Nickel Research Centre

Nickel News Roundup - Week 13

March 30th, 2023

Market Overview:

Digital assets cooled off slightly after several weeks of explosive growth, but still neared the end of Q1 with a strong quarterly performance.

  • Bitcoin traded in a narrower range than the last fortnight, mainly ranging between $27,300 and $28,250, before concerns over the CFTC suing Binance caused a day-long dip including a weekly low of $26,780
  • Bitcoin recovered to hit a weekly high of $29,160 early on Thursday, breakingthe $29,000 mark for the first time since 11th June
  • Bitcoin’s current price of $28,700 equates to 3.6% weekly growth
  • Ether’s hit a weekly low of $1,691 and a high of $1,840
  • Ether’s current price of $1,807 is a 2.7% increase on last week
  • Total Ether supply continues to decline with annual net issuance currently at -0.2% yearly
  • Overall market capitalisation increased slightly to $1.18tn
  • According to industry monitoring site DeFi Llama, total value locked in DeFi this week across all blockchains and platforms increased to $49.7bn

US regulators continue to bring enforcement actions in what appears to be an outright adversarial attitude to digital assets; but ongoing failures and concerns in the global banking sector have helped illustrate several key benefits of crypto. Bitcoin’s technological security continues to grow as its hash rate hit a new high, Hong Kong continues to court crypto companies, Franklin Templeton identified Web3 and crypto as indicators of long-term social trends, Goldman Sachs alumni moved into DeFi, and Nasdaq announced an update to their plans for digital asset custody services.

What happened: Global banks continue to display issues

How is this significant?

  • The largest banking crisis since the 2008 Global Financial Crisis continued this week as more industry failures and misdeeds emerged—and the performance of digital assets once again suggested the current crisis is highlighting crypto’s advantages
  • The transparency of blockchain is a key benefit for digital assets as immutable public ledgers provide instant insight into movement of funds—much in contrast to banking, where more evidence of wilful manipulation and deceit emerged this week
  • French regulators (adding more global flavour to the crisis) raided major banks in a tax fraud and money laundering probe that could lead to $1bn in fines
  • SocGen, BNP Paribas, and HSBC are among the firms under investigation for dividend arbitrage fraud; revealed after an operation involving more than a year of research, 16 local magistrates, more than 150 investigators and 6 prosecutors from Germany
  • In the wake of the SVB and Credit Suisse collapses, the amount of corporate debt in distress shot up to over $620bn
  • This includes a $69bn increase since SVB failed
  • President at Queens'​ College Cambridge, Mohamed A. El-Erian commented on its downfall; “Banking is based fundamentally on trust. Any erosion in trust can, and does, lead to outcomes that were deemed highly unlikely or even unthinkable just a few days earlier”
  • Meanwhile, as banks have struggled, the digital asset market has performed strongly; blockchain is defined by lack of central points of failure and trustlessness, the lack of need to trust any third party
  • On the subject of SVB, a sale was finally agreed for the bankrupted bank; but the FDIC had to invest considerable resources to get the deal done, offering First Citizens bank a large discount “on top of a $70 billion credit line, an agreement to cover First Citizens’ losses in excess of $5 billion on commercial loans for the next five years, and $35 billion of borrowings to the bank in the form of a note”
  • The FDIC is currently working to sell Signature Bank’s real-time crypto payments network Signet; but is also working to ensure crypto businesses are de-banked, warning industry firms to close their accounts by April 5th
  • Bloomberg reported that the FDIC currently faces $23bn of costs from recent bank failures, and wants to pass a significant portion of that burden onto the market’s biggest banks
  • Charles Schwab ($7tn of assets across all businesses) felt the strain this week, with shares down a quarter since March 8th—in the same period, Bitcoin has grown from $22,000 levels to over $28,000
  • Deutsche Bank faced major selloffs, fuelled by concerns over credit default swaps; a market identified by the ECB as “very opaque, very shallow, and very illiquid”

What happened: Bitcoin hash rate reaches new record high

How is this significant?

