Nickel Research Centre

Nickel News Roundup - Week 24

June 16, 2023

Market Overview:

Digital assets slid further this week, in the wake of the SEC’s enforcement actions against Binance and Coinbase.

  • Bitcoin dipped below $25,000 for the first time since March, hitting a weekly low of $24,800 amid a confluence of general risk reduction and rate-driven macroeconomic concerns.
  • Bitcoin traded predominantly in the $25,500 to $26,100 range (with a high of $26,783)
  • Industry-specific malaise was exacerbated by general hawkishness across several major central banks; the ECB hiked rates to their highest levels in two decades, and although Jerome Powell paused rate rises this month, he cautioned that more hikes will come and it could be years before they hit their inflation target
  • Bitcoin’s current price of $25,520 is equivalent to a 3.6% weekly decrease
  • Ether declined throughout the week, from a $1,855 high on Friday, to a Thursday low of $1,626
  • Current pricing at $1,675 represents a 9.5% decline
  • Ether supply dynamics returned to a nearly neutral state, registering a current annual net issuance of -0.04%
  • Overall digital asset market capitalisation dropped to $1.03tn
  • However, it should be noted that this was driven largely by greater losses in the altcoin sector, particularly among the specific coins and tokens alleged as securities by the SEC
  • According to industry monitoring site DeFi Llama, total value locked in DeFi this week across all blockchains and platforms dropped in line with altcoin losses, to $41.5bn

Digital assets experienced another week of declines in the wake of the SEC’s bombshell enforcement actions, but Bitcoin weathered the storm better than most. The consequences of lawsuits against Binance and Coinbase continued to dominate the news cycle, but elsewhere many positive stories emerged; the world’s largest asset manager applied for a spot Bitcoin ETF (custodied by Coinbase), Hong Kong regulators actively pursued the industry in stark contrast to their American counterparts, a Chinese bank issued tokenised securities on the Ethereum blockchain, Colombia’s central bank partnered with Ripple for CBDC platform trials, VC giant a16z launched a crypto-centric HQ in London, and the SEC’s favoured approved crypto securities broker faced widespread scrutiny and consternation following their testimony in Congress.

What happened: BlackRock files for spot Bitcoin ETF

How is this significant?

  • After initial reports by industry publication Coindesk earlier in the week, it was confirmed late on Thursday that BlackRock—the world’s largest asset manager—filed an application for a spot Bitcoin ETF with the SEC
  • The initial reports were uncertain about whether the rumoured ETF proposal would be for a spot or derivatives-based product—the fact that it’s the former makes the news even more intriguing, as the SEC has rejected all previous spot applications
  • Whether the agency will take the same approach with a $10tn AUM financial behemoth as with crypto-first entities such as Grayscale remains to be seen
  • In another development suggesting BlackRock doesn’t fear the SEC, their chosen crypto custodian for the ETF is Coinbase; an existing strategic partner, but also one of the companies currently facing legal action from the regulators
  • The filing for their iShares Bitcoin Trust ETF suggested it offers a simplified means of Bitcoin exposure for a broad range of investors; “The Shares are intended to constitute a simple means of making an investment similar to an investment in Bitcoin rather than by acquiring, holding and trading Bitcoin directly on a peer-to-peer or other basis or via a digital asset exchange”
  • Of course, some industry observers believe that if the SEC relents in the face of Larry Fink’s investing juggernaut, it could trigger a raft of spot ETF applications from other providers; so the development of this application will likely be watched with great interest by many third parties
  • Sui Chung, CEO of industry price aggregator CF Benchmarks, commented that “BlackRock’s increasing engagement shows Bitcoin continues to be an asset of interest for some of the world’s largest financial institutions”

What happened: SEC enforcement fallout continues

How is this significant?

