Nickel Research Centre

Nickel News Roundup - Week 21

May 26th, 2023

Market Overview:

Digital assets traded in a tight range this week, as concerns over the ongoing US debt ceiling drained momentum from risk-on assets.

  • Bitcoin spent the majority of the week ranging between $26,700 and $27,200, before dipping sharply in midweek as fears over a possible US debt default intensified
  • This led to a weekly low of $26,070 on Thursday, down from a Tuesday high of $27,410
  • Bitcoin’s current price of $26,430 is down 1.2% over the last seven days
  • Bloomberg noted this week that the recent withdrawal and scaling back of institutional market makers like Jane Street and Jump Crypto has dropped Bitcoin trading volumes across the industry; from around $20bn a day in March to $4bn a day now
  • Ether predominantly traded in the $1,795 to $1,829 range, with a weekly peak and trough of $1,867 and $1,776 respectively
  • Ether currently trades at around $1,802, nearly unchanged from last week
  • Ether supply dynamics remain deflationary, but slowed the rate of deflation in the face of reduced on-chain trading volumes, registering a current annual net issuance of -0.75%
  • Overall digital asset market capitalisation remained nearly unchanged at $1.11tn
  • According to industry monitoring site DeFi Llama, total value locked in DeFi this week across all blockchains and platforms increased slightly to $46.7bn

Digital assets traded in a narrow range this week, as markets remain on edge over fears surrounding the unresolved US debt ceiling. Despite ongoing hostility from US regulators, two key presidential hopefuls for 2024—on both sides of the political aisle— voiced support for Bitcoin and digital assets this week. On the other side of the globe, Hong Kong’s digital asset push continued (and was recognised by mainland China), OpenAI’s CEO landed a $115m funding round for a crypto startup, the WEF published a paper of regulatory recommendations, and ambitious developers in Dubai announced plans to construct a blockchain-integrated “Bitcoin Tower” as part of the city’s iconic skyline.

What happened: US presidential hopefuls issue public Bitcoin support

How is this significant?

  • Although the US government (particularly the SEC) has been publicly hostile towards digital assets this year, that doesn’t reflect the opinions of all politicians on both sides of the aisle
  • This week, two key hopefuls for the 2024 presidential race—Republican Ron DeSantis and Democrat Robert F Kennedy Jr—both signalled public support for digital assets (and opposition to government-led efforts in the space)
  • As a Republican, DeSantis is perhaps the less surprising of the two, since digital assets tend to have greater support amongst small-government politicians
  • Reuters reported that the presumed Republican front-runner pledged “to support people's right to trade in digital assets like Bitcoin”
  • Additionally, he’s vehemently opposed the introduction of a CBDC, arguing that a centralised digital currency could put too much control in government hands
  • As Florida governor, he recently signed a state bill effectively banning CBDCs from use in Florida, stating “The government and large credit card companies should not have the power to shut off access to your hard-earned money because they disagree with your politics”
  • Speaking in a Twitter Spaces with Elon Musk, DeSantis outlined an avowedly pro-Bitcoin positioning; making him one of few presidential candidates thus far (the other notable example being Andrew Kang in the previous Democratic candidate race) to specifically voice support for the sector
  • He declared concerns over current regulatory approaches to crypto; “You have every right to do Bitcoin. The only reason these people in Washington don’t like it is because they don’t control it… I think that the current regime, clearly they have it out for Bitcoin, and if it continues for another four years, you know, they’ll probably end up killing it”
  • Kennedy (aka RFK Jr) meanwhile made his first public appearance as a 2024 candidate at the Bitcoin 2023 conference in Miami
  • The nephew of former president JFK (and son of slain candidate Robert Kennedy) announced that “As president, I will make sure that your right to hold and use Bitcoin is inviolable. I am an ardent defender and lifelong defender of civil liberties, and Bitcoin is both an exercise and a guarantee of those freedoms”
  • In particular, he argued in favour of self-custody solutions for digital assets, as well as fighting against restrictions on the mining industry—a notable stance, given his background in environmental law
  • He also voiced concerns on the possibility of a CBDC, noting that his interest in Bitcoin was fostered by the Canadian government’s decision to freeze bank accounts of anti-government protestors in the notorious trucker’s convoy of early 2022
  • Putting his money (or his satoshis, in Bitcoin parlance) where his mouth is, RFK Jr became the first presidential candidate in history to accept donations via Bitcoin’s Lightning Network scaling solution

What happened: OpenAI CEO raises $115m for blockchain identity digital asset startup

