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21. 23/01/2019 12:17
What We Learned in 100 Crypto Talks With Institutional Investors

Through meetings with over 100 institutional investors over the past four months from California to New York, one thing has stood out most − an overwhelmingly positive response.

These endowments, family offices, pensions and other institutions are enthusiastic about crypto assets despite an overall pullback in crypto valuations upwards of 75 percent from their all-time highs.

This is remarkable.

Though the majority of these investors want to dip their toes in the crypto pool, they come from varying backgrounds and have different levels of knowledge:

  • Those just beginning their crypto educational journey
  • Those that didn’t have a “crypto specific mandate,” but are evaluating crypto managers in the same way they evaluate all emerging fund managers
  • Those that are well versed in crypto, and considering an immediate allocation.

Not surprisingly, each category of investors had different questions and goals.

The ‘Beginning’ Investors

Learning a new industry can be daunting.

The typical learning curve looks something like this:

  • Phase I: The first time you hear about blockchain or crypto –> Skepticism
  • Phase II: You spend the next six months researching and learning –> Optimistic but confused
  • Phase III: You spend the next 12 months going deeper down the rabbit hole until you want to dedicate the next 20 years to this new technology –> Passion and full adoption

Most investors considering digital assets are somewhere between “Phase I” and “Phase II” and, even if they weren’t thinking of allocating, it was not uncommon to hear some variation of “crypto is hard to ignore right now.”

Two points resonate universally with this group:

  • You’re 100% long the financial system right now! Even if you moved to 100 percent cash across all of your investments, you are still 100 percent long the financial system (via the banking system). As we saw in the 2008 banking crisis, 2011 European sovereign crisis and the 2018 emerging market currency crisis, there is systemic risk out there that investors want to hedge against. Crypto offers investors exposure outside of the traditional financial system, and many argue it is actually more dangerous NOT to have some exposure to crypto than it is to have a small allocation.
  • Crypto is both an asset class and an infrastructure. As an asset class, there are opportunities today to participate in the growth of emerging technologies. The pie is growing even as prices collapse and, with enough research, you can figure out which slices of the pie to grab.As an infrastructure, you have time to wait. But you’ll want to familiarize yourself today because one day soon, every asset class you own may be represented in digital asset form (equities, fixed income, real estate, hard assets). Viewing the utility of cryptocurrencies through price alone misses the fundamental revolution. Cryptocurrency and blockchain have uses far beyond price.

What matters most is understanding how crypto assets can meet their goals and fit within their risk tolerances, as well as how it fits as a smaller piece of an overall balanced and diversified portfolio.

Understanding every nuance is secondary. For example, most investors who invest in healthcare equity funds don’t fully understand Medicare reimbursement, hospital admissions and patent processes. Instead, these investors know enough to recognize that they want exposure to healthcare, and then hire experts to express the individual views for them.

This is likely what will happen in crypto.

The ‘Traditional Hedge Fund Due Diligence’ Investors

Investors in this camp spend most of their time seeking out strategies that expose them to the potential upside while limiting downside risk:

This is what most often gets their attention:

  1. Don’t focus on how high it can go; focus on how low it can go. A good fund manager in any asset class tries to capture most of the upside, while ensuring that downside risk is mitigated. This is an especially important message for investors to hear in crypto, since most of what they see and hear strictly focuses on outlandish return potential.
  2. DO NOT short this market today. I’ve spent my entire career trying to isolate idiosyncratic risk and removing market risk through cap structure arbitrage trades and long-short trades, but this strategy does not yet work in crypto for a variety of reasons (asymmetric upside, low liquidity, high costs, etc). As such, the best hedge today is simply not to own a token that you don’t like. Currently, the best way to protect against the downside is by sizing positions correctly according to risk/return profiles, taking chips off the table when this equation is no longer favorable, and using derivatives to hedge tail risk.
  3. A top-down AND bottom-up approach. Active management matters in crypto, perhaps more than in any other asset class, because of the large swings and bifurcations between top performers and underperformers. Understanding the macro landscape (top down) while simultaneously searching for value (bottom-up approach to security selection) is how to take advantage of current market conditions. Few investors want to hear about best ideas because they are not ready to execute them on their own − but they do want to understand the process.

