Copyright 2018 Aaron Li ([email protected]) Copyright 2018 Aaron Li ([email protected]) Cryptos: Value and Risks lessons from the rise and fall of Bitcoin, frauds, ICO bans, subpoenas, and regulations Founder & CEO @ Qokka - Value of Bitcoin and crypto - The dark side of crypto - Regulatory actions & trends Feb 18, 2017 https://linkedin.com/in/aaronqli/ https://t.me/ai_qokka https://facebook.com/ai.qokka http://qokka.ai/about Aaron Li [email protected] Topics: 

Copyright 2018 Aaron Li ([email protected]) Copyright 2018 Aaron Li ([email protected]) Announcement Coming soon: Crypto Information Platform Find out more at http://qokka.ai/crypto https://t.me/ai_qokka Summarizing news, discussions, technical papers, teams … 

Copyright 2018 Aaron Li ([email protected]) Copyright 2018 Aaron Li ([email protected]) Value of Bitcoin and crypto ORDER & UTILITY Mechanisms and common understandings Systems built around crypto that are used by lots of people Complex problems easily solvable by cryptos / blockchain a non-quantitative value analysis 

Copyright 2018 Aaron Li ([email protected]) Copyright 2018 Aaron Li ([email protected]) mechanisms consensus protocols proof-of-X (proof-of-work, stake, …) …. on-chain operations Bitcoin: scripts, opcodes, … Ethereum: EVM instructions, … … Value of Bitcoin and crypto common understandings “It’s okay (not crazy) to do payment in Bitcoin instead of cheque/credit card” “transactions on blockchain can’t be modified once they are confirmed” “nobody can cheat by spending coins twice” … … Mechanisms and common understandings 

Copyright 2018 Aaron Li ([email protected]) Copyright 2018 Aaron Li ([email protected]) Complex problems easily solvable by cryptos / blockchain A received different amount investment from 100 people A wants to prove the investments to 1000 people Example: Prove 100 investments to 1000 people These 1000 people want to validate the 100 investments, and verify A’s proof, because they are seriously considering to invest in A, Value of Bitcoin and crypto Cost of these without blockchain v.s. with crypto / blockchain ? 

Copyright 2018 Aaron Li ([email protected]) Copyright 2018 Aaron Li ([email protected]) Complex problems easily solvable by cryptos / blockchain Value of Bitcoin and crypto Example: Prove 100 investments to 1000 people Without blockchain: 1000 people can verify with 100 existing investors each (very high $$ and time cost) A could prove to a central authority instead (like SEC) and ask people to trust the central authority (moderately high $$ and time cost) (trust issue: many people don’t even trust SEC) With blockchain: 1000 people can just go to sites like https://etherscan.io/ and check transaction history / identities 

Copyright 2018 Aaron Li ([email protected]) Copyright 2018 Aaron Li ([email protected]) Complex problems easily solvable by cryptos / blockchain Value of Bitcoin and crypto Without blockchain With blockchain $$ Cost Very high Almost Zero Time Cost Very High Almost Instant 

Copyright 2018 Aaron Li ([email protected]) Copyright 2018 Aaron Li ([email protected]) Systems built around crypto that are used by lots of people Value of Bitcoin and crypto Social news / blogs Crypto Systems Utility Usage >750,000 users Settlement / Remittance >90 banks, >500k wallets …… Many other systems are in product development & scaling up 

Copyright 2018 Aaron Li ([email protected]) Copyright 2018 Aaron Li ([email protected]) The dark side of crypto Print “Paper Money” and influence market price Pump and dump (will be discussed in the future) Securities sale & scams disguised as ICO (drives up the market price… then dump and profit!) (several decades old Ponzi schemes in stock markets resurface as “ICO”) “46% of 900+ ICOs in 2017 already failed” - news.bitcoin.com 

Copyright 2018 Aaron Li ([email protected]) Copyright 2018 Aaron Li ([email protected]) The dark side of crypto Print “Paper Money” and influence market price Tether (USDT) Each USDT issued = $1 frozen in the issuer’s bank Issuer claims USDT is backed by USD: 1 USDT ~= 1 USD Used as sort of a replacement of USD, for people to buy Bitcoin & other cryptos Easy to access & exchange, especially for people who can’t get USD (when subpoenaed by US gov… Bitcoin price fell by 20%) 

Copyright 2018 Aaron Li ([email protected]) Copyright 2018 Aaron Li ([email protected]) The dark side of crypto Print “Paper Money” and influence market price Tether (USDT) Each USDT issued = $1 frozen in the issuer’s bank Issuer claims USDT is backed by USD: 1 USDT ~= 1 USD Circulating supply = ~2 billions USDT 24h trading volume = ~1-2x circulating supply Is there really $2B frozen in the bank? Nobody knows => each USDT changed hand 1-2 times every day, huge impact to crypto ecosystem (when subpoenaed by US gov… Bitcoin price fell by 20%) 

Copyright 2018 Aaron Li ([email protected]) Copyright 2018 Aaron Li ([email protected]) The dark side of crypto Print “Paper Money” and influence market price 

Copyright 2018 Aaron Li ([email protected]) Copyright 2018 Aaron Li ([email protected]) The dark side of crypto BitFinex One of the largest crypto exchange Tether Team Print “Paper Money” and influence market price 

Copyright 2018 Aaron Li ([email protected]) Copyright 2018 Aaron Li ([email protected]) Both Tether and BitFinex received subpoenas from US Regulators (by CFTC, on Jan 30, 2018) The dark side of crypto Print “Paper Money”? This does not mean BitFinex / Tether are frauds, but people should be cautious. They need to prove to US Regulators that they are not frauds. Bitcoin price fell >20% over the next 3 days 

