DeFi vs CeFi, ‘Regulation by Enforcement’, Emerging Market Opportunities, and Stablecoins vs CBDCs

Thomas Murray Digital Newsletter

Pantera Capital’s Dan Morehead (Photo by Steve Jennings/Getty Images for TechCrunch)

This issue’s stories cover the whole gamut of topics, from more regulatory debate and legislative progress, market opportunities, and questions over the best architecture for the future payment rails of global financial infrastructure:

  • Crypto hedge fund Pantera Capital asserts that recent crypto lender bankruptcies are down to old-fashioned over-leveraging and poor risk management, rather than symptomatic of risks specific to the digital asset sector, and a move to rigidly-applied smart contracts will provide increasing investor protections by taking out the human factor
  • Coinbase continues to bear the brunt of the SEC’s ‘regulation by enforcement’, in the words of the Commissioner of rival regulator the CFTC, as there continues to be disagreement on the definition of a security in the context of digital assets
  • Two reports highlight digital asset opportunities in emerging market regions including Latin America and Asia Pacific, with new revenue streams for exchanges identified and an estimate that there will be a billion crypto users worldwide by 2030
  • Stablecoin regulations are progressing in the EU, UK and US, while the debate continues over whether CDBCs or stablecoins should prevail for retail and wholesale payments use cases: can stablecoins function as ‘synthetic CBDCs’ in much the same way that commercial banks support fiat money supply under the existing system, and bypass issues with the potential for CBDCs to disintermediate commercial banks?

Digital Asset Developments


Crypto lender failures – is DeFi or CeFi to blame?
In the aftermath of the collapse of several lenders in the crypto-sphere – and the accompanying crash in cryptocurrency values – the CEO of crypto hedge fund Pantera Capital offers an interesting viewpoint countering the mainstream press narrative that this was a failure of the Decentralised Finance (DeFi) business model. In an investor newsletter, Dan Morehead points out that Celsius, BlockFi and Voyager Digital are not exemplars of the new financial world, despite operating in that sector, so much as traditional, centrally-managed and bank-like entities. These startups used VC funding to grow, but their fundamental business model was to take short-term deposits but to make long-term loans, all while massively over-leveraged, leading to the same results as experienced by Long Term Capital Management and Lehman Brothers, among other salutary tales from the world of traditional finance. This view corresponds with our previous article asserting that the bankruptcy of Three Arrows Capital was down to failures in governance and due diligence.
Conversely, the true DeFi protocols – including Aave, Compound, Uniswap and MakerDAO – continued to operate ‘flawlessly’ throughout the crisis. DeFi loan contracts are over-collateralised (typically in the 110-150% range, and as high as 300%) in much the same way as mortgages secured by real estate, providing effective risk management. The distributed operators of the infrastructure incentivised by yield on staked assets to use smart contracts to ensure the absolute consistency of the application of contract rules (removing the human factor) and the security of the protocols. The smart contracts forced Celsius and others to pay down their loans in order to avoid liquidation of their collateral, exactly as intended, and without introducing the complexities and potential for loss that a restructuring or breaking of contractual terms would entail. The newsletter highlights that the transparency of on-chain arrangements, such as DeFi smart contracts, allows open analysis of loan terms, leverage ratios, and performance, without having to take the representations of centralised finance (CeFi) players on trust.
Coinbase hits back at SEC over ‘regulation by enforcement’ in struggle to define digital securities
Reported by Bloomberg on Monday, the SEC has launched an investigation into Coinbase in an attempt to assess whether or not it let customers trade securities. The SEC published a list of crypto projects that it deems satisfy the Securities Act definition of an investment contract, seven out of the nine of which Coinbase supports on its platform. The digital asset provider vehemently refuted these claims in a blog post, stating the crypto exchange uses a thorough SEC-reviewed process for considering crypto projects for listing. Originally, the SEC’s interest in Coinbase stemmed from an investigation by the Department of Justice (DOJ) into insider trading which resulted in charges for a Coinbase product manager, his brother, and another party, with the SEC announcing its own civil case shortly after. The investigation coincidentally came hours after Coinbase filed a court petition calling upon the SEC to establish a clear regulatory framework for digital assets ‘guided by formal procedures and a public notice-and-comment process, rather than through arbitrary enforcement or guidance developed behind closed doors.’ The SEC’s approach has caught out a number of exchanges and crypto projects in the recent past, most notably Ripple Labs Inc., whom the SEC charged along with two executives with conducting an unregistered securities offering of its native token XRP. Adding the fuel of inter-agency rivalry to the fire, the Commissioner of the Commodity Futures Trading Commission (CFTC), Caroline Pham, echoed Coinbase’s indictment of the SEC and its behaviour, declaring on Twitter that the SEC’s broad classification of crypto projects as securities is a striking example of ‘regulation by enforcement’. The SEC has come under increasing pressure to issue a clear and concise framework that extends beyond the widely-used Howey Test, which was adopted in 1946, and not considered fit for purpose when considering digital assets.
The future of crypto exchanges: emerging market opportunities, revenue streams and institutional adoption
A recent report published by Boston Consulting Group (BCG), Bitget, and Foresight Ventures titled What Does the Future Hold for Crypto Exchanges? suggests that crypto as a technology and asset class is still in the early throes of adoption, and that it will really accelerate as it expands across the Latin America and Asia Pacific regions. These represent the greatest potential for growth due to under-developed traditional financial infrastructure, and offer opportunities for exchanges to offer crypto-backed services relevant to emerging markets such as loans, remittances, payment services, and tokenised stock trading. These services can supplement revenue streams that are also available to traditional exchanges but not as easily monetisable in the crypto world due to crypto’s more open nature, such as data, co-location services, market data feeds, and API high frequency trading connections.
The focus of the report looks at the role that exchanges play in the development of the digital asset ecosystem, which by the end of 2021 had accounted for approximately USD 54 trillion in crypto trading value. Emerging markets and ‘advanced APAC countries’ accounted for one third of global spot trading volumes and around 40% of global derivatives trading volumes in 2021.
The report also highlights that institutional adoption is continuing, with an expanding class of crypto-native funds leading the charge. The authors estimate that the number of crypto users will reach 1 billion by 2030.
A separate joint study by KPMG and HSBC on emerging corporate giants in the Asia Pacific region concluded that over a quarter of the 6,742 start-ups surveyed are blockchain related, with NFTs and DeFi proving the most popular themes. 32.8% of surveyed companies herald from China, 30.1% from India, 12.7% from Japan, and 8.7% from Australia, with a further 8 countries making up the remaining 5.2%.

