Monochrome Digest | November 2023 - December 2023


UBS allows clients to trade crypto ETFs in Hong Kong

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One of the largest banks in the world, UBS, has provided wealthy clients in Hong Kong access to three crypto exchange-traded funds (ETFs). Within UBS’s Hong Kong platform, users can purchase the Samsung Bitcoin Futures Active, CSOP Bitcoin Futures and CSOP Ether Futures ETFs, which are all approved by the Hong Kong Securities and Futures Commission (SFC).

Recently, Hong Kong has attempted to be a digital asset hub within the global digital asset economy by providing favourable regulation for investors. The Hong Kong SFC has taken a distinctive approach by including retail investors in its regulatory regime, setting it apart from many regulators around the world, which are addressing regulation on digital assets. The developments within Hong Kong, including UBS allowing wealthy clients to trade crypto ETFs, are expected to see more digital asset offerings in the jurisdiction and increase the adoption of digital assets.

Alongside its financial heavyweight peers, UBS has previously stepped into the digital asset landscape by working alongside Swiss National Bank, six digital exchanges and five other banks to create a tokenised version of the Swiss franc. This aims to provide an instrument for settlement across financial institutions for digital securities transactions on the SIX Digital Exchange (SDX). The tokenised Swiss franc will be a wholesale central bank digital currency (CBDC), which is used between financial institutions, as opposed to a retail CBDC, which is a digital medium of cash for consumers.

Within Europe, other central banks are also developing CBDC projects, which was commented on by the French central bank governor, François Villeroy de Galhau.

“The Eurosystem has started exploring new technologies for the settlement of central bank money, including the issuance of a first type of tokenized CBDC,” He added, “The eligibility criteria and the call of interest will be published in the coming weeks and experiments will be rolled out over the course of next year, including trials with real transactions.”

There are numerous privacy and stability concerns about CBDCs, which weigh against the benefits, including ease and cost of transactions. Despite debates among stakeholders of the projects, the growing involvement of large financial institutions in digital assets is contributing to the integration with existing financial systems.

Sam Bankman-Fried found guilty in FTX Trial

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Following the collapse of FTX one year ago, Sam Bankman-Fried has been found guilty of multi-billion dollar fraud, having misappropriated funds from FTX customers. The case was labelled one of the biggest financial frauds on record, as the 31-year old former billionaire illegally accessed $8 billion of customer funds that were held on the digital asset exchange.

Prosecutors alleged that Bankman-Fried had syphoned customer funds from FTX to his hedge fund, Alameda Research, while the marketing efforts of FTX focused on the safety of customer funds. These funds were used to pay Alameda’s lenders and provide loans to Bankman-Fried alongside other executives. The prosecution alleged that Bankman-Fried and Alameda executives made investments and donated up to $100 million to U.S. political campaigns, in an effort to lobby favourable cryptocurrency legislation for the FTX business.

Following the testimonies of three of his senior FTX colleagues against him, Bankman-Fried testified in his own defence, claiming that while he made risk management mistakes, he thought borrowing funds from FTX was allowed and was unaware of the size of the debt across both companies. Despite pleading not guilty to two counts of fraud and five counts of conspiracy, the guilty verdict was returned for Bankman-Fried after only four hours of deliberations by the jury.

For the top federal prosecutor in Manhattan, Damian Williams, who has focused on corruption in financial markets, the case was a victory for regulators in the digital asset industry. Williams told reporters outside the courthouse the importance of the legal win.

"The crypto industry might be new, the players like Sam Bankman-Fried may be new, but this kind of fraud is as old as time and we have no patience for it…"

Despite these court rulings, Bankman-Fried continues to assert his innocence and intends to continue his legal battle against the charges.

Binance CEO pleads guilty to money laundering charges

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After the collapse of FTX last year, U.S. regulators pledged to crack down on digital asset exchanges to ensure that they comply with regulatory requirements and to identify fraud within the digital asset industry. In March, U.S. regulators tried to ban the world's largest digital asset exchange, Binance, from operating in the U.S. in belief that the exchange had broken U.S. financial laws, including laws designed to prevent money laundering and terrorist financing.

