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Cryptocurrency and Blockchain News update 7th October 2019



Former Military Serviceman Uses Crypto On Dark Web For Drugs

A former interpreter for the United States military forces was sentenced to 30 years in jail for dealing fentanyl, which led to the death of a U.S. Marine. Former Iraqi U.S interpreter was sentenced to 30 years in federal prison without the possibility of parole for using the darknet to sell fentanyl The suspect pleaded guilty to the drug charges and acknowledged using the now-defunct online darknet market Alpha Bay to sell a variety of hard drugs, such as oxycodone laced with fentanyl, while accepting payments in cryptocurrencies.

Tether And Bitfinex May Soon Face Legal Trouble

Stablecoin firm Tether and its affiliate exchange Bitfinex are expecting a lawsuit alleging that Tether token (USDT) is involved in market manipulation as the result of an unpublished paper. Tether and Bitfinex published statements claiming that they had become aware of an unreleased paper “falsely positing that Tether issuances are responsible for manipulating the cryptocurrency market.” Both firms argued that findings and conclusions claimed by that unpublished source rely on “flawed assumptions, incomplete and cherry-picked data, and faulty methodology.” Both announcements likewise refer to the paper as “non-peer reviewed

Insurance Market Grows In The Crypto Space

The rapid growth in the popularity of cryptocurrencies has in some ways outpaced the infrastructure built to support it. When it comes to security, cryptocurrency exchanges that serve both as a marketplace and a store of the digital assets have become a key target for hackers. Now that the cryptocurrency market has grown to its current capitalization of more than $200 billion, demand for crypto insurance is gaining traction. Already, big-time insurers are emerging as major players in the market: Lloyd’s of London, a centuries-old insurer with a net worth of $45 billion, partnered with Coinbase last year to provide a $255 million policy in April this year.

Chainalysis Supports New ETH Based ERC-20 Tokens

Blockchain analytics firm Chainalysis has announced the launch of its on-demand compliance and investigations software for several Ethereum (ETH)-based ERC-20 tokens. The company announced in a press release published on Oct. 3 that its Know Your Transaction (KYT) tool now supports tokens such as Basic Attention Token (BAT), DAI, GoldX, Maker (MKR), OmiseGO (OMG) and 0x (ZRX). The firm claims that — with the system in question — it is “helping businesses rapidly meet anti-money laundering/combating the financing of terrorism requirements for new ERC-20 tokens.”

The CEO Of Coinbase Chimes In On U.S. Reaction to Libra

Brian Armstrong, CEO, and co-founder of major crypto exchange Coinbase said in recent days that he expects the United States government to react to China’s stable-coin project by reconsidering its “ridiculous” response to Facebook’s Libra digital currency.  Armstrong said he believes that “the way the U.S. government reacted it’s like they almost want to be left behind.” He went on to talk about his concerns over the United States possibly becoming obsolete due to innovation obstruction.

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Circle CEO says Stablecoins Need Open Standards to Transform Commerce



Circle CEO says Stablecoins Need Open Standards to Transform Commerce

Jeremy Allaire believes that stablecoins offer immense opportunities outside the cryptocurrency industry. The Circle CEO says a set of standards, like those that make near-instant data transfer on the internet possible, is needed for digital representations of fiat value to truly transform global commerce.

Allaire’s company started working on its own stablecoin project in early 2017. As he explains in a recent interview with Messari CEO Ryan Selkis, the company made the decision to move away from Bitcoin in 2016. Allaire says that the Bitcoin-as-a-store-of-value narrative was gaining traction at a time when Circle wanted to focus on tokenized finance.

Working with Coinbase, Circle launched USDC at the end of 2018 as an open standard. This latter point, for Allaire, is crucial if USDC, or any stablecoin, is to transform finance.

Allaire sees stablecoins as much more than a tool to help questionable cryptocurrency exchanges avoid regulatory scrutiny. He also sees them as more than just a means to enable decentralized finance. These “bootstrapped” use cases are just a “step along the way.”

The next chapter in the stablecoin story is adoption of payments and settlements more generally. For this to be successful, standards need to emerge, just like TCP/IP was needed for the internet to proliferate.

To illustrate the concept of standards further, Allaire uses the emergence of Visa. The payment network was actually formed as a result of numerous networks uniting under a single standard to enable the scaling of electronic retail payments. This is the kind of cooperation and interoperability, the CEO says, is crucial for stablecoins to disrupt global commerce.

