The New York State Department of Financial Services (NYDFS) has revised its guidelines on the listing and delisting of cryptocurrencies. This move aims to bolster investor protection and ensure that virtual currency businesses adhere to heightened regulatory standards.
Since 2015, the NYDFS has been a pivotal regulator in the virtual currency sphere, introducing specific regulations like BitLicenses and trust company charters. The department’s initial guidance on the adoption or listing of virtual currencies was released in 2020.
Replacing its 2020 guidance, the NYDFS’s new directive, effective immediately, introduces more stringent requirements after considering inputs from various stakeholders. The guidelines emphasize heightened consumer protection measures and clearer risk assessment procedures to reduce ambiguities in regulatory processes. Also included are exceptions for advance notifications in specific scenarios of coin delistings and updated definitions for clarity.
Entities involved in virtual currency activities are now required to obtain DFS approval for their coin-listing policies, maintain detailed records, and communicate with DFS regarding self-certified coins. Furthermore, a crucial aspect of the new regulations is the development of a comprehensive coin-delisting policy. Entities must formulate these policies and submit them for review, complying with the revised guidelines by January 31, 2024, while presenting their draft policies by December 8, 2023.
These guidelines are set to influence a range of licensed digital currency businesses in New York. The NYDFS aims to maintain its leadership in regulating the evolving virtual currency market.
The NYDFS’s initiative is part of its broader efforts to protect investors in the cryptocurrency market. Entities like Circle, Gemini, Fidelity, Robinhood, and PayPal must comply with these new regulations, reflecting New York’s commitment to monitoring the cryptocurrency industry closely.
On October 2, 2023, Visa Inc., a global leader in payment solutions, announced a $100 million fund dedicated to generative artificial intelligence (AI). The fund is designed to invest in startups and established businesses that are at the forefront of developing generative AI technologies and applications, particularly those that have potential applications in commerce and payments.
Visa Ventures, the corporate investment division of Visa, will be responsible for overseeing the fund’s investment activities. Established in 2007, Visa Ventures has a history of backing innovative projects in the payment and commerce sectors. David Rolf, Head of Visa Ventures, expressed enthusiasm about the initiative, stating, “Generative AI has the potential to be one of the most transformative technologies of our time. We are excited to expand our focus to invest in some of the most innovative and disruptive venture-backed startups in the fields of generative AI, commerce, and payments.”
The Capabilities of Generative AI
Generative AI is a type of artificial intelligence that can produce a wide array of content, from text and images to audio and synthetic data. The technology has already shown its capabilities through major AI chatbots like OpenAI’s ChatGPT and Google’s Bard, which can generate text that closely resembles human writing. This opens up new avenues for how AI can be utilized in various sectors, including commerce and payments.
Visa’s Long-standing Commitment to AI
Visa has been a pioneer in the adoption of artificial intelligence technologies. As early as 1993, the company implemented AI-based systems for risk and fraud management. In 2022, Visa Advanced Authorization, the company’s real-time fraud monitoring system, was credited with preventing approximately $27 billion in fraudulent activities. Last year, Visa also launched VisaNet +AI, a suite of AI-based services aimed at helping financial institutions tackle challenges related to daily settlement operations.
Beyond its investments in AI, Visa has also been exploring other technological frontiers. The company has shown a positive stance on the incorporation of blockchain technology, particularly Bitcoin, into payment systems. Jack Forestell, Chief Product and Strategy Officer at Visa, believes that generative AI holds significant promise in reshaping the financial landscape.
The $100 million fund is a significant step in Visa’s broader strategy to stay ahead in the rapidly evolving technological landscape. It not only reinforces the company’s leadership in AI but also signals its intent to be at the forefront of future innovations that could redefine commerce and payments.
In the aftermath of a string of high-profile bank collapses in the United States, regulatory agencies are acknowledging the errors they have made. Internal evaluations of how each organization dealt with Signature Bank and Silicon Valley Bank (SVB) have been made public by the New York Department of Financial Services (NYDFS) and the Federal Reserve Board of the United States, respectively. Both banks were shut down in March of this year, with the New York Department of Financial Services taking action against Signature Bank on March 12 and authorities in California closing SVB only two days earlier on March 10. The collapses occurred shortly after the news of the voluntary liquidation of crypto-friendly Silvergate Bank on March 8th, which spurred runs on the impacted institutions and ultimately led to the failures.