  • Last week’s news of SEC enforcement actions against major crypto asset exchanges, Binance and Coinbasecontinued to heavily influence the news cycle this week, spawning a broad array of analysis and consequences
  • One of the most immediate results from last week’s actions was a US judge denying the SEC’s request to lock all of Binance.US’s funds, after the regulators alleged a lack of separation between the US entity and the global parent company
  • District judge Amy Berman Jackson indicated that the two sides should compromise, believing them to be relatively close to an agreement, but cautioning that the SEC’s proposed outcome risked “significant consequences” for the firm and industry
  • Binance.US lawyers remained firm that a full asset freeze would be out of the question, and cripple their business; “We are not willing to accept the death penalty eight days into our case”
  • Instead, the exchange “proposed a compromise that would include transferring US customer cryptoassets to new wallets with new private keys that would be under the sole control of US-based officers at Binance.US”
  • Regardless of the specific eventual compromise (or lack thereof), the effect on Binance.US was immediate; Reuters reported a round of layoffs equivalent to around 10% of staff as the company braced for legal action
  • In documents seen by industry publication Coindesk, management cited a “politically-motivated regulator” forcing the company to become “a crypto only exchange” (i.e. removing any fiat on- or off-ramps)
  • The documents claimed “because of our preparation for a multi-year and very costly litigation process, the Board has asked Management to shrink the size of our teams across the company and reduce our burn rate”
  • In a possible example of the old “know your enemy” adage, part of this costly litigation process was apparently allocated towards hiring George Canellos, former SEC enforcement director, as part of their defence team
  • In another regulation-motivated move, Binance moved to deregister its Cypriot entity in the EU ahead of MiCA regulation, to “focus efforts on fewer regulated entities in the EU, especially our larger registered markets where we already have a mature footprint”
  • Some of the most prominent analysis came via a JP Morgan research note, which broadly indicated short-term pain but possible long-term silver linings in the form of clarity via legislation, not enforcement
  • The JP Morgan analysts led by Nikolaos Panigirtzoglou argued that the SEC’s aggressive actions may force Congress to act and pass actual legislation and guidelines for digital assets, to remove the carte blanche currently afforded to regulators
  • JPM believes that the hostile approach of the SEC could lead to increased off-shoring of US-based crypto firms, "creating more urgency for U.S. lawmakers to come up with a comprehensive regulatory framework by this year"
  • They also argued that this isn’t a straightforward case, citing the SEC's ongoing lawsuit against Ripple, initiated in 2020
  • Reaction to perceived regulatory overreach was also pronounced this week; House Republicans led by Warren Davidson submitted a bill called the “SEC Stabilisation Act”, which proposed restructuring the commission and removing the post of chairman, including Gensler specifically
  • Davidson alleged “ongoing abuse of power” on Gensler’s part, advocating for “real reform” through the bill
  • Co-sponsor Tom Emmer, a noted advocate for digital assets in Congress, stated that “American investors and industry deserve clear and consistent oversight, not political gamesmanship”
  • On the subject of clarity, footage emerged this week of Gensler at a Bloomberg conference in 2018—during his stint as professor of blockchain at MIT—categorically identifying Ether (alongside Bitcoin, Bitcoin Cash, and Litecoin) as a commodity, not a security; a full five years before he repeatedly dodged questions on Ether’s status before Congress
  • The BBC reported that hostile actions could reasonably be interpreted as a regulatory desire to “kill crypto” in the United States
  • Stablecoin issuers Circle have apparently gauged the regulatory landscape and decided to recruit additional expertise; it was revealed on Friday that former CFTC chair Heath Tarbert will join them as chief legal officer and head of corporate affairs next month
  • Tarbert told Coindesk “This is a critical crossroads for blockchain technology, as we start to see regulators making some movements. But we [also] are actually seeing bipartisan legislation…with the hope of getting something done”
  • Retail trading platform Robinhood announced the forthcoming removal of three digital assets cited as securities in the SEC’s suit; Solana, Cardano, and Polygon
  • These (and the 16 other digital assets named in the SEC’s suits) were hit particularly hard in the markets this week, as investors sought safer allocations; the 19 assets lost a cumulative $23bn in market value in the week following the lawsuit filings
  • A new research report by Bernstein postulated that direct application of the 1946 Howey Test guidelines could lead to more tokens being classified as securities; but also warned that it could create a self-fulfilling prophecy which restricts “blockchain networks [attaining] decentralisation over time”, which excludes them as securities, a la Bitcoin
  • Bernstein also noted potential brain drain and capital flight from the US, citing “progressive steps by the U.K., Europe, Hong Kong, Singapore and the Middle East” to build crypto hubs
  • Billionaire investor Mark Cuban was one of many voices countering SEC claims of clarity; tweeting “When I and others ask for bright line guidance and oppose ‘regulation via litigation’ the businesses I see that are thrown under the bus by the SEC and Gary Gensler are the dorm room start ups that are driven by sweat equity”
  • He added that “It’s time for Congress to respond again and modify the exemptions available to this technology so that registration is obvious and the path for exchanges are doable in a way that protects investors and enables the industry to grow. They are not mutually exclusive”
  • Cuban also commented that the SEC “aren’t supposed to make judgement calls on whether a technology is valid or investors need protections based on their view of a technology”
  • Corporate Bitcoin bull Michael Saylor claimed that “regulators don’t have any love for crypto tokens”, speculating a move towards a more Bitcoin-centric marketplace
  • Coinbase announced plans to push for legislative solutions during their current conflict with regulators, according to chief legal officer Paul Grewal
  • Speaking at an investor conference, he said “Even as we’re managing the litigation, we are equally eager to engage in pressing legislative solutions. We think the court could and should rule that the case lacks legal merits and that will be the end of it”
  • Grewal remains hopeful that draft legislation for the industry could move through the House of Representatives by the end of summer
  • The legislation in question, proposed by House Financial Services Committee Chairman Patrick McHenry and House Agriculture Committee Chairman Glenn Thompson, would allow digital assets to transition from security to commodity status depending on specific parameters
  • He stressed that Coinbase would maintain business as usual throughout the litigation process, and revealed that applied for a full licence to sell derivatives in the US, claiming the relevant agencies were “very positive and productive in reviewing our applications”
  • Grewal’s end-of-summer forecast for legislators seems to anticipate that they move more speedily than regulators; the SEC asked a judge to give them four months to respond to Coinbase’s request (filed last summer) for a response to their rulemaking petition

