🔮 Weekly Attestations #8

As we enter the first week of March without a banking institution collapse, a short breather to readjust and focus on core stories is welcomed. A week of relatively quiet news allows us to catch our breath and gather our bearings as we move forward. Headlines predominantly revolved around The Whitehouse slamming crypto in their annual report, Binance boomeranging back into the news, Do Kwon finally getting arrested, and some noteworthy linkages between the off- and on-chain world. Read on for your weekly dose!

Featured Story: Regulation Comes to Crypto

United States v. Binance Holdings Ltd

• The US Commodity Futures Trading Commission (CFTC) is suing cryptocurrency exchange Binance and founder Changpeng Zhao, accusing them of knowingly offering unregistered crypto derivatives products in the US in violation of federal law. According to the CFTC, Binance made $1.3 billion in fees on illegal transactions from U.S.-based customers, which represents around 10% of the company's overall trading volume. The lawsuit was filed in the US District Court for the Northern District of Illinois and claims Binance operated a derivatives trading operation in the US for cryptocurrencies including Bitcoin, Ether, Litecoin, Tether and Binance USD, which the suit referred to as commodities. The CFTC has charged Binance with violating laws around offering futures transactions, "illegal off-exchange commodity options", failing to register as a futures commissions merchant, designated contract market or swap execution facility, poorly supervising its business, not implementing know-your-customer or anti-money laundering processes and having a poor anti-evasion program. In response to the allegations, a Binance spokesperson said the company has "made significant investments over the past two years to ensure we do not have US users active on our platform".

Whitehouse Talks Crypto

• The Whitehouse wasn't ignoring crypto in their latest economic report. The White House's Council of Economic Advisors (CEA) published its annual report this week, which included a chapter dedicated to digital assets. The report argues that the crypto industry is seeking to exist outside of government regulations, which sets it up for failure. It also asserts that digital assets lack the design necessary to be beneficial to consumers and investors. Many industry members found the report troubling, given the current regulatory uncertainty surrounding crypto. Some argued that the report's negative attitude towards crypto could push companies offshore, potentially harming innovation and setting up investors for exposure to risky business practices.The CEA report also quotes prominent computer scientists and their issues with crypto as evidence that the underlying technology may not be legitimate, but fails to mention that thousands of prominent computer scientists believe the technology is transformational and are working on it. Never once does the report use the word "unstable" The report came during an unexpectedly explosive week for cryptocurrency regulatory actions, including the arrest and indictment of the long-wanted founder of collapsed Terraform Labs, a Wells notice served to Coinbase, and the SEC targeting SushiSwap with new securities violations.Additionally, SEC Commissioner Hester Peirce confirmed that some regulators are trying to push crypto out, but she disagrees with that mindset. The report argues that crypto advocates need to go back to school and learn basic economic principles. However, critics argue that digital assets have already provided benefits such as improving payment systems, increasing financial inclusion, and creating mechanisms for the distribution of intellectual property and financial value that bypass intermediaries.

Token Specific News

Taking the stress out of roll-ups with zero knowledge; zkSync

• zkSync, a layer-2 scaling solution for the Ethereum network, has launched its public alpha mainnet. The solution, which was created by Ethereum's Matter Labs, aims to tackle network congestion by compressing transactions into "proof" data that is then sent back to the Ethereum chain for verification. zkSync's solution reduces the cost of transactions and increases the overall efficiency of the Ethereum blockchain, with added security features such as delayed withdrawals. The solution's engineering development plans include the integration of more features, scaling tools and services to support developers and users, further improving transaction speed and security. The system has partnered with OpenZeppelin, a security standard for blockchain applications, to provide security auditing of the platform. The alpha mainnet is designed for testing and is not expected to last beyond two or three years as more engineering work is done.

Stolen from the start

• A potential crypto thief has attempted to intercept 3 million ARB tokens from the upcoming Arbitrum airdrop. The thief sent ether to around 2,400 wallets in order to approve a contract that allows recipients to claim the airdrop, and also has access to the wallets' private keys. The approved contract will automatically claim the airdrop on behalf of the thief, bypassing any bots that might be set up to sweep funds that land in the wallets. If successful, the thief would end up claiming 0.26% of the user airdrop by siphoning them from wallets that aren't their own.

