Nickel Research Centre

Nickel News Roundup - Week 49

8th December, 2022

Market Overview:

Digital assets experienced predominantly range-bound trading this week, dropping slightly (but outperforming stocks) on Tuesday amidst a wider market rout.

  • Bitcoin hit a weekly high of $17,360 on Monday, before dropping to a low of $16,760 on Wednesday
  • Trading predominantly stayed in a narrow range between $16,900 and $17,100 throughout most of the week
  • Bitcoin’s current price of $16,830 equates to a 1.5% weekly decline—still better than the daily performance of US stock markets in the early week as recessionary fears and concerns over Federal Reserve monetary policy persist
  • Ether followed Bitcoin’s movements, peaking at $1,301 on Monday, before falling to a weekly low of $1,226 on Wednesday
  • Ether’s current price of $1,232 represents a 3.7% decrease
  • Total Ether supply exceeded pre-merge levels for the first time since November 9th, currently clocking in at a 0.03% annual supply growth
  • Overall market capitalisation dropped to $842bn
  • According to industry monitoring site Defi llama, total value locked in DeFi this week across all blockchains and platforms increased slightly to $42.1bn, partly driven by traders moving off centralised exchanges

Former FTX CEO Sam Bankman-Fried made a flurry of media appearances this week, establishing his own narrative around FTX’s collapse. The collapse and consequences of FTX continue to dominate reporting, but adverse market conditions didn’t stop others from making moves in the space; Goldman Sachs is eyeing a slew of acquisitions, the UK government is proceeding with regulatory consultations, CME introduced more industry indices, Standard Chartered and Northern Trust released new off-exchange settlement services, and significant VC raises continue (albeit at a slowed pace and reduced valuations).

What happened: FTX latest—Sam Bankman-Fried speaks to media

How is this significant?
  • FTX coverage continued to dominate the news cycle this week—not least because former CEO Sam Bankman-Fried followed up his remote interview at last week’s New York Times Dealbook summit with a host of other interviews and statements this week
  • Bankman-Fried (aka SBF) indicated he was unlikely to testify at an upcoming December 13th Financial Services Committee hearing about FTX, as he claims to still be “learning and reviewing what happened”
  • A common theme of recent interviews was the repeated denial of any wilful wrongdoing, instead citing messy and confused internal accounting practices as a route cause of him losing oversight over his empire’s true financial state
  • In an interview with New York Magazine, he said that alongside the “historical banking artifact” of FTX users sending fiat deposits to Alameda before FTX had a bank account “we should not have allowed a margin position to get that big. It was too big. And it was too big, it was too big, given the liquidity of the collateral”
  • “Alameda ended up with a very large position on FTX that involved a very substantial U.S. dollar borrow that it was not going to be able to meet in a crisis scenario. And it’s not something that I should have allowed to happen. Accounting shouldn’t have let that happen—should not have made it hard to figure out what the size of that was… I should have been much more cautious and much more, you know, less trusting and more careful than I was”
  • In a 2-hour interview with industry publication The Block on Tuesday, he also claimed that auditors and regulators couldn’t see financial holes due to both customer positions and Alameda Research positions not being included in FTX financials
  • Bankman-Fried said that since he wasn’t involved in the day-to-day running of Alameda, he only had surface-level awareness of their financials, which allowed them to build up liabilities far beyond his reckoning
  • The interview also disclosed that top executives were “extended large personal lines of credit” and that “many customers had negative positions open on FTX…Those were not part of FTX’s assets or liabilities, they were customer assets and liabilities, and so FTX’s financials were not directly impacted by this”
  • In terms of large personal lines of credit, an anonymous FTX source speaking to industry publication claims that an FTX margin position which grew too large belonged to Caroline Ellison, the CEO of Alameda research
  • The document viewed by the publication alleges that Ellison “had a negative balance at that time of around $1.31 billion in May 2022”, aligning with the timeframe when the Terra Luna implosion rocked digital asset markets
  • The Block pressed Bankman-Fried on claims by Ellison that he knew about credit lines to Alameda, and he conceded “I think she’s likely correct, that Alameda Research was effectively extended a substantial amount of credit by FTX and in the end, that margin position became under severe stress and it blew out”
  • In another interview, he appeared to specifically direct responsibility for FTX’s downfall towards Ellison, saying “there was a pretty big diffusion of responsibility” and “I don’t control her”
  • He also appeared to express regret for her appointment in the New York Times, saying “I was frankly surprised by how big Alameda’s position was, which points to another failure of oversight on my part and failure to appoint someone to be chiefly in charge of that”
  • Crypto Twitter was sent into a flurry of conjecture early in the week when Ellison was allegedly spotted in New York City, leading to speculation that she may be cutting a deal with federal agencies whilst SBF remains ensconced in the Bahamas
  • Binance CEO Changpeng “CZ” Zhao weighed in on Twitter, giving his perspective on “a list of wrong narratives”
  • When accused of crashing FTX by tweeting that Binance planned to divest themselves of their FTT holdings, he opined “no healthy business can be destroyed by a tweet”
  • He also said that if any single tweet could be blamed for FTX’s downfall, it was one by Ellison responding to CZ offering to buy Binance’s FTT at $22—”she gave her floor price away”
  • Dave Ripley, incoming CEO of digital asset exchange Kraken, also didn’t mince words regarding their former competitors, claiming “We have information to know that fraud was committed there”
  • Reuters reported on Tuesday that Bankman-Fried has now retained the services of high-profile defence attorney Mark S. Cohen to represent him, whilst Ellison secured the services of law firm Wilmer Cutler Pickering Hale & Dorr
  • Outside of key personae in the FTX executive echelons, Senate Banking Committee chairman Sherrod Brown cited the exchange as a reason for more regulation to “crack down on crypto”
  • He did however concede that there’s no unanimous support for such measures, saying “Half the Senate, the Republicans and a handful of Democrats, still think crypto is legitimate and that it is something that should be a significant part of our economy”
  • His committee counterpart, Republican Pat Toomey confessed he had been fooled by Bankman-Fried and FTX; “I bought the story. I bought the hype. I was impressed”
  • Now, Toomey is aiming to pass a (bipartisan) narrow digital asset regulation bill before his retirement at the end of the year, including regulation on stablecoins, clarification on “crypto broker” definitions, and tax exemptions for small-scale digital asset transactions
  • He told Bloomberg that a lack of regulatory clarity forced companies like FTX overseas, creating crises such as the one seen now, but “This blowup of FTX is not about crypto. It’s an indictment on the behaviour of one or more individuals and really on us for not having passed legislation that would create the guardrails, the regulations, the consumer protections to allow this space to thrive”
  • Rostin Behnam, chairman of the CFTC used FTX as a justification for attempts to secure more regulatory remit for his agency, saying “We need to move quickly on a thoughtful regulatory approach to establish guardrails in these fast-growing markets”
  • In a piece of good news, solvent subsidiary FTX Japan has apparently drafted a plan to return user assets from January onwards via the Liquid platform, pending local regulatory approval 

