Crypto

Learn from Celsius — stop exchanges from seizing your money

Are your coins at risk of being seized by an exchange in the future? Here are some factors to consider related to using centralized exchanges.

Disgraced cryptocurrency lender Celsius Network asked a court this month to return assets to its “custody clients,” but not to its “earn-and-borrow” customers. Wondering how to keep yourself in the former group when the crypto exchange you’re using goes under? Here’s a summary.

What exactly is a “custody client?” It’s similar in principle to a savings account with a traditional bank — often repayable upon demand by the custodian. In this case, it’s Celsius that has a fiduciary responsibility.

This type of account is kept separate from an “earn-and-borrow” account. It includes coins that can be transferred, swapped or used as loan collateral, but they don’t earn rewards. Purchased or transferred coins will go to your custody account. It is estimated Celsius has approximately 74,000 custodian accounts.

In contrast, coins in your earn-and-borrow account will earn rewards but can’t be swapped or used as loan collateral. This applies to stakers and — obviously — borrowers.

The bankruptcy court has scheduled a hearing for Oct. 6. The argument Celsius put forward is that custody clients retained “beneficial ownership” of their coins, so they don’t form part of Celsius’ bankruptcy estate.

*Financial Statement from Celsius Network’s Bankruptcy Filing*

Celsius follows Voyager Digital and Hodlnaut, which, on Aug. 29, were put under interim judicial management — “intensive care” in insolvency speak. And they will not, in my view, be the last during this crypto winter. Crypto carnage is underway, but the question is: What key lessons can be learned from Celsius’ downfall? Are your coins at risk of being placed in the “wrong kind of account” in the future? Let’s examine.

Celsius, founded in the United States in 2017, claimed to have 2 million users across the world as of June 2022. It had raised substantial sums from investors, estimated at $750 million as of late 2021. The company’s business model drew some parallels to a traditional bank — using the concept of fractional reserving — receiving deposits from crypto investors searching for a yield and, subsequently, providing loans to earn a margin, profits if you like. But what factors and events possibly contributed to Celsius’ demise into its unenviable position — the insolvency abyss?

Firstly, it seems as though Celsius’ strategy relied upon a continuous bull market to keep liquidity flowing — more new users depositing on the platform to satisfy the rewards and withdrawals of existing users. A Ponzi-type structure? Perhaps. A strategy orchestrated by leadership — most definitely. They decided to bet on either black or red, compounded by overall poor investment decisions. According to numerous sources, Celsius CEO Alex Mashinsky took control of Celsius’ trading strategy only a few months before its demise, often overruling experienced investment managers.

In addition, it often positioned itself as a high annual percentage yield (APY) provider relative to other decentralized finance (DeFi) platforms — particularly, its CEL tokens, where returns of 20% were being offered. This raises the question as to whether such rates were sustainable in a cyclical downturn. When lending out depositors’ crypto, it seems the risk profile of these borrowers was high — high in reference to credit and default risk. Traditional banks have had decades of experience and data to draw upon and refine their credit risk procedures before lending. I doubt Celsius had the same depth of expertise.

And then came the liquidity crunch came — similar to the run on the Northern Rock bank in the United Kingdom back in the 2008 financial crisis. Because of the concept of fractional reserving, no bank or lending institute is able to simultaneously satisfy withdrawal demands if a proportion of depositors all come calling at once. Celsius recognized this and thus froze withdrawals and trading activity as soon as the alarm bells rang.

On balance, whatever its fate, Celsius has contributed to the development and evolution of crypto and DeFi, akin to inventors whose ingenious inventions just fell short of commercial success. They played a vital role in the process and allowed others to succeed. Valuable lessons can be learned, and the teachings applied.

Further mitigating factors reside in a series of crypto events — Terra’s LUNA Classic (LUNC) and TerraClassicUSD (USTC) crash and the BadgerDAO hack. Celsius had exposure to both, which culminated in a financial impact that punched holes in its balance sheet. Macroeconomic events of rising global inflation no doubt played a part. With a glut of “new money” printed by governments during the pandemic, its increasing velocity through the system coupled with supply chain issues only added more fuel to the crypto speculative bubble and bust.

So, what are three key lessons that can be learned from Celsius’ plight?

Firstly, whether you are a custody or earn-and-borrow account holder, it will come down to the facts — it’s not a matter of choice. While it will almost certainly boil down to a legal determination, in my opinion, the economic substance of your activity should be considered. Even then, I suspect Celsius will argue for a narrow definition of “custody” in this context, and don’t be surprised if there are clawback clauses. They have openly stated their intention to file a plan that will provide customers with an option to remain long crypto.

Secondly, it’s become a bit of a cliché, but the mantra of “not your keys, not your coins” rings true. The risks of custodial wallets are now apparent. Investors whose crypto is locked on a platform are more likely to suffer losses. Under insolvency laws, investors are classified as unsecured creditors, and even if they are a custody client, the probability is they will receive a fraction — if anything at all — of their portfolio value.

Lastly, if an APY reward is too good to be true, then perhaps it is. In Celsius’ case, the problem was compounded by the offering of near sub-zero loan interest rates of 0.1% APY. Simple math suggests its business model was not robust at all.

Only time will tell what emerges from the rubble of this catastrophe. If history is to teach us anything, it is that bear markets are often the catalyst for attention to be focused on innovation and utility — the Web 1.0 and 2.0 dot.com era is testimony to this. Consolidation, mergers and acquisitions are definitely on the horizon, and with it will emerge the new Amazons and eBays of the cryptoverse.

