Market Overview:

Digital assets traded across a broad range this week, as Bitcoin hit a high of almost $28,000 before hawkish commentary from the Fed reversed momentum.

• Bitcoin experienced flat performance within our weekly timeframe; but that doesn’t quite reflect the volatility between Friday and Friday, as it traded over a $1,250 range throughout the week
• The majority of this trading took place between $26,400 and $26,850. Rising from a Friday afternoon low of $26,240 to a Tuesday high of $27,490
• Bitcoin subsequently surrendered most of those gains over Wednesday and Thursday, amidst wider market concerns and pullbacks over Federal Reserve hawkishness
• Digital asset funds continued the recent trend of weekly outflows, amounting to $500m over the last nine weeks; comprised 85% of Bitcoin value
• Ether matched Bitcoin’s momentum but pulled back further, leading to a weekly decline
• Ether hit a weekly high of $1,666 on Monday, dropping to a low of $1,574 late on Thursday
• Overall digital asset market capitalisation remained unchanged at $1.06tn, fuelled primarily by Bitcoin’s rise
• According to industry monitoring site DeFi Llama, total value locked in DeFi this week increased slightly despite Ether’s value decline, growing by $200m to $38bn

Digital assets experienced flat weekly performance, retracing from strong early trading following concerns over continued hawkishness from the US Federal Reserve. Major global banks like Nomura and Citi deepened their involvement with the space this week, alongside VCs, hedge funds, stock exchanges, and city governments. Tokenisation was a key theme of the week’s reporting, as more institutions realise the potential of digital assets and blockchain beyond Bitcoin. Franklin Templeton CEO Jenny Johnson recognised digital assets and blockchain technology as “the greatest disruption to financial services”, and growing institutional demand for staking services saw the development of insurance to go alongside staking.

What happened: Japan’s largest investment bank launches long-only Bitcoin fund

How is this significant?

• Japanese banking giant Nomura Holdings ($500bn AUM) became the latest major financial institution to build a Bitcoin investment vehicle this week, through the creation of a long-only Bitcoin fund by its crypto asset subsidiary, Laser Digital
• According to a press release, the “Bitcoin Adoption Fund” will provide “a seamless way for institutional investors to access the digital asset class”
• Additionally, the firm promises that this is just “the first in a range of digital adoption investment solutions” they will deploy
• Laser Digital head Sebastian Guglietta outlined Nomura’s enthusiasm for digital assets, saying “Technology is a key driver of global economic growth and is transforming a large part of the economy from analogue to digital. Bitcoin is one of the enablers of this long-lasting transformational change and long-term exposure to Bitcoin offers a solution to investors to capture this macro trend”
• Laser Digital went a step further in deepening Nomura’s crypto industry involvement by custodying the fund’s assets with Komainu—founded in 2018 as a joint venture between Nomura, Ledger, and CoinShares.
• Nomura’s home base of Japan—which has moved towards policy-level support of digital assets and Web3—appears more agile in addressing the institutional market than their American contemporaries, who are currently waiting on spot Bitcoin ETF approvals
• Last week $1.53tn AUM Franklin Templeton joined the ETF race, following investment titans like BlackRock, Fidelity, ARK, and Invesco. However, timeframes for potential approval all remain at the mercy of the SEC; a regulator ruled “arbitrary and capricious” in its denial of Grayscale’s request to convert their GBTC fund into a spot Bitcoin ETF.
• Laser Digital co-founder Jez Mohideen believes that “Asia benefitted from what happened in the US and realised the things they need to avoid”, while Laser’s head of distribution, Fiona King, noted that such funds are a reliable way for institutional investors to gain digital asset exposure “backed by established finance, with the highest levels of risk management and compliance”
• Laser Digital secured a Dubai VARA (Virtual Assets Regulatory Authority) licence last month, meaning that institutional investors in the UAE should be able to access the Bitcoin Adoption Fund in a regulated environment without any legal hassles

What happened: Crypto VC raises $580m for two new funds

How is this significant?

