Nickel Research Centre

Nickel News Roundup - Week 23

9th June, 2023

Market Overview:

Digital assets dipped this week, as SEC enforcement actions against Binance and Coinbase in America dominated the news cycle.

  • Bitcoin experienced a deep decline on Monday and Tuesday as markets reacted to SEC lawsuits, driving Bitcoin as low as $25,480
  • However, prices recovered later on Tuesday, topping out at just below the weekly high around $27,330
  • Bitcoin’s current price of $26,480 represents a 2.2% decrease
  • A new Goldman Sachs report suggested widespread profit-taking in May, as the degree of realised profit reached levels last seen in December 2020
  • Researchers Kaiko noted a large decrease in Bitcoin spread and liquidity on Binance, as numerous users moved their funds off-exchange in the wake of news surrounding the SEC’s enforcement action against the exchange
  • Concerns over future interest rate hikes in the US continue to concern the markets, with one former Fed governor speculating that a 6% interest rate could be forthcoming, with no cuts in 2023
  • Ether followed Bitcoin’s movements, dropping from a weekly high of $1,910 pre-lawsuits to a weekly low of $1,784 in the immediate aftermath
  • Current pricing at $1,840 indicates a 2.4% decrease
  • Ether supply dynamics remain deflationary, but once again slowed compared to the previous rate of deflation, registering a current annual net issuance of -0.27%
  • Overall digital asset market capitalisation declined slightly, to $1.1tn
  • According to industry monitoring site DeFi Llama, total value locked in DeFi this week across all blockchains and platforms dropped to $45.3bn

Digital assets declined following consecutive bombshells from Gary Gensler and the SEC, who brought lawsuits against both Binance and Coinbase within a 24 hour period. However, the declines were partially reversed after the shock wore off, indicating that traders may be growing more comfortable with a world in which the US plays a diminished role in digital assets. Elsewhere, global appeal of the borderless asset class continued to shine; a new SWIFT initiative is testing out blockchain interoperability and asset tokenisation with banks like ANZ, BNP Paribas, BNY Mellon, Citi, and Lloyds, Cboe gained approval for margin trading on their futures contracts, El Salvador secured around $1bn for the creation of a massive renewable-powered Bitcoin farm, Russia and China continued development of local blockchain solutions, a $916bn asset manager moved into the space, and an investment firm announced a new $300m fund.

What happened: Gary Gensler continues crypto crackdown, suing Binance and Coinbase

How is this significant?

