In this issue

  1. Antivirus pioneer McAfee arrested for SEC violations and tax evasion
  2. Cryptocurrency traders bearish on Trump’s odds in November
  3. BitMEX faces money-laundering charges, but CEO may be out of legal reach
  4. Filecoin mainnet launches this month
  5. In China: Banks help build business uses for new e-RMB; NetEase’s forever email
  6. Funding spotlight: Fintech in Singapore

From the Editor’s Desk

Dear Reader,

When it comes to crimes against the state, time is not forgiving, nor lets you forget. This week, we learned of the arrest and outstanding warrants for BitMEX‘s founders and its first employee; followed a few days later with the arrest of John McAfee in Spain, awaiting extradition to the U.S. to face tax evasion charges. It seems the sky is falling and the big guns are out. After all, when the public purse and interests are at stake, no one is fooling around. 

But it’s also a reminder to check ourselves — that in the speed of innovation, these allegations of crimes of disregarding rules came from a time where few were sure if those rules applied, or how might they be applied. Of course, hindsight is 20/20 in 2020. Since those early days, we’ve seen regulators evolve along with the industry. Once adversaries, today both sides work much more collaboratively. 

So while the headlines scream of yet more arrests and intensify perceptions of the criminality of those who delve in cryptocurrencies, it also contrasts with where we are now: blockchain in fintech, development of digital currencies by governments around the world, cryptocurrencies as alternative assets for investors. We are richer for having these options, thanks to the global financial crisis and bitcoin’s birth in 2008.

Fast forward to today. Rules do apply. They can bring order to chaos. And the industry might not be able to grow without it. After all, when money grows too fast, a lot of people can get hurt. 

Until the next time,

Angie Lau,
Founder and Editor-in-Chief

1. Tech pioneer John McAfee arrested after pushing crypto

Crypto advocate John McAfee is in hot water with the SEC over promoting ICOs. Photo: Gage Skidmore, CCASA 2.0
Crypto advocate John McAfee is in hot water with the SEC over promoting ICOs. Photo: Gage Skidmore, CCASA 2.0

By the numbers: McAfee — 4,400% increase in Google search volume.

The larger-than-life crypto personality and antivirus software pioneer was arrested in Spain this week on tax evasion charges. McAfee was also charged by the Securities and Exchange Commission for not disclosing he was being paid to promote ICOs through his Twitter account. 

  • Federal prosecutors allege McAfee hid cryptocurrency transactions, a yacht and real estate through various alternate names to avoid paying Uncle Sam.
  • The Justice Department announced tax evasion charges shortly after the SEC brought civil charges, alleging McAfee made US$23.1 million in undisclosed compensation but failed to file any tax returns from 2014 to 2018.
  • The elusive tech mogul, notorious for hiding out in exotic locations but being vocal on social media, has been arrested almost two dozen times over the past few years.

Forkast.Insights | What does it mean?

John McAfee was always an entertainer, but never someone to be taken too seriously — something that the SEC lays bare in a 55-page complaint filed in the District Court for the Southern District of New York late Monday. The former antivirus executive, who once promised that he would televise the ingestion of a defining aspect of his manhood should the price of bitcoin not hit a certain target, was known for his “extravagant posts” that “generated an enormous amount of publicity,” according to the SEC complaint, which also noted that these predictions, per his own admission, were a ruse to “onboard new users.”  

The crux of the complaint against McAfee is that he operated as a securities promoter without disclosing — or outright lying — about his financial interests in the projects he was promoting. This is something that’s been illegal since the dawn of securities laws, as the early days of the stock market were defined by hucksters promoting junk. The SEC complaint lists nearly a dozen times where McAfee, well aware of his role at the top of the sales funnel, either misrepresented his role as an advisor — and not as a promoter for companies he featured on Twitter — or simply endorsed companies outright. The SEC also notes that McAfee and associates were active in “scalping” ICO tokens, that is, selling them at the height of his market-moving tweets.

2. Crypto money is on Biden to win election

Trump, Covid, crypto, betting
President Trump at the Walter Reed National Military Medical Center after testing positive for Covid-19. Photo: Joyce N. Boghosian

By the numbers: Donald Trump — over 5,000%  increase in Google search volume.

