SEC Throws Cold Water on Bitcoin ETF Plans

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The US Securities and Exchange Commission (SEC) has thrown cold water on exchange-traded fund (ETF) providers jockeying to list the first bitcoin ETF.

Thought to be a game-changer for cryptocurrency adoption, bitcoin ETFs would provide investors with the ability to obtain exposure to the flagship cryptocurrency through a conventionally-wrapped investment product.

Fund providers have sought SEC approval for cryptocurrency-derived ETFs for years, but the SEC has been reluctant to lend its approval to these products, which would likely be popular among retail investors.

The rush to list a bitcoin ETF intensified following the launch of the first bitcoin futures contracts, as the general consensus among analysts was that the SEC would quickly approve a fund that invested exclusively in futures contracts, which currently trade on two regulated US exchanges.

However, several recent developments indicate that this may not be the case.

Most recently, the SEC sent two investment industry trade groups a lengthy letter outlining a number of “significant investor protection issues” that fund sponsors must answer before the agency will consider approving a bitcoin ETF.

“We believe…that there are a number of significant investor protection issues that need to be examined before sponsors begin offering these funds to retail investors,” Dalia Blass, director of investment management at the SEC, wrote in the letter, which was dated Jan. 18.

Blass said that the SEC was chiefly concerned about the liquidity of the futures markets, as well as how to assign a fair market value to what would be intensely-volatile products. However, she also touched on a variety of other topics, including market manipulation, custodial issues, and arbitrage.

“[T]he innovative nature of cryptocurrencies and related products, as well as their expected use and utility in our financial markets, means that they are, in many ways, unlike the types of investments that registered funds currently hold in substantial amounts. In light of these considerations, we have, at this time, significant outstanding questions concerning how funds holding substantial amounts of cryptocurrencies and related products would satisfy” federal securities laws, Blass said.

Earlier this month, the SEC reportedly asked fund providers to voluntarily withdraw their bitcoin ETF applications, citing some of the concerns outlined in the letter above.

Notably, the agency also pressured the first blockchain-focused funds to remove the word “blockchain” from their names, although these ETFs — which primarily invest in companies experimenting with blockchain technology — were allowed to begin trading this week after complying with this request.

Featured Image from SEC/Flickr

Japan’s Largest Bank to Launch Cryptocurrency Exchange for Its Yen-Pegged Token

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Japan’s largest bank, MUFG, plans to launch its own digital currency and add a cryptocurrency exchange to its growing list of blockchain-related services.

MUFG to Launch Cryptocurrency Exchange

Mitsubishi UFJ Financial Group (MUFG), which also ranks as one of the five largest banks in the world, intends to become the first Japanese bank to open a licensed cryptocurrency exchange, according to a report from The Mainichi, a media outlet based in Tokyo.

Following its launch later this year, MUFG plans to use the exchange as a platform to issue MUFG Coin, a yen-pegged token that will operate on a private blockchain controlled by the bank.

Strictly speaking, MUFG Coin’s value will not be directly fixed to the yen, because Japanese financial services regulations require that transfers of more than one million yen (~$9,000) be conducted through a bank.

Consequently, a crypto-token that was truly pegged to the yen could not operate as a fully-functional currency.

Instead, the bank will “suppress” the price of MUFG Coin on its exchange to ensure that each token is always worth approximately one yen while also retaining the currency’s utility as a payment mechanism.

The report said that MUFG has already informed Japan’s Financial Services Agency (FSA) of its plans to open the exchange and use it to issue MUFG Coin, although the bank has not officially submitted an application for licensure.

MUFG has not revealed what other cryptoassets, if any, will trade on its exchange alongside MUFG Coin.

However, the bank has announced the creation of a custodial service for bitcoin traders. Customers who opt-in to the service will have their holdings placed in segregated accounts that are separate from the exchange’s assets, and these assets will be guaranteed by the trust bank in the event that they are compromised.

Although this service will be available to traders at all participating bitcoin exchanges, it would seem likely that MUFG would seek to integrate it into its own service as well.

Japanese Banks Race to Issue Digital Currencies

Notably, MUFG is not the only bank in cryptocurrency-friendly Japan that intends to issue its own digital currency.

A consortium led by Mizuho Financial Group has announced that they will issue the yen-pegged J-Coin later this year.

Mizuho has said that one of its chief priorities is integrating J-Coin with Alibaba’s Alipay mobile payment platform.

Featured Image from Wikimedia Commons/Rebirth10

Mota Drone Company Explores Blockchain Integration

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California-based Mota drone company wants to use blockchain technology to efficiently manage real-time drone flight data, and to make this information publicly accessible.

The Federal Aviation Administration (FAA) is responsible for regulating drone use in the U.S. and is in the process of developing a system for keeping track of drones in flight. The proposed FAA drone tracking system would require drone pilots to publish their flight data to an online database. While in the air, each drone would be identified and tracked with a unique numeric identifier.

Mota’s Vision

Mota Chief Executive Michael Faro believes all drone flight data should be decentralized, secure and available to the public.

“Think of when we have hundreds of thousands of drones flying in one area at a time. That’s hundreds of thousands of eyes in the sky. No centralized place should have a monopoly over such data,” Faro says. He also thinks any crash data should be auditable. The Mota site states that a decentralized, tamper-proof database and expanding map of drone flights can increase drone safety. Faro explains that the system Mota wants to develop would be “much larger” than the FAA’s; it would be global, multinational and offer “freely accessible” data.

