CryptoAM: Securities Laws, Coinbase <3 Visa and IEOs


Welcome one welcome all to CryptoAM’s Thursday edition. Thanks to those who filled out our survey - we’ll be shifting around our schedule to make sure this newsletter comes through in the AM over the coming weeks so we don’t have to rebrand to CryptoPM ;)

For those who were FO256 in NYC, you may have met my co-writer Zac Thomas. Despite speaking english really weirdly (he calls it an “accent” because he’s from “New Zealand”), I’m glad to have a partner in crime. Expand your crypto twitter game and go give him a follow!



3 things you need to know:

One: Token Taxonomy Act gets reintroduced to Congress

The charge to amend securities laws in the US continued yesterday with the reintroduction of the Token Taxonomy Act to Congress by Representative Warren Davidson. Passing the Act would have a number of beneficial consequences for the industry in the US, such as excluding digital tokens that meet certain requirements from US securities laws and adjusting the taxation of virtual currencies.

Paying tax on crypto transactions is currently a nightmare as all those who just recently filed (or should have filed) their taxes can attest. From a tax perspective, some of the highlights of this bill include:

  • Crypto-to-cash transactions under $600 being tax-exempt

  • Exchanging one cryptocurrency to another would no longer be a taxable event

  • Virtual currencies held in individual retirement accounts receive favorable tax changes

Perhaps the most interesting revision in the bill is that, if passed, it would supersede existing state laws around digital tokens if they overlap with the Act. This means that state regulation ranging from the lassaiz-faire (Wyoming, Colorado) to the strict (New York, Texas) would all be affected.

Realistically though it’s unlikely we see this pass in the near future.
There’s no real mainstream catalyst to quickly push this bill through Congress. It’s also very probable the bill in its current form undergoes more changes before being passed.

The bottom line: This is all a push to make the regulatory environment in the US more favorable to the growing crypto industry. If there’s one thing US politicians can get behind, it’s trying to make the U.S of A the world leader in new industries.

P.S. Bonus legal nerd points - Two heavy hitters on regulation, Caitlin Long from the Wyoming Blockchain Task Force and Peter Van Valkenburgh of Coin Center (leading crypto think tank), were sharply divided on the bill and its implications. Check it out.


Two: Things are the way they are for a reason: The Rise of IEOs

Yesterday OKEx held their first IEO, following the newest and hottest trend in the exchange world. It sold out in ~1 second according to OKEx, solidifying the idea that IEO’s are the new wave. Why ever hold an ICO and spend all that time on raising, and marketing when you can apply to have an IEO? You get immediate access to a pool of liquidity, and also get credibility in the eyes of a consumer because a trusted intermediary (OKEx) has vetted your company.

I’ve talked previously about the tendency of the cryptocurrency markets to mimic the traditional markets in new ways. This new idea of an “IEO” is no different, and is the natural evolution of the ICO market.

The ICO market was similar to a direct listing on the stock market, where a company will just announce it’s raising money and the go to public and say “Look, I’m raising money, go buy my token”.

The IEO is more similar to your traditional IPO, except that instead of having an investment bank underwrite and market your offering, an exchange assumes that role. We’ve come full circle, and with it we’ve realized (once again) that the traditional markets are often they way they are for a reason. They work!


Three: Coinbase introduces crypto-to-fiat debit card for the UK


Coinbase announced yesterday a new Visa debit card
for UK customers. The card will allow customers to use cryptos available on Coinbase such as Bitcoin, Ethereum and Litecoin, to make payments at stores online and in-person. The card has all the regular functionality of a regular debit card including contactless functionality and the ability to withdraw cash from ATMs.

How it works:

  • A customer links their selected Coinbase wallets to the card

  • When a customer pays for something, Coinbase automatically makes the conversion to fiat at the point of sale and withdraws the equivalent amount of crypto from the Coinbase account. This part is important - no wait times for block confirmations

  • The seller can accept this payment without friction

Pretty simple right? That’s the point. Apart from a small subset of people, everyday consumers aren’t willing to trade off the ease of use of credit and debt cards for being able to use crypto to pay for everyday goods. Coinbase’s announcement seems directly focused on this idea.

Why this is special according to Coinbase:

“This is the first debit card to link directly with a major cryptocurrency exchange …previously available crypto cards required users to pre-load a specified amount of crypto onto their card, adding a point of friction to the process.”