Global stock markets fell sharply after U.S. President Donald Trump announced that he and the first lady have tested positive for the coronavirus. Bitcoin also saw a sharp fall in its price in the following hours, dropping to US$10,416, its lowest in 90 days, though it is unclear that the slump was related to Trump’s Covid reveal. Trump confirmed his infection on Twitter after his confidante Hope Hicks fell ill with Covid-19. 

  • A spokesperson for FTX, a crypto futures market, told Forkast.News that it saw nearly $2 million in total transaction volume on its TRUMP futures contract just hours after the White House made the announcement. The TRUMP contract dropped to 0.31 upon the first report, then levelled off at 0.34, reflecting how crypto traders gave Trump a 34% chance of holding on to the Oval Office. Before finally levelling off at 0.40, approximately where it was after the first debate.
  • Through the weekend, as news continued to flow out of the White House and Walter Reed hospital, the markets gyrated accordingly.
  • Trump’s Covid illness and debate performance against former Vice President Joe Biden were also tracked through FTX futures contracts, reflecting what a FTX spokesperson said may be a more accurate view of public perception than traditional polls. Read more here.

Forkast.Insights | What does it mean?

Is the positive Covid-19 diagnosis of President Trump, a 74-year-old slightly obese male, a big deal in his overall election chances? Or is the probability of him remaining in the White House so precipitous anyway that a Covid diagnosis is a non-factor?

According to the market, the latter. As there is a considerable lag between events and polls, a notable divergence between pollsters and FTX’s marketplace happened in the immediate aftermath of this “October Surprise. Polls from Ipsos and YouGov conducted between Oct. 2 and 3 place Trump’s chances at 40 to 42%, just as news broke, according to poll aggregator FiveThirtyEight. In the meanwhile, FTX’s fast-moving crypto futures market digested the news and showed initial signs of panic, but ultimately determined that this was a non-consequential factor in the race and pushed the future’s price back near to where it was, tracking the polls. 

The price of bitcoin was down approximately 6% during the Friday trading day. Not so much because of the market pricing in political fortunes, but more likely the shock to the crypto derivatives and DeFi sectors from the BitMEX indictments. 

3. Bitmex accused of money laundering 

BitMEX owner Arthur Hayes (left) talks to Forkast.News Editor-in-Chief Angie Lau in 2019. Photo:
BitMEX owner Arthur Hayes (left) talks to Forkast.News Editor-in-Chief Angie Lau in 2019. Photo:

By the numbers: Bitmex — over 5,000% increase in Google search volume.

Cryptocurrency derivatives trading platform BitMEX owners Arthur Hayes, Ben Delo, Samuel Reed and the company’s first employee and head of business Gregory Dwyer have been charged with violating the Bank Secrecy Act by deliberately failing to establish an anti-money laundering (AML) program. While Hayes, Delo and Dwyer remain at large, Reed has already been arrested in Massachusetts. 

  • According to the Commodity Futures Trading Commission (CFTC), BitMEX received more than US$11 billion in bitcoin deposits and made more than $1 billion in fees from U.S. customers.
  • After the CFTC charges, 23,200 bitcoin worth US$243 million was withdrawn from BitMEX in just an hour. Bitcoin prices also saw a steep nosedive from over US$10,880 to around US$10,470. Since then, the price of Bitcoin has been fluctuating around the $10,400 and $10,800, which included another crash triggered by President Trump’s Covid-19 diagnosis.
  • Hayes, a Hong Kong resident, is believed to still be in the territory. 

Forkast.Insights | What does it mean?

The days of the Wild West of the cryptocurrency derivatives market are likely coming to an end. Even before the CFTC regulatory grasp on crypto was solidified via the Digital Commodities Exchange Act and Securities Clarity Act, the agency is showing its fangs by cracking down on BitMEX — which until August had notoriously lax know your customer/anti-money laundering (KYC/AML) policy. 

