Noelle Acheson is a veteran of company analysis and member of CoinDesk’s product team.

The following article originally appeared in Institutional Crypto by CoinDesk, a newsletter for the institutional market, with news and views on crypto infrastructure delivered every Tuesday. Sign up here.

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In the big-stakes world of institutional custody, it pays to be cautious.

In the fast-growth world of crypto assets, though, this can be a barrier, leaving latecomers with underperforming returns as infrastructure providers scramble to catch up with those that were braver.

Or at least, so the legend goes.

In crypto, however, things are generally not as straightforward as they seem. And with custody of crypto assets, the scramble for volume is checked by the outsized risk to both reputation and client wealth.

Last week, Fidelity Digital Assets president Tom Jessop gave an update on the platform’s planned roll-out of services and hinted that it would not be offering custody support for ethereum at first, due to uncertainty over its recent and planned hard forks.

This caution highlights some of the intrinsic difficulties of the emerging world of crypto assets and goes a long way toward explaining why institutions are taking longer than the market expected to enter the sector.

Crypto asset custody is riskier and more complicated than most of us realize.

What’s the problem?

First, let’s review what a hard fork is: a change to the underlying characteristics of a blockchain, after which mined blocks will not be recognized on the old chain. The old chain can continue to grow independently, though, with blocks produced by miners who have opted to stay with the unchanged technology.

Hence the term “fork,” as the blockchain splits into two versions.

Now, let’s separate Fidelity’s concerns regarding ethereum from the potential problem that blockchain splits in general pose for custodians.

The ethereum blockchain recently underwent a hard fork to upgrade the technology and implement a few strategic changes. No hands-on action was needed from custodians or ether holders, and by all accounts, the switch went smoothly.

Hard forks do bring additional risk, however. Will the new version be as robust as the old one? The latest ethereum fork was originally scheduled for January of this year but was delayed (again) at the last minute because developers discovered a potentially serious security bug. Imagine if they hadn’t found it in time.

Another hard fork upgrade is expected, possibly towards the end of this year – but, as with this one, no chain splits are expected.

Fidelity’s caution has been criticized as over-zealous, potentially leading to loss of business as institutional investors increasingly need reliable custody solutions for a range of assets, not just bitcoin.

But, given the reputational risk and the institution’s traditional rigor when it comes to protecting client assets, it can be interpreted as solid business sense.

Is it safe?

Contentious hard forks, when chain splits are led by developers unhappy with the original structure, are a different type of problem. This has happened often, most recently with the recent split of the bitcoin cash chain into two competing versions, bitcoin ABC and bitcoin SV.

Bitcoin cash itself was the result of a contentious hard fork split from bitcoin in August 2017.

Generally, the holdings on the old chain are replicated on the new one, with the new characteristics embedded. Custodians don’t have to support the new chain, though, and therefore might not custody these new assets, even if their clients are entitled to them.

Why would they decline to offer this service, when on the surface it looks like a sure route to extra revenue? The main reason is technological complexity and concern over security risks.

When ethereum hard forked in 2016, a glitch had transactions on one chain also being reflected on the other, even though no transaction had been originated there. Imagine trying to keep track of custody holdings in this scenario.

Is it worth it?

Another part of the reluctance comes down to straightforward business logic.

While it is relatively straightforward to add support for new digital assets that run on an existing blockchain (such as ERC-20 tokens), adding a new chain requires a significant amount of work. Will the resulting coins have enough volume and liquidity, and will there be enough demand for custody going forward to justify the development expense?

This is one of the main factors differentiating crypto custody from that of “traditional” electronic securities – with the latter, the underlying technology is not a defining feature.

Crypto custodian BitGo, for example, is continually adding to their list of supported assets. When it comes to hard forks, however, their decision to support is “based on a number of criteria, including technical stability, market capitalization and liquidity.”

Kingdom Trust boldly states that “if there appears to be little or no value or no trading interest in the new fork…, Kingdom will not support the fork.” And institutional dealer and custodian Gemini directly “does not support forks.” Xapo, one of the original bitcoin custodians, does not commit to supporting anything other than the original bitcoin blockchain.

