CME Bitcoin options surpassed that of Bakkt exchange — its direct competitor — within a single day, underlining the status of CME as well as the increasing demands for a wider range of Bitcoin products for traditional investors.
Ethereum
Ethereum (ETH), the second largest cryptocurrency, saw a breakout from a consolidation range of $145 to a high of $170, amounting to a relatively modest 18% increase. This was substantiated by strong trading volume that guided ETH’s price spike through a key resistance line that has been hindering its price growth.
Ethereum’s fundamental prospects look positive, particularly given the latest statistics by DeFi Pulse. These indicate that $667M worth of digital asset value — consisting of more than $450M worth of ETH — is locked in decentralized finance (DeFi) applications, which is an increase of 2.5% over last year at the same time. DeFi applications are mostly built on the Ethereum blockchain. An increase of ETH locked in decentralized applications would result in a lower circulating supply, and result in notable scarcity.
Another fundamental metric for ETH is the growing quantity of users that it has, represented through the number of unique Ethereum addresses. There are now more than 84 million unique ETH addresses, an upsurge from 50 million in 2019. Additionally, last month Ethereum also managed to successfully implement its latest hard fork — known as Istanbul.
EOS
EOS performed relatively well in the recent bull market, clocking a rally of over 22% in the last couple of days. It rose from a low of $3.1 to a high of nearly $4, breaking through major resistance levels to briefly touch $4 for the first time since September 2019.
Much like Ethereum, EOS is also big on DeFi. Nearly 7% of EOS coins are locked in various DeFi applications, more than ETH’s 3%, indicating a strong use case.
DASH
One of the best performers in the market was the privacy coin, DASH, currently the 12th largest cryptocurrency. DASH jumped from $86 to a high of $127, notching a stupendous 47% gain over two days.
This significant increase may be substantiated by the fact that Dash is the preferred cryptocurrency of the citizens of Venezuela. Its increased popularity in Venezuela is not surprising given the hyperinflation that the country faces, compounded by ineffective economic policies, corruption, and sanctions. Given that a privacy-focused cryptocurrency can effectively mask users’ activity, it was natural that Dash became a top candidate. Since January 4, 2020, Dash has seen an exponential rise in value, at one point going from $45 to a high of $120 over a matter of hours. That is an astounding 150% increase within a week. Recent reports have also announced that Burger King is considering accepting Dash in its outlets.
Conclusion
The cryptocurrency market is experiencing a steep rally across the board, with many convinced that this may be the end of a two-year bear market. Various developments in cryptocurrency adoption and technology further substantiate the use cases of blockchain. The increase in trading volume and the breaking of prior price resistance could signal a resurgence in the markets.
“Because when you have enough money, money doesn’t matter.”
Pineapple Fund
The quotation above represents a powerful idea that may not resonate with over 65% of the global population that lives on less than $10 a day*. Despite this, given the sharp rise in wealth inequality since the 1970s**, it is encouraging to come across stories that highlight efforts to create a balance: generous acts of philanthropy.
Philanthropy has always been practiced by wealthy individuals and organisations to promote the welfare of others through donations to good causes. Nevertheless, some in the wider community might question the agenda of philanthropists; Is their motivation true selflessness? Is there a personal or political agenda? Is the act purely for marketing purposes?
When considering the notion of giving, it’s possible a philanthropist’s motivation might not be pure. This is why it is especially impressive to come across a philanthropic initiative that is anonymous, selfless, and impactful. A notable example of a new field in giving is the philanthropy of cryptocurrency. This genre of philanthropic initiatives is fuelled by the exponential rise in the value of digital coins; in other words, the cryptoassets that are backed by the ground-breaking technology blockchain.
Bitcoin Boom: Creating A New Breed of Wealthy
Wealth creation has always been a primary objective of our capitalistic system, and the goal of creating wealth fuelled by rising cryptocurrencies is no different from that stemming from rising stocks or the price of gold. In 2009, a peer-to-peer digital cash system was introduced to the world, leveraging advanced distributed computing systems and cryptography. Called Bitcoin, it is a completely decentralised and transparent form of cash that has disintermediated our traditional financial system, and had enormous implications for numerous sectors and industries. Bitcoin and some of the other crypto coins have, for some individuals, created great wealth – and made a new breed of wealthy possible.
At the end of 2010, close to 10 million Bitcoin had been created, and they were shared within a small ecosystem of technology enthusiasts. At the time, Bitcoin was trading between $0.0008 and $0.08 per coin. Over time, its price rose, and it is therefore not hard to imagine how an individual who accumulated a substantial amount of Bitcoin (BTC) in the early stages – when it was worth mere pennies – would be worth millions of dollars when the price of a single Bitcoin reached close to $18,000 in 2017.