Tony Dhanjal serves as the head of tax strategy at Koinly and is its PR and brand ambassador. He is a qualified accountant and tax professional with more than 20 years of experience spanning across industries within FTSE100 companies and public practice.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Latin America is ready for crypto — just integrate it with their payment systems

Brazil is already leading the globe in cryptocurrency adoption. Integrating crypto with payment providers in the region is a surefire way to see Latin America fully embrace the industry.

Thriving on exploiting users’ data, Web2 monopolies like Facebook and Google have ushered in an era of massive internet centralization in recent years. This concentration of power has enabled huge shares of communication and commerce closed platforms, giving users little control over how their data is collected.

An emerging concept, Web3, will provide a means to pivot from centralization to an open-source internet. A recent report from Andreessen Horowitz (a16z) found that this new digital economy could reach an astounding 1 billion users by 2031. If executed correctly, the decentralized internet will allow users to take control of their data and content.

While Web3 promises to radically change the internet and its ability to provide value to users worldwide, key hurdles must be overcome before it can be adopted en masse.

One major obstacle to mass adoption is the lack of local payments integration that many Web3 projects have. For example, a global Web3 project based in Germany likely doesn’t understand or offer the preferred payment options of people living in Brazil. While it seems tedious, accepting local payment options familiar to customers in their respective regions is a strategic decision that can make an enormous impact in winning market share.

Let’s look at how Web3 projects can scale in Latin America and globally by expanding local payment options.

Understanding local payment preferences

Local payment methods are regionally preferred payment types. These methods include digital wallets, cash vouchers, local debit networks, bank transfers, open invoicing and other tactics used globally to transact in-store and online. Without local payment fluency, Web3 businesses aren’t able to access different markets across the globe.

However, serving an international clientele by accepting local payments is no easy feat as each region subscribes to significantly different preferred payment options and regulatory requirements. Web3 projects often don’t have the proper infrastructure to reach global audiences at scale.

One of the hottest Latin American markets for Web3 projects is Brazil, as its citizens are adopting digital transactions faster than in any other country. Brazil has seen a massive uptake of its national instant payment solution, PIX, implemented by the Brazilian Central Bank in 2020. For Web3 companies to reach this audience, they must forge a way to connect with local banks and stay in line with local regulations.

COVID-19 accelerated digital transformation in nearly every corner of the world. In Mexico, the adoption of SPEI, a real-time gross settlements payment system created by the Bank of Mexico, is rising. Companies can capitalize on systems like SPEI by finding a way to partner with central banks or employing a third party to link to banks for them.

Additionally, the pandemic and the rise of contactless payments highlighted the importance of flexible payment options. Online payment methods are gaining significant traction in Latin America. For example, Mexican convenience store OXXO recently launched a voucher-based banking app that allows users to pay for their utility bills and online purchases that now boasts more than 1.6 million users. Keeping up-to-date with new developments in the payments landscape is vital to serving customers and keeping pace with the competition.

Establishing trust and loyalty

In many countries in Latin America, individuals are eager to embrace crypto in the hope of a better financial future. A recent study found that Latin Americans are the most bullish on crypto compared to any other region worldwide. There is a huge opportunity for the Web3 movement to establish deep trust with Latin Americans as the centralized system has failed them.

Local payments are a gateway to customer acquisition and loyalty. To effectively enter new markets, it is vital to establish quick integration with all relevant currencies. This results in new end-user conversions and higher success rates, which builds loyalty and trust with local audiences.

Enhancing user experience

It is a widely held belief that much work is needed to streamline the user experience in Web3. Regarding Web3 payments, users are looking for fast, reliable transactions in the payment method of their choice. Web3 projects can improve user experience by meeting customers where they are and speaking their language.

Ways to enhance payment user experience include simplifying the onboarding process and providing exceptional customer support. Notifying users every step of the way so that they are confident their payment is being processed will ensure there is no confusion or apprehension.

Web3 is still in its infancy and has some growing pains in its current state. But accomplishing the due diligence required to deepen infrastructure integrations worldwide will open up endless possibilities and, ultimately, transform the ways individuals socialize, transact and consume data.

Holger Arians is the CEO of Banxa, a payment and compliance infrastructure provider to the global crypto industry.

Liquid staking is key to interchain security

Liquid staking allows larger proof-of-stake (PoS) blockchains to help secure smaller ones, conferring benefits to the industry as a whole.

Bitcoin’s genesis in 2009 will probably go down in history as one of the most notable technological events of all time. Demonstrating the first real use case for the immutable, transparent and tamper-proof ledgers — i.e., blockchain — it established the cornerstone for developing the crypto and other blockchain-based industries.

Today, just over a decade later, these industries are thriving. The total crypto market capitalization hit an all-time high of $3 trillion at its peak in November 2021. There are already more than 300 million crypto users worldwide, while forecasts suggest the figure may cross 1 billion by December 2022. Although phenomenal, this journey has merely begun.

Several factors have contributed to the blockchain and cryptocurrency industry’s success so far. But above all, it’s due to certain key features of the underlying technology: decentralization, trustlessness and data security, to name a few. Leading blockchain networks like Bitcoin are pretty robust as such thanks to their proof-of-work (PoW) consensus mechanism. Globally distributed miners secure these networks by providing “hashing” or computational power. Similarly, in the proof-of-stake (PoS) consensus that Ethereum plans to adopt soon, validators secure the network by locking up or “staking” digital assets.

