Merge Ahead; Billions Flow into Crypto Funds; ECB and Fed Look at Licensing; Tether’s Fortunes Change

Thomas Murray Digital Newsletter

The Merge (
The Merge (

In this issue:

  • Exploring the implications of the Ethereum blockchain’s upcoming major upgrade, known as ‘The Merge’.
  • Billions more dollars are going into cryptoasset, blockchain and metaverse asset trading and venture capital funds, including those run by Steve Cohen, Brevan Howard, Invesco, Andreessen Horowitz, CoinFund, and Temasek.
  • In regulatory news, the European Central Bank seeks to head off more country-level differences from emerging in the regulation of crypto-related activities by banks – and corresponding regulatory arbitration opportunities – by looking at introducing an EU-wide licensing regime. In the US, the Federal Reserve opens the door for non-bank financial institutions to access master accounts and payment services.
  • The beleaguered Tether stablecoin has seen a small reversal of fortunes as it appoints a more prominent audit firm to attest to its reserves and divests the commercial paper holdings that they currently contain, while its decision not to block addresses related to the sanctioned Tornado Cash crypto mixer is at odds with that of rival Circle.

Major Digital Asset Developments

Ethereum Blockchain Upgrade Approaches, Reducing Energy Use and Making Ether a Deflationary Asset
Ethereum, the second largest public blockchain network by market capitalisation and most popular as a host to thousands of crypto tokens, is due to migrate to a new Proof-of-Stake (PoS) protocol on or around 15 September. Staking entails depositing ether and using it in a voting mechanism to validate transactions, with rewards for correct behaviour and penalties for dishonesty. This system makes it economically unviable for bad actors to attempt a ‘51% attack’ to take control of the blockchain. The upgrade will replace the current Proof-of-Work system that is similar to that used by Bitcoin and a number of other first-generation blockchain projects. The Merge (, as the upgrade is commonly known (borrowing a term from software engineering), is being heralded as an important step that helps to solve elements of the ‘blockchain trilemma’ of decentralisation vs scalability/speed vs security (CertiK). Until now, the Ethereum blockchain has suffered from low transaction throughput and high gas (transaction) fees despite, or as a result of, its great popularity as the most popular platform for tokens and smart contracts. By moving to PoS, Ethereum expects to be able to introduce a number of measures to improve its speed and usability, adding scaling solutions such as Zero-Knowledge Succinct Non-Interactive Argument of Knowledge, aka zk-SNARKs (Consensys) and sharding ( Additionally, PoS will also offer greatly improved green credentials, as the new model replaces the need for the mining of new tokens with staking rewards, and is estimated to reduce electricity use by 99.95%. The Merge will see the existing execution layer that is used today (known as Mainnet) adopt a separate consensus layer called the Beacon Chain, which is currently running in parallel in the background. Concluding a successful merge, the Mainnet will act as the consensus engine for all network data, including execution layer transactions and account balances. At the same time, the issuance rate of new ether tokens will drop by 90%. This, coupled with tokens that are ‘burned’ as transaction fees, deducted as penalties from validators’ stakes, or simply lost, should combine to make the available supply of ether deflationary (Pantera Capital) as new token issuance will drop to about 1,600 ETH per day for staking rewards, which is approximately equal to the amount of ETH burned as base transaction fees.
ECB Supervision Newsletter: Licensing of Crypto-asset Activities
Following on from the draft Markets in Crypto-Assets (MiCA) legislation (Finextra) and the latest proposals on capital adequacy from the Basel Committee on Banking Supervision (Bank for International Settlements), the European Central Bank has announced a framework for the licensing of banks on a pan-European Union basis (European Central Bank). The approach will be similar to existing requirements in Germany. The move is an attempt to avoid fragmented national-level approaches that are already emerging within the EU (CoinDesk). The framework is based on the Capital Requirements Directive (CRD) and will examine the risks and capabilities of providers of crypto services, including their business models, internal governance, and risk management practices – which include cybersecurity, AML/CFT and fraud risks – under ‘fit and proper’ assessments. A workstream of the Single Supervisory Mechanism (SSM) will report more broadly on banks’ digital transformations, including their adoption of crypto technologies, by the end of 2022.
More Asset Managers Set Up Crypto-related Funds
