Crypto-Native

Total Market Cap decreased from $2.12 trillion 31 August to $2.02 trillion 30 September as major crypto prices moderated after recovering from their July lows but failed to reach prior all time highs before price retraced and held above $40,000 for bitcoin (BTC) and $2,800 for ethereum (ETH). Levels above BTC $53,000 and ETH $4,000 could indicate the potential for continued upward direction in price, while movement below BTC $40,000 and ETH $2,700 could indicate the potential for additional weakness.

• The exchange traded fund (ETF) using bitcoin futures received positive support from the U.S. Securities and Exchange Commission (SEC) Chair Gary Gensler during a speech at The Future of Asset Management North America Conference hosted by the Financial Times in Washington D.C. on 29th September. Gensler had commented on the growing size of the cryptocurrency markets warrants ensuring investor protections are in place and therefore requires regulatory oversight to reduce the likelihood of participants getting hurt as they enter digital asset markets.
• China increased their stance against transactions involving cryptocurrencies by banning crypto trading and mining in the country while at the same time not prohibiting holding crypto in a statement issued by the People’s Bank of China (PBOC) on 24th September. Commentators believe that decentralized finance applications could benefit from this move by the PBOC as well as more crypto friendly jurisdictions like Singapore which recently announced two firms being granted formal licenses to provide crypto services under the Payment Services Act.

Tokenization

Tokenized bonds and decentralized finance (DeFi) in-combination use cases could generate interest with a SocGen proposal to use tokens it issues as collateral for DAI stablecoin loans. Digital asset firms are meeting traditional finance half way in some respects by obtaining licenses that allow them to provide secondary markets for tokenized products that include tokenized private equity funds and security tokens. Networks and custody solutions would be essential regardless for tokenization to function and could be minted on permissioned or permissionless protocols.

• In a combination of two blockchain based technologies, tokenized bonds and decentralized finance applications, Société Générale (SocGen) is proposing to MakerDAO to allow bond tokens issued on its SocGen-Forge platform to serve as collateral for a DAI stablecoin loan and provide for an innovative use case for the digital asset ecosystem.

• Securitize launched a secondary marketplace for trading private companies tokenized securities and holds broker-dealer and alternative trading system (ATS) licenses in the United States. This will add another venue for equity and similar tokens to be listed and traded in the same way as those offered on tZero and ADDX which offers private equity fund tokens and other alternative investment tokens.
• Tokenization and financial inclusion was discussed on a panel at the OECD Global Blockchain Policy Forum held virtually on 15th September – 1st October and highlighted the need for a review of the requirement for these assets to only be available to accredited investors which restricts access to retail investors who are not able to benefit from the fractionalization that tokenization affords.
• The tokenization of the Singapore Variable Capital Company using a blockchain-native structure is being explored by InvestaX, UBS, State Street and CMS to enable the tradability of the structure in tokenized form.

Regulation | Regulators

U.S. regulators are ramping up their engagement of the crypto market players and spelling out the need for regulatory oversight of the industry. Singapore approved new digital asset licences this month that allow the use of digital tokens for payments and access to digital asset markets. Switzerland approved its first digital exchange through which institutions may trade and custody digital assets, and also approved a crypto focused fund for qualified investors to access.

The regulatory scene has seen further progress towards allowing investments into crypto assets at the institutional level and providing licensing to operate in a regulated environment. Multiple jurisdictions continue to develop their regulatory frameworks and approach to the crypto market.

• U.S. Federal Reserve Chair Jerome Powell made comments during the Oversight of the Treasury Department’s and Federal Reserve’s Pandemic Response hearing that the United States does not have plans to ban cryptocurrencies when answering questions on the state of inflation in the United States on 30th September. The cryptocurrency markets reacted positively to his comments sending prices higher.
• U.S. SEC Chair Gensler continued to express his position on regulations over crypto markets including decentralized finance (DeFi) projects and the need for crypto market players themselves to seek U.S. regulatory oversight. Earlier in August, the SEC Chair was seeking more power to regulate crypto assets echoing the need for more regulation by U.S. Fed Chair Powell and was adamant that all forms of tokens – stable value, stock – will have to work within the securities regulatory regime.
• Singapore’s MAS granted Digital Payment Token Service licences to DBS Vickers and Independent Reserve under the Payment Services Act (PSA) in September. There are another 170 companies pursuing the licence some of which have been granted in-principle approval or temporary exemptions to offer services pending the granting of the full license.
• In Switzerland, the Swiss Financial Market Supervisory Authority (FINMA) granted SIX Digital Exchange (SDX) two licenses allowing it via regulated institutions to trade, settle and store digital tokens. This makes SDX the first regulated digital exchange in Switzerland to operate and offer digital assets to investors. FINMA had also approved its first Swiss crypto focused fund, “Crypto Market Index Fund“, which can only be made available to qualified investors.

