March 16th, 2023
Market Overview:
Digital assets bounced back in a significant way this week, as chaos in the global banking market crystalised numerous key value propositions for DeFi.
Banks and banking were once again a key theme in digital assets; but whereas last week was dominated by Silvergate’s collapse and industry debanking concerns, this week was dominated by banks repeating mistakes of the 2008 global financial crisis that birthed Bitcoin, leading to a sharp sentiment swing in favour of DeFi. Goldman Sachs, Standard Chartered, ARK, and Brevan Howard all featured from the world of traditional finance, Bitcoin miners benefitted from positive market performance, and the CFTC recruited industry expertise to help form policy on digital assets that may be less hostile than that of their colleagues at the SEC.
What happened: Banking industry concerns lead to crypto asset rally
How is this significant?
What happened: Brevan Howard acquires crypto fund from Dragonfly Capital
How is this significant?
What happened: Goldman Sachs launches “Alternate Haven” fund, tokenisation to follow
How is this significant?
What happened: ARK’s Cathie Wood promotes DeFi in response to banking chaos
How is this significant?
What happened: Regulatory news
How is this significant?
What happened: Coinbase partners with Standard Chartered
How is this significant?
What happened: Contagion latest—UK banks limit access
How is this significant?
What happened: India and UAE announce CBDC collaboration
How is this significant?
What happened: Bitcoin miner stocks surge
How is this significant?
- Bitcoin exhibited double-digit growth, with spikes coming in response to both the ongoing banking crisis and CPI figures
- This included a weekly high of $26,510 on Tuesday—Bitcoin’s highest price since mid-June 2022
- The Bitcoin market declined over the weekend, hitting a low of $19,680 as banking contagion led to several stablecoins de-pegging as they stored their backing assets at affected institutions—however momentum reversed on Monday as stock markets reopened and banks plummeted, whilst stablecoin pegs were recovered
- At certain stages during trading, Bitcoin was up 18% in 24 hours, as banking stocks halted trading following falls upwards up 70%
- Bitcoin’s current price of $24,580 is up 13% from last week; one of the best weekly performances on record
- Ether mirrored that momentum, hitting a weekend low of $1,379 low before surging to a high of $1,780 on Tuesday
- Ether’s current price of $1,654 equates to 8.1% growth
- Total Ether supply declined further, dropping more than 50,000 Ether below pre-Merge levels, and annual issuance rate remained steady at -0.5% yearly
- Overall market capitalisation recovered above $1tn once again, for a current value of $1.1tn
- According to industry monitoring site DeFi Llama, total value locked in DeFi this week across all blockchains and platforms declined to $47.3bn
Banks and banking were once again a key theme in digital assets; but whereas last week was dominated by Silvergate’s collapse and industry debanking concerns, this week was dominated by banks repeating mistakes of the 2008 global financial crisis that birthed Bitcoin, leading to a sharp sentiment swing in favour of DeFi. Goldman Sachs, Standard Chartered, ARK, and Brevan Howard all featured from the world of traditional finance, Bitcoin miners benefitted from positive market performance, and the CFTC recruited industry expertise to help form policy on digital assets that may be less hostile than that of their colleagues at the SEC.
What happened: Banking industry concerns lead to crypto asset rally
How is this significant?