• Despite ongoing crypto winter conditions and greatly reduced venture capital activity, digital asset VC Blockchain Capital completed its largest-ever raise this week
• Totalling $580m across two funds, the raise is one of the biggest in the industry this year, and adds to the $2bn AUM currently boasted by the decade-old Silicon Valley VC
• General partner Spencer Bogart told TechCrunch that the two funds—an early-stage fund and an “opportunity fund”—”are allocated roughly two-thirds and one-third of the $580 million, respectively”
• Bogart commented that attempting to raise a figure like $2bn would be too much for the current climate, but that they nonetheless aimed for a significant stack of capital; “It’s doing more of what we’ve been doing for the past decade. This is our bread and butter, and we wanted to stay aligned with LPs [and] think about prior fund sizes, but still grow”
• The aforementioned LPs are split into two broad categories; strategic LPs including Visa and PayPal, and “long-term committed capital like university endowments, family offices and sovereign wealth funds”
• Key areas of focus for the new funds will include DeFi, infrastructure projects, gaming, and web3 social networking
• General partner Kinjal Shah told Bloomberg that the firm would continue to invest via token purchases, although she acknowledged that could be tricky in a US market context; “the regulatory environment is certainly challenging… I would say that there’s perhaps more than normal sort of interest in moving abroad”
• In other significant venture capital news this week, Shawn Shi, co-founder of crypto payments provider Alchemy, launched Oak Grove Ventures, a new $60m VC
• Shi told industry publication TheBlock that the new firm will focus on early-stage Web3, biotechnology, and AI investments
• Two former Andreessen Horowitz (a16z) executives this week launched Bastion, a Web3 infrastructure firm backed by $25m of VC funding
• The funding round was led by their former employers a16z, alongside other industry specialists like Laser Digital and Alchemy

What happened: Hedge fund Brevan Howard predicts “disproportionate returns” from crypto

How is this significant?

• Macro hedge fund Brevan Howard was one of the first institutional investment houses to recognise the potential of the digital asset sector, securing $1bn for the launch of their own crypto hedge fund subsidiary, BH Digital in September 2021
• Despite launching shortly before the market downturn of 2022, BH Digital leadership remains optimistic about the future prospects of crypto assets; speaking at the FERI hedge funds conference in Frankfurt, CEO Gautam Sharma said “We truly believe that this is a very disruptive technology and it can unlock value in many ways. And we are here to enable our institutional investors to find ways to get access to this space”
• Sharma takes the view that digital assets are still at a formative stage in their adoption cycle, akin to the internet in the early 90s; he thus believes in future growth potential and the possibility of “disproportionate returns” for BH Digital
• He also stressed the need for greater regulatory clarity in order to enable true growth within the industry, positing that US uncertainty is keeping many potential investors sidelined
• In other hedge fund news, Bloomberg highlighted several funds making tidy profits in the aftermath of the recent Grayscale court ruling
• Grayscale’s victory over the SEC—and the perceived increased chance of their GBTC fund being converted into a spot Bitcoin ETF—led to a major reduction in the long-running discount of GBTC’s price versus the value of its underlying net asset value
• In Q4 2022, GBTC traded at more than a 40% discount; a figure which has now narrowed to less than 20%
• Investors like ARK, hedge fund Fir Tree, and Saba Capital Management all benefited from this surge in GBTC’s price; Fir Tree registered a return of around 40%, whilst ARK remains the third-largest holder of GBTC, which boasts a 52% year-to-date increase

What happened: Busan to create tokenised commodity exchange in November

How is this significant?

