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Bittrex: ‘North Korean’ Accounts Flagged by NYDFS Were South Korean

Crypto exchange Bittrex said Monday that New York regulators erred in identifying two of its users as North Korean.

In a statement issued Monday, Bittrex said it had reviewed two accounts that were flagged as belonging to residents of the sanctioned country by the New York Department of Financial Services (NYDFS), which recently rejected the exchange’s application for a BitLicense.

It turned out that the same two users had already been investigated by the exchange in October 2017, Bittrex said, adding:

“South Korean residents mistakenly selected North Korea in our country dropdown menu, but we determined through country identification, physical and IP address that ALL were from South Korea.”

In an op-ed published in CoinDesk Thursday, Shirin Emami, the executive deputy superintendent for banking at NYDFS, stated that when the agency’s examiners sampled Bittrex accounts earlier this year, they identified two based in North Korea.

“More may exist,” she wrote. “At least one North Korean account was active into 2017,” along with two accounts in another sanctioned country, Iran, that were active during this year’s examination.

In a rebuttal issued the same day, Bittrex denied having any accounts in either country this year. But Monday’s statement represented the first time the company explained why NYDFS might have thought two of the accounts in question were North Korean.

Sanctions compliance is one of several issues NYDFS cited for denying a license to Bittrex, along with broader anti-money-laundering (AML) practices and the exchange’s coin listing process.

A Bittrex spokesperson said the company had “nothing to add” regarding the alleged Iranian accounts. An NYDFS spokesperson did not immediately respond to a request for comment.

North Korea/South Korea image via Shutterstock.

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Coinbase Exec Dan Romero Leaving Crypto Exchange After 5 Years

Cryptocurrency exchange Coinbase is losing another executive.

Dan Romero, who works as vice president for Coinbase’s international business, announced in a Medium post on Friday that he will be leaving the firm at the end of this month. Romero joined Coinbase in April 2014, according to his LinkedIn profile.

While he didn’t provide a specific reason for departing the firm, Romero said:

“Staying true to a mission often requires doing hard (or even unpopular) things. But I’ve been lucky to learn first-hand that it’s those hard things that often generate the most value.”

“I’m planning to take some time to figure out what’s next,” he continued, adding that he joined Coinbase when it had just 20 staff – it now has a headcount of over 700.

In his time at the firm, Romero has worked on “almost every aspect” of the Coinbase business, he said, including banking partnerships and both consumer and institutional businesses.

Despite Coinbase’s status as one of the most popular and valuable crypto exchanges – it raised $300 million late last year giving it a valuation of $8 billion – there have been a spate of departures (and some arrivals too) in the months since.

Two weeks ago, Coinbase’s director of institutional sales, Christine Sandler, left the exchange for Fidelity Investments, one of the world’s largest financial services providers. Earlier this year, the exchange’s director of data science and risk Soups Ranjan also left, as did senior compliance manager Vaishali Mehta.

And at least nine other senior or mid-level employees have left Coinbase since its October fundraise.

It was previously revealed that, since March 2018, the firm has been offering a cover up to $5,000 a year for treatments like egg-freezing in a bid to retain staff – that’s in addition to more standard health insurance options.

Coinbase did not respond to a CoinDesk request for comment on Romero’s departure by press time.

Dan Romero image via Coinbase

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Crypto Exchange Bithumb Posts $180 Million Loss for 2018

Bithumb, South Korea’s largest cryptocurrency exchange, has posted a net loss of 205.5 billion won ($180 million) for 2018.

CoinDesk Korea reported the news on Thursday, saying that the loss was mainly due to a sharp decline in the cryptocurrency market last year, though the company’s operator BTCKorea also cited infrastructure investments and labor costs as factors.

The figure marks a big swing into the red for Bithumb, having recorded a net profit of 534.9 billion won ($469 million) in 2017.

The exchange’s revenues, on the other hand, grew around 17.5 percent to 391.7 billion won ($343.4 million) in 2018, compared to 333.4 billion won ($292.3 million) the year prior.

The figures also show that the exchange’s operating profit declined 3.4 percent to 256.1 billion won ($224.5 million) last year from 265.1 billion won ($232.5 million) in 2017.

Meanwhile, operating expenses rose from 68.3 billion won ($59.8 million) to 135.6 billion won ($119 million), while non-operating expenses increased sharply from 4.1 billion ($3.6 million) won to 381.9 billion won ($334.8 million).

Bithumb has been going through some tough times. Just two weeks ago, the exchange suffered its latest hack, losing around $13 million in the EOS cryptocurrency and about $6.2 million in XRP. Last year, Bithumb was also hacked for some $30 million-worth of cryptocurrencies, but later claimed to have retrieved $14 million-worth of the hacked funds.