  • As concerns grow over the security of the banking industry, Bitcoin is becoming fundamentally more secure on a technological level, as the network’s hash rate continued its long-term uptrend with a new record high
  • Hash rate effectively reflects how much computational power is required to mine Bitcoin; this rises when there is more competition for mining, thus reflecting greater decentralisation and therefore greater security, as singular entities hold less power
  • The network’s hash rate is adjusted on a (roughly) fortnightly basis, to ensure that block times remain consistent at approximately ten minutes
  • On a three-month rolling basis, Bitcoin’s hash rate has increased by 52%—the third-highest adjustment over the last 5 years
  • Industry media platform Cryptoslate hypothesises that this growth has been largely driven by Bitcoin’s Q1 price appreciation; as it becomes more profitable to mine Bitcoin, more miners bring their hardware back online, boosting competition and hash rate

What happened: Goldman Sachs alumni lead decentralised investment startup

How is this significant?

  • Goldman Sachs’ former head of digital asset markets, Justin Schmidt, became president and CEO of decentralised investment platform Ondo Finance this week
  • The company was founded by other Goldman associates, Nathan Allman and Pinku Surana
  • Schmidt told Bloomberg “I will focus on growth, strategy, and execution as we continue to bring innovative institutional-grade financial products and services on-chain”
  • Ondo is a noted proponent of tokenisation; reflecting and trading real-world assets on blockchain, leveraging advantages like transparency, borderless trading, and instant settlement
  • In other news of decentralised trading, popular DEX (decentralised exchange) dYdX announced a move towards absolute decentralisation; removing centralised entities who currently maintain exchange operations
  • dYdX CEO Antonio Juliano commented “I think the end state for everything in DeFi has to be full decentralisation. The middle ground doesn’t really work indefinitely”
  • Some analysts view this move as a pre-emptive protection against expected increasing regulatory pressure

What happened: Hong Kong regulators rush to facilitate banking access for crypto industry

How is this significant?

  • Whilst the failure of Silvergate and seizure of Signature have limited banking options for American digital asset firms, Hong Kong regulators are taking a stance much less hostile than the US; actively encouraging banks to engage with the sector
  • A roundtable between Hong Kong regulators and banks has been scheduled for next month, “to facilitate direct dialog” and “share practical experiences and perspectives in opening and maintaining bank accounts”
  • This conciliatory includes the backing of state-owned Chinese banks; despite a mainland ban on crypto trading, the institutions have taken advantage of the “one country, two systems” policy in order to reach out to businesses setting up in Hong Kong
  • Sources speaking to Bloomberg noted that Hong Kong branches of China’s Bank of Communications Co., Bank of China Ltd., and Shanghai Pudong Development Bank now offer banking services to local crypto firms
  • One local Web3 CEO told Bloomberg that this “means a lot to us because it’s something you’d never expect at this point, even around the globe… A cryptocurrency account at a tradfi bank is something groundbreaking”

What happened: Regulatory news—USA crackdown includes Binance lawsuit

How is this significant?

