🔮 Weekly Attestations #6

As we turn the page on what has been an exceptionally contentious week for both digital assets and the greater market, we wanted to introduce you to our weekly newsletter. Since inception, it’s been our light-hearted way to internally consume news, stay on top of the markets, and share opinions on everything from tokens to macro trends. Welcome to Weekly Attestations, a (slightly) more “refined” version of what we distribute internally, for your viewing pleasure. Let’s get into it…

A Fortress Made of Silicon and Tarnished Silver; how tech's favorite banks broke

“You’ve been given a great gift, George, a chance to see what the world would be like without you.” — Clarance, It's a Wonderful Life

• In just a few short days, three primary banking institutions in the US, all of which serviced firms within the industry, entered voluntary liquidation, or were taken into receivership by US regulators. While a full account of the mechanics that lead to the failure of 3 regulated US banks over the last week will require a longer form note, we will do our best to hit the high points to bring everyone up to speed on the drama of the last week:

• On March 8, 2023, Silvergate Bank ($11.36B in assets), a major intermediary in the digital asset market, announced that it was liquidating amidst a massive outrush of deposits. Unlike SVB, this was a relatively quiet closure (compared to what followed).

• On March 10, 2023 SVB Financial, ($209.03 billion in assets), headquartered in California with niche tie-ins to the Venture Capital industry, announced it was closing its doors. This led to broad hysteria in Silicon Valley and small businesses alike who were faced with potentially steep losses and an inability to meet payroll obligations. SVB Financial has long had the highest deposit concentration amongst community banks, with a large percentage of deposits held by less than 1% of depositors. While the bank was arguably insolvent for some time prior to last week, it was the rapid withdrawal of liquidity that necessitated a sale of assets that were meant to be held until maturity and thus steep leveraged losses were realized, fueling the withdrawal frenzy.

• To add to the drama, Circle Internet Financial, the issuer of the most regulated and consumer-held stablecoin, USDC (~$43bn outstanding), reported that approximately $3 billion of the dollars backing USDC were tied up in accounts at SVB. The unfortunate reality was that banks don’t send wires on weekends and the SEN, the default option for 24/7 redeeming of USD, had just been shuttered. Although seemingly only a nuance, this panic was highly driven by US banking hours. USDC sold off to $0.80 before steadily (and then rapidly) climbing back to the $1 par value amidst Circle affirming that wires would open normally on Monday. 

• Just two days later Signature Bank, ($110.36 billion in assets), small business bank that had previously benefited as the preferred alternative to Silvergate, also announced it was closing its doors and being taken over by regulators. 

• In the wake of the failures, the Treasury, Federal Reserve and Federal Deposit Insurance Corporation (FDIC) made two major policy announcements intended to stabilize the banking system. The FDIC announced its use of the “systemic risk exception,” designed to make the uninsured depositors at SVB and Signature Bank completely whole on their deposits. The Fed also announced the creation of a Bank Term Funding Program (BTFP), a backstop designed to provide liquidity to other banks that may be facing heavy withdrawals. This will enable banks to avoid forced-selling of high quality securities at a loss to meet demand and thereby avoid another SVB situation. Despite ongoing market volatility, we expect these measures to stabilize the system and to increase confidence among depositors.

• Some may rightfully wonder whether this is a symptom of a larger systemic issue rather than an idiosyncratic blow up. For those that remember, the core balance sheet mismatch today is not dissimilar to the RTC Crisis in the early 90s - albeit far less severe and widespread in nature. In our view, this is likely a symptom of aggressive Fed tightening following 15 years of loose monetary policy rather than systemic asset quality deterioration, These specific failures seem to be largely idiosyncratic in nature. If we use history as our guide and Jerome’s own words, we may expect an incrementally dovish outlook for monetary policy - and that’s what the market seems to think given recent price action. With that being said, we would temper expectations of a softening in language from Jerome, who will likely use the power of Fed speak to manage broader psychology while working to manage an increasingly complex and fragile economic situation behind closed doors.

• Most importantly, this episode offers another stark reminder that the traditional financial infrastructure we’ve been lulled into blindly trusting can fail – and fail big. Once again, it was the decentralized, trustless systems that functioned as intended, and with that we have witnessed a fresh move from major financial institutions adopting blockchain technology at the core of their business.

