Market Overview:

Digital assets recovered from last week’s pullback, posting weekly growth despite news of a DoJ settlement against the industry’s largest exchange.

• Bitcoin traded across a wide range, dipping to a weekly low of $35,910 on Friday and dipping below $36,000 again in the aftermath of news regarding Binance paying a $4.3bn fine to the US
• Bitcoin recovered to hit a weekly high of $37,810 on Wednesday, with the majority of weekly trading occurring between $36,300 and $37,200
• Ether followed similar chart patterns to Bitcoin, but outperformed it over the week, growing from a Friday low of $1,916 to a Thursday high of $2,085
• Overall digital asset market capitalisation increased to $1.42tn
• Digital asset investment products experienced an 8th consecutive week of inflows, totalling $176m and experiencing double the annual trading average
• The crypto industry fear/greed index remained stable at 72/100; denoting “greed” in the market, but below the levels of a fortnight ago
• According to industry monitoring site DeFi Llama, total value locked in DeFi this week grew to $47.2bn, helped by Ether’s appreciation

Digital assets returned to growth this week, despite momentary market nerves following enforcement action against Binance. Ultimately, investors appear to have favoured the certainty of a resolution over the uncertainty of previous hearsay and conjecture regarding the DoJ investigation, as the market soon rebounded from the news. Elsewhere, several European banks (and Japanese financial giants) launched new digital asset offerings, as a Bitcoin advocate became Argentina’s president-elect. Tokenisation continues to gather steam, and a former NYSE president bought a major crypto publication and Fidelity became the latest major name to join the spot Ether ETF race.

What happened: Binance reaches $4.3bn settlement with US Department of Justice

How is this significant?

• Crypto asset exchange Binance this week reached a settlement in ongoing investigations from US prosecutors, leading to a $4.3bn fine and the resignation of Changpeng Zhao (as well as a personal $50m fine and potential 18 month sentence for Zhao, pending sentencing in February)
• In particular, the DoJ identified sanctions violations (involving both nations and organisations) as a particularly egregious failing of the exchange, and that its growth was spurred, in part, by lacklustre AML or KYC practices
• Changpeng Zhao, known as “CZ”, was the long-standing CEO of Binance, which grew to become the largest global crypto trading platform since its launch in 2017, but along with his fine must step away from any executive roles within Binance (though he may maintain a majority ownership)
• To contextualise, this $4.3bn fine—though one of the largest corporate censures in history—is still dwarfed by compliance fines paid by TradFi companies with decades (or even centuries) of operational experience
• The likes of Goldman Sachs, Deutsche Bank, JPM, Credit Suisse, BNP Paribas, and Bank of America have all faced greater fines than Binance (with the record standing at $30.6bn for BoA) for various compliance failings or illicit practices
• Despite the massive fine, some industry analysts still identified the news as a net positive for the industry; Bloomberg called the settlement a “grey swan” rather than a “black swan event”, writing “That Binance ends up surviving a coordinated, blockbuster investigation by paying $4.3 billion, replacing the CEO and promising to do better next time is considered a major win, rather than a loss of faith that would have accompanied a harsher outcome”
• JP Morgan analysts led by Nikolaos Panigirtzoglou agreed, telling industry publication TheBlock “We see the prospect of settlement as positive as uncertainty around Binance itself would subside… For crypto investors the prospect of settlement would see the elimination of a potential systemic risk emanating from a hypothetical Binance collapse”
• Matrixport analyst Markus Thielen said the resolution was bullish, far below a speculated $10bn fine—and free from any allegations of commingling funds
• Janet Yellen proclaimed that “Binance turned a blind eye to its legal obligations in the pursuit of profit”, but erstwhile rival, Coinbase CEO Brian Armstrong, put a positive spin on the news, calling it “an opportunity for the industry to turn the page”
• Armstrong also opined that this could move investors towards more compliant exchanges (implying Coinbase); saying that clarity in AML/KYC regulations, must be replicated in other aspects of the industry (such as market structure)
• A possible silver lining in Zhao’s resignation may be the appointment of Binance’s new CEO; Richard Teng, who steps up into the role from his former position as the exchange’s Global Head of Regional Markets
• Teng boasts a wealth of prior experience from the world of TradFi; including regulation-side at the Monetary Authority of Singapore, Singapore Exchange, and Abu Dhabi Global Market (ADGM)
• In court, Zhao declared “I want to take responsibility”, and in a tweet he pointed out that unlike FTX, regulators didn’t allege any market manipulation or fund misappropriation in their charges against Binance
• Though he pled guilty, US prosecutors nonetheless tried to bar Zhao from returning to his home in the UAE, despite him posting a $175m bond
• Teng declared he will work to “continue to meet and exceed the expectations of stakeholders while achieving our core mission, the freedom of money”, seeking to maintain the exchange’s 150 million customers
• The market briefly reacted to news of Zhao’s resignation, sending Bitcoin below $35,800, but at the time of writing it has recovered to trade at over $37,000; reflecting progress on the weekly chart
• Binance withdrawals also increased in the immediate aftermath of the news, but not above historic levels
• In other enforcement action news, the SEC alleged that US exchange Kraken is violating securities laws, less than a year after suing them for their staking program
• Kraken co-founder Jesse Powell maintains that his exchange has acted within regulatory bounds, tweeting that the sector “feels a bit more fair” following Binance’s fine, alleging that they grew faster than Kraken by being less compliant

