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OFAC Compliant Ethereum, Tether Strengthening Reserve Backing, and More!
Markets have struggled over the past week on the back of inflation pressures sandwiched by the burgeoning war in Europe and the COVID-zero measures in China, adding flame to the fires of both crises of energy and supply. Returns on Bitcoin and Ethereum have been persevering, increasing by almost 3% and 4% respectively over the past week. The biggest headline was the $114M exploit on Solana’s Mango Market that dragged its total value locked (TVL) down by over 20%, as shown in Figure 1; the attacker later revealed himself, claiming that he is part of a group of investors that benefited from the “highly profitable trading strategy” and that their actions were legal open market actions. Aside from that, the biggest losers within major crypto categories were Cardano and Optimism, whose TVLs declined by -8%. Ethereum’s largest decentralized exchange increased by 7% and its TVL declined by almost 9%. Uniswap Labs’ $165M Series B round raised last week is expected to improve user experience and in turn boost performance.
Figure 1: TVL and price development of major crypto sectors
Source: 21Shares, Coingecko, DeFi Llama
Key takeaways:
• America’s oldest bank begins accepting crypto holdings
• More than 50% of Ethereum’s newly produced blocks are now OFAC-compliant
• Tether fully eliminates its commercial paper exposure backing its reserves
• Uniswap prepares to launch NFTs
Spot and Derivatives Markets
Figure 2:
Source: Bitcoin Magazine Pro
BTC-denominated open interest reached an ATH relative to the asset’s market cap, which could signal a breakout move to either side. However, as Bitcoin’s funding rate has been range-bounding near the neutral territory since June, it’s becoming difficult to gauge market sentiment as this tight range signifies that a roughly growing equal number of longs and shorts are being placed. Bitcoin’s dampening volatility has caused the asset to undergo moderate swings between the 18K-20.5K levels. That said, with BTC’s volatility at an ATL that hasn’t been seen since 2020, a hot CPI print in November could bring about a tense move for the asset
On-chain Indicators
Figure 3:
Source: Glassnode, Blockware Solutions
As shown in Figure 3, the total supply in the hands of long-term Bitcoin holders has reached a new all-time high of over 13.5M Bitcoins. This reiterates the conviction that the value of Bitcoin lies in its long-term investment, given that long-term holders are the winners of Bitcoin’s rally.
Next Week’s Calendar
Read full report here
Research Newsletter
Each week the 21Shares Research team will publish our data-driven insights into the crypto asset world through this newsletter. Please direct any comments, questions, and words of feedback to research@21shares.com
Disclaimer
The information provided does not constitute a prospectus or other offering material and does not contain or constitute an offer to sell or a solicitation of any offer to buy securities in any jurisdiction. Some of the information published herein may contain forward-looking statements. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties and that actual results may differ materially from those in the forward-looking statements as a result of various factors. The information contained herein may not be considered as economic, legal, tax or other advice and users are cautioned to base investment decisions or other decisions solely on the content hereof.
Panic selling drained the cryptoassets market in response to a new lawsuit launched by the Securities and Exchanges Commission (SEC) against Binance, the world’s largest crypto exchange, alleging that Binance operated an unregistered national securities exchange, broker-dealer, and clearing agency, allegedly misused user funds, and offered and sold unregistered securities, among other allegations. The news added to the selling pressure of Bitcoin and Ethereum, falling by 7% and 4%, respectively.
Figure 1: Weekly TVL and Price Performance of Major Crypto Categories
Source: Coingecko and DeFi Llama. Close data as of Jun 5, 2023.
5 Things to Remember in Markets this Week
• Binance is facing a civil lawsuit launched by the US securities regulator: The SEC filed 13 charges against the world’s largest crypto exchange, shrinking crypto’s market cap by 5% overnight. Starting with the primary claim of operating an unregistered national securities exchange, broker-dealer, and clearing agency, the lawsuit is profound because it alleges that a number of cryptoassets are securities under U.S. law, including BNB, BUSD, SOL, ADA, and MATIC. This could nudge exchanges and other platforms to delist these tokens due to fear of regulatory exposure. The SEC also alleged that Binance offered and sold unregistered securities, focusing on BUSD, BNB, and certain lending and staking-as-a-service programs. Furthermore, the SEC alleged that Binance engaged in the commingling of billions in customer funds through entities controlled by the exchange’s CEO Champeng Zhao.