What happened: Goldman Sachs plans digital asset industry acquisition spree

How is this significant?
  • Reuters reported this week that Goldman Sachs exhibit continued faith in the digital asset industry despite FTX fallout, to the extent of planning eight-figure acquisitions amidst depressed valuations
  • Mathew McDermott, Goldman’s head of digital assets, told Reuters “We do see some really interesting opportunities, priced much more sensibly… It’s definitely set the market back in terms of sentiment, there’s absolutely no doubt of that.... But to reiterate, the underlying technology continues to perform”
  • McDermott also noted that the collapse of FTX had a positive effect on their own trading volumes; “What’s increased is the number of financial institutions wanting to trade with us… I suspect a number of them traded with FTX, but I can’t say that with cast iron certainty”
  • Other TradFi firms keen to exploit current crypto winter conditions include Britannia Financial Services 
  • CEO Mark Bruce told Reuters “We have seen more client interest since the demise of FTX. Customers have lost trust in some of the younger businesses in the sector that purely do crypto, and are looking for more trusted counterparties”
  • Bloomberg reported that growing awareness of counterparty risk could be a key consequence of the FTX debacle, including greater calls for off-exchange settlement; Nickel Digital’s David Fauchier said “The era of posting collateral to offshore exchanges is over. We’re refusing to post collateral directly to almost all venues… We’re hammering them every day to implement some form of off-exchange settlement solution”

What happened: UK moves towards digital asset regulation

How is this significant?
  • Bloomberg reported that FTX could catalyse movement towards a more comprehensive regulatory framework for digital assets in the UK
  • According to sources, the Treasury will soon launch a consultation process for the new regulatory regime
  • The FT reported a wide-ranging scope for regulation, including “provisions for how to deal with the collapse of companies and restrictions on the advertising of products”
  • A distinct regulatory framework (especially one that provides more support than the EU’s MiCA legislation) could play a key role in prime minister Rishi Sunak’s ambitions (announced when he was chancellor in April) to make the UK “a global cryptoasset hub”

