6th October, 2023
Market Overview:
Digital assets experienced another week of growth, as Bitcoin hit its highest levels in six weeks with a run above $28,000.
- Bitcoin traded predominantly in the $26,950 to $27,520 range this week, and recorded its best performance since mid-August, reaching a weekly high of $28,430 on Monday
- Ether tailed off after early growth, in a “sell the news” event after Ether futures ETFs launched
- Volume on said futures at launch was in line with most new ETFs, but lagged considerably behind Bitcoin’s first futures ETF
- Ether peaked at $1,738 on Monday, before experiencing a steady decline to current levels, just above the weekly low of $1,611
- Overall digital asset market capitalisation increased to $1.09tn, as gains amongst Bitcoin and several major altcoins compensated for Ether’s dip
- According to industry monitoring site DeFi Llama, total value locked in DeFi this week dropped almost $1bn to $38.3bn
Digital assets enjoyed another week of growth, as positive news rolled in globally and across multiple sectors of the industry. UBS became the latest big institutional name to announce tokenisation plans, the SEC lost in court again (and Grayscale sought to build on their recent victory with a spot Ether ETF conversion proposal), a Hong Kong VC raised $100m for Web3 investment, Sam Bankman-Fried’s long-awaited trial kicked off, a Dirham-backed stablecoin was launched, and much much more besides.
What happened: UBS launches “first blockchain-native tokenised fund” in Singapore
How is this significant?
- Swiss banking giant UBS became the latest major financial institution to embrace the benefits of tokenisation this week, launching a pilot for "the first blockchain-native tokenised fund" in Singapore
- This move follows in the recent footsteps of Franklin Templeton and Citi—but some industry observers argue that it’s the most significant step so far, as UBS are launching their tokenised fund on the public Ethereum blockchain, rather than using a private, permissioned chain
- On Sunday, UBS announced the pilot, in association with the Monetary Authority of Singapore's Project Guardian program
- The fund in question involves a Variable Capital Company (VCC) fund—a new form of company in Singapore—part of a wider VCC umbrella to bring "real world assets" onto the blockchain as part of Project Guardian
- Thomas Kaegi, Head of UBS Asset Management in Singapore and South East Asia, described the program as "a key milestone in understanding the tokenisation of funds, building on UBS’s expertise in tokenising bonds and structured products", intended to "help understand how to improve market liquidity and market access for clients"
- According to UBS' press release, the VCC fund will be tokenised through their own in-house tokenisation service, but represented as a smart contract on the public Ethereum blockchain, rather than a permissioned internal chain; thus not only enabling automation of functions "including fund subscriptions and redemptions", but also boosting transparency around transaction history
- UBS actually have some previous experience in asset tokenisation; in November last year they launched "the world's first publicly traded digital bond", and the month after issued a $50m tokenised fixed rate note, followed by a $50m tokenised note in June
- The release also notes that this latest development with Project Guardian is just the first step of many; "Following the successful launch of the first pilot transactions, UBS Asset Management will be looking to execute further live pilot use cases under Project Guardian—working with a wider set of partners and explore various investment strategies"
- As the largest bank from arguably the world's most-renowned banking market—and the hand-picked saviour of Credit Suisse—UBS' influence in the banking and asset management sectors is considerable, leading some observers to speculate that other banks could follow in launching asset tokenisation schemes
What happened: Judge rejects SEC request to appeal Ripple verdict
How is this significant?
- On Wednesday, the Southern District of New York Court denied the SEC’s request for an interlocutory appeal against the court’s recent ruling in the Ripple lawsuit
- This represents the SEC’s third legal setback in quick succession against the industry, following the initial July ruling, and subsequently Grayscale’s victory concerning a request for review on their ETF rejection
- The July ruling essentially declared that sales of XRP by Ripple only constituted "investment contracts"—i.e. securities—when they were offered directly to sophisticated professional investors, with prospectuses and materials outlining Ripple's plans for the business and how each investment would support growth of the XRP token
- However, when sales were conducted on public crypto exchanges, the blind bid conditions of those exchanges left buyers completely unaware their XRP was coming directly from Ripple
- The court ruled that programmatic sales, as on public exchanges, “could not lead investors to reasonably expect profits from Ripple’s efforts”
- This was widely seen as a victory for the crypto industry, but still contained a morsel of solace for the SEC in terms of recognising the direct institutional sales
- The SEC claimed their interpretation (and interpretation of programmatic sales) was important to "a large number of lawsuits"—so this latest ruling may have established a legal precedent against them using the same arguments in said lawsuits
- Last week, Financial Services Committee chair—and new interim House Speaker—Patrick McHenry suggested in Gensler's congressional grilling that the SEC’s aggressive stance to crypto firms does more harm than good and drives US industry participants off-shore
- In other SEC news, the agency filed an objection against Coinbase’s request to dismiss the lawsuit filed against it
- The SEC argues that Coinbase misinterprets the Howey Test and that formal contracts are not required for investment contracts, whilst Coinbase chief legal officer Paul Grewal dismisses SEC reasoning as “same old same old”, and argues that recent court rulings support the exchange’s view
- Meanwhile, major players in the US crypto industry joined together to support another exchange in the agency’s crosshairs; Binance
- VC Paradigm and stablecoin issuers Circle filed an amicus brief and motion of support respectively, arguing that the SEC has overstepped its bounds
- Paradigm said that “The agency’s arrogation of authority cannot stand… unsavory allegations should not define the scope of an agency’s powers”, whilst Circle claimed the agency’s interpretation of the BUSD stablecoin as a security “may have significant ramifications for competing issuers like Circle, as well as for the digital-asset ecosystem and US economy more broadly”
- In other Ripple news meanwhile, the XRP developers received a digital asset licence from the Monetary Authority of Singapore (MAS) allowing them to “offer regulated digital asset token services”
- Ripple CEO Brad Garlinghouse commented that “Under MAS’ leadership, Singapore has developed into one of the leading fintech and digital asset hubs striking the balance between innovation, consumer protection and responsible growth”
What happened: Grayscale files to convert Ether fund into spot Ether ETF
How is this significant?
