Nickel Research Centre

Nickel News Roundup - Week 19

10th May, 2024

Market Overview:

Digital assets mounted a recovery from last week’s decline, as some momentum returned to the ETF market.
  • Bitcoin recovered following last week’s steep decline, climbing back above the $60,000 mark and snapping its longest losing streak of the year
  • Bitcoin peaked at $65,430 on Monday buoyed by a return of ETF inflows, after a steep weekend rise from a weekly low of $58,950 on Friday
  • Ether also returned to growth, but underperformed Bitcoin significantly
  • Ether hit a weekly high of $3,216 on Monday, but hit its low significantly later in the week than Bitcoin, touching $2,944 on Wednesday
  • Overall digital asset market capitalisation increased to $2.32tn
  • The crypto industry fear/greed index moved back above 50%, but remained in “neutral” territory at 56%
  • According to industry monitoring site DeFi Llama, total value locked in DeFi increased to $92.6bn

Digital assets returned to growth this week, driven by some positive momentum in the ETF sphere (including GBTC’s first post-launch inflows). News and consequences around US regulatory approaches featured heavily in reporting, alongside positive news for FTX customers, a new exchange launch in the UK, tokenisation in Germany, and much more.

What happened: ETF News

How is this significant?

  • For the first time since launching in January, all Bitcoin ETFs—including Grayscale’s converted GBTC fund—experienced inflows on the same day
  • On Friday, Bitcoin ETFs registered $378.5m inflows, including $63m inflows for GBTC, snapping its post-launch outflow streak
  • Friday’s performance represented the first positive net inflow day since April 23rd, and the largest net inflow day since March 26th
  • This marked an improvement from consistent outflows over previous weeks, although overall inflows still remained well below record levels, and many issuers posted zero flow days
  • Franklin Templeton’s EZBC ETF posted record daily inflows this week, at $60.9m
  • GBTC posted multiple inflow days (and zero-flow days) this week following its lengthy losing streak; albeit at comparatively modest levels
  • This may signal that GBTC could be nearing equilibrium, after its higher-than-average fees led to a sustained exodus upon conversion to an ETF
  • Since launch, GBTC has bled more than half its assets, dropping from more than 600,000 Bitcoin upon ETF approval, to just over 291,000 Bitcoin currently
  • According to Grayscale’s chief legal officer Craig Saim, the firm remains optimistic regarding future spot Ether ETF approvals, due to “similarities between the approval processes for spot Bitcoin ETFs and spot Ethereum ETFs”
  • However, Bloomberg ETF analyst James Seyffart noted that Grayscale withdrew its active filing for an Ether Futures ETF, which he deemed “essentially a trojan horse filing … in order to create the same circumstances that allowed Grayscale to win the $GBTC lawsuit ([the SEC cannot] approve futures [ETF and then] deny spot)”
  • Speaking on the recently-launched spot Bitcoin and Ether ETFs in Hong Kong, senior Bloomberg ETF analyst Eric Balchunas indicated they could already be considered a success despite the absolute value of assets remaining very modest in comparison with their US counterparts
  • Balchunas explains “we advised don’t expect big numbers in HK vs US (which is in league of its own ETF-wise) but… the HK ETFs at $310m is equivalent to $50bn in the US market. So in that regard these ETFs already as big to their local mkt as US ones are to its”
  • News this week emerged of several major institutions that secured Bitcoin exposure via ETFs
  • $480bn AUM asset manager Susquehanna confirmed via SEC filings that it purchased around $1.3bn of spot Bitcoin ETFs, spreading the buys across nearly all issuers
  • Susquehanna’s largest allocations went to Grayscale, Fidelity, and BlackRock
  • $130bn AUM asset managers Hightower Advisors also revealed exposure to a variety of Bitcoin ETFs via a 13-F SEC filing
  • Their total $68m allocation may be significantly smaller than Susquehanna’s but is nonetheless substantial, and put its largest allocations towards the same issuers
  • Analysts increasingly point towards growing institutional exposure via ETFs moving markets; FRNT Financial CEO Stéphane Ouellette told Bloomberg “What this week has taught us is that Bitcoin at all-time-high and the new development of Bitcoin ETFs basically open Wall Street’s participation into the Bitcoin market in a way we’ve never seen before. Before, there weren’t any obvious correlations with other asset classes, and it was very obvious that this week, particularly on the [previous] Tuesday night sell-off ahead of the Fed that Bitcoin was trading in line with other risk assets”
  • Additionally, CF Benchmarks (a subsidiary of crypto exchange Kraken) has been a beneficiary of the “ETF Boom”, providing “reference data for about $24 billion in cryptocurrency ETF”
  • CF Benchmarks CEO Sui Chung sees spot Bitcoin ETFs spreading to other markets following the US and Hong Kong, identifying South Korea as one of the most viable candidates; “South Korea is a market where ETFs have become the wrapper of choice for long-term savings,” he said in an interview. “It is also a market where digital assets have gained a high degree of adoption”

What happened: FTX customers to be made profitable by bankruptcy proceedings

How is this significant?