How is this significant?
  • Artificial Intelligence is one of the hottest topics in business and venture capital at the moment; and one of the key players in the AI space just leveraged that interest to secure a significant raise for his new crypto startup
  • OpenAI CEO Sam Altman raised $115m in a Series C round led by Blockchain Capital, including participation from Bain Capital Crypto and Andreessen Horowitz (a16z)
  • Speaking to the FT, sources with knowledge of the deal were thrilled, saying “It’s a bear market, a crypto winter. It’s remarkable for a project in this space to get this amount of investment”
  • Altman is the co-founder of Tools for Humanity, developers of WorldCoin, a project that has “a three-part mission: create a global ID, a global currency and an app that enables payment, purchases and transfers using its token — alongside other cryptocurrencies and traditional assets”
  • His WorldCoin co-founder Alex Blania told Bloomberg that the raise would be used for expansion and hiring efforts, noting future usecases such as “the distribution of a universal basic income, since it combines an economic layer with an identity system”
  • The universal basic income example is particularly relevant given Altman’s other business interests, as concerns rise over AI displacing human workers
  • Creation of the global ID is done via a digital fingerprint; or rather, a digital iris-print, captured by a spherical biometric scanner, in exchange for payment in the company’s digital token
  • This successful Series C follows a $100m raise at a $3bn valuation in March last year
  • Blockchain Capital acknowledged privacy concerns over the project, but believe that the potential for a persistent digital ID is still compelling; “For good reason, folks get concerned and sensitive when it comes to biometrics … However, what’s actually happening under the hood is that the orb takes a picture of an iris and the device subsequently generates a unique encoding of the randomness of the iris (an ‘iris code’)... the original biometric is immediately destroyed and the iris code is the only thing that leaves the orb”

What happened: Hong Kong’s digital asset push continues (with China’s tacit support)

How is this significant?

  • Crypto investment firm Hashkey is taking advantage of Hong Kong’s recent pivot towards becoming a global digital asset hub—this week it was reported that they are raising between $100m and $200m at a $1bn total valuation
  • Hashkey is comfortably positioned for this shift in the city’s policy; it was an early investor in Ethereum, and is one of only two currently licenced exchange service providers
  • The move towards providing Hong Kong retail investors access to major digital assets like Bitcoin and Ether is imminent, going live on the 1st of June
  • Enthusiasm for digital assets is growing in Hong Kong; on Tuesday the city’s Securities and Futures Commission (SFC) concluded a consultation on virtual asset trading platforms, noting “A significant majority of respondents agreed to our proposal to allow licensed trading platform operators to serve retail investors”
  • The scale of investor appetite is perhaps reflected in another news item from this week; there’s a noted shortage of Responsible Officers (ROs), a type of executive required for regulatory compliance under the city’s financial regulatory structure
  • The conclusions of the SFC’s consultation could relax the requirement for the number of ROs required by digital asset firms; Bloomberg notes that “The RO arrangement, which requires a firm to have two such executives for each type of licence it holds, is also being used for the framework for digital assets”
  • However, the specific type of licence covering digital assets is still new, and in short supply; of 18,000 ROs in Hong Kong “only 95 have the Type 7 licence for providing automated trading services, a key one for crypto exchanges”
  • SFC Executive Officer Julia Leung stated “Providing clear regulatory expectations is the key to fostering responsible development. Hong Kong’s comprehensive virtual assets regulatory framework follows the principle of ‘same business, same risks, same rules’ and aims to provide robust investor protection and manage key risks. This will enable the industry to develop sustainably and support innovation”
  • Under the “one country, two systems” approach, Hong Kong’s shift in attitudes towards digital assets needn’t be mirrored by mainland China; but alongside Chinese banks servicing digital asset firms in Hong Kong, another development this week caught the eye of industry observers
  • On Tuesday (the same day as the SFC’s consultation concluded), Chinese state broadcaster CCTV broadcast a segment on crypto adoption in Hong Kong
  • Though it was only around a minute and a half long, the segment represented a rare spotlight for the officially-banned asset class in mainland China, as an SFC official explained their regulatory standards
  • Binance CEO Changpeng “CZ” Zhao was enthused by the broadcast, tweeting that “CCTV (China Central Television) just broadcasted crypto. It's a big deal. The Chinese speaking communities are buzzing”
  • However, perhaps they were buzzing a bit too loudly; following widespread coverage in industry media, CCTV silently removed the segment from their website
  • Additionally, on Monday Nanjing University announced the launch of a state-backed Chinese metaverse project

What happened: Crypto firm achieves SEC registration—but cannot handle Bitcoin

How is this significant?

  • The SEC (and public face Gary Gensler) have long taken the position that digital asset firms are welcome to “come in and register”, but the industry has pushed back against those statements, claiming no suitable registration framework exists
  • Now, a digital asset startup has indeed identified a route for SEC registration; but with a notable caveat
  • New York-based Prometheum Ember Capital claims to be the first SEC qualified custodian for digital asset securities; but since the only classification that Gensler has offered any certainty on is Bitcoin’s status as a commodity, Prometheum is excluded from dealing with the number one digital asset
  • The firm is also limited in the activities they can undertake; its special purpose broker-dealer licence allows it to custody digital assets, but currently excludes permission for clearing and settling, preventing any trading activity
  • The special purpose broker-dealer licence (proposed by Gensler’s predecessor Jay Clayton in 2020) also prevents such licensees from holding anything except digital asset securities, precluding existing TradFi firms from officially moving into the crypto asset space
  • Although this illustrates that there may technically be a possible path to SEC registration, it remains a restrictive process with limited approved activity, predicated on the belief that digital assets (excluding Bitcoin) are securities
  • Furthermore, financial lawyer Russell Sacks points out “The conditions in the December 2020 release are quite complex and rigid and create a very complex web of policies and procedures that need to be put into place in order to meet the requirements. The barriers to establishing special purpose broker dealers that are designed to deal with digital assets securities are still very much present”
  • Former CFTC enforcement lawyer Gary DeWaal likewise views the registration pathway as flawed, stating “[it’s] not the be-all, end-all solution”

What happened: Contagion latest

How is this significant?