Could stablecoins substitute CBDCs? Questions of adoption, privacy and bank disintermediation
The potential for Central Bank Digital Currencies (CBDCs) to facilitate domestic and international payments continues to receive significant attention. According to, 86 central banks have recently researched, piloted or launched CBDCs, with increasing numbers of countries exploring their applications in both retail and wholesale sectors. Stablecoin projects and their adoption have also increased considerably in the past couple of years, supporting the role of settlement in digital asset markets globally by operating on the same digital rails as cryptocurrencies, utility tokens and asset-backed tokens such as NFTs.
While some including the Financial Stability Board, US Treasury and the Bank of England have warned of potential financial stability risks from stablecoins, there is growing recognition that properly backed stablecoins are highly effective tools for bridging the gap between traditional and crypto finance. A recent report by the Federal Reserve Bank of Richmond suggests that stablecoins may be better placed to serve the needs of growing crypto-based economies and can serve as ‘synthetic CBDCs’. Furthermore, the Chief of the Australian Central Bank has suggested that private, regulated tokens such as stablecoins could beat CBDCs to the punch due to their increasing acceptability and adoption in the market, their support for privacy (at front of mind for many given the intrusive nature of China’s digital yuan), their wholesale applicability, and their compatibility with commercial bank activities which is not as clear cut for some currently envisaged retail CBDCs. Stablecoins are also being brought into the scope of draft regulations such as the EU’s MiCA, the UK’s Financial Services and Markets Bill, and the US Stablecoin Bill.
Interestingly, as reported this week, China’s Digital Currency Electronic Payment project is witnessing a slowdown in adoption of the digital yuan. The report shows that users are struggling to differentiate between the benefits of the nascent e-CNY and existing digital payment applications such as the widely-used WeChat and Alipay. Furthermore, citizens are increasingly concerned with privacy, leading the Chinese Communist Party to announce an effort to increase personal data protections in the project, although without providing specifics.

News Links

U.S. Bipartisan Stablecoin Legislation Delayed (Ledger Insights)
Senators Toomey and Sinema Introduce Bill to Exempt Small Crypto Transactions from Capital Gains Taxes (The Block)
Putin Signs Law Banning Crypto-based Payments in Russia (Cryptoslate)
Binance Fined Over $3.3M by Dutch Central Bank (Coindesk)
South Korea Postpones 20% Tax on Crypto Gains to 2025 (Cointelegraph)
Paraguay’s New Bill May Turn the Country into Mining Heaven (Cryptoslate)
Strict Thai Crypto Regulation Causes Siam Commercial Bank Group to Delay Bitkub Acquisition (Cointelegraph)
SEC Hasn’t Subpoenaed Binance About BNB: FOIA Response (Coindesk)
Binance CEO Files Defamation Case Against Bloomberg (AMBCrypto)
Taiwan Set to Ban Crypto Purchases Using Credit Cards (Coindesk)
California Ends Ban on Crypto Campaign Donations (The Block)
Central Bank of Ireland Highlights Weaknesses in Virtual Asset Service Providers’ AML/CFT Frameworks (Central Bank of Ireland)
European Banking Regulator Sees ‘Major Concern’ in Retaining Staff to Handle Crypto: Report (Cointelegraph)
  Rio de Janeiro Forges Ahead with Bitcoin Integration Plans (Cryptoslate)
  Komainu, a Nomura-backed Crypto Custodian, Granted Initial Provisional Regulatory Approval to Operate in Dubai (PR Newswire)
  Gemini Becomes First Company to Be Registered as Virtual Asset Service Provider (VASP) in Ireland (Gemini)
  Coinbase Secures Regulatory Approval in Italy (Coindesk)
  Cryptocurrency Exchange Expands to Italy (Coindesk) Continues Expansion with Cyprus (Cryptoslate)
  Standard Chartered-backed Zodia Markets Secures FCA Registration (Finextra)
  Central African Republic Begins Public Sale of Sango Coin (The Block)
Schroders Buys Stake in Digital Assets Firm (Finextra)
Block by Block: Blockchain Technology is Transforming the Real Estate Market (Cointelegraph)
Barclays Snaps Up Stake in $2bn Cryptocurrency Firm Copper (Sky News)
Saxo Bank Founder: Blockchain Has the Biggest Potential Since the Internet (Cointelegraph)
FTX and Coinbase Invest in ‘Bloomberg for Crypto’ Coinfeeds (Finextra)
BNP Paribas Securities Services to Develop Digital Assets Custody Capabilities Through Partnerships with METACO and Fireblocks (BNPPSS)
BNP Paribas Issues Tokenized Bond for EDF on Public Blockchain (Ledger Insights)
  BME, BBVA and IDB Issue Spain’s First Blockchain-based Regulated Bonds (Inter-American Development Bank)