What happened: a16z launches crypto-centric UK headquarters

How is this significant?

  • VC giant Andreessen Horowitz (a16z) announced their first office outside of the US this week, setting up a new headquarters in London; and as per FT reporting, it will concentrate on crypto investments
  • a16z made the decision due to the current regulatory uncertainty in their home market, and are “betting that the UK government will create a more hospitable climate for blockchain start-ups amid a crypto crackdown by the American financial regulator”
  • Their crypto commitment in the new London office “includes running a Crypto Startup School accelerator programme early next year as part of a broader set of initiatives intended to boost the local fintech community”
  • Overall, the VC has already invested around $7.6bn in the sector globally, out of $35bn total investments in the Silicon Valley veteran’s company portfolio
  • Rishi Sunak declared himself “thrilled” at a16z’s choice, declaring that his crypto hub ambitions remain unchanged; “While there’s still work to do, I’m determined to unlock opportunities for this technology and turn the UK into the world’s web3 centre”
  • a16z crypto lead Chris Dixon meanwhile commented that “London is a major financial hub, it’s a major tech hub… You just need to get it to a critical mass to really get it going and we’re hoping that we can become a part of that and nudge [London] into being a more active hub of technology”
  • Dixon praised the UK’s comparatively more “nuanced approach to blockchain and web3”, although he held out hope for the US “We are long-term optimistic that the US will get it right. The thing that we really want is just very clear rules”

What happened: Hong Kong courts digital asset industry in response to US hostility

How is this significant?

  • The Financial Times reported this week that Hong Kong regulators are “pressuring” banks including HSBC, Standard Chartered, and the Bank of China to take on clients from the crypto industry, despite regulatory crackdowns in the US
  • In a letter viewed by the FT, the Hong Kong Monetary Authority (HKMA) urged banks not to “create undue burden… for those setting up an office in Hong Kong to look for the opportunities here”
  • The US crisis is thus framed as Hong Kong’s opportunity; and outreach has been specific as well as general on that front, evidenced by Hong Kong legislator Johnny Ng personally inviting Coinbase and “all global virtual asset trading operators” to set up shop in the city
  • HKMA deputy chief executive Arthur Yuen wrote that “regulated virtual asset service providers (VASPs) will be able to successfully apply for a bank account through a reasonable process”
  • Neil Tan of Hong Kong’s FinTech Association told the FT “Everything has been done on the government’s side to encourage these banks to facilitate the opening of banking services to the sector”, whilst an HSBC spokesperson declared the bank “very engaged on policies and developments of this nascent industry in Hong Kong”
  • In other news for the industry in Hong Kong, TechCrunch reported (citing local media) that the city aims to introduce a regulatory framework for stablecoins by the end of next year, and is currently seeking responses from the public
  • According to the discussion paper, current policy proposals exclude algorithmic stablecoins, and will prioritise “the development of a regulatory framework for stablecoins as a means of payment and start with regulating stablecoins pegged to fiat currencies”

What happened: Bitcoin dominance reaches highest level in nearly two years

How is this significant?

