Nickel Research Centre

Nickel News Roundup - Week 51

22nd December, 2022

Market Overview:

Digital assets erased last week’s significant gains, amidst indications that macroeconomic policies will likely remain hawkish for the foreseeable future. 

  • Bitcoin declined through the week, dropping from a Thursday high of $17,840 to a low of $16,410 on Tuesday 
  • Bitcoin’s current price of $16,850 equates to a 4.8% weekly pullback 
  • Ether followed suit, dropping below $1,300 on Thursday and reaching weekly lows of $1,160 on Tuesday 
  • Ether’s current price of $1,213 represents a 5.6% drop 
  • Total Ether supply exhibited similar trends as recent weeks, with a current annual issuance rate virtually flat around 0.04% 
  • Overall market capitalisation dropped to $811bn 
  • According to industry monitoring site Defi llama, total value locked in DeFi this week across all blockchains and platforms declined slightly to $39.7bn 

Disgraced former FTX CEO Sam Bankman-Fried agreed on extradition back to the US this week, and two former executives turned on him in the latest twists of the FTX saga. Digital asset adoption continues to roll in internationally, with positive regulatory changes in Japan, Hong Kong, and global guidance on digital asset allocations from the Basel Committee. Visa and PayPal deepened their commitment to the asset class, Bitcoin miners felt the freeze of crypto winter, but other victims of market conditions managed to secure crucial funding. 

What happened: FTX latest—Sam Bankman-Fried agrees to US extradition 
How is this significant? 
  • The ongoing FTX saga once again dominated reporting this week, including the major new development that disgraced former CEO Sam Bankman-Fried (aka SBF) could face charges within the US in the near future as he signed extradition papers on Tuesday following a week in Bahamas jail 
  • Reuters reported that he left Bahamas custody on Wednesday, paving the way for his extradition to be executed expeditiously, accompanied by FBI agents 
  • Having been denied bail in the Bahamas, there is speculation that he may strike a deal for bail or house arrest within the US 
  • Late on Wednesday it emerged that Caroline Ellison and Gary Wang (former Alameda CEO and FTX co-founder respectively) both pled guilty to criminal charges including fraud and are now cooperating in the case against Bankman-Fried 
  • They were charged by both the New York District Attorney’s office and the SEC, who alleged price manipulation and misuse of customer assets  
  • Bloomberg released details on internal documentation from FTX, including indications of deliberate malfeasance 
  • An investigatory review of FTX engineering director Nishad Singh’s GitHub account (a repository of software code) found numerous irregularities designed to mask the debts of Alameda Trading 
  • According to Bloomberg “The GitHub account bearing his name annotated the code snippets with comments including ‘Korea KYC’ and ‘BD expenses accounts’ The latter was tied to a ‘Korea expenses’ account” 
  • The CFTC alleges that debts from Alameda were shunted into newly-created FTX customer accounts that couldn’t be directly linked to the trading firm, with Bankman-Fried referring to it as “our Korean friend’s account” 
  • These accounts were granted the same exclusive exemptions from FTX risk management policies (such as automatic liquidation) as the main Alameda accounts, indicating their connection 
  • The CFTC complaint also claims that SBF considered closing down Alameda in September, going as far as drafting a Twitter thread announcing its closure, but never followed through 
  • On Tuesday, FTX creditors were informed that the company’s new management team had located over $1bn in missing assets, including $720m in cash 
  • In a procedural hearing, they revealed that “the company located about $720 million in cash assets, which the exchange has yet to consolidate, in U.S. financial institutions authorised to hold funds by the U.S. Department of Justice. Another near $500 million is already being held in U.S. institutions” 
  • New CFO Mary Cilia told the court that FTX were currently reaching out to the banks and attempting to change signatories on the accounts in question, “so that we can get access to the accounts and move the cash as much as we can to authorised depository institutions” 
  • Around $130m of cash is currently held in Japan and ringfenced for customers of FTX’s Japanese subsidiary, in accordance with local regulations 
  • Due to the notoriously lax record-keeping of the previous leadership team, Cilia told the court that FTX would likely be unable to file a proper statement of assets or financial position until April 
  • US regulators appeared split on FTX across several recent hearings; former CFTC head Timothy Massad commented “the problem on Capitol Hill is everybody finds this to be a problem, but they have very different views on what should be done about it”, split between heavy regulation, and recognition of FTX failing as a centralised intermediary 
  • Republican senator Cynthia Lummis of Wyoming, a noted proponent of digital assets, told Bloomberg that existing sceptics were attempting to leverage the crisis by shifting the narrative; “There are two conversations going on. One is FTX, and the other is digital assets… We’re conflating the two in some of these discussions” 
  • Senate banking committee chairman Sherrod Brown voiced highly negative views on crypto assets, positing that “maybe” the US should ban the industry, but acknowledging that would be difficult and only drive more firms into unregulated offshore environments 
  • On the other side of the debate, his Republican counterpart Pat Toomey noted “FTX and cryptocurrencies are not the same thing. FTX was opaque, centralised and dishonest. Cryptocurrencies usually are open-source, decentralised and transparent” 
  • Toomey also stressed the need for perspective; “To those who think that this episode justifies banning crypto, I’d ask you to think about several examples. The 2008 financial crisis involved the misuse of products related to mortgages. Did we decide to ban mortgages? Of course not. A commodity brokerage firm run by former New Jersey Senator John Corzine collapsed after customer funds—including U.S. dollars—were misappropriated to fill a shortfall from the firm’s trading losses. Nobody suggested that the problem was the U.S. dollar and that we should ban it” 
  • Minnesota’s Tom Emmer stated that the entire episode illustrated one of the key benefits of digital assets; “For the most engaged members of Congress on crypto policy, the FTX collapse remind us of why we care so deeply about this technology—decentralisation is the point” 