  • The week’s biggest news came from the US regulatory sphere, as Gary Gensler and the SEC launched enforcement actions against two of the world’s largest crypto asset exchanges, Binance, and the US-registered Coinbase
  • The SEC issued numerous charges against Binance and its CEO, Changpeng “CZ” Zhao on Monday, which led to a cagy market reaction and drove Bitcoin below $26,000 for the first time since March
  • The 13 charges raised centred around KYC procedures allowing US customers access to Binance’s global site, Binance.US lacking separation from Binance, mishandling customer funds, misleading investors and regulators, and breaking securities rules
  • 12 tokens or coins were deemed as unlisted securities in the complaint, including Binance’s proprietary BNB, the BUSD stablecoin, and Algorand—a coin which Gensler himself had previously praised as “great technology” and an example of decentralisation when he was professor of blockchain at MIT in 2019
  • They also claimed that Zhao’s trading firm received $11bn via a client deposit company
  • Binance responded publicly, saying allegations of customer funds at risk were “simply wrong”, and that they would “vigorously defend” themselves against the charges
  • The company added that the action came “after extensive cooperation and recent good-faith negotiations” which the SEC unilaterally abandoned, choosing to “grab headlines” and “regulate with the blunt weapons of enforcement and litigation rather than the thoughtful, nuanced approach demanded by this dynamic and complex technology”
  • Binance also argued that the SEC’s approach risks undermining the US as a global base of financial leadership, and that the commission seeks to “Unilaterally Define Crypto Market Structure”
  • Additionally, they published a blog on the value of crypto outside of a US-centric lens, praising its borderless nature, decentralisation, and capacity for financial inclusion
  • Reports earlier in the week speculated that Richard Teng, the exchange’s newly-appointed head of [non-US] global markets, could soon step up as Binance’s new CEO, with Zhao allegedly wishing to step down to ease the regulatory tension caused by his public profile
  • The SEC requested “alternative means” to serve Zhao with court papers, calling him “famously protective of revealing his whereabouts”
  • Binance.US responded to the lawsuit by suspending all USD deposits and announcing the delisting of 10 trading pairs on the exchange, but maintained that “Your assets remain safe and secure with Binance.US, and deposits and withdrawals continue to function as normal”
  • A day after filing their suit, the SEC filed an emergency motion with a federal judge, requesting they “freeze the assets of Binance’s U.S. platform and repatriate both fiat currency and crypto held by the service’s customers”
  • On Wednesday, Binance lawyers appeared to imply wrongdoing on the part of Gensler, claiming that he “offered to serve as an advisor to the crypto exchange in several March 2019 conversations with Binance executives and Zhao [whilst still employed at MIT]”
  • They furthermore noted that Gensler interviewed Zhao for his blockchain course at MIT, and allege that he sent Zhao a copy of his intended testimony before the House Financial Services Committee in 2019
  • Meanwhile, the charges against Coinbase didn’t include any individual actions against top executives, but did include charges of listing unregistered securities, and operating an unregistered exchange, broker, and clearing house
  • Coinbase CEO Brian Armstrong spoke at the Bloomberg Invest summit on Wednesday, mentioning how often they met with regulators seeking clarity, saying the company even acquired a broker-dealer licence which remains dormant because they haven’t found a way to activate it
  • Armstrong noted that when Coinbase filed for its IPO in 2021, it was approved by the SEC, with full knowledge of the company’s business model
  • Additionally, he pointed out that of over 200 listed assets, the SEC only named 13 as securities in the suit
  • He also said “there’s a broad recognition in Congress… the US is going to get left behind if they don’t start to create some regulatory clarity
  • Afterwards, Armstrong tweeted that he is “proud to represent the industry in court to finally get some clarity around crypto rules”
  • Speaking of Coinbase’s quest for clarity around rules, a US judge ordered the SEC to respond to Coinbase’s 2022 petition for formal industry rulemaking within a week
  • Coinbase chief legal officer Paul Grewal tweeted “We continue to believe that the SEC could not be proceeding with litigation against our industry, like the case filed against us today, if the SEC had not already decided to deny our petition for rulemaking… If the SEC’s answer to our petition for rulemaking is ‘no’, then they are required by law to tell us, because we have the legal right to question that ‘no’ in court. And there are serious questions to be asked”
  • Grewal also stated “The SEC’s reliance on an enforcement-only approach in the absence of clear rules for the digital asset industry is hurting America’s economic competitiveness and companies like Coinbase that have a demonstrated commitment to compliance”
  • Coinbase published a “by the numbers” video response to the SEC, noting that they met with the SEC 30 times in 2022 alone requesting guidance, reject 90% of assets from listing due to legal standards, and that the SEC has established 0 comprehensive rules for crypto in America, despite 33 other countries currently developing such frameworks
  • Numerous state regulators also ordered Coinbase to withdraw staking services to their citizens
  • ARK Invest’s Cathie Wood believes that the enforcement action against Binance could prove positive for Coinbase if it results in more industry clarity—and she put her money where her mouth is, adding to ARK’s sizeable Coinbase stake after shares slumped in the wake of news around the enforcement action
  • Following the latest update to its list of securities, the SEC now suggests that around $120bn of crypto assets qualify as securities
  • There were some concerns that SEC sources may have leaked plans regarding their enforcement actions, as a mystery trader purchased $86,500 of puts on Coinbase (expiring Friday) at 10:36 am on Monday, roughly 24 minutes before the SEC announced their action against Binance
  • A day later, following the addition of Coinbase, that $86,500 investment was worth over $2.6m
  • Concerns over leaks were intensified as this came days after another mystery trade on a company that benefited from its inclusion in the recent US debt ceiling deal
  • Although markets were rattled by the original enforcement action against Binance, they recovered swiftly and soon clawed back some of those losses; Bitcoin rose nearly 5% on Tuesday after dropping below $26,000 on Monday after the news
  • Gensler continued his anti-crypto tirades and headline-grabbing on CNBC’s Squawk Box, whilst appearing to relegate all digital assets to the function of currency, stating “We don’t need more digital currency. We already have digital currency. It’s called the US Dollar. It’s called Euro. It’s called the Yen. They’re all digital now”
  • Despite Gensler’s repeated assertions, it’s worth noting that the CFTC launched a civil enforcement action a gainst Binance just over a month ago—one which cites several of the very same assets the SEC deems securities as commodities instead
  • This could lead one to reasonably question whether separate regulatory bodies disagreeing on the status of assets could indeed be a sign that regulatory clarity is perhaps lacking in the US, or if crypto assets have achieved the remarkable feat of quantum superposition, somehow being—unlike other assets—both a commodity and a security at the time; Schrödinger’s assets

What happened: Binance and Coinbase industry reaction

How is this significant?

