Crypto Industry Report #47
Balzers (LI), 25 March 2021
This week, our blockchain experts assessed the following headlines:
Our weekly Crypto Industry Report news ticker provides you with the latest information on the global crypto industry – picked and analysed by our blockchain experts.
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DEFI - It’s not a problem until it’s a problem
There was news coming from the international regulatory working group FATF, also known as the Financial Action Task Force. Although potentially a big deal, there wasn’t much noise about FATF’s newly released draft guidance. In their goal to combat for global anti-money laundering, the task force has cast a critical eye on decentralized finance application (dApps) and non-fungible tokens (NFTs) in their recent publication.
Seemingly making a rough guess, FATF has defined most operators of decentralized finance (DeFi) platforms as “Virtual Asset Providers” (VASPs). The latter describes any entity that engages in financial activities surrounding virtual assets. Because of this, obligations to fight anti-money laundering and combat the financing of terrorism (AML/CFT) apply to VASPs, i.e. DeFi providers. While the underlying software and technology will most likely not be affected by any of FATF’s rulings, operators that do monetize these underlying protocols in any way run the risk of falling into the category of VASPs.
But complying with such FATF rules is no easy task for DeFi platforms. As such, many of these are pseudonymous, peer-to-peer and openly accessible by design. Having DeFi applications comply with AML/KYC requirements will kind of thwart DeFi’s raison d'être in the first place. A lot of DeFi providers have no relationship with a bank for fiat on-ramp. At the same time, a true DeFi platform does not custody any of its users’ virtual assets. Using such a DeFi application means that you are swapping assets peer-to-peer, not transacting them. In the original setting, there are no counterparties involved. Therefore, the logic of centralized finance might not apply at all.
It will be interesting to see, how things will move forward in this respect. Regulators as well as DeFi platforms are facing a dilemma here. If regulators will have decentralized finance applications comply with all the rules meant for centralized entities, the purpose of having DeFi in the first place seems to be a non-starter. For DeFi to be integrated with the traditional financial system and gain wider adoption though, compliance with some of the established rules would need to be necessary.
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Focus on Travel Rule: What is it?
When talking about FATF, as we just did above, one major regulation called the “Travel Rule”, sometimes also referred to as “Recommendation 16”, needs to be addressed. In a nutshell: The “Travel Rule” is part of the global regulation against money-laundering. It applies to any VASP (further explaining above) and requires the entity to know about its users. More specifically, if VASPs exchange their client’s virtual assets with other VASPs, they are obliged to obtain, hold and transmit identification information of originator as well as recipient. This means that a customer’s name, address and account number need to be exchanged.
In the traditional financial system, this rule has been in place for a long time. With crypto gaining ever more traction, regulators around the globe are pushing the crypto space to adopt this regulation as well. Crypto enthusiasts fear that the peer-to-peer nature of cryptocurrency exchange will be weakened. After all a VASP will face less compliance costs when receiving cryptocurrencies from another VASP, which makes it more economical to do maximize these kinds of transactions.
But make no mistake: The “Travel Rule” poses major challenges for VASPs. Without a clean database concerning wallet, enforcing the Travel Rule correctly could be a difficult task. For established actors, this could become a strategic advantage as they can more easily map transfers among their customers in a "compliant" manner. The larger the customer base, the greater the added value.
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Is Diem loosing steam or taking off?
It’s been a long time coming. What was introduced in June of 2019 was Facebook’s ambitious project to launch a consortium blockchain powering a digital currency called Libra. Because of major backlash from politicians all around the globe, the endeavor was rebranded last year with the subtle goal of making the project more appealing to critics.
Going by the new name of Diem, the focus is no longer on a new global currency existing on its own but a global payment system and global financial infrastructure. The latter is supposed to power several versions of today’s dominant national currencies, such USD, EUR or GBD. At the same time, the rebranding was interpreted as a strategy to make the project appear more distinct and independent from Facebook itself.
While Julien Le Goc, Director of Policy at the Diem Association, indicated on a recent podcast interview that Diem is almost ready to launch, the project has taken another unexpected turn, when Kevin Weil, one of the original creators of Libra, announced on Twitter that he would be leaving. Some commentators viewed this incidence as another setback to Diem’s ambitions. With FINMA’s license still missing and further pushback coming from members of the European Parliament, the project’s launch still seems to be doubtful.
