REPORT: NEW YORK CRYPTO REGULATIONS: NY BitLicense Is An Abomination; May Only Get Worse

New York, one of the first states to adopt virtual currency rules, has taken a relatively strict approach in the regulation of virtual currency activities.1 The rules, enacted on 24 June 2015, established a regulatory framework for virtual currency businesses that requires operations related to transactions involving any form of virtual currency to obtain a “Bitlicense” from the state.2

The strict licensing requirements favor large virtual currency firms and financial institutions. The BitLicense application and licensing process are likely overly burdensome for small companies with limited access to capital and legal resources.

Overview of Bitlicense

Subject to certain exceptions, anyone engaging in any of the following activities is required to obtain a BitLicense from the New York State Department of Financial Services (“NYSDFS”):

  • Virtual currency transmission
  • Storing, holding, or maintaining custody or control of virtual currency on behalf of others
  • Buying and selling virtual currency as a customer business
  • Performing exchange services as a customer business
  • Controlling, administering, or issuing a virtual currency.3

Out-of-state businesses that engage in virtual currency activity involving New York State, or with persons within the state, must obtain a BitLicense to conduct their business.4

Some of the regulatory requirements include:

  • Minimum capital reserves
  • Records of transactions must be kept for at least seven years
  • Quarterly financial statements must be submitted within 45 days of the close of a quarter
  • Background checks on all employees must be performed by an independent investigatory agency
  • Appointment of a dedicated compliance officer
  • Enforcement of written anti-fraud, anti-money laundering, cybersecurity, privacy, and information security procedures
  • Prior written approval from the superintendent of the NYSDFS before the company introduces a “material change” to their business models, such as a new product or service
  • Prior written approval from the superintendent of the NYSDFS before any merger with or acquisition of any company holding a BitLicense5

The application fee for a Bitlicense is $5000 and the applicant must complete a 31-page application form.6

The “one-size-fits-all” licensing process does not provide any exceptions for small virtual currency companies.

Application Approval Process Slow, but Improving

The 2015 rules do not impose a deadline on the NYSDFS for completing the licensing process.7

Since the enactment of the rules, the NYSDFS has approved only eleven charters or licenses for virtual currency companies.8

The license for Genesis Global Trading was not granted for nearly three years, and a license for BitFlyer USA, Inc. was not granted for over a year.9

The number of licenses issued will likely increase over the next 12-24 months.

Focus Remains on Consumer Protection: The 2018 New York Attorney General Report

In September, the New York Attorney General (“NYAG”) issued a report that concluded crypto trading platforms vary significantly in their risk management strategies and in the ways they fulfill customer responsibilities.10

The NYAG identified three broad areas of concern: potential conflicts of interest; lack of serious efforts to impede abusive trading activity; and limited protections for customer funds.11

The NYAG also referred three virtual currency exchanges- Kraken, Binance, and Gate.io-to the state’s financial regulator for possible legal action and raised concerns over price manipulation and conflicts of interest on trading platforms.12

The report concludes that “virtual asset trading platforms have yet to implement serious efforts to monitor and stop abusive or manipulative trading.”13

Draft Virtual Currency Legislation Introduced into the State Assembly

Virtual currency bills have been introduced in the State Assembly this year. New York, however, will not likely amend existing rules or introduce major virtual currency legislation until 2020, after the State Assembly is able to review a task force report that must be completed by December 2019.

  • Bill on the Creation of Virtual Currency Task Force: The bill proposes the creation of a digital currency task force to provide the governor and the legislature with information on the potential effects of the widespread implementation of digital currencies on financial markets in the state. If passed, the bill would establish a group consisting of nine members which would be called on to submit a report to the governor, temporary president of the Senate, and the speaker of the assembly by December of 2019. Additionally, the task force would be required to provide the number of digital currencies and exchanges operating in the state, information about large investors in the field, and the energy consumption necessary for coin mining operations. The task force would also provide a review of laws and regulations on digital currency used by other states, the federal government, foreign countries, and foreign political and economic unions to regulate the marketplace.14
  • strong>Bill on Virtual Currency: The bill proposes eliminating the BitLicense and licensing fees. In addition, the bill mandates that any virtual currency business or entity be subject to routine audits by a public or third-party depository service. Any entity in full compliance will receive a digital New York Seal of Approval to reassure consumers that the outlet is trustworthy and secure.15

Recommendation: We would advise new crypto firms to consider establishing operations in Montana, New Hampshire, Texas, Tennessee or Wyoming.

The information provided in this report is for informational purposes only. It should not be considered legal or financial advice. You should consult with an attorney, financial advisor, or other professional to determine what may be best for your individual needs.


This report was prepared by Trifin Roule.

For nearly two decades, Mr. Roule provided for the U.S. government legal analysis of anti-money laundering, counterproliferation financing and counterterrorist financing laws and regulations dozens of jurisdictions, and international standards, as detailed through intergovernmental bodies (e.g. Financial Action Task Force (FATF)), and financial institutions (e.g. banks’ financial intelligence units and compliance offices).

In addition, Mr. Roule has provided in-depth analysis of digital asset accounting, auditing, customer due diligence, exchange, licensing, mining, initial coin offering (ICO), private key storage, and record-keeping practices and regulations.

Mr. Roule is a former Assistant Editor at the Journal of Money Laundering Control, a peer-reviewed journal that provides detailed analysis and insight on the latest issues in the law, regulation and control of money laundering and related matters. Mr. Roule has published dozens of articles on anti-money laundering, and counterterrorist financing laws and regulations.

Trifin Roule is the Publisher of our new division, Abacus Legal, and his and his team’s reports will be free to read for the next 45 days. After that time they will be dubbed premium content and require a subscription.


