The Digital Asset Insider is your monthly recap on what’s been going on in the digital asset space. Brought to you by Andrew Han, Director of Business Research at Fireblocks.
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Tokenization of private markets continues to gain interest as traditional fund managers make their funds accessible to a wider audience. Decentralized finance gets support from central bankers interested in supporting the ecosystem possibly with central bank digital currencies.
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Despite “crypto winter” market conditions, crypto-native exchanges are not seeing a slowdown in institutional interest in digital assets. Meanwhile, traditional financial firms are expanding products involving digital assets offered to their clients. The building of digital asset portfolios and investment into the ecosystem continues, with firms taking a medium to long term strategic outlook for the digital assets market.
- Traditional markets trading platform Robinhood will allow its customers to buy and sell USD Coin (USDC) stablecoin. Users will be able to transfer and use USDC on the self-custody Robinhood Wallet, which gives access to Web3 products and services.
- BitMEX says institutional interest in crypto is growing despite the bear market, which tend to be times where institutions build their business and ready themselves for when markets recover. Retail investors tend to do the opposite.
- Fidelity Digital Assets has added a new fund, the Fidelity Ethereum Index Fund, to its crypto-focused fund line up. The fund will only be available to accredited investors, with a minimum investment of $50,000.
Traditional fund managers are taking advantage of tokenization to make their private funds accessible to a wider investor audience. Financial system infrastructure that enables token interoperability is being developed by incumbents in the traditional markets to remain relevant in a growing digital assets ecosystem.
- Digital asset securities firm, Securitize, announced a partnership with Hamilton Lane to expand investor access to tokenization. Qualified US-based investors will be able to access three Hamilton Lane funds — direct equities, private credit, and secondary transactions. KKR’s Health Care Strategic Growth Fund II is also being tokenized to make private funds more accessible to individual investors.
- SWIFT has developed infrastructure that serves as a connector between tokenization platforms and different types of cash payment. The global messaging firm also successfully tested their experimental blockchain interoperability infrastructure with both CBDC-CBDC transactions and fiat-to-CBDC transfer.
Decentralized Finance (DeFi) could accelerate adoption with the help of central bank digital currencies (CBDCs). Non-fungible tokens (NFTs) are being used to verify users and grant access to financial services or benefits associated with a card used for payments. Musical artists are being empowered to bring their fans into the Web3 community using NFTs.
- Thomas Moser, board member of the Swiss National Bank, stated that a CBDC could provide more stability and lower risks as the basis of development of DeFi applications. Since centrally issued fiat-backed stablecoins are being used in DeFi, like USD Coin and Tether, a CBDC could be used as an alternative and remove counterparty risk.
- Payments firm Mastercard has partnered with crypto and fiat app firm Hi to launch a customizable debit card printed using a verifiable NFT avatar owned by users of the Hi app. Payments in fiat or crypto can be made using the card, which will also generate reward benefits when used, like spending rebates and cash back.
- Warner Music Group (WMG) announced a partnership with NFT marketplace OpenSea to provide a platform for selected musical artists to build and extend their fanbase into the Web3 community. WMG artists would be able to launch NFT collections and projects on their own customizable and dedicated pages.
Digital Asset Infrastructure
Blockchain developers have the challenge of building solutions that balance between transaction transparency, price integrity, and trust in the overall ecosystem. One firm is attempting to provide a solution through “dark pools”. However, there remain challenges related to margin provisioning, which revolves around managing credit risk and settlement risk.
- Enclave Markets’ Enclave Cross enables traders to execute trades with a level of privacy to enhance their ability to obtain best price execution. The traceability of transactions on blockchain protocols is good for transparency, but could allow exploits such as front running, which is not good for the integrity of price discovery.
- German telecom giant, Deutsche Telekom, has partnered with a liquid staking service and decentralized autonomous organization (DAO) StakeWise to operate Ethereum validator nodes, and provide staking support for their customers. Customers will not need to set up a validator node themselves if they wish to be involved in staking activities.
- Traditional equities exchange, Nasdaq Inc. has plans to launch a crypto custody service to institutional investors focused on holding Bitcoin and Ethereum. The firm set up a new division – Nasdaq Digital Assets – to handle digital asset exchange technology, and index solutions for products that can be traded. A crypto exchange trading venue is not being considered until regulation is clarified.
Regulation | Regulators
Global regulators and legislatures are at different stages of providing clear regulations around digital assets. Some need to work on the definition of what constitutes digital assets, while others need to address regulatory gaps affecting financial stability.
