CBDC

Leading Crypto Exchange Bites the Dust; UK Votes for Crypto Financial Instruments; MiCA Delayed Again; UBS Launches Bond on SDX and SIX

Thomas Murray Digital Newsletter

FTX founder Sam Bankman-Fried, Cointelegraph, CC BY 3.0, via Wikimedia Commons

In this issue:

  • Leading exchange FTX and its sister hedge fund Alameda Research file for bankruptcy after revelations of a balance sheet black hole and unauthorised lending of customer deposits; further retail-focused crypto exchanges may also be vulnerable.
  • Germany finalises legislation to authorise the issuance of DLT-based securities, adding asset classes including equities and funds to the existing digital bearer bonds.
  • EU delays approval vote on the Markets in Crypto Assets Regulation (MiCA) to February 2023, further pushing back its implementation date.
  • UBS becomes first bank to issue a bond on a regulated digital exchange, with components trading on both SDX and the traditional SIX exchange.

Major Digital Asset Developments

FTX Bites the Dust as It Too Fails to Implement Sound Governance and Financial Risk Management
With major and serious development efforts taking place in the institutional digital assets ecosystem, it is disappointing that the narrative dominating the media is once again the failure of a poorly-governed and now failed exchange (and its related hedge fund) that enabled the retail trading primarily of unbacked cryptocurrencies. This series of failures is due in part to a lack of regulation and oversight, and particularly to the tendency of digital asset firms such as exchanges to operate from jurisdictions (in this latest case, the Bahamas) with weak requirements for firms to implement sound corporate governance and financial risk management. This year has been strewn with stories of bankruptcies, insider trading, and the persistent threat of contagion.
This week FTX, one of the world’s largest digital asset exchanges, filed for bankruptcy – firstly for its non-US trading arm, and then its US entity following an application for Chapter 11 Bankruptcy protection (Finextra).
A leaked balance sheet for FTX founder Sam Bankman-Fried’s trading firm, Alameda Research, was the subject of a CoinDesk article on 2 November. It purported to show that almost a third of Alameda’s USD 14.6 billion was allocated to FTT, the native token of the FTX exchange, and that this represented more than 50% of the token’s total circulating supply.
Binance, the largest cryptocurrency exchange, was an early investor in FTX and had exited its equity position in mid 2021, in return receiving USD 2.1 billion in a combination of BUSD (the native stablecoin of the Binance ecosystem) and FTT. Once news of the weak balance sheet got out, and in apparent retaliation for rumours of FTX briefing the press against Binance, the latter announced the divestment of its remaining FTT tokens, sending their price crashing and causing a run on FTX. Alameda Research might have been able to survive the liquidity squeeze if not for the fact that it had apparently borrowed heavily against FTT and a basket of closely related tokens.
Allegedly, in order to support the value of the token, Alameda received lines of credit from the FTX exchange in the form of user deposits (The Verge), which it then used to bet on other cryptocurrencies as well as misguided attempts to support other embattled ventures like Voyager Digital which filed for Chapter 11 bankruptcy protection (CoinDesk) in July this year. Perversely, Alameda Research actually owed Voyager an estimated USD 200 million for funds it had borrowed in 2021, and by repaying the debt (which it did loudly and proudly) it was able to recoup the collateral it had posted with the firm for the loans it had taken. Ironically, FTX actually won a bankruptcy auction for Voyager Digital’s assets (CNBC) in September.
Despite its size, FTX’s management team comprised a small clique of inexperienced executives, and the group’s entities had no financial audits from large or reputable audit firms, nor any controls environment or IT security certifications. Despite this, even seasoned investors including BlackRock, Ontario Teachers’ Pension Plan, and Sequoia Capital were caught asleep at the wheel.
Given yet another case of signs of serious internal malfeasance and even fraud, serious due diligence and ongoing assessment of digital asset service providers remain paramount. The failures that the industry continues to witness are – as Dan Morehead, CEO of Pantera Capital articulated following the collapse of hedge fund Three Arrows Capital (3AC) earlier this year – down to old-fashioned over-leverage and poor risk management, rather than symptomatic of risks specific to the digital asset sector.
There could be further dominoes to fall in the ranks of exchanges as they scramble to reassure customers of their stability before they too are subject to runs and liquidity crunches. Several have urgently commissioned ‘proof of reserve’ audits to demonstrate that they hold, and have not lent out without customers’ agreement, the assets that they claim to have. Crypto.com, a retail exchange and investment platform that spent profligately on marketing before pulling up the drawbridge (Wall Street Journal) and making major layoffs (Coingeek) earlier this year, is reported to hold 20% of its reserves in Shiba Inu (SHIB), a meme token, although now comprising the fourteenth-largest cryptocurrency by market capitalisation. Its efforts to promote itself as stable and competently run took a hit when it purportedly sent over USD 400 million in Ether tokens to another exchange, Gate.io, by mistake, instead of sending them to its own cold storage wallet. The tokens – representing over 80% of its Ether holdings – were returned a week later. Even Binance, the world’s largest exchange group whose CEO Changpeng “CZ” Zhao has been extremely critical of other exchanges, appears to have 40% of its token reserves in its own-brand stablecoin Binance USD (BUSD) (c.USD 23 billion) and in-house token Binance Coin (c.USD 6.4 billion) (Bloomberg). The stablecoin reserves are, however, fully dollar-backed with third-party monthly attestations, with reserves managed by Paxos Trust Company.
While there continue to be centrally-managed organisations fulfilling essential market-making and custody functions in this growing industry, there also needs to be respect for the rules that exist for traditional non-crypto firms and that have been built up to protect investors over several decades. Blockchain and the use of distributed ledgers do not obviate the need for well governed, transparent and fiscally prudent management of these service providers.