Allaire thinks that stablecoins will be even more revolutionary than electronic payments were last century. Programmable money, lacking the volatility of assets like Bitcoin, makes all kinds of new financial relationships possible.

Stablecoins Circle

He also welcomes regulatory scrutiny in the stablecoin sector, something which he acknowledges Facebook’s Libra proposals as generating a lot of. On global regulators and lawmakers expressing objections to the social network company’s financial ambitions last summer.

Although clearly not part of the Circle business model anymore, Allaire doesn’t seem to have totally fallen out of love with Bitcoin. He comments that having decentralized, permissionless value transfer networks is important and that Bitcoin is the best example we have of that.

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MIT Research Group Looks Into Testing A Central Bank Digital Asset



MIT Research Group Looks Into Testing A Central Bank Digital Asset
MIT Research Group Looks Into Testing A Central Bank Digital Asset

MIT’s crypto and distributed ledger tech research group, the Digital Currency Initiative, recently explained that a central bank digital currency (CBDC) will eventually use some of the concepts and technology currently at play in the experimental crypto space.

“CBDC should not be a direct copy of existing cryptocurrencies with exactly the same design and features but there are things we can learn from their emergence — the usefulness of programmability in money and the importance of preserving user privacy,” the MIT group wrote in a lengthy report on Jan. 22.

Pointing to the intersection of technology and finance, the MIT group noted that digital value transfer innovation has lagged behind the world’s rapidly growing desire for computerized payment solutions, as partially seen in the e-commerce sector. The crypto space came into existence out of such necessity, the group wrote, which has contained significant trial and error so far in its history, causing authorities to reevaluated money’s current state.

Image result for MIT boston

In the crypto space, much of the ecosystem allows contributions from virtually anyone, making it an open system of development and counterbalance to an extent, while also igniting levels of market competition, the MIT group explained. “The cryptocurrency ecosystem should be viewed as a laboratory where developers are inventing different technologies, monetary policies, governance strategies, and reward systems which are competing,” the group wrote, adding:

“The space is still in its infancy, but make no mistake — successful ideas from this area will eventually find their way into the more conservative world of fiat digital payments.”

The report lists several key takeaways from the crypto and distributed ledger industry so far, including decentralized blockchain consensus protocols, “Atomic cross chain transactions as an example of programmable money,” and blockchain-based privacy methods.

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Crypto Insurance May Soon Become the Norm



Crypto Insurance May Soon Become the Norm

If the crypto sector is to attract more institutional investors, it will need to provide more insurance solutions. This point was driven home anew with the recent news that the Gemini crypto exchange has launched a captive insurance company, Nakamoto Ltd., to insure its Gemini Custody business for up to $200 million — reportedly the largest amount for any crypto custody service in the world.

This new insurer will help Gemini’s institutional clients to meet their regulatory requirements, Gemini’s head of risk, Yusuf Hussain, this “is consistent with Gemini’s approach of being a security-first, compliance-first, and regulatory friendly exchange and custodian.”

Black swan events

The crypto sector badly needs risk transfer solutions, including traditional insurance, and this goes beyond protection from hackers and thieves. It is no secret that the crypto world suffers from continued price volatility and that users could benefit from some protection against market gyrations — whether through traditional insurance carriers or by other means.

Equilibrium, a multichain framework for DeFi products, explained in a white paper: “The crypto community needs a reliable insurance mechanism to ensure users of DeFi projects will get their funds back in case of a black swan event.”

A black swan event needn’t be catastrophic. It could be South Korea deciding to shut down all its cryptocurrency exchanges, for instance, or United States regulators suddenly lowering the hammer on Bitcoin (BTC).

Along these lines, Equilibrium has recently created a “stability fund” to protect the users of its stablecoin, EOSDT, against “extraordinary market events,” which is self-capitalized with 6.5 million EOS tokens, worth about $17.5 million at the time of the fund’s announcement in mid-December.

As Equilibrium CEO Alex Melikhov stated users expect that the price of EOSDT remains stable, saying: “But in an extraordinary market event, the price of all cryptos, including EOS, could plummet.” ESODT users could suddenly find their positions liquidated and liable for a 20% penalty fee due to insufficient collateral. According to Melikhov:

“Should something unusual happen, like a market shock to cause the value of EOS to plummet and the overall system collateral value to drop below the total dollar value of EOSDT supply, our smart contract-based fund can step in and algorithmically ensure that EOSDT users are able to maintain their value.”

