Nickel Research Centre

Nickel News Roundup - Week 50

15th December, 2022

Market Overview:

Digital assets improved on last week’s performance, buoyed by news of Sam Bankman-Fried’s arrest, and reduced rate hikes from the FOMC meeting.

  • Bitcoin grew from a weekly low of $16,810 on Thursday to a weekly high of $18,300 on Wednesday
  • Bitcoin’s high represented its best performance in over a month, since 11th November
  • Most trading was range-bound between $16,900 and $17,250, until news of Sam Bankman-Fried’s arrest on Monday led to upward momentum
  • Bitcoin’s current price of $17,650 equates to 4.9% weekly growth
  • Ether performed similarly, increasing from Thursday lows of $1,228 to a Wednesday high of $1,345
  • Ether’s current price of $1,286 represents a 4.1% appreciation
  • Total Ether supply remains slightly above pre-merge levels, with a flat yearly issuance of 0.03% based on current network burn rates
  • Overall market capitalisation grew to $859bn
  • According to industry monitoring site Defi llama, total value locked in DeFi this week across all blockchains and platforms remained steady at around $42.6bn

Sam Bankman-Fried was arrested in the Bahamas this week, and charged with numerous offences by US authorities, perhaps signalling the beginning of a resolution for the FTX affair that’s dominated media coverage over the last month. Elsewhere, more regulatory developments occurred, Binance experienced record outflows as investors increasingly seek self-custody, another major market maker moved into the space, and a leading Japanese utility firm struck a deal to provide excess renewable energy for Bitcoin mining.

What happened: FTX latest—Sam Bankman-Fried arrested and indicted

How is this significant?
  • The latest major development in the FTX saga this week was one which may signal the beginning of the end—or at least the end of the beginning—as former CEO Sam Bankman-Fried was arrested in the Bahamas on Monday and indicted by US authorities
  • Charges came in parallel actions from three entities; the SEC, the CFTC, and the New York district attorney’s office
  • Bankman-Fried (aka SBF) was originally scheduled to testify at a US House Committee hearing on FTX’s collapse on Monday (after previously rejecting the invitation), but his incarceration in Nassau prevented his presence virtual or otherwise
  • A judge in the Bahamas refused his application for bail due to perceived flight risk; Bankman-Fried and his attorneys said he will fight extradition back to the US—where he could face a maximum sentence of 115 years if found guilty on all charges
  • Markets appeared to react positively to news of his arrest, with Bitcoin maintaining a position above $17,000 since Monday evening
  • SBF faces a litany of charges after American authorities accused him of “one of the biggest financial frauds in US history”, alleging deliberate misconduct by Bankman-Fried since the formation of FTX
  • The SEC alleges that Bankman-Fried raised $1.8bn in “an orchestrated scheme to defraud equity investors”, with FTX built on a “foundation of deception”
  • Charges included conspiracy, illegal campaign contributions, and wire fraud, and the CFTC voiced particular issues with the relation between SBF's exchange and trading house, noting "At Bankman-Fried’s direction, FTX executives created features in the underlying code for FTX that allowed Alameda to maintain an essentially unlimited line of credit on FTX"
  • Reuters reported that FTX chief engineer Nishad Singh tweaked the exchange’s code in mid-2020 to prevent liquidation of Alameda positions, citing changes to the codebase allowing Alameda to maintain a negative balance, which led to SEC charges 
  • The CFTC also allege that Alameda were provided numerous technical advantages over other traders on FTX, including a “significant speed advantage” which was “not publicly disclosed”
  • Bankman-Fried was the only individual defendant named in any of the complaints, but other executives could yet see consequences, as at a press conference announcing the charges, New York district attorney Damian Williams stated “ I can only say this: Clearly, we are not done”
  • The Financial Times claims that FTX executive Ryan Salame (head of FTX Digital Markets) acted as whistleblower to Bahamian authorities, informing them of improprieties on November 9th, soon before the exchange collapsed 
  • New FTX group CEO John Ray III identified the company’s downfall once again as a failure of leadership, telling the House Financial Services Committee “The FTX Group’s collapse appears to stem from the absolute concentration of control in the hands of a very small group of grossly inexperienced and unsophisticated individuals”
  • The Wall Street Journal reported that new FTX leadership have hired forensic investigators to trace billions of dollars in missing funds
  • Not only has Bankman-Fried been accused of attempting to buy influence in politics via large undisclosed donations, he was also outed as secretly financing industry publication The Block for the last two years, leading their CEO to resign
  • As well as loans allowing the outgoing CEO, Michael McCaffrey, to buy out other shareholders and assume sole control of The Block’s board, Alameda also provided McCaffrey loans for running costs and $16m for “personal real estate” in the Bahamas
  • A New York Times article suggested FTX may have fallen victim to their own practices, suggesting that short-selling from Alameda was a key factor in the Terra Luna stablecoin depegging and blockchain collapse earlier this year—an event which caused industry-wide contagion that eventually weakened Alameda’s own collateral
  • Former Alameda CEO Caroline Ellison hired a former SEC enforcement chief as her lawyer this week—leading to widespread speculation within the industry that she could “cut a deal” with regulators in exchange for information on Bankman-Fried
  • Her new lawyer, Stephanie Avakian was SEC enforcement director for four years, overseeing several cases in the digital asset space, including the ongoing action against XRP issuers Ripple Labs
  • Blockchain Association executive director Kristin Smith acknowledged current events were “certainly a setback”, but represented “incredibly abnormal behaviour”, and thankfully “tremendous differences in strategy” had prevented FTX from ever joining their trade group
  • She outlined stablecoins and regulations for crypto spot markets as the main areas of focus, but believes FTX’s downfall could slow the legislative process down by bringing the category to the attention of previously disengaged politicians
  • Grace Berkery, director of startup management at Mastercard, also identified FTX as an opportunity for a “reset” within the industry; “I think it’s an opportunity and time to reset. At Mastercard, we believe there’s a lot of promise in the underlying technology”
  • Berkery added that equity investors would likely learn a lesson on better due diligence; “There’s a lot happening in the space… The focus is going to be less on buzzwords and hype in the space and more on what is the tangible value you’re adding as a company”

