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Keep an eye out for major company NFT trademark filings this year

NFT trademark filings by companies aren’t just a marketing stunt. According to a trademark lawyer, they have to use what’s in the application.

Crypto proponents would be wise to keep their eyes on nonfungible token (NFT) and metaverse trademark applications this year, which are “reliable signals” of future-use plans.

Speaking to Cointelegraph, intellectual property lawyer Michael Kondoudis said while many people may think big corporations are just jumping onto the NFT trend as a novelty, “it is not possible” to register a trademark in the United States with no intention to use it.

Despite a relatively low cost for filing an application — ranging from $250 to $350 per class of goods/services — Kondoudis explained when a company submits a trademark application, it requires a sworn statement that the applicant has a “bona fide” intent to use the mark in the future for the listed products and services.

He noted, however, that these applications “undergo substantive review” and may be rejected for a number of legal and technical reasons.

2023 has already seen a string of major companies filing for NFT-related trademark applications and Kondoudis has been active on Twitter, bringing them to the public’s attention.

Trademark trends so far in 2023

Kondoudis noted “the first trend for 2023” was liquor companies filing for NFT trademark applications.

This year has already seen new filings from well-known alcohol brands such as Absolut Vodka, Chivas Regal whisky and Malibu Rum, he noted.

Irish Distillers International, makers of Jameson Irish whiskey, was the latest liquor company to file for an NFT trademark application on Jan. 18.

Irish Distillers Int’l has filed a trademark for #JAMESON #whiskey claiming plans for

Virtual clothing, footwear, alcoholic drinks
NFT trading software
Stores for virtual goods + NFTs
NFT trading marketplaces
Virtual bars + restaurants#NFTs #Metaverse #Web3 pic.twitter.com/7dhHZrXh2S

— Mike Kondoudis (@KondoudisLaw) January 23, 2023

Kondoudis said 2022 saw a diverse range of sectors filing for NFT trademarks — from grocery stores, pet food brands, sports teams and leagues, cities, casinos and even game shows.

He believes the sheer number of filings confirms NFTs and the metaverse have the attention of “corporate America.”

NFT patents give companies the edge

Kondoudis is confident consumers will see companies act on their NFT patents in the future, noting:

“These trademark filings are reliable signals of future plans to use marks for the products and services listed in the applications.”

Speaking to Cointelegraph, Ralph Kalsi, CEO of Blockchain Australia believes diving into the NFT patent space can bring significant growth opportunities for companies.

Kalsi said as NFTs continue to gain popularity, companies holding patents in the space can capitalize on the possible growth by licensing their technology or developing their own NFT-based products and services.

He believes the NFT patent space is a “promising area” that can establish a company as a leader by being an early adopter of NFT technology.

Related: US trademark and copyright offices to study IP impact of NFTs

He added that it’s advantageous in the early stage of NFTs to own related patents as it could provide a competitive edge and prevent others from using “similar technology without permission.”

According to a Jan. 5 tweet from Kondoudis, applications relating to NFTs totaled 7,746 in 2022, a nearly 260% increase from 2021.

The rate of new trademark applications for NFTs and related goods/services continues to slow. Only 341 were filed in December, which is less than 1/3 of the 1089 filed in March

2022 Total: 7746
2021 Total: 2154
2020 Total: 27#NFTs #Web3 #NFTCommmunity #Metaverse #MetaverseNFT pic.twitter.com/KneGIl0WxJ

— Mike Kondoudis (@KondoudisLaw) January 5, 2023

In a separate tweet on the same day, he added applications pertaining to the metaverse totaled 5,850 last year, a nearly 206% increase from 2021.

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US Senator Ted Cruz pushes for crypto in Congress… using snacks

A newly introduced resolution could potentially see lawmakers buying sodas and chips using crypto-supporting vending machines.

Texan Republican Senator Ted Cruz is pushing the United States Congress to adopt cryptocurrency within its halls using an incentive both sides might agree on — food.

Cruz introduced a concurrent resolution dated Jan. 25 that would only allow vending machine and food service contractors that accept crypto as a payment option within the U.S. Capitol.

If adopted, the Architect of the Capitol, the Secretary of the Senate and the Chief Administrative Officer of the House of Representatives would be required to find the crypto-accepting food and vending firms.