  • In a very rare outcome for US bankruptcy proceedings, customers of the collapsed digital asset exchange FTX can expect not just to be made whole, but to be compensated in excess of the value they lost
  • Current CEO John Ray stated this week that “We are pleased to be in a position to propose a chapter 11 plan that contemplates the return of 100% of bankruptcy claim amounts plus interest for non-governmental creditors”
  • He added “In any bankruptcy, this is just an unbelievable result”
  • This “plus interest” could result in more than $5bn above total above current debts, with two million customers and non-governmental creditors owed about $11bn, and the firm expecting $16.3bn cash from its asset sales
  • According to Bloomberg, the interest afforded to customers could be substantial; “Depending on the type of claim they hold in the case, some creditors could recover as much as 142% of what they are owed. The vast majority of customers, however, will likely get 118% of what they had on the FTX platform the day the company entered Chapter 11 bankruptcy”
  • As a result, some creditor claims are now being traded on secondary markets for more than 100% of their face value
  • However, it should be noted that customers will be returned value in cash, based on the price of their crypto assets when FTX collapsed—not the assets they initially deposited
  • The 100%+ repayments are possible because of a strong crypto market rally since November 2022 boosting the value of FTX’s remaining digital assets; but enough of said assets were drained that they cannot be returned to customers
  • Some customers are complaining that a quadrupling of Bitcoin’s price post-collapse means they’re being returned effectively a quarter of their Bitcoin deposit value, but as John Ray stated “All we can do as a bankruptcy team is monetise the value and distribute it out. We can’t create coins and tokens that aren’t there. And this is the next best alternative”

What happened: Revolut launches digital asset exchange for experienced traders

How is this significant?

  • Leading e-bank Revolut launched its own digital asset exchange this week, several years after integrating in-app crypto trading
  • The new exchange—Revolut X—will offer significantly lower fees (from 0% to 0.09%) than the existing in-app experience, and is targeted at experienced crypto traders within the bank’s home market of the UK
  • Revolut previously pulled crypto trading capabilities from US customers due to regulatory uncertainty, but the new launch indicates the firm remains committed to the asset class as a whole
  • The exchange is specifically set up only to work on desktop and laptop, separating it from the mobile interface of its primary app offering
  • Users will be able to trade over 100 different digital assets with both market and limit orders, rather than the market order-centric model of the in-app crypto trading
  • This makes Revolut the first bank to launch its own standalone digital asset exchange, although several have followed their lead in introduction crypto within their existing online interfaces

What happened: US regulatory hostility may lead to mass industry exodus

How is this significant?

