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All Cypherpunks value privacy; it’s basically the founding principle of the collective of cryptographers, academics, developers and activists grouped around the 1990s mailing list by the same name. But few put it in practice like Wei Dai does. Once described as an “intensely private computer engineer” by the New York Times, not many personal details are known about the man who, two decades ago, dreamed up an electronic cash system intriguingly similar to Bitcoin.

This lack of personal details is made up for by Wei Dai’s work and proliferation of ideas. A talented cryptographer, Dai created and still maintains Crypto++: a C++ library for cryptographic algorithms. Dai is also, to this day, active on rationality forums like LessWrong, where he philosophizes on such topics as artificial intelligence, ethics, epistemology and more. His insights earned him the praise of well-known AI researcher Eliezer Yudkowsky and repeated invitations to speak at his Machine Intelligence Research Institute (MIRI; previously known as the Singularity Institute).

Dai’s interest in philosophy and politics is nothing new. Back in the 1990s, as a young bachelor student in computer science at Washington University, his curiosity led him to the writings of Timothy May, one of the “founding fathers” of the Cypherpunk movement. Dai was inspired by the crypto-anarchy May advocated; the brand-new ideology prevalent amongst Cypherpunks based on the conviction that cryptography and software could provide and safeguard political and economic freedom better than any system of government would.

“I am fascinated by Tim May's crypto-anarchy,” Dai wrote in 1998. “Unlike the communities traditionally associated with the word ‘anarchy’, in a crypto-anarchy the government is not temporarily destroyed but permanently forbidden and permanently unnecessary. It's a community where the threat of violence is impotent because violence is impossible, and violence is impossible because its participants cannot be linked to their true names or physical locations.”

By the mid-1990s, Dai engaged in discussions on various topics on the Cypherpunks mailing list such as digital reputation systems, game theory, privacy and anonymity in digital cash systems. Perhaps more importantly, Dai made a number of proposals to further the Cypherpunk cause, including trusted timestamping, an encrypted TCP tunneler, a secure file sharing system and more. It garnered him a reputation as a prolific contributor to the Cypherpunk community — though, even back then, no one knew much about him personally. (Not even whether Dai was male of female, Timothy May recently said.)

But Dai would become best known for an idea he casually announced in November 1998, just after graduating from university. “Efficient cooperation requires a medium of exchange (money) and a way to enforce contracts,” Dai explained. “The protocol proposed in this article allows untraceable pseudonymous entities to cooperate with each other more efficiently, by providing them with a medium of exchange and a method of enforcing contracts. [...] I hope this is a step toward making crypto-anarchy a practical as well as theoretical possibility.”

He called his proposal “b-money”.

B-money

Typical digital money systems use a central ledger to keep track of account balances. Whether it’s a central bank, a commercial bank, VISA or any other payment provider, a centrally-controlled database somewhere tracks who owns what.

The problem with this solution, from Dai’s and the crypto-anarchist perspective, is that it ultimately lets governments control the flow of money through regulation, while participants in the system are usually required to identify themselves. “My motivation for b-money was to enable online economies that are purely voluntary … ones that couldn’t be taxed or regulated through the threat of force,” he later explained.

So, Dai came up with an alternative solution. Or really, two alternative solutions.

In the first solution, instead of a central entity controlling the ledger, all participants maintain separate copies of the same ledger. Any time a new transaction is made, everyone updates their records. These ledgers, furthermore, would consist of public keys, with amounts attached to them — no real names. This decentralized approach would prevent any single entity from blocking transactions, while offering a level of privacy to all users.

As a quick example, let’s say Alice and Bob are b-money users. They both have a public key: Alice has public key “A” and Bob has public key “B”, for which they both control their unique private keys. And, as recorded in the ledgers maintained by all users, both their public keys hold b-money units; let’s say three units each.

If Bob wants to receive two b-money units from Alice (because he’s selling her a product), he sends her his public key: B. Assuming Alice wants to buy the product, she then creates a transaction in the form of a message: “2 b-money from A to B.” Next, she signs this message, with her private key corresponding to A. The message and the cryptographic signature is then sent to all b-money users.

The signed message proves to all b-money users that the rightful owner of A wants to send two b-money units to B. Everyone, therefore, updates their ledgers, now attributing a total of one b-money unit to A and a total of five b-money units to B — without learning that Alice or Bob control either.

If this solution sounds familiar, it should: It’s roughly how, 10 years later, Satoshi Nakamoto designed Bitcoin.

B-money, Version 2

Dai considered his first b-money solution impractical, however, “because it makes heavy use of a synchronous and unjammable anonymous broadcast channel,” he explained in his proposal.

Put differently, the first b-money proposal didn’t solve the double-spending problem. Alice could send two b-money units to both Bob’s B and to Carol’s C at the same time, transmitting these transactions to different parts of the network. Both Bob and Carol would give Alice a product in return … only to later find out that half of the network won’t acknowledge their new balances.

That’s why Dai came up with a second b-money solution, all in the same proposal.