To help understand what BitMEX’s prosecution means, Forkast.News reached out to Taipei-based attorney and political risk analyst Ross Feingold, whose practice has brought him throughout Asia, including Hong Kong. Feingold explains that the case against BitMEX is precedent-setting as it is one of the first times that the Bank Secrecy Act has been used to prosecute a non-bank financial institution and the first time the law is used against a cryptocurrency company.

This will be a huge wakeup call for the DeFi industry, which repeatedly has ignored calls for KYC/AML protocols.. 

As for Hayes, who resides in Hong Kong, he’s not likely to be going anywhere soon. The U.S. has suspended its bilateral extradition treaty with Hong Kong, and given the current chilly relations between the U.S. and China over Hong Kong, HKSAR government officials — who recently got slapped with sanctions by the U.S. — will likely be in no hurry to assist the U.S. extradite Hayes or invalidate his residency permit (which the territory’s immigration department would have some flexibility to do if he’s not a permanent resident). 

4. Filecoin’s mainnet prepares to launch

Filecoin is a “decentralized dropbox.” Image: Decrypt
Filecoin is a “decentralized dropbox.” Image: Decrypt

By the numbers: Filecoin — 800% increase in Google search volume. 

Filecoin’s much anticipated mainnet has finally received a date for liftoff. Protocol Labs’ cryptocurrency for its decentralized storage network for the Web 3.0 era is now scheduled to launch on Oct. 15. 

  • Today’s data storage relies on centralized databases largely controlled by a handful of large corporations, such as Amazon, Google and Alibaba. Filecoin seeks to enable any storage providers around the world to rent out storage space, which could decentralize data storage and eliminate single points of failure. 
  • Filecoin’s Space Race to stress test its network has onboarded over 325 pebibytes (PiB) of data over four weeks. Over 400 miners across 34 countries have participated in their Space Race event. 

Forkast.Insights | What does it mean?

Cloud storage has taken the world by storm by offering an alternative to companies hosting their own capital intensive data centers. But the problem with cloud is that it’s heavily centralized: controlled by a handful of corporations at a handful of physical locations. Outages among cloud providers aren’t frequent, but given the Covid-mandated work-from-home requirements when they hit, they tend to be high profile. Google had outages in August and September; Microsoft Azure in the U.K. had a widespread outage in mid-September. 

There’s also the issue of censorship. Deplatforming can range from outright banning of the internet’s loudest and most notorious voices, or demonetizing users to discourage speech. As Wired reported in 2019, conservative nonprofit Prager University and a group of LBGTQ+ creators are both suing YouTube for turning off their monetization taps for having content that some might find “shocking” for different reasons. 

We don’t have an alternative to YouTube because of the massive capital costs in running video-sharing platforms, and not everyone can afford to run the kind of data center required. But Filecoin’s “Space Race” may show that large cloud storage centers aren’t the only game in town. Decentralized storage options, powered by blockchain, may become viable alternatives that this proof of concept has demonstrated.  

4. In China: Banks help build out e-RMB’s usability; NetEase plans to store email forever via blockchain

China’s central bank digital currency may be close to launch. Image: Shutterstock, Decrypt
China’s central bank digital currency may be close to launch. Image: Shutterstock, Decrypt

Private banks and city commercial banks are helping build out a workable DCEP, China’s central bank digital currency (CBDC) initiative, according to the elite financial news outlet, 21Caijing.

  • The Digital Currency Research Institute, a unit of People’s Bank of China (PBOC), recently signed a pact with City Commercial Banks Clearing Co. to create a platform for small and medium-sized banks to connect the digital yuan to its system and provide related services.
  • City Commercial Banks Clearing Co., established in 2018, is one of PBOC’s chartered clearing centers. It provides clearing, custody and single-point access services for small and medium-sized banks and financial institutions. As of December 2019, City Commercial has served 433 banks in China.
  • DCEP is already being tested in four big state-owned banks in China, including the Industrial and Commercial Bank of China, China Construction Bank, Agricultural Bank of China, and Bank of China.

Forkast.Insights | What does it mean?