What happened: International regulatory news

How is this significant?
  • The FT reported this week that the Financial Stability Board “will lay out firm steps to regulate the cryptocurrency industry in early 2023”, laying the groundwork for potential global regulation
  • Outgoing secretary-general Dietrich Domanski told the paper “One objective of this work plan is precisely to counter a perception that all this (work on crypto assets) is disperse and slow and is not focused on a single common goal”
  • Indeed, he indicated that FSB members already have “strong agreement” on their strategy, including that crypto service providers should “be held to the same standards as banks… if they provide the same service that banks provide”
  • Domanski expects global rules to be somewhat fast-tracked compared to general procedures; “I don’t think that we would be talking about a decade. I mean, that would be way too long. I think the work plan will reflect the urgency”
  • Australia’s government outlined a range of proposed changes to their financial system on Wednesday, including a consultation on digital asset custody and licensing frameworks next year
  • Brazilian legislators backed a bill calling for digital asset regulation, which is now awaiting presidential approval before being passed into law
  • Kazakhstan lawmakers approved a digital asset draft bill including provisions for licensing of crypto mining activities, a field in which Kazakhstan is a world leader thanks to cheap energy

What happened: Contagion latest

How is this significant?
  • In the latest development concerning beleaguered lender Celsius’ bankruptcy proceedings, a judge ordered the company to return deposited digital assets which customers never entered into yield-bearing products
  • The total amount of applicable funds to be returned according to the above criteria is currently estimated at $44m to $55m, a fraction of the lender’s overall liabilities
  • Canadian Bitcoin mining firm Hut 8—operating in a sector particularly hard-hit by crypto winter—appointed a former IBM Canada CFO as their new CEO this week, after previously posting a third-quarter loss
  • The discount relative to Bitcoin price on Grayscale’s GBTC fund briefly hit 50% for the first time this week, as a combination of factors—including concerns about sister company Genesis, lack of transparency over their Bitcoin holdings, and SEC rejection of their ETF application—led to investor nervousness
  • WisdomTree announced the launch of nine new blockchain-enabled funds this week, having previously also suffered several physical Bitcoin ETF rejections from the SEC
  • The Securities and Exchange Commission indicated that firms with exposure to companies affected by crypto winter conditions “may have disclosure obligations under the federal securities laws related to the direct or indirect impact that these events and collateral events have had or may have on their business”

