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China Crypto Insider Lifts Lid On What’s Really Going on in Beijing

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Last Updated on December 10, 2019

There has been a lot of news out of China in recent weeks buffeting the markets – both to the upside and downside.

The “Xi put” in the shape of President Xi Jinping’s blockchain-friendly pronouncements in November got the juices going.

And yesterday we heard that the People’s Bank of China is supervising the rollout of a yuan-backed digital currency in Shenzhen and Suzhou.

However, it was the initial euphoric response in the marketplace to Xi’s speech to the Chinese Communist Party’s powerful Politburo, and the subsequent supposed renewed clampdown on cryptocurrencies that followed, that has been moving markets.

Western media reporting on Chinese crypto matters is often inaccurate or confusing. The crypto ban is a case in point. Although China did ban crypto exchanges operating in the country in 2017, it didn’t stop Chinese citizens trading offshore – a fact that is often overlooked. Also, over-the-counter business still allowed those who wished to buy bitcoin.

Also, in some ways Xi’s speech was nothing new as blockchain technology was previously identified as a key technology by state planners.

To get behind the headlines and to glean some insights into what China’s leaders in government and tech are up to, we spoke to Randolf Zhao, vice president operations at crypto derivatives exchange BaseFEX.

We began by considering some of the issues raised in a recent major South China Morning Post article on Chinese crypto developments and how blockchain was likely to affect governance in China.

Randolf Zhao, vice president operations at BaseFEX
Randolf Zhao, vice president operations at BaseFEX

RZ: The thing that I see commentators in the SCMP article haven’t touched on is, some use cases of blockchain in China’s government services might not be as revolutionary as they thought. Instead, it could just make complicated things much simpler, thanks to the distributed nature of blockchain technologies.

A pain-killing application could be an inter-departmental-blockchain of all levels of all administrative departments.

The databases of different government departments in China are NOT shared. It is not because they refuse to do so. It is because it is such a lengthy, expensive, and complicated process for different departments to connect their cloud databases with each other.

I still remember how painful that was back in 2015 when the city government of Beijing was syncing the Business License, Corporation Code Certificate and Tax Registration databases all together, which was called ‘3in1’  (三证合一) back then. For four weeks, all paper-based processes in Beijing came to a halt until the syncing was completed. And this entire process took the three departments half a year to prepare for.

And now, what if they want to sync more databases – for example with the Social Insurance database – to the system they have? It will be another half year in preparation for all government departments involved.

An inter-departmental blockchains at different levels of all administrative departments could be a perfect pain-killer for situations like this. Data can be immediately visible to different departments and to local layers of all government agencies.

These blockchains will be semi-private – what the community usually calls ‘consortium blockchain’ or ‘permissioned blockchain’ – in which authorised personnel can access and update different info, with different types and levels of authority on the blockchain.

And on top of this mega inter-department blockchain, different departments and agencies can develop a variety of complex, blockchain-based applications, for example social benefits calculations, anti-financial crimes, anti-corruption, or

fugitive hunting. Of course, these can all be artificial intelligence-based as well.

As a matter of fact, this is happening now. Some provincial and municipal governments in China are already pioneering these use cases, such as Zhejiang province, where Alibaba helped with development, and in Xiongan and Shenzhen where Tencent was involved.

So what about the reported crackdown on bitcoin mining and exchanges?

RZ: We all know it is pretty much an open secret that although the Chinese government regulations banned cryptocurrencies and crypto and bitcoin trading, it gave implicit consent to local operations that are not involved in Ponzi schemes or other forms of fraudulent behaviour.

Legitimate projects and exchanges voluntarily moved registration offshore, yet the majority of their teams remain in China, and as long as they don’t play too wild, the local government sees no problem with this. I would say local governments are silently happy with the revenues and employment opportunities we bring to the local economies.

How do you see the government’s crypto/blockchain strategy evolving?

The general idea is, China cannot be absent from the upcoming cryptocurrency financial system, and the Chinese government will not give up the economy’s existing advantages in cryptocurrencies and crypto trading. This is the open agenda of People’s Bank of China (PBOC) and the Ministry of Industry and Information Technology (MIIT), both of which are actively promoting China’s Digital Currency Electronic Payment (DCEP) system.

The main concern is Ponzi schemes and other types of fraud occurring under the name of cryptocurrency or blockchain. Thus, fraud-related exchanges are the targets for crackdowns. Also note I am separating the term cryptocurrencies from the term blockchain. They are being assessed separately.

