Nickel News Roundup - Week 45

10th November, 2022

Market Overview:

Digital assets experienced one of their worst weeks in recent memory, as strong trading through the weekend was erased by mass sell-offs following concerns over the liquidity of a major digital asset exchange.

• Digital assets were rocked by news of liquidity issues at leading exchange FTX, causing major declines across the board as investors moved to protect themselves
• Bitcoin reached a weekly high of $21,400, and traded comfortably above $20,000 before the FTX situation intensified on Tuesday
• Following the ultimate conclusion of Binance’s potential takeover offer, Bitcoin hit a weekly low of $15,720, its lowest level since November 2020 
• Bitcoin’s current price of $17,890 represents an 11.6% weekly drop
• Ether was likewise affected by the FTX news, echoing Bitcoin’s chart movements with a weekend high of $1,658, followed by mass sell-offs from Tuesday onwards leading to a weekly low of $1,093 in the early hour of Thursday 
• Ether’s current price of $1,335 represents a 12.3% weekly decline
• Total Ether supply moved below its pre-merge levels for the first time, as a corollary of mass sell-offs and liquidations was increased network volume—leading to higher transaction fees, and thus a greatly elevated burn rate versus issuance rate ratio, with a current net annual issuance of -1.2%
• Overall market capitalisation dropped around 20% in line with Bitcoin, to $809bn
• According to industry monitoring site Defi llama, total value locked in DeFi this week across all blockchains and platforms dropped significantly, from $54.1bn to $43.7bn

The digital asset industry was rocked this week by revelations about the state of top 5 exchange FTX’s financial health. Monday through Wednesday were punctuated by drama as FTX CEO Sam Bankman-Fried and Binance CEO Changpeng Zhao offered differing perceptions of FTX’s risk management, after reports in the industry press suggested too much overlap between Bankman Fried’s digital asset exchange and his trading company, Alameda Research. Mass withdrawals eventually became more than FTX could handle, leading to a non-binding takeover offer from Binance. The fallout will likely be significant, with a large effect on both the market and investor confidence. 

However, outside of this one—admittedly very large—story, there were still several positive developments this week; JP Morgan increased its involvement in the space, Japanese corporate giants and legislators moved towards bolstering the nation’s Web3 industry, Fidelity announced retail crypto trading, and despite reduced VC investment levels, numerous digital asset firms still closed 10-figure raises this week.

What happened: FTX liquidity crunch creates market chaos as Binance pulls out of rescue bid

How is this significant?

