Vol 2・5th June 2018
In this edition of the HAT newsletter, we’ll cover news and updates from the past month, discuss our opinions and views about the current state of crypto as it relates to increasing levels of government scrutiny around the world, clear up a few myths about decentralization, and clarify some legal issues.
Bulls and Bears : Meet The SEC
Anyone who is deeply committed to cryptocurrency and blockchain, as both an investment and a game-changing technology, has looked at the bull market of 2017 and the subsequent drop in prices and market cap at the beginning of 2018 and wondered what is behind it. Much like the birth of the Internet and the World Wide Web, we’ve seen an extended period where hype and speculation have far outweighed successful business models, use cases, and working technologies.
Equally as significant, we’ve been accustomed to a virtually unregulated environment where dreams are bought and sold, and scams proliferate. Nowhere has this been more true than with the ICO, or “initial coin offering” (let’s also stop here and remind our readers that the HAT token was not issued as an ICO!). Projects with nothing more than an Ethereum-based token, a fancy website, jargon-filled whitepaper, and some photos of the supposed “team”, have pulled in millions of dollars of speculative investment, often leaving their token holders with an asset that is worth far less than what they paid for it, with zero promises delivered. It was inevitable that this “business model” would draw the scrutiny and potential ire of the U.S.A. Securities and Exchange Commission (SEC).
On Monday, December 11th, 2017, Jay Clayton, the SEC’s chairman, released a public statement addressing certain concerns with cryptocurrency and initial coin offerings (read the full statement here: https://www.sec.gov/news/public-statement/statement-clayton-2017-12-11 ).
“A number of concerns have been raised regarding the cryptocurrency and ICO markets, including that, as they are currently operating, there is substantially less investor protection than in our traditional securities markets, with correspondingly greater opportunities for fraud and manipulation.”
The price of Bitcoin (along with most altcoins) continued to climb in the days following the announcement as investors digested the news, and in all likelihood, considered the implications of the spotlight the SEC was focusing on the crypto space. Six days after the SEC statement, on Sunday, December 17th, 2017, Bitcoin hit its all-time high of $20,089.00 (source: CoinMarketCap), and since then the price has continued to fall, with a low of $6,048.26 at the end of the day on Tuesday, February 6th, 2018.
As of this writing, Bitcoin has recovered less than half of its all-time high price, and stands at $7,396. The prices of many altcoins have dropped even more dramatically. On February 28th, 2018, the Wall Street Journal reported that the SEC had issued “dozens of subpoenas and information requests to technology companies and advisers” who used the ICO model to sell their tokens and coins – Cryptocurrency Firms Targeted in SEC Probe (https://www.wsj.com/articles/sec-launches-cryptocurrency-probe-1519856266)
What theories and conclusions might be drawn from these facts? It’s likely that the very large drop in overall crypto market capitalization is a result of institutional investors reducing their exposure to risk in the wake of the government’s signaling of enhanced regulatory scrutiny, and subsequent inquiries directed at projects that issued ICOs. Quoting Andrew Nelson in Bitcoin Magazine (Cryptocurrency Regulation in 2018: Where the World Stands Right Now): “If 2017 was the year of the ICO, it seems as if 2018 is destined to become the year of regulatory reckoning.”
The Long Game: Would You HODL This?
Let’s talk about how HAT’s business model fits into all of this, and why we believe HAT has the potential to succeed where other projects might fail. As we reminded our readers above, HAT tokens were not marketed and sold as an ICO, and this is because a key part of our business model is to operate with the smallest possible regulatory footprint while building a true, decentralized platform (we’re going to get into more detail about what constitutes “true” decentralization in another section below). Suffice it to say, the company did not receive one of the dozens of SEC subpoenas targeting ICO-based projects!
From the project’s inception, and as described in the original HAT whitepaper, the core business model has always focused on three key concepts: decentralization, regulatory compliance, and mass adoption. Readers should note that “decentralization” is not synonymous with “anonymity.” It is simply not possible to successfully deploy our business model around the world, with full legal compliance in multiple jurisdictions, without adhering to standard and well-established Know Your Customer (KYC) and Anti-Money Laundering (AML) protocols. Companies with an operational footprint in the United States must comply with the Bank Secrecy Act (BSA), as enforced by FinCEN, the Financial Crimes Enforcement Network.
From the point of view of the institutional investor, such as a hedge fund analyst managing a cryptocurrency trading desk with millions of dollars at risk, would it be wise to place a bet on any project that is likely to be stopped in its tracks by the SEC, FinCEN, or similar agencies around the world, because legal compliance was not taken seriously or made a priority at the outset?
Are You Decentralized?
Many crypto traders, particularly those who got into the game two or more years ago, became accustomed to transactional anonymity and so-called “decentralized exchanges” (DEXs), such as EtherDelta. HAT.Exchange is being developed as a “peer-to-peer, fiat-to-crypto exchange,” so now would be an appropriate time to discuss what “decentralization” is and isn’t in the context of cryptocurrency exchanges and smart contracts on the Ethereum blockchain.
