Recap of the G-20 summit in Argentina.
Members of the Group of 20 (G-20), an international forum for the governments and central banks of countries with developed and developing economies, addressed cryptocurrencies in their recent declaration on sustainable development of the global economy.
Declaration summary: Crypto is important, but it needs to be put under scrutiny and tax regulations
On Dec. 1, the G-20 declaration titled “Building Consensus for Fair and Sustainable Development” was published on the official website of the Council of the European Union and the European Council. The document summarized the 13th gathering of G-20 nations that took place on Nov. 30 and Dec. 1 in Buenos Aires, Argentina.
The declaration addressed crypto regulation, albeit briefly: Cryptocurrencies are mentioned just once there, in the broader context of an “open and resilient financial system” that “is crucial to support sustainable growth.”
While recognizing the importance of the cryptocurrency industry for the global economy, the G-20 also noted that it will introduce Anti-Money Laundering (AML) and anti-terrorist measures per standards of Financial Action Task Force (FATF), an intergovernmental body formed to fight money laundering and terrorist financing:
“We will regulate crypto-assets for anti-money laundering and countering the financing of terrorism in line with FATF standards and we will consider other responses as needed.”
Further, in the same segment of the declaration, G-20 participants expressed a positive stance on non-bank financial institutions, pointing out the potential advantages of technology in the financial sector, given that the tech innovators are managing associated risks:
“We look forward to continued progress on achieving resilient non-bank financial intermediation. We will step up efforts to ensure that the potential benefits of technology in the financial sector can be realized while risks are mitigated.”
There is more crypto-related news coming from the international summit, however. On Dec. 2, Japanese news outlet Jiji reported that the G-20 countries have also called for the international taxation of cryptocurrency. According to the publication, the final text of a document cooperatively prepared by G-20 leaders outlines “a taxation system for cross-border electronic payment services.”
The article specifies that — under current laws — foreign companies that do “not have a factory or other base in Japan” cannot be taxed by the local government, while the G-20 leaders seek to “build a taxation system for cross-border electronic services.”
The Japanese news outlet also mentioned an estimated deadline for the system, saying that the final version of regulations, after considering proposals from each member state, is expected to be introduced by 2020. The issue will reportedly be discussed next year, when Japan will become the host of the summit and Japanese Prime Minister Shinzō Abe will take the position of G-20’s president.
Previous G-20 commentary on crypto
G-20 officials have previously maintained a ‘hands-off’ approach on crypto. In March 2018, after a call from France’s finance minister, Bruno Le Maire, the G-20 participants concluded the first public debate on virtual currencies.
The meeting resulted with a “firm” July deadline that had been put forward for “very specific recommendations” on how to regulate cryptocurrencies globally, despite the Financial Stability Board (FSB) — the group which coordinates financial regulation for the G-20 economies — resisting calls from some G-20 members to discuss regulating cryptocurrencies at the conference.
Moreover, many of the G-20 participants decided that cryptocurrencies needed to be examined further before making a concrete regulatory move, albeit some countries including Brazil stated that they won’t be following the G-20 recommendations.
Nevertheless, the G-20 members agreed that the FATF would have its standards applied to the cryptocurrency markets in the respective countries, a position they recently reiterated in Buenos Aires:
“We commit to implement the FATF standards as they apply to crypto-assets, look forward to the FATF review of those standards, and call on the FATF to advance global implementation. We call on international standard-setting bodies (SSBs) to continue their monitoring of crypto-assets and their risks, according to their mandates, and assess multilateral responses as needed.”
In July, a summary of provisional decisions made by the dedicated Finance Ministers & Central Bank Governors said that “technological innovations, including those underlying cryptoassets [sic], can deliver significant benefits to the financial system and the broader economy.” Nevertheless, the document also listed various related problems, including tax evasion and AML concerns:
“Crypto-assets do, however, raise issues with respect to consumer and investor protection, market integrity, tax evasion, money laundering and terrorist financing.”
Still, the actual recommendations for how to approach the cryptocurrency sphere at the international level were not presented, and the deadline was pushed to October 2018:
“[W]e ask the FATF to clarify in October 2018 how its standards apply to crypto-assets,” the summary read. It is unclear if those recommendations have been presented to date, as there has been no information from the G-20 regarding that issue.