Custody and Post Trade Developments

New German Regulations Enable the Issuance of Securities on Distributed Ledger Technology (Bundesgesetzblatt) (German)
The German government has published in its official journal, Bundesgesetzblatt, regulations and requirements that set out how electronic securities registers (eWpRV) can be used to support the issuance of securities, including equities and funds on a Distributed Ledger. This completes Germany’s approach to securities issuance using DLT, since only digital bearer bonds were supported in law until now.
HSBC to Launch Orion Blockchain Bond Tokenization Platform (Ledger Insights)
HSBC has announced plans to launch a permissioned DLT-based bond tokenisation platform, Orion. The solution is expected to be able to support the issuance and trading of digital bonds as well as the tokenisation of currencies such as GBP, such that assets can benefit from atomic settlement – the simultaneous exchange and instant settlement of assets – or true delivery versus payment (DvP).
Binance Custody Turns to TRM Labs for Institutional Compliance (Finextra)
In an effort to improve its institutional credentials and mitigate its many past regulatory challenges, Binance – the largest digital asset exchange by market capitalisation – is calling upon TRM, a leading blockchain analytics and intelligence firm, to bolster its risk management and compliance frameworks to support its custody activities, which it launched in December 2021. In signs of a maturing industry, the firm has reportedly secured specie insurance, certification under International Organisation for Standardisation (ISO) standards 27001 and 27701, as well as a SOC 2 Type 1 external audit attestation, and is currently pursuing a SOC 2 Type 2. These are standard credentials for traditional institutionally-focused custodians, and increasingly common for digital custodians.

UBS Launches Bond Traded on Blockchain-based Exchange (Finextra)
UBS has become the first banking entity to launch a bond on a regulated digital exchange. The CHF 375 million digital bond is trading on Switzerland’s SIX Digital Exchange (SDX) and also on the traditional SIX Swiss Exchange, in the same way that SIX’s own bond is traded following the launch of the Digital Exchange in November 2021. Utilising SDX’s atomic settlement technology, the bond is able to settle instantaneously within SDX’s distributed ledger-based CSD without the need for clearing via a Central Counterparty (CCP). Meanwhile, the analogue part will settle through traditional means via SIX Swiss Exchange. This Swiss dual digital/traditional model demonstrates a gentle path for other markets to introduce the tokenisation of traditional assets and the listing of digitally native securities.

