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Every DOGE has its day
Simon Erickson, 7Investing
“There is so much volatility in the price and the market cap of Dogecoin. Is this just a hustle, or is there actual value to this as a cryptocurrency?”
Spencer Randal, CryptoEQ
“I think there’s a lot of comparisons to be drawn to GameStop and the exuberance in the market around GameStop. So, know what it is, would be my point of feedback for the audience. If you’re a long-term investor and you buy and hold things for years and years, I don’t think that Dogecoin is fundamentally a valuable crypto asset. Now if you’re a short-term trader and you like things that have volatile price action, even beyond the volatility that you see in Bitcoin, then Dogecoin might be an effective short-term trade.”
Dogecoin is an open-source, publicly accessible cryptocurrency. On the website https://dogecoin.com/, the source code is readily available to be accessed and contributed to, which allows developers to access it with ease.
Dogecoin was abandoned by its creators in 2015 and was left in the hands of only a handful of community developers. Unsurprisingly, little has been done with the code since the creators walked away. The last consistent contribution to the code base was in 2017 which is when the last bull market for cryptocurrency occurred. After that, there was a development posted on Nov. 8, 2019, and some recent activity brought about by the Elon Musk headlines.
Development activity on DOGE essentially ceased in 2017. Image credit: Github
Speaking of Elon, it should be clear by the chart below that DOGE’s price is highly erratic, arguably manipulated, and undeniably irrational based on headlines. There have been 4 instances (vertical rice rises) since mid-2020 in which headlines have clearly resulted in the pump and gradual dump of DOGE. Most of these revolve around Elon Musk. It should be obvious to all that any crypto, stock, or investment that can be manipulated to this extent by one person’s tweets should be approached with caution and not considered a sound, fundamentally driven long-term investment.
DOGE mining is “merged” with Litecoin mining, meaning any miner mining LTC can mine DOGE at the same time. Even though it is merged with LTC mining, DOGE security is still orders of magnitude less than BTC and ETH.
DogeCoin’s current hash rate is ~500.81 TH/s, which is a TeraHash per second. This hash rate is a numerical value that estimates how many hashes are generated by miners trying to solve the Dogecoin puzzle on the blockchain. For comparison, Bitcoin’s hash rate is ~145 ExaHash per second or nearly a million times more. DogeCoin has the same security algorithm as Litecoin which is Scrypt.
Along with DogeCoin lacking consistency in contributions to the code base, there is also uncertainty when it comes to where most of the hashing occurs. This lack of information can, unfortunately, take away from the transparency of decentralization within the DogeCoin cryptocurrency.
Image credit: CoinWarz
DogeCoin was hacked on May 11th, 2014. Online wallet service, Doge Vault, allowed for the storing and buying of DogeCoin with individual addresses with a supposedly securely tied encryption to it. In 2014, the Doge Vault service became compromised by attackers, and by the time the administrators noticed, the hackers had escaped with 280 million DogeCoins and destroyed any trace of infiltration. Doge Vault issued a statement saying: “It is believed the attacker gained access to the node on which Doge Vault’s virtual machines were stored, providing them with full access to our systems. It is likely our database was also exposed containing user account information; passwords were stored using a strong one-way hashing algorithm. All private keys for addresses are presumed compromised; please do not transfer any fund to Doge Vault addresses.” The 280 million DogeCoins were valued at $55,000 USD in 2014 but today it would be around $109 million USD. The Doge Vault wallet service was forced to shut down and go out of business due to this massive heist.
Crypto Regulation
Simon Erickson, 7Investing
Are their classifications for cryptocurrencies right now as securities or as any other asset that would be under that same umbrella of regulations? Do you foresee any regulations in this aspect of cryptocurrencies, particularly as they apply to buying and selling by retail investors?
Michael Thoma, CryptoEQ
“The most apt comparison is obviously to a security. And a lot of times people will try to run these cryptocurrencies through the Howey Test, which is how you know the 1933 Act that determines whether an asset is a security and there’s a four-point test essentially. And basically, the test is: Are you putting up money looking for a return on investment from the efforts of a third party? And a lot of these things certainly do look like securities, a lot of them I think will be deemed securities. The only real concrete comments we’ve had are from the SEC or the CFTC. They said that they do not believe Bitcoin, as it exists today, demonstrates the attributes of a security. They’ve also made comments to that effect with Ethereum as well. Those are the only two that have really gone on record. Anything (any crypto project) beyond that is very dicey, and especially some of these ICOs.
Current statements made regarding the regulation of bitcoin can be a bit confusing as different government bodies view bitcoin differently. For instance, the U.S. Internal Revenue Service (IRS) classifies bitcoin as property for tax purposes, while the U.S. Commodity Futures Trading Commission (CFTC) categorizes it as a commodity.
Regardless, one thing that is known for certain is that in April of 2018, SEC chair John Clayton made the statement, “A pure medium of exchange, the one that's most often cited, is Bitcoin. As a replacement for currency, that has been determined by most people to not be a security.”