  1. “New York State Department of Financial Services, New York Codes, Rules and Regulations, Title 23, Department of Financial Services, Chapter I, Regulations of the Superintendent of Financial Services, Part 200. Virtual Currencies”.
  2. In accordance with the New York State Administrative Procedure Act (SAPA), the final DFS rules for virtual currency business activity have been published in the New York State Register’s June 24, 2015 edition.
  3. New York Codes, Rules and Regulations, Title 23, Department of Financial Services, Chapter I, Regulations of the Superintendent of Financial Services, Part 200: Virtual Currencies, §200.2(q).
  4. New York Codes, Rules and Regulations, Title 23, Department of Financial Services, Chapter I, Regulations of the Superintendent of Financial Services, Part 200: Virtual Currencies, §200.2(q).
  5. New York Codes, Rules and Regulations, Title 23, Department of Financial Services, Chapter I, Regulations of the Superintendent of Financial Services, Part 200: Virtual Currencies, §§200.4, 200.7.-200.19.
  6. New York Codes, Rules and Regulations, Title 23, Department of Financial Services, Chapter I, Regulations of the Superintendent of Financial Services, Part 200: Virtual Currencies, §200.5; and “Application Forms For: License to Engage in Virtual Currency Business Activity,” New York Department of Financial Services at URL: https://www.dfs.ny.gov/legal/regulations/vc_license_application.pdf.
  7. New York Codes, Rules and Regulations, Title 23, Department of Financial Services, Chapter I, Regulations of the Superintendent of Financial Services, Part 200: Virtual Currencies, §200.3.
  8. “DFS Authorizes Coinbase Global, Inc. to Form Coinbase Custody Trust Company LLC,” New York Department of Financial Services Press Release at URL: https://www.dfs.ny.gov/about/press/pr1810231.htm.
  9. “The Ledger: Is New York’s BitLicense an ‘Absolute Failure?” Fortune, 25 May 2018.
  10. “Virtual Markets Integrity Report – New York State Attorney General,” Office of the New York State Attorney General, 18 September 2018, p. 1.
  11. “Virtual Markets Integrity Report – New York State Attorney General,” Office of the New York State Attorney General, 18 September 2018, pp. 5-6.
  12. “Virtual Markets Integrity Report – New York State Attorney General,” Office of the New York State Attorney General, 18 September 2018, p. 2.
  13. “Virtual Markets Integrity Report – New York State Attorney General,” Office of the New York State Attorney General, 18 September 2018, p. 5.
  14. Bill No. S09013: Creates the digital currency task force to provide the governor and the legislature with information on the potential effects of the widespread implementation of digital currencies on financial markets in the state, New York State Assembly website at URL: https://nyassembly.gov/leg/?bn=S09013&term=2017.
  15. Bill No. A09899: Relates to financial technology products and services; establishes a regulatory sandbox program, New York State Assembly website at URL: https://nyassembly.gov/leg/?default_fld=%250D%250A&leg_video=&bn=A9899&term=2017&Summary=Y&Actions=Y&Committee%2526nbspVotes=Y&Floor%2526nbspVotes=Y&Text=Y.

NORTHERN TRUST: Crypto Hedge Funds Keep Creeping Into Huge Institutions (Like Northern Trust) And Finding A Warm Welcome

The latest legacy financial institution to welcome increased involvement in the crypto ecosystem is Northern Trust. The ‘white shoe’ family wealth firm is the last place you would expect crypto hedge funds to find a ‘safe space’.

According to Forbes, the 129-year-old firm headquartered in Chicago, Illinois, that mostly caters to ultra high net worth investors and asset heavy institutions is now offering their services to raise funds by assessing their crypto ventures, while additionally passing on the accumulated data to the fund’s clientele.

Most recently, Northern Trust has been working with three “mainstream hedge funds” to broaden their portfolios into cryptocurrency investments.

Having an estimated $10.7 trillion assets under custody (focus on the term custody there), Northern Trust at present has no authority over crypto resources specifically. However, the firm is giving crypto-inquisitive hedge funds and institutions with managerial administrations advice; for example, helping them allocate assets to their ventures, aiding in Anti-Money Laundering [AML] detection, and confirming that the organizations’ third party custodians are holding on their balance sheets have proper legal standing and are tax compliant.

Pete Cherecwich, the President of Northern Trust’s corporate and institutional services explains to a Forbes Interviewer why Northern Trust as pledging so many resources to the Technology and the reason for his interest in cryptocurrencies. He said: “You can take anything today. You can take movie rights, you can take all sorts of entities, and you can create a token for those… We have to be able to figure out how to hold those tokens, value those tokens, and do those things.”

Sources indicate that it was also expressed that although the company is exploring blockchain technology, they are ‘cautious’ as they believe regulations specific to the crypto ecosystem are on a speedy path to an announcement in the United States.

Cherecwich further stated: “I do believe that governments will ultimately look at digitizing their currencies and having them trade kind of like a digital token — a token of the U.S. dollar — but the U.S. dollar [would still be] in a vault somewhere, or backed by the government. How are they going to do that? I don’t know. But I do believe they are going to get there.”

That…is a remarkable statement from a long-tenured executive at a financial institution of Northern Trust’s reputation. Very remarkable. But what isn’t remarkable is the continual creep into the deep end with cryptocurrencies and blockchain for financial institutions of note. It keeps happening, day after day.

Pay attention.

TETHER IS A MESS: Incomplete Audits, Lack Of Transparency, Questionable Banking Jurisdictions; Red Flags Abound For Beleaguered Stablecoin

Tether Limited (“Tether”), one of the most traded digital assets, has been under pressure for lack of transparency and concerns that it does not have the U.S. dollar (USD) holdings to fully back its tokens (“Tethers”) in circulation.

Since 2017, Tether has taken steps to re-insure investors. Each effort, however, only raised additional concerns.

According to data from CryptoCompare.com, more than 40% of all Bitcoins are currently traded on exchanges directly against Tethers1; but the failure to alleviate these long-standing concerns could result in investors seeking better alternatives, namely stablecoins issued by regulated, audited, and transparent firms.

Some exchanges may also decide to move away from offering Tether trading pairs and adopt a rival, regulated stablecoin instead.

Tether’s Response to Industry Concerns

Tether responded to these concerns by stating on its website that “much of the speculation and negative reporting has been the result of misunderstandings of how Tether functions.”2

In addition, Tether’s website states that “(a)ll Tethers in circulation are fully backed by USD reserves”, and this has been “confirmed by “(m)emoranda, consulting reports, industry leaders, virtual currency pioneers, and competitors”.3

The company maintains a “Transparency” page that provides the current balances that Tether is holding in USD and euros (EUR) compared with the number of Tethers in circulation.4 Tether’s website also states that holdings are “subject to frequent professional audits.”5

Third-Party Attestations Issued, But With Significant Qualifications

Tether has supplied some evidence of its assets. Tether, however, has not produced a full assessment of its bank balances or a comprehensive attestation of its holdings by a professional, trusted third-party.