Other News and Links

EU Delays Vote on MiCA Crypto Legislation Until February (CoinDesk)
Further to our previous newsletter, the EU has decided to delay its vote on the implementation of the Markets in Crypto Assets Regulation (MiCA) until February next year, reportedly due to the complex and technical nature of the text. The delaying of the vote, which was anticipated to take place this December, means that MiCA will most certainly not be published in the Official Journal of the European Union (OJEU) originally slated for Q1 2023, which formally signifies the full applicability of the law. As such, this will likely impact the timing of the implementation of the regulatory and licensing regime which was due to come into effect in 2024, approximately 12 to 18 months after its publication in OJEU.
UK Lawmakers Votes to Recognize Crypto as Regulated Financial Instrument (CryptoSlate)
A proposal introduced to the House of Commons to recognise crypto assets as regulated financial instruments has received approval by the lower house after a second reading on October 25.
The proposal seeks to include crypto assets and the services that support them under the Financial Services and Markets Bill which, if successful, will result in types of crypto assets including stablecoins falling under the same laws as other financial assets. If approved in law, the UK Treasury department would be empowered to enforce regulation over the crypto industry.
 IRS 2022 Tax Guidelines to Treat NFTs as Stablecoins, Cryptocurrencies (Decrypt)
The US’s Internal Revenue Service (IRS) has introduced a draft update to its tax language which now considers a broader definition for digital assets as being “any digital representations of value that are recorded on a cryptographically secured distributed ledger or any similar technology”. As such, NFTs are now considered in scope, alongside virtual currencies such as stablecoins, and cryptocurrencies, all of which are set to be taxed under the same rules. Interestingly, the IRS has decided not to categorise NFTs as collectibles, such as art, which suffer from a the higher 28% rate of taxation, versus traditional equities bonds, and cryptocurrencies which are taxed at 0%, 15%, or 20% depending on the income level.
South African Crypto Platforms Must be Licensed in 2023 – Regulator (Reuters)
South Africa’s Financial Sector Conduct Authority (FCSA) has announced the need for companies that support cryptocurrency activities to apply for a licence in a time window between 1 June and 30 November, 2023, in order to operate legally within the country. NFTs are not covered under the announcement at present, given that they are considered to have characteristics more like traditional works of art. It appears that the licensing regime is being implemented in some part to mitigate the risk of potentially being added to the Financial Action Task Force’s so-called ‘grey list’, which has apparently identified material weaknesses in the country’s AML and CTF regime.
Singapore Lays Down the Law for Crypto Trading and Stablecoins (Finextra)
Japan Greenlights Tougher Anti-Money-Laundering Rules for Crypto (CoinDesk)
UK Law Commission to Review International Laws on Crypto to Consider Legal Reforms (Coin Telegraph)
Coinbase Piles on Support for Grayscale’s EFT by Filing Amicus Brief in Effort to Reverse SEC’s Rejection (CoinDesk)
Canada Announces Crypto, Stablecoin Consultation in New Budget Statement (CoinDesk)
EU Countries Must Be Ready to Block Crypto Mining, Commission Says (CoinDesk)
The European Commission is once again coming after bitcoin and other proof-of-work cryptocurrencies on sustainability grounds, following an announcement in response to concerns over energy security this winter. Mining is fundamental to securing and ensuring the validity of the network, and therefore banning it across the EU would further undermine the decentralised nature of the blockchain which is integral to its security. The majority of bitcoin mining takes place in the US, China, Kazakhstan, Russia and Canada, with the EU’s Germany and Ireland considered key markets representing 4.48% and 4.68% of the hash rate respectively.
HK to Legalize Retail Crypto Trading (Bloomberg Markets and Finance via YouTube)
Stablecoin Issuer Paxos Receives Operating License from Singapore Regulator (CoinDesk)
Fidelity 2022 Institutional Investor Digital Assets Survey: 58% of Institutional Investors Allocate to Digital Assets
DBS Goes Live on SGX Unit’s Crypto Platform; Launches Programmable Money Pilot (Finextra)
Israeli Government to Trial Blockchain Bonds with Stock Exchange TASE (Ledger Insights)
France, Switzerland, Singapore to Test DeFi in Forex Markets (CoinDesk)
Coordinated by the Innovation Hub of the Bank for International Settlements, Central Banks from France, Switzerland, and Singapore are collaborating on Project Mariana, which is designed to test the automation of foreign exchange markets across a decentralised financial infrastructure.
JP Morgan to Launch Blockchain Euro Deposits Soon. Sees NFT Opportunity (Ledger Insights)
Ethereum Records 1st Deflationary Month in History as Circulating Supply Declines (CryptoSlate)
Following Ethereum’s transition to a proof-of-stake blockchain on 15 September 2022 the network has recorded its first deflationary month, in which more ETH was burned (introduced under the EIP-1559 proposal) than produced. As such, the circulating supply has been reducing by approximately 3,318 ETH daily.
Ripple Begins Testing XRP Ledger Sidechain That’s Compatible with Ethereum Smart Contracts (CoinDesk)

Key: Legal/Regulatory             Technology            Ecosystem              Markets 

CBDC Corner

BIS and Four Central Banks Hail Pilot Trials of CBDCs in Cross-border FX Transactions (Finextra)
Singapore’s MAS Starts Wholesale CBDC Project Ubin+ for Cross-border Payments (CoinDesk)
BOK Completes Mock Test on Digital Currency (Bank of Korea)
New York Fed Tests Wholesale CBDC for Cross-border Payments (Finextra)

Thomas Murray Digital

Andrew Wright | Hugo Jack

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.

EU Ratifies MiCA; The World’s Largest Custodian Goes Live; SWIFT Acts Swiftly to Cement its Role in Blockchain Global Finance

Thomas Murray Digital Newsletter

Photo by Alexandre Lallemand on Unsplash

In this issue:

  • The EU’s landmark Markets in Crypto Assets legislation has finally been published and ratified, and the Transfer of Funds Regulation receives preliminary approval
  • SWIFT makes a play to keep itself at the heart of linking financial institutions in the developing DLT-based financial system by piloting a framework to link tokenisation and settlement systems and a system to ensure interoperability between digital and traditional finance
  • BNY Mellon, the world’s largest custodian, begins rolling out its digital asset custody service to select clients as more leading name banks including Société Générale announce and launch their own digital asset servicing offerings
  • OECD launches global Crypto-Asset Reporting Framework; EU extends Russia crypto sanctions; Basel Committee crypto reserve pushback continues; Coinbase partners with Google and continues service expansion; digital Euro plans updated

