Your Monthly Brief into the World of Digital Assets
1. Market update
2. March in a Nutshell
- Banking Turmoil in the U.S. and Beyond
4. Institutions: Read More
- Hong Kong Crypto Regulation: Overview of Latest Developments
6. Regulators: Read More
7. Crypto Projects
- Conflux Network: the New Rising Star of the Orient?
8. Crypto Projects: Read More
10. April Preview
- Bitcoin performance calendar
- Macroeconomic events
- Crypto events
Crypto markets reversed weakness in the first half of March and reached new highs for this year. Notably, Bitcoin was able to shrug off several pieces of negative headlines, including the failure of several regional and global banks, a depeg of the USDC stablecoin, as well as regulatory action against Coinbase and Binance.
Charts wise, Bitcoin has surpassed $27.7k which corresponds to the Fibonacci 0.236 retracement level and appears to enter short term consolidation. The trend remains bullish if price can sustain above this level. To the upside, $31.5k could be the next significant resistance. On the contrary, some traders could be reluctant to enter here and are waiting for a possible retracement towards $25.5k, which represents a flip of previous resistance into support.
It does seem that fears over a potential meltdown of the banking system has led investors to allocate into alternative stores of value like Bitcoin and gold. To compare, gold gained 8% month-to-date while Bitcoin gained 21%. The rolling 30-day correlation between Bitcoin and gold spiked since mid-March and remained at elevated levels above 0.8, indicating a strong positive relationship during the recent period.
Nevertheless, evolving liquidity conditions likely remain the key factor that influences Bitcoin price. In response to the banking crisis, the Fed created the Banking Term Funding Program (BTFP) to provide backstop funding for banks. It also took joint action with five other major central banks to enhance U.S. dollar liquidity, hoping to keep credit flowing to households and businesses. As a result, the Fed balance sheet has ballooned by roughly $400 billion in March, representing a substantial reversal of the quantitative tightening since last summer.
On the other side of the globe, the People’s Bank of China (PBoC) announced on March 17 a reduction of the reserve requirement ratio (RRR), effectively easing money supply. It is also injecting liquidity via reverse repos and, as suggested by macro analyst tedtalksmacro, this may have contributed to Bitcoin strength towards the end of March. 
The March FOMC decision came in at 25 bps, which was reasonable from the Fed to keep its creditability in the attempt to restore inflation at the 2% target level. Currently, interest rate markets are predicting that the Fed will deliver one final hike in May, and then cut as early as July. Of course, whether the Fed will be able to deliver this will depend greatly on inflation numbers. The latest readings from Truflation, an independent economic data provider, suggest significant cooling down over the past few months.
Meanwhile, on-chain indicators point towards a late-bear to early-bull stage for Bitcoin. 
Liveliness, which quantifies accumulation and divestment behavior from Bitcoin holders, is still on a downtrend. This hints that the market is still accumulating coins and avoids taking profit for the time being.
Binary CDD (Coindays Destroyed), an indicator used to identify periods of profit-taking by Bitcoin holders, remains quiet and this suggests we could be transitioning to an early bull market.
Banking Turmoil in the U.S. and Beyond
Silicon Valley Bank (SVB)
Founded 40 years ago, the SVB became the 16th largest bank in the U.S. by establishing itself as the go-to banking operator for early-stage tech firms. Nearly half of all U.S. venture capital (VC) funded start-ups were banked at SVB. The bank was also active in the crypto space and secured more than $5b from leading crypto VC firms like Pantera Capital, Paradigm and a16z. It gained impressive traction in the start-up ecosystem by offering attractive loans in exchange for banking exclusivity. Its balance sheet tripled between 2019 and 2021 as Quantitative Easing (QE) policies during the COVID pandemic made access to capital cheap, boosting VC activity. With an immense amount of cash on their hands, SVB had to find a safe way to earn a yield. Therefore, the bank bought treasury bonds and mortgage-backed securities offering near all-time low fixed interest rates of around 1%.