Hedge fund mogul Steve Cohen – former founder of insider-trading fund SAC Capital Advisors and now running Point72Asset management – is reportedly establishing a cryptocurrency-only investment firm (Blockworks). It is believed the firm will trade spot cryptocurrencies as well as digital asset derivatives. It has also been reported that BH Digital, Brevan Howard’s crypto-focused fund, raised over USD 1 billion on its launch earlier this year (Blockworks). BH Digital claims the figure exceeds the capacity of the current cryptocurrency market for liquid investment, leading it to invest some of its capital in VC deals and to leave some uninvested for the present time. Its VC activity goes up against that of Andreessen Horowitz, which raised USD 4.5 billion earlier this year for its own fund called a16z (Axios). Meanwhile CoinFund, a VC firm that claims already to have invested over USD 1 billion in over 100 crypto companies since 2015, has raised USD 300 million to start a new web3 fund, CoinFund Ventures I (Yahoo! Finance). Invesco – with USD 1.6 trillion AuM – launches its Invesco Metaverse Fund (Finextra), an actively managed approach to the ‘metaverse value chain’ that it says could contribute USD 1.4 trillion to the global economy by 2030. It follows similar funds launched by Axa, Fidelity and HSBC. Singapore’s Temasek has also invested SGD 100 million in convertible bonds issued by Animoca Brands (Blockworks), a metaverse company that owns properties such as The Sandbox and Decentraland.
Tether Moves Towards Greater Transparency, Reduces Commercial Paper Holdings
Tether, the embattled issuer of what remains the most widely adopted stablecoin, has appointed BDO Italia (CoinDesk) to succeed MHA Cayman in producing attestation reports on the reserve assets that back its tokens. It will also move from a quarterly to a monthly publication schedule. The move marks a further step towards a full audit of those reserves, the lack of which – together with alarming reports of the quality of assets that make them up – has become a major reputational risk for the firm in past months, as well as a cause of potential financial stability concerns should the widely-used stablecoin fail. Tether has cited the reluctance of major, reputable accounting firms to take on crypto businesses as clients as the main factor in its lack of progress towards full transparency. It has also promised to assuage concerns by reducing its once-dominant form of backing, commercial paper, to zero (BeInCrypto). It stated that such holdings would be reduced to USD 3.5 billion by the end of July (out of a total issuance at the time of over USD 66 billion) from a March figure of USD 20 billion. It has also denied that it holds any Chinese commercial paper or that it remains exposed to Celsius Network or Three Arrows Capital. Tether has stated that it expected commercial paper holdings to decline to just USD 200 million by the end of August and for them to be eliminated from its balance sheet completely by year end (CoinDesk).
Federal Reserve Board Announces Final Guidelines for Reviewing Requests to Access Fed Master Accounts and Payment Services
The US Fed is considering ways to open up the Central Banking system to ‘novel financial institutions’ including crypto banks, by providing access to its master accounts. The Federal Reserve Board has published final guidelines (Federal Reserve), following the 2021 publication of initial proposals, on how Reserve Banks should transparently and consistently evaluate fintechs’ requests for access to their master accounts and payment services. The result is a three tiered structure (Finextra) comprising 1) banks that are federally insured, 2) banks that are not federally insured but still subject to prudential supervision by a federal banking agency, and 3) firms that are neither insured nor subject to federal supervision, but that may be set up in jurisdictions such as Wyoming that have introduced laws for ‘special purpose depository institutions’ (SPDIs) (Wyoming Banking Division) such as digital asset bank custodians Custodia Bank and Kraken Bank, which may be able to access these accounts in future without an intermediary. Those holding federal deposit insurance will be subject to fewer additional requirements than those regulated by federal banking agencies, and those engaging in ‘novel activities’ or for which regulations are still under development will be subject to the most stringent checks. Some involved in the consultation process have suggested that tier 2 and 3 institutions should be held to the same standards as federally insured businesses. Custodia (formerly Avanti) and Kraken Bank, also established in Wyoming, are reported to have received routing numbers earlier this year, however neither have received regulatory approval within the mandatory one-year deadline and subsequently Custodia is suing the Fed (Pymnts).