At the time of writing the text of the resolution was not publicly available on the Congress website. It’s unknown the potential cost of implementing the measure, or if the resolution would require contractors to take payment in certain cryptocurrencies.

The U.S. Capital Cafe could be one of the purveyors required to take crypto payments. Image: Google

Cointelegraph contacted Cruz’s office for comment but did not immediately receive a response.

Cruz has long been a vocal advocate for cryptocurrencies, especially lauding Bitcoin (BTC) for its decentralization. At roughly this time last year, the Senator bought between $15,000 and $50,000 worth of BTC according to a financial disclosure.

Related: Crypto industry leaders ‘scared of a strong SEC’ — Senator Warren

He is one of only eight known crypto investors in Congress according to the “Bitcoin Politicians” crowdsourced data project.

The list also includes Cynthia Lummis, the Wyoming Senator behind a pro-crypto piece of legislation and Pat Toomey, a Pennsylvanian Senator who recently introduced a stablecoin bill aiming to create a regulatory framework for payments.

Senator Cruz also has signaled his interest to make his home state of Texas an oasis for Bitcoin and other cryptocurrencies, saying crypto mining could be used to monetize the energy from oil and gas extraction and the activity may be used as an alternate way of storing energy.

The resolution put forward by Cruz will need to be agreed to in both the Senate and the House before it can be adopted.

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Moody’s to build scoring system for stablecoins: Report

Moody’s is allegedly developing a scoring system for stablecoins, with analysis of up to 20 digital assets.

Credit rating firm Moody’s is allegedly developing a scoring system for stablecoins, with analysis for up to 20 digital assets, Bloomberg reported on Jan. 26, citing unnamed sources. 

The system, which appears to be in the early stages of development, will evaluate and rate the quality of the attestations of stablecoin reserves, although it will not be considered an official credit rating. Generally speaking, third parties attest that a company’s claims are accurate and validate that stablecoins are backed 1:1 by their reserves.

A stablecoin is a type of cryptocurrency whose value is pegged to a fiat currency, such as the United States dollar, or another financial instrument. The concept was developed to offer an alternative to the volatility of other cryptocurrencies by tying the stablecoin’s value to another asset. This does not imply, however, that stablecoins are risk-free.

For instance, Tether, the largest stablecoin issuer, settled with the New York Attorney General’s office in 2021 after allegedly misrepresenting the amount of fiat collateral backing its USDT (USDT) stablecoin. In addition to paying $18.5 million in damages to the state of New York, the company was required to submit periodic disclosures of its reserves, Cointelegraph reported at the time.

Related: SBF tried to destabilize crypto market to save FTX: Report

Stablecoin reserves have come under further scrutiny in recent months as a consequence of the bear market and crypto firms’ collapse in 2022. In May, the Terra ecosystem imploded when its algorithmic stablecoin, TerraUSD (UST), lost its dollar peg, crashing to a low of around $0.30.

Recently, Tether disclosed plans to stop lending funds from its reserves amid rumors concerning its secured loans. The company reiterated that its loans were overcollateralized by “extremely liquid assets” but decided to discontinue the service throughout 2023.

Moody’s provides credit ratings for publicly traded companies, delivering analyses regarding credit risk through its rates. On Jan. 19, the agency released a note on Coinbase discussing the crypto exchange’s downgraded senior debt and corporate family rating, which indicates a company’s ability to meet its financial obligations.

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SEC once again rejects ARK 21Shares Bitcoin ETF listing

Proponents of the fund had argued that a current surveillance sharing agreement with CME would be adequate to protect investors.

The SEC has once again rejected a proposal to list the ARK 21 Shares Bitcoin ETF on equities exchange Cboe BZX, according to Jan. 26 statement from the SEC. The SEC rejected a similar proposal in April, 2022.

The SEC has just now once again rejected ARK’s and 21Shares spot bitcoin, $BTC ETF listing.

— unusual_whales (@unusual_whales) January 26, 2023

The proposed ETF would have been managed jointly by Cathie Wood’s Ark Investment Management and 21Shares if it had been approved. The purpose of the proposed fund was to allow investors to gain exposure to Bitcoin’s price within the confines of the regulated stock market.

The Cboe BZX Exchange had originally asked to list the ETF in June, 2021. After the first application was rejected in 2022, it reapplied and made new legal arguments in an attempt to get the fund approved.