Self-capitalized funds

Equilibrium isn’t the only crypto firm to implement a self-capitalized fund for the protection of its users. In July 2018, leading crypto exchange Binance announced that it would allocate 10% of all trading fees it received into a Safe Asset Fund for Users (SAFU), which are stored in a separate cold wallet, to protect users and their funds in “extreme cases.”

An extreme case occurred 10 months later, in May 2019, when hackers stole 7,000 Bitcoins — worth about $41 million at the time. Binance used its SAFU as a kind of emergency insurance to cover the incident.

Proceed with caution

Meanwhile, traditional insurance companies are beginning to dip their toes into the crypto waters. “Over the last two years, insurance carriers have cautiously expanded underwriting appetites to provide coverage for crypto exposures,” according to broker Willis Towers Watson. “But so-called crypto coverage isn’t cheap, and underwriting remains hamstrung by the unsettled and even precarious state of cryptocurrencies as well as the lack of historical loss data.” The broker’s message comes down to: proceed with caution.

More crypto exchanges and custodians are turning to traditional insurers and brokers to secure protection against hackers and thieves. In April, Coinbase revealed details of its $255 million limit insurance coverage for its hot wallet crypto holdings — purchased through a Lloyd’s of London-registered broker. Gemini, for its part, was assisted by major brokers Aon and Marsh in its recent Nakamoto Ltd. launch.

In the wake of last year’s Quadriga scandal, crypto security firm Bitgo announced a $100-million Lloyd’s underwritten policy to cover the digital assets of its custodial clients “where the offline private keys are held 100% by BitGo, Inc.,” per a press release.

“Some insurance companies are further along than others” when it comes to working with the crypto community, Jacob Decker, vice president and director of financial institutions with insurance broker Woodruff Sawyer stated.

He went on to add that most still have to educate their management teams about cryptocurrencies and that it’s not an overnight process. It can take two to three years. That said, more carriers are beginning to write policies today, said Decker, who helped BitGo secure its Lloyd’s policy.

Best use of capital?

Often, exchanges have elected to self-insure by setting aside capital to cover potential losses. There are problems with this approach, however. Setting aside coins that could have been potentially invested is often not the best use of capital, said Lei Wang, head of Huobi’s Global Institutional Center, and risk remains fairly concentrated within the exchange — without access to the reinsurance market. Coverage terms and claiming procedures are often ambiguous, too, due to lack of expertise. Wang stated

“We have currently put aside 20,000 Bitcoin, which could have been put to better use in the ‘Huobi security reserve’ as a fallback protection mechanism in the event of security breach. The funding cost is significant.”

Huobi is interested in exploring other insurance options, Wang explained, including forming a captive insurance entity, in which segregated funds are held in regulated and audited vehicles that could potentially help the exchange get more coverage from the reinsurance market. Wang added that he is “optimistic about the captive insurance option.” Details like standardisation and pricing would still have to be figured out, and even here he had a few caveats:

“Every exchange has different security mechanisms and potential exposure to attacks. It would be difficult to come up with a standard industry pricing model without completely understanding each exchange’s security methods, assuming they are willing to share with competitors. Furthermore, owning insurance may encourage exchanges to reduce investment in security to compensate for the cost of the insurance.”

Insurance has its limits

Not everything can be easily insured, however. Crypto assets held in hot wallets are difficult — and expensive — to insure, and “We can’t insure against Bitcoin going to zero,” added Decker. For a user who is worried about losing their private key, “the best thing may be to go to a speciality vendor who will protect you, a firm that will make you whole.” The retail investor will want to research the reputation of that vendor and its balance sheet before entrusting crypto assets to them.

Insurers need a framework by which to assess and price risk, according to Decker, something the crypto community doesn’t always understand. Who, in the case of exchanges, is the insured’s regulator? Does the firm have a relationship with that regulator? What’s the financial condition of the company? Are there minimal capital buffers? Audited financials? Who is on the management team? Are they experienced? And so on. Decker summarised:

“The evolution of companies dealing in crypto has been extremely rapid. A crypto exchange trading today looks very different from one trading several years ago.”

According to Decker, they often have audited financials, a chief compliance officer, and seek out regulators when issues arise. When regulatory compliance is a priority, businesses are easier to underwrite. Overall, “I feel very positive,” Decker said.

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