Mint Digital Assets Journal - Issue 4
#mdj | 11/Sep to 17/Sep | By Pranay Yadav with inputs from Srinidhi Raghavendra
#mdj is a weekly journal covering developments within the global digital assets industry.
In this issue of #mdj, we cover:
Read Disclaimer
Previous issues: Issue 1, Issue 2, and Issue 3
EXECUTIVE SUMMARY
ETH Merge Completed. The ETH merge was successfully completed without any disruptions to the network on Thursday. This sees the network shifting to Proof of Stake consensus. ETH saw an expected sell-off after the merge. Meanwhile the Proof of Work fork of Ethereum saw a 75% decline in price along with network disruptions.
BTC Price Declined After US CPI Report. BTC price dropped sharply following the release of US CPI data. Overall BTC ended the week 13% lower.
White House Release Crypto Regulation Framework. The White House released their fact sheet that summarized reports by several agencies regarding their views on effective regulation and responsible innovation in the space.
Concerns Over ETH Centralization. We highlight the concerns over risks of centralization to the Ethereum networks with the shift to proof of stake by looking at the concentration of staked ETH among a handful of centralized entities.
Starbucks launches NFT Rewards. Starbucks launched a new rewards program that utilizes NFTs to reward customers with digital experiences and other rewards marking their foray into the space as highlighted by their intentions last year.
SWIFT Launches Blockchain Pilot. SWIFT is reportedly working on testing out a blockchain solution for communicating data over company financials and significant corporate events in order to improve data quality for clients.
KKR Puts Private Equity Fund on AVAX. KKR put a portion of its Healthcare strategic growth fund on the avalanche blockchain in partnership with Securitize. They hope that this will make the fund more accessible to retail investors.
VC Activity in Digital Assets. The past week saw $410.5M of investment into crypto firms as well as the launch of several funds including a $100M fund by NEAR.
LARGE CAP PRICE ACTION
This week saw a large sell-off in crypto markets as the CPI data for the US ticked upwards indicating worsening inflation. Additionally, speculation around the merge wound up and an expected “sell-the-news” event played out. BTC price declined from its level above 22k last Monday to nearly 19k, at the time of the snapshot, representing a 13% fall. BTC price fell as low as $18,250 on Monday before rebounding above 19k again. BTC had a VRVP price of $19,675 over the past week with majority of selling concentrated between 19.6-20k. The level at $18,800 also saw notable trading activity along with the top of 22.4k.
Meanwhile, ETH saw a decline in price throughout the week, initially because of the CPI release and subsequently because of an expected “sell-the-news” event as traders sold off their ETH holding after the fork airdrop tokens were released. The fork token itself declined nearly 75% in price. ETH declined 21.6% through the week. ETH had a VRVP price of $1,604 with price levels at 1,600 and 1,450 seeing notable trading activity. ETH dropped below $1,300 on Monday before recovering.
TOP CRYPTO ASSETS PERFORMANCE
Crypto markets largely saw a decline through the week. BTC was down 13% while ETH was down nearly 21%. XRPL was a notable standout as it ended the week 1.2% higher. XRPL is nearly 5% higher over the past month.
STABLECOINS MARKET CAPITALISATION
Overall stablecoin marketcap declined 0.2% or $300M over the last week. BUSD continued to gain with a 3% increase in circulation the past week for a 10% increase over the past month.
USDC supply dropped 2.5% as USDC on Binance continued to be converted to BUSD. FRAX saw a 3% reduction in supply.
CRYPTO AND EQUITY MARKET SENTIMENTS
The past week saw market sentiment largely declining as the Fear and Greed index slipped further towards Fear.
BTC & ETH DERIVATIVES TERM STRUCTURE
WEEKLY NEWS HIGHLIGHTS
Source: Mint Finance Blog
ONCHAIN ACTIVITIES
The % of BTC circulating supply that has not moved in the past year continued to remain flat through August and September indicating that these addresses belonged to holders likely to hold for longer. This is despite a 17% decline in price during this period.
Bitcoin Mining Difficulty edged up a further 3.45% last week after the 9.26% increase in August. This has taken the Bitcoin mining difficulty to an all time high of 32.05T.
