Day: April 6, 2018

One hard fork later, there are four new Monero projects.

Monero hard forked to version 12 of its protocol yesterday. But not everyone is on board. Following the example once set by Ethereum Classic, some users are continuing on the pre-hard fork Monero blockchain… though in this case not as a single project. Now there is  Monero Classic, Monero 0 (XMZ), Monero Original (XMO) and a second project by the name Monero Classic (XMC) (which in this article we will refer to as Monero-Classic); these are all continuing on version 11 of the Monero protocol. Of course, this means they are all still compatible on a single network, using the same asset (coin) — just with different names.

Here’s the story of the pre-hard fork Monero blockchain and the four different projects keeping it alive.

The Hard Fork

As an ongoing protocol upgrade process, Monero has made a habit of hard forking once every six months. The latest hard fork introduced several new features, including an increased ring-size for more private but also bigger (thus more resource-intensive) transactions, multi-signature transactions, initial Ledger Nano S hardware wallet support, and more.

The latest hard fork also introduced a tweak to Monero’s CryptoNight proof-of-work hashing algorithm. This backwards-incompatible change makes all existing ASIC (application-specific integrated circuit) mining hardware useless. Such specialized hardware is a bigger concern on the CryptoNight hashing algorithm than most other hashing algorithms, as it could let ASIC miners launch denial-of-service (DoS) attacks on non-ASIC miners and non-mining nodes on the network.

The risks presented by ASIC-mining hardware appeared to be reason why at least most of Monero’s development and user community agreed on the change. However, not all parties were equally happy with the hard fork, presumably. Most notably, major hardware manufacturer Bitmain, as well as smaller manufacturers Halong Mining and PinIdea, recently all announced that they had developed ASIC machines for the CryptoNight hashing algorithm. All this hardware would be rendered mostly useless after Monero’s hard fork.

Now, over the past couple of days and weeks, four projects have announced that they will continue to use the pre-hard fork Monero protocol. Since all four are using the same protocol, they are (at least as far as we can tell) really all the same network and coin, albeit with different names and logos.

These are the four new projects continuing the pre-hard fork Monero blockchain.

Monero Classic

This first, Monero Classic, is initiated by a group that self-identifies as Monero enthusiasts from Singapore — including developers and “a few” miners — who felt it was “time to take action.” Speaking to Bitcoin Magazine, representative Bento Tan explained that he believes that the development of ASICs is a healthy, market-driven process.

He said:

“The ability to have choices promotes competition and that drives growth. We have to look at things at that level. Unilateral control is a suffocating death because you take away the need to improve and innovate.”

Tan added that he considers this healthy dynamic to be confirmed by the fact there are three different manufacturers to have created ASICs — not just one.

Further, hard-forking to make mining hardware obsolete is a considered a bigger risk than the risk of mining centralization. A statement on the Monero Classic website reads:

“The main message of Monero Classic is that we believe that the developers changing the proof of work creates more centralization and harms decentralization.” And: “The M[o]nero developers are saying that they can and will change the consensus rules whenever it suits them and the community seems to be conditioned into following the wishes of the developers.”

Monero Classic has no connections with any of the other new Monero projects, Tan said, and has no plans to cooperate with them.

Monero-Classic (XMC)

On the project website, the person behind Monero-Classic identifies himself as “PZ, an early Bitcoin evangelist and blockchain eco builder”.

Not unlike (the other) Monero Classic, PZ explains on this website that “the emergence of specialized mining machine[s] for a cryptocurrency is [a] normal market economy phenomenon.” Additionally, PZ argues that “if there are professional mining machines, the events like ‘Monero was attacked by more than 500,000 botnets’ could be avoided,” referring to botnets that have been used to mine Monero.

Since the project is actively promoted by Bitmain’s mining pool AntPool, and of course because Bitmain has much to gain from a continuation of Monero with the CryptoNight hash algorithm, some suspect that this ASIC hardware manufacturer has a hand in this project, too. However, when asked by Bitcoin Magazine, a Bitmain representative suggested this was not the case.

Bitcoin Magazine was unable to get in contact with PZ or anyone else from the Monero-Classic project by time of publication.

Monero 0 (XMZ)

Speaking with Bitcoin Magazine, a pseudonymous spokesperson for Monero 0 identified the group as one of “concerned users” and “proof-of-work maximalists,” some of whom operate hobby operations for mining.

On the project website, Monero 0 writes:

“We’ve decided that the Monero Project’s strategy to continuously hard fork is no longer a stable or a sane strategy. We believe that Satoshi’s Proof of Work is the only mechanism for decentralized consensus. The so-called ‘network upgrades’ that are centrally mandated by the Monero Project are a Trojan Horse designed to compromise the effectiveness of Proof of Work in the Monero network. Monero 0 is not a fork; it is the original Monero.”

