So, 2019 has come to an end. Having celebrated at the start the 10th anniversary of the launch of the Bitcoin network, the cryptocurrencythe industry went through periods of hotexcitement, and through bitter disappointments. According to the already established tradition, we have witnessed ups and downs in the market, failed predictions, numerous speculations and mutual criticism.
Summing up the line for the outgoing year, we offerrecall the key events of 2019, which largely determined market movements and laid the foundation for future trends, which, as you can expect, will determine the further development of the industry.
FATF Recommendations, Fifth EU Directive and Tighter Regulation
Something that many representatives are wary abouthave been saying for the previous few years, it happened in 2019 when the Financial Action Task Force (FATF) published the final version of its guidelines for the cryptocurrency industry. In the published document, the FATF required Bitcoin exchanges, exchanges and other cryptocurrency service providers (VASPs) to comply with AML and CFT (anti-money laundering and countering the financing of terrorism) procedures, similar to traditional financial companies.
Experts and analysts have tried to convince the FATF thatthat in the blockchain industry it’s quite difficult, if possible at all, to follow the same rules as in the banking sector. There were also warnings that the cryptocurrency business could partially go into the background, and that privacy of users and the effectiveness of law enforcement operations would suffer.
However, in June new recommendationswere adopted and approved by the G20 countries, after which businesses and governments are given 12 months to implement them. The new standards will also apply to organizations working with cryptocurrencies and tokens, for example, exchanges and hedge funds. The FATF is expected to carry out its first review of implementation of the recommendations in June 2020.
All this has led to the fact that many governmentscountries, including those not members of the FATF, for example, Ukraine, began to practically implement these recommendations, and already in the second half of 2019, tightening regulation of the cryptocurrency sector took concrete shape.
So, with more stringent requirements fromlocal banks clashed with South Korean exchanges, some of them even announced the delisting of anonymous coins like Monero, ZCash and DASH. Other major exchanges have begun to implement specialized tools designed to monitor suspicious transactions, and some have even begun to block withdrawals of funds to wallets supported by CoinJoin transaction anonymization technology (coin mixing).
All these events clearly indicate that the industryis on the verge of tremendous change. This process will not be short-term, but many people should already think about whether they are ready to play by the rules or continue to uphold the ideals and philosophy of a world free of state censorship of cryptocurrencies.
The fact that the new reality will be verydisappointing, confirms the closure of a number of companies that declared it was impossible to continue operating due to the Fifth EU Directive (5AMLD EU). The latter comes into force on January 10, 2020 and imposes stricter reporting obligations on companies dealing with cryptocurrencies, and also empowers financial intelligence units to obtain addresses and identifiers of digital asset holders.
Digital currencies from Facebook and Telegram
In June, the world's largest social networkFacebook has announced the creation of its own digital currency, Libra. The project of a global stablecoin based on a “secure, scalable and reliable blockchain” was met with hostility by world governments and regulators, who almost immediately declared their opposition to this initiative.
According to authorities, such a private currency putsthreatening the stability of the global financial system, leads to a decrease in the solvency of banks and a reduction in their reserves, the outflow of capital from the economies of developing countries, and also increases the risks of money laundering and terrorist financing. Also in the light of previous incidents with data leaks, Facebook expressed concerns regarding the protection of users' personal data.
The series reached its apogeecongressional hearings, to which Facebook CEO Mark was calledZuckerberg and Calibra CEO David Marcus. They had to answer numerous questions from American legislators, but as of the end of 2019, the government’s position remains unchanged: until regulators’ doubts are dispelled, the project cannot receive the green light. Some countries, such as Germany, have gone even further, adopting a strategy to combat the issuance of private digital currencies.
Due to concerns that participation in the Libra Associationwill have negative consequences for their core business, some major players have left the organization, including payment companies PayPal, Mercado Pago, Visa, Stripe and Mastercard.
Be that as it may, the creators abandoned their plansthe project is not being abandoned: at the end of December, the Libra Association published a second roadmap for the development of Libra Core software. At the same time, the organization confirmed that it continues to prepare for the launch of Libra, however, the specific timing (previously called the first half of 2020) will depend on negotiations with regulators.
In parallel with this, the attention of a significant partThe community was focused on another project - Telegram Open Network (TON). Work on it began last year, when the messenger raised about $1.7 billion following two closed preliminary rounds of placing Gram tokens.
