CryptoAM: Derivatives, the SEC and International Payments
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3 things you need to know:
One: SEC announced a token issuance framework and clears first legal token sale
The SEC was clearly busy yesterday, releasing two pieces of legal content related to token offerings. The first piece of content was a digital asset issuance framework, which is something that ICO issuers have been waiting patiently for. Unfortunately for them, it looks like it will be exceedingly difficult to adhere to these rules via the traditional ICO model.
Some key points about the framework:
The product must be built and fully operational before raising funds.
The tokens must have immediate utility upon sale.
Token transfers must only occur between platform wallets, not those external to the platform.
Tokens are sold at only one price, representing an equal obligation of utility value of that price.
Project teams will only repurchase tokens at a discounted price to face value, consistent with SEC rule 10B-18 for public company stock buyback.
Marketing is directed to the utility of the token, not the expectation of future increase in value.
The SEC approved token sale was held by an aircraft charter startup called TurnKey Jet. The response had been a full 11 months in the making, with the first request submitted by the company in May 2018.
The SEC issued a no-action letter that allowed Turnkey Jet to legally raise money from the issuing of its TKJ tokens (without having to register these as securities) assuming it adheres to a number of conditions set out by the SEC. These include:
None of the funds raised from the token sale can be used to develop the TKJ platform, network or app
The platform, network and app have to be developed before any TKJ tokens can be sold
TKJ tokens have to be able to be used immediately once they are sold
TKJ tokens will remain at a fixed price of $1USD and these tokens cannot be sold outside of TKJ wallets (no secondary market trading outside of the TKJ platform)
TKJ can’t represent the tokens as having profit potential
Needless to say, these are a lot of conditions. In fact, they don’t look like any ICO that you’re likely familiar with. After looking through this offering, it becomes clear that this isn’t really an ICO — but rather just the issuance of a digital coupon on the blockchain. Why go through all the hassle of issuing a token this way?
According to an interview on Coindesk, TKJ lawyer
“Rich guys have wire money ready to go, but they are subject to banking hours.”
If someone wants to take a trip immediately, and that’s outside of banking hours, then as a company you potentially have to turn a customer down if the customer wants to wire funds. This wouldn’t be the case with the TKJ token as you’d be able to pay immediately as soon as it received confirmation on a blockchain.
Think of all the costs associated with going through an 11 month process with the SEC and that’s before starting to build the token, platform or related infrastructure. Unless the funds from the token sale and extra revenue from being able to service a customer’s payment 24/7 exceed these cost, what’s the point? Hype is really the only answer here — it doesn’t seem like a particularly good application of tokens.
The bigger picture: No doubt crypto lawyers will pour over this decision and newly released SEC guidelines to try and structure other legal token sales, so future decisions may be made quicker than TKJ.
Since neither Zac or I are lawyers, check out these takes on the recent developments from actual lawyers:
Go deeper: Check out the Turnkey Jet statement and overall framework statement.
Two: Coinbase offers free international payments between wallet users
In an announcement that most people missed (including us), Coinbase launched a new payments service in late February allowing users to "send money internationally for free." XRP and USDC (Circle's stablecoin) will initially be used for the service.
A zero fee applies if sending between Coinbase wallets overseas with an on-chain fee if sending to non-Coinbase wallets.
What's the catch? In most cases people will want to convert their crypto to fiat, and this is where the fees start to kick in. Because Coinbase doesn't itself have a fiat off-ramp, it has banking relationships in over 40+ countries to help users with this.
The word on everyone's lips - 'remittances' (except for Coinbase who explicitly stated that this service was not a money remittance. But let's be clear - if the fees to convert crypto back to fiat are less than it would cost to transfer money via TransferWise and Western Union, then this could have an impact on the remittances market.
Sending money anywhere in the world instantly at nearly no cost is the future (if you hadn’t realized by now). Coinbase's announcement moves the needle further in this direction particularly for retail consumers. On an institutional level IBM and Stellar's 'World Wire', Ripple, and a host of blockchain and fintech startups are continuing to reduce costs and eat into traditional margins to send money overseas.
Three: Japanese crypto trading platform ‘Liquid’ Becomes a Unicorn
Liquid.com announced yesterday the close of a Series C round valuing the company at over US$1billion. Lead investors include IDG Capital (who also invested in Coinbase, KuCoin and Ripple), as well as Bitmain (who have enough money to invest but not enough to IPO).
The company is owned by Japanese crypto exchange Quoine and already has 340 employees in offices around Asia. It intends to spend the Series C proceeds on global expansion, product development and expanding into the security token market. Noteworthy are its plans to apply for a 'virtual currency license' in Singapore - allowing them to offer derivates services, fiat currency ramps, security tokens and stable-coins.