Treasury Markets Are Drying Up, But Stablecoin Issuers Say They’re Still Liquid

• The bid-ask spreads for US government bonds have reportedly surged to the highest levels in at least six months due to a drop in liquidity in the US Treasury market. However, stablecoin issuers have said that they are not impacted by the liquidity decrease as they invest in short-dated Treasury securities such as Treasury Bills. Stablecoin issuers allocate only a small proportion of reserves to longer-term government bonds, and their higher allocation to reserves invested in short-dated Treasury securities, such as Treasury Bills, keeps them safe from the drop in liquidity in Treasury bonds. Tether, whose stablecoin USDT has a market capitalization of around $75bn, said that it holds "a strong, conservative, and liquid portfolio" that includes cash, cash equivalents, and US Treasuries with a very short-term duration. MakerDAO is looking to increase its investments in US Treasuries and bonds to $1.25bn.
• See Similar: Businesses Should Diversify Short-Term Cash Holdings with Cryptocurrencies... venture capitalist Tim Draper has recommended that businesses hold at least two payrolls worth of cash in Bitcoin and other cryptocurrencies. He suggested keeping the funds in both a local and global bank, diversifying risk, and embracing decentralization by setting up redundancies to ensure swift decision-making. His advice came after Tezos Foundation invested in a Tim Draper fund to incubate XTZ ecosystem. Draper still has $260 million worth of Bitcoin at the price point of $6,500 five years later. He also predicted an $80 trillion crypto market within 15 years.

Tethered in

• Telegram, the popular messaging app, has announced that its users can now make payments using Tether's USDT stablecoin on the Tron network. The new feature is available to users in Russia, Europe, and Latin America, and it is expected to expand to other regions soon. The move is seen as a way for Telegram to compete with other messaging apps that have already integrated cryptocurrency payments, such as Facebook's WhatsApp and China's WeChat. Additionally, the integration of USDT on the Tron network is expected to boost the adoption of both the stablecoin and the Tron blockchain.
• See more: Tether's chief technical officer, Paolo Ardoino, has announced the stablecoin issuer aims to achieve a $700m profit in Q1 2023, matching the profits of Q4 2022. This comes as Tether's market value has increased by around $8bn since the end of February, reaching $79bn, its highest since May 2022. Ardoino stated that because Tether differs from banks based on the fractional reserve model, USDT is quickly evolving into the "safest asset to hold in the world". Tether has significantly reduced its commercial paper backing and eventually eliminated it by the end of 2022.

Blockchain IRL

• Polygon Partners With Salesforce for NFT-Based Loyalty Program: Salesforce has partnered with Polygon, a layer 2 blockchain platform, to create NFT-based loyalty programs. The CRM software company will use Polygon's management platform to help its clients create token-based customer engagement initiatives. The partnership comes after Salesforce announced on March 15 that it was expanding into the management of NFT loyalty programs. The collaboration represents another major investment into customer engagement initiatives using Web3 technologies by a significant company. According to Polygon Labs President Ryan Wyatt, Salesforce will assist its clients in onboarding with Polygon to create their own token-based loyalty programs. Salesforce's website for Web3 platform states that users can monitor real-time blockchain data from collections launched on Ethereum and Polygon within their CRM. Salesforce did not provide any further comment on the partnership. See similar: Polygon and Immutable partner to help onboard more gamers and developers into web3
• Sony Interactive Entertainment, the parent company of the PlayStation brand, has filed a patent for a framework that would enable users of the forthcoming PlayStation 5 console to transfer and use Nonfungible Tokens (NFTs) across various game platforms. The patent aims to allow gamers to experience new and more complex forms of gameplay with the incorporation of Blockchain-based NFTs. According to Bergstrom from GameFi, the technical aspects of implementing a game won't matter to gamers as long as it's enjoyable and exciting. Therefore, developers must use a variety of technologies such as blockchain and NFTs to create a game that players will enjoy. This move from Sony is expected to create a more immersive gaming experience for PlayStation users, as they will be able to access a wider range of content and experiences by using NFTs on multiple game platforms.
• Nasdaq is set to launch cryptocurrency custody services by June, according to reports. The move is part of Nasdaq's push to widen institutional adoption of digital assets, with the ultimate goal of opening up opportunities for trading within institutions as well as further legitimizing digital financial products. The initial offering will be custody services for Bitcoin and Ethereum, with the potential for other digital assets to be added to future plans. Last September, Nasdaq hinted at exploring this line of business, with further details added in October by Tai Cohen, executive vice president and head of North American markets at Nasdaq, who said that the firm's suite of crypto services would include provision for liquidity and regulatory compliance.
• Ticketmaster Debuts NFT-Gated Ticket Sales, Starting With Avenged Sevenfold: Ticketmaster has partnered with Avenged Sevenfold to launch a feature that allows artists to offer special access to concert and event tickets for eligible NFT owners. The feature, which has been live since last week, prompts users to connect their wallet to verify their ownership of one of the eligible NFTs. After that, it's the same buying process as usual, but with less competition fighting for a small pool of tickets. The feature is now available to any artist with its own NFT collection or that has partnered with an NFT community, and the functionality can unlock other benefits for fans.