The collapse of these banks has sent shockwaves across the business, and as a result, Vice President Joe Biden of the United States sent out a statement to the situation through Twitter. The Federal Reserve study concluded that SVB’s management had failed to adequately manage its risks, and that the bank’s supervisors had “not fully appreciated the extent of the vulnerabilities” of the bank as it increased in size and complexity. Both of these findings were uncovered as a result of the Fed’s investigation. Regulators had not taken enough action to resolve SVB’s fundamental issues despite the fact that these issues were pervasive and well-known.
Similar problems were discovered during the investigation conducted by the NYDFS on Signature Bank. These problems include inadequacies in the bank’s risk management policies and inadequate oversight of third-party suppliers. In addition, the study included criticism directed at the board of directors of the bank for their lack of action to address these concerns.
These failures have caused regulators to reexamine their monitoring processes, and several have called for a more proactive approach to risk management as a result of their findings. Concerns have also been raised about the possibility that the failures are an indication of more widespread systemic problems within the banking sector.
Moving ahead, it is probable that regulatory agencies will continue to monitor the banking sector with an even closer eye in an attempt to reduce the likelihood of failures that are analogous to those that have occurred in the past. This may include more stringent requirements for risk management practices, increased oversight of third-party vendors, and more stringent regulatory enforcement actions taken against banks that fail to meet their obligations. At the end of the day, the expectation is that these precautions will assist in protecting the financial system and preventing new crises from arising.
Signature Bank’s Collapse Blamed on Poor Management and Inadequate Risk Management Practices
Signature Bank, a New York-based bank that catered to corporate and high-net-worth clients, collapsed on March 12, 2023. In the wake of the bank’s collapse, the United States Federal Deposit Insurance Corporation (FDIC) conducted a post-mortem assessment to determine the cause of the bank’s failure. The FDIC’s assessment revealed that poor management and inadequate risk management practices were the root causes of Signature Bank’s collapse.
According to the FDIC, Signature Bank’s senior management failed to adequately monitor and control the bank’s risk exposures, which ultimately led to the bank’s downfall. The FDIC also noted that the bank’s board of directors did not provide effective oversight of management’s actions, further contributing to the bank’s collapse.
The FDIC’s assessment of Signature Bank’s risk management practices revealed several shortcomings. For example, the bank did not have adequate controls in place to manage its credit risk exposures. Additionally, the bank’s risk management systems and processes were not integrated, making it difficult to obtain a comprehensive view of the bank’s risk exposures.
In addition to the bank’s poor risk management practices, the FDIC’s assessment also identified deficiencies in Signature Bank’s operations and internal controls. For example, the bank did not have adequate procedures in place for verifying customer identities and detecting potential money laundering activities.
The FDIC’s assessment of Signature Bank’s collapse underscores the importance of effective risk management practices in the banking industry. Banks must have robust risk management systems and processes in place to identify, measure, monitor, and control their risk exposures. Additionally, senior management and board members must be actively engaged in overseeing the bank’s risk management activities.
In response to Signature Bank’s collapse, the FDIC has taken steps to strengthen its oversight of the banking industry. The FDIC has increased its examination frequency for banks that pose a higher risk to the insurance fund. Additionally, the FDIC has enhanced its risk management guidance for banks to promote better risk management practices.
In conclusion, the collapse of Signature Bank serves as a cautionary tale for the banking industry. Banks must prioritize effective risk management practices to prevent similar failures in the future. Furthermore, regulators and industry participants must work together to promote a strong and resilient banking system that can withstand economic shocks and protect the interests of depositors and the broader economy.
In its 86-page report released on March 24, the US Federal Reserve denied Custodia Bank’s application for membership citing concerns over the bank’s involvement in the crypto industry. The Fed has raised “concerns about banks with business plans focused on a narrow sector of the economy”, with a high concentration of activities related to the crypto industry. The report states that “Those concerns are further elevated with respect to Custodia because it is an uninsured depository institution seeking to focus almost exclusively on offering products and services related to the crypto-asset sector, which presents heightened illicit finance and safety and soundness risks.”
The Fed also noted that Custodia Bank had not yet developed a sufficient risk-management framework for its proposed cryptoasset-related activities, nor had it addressed the highly correlated risks associated with its undiversified business model. The report stated that Fed’s members must align their risk management systems and controls with the activities described in their business plans.
If Custodia Bank were to be accepted as a member of the System, it would be further prohibited from running crypto-related services “given the speculative and volatile nature of the crypto-asset ecosystem” that is not consistent with the purposes of the Federal Reserve Act. The report stated that “Further, if the Board were to approve Custodia’s membership application, it would prohibit Custodia from engaging in a number of the novel and unprecedented activities it proposes to conduct—at least until such time as the activities conducted as principal are permissible for national banks.”