Major Digital Asset Developments

        EU ratifies MiCA, and TFR is Approved
Following provisional agreement in July by the European Parliament and Council, the text of the Markets in Crypto Assets Regulation (MiCA) has been finalised and the bill has been ratified. The lawmakers of each European member state voted 28 to 1 in favour of the new laws, which are expected to enter into force within 18 months after publication in the Official Journal of the European Union (OJEU), slated for next spring. The regulatory package earmarks the first multi-jurisdictional approach to regulating crypto assets, as well as what it terms Crypto Asset Service Providers (CASPs). For an overview of MiCA’s scope, please see our previous newsletter.
Soon after the MiCA deal was reached, the independent – but very much related – Transfer of Funds Regulation (TFR) was also preliminarily agreed. In keeping with the anti-money laundering expectations set by Financial Action Task Force Recommendation 16 and supported by MiCA, known commonly as the Travel Rule, the EU’s Civil Liberties Committee confirmed that the tracing of cryptocurrency transfers remains crucial to preventing money laundering and fraudulent activity. As such, information on the source of assets and the beneficiary are to ‘travel’ together with the transaction instruction itself, which is to be stored and monitored by both sides of the exchange. CASPs such as regulated exchanges would be required to provide this information to the competent authorities if required. Furthermore, much to the concern of some crypto industry insiders and commentators, there will not be a minimum threshold or exemption for low-value transfers, as originally proposed, which means that all transactions that interface with or flow through a regulated/hosted wallet will be subject to scrutiny. Importantly, this will not apply for the time being to private/unhosted wallets, unless they interact with hosted wallets managed by a regulated CASP.
Coinbase CEO Brian Armstrong first responded to the initial proposal in April 2022, articulating his belief that this goes against the EU’s work to be a global leader regarding privacy (Cointelegraph). With the low-value exemption removed in the final MiCA text, this concern has been heightened. Beyond privacy, a further issue is that this measure will dramatically increase compliance costs for regulated entities and banks, which Armstrong further suggests may not even be able to comply from a cost or technical perspective. There is a chance that the parameters of the TFR could change given the continued pushback and the technical challenges, though given the concerted effort to tackle AML this seems unlikely. Still, the technical aspects of the text will need to be approved by the Economic and Monetary Affairs and Civil Liberties and Justice Committees and the EU Parliament before it can enter into force.

SWIFT Forges Ahead with Blockchain Development and Integration
The Society for Worldwide Interbank Financial Telecommunications (SWIFT) has announced a number of recent trials, experiments, and product enhancements aimed at reaffirming its role in the broader financial system. Recent projects have included a pilot in which it successfully implemented a common framework that was able to link asset tokenisation systems between Central Securities Depositories (CSDs) and Global Custodians. This was completed in partnership with Clearstream, Northern Trust, and SETL, a DLT technology and settlement platform. The pilot successfully demonstrated the ease with which tokenised assets, which included bonds and equities, could be issued and settled on a delivery-versus-payment basis (DvP), as well as redeemed, with settlement undertaken using fiat payment systems as well as with a Central Bank Digital Currency (CBDC).
SWIFT is also exploring the concept of interoperability, the ability to integrate traditional finance with native blockchain systems that do not necessarily easily communicate with one another today. Through a partnership with Chainlink Labs, a leading cross-chain interoperability protocol, the Cross-Chain Interoperability Protocol (CCIP) proof of concept is expected to enable SWIFT to instruct on-chain token transfers across all blockchain environments which, if successful, would mean that public blockchains could, subject to regulatory approval, be used to facilitate digital asset servicing and transfers of assets as well as securities.
BNY Mellon Switches On Crypto Custody
Just over a year and a half since it first announced its intention to build a multi-asset digital platform (BNYM) to service bitcoin and other digital assets, last week BNY Mellon went live with the first elements of its much anticipated solution. Select institutional clients are being offered access to bitcoin and ether on its new platform, with the intention to roll this out to a wider audience over time, much like Blackrock’s approach in partnership with Coinbase (Coinbase) unveiled in August this year. This development comes at a time when numerous high-profile traditional banking, investment and infrastructure organisations are similarly releasing their own solutions to meet the needs of the rapidly growing digital assets industry. In the last year alone, Société Générale (SG Forge), BBVA, CACEIS, State Street, Citigroup, Nomura (Komainu), Nasdaq, BlackRock, DBS, Google, Invesco, Standard Chartered (Zodia), BNP Paribas, Schroders, Northern Trust, Bank Itaú, Deutsche Bank, ANZ, J.P. Morgan, U.S. Bank, Goldman Sachs, Commerzbank, Clearstream, and SIX (SIX Digital Exchange), among many others, have all announced or launched their digital asset solutions.
Legal and regulatory agency pressures, particularly in the US, have in part limited the flow of investment and activity in the institutional end of the sector. Banks have found it increasingly difficult to meet customer demands for crypto asset solutions, as articulated by State Street (see previous newsletter, first item) last month, primarily as a result of the SEC’s Staff Accounting Bulletin 121 (SEC) which expects banks to hold clients’ crypto assets as liabilities on their balance sheets, resulting in significantly increased regulatory capital requirements. Further, the Bank for International Settlements has continued to propose punitive capital requirements for banks and credit institutions which are also receiving industry-wide pushback. That said, the momentum is clear, and with BNY Mellon now firmly involved in supporting the ecosystem, and other industry behemoths firmly on its heels, it may well lead to a race for control between the global custodians and leading FinTechs such as Coinbase who have hitherto stolen a march on their traditional counterparts. This may too lead to a turnaround in fortunes for the digital asset market as a whole, which has been struggling much like most asset classes due to the tumultuous macro environment but also due to the dampening pressures applied by poorly-applied or delayed regulatory policies.

