Nickel Research Centre

Nickel News Roundup - Week 20

19th May, 2023

Market Overview:

Digital assets continued their sluggish May performance, but bearish momentum slowed compared to last week.

  • Bitcoin’s weekly low of $26,080 last Thursday gave way to a gradual rise towards a weekly high of $27,600 on Monday
  • The majority of Bitcoin trading happened in the $26,800 to $27,200 range
  • Bitcoin’s current price of $26,770 is down 2.6% from last week
  • On a year-to-date basis however, performance appears much more positive; up 61.8%
  • Ether recovered from lows of $1,745 last Thursday to trend broadly upwards, with most trading in a relatively narrow range between $1,790 and $1,820, topping out at $1,843
  • Ether currently trades at around $1,800, for a 1.7% weekly drop
  • Despite the month-to-date declines, year-to-date performance remains positive; up 50.3% from January 1st
  • Ether supply dynamics remain deflationary, registering a current annual net issuance of -1.1%
  • It’s worth noting that momentum hasn’t just slowed in crypto markets; Citi analysts say that stock trading ranges are “the most painful since the 1980s”; “We did a quick survey of our investors, and two-thirds of people said they wouldn’t put money into equity markets unless they said they had 10% or more potential upside”
  • Overall digital asset market capitalisation remained steady at $1.12tn—despite Bitcoin and Ether retracing, altcoins performed solidly, with only 4 of the top 50 assets by market capitalisation (excluding stablecoins) posting weekly declines
  • According to industry monitoring site DeFi Llama, total value locked in DeFi this week across all blockchains and platforms shrunk slightly to $46.6bn

Digital assets had a relatively flat week in the markets, but another active week within news and adoption. VC activity spiked once again, XRP issuers Ripple made one of the largest industry acquisitions ever to bolster their institutional credentials, Tether recorded a $1.5bn profit (whilst also pledging to build Bitcoin holdings), CFTC Chair Rostin Behnam gave an interview that appeared to conflict with several statements and positions from his SEC counterpart Gary Gensler (whose agency told a court they are in no hurry to clarify a framework for crypto regulation), a major Singaporean family office moved to boost digital assets in Bahrain, and Coinbase increased their service offering internationally whilst maintaining their fight for clarity in the United States.

What happened: Ripple acquires Swiss digital asset firm Metaco for $250m

How is this significant?

  • Ripple, the creators and issuers of the XRP digital asset, made a major acquisition this week, purchasing Swiss crypto custody and institutional specialists Metaco for a quarter of a billion dollars
  • CEO Brad Garlinghouse commented “Metaco is a proven leader in institutional digital asset custody with an exceptional executive bench and a truly unmatched customer track record. Through the strength of our balance sheet and financial position, Ripple will continue pressing our advantage in the areas critical to crypto infrastructure”
  • Metaco will act as an independent brand and business unit under the terms of the deal (financed through a mix of cash and equity), retaining existing CEO Adrien Treccani
  • Treccani commented that “Our mission has always been to enable institutions to thrive in the digital asset economy… This deal will enable Metaco to leverage Ripple’s scale and market strength to reach our goals and deliver value to our clients at a faster pace”
  • The Swiss firm have been a leading presence in institutional integration of digital asset trading and storage solutions for banks, including Citi, BNP Paribas, and SocGen
  • Metaco have experienced strong growth despite challenging overall market conditions for digital assets, tripling headcount over the last year whilst securing clients and partnerships across multiple markets, including Switzerland, Germany, Turkey, France, the UK, USA, Singapore, Australia, Hong Kong and the Philippines
  • Ripple’s willingness to splash the cash was evidently influenced by a desire to “expand its enterprise offerings” and Metaco’s strong institutional roster and positioning, as well as its work across multiple jurisdictions
  • Company president Monica Long commented that the acquisition left Ripple “uniquely positioned to address the growing institutional crypto custody market, expected to reach nearly $10 trillion by 2030”
  • Advisory firm Architect Partners published a new research note in response to the acquisition, predicting that it could trigger a wave of M&A activity in the digital asset space
  • They expect crypto custody in particular to be an area of activity, due to US regulators wishing to enforce “Qualified Custodian” requirements on crypto exchanges and firms
  • This could lead to greater presence by TradFi custodians like BNY Mellon or Northern Trust, presenting “both a threat and an opportunity for those building specialised digital and crypto asset custody businesses”
  • In another (presumably) positive piece of news for Ripple, a US judge denied the SEC’s request to seal documents from former SEC official William Hinman
  • The news was greeted enthusiastically in crypto circles, as the documents in question pertained to Hinman—whilst serving as SEC Director of Corporate Finance—giving a speech in 2018, during which he opined that Ether was not a security
  • Southern District of New York judge Analisa Torres ruled that the documents are in the public interest and “relevant to the judicial process”
  • Hinman’s assertion was seen at the time as a signal for many in the wider crypto industry that they didn’t fall under securities remits
  • News of the decision (reaffirming a 2022 decision by another judge) led to significant market outperformance by Ripple’s XRP asset
  • The SEC’s lawsuit against Ripple, alleging unregistered securities violations, has been running since 2020, but Brad Garlinghouse stated in March that he expects a decision this year

