21Shares Research Newsletter – Issue 151
Recovery is on track this week, with Bitcoin performing better by over 7% and Ethereum by 16% since last week. Avalanche is also up by a whopping 28.7%; a development that may be attributed to the increasing interest in the NFT ecosystem when gauging the 48% jump in the network’s NFT sales, as well as the excitement surrounding the expansion of Terra’s Anchor money-market protocol onto the AVAX network.
Broadly, the market has gained a mildly bullish momentum on the back of massive outflows occurring across exchanges for Bitcoin. This might be signaling that institutional investors and high-net-worth individuals could be capitalizing on this 38k-42K price level for withdrawing their BTC holdings into their cold storage for long-term holding. A precursor that usually occurred before a rally, as shown below in November of 2020, and September of 21.
Source: Glassnode
Major Caps’ State of Affairs
Aside from BTC’s relative strength that affects the market’s wider momentum, several developments can be attributed towards the Majors’ positive performance over this past week. For instance, Ethereum saw its final public variation of its merge testnet preceding the final Proof-of-Stake switch - dubbed Kiln - launch this past Thursday. In that view, the excitement underpinning the anticipation of having the largest smart-contract network migrate to a POS network is now becoming a feasible reality by Q2 of 2022. This enthusiasm was felt as Ethereum’s balance on exchanges fell to its lowest point since 2018, as hedge-funds like 3AC had a solid bullish case to bet on its compelling future, seeing they deposited more than $110M worth of ETH into Lido’s liquid staking service. The switch should also enrapture traders and hedge funds as they expect the network’s yields to swell to somewhere from 10-15%, notably as the fees garnered for miners (base-fees) will now be reallocated towards stakers.
On the other hand, Avalache had grounds for its rally rooted in the fact that Terra’s infamous anchor money-market protocol will now be deployed on top of the network through its wormhole integration. This should fend-off native users from having to take their funds off-chain and instead leave it within the premises of Avalanche.
Crypto and Sanctions
Last Thursday, the US Senate Committee on Banking, Housing, and Urban Affairs held a hearing to understand the role crypto-assets are playing in the pursuit of illicit finance. The main takeaways from the discussion:
Jonathan Levin, Co-Founder and Chief Strategy Officer, Chainalysis, Inc
Bitcoin and Ethereum are technologies that pose the greatest opportunity to increase the degree of transparency in financial services, including the excluded, and create new ways for commerce to happen. The blockchains’ transparency and the permanence of the records contained within this allow Chainalysis to root out illicit activities. Likewise, Law enforcement leverages the permanence of these records and its openness to take proactive steps to investigate crimes without the need to serve subpoenas or have reporting requirements.
The sanctions imposed on Russia demonstrate the power of investing in financial technology and the dollar’s dominance over the 20th century. Levin urged the committee of the need to continue investing in financial technology and build the financial rails that the globe will use in the 21st century. Embracing digital assets will help the US build this future. In fact, these new rails can be built to encourage transparency, which not only protects national security and public safety, but also enhances it.
Michael Mosier, Former Acting Director, Deputy Director/Digital Innovation Officer, Financial Crimes Enforcement Network (FinCEN)
When speaking of illicit finance, Mosier reminded the senators not to forget about defenders of democracy whose financing may be considered illicit to autocrats and invading armies. The same cryptographic capabilities discussed here enabled to secure auditable humanitarian aid to 60,000 healthcare workers in Venezuela under a repressive regime. Likewise, in the past few weeks, tens of millions of dollars worth of crypto-assets were donated to Ukraine faster and more aid than the UN provided. Thanks to this transparency, the government identified wallets on a public ledger with far more accountability than the UN’s Oil for Food scandal in Iraq.
