21Shares Research Newsletter - Issue 34

Market Outlook

The top five largest crypto assets saw a mid-week resurgence following a period of dampened volatility. As one can remember, news around the Chinese government's involvement with Bitcoin and blockchain technology has been the key driver of the market's volatility over the last month. We can expect this to subside as more certainty develops around the People's Bank of China's digital currency project — BTC (0.30%), ETH (-1.13%), XRP (2.00%), BCH (-2.69%), and LTC (-2.70%).

Adjusted transaction volumes continued the general week-on-week downward trend ($2.30B to $1.79B for the weeks' averages), though Bitcoin's transaction volume did experience a noticeable spike yesterday — BTC ($1.44B), ETH ($172M), XRP ($66.7M), BCH ($93.1M), and LTC ($17.3M).

21Shares Receives Approval of A Base Prospectus under The EU Prospectus Regulation

We are pleased to announce that the Finansinspektionen, the Swedish Financial Supervisory Authority (SFSA), has approved the Base Prospectus filed by 21Shares. We have extensive plans to expand our current set of product offerings of digital-asset Exchange Traded Products (ETPs) into the European Union as we continue our mission to lead the delivery of professional-grade investment products in the crypto currency and blockchain markets.

Our co-founder and president Ophelia Snyder was quoted as saying the following: “We recognize that the regulatory framework in Sweden has been supportive of such initiatives and we welcome its deliberation. The combination of strong demand for ETPs in Sweden – especially in crypto assets – among private investors and institutional clients and our strong expertise in these product categories create ideal conditions for 21Shares’s entry into the Swedish and European Union markets for ETPs."

Learn more here.

Podcast - Understanding Tokens: Regulation and Economic Models

The 21Shares team (Hany Rashwan, Ophelia Snyder, Laurent Kssis, Hansen Wang, and Lanre Ige) comes together to discuss the impact recent regulatory actions on token sales will have on the market and gives an overview of the different economic models for tokens. The Securities Exchange Commission (SEC) has been heating up their enforcement action over the last few months with recent enforcements/settlements actions against companies such as Block.one. The primary contributor to the cool-down of the wider token sale market has been a general fear of action by the SEC and the intricacies of each of the SEC's token sale-related cases thus far will have long-term impacts on the crypto asset market.

In addition, the regulatory investigations over the last few years into different tokens have helped further shed a light on the various kinds of economic models different crypto assets use. The differences between each token's economic model affect its economic, valuation, and regulatory status and as such is of the utmost importance for anyone interested in the crypto asset industry.

Tune in to this week's episode to learn about token sale regulation and crypto asset economic models — two of the most cutting edge topics within the sector.

Reading Materials:

U.S. Securities and Exchange Commission (SEC) — SEC Orders Blockchain Company to Pay $24 Million Penalty for Unregistered ICO; Karen E. Ubell (Special Counsel, Cooley) — In the Matter of Block.one; Block.one — Block.one Announces Settlement with U.S. Securities and Exchange Commission; Fabric Ventures — The Fabric Ventures Investment Thesis; Kyle Samani (Multicoin Capital) — New Models for Utility Tokens; John Pfeffer — An (Institutional) Investor's Take on Cryptoassets

This podcast is presented by BlockWorks Group. For exclusive content and events that provide insights into the crypto and blockchain space, visit them at: blockworksgroup.io.

You can listen to the episode on Spotify, Apple Podcasts, or Megaphone.

News - SEC Reveals Telegram’s Communications With Investors, Seeks to Question Advisor | CoinDesk

What happened?

The U.S. Securities and Exchange Commission (SEC) wants Telegram’s former chief investment advisor, John Hyman, to testify and hand over documents related to the company's $1.7 billion 2018 token sale. The trans-Atlantic request was revealed in a trove of documents filed by the SEC last Friday with the U.S. District Court of the Southern District of New York.