On Oct. 22, as the G-20 remained silent, Jeremy Allaire, the CEO of the Goldman Sachs-backed crypto investment app Circle, stated that crypto-related regulatory matters have to be addressed “at the G20 level.” Prior to that, on Oct. 19, the FATF said that by June 2019, jurisdictions will be obliged to license or regulate cryptocurrency exchanges and some firms providing encrypted wallets internationally as part of AML and anti-terrorism procedures.
More international action
In separate news regarding international adoption and regulation of crypto technology, on Dec. 4, seven southern EU countries — including France, Italy, Spain and Malta — formed an alliance called the “Mediterranean seven” with the aim to promote the use of Distributed Ledger Technology (DLT) among governments, as per Financial Times. The EU, as well as Italy and France, are members of the G-20 alliance.
More specifically, the EU countries have reportedly signed a declaration stating that areas like “education, transport, mobility, shipping, land registry, customs, company registry, and healthcare” can be “transformed” and boosted with the use of DLT.
“This can result not only in the enhancement of e-government services but also increased transparency and reduced administrative burdens, better customs collection and better access to public information,” the declaration reportedly states.
EOS’ governance model has attracted another round of criticism.
This week, the EOS blockchain protocol angered decentralization proponents yet another time. Specifically, Starteos, one of EOS’ officially sanctioned Block Producers (BPs), appeared to publically offer its token holders financial rewards in return for their votes.
Starteos’ vote-buying tendencies seem to fall in line with previous scandals centring around EOS: This year, the blockchain protocol reversed previously confirmed transactions and started an internal investigation after Huobi, its other BP, was accused of running a corruption scheme, among other things.
Brief introduction to EOS and its key features
EOS.io is a blockchain-powered smart contracts protocol for the development, hosting and execution of decentralized applications (DApps). It was launched in June 2018 as open-source software, while the first testnets and the original white paper emerged earlier in 2017. The platform was developed by block.one, a startup registered in the Cayman Islands and lead by Daniel Larimer and Brendan Blumer.
EOS has raised the most funds during its Initial Coin Offering (ICO): The startup managed to gather around $4.1 billion worth of investments, after fundraising for nearly a year. That number remains unmatched to date.
The protocol is supported by the native cryptocurrency, EOS — currently the sixth largest crypto by total market cap. Those tokens can be staked for using network resources either for personal use or leased out for developer-use — basically, EOS.io attempts to represent a decentralized alternative to cloud hosting services.
EOS employs a consensus model called delegated proof-of-stake (DPoS). Essentially, that means that its investors are rewarded with voting power and decide who gets to mine the EOS blockchain.
Hence, the EOS ecosystem rests upon at least two major entities: the EOS Core Arbitration Forum (ECAF) — effectively its ‘judicial branch’ — and BPs, who produce blocks on the EOS blockchain — just like miners do within the Bitcoin (BTC) blockchain.
BPs earn EOS tokens produced by inflation — according to some estimations, top EOS BPs obtain around 1,000 tokens per day. They are elected through the constant voting process, and their number is capped at 21 — consequently, the top is fluid by design, and BP candidates who earn enough votes can replace the BPs in power at any minute.
Starteos: Major BP’s explicit vote buying
Starteos is a startup based in Chengdu, China. According to its website, the company “entered blockchain industry [sic]” in 2013. This year, Starteos has reportedly issued at least two products: the self-titled digital wallet and ‘Memory Box,’ a “one-tap access” cold-storage wallet. Currently, Starteos is the fourth-largest BP, as per eosnetworkmonitor data, meaning that it gets a large portion of the BP revenue.
On Nov. 27, Starteos published a Medium post titled “We Gonna Share BP Proceeds With You — This Is the Way We Warm You Up in This ‘Winter’!” In it, the startup team claimed that “after delegating Starteos.io as proxy, you could get continuous and stable EOS revenue.”
“The ‘winter’ of cryptocurrencies has come. How much faith do you left to have [sic]?” the post reads, continuing:
“Now, Starteos is still gonna stay with YOU, our most important and best friends! And we [are] gonna share the proceeds with you and make [it] through the difficulties together.”
Further, the Chinese startup outlines an instruction on how to claim the benefits: After selecting Starteos as a proxy, users can pick “stable income,” “mining” revenue mode or the “random revenue” mode, where they play “Lucky Fruit Slots Machine” with game tokens to get “EOS revenue.”
Explicit vote buying seems to contradict decentralized and democratic blockchain policies advocated by the EOS administration and the project’s original white paper. Its co-founder and chief technology officer, Daniel Larimer, wrote soon after EOS mainnet went live:
“EOS is fundamentally different from other governments and blockchain communities in that its community wishes to operate at the highest possible ethical standard of voluntary consent and non-violence.”