- Digital asset investment firm Grayscale filed to convert their $5bn Ether fund (ETHE) into a spot Ether ETF on Monday
- This effectively represents a thematic blending of several recent industry developments; a recent slew of Ether futures ETF launches and Grayscale’s court victory against the SEC regarding their spot Bitcoin ETF conversion rejection
- Plans to convert ETHE into a spot Ether ETF essentially mirror the firm’s efforts with their GBTC fund, and could (if approved) make Grayscale one of the first issuers of a spot Ether ETF
- Other firms to have applied for spot Ether ETFs include ARK and VanEck, which both filed a month ago, and Invesco (with industry firm Galaxy acting as “execution agent”)
- In a statement announcing the filing, Grayscale CEO Michael Sonnenschein said the move should be supported as an institutional-friendly offering in the US; “At Grayscale, our unwavering commitment is to offer investors transparent and regulated access to crypto through product structures that are familiar. As we file to convert ETHE to an ETF, the natural next step in the product’s evolution, we recognize this as an important moment to bring Ethereum even further into the U.S. regulatory perimeter”
- Given the SEC’s track record of delays and rejections thus far, one should however probably not expect an immediate approval for Grayscale’s filing, at the very least not before any spot Bitcoin ETF approvals
What happened: Dirham-backed stablecoin launched in UAE by SoftBank veteran
How is this significant?
- Since the UAE outlined plans to become a global crypto hub, it was perhaps only a matter of time until the first localised stablecoin appeared; and now it has, courtesy of former SoftBank executive Akshay Naheta
- The project is headquartered within Abu Dhabi’s international financial free zone, and partnered with Hong Kong based DRAM trust, which according to Bloomberg “has ties to several high-net-worth individuals”
- The DRAM stablecoin will be one of the few backed by a fiat currency that isn’t the US dollar; although it should be noted that the UAE dirham itself is pegged to the greenback at a 3.67:1 exchange rate, creating a stable value
- In an interview, Naheta said “Our main focus is the unbanked and underbanked in… [high inflation] nations [such as Turkey and Egypt]. If you want to diversify your risk and be in a currency that’s complimentary to the dollar, there’s a big percentage of money that can move into this”
- DRAM coins will initially be available on decentralised exchanges (DEXes) before listing on centralised exchanges (CEXes) in the future, according to Naheta
- He believes that the UAE’s position (financially as a hub for expats and international investment,and geographically proximate to several inflation-hit nations) strengthens the proposition of a Dirham-backed stablecoin; “We’re moving into a whole new and rewired financial system where the dirham will be a big player. I’m extremely bullish on the UAE. It’s the new Switzerland—geopolitically neutral, a great transportation hub and a top tourism destination”
What happened: CMCC raises $100m for Hong Kong web3 investments
How is this significant?
