3iQ Research Group consolidates the top five cryptoasset stories of interest
to investment advisors and our investors.


Fidelity’s Bitcoin Custody Service is Now Online

March 8 – Fidelity Investments, the Boston-based multinational financial services company with over $7.2 trillion USD in assets under management (AUM), has announced that its Bitcoin custody service, Fidelity Digital Assets, is now online for a select group of eligible clients. Clients who are initially qualified to use the custody service will range from “hedge funds, family offices, pensions, endowments, [and] other institutional investors”. The custody service will only operate for Bitcoin at this time, as further developments are required to integrate alternative cryptocurrencies. The Bitcoin custody service has been long awaited by many market-players, particularly hedge funds and other investment fund managers (IFMs), as new financial products that are based on Bitcoin have been under the scope of federal and other regional regulators for having issues surrounding custody.

In a recent interview, Tom Jessop, the leader of Fidelity Digital Assets, discussed his thoughts about the Bitcoin custody solution and provided several interesting numbers relating to digital asset adoption from experienced market participants. Notably, Jessop cites a recent survey that Fidelity conducted on 450 institutions which concluded that many are expecting or have already allocated some of their portfolios to digital assets. “We just completed a survey of about 450 institutions, so everything from family offices to registered investment advisors to hedge funds. It’s interesting, I think about 20% indicated that they currently allocate to digital assets with an intention to grow that. I think when you think about blockers, and the issues that people cite for not being in the space, interestingly, volatility is number one, which is a solvable problem. Lack of regulatory certainty is number two, and in some cases, lack of fundamental data is a third.”

Read the full article here.


Chainalysis: Bitcoin Whale Selling Has “No Strong Relationship” to Moving Prices Intraday

March 7 – Last Thursday, a leading crypto surveillance and analysis company used by law enforcement and other government agencies, Chainalysis, hosted an online webinar discussing the topic of “Crypto Whales”, a named dubbed for large holders of cryptoassets such as Bitcoin. Crypto Whales have often been blamed by retail crypto investors as those responsible for either large sell or buy orders that move the price of cryptoassets more than other market participants. According to Chainalysis, to classify as a Bitcoin Whale, an individual needs to hold at least 15,000 BTC, meaning that crypto exchange cold-wallets who hold those amounts would not classify. The webinar focused on both Bitcoin and Bitcoin Cash Whales with hopes to provide transparency around their ability to create liquidity risks for crypto exchanges, and narrowed their findings into four types of whales, “Criminal Whales”, “Early Adopter Whales”, “Trader Whales”, and “Lost Whales”, which make up 11%, 24%, 43%, and 22% of their taxonomy respectively.

Some notable findings in the webinar were that both Criminal Whales and Lost Whales have the lowest price and liquidity risk for exchanges, potentially because Criminal Whales wish to keep their Bitcoin holdings off exchanges that have proper KYC/AML procedures in place, and Lost Whales simply do not have access to their coins meaning they cannot liquidate them on exchanges. Additionally, Trading Whales who may have been blamed for large buy and sell orders that move prices on exchanges actually accumulate more Bitcoin in bear markets, and have no strong relationship in moving prices intraday when they sell directly into exchange orderbooks. Other important numbers presented in the webinar were that only 22 million entities hold Bitcoin, and only 3% of those hold more than 1 BTC. Around 49 large holders control 21% of all outstanding Bitcoin, and 28 Bitcoin Whales control 5% of all outstanding Bitcoin.

Read the full article here.


Why Crypto Companies Still Can’t Open Chequing Accounts

March 3 – Despite several new multibillion-dollar institutional entrances into the digital asset industry, basic banking services for digital asset companies are still being refused by entities such as HSBC Holdings and JPMorgan Chase. Some entrepreneurs in the industry have noted that many of these major banks still do not have the proper monitoring and compliance systems in place to mitigate the risks that could be associated with providing basic banking services to digital asset companies. Building and maintaining these monitoring systems could be expensive, and some banks may have concluded that the costs associated with such operations are not worth it. According to one estimate, fighting money laundering already costs financial firms around $25 billion USD per year. However, at their ethos, digital assets and other cryptocurrencies do pose some sort of “existential risk” for major banks, so slower-adoption in implementing compliance procedures for digital assets could be expected.

“The banking system has never been friendly to crypto, and while maybe that made some sense in the early days, continuing to label all crypto businesses as high-risk is indefensible and protectionist,” said Mark Lamb, the CEO of a newly launched crypto derivatives exchange. “The standard answer of ‘just go to your local Chase branch’ doesn’t work in crypto,’’ said Sam Bankman-Fried, the CEO of Alameda Research. “It’s not illegal for big banks to bank the crypto industry, but it’s a massive compliance headache that they don’t want to put the resources in to solve.’’

Read the full article here.


Cryptocurrency Investors Targeted With Audits by Canada Revenue Agency

March 6 – Several sources have reported that the Canada Revenue Agency (CRA) has targeted several cryptocurrency investors with audits this tax season. Those who have been targeted have been given a set of comprehensive questions relating to their historical cryptocurrency activities. Some of the questions relating to cryptocurrencies are quite industry-specific, such as Question 3, which asked the target “Do you use any cryptocurrency mixing services and tumblers? If so, which services do you use?”. Cryptocurrency mixers and tumblers essentially “scramble” cryptocurrency transactions across user addresses in attempts to hide the original user of the cryptocurrency. Although, if a user did indeed scramble their cryptocurrency transactions in order to help evade taxes, they would still need to convert their cryptocurrency holdings to fiat on a cryptocurrency exchange. Most leading crypto exchanges who offer fiat pairings and fiat withdrawal methods have implemented KYC/AML procedures to be able to determine who that user is.

“The CRA established a dedicated cryptocurrency unit in 2017 to build intelligence, and conduct audits focused on risks related to cryptocurrencies. This unit has enhanced the CRA’s ability to monitor and enforce compliance in areas of emerging risk, including the cryptocurrency space. There are currently over 60 active audits related to cryptocurrency,” said the CRA in a statement.

Read the full article here.


The First Bitcoin Expert Witness Used to Testify in Canadian Criminal Court

March 6 – CipherTrace, a blockchain surveillance and security company based in Silicon Valley, has recently announced that its CEO, Dave Jevans, has been used in a Canadian criminal court to testify as an expert witness. This is reportedly the first time an expert witness has been used during a bitcoin forfeiture hearing in Canada, and is also the first time a seizure of cryptocurrencies has been made by a Canadian police force. Jevans testified against the defendant, Matthew Phan, who was a cryptocurrency user convicted for trafficking drugs and weapons over the dark web.

“I would have loved to have access to a tool such as CipherTrace when I originally conducted this investigation in May of 2015. The report prepared by Dave really was the pivotal piece in the Crown’s case for forfeiture,” said Dwayne King, Senior Manager of Grant Thornton Canada LLP. “As the crypto market expands, Canadian policymakers and law enforcement officials need to leverage external parties who specialize in blockchain forensic analysis if they intend to build resistance to illicit activity,” said Dina Mainville, the Canadian Sales Director of CipherTrace. “Dave Jevans demonstrated that CipherTrace can bring transparency and accountability to illegal and fraudulent cryptocurrency transactions.”

Read the full article here.


3iQ Global Cryptoasset Fund: Price as at March 8, 2019

3iQ is the first regulator approved multi-cryptoasset portfolio manager in Canada, providing accredited investors with exposure to bitcoin, ether, and litecoin through its 3iQ Global Cryptoasset Fund.


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