Is it mine?

Another potential issue complicating crypto custody is that of “settlement finality,” a legal construct that refers to the moment when sale and delivery of an asset is complete and ownership is transferred. The specifics differ by jurisdiction and other details, but the principle is of particular interest to custodians who need to know exactly what they are holding at all times.

With blockchain-based assets, settlement finality is fuzzy. In a distributed network, a transaction is “final” when the whole network agrees it is final. In a decentralized system that relies on consensus, it’s probabilistic.

In other words, transactions involving assets on public blockchains are rarely 100 percent “final” – consensus can unwind them, at least in the short term (true, as time goes by the possibility of that happening gets really close to zero).

Many argue that blockchain technology makes the legal concept of settlement finality unnecessary and that “final” on traditional databases is at best subjective (for example, the regulators can wind back pretty much whatever they want to). However, institutions are comfortable with the current definitions and will require a similar concept in the blockchain world.

As the system evolves, ways will be found to compensate for this, but legal definitions generally take a long time to adjust, even more so when regulators are still grappling with the new concept and struggling to keep up with the sector’s rapid evolution.

This uncertainty is unlikely to stop providers from offering services that institutional investors so clearly need. But it does highlight the need for caution, especially from systemic incumbents – precisely the big institutions the market is so clearly waiting for.

They’re obviously interested, and that’s encouraging. But we shouldn’t expect them to pile in enthusiastically without examining all possible risks. Mitigating risk is, after all, a large part of their job.

Caution sign image via Shutterstock

Blockchain interoperability project Tendermint has raised $9 million in a Series A funding round led by technology-focused venture capital firm Paradigm.

Announcing the news on Thursday, Tendermint said that other participants in the round included Bain Capital and 1confirmation, among others. The investment will go toward supporting the firm’s continued development of the Cosmos Network, expanding its team and making its business model “sustainable.”

Just a day before the funding was announced, Tendermint launched Cosmos Hub, a blockchain designed to improve interoperability between any number of other blockchains, after nearly three years of planning and development. Cosmos Hub is the firm’s first in a series of proof-of-stake (PoS) blockchains.

“Blockchain technology is an incredible innovation that has unfortunately been hamstrung by a series of limitations, including scalability problems, a lack of usability and myriad governance and environmental issues,” Jae Kwon, CEO of Tendermint and contributor of Cosmos, said in Thursday’s announcement.

He added:

“The vision of Cosmos is to overcome these limitations and break down barriers to innovation, ultimately creating an Internet of Blockchains: a decentralized network of independent, scalable, and interoperable blockchains.”

Tendermint first revealed its plans to launch a public blockchain platform as far back as 2014 through its white paper.

The project has recently released a couple of other developer-focused products, such as software development kit, or SDK, (being used by cryptocurrency exchange Binance) and Tendermint Core, which is the blockchain networking and consensus mechanism underlying the Cosmos Hub.

“We envision a future where multiple blockchains serve specific use-cases – store of value, privacy, general purpose smart contract platforms, and many others,” said Salil Deshpande, partner at Bain Capital, in yesterday’s announcement.

He added:

“In this future, interoperability solutions provide a crucial alchemy that could lead to an explosion of blockchain applications, as well as boosting usage on existing chains.”

U.S. dollars image via Shutterstock

“We’re going back to stuff we were tired of talking about months ago. We decided the only issue is whether there are errors in the algorithm [or] back doors in the algorithm.”

So said Greg Colvin during a heated debate during an ethereum developer call Friday over a proposed change to the network’s mining algorithm known as Progressive Proof-of-Work or “ProgPoW.”

A change that would impact the estimated $655 million annual market for ethereum’s mining rewards, ProgPow is aimed at reducing the efficiencies of specialized mining devices called ASICs and maximizing the performance of general purpose hardware called GPUs. Both types of machines can be deployed on the network as of 2018, a development that has set off a contentious debate.