The Monero 0 spokesperson further said that Monero is “an NVDA project”, that “‘proof of fork’ is not a consensus method,” and that “Bitmain is trying to destroy Monero” — but did not have time to explain more.

Monero Original (XMO)

Not much is known about Monero Original or the people behind it.

The project has a GitHub, and it sent press releases to several outlets. This press release did not contain much information, but it did include a statement from the “lead developer of Monero Original team”:

“Monero has always been about freedom of choice, about diversity and about the strong community behind it. We are providing the Monero fans [with] a possibility to support the iconic coin and stay on the original chain. Monero Original team stands for diversity, which is a logical marker of evolution. We are excited to see our favourite coin mature, and we are even more excited to help [in] keeping this diversity,” says the lead developer of Monero Original team.

At least one cryptocurrency exchange — HitBTC — indicated it would make XMO balances available to all XMR holders at the time of the hard fork. This does not necessarily mean that HitBTC will also offer XMO trading, but it does make it more likely they will.

Bitcoin Magazine reached out to the Monero Original project but did not receive any response by the time of publication.

The Complications

So far, it appears that both the new Monero blockchain and the pre-hard fork blockchain are running — though both are supported by less hash power than they were before the hard fork. This means that blocks are being found more slowly, in particular on the Monero blockchain, but this situation should stabilize within days.

Assuming that at least one of the four new projects succeeds in keeping the pre-hard fork Monero blockchain running (and assuming the new Monero blockchain keeps running too), this could lead to some complications.

For one, the Monero hard fork did not implement replay protection. This could mean that users who spend XMR on the new Monero blockchain could unintentionally spend the equivalent coins on the pre-hard fork blockchain, and vice versa.

Thanks to other changes on the new Monero protocol, this risk appears limited for users of the pre-hard fork blockchain, however. The default transactions they make will be considered invalid on the new Monero protocol. But users of the new Monero blockchain do not have that same luck. If they want to keep their pre-hard fork coins, they should move these before they move their XMR, and do so with the default ring-size of five (or six).

Over time, replay attacks should become less likely, even if for users that didn’t move their coins. This is because on Monero mixing coins is a requirement, and the odds that users will mix their coins with coins that are only valid on one chain will increase. Doing so will make the whole transaction invalid on one of both chains.

A bigger problem is that moving coins on both blockchains reveals which coins are controlled by the same user. This is at odds with Monero’s central value proposition of privacy and fungibility. Therefore, anyone who uses Monero for privacy reasons is best advised to completely choose one chain and ignore the other completely. (It’s presumably best to ignore the chain that carries the least value.)

Even users that do not use both chains may suffer from somewhat decreased privacy. If they mix their coins with users who revealed which coins they own, it can reduce the anonymity set of other users as well. This added risk is probably compensated for on the new Monero protocol by the increased ring-size for transactions, however.

Whether the pre-hard fork version of Monero (in the form of the four different projects) will gain and retain any market value of course remains to be seen.

Monero lead developer Riccardo Spagni did not respond to a request for comment by the time of publication.

Thanks to Monero community contributor Justin Ehrenhofer for clarifying some of the technical details.

Cryptocurrency trading firm Coinbase has entered into talks with the U.S. Securities and Exchange Commission about registering as a licensed broker-dealer firm and electronic trading venue, The Wall Street Journal reported on Friday, April 6, 2018.

The move comes just as U.S. regulators have begun clarifying their stance on virtual currencies. Testifying before the Senate on February 6, 2018, SEC chairman Jay Clayton made it clear that he considered all initial coin offering (ICO) tokens to be securities.

While it is likely that regulatory laws surrounding ICOs will only be settled in court (perhaps even the Supreme Court), if ICO tokens are legally classified as securities, any exchange that wants to list those tokens needs to either register as a national securities exchange or operate under an exemption and set itself up as an alternative trading system (ATS).

As the SEC spelled out in its statement on March 7, 2018, any entity that wants to become an ATS needs to register with the SEC as a broker-dealer and become a member of a self-regulating organization (SRO), such as the Financial Industry Regulatory Authority (FINRA). “An ATS must comply with the federal securities laws and its SRO’s rules and file a Form ATS with the SEC,” the statement reads.

In a possible lead-up to its plans on becoming an ATS, on March 26, 2018, San Francisco-based Coinbase announced it was adding support for ERC20 into all its trading platforms. ERC20 is the Ethereum technical standard that the majority of ICO tokens are based on. “This paves the way for supporting ERC20 assets across Coinbase products in the future, though we aren’t announcing support for any specific assets or features at this time,” Coinbase said in a blog post.

