Mint Digital Assets Journal - Issue 5
#mdj | 01/Oct to 15/Oct | 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
EXECUTIVE SUMMARY
Crypto markets declined 3% this week. BTC down -2% and ETH down -4%. However, BTC remains within the $18-$20k range after it rejected a downward move on the release of US CPI data.
BTC’s correlation with Nasdaq-100 and S&P-500 recovered this week as the three markets moved in tandem around CPI announcement.
Cardano declined 14% last week. This is despite the Cardano Vasil upgrade that was rolled out last month which brought performance improvements to the network.
On-chain data shows that Long-Term Holders are the most dormant they have ever been. Coin’s last moved 3+ months ago accounted for 86.3% of USD wealth held in BTC. However, their profitability declined to a 4-month low with an average cost basis of $32k.
Bitcoin’s mining difficulty spiked 13.5% putting more stress on miners, many of which are already stressed due to high energy prices and low BTC prices. The estimated cost of mining a Bitcoin was $18,300, right below the current BTC prices showing tightening profit margins.
BTC volatility dropped sharply in October. 30-day volatility reached a new YTD low of 1.93%. Along with the low volatility, Open Interest on bitcoin futures contracts reached an all-time high of 768k BTC.
ETH supply decreased by 6,200 tokens due to a large number of XEN transactions. However, the XEN token faced multiple issues raising uncertainty about whether this increased transaction flow would continue.
Major exploits this month caused $718M in losses. BSC chain’s token hub bridge was hacked for 2M BNB and the hacker made off with $100M. Solana-based DeFi protocol Mango Markets faced a market manipulation attack that cost the platform $100M. Solana TVL dropped 23% falling below $1B after the attack.
Zero-Knowledge based rollups for Ethereum may be here sooner than expected as Polygon launched the testnet of their zkEVM. Rival zkSync’s EVM compatible zero-knowledge L2 is also expected to launch their mainnet later this month.
Blockwater defaults on $3.4M uncollateralized DeFi loan from TrueFi. Wintermute which was hacked for $160M last month came through and repaid their $96M loan.
Last month saw $482.2M in funding with Uniswap reporting their Series B round closed with $165M raised valuing them at $1.6B.
EU’s crypto regulation bill – MiCA passed parliament and will enter into force sometime in 2024.
LARGE CAP PRICE ACTION
BTC traded between $18.8k and $19.6k over the past week descending in the range as we awaited the release of US CPI data for the month of September.
On the release of the data, BTC initially dropped to a low of $18,100 before quickly recovering losses to reach a high just below $20k. Price dropped off to end the week 2% lower at $19.1k.
BTC’s price range continues to remain tight. Still, the CPI announcement saw high volatility with volume spiking. Volume also spiked on Friday after options expiry.
ETH started the week at $1,340 before descending down through the week. ETH price also dropped on the release of US CPI data reaching a low of $1,200.
Price quickly recovered, however was unable to go higher than $1,340. ETH ended the week 4% lower at $1,280.
CORRELATION ANALYSIS
Bitcoin correlation with NDX and SPX had reached a low of 0.1 at the start of the week in an uncommon decoupling of BTC price from NDX and SPX which saw BTC remain resilient despite a large decline in US equities. This week, correlation increased again to reach 0.87.
BTC’s correlation with gold increased through the week to reach 0.81 indicating a high positive correlation.
BTC’s correlation with crude dropped from weak positive correlation of 0.5 to 0.2.
BTC remained highly correlated with ETH through the week as the price of the 2 assets moved in tandem. Although correlation between the 2 has been lower the past month than the prior month.
TOP CRYPTO ASSETS PERFORMANCE
Large cap crypto tokens declined over the past week. BTC performed the best last week as it ended up 2% lower.
Cardano performed the worst as it declined 14% reaching a new yearly low. Cardano is now 83.5% lower over the past year despite the major Vasil upgrade being rolled out on the network.
Solana fell 9% as a DeFi protocol on the network suffered an exploit that saw TVL on the network drop drastically.
XRPL declined 7% over the past week but still remains nearly 50% higher over the past month as investor’s grow excited over the potential end of Ripple Labs lawsuit with the SEC.
BNB which also suffered a major exploit last week remained notably resilient as it outperformed BTC over the past month.
STABLECOINS MARKET CAPITALISATION
Over the past week, total stablecoin marketcap declined 1.15% following the same trend we’ve seen over the past month.
Nearly all Stablecoins saw a decline over the past week with USDT being the only exception as it saw supply increase by 0.04% (~$70M).
DAI saw the highest outflow as it declined 4.74% due to a de-risking in the DeFi space as a result of multiple major hacks.
USDC declined 2.72% and BUSD declined 1.54%.
Market cap of top stablecoin is now $142.19B far lower than its peak of $166B earlier this year.