Meanwhile, Glassnode highlighted new on-chain metrics that would be relevant after the merge. According to them the following metrics should be watched going forward:
Block Production: Slot Height, Epoch Height, Missed Blocks, Orphaned Blocks
Network Stability: Participation Rate, Attestation Count
Validator Movement: Voluntary Exit Count, Active Validators, Slashing Event Count
Validator Balances: Total Effective Balance, Stake Effectiveness, Average Validator Balance, Staking Deposits
Validator Economics: Estimated Annual Issuance ROI per validator ,Estimated Annual Issuance
Glassnode’s weekly report also highlighted that over the last week, there appears to have actually been an increase in ETH futures leverage, rather than a decrease, suggesting many risk hedging positions have not been closed.
Meanwhile, in the options market, Call options OI declined 10% after the merge while Put options OI declined 19%. ETH still has a Call/Put ratio of 1.81 according to Coinglass indicating that options traders remain largely bullish.
With their participation rate metric they highlighted an increase in missed blocks before the merge indicating brief disruption to a subset of validators that recovered soon after.
Source: Glassnode
KEY MACRO HIGHLIGHTS
ETH Staking Concentration
Heading into the merge, Nansen published a report analyzing the holdings of staked Ethereum and what that means for its centralization and price pressure following the merge.
Nansen’s report showed that 11.3% of Ethereum was currently staked on the beacon chain (which will become the main chain following the merge) which is significantly less than other Proof of Stake chains such as Polygon (41%) and Solana (77%). Out of this 11.3%, 65% is staked through a liquid staking service while 35% is illiquid.
They highlighted that although the chain had 426k validators and 80k unique depositors, nearly 64% of the staked Ethereum was held by just five (5) entities: LIDO (31%), Coinbase (15%), Kraken (8.5%), Binance (6.75%), and Staked.us (3.02%).
Nansen noted that although LIDO was set up as a decentralized liquid staking service, its governance token LDO is concentrated with very few entities (9 addresses hold just 46%) which raises concerns of censorship
The report also noted that 71% of the staked Ethereum was currently out of profit while 18% of all staked ETH belonged to illiquid stakers who were currently in profit.
This category of illiquid, profitable trader, are most likely to unstake and sell their staked Ethereum once deposits are enabled with the Shanghai upgrade (sometime in 2023). This would represent 2.5M ETH of selling pressure from these entities.
Source: Nansen
Ethereum PoW Forks
The Ethereum merge also saw the launch of a Proof of Work fork of the network. The forked token was airdropped to all ETH holders as per a snapshot of all wallets right before the merge. However, the launch of the fork was wrought with issues as users were unable to access the network or the networks servers. The issues could have been a result of a misconfigured chainID that is used by a wallet to sign transactions on the network. The project was also unprepared in many other ways as they did not have common blockchain tools such as a block explorer, wallet, or a public RPC software for users.
Additionally, Justin Sun’s Poloniex exchange surprisingly supported a rival Proof of Work fork ETH Fair, bringing even further uncertainty to the future of the forked chain.
After its launch the token saw high volatility, rallying up to nearly $50 before crashing to $8 far lower than the $30 it was trading it pre-merge. The token saw huge selling pressures as several traders had acquired ETH with the purpose of capturing the airdrop to sell the tokens.
Notably, Grayscale which now holds 3.1M ETHW tokens plans on selling the forked tokens once they see enough liquidity in order to redistribute the profits to shareholders.
Meanwhile, with the end of proof of work mining on the Ethereum network, some miners migrated to mining other cryptocurrencies such as ETC, Ravencoin, and Beamcoin.
However, they saw profits quickly decline as mining rewards on these chains decreased with the rising difficulty due to higher hash rate. Ethan Vera of mining firm Luxor stated that 20-30% of Ethereum miners had migrated to other chains while the rest had shut down their operations completely.
Sources: Coindesk (Miners are dying quickly), Cryptoslate, Coindesk (ETH PoW crashes), and Coindesk (ETH PoW sees complaints)
Crypto Lending Yields Less than US Government Debt
Crypto yields from lending have recently dropped off from their 2021 highs and now stand closer to returns offered by 3-month US treasury bills.