Other News and Links

OECD Releases New Global Tax Reporting Framework for Crypto Assets (CoinDesk)
The Organisation for Economic Co-operation and Development (OECD) has released a tax reporting framework for crypto assets. The Crypto-Asset Reporting Framework (CARF) was presented to the G20 last week, and attempts to address how crypto assets should be considered in context of the G20’s Common Reporting Standard (CRS), designed to foster greater global transparency and eliminate tax evasion.
  Uzbekistan Introduces Monthly Fees for Cryptocurrency Companies (Bitcoin.com)
A new law has been adopted in Uzbekistan which requires digital asset service providers and cryptocurrency miners to pay monthly fees to the state depending on the service performed. Exchanges will reportedly be expected to pay as much as USD 11,000 per month, with failure to pay resulting in the suspension of their licences. Miners will be required to pay approximately USD 270 a month, while custodians will benefit from the lowest fee of approximately USD 135 per month.
UK Shuts Down Temporary Crypto Company Licensing Program (CoinDesk)
Following Copper Technologies’ retraction of its attempted registration with the Financial Conduct Authority (FCA), and Revolut’s successful application last month, the Temporary Registration Regime (TRR) has now come to an end. Subsequently, any and all firms looking to engage with certain types of crypto assets, or provide services for them, is required to seek full FCA registration.
EU Issues Bitcoin, Crypto Ban on Russia with New Sanctions (Bitcoin Magazine)
The EU has doubled down on its crypto sanctions against Russia by prohibiting the transfer of crypto assets from Russian-based cryptocurrency wallets. This comes a month after the Russian Ministry of Finance conceded that cryptocurrencies are needed to support its cross-border settlement needs.
TRON Becomes Legal Tender in Dominica (CryptoSlate)
The Commonwealth of Dominica has legalised the use of the TRON blockchain’s native tokens as a medium of payment in the country, in order to boost tourism as well as better position it within the context of an emerging global digital economy.
France Approves its Third-Biggest Bank to Operate Digital Asset Services (The Block)
Société Générale’s subsidiary, SG Forge, has received regulatory approval from the French financial markets regulator, Autorité des Marchés Financiers (AMF), to operate as a digital asset service provider (DASP), offering custody and exchange services.
Crypto Exchange Binance Receives Licence to Operate in Kazakhstan (CoinDesk)
Industry Pushes Back Again on Basel Committee’s Crypto Reserve Measures (Finextra)
For the second time, the Bank for International Settlements’ Basel Committee on Banking Supervision has received further push back from industry associations including the Global Financial Markets Association, the Futures Industry Association and the International Swaps and Derivatives Association regarding its second consultation document published on 30 June on the ‘prudential treatment of cryptoasset exposures’. In 2021, the Basel Committee issued a proposal – largely viewed by the industry as unviable and even punitive – to require banks to reserve capital to cover the whole value of cryptocurrency holdings. Following stiff resistance, as we reported last November, the BIS withdrew that model and went back to the drawing board. The second proposal appeard to take a more refined and pragmatic approach, however, it has continued to be met with stiff resistance by numerous industry groups who argue yet again that the rules would reduce, and in some cases ‘preclude banks from utilising the benefits of distributed ledger technology (“DLT”) to perform certain traditional banking, financial intermediation and other financial functions more efficiently.’ Significant to the proposal is the idea of exposure limits to Group 1a/b (akin to traditional assets or those with effective stabilisation mechanisms, i.e. stablecoins) and Group 2a/b type crypto assets (unbacked crypto assets such as cryptocurrencies, as well as other assets that are not covered under Group 1). However, the proposal does not, according to the associations, take into account hedging that is often performed by financial institutions to limit their short and long term exposure. As such, they would still be subject to a 100% capital charge for Group 2 assets, which for all intents and purposes are the predominant digital asset type in circulation today, and those most in client demand.
Coinbase Gets Singapore Digital Payment Token License (CoinDesk)
Coinbase Expands Services in Australia, Calling Country a ‘Priority Market for Us’ (CoinDesk)
Coinbase Commences Partnership with Signature Bank to Provide Real Time Settlement via Signet (Business Wire)
Coinbase Hires Fintech Executive to Lead European Expansion (Bloomberg UK)
Germany’s 2nd Largest Bank DZ to Launch Crypto Custody (Ledger Insights)
Google Selects Coinbase to take Cloud Payments with Cryptocurrencies and Will Use Its Custody Tool (CNBC)
Google is set to enable certain clients to pay for cloud services using digital currencies, reportedly as soon as early next year. It has appointed Coinbase (NASDAQ: COIN) to support it with the payment process and is also considering Coinbase’s Prime services for trading and custody. With reciprocity in mind, Coinbase is said to be moving some of its applications from Amazon’s Web Services to Google’s cloud.
Paxos Wins Custody Deal for Fidelity, Schwab-backed Digital Asset Exchange EDXM (Ledger Insights)
Custodian Anchorage Adds to Asia Push with Batch of Institutional Crypto Partners (CoinDesk)
JPMorgan and Visa Link Blockchain Payment Networks (Finextra)
J.P. Morgan (JPM) and Visa are due to establish a link between their proprietary blockchain networks, Liink and B2B Connect respectively, with Visa expected to benefit from JPM’s account validation tool, Confirm.
SIX Integrates CryptoCompare’s Cryptocurrency Data Feed (Finance Feeds)

