bitcoin ethereum and ripple coins on a black background

The flippening is a hypothetical moment in the future when ethereum, ripple, or another cryptocurrency overtakes bitcoin.

Bitcoin is currently the largest cryptocurrency on the planet, but it’s not impossible to imagine ethereum or ripple catching up.

At the start of 2017, bitcoin had a true monopoly in the world of digital currency. It accounted for 87% of the total crypto market value. By January 2018, that figure had fallen to 33% with ethereum, ripple and others eating into bitcoin’s market share.

Some predict that one of these altcoins (alternative cryptocurrencies to bitcoin) will overtake bitcoin entirely. That future moment is the flippening.

The Rise of Altcoins

While bitcoin dominated the blockchain space for eight years, new cryptocurrency projects were stirring under the surface.

Vitalik Buterin launched Ethereum – a “world computer” which took the concept of blockchain way beyond money transfers. Ethereum became a platform for companies and developers to build anything on the blockchain.

Ripple emerged to revolutionize the way we transfer money between banks and across borders. Ripple’s native cryptocurrency XRP was the fastest growing token in 2017, briefly overtaking ethereum.

These altcoins gained huge media attention through 2017 and rose more than 1,000% in value. The momentum lead many to predict that ethereum and XRP could surpass bitcoin in the coming years.

The Flippening: A Measure of Market Capitalization

It’s worth pointing out that the flippening refers to market capitalization (or market cap), not the price per coin.

For example, XRP is worth just 27c per coin, compared to ethereum’s $195 and bitcoin’s $6,332.

Bitcoin is by far the most expensive coin because there are only 17 million in existence (there are 100 billion XRP tokens and more than 100 million ethers).

Bitcoin, Ethereum and Ripple: Where Do They Stand?

At the time of writing, the top three by market dominance looks like this:

1. Bitcoin – 56%
2. Ethereum -10%
3. Ripple – 6%

chart depicting bitcoin, etheruem and ripple market capitalization
Chart: CoinMarketCap

Through the course of 2018, “the flippening” has moved further away. Bitcoin has re-established its dominance, while altcoins like ethereum and ripple have fallen. This is perhaps because bitcoin is seen as a “safer” haven during the long market downturn.

Could the Flippening Really Happen?

Theoretically, yes. Bitcoin has a number of practical issues that hold it back, not least its transaction speed when compared to other blockchains. There are faster, more efficient projects out there that could, ultimately, become more valuable than bitcoin.

However, bitcoin has one major advantage: reputation. 71% of Americans have heard of it. Could the same be said for XRP?

For most people, bitcoin is the first cryptocurrency they buy. On many of the major exchanges, you have to purchase bitcoin before you can buy an altcoin like ethereum or ripple.

Not only that, but Wall Street is slowly embracing bitcoin. We’ll soon have a bitcoin exchange-traded fund (ETF) and institutional money pouring into the market. That money will go to bitcoin first.

In other words, it’s very difficult to knock bitcoin off the throne, because it’s engrained as the world’s first and largest cryptocurrency.

Ethereum or Ripple?

Let’s say the flippening did happen. Which coin is the most likely to overtake bitcoin?

Ethereum has tremendous practical application. The likes of JP Morgan, MasterCard and Microsoft are all experimenting with the Ethereum system. Others are building dapps, smart contracts and new cryptocurrencies. These projects each require ether as a payment token. As Ethereum grows and develops, the demand for (and the price of) ether may rise higher than bitcoin.

Ripple also has a practical application. Ripple aims to deploy its cryptocurrency, XRP, as a “bridge currency” for banks to transfer money abroad without fees or delays. If the world’s banks opt to use the XRP token, the market cap could soar beyond bitcoin’s. It’s worth pointing out, however, that no bank is yet using XRP beyond a pilot scheme.

Ultimately, Ethereum remains the best candidate if the flipping were to happen, simply because it is easier to buy than ripple. Only a handful of exchanges allow you to purchase ripple with fiat currency (like USD). You can’t buy ripple on Coinbase, for example. Instead, you would have to purchase bitcoin or ethereum before transferring it to another exchange to buy ripple.

The difficulty in buying it means it’s unlikely to overtake bitcoin anytime soon.

Does It Matter?

Ultimately, bitcoin, ethereum and ripple each exist for very different reasons. They are not direct competitors, so comparing them as such doesn’t get us very far.