This change has been driven by increasing interest rates across other fixed income securities such as US Treasury Bills and Global Company Debt has ballooned as the Fed hiked interest rates.
Additionally, lower trading demand in crypto has reduced the returns offered by lending platforms that are used to provide liquidity.
The yield that investors can now access from lending cryptocurrency has dropped off over the year on DeFi lending platforms such as Compound and Aave, pictured below.
However, notably, the Deposit Index for Aave, which includes earnings from liquidation fees and flash loans has been steadily increasing indicating that a different type of borrowing demand is on the rise.
Aside from DeFi platforms, CeFi crypto lending platforms still offer high yield on some deposits, as a result of a recent spike in interest rates led by increased borrowing demands as a result of the Ethereum merge.
Nexo currently offers 10% APY as part of a flexible deposit of USDT or USDC, meanwhile BlockFi offers 7.5-8.5% on USDT and USDC deposits. This higher interest rate offered could also point to there still being demand for crypto borrowing in specific cases (private liquidity providers and exchanges).
On the other end, skyrocketing interest rates as result of the Fed’s fight against inflation have led to yield from US Treasury Bills to spike over the past years and investors can now access similar yield as crypto lending from 3-month US Treasury bills and Global company debt (4.4% according to Bloomberg Index). This can also allow investors to take on far less risk in order to access yield.
Source: Block
China Metaverse Economy
According to JP Morgan analysts, the metaverse will have profound implications for China, impacting gaming, advertising and e-commerce.
The metaverse could triple China’s online-gaming market from $44B to $131B with Tencent and NetEase potentially benefitting from the increase given their strong gaming businesses and strategic global partnerships.
Potential firms that could benefit from the growth in metaverse in China are:
Tencent through its stake in Roblox and other virtual world games
NetEase through its partnership to build a Harry Potter themed mobile game
NetEase through Yaotai which offers virtual meeting rooms
Tencent through managing Weixin/mobile QQ which could benefit from sales of virtual items
Bilibil could benefit from virtual item sales and value added services
Baidu through its virtual XiRang world
VR development by Baidu backed iQiyi
Non-internet companies such as Agora, China Mobile, and Sony
Krafton
Sea
Bandai Namco
The report stated that the development of mobile internet and AI in the past 5-10 years suggests that a company’s competitive advantage in one part of the tech ecosystem is often more important in determining long-term value creation to shareholders than which part of the ecosystem the company operates in.
The analysts stated that the metaverse could double the digital time spent from the current 6.6 hours. The Total Addressable Market for services and software in the metaverse would be $27B. Overall, the market for digitizing offline goods and services could become a $4T market in China.
They stated that potential risks to the development of the metaverse in China include regulatory crackdowns by Chinese authorities on prolonged gaming, cryptocurrencies being banned in the country despite being a major element of the metaverse, regulatory risks around data security, and technological preparedness and affordability of VR and AR devices.
UPDATES FROM DIGITAL ASSET COMPANIES
Abra Crypto Bank
Crypto services company Abra announced that they were in the process of launching Abra Bank – a fully regulated depository institution for cryptocurrency in the US. The launch is expected in 2023 and could potentially mark the first fully operational cryptocurrency bank in the US.
Along with Abra bank, Abra also announced that they would be launching Abra International, a fully regulated digital asset business that would provide similar banking services to customers outside the US. They also launched Abra Boost, which is an updated lending platform serving qualified investors.
This comes after the Federal Reserve announced, in August, that they would allow master account access to institutions with novel charters such as cryptocurrency banks, stablecoin issuers, and digital asset banks. The access would be pursuant to evaluation guidelines laid out by the Federal Reserve. According to the guidelines, access would be granted based on tiered approval.
Firms with FDIC insurance would require lighter review. Firms that are subject to prudential supervision by a federal banking agency would require intermediate review and those that don’t qualify in this category would require an extensive review process to access the master account.
Currently there are a few crypto companies that operate as Special Purpose Depository Institutions in Wyoming such as Kraken and Custodia as well as New York Trust Entities such as Paxos.