All quiet on the crypto funding front

• This week saw a significant drop in funding for crypto startups, with only $37m invested across six companies. The biggest raise was from LA-based digital fashion tech company DRESSX, which secured $15m in a series A round led by Greenfield, with participation from Slow Ventures, Warner Music, the Artemis Fund, and Red Dao. Play-to-earn gaming platform Metacade raised $10m in a token presale round, while decentralized infrastructure organization TeleportDAO secured $2.5m in seed funding from AppWorks and DefinanceX. Other notable raises included Jungle, a web3 gaming studio, which raised $6m in a seed round led by Bitkraft VC and Framework Ventures, and crypto wallet infrastructure Capsule, which received a $500,000 investment from a16z.

A dirty way to wash (trade)

• The rise of NFT wash trading is attracting attention in the cryptocurrency world, with rewards-based marketplaces including Blur (~$400M worth of tokens), X2Y2, and LooksRare offering free tokens for every transaction. CoinGecko data showed NFT wash trading across the top six marketplaces reached $580m last month, marking a 126% increase from January. The practice has become more widespread as traders try to artificially inflate asset prices by buying and selling multiple times. The three laundromats previously mentioned offered rewards accounted for 92.5% of all wash trading volume last month, with top collections including Bored Ape Yacht Club, Azuki, and CryptoPunks affected. Critics argue the practice risks attracting attention from regulators, who may seek to bring cryptocurrency under tighter regulation if more than 25% of monthly NFT volume is washed. Although illegal in the stock market, there are no rules governing the practice in cryptocurrency, leading to concerns it could undermine the industry's reputation.

Regulation

Well(s) that isn't going to plan

• Coinbase has been issued a Wells notice by the US Securities and Exchange Commission (SEC), alleging that the company's staking products constitute unregistered securities. The notice also mentions "aspects of Coinbase's exchange... and Coinbase Wallet." This is the second time the SEC has issued a Wells notice to a crypto entity, after issuing one to stablecoin issuer Paxos in February. Coinbase CEO Brian Armstrong has previously criticized the SEC for perceived overreach and the lack of regulatory clarity in the crypto industry. Coinbase is "confident it will be able to defend its position in court." The company said the warning wouldn’t mean any changes to the exchange’s current products or services. Until the resolution of any legal processes, the exchange’s offerings would continue to operate as usual. Coinbase is seeking more regulatory clarity from the SEC, saying: "Tell us the rules and we will follow them. Give us an actual path to register, and we will register the parts of our business that need registering."

Fed Says Real-time Payments Service To Launch in July

• The launch of the FedNow instant payments system in the US is expected to provide citizens with a faster settlement and clearing service for transactions. While the service is viewed as an alternative to central bank digital currencies, some experts suggest that it could be the first step toward a CBDC. The launch may also have an impact on crypto, with the potential for a role for cryptographically secured stablecoins even if a CBDC is eventually issued. However, the launch of FedNow is not expected to have an immediate impact on the broader crypto market.

Ron DeSano Central Currency

• Florida Governor Ron DeSantis has introduced legislation that would prohibit the use of a central bank digital currency (CBDC) within the state's commercial code, citing concerns over the Biden administration's potential use of CBDCs for " surveillance and control." DeSantis accused the administration of pursuing policies that threaten personal economic freedom and security. The move comes after South Dakota Governor Kristi Noem vetoed a commercial code bill that would have excluded bitcoin from the state's definition of money but potentially allowed a CBDC to be considered legal currency. The proposed legislation in Florida is seen as a move to protect Floridians from potential centralization of the financial sector.