However, the number of miners or validators matters greatly in PoW and PoS, respectively — more miners or validators means greater security. Thus, only the bigger, more established blockchains can benefit optimally from conventional consensus mechanisms. On the other hand, emerging blockchains often lack the resources to secure their networks fully, no matter their innovative potential.

Bolstering interchain security frameworks is one way of solving this rather pertinent problem. Moreover, with innovations like liquid staking, bigger PoS blockchains can help secure the emerging ones, ultimately facilitating a safer and stabler industry overall.

Interchain security matters for blockchains big and small

One might wonder why bigger blockchains would even care to share validators with the smaller ones. Isn’t it about meritocratic competition, after all? Of course, it is, but that doesn’t necessarily mean underplaying the role of interoperability or cross-chain mechanisms. Moreover, if emerging but innovative blockchains thrive, it’ll benefit them and the industry as a whole. And this is the key to blockchain technology’s mass adoption, which is the ultimate goal despite all competition.

PoS blockchains are generally more prone to various majority attacks than their PoW-based counterparts. As Billy Rennekamp of the Interchain Foundation succinctly pointed out, “If one can control one-third of a network, they can do censorship attacks and if they control two-thirds of the network, they can control governance and pass a proposal for a malicious upgrade or drain the community pool with a spend proposal.”

Having said that, over 80 blockchains already use PoS, with more to come in the near future, including Ethereum. This is primarily because of the massive energy consumption and environmental impact of PoW chains. But while this change is welcome, it could cause an industry-wide security crisis without robust measures. If that happens, the industry will lose investors’ confidence, and everyone will suffer, including the bigger chains with well-established PoS networks. Thus, enhancing interchain security is a win-win approach and, indeed, the need of the hour.

Liquid staking optimizes interchain security

So much for the rationale behind interchain security. It is, in fact, already in action, thanks to the Cosmos Hub. However, the journey is far from complete. It’s possible to take interchain security to the next level with innovations such as liquid staking.

For the uninitiated, liquid staking unlocks the liquidity of assets staked (locked up) in PoS blockchains or other staking pools. This is crucial because, otherwise, the staked liquidity remains underutilized. Users cannot use their staked assets in decentralized finance (DeFi), which restricts them from generating optimal yields. By offering tokenized derivatives of these staked assets, liquid staking allows individuals to reap the benefits of staking and DeFi simultaneously. This enables additional utility besides maximizing yield.

If these advantages appear too money-minded to some people, it’s because they overlook a more critical aspect. The mechanism allowing liquid staking protocols to liberate locked values also enhances interchain security. In simple terms, this works by letting validators on established PoS blockchains like Cosmos — aka the provider chain — verify transactions on smaller “consumer” chains. Validators won’t go rogue in the process since that would mean losing the assets they staked on the provider chain.

However, the more specific significance of liquid staking is that it broadens the scope for interchain security. The liquid-staked assets can represent the value of assets staked on any producer chain, which can then be used to share validators with mostly any consumer chain. In other words, what’s currently possible primarily on Cosmos can be widely accessible with liquid staking.

Tushar Aggarwal is a Forbes 30 Under 30 recipient and the founder and CEO of Persistence, an ecosystem of bleeding-edge financial applications focusing on liquid staking.

What will drive crypto’s likely 2024 bull run?

Easing monetary policies, the decline of inflation, the change in Bitcoin’s mining difficulty, and growing confidence in DeFi are factors that point to a renewed surge for crypto prices.

Decentralized finance (DeFi) has seen tremendous growth since its inception, expanding by more than 1,200% in 2021 in total value locked (TVL) and surpassing $240 billion in invested assets. While DeFi has since dropped to around $60 billion TVL as a result of wider macroeconomic trends, such as rising inflation, the seeds are in place for DeFi to reconfigure the foundations of our financial infrastructure when the next market cycle comes.

Historically, the return to a bull market develops over a four-year trajectory. This time, a recovery in 2024 is highly feasible due to the maturation of monetary policy and easing of regulatory headwinds, which can allow for reduced interest rates and enable the flow of funding back into the space.

That bull market is likely to be driven by four factors: the taming of global inflation, renewed confidence in the sustainability of DeFi business models, the migration of at least 50 million crypto holders from the world of centralized exchanges to the world of decentralized applications (there are more than 300 million crypto holders worldwide today, mostly via exchanges), and, potentially, the next change in Bitcoin (BTC) mining difficulty.

Everyone is wondering where users and developers should turn next for opportunities. Is the next cycle going to repeat the 2020 “DeFi summer,” only bigger and with more users?

A shift to economic sustainability

Startup founders can no longer rely on “magic internet money.” What this means is that the market is unlikely to revert to the levels of confidence that allowed DeFi protocol founders to reward early users with large amounts of protocol-generated tokens, thus subsidizing annual yields of more than 100% or even 1,000% on invested capital.

While DeFi protocol tokens will continue to have a role to play, the minting of these tokens is going to be under increased scrutiny. Market participants will be questioning whether the protocol is able to generate enough fees to fund its treasury and eventually retain (or invest) more value than what it is distributing to end-users via inflation or rewards.

Of course, this does not mean that DeFi protocols are expected to be profitable from Day 1. Web3 founders will need to consider the concept of unit economics, borrowed from Web2 and Silicon Valley. This will allow a tech-enabled business model to generate free cash flow in excess of operating and user acquisition costs once outsized early-stage investments are not required anymore.