DIGITAL ASSETS SECTOR DOMINANCE
The past week, overall crypto marketcap declined 3.1%. Currencies declined 2.49% which is largely in line with Bitcoin’s 2% drop.
Stablecoins continued to decline as the market cap of top stablecoins fell 1.15%
DeFi saw a 4% decline pushed lower due to 2 major hacks – BSC and Mango Markets. Blockchain Infrastructure declined 4.76%. CeFi outperformed as it stand 0.56% higher.
Bitcoin dominance increased over the past month from 37.64% to 38.31%. ETH dominance declined over the past month from 17.71% to 16.34%, ETH dominance has dropped off from its high before the merge. Stablecoin dominance increased slightly while other altcoins also saw their dominance go up.
CRYPTO AND EQUITY MARKETS SENTIMENTS
The past 2 weeks saw a declining US equities sentiment recover slightly after the release of US CPI data.
Crypto market sentiment, which has been solidly unchanged in the Fear range briefly dipped before recovering.
CRYPTO OPTIONS MARKET ANALYSIS
BTC options on CME have more puts than calls except for December which has more call contracts. Call/Put ratio is 0.71, higher than last weeks reading of 0.67
ETH options on CME have more puts than calls with a Call/Put ratio of 0.91. Notably, the number of open ETH contracts on CME nearly doubled this month.
BTC options on Deribit have a Call/Put ratio of 1.98, higher than last week’s level of 1.86. ETH options on Deribit have a Call/Put ratio of 4.52, higher than last week’s level of 4.36.
LARGE CAP CRYPTO TOKENS TERM STRUCTURE
BTC futures on CME are in contango except for the closest expiry. BTC futures on Deribit until December expiry are in backwardation while futures with later expiries are in contango.
ETH futures on CME are in backwardation except for March expiry. ETH futures on Deribit are in backwardation.
ONCHAIN ACTIVITY SUMMARY
On-chain data analyzed by Glassnode showed that volume of Bitcoin coin-days destroyed in the last 90 days has reached an all-time low. This means that long time holders (month to years) are the most dormant they have ever been.
Essentially, long time holders are unfazed by the massive drop in Bitcoin price. Coins last moved more than 3+ months ago now account for 86.3% of USD wealth held by the BTC supply further reaffirming this point. This could also point to the reason behind the uncharacteristically low volatility in Bitcoin price.
However, profitability of long-term holders declined to a 4-year low as the long term holder SOPR (7d MA) declined to a level last seen in 2018. This means that long-term BTC holders are selling their tokens at an average loss of 42%. Average cost basis for long term holders is now $32,000.
Glassnode also highlighted that whale entities holding 1k-10k BTC have been accumulating BTC since the start of September.
This accumulation trend can also be seen from net whale flows to exchanges which saw 15.7k BTC outflows from exchanges to whale wallets over the past month.
Bitcoin’s hashrate spiked to a new all-time-high even as the price of Bitcoin trades at the edge of profitability.
In Glassnode’s Week Onchain they highlighted that Bitcoin’s Hashrate, smoothed out to 7 days, spiked to its all time high of 242 EH/s.
The spike in hash rate also led to a 13.5% increase in Bitcoin mining difficulty as difficulty reached an all-time-high of 35.61T hashes.
This large increase in difficulty makes it harder for miners to successfully mine BTC leading to further stress on miners, many of which are already on the verge of collapse. (Cointelegraph)
Meanwhile, revenue earned per exahash continued to drop to an all-time-low of 4.06 BTC/EH as competition in the Bitcoin mining industry continues to tighten. According to the difficulty regression model, which is used to estimate the cost of mining 1 BTC, this price currently hovers around $18,300 at the edge of BTC’s current price. Meanwhile, an estimate of cost of mining which only considers miners who are the most profitable, showed that the cost of mining for these operations is $12,140.
At the previous intersection between spot price and the difficulty regression model’s estimated cost of production in June 2022, we saw a number of Bitcoin miners capitulating, many of whom are still struggling to recover.
This includes Poolin, which announced last month that they would be halting withdrawals in order to improve liquidity. This led to a sharp drop in hashrate for the pool and a large outflow of funds as they sold their Bitcoin holdings.
We can also see signs of stress in other major Bitcoin mining operations. Argo Blockchain recently issued 87M shares to raise funds to improve liquidity. This led to a 15% drop in their share price.
Meanwhile, Marathon Digitals reported $80M exposure to bankrupt crypto mining firm Compute North. Argo holds ~2000 BTC in their reserves while Marathon holds 10,670. Additionally, Core Scientific has also been hit with outages due to bad weather that have hampered their Bitcoin production even as they continue to add hashrate.