  • Reaction to the enforcement actions was varied; anti-crypto senator Elizabeth Warren joined recriminations, while Bloomberg opinion columnist Matt Levine mused on whether the SEC is acting to protect investors, or harm the industry; “Is the SEC suing Coinbase and Binance for being crypto exchanges, or for being bad crypto exchanges? Is the claim here ‘you let people trade crypto, which we think is illegal,’ or is it ‘you let people trade crypto and steal their money’?”
  • Some in Congress decidedly disagreed with Gensler’s actions; New York Democrat Ritchie Torres told Marketwatch “The latest enforcement action against Coinbase is an egregious example of regulation by enforcement. It demonstrates a complete contempt for Congress which is in the process of developing a [regulatory] framework… He’s portraying crypto as the villain in order to portray himself as a political hero”
  • Arkansas representative (and digital assets subcommittee chair) claimed that the enforcements were an example of “CYA” after the SEC were caught asleep at the wheel during FTX’s massive fraud last year
  • Billionaire Mike Novogratz was concerned that there would be “no quick closure” to the litigation process, leading to prolonged uncertainty—but he found a silver lining in the exclusion of Bitcoin, Ether, and major stablecoins in the suits, saying “if you take the opposite [perspective]—three-quarters of our industry even in the US is available to play”
  • Former SEC chair Jay Clayton closely mirrored Binance’s public sentiment at the Bloomberg Invest summit, commenting on the industry; “I think we’re having very blunt conversations about something that requires nuance”
  • Clayton further supported the concept of crypto; “I am remarkably impressed by the performance of true stable stablecoins… the power of technology is underestimated”
  • Speaking to Bloomberg, Columbia Business School professor Omid Malekan commented "The SEC under Gensler is dead set on enforcing rules that, if followed, would kill off almost all of crypto [in the US]"
  • New research by asset managers Coinshare appears to indicate that US regulatory hostility has already had the effect of shrinking the nation’s profile within the space, creating “regulatory arbitrage”; US crypto market share in the sector has fallen by 15% year-to-date; a timeframe in which the overall market has grown by over $300bn

What happened: Hivemind Capital launches $300m crypto fund

How is this significant?

  • Hivemind Capital, the investment firm founded by ex-Citi executive Matt Zhang, announced on Tuesday that they are launching a $300m crypto investment fund
  • Even though the week was marked by news of regulatory pressure intensifying, Zhang believes that “this reinforces our viewpoint that the digital-asset space is still early in its formation as an investable asset class”
  • He told Bloomberg “We are doubling down in the space, while other people are taking off”
  • The $300m Liquid Opportunity Fund will be an open-ended investment vehicle, focused on large, widely-traded, highly-liquid tokens, rather than any VC investments
  • Zhang said the fund has raised about $60m of its goal thus far, with aims of completing the $300m raise by the end of next year
  • Although the SEC’s recent lawsuits “don’t impact Hivemind’s new fund launch at all”, the prevailing uncertainty in the US has apparently led to a change in investor demographic; rather than US pension funds or endowments, the bulk of investors thus far have been Asian family offices

What happened: Analysts assess China’s Web3 vision

How is this significant?

