New in Digital Assets: June 2023

Despite very strong performance through the month of May, the digital assets industry garnered only limited media attention as investors focused on developments in artificial intelligence, Federal Reserve policy, economic data, and stresses in the banking system among others. As the calendar turned to June, however, the industry found itself in the spotlight once again as markets were whipsawed by headlines.

After an initial drawdown in crypto and digital asset equities on the heels of regulatory action taken by the SEC against Coinbase and Binance, markets rallied as a slew of large asset managers filed for spot bitcoin (BTC) ETFs.

Markets were also propelled by announcements signalling further institutional appetite for digital asset adoption, including the launch of an institutional-grade OTC marketplace, beta testing platforms to use stablecoins for cross-border business-to-business payments, and experimentation in the realm of digital collectibles.

While performance in June was moderate to strongly positive, the path was volatile. BTC closed the month up 11.9% while ether (ETH) lagged, closing the month up 3.2%, though not before experiencing a peak-to-trough decline of -10% and -15% in the first half of the month respectively. Likewise, the total crypto market capitalisation gained 4.9% to close at US$1.16T, after initially dropping about -13% in the first half of the month.

Bitcoin dominance—bitcoin’s share of the total market capitalisation of all crypto assets—broke the 50% level in June and reached as high as 52.2%, its highest level since April 2021. This is a potentially significant milestone in the progression of the crypto bear market that began in late 2021.

Bitcoin dominance can be a helpful indicator when analysing broad crypto market trends. As the largest, most liquid, and most widely adopted crypto asset, bitcoin tends to be viewed as a safe haven compared to the rest of the non-stablecoin market. Consequently, changing trends in bitcoin dominance levels often coincide with inflection points in broader crypto markets.

During strong bull markets, for example, bitcoin dominance tends to fall dramatically as investors rotate capital out of bitcoin and into more speculative areas of the market such as new, unproven projects with relatively small market caps. Compared to bitcoin, these projects present the opportunity for more substantial price appreciation, though with greater risk. While the price of bitcoin participates in these market rallies, it tends to underperform assets that sit further out on the risk/reward curve during these periods. Conversely, during prolonged bear markets, bitcoin dominance tends to rise substantially over time as more speculative corners of the market experience more severe drawdowns than bitcoin.

Analysis of historical trends suggests that the conclusion of crypto bear markets and the resulting start of a new market cycle coincides with bitcoin dominance rising to and remaining at a sufficiently high level. This behaviour suggests that crypto assets situated farther out on the risk/reward curve have begun to find a market bottom. This concept is analogous to a forest fire: a necessary clearing of brush and overgrowth to give rise to a healthier and more sustainable ecosystem.

The substantial rise in the bitcoin dominance out of a range first established in Spring 2021 suggests the crypto market’s self-cleansing process is well underway. While the timeline for bitcoin dominance to reach its ultimate peak can be prolonged, this revitalised trend suggests that crypto markets may be entering the latter stages of the most recent crypto winter.

News & Headlines

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Adoption

Institutions Dominate Headlines with Slew of Spot Bitcoin ETF Filings

BlackRock, the world’s largest asset manager, applied to launch a spot bitcoin (BTC) ETF, setting off a wave of similar applications from other large asset managers including the likes of Fidelity, WisdomTree, and VanEck among others.

BlackRock’s application came at a curious time—only a week after the SEC announced that it would be bringing charges against crypto exchanges Binance and Coinbase, including allegations that both companies were operating unregistered securities exchanges. In light of this, BlackRock’s selection of Coinbase as its custodial partner for the proposed ETF also raised eyebrows, appearing to many as an implicit vote of support for the crypto exchange.

While there have been no indications as to the likelihood of approval, many industry insiders have voiced their optimism that this most recent wave of applications holds promise. Largely, this is due to the implementation of a surveillance-sharing agreement (“SSA”) with a significantly large market—a stipulation made by the SEC in their previous rejections of spot bitcoin ETF applications. According to the SEC, an SSA is needed to safeguard against the potential for market manipulation and fraud. For many of the ETF products proposed in the past month, Coinbase has been designated as the partner for the SSA.

EDX Markets, a Crypto Exchange Supported by Citadel, Has Officially Launched and is Now Live for Trading

EDX Markets, a new digital asset exchange, launched in June. Backed by a number of large players in the asset management and exchange business including Citadel Securities, Fidelity Investments, and Charles Schwab, EDX Markets is designed to provide a compliant way for institutional investors in the U.S. to trade crypto assets. The platform will offer order-matching services and trading capabilities for a limited subset of crypto assets including bitcoin (BTC), ether (ETH), litecoin (LTC), and bitcoin cash (BCH).

In its initial rollout, EDX will solely provide exchange services—a departure from the model taken by prominent crypto exchanges which offer clearing and custodial services in addition to asset exchange. It is expected that Anchorage Digital will be designated as EDX’s default custodian.

Hong Kong & Beijing Make a U-Turn on Digital Assets

Hong Kong’s Securities and Futures Commission (SFC) announced that it is accepting applications from crypto trading platforms to obtain licenses to operate in the jurisdiction. Coinbase is among the list of exchanges that have been invited to apply for a license. Licensed entities will be permitted to serve retail customers so long as they comply with regulatory mandates including minimum capital requirements, transparency reports, and compliance with token-listing guidelines among others.