Other News and Links

Federal Reserve Board Provides Additional Information for Banking Organizations Engaging or Seeking to Engage in Crypto-asset-related Activities (Federal Reserve)
Mindful of the wave of interest from banks in supporting digital assets, the Federal Reserve Board has released additional information to the market designed to define for FRB-supervised banks (including those with USD 10 billion or less in consolidated assets) the steps they should take prior to engaging in crypto-asset-related activities. These include ensuring the bank is legally permitted at the state and federal level to do so, and that is has adequate systems and controls in place to mitigate operational risks associated with loss of assets, consumer protection, AML and CFT (Federal Reserve).
US Regulator ‘Improperly’ Pushing Banks to Avoid Serving Crypto Companies, Lawmaker Says (CoinDesk)
Senator Pat Toomey claims that he has received complaints that the Federal Deposit Insurance Company (FDIC) is deterring banks from working with cryptocurrency-related businesses under an extension of an ostensibly shuttered (Politico) programme called Operation Choke Point (Wall Street Journal) that was initially intended to limit the banking of ‘questionable financial ventures’ such as payday lenders and other legal but controversial businesses such as gun sellers. FDIC regional offices are said to have been sending letters to banks asking them to limit their relationships with crypto businesses, whether by providing them with banking services or by partnering with them to provide bank customers with access to crypto trading. These actions are consistent with the FDIC’s open letter (FDIC) requiring its supervised entities to discuss any crypto-related activities with it prior to their commencement, and a new batch of reminder letters from the Federal Reserve to banks that it oversees to do the same.
Still Waiting: SEC Delays VanEck’s Third Bitcoin Spot ETF Application (Cointelegraph)
The SEC has once again deferred a decision on an application by VanEck to create a Bitcoin spot ETF. The decision is now due by 11 October. VanEck made its first application in 2017, but the SEC continues to cite lack of faith in the cryptocurrency markets and their ability to resist manipulation as reasons for denial. This time around, VanEck claims that American investors are taking advantage of the now well-established range of spot ETFs available over the border in Canada.
Canadian Securities Regulators Expect Commitments from Crypto Trading Platforms Pursuing Registration (Canadian Securities Administrators)
The Canadian Securities Administrators (CSA) expects crypto exchanges to agree, publish and abide by a set of undertakings to be permitted to continue operations in the country pending their full compliance with  Canadian securities laws and registration with (i.e. approval by) the CSA. The first undertakings, from Coinsquare Capital and, were published earlier this month.
EU Considers New ‘Anti-money Laundering Authority’ (Blockworks)
The Council of the European Union looks set to introduce a new Anti-Money Laundering Authority (AMLA) that would, according to the proposal, ‘boost the efficient functioning of the Anti-Money Laundering and Countering the Financing of Terrorism (AML/CTF) framework of the Union’. The proposal, first issued last year as an amendment to the current AMLD6, looks to help the EU combat money laundering but will also provide new powers to directly supervise types of credit and financial institutions such as digital asset service providers.
Australian Securities & Investments Commission Report 735 – Retail Investor Research (Australian Securities & Investments Commission)
ASIC has published results of a survey of over 1,000 retail investors conducted in November 2021. 44% reported having cryptocurrency investments, making it the second-most common asset type after Australian equities. A quarter of investors indicated that they only held cryptocurrency investments. Despite their unregulated and volatile nature, only 19% of cryptocurrency holders considered that they own risky or speculative products. ASIC raises concerns over limited state ability to protect retail investors from risk and calls for increased regulation.
Abu Dhabi to Launch Blockchain and Virtual Assets Strategy (Abu Dhabi Government Media Office)
The Abu Dhabi Blockchain and Virtual Assets Committee (ADBVAC) has been convened and held its first meeting under the Chairmanship of H.E. Mohamed Ali Al Shorafa, Chairman of the Securities and Commodities Authority (SCA) and the Abu Dhabi Department of Economic Development. The ADBCVAC’s goals are to develop strategy for virtual assets, including AML/CFT regulation, the building of a cryptoasset ecosystem for the UAE, investor protection, and custody risk. The UAE was put onto the Financial Action Task Force’s ‘grey list’ of jurisdictions subject to increased monitoring of AML/CFT risks earlier this year (Reuters).
New UCC Amendments to Establish Ground Rules for Blockchain Transactions and Crypto-Backed Secured Financings (JD Supra)
A joint committee of the Uniform Law Commission and the American Law Institute has published a draft amendment to the Uniform Commercial Code (Uniform Law Commission) that governs sales and other commercial transactions through most of the United States and its Territories. Among other updates, the draft explicitly covers digital asset transactions and in particular the use of crypto as loan collateral, with considerations of ‘how security interests in digital assets can be perfected’, an area of particular relevance to the current legal disputes surrounding the rights of various stakeholders in bankruptcy proceedings such as those of Voyager Digital and Three Arrows Capital. A new Article 12 also defines digital asset sub-classes, referring to the overall asset class as ‘controllable electronic records’ (CERs) which may extend in future beyond today’s DLT concepts.
 Qatari Government Consults on New Regulations for Blockchain Technology (Pinsent Masons)