  • Following last week’s tensions between House Republicans and the SEC regarding the agency’s attitude towards digital asset enforcement, several reports emerged this week of regulatory hostility and legislative uncertainty actively driving firms out of the US
  • In an interview with Bloomberg, Delta Blockchain Fund founder Kavita Gupta said that “We are seeing massive brain-drain I would say, a lot of amazing talent leaving the US, and they’re building in the blockchain and crypto space… whether you’re building on Bitcoin, Ethereum, Solana, Polygon, we are continuously seeing major tech talent moving to places like Dubai, Lisbon, Hong Kong, Singapore, just on the fear that ‘you are legal in the rest of the world, but in a grey area in one country’ for no reason, and that should be a big worry for the US economy”
  • Dubai certainly seems primed to accept some of the potential exodus, with the Emirate’s Dubai international Financial Centre (DIFC) expecting record numbers of international businesses to set up shop there this year
  • According to DIFC officials, they have already approved 50% more licences than at this stage last year
  • TechCrunch reported that US (and global) digital asset firms are increasingly turning to Hong Kong “for refuge—and opportunity”
  • The recent Hong Kong Web3 Festival attracted more than 50,000 attendees, featuring increasingly global demographics, including industry personae like Ethereum co-founder Vitalik Buterin and ARK Invest CEO Cathie Wood
  • Jack Jia, of crypto payments company Unlimit, says that it isn’t lax legislation, but rather clear rules and processes that draw firms to the city; “The SEC is notorious. ‘Everything’s a security, but we’re not going to tell you clearly what licensing you need to apply for, and then we might just reject your application anyway. There’s no set SEC process. But Hong Kong regulators have put out a process for hearing your opinions”
  • Digital asset accelerator Alliance DAO has also seen a shift in demographics away from the US, as continued regulatory hostility weighs upon participants
  • In H2 2021, founders in North America accounted for 45% of accelerator applicants, but that figure fell to 26% by H1 this year
  • In an email to TechCrunch, founding partner Qiao Wang said that “Essentially, the U.S. is losing market share for crypto founders over the last three years. This is likely due to 1) regulations and 2) crypto finding product-market fit in emerging markets”
  • In an illustration of the ongoing US regulatory antagonism and legislative impasse, the US House of Representatives voted to repeal SAB121 (an SEC directive requiring banks custodying crypto assets for customers to hold them on their own balance sheets), however President Biden pledged to veto that resolution
  • According to House Financial Services Committee chair Patrick McHenry, SAB121 “made a joke of the rulemaking process and ignored other regulatory agencies… a massive deviation for how highly regulated banks are traditionally required to treat assets on behalf of their customers”
  • Furthermore, the SEC argued that XRP developers Ripple Labs should pay a $2bn fine (rather than Ripple’s suggested $10m) for selling XRP to institutional investors—the one charge where Judge Torres deemed XRP sales could be considered securities, after the SEC failed on multiple other charges
  • Ripple chief legal officer Stuart Alderoty tweeted “ More of the same from the SEC—failing to faithfully apply the law and trying to pull the wool over the Judge’s eyes… And just when you think the SEC can’t sink any lower, if you are a financial regulator outside the U.S. and have done the hard work of establishing comprehensive crypto licensing frameworks, know that the SEC has no respect for you and thinks you are handing out the equivalent of fishing licences”
  • Speaking at the Milken Institute, CFTC chair Rostin Behnam bemoaned the shrinking timeframe before the next election, supposing that it made passage of crypto legislation unlikely, and would create “another cycle of enforcement actions”
  • Speaking on said actions, rep. Tom Emmer accused the SEC of “regulation by intimidation”, and said “Over the last few years, the SEC has completely embarrassed itself in its various court cases, and now Chair Gensler wants to hide behind the threat of lawsuits to an industry that, frankly, hasn’t shied away”

What happened: German state-owned development bank issues blockchain-based bond

How is this significant?

  • Kreditanstalt für Wiederaufbau (KfW), a state-owned German development bank, is the latest major financial institution to move towards tokenisation, via the issuance of a crypto security on the blockchain
  • The digital bond will have a minimum value of €100 million with a December 2025 maturity, according to Bloomberg sources, with transactions scheduled to be completed this summer
  • German banking powerhouses DZ Bank, Deutsche Bank, and LBBW will be amongst the joint bookrunners, and fintech firm Cashlink Technologies GmbH will function as crypto securities registrar
  • KfW treasurer Tim Armbruster stated “We are now taking the next big step with the issuance of a blockchain-based bond for which we want to attract as many investors as possible… We believe that digitalisation will be advantageous in terms of increased efficiency and scalability”
  • Executive board member Melanie Kehr added “With the planned issue of our first crypto security in accordance with the German Electronic Securities Act, we are once again testing an innovation on the financial market and aim to pave the way for future transactions of this type for other market participants”
  • In other banking tokenisation news, JP Morgan Chase led a $10m municipal bond issuance for Quincy, Massachusetts, via the bank’s Onyx Digital Assets unit and proprietary blockchain
  • Additionally, Mastercard joined with a host of finance industry titans on a proof-of-concept for a new settlement layer dedicated to tokenised assets related to the banking industry
  • According to Mastercard, “the Regulated Settlement Network proof-of-concept will simulate transactions in dollars” and improve cross-border transactions
  • Participants in the proof of concept include Citigroup, JPMorgan Chase & Co, US Bancorp, Wells Fargo, Visa Inc, Swift, TD Bank NA and Zions Bancorp
  • Active contributors include the BNY Mellon and the International Swaps and Derivatives Association

What happened: Robinhood registers crypto volume uptick and SEC Wells Notice

How is this significant?

