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National Bureau of Economic Research Paper Showcases Custody Concerns

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In a new paper entitled “Blockchain Analysis of the Bitcoin Market,” Igor Makarov and Antoinette Schoar of the National Bureau of Economic Research detail the state of Bitcoin. Within the paper, a section on custody piqued the interest of a fintech CEO, as it highlighted concerns upon which he has long expounded.

“It’s hidden, but it’s there,” said Richard Gardner, CEO of Modulus, a US-based developer of ultra-high-performance trading and surveillance technology that powers global equities, derivatives, and digital asset exchanges. “About halfway through the paper, it talks about the current state of custody. Even beforehand, it discusses how, practically speaking, exchanges and wallets don’t often differ in significant ways. Both have a custodial aspect to them, but, if we’re talking about the future of digital assets, I don’t think you can make the argument that custody providers are all that they must be. In fact, it is just the opposite. We must expect much more from custodial services.”

On page ten, the paper notes:

“Cryptocurrency exchanges such as Coinbase, Binance, or Kraken, and on-line wallets such as Blockchain.info and BixIn are one of the major types of entities where Bitcoin can be stored and traded. Exchanges in theory provide platforms to trade Bitcoin against fiat currencies and other coins, while on-line wallets specialize in custodian services. However, in practice, the difference between exchanges and on-line wallets is often slim. Both types of entities in many cases offer both functions.

The paper continues to discuss custody as it relates to Bitcoin ownership, saying:

Determining the concentration of ownership is more complicated than just tracking the holdings of the richest addresses since not all large addresses represent individuals. Many public entities, e.g., exchanges and on-line wallets, hold Bitcoin on behalf of other investors. Therefore, the first step in our analysis is to differentiate between addresses belonging to individual investors and those belonging to intermediaries. When market participants deposit their bitcoins with exchanges or on-line and custodial wallets they forfeit their bitcoins to the exchange. Exchanges usually mix all deposits together and store them in the so-called cold wallets — Bitcoin addresses stored on special devices not connected to the Internet because of security concerns. A given intermediary typically has only a few Bitcoin addresses that constitute its cold wallet but these addresses hold very large balances. For example, the cold wallet of Binance, which is one of the largest cold wallets, holds 300,000 bitcoins as of the end of June, 2021.23 However, not all exchanges have a cold wallet that is as distinct as Binance’s cold wallet. Because cold wallets typically consist of few addresses and send and receive funds only infrequently, the default clustering algorithm in many cases does not link them to the corresponding hot wallets of exchanges. Therefore, identifying cold wallets presents a significant challenge.

“While the paper’s concern is to identify the state of Bitcoin ownership, there’s a more significant custody question. Since the industry’s beginnings, exchanges have been hacked. Many of the losses were due to the exchange’s failure to properly utilize cold storage best practices. When an exchange is in charge of custody, those decisions are made on a macro-level. Custodianship, right now, is an afterthought. There are only a handful of custody providers out there, and most of them have major security concerns,” noted Gardner.

Modulus is known throughout the financial technology segment as a leader in the development of ultra-high frequency trading systems and blockchain technologies. Modulus has provided its exchange solution to some of the industry’s most profitable digital asset exchanges, including a well-known multi-billion-dollar cryptocurrency exchange. Over the past twenty years, the company has built technology for the world’s most notable institutions, with a client list which includes NASA, NASDAQ, Goldman Sachs, Merrill Lynch, JP Morgan Chase, Bank of America, Barclays, Siemens, Shell, Yahoo!, Microsoft, Cornell University, and the University of Chicago.

“All you have to do is read the news. One of the leading vendors for custody services has been mired in a lawsuit which alleges they are responsible for the loss of $70 million in digital assets. $70 million in losses. Is that the company you want keeping your assets safe? It is time that the industry acknowledges that it must adapt. Custody must be prioritized if digital assets are ever to reach their full potential. Custody providers must put security at the forefront. If you can’t keep your assets safe from malfeasance or incompetence, what are they really worth?” queried Gardner.

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Bitcoin

Bitcoin Holds Above $67,000 Amid Trump Win Bets

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Bitcoin is holding above $67,000 after yesterday’s correction after breaching the $69,000 level and rising to its highest level since late July.

Yesterday’s correction comes after an upward trend that investors are pushing to continue in light of a set of supporting factors, whether from the massive inflows into cryptoinvestment products or from more bets on Donald Trump winning the White House again.

Cryptocurrency investment products recorded massive inflows last week, reaching $2.2 billion, which represents the highest level since last July, with Bitcoin accounting for most of these flows that went to US spot ETFs, according to CoinShares. Net flows to these funds amounted to more than $294 million yesterday alone, according to SoSo Value.