What happened: Tether announces $1.5bn profits—and Bitcoin investment plans

How is this significant?

  • Tether, issuers of USDT (the largest stablecoin by market capitalisation) reported $1.5bn of profit for Q1 2023(or $1.48bn to be precise); more than twice the previous quarter’s profit
  • Key factors behind this growth included the strong Q1 performance across the digital asset market at large, as well as rising interest rates benefitting money-market funds within their backing assets
  • It may have helped their case that this reporting period covered the collapse of Silicon Valley Bank—an institution that stablecoin rivals Circle were directly exposed to
  • SVB’s failure led to a brief decoupling (and subsequent flight to Tether) for their USDC stablecoin, as investors grew concerned about the backing assets held by the bank, which didn’t process Circle’s withdrawal requests before shutting down over the weekend
  • According to their latest attestation report, Tether held $69 billion in cash and cash equivalents at the end of March, including $53 billion of U.S. Treasury bills, $7.5 billion in overnight reverse-repos and $7.5 billion in money-market funds
  • Additionally, they added new categories to their report, reflecting around $12bn investments in other assets, including $3.4bn of precious metals and $1.5bn of Bitcoin
  • The company’s excess reserves' reached an all-time high of $2.44bn in the reporting period, effectively providing more than 100% backing on their stablecoins
  • Wall Street Journal reports also revealed that Tether plans to reinvest a portion of their profits into the digital asset market, setting aside 15% of net operating profits for future Bitcoin acquisition, allocated towards their excess reserves
  • CTO Paolo Ardoino stated “Looking ahead to Q2, we have an extremely positive outlook and remain committed to transparency, which is why we have introduced new categories in the reserves' breakdown in our quarterly report to provide even greater transparency to our users”
  • He also justified investment in Bitcoin (rather than less volatile assets like government bonds), declaring “Bitcoin has continually proven its resilience and has emerged as a long-term store of value with substantial growth potential. Its limited supply, decentralised nature and widespread adoption have positioned Bitcoin as a favoured choice among institutional and retail investors alike”
  • Bloomberg columnist Matt Levine noted that whilst Tether has faced criticism in the past, its current performance was nonetheless impressive; “Tether has gone from alarmingly thinly capitalised to reasonably well capitalised over the past year, because it is a pile of money invested in short-term money-market instruments and rates have gone up a lot”

What happened: Regulatory news: CFTC Chair gives interview on digital asset regulation

How is this significant?

