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Risk Assets React to Higher Rates for Longer

Weekly News Wrap Up

Markets grappled with the idea of higher rates for a longer period and the potential for a government shutdown as most U.S. equity markets retreated lower for the week, SPX -0.74%, DJIA -1.34% and NASDAQ +0.06%. This move rounded off the worst month for 2023 with SPX -4.87%, DJIA -3.50% and NASDAQ -5.81%.

Last week, the U.S. economy exhibited robust growth in Q2, with an unrevised 2.1% annualized GDP increase, and is on track for 4.9% growth rate in Q3. The latest core PCE also came in lower than expected at 0.1% in August and 3.9% annually. However, the U.S. 10-year Treasury yield moved up to as high as 4.63% (vs 4.18% beginning September), matching its highest level in about 16 years. Alongside the rise in interest rates, the price of oil touched a new high of almost $95/barrel.

Adding on to investor worries, concerns continued over a potential U.S. government shutdown, which could begin as early as 1 Oct unless Congress agrees on a deal to fund the federal government before then. A shutdown could negatively affect the U.S.’ credit rating, which could have knock-on impacts on rates and USD. President Biden on Tuesday called on Congress to resolve the issue.

With a potential government shutdown on the line, the spotlight shines on the SEC as the agency approaches deadlines of crypto ETFs (many of which have been delayed – latest updates in “Cryptocurrency News”) and court cases that could remake the U.S. crypto industry. SEC Chair Gary Gensler has warned the agency will operate with a “skeletal” staff in the event of a shutdown.

Although interest rates continue to trend upwards, which in theory should put pressure on risk assets, we saw both BTC and ETH buck the trend and close the week higher +1.24% and +4.66% respectively. Bitcoin has seen increased intraday volatility, resulting in significant liquidations in the perpetual futures markets. The current market environment is highly susceptible to more significant liquidations, given that volatility is being exacerbated by exceptionally low spot volumes and we saw a couple of these outsized moves last week.