In the world of DeFi, the concept of unit economics translates into an imperative to achieve capital efficiency for liquidity providers and market makers. Simply put, this means that a DeFi protocol must eventually be able to generate enough transaction fees to reward liquidity providers once it cannot rely on arbitrary protocol token inflation anymore.

What this means for decentralized exchanges

Decentralized exchanges (DEXs), also called automated market makers, have always been at the forefront of DeFi. For example, SushiSwap pioneered the concept of protocol-sponsored early adopter rewards and “vampire attacks” to incentivize liquidity providers to move away from Uniswap.

DEXs have historically not been capital efficient, requiring large amounts of liquidity from liquidity providers in order to power every dollar of daily trading volume in a decentralized manner. As liquidity pools generate low fees per dollar of liquidity locked, they relied on protocol-generated tokens to generate sufficient rewards for liquidity providers.

We are now seeing the emergence of more capital-efficient DEXs in a trend that is likely to be followed by every other DeFi vertical.

For example, Uniswap v3 allows liquidity providers to concentrate their capital to enable trading between specific price ranges only. This allows one dollar of liquidity to enable many more dollars of daily trading volume, as long as the prices stay within that range, and thus capture more transaction fees per dollar invested in liquidity without relying on protocol-generated token inflation.

Another example is dYdX, a decentralized derivatives platform. As dYdX utilizes an order book to match buy and sell orders, it does not require regular users to commit liquidity in liquidity pools and relies instead on much more efficient professional market makers to act as counterparties to end-users.

Capital efficiency is the name of the game

The next wave of DeFi innovation is going to come from founders who are able to design decentralized business models that generate sustainable unit economics for liquidity providers and market makers.

The startups that will create these business models may not even exist today. As a result, we are seeing a proliferation of early-stage Web3 startup accelerators looking for the “next big thing” (for example, Cronos, Outlier Ventures or BitDAO).

In order for DeFi to continue accelerating growth among the next generation of Web3 users, founders and projects will need to continue to build a variety of options with different risk and reward profiles. With an increasing number of interoperable blockchains that offer high throughput and low transaction rates, developers are presented with a diverse array of options upon which to further develop DeFi and yield-generating decentralized applications. As Web3 moves toward a multichain future, competition will help foster innovation in order to deliver the best products for end users.

Ken Timsit is the managing director of Cronos chain and Cronos Labs, the first Ethereum Virtual Machine-compatible layer-1 blockchain network built on the Cosmos SDK.

Powers On… Insider trading with crypto is targeted — Finally!

Powers On… is a monthly opinion column from Marc Powers, who spent much of his 40-year legal career working with complex securities-related cases in the United States after a stint with the SEC. He is now an adjunct professor at Florida International University College of Law, where he teaches “Blockchain & the Law.”

It took a few years, but government crackdowns on “insider trading” involving digital assets have finally arrived. It’s about time! Insider trading occurs often in our securities markets, so it was only a matter of time before crypto and other digital assets would be exploited improperly by miscreants for financial gain.

On June 1, the U.S. attorney for the Southern District of New York announced a criminal indictment against a former product manager of the OpenSea marketplace, Nathaniel Chastain. He is charged with using the confidential information about which nonfungible tokens were going to be featured on OpenSea’s homepage to buy them in advance of that event, and then sell them after they were featured. It is alleged that to conceal the fraud, Chastain conducted these purchases and sales using various digital wallets and accounts on the platform. He is charged with wire fraud and money laundering through making approximately 45 NFT purchases on 11 different occasions between June and September 2021, selling the NFTs for 2x to 5x his cost.

There are a few interesting things to note about the indictment in United States v. Chastain. First, the criminal charges do not include securities fraud. Why? Because while there may be occasions when an NFT sale involves the sale of “investment contracts,” which are one kind of “security” under the federal securities law, it seems here that the NFTs in question did not fall under that categorization. Also, even if some of the NFTs might be “securities,” the U.S. attorney wisely found no need to tack on that added charge, given that wire fraud carries the same prison term. Wire fraud is also easier to prove.

Second, the indictment does not indicate the amount of financial gain Chastain obtained from this purported scheme. Given this, I can only assume it was a relatively small dollar amount, probably less than $50,000.

Third, while a bit esoteric, what happened here is not traditionally referred to as “insider trading,” as the U.S. characterizes it. To most securities lawyers, it is more like a “trading ahead” scheme. Insider trading generally involves the improper advance purchase or sale of a security. Here, the NFTs at issue do not appear to be “securities” and involve the exchange participants trading ahead of market participants.

Finally, it is worth emphasizing that the Securities and Exchange Commission has not brought any complaint against Chastain for this conduct. This validates my thinking that the NFTs at issue in the scheme are not “securities,” as the SEC only has jurisdiction over conduct involving securities.

More interesting is the insider trading case against Ishan Wahi; his brother, Nikhil Wahi; and his close friend, Sameer Ramani, in SEC v. Wahi, et al. On July 21, the SEC filed its complaint in the SDNY alleging that the three realized about $1.1 million in ill-gotten gains from their scheme, which ran from June 2021 through April 2022. It fell apart because of Coinbase’s compliance department, from which Ishan — a Coinbase employee — “misappropriated” confidential information about tokens to be listed on the exchange and traded on them in advance of listing announcements.