Since the latest theft, Bithumb has disclosed that it holds all customers’s assets in cold (offline) wallets to prevent losses through such attacks.

Amid its financial issues, Bithumb, said last month that it plans to cut its staffing levels by up to 50 percent, from 310 employees to around 150.

Bithumb image via Shutterstock 

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Returns on Crypto Assets: The Hidden Message

Noelle Acheson is a veteran of company analysis and member of CoinDesk’s product team.

The following article originally appeared in Institutional Crypto by CoinDesk, a newsletter for the institutional market, with news and views on crypto infrastructure delivered every Tuesday. Sign up here.

For those of us in the northern hemisphere, April is traditionally the month when the furious subterranean growth during the winter months finally breaks through in the form of the first buds of spring.

The crypto world does not move to such a predictable rhythm, however, and the building during the bear market has yet to show substantive signs of flowering. Yet, unruly shoots are starting to emerge in unexpected forms.

The past couple of weeks have seen a flurry of headlines proclaiming a relatively new type of crypto asset return: income, not from trading or realizing profits, but from just holding the cryptocurrencies and tokens.

Coinbase announced that it will start to offer staking services (in which tokens are deposited in order to participate in network maintenance) for institutional clients that hold XTZ, the native token of the tezos blockchain, which should earn holders a net return of over 6 percent. And Battlestar Capital has partnered with crypto lender Celsius to launch a staking network, which will handle proof-of-stake token deposits offering returns of between 5 percent and 30 percent.

We also have the growing attention paid to returns from crypto loans, evidenced by the inflow of $25 million-worth of crypto in just two weeks into BlockFi’s interest-bearing crypto accounts. TrueUSD stablecoin holders can earn up to 8 percent on tokens deposited with crypto lender Cred for a minimum of 6 months. And the Universal Protocol Alliance – a group comprised of exchange Bittrex, crypto lender Cred and others – is launching a euro-backed stablecoin that can be deposited for a return of 8 percent.

Yield, interest, dividends, rewards – whatever you want to call them (the crypto sector is notorious for its confusing vocabulary), they reveal two divergent characteristics of the crypto asset space.

Unexpected returns

First, they hint at the sector’s increasing maturity. While investors have by no means given up on the potential for price appreciation, it is interesting to note the growing focus on other sources of return.

Devising yield strategies is common in more stable investment assets; in crypto, it feels new.

Second, they add layers to the well-entrenched regulatory confusion over what these underlying assets are.
Interest-bearing accounts traditionally fall under the purview of banking authorities. Cryptoassets don’t. So who would regulate crypto asset interest-bearing accounts?

BlockFi offers interest on deposited bitcoin and ether. Both have been designated commodities by the CFTC, which regulates commodity-based derivatives – not commodity-based yields.

Much at stake

Let’s consider the business push behind reward management for proof-of-stake tokens, such as the Coinbase and Battlestar announcements.

Could staking rewards be considered “expectation of profit,” especially when the returns are advertised as such? If so, wouldn’t that nudge the tokens toward the definition of a security?

When it comes to stablecoins things get even more confusing.

The promised TrueUSD and euro-backed stablecoin returns could add fuel to the quietly simmering debate that even coins designed to not produce capital appreciation could still be considered securities. Should that happen, their intended use as transaction tokens could be compromised.

Both hands

So, on the one hand, the focus on yield implies a growing maturity and could entice new investors in as the dovish stance of central banks perpetuates the dearth of income elsewhere. This is positive.

On the other hand, the deepening layers of complexity highlight not only the lack of comprehensive and reassuring regulation but also the hard task ahead for regulators struggling to adapt old rules to new products. Furthermore, the rush to launch differentiated services with enticing yields is bound to attract the regulators’ attention, especially with services aimed at the retail market.

I’m not a lawyer and I’m sure there are many nuances and qualifications that I’m overlooking – but I am willing to bet that even lawyers don’t know for sure how this will play out.

I’m also willing to bet that most of us can agree on one thing: the more confusing this gets, the more interesting it becomes.

Encryption machine image via Shutterstock

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The Ultimate Irony of Crypto Trading

David Weisberger is co-founder and CEO of CoinRoutes and a veteran of building trading desks and financial technology businesses. The opinions expressed in this article are his own, and do not reflect CoinDesk’s position.

The following article originally appeared in Institutional Crypto by CoinDesk, a free newsletter for the institutional market, with news and views on crypto infrastructure delivered every Tuesday. Sign up here.

We have all witnessed armies of “introducers” trolling around LinkedIn and Telegram advertising their access to buyers or sellers of bitcoin, coupled with hundreds of wannabe over-the-counter (OTC) trading desks whose only method of trading is to call wholesale market makers.