SVB’s health indicators appeared strong until the Fed started raising interest rates, which impacted SVB in two major ways:
1/ When interest rates rise, newly issued bonds will have higher yields than existing bonds that were issued at lower interest rates. Demand for bonds issued today that yield around 4% significantly outweigh the demand for bonds issued back in 2020. So, each time the FED was hiking rates, the value of bonds in SVB portfolio were decreasing.
2/ VC activity was greatly hindered by the high cost of capital, and financing opportunities for early-stage companies become much less common. This is because, the high risks associated with these investments are deemed less reasonable when low risk bonds are yielding high returns. Consequently, VC-backed startups regularly had to withdraw cash from the bank to support their dried-up operations.
In conclusion, SVB had to massively sell bonds that lost in value to process clients’ withdrawals. Since SVB had no hedging strategies to make up for a decrease in price of their securities, the bank registered a net loss of $1.8b in the last quarter of 2022. Executives tried to cover the hole by raising money through a share sale. However, under time pressure, a confidentiality agreement was omitted in the sale proposition. News of SVB’s unstable position spread fast and triggered the crash of SVB stock. It significantly accelerated panic withdrawals and SVB experienced a run on the bank.
Silvergate is yet another crypto success story that saw a tragic ending. Before Satoshi Nakamoto released Bitcoin’s white paper, Silvergate was merely a mid-sized community bank based in the San Diego region. Then, at a conference in 2013, Silvergate’s CEO, Alan Lane, was introduced to Bitcoin by Barry Silbert, current CEO of Digital Currency Group (DCG), the largest crypto company. At the time Silbert was CEO of SecondMarket, a marketplace for illiquid assets, and was fiercely promoting Bitcoin. Once Lane discovered the potential of Bitcoin, Silvergate gradually oriented its services to Bitcoin and crypto related activities. By 2017, more than 250 crypto companies were banked by Silvergate.
In November 2019, the company went public for $13 a share. At the peak of the bull run in November 2021, its balance sheet had grown by 650% and its share price had skyrocketed by 1,580% to reach $219.
But then 2022 happened and FTX administered the coup de grâce to an already fragile Silvergate. According to a mid-January earnings conference call, deposits from digital assets clients collapsed from $11.9 billion at the end of September to $3.8b by the end of 2022. To support outflows, Silvergate used wholesale funding that effectively increased its liquidity and funding risks. In the same timeframe, Silvergate’s leverage ratio fell from 10.5% to 5.1%, close to the regulatory minimum of 3% imposed by the Basel III framework. The leverage ratio measures banks’ amount of Tier 1 capital relative to their total leverage exposure, in other words, it quantifies the extent to which banks rely on borrowed funds to finance their operations.
But wholesale funding was not enough to withstand withdrawals. Silvergate was forced to sell its holdings which halved the value of its investment securities from $11.4b pre-FTX to $5.7b by the end of 2022. Just like SVB, Silvergate experienced significant losses since securities values significantly decreased due to Fed’s rate hike. Eventually, on March 8, Silvergate announced it will voluntarily liquidate and close operations.
Unlike SVB and Silvergate, Signature has not declared insolvency when it was taken down by New York regulators on March 12. Even though Signature announced in December that it was looking to reduce its exposure to crypto by $10b, New York regulators deemed unsafe to allow withdrawals to deepen following Silvergate’s recent collapse.
The fate of Signature sparked a heated debate. On the one hand, regulators are blaming the repetitive frauds and uncalculated risks in the crypto space. On the other hand, crypto advocates are blaming regulators’ incompetence. Since Signature was serving many crypto clients, some believe that Signature’s closure is a targeted attack on the crypto ecosystem. Even if the New York Department of Financial Services denied all accusations, the ongoing crypto crackdown in the US led by the SEC is a reality. In 2008, when Washington Mutual failed, regulators reacted with strict regulations under the Dodd–Frank Act to prevent banks from acting as investment banks. Today, regulators will most probably take strong steps to limit banks’ exposure to crypto related activities in the future.