  • Crypto winter generally sees the greatest amount of suffering in digital assets with lower market capitalisations and liquidity levels—data this week suggests that is once again the case
  • Bitcoin dominance—i.e. the percentage of overall industry market capitalisation derived from Bitcoin’s market cap—is now at levels last seen in October 2021, 20 months ago
  • Currently, Bitcoin accounts for around 46% of all digital asset value, up from lows of 36% in September and November last year
  • Industry publication The Block believes this indicates “traders and investors are flocking to the relative safety of the world's first and largest cryptocurrency over other smaller tokens”, a move which it speculates could have been catalysed by the upcoming Bitcoin halving, anticipated in April next year
  • Bitcoin bull Michael Saylor told Bloomberg that he imagines Bitcoin dominance could climb up to 80% if US regulatory crackdowns concentrate on all projects operating without a Proof-of-Work consensus mechanism
  • In Saylor’s view “The entire industry is kind of destined to be rationalised down to Bitcoin and a half a dozen to a dozen other proof-of-work tokens”

What happened: Crypto-friendly Miami mayor enters race for presidential nomination

How is this significant?

  • Miami mayor Francis Suarez—dubbed the “Bitcoin mayor” for his pledge to take paycheques in digital assets—became the latest candidate to officially enter the race for the Republican presidential nomination, alongside fellow Floridian crypto enthusiast Ron DeSantis
  • Although he’s currently viewed as a long-shot for the nomination due to moderate views on social issues, he could still be taken as evidence for the appeal of digital assets particularly amongst Republican legislators, noting in his campaign video “Today, our city is a major technology hub. Because we chose to embrace innovation”
  • Despite his status on the fringes of Republican consciousness, he could have enough support to remain in the Primary race for a while; reports indicate that he met with significant Republican donors, including BlackRock CEO Larry Fink, and Blackstone CEO Stephen Schwarzman
  • In January, Suarez told CNBC that he still takes salary in Bitcoin, arguing that it provided an inflation hedge; “My salary is actually up. It’s actually been a pretty good investment!”

What happened: Prometheum testifies before Congress, sparks industry backlash

How is this significant?

  • A couple of weeks after little-known crypto firm Prometheum Ember Capital declared themselves the first-ever SEC-registered special purpose broker-dealer (SPBD) for digital asset securities, they were called to Congress to testify about regulatory clarity and registration paths—but their appearance caused as much confusion as it sought to alleviate
  • On June 13th, they appeared at a House Financial Services Committee hearing to discuss a proposed “functional framework” for digital asset clarity, requiring “the SEC to modify its rules to allow broker-dealers to custody digital assets, if they meet certain requirements… [and] require the SEC to write rules to modernise certain regulations for digital assets”
  • Prometheum appeared at the hearing, touting their registration, and the fact they believed digital assets fit neatly within existing securities laws, claiming that any crypto firms not registered with the SEC are “reckless, unlawful platforms”
  • However, during the hearing, several committee members raised issues with Prometheum’s assertions; Rep. John Rose noted that Gensler’s approval of their SPBD licence was not indicative of the system working, because an ATS cannot facilitate trading for any unregistered securities, meaning that by their own definition of the industry, Prometheum is unable to offer almost any tokens to clients
  • He also pointed out the difficulties in expecting individual responsibility for registration processes on decentralised assets
  • Speaking to lawyer (and former SEC counsel) Coy Garrison, Rose asked “What impact, if any, does the SEC’s approval of this SPBD licence have on retail traders?”, garnering the response “not a significant impact”
  • Rep. Mike Flood was similarly scathing, revealing that Prometheum had written to the SEC in 2021 complaining of regulatory ambiguity; a state which the Prometheum representative said was not remedied by new guidance, but rather the SEC’s enforcement actions
  • He argued that Gensler’s inability to answer whether Ether is a security last month illustrates that Prometheum’s uncertainty from 2021 hasn’t been adequately addressed, as no unified standards or definitions for digital asset securities exist
  • Flood also pointed out that Prometheum explicitly excludes any exposure to Bitcoin or Ether (or any digital assets deemed commodities), eliminating well over 60% of the overall digital asset market; asking “if the current system is working, why can’t your customers trade the most widely-used and popular digital assets?”
  • His response from Prometheum’s CEO Aaron Kaplan was that they are apparently taking a “crawl walk run” approach
  • Flood appeared unimpressed, commenting that “To testify, in front of our committee, that your company’s charter — which only allows trading in a very small subset of assets — is evidence that no legislation is needed, just doesn’t make sense. If anything, the fact that Prometheum’s customers cannot trade the most popular digital assets is an illustration of the broader problem, Mr Kaplan”
  • This sudden spotlight (and apparent ignorance on several key issues) led crypto twitter to research the firm further, unearthing several interesting facets around their formation
  • DeFi researcher Adam Cochran pointed out deep regulatory ties within Prometheum’s staff, featuring FINRA, SEC, and CBOE alum; resources not generally available to most crypto startups
  • He also noted that they promoted their own token issuance in 2017, and raised $15m in 2021, before going silent until their aforementioned press release a few weeks ago
  • Marisa Tashman Coppel of the Blockchain Association declared that they had filed a Freedom of Information Act request for Prometheum documents, citing numerous factors including the token issuance plans, possible legal misrepresentations and alleged investments from (and payments to) various entities with supposed CCP links
  • Matt Walsh of Castle Island VC outlined many of the above concerns in a lengthy Twitter thread, claiming it “Bizarre that this fringe player with no biz model is being held up as an example of compliance by the SEC when the actual businesses in the United States can’t get a fair shot”