More specifically, Starteos’ winter promotional campaign seems to violate Article IV of the current EOS constitution titled “No Vote Buying,” which states the following:
“No Member shall offer nor accept anything of value in exchange for a vote of any type, nor shall any Member unduly influence the vote of another.”
Community reaction: Calls for unvoting, constitutional reform
Expectedly, the crypto community, which traditionally values decentralization, was not happy about an EOS BP openly buying votes.
On Nov. 8, weeks before Starteos published a Medium post explicitly describing how users can claim some of the revenue, EOS investor Maple Leaf Capital pointed out that Starteos was launching a slot machine DApp, where users allegedly could set Starteos as a voting proxy to obtain in-game tokens. According to the original article describing the DApp, the rewards to the gamers would come directly from games.eos’s BP reward, which, in turn, is owned by Starteos.
“It may not be bad-intentioned, but it looks awfully close to transferring block-producing reward value to its voters, with a thin veil of gamification & probability attached to it. This could set a bad precedence and deserves some debate.”
Later, on Nov. 29, the investor announced it would discontinue voting for Starteos, arguing that “swapping block reward for votes in gaming form is detrimental to the long-term economic value for the EOS.”
Steemit user theawakenment stresses that games.eos is holding a paid position, being ranked at the 66th position (game.eos has since moved up to the 50th place). He wrote an open letter to EOS investors after contacting the Starteos administration and failing to receive a response from them, stating:
“If other BPs copy what Starteos is doing and launch a second or third BP themselves, we will soon end up with the large BPs being owned and run by the same handful of owners.”
After the letter was published, a Starteos representative reportedly did message him:
“[They] admitted to creating the games.eos account and admitted to ‘collaborating’ with games.eos, but they told me they had different owners, which does not match up with what they have stated on their website.”
Australia-based crypto persona Crypto Tim, who covers mostly EOS-related news, published a video titled “EOS BP Starteos Are Vote Buying,” which gathered some commentary from the community on Reddit and YouTube. On Twitter, he called for Starteos “to be removed as a Block Producer.”
Some of the BPs have expressed their views on vote buying as well, albeit without directly mentioning Starteos. On Nov. 27, EOS New York, which is currently the eighth largest BP, wrote that “the EOS constitution is simply not good enough and we deserve a clear document that outlines our basic system of governance,” and then shared their proposal. After being asked in the comment section whether the document features any restrictions on vote buying, EOS New York stated, “There are not. We have it now and we have BPs violating it. No point.”
Moreover, Starteos has reportedly been unvoted by at least one BP, Bulgaria-based EOS Titan. Nevertheless, Starteos continues to hold the third/fourth positions in the BP ranking, which suggests that it is still largely supported by other BPs. The list of Starteos supporters can be monitored via a resource powered by EOS Titan — according to their data, Starteos’ largest ally is Huobi, which has been previously accused of running a mutual voting rig.
Source: EOS Titan
The EOS vote-buying scandal has correlated with the token’s massive price drop. While it followed an overall bearish market trend, the losses EOS/USD experienced were more significant comparing to other top coins. EOS is trading at $2.36 as of press time, down around 25 percent over the past seven days.
Previous signs of centralization in the EOS protocol
EOS’ model of governance has attracted controversy before: Just a few weeks ago, in November, a screenshot showing an ECAF moderator reversing transactions — which had already been confirmed — was posted on Reddit and gathered hundreds of comments.
According to Reddit user u/auti9003, a dispute allegedly involving a phished EOS account was referred to one of the platform’s “arbitrators” Ben Gates, who decided to reverse transactions that happened without the owner’s permission. This, the user noted, involved undoing transactions which had already received network confirmations.
That move outraged decentralization maximalists, as Reddit responses mostly claimed that EOS had failed to prove its use case versus other, more traditional centralized structures.
“Why would anyone use this over a bank account and traditional legal system?” the most popular comment read, adding:
“These guys raised [$4 billion] to recreate the legal system using a token that is neither censorship-resistant, nor immutable.”
Essentially, an alleged leaked Huobi spreadsheet suggested that main EOS nodes were involved in mutual voting along with payoffs to remain in power of the EOS blockchain and keep their profits. Interestingly, Starteos was also listed in the document.