- Last week Silvergate Bank collapsed, leading to widespread criticism and lectures within the financial press concerning the risks of digital asset exposure
- However, this week the banking industry went into major meltdown, following the second-largest bank collapse in US history
- Things came to a head after Silicon Valley Bank (SVB), a key partner to many startups, attempted a new share issue to shore up liquidity shortfalls from bond overexposure
- As the Federal Reserve embarked on a series of aggressive interest rate hikes—which some might argue was a consequence of their previous inaction—government bonds quickly went from “safe” investments to loss-makers, as their interest rate fell well below current levels
- 2-year treasury yields suffered their worst performance since 1987, falling 100 basis points from Wednesday to Monday
- SVB sold bonds for a $1.8bn loss after US banks faced their first year of net withdrawals since 1948; but this act was the first domino in exposing the potential scale of risk from held-to-maturity bond exposure in a market of rapidly rising rates
- On Sunday, before weekly trading opened, US regulators stepped in to seize SVB and assure their depositors
- This announcement also mentioned the seizure of Signature Bank, the largest crypto-friendly bank after the demise of Silvergate
- Signature board member Frank Dodd—the actual namesake of the Dodd-Frank Act designed to overhaul banking after 2008—opined that they were unfairly singled out for their crypto association; “I think part of what happened was that regulators wanted to send a very strong anti-crypto message… We became the poster boy because there was no insolvency based on the fundamentals”
- Other banks around the world quickly suffered from declining market sentiment, and trading was halted on over 30 banks in the US (including Charles Schwab)
- Although the majority of banks facing double-digit declines were characterised as regional or mid-size, larger institutions were not unscathed; Credit Suisse fell more than 30% on Wednesday as backers confirmed they wouldn’t contribute any further
- Credit Suisse shares plunged to an all-time low, down 98% from their historical zenith—a performance far worse than most digital assets
- All of the above combined to shake confidence in the banking industry; and sentiment was furthered soured by revelation about executive behaviour at SVB, including millions of dollars in recent share sales, lack of a risk officer, and bonus payments expedited prior to regulatory seizure
- Digital assets turned bullish in the wake of the banking crisis, with many observers pointing out the benefits of transparency and decentralisation, compared to the consequences of centralisation and secrecy that were evidenced by banks
- Bitcoin and Ether both posted double-digit growth en route to hitting their highest levels since June 2022—at the time of writing both retraced slightly from these highs, but remain well above last week’s levels
- Additionally, Bitcoin correlation with European stocks reached its lowest level in two years as digital assets outperformed the general stock market significantly amidst wider financial panic
- One key development over the weekend was a reversal of financial media narrative; that crypto could threaten the stability of traditional finance if it grows too large—instead crypto was affected by TradFi instability, as SVB’s collapse affected USDC stablecoin issuers Circle
- Circle had $3.3bn of funds custodied at SVB as backing value for USDC. Despite initiating withdrawals on Thursday as SVB mismanagement became apparent, the withdrawals weren’t processed by close of business, leading to a weekend of uncertainty
- Mass redemptions followed as USDC holders were uncertain whether the bank would lose the $3.3bn held at SVB. More than $6.2bn of USDC was redeemed (including a single redemption of $723m), leading to a temporary depeg as low as $0.88 on Saturday at the height of panic
- USDC since recovered its banking after the FDIC announced depositors would be made whole, but it was nonetheless identified as an ironic example of digital assets being adversely affected through their own regulatory compliance and TradFi’s risk management
- Bloomberg reported that several crypto firms are now reaching out to institutions like Fidelity to invest cash into treasuries, rather than holding it in bank accounts
- In an act of fortuitous timing, Bernstein Research published a DeFi research report on Friday, just as banks began to collapse
- Analysts Gautam Chhugani and Manas Agrawal forecast that within five years, bank-free DeFi will have revenue of $40 billion and total assets will grow to $1tn
- Over the next decade, they believe that total assets could grow to $5tn
- Additionally, they predicted that banks will lose share to DeFi applications; “New wealth creation and financial-services innovation will move to a new financial app universe on the Ethereum ecosystem…[a new generation of DeFi] far more sustainable, scalable, transparent and with improving token economics”
- Industry publication Coindesk reported that its parent company Digital Currency Group issued a memo saying that several major institutions were still willing to work with crypto firms, including Santander, HSBC, Deutsche, BlackRock, JPM, Revolut, and UOB
- Coindesk also reported that the US banking crisis could push more digital asset firms to offshore banking solutions; Swiss-based Sygnum and SEBA, Liechtenstein’s Bank Frick, and Gibraltar’s Xapo all confirmed that they experienced increased enquiries across various jurisdictions following the weekend’s banking drama
What happened: Brevan Howard acquires crypto fund from Dragonfly Capital
How is this significant?