Other Domestic Regulation Updates

• Non-crypto-related deposits held by former Signature Bank (now Signature Bridge Bank) will be assumed by Flagstar Bank
• SEC’s Peirce: Gensler Is Trying To Do Too Much Too Fast
• JPMorgan, Citi, HSBC Still Welcome Crypto Clients
• Jared Grey of SushiSwap is asking the DeFi platform’s DAO for $3 million to fund a legal defense after he revealed the existence of an SEC subpoena
• FTX Influencers Face $1B Class Action Suit for Promoting Fraud
• SEC Sues Tron Network Founder for Allegedly Selling Securities
• Wyoming Could Be First US State to Issue Official Stablecoin
• Judge approves Celsius custody account settlement to return 72.5% of crypto assets

Other International Regulation Updates

• Taiwan Securities Watchdog Will Regulate Crypto — But Not NFTs
• Xapo Bank Becomes The First Fully Licensed Bank To Enable USDC Deposits and Withdrawals
• Australia’s Gold-Backed Crypto Under Threat as Issuer Backs Away
• Hong Kong To Release Licensing Details For Virtual Asset Businesses In June
• Belgian Crypto Ads Must Now Warn of Risk
• Int’l Law Enforcement Takes Down Mixer Used by Russia, North Korea
• Do Kwon Arrested in Montenegro: Interior Minister

Pain & Gain

Pain

• DefiLlama Team Fractures Over Potential Token Launch
• DeFi Implications Following USDC Depeg

Gain

• The Launch of Arbitrum Governance
• The dollar value locked in the number of open bitcoin futures contracts is rising
• Microsoft Edge Testing Built-In Ethereum Crypto Wallet, Screenshots Show
• Crypto Enthusiasts Rush to Promote Bitcoin's 'Safe Haven' Status Amid Banking Crisis
• Bitcoin Halving a Year Out: Here’s What To Expect
• Coinbase Stock Surges 12% on Brazil Expansion News
• Ethereum Rolls Out ERC-4804 URL Standard to Allow Direct Access to Web3
• ARB Airdrop Pushes Arbitrum To Its Limit
• Uniswap V3 To Be Deployed On Avalanche
• Bitcoin Mining Difficulty Hits All-Time High as Hashrate Surges

The Week in Charts

The current banking crisis is a perfect setup for BTC but market liquidity is getting in the way

Some investors view the current banking crisis as an opportunity to invest in risky assets, particularly those that emerged from previous banking crises like Bitcoin (BTC). However, some skeptics point out that BTC has only seen a lackluster 38% increase in value since the banking crisis started, such as the collapse of banks like Silicon Valley Bank (SVB). They argue that this is due to the regulatory chokehold that banks have placed on cryptocurrencies, which has limited their net inflows. Moreover, it seems that the G7 countries are coordinating to tighten regulations on cryptocurrencies, which could further constrain their growth in the future.

Stablecoin supplies and liquidity are major market drivers

Crypto's performance in recent years can be partly attributed due to the growth of stablecoin supplies before 2022, as injected dollar liquidity spread across the risk curve like quantitative easing (QE). However, stablecoin supplies have since fallen by 21%, raising concerns among investors about the potential limitations on the upside performance. In other words, if the pool of stablecoins is shrinking, and trading in USD is now impractical, where will the new buyers come from? It's also unclear whether an increase in stablecoin supplies will lead to a market bottom.

The crypto liquidity story

Bitcoin's liquidity has hit a 10-month low due to market makers being unable to access USD payment channels. Although BTC's lower market liquidity means that internal flows have less impact on its performance, this effect works both ways. Higher liquidity allows larger players to use BTC as a hedge against USD.

Rising tides lift all boats

The reason to be more constructive for crypto's outlook is due to the 'rising tides lift all boats' dynamic that exists with market liquidity. Capital starts to flow down the risk curve – crypto > small cap > large cap > so on and so forth...

In short, we believe that crypto serves as a forward-looking market liquidity indicator and may be more resilient than equities during a liquidity/credit crisis. However, there is uncertainty about whether the nominal interest rate range of 4.75% to 5% is high enough as a peak. The recent 25 basis point rate hike by the Fed suggests their determination to combat inflation, which is far above their target of 2%.

A flight to quality

BTC dominance is at 9-month highs at 47.7% and pushing towards its 11-month resistance area. A break above here indicates a new market regime of flight to safety.

How are fundamentals doing, you ask?

The DEX to CEX volume ratio is spiking up to new highs not seen since May 2022.

The Week in Trends

Sector Performance Breakdown (7d trend)

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

Trending 7d Protocol Revenue (Market Cap >$50M)

Trending 7d Protocol Earnings (Market Cap > $50M)