Some believe optimizing the network for GPUs will enable more ethereum users to compete for new cryptocurrency awarded by the protocol, while others believe large mining firms are likely to push out such individuals regardless of what types of chips are capable of conducting the computing requirements needed.

Still, developers reached a tentative agreement about the code in early January, prompting Colvin today to question why the agenda item discussing the proposal persisted.

“Nobody objected. Many agreed. Nobody blocked it. We had a consensus that we’re moving forward unless there were technical issues,” said Colvin.

But investigating these potential “technical issues” is proving to be harder task than expected.

Having initiated third-party security audits of the ProgPoW code, core developers agreed that a working group of project managers would be in charge of executing and reporting the findings of these audits. But disagreement over the deliverables of the audits has been delaying this process.

Highlighting that the audits have not yet begun for ProgPoW, Hudson Jameson, Ethereum Foundation community relations manager, noted during the call that the original plan to conduct two separate audits over the proposal may not go entirely as planned.

“We may not do the benchmarking [audit] at all, because that is the less important part of the two pieces of the audit,” explained Jameson.

This second audit, Jameson added, would serve to do a “constraint analysis on ProgPoW to look over claims in how efficient a ProgPoW ASIC would be compared to a [GPU],” among other analysis on “proposed ASIC architecture” and “economic analysis on the impact ProgPoW would have on the economics of ethereum protocol.”

Explaining that he had tried to pin down the deliverables to these audits before, core developer Alexey Akhunov admitted the process “was very difficult.”

“What is the goal [of ProgPoW]? What is the criteria of success? So far, I’ve not been able to extract this from people who are suggesting ProgPoW,” Akhunov emphasized.

While debate over how to best conduct ProgPow audits is likely to continue outside of today’s call, core developers did reaffirm ProgPoW remained an approved proposal for inclusion in either ethereum’s next upcoming system-wide upgrade, Istanbul, or a separate hard fork that would give ethereum’s users the option to upgrade to a software that included it.

Either way, those in charge of assessing the risk of new ethereum software versions, believe the implications are the same.

“Any [Ethereum Improvement Proposal] that we accept for hard fork if it later turns out there’s something horrible wrong with it, yes, we’re going to pull it. It’s always going to be conditional acceptance,” Ethereum Foundation security lead Martin Holst Swende concluded.

Mining device image via Shutterstock 

The U.S. Securities and Exchange Commission’s Valerie Szczepanik is optimistic that regulation will ultimately boost the cryptocurrency market.

“I do think if we hope to smell the crypto spring in the air, it will take people walking with the regulators,” Szczepanik, the SEC’s senior advisor for digital assets, told a crowd Friday at SXSW in Austin, Texas. “But I do think the spring is going to come.”

In a Q&A session with attorney Daniel Kahan of Morrison & Foerster LLP, Szczepanik emphasized how the regulatory approach at the SEC is designed to let innovation flourish, though it comes at the cost of not providing completely clear guidelines for new kinds of businesses.

“The lack of bright-line rules allows regulators to be more flexible,” she said.

While respecting the desire from entrepreneurs to know whether they can or can’t run a business in full compliance with current securities laws, she said the principles-based approach allows more opportunities to arise from new technology.

She told attendees:

“I think if you were to propose a new regime of regulations in a precipitous way without really studying it, you might end up steering the technology one way or another.”

When asked for her thoughts on the rise of stablecoins, Szczepanik noted that there as several arrangements that allow these tokens to maintain a relatively stable price relative to other assets.

She singled out stablecoins that create two assets – one that maintains a fixed price and the other whose value fluctuates in order to help the first token’s price stay fixed (often referred to as algorithmic stablecoins).

With regard to that particular category of project, she said, “You might be getting into the land of security.”

“Folks like to put labels on things,” Szczepanik said of stablecoins, “but we’ll always look behind the label to see exactly what’s happening. We’ll give it the label it deserves under the law.”

Appropriate penalties

A topic that she returned to multiple times during the 90-minute talk was the SEC’s FinHub, where companies can come in and talk with staff about approaches they are taking. Kahan offered a rule of thumb: “It’s always better to find your regulators than to let your regulators find you.

