Blockchain Bites: Ethereum 2.0 Deposit Contract Fully Loaded, IRS Sends Befuddling Letters – Again

More than 500,000 ETH have been locked and loaded into Ethereum 2.0’s deposit contract, kick-starting the network’s major, multi-year development phase. JPMorgan analysts say institutions are piling into bitcoin. And the IRS has again sent out (possibly erroneous) letters to crypto traders indicating they owe taxes on unrealized gains. 

Top shelf

Taxman knocketh
The Internal Revenue Service (IRS) is again sending mixed messages related to crypto trading and tax reporting obligations. Allegedly, “dozens of individuals” have received CP2000 letters detailing how much the IRS believes traders owe – based on gains from unreported crypto holdings in 2018, according to CryptoTrader.tax. However, as in years prior, it’s possible these traders never realized these gains and don’t owe anything. The issue may stem from how crypto exchanges report transactions to the IRS, using form 1099-K, which shows all transactions as generating revenue. Exchanges could prevent this issue by sending 1099-B reports to the IRS, which accurately mark gains and losses, TaxBit co-founder Austin Woodward told CoinDesk last time around, in March.

Institutional analysis
JPMorgan analysts say institutions are piling into bitcoin at a stronger pace this quarter than they were in Q3, according to the banking giant’s “Flows & Liquidity” report. Published Friday, the analyst report compares institutional to retail buying. For instance, Q3, retail customers bought $1.6 billion worth of bitcoin using Square’s Cash App, nearly three times more than what was invested in Grayscale’s bitcoin product. Though in Q4, the Grayscale Bitcoin Trust is at three times its Q3 numbers. To be sure, Square has yet to post numbers related to customers’ Q4 bitcoin buys. (Grayscale, like CoinDesk, is wholly owned by Digital Currency Group.)

Gold bug to BTC ‘cockroach’
Pendal Group, an Australian Securities Exchange-listed investment manager with over A$100 billion (US$73.6 billion) in assets under management, is getting into bitcoin. Vimal Gor, Pendal’s head of bond, income and defensive strategies, said Monday the company is now investing in bitcoin futures on the Chicago Mercantile Exchange. As quoted by the Australian Financial Review, Gor thinks not only is bitcoin “entering the realm of mainstream,” as shown by the entrance of major hedge fund managers, but that “bitcoin is a cockroach that exists. They can’t ban it out of existence.” Pendal also reportedly aims to position BTC for their clients, as it previously has done with gold.

Crypto… currency?
In case you missed it, PayPal’s CEO Dan Schulman is bullish on bitcoin as an actual currency. Luckily for him, PayPal will soon allow its network of merchants to accept bitcoin payments. Appearing on CNBC’s Squawk Box on Monday, Schulman said bitcoin’s usefulness as a currency will co-exist with its buy-and-hold status. The CEO also said a central bank digital currency is a global inevitability, though that could bolster bitcoin’s utility. “I think that there’ll be more and more use cases for cryptocurrencies” that make bitcoin more widely accepted, more stable and probably “more valuable” over time.

E-money license
Crypto.com is trying to bulk up its Maltese financial licenses in search of a competitive edge across Europe. The Hong Kong-based crypto firm received preliminary approval from the Malta Financial Services Authority (MFSA) for two financial licenses that govern how payment companies operate and what services they can provide. Crypto.com could soon start offering payment services and issue e-money as a licensed financial institution with MFSA oversight. It could additionally execute, custody and deal in-house with customers’ crypto assets as one of the first-ever holders of a Class 3 Virtual Financial Assets license from Malta.