  • Following on from several recent SEC enforcement actions, the Commodities and Futures Trading Commission (CFTC) got in on the act this week, suing both Binance and its CEO, Changpeng “CZ” Zhao on Monday
  • The CFTC alleges several regulatory violations; including derivatives violations and a “calculated, phased approach to increase its United States presence” despite official geo-blocking, citing educational materials in their Binance Academy website that explained VPN usage
  • Charges are (at this point) all civil, rather than criminal
  • They also allege onboarding of US-based VIP customers, ineffective KYC practices, and insider-trading allegations against CZ
  • Allegations date back to 2017, with Binance representatives noting that they have spent large sums particularly over the last two years to ensure US customer exclusion
  • Zhao responded with a blog post refuting the allegations
  • Binance—whose global exchange isn’t based in the US—could face a permanent injunction against ever doing business in America, with some analysts believing they may surrender their Binance.US subsidiary to placate regulators
  • One possible corollary could be harsh punishments for any US-based trading firms found to have traded on Binance’s international site; market makers who operate in other industries could be limited falling afoul of rules
  • Georgetown Law professor Urska Velikonja said “The risks to US firms are far greater than the risk to Binance. The big risk to them is the ‘lights out’ risk that they lose their licence to operate as broker-dealers in the US”
  • Chicago-based trading firm Radix confirmed to the Wall Street Journal that it’s one of the firms cited in the suit, but said “We got legal vetting on anything we did in terms of crypto connectivity”
  • In a worst-case scenario however, the CFTC is requesting payments for all fees back to 2017 derived from US users, as well as making them whole; which could run into billions
  • This lawsuit spooked the market, briefly dropping Bitcoin’s price below $27,000—but as of writing those losses were erased
  • On Wednesday, the FT claimed that Binance maintained business links with China for several years after officially leaving the country in 2017
  • Sheila Warren, CEO of industry body Crypto Council for Innovation said she wasn’t surprised at the CFTC’s action, citing “systematic pushing-out across a variety of different actors” from regulators, calling the SEC’s recent Well’s Notice against Coinbase “overt hostility” against the industry
  • One key observation from the CFTC’s filing is that despite regulators cracking down on crypto, they still don’t agree on whether, or when, it’s a commodity or security, deepening confusion for regulatory registrations
  • The CFTC claims Bitcoin, Ether, Litecoin, fiat-backed stablecoins, “as well as other virtual currencies as alleged herein, are commodities”, whereas SEC chair Gary Gensler has routinely refused to confirm anything except Bitcoin qualifies as a commodity
  • Speaking at a House Appropriations Committee meeting on Wednesday, Gensler claimed existing securities laws “cover most of the activity that's happening in the crypto markets”
  • Financial Services Committee chairman Patrick McHenry meanwhile confirmed that Gensler will testify before the committee on April 18th, in the first SEC oversight hearing with a focus on Gensler’s rule-making and digital assets
  • The Republican members are accusing him of overreach, declaring an intention to hold him “accountable for his flagrant disregard for the law, jurisdiction”
  • McHenry said that “in terms of policy” the committee would concentrate on “a regulatory sphere for digital assets”
  • Coinbase held an online forum where leadership discussed the recent SEC decision to enforce rules that don’t exist”, noting that “If the SEC wants to throw the rulebook at crypto, they should have a rulebook”
  • CEO Brian Armstrong acknowledged the recent regulatory hostility, and announced plans to start donating to pro-crypto candidates; “What we’re going to do is start putting out content where people can contact their congressman, donate to pro-crypto candidates, show up at town halls, make your voice heard… We are going to elect pro-crypto candidates in this country to make sure that our success is ensured”

What happened: Franklin Templeton identifies decentralisation as key driver for tech evolution

How is this significant?

  • Global investment giant Franklin Templeton published a new report this week on “tech-driven megatrends transforming modern society”, including a focus on Web3 and digital assets
  • Sandy Kaul, the firm’s head of digital assets, told industry publication Coindesk “The whole reason that we've laid out the megatrends… is that this set of technology innovations and the changes that they've been driving in society is what has brought us to this Web3 moment and the development of this critical crypto ecosystem”
  • The report notes democratisation of investment access enabled by DeFi and asset tokenisation, citing them as part of an ongoing evolution from tangible assets to intangible assets, previously evidenced in the shift from Web1 to Web2
  • Kaul added “For people from the traditional financial world who still are not convinced about the potential of what these new models represent, I think it's important to tie it to the history of innovation, and to the trajectory that this innovation has taken us throughout the last 60 years. This is not something that just popped up out of the blue”
  • The report’s authors state “Taking stock of where we are today is critical because a fourth tech-driven innovation cycle is beginning…. Digital currencies and cryptocurrency-backed payment networks, layer 1 blockchain development platforms, programmable tokens with self-executing smart contracts, oracle networks, ZK (zero-knowledge) scaling solutions… are running 24/7/365 (24 hours a day, 7 days a week, 365 days a year) proofs-of-concept in an ecosystem already valued at more than US$1.0 trillion”

What happened: Contagion latest—Failed leadership faces more consequences

How is this significant?