Token Specific News

Another Ethereum upgrade, another set of numbers

• ERC-4337 is a new Ethereum upgrade that was teased earlier this month. It introduces something called Account Abstraction, which allows Ethereum wallets to operate as smart contracts. Essentially, this means that users can perform a variety of new functions, such as recovering lost private keys, securing wallets without seed phrases, carrying out automated payments, and sending gasless transactions.
• One of the main benefits of the Account Abstraction upgrade is that it enables a lot of the same features that a bank offers, without the need to trust a bank. By merging crypto wallets with smart contracts, Account Abstraction makes for more secure and efficient transactions, ultimately making crypto more user-friendly. It also makes previously impossible tasks, such as wallet recovery and seedless wallets, possible.
• With the introduction of this upgrade, there are several potential outcomes. On the opportunistic side, wallets that use ERC-4337 will be more secure than current offerings as they will eliminate the need for seed phrases and make wallet recovery methods easier. Additionally, the ability to sponsor gasless transactions will make it easier and cheaper for customers to use decentralized applications. On the bearish side, some people argue that the terminology / technology in the upgrade, such as "account abstraction," "paymasters," and "bundlers," may be too complex for average retail users. 

Trekking through the Amazon towards Web 3.0

• Amazon is reportedly laying the groundwork to offer its customers the ability to purchase non-fungible tokens (NFTs) tied to real-world assets. This would represent a significant upgrade from the company's earlier NFT platform development, and it could launch as soon as April 24, according to one report. The company plans to notify all US-based Amazon Prime customers of the digital collectibles initiative once it goes live. The NFTs would reportedly be purchased with credit cards, just like other Amazon purchases. The back-end blockchain technology is not clear, and Amazon appears to be exploring various options for integration – in addition to reported ties to various layer-1 blockchains, Amazon has also reached out to various blockchain gaming companies and other digital asset projects in line with their reported internal developments. Amazon's reported intention is to create a private blockchain of some kind, but it's not clear whether an Amazon token would be part of the deal.
• One source noted that Amazon could onboard millions of users without educating them about self-custody or how to set up a MetaMask wallet. The move is similar to Starbucks' loyalty program with Polygon. Amazon currently has approximately 167 million Prime members in the USA. It's not yet clear how Amazon's entry into the NFT market will impact the environmental concerns around the creation and trading of NFTs.

Crypto exchange Huobi has created a $100 million liquidity fund

• Huobi, a leading cryptocurrency exchange, has launched a $100 million liquidity fund to safeguard against sharp declines in the price of its native token, HT. This move comes after HT's value plummeted by 93% on Thursday before rebounding quickly. Justin Sun, founder of the Tron blockchain and a significant HT holder, confirmed the transfer of the $100 million. The sudden drop in HT's price was caused by a few users who engaged in leveraged liquidation on the market. In response, Huobi has implemented new risk control measures, including tightening its risk management system and increasing its risk management team. The exchange has also pledged to continue enhancing its risk management capabilities and reinforcing its user protection mechanisms. By taking these measures, Huobi aims to prevent significant losses for its users and maintain their trust in its platform.

Free for all

• Uniswap v3's protocol will become open-source software when its Business Source License (BSL) expires on April 1. The move is expected to allow DeFi developers to create their own decentralized exchanges more cheaply and easily. Uniswap Labs' protocol enables users to trade cryptocurrencies without relying on a centralized authority. The v3 version allows liquidity providers to specify a range within which they are willing to trade. PancakeSwap, the biggest exchange on the BNB Chain, is expected to use Uniswap's v3 protocol for its own v3 update, set to be released in April. Although it is theoretically possible for Uniswap to modify the license to retain exclusive commercial rights, it is considered unlikely.

LDO adds sides, joins Polygon

• Lido, the largest liquid staking derivatives (LSD) provider and the leading DeFi protocol by total value locked (TVL), has launched on Polygon network, its third deployment on an Ethereum scaling solution. Users can now bridge Lido's Wrapped Staked Ether (wstETH) onto the Polygon network, with Kyber, Balancer, and Beefy Finance offering liquidity incentives for wstETH markets on Polygon. Lido chose to launch on Polygon due to its native DeFi activity, track record for security, and existing Lido partners on the network. The LSD sector is expected to boom with the upcoming Ethereum's Shapella upgrade, which will activate staked Ether withdrawals for the first time. Over 16M Ether worth more than $26B is currently staked on the Beacon Chain. Lido's stETH token represents a share of staked Ether and accrues corresponding staking rewards, and with the ability to bridge between networks, it provides an opportunity for users to combine staking rewards with other sources of yield.
• This came shortly after: The price of Lido's LDO token fell by 10% following rumors that the US SEC had served the largest Ethereum staking service with a Wells Notice. A Wells Notice is a letter from the SEC detailing charges it is considering bringing against a recipient. 