In its second application back in May 2022, the Cboe BZX Equities Exchange argued that it has a “comprehensive surveillance-sharing agreement with a regulated market of significant size” that can prevent manipulation of prices. The ARK 21Shares Bitcoin ETF should therefore be allowed to be listed on the exchange. According to the application, this surveillance sharing agreement is with the Chicago Mercantile Exchange (CME), where Bitcoin futures contracts are traded.

The application also argued that most currency and commodity spot markets are unregulated, but this does not usually mean that an application will be rejected for that reason alone.

Related: SEC’s ‘one-dimensional’ approach is slowing progress: Grayscale CEO

In its response, the SEC rejected these arguments. It stated that the surveillance sharing agreement between Cboe BZX Equities Exchange and the CME does not apply to spot Bitcoin, since only Bitcoin futures contracts are traded at CME.

The SEC also claimed that having a surveillance sharing agreement is not always necessary, but if such an agreement does not exist, then the exchange must “establish that other means to prevent fraudulent and manipulative acts and practices will be sufficient.” It said that the exchange has not demonstrated this point, so it is not allowing the ETF to be listed.

The SEC has so far not approved any spot Bitcoin ETF to be listed on an exchange. Grayscale Investment Trust is seeking to convert its Bitcoin Trust into a spot Bitcoin ETF, and it has sued the SEC for rejecting its proposal. Oral arguments are scheduled to be heard for the Grayscale case in March 2023.

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Data shows pro Bitcoin traders want to feel bullish, but the rally to $23K wasn’t enough

Bitcoin price has flashed a few bullish signals, but traders are not too keen on adding leverage longs until after the Federal Reserve shows its cards on Feb. 1.

Bitcoin (BTC) price had a mixed reaction on Jan. 25 after the United States reported a 2.9% gross domestic product growth in the fourth quarter, slightly better than expected. Still, the sum of all goods and services commercialized between October and December grew less than 3.2% from the previous quarter.

Albeit somewhat optimistic, another data set limiting investors’ confidence was news that the U.S. Federal Reserve (FED) would revert its contractive measures anytime soon as U.S. durable goods orders jumped 5.6% in December. The indicator came in much higher than anticipated, so it could potentially mean that interest rates could be increased for a little longer than expected.

Oil prices are also still a focus for investors, with crude WTI approaching its highest level since mid-September, currently trading at $81.50. The underlying reason is the escalation of the Russia-Ukraine conflict after the U.S. and Germany decided on Dec. 25 to send battle tanks to Ukraine.

The United States dollar index (DXY), a measure of the dollar’s strength against a basket of top foreign currencies, sustained 102, near its lowest levels in eight months. This signals low confidence in the U.S. Federal Reserve’s ability to curb inflation without causing a significant recession.

Regulatory uncertainty could also have been vital in limiting Bitcoin’s upside. De Nederlandsche Bank, the Dutch central Bank, fined cryptocurrency exchange Coinbase $3.6 million due to non-compliance with local regulations for financial service providers — the news was released on Jan. 26.

Let’s look at derivatives metrics to understand better how professional traders are positioned in the current market conditions.

Bitcoin margin longs slightly increase

Margin markets provide insight into how professional traders are positioned because it allows investors to borrow cryptocurrency to leverage their positions.

For example, one can increase exposure by borrowing stablecoins to buy Bitcoin. On the other hand, Bitcoin borrowers can only short the cryptocurrency as they bet on its price declining. Unlike futures contracts, the balance between margin longs and shorts isn’t always matched.

OKX stablecoin/BTC margin lending ratio. Source: OKX

The above chart shows that OKX traders’ margin lending ratio slightly increased from Jan. 20 to Jan. 20, signaling that professional traders added leverage long after Bitcoin broke above the $21,500 resistance.

One might argue that the demand for borrowing stablecoins for bullish positioning is far less than levels seen earlier in January. However, a stablecoin/BTC margin lending ratio above 30 is unusual and typically excessively optimistic.

More importantly, the current metric at 17 favors stablecoin borrowing by a wide margin and it indicates that shorts are not confident about building bearish leveraged positions.

Options traders flirt with an optimistic bias

Traders should also analyze options markets to understand whether the recent rally has caused investors to become more risk-averse. The 25% delta skew is a telling sign whenever arbitrage desks and market makers are overcharging for upside or downside protection.