The Hong Kong Monetary Authority (HKMA), Hong Kong’s banking regulator, has also encouraged HSBC, Standard Chartered Bank, and the Bank of China to start conducting business with crypto exchanges that obtain the required licensing. In particular, the HKMA has emphasised the need for due diligence efforts that are not overly burdensome so as to encourage crypto business development in Hong Kong. Taken together, these announcements suggest that Hong Kong is seeking to grow its appeal as a potential hub for the global crypto industry.

Separately, the Bank of China’s investment banking division, BOCI, made history as the first Chinese financial institution to issue a tokenised security. BOCI offered CNH 200 million (approximately US$28 million) of structured notes in a tokenised format on the Ethereum blockchain. The offering was underwritten by UBS and was offered to clients in the Asia Pacific region.

Finally, the Beijing Municipal Science and Technology Commission, a branch of Beijing’s municipal government, published a white paper promoting Web3 innovation and development. The white paper emphasised the government’s view of Web3 as an inevitable force in the future development of the Internet. The white paper also served to announce the government’s plans to allocate roughly US$14 million annually through 2025 to enhance Web3 policy support and technological advancements.

Stablecoins Recognised as a Vehicle for Global Payments

In testimony to the U.S. House of Representatives Financial Services Committee, Federal Reserve Chairman Jerome Powell acknowledged the role of stablecoins as a legitimate form of currency that facilitates more efficient and global payment transactions. He also acknowledged the need for strong oversight by the Fed over stablecoin regulation that is being actively drafted within the House of Representatives.
Echoing Powell’s commentary on the legitimacy of stablecoins, multinational enterprise software company SAP announced its active experimentation with stablecoins as a means of cross-border business-to-business payments. Citing the high costs, latency, and lack of transparency associated with international payments today, SAP announced the launch of the Digital Currency Hub. The product is expected to utilise blockchain technology and stablecoins like Circle’s USDC token to facilitate instant payments among participating business partners.

Lastly, JPMorgan is expanding the implementation of its blockchain-based payment system, JPM Coin. The platform introduces euro-denominated stablecoins that enable 24/7/365 payments between corporate clients. According to a recent press release, German conglomerate Siemens conducted the first euro payment on the platform.

Nike Partners with EA Sports in an Effort to Integrate Virtual Creations into Games

Nike Virtual Studios and EA SPORTS are joining forces to enhance and personalise the virtual sports experience for fans around the world. The partnership between Nike and EA SPORTS is expected to create new virtual experiences powered by Nike’s SWOOSH platform. Leveraging Polygon’s technology stack, SWOOSH is a platform for creating, collecting, displaying, and trading digital collectibles. It is also expected to allow players to customise their virtual experiences with Nike’s iconic products and designs. The partnership has the potential to create a new level of immersive experiences where digital collectibles are composable with future EA games.

MicroStrategy Buys US$347 million Worth of BTC

On June 28th, software analytics firm MicroStrategy revealed that it had made an additional purchase of 12,333 BTC, valued at US$347 million. The acquisition took place between April 29th and June 27th. MicroStrategy now holds 152,333 BTC on its balance sheet, worth approximately US$4.6 billion. MicroStrategy’s position represents roughly 0.784% of the current total BTC supply.

Regulation

SEC Files a Lawsuit Against Binance & Coinbase Alleging Listing of Unregistered Securities

The SEC filed a lawsuit against Binance and its CEO Changpeng Zhao (CZ), accusing Binance of operating as an unregistered securities exchange, broker-dealer, and clearing agency. Further, the SEC claims that Binance’s staking-as-a-service product qualifies as an unregistered securities offering, in addition to more than 20 assets listed on the exchange.

The claim also alleges that Binance has intertwined numerous international and U.S.-domiciled entities in a manner that provides minimal separation between domestic and offshore operations, inappropriately commingled company and customer assets, and enabled prominent U.S. clients to gain access to Binance’s offshore trading platform.
The SEC also filed a lawsuit against Coinbase. The SEC contends that Coinbase has been operating as an unregistered securities exchange, broker-dealer, and clearing agency since at least 2019. The SEC also asserted that Coinbase has listed several crypto assets, as well as a staking-as-a-service offering, which the SEC believes constitute unregistered securities.

Both Binance and Coinbase have rejected the SEC’s claims and announced their intentions to defend themselves in court.

The EU Finalises Initial Regulatory Framework for Digital Assets Industry

The European Union (EU) signed the first version of the Markets in Crypto-Assets (MiCA) regulations into law on May 31, 2023. This landmark legislation provides the first comprehensive framework for the regulation of crypto assets and service providers. MiCA is expected to come into effect in 18 months. The bill was published in the Official Journal of the European Union (OJEU) on June 9, 2023, and marks the beginning of the countdown to the law’s implementation. It is expected that crypto businesses will begin to comply with the law’s requirements over the coming months. Stablecoin rules will apply from June 30, 2024, and rules for exchanges will take effect on December 30, 2024.

Moreover, the European Commission’s (EC) plans for a digital euro were published this month. The EC says the digital euro would ensure that Europeans can pay digitally for free across the Eurozone and would include safeguards for privacy and financial stability. Some, however, question the potential benefits of this centrally controlled digital asset and industry experts are expected to debate the proposal.

Related Funds

EBTC: For those wishing to gain direct exposure to Bitcoin, the Global X 21Shares Bitcoin ETF (EBTC) offers a solution. Invest in the only physically backed Bitcoin ETF in Australia.

EETH: For those wishing to gain direct exposure to Ethereum, the Global X 21Shares Ethereum ETF (EETH) offers a solution. Invest in the only physically backed Ethereum ETF in Australia.