21Shares Research Newsletter - Issue 28

Market Outlook

The last week was one of the most volatile in recent memory for the crypto asset market, with Bitcoin's price hitting as low as $7,500 before briefly surging back to over $10,000 on Saturday. The price volatility was likely driven, to some extent, by the news of China's strengthened focus on blockchain technology, Mark Zuckerberg's hearing before Congress, and the arrest of the President of Crypto Capital, the former payment facilitator of Bitfinex — BTC (14.20%), ETH (1.40%), XRP (3.26%), BCH (20.71%), and LTC (7.03%).

As the market rebounded from last week's lows, on-chain transaction volumes also followed a steep upward trend which reflected an increased demand for crypto assets towards the tail-end of last week — BTC ($2.24B), ETH ($356M), XRP ($257M), BCH ($129M), and LTC ($31.8M).

News - China's President Xi Jinping Wants the Country to 'Take the Leading Position' in Blockchain | The Block

What Happened?

China's President Xi Jinping said on Thursday that the country's communist party should regard blockchain as a core technology for important innovative breakthroughs and should commit to accelerating the development of the technology, according to a report from Xinhua.net. Xi made the remarks in a meeting with the political bureau of the party's Central Committee. The meeting is part of a workshop series held regularly by the Central Committee and Thursday's workshop aimed at learning the current state and future development of blockchain technology. This is presumably the first time the party's central committee collectively studied blockchain technology.

Xi stressed that China already has a solid foundation to develop blockchain technology. Therefore, it is necessary to strengthen and let China "take the leading position in the emerging field of blockchain. The country needs to accelerate the standardization of blockchain research, which will, in turn, give China more power in setting rules and standards internationally", Xi said. According to Xi, China will also promote the integration of blockchain technology with the real-world economy and solve real problems in the existing banking and financial systems.

Why Does This Matter?

It should not come as a surprise that China continues to push forward with its "blockchain" efforts, but perhaps it is slightly surprising that President Xi Jinping would take such a public stance on the industry during a Communist Party of China's Central Committee meeting. Perhaps, the biggest example of China's increased focus on blockchain technology is the development of its own digital currency — the Digital Currency Electronic Payment (DCEP) initiative.

As reported by Dovey Wan, Founding Partner at Primitive Ventures, the news had a large effect on mainstream interest in Bitcoin and blockchain technology within China. The chart below shows the increase in search interest on Baidu and WeChat for the word "Blockchain" between November 24-26; on the day the news broke (November 25), search interest in the term "Blockchain" increased by 329.07% and 1382.79% on WeChat and Baidu respectively. Interestingly, search interest for "Bitcoin" fell by 5.55% and 5.65% over the same timeframe on WeChat and Baidu respectively.

Learn more here.

News - Zuckerberg Gets Thrown a Long List of Grievances by Congress on Libra | Brave New Coin

What Happened?

In the latest round of scrutiny over Libra, Mark Zuckerberg sat before Congress and fielded questions about the embattled digital currency project. The hearing, which was officially about the impact of Libra on Financial Services and Housing, lasted for six long hours, during which politicians competed to quiz the CEO on issues as diverse as money laundering, control over user data, and the recent departures of Mastercard, Visa, PayPal, and eBay.

In his opening remarks, Zuckerberg appealed to the plight of the unbanked population, claiming “there are more than a billion people around the world who don’t have access to a bank account, but they could through mobile phones if the right system existed.”

Why Does This Matter?

Facebook founder and CEO Mark Zuckerberg faced as much scrutiny for Facebook's core business as he did for its Libra project's ambitions during the congressional hearing, which speaks to the extent that Libra's troubles can be traced back to the issues regulators have with Facebook's operations as much as its troubles are predicated on the project itself. It should be obvious now that U.S. regulators will take the lead in holding Libra to account and it is entirely possible that further product decisions around the digital asset will be made specifically to placate them — for example, Andreessen Horowitz (a member of the Libra Association) Partner Chris Dixon recently gave the example of "denominating the currency in U.S. dollars" as one way to assuage regulators.

As a member of the Libra Association, one can assume that Andreessen Horowitz's partners have been privy to strategic talks that have been had by the Libra Association in response to the outcry from regulators; perhaps, the concept of a US-denominated Libra shouldn't be considered too "hypothetical" after all.

Learn more here.

News - President of Crypto Capital Arrested in Alleged Money Laundering Operation | CoinDesk

What happened?

Crypto Capital President Ivan Manuel Molina Lee was arrested by Polish authorities, accused of being part of an international drug cartel and involved in its money-laundering operations using Bitfinex, according to several Polish news sites. Crypto Capital was a company with which Bitfinex allegedly entrusted $850 million, money the exchange said it was unable to access later. To cover the loss, the exchange conducted a $1 billion token sale in May. It was previously reported that the Polish Ministry of Justice had seized bank accounts in name of Crypto SP. Z O.O. The seized funds, which amount to $350 million, reportedly belonged to Crypto SP. Z O.O. and NESP SP. Z O.O., two companies likely affiliated with Crypto Capital and Molina Lee, according to several financial documents. The seizure was a part of an anti-money laundering operation conducted by the Polish authority.

Polish Media RMF 24 said Molina Lee was sought by Polish authorities in connection with the seized funds, which was “about laundering money from Colombian drug cartels through the crypto asset exchange,” the article said. According to the National Public Prosecutor’s Office, The money-laundering operation was “the largest security [seizure] in the history of the Polish prosecutor’s office against forfeiture.”

Why does this matter?

This news story is the latest escalation in the controversy around the New York Attorney General's (NYAG) investigation into Tether and the subsequent revelation that the firm had lost access to $850M of the capital used to back its stablecoin. As mentioned, the firm whose President was arrested by Polish authorities, Crypto Capital, had previously counted crypto asset exchanges such as Kraken, Bitfinex, and BitMex as their clients — with Crypto Capital acting as a middleman offering the exchanges access to banking services they otherwise would struggle to get.

It is likely that this further escalation of regulatory and legal actions against Crypto Capital further reduces the likelihood that Tether will be able to successfully recover the lost funds — given that Crypto Capital's funds seem to be linked to money laundering activity. Though this claim is something that Bitfinex has denied any involvement with, in a statement, they said that "any suggestion that Crypto Capital laundered drug proceeds or any other illicit funds at the behest of Bitfinex or its customers is categorically false."

The news does not seem to have affected the market's faith in Bitfinex; for example, there were only net-USD outflows of its funds for the ERC-20 tether (USDT_ERC20) token and not for any of the other major crypto assets listed on the exchange — as shown by the exchange in-/out-flow data from TokenAnalyst below.

Learn more here.