Soon after, Block.one — the developer of EOS — published a statement, saying it was “aware of some unverified claims regarding irregular block producer voting, and the subsequent denials of those claims.” Nevertheless, there was no further update on the matter, while Huobi remains EOS’ top BP as of press time.
Further, in June, another scandal occurred when EOS BPs overrode an ECAF decision and froze seven accounts associated with phishing scams after the arbitration body failed to promptly come up with a response. The ECAF later retroactively ordered the accounts frozen, but the BP conference call-based decision caused some to question EOS’ decentralized system, and to label the move as “power abuse.”
Less than a week after, another ECAF order to stop processing transactions involving 27 more addresses surfaced. Interestingly, it lacked any explanation for blocking the addresses, promising to do so on a later date.
That attracted another round of harsh criticism from the crypto crowd, and, after an apparent fake ECAF order began to circulate on social media several days later, some BPs — notably EOS New York — announced that they would suspend execution of any such orders, as they couldn’t tell if they were legitimate. Yet again, the ECAF and BPs struggled to coordinate their action, and, as a result, another important decision on EOS blockchain was handled by centralized entities.
On Nov. 1, more criticism of EOS’ governance model arrived, as blockchain testing company Whiteblock published results of “the first independent benchmark testing of the EOS software.” Essentially, the investigation came to several conclusions about EOS, the most bold of which was that “EOS is not a blockchain,” but “rather a distributed, homogeneous database management system” because its transactions were reportedly “not cryptographically validated.”
Additionally, the research results showed inaccuracies in performance claims. In July, EOS CTO Daniel Larimer tweeted that EOS was performing 2,351 transactions per second (TPS) — Ethereum, for comparison, can process around 15. The Whiteblock report, however, showed that with “real-world conditions” of round-trip latency and 0.01 percent packet loss, EOS performance was below 50 TPS, “putting the system in close proximity to the performance that exists in Ethereum.” The investigation concluded that “the foundation of the EOS system is built on a flawed model that is not truly decentralized.”
Similarly, a report published by Hong Kong-based peer-to-peer cryptocurrency exchange BitMex in late November suggested that EOS resembled a “distributed database system” rather than a blockchain-powered network. The document is no longer available for unknown reasons, but has been covered by various media outlets before going offline.
Still, EOS’ Daniel Larimer has previously confirmed that his company does not aim to be decentralized. In an interview with YouTube blog “Colin Talks Crypto,” which aired on Oct. 3, Larimer clarified his vision:
“Decentralization isn’t what we’re after. What we’re after is anti-censorship and robustness against being shut down.”
Cointelegraph has reached out to various Block.one representatives as well as Starteos for further comment, but none of them have replied to date.
More about Amazon’s recent blockchain-related offerings.
On Nov. 28, e-commerce giant Amazon announced two blockchain-related products: Amazon Quantum Ledger Database (QLDB) and Amazon Managed Blockchain. The company hence marked its further expansion into the field of blockchain technology, which started with blockchain-related patents and collaborations that Amazon has seemingly chose over working with cryptocurrencies, per se.
So what are those new projects and are they going to change the crypto industry?
QLDB: Cryptographic, but centralized database
As per Amazon’s website, QLDB is a ledger database designed to provide “transparent, immutable and cryptographically verifiable log of transactions,” which is overseen by “a central trusted authority.”
Thus, all changes are purportedly recorded on-chain, while the new product is also able to automatically scale to “execute 2–3X as many transactions than ledgers in common blockchain frameworks.” Indeed, Andy Jassy, the CEO of Amazon Web Services (AWS), reportedly stated that the QLDB “will be really scalable, you’ll have a much more flexible and robust set of APIs [application program interfaces] for you to make any kind of changes or adjustments to the ledger database.”
Additionally, QLDB allegedly uses a cryptographic hash function (SHA-256) to generate a secure output file of data’s change history, serving as a proof that “validates the integrity of data changes.”
“With QLDB, your data’s change history is immutable — it cannot be altered or deleted — and using cryptography, you can easily verify that there have been no unintended modifications to your application’s data,” according to the description on Amazon’s website.
Walter Montes, co-founder of the Costa Rican Blockchain Community, told Cointelegraph that — being a centralized product — QLDB cannot be compared to decentralized solutions, although it does attempt to do so in its roadmap:
“It makes no sense to compare things like transactions per second from a centralized service to a decentralized one. There are reasons why these things are decentralized and these are not merely technical ones. Amazon seems to miss the point by comparing QLDB with a blockchain.”