Key: Legal/Regulatory             Technology            Ecosystem              Markets 

CBDC Corner

Progress on the Investigation Phase of a Digital Euro (European Central Bank)
A digital Euro will not be released until at least 2026. It will come with restrictions designed to slow the disintermediation of banks through conversions of bank deposits into CBDC holdings, and with an interest structure that disincentivises holding high digital Euro balances.
India Preps Digital Rupee Pilot (Finextra)
RBA and Digital Finance Cooperative Research Centre White Paper: Australian CBDC Pilot for Digital Finance Innovation (Reserve Bank of Australia)
Project Icebreaker: Central Banks of Israel, Norway and Sweden Team Up with the BIS to Explore Retail CBDC for International Payments (Bank for International Settlements)
Anchors and Catalysts: Central Banks’ Dual Role in Innovation – Speech by François Villeroy de Galhau, Governor of the Banque de France (Bank de France)
In this speech at the Conference on Opportunities and Challenges of the Tokenisation of Finance in Paris, the Banque de France announced wholesale CBDC projects to improve CBDC liquidity through automated market makers in DeFi markets and to issue and trade tokenised bonds.
The Banque de France has also joined a consortium of 14 banks and market infrastructures launched by SWIFT to conduct a new CBDC experiment for interbank settlement purposes.
Innovation in Post Trade Services – Opportunities, Risks and the Role for the Public Sector − Speech by Sir Jon Cunliffe (Bank of England)
The post-trade sector could see huge consolidation and disintermediation as smart contracts operated by single centralised or decentralised entities replace custodians, exchanges, CCPs and CSDs, removing settlement risk but reducing the ability to correct erroneous transactions and increasing liquidity risk. The FMI Sandbox being launched by the Bank of England, Financial Conduct Authority and HM Treasury will focus initially on testing DLT securities settlement systems and their integration with trading platforms.

Thomas Murray Digital

Andrew Wright | Hugo Jack

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.

Asset Managers Move Into Digital Assets; CBDCs Could Be ‘Holy Grail’ of Cross-border Payments

Thomas Murray Digital Newsletter

CBDCs: A Holy Grail for Cross-Border Payments? (Public Domain)

BlackRock, Charles Schwab and Abrdn have joined the likes of Fidelity and Schroders in moving into the digital asset sector through tie-ups with Coinbase and Archax, and the launch of a new crypto thematic index and associated exchange-traded fund. Meanwhile, the European Central Bank believes that CBDCs could solve the centuries-old challenge of establishing a cross-border payment system that is ‘cheap, universal, and settled in a secure settlement medium’.

Digital Asset Developments

      

      		Asset Managers Move into Crypto in Numbers
Prominent asset management firms including BlackRock, Abrdn and Charles Schwab have moved en masse in recent days with tie-ups and new services that extend access to cryptoassets to more institutional and retail investors. These names join the likes of Fidelity and Schroders in entering the digital asset space.
  • Last week, Coinbase announced that it has been selected by BlackRock to enable its clients to access crypto trading and custody via Coinbase Prime (Coinbase). Clients will be able to access cryptoassets through Aladdin, Blackrock’s investment management platform, starting with bitcoin. Clients of the USD 21.6 trillion investment platform will be able to manage their exposure to digital assets directly from their existing accounts, with a holistic ‘portfolio view of risk across asset classes.’ BlackRock has also now launched a bitcoin private trust for institutional investors (BlackRock), designed to track the price of the oldest cryptoasset.

