Thomas Murray Digital Newsletter

State of the Digital Asset Market, and Thomas Murray Digital at The Network Forum

Andrew Wright speaks at The Network Forum's 2022 Annual Meeting
TM Digital’s Andrew Wright speaks at The Network Forum’s 2022 Annual Meeting

For investors in digital assets, and cryptocurrencies in particular, the pain caused by the latest ‘crypto winter’ continues unabated. Although institutional investors have been engaged in the crypto market in large numbers since 2021 the digital asset sector is still reminiscent of the early days of the Internet, evidenced by ecosystem failures, the misallocation of capital, and poor investor protection. At the same time, financial institutions and FinTechs are continuing to invest and build new operational models and DLT-based infrastructure. Hugo Jack takes stock of what is happening in the crypto market today: where things are going wrong, but also the continuing positives driving the industry forward.

This newsletter comes out a week later than usual as Thomas Murray has been attending The Network Forum’s 2022 Annual Meeting. The Digital team was represented by Andrew Wright, who engaged in a lively debate with panellists from HSBC, Deutsche Bank, Euroclear and Digital Asset on DLT adoption in the financial services industry and the future of custody. Although it is relatively early days for institutional engagement with digital assets and their infrastructure, DLT has been deployed in some major applications for a few years already, with more projects – such as to replace the national clearing and settlement infrastructure for several major markets – in active development. The discussion centred on the speed at which digital forms of assets would become mainstream and the extent to which existing traditional securities may be converted to digital token form, if at all. Thomas Murray Digital’s house view is that it only requires a small pressure gradient, comprising convenience, transaction speed, enhanced functionality, and cost savings, to trigger a snowball effect in this tokenisation of existing assets. In the words of William Gibson, ‘The future is already here – it’s just not evenly distributed’; the example of SDX, Switzerland’s fully regulated end-to-end digital asset infrastructure, shows how the gap to a fully digital future can be bridged through the instantaneous tokenisation or conversion back into traditional form of securities, allowing the market to choose its preferred asset form at its own pace. Meanwhile, although members of the audience remained largely sceptical that digital assets would represent a majority of issuances any time soon, or ever, it seemed clear that the members of all three digital-themed panel discussions at the event accept DLT-based assets and infrastructure as an inevitability, given sufficient time.

Digital Asset Developments

      