In November, weeks after Bankman-Fried was found guilty in court proceedings, Binance CEO, Changpeng Zhao, widely known as "CZ", stepped down from his role at the digital asset exchange after pleading guilty to a number of charges brought against him by the Department of Justice and various U.S. agencies. The charges related to money laundering, whereby the firm assisted users in bypassing sanctions laws across the world. A spokesperson outlined the money laundering in greater detail.

"Binance enabled nearly $900 million in transactions between US and Iranian users, and facilitated millions of dollars in transactions between US users and users in Syria, and in the Russian occupied Ukrainian regions of Crimea, Donetsk and Luhansk."

Additionally, there were over $100 million of Bitcoin transactions between August 2017 and April 2022 involving transfers from Hydra, a Russian darknet marketplace known for facilitating the sale of illicit goods and services, including drugs, stolen financial information, and money laundering services, amongst others.

As part of the guilty plea, Binance is required to report any suspicious transactions to the authorities and pay a $4 billion fine which will allow the company to continue operating without triggering a meltdown reminiscent of FTX. Unlike Bankman-Fried, CZ has pleaded guilty and is remorseful for his actions, which is shown in statement on X.

"I made mistakes, and I must take responsibility. This is best for our community, for Binance, and for myself"

The legal proceedings against the former CEOs of both FTX and Binance highlight the activities of exchanges in a previously unregulated environment. Investors should understand the risks of exchange failure and how a liquidity crisis can affect an investment.

CoinShares secures an option to acquire Valkyrie’s investment advisory business

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CoinShares, a European digital asset manager, has an opportunity to expand into the United States with an option to acquire Valkyrie Funds, which is the investment advisory arm of Valkyrie that focuses on digital asset ETFs.

The option, which was issued on 16th November 2023, will expire on 31st March 2024. More importantly, the final deadline for an SEC approval for the application of a Valkyrie Bitcoin Trust is set to be on 19th March 2024, which is within the option window. Despite the final deadline, Bloomberg ETF analyst, James Seyffart, believes there is a 90% for an approval of a spot bitcoin ETF by January 10th, 2024.

Jean-Marie Mognetti, CEO of CoinShares, has outlined the contrast between the U.S. and European digital asset ETF markets.

“The global ETF market is fragmented. The establishment of crypto spot ETPs in Europe since 2015, a development about to be mirrored in the U.S., is the perfect illustration,” Mognetti further added, “This disparity in market evolution presents both challenges and significant opportunities. The option to acquire Valkyrie is accelerating our expansion into the U.S. market and the deployment of our digital asset management expertise globally.”

Valkyrie CEO, Leah Wald, reinforced the benefit of the potential acquisition for Valkyrie’s business growth.

“Valkyrie is enthusiastic about this strategic development with CoinShares. Joining forces with CoinShares, a leader in digital asset investments, enables us to expand our reach and enhance our offerings. We are excited about the opportunities this partnership presents, not only for our team but also for our clients…”

The potential acquisition appears to hold strategic significance for both CoinShares and Valkyrie. It provides CoinShares with an opportunity to extend its presence into the US market, which has not kept pace with the European market in terms of growth. Simultaneously, Valkyrie aligns itself with an industry leader. Until the option is exercised, Valkyrie will continue to operate as an independent entity.

Alongside the option, CoinShares and Valkyrie have entered into a brand licensing agreement for Valkyrie’s products, which permits Valkyrie to use the CoinShares name in products and regulatory filings. This includes the spot bitcoin ETF application submitted by Valkyrie.

The content, presentations and discussion topics covered in this material are intended for licensed financial advisers and institutional clients only and are not intended for use by retail clients. No representation, warranty or undertaking is given or made in relation to the accuracy or completeness of the information presented. Except for any liability which cannot be excluded, Monochrome, its directors, officers, employees and agents disclaim all liability for any error or inaccuracy in this material or any loss or damage suffered by any person as a consequence of relying upon it. Monochrome advises that the views expressed in this material are not necessarily those of Monochrome or of any organisation Monochrome is associated with. Monochrome does not purport to provide legal or other expert advice in this material and if any such advice is required, you should obtain the services of a suitably qualified professional.

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