However, it’s still an important (hypothetical) moment. If another coin overtook bitcoin, it means that particualr coin was being used in a meainstream, day-to-day, practical way. And that’s an exciting prospect for blockchain technology.

ethereum logo on a dark blue background
  • Ethereum futures contracts are expected to launch in the near future via Cboe Global Markets.
  • ‘Futures’ provide an easy way for investors to ‘bet’ on the price of Ethereum.
  • Bitcoin futures (launched in 2017) sent the market to an all-time high, before triggering a 60% reversal.

In December 2017, the price of bitcoin hit a record $20,000. One trigger for this price rise was the launch of a bitcoin ‘futures’ market, introduced by Cboe Global Markets. Cboe is now expected to announce an ethereum futures equivalent.

But what exactly is a futures contract? How will it affect Ethereum and the wider crypto market?

Ethereum futures contract: what is it?

A futures contract allows investors to ‘bet’ on the future price of something.

It’s an easy way to speculate on price rises (and falls) without having to buy the asset itself, in this case, ethereum.

It works like this: you agree to purchase ethereum for a pre-determined price, on a specific date in the future. That price may be higher or lower than today’s value, depending on whether you think ethereum will move up or down.

A real-life example

Let’s say you think ethereum will go up in value. You agree to buy at $290 (today’s price), but you won’t pay until the contract expires in two month’s time.

If ethereum has increased in value when the futures contract expires, you have successfully bought in at a much lower market price.

Most speculative investors close the trade before the contract expires to lock in the profit (or cut their losses) without having to buy the asset itself.

Betting against crypto

Futures trading also allows you to bet against the market.

This is what we saw in January 2018, when the bitcoin price came tumbling down, shortly after hitting a record high. Investors now had a way to ‘short’ the bitcoin market, and they pounced.

bitcoin price chart after futures launched in December 2017
Chart: Coinmarketcap

What will happen to ethereum?

We may see a similar pattern if the ethereum futures market is launched. Investors will have the opportunity to flood into the market with relative ease. However, they may also bet against ethereum, sending the price down.

Good news for bitcoin?

Tom Lee, who recently reaffirmed his bitcoin price target of $20,000+, thinks the move could be good for bitcoin:

“Since December of this year, if one was bearish on any aspect of crypto but did not want to own the underlying, they could short bitcoin. They can now short ether, means the net short on bitcoin in futures would fall.”

In other words, if investors want to bet against the crypto market right now, shorting bitcoin is their only option. If ethereum futures are launched, however, they will also be able to short ethereum, which could take some of the pressure off bitcoin.

More details about the ethereum futures market

Cboe Global Markets, which owns the Chicago Board Options Exchange, was the first exchange to offer bitcoin futures. It harnesses the Winklevoss Twins’ Gemini market to track the underlying price of bitcoin.

The ethereum futures contracts are expected to use the same underlying Gemini market. They will be ‘cash-settled,’ which means they won’t trade ethereum itself. Rather, they will simply track the price and all positions will be closed before the futures contract expires.

We’re still waiting for a green light from the Securities and Exchange Commission (SEC). However, there is a precedent since the bitcoin futures market already exists.

Although the SEC is dragging its heels on an exchange-traded fund (ETF), it is much more likely to pass the ethereum futures market proposal.

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About three years ago, a so-called crypto-anarchist, deep into libertarianism, hired me to write a book that included content railing against government anti-money laundering regulations. As he saw it, there is essentially nothing wrong with financially supporting terrorist organizations,  smuggling drugs or other contraband items. (Hell, there was nothing wrong with terrorism to him; one man’s terrorist is another man’s freedom fighter). People can do what they want as long as they don’t harm others. Drugs and prostitutes (for instance) delight individuals. And, therefore, the government, which, by the way, does a lousy job of literally minding its own business should focus on “minding its own business”.

Five years later and knowing more on money laundering, I think large-scale smuggling and certainly funding terrorists may have more negative social and economic ramifications than my well-meaning friend opined. This is  partly because unrequited criminal laundering turns us into a criminal society – after all why work ethically when we can make far more money in illicit activities. Above all, successful money laundering means more drugs on the streets, more drug-related crime, more fraud, more corporate embezzling, and more terrorism, among a host of other social ills.

What  is money laundering?

money laundering

 

Money laundering, at its simplest, is the act of trying to make money that comes from nefarious Source A look like it comes from “clean” Source B. If caught, the perpetrator can’t use that money, since law enforcement would seize it. Source A involves funding ISIS, smuggling cocaine, engaging in corrupt political businesses, or benefiting from fraudulent business schemes, as examples.