  • Trading platform Robinhood has reaped the benefits of a digital asset market recovery, as it posted Q1 crypto revenue of $126m from $36bn trading volume; representing a 232% year-on-year increase
  • However, the SEC was evidently irked that Robinhood made any revenue from digital asset trading, as it issued the platform with a Wells Notice, indicating upcoming enforcement action
  • In a company statement, chief legal officer Dan Gallagher said the notice came “after years of good faith attempts to work with the SEC for regulatory clarity”, whilst CEO Vlad Tenev said that crypto assets are becoming “more and more important”, and accused the SEC of a “continued attack on crypto”
  • Gallagher outlined extensive efforts by Robinhood to comply with the SEC, including application for a special purpose broker-dealer licence
  • This was apparently easier said than done; Tenev noted that the firm met 16 times with the SEC; “We tried to create what’s called a special purpose broker-dealer for the purpose of transacting in crypto assets. And we actually came in good faith to meet with the SEC. I think we met with them 16 times. And unfortunately, that was not reciprocated, and it was clear that there didn’t seem to be a path, and so here we are”
  • He added “It’s hard to impute the reasoning behind that, but they told us they didn’t want to keep meeting about it, and they didn’t see a path toward it… The SEC has the ability to change the rules to allow for brokers to accommodate crypto assets, and they don’t seem intent on doing that… rather, they’re proceeding with regulation by enforcement”
  • However, JP Morgan analysts led by Nikolaos Panigirtzoglou published a research note on Wednesday opining that Robinhood enforcement should not provide any obstacles to eventual Ether ETF approval; “The template is likely to be similar to Bitcoin: with futures-based Ethereum ETFs already approved, the SEC (if it denies the approval of spot Ethereum ETFs) is likely to face a legal challenge and eventually lose”
  • Panigirtzoglou told industry publication TheBlock “we don't think it [Ether being judged a security] is implied by the Wells notice to Robinhood. Robinhood does not only facilitate trading on Bitcoin and Ethereum but on another 13 tokens also. Eventually, the status of Ethereum is likely to be determined by legislation and as we argued previously (and as it was revealed in Hinman's papers last June) there might be an eventually 'middle' category for Ethereum, neither commodity nor security but something in between”

What happened: Bitcoin mining difficulty experiences drop post-halving

How is this significant?

  • The latest fortnightly Bitcoin mining difficulty adjustment saw its largest decrease since the depths of crypto winter, dropping 5.7%
  • As per data from TheBlock, network hash rate dropped 10% since April 24th
  • The last time that mining difficulty dropped this much, Bitcoin was priced at around $17,000; just over a quarter of current prices
  • This can be read largely as a consequence of miners leaving the scene, as the recent Bitcoin issuance halving reduced the profitability of winning a block issuance

What happened: Donald Trump to accept campaign donations via crypto assets

How is this significant?

  • Speaking at a gathering for supporters, presumptive Republican presidential nominee Donald Trump appeared to outline a broadly pro-crypto policy this week
  • It should be noted that the crowd was largely composed of crypto advocates (including Trump NFT holders), and thus Trump may have been crafting a message to suit the audience
  • The former president stated “Can we donate to the Trump campaign using crypto? I believe the answer is yes. If you can’t, I’ll make sure you can”
  • He added “[Biden] doesn’t even know what crypto is. If you like crypto in any form, and it comes in a lot of different forms, if you are in favour of crypto, you better vote for Trump!”
  • Additionally, he appeared to advocate for a lighter regulatory touch; “If crypto is moving out of the U.S. because of hostility toward crypto… well, we’ll stop it. We don’t want that. If we’re going to embrace it, we have to let them be here.”
  • Although some minor candidates for the US presidential nomination have previously outlined pro-digital asset positions (including Andrew Yang and Robert F. Kennedy Jr), this would represent the most explicit support for digital assets from an actual nominee
  • It also marks a turnaround from Trump’s previous statements on the asset class from two years ago, when he called Bitcoin “a scam against the dollar”
  • However, as always in the partisan landscape of US politics, it remains to be seen how much of this sentiment reflects genuine enthusiasm by Trump, and how much is simply taking the opposite perceived position to the incumbent
  • A new report by Standard Chartered theorised that an election victory for Trump would be positive for the US digital asset market; “we would expect a second Trump administration to be actively supportive of BTC (and digital assets more broadly) via looser regulation and the approval of U.S. spot ETFs”

What happened: SBI Holdings to introduce digital assets to Japanese sports market

How is this significant?

  • Japanese financial giant SBI Holdings announced a joint venture between its digital asset arm SBI DAH and crypto company Chiliz this week, aimed at introducing “fan tokens” to Japan
  • SBI Digital Asset CEO Fernando Luis Vázquez Cao stated that “The partnership between SBI DAH and Chiliz will bring together the best-in-class capabilities of both traditional finance and Web3, leveraging fintech innovations to transform the sports and entertainment experiences for communities”
  • Tokens created by Chiliz have reached around 2 million users thus far across 82 different sports team fan tokens
  • According to the press release, “These tokens provide unique engagement opportunities for sporting fans to participate in fan-focused decisions, access exclusive rewards and connect with fellow supporters in the global community”
News Roundups