Dear Reader,

While the focus here at The Bleeding Edge is the world of technology, I always keep a close eye on policy issues… specifically those that directly impact or create large opportunities for technology companies. That’s why we have to look at the recent move by the Federal Reserve.

You see, it happened just as the market expected. The Federal Reserve lowered the federal funds rate by 25 basis points to a range between 2% and 2.25%. The previous range was between 2.25% and 2.5%.

One chart tells the whole story…

This is one of the strangest examples of monetary policy in history. During just one year (2008), the Federal Reserve dropped the fed funds rate from 5.25% to effectively zero. Then, the Fed maintained that monetary policy for the next seven years without a single change. And suddenly, in the span of two years, it yanked rates back up to the 2.25–2.5% range. And the U.S. economy has boomed in spite of these actions.

It is about time the Federal Reserve eased off. With the protracted trade negotiations with China and weaker international economic environment, some “corrective” easing is overdue. The markets were hoping for a 50 basis point reduction. We certainly would have seen a more positive market reaction had there been one. The 25 basis point cut was already priced into the market.

If, for some reason, the trade negotiations extend beyond summer, it would be a wise move by the Fed to cut an additional 25 basis points.

As for today, we have more interesting things to discuss in The Bleeding Edge

The IRS is coming for crypto investors. There’s a little-known detail about the Capital One hack you might have missed. And I’m going to give you a glimpse of the future of decentralized finance and trading…

The IRS is on the attack…

Two weeks ago, we warned that the Internal Revenue Service (IRS) – the U.S. government’s tax authority – was gunning for cryptocurrency investors. We knew the IRS was getting aggressive because it was leaked that it was training agents to find cryptocurrency holdings belonging to U.S. taxpayers.

Well, it turns out that my warning was prescient. It just came out that the IRS is sending warning letters to more than 10,000 people who hold cryptocurrencies. The letters are strongly worded. And they warn people to pay income tax on gains from cryptocurrency sales.

According to IRS Commissioner Chuck Rettig, the IRS is officially stepping up its efforts. It is using data analytics to go out and find cryptocurrency sales.

And the U.K.’s The Guardian reported that the IRS has specific targets. It is looking for anyone who sent or received $20,000 or more worth of cryptocurrency between 2013 and 2015.

This makes sense. Many people investing in popular cryptocurrencies back then made an absolute fortune. It appears that the first step the IRS is taking is to target those citizens who potentially will have to pay the largest amount of taxes.

Now, IRS fines can be very steep. And depending on the severity, they can include jail time. Any investors receiving a letter should make sure that they accurately reported and paid income taxes. If it requires refiling past tax years, then so be it. Otherwise, investors are at risk.

And as a reminder, anyone who sold or exchanged a digital asset for a U.S. capital gain is liable to pay taxes on those gains. It’s just like selling a stock for a profit. I recommend working with a good tax accountant and being proactive on this issue if you fall into this category and have not yet declared your gains. This is only the first wave of letters from the IRS regarding this issue. There are certainly more to come.

An innovative decentralized exchange…

We are seeing a big shift in digital asset exchanges. And it has everything to do with security.

In 2018, hackers stole over $800 million worth of digital assets from exchanges. And in total, exchanges have lost more than $1.5 billion to hacks.

In many cases, there’s nothing investors can do to get their funds back. That’s because each exchange was the custodian of those funds. It was responsible for protecting them. Many of the exchanges do not have the backing of a major financial institution. They simply don’t have the ability to return funds to investors who held their digital assets on the exchange.

As a result, one of the trends in the industry has been to move toward decentralized exchanges (DEXs).

DEXs are unique because they do not take custody of the digital assets. They allow users to trade with each other while keeping custody of the assets they are trading at all times.

Because of this, DEXs can’t be hacked. They don’t hold the assets.

But the downside is that it’s hard for DEXs to provide liquidity and speed. They simply match buyers with sellers… So they can’t “make a market” by creating a pool of assets available for trade.

For this reason, DEXs don’t function at the speed necessary for traders to use them. And that makes it hard for a DEX to gain scale and liquidity.

An interesting blockchain project called Arwen caught my eye because it has created a novel way to solve this problem…

Arwen’s blockchain technology allows self-custody like DEXs. And it also allows traders access to the liquidity of centralized exchanges. Here’s how it works…

Arwen uses the equivalent of a blockchain-based smart contract to allow traders to put digital assets into escrow. Traders can put their digital assets into escrow and trade with other escrow funds. It’s like trading on an exchange without ever needing to trust the exchange to have custody of the assets. Once the traders are finished, they can unlock the digital assets out of escrow and have them returned to their custody.

Pretty cool. This is a fantastic solution. And it will be attractive to high-net-worth traders and digital asset-focused hedge funds.

Unfortunately, this platform is not available to U.S. residents at this time. It just doesn’t meet Securities and Exchange Commission and Financial Action Task Force requirements… largely because it can’t comply with money transfer or Know Your Customer regulations.

We don’t know if Arwen will ultimately be successful, but this is a great glimpse into the future of decentralized finance and trading. We will eventually get past the regulatory roadblocks… And platforms like Arwen will become common.

Another $100+ million hack…

Just last week we wrote about the big Equifax hack. It was one of the largest data breaches in history… And it likely could have been avoided with timely software updates.

Well, it’s not just Equifax. This week Capital One announced that it had been hacked. The company said that 100 million people in the U.S. and 6 million people in Canada were affected.

Among the compromised data were 140,000 social security numbers… 80,000 bank account numbers… and a treasure trove of names, addresses, phone numbers, email addresses, and estimated income figures. To remediate, Capital One is setting aside $100-150 million.

But in an unusual twist, the hacker has already been found and arrested. That’s because 33-year-old Paige Thompson boasted about her hack on the software development and collaboration platform GitHub… And somebody reported it to Capital One. The company didn’t even know it had been hacked until it got the tip.

Capital One immediately got the FBI involved… And it found that Thompson had boasted about her hack in messages on Twitter and Slack also. That gave the FBI enough evidence to raid her house… And it found a copy of the stolen data on her computer. Of course, that led to her arrest. If convicted, Thompson faces up to five years in prison and a $250,000 fine.

What a bizarre case. Usually, hackers hide in the shadows. They keep quiet and cover their tracks. It’s not often this easy to catch them. Not a very clever cybercriminal at all…

I wish they were all this “smart”… The internet would be a much safer place.

For Capital One customers, anyone who applied for a credit card from 2005 to 2019 is likely affected. For most, only their names, addresses, phone numbers, email addresses, dates of birth, and stated incomes were leaked. Relatively few social security numbers and bank accounts got out.

So anyone who may be affected should monitor their credit and their credit card. You should make sure no one is applying for credit in your name. And you should look out for fraudulent credit card transactions.

Those affected should also be wary of phishing attempts via phone or email. Remember, phishing attacks try to trick people into giving away account information or sensitive personal information. We dissected this earlier this month. You can read our “don’t be a phishing victim” write-up here.


Jeff Brown
Editor, The Bleeding Edge