Rehashed - #13 Cryptocurrencies: Regulations and Cross-Correlations
SEC Regulatory Update
A Director from the Securities and Exchange Commission (SEC) made a splash this week with his remarks on regulatory action in the space. It is important to follow regulatory developments in the United States, as they are likely to inform crypto regulatory action across global jurisdictions.
According to the SEC Director’s guidance, as it stands today, Ether is not considered a security under the Howey test. Although the Ethereum Foundation’s sale of Ether was considered an investment contract and therefore a security, the success of the Ethereum network no longer depends on the efforts of a central third party.
Essentially, it boils down to whether a token is “sufficiently decentralized.” This is unlikely to be judged on technical factors such as those measured on ‘are we decentralized yet?’ (amount of nodes etc.) but more upon the basis of what/who is primarily responsible for any expected increase in the value of the token. If token purchasers are expecting a project’s founders/curators to “carry out essential entrepreneurial or managerial efforts”, then the project is likely to constitute a security and would fall under the more rigorous regulatory umbrella of the SEC.
We’ve always been confident that Bitcoin does not fall into this bucket, and similar guidance on Ether is promising for the ecosystem. Yet many ICOs are unlikely to receive such treatment. It’s clear that a majority of ICOs involved the promotion and promise of profits by issuers, whilst lacking any sign of utility from the outset. Unfortunately for these ICOs, the law is likely to catch up quickly (in fact, multiple ICOs have already been subpoenaed over the past few months).
ICOs and their lawyers may still have some wiggle room in court. Based on this recent guidance, the degree to which something is “decentralized” seems totally ambiguous and we are likely to see some interesting arguments play out in court over the next few years.
A Flight to Quality?
Since February of this year, we have been in an interesting period where correlations have been persistently high within the crypoasset class. A quick refresher on correlations- correlation amongst assets is the degree to which they move in tandem. The values range between -1 and +1, where a value of -1 means that the returns move in opposite directions (e.g. BTC up 0.5% and ETH down -0.5%) and a value of +1 means the returns move in the same direction (e.g. BTC up 0.5% and ETH up 0.5%). A value of zero denotes no dependence between the assets.
Anecdotally, the market has largely taken its cues from bitcoin’s price movement. Yet as the following graph indicates, the market is trading in a tighter lock-step than we have seen before. Over the past 3 months, the correlation between the prices of the top 25 cryptoassets by market capitalisation has been hovering around 0.8.
Chart sourced from Cryptorae
This is completely irrational, as cryptocurrencies each have a unique value proposition and multiple variables that should contribute to their valuations. I certainly don’t believe in rational markets but even in a slightly efficient market, variability in quality should be reflected by price and market capitalisation. As the markets mature, I hope and suspect that correlations will unwind and we will see a long overdue flight to quality.
In the News
Bitcoin trading in Venezuela continues to skyrocket. No matter how volatile BTC is, it is better than the 14,000% inflation of the bolivar that IMF has projected.
The highly anticipated EOS network has finally launched.
Former Augur CEO, Matt Liston, has formed a blockchain-based religion, ‘0xΩ.’ Make sure that you pronounce it right, “Zero Ex Omega.”
Fractional ownership in an Andy Warhol painting will be sold via the blockchain this month. A 49% stake in “14 Small Electric Chairs” (worth $5.6M), will be up for grabs; buyers will be able to purchase digital certificates of partial ownership using BTC and ETH.
Ripple concedes that banks aren’t yet ready to use their blockchain.
Ripple decides on a new logo to distinguish XRP the currency.
The financial services industry is spending (USD) $1.7 billion annually on Distributed Ledger Technology.
June 21 - Blockchain Summit Auckland 2018
Thanks for joining, see you next week for Rehashed.
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About the author:
Capital markets to crypto convert. From Christchurch → Boston → New York, Freddie became intrigued by the potential of the digital asset economy after plucking a book on Bitcoin off a New York library bookshelf in 2016. Her parents are thrilled that she is chasing magic money on the internet.
Disclaimer: The above references an opinion and is for informational purposes only. The opinions expressed by the author do not represent the opinion of BitPrime.