Wall-Street / Bitcoin news board

Interview: Wall Street Vet Warns of ICE Bringing Bad Banking Practices to Crypto

Caitlin Long is a Wall Street professional with 22 years of experience including running Morgan Stanley’s pension solutions business. Recently, Long wrote an article about the financialization of cryptocurrency by Wall Street entities, describing the new initiative by ICE (owner of the New York Stock Exchange) to launch a new Bitcoin market called Bakkt as a “double-edged sword.”

Long spoke with CCN on financialization in crypto, describing two forms of financialization, one of which improves liquidity through new investors like institutional investors and is beneficial to the space.

“In the good context, liquidity is improving because an asset’s investor base is growing—new investors are coming in, especially institutional investors.”

Cryptocurrency pundits have long been awaiting the arrival of institutional investors with the deep pockets required to bolster the market cap, and with custodianship and other traditional financial infrastructure being put in place that seems to draw ever nearer.

There is, however, a second type of financialization.

Leverage Financialization Mirrors Fractional Reserve Banking

Leverage financialization also improves liquidity, but it does so artificially.

“In the negative context, it means liquidity is improving but it’s coming from the bad kind of leverage—paper claims to an asset that aren’t backed by the asset itself, or “circulation credit” as economist Ludwig von Mises calls it,” says Long.

She goes on to describe a method of creating value out of thin air that since the 2008 financial crisis has become all too familiar.

“The problem is that there’s really no theoretical limit on how much “paper bitcoin” can be created, and paper bitcoin can offset bitcoin’s scarcity—we’ve watched that happen in commodities markets and credit derivatives markets, where paper versions of the asset can suppress the underlying asset’s price by offsetting the real-world scarcity of the asset, such as gold and silver.”

“Bitcoin’s biggest defense is that most bitcoins are stored off the Internet, which will make it hard for Wall Street to source the actual bitcoins and consequently keep a practical lid on how much leverage-based financialization can happen to bitcoin,” she adds.

Caitlin Long@CaitlinLong_

About ICE’s news, when CEO says “bringing transparency & trust to previously unregulated markets” it means he doesn’t understand bitcoin, which is the epitome of . It doesn’t need a centralized institution to bring it trust & transparency! @TraceMayer @BKBrianKelly

Long points to a recent incident with the Hong Kong-based exchange OKEx as a perfect example of how introducing what equates to fractional reserve banking to crypto can go wrong.

“Exhibit A is what happened with Hong Kong-based OKEx this week, where a large futures contract (worth more than $400 million) ended up with such a big loss that it threatened the exchange’s solvency because the loss consumed all of OKEx’s guarantee fund, so the exchange haircut its other customers’ gains in order to stay in business (a “bail-in”),” she said, continuing:

“It’s clear that OKEx was creating unbacked claims to bitcoin, or this could not have happened. A financial institution would only ever need a guarantee fund if it’s creating fractionally-reserved assets. In other words, a financial institution that is fully collateralized—fully backed by the asset against which it creates a paper claim—would never need a guarantee fund. Interestingly, ICE’s press release noted that Bakkt would be starting a guarantee fund as well. So there it is, in plain sight.”

The Wall Street exec went on to point out that fractional reserve banking doesn’t only occur where the Federal Reserve creates money from nothing, explaining how most of the credit created since the 1980s has been created in securities markets, not in the traditional banking system.  Securities market credit is in the form of paper to assets, usually piled on top of other paper claims to assets, just as banking system credit is.

“And this is what I worry will happen to bitcoin—paper claims, piled upon paper claims, piled upon paper claims to the actual bitcoin.”

ICE CEO Doesn’t Understand Bitcoin

NYSE bitcoin
ICE, the owner of the NYSE, is launching a bitcoin market.

Long fears that ICE, the owner of the New York Stock Exchange, will be a key player in the financialization of Bitcoin and other cryptocurrencies, and that the results may not be pretty. ICE will be launching a physically-backed bitcoin futures contract, as well as a full-featured “bitcoin market.”