Still, Stronghold Digital was able to bolster its balance sheet after it ended its hosting deal with bankrupt Compute North. This will eliminate all profit-sharing obligations estimated between $10-25M. They have also instituted other cost cutting measures which have led to debt burden reducing 60% since May. (Coindesk)
Overall, miners are estimated to hold 78.4k BTC in their treasuries, a sale of which could have a huge impact on the markets. As BTC trades close to the cost of mining, stress on these miners increases. We could see a second capitulation that hits the Bitcoin mining industry with already stressed miners being pushed over the edge.
Grayscale is looking capitalize on the miner stress. They set up a new co-investment product that will allow investors to gain exposure to mining hardware. The fund will be used to purchase mining hardware from stressed miners and operate the equipment providing the returns to investors.
MACRO DEVELOPMENTS IN DIGITAL ASSETS
Bitcoin volatility drops off sharply while OI on futures reaches new high
Bitcoin’s volatility dropped off sharply in October. 30d volatility reached a new low of 1.93% for the year. BTC price has remained unshakeable despite a major decline in US equities which are generally correlated to BTC.
Price has largely stayed between $18k and $20k over the past month, during this period the Nasdaq-100 has declined 10%. Meanwhile, Bitcoin’s Bollinger Band width has also shrunk to levels last seen in 2020. A period of low volatility like this has led to a ~16% decline over the subsequent month 4 out of the 5 times this happened in the past 2 years. (Bloomberg)
Meanwhile, BTC futures open interest has reached an all-time-high of 768k BTC, as such a large move outside the current range could lead to a large amount of liquidations fueling more price movement. Additionally, implied volatility from forward looking contracts on Deribit remains relatively higher indicating that traders were targeting speculation towards derivatives.
Ethereum supply reduces by 6200 as XEN transactions dominate network
Last week, Ethereum supply turned deflationary for the first time, reducing its supply by 6200 tokens. The deflation was caused by increased transactions on the network which leads to higher fees being burned. (Ultrasound.money)
The higher network activity and fees were largely associated with the minting of an ERC-20 token called XEN on Ethereum. XEN related transactions accounted for nearly 40% of all Ethereum transactions. Still, the token itself faces several issues including a Sybil attacks on the network where one party took control of nearly 80% of addresses. (Cryptoslate)
XEN transactions still account for nearly 15% of gas paid on Ethereum. However, with the project value declining, related transactions will likely drop off. And with general activity on Ethereum still stagnant, Ethereum is likely to turn inflationary again soon. From the emissions graph of Ethereum, we can already see the emissions increasing back to positive from the low on 10th October.
Bitcoin development still going strong as network improvements continue to be worked on
Despite lowered developer interest on the Bitcoin blockchain, improvements continue to be worked on. One such improvement is the Stratum V2 upgrade. Stratum V2 is an improved version of the Stratum mining protocol used to manage block creation for mining pools. Although Stratum V1, the protocol currently is use, was a significant improvement over previous protocols, it suffers from poor documentation, inefficiencies, and security issues.
Stratum V2, being developed by a collection of crypto firms, aims to offer improved documentation, lower CPU load and bandwidth for miners, encrypted channels to improve network security, and improved decentralization by shifting over block template construction from pools to miners. (Galaxy)
Bitcoin mining firms, Braiin and Spiral announced the launch of an open source test version of the protocol and started promoting the protocol to miners in the hopes of convincing them to implement the upgrade. (The Block)
Meanwhile, the Lightning network that is an L2 chain on the Bitcoin network offering cheaper transactions on a sidechain saw the Taro upgrade announced in April. Taros, currently in testnet allows for multiple assets on the lightning network including stablecoins. (Coindesk)
Major attacks cause nearly $718M in losses in October
Last week we saw the BNB token hub bridge on the Binance Smart Chain exploited. The attacker was able to mint 2 Million BNB (~$570M) across 2 transactions. The attacker was able to bridge $110M from BSC to other chains before the halting of the chain. $7M of the bridged funds were frozen by crypto service providers, leaving the attacker with $100M. The BNB smart chain was eventually restarted with an update that froze the hackers wallet on BSC and fix the exploit used by the hacker. (Coindesk)
This week saw another major exploit as Solana based DeFi protocol, Mango Markets, lost $100M to an attack. The attacker used $10M of USDC to temporarily drive up the price of the platforms native token MNGO and used the inflated value of the token as collateral to borrow other tokens from the platform. The seller then closed his large position, crashing the token and leaving the protocol at a deficit on the bad loan. The seller eventually offered an ultimatum to the platform stating that he would return the tokens if the Mango market treasury used it $60M USDC reserves to pay off bad debt related to a whale that almost got liquidated on Solend. (Decrypt)
The exploit on Solana saw its TVL decline by 23% following the exploit, dipping below $1B for the first time since July 2021. (Cryptoslate)
Exploits in the crypto space have been on the rise, so far this year $3B has been lost to thefts and exploits. Out of that, October accounts for nearly $718M making it the worst month. (Decrypt)
Large losses on DeFi hacks are becoming an existential threat for the industry, highlighting lapses in cybersecurity.