In this version, not everyone maintains a version of the ledger. Instead, the system would consist of two types of users: regular users and “servers.” Only the servers, linked through a Usenet-style broadcast network, would maintain the b-money ledgers. To verify that a transaction went through like it should, regular users — like Bob and Carol — would have to verify it with a random subset of these servers. (In case of a conflict, Bob and Carol would presumably reject the transaction from Alice and not sell her anything.)

While not detailed in the proposal, anyone would probably have been able to become a server, but “each server is required to deposit a certain amount of money in a special account to be used as potential fines or rewards for proof of misconduct,” Dai proposed. The servers should also periodically publish and cryptographically commit to ownership databases.

“Each participant should verify that his own account balances are correct and that the sum of the account balances is not greater than the total amount of money created,” Dai envisioned. “This prevents the servers, even in total collusion, from permanently and costlessly expanding the money supply.”

If this sounds somewhat familiar as well, that’s no wonder either: Dai’s second b-money proposal loosely resembles what would today be called a proof-of-stake system.

To boot, Dai added an early version of a smart contract solution to his proposal(s). These types of smart contracts most closely resemble a mixture of a proof-of-stake system and an arbitration system, where both parties to a contract and an arbitrator must all deposit funds in a special account. Curiously for modern standards, however, these contracts did not have a dispute resolution system encoded: Instead it was possible that, in case of disputes, different users (or servers) would adjust their own ledgers differently, in effect leaving the state of ledgers on the network out of consensus. (Presumably, the potential penalties would make the cost of cheating too high to risk it.)

Monetary Policy

Yet, where b-money would have perhaps differed most sharply from Bitcoin was Dai’s proposed monetary policy.

Bitcoin’s monetary policy is of course very straightforward. To bring coins in circulation, it initially issued 50 new bitcoins per block, a number which has since dropped to 12.5. This number will continue to decrease over time until, some hundred years from now, the total amount of bitcoin issued caps out at slightly below 21 million. Whether or not such a monetary policy is ideal has been a subject of debate, but one thing is clear: So far it has not produced a stable coin value.

In contrast, a stable coin value was explicitly part of Dai’s vision. To achieve this, the value of b-money was to be coupled to the value of a (theoretical) basket of goods. For example, 100 b-money units would be worth one basket of goods. This should give b-money a stable value, at least in relation to this basket of goods: the same 100 b-money units would buy the same basket of goods in the past, in the present and in the future.

To issue new coins, users were to determine what a basket of goods would cost relative to a solution to a computational problem: a “proof of work.” If, for example, a basket of goods should cost $80 at specific point in time, it would have to be matched by a proof of work that would on average cost $80 to produce. If, 10 years later, the same basket of goods were to cost $120, the same 100 units would have to be matched with a proof of work that’d cost $120 to produce.

Using this indicator, the first person to produce a valid proof of work would be credited 100 new b-money by all users or the servers. Therefore, no one would be particularly incentivized to produce proofs of work unless they intended to use b-money, limiting inflation to the growth of the “b-money economy.”

Alternatively, in an appendix to his proposal, Dai suggested that money creation could be realized through an auction. Either all users (first protocol) or the servers (second protocol) would first have to determine an optimal increase of the monetary base. Then, if this ideal increase were to be established at 500 b-money units, for example, an auction would determine who should create these 500 units: whoever was willing and able to provide the most proof of work for it.

Bitcoin

B-money was never implemented. It couldn’t have been: “b-money wasn't a complete practical design yet,” Dai acknowledged in a LessWrong forum thread a couple of years ago. What’s more, Dai did not expect b-money to take off in a big way, even if it was implemented.

“I think b-money will at most be a niche currency/contract enforcement mechanism, serving those who don't want to or can't use government sponsored ones,” he explained in an email following his announcement on the Cypherpunks mailing list.

Indeed, several of b-money’s problems remained unsolved or at least under-specified. Perhaps, most importantly, its consensus model was not very robust, as best shown by Dai’s proposed smart contract solution. It has since also been found that proof-of-stake systems introduce new challenges that Dai may not have foreseen; for example, it’s not clear how “misconduct” can be objectively established. And that doesn’t even get into the more nuanced problems of the proposal, such as a lack of privacy due to traceability of funds or potential coin issuance (“mining”) centralization. Indeed, some of these problems are still not solved for Bitcoin today.

Dai — who after proposing b-money went on to work for TerraSciences and Microsoft, and may have retired early on since then — would not stick around to solve these problems.

“I didn't continue to work on the design because I had actually grown somewhat disillusioned with crypto-anarchy by the time I finished writing up b-money,” Dai later explained on LessWrong. He reiterated, “I didn't foresee that a system like it, once implemented, could attract so much attention and use beyond a small group of hardcore Cypherpunks.”

Yet, Dai’s proposal was not forgotten: b-money ended up as the first reference in the Bitcoin white paper. Still, as similar as b-money and Bitcoin’s designs may be, it’s possible that Satoshi Nakamoto was not inspired by Dai’s idea at all. Dai himself believes that Bitcoin’s inventor came up with the idea independently.