  • In a 45 minute interview with Bloomberg’s Odd Lots podcast conducted at the ISDA Annual General Meeting, current CFTC chair Rostin Behnam spoke in detail about his perceptions of the current crypto regulatory landscape in the US
  • Crucially, although he claims frequent and transparent interagency dialogue with the SEC, he appears to disagree with Gary Gensler’s belief that “the vast majority” crypto assets are securities
  • He told the interviewers that he believes at least a sizeable portion fall under his agency’s purview; “when it comes to commodity financial assets, which many of these tokens are, I have to do everything I can with the power I have as Chair of the CFTC to ensure that US customers are protected”
  • Behnam responded to a question about Ether’s status as a commodity (based on 2020 approval for Ether futures) by saying “in the context of your question about is it a security or is it a commodity? There's no doubt, you know, we within the agency and at the staff level, examine the characteristics of a financial asset to ensure that it complies with the law and that it falls within the definition of a commodity. And more importantly, is not a security”
  • He also appeared to buck Gensler’s assertion that existing laws are perfectly suited for digital asset regulation, referring to current reliance on the Howey Test in regulatory examinations
  • “That, for better or for worse, is this sort of driving force that sits as the foundation of our legal analysis to this day for digital assets… there are many characteristics about the digital financial assets, which are common to traditional financial assets. But there are certainly many characteristics which are unique and I think demand a unique set of thoughts and policy driven ideas about how and whether we should regulate it”
  • Behnam acknowledged the challenge that decentralisation poses in the face of traditional regulatory structures; “there's going to be a pooling of capital from investors to start a protocol or to start a project. And at some point there would be a milestone and an inflection point where that asset flips from being a security because of those characteristics and then ends up being a commodity. We've never had to deal with this, I think, in the context of traditional non-digital assets”
  • On the subject of DeFi and the distinction between individual developers and the code they’ve developed, he claimed his main concern is the protocol’s offering and exposure to US investors; “this raises this question about regulation by enforcement. And I very vigorously oppose, at least from a CFTC perspective… we have done everything in our power… to remain transparent and to engage with market participants in this digital asset DeFi space to ensure they know as much as they can about what the Commodity Exchange Act requires and what is required of them if they're going to offer futures options or swaps to us customers”
  • Meanwhile, the SEC asked a judge to deny Coinbase’s recent legal challenge to the agency, requiring them to respond to a request for clarity on digital asset security laws that Coinbase filed in June 2022
  • SEC lawyers claimed on Tuesday (12 days after the court initially issued a 10 day response deadline) that “Coinbase’s preference for faster or different regulatory action by the commission does not entitle it to extraordinary relief from this court”
  • The SEC essentially said they’re in no rush to formalise regulations for the industry, stating that rule changes are a “necessarily complicated endeavour” but that they can (and often do) enforce existing requirements whilst considering amendments
  • Coinbase Chief Legal Officer Paul Grewal tweeted his response to the Commission’s filing, saying “the SEC responded to Coinbase’s petition for a writ of mandamus—asking the court to require the SEC to respond just yes or no to whether it will undertake rulemaking for our industry. The SEC’s answer? A resounding maybe”
  • Coinbase’s filing had previously attracted support in the form of an amicus brief from the US Chamber of Commerce, which stated “The Chamber’s members have a strong interest in regulatory clarity, and many of its members are companies subject to US securities laws that may be adversely affected by the Securities and Exchange Commission’s current approach to digital assets”
  • The SEC also issued a subpoena to Bitcoin miners Marathon Digital concerning their Montana data centre
  • Speaking to CNBC, hedge fund billionaire Paul Tudor Jones voiced his concerns that hostile regulatory approaches in the US might diminish appetite for Bitcoin there
  • However, he noted that he personally remains loyal to Bitcoin, saying “I’ve never sat on a horse so long… it’s the only thing humans can’t adjust the supply in”, pinpointing long-term “bad monetary policy” and inflation mismanagement by the Fed
  • In the UK meanwhile, the Treasury Select Committee pushed back on the government’s plans to regulate digital assets within the same framework as traditional financial services
  • Instead, the cross-party group recommended regulating retail trading of digital assets similarly to the gambling industry
  • Bloomberg notes that “By convention, the government must respond to the report within about two months of publication, but it’s not required to follow the recommendations”
  • Binance revealed plans to exit from their Canadian operations, stating that “Binance will be joining other prominent crypto businesses in proactively withdrawing from the Canadian marketplace… Unfortunately, new guidance related to stablecoins and investor limits provided to crypto exchanges makes the Canada market no longer tenable for Binance at this time”

What happened: Number of “wholecoin” Bitcoin addresses reaches new record high

How is this significant?

  • Part of Bitcoin’s appeal from an economic perspective is its combination of predictable issuance rate and capped supply, which will result in the last new Bitcoin (of 21 million total) being mined in the year 2140
  • This capped supply puts a finite limit on the number of blockchain addresses that can be classified as “wholecoiners”; those owning 1 entire Bitcoin or above
  • According to blockchain analytics firm Glassnode (and its CTO Rafael Schultze-Kraft), Bitcoin achieved 1 million “wholecoin” addresses on Monday; a new record
  • Every 4 years, new Bitcoin issuance is cut in half, in the “halving” event that adjust Bitcoin mining rewards; which have already decreased from 50 Bitcoins per block at launch to 6.25 Bitcoins per block now
  • Due to this declining issuance dynamic, the vast majority of all Bitcoins have already been mined; around 19 million out of the 21 million limit; this includes around 1.1 million widely believed to have been mined by Bitcoin creator Satoshi Nakamoto; coins which haven’t moved since they sent their last message in 2010
  • The next Bitcoin halving will occur in April 2024, reducing new Bitcoin issuance to 3.125 Bitcoins per block; thereby potentially making it even more difficult to achieve “wholecoiner” status in future

What happened: Contagion latest

How is this significant?