- Hong Kong’s South China Morning Post (SCMP) newspaper reported on Wednesday that local venture capital firm CMCC concluded its first $100m funding round, with more than 30 investors participating
- Co-founder Martin Baumann told the paper that the $100m fund—dubbed the Titan Fund—included investments from a range of institutions and individuals, such as blockchain company Block.one, Hong Kong tycoon Richard Li’s Pacific Century Group, Winklevoss Capital, Jebsen Capital and Animoca Brands founder Yat Siu
- Titan is CMCC Global’s fourth fund in total, and will “offer equity investments in early-stage blockchain start-ups with a heavy focus on Hong Kong”
- Baumann told the SCMP “If Hong Kong continues on its route of embracing Web3, there will naturally be more and more entrepreneurs starting companies in that space. And we can be their first capital. Ever since Hong Kong embraced this [sector], we see a steady increase [of] new companies aiming to settle down here and companies relocating to Hong Kong”
- He did acknowledge that fundraising was “super hard” in the current digital asset VC climate, which has now registered seven straight quarters of decline according to Crunchbase data
- Web3 startups raised around $1.3bn in Q3, down from $2bn in Q2, and massively down from $8bn in Q2 2022
- There is some dispute on the exact figures; blockchain data firm Messari for instance quotes the Q3 2023 raises at just under $2.1bn, but agrees that figures are at a three-year low
- However, there are still startups securing healthy funding even in this climate; Web3 loyalty app Blackbird closed a $24m Series A round this week, led by Andreessen Horowitz (a16z)
- Morgan Beller of NFX Capital Management told Bloomberg that “FTX forced us to ask straightforward questions” that weren’t regarded during the height of VC mania in 2021, arguing that the industry “hasn’t had its ChatGPT moment”, catalysing mainstream consumer usage
- She adds that crypto winter conditions created a “filter” where startups are now being launched by people passionate about the industry and solving problems, rather than opportunists looking to capitalise on a gold rush environment
- In other Hong Kong news, local market operator Hong Kong Exchanges and Clearing Limited (HKEX) announced the creation of a blockchain-based settlement platform
- As part of a Hong Kong/Mainland China market access program called Stock Connect, the new HKEX Synapse platform “aims to boost operational efficiencies, lower settlement risks and bolster transparency by using smart contracts to augment post-trade workflows”
- HKEX executive Glenda So stated “HKEX Synapse will support the next phase of growth for international participation in Mainland China’s equity markets… This technology-empowered platform will not only improve post-trade efficiencies, but will, over time, build a better, stronger ecosystem, supporting both market growth and investor growth strategies”
What happened: Stablecoin issuers Circle roll out tokenised credit protocol
How is this significant?
- Circle, issuers of the USDC stablecoin, announced several new ventures this week, including Perimeter; a protocol for the tokenisation of credit
- According to their press release, the firm developed a credit solution due to the fact that “for new entrants to participate in these markets, the ability to securely unlock credit on chain through safe standards and underwriting, represents a significant barrier to entry”
- Circle’s VP of Product Rachel Meyer stated “DeFi protocols have pioneered how open networks using stablecoins bring value and financial inclusion to anyone with a wallet and internet connection. Transparent flow of funds and smart contracts enacting ‘code is law’ bring improved efficiency, automation, speed and scale relative to traditional financial markets due to programmable infrastructure and digital asset 24/7 rails”
- The Perimeter white paper and public github codebase were released in conjunction with the announcement, allowing interested parties to acquaint themselves with the inner technical workings of the project and build on top of it
- According to Circle, Perimeter can “accommodate a wide range of credit use cases, from invoice factoring for small and medium sized businesses, to institutional crypto credit for trading opportunities, global payroll advances or instant settlement capabilities as part of merchant processing”
- Institutional DeFi platform OpenTrade was the first project to utilise Perimeter, calling it “a key technological foundation for building a secure, scalable, and composable platform” behind the creation of a yield-generating tokenised US treasury pool
- Additionally, Circle announced Circle Research, a new research & development division “launched with a charter to accelerate and amplify technical innovation within crypto, blockchain, and Web3 through open-source research”
What happened: Contagion latest
How is this significant?