What happened: Fidelity follows BlackRock in spot Ether ETF filing

How is this significant?

• Hot on the heels of BlackRock’s spot Ether ETF filing, $4.5tn AUM finance giant Fidelity followed suit, filing for their own spot Ether ETF
• If approved, the product would “track the performance of Ether, as measured by the performance of the Fidelity Ethereum Index”, and list on the CBOE BZX exchange
• Bloomberg Intelligence analyst James Seyffart noted that Fidelity were the seventh applicant to file in an increasingly-crowded spot Ether ETF race
• In the proposal, Fidelity noted that American investors are currently missing out’ “Heretofore, US retail investors have lacked a US regulated, US exchange-traded vehicle to gain exposure to [Ethereum]. Meanwhile, investors in other countries… are able to use more traditional exchange-listed and traded products”
• Elsewhere in the filing, Fidelity called on legal precedent to urge approval for spot crypto ETFs, noting the recent Grayscale court victory which ruled the SEC “arbitrary and capricious” for rejecting spot Bitcoin ETFs whilst approving futures products
• Fidelity also argued approval strengthens regulation; “approval of a Spot ETH ETP would represent a major win for the protection of US investors in the crypto asset space. If a Spot ETH ETP was available, it is likely that at least a portion of the billions of dollars tied up in those proceedings would still reside in the brokerage accounts of US investors”
• In other ETF news, the first fee (8%) for a spot Bitcoin ETF filing was revealed via an update by ARK and 21Shares
• Bloomberg ETF analyst James Seyffart believes there could be a race towards the 0.5% average ETF fee, but also concedes “the fact that Ark and 21Shares have updated their filing from a 70 basis point fee to 80 basis points might mean that running these products is going to cost even more than some sponsors and issuers thought it would”
• 8% would still undercut existing Bitcoin exposure vehicles such Bitcoin futures ETFs, and Grayscale’s GBTC trust
• GBTC’s 2% fee hasn’t been too much of a hindrance as of late; demand ignited by ETF filings has dropped GBTC’s discount to NAV below 10% for the first time in over two years; but JP Morgan believes it could experience $2.7bn in outflows if converted to an ETF, as investors would seek to cash out
• Bloomberg Intelligence estimates that spot Bitcoin ETFs could grow to a $100bn market, claiming that potential “ETF approval is driving money managers to crypto”

What happened: Austria’s Raiffeisenbank opens up retail digital asset trading

How is this significant?

• Raiffeisenbank—the second-largest bank in Austria—revealed plans to roll out digital asset trading capabilities for retail customers no later than the end of January
• The move will be conducted in conjunction with European crypto exchange Bitpanda, following a partnership agreement earlier this year
• Initially, trading services will be limited to customers in Vienna (where both companies were founded), before rolling out nationwide
• As Curt Chadha, Raiffeisenbank’s head of innovation told Coindesk; “We are starting in Vienna where about a quarter of Austria’s population lives. The customer can use their mobile device to enter Bitpanda through the Raiffeisen app… confirming a trade will work exactly like an account-to-account bank transfer”
• In other European banking news, Santander is launching Bitcoin and Ether trading services for private wealth customers in Austrian neighbour Switzerland
• Assets are custodied directly by the bank, and other crypto assets may be added in future, according to an internal announcement viewed by Coindesk
• John Whelan, Santander’s head of crypto and digital assets stated “Swiss regulation related to digital assets is one of the first and most advanced in the world… As holding of crypto as an alternative asset class continues to expand, we expect that our clients prefer to rely on their existing financial institutions to be responsible for their assets”

What happened: South Korea to launch retail CBDC pilot

How is this significant?

