Episode 024

Koine, X-Margin & XReg Consulting

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Crypto clearing is making its way to the cryptocurrency market, and the reaction from traders has been mixed, according to Phil Mochan, founder of Koine, which does custody and settlement of digital assets. X-Margin Founder Darshan Vaidya said the company has a positive relationship with regulators. Koine’s Mochan points out that the UK’s decision to ban derivatives trading for retail investors was a step backwards. Sian Jones, senior partner at XReg Consulting, discussed the European Commission’s comprehensive draft policy, Markets in Crypto-Assets Regulation (MiCA). ByteTree’s James Bennett provided this week’s onchain insights and observations, saying there was a drop in activity on and off the chain.


Market Spotlight: Bringing Clearing to the Crypto Market

Teana Baker-Taylor spoke with the founders of Koine and X-Margin about bringing clearing to the crypto markets. With headlines such as Paul Tudor-Jones and MicroStrategy on one hand and BitMEX on the other side of the spectrum, the crypto ecosystem is being challenged to mature. 
Phil Mochan is founder of Koine, which does custody and settlement of digital assets. Teana asked him about the response from the industry to the services that Koine offers, in response to which Mochan said, 

(20:38) “I’d say the response is bifurcated. And it’s split between those that have come from a traditional capital markets background, and that’s merely on the buy-side of the institutional funds. Because asset allocators tend to allocate to proven managers who have a capital markets background. And those groups have found our institutional model, which is a centralized counterparty, is echoing what they are traditionally used to and therefore drives capital efficiency in a way that they would like to see. On the other hand, the venues, traditional crypto venues, which are quite different models for the most part from traditional capital markets infrastructure players, have been more reticent to adopt that model because they’ve not necessarily understood that it is a requirement for institutional capital. But we are seeing an increasing take-up of that as they recognize that a decentralized model is not yet universally accepted by asset allocators.” 
Recent industry events have thrust regulation into the spotlight, including the CFTC’s charges against BitMEX, the European Commission’s proposed guidelines for crypto asset regulation in Europe and the FCA’s decision to crypto derivatives for retail traders. X-Margin allows cross-margin on derivatives through Zero Knowledge. Teana asked founder Darshan Vaidya about how his relationships with regulators have gone and some of the challenges they’ve faced. 

(23:35) “Obviously it’s an interesting time with all of the things that you just mentioned. And it validates some of our hypotheses from the beginning which was that navigating the existing regulations is vital vs. just running further overseas to avoid that regulation. I think navigating the existing regulations and trying to fit either to be a regulated entity that does regulated activity or finding specific niches where you are not doing regulated activities seems like the more standable way forward. So far we’ve upgraded within the remit of predominantly CFTC and our conversations with lawyers have been fairly comfortable because we’re basically a technology solution where we don’t touch the funds, we don’t see the trades and basically just help them to get more capital efficiency. But in terms of how keen the regulators are to support us, they tend to be very open actually to capital efficiency solutions especially if they tend to reduce operational systemic risk…The conversations have been generally very positive.” 

Koine’s Phil Mochan offered his take on the regulatory landscape, saying, 

(25:29) “It’s very encouraging to see the European regulators come forward with a set of policy suggestions to modify the existing regulatory frameworks across four or five different areas of regulation to provide some uniformity and consistency on the digital assets side. It was very much along the direction that we anticipated and had already built for our systems to, for example, meta compliance, stablecoins using PMI structures, all of that. So we find that it’s very much going in a sensible direction in the EU level. The UK is a little more uncertain and erratic in uts behavior. I’m not sure the recent decision to ban CFDs at the retail level was a very positive one for consumer protection given that the previous experience of doing the same for FX just moved everything offshore and gave no protection to the consumers as a consequence of that action. I think there are some political moves rather than what we call common sense being applied in some cases.” 

Governance & Guardrails: The EU’s Markets in Crypto-Assets Regulations 

The first draft of euro zone policy known as the Markets in Crypto-Assets Regulation (MiCA) has been proposed. CryptoUK’s Ian Taylor spoke with Sian Jones, senior partner at XReg Consulting, who has experience working with MEPs and helping them to come to terms with the brave new world of digital assets, about MiCA and who it applies to. Jones said, 

 (32:04) “Well I guess you could at the highest level say pretty much issuers of all manner of tokens, referred to as crypto assets. So that even includes utility tokens, then goes through stablecoins, both of two different categories. Then also beyond that into what are going to be known as crypto asset service providers. So that’s again a broad range of service providers, the ones you might expect, such as exchanges and custodial providers but there’s also a broader range. Really anybody who’s running a market or anyone who is providing a service into the space is going to be caught by this legislation.” 

Taylor described the taxonomy of the crypto ecosystem, which includes there are three different categories: payment, utility and security tokens. He asked Jones about the taxonomy under MiCA, in response to which Jones said, 

(35:28) “What MiCA does is it says that everything that is already covered under, typically under MiFID, so anything that is a financial instrument…that doesn’t change. So if it’s a security token that meets the criteria for being a financial instrument, that stays exactly the same and you can ignore MiCA. It’s still going to be governed under the existing arrangements. But it says that everything else that’s a crypto asset, we’ve got a pretty broad definition of crypto assets any kind of asset hta is based around DLT. Everything that we know of as a token or coin in the crypto sphere is going to be caught by MiCA. And that includes utility tokens. So there is a base level of requirements that will apply even to issuers of utility tokens.  And then it sets a sort of next tier up if you want to think of it like that as stablecoins, which it defines either as asset reference tokens or e-money tokens. And if the asset reference token, they’ll be based on anything other than something that references a single fiat currency…like a euro, for example, that will be deemed an e-money token.”

Taylor asked about Tether’s classification, in response to which Jones explained, 

(37:23) “Tether would be, the different forms of Tether would be e-money tokens. Libra’s proposition under the verison two whitepaper where they would be based on single fiat currencies, so they would be classed as e-money tokens. Whereas the version one idea of a basket of tokens, Libra’s sort of version one concept, that would have been an asset reference token.”
Jones added that those stablecoins that the European Banking Authority deems to be significant tokens, whether they are asset reference or e-money tokens, are subject to the most stringent rules. The new rules are expected to come into effect in the next two to three years. 

Onchain Reaction 

Onchain insights and observations; James Bennett CEO of ByteTree
James Bennett, CEO of ByteTree, provided this week’s onchain insights and observations. He said this week on and off the chain, there was a drop in activity, or a quiet period as he calls it. 

  • (47:23) “Volatility falls as fewer bitcoins are on the move.” 
  • (48:40) “Miners struggle to keep up as difficulty hits all-time high.” 
  • (49:50) “Bitcoin price holds steady as weekly transaction value starts to trend down.”
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