Even if one attempts to compare QLDB with permissioned blockchains, which are common among industry-level corporations because of their security, there are major distinctions between the two, says Montes:
“Permissioned blockchains handle cryptography in a decentralized way, which provides properties like historical evidence […] Another relevant point is the value of the smart contracts or chaincodes, which function as agreed and signed rules on how to modify the data. At least in the public information, they only address the immutability promise, but what about the governing rules of data? Without that, they only log whatever happens, with no real proactive control.”
That technically makes QLDB a database, argues Eyal Shani, a blockchain researcher and former software engineer, as well as Aykesubir consultant:
“QLDB is a normal database from that sense, [while] a blockchain database is also an immutable ledger […] the QLDB tech is another layer of software which eases the development of ledger-like software.”
Montes also agrees that QLDB resembles a conventional database, adding that its cryptography feature still makes it inferior to blockchains in terms of safety.
“Cryptography may calm down some users but doesn’t provide the security and robustness that a blockchain provides. [It is more] like a marketing tool.”
Moreover, the fact that there is a central authority overseeing the whole process might make it less reliable among competing businesses:
“Imagine six banks of the same size trusting one of them (a competitor) to hold a ‘cryptographically linked-list’ that they can verify. They simply won’t trust it. [Instead], they’d end up creating their own data store and then checking data versions daily. Cryptography is there in part to verify things, but when you can’t even do that, it falls short.”
Why QLDB avoids decentralization?
So who are the potential users of Amazon’s QLDB solution? Perhaps those who have become skeptical of the blockchain buzzword, now that the hype has begun to settle, suggests Shani:
“Some believe in that as much as Satoshi and some don’t want to hear about decentralization, possibly because of the bad reputation it had and the excessive amount of speculators in the cryptosphere.
“It’s marketing buzz, we see it with artificial intelligence and [the] Internet of Things, too. That may continue to happen until creating a real decentralized blockchain is as easy as creating a database today.”
Therefore, with further development of blockchain comes greater adoption. It might take more time until decentralization becomes a more trusted solution among corporations looking to shield their data from tampering:
“Decentralization of trust as a concept is something that could fundamentally disrupt some industries, but it’ll take time until we get there. The public and the regulators would have to change their mindset in order for that to happen fully […] Meanwhile, the use of blockchain-like applications and tokenization of assets is already a big jump to many industries and will ease the change into blockchains in the long run.”
Amazon Managed Blockchain: Add-on to QLDB or independent blockchain solution?
Amazon Managed Blockchain, which was announced along with the QLDB, “makes it easy to create and manage scalable blockchain networks using the popular open source frameworks Hyperledger Fabric and Ethereum,” but also works with QLDB itself, according to the company’s website.
Further, the product automatically scales depending on the needs of specific applications and is deployed in managing certificates, inviting new users to the network and tracing metrics, such as memory and storage resources and usage of computer, Amazon argues. AWS CEO Andy Jassy claims that this service “is going to make it much easier to use the two most popular blockchain frameworks [Ethereum and Hyperledger Fabric].”
Shani questions that argument by stating that Ethereum and Hyperledger blockchains are already “easily” set up in the industry’s present circumstances. The blockchain researcher also emphasizes the vagueness of Amazon’s press release:
“Governance in distributed protocol is an important aspect, but it’s unclear in what manner Amazon achieves this. If they implemented it in a centralized manner, how different is that from QLDB?”
Montes, in turn, doesn’t believe that a managed blockchain service offering may be around for long because “it limits open scalability (in a technology that is based on network-effects) by locking it up into a single cloud provider.” However, such solutions might be useful for testing and proof-of-concept (PoC) operations, he adds.
Still, the fact that a company as large as Amazon announced new blockchain-related products might seem like a healthy sign for the industry.
“From a macro point of view, the more research and development being done around Ethereum, the more the protocol strengthens and grows into a global adoption as a standard,” Shani concludes.
Aftermath of the BCH hash war.
It has been more than a week since the Bitcoin Cash (BCH) blockchain was split into two during the fateful hard fork. Two opposing sides clashed over the future of BCH as an asset, and it is time to see where both parties stand, now that the dust has finally started to settle.
Conservatives secured the victory, but the cost was high
As described in an earlier Cointelegraph article, Bitcoin ABC (BCH ABC, where ABC stands for Adjustable Blocksize Cap) is spearheaded by the likes of Roger Ver, renowned BCH advocate, and Jihan Wu, co-founder of Bitmain, an extremely powerful mining outfit. It was founded back in July 2017 as part of the original BCH blockchain, but morphed into an independent entity as the conflict escalated and the split became inevitable.