Starbucks to launch Odyssey enabling customers to earn NFTs
Starbucks announced that they were partnering with Polygon to launch a rewards program called Odyssey. The program will allow customers to earn NFTs by engaging in activities to deepen their knowledge of coffee and Starbucks.
The NFTs can be purchased using a credit card without requiring users to purchase cryptocurrency. The NFTs will have a point value based on rarity and the NFTs can also be bought and sold among members with ownership held on the Polygon blockchain.
The points that users accumulate from their NFTs can be used to access benefits such as virtual classes, merchandise, and access to exclusive events.
The program launched on September 12th and will run in parallel to their current point based loyalty program. The program marks the beginning of the company’s ambitions of entering the digital assets that began with them allowing users to reload their Starbucks cards using cryptocurrencies.
Last year, ex-CEO Kevin Johnson had stated that they were working on leveraging blockchain technology to tokenize their rewards program and allow other merchants to connect their reward programs to Starbuck’s.
Notably, a change in leadership on the horizon for the firm as Laxman Narasimhan is expected to take over as CEO of Starbucks in October. Laxman was previously CEO of Reckitt Benckiser and COO of Pepsico, as such his tenure at Starbucks will mark his foray into the retail coffee industry. He brings an outsider perspective into the firm and has a history of being a fasts mover and forging strategic partnerships in order to expand into emerging consumer trends. The leadership change could see the scope of this reward program expanding further over the next year.
Sources: Starbucks, Yahoo! Finance, Fool, LiveMint
KKR Puts Private Equity Fund on AVAX
US Investment Firm KKR has made a portion of its Health Care Strategic Growth Fund II available on the Avalanche blockchain in a tokenized form. They have partnered with digital asset management platform, Securitize Capital, which will handle the onboarding of new investors. This will allow individuals to invest in the $4B fund through a tokenized feeder fund that can be accessed through Securitize.
Prospective investors will need to set up an account through Securitize and complete KYC and AML requirements. The tokenized fund lowers the minimum threshold for investors from millions for the regular fund to $100k for the tokenized fund. Investors will also be able to trade the tokens representing their investment into the fund on a secondary market after a 1-year lockup period. Investments through the tokenized fund will be subject to 0.5% management fees.
Avalanche is an eco-friendly smart contract platform built for the scale of global finance. It features near-instant transaction finality, and a novel scaling technology that enables both institutions and individuals to build custom blockchains-as-a-service.
Sources: Coindesk, Pitchbook, Cointelegraph, and Securitize
MERGERS, ACQUISITIONS AND PARTNERSHIPS IN DIGITAL ASSET INDUSTRY
SWIFT Blockchain Pilot
The Society for Worldwide Interbank Financial Telecommunications (SWIFT) is reportedly working on testing out a blockchain solution for communicating data over company financials and significant corporate events in order to improve data quality for clients. They are making use of Symbiont’s platform, Assembly, that seeks to solve inefficiencies in the financial marketplace using its proprietary platform and smart contracts.
Assembly’s smart contract would allow SWIFT to "compare information shared between participants and flag discrepancies, contradictions or inconsistencies across custodians.” In order to automatically harmonize data from multiple sources of a corporate action event.
The pilot is in development and with a select group of participants that will test it and provide feedback in September. If it’s successful, SWIFT will extend it to cover more corporate events and assess bringing it to the wider SWIFT community.
Symbiont has previously worked with Vanguard in 2017 to simplify their data management process by enabling index data to move instantly between index providers and market participants in a decentralized database resulting in improved benchmark tracking and cost savings for clients. They also helped Vanguard and a group of other major banks to explore the applications of DLT to foreign exchange forwards
Meanwhile SWIFT has also been working on researching DLT to ascertain how the technology could be used to improve their services. They developed a proof-of-concept Hyperledger DLT implementation, are working on developing standards for DLT in financial systems and its path to adoption, and a DLT platform for Nostro reconciliation in 2017 which they stated “showed blockchain has potential for global liquidity optimization”.
Sources: Bloomberg, Swift, Vanguard, and Cointelegraph
Digital Assets Funding Activity
The past week saw digital asset firms raising $410.5M.