What happened: Bank for International Settlements publishes digital asset exposure standards 
How is this significant? 
  • The Basel Committee of the Bank for International Settlements (BIS) published guidelines for the digital asset exposure of member banks this week 
  • The new guidance is set to come into play from 2025 onwards 
  • They separate digital assets into multiple classification tranches; tokenised traditional assets, stablecoins, and “unbacked cryptoassets” 
  • The former two categories aren’t subject to any specific guidance from the BIS, being viewed as analogous to the un-tokenised equivalents and fiat currencies 
  • For “unbacked cryptoassets” (representing the majority of digital assets traded on spot exchanges), they are further classified into 2a for more established digital assets, and 2b for newer, more speculative assets 
  • The Basel Committee recommends a prudential allocation of between 1-2% of a bank’s Tier 1 Capital for unbacked crypto assets—but to encourage banks not to exceed their guidelines, the entire allocation will be subject to the capital requirements for the more speculation (2b) exposure if a 2% allocation is breached 
  • Although a 1-2% allocation appears rather conservative and modest; it reflects great scope for growth compared to previous BIS publications; in a September paper, they reported that “When considering the whole sample of banks included in the Basel III monitoring exercise (ie also those that do not report cryptoasset exposures), the amount [of overall digital asset exposure] shrinks to 0.01% of total exposures” 
  • However, it should be noted that the BIS treats unbacked crypto assets as high risk, at 1250% risk weight 
  • Thus, the BIS is effectively acknowledging that the global banking industry could increase its capital allocation towards digital assets by 100 to 200 times, whilst still falling within prudential management classifications 

What happened: Contagion latest 
How is this significant? 
  • Asia-based digital asset trading and landing platform Amber Group announced $300m in fresh funding this week, mainly intended for customers who lost money after the company suffered from FTX exposure 
  • Amber Group CEO Michael Wu said the new Series C represented a shift from a previous $100m funding goal they had planned before the FTX collapse happened; “We made a quick decision to basically pause that previous round” 
  • He acknowledged the raise happened on a lower valuation than the previous round’s $3bn target 
  • A day before the $300m was announced, Amber disclosed widespread cost-cutting efforts, “including redundancies and wage reductions” 
  • Gemini exchange co-founder Cameron Winklevoss tweeted that Gemini, alongside other creditors “presented a plan on behalf of the Creditor Committee to resolve the liquidity issues at Genesis [lending] and [Genesis parent company] DCG and provide a path for the recovery of assets” 
  • Gemini had to halt their yield-bearing Gemini Earn program, run in partnership with Genesis Lending, with reports estimating the exchange accounts for $900m of $1.8bn total debts owed by Genesis to their creditors 
  • Bitcoin miners have been a key casualty of falling digital asset prices amidst rising global energy prices this year; Greenidge Generation acknowledged “the potential for, and timing of, a voluntary bankruptcy filing” despite agreeing a debt restructuring deal with NYDIG 
  • Publicly-traded miners Core Scientific filed for Chapter 11 bankruptcy protection on Wednesday morning, with plans to continue operating normally whilst reaching a deal with their senior security noteholders  
  • Pitchbook analyst Robert Le told industry publication Coindesk that although 2022 saw a slowdown in VC funding for digital assets, interest remains, specifically for certain subsectors; Web3 and DeFi propositions are growing, whilst FTX’s downfall means “there’s been a shift away from centralised crypto services” 
  • Auditing firm Mazar’s paused all work with digital asset clients, leading to renewed market panic around Binance, whose Proof of Reserves system Mazar’s recently verified 
  • In a CNBC interview, Binance CEO Changpeng “CZ” Zhao claimed the industry’s reputation complicated the retention of top-class auditors; “Many audit firms are scared to work with crypto businesses”, adding that the traditional Big 4 “don’t even know how to audit crypto exchanges” 
  • Zhao confirmed once again on Thursday that Binance does not run a fractional banking system, and “People can withdraw 100% of the assets they have on Binance, we will not have an issue in any given day” 
  • His claims seem to be substantiated by customer action; the exchange faced record outflows of funds, including over $6bn in three days alongside a steep drop for its proprietary BNB token 
  • The company also joined the executive committee of American industry lobbying group Chamber of Digital Commerce 
  • American subsidiary Binance US agreed a deal to buy bankrupt lender Voyager’s assets for $1.022bn  
  • Binance US CEO Brian Schroder said more acquisitions may follow; “We are in the data room for many other assets that make sense as we focus on growth. We are learning about the deals. We are also looking at several firms that are in trouble right now” 

