Digital Asset Insider | Nov ’21

Crypto Native

Major crypto prices made new all time highs $66,929 for bitcoin (BTC) and $4,456 for ethereum (ETH) boosting Total Market Cap from $2.02 trillion 30 September to $2.74 trillion 31 October.  Subsequently, prices eased at the month end to close below the highs at $61,032 for BTC and $4,280 for ETH.

Triggers for this move include the approval of the bitcoin futures-based exchange-traded funds (ETFs) by the United States Securities and Exchange Commission (SEC) encouraging the buying of the underlying bitcoin.  Increased risk appetite for digital assets expressed by an increasing number of private wealth clients who are taking independent steps to invest in digital assets, and other sources of institutional investment-linked demand have also encouraged buying.  Regulatory clarity on digital assets remained a requirement across jurisdictions for large investors before allocating more significant amounts.

• On October 15th, the SEC approved a bitcoin exchange-traded fund named the ProShares Bitcoin Strategy ETF, which was then launched on October 18th.  While not a digital-native based fund, the approval by the SEC can be seen as a positive step in allowing greater acceptance of digital assets as an investment option.  Meanwhile, Grayscale filed an application for their bitcoin trust to be listed as an exchange traded fund, and Blockfi in partnership with Neuberger Berman are preparing to launch crypto investment products towards the end of the year.
  
• Australian pension fund Queensland Investment Corporation (QIC) with $69 billion in assets under management is considering small investments into digital assets.  In an interview with the Financial Times, Stuart Simmons, QIC Director and Head of Currencies,  said that regulatory certainty around protection from asset theft and market manipulation was needed before large investments could be seen from large investors.
  
• While regulation may be a barrier for many investors to allocate funds into crypto-assets, European private wealth clients are independently investing in digital assets according to a survey commissioned by fund management firm WisdomTree.
  
• Ethereum Layer 2 (ETH2) got a boost by Vitalik Buterin at the 2021 Shanghai International Blockchain Week where he was speaking and said that ETH2 is the future of Ethereum to support a scalable, secure and sustainable ecosystem especially as decentralized finance (DeFi) and non-fungible tokens (NFTs) continues to grow.

Tokenization

Tokenization platforms continue to develop solutions tackling the adoption challenges faced by traditional financial institutions who are evaluating opportunities for tokenization in the financial markets.  The challenges being addressed involve meeting the specific design requirements of the various asset classes, such as fixed income products, through permissioned blockchains and making them interoperable.  Companies issuing tokenized shares are at an early adoption stage.

• SETL, an enterprise blockchain firm, announced it will open-source its core blockchain and interoperability solution. This is to allow innovation and development of scalable solutions in the financial industry for tokenized assets to move through with less friction.
  
• Hedera Hashgraph has upgraded its smart contract service for fungible and non-fungible tokens that allows smart contracts to be called only as needed when certain conditions are met giving developers more flexibility in how tokens are programmed. 
• Blockdaemon, an independent blockchain infrastructure platform known for its staking expertise, is partnering with RiddleCode, an Austrian based blockchain interface solution provider using cryptography, to develop Blockdaemon’s next generation institutional-grade tokenization services.
• Alaïa SA is a Swiss action sports lifestyle company which issued shares using tokens on the Ethereum blockchain with the support of Credit Suisse using Swiss Capital Markets and Technology Association (CMTA) standards.  Switzerland recognizes tokenized securities as having the same legal standing as traditional assets in laws passed in February.  Alaïa joins other Swiss companies such as SEBA Bank and Sygnum Bank in having issued tokenized shares.   
• Using its own digital currency, C-Coin, Thailand’s Central Retail Corp., a department store chain, is using the token as a bonus to their salary to spend in Central Retail stores.  The company is trialing the use of the token with their employees before introducing it to their customers.  Tokens used in this form could be seen as a way to increase engagement.

Regulation | Regulators

U.S. regulators are taking steps to allow investors to gain exposure to digital assets under familiar regulatory environments. With the approval of bitcoin futures-based ETFs, they continue in their attempt to determine the best way to categorize these assets and the regulation under which they fall.  At the same time, regulators are taking action to ensure digital asset participants are aligning themselves to what is expected of them as they seek to engage with the public markets more broadly.  Central banks are increasing their engagement with traditional finance to determine how to design and build infrastructure allowing digital assets to be widely distributed.

• The United States Commodity Futures Trading Commission (CFTC) acting Chairman Rostin Behnam said in his testimony before the Senate Agriculture Committee, that 60% of all cryptos are commodities and would fall under the Commodity Exchange Act like bitcoin.  This categorization of crypto assets as a commodity is also shared by other jurisdictions like Indonesia and towards which India is leaning.  One of the implications is that it could allow crypto assets such as bitcoin to be traded in some form, but not allowed as a means of payment.
• The CFTC which oversees foreign currency exchange markets fined Tether $41 million for false and misleading statements concerning the collateral backing the stablecoin USDT.  They found that Tether was not fully-backed with reserves the majority of the time.
• Thirty professionals from the financial industry have been appointed to an advisory group formed by the European Central Bank (ECB) that will focus on the design and distribution of a digital euro.  The members will act in their own personal capacity.