What happened: EU proposes mandatory transaction reporting

  • European Union lawmakers sought to add new rules this week, aimed at boosting taxation compliance within digital assets
  • As part of a package to improve overall tax system transparency, the European Commission is seeking to cut out routes towards transactional anonymity
  • According to Bloomberg, “The rules would cover crypto-service providers of all sizes and both for domestic and cross-border transactions, regardless of where the entities are based. The commission also proposed extending the reporting obligations of financial institutions to cover e-money and digital currencies”
  • Effectively, all transactions in digital assets would have to be logged and tied to individual identities in order to streamline taxation on trading gains
  • The proposals would require unanimous approval from all 27 EU member states, and wouldn’t come into effect before 2026

What happened: Centralised exchanges experience major withdrawals

How is this significant?
  • Digital asset exchange Binance was the latest centralised entity to face increased withdrawal volumes this week, as digital asset investors adjust their behaviour regarding asset custody following the collapse of FTX
  • Currently, investors are increasingly exercising self-custody of their digital assets, rather than leaving them on exchanges for extended periods of time
  • Over the last week, Binance experienced $3.7bn worth of net outflows, including almost $2bn from Sunday to Monday alone, followed by record Bitcoin and Ether outflows on Tuesday
  • Alex Svanevik, chief executive officer at blockchain analytics firm Nansen commented “The flows are still relatively small considering Binance’s reserves. But given everything that’s happened, it’s not surprising many are choosing a cautious approach”
  • As the largest exchange in the world, traders are now exercising additional caution towards Binance, with some FUD (industry slang for fear, uncertainty, and doubt) circulating this week around issues like previously-planned withdrawal pauses during platform upgrades and the depth of their recent audit by Mazars
  • Binance CEO Changpeng “CZ” Zhao sent a memo to staff earlier this week acknowledging the “historic moment” the industry is experiencing
  • He also warned the “next several months” could be challenging for digital assets, but stated “we will get past this challenging period—and we’ll be stronger for having been through it”

What happened: Tokyo Electric secures deal to use excess energy for Bitcoin mining

How is this significant?
  • Whilst many Bitcoin miners globally have struggled this year amidst rising energy prices and power shortages, one major utility company in Japan appears set to enable the reverse
  • Tokyo Electric Power Grid (TEPCO) signed a memorandum of understanding with new subsidiary Agile-X and hardware manufacturers Triple-1 to capitalise on excess renewable energy on its local grid
  • Instead of creating power grid congestion by forcing surplus power to flow into power lines, the companies will convert “electric power into digital value by utilising distributed energy resource facilities (container-type distributed computing equipment and blockchain technology-based cryptocurrency mining equipment)”
  • Thus, by distributing surplus power directly to mining facilities built and developed by their partners, TEPCO is able to both gain a direct value return on the electricity generated, and ensure that more renewable energy goes towards Bitcoin mining

What happened: VC News

How is this significant?
  • Web3 startup Nillion, a decentralised data storage network, raised $20m from over 150 investors
  • Founders and executives include ex-Uber, Coinbase, and Nike employees, with a raise over a large number of investors deliberately chosen to prevent concentrated ownership, according to Nillion CEO Alex Page
  • Digital asset insurance firm Evertas may have benefitted from recent market turmoil, as FTX’s failure crystalised the value proposition of their products
  • Now, they’ve raised $14m in Series A funding; CEO J. Gdanski told industry publication Coindesk “There are things that come out of these massive crises in the space that we’ve had in our underwriting for three or four years. That includes things like trust accounts, segregation of assets, clear delineation of ownership in the event of bankruptcy or insolvency, having appropriate boards in place”
  • German private bank Bankhaus von der Heydt (est. 1754) agreed a deal to be acquired by Germany’s Bitcoin Group SE, a holding company focused on digital asset and blockchain industries
  • Valuation of the deal was set at around $15m, “and 150,000 shares from a capital increase against contributions in kind of Bitcoin Group SE”
  • The move will grant Bitcoin Group SE a full banking licence in Germany, and is expected to conclude in Q3 2023

News Roundups