Monochrome Monthly Recap | May 2023 - June 2023


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BlackRock's iShares Files Paperwork for Spot Bitcoin ETF

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BlackRock's iShares, a unit of the world's largest asset manager, BlackRock, has submitted a filing to the Securities and Exchange Commision (SEC) to create the iShares Bitcoin Trust, a spot bitcoin exchange-traded fund (ETF). Unlike prior attempts by other US-based fund management firms, which were rejected by the SEC, BlackRock's participation adds significant weight to the prospective approval of a spot bitcoin ETF. With over $10 trillion in assets under management, BlackRock's political stature and CEO Larry Fink's influence might play a big impact in the SEC’s decision-making process.

The SEC has previously rejected spot bitcoin ETF applications, due to concerns around whether the structure is safe for retail investors. VanEck’s previous application for a spot bitcoin ETF was denied as it had not met requirements that it be designed to prevent fraudulent and manipulative acts and practices. BlackRock’s submission using an investment structure that has repeatedly been rejected by regulators reflects its desire to maintain dominance in global capital markets.

The proposed iShares Bitcoin Trust ETF would custody bitcoin with Coinbase Custody, the custodian arm of the popular US cryptocurrency exchange. The fund intends to track the spot price of bitcoin by benchmarking against the CME CF Bitcoin Reference Rate, which receives price data from cryptocurrency exchanges that adhere to strong market integrity and transparency requirements. If authorised, it may lead to growing institutional interest and acceptance of the cryptocurrency sector.

This filing by BlackRock comes at a time when the crypto sector is facing heightened regulatory scrutiny, as seen by SEC’s recent moves against prominent cryptocurrency exchanges such as Coinbase and Binance. The conclusion of the SEC's assessment of BlackRock's iShares Bitcoin Trust might have far-reaching consequences for the adoption and integration of cryptocurrencies into traditional financial markets, opening the path for more institutional engagement and signify a growing acceptance of bitcoin as a valuable asset for large financial institutions.

While the approval of a spot bitcoin ETF remains uncertain, BlackRock's involvement creates a new dynamic in the evaluation of spot bitcoin ETFs in the United States. As traditional banking and digital assets continue to converge, market players will closely follow regulatory changes and their effect on the crypto-asset market.

PayPal to Increase Crypto-asset Holdings From Q4 2022

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The most recent quarterly filings for PayPal show the fintech giant’s digital asset holdings to be nearly $1bn, increasing by 56% over the reported figure in Q4 2022. This takes PayPal’s holdings of crypto assets to a total of $943m, which is predominantly comprised of $499m in bitcoin and $362m in ether, with the remaining $82m allocated to other cryptocurrencies. Despite the amount increasing, the underlying asset types have remained the same since Q4 2022.

Considering PayPal has allowed the use of cryptocurrencies on its platform, PayPal has noted that their digital asset holdings are a “safeguarding liability”. This is motivated by the characteristic idiosyncratic risks of holding cryptocurrencies:

“We allow our customers in certain markets to buy, hold, sell, receive, and send certain cryptocurrencies as well as use the proceeds from sales of cryptocurrencies to pay for purchases at checkout. These cryptocurrencies consist of Bitcoin, Ethereum, Bitcoin Cash, and Litecoin (collectively, ‘our customers’ crypto assets’).”

PayPal currently holds cryptocurrencies on behalf of their customers using third party providers, including Gemini and Coinbase Custody. Following the acquisition of Venmo by PayPal in 2013, customers can also transact with various digital assets between both Venmo and PayPal wallets.

Evidently, payment-facilitating platforms are increasing digital asset adoption, which is signified by the increase in cryptocurrency holdings, as they are primarily used for customer transactions. To remain competitive, other firms including Mastercard are also investigating crypto products, where Raj Dhamodharan, Executive Vice President Blockchain/Digital Asset Products & Digital Partnerships stated, “a lot of energy is going to figuring out the next use cases”.

The SEC Sues Binance and Coinbase

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The Securities and Exchange Commission (SEC) has filed a complaint against Binance and its CEO Changpeng Zhao. The SEC alleges Binance and Zhao operated a “web of deception” and listed 13 charges against them which includes; artificially inflated trading volumes from wash trades with Zhao’s trading firm, Sigma Chain, failed to restrict US customers from its platform, diverted customer funds for their own use, and misled investors about Binance’s market surveillance controls. Additionally, the SEC believes Binance has created separate U.S. entities in evasion of U.S. federal laws.

