Monday, September 21, 2015
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Bitcoin According to Regulators: Money, Currency, Property, and Now a Commodity
Bitcoin is now officially a commodity according to U.S. regulators, Bloomberg Business reports. The Commodity Futures Trading Commission (CFTC) announced on Thursday that it had filed and settled charges against a Bitcoin exchange for facilitating the trading of option contracts on its platform.
“In this order, the CFTC for the first time finds that Bitcoin and other virtual currencies are properly defined as commodities,” notes the CFTC press release.
The U.S. Commodity Futures Trading Commission is an independent agency of the U.S. government created in 1974, which regulates futures and option markets that are subject to the Commodity Exchange Act. By this action, the CFTC asserts its authority to provide oversight of the trading of cryptocurrency futures and options, which will now be subject to the agency’s regulations.
“While there is a lot of excitement surrounding bitcoin and other virtual currencies, innovation does not excuse those acting in this space from following the same rules applicable to all participants in the commodity derivatives markets,” said CFTC’s Director of Enforcement Aitan Goelman.
The CFTC action targets Bitcoin exchange Coinflip, which operated the Bitcoin financial derivatives market Derivabit, and its chief executive officer Francisco Riordan, for “conducting activity related to commodity options transactions without complying with the Commodity Exchange Act (CEA) and CFTC Regulations, specifically, by operating a facility for the trading or processing of commodity options without complying with the CEA or CFTC Regulations otherwise applicable to swaps or conducting the activity pursuant to the CFTC’s exemption for trade options.”
The website derivabit.com hasn’t been active since mid-2014. A September 2014 site snapshot on Internet Archive advertised Derivabit services as “Financial derivatives to manage exposure to Bitcoin volatility – Buy & sell option contracts to control your Bitcoin risk” and listed ongoing trades. Later snapshots just said “Not Currently Accepting Customers,” and the domain was announced for sale on Bitcointalk with the source code in January 2015. More information on Derivabit services is available in this discussion thread on Hacker News.
The CFTC press release notes that Coinflip and Riordan cooperated with the Division of Enforcement’s investigation.
“The cease and desist was a fair settlement,” said Riordan to Bloomberg Business, and added that customer funds had been refunded in July 2014, before the CFTC made contact with the company: “There wasn’t enough trade volume for the site to sustain itself.”
A follow-up Bloomberg Business article lists reactions and comments to the CFTC claim from notable members of the Bitcoin community.
“There are so many regulators in the U.S., and they all want more jurisdiction, which leads to a constant stream of bizarre rulings,” said Bitcoin developer Mike Hearn. “None of them has much work to do because there’s not a whole lot of financial innovation happening in the States. So when they find a small one-man startup they can’t resist giving themselves work to do – so they go in and whack it, especially in California.”
Heard added that he is not terribly surprised and not terribly worried.
“I think the CFTC has a very weak case here and it’s a very creative reinterpretation of what the word commodity means,” he said. “The ruling will be challenged, and judges will apply common sense and decide it to be a currency.”
Some commentators said that compliance with the Commodity Exchange Act and applicable CFTC regulations would be too costly for many Bitcoin startups, with the predictable result that many innovative U.S. companies will be forced to move offshore.
Others, in agreement with Hearn, noted that the CFTC claim is inconsistent with related decisions by regulatory agencies in the United States and other countries.
Journalist David Seaman summarized the situation in a tweet: “To commodities regulators, Bitcoin is a commodity. To bank regulators, it’s a bank. To stock regulators, it’s a stock. Everyone wants ‘in.’”
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Notable Bitcoin Core Contributors Now Open to Increasing Block-size Limit to 2 or 4MB
Although some individuals in the Bitcoin community believed that nothing would come out of the recent Scaling Bitcoin workshop in Montreal, it seems that some progress was made in finding a compromise between the small-block decentralists and the big-block progressives.
Multiple discussions between some of the key minds in the Bitcoin Core development community took place at the event this past weekend, and it seems the overall goal was to find the key areas of agreement between all of the contributors’ wide-ranging points of view. Rumors were originally swirling around a possible implementation of Adam Back’s 2-4-8 block-size limit increase proposal, but it appears that the area of agreement is more general than that.