      
Last week, Japan became the first country in the world to usher in comprehensive regulations governing stablecoins. Passed by the upper house, the bill takes aim at stablecoins and other fiat-pegged assets which in recent months have received significant attention from regulators globally amid concern for investor protection and financial stability. This comes on the back of the dramatic demise of Terra’s algorithmic stablecoin, UST, which collapsed in May, and the ongoing drama faced by lending platforms like Celsius which is currently facing solvency issues. The amendment to the Funds Settlement Law is expected to enter into force in 2023 and will limit the issuance of stablecoins to banks, licensed money transfer companies with custody capabilities, and trust companies. The law recognises stablecoins as electronic money and guarantees their redemption at face value to the Yen or other fiat currency of issue. In addition, a new licensing regime will apply for intermediaries including brokers and enhanced anti-money laundering provisions will be applied. This is a welcomed move by the industry as a group of 74 financial institutions is set to launch their own deposit-backed digital currency next year.
In a somewhat surprising move, Lithuania has pressed ahead and introduced its own crypto licensing regime, despite the European Union’s Markets in Crypto Assets Regulation (MiCA) being reportedly in the final stages of negotiation. The concern, articulated by the country’s vice minister of the Ministry of Finance, was that MiCA will take some time to come into effect, likely in 2024. In that time the industry will continue to go through immense changes, and yet it remains at the mercy of unscrupulous actors looking to game investors. The country has implemented these steps as an interim measure which the MiCA regime will supplant once ratified. That said, there is still much to cover in the pending European regulation, which for the most part does not yet cover how to govern non-fungible tokens (NFTs), decentralised finance (DeFi), and more systemically significant stablecoins proposed by the likes of Libra (later Diem and now purchased by Silvergate), which according to this article are likely to be rejected by EU member states due to their competition with the euro. The law will enter into force in Lithuania on November 1, 2022.
A copy of a U.S. draft bill entitled the Lummis-Gillibrand Responsible Financial Innovation Act has been leaked online and is making the rounds on social media. It reports to show that greater regulation is closing in on the digital asset ecosystem, with particular attention paid to Decentralised Finance (DeFi) and Decentralised Autonomous Organisations (DAOs) which are both soon to be subject to greater oversight. Within the 600 pages of the draft, investor protection appears to be the driving motivation. It proposes that crypto platforms or service providers, including DAOs that operate in the U.S., should be required to be legally registered in the country, although this would naturally compromise projects with anonymity at the core – such as the Bitcoin network itself. Encouragingly, the bill appears to offer long-awaited clarity on securities laws as they relate to tokens, DeFi and DAOs, offering an extended universe of tokens that would fall under the purview of the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) depending on their nature. Unsurprisingly, given the bill’s sponsors, the draft bill aims to limit the SEC’s remit to pure securities tokens due to what has been seen as an unhelpful and aggressive stance from the agency towards crypto, while the CFTC will oversee everything else including utility tokens, stablecoins and unbacked cryptocurrencies. The CFTC would be granted greater powers to police investor protection and anti-fraud/anti-manipulation issues, and would be funded from fees gathered from digital asset issuers. By that logic, man cryptocurrencies and stablecoins would be classed as commodities, while NFTs will be considered an entirely new asset class. The CFTC has already offered its working definition of securities tokens that will be under the SEC’s purview, stating that “if there is any debt, equity, profit revenue, or dividend of any variety, then it is now expressly not a digital asset commodity”. In light of the Terra debacle last month and the ongoing drama with crypto lender Celsius, investors will likely be pleased by one part of the draft bill which outlines the obligation of an exchange to return users’ funds rather than being able to liquidate them to cover operational losses. Some commentators have pointed out that the draft bill could increase the cost of compliance for these entities, which would most likely be passed on to the customers, however they may be willing to pay the price for increased protection.
 
In related news, the U.S. Treasury, in comments made by Deputy Secretary Wally Adeyemo, is taking actions to prevent the use of self-custody and unhosted crypto wallets. The argument presented by the Treasury is one that has been echoed by many policy makers globally as they grapple with the principle of anonymity against a rapidly evolving crypto financial ecosystem. Adeyemo argues that financial institutions need to be able to determine who they are dealing with, suggesting it is difficult to do so with unhosted wallets as they “are effectively just addresses on a blockchain”. Understandably, doing away with self-custodied wallets will increase the ease with which individuals can be identified as wallet providers are subject to KYC/AML rules, although it is accepted that there are numerous cryptographic techniques to prove one’s identity in a blockchain ecosystem that can still preserve anonymity. This policy, while intended to further mitigate money laundering and illegal activities, will likely impact heavily on decentralised finance models which are increasingly popular with digital asset businesses and some banking institutions. Counter to the above, the U.K. Treasury, in a response to its public consultation on Amendments to the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, Statutory Instrument 2022, has now backtracked on its intention to collect information on unhosted or private wallet data. Following feedback from industry, the Treasury suggests it does not make sense for every sender of funds to have to collect identification information of the beneficiary.

Acting on behalf of the recently hacked Lichtenstein-based digital asset exchange LCX, Lawyers Holland & Knight and Bluestone, P.C., achieved an historic first by issuing a temporary restraining order (TRO) via a non-fungible token (NFT). The token was sent to a hacker whose wallet addresses were discerned through blockchain tracking technology using algorithmic forensic analysis. The hacker managed to siphon approximately USD 8.0 million in digital assets from the exchange in January 2022. However, through coordinated court orders sought from the Supreme Court of New York and the courts of Liechtenstein, 500 eth and 1.3 million USDC have been frozen by Coinbase Europe and Centre Consortium, the operating entity of Circle, the issuer of the USDC stablecoin.