  • Following the recent publication of Web3 whitepaper (including a yearly 100m Yuan investment pledge) by Beijing’s Municipal Science & Technology Commission, there was widespread interest in the potential impact by industry analysts
  • According to TechCrunch, there may be some slight geographic clarification necessary; rather than reflecting broader government policy, it may just apply to “Zhongguancun, the Chinese government’s designated high-tech industrial zone that’s home to some of the country’s better-known tech firms”
  • Regardless of its exact geographic breadth, the white paper suggests interest in metaverse development, even as it’s cooled in the west, claiming “a three-dimensional space that combines virtual and real realms with a highly immersive interactive experience… will greatly improve the interaction between people and information and the efficiency of economic activities”
  • This aligns well with activities elsewhere in China; in the eastern Jiangsu province, the city of Nanjing recently inaugurated the China Metaverse Technology and Application Innovation Platform, building on a local metaverse strategy that forecast over $19bn in revenue by 2025
  • Shanghai also presented a wide range of metaverse concepts, including public applications like healthcare diagnosis, and forecasting annual revenues of $49.6bn in three years
  • The aforementioned white paper also highlights the potential of virtual-real integrations, indicating plans for AR layers on top of a wider web3 experience
  • The paper outlines a variety of other potential use cases, stating “web3 will serve as a crucial foundation for identity verification, data authentication, asset trading and regulation in the metaverse”

What happened: SWIFT collaborates with crypto project Chainlink on blockchain integration

How is this significant?

  • Interbank messaging system SWIFT announced a new collaboration with blockchain oracle network provider Chainlink in a press release on Tuesday, as part of a series of trials concerning the integration of major financial institutions with blockchain
  • The SWIFT press release noted a particular focus on asset tokenisation and blockchain interoperability “to remove friction from tokenised asset settlement”
  • They note a rising interest in tokenised assets amongst institutional investors, as “in capital markets, there’s a growing view that blockchain technology has the potential to generate efficiencies, reduce costs and open up opportunities”
  • Tom Zschach of SWIFT argues that “it would simply not be feasible for financial institutions to connect to each and every [tokenisation] platform individually. That’s why the community is working with Swift to develop an interoperability model that would enable access to different platforms globally”
  • This new round of experiments builds on successful blockchain and tokenisation trials from 2022, and includes participation from a number of major banks, including ANZ, BNP Paribas, BNY Mellon, Citi, and Lloyds
  • Tests will include use of Chainlink’s Cross-Chain Interoperability Protocol (CCIP) for transfer of tokenised assets between Ethereum and another public blockchain network
  • Chainlink co-founder Sergey Nazarov commented “We’re excited to work with Swift. It’s clear that as banks endeavour to access multiple blockchains, a common connectivity layer across the various chains will be a critical building block for their adoption of on-chain finance”
  • He added “Banks hold the largest amount of capital globally and if our industry is going to grow past the single digit trillions, then the banks have to come in and in reality, I think it'll be the banks and their clients that grow the blockchain industry past $10 trillion”
  • In another bank-based pilot project, JP Morgan revealed a collaboration with six Indian banks to trial real-time 24/7 dollar settlements, using its proprietary Onyx blockchain
  • The pilot will be based in Gujarat, and includes participation from JPM themselves, alongside HDFC Bank, ICICI Bank, Axis Bank, Yes Bank, and IndusInd Bank

What happened: Cboe approved for crypto margin trades

How is this significant?

  • Derivatives giant Cboe gained regulatory approval for margined Bitcoin and Ether futures contracts on Monday, expanding their offering in the digital asset space
  • Cboe will offer the physically and financially settled contracts later this year according to a statement, allowing traders to post less capital when opening positions
  • Cboe Digital President John Palmer said their status as the only US-registered spot and derivatives digital asset exchange (as well as a clearinghouse) provided them with advantages over competitors; “That’s where the concept of us also having a spot market has advantages. We didn’t want to have to force participants to custody or touch the physical asset”
  • Although the margin approval only extends to Bitcoin and Ether, the company offers spot and derivatives trades on a select few other large-cap assets including Bitcoin Cash, Litecoin and USDC
  • Galaxy Digital became a minority investor in Cboe last year, perhaps backing their desire to list more digital assets in future

What happened: El Salvador secures $1bn for renewably-powered Bitcoin mining operations

How is this significant?

  • El Salvador—the first country to recognise Bitcoin as legal tender—continued its activity at the vanguard for national adoption of digital assets this week, securing $1bn in commitments for Bitcoin mining facilities powered by renewable energy
  • The public-private partnership will be one of the largest Bitcoin farms in the world, with 50% of revenues earmarked for reinvestment into mining infrastructure
  • Although the government-backed Volcano Energy firm won’t initially use geothermal power, the mining site will produce over 270 MW from a combination of solar and wind energy, meaning all its energy needs will be covered by renewables
  • El Salvador’s government has secured “preferred participation equivalent to 23% of revenues”, whilst other backers (gaining 27% of revenues) for the project include stablecoin issuers Tether, who just last week revealed investment in sustainable mining facilities in Uruguay

What happened: Contagion latest

How is this significant?

