Insights, news and analysis for the professional investor |
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Bitcoin (BTC) - $21,381.71 |
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Prices as of 8/19/22 @ 6:35 p.m. UTC |
Welcome to Crypto Long & Short! Well, the annoying market is still annoying, wishy-washy and boring (apart from bitcoin tanking Thursday night) so we’re going to keep leaning into tech, policy, privacy and other related topics until the annoying market stops being annoying. Don’t worry, though, there’s still plenty to chew on out there. For example, we can chew on Ethereum’s long-awaited transition from proof-of-work to proof-of-stake (which we covered last week), which might actually happen soon. Or we can chew on the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) adding Tornado Cash to its Specially Designated Nationals list because North Korean hackers allegedly used it to launder money. Since those chewables mean nothing to almost everyone, here’s the more chewable translation: Ethereum (a valuable crypto platform) is doing a big technology upgrade and the U.S. government (through OFAC) made it illegal to use Tornado Cash (an Ethereum “mixer” that obfuscates the path of Ethereum-based transactions) because alleged criminals used it to launder money (which only allegedly happens through Tornado Cash and not in actuality through financial institutions like HSBC). Instead of diving into details about these two topics, I think we’re be better served to focus on a conversation topic that took place on Twitter about a potential user-activated soft fork (UASF) on Ethereum because it deftly ties these two topics together well. If that means nothing to you now, just hang in there … – George Kaloudis |
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There is a fantastic book by Jonathan Bier called “The Blocksize War,” which outlines an important time in Bitcoin’s history (it is available for free in serialized form on BitMEX’s website). Between August 2015 and November 2017, Bitcoin network participants were at war with themselves regarding the size limit of blocks in Bitcoin’s blockchain. While that seems innocuous on the surface, it was a hugely contentious technical debate that eventually led to the creation of an alternate version of Bitcoin called Bitcoin Cash. Although the book isn’t mandatory reading for those with a cursory interest in Bitcoin, I still think it is a worthwhile read. Let’s skip over a lot of detail around BitcoinXT, Bitcoin Unlimited, Bitcoin Classic, ASICBoost, SegWit2x and much (much) more, and get to the climactic battle of the Blocksize War: The activation of Segregated Witness (SegWit) through a UASF. What SegWit did was important technologically, but what is more salient for the topic at hand was how it was activated. Miners and users run the same software (usually on different hardware), with a notable difference: Miners can mine blocks, users cannot. Bitcoin miners didn’t want SegWit and users did, for a variety of reasons we won’t get into here. Since things get activated on Bitcoin by signaling approval (sort of like casting a vote) through mined blocks, SegWit wasn’t going to happen. But the users really wanted SegWit, so they took their “full nodes” (i.e., their Bitcoin software and hardware), which each independently verifies that Bitcoin blockchain rules are enforced, and started enforcing SegWit. The users were successful and their actions resulted in a soft fork of the Bitcoin protocol, hence UASF. (The user-activated part is obvious, but the soft fork part just means that the code modification was backwards-compatible.) But this column isn’t about Bitcoin’s UASF; it’s about how a proposed Ethereum UASF might potentially sidestep OFAC-wrought transaction censorship. Read the full article here. |
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Representative Tom Emmer (R-Minn.) calls U.S. Treasury's Tornado Cash sanctions "unprecedented." - TAKEAWAY: The U.S. congressman said, “My problem is that this software is controlled by code, not by any person or entity. So if you think about it, the sanctioning of Tornado Cash is an unprecedented shift in the Office of Foreign Asset Control in their sanctioning policy.” The ban on Tornado Cash is driving the internal debate on Capitol Hill regarding which regulatory agency should be responsible for oversight of cryptocurrencies, according to Rep. Emmer. Read more here.
BitGo is planning to sue Galaxy Digital. - TAKEAWAY: Cryptocurrency custody company BitGo said on Aug. 15 that it plans to sue Galaxy Digital for abandoning the firms’ $1.2 billion merger agreement. As one of the biggest custodians in the crypto industry, BitGo said it will seek $100 million in damages from Galaxy. In a press release, it said Galaxy is refusing to pay this previously promised breakup fee. R. Brian Timmons, a partner with Quinn Emanuel, the law firm BitGo has retained, said, “The attempt by [CEO] Mike Novogratz and Galaxy Digital to blame the termination on BitGo is absurd.” Read more here.
The U.S. Federal Reserve will open a pathway for crypto banks to tap the central banking system. - TAKEAWAY: On Monday, the central bank said it is publishing its final guidance for novel financial institutions, like Custodia and Kraken Bank, to access its “master accounts,” something these firms need to participate in the global payment system. Fed Vice Chair Lael Brainard said, “The new guidelines provide a consistent and transparent process to evaluate requests for Federal Reserve accounts and access to payment services in order to support a safe, inclusive and innovative payment system.” Read more here.
Nigeria’s CBDC eNaira was used to carry out transactions worth more than $9 million since October. - TAKEAWAY: On Thursday, Central Bank of Nigeria Governor Godwin Emefiele described the volume and value of transactions on the platform as “remarkable,” noting the eNaira app has been downloaded 840,000 times and now has about 270,000 active wallets. The bank is seeking to get 8 million more people to start using the eNaira platform in its second phase, which begins next week when both banked and unbanked Nigerians will be able to open an eNaira wallet by dialing a four-digit code on their mobile phones. Read more here.
Forty of the world’s largest companies invested roughly $6 billion in blockchain companies between September 2021 and June 2022. - TAKEAWAY: According to a study by Blockdata, Samsung was the most active, investing in 13 companies, while Alphabet had the largest value, participating in four funding rounds that raised $1.5 billion for crypto-related companies. BlackRock (BLK) and Morgan Stanley (MS) also took part in rounds valued together at $2.3 billion. The study highlights the mainstream acceptance of blockchain technology and the crypto industry. Read more here.
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