Ishan was called by the compliance department on May 11 to appear for an in-person meeting at Coinbase’s Seattle, WA office on the following Monday, May 16. On the evening of Sunday, May 15, Ishan purchased a one-way ticket to India that was scheduled to depart the next day, shortly before he was to be interviewed by compliance. In other words, it seems from the allegations that he was attempting to flee the country! Thankfully, Ishan was stopped by law enforcement at the airport prior to boarding and was prevented from leaving, so he will have his day in court here in the U.S. to explain his conduct and prove his innocence.

The SEC complaint alleges that Ishan was in breach of his duty of trust and confidence owed his employer, Coinbase. He was a manager in Coinbase’s Assets and Investing Products Group, responsible in part for determining which digital assets would be listed on the exchange. He traded ahead of 10 listing announcements involving 25 different cryptocurrencies. Ishan was a “covered person” subject to Coinbase’s global trading policy and digital asset trading policy, both of which prohibited using token listings for economic gain. It is alleged that Ishan tipped off his brother and close friend with details about which cryptocurrencies would be listed, in advance, and that they used the material, nonpublic information to buy these cryptocurrencies.

In other words, the SEC parrots the elements of insider trading in the complaint: purchasing or selling securities based upon material, nonpublic information, in breach of a duty. If the duty by the trader or tipper is owed to the issuer of the securities, like a public company, then what has occurred is known as “classic” insider trading. If the duty is owed not to an issuer but rather to someone else, like an employer, then the “misappropriation” theory of insider trading applies. Here, what is alleged is the “misappropriation” theory in Section 10 (b) of the Securities Exchange Act of 1934 and Rule 10b-5 violations.

In the second part of this column next week, I will discuss the legal development of the misappropriation theory and tippee liability of insider trading and some of the implications of the Coinbase employee case.

Marc Powers is an adjunct professor at Florida International University College of Law, where he is teaching “Blockchain, Crypto and Regulatory Considerations” and “Fintech Law.” He recently retired from practicing at an Am Law 100 law firm, where he built both its national securities litigation and regulatory enforcement practice team and its hedge fund industry practice. Marc started his legal career in the SEC’s Enforcement Division. During his 40 years in law, he was involved in representations including the Bernie Madoff Ponzi scheme, a recent presidential pardon and the Martha Stewart insider trading trial.

The opinions expressed are the author’s alone and do not necessarily reflect the views of Cointelegraph nor Florida International University College of Law or its affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.

Michael Saylor got wrecked, but Bitcoin investors needn’t panic

Cryptocurrency’s real-world utility is growing, users are increasing, and plans are proceeding apace — despite events that have provoked some temporary price challenges.

As cryptocurrency investors know, the market moves in cycles. We had the up-cycle when Bitcoin (BTC) and Ether (ETH) hit their all-time highs, and now the bears are back in town.

One of them mauled MicroStrategy founder and executive chairman Michael Saylor this week. In this case, it was a very powerful bear — Washington, D.C. Attorney General Karl Racine — suing the Bitcoin evangelist for allegedly owing $25 million in unpaid taxes. MicroStrategy’s stock price has fallen more than 13% on the news, from $251 on Aug. 29 to less than $220 on Sept. 1.

Still, now isn’t the time for investors to panic. It’s been roughly three months since the now-infamous crash of the Terraform ecosystem—which ended the greatest bull party known to man—and the sky still isn’t falling. The world isn’t ending, and blockchain is as immutable as ever.

Does that mean industry leaders should stop viewing market downturns as existential threats to cryptocurrency as an enterprise? Perhaps not, considering $2 trillion in value was erased from cryptocurrency’s market capitalization after Terraform’s collapse. Such extreme market events can’t be dismissed as volatile swings that we should expect going forward. Not all the factors playing into them are healthy.

If the previous downcycles bore the brand of things like the initial coin offering (ICO) scams of 2017-18 or the decentralized autonomous organization (DAO) hack of 2016, this one also has a story to tell. This time, it’s that over-reliance on leverage is not good for you. Companies that tried to go too far too fast ended up overextended and now face a moment of reckoning.

Many cryptocurrency projects are inclined to rebuke traditional finance in favor of a new path forward. That mentality should be applauded. Platforms, including Celsius, introduced the prospect that lenders can earn high yields on loans without going through a bank as an intermediary. That idea won’t, and shouldn’t, go away.

Nevertheless, snubbing the old ways doesn’t mean crypto companies can defy the laws of gravity. Failing to assess the risk of default and having a strategy in place for when that happens—because it will happen at some point—doesn’t count as innovation.

That principle far beyond decentralized finance (DeFi) applies across the crypto industry. When hundreds of crypto projects added “metaverse” and related words to their messaging after Facebook rebranded as Meta, serious business people understood it was often another marketing ploy by unserious nonfungible token (NFT) projects looking to capitalize on the hype. Indeed, in January, OpenSea, the largest NFT marketplace in the industry, claimed that a whopping 80% of NFTs minted on its platform for free were fraud or spam.

In the early days of the ICO Wild West, we could accept some degree of this kind of mania as a normal, early-stage phase of new technology. But that can’t be the status quo going forward.

Exchanges like OpenSea don’t have to become like Robinhood to thrive, but they have to employ the same mechanisms legitimate trading platforms use to prevent frauds from taking over. Again, the laws of gravity still apply to the Metaverse, NFT projects and platforms that offer their tokens for trading.

OpenSea users, volume and transactions statistics. Source: DappRadar

That doesn’t put the sole burden on exchanges or minimize what I and others have written about regarding projects themselves bearing the burden of behaving responsibly. Having an actual product is necessary before launching yet another token sale devoid of purpose and a marketing campaign to go along with it.