Conversely, the biggest pushback from this group is that the underlying asset class itself is still so new, and it’s hard to invest in something that has unknown tangible value. But it’s important to remember that many asset management strategies can work on top of any underlying asset class. For example, there are managed futures funds that focus on very esoteric underlying assets (like weather futures).

Others in this group point to how some crypto assets are “frauds” or have market values in large excess compared to value. But this exists in traditional asset classes too.

There are hundreds of penny stocks that retain market cap value and trade, despite no underlying value. And there are plenty of “stub bonds” in the corporate bond and distressed market that have no value but remain priced and trading for decades.

As the overall size of legitimate crypto assets grows, these outlier, “worthless,” tokens will fade and become less impactful.

The ‘Savvy Crypto’ Investors

As you might expect, investors in this bucket are trying to figure out which managers they trust to generate high risk-adjusted returns in the crypto space. In addition to focusing on risk management like group 2 above, this group of investors often got much more granular with their questions about what specifically goes into a crypto portfolio.

The two messages that resonated the most were:

  1. Developers are the new research analysts. Research has greatly evolved over the past decade, especially with the emergence of digital assets. The ability to read lines of code in GitHub, test pre-launch products and engage with various development communities is a must for any fund investing in this space.
  2. What is ‘fundamental research’ in crypto? This is a smart question. Unlike traditional asset classes like equities and fixed income, there is no widely agreed upon Graham & Dodd Security Analysis in crypto. BUT, that doesn’t mean valuation frameworks aren’t in the works. There has been great work done like MV = PQ, NVT analysis and even variations of Metcalf’s Law. It’s right to question the fundamental value of these new technologies, but wrong to dismiss the lack of progress.

Looking ahead, this group is already excited about today’s crypto assets, but also focused on what is coming in the future. They want to align themselves with managers who are in a position to take advantage of today’s opportunities, while also being on the front-line when new opportunities arise.


This past year has opened my eyes to the progress that is being made on both the technology side and the education side. Whether investors have a specific mandate or not, most are trying very hard to figure out where crypto fits into their process and portfolio.

While it is true that many funds already have some secondary or tertiary exposure to crypto via their traditional hedge fund or VC investments, it’s becoming clear this alone is not satisfying their needs.

As stated earlier, “Crypto is pretty hard to ignore right now.” Unless investors want to completely write it off, they will have to figure out how to get involved.

22. 19/01/2019 07:26
How BlockEx Went from $24 Million ICO to Layoffs in Less Than a Year

BlockEx’s treasury couldn’t stop taking hits in 2018 – and for the London-based startup, it has meant significant delays, scaled-back ambitions and layoffs.

CEO Adam Leonard confirmed to CoinDesk that “staff reductions” had taken place.

“Some of it naturally as products finished and additionally to reduce burn,” Leonard said via email, declining to offer specifics on how many were let go. “We are not winding down the business and hope to have some good news next week.”

According to a year-end review penned by Leonard earlier this month, the company is working to finalize a new round of fundraising. So, how did BlockEx go from a reported $24 million ICO and equity raise to layoffs in roughly 12 months?

Fund management

BlockEx’s treasury took a number of hits with cascading effects through 2018.

BlockEx first got attention as a platform for issuing tokens, but the company had aimed to offer a place to trade the tokens it issued as well, plus ways for existing trading shops to easily get into crypto trading. The company believed it could have been first to market with a securities token issuer that had the blessing of a European Union regulator, that is if it hadn’t had various troubles with investor funds.

“We would have been up by now,” Leonard explained to CoinDesk in a phone call.

He wrote in the annual review about some of the company’s issues in 2018, calling it “a rollercoaster of a year,” but he expanded on those observations in interview. “You could say it’s setting back the security token industry in Europe,” Leonard said.