Mosier also shed light on some observations on ransomware. Ransomware dates back to 1989, two decades before the emergence of Bitcoin. Bitcoin has become a preferred payment method because of speed and perceived anonymity; however public ledgers offer law enforcement significant visibility and investigative benefits over opaque international banking. A significant testament to this thesis is the recovery of $2.3M from the colonial pipeline attackers. The increase in ransomware has more to do with other developments; first, the advent of ransomware as a service making kits widely available regardless of coding skills and drastically reducing barriers to entry. In addition to double extortion, they are greatly increasing payouts by threatening to expose stolen data, not just lock the computer. According to SolarWinds, there are plenty of menial actors driven by non-financial incentives. Over attributing cybercrimes to crypto-assets misses critical causes and preventive measures that can be taken. Certainly, there’s work to be done yet for Web 3 to be safely accessible but the early internet had a lot of fraud and exploits as well; instead of shutting down the internet, developers and regulators worked persistently side by side to find the balance while prioritizing risks and pathways to consensus and clarity.
Michael Chobanian, Founder of KUNA Exchange, President of Blockchain Association of Ukraine
Chobanian denied that the Russian government could evade sanctions using crypto-assets, explaining that it’s virtually impossible to transfer large amounts of money from fiat to crypto-assets. In addition, Chobanian stressed that there are a lot of Russians in and outside Russia who rely heavily on crypto. These Russians represent the opposition to Putin’s regime, who will be negatively affected if legislation is drafted that would exclude Russian users altogether, killing the opportunity to have an opposition to bring down this regime.
During the hearing, Elizabeth Warren introduced a bill targeting Russian crypto use. The Digital Asset Sanctions4Compliance Enhancement Act features co-sponsorship from 10 other Democratic senators, including the Foreign Relations and Agriculture Committees leaders, but not the Banking Committee Chair Sherrod Brown. The Block obtained a copy of the bill, which hasn’t been made public yet, and reported that it mandates that the White House puts together a report on all crypto service providers that have any affiliation with Russia. It also gives sweeping authority to the Treasury to bar crypto services providers like exchanges from transacting with any addresses associated with Russia.
Over the past few weeks, we’ve seen Kraken, Coinbase Global, and Tether decline Ukraine’s plea to halt transactions that involve Russian users. In the case of passing Warren’s bill, exchanges and crypto projects operating in the US may be obliged to suspend Russian users on their networks.
Global State of Adoption
The Middle Eastern region is taking the lead in ramping up its efforts towards embracing the technology as it introduced a set of legislations that will allow crypto to be integrated and enable an accepting regulatory regime to oversee its operations.
For instance, Binance was issued its second MENA crypto-asset service provider license from the central bank of Bahrain that allows them to provide services such as trading and custody. That follows the approval by Dubai’s Virtual Asset Regulatory Authority (the country’s newly established regulator) in permitting the crypto exchange to offer a limited set of services to pre-qualified investors. Binance was not the first service provider as FTX had just been accorded the same license within the UAE the week before.
Accounting for the west, Ukraine finally legalized crypto as an asset class after president Zelensky’s signed the law on virtual assets. The newly ratified legislation will allow local and foreign exchanges to operate legally within the country and establish a regulatory framework for the open crypto market for the first time. The move comes following the extraordinary fundraising that materialized through a plethora of supported currencies found on the government’s crypto-native donation website, amounting to roughly $65M. Looking at the Asian region, Malaysia’s minister of multimedia called for the state to consider legalizing crypto and NFTs as the move would purposefully support the growing youth who are the most prominent endorsers of the nascent industry.
DeFi and NFTs Espousal
The self-custody wallet by crypto exchange Coinbase, which goes by Coinbase Wallet, has added support for Solana to its Chrome browser extension. This will allow Coinbase Wallet users to store, send and receive SOL and Solana-based tokens from the wallet's browser extension. The Block also reported that the wallet wants to add Solana support for its mobile applications. This could translate into better price performance of SOL which is already up by 12.5% since last week.
HSBC became the first global bank to buy a plot of land in the Sandbox metaverse, and the second to invest in a popular metaverse platform after JPMorgan set up a presence in Decentraland last month. This purchase will allow HSBC to engage with sports, e-sports, and gaming fans through its slice of the Sandbox, whose token SAND jumped 14.5% in the last seven days.