Kraken, recently sued by the SEC, looks at the markets most scrutinized sector (banking) and says “yeah, I can do it better”

• Kraken, the cryptocurrency exchange, has announced it is planning to launch its own bank, Kraken Bank, which is expected to offer “comprehensive deposit-taking, custody, and fiduciary services for digital assets”. The bank, headquartered in Cheyenne, Wyoming, received approval from the state to form a Special Purpose Depository Institution in 2020. This allowed the firm to be recognized as the “first digital asset company in US history to receive a bank charter recognised under federal and state law”. It was originally scheduled to launch in 2021, but is now expected to roll out services to existing US-based Kraken clients soon, with a potential international expansion to follow.
• All operations will be online and via mobile devices, with the bank offering deposit accounts in US dollars and cryptocurrency, institutional custody products, IRAs and funding and payments options. The bank claims to be more secure than traditional banks, stating that all Special Purpose Depository Institutions must keep their reserves full, and will maintain significant capital reserves and surpluses of their own capital to cover the full balance of all clients, even in the event of a bank run.

Regulation

All the king's horses and all the king's men couldn’t put FTX back together again

• Alameda Research is suing Grayscale Investments, its CEO Michael Sonnenshein, and Digital Currency Group chief Barry Silbert. The FTX debtors, who recently acquired Grayscale, are seeking injunctive relief to unlock $9 billion or more in value for shareholders of the Grayscale Bitcoin and Ethereum Trusts. They want to force Grayscale to open up redemption for its Bitcoin and Ethereum Trusts to realize over a quarter billion dollars in asset value for creditors and customers. Grayscale's trusts have seen their discount to net asset value, or NAV, fall precipitously over time. Currently, the Grayscale Bitcoin Trust (GBTC) discount to net asset value has narrowed to the lowest level in a month, ahead of oral arguments in federal court related to Grayscale's lawsuit against the SEC. Grayscale is appealing the SEC's decision to deny the conversion of the trust into an exchange-traded fund. The discount has narrowed from 47% in mid-February, and some analysts believe the market is underpricing the likelihood of a Grayscale victory.
• Similarly: Binance.US has overcome a major hurdle in its bid to acquire the assets of bankrupt crypto lender Voyager Digital in a deal worth over $1 billion, after a bankruptcy judge overruled objections to the proposed acquisition. The judge indicated that he was in favor of approving the deal, which had been supported by 97% of Voyager creditors. However, Binance.US may still have to clear certain regulatory hurdles before the deal can be finalized. Voyager's VGX token surged over 8% in the minutes after the ruling. Further, Voyager has reportedly liquidated $56 million worth of Ethereum, Voyager Token, Shiba Inu, and Chainlink on March 9, with a total of $358.5 million in assets sold in the last six weeks. The exchange's USDC balance has increased to $460 million since January, while its wallets still hold around $271.5 million in crypto assets for liquidation. However, regulators are reportedly working to slow the process down.
• Update: The discount of Grayscale Bitcoin Trust's shares has narrowed to 35%, the lowest level since November 2021, following a court hearing on Tuesday where judges questioned the SEC's reasoning for rejecting Grayscale's bid to convert the trust into an exchange-traded fund. The judges were skeptical about the SEC's distinction between bitcoin spot market prices and futures market prices, for which the SEC has approved ETFs. The discount narrowed to just below 35% after the hearing. Grayscale and CoinDesk are both owned by Digital Currency Group.