The most recent assessment of bank balances by a third-party was issued by Bahamas-based Deltec Bank & Trust Limited (“Deltec”). According to a statement released by Tether, Deltec accepted Tether as a client after a due diligence review that included an analysis of compliance processes, policies and procedures; a full background check of the shareholders, ultimate beneficiaries and officers of the company; and assessments of its ability to maintain the USD-peg at any moment.6

The statement also noted that Deltec reviews the company on an ongoing basis.7 It is unclear from the statement, however, when Deltec will conduct reviews or what the reviews will specifically assess.

Tether also released a letter, dated 1 November, from Deltec, which states that Tether has a portfolio cash value of $1,831,322,828.8 The reserve funds cited in the letter exceed the number of Tethers currently in circulation by more than $50 million.

The phrase “portfolio cash value,” however, implies that Tether may not be strictly complying with its own assertion that all Tethers in circulation are “fully backed by USD reserves”. “Portfolio cash value” could refer to various fiat currencies, virtual currencies, or, perhaps, short-term unsecured promissory notes.

The ambiguous letter, however, will not likely ease concerns from investors, as Deltec strongly qualified its findings. In the letter, Deltec states that the confirmation of reserves was made “without any liability, however arising, on the part of Deltec Bank & Trust Limited, its officers, directors, employees, and shareholders” and the confirmation was “solely based on the information” provided to the financial institution.9

Earlier this year, a three-page “Attorney-Client Communication/Work Product” prepared by Freeh, Sporkin & Sullivan LLP (FSS) was released by Tether. FSS reviewed bank account documentation and performed a randomized inspection of the numbers of Tethers in circulation and the corresponding currency reserves. FSS also reviewed the USD balances in accounts owned or controlled by Tether at its banks.10

The FSS report concluded that all Tethers in circulation as of 1 June 2018 were fully backed by existing USD reserves.11

Like Deltec, however, FSS, significantly qualified its findings, The FSS report stated:

  • FSS is not an accounting firm and did not perform the review and confirmations using Generally Accepted Accounting Principles.
  • The confirmation of bank and Tether balances should not be construed as the results of an audit and were not conducted in accordance with Generally Accepted Auditing Standards.
  • FSS makes no representation regarding the sufficiency of the information provided to FSS.
  • FSS procedures were not performed for the purpose of providing assurance.12

The attestation has a few other additional limitations. The FSS findings are restricted to a single date-1 June- and do not confirm that each Tether was backed by a dollar for all points in Tether’s history.13 The FSS attestation also does not name any of the banks Tether was using to hold its reserve funds.

A September 2017 memorandum prepared the accounting firm Friedman LLP (“FLLP”) that is posted on Tether’s website is also problematic. The memorandum states that Tether had at least $440 million and €1,590 in various bank accounts.14

The memorandum, however, states that FLLP makes no representations about “whether the funds are committed for purposes other than Tether token redemptions”.15

The memorandum also redacts the name of banks where reserve funds are held, and the document is carefully phrased, so it is unclear if the Tethers are exclusively backed by USD reserves.

Tether’s relationship with FLLP was dissolved in January 2018 without a comprehensive audit being completed.16 Tether acknowledges that the services provided by FLLP “do not constitute an audit or attestation engagement, which would include a significantly expanded scope of procedures and take substantially more time to complete.”17

Unease over Tether’s Access to Banking Services

There have also been long-standing concerns over Tether’s relationships with banking institutions. These concerns will not be alleviated by Tether’s recent decision to select a bank in the Bahamas to hold its currency reserves.

A July 2017 Caribbean Financial Action Task Force (CFATF) report was highly critical of the Bahamas efforts to combat illicit finance activities. The scores for the Bahamas for the eleven “effectiveness ratings” are troubling. The Bahamas scored “low” in six categories, and “moderate” in five categories. The Bahamas did not receive a “high” or “substantial” score in any category.18

The report also specifically faulted the Bahamas for:

  • Not providing law enforcement agencies with adequate resources to conduct investigations into illicit financial activities.
  • Limited judicial action (e.g. prosecutions) against individuals suspected of committing illicit financial activities.
  • The low number of suspicious activity reports filed, in particular in the context of the substantial size of the financial sector.19

The selection of a Bahmanian bank follows Tether’s previous banking relationship with Noble Bank International, based in San Juan, Puerto Rico, which ended earlier this year. Nobel Bank was audited by Puerto Rico’s bank regulator in 2017. The audit “raised concerns,” but the bank has not been “faulted publicly.”20 The bank is currently for sale.21

Prior to its relationship with Noble Bank, Tether lost its relationship with its Taiwanese bank in early 2017 after Wells Fargo & Co. (“Wells Fargo”) ended its correspondent banking relationship with the Taiwan lender.22 This followed Wells Fargo’s decision earlier in the year to end its role as a correspondent bank through which customers in the U.S. could send money to Tether’s banks in Taiwan. Tether was the co-plaintiff with Bitfinex in a suit filed against Wells Fargo, but the plaintiffs withdrew the case.23

Allegations of Market Manipulation

Authorities have not accused Tether of unlawful activity. There is possibly evidence, however, that Tether may have been used to manipulate the price of Bitcoin and other virtual currencies, according to a research paper released by the University of Texas at Austin.24

The paper, written by Professor John Griffin and graduate student Amin Shams, alleges that Tether was a possible source of fraudulent buying demand that drove about half of the rise in Bitcoin in late 2017.25

The researchers found that Tether issuances rose in 2017 during periods when the price of Bitcoin was dropping. When Bitcoin was rising, the same pattern could not be found. Once issued, nearly all Tethers were moved to Bitfinex and then shifted to other exchanges, where they were used to buy Bitcoin, propping up the price.26

The authors contend that the findings may “provide substantial support for the view that price manipulation may be behind substantial distortive effects in cryptocurrencies”.27

In a statement, Bitfinex and Tether Chief Executive Officer JL van der Velde said that “(Neither) Bitfinex nor Tether is, or has ever, engaged in any sort of market or price manipulation”.28

In addition, an anonymously published statistical analysis of the issuance of Tethers, dated 24 January 2018, suggests that the timing of new Tether releases in 2017 was “closely aligned with notable dips in the price of Bitcoin”.29