News Links

CFTC Sues Gemini Over ‘False Statements’ Relating Bitcoin Futures Plan (Finextra)
IRA Financial Trust to Sue Gemini Over $36M Crypto Assets Exploit Back in February (Cointelegraph)
New York Senate Votes for Bitcoin Mining Moratorium (Finextra)
SEC Investigates Binance Over ICO of BNB Token (Pymnts)
Bill to Ban Digital Assets as Payment Introduced in Russian Parliament (Cointelegraph)
Crypto Bank Custodia Sues Federal Reserve (CoinDesk)
The Republic of Serbia Securities Commission Approves Issuance of the First Digital Token (Republic of Serbia Securities Commission)
Britain Makes Crypto Technology a Priority for Streamlining Markets (Reuters)
Ugandan Central Bank U-turns on Crypto, Welcoming Firms to Regulatory Sandbox (Cointelegraph)
KBC launches Kate Coin (Finextra)
Indonesian Exchange Pintu Raises $113M to be ‘Coinbase of Southeast Asia’ (Decrypt)
Coinbase Extends Hiring Freeze, Rescinds Job Offers (Finextra)
FTX to Buy Canadian Crypto Player Bitvo (Finextra)
Goldman Sachs Begins Trading Ethereum-Linked Derivative Product (FinanceFeeds)
Russian Bank Sber to Complete its First Digital Currency Deal (Cointelegraph)
Central African Republic Announces Plan to Tokenize Country’s Minerals (The Block)
Two More Spot Crypto ETFs Launch on Australian Markets (Cointelegraph)
‘Bitcoin-Thematic’ ETF Lists on Italian Stock Exchange Borsa Italiana (Cointelegraph)
Osaka Digital Exchange Developing Secondary Market for Security Tokens (Osaka Digital Exchange)
Ripple and Stellar to Help Launch AUDC Stablecoin for Novatti Group (U.Today)
Tether Launches Stablecoin on Tezos to Unlock New DeFi Products (Decrypt)
Circle Launches Euro-Backed Stablecoin EUROC (Cointelegraph)
MoneyGram Launches Pioneering Global Crypto-to-Cash Service on the Stellar Network (PR Newswire)
UnionBank Raises ₱11B in PH’s First-Ever Digital Peso Bonds (CNN Philippines)
Deutsche Börse Introduces Comprehensive Crypto Data Feed (Finextra)
Bitcoin Uses 56 Times Less Energy Than Classical System (Cryptoslate)
BIS to Launch Market Intelligence Platform Amid Stablecoin, DeFi Collapse (Cointelegraph)
Key: Regulation             Technology            Ecosystem              Markets 

CBDC Corner

Bank of England Exec Says Digital Currencies Could Be ‘Important’ for Central Bank Balance Sheets (The Block)
No ‘Redline’ Argument Against CBDC, Says BoE Official (Beincrypto)
Bank of Russia Steps Up Efforts to Issue Digital Ruble Due to Sanctions (Bitcoin.com)
Bank of Ghana Tests CBDC Integration with Mobile Money Providers (The Papers)
Bank of Thailand Postpones CBDC Pilot (CoinDesk)
Digital Real Will Be Used by Banks in Brazil as Collateral to Issue Their Own Stablecoins (Bitcoin.com)
CBN to Introduce USSD Code to Improve eNaira (Premium Times)
Oman is Currently Working on its First Digital Currency (Beincrypto)
Central Bank Preparing Concept of Digital Manat (Azer News)
Philippines, Vietnam conducting CBDC Feasibility Studies with Soramitsu
Bank of Israel Investigates Anonymous Digital Shekel Payments (Finextra)

Thomas Murray Digital

Andrew Wright | Hugo Jack | Ben Ashley

Tel. +44 (0)20 8057 7100
Email: digital@thomasmurray.com
Web: thomasmurraydigital.com

Whilst reasonable care has been taken in the compilation of this information, neither Thomas Murray Network Management Limited, its affiliates or information contributors shall have any liability for any errors, omissions, delays or inadequacies in the information or for any loss or damage however occasioned (whether arising directly or indirectly), to any person or company relying on this information, or any decision made, action taken or inaction by any party in reliance upon this information (except to the extent permitted by law). Copyright © Thomas Murray Network Management Limited, company no. 03313014. All rights reserved. No reproduction without prior authorisation.

