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This June, as the news bristled with headlines about Facebook’s cryptocurrency-to-be and the price of bitcoin once again soared, the mood in the San Francisco offices of Coinbase was subdued. In 2017, the cryptocurrency exchange was close to the frenetic epicenter of the bitcoin boom.

Millions of people used its app to dip their toes into cryptocurrency speculation. Then came the crash. By now, according to Coinbase COO Emilie Choi, the company has weathered a few similar cycles and drawn an important lesson from the highs and lows: Booms don’t last. “It’s a roller-coaster ride here,” she says. “There’s no two ways about it.”

Sure enough, bitcoin plummeted that same afternoon, as cryptocurrency prices are wont to do.

Coinbase has remained one of the biggest exchanges for buying and selling crypto—making it an $8 billion business, at last valuation. Despite increased wariness of overvalued unicorns after recent high-profile flameouts, CEO Brian Armstrong said last month that Coinbase has actually turned a profit three years running.

But Coinbase’s fortunes, built around the fees users pay for trading, remain closely tied to rollicking price of bitcoin, and to a lesser extent the nearly two dozen other tokens it supports.

Profitable, yes, but precarious.So today Coinbase will begin offering a service, known as "staking," that it hopes will convince users to stick around even when prices aren’t spiking. Under the new system, if you hold particular cryptocurrencies in your Coinbase account, you’ll receive set returns independent of market fluctuations.

Coinbase is starting with a coin called Tezos. The returns—roughly 5 percent to start—come in the form of tokens that Coinbase receives for participating in the network that keeps the Tezos blockchain secure.

Similar to how new bitcoin are distributed based on how much computing power is contributed to network, Tezos doles out new coins based on how many coins each participant has “staked.”Basically, it’s interest. Just don’t call it that.

Coinbase prefers the ersatz term “staking rewards.” That distinction is rooted in regulatory questions.While staking has become a common choice for newer coins, it’s unclear where the process falls under investing rules. Because of those concerns, staking was made available to wealthy investors in March, but held back from ordinary Coinbase users until now.

The company says it now feels confident that it has worked out an arrangement that falls within the SEC’s good graces. Coinbase is the first major exchange to open up staking to all US customers.Rhetorical contortions aside, Coinbase bills staking as a step in the direction of looking more like a bank, with the diverse revenue sources they enjoy.

That includes generating fees from serving as a custodian of assets and facilitating lending and consumer payments. “We’re just doing it in our own crypto way,” Choi says.Beyond the risks of depending on bitcoin prices for revenue, Coinbase faces growing competition.

Beyond the risks of depending on bitcoin prices for revenue, the company faces growing competition. “They’re fighting a two-front battle,” says John Sedunov, a professor of finance at Villanova University.

Coinbase has been seen as uniquely approachable in an industry known for shady actors. But others now compete for that mantle.

Rival exchanges like Binance have grown in the US, and there are now a raft of startups that specialize in safe offline storage for your crypto coins. New offerings from the legacy world of finance, like Bakkt, which shares a common owner with the New York Stock Exchange, and Fidelity Digital Assets, are also entering the fray with existing financial relationships and trusted brands.

 “If I’m thinking about who I trust, do I trust JP Morgan to be the custodian of my cryptocurrency or a website that’s been operating for a few years?” Sedunov asks.It’s no surprise, he says, to see big exchanges getting into edgier aspects of crypto that legacy businesses won’t yet touch.

 It’s a familiar playbook. During the so-called “crypto winter,” the long period of low prices after the 2017 bitcoin boom, a common way for exchanges to bolster bottom lines was to add more esoteric coins for trading. Tezos, listed on the exchange this August, is one of Coinbase’s newest additions.

Even in the context of the volatile cryptocurrency world, Tezos had a rough start. After raising $232 million by selling a token without a network in place, the project descended into chaos over a management dispute. The ship eventually righted itself, but regulatory questions have dogged it and other projects.

The SEC has made clear that people should assume tokens used to raise money are securities, says Joshua Klayman, an attorney who specializes in blockchain and digital assets at Linklaters. Some coins have gotten a pass based on a variety of reasons, but "there is no bright line," she adds. "It really is a case-by-case basis.