• This week witnessed major developments in the world of digital asset exchanges, as Binance (the largest exchange in the world) agreed an in-principle deal to acquire FTX (a top 5 exchange) on Tuesday
• Concerns over the liquidity of FTX began when industry publication Coindesk reported that Alameda Research—a trading firm owned by FTX CEO Sam Bankman-Fried—held a high proportion of its balance sheet assets in FTT, the proprietary token of FTX exchange, rather than more independent assets
• The apparently-limited delineation between two ostensibly independent entities raised eyebrows in the industry, and speculation over the scale of their co-dependence
• Over the weekend, this sparked fears over the liquidity of Bankman-Fried’s digital asset empire, as well as concerns over another crypto contagion episode; due to the possibility of industry lenders having received FTT tokens as collateral
• The first major development happened on Sunday, when Binance CEO Changpeng “CZ” Zhao announced that the company would sell off their FTT token reserves—accrued as exit compensation for a previous equity position in FTX—worth over $500m at the time of tweeting
• Zhao characterised this move as “post-exit risk management, learning from LUNA”, alluding to the failed Terra LUNA blockchain that created the previous contagion event when their algorithmic stablecoin depegged, sending LUNA assets into a death spiral
• He also added that the exchange would likely offload their FTT holdings over the course of several months, in order to minimise price impact
• FTX representatives including Bankman-Fried originally denied any liquidity issues in the company, with Alameda’s CEO Caroline Ellison claiming Coindesk’s reporting only reflected “a subset of our corporate entities”
• Ellison also offered to buy Binance’s FTT tokens in an OTC deal for $22 per token, but Zhao didn’t accept
• However, despite FTX’s attempted reassurances, markets were spooked, with mass withdrawals from the exchange
• On Tuesday, Bankman-Fried reversed course, saying FTX had accepted a takeover offer from Binance (pending due diligence), and acknowledging “liquidity crunches”
• If completed, the move would have been the digital asset industry’s largest-ever M&A deal
• Markets responded with shock to the news; initially exhibiting a brief bounce on the news of FTX’s “rescue”, before rapidly shifting into mass sell-offs as the prevailing narrative shifted towards the extent of FTX’s liquidity issues and the possibility of antitrust regulators intervening to stop the creation of a potential mega-exchange, driving down the value of all major digital assets
• Crypto asset most closely associated with FTX were hit hardest; namely FTT and the Solana blockchain, which was heavily backed by Alameda
• The declining value of FTX-associated crypto assets demoted Bankman-Fried from multi-billionaire status to (multi-multi-)millionaire at a dizzying pace, wiping out more than $14bn of net worth
• An internal memo by Zhao meanwhile, reported in the Financial Times, noted that this move by Binance was “not a win”, and that FTX’s failure would likely herald greater regulatory scrutiny worldwide
• Zhao welcomed such scrutiny, saying digital asset exchanges should leverage the transparency of blockchain, and demonstrate on-chain proof of reserves, rather than feeling tempted by fractional reserve practices of the banking industry
• He further added that as a result of marketwide price fluctuations, the exchange topped up its customer insurance fund on Wednesday to restore a $1bn value 
• A further twist in the rapidly-developing story emerged late on Wednesday, when Coindesk reported that Binance was now leaning away from completing the deal after an initial review of FTX’s finances
• Even later on Wednesday evening, industry publication Blockworks reported via sources that Binance would pull out of the acquisition deal unless FTX’s American-based partner exchange, FTX.US, was also included
• Finally, as Wednesday drew to a close, Binance confirmed they would NOT be acquiring FTX, writing that “corporate due diligence, as well as the latest news reports regarding mishandled customer funds and alleged US agency investigations” led to the decision
• The shift seemed to acknowledge merging Wall Street Journal reports on Wednesday evening that the SEC was intensifying existing investigations into FTX’s finances
• The Journal also suggested FTX is seeking $8bn in emergency funding to cover withdrawals
• Bloomberg’s figures differed slightly, citing a source who claimed Bankman-Fried said they faced a shortfall of “up to” $8bn, and needed $4bn to remain solvent
• According to the source “FTX is attempting to raise rescue financing in the form of debt, equity, or a combination of the two”
• Without adequate funding, FTX will have to file for bankruptcy, stated the source
• Earlier on Wednesday, Singaporean newspapers The Straits Times and Business Times both reported that national sovereign wealth fund Temasek is “in talks” with FTX, and “engaging FTX in our capacity as a shareholder” in response to the news of Binance’s proposed takeover
• However, Temasek told the local press “Given the ongoing discussions between both companies, it wouldn’t be appropriate for us to comment beyond that”
• This raised some speculation that Temasek could seek a controlling stake if Binance’s takeover efforts fall through, but details around the nature of their “engagement” remain scarce at the time of writing
• On Thursday morning, Reuters reported that after Alameda suffered heavy losses in May and June following the marketwide contagion events, Bankman-Fried transferred $4bn of funds from FTX to Alameda, in order to keep the trading firm afloat
• Startup news site Semafor also reported late on Wednesday that FTX’s legal & compliance team handed in mass resignations after the takeover news, but as of the time of writing this has yet to be corroborated by larger news organisations

What happened: JP Morgan performs first trade on a public blockchain

How is this significant?

• Despite JP Morgan CEO Jamie Dimon's evident personal distaste for digital assets, the bank itself continues to push forward in the field with new means of implementation, integration, and exposure
• Last week, JP Morgan properly entered the realms of DeFi, executing their first live trade on a public blockchain, although it flew somewhat under the radar as reporting concentrated on the role of Singaporean authorities in the endeavour
• As part of a pilot program from the Monetary Authority of Singapore, JPM tokenised 100,000 Singapore dollars and traded them for tokenised Yen provided by Japan's SBI Digital Asset Holdings
• Even though the trade itself didn't consist of mainstream digital assets, it proved the viability of public blockchains for transfer of tokenised financial instruments
• Furthermore, it was executed using infrastructure from established digital asset development companies; the Ethereum layer-2 scaling solution Polygon, and a modified version of leading DeFi lending protocol Aave
• Tyrone Lobban, head of Blockchain Launch and Onyx Digital Assets at JPMorgan commented that it was “the first step to show that we can actually trade on these public networks... The future is really working toward scaling this pivotal moment”
• In other JP Morgan news, the bank issued a new report this week, authored by Nikolaos Panigirtzoglou, outlining decelerating venture capital investment into the digital asset sector due to the crypto winter, down to about a third of last year’s bull run levels
• In the wake of FTX’s crash, JP Morgan strategists speculated that there could be “a cascade of margin calls” that would drive down digital asset values further, but also theorised a smaller overall impact than the Terra LUNA blockchain collapse and contagion in May, “as the TerraUSD episode already sparked a pullback in risk taking”

What happened: Contagion latest—FTX Fallout

How is this significant?