Shortly before publishing the Bitcoin white paper, Hashcash inventor Dr. Adam Back directed Satoshi Nakamoto to Dai’s work, making Dai one of few people Bitcoin’s inventor personally reached out to before publishing his white paper. But Dai did not respond to Satoshi’s email. In retrospect, he wished he had. Unsurprisingly, Dai questions Bitcoin’s coin generation model.

“I would consider Bitcoin to have failed with regard to its monetary policy (because the policy causes high price volatility which imposes a heavy cost on its users, who have to either take undesirable risks or engage in costly hedging in order to use the currency),” he wrote on LessWrong. “[O]ne possible impact of Bitcoin might be that due to its deficient monetary policy and associated price volatility it can't grow to very large scales, and by taking over the cryptocurrency niche, it has precluded a future where a cryptocurrency does grow to very large scales.”

He added, “This may have been partially my fault because when Satoshi wrote to me asking for comments on his draft paper, I never got back to him. Otherwise perhaps I could have dissuaded him (or them) from the ‘fixed supply of money’ idea.”

This is the third installment in Bitcoin Magazine’s The Genesis Files series. The first two articles covered Dr. David Chaum’s eCash and Dr. Adam Back’s Hashcash. For more from Wei Dai, visit weidai.com.

There is substantial controversy surrounding Tether, a cryptocurrency that claims to be pegged to the U.S. dollar. According to Tether, each Tether token is backed by one U.S. dollar, held in the full reserve of Tether. But the existence of the U.S. dollars pegging Tether has been called into question. Moreover, worries exist that Bitfinex has been using Tether to the prop up the price of Bitcoin.

Research into Tether shows that misconceptions exist regarding how Tether functions. These misconceptions, in turn, may be contributing in part to the existing controversies. By better understanding how Tether functions, it may be possible to provide some clarity. Analysis of how Tether functions, for example, shows that it is not possible to prop up the price of Bitcoin on Bitfinex through Tether — regardless of whether or not these tokens are backed.

Tether and Bitfinex

Whereas most cryptocurrencies have a finite supply of tokens, Tether does not. According to Tether’s white paper, new Tether tokens can be issued when customers buy tokens by depositing the underlying fiat currency — U.S. dollars or Euros — in Tether’s bank account. However, it is not currently possible to register at Tether; in fact, registrations have been closed since December 2017. During this time, the amount of Tether tokens more than doubled, peaking at 2.5 billion tokens at the time of writing.

For Tether to function as a so-called stablecoin, each Tether token — trading under the ticker USDT — has to be backed by one U.S. dollar. Tether, therefore, needs to hold the underlying fiat of all Tether tokens in their reserve. In their white paper, Tether promised to deliver regular audits to show Tether holds the necessary funds in reserve, but the company has not delivered a complete audit since March 2017. Tether published an audit in September 2017, but the document is an internal memo issued by Friedman LLP, their auditor at the time. No further audit is expected anytime soon as the relationship with Friedman LLP was dissolved in January 2018 and Tether has not yet obtained a new auditor.

The Paradise papers showed that Tether and Bitfinex, one of the largest cryptocurrency exchanges, are run by the same management team. Bitfinex has been accused of propping up the price of bitcoin through issuing Tether tokens to buy bitcoins. Whenever Bitfinex’s wallet ran out of Tether tokens, new tokens would be issued.

These increases in Tether tokens may be linked to coinciding increases in the price of bitcoin.

In January, a report posted anonymously online showed that the price of bitcoin mostly went up in the hours after new Tether tokens were issued and sent to the Bitfinex wallet. The report furthermore concluded that it is highly unlikely that Tether is growing through any organic business process, but that Tether tokens are printed in response to market movements in order to be used to buy bitcoin and, thereby, increase its price.

In an academic paper published on June 13, 2018, John Griffin and Amin Shams, both associated with the University of Texas, analyzed both Tether and Bitcoin blockchain data to determine whether Tether tokens were issued following market demand or were instead pushed onto the market. Their results suggest that Tether tokens are used to support certain thresholds — a price floor — for bitcoin when prices are falling, stabilizing bitcoin’s price.

Analyzing Tether Issuance

Whenever new Tether tokens are issued, the tokens are sent to the Bitfinex wallet. Tether’s white paper mentions that Tether tokens may be purchased from Bitfinex and that Bitfinex supports the deposit and withdrawal of Tether tokens. Moreover, Tether tokens are always issued and sent to the Bitfinex wallet in round numbers. For example, the latest issuance on May 18, 2018, was exactly 250,000,000 Tether tokens.

These new, large Tether issuances in round numbers moving to Bitfinex have, in part, drawn suspicion. Since Tether registrations are closed and all Tether tokens issued are transferred to Bitfinex’s wallet, the issuance of Tether tokens in round numbers makes it unlikely that these are direct purchases by customers of Tether. Questions have, therefore, been raised asking who could realistically be behind these issuances.