Szczepanik emphasized that dialogue with the SEC yields better outcomes for companies. In particular, she highlighted recent regulatory action against Gladius, a cybersecurity company defending against distributed denial of service (DDoS) attacks. Its settlement was announced in February.

As the agency acknowledged in that settlement, it did not impose a penalty on Gladius because the firm self-reported and communicated with regulators throughout the investigation.

That said, rather than focus entirely on regulatory action against companies, Szczepanik also argued that businesses can do better by working with regulators from the start.

She acknowledged that some companies will go offshore in search of more lenient regulatory regimes, but she said the real opportunity is with companies that abide by the stronger U.S. rules. “There are benefits to doing it the right way. And when they do that they will be the gold standard,” she contended.

Beyond the U.S., Szczepanik said regulators around the world are in regular contact about distributed ledger technology. “I think there’s a lot of excitement around the globe about how DLT can be deployed to increase efficiency,” she said.

No-action letters

One form of relief that entrepreneurs have been seeking since the earliest days of the initial coin offering boom have been no-action letters. That is, letters from the SEC that acknowledge a review of a companies business process and affirm that the SEC will not take regulatory action against it.

Szczepanik has emphasized these before. However, attorneys in the space have noted that thus far no no-action letters have been issued.

Regardless, Sczczepanik’s fundamental message was that companies will have better outcomes if they interact with securities regulators. To that end, she is going on the road now to give more entrepreneurs the opportunity to reach her.

She concluded:

“We’d much rather have people come and ask us before they do something rather than coming and asking for forgiveness.”

SEC Senior Advisor for Digital Assets Valerie Szczepanik speaks at SXSW 2019

It’s business as usual for CME Group’s bitcoin futures market, despite a retrenchment by rival derivatives exchange operator Cboe Global Markets.

Contacted by CoinDesk Friday, a spokesperson for CME said the exchange has “no changes to announce re our bitcoin futures contract” and declined to comment on Cboe’s pullback.

The affirmation is notable in light of the news Thursday that Cboe will not add a bitcoin futures contract for trading in March.

This means that after the last currently traded futures expire in June, this market will essentially come to a halt at Cboe Futures Exchange (CFE), at least until new futures get listed.

“CFE is assessing its approach with respect to how it plans to continue to offer digital asset derivatives for trading. While it considers its next steps, CFE does not currently intend to list additional XBT futures contracts for trading,” the company said in its notice to investors.

A spokesperson for Cboe declined to comment beyond Thursday’s product update.

The difference in outcomes isn’t all that surprising since CME’s volumes have been approximately more than double Cboe’s.

As of March 14, for example, the daily trading volume of CME’s bitcoin futures was reported at 4,666 contracts, compared to 2,089 contracts at Cboe.

Product-market fit

Market participants offered several explanations for CME’s outperformance of Cboe in bitcoin futures.

One reason could be the difference in how the two exchanges approached the product and marketed it, Lanre Sarumi, CEO of a crypto asset derivative exchange Level Trading Field, told CoinDesk.

First of all, CME made its product available to a larger group of traders from the very beginning, Sarumi explained, saying:

“Connecting to both CME and Cboe is expensive. If you are already trading other products on an exchange, then there is no new cost. If not, you must pay for connectivity, software license, market data, cross connects etc.  — all that just to trade one new product?”

Cboe put the bitcoin futures on its Cboe Futures Exchange (CFE), Sarumi goes on, where people mostly trade Cboe Volatility Index (VX) Futures: “If you don’t trade VX then do you want to pay hundreds of dollars extra per account just to dabble in bitcoin?”

CME group, on the other hand, put bitcoin in the equities group on the CME exchange, which offers a lot of products and asset classes enjoying large daily volumes, Sarumi said. So a lot of traders already trading various assets at CME had no additional steps to take to get into bitcoin.

Other intangibles

In addition, CME invested more effort in promoting its futures than Cboe did, Sarumi believes. “Cboe was more like ‘build it and they will come.'”

The price discovery method could also contribute to CME’s advantage: while Cboe’s relies on an auction at the Gemini exchange, CME settles to an aggregate price of several spot markets, which might look more reliable to traders.