• As FTX’s liquidity came into question and adjacent digital assets like FTT and SOL fell sharply, numerous companies in the digital asset space addressed the financial impact of any exposure to the exchange
• Mike Novogratz of Galaxy Digital confirmed $76.8m of exposure to the exchange, with just under $48m of assets currently in the withdrawal process
• On a conference call, Novogratz said “we are going to have to be nimble and agile for the next 2-to-12 weeks as this digests, and people really make sense of what happened”
• He also confirmed existing plans for a 15% headcount cut (mirroring current moves in the investment banking sector by the likes of Citi, Barclays, Morgan Stanley, and Goldman Sachs), but stated the scale was unlikely to be affected by the FTX fallout
• Other companies with exposure to the digital asset sector making redundancies due to the challenging macroeconomic landscape included Dapper Labs, Stripe, Mythical Games, and Meta
• Leading stablecoin issuers Tether and Circle also issued statements on FTX exposure, with Tether’s CTO Paolo Ardoino tweeting “To be clear: #Tether does not have any exposure to FTX or Alameda. 0. Null”, whilst Circle CEO Jeremy Allaire stated “Circle has no material exposure to FTX and Alameda… Circle has never made loans to FTX or Alameda, and has never received FTT as collateral, and has never held a position in or traded FTT”
• Indeed, in a move to further protect their backing assets this week, Circle began the process of moving assets to the SEC-registered “Circle Reserve Fund”, a government money market fund managed by BlackRock
• Circle announced plans to move all their short-term treasury assets into the fund, although they will continue to hold their cash reserves with partner banks
• Speaking of banks, shares of digital asset bank Silvergate tumbled in response to the FTX news, as the exchange is one of their customers, but analysts at both BTIG and Canaccord defended the bank, saying that Silvergate neither has any FTT tokens, nor lends against any digital assets except (over-collateralised) Bitcoin
• Leading digital asset exchange Coinbase addressed FTX’s liquidity crunch in a blog post, saying “There can’t be a ‘run on the bank’ at Coinbase”, noting that as a publicly-listed company, they are audited and certified as fully backing customer assets
• They did note a minimal $15m exposure via a trading deposit at FTX, and Coinbase servers did briefly go offline on Tuesday as plummeting prices and investor panic led to mass withdrawals—but websites were quickly restored online
• VC firm Sequoia Capital wrote down their entire value of their FTX stake, demonstrating a philosophical response to the event by saying “We are in the business of taking risk. Some investments will surprise to the upside, and some will surprise to the downside”
• Sydney-based Bitcoin mining firm Iris flagged up the potential for debt defaults, due to the combined effects of rising global energy prices and falling digital asset prices

What happened: Fidelity announces zero-commission retail digital asset trading

How is this significant?

• Financial services giant Fidelity deepened its involvement with digital assets further this week, announcing Fidelity Crypto, a commission-free retail trading platform
• Customers will be able to buy, sell, and hold both Bitcoin and Ether on Fidelity Crypto, with the only publicised requirement being a $1 account minimum
• In a statement to CNBC, Fidelity representatives said “Where our customers invest matters more than ever. A meaningful portion of Fidelity customers are already interested in and own crypto. We are providing them with tools to support their choice, so they can benefit from Fidelity’s education, research, and technology”
• Whilst they won’t take commission, Fidelity will use a 1% price spread on each executed trade in order to help monetise the platform
• Whilst a launch date hasn’t been announced, interested customers can sign up to a waiting list and be notified when the exchange goes live
• Fidelity Crypto is the latest of several digital asset-focused moves by the $9.6tn AUM finance giant, following recent plans to increase headcount in its digital asset division by 25%

What happened: Crypto custodian Copper secures $500m insurance deal

How is this significant?

• Copper, a London-based digital asset custodianship firm, finalised a deal with insurance giant AON this week, granting them half a billion dollars of insurance cover for digital assets held in cold storage (meaning in devices disconnected from the internet)
• The insurance policy will protect against multiple eventualities, including “employee collusion, third-party theft and physical loss of or damage to digital assets looked after by the company”
• The deal was announced on Wednesday, as news of FTX’s liquidity issues dominated industry media, and Copper’s Greg Hall said “Safeguarding digital assets is the central goal of our business, and now we have an extra level of security to reassure our clients”

What happened: NTT Docomo pledges Web3 investment with support of Japanese legislators

How is this significant?