Indeed, memecoins might yet play a vital role in the industry. But projects that aren’t meant to be the next Dogecoin shouldn’t employ the marketing strategy of the Shiba Inus of the world. Some projects are doing this right, and they are the ones that have a serious shot at succeeding in the next bull run.

Another hurdle the industry must overcome is crypto platforms launching purely to allow investors to trade for other digital currencies. We have plenty of those as it is. Projects that can find other ways of spending crypto will move the industry beyond speculation.

Of course, even these projects must ground their innovative drives in realistic business plans. When we start seeing more of that, perhaps the grand crypto experiment can finally outgrow the fear of extinction every time a crash hits.

The accusations against Saylor, one of Bitcoin’s biggest supporters and an icon among crypto enthusiasts, amid a bear market are a PR nightmare. But crypto investors aren’t going anywhere. It’s time for the projects that are better at product-building than marketing to capitalize on that.

Ariel Shapira is a father, entrepreneur, speaker and cyclist and serves as the founder and CEO of Social-Wisdom, a consulting agency working with Israeli startups and helping them to establish connections with international markets.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Argentina’s Mendoza province now accepting crypto for taxes and fees

The New Mendoza Tax Administration crypto payment service turned on as of Aug. 24.

In another shift toward widespread crypto adoption in Argentina, citizens from the Mendoza Province can now pay government fees and taxes using cryptocurrencies.

In a Saturda statement, the Mendoza Tax Administration (ATM) described the new crypto payment service as fulfilling “the strategic objective of modernization and innovation,” giving “taxpayers different means to comply with their tax obligations.”

The service officially began operation on Aug. 24, but at this stage, it will only accept stablecoins such as Tether (USDT) for tax payments.

Citizens can pay through the portal on the ATM website using any crypto wallets like Binance, Bybit and Ripio.

Once the user chooses cryptocurrencies as their payment option, the system sends a QR code, with the equivalent amount of stablecoins converted to pesos by an undisclosed online payment service provider.

When ATM receives the payment, a receipt is sent to the taxpayer.

Another step toward crypto adoption

The announcement by the ATM is just the latest in a long line of crypto-related adoptions across Argentina.

Mastercard announced earlier this month it would launch a card supporting 14 coins including USDT in Argentina ahead of a wider rollout supporting 90 million online and physical stores.

In April, the country’s capital Buenos Aires unveiled plans to start accepting public financial transactions in crypto.

An unstable economy has seen major adoption of cryptocurrencies, especially stablecoins, which escalated in price after the resignation of Argentina’s economy minister in July.

In emailed statements to Cointelegraph last month, Tether noted that the country has “battled high levels of inflation throughout its history.” Due to the instability of the Argentinian peso, there is high demand for United State dollars, noting:

“Tether has provided a real tool for users facing economic crises in Argentina.”

Since 2016, the country has been in a one-sided battle against inflation, as a lack of trust in the central bank and government spending hit new highs.

Combined with the Argentinean peso’s depreciation, it’s a perfect storm of events that have forced many into the arms of Bitcoin (BTC) and crypto to hedge against inflation.

“USDT allows Argentinians to access a market that is truly global and liberates them from local black markets with highly constrained liquidity resulting in high premiums. It also empowers them to hold Tether in ways that cannot be confiscated by the government, unlike local bank accounts, added Tether.

Despite the market still being deep in the throes of a crypto winter and the central bank stepping in to block coin offerings in May, the country’s citizens continue to turn to stablecoins to help store the value of their savings in USD.

Crypto will become an inflation hedge — just not yet

Crypto can act as protection against inflation, but not until it establishes its fundamentals and achieves mass adoption.

In theory, Bitcoin (BTC) should serve as a hedge against inflation. It’s easy to access, its supply is predictable, and central banks cannot arbitrarily manipulate it.

However, investors aren’t treating it that way. Instead, the cryptocurrency market is mirroring the stock market. Why is that? Let’s dive into what prevents cryptocurrencies from acting as a hedge against inflation, and what needs to happen to make them a hedge in the future.

Crypto could be a hedge, but it comes with inconveniences

Cryptocurrencies present a unique solution, given their lack of a central governing bank. You can’t lose trust in something that doesn’t exist. Its supply is finite, so it naturally appreciates in value. People using a blockchain with proof-of-stake protocols can access their funds at any time, while continuously earning staking rewards on their current balance. This means that the actual value of annual percentage yield is tied to the economic activity on the chain via its treasury and staking reward distribution mechanics. Those properties seem to address the cause of inflation in the traditional monetary systems — but some roadblocks remain.

For starters, let’s examine the reasons why people invest in and hold cryptocurrencies. The majority of cryptocurrency holders see the future potential of those technologies, meaning some of their value is not currently present. They are speculative investments. Decentralization has been achieved by Bitcoin, but its exuberantly high energy costs remain unaddressed, and the majority of mining forces are still aggregated into a dozen mining pools. Ethereum has similar issues with energy consumption and mining pool centralization. Ethereum also has a security problem — more than $1.2 billion has already been stolen on its blockchain this year.

There’s also the issue of decentralized exchanges, or DEXs, which are currently not as fit for use as centralized exchanges. The DEX with the highest transaction volume, Uniswap, offers inefficient pricing compared with a centralized exchange. A simple trade of $1 million in Tether (USDT) for USD Coin (USDC) would cost over $30,000 more in fees and slippage than when executed on a centralized exchange.