Payments | Settlement

The Bank of International Settlements (BIS) released a report that questions the use of digital money to address financial system weaknesses in emerging markets and developing economies.  Fintech payment firm Stripe is reversing their earlier decision to stop using cryptocurrency for payments and will get back into designing and building payment infrastructure to allow them to engage with digital assets and remain competitive.  Cross-border blockchain-enabling technology continues to expand into new regions with high potential for growth and the bitcoin Layer-2 solution, Lighting Network, is expected to provide scale and reduced costs over the next decade.

• The Bank for International Settlements (BIS) released a report, “What Does Digital Money Mean for Emerging Market and Developing Countries” on the risks that could be created by Stablecoins and CBDCs in developing countries.  The report found that Stablecoins may not sufficiently meet policy goals to improve financial inclusion and cross-border remittances and that flows into CBDCs from other assets may lead to a “digital bank run” during periods of systemic stress.
• Payments fintech firm Stripe is looking to get back into digital-native assets after dropping bitcoin in 2018.  Stripe is looking to set up a crypto-focused team of engineers to design and build the infrastructure to support crypto use cases.
• Ripple launched its cross-border payment product, On-Demand Liquidity (ODL), in the Middle East starting with the United Arab Emirates (UAE).  Ripple partnered with Pyypl, an enterprise blockchain technology company focused on international payments based in the UAE, who already operates ODL in the Philippines.
• Lightning Network has the potential of processing 364 trillion transactions per year according to a report by Arcane Research and 700 million users by 2030.  Bitcoin’s Layer-2 scaling solution for fast and cheap bitcoin payments, now houses over 3,000 BTC in its more than 77,000 channels per TXStats.com.

Decentralized Finance (DeFi)

DeFi has seen significant transaction volume growth in 2021 involving decentralized exchanges, derivatives and lending.  Blockchain protocols have increased their engagement of traditional finance to increase adoption of decentralized finance. Firms in the digital asset ecosystem are calling for regulators to take further steps to address regulations that will allow institutional investors to engage clearly into DeFi.  DeFi enabled asset management applications continue to evolve and demonstrate their value and the flexibility of digital assets to generate additional yield.  Exploits continue to confront DeFi projects and highlight the need for vigilance and an aggressive stance against attackers.

• Chainalysis’ Geography of Cryptocurrency report released this month covering the past 12 months until June 2021 saw DeFi as contributing the most to the cryptocurrency market in North America.  It highlighted Uniswap, dYdX Exchange and Compound as having the highest transaction volumes amongst the DeFi applications. 
• The public blockchain Hedera Hasgraph has added DBS Bank to its 24 member Hedera Governing Council which aims to increase its adoption in industries such as decentralized finance and non-fungible tokens.  The council includes members from universities and corporates in a broad range of industries from telecommunications, technology, manufacturing and finance. 
• Fireblocks’ Chief Executive Officer, Michael Shaulov, spoke to CoinDesk as part of their Policy Week forum on regulators and pointed out four areas that DeFi regulation need to address including protocol disclosures to users, how much audit on risk controls should be performed, identify certification attestations related to anti-money laundering, and clear definitions on how institutions are meant to interact with protocols and custody.
• Robo advisory has reached DeFi with BlockBank launching an AI-driven application that will enact user-approved automated order management and execution, portfolio creation and management.  Users will also be able to lend their assets to generate additional yield, in effect leveraging their personal balance-sheet.
• Lending protocol Cream Finance suffered a $130 million exploit involving a large flash loan through its Yearn Finance arm and has moved to patch the problem.  This would be the 3rd exploit suffered by Cream Finance this year, the other occurrences being in February and August.

Centralized Finance (CeFi)

Relative to DeFi, CeFi activity could be considered to be quiet given the attention in prior months on regulatory pressures in the United States on lender products offered by Blockfi, Celsius Networks and Coinbase, as well as China’s broad crackdown on bitcoin miners and crypto exchanges.  Binance must also be enjoying the lack of attention in the news.  However, these firms still continue to define their space and have raised new capital, made investments of their own, and continue building out their business.

• Lending and borrowing CeFi platform Celsius Networks raised $400 million from investors giving it a $3 billion valuation.  In an interview with the Financial Times, Celsius Network’s Chief Executive Officer Alex Mashinsky said that this raise will help reassure regulators of the credibility of their business.
• With the approval of bitcoin futures based exchange traded funds, Chicago Mercantile Exchange (CME) listed futures open interest valued at $5.45 billion has skyrocketed to levels shy of Binance bitcoin futures valued at $5.64 billion according to Skew.  At the beginning of September the open interest for CME bitcoin futures was valued at $1.57 billion in 5th place after Binance’s $4.22 billion.
• As part of Coinbase’s strategy for a technology hub in India, the company announced its acquisition of Agara, an AI-power customer support platform. Coinbase aims to have teams in all major areas of digital asset related technology including infrastructure, cloud, payments, blockchains, and machine learning.