The anonymous report contends that that price data for 2017 suggests that Tethers may have not been minted independently of Bitcoin price and may have been created when Bitcoin was falling. One interpretation of the data suggests that “Tether could account for nearly half of Bitcoin’s price rise, not even allowing for follow-on effects and the psychological effects of rallying the market repeatedly”.30

U.S. Regulatory Authorities Subpoena Tether

On 6 December 2017, the U.S. Commodity Futures Trading Commission (CFTC) sent a subpoena to Tether.31 Friedman LLP was also subpoenaed by the CFTC.32 According to Bloomberg, the CFTC is investigating whether Tether’s has the currency reserves to fully back Tethers in circulation.33

Tether’s response to the subpoena was muted. A spokesman for Tether (and Bitfinex) said in a statement: “We routinely receive legal process from law enforcement agents and regulators conducting investigations. It is our policy not to comment on any such requests.”34

Tether’s Response Motivated by Fear of Losing Market Share to Rival Stablecoins

Tether’s efforts to increase transparency are likely designed to blunt competition from four recently launched stablecoins that are also backed by the USD: Gemini, Circle, TrustToken, and Paxos.

The companies are substantially more transparent than Tether with disclosures of their holding entities, bank accounts, and regulatory compliance. The four new stablecoins, which are audited, regulated, and licensed, will provide more stability to the market.

Tether Should Increase Transparency to Ease Investor’s Concerns

Tether recognizes that its efforts enhance transparency are “unfinished” and it is taking “additional steps aimed at opening up Tether to the general public and clearing away any uncertainty that may exist.”35

In the near-term, Tether could ease the concerns of the market by:

  • Conducting regularly scheduled comprehensive assessments of assets and liabilities by a trusted third party, such as one of the “Big Four” accounting firms.
  • Routinely updating information on its website that confirms existing relationships with financial institutions.
  • Confirming existing relationships with virtual currency exchanges.
  • Introducing strictly prescribed, predictable rules for the creation of new Tethers.
  • Confirming the destruction of Tethers that have been taken out of circulation to ensure the tokens are not brought back into circulation in the future.

Tether fulfilled its initial promise for the virtual currency community, but its dominance will only continue if it provides investors with a high degree of transparency of their cash reverses, bank accounts, and regulatory compliance that approximates what is offered by rival stablecoins.

The information provided in this report is for informational purposes only. It should not be considered legal or financial advice. You should consult with an attorney, financial advisor, or other professional to determine what may be best for your individual needs.


This report was prepared by Trifin Roule.

For nearly two decades, Mr. Roule provided for the U.S. government legal analysis of anti-money laundering, counterproliferation financing and counterterrorist financing laws and regulations dozens of jurisdictions, and international standards, as detailed through intergovernmental bodies (e.g. Financial Action Task Force (FATF)), and financial institutions (e.g. banks’ financial intelligence units and compliance offices).

In addition, Mr. Roule has provided in-depth analysis of digital asset accounting, auditing, customer due diligence, exchange, licensing, mining, initial coin offering (ICO), private key storage, and record-keeping practices and regulations.

Mr. Roule is a former Assistant Editor at the Journal of Money Laundering Control, a peer-reviewed journal that provides detailed analysis and insight on the latest issues in the law, regulation and control of money laundering and related matters. Mr. Roule has published dozens of articles on anti-money laundering, and counterterrorist financing laws and regulations.

Trifin Roule is the Publisher of our new division, Abacus Legal, and his and his team’s reports will be free to read for the next 45 days. After that time they will be dubbed premium content and require a subscription.