• Next year, South Korea will begin trialling a national digital currency, according to reports in the nation’s Korea Times newspaper
• The CBDC trial will be jointly administered by the Bank of Korea (BOK), Financial Services Commission (FSC) and Financial Supervisory Service (FSS)
• Around 100,000 Koreans across the cities of Jeju, Busan, or Incheon will participate in the pilot, allowing them purchase goods with “Digital Won” deposit tokens issued by commercial banks, between next November and January 2025
• The money will be “programmable” insofar as it can only be spent on selected goods or services; a particular criticism many observers have of CBDCs
• The BOK outlined several advantages of a CBDC; “digital currencies have the potential to significantly address challenges with existing voucher systems, such as special grants during COVID-19 and childcare grants offered by the government”
• In other Asian policy news, Singapore moved to further restrict retail participation in digital asset trading or crypto speculation
• The Monetary Authority of Singapore is cracking down on incentives for retail trading, including “referrals, learn-and-earn programs and similar promotions”
• These measures will be phased in from mid-2024 onwards

What happened: Argentina elects pro-Bitcoin president

How is this significant?

• On Sunday, Argentinians voted for populist candidate (and Bitcoin advocate) Javier Milei in the country’s run-off election, following his earlier primary success with a 55% share of the vote
• Milei previously served as chief economist at Corporacion America Internacional, and appeared at the WEF, but has staunch libertarian ideals; identifying the nation’s central bank as a “scam”, forcing an “inflationary tax” on citizens, whilst praising Bitcoin as a return to “private money”
• He also called Bitcoin “the natural reaction against central bank scammers” and praised its transparent issuance mechanisms
• Milei’s opponent, Economy Minister Sergio Massa, proposed the opposite; suggesting a CBDC as a means to tackle inflation, whilst Milei wants to “shut down the central bank, replace the Argentine peso with the US dollar, and embrace decentralised finance” in an “economic shock therapy” approach
• Some speculate Milei’s inauguration could “supercharge” adoption of digital assets across Latin America’s second-largest economy; Grayscale published a research note on Monday, writing “His presidency could pave the way for greater acceptance and integration of cryptocurrencies in Argentina’s economy… Milei sees Bitcoin as a crucial tool in countering the inefficiencies and corruptions of centralised financial systems”
• Argentina is perhaps better conditioned than any other country to appreciate some of the fundamental properties of digital assets like Bitcoin, such as predictable, guaranteed issuance rates; national inflation currently stands at nearly 143%, but this isn’t the first time the country has battled hyperinflation

What happened: UK chancellor supports digital asset industry in new budget

How is this significant?

• In the UK’s new mini-budget (or Autumn Statement) published this week, chancellor Jeremy Hunt outlined measures to help grow the digital asset sector
• Most notably, the government will create a sandbox to speed adoption of digital assets across the finance sector; “The government will lay a statutory instrument to implement the Digital Securities Sandbox, delivering on the Edinburgh Reform announcement to implement a Financial Market Infrastructure Sandbox in 2023”
• Zodia Markets general counsel Dina White outlined the significance of this commitment; the sandbox “allow for a wide range of assets to interact with wider financial market activities, such as being used as collateral, or as part of repo transactions. Given that these will include both ‘digitally native’ securities and digital representations of traditional instruments, this represents exciting experimentation in a well-established industry”
• White added “We are seeing a continual progression of digitalization across a range of financial instruments, and this represents a critical step in the adoption of new technologies as they are applied to traditional financial assets”
• In other British news, Reuters reported on Friday that UK investment managers have approval to create tokenised funds, according to industry trade body the Investment Association
• Michelle Scrimgeour, chief executive of Legal & General Investment Management, commented “Fund tokenisation has great potential to revolutionise how our industry operates, by enabling greater efficiency and liquidity, enhanced risk management and the creation of more bespoke portfolios”

What happened: UAE crypto miner IPO 33x oversubscribed

How is this significant?

• Phoenix Group, a crypto asset miner listing publicly on the Abu Dhabi Securities Exchange (ADX) reported this week that its IPO was 33 times oversubscribed, indicating ongoing interest in the industry within the Emirates
• The UAE firm was offering 907,323,529 shares at 1.50 dirhams each, targeting a raise of 1.36bn dirhams ($368 million)—equivalent to just under 18% of the company’s shares
• This limited supply evidently bred great demand; according to a press release “Retail investors oversubscribed 180 times and professional investors contributed to a 22-fold oversubscription”
• Phoenix offers hosted mining and rented hashrate services, as well as running the M2 crypto exchange powered by a proprietary ERC-20 token on the Ethereum blockchain
• Trading of the shares is scheduled to go live on December 4th, so it remains to be seen whether the levels of IPO oversubscription translate to similar appetite at the opening bell

What happened: SBI and Sumitomo Mitsui launch tokenised securities exchange

How is this significant?