DCEP’s development continues to roll on, and even though it’s not yet publicly released, the platform is showing maturity by allowing small and mid-sized banks to connect and clear DCEP-RMB fund transfers. These small and medium-sized banks are what allow people and small businesses in China’s less-developed cities to access the financial system. Ensuring that these banks have the ability to clear payments on DCEP is a way to build platform adoption outside of China’s urban commercial hubs. 

Chinese internet firm NetEase has started using blockchain in its services. Photo: Raysonho, CC0
Chinese internet firm NetEase has started using blockchain in its services. Photo: Raysonho, CC0

NetEase Inc., one of China’s leading internet and online game services providers, launched a blockchain proof of existence service for its e-mail users, according to China Daily.

  • Each email, including time, recipients and content sent by NetEase’s paid members will be stored on a permissioned blockchain. Certification authorities, notarial institutions and internet courts are nodes on the permissioned blockchain. The on-chain information could be used as digital evidence in court, the report explained. 
  • NetEase, which has one billion registered users as of December 2019, provides free email as well as paid membership services. The blockchain depository service is for members only.

Forkast.Insights | What does it mean?

If Netease’s forever email service is going to work in a business setting, there needs to be a way to turn it off. Of course, having this in place could be advantageous when dealing with contracts or other circumstances when you need to hold someone to their word. But there are also cases where you want to do the opposite — go off the record. (“Without prejudice” starts to appear on headers and footers when business relations sour.) 

Western courts have frequently ruled that business chatter is not admissible in court; people may not be frank if they knew that every word was being logged with the same effect and sense of permanency as sending something by registered mail. Chinese courts and businesses may operate in different ways with respect to such records though, as suggested by this new blockchain-based system.

5. Funding spotlight: Fintech in Singapore

RootAnt — seed, Singapore, US$1.5 million 

Fintech firm RootAnt closed a $1.5 million funding round for its banking as a service initiative, which is an automated “satellite engine of existing core banking systems.” Effectively, it’s a more scalable approach to interbank transfers using blockchain. The round was led by Linear Venture and the venture capital firm KZM & Company Group. This is KZM & Company’s first outside investment. The VC company was founded by Kazuma Yamauchi, the same angel investor in tidying-up guru Marie Kondo’s media company. RootAnt plans to expand further in Singapore, Southeast Asia and Japan, according to a press release.

RootAnt, which is not affiliated with Chinese fintech megacorp Ant Group (previously Ant Financial), was a “Selected Outstanding Program” by PwC in 2019. Its founder was later named an Asia Fintech Leader and a Fintech Leader Under 30 by the Singapore Fintech Association. The firm is headquartered in Singapore, with secondary locations in China and Japan. 

Forkast.Insights | What does it mean?

Interbank transfers have long been a use case for blockchain to replace the aging SWIFT system. When a SWIFT transfer occurs, a bag full of cash isn’t wrapped up and sent down a wire. Rather, the bank sends a message to another bank instructing it to credit the receiver’s account. A centralized ledger keeps track of all of these transactions, and at certain times throughout the year ensures that banks reconcile the capital with each other to even out their accounts. 

If there ever was an industry prime for disruption, this is it. But in the West, there’s nothing yet. Ripple has made some inroads, and a number of payment corridors have adopted it, particularly in the developing world. But its association with the cryptocurrency XRP and confusion that XRP is Ripple the payment technology may be keeping it from wider adoption. Quorum, which was recently sold to Consensys from JP Morgan, is attempting to build a solution, but it is limited to assisting in Financial Action Task Force (FATF) compliance and also in tracking down missing payments that might have been stuck at a correspondent bank. It’s a way to make SWIFT more efficient, but not replace it.

China, of course, is well ahead of the game. The nation is building out cross-border finance bridges between Hong Kong and Guangdong to allow remittances to pass through smoothly between the two separate banking systems where SWIFT was a necessity before. 

Interestingly, a McKinsey & Co. 2019 report, titled “A vision for the future of cross-border payments,” has no mention of blockchain and slights distributed ledger technology, stating that it is “unlikely to provide an international payments structure at scale in the short term.” But this, of course, is due to the higher initial costs of research and development. Yet, would these costs really be borne on consumers? It’s our bet that VC funding and public capital infrastructure would lessen these price blows.