Here’s the catch - fees. In many parts of the world there’s minimal or no cost associated with visa debit domestic transactions. Coinbase charges 2.49% on each purchase using the card. It’s not clear yet whether that charge falls on the consumer making the payment or the merchant accepting it.

The thing to watch here will be consumer adoption. A partnership with Visa gives Coinbase a much faster route to market and user base, but no guarantee that UK consumers will get on board and specifically use a Coinbase card over their traditional bank cards.


Also in the news:


Market Outlook:

Quick Take

Daily Chart (click picture to enlarge)

Hourly Chart (click picture to enlarge)

Direction: As expected yesterday, once we broke down past 5180 it was a quick ride down to the 5000 level. We rebounded off that level nicely and are now trading around the 5080 level. There was a strong volume push down below 5000, but was immediately bought up. To me this indicates trapped shorts and failed trend buying, meaning a reversal is now more likely than not.

The key right now is to make sure that we are able to stay above the blue box area and the 200D moving average.

Notice on the daily chart above I’ve outlined where the rallies over the last year have broken down. We are coming close to calling this rally over as well, at which point I would expect revisit 3xxx (but not to revisit below 3200 as that would signal continuation of the bear market).

I personally sold both 5625 and 5700 calls when we were at the 5200 level, as implied volatilities ticked up after the large move. I expect volatility to fall once again over the next few weeks and will be selling additional short dated calls and will be looking for IV’s around 55-60% to buy long dated calls. The best prints right now based on cash flow/margin required are the 5250 and 5375 calls although they are lower volume.

Key Support:  5040, 4950

Key Resistance: 5180, 5220

Overall Market: Alts continue to bleed. If you’re currently overweight in alts I wouldn’t panic just yet. I would reduce exposure if we break down to 4800 but I do have a significant amount of exposure to alts right now, as I believe on the next run up we’ll see alts follow in a more significant manner.


What I’m thinking today:

Where is the value in tokens?

Boris over at VersionOne wrote a really good article on the value and place of tokens in our overall ecosystem, and I’d like to share some of the insights for those less familiar with how tokens are actually useful.

Many people tend to write off tokens these days because of the death of the ICO market, and I believe that is a mistake. At the core of it, tokens are a way of introducing economic incentive for coordination and cooperation is a scalable way, something that historically hasn’t been so easy. If you can build a platform and then give users economic stake in that platform, it in many cases that system will solve the tragedy of the commons.

Boris outlines three major ways that tokens introduce value:  

Store of value

The first and oldest idea around value accrual is centered around the store of value concept. If people think that a certain currency / token is a good store of value, that will drive demand in such token / currency. Bitcoin is the best example, but it’s also clear that very few tokens will have a shot at such a position (with ETH being probably first in line to join Bitcoin).

Working capital

The second concept is centered around the idea that I have to hold a token in order to participate in a platform or financial instrument and I have chosen to call it a working capital token. There have been two use cases that have evolved around working capital tokens.

The first use case is staking. Users on Numerai stake NMR tokens on their predictions as a way to express the confidence they have in their machine learning model. If their predictions are good, they earn money and their NMR is returned. If their predictions are poor, their NMR is destroyed. Users on the prediction market Augur stake the native token REP to create a bet, dispute a bet’s outcome and purchase participation tokens. For every action they take that uses REP, they are literally staking their reputation on it.

The second use case is using a token as a collateral in financial instruments, mostly in the Ethereum ecosystem. Decentralized finance platforms have recently gained in importance (especially Maker) and the amount of ETH locked up in these instruments is increasing significantly (see https://defipulse.com/).

I predict that both working capital use cases (staking and collateralization) will become significantly more important in the near term, while additional working capital use cases might emerge.

Governance

The last concept on how tokens can accrue value is centered around governance: the basic premise being that token ownership determines who has the power to change the rules of a platform, and under which conditions. The crypto fund Placeholder has created a whole investment thesis around governance tokens and their role in a network.

The big question is how valuable a governance token is if losers of a token vote can simply fork? That answer most likely depends on the nature of the protocol. If the underlying platform acts mostly like an open-source software library but “states” are not stored on the protocol level (e.g. 0x – the decentralized exchange protocol – acts like an open-source software library with instructions on how to build a decentralized exchange, but liquidity is built by relayers on top of 0x), then there are no network effects on the protocol level and there is little cost to fork the network (and hence little value to a governance token that would prevent such a fork).


Join the conversation on Telegram and Twitter

If you ❤️ our newsletter, tell your friends about us!

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.