BlockEx ran its own token sale last year for the DAXT token, the chief utility of which was giving holders early access to tokens issued by BlockEx. The trouble, the company now believes, was that it insisted on strict adherence to KYC/AML practices. Prices on ETH dropped dramatically from the start of its sale at the end of December 2017 until it closed in early March 2018.

Further, the company chose not to finalize any sale until a buyer had received DAXT in exchange for their ETH. So, if the buyer saw ETH plummeting and wanted out of the position, they would let them go.

Still, many stayed in, but by the time BlockEx got its hands on funds after all the KYC/AML checks, it had lost considerable value.

Leonard wrote in his update: “So, in reality, out of the £20 million raise, we were actually left with just £5.5 million of available funds for the business go-forward basis.”

Nevertheless, as Leonard pointed out, “£5.5 million is a lot of money if the market had been marginally successful.”

The cascading effects set in from here. With ICOs freezing up, there weren’t new offerings on the platform to make. This cut into revenue and the value of the DAXT token. “Most of the ICOs we contracted with killed their ICO or pushed it back into 2019,” he said.

On top of all this, BlockEx had expected an $8 million investment from one fund set up by a blockchain advisory that never came through. It had planned to buy both a large share of tokens and some equity in BlockEx. The fund never succeeded in closing, so it never delivered its promised investment.

Project graveyard

Due to these setbacks, BlockEx ended up not coming through on a number of initiatives for 2018.

Among its unfinished projects: its mobile app, functionality by which DAXT could be staked on the BlockEx exchange for discounted trading, supporting third-party market makers and additional quick-buy features.

BlockEx saw setbacks in its ability to quickly set up white-label brokerage services for equity shops. It also has had to delay an overall audit feature for the BlockEx exchange.

“The plan for BlockEx always was for different auditing firms to run regular audits,” Leonard said, so users and traders would never have any doubt the funds were there. “We wanted to make it 100 percent transparent that the exchange had traders’ money.”

The advantages to using BlockEx as an exchange included its banking rails (for easy exit and entrance from fiat), white labeling features, what should have been a larger liquidity pool and an exchange that should soon be regulated.

But without funds, it hasn’t been able to run the marketing campaign to tell that story. Nevertheless, the company hasn’t shut down and its products are coming out, if more slowly, Leonard says.

“We are nicely in a position to generate revenue,” he added.

Looking back, Leonard wondered if his strict adherence to the rules was more of a bug than a feature.

“If we didn’t follow rules so much, we could have taken in a lot more money,” he told CoinDesk.

23. 18/01/2019 09:46
QuadrigaCX Crypto Exchange Users Still Can’t Get Their Money Out

QuadrigaCX customers are complaining they still can’t get their money out more than a month after the cryptocurrency exchange won a court dispute that had held up $19 million of funds.

While that would be worrisome enough, users’ concerns were compounded by the company’s announcement Monday that its CEO and founder, Gerald Cotten, had died more than a month earlier.

In a statement attributed to Jennifer Robertson, Cotten’s wife, the exchange said he died on December 9 from complications arising from Crohn’s disease while traveling in India. The same statement also said QuadrigaCX was working through a backlog of withdrawal requests and had set daily withdrawal limits.

Then, on Tuesday, QuadrigaCX sent its customers an email, a copy of which CoinDesk obtained, stating that it was processing withdrawals “slowly” and that the team is “actively working on having the funds deposited and distributed.”

“While we don’t have a specific update pertaining to this situation, our goal was to resolve this issue within the next two weeks and we remain committed to that goal,” says the email, which was signed by Aaron Matthews, QuadrigaCX’s interim president and CEO.

QuadrigaCX user and Canadian resident Xitong Zou told CoinDesk that he had filed multiple support tickets in recent weeks and received a response saying the withdrawal could take a week or two each time. “If only the [QuadrigaCX] customer support were better I think it could go a long way, and it’s not like they aren’t active,” he said.

“I see them on Reddit and Facebook and Twitter answering minor questions about cash pickup times etc., but they don’t answer any of the big questions we have regarding the CEO’s recent death,” he wrote in an email, adding:

“The fact that it happened a month ago, and they just announced it now, and no proof of death, no obituary, no linkedin profiles of any of the staff, no physical addresses, limited crypto withdrawal limits, etc all makes people suspicious.”