This hasn’t changed during the recent events. Beijing local government recently raided a few China-focused exchange that were allegedly associated with frauds. But they are by no means targeting everyone.

I, together with most people I know in Beijing’s crypto industry, don’t agree with articles like this [SCMP article] feeding FUD.

When it comes to the question of the party and government using blockchain to tighten control from the top do you think there may be push back from local governments  and other areas of the party who might see it threatening their control?

RZ: I beg to differ.

The recent events, Xi’s blockchain speech and local governments’ anti-fraud raids, strongly suggested an approval in the Politburo’s standing committee for blockchain technologies and crypto initiatives esp. China’s DCEP. [If there was opposition in the provinces and elsewhere then…] provincial governments wouldn’t be doing anything, such as implementing the 2017 ban so swiftly.

It should also be noted that provincial governments report to the Politburo. It seems a general roadmap has already been drafted, but details are still being discussed by relevant ministries so local governments are taking some preventive measures to avoid social instabilities stemming from crypto as camouflage for frauds.

By the way, it would be PBOC and MIIT that first brought the topic to the Politburo’s standing committee – that’s how the internal initiative process goes. They have been researching and promoting the topic for years. The PBOC and MIIT both have working groups researching on blockchain and crypto matters.

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Ex-NFL Team Owner Pleads Guilty to Running Unlicensed Money Transmitter

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Former “shadow banker” Reginald Fowler pleaded guilty to charges of operating an unlicensed money transmission business during a court hearing Friday.

In a hearing before the Southern District of New York, Fowler, a former co-owner of the NFL’s Minnesota Vikings, changed his original plea from not guilty, admitting to providing exchanges with banking services through his alleged operations with Crypto Capital, a payment processor which served exchanges like Bitfinex, QuadrigaCX and CEX.io. 

Additional charges of conspiracy to operate an unlicensed money transmitting business, bank fraud and conspiracy to commit bank fraud were dropped, according to Inner City Press’s Matthew Russell Lee, who first reported the news. According to Cornell Law School’s Legal Information Institute, Fowler could be sentenced to no more than five years in prison and fined.

Fowler is accused of directing “the ebb and flow of significant amounts of money” from various international bank accounts, often assisting crypto exchanges in skirting know-your-customer and anti-money laundering regulations. 

CoinDesk reported that Fowler planned to

change his plea last month.

Fowler allegedly co-founded the payment processor Crypto Capital with Israeli national Ravid Yosef. The two are accused of defrauding financial institutions by opening accounts on the pretense of serving real-estate clients, but instead storing funds on behalf of cryptocurrency exchanges. 

According to U.S. Attorney Geoffrey Berman, the Panama-based firm processed hundreds of millions of dollars over its half-decade in existence. Crypto Capital was a key financier to an industry that has had trouble securing banking relationships with legacy firms. 

Yosef has been indicted, but remains at large.

Crypto exchange Bitfinex reportedly lost access to approximately $850 million banked with Crypto Capital after the company’s accounts were frozen. 

According to a subpoena to depose Crypto Capital executives, Fowler had opened several bank accounts holding Bitfinex’s funds under his name, rather than Crypto Capital’s, in Poland.

Crypto Capital also stored funds for clients of QuadrigaCX, at one point the largest crypto exchange in Canada.

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Deribit Takes On New Trading Tools to Capture ‘Exploding’ Options Market

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Amid increasing activity within the crypto derivatives market, software maker Trading Technologies (TT) announced Wednesday it would provide trading tools to users of leading crypto exchange, Deribit.

Included in the suite are advanced order types, charting and analytics as well as access to a feature allowing users to create algorithms for bot trading.

TT users eligible to trade on Deribit will be able to access all listed products, including bitcoin (BTC) and ether (ETH) futures, perpetual and options contracts. Dutch-based (for another month) Deribit, founded in 2016, is now the fifth crypto-only exchange that TT supports, alongside BitMEX, CoinFLEX, Coinbase and Bakkt.

TT’s vice president of cryptocurrencies, Michael Unetich, said demand for crypto derivatives was strong in regions such as the U.S., Asia and Europe.

“We hope to provide trading access to the highest volume derivatives exchanges in the world. CME is one leading derivatives venue, while others are located in Asia.” Unetich said.

Trading Technologies creates professional trading software, infrastructure and data solutions for a wide variety of users, including proprietary traders, brokers, money managers, chartered tax advisors (CTAs), hedge funds, commercial hedgers and risk managers. Traditional financial institutions like Goldman Sachs; stock exchanges like the Johannesburg Stock Exchange; and Europe’s largest derivatives exchange Eurex also use the 25-year-old firm’s tools.