• South Korea’s second-largest city, Busan, will create a digital asset exchange in November, with plans to officially launch in H1 2024, according to a municipal press release this week
• As part of its official “Target 2026 Blockchain Busan” vision, city officials revealed a plan to select a blockchain operator for a localised digital asset exchange in November, with delivery of a functional platform “within the year”
• The exchange will be funded via private capital, with administrative and financial support provided by the city
• Rather than trading established digital assets like Bitcoin and Ether, Busan is building an exchange for trading of tokenised commodities
• Local media reported that “Specifically, items traded through Busan Port, such as gold, silver, copper, and crude oil, are tokenized and traded. In this process, existing infrastructure such as logistics warehouses and certification systems in Busan are expected to be actively utilised”
• As part of Busan’s aim to become a “blockchain city”, local news platform News1 reported that Busan is also building an Ethereum-compatible “blockchain mainnet at the city level” for public services, committing a $75m fund to its development
• Busan City has already trialled blockchain implementation of various public services such as its B-pass and digital vouchers, but found the user experience of different services provided on different blockchains to be sub-optimal; thus the city is now developing its own bespoke chain, interoperable with major public chains like Ethereum and Cosmos

What happened: Franklin Templeton CEO: digital assets are “the greatest disruption” in finance

How is this significant?

• Following Franklin Templeton’s recent entry into the US spot Bitcoin ETF race, the $1.5tn AUM asset manager’s president and CEO Jenny Johnson spoke at the Milken Institute, outlining a vision for digital assets that goes far beyond just Bitcoin
• She identified blockchain technology as “the greatest disruption to financial services”, noting numerous advantages it provides in cost, access, and execution
• In particular, Johnson was bullish on the potential of asset tokenisation; “Tokenisation will ultimately displace ETFs and mutual funds as a wrapper of investment advice… it’s just much more efficient from a cost perspective, and the discovery of information at the time you’re trading”
• Whilst Bitcoin is often described as “digital gold” thanks to its store of value role in a data-driven age, tokenisation can actively digitise gold; as well as any other commodities, funds, or “anywhere where you have a revenue stream”
• Johnson cited a suite of benefits that tokenisation can provide, including accurate fund valuation at purchase via smart contracts (instead of reliance on twice-daily pricing), and accessibility via fractionalisation; “We have a real issue today where only the wealthy access private equity, private credit because of the liquidity nature… blockchain can bridge that gap”
• Franklin Templeton has previous exposure in the space; most notably an SEC-regulated blockchain-based money market fund that records all transactions on public blockchain

What happened: Stablecoin issuer Tether makes €400m AI-focused investment

How is this significant?

• Tether made another major investment this week, as the company capitalises on rising interest rates and their increased yields on the underlying assets that form its backing reserves
• This week, the company revealed a major investment focused on artificial intelligence, investing in cloud computing provider Northern Data Group via its Damoon subsidiary
• Although Tether themselves did not disclose the size of the investment or stake, independent outlets reported the investment amount to around €400m ($427m) and claimed it represented a 20% ownership stake
• If accurate, these figures would represent one of the largest global investments in the chips necessary to power AI; even greater than the nation-level investment of the UK government
• Much of the investment was reportedly centred around the acquisition of hardware allowing Northern Data to scale up their operations, including the rental of said computing hardware power to AI firms
• Tether CTO Paolo Ardoino commented “We are excited about this investment into Northern Data Group as it represents a fresh venture into new technological frontiers… his investment underscores our commitment to responsible growth and innovation while preserving the strength and integrity of Tether tokens’ reserves”

What happened: Boerse Stuttgart to introduce fully-insured crypto staking service

How is this significant?

• Boerse Stuttgart Digital—the crypto arm of the Stuttgart stock exchange—announced plans for a fully-insured digital asset staking service this week, in conjunction with global insurance firm Munich Re
• This will allow investors to participate as validators in proof-of-stake networks like Ethereum, as an expansion of Boerse Stuttgart’s current crypto custody capabilities
• The staking service is designed to address the challenges of network validation, including “slashing”; aka the loss of staked tokens as penalisation for validators who violate network rules or undermine performance with lengthy downtimes
• It’s important to note that network rule violations do not necessarily equal malicious intent; situations like block proposer double votes or attestor double votes can simply be the product of unfortunate timing, but may lead to slashing
• Andre Knoerchen, Head of New Tech Underwriting at Munich Re commented: “Digital assets are a key growth opportunity for the financial services industry… With partners like Boerse Stuttgart Digital and Munich Re combining their strengths, the institutional adoption of digital assets is enabled to progress not only faster but also safer”
• Boerse Stuttgart Digital MD Dr Oliver Vins added “We have noticed an increasing interest from institutional investors in the staking sector, eagerly anticipating the chance to participate, provided they have complete confidence in the security of the environment”

What happened: Contagion latest

How is this significant?