On the other hand, remaining members of Diem, such as Coinbase or Uber, have pressed forward with a so-called testnet. According to sources, over 50 million transactions were processed during testing. As a matter of fact, though, a project of this magnitude will not only have to be technological capable but also have all the regulatory requirements in place. It remains to be seen whether Diem’s digital currency will launch later this year.
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Blockchain startup deals gain momentum
It’s not only rising crypto prices that indicate that interest in the industry seems to be back. As the latest numbers show, blockchain startup funding is building up momentum yet again. Following bitcoin’s first real hype in 2017, crypto startup funding exploded. But then the prices of cryptocurrencies fell precipitously, and fundraising retreated as well.
With the recent price spike in bitcoin though, we have seen the strongest quarter for cryptocurrency and blockchain startups since the end of 2018. A total of $702 million was raised in Q4. Now that bitcoin’s price is back big-time, it might have dawned on traditional financial institutions that the cryptocurrency industry is here to stay. This is why more of them might be looking to buy up or invest in crypto companies to stay up-to-date. For example, rumor has it that US bank Morgan Stanley is eyeing to get a stake in South-Korea’s top crypto exchange Bithump.
While spectacular fundraising deals with a lot of money involved are often happening in the US or Asia, Europe is lagging behind. Recently though, Blockchain.com, a London-based cryptocurrency firm, has taken on $120 million in new venture capital funding. Another phenomenally high amount of $170 million was raised in a Series B round by Bitpanda. The crypto exchange and card issuer is based in Vienna.
Such fundraising happening is good news for Europe and its wider crypto ecosystem. The relevancy of the amount raised becomes evident, when given proper context: Europe’s fintech darling Revolut was able to raise $66 million in their Series B round. At the same time, the European Union published its “Markets in Crypto-Asset Regulation” last September. Although this legislation is not yet finalized, with this new regulation the EU aims to implement clear-cut rules that will foster long-term regulatory certainty making it more meaningful for crypto companies to operate out of Europe.
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Crypto Market Update
Bitcoin’s price seems to be undecided, where to go next. For almost three weeks, bitcoin has stayed above the $50k price indicating that a consolidation is going on right now. As is usually the case with the cryptoasset, a consolidation phase of a few weeks oftentimes results in a massive price move. The question many are asking right now: Will it be to the down- or upside?
Some argue that bitcoin’s price rally could lose some steam as with the last few days we have seen lower highs, a sign that usually indicated price fatigue. Because of this, price could potentially fall back to the $50k range. While such commentators are short-term bearish, most of them would argue that such as scenario would not break the current bull run’s upside trajectory.
Other focus on the fact that selling pressure has been waning yet again. As on-chain data fundamentals show, whales seem to be accumulating bitcoin rather than selling off. This could be an indication that coins are moving from weak into stronger hands. This coincides with exchange reserves plunging to the lowest levels since early March, right before BTC hit new all-time highs above $60,000.
Macroeconomically, there are still forces pushing in either direction. Stricter regulation for bitcoin and its wider ecosystem can never be ruled out complete. Investigations of big crypto exchanges are going on and if any significant tightening were to happen, prices could go south. Still a risk are rising yields. The US 10-year yield is up for the 8th week in a row. Although bitcoin’s price has been holding up surprisingly well, if rising rates were to suddenly trigger a liquidity crisis, overall markets as well as bitcoin would be affected harshly. A rather positive effect on bitcoin might come out of Turkey. While the Turkish lira was once again in free fall, google search inquires for bitcoin have doubled.
Within the crypto ecosystem itself, the most exciting announcement as of late is coming from Uniswap. Ethereum’s biggest decentralized exchange has announced the launch of its newest update V3. This upgrade is supposed to make the DEX way more capital efficient and with an implementation on second-layer technology, fees should also be coming down.
With Uniswap moving forward, Ethereum is once again solidifying its position as the number 1 DeFi blockchain. Other projects like Cardano though are confident that they will be able to challenge Ethereum in the field of smart contracts. Cardano enthusiasts have been celebrating the listing of its token ADA on Coinbase. At the same time, a twitter fight was going on over whether Cardano’s blockchain is still just a ghost chain.
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Our weekly Crypto Industry Report news ticker provides you with the latest information on the global crypto industry – picked and analysed by our blockchain experts.
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