BCP Group to Launch First Bond Issue on Blockchain in Morocco (Morocco World News)
Russian Firm Claims Digital Token First (Finextra)
UK to Explore Blockchain-based Government Bond (Ledger Insights)
IMA Broker Issues Blockchain-based Certificates of Insurance (Ledger Insights)
UK Finance Association Labels Crypto a ‘Good Alternative’ to Traditional Payments (Finbold)

Key: Regulation             Technology            Ecosystem              Markets 

CBDC Corner

BIS and Bank Indonesia Shortlist 21 Teams for CBDC G20 TechSprint Challenge (Finextra)
Central Bank Digital Currencies and Regulatory Alternatives: the Case for Stablecoins (Richmond Federal Reserve)
Private but Regulated Tokens Could Beat CBDCs, Australian Central Bank Chief Says (Cryptoslate)
Reserve Bank of India Working on Phased Implementation of Digital Currency (The Print India)
Indonesia Plans Wholesale Digital Currency to Improve Transfers (Bloomberg)
IMF Wants M-Pesa Shielded in CBK Digital Shilling Plan (Nation Media)
Lenders Are Thwarting Digital Currency’s Adoption in Nigeria (Bloomberg)

Thomas Murray Digital

Andrew Wright | Hugo Jack

Tel. +44 (0)20 8057 7100

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.

Digital Custody Partnerships Abound Despite the Crypto Bear Market

Thomas Murray Digital Newsletter

The cryptocurrency market appears to have found a stable (if much reduced) footing, at least for the time being. The dwindling value of bitcoin and other cryptocurrencies has led some to short-sightedly conclude that investment would dry up and that infrastructural and market developments would grind to a halt. However, the course of digital assets has far wider scope than just cryptocurrencies, which merely serve as the first real examples of blockchain applications. It is therefore of little surprise that a number of high-profile partnerships between legacy custodian banks and digital asset technology firms have recently been announced.

CACEIS, the asset servicing arm of Crédit Agricole and Santander, has partnered with Taurus, a leading Swiss-based digital asset infrastructure and technology firm. Meanwhile, Citi announced a similar partnership with METACO, an equally established Swiss-based digital asset infrastructure and technology firm, to develop a platform to enable clients to store and settle digital assets seamlessly and securely. SG FORGE, the digital asset subsidiary of Société Générale, followed suit and announced its own partnership with METACO, to expand its institutional digital asset capabilities and aid the bank in its efforts to integrate security tokens into traditional finance. These partnerships will help incumbent providers to take advantage of the new and rapidly growing digital economy by giving them tools to securely and accurately support the trading, custody, issuance, and management of digital assets, which are taking tentative first steps to extend to securities tokens.

Archax, the U.K.’s first licensed digital asset exchange, has also partnered with METACO to be able to provide a segregated bank-grade custody solution, alongside IBM. While not the first to implement this model, it is representative of a growing trend, and a sign of increasing maturation, to formally segregate digital asset execution from custody, something that is standard practice across the traditional securities industry. In a related development, ING, which has been heavily involved in blockchain development and testing for many years, has decided to spin out its digital asset custody platform Pyctor to GMEX Group, a leading digital asset market infrastructure with a focus on post-trade solutions. The deal is expected to enable GMEX to scale Pyctor alongside its other digital asset services.

Digital Asset Developments


MiCA’s next milestone: The long awaited Markets in Crypto Assets (MiCA) regulation is one step closer to being finalised, having been provisionally agreed by the European Parliament (EP) and Council (EC). MiCA, which aims to create a regulatory framework for digital assets across Europe, has been through a number of iterations since it was first proposed in 2020 as part of the EU’s Digital Finance Package. The agreement now confirms a number of broad requirements for entities that interact with digital assets, including a robust licensing framework for crypto-asset service providers (CASPs) such as custodians, hosted wallet providers, and trading venues, which will all need authorisation to operate in the EU. Issuers of digital assets will be required to produce and publish a white paper outlining all relevant information on the specific crypto asset. MiCA regulation will capture all digital assets not currently covered under existing financial service legislation, including asset-reference tokens, e-money tokens, and other crypto assets. Stablecoins, which continue to receive significant attention by regulators globally, are firmly covered under MiCA, with strict conditions set for any stablecoin operators. These include being required to register an office in the EU, maintain significant reserves, guarantee 1:1 redemption in fiat, eliminate interest-bearing mechanisms for stablecoins, and supervision by the European Banking Association. NFTs will remain out of scope, unless they fall under existing categories of digital assets. The provisional agreement is subject to final approval by the EP and EC, whereupon the formal adoption procedures would then run their course. The regime would be expected to apply 18 months thereafter. Despite the progress made on MiCA, the European Central Bank has continued to sound the alarm bells by warning eurozone countries that national-level practices must be aligned in order to better manage digital asset risks, given that it will still be many months before MiCA comes into effect. This announcement comes two weeks after Lithuania introduced its own crypto licensing regime as a stop-gap measure.
UK regulation, stablecoin concerns, and DeFi: Given the EU’s progress with MiCA and the former UK Chancellor’s desire for the country to be a ‘cryptoassets technology hub, the UK Government and the Bank of England have been vocal in the past weeks in calling for greater clarity and regulatory oversight of the digital asset industry. The Bank of England, led by its Financial Policy Committee has stepped up efforts to address the financial stability threat, particularly in light of Terra LUNA/UST’s collapse in May of this year, the fallout from which is still reverberating. In its quarterly stability report, the BoE called for an ‘enhanced’ crypto regulatory framework that would be designed to mitigate potential risks emanating from digital assets, evidenced by recent vulnerabilities including bank-like runs, company bankruptcies, liquidity mismanagement, and likely criminal behaviour. Stablecoins, in the eyes of the BoE and most Central Banks continue to be the presiding threat to overall financial stability. Subsequently, the Bank this week recommended additional regulation be established to manage the systemic threat they may soon present. The Deputy Governor of the BoE announced last Wednesday (6 July) his expectation that a regulatory system for stablecoin legislation will be introduced prior to August. This announcement came a week before the Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) announced their final guidance on stablecoin arrangements, which they confirm as now being subject to the Principles for Financial Market Infrastructures for systemically important tokens. Decentralised Finance (DeFi) and the tax treatment of events relating to the peer-to-peer economy continues to perplex governments and regulators alike. Last week, the UK Government launched a public consultation calling for members of the industry to opine on the DeFi economy, with a particular focus on the best ways to approach the taxation of cryptoasset loans, lending, and staking. The reported objective is to reduce the administrative burden and cost for taxpayers that engage in the activity. The consultation is set to close on 31 August 2022.