  1. “BTC Volume by Currency,” 2018, https://www.cryptocompare.com/coins/btc/analysis/USD (accessed 5 November 2018).
  2. “Transparency Update – FSS Report,” 2018, https://Tether.to/fss-report-transparency-update/ (accessed 5 November 2018).
  3. “Transparency Update – FSS Report,” 2018, https://Tether.to/fss-report-transparency-update/ (accessed 5 November 2018).
  4. “Transparency,” 2018, https://wallet.Tether.to/transparency (accessed 5 November 2018).
  5. “Transparent,” 2018, https://tether.to/ (accessed 5 November 2018).
  6. “Tether Banking Relationship Announced,” 2018, https://Tether.to/Tether-banking-relationship-announced/ (accessed 5 November 2018).
  7. “Tether Banking Relationship Announced,” 2018, https://Tether.to/Tether-banking-relationship-announced/ (accessed 5 November 2018).
  8. “Tether Banking Relationship Announced,” 2018, https://Tether.to/Tether-banking-relationship-announced/ (accessed 5 November 2018).
  9. “Tether Banking Relationship Announced,” 2018, https://Tether.to/Tether-banking-relationship-announced/ (accessed 5 November 2018).
  10. “Transparency Update – FSS Report,” 2018, https://Tether.to/fss-report-transparency-update/ (accessed 5 November 2018).
  11. “Attorney-Client Communication / Work Product Privileged & Confidential,” Freeh, Sporkin & Sullivan LLP, https://Tether.to/wp-content/uploads/2018/06/FSS1JUN18-Account-Snapshot-Statement-final-15JUN18.pdf (accessed 5 November 2018).
  12. “Attorney-Client Communication / Work Product Privileged & Confidential,” Freeh, Sporkin & Sullivan LLP, https://Tether.to/wp-content/uploads/2018/06/FSS1JUN18-Account-Snapshot-Statement-final-15JUN18.pdf (accessed 5 November 2018).
  13. “Attorney-Client Communication / Work Product Privileged & Confidential,” Freeh, Sporkin & Sullivan LLP, https://Tether.to/wp-content/uploads/2018/06/FSS1JUN18-Account-Snapshot-Statement-final-15JUN18.pdf (accessed 5 November 2018).
  14. “Memorandum Regarding Consulting Services Performed,” Friedman LLP, 28 September 2017, https://tether.to/wp-content/uploads/2017/09/Final-Tether-Consulting-Report-9-15-17_Redacted.pdf (accessed 5 November 2018).
  15. “Memorandum Regarding Consulting Services Performed,” Friedman LLP, 28 September 2017, https://tether.to/wp-content/uploads/2017/09/Final-Tether-Consulting-Report-9-15-17_Redacted.pdf (accessed 5 November 2018).
  16. “Tether Confirms Its Relationship with Auditor Has ‘Dissolved’,” Coin Desk, 27 January 2018, https://www.coindesk.com/tether-confirms-relationship-auditor-dissolved/ (accessed 5 November 2018).
  17. “Transparency Update – FSS Report,” 2018, https://Tether.to/fss-report-transparency-update/ (accessed 5 November 2018).
  18. “Anti-money laundering and counter-terrorist financing measures: The Bahamas ,” Caribbean Financial Action Task Force, July 2017, https://www.cfatf-gafic.org/index.php/documents/4th-round-meval-reports (accessed 5 November 2018).
  19. “Anti-money laundering and counter-terrorist financing measures: The Bahamas ,” Caribbean Financial Action Task Force, July 2017, https://www.cfatf-gafic.org/index.php/documents/4th-round-meval-reports (accessed 5 November 2018).
  20. “Puerto Rico’s Noble Bank Seeks Sale Amid Crypto Slide,” Bloomberg, 1 October 2018, https://www.bloomberg.com/news/articles/2018-10-02/puerto-rico-s-cryptocurrency-bank-noble-is-said-to-seek-sale (accessed 5 November 2018).
  21. “Puerto Rico’s Noble Bank Seeks Sale Amid Crypto Slide,” Bloomberg, 1 October 2018, https://www.bloomberg.com/news/articles/2018-10-02/puerto-rico-s-cryptocurrency-bank-noble-is-said-to-seek-sale (accessed 5 November 2018).
  22. “Bank Tied to Tether Goes Quiet on Relationship With Crypto Firm,” Bloomberg, 2 November 2018, https://www.bloomberg.com/news/articles/2018-11-02/bank-tied-to-tether-goes-quiet-on-relationship-with-crypto-firm (accessed 5 November 2018).
  23. “There’s an $814 Million Mystery Near the Heart of the Biggest Bitcoin Exchange,” Bloomberg, 5 December 2017, https://www.bloomberg.com/news/articles/2017-12-05/mystery-shrouds-tether-and-its-links-to-biggest-bitcoin-exchange (accessed 5 November 2018).
  24. “Cryptocurrency Tether used to boost Bitcoin prices, study finds,” Reuters, 13 June 2018, https://www.reuters.com/article/us-cryptocurrency-tether/cryptocurrency-tether-used-to-boost-bitcoin-prices-study-finds-idUSKBN1J92U0 (accessed 5 November 2018).
  25. “Cryptocurrency Tether used to boost Bitcoin prices, study finds,” Reuters, 13 June 2018, https://www.reuters.com/article/us-cryptocurrency-tether/cryptocurrency-tether-used-to-boost-bitcoin-prices-study-finds-idUSKBN1J92U0 (accessed 5 November 2018).
  26. “Cryptocurrency Tether used to boost Bitcoin prices, study finds,” Reuters, 13 June 2018, https://www.reuters.com/article/us-cryptocurrency-tether/cryptocurrency-tether-used-to-boost-bitcoin-prices-study-finds-idUSKBN1J92U0 (accessed 5 November 2018).
  27. “Cryptocurrency Tether used to boost Bitcoin prices, study finds,” Reuters, 13 June 2018, https://www.reuters.com/article/us-cryptocurrency-tether/cryptocurrency-tether-used-to-boost-bitcoin-prices-study-finds-idUSKBN1J92U0 (accessed 5 November 2018).
  28. “Cryptocurrency Tether used to boost Bitcoin prices, study finds,” Reuters, 13 June 2018, https://www.reuters.com/article/us-cryptocurrency-tether/cryptocurrency-tether-used-to-boost-bitcoin-prices-study-finds-idUSKBN1J92U0 (accessed 5 November 2018).
  29. “Quantifying the Effect of Tether,” 24 January 2018, http://www.Tetherreport.com/ (accessed 5 November 2018).
  30. “Quantifying the Effect of Tether,” 24 January 2018 at URL: http://www.Tetherreport.com/ (accessed 5 November 2018).
  31. “One of the Biggest Crypto Exchanges Is Heading to the Caribbean,” Bloomberg, 24 May 2018, https://www.bloomberg.com/news/articles/2018-05-24/bitfinex-said-to-find-bank-in-puerto-rico-after-wells-fargo-exit (accessed 5 November 2018).
  32. “One of the Biggest Crypto Exchanges Is Heading to the Caribbean,” Bloomberg, 24 May 2018, https://www.bloomberg.com/news/articles/2018-05-24/bitfinex-said-to-find-bank-in-puerto-rico-after-wells-fargo-exit (accessed 5 November 2018).
  33. “U.S. Regulators Subpoena Crypto Exchange Bitfinex, Tether,” Bloomberg, 30 January 2018, https://www.bloomberg.com/news/articles/2018-01-30/crypto-exchange-bitfinex-tether-said-to-get-subpoenaed-by-cftc (accessed 5 November 2018).
  34. “U.S. Regulators Subpoena Crypto Exchange Bitfinex, Tether,” Bloomberg, 30 January 2018, https://www.bloomberg.com/news/articles/2018-01-30/crypto-exchange-bitfinex-tether-said-to-get-subpoenaed-by-cftc (accessed 5 November 2018).
  35. “Transparency Update – FSS Report,” 2018, https://Tether.to/fss-report-transparency-update/ (accessed 5 November 2018).

BARCLAYS REDUX: BANK WEIGHS CRYPTO SERVICES: Despite 2018 Denials, Barclays Continues Crypto Custody/Trading Planning

More and more banks continue to wade into the crypto ecosystem with a sharp eye for both trading profits and the ability to score fees to hold crypto assets via custody solutions. Another name that we’ve attempted to ignore for nearly a month is Barclays. Their current CEO, Jes Staley, publicly denied any movement on or in the crypto space last fall, but he was being coy, to say the least. Continued exploration and progress is being made.

A word about European banks at large and Barclays in particular. They are, amongst the global IB set, the most concerned about crypto and its ability to displace their goods and services long term. The revenue base and profits of the likes of Barclays, Credit Suisse, Deutsche Bank, Santander, and others have gotten pressed down to levels not seen in more than a decade and a half. You may recall that Binance approached and surpassed the quarterly revenue of Deutsche Bank in the last quarter of 2018. An incredible feat given that Binance opened its doors for business less than two years ago.