Based on analysis of the issuance and movement of Tether tokens, the answer is that there is currently only one possible customer, in the sense of how the word “customer” is used in Tether’s white paper: Bitfinex.

Instead of buying tokens directly from Tether, Bitfinex’s users can buy Tether tokens on the exchange using U.S. dollars. However, Tether tokens cannot be used to trade on Bitfinex itself. Bitfinex offers Tether as a withdraw-only option to its users. When Bitfinex’s users use Tether as their withdrawal option, they use their U.S. dollar balance on Bitfinex to buy the Tether tokens. Subsequently, withdrawals of Tether tokens from Bitfinex result in a decrease of the Bitfinex wallet’s balance.

When purchasing Tether tokens on Bitfinex, customers are not purchasing them directly from Tether; rather, they are buying from the supply Bitfinex “purchased” earlier as Tether’s “customer.” The issuance of new Tether tokens therefore occurs when Bitfinex runs out of Tether tokens they can sell to their users — when Bitfinex’s wallet runs empty — and purchases new Tether tokens by depositing the underlying fiat in Tether’s bank account. As a result, all Tether tokens in Bitfinex’s wallet are owned by Bitfinex and are available for users to withdraw.

Paolo Ardoino, Bitfinex’s chief technology officer, confirmed in an interview that Bitfinex is a direct customer of Tether and is currently the only gateway in and out of Tether. According to Ardoino, Bitfinex and Tether decided on this change in late 2017 to put less strain on the banks processing Tether purchases. Ardoino added that the company’s plan is to offer more gateways to Tether — suggesting up to 20 — in the near future. To establish these gateways, Tether is expected to hire a new chief compliance officer to oversee Tether’s compliance program, including its due diligence procedures for onboarding new customers.

Whenever Tether tokens are withdrawn from Bitfinex, the tokens are transferred to other cryptocurrency exchanges supporting Tether, such as Binance, Bittrex and Kraken. The Tether tokens on these exchanges are owned by users of those exchanges, not the exchanges themselves, although the exchanges do obtain some tokens through trading fees. Tether is, therefore, a source of liquidity for these exchanges and Bitfinex currently functions as its gateway. For these exchanges, Tether is just another cryptocurrency that their customers bring to the exchanges and trade with. Bittrex and Kraken confirmed that Tether is just like any other token on their exchange, adding that there was no fee involved for listing Tether on either exchange.

Access to Fiat Banking

The implication of Tether tokens only being purchasable at Bitfinex is that the two entities are further intertwined than previously understood: Besides the fact that Tether and Bitfinex are run by the same management team, Tether would not be able to function as it currently is without Bitfinex serving as its gateway to fiat deposits and withdrawals.

For Bitfinex to function as this gateway, however, it needs access to fiat banking itself. In March of 2017, Wells Fargo ended its relationship as a correspondent bank to Bitfinex and Tether. Bitfinex has kept details of its banking relationships a closely guarded secret ever since — a lack of transparency that has further fueled the controversy surrounding Bitfinex and Tether.

On May 24, 2018, Bloomberg reported that Bitfinex and Tether held bank accounts at Noble Bank in Puerto Rico. Furthermore, Bloomberg reported that Bitfinex had partnered with Panama-based financial institution Crypto Capital Corp and used its bank accounts to maintain access to fiat deposits and withdrawals after being cut off by Wells Fargo.

Access to fiat banking is necessary for Bitfinex in order to offer its users U.S. dollar trading. Ardoino confirmed that all balances and USD trading pairs on Bitfinex are in U.S. dollars (USD) instead of in Tether tokens (USDT) and that the dollars and Tether tokens are not mixed together.

Verified Bitfinex users are thus credited with U.S. dollars on Bitfinex when making deposits. Users can use their U.S. dollars when choosing Tether as a withdrawal option. In doing so, they purchase Tether tokens from Bitfinex.

When users instead deposit Tether tokens to Bitfinex, they are similarly credited with U.S. dollars, one U.S. dollar for each Tether token (USDT). Effectively, verified users are redeeming the Tether tokens by selling the tokens back to Bitfinex.

Since Tether is only available as a withdrawal option and cannot be used in trading pairs on Bitfinex, it is, therefore, not possible to prop up the price of bitcoin using Tether tokens on Bitfinex. This conclusion, however, does not disprove the theory that Tether has been used to prop up the price of bitcoin elsewhere. In their previously mentioned paper, Griffin and Shams analyze how Tether tokens are moved to other exchanges and have been used to stabilize the price of bitcoin on these exchanges.

Tether’s Price and Peg

Given each Tether token is offered for and credited with one U.S. dollar on Bitfinex, why does the price of Tether show fluctuations? For example, Coinmarketcap and investing.com offer charts that show Tether’s price (USDT) fluctuating around one U.S. dollar. Investing.com explained that their “Tether index” chart is based Kraken’s and EXMO’s USD/USDT trading pairs. Coinmarketcap did not respond to a request to explain what data is used to create their graph.