As part of its V3 upgrade, Aave is expanding into more L1s and L2s to draw in more mainstream users and cater to a much larger market opportunity in crypto lending than its creators anticipated. The upgrade also includes some new functionalities and mechanisms designed to improve user experience, risk management, and capital efficiency.
On the non-fungible front, GameStop is partnering with Immutable X, a layer two solution for NFTs on Ethereum, to launch its NFT marketplace by the end of Q2. Upon achieving certain milestones, the struggling game retailer will receive up to $150M in Immutable X’s IMX tokens.
Mark Zuckerberg announced that NFTs would “soon” be integrated on Instagram, shying away from giving any specifics. Meta is a bit late to the party as Twitter had already started allowing its Twitter Blue users to exhibit their NFTs as of January 2022. However, this further ties in with our thesis that the trading volume of the NFT market, which has been down since the wake of the Russo-Ukrainian conflict, will not bleed for long.
The returns of the top five crypto assets over the last week were as follows — BTC (4.4%), ETH (10.54%), BNB (6.7%), XRP (9.26%), and LUNA (8.05%).
The net Inflows of our ETPs amounted to $12.2M in the past week. Find the breakdown of the inflows and outflows per ETP below.
Our very own Eliezer Ndinga, 21Shares’ Director of Research, was featured in an article exploring how ETP issuers boost returns in crypto ETPs. “The return to the investors comes in the form of reduced fees as well as direct yields, and for a few products, the yield is explicitly shared. For example, ASOL was the world's first staking ETP and has been providing near 6% annualized yield, since launch,” ETF Stream quoted Eliezer.
In a report about the demand of crypto insurance, Eliezer told Capital.com that, “The demand will definitely grow in tandem with the growth of the crypto asset class.” He elaborated that insurance is one of the biggest crypto sectors that needs well-thought-out designs. “He noted that many sophisticated investors have lost millions of dollars’ worth of crypto assets through theft, forgotten passwords, lost private keys, or natural disasters that destroyed cold crypto wallets,” Capital.com wrote further.
21Shares’ CEO and Co-founder Hany Rashwan was also invited for an interview on CoinDesk. “Around the globe we’ve certainly seen a lot of events that have shown the benefits of crypto and how it actually could be used, which all explain why people are holding,” Hany said. You can watch the full interview here.
Last but not least, we are also thrilled to announce that Arielle Sobel has been appointed as 21Shares’ first Head of Communications. Read more about Arielle in this article.
Afghans Resort to Crypto to Survive Taliban’s Sanctions-Ridden Economy
What happened?
The AFP reported that cryptocurrencies have been helping Afghans back into financial inclusion amid the financial crisis that has been paralyzing the war-ridden country ever since the Taliban rose back to power last year, inviting sanctions and diplomatic isolation. Consequently, bank transfers to Afghanistan have become impossible and even with money in a bank, individuals are limited to withdrawing the equivalent of $200 a week, and businesses $2,000.
Why does it matter?
US sanctions have been plaguing Afghanistan since 1999, and they’ve proven to have done more harm than good. According to a recent report by US Today, it is estimated that more people will die from the economic impact of sanctions over the next year than the number who died in 20 years of war.
Cryptocurrencies can’t be viewed other than a savior in this context. Thanks to Code to Inspire, an NGO led by Fereshteh Forough, a glimpse of hope can breathe between just a hundred students in Herat, an oasis city in western Afghanistan, who receive about $200 a month in cryptocurrency since September, a few months following the fall of the city under the reign of Taliban.
At 21Shares, we have always reiterated that crypto’s multiple use cases echo louder in times of conflict and despair. As the world opens its arms to crypto adoption, governments are less likely to use cryptocurrencies to evade sanctions for the reasons mentioned earlier in this newsletter. However, the real beneficiaries are and will always be the unarmed civilians living in war-stricken nations who have always paid the price.
