Market Overview:

Digital assets experienced slight growth this week, with some speculating that the imminent possibility of a US government shutdown could strengthen Bitcoin’s value proposition.

• Bitcoin traded across a large range following flat weekend trading, ranging from a Monday low of $26,050 to a Thursday high of $27,230
• The majority of this trading took place between $26,170 and $26,520, with a rapid ascent on Thursday
• Some analysts posited that the probability of a US government shutdown in October could boost Bitcoin’s benefits, just as the US banking crisis earlier this year when it rose 25% throughout March
• Stephane Ouellette, co-founder and CEO of FRNT Financial, told Bloomberg “We actually saw Bitcoin rally as a sort of safety-hedge against further banking unrest. It will be very interesting to see if the market’s going to buy Bitcoin during all different types of periods of US-economic/financial uncertainty or just in a banking crisis context as we saw earlier in the year”
• Ether outperformed Bitcoin after several weeks of decline, gaining nearly 4% over the week
• Ether traded in a steadier range (between $1,574 and $1,594) for longer than Bitcoin (from Friday until Thursday), before following Bitcoin’s bullish momentum shift on Thursday afternoon, with a weekly low and high of $1,567 and $1,662
• Overall digital asset market capitalisation increased to $1.07tn
• According to industry monitoring site DeFi Llama, total value locked in DeFi this week grew by around $1.2bn to $39.2bn

Digital assets grew this week, with some analysts suggesting a likely US government shutdown could crystalise their benefits in the same way that Q1’s US banking crisis did. The SEC could find itself operating with minimal staff in the event of such a shutdown, but was very busy this week; expediting approvals for Ethereum futures ETFs whilst also speeding up official deferrals for spot Bitcoin ETFs. SEC chair Gary Gensler testified before the House Financial Service Committee, and faced many challenges from politicians, including a bipartisan request to finally grant spot ETFs. Outside of the political arena, there was news around major exchanges broadening their product offerings, stablecoin developments, a new hedge fund, and much more.

What happened: Valkyrie and VanEck announce Ethereum futures ETFs

How is this significant?

• Asset manager and ETF specialist VanEck made the first move in the Ether futures ETF space this Thursday, announcing the upcoming launch of their VanEck Ethereum Strategy ETF (EFUT)
• The actively-managed EFUT will not hold any Ether directly, but rather “will invest in standardised, cash-settled Ether futures contracts” trading on CFTC-registered exchanges
• EFUT will be listed on CBOE, and be managed by VanEck’s head of active trading, Greg Krenzer
• Early indications suggest the ETF will trade with a 66bps fee, representing a significant discount over the 95bps fee charged by Bitcoin futures ETFs like BITO
• Although the first Bitcoin futures ETF was approved almost two years ago in October 2021, this makes VanEck the first approved issuers of a US-based Ether futures ETF
• This follows in the footsteps of VanEck’s own Bitcoin futures ETF, which listed back in November 2021
• It also follows reporting by Bloomberg ETF analyst Eric Balchunas which suggested that, whilst the SEC keeps investors in the lurch on long-awaited spot Bitcoin ETF approvals, they actively solicited filings for Ether futures ETFs ahead of a possible US government shutdown which would pause the commission’s work
• Speaking on X (formerly Twitter), Balchunas stated “Hearing the SEC wants to accelerate the launch of Ether futures ETFs (because they want it off their plate before shutdown) so they’ve asked the filers to update their docs by Friday pm (no small task to jam into 48hrs, esp for indie issuers), so they be effective Monday and trade Tuesday”
• On Tuesday, Balchunas and his colleague James Seyffart predicted a 90% likelihood of Ether ETFs going live in October, with
• However, depending on your perspective, Valkyrie may have been the first entrant into the Ether futures ETF space
• Unlike VanEck, they entered by amending an existing Bitcoin futures ETF to include Ether futures exposure as well, switching their BTF fund to a 50/50 Bitcoin/Ether futures ratio from next week week onwards
• Valkyrie chief investment officer Steven McClurg was bullish on the second-largest digital asset, telling FOX Business “We are thrilled to be the first to offer Ether futures to our investors as interest in the asset has grown exponentially over the past year”
• Other ETF issuers expected to follow in the space include VolatilityShares, whose 2x leveraged Bitcoin futures ETF was cited by analysts as a catalyst for Ether futures ETFs

What happened: Remittance giant Moneygram develops crypto wallet

How is this significant?

