21Shares Research Newsletter - Issue 140

Market Outlook

At 21Shares, we are thrilled to share our Year In Review and 2022 Crypto Markets Outlook.

2021 was nothing short of an eventful year, most importantly marked by defining moments accelerating the pace of innovation and adoption in the crypto industry. While 2020 was labeled as the year of institutional and corporate engagement and the dawn of DeFi, this year, the unprecedented interest in crypto onboarded a whole new wave of entrepreneurs and investors never seen before. Many who leapfrogged Bitcoin and even Ethereum to build and use the first generation of Web 3 applications.

One of the major challenges of this report is turning it into a coherent story summarizing the year and heading it towards the future. If we had to define the year 2021, it will be labeled by the following patterns:

• Continued Institutional Engagement: The institutional adoption starting with Tesla boosted with the Coinbase public listing
• The China Ban: The China ban on cryptoasset mining and trading
• The DeFi Bear Market: The discrepancies between fundamentals and price developments for Ethereum-based DeFi applications
• The Web 3 Movement: The resurgence of NFTs, expansion of its various use cases for music, gaming, and movies alongside the rise of the Metaverse
• Ethereum Competitors: The developments of the crypto infrastructure with Ethereum competitors at the forefront of public attention
• The Developments of the Crypto Infrastructure: Interoperability and scalability solutions also dubbed Layer 2s
• Expectations for 2022: This year’s overlooked use cases to keep an eye on in 2022
• Give it a read here: https://21shares.com/research/year-in-review-21/

Weekly Returns

The returns of the top five crypto assets over the last week were as follows — BTC (-2.5%), ETH (-0.99%), BNB (-4.27%), SOL (-4.3%), and ADA (-6.38%).

Net Inflows per 21Shares ETP

The net Inflows of our ETPs amounted to $51.27M in the past week. Find the breakdown of the inflows and outflows per ETP below.

Media Coverage

In a report about the US Senate and its take on stablecoins, Institutional Money, a leading German news portal, shared our thesis on the cryptocurrency published in our last newsletter. While we believe that stronger regulatory supervision of stablecoins will provide more clarity about their status, we don’t believe that a total ban - like suggested in a hearing in Capitol Hill - would benefit the end users; “especially [that] stablecoins already play an important role in financial inclusion,” Institutional Money wrote, mentioning the example our newsletter added about how Circle worked with Airtm to provide USDC to pay Venezuela’s health workers during the pandemic.

Also in German, Finance Fwd released a new episode in its podcast that featured 21Shares as one example of crypto ETP providers. In the episode, ETP expert Jan Altmann explained how crypto ETPs work. Also, Investing.com published an article about how Bitcoin ETPs in Europe and Canada remain popular even with the launch of US ETFs, featuring our very own ABTC.

This time in Swedish, ETF Marknaden published a handy report featuring our Avalanche ETP, summarizing our Avalanche primer, which you could read here.

News - Polymarket Fined $1.4 Million for Unregistered Swaps

What happened?

The US Commodity Futures Trading Commission (CFTC) cracked down on Polymarket on January 3, ordering the DeFi event-betting platform to pay a $1.4 million civil monetary penalty. The CFTC is also giving Polymarket until January 14th to “wind down” all markets displayed on the platform that do not comply with the Commodity Exchange Act (CEA) and applicable CFTC regulations. Polymarket is also expected to make full refunds to its users also by mid-Jan.

Why does it matter?

Although the news shook the DeFi ecosystem in the US, the CFTC’s approach was met with a sigh of relief. The order represents how crypto regulations make far more sense under the CFTC, an entity that treats cryptocurrencies and their derivatives as commodities. In the order, the CFTC also made it a point to mention that it recognizes Polymarket’s Automated Market Maker (AMM) as it is, an “algorithmic functionality,” as opposed to being treated as exchanges or platforms run by humans. This concept adopted by the CFTC could potentially lead to the understanding that not all AMMs need to register as a licensed market like a Swap Execution Facility or Designated Contract Market.

Another positive thing in yesterday’s order is that it highlights the issue with the centralization of Polymarket, as the users depend on the front end to access smart contracts even with the presence of non-custodial wallets. At 21Shares, we believe that with adequate lobbying for crypto-awareness, regulators (like what is happening with the CFTC) will adhere and become more accepting of the industry. On another note, it shouldn’t come out as a surprise if the CFTC put non-US-based DeFi protocols on its Red List amongst offshore companies offering binary options. It’s just a matter of time until decentralized finance applications become large enough in market value and traded volume to treat them as offshore entities.

“Many offshore companies engaged in commodity binary options transactions are not registered with the CFTC, however, and it is best to avoid them entirely. When companies operate offshore, investors have even fewer protections and are at greater risk of being targeted for fraud. Those featured on the RED List, for example, are companies operating without CFTC registration and are based offshore where they are not held up to the same standards as those based in the U.S.” Source: The CFTC