• FTX reporting featured heavily this week, as current FTX management alleged that Sam Bankman-Fried misappropriated company funds via his parents
• Representatives of the bankrupt exchange claim that Bankman-Fried’s Stanford Law School professor parents “enrich[ed] themselves, directly and indirectly, by millions of dollars” through their access and influence via cash and property gifts, alongside employment and consultancy gigs for various arms of the exchange
• His parents’ lawyers deny all the charges, but court papers show email trails from his father complaining about compensation, and millions in donations to a political action group his mother founded
• Stanford University announced it would return the “entirety” of gifts given by FTX and associated entities, amounting to around $5.5m between November 2021 and May 2022
• Distressed debt investors are capitalising on the FTX bankruptcy process; according to Bloomberg analysis, firms including “Silver Point Capital, Diameter Capital Partners and Attestor Capital… have bought more than $250 million worth of FTX debts since the beginning of the year”
• Bankruptcy claim investor Thomas Braziel commented “People made careers off of Lehman and Madoff—I think people see FTX as a Lehman or Madoff [opportunity]… The guys that are buying in these dockets, I consider them some of the smartest people in distressed”
• According to data from a claims market, the value of low-ranking claims has nearly tripled year-to-date, helped by the general growth of the digital asset market in 2023
• The SEC faced another court setback after they were denied a request for immediate access to Binance.US software, as a judge suggested they “come up with more tailored requests and speak with additional witnesses” first
• US has faced a torrid time in light of SEC enforcement, plummeting in trade volume and losing several key executives

What happened: Mt Gox pushes back date of creditor payout

How is this significant?

• The deadline for repayment of Mt Gox creditors was pushed back by a year, as per a letter from Rehabilitation Trustee Nobuaki Kobayashi
• Mt Gox was the largest Bitcoin exchange in the world before a major hack led to its collapse in 2014; kicking off a decade-long legal process that is now nearing its end
• The extension was issued due to the complexity in verifying information from creditors necessary to issue payment
• Some payments may still be issued this year, but the final deadline has been pushed back from October 31st 2023 to October 31st 2024
• At the time of its demise, Mt Gox serviced around 70% of global Bitcoin trades; over 800,000 Bitcoin was lost in the hack, and some industry analysts cited the longer window for creditor payouts as a reason for positive price moves earlier this week
• According to industry publication TheBlock, Mt Gox will compensate creditors from “the 142,000 BTC ($3.9 billion), 143,000 BCH ($31.3 million) and 69 billion Japanese yen ($467 million) that it still holds. The first 200,000 yen worth of each creditor’s claim will be paid in yen. Claims greater than this amount selecting crypto and cash repayments will receive a mix of around 71% crypto and 29% cash after the initial payment”

What happened: Citigroup launches tokenisation service for institutional clients

How is this significant?

• Citi issued a press release on Monday announcing new tokenisation services for institutional clients
• The new Citi Token Services offering will tokenise customer deposits, enabling instantaneous global transfers via blockchain
• Shahmir Khaliq, head of the bank’s services division, stated that the move represented a technological breakthrough; “Digital asset technologies have the potential to upgrade the regulated financial system by applying new technologies to existing legal instruments and well-established regulatory frameworks. The development of Citi Token Services is part of our journey to deliver real-time, always-on, next generation transaction banking services to our institutional clients”
• The tokenised deposits perform the same purpose as bank guarantees and letters of credit in the traditional finance ecosystem, but with the benefits of a 24/7 “just-in-time, programmable basis” for liquidity management
• Citi tested the new solution with global shipping and cargo giant Maersk and a canal authority, “to reduce transaction processing times from days to minutes”
• The technology was devised by city itself, and runs on a private/permissioned blockchain, rather than the public Ethereum network
• This release follows a Citi report from March this year in which the bank predicted securities tokenisation could grow to a $5tn market by 2030