CPMI Consults on Increasing PvP for FX, Supported by DLT Solutions
The Bank for International Settlements’ Committee on Payments and Market Infrastructures (BIS CMPI) has launched a consultation (Ledger Insights) on ways to lower global financial stability risks arising from FX transactions by increasing payment-versus-payment (PvP) settlement. The FX market has the largest turnover, and bank exposures to FX risks in some countries such as the UK, Hong Kong and Singapore exceed their regulatory capital requirements. The aim is to reverse the decrease in FX transactions with PvP protection arising from increased trade with emerging markets that lack PvP abilities. Four of the ten proposed solutions are based on DLT, and one is Citi’s Regulated Liability Network concept (Citigroup).
Santander Brazil Launching Retail Crypto Offering and Tokenising Traditional Assets
Santander Brazil is to launch a retail crypto offering (Ledger Insights), citing significant client demand for the asset class. CEO Mário Leão added in the bank’s quarterly earnings call last week that it intends to use blockchain to tokenise traditional assets such as debt securities. This announcement comes a month after Latin America’s largest bank, Itaú Unibanco, launched its tokenisation platform and digital asset custody solution. The solution is part of a new unit, Itaú Digital Assets (Coindesk) and will be available to institutional clients first, with a retail version expected towards the end of 2022.
US Treasury Sanctions Cryptocurrency Mixer Tornado Cash; Dutch Authorities Arrest Developer
The U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) has sanctioned Tornado Cash (US Department of the Treasury), a protocol used to ‘mix’ crypto transactions to provide transaction anonymity. OFAC asserts that Tornado has been used to launder over USD 7 billion of stolen cryptocurrencies. The move raises the long-standing question of the liability of platform operators for the uses to which their services are put, just as regulators continue to debate the responsibility of other services such as Facebook or YouTube. Ethereum founder Vitalik Buterin has stated that he used Tornado Cash to donate funds to Ukraine (Forkast) in order to protect the recipients. In a development that has implications for the free speech rights of software publishers, Dutch authorities have today arrested the developer of the open source software behind Tornado Cash (Cointelegraph) on suspicion of money laundering.

Reserve Bank Innovation Hub: Interoperable DLT POC Closure Report
The Reserve Bank of India’s Innovation Hub (RBIH) has reported on the results of a proof-of-concept exercise (Reserve Bank of India) to move domestic trade finance processes – revolving around Inland Letters of Credit (LCs) – onto a distributed ledger platform. RBIH worked with a consortium of 11 banks and other fintech startups on the test, which was conducted using technology from IBM Hyperledger, R3 Corda, and Billon’s FIS. Following successful results, it now plans to facilitate the adoption of DLT ‘at scale’.

Crypto Takes a New Hit as Thousands of Solana Wallets Hacked
Security flaws in wallet software used to store assets for the Solana ecosystem were exploited to steal over USD 5.2 million of value from more than 7,900 wallets. Security researchers suggested that the Slope wallet was storing users’ seed phrases – used to create their private keys – in plain text (The Block) on a centralised server that was compromised. This follows an exploit of the Nomad ‘bridge protocol’ (Bloomberg) that transfers cryptoassets between blockchains that led to assets worth almost USD 200 million being lost. These stories, on top of several other hacks of similar cross-ledger bridge services that have led to estimated losses totalling over USD 2 billion this year (Chainalysis), highlight both the complexity of securing DeFi protocols and the dangers of relying on untrusted centralised services rather than regulated custodians.

