Nickel Research Centre

Nickel News Roundup - Week 36

8th September, 2023

Market Overview:

Digital assets recovered slightly but traded in a much narrower range than last week, after ETF decision delays removed possible impetus for traders.
  • Bitcoin performed steadily after last week’s volatility, predominantly trading in the $25,640 to $25,940 range before a late surge took it into the green
  • Bitcoin hit a weekly high of $26,390 early on Friday, rising from a weekly low of $25,450 the previous Friday
  • Ether underperformed Bitcoin this week, registering a slight overall pullback, spending the majority of the week oscillating in the narrow $1,621 to $1,639 range
  • Ether experienced a weekly low of $1,606 late on Friday, before reaching a high of $1,653 early the next Friday
  • Overall digital asset market capitalisation remained steady at $1.05tn
  • According to industry monitoring site DeFi Llama, total value locked in DeFi this week grew by $0.5bn to $38.3bn

Digital assets exhibited rather stable trading performance this week, after recent ETF decision delays from the SEC sucked a lot of momentum out of the market. In the news, there was another legal ruling in the US that could potentially have significant repercussions in terms of token classifications, JP Morgan insiders introduced a new blockchain project from the US’ largest bank, ARK filed for the first spot Ether ETF, and liquid staking performance proved that appetite for DeFi remains despite crypto winter conditions.

What happened: US judge deems Ether a commodity as DeFi exchange Uniswap wins lawsuit

How is this significant?

  • A federal judge in the US ruled that leading decentralised exchange (DEX) Uniswap is not liable for any losses experienced by users who purchase tokens on the exchange which turn out to be scams
  • District Court Judge Katherine Polk Failla however threw out the class action lawsuit of investors burned by decentralised listings, ruling that the DEX was not operating as an unregistered securities exchange as it “does not implicate the federal securities laws”
  • She found that the true defendants of the case should be the issuers of scam tokens, not Uniswap itself—thus declining to extend federal securities law to cover Uniswap
  • Judge Polk Failla specifically called out the US’ lack of regulatory clarity as part of the exoneration, stating “each [token developer] theoretically could register their tokens with the SEC, but such registrations are few, as Congress and the courts have yet to make a definitive determination as to whether such tokens constitute securities, commodities, or something else”
  • Crucially for many industry observers, she also wrote in her opinion accompanying the ruling that “ the context of a decentralised protocol's smart contracts, the Court finds that the smart contracts here were themselves able to be carried out lawfully, as with the exchange of crypto commodities ETH [Ether] and Bitcoin
  • Thus, the judge explicitly identified Ether as a commodity; a classification which SEC chief Gary Gensler repeatedly refused to comment on during a congressional hearing in April despite numerous requests
  • Previously, in February, Gensler had implied that he believes “everything other than Bitcoin” to be a security—an opinion which conflicted with previous SEC leadership such as William Hinman and Jay Clayton as far back as 2018

What happened: JP Morgan developing blockchain-based token for settlements

How is this significant?

  • A source told Bloomberg this week that TradFi colossus JP Morgan is increasing their blockchain involvement, and is currently “exploring a blockchain-based digital deposit token for speeding up cross-border payments and settlement”
  • The source told Bloomberg that the bank has already finished most of the technological infrastructure around the international settlement project, but is holding fire on the development and deployment of a token until they receive approval from US regulators
  • According to the person with knowledge of the matter, corporate clients could gain access to such a token within a year of approval
  • A JP Morgan spokesperson released a statement saying “Deposit tokens bring plenty of potential benefits, but we also appreciate that regulators would want to be thoughtful and diligent before any new product gets developed and used… Should that appetite develop, our blockchain infrastructure would be able to support the launch of deposit tokens relatively quickly”
  • Potential benefits include instantaneous settlement and cheaper transfer rates compared with legacy banking rails
  • JP Morgan has already got experience in several fields mirroring this proposed project; their JPM Coin stablecoin is used as an internal settlement vehicle on the company’s proprietary Onyx blockchain, and they’ve previously collaborated with Singapore’s central bank on asset tokenisation pilot Project Guardian
  • In other JP Morgan news, the bank adjusted its estimated Bitcoin mining cost following recent revisions to the Cambridge Bitcoin Electricity Consumption Index(CBECI)’s methodology
  • The CBECI had previously assumed uniform distribution of mining hardware across the Bitcoin mining industry, causing them to over-index estimates of older, less energy-efficient ASIC machines

What happened: Kraken to expand UK digital asset derivatives services

How is this significant?