The irony of this is amazing, considering that one of the most important goals of bitcoin and other cryptocurrencies is to “eliminate middlemen” and remove frictional costs from the financial system. Today, however, bitcoin trading is done by more middlemen than in traditional finance, with the result that frictional trading costs are far higher than for non-digital assets.

Before delving into the silliness of the current market structure for trading crypto, it is important to note that I am a fervent believer in the potential for crypto to revolutionize the capital markets, eventually.

I have, on the record, stated that the ability of crypto market structure to support global capital formation and trading will eventually mean that all financial assets will trade digitally.

My reasoning is based on the ability of crypto exchanges, serving clients around the world, to trade the same asset against a variety of different currencies, cryptocurrencies or stablecoins. This can potentially eliminate a wide variety of intermediaries from markets that currently serve one geography trading in one currency per instrument. That being said, the current crypto OTC market is littered with intermediaries, all of whom extract their own commission.

Consider the following workflow diagram that represents a typical transaction in crypto today:

In this example, the investor is “represented” by an introducer, who wins from among five introducers that all talk to that investor. The winner contacts five OTC desks to “source liquidity” for its client. One desk is chosen, and it, in turn, contacts three market makers and chooses one for the trade.

The market maker then gives the client a price, after checking where they believe they can trade the order; the transaction is done with the client and the market maker trades out of the position via an exchange.

This model is, of course, quite inefficient. Paying a commission or implied spread to four different counterparties makes little sense, but even worse is the fact that each of the OTC desks and market makers contacted knows about the order’s existence. This, in turn, makes it likely that the market would move before the trade is consummated, magnifying the cost to the investor.

All is not lost, however, as there are legitimate options for investors that want to trade efficiently. For example, the most sophisticated large wholesale market makers have built excellent systems for trading across exchanges and other market makers. In addition, agent desks with smart order routing systems are being established. From the perspective of investors, however, it can be hard to discern each firm’s real capabilities. That makes it difficult for investors to find the best trading desk to suit their needs.

My advice to investors is to ask the following questions when evaluating a trading firm:

1. Does it trade against my order flow as “principal”? (I.e., does it take the other side of the trade by committing their own capital?)

The answer is vital, as it tells you immediately if you are facing off with a proprietary trading desk. If the answer is “yes” that is neither bad nor good, but it does have important implications – it means that you are likely trading without having to pay an extra intermediary (good), but, unless the desk contacted you first, you should only trade with them if you need immediacy. That is because immediate liquidity comes with a cost, and you end up paying too much in the implied spread.

Additionally, if you contact multiple desks to source your trade, you are leaking a lot of information to the market, and desks will often “pre-hedge” ahead of consummating the trade. That is very expensive as it amounts to legal “frontrunning” that will move the price against you.

If, however, the desk you are talking to does not commit capital, that is also neither good nor bad, depending on their process and relationships. If they are acting as an agent and have a bonafide “natural” counterparty to the trade or if they have a sophisticated algorithmic trading platform, they can provide substantial value. In the case of “natural” counterparties, however, be suspicious as most of those claims in the crypto market tend to be false.

Algorithmic platforms built for the crypto markets are typically the most cost-efficient trading alternative. Once again, be careful to understand if the desk you are talking to trades for their own account also. If they do, ask for their procedures in writing that stop them from trading ahead of or alongside your order. If they don’t provide that, assume that they are going to use your trade to make trading profits.

2. How and where does the firm source liquidity and what does it charge to do so? Is that charge reflected as commission or a markup/markdown from the price?

Asking where your OTC desk is sourcing liquidity is also vital. If it relies exclusively on other OTC desks, find another one. Why do you need an intermediary desk to talk to firms that will take your call themselves? That means you are paying an extra desk, for no reason. In addition, you would be losing control over your order. Sadly, such desks are very common and probably make up the bulk of the trading universe. If, however, they have a robust platform with access to a combination of OTC desks and exchanges, the next question becomes key.

3. What electronic trading tools does the firm utilize and how do they interact with “public” markets?

If your OTC desk uses a combination of single exchange or OTC desk interfaces, be extremely suspicious.

It is almost impossible for a trader to simultaneously survey all markets and calculate the optimal pieces of the order to send to markets over an order’s full life. The answer you should be looking for is that the desk has an algorithmic trading system with maximum connectivity and access to data.

That statement is considered self-evident in other asset classes, but not in crypto. Now that such tools for trading crypto exist, it is time for crypto investors to take notice and demand their agents use them.

In conclusion, it is about time for investors in the crypto markets to start caring about best execution, which will help them earn greater returns while improving the market structure overall.

That is important as such improvement will help attract reluctant institutional investors that are leery of rapid price moves and the difficulty of discerning the price of liquidity.

Broken bitcoin on chart via Shutterstock