Thomas Murray Digital Newsletter

Tether USD token

TerraUSD Fallout – Debating the Future of Stablecoins and CBDCs

Following the recent failure of the TerraUSD algorithmic stablecoin, the fallout affecting the cryptocurrency markets and the policy questions that the incident raises have continued to dominate discussions. At issue are what – if any – role privately-operated stablecoins may have in the future of wholesale and cross-border settlements, the parameters and priority of stablecoin regulation, and the degree to which Central Bank Digital Currencies (CBDCs) – previously viewed by some major economies as more relevant to retail applications – could assume wholesale roles. We summarise those discussions and evaluate some of the other winners and losers in the stablecoin market.

Digital Asset Developments

      

      
Following the publication of the US Securities and Exchange Commission Staff Accounting Bulletin (SAB) 121 – which prompted Coinbase to present client assets as a liability on its balance sheet – the US government will reportedly urge Congress to legislate that crypto service providers segregate client and corporate funds. Coinbase’s disclosure that customers’ assets may potentially form part of any bankruptcy estate, and that the customers may be treated as general unsecured creditors, caused a stir within the crypto industry as the implication was that if Coinbase were to go bankrupt, many of the assets it holds for customers may go with it. Despite this move to mandate segregation of client funds  from proprietary funds, the government still believes providers should be able to pool customers’ assets, allowing them to internally manage trades instead of processing each individual trade on the blockchain.
The European Central Bank (ECB) says that the increasing interconnectedness between cryptoassets and traditional markets means that contagion from cryptoassets pose a considerable risk to financial stability. The report, published as part of the central bank’s biannual financial stability review, warned that “cryptoasset markets currently show all the signs of an emerging financial stability risk.” Although such contagion has so far remained sufficiently small to prevent any financial stability risks being incurred, the ECB is eager to highlight that a point will soon be reached where this is no longer the case. The central bank advocates for regulators to monitor developments, stating that “any further steps that allow the traditional financial sector to increase its interconnectedness with the crypto-asset market space should be carefully weighed up, and priority should be given to avoiding financial stability risks.” The report consequently argues that to prevent such risks it is paramount for regulatory measures to be globally coordinated: “The challenges faced in monitoring financial stability risks from cryptoasset developments and interconnectedness with the traditional financial sector will persist as long as there are no standardised reporting or disclosure requirements.”
JP Morgan has reportedly been trialling the use of its own private blockchain for collateral settlement, conducting a pilot transaction involving the transfer of tokenised BlackRock money market fund shares.  The investment bank, which founded Onyx Digital Assets (ODA) in 2020, has long been an advocate for the use of blockchain technology, despite its more recent Damascene conversion on the value of cryptocurrencies. ODA is described as a “blockchain-based network that enables the processing, recording and Delivery-versus-Payment (DVP) exchange of digital assets across asset classes.” BNP Paribas recently completed its first trade on the ODA platform, becoming the first European bank to join the network. JP Morgan is also involved in the Monetary Authority of Singapore’s Project Guardian, a tokenisation pilot for DeFi transactions involving borrowing and lending on a public blockchain, while the investment bank participated in the USD 60 million Series C fundraising round for blockchain analytics firm Elliptic, and recently evaluated bitcoin’s fair price at USD 38,000 while declaring crypto to be its preferred alternative asset in a note issued to clients.