John Todaro, director of research at TradeBlock, says CME’s strategy might have had more success due to greater flexibility.

“CME had greater position limits, allowing single accounts to hold a larger number of contracts,” he told CoinDesk. “Over time, the CME gained greater market share. The Cboe raised contract limits in order to remain competitive late in the summer of 2018, but by this time the CME was trading in significantly higher volume.”

Marc Hochstein contributed reporting.

Image of CME director of equity products Tim McCourt via CoinDesk archives

“What happens when you need an MRI?”

Someone answers for me: “You die an excruciating death… Actually, they remove them painfully quickly or the machine does.”

I’m sure these paranoid, exaggerated remarks didn’t help as I sat down at the folding table in front of a large man with a 14-gauge needle. I was sweating through my shirt.

“Are you gonna pass out?” he asks.

“I don’t think so.”

It’s literally right on my face – in the form of a septum piercing – that I’m pretty familiar with needles.

“Three, two and one,” the man with the needle said as he pushed it into the squishy part of my left hand, between my thumb and index finger.

It was all of one second of pain, and then it was over. I hardly even bled.

And just like that, I was now officially a cyborg.

So, what the hell am I doing here? Well several years ago, in 2014, I stumbled on this guy, Martijn Wismeijer, aka Mr. Bitcoin, who had gotten a microchip implant that he then programmed to hold his cryptocurrency.

I doubt I really knew much about the transhumanism movement back then, but I have always been fascinated with robots and the idea of melding robots into humans or vice versa. This seemed right up my alley, as even back then, I was basically covering crypto full-time, so I started reaching out but communication eventually dropped off and it was all but forgotten.

Until this January, when Bryan Bishop, the Bitcoin Core developer that’s known for his tremendously fast typing and in turn his transcriptions of conferences, mentioned BDYHAX to me. “There’s a lot of transhumanists in the bitcoin community,” he said.

But the conference’s agenda had already piqued my interest – “Implantable Tech Area.”

I’m there.

Freedom of…

Bishop’s right – at least anecdotally, that there’s an overlap between the body hackers and the bitcoiners. Transhumanism does, in fact, link them. Bitcoin pioneer Hal Finney seems to have been one, since he cryogenically froze his body, hoping that sometime in the future he might be able to be resuscitated.

It probably doesn’t come as much of a surprise that folks that believe technology can create a better future as it relates to money, payments, shit just about everything, would think that technology can also make humans themselves better.

Take Bishop’s recently revealed designer baby venture.

Funded with his bitcoin savings, Bishop’s project, recently written about in MIT Technology Review, looks to allow parents to genetically engineer their babies to have features like muscles without ever picking up a dumbbell or enhanced memory.

If that sentence sounds weird – almost like adding apps to your smartphone – it’s because it kinda is. There’s mounting criticism and concern over the practice, especially after a Chinese biophysicist named He Jiankui claimed he’d made the first genetically edited babies.

If you give your imagination even a tiny bit of wiggle room, you can see why.

Do parents have the right to choose how their children look and act? This can’t be a cheap procedure; will everyone be able to edit their children to be smarter or will it only be the rich that benefit? Will we lose some humanity if everyone edit’s themselves for the flavor of the week?

Yet for all those dystopian futures (that I very much see and worry about), ultimately some of this could no doubt be beneficial and save hundreds of thousands, maybe even millions of lives.

For instance, one of Bishop’s first examples – something we talked about in the Fall last year – was making humans resistant to HIV.

Future humans will think we’re barbaric if we resist this kind of medical achievement.

While I’m not so interested, and even slightly disturbed, by genetic beauty enhancements such as muscles or blue eyes, I worry these concerns could push this type of biohacking into the shadows.

And that’s a shame.

Bodies and money

We’ve seen a similar thing happen in the cryptocurrency space.

There are hacks, scams, fucking idiots and all sorts of bad things lurking in the blockchain scene, and typically that’s made many turn up their noses to the whole industry. They lump it all together and mark it “useless,” “nefarious,” “shit.”

