What happened this week around blockchain and cryptocurrencies? The most relevant local and international events as well as appealing background reports in a pointed and compact weekly review.
Selected articles of the week:
Silvergate was a US financial institution that specialized in digital asset services almost 10 years ago. With its broad and FinTech-like offering (24/7 transfers, fiat-crypto bridge, etc.), the bank attracted the largest companies in the crypto industry. Its customers included reputable US exchanges such as Coinbase and Kraken, as well as the now-insolvent FTX/Alameda construct. In response to the debacle, depositors withdrew over 70% of the bank’s crypto holdings. Silvergate found itself in a liquidity crisis and had to sell securities for losses of over one billion USD. The bank’s entire net income over two decades was destroyed in just a few months. This led Silvergate to cease operations and voluntarily liquidate this week. While the bank’s customers are likely to be able to reclaim their assets, the situation is likely to leave various crypto companies without a bank connection amid a US crackdown.
Crypto exchanges are online platforms where customers can buy, sell, and trade cryptocurrencies. These exchanges are crucial to the ecosystem as they serve as a marketplace for investors and traders, making price discovery easier and providing liquidity to the market. Additionally, these platforms typically serve as a bridge between the fiat and crypto worlds – a sensitive area for regulators. Thanks to its savvy use of international gray areas around crypto regulation a few years ago, Binance climbed to the throne of crypto exchanges in just a few years. Without a fixed headquarters, the trading platform offered services to customers from all over the world. This regulatory arbitrage is now proving to be the exchange’s undoing. Binance is embroiled in proceedings with various US agencies such as the SEC, CFTC, and the Department of Justice (DoJ). The exchange allegedly provided services to US customers without registration and deliberately sought to circumvent existing regulations.
The approval of the first exchange-traded fund (ETF) for Bitcoin in the United States marked a milestone for the industry at the end of 2021. However, the six approved ETFs to date are exclusively futures-based products, backed by CME futures contracts. This presents some disadvantages for investors compared to a physically-backed ETF, primarily caused by roll costs. While there are numerous applications for spot-based products, the Securities and Exchange Commission (SEC), the securities and exchange regulatory body, categorically rejects physically-backed Bitcoin ETFs. One of the applicants was Grayscale, provider of a $12 billion Bitcoin trust (GBTC). The rejection of the ETF proposal is now in court and places the SEC in an explanatory position for the first time.
While Grayscale fights in court with the SEC for a spot ETF, some GBTC investors are filing lawsuits against the asset manager itself. The insolvency administrators of FTX Trading Ltd. and its related debtors accuse the crypto giant of violating “fiduciary duties” and demand the dissolution of the successful Bitcoin trust. Grayscale allegedly violated the trust agreements by preventing the investment product’s shareholders from redeeming underlying assets for years with artificial excuses. These actions are said to have led to the trusts trading at a discount of up to 50% on their net asset value (NAV). The aim of the lawsuit is to release the billions of digital assets behind the investment vehicles.
Additionally: An unhosted wallet, also known as a self-hosted wallet, is used to store cryptocurrencies. With unhosted wallets, the wallet owner has direct access to the private key required to conduct transactions. As their permissionless nature enables financial transactions without regulated intermediaries, this type of “digital wallet” is increasingly coming under the scrutiny of regulatory authorities. Compliance specialist 21 Analytics provides an overview of the key guidelines for crypto service providers in Switzerland and the EU regarding the FATF Travel Rule.