BCH ABC proponents stand for the idea that the basic structure of BCH “does not need any radical change.” Still, Bitcoin ABC’s roadmap suggests further development of the network, mainly via increasing Bitcoin Cash’s blocksize (hence the name) and minimizing transactions costs.
On the other side of the corner was Bitcoin SV (Satoshi’s Vision) lead by Craig Wright, who has previously declared himself as Satoshi Nakamoto. Other supporters include niche news outlets like CoinGeek, CalvinAyre and Bitcoin.org. BCH SV was created in August 2018, not long before the hard fork began.
The “reformers” attempt to restore “the original Satoshi protocol” by changing the BCH structure. Specifically, the plan involves entirely overwriting the network scripts of Bitcoin ABC and increasing the block size of BCH from 32MB to a maximum of 128MB to elevate network capacity and scale.
On Nov. 15, the BCH blockchain was split, and both parties started to form blocks on their respective, separate blockchains. The aim for both was to assert dominance, get as many blocks as possible, and show that their rule set is more reliable. Both sides mobilized some of their mining power, shifting it from BTC to BCH during the peak time of the conflict. That could have affected the Bitcoin (BTC) price, and therefore the overall crypto market, which notoriously started to slump at the time, eventually resulting in the market’s current, shredded state.
According to statistics from Bitcoin Cash data aggregator Coin Dance, BCH ABC has been accumulating more proof-of-work (PoW) than BCH SV since the date of the split and, eventually, it won the allegiance of major crypto exchanges including Bittrex, Kraken, Bitstamp, and Coinbase, among others, who initially chose to halt BCH trading during the most active stage of the hash war: after several days of silence, those exchanges appointed the winner by assigning the original “BCH” ticker to the BCH ABC rule set. Other signs suggesting that BCH ABC has come out ahead include platforms like CoinMarketCap merging BCH and BCHABC listings, and cryptocurrency hardware wallet Ledger, which resumed its BCH services in the form of BCH ABC only.
Further, news about BCH SV failure could have helped BCH ABC to further cement its winning position. On Nov. 19, Peter Rizun, chief scientist of Bitcoin Unlimited, reported that BCHSV suffered a blockchain reorganization (a situation when a node or a blockchain client needs to disregard blocks they have previously considered as accepted). Emin Gün Sirer, creator of the world’s first cryptocurrency to deploy a PoW concept and vocal critic of BCH, soon questioned BCHSV’s level of decentralization.
“This should not be possible in a decentralized system.
“You can only invalidate your own block and create a new tail if you’re the majority miner. BCHSV is a centralized coin.”
Haters gonna hate: Bitcoin SV lives on as “the original” BTC, not BCH
Nevertheless, Bitcoin SV is far from being dead. First, on Nov. 16, Binance, one of the largest players among crypto exchanges, opted to stay neutral in the fight: its CEO, Changpeng Zhao, announced that both tickers — BCHABC and BCHSV — “will stay” on his platform under their respective tickers, thus recognizing BCHSV as an independent entity. Currently, BCH ABC trades at $183 there, while BCH SV is set at $114. BCH price on other exchanges seem to correlate with BCH ABC price on Binance, as per CoinMarketCap data.
Then, around Nov. 19, Kraken, the platform which initially claimed it would only support one of the two BCH chains – Bitcoin Cash ABC – launched trading of its counterpart chain, Bitcoin SV under the “BSV” ticker. Still, in the accompanying blog post Kraken warned its clients that “Bitcoin SV does NOT meet Kraken’s usual listing requirements,” adding that there are “many red flags” that traders should be aware of, including miner coercion:
“Custodial losses taken on due to attacks originating from nChain or its affiliates will be socialized among all BSV holders on Kraken. Given the volatile state of the network and threats that have been made, Kraken cannot guarantee perfect custody of BSV.”
Afterwords, on Nov. 23, billionaire entrepreneur and BCH SV supporter, Calvin Ayre, declared that the coin “no longer want[s] the name Bitcoin Cash [BCH]” in an article published on his own crypto media outlet CoinGeek.
The statement clarified that Bitcoin Cash SV will continue to exist independently from Bitcoin Cash (BCH), and that the coin is in fact the “original” Bitcoin (BTC):
“Bitcoin SV is the original Bitcoin not the original Bitcoin Cash.”