What happened: Contagion latest—Zipmex secures buyout

How is this significant?
  • Beleaguered Asia-Pacific digital asset exchange Zipmex seemingly secured a positive resolution to their recent travails, according to sources familiar with the matter
  • VC fund V Ventures finalised a share sale agreement to acquire the exchange in a deal worth $100m, split between $30m in cash and the rest in digital assets
  • The deal will account for 90% ownership of Zipmex, with the digital asset component allowing users to eventually withdraw frozen funds
  • Institutional lender Genesis sent out a customer letter advising patience, saying it would likely be “weeks” rather than days before their withdrawal freeze is resolved
  • Singapore-based Amber Group were the latest to cut staff, as well as freezing a recent $100m funding round at a flat valuation, in order to undertake a new funding round (presumably at a lowered valuation)
  • Top executives at Amber claimed it’s “business as usual” within the company, despite speculation they’ve been burned by FTX contagion
  • Amber were founded by Morgan Stanley alumni in 2018, and secured $200m funding on a $3bn valuation in February this year
  • Digital asset exchange Bybit announced a 30% workforce layoff, citing “an even colder winter than we had anticipated from both industry and market perspectives”
  • Teneo, the appointed liquidators of fallen hedge fund Three Arrows Capital (3AC) provided an update on recovery efforts in a court hearing on Friday
  • They have seized nearly $36m from 3AC bank accounts in Singapore, as well as “$2.8 million from forced redemptions of investments”
  • Liquidators also continued their stance that 3AC co-founders Kyle Davies and Su Zhu have been uncommunicative and uncooperative with them, although both have been happy to share their own narratives on Twitter
  • A federal bankruptcy judge in the US is to rule on whether bankrupt lender Celsius owns the digital assets customers deposited on their platform
  • Celsius is seeking permission to sell $18m of crypto assets from their balance sheet to fund continued operations, but given that the assets came from depositors using the firm’s interest-bearing accounts, there will likely be opposition if he rules for Celsius
  • The same bankruptcy judge approved a plan to pay non-executive staff $2.8m in bonuses to prevent an employee exodus that would derail ongoing recovery efforts
  • Speaking of Celsius, billionaire Mike Novogratz’s Galaxy Digital won an auction to acquire self-custody platform GK8 from their company portfolio
  • Terms of the deal were not disclosed, but GK8 cost Celsius $115m just over a year ago

What happened: Binance clarify revenue model and pass audit

  • Digital asset exchange Binance continued a recent drive towards greater transparency, offering more insights into their revenue streams and undergoing an audit for their new Proof of Reserves system by Mazars
  • In an interview with TechCrunch, CEO CZ said that 90% of their revenues come from transaction fees on the exchange
  • Additionally, he said that they could earn $40m annually by re-enabling adverts on data aggregator Coinmarketcap, but chose to keep them switched off for a “cleaner” experience
  • An audit by Mazar’s, undertaken in late November, correlated with the (Bitcoin) Proof-of-Reserves system subsequently released by the exchange
  • Mazar’s stated that “At the time of assessment, Mazars observed Binance controlled in-scope assets in excess of 100% of their total platform liabilities”

What happened: CME Group launches new DeFi reference rates and indices

How is this significant?
  • CME Group broadened their coverage of the wider DeFi ecosystem, adding real-time indices and rates for popular protocols Aave, Curve, and Synthetix
  • Giovanni Vicioso, CME’s head of crypto products, said “These three new benchmarks, together with Uniswap launched earlier this year, will capture more than 40% of the total value locked in [DeFi] protocols on the Ethereum blockchain”
  • Interest in DeFi is currently growing, as FTX’s collapse has made some traders wary of keeping their funds on centralised exchanges; Vicioso recognised current market volatility by stating “We continue to take a cautious, careful approach to this market. Exactly how it will develop is yet to be seen”

What happened: Zodia introduces exchange insolvency protection services

How is this significant?
  • Digital asset custodian Zodia—a joint venture between Standard Chartered and Northern Trust—has released a new service aimed at safeguarding client assets on exchanges
  • Their “Interchange” service “offers an alternative to the pre-funding and margin models on exchanges”
  • Instead of directly sending their funds onto exchanges, clients can hold them with Zodia, who will mirror the balances on exchanges
  • Sister company and institutional exchange Zodia Markets will also leverage the technology, aimed at assuaging current concerns over counterparty risk in the wake of FTX’s collapse

What happened: Digital asset VC news

How is this significant?
  • Digital asset infrastructure firm Blockstream is taking a cue from current market conditions, seeking fresh funding, but at a reduced valuation compared to previous rounds
  • The valuation may be close to $1bn, compared to the $3.1bn Series B valuation when they raised from $210m from investors including Baillie Gifford in August 2021
  • Blockstream CEO Adam Back said new funding would primarily be directed towards hosted Bitcoin mining services; “We rapidly sold out all of the capacity and have a big backlog of existing and new customers with miners seeking large-scale hosting with us”
  • Web3 developer platform Fleek successfully closed a $25m Series A round
  • Investors included Polychain Capital, Coinbase Ventures, Digital Currency Group, and North Island Ventures
  • Former FTX.US chief Brett Harrison is currently raising funds for a digital asset startup to create trading software, according to Bloomberg reports
  • Harrison didn’t return any requests for comment, but Bloomberg and VC publication The Information speculate raises for 1/10th the valuation, ranging from $6m on a $60m valuation to $10m on a $100m valuation
News Roundups