The indicator compares similar call (buy) and put (sell) options and will turn positive when fear is prevalent because the protective put options premium is higher than risk call options.

In short, the skew metric will move above 10% if traders fear a Bitcoin price crash. On the other hand, generalized excitement reflects a negative 10% skew.

Bitcoin 60-day options 25% delta skew: Source: Laevitas

The 25% delta skew flirted with the optimistic bias on Jan. 21 as the indicator reached the threshold at minus 10. The movement coincides with the 11.5% BTC price increase and its subsequent rejection at $23,375. From then on, options traders increased their risk aversion for unexpected price dumps.

Related: Here’s why Bitcoin price could correct after the US government resolves the debt limit impasse

Currently, near zero, the delta skew signals investors are pricing similar risks for the downside and the upside. So, from one side, the lack of demand from margin traders willing to short Bitcoin seems promising, but at the same time, options traders were not confident enough to become optimistic.

The longer Bitcoin remains above $22,500, the riskier it becomes for those betting on BTC price decline (shorts). Still, traditional markets continue to play an essential role in setting the trend, so the odds of another price pump ahead of the FED’s decision on Feb. 1 are slim.

The views, thoughts and opinions expressed here are the authors’ alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.

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Bithumb in turmoil, Binance’s 47K law requests, Axie players down 85%: Asia Express

Our weekly roundup of news from East Asia curates the industry’s most important developments. Bithumb in turmoil  On Jan. 25, Yonhap Infomax reported that South Korean authorities had requested an arrest warrant for Kang Jong-Hyun, chairman and owner of cryptocurrency exchange Bithumb, over embezzlement allegations. That same day, the Financial Investigation Second Division of the […]

Our weekly roundup of news from East Asia curates the industrys most important developments.

Bithumb in turmoil 

On Jan. 25, Yonhap Infomax reported that South Korean authorities had requested an arrest warrant for Kang Jong-Hyun, chairman and owner of cryptocurrency exchange Bithumb, over embezzlement allegations. That same day, the Financial Investigation Second Division of the Seoul Southern District Prosecutors Office accused Jong-Hyun and two Bithumb executives of embezzlement, conducting fraudulent transactions and breach of trust. 

A leaked photo of Bithumb chairman Kang Jong-Hyun. Source: Korea Post English

Authorities said that Kang played a key role in manipulating the stock prices of Bithumb affiliates Inbiogen and Bucket Studio through the issuance of convertible bonds.

Bithumb is one of the largest cryptocurrency exchanges in South Korea. Its previous chairman, Lee Jung-Hoon, was found not guilty last month of a $70 million fraud charge related to his activities at Bithumb. Park Mo, Bithumbs former largest shareholder, died on Dec. 30 while under investigation for allegedly embezzling funds from Bithumb and related companies. The firm is also currently probed by the National Tax Service over tax compliance incidents. 

Binances 2022 annual report

In its annual report released on Jan. 19, cryptocurrency exchange Binance revealed that the firm received more than 47,000 law enforcement inquiries throughout the year. The exchange said such requests were processed at a record time and that it was the first among blockchain firms to join the National Cyber-Forensics and Training Alliance, a nonprofit cybercrime fighting unit based in Pittsburg. 

In response to the inquiries, Binance said it increased the headcount of its security team by more than 500% and hosted 70 law enforcement workshops around the globe in 2022 to help fight blockchain-related financial crime.

In the event of security incidents, Binance also stated it would tap into funds from its $1 billion SAFU (Secure Asset Fund for Users) user insurance program to compensate for losses. The exchange also tightened requirements such as NFT listings. Starting Feb. 2, Binance will delist all NFTs listed before Oct. 2 that had an average daily trading volume of less than $1,000 between Nov. 1 and Jan. 31.

In January 2022, we announced that SAFU was worth
$1B. Due to market conditions in 2022, that value
dropped to $735m. As of November 2022, we topped the
SAFU balance back to $1B. We made a promise to our
users, along with the larger crypto ecosystem, that SAFU
would always maintain a sizable level.

The exchange received 14 licenses and regulatory registrations in 2022. Other highlights include its $1 billion pledge for an industry recovery fund amid FTXs collapse and investing $500 million into Web3 and blockchain firms through Binance Labs. Although it does not have a fixed corporate office, the exchanges governing jurisdiction is the Hong Kong International Arbitration Center for legal disputes. Its servers are also reportedly located in Japan. 

