Blockchain Confidential - 21 January 2022

Crypto ad scrutiny worldwide, Layer 2 launches and a cloud trading system HOWTO

The Week

It was a big week in DeFi news, with Curve launching Layer 2 support on Optimism, and and Aave Arc announcing plans to support Optimism and Arbitrum for institutional investors. The Cosmos Gravity Bridge now connects that network’s Osmosis DEX to Ethereum. Uniswap volumes hit a tipping point, with ETH-stablecoin pair trading topping Binance and Coinbase volumes — though high gas fees contributed a lot of this notional value.

Coindesk’s podcast explored the metaverse implications of Microsoft’s $69B acquisition of Activision Blizzard; many view the 3D design expertise and rendering engines behind gaming systems to be a key technical building block for the metaverse. How do you topple OpenSea’s NFT trading dominance? Coinbase announced a partnership with Mastercard to support fiat purchases to try and make that happen. JP Morgan sees more NFT trading moving to Solana, driven by high transaction fees. Meta is experimenting with an NFT marketplace for Instagram, while Twitter started rolling out NFT-linked authenticated profile pictures.

BitMEX plans an EU expansion via a German bank acquisition, subject to regulatory approval. Jack Dorsey’s Block is integrating Bitcoin’s Lightning Network with its Cash App to offer ultra-fast Layer 2 transactions, as part of their big pivot toward all things crypto payments. Google hired a former PayPal executive to lead its payments arm, which has taken tentative steps toward crypto support — but they are not yet ready to go all-in with crypto transaction support, unlike Block.

The Good Read

Want to lift the hood on how to build a low-latency trading system in the cloud? Proof Trading previously blogged on this topic, and they are back with an update. Read Building A High Performance Trading System in the Cloud.

From the Research Desk

Cloudwall Capital’s Head of Research Ilya Kulyatin dives into a paper on liquidity risk in digital assets this week. Read Measuring liquidity in cryptocurrencies.

Regulator Radar

Regulators worldwide are paying attention to digital asset business advertising this week, with the U.K., Singapore and Spain announcing new rules and guidance. Even FINRA is contemplating guidelines in this space later this year. Climate concerns were also in the news on both sides of the Atlantic, with the vice chair of EU’s markets regulator ESMA calling for a proof-of-work ban, while the U.S. Congress held a hearing on Bitcoin mining to gather more information on energy policy implications.

The OCC’s Michael Hsu added to calls for U.S. banking regulators to provide oversight for stablecoins. SEC Chair Gensler wants to add crypto exchange supervision to his agency’s remit. The SEC also pulled the football from Charlie Brown once again and rejected another spot Bitcoin ETF’s, this time from First Trust and SkyBridge; these two things are almost certainly connected by investor protection concerns, as the SEC has repeatedly expressed concerns about inadequate spot exchange supervision as a reason to reject these applications. Finally, the Fed issued a 35-page discussion paper on the digital dollar and opened up for public comment until May 20th, but unsurprisingly called for legislation to authorize such a big move.

In a new set of crypto regulatory proposals the U.K. Treasury proposed taking blockchain out of its definition of crypto assets and also hinted at a move into DeFi regulation on a case-by-case basis. You can add Malaysia to your list of countries looking to explore issuing a CBDC; this is off the back of their previous BIS Project Dunbar collaboration in the region, and the Central Bank of Iran may follow. Russia continues to head in the other direction, with a central bank report calling for a ban on both mining and trading onshore.

At the Office

We are moving ahead with building our prototype digital asset risk system on Azure. Barry has a skeletal web application on the cloud alongside the JupyterLab setup built last week, and we have automated standing up storage, databases and other infrastructure in code to make it easy to build & test. We have also been looking at how we will tackle streaming market data and position updates. Jia Yng has been working with our bank in Singapore to get ready for local payroll, while U.S. is now switching to regular operations. Ilya has been working closely with Bob Guzman, our product strategy advisor, and has written the epics and stories for our demo application’s functionality while continuing his research collaborations. Finally, we are continuing our outreach with institutional investors in digital assets to better understand their risk management needs.