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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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.

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.”