"Last week, in an interview at San Francisco Blockchain Week, Hester Peirce, an SEC commissioner known for her cryptocurrency enthusiasm, noted her colleagues should be looking at the “structure of the product” instead of the underlying assets. Coinbase says it’s confident the Tezos token is in the SEC’s good graces. (The SEC did not respond to a request for comment.)


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The WIRED Guide to Bitcoin


Staking adds a few other wrinkles. Bitcoin doesn’t use staking to keep its network secure; it has a system called proof-of-work, in which a network of computers, known as miners, race to solve cryptographic problems. In exchange for their services, the miners are rewarded with bitcoin and can also vote on proposed changes to the protocol.

Staking puts both the incentives and the voting rights in the hands of token holders, not miners. To some, that has all the hallmarks of an investment relationship. “Initially [the SEC] said it would have serious concerns about this,” says Brian Brooks, Coinbase’s chief legal officer.

Brooks says the SEC became comfortable with the arrangement because of the unique structure of the Tezos staking process. Rather than having customers stake the tokens, Coinbase stakes coins itself using funds from its custody business. It then distributes the profits as “rewards” to customers based on how much Tezos they hold in the company’s accounts.

Coinbase says the arrangement insulates customers from the potential risks of staking. Staked coins are harder to trade quickly during price swings, and more vulnerable to hacks than coins stored offline.Still, nothing in the arrangement protects investors from the frequent whiplash of cryptocurrency prices.

If Tezos were to crash, the customer’s funds would go with it. Max Branzburg, head of product for Coinbase’s consumer product, compares the idea to picking stocks, with all the attendant dangers.

Of course, public companies are required to make extensive disclosures about their risks and financial health; Branzburg notes Coinbase has invested in making information available about specific coins.

“The principle here was to make it as simple and easy for customers as possible,” he says.

That pitch is likely to irk independent-minded crypto enthusiasts, who already see companies like Coinbase as unnecessary middlemen who stand between users and their coins.

A more practical tradeoff to convenience are fees. Tezos offers nearly 8 percent rewards to those who stake their coins directly. Coinbase plans to take a hefty percentage off the top, leaving users with a roughly 5 percent annual return that pays out every three days.

That pitch is likely to irk independent-minded crypto enthusiasts, who already see companies like Coinbase as unnecessary middlemen who stand between users and their coins.

Coinbase says it will consider staking for other tokens, especially as other networks, including Ethereum, adopt similar security models.

The company also has other ventures outside of trading, including an expanding crypto custody business for larger institutions to park their coins. It has also invested in efforts like Coinbase Commerce, which enables partner merchants to accept cryptocurrency.

(The company also joined the Libra Association, the struggling Facebook-led group that hopes to enable global crypto payments.) Armstrong has also speculated on the possibility of offering crypto-based loans.

The fate of those products is unclear, given the hurdles of regulation and user adoption. Crypto loans have been called a bubble, and payments have gained little traction so far.

Coinbase has stumbled in its attempts to get other ventures off the ground. Last spring, the company closed its Chicago office, the central hub of an effort to get into high-frequency crypto trading.In the meantime, Choi says the company is focused on making sure the core product works and remains secure.

During the big run-up in 2017, the onslaught of users forced portions of the trading system offline. This summer’s spike was a calmer affair; staffers seemed visibly relieved that no major gaskets had been blown—a reflection, Choi pointed to at the time, of the company’s investments when cryptocurrency prices were low. “It feels like the lessons have been learned.”

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Gregory Barber is a staff writer at WIRED who writes about blockchain, AI, and tech policy. He graduated from Columbia University with a bachelor’s degree in computer science and English literature and now lives in San Francisco.

Cryptocurrency analysts have warned that early adopting Bitcoin $BTC▲0.14% whales still have “plenty of clout” when it comes to dictating market prices.

Those behind Twitter-based transaction monitor @whale_alert have noted that an apparently dormant Bitcoin address houses almost 80,000 BTC ($750 million), and if the owner decides to sell them all, it could spell utter devastation for the industry.

“That address alone — if that is actually a whale who’s been holding their coins for so long without doing anything with them — if they decide, ‘Okay, let’s go sell them,’ it would crush the market completely,” Whale Alert told crypto prime dealer SFOX in a recent interview.

“But it’s really hard to say anything about the status of that address: Are those keys lost? Is that person even still alive? […] It’s just waiting to see if anything happens with those addresses,” they added.A list of top dormant Bitcoin whale addresses (in which no outflowing Bitcoin has been detected in at least five years) can be found here.