And I get it. I look around the crypto industry, after being here for six years, and see rot. I see individuals who only want to make quick money at the expense of others; I see companies touting their disrupting finance but actually enstating the same, arbitrary, discriminatory rules as legacy banks.

Where the fuck did the ethos go?

I’ll tell you. It might be hard to see through all the “sky is falling” – or during a hype cycle all the glitz of free money – but it’s in Venezuela, helping people literally starving because of their corrupt government, hold onto some value. It’s in the lightning torch, hopping all around the world, showing people the power of a stateless digital currency.

And because those instances exist, I’ll take some of the bullshit.

Because that’s what I’m here for – an alternative to the systems that were created without my input and sometimes do not work for – to be more clear, work against – me and other individuals.

“We’re all already attuned to this, we want freedom, we don’t want to be told what we can and can’t do with our bodies, what we can or can’t put into our bodies, and people don’t want to be told what they can and can’t do with their money,” Chad Creighton, a vice president at blockchain development consultancy BlockSaw, who was at BDYHAX, said.

While our bodies and our money could seem like apples and oranges, they’re really not. Because what we can do with our bodies is directly determined by what we can do with our money.

Case in point, for some in the biohacking space, healthcare is too costly and big pharma, insurance providers, even doctors are working against the people, the individuals who need care. For cryptocurrency aficionados, the great monolithic entity to disrupt is the Federal Reserve, state monetary policy, the banks.

There’s an overlapping “distrust of formal institutions,” Bishop told me. “They have gotten so large and bureaucratic, it’s sometimes more practical to go your own way and see what you can get done. Even more specifically, some people see certain regulations directly interfering with people’s right to live.”

He gives the example of a DIY biohacker figuring out a way to make insulin cheaper and then offering that to diabetics, which would be technically illegal.

As with all these anarchist attempts, Don Andres Ochoa, a biotechnologist and data scientist speaking at the event, gave the best rallying cry:

“Fuck it, let’s fix the problem ourselves.”

Scared of needles?

These two fields of research “are not directly useful to each other, but there’s a common source of inspiration,” Bishop said.

And they do mix together at a certain point. For instance, because of the controversy surrounding designer babies today, Bishop is cognizant that cryptography-backed privacy tech will likely play some role – if nothing else, at least as it relates to anonymous payments for the service.

Still, all this stuff seems outrageous to the majority of people.

“Right now, the idea or concept of body hacking is literally bleeding edge (ha),” said Amal Graafstra, the founder and CEO of VivoKey, the maker of the implant I got.

With implants, as with cryptocurrency, “the overlap is directly related to people’s sense of adventure,” he continued.

Case in point, Jerrah Cameron, a Denver-based programmer, who stumbled upon the body hacking scene only about a month ago and already has three implants – two small chips and this larger NFC chip, for which he had a gnarly one-inch slice on the side of his right hand.

For the novelty these devices provide so far – I currently have my chip programmed to take an NFC-enabled phone to my “receive bitcoin” QR code, making it fast and easy for someone to send me a tip – most people won’t want to get poked, he said.

That’s why he’s working on an application that would allow the chips to be used as payment mechanisms, housing first the tokens needed for apps like Apple Pay, Google Pay or Venmo, and then in the future even cryptocurrencies.

And VivoKey is also working on something similar.

In a week or so, Graafstra and his team plan on releasing an API that can allow developers to program one of their chips (yes, the one I have! squee) to act as an authenticator key. With this, users should be able to request that their chip be tapped to verify any send or transfer of crypto within a wallet.

“The idea was to develop a completely autonomous secure element under the skin,” Graafstra told CoinDesk.

And the company also offers a chip (not the one I have) that can actually complete key generation and the signing of a transaction all within the chip. That’s currently in private beta and requires quite a lot of programming to make it all work, so it’s not ready for mainstream use yet.

So for now, my hand isn’t worth any more than it was when I was just a boring old human (although it has facilitated $2 worth of bitcoin).

Implant procedure images via Bailey Reutzel for CoinDesk