• Commingling of assets: According to the 136-page filing, Binance used the accounts of two Zhao-controlled entities, Merit Peak and Sigma Chain, to transfer tens of billions of dollars involving Binance and related entities. In 2021, at least $145 million was transferred from BAM Trading to a Sigma Chain account, and another $45 million of funds were transferred from BAM Trading’s Trust Company B account to the Sigma Chain account. From this account, Sigma Chain spent $11 million to purchase a yacht, as written in the filing. Since the launch of Binance.US, Merit Peak’s U.S. bank account allegedly received, as a “pass-through” account, over $20 billion that included customer funds from both Binance platforms, the U.S. and the global. Merit Peak then transferred the vast majority of those funds to Trust Company A in transfers that appear to relate to the purchase of BUSD. As Merit Peak was a purportedly independent entity, sending Binance customer funds to Merit Peak may have placed those funds at risk, including loss or theft, and was done without notice to customers.
Figure 2: Web of CZ-controlled Entities
Source: SEC’s Court Filing
• Misrepresenting trading controls: The lawsuit alleges that Binance failed to implement the manipulative trading controls that the exchange claims to have in place. The SEC alleges that the controls were virtually non-existent, and those that did exist did not monitor for or protect against “wash trading” or self-dealing, which was happening on Binance.US. The regulator gave new evidence that Sigma Chain engaged in wash trading from at least September 2019 until June 2022, which in turn artificially inflated the trading volume on the U.S. platform.
• Over a billion outflows overnight on Binance:
Figure 3: CEXs Inflows and Outflows (24 hours)
Source: 21shares on Dune Analytics
• Binance released a statement expressing their disappointment in the SEC while vowing to continue collaborating with regulators to reach clarity: The exchange took to its blog shortly after the lawsuit broke the news, claiming that the SEC refused to productively engage, even after their recent extensive good-faith discussions to reach a negotiated settlement to resolve their investigations. Binance also denied the allegations of fraud and market manipulation as well as the commingling of user funds through Zhao-controlled entities, which Binance has previously refuted as only being used to facilitate user purchases.
What You Should Pay Attention To
Regarding non-custodial exchanges, we could expect the delisting of specific tokens from Uniswap, akin to how tokenized stock shares were removed in response to the regulatory pressure back in 2021 from the front-end interface, to maintain regulatory conformity. Important to note that delisted assets are still accessible via interacting with the underlying smart contract, which is immutable and uncensorable.
On the other hand, liquidity could improve across the non-custodial infrastructure as users and liquidity providers will opt to utilize their capital using decentralized exchanges that retain ownership of their assets. The gradual migration away from centralized entities began back in November after the collapse of FTX, and thus, the current events should continue to accelerate the trend. In the event that altcoins are officially classified as securities, it is anticipated that the long tail of crypto assets may experience tighter market conditions and reduced liquidity. Prominent market makers like Jane Street and Jump Crypto will likely continue scaling back their operations in the United States until greater clarity regarding the classification of crypto assets is established.
In addition, the SEC isn’t the only agency targeting Binance. Thus it’ll be imperative to watch the developing allegations that the CFTC and the US Department of Justice (DOJ) have put forward against the exchange.
Next Week’s Calendar
These are the top 3 events we’re monitoring for next week.
• CPI print next week will determine whether the FED will pause the next rate hike, especially after the blowout jobs report data sent mixed signals to economists across the board.
• Apple’s WorldWide Developers Conference: Apple’s recently unveiled VR headset could revive interest in metaverse-related tokens during its conference, running from June 5th to the 9th
• Replacing ETH reserves with LSDs: The DeFi industry is witnessing a trend of incorporating Liquid Staking Derivatives (LSD) as reserves, replacing ETH. Maker and Aave have already taken steps in this direction. Liquid staking protocols enable users to earn staking yield without locking their assets, with the added benefit of near-instant redemption as withdrawals become available. Thus, we expect more DeFi blue chips to begin accepting a broader range of LSDs as collateral.
Source: Forex Factory, CoinMarketCal
Research Newsletter
Each week the 21Shares Research team will publish our data-driven insights into the crypto asset world through this newsletter. Please direct any comments, questions, and words of feedback to research@21shares.com
Disclaimer
The information provided does not constitute a prospectus or other offering material and does not contain or constitute an offer to sell or a solicitation of any offer to buy securities in any jurisdiction. Some of the information published herein may contain forward-looking statements. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties and that actual results may differ materially from those in the forward-looking statements as a result of various factors. The information contained herein may not be considered as economic, legal, tax or other advice and users are cautioned to base investment decisions or other decisions solely on the content hereof.
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