Not so stable stablecoins and insecure securities

• The chairman of the US Commodity Futures Trading Commission (CFTC), Rostin Behnam, has reiterated his position that the ether cryptocurrency and stablecoins such as tether should be regarded as commodities, despite Securities and Exchange Commission (SEC) chief Gary Gensler’s assertion that all cryptocurrencies except bitcoin are likely securities. Behnam argued that the CFTC would not have permitted ether futures to be listed on its exchange if it did not believe the asset was a commodity. In December, the CFTC referred to bitcoin, ether and tether as commodities under US law. Behnam also argued that stablecoins should be viewed as commodities, while acknowledging that some colleagues might hold a different view. The position stands in contrast to that of the New York attorney general, Letitia James, who has argued in court that ether is a security in a case against the KuCoin exchange. James claimed that ether was “a speculative asset that relies on the efforts of third-party developers in order to provide profit to the holders of ETH” and should have been registered before being offered on the exchange.

Other Domestic Regulation Updates

• Supreme Court Ruling Backs XRP ‘Fair Notice’ Defense: Ripple
• SEC Files Emergency Action Against BKCoin for Running $100M ‘Ponzi-Like’ Scheme
• SEC Accuses Utah-Based Green United of Running $18M Crypto Mining Scam
• Missouri Moves Closer to Legally Protecting Crypto Mining
• A U.S. Securities and Exchange Commission lawyer said Binance.US is operating illegally in the U.S.
• U.S. District Judge Denies Motion to Dismiss Custodia’s Lawsuit Against the Fed
• New York State Attorney General Letitia James sued KuCoin
• Biden includes crypto tax changes in 2024 budget request

Other International Regulation Updates

• Singapore police are investigating Terraforms Labs
• Dubai Unveils Crypto Regulatory Framework
• Germany: Digital Collectible NFTs Not Securities
• All Crypto Companies in India Must Now KYC Users

Pain & Gain

Misc. Pain

• Kraken Steps Away from Signature Bank Due to Transfer Limitations
• Stablecoin Issuer Tether Used Bank Accounts Opened With Falsified Documents in Past
• Olympus Says Goodbye to Staking APY
• Environmental Impact of Bitcoin Mining ‘Deserves the Spotlight’
• FTX Reaches $45M Deal to Sell Interest in Sequoia to Abu Dhabi's Investment Arm

Misc. Gain

• Crypto Hedge Funds Outperform Wall St: Report
• ConsenSys announces public testing of ZK-Rollup network compatible with Ethereum
• User Retention on Arbitrum and Optimism
• BNB Chain Announces 2023 Roadmap
• VitaIik changes his strategy
• Coinbase launches wallet API to help integrate Web 2.0 devs into web3 world
• Vitalik Buterin’s Fund Donates $15M in USDC to Airborne Pathogen Research

The Week in Charts

On Friday, investors rapidly adjusted the pricing of USDC by 8.25% below par, factoring in the collateral risk ratio after a severe de-pegging event. As a result, USDC was trading at $0.87. At the same time, Tether's USDT surpassed its peg due to increased demand.

On Saturday, Curve, the foremost decentralized exchange for exchanging stable assets, achieved a new record high in trading volume, amounting to $6.4 billion. Notably, non-volatile trading pairs accounted for 95.7% of the totl trading volume. Despite Circle's assurance regarding the backing of USDC, the 3pool still displays significant imbalance. Although the pool is supposed to have an equal weightage of DAI, USDC, and USDT, it remains heavily skewed towards DAI and USDC. Presently, USDT only constitutes approximately 5% of the 3pool, while the remainder is divided between USDC and DAI.

In the fourth quarter, banks' unrealized losses on bonds amounted to $620 billion, according to the FDIC's report. The report warned that these unrealized losses could turn into real losses if banks are forced to sell securities to meet liquidity requirements. As it turns out, this week, banks found themselves in a position where they had to sell securities.

Within a span of slightly over two weeks, the conversation around interest rates has shifted from the possibility of a 50 basis point hike to the possibility of a pause or reduction. As a result, traders have adjusted their expectations, with the terminal Fed funds rate now projected to be 5.1%, down from 5.7%. In just three days, the two-year rate has declined by approximately 50 basis points.

Shown above, declining deposits are what transform unrealized losses into realized losses. Deposits have been decreasing since Q2 of 2022.

When Treasury yields rise, it leads to lower bond prices and reduced deposits as depositors opt to switch into money markets. If yields rise at a fast and significant rate, it is inevitable that something will eventually give way.

The Week in Trends

Sector Performance Breakdown (7d trend)

Top 7d Gainers/Losers (Market Cap >$100M)

Trending 7d Protocol Revenue (Market Cap >$100M)

Trending 7d Protocol Earnings (Market Cap > $100M)

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