Nickel Research Centre

Nickel News Roundup - Week 19

11th May, 2023

Market Overview:

Digital assets experienced pullbacks this week, amidst a combination of wider macroeconomic concerns and congestion on the Bitcoin blockchain.

  • Bitcoin peaked over the weekend at $29,720, before declining steadily throughout the rest of the week, this culminated in a weekly low of $27,230 late on Wednesday
  • Bitcoin fell in value after a drastic increase in network usage led to a significant amount of transactions waiting to be processed
  • This increase in usage is due to deployments of other utilities onto the Bitcoin blockchain, such as NFTs (known as Ordinals) and tokens (known as BRC-20s)
  • Bitcoin’s decline was compounded by concerns over the US debt ceiling, leading to losses across many risk-on assets
  • Bitcoin’s current price of $27,500 equates to a 5.3% drop
  • Ether predominantly traded between $1,850 and $1,930, with extremes of $1,816 and $2,015
  • Ether’s current price of $1,831 represents a 3.8% decrease
  • Ether supply burn rose significantly, as increased DeFi activity led to a greater burn rate of transaction fees, leading to a current annual net issuance of -2.87%
  • Total Ether supply change since the Merge (the transition to proof-of-stake consensus last September) has now seen a reduction of over 66,000 Ether, with a forecast annual burn of 4.1m Ether at current burn rates
  • Whilst annual issuance will remain stable (at around 687,000 Ether), burn rate fluctuates according to network activity — since January, network activity has been consistently high enough to make Ether a net deflationary asset
  • Overall market capitalisation dropped to $1.12tn
  • According to industry monitoring site DeFi Llama, total value locked in DeFi this week across all blockchains and platforms shrunk slightly to $47.3bn

Digital assets experienced a wide range of institutional adoption this week; but regulatory clarity—or the lack thereof—continues to be the lead story in the US, even as the country’s banking sector shows little sign of healing itself. Elsewhere globally, the regulatory approaches of Hong Kong and the UAE were praised, Liechtenstein announced plans to accept Bitcoin as payment for state services, several industry firms reported impressive Q1 results, and Deloitte, EY, BNP Paribas, Goldman Sachs, and Moody’s were just a few of the institutional names to feature.

What happened: More US banks suffer in the wake of First Republic collapse

How is this significant?
  • Mid-sized and regional banks in the US continue to creak under the conditions of deposit flight and failed investments, leading the Federal Reserve to caution on a credit crunch
  • Last week’s collapse of First Republic was the second-largest bank failure in US history—but current market conditions suggest it won’t be the last
  • PacWest and Western Alliance became the latest to prove the volatility of the banking market, both dropping over 50% in a day as reports of possible sales spread
  • Toronto-Dominion Bank called off a $13.4bn acquisition of First Horizon, sending its leading to share prices dropping 33%
  • Although the market performance wasn’t as pronounced this week as during the actual collapses of larger banks (SVB, Credit Suisse, First Republic), the length of the ongoing crisis continues to illustrate some innate advantages of decentralised finance; such as fully-funded models, transparency, decentralisation, and predictable supply dynamics
  • European regulators sought to reassure the public that the continent’s banking sector is subject to much more stringent supervision than America
  • As billionaire investor Bill Ackman tweeted; “Confidence in a financial institution is built over decades and destroyed in days. As each domino falls, the next weakest bank begins to wobble”
  • Perhaps perversely (and in a statistic unlikely to foster much goodwill), US banks recorded record profits in Q1—with the largest profits reserved for the banks who purchased failed banks at major discounts
  • As “The Crypto Story” author Matt Levine wrote in a Bloomberg Opinion piece “Nobody trusts the banks now… if your bank has huge mark-to-market losses, you are more likely to hear about it. And if you are worried about the solvency of your bank, you can tweet or Whatsapp or group-text about it, and worries can spread faster, and you can withdraw your money via app”

What happened: Coinbase continues fight for US regulatory clarity

How is this significant?

