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National Bureau of Economic Research Paper Showcases Custody Concerns

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cryptocurrency custodial services

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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Cryptocurrency

YouTube To Explore NFT Features For Video Creator

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American online video sharing and social media platform YouTube has announced plans to explore Non-Fungible Token (NFT) features to help video creators capitalize on emerging technologies.

According to YouTube Chief Executive Officer, Susan Wojcicki, the introduction of NFT is to enhance the experiences of creators and fans on the platform, she said, “we’re always focused on expanding the YouTube ecosystem to help creators capitalize on emerging technologies, including things like NFTs while continuing to strengthen and enhance the experiences creators and fans have on YouTube.”

NFT, Non-Fungible Token is a unique unit of digital assets such as art, music, videos, and pictures built on a blockchain network. They can be bought and sold on NFT Marketplace.

Aside from YouTube, other social media platform has begun exploring NFT. Twitter now allows users to post NFTs as profile pictures while Meta, the parent company of Facebook and Instagram, is reportedly working on a similar offering where users can display the tokens they own.

Susan Wojcicki in an annual letter informed content creators that the company is considering web3, internet service and mobile apps rebuilt on decentralized blockchain technology as a “source for inspiration”.

According to the CEO, YouTube is continuously exploring ways to serve its creators by adding tools like fan payments and e-commerce thereby creating more means of income generation.

In her letter, Susan Wojcicki affirmed YouTube’s priorities on gaming, shopping, music, and Shorts. The CEO wrote that Shorts has already generated 5 trillion views since its debut in late 2020. However, YouTube did not provide additional details on when and what NFT features would look like.

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Bitcoin

Stop Using Bitcoin as Legal Tender, IMF Tells El Salvador

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El Salvador’s Bitcoin Rollout = Investors king

The International Monetary Fund (IMF) has urged El Salvador to drop Bitcoin, the world’s most dominant cryptocurrency, as a legal tender over rising concerns about “financial stability, financial integrity, and consumer protection.”

The Executive Board of the Fund said in a report released on Tuesday after it concluded the Article IV consultation with El Salvador.

The report said “Directors agreed on the importance of boosting financial inclusion and noted that digital means of payment—such as the Chivo e-wallet—could play this role.

“However, they emphasized the need for strict regulation and oversight of the new ecosystem of Chivo and Bitcoin. They stressed that there are large risks associated with the use of Bitcoin on financial stability, financial integrity, and consumer protection, as well as the associated fiscal contingent liabilities.

“They urged the authorities to narrow the scope of the Bitcoin law by removing Bitcoin’s legal tender status. Some Directors also expressed concern over the risks associated with issuing Bitcoin-backed bonds.”

The board, however, said while the COVID-19 pandemic disrupted a decade of growth, “El Salvador is rebounding quickly.” The economy contracted by 7.9% in 2020 and is projected to grow by about 10% in 2021 and 3.2% in 2022, the board said.

“Against this backdrop, public debt vulnerabilities emerged,” the board said. “Persistent fiscal deficits and high debt service are leading to large and increasing financing needs.”

El Salvador became the first country to accept bitcoin as legal tender in 2021 despite the uncertainty surrounding the unregulated coin and the entire crypto space. The government gave $30 in free bitcoins to citizens who signed up for its national digital wallet, known as “Chivo,” or “cool” in English, to deepen its adoption.

However, with Bitcoin and other cryptocurrencies falling with the United States plans to raise interest rates in 2022, the country and citizens that invested in the digital currency could be in trouble.

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Dogecoin

Elon Musk Puts Pressure on McDonald’s to Accept Dogecoin

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Doge and Ethereum -Investors King

Billionaire Elon Musk, the CEO and Cofounder of Tesla, on Tuesday, took to his Twitter page to challenge Mcdonald’s, one of the world’s iconic fast-food restaurants, to accept the popular meme coin, Dogecoin as one of its numerous payment methods across its outlets globally.

The billionaire promised to eat the company’s happy meal on tv if the company accepts the meme coin as payment.

Dogecoin immediately responded to Elon Musk’s tweet with a picture of Mcdonald’s meal containing Kabosu, the dog in the doge meme logo.

This is coming a week after Tesla and Elon Musk announced that the company has started accepting Dogecoin as payment for Tesla’s merchandise. The value of the digital asset surged by 20 percent immediately the billionaire made the announcement via his Twitter handle.

The value of Dogecoin rose by 3.76 percent on Tuesday to $0.1415 a coin, still below its all-time high of $0.7.

Cryptocurrency started falling in early December when it became clear that the US Federal Reserve will raise interest rates in 2022 to curb rising inflation and rein in prices.

According to The Wall Street Journal, the “Federal Reserve officials at their meeting last month eyed a faster timetable for raising interest rates this year, potentially as soon as in March, amid greater discomfort with high inflation.

“Minutes of their Dec. 14-15 meeting, released Wednesday, showed officials believed that rising inflation and a very tight labor market could call for lifting short-term rates “sooner or at a faster pace than participants had earlier anticipated.”

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