The Government of Qatar has published a National Blockchain Blueprint (State of Qatar), a co-authored consultation by the Communications Regulatory Authority, Hamad Bin Khalifa University and Qatar University. It offers a roadmap for the development of blockchain in the country. Through a combination of regulation and innovation, Quatar plans to increase its domestic and foreign investment through the sector. Key requirements include an ‘efficient regulatory foundation’ that encourages user protection, innovation and adoption, oversight of cryptocurrencies and ICOs by Qatar’s Central Bank, and a new legal framework that would be enforced by the National Cybersecurity Agency. The consultation on the blueprint closes on 15 September, 2022.
South Korea’s Money Laundering Watchdog Flags 16 Crypto Firms for Operating Without Registration (CoinDesk) Secures UK Registration for ‘Cryptoasset Activities’ (Cointelegraph)
New Brazil Bill Wants to Tokenize Mined Gold on Blockchain (Cryptoslate)
Revolut Gets Regulatory Approval to Offer Crypto Services to its 17 Million European Customers (Finbold)
Vitalik Cheers Ethereum Community Push Back Over Harsh Canadian Crypto Rules (Cryptoslate)
Vitalik Buterin, co-founder of Ethereum, has been cheering on members of the Canadian crypto community who have been pushing back at Ontario’s increasingly restrictive crypto rules. The Ontario Securities Commission has implemented a CAD 30,000 buy-limit on most tokens in an attempt to protect crypto investors. The limits do not apply to a number of tokens including bitcoin, ether, litecoin and bitcoin cash. One prominent crypto author and commentator, Simon Dixon, has pointed out on Twitter that the rule does not take into account an individual’s net worth, and perhaps more concerningly creates a two-tier token system which goes against the remit of the regulator who is supposed to observe neutrality. The limits do not apply to residents of British Colombia, Alberta, Manitoba, or Quebec.
Class Action Lawsuit Blames Coinbase for Security Failures and Repeated Thefts (
A class action lawsuit coordinated by BraunHagey & Borden LLP (BHB) is alleging that breaches have led to plaintiffs’ losses through the ‘repeated theft of ordinary customer accounts’. It also claims that, despite high fees and commissions, Coinbase’s customer service processes subject consumers to a never-ending cycle of automated responses to complaints that have already been the target of regulatory fines. BHB claims that Coinbase must repay stolen funds under the Electronic Funds Transfer Act due to its role as an operator of custodial accounts and its claims of using bank-level security standards, despite any small print disclaimers to the contrary. Its latest 10-Q filing to the SEC states, ‘we are required to safeguard customers’ assets using bank-level security standards applicable to our wallet and storage systems, as well as our financial management systems related to such custodial functions.’ Coinbase is said to hold itself out as more secure than competitors but its claim to be ‘the only crypto exchange to have never been hacked’ is challenged as ‘false and misleading’, with BHB citing a breach targeting SMS-based authentication codes affecting over 6,000 users in 2021 (later compensated in full) that its says Coinbase admitted in a filing to the California Attorney General. Coinbase is also said to have acknowledged vulnerabilities allowing hackers to access and amend customer account details, leading to further hacks despite use of alternative two-factor authentication procedures.
Galaxy Digital Ends Agreement To Buy BitGo (Blockworks)
Galaxy Digital has walked away from its acquisition of BitGo, a leading digital asset custodian. That decision has led to an acrimonious war of words in which both sides are claiming that the other party failed to deliver on undertakings. Galaxy Digital suggested the acquisition process had been frustrating and that BitGo had failed to deliver satisfactory audited 2021 financial statements by a 31 July deadline. In response, BitGo claimed it had done so, and that it intends to hold Galaxy Digital ‘legally responsible’ for its decision to terminate the merger. It is seeking damages in excess of USD 100 million and/or a USD 100 million reverse break fee (TechCrunch) promised by Galaxy in March as an inducement for BitGo to extend the merger agreement. BitGo has pointed to Galaxy’s recent financial struggles (BitGo) as it reported a USD 554.7 million loss for the latest quarter, while its stock has also been struggling, dropping from a high of CAD 46.50 in April 2021 to a low of CAD 7.33 the day after Galaxy’s announcement to terminate the acquisition. Galaxy Digital is still pursuing a Nasdaq listing, pending SEC approval.
State Street Sees ‘Significant Opportunity’ in Tokenization (Blockworks)
State Street’s Nicole Olson, vice president of digital product development and innovation at the bank, indicates that tokenisation of traditional assets remains the custodian bank’s top focus for the coming years, as investors are reportedly demonstrating a growing interest in its potential to improve market efficiencies and increase accessibility to traditional assets, private assets and funds. In particular, Olson makes the point that tokenisation opens the door to more efficient processes for funds, increasing access to investors and distribution for the fund issuer. State Street has a partnership with Lukka to offer fund administration capabilities for digital assets including cryptocurrencies, a service which is currently being offered to State Street’s private fund clients.
SIX Digital Exchange Launches Ethereum Staking for Institutions (Ledger Insights)