Jurisdictions where Binance received regulatory clearance in 2022. Source: Binance

Axie Infinitys declining numbers 

The latest data from the website Active Player reveals that the number of players of the popular monster battle P2E game Axie Infinity, developed by Vietnamese gaming studio Sky Mavis, fell to 432,001 in the past month. This represents the lowest level seen since November and means the game has lost approximately 85% of its player base over the past year. 

Axie Infinity’s popularity has dwindled in recent months. Source: Active Player

Initially a groundbreaking GameFi success, Axie Infinity has fallen on hard times as the crypto winter took a toll on its play-to-earn dynamic, which was exacerbated by the infamous Sky Mavis Ronin bridge hack last March. New features, such as the much-anticipated Land Gameplay release on Dec. 28, did not appear to reverse the declining trend. At the time of publication, about $3.85 million worth of Axie NFTs changed hands in the past 30 days, compared with $639.5 million in November 2021. 

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City of Busans crypto exchange

As first reported by local news outlet News 1 Korea, the city of Busan is working to establish a decentralized digital assets exchange scheduled for operations this year. According to municipal officials, the exchange will include buying and selling of tokenized intellectual property rights for films and games, as well as trade in gold, precious metals, agricultural and livestock products, ships and real estate. The Busan Digital Asset Exchange Establishment Promotion Committee plans to coordinate with domestic financial companies and conduct system tests in the near future. 

Bybits Genesis exposure 

In a Jan. 20 Twitter thread posted by Ben Zhou, CEO of Singaporean cryptocurrency exchange ByBit, the blockchain executive clarified the exchange positions after questions arose regarding an alleged $151 million exposure to bankrupt crypto lender Genesis Global. As told by Zhou, the exposure amount is limited to Mirana, the investment arm of ByBit, and that $120 million of collateralized positions out of the $151 million exposure amount had already liquidated.

Zhou claims that Mirana only manages some ByBit company assets and that clients funds are separated. In addition, Zhou said that ByBit Earn products dont use Mirana. Genesis Global froze withdrawals last November, citing unprecedented market conditions, and filed for bankruptcy on Jan. 20, reportedly owing $3.5 billion to over 50 creditors. 

Full disclosure:
1. Mirana is the investment arm of bybit.
2. Mirana only manage some bybit company asset. Client fund is separated snd bybit earn product doesnt use mirana.
3. The reported 151m has abt 120m of collateralized positions which mirana had already liquidated. https://t.co/kqVPpAMGky

— Ben Zhou (@benbybit) January 20, 2023

Bitzlatos trail of dirty money

According to a Reuters report on Jan. 24, cryptocurrency exchange Binance allegedly helped move $346 million in Bitcoin for now-defunct Hong Kong cryptocurrency exchange Bitzlato. Binance was also reportedly one of the largest counterparties to the exchange. On Jan. 23, Europol stated that $19.5 million were seized in enforcement actions against Bitzlato.

Last week, the United States Department of Justice announced a major international cryptocurrency enforcement action against Bitzlato for the latters alleged role in laundering $700 million in funds tied to dark web marketplace Hydra and Russian illicit finance. Its founder, Anatoly Legkodymov, a Russian national and resident of China, was arrested in Miami on Jan. 18 on charges of operating an unlicensed money transmitter. The exchange has since been shut down. 

Through a detailed analysis of our address labels and on-chain analytics, we have uncovered a significant portion of the funds that was sanctioned on Bitzlato.

Including:
64.8 BTC
274 ETH
3200 LTC
530 BCH
385,117 (USDT + USDC + DAI)
1,202,000 DOGE

Total value: ~$2.56M

— MistTrack (@MistTrack_io) January 19, 2023

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Polkadot restates its case that DOT has ‘morphed’ away from security status

The Web3 Foundation has reminded the world that, in its eyes, it has conformed to SEC requirements and DOT should no longer be considered a security.

The Web3 Foundation, which supports the Polkadot protocol, has again presented its argument that its native DOT (DOT) token is not a security. In a Twitter thread, the foundation emphasized its efforts to comply with U.S. securities laws, as well as Securities and Exchange Commission guidance on digital assets, and declared that DOT had successfully “morphed” and is software, not a security. 