Cryptocurrency News

The Bank for International Settlements (BIS) wants countries to set up clear and updated legal frameworks that support the deployment of CBDCs. BIS chief Agustín Carstens gave policy recommendations for jurisdictions working on these issues and warned that outdated legal frameworks in different jurisdictions could hinder the development of CBDCs. Later in the week, BIS released a report, concluding its CBDC pilot which tested the cross-border trading and settlement of CBDCs between financial institutions, using innovations derived from DeFi. BIS said that elements of DeFi could form “a new generation of financial market infrastructures.”
SEC Chair Gary Gensler fielded questions about bitcoin ETFs and faced criticism over his approach to crypto regulation during a House committee hearing last Wednesday. He remained tight-lipped about what the SEC will do with spot bitcoin ETFs. Prior to that, Gensler held fast to his stance that most cryptocurrencies and crypto firms are subject to federal securities laws.
The U.S. SEC has moved to delay a decision on the proposed Global X and ARK 21Shares Bitcoin ETFs to 21 Nov this year and 10 Jan next year respectively. The SEC has begun considering applications for spot crypto ETFs from Franklin Templeton and Hashdex, while announcing delays in decisions in approving VanEck’s and ARK’s ether ETF applications. The Commission has frequently delayed decisions, looking to use the entire 240 days. Later in the week, the SEC said it is instituting additional proceedings to determine whether the proposed Valkyrie Bitcoin Fund ETF should be approved or disapproved. Similar proposed funds from BlackRock, Bitwise and Invesco were also delayed.
VanEck is preparing to launch the Ethereum Strategy ETF (EFUT) that focuses on capturing capital appreciation by investing in ether futures contracts. EFUT will be listed on CBOE and actively managed by VanEck head of active trading Greg Krenzer.
Valkyrie’s application to increase exposure to Ethereum futures contracts in its Bitcoin futures ETF was approved, and will officially take effect on October 3. The fund’s name will be updated to Valkyrie Bitcoin and Ether Strategy ETF, and the ticker will remain BTF.
ECB President Christine Lagarde told lawmakers last Monday that a digital euro is at least two years away as she sought to address privacy fears arising from CBDC. The ECB is due to take major decisions in the coming weeks over whether to press ahead with preparations for the CBDC but many members of the European Parliament appear skeptical.
Hong Kong’s Securities and Futures Commission said the regulator is working on more detailed guidance on the tokenisation of authorised investment products and is looking to issue this guidance in the near-term.
Shanghai municipal government published an action plan to boost the technical development of blockchain in the city up to 2025, as the Chinese city continues its web3 drive. Under the plan, Shanghai intends to achieve breakthroughs in blockchain fields which can offer support for trade, metaverse and government affairs.
Taiwan’s Financial Supervisory Commission published its guidelines for crypto platforms as it looks to step up oversight of the industry. Under the new guidelines, Taiwan crypto platforms must ensure the separation and custody of companies’ and customers’ assets, strengthen information disclosure and establish review standards for virtual asset listing and delisting.
Poland has 951 crypto firms registered with its Virtual Currency Business registry, almost twice as many registrants as runner-up Lithuania. Poland has set up a speedy and affordable system for hosting crypto and also permits individuals as well as companies to register as crypto entities in its registry. However, regulators in member states, like Poland, will soon have to adapt their national regimes to the new rules set as a result of EU’s landmark MiCA law.
Bernstein said the crypto fund management business could be worth as much as $50 billion in terms of revenue, equivalent to 4% of present size of crypto market, as the expected launch of spot-based BTC ETF in the U.S. is likely to bring more capital to the market. Bernstein expects the crypto industry to transition to a formal, regulated asset management industry with $500 to $650bn of assets over the next five years.
Thailand’s SCBX and Korean Web3 firm Hashed has signed an agreement to work on joint R&D initiatives and events aimed at promoting decentralized technology adoption regionally and globally. SCBX is one of Thailand’s largest financial institutions and Hashed is one of Korea’s biggest Web3 investors. The partnership comes weeks after KBank, a rival of SCBX, announced a $100 million web3 fund.
Binance has partnered with Japanese bank MUFG to study the issuance of a new stablecoin pegged to fiat currencies, as it looks to re-enter the Japanese market. Both companies plan to commence stablecoin operations by the end of next year upon obtaining applicable regulatory approvals.
MoneyGram is expanding its footprint in the world of crypto and digital payments by launching a non-custodial digital wallet that will allow customers to convert fiat to crypto and vice versa. Additionally, MoneyGram, a global money wire service company, emphasised that the new wallet, set to be released in the first quarter of 2024, will “leverage stablecoin technology.”
Coinbase will decide on where to apply for a MiCA licence in the next weeks as part of its plans to set up its Europe hub, away from its battles at home with the U.S. SEC. The Markets in Crypto-Assets legislation, also known as MiCA, allows firms to access the entire European market if they get the licence, but firms will need to pick one member state to get licensed. Separately, Coinbase has gained approval to offer non-U.S. retail users perpetual futures trading from the Bermuda Monetary Authority.
Kraken plans to offer customers in the U.S. and UK the option of buying and selling traditional U.S.-listed stocks. Kraken, one of the world’s biggest cryptocurrency trading platforms, already has the required authorisation in the UK and has applied with the Financial Industry Regulatory Authority for a broker-dealer license in the U.S..
Binance has lost considerable market share to global rivals that do not offer USD support this year. Binance finished 2022 with a 75% market share among a group of platforms that also includes major Asian players like Upbit, Huobi, Bybit and OKX — but that figure declined steadily throughout the year, hitting 54% in August.
Chase Bank will block crypto-linked payments by UK customers via debit card or bank transfer from 16 Oct, citing increasing fraud and scams using digital assets as the reason behind the decision. Chase isn’t the only UK bank to take such measures, with Santander and Barclays previously imposing restrictions on certain crypto-related transactions.
Majority of creditors impacted by the Celsius bankruptcy voted in favour of a reorganisation plan that would distribute about $2bn worth of BTC and ETH and equity in a new company to creditors. Celsius plans to use Coinbase to distribute crypto for international customers but the SEC had said Coinbase’s involvement in Celsius bankruptcy plans implicates concerns it raised in its lawsuit against the exchange.
Hong Kong cryptocurrency firm Mixin said it has lost approximately $200mm after the database of its network’s cloud service provider was attacked by hackers. Mixin describes itself as a network for transferring digital assets with one million users.
MicroStrategy purchased an additional 5,445 BTC for $147.3 million between 1 August and 24 September, bringing its total to around 158,245 BTC, worth roughly $4.1bn at current prices. This comes after MicroStrategy acquired an additional 12,800 BTC in June and August this year.
Bitcoin mining company Marathon Digital (MARA) has mined an invalid Bitcoin block, citing a bug during an experiment. The invalid Bitcoin block was rejected by other node operators. The block contained a transaction that was ordered incorrectly with a spending output transaction. The mining of the invalid block raised some questions within the community as to the security of the network. However, the rejection of the block was cited by Marathon as an example of the resilience of the Bitcoin network.

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