Switzerland’s digital asset infrastructure, SDX, has announced plans to launch a non-custodial Ethereum staking service for institutions. The service will enable clients to generate yield from staking their holdings in ether, the token of the Ethereum blockchain, potentially extending to tokens held by their underlying clients. Staking forms part of SDX’s Web3 strategy which was announced in June this year (SDX). The service is expected to launch between 10-20 September, following the greatly anticipated Ethereum Merge, in which the blockchain moves from a Proof-of-Work protocol like Bitcoin to one of Proof-of Stake, which is currently anticipated for 15 September. The largest Ethereum mining pool, Ethermine, has also launched a staking service (Cryptoslate) enabling yield from deposits as low as 0.1 ETH, far lower than the 32 ETH minimum needed to become an independent validator.
Google Parent Alphabet Invested $1.5B into Blockchain Startups Since September 2021 (Cryptoslate)
Alphabet’s concentrated investments in four startups, including DapperLabs, comprised a quarter of a total of USD 6 billion invested by 40 public companies between September 2021 and June 2022. Its large bets have been followed by smaller but sizeable investments from BlackRock, Morgan Stanley, Goldman Sachs, Samsung, Microsoft, United Overseas Bank, and Citi.
Tether and Circle Stablecoins See Reversal of Fortune on Varying Tornado Cash Stances
Tether’s USD stablecoin has seen a 2.6% monthly uptick of nearly USD 2 billion in circulating supply while Circle’s rival USDC has fallen 2.1% over the period (Cryptoslate). The reversal in the prior trend of the past several months is linked to differing stances on the treatment of wallets linked to Tornado Cash, the recently-sanctioned crypto mixer. Circle has frozen over USD 75,000 in USDC tokens associated with 81 sanctioned addresses (Forkast). However, Tether has published a statement (Tether) saying that it will not act unilaterally and will await an order or a positive match to a name in a sanctions list before freezing funds, citing existing rigorous checks on inbound and outbound transactions, close cooperation with law enforcement agencies, and the risk of disruption to investigations to justify its stance.
Seven S. Korean Brokerages Plan to Start Crypto Exchanges Next Year: Report (CoinDesk)
Seven brokerage firms including Mirae Asset Securities and Samsung Securities have made preliminary applications to establish exchanges in the context of new President Yoon Suk-Yeol’s crypto-friendly stance, despite a crack-down by regulators following the collapse of the Terra algorithmic stablecoin.
Ripple Launches Crypto-enabled Enterprise Payments in Brazil with Travelex Bank (Finextra)
Brazil’s Travelex Bank has partnered with Ripple to use its On-Demand Liquidity (ODL) service – based on Ripple’s XRP payment token – to facilitate cross-border payments. The new service will ensure high speed and low cost, and remove the need to pre-fund capital in the market of remittance, and will begin with a corridor between Brazil and Mexico before expanding to further markets and use cases such as treasury and business payments.
Itaú to Trial DeFi for FX as Part of Brazil’s Central Bank Lab (Ledger Insights)
Blockchain Industry Workforce Grows 80% This Year, Study Shows (Bitcoinist)
Australian Securities Exchange Takes Step Towards Tokenized Asset Trading (Cointelegraph)
Zerocap, a digital investment platform, has successfully tested integration with ASX’s Synfini DLT settlement platform – distinct from the delayed CHESS replacement initiative – opening the door to the tokenisation and trading of traditional assets such as bonds, equities, funds and carbon credits. It aims to launch these services in the near future having received legal approval. The use of ASX’s platform is expected to increase confidence through reduced counterparty risk.
Mid-year Crypto Crime Update: Illicit Activity Falls With Rest of Market, With Some Notable Exceptions (Chainalysis)
Blockchain analysis firm Chainalysis has published an assessment of blockchain-based financial crime for the first half of 2021, highlighting a 65% year-on-year decline in the proceeds of scams to USD 1.6 billion, albeit largely correlated to the decline in cryptocurrency values. However, the firm also says that the number of fraudulent transactions has fallen to a four-year low, and none have netted anywhere near as much as large outlier scams in previous years. Darknet revenue is also down 43% year-on-year, driven by a sudden drop after the shutdown of Hydra Marketplace, a darknet site that had become the dominant player since the closure of the infamous Silk Road platform. These declines are offset by small increases in funds lost to hacks, largely of DeFi protocols.
DTCC’S Project Ion Platform Now Live in Parallel Production Environment, Processing Over 100,000 Transactions Per Day on DLT (DTCC)
DTCC’s R3 Corda-based settlement platform is now parallel processing bilateral equity transactions, with peaks of up to 160,000 transactions per day. DTC’s existing settlement system remains the ‘authoritative record’ for the present time. DTCC’s aim is to provide a voluntary transition option to the DLT system once its resilience and safety have been firmly established. The platform will support netted T+0, T+1, T+2 and extended settlement cycles. Future plans include expansion to other DTC activities and to central counterparty National Securities Clearing Corporation (NSCC).
‘Post-Quantum’ Cryptography Scheme Is Cracked on a Laptop (Quanta)
One of four supposedly ‘quantum-resistant’ cryptographic algorithms selected by the National Institute of Standards and Technology in a competition (National Institute of Standards and Technology) in early July has been cracked by two researchers on a laptop. The protocols were supposed to form the agency’s post-quantum cryptographic standard (National Institute of Standards and Technology). The algorithm, known as the supersingular isogeny Diffie-Hellman protocol (SIDH), uses the same elliptical curve theory that forms the basis for existing cryptographic protocols but in a novel way. Metadata necessary for the algorithm was exploited using an even more complex mathematical theorem to ascertain the way in which the data were encrypted. Subsequent research has reduced the possible speed of breaking encryption to just a few minutes.