In response, Custodia Bank criticized the Fed’s decision as shortsighted and an inability to adapt to changing markets. The bank claimed that perhaps more attention to areas of real risk would have prevented the bank closures that Custodia was created to avoid. The bank has vowed to turn to the courts to vindicate its rights and compel the Fed to comply with the law.
The Fed’s report on Custodia Bank’s membership application is 14 times longer than its previous longest denial order, and 41% longer than the Fed’s longest order on any subject, according to the bank. In late January, the Fed denied a membership request from Custodia Bank, as well as a second application in February, claiming that its application “was inconsistent with the required factors under the law.”
In conclusion, the US Federal Reserve has denied Custodia Bank’s membership application due to concerns over the bank’s involvement in the crypto industry. The bank’s proposed cryptoasset-related activities were deemed to present heightened illicit finance and safety and soundness risks, and the bank had not developed a sufficient risk-management framework. While Custodia Bank has criticized the Fed’s decision, the bank is now prohibited from running crypto-related services if accepted as a member.
While all investing carries some risk, that doesn’t mean all risk is created equal. Learn how to optimize your portfolio weighting for the best risk-adjusted returns using modern portfolio theory and the Sharpe ratio.
Modern Portfolio Theory
To calculate the most efficient crypto portfolio, we will utilize aspects of Modern Portfolio Theory (MPT). The theory assumes that an investor is risk-averse and is looking to find the optimum ratio between theoretical gains and assumed risk. MPT does this by taking a batch of assets and calculating the best weighting for each using historical data. From this point, we can adjust weightings to increase or decrease theoretical returns against the volatility of each asset.
Riskier investments often have the potential for greater returns. Thus, modern portfolio theory seeks to create a weighted portfolio that finds the highest theoretical returns for the least amount of risk.
For example, a portfolio weighting could yield a 90% return based on historical data but have an implied risk (as measured by volatility) of 0.8. Another weighting could lead to only 70% returns but have a much lower risk, making it a better risk-adjusted investment. This ratio between expected return and risk is more commonly known as the Sharpe ratio.
The higher an asset, or group of assets, the higher its theoretical returns are per unit of risk. By experimenting with different asset weightings, we can find optimum portfolio compositions depending on how much risk an investor is willing to take. We can use a Monte-Carlo approach to generate an “efficient frontier” of portfolio compositions that maximizes risk-adjusted returns.
Each dot on the graph represents a hypothetical portfolio. Dots in black on the top edge of the plot are part of the efficient frontier. These portfolios have the best risk-adjusted returns, meaning that an investor is not taking on additional risk without the likelihood of optimum returns.
The Sharpe Ratio and Crypto Portfolios
While modern portfolio theory and the Sharpe ratio were originally designed for use in traditional financial markets, investors can also use them to optimize a crypto portfolio.
However, calculating an accurate Sharpe ratio relies heavily on historical price data. To generate a good Sharpe ratio for portfolio allocation of a given crypto asset, we need data on its performance during a full bull/bear cycle to assess its volatility and the subsequent risk of holding it.
Unfortunately, the crypto space is both nascent and fast-moving, meaning that few assets with enough historical data are eligible for consideration. This analysis will use a portfolio of Bitcoin, Ethereum, and Litecoin to demonstrate the best risk-adjusted returns as these assets have the highest market capitalization with the most historical data. Using these three assets, the approximate best allocation for maximizing risk-adjusted returns comes out at 65% Bitcoin, 35% Ethereum, and 0% Litecoin.
However, moving along the efficient frontier will display efficient portfolios with higher risk-adjusted returns. Generally, riskier portfolios on the frontier will substitute Bitcoin for Ethereum. Historical data indicates that Ethereum can generate higher returns than Bitcoin but is also more susceptible to large drawdowns, increasing its volatility and, therefore, the risk of holding it.
Now we’ve examined how modern portfolio theory and the Sharpe Ratio can help us achieve the best risk-adjusted returns, let’s look at examples of low, medium, and high-risk portfolios.
The lowest risk crypto portfolio with the highest returns follows the efficient frontier as described previously. Using current historical data, low-risk investors should allocate around 65% to Bitcoin and 35% to Ethereum to create the safest portfolio with the most upside potential. Investors wanting to increase their risk-adjusted returns can try allocating less to Bitcoin and more to Ethereum. At this point, all other crypto assets are either too risky or have similar risk profiles but worse historical returns than Bitcoin and Ethereum, such as Litecoin.