The agency is seeking to halt the launch of TON, Telegram’s ambitious blockchain project, and the issuance of TON’s tokens, named grams. The SEC considers Grams unregistered securities – an allegation Telegram has repeatedly denied. According to the Friday filing, the SEC is seeking Hyman’s testimony as he has been closely involved in raising funds for TON and communicated with “over a dozen” investors. Telegram CEO Pavel Durov described Hyman in January 2018 as the chief investment advisor at Telegram and the person who “runs the distribution of Grams,” the SEC says.

Why does this matter?

As CoinDesk noted, Telegram is due to meet the SEC in court on February 18-19, 2020. Since the news broke several months ago on the SEC's investigation into Telegram which halted the continuation of their $1.7B fundraise, the SEC has continued its investigation into the project and Telegram has, as a result struggled to launch its TON blockchain — despite its original launch date of October 31.

It is difficult to understand how such a case will pan out but it is interesting to put this news in the context of the most recent episode of our podcast, Understanding Tokens — Regulation and Economic Models, where we discussed how Block.one's willingness to settle with the SEC — in contrast to Kik's desire to fight their case — led to a relatively favourable outcome for the former (i.e. a settlement amount which was a fraction of the amount raised in the token sale) whilst Kik has suffered as a result. The chart below plots the industry's largest token sales where the $1.7B raised by Telegram ranks as the second-largest amount after Block.one's fundraise for their EOS token.

Learn more here.

News - Ethereum’s Istanbul Hard Fork Is Now Live | CoinDesk

What happened?

Ethereum has successfully completed the Istanbul hard fork. Hitting at block number 9,069,000, the systemwide upgrade is the network’s third in 2019, following February’s St. Petersburg and Constantinople hard forks. The months-long process culminated at 0:25 UTC on Sunday.

Another iteration of Ethereum 1.x, Istanbul is the network’s eighth hard fork overall with the first code changes being approved in June 2019 (ETH 2.0, the network’s major transition to proof-of-stake (PoS), is expected to be completed by 2021). Being non-contentious, all ethereum clients – which host and independently upgrade the ethereum protocol themselves – have agreed to the new software.

Why does this matter?

According to a blog post from Consensys, the main issues addressed by the hard fork are as follows: denial-of-service (DDoS) attack resilience (EIP 1344), interoperability with equihash-based proof-of-work (PoW) cryptocurrencies such as zcash (EIP 152), gas costs (EIPs 1108, 2028, 2200). As such, the hard fork can be expected to have a positive impact on Ethereum's ability to function.

In addition, some of the reductions in gas costs (i.e. the amount users pay for transactions and smart contracts) will massively improve the viability of certain "layer-2" scalability solutions on Ethereum, as noted by The Block's analyst Matteo Leibowitz.

An unfortunate side effect of the hard fork has been an increase in the failure of smart contract "calls" (transactions which interact with smart contracts) as the chart below clearly demonstrates. On the day of the hard fork, December 8, the Ethereum network saw a brief spike in failed transactions; though there have been many days in Ethereum's past where there have been much greater amounts of failed transactions.

Learn more here.

News - Bakkt Has Launched 2 New Trading Products, And It Sheds Light On The Firm's 2020 Vision | The Block

What happened?

It's not yet clear who will lead Bakkt going into 2020, but the firm's product roadmap for the new year is somewhat apparent. As per a blog post announcing the launch of two new futures contracts, the Intercontinental Exchange-backed firm said it's looking to model itself after its parent company by offering a suite of digital currency products that mirror the popular Brent Crude Oil Futures contract.

The blog comes a week after Bakkt's CEO Kelly Loeffler was tapped to take over a vacant U.S. Senate seat in Georgia.

Why does it matter?

As the chart (Source: Skew) below shows, Bakkt's futures volumes are still a fraction of that of the futures products available on platforms like Binance or BitMEX — Bakkt currently makes up only a small segment of the tens of billions of dollars being traded every day in the Bitcoin futures market.

On the other hand, the Bitcoin options market is minuscule with the current offerings of Deribit and LedgerX struggling to hit over $40M in daily volume (Source: Skew). Bakkt's strategy of entering product lines with little competition could be a useful maneuver in the firm's push to stake its place in the market — on the assumption that once they come to dominate the Bitcoin options market, for example, it will continue to grow.

Learn more here.