European support for digital asset funds: UK fund managers have been actively lobbying for the approval of blockchain-traded funds, arguing that the technology would lead to a number of worthwhile benefits including a reduction in general administration, greater transparency, near instant settlement, and reduction reduced customer costs. The message, delivered through the Investment Association – the trade body that represents the UK’s asset management industry – was that the industry is ready for blockchain-based funds and that all efforts should be made to approve them. Amongst the suggestions is a proposal to create a new task force that would investigate how to accelerate DLT adoption and explore ways to give customers greater customisation over their portfolios, which could include holdings in private companies as well as cryptocurrencies. Some jurisdictions have been much more proactive in developing frameworks to support digital asset-based funds, most notably Luxembourg, which permits Alternative Investment Funds (AIFs) to invest in digital assets, although Undertakings for the Collective Investment in Transferable Securities (UCITS) funds are still not permitted to do so. Ireland’s Central Bank has just introduced positive changes and updated its approval process for AIFs looking to allocate funds to digital assets, something it has reportedly been unwilling to consider until now. Last month, Germany introduced an update to its securities law by introducing the concept of Crypto Fund Units (Verordnung über Krypto­fonds­an­teile), so the law now recognises a fund’s ability to issue units in a common fund via a crypto securities register which may be decentralised and based on Distributed Ledger Technology.
Basel Committee’s Take 2 on Crypto Reserve Rules: In 2021, the Bank for International Settlements’ Basel Committee on Banking Supervision 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 result, a new consultation document published on 30 June on the ‘prudential treatment of cryptoasset exposures’, takes a more refined and pragmatic stance. The latest suggestion is that banks may hold up to 1% of their reserves in cryptocurrencies. Digital assets may be classified as Group 1, broadly representing certain tokenised traditional assets (Group 1a) and some stablecoins with ‘effective stabilisation mechanisms’ (Group 1b). These would be treated in a similar way to the assets backing those tokens under the principle of ‘same risk, same activity, same treatment’. All other cryptoassets would fall into Group 2, which is also further divided into two classes. Group 2a has been defined in response to banks’ concerns that the original rules did not recognise that some assets are suitable for hedging, which can now be reflected when calculating banks’ net exposures. That leaves unbacked cryptoassets, and other tokens that do not meet the rules of Group 1 assets, in Group 2b, which remains subject to the 100% capital charge. It is these Group 2 assets of both sub-classes that will now be subject to a total exposure limit of 1% of Tier 1 capital, ‘including both direct holdings (cash and derivatives) and indirect holding (i.e. those via investment funds, ETF/ETN, special purpose vehicles)’. It remains to be seen how this may be reconciled to the SEC’s recent demand that client cryptoassets under custody should appear on banks’ own balance sheets, with industry groups, members of Congress and even the SEC’s own commissioners challenging that determination.

