There is no better way to summarize an eventful Q1 2023 than to highlight the key events that wrapped up in March 2023. There are three major market observations:
- Multiple banks failures with potential systematic problems in the banking sector
- Further regulatory crackdowns on crypto-based businesses
- With a 72% gain, Bitcoin became the best performing asset in Q1 2023
Despite the interrelation between these events being unclear, they provide crucial insights into several aspects that are certain.
- The current fractional reserve banking system is fragile and the guarantee issued by governments to restore market confidence pushed up the debt ceiling further to unsustainable levels
- Bitcoin and blockchain technology are too powerful to remain unregulated
- Bitcoin’s decentralized and transparent blockchain has led many market participants to consider it an alternative store of value
In a recent Economic Report of the President, the White House admitted openly that sovereign money lacks intrinsic value, and the US dollar’s value is based on confidence. (page 252) As Peter McCormac pointed out in his recent opinion article, “[since] the U.S. dollar is based on confidence, when confidence starts to ebb, as we’ve seen in previous crises, this can quickly turn into a flood.”
While many possible conclusions can happen, it is wise to keep a close eye on the market developments, and take appropriate actions to protect your wealth and purchasing power whenever necessary. Tokenomy just celebrated its fifth year anniversary this past week, and we remain long-term positive on the crypto market outlook. We believe an allocation (of Bitcoin and Ethereum) in your portfolio is wise to hedge against all the uncertainties that could disrupt the current financial system.
The U.S. Securities and Exchange Commission (SEC) continues its warpath of “regulation by enforcement”:
- SEC charged Tron’s Justin Sun for the unregistered offer and sale of crypto asset securities $TRX and $BTT, as well as for fraudulently manipulating the secondary market for $TRX through wash trading. He is also accused of paying celebrities to promote $TRX and $BTT without disclosing they were paid to do so. The SEC has also charged those eight celebrities.
- SEC issued Coinbase a Wells notice alleging a violation of securities law in the running of its exchange and staking services, but few details were offered.
- SEC subpoenaed SushiSwap and founder Jared Grey, requesting documents and information about the team’s operations. This could lead to regulatory action against the DAO. In response, SushiSwap has established a legal defense fund of $3 million to cover legal costs.
The U.S. Commodity Futures Trading Commission (CFTC) announced it has filed a civil enforcement action in the U.S. District Court charging Changpeng Zhao, CEO of Binance, and Samuel Lim, Binance’s former chief compliance officer with numerous violations of the Commodity Exchange Act (CEA) and CFTC regulations. In a CFTC release, it reported that the defendants knowingly disregard applicable provisions of the CEA while engaging in a calculated strategy of regulatory arbitrage for their commercial benefit. U.S. CFTC Chief Behnam reinforced his view of Ether as a commodity shortly after the Binance news at a congressional hearing.
Bitcoin was trading up over 21% in March amidst banking uncertainties and macro headwinds. BTC and ETH have widely outperformed the S&P 500, Nasdaq, and other traditional assets. The tech-focused Nasdaq rose over 4% for the month.
Two of the crypto-friendly banks and the biggest bank for tech startups all failed in March. Silvergate Capital, a central lender to the crypto industry, is winding down operations and liquidating its bank due to exposures with FTX. Silicon Valley Bank, a major lender to startups, collapsed after depositors withdrew more than $42 billion following the bank’s statement that it needed to raise $2.25 billion to shore up its balance sheet. Signature bank, which also had a strong crypto focus but was much larger than Silvergate, was seized by banking regulators. A joint statement by the Treasury, Federal Reserve, and FDIC, announced an emergency program to safeguard deposits – Signature Bank and Silicon Vallet Bank’s deposits will be made whole using the Federal Reserve’s lending authority.
In the long run, the shutdown of the crypto banking trifecta could present problems for the crypto asset industry in general. The Silvergate Exchange Network (SEN) and Signature’s Signet were real-time payment platforms that crypto customers considered core offerings. Both allowed commercial clients to make payments 24 hours a day, seven days a week, through their respective instant settlement services. Bitcoin, Ethereum, and other stablecoin liquidity will be somewhat impaired.
Chinese state-owned banks have been offering banking services to crypto firms in Hong Kong, a sign that the city’s push to become a major digital asset center has backing from Beijing, even though crypto trading has been banned in mainland China for over a year. The Hong Kong arms of Bank of Communications Co., Bank of China Ltd., and Shanghai Pudong Development Bank have either started offering banking services to local crypto firms or have made inquiries into the field.
