In this 3-2-1 QnA Session 9, we will discuss about the Regulations for Institutions around Best Execution and Transparency in Liquidity, Regulations coming to centralized businesses before decentralized and FTX-Alameda blow up update. Then we will discuss two twitter threads, first one is Apple Pay is now available to eligible businesses that build with Circle and the other one about Banking giants and New York Fed start 12-week digital dollar pilot. Finally we analyze the FTX hack. Here is what you will be learning about:
Question 1. Best Execution Regulations and Transparency in Liquidity for Institutions. FASB Accounting Update for crypto on treasuries
Question 2. Pete Woodard on regulations coming to centralized parties first and DeFi might
Question 3. FTX- Alameda update and how it does not affect Coinchange
Twitter Thread #1: Apple Pay is now available to eligible businesses that build with Circle.
Twitter Thread #2: Banking giants and New York Fed start 12-week digital dollar pilot
DeFi Exploit Analyzed: FTX got “Hacked”
Question 1. What have we learned the past couple of weeks about Best Execution Regulations and Transparency in Liquidity for Institutions and the FASB Accounting Update for crypto on treasuries?
Answer: Last week we had Stephane from SUN ZU Lab and our takeaway was this: Transparency matters a lot to the institutional players and one of the biggest problems that is stopping the big players from entering this space is lack of transparency in the liquidity of crypto assets. Regulators in traditional markets have some very demanding rules, which is called best execution for liquidity analysis. There is none in crypto and that is what SUN ZU Lab is trying to solve.
Another learning from our interview with Paul McCaffrey from KBW was that FASB the accounting standards board for companies, is updating their rules around holding crypto assets on balance sheet. Currently if a treasury holds a crypto asset on its balance sheet and the price changes during the reporting period, the asset can only be marked down to its lowest value during the period. However very soon they will let treasuries record the fair value of asset meaning the current fair market value. This might be a huge deal and many CFOs of large treasuries held back from buying digital assets due to the current rules around reporting.
Question 2. What are our key takeaways from our interview with Pete Woodard?
Answer: Regulations highly likely coming to centralized parties first and DeFi might be next. DeFi is still operating in a grey area and as such the industry has been self regulating. But there's definitely a focus on bad actors in the space. He also pointed out that stablecoins would be the first to be regulated as there has been a major collapse of Terra Luna’s UST and also because it is very easy for the tradfi regulators to understand stablecoins and its need.
Question 3. What are the FTX- Alameda updates and how it does not affect Coinchange?
Answer: We want to assure you that your funds are safe and not affected in any way by the recent events related to FTX and Alameda. We have a blog article on how this all unfolded which you can read at coinchange.io. Meanwhile, Coinchange has been pushing for transparency. We have started publishing monthly Asset Allocation Reports which show how our users' funds are being used to earn yield. We openly provide our AUM breakdown, list the DeFi protocols and Blockchains we participate in, and inform you what the Coinchange team is working on next. We have a robust risk assessment framework in place and will be working with one of the big 4 accounting firms to attest and verify that it follows financial industry evaluation standards. We are in the process of finalizing our financial audit and will do the attestation of assets very soon. We are having concrete discussions with various DeFi cover providers to protect our user funds in case of black swan events (DeFi hacks, Governance attack, Smart Contract vulnerabilities, oracle attack, economic attack, de-peg event). And most importantly, since the inception we have deployed user funds only in DeFi. We have never allowed any centralized counterparty to borrow our user funds directly. All the assets are strictly deployed on-chain.
Apple Pay is now available to eligible businesses that build with Circle. Customers can quickly checkout using their phones or laptops. Using Apple Pay and Circle's Payments solution, crypto-native businesses can accept payments from non-crypto customers.
Businesses can open a free Circle Account and create an Apple developer account. Their sandbox allows you to test Apple Pay and other payment methods using Circle's Payments solution via easy API integration.
Apple Pay via Circle makes it easy for your customers to pay online and in apps using their iPhone, Apple Watch, iPad, and other supported devices.