Notably, sports metaverse startup LootMogul received a $200M investment commitment from Gem Global Yield, providing them a share subscription facility of up to $200M following an equity exchange listing. (Cointelegraph)
Doodles, an NFT creator raised $54M at a $704M valuation in a funding round led by Seven Seven Six with participation from 10T Holdings, Acrew Capital, and FTX Ventures. (Cointelegraph)
Portofino raised $50M in equity funding from Valar Ventures, Global Founders Capital, and Coatue with the launch of its high-frequency trading platform for digital assets. (Cointelegraph)
NEAR announced a $100M VC fund targeting Web3 culture and entertainment in collaboration with Caerus Ventures. The fund had an initial closing of $50M with a target of $100M with plans to invest in seed and series A rounds. (Coindesk)
Binance Labs doubled down on their investment into Aptos Labs with an undisclosed amount. Binance had previously joined Aptos’s $150M funding round in July. Bloomberg reported that Aptos’s valuation is now up to $4B. (Coindesk)
Northzone raised €1B for their new fund with plans to invest in web3 firms as a core sector. (The Block)
North Island Ventures announced the launch of a $125M investment fund targeting strategic investments in 30-40 early stage crypto and web3 companies and protocols. (The Block)
Two Sigma Ventures raised $400M across 2 funds with plans to invest in companies that use data and technology for social advancement. The firm invests in early stage crypto and DeFi firms. (The Block)
Web3 developer platform Alchemy is raising $12M for a new VC fund, although it is yet to start raising capital. (Coindesk)
REGULATORY UPDATES
Whitehouse Crypto Regulations Framework
The White House released their first ever comprehensive framework for responsible development of digital assets.
This fact sheet outlined six principal directions for crypto regulation in the United States summarized from nine (9) separate reports that were submitted following the president’s executive order on Ensuring Responsible Development of Digital Assets in March 2022.
The fact-sheet attempts to condense the views of multiple regulatory agencies in the country over the regulation of the new asset class. Overall, although the fact-sheet highlighted digital asset regulation as a priority for the government, it did not offer much new guidance, instead reiterating the importance of observing the space, researching new innovations, and ramping up enforcement against bad actors.
The fact-sheet is divided into seven (7) sections:
1. Protecting consumers, investors and businesses
The report stated that digital assets pose meaningful risks for consumers, investors, and businesses as the prices of these assets can be highly volatile (pointing to the recent market crash). Their proposals for offsetting these risks for stakeholders reiterated previously expressed views:
Aggressively pursue investigations and enforcement actions against unlawful practices in the digital assets space.
Consumer Financial Protection Bureau (CFPB) and Federal Trade Commission (FTC) should increase their efforts towards addressing consumer complaints and stepping up enforcement against illicit practices.
Cross agency collaboration and data sharing
Public awareness campaigns highlighting risks associated with investing in digital assets
2. Promoting Access to Safe, Affordable Financial Services
This section prompted upcoming development and innovation in the industry to be more inclusive in order to address unbanked sections of society. The recommended proposals were:
Support increased adoption of instant payments systems such as FedNow (including for government use) and the development of innovative solutions in the domain.
Developing a federal regulatory framework for nonbank payment providers.
Promote efficiency of cross-border payment by aligning practices and regulation.
3. Fostering financial stability
This section highlighted the importance of identifying systemic risks associated with an increasingly intertwined digital asset and conventional financial system. They pointed to an upcoming report by the Financial Stability Oversight Council (FSOC) in October discussing digital assets’ financial-stability risks, identifying related regulatory gaps, and making additional recommendations to foster financial stability. Their recommended proposals for now were:
Work with financial institutions to bolster their capacity to identify and mitigate cyber vulnerabilities by sharing information and tools.
Tasking the treasury to identify, track, and analyze emerging strategic risks in the digital asset space.
4. Advancing Responsible Innovation
This section stated that the administration would work on fostering an environment for innovation. Their recommended proposals were:
The Office of Science and Technology Policy (OSTP) and NSF to develop a Digital Assets Research and Development Agenda to kickstart research in fundamental topics relating to digital assets.
NSF will back social-sciences and education research that develops methods of informing, educating, and training diverse groups of stakeholders on safe and responsible digital asset use.