News Links

Basel Committee to Issue Second Consultation on Crypto (The Block)
Regulate Ledgers and Not Individual Crypto Providers, BIS Study Says (CoinDesk)
Financial Regulator Cautions UK Against Rushing to Create ‘Crypto Hub’ (Financial Times)
Portugal’s Parliament Rejects Crypto Tax Proposals Amidst Budget Negotiations (The Block)
German BaFin Official Calls for ‘Innovative’ EU-Wide DeFi Regulation (Cointelegraph)
Russian Finance Ministry Calls on Crypto for International Settlements (Beincrypto)
Russian Central Bank Signals Agreement with Crypto Law Revisions: Report (Cointelegraph)
Paraguayan Bill Regulating Crypto Mining and Trading Moves Closer to Law (CoinDesk)
Thailand Excludes Crypto Transfers from VAT Payments Until 2024 (The Block)
South Korean Legislature Considering New Licensing System for Crypto (Cointelegraph)
Korean Police Move to Freeze Luna Foundation Guard Assets: Report (CoinDesk)
OCC’s Hsu Reiterates “Careful and Cautious” Approach after Terra Collapse (The Block)
US Senators Lummis and Gillibrand Set to Propose Crypto Oversight Bill Next Month (CoinDesk)
Draft Bill to Ban China’s Digital Yuan from US App Stores (Cointelegraph)
CFTC Roundtable on FTX Proposal Highlights Barriers in Clearing of Digital vs Physical Assets (The Block)
Central African Republic to Launch Bitcoin, Crypto Hub (Bitcoin Magazine)
Binance to Advise on Crypto Strategy as Kazakhstan Looks to Boost Industry (CoinDesk)
CBA Presses Pause on Crypto Pilot (Finextra)
China’s State-Backed BSN Pushes New Public Blockchain Network Unlinked to Cryptocurrencies for International Markets (South China Morning Post)
Investment Platform Achieves World-First with Asset Management Recorded on Blockchain (Cointelegraph)
Online Broker FlatexDegiro Moves into Crypto with Boerse Stuttgart (Finextra)
Swiss Asset Manager Julius Baer Eyes Crypto and DeFi Potential (Cointelegraph)
SBI Invests in Digital Asset for ‘Smart Yen’ Joint Venture Project (Finextra)
Protego Trust Bank Targets $2 Billion Valuation After Quietly Raising $70 Million (The Block)
Digital Securities Platform ADDX Raises $58 Million (The Block)
Tether Launches Stablecoin Pegged to Pesos on Ethereum, Tron and Polygon (Cointelegraph)
US SEC Rejects One River Spot Bitcoin ETF Application (Blockchain News)
ARK and 21Shares Make Another Attempt at a Bitcoin ETF Approval (The Block)
Terra to Restart Luna Blockchain, Abandon UST Stablecoin (Pymnts)
ISDA: Crypto-Asset Risks and Hedging Analysis (Markets Media)
Ethereum Liquidations Top $157M After Merge Upgrade Test Hits Snag (Decrypt)
Crypto Funds Under Management Drop to a Low Not Seen Since July 2021 (Cointelegraph)
Key: Regulation             Technology            Ecosystem              Markets 

CBDC Corner

As discussed in this week’s article, G7 Finance Ministers and Central Bank Governors have issued a statement that highlights the opportunities and implications of CBDCs and their potential role in future payment transactions. The statement encourages “jurisdictions exploring CBDCs to examine the international dimensions of CBDCs, in particular their cross-border use. CBDCs with cross-border functionality may have the potential to spur innovation and open up new ways to meet users’ demand for more efficient international payments, but continued international cooperation will be important to understanding and minimising any negative spillovers to the international monetary and financial system.”
Bank of Japan CBDC Experiments: Results and Findings from PoC Phase 1 (Bank of Japan)
ECB’s Lagarde Says While Crypto Has No Worth, She Would Back Digital Euro: Politico (The Block)
IMF, Bank of France Officials Believe More CBCDs Will Emerge in Next Three to Five Years (The Block)
Fed’s Brainard Sees Case for Central Bank Digital Currency (Reuters)
US Fed Vice Chair Says Digital Dollar Would Take 5 Years to Launch (CoinDesk)
Fed’s Vice Chair Tells Banks: Digital Dollar Won’t Cut You Out (Pymnts)
Nahmii Selected to Build Norges Bank CBDC Sandbox (Norges Bank)
Mercado Bitcoin Partners with Stellar to Create MVP for Brazilian CBDC (Cointelegraph)
SWIFT in Cross Border CBDC Interoperability Trial with Cap Gemini (Ledger Insights)
Circle Tells Federal Reserve a CBDC ‘Could Destabilize’ Banking (Pymnts)