Back to Barclays and their renewed interest in bringing crypto architecture to both institutional and UHNW clients. They are acutely aware of what Goldman Sachs is embarking on and where the global IB leader, that is Goldman, is about to take the industry with respect to crypto. And the sole reason, as it goes for bankers, that this move is on the way, is that profits can be extracted from the architecture being built.

Barclays needs new lines of revenue and profits. Pure and simple. That is the impetus behind the continued search for answers in crypto and the right time and place to roll out a crypto framework. As was discussed near the middle of 2018, Barclays has been discussing solutions with crypto hedge funds to understand their wants and needs.

A hedge fund contact on the west coast put it this way: “We’ve heard from Barclays, and by no means are they the only firm we consistently hear from, three different times so far in 2019. The pick up in communication seems to be mirroring other institutional initiatives that they may be able to conjoin with to put together framework that doesn’t cost them an arm and a leg to build and staff. If I had to guess how many people are working on the project there (Barclays) I would put the number at 10, maybe 12. It isn’t a massive number by any means, but it isn’t zero either. And I doubt they will be first to market with anything…but they are preparing to at least come to the party.”

An interesting take on the inner workings of building crypto architecture and the ‘hive mind’ of decision makers at the firm. How best to position themselves if and when the institutional need becomes to serious that they can’t ignore the money to be made. It will be interesting to evaluate Jes Staley’s future comments about crypto and the firms involvement. Will it ‘evolve’ in the same way that JP Morgan’s Jamie Dimon did? It wouldn’t surprise us.

MORGAN STANLEY COPYCAT: FOLLOW FIDELITY: Morgan Stanley Is Watching Fidelity’s Digital Assets Initiative Closely, Planning Similar Offering

Morgan Stanley has seemingly been planning some sort of crypto initiative for longer than their clients can wait. According to sources at the global investment bank, clients (institutional and UHNW retail) have grown impatient with Morgan Stanley and ‘talk’ of crypto accessibility.

The sources discussed a small percentage of the client base keeps asking the firms bankers and brokers why they aren’t out in front in regards to crypto. Specifically, a straight line is being made by some as to Goldman Sach’s (it is well known in traditional finance that Morgan Stanley and Goldman Sachs are bitter rivals) consistent investments in the crypto ecosystem, BitGo and Circle, to name just a couple.

Those Goldman Sachs led investments position the firm to quickly scale up once the regulatory landscape is clear and defined. Morgan Stanley hasn’t made those any ‘in-kind’ investments that match Goldman’s and clients and brokers have been grumbling about it.

But there may be some hopes according to two sources that we spoke to at the bank. Morgan Stanley leadership is enamored with the path that Fidelity is taking and believe they can take the same path – and fashion it to be of interest to the firms largest institutional and UHNW clients.

“Are we behind? Yes. That really can’t be disputed at this point.” said our first source near the top of the communications org chart at Morgan Stanley. “But that won’t be the case once we commit to a particular strategy. We believe we are well positioned when the time is right.”

A second source closer to the broker ranks had this to say, “The word we hear is that leadership finds the Fidelity model for crypto appealing. And that could be the way it goes down here. Whatever strategy they choose, it needs to come quickly. We are getting asked about it daily. It does seem like clients that are aware of Bitcoin in particular see it as digital gold. That phrase has popped up often with UHNW clients.”

The digital gold narrative from uber-wealthy individuals and families is interesting. It means, if nothing else, that for those looking for Bitcoin information, the digital gold narrative is resonating.

“Clients that ask about crypto seem to be aware of Bakkt as well and question us as to our involvement and accessibility within their framework”, our second source described. “It is revealing what messaging seems to be making its way into these clients hands and sticking. Bakkt and digital gold seem to be moving in lock step – expect our firm (Morgan Stanley) to play along and once involved market it ($BTC) as such.”

Interesting conversations yesterday that reveal how traditional market players and dealing with the growth of Bitcoin and crypto at large. The bigger picture, that these firms have finally embraced, is that Bitcoin isn’t going away. And they are hell-bent on being there when mass investment follows an increase in awareness and adoption.

CIRCLE APPROVAL: BROKER DEALER DEAL: Circle Bid To Acquire SeedInvest Gets Go-Ahead From FINRA

Circle is in the midst of a serious ‘beef up’ of its operations, scale, and capital position. Word of a sizable capital raise (which we expect to be heavily funded by one of their largest current stakeholders – Goldman Sachs) made its way through crypto news outlets last week. And now, today, FINRA has approved the broker dealer acquisition via SeedInvest.

As per Circle’s corporate blog post:

“Circle has signed a definitive agreement to acquire SeedInvest, an equity crowdfunding industry leader and an SEC and FINRA registered Broker-Dealer. This acquisition will accelerate our strategy of delivering a token marketplace that enables businesses and individuals to raise capital and interact with investors using open crypto rails and infrastructure. This acquisition and planned new offerings are subject to FINRA approval.”

“The SeedInvest product includes many of the end-to-end capabilities needed for executing regulated crowdfunding, including startup due diligence, securities issuance, investor accreditation, payments and securities custody, as well as a broad range of innovative tools for startups to market their crowdfunding offerings online in a compliant fashion. With the merger and approval from key regulators, these capabilities will be expanded to support crypto-denominated investments including using fiat stablecoins such as USDC, as well as issuing and offering tokenized securities.”

Circle remains a largely institutional trading platform, but moves like this make it clear they have designs on expanding their horizons. In many ways the language above makes it look like they are positioning themselves to handle as many STO-like transactions as legally feasible.

The growth in the crypto ecosystem, even in the midst of a long tail bear market, is remarkable. Add Circle to the list of those making moves in spite of any crypto headwinds.

TRADERS: BULL RUN: 5 Reasons A Legitimate Bull Run Is Coming (and soon)

The crypto bear market has lasted nearly 13 months, but seems to be turning at the moment.

For the longest time crypto twitter has been a ‘trail of tears’. Instead of bullish posts being all the rage, the latest crypto twitter meme seems to be rage tweets claiming portfolio destruction and leaving the space altogether.