• Global remittance firm MoneyGram this week announced that they will launch a (non-custodial) crypto wallet to enable remittances via USDC transfers
• Users of the wallet will be able to cash out digital assets at MoneyGram locations worldwide, as well send them directly to others via the MoneyGram wallet app
• In a press release, MoneyGram CEO Alex Holmes declared “Our vision to connect the world’s communities, by empowering our customers through innovative financial solutions, takes another step forward today… The MoneyGram non-custodial digital wallet advances this mission”
• Stablecoin USDC is a key aspect of the new offering, as Holmes told Fortune it provided a compelling means of hedging against national currency valuations in the country of destination; “We’re redefining paradigms around what it really means to move money between fiat currencies”
• He added that this step forward would not be the end of the company’s digital asset journey; “We’re turning MoneyGram into a global ATM concept using blockchain… We’re excited to share more in the coming months”.
• Remittances have oft been cited as a beneficial usecase for digital assets, as blockchain enables borderless transfers, instant transfers, and 24/7 transfers
• Rather than fighting against digital assets, MoneyGram decided to leverage them to their own benefit; Holmes commented “As a global fintech, the work we’re doing on the blockchain is one of the many ways we’re thinking about… playing a broader role in the lives of consumers globally”
• An additional—and compelling—benefit for users is transaction costs. According to World Bank estimates, the average cost of sending remittances globally is 6.25% using legacy infrastructure
• Blockchain and crypto rails can drastically reduce this figure to to the level where companies charge fees around 1% and remain profitable
• An important note is that the new wallet is built on the Stellar blockchain—founded by a former Ripple executive in 2014—MoneyGram can ensure that transfer costs are kept low, boosting their bottom line
• Unlike more general and versatile smart contract blockchains such as Ethereum, Stellar was designed to specialise in one thing only; low cost value transfers, enabling MoneyGram to enjoy the convenience and benefits of stablecoin transfers, without volatile transaction costs
• Another important aspect to note is that the MoneyGram wallet is non-custodial, meaning the user doesn’t control the private keys; they are granted access to the blockchain address, but the funds remain under the ultimate control of MoneyGram, enabling necessary KYC and AML measures to be satisfied
• A non-custodial wallet from an established reliable brand also removes an element of complexity from the initial contact with digital assets, especially useful when remittance customers are often sending funds home to elderly relatives who may be less technologically-savvy.

What happened: SEC delays decision on several spot Bitcoin ETF filings

How is this significant?

• Despite rushing through Ether futures ETF decisions ahead of the anticipated government shutdown, the SEC decided to do the opposite with high-anticipated spot Bitcoin ETFs; rushing through to announce deferrals
• The first to be deferred was the first to be filed; the ARK/21Shares application which predated the slew of entrants once BlackRock reignited interest in the space
• The actual deadline for decision or deferral was November 11th, but concerns over an impending SEC shutdown evidently sped their hand; Bloomberg ETF analyst James Seyffart commented “I’m shocked they went this early on ARK and 21Shares. My assumption is they’re worried about the government shutdown and trying to get ahead of that”
• ARK’s proposed ETF was initially filed in April, and this decision thus represents its third delay from the SEC, and sets a final decision deadline of January 10th
• This was followed on Thursday by a series of rapid-fire deferrals for BitWise, BlackRock, and Invesco, with deferrals expected for the rest on Friday
• Some cynical observers suggest that the government shutdown may have been welcomed by the SEC at this time, since their recent court defeat against Grayscale effectively ruled their key criteria for all previous spot Bitcoin ETF rejections “arbitrary and capricious”
• Thus, by deferring all decisions now shielded by a shutdown, the SEC could buy itself time to explore new reasonings for rejections; or “inventing another reason for refusal”, as Bernstein analysts put it
• Meanwhile, a new report released this week by Alliance Bernstein speculated that a spot ETF approval could lead to crypto fund management growing over ten-fold within five year, beyond $500bn
• The analysts wrote that demand from institutional investors and investment advisors could “transition from a cottage industry ($50 billion of managed assets) to a formal, regulated asset management industry with $500-650 billion of assets over the next 5 years… This would imply a 10% ETF share for Bitcoin and Ether market cap, and 5-6% share for liquid crypto hedge funds”
• In a best-case scenario, they estimated that the figure could grow up to $650bn, anticipating “2024 as the landmark regulatory year for approval of ETFs”

What happened: Gary Gensler grilled on digital assets before US Congress

How is this significant?