The price of Tether is not maintained through these trading pairs, however. The price of Tether is guaranteed by Bitfinex offering and crediting each Tether token for one U.S. dollar per token. As long as Bitfinex credits each Tether token with one U.S. dollar, the price of Tether is fixed at one U.S. dollar. Thus, USDT/USD trading pairs may offer insight into how much people trust Tether.

The fact that Bitfinex always values one Tether token at one U.S. dollar probably explains why the USDT/USD trading pairs hardly ever fluctuate far from one U.S. dollar. Whenever the price on the trading pair drops to 98 cents, for example, arbitrage traders — verified on Bitfinex — can buy tokens at 98 cents and deposit them to Bitfinex to be credited one U.S. dollar.

Tether’s Business Model

How does Tether create revenue? Revenue here can be distinguished in two forms: revenue generated by Bitfinex and revenue generated by Tether.

Bitfinex’s function as the gateway to Tether sheds light on how the use of Tether creates revenue for Bitfinex. For other exchanges supporting Tether, Tether is an important source of liquidity as the exchanges do not offer direct fiat withdrawals or deposits. In a way, Bitfinex functions as the fiat withdrawal and deposit gateway for these exchanges, although only for verified users.

To purchase Tether tokens from Bitfinex, users are required to have U.S. dollars deposited to Bitfinex. Similarly, the only location where holders of Tether tokens can redeem their tokens for U.S. dollars is on Bitfinex. For both deposits and withdrawals of U.S. dollars, Bitfinex charges a 0.1 percent fee. To use the Tether withdrawal option on Bitfinex, users are charged $20, regardless of withdrawal size. Deposits of Tether tokens, on the other hand, are free. The revenue created this way is therefore generated on and by Bitfinex, not by Tether itself.

The only source of “revenue” generated by Tether itself is the interest gained on the U.S. dollars held in its reserve. The U.S. dollars backing the Tether tokens are stored in a full reserve bank account, with recent reports suggesting that they are being held at the Noble Bank in Puerto Rico. According to Ardoino, the interest gained on the reserve covers Tether’s expenses while also leaving room to invest in improving Tether’s structure, marketing and compliance program.

Audits

Given Tether’s business model depends on the amount of U.S. dollars held in its reserve, Tether’s “revenue” heavily depends on the existence of all U.S. dollars needed to back the Tether tokens in circulation. Moreover, the model stands or falls on the premise that Bitfinex transfers all U.S. dollars to Tether’s bank account in order to not issue unbacked Tether tokens. Without the existence of the U.S. dollars backing Tether tokens, there is no way to gain interest on those amounts.

In turn, the existence of a full reserve determines whether or not each token should be valued at one dollar; that is, whether all Tether tokens are actually backed by U.S. dollars. If Tether is instead functioning on a fractional reserve, a bank-run on Bitfinex — wherein users deposit back large amounts of Tether tokens at the same time — would crash the price of Tether.

Although recent reporting suggests at least a large amount of the dollars are stored at the Noble Bank, only an independent audit — as promised in Tether’s white paper — can prove that all the U.S. dollars purported to be backing Tether exist.

When asked about the lack of audits, Ardoino acknowledged that an independent audit is needed to prove the existence of the full reserve to the community. “What we want to do is not [audit] the bank balances as of now, but we want to demonstrate to the community that we had the money at the end of every single month, since a reasonable date like January 2017 and on.” He added that talks are ongoing to find a new auditor.

However, this may not be enough to prove Tether was always fully backed. In their paper, Griffin and Shams analyzed whether it is possible that Tether only maintained a full reserve at the end of the month. If true, a coinciding decline of the price of bitcoin could also be expected at the end of each month to create the necessary reserve in U.S. dollars. Their analysis shows that the price of bitcoin did indeed show large declines at the end of every month in which a large amount of new Tether tokens were issued. This correlation seems to suggest that these declines in bitcoin’s price may have been related to Bitfinex’s need to raise reserves at the end of those months.

Although some misconceptions regarding Tether are addressed in this article by analyzing how Tether works, it is likely that the controversy surrounding Tether will continue until Tether and Bitfinex provide full transparency and independent, conclusive audits.

In an informal statement made at Yahoo Finance’s All Market Summit: Crypto, William Hinman, the United States Securities and Exchange Commission (SEC)’s director of corporate finance, indicated that the regulatory agency has no plans to deem ether a security.

“... based on my understanding of the present state of Ether, the Ethereum network and its decentralized structure, current offers and sales of Ether are not securities transactions,” Hinman said in a speech at the summit.

Along with ether, Hinman stated that the SEC would not classify bitcoin as a security, either. Rather, both cryptocurrencies function similar to commodities like gold, silver or oil, the agency believes.