It was expected that TON will be launched in 2019,however, the US Securities and Exchange Commission (SEC) stood in the way of the project. In October, the regulator announced it was taking “extraordinary measures and restrictions” against offshore companies Telegram Group and TON Issuer Inc. related to the TON token sale.
According to the Commission, Telegram proposedinvestors unregistered securities in the United States and beyond, selling at a reduced price about 2.9 billion Gram 171 tokens to the original buyer. Of these, 1 billion tokens were sold to 39 American buyers.
Investors, apparently, continue to believe inproject: by a majority vote they refused to demand a refund and approved the postponement of the platform launch to April 2020. However, it cannot be ruled out that the proceedings with the SEC may drag on.
It is noteworthy that the initiatives of Facebook and Telegramforced some major players in the cryptocurrency market to act more actively in the direction of creating their own digital assets. Thus, in August, the largest crypto exchange Binance announced plans to launch the Venus project, the goal of which will be the development of regional stablecoins and digital assets pegged to fiat currencies in different countries around the world. It is possible that Venus will be launched not using the Binance Chain network, but a specially created public blockchain.
China - a fierce "blockchain revolution" and pressure on the crypto business
Having successfully squeezed out a significant part of the cryptocurrency business from the country at the end of 2017 and in 2018, the Chinese authorities continued this “tradition”, increasing pressure on the remaining companies and traders in the country.
This trend became especially noticeable in November,when CCTV1, the mouthpiece of the Chinese Communist Party, called cryptocurrencies “unregistered securities, scams and Ponzi schemes,” and Shanghai authorities initiated a new probe aimed at cracking down on activity related to crypto trading and token sales.
Around the same time, social networkWeibo blocked the official accounts of the Binance exchange and the Tron Foundation, citing “violations of laws and regulatory requirements,” and residents were encouraged to report crypto traders they know.
It is noteworthy that the mining industry is powerChina is still bypassed. It is in the Celestial Empire that significant capacities are concentrated today (according to some sources, only 70% of all bitcoins are mined in the Sichuan province).
The beginning of a new wave of pressure on the crypto industrywas preceded by a statement made on October 25 by Chinese President Xi Jinping about the need to support the development of blockchain technology and its integration into related information technologies - artificial intelligence, Big Data and the Internet of Things.
Almost immediately after this blockchain for the first timeHe was at the forefront of the Chinese newspaper People’s Daily, which said that the leading universities of the Celestial Empire are already launching special courses on the study of technology, and local municipalities will soon present their own initiatives in this area. For example, the Guangzhou authorities announced the allocation of 1 billion yuan (about $ 142 million) to subsidize blockchain projects.
However, even more remarkable news wasthat the People's Republic of China's parliament has approved a cryptography law that standardizes cryptographic applications and the process of managing public and private keys. The law comes into force on January 1, 2020, and a special department subordinate to the leadership of the Communist Party will regulate cryptography.
It is alarming to hear that a leading bankChina Merchants Bank has invested in the Bitcoin wallet BitPie, once one of the most popular among local cryptocurrency holders. What exactly the cooperation between China Merchants Bank and BitPie will consist of is still unknown, but some analysts believe that the deal can be considered the beginning of the nationalization of the crypto industry in China.
“For me, this is a sign of the beginning of nationalizationbitcoin’s infrastructure and cryptocurrencies in general ... In the end, everything can belong to the state, at least in part (mining, ASIC, exchanges, wallets) ”,— Dovi Wang, partner at the investment company Primitive Ventures, commented on this news.
Further developments in China will undoubtedly haveinfluence on the development of the entire industry, but at this stage what is happening causes more anxiety than optimism. So far, the tightening of policies by the authorities has encouraged traders to transfer their assets to safer places.
Bakkt platform launch
Expected last year and several timesThe delayed launch of the Bakkt cryptocurrency platform eventually took place in September. Bakkt's first product was deliverable Bitcoin futures. This type of contract will allow market participants to bet on future changes in the price of Bitcoin and receive settlements in cryptocurrency, which distinguishes them from the existing regulated futures of the Chicago Mercantile Exchange (CME), which allow only the fiat equivalent of earned Bitcoins.
However, at the start of trading the volumes wereQuite modest, the expected market growth in connection with the launch of the platform not only did not take place, but what’s more, in the following days the price of Bitcoin sank noticeably, falling within a week by an impressive 20% - from $10,000 to $8,000.
Despite the fact that the launch of Bakkt largely contributed to the continuation of the bear market in the second half of 2019, the company continued its expansion, introducing several more new products.