Lessons in due diligence from Three Arrows Capital: Three Arrows Capital (3AC), a crypto hedge fund that until recently had been viewed as a mature and reliable player, collapsed recently due to betting that the price of cryptocurrencies would rebound and to high exposures to the LUNA token that ‘backed’ the TerraUSD algorithmic stablecoin, both of which failed in May. Founded in 2012 by ex-Deutsche Bank and Credit Suisse traders Su Zhu and Kyle Davies, at one point the fund was managing USD 18 billion in assets, and was worth USD 10 billion as recently as March. Its rapid fall has led to further contagion risk to a surprisingly wide range of lenders including Voyager Digital, Babel Finance,, Genesis, BlockFi, BitMEX and FTX, with Voyager also filing for Chapter 11 bankruptcy protection. These lenders relied primarily on 3AC’s founders’ reputation in setting their exposure levels to the fund. Research firm FSInsight has accused 3AC of running an old-fashioned Ponzi scheme, using new borrowings to service older loans in a repeat of the behaviour that sunk Long Term Capital Management back in 1998. This raises the spectacle that the industry – or at least, relative newcomers to it operating in the crypto sector – has failed to learn the lessons of the past. FSInsight’s report assesses that it is likely that the vast majority of 3AC’s assets were bought with borrowings, and that relatively little equity was made available as collateral for the loans. This leverage ratio turned sour due to bets on both LUNA and also the Grayscale Bitcoin Trust. To add to 3AC’s troubles, the Monetary Authority of Singapore (MAS) has accused the fund of providing false information and exceeding limits on assets under management (AUM) set by the regulator. 3AC, incorporated in the British Virgin Islands (BVI) but headquartered in Singapore, had told MAS that management of the fund had been transferred to an unrelated BVI entity in September 2021, without disclosing that Su was a shareholder of both 3AC and that entity. The AUM limit was allegedly breached between July and September 2020 and again between November 2020 and August 2021. A BVI court ordered the liquidation of the 3AC fund on 27 June. On 1 July 3AC filed for Chapter 15 bankruptcy protection in New York,  but despite that a New York court has frozen the fund’s assets in an attempt to protect them from unauthorised disposals, a possibility hinted at by the transfer of 3AC NFT holdings to a new address. Zhu and Davies have now gone missing and are allegedly failing to cooperate with court-appointed liquidator Teneo, which has been unable to obtain information regarding the fund’s wallets and their associated private keys. The lessons are clear: just as in traditional finance, reliance on reputation alone is insufficient. There are continuing needs to perform adequate due diligence, monitor overall credit exposures, and to ensure good governance practices such as the use of trustworthy, independent fund administrators and custodians who can keep records and assist stakeholders and administrators in the event that issues arise.
Challenging DLT’s Reputation for Decentralisation and Security: Research commissioned by the US’s Defense Advanced Research Projects Agency (DARPA) and conducted by Trail of Bits highlights several thought-provoking facts and possible attack vectors that could compromise blockchains. The paper’s insights add nuance to DLT concepts, such as decentralisation and immutability of transactions, that have almost become axiomatic. They have implications for the design and governance of blockchains before too much responsibility for running future financial infrastructure is placed on them. Although blockchain networks are ostensibly decentralised, centralisation (and therefore single or at least fewer points of failure/weakness) can creep in through: authoritative centrality, ‘the minimum number of entities necessary to disrupt the system’ (aka the Nakamoto coefficient); consensus centrality, the extent to which the source of consensus – such as mining power in proof-of-work blockchains – is concentrated; motivational centrality, the way in which network participants are disincentivised from acting maliciously and whether those levers are managed centrally; topological centrality, or the risk that a network could be disrupted because it relies on a specific subset of nodes; network centrality, in which nodes may be subject to similar connectivity risks due to their geographical location or ISP or cable connectivity; and software centrality, being the risk that bugs or back doors in the blockchain’s core software, or incompatibilities or differences between different clients, could break immutability or cause a fork in the chain. Taking the Bitcoin network as an example, they found that:
  • Every popular blockchain has privileged users or entities that can amend the system and potentially cause changes to past transactions
  • As few as two entities need to be compromised or act maliciously to disrupt the Bitcoin blockchain, four for Ethereum, and fewer than twelve for most proof-of-stake blockchains
  • Only a small and dense subset of the thousands of advertised Bitcoin nodes participates in mining, contributes to the health of the network, and coordinates mining activity (which, in addition to creating new bitcoins, is also responsible for validating transactions and voting on governance issues); furthermore, node operators are not penalised for any dishonesty
  • Unlike the transactions themselves, Bitcoin network traffic is unencrypted, and therefore vulnerable to man-in-the-middle observation and tampering with messages from ISPs, governments, WiFi providers or Tor network exit nodes (the latter host to traffic for about half of all Bitcoin nodes); similarly, the most common mining pool communication protocol, Stratum, is unencrypted and effectively unauthenticated
  • 60% of Bitcoin network traffic passes through just three ISPs
  • 21% of Bitcoin nodes still run an outdated version of the Bitcoin Core client software that was known to have code vulnerabilities as far back as June 2021, over a year ago

News Links

Bank for International Settlements to Allow Banks to Keep 1% of Reserves in Bitcoin (Finbold)
US Fed Evaluating SEC’s Position on Digital Assets Custody, Powell Says (CoinDesk)
Gensler Labels bitcoin a ‘Commodity’ as Crypto Prices Stabilize (Morningstar)
CPMI and IOSCO Publish Final Guidance on Stablecoin Arrangements
Confirming Application of Principles for Financial Market Infrastructures
Belgium Starts Consultation on Classification of Crypto as Securities and Investment Instruments (Cryptoslate)
Singapore Eyes More Regulation to Protect Retail Investors From Crypto Winter Fallout (Cryptoslate)
Russian Parliament Approves Tax Break for Issuers of Digital Assets (Reuters)
Bank of Russia Ready to Legalize Crypto Mining If Miners Sell Minted Coins Abroad (
Grayscale Files Suit Against SEC Following Rejection of GBTC Conversion Bid (The Block)
Poundtoken Launches as the First Fully Backed GBP Stablecoin Regulated in the British Isles (City A.M)
Tether To Launch GBP₮, Tether Tokens Pegged to the British Pound Sterling (
Colombia Integrates Ripple’s XRPL for Land Registry (Cryptoslate)
  Crypto Exchange Coinbase Seeks Licenses in Europe as it Looks to Ramp Up Growth Outside the U.S. (CNBC)
   Paxos Promises Monthly Disclosure of Reserve Assets Backing its Stablecoins (Finextra)
The Central African Republic Launches Crypto Initiative Post Bitcoin Adoption (Cointelegraph)
Swiss Post Office to Offer Crypto Trading and Custody Services by 2024 (Finbold)
Northern Trust Creates Digital Assets and Financial Markets Group (Finextra)
Blockchain Firm SETL Acquired by Turkish Fintech (Finextra)
Deloitte, NYDIG Partner to Help Institutions Adopt Bitcoin (Nasdaq)
Fintech Infrastructure Firm Prime Trust Raises $107m (Finextra)
Stablecoin Tether (USDT) To Undergo Full Audit From Top Firm in Bid for Transparency (Daily Hodl)
Tether Reducing Commercial Paper Holdings Down to $3.5 billion by End-July (Cryptoslate)
Delio Unveils South Korea’s First ‘Crypto Bank’ (Finextra)
Crypto Exchange Binance Launches New Platform Aimed at Institutional Investors (Decrypt)
  SIX Digital Exchange Launches SDX Web3 Services (Finextra)
ANZ Completes First A$DC Stablecoin Transaction (Finextra)
EU-regulated Firm Banking Circle Adopts USDC Stablecoin (Cointelegraph)
  Goldman Sachs Executes First Bitcoin Futures Trade in Asia (Finbold)
Binance Brings Bitcoin Trading Fees to Zero (The Paypers)
NIST Announces First Four Quantum-Resistant Cryptographic Algorithms (National Institute of Standards and Technology)
Key: Regulation             Technology            Ecosystem              Markets 