While the situation is far from settled and the legal status of cryptocurrencies widely varies around the globe, US government agencies have taken a cautious “wait and see” approach towards the new, unconventional digital currency sector. Because cryptocurrencies largely operate outside the conventional financial system and securities laws, regulators are trying to find a balance between obstructing a world-changing technology and ensuring the technology is not used for illegal activities. In 2015, the CFTC outlined its stance regarding BTC as a commodity and that it would be regulated as such. The general consensus of today is that bitcoin does not fit the definition of a security and is viewed more as property in its current state.
However, in May of 2021, the OCC, the Federal Reserve, and the FDIC began preliminary talks about creating an “interagency sprint team” for crypto regulation. The government agencies intend to make a “joint effort” to create a unified framework across the board and set of clear regulatory definitions for cryptocurrency.
As for Ethereum, the SEC has already commented on Ethereum (twice) – in conjunction with Bitcoin – saying that it is not a security. In addition to those preliminary comments, the CFTC Chairman publicly stated in October 2019 that ether is viewed as a commodity by the U.S. regulatory body. Ethereum will likely still be subject to any blanket regulation imposed on cryptocurrencies but regulatory restrictions that target Ethereum specifically are unlikely. As such, Ethereum will not be subject to as much intense regulatory scrutiny as the many ICOs that were launched on its platform. A recent landmark case by the SEC sets a precedent for them to evaluate ICOs as securities retroactively, but this does not affect Ethereum itself, even though it had an initial token sale in 2015.
As for precedent, and in order to estimate the likelihood any particular crypto asset will be classified as a security the most common legal test is known as the Howey Test, the four-component questions of which are listed below:
- Is there an investment of money?
- Is there an expectation of future profits?
- Is the investment of money in a common enterprise?
- Do any profits come from the efforts of a promoter or third party?
When examined through the lens of the Howey Test, it does not appear that one could make a case that BTC should be classified as a security. While there is an investment of money, and most investors do expect future profits (although not in the form of dividends, for example), the definitional question of what constitutes a “common enterprise” is a difficult one rife with ambiguity. Most importantly, however, is the answer to the final question; it would be difficult to argue that the profits that would result from an investment in BTC are the product of the efforts of a singular party.
Binance investigation
Michael Thoma, CryptoEQ
“Just this week news broke that the US is investigating Binance, the company, for a host of things. One of the things we saw for sure was money laundering, but there’s a lot of peculiar activity that goes on behind closed doors with the BINANCE team. And again, some of the regulatory arbitrage definitely caught the eye of the US and so this will be another high-profile case just like you know the Ripple case I think we’ve talked about it before that’s still ongoing.”
Binance is currently under investigation by the U.S. Internal Revenue Service as well as the Department of Justice for money laundering as well as dealing with inquiries from the Commodity Futures Trading Commission (CFTC) over whether Binance allowed U.S. residents to trade on its exchange. It is important to note that of Q2 2021, "[t]he federal agencies haven’t accused Binance of wrongdoing." However, over the course of 2021, Binance hired a slew of high-profile individuals to join its regulatory advisory team including former U.S. senator Max Baucus as a regulatory advisor and two former members of the Financial Action Task Force (FAFT) to its advisory team.
Another key risk variable when discussing BNB is regulatory risk from governments. Binance, in its short ~5 year history, has moved headquarters from China to Japan to Malta in an attempt to avoid regulation. Most recently, Binance has taken the stance that there is not a Binance headquarters after news broke that Malta denied their application under its jurisdiction. There are also reports that Binance is legally headquartered in the Cayman Islands and Seychelles. This represents an inordinate amount of regulatory risk as businesses must fall under some jurisdiction. It is unprecedented for a legitimate business to not submit to some regulation scheme. This ambiguity, lack of transparency, and game of regulatory “musical chairs” should be worrisome to BNB token holders — the music always ends eventually. Decentralized cryptocurrencies like Bitcoin and Ethereum do not suffer from the same problem. In addition, the BNB token could be susceptible to US security laws.
The BNB token launched in an initial coin offering, which the United States Securities and Exchange Commission has viewed unfavorably and has yet to rule broadly. Some ICOs have been retroactively penalized for violating US securities law.
BNB can be deemed a security if it satisfies certain properties based on the common definition and interpretation of the Howey Test (discussed above). Is the investment of money in a common enterprise?
Many digital assets lack clear utility and thus have no purpose other than for retail investors to speculate on price (e.i. invest). BNB, however, has clear utility on the platform if for nothing else than to receive discounted trading fees. This appears to be BNB’s best argument for not being classified as a security as Binance US CEO Catherine Coley reaffirmed recently on a podcast.
The biggest argument for BNB being classified a security according to the Howey Test is its dependency and centralization around the “common enterprise” and “third party” company, Binance. Other tokens created by large centralized companies have recently run into opposition from the US regulators, such as Telegram abandoning its project entirely after a multi-year battle with the SEC.