Sounds perfect – to several tenured crypto traders and crypto hedge fund managers. The screeches and audible pain that is emitting from crypto ‘hodlers’ and traders sounds like the sentiment that occurs just before a turn and the makings of a quiet bull market floor forming.

In discussions with several traders and a couple of crypto hedge fund managers over the weekend, we gathered five good reasons why the next crypto bull run could be upon us. Let’s take a look:

  1. Institutional infrastructure breadth and depth: Beyond individual stories about Goldman Sachs, Fidelity or Bakkt – two hedge fund managers spoke extensively about the breadth of institutional involvement in crypto that is on its way to the markets. Goldman Sachs, Fidelity, DRW and TD Ameritrade (ErisX), BlackRock and Coinbase, Nasdaq, Bakkt and the NYSE, and on and on and on.
  2. OTC Markets are VERY robust: One trader told us that the volume on the OTC markets is at a turning point and volumes have recently spiked higher; and not for sellers, but for buyers. Smart money sees the 2018 bear market as an opportunity to buy ‘digital gold’ on the cheap and stash it away for a couple of years. If traditional markets weaken any further the OTC buyers dynamic will only increase and push Bitcoin prices higher.
  3. The SEC just gave muted guidance (via enforcement) that should embolden the tokenization movement: The latest enforcement actions by the SEC, scolding two separate ICO’s, provided further guidance to the tokenization movement and its actors. The short version is essentially this ‘ICO’s aren’t illegal, and we really don’t mind them, just check in with us, pursue registration, and you should be good.’ The ICO enforcement actions taken late last week amounted to small fines given how much those ICO’s raised. A virtual slap on the wrist. And neither announcement claimed fraud of any kind.
  4. Some alt-coins are being destroyed, while others are pumping as we speak: One crypto hedge fund manager discussed Verge ($XVG) as an example of the kind of waste that needed to be burnt out of the ecosystem for the next bull run to begin, “…a token like Verge, built on nothing more than vaporware, hype, cringe partnerships, and stickers on rented lambos are what needed to go away before capital could consolidate and find it’s way back to the likes of projects that are serious and legitimate. Bitcoin, Ethereum, Monero, Stellar (and others) – these are teams that are legitimately attempting to build something that lasts and you can see money flows moving in that direction.” Yet, today the alt-coin markets are flying on the backs of the strength in Ethereum.
  5. Bakkt arrives soon enough: Bakkt brings serious force to the crypto markets by providing Tier 1 institutions the ability to accumulate and trade Bitcoin no differently than they trade gold, oil, natural gas, silver, copper, etc. Trading Bitcoin globally on the ICE exchange networks is 10x the size of CME and CBOE futures trading. The daily gold futures volume on global exchanges is routinely better than $200B. Yes, that is the DAILY volume. DAILY. The late 2017 bull run was somewhat fueled by the Bitcoin futures ramp up on the CME and CBOE. Expect a similar market reaction to Bakkt.

A look back to how some accomplished traders view Bakkt and its ability to curtail the bear market:

“Nothing else on the horizon comes close to what Bakkt will mean for Bitcoin. The depth and breadth of the ICE (Intercontinental Exchange) network and exchange ecosystem means that adoption/trading volumes will skyrocket overnight. The same pipes and structures that allow Goldman, JPMorgan, Morgan Stanley, among a horde of others, to trade billions in commodities like gold, silver, soybeans, and corn; will be the same architecture used to trade Bitcoin.”

“Think of it this way…with the custody and ‘warehouse facility’ solved inside of Bakkt’s infrastructure you have solved the final issue that institutions have been clamoring for in the digital asset space. Their Bitcoin transactions and investments are ‘safe’ via the warehouse facility, and the ability to go claim their Bitcoin straight from the warehouse should they allow their position to mature to that point.”

“Rather than ‘physical’ Bitcoin per se, you are getting access to Bitcoin being housed in an uber protected, heavily secure facility that will hold the digital asset as the backstop for Bitcoin. That is what the Novogratz’ of the world and Goldman and JPMorgan have been clamoring for.”

“While it would be interesting if Bakkt got the press it deserved, there really isn’t a single ‘name’ banking institution that could accompany them in a headline. And that is precisely the scale of the Bakkt story. The ramp up and volume with be enormous and lightning fast. Within months you will have billions of dollars in institutional cash running through Bakkt’s system, buying and selling Bitcoin.”

“This is ultimately the solution that the biggest players (within banking) want and need. And this move furthers the narrative of Bitcoin as a ‘store of value’ or ‘digital gold’.”

And a reminder regarding the reactions crypto hedge fund managers had to the Fidelity ‘digital assets’ initiative several weeks ago (that aims to compete with Bakkt):

“The rumors out there stem from Fidelity passing on taking a stake in Bakkt and then have run amok from there. They’ve been just as secretive about their build as Bakkt was for nearly two years leading up to their announcement. All we know is what we hear from a couple guys that work at Fidelity, but even that is vague and a wink and a smile. But as we see stuff leaked via the media in some way it makes sense that they would scale up. Bakkt has all the institutional pipes, but Fidelity has that same access, but a massive retail name that can tap millions of customers.”

“The real intrigue here is the rumor that Fidelity considers themselves to be crafting a real competitor to Bakkt. That is a mouthful if you ask me. Bakkt is leveraging fifty plus years worth of exchange infrastructure to establish Bitcoin as a standard and then offer products that evolve from there. Fidelity is said to be further along in the way they plan to leverage that same architecture. If that is true, and that is a big if, it only furthers adoption, and the crypto ecosystem wins. Still, lots of chatter about what could come from a name like Fidelity.”

Even Bank of America keeps grabbing crypto custody and blockchain patents by the armful:

“Describing its place and necessity in the future of financial services, the application reads, “As technology advances, financial transactions involving cryptocurrency have become more common. For some enterprises, it may be desirable to securely store cryptocurrency.” The Bank of America began its development of this online cryptocurrency vault system in 2014. So while top leaders at Bank of America have publicly derided Bitcoin and cryptocurrency in general, actions speak louder than words. And they are preparing for the rollout of custody solutions, structured products, and payment systems. Book it.”

A bull run is coming…and if tenured traders are to be believed, it is just around the corner.