The Web3 Foundation reposted an excerpt from a December Twitter Space where Angela Dalton, identified as an adviser to the foundation, described how representatives accepted the SEC’s invitation to “come in and talk to us.” Subsequently, the foundation claimed:

“The Foundation made sure the SEC’s full vision of token morphing was addressed, […] as well as taking steps to manage the distribution of the DOT token so that no individual holds a large percentage of the network, turning down purchases from VCs interested solely in investment purposes, and promoting the tech but not the token.”

“The Foundation is confident DOT has morphed and is not a security. It is software,” the foundation concluded. Polkadot is a multichain protocol that had 66 blockchains operating on it and its Kusama parachain network as of October 2022. The Web3 Foundation was founded by Gavin Wood, a co-founder of Ethereum, and released the Polkadot white paper in 2016. Polkadot completed its launch in December 2021 when it rolled out parachains, according to a Medium post.

1/ @Polkadot‘s native token DOT is, and always has been, co-ordinating software. Following W3F’s announcement on DOT morphing into a non-security, read the thread below to learn how DOT was able to morph, what Polkadot is, and the primary goals of the network. pic.twitter.com/sAnU56GnIh

— Web3 Foundation (@Web3foundation) January 26, 2023

“Our experience has been a positive one,” the foundation says in the post. “The SEC has welcomed meetings with the Web3 Foundation, and there has been a spirit of open communication and dialogue.”

Related: Staking on Polkadot, explained

The Web3 Foundation first declared DOT a non-security in November. Its position has apparently not received confirmation from the SEC. The foundation’s argument echoes key points in the SEC case against Ripple. “Morphing” is a concept put forward in a speech delivered by former SEC official William Hinman at the Yahoo Finance All Markets Summit in June 2018.

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Sens. Warren, Wyden question quality of auditors’ oversight in light of FTX debacle

The senators co-authored a letter to the Public Company Accounting Oversight Board chair asking how FTX and other crypto firms were audited and why the audits failed so badly.

Two United States senators have taken their questions about the performance of accounting firms active in the crypto space to a higher power: the Public Company Accounting Oversight Board (PCAOB). Failure to uncover alleged criminality and poor recordkeeping at FTX has sullied the image of the PCAOB and the accounting profession, the senators said.

In a letter addressed to PCAOB chair Erica Williams and dated Jan. 25, Democratic Senators Elizabeth Warren and Ron Wyden point out claims former FTX CEO Sam Bankman-Fried made about passing audits by large accounting firms Armanino and Prager Metis. Current FTX CEO John Ray told a bankruptcy court that he had “substantial concerns as to the information presented in these audited financial statements.”

In addition, the senators question the firms’ impartiality, saying they acted as “crypto industry cheerleaders.”

Just sent from @SenWarren to @PCAOB_News: “We write regarding recent turmoil in the cryptocurrency industry following the collapse of
crypto platform FTX in Nov 2022 and the role that auditors may have played in misleading the public…” https://t.co/erbblBns9K pic.twitter.com/nDjenQ9awW

— blockchain tipsheet (@blockchaintpsht) January 26, 2023

Warren and Wyden mention Williams’ statement that PCAOB-registered firms are only required to meet the board’s standards “when they’re auditing a public issuer or broker dealer under our jurisdiction, not for any other clients,” and point out PCAOB rules that seem to contradict Williams’ statement.

The senators also criticize proof-of-reserves reports. They write:

“In reality, proof-of-reserves examinations fall significantly short of real audits, as proof-of-reserves reports do not follow established standards, are not overseen by the PCAOB, and do not prove that listed assets actually belong to customers.”

The reason for their discussion of a process that is explicitly not subject to PCAOB oversight becomes clear in the 12 questions posed by the letter. They ask as their first question:

“What risks do investors face when crypto firms – whether publicly traded or private – attempt to pass off proof-of-reserve examinations as ‘audits’ and what is the PCAOB doing to mitigate these risks?”

Warren and Wyden go on to seek confirmation that the PCAOB has taken all appropriate actions in relation to crypto industry auditors. They also ask if Williams will “commit to using your inspection authority to evaluate and publicly report on auditors that provided services for any crypto company acting as a broker dealer, even if the firm was not registered as such with the SEC.”

Finally, the senators ask about the standards auditors are held to when they audit organizations with crypto asset holdings or shares in crypto companies. They say that they hope to receive an answer by Feb. 8.