Chainalysis released their Global Crypto Adoption Index 2022
The report showed overall global adoption slowing in the bear market, still, adoption rate remains higher than 2019 levels. The data suggests that many of those attracted by rising prices in 2020 and 2021 stuck around, and continue to invest a significant chunk of their assets in digital assets.
Overall, emerging markets dominate the crypto adoption index, as users in lower-middle and upper-middle income countries rely on cryptocurrencies to send remittances and preserve saving in times of local currency volatility.
Vietnam ranked as the top country for cryptocurrency adoption for the second year in the report. US stands out as the only high-income country in the top 10 at 5th place, higher than last years ranking of 8th. China ranked 10th, with especially strong usage of centralized services, despite the governments crackdown on crypto activity suggesting the ban has either been ineffective or loosely enforced.
Global adoption index staying above pre-2020 levels, suggests that the new market participants that joined during the bull market remain invested. Looking at overall adoption trends strengthening over the years can help differentiate emerging sectors and passing fads. Additionally, looking at the top countries for crypto adoption, we can see a clear trend of emerging markets dominating adoption. This helps to elucidate the real-world utility of cryptocurrencies strengthening. (Chainalysis)
CCAF releases updates to CBECI
The Cambridge Center for Alternative Finance released a major update to their Cambridge Bitcoin Electricity Consumption Index with the latest data covering the state of energy utilization by the network over the past year.
The report showed that GHG emissions by Bitcoin miners fell 13% in September 21-22 compared to September 20-21. Power demand by the network also declined 17% over the past year compared to the prior period. This is despite the network operating at a record high hash rate up 62% YoY.
The decline in power consumption was likely led by more efficient ASIC miners being released.
The report also highlighted the composition of energy sources used for Bitcoin mining. Fossil fuels made up 62% of Bitcoin’s total energy mix, while the rest was generated through sustainable energy sources. Coal alone accounted for 36% of the composition however, coal usage declined compared to 2021 when it was 38%. Natural Gas, another major energy source, increased from 22.9% in 2021 to 24.9% in 2022. Nuclear increased from 8.8% to 11.3% while hydro power decreased from 18.5% to 14.8%. Wind and Solar power both increased marginally.
Hydro power specifically has seen a drastic decline from 2020 when it accounted for nearly 33% of all energy used. This decline is a result of China’s ban on Bitcoin mining as hydropower was the main energy used for mining there. The difference was made up by Natural Gas which is not only more harmful for the environment but also faces sky-high commodity prices.
CCAF’s data differed from the Bitcoin Mining Council’s data which showed that sustainable sources accounted for 60% of Bitcoins energy mix. CCAF stated that this was the result of a different methodology. CCAF estimates usage based on miner density in each country and the energy composition there while BMC asks mining firms to self-report data.
GBTC discount hits all-time low
The discount between the Grayscale Bitcoin Trust (GBTC) and spot Bitcoin, hit its all-time lowest level, widening to -36.19%. The value of GBTC shares are now 36% lower than the net asset value of the fund. Grayscale had petitioned the SEC to convert its Bitcoin Investment Trust (BIT) to a spot Bitcoin ETF, however, after repeated delays in June 2022, their request was denied by the SEC stating that the firm was unable to clear the SECs concerns over market manipulation.
Grayscale, which is a subsidiary of the Digital Currency Group has appealed the ruling stating that it is inconsistent to approve Bitcoin futures ETF while denying spot ETF approval.
As a trust, GBTC is unable to sell their holdings in order to manage supply and demand.
Previously, GBTC was trading at a premium to spot Bitcoin at a peak as it provided investors a regulated path to Bitcoin exposure. However, in February 2021, the premium flipped to a discount and continued to widen as the prospects of converting the trust to a spot ETF turned bleak with the SEC repeatedly delaying approval. Additionally, the launch of several new Bitcoin futures ETFs and other Bitcoin exposure avenues outstripped demand for the product which fell further with a decline in BTC price. The situation was made worse by the collapse of major crypto hedge fund, Three Arrows Capital (3AC). 3AC had acquired a large position in GBTC attempting to arbitrage the discount. With the collapse of the fund, their large position was liquidated.
The past week also saw the launch of several new investment vehicles being announced that provide crypto exposure. Morgan Stanley, highlighted in their report that crypto Exchange Traded Products and Funds continued to grow this year, even as the bear market saw AUM in these products decline 70% to $24B. There are now more than 180 active crypto ETFs. Notably, Fidelity announced their Ethereum Index Fund that provides investors with exposure to Ethereum. The fund has received $5M in sales according to SEC filings.