Thus, on December 9, settlement trading was launchedBitcoin futures and options, and a few days later the first block trade of Bakkt monthly Bitcoin options was announced on the ICE Futures U.S. platform. — the deal was concluded between Mike Novogratz’s company Galaxy Digital Trading and the crypto-financial platform XBTO.
In addition, in November Bakkt begantesting a consumer payment application through which users can pay with Bitcoin for various goods and services. The first partner connected to the Bakkt application will be the international coffee chain Starbucks (mass adoption!), and its launch is expected in the first half of 2020.
However, the main focus of analystsriveted precisely to supply Bitcoin futures, which are believed to increase interest in the first cryptocurrency from institutional investors. And as you can see in the graph below, despite the correction during the New Year holidays, the trading volumes for this type of contracts and the number of positions to be opened continue to grow, however, this has not yet had a positive impact on the price of bitcoin:
This week's summary of Bakkt Bitcoin Monthly Futures:
? Total volume: $ 46 million (-59%)
? Max open interest: $4.0 million (-44%)Follow @BakktBot for updates — Sats for server costs: https://t.co/TF6sNUwWpO pic.twitter.com/o3J8T1vB60
- Bakkt Volume Bot (@BakktBot) December 29, 2019
Speaking about Bakkt, we cannot ignore the cryptocurrency initiative of the financial corporation Fidelity Investments. After almost a year of testing in OctoberFidelity digital assets, the company's digital assets division, has launched a Bitcoin custody service for institutional investors such as hedge funds, family offices and financial advisors.
In December, Fidelity Digital Assets President TomJessop also stated that the company is working on supporting Ethereum in the context of custody services, and a corresponding service could launch in 2020.
Ethereum - Towards Proof-of-Stake and ETH 2.0
In 2019, two events took place on the Ethereum network.planned hard forks (Constantinople and Istanbul). Despite the delays and postponements, the ecosystem of the second largest cryptocurrency by capitalization, according to the developers themselves, has entered the initial stage of ETH 2.0 - a new stage in the evolution of the project, which involves the transition from the Proof-of-Work algorithm to the Proof-of-Stake.
According to the creator of Ethereum VitalikButerina, “switching to PoS will make Ethereum safer than bitcoin,” while other developers have repeatedly stated throughout the year that this task is necessary to keep Ethereum competitive.
As stated, Ethereum 2.0 will be a separate blockchain (Beacon Chain) with a new token, which at the initial stage will work in parallel with the current version.
Despite the fact that ambitious plansdevelopers are subject to certain doubts, a comprehensive security audit of Ethereum 2.0 as part of the zero phase should take place in February next year. A test network with support for various clients may also launch this winter. In addition, the deposit contract will be tested for approximately three months. If everything goes according to plan, the Ethereum 2.0 main network will go live no earlier than mid-summer 2020.
The boom of decentralized financial services (DeFi) and IEO
Rapidly gained popularity in 2019DeFi sphere, consisting of open source projects and designed to make the world of finance more open and free with the help of blockchain and smart contracts.
Innovative cryptocurrency market suddenlyarose against last year's collapse in the prices of bitcoin and most other assets. In an effort to avoid fixing losses, some holders in the midst of cryptozymes borrowed funds secured by digital assets, or deposited coins to get a small but passive income with minimal risk.
Key Asset and DeFi Services Protocolis Ethereum, and tokens based on it have recently been used as collateral for loans. The main users of these services are traders, ICO / IEO projects and borrowers experimenting with an alternative to expensive and bureaucratic banking services.
Recently, the decentralized marketfinancial services is rapidly growing and developing, expanding the list of supported assets and enriched with additional functions. If a year ago, the cost of blocked airtime as collateral was $ 189 million, then by the end of 2019 this figure was about $ 680 million:
Absolute leader in this segment for a long timetime is Maker, whose smart contracts had 2.3 million ETH (> $345 million) locked at the end of 2019. The dominance index of this service in the DeFi ecosystem has already exceeded 50%.
The service is also rapidly gaining popularity.Synthetix It offers decentralized trading in synthetic assets derived from digital currencies and traditional instruments (fiat money, gold, silver, etc.). The service has a native SNX token, the holders of which can block it to create assets of the ERC20 standard called Synths and then trade them. The third place in the DeFi Pulse rating is occupied by the Compound service, similar in functionality to the Maker.