Payment | Settlements

Central bank initiated pilot projects with BIS are underway and have yielded preliminary results of their transfer trials which are showing positive results in terms of transaction speeds and expected cost reductions. The BIS also released a report supporting public and private cooperation for a global payment system.

• The Bank for International Settlements (BIS) conducted a cross border payments trial using CBDCs and found that the transaction time needed ends up being seconds instead of three to five days and could cut costs by as much as 50%. The project now known as “mBridge”, started with the central banks of Hong Kong and Thailand and now includes those from China and the UAE.
• The Bank for International Settlements (BIS) published a joint report exploring the retail CBDC ecosystem with the central banks from Canada, Japan, United Kingdom, United States, Switzerland and Sweden, stating the need for both public and private cooperation for a global payment system to ensure interoperability and coexistence with the broader payment system.

DeFi | Lending and Borrowing

U.S. Federal and State regulators continue to challenge the nature and characteristics of interest bearing products that DeFi and CeFi lending firms are offering, arguing that they meet the Howey test of an investment security. Coinbase reluctantly pulled their Lend project on the threat of being sued by the SEC, while Celsius Network is feeling the heat from Alabama, Kentucky, New Jersey, and Texas for offering unregulated securities. Meanwhile, two DeFi firms have experienced what appear to be ‘fat finger’ errors in protocol or smart contract code leading to sizable losses to the firms, the funds of which they are seeking to recover from the recipients or have been able to recover.

• Aave is expected to deploy their permissioned version of their DeFi lending platform, Aave Arc, together with institutional digital custody firm, Fireblocks, as a whitelister to ensure that participants have gone through KYC processes. Aave allows participation as either depositors providing liquidity to the market or as overcollateralized or undercollateralized borrowers.
• Coinbase was issued a Wells notice by the U.S. SEC and reluctantly decided to pull the launch of Lend, a product which would allow their customers to stake their stablecoin USDC and receive a percentage yield.
• Celsius Network joins Blockfi in facing U.S. State regulators on its claim that their lending products are unregulated securities. Alabama and Kentucky together with New Jersey and Texas had issued cease-and-desist orders or similar orders against Celcius’ interest bearing products. Beginning from July, Blockfi had received orders to stop providing access to their lending products from the same four states with the addition of Vermont.
• Compound suffered a $90 million loss due to smart contract programming error after a protocol upgrade was released and have requested clients who received these funds in error to voluntarily return the COMP tokens.
• Decentralized exchange, DeversiFi, suffered a loss of $24 million which they were able to recover, resulting from an unusually high gas transaction fee, the cause of which related decimal places being used but which is not supported by the EthereumJS library.

CeFi | Centralized Exchanges

China adds to cryptocurrency woes by banning crypto payments and services adding to the mining ban earlier in the year.  Centralized exchanges outside of China had responded by restricting new registrations of China-based residents.  Binance’s jurisdictional regulatory challenges remain, but are seeking to address compliance concerns.

China’s actions on banning crypto trading and mining had taken some wind out of the sails of crypto prices temporarily,  but their actions were not entirely unexpected given their focus on rolling out the digital yuan.

• Large centralized exchanges restrict new user registrations from China including Kucoin, Huobi Global and Binance
• China bans cryptocurrency related payments and services (September)
• Digital yuan trials reach over 139 million people (July)
• China’s largest crypto mining hub banned mining in Sichuan Province (June)

The actions being taken involving Binance since July is significant as it demonstrates the toughening regulatory environment as increased interest emerges in crypto assets.  The nature of products being offered by CEX like Binance has also been challenged as financial products which could or should fall under the definition of financial products that should be regulated such as BTC futures dominated by unregulated Binance vs regulated CME futures ($3.37B vs $2.07B, Skew, October 4).

