July 3, 2023
This cycle’s version of crypto winter kicked off in spectacular fashion in May 2022. The collapse of cryptocurrencies Luna and TerraUSD taking down Three Arrows Capital collectively wiped out $42 billion of investor assets. Then, in July, Voyager Digital and Celsius Network, two crypto lenders, filed for bankruptcy.
More links in the chain reaction of failure followed, with the biggest being the breathtaking fall of FTX. This fall caused collateral damage in all directions, harming traders and trading firms across the globe, and culminating with the arrest of its founder, Sam Bankman-Fried. As we rounded into 2023, and likely because of these huge investor losses and the failure of two large crypto-associated banks, regulators around the world, particularly in the U.S., began taking a harder look at the crypto sector. This caused fears of an SEC regulatory crackdown, which would include a reclassification of most cryptos as securities, and has led to the delisting of several prominent coins on U.S. exchanges.
This all sounds pretty bad, right? Companies and founders must be fleeing the sector?
Not exactly.
Some are, but others, both in DeFi and TradFi, are using this opportunity to build, retool, consolidate, and acquire. Below, we take a look at some of the more noteworthy activities.
London calling
Prominent U.S.-based VC Andreesen Horowitz, one of the biggest Web3 and crypto investors, unveiled plans to establish an office in London. It would be A16Z’s first international office. The company believes the U.K. is poised to become a powerhouse in crypto, blockchain, and digital currencies, sectors in which it has already committed $7.6 billion. The company is also keen to take advantage of the fact that, from a regulatory standpoint, the U.K. seems to be more hospitable to the sector than the U.S.
In other A16Z news, the VC just led a $29.3 million seed round for Story Protocol. Story describes itself as a developer of a Web3 technology designed to revolutionize how narrative universes are created, unleashing an entirely new way to create, govern, and license IP on-chain. This revolution ultimately formed an ecosystem of “story legos” that could be remixed and composed.
Consensys
The Web3 pioneer has been particularly busy recently, as it continues to help expand the uses of the Ethereum blockchain. They recently announced the integration of their institutional wallet, MetaMask Institutional, with Fireblocks. Fireblocks is a user-friendly platform for building innovative blockchain products. More than 1,800 institutions that utilize Fireblocks will now have the capability to tap into MetaMask Institutional's comprehensive array of portfolio management tools and premier DeFi connectivity.
This will enable them to engage in investment, trading, lending, and borrowing activities across over 17,000 dApps. The partnership further expands the portfolio of MetaMask Institutional, which currently includes 12 top-rated custody solutions. These solutions cater to funds, Web3 companies, and any organizations trying to increase their digital asset exposure.
Your trading desk, run by BloombergGPT
We'd also be remiss if we didn’t at least mention the rapidly evolving development of trading tools combining crypto and AI. AI is everywhere, and it shouldn’t be a surprise that builders are racing to create AI-based crypto tools. We’re already seeing tools for trading, portfolio management, analytics, compliance, risk management, and much more. Some of these tools are merely fancy front-ends on one of the Large Language Models (“LLMs”), but many others are truly new AI tools, taking advantage of the powers of AI and its synergies with trading and investing.
In what may prove to be the Godzilla of finance AI platforms, Bloomberg is currently using its vast financial information IP and knowledge base to develop a 50 billion parameter LLM, specifically trained on a wide range of financial data to support a diverse set of natural language processing (“NLP”) tasks within the financial industry.
According to the company, Bloomberg GPT “will assist Bloomberg in improving existing financial NLP tasks, such as sentiment analysis, named entity recognition, news classification, and question answering, among others. Furthermore, BloombergGPT will unlock new opportunities for marshaling the vast quantities of data available on the Bloomberg Terminal to better help the firm’s customers, while bringing the full potential of AI to the financial domain.”
From this quote, it seems clear that BloombergGPT will be offered to Bloomberg Terminal customers, but it's unclear yet whether non-Terminal users will be able to access it as a standalone service.
The biggest of the big
By far, the biggest TradFi/DeFi story right now is that TradFi behemoths are racing to enter the crypto sector via ETFs:
BlackRock, the world's largest asset manager, with AUM of $9+ trillion, filed an application to launch a spot Bitcoin Exchange Traded Fund (“ETF”) with Coinbase Custody. This partnership would provide trusted storage and management of the BTC in the ETF, as well as Coinbase’s live spot data for pricing.
Invesco, the world’s fourth largest ETF manager ($1.5 trillion AUM) reapplied for a spot BTC ETF, re-upping their original 2021 application.
Wisdom Tree, the world’s tenth largest ETF manager, also reactivated an old spot BTC ETF application. They’re calling their ETF “WisdomTree Bitcoin Trust.” It will list on the CBOE, and its price will be calculated using the CF Bitcoin U.S. Settlement Price, which aggregates price data from various spot exchanges.