If I were involved in any of these activities and would want to retain my stash, I’d be advised to go through the following three steps:

  1. Placement – Find a place to stash my money. If I wire the trove to my banks Capital One or Charles Schwab, they’d have to tell the government I’m suddenly depositing millions in checks. So I need to find a resilient hiding place.
  2. Layering – Money launderers can teach me all sort of schemes like wiring money between different accounts in different names in different countries, or purchasing high-value items (boats, houses, cars, diamonds) to change the form of my money. I can also change my money’s currency – and this is where cryptocurrency comes in. So, I can change my dirty dollars into Bitcoin and then again into Monero or Dash to better hide its source – now there’s a way to evade the cops!
  3. Integration – At this point, my money re-enters mainstream society as though it comes from a legitimate source. I’ve strategized in such a way that my startling fortune is innocuous and can slip under the radar.

The government’s response to money-laundering

Anti-money laundering regulations

In the United States, the Department of Justice, the State Department, the Federal Bureau of Investigation, the Internal Revenue Service and the Drug Enforcement Agency join forces in catching money-launderers like me. State and local police investigate cases under their jurisdiction. On the international stage (and when it comes to blockchain), organizations like the United Nations, the World Bank, the International Monetary Fund and the Financial Action Task Force on Money Laundering (FATF) send in their troops. The last has 33 member states and organizations, as of 2018.

Cops combine legislation with law enforcement.  In the United States, legislative acts include:

  • The Bank Secrecy Act (1970) – Financial institutions have to report all single transactions above $10,000 and multiple transactions totaling more than $10,000 to or from a single account in one day. When it comes to the blockchain industry, this includes money service businesses (MSB), too. Bankers who violate this rule can serve up to 10 years in prison.
  • The 1986 Money Laundering Control Act – Any aspect of money laundering is a crime punishable by fines or jail.
  • The 1994 Money Laundering Suppression Act – Banks have to establish their own money-laundering task forces to weed out suspicious activity in their institutions. When it comes to blockchain-based financial institutions, customer due diligence (CDD) rules are no different.

In truth, it’s a perpetual chase of cops vs. robbers, with the robbers mostly slipping through even as cops set the traps.

How do AML rules impact ICOs?

ICOs, also known as token sales, can fall foul of anti-money laundering regulations with their digital tokens.  While “utility tokens” that only give investors access to the startup’s features are ok,  it is the “security tokens” that may offer investors equity or some form of an investment return that are problematic.

This is where a growing number of ICOs interest themselves in Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations for reasons that include the following:

  1. Establish credibility with banks – After all, banks don’t want to trip up with organizations like FinCen, a bureau of the U.S. Department of the Treasury, that snoops into whether financial institutions are adhering to KYC.
  2. Long-term legitimacy – It’s good for your bottom line. You don’t want the government to bust your booty as happened in 2014 with Mt. Gox, the largest Bitcoin exchange, after the US Department of Homeland Security (DHS) seized suspicious money from its U.S. subsidiary account.
  3. Improved public perception – You appear more legitimate. You’re more likely to interest investors. The Dutch Authority for the Financial Markets (AFM), for one, warns consumers to avoid ICOs:

“Due to their unregulated status and the anonymous nature of the transactions involved, ICOs are attractive for the laundering of money obtained by criminal means. .. Because of these risks, there is a strong possibility that investors will lose their entire investment.”

With your compliance to KYC/ AML rules, you prove the AFM wrong.

4. Expanded reach – You’re more likely to attract investors in countries with rigid KYC/AML regulations like US, UK and Canada.

5. Avoid Regulatory Fines – There have been cases of regulatory bodies fining or suffocating ICOs that smell suspicious. With the Mt. Gox case, more than 3,000 customers lost some, or all, of their investments. You really don’t want that happening to you! AML in practice?

Our most recent guide to all there’s to “KYC: A  Practical Guide for Blockchain Entrepreneur and Investor” gives you the overall picture.

Really, it reduces to three steps:

  • Identify and do background checks on depositors.
  • Report all suspicious activity. (For example, if a background check revealed that depositor A works in an oil rig, and he deposits $2,000 every two weeks, a series of ten $9,000 deposits over two weeks should worry you.)
  • Build an internal task-force to identify laundering clues.

