February 4 – 10, 2019 | Canadian Custody, Crypto Funds & More Crypto News
3iQ Research Group consolidates the top five cryptoasset stories of interest
to investment advisors and our investors.
Controversy Behind Canadian Crypto Exchange QuadrigaCX Raises More Questions About Cryptoasset Custody
February 4 – A major Canadian cryptocurrency exchange based in Vancouver, QuadrigaCX, says it can’t retrieve about $190 million CAD worth of bitcoin, ether, litecoin and other tokens that it holds for its customers after one of its founders, Gerald Cotten, had reportedly passed away in India. According to recent court documents filed in Halifax, access to QuadrigaCX’s cold-storage wallets had been lost after Cotten passed away on December 9, 2018 in India after suffering from complications arising from Crohn’s disease. Speculations regarding his death have come in droves on Reddit since hundreds of customers now have no way of withdrawing their cryptocurrencies from the exchange. Some Reddit users have claimed that Cotten may be faking his death, and may still be alive, as he had filed his will just ten days before the death was reported. In an affidavit from his widow, Jennifer Robertson, Cotten was very conscious about security, noting that his laptop, email address, and messaging system he had used to run QuadrigaCX were all encrypted, and only he had access to the exchange’s cold-storage wallets. Cotten was also the only one responsible for the funds, coins, keys, banking, and accounting of the exchange. At the time of writing, QuadrigaCX has since barred public entry into their exchange, hosting a simple landing page on their website that asks the Nova Scotia court for creditor protection while the exchange attempts to address “significant financial issues”.
“For the past weeks, we have worked extensively to address our liquidity issues, which include attempting to locate and secure our very significant cryptocurrency reserves held in cold wallets, and that are required to satisfy customer cryptocurrency balances on deposit, as well as sourcing a financial institution to accept the bank drafts that are to be transferred to us,” said QuadrigaCX. “Unfortunately, these efforts have not been successful.”
3iQ Corp has long emphasized the need for regulated and secure cryptoasset custodians, and has never had affiliations with QuadrigaCX, nor ANY executives or directors affiliated with the exchange. Given its lack of historical regulatory oversight, 3iQ Corp had determined that selecting QuadrigaCX as a custody provider for the 3iQ Global Cryptoasset Fund was not in the best interest of the Portfolio Manager, Shareholders, or Unitholders of the fund.
“Regulated investment fund managers in Canada are required to conduct thorough due diligence on potential custodians to protect Canadian investors. Unlike QuadrigaCX, the keys to our cold-storage wallets are held by a trusted custodian that is regulated by the New York Department of Financial Services (NYDFS) after passing a comprehensive review of anti-money laundering, capitalization, consumer protection and cybersecurity policies. Custody is key, and we believe we have done the hard work to argue that there is a better way for Canadians to invest in cryptoassets,” said Fred Pye, the President and CEO of 3iQ Corp.
Comparing Crypto Hedge Funds Vs. Venture Funds
February 2 – Placeholder, a crypto venture capital partnership which is based in New York City with over $150 million USD under management, has released a new article which compares and contrasts crypto hedge funds to crypto-based venture funds. The article seeks to provide clarity on how both crypto hedge funds and venture capital funds operate, particularly in regards to how they structure financings and how they operate in different stages of the market. According to the author of the article, Joel Monegro, crypto hedge funds use a “liquid fund structure”, meaning that investors in the fund typically have the rights to withdraw capital after certain lockup periods and other requirements are met. Often, the assets under management (AUM) of these crypto hedge funds would fluctuate over time, as people who have a stake in the fund may redeem their investments, or new people looking to invest would subscribe. Crypto hedge funds are often under pressure to “maximize performance in the short-term”, as if the fund underperforms during a given time period, the management fee and income of the business are significantly hindered, particularly when the AUM drops. Unlike hedge funds, crypto-based venture funds typically use a “committed capital” structure, meaning that investors cannot redeem their investments at will like they can with hedge funds.