Meanwhile, both ARK Investment Management and Valkyrie funds announced that they would be launching Separately Managed Accounts (SMA) to provide traditional investors with exposure to their respective crypto strategies. SMAs allow investors to own underlying assets while allowing the fund operator to manage positions. Franklin Templeton also offers a crypto SMA to accredited investors.
Additionally, Gemini partnered with Evestnet to offer a direct custodial feed for crypto managed accounts to RIAs on the Tamarac platform. 21Shares also launched the first spot BTC ETP in the middle east. (Blockworks)
However, the other pending spot ETF proposed by WisdomTree was also denied approval by the SEC as they claimed the product did not offer enough investor protection. They stand by their long-standing disapproval of Spot BTC ETFs.
Many investors still believe that purchasing GBTC is a viable arbitrage strategy in the long term as they count on the spot ETF approval to close the gap. However, SECs continued disapproval of Spot BTC ETFs creates a high level of uncertainty over eventual approval. Grayscale submitted their brief for their appeal against the decision claiming the SECs decision to reject the spot ETF was “discriminatory” and “capricious”. (The Block) (Bloomberg)
Bitcoin’s Environmental Impact
Bitcoin’s environmental impact has become a concern for the industry and a major criticism of the network.
The report notes that although coal footprint has decreased marginally, while Solar, Wind, and Nuclear usage increases, this shift has been largely offset by an increase in Natural Gas usage. (CBECI, Cointelegraph)
Cosmos releases new whitepaper detailing revamp for the ecosystem
Cosmos released a new whitepaper, Cosmos Hub 2.0, detailing proposed expansions and improvements to the blockchain ecosystem and a new vision for the native token ATOM. Cosmos is a decentralized network of independent but interoperable blockchains that can exchange information and tokens in a permissionless manner.
The first network on the Cosmos network was the Cosmos Hub, which had ATOM as its native token. However, the network has struggled with identity issues with the main utility of the Cosmos network being to provide a framework for building out independent blockchains. One way to think about this is a hub and spoke model with Cosmos Hub (ATOM) at the center with other blockchains connected to it.
The new whitepaper aims to provide the Hub and the native token ATOM more utility by:
Changing the tokenomics of Atom to make it less inflationary and something that users would want to hold for longer. Earlier ATOM was used to provide a subsidy which increased its supply over time. Now, the subsidy will decrease by 10% every month for the next 3 years bringing the inflation rate down from 20% to ~1% per year.
Introducing liquid staking for ATOM which will lead to a higher staking ration and further reduce inflationary pressure on the token.
Interchain security – New projects on Cosmos can now rent out Cosmos Hub validators which provides a new revenue source for Cosmos hub while also providing projects with an easy source of security for their networks
Interchain scheduler and allocator – Cross chain block-space marketplace which will generate revenue from cross-chain MEV and allocate these funds to capitalize new chains.
\Treasury changes – the changes above will generate more revenue for the Cosmos treasury, they will use 2/3rd of these funds to support new initiatives and expand the chain.
Together, these changes bring the potential for the native token ATOM to appreciate significantly in value through higher utility and expand the chain through feature improvements. (Coindesk, Route2Fi)
STABLECOINS AND CBDC
Tether ordered to produce documents showing USDT backing by NY Court
Stablecoin issuer was ordered to product financial records showing the backing of the stablecoin USDT as well as details of accounts held by partner exchanges Bitfinex, Poloniex, and Bittrex.
The order requires Tether to produce “general ledgers, balance sheets, income statements, cash-flow statements, and profit and loss statements” as well as records of any trades or transfers of cryptocurrency or other stablecoins by Tether including information about the timing of the trades.
The lawsuit alleges that unbacked USDT issuance led to $1.14T in market damages.
While attorneys representing Tether moved to block the order to release, calling it “incredibly overboard” and “unduly burdensome,” the presiding judge disagreed, writing that the “documents Plaintiffs seek are undoubtedly important.” Tether subsequently issued a statement labelling the order "a routine discovery" that "does not in any way substantiate plaintiffs’ meritless claims."
This is relevant because there has been intense speculation regarding the reserves backing the largest stablecoin and potential over-exposure to commercial paper. The last full audit of the firm was nearly 2 years ago and Tether was even fined by the CFTC for not maintaining sufficient reserves last year.
Tether, has recently announced that they plan to undergo another full audit however the timeline for this remains uncertain. They recently switched away from Friedman LLP to the 5th largest firm, BDO. These documents, if released to the public, could provide assurance for the backing of USDT. (Coindesk)
Tether reported this week that they had reduced commercial paper holdings to zero converting all relevant assets to US treasury bills. They also stated that they did not incur losses from the transaction. (Coindesk)
Circle moving towards multi-chain future with new announcements
USDC issuer, Circle, is expanding their stablecoin to 5 new chains by the end of this year – Arbitrum Near, NEAR, Optimism, Polkadot, and Cosmos (2023). USDC will now be available on 14 blockchains. Rival Tether is available on 13 chains and is looking to expand to Polygon.