News Links

SEC’s Gensler Wants Crypto Exchanges to Segregate Market Making, Custody (Ledger Insights)
Gary Gensler, Chair of the SEC, has proposed that crypto exchanges should segregate market making from custody activities, as is the requirement for traditional securities markets. He argues that clients are not expected to hand their assets to the New York Stock Exchange, and given that private keys are a proxy for ownership it would be more appropriate for the assets to be kept with a third party digital asset custodian.
Joint Statement on the UK-U.S. Financial Regulatory Working Group (US Department of the Treasury)
On 21 July, the UK-US Financial Regulatory Working Group convened and reconfirmed their commitment to addressing the cryptoasset market, with a focus on broadening their collaboration – and in particular strengthening the ‘regulatory outcomes for stablecoins across jurisdictions.’
UK Proposes Changes to Personal Property Laws Around Digital Assets (Ledger Insights)
The UK’s Law Commission of England and Wales has published a consultation paper suggesting that the law needs to be updated to account for the unique characteristics associated with cryptocurrencies, NFTs, and the metaverse more broadly. The objective would be to introduce the right legal foundation, in order to limit the potential impact of imposing existing structures on these new forms of assets that might stifle their development.
UK Legal Taskforce Probes Rules Underpinning Securities Issuance on Blockchain (Finextra)
More regulatory consultation in the UK, where the UK Jurisdiction Taskforce (UKJT) is examining support in English law for digital securities models in an effort to address concerns that the legal basis for digital securities in the UK is less supportive than that in other countries.
Crypto Inquiry 2022 (CryptoUK)
The UK’s Crypto & Digital Assets All-Party Parliamentary Group (APPG) has announced details of its assessment of the UK’s crypto and digital assets sector. It seeks feedback from the wider community on current approaches to regulation, the UK government’s plan for the country to become a crypto hub, the role of regulators, CBDCs, and investor protection.
Celsius Facing Legal Action by Aggrieved Custody Customers over $180M Deposit (Cryptoslate)
Bankrupt crypto lender Celsius is facing a lawsuit from a group of 400 customers of its custody service – distinct from its Earn programme, under which customers relinquished title to their crypto – whose assets remain stuck in the network. Celsius’s lawyers are resisting requests for refunds and claiming that even title ownership of deposited assets may not assure recoverability of funds in Celsius’s bankruptcy case. This is a further chapter in the debate on the status of crypto following the SEC’s guidance that custodians should move client assets on-balance sheet pending clarification of this issue in law (Thomas Murray Digital).
SEC/CFTC Proposed Amendments to Form PF (Securities and Exchange Commission)
In a joint proposal by the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), there are to be New Crypto Reporting Rules for Large Hedge Funds (The Block) that would oblige qualifying hedge funds – reported to be those with more than USD 500 million of net assets – to provide information to the regulators that pertain to the hedge funds’ investment strategies, counterparty exposures, and trading and clearing mechanisms.
Over 70k XRP Holders Join Class Action Lawsuit Against SEC (Cryptoslate)
Tens of thousands of holders of Ripple’s token from all around the globe have now joined the challenge to the SEC’s assertion that XRP represents an unlicensed security token, in an alleged expansion of the principles of the Howey Test.
   EBA Warns Talent Shortage Will Hamstring Crypto Regulation (Finextra)
The European Banking Association (EBA) has warned that difficulties in attracting and retaining talent will limit regulators’ ability to supervise the digital asset sector. This follows a multitude of high-profile exits of leading regulators and industry experts into the clutches of the cryptoasset industry.
   Zodia Custody Gets Approval to Provide Cryptoasset Custodian Services in Ireland (Irish Times)
Zodia Custody has received approval from the Irish regulator to provide cryptoasset custody in the country, making it one of the first licensed Virtual Asset Service Providers (VASPs) there and the first dedicated custodian. As CEO Maxime de Guillebon articulated in a LinkedIn post, this will mean that Irish authorised Alternative Investment Funds will now be able to take advantage of institutional-grade safekeeping.
   Binance US Delists Token After SEC Labels It a Security (Blockworks)
Following the SEC’s categorisation of several crypto projects as securities, Binance US has delisted one, Flexa Network’s Amp token, that it previously supported on its exchange.
   Pando Asset Lists First Crypto ETP on SIX Swiss Exchange (Coin Speaker)
The Pando Asset Crypto 6 ETP offers investors the opportunity to participate in the performance of a basket of digital assets consisting of the largest cryptoassets by market capitalisation.
Ripple Casts Eye Over Bankrupt Crypto Lender Celsius (Finextra)
In other Ripple news, the firm has registered an interest with the bankruptcy court in acquiring assets from failed crypto lender Celsius.
Major Insurers Pull the Plug on B3i Insurance Blockchain Consortium (Ledger Insights)
Swiss insurer B3i is to close after its consortium of over twenty insurers and reinsurers failed to commit sufficient funds to its latest investment round, triggering its insolvency.
Bitcoin Fanatic Michael Saylor Steps Down as MicroStrategy CEO (Decrypt)
Saylor takes on Executive Chairman role in order to devote exclusive attention to the firm’s crypto activities, leaving management of the original software business to former company president Phong Le, who assumes the CEO role.
Virginia Pension Fund Invests in Crypto Lending in Bid to Boost Returns (Financial Times)
Virginia’s Fairfax County Retirement Systems Pension Fund is reportedly investing in crypto lending markets following earlier investments in cryptocurrencies, made alongside the Fairfax County Police Officers Retirement System. Its new venture into ‘yield farming’ entails lending assets in return for a fixed stream of payments, akin to securities lending. Katherine Molnar, CIO of the police retirement fund, cited the recent bankruptcy or withdrawal of other lenders as a factor that makes returns from the activity attractive.
Binance and Mastercard to Bring Streamlined Crypto Payments to Argentina (Blockworks)
Sygnum Bank Expands Bank-grade Staking with Cardano (ADA) (Sygnum Bank)
The leading Swiss digital asset bank has expanded its blockchain capabilities to support clients who wish to wish to earn rewards by staking their ADA tokens, the native token of Cardano’s Layer 1 protocol.
Bank of America “Disagrees” that Crypto Has No Intrinsic Value (AltFi)
In the July edition of its Global Cryptocurrencies and Digital Assets report, Bank of America contradicts the Governor of the Bank of England’s recent comments that the crypto industry has no intrinsic value, referring to the GBP 9 billion in transaction fees that blockchains have generated to date, in addition to network validation services and NFT transactions.
Ex-PwC Crypto Head Launches $75m Hedge Fund for Institutional Investors (FNLondon)
Henri Arslanian has launched Nine Blocks Capital Management in Dubai with backing from other hedge funds.
ASX Calls In Accenture to Assess CHESS Replacement Project (Finextra)
The Australian Securities Exchange (ASX) has engaged Accenture to assess the gaps in the current development plan and draw up a new timeline for the project’s completion. Originally slated for April 2021, the replacement for the aging CHESS system has suffered several setbacks. Current estimations suggest it will be delayed until late 2024.