Undoubtedly, a very young market is still tinycompared to the traditional counterpart. Nevertheless, this sector deserves attention, given the pace of its growth and the introduction of innovations, the value proposition of services and the potential for the development of market infrastructure.
Another trend of 2019 was the so-calledInitial Exchange Offers (IEO), largely conceived as an alternative to ICO.The first large-scale IEO project of this year was the January BitTorrent crowdsale on the platform. The campaign ended in less than 18 minutes, resulting in the distribution of 59.4 billion BTT tokens (about $7.2 million). The example turned out to be contagious, and within a year, a number of other exchanges opened platforms for IEOs, and the Bitfinex exchange, at war with the state of New York, even conducted a private placement of its own LEO token, collecting the target amount of $1 billion.
Doubts about the effectiveness of this toolattracting financing, however, arose quite quickly, as confirmed by the December BitMEX study. According to him, investors in IEO tokens lost up to 98% of their investments.
Mimblewimble - a new technological breakthrough?
Mimblewimble technology was originally conceived inas the second layer of Bitcoin, designed to increase transaction confidentiality and network scaling. However, the developers subsequently came to the conclusion that creating your own cryptocurrency could be the easiest way to test it in real life.
To implement their plan it took them about16 months, but Grin, which was initially under development, turned out to be not the only cryptocurrency based on Mimblewimble. Slightly ahead of Grin with its launch, Project Beam was unveiled on January 3rd, choosing a model involving funding and stricter corporate ethics. On January 15, the Grin network was launched, the launch of which was not preceded by an ICO or premine, and the development was carried out on a voluntary basis.
Over the past year, both cryptocurrencies have gainedcertain popularity and are available for trading on a number of major exchanges. The technology behind them, Mimblewimble, is also gaining more attention. So, in October, two proposals to improve the protocol, providing for the integration of MimbleWimble to ensure the privacy of transactions, were published by Litecoin developers.
It is these properties of technology that canhas the potential to become the “secret weapon” that will push the industry toward its wider adoption, especially in light of increasingly harsh regulatory rhetoric regarding the better-known anonymous coins.
Sidechains growing in popularity
The first bitcoin-based sidechains - Liquid byBlockstream and RSK from RSK Labs - were launched back in 2018, so that companies and their customers were able to quickly and efficiently transfer funds between exchanges, as well as use the L-BTC token for their exchange for assets created in alternative blockchains.
By May 2019, the most popular onlineThe Liquid sidechain had over 30 participants, including major exchanges such as Bitfinex, BitMEX, OKCoin, Huobi and CoinCheck. Shortly after this, Blockstream introduced the first product based on Liquid - a platform for launching security tokens, the security of which is ensured by smart contracts operating on the Bitcoin network with a multi-signature function.
In July, Liquid Network implementedsupport for atomic swaps and the Lightning Network, and with the participation of Tether, the USDT stablecoin was also launched, after which the fourth crypto asset by capitalization to date became available for arbitrage.
“The growing popularity of alternative assets -stablecoins and security tokens - in the Liquid network it says that sidechain technology is quickly becoming mature. We expect that in 2020, the use of Liquid will only increase. ”— said Blockstream Chief Strategy Officer Samson Moe.
There is every reason to believe that these expectationsdestined to come true. For example, in early December, the Dubai-based bitcoin exchange BTSE announced its own token sale on the Liquid sidechain. The platform's ambitions are very high - BTSE hopes that in 2020 it will be able to earn $103 million, and by the end of 2021, monthly trading volumes should reach $70 billion.
Other versions of sidechains do not stand still either.Thus, in October, the developers of the Horizen cryptocurrency, focused on increased user privacy, announced the launch of a sidechain in alpha mode, allowing developers and companies to quickly and inexpensively create their own blockchains. According to them, the Horizen sidechain is the first important milestone towards creating an environment with multiple applications that will allow the benefits of blockchain technology such as privacy and decentralization to be realized in practice.
The startup Money on also presented an interesting solutionChain, which launched a DeFi platform based on the RSK Bitcoin sidechain in December. On top of it, the project developers intend to create products in the field of lending. In addition, it will be interesting to watch the future of the Sun Network, which includes DAppChain, a sidechain created for “unlimited scaling” of the TRON main network, as well as Arbitrum, an Ethereum sidechain, the developers of which have already attracted investments from Pantera Capital, Compound VC, Blocknation and Coinbase .
Bitfinex vs New York State
On April 25, the cryptocurrency industry was hit bya real information bomb - the New York State Attorney's Office charged the Bitfinex exchange with the fact that, having suffered multimillion-dollar losses, it concealed this fact, using funds from its affiliated issuer of the stablecoin Tether to cover the damage.