• Osaka Digital Exchange (ODX), a joint venture between Japanese finance giants SBI and Sumitomo Mitsui, will begin the trading of tokenised securities from the 25th of December onwards, according to a press release
• ODX’s system for trading security tokens, called START, was approved by regulators last week, leading the exchange to move swiftly on opening up trading
• Real estate firm Ichigo Owners will issue around 3bn Yen ($20m) of security tokens backed by property investments on ODX, as outlined in an SBI press release
• Bloomberg reported that another real estate firm, Kenedix, will do likewise
• “Unconventional” securities such as these have been identified as “part of Japan’s drive to sell assets that are riskier but offer higher rewards to boost funds for a rapidly ageing population”

What happened: Bitcoin derivatives experience major growth

How is this significant?

• Despite the lack (thus far) of approval for the highly-anticipated spot Bitcoin ETF, digital asset derivatives and investment products have posted considerable growth in 2023
• According to new data from CoinShares, digital asset investment products have now experienced net year-to-date inflows of over $1.3bn; but the real story is that the last 8 weeks all experienced overall inflows worth a cumulative $1.17bn, suggesting rising optimism across the market.
• Not only have the likes of BlackRock, Fidelity, Invesco, and Franklin Templeton famously filed for spot Bitcoin ETFs, but Ethereum investment products experienced their highest weekly inflows in over a year as BlackRock filed for a spot Ether ETF, indicating the growing appeal of the entire asset class
• Bloomberg sees “echoes of the 2020/21 record run” as Bitcoin options open interest on Deribit (the largest crypto options exchange) reached a new record of roughly $14.9 billion earlier this week—surpassing the $14.4bn during Bitcoin’s all-time high run in Q4 2021. Average funding rates on perpetual futures now sit near a 2-year high.
• However, many observers believe the market has opened up more to institutional investors since 2021’s market euphoria. For example, the notional value of Bitcoin futures open interest on the CME has now eclipsed that of Binance, the world’s largest crypto exchange. Coinglass figures show $4bn of open interest on the former, vs $3.8bn on the latter
• Caroline Mauron, co-founder of digital asset derivatives liquidity provider Orbit Markets notes that “Crypto call options were in strong demand for the past few weeks”, although traders’ degree of bullishness currently varies from a sensible $38,000 all the way up to fanciful $100,000 breakouts
• Auros head of trading Le Shi believes this is proof of growing institutional presence within the space, as digital assets and their value propositions have become more and more legitimised to professional investors; in the absence of a spot ETF, CME growth “suggests a more substantial institutional participation in using futures to obtain long exposure to Bitcoin”
• CoinShares head of research James Butterfill agrees, pointing out that the average Bitcoin investor is now more mature and sophisticated than in previous market cycles; “Bitcoin ETP trading volumes made up as much as 19.5% of total Bitcoin trading volumes on trusted exchanges. This has rarely happened and suggests ETP investors are participating much more in this rally compared to 2020/21”
• He also modelled the potential impact of a spot Bitcoin approval in the US; according to CoinShares models, total inflows of $2.5bn could push Bitcoin to $54,000

What happened: Former NYSE president buys crypto media platform Coindesk

How is this significant?

• Bullish, a digital asset exchange run by former NYSE president Tom Farley, acquired leading crypto industry publication Coindesk this week, in an all-cash deal
• The value of the acquisition was not publicly disclosed, but previous rumoured bids for Coindesk ranged from $125m to $200m
• Competing crypto news site TheBlock was valued at $70m when Singaporean VC Foresight Ventures bought a majority stake in them last week
• Coindesk will operate as an independent subsidiary, maintaining its branding, and Farley has pledged to “immediately inject capital” to help the media platform grow
• Matt Murray, previous Wall Street Journal editor-in-chief will head a new editorial committee intended to ensure the publication’s independence
• Coindesk’s (former) parent company Digital Currency Group has faced financial challenges since its subsidiary Genesis Global Lending was caught up in industry contagion, leading it to put the publisher up for sale
• Ironically, it was reporting by Coindesk which helped to expose FTX’s fraudulent practices—fraud which led to massive losses by Genesis

What happened: Data reveals performance improvements thanks to tokenisation

How is this significant?

• Tokenisation has been a hot topic within the institutional space recently, and Coindesk collated some key data on the actual effects it can have when implemented
• According to the Coindesk research:
• Goldman Sachs Digital Asset Platform (GS DAP) achieved 15 basis points in savings for its €100M digital bond issuance, resulting in €150K of added return passed onto Union Investment as the sole buyer
• JP Morgan’s Onyx Digital Assets (ODA) currently projects $20 million in savings on an expected $1 trillion in tokenized repo volume by the end of 2023
• Sell-side clients like Societe Generale save $1 million per 100,000 repo transactions using Broadridge’s Distributed Ledger Repo (DLR)
• Liquid Mortgage has reduced Mortgage-Backed Securities (MBS) reporting from 55 days to 30 minutes on the Stellar blockchain