New in Digital Assets: August 2023
Crypto and digital assets markets generally lacked direction in August. The first half of the month saw volatility across bitcoin (BTC) and ether (ETH) markets reach all-time low levels, with both assets largely trading within a 4% range. The catalyst that broke this range was a wave of liquidations that rippled through bitcoin and ether markets, largely the result of traders taking excess leverage to boost returns as volatility dropped off in the first half of the month. In fact, just before these liquidations began, BTC and ETH open interest—referring to the total number of outstanding futures or options contracts in the market—reached their highest points since May 2022. On August 17th, BTC and ETH prices fell to local lows of US$25,200 and US$1,540 respectively, after US$855 million in long positions were liquidated across exchanges in just a few hours.
Crypto markets continued to consolidate for the rest of the month, with brief price moves upward stemming from Grayscale’s legal victory over the SEC retracing within a matter of days. In the end, both BTC and ETH finished the month down -11.3%. The total market capitalisation of all crypto assets performed slightly better, falling -10.0% on the month, largely buoyed by stability in the market capitalisation of major stablecoins such as Tether (USDT) and USD Coin (USDC).
Coinbase officially launched the public mainnet for its long-awaited Base Layer 2 (L2) blockchain network on August 9, 2023.1 L2 networks such as Base operate on top of the Ethereum blockchain, which means that they inherit Ethereum’s native security while improving the scalability and user experience. For example, by batching transactions together in a separate chain, L2 networks can offer cheaper fees and greater transaction throughput.
While other L2 networks exist today, Base is an exciting new participant because it is also expected to provide a seamless integration with Coinbase products, services, and an extensive user base. Additionally, Coinbase has dedicated resources towards a marketing push in partnership with over 50 brands that are hosting creative token mints on the Base network to encourage the public to experiment with blockchain activities.
Base’s launch has been a resounding success, as it surpassed 100,000 daily active users faster than any other L2 network to date. As of August 31, 2023, the Base hosts over 1.1 million users and has executed over 17 million transactions.2
Importantly, Coinbase is currently the only entity that operates Base’s sequencer—the mechanism responsible for processing transactions, producing blocks on the rollup chain, and submitting these batched transactions to Ethereum. This means that Coinbase not only has control over the fees it charges per transaction which are generally based on the cost to submit batch transactions to Ethereum, but Coinbase also has the power to order transactions within Base’s rollup blocks. While Base’s sequencer is expected to be decentralised in the future, Coinbase may be able to profit from these powers under the current paradigm. To date, Coinbase has generated over US$2 million in profit through transaction fees on Base alone.3
News & Headlines
PayPal Launches Stablecoin on Ethereum
PayPal announced the launch of its fiat-collateralised USD stablecoin, PYUSD, on the Ethereum network. PYUSD can be sent or transferred by PayPal users across PayPal products, including Venmo, and can be used to trade across all crypto markets available on the PayPal platform. In addition, PayPal will facilitate on-ramps for PYUSD from PayPal accounts to self-custodial wallets connected to the Ethereum network. PYUSD will be fully backed by cash reserves and short-dated U.S. Treasuries.
PYUSD represents a vote of confidence for blockchain’s potential to drive efficiencies in global payments. For several years, PayPal has been vocal about its ambitions in digital assets and blockchain payments. This announcement, however, signals PayPal is actively investing in these efforts as well.
With more than 400 million active users and a long track record of success in global payments and remittances, PayPal’s most recent foray into blockchain payments has the potential to significantly grow the number of global crypto users.4 By providing these users with seamless access to crypto payments, the digital assets industry stands to see a significant uptick in user adoption even if only a fraction of users choose to interact with PYUSD.
Court Rules that SEC Must Review Grayscale’s Application to Convert GBTC to an ETF
The U.S. Court of Appeals for the District of Columbia Circuit ruled that the Securities and Exchange Commission (SEC) must review its rejection of Grayscale’s application to convert its Bitcoin Trust (GBTC) into an ETF. Prior to the decision, the SEC had cited concerns of market manipulation in spot BTC markets as a primary reason for disallowing a spot ETF product. In its decision, however, the D.C. court stated that “the denial of Grayscale’s proposal was arbitrary and capricious because the Commission failed to explain its treatment of similar products. We therefore grant Grayscale’s petition and vacate the order.” In other words, the court found that the differences between spot and futures-based BTC markets were so marginal that the approval of the futures product but not the spot product could not be reasonably justified on the grounds provided by the SEC.
While the SEC may still appeal the ruling, the decision as it currently stands is the latest in a series of major legal victories by the digital assets industry over the SEC. Most notably, Ripple Labs won a partial victory over the SEC in July 2023 on claims that the sale of the XRP token on crypto exchange platforms represented an unregistered securities offering. The Grayscale decision also comes at a time of growing public backing for spot BTC ETF products, as a handful of major asset managers have been submitting applications to list such products on US exchanges over the past two months.
Coinbase and Circle Reinforce their USDC Partnership
Coinbase has acquired a minority equity stake in Circle Financial, the issuer of the USDC stablecoin. The Centre Consortium, which was created 5 years ago to oversee USDC and guide policy thinking around stablecoins, will be shut down and all issuance, governance, and operational responsibilities will be handled by Circle’s in-house team. Additionally, USDC will be launching on a slew of new blockchain networks in September and October including Base, Noble, Near, Optimism, Polkadot, and Polygon PoS. These new launches will expand USDC’s reach across 15 different blockchain networks. The two companies will continue to generate interest income earned on the reserves backing the USDC stablecoin.
Shopify Integrates Solana Pay to Enable USDC Payments
Shopify has integrated with Solana Pay, a platform that enables Web3-native point-of-sale commerce features. Solana Pay is built on the Solana blockchain, which is a high-performance blockchain that can handle high volumes of transactions with low fees. With Solana Pay’s transactional capacity, merchants using Shopify’s web development stack will be able to accept payments made over blockchain rails and leverage benefits such as cheap transaction fees and fast settlement finality. The initial medium of exchange for the Shopify integration will be USDC.
For investors looking to invest in Bitcoin or Ethereum, the Global X 21Shares Bitcoin ETF and Global X 21Shares Ethereum ETF may be of interest. Global X offers Australia’s only ETFs with direct physical exposure to Bitcoin and Ethereum.