What are the implications?
One would think that the demise of the fractional reserve banking system is a bullish narrative for Bitcoin. However, now that the major bridges between crypto and the banking system have fallen, we will see how reliant the crypto ecosystem is on the traditional financial system. Notably, the collapse of Silvergate led to the closure of the Silvergate Exchange Network (SEN) that allowed 24/7/365 instant settlements. It was Silvergate’s flagship service and largely contributed to its success. Getting access to cash instantly outside of working hours is greatly needed in a trading environment that operates continuously. It will take time before a new actor of the space establishes a settlement network dedicated to crypto as secure, efficient and cheap as the SEN. In the meantime, one should keep an eye on crypto institutions, and exchanges in particular, as they are now more exposed to liquidity crises.
Amid the biggest banking crisis since 2008, it is generally agreed that the Fed will slow its rate hike to avoid additional bank failures. Since risk assets tend to perform well in a low interest rate environment, the crypto market reacted positively. Paired with Binance $1b purchase of cryptocurrencies, BTC recorded its highest monthly close since June 2022 and the Three Arrows (3AC) collapse.
Nevertheless, the March FOMC meeting showed that as long as inflation numbers do not recover to sustainable levels, the Fed will maintain high interests. “The process of getting inflation back down to 2% has a long way to go and is likely to be bumpy”, said the Fed’s Chair, Jerome Powell. He announced the Fed’s ninth hike in one year pushing the federal funding rate to the 4.75–5% range. Despite the interest rate impact on banks’ balance sheets, Powell specified “rate cuts are not in our base case”. Recent market strength hints traders might be pricing the contrary and further correction is expected.
Another significant consequence of the banking turmoil was the depeg of USDC, the second largest stablecoin. Circle, the company issuing the USDC stablecoin, deposited 8.25% of its reserve at SVB, and crypto investors were afraid that they may lose access to funds that amounted to $3.3b. Consequently, USDC depegged and dipped to $0.9 per USDC. However, the USDC crisis was nothing like what UST experienced since the remaining 92% of total reserves were still covered in alternative robust custodian solutions. Notably, Circle had $9.7b in cash at BNY Mellon, often considered as a too-big-to-fail banking institution. Rumors of Circle planning to plug the hole with corporate funds and regulators looking to rescue SVB eventually led USDC to repeg on March 13. In the end, Circle regained access to the funds on March 14 and transferred them to BNY Mellon.
Depeg events are full of opportunities for risk-seeking traders. On Curve Finance (CRV), the largest decentralised exchange for stablecoins, the depegging event triggered a $7b daily volume which was Curve’s biggest trading day since inception. Traders were split between cautious investors looking to de-risk by selling USDC at discount and arbitrageurs speculating USDC would repeg. As USDC came back to $1, one highly risk seeking trader registered a $16.5m profit in one day. In the end, despite USDC repeg, its circulating supply has not recovered as confidence is greatly damaged.
Will the crisis spread?
On March 13, the FDIC announced SVB’s deposits would be transferred to a bridge bank created for the occasion and operated by them. The apparent market stability offered by the US government intervention didn’t prevent Credit Suisse’s crisis on March 15. The bank’s shares lost 30% of their value after it acknowledged “material weakness” in their financial reporting process. Credit Suisse was then acquired by UBS at 60% discount in a rescue operation brokered by the Swiss government. As most central banks are raising interest rates, it hinted contagion could spread to other areas of the world.
Some compare current events to Long Term Capital Management’s failure in 1998, while some believe we could be in the middle of a Lehman Brothers scenario like in 2008. Ultimately, the route that the financial system will take will depend once again on the Fed decisions but also on the trust in the fractional reserve banking system. If markets no longer consider the financial stability can be preserved, bank runs will continue. And stability is fragile when the FDIC can only cover 1.3% of all deposits in the US. What’s most disturbing is that the FDIC only promises to insure up to $250k per depositor which makes businesses highly vulnerable.