But not all coins are created equal, Hinman expressed in his speech, and the SEC’s leniency on crypto’s top assets won’t relieve tokens from scrutiny. Tokens and Initial Coin Offerings, he continued, are most likely to be considered securities. The distinction lies in how the asset is offered or sold to the public.

“… strictly speaking, the token — or coin or whatever the digital information packet is called — all by itself is not a security … But the way it is sold — as part of an investment; to non-users; by promoters to develop the enterprise — can be, and, in that context, most often is, a security — because it evidences an investment contract,” Hinman stated.

This analysis seems to prioritize circumstance over semantics when deeming a token’s securities status. Projects will often dance around their token’s nomenclature to avoid self-branding as something that could be seen as a security, but Hinman conveyed that the SEC isn’t fooled by the verbal footwork. He made it clear in his speech that “simply labeling a digital asset a ‘utility token’ does not turn the asset into something that is not a security … the economic substance of the transaction always determines the legal analysis, not the labels.”

Hinman appeared to contradict himself when he dove into an analysis of token sales likely falling under the blanket of securities, only to dismiss ether from this classification. But this absolution comes from “putting aside the fundraising that accompanied the creation of Ether,” he said, as a token or coin can’t be deemed a security if no central organization or company is directing it after launch.

“Can a digital asset originally sold in a securities offering eventually be sold in something other than a security?” he posits, eventually concluding that it cannot. “But what about cases where there is no longer any central enterprise being invested in or where the digital asset is sold only to be used to purchase a good or service available through the network on which it was created? I believe in these cases the answer is a qualified ‘yes.’”

The speech shed substantial clarity on a question that has loomed over the industry for some time: namely, whether or not ether would be ruled as a security. And, while this speech is sure to quell the anxieties of enthusiasts and investors alike, it leaves a gray area open for the SEC to color in its treatment of each individual token and coin under Hinman’s interpretation.

Still, the developments are positive for an industry that, in the context of the United States, has made a slow crawl toward regulatory legitimacy.

“We are glad the SEC agrees with our long held analysis of how securities law applies to decentralized cryptocurrency networks like Bitcoin and Ethereum,” Coin Center Executive Director Jerry Brito said in a statement. “We are thrilled to see it take a strong pro-innovation approach to this nascent technology. With this guidance, the SEC is showing that taking a pro-innovation approach does not have to come at the expense of protecting investors.”

While the words carry weight from one of the SEC’s highest officials, it’s worth noting that they were spoken somewhat informally and may not represent a cohesive message across the SEC’s regulatory staff.

This morning, Valerie Szczepanik, the SEC’s first crypto czar, issued what looks like a caveat on this front, stating in a panel at the summit that individual staffer comments may not be wholly in line with the SEC’s official stance.

A key aspect of modern society is its trust in reliable government and monetary systems. Government and central banks have been the guardians of the financial system. Ever since humans evolved from nomads, government and financial institutions have sought restrictions — to varying degrees — on choices available to individuals with their assets and currency.

But what if government and banks can’t be trusted?

While Bitcoin does not guarantee freedom and trust, it is an important step toward enabling freedom of choice beyond just freedom from a third party to make a payment. It enables peer-to-peer transactions where the responsibility for validation of transactions via technology is transferred to a community of users.

The white paper on Bitcoin, which I keep a copy of on my desk at all times, was published in October 2009 by Satoshi Nakamoto, a pseudonym for a person or group of people — no one knows. The timing is significant; it was written at the height of the global great recession and financial crisis — a crisis caused primarily by the realization that assets masked as highly valuable were nearly worthless.

Millions of people lost their jobs. Huge companies imploded. And this masquerade of assets was orchestrated by the financial institutions we trusted. There was vast manipulation and the governments and banks spent trillions to fix it — but not to change it. Trust between citizens and governments was shattered around the world.

Bitcoin and its rapid growth is a result of individuals realizing that financial institutions are not fully trustworthy and that the government does not always act to protect individuals; rather, it often protects these institutions. This harsh reality was made clear by the government bailout of the perpetrators of the crisis.

Bitcoin is anti-establishment at its core. It is a snub to financial institutions charging high fees and selling worthless, mortgage-backed securities. Bitcoin, at its heart, is the taking-back of the monetary system by people who no longer trust government and financial players.

Rather than being centrally controlled, Bitcoin is revolutionary in that it is controlled and secured by its participating community — not by government or financial institutions. Consequently, individuals around the world have been empowered to store value in this medium that is made portable by memorizing a password — a large step in the direction of securing assets from wrongful governments. Perhaps this is not a concern in the United States, but certainly it is a major concern in many other parts of the world.

Today, Bitcoin is fraught with hackers, fraudsters, speculators and regulators seeking to control it. Warren Buffett famously claimed that Bitcoin is not an investment. He’s right. It has no revenue or earnings to analyze, similar to gold. But what one of the world’s wealthiest men fails to acknowledge is that Bitcoin represents freedom of choice. Buffett was also wrong on his early assessment of Amazon and Google. While there is no doubt that he is a brilliant investor, he has not traditionally been a proponent of game-changing technology.