They also announced the launch of a new cross-chain transfer protocol that will allow users to shift assets from one chain to another more efficiently. The protocol will operate as a bridging contract which burns tokens on the initial chain and subsequently mints tokens on the new chain, facilitating the transfer of assets using a smart contract in a decentralized manner.
This is a shift from the current setup where users are required to deposit USDC into their Circle accounts in order to swap chains. The new tool will initially debut on Ethereum and Avalanche and soon expand to all other supported chains.
Circle’s recent announcement stands in line with their belief in a multi-chain future. This move also works to make the stablecoin available natively on more DeFi platforms, increasing its utility. This announcement also comes amid fierce competition in the stablecoin market.
Earlier this year, USDC saw a meteoric rise as it captured significant market share from rival Tether. However, the trend soon reversed due to the issuer’s handling of Tornado Cash sanctions. Circle opted to sanction associated wallets while Tether adopted a “wait and see” approach.
Additionally, Binance announced that they would convert all USDC (among other stablecoins) balances to their proprietary BUSD on their exchange. This further led to a drop in Circle’s market dominance which declined 5% over the past 3 months but still stand 6% higher YoY.
E-Yuan transactions reach 100B Yuan
China’s CBDC, E-Yuan reached 100 Billion Yuan of transactions. Transaction volume in e-CNY incrased 14% YTD however, this growth marks a big decrease compared to the 154% growth seen in the prior half of the year.
The 100 billion yuan figure is also dwarfed by the volumes recorded by the country's top payment providers such as Tencent's WeChat Pay and Ant Group's Alipay. The latter, for example, processed payments worth 118 trillion yuan ($16.4 trillion) in the 12 months ending in June 2021.
China's e-CNY is being rolled out on a trial basis across the country, with 23 cities including Beijing, Shanghai and Shenzhen now covered. (Coindesk)
DIGITAL ASSET COMPANY UPDATES
Miners struggles continue while crypto firms offer alternative lending facilities
Bitcoin miner’s struggles continue as already stressed mining firms struggle with soaring energy prices and Bitcoin difficulty.
Greenridge holdings is expected to report a GAAP net loss of $20-22M for Q3. (Coindesk)
Meanwhile, Argo Blockchain stock plummeted following their efforts to raise funds to improve liquidity. Argo raised $27M by issuing 87M shares (~15% of total business) and $7M by selling 3400 mining rigs. Argo stock has crashed 82% YTD with a 58% decline over the past month after reports that they were struggling with liquidity. (Coindesk)
Hive blockchain reported that their GPU mining revenue plummeted following the Ethereum merge that saw the end of Ethereum mining. The total of BTC equivalent produced from GPU mining fell 44% month-over-month in September. As of Sept. 30, the Hive had a balance of 3,350 BTC and 356 ETH — down from 5,100 ETH at the end of August. (The Block)
Still, this week, Binance Pool announced a $500M fund to support distressed Bitcoin miners. The fund will provide a lending facility to miners. Earlier, Jihan Wu (founder of Bitmain) announced a $250M fund to purchase distressed miner’s assets.
Decentralized finance (DeFi) platform Maple Finance has also established a lending pool, with a 20% interest rate to provide miners with working capital. (Coindesk)
Last month, major US bank CEO’s told Congress that they would not fund Bitcoin miners. As a result, the crypto industry has had to come up with alternative lending facility to the struggling Bitcoin mining industry. (Coindesk)
Polygon and zkSync show that zero knowledge rollups may be here sooner than expected
Zero Knowledge Proof based rollups differ from the current most popular type of rollup – optimistic rollups – as they prove the validity of the transactions in the rollup cryptographically. By contrast, optimistic rollups have an appeal period (generally 1-2 weeks) required to move funds off the L2 blockchain during which users can appeal any incorrect transactions. ZK proofs can offer more robust security however they were only able to operate on simple transactions until now, limiting their utility.
Last week, Polygon announced the launch of the public testnet for their zkEVM with mainnet expected to roll out sometime in 2023. They claim that this is the first fully EVM equivalent zk-rollup ecosystem that can process existing Ethereum smart contracts, developers, and wallets. However, rival zkSync CPO stated that Polygon’s zkEVM only showed 97% Ethereum compatibility. (Blockworks)
zkSync is also launching the mainnet of their EVM-compatible zk-based L2 network later this month. They had launched the testnet for their network earlier this year. zkSync also announced a zk-based L3 chain called pathfinder which is expected to launch in 2023. Their claims of EVM compatibility have also been disputed by Polygon. (Cointelegraph)
These announcements have brought the timeline for zero knowledge based rollups on Ethereum forwards by years if they are able to deliver on their promise of full EVM compatibility.