Related: Senate Finance Committee Chair probes ‘lack of safeguards’ in crypto tax incentives

Warren is one of the crypto industry’s most vocal critics. Wyden, the Senate Finance Committee chair, has a more nuanced record on crypto. He partnered with “crypto senator” Cynthia Lummis in 2021 to propose a “fix” to the crypto reporting requirements in the bipartisan infrastructure bill. He also wrote letters to Binance, Coinbase, Bitfinex, Gemini, Kraken and KuCoin in November to ask about their consumer protections.

The PCAOB is a nonprofit corporation set up by the U.S. federal government under the 2002 Sarbanes–Oxley Act. The SEC indicated in December that it too would be keeping a closer eye on auditors.

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Here’s why Bitcoin price could correct after the US government resolves the debt limit impasse

Bitcoin price has been on a tear, but analysts warn that resolving the U.S debt limit issue could trigger sharp downside for risk assets like BTC.

For much of 2022, the crypto market focused on the U.S. Federal Reserve’s actions. The central bank created a bearish environment for risk-on assets like stocks and cryptocurrencies by increasing the interest rates on borrowing. 

Toward the end of 2022, positive economic data, healthy employment numbers and a decreasing inflation rate provided hope that a much-awaited slowdown in the rate of interest rate hikes would occur. Currently, the market expects the rate hikes to reduce from 50 basis points (bps) to 25 bps before the complete end of the hike regime by mid-2023.

From the perspective of the Fed’s goal of constraining liquidity and providing headwinds to an overheated economy and stock market, things are starting to improve. It appears that the Fed’s plan of a soft-landing by quantitative tightening to curb inflation without throwing the economy into a deep recession might be working. The recent rally in stock markets and Bitcoin can be attributed to the market’s trust in the above narrative.

However, another essential American agency, the U.S. Treasury, poses significant risks to the global economy. While the Fed has been draining liquidity from the markets, the Treasury provided a countermeasure by draining its cash balance and negating some of the Fed’s efforts. This situation may be coming to an end.

It invokes risks of constrained liquidity conditions with the possibility of an adverse economic shock. For this reason, analysts warn that the second half of 2023 may see excess volatility.

Backdoor liquidity injections negate the Fed’s quantitative tightening

The Fed started its quantitative tightening in April 2022 by increasing the interest rates on its borrowings. The aim was to reduce inflation by constraining the market’s liquidity. Its balance sheet shrank by $476 billion during this period, which is a positive sign considering that inflation dropped and employment levels stayed healthy.

U.S. Fed Balance sheet. Source: U.S. Federal Reserve

However, during the same time, the U.S. Treasury used its Treasury General Account (TGA) to inject liquidity into the market. Typically, the Treasury would sell bonds to raise additional cash to meet its obligations. However, since the nation’s debt was close to its debt ceiling level, the federal department used its cash to fund the deficit.

U.S. Treasury General Account Balance. Source: MacroMicro

Effectively, it’s a backdoor liquidity injection. The TGA is a net liability of the Fed’s balance sheet. The Treasury had drained $542 million from its TGA account since April 2022, when the Fed began rate hikes. Independent macro market analyst, Lyn Alden, told Cointelegraph:

“U.S. Treasury is drawing down its cash balance to avoid going over the debt ceiling, which is adding liquidity into the system. So, the Treasury has been offsetting some of the QT that the Fed is doing. Once the debt ceiling issue gets resolved, the Treasury will be refilling its cash account, which pulls liquidity out of the system.”

Debt ceiling issue and potential economic fallout

The U.S. Treasury’s debt totaled approximately $31.45 trillion as of Jan. 23, 2023. The number represents the total outstanding of the U.S. government accumulated over the nation’s history. It is crucial because it has reached the Treasury’s debt ceiling.

The debt ceiling is an arbitrary number set by the U.S. government that limits the amount of Treasury bonds sold to the Federal Reserve. It means that the government can no longer take on additional debts.

Currently, the U.S. has to pay interest on its national debt of $31.4 trillion and spend on the welfare and development of the country. These expenditures include salaries of public medical practitioners, educational institutions, and pension beneficiaries.