- Europe has approved the Markets in Crypto Assets Regulation (MiCA) framework, which is expected to be tabled at the European Parliament in October. If approved, it is expected to come into effect in 2024. The regulations cover items like minimum requirements on stablecoins and anti-money laundering measures.
- U.S. regulators are urging the Biden Administration to speed up regulation on digital assets against the backdrop of ongoing negative geopolitical events, falling market prices, and global recessionary fears. A report by the US Financial Stability Oversight Council highlighted regulatory areas to be addressed, including crypto spot markets not covered under securities law and crypto businesses engaging in regulatory arbitrage.
- Brazil’s Securities and Exchange Commission (CVM) is seeking changes to the cryptocurrency bill surrounding what qualifies as a virtual asset. The CVM wants digital assets such as carbon credits issued on a blockchain to be considered as virtual assets and therefore come under their purview.
Projects involving the Bank of International Settlement (BIS) have shown positive results at the wholesale cross-border level. New projects involving BIS and central banks are looking at experiments at the retail cross-border level. Research into CBDCs by the United States is slowly progressing, alongside debates on the value of a CBDC to the U.S. financial system.
- The Bank of International Settlements’ (BIS) has successfully completed 164 cross-border transactions worth about $22 million in real-value through the multi-CBDC platform, mBridge. Participants included the central banks of China, Hong Kong, Thailand, and the United Arab Emirates (UAE), and 20 commercial banks.
- Sweden’s central bank, Sveriges Riksbank and the central banks of Israel and Norway, along with BIS are launching Project Icebreaker. The project will explore how CBDCs can be used for cross-border retail and remittance payments.
- The White House Office of Science and Technology Policy (OSTP) has released a report on the technical capabilities for a U.S. CBDC system. A technical evaluation of 18 CBDC design choices was made across six broad categories: participants, governance, security, transactions, data and adjustments. In the report, the technical evaluation highlighted an inclination toward an off-ledger, hardware-protected system. The OSTP foresees technical complexities and practical limitations when trying to build a permissionless system governed by a central bank.
Funds flowing into blockchain protocols seen as friendly to the environment could be considered supportive of application development on those protocols. A traditional finance venue is trialing carbon credit trading to move companies closer to achieving carbon neutrality by 2050.
- The Modular Blockchain Fund, Modular Asset Management,’s ESG-focused crypto hedge fund, bought Algorand (ALGO), Cosmos (ATOM), and Polkadot (DOT) tokens. These tokens belong to blockchain protocols considered to have sustainability characteristics that favor positive ESG outcomes.
- The Tokyo Stock Exchange (TSE) has started a trial to trade certified carbon credits (J-Credits) in an effort to meet its own goal of becoming carbon neutral by 2050. The trial project is intended to allow participants the ability to offset their own emissions or monetize reduced emissions.
- KlimaDAO and Sushi have launched a fully automated carbon offsetting system on Polygon. It allows users who opt-in to the initiative to offset their carbon emissions associated with the transactions they execute for a nominal fee, set at 0.02 MATIC per transaction.
Crypto-Native Market Analytics
Crypto-native markets continued to trade sideways and ended relatively flat month-on-month. Total Market Capitalization (TMC) dipped below $1 trillion in September. Besides the Ethereum move from proof of work to proof of stake, there were few catalysts influencing the markets. Overall weakness in risky assets as global economic concerns grow has kept investors on the sidelines.
Crypto-native markets ended the third quarter mixed.
TOP 10 MARKET CAPITALIZATION
Digital asset markets remained flat in September. The exception being Ripple which saw a 48% jump in market cap.
Bitcoin remained between $25,000 and $17,000 with little catalyst to move price in any clear direction.
BTC: ALL EXCHANGES NETFLOW
Net position change was positive in the later half of September even as the price of bitcoin fell. This could indicate traders and investors taking advantage of the lower prices to accumulate bitcoin.
REGIONAL BTC FLOWS [Last 7 Day Average, Oct 4]
Intra-regional flows within Asia and Western Europe remain relatively robust around $50 million.
From a percentage change perspective, flows from North America fell to the other regions in the last 7 days versus the 30 day average.
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.
Ethereum fell from the $2,000 level set in August and is continuing the overall down trend with no real catalysts to move price higher. The move to proof of stake temporarily moved the price higher, but not enough to sustain a greater move to the upside.
TOTAL VALUE LOCKED [TVL, Sept 30]
DeFi TVL dipped slightly in tandem with the fall in ETH and other tokens.
PROTOCOL POSITION [TVL, Sept 30]
Total value locked (TVL) for the protocols ranking behind Ethereum was mixed with Polygon and Avalanche falling the most.
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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.