A Short-term Bump in the Block-size Limit
Instead of implementing a long-term solution as soon as possible, the majority of Bitcoin Core contributors are interested in a short-term fix. When reaching out to Blockstream co-founder and President Adam Back to clarify some of the rumors that were swirling around the Montreal workshop, the longtime applied cryptographer pointed to a short summary of the discussions between Bitcoin Core contributors posted to the bitcoin-dev mailing list by Bitcoin Core Developer Jeff Garzik. In his summary, Garzik noted:
“Many [are] interested or at least willing to accept a ‘short term bump,’ a hard fork to modify block size limit regime to be cost-based via ‘net-utxo’ rather than a simple static hard limit. 2-4-8 and 17%/year were debated and seemed ‘in range’ with what might work as a short term bump – net after applying the new cost metric.”
The 2-4-8 plan is Adam Back’s simple fallback plan of increasing the block-size limit to 2 megabytes now, 4MB in two years, and 8MB in four years. This is similar to Garzik’s BIP 102, which simply increases the block-size limit to 2MB on November 11, 2015. The 17 percent per year plan is in reference to Bitcoin Core Developer Pieter Wuille’s plan to increase the block-size limit in accordance with technological advancements. The 17 percent per year number is based on data publicly released by Cisco on an annual basis.
Avoiding an Endless Block-size Increase
Blockstream co-founder and Bitcoin Core Contributor Matt Corallo also chimed in in regard to the Scaling Bitcoin discussions on the bitcoin-dev mailing list. He noted that there does not seem to be widespread consensus on the idea of a block size that continues to grow over time. He noted:
“Still, the ‘greatest common denominator’ agreement did not seem to be agreeing to an increase which continues over time, but which instead limits itself to a set, smooth increase for X time and then requires a second hardfork if there is agreement on a need for more blocksize at that point.”
More Work to Be Done in Hong Kong
There are bound to be more discussions before the next Scaling Bitcoin event in Hong Kong, but that’s where real proposals can be presented alongside test results based on the guidelines for scaling outlined in the Montreal event. Although some view a small block-size limit increase as nothing more than “kicking the can down the road,” the reality is that more time is needed to fully develop long-term solutions, such as the Lightning Network or flexcap, that could help Bitcoin scale to millions (or even billions) of users over time. For now, it seems that a simple block-size limit increase to 2MB or 4MB is an area where many notable Bitcoin Core developers and contributors have found some common ground.
Kyle Torpey is a freelance journalist who has been following Bitcoin since 2011. His work has been featured on VICE Motherboard, Business Insider, RT’s Keiser Report, and many other media outlets. You can follow @kyletorpey on Twitter.
Coinkite Processes $250 Million in Third Quarter; 10% of Total Daily Bitcoin Transactions
Leading bitcoin platform, multi-sig vault service provider and bitcoin merchant payment processor Coinkite has powered more than USD$250 million over the past three months, processing around 10 percent of the world’s total daily bitcoin transactions.
“It is remarkable what can be done with the right team and bitcoin. We are processing 5 to 10 percent of all bitcoin transactions. Over the past two years that we’ve been in business, we have never lost customer funds. I hear even well-funded competitors are pivoting away from our space due to our unparalleled uptime, security and the feature-rich bitcoin platform that we offer,” announced Coinkite CEO Rodolfo Novak.
Today, Coinkite backs businesses and individuals in more than 180 countries to support, send and receive bitcoin instantly and securely.
Rapid Growth
The bitcoin platform has seen a significant increase in volume since its previous quarter due to its trending multi-signature vault service and the increase in bitcoin sales of its supported startups.
“It’s close to 40 percent increase, and is due to better communication, our unparalleled features, truly enterprise class uptime and a greater volume from startups that had their services providers not be able to cope with their transactions. We even hold funds for some competitors,” the Coinkite team told Bitcoin Magazine.
The Coinkite team further explained that the reason behind the platform’s substantial increase in bitcoin volume is its expansion and diversification of its services. Although the startup declined to disclose the names of bitcoin platforms that are using its services, Coinkite told Bitcoin Magazine that the platform’s bitcoin vault service has been a vital factor of the startup’s success.
Coinkite provided Bitcoin Magazine with an infographic of its enterprise-level services and products. The Coinkite platform connects a user to five services, including web-wallet API for developers, multi-sig wallet, Coinkite co-sign, bitcoin vault and bitcoin exchange platform, providing an all-around bitcoin platform for its users.
HSM (Hardware Security Module)
Coinkite explains that the number of developers using its API has increased substantially over the past few months, after the release of the platforms HSM or Coinkite co-sign, a robust solution to secure and hold bitcoins safely.
“We built the HSMs because we couldn’t find a robust solution for our services over two years ago. It is the only secure and sane way of scaling bitcoin solutions for users and developer’s API,” the Coinkite team said.
