Week of 12.8.19 - Issue #6
Welcome to the sixth edition of the ₿it Economy! Each week, I break down the top stories in Bitcoin in a simple in clear format. Enjoy!
Topics: State of Mining, Pseudonymous Funding & AMLD5
S1: Crusoe Energy System Raises $70 Million
What is it? - Denver-based company Crusoe Energy Systems is set to build a new bitcoin mining facility in the United States. The Denver-based company converts natural gas to energy-intensive computing raised $70 million in fresh capital to fund 70 units in 2020. The new capital comes in a $30 million equity funding and $40 million in project financing from investors like Bain Capital Ventures, Winklevoss Capital, Founders Fund, and Polychain Capital. The company looks to take advantage of the United States shale boom by preventing gas flaring. Gas flaring occurs when energy companies burn off excess gas in the absence of adequate pipeline capacity.
Why it Matters? - There has been a lot of talk recently about Bitcoin mining and the location of miners and its overall impact on the environment. CoinShares published its latest report on Bitcoin mining trends this week, which found that one Chinese province, Sichuan, accounts for 54% of global mining.
If you have been following the newsletter from the beginning, you would know that China has a large concentration of miners due to its low electricity costs. Moreover, one can allude to Occam's Razor as it plays a role due to the majority of manufacturer and mining equipment being built in the country or nearby countries. Though currently dominating, other regions of the world have begun to subsidize electricity in order to capture some of the market. One of those countries is the United States, which has seen firms like Crusoe Energy Systems take advantage of the stable political culture and low electricity cost in building innovative facilities. For one to be successful in a region like China, one must have a deep understanding of the local and political culture and possess a substantial network. Due to the general regulatory instability and often policy making flip-flop of the Chinese on Bitcoin, areas like the United States appear to be making a strong push to compete in the sector.
Final Take - The United States will continue to grow in the mining sector and the Bitcoin network will become less dependent on Chinese based miners.
S2: Square Crypto Funds An Anonymous Dev
What is it? - Square Crypto, the cryptocurrency development arm of payments firm Square, has funded pseudonymous Bitcoin developer, ZmnSCPxj. The develop is well known for his work on both Lightning Labs and c-Lightning implementations over the past two years. Square Crypto has one goal in mind: help build out the foundations of the future Bitcoin ecosystem as effectively as possible.
Why It Matters? - This is the beauty of bitcoin. Why you ask? Well, in what other industry could a publicly traded company provide funding to a pseudonymous character? "We don’t actually know where ZmnSCPxj lives, apart from somewhere in the GMT+8 timezone, which includes China, Brunei, Hong Kong, Macau, Taiwan, the Philippines, Malaysia, and Singapore. That’s it. That’s all he told us and that’s all we know." Round of applause has to go to Jack Dorsey and the rest of the Square Crypto team as they are slowing becoming a key player in the funding of Bitcoin developers. Grants like these give develops that opportunity to devote the entirety of their professional focus to contributing to the betterment of the bitcoin ecosystem. As Rome was built in a day, neither will Bitcoin. This news came shortly after Jack Dorsey announced that Twitter will be funding a small independent team to develop an open and decentralized standard for social media. The combination of the two news stories contribute to the overall ethos of Twitter and Square as the look to build censorship resistant decentralized open source projects.
Final Take - Square will be the most important bitcoin company in 2020.
S3: Bottle Pay to Shutdown
What is it? - Bottle Pay, a fast and simple way to make Bitcoin payment, announced that it will be closing its doors on December 31st due to regulatory compliance. The platform integrates with your social media account which allows anyone to send Bitcoin straight away, without the need to create a wallet or download an app. On Friday, the Block Matrix, the team behind Bottle Pay, requests that all users withdraw their funds by the end of the year due to the difficult standards in the Fifth Anti Money Laundering Directive or 5AMLD. The Directive is a piece of a regulation that contains requirements for the mandatory verification for all cryptocurrency platforms clients following the KYC and AML standards. The goals of 5AMLD, as stated by the European Commission are as follows:
Enhance the power of the EU Financial Intelligence Units and facilitate transparency on who really owns companies and trusts by establishing beneficial ownership registers;
Prevent risk associated with the use of virtual currencies for terrorist financing and limit the use of pre-paid cards;
Improve the safeguards for financial transactions to and from high-risk countries;
Enhance the access of Financial Intelligence Units to information, including centralized bank account registers.
Ensure centralized national bank and payment account registers or central retrieval systems in all Member states.
These new rules are more strict, due to ensuring transparency of transactions conducted by anonymous parties using cryptocurrency trading platforms. EU member states are required to implement the amended rules in their national laws no later than January 10, 2020.
Why it Matters? - Keeping regulations current is an ongoing process; regulations need to keep pace with technology, consumer behavior, and other laws and international standards. More companies will have to face the choice to shut down or face unknown consequences due to 5AMLD. Compared to 4AMLD, which was enacted in 2017, 5AMLD imposes more stringent reporting obligation of cryptocurrency ownerships.
The new directive requires exchanges and wallet providers to register with local authorities and authorize Financial Intelligence Units to obtain addresses and identities of owners of virtual currencies. The directive goes on to provide a legal definition of virtual currencies:
"a digital representation of value that is not guaranteed by a central bank or a public authority, it is not necessarily attached to a legally established currency and does not possess a legal status of currency or money, but is accepted by natural or legal persons as a means of exchange and which can be transferred, stored and traded electronically."
It is not known if anyone or any team will take over the Bottle Pay project, or if the current team will open-source its codebase. This project involves a lot of liability due to the EU applying KYC regulations to open source development. 5AMLD regulations are a scapegoat for capital control on behalf of the banks. The same regulations that are applied to today's financial institutions are now being applied to virtual currencies before they have had an adequate time to develop. This is only the beginning as I expect more financial regulators to weaponize and over-regulate value transactions. Their blatant and obvious overreach of power will fuel the further development of open-source projects.
Final Thought - Regulation like 5AMLD will increase Lightning Network adoption at a faster pace.
Market Watch
- High: $7,541.14
- Low: $$7,085.36
- ATTOW: $7,104.13
Bitcoin has been looking weaker than last week, now trading below psychological resistance levels near $7,600. On Tuesday, Bitcoin saw a bearish outside candle pattern which occurs when the day begins with optimism but ends on a negative note. The asset remains on slippery footing but could see a swing in the opposite direction if $7,400 were to be reclaimed. If this does not occur in the beginning of the week, expect further bearish pressure to minor support area of $6,900. If that support level were to be broken, expect continued falling as the asset will see strong selling pressure until key support around $6,500.
Announcements
- Bakkt adds options and cash-settled futures to suite of Bitcoin derivatives - Link
- Jack Dorsey announces new Twitter team - Link
- Paxful partners with Binance to bring bitcoin to masses - Link
Interesting Reads
- Paul Grahams Lessons - Link
- Jill Carson's Crypto is most useful for breaking laws and social contracts - Link
Final Quote
“The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts.”
Satoshi Nakamoto, Founder of Bitcoin, on the reason for Bitcoin.
Have a great week!