The rest is up to you.

hand-coin

The process of ‘Know Your Customer’ (KYC) is simple. Say you want to invest in an ICO, you may be particularly anxious that no organizations or individuals connected with or funding criminals and terrorists share the platform with you. KYC also refers to parties involved in other anti-government activities like money-laundering, smuggling, or coming from countries under sanctions. Even if you don’t care, the government does.

There have been stories where funds have been frozen or confiscated while the government inspected the company’s transactions. In 2014 for instance, more than 3,000 customers lost some, or all, of their investments in Mt. Gox, the largest Bitcoin exchange, after the US Department of Homeland Security (DHS) seized money from its U.S. subsidiary account.

I assure you, most token buyers would rather go through the quasi-onerous motions of KYC than have their crypto booty confiscated!

In a similar way, if you’re thinking of running a cryptocurrency exchange, a cryptocurrency ATM, or an ICO, you’d like people who participate in your token sales and incoming funds to be “clean”. Either way, FinCen, a bureau of the U.S. Department of the Treasury, requires ICOs to adopt KYC regulations. Finally, if you’re a money service business (MSB), you’d certainly want KYC to be your rule since banks, large corporations, and public bodies are all KYC-crazy.

As a client, this is what KYC means

Most credible bitcoin exchanges like Bitstamp, Coinbase, or Kraken will ask you to do the following:

  1. Confirm your phone number You’ll enter a code the company sends to your mobile phone.
  2. Provide personal IDYou’ll likely need to attach one or more of the following: a scan of your ID or driver’s license, a recent utility bill, and/ or a copy of your birth certificate or passport. The types of required ID documents depend on the bitcoin exchange and on the amount you want to trade, with larger amounts requiring stricter verification.  

Expect a growing number of ICOs, particularly those that are MSBs, to ask you for some of those documents, too.

Most major platforms verify your identification within one to three hours. Slower businesses may take up to a week.

As a business owner, here’s what KYC means

The process is simple:

  1. Establish customer identity – Collect basic identity documents or data like the following: IP address, name and address validation, citizenship, birth date, a photo of government issued ID (Driver’s License, passport, ID card), Social Security number or Tax Identification, bank statement, recent utility bill.
  2. Understand the nature of the customer’s activities (to satisfy yourself that the source of their funds is legitimate) – Check that they’re allowed to take part in a token sale (e.g., they are not on a sanctions list). IdentityMind Global, a service that offers risk management and anti-fraud services for e-commerce platforms, deals with this problem by comparing a selfie of the individual to the picture in the government issued ID.
  3. Monitor the customer’s activities – As of January 1, 2017, The New York Department of Financial Services (NYDFS) required an ongoing monitoring program that includes checking that the client’s financial transactions and accounts match their risk profile.

Some concerns are that individuals from sanctioned countries could hide their location and buy tokens from US companies. IdentityMind prevents this by looking at the IP address and determining, first, if the prospective clients uses a proxy (and if so, which kind), and, second, if it employs the Tor network or a VPN. If either is used, the application is denied. When it comes to money laundering, IdentityMind imposes EDD for contributors over a certain dollar amount.

EDD: Advanced KYC

There are three tiers of due diligence:

  • Simplified Due Diligence (“SDD”) – Situations where the risk for money laundering or terrorist funding is low, and you only need a partial KYC.
  • Basic Customer Due Diligence (“CDD”) – Information obtained for all customers to verify the identity of a customer and assess the risks associated with that customer. Here’s where you’ll need the complete KYC.
  • Enhanced Due Diligence (“EDD”) – Additional information collected for higher-risk customers to avoid possible risks.

Since this sounds like a lot of work and you have enough on your plate, some ICOs, or blockchain companies, dispatch identifications to third-party KYC providers, who, in turn, send documents to call centers around the world where clerks review information. Other blockchain companies, like data marketplace Datum, seek more confidentiality for their clients and review the data themselves.

Dealing with upset customers

Admittedly, KYC frazzles some people’s moods. Crypto enthusiasts, for instance, tend to disagree with the government’s “interference” ideologically, on the grounds that cryptocurrency should be anonymous, or at least, pseudo-anonymous. Others find the KYC requirements irksome and intrusive.

To modify such customers, you may want to make your requirements clear ahead of time, show how KYC protects investors, and that even if they disagree – “Sorry, guy, but we need this information to comply with FinCen’s Know your Customer requirements.

After all, know thy client saves you and your customers oodles of stress and money.