  • US-based, publicly listed exchange Coinbase stayed on the front foot this week after filing a lawsuit against the SEC last week demanding an answer to a previous request for clarity on digital asset securities
  • CEO Brian Armstrong said they weren’t planning to leave the US, but told Bloomberg that the SEC’s plan for an enforcement action against his exchange was a prime opportunity for “regulatory clarity”
  • Despite downplaying desires to leave the US, Coinbase also published a blog post this week, detailing their attendance at the Dubai Fintech Summit, and praising UAE lawmakers for creating a pro-business, pro-consumer regulatory framework
  • In particular, Coinbase promoted the Virtual Asset Regulatory Authority (VARA) for its status as a crypto-native regulatory body, rather than the US approach of (attempted) shoehorning crypto into existing regulation and guidelines drafted in the 1940s
  • On Thursday, a US Court obliged the SEC to respond to Coinbase’s complaint within ten days, after which Coinbase would have seven days to file a response
  • Coinbase were also involved in a landmark legal decision regarding a former employee; former manager Ishan Wahi was sentenced to 2 years federal imprisonment for insider trading, after exploiting advanced knowledge of future token listings
  • Strong Q1 performance across digital assets led to good news for Coinbase outside the regulatory realm; first quarter results were released and strongly outperformed expectations
  • Coinbase stock was up 16% post-earnings, after news that the exchange achieved Q1 revenues of $773m; up nearly 25% from the previous quarter, and more than $100m above analyst estimated of $655m
  • However, Goldman Sachs analysts refused to upgrade their assessment of the stock, pointing towards the very issue Coinbase is crusading against; regulatory uncertainty; “we see limited near-term catalysts for increased retail engagement, adoption in the US”

What happened: US market makers pull back amidst regulatory uncertainty

How is this significant?

  • Market makers Jane Street and Jump Crypto both revealed their intentions to scale back crypto operations in the US this week, due to ongoing confusion about the regulatory landscape
  • Jane Street plans to reduce their crypto exposure globally, but Jump Crypto are actually expanding and recruiting internationally, according to people with knowledge of the matter
  • Sources told Bloomberg that both will continue US market-making, but on a smaller scale than previously
  • Both firms have also been affected by the major crypto contagion events of last year; Jump was exposed to the Terra LUNA blockchain ecosystem when the UST algorithmic stablecoin collapse set off last year’s crash, and Jane Street were cited by the CFTC as a US-based entity trading on Binance’s international (rather than US-based subsidiary) exchange

What happened: Hong Kong praised as “crypto regulation leader”

How is this significant?

  • Speaking at the Bloomberg Asia Wealth Summit, several venture capitalists reinforced the perception that Hong Kong’s recent drive to become a global digital asset hub is bearing fruit
  • Edith Yeung, a partner at VC firm Race Capital, stated that “Hong Kong could lead the way with clear policies that attract good actors and drive the bad ones away”
  • Speaking at the same summit on Tuesday, Hong Kong Monetary Authority chief Eddie Yue sought to reassure observers that a supportive regulatory regime doesn’t mean a Wild West free-for-all
  • Said Yue; “Our regulation will be tight. We will let them create the ecosystem here and that actually brings a lot of excitement. But that doesn’t mean light-touch regulation”
  • Hong Kong’s new legislative regime for virtual asset service providers will launch in June, with retail investors provided access to major digital assets like Bitcoin and Ether
  • Yue added that guidance for banks is being developed, and the Securities and Futures Commission will soon release the results of deliberations on the scope of retail investor exposure to the asset class
  • When asked whether officials could backtrack on the city’s crypto pivot, Yue instead said that formal crypto rules will bring clarity and transparency, and that Hong Kong was previously too restrictive, before lowering their guardrails to a “reasonable and sustainable level” recently
  • In news geographically relevant to Hong Kong, new research this week suggested that despite Mainland China’s official ban on digital assets, PRC investors are still managing to achieve exposure to crypto
  • Digital asset data firm Chainalysis claims that since the ban in September 2021, “The average monthly value of crypto flowing to China did roughly halve in 2022 from a year earlier but still remained sizable at $17 billion”
  • Caroline Malcolm, global head of public policy at Chainalysis explained “Essentially, bans don’t work. The decentralised nature of cryptocurrencies and the fact that they can be transferred peer-to-peer and traded on global exchanges make it difficult for any government to completely eliminate them”
  • Speaking of China, the South China Morning Post reported that French bank BNP Paribas will foster adoption of the e-Yuan CBDC, linking digital yuan wallets to corporate bank accounts for “efficient real-time and convenient” CBDC payments, with additional testing being undertaken for implementation in cross-border payments, supply chain financing, and smart contracts

What happened: Deloitte, Goldman Sachs, BNP Paribas join institutional blockchain project

How is this significant?

  • A host of major names in industry and finance this week joined the Canton Network; “a new blockchain system aimed at linking disparate institutional applications”
  • Participants in Canton include Deloitte, Goldman Sachs, BNP Paribas, Microsoft, Deutsche Börse Group, Cumberland, Moody’s, Paxos, SBI Digital Asset Holdings, and Cboe Global Markets
  • Canton will help link blockchain-based apps written in the Daml smart contract language, originally developed by Digital Asset Holdings, a blockchain startup once led by JP Morgan executive Blythe Masters
  • According to Bloomberg, interoperability is a key selling point for Canton; “As a so-called “network of networks,” Canton claims it can overcome [interoperability and privacy issues] by allowing systems to work together without requiring the entities that run them give up control”
  • Jens Hachmeister of Deutsche Börse celebrated Canton’s potential as “a key building block for future digital and distributed financial market infrastructures”
  • On Thursday, Deloitte also revealed their participation in another blockchain ecosystem, using the KILT blockchain for persistent digital credentials
  • In a statement, Deloitte commented that blockchain-based credentials “make identity verification more efficient for both businesses and customers… Digital credentials that are convenient, cost-effective and secure have the potential to open new digital marketplaces, from e-commerce and DeFi to gaming”

What happened: Galaxy Digital posts significant profit after bullish Q1

How is this significant?