“The effect of these differences is that hedge fund managers have a greater incentive to maximize short-term profits, as they can be severely affected if the fund underperforms in any given period, while VCs are incentivized to maximize long-term, realized value in order to increase their payout. And this is reflected in how each type seeks profits: in general, hedge funds will tend to trade around market fluctuations, while venture funds tend to build and hold investments to optimize for long-term value,” said Monegro.
SEC’s Robert Jackson Jr. Confirms That a Bitcoin ETF Will Pass Regulator Approval “Eventually”
February 6 – In a recent interview, Robert J. Jackson Jr., a commissioner at the US Securities and Exchange Commission (SEC), confirmed that an ETF based on cryptocurrency will get approved through the agency as soon as this year, despite the agency denying previous submissions. The commissioner expects at least one applicant will meet the requirements that the SEC has outlined sometime in 2019. Back in January 2018, the SEC had asked for 14 separate crypto-based ETF submissions to be pulled, citing issues around manipulation and surveillance, in addition to other factors for rejection. “I’m happy to say market participants have begun to come in with ideas,” Jackson said. “Whether or not we’re going to find one that really protects investors I don’t know, but I do know that that case wasn’t especially close”.
However, the SEC’s rejection of these crypto-based ETF applications encouraged other applicants to respond to the agency with ideas on how to meet their expectations. “Getting the stamp of approval from the deepest and most liquid capital markets in the world is hard, and it should be,” Jackson said. “Once we put the stamp of the United States Securities and Exchange Commission on an investment, once we make it available to everyday mom and pop investors, we are taking risks that Americans can get hurt.”
Credit Suisse Utilizes Blockchain for Processing Cross-Border Fund Trades
February 7 – A subsidiary of Credit Suisse has reportedly completed a test for fund transactions using only the blockchain to help quicken transaction times and keep them secure. Credit Suisse is a major investment bank based in Zurich, Switzerland that has its operations spread across many major financial hubs in the world. The fund distribution division of the Luxembourg Stock Exchange, Fundsquare, announced the success of the trial in a blog post on February 7. Credit Suisse Asset Management used the blockchain-based trading system to process several trades that occurred cross-border. According to Portugal’s Banco Best and Fundsquare, the trial was a success, and showed that cross-border distribution of fund trades over the blockchain was “more efficient, scalable and timely in processing”.
“Our goal is to collaborate with major players from the fund industry so as to capitalize on the benefits that blockchain technology brings. We are delighted to see a Portuguese innovative bank linking with Credit Suisse Asset Management and test our platform to explore the value that this new infrastructure can deliver. FundsDLT is an international initiative that streamlines a number of activities within the fund distribution value chain, and as a consequence, will reduce costs for the benefits of investors across fund and investor domiciles”, said Olivier Portenseigne of Fundsquare.
Previously Bearish Analyst Now Predicts a Comeback in Bitcoin and Cryptocurrencies
February 6 – Nikolaos Panigirtzoglou, an analyst at the major investment bank JP Morgan, notes that other major financial firms who he once thought were losing interest in cryptocurrencies has re-iterated his call, and believes they are now beginning to see renewed interest in cryptocurrencies. Back in December 15, Panigirtzoglou stated that participation by financial institutions in cryptocurrencies such as bitcoin trading were fading; however, in a recent interview on CNBC last week, he states that the situation is likely temporary. Panigirtzoglou believes that firms are beginning to show renewed interest as the cryptocurrency industry is beginning to stabilize.
In particular, Panigirtzoglou sees that more implementation of blockchain across traditional financial services will help spur interest for cryptocurrencies that utilize the technology. “The stability that we are seeing right now in the cryptocurrency market is setting the stage for more participation by institutional investors in the future,” said Panigirtzoglou. “The cryptocurrency market was a new market. It went through a bubble phase [and] the burst.”
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