As a result, “there’s a bunch of warning bells going off in most people’s heads right now,” Zou said.

QuadrigaCX did not respond to multiple requests for comment.

When contacted by CoinDesk, a spokesperson for Global Affairs Canada, the government agency that manages diplomatic relations, appeared to confirm QuadrigaCX’s account of Cotten’s death overseas, but did not mention his name or give a date.

“Our thoughts and sympathies are with the loved ones of a Canadian who recently died while visiting India,” said the spokesperson, Sylvain Leclerc. “We are providing assistance to the family at this very difficult time.”

Leclerc said he could not disclose any further information, citing Canadian privacy law, and did not answer follow-up questions by press time.

When reached by phone, a spokesperson for the Indian Bureau of Immigration was unable to confirm that Cotten had been in the country.

Banking bottlenecks

QuadrigaCX blamed the withdrawal backlog on its recently resolved court dispute with the Canadian Imperial Bank of Commerce (CIBC), which froze funds held by the exchange’s payment processor, Costodian, Inc., over concerns about their origin.

While the Ontario Superior Court of Justice briefly took custody of these funds last year, Judge Glenn Hainey released the majority of them back – $70,000 in U.S. dollars and $25 million in Canadian dollars (about $19 million USD), less $200,000 that was withheld, according to a court document published in December.

These funds were then frozen by the processor’s new bank, the Bank of Montreal, according to a statement by the exchange on Reddit.

A subsequent update stated that the bank had released the funds, but said there would be another delay while Billerfy, a payment processor, endorsed the bank drafts.

When reached by CoinDesk, Billerfly managing director and owner José Reyes said the company had finished endorsing the drafts “but no banks have the appetite to take the drafts so we are looking around for crypto-friendly banks that will take the drafts so we can use it to payout clients. Even lawyers are having a hard time getting a bank.”

When asked if that meant customer withdrawals would remain delayed until a banking partner could be found, Reyes responded:

“Yes. Hope not long. We are really working very hard to work with crypto-friendly banks.”

Billerfy and Costodian are both owned by Reyes, and were all listed as parties in the now-concluded legal fight.

Long delays

A number of QuadrigaCX customers have been complaining about withdrawal issues on social media platforms like Reddit and Twitter, with most claiming long delays – some several weeks or even monthslong – in receiving funds.

Some users even say their open tickets on the exchange were marked as “complete,” despite the fact that they had not received their funds.

(A few users claimed they did receive funds on Reddit, though they were outnumbered by the number of posts listing issues or concerns.)

Some withdrawal attempts were met with a “failed to send” message, a problem that interim president Matthews addressed in his Tuesday email to customers.

He wrote:

“Regarding failed withdrawal notice to customers,

Your pending withdrawal has not failed, it was canceled back to your account. Please restart your withdrawal according to the new limits set out by QuadrigaCX on January 14, 2019.”

He later added that all withdrawals “will occur in the advertised timeframes” of two weeks.

Moving forward

Once the exchange has caught up on its backlog, QuadrigaCX hopes it “will return to normal operating levels regarding withdrawals and punctual timelines,” Matthews wrote.

As part of this process, the exchange has instituted new withdrawal limits on U.S. dollars, Canadian dollars and cryptocurrencies, with different limits for differing levels of customer verification.

“We did this to ensure service levels don’t get to the point where any backlogs or interruptions to banking services happen again,” Matthews explained.

The exchange will also work to diversify the number of Canadian banks it works with, so as to ensure no single bank can freeze funds like CIBC again.

Unverified customers can withdraw between $5,000 and $10,000 in crypto, while “level 1 verified” customers can withdraw as much as $25,000, Matthews noted, concluding:

“These changes were the result of our efforts to continuously improve our service offering. We will continue to review service levels and make any changes that we feel best serve the interests of our customers. We thank you for your patience and look forward to the resolution of this matter.”