Copyright 2018 Aaron Li ([email protected]) Copyright 2018 Aaron Li ([email protected]) The dark side of crypto What about other cryptos? Many cryptos are controlled by one organization It takes a long time for a crypto to go through the process of centralized control -> decentralised control Example: Ripple, owns majority of XRP since 2012, therefore controls supply committed majority of XRP to escrow account in mid 2017 Print “Paper Money” and influence market price 

Copyright 2018 Aaron Li ([email protected]) Copyright 2018 Aaron Li ([email protected]) The dark side of crypto Securities sale & scams disguised as ICO Scams: discussed in previous talks (https://youtu.be/Sj5kAKf4_YQ) Securities: briefly mentioned in another talk (https://youtu.be/suGaoGH1UD0) If a crypto is classified as a security, a public token sale will be in violation of the law, unless buyers are all verified to be accredited investors 

Copyright 2018 Aaron Li ([email protected]) Copyright 2018 Aaron Li ([email protected]) The dark side of crypto Securities sale & scams disguised as ICO Accredited investors - taxable income >= $200k for last 2 years (or >=$300k if married) - net asset >= $1M Full definition can be found online or on SEC’s website and Wikipedia 

Copyright 2018 Aaron Li ([email protected]) Copyright 2018 Aaron Li ([email protected]) The dark side of crypto Securities sale & scams disguised as ICO Quick way to determine if a crypto token might be classified as security - there is investment of money to acquire the token - there is an expectation of profit from the investment - all investment goes to a common enterprise (i.e. single organization) - the profit comes from efforts from others (third-party, or promoters) 

Copyright 2018 Aaron Li ([email protected]) Copyright 2018 Aaron Li ([email protected]) The dark side of crypto Securities sale & scams disguised as ICO Quick way to determine if a crypto token might be classified as security investment of money expectation of profit common enterprise efforts from others What’s not a security? Utility tokens: cryptos that are already functional i.e. buying them is like buying goods & services 

Copyright 2018 Aaron Li ([email protected]) Copyright 2018 Aaron Li ([email protected]) Regulatory actions & trends China banned ICOs (Sep 2017), exchanges, and crypto minings (Jan 2018) South Korea banned ICOs (Sep 2017) and possibly crypto exchanges (Jan 2018) India possibly bans cryptocurrencies (Dec 2017) …. USA: sophisticated regulations to protect the public and encourage innovation EU: allowed ICO conditioned on KYC + AML; issued warnings & alerts Also see https://www.bitcoinmarketjournal.com/ico-regulations/ 

Copyright 2018 Aaron Li ([email protected]) Copyright 2018 Aaron Li ([email protected]) Regulatory actions & trends SEC & CFTC heads testified about cryptos before senate - Feb 6, 2018 (video & PDFs) Learned crypto from Wall st. lawyers Learned crypto from his children 

Copyright 2018 Aaron Li ([email protected]) Copyright 2018 Aaron Li ([email protected]) Regulatory actions & trends SEC & CFTC heads testified about cryptos before senate - Feb 6, 2018 Difference in stances & opinions among regulators - SEC: more restrictive: “any ICO must comply with security law" - CFTC: more progressive: “do no harm” (unless against frauds) - … No single regulatory agency has complete jurisdiction - SEC: only jurisdiction over securities (e.g. ICOs classified as securities) - CFTC: only jurisdiction over commodity derivatives (e.g. Bitcoin future) - …. Using or trading cryptos are unregulated, though still subject to taxation (IRS) 

Copyright 2018 Aaron Li ([email protected]) Copyright 2018 Aaron Li ([email protected]) Regulatory actions & trends SEC & CFTC heads testified about cryptos before senate - Feb 6, 2018 CFTC Chairman Christopher Giancarlo: “I’d like to begin with a slightly different perspective, and that is, as a dad, as a father of three college aged children” “We have never been able to interest them with stock market…. well, something changed in the last year, suddenly they are all talking about Bitcoin.” “It strikes me that we owe it to this generation, to respect their enthusiasm about virtual currencies, with a thoughtful and balanced response, not a dismissive one. ” “Yet we must crack down hard, on those who try to abuse their enthusiasm, with fraud and manipulation” 

Copyright 2018 Aaron Li ([email protected]) Copyright 2018 Aaron Li ([email protected]) Regulatory actions & trends SEC & CFTC heads testified about cryptos before senate - Feb 6, 2018 SEC Chairman Jay Clayton: “Many ICOs are being conducted illegally. Their promoters and other participants are not following our security laws. Some say it is because the law is unclear. I do not buy that for a moment” “The analysis is simple: are you offering a security? If so, you have a choice: follow our private placement rules, or conduct a public offering registered with SEC” “To the extent that digital assets like ICOs are securities, and I believe every ICO I have seen is a security, we have jurisdiction and our federal security laws apply” 

Copyright 2018 Aaron Li ([email protected]) Copyright 2018 Aaron Li ([email protected]) Regulatory actions & trends SEC & CFTC heads testified about cryptos before senate - Feb 6, 2018 SEC 4 civil actions (enforcements) over the last few months against frauds and illegal ICOs CFTC First enforcement action on Sep 2017 (Blueprint, Inc) 3 enforcement actions in Jan 2017 - My Big Coin Pay Inc - The Entrepreneurs Headquarters Limited - CabbageTech, Corp. 

Copyright 2017 Aaron Li ([email protected]) Copyright 2017 Aaron Li ([email protected]) Contact https://linkedin.com/in/aaronqli/ https://t.me/ai_qokka https://facebook.com/ai.qokka http://qokka.ai/about Aaron Li [email protected] Founder & CEO @ Qokka