The ‘Bitcoin whale effect’ has been demonstrated before

It’s plausible that the power of Bitcoin whales has been demonstrated recently. Whale Alert told SFOX that between August 29 and September 6 2018, a cryptocurrency whale unloaded around $1 billion worth of Bitcoin after they moved the funds from a single wallet to exchanges.When most of the Bitcoin from the wallet was sold, the price of Bitcoin dramatically dropped by almost 15 percent, and the 30-day rolling volatility increased by almost 25 percent.




Price goes down, volatility goes upAnother example is the recent closure of a darknet child abuse imagery ring in South Korea. Police confiscated a massive amount of Bitcoin from the perpetrators, which were eventually auctioned.

Whale Alert managed to track 10,000 BTC ($94 million) during the auction, which were likely sent to cryptocurrency exchange Binance for selling.“Almost directly after that big transaction, the price of BTC dropped,” said Whale Alert. This seems to be corroborated by Binance‘s order book, which shows a rise in volume just a few hours after the auction.An eventual BTC selloff drove the price of Bitcoin on Binance from $8062.56 to $7856.89.



Those are some big-daddy red candles.It’s worth noting, however, that these kinds of movements are often localized to one particular exchange – in this case, Binance.However, when such large, inactive Bitcoin addresses exist, one can’t help but wonder what the markets would look like if dormant whales one day awoke with a sudden urge to capitulate.

You can read the rest of the Whale Alert interview here.

BRUSSELS (Reuters) - The European Central Bank should consider issuing a public digital currency, an EU draft document said, after plans by Facebook to introduce a private one met with a hostile response from global regulators.

FILE PHOTO: Small toy figures are seen on representations of the virtual currency before the displayed European Union flag and the Facebook Libra logo in this illustration picture, October 20, 2019.

The social media firm said in June it planned to launch its Libra digital currency next year. But France and Germany said in September it posed risks to the financial sector, and backed developing a public alternative.

The draft European Union text, seen by Reuters on Tuesday, also urges the bloc to develop a common approach to cryptocurrencies, including possibly banning projects deemed too high-risk.

In its current form, the document - which could be adopted by EU finance ministers next month - would escalate an EU regulatory campaign against cryptocurrencies, which have so far been only partly regulated in some EU states.

“The ECB and other EU central banks could usefully explore the opportunities as well as challenges of issuing central bank digital currencies including by considering concrete steps to this effect,” said the draft, prepared by the Finnish EU presidency and subject to possible amendments.

Digital currencies like Libra - also known as stablecoins - are usually backed by traditional money and other securities, while crypto coins like bitcoin are not. Both are cryptocurrencies.

The draft text could be discussed by EU finance ministers on Friday, according to the agenda for that meeting, with a view to its adoption at their next gathering on Dec. 5.

“STEPPED UP” THINKING

ECB board member Benoit Coeure said in September the bank should “step up” its thinking on a public digital currency.An ECB official said that, in its most ambitious version, the project could allow consumers to use electronic cash, which would be directly deposited at the ECB, without need for bank accounts, financial intermediaries or clearing counterparties.

They are all needed now to process digital payments, but might no longer be if the ECB took over their functions, slashing transaction costs. But that raises technical challenges, and opposition from banks is likely.

Until Facebook launched its project in June, regulators had largely ignored stablecoins because of their tiny size. The largest, Tether, is far smaller than bitcoin.

But Libra’s potentially huge reach - it could be used by billions of Facebook users - has spooked regulators.As part of a global push against Libra, the G7 group of wealthy nations said last month that stablecoins should not be allowed to launch until international risks they posed were addressed.

Under regulatory pressure, Libra has lost a quarter of its original members, including payments firms Visa and Mastercard.The EU document reiterates the G7 concerns over the risks that private currencies pose, citing money laundering, consumer protection, the functioning of payment systems, taxation and cyber security.

But in recommending an outright ban on risky projects and a move toward a public digital currency it goes further.“At the very least, we need a robust regulatory framework to deal with virtual currencies,” said Markus Ferber, a German conservative who leads on financial matters the largest EU Parliament grouping.

“The (executive EU) Commission has been way too ... complacent on the issue so far. With the threat of Libra on the horizon, it is time for action now.”

Reporting by Francesco Guarascio @fraguarascio; editing by John Stonestreet