Can EtherDelta and other similar, “trustless,” ERC-20 token exchanges truly be considered “decentralized?” When we want to buy tokens on EtherDelta, we must first import or create a wallet, deposit Ethereum into it, and then transfer some of that Ethereum into a “virtual wallet” on the EtherDelta smart contract before we can start trading. Each user has exclusive ownership and control over the private key associated with their personal wallet, but the same cannot be said for the “virtual wallet” from which all trading takes place. The moment you deposit your ETH or tokens to EtherDelta’s smart contract, you are no longer the custodian of those funds, EtherDelta is, and this has significant legal implications.
It follows then, that while it can be said that the process of connecting a buyer and seller within the EtherDelta smart contract is a fully automated process, lacking any centralized, “human authority” with influence or control over the transaction or users’ funds, the underlying architecture itself is not “decentralized” in the way that a bonafide, peer-to-peer trading system would be.
as a true, decentralized, p2p trading platform.
How does HAT’s peer-to-peer trading system differ from the quasi-decentralized one we’ve described above? Since the exchange does not use an intermediary smart contract to process trades or hold user funds, at no time does any user lose custodial control over their ETH or tokens, unless their order is filled and the trade they initiated is successfully executed. We can’t wait to go into all of this in more depth, and the technical details of how we accomplish this feat will be explained in an upcoming newsletter, following the official release of the product.
Keeping The Lawyers Busy: Crypto Compliance is a
When the HAT project was first conceived, it was impossible to know which specific regulations and governing agencies would have jurisdiction over our business model and products. As a result of the regulatory landscape changing so rapidly, certain statements we made in the past few months may no longer apply in the wake of more recent clarifications from regulators. An example of this are certain, unofficial references to “MSB (Money Services Business) licenses,” and whether or not these would be required for us to operate legally in the United States. In the interests of transparency, we shared some of our thinking with the community, but some members interpreted these statements as essentially “set in stone.”
As it stands now, HAT.Exchange does not qualify as a “Money Services Business,” because at no point in the transaction between buyer and seller is our system ever the “custodian” of our users’ tokens or funds. We are merely facilitating a peer-to-peer exchange between ERC-20 wallets that we do not control. Might this legal classification change? Yes, and that is why we’ve cited this particular example. Until the cryptocurrency space matures to the point where the legal landscape becomes more predictable and stable, investors and users of blockchain products should expect more changes to come.
Development Recap And News
The HAT team has been highly focused on software development and navigating legal compliance since our last newsletter. If our social media presence has been a little on the quiet side, don’t worry, while we’re prioritizing our product launch, we’re still paying attention to our community and we’ll be expanding and amplifying our social media and marketing presence in the coming weeks. Here’s what we’ve achieved since our previous newsletter:
- Development of exchange services and security measures is now complete. What this means in layperson’s terms is that we have completed the general code that HAT.Exchange runs on, and the security testing and implementation that keeps the platform secure.
- Full implementation of the exchange services for web, Android, and iOS is now entering “sprint mode,” including UI/UX (for the layperson: “user interface / user experience”). At this stage, beta testers will see a regular progression of incremental updates in response to continuous user feedback. The HAT team leverages their flavor of Agile Software Development to incrementally adjust to user and market needs. Interested readers can get an overview of the Agile development methodology here: (https://study.com/academy/lesson/what-is-agile-software-development-definition-methodology.html)
- Cash cards implementation on the blockchain has now been completed. The team is now focused on logistics, which includes legal compliance. The first working cash cards are expected to be deployed in jurisdictions with the least stringent regulations.
General Updates and News
- HAT.Exchange will start accepting listing requests, and aims to list ten ERC-20 tokens upon beta launch. Only tokens that have been distributed exclusively via airdrops will be eligible. In the near future, HAT.Exchange will be able to list tokens and coins built on other blockchains, starting with Bitcoin and expanding from there.
- HAT.Exchange will start Airdrop 5 with the Beta launch on the 30th of June. All verified users (KYC) will receive a specified number of HAT tokens. The airdrop will be ongoing as new members are verified in our system, and will end when a predetermined number of HAT tokens have been distributed. Details to follow.
- Users will be able to earn bonus tokens for successful referrals. Bonuses will be credited to user wallets once the user has been verified through KYC.
- HAT.Exchange will not collect trading fees for the first 60 days following the exchange launch, after which users will be charged according to the number of tokens they hold (e.g. users holding 5k or more HAT will pay little or no transaction fees).
- HAT tokens will act as the software license to use the platform. Each user will be required to hold a minimum number of tokens to be eligible for trading. The implications of this are twofold: the intrinsic value of each HAT token is tied to its use as a required software license, and the staking of HAT tokens is equivalent to minting new software licenses.
This concludes the second installment of the HAT.Exchange Newsletter. See you next month!