Thomas Murray Digital

Andrew Wright | Hugo Jack | Ben Ashley

Tel. +44 (0)20 8057 7100
Email: digital@thomasmurray.com
Web: thomasmurraydigital.com

Whilst reasonable care has been taken in the compilation of this information, neither Thomas Murray Network Management Limited, its affiliates or information contributors shall have any liability for any errors, omissions, delays or inadequacies in the information or for any loss or damage however occasioned (whether arising directly or indirectly), to any person or company relying on this information, or any decision made, action taken or inaction by any party in reliance upon this information (except to the extent permitted by law). Copyright © Thomas Murray Network Management Limited, company no. 03313014. All rights reserved. No reproduction without prior authorisation.

Thomas Murray Digital Newsletter

Coinbase logo on laptop

Cryptocurrency Market Crash, and SEC Moves Crypto Assets Under Custody Onto Balance Sheets

The past week saw another crash in the value of cryptocurrencies; bitcoin fell to USD 24,000, its lowest value since December 2020. Although bitcoin’s price has been slowly falling since the end of the last year – reflecting the current macroeconomic climate of increasing inflation and interest rates facilitating a risk-off environment – this latest capitulation was a result of the TerraUSD (UST) stablecoin catastrophically losing parity with its dollar peg and the fallout thereafter. Ben Ashley assesses the root causes of the incident and the impact on cryptocurrencies and stablecoins.

While causing fewer headlines, but perhaps of more significance to would-be digital asset custodians, the SEC has prompted Coinbase to disclose in its latest quarterly financial filing that customers’ assets may potentially form part of any bankruptcy estate, and that the customers may be treated as general unsecured creditors. It remains unclear whether this assessment stems from the way in which Coinbase structures its custody arrangements legally or more broadly reflects legal uncertainty surrounding liability for crypto assets given the lack of a clear legal, regulatory and accounting policy environment. In any case, the SEC appears to expect that customer crypto assets should appear on custodians’ balance sheets. Andrew Wright explores the SEC’s move and the reaction from policymakers to it.

Digital Asset Developments

      

      
The California state governor has signed an executive order for blockchain and Web 3.0 companies. The aim of the order is to integrate federal and state approaches to provide a regulatory environment that is clear, transparent, and easy to navigate. The order has seven key priorities – mainly focused on crypto assets and related technologies – and is designed to stimulate innovation while simultaneously protecting investors. The Governor commented that the state is aiming to get ahead of the curve in order to harness the potential of the technology. Further benefits the order cites are the ability to deploy blockchain technology for state and public institutions, and the construction of research and workforce development pathways.
A New York state assembly committee has advanced a bill blocking any new proof-of-work (PoW) mining facilities that use non-renewable energy. The bill, which would impose a two-year moratorium, will now go to a full vote of the legislative body. Although existing facilities will not be affected, a provision within the bill would ban permit renewals for carbon-based electric generating facilities if the renewal applicant supplies PoW mining facilities and seeks to grow their operation. On top of this, the bill calls for PoW miners to be subject to a full generic environmental impact statement review that evaluates their mining facilities within the state. The move is similar to efforts made by the European Parliament to introduce a provision to the Markets in Crypto Assets (MiCA) Regulation regarding the acceptability of PoW blockchains on environmental grounds. A controversial amendment had been added to the draft bill that would have limited PoW blockchains, but was subsequently removed due to fears that it could be interpreted as a de facto ban on bitcoin.