Bitcoin represents freedom to store wealth in an asset that is out of government’s reach; freedom to conduct transactions — peer to peer — without relying on centralized financial institutions that have eroded our trust. And it is a currency whose distribution cannot be deflated by central banks printing more currency to manage problems.

Bitcoin is kept scarce by only ever allowing 21 million coins and it is not backed by debt, such as the U.S. dollar and many other fiat currencies. It is a digital gold whose validity is protected by its community of users.

Bitcoin is not perfect. It will evolve. Scammers will remain, as they do everywhere in the financial community. Regulation will come. Gains will be rightfully taxed. Detractors will continue to hate. Volatility will remain. However, because of the freedom it puts in the hands of individuals, Bitcoin will not disappear or pop like a bubble. Ever.

This is an opinion piece by Andrew Kiguel, CEO of Hut 8 Mining Corp. Views expressed are his own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.

Coinbase dominated headlines across the space this week with a pair of significant developments. The San Francisco–based exchange announced on Monday, June 11, its intention to add Ethereum Classic to its trading platform and then quickly followed the news on Tuesday with the official opening of a crypto index fund.  

Its addition to the exchange has revamped public interest in Ethereum Classic and sent the price of its native currency, ETC, into a dramatic state of flux.

Ethereum Classic

In May of 2016, The DAO, a decentralized autonomous organization and venture capital fund, raised a sum of $150 million for investment in smart contract projects built on the Ethereum blockchain. It was, at the time, the largest crowdfunded project ever created.

On June 18, 2016, hackers successfully exploited a weakness in the splitting function of the protocol that allowed for the extraction of ether from multiple DAO smart contracts while utilizing the same DAO tokens. The end result was a theft of 3.6 million ether that was worth roughly $70 million.

Debate arose within the Ethereum community regarding a proper response to the attack. After a failed soft fork, a vote in July concluded that a hard fork would be instituted to erase the DAO hack by placing the compromised ETH in a new smart contract that would then be used to redistribute the funds to their original owners. The decision, though approved by a super majority of 89 percent, was extremely controversial. Anti-forkers contended that although the DAO hack was unfortunate, code is law. All transactions are innately immutable and should remain free from modification or censorship, regardless of the justification.

When the hard fork was implemented on July 20, during the mining of the 1,920,000th block, some dissenters continued to support the original ledger and thus created what is now known as Ethereum Classic (ETC).

The Addition of ETC to Coinbase

On Monday, via blog and Twitter, Coinbase announced that during the coming months it intends to add support for Ethereum Classic (ETC) to its exchange platform. The currency will join bitcoin (BTC), ether (ETH), litecoin (LTE) and bitcoin cash (BCH) as the fifth digital currency supported by the largest U.S.-based crypto exchange.

Since its inception in June of 2012, Coinbase has worked to distinguish itself as the most secure and legitimate of the major crypto exchanges. Despite operating in a space where rapidity of technical development is heavily valued, Coinbase has fostered a cautious approach to expansion, priding itself on a method that is both meticulous and methodical.

The integration of alternative coins into the Coinbase platform has, by industry standards, progressed at a crawling pace. The first expansion of its trading portfolio was launched in May of 2016, when it included support ether (ETH). Support for its third currency, litecoin (LTE), was not released until the following May, while its most recent addition, bitcoin cash (BCH), was only added this past December.

In each case, Coinbase has followed a systematic preparation process, a trend that will continue with the addition of Ethereum Classic. Via the Coinbase blog:

We will now begin the engineering work (Step 4) for supporting Ethereum Classic. As part of this process, customers can expect to see public-facing APIs and other signs that the asset is being added. When we reach the final testing phase of the technical integration, which we expect to occur over the next few months, we will publicly announce a launch date for trading via our blog and Twitter (Step 5).

When the final stage of technical integration is reached, Coinbase will announce the date on which its prime and pro customs can begin placing limited orders of ETC. When this resting market reaches sufficient liquidity, live trading will commence on the open platform.

The announcement also went on to reassure its GDAX customers who held ether prior to the July 2016 hard fork that they would receive Ethereum Classic credits once trading is launched. However, this distribution does not apply to the Coinbase customer interface as it did not support Ethereum at the time of the fork.

The market response has been mixed. The first five hours of trading after the announcement saw the price of ETC soar 25 percent from $12.88 to $16.11. Since this peak, the price has experienced a turbulent ride, crossing the $13.50 mark four times before settling at $13.79 at the time of writing of this article.

The Index Fund

On the heels of this news, Coinbase reported yesterday that its crypto index fund, first announced back in early March, is now open for investment. An index is “a measurement of the financial performance of a defined group of assets” while an index fund is the investment vehicle that tracks and grants returns based on that index.