Quick bites

• BRING BACK BITCOIN SIGN GUY: President-elect Joe Biden tapped former Federal Reserve Chair Janet Yellen as the next U.S. Treasury Department head, with oversight of FinCEN, IRS and the Office of the Comptroller of the Currency (OCC).
• CRYPTO IPO: Australia-based West Coast Aquaculture (WCA) has completed an A$5 million (US$3.65 million) initial public offering, becoming the first firm in the nation to use cryptocurrency for its capital raise.
• ACJR SPEAKS: A professional association for crypto journalists has weighed in on the lawsuit brought by Binance against Forbes, affirming that the standard for defamation is “actual malice.”
• NOT DEMURE: WTF Happened in 2020? | Meltem Demirors (Bankless – YouTube video)
• BIG IDEA: Cypherpunk, Crypto Anarchy and How Bitcoin Lost the Narrative – Brady Dale’s crypto-philosophical essay makes for an engaging Thanksgiving read. 

Market intel

Powder keg
Bitcoin hurdled past $19,000 on Tuesday, with momentum to potentially reach its all-time high of $19,783 set on Dec. 17, 2017. Bitcoin broke the $17,000 level and then $18,000 level within the same week, and has rallied $7,000 in one month. The market capitalization of bitcoin also hit its all time high this week to about $329 billion, according to data provided by crypto analytic firm CryptoQuant. With increased institutional investors entering the bitcoin market, the ease of retail buying from PayPal and Square (among other providers) as well as miners not liquidating their positions, “it appears likely that price will continue to rise,” according to a newsletter by CryptoQuant on Nov. 13.

Airdrops and inflows
XRP continues to rally, hitting a watermark of $0.79 early Tuesday, the highest since 2018. The world’s third-largest cryptocurrency by market value is up 130% from lows near $0.30 seen on Saturday. Analysts say a recent airdrop of 45 billion “spark” tokens to XRP holders related to a forthcoming smart contract platform developed by Ripple’s investment arm could be driving the price. Still, as XRP surges, selling pressure mounts: as evidenced by nearly $1 billion in XRP flowing into exchanges, possibly for liquidation.

At stake

Deposit set
Yesterday morning (in the U.S. at least), Ethereum pundit Anthony Sassano tweeted that 307,392 ETH ($181 million) had been allocated to a smart contract that would kick off the first phase of Ethereum 2.0, in what’s shaping up to be the largest blockchain overhaul to date.

That was nearly 220,000 ETH shy of the total amount needed to get things rolling on schedule. Exactly 524,288 ETH (worth over $325 million) needed to be locked up in the so-called deposit contract to begin the next phase of development by Dec. 1.

Yesterday evening, that amount was matched, a significant feat of community commitment. Now begins the hard part.

Ethereum will undergo a transition in consensus model, from the proof-of-work system implemented in Bitcoin to the proof-of-stake mechanism thought to improve blockchain scalability. Eth 2.0 will also see the implementation of sharding, another cryptographic technique meant to improve transaction throughput.

While the launch of the actual Eth 2.0 network is a ways off, on Dec. 1 a parallel proof-of-stake blockchain dubbed “the Beacon chain” will go live. In this initial phase of development, the PoW Ethereum and Beacon chain will exist side-by-side.

Those that pledged funds to the deposit contract will be validators on this experimental network, and earn rewards for processing transactions and creating new blocks. CoinDesk is just one of many network validators.

One potential reason funding for the deposit contract came down to the wire is the staked ether is irretrievable in the short term, at least until Ethereum 2.0 development progresses to a significant degree.

Viktor Bunin, a protocol specialist at blockchain infrastructure service provider Bison Trails, said that while some users may be put off by the one-way nature of staking ETH in the contract, “by and large the community is extremely excited to launch Eth 2.0.”

The Beacon chain activation is the first of four phases of the Ethereum 2.0 migration, which begins with the onboarding of validators and eventually leads to the full transition of all users and dapps to the new network.

“There’s not a chance that Eth 2.0 doesn’t launch,” Bunin told CoinDesk. “Eth 2.0 is a vision. It is a drive to improve Ethereum to scale support for the entire planet. Even if this launch is not successful for some reason, you can be sure that the community will learn from it and try, and try, again.”

Food for thought