Blockwater Technologies defaults on $3.4M uncollateralized loan to TrueFi
Crypto investment firm, Blockwater Technologies, were issued a default notice for failing to make payments on a $3.4M uncollateralized loan from DeFi protocol TrueFi. TrueFi offers uncollateralized loans based on due diligence of borrowers by DAO members.
TrueFi and Blockwater restructured the loan and extended the payment period in August. Blockwater managed to repay $654,000 of its outstanding debt after the restructuring efforts, but eventually missed payment. The remaining debt amounts to almost $3 million. (Coindesk)
TrueFi had an extensive out-of-court workout with Blockwater's principals last week. After reviewing the "complexity around the sudden insolvency," the company concluded that a court-supervised administrative proceeding would bring better outcomes for stakeholders. (Cointelegraph)
This is the first time that TrueFi has had to issue a default notice for one of their loans since the start of the service in 2020.
However, on a positive note, Crypto market maker Wintermute was able to pay back its $96M uncollateralized loan to TrueFi one day before the deadline. Wintermute had suffered a $160M hack last month raising liquidity concerns.
This was the largest single uncollateralized loan that TrueFi had given and its recovery clears up a lot of uncertainty. (Coindesk)
Google starts accepting crypto payments from select users for cloud services in partnership with Coinbase
Google announced that it would start accepting crypto payments for cloud services from select Web3 customers.
They expect the move to make development on Web3 faster and easier. Google will integrate Coinbase for accepting payments and will also use Coinbase Prime for custody. (Coindesk)
Major security vulnerability found in Cosmos IBC
A major security vulnerability was found in Cosmos IBC. Cosmos is an ecosystem of distinct but interoperable blockchains that are built using the Cosmos framework.
IBC is the Inter-Blockchain Communication protocol that allows projects in the Cosmos ecosystem to communicate with each other in a decentralized way.
The vulnerability was for all versions of IBC and a patch was released which will fix the vulnerability when implemented by >33% of the voting power of each Cosmos chain. (Cointelegraph)
In other Digital Asset Company news:
Crypto mining services firm Luxor announced the launch of “hashprice” based derivates that miners can use to hedge risk. The product will be traded OTC. (Coindesk)
BNY Mellon to offer crypto custody services for BTC and ETH to institutions. (Coindesk)
PowerTrade launched an RFQ model for its options market. They hope that the RFQ model that traditional finance investors are more familiar will lead to more institutional activity by allowing them to trade in bulk. Paradigm and Dfyn have also launched RFQs in the past, while Deribit offers a similar option called “COMBOS”. (Coindesk)
M&A AND PARTNERSHIP ACTIVITY IN DIGITAL ASSETS
The past week was dominated by news of Uniswap Labs raising $165M. Overall, last week saw $1,030M in funding ($482.2M excluding Step, Stash, and Copper’s unclosed round). However, overall crypto funding sank to its lowest level in a year in Q3. VC firms invested $4.44B in crypto startups during the quarter, 37% lower YoY. (Yahoo)
Company filings showed that Crypto custodian, Copper, raised $196M in new funding as part of their Series C round this year with $181M coming from existing and new shareholders. Copper’s funding round has been delayed since 2021 when it was reported that they were seeking a $2B valuation. (Coindesk)
Uniswap Labs, creators of the Uniswap DEX raised $165M in a series B round. The funding was led by Polychain Capital with Andreessen Horowitz, Paradigm, SV Angel, and Variant also participating. The funding values the firm at $1.6B. (Blockworks)
Banking services providers aimed at millennials, Step, raised $300M through debt funding. The announcement coincided with the launch of their crypto investment platform. (The Block)
Investing app Stash raised $52.6M in a debt offering a week. Earlier this month Stash opened access to cryptocurrencies on their platform. (Coindesk)
Crypto and digital bank MinePlex raised $100M in funding from GEM Digital. They will use the funds to develop new banking technologies including transactions accepting select crypto tokens. (Cointelegraph)
Crypto data infrastructure firm, Nxyz, raised $40M in series A funding. The round was led by Paradigm with Coinbase Ventures, Greylock Partners, and Sequoia Capital also participating. (Coindesk)
In other M&A and Partnership activities:
This week also saw the announcement of the Soroban fund by the Stellar foundation which will incentivize developers to build tools and projects on the Soroban blockchain. (Coindesk)
BlockTower launched a $150M VC fund while launching their VC arm. They plan to back DeFi and blockchain infrastructure projects with the fund. (Coindesk)
In a notable partnership, Google announced that they would start accepting crypto payments from select cloud services customers who are engaged in Web3 development in partnership with Coinbase. They will also use Coinbase Prime for custody of funds. (Coindesk)
Builder of Ethereum L2 network Arbitrum, Offchain Labs, acquired Prysmatic Labs, a core team which was behind the Ethereum merge’s successful execution. (Coindesk)
DIGITAL ASSETS REGULATORY UPDATES
EU’s Crypto Regulation Bill – MiCA passes parliament
This week, EU lawmakers voted 28 to 1 in favor of the landmark crypto regulation bill MiCA. MiCA provides regulatory clarity for crypto services providers.