- Hedge fund giant Brevan Howard increased their exposure to digital assets this week, taking over a long-short hedge fund run by crypto investors Dragonfly Capital
- Sources told Bloomberg that the $30bn AUM firm will assume control over the actively-managed Liquid Opportunities Fund founded in June 2021
- The fund will be absorbed into Brevan Howard Digital, the firm’s digital asset arm
- A Dragonfly memo seen by Bloomberg outlined the move as a means of maintaining a consistent investment philosophy across their whole business; “managing two hedge funds with different strategies under the same umbrella incurs a surprisingly large amount of friction…This spin-out simply means we can streamline our operations and focus more fully on our bread and butter, which is long-term investing”
- Meanwhile, sources said the long-short strategy aligns more closely with BH Digital’s active trading approach
What happened: Goldman Sachs launches “Alternate Haven” fund, tokenisation to follow
How is this significant?
- Goldman Sachs partnered with economist Nouriel Roubini to launch a suite of financial products designed to provide an alternative safe haven for investors during market downturns (such as that currently seen in banking)
- The Atlas Capital Team Index will offer exposure to more conservative asset classes; “a mix of short-term and inflation-protected US Treasuries, as well as gold and US real estate investment trusts”
- Roubini’s rationale on the fund’s creation is that “Traditional safe haven assets are long-duration dollar fixed income instruments such as long-dated Treasuries. One has to look for new defensive assets that hedge against the inflation risk: short-term treasuries, TIPS, gold, and environmentally resilient-real estate”
- He also commented on the current banking crisis, claiming “many other banks would have a third to one half of their capital wiped out if losses are realised. These huge losses are all related to the rise in long yields”
- Atlas CEO Reza Bundy said that currency devaluation as a result of ongoing macroeconomic challenges was a key consideration for the fund; “Governments are faced with a pending need to print more money to manage these threats, which is likely to devalue these currencies so that investors are forced to safeguard their assets”
- However, one interesting factor to note—especially considering Roubini’s status as an outspoken crypto asset sceptic—is the stated strategy of offering a retail version of the fund via blockchain tokenisation, a move which Roubini characterises as a “financial inclusion opportunity” rather than endorsement of digital assets
- Atlas stated they are working with crypto firm Fireblocks (backed by Alphabet) on the fund tokenisation efforts, as well as Web3 developer Mysten Labs for a product dubbed the “United Sovereign Governance Gold Optimised Dollar”, a tokenised inflation-resilient dollar alternative
What happened: ARK’s Cathie Wood promotes DeFi in response to banking chaos
How is this significant?
- Growth investor Cathie Wood spoke out in the wake of this week’s banking collapse, taking the opportunity to outline what she perceives as the fundamental benefits of digital assets
- She tweeted on Tuesday that “While the US banking system was seizing up in response to bank runs threatening regional banks, Bitcoin, Ethereum, and other crypto networks didn’t skip a beat. Instability in the banking system threatened stablecoins, the on-ramps to DeFi, in stark contrast to regulator rhetoric”
- Wood pointed out several metrics that regulators should have identified as greater risk vectors than DeFi, such as short-rates soaring 19-fold in a year, and deposits declining year-on-year for the first time since the 1920s
- She echoed the frustrations of many regarding banking infrastructure; “Instead of blocking decentralised, transparent, auditable and well-functioning financial platforms with no central points of failure, regulators should have been focused on the centralised and opaque points of failure looming in the traditional banking system”
- Wood backed her words with actions; several of her ARK funds added a total of 350,000 Coinbase shares to their portfolios, the largest such purchase year-to-date
- Following those additions, ARK currently owns approximately 3.8% of the exchange
What happened: Regulatory news
How is this significant?