Pineapple Fund: Popularizer of Cryptocurrency Philanthropy
On 14 December, 2017, an anonymous individual with the pseudonym “Pine” created a post on the popular social networking site Reddit explaining his motivation for creating a charitable fund to disburse the majority of his Bitcoin wealth. Dubbed ‘an experiment in philanthropy with cryptocurrency wealth’, it was named The Pineapple Fund. Originally Pine planned to give away 5,057 Bitcoins, which were then worth around $86 million, and thousands of non-profits and charities applied for funding on Pineapple Fund’s website. When asked why he decided to establish the fund, Pine replied:
“Sometime around the early days of bitcoin, I saw the promise of decentralized money and decided to mine/buy/trade some magical internet tokens. The expectation shattering returns of bitcoin over many years has lead to an amount far more than I can spend. What do you do when you have more money than you can ever possibly spend? Donating most of it to charity is what I’m doing. For reference, The Pineapple Fund is bigger than the entire market cap of bitcoin when I got in, and one of the richest 250 bitcoin addresses today.”
The original post outlined the underlying motivation for establishing the fund as well as a list of its first contributions to several non-profits:
- $2 million to Watsi, an innovative crowdsourcing platform with a mandate of providing universal, affordable healthcare to underprivileged populations in developing countries.
- $1 million to The Water Project, a charity focused on providing access to clean, safe, and reliable water and sanitation solutions across Africa. The donation led to 37 new water projects that have given thousands of people access to clean water.
- $1 million to The Electronic Frontier Foundation (EFF), an international non-profit digital rights group that promotes internet civil liberties.
- $500,000 to Bitgive Foundation, a blockchain-powered non-profit that builds charity projects using blockchain technology.
More Pineapple Fund Bitcoin Beneficiaries
According to Pineapple Fund’s official website, 60 charities received funding, totalling 5,104 Bitcoins. Cumulatively, these were worth over $55 million. The donations for each organisation ranged from $50,000 to $5 million. A drop in the price of Bitcoin, along with the general cryptocurrency market in early 2018, reduced the value of donations relative to the planned commitment.
Other charities to receive a substantial donation from Pineapple Fund included:
Multidisciplinary Association for Psychedelic Studies: $5 Million
One of the key recipients of Pineapple Fund was the Multidisciplinary Association for Psychedelic Studies (MAPS), a non-profit research organisation dedicated to exploring the use of psychedelic substances. The donation of $5 million allowed MAPS to engage in clinical studies of the drug methylenedioxymethamphetamine (MMA) to be used for patients suffering from post-traumatic stress disorder (PTSD). This had the potential to lead to a huge medical breakthrough for millions of individuals suffering from PTSD.
GiveDirectly: $5 Million
GiveDirectly is a non-profit organisation that provides poverty-stricken families in East Africa (Kenya, Uganda, and Rwanda) with cash donations via mobile phones. After rigorous audits using public data on shortlisted households, GiveDirectly transferred approximately $1,000 to each recipient.
Open Medicine Foundation: $5 Million
The Open Medicine Foundation (OMF) focuses on accelerating collaborative medical research into chronic complex diseases. OMF initially received $1 million from Pineapple Fund to accelerate research into a complex illness called Myalgic encephalomyelitis/chronic fatigue syndrome (ME/CFS). However, after a remarkable outpouring of public thanks from the patient community on Reddit, another $4 million was donated, to boost the development of cures for ME/CFS.
Mona Foundation: $1 Million
A non-profit that supports worldwide initiatives in education and equality, Mona Foundation empowers children through education. In 2018, Mona supported via 16 projects the education and empowerment of more than 411,000 students in 10 countries.
The End of the Road
Just five months after the Pineapple Fund’s first donation, Pine decided it was time to close the fund and bid farewell to his supporters and recipients. Pine thanked those who were behind him as well as the wider Bitcoin community. On a deeper level, Pine embraced the spirit of the cryptocurrency community and reiterated the raison d’etre of Bitcoin:
“Every development since then makes Bitcoin stronger, and better at solving the problems of the existing… monetary system. It’s created a new generation of crypto early adopters, cypherpunks or technologists using cryptography to change the world; and now having the power and responsibility of capital.” Pine
Conclusion
The initiative led by Pine, an anonymous individual – or perhaps collective – received universal approval for its philanthropic efforts. To date, it is the single greatest act of altruism the cryptocurrency community has come across. Large donations were made to charities and nonprofits in the pursuit of effecting a positive change on society. Whether in the spheres of the environment, medicine, technology or health, wealth was distributed from someone who amassed a fortune due to the exponential growth of Bitcoin; a truly groundbreaking act. Perhaps above all else, the Pineapple Fund represents the unwavering standard to which the new generation of wealthy individuals, the new cryptocurrency wealth generation, could aspire to achieve.
* Our World in Data: Distribution of population between different poverty thresholds, World
** The Guardian: Inequality: is it rising, and can we reverse it?