Key: Legal/Regulatory             Technology            Ecosystem              Markets 

CBDC Corner

Fed Promotes FedNow as Alternative to CBDC and Updates Release Date to Mid-2023
US Federal Reserve Governor Michelle Bowman has claimed that a CBDC may not be necessary since many of the challenges that CBDCs are designed to solve, including 24×7 real-time payment and settlement, may be covered by the planned FedNow payment service (Federal Reserve). The Fed has also refined its 2023 target for the production rollout of FedNow to the May to July 2023 window, and has expanded its pilot test programme to over 120 organisations (Federal Reserve).
Tech Industry Consortium to Run CBDC Pilot with Sterling Stablecoin (Finextra)
The Digital Financial Market Infrastructure (DFMI) consortium has announced a test of retail CBDC use cases based on a live Sterling-denominated stablecoin under ‘Project New Era’ principles set out in a white paper (The Payments Association) authored by the Payments Association, Dutch payment infrastructure provider and Boston Consulting Group. With other DFMI members including IBM, Finastra, FinClusive, Ibanera, Mattereum, Trust Payments and Accomplish Financial on board, the pilot is also intended to expand to other jurisdictions.
Reserve Bank of Australia Says a Live CBDC Likely to be Wholesale (Ledger Insights)
Further to our coverage in our last edition of the Reserve Bank of Australia’s (RBA) initiation of a year-long CBDC research project that would cover both retail and institutional use cases (Thomas Murray Digital), the synopsis of a payment systems board meeting has revealed that there will be a particular focus on wholesale applications such as cross-border payments and securities settlement. These plans are in line with ASX’s ambitious but increasingly delayed plans for a DLT-based post-trade infrastructure (Finextra) and with Project Dunbar (Bank for International Settlements), a multi-CBDC cross-border payment project in conjunction with the Monetary Authority of Singapore and the central banks of Malaysia and South Africa overseen by the Bank for International Settlements.
Nigeria Cuts CBDC Fees and Enables USSD
The Governor of the Central Bank of Nigeria (CBN) has announced that Nigerians are able to transact with their eNaira wallets and open new wallets using Unstructured Supplementary Service Data (USSD) codes on their mobile telephones (Punch), enabling instant payments for merchants and consumers to any bank account. The Governor also announced in a speech that eNaira has been used for almost USD 10 million worth of transactions, and the app has been downloaded 840,000 times with 270,000 active wallets (CoinDesk) for the country’s population of about 200 million, about 40% of which is unbanked. However, in June – roughly 6 months on from eNaira’s launch – retailers remained slow to accept the CBDC and a survey revealed that only 4% of respondents had used it, with 67% not aware of it at all (Punch). As Quartz points out, this averages to just 1.35 transactions per active wallet (Quartz). Perhaps reacting to this, CBN’s Deputy Governor Dr Kingsley Obiora has now said that the bank is cutting merchant fees for using eNaira by 50% (Daily Trust) to increase adoption.
Colombia: Petro Government Will Seek “Creation of a Digital Currency” (Semana)
The Director of Colombia’s National Directorate of Taxes and Customs has announced plans to create a CBDC with the aims of making financial transactions easier and preventing tax evasion, which is estimated to be worth between 6% and 8% of GDP, by ensuring traceability of transactions over a certain value.
Brazil CBDC Trials: Farm Lending Explored by Digital Asset, Oliver Wyman, VERT (Ledger Insights)
This project is a participant in Banco Central do Brasil’s Real Digital Lift Challenge, a series of tests of CBDC. Initially using tokenised commercial bank money, it will test ensuring an ongoing role for commercial banks in processing loan applications while keeping their balance sheets free of current low-interest ‘directed’ lending, and will see the creation of a marketplace where the banks can bid to provide loans.
Russia to Start Digital Ruble Pilots in 2023 (Ledger Insights)
Reserve Bank of Zimbabwe ‘Developed a Roadmap for Adoption of CBDC,’ Says Governor (

