Crypto Highlights July 2022

Macroeconomic situation

Inflation rose to 9.1% in the USA, shortly followed by the Federal Reserve raising its interest rates by 75 basis points - taking them to 2.5% overall. Inflation in the UK also reached a 40-year high of 9.4%, helped in particular by rising energy prices, which are expected to continue rising sharply in October. While the Bank of England (BoE) will raise interest rates in August, the European Central Bank (ECB) raised rates by 50 basis points, the first since 2011.

Interest rates will thus rise to an effective 0%, and Europe's eight-year experimentation with negative interest rates will come to an end. The ECB will most likely make another rate hike in September. As can be seen in the chart below, global inflation rates are currently at the level of the late 1970s.

Regulation picks up

For the first time ever, a crypto insider trading case came to light in July 2022: A former Coinbase executive was arrested along with two other individuals for wire fraud. As a result of this incident, the Securities and Exchange Commission (SEC) classified nine tokens listed on Coinbase as securities, including Amp, Rally, DerivaDAO, and XYO Network. In turn, cryptocurrency exchanges in South Korea - Bithumb, Upbit, Conine and four others - are under investigation for a fraud case related to the collapse of the Terra stablecoin UST. Key regulatory developments this month include the following:

• The U.S. Treasury Department published a framework for the treatment of digital assets from an international perspective.
• Taiwan has effectively banned the purchase of crypto assets with credit cards.
• Paraguay passed a law regulating crypto mining and trading.
• The United Kingdom published the Financial Services and Markets Act, which regulates the use of stablecoins in payments.

The Commons Foundation, a Singapore-based non-profit organization, has signed an agreement with Paraguay's state grid operator to purchase 100 megawatts of electricity. The agreement is to provide the Commons Foundation with electricity for mining for a period of ten years. It is estimated that this will also create around 1,000 jobs over the next four years and also absorb the excess energy from the world's largest electricity-generating dam.

For crypto exchanges, the past quarter was far from being effortless - and yet some of them were able to make progress on the path to global expansion. Crypto.com received approvals in Cyprus and Italy, while Binance is now allowed to operate in Spain via its subsidiary Moon Tech. In addition:

• The Central Bank of Ireland awarded crypto exchange Gemini with a crypto service provider license.
• Digital bank Nubank launched in Brazil, which now allows over 57 million users to buy bitcoin.
• The crypto exchange Huobi received operating licenses in Dubai and New Zealand.

The domino effect of Three Arrows Capital, LUNA and Celsius

Overall, July was still dominated by the financial aftermath of the Luna collapse and the resulting bankruptcies, by some of the biggest names in the crypto industry.

• Celsius has officially filed for bankruptcy, disclosing a $1.2 billion hole in its balance sheet.
• Vauld has turned to its creditors and disclosed a deficit of over $70 million due to market value losses on BTC, ETH, and MATIC trades.
• Voyager, a crypto exchange and lender that had extended $650 million in unsecured loans to Three Arrows Capital (3AC), has filed for bankruptcy and voluntarily delisted its common stock from the Toronto Stock Exchange.

There was also news about the companies previously known to be involved in the 3AC bankruptcy:

• BlockFi admitted to having over $1.8 billion in loans and $600 million in unsecured loans owed to customers.
• FTX and Alameda presented Voyager with a bailout plan that would provide relief to customers. Voyager has rejected this plan, calling it "cheap" because it would hurt customers and only benefit the company itself.
• Binance.us is introducing an affiliate program in response to the recent market turmoil after Coinbase suspended theirs.
• Babel Finance lost over $280 million in proprietary trading of customer funds.

Conclusion - What we expect

The remarkable aspect of the domino effect created by the crashes of Three Arrows Capital (3AC) and crypto-bank Celsius is that DeFi has proven its resilience. Moreover, the notion that "code" is as binding in the crypto world as law is in the physical world has been confirmed. Unlike transactions in the traditional financial world, pre-agreed terms must be adhered to, as immutable applications only understand conditional instructions and do not easily adapt to unconventional external circumstances. The evidence for this argument is that Celsius and 3AC actually fulfilled their obligations to MakerDAO and Aave long before the deals with the CeFi institutions that eventually turned out to be insolvent.

According to our expectation, the market as a whole might experience a touch of relief. This is also due to the fact that the crypto market has apparently already priced in the FED's recent 75 basis point rate hike - after all, both BTC and ETH rose by around 10% following the news. The Federal Reserve goes on a summer break in August, which means the market won't have to deal with another short-term monetary tightening cycle. This is until the committee meets again on September 23. The latest statement from FED President Jeremy Powell signaled a more dovish tone, stating that the recently adopted tightening measures have achieved their purpose of reducing consumer spending. After the last rate hike in July, the FED has now reached its target rate of 2.25% to 2.50%, which explains that we could be heading towards a scenario in which the FED would reverse the quantitative easing policy it has been pursuing since early 22.