Mota was founded in 2003 and sells recreational drones along with professional models for commercial, agricultural, disaster response, energy-related, industrial and military use. Mota Group filed for an initial public offering (IPO) in October 2016.

In Other Drone News…

Walmart has also been working on using blockchain technology to track drones. It filed a patent in May 2017 for a computing system that would use blockchain to manage unmanned drone delivery data, called, “Unmanned Aerial Delivery to Secure Location.”

While drone regulations are still evolving, in November 2017, the FAA and Department of Transportation (DOT) announced the creation of the Unmanned Aircraft System (UAS) Integration Pilot Program, which invites local, state and tribal governments to participate in developing new nationwide drone regulations.

BlackWallet Hack Nets Thief $400,000 in Stellar Lumens

More than $400,000 worth of Stellar lumens (XLM) were allegedly stolen in connection with the reported hack of wallet service BlackWallet.

Cybersecurity researcher Kevin Beaumont broke the news on Jan .13, explaining that BlackWallet’s domain name service (DNS) server had been compromised in what is known as a DNS hijacking attack.

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Source: Twitter

Simply put, the attack allowed the hacker to redirect the DNS entry of BlackWallet’s domain to his or her own server, which contained a copy of the original website with one key difference: the attacker injected code into the wallet that automatically stole balances greater than 20 XLM.

Consequently, much like the DNS hijack that decentralized cryptocurrency exchange EtherDelta suffered last month, users’ funds were stolen after they entered their private keys into the account viewer.

An individual claiming to be the creator of BlackWallet posted a statement on the Stellar subreddit warning users about the attack, but the thief nevertheless made off with approximately 670,000 XLM, according to Bleeping Computer, worth roughly $419,000 at the present exchange rate.

The creator apologized profusely for the hack and said that the attacker had managed to access the service’s hosting provider account.

“I am sincerely sorry about this and hope that we will get the funds back. I am in talks with my hosting provider to get as much information about the hacker and will see what can be done with it,” the statement read.

He or she added that while the hack only affected users who accessed the fake BlackWallet website, all former users may want to take the extra precaution of using the official Stellar account viewer to move their funds to a new wallet.

The hacker wasted no time laundering the funds following the attack, and at the time of writing approximately 98 XLM remained in the wallet associated with the hack.

The attacker apparently sent at least a portion of the funds to cryptocurrency exchange Bittrex, but it is not currently known whether Bittrex learned of the hack in time to freeze the funds before the thief could launder and withdraw them from the exchange.

Featured Image from Pixabay

Zk-starks White Paper Aims for Zcash-level Privacy Without the Trusted Setup

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A team of researchers has released a white paper for zk-starks, a much-anticipated blockchain privacy technology that has been lauded as a way to achieve zcash-level privacy without the risk of using a trusted setup.

One of the chief criticisms of using public blockchains like bitcoin to store monetary value is that they are the equivalent of making everyone’s bank account records publicly-accessible. Though the data is technically pseudonymous, it is often quite simple for governments and other powerful actors to associate addresses with their owners.

The zk-starks white paper, published on Jan. 12 by a team of researchers led by Eli Ben-Sasson of the Technion-Israel Institute of Technology, represents the latest attempt to use zero-knowledge (ZK) proofs to rectify the need for a public ledger to validate the integrity of the blockchain with the importance of protecting user privacy.

The white paper states:

“Human dignity demands that personal information, like medical and forensic data, be hidden from the public. But veils of secrecy designed to preserve privacy may also be abused to cover up lies and deceit by parties entrusted with Data, unjustly harming citizens and eroding trust in central institutions.”

The gripe with current ZK implementations — the most notable of which is the zk-snark technology currently used by the zcash cryptocurrency — is that they require the creation of a “master key.” The team behind zcash went to elaborate lengths to ensure that this key was not compromised during the launch of the network and was destroyed after its deployment.

However, the problem with such a trusted setup is that there is no way to conclusively verify that the key was destroyed without being compromised by a potentially hostile actor, who could use it to print new units of currency at will. The stakes of this trusted setup only increase along with zcash’s market cap, creating what some would term untenable systemic risk if zcash ever approached mass adoption.

“Public trust demands transparency from ZK systems, meaning they be set up with no reliance on any trusted party, and have no trapdoors that could be exploited by powerful parties to bear false witness,” Ben-Sasson and his co-authors continue, adding that unfortunately “no ZK system realized thus far in code (including that used by crypto-currencies like Zcash™) has achieved both transparency and exponential verification speedup, simultaneously, for general computations.”

Zk-starks (short for a zero-knowledge system that is a scalable and transparent argument of knowledge), if realized, could introduce transparency into the equation while also retaining the blockchain’s scalability.

The white paper includes a proof-of-concept in which police investigators prove that an allegedly-corrupt presidential candidate’s DNA does not appear in the department’s forensic DNA database, without compromising the integrity or confidentiality of either the candidate’s DNA or the database.

However, as the paper notes, zk-snarks are “roughly 1000x shorter” than zk-stark proofs, so more research will be needed to mitigate this problem through shorter proofs or another solution.

Notably, researchers are also exploring ways to implement ZK proofs into Bitcoin. Stanford University’s Applied Cryptography Group, for instance, recently released a white paper for Bulletproofs, a ZK protocol that could be used to increase the privacy of bitcoin transactions without a trusted setup.

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