This comes with two weeks left until the US presidential election. While the Polymarket betting market indicates that Republican candidate Trump is likely to win with a 63% probability, the betting site has sparked controversy over who is behind the significant increase in Trump bets. In contrast to Polymarket’s results, the poll average indicates that Democratic candidate Kamala Harris is ahead by 48.2% compared to 46.4% for Trump, according to FiveThirtyEight.

While this disparity and fluctuation in polls and predictions is likely to keep cryptocurrencies vulnerable to sharp volatility in the coming days, as the identity of the winner of the White House presidency might shape the future of the industry.

However, the futures market is presenting a mixed story and is questioning the sustainability of Bitcoin’s bullish trend. Bitcoin futures open interest regained its record level of more than $40 billion yesterday, according to CoinGlass, despite the price correction. This correction only resulted in a very small liquidation of the long positions of about $28 million yesterday.

Of that $40 billion, $12.5 billion was on the Chicago Mercantile Exchange (CME), which also represents a new record high for Bitcoin futures on the US’s largest futures exchange. This reflects the increasing involvement of institutional investors in driving price action.

What is concerning is the decline in the long/short ratio from 1.04 on Sunday to 0.94 today, which may reflect increasing bearish bets in futures market, which in turn may indicate a possible reversal of the bullish trend and a renewal of yesterday’s losses soon.

Written by Samer Hasn, Senior Market Analyst at XS

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Binance Expands Crypto Access in West and Central Africa With Mobile Money Integration

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Binance, the world’s leading blockchain and cryptocurrency infrastructure provider continues to drive innovation and expand access to cryptocurrency in Africa, now allowing users in Benin, Cameroon, Ivory Coast, Democratic Republic of Congo (DRC), Togo and Senegal to purchase crypto directly through mobile money payments enabled through local partnerships. 

This new functionality further strengthens Binance’s commitment to providing simple and secure access to cryptocurrency for users across the continent, reinforcing the platform’s vision of financial inclusion.

Samantha Fuller, Spokeswoman for Binance says “We remain focused on advancing financial inclusion and delivering user-friendly solutions for crypto adoption across Africa. This expansion into West and Central Africa is a significant step in our mission to increase crypto adoption, providing millions of people with more direct access to the global digital economy”.

This new service currently supports only BUY transactions, further simplifying the entry point for new crypto users in these regions, while providing them with a reliable and secure platform to acquire digital assets.

How to buy crypto:

  1. Log in to your Binance app and select [Add Funds] from the homepage.
  2. Choose your local fiat currency you wish to use by selecting the currency in the top-right column.
  3. Follow the instructions to complete your crypto purchase.

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Bitcoin Fails to Hold $63,000 Amid Weak Risk Appetite, Growing Selling Pressure

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Bitcoin remains below $63,000 after failing to hold above it over the past two days while Ethereum is also struggling to reclaim $2,440.

The crypto market has been trading sideways since the beginning of this week.

The cautious moves in the crypto market come amid uncertainty over a range of economic and political factors in the US and geopolitics in the Middle East.

Add to that the potential selling pressure that the US government may exert with its permission to sell around 70,000 Bitcoin.

The Supreme Court has allowed the US Marshals Service to proceed with the sale of 69,370 Bitcoins seized from the Silk Road online store, which would be the largest sale of its kind in history. While the nature and pace of this selling is not yet known, it will not necessarily put downward pressure on prices if it is done in over-the-counter (OTC)
transactions, according to Beincrypto.

As for the economic side, in light of the surprise labor market numbers that were much better than expected and Jerome Powell’s hawkish speech, hopes for a rapid continuation of interest rate cuts this year have diminished. While the relatively high rates remain for a longer period and the continued rise in Treasury bond yields will weaken appetite for risky assets in general, including cryptocurrencies.

Whereas, after the hypothesis of a half-percentage point cut at the next November meeting was the most likely, it has now become excluded in the Fed Fund futures market, and the probability of a quarter-percentage point cut has become 87%, according to the CME FedWatch Tool. The remaining 13% is for the possibility of keeping current rates unchanged.

The state of caution may also prevail in the markets in the coming weeks, as we anticipate the presidential elections in the United States, which will begin next month. While the outcome of these elections could cause a structural shift in the crypto industry.

Far away, in the Middle East, markets are still anticipating the nature of the expected escalation in the region, especially regarding the nature of the Israeli response to the unprecedented attack from Iran and the nature of the counter-response. While one of the most prominent scenarios is targeting energy facilities, which would bring inflation back to the forefront, which in turn may require central banks to keep interest rates high.

 

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