Exploding options market

Jehan Chu, co-founder and managing partner of Kenetic, a Hong Kong-based blockchain investment and trading firm said TT’s connection to Deribit was a “massive show of confidence” for the “exploding” options market. 

“TT’s long credible history and impressive user base combined with Deribit’s experience as one of the first crypto options platform is an exciting match that should significantly increase volumes over time,” Chu said.

Commenting on the Asia-Pacific region for retail investors, Chu also said the TT and Deribit partnership would “expand the options markets for Asian traders through a familiar and trusted platform.”

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2019’s DeFi Boom Creates New Questions for Tax Filing Season

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The decentralized finance (DeFi) boom of 2019, leading to over $785 million in locked crypto assets, is already making accountants dizzy. 

If you lock up bitcoin or ether in exchange for a synthetic asset or a stablecoin, as nearly a dozen projects and platforms today allow, is that a trade or merely a temporary reorganizing of the original asset? 

Cryptio CEO Antoine Scalia, of the accounting startup that received a small investment from ethereum co-founder Joe Lubin’s ConsenSys, said there’s no clear answer yet. 

“The challenges will be how to account for all the use cases in 2020,” Scalia said. “The more complex transactions and assets are, the more complex the accounting is.” 

That’s why firms such as Dragonfly Capital and Winklevoss Capital, the latter of which is owned by Tyler and Cameron Winklevoss of the Gemini exchange, invested $5 million in startups like TaxBit. TaxBit CEO Austin Woodward said so far “thousands” of users have signed up for the 2020 tax season, including a few exchanges. 

Dragonfly Capital co-founder Alex Pack said connecting automated software to an exchange account could create additional privacy risks, in the case of a cloud breach, which is why the firm invested in TaxBit’s experienced team. 

“There are a lot of attacks on blockchain around anonymity or pseudonymity that rely on knowing a lot of the addresses between various exchanges,” Pack said. “That’s why we would only trust something like TaxBit … which comes from the business-to-business, security-focused mindset.” 

He added the Internal Revenue Service (IRS) is being “heavy-handed” when it comes to staking and DeFi products. Because there’s no clear categories for the experimental assets, prudent DeFi users record everything from wallet addresses

to open source code links in case the IRS comes knocking. That’s why these new compliance tools record and aggregate data across various networks. 

“Our software offers real-time monitoring, because we have the API connections. We’re pulling in data as you trade, at least daily,” TaxBit’s Woodward said. “We’re releasing a lot of functionality around tax optimization. Recommending trades that could give users the most beneficial tax answer.”

So far, Woodward said DeFi users that used MakerDAO loans and other financial products beyond exchanges need to enter transaction details manually, relying on support from TaxBit’s chat hotline with tax attorneys and CPAs (Certified Public Accountants). 

Unclear requirements

Both of the above-mentioned startups are working with clients to improve their systems’ ability to automatically flag potentially taxable events in the DeFi ecosystem.

As for Cryptio, which is strictly focused on serving businesses and doesn’t offer a TurboTax-style option for retail users like TaxBit, Scalia said his team is helping clients that used DeFi products to record information related to every smart contract the asset touched along the way. 

“The exchange of the ETH that I’m depositing on the Compound smart contract for the c-ETH in my wallet, could be seen as a trade. This [compliance standard] is unknown,” Scalia said, referring to the lending platform Compound, which uses synthetic crypto assets. “You have to be able to say, ‘Here is all the smart contract activity and transactions that led to the creation of this synthetic asset.’”

CoinDesk reached out to the team at MakerDAO, DeFi’s most popular loan platform, about the accounting challenges presented by leaderless services and will update the article if we hear back. 

In part because the accounting requirements are so unclear, a Credit Karma survey found just 0.04 percent of Americans reported their crypto transactions in their 2018 taxes, compared to an estimated 4 percent of the population saying they used crypto. This is expected to change since the IRS issued a crypto-oriented guidance update in 2019. 

Pack, Scalia and Woodward all agreed tax reporting is a major barrier to crypto adoption. People don’t know how to use the technology without the headache of so much paperwork. As such, these startups see their role as enabling the next wave of mainstream, compliant usage. 

“My thesis is that within the next few tax seasons, the number of [people reporting crypto on their taxes] will be 100x larger,” Dragonfly’s Pack said. “That hasn’t even been factored in yet. … I think figuring out how to [definitively] do accounting for DeFi is still several years out.”

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