Providers of wallets and other crypto services can now market themselves across the block after registering with national authorities and meeting minimum investor protection guarantees.
The bill also requires issuers of MiCA crypto assets to share a whitepaper with authorities for approval if the offering is larger than a minimum threshold.
MiCA also limits the volume for stablecoin payments to $200M per day
NFT regulation remains uncertain as guidelines suggested that certain NFTs, especially those published as a series, could be considered as crypto-assets and be subject to the same regulations
The law will enter force 12 to 18 months after it is published in the EU’s official journal which is expected to happen next spring. As such, MiCA could be in effect by 2024.
Along with MiCA, lawmakers also passed a separate law requiring identification of participants of crypto transactions in an effort to tackle money laundering. (Coindesk)
Portugal proposes 28% tax on crypto earnings
Portugese government proposed a 28% tax on all earnings generated from crypto which is held for less than a year in its 2023 budget. The proposal also suggested a 10% tax on airdrops and 4% on crypto broker commissions.
Portugal had earlier been one of the most crypto friendly nation in the world. However, in May 2022, the Finance Minister of Portugal stated that the country would change its crypto-friendly attitude and start taxing crypto. (Cryptoslate)
Bittrex ordered to pay $30M fine for sanction violations
Crypto exchange Bittrex was ordered to pay $24M in fines for inadvertently violating federal sanctions from the US Treasury Department.
Between 2014 and late 2017, Bittrex allowed around 1,800 people in sanctioned jurisdictions – including Iran, Cuba, Sudan, Syria and Crimea – to conduct more than 116,000 transactions worth roughly $260 million through its platform, according to the settlement.
In addition, FinCEN fined Bittrex $29.8M for failing to file suspicious activity reports tied to 200 transactions. They credited the OFACs $24M fine meaning that Bittrex would have to pay just under $30M across both settlements. (Coindesk)
DC Fintech Week (Coindesk)
Acting comptroller Michael Hsu stated that crypto platform’s user interfaces could trick users into thinking that crypto services are similar to traditional financial services. He stated that until appropriate guardrails are put in place, activities commingled under a single crypto firm should be limited to reduce risk.
CFTC Chair Benham stated that the Ooki DAO case was “egregious and obvious” as the DAO was highly centralized with a few people in control.
Custodia Bank founder Caitlin Long criticized the Federal Reserve over BNY Mellon receiving approval to offer crypto custody services while Custodia Bank’s application has been pending for more than a year.
US DoJ’s director of crypto enforcement stated that mixers were a challenge but had not slowed down investigations into illicit activities.
Fed Vice Chair, Michael Barr warned that banks tokenizing things was concerning and risk identification was necessary before the practice proliferates.
Representative Patrick McHenry stated that the long-awaited stablecoin bill may only be a few months away but still faced disagreements over regulatory oversight.
OECD presents crypto tax reporting framework to G20
OECD released its Crypto-Asset Reporting Framework outlining a comprehensive tax framework that can be applied globally. The framework ensures the collection and automatic exchange of information on transactions for relevant crypto.
The report stated that the current scope of assets, as well as the scope of obliged entities, covered by the Common Reporting Standard (current standards) do not provide tax administrations with adequate visibility on when taxpayers engage in tax-relevant transactions in, or hold, relevant crypto assets.
The CARF sets rules that crypto asset firms must report in the country that they conduct business in. Exchanges between relevant crypto assets and fiat currencies, along with exchanges between one or more type of crypto and transfers of crypto (including retail payment transactions), will need to be reported.
According to the framework, assets covered under it include assets that can be held and transferred in a decentralized manner, including stablecoins, derivatives issued in the form of a crypto asset and certain NFTs. Intermediaries and other service providers facilitating exchanges between relevant crypto assets, such as exchanges, brokers and ATM operators, will also be included in the scope of the framework. (Coindesk)
Regulatory approvals and licences obtained by firms this week include:
Coinbase obtained a Singapore Digital Payment Token License from MAS, joining Crypto.com and DBS Vickers. MAS has granted 17 in-principle approvals and licenses for DPT platforms until now. (Coindesk)
Blockchain.com granted in-principle approval for DPT license by MAS. (Coindesk)
Coinsquare receives IIROC registration making it the only firm in Canada to be a IIROC-registered investment dealer and marketplace member. The regulation requires that client funds be fully segregated and held by licensed and insured custodians. It will also be required to report its financial standing and maintain adequate capital. Cash held in client accounts will also be protected by the Canadian Investment Protection Fund in the event of an insolvency. (Cointelegraph)
BNVK granted VASP registration in Spain. (Coindesk)
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