  • South Korean prosecutors alleged that fugitive Terra Luna blockchain developer Do Kwon (recently arrested in Montenegro) has funnelled nearly $30m in assets since his arrest earlier this year
  • Dan Sunghan of Korea’s financial crime bureau told Bloomberg “We’re assuming that Do Kwon, or someone under his direction, took out the amount and moved it to another wallet, not to [Swiss digital asset bank] Sygnum, and cashed it out somewhere else”
  • The prosecutors are trying to freeze $13m at Sygnum originating from the Luna Foundation Guard, the entity responsible for the failed TerraUSD algorithmic stablecoin
  • A US federal judge asserted jurisdictional control over $7.3bn of assets in the FTX bankruptcy case, striking a blow at Bahamian liquidators who claim the company’s registration there made its assets a matter of their purview
  • However, there’s a chance the aforementioned $7.3bn could soon grow beyond that figure; one of FTX’s many investments was in the artificial intelligence field, where mass hype is currently driving up valuations
  • Semafor first reported that FTX holds stock in A.I. startup Anthropic worth hundreds of millions of dollars; but the bankers responsible for selling off assets must weigh the timing due to the current market enthusiasm around A.I.; “If FTX’s bankers sell their shares in Anthropic now, it could go down in history as one of the great missed opportunities of all time”
  • The Wall Street Journal revealed that crypto custodians BitGo struck a deal to acquire their troubled competitors Prime Trust “to enhance its best-in-class, trusted solutions and to service the combined customer base”

What happened: Russia’s largest bank opens access to DeFi platform

How is this significant?

  • In a press release this week, Sberbank—the largest bank in Russia—announced the expansion of developer access to their DeFi platform
  • This move will allow interested developers to test DeFi applications on the bank’s (Ethereum-based) ComUnity platform
  • The press release promotes the platform’s “integration with Sberbank’s existing services, enabling users to seamlessly conduct operations on the platform while conducting payments in Russian rubles”
  • Speaking at a recent Sberbank blockchain conference, Anatoly Aksakov, Chairman of the State Duma Committee on Financial Market outlined wider Russian plans for the crypto market, disclosing that “the Federal Taxation Service is expected to assume responsibility for overseeing the country’s crypto market”
  • According to statistics shared at the conference, around 17 million Russians (12% of the population) currently own crypto wallets, and around 3 million frequently interact with the technology
  • Aksakov added that they aim for a balanced approach at the national level, looking “to strike a balance between nurturing innovation and ensuring compliance, thus creating a secure and stable environment for crypto enthusiasts and businesses alike”

What happened: Schroders plans digital asset push

How is this significant?

  • $916bn asset manager Schroders is moving into digital assets despite the ongoing crypto winter, according to Bloomberg sources
  • One of their first priorities is securing a third-party custodian for crypto assets, with the frontrunner believed to be Standard Chartered’s institutional-focused Zodia Custody Ltd
  • London-based Schroders made their first move into the space in 2022, when they purchased a stake in digital asset managers Forteus
  • Their annual report card also outlined plans to hire a new board member with experience in the digital asset field
  • A Schroders spokesperson commented that “Given the potentially transformative impact blockchain technology may have, we want to broaden our understanding of the infrastructure that may be required to support evolving digital asset classes”, but did not confirm any information regarding their choice of custodian
  • In other news involving Zodia, they secured an institutional staking services partnership with Blockdaemon on Tuesday, making them “the first bank-owned custodian to offer staking services to institutional clients”
  • In other custodial news, SBI-backed Komainu Connect secured a partnership with top-5 digital asset exchange OKX, allowing their institutional customers to trade with funds reflected on the exchange whilst secured off-exchange
  • OKX chief commercial officer Lennix Lai told industry publication Coindesk "Funds deposited in a Komainu custody wallet are moved to a Komainu collateral wallet and then linked to an OKX account. The OKX account then mirrors the balance and allows active trading across OKX's 700-plus spot and derivatives markets”
News Roundups