24. 17/01/2019 13:16
One Year Later, What’s Holding Back SegWit Adoption on Bitcoin?

It’s been over a year since the scaling upgrade known as segregated witness, or SegWit, was activated on the bitcoin network.

Even so, only an estimated 36 percent of all bitcoin transactions are actually using it.

Why the minimal adoption rate? It’s largely because, like any backward-compatible upgrade (otherwise called a soft fork), SegWit ensures participants in the bitcoin network that haven’t upgraded to the same software can still follow the same network only under a slightly less-restricted ruleset.

As a result, some bitcoin businesses and exchanges have put off making the switch to enable SegWit transactions despite the low-fee advantage that it presents when sending bitcoin payments.

“Some of the [venture capital]-backed companies don’t care about paying bitcoin fees,” said Rusty Russell, a developer for blockchain technology firm Blockstream. “They can burn a million dollars a week on bitcoin fees and nobody really cares because what they care about is user adoption numbers.”

Calling the switch to optimize operations for SegWit an “engineering-level” decision, Russell told CoinDesk back in December that due to a significant decline in total transaction fees since the beginning of 2018 the priority at present for startups is “optimizing for growth” – not “implementing cool new tech.”

Still, both Russell and Aaron Lasher, the chief strategy officer at bitcoin wallet company BRD, suspect that pressure for SegWit adoption will increase for businesses in the event of a bitcoin price increase.

As Lasher told CoinDesk last November:

“We don’t feel the pressure right now to implement SegWit because it doesn’t make a huge difference but it will during the next price run-up. I don’t know if that’s going to be one year, three years or five years but I’m quite sure it will happen.”

Lasher conceded that it was no easy feat to change backend code to recognize, send and receive SegWit transactions.

“There’s just a lot of mechanics that you have to be thoughtful about,” he said. “It’s people’s money. The default thing to do is to do nothing because it works already and you’re not risking your customers’ funds.”

To Lasher’s point, Tyler Winklevoss, co-founder of cryptocurrency exchange Gemini, said in an open Q&A forum on Reddit earlier this month that retrofitting exchange wallets for SegWit was a “very tricky” procedure requiring building “a new hot wallet from the ground up.”

While not yet released for bitcoin, Winklevoss promised migration to the new wallet system in Q1 of this year.

And the sooner the better in Russell’s point of view who advises businesses and exchanges to think proactively.

“Frankly, at some point when fees do go up if there are businesses that do not support segwit, people screaming about fees will obviously take their business somewhere else to someone who has done the work [to support segwit],” said Russell to CoinDesk.

Miner incentives

Approaching the release of SegWit back in August 2017, fundamental disagreements created competing parties that envisioned divergent use cases for the world’s first cryptocurrency.

Indeed, since 2017, the segment of the bitcoin community that disapproved of SegWit has focused its efforts around an alternative cryptocurrency called bitcoin cash (now referenced on some exchanges as Bitcoin ABC and Bitcoin SV due to a recent chain split).

While there are bitcoin mining firms that were formerly vocally opposed to SegWit activation – notably, hardware giant Bitmain – the financial incentives for miners to validate SegWit-enabled transactions are now difficult to ignore.

With SegWit-enabled transactions making up nearly 40 percent of the bitcoin network, it means that transactions deliberately excluded for ideological reasons would reduce the total mining reward doled out to miners for validating a new block.

Speaking to what he concedes are purely “ideological differences,” David Steinberg – vice president of Random Crypto, the analytics company that built a calculator showing mining “unprofitability” – explained to CoinDesk in a previous interview that in his view:

“SegWit adds additional rules and removes one rule from bitcoin, which is that you can only spend money that you have. It’s not that it doesn’t enforce it. It just enforces it in a different way that many, including myself, feel is less secure.”

But Steinberg agreed with Lasher that differences in opinion over SegWit are not primary factors currently dissuading SegWit adoption.

At least from the vantage point of the bitcoin mining community, Steinberg said, “a more obvious reason for why miners may want to exclude SegWit transactions would be AsicBoost.”