– Visa Says It’s Not Slowing Down Plans for Crypto Products (Read More)
– Multicoin Capital’s Hedge Fund Lost 91.4% Last Year, Investor Letter Reveals (Read More)
– Alameda Sues Grayscale and DCG to Allow Redemptions, Reduce Fees (Read More)
– GBTC Discount Narrows to Lowest Level Since November Following Court Hearing (Read More)
– Crypto Bank Silvergate Announces ‘Voluntary Liquidation’ (Read More)
– Banks Lose Billions in Value After Tech Lender SVB Stumbles (Read More)
– USDC Stablecoin Depegs, Crypto Market Goes Haywire After Silicon Valley Bank Collapses (Read More)
– Meta Will End Support for NFTs on Instagram, Facebook (Read More)
– Crypto Exchange Coinbase Ties Up With StanChart in Singapore for Free Transfers (Read More)
– Fidelity Crypto quietly went live, giving millions of retail customers access to bitcoin, ether (Read More)
– Crypto ETP-Provider 21Shares to Close Funds as Demand Fades (Read More)
– Coinbase Explores Overseas Venue as US Ramps Up Crypto Scrutiny (Read More)
– Banking Giant State Street Cuts Ties With Crypto Custody Firm Copper (Read More)
– Crypto Wallet Prototype Discovered Inside Microsoft Edge Browser (Read More)
– UBS Buying Rival Credit Suisse In $3.2 Billion Rescue Deal (Read More)
– Jack Dorsey’s Block Tumbles 17% After Short-Seller Hindenburg’s Report (Read More)
– NFT Investor Animoca Brands Cuts Target for Metaverse Fund to $800M: Reuters (Read More)
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Hong Kong Crypto Regulation: Overview of Latest Developments
In February, the SFC released the Consultation Paper on the Proposed Regulatory Requirements for Virtual Asset Trading Platforms (“Consultation Paper”). Centralized crypto exchanges (CEX), which are referred officially as Virtual Asset Trading Platforms (VATP), are the focus of this new round of regulation. Under the proposed regime, all VATPs must obtain the relevant licenses before providing services to its clients.
But the Consultation Paper is merely a first step towards building a regulatory framework for CEXs, crypto firms, asset managers and banks.
Let’s examine the Hong Kong government’s regulatory approach, including the latest proposal, and look at the current landscape for local crypto firms.
From the start, the approach of Hong Kong has been aiming to fit crypto into the existing banking and securities framework that consists of two pillar organizations. First, the Hong Kong Monetary Authority (HKMA) which is the regulator of banks. Second, the Securities and Futures Commission (SFC) which oversees securities exchanges and trading activity.
Under this framework, the HKMA will be the regulator of stablecoins and banking activity with crypto firms, while the SFC will monitor trading of crypto tokens and tokenized securities. However, the SFC does not have oversight of tokens that do not classify as securities, and these are subject to much laxer restrictions.
The SFC has been restricting crypto investment and trading to Professional Investors (PIs), which is essentially a small set of high-net-worth individuals and corporations.
But this would all change starting from June 1, the commencement date of the new VATP regulatory regime. The Consultation Paper clearly stated that “all types of investors, including retail investors [will be allowed] to access trading services provided by licensed VA trading platform operators”.
For the wider crypto community, this was the most important highlight of the latest regulatory proposal. There is now substantial anticipation for large volumes of inflow from retail investors in Hong Kong and possibly mainland China.
Indeed, the Consulation Paper provided more clarity over the criteria of token listings by CEXs, including “eligible large-cap virtual assets” that can be offered to retail clients.
For tokens that are offered only to Professional Investors, the listing requirements are straightforward. The CEX only needs to notify the SFC about the intent of listing the token(s) and does not require written approval from the authority.
However, tokens offered to retail clients must go through VATP’s due diligence process which includes a review of both their team and smart contracts. The proposed token must be a constituent of two crypto benchmark indices, and at least one of which should be issued by an index provider which has “experience in publishing indices for the traditional […] financial market.” Moreover, the VATP must provide written legal advice confirming that the token does not fall within the definition of “securities”.