POP! BANG! JP MORGAN COIN: Hedge Fund Sources Claim Surge In Volumes And Prices Directly Tied To JP Morgan Announcement

Crypto purists scoffed at the JP Morgan coin announcement – and rightfully so. After nearly three years of shunning Bitcoin and crypto altogether, Jamie Dimon and his cohorts cooked up a crypto of their own.

Every news outlet in the world covered it. Every single one. And the news lasted for days and quickly made its way into the heads and hands of what most crypto diehards would call ‘plebs’.

Guess what those ‘plebs’ did with the JP Morgan coin information? They bought Bitcoin, Bitcoin futures, Ethereum (a whole lot of $ETH) and all manner of alt-coins as the crypto markets surged.

We went on the hunt to find out if a hunch we had had some meat to it. In speaking with our staffs friends and family, every single one of them asked “what do you think of the JP Morgan coin?”

That set our ears ablaze and gave us a reason to have deeper industry conversations.

Sure enough several hedge fund contacts were seeing and hearing the same thing. In the short run, the JP Morgan coin announcement breathed new life into the crypto narrative and added a large slice of credibility.

One hedge fund source said the following:

Every adult with a bank account and a job knows who JP Morgan is. So the announcement of a native cryptocurrency brought interest to a renewed and fresh level that had been diminished throughout nearly all of 2018. My wife even asked me about it the day after it was announced. The huge bounce in volumes in Bitcoin and, for example, Bitcoin futures at the CME are indicative of the wave the announcement caused.”

A second hedge fund source went a step further:

It isn’t that far fetched to foresee a look back in six months and point to the $JPM coin as the catalyst that busted the bear market. Sentiment and narrative play a huge role in what remains a pretty small markets at this point. The JP Morgan news pushed prices higher across the board and those price increases weee seriously validated by a surge in volumes.”

Again, nobody with a reasonable grip on the history and mission of Bitcoin and crypto believes that the JP Morgan coin poses any sort of existential threat to the ecosystem. In fact, those that claim that it may just be another shitcoin may not be that far off.

Be that as it may, everybody we’ve run into that is outside the crypto echo chamber has one question and one question alone: What do you think of the JP Morgan coin?

JAMIE DIMON: JP MORGAN COIN: Dimon Describes JP Morgan Coin Potential Evolution; Could See Consumer Use

Jamie Dimon sure has been properly baptized as of late, hasn’t he? Baptized in the religion of crypto. Just two plus years ago Jamie was an avowed ‘no-coiner’ with knives out for Bitcoin and it’s siblings.

Earlier today he described a pathway where JP Morgan coin could be used at the consumer level.

Via CNBC:

“JP Morgan Coin could be internal, could be commercial, it could one day be consumer,” Dimon, 62, said during a question-and-answer session.”

“Earlier in February, J.P. Morgan became the first major U.S. bank to create its own cryptocurrency with the launch of “JPM Coin.” The digital token was designed to settle transactions between clients of its wholesale payments business, specifically for international payments and securities transactions that migrate to the blockchain.”

What a reversal. And what might that reversal mean? You can place your bets that JP Morgan has come up with a way to make the use of their native coin somehow profitable either directly or indirectly. Either way, it sheds light on the thinking of one of the largest banks in the world and where it’s CEO sees finance going.

And if JP Morgan and Dimon have moved this far, this quickly – how long before we see a Fidelity coin? Asking for a friend.

FACEBOOK STABLE COIN: BLOCKCHAIN BUILD OUT: As Facebook Continues To Build It’s Blockchain Team, Rumors Swirl Regarding A Potential Token

Facebook continues to stalk the crypto and blockchain space. If you stop and pay attention you can almost feel their eyes staring at the cracks in the ecosystem. And those cracks are feeding rumors regarding Facebook’s intentions when it comes to crypto and a potential native platform payment token.

Whether like or dislike Facebook it is hard to deny that a Facebook token of some sort would be a potential eye opener for adoption within crypto. Billions upon billions of users across Facebook, WhatsApp, and Instagram would have access to digital cash fostered by social media’s ultimate ‘elephant in the room’.

As we’ve discussed the potential for a Facebook token this week with several thought leaders in the space one particular theme kept coming up. A Facebook token would make the most sense as a dollar backed stable coin. It would provide incredible buying power for ‘unbanked’ individuals that find themselves part of all three platforms. The WhatsApp platform in particular, with it’s adoption across locations such as India (a notoriously un-banked country), would create enormous demand for a stable coin.

As Facebook staffs up across it’s blockchain initiatives (whatever those happen to be, nobody really knows) the next incredibly used and profitable product could be a Facebook token used across billions of daily active users across the globe.

One rumor we heard coming out of Silicon Valley is that Facebook considered several types of banking initiatives to integrate into WhatsApp over the past two years, but simply wasn’t satisfied with the potential solutions. With the advent of Bitcoin and other cryptocurrencies becoming a larger part of the financial discussion, as stable coin would seem to meet the needs that a potential banking operation may have had it been rolled out.

One source, who left Facebook two months ago, added:

“Facebook has flirted with acquisitions in the crypto space and has yet to pull the trigger. That is telling if you ask me. They could easily swallow up Coinbase tomorrow, but they’ve chosen not to up to this point. Just keep track of the size, scale, and names associated with their ever-growing blockchain team. As it grows you can bet they are getting closer and closer to pulling the trigger on a token of some sort. And my guess, to satisfy regulators, it would be tied to the dollar in the way stable coins have been. They (Facebook) could easily back a token with the cash hoard they have on tap.”

Whatever truth exists in these rumors a Facebook ecosystem token would be enormous. With access to platforms carrying billions of users on a daily basis, adoption would quickly dwarf and other coin in existence. The specter of ‘Facebook Coin’ becoming a competitor to Bitcoin would be a remarkable evolution to witness in real time. And it isn’t as far-fetched as you may think.

A reminder…Facebook matured in the depths of Silicon Valley and the best minds in the valley are constantly looking for the next big thing. And need we mention the headlines Facebook has dealt with overt the past 12 months?

A Facebook stable coin could be the next innovation from a company in need of something new and shiny to feed Wall Street. If one of techs ‘glitterati’ (Jack Dorsey) finds comfort basking in the glow of the crypto world, who’s to say others like him aren’t aware of the opportunity that lies in this fast growing industry. Nobody should be surprised if we eventually see a coin with Facebook’s fingerprints all over it.