“A pretty good guess”

AsicBoost, described as a “mathematical trick,” is a mining firmware that enables bitcoin miners to perform the computations necessary to create new blocks and verify transactions on the blockchain up to 20 percent faster than average speeds.

The technology, patented by Bitcoin Core developer Timo Hanke and Sergio Demian Lerner in 2014, was recently made publicly available for all miners to use under the Blockchain Defensive Patent License.

However, in order to use the firmware without license or detection, miners must deploy an alternative version of the technology called “covert AsicBoost” that is incompatible with SegWit for reasons to do with how SegWit payments are written and rearranged on blocks.

As such, back in late October 2018, when bitcoin mining pool Antpool was seen to exclude SegWit-enabled transactions for a period of roughly one week, certain proponents of the bitcoin community harped back to old allegations against Bitmain – which operates Antpool – for secretly attempting to deploy the firmware.

Calling that “a pretty good guess” as to what may have been going on, former Bitcoin Core developer and applied cryptography consultant Peter Todd said that, at the end of the day, nothing could be ascertained for certain.

25. 16/01/2019 11:12
Game of Coins: Inside the Paxos-Gemini Stablecoin Discount War

The rise of new stablecoins was a defining story in the second half of 2018, but the reality is that exclusive discounts partly fueled their growth.

Dollar-backed stablecoins are generally supposed to be worth $1, whether it’s Gemini’s GUSD or Paxos’ PAX. But according to four sources with knowledge of these cryptocurrency exchanges, both stablecoin-issuers privately offered over-the-counter [OTC] trading desks up to a 1 percent discount if traders used these tokens in some fashion before redeeming them for USD.

“They were offering that as a sweetener for getting it kick-started with adoption,” an OTC trader, who asked to stay anonymous, told CoinDesk.

This is why GUSD and PAX activity surged in December 2018, both between OTC desks and on exchange platforms like Huobi and Binance, where several traders moved millions of dollars within a matter of days. According to CoinMarketCap, GUSD’s global market cap suddenly surged from roughly $87 million on December 17 to over $103 million the following day.

“A lot of the arbitrage opportunities were manufactured,” the OTC trader added.

Dorothy Chang, VP of Paxos’ marketing and communications department, told CoinDesk this incentive structure was only offered to a “handful of partners” for “less than two months” starting around late September. Perhaps fortuitously for Paxos, the first-ever U.S.-dollar-pegged stablecoin Tether (USDT), temporarily lost parity in mid-October.

According to a report prepared for CoinDesk by the analytics firm Delphi Digital, USDT lost almost a third of its market share during this period, with GUSD eventually exceeding PAX with more than $140 million in transaction volume in January 2019.

The Delphi Digital report argued that “competitors are all fighting for the spot Tether will most likely eventually lose.”

With regards to PAX, Chang said the discount was “something we did when we were first introducing our product to the market,” adding that Paxos is increasing its redemption windows from once to twice a day and looking for more partnerships with enterprises across the space.

“We’ve been at above $100 million in daily transaction volume for the past three days and holding steady,” Chang said on Monday.

While Paxos has moved on, the markets may still witness ripple effects from these corporate incentive programs for months to come. GUSD, for example, saw a burst of trading activity and market valuation in January.

“The incentives that are issued by these entities often come with a lock-up period. Those may have expired,” said Jesse Proudman, CEO of the algorithmic trading platform Strix Leviathan. Proudman explained to CoinDesk that the discounted stablecoins can now be freely traded.

Game of coins

Once several stablecoins became available for less than or more than a dollar, whether based on incentive strategies or organic market fluctuations, the arbitrage games began.

According to a Paxos blog and reporting by The Block, several Huobi users tried to obfuscate their source of funds by opening dozens of accounts using other names in order to exceed the Paxos exchange’s daily USD redemption limit. Paxos told CoinDesk at least 10 accounts were closed in relation to this trend.

The frenzy arose because the PAX discount program coincided with the release of HUSD, which is essentially a pool of stablecoins offered by the Singapore-based exchange Huobi that allows traders to deposit one type and later withdraw another. Besides GUSD and PAX, the pool also supports Circle’s USDC and TrustToken’s TUSD.