Promote collaboration with US firms developing new financial technologies.
The Department of Energy, the Environmental Protection Agency, and other agencies will consider further tracking digital assets’ environmental impacts and develop performance standards as appropriate.
5. Reinforcing Our Global Financial Leadership and Competitiveness
This section highlighted efforts to set global standards. Their recommended proposals were:
US agencies to spread US values regarding digital assets.
Enforcement agencies to increase collaboration with partner agencies abroad.
Department of Commerce to help innovative US firms find a foothold in global markets
6. Fighting Illicit Finance
This section reiterated their ideals for applying AML and CFT standards in the digital assets space while also strengthening and tailoring these standards for digital assets. Their recommendations were:
Potentially call upon congress to amend the Bank Secrecy Act (BSA), anti-tip-off statutes, and laws against unlicensed money transmitting to apply explicitly to digital asset service providers. Also call on the legislative branch to raise penalties for unlicensed money transmission.
Departments and agencies to step up enforcement against illicit actors.
7. Exploring a U.S. Central Bank Digital Currency (CBDC)
This section laid out the administration’s plans regarding the development of a digital dollar – A more efficient payments system for faster cross-border transactions. The report highlighted the administration’s policy objectives with respect to a US CBDC system stating that the Fed and other agencies should continue their efforts in CBDC research and stated that the final decision over its implementation would rely on whether it was in the best interest for the nation.
Source: Whitehouse
Abu Dhabi Guiding Principles for Crypto
Abu Dhabi Global Market’s regulator FSRA introduced its guiding principles for crypto as they seek to expand the regulatory framework in the country.
The principles pledge to comply with international standards in AML, combating terror (CFT), and supporting financial sanctions while also working to collaborate with industry participants and working to make the market more dynamic, innovative and safe.
Sources: ADGM, CoinTelegraph
Russia Cross-Border Crypto Payments
Russian Prime Minister, Mikhail Mishustin, instructed the government to come to a consensus over crypto regulation by the end of the December 19th. He stressed that the plan should be aligned with the Russian Finance Ministry, the central bank, AML authority, Federal Tax, and Federal Security service.
In addition to policies over the domestic circulation and issuance of digital currencies, the policies should also finalize regulations for cryptocurrency mining and cross-border transactions.
Last week, Deputy Finance Minister of Russia had stated the country’s plans to develop a digital platform for cross-border settlement with friendly countries in commodity-backed stablecoins. At the same time, the Russian Central Bank opposed the legalization of local crypto exchanges.
This has been a sharp U-turn by the Russian administration over the regulation of digital assets as they banned their use in the country just months ago. Now, hit hard by sanctions that hamper Russian international trade, the administration has markedly changed its stance towards digital assets.
Additionally, it was reported that US and EU mining firms have largely not exited Russia despite sanctions while several others have entered the country. Although, a major mining firm, BitRiver, saw its business go down as partners Compass Mining and SBI Digital Holdings, pulled out. Other firms are not as concerned about the sanctions and instead find the cheap electricity available there attractive.
Sources: Cointelegraph, Coindesk
In other regulatory updates:
Argentina conducts raids on secret crypto miners. (Coindesk)
India’s ED unfreezes WazirX accounts. (Coindesk)
Blockchain Association launches new Political Action Committee to influence US crypto policy. (Coindesk)
SEC sets up 2 new offices to handle influx of crypto issuer filings. (Cointelegraph)
Treasury outlines path for investors to withdraw funds from Tornado Cash, allows sharing of its code, and states they won’t prioritize prosecution of dust attacks. (Blockworks)
Uruguay bill proposed to give central bank authority to regulate crypto. (Coindesk)
Arrest warrant issued for Terra founder Do Kwon. (Coindesk)
OpenNode receives approval to test Bitcoin payment in Bahrain. (Cryptoslate)
Crypto exchanges and custodians now required to report on suspected breaches. (NYU)
US Treasury sanctions Iran-based ransomware group. (Cointelegraph)
Thai SEC bans crypto firms from offering lending and staking. (Coindesk)
SBI Digital wins capital markets license in Singapore. (Coindesk)
Disclaimer
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