Coinbase is not alone in making moves toward becoming an ATS. Recently, mobile payment app company Circle acquired Poloniex, another U.S.-based exchange, with plans to “clean up” the exchange. A slide that was initially leaked from a Circle presentation stated, “Circle has briefed the SEC on the transaction and indicated that upon closing that we will begin the process of registering the new entity with the SEC and FINRA as a Broker/Dealer and in turn as a licensed ATS…”

On March 7, 2018, Bittrex has also said that it is in communication with the SEC, stating on its website “… we look forward to continuing our proactive dialogue with the SEC and other regulators on how to build a secure, fully-regulated environment for blockchain that encourages innovation and economic growth.”

The Lightning Network’s first mobile app for Bitcoin’s mainnet is now available through Google Play. Known as the Eclair Wallet, the app was released on April 4, 2018, via French technology startup ACINQ, and is being offered specifically to Android users.

Devices employing software version 5.0 or higher can send Lightning payments, which require significantly lower fees than the standard Bitcoin network. Transactions also happen much faster compared to on-chain confirmations.

Describing the new product on GitHub, ACINQ wrote:

“The Eclair Wallet is a next-generation, Lightning-ready Bitcoin wallet. It can be used as a regular Bitcoin wallet, and can also connect to the Lightning Network for cheap and instant payments. This software is based upon eclair [another Lightning implementation], and follows the Lightning Network standard.”

The product’s release marks the latest in a long list of items that have come by way of the Lightning Network over the past several weeks. In March, for example, the protocol’s “first Lightning mainnet release,” known as Ind 0.4-beta, went live to widespread acclaim. Several other new tools have since entered the market by way of private developers, and an upcoming beta known as c-lightning is expected to be available relatively soon.

The Lightning Network on Bitcoin is made possible in part due to Segregated Witness, the protocol upgrade that activated on Bitcoin last summer. The app’s popularity has also inspired users to request an iOS edition of the product.

The wallet does, however, come with certain limitations. According to a description written by ACINQ, “Lightning channels are outbound only: you can pay with LN but you cannot receive or forward payments with this wallet.” It further states that if users wish to enjoy the full LN experience, they are advised to run a full Eclair node.

The Lightning Network is described as a “peer-to-peer system” working as a “second-layer payment protocol” leveraging the security of Bitcoin’s blockchain to process (micro)payments. The Network’s scalability should allow it to process millions to billions of transactions per second across the network.

Founded in 2014, ACINQ is based in Paris, and seeks to build “products and services for the Bitcoin ecosystem.”

South Africa has joined a growing list of countries that expect citizens to pay income tax on their cryptocurrency earnings.

The South African Revenue Service (SARS) released a statement today, April 6, 2018, making it clear that, even though the country does not consider cryptocurrencies legal tender, you still have to pay taxes on the gains.

That means that anyone who is paid for goods or services in bitcoin must declare that just as they would ordinary income. Also, traders who make money buying cryptocurrencies at a low and selling at a high will have to pay capital gains on any profits. Further, anyone who mines cryptocurrencies will have to pay taxes on the money they make as well.

“The onus is on taxpayers to declare all cryptocurrency-related taxable income in the tax year in which it is received or accrued. Failure to do so could result in interest and penalties,” SARS said.

SARS still has yet to make clear the value added tax (VAT) status of bitcoin. “The 2018 annual budget review indicates that the VAT treatment of cryptocurrencies will be reviewed. Pending policy clarity in this regard, SARS will not require VAT registration as a vendor for purposes of the supply of cryptocurrencies,” SARS said.

South Africa is not alone in taxing bitcoin. Many countries, including the U.S., Japan and South Korea, tax all gains arising from selling, trading and purchasing items with cryptocurrencies, as well as gains accrued through mining and chain-splits.

As reported by the Wall Street Journal, bitcoin use has surged in South Africa amid political and economic instability in the country, where it can be used to transfer money without restriction due to sanctions or going through a bank.

In the past, South Africa has taken an open-minded stance on bitcoin and cryptocurrencies. In 2014, the South African Reserve Bank (SARB) issued a position paper on virtual currencies where it declared that virtual currency has “no legal status or regulatory framework” and is, therefore, unregulated in South Africa. But in July 2017, SARB began to work with blockchain-based solutions provider Bankymoon to test out a number of new cryptocurrency regulations in the country.

Read more about where countries around the world stand on cryptocurrency regulation in 2018 here.

On April 6, 2018, the United States Securities and Exchange Commission obtained a court order to freeze $27 million in stock trades from Longfin Corp., a publicly traded blockchain technology company. According to the SEC’s official statement, the company’s CEO and three other affiliates are under investigation for the illegal distribution and sale of restricted Longfin Corp. shares.