- Former FTX leader Sam Brankman-Fried’s criminal trial kicked off this week, garnering lots of column inches, down to coverage of his new haircut in the WSJ
- In the opening statements, the prosecution argued that Bankman-Fried knowingly committed fraud to fund a lavish lifestyle, whilst his defence claimed he suffered the effects of a “perfect storm” of cascading liquidations and bank runs, suffering in the light of judgement in hindsight
- However, the defence did argue that sister firm Alameda Research enjoyed a privileged relationship with FTX, including the ability to withdraw money from the platform; possibly as a means to undermine former Alameda chief Caroline Ellison later in the trial, as she will act as star witness against Bankman-Fried
- According to a Wall Street Journal report on Thursday, some FTX employees discovered and warned about the “backdoor” enabling fund-funnelling from FTX to Alameda, reporting it to former FTX director of engineering Nishad Singh, who pled guilty before trial in a deal with authorities
- Several industry participants and observers appear keen for Bankman-Fried to be scrutinised and act as a cautionary tale
- Canadian investor Kevin O’Leary told industry publication Coindesk “All the crypto cowboys that were the founders of this industry… they’re all going to be gone soon... They all have arrows in their backs”
- Meanwhile, Fractal co-founder Anya Kantorovich said the industry “is ready to close the chapter on FTX”, saying its collapse due to opaque internal workings illustrates the benefits of blockchain technology’s natural inclination towards transparency, operational efficiency, and collateral management capabilities
- Two private jets (valued at $28m) purchased by FTX are reportedly the target of seizure by the United States DoJ
- However, there was some potential good news for FTX too; a new raise by A.I. firm Anthropic reportedly valued it at $30bn
- Bankman-Fried used FTX funds to lead a $580m Series B round last April, meaning Anthropic’s increased valuation “could make a 100% recovery rate possible for creditors”, although “It remains uncertain when the FTX bankruptcy restructuring team would be able to sell off its stake”
- Outside of FTX, hardware wallet manufacturers Ledger cut headcount by 12% in a bid to reduce their burn rate as the firm feels the effects of crypto winter and consumer backlash against a new (optional) recovery service which stores users’ private keys
- Celsius lawyers argued for the resurrection of the collapsed lender as a mining firm in the company’s Chapter 11 bankruptcy trial, saying that proposal comes with $450m of seed capital, with creditors repaid via $2bn of Bitcoin and Ether distribution alongside shares in the proposed phoenix firm
- Su Zhu, co-founder of failed hedge fund Three Arrows Capital (3AC) was arrested at Changi airport in Singapore, and jailed for four months due to a committal order from liquidation firm Teneo
- 3AC Co-founder Kyle Davies is subject to the same order, but remains at large
- Singapore’s Business Times newspaper reported that Zhu’s $36m mansion in Singapore has been converted into an urban farm by his wife, offering guided tours and fine dining
What happened: DBS digital asset strategy is “for the long run”
How is this significant?
- Singapore’s largest bank, DBS, remains committed to the digital asset space despite trying conditions over the last couple of years—and is investing with an eye towards many more years down the road
- Speaking to Coindesk, DBS head of institutional digital asset Evy Theunis said “we’re still doing a lot, getting our hands dirty for the long run”
- Awarded “the safest bank in Asia” for over a decade running, Thenusi disclosed that the bank for instance hasn’t utilised a licence for securities purchase via stablecoins, as they wish to track every blockchain wallet a token has ever interacted with for AML purposes; and the multi-chain nature of stablecoins makes this highly complex
- Speaking at the recent Token2049 conference in Singapore, she however revealed that throughout crypto winter, “digital assets under custody at DBS grew around 150% year-on-year as of the end of the second quarter”, outstripping even the handsome growth of Bitcoin and Ether in the same timeframe
- Theunis added that this type of growth is driven by institutional investors; “Right now we are focusing on institutional players, continuing to evolve on the accredited investor side. Not so long ago, we enabled all our qualified accredited investors to buy digital assets on the exchange”
- She also implied a “wait and see” approach regarding regulatory clarity was keeping a lot of additional capital on the sidelines for now; “we’ve seen how a lot of traditional players have readied themselves, but they've not been really active”
What happened: Bank of Korea announces plans for wholesale CBDC testing
How is this significant?
- According to a Wednesday press release from the country’s central bank, South Korea is the latest nation to make major moves in the exploration of a CBDC
- In particular, the bank’s pilot program concentrates on a wholesale CBDC, testing whether such a CBDC “can be used as a settlement asset for commercial bank tokenized deposits”
- The project is a collaborative effort with the BIS and Korea’s financial industry regulators
- Financial Supervisory Service First Deputy Governor Lee Myung-soon said “The BoK has persistently pursued technological research related to CBDCs. This test, building upon past achievements, represents a significant step towards creating a prototype for the future monetary system"
- The Bank of Korea has already done research on a retail CBDC, but determined that the current financial infrastructure is sufficiently efficient for such uses
- The wholesale CBDC trial will likely utilise the BIS’ Unified Ledger system, intended to integrate multiple disparate fiat currencies into an interoperable network
What happened: Geothermal Bitcoin mining firm launches in El Salvador
How is this significant?
- El Salvador, the first country to officially adopt Bitcoin as legal tender, will soon be one of the first to officially mine it as well, after announcing the launch of a mining firm using the nation’s geothermal energy
- Volcano Energy will operate the mining pool in partnership with mining software developer Luxor, and will contribute 23% of net income to the Salvadoran government as a public-private joint venture
- The Salvadoran government will act as “buyer of first and last resort” for mined Bitcoins, investing profit back into the nation’s energy infrastructure as it further integrates Bitcoin into the financial infrastructure
- Company CSO Gerson Martinez commented “Lava Pool is another example of El Salvador’s first mover advantage as a nation-state in the Bitcoin ecosystem. Our vision is to create a vertically integrated energy and Bitcoin mining company whose value is accretive to investors and to all Salvadoran citizens
- Volcano Energy secured $1bn in capital commitments in Q2 this year, led by stablecoin issuers Tether