In this case, the fund will be comprised of all of the assets currently supported by Coinbase, divided proportionally to their market capitalization. The current composition of the fund is as follows: Bitcoin 61.47%, Ethereum 27.17%, Bitcoin Cash 8.22% and Litecoin 3.14%. When Ethereum Classic is officially added to the platform later this year, the fund’s composition will be altered to account for ETC’s additional market cap, which as of today sits at just over $1.4 billion.

The index fund is limited to accredited U.S. residents with a required minimum stake of $250,000 and will be subject to a 2 percent annual management fee. The investment window will open on a monthly basis while the redemption window will be available quarterly requiring a 30-day notice for withdrawal.

Coinbase dominated headlines across the space this week with a pair of significant developments. The San Francisco–based exchange announced on Monday, June 11, its intention to add Ethereum Classic to its trading platform and then quickly followed the news on Tuesday with the official opening of a crypto index fund.  

Its addition to the exchange has revamped public interest in Ethereum Classic and sent the price of its native currency, ETC, into a dramatic state of flux.

Ethereum Classic

In May of 2016, The DAO, a decentralized autonomous organization and venture capital fund, raised a sum of $150 million for investment in smart contract projects built on the Ethereum blockchain. It was, at the time, the largest crowdfunded project ever created.

On June 18, 2016, hackers successfully exploited a weakness in the splitting function of the protocol that allowed for the extraction of ether from multiple DAO smart contracts while utilizing the same DAO tokens. The end result was a theft of 3.6 million ether that was worth roughly $70 million.

Debate arose within the Ethereum community regarding a proper response to the attack. After a failed soft fork, a vote in July concluded that a hard fork would be instituted to erase the DAO hack by placing the compromised ETH in a new smart contract that would then be used to redistribute the funds to their original owners. The decision, though approved by a super majority of 89 percent, was extremely controversial. Anti-forkers contended that although the DAO hack was unfortunate, code is law. All transactions are innately immutable and should remain free from modification or censorship, regardless of the justification.

When the hard fork was implemented on July 20, during the mining of the 1,920,000th block, some dissenters continued to support the original ledger and thus created what is now known as Ethereum Classic (ETC).

The Addition of ETC to Coinbase

On Monday, via blog and Twitter, Coinbase announced that during the coming months it intends to add support for Ethereum Classic (ETC) to its exchange platform. The currency will join bitcoin (BTC), ether (ETH), litecoin (LTE) and bitcoin cash (BCH) as the fifth digital currency supported by the largest U.S.-based crypto exchange.

Since its inception in June of 2012, Coinbase has worked to distinguish itself as the most secure and legitimate of the major crypto exchanges. Despite operating in a space where rapidity of technical development is heavily valued, Coinbase has fostered a cautious approach to expansion, priding itself on a method that is both meticulous and methodical.

The integration of alternative coins into the Coinbase platform has, by industry standards, progressed at a crawling pace. The first expansion of its trading portfolio was launched in May of 2016, when it included support ether (ETH). Support for its third currency, litecoin (LTE), was not released until the following May, while its most recent addition, bitcoin cash (BCH), was only added this past December.

In each case, Coinbase has followed a systematic preparation process, a trend that will continue with the addition of Ethereum Classic. Via the Coinbase blog:

We will now begin the engineering work (Step 4) for supporting Ethereum Classic. As part of this process, customers can expect to see public-facing APIs and other signs that the asset is being added. When we reach the final testing phase of the technical integration, which we expect to occur over the next few months, we will publicly announce a launch date for trading via our blog and Twitter (Step 5).

When the final stage of technical integration is reached, Coinbase will announce the date on which its prime and pro customs can begin placing limited orders of ETC. When this resting market reaches sufficient liquidity, live trading will commence on the open platform.

The announcement also went on to reassure its GDAX customers who held ether prior to the July 2016 hard fork that they would receive Ethereum Classic credits once trading is launched. However, this distribution does not apply to the Coinbase customer interface as it did not support Ethereum at the time of the fork.

The market response has been mixed. The first five hours of trading after the announcement saw the price of ETC soar 25 percent from $12.88 to $16.11. Since this peak, the price has experienced a turbulent ride, crossing the $13.50 mark four times before settling at $13.79 at the time of writing of this article.

The Index Fund

On the heels of this news, Coinbase reported yesterday that its crypto index fund, first announced back in early March, is now open for investment. An index is “a measurement of the financial performance of a defined group of assets” while an index fund is the investment vehicle that tracks and grants returns based on that index.

In this case, the fund will be comprised of all of the assets currently supported by Coinbase, divided proportionally to their market capitalization. The current composition of the fund is as follows: Bitcoin 61.47%, Ethereum 27.17%, Bitcoin Cash 8.22% and Litecoin 3.14%. When Ethereum Classic is officially added to the platform later this year, the fund’s composition will be altered to account for ETC’s additional market cap, which as of today sits at just over $1.4 billion.

The index fund is limited to accredited U.S. residents with a required minimum stake of $250,000 and will be subject to a 2 percent annual management fee. The investment window will open on a monthly basis while the redemption window will be available quarterly requiring a 30-day notice for withdrawal.