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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.
Digital Assets — A World of Possibility (Wells Fargo)
In its August report, Wells Fargo states that digital assets are ‘a transformative innovation on par with the internet, cars, and electricity’. Its argument is that the ‘Internet of Value’ is likely to be as disruptive to the world of finance as the original internet was to communications and information.
Chinese Municipal Bank Issues First-ever Digital Yuan Loan Using Intellectual Property as Collateral (Coin Telegraph)
Agricultural Commerce Bank of Zhangjiagang has made the loan of e-CNY 500,000 (USD 74,000) directly to a manufacturer’s digital wallet.
Galoy Launches Synthetic Dollars Backed by BTC, No Stablecoins Needed (The Tokenist)
Galoy, an open source banking company that specialises in Bitcoin acceleration and integration, has launched Stablesats, a synthetic dollar backed by bitcoin that uses inverse perpetual swaps and forgoes the traditional fiat peg that most stablecoin operations implement.
ZK-Rollups Likely to be Main Layer 2 Solution for Ethereum, says Vitalik Buterin (The Block)
Vitalik Buterin, the founder of Ethereum, has suggested that ZK-Rollups are likely to win out over Optimistic Rollups as the main Layer 2 solution for scaling up the blockchain’s capacity due to their faster speed. Rollups move processing of transactions off-chain, posting batches of aggregated results to the main network. Optimistic Rollups – as the name suggests – save effort by assuming the validity of transactions without further verification, but allowing a challenge period during which they can be disputed, with staked ether used as an incentive to process only legitimate transactions. In ZK-Rollups, transactions are always presented with proof of their validity. This is slightly more computationally expensive, but reduces transaction finality from 7 days to near-instantaneous.
Bitcoin Network’s Power Demand Drops by Over 20% in 2022 as Shift to Renewables Accelerates (Finbold)
Crypto Investments Products See Inflows of $474M in July (Crypto Slate)
The end of July saw the fifth consecutive week of inflows. Total cryptocurrency market capitalisation exceeded USD 1 trillion once more in a slight recovery from the bear market.

