Our weekly list of announcements about how capital markets participants and regulators are engaging with digital assets.
The Block: crypto clearinghouse places trades without collecting collateral in decentralization push
KeyTango, an Israel-based startup that offers non-custodial clearing services, recently piloted options trading with OTC firm GSR Markets, in which the OTC desk did not receive the seller’s collateral in advance. Instead, the seller deposited his collateral in a digital wallet with three key shares, held separately by GSR, the seller, and an agreed-upon arbitrator.
Funds locked in the wallet can only be transferred when two of the three key shareholders co-sign the transaction. KeyTango CEO Dan Danay explained that this design delegates the custody responsibility to three parties while also assuring GSR that collateral is deposited. Currently, in cryptocurrency trading, traders have to deposit funds with OTC desks and exchanges before they can make a trade. This practice could expose traders to risk of the exchanges or OTC desks losing their funds in a hack.
KeyTango secures its wallets with multi-party computation (MPC), a cryptographic technique in which several key shares are generated, stored separately, and computed collectively to authorize transactions. Under the MPC scheme, authorizing a transaction from the wallet does not require all key shares to be used, only the majority. In the event one side of the trade fails to authorize a transaction, an arbitrator can step in and co-sign.
“Basically we use MPC to completely decouple running the logic layer in doing any kind of centralized crypto trading, and doing the actual settlement,” said Danay to the Block. To be sure, multi-signature, another cryptographic scheme that has been widely adopted in securing digital wallets, can also facilitate the clearing and settling process that KeyTango is offering with MPC. However, Danay said that multi-signature does not satisfy their needs to settle in different cryptocurrencies.
“The comparison between MPC and multi-signature is exactly like in custody. If you want to do this with multisig, you will be limited to the chains that actually support multisig contracts you can actually trust,” said Danay. Meanwhile, although non-custodial trading is a feature for decentralized exchanges and many DeFi protocols, in centralizing crypto trading, a clearinghouse is still needed so that neither side of the trade is exposed to counterparty risk. According to Daney, they have onboarded several OTC desks and lending firms as clients, some of which will be announced soon.
“We are excited to be involved in the advancement of this new technology. It not only reduces the counterparty risk prevalent in trading digital assets but also helps decentralize the trading process, which is key for the industry’s development,” said GSR co-founder Cris Gil.
CoinDesk: DTCC delays blockchain project on back of Brexit
The Depository Trust & Clearing Corporation (DTCC) has pushed back the release of its blockchain-based post-trade system for derivatives by several months, in part because of complications created by Brexit. The official line from the US central securities depository (CSD) is that the delay, which has not been previously reported, is to allow for additional testing of the revamped trade information warehouse (TIW).
A spokesperson for the DTCC told CoinDesk: “The project is progressing well. DLT and cloud development have been completed and we continue to conduct in-depth industry-wide testing with our clients, vendors and technology providers. However, to ensure that this technology is implemented in a measured, prudent and most secure manner, we have allocated additional months for testing, to ensure that firms are 100 percent ready.”
But a person familiar with the technology testing process said the delay is also caused by the UK’s departure from the European Union. The previously scheduled release of the new TIW system coincided with the week of Brexit, which is slated for Oct. 31.
Reuters: Philly Fed pres says central bank digital currency “inevitable”, US should not move first
It is “inevitable” that central banks including the US Federal Reserve will start issuing digital currency, Philadelphia Federal Reserve bank president Patrick Harker said on Wednesday, while cautioning that the United States should not be the nation to lead such a move.
“Frankly I don’t think we should be the first mover as a nation to do this,” Harker said at a community banking conference here, given the dollar’s role as the world’s reserve currency and the need to test out new technology. But he added: “It is inevitable … I think it is better for us to start getting our hands around it.”
The Fed and other central banks are debating both how to approach the rise of privately issued cryptocurrencies like bitcoin, and examining how the underlying blockchain technology might change traditional central banking. The general mood is skeptical – about whether private cryptocurrencies will ever become large enough, or behave enough like true currencies, to require regulation, or to threaten the ability of traditional central banks to conduct monetary policy.
Harker acknowledged his view was “in the minority” at the Fed right now. But his staff has begun research on the issue, and he said he is organizing a small research conference for academics to be held early next year.
SEC rules that bitcoin is not a security
There was some insight into the view of the Securities and Exchange Commission on cryptocurrencies in a letter detailing a ruling to Jacob Comer, head of regulatory and compliance at Cipher Technologies, which was applying for registration of a closed-end interval fund. The SEC said it disagreed with Comer’s conclusion that bitcoin is a security: “We think that conclusion is incorrect under both the reasoning of SEC v. Howey and the framework that the staff applies in analyzing digital assets,” the SEC wrote in the letter.
“Among other things, we do not believe that current purchasers of bitcoin are relying on the essential managerial and entrepreneurial efforts of others to produce a profit. Accordingly, because Cipher intends to invest substantially all of its assets in bitcoin as currently structured, it does not meet the definition of an ‘investment company’ under the Investment Company Act…”
The SEC explained that if bitcoin were a security, “it would then raise substantial other issues”. For example, bitcoin would be an unregistered, publicly-offered security, and, among other things, it potentially would render the proposed fund an underwriter of bitcoin. Other legal and investor protection issues the SEC is looking for companies to address are with respect to valuation, custody and potential manipulation in the bitcoin market.