These are technical problems that have solutions

Granted, these issues are being addressed. Several third-generation blockchains are tackling energy consumption and decentralization head-on. Privacy is improving. Crypto holders are beginning to accept that their wallets will always be fully traceable, which will prove enticing to new users who have previously been hesitant over blockchain’s hypertransparency. Projects seeking to merge traditional finance’s mathematical rigor with the native attributes of cryptocurrency are tackling the problem of DEX inefficiency.

Mass adoption and integration need to happen before crypto can act as a bulwark against inflation. Crypto has characteristics of future value in an ecosystem that is currently struggling to establish its fundamentals. The crypto economy is still waiting for applications that will take full advantage of decentralization without sacrificing the quality and experience, which is especially important for widespread adoption. A payment system where each transaction costs $5 and the exchanged value is regularly lost will remain unfeasible.

Until the top cryptocurrencies can be used efficiently for real-world payments and decentralized applications provide a similar level of utility as centralized systems, crypto will continue to be treated as a growth stock.

Inflation is caused by a lack of trust — something crypto still needs

Inflation isn’t caused by just printing more money, which is to say that the presence of an asset doesn’t automatically cause its value to go down. Between September 2008 and November 2008, the number of billions of U.S. dollars in circulation tripled, yet inflation went down.

Inflation has much more to do with public distrust of the central monetary system. This lack of confidence — combined with corporate price gouging, the upheaval caused by pandemic relief packages and significant supply chain disruptions (accelerated, in part, by the war in Ukraine) — has landed us in the current crisis. The big money-print of 2021 didn’t cause inflation, but it magnified it.

In terms of presence, the supply of funds alone is not an overly significant issue for a store-of-value currency. What is stored is not necessarily part of the circulating supply. Gold, for example, exists in large volumes in the form of jewelry, bullion and so on, but in much smaller volumes on the commodity market. A market that took into account all the mined gold on earth would have a totally different price. Because this jewelry and bullion are not traded on the market at all, they do not affect the supply-and-demand curve. The same applies to currency.

Wow Year on year inflation in Europe in July. pic.twitter.com/VGWQ1OQOcB

— Arnaud Bertrand (@RnaudBertrand) August 27, 2022

Inflation is the result of a loss of trust that an asset is able to store its value over a long period of time. Most goods in this world are finite, so every party aware of the raised supply but unsure of the monetary policy will automatically factor it into their prices. Inflation becomes a self-fulfilling prophecy.

Crypto as an inflation hedge is possible, but not in the current climate

Cryptocurrencies fail as an inflation hedge during times of high volatility and market uncertainty. That said, they generally excel in steady growth environments where they easily outperform the market and where the relatively small market capitalization compared with fiat currencies plays in their favor as a growth stock. Current solutions to the problem of usability aren’t sustainable due to their speculation-based nature and low transaction volumes. The fall of financially unsound blockchains affects the entire ecosystem, which means that potential long-term solutions keep being derailed by scammers.

The more responsible and diligent the crypto community becomes, the more every sound protocol will benefit, and crypto will become a genuine hedge against inflation. Because cryptocurrencies currently follow growth stock patterns, they act as a good hedge against inflation during periods of stable growth but fail during times of financial crisis. As cryptocurrencies evolve, they’ll become an effective bulwark during these downturns too.

These days, it’s prudent to err on the side of caution when it comes to crypto investing during periods of market turmoil, and it would be unwise to use crypto as the only tool for shoring up investments against inflation. But this will shift as blockchain protocols continue to mature, and we’ll see an increase in the adoption and stability of cryptocurrencies as inflation hedges. The tools are already in place.

Jarek Hirniak is the founder and CEO of Generation Lambda and a certified quant with more than 20 years of software development experience. He spent six years working on trading systems at Citadel Securities and UBS, where he developed a series of novel trading systems and trading-related software platforms while leading multidisciplinary teams.

The opinions expressed are the author’s alone and do not necessarily reflect the views of Cointelegraph. This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice.

Thai SEC approves four crypto firms despite Zipmex woes

Thailand’s regulators are still approving crypto companies despite one of its largest ones suspending withdrawals.

Thailand’s financial regulator, the Securities and Exchange Commission (SEC), has approved four more crypto companies in the Kingdom.

On Thursday, it was reported in local media that the SEC had granted operating licenses to four more digital asset operators.

These include Krungthai XSpring, a crypto broker affiliated with one of the country’s leading banks, and crypto exchange T-BOX Thailand. Also winning regulatory approval was crypto advisr and fund manager Coindee and Leif Capital Asset Management, which also manages funds.

The four firms have yet to commence operations, however, as the regulator still needs to inspect their operations.

Thailand now has 21 fully regulated digital asset operators comprising nine exchanges, nine brokers and three fund managers. Thailand’s military-backed government has been largely tolerant of cryptocurrencies despite the central bank’s efforts to restrict them.

The report noted that another major player is waiting to enter the burgeoning Thai crypto market. Gulf Innova and Binance Capital Management aim to launch the jointly owned “Gulf Binance” crypto exchange and brokerage.

Crypto volumes in Thailand surged almost 600% in early 2021 as the bull market was building momentum.

The move comes amid turmoil regarding the Singaporean exchange Zipmex, which also operates in Thailand. Late last month, Zipmex Thailand suspended withdrawals for customers in the country using its Z Wallet. Shortly after, the SEC launched a hotline for Zipmex customers to submit details on their losses.