Coinchange Take: This can be especially powerful for crypto-native businesses, since it can help them remove the complexity of dealing with cryptocurrency in the place, especially with customers who want to pay using fiat and even enable them to buy crypto with Apple Pay on their preferred exchange. NFT marketplaces, crypto gaming, crypto exchanges, crypto wallets and cross-border remittance providers can help their business grow by making checkout easy with Apple Pay and Circle. As a result of this enhancement, traditional businesses can now transition more of the retail payments to digital currency and take advantage of USDC settlement benefits.
The New York Fed's innovation center is partnering with several major financial institutions such as Citigroup Inc C.N, HSBC Holdings Plc HSBA.L, Mastercard Inc MA.N and Wells Fargo & Co WFC.N to pilot a digital dollar system. The project, called the “regulated liability network”, will use simulated data to test how banks can use digital dollar tokens to speed up payments. Michelle Neal, head of the New York Fed's market's group, has said that the central bank digital dollar has the potential to speed up settlement time in currency markets.
Coinchange Take: Central Bank digital currency has been in the works for quite some time. Some people have concerns that since this digital currency will be programmable and controllable by the FED, it doesn’t fit with the ethos of a decentralized USD stablecoin such as DAI. Similarly a week ago the ECB shared that the digital euro would have Tx limits and saving caps, planned to be ~$3000. For example, they could potentially freeze the CBDCs from a particular wallet belonging to a certain protest group but they could also stop hackers from using stolen CBDCs. And btw, these digital dollars will follow the same monetary policy as fiat dollars. Our hope is that they will co-exist with private stablecoin issuers such as Circle (USDC) and Tether (USDT). What’s going to happen in future is that the Institutional version of DeFi will be built to be interoperable with these CBDCs as well, no doubt about it. Is it good or bad? We will have to see how they program it.
First regarding the whole situation and what happened with FTX, you can read our blog post on the website.
Now regarding the hack:
On Nov 12 FTX and FTX US experienced suspicious withdrawals upwards of $450m. The tokens were sold for DAI, ETH, BNB, & more. The tokens were consolidated into one main wallet 0x59. FTX US General Counsel Ryne Miller clarified these were unauthorized transactions. Tether and Paxos froze assets on Ethereum, Solana, and Avalanche. Those transfers happened after FTX had filed for chapter 11 bankruptcy.
Update 11/20: Assets continued to be consolidated in 0x59 on mainnet using bridges like Stargate or Celer. Assets began to be bridged from 0x59 to BTC using RenVM.
Update 11/21: ETH moved from 0x59 in 12 transactions of 15k ETH.
Now there was confusion at some point because the bahamian government also released a court filing on Nov 17th detailing that they now have control over all of FTX asset in order top safeguard it. The method of doing such transfer is still unknown but it can be supposed that the transfers have been ordered after the chapter 11 filing on Nov 11th. Apparently SBF used a “supposed backdoor” in the accounting software to do this without employees and the new CEO knowing. This same “supposed backdoor” seems to have been used by SBF to comingle clients funds with Alameda Research without employees knowing any of it.
One interesting facts is that the address of the “hacker” was at some point the 35th largest holder of ETH link ; The community has been really reactive in tracking the funds and doing on-chain analysis of the flow while recording the historical changes/update in dedicated websites like Chainabuse.
At this point with the limited information that we have, this hack is a result of lack of compliance, no oversight nor any standard corporate procedures. What we can say is there was absolutely no transparency (lack of proof of reserves) in FTX’s case which was highlighted by CZ from Binance, sparking the need for proof of reserves across all other CEX such as Bitfinex, Gate.io, crypto.com etc. all releasing their proof of reserves within days. Regarding the hack, we have to monitor and see how things unfold. In regards to the impact on the market, right now fear and distrust is on the table, but we can infer that it was the last rotten apple that needed to be discarded after the domino effect of insolvency/bankruptcy that Terra Luna crash sparked back in May. This will ensure that the space grows again on sound foundations that have been continued to be worked on during this turmoil.
This concludes our 3-2-1 Q&A Blog. We’ll see you in the next one, two weeks from now. Meanwhile, kick back and earn passive income using Coinchange. Sign up today!
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