Liquid's special sauce comes from its "World Book" technology. Basically what this allows is orders in one currency pair (BTC/USD) to be matched and filled across different currency pairs (BTC/EUR). So if I'm an American trader selling BTC/USD I can be matched with a buy order from a trader looking for BTC/EUR and the foreign exchange transaction happens behind the scenes. Both traders receive their funds in their chosen order currencies. This should dramatically increase liquidity.
The future of crypto is infrastructure: This is one of many recent investments in the crypto-asset trading & liquidity infrastructure space that has cropped up over the past few months, and I expect that trend to continue. We’ve seen companies such as Tagomi, Bakkt, and ErisX raise large amounts of money from both traditional venture capital firms and crypto-native firms as both have begin to realize one thing:
Crypto is most useful as speculative asset!
This may sound like a negative, but it’s really not. Even things that are generally useful often command speculative markets that are bigger than their “true use” market. See almost every commodity derivatives markets that exists. Soybeans, gold, silver, etc. They are used for speculation almost as much as they are used their “true use”.
This is also why the thesis at our fund right now is investing in projects that enable cryptocurrency speculation. As any trader that has been in the cryptocurrency markets knows, infrastructure for high quality trading is not quite there yet. There is too much fragmentation of liquidity and there are not enough products that allow you to tailor your portfolio to your specific needs. Wouldn’t it be great if we could short EOS/XTZ easily? Or long BIX/BNB?
Looking to the traditional markets as a barometer, we find that spot trading pales in comparison to derivatives trading.
This is a good representation of where the market is headed, and I’m looking to leaders such as Deribit, LedgerX and BitMEX as the leaders in the cryptocurrency derivative space. There is already a clear appetite for some form of derivative (see: BitMEX perpetual contract).
Moving forward I expect the Bitcoin derivatives markets to rapidly catch up with the spot markets, and in 2 years, vastly exceed the spot market.
Also in the news:
Crypto Exchange Binance Is Setting Up Shop in Singapore This Month
Exchange-Traded Products for XRP, Litecoin Go Live for EU Investors
Coinbase, Paradigm Invest $15 Million in Startup Behind Disappearing Blockchain
Market Outlook:
Quick Take
Direction: Bitcoin volatility has increased significantly over the last week due to all the crazy price action, but is still as reasonable levels and still historically low. We saw a lot of profit taking from the 5000-5300 level and the real test will be staying above the 4800, and 5000 level.
If Bitcoin falls below 4800 the probability of a continued run falls dramatically and scaling back positions at that level is likely an EV positive play. If we break below 4200, the bullish structure of the market is invalidated and I would consider this a failed run up, with increased likelihood that we reach new YTD lows.
Key Support: 4800, 4500, 4200
Key Resistance: 5000, 5100, 5400
Overall Market: Altcoins have seen their Bitcoin ratios decimated, which is par for the course when Bitcoin runs. As mentioned previously, profits generally spill over from high caps -> mid caps -> low caps. If Bitcoin manages to hold above the 4800 level, it’s likely that alt ratios to begin recovering. Personally, I am overweighted in mid to high cap alt-coins and have exited my long BTC positions. In order to at least hedge a little against a fall, I’ve also sold call options at the APR 19 5375 and 5500 level as I think these are the best EV play. Watch closely for altcoin volumes to rise vs Bitcoin volumes before allocating more to your position, as volumes precede price consistently in the cryptocurrency markets.
What I’m thinking today:
What can you learn from Bitcoin Derivatives?
As mentioned earlier, the Bitcoin derivatives market is small but growing. Many people in the cryptocurrency sphere do not pay attention to derivatives and for the life of me I don’t understand why. There’s all sorts of interesting information hidden in the derivatives that make them useful to pay attention to.
Here are my two favorite things to check:
Understand where Bitcoin volatility is going based on implied volatilities and determine if volatility is cheap or expensive. Options prices vary significant based on volatility, and by looking at option prices you can “back out” the “implied volatility” or in other words, what the market things volatility will be in the future. By comparing the actual volatility of Bitcoin to where the market expects volatility will be, you make better guesses as to what the price action of Bitcoin might look like.
You can use them to understand where the market thinks prices will be in the next few months based on option delta. For those interested, I’ll be writing a full breakdown of the option parameters (also known as “the greeks”) specifically for crypto next week, or you can check out this article here. For now, just know that delta means “probability the option will end in the money”. You can graph this vs the strike price to get a probability curve for prices over the coming months. The specific lines are the maturity dates of the option. X axis is price and Y axis is the probability at the maturity date that Bitcoin will be >= the price.
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Nothing written in CryptoAM is legal, or investment advice and should not be taken as such. CryptoAM does not make any guarantee or other promise as to any results that may be obtained from using our content. No one should make any investment decision without first consulting his or her own financial advisor and conducting his or her own research and due diligence.