  • Galaxy Digital, the crypto financial services firm founded by Silicon Valley billionaire Mike Novogratz, benefitted from the first quarter’s positive market momentum, leading to a dramatic reversal in fortunes
  • Net income in Q1 was $134m, compared to a $288m loss the previous quarter (and a $111m loss in Q1 2022)
  • In a statement, Novogratz said “We enter the second quarter of 2023 extremely well positioned to grow our market share and build deeper relationships with our clients and partners”
  • Galaxy also reported trading income of $129.9 million in the first quarter, a 257% increase quarter-over-quarter
  • Novogratz reaffirmed plans for the company to eventually list on the Nasdaq, pending regulatory approval

What happened: Contagion Latest

How is this significant?

  • Disgraced former FTX CEO Sam Bankman-Fried attempted to reduce the amount of charges against him this week
  • A series of motions filed on Monday asked US district judge Lewis Kaplan to dismiss charges related to campaign finance violations, since they weren’t green-lit by Bahamian authorities when they confirmed his extradition last year
  • In filings, his attorneys wrote “Mr. Bankman-Fried consented to be tried only on the charges in the original indictment for which the government of the Bahamas agreed to extradition”
  • They also claimed that new FTX management “acted as a public mouthpiece for the government by continuing to make disparaging remarks” about the competence of Bankman-Fried and his team whilst running the exchange
  • Private equity giant Apollo ($500bn AUM) was identified as one of several entities involved in NovaWulf’s bid to buy bankrupt lender Celsius
  • Digital asset exchange Bittrex’s US presence filed for bankruptcy this week; the latest in a wave of moves for the once-mighty exchange
  • After they initially announced plans to shut down their US operations in April, Bittrex were hit by a lawsuit from the SEC
  • However, Bittrex claims that international customers and operations outside the US will be unaffected by this bankruptcy filing
  • On Friday, the DoJ announced investigations into whether Binance allowed Russian customers access to their exchange in contravention to international sanctions

What happened: Ernst & Young launch Ethereum-based Carbon tracking

How is this significant?

  • At EY’s global blockchain summit in London, the accountancy giant revealed the launch of “an Ethereum-based platform for enterprises to track their carbon emissions and carbon credit traceability”
  • The beta for it is built on Ethereum, compared to previous in-house private blockchain solutions such as EY’s “Nightfall”
  • A press release claimed that “the new solution will provide a single, verifiable view of CO2 emissions (CO2e)... It will also provide consumers, business partners and regulators with the transparency they demand via a trusted platform for emissions and carbon credit traceability within an ecosystem through the use of tokenisation”
  • EY blockchain leader Paul Brody promoted the potential of tokenisation, stating “Detailed traceability allows for tracking of emissions inventory through tokenisation including the ability to link carbon output to specific product output. By using carbon credit tokens, either created or sourced on the market, enterprises can now have visibility into their actions toward decarbonization”

What happened: Liechtenstein to accept Bitcoin for government payments

How is this significant?

  • Following last week’s surprise feature for Bhutan, there’s another lesser-spotted country in digital asset reporting this week—a principality, to be precise
  • According to a report in the German-language financial newspaper Handelsblatt this week, the government of Liechtenstein is planning to integrate Bitcoin as a payment method for certain state services
  • Prime minister (and also finance minister) Daniel Risch told the paper “A payment option with Bitcoin is coming”
  • Any Bitcoin used to pay for state services would be instantly converted to Swiss Francs (Liechtenstein’s national currency under a customs and monetary union)—but this move nonetheless signals its government’s recognition of Bitcoin as a suitably legitimate and liquid asset to accept
  • Despite its small size, Liechtenstein remains a significant state in the realms of finance, with the second-highest GDP per capita (after Monaco) according to World Bank estimates
  • In the same interview, PM Risch also revealed a willingness to consider investing in Bitcoin with state reserves; although he said it was currently deemed to risky, he stated that “this assessment can change”
  • As one the least-indebted countries in the world (running national and municipal budgets on a surplus), Liechtenstein saves and invests as much as three times its annual $1bn budget every year; so allocating towards cryptoassets could prove significant

News Roundups