What happened: Visa proposes automated payments from digital asset wallets 
 How is this significant? 
  • Payments giant Visa deepened their involvement in the digital asset space yet further this week, publishing a proposal that could integrate digital assets into existing payment flows by allowing automated payments from self-custodial crypto wallets 
  • Visa’s proposal would essentially merge user accounts and contract accounts, utilising smart contracts to automate payments (such as bills or standing orders) directly from the wallet rather than requiring user input every time 
  • Layer-2 Ethereum scaling solution StarkNet was used to demonstrate the concept, as the “account abstraction” process necessary hasn’t launched on the Ethereum base layer 
  • The proposal’s authors noted “other real-world applications beyond recurring payments could be brought to the blockchain” thanks to this innovation, as well as removing some of the perceived advantages of legacy financial systems 

What happened: PayPal streamlines crypto asset purchasing process 
How is this significant? 
  • PayPal, one of the vanguard in institutional adoption that signalled the 2021 bull market, increased industry integrations further this week 
  • Partnering with Consensys, developers of the popular browser-based Metamask wallet plugin, PayPal will simplify the process of purchasing crypto assets with fiat currency 
  • PayPal wallets and existing PayPal accounts will now be available as both fiat and crypto on-ramp options within Metamask, allowing users to directly top up digital asset balances within their own self-custodied wallets, rather than buying from centralised exchanges like Coinbase and then transferring the assets over 
  • Because PayPal has enabled digital asset purchases within their own app since 2020, users will also be able to directly transfer any Ether balances from their PayPal accounts to their Metamask wallet addresses 

What happened: Japan eases corporate tax for digital assets 
How is this significant? 
  • Japanese lawmakers made yet another move to attract and retain more digital asset businesses this week, with the ruling party signalling continued support for the industry by agreeing to exempt firms from taxes on digital assets’ paper gains 
  • Akihisa Shiozaki, a member of the government’s Web3 team, commented “This is a very big step forward. It will become easier for various companies to do business that involves issuing tokens” 
  • Previously, even unrealised gains on tokens were subject to a 30% corporate tax in Japan, driving many Web3 businesses to alternative jurisdictions 
  • Such policies were particularly troublesome for startups in the digital asset and Web3 space, which often gain funding through token sales and hold their own tokens to  

What happened: Hong Kong launches first digital asset ETFs 
How is this significant? 
  • Following on from a recently-stated goal to become a global crypto hub—maintained despite the FTX meltdown—Hong Kong launched its first crypto asset ETFs on Friday 
  • Both the Bitcoin futures ETF and Ether futures ETF debuted positively, after raising $79m in initial investment 
  • The ETFs provide Hong Kong investors with access to futures products traded on the Chicago Mercantile Exchange (CME) 
  • Hong Kong’s recent shift in digital asset strategy is seen by some analysts as an attempt to wrest “crypto hub” status from finance hub rival Singapore, particularly after the latter announced plans to restrict retail investor access to the asset class following industry contagion events 
  • Julia Leung, head of the Hong Kong Securities and Futures Commission, states that a more relaxed regulatory environment creates an opportunity; “When other main regions are now singing the same tune and establishing a more holistic regulatory regime, we see conditions for more relaxation since we already have [regulations] in place” 
  • Some commentators, like Huobi exchange owner Justin Sun, believe that Hong Kong is now in “embrace crypto mode” 
  • He also speculated Hong Kong could serve as an opening for digital assets across China, essentially acting equivalently to the Shenzhen special economic zone—a petri dish for Chinese regulators “using Hong Kong as an experiment base so they can see all the feedback, all the results, once they adopt crypto” 

What happened: Grayscale considers tender offer to close GBTC discount 
How is this significant? 
  • Grayscale—creators of the world’s largest Bitcoin fund, GBTC—announced their intention for a large-scale share buyback if the SEC again refuses permission to convert GBTC into a spot Bitcoin ETF 
  • The firm are currently suing the SEC about a previous rejection on their ETF application, but would also require approval from them for the buyback 
  • In a letter to investors, Grayscale CEO Michael Sonnenschein stated that they’re considering a tender offer for up to 20% of outstanding shares, which are currently trading steeply discounted around 50% below the value of the underlying Bitcoin 
  • Since February 2021 GBTC has traded at a discount, after previously trading at surcharges up to 80% when traditional investors had no other means of gaining Bitcoin exposure 
  • Unlike ETFs, GBTC shares can’t be destroyed or redeemed for Bitcoin; thus the proposal for a buyback, pending SEC approval 
  • Sonnenschein wrote that Grayscale has no plans to dissolve despite issues at Genesis, a subsidiary of the same parent company, Digital Currency Group; “In the event we are unsuccessful in pursuing options for returning a portion of the capital to shareholders, we do not currently intend to dissolve GBTC, but would instead continue to operate GBTC without an ongoing redemption program until we are successful in converting it to a spot Bitcoin ETF” 
News Roundups