She didn’t mince words when it came to the statements made by ICE CEO Jeffrey Sprecher, stating that he doesn’t have a good understanding of the cryptocurrency.

“It was odd for the CEO to talk about bringing trust and transparency to Bitcoin, when Bitcoin doesn’t need either because it has already achieved both.”

Long went on to explain that through the Bakkt startup, ICE would try to create liquidity by building exchanges for financial instruments and then collect fees and lend out client collateral in securities lending/repo markets.

“Clearinghouses rehypothecate—lend out—client collateral multiple times, forming long collateral chains in which multiple parties report that they own the very same, single asset. This is one of the ways securities markets engage in a form of fractional reserve banking, and you can’t detect it by reading a clearinghouse’s financial statements because repo accounting allows every party to report that they own the asset—but there’s only one asset!

So, it’s subtle. The devil is always in the details of clearinghouse collateral arrangements, but almost all clearinghouses rehypothecate collateral and I’ll be interested to see if Bakkt plans to do this for its bitcoin collateral,” she concluded. “Net-net, bitcoin holders have real reason to cheer ICE’s entry but also real reason to be concerned about it.”

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Lloyds bank bans bitcoin purchases on its credit card.

The bitcoin ban, starting today (5th February 2018), applies to Lloyds Bank, Bank of Scotland, Halifax and MBNA customers.

Bitcoin ended last week down 30% at $8,291.87 – its worst week since April 2013 and far below the $19,000 it reached last November. However, the cryptocurrency is still ahead of the $1,000 it was trading at this time last year.

Police have warned that digital currencies remain popular among criminals as they can use them to evade traditional money laundering checks and other regulations.

Banking group fears cryptocurrencies’ falling value could leave it with huge debt hence issues directives to its credit owners against buying cryptocurrency.

The ban, which comes into effect today across all of the British banking giant’s brands, will mean cryptocurrency exchanges are blacklisted by the bank, preventing customers from taking on debt to buy the volatile assets.

As said by a Lloyds spokesperson, “Across Lloyds Bank, Bank of Scotland, Halifax and MBNA, we do not accept credit card transactions involving the purchase of cryptocurrencies.”

So, as we know, Britain’s biggest bank has become the first to announce a ban on customers using credit cards to buy Bitcoin amid fears they could run up huge losses.

Lloyds Banking Group will on Monday(today) tell its 9 million credit card customers that it will block any attempts to buy Bitcoin after the digital currency lost more than half its value in just two months.

The ban will not cover debit card transactions but will prevent customers from using credit to speculate on the price of cryptocurrencies amid fears the bubble may be bursting.

Check what this announcement has had an effect on Bitcoin prices: https://www.express.co.uk/finance/city/914520/Bitcoin-price-LIVE-falling-latest-ripple-ethereum-blockchain-lloyds-bank-credit-card

Other British banks are expected to follow suit over the coming weeks after several of the biggest US banks including JP Morgan, Bank of America and Citigroup all confirmed plans to block attempts to buy digital currencies.

A spokesman for Lloyds said the decision was made to “protect customers” in what is thought to be a pre-emptive move to reduce the risks that come with the volatile cryptocurrency.

The news comes amid growing international concerns about how the increasingly popular cryptocurrencies are being used, with fears some people are using them to launder money.

So, is the future of cryptocurrencies still bright?

cryptocurrencies / bitcoinnewsboards

South Korea has no plans to ban cryptocurrencies.

Worldwide, the cryptocurrencies are increasingly into the spotlight. South Korea is nothing that has refrained from commenting. The country has also come up and announced its views, happenings, regulations on cryptocurrencies. Here goes:

Recently, the country has thrown down the gauntlet on cryptocurrency speculation. In the initial days of this week, the country’s Financial Services Commission enacted a series of rules that it hopes will reduce room for cryptocurrency transactions to be exploited for illegal activities such as crimes, money laundering, and tax evasion.