  • American digital asset exchange Kraken looks set to leverage friendlier regulatory conditions in the UK by launching a broader range of derivatives products in the British market
  • Compared with their home market of the US—where Kraken had to shut down staking services following an SEC lawsuit—the UK market appears more welcoming to digital asset businesses following PM Rishi Sunak’s desire to make the country an international crypto hub, including regulatory supervision under the Financial Services and Markets Act
  • In an interview, Kraken CEO Mark Jennings revealed that the exchange is currently involved in FCA discussions for approval to “allow it to custody a broader range of client assets in the country”
  • If approved, Kraken’s local unit will be able to offer futures contracts denominated in the client’s fiat currency of choice
  • Jennings perceives growing institutional demand in Britain, saying “It’s a key driver as we expand out what we do in the institutional market across crypto”
  • Expanding derivatives exposure could represent a lucrative opportunity for Kraken; CCdata indicates that last month centralised exchanges processed $1.85tn in derivatives volume, compared with $515bn spot trading volume
  • However, Jennings acknowledges that the volume of both remains well below bull market levels, negatively affected by last year’s FTX collapse; “Prior to FTX we’d be hitting $700 million to $800 million a day… We’re not at the pre-FTX kind of bull market volumes”

What happened: Regulatory news

How is this significant?

  • In UK regulatory news, the Financial Conduct Authority delayed enforcement of more stringent standards for digital asset advertising and marketing until next year
  • FCA director of consumer investments Lucy Castledine commented “As a proportionate regulator, we’re giving firms that apply a little more time to get the other reforms requiring technology and business change right. We’ll maintain our close eye on firms during this extended implementation period”
  • In US regulatory news, the Financial Accounting Standards Board (FASB) unanimously approved new regulations requiring firms holding digital assets to report them at “fair value” in their accounting by calendar year 2025
  • This means reporting the assets at their most current value, instead of historical price at purchase, the most common method under current practices; one which can often create impairments given the relative volatility of the digital asset sector
  • Jeff Rundlet, head of accounting strategy at accounting software company Cryptio believes it could encourage more firms to invest in crypto assets; “It’s a great step forward for the entire crypto market. I think it’s a great step toward mainstream adoption. I can see finalising this proposal to help large corporations that are maybe scared to hold crypto on their balance sheet because of the technical complexities”
  • MicroStrategy—the largest corporate holders of Bitcoin—were supporters of this proposal, with CFO Michael Kang writing “[fair value reporting] would enable us to provide investors with a more relevant view of our financial position and the economic value of our bitcoin holdings, which in turn would facilitate the ability of investors to make informed investment and capital allocation decisions”
  • MicroStrategy founder Michael Saylor commented that the decision “eliminates a major impediment to corporate adoption of $BTC as a treasury asset”
  • In other US regulatory news, the CFTC charged three DeFi platforms with providing illegal derivatives trading, ordering them to cease the services and issuing fines of $250,000, $200,000, and $100,000
  • Meanwhile in the US Congress, Senate Banking Committee member Bill Hagerty advocated for an incremental approach to crypto regulation, rather than an exhaustive one-time bill
  • Speaking at an event of the Cato Institute libertarian think tank, he stated “The perspective I've taken is rather than trying to come up with a fulsome complete package in one blow, to try to take step by step processes… My legislation is two pages as opposed to some complex behemoth that comes out of the Hill”
  • He also criticised the SEC’s “regulation by enforcement” approach and Gary Gensler’s attitude towards the industry, claiming “Rather than articulating a set of criteria, what they're doing is they're allowing the market to evolve and then they're just picking and choosing where they want to lay an enforcement proceeding and say, well, we don't like that and therefore it's wrong”
  • In a Bloomberg interview, Ripple Labs co-founder Chris Larsen claimed that hostile government attitudes killed the opportunity for San Francisco and Silicon Valley to be the “global capital of blockchain”
  • He said “They [regulators] pretty much killed San Francisco from being what it was. We owned it [crypto capital status] and we don’t anymore because the Biden administration, for whatever reason, decided they want to push this industry offshore”

