The Ledger: China’s Bitcoin Ban, Crypto Endowments, Arbitrage bots
China appears poised once again to clamp down on the cryptocurrency industry. But people should welcome, not fear, the proposal.
The National Development Reform Commission, China’s top economic planner, last week recommended eliminating the digital “mining” business altogether, echoing similar guidance the commission published in 2011. The country has dominated this lucrative specialty for the better part of Bitcoin’s history thanks to an abundance of cheap electricity, sourced from coal and hydropower, as well as the presence of a well-established manufacturing base capable of supplying the necessary machinery.
The prospective ban does not come as a surprise. China has been unfriendly to cryptocurrency—the permission-less, public blockchain variety—for a while. It banned so-called initial coin offerings, or ICOs, in 2017. It cracked down on cryptocurrency exchanges that same year. Targeting mining was the nation’s next logical step.
“Even back [in 2017], many miners in China figured they’d be next in the government’s crosshairs,” Juan Villaverde, head of crypto research at Weiss Ratings, tells Fortune. He notes that big cryptocurrency mining operations have had time to put in place contingency plans to move to friendlier jurisdictions. “Even if Chinese miners must shut down, they’ll be promptly replaced by others,” he says. “Moreover, the reduced competition will make mining Bitcoin more profitable for those who remain in the game.”
Industry insiders and academics have long warned that China’s outsized influence posed an existential threat to Bitcoin. In recent years, the country’s mining pools have accounted for roughly three quarters of the compute power devoted to Bitcoin’s network. A ban in China could lead to greater decentralization of the network: More miners based elsewhere.
China has good reasons to consider a ban, including the cryptocurrency trade’s rampant speculation, fraud and energy consumption. No doubt the Communist Party seeks greater control and oversight of the industry, something of a Great Firewall for blockchain. The irony is that, if the country does end up outlawing mining, the move could, ultimately, make Bitcoin and its ilk more global and resilient.
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To the Moon… New York regulators grant Europe's biggest cryptocurrency exchange a BitLicense. Japan's biggest bank has plans for a cryptocurrency exchange and token. JPMorgan Chase crushes earnings. Harvard University's endowment to buy crypto tokens from Blockstack. Western Union is partnering with a blockchain startup. Coinbase debuts debit card in the UK. Relatedly, London may soon beat out San Francisco when it comes to fintech. (Credit Karma is tripling its staff there, by the way.) ConsenSys looks to raise $200 million on $26 million in revenue. Amazon Go stores to accept cash. PayPal board director is a big Bitcoin bull.
…Rekt. New York rejected U.S.-based cryptocurrency exchange Bittrex's BitLicense application. Apparently, the regulatory body found Bittrex customers trading under aliases like "Donald Duck" and "Elvis Presley." Binance is delisting "Bitcoin SV" after its CEO publicly feuded with Craig Wright, the coin's champion and self-proclaimed inventor of Bitcoin. People think blockchain could fix Brexit. Credit card debt is booming in the U.S. European challenger bank N26 faces questions from regulators.
BALANCING THE LEDGER
In lieu of Balancing The Ledger, here's a clip of Fortune's Jen Wieczner moderating a cryptocurrency hedge fund panel at the Token 2049 conference in Hong Kong last month. Alex Sunnarborg, founding partner of Tetras Capital, told her he believed that the markets for Bitcoin were "probably pretty close, in terms of time and price," to bottoming out. Just a couple weeks later, Bitcoin's price mysteriously lurched upward, exceeding $5,000 for the first time in months and leading to some speculators to question whether "crypto winter" is in thaw.
That's the percentage of endowment funds that have allocated to crypto-related investments in the past 12 months, according to a survey of 150 such funds by Global Custodian and The Trade Crypto, two financial trade publications, in partnership with BitGo, a cryptocurrency custodian startup. Only 7% of the respondents said they planned to reduce their allocations in the next 12 months. (Eighty-nine percent of the funds surveyed were American while the rest were either Canadian or British.)
MEMES AND MUMBLES
Garbage BIN. Halifax Bank in the UK appears to have lifted liberally from the marketing materials of Monzo, a challenger bank based in London. Tom Blomfield, chief executive of Monzo, called out the offender on Twitter. "It's great to see your updated brand identity, but it looks like you forgot to update couple of things," Blomfield wrote. "The card in the photo still displays the monzo BIN (5355 22)"—also known as bank identification number—"and the name of one of our staff members... 😉"
FOMO NO MO'
Flash Boys 2.0. Many cryptocurrency boosters have long dreamed about the technology leveling the playing field for financial aspirants. A key part of that vision is the "decentralized exchange," or DEX, a piece of software-based infrastructure that allows people to conduct trades without need for a centralized market-maker, such as a Binance or a Coinbase. But there's a problem with this approach: Traders can easily outbid peers and front-run orders, thereby gaming the system to their advantage, according to a new study from a group of academics out of Cornell University, University of Illinois at Urbana–Champaign, Carnegie Mellon University, and ETH Zurich. Below is a snippet from the paper's abstract; those wishing to dig deeper can read the full 23-page paper here.
Blockchains, and specifically smart contracts, have promised to create fair and transparent trading ecosystems.
Unfortunately, we show that this promise has not been met. We document and quantify the widespread and rising deployment of arbitrage bots in blockchain systems, specifically in decentralized exchanges (or "DEXes"). Like high-frequency traders on Wall Street, these bots exploit inefficiencies in DEXes, paying high transaction fees and optimizing network latency to frontrun, i.e., anticipate and exploit, ordinary users' DEX trades.