What happened: Hardware wallet manufacturer Ledger faces backlash over recovery service

How is this significant?

  • French hardware wallet manufacturer Ledger thought they were launching a user-friendly new service to help ensure asset recovery this week; but instead they were faced with a “humbling experience” as those most likely to self-custody displayed widespread outrage at those plans
  • A proposed firmware update and monthly subscription fee would allow users to recover their private key (and thus access to their blockchain address) if they ever lost their seed phrase
  • Effectively, instead of storing (and thus potentially exposing) a user’s private key (or rather the seed phrase used to encrypt it) in one continuous string, Ledger announced a “Recover” service which breaks the private key into three overlapping “shards”, each of which would be stored with one of three “trusted custodian”
  • This conflicted with previous marketing efforts by Ledger, who wrote that “your private keys never leave the Secure Element chip… A firmware update cannot extract the private keys from the Secure Element”
  • Although the paid monthly service is strictly opt-in, it helped to crystalise the gulf in philosophy between those who favour convenience, and those who believe a hardware wallet is the ultimate means of ensuring personal control over one’s own assets
  • Amongst the key concerns for many in the digital asset community was the revelation that, if users sign up to the service, they run the risk of having their private key shards subpoenaed by government entities
  • Outrage was so widespread that Ledger were forced to delay the rollout of the new service, and guarantee more open-sourcing of their technology for decentralised community review

What happened: WEF issues regulatory recommendations

How is this significant?

  • On Thursday, the World Economic Forum (WEF) published a new white paper, titled “Pathways to Crypto-Asset Regulation: A Global Approach”
  • Although they acknowledge that “coordinating regulatory frameworks across jurisdictions is a complex and formidable task”, the WEF’s Digital Currency Governance Consortium nonetheless deems the effort worthwhile, thanks to the technology’s “limitless potential”
  • The white paper identifies the USA as the home of “regulation by enforcement”, but deems it the least effective regulatory approach, as “this approach is not recommended to build out a framework, as ‘regulation by enforcement’ precludes any meaningful discussion of what should and should not be regulated”
  • In particular, that regulatory approach is criticised for a lack of certainty and disincentivising innovation
  • Due to the borderless nature of digital assets, the WEF recommends multiple stakeholder involvement, rather than just government bodies; “Policy-makers and industry stakeholders need to collaborate across jurisdictions to ensure consistency and clarity. As these new technologies start from a position of transparency, it is possible to imagine even better regulatory tools to address cross-border concerns”
  • In terms of effective regulatory approaches, the report authors recommended either Outcome-based regulation, Risk-based regulation, or Agile regulation
  • Key recommendations for regional and national authorities included cross-sector co-ordination, unified taxonomies, and regulatory certainty
  • Sheila Warren of the Crypto Council for Innovation was quoted in the paper, saying “Crypto asset regulation requires a forward-thinking and flexible approach that balances innovation and stability. By examining global best practices, we gain valuable insights to develop regulatory frameworks that encourage growth, protect consumers and foster trust in this dynamic digital landscape”
  • The white paper concludes that “as the understanding of the opportunities as well as the distinct risks strengthens, there is a need to evolve a principles-based, agile approach that advances best practices and guidelines with a co-innovation lens. Crucially, policy-makers and industry stakeholders need to collaborate across jurisdictions to ensure consistency and clarity”

What happened: Dubai developers announce plans to construct “Bitcoin Tower”
How is this significant?

  • In a press release this week, developers in Dubai touted plans to construct “the world’s first Bitcoin Tower”
  • Given Dubai’s ambitions to become a global digital asset hub, it’s perhaps unsurprising that there now appears to be an intersection on the Emirate’s interest in crypto assets and bombastic architecture
  • The 40-storey building, developed by Metaverse Investments LLC, is identified as the first in a new hotel chain which “embraces new technologies of blockchain and artificial intelligence with attention to material sustainability and zero CO2 consumption, inspired by the upcoming COP28 summit in Dubai”
  • Salvatore Leggiero, the project developer, claims that guests will be offered NFTs which unlock “exclusive utilities”
  • Additionally, the press release touts a system whereby “the rental price will be considered as staking of crypto and will produce an APY that guests can redeem”
  • Salvatore Leggiero furthermore claims that due to this system “It will be the first hotel that gives you back the money you paid, plus interest”
  • The planned tower will exist in the metaverse as well as the physical world, with Leggiero announcing his ambitions (which have not yet received planning permission) to build it along Sheikh Zayed Road as part of the Dubai skyline
News Roundups