While Binance has claimed to be actively cooperating with regulators, the exchange intends “to defend its platform vigorously” and claims the SEC’s controls are limited because Binance is not a U.S. Exchange.

Only days after the SEC’s filing against Binance, the SEC also filed a lawsuit against the New York based crypto exchange Coinbase. The regulator claims Coinbase has offered unregulated securities, including, Solana, Cardano and Polygon, which all classify as securities. These assets were classified as securities as Coinbase’s staking program includes these crypto assets, which makes the staking program an investment contract. The SEC says that per the definition of a security, these assets are securities, something which is refuted by Coinbase. The lawsuit alleges that Coinbase has evaded the disclosure scheme for securities markets and has never registered as a broker.

A statement from Director of the SEC’s Division of Enforcement, Gurbir S. Grewal, shows the tough stance the SEC has taken on crypto exchanges.

“You simply can’t ignore the rules because you’d prefer different ones: the consequences for the investing public are far too great.”

The regulation activity surrounding exchanges has spurred market uncertainty within the digital asset class, which has placed downward pressure on bitcoin. The actions taken by regulators have highlighted the risks of crypto exchanges as a medium to gain bitcoin exposure. As such, it is important for investors to understand the risks they take when transacting through exchanges, which are often not as transparent.

Lightning Network Relieves Congestion From BRC-20 Token Activity

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The BRC-20 token market has surged following the recent Taproot upgrade, which introduced a new protocol, Taproot Ordinals. This allows BRC-20 tokens to be minted on Bitcoin, which has seen a strong transaction demand, resulting in congestion on the network. The heavy ordinals activity on Bitcoin had caused over 450,000 transactions to be unconfirmed in Bitcoin’s mempool space. As a result of the congestion, transactions with a higher fee were prioritised, driving fees to increase.

As transaction volumes increased, transactional fees quadrupled to the highest level since May 2021, rising from an average of USD$3 to $19 per transaction in one week. Bitcoin miners benefited from this increased demand, receiving a record percentage of their mining revenue in block fees, which is further bolstered by Bitcoin’s hash rate reaching an all time high. The graph below shows the increased transaction fees and the transaction count on Bitcoin reaching an all time high.


Chart taken from Glassnode.

To ease congestion, Bitcoin’s layer-2 Lighting Network allows traffic to be offloaded from Bitcoin by keeping transactions off chain. The Lightning Network has a capacity of over 5,351 BTC and allows transactions to be extremely fast with very low fees, as miners do not have to include each individual transaction within blocks.

Despite the Lightning Network capacity being relatively low for widespread adoption, Binance proposed further development to the network in a statement,

“To prevent a similar recurrence in the future, our fees have been adjusted. We will continue to monitor on-chain activity and adjust accordingly if needed. Our team has also been working on enabling BTC Lightning Network withdrawals, which will help in such situations.”

Lightning Network has shown to be a suitable layer-2 solution, allowing Bitcoin to outsource scalability, while focusing on decentralisation and security. Given the rapid adoption of ordinals, new utility for Bitcoin has shown to test the scalability of Bitcoin through layering and could drive further adoption.

Commonwealth Bank Restrict Cryptocurrency Payments

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Australia’s largest bank, Commonwealth, has implemented its fraud protection measures, which limit the transfers to high-risk cryptocurrency exchanges. In alignment with Commonwealth Bank, Westpac also rolled out a series of fraud protection measures, targeting exchanges. Westpac banned customers from transacting with numerous cryptocurrency exchanges in scam prevention measures, which bundles exchanges including Binance Australia with other “high risk” exchanges.

In a statement, general manager of group fraud management services at CBA outlined the difficulties the Australian bank faces when attempting to recover money from cryptocurrency exchanges.

“We can usually ask other Australian banks to preserve fraudulent money, but when it hops across crypto wallets all around the world instantly, the recovery rate is very low.”

While some customers may be prevented from transacting with some exchanges, there are additional restrictions, which include, 24-hour transaction holds for cryptocurrency exchange transfers and a A$10,000 monthly limit. Evidently, retail banking institutions are witnessing money transfer to cryptocurrency exchanges, which have shown to have inherent risks, resulting in customers being subject to financial fraud, packaged as investment opportunities.

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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