A medium-risk portfolio will still use the efficient frontier to maximize risk-adjusted returns but moves away from a high Bitcoin allocation. 10% Bitcoin, 89% Ethereum, and possibly 1% Litecoin would be one way to achieve a medium-risk portfolio. The high proportion of Ethereum will increase theoretical returns but also implied volatility. Additionally, a small allocation of Litecoin may help yield a higher return in the scenario where it experiences significant upward price divergence.
This is where things get interesting. As mentioned previously, when calculating lower-risk portfolios, we only want to use assets that have price data going back several years. However, there is still some merit to looking at the Sharpe ratios for newer crypto assets, as long as we understand that doing so exposes an investor to a lot more risk.
For a higher-risk portfolio, an investor can substitute an increasing amount of Ethereum for other crypto assets. To help identify candidates for a high-risk allocation, we can look at the one-year Sharpe ratios of other crypto assets and see how they compare to Bitcoin and Ethereum.
When choosing riskier assets for a portfolio, anything with a Sharpe ratio higher than Bitcoin and Ethereum is a potential candidate. Within the top 10 crypto assets by market capitalization, Solana and Terra have ratios of 3.37 and 3.25, respectively, with Cardano coming in third at 2.85.
Because Solana, Terra, and Cardano have one-year Sharpe ratios higher than Ethereum, they could be good riskier assets to pick based purely on the historical data. However, it is important to note that other factors are important when deciding whether to invest in an asset. Things such as the project fundamentals, time since launch, and whether or not the asset price looks overextended should all be considered when choosing an investment.
Like before, a portfolio will become riskier but potentially yield higher returns the more Ethereum is substituted for these newer, riskier assets.
Whether you’re looking for the best low-risk allocation or willing to dive into some riskier bets, you’ll need to find somewhere to build your portfolio. This is wherePhemexcomes in. You can purchase all of the assets mentioned in this feature plus many more. Moreover, the platform’s low fees and excellent support services make for a great choice. For those not ready to jump in just yet, Phemex offers simulated crypto trading where users can learn and test different trading strategies, risk-free.
For more advanced users, Phemex offersperpetual contract tradingon all crypto assets and inverse perpetuals on Bitcoin. By depositing and trading on Phemex, users can earn up to $100 and receive additional fee discounts and bonuses by referring friends. For more information, check out the officialPhemex website.
Disclaimer: At the time of writing this feature, the author owned BTC, ETH, and several other cryptocurrencies. The information contained in this article is for educational purposes only and should not be considered investment advice.
This news was brought to you by Phemex, our preferred Derivatives Partner.
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Decentralized finance protocol BarnBridge has introduced an application that allows users to automate position management between Ethereum-based assets.
On July 5, BarnBridge announced its second application, dubbed “SMART Exposure.” The application enables users to passively maintain a particular weighting between the assets in a specific ERC-20 token pair through automatic rebalancing.
The application has been launched on the Ethereum mainnet with support for wrapped Ethereum (WETH), Wrapped Bitcoin (WBTC), and USD Coin (USDC) in pairings weighted to 75/25 or 50/50 ratios. It will also be deployed on the Polygon Network in the coming weeks.
We’re excited to announce the launch of our second application, SMART Exposure
SE is launching with support for WETH, WBTC, and USDC in 75/25, 50/50, 25/75 configurations.
Follow the link to try it out, and continue reading to learn more:https://t.co/rcMOhK2KJu pic.twitter.com/vCRh9OjqJg
— BarnBridgΞ (@Barn_Bridge) July 5, 2021
The protocol explained that the functionality is possible because SMART Exposure maintains its own asset pools.
Each exposure ratio is represented by a fungible ERC-20 token with its own ticker, allowing the positions to be traded on secondary markets, or potentially used as collateral in other protocols. BarnBridge stated:
“We expect SMART Exposure to serve as a key building block for structured products incorporating assets from other BarnBridge products in the future. Today, it offers an efficient passive treasury management solution as well as tokenized versions of popular ratios.”
Related:Report identifies 18 serious ‘non-financial risks’ for DeFi
BarnBridge, officially launched in September 2020, is a derivatives protocol focused on structured stablecoin lending products. It aims to facilitate the transition to DeFi by addressing some key aspects of institutional activity, such as risk management and access to fixed income instruments.
According to DefiLlama, BarnBridge has a total value locked of $294 million at the time of writing.