• On Wednesday, SEC chair Gary Gensler testified before Congress’ Financial Services Committee on his agency’s work, facing major criticisms and pushback on several issues—including the digital asset industry
• House Republicans were (as expected) especially critical of his tenure in charge thus far, leading to several tense exchanges, including one in which Committee chair Patrick McHenry threatened to subpoena Gensler as he accused him of obstruction and obfuscation over investigations into FTX
• McHenry told Gensler “Your lack of responsiveness to this committee’s legitimate oversight continues to be unacceptable. In February, this committee made multiple requests for documents to the SEC. Yet, seven months later, the committee has not received a single non-public document that was not part of a FOIA production”
• He also cited the SEC’s recent “losing streak in the courts” and claimed “your efforts to choke off the digital asset ecosystem have created real harm for consumers and our markets. You said the law is clear, but your actions have created more confusion and lasting damage… your actions have pushed legitimate digital asset activities out of regulated financial institutions where consumers are best protected”
• Gensler did (eventually) confirm to McHenry that he didn’t view Bitcoin as a security since it doesn’t satisfy the Howey Test, but refused to state that it is thus a commodity
• After Gensler noted that “even gold medalists have to keep training” in reference to his agency’s zealous enforcement approach, representative Andy Barr responded “With all due respect, Mr. Chairman, if the U.S. capital markets are a gold medalist, you are the Tonya Harding of securities regulations. You are kneecapping the U.S. capital markets with the avalanche of red tape coming out of your commission”
• Republican Tom Emmer, a noted supporter of digital assets, accused Gensler of “regulation by harassment” and bias due to his banking background; noting Gensler’s previous quote that “Over the past year, several bank executives have shared their concerns with me about the sheer number of depositors who have moved money from their bank accounts into crypto-related exchanges and wallets”
• He followed this up with a quote from a recent SDNY court ruling in favour of a Defi exchange, noting that underwriters such as Gensler’s previous employers are “precisely the types of individual roles that decentralised exchanges were designed to eliminate”
• Emmer concluded by referring to recent SEC legal defeats, saying “Even the federal courts are highlighting the damage, you sir, are doing to our constituents and they’re telling you that you don’t have the legal authority to accomplish your goal of squashing competition in the financial markets”
• Democrat Ritchie Torres meanwhile attempted to undermine Gensler’s claims that he and the agency were “technology-neutral”, first asking whether purchasing a Pokémon card constituted a security (Gensler said no), and then whether purchasing a tokenised Pokémon card on a digital, blockchain based exchange did (“I’d have to know more… it’s when the investing public expects a profit based on the efforts of others”)
• Torres called Gensler’s evasions “deafening” and “damning”, showing that whilst support for the sector certainly skews Republican, it isn’t an exclusively partisan issue
• Prior to his testimony, a bipartisan group of politicians (including the aforementioned Emmer and Torres) wrote an open letter to Gensler urging him to stop discrimination “against spot Bitcoin exchange traded products”, noting that “Following the Court of Appeals’ decision [re: Grayscale] there is no reason to continue denying such applications under inconsistent and discriminatory standards”

What happened: Crypto asset manager CoinShares starts US hedge fund

How is this significant?

• CoinShares, a European digital asset manager, entered the US market this week, via the creation of a hedge fund
• Particularly noted as a crypto ETP creator, the Jersey-based firm currently has around $2.5bn AUM, but no strong US presence thus far
• The new CoinShares Hedge Fund will only be available to qualified investors, and will include the integration of the firm’s proprietary trading division
• CEO Jean-Marie Mognetti told Bloomberg that they viewed the time as rife for such a move; “The market, the macro environment is very fertile for this because of monetary policy, lots of volatility, macro uncertainty. When you get interest rates which are a bit higher, being able to deliver some kind of outperformance is much more interesting”
• He also said their insight into data via the blockchain gave them confidence; “We can see now that the stats on-chain and also off-chain are showing that people are starting to hold to their Bitcoin and are not letting them go. People are starting to realise and go back to the real principles of Bitcoin, for instance, whether it was a reserve of value, a way of storing of value for them for the long term, and not just like a trading asset”

What happened: Stablecoin news

How is this significant?

• In a client note on Tuesday, JP Morgan analysts warned that stablecoin issuers could potentially disrupt certain funding markets due to restrictions placed upon them
• As fully-backed stablecoins hold backing in the form of cash or highly-liquid assets
• However, strategists led by Teresa Ho point out that the exclusion of certain money funds from the Federal Reserve’s overnight reserve repo facility (ONRRP) may drive stablecoin issuers to depend more on treasury bills, “potentially pushing those rates below the offering level on the RRP—currently 5.3%”
• Ho wrote “While prohibiting access to non-standard money-market funds makes sense from a financial stability perspective, it risks potentially disrupting the already-soft floor for money market rates that the Fed’s ON RRP currently provides”
• The two largest stablecoins—USDC and USDT—had reserve portfolios of around $114bn in June, with 60% comprised of treasury bills; around 2% of the total T-bill market
• However, JP Morgan believes that “additional growth in stablecoins could crowd out other buyers and intensify the supply-and-demand imbalance in the money-market space, leading to shortages in T-bills and repos, pushing rates even lower”
• Meanwhile, digital asset exchange Binance, through its Binance Japan unit, looks set to introduce three new stablecoins to the market next year
• Japan legalised stablecoin issuance in June this year, and Binance can now issue stablecoins through a partnership with Mitsubishi Financial Group’s trust banking arm, MUFG
• Issuance plans require Binance to gain a licence in Japan as an electronic settlement methods transaction business provider, and currently involve proposals for stablecoins denominated in US dollars, Euros, and Yen

What happened: Digital asset exchange Kraken plans expansion into stock trading

How is this significant?