U.S. Federal Reserve’s real-time payments system coming in July. The new government-operated payments system (FedNow Service) – often used as an argument against the need for crypto’s payments innovations – will have its first participants certified within weeks. The Fed’s new system for transactions won’t be the first, though, because the banking industry had already launched its own RTP network. A similar, private-sector competitor has been operating since 2017.
National Australia Bank makes first-ever cross-border stablecoin transaction. The “Big Four” Australian bank is the second to issue a stablecoin and hopes to support transactions by corporate clients by the end of the year. The transaction was conducted on the Ethereum blockchain and used smart contracts for seven currencies.
Fidelity Crypto quietly went live, giving millions of retail customers access to Bitcoin and Ether. The app was previously restricted to a waitlist, with users given access on a rolling basis. Fidelity Crypto is open to new and existing customers — first-time customers must create a Fidelity Brokerage account during the setup process. Trading is currently commission-free, with a spread of no more than 1%. Withdrawals are not yet permitted.
India and UAE to collaborate on CBDC. India has already been testing a retail CBDC in 15 cities reaching more than 50,000 customers and 10,000 merchants and hopes to launch a digital currency by the end of 2023. The UAE recently announced a CBDC for both cross-border payments and domestic usage. It is also an active member of many global CBDC initiatives including the mBridge project.
The Naira Crisis is fueling Bitcoin adoption in Nigeria. The recent economic cash crisis in Nigeria, caused by the naira redesign, political climate, and economic conditions, has increased bitcoin’s value proposition for average Nigerians. In Africa, bitcoin offers an indispensable financial haven.
Coinbase acquired One River Digital Asset Management as it looks to expand beyond its core business catering to retail customers. One River Asset Management will become Coinbase Asset Management and will “form the foundation” of Coinbase’s investment advisory service for institutional clients, the exchange said in a blog.
Custodia Bank’s membership was denied for ties with crypto markets. The United States Federal Reserve released an 86-page report detailing the reasons for denying Custodia Bank’s application for membership. The board raised “concerns about banks with business plans focused on a narrow sector of the economy,” with a high concentration of activities related to the crypto industry. Caitlin Long, founder and CEO of Custodia Bank and a popular personality in the Bitcoin community, wrote a blog post to openly express her frustration and criticize the regulators in Washington DC.
MicroStrategy (MSTR), a software company co-founded by crypto advocate Michael Saylor, prepaid its $205 million loan from failed, crypto-focused Silvergate Bank and purchased another 6,455 bitcoins for roughly $150 million (about $23,238 per coin) in March. This bitcoin acquisition brings MicroStrategy’s holdings up to 138,955 bitcoins purchased at an average price of $29,817 each and worth roughly $3.88 billion at the current bitcoin price of $27,900.
Uniswap penetration has been declining. Uniswap made its debut on Ethereum in 2018 and saw little competition despite the entry of other DEXs like Balancer, Curve, and SushiSwap. Uniswap’s network penetration outpaced Ethereum’s active user growth by almost five times from July 2020 to July 2021. However, Uniswap’s share of Ethereum users peaked at around 55% and has since declined to 46%. This stall in network penetration indicates that Uniswap matured in its product growth phase. Other decentralized exchanges (DEXs) have failed to approach Uniswap’s impressive user market share. In particular, SushiSwap and Balancer each struggled to capture more than 5% of Ethereum’s users. To remain competitive within Ethereum’s ecosystem, these protocols should focus on improving their offerings and creating a more compelling product to attract new users.
The price of Ethereum traded up in March. The gains may have been driven by an update on Ethereum’s Shanghai and Capella upgrades (named Shapella), which have now been confirmed for April 12, 2023. The most anticipated aspect of the upgrade is the ability for stakers to withdraw their staked ETH from the Beacon Chain to the execution layer.
MaiCoin Group, a conglomerate that operates Taiwan’s largest cryptocurrency exchange, is going public on the Nasdaq stock exchange. The company is completing a Series C funding round that could value it at about $400 million. Based on data compiled by Bloomberg, only two Taiwanese companies have ever completed US IPOs over the past five years.
What is Operation Choke Point 2.0? An excellent white paper published by law firm Copper & Kirk about bank regulators’ plan on crippling crypto companies.
The White House discusses crypto assets in a new Economic Report from President with a negative view. The report says the most utility demonstrated by crypto assets was mostly speculation.
What is BTFP (Bank Term Funding Program) and its implications? Arthur Hayes, Co-founder of BitMex, wrote an opinion piece that all these banking safeguards would eventually benefit crypto.
How U.S. Regulators are choking crypto: The effort would stifle American innovation and competition, WSJ (paywall) by Katie Haun.
Bitcoin was a winner during the U.S. banking crisis, but illiquidity prevents it from being a USD hedge, Coindesk Opinion, by Conor Ryder
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