  • On Thursday, FTX sued former CEO Sam Bankman-Fried and other parties, aiming to recover $220m from a previous acquisition deal
  • The suit pertains to FTX’s purchase of stock-clearing firm Embed “at a wildly inflated price”, after SBF & co “surreptitiously and unlawfully diverted and transferred assets belonging to”, according to current CEO John Ray III
  • Terra Luna blockchain developer Do Kwon was granted €400,000 bail from a Montenegrin court this week, to be released into house arrest under police supervision
  • Kwon’s former CFO Han Chong-joon, arrested alongside him, received bail under the exact same conditions
  • On Monday, research from the Chicago Fed posited that mass withdrawals which strained and broke digital asset lenders like Celsius last year were largely institutional; “spearheaded by customers with large holdings, some of which were sophisticated institutional customers”
  • However, whilst the report’s authors classified last summer’s crypto contagion as “a classic financial crisis in a novel setting that has raised urgent policy concerns”, they also acknowledged that actual bank runs happen faster than crypto bank runs; “The runs on those banks [in 2023] were extraordinarily large and fast—the largest and fastest we’ve ever seen”
  • Bankrupted brokerage Voyager Digital—which suffered from failed acquisition bids by both FTX and Binance.US—were granted permission to begin the liquidation and winding-down process to return assets to users
  • Under current conditions, customers will receive about 36% of their assets back; however this could increase pending Voyager claims against FTX
  • The Information reported that Binance.US and global Binance CEO Changpeng “CZ” Zhao are looking for ways to reduce his ownership stake in the American subsidiary, on the premise that it will make the exchange more palatable to US regulators

What happened: Singapore’s Whampoa group plans to court crypto clients in Bahrain

How is this significant?

  • On Thursday, Bahrain’s Economic Development Board revealed that Singaporean private family office Whampoa Group will set up a digital bank in the Gulf state, with a particular focus on serving crypto clientele
  • The Bahraini government have granted “in principle approval”, and current timelines forecast the bank to be set up by the end of the year
  • According to a Whampoa press release, this new digital bank “will serve institutions, innovators and sophisticated investors worldwide… [offering] digital banking services and the trading, custody and asset management of digital assets”
  • Whampoa Group features direct ties to two prominent and influential Singaporean families, both called Lee; co founders Lee Han Shih and Amy Lee are members of the OCBC banking dynasty, and the Lee political dynasty respectively
  • This is far from Whampoa’s first venture into digital assets; last year they announced plans for a $50m crypto hedge fund and a $100m digital asset VC fund
  • Whampoa Group CEO Shawn Chan praised Bahrain’s regulatory environment, stating “We were impressed by Bahrain's solid reputation in the financial services sector, transparent regulatory framework, and ongoing pledge to collaborate and innovate. We are committed to providing innovative digital financial solutions in line with global best practices and are confident that our digital bank will set a new benchmark”
  • With fellow Gulf state UAE’s overtures towards the digital asset industry, development in Bahrain could position the larger region as a crypto hub, rather than just Dubai and Abu Dhabi

What happened: VC News

How is this significant?