• According to Bloomberg sources, American digital asset exchange Kraken is planning to add stock trading to their platform, aiming to launch in 2024
• The source told Bloomberg that the company would trade US stocks and ETFs in the US and UK through a new division called Kraken Securities
• Currently, Robinhood offers both services, and FTX had previously announced plans to branch into stocks before its collapse
• Thanks to enforcement-driven declines at Binance this year, Kraken’s market share in digital asset spot trading has grown to the highest levels since 2018, at around 3.5%
• In other exchange news, Coinbase secured a licence from the Bermuda Monetary Authority to extend perpetual futures trading to non-US retail customers
• This follows on from its May 2023 launch, in which Coinbase’s licence permitted it to offer perpetual futures to non-US institutional customers
• According to Coinbase’s announcement, “The global crypto derivatives market represents ~75% of crypto trading volume worldwide, clearly indicating a strong demand from traders for derivatives. However, only a few trusted players exist in the global crypto derivatives market that provide the security and transparency that crypto traders need to trade with confidence”

What happened: Contagion latest

How is this significant?

• Former FTX CEO Sam Bankman-Fried was denied release during trial by US Judge Lewis Kaplan this week
• Prosecutors argued that Bankman-Fried’s alleged difficulties in preparing for trial represented “inconveniences common to all incarcerated defendants.”, and his pre-trial assistance thus far represents “accommodations beyond those accorded to most detainees”
• The New York Post reported that Gemini exchange withdrew about $282m from Genesis in August 2022, ahead of Genesis’ collapse in November last year
• On X (formerly Twitter), Gemini responded the funds were from the exchange’s Earn program; “Earn users’ money” and belonged to neither the crypto exchange nor to its billionaire co-founders… As a result of our risk management, Earn users had $282 million less exposure to Genesis when Genesis halted redemptions on November 16”
• An unlicenced crypto exchange, JPEX, was accused of defrauding investors out of over $190m in Hong Kong, with police raids and arrests widely publicised
• Commentary indicates that the visible police response to the exchange “was meant to demonstrate that authorities, who introduced a new regulatory regime for cryptocurrencies four months ago, will deal harshly with any wrongdoers”

What happened: MicroStrategy further increases Bitcoin holdings

How is this significant?

• MicroStrategy, the largest corporate holder of Bitcoin, added even more to their holdings over the last few months, according to a new SEC filing
• The software firm used stock sales to fund $150m of Bitcoin purchases—5,455 Bitcoin at an average price just above $27,050
• The Bitcoins were acquired between the 1st of August and 24th of September, bringing the company’s holdings to 158,245, with a total acquisition spend of $4.68 billion
• MicroStrategy’s share prices have followed Bitcoin’s performance this year, effectively acting as a US stock market proxy for Bitcoin exposure; Bitcoin is up over 60% year-to-date, and MicroStrategy shares have doubled (albeit after stock prices dropped 70% last year)

What happened: Taiwan releases guidelines for digital asset exchanges

How is this significant?

• Taiwan became the latest major economy to add some clarity to its digital asset market this week, issuing guidelines for crypto exchanges
• The island’s Financial Supervisory Commission (FSC) released a statement outlining its approach, specifying that any offshore exchanges must be FSC-registered to serve Taiwanese customers
• The statement said “Foreign virtual asset platform operators that have not registered under the company laws and have not declared compliance with anti-money laundering regulations to the FSC may not solicit business within Taiwan or target Taiwanese nationals”
• Additionally, derivatives aren’t permitted in the Taiwanese market; exchanges are “not allowed to engage in operations involving derivative financial product transactions with virtual assets as underlying assets or virtual asset businesses with securities-like characteristics”
• Nine Taiwanese exchanges have already set up an industry working group, with a view towards becoming an officially-recognised organisation from October onwards
• Wayne Huang, CEO of local exchange XREX told industry publication TheBlock that the new regulations “give birth to a new industry, providing this new industry legitimacy, oversight, a solid path to grow, and an accelerated means to acquire public trust”