• NTT Docomo, the largest mobile network in Japan, has pledged $4bn of investment in local Web3 infrastructure, according to statements provided to the industry press
• The Japanese government owns 1/3rd of the shares in NTT Docomo’s parent company, NTT (the Nippon Telegraph and Telephone Corporation)
• Masaaki Taira, the government’s Web3 project team lead said that, although regulators recently outlined plans to relax industry rules, he expected more support from them
• In an interview, Taira said “This is still not enough. I don’t think we can stop here”
• Taira was a key figure in drafting the initial white paper for Japan’s Web3 industry, which helped make it a pillar in prime minister Fumio Kishida’s policy guidelines
• He said “momentum is building” for Japan’s digital asset industry, and told Bloomberg his team is currently drafting a second white paper—ready by year-end—focused on “improving tax, listing and accounting regulations, as well as creating a regulatory framework for so-called decentralized autonomous organizations, or DAOs, the crypto world’s version of company-like entities”

What happened: Cathie Wood increases Coinbase exposure

How is this significant?

• Cathie Wood’s Ark Investments took advantage of recent tumult in the digital asset market, with three Ark funds buying more than 420,000 Coinbase shares worth around $21m on Tuesday, according to daily investment disclosures
• The COIN shares fell 11% on Tuesday when it appeared that Binance might absorb FTX to create a mega-exchange, although subsequent revelations about FTX liquidity and practices scuppered the deal
• FTX’s loss may lead to Coinbase’s gain; CEO Brian Armstrong was keen to stress when asked for commentary that Coinbase could not experience a similar incident, since they are publicly listed and audited, and don’t engage in “risky behaviours”
• This was ARK’s first purchase of Coinbase shares since July, and makes the investment firm the 4th-largest shareholder, with approximately a 4.3% stake

What happened: VC news—10-figure raises continue despite lowered VC activity

How is this significant?

• Digital asset exchange Archax completed a $28.5m Series A funding round on Tuesday, led by $532bn AUM British investment giant Abrdn
• This marked a continuation of Abrdn’s involvement with the FCA-registered exchange, after they became their largest external shareholder earlier this year
• UAE sovereign wealth fund Mubadala led a $70m Series B round for Web3 payment infrastructure firm Ramp
• Ramp will use funding to increase headcount across multiple seniority levels, and integrate more local fiat currencies and payment methods to reduce user friction
• As part of the deal, a representative from Mubadala was awarded a director role at Ramp
• Blockchain intelligence firm TRM Labs also secured $70m in a Series B (extension) round, led by private equity firm Thoma Bravo
• Other participants in the round included a who’s who of finance; Citi Ventures, PayPal Ventures, Goldman Sachs, and Amex Ventures
• Thoma Bravo Principal Christine Kang said that blockchain analytics capabilities will grow more and more important as the industry becomes more established; “In the rapidly evolving regulatory landscape, TRM’s capabilities are ever more critical to helping organisations scale and adapt risk management needs”
• Singapore-based digital asset trading platform Amber Group kicked off a new $100m funding round at a $3bn valuation; the exact same valuation as when they raised $200m in February
• A source told Bloomberg that they consider the $100m raise an extension of the previous round, which included Singaporean sovereign wealth fund Temasek Holdings

What happened: US Justice Department completes second-largest digital asset seizure

How is this significant?

• On Monday, US prosecutors confirmed a haul of almost $3.4bn in Bitcoin at the time of seizure last November—though values have since declined in the wake of the 2022 crypto winter
• More than 50,000 Bitcoin were found on cold storage devices hidden in the home of James Zhong, a computer science graduate who gained the Bitcoins by defrauding darknet marketplace Silk Road a decade ago, during Bitcoin’s murky formative years
• Zhong pled guilty to wire fraud, though his attorney noted Zhong returned “virtually all of the Bitcoin he improperly acquired… Given the increase in Bitcoin value over the last decade, the value of the Bitcoin he returned exponentially exceeded the value of the Bitcoin he took”
• As a result, the US government is now one of the largest Bitcoin “whales”, with hauls across various law enforcement activities amounting to at least 214,000 Bitcoins in their current holdings
• In the past, federal authorities have liquidated Bitcoin holdings through public auctions run by the US Marshals service, and has established a reputation for patiently waiting until digital assets appreciate in value in order to secure the highest prices possible