Key: Regulation             Technology            Ecosystem              Markets 

CBDC Corner

Working Paper Series: Towards the Holy Grail of Cross-border Payments (European Central Bank)
The ECB’s latest paper assets that CBDCs could solve the challenge – ‘as old as international commerce and the implied need to pay’ of finding a cross-border payment system that is ‘cheap, universal, and settled in a secure settlement medium’. It expects this system to be developed over the next 10 years.
Reserve Bank and Digital Finance Cooperative Research Centre to Explore Use Cases for CBDC (Reserve Bank of Australia)
The Reserve Bank of Australia has initiated a year-long research project to consider use cases for a CBDC in Australia. Industry participants will submit proposals, and some will be selected to take part in a ring-fenced pilot scheme that will use a pilot CBDC that is a real claim on the Reserve Bank. The study aims to explore the economic benefits of applications of a CBDC for households and businesses in addition to technical aspects, as these are seen as a gap in existing CBDC studies for markets such as Australia that already have efficient and well-functioning payment and settlement systems.
Millicent Completes World’s First Test of a General Purpose Full-Reserve Digital Currency (FRDC) (
Millicent, a fintech company partly funded by the UK Government, has used a sandbox to issue and test use cases for a pegged token fully collateralised by cash deposits held at the Bank of England. It claims it is effectively the first retail test of a synthetic CBDC.
Seven Out of Ten Tell Fed They Don’t Want Digital Dollar: Cato Institute (Ledger Insights)
The Libertarian think tank finds concerns over financial privacy, financial oppression, and fears of the disintermediation of banks. This may be a case of self-selection of respondents, or of a misplaced belief that the financial system simply needs a ‘faster horse’ rather than substantively newer technology.
Thailand’s Central Bank Extends Retail CBDC Study to Pilot Phase (CoinDesk)
Nepal Prepares Laws to Enable CBDC Issuance (Ledger Insights)
China’s Central Bank to Expand Digital Yuan Pilot Program (Yahoo)

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Algorithmic Stablecoin Failure Crashes Cryptocurrency Markets

LUNA USD price chart
LUNA USD price chart

Ben Ashley

LUNA USD price chart
Photo by Alex jiang on Unsplash

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.

UST, an algorithmic stablecoin, works in conjunction with the Terra blockchain to maintain a 1:1 peg with the US dollar via a set of on-chain mint and burn mechanics. In theory, these mechanics ensure that one dollar of UST can always be swapped for one dollar of LUNA, the Terra blockchain’s native token, by allowing traders to take advantage of arbitrage opportunities. However, on 8 May this mechanism began to fail, and the value of UST fell below USD 0.8 the following day. Although the price managed to recover to USD 0.94, 11 May saw the sticking plaster ripped off and the price falling below USD 0.3 as trader sentiment around the stablecoin dropped. At the time of writing UST is now trading below USD 0.1, over 90% down on its supposed peg.

This de-pegging resulted in a significant knock-on effect for the price of the LUNA token used to help maintain the peg. The token opened May with a price of USD 80, down from its early April all-time-high of USD 120. However, at the time of writing the token’s price is a measly USD 0.0002, meaning the price has fallen over 99% in little over a week. Before the rout, LUNA was a top ten crypto asset with a market capitalisation in excess of USD 30 billion, while UST was the third largest stablecoin with a market capitalisation of USD 18 billion. The combined market capitalisation of the two tokens is now around USD 2 billion, meaning investors have lost over USD 45 billion.

The after-effects have rippled throughout the crypto market. The price of bitcoin fell over 20% in the three days following UST’s de-pegging, triggered by sell-offs of 80,000 bitcoin from the reserves of the firm behind LUNA and TerraUSD and a loss in sentiment, while the total market capitalisation of all cryptocurrencies fell over 30%. This – together with bitcoin’s value more recently falling in step with technology equities rather than ploughing its own furrow – suggests that the ‘bitcoin as an inflation hedge’ narrative is now well and truly dead. This is the first time since its creation that the cryptocurrency market is experiencing rising inflation and interest rates, and it is currently performing as badly as equity markets.

Tether (USDT) – the largest stablecoin with a market capitalisation of over USD 70 billion – also lost its dollar peg for a time. USDT differs from UST as it is supposedly backed 100% by a combination of cash, commercial paper, fiduciary deposits, reserve repo notes and treasury bills. Tether fell to USD 0.95 as fear and uncertainty spread throughout the market. Although the price recovered, it did not stop investors from redeeming USD 7 billion worth of the token.

The collapse of TerraUSD and the brief de-pegging of Tether have seen an outpouring of calls for the introduction of stablecoin regulations, including from the US Secretary of the Treasury Janet Yellen. With the rapidly increasing size of the stablecoin market, it is now obvious that regulation is needed to protect investors and address the risks posed to financial stability. The stablecoin debacle could lead to central banks rethinking the use cases for CBDCs and imposing themselves on the wholesale settlement markets after all, rather than prioritising exclusively retail-oriented applications. Indeed, as the European Central Bank’s Fabio Pannetta states: “Recent developments in the market for crypto assets illustrate that it is an illusion to believe that private instruments can act as money when they cannot be converted at par into public money at all times.”