What happened: Chinese bank issues tokenised security on Ethereum

How is this significant?

  • Despite China’s ongoing official ban on digital asset trading, the nation still appears to value the promise of Web3 and blockchain technology, as evidenced by the issuance of tokenised securities this week
  • Bank of China investment bank BOCI successfully issued 200m offshore renminbi ($28m) in collaboration with UBS
  • Rather than using a private or permissioned blockchain, this was conducted on Ethereum, the world’s largest smart contract blockchain
  • This makes BOCI the first Chinese financial institution to issue a tokenised security; albeit technically in the jurisdiction of Hong Kong
  • UBS promoted the event as an international success story, stating “This transaction marks the first product of its kind in Asia Pacific constituted under Hong Kong and Swiss law and tokenised on the main Ethereum blockchain, successfully introducing regulated securities onto a public blockchain”
  • BOCI deputy CEO Ying Wang sounded a similarly optimistic note, declaring “We are driving the simplification of digital asset markets and products… through the development of blockchain-based digital structured products… We are encouraged by the evolution of Hong Kong's digital economy and are committed to promoting the digital transformation and innovative development of Hong Kong's financial industry”

What happened: Contagion latest

How is this significant?

  • Sam Bankman-Fried returned to the headlines this week, amidst several stories around him attempting to reduce the pending charged against him
  • He won a Bahamian court order “temporarily blocking that nation’s government from consenting to charges that were added to his US indictment after the FTX co-founder’s December extradition to New York”
  • The apparent result could be two trials for Bankman-Fried, as 5 out of 13 charges were added after his return to the US, and thus not covered by the initial extradition agreement with the Bahamas
  • The first trial (on the charges covered by the extradition) remains scheduled for October, whilst the remaining charges—including conspiracy to commit bank fraud and foreign bribery—will be tried in March 2024

What happened: Colombian central bank partners with Ripple for blockchain trials

How is this significant?

  • Ripple (issuers of the XRP digital asset) announced a partnership with Colombia’s central bank this week, piloting use cases for high-value payments using Ripple’s XRP-powered CBDC platform
  • Colombia’s Information and Communications Technology minister Mauricio Lizcano promoted the efficiency of blockchain solutions; “Potential efficiencies can be evaluated through the results obtained in the development of a solution with Blockchain technology, which manages to improve and complement the processes in the entities in a safe and efficient way”
  • In other Ripple news, documents related to a speech by SEC official William Hinman were unsealed this week as part of their long-running trial against the SEC; documents which Ripple claim prove that the agency was prejudiced against them
  • The documents met with a mixed reaction across industry press and personae; whilst some publications opined that all the information was expected, some (such as the rather more partisan Ripple CEO Brad Garlinghouse and chief legal officer Stuart Alderoty) argued that it was a clear-cut case of unequal treatment
  • Alderoty pointed in particular towards feedback comments from other SEC staffers, claiming Hinman’s speech classified Bitcoin and Ether as commodities and was used as guidance in other SEC determinations (including by then-chair Jay Clayton), despite the fact that it “contained made-up analysis with no basis in law, was divorced from the Howey factors, exposed regulatory gaps, and would create not just confusion, but ‘greater confusion’ in the market”
  • Although Ripple was not mentioned in the speech, Ripple’s rationale appears to be that the factors cited by Hinman as reasons to classify Ether “not a security” applied to their XRP token as well

News Roundups