Founded in December of 2017, the company went public with an IPO on the Nasdaq stock exchange on the 13th of the same month. After acquiring Ziddu.com, a blockchain company that advertises itself as a solution for the global warehousing industry, Longfin’s stock soared 230 percent in a single day and 2,000 percent over the course of two days, driving its market cap up in excess of $3 billion.

This price action drew the attention of more than just investors and cryptocurrency speculators. Shortly after the acquisition and subsequent price appreciation, the SEC launched an investigation into the matter, filing a sealed complaint with the New York state court system on April 4, 2018.

With the complaint now unsealed and approved, the SEC has an order to freeze what it believes to be $27 million worth of illegally sold Longfin stock. Per the complaint, Longfin’s CEO and majority shareholder, Venkat Meenavalli, approved the distribution of over two million restricted, unregistered shares to Amro Izzelden Altahawi, Longfin’s director and corporate secretary. Dorababu Penumarthi and Suresh Tammineedi, two other Longfin affiliates, reportedly received some tens of thousands of shares, as well. According to the SEC, the three illegally sold their restricted shares on the public market when Longfin’s stock was on the rise.

These sales violated federal securities laws, the SEC claims, which restrict company affiliates from publicly trading unregistered shares.

“We acted quickly to prevent more than $27 million in alleged illicit trading profits from being transferred out of the country,” Robert Cohen, the SEC Enforcement Division’s cyber unit chief, said in regards to the freeze. “Preventing defendants from transferring this money offshore will ensure that these funds remain available as the case continues.”

Longfin, along with Meenavalli, Altahawi, Penumarthi and Tammineedi are all charged with violating Section 5 of the Securities Act of 1933. The SEC’s press release further states that the “complaint seeks injunctive relief, disgorgement of ill-gotten gains and penalties, among other relief.”

The SEC’s total punitive response has not yet been decided as the investigation is ongoing.

As cryptocurrencies continue to make their mark on the financial arena, many capital investment firms are looking to bring the power of the blockchain and traditional investment strategies together to give traders more opportunities in an adapting industry.

Leading Chinese private equity group JD Capital is one of those firms. Founded in 2007 and headquartered in both Beijing and New York, the company holds $9 billion assets under management and claims to be the only Chinese private equity enterprise listed on a major stock exchange. Presently, JD Capital employs over 400 people and manages over 100 publicly-traded portfolio companies.

In early 2017, JD Capital established its blockchain investment division, JLab. It has since  participated in over 20 token sales in infrastructure, applications, exchanges and media verticals. JLab has also partnered with Huobi Labs to incubate new projects.

JOne is JD Capital’s investment banking division, established to help blockchain companies with fundraising, community building and marketing. Among JOne’s many goals is accelerating the blockchain industry by connecting fintech portfolios with public chains. Examples include Jiedaibao, which is valued at over $10 billion and boasts over 100 million users.

Balancing Blockchain and Cryptocurrency Business Models

Zhen Cao serves as JD Capital’s investment director and the North American representative of JLab. Before joining JD Capital in February of 2018, she was the founding member of Outpost Capital; she has worked on roughly 15 equity investments in virtual reality, augmented reality and artificial intelligence, as well as deploying over $10 million into more than 20 pre-sales and crypto funds.   

“China has been very fast paced regarding blockchain development,” said Cao in an interview with Bitcoin Magazine. She added that the country is more open to blockchain applications and businesses than digital currencies. “They’ve already done a lot of implementation in finance, supply-chain management and medical insurance. China is supportive of blockchain development, and different cities are setting up blockchain incubation centers.”

Despite what she considers to be solid growth over the last few years, Cao admits that the current environment in China still makes things challenging for cryptocurrency companies. “The government is not supportive of crypto fundraising models like ICOs, as they are trying to protect retail investors.”

Last February, regulators began cracking down on trading platforms that allowed investors to trade on overseas exchanges. This move was preceded by a ban on all websites that involved or promoted initial coin offerings and token sales.

A Global Approach

Strict laws surrounding virtual assets means that most companies need to think big from the very beginning and lay out any long-term plans for expansion before official launches can occur.

“Thinking about globalization from day one is very important,” she said.

According to Cao, JD Capital provided a 900 percent return on fund one during its primary market. The company is now looking to expand its secondary market team by recruiting individuals with extensive “blockchain development experience.”

“JD Capital has always been an innovator in finance in China with a large range of different services,” Cao states. “The blockchain is a critical element of the future of finance.”

She also mentions that the company is leveraging existing experience in public market trading and working to develop stronger trading strategies for its expanding list of clients. Lastly, executives are beginning work on public chains and new consensus mechanisms.