As the new regulatory and licensing regime will come into effect on June 1, it will be interesting to observe then, which crypto tokens will be approved for retail trading. It is also worth keeping an eye on new additions to the list of licensed crypto exchanges. These will provide a gauge towards the region’s acceptance and friendliness towards blockchain projects, tokens, CEXs and their customers.
Aside from CEXs, one should also keep an eye on regulations directed to asset managers. They offer growingly popular investment vehicles that could greatly contribute to crypto tokens mainstream adoption.
Nevertheless, crypto fund investments are currently limited to Professional Investors, with exception of few futures-based crypto ETFs. There has been no indication towards lowering the barrier of entry.
With regards to crypto asset management, there are less existing black and white from the SFC. Currently, local asset managers refer mainly to two pieces of written guidelines. Namely, the Regulatory Standards for licensed corporations managing virtual asset portfolios, published in November 2018, and the Proforma Terms and Conditions for Licensed Corporations which Manage Portfolios that Invest in Virtual Assets (“Proforma T&Cs”) published in October 2019.
Under these guidelines, if an asset manager wants to set up a crypto fund for distribution in Hong Kong, it should acquire a Type 9 license, which is in line with traditional asset management firms. In addition, it should obtain an uplift from the SFC that allows allocating more than 10% of fund assets into crypto.
The following tables summarize the relevant SFC licenses that crypto exchanges and asset managers may require before they can offer crypto-related services, and provide an overview of the existing CEXs and asset managers that have obtained these licenses.
Currently two platforms have successfully obtained both Type 1 and Type 7 licenses and are accepted as licensed VATPs by the SFC. There are also two providers that only have the Type 1 license but are given permission to offer crypto trading to a partial capability. Besides, at least eight asset management firms have successfully obtained the Type 9 license plus the Virtual Asset uplift. It is encouraging to see that new license approvals have ramped up in the past months, reflecting increased appetite from crypto firms and the government alike.
Regarding banking activity related to crypto, the HKMA has not issued any documents so far this year, though it is expected to soon introduce regulations for stablecoins. Bloomberg reported that state-owned banks are directly reaching out to crypto businesses over the past few months, demonstrating an eagerness to establish services for these firms. Moreover, the HKMA will be hosting a roundtable between crypto firms and bankers in an attempt to ease financing for the sector.
Overall, it appears that the latest announcements are widely welcomed. Christopher Hui, the Secretary for Financial Services and the Treasury of Hong Kong, said in a recent event that over 80 crypto firms are looking to set up shop in Hong Kong. Most importantly, recent developments support the conjecture of a subtle shift of attitude from the central Chinese government with regards to crypto trading and related activities.
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– Binance US Cleared to Buy Voyager Assets as Judge Dismisses SEC Objections (Read More)
– New York Attorney General Sues KuCoin, Claims Ethereum Is a Security (Read More)
– Silicon Valley Bank Shuttered by State Regulators (Read More)
– Feds Shut Down Signature Bank, Say Signature and Silicon Valley Bank Depositors Will Be Made Whole (Read More)
– CFTC Names Executives From Circle, TRM, Fireblocks Among Others to New Tech Advisory Group (Read More)
– SEC’s Gensler Reiterates ‘Proof-of-Stake’ Crypto Tokens May Be Securities (Read More)
– Taiwan’s Crypto Industry Welcomes Regulatory Announcement (Read More)
– Sushi Braces for Legal Fight After SEC Subpoena (Read More)
– Congress needs to put U.S. regulators on same page for crypto, says CFTC commissioner (Read More)
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Conflux Network: the New Rising Star of the Orient?
Hong Kong’s announcement to position itself as a global crypto hub caused a frenzy to chase after Chinese crypto projects and coins. Among them, Conflux Network (CFX) was one of the most prominent names, having gained a stunning 1770% year-to-date and catapulted to rank 46th by market capitalization as of March 31.