CBDC Corner

Report: Options for Access to and Interoperability of CBDCs for Cross-border Payments (Bank for International Settlements)
Ripple Introduces CBDC Competition to Encourage XRPL Innovation (U.Today)
Amsterdam to Launch its Own Digital Currency to Promote Local Economy (NL Times)
More African Central Banks Are Exploring Digital Currencies (IMFBlog)
ECCB Launches DCash in Anguilla (Eastern Caribbean Central Bank)
Bank of Russia Accelerates Schedule for Digital Ruble Project (
Iran to Roll Out Pilot Version of Crypto-Rial Digital Currency Soon (IPFNews)
Taiwan Completes Trials of its Prototype CBDC for Retail Use (Forkast)
Taiwan Central Bank Governor Considers Interest-Free CBDC Design to Prevent Fiat Deposit Flight (Cointelegraph)
South Korea Ready to Test its CBDC with Commercial Banks (AJU)
Bank of England’s Vision for the Digital Pound Differs from China’s Model (Cryptoslate)
Banque de France Steps Up Wholesale CBDC Work (Finextra)

Thomas Murray Digital

Andrew Wright | Hugo Jack | Ben Ashley

Tel. +44 (0)20 8057 7100

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.

State of the Digital Asset Market: ‘Crypto Winter’ and Silver Linings

Sun rays shining through clouds

Hugo Jack

Photo by Jonny Clow on Unsplash

For investors in digital assets, and cryptocurrencies in particular, the last couple of months have been something of a nightmare. Ongoing macro and geopolitical pressures have continued to hit the digital asset ecosystem as investors – both retail and professional – have continued to exit the market as uncertainty around the regulatory and fiscal environment remains. While 2021 was officially the year in which institutional investors entered crypto in significant numbers, it is fair to say that the digital asset sector is still reminiscent of the early days of the Internet, evidenced by ecosystem failures, the misallocation of capital, and poor investor protection.

That said, while a much-needed shakeout (mostly of irresponsible leverage trading) is taking place, a digital asset future is still very much on the cards. Just as the tech bubble in 2001 paved the way for the Internet success stories of today, now global banks, financial institutions and FinTechs are continuing to invest and build new operational models and DLT-based infrastructure. The scope for this new environment is not just cryptocurrencies, which constitute a meaningful but relatively small asset class, but all financial instruments including equities, bonds, funds and alternative assets that will in time all likely run on blockchain rails. That said, as cryptocurrencies currently comprise the largest part of today’s real use cases for digital assets, it is worth taking a look at what is happening today: where things are going wrong, but also the continuing positives driving the industry forward.

Digital assets continue to dive amid macro uncertainty and ecosystem failures

In the past couple of weeks the cryptocurrency sell-off has continued as bitcoin crashed to its lowest level in two years. The period from May to June has seen one of the largest month-on-month declines with over USD 416 billion wiped from the total market capitalisation, which now sits at USD 933.0 billion. Considered a key line of support, bitcoin crossed its 200-week moving average (200W MA) last week, which has reportedly only occurred three times in its 13-year history. Historically, this has usually correlated with a market bottom. That said, central bank tightening is likely applying greater pressure to markets globally, which in crypto is compounded by miners of bitcoin needing to sell their BTC rewards to cover their operational costs which currently stand at approximately USD 20,000 per bitcoin. Consequently, there may still be some way to go before any sign of a true turnaround can be found.

The crypto markets are still reeling from the collapse of the Terra/Luna ecosystem in May, which impacted tens of thousands of investors globally including a well-known Dubai-based crypto focused hedge fund, Three Arrows Capital (3AC). It was quickly reported that 3AC was facing insolvency after incurring at least $400 million in liquidations. It failed to meet margin calls and is now considering multiple options including an asset sale, or a bail out by another firm. Celsius, a crypto lending platform which at one point claimed more than USD 20 billion in assets under administration, has come under pressure by investors in an old-fashioned “bank run”, with depositors scrambling to pull assets from the platform. On Monday 13 June Celsius released a community memo announcing its decision to pause all withdrawals, swaps and transfers between accounts, an option which it reserved under its terms of use. According to reports, Celsius is similarly in the process of considering insolvency proceedings and has appointed a legal firm that specialises in business restructuring, as well as hiring Citigroup as an independent advisor to brainstorm possible financing options. Nexo, another lending platform, put forward an unsolicited offer to acquire “any remaining qualifying assets”, although following a swift initial rejection it is unlikely the offer will be accepted.