Custody

Traditional financial institutions faced with the growing demand for digital assets, especially in crypto, are offering digital custodian services and entering into or seeking partnerships with firms that have the digital custody technology, for fear of getting left behind.  Regulations remained unclear on the need for a third party custodian in the digital asset ecosystem.  Whatever the case may be, the gap will be bridged to meet the demands of the investor.

• Société Générale is on the lookout to purchase a custody solution or to make an investment into one, according to sources.  Custody technology is a critical piece of digital asset infrastructure that has become highly sophisticated. It comprises both software and hardware components to meet the level of security demanded by institutional investors to custody billions if not trillions of dollars worth of digital assets now and in the future.
• Komainu, a digital custodian, has partnered with Crypto Garage, a crypto asset trading and settlement platform to offer institutional services to other local crypto trading firms.  The Japanese market is seen to be underserved when it comes to service providers for digital assets.
• US Bank has launched a crypto custodian service for fund managers who are wanting to participate in the growing digital asset marketplace.

CBDCs

China continues to expand the use of its digital currency domestically beyond the proof of concept stage and encourage more companies to accept it for payment.  Nigeria has begun the first stage of its digital currency roll out, starting with the banks and subsequently to customers.  Discussions continue amongst global financial organizations on the implications of digital money to the current financial system and the benefits and risks it can bring to economies at various stages of development.

• China’s soft rollout of the e-Yuan continues with Beijing Capital Airport accepting the government backed digital currency for payment.  However, they are also pressing companies such as McDonalds to accept the e-Yuan for payment, which is expected to launch in February 2022.
• Nigeria officially launched the eNaria with the Central Bank of Nigeria having minted N500 million eNaira and has issued N200 million eNaira to banks. Customers are able to download an eNaria wallet, fund it via their bank accounts and then use their eNaria for payments at registered merchants.
• The International Monetary Fund (IMF) hosted a seminar, “The Digital Money Revolution”, where the implications of CBDCs and Stablecoins was discussed with panelists from the IMF, BIS Innovation Hub and Cornell University.  The discussion highlighted the need for governments to take an active role in regulating digital money and partnering with the private sector in developing its use which has started to demonstrate its ability to strengthen countries with weak financial institutions and promote financial system stability.

Crypto-Native Market Analytics

Crypto-native markets rose strongly to new all time highs in October with the last quarter of the year expected to remain positive.  DeFi alternative coins (Alt Coins) trailed the performance of BTC and ETH which can be observed in how the Defi Pulse Index ranged for most of October.  However, Alt Coins related to protocols performed well such as Solana and Polkadot.

MONTHLY CHANGE

Major crypto prices dominated the month with DeFi coins performing relatively weaker. (Coingeko)

MARKET CAPITALIZATION

Top 10 Coins: Polkadot market cap rose the most in October by 51% with Cardano falling 7%. (Coingeko)

BITCOIN [BTC]

Price set a new all time high in October and could be seen to have established a trend to the upside. (Glassnode)

ETHEREUM [ETH]

Price set a new all time high in October and could be seen to have established a trend to the upside. (Glassnode)

BITCOIN : STOCK TO FLOW RATIO [BTC:STFR]

BTC is lower than STFR indicating it is undervalued.

The Stock to Flow Ratio is a popular model that assumes that scarcity drives value. Stock to Flow is defined as the ratio of the current stock of a commodity (i.e. circulating Bitcoin supply) and the flow of new production (i.e. newly mined bitcoins). Bitcoin’s price has historically followed the STFR and therefore it is a model that can be used to predict future Bitcoin valuations. (Glassnode)

BTC: ALL EXCHANGES NETFLOW

Net outflows were observed as price traded below the new all-time high which could indicate some profit taking by investors.

The difference between the number of BTC flowing into and out of all exchanges’ wallets. (If positive, inflow>outflow, an increase in BTC supply for selling, altcoins purchasing, and margin trading.) (CryptoQuant)

REGIONAL BTC FLOWS [Last 7 Day Average, Nov 1]

Inter-regional flows appeared the strongest out from Eastern Asia to other parts of the world.

Assets typically flow within a region, likely due to preferences for local exchanges, but flows between regions often occur as a result of regulatory concerns, geopolitical changes, or significant market price variations. (Chainanalysis)

TOTAL LOCKED  VALUE [TVL, Nov 1]

TLV rose from $174.0B to $240.3B over October as ETH price reached a new all time high of $4,456. Defi Llama Total Locked Value (Glassnode)

DEFI PULSE INDEX [DPI]

Top 5 Tokens: Uniswap, Aave, Maker, Sushiswap and Compound. Index information can be found at the Tokensets site: www.tokensets.com/portfolio/dpi (Messari)

This reCap is distributed for general informational and educational purposes only and is not intended to constitute legal, tax, accounting, or investment advice. For other important disclosures.