• Binance halts offerings in Singapore after being placed on the Monetary Authority of Singapore’s Investor Watchlist (September).
• Binance under regulatory scrutiny in multiple countries South Africa, Thailand, Malaysia, U.K., Canada, Italy, Japan. (July, August)
• Binance pulls back offering of tokenized stocks. (July)
• Binace removes futures derivative trading in Europe including Germany, Italy and the Netherlands and reduces leverage to 20x for new clients. Brazilian and Hong Kong clients will also not be able to trade derivatives according to the recent reports in August. (July, August)

Custody

Digital asset institutions are adapting their business models to include pursuing traditional finance custodial licensing or partnerships that will allow them to provide or continue to provide custody-related services involving digital assets in their jurisdictions.  This could be seen to be transitory actions taken by digital asset participants to bridge the market view of custody and what the blockchain ecosystem provides.

• SEBA Bank, a digital asset focused bank was granted a CISA license from the Swiss Financial Market Supervisory Authority (FINMA) allowing it to provide custodian services.
• Korean banks are not allowed to offer digital asset custodian services under the country’s current regulations which only permit banks to enter the custodian market through joint ventures or share investments.  Nonghyup Bank with a strategic equity investment in the digital asset custodian firm, Cardo, will now be able to provide these services. Three of South Korea’s major banking groups are in the digital asset custody service market – KB Financial Group formed Korea Digital Asset Co. with blockchain company Haechi Labs and venture fund Hashed; Shinhan Financial Group invested in Korea Digital Asset Custody Co. founded by the digital asset exchange Korbit, and more recently Woori Financial Group’s joint venture with Coinplug Inc.

CBDCs

More countries have outlined their strategies or announced their intentions to pursue their own CBDC and are looking at how CBDCs could be useful to their financial systems.

• Countries are initiating strategies for their own digital currencies including Chile and Tajikistan, with Nigeria ready to launch their October CBDC eNaria pilot under Project Giant using Bitt as their technical partner.
• Not to be left behind, the Reserve Bank of New Zealand is seeking public input on issuing a CBDC, seeing it as necessary to support its role in an increasingly digital payment environment where there is a declining use of cash.
• The Bank of England is expanding its working groups to provide input on its CBDC initiatives. These working groups include a CBDC Engagement Forum focused on non-technical aspects of a CBDC, and a CBDC Technology Forum focused on understanding the technological challenges of designing, implementing, and operating a CBDC.
• U.S. Federal Reserve Chair Jerome Powell in a 22nd September news conference said that the U.S. Federal Reserve will release a research paper on a CBDC which it had indicated it would release in the summer back in May.

Crypto-Native Market Analytics

Crypto-native markets struggled through much of September after the August move higher.  Markets had been under pressure due to a number of factors during the month starting with exchange outages, September being seen as a seasonally weak month, and weak technicals.  Bitcoin ‘whales’ were noticed by ‘whale watchers’ to ‘buy the dip’ at lower prices indicating continued interest in acquiring crypto and being supportive of prices.  DeFi and related alternative coins (Alt Coins) remained a hot topic in September even while Alt Coins came under selling pressure which may be indicative of their correlations with the main coins such as BTC and ETH, or it could be a reaction to the issues being faced by CeFi lending platforms which could have a flow on effect to the DeFi lending business model.

MONTHLY CHANGE

Prices fell in all the key markets MoM with DeFi markets experiencing large falls in price between 14-33% possibly linked to U.S. regulator action on CeFi lending platforms during the month. (Coingeko)

MARKET CAPITALIZATION

Top 10 Coins: Solana market cap rose the most in September by 29% with Dogecoin falling 27%. (Coingeko)

BITCOIN [BTC]

Price set a lower high and retraced over the month towards $40,000. (Glassnode)

ETHEREUM [ETH]

Price retraced and unable to reach the all-time high set around $4,400. (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

Significant net outflows occurred on September 10 as price fell from $52,000 down towards $42,000. Outflows had moderated since then.

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, October 1]

Intra-regional flows remained strongest within Western Europe, were somewhat flat within Eastern Asia with flows lower overall in North America based on the percentage change in regional flows.

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, Oct 1]

TLV rose from $174.2B to $177.6B over September even as ETH prices ended lower for the month at $3,000 from the earlier month high of $3,961. Defi Llama Total Locked Value (Glassnode)

DEFI PULSE INDEX [DPI]

Top 5 Tokens: Uniswap, Aave, Maker, Sushiswap and Synthetix which nudged Compound out of the Top 5 this month. 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.