On Monday, the SEC launched an investigation into Zipmex, claiming the company may have violated trading rules by suspending withdrawals. It stated that the firm cited inadequate reasons for such actions as “market fluctuations.”

The regulator ordered the firm to resume trading operations, and by Tuesday, Zipmex had resumed withdrawals for Solana (SOL) and Ripple (XRP) the following day, as reported by Cointelegraph. Withdrawals of larger assets such as Bitcoin and Ether (ETH) remain suspended, as are withdrawals from its ZipUp+ service.

On Thursday, the firm tweeted that it was committed to resuming all services asap.

We are committed to resuming all services on the Zipmex platform ASAP and to rebuild confidence and alleviate customer concerns.

To read more, click https://t.co/J7IVjWsq6N pic.twitter.com/tfZ4lhjXVf

— ZIPMEX (@zipmex) August 4, 2022

Zipmex was caught up in this year’s crypto contagion due to its exposure to Celsius and Babel Finance. On Wednesda, Zipmex Thailand CEO Akalarp Yimwilai said that its parent company in Singapore had injected $5 million to compensate for the Celsius losses.

The battle between crypto bulls and bears shows hope for the future

Bitcoin traded below its mining cost basis in June, DeFi experienced a 33% decline in TVL, and mid-month weekly BTC options peaked to their highest on record.

The blockchain space is seeing some areas of strength despite the perceived downturn in the market. The perpetual futures funding rates for Bitcoin (BTC) and Ether (ETH) have flipped back to positive on major exchanges, which shows bullish sentiment among derivatives traders. In addition, Bitcoin started trading below its cost basis, which has marked previous areas of market bottoms. In contrast, June saw decentralized finance (DeFi) experience a 33% decrease in total value locked and crypto stocks provide a -42.7% average month-over-month return.

There is an ongoing battle between bullish and bearish sentiments in different areas of the market. To help cryptocurrency traders maneuver through the battlefield, Cointelegraph Research recently launched its monthly “Investor Insights Report.” In the report, the research team breaks down the past month’s top market-moving events and the most critical data across the various sectors of the industry. The researchers provide expert analysis and insights that can benefit serious blockchain market participants.

Derivatives may provide a key indicator of changing sentiments

Leading up to June, there had been a strong bearish sentiment in the market. One indicator of bearish and bullish sentiment is the volatility skew of a market. The larger the skew range, the more volatile, while tighter ranges suggest less volatility — which implies more confidence in the market. On June 18, the Bitcoin options 25-delta skew peaked at 36%, the highest ever on record. Since then, some optimism has returned, sending the skew down to 17%. This signals a strong belief that the crypto market will rebound over the next few months.

Premiums on long calls on Bitcoin and Ether indicate that traders are optimistic about the end of the year. However, solvency issues and the risk of contagion are still present in the market and the minds of investors and regulators.

In sideways markets, traders can use strangles to generate returns if Bitcoin stays range-bound. Strangles involve selling puts and calls at different strike prices. The idea of a strangle is like the name implies: placing a put (an option to sell) and a call (an option to buy) below and above the current spot price. For example, if Bitcoin is at $20,000, first sell a put at $15,000 on the downside and a call at $30,000 on the upside. If they expire after a month, the premiums result in the gains minus the transaction fees.

Download and purchase reports on the Cointelegraph Research Terminal.

Currently, the options skew has a steep slope, with an implied volatility differential of up to 10% between the $17,000–$24,000 strike prices on Deribit and the Chicago Mercantile Exchange. This indicates a good setup for a risk reversal involving a short put at $17,000 and a long call at $24,000.

Is bullish sentiment starting to push bears back?

Bitcoin’s net unrealized loss has hit a three-year low, highlighting that its current market value is nearly 17% lower than that of its aggregate cost basis. Historically, global bottoms have formed when losses hit over 25%. The downsloping moving averages and the relative strength index in the oversold zone indicate that bears are in control.

However, for the first time since March 2020, Bitcoin traded below its mining cost basis, a level that has historically marked global capitulations and bottoms in the price of Bitcoin. The net unrealized profit/loss indicator is more evidence that the bulls may potentially be overtaking the bears.

From derivatives to the NFT sector

The Investor Insights Report covers various other topics such as security tokens, DeFi, blockchain gaming, cryptocurrency mining, blockchain-related stocks, regulation and venture capital investments. The subject matter experts stay up-to-date on all the latest news and trends to cut through the weeds and provide essential insights into the blockchain industry.

Each section of the report covers important elements impacting the topic. Subject matter experts cover the most important happenings that will have a significant impact, and the information is presented in a digestible format that serious participants in the crypto marketplace can use to get an overview, highlights and a forecast for what may be on the horizon. The newsletter is now available for subscription and features complete charts and detailed analyses.

The Cointelegraph Research team

Cointelegraph’s Research department comprises some of the best talents in the blockchain industry. Bringing together academic rigor and filtered through practical, hard-won experience, the researchers on the team are committed to bringing the most accurate, insightful content available on the market.

Demelza Hays, Ph.D., is the director of research at Cointelegraph. Hays has compiled a team of subject matter experts from across the fields of finance, economics and technology to bring to the market the premier source for industry reports and insightful analysis. The team utilizes APIs from a variety of sources in order to provide accurate, useful information and analysis.

With decades of combined experience in traditional finance, business, engineering, technology and research, the Cointelegraph Research team is perfectly positioned to put their combined talents to proper use with the Investor Insights Report.

Disclaimer: The opinions expressed in the article are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product.