It is unclear where the market goes from here. A significant amount of speculative capital has been put into the crypto ecosystem over the last couple of years during a period of exceptionally loose monetary policy and government stimulus; however, a flight to safety is now well underway across all asset classes. In addition, well established and high profile firms have put their reputations on the line and acquired significant amounts of bitcoin; the poster child for this tactic is MicroStrategy (Nasdaq: MSTR) which has 130,000 bitcoin, acquired at a cost of circa USD 3.97 billion, on its balance sheet, bought with cash from sequential debt offerings totalling nearly USD 2.4 billion. As a significant holder of bitcoin, all eyes are on the institution which at current prices is facing an unrealised loss of over USD 1 billion. In May it was reported that if bitcoin fell to USD 21,000 then a margin call would be triggered on a USD 205 million loan it took with Silvergate Bank in March to purchase additional bitcoin. That number was reached last week and has in the following thereafter gone as low as USD 17,744 as of Saturday 17 June. There is an inevitable concern that further liquidations would panic the market even further, however, MicroStrategy CEO Michael Saylor confirmed last week that a margin call had not been made, and that the company has reserves to protect against bitcoin dropping much lower.

Re-evaluation of business needs triggers firing and hiring

The bear market and general downturn is causing concern across the industry, as companies grapple with the implications of a looming recession and even stagflation. Financial considerations are being made a priority amidst declining revenues. Consequently, some digital asset institutions have announced reductions in head count. Coinbase (Nasdaq: COIN), one of the leading digital asset custodians and exchanges, announced cuts to staff of 18%, or approximately 1,100 staff, and furthermore rescinded 300 new hire offers. Gemini, an equally established exchange, expects to lay off 10% of its employees, while BlockFi and, more retail focused entities, will reduce headcount by 20% and 5% respectively, citing a “dramatic shift in macroeconomic conditions worldwide” which are impacting growth. However, at odds with the trend is Citibank, which this week announced its intention to hire 4,000 tech workers in a $10 billion effort to enhance online customer experience. It is joined by Binance and Kraken, two of the largest and most well-known cryptocurrency exchanges, which have similarly advertised their on-going efforts to recruit for 2,000 and 500 new positions respectively.

Longer-term sentiment remains positive as adoption increases

Despite the obvious pain that is being felt by the market during the latest crypto winter, sentiment around the future of the ecosystem and about cryptoassets remains positive. This week, Bank of America carried out a survey in which 91% of US adults said they plan to buy more cryptoassets over the course of the next six months, with 30% of respondents confirming their intention to hold their assets for at least the next six months despite the uncertainty. Echoing this sentiment, PwC’s Global Crypto Hedge Fund Report showed that allocations by crypto-focused and traditional hedge funds have increased over the past year, with 38% of traditional hedge funds currently investing in digital assets, up 21% from a year ago. Furthermore, 27% of the traditional funds that had not yet invested in digital assets reported that if the main barriers to adoption were removed they would accelerate their investments in them. Capgemini, a leading technology consulting firm, also released its 2022 World Wealth Report last week. Of the 2,973 global High Net Worth Individuals (HNWI) polled, 71% of them have allocated capital to cryptocurrencies and other digital assets. Furthermore, in assessing the demographic of respondents, 91% of under 40s have invested in digital assets, with Capgemini observing that cryptocurrencies remain their favourite digital asset investments for now. Even J.P. Morgan – whose chairman and CEO Jamie Dimon has been famously anti-bitcoin – has declared cryptocurrencies its new favourite alternative asset in preference to real estate, and has set a ‘fair value’ for bitcoin of USD 38,000, nearly twice its current price. And a joint PayPal and Deloitte survey of 2,000 senior U.S. retail executives found that nearly 85% of them expect digital currency payments to be ‘ubiquitous’ within the next five years.

Continued growth in institutional products and services

In other news, Goldman Sachs (GS) has launched a derivatives product linked to ether (ETH). The non-deliverable forward will enable investors to speculate on the price of ether without having to hold it directly. It comes at a time when investor confidence is low in the short term, however the firm reinforced its belief that digital assets are still desirable, stating that “institutional demand continues to grow significantly in this space”, with this offering helping the firm to evolve its nascent cash-settled cryptocurrency capabilities. And despite the reputation of stablecoins taking a knock of late, demand for them remains high as Circle Internet Financial – creator of the popular USDC dollar-pegged token – launches a new regulated euro-pegged stablecoin, EUROC, fully backed by euros held in custody by US qualified custodians.

Digital infrastructure for the repo market is also having a good month. BNP Paribas recently joined J.P. Morgan’s Onyx Digital Assets system, a tokenisation platform whose Intraday Repo application has processed over USD 300 billion of US treasury-based transactions in the year since it launched and is now looking to tokenise money market funds and other traditional securities as collateral. Meanwhile, Finteum’s DLT-based intraday FX swap and repo trading platform – due to go live next year – has been successfully tested by 14 banks, including Citi, NatWest and Barclays.

In Japan, the country’s two largest banks are making further moves in the digital asset space. Nomura – already one of the backers of custodian Komainu – will launch a new wholly-owned subsidiary to offer a range of digital asset services to institutional clients, with an unnamed executive quoted as saying, ‘If we don’t do this, then it’s going to be more difficult down the line to be competitive’. Meanwhile, Tokyo cryptocurrency exchange Bitbank has partnered with Sumitomo Mitsui Trust to create a new institutional digital asset custodian to be named Japan Digital Asset Trust. And the country has just become the first to pass legislation to limit yen stablecoin issuance to licensed institutions and guarantee their redemption back into fiat currency at par, a move that come into effect next year as a consortium of 74 Japanese banks and corporations moves to launch a private sector yen stablecoin.