Hardware Security Module stores key data in hardware separate from the server. With several tamper-proof security measures, HSM secures bitcoin of its users on the platform by preventing the theft of the keys. In a potential data breach, hackers may obtain vital information from the server, but the safeguards of HSM prevent the hackers from stealing the keys, thus, eliminating a large probability of bitcoin theft.
“Our system is designed in such a way that even if our web servers were to be compromised, the private keys that protect the funds are not stored on those machines. The private keys for your funds are stored exclusively on our custom HSM Hardware Security Module which is carefully isolated from the web servers and the Internet,” said the Coinkite team.
IBM Developing Blockchain Without Bitcoin for Record-Keeping and Smart Contracts
IBM is developing its own version of the blockchain technology and plans to release open-source software within the next few months, The Wall Street Journal reports. The new platform would operate without a native currency like bitcoin and be used to keep track of B2B – business to business, bank to bank, and bank to business – transactions and enforce smart contracts.
The new IBM software platform will permit creating digital contracts that – like bitcoin transactions – would be recorded publicly and securely on a worldwide computer network.
“Blockchain, as a technology, is extremely interesting and intriguing,” said Arvind Krishna, senior vice president and director of IBM Research. ““I want to extend banking to the 3.2 billion people who are going to come into the middle class over the next 15 years. So I need a much lower cost of keeping a ledger. Blockchain offers some intriguing possibilities there.”
Krishna, who previously was general manager of IBM Systems and Technology Group’s Development and Manufacturing organization, leads IBM’s overall technical strategy, overseeing a global organization of approximately 3,000 scientists and technologists located at 12 labs on six continents.
Over the past year, dozens of IBM researchers have been developing their own blockchain-based technology for secure online smart contracts. Krishna said that the project – which is still considered as an experimental project by IBM – could log transactions between banks or international businesses, or even let banks and businesses share the same system of record.
For example, once a Chinese supplier and a U.S. buyer agree that a product had been delivered, a U.S. bank could pay the supplier instantly over the Internet.
The IBM researchers are modifying the original bitcoin ideas to build a blockchain that operates without currency, ensures that contract details remain private and makes it easier for companies to embed business rules into their smart contracts – for example, automatically paying for a package upon delivery.
ExtremeTech notes that this is the first time the concept of blockchain-based smart contracts is backed by a company as large and powerful as IBM. With a track record of successful open-source software solutions, and with its name and reputation behind their blockchain idea, IBM could convince major companies to get on board.
Smart contracts are computer programs that can automatically execute the terms of a contract. In 2001, legendary cryptographer Nick Szabo spoke of smart contracts that solved the problem of trust by being self-executing, and having property embedded with information about who owns it. For example, the key to a car might operate only if the car has been paid for according to the terms of a contract.
Now, Szabo expects emerging “Bitcoin 2.0” smart contracts platforms like Ethereum to have a disruptive impact on financial and legal systems, comparable to that of Bitcoin itself. “[E]ventually more so, since Ethereum’s more flexible and general language can facilitate a much wider variety of commercial and other formal relationships,” said Szabo.
However, according to the scarce information about the IBM project that has been released so far, there seems to be an important difference between Ethereum and the upcoming IBM platform: the concept of “miners” – end users who contribute computing to validate transactions and receive a financial reward in the native crypto-currency carried by the blockchain – would be absent in IBM’s implementation.
Therefore, it appears that IBM wants to go one step beyond the now fashionable concept of permissioned blockchains, where only approved financial operators and governments are allowed to validate transactions, and implement a blockchain without a native crypto-currency, to be used only for record-keeping and smart contracts.
IBM has been doing research on blockchain technology for some time – at CES 2015 it unveiled ADEPT, a system developed in partnership with Samsung that leverages elements of blockchain technology to coordinate a decentralized Internet of Things. In March, Bitcoin Magazine reported that, according to solid rumors, IBM was developing a digital cash and payment system for major currencies, “sort of a Bitcoin but without the bitcoin,” and discussing the project with a number of central banks, including the Federal Reserve, in view of possible adoption by governments.
The new project described by Krishna is unrelated to ADEPT, but it could be related to the rumors reported in March. It’s evident that, if IBM were to become the preferred partner of governments for next-generation fintech based on blockchain technology, the payoff could be huge. It’s unclear, however, how IMB plans to achieve operational robustness and scalability without crowd-sourcing the operations of the blockchain to properly incentivized miners.
Photo Mr Seb / Flickr (CC)
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