According to Kelvy Ko, partner at crypto hedge fund Leotank Digital Trading, Huobi’s HUSD pool has made it much more convenient for traders to swap stablecoins and leverage arbitrage without actually trading them.

Indeed, around the same time that the stablecoin USDT oscillated and Huobi launched HUSD, PAX’s global market cap jumped from roughly $42 million to $79 million in a single day on October 23. Then in early December, Binance saw a plethora of multibillion-dollar PAX trades as traders struggled to find liquidity and arbitrage sources beyond the redeemer itself. By the first week of 2019, Paxos told CoinDesk the company had redeemed $200 million worth of stablecoins so far.

Even so, there could be a long way to go until the regulator-approved stablecoins like PAX and GUSD catch up to USDT in terms of volume.

“Even though USDT is wash traded, it has the first mover advantage,” Ko said, referring to how some USDT users allegedly buy and sell the same financial instrument to create the artificial appearance of marketplace activity. Plus, this practice is hardly restricted to USDT and might currently be applied by some traders to other stablecoins as well.

“Even if USDT is in a legal grey area, it is hard for others to compete because some people want to avoid the regulators,” Ko added.

Gemini declined to comment on this specific incentive program or transaction volumes across global exchanges. According to the company’s blog and a recent regulation-friendly marketing campaign, Gemini seeks to distinguish itself from the competition by being “a compliance-centric company.”

When asked if incentive programs artificially inflated the respective coin’s market cap, Chang of Paxos said:

“That may have been true for some, but we have not been optimizing for market cap alone; it’s not meaningful by itself. What is meaningful is transaction volume. For us, the point of offering an incentive was to develop market depth.”

Windows of opportunity

One of the anonymous OTC traders CoinDesk spoke with said that stablecoin issuers were inspired to launch this short-lived campaign because there isn’t an organic demand for these assets.

“The banks and the other [crypto] OTC desks we work with are really incredibly flexible,” the trader said. “It’s much easier to do that [work with the bank] than to…get back these tokens that have a bunch of strings attached and also doesn’t pay any interest.”

On the other hand, Proudman of Strix Leviathan told CoinDesk his company uses PAX for large-scale trades on Binance – sans backroom discounts – because he prefers to hold a regulated asset that can be redeemed for dollars.

“We elect to not use the incentive strategies from any of the stablecoin companies,” Leviathan said, adding they use stablecoins for arbitrage related to bitcoin, ethereum and other trading pairs. “From a trader’s perspective, we find ourselves electing to use coins we are comfortable with over those that we are less comfortable with.”

However, since stablecoin issuers require a significant amount of know-your-customer information in order to redeem the tokens, the anonymous trader said OTC desks that participated in the rush may have revealed competitive information about their partners and trading volumes to the exchanges, namely Gemini and Paxos.

“These smaller desks can’t get banked at the places that allow instant U.S. dollar transfer, so they are willing to give up some of their privacy,” he said.

The second anonymous trader agreed that this opportunity was especially appealing to OTC desks with liquidity challenges, often related to jurisdictional compliance. Because of that, he expects companies to continue issuing stablecoins, perhaps with more promotional discounts, in 2019.

“I think there is no clear winner yet, both in terms of traders and issuers,” he said.

According to Ko, the regulated stablecoin arbitrage opportunity closed after several weeks because “once the short-term interests [were] achieved, they don’t need to keep the aggressive promotional rebates.”

Plus, a Huobi Global representative told CoinDesk that the exchange added the daily withdrawal limits during the timeframe of this incident.

For PAX traders in particular, the limits are now $20,000 for verified accounts and $1,000 for unverified users. The arbitrage rush may have impacted Huobi’s coffers, with three Huobi wallets holding roughly 78 percent of all GUSD in circulation. Gemini declined to comment on why that might be.

Moving forward, the Huobi Global representative said the exchange plans to “dynamically develop HUSD over the course of 2019” in order to improve the user experience and prevent misuse of the system.


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