According to the official website, Conflux is a public blockchain project backed by the Tree-Graph Research Institute. The Institute’s chief scientist is Andrew Chi-Chih Yao, who was the winner of the Turing Award in the year of 2000. Yao was also the first Chinese scholar to receive this award.
The rest of the team consists of other Chinese computer scientists, Yao’s protégés and other Chinese computer scientists from renowned institutions like MIT, UIUC and Carnegie Mellon.
The Conflux blockchain uses a hybrid Proof-of-Work / Proof-of-Stake consensus and is theoretically capable of 3000–6000 transactions per second (TPS).
That said, Conflux’s close ties with China is arguably the most appealing and unique feature for crypto investors. In fact, it positions as one of few blockchains that are officially recognized and legitimate in the country. While Conflux being China-compliant hints it may not be a good fit with Web3 ideals, it is paradoxically the project prime selling point.
In 2018, the team established the Shanghai Tree-Graph Blockchain Institute together with the Shanghai city government. This is why, in Chinese crypto circles, Conflux is sometimes better known as the “Shanghai chain”.
In fact, back in 2021, Conflux was the blockchain selected to facilitate trials for an offshore digital yuan, which is a strong sign of its high degree of compliance and alignment with the Chinese government.
This year, the team achieved two high-profile partnerships with Chinese business giants that directly contributed to its soaring token price.
In January, Conflux announced a partnership with Xiaohongshu (Little Red Book) to enable NFT support on the platform. Xiaohongshu is the Chinese equivalent of Instagram and has over 200 million Monthly Active Users.
In February, Conflux announced that they will be partnering with China Telecom to develop and make Blockchain-enabled SIM (BSIM) cards. These will enable mobile phones to store, transfer and display digital assets safely. In its marketing, the BSIM is described as the “gateway to Web3”.
Crypto analyst Jason Chen commented that it is very rare for a blockchain project in China to announce high-profile collaboration with a state-owned corporation. This demonstrates a good level of acceptance and understanding from the Chinese government leadership.
Above these, Conflux has established business partnerships with a range of renowned brands, some of which are shown in the graphic below. For any blockchain project, these represent a very attractive lineup.
Next, let’s examine some actual statistics of activity on the Conflux blockchain.
Looking at transactions per day, it is observed that activity picked up slightly in the first three months of this year, but it is still some distance away from the historical highs. In addition, the chain’s actual speed is somewhat underwhelming, having never exceeded 5 TPS and has recently fluctuated around 0.5–1 TPS.
That said, the chain’s Total Value Locked (TVL) has grown impressively. This is thanks to a handful of decentralized finance (DeFi) applications that are ready for user deployment, as well as up-and-running infrastructure that allow users to bridge funds from other chains. Combined with increased token prices, positive feedback effects could be created to drive further growth of the ecosystem.
In conclusion, given its strong backing from the Chinese government, Conflux has a real potential to develop into a powerhouse in the East. Its formidable lineup of business partnerships is an added plus. One should keep an eye on the chain’s performance and adoption over the next few months as Conflux will be traders top of mind if the China narrative strengthen further.
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Inflation indicators like CPI and PPI remain the most important data to watch in April. If data cools down, markets could receive a boost as it is more likely that the Fed can pause hikes, or even engage in cuts if necessary. But if numbers come in hot again, the Fed could be thrown into a dilemma and may be forced to raise rates further, taking risks to put additional pressure on the banking system and the overall economy.
There will not be an FOMC meeting this month as the next interest rate decision is due for May, though the March meeting minutes will be released in mid-April and could bring volatility to markets around that time. That said, the dot plot released earlier has reinforced the hawkish official take, in Fed Chair Powell’s words, that rate cuts are not included in this year’s “base case”.
Bitcoin performance calendar
April tends to be a bullish month for crypto, with Bitcoin closing six times in green over the past ten years. The corresponding median return of 18.4% puts April at second place among all twelve months.
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