Daily market commentary from 02.10.2020

Market commentary

Good Morning!

I am certain that everyone has an opinion on the CFTC charges against BitMEX.

I have tried to break down the facts, and categorise them in terms of what I believe the further implications on the crypto asset ecosystem are.

Two different charges

1. The above mentioned CFTC charges: BitMEX owners are being charged of illegally operating a cryptocurrency derivatives trading platform and violating anti-money laundering laws.
2. The DoJ (USAO-SDNY) has indicted Arthur Hayes, Benjamin Delo, Samuel Reed, and Gregory Dwyer with violating the bank secrecy act. Read the press release here.

We will begin with the response from BitMEX, and then dive into the various possible implications:

Implications for BitMEX and the co-owners

The lawyers I follow clearly distinguish between the CFTC charges and the DoJ charge. For the owners, the DoJ charge is the hefty one. If the judge has a bad day, a person could be charged with up to five years imprisonment. In terms of the CFTC, one should be able to get away with a fine, which is not really an issue for BitMEX. As of now, we know that Samuel Reed has been arrested in his home in Massachusetts. The other co-owners remain at large, but who knows for how long.

Implications on the price of bitcoin

The initial reaction was as expected: the price dropped. This happened quickly, but not very deeply (roughly -2.5%). Altcoins suffered more with some of the other CEX coins, e.g. BNB and FTT lost nearly 10%. Other big altcoins were down between 4-8%. All of them recovered fairly quickly, though, especially some of the DeFi coins such as UNI. To me, this reaction shows that the market has continued to grow up.

Implication for the crypto asset space

Here things start getting difficult to judge, at least for me, since I do not have comprehensive knowledge of US law. Therefore, I need to lean on different tweets from blockchain law experts around the globe. A first good overview, incl. different arguments are summarised in this Decrypt news article.

I believe it is important to distinguish between centralised services (mainly CEXs) and decentralised services (DEXs and various other protocols such as Aave and Yearn). For the CFTC, there are significant differences between the two.

For example:

• DeFi protocols are non-custodial (they never touch users funds)
• DeFi (if truly decentralised) the community (no central party or person) holds “the private key” to the protocol
• CEX (with their central order books) exhibit a large potential for price manipulation attacks
• KYC is mainly an issue for CEXs and VASPs
• AML is an issue for both concepts

In my opinion, this BitMEX blow is more relevant to CEXs and has more negative implications for them. Bitfinex immediately comes to mind. It has been on the US attorney general's radar for years (as has the stablecoin Tether USDT). I am not saying that DeFi is untouchable and does not need to fear regulatory action, but they definitely have more time to address certain regulatory shortfalls. There is a good thread on this from Adam Cochran.

1/25

So a lot of Crypto Twitter doesn't understand why today's news isn't just bad for CeFi but is also bad for DeFi.

It has a something to do with legal nuance and a little something called the "Bank Secrecy Act" (BSA)

Here's a run down for you 👇

— Adam Cochran (adamscochran.eth) (@adamscochran) October 1, 2020

In my mind, it all comes down to what Aaron Wright tweeted:

“For those surprised about BitMEX, the Bank Secrecy Act has always been the third rail for Bitcoin, Ethereum, and Blockchain. Just because blockchain does not have KYC baked in at the protocol level, does not mean services on top will not be required to do so”.

VASPs like us are the ones who need to build the bridge to the DeFi sector and make sure we comply with the regulatory guidance and law to offer those powerful DeFi platforms to our clients. I am confident we will get there, and therefore, I will stay bullish on this sector in the medium to long term.