Bitcoin (BTC), in turn, is referred to as “Segwit BTC” in the article.
The author also accuses supporters of both BTC and BCH of having “tinkered it [Bitcoin] to death,” as their cryptocurrencies “abandoned Bitcoin’s core principles by abandoning Nakamoto consensus and trust in miners’ Proof of Work.”
Ayre finished by saying that he has instructed his team to “start working with everyone” to release Bitcoin SV as an independent coin from Bitcoin Cash. The coin is scheduled to release as soon as next week during a CoinGeek event.
BCH, in turn, has been steadily losing its value since the hard fork began. It trades at around $197 as of press time, according to Coin360.
OKEx denies any wrongdoing during the BCH hard fork.
On November 20, the exchange responded to those allegations, essentially defending its decision and promising to provide evidence if the case goes to court. Curiously, it is at least the third time this year that OKEx has shown strange price volatility on their exchange.
Brief introduction to OKEx, major crypto futures trading player
OKEx was founded in 2017 as an international arm of the no longer operating Chinese exchange OKCoin. According to data from CoinMarketCap, it is currently the second largest player by volume, handling more than $1 billion worth of crypto trades per day. OKEx is based in Belize and has an operating hub in Hong Kong. Moreover, in April 2018, the company expanded its presence to Malta, citing their “confidence” in the local government’s approach to cryptocurrencies.
The exchange has been focusing on futures trading, which is basically an agreement to buy or sell an asset on a specific future date at a specific price, hence representing a risk management tool for investors.
On Nov. 3, 2017, OKEx launched its Bitcoin Cash (BCH) and Ethereum (ETH) futures trading, while its parent company OKCoin had been trading Bitcoin (BTC) futures since 2014. In December 2017, crypto futures received wider recognition after mainstream exchanges Chicago Board Options Exchange (CBOE) and Chicago Mercantile Exchange (CME) introduced BTC futures trading to the wider market.
Allegations: market manipulation, silent policy updates and “sponsored” social media posts
On Nov. 14, amidst the Bitcoin Cash hard fork that resulted in two different blockchains, BCH ABC and BCH SV, being born, OKEx abruptly forced the early settlement of its Bitcoin Cash contracts “to avoid potential losses to [their] customers caused by the short-term volatility and possible market manipulation attempts.” Thus, the BCH future contracts were settled early against the last traded price at early Nov 14, shortly after the announcement.
The move was criticized by a number of investors, who claimed that they had suffered major losses as a result of OKEx’ decision. Namely, Amber AI, a Hong Kong-based crypto firm co-founded by former Morgan Stanley trader Tiantian Kullander, as per LinkedIn, published a Medium article on the matter, arguing that OKex had changed the rules of the settlement index by discontinuing to reference Bitfinex prices before the early settlement. The update details were published on November 12, just two days prior to the event:
“By changing the settlement date and delivery rule against the open interest in the market, [OKex] invalidated their previous announcement. This meant that for each short position carried in the contract, OKEx implicitly imposed a fixed loss on the notional amount, delivering the contract 20% higher vs fair value.
“This is no different than the Chicago Mercantile Exchange (CME) announcing that the S&P 500 E-Mini Futures will settle against the Shanghai Composite Index in the midst of trading.”
Additionally, Amber AI accused OKex of intentionally malfunctioning the order submission system on Nov. 15, during BCH “most volatile trading session in 9 months.” According to the crypto company, traders were unable to submit their orders due to a “Limit Order Bug,” although OKEx continued to operate at large:
“Recorded level-2 data throughout this period shows the order matching engine as functioning. The exchange continued to host traffic and operate but with all order submissions blocked, except buy-orders below the best bid, and sell-orders above the best offer.”
Amber AI continued with even more allegations by claiming that OKex “sponsored” a company called ‘Honeycomb Finance’ to publish a Reddit post allegedly supporting the exchange’s point of view. Finally, Amber AI claimed that OKEx ultimately imposed a BSV liability for its BCH borrowers despite allegedly writing that “users who have outstanding borrow of BCH, […] will not need to repay BSV” before silently updating its announcement.
Ultimately, traders lost “$24 million” due to the incident, the post argues, continuing:
“The course of events surrounding the BCH hard fork are indicative of market manipulation, fraud and deceit.”
