Blockchain Confidential - 20 May 2022
Novogratz ne regret rien, Terra's troubles continue, FTX US diversifies
The Week
Trading has brought us many fine nuggets of wisdom. The market can stay irrational longer than you can stay solvent. It is only when the tide goes out that you see who has been swimming naked. Mike Novogratz’s contribution to this lexicon appears to be: when taking a long position in crypto, memorializing it with a tattoo might not be the best idea. It was a learning experience, though.
The Luna Foundation Guard (LFG) admitted it spent $3.1B in Bitcoin reserves unsuccessfully defending the UST peg. In the middle of a governance vote Do Kwan amended the proposal to restore the Terra blockchain, triggering more controversy. And it came to light that he had dissolved Terraform Labs Korea just days before the events that would lead to, among other things, legal problems in Korea. DEUS Finance’s DEI hybrid algorithmic stablecoin also de-pegged this week. Tether revealed that it had reduced its commercial paper holdings 17%, potentially reducing concerns about the quality of its collateral.
There was a lot going on this week with the centralized exchanges. FTX US launched no-fee stock trading with beta users. The BitMEX derivatives exchanges launched a new spot trading exchange. And Coinbase hinted at turbulent times ahead as it outlined cost-cutting measures.
For those seeking lighter entertainment Aave’s open source Lens Protocol, a decentralized social network, went live with early adopters, attracting a perhaps unsurprising amount of shade-throwing from the competing DeSo protocol.
And if the last two weeks in crypto has you stress-eating, remember this Sunday marks the 12th anniversary of Bitcoin Pizza Day.
Regulator Radar
Former Fed Chair Bernanke expressed his view that the unique value proposition of Bitcoin was to facilitate ransomware. Ouch. House Republicans meanwhile pushed the current Fed Chair Powell to advance analysis on a US CBDC, and took the position that well-regulated private stablecoins could play a part. The Biden administration wants crypto exchanges to segregate client funds from those of the exchange itself, to help protect them in case of collapse. SEC Chair Gensler threatened action against unregistered crypto exchanges. And after the recent SEC announcement about expanding its crypto enforcement, the CFTC got into the act; CFTC Chair Behnam indicated they would also add resources in this area. Questions about jurisdiction over crypto in the U.S. are definitely not settled yet.
In Nigeria the SEC’s new rulebook holds all digital assets to be securities; the agency is also trying to clarify the rules of the road for exchanges. The U.K. may put forward new regulations that recognize stablecoins as a form of payment, although the FCA intends to do a post-mortem on the UST collapse to inform rule-making. A new BIS study recommends regulating the distributed ledgers — the blockchains — rather than the crypto providers like exchanges who provide on- and off-ramps today, as the latter approach fails to cover all of the complexity and risks, e.g. with DeFi. Finally, financial officials from the G7 called on the Financial Stability Board (FSB) to take up the challenge of global crypto regulation.
From the Research Desk
Head of Research Ilya Kulyatin and Boris Skorodumov published their take on how the LUNA collapse played out in risk factors. Read To The Moon and Back: A Factor Risk Lens on the LUNA Crash.
The Good Read
Dragonfly Capital offered its take on the Terra collapse with The Reign of Terra: The Rise and Fall of UST, and for those with more of a regulatory bent the latest BIS working paper may be worth reading: Banking in the shadow of Bitcoin? The institutional adoption of cryptocurrencies.
The Podcast
In Episode 1 of the Blockchain Confidential podcast, we start the Employee Showcase series for Cloudwall Capital. This first episode features Chloe Chen.
At the Office
We continue our push to the July 1st release of Serenity’s digital asset risk attribution API, which will allow our design partners to break down their portfolios using our Research team’s innovative factor risk model. To this end we fine-tuned our scrumban practice to get Research and DevSecOps moving even faster. Sam continued his work to rebuild our cloud engineering automation. Chloe and Makas teamed up on refining the models, data and risk API integration while Thierry and Phil worked on data pipelines. Ilya & Boris collaborated on a LUNA analysis and pushed forward with our 5-factor and next generation 7-factor models. Ilya finalized our choice of main data vendor and we settled on a key analytics partner which we’ll hopefully be able to announce in coming weeks. Jia Yng and Bob fanned out to clients seeking input on both the beta and our sales process, while Kyle worked with Gareth on planning our June digital asset risk panel, the start of our Blockchain Alpha series at Rise Barclays.