Needless to say that the U.S. government spends more than it makes. Thus, if it can’t raise debt, there’ll have to be a cut in either interest rate payments or government expenditures. The first scenario means a default in U.S. government bonds which opens a big can of worms, starting with a loss of trust in the world’s largest economy. The second scenario poses uncertain but real risks as failure to meet public goods payment can induce political instability in the country.

But, the limit is not set in stone; the U.S. Congress votes on the debt ceiling and has changed it many times. The U.S. Treasury Department notes that “since 1960, Congress has acted 78 separate times to permanently raise, temporarily extend, or revise the definition of the debt limit – 49 times under Republican presidents and 29 times under Democratic presidents.”

If history is any indication, the lawmakers are more likely to resolve those issues by raising the debt ceiling before any real damage is done. However, in that case, the Treasury would be inclined to increase its TGA balance again; the department’s target is $700 billion by 2023 end.

Either by draining out its liquidity completely by June or with the help of a debt ceiling amendment, the backdoor liquidity injections into the economy would come to a close. It threatens to create a challenging situation for risk-on assets.

Bitcoin’s correlation with stock markets remains strong

Bitcoin’s correlation with the U.S. stock market indices, especially the Nasdaq 100, remains near all-time highs. Alden noted that the FTX collapse suppressed the crypto market in Q4 2022 when the equities rallied on slower rate hike expectations. And while the congress delays its decision on the debt ceiling, favorable liquidity conditions have allowed Bitcoin’s price to rise.

BTC/USD price chart with Bitcoin-Nasdaq correlation coefficient. Source: TradingView

However, the correlation with the stock markets is still strong, and movements in S&P 500 and Nasdaq 100 will likely continue influencing Bitcoin’s price. Nik Bhatia, a financial researcher, wrote about the importance of the stock market’s direction for Bitcoin. He said,

“…in the short term, market prices can be very wrong. But over the more intermediate term, we have to take trends and trend reversals seriously.”

With the risks from the ongoing Fed’s quantitative tightening and stoppage of Treasury liquidity injections, the markets are expected to stay vulnerable through the second half of 2023.

The views, thoughts and opinions expressed here are the authors’ alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.

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ISDA releases standard definitions for digital asset derivatives

The International Swaps and Derivatives Association is working on two papers to address fundamental legal risks in the crypto markets.

The International Swaps and Derivatives Association (ISDA) is working on two papers to address fundamental legal risks in the crypto markets, such as the insolvency of crypto exchange firms, according to a statement released on Jan. 26. 

The initiative was motivated by the collapse of crypto exchange FTX and previous bankruptcy cases that “prompted a cascade of liquidity and solvency concerns across the crypto ecosystem.” Along with other things, the papers will offer guidance for market participants regarding crypto ownership and the role of intermediates in the event of bankruptcy.

“The prospect of insolvency of a major market participant requires firms to consider how they manage counterparty credit risk, which intermediated or custodial structures are most appropriate, and whether the tools employed can be reliably enforced in a bankruptcy scenario. Applying existing bankruptcy rules to a new asset class inevitably raises legal characterization and other questions that must be tackled to provide the necessary certainty,” notes the announcement. 

In addition, the association said that the oft-repeated principle “not your keys, not your crypto” seems to imply that fundamental questions settled in the traditional markets may still be evolving or may not exist in the crypto industry, such as “what defines the owner of an asset?” or for “a party that is not the direct owner, but holds an asset indirectly via an intermediary, what is the impact of an intermediary’s bankruptcy?” Specifically, the statement says:

“The FTX collapse indicates that such norms are still evolving (or may not yet exist) in the cryptocurrency markets. When these issues are not well understood by market participants or the risks are not properly managed, unanticipated and significant loss of capital can emerge.”

The publications will deliver standards on close-out netting and collateral and address issues relating to customers’ digital assets held with intermediaries and how they may be held and treated in an insolvency scenario. The papers will also inform legal and documentation needed to establish ownership of digital assets and their use as collateral. 

The ISDA is a private trade association comprising primarily banks that transact in the over-the-counter derivatives market. As part of its work, the association seeks to identify and reduce risks in the markets.

The USDA’s last annual meeting, held in May 2022, had the presence of Sam Bankman-Fried, former CEO of FTX, representing the crypto industry. Featured keynotes at the event included Gary Gensler, chair of the United States Securities and Exchange Commission, and Rostin Behnam, chair of the Commodity Futures Trading Commission.

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