  • Former FTX CEO Sam Bankman-Fried was served with a new charge this week, bringing his running total of indictments to 13
  • The new charge alleges bribery of Chinese officials, claiming he offered $40m to unfreeze $1bn of Alameda funds when the company was based in Hong Kong
  • Do Kwon, fugitive founder of the collapsed blockchain Terra Luna blockchain ecosystem was arrested in Montenegro, ending many months on the run
  • South Korea and the US are both seeking his extradition
  • Kwon denies allegations that he and former CFO Han Chang-joon were arrested en route to Dubai travelling with false identities, but purportedly told Montenegro police they had enjoyed “VIP treatment” in other jurisdictions
  • Law firm Eversheds Sutherland filed for an early ring-fencing of assets for non-US FTX customers, ensuring they be kept separate from other debtors’ claims
  • Beleaguered lender BlockFi had a proposed $4.7m sale of mining hardware approved by bankruptcy court officials

What happened: MicroStrategy pays off loan early, adds to Bitcoin holdings

How is this significant?

  • One of the world’s largest corporate Bitcoin proponents, MicroStrategy, were able to pay off a $205m loan from failed bank Silvergate, according to new SEC filings
  • The payment of $161m was made last Friday, financed partly through the sale of shares
  • Paying off the loan enabled the recovery of their collateral; 34,619 Bitcoins
  • Additionally, they added to their Bitcoin holdings, spending around $150m over the last five weeks to acquire 6,455 Bitcoins at an average price of $23,238

What happened: Animoca reduces target for metaverse fund in light of crypto winter

How is this significant?

  • Web3 firm Animoca Brands is pushing ahead with plans for a new metaverse investment fund; but has adjusted expectations for the second time due to ongoing crypto winter and market uncertainty
  • Initially announced in November with a goal of $2bn, this was cut to $1bn in January before the present funding aim
  • Animoca representatives told Reuters that the industry is experiencing challenging conditions, but remained optimistic on longer-term prospects; “There's no doubt that the FTX and banking crises have had a serious impact on available venture capital, but fundraising for the Animoca Capital fund is in progress. When the raise is concluded we will inform the market with the appropriate details, including the final size of this fund”

What happened: Nasdaq announces Q2 goal for crypto custody services

How is this significant?

  • Exchange group Nasdaq expect to launch their crypto custody solution before the end of Q2 this year, having first announced their plans in September 2022
  • This will mark their first major direct exposure to the digital asset industry, and comes as several firms from traditional finance display have moved into the digital asset custody space
  • TradFi firms could benefit from bankruptcies of crypto-native firms who acted as one-stop shops offering the entire suite of trading related services; some analysts believe “Wall Street style middlemen” could help restore trust for institutional traders
  • Nasdaq will join BNY Mellon and Fidelity in offering such services
  • Ira Auerbach, senior vice president and head of Nasdaq Digital Assets, said that they’ve applied to New York regulators for a limited-purpose trust company charter to oversee the new business

What happened: Stablecoin issuer Tether forecasts $700m quarterly profit

How is this significant?

  • Tether, the leading stablecoin issuer in the crypto industry could experience healthy profits in Q1 despite being known for digital assets designed not to increase in value
  • CTO Paolo Ardoino believes the company will post a profit of around $700m for the first three months of the year
  • Tether has benefited somewhat from the misfortune of rivals; Circle’s USDC was briefly knocked off-peg during uncertainty surrounding backing assets held at Silicon Valley Bank, and Paxos’ BUSD was censured by the SEC due to its connection with Binance
  • Ardoino added they expect to end the quarter with around $1.6bn in surplus compared to backing reserves, which are mainly invested in short-dated US Treasury bills
News Roundups