According to the prosecutor, during the investigationmanaged to establish that iFinex Inc. (operator Bitfinex and Tether) was involved in operations to conceal the alleged loss of $ 850 million owned by both the company and its customers. It is assumed that precisely because of this, the exchange in the past had problems with the withdrawal of funds.
Bitfinex is supposed to have passed the specifiedthe amount, both corporate and client funds, to the payment service provider from Panama Crypto Capital Corp., which could hold assets of other exchanges, including Binance, Kraken and BitMEX and the bankrupt QuadrigaCX. When in December 2018, Crypto Capital's accounts in several countries were frozen, Bitfinex ran into problems.
The exchange itself immediately stated that it categoricallydenies the accusations, but the news still caused a sharp decline in the price of Bitcoin and provoked a massive withdrawal of funds from the exchange. So, within a few hours, almost 19 thousand BTC (more than $98 million at the exchange rate at that time) were withdrawn from the Bitfinex cold wallet to unknown addresses, and impressive amounts of ETH were also withdrawn.
Eight months later, the situation is still farby permission: throughout this time, the parties continued to exchange mutual attacks and statements. The exchange continues to defend its line, insisting, among other things, that the New York State Attorney's Office has no jurisdiction over Bitfinex and Tether.
Additional confusion in this mattercontributed to a more than $1.4 trillion class action lawsuit filed in early November against iFinex Inc. and its subsidiaries. The defendants in the case are Bitfinex CEO Jean-Louis van der Veld, CFO Giancarlo Devazini, former strategy director Philip Porter, the same processing company Crypto Capital, as well as Global Trade Solutions AG, which was previously involved in the case of shadow banking for bitcoin exchanges .
They were accused of violating the US Trademark Actstock exchanges, RICO Act (Racketeer Inventory Act), money laundering, Pump & Dump, market manipulation through the issuance of USDT and deliberate deception of investors.
It is now impossible to predict how all these proceedings will end, however, any outcome will probably have considerable significance for the entire market.
Infrastructure projects and community initiatives
Two important releases took place in 2019the most popular client of the first cryptocurrency Bitcoin Core. In May, Bitcoin Core 0.18.0 was released, one of the main features of which was support for hardware wallets; in November, Bitcoin Core 0.19.0.1 was released with native generation of bech32 addresses. Also in this release, support for the BIP-70 payment protocol is disabled, which, due to the risks of tracking transactions in blockchain records, has been subject to considerable criticism from the crypto community.
Meanwhile, Bitcoin's second layer protocolThe Lightning Network has also had its share of important releases. Among these, we highlight c-lightning v0.8.0 from Blockstream, LND 0.8 from Lightning Labs, which became, among other things, a response to the identified vulnerability, as well as Lightning Loop, another solution from Lightning Labs, the main goal is to simplify the process of accepting coins.
Achieving new technological frontierswas accompanied by growing interest in the Lightning Network from the wider community. Suffice it to recall the unique Lightning Torch relay launched on Twitter by the user Hodlonaut (who, thanks to his confrontation with the self-proclaimed creator of Bitcoin Craig Wright, became one of the most recognizable memes in the community in 2019.
The action was organized on the basis of the relayOlympic flame - to the initial payment of 100,000 satoshi (0.001 BTC), each new participant adds 10,000 satoshi, challenging the next user. The aim of the experiment was to demonstrate the capabilities of the second layer protocol of the Lightning Network.
The Lightning Torch relay race lasted 83 days, in itIt was attended by users from 56 countries who made a total of 293 Lightning payments. Among those who transmitted the Lightning torch, there are such well-known representatives of the community as Pierre Rocheard, Jack Mullers, Nicholas Dorier (BTCPayServer), the Bitrefill team, Anthony Pompliano, Andreas Antonopoulos, CEO Twitter Jack Dorsey, Elizabeth Stark, Samson Moe, Ricardo Spagni, Alena Vranova, WhalePanda, Giacomo Zucco, Binance CEO Changpan Zhao, Tron founder Justin Sun, Eric Vorhes, Charlie Shrem, Adam Back, Slush Pool mining pool, Peter Velle, Fidelity Digital Assets and even Miss Finland Rosa-Marie Ryuti.
All bitcoins (0.4108021 BTC) collected during its course were donated to the Bitcoin for Venezuela humanitarian initiative.
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