- The EU parliament passed new legislation concerning data this week, including provisions for smart contracts
- Article 30 of the Data Act includes requirements for “rigorous access control mechanisms” including the “possibility to terminate or interrupt transaction mechanisms” if ordered by lawmakers
- Although a lawmaker noted that the legislation may “limit the possibility to develop harmonised standards for smart contracts”, it nonetheless was less restrictive than the European Commission’s initial draft, which included bureaucratic barriers like declarations of conformity for every smart contract
- Legislation now moves into trilogue negotiations between the major European institutions
- The CFTC in America signalled intentions for more regulatory influence over digital assets, announcing the creation of a new Technology Advisory Committee (TAC)
- Commissioner Goldsmith Romero said a key goal of the Committee is “to ensure responsible development of digital assets in a way that protects customers”
- The committee includes several major names from the digital asset space, including Avalanche Labs CEO Emin Gün Sirer, AWS digital assets lead Michael Greenwald, and Circle’s policy VP Corey Then
- Additionally, the TAC will create “a new Subcommittee on Digital Assets and Blockchain Technology that combines and expands two previous TAC subcommittees, and establishing new Subcommittee on Emerging Technologies”
- The UK added a crypto declaration to tax forms for the first time, “requiring amounts in respect of cryptoassets to be identified separately” from the tax year ending April 2025 onwards
What happened: Coinbase partners with Standard Chartered
How is this significant?
- Digital asset exchange Coinbase joined forces with Standard Chartered this week, along customers in Singapore to “transfer Singapore dollars to and from the platform via any local bank in the country for free”
- The timing of the partnership is significant coming during a period of both retail restrictions in Singapore, and large-scale de-banking in the United States
- Coinbase’s Singapore head Hassan Ahmed acknowledged “For banking integration in particular, definitely I’d say that the backdrop is sort of a little interesting and in contrast”
- Standard Chartered’s Singapore head of cash products said the collaboration would streamline several processes; it will “allow users to make and receive real-time payments and also allow the exchange to automatically reconcile user accounts”
- Standard Chartered have championed digital assets in the past; institutional crypto exchange Zodia is a joint venture between them and Northern Trust
What happened: Contagion latest—UK banks limit access
How is this significant?
- British bank Natwest revised its rules, restricting customers to a maximum £1,000 daily (and £5,000 monthly) transfer of money to digital asset exchanges
- Binance suspended bank transfer and card payment deposits and withdrawals for UK customers, as their local payments partner stopped providing services, citing regulatory approaches
- TradFi trading powerhouses Jump Trading and Jane Street are being investigated over their possible role in the collapse of the UST stablecoin in May, which caused the Terra Luna blockchain’s demise and a subsequent market decline
- Manhattan federal prosecutors are examining conversations between the two firms and Sam Bankman-Fried’s Alameda Research, concerning the possibility of market manipulation
- Signature Bank board member Barney Frank (sponsor of the Dodd-Frank Act) claimed the bank was summarily seized despite stabilising over the weekend because regulators, “especially the New York state regulators, wanted to send the message that crypto is toxic”—claims which the NYDFS denies
- Despite being shuttered, Signature’s 24/7 crypto settlement service, Signet, remains active as of press time
- Lending platform Euler Finance was exploited for $197m by hackers
- American crypto bank Anchorage Digital layed off 20% of its workforce, citing ongoing regulatory uncertainty
What happened: India and UAE announce CBDC collaboration
How is this significant?
- The Reserve Bank of India announced a new collaboration with the Central Bank of the United Arab Emirates this week, bolstering both nations’ ongoing efforts in CBDC development
- Interoperability will be a key facet of the project; cross-border settlement has been cited as a major potential benefit for CBDCs, and many Indian nationals live and work in the UAE
- The announcement stated that the remittance market was an area of particular interest as the two nations “jointly conduct proof-of-concept (PoC) and pilot(s) of bilateral CBDC bridge to facilitate cross-border CBDC transactions of remittances and trade”
- India allegedly intends to go nationwide with their retail CBDC efforts by the end of the year, having recently expanded their trials to 50,000 consumers and 10,000 merchants (including retail giant Reliant) across 15 cities
What happened: Bitcoin miner stocks surge
How is this significant?
- Another beneficiary of the ongoing banking sector meltdown was digital asset infrastructure, in the form of publicly-listed Bitcoin mining firms
- After experiencing major losses throughout 2022, they’ve been buoyed by Bitcoin’s bounce year-to-date, and this growth was further boosted by the banking industry inadvertently highlighting the benefits of digital assets this week
- When markets opened on Monday, major miners made major money; Core Scientific increased by 34%, Marathon Digital by 21%, Greenidge by 16.7%, and Argo Blockchain by 17.8%
- Of 20 miners monitored by Coindesk, only one declined on daily trading, with an average increase of 11%