Learn more about South Korea’s problem of illegal activities here: https://www.forbes.com/sites/jessedamiani/2018/01/31/south-korean-customs-reveals-nearly-600m-in-illegal-crypto-trading/#48c8c0c3101d

In the country, a defense sector did come into the picture:

  • The Defense Ministry has reportedly warned soldiers against trading cryptocurrencies.
  • The military may view cryptocurrency trading as a form of gambling as crypto exchanges have gone largely unregulated in the country.

Earlier this month, the government proposed banning all cryptocurrency trading. The move set bitcoin prices plummeting and caused mass panic. But finally, a disclosure is out which concludes that the country has no plans of banning cryptocurrencies but will closely regulate them.

The announcement follows reports earlier this month that the country was considering shutting down trading because of tax evasion (as mentioned above), which led to massive disruption on trading platforms around the world. However, the government does plan to tighten regulation and crack down on illegal practices within the area.

It’s not yet clear exactly how the government plans to tighten regulation, although it has now imposed new rules that stipulate only real-name bank accounts can be used for trading, which it hopes will help tackle money laundering and other crimes.

The FM’s exact words were, “There is no intention to ban or suppress cryptocurrency” and highlighting that the government’s immediate task is to regulate exchanges.

Reinforcing Seoul’s intent to tighten the screws on a market widely seen as opaque and risky by global policymakers, the country’s customs earlier this week announced it had uncovered illegal cryptocurrency foreign exchange trading worth nearly $600 million.

Therefore in conclusion: Rules in South Korea that tackle anonymity and money laundering in the cryptocurrency space take effect this week.  The rules bring greater legitimacy to the cryptocurrency markets and are positive in the long term, market participants say. Plans to introduce regulations in South Korea had spooked investors earlier this month.

Let’s see whether or not South Korea well with the crypto-world.


What is Canada’s say on cryptocurrency?

In Canada, cryptocurrencies can essentially be treated as money, a commodity, or even income. This makes things quite difficult. According to a report by a law firm, the current regulations on cryptocurrencies are not enough and people are struggling to figure out how they should be reporting these transactions.

At the World Economic Forum in Davos, Canadian Finance Minister Bill Morneau said his country isn’t planning on making changes to existing tax code to deal with cryptocurrencies. Rather, the main focus will continue to be on “making sure that we understand what’s going on underneath that market, to make sure that we aren’t introducing any risks into our economy, whether they be risks like money laundering or terrorist financing.”

Right there, in Canada, decade-old tax rules with no specific provisions for cryptocurrencies are being applied to a fast-changing online technology that presents its own complications. The existing system generally considers Bitcoin a commodity, and profits can be either a capital gain (half of which is taxed) or fully taxable income, like a salary. Really, it depends on the facts and circumstances of a particular taxpayer.

On the other hand, the Canadian governor warns people to stay away from virtual currencies saying, “Buyers should beware, it’s much closer to gambling than investing.” He said regulations will eventually come and they will be developing regulations around this space in due course while they’re being careful to do here is to not stifle innovation.

Read the talks with Poloz here: http://blocktribune.com/bank-canada-head-will-regulate-cryptocurrency/

Meanwhile, news like these are running the errands: Fried chicken chain KFC Canada is accepting bitcoin – for a limited time and for a cryptocurrency-themed bucket of chicken, that is. The limited-time marketing move sees the Canada-based chain advertising “The Bitcoin Bucket” complete with a Facebook-based live-tracker of the standing price for the product, which works out to roughly 20 Canadian dollars depending on the exchange rate with bitcoin.

Also, the Canadian government has launched a trial to explore the use of blockchain technology in making government research grant and funding information more transparent to the public.

It has been noted that Canada may soon be able to count itself among the world’s prime cryptocurrency mining destinations. Canada might be able to solve Bitcoin’s energy problem, as cryptocurrency mining becomes more prevalent, mining operations increasingly use more energy.

Let us wait to watch the picture of Canada with cryptocurrencies.