What happened: ARK Invest files for first spot Ether ETF

How is this significant?

  • Following the influx of spot Bitcoin ETF filings after Grayscale entered the race, and the subsequent raft of Ether futures ETF applications, two major investment firms decided to split the difference this week and also file for the first spot Ether ETF
  • The firms in question are Cathie Wood’s ARK Invest and ETP issuers 21Shares, who collaborated on a filing submitted Wednesday
  • Their “ARK 21Shares Ethereum ETF” would be the first physically-backed ETF dedicated to the second-largest digital asset by market cap, but given filing timelines, regulatory uncertainty, and the SEC’s habit of delaying decisions, it would almost certainly only be approved after the approval of spot Bitcoin ETFs
  • Grayscale’s recent court victory against the SEC could hasten the approval of spot Bitcoin ETFs during the next review period in October, having eliminated the SEC’s primary reasoning for denial thus far; a supposed lack of protections against market manipulation
  • 21Shares co-founder Ophelia Snyder commented “There have been considerable market developments over the last couple of weeks—Grayscale winning their lawsuit being one of them… If you look at the state of Ethereum markets today, especially around things like the futures products, you’re starting to get to a place where those markets are much more established”
  • Cathie Wood believed that the streamlining of digital asset exposure into traditional brokerage vehicles could greatly expand investor access to the asset class, saying “There is so much friction in the process that this will save people”

What happened: Contagion latest

How is this significant?

What happened: Coinbase launches institutional crypto lending service

How is this significant?

  • Leading US exchange Coinbase has increased its institutional revenues over the last year; this week they disclosed an increase in institutional possibilities with a new digital asset lending service
  • According to SEC filings, Coinbase has already secured $57m from customers of its institutional Prime service
  • In a statement on Tuesday, Coinbase commented “With this service, institutions can choose to lend digital assets to Coinbase under standardised terms in a product that qualifies for a Regulation D exemption”
  • The institutional lending program is run by the company’s Coinbase Credit subsidiary unit, which previously ran a retail-facing service allowing users to borrow against their Bitcoin, before regulatory concerns shuttered it in May

What happened: Leading web wallet integrates cashout options

How is this significant?

  • MetaMask, the top non-custodial wallet in the digital asset industry (boasting 22 million users), recently updated its functionality to allow direct fiat cash-outs to both PayPal and bank accounts
  • This could give a variety of Web3 assets greater perceived real-world value, as Metamask is used heavily in DeFi contexts, where tokens don’t have to be hand-picked by centralised exchanges for listings
  • Non-custodial (or self-custody) wallets such as MetaMask have gained popularity since last year’s FTX collapse, which encouraged many industry participants to be more cautious about maintaining control over funds and keeping them off exchanges
  • The cash-out feature will however initially be limited to Ether, the primary numeraire in DeFi
  • Users will be able to select their country of residence in MetaMask, which will populate a list of third-party provider options for fiat off-ramp services
  • These services will then send the equivalent currency value straight to a user’s bank or existing MetaMask partner PayPal accounts
  • The cashout options will initially be available in the UK, US, and Europe, although depending on withdrawal amounts some users could potentially get a better deal on centralised exchanges, due to commission charged by the off-ramp partners
News Roundups