These moves are potentially huge. The SEC has approved a number of BTC futures ETFs but has to date refused to do so for spot BTC over concerns about price manipulation and reliability. If approved, these would give investors a regulated way to invest in Bitcoin, which would be a landmark in the acceptance of crypto by the investment community, and go a long way toward rebuilding faith in digital assets.
Your trusted name in … crypto?
Another big TradFi player pushing forward in DeFi is Fidelity Investments. This March they finally opened their crypto trading platform to U.S. citizens in the 36 states. Fidelity Digital Assets offers these services. Called Fidelity CryptoSM, it currently enables users to trade only Bitcoin and Ether, and they can only send cash to/from the platform, not crypto.
Trading is free, but with a commission spread of up to one percent. Most importantly, though: it comes with the Fidelity name, custody, and the reassurance this gives Fidelity’s 40 million retail customers. If anything is going to mainstream retail crypto investing in the U.S., this is probably it.
In a related story, a new crypto exchange just went live. It’s name is EDX Markets, and it is backed by huge investment names Fidelity Digital, Citadel Securities, and Charles Schwab. EDX is non-custodial, acting as a platform on which its users can execute and settle, and allows trading in Bitcoin, Ethereum, Litecoin, and Bitcoin Cash.
Ja, krypto!
Deutsche Bank AG, Germany’s largest bank, has filed an application with BaFin, Germany’s financial regulator, for a license to offer crypto custody services. This is another in the rush of big TradFi institutions that see an opening now that regulators are cracking down on unregulated crypto exchanges.
Deutsche has reportedly been developing its platform since late 2020, and the move is a strategic play to snag a share of the fee income generated by crypto. This represents a change of heart for the bank, which in 2021 described BTC’s value as “entirely based on wishful thinking.”
TradFi killer app
TradFi J.P. Morgan’s Onyx business unit, which builds next-gen blockchain and digital currency products and services, continues to plow forward despite crypto market turmoil. According to Tyrone Lobban, Head of Onyx, “We think that tokenization is a killer app for traditional finance.” This comes at a time when tokenized bank deposits seem to be gaining a foothold, or at least increased mindshare, around the world. Additionally, tokenized versions of U.S. treasuries are becoming a thing, with the market cap of tokenized money market funds quadrupling in the first half of 2023.
Come on in from the cold!
While it’s crypto chilly in the U.S., crypto adoption is heating up in other parts of the world, specifically in emerging markets. Predictably, it’s hottest in nations such as Nigeria, Turkey, Columbia, and Argentina that are facing significant economic challenges. Those challenges include inflating or devaluing currencies, spotty borrowing/lending capabilities, and suspect banking infrastructure. This is leading to the increased development of DeFi infrastructure in these countries.
One such example is Nigeria, whose government, in May 2023, approved the official use of blockchain technology in the nation. Nigeria’s relevant agencies are now developing appropriate usage and regulatory frameworks. This comes, by the way, after years of the Nigerian government warning against and prohibiting crypto-related transactions. While still cool on unbacked crypto offerings, the government seems to have warmed to blockchain’s infrastructure benefits.
According to a long tweet from Nigeria’s Federal Ministry of Communications and Digital Economy, "[Our vision] is to create a blockchain-powered economy that supports secure transactions, data sharing, and value exchange between people, businesses, and government, thereby enhancing innovation, trust, growth and prosperity for all."
Paging Agent Smith
Okay, so this doesn’t really belong here, but we couldn’t let this news item slip by without mentioning it. It seems the U.S. Secret Service has its own NFT collection. This federal asset came to light on May 15, when reps from the Service’s San Francisco Field Office and the Bay Area Regional Enforcement Allied Computer Team sat for a Reddit AMA (Ask Me Anything).
The Secret Service is quite fluent in crypto because, unbeknownst to most citizens, one of its responsibilities is protecting the U.S.’s financial infrastructure. In the old days, that often meant going after counterfeiters; these days, it often means going after crypto scammers. The AMAers also fessed up to the fact that it’s easier to commit bad acts with good old cash than with crypto, debunking a media talking point that refuses to die.
Duck duck goose
Technically, this doesn’t belong here either, but we’re including it as yet another proof of that timeless trading philosophy, “What goes around, comes around.” NFTs have been hit particularly hard during crypto winter, especially art NFTs. Trading volumes have collapsed, marketplaces have closed, and you don’t hear much about $Million+ Apes or Punks or whatevers anymore.
However, there was one whopper of an NFT sale recently. An art NFT entitled "Ringers #879 (The Goose)” by Dmitri Chernik (see right) was sold at Sotheby’s for $6.2 million, the second largest sum for a generative art NFT ever, after Beeple’s $69 million sale.
Who was the previous owner?
Three Arrows Capital, whose collapse kicked off the start of crypto winter.