  • After a quiet few weeks, venture capital raises flooded in full force, with numerous eight-figure rounds concluding
  • Sources told Bloomberg this week that some employees of $1.2bn AUM crypto investment firm 10T Holdings (backed by Alan Howard) are starting a new digital asset investment fund, called 10 Square Capital (10SQ)
  • 10SQ are seeking $200m “to back crypto startups at various stages of growth”, with further plans to operate as a registered investment advisor
  • According to people familiar with the matter, capital has already been allocated, with two investments likely to close within the next month
  • Bitcoin mining firm Marathon Digital recently contributed $80m to a joint mining venture in Abu Dhabi
  • Together with Zero Two (backed by Abu Dhabi’s sovereign wealth fund), marathon will develop two immersion-cooled Bitcoin mining facilities in the Emirate, powered by excess energy generation
  • The initial capital contribution for the venture will amount to around $406m, at a 20:80 split between Marathon and Zero Two
  • Digital asset media platform Blockworks concluded a $12m raise on a $135m valuation; led by the aforementioned 10T Holdings
  • Blockworks commented “This investment allows us to double-down on this effort to bring better information to the industry”
  • Miami-based VC Borderless Capital is leading a new $50m fund focused on cross-chain interoperability investment
  • In a press release, Borderless explained that “Navigating the Web3 landscape is becoming increasingly challenging due to the proliferation of numerous layer-1 blockchains, layer-2 scaling solutions, and specialised appchains with unique purposes and parameters. This poses difficulties for users and alienates developers who are restricted from accessing a single ecosystem, hindering their growth”
  • The fund is backed by other entities in the space, including Jump Crypto, Arrington Capital, the Solana Foundation, and Polygon Ventures
  • Kingsway Capital and billionaire Peter Thiel led a $35m Series B round for Bitcoin services firm River
  • River CEO Alex Leishmann commented “These bank failures and bailouts have been a reminder of why Bitcoin is so important. It's a secure path to a fairer, more equal, and transparent global economy… This funding round demonstrates our commitment to championing an honest and robust financial environment through the use of Bitcoin”
  • Bitcoin miners Cormint completed a $30m Series A round to build a new data centre in West Texas
  • Fellow Bitcoin miners Marathon Digital contributed $35.5m of a $81m stealth Series A for digital asset infrastructure firm Auradine
  • Other investors included Celesta Capital and Mayfield, whose executives will sit on Auradine’s board
  • Mayfield MD Navin Chaddha said “We are excited to serve as an inception investor on their journey to leverage AI, blockchain, and privacy technologies to help create an industry leader”

What happened: Bernstein Research predicts bull market boon for Ether Yield

How is this significant?

  • According to a new research report from Bernstein, the ability to stake Ether, act as a validator on the blockchain, and generate yield from transaction fees and block rewards, could be a key narrative driver when markets turn bullish again
  • Analysts Gautam Chhugani and Manas Agrawal noted that the recent banking crisis is driven by bank account returns vastly underperforming alternatives like money-market funds; as Ether staking becomes more mainstream “it is hard not see more demand for ETH deposits and ETH yields”
  • They also posit this becomes even more attractive if traditional banking alternatives (like money-market funds) suffer from their fiat base-pairing; “Any hard landing leading to a decline in rates and USD debasement would immediately make Ether yields in ETH terms extremely attractive”
  • At the moment, demand for validator status is already heightened; Ether holders looking to join as network validators currently face a 1 month waitlist before going active
  • The amount of total Ether supply staked in validator nodes has actually increased since the recent network upgrade, from 13% to 15%
  • The appeal of Ether staking is not just limited to individuals; since the Shanghai upgrade removed time limits, it presents an attractive avenue for institutions to generate yield as well; beleaguered lender Celsius transferred $75m of Ether to (non-custodial) institutional staking platform Figment this week
  • Figment currently offers around 5.6% annualised staking reward for Ether; better than simply letting their assets lie idle during their bankruptcy process

What happened: Coinbase launches subscription service
How is this significant?

  • In a TechCrunch exclusive, publicly-traded digital asset exchange Coinbase revealed that they are launching their subscription service, Coinbase One, in 35 countries across most of Europe
  • The initial launch will feature access in the US as well as UK, Germany and Ireland; with another 31 European nations to follow
  • Not only does this represent a significant attempt to boost their presence outside their US home market (where the company is currently embroiled in legal tensions with the SEC), but also diversify their revenue streams
  • Paying a monthly subscription fee of $30 essentially provides a suite of enhanced services and benefits, including “including no trading charges, higher staking rewards, 24/7 customer support and pre-filed tax return documents”
  • Senior product director Phil McDonnell told TechCrunch that customer loyalty was an important consideration in developing the program, essentially as challenging market conditions fostered mercenary user behaviour; “Maybe 18 months ago, it was very transactional,” McDonnell said. “People come in, trade, pay a fee, and that was the relationship… we wanted customers to stay […] That was the inspiration. How do we build a longer, deeper relationship with our customers and make it a win-win?”
  • This offering appears to have resonated strongly; subscription services and revenue increased 138% year-on-year to $351m in Q1, a period during which only US customers had Coinbase One access.
  • A couple of days before Coinbase revealed their subscription expansion, they were however identified as an investment risk due to the ongoing SEC conflicts
  • Berenberg Capital Markets analyst Mark Palmer believes that MicroStrategy’s exclusive focus on Bitcoin makes them a more attractive alternative for digital asset exposure
  • In an initiation note, he wrote “Given the heightened uncertainty that Coinbase faces, we believe investors would be much better served investing in shares of MicroStrategy”
News Roundups