There were others who have voiced their discontent in regards to how OKex handled the BCH hard fork. Thus, Qiao Changhe, the founder of Beijing-based Consensus Technologies, told Bloomberg that his fund lost $700,000 because its hedging position on OKEx “was abruptly closed at a level that didn’t reflect prevailing market prices”:
“OKEx is losing its credibility […] The futures contract became something nonsense, not something we could use to hedge.”
Changhe also added that he was going to reduce his $5 million fund’s use of OKEx because of that incident. Bloomberg mentions four other alleged traders who chose to stay anonymous, but also confirmed that they were going to limit or end their relationships with the exchange. One of them reportedly filed a complaint with Hong Kong’s Securities and Futures Commission (SFC), whilst the agency’s spokesman declined to comment after being approached by Bloomberg.
OKEx has issued a number of comments regarding the incident. First, the exchange explained its reasoning in a blog post published shortly after the hard fork, on Nov. 15. In it, OKEx said that they brought the delivery time earlier because of strong volatility and unclarity of “the final outcome.”
“An early announcement may make room for market manipulation and cause loss to our users,” the exchange added when explaining the urgency of the move.
Further, on Nov. 19, Andy Cheung, head of operations at OKEx, echoed that response in a comment for Bloomberg:
“After considering various scenarios, we decided that an early settlement was the most fair and rational decision to maintain an orderly market.”
On Nov. 20, OKEx directly addressed Amber AI’s article via Medium. First, the exchange claimed that they “do not have an institutional client profile named Amber AI, while Amber AI claim themselves as a Hong Kong-based company,” adding that OKEx “[does not] serve any customer in Hong Kong, in respect of the local laws and regulations”.
“The OKEx account that Amber AI claimed managing is an individual account, which is not a Hong Kong resident or entity on the report of the KYC information,” the exchange then disclosed. “Amber AI made a profit from the individual account on OKEx they claimed to have managed during the early delivery.”
More importantly, OKEx denied any manipulation, noting that Amber AI’s statements “have caused serious damages to OKEx’ reputation” and that “majority of [OKex’] users supports our decision of early delivery of BCH futures contracts.” The exchange also stated that it is ready to address the allegations in court:
“We will disclose the evidence required to the court to prove that OKEx is not involved in the alleged trading when deemed necessary. We reaffirm that we will NEVER [sic] trade against our customers and manipulate the market.”
Previous incidents featuring OKEx and price anomalies that happened this year: trader threatening suicide, whale tumbling the price
There are at least two other similar incidents involving OKEx that happened in 2018. First, there was an abnormal pricing drop on March 30 when the exchange posted quarterly futures market that were significantly lower BTC/USD readings comparing to the rest of the market. In a video that was circulating on Twitter at the time, an OKEx trader who allegedly lost 11 mln yuan ($1.75 mln) in the debacle was threatening CEO with committing suicide by drinking poison at the exchange’s office in Hong Kong.
OKEx blamed the issue on users closing huge numbers of contracts “regardless of costs.”
“OKEx has the right to warn against all unethical behavior such as malicious manipulation of prices, malicious influence on trading systems, restrictions on trading, shutting down of accounts, etc.,” the company’s statement shared with clients read. OKEx also confirmed that a rollback had been completed, and that normal trading operations would resume shortly.
Furthermore, in August, OKEx featured in another situation involving strange market fluctuation after forced liquidation of a large misfired Bitcoin futures trade worth $416 million was initiated by an unknown trader.
Due to the “sheer size of the order” — a hefty 4,168,515 contracts, according to the exchange — OKEx said it took preemptive action, explaining that their risk team asked the client to “partially close the positions to reduce the overall market risks” several times.
“However, the client refused to cooperate, which lead to our decision of freezing the client’s account to prevent further positions increasing Shortly after this…unfortunately, the BTC price tumbled, causing the liquidation of the account.”
The exchange then allegedly injected 2,500 BTC (around $18.5 million at the time) into an insurance fund to help mitigate the losses incurred by the force-liquidated trade.
Crucially, it was revealed that aside from this insurance cover, the platform did not provide the funds that traders use to leverage their futures contracts. Instead, it relied on the so-called “socialized claw-back” policy for such cases, meaning that the losses from the unfilled order would need to be covered by counterpart traders. In that particular instance, some traders were set to lose 18 percent of their profits.
OKEx’ official statement outlined measures the exchange was undertaking to “prevent similar cases” from occurring again and to enhance risk management and thwart possible manipulation.
In a comment for Cointelegraph at the time, OKEx head of operations, Andy Cheung, claimed that this had been a “valuable lesson” for him and OKEx.