Growing pains belie a maturing sector

The current market shake-up is inflicting short-term pain on investors, and the drying up of the previous flood of cheap capital that led to poor investment choices is now consigning thousands of weaker tokens and their associated projects to the scrap-heap. Investors are being reminded of the need to focus on utility and fundamentals over speculation. The last crypto market crash occurred in early 2018 when cryptocurrencies were the preserve of retail investors and the bravest of hedge funds, and institutional-grade services and infrastructure were not yet established. Four years later, the build-out of the foundations of the future financial system has got off to a strong start and continues apace. At the same time, regulation is beginning to catch up with the exuberant growth of this sector. We are witnessing the latest shift in a free market that should lead us to a more robust digital asset economy. Perhaps this moment will be seen in retrospect as an inflection point in the march towards a future financial system that encapsulates the best aspects of both stability and innovation.

TerraUSD Fallout – Debating the Future of Stablecoins and CBDCs

Tether USD token

Thomas Murray Digital team

Tether USD token
Photo by DrawKit Illustrations on Unsplash

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

Finance ministers from the G7 group of nations meeting in Germany this month with representatives from the International Monetary Fund, World Bank Group, Organisation for Economic Cooperation and Development, and the Financial Stability Board discussed the potential role that CBDCs could play in realising greater efficiencies, in the context of the G20 Roadmap for enhancing cross-border payments. They highlighted the potential international uses of CBDCs and the need to minimise negative effects on the international monetary system by introducing consistent and comprehensive regulation of digital asset issuers and service providers. They noted in particular the need to achieve widespread compliance with the Financial Action Task Force’s ‘travel rule’ and the need for greater reporting requirements of the assets backing stablecoins.

Policymakers at the Bank of England have previously been open about their view that any so-called ‘Britcoin’ would not be a priority for wholesale settlement, given the introduction in 2021 of omnibus accounts permitting regulated entities to commingle tokenised money in order to settle among themselves. The Bank’s governors also cited the ability of the private sector to manage such settlements, which have fewer complexities and policy implications than retail CBDC usage, without government involvement. However, the UK Treasury has this week published a consultation paper titled Managing the failure of systemic digital settlement asset (including stablecoin) firms that proposes that the Bank of England be designated as the regulator of stablecoins, giving it the power to appoint administrators should so-called Digital Settlement Assets encounter difficulties. Similarly, the Financial Conduct Authority would bring stablecoin activity under its existing electronic money and payments regulatory regime.

In South Korea, the government has reacted to Terra’s collapse – believed to have affected 280,000 Koreans – by proposing a new digital assets committee to oversee the imposition on the industry of investor protections equivalent to those for securities, uniting a currently fragmented regulatory environment under one roof.

The US and Japan commenced preparations for the regulation of stablecoin issuers last year. In November, the President’s Working Group on Financial Markets coordinated a report on stablecoins that proposed that issuers should be treated like banks. And in December, Japan’s Financial Services Agency proposed legislation to limit the number of stablecoin issuers by restricting their issuance to banks and wire transfer companies, positing that this would increase trust in them and help to avoid runs that could crash their value and potentially destabilise the wider financial markets.

While TerraUSD – a bold and unusual ‘algorithmic’ (rather than fully asset-backed) stablecoin – may not have enjoyed widespread institutional use, its collapse has put a sharp focus on its more traditionally structured erstwhile competitors.

The long-running controversy over Tether (USDT), the first and largest stablecoin, continues as the company behind it has still not produced an audited set of financial disclosures, despite past promises, to offer assurance that it has adequate asset backing for the USD-pegged tokens it has issued. Its CTO, Paolo Ardoini, has hinted at a reluctance to publish full details of the constitution of Tether’s reserves, or of its counterparties, calling the information its ‘secret sauce’. Senator Elizabeth Warren has called this lack of transparency a ‘gigantic red flag’. Tether’s accountant, MHA Cayman, introduced new language in its latest attestation report dated 18 May, covering Tether’s Consolidated Reserves Report as at 31 March, stating that there is significant uncertainty regarding the value of large parts of the reserves – for example, during a run on its tokens – and Tether’s exposure to risk resulting from potential issues with its unnamed custodians and counterparties:

“The valuation of the assets of the Group have been based upon normal trading conditions and do not reflect an unexpected large-scale sale of assets, or the case of any key custodians or counterparties defaulting or experiencing substantial illiquidity, which may result in materially different or delayed realisable values. No provision for expected credit losses was identified by management at the financial reporting date.”

MHA Cayman also states that Tether’s management makes no provision for the potential costs of two legal cases that it is currently defending nor for credit losses.

At the end of March, approximately 47% of the reserves were in less liquid and riskier forms such as digital tokens, commercial paper, corporate bonds, and money market funds. Just under 5% of its reserves were held as cash.

By contrast, Tether’s younger rival Circle – issuer of the USD Coin (USDC) stablecoin – is making hay from Tether’s misfortunes. Its CFO Jeremy Allaire published a blog post provocatively titled How to Be Stable asserting that USDC’s reserves are held entirely in cash and US Treasuries with maturities of 3 months or less, and that those assets are custodied by Bank of New York Mellon, US Bank and BlackRock. It has also recently stepped up publication of the full breakdown of its reserves from a monthly cadence to weekly, with monthly attestation reports from accountants Grant Thornton continuing.

USDT chart May 2022
Tether’s USDT market capitalisation, May 2022 (CoinMarketCap)
USDC chart May 2022
Circle’s USDC market capitalisation, May 2022 (CoinMarketCap)

As of writing, the market capitalisation of Tether’s USDT has fallen by approximately USD 11 billion since 7 May (when TerraUSD first showed signs of instability) while that of Circle’s USDC has risen by about USD 5.5 billion over the same period.