Digital asset markets’ December slump continued into January as investors moved away from assets they considered to be higher risk. Regardless, many participants are taking the long view and focusing on use cases versus short-term price volatility: dApps continued to launch on DeFi protocols, boosting Total Value Locked (TVL). We are also seeing concerned regulators over rising retail investor interest in digital assets, putting more pressure to implement restrictions on marketing of digital asset trading. One big proof-point for the future of digital asset infrastructure was Fireblocks’ recent Series E funding round. Fireblocks, as well as our investors, believe in taking the long view of the industry’s future potential.

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Crypto Native

Bitcoin continued to weaken in January, but held above July 2021’s $29,300. By month’s close, BTC had experienced a 19.5% drop MoM – around 45% from the all-time high set in November. Total Market Cap was 24.7% lower, at $1.76 trillion, by month’s end. Total Value Locked also fell sharply in January, ending the month down 21.7% at $191.9 billion. While bitcoin price had moved significantly, the overall market structure with its upward bias would not indicate additional weakness unless new lows are created below $29,300.

• Despite the fall in crypto prices across the board, “whales”, or those who have large funds at their disposal, are taking advantage of lower prices to acquire thousands of bitcoins (worth millions of dollars). HODLers are holding more coins, which will reduce the number of coins available for active trading. More funds chasing fewer coins could lead to supply and demand imbalances, resulting in higher price points attractive enough for HODLers or traders to sell and realize profits.
• El Salvador’s President President Nayib Bukele announced that his country bought 410 bitcoins during the recent fall in price, bringing their total holdings to 1,810 bitcoins ($66.6 billion @ US$37,00). Compared to bitcoins held by publicly listed corporations, El Salvador’s holdings place the country 8th behind Coinbase’s 4,483 bitcoin and ahead in front of Nexon Co Ltd’s 1,717 bitcoin holdings.
• The second largest crypto mining country, Kazakhstan, has banned the use of electricity by miners until February as the country struggles to meet energy demands during the winter months. Several miners moved their operations to the country after China banned miners in June 2021. 
• Former Goldman Sachs CEO Lloyd Blankfein has changed his view of cryptocurrencies given the significant flow of funds into digital assets supporting the growth of the industry. He sees that the benefits of blockchain technologies like instant transfer and credit risk reduction are happening, and can no longer be ignored.

Tokenization

The creation of native tokens to incentivize users within an ecosystem is not new, and points towards the value of establishing a tangible measure of value and medium of exchange of the goods and services provided by the issuer. As crypto-native firms become more regulated by applying to be regulated in a jurisdiction, either through acquiring or by being acquired by regulated firms, any in-house knowledge obtained through their own tokenization journey will help them understand tokenization mechanics, costs, and benefits. This will better position crypto-natives to take advantage of tokenization opportunities that would have been out of reach if they were not regulated.

• Fireblocks published a Tokenization whitepaper that provides a deep dive on the potential impacts of tokenization on traditional markets, key tokenization uses cases that exist today, and the key considerations for financial institutions to strategically position themselves to benefit from this technology.
• Centralized exchange BitMEX partnered with Tokeny to issue a native token BMEX to incentivize users in the BitMEX ecosystem. In a strategic move and subject to regulatory approval by Germany’s Federal Financial Supervisory Authority (BaFin), BitMEX has signed an agreement to acquire Bankhaus von der Heydt and position the exchange to launch regulated digital asset products in Germany, Switzerland and Austria. Bankhaus von der Heydt is not new to the digital asset ecosystem, having launched a Euro stablecoin on Stellar in 2020 with Bitbond.
• Tokenization platform Tokeny Solutions (Tokeny) raised 5 million euro in seed funding led by Inveniam Capital Partners (Inveniam). Inveniam is partnering with Tokeny to make private assets more liquid and trusted to investors with regards to the valuation of assets and pricing.

Regulation | Regulators

Regulators across the globe are starting to set expectations of what the industry can expect in 2022. Limiting the marketing of crypto trading activities has been one approach to protect novice investors who may be attracted to the high returns reported in the news but who are ill equipped to navigate and control their exposure to higher levels of risk. More substantial regulations are expected to be introduced, which will create clearer expectations of how institutional investors cal involves themselves in digital assets.

• India’s Finance Minister, Nirmala Sitharaman, announced that digital assets will fall into the highest tax band at 30%. India’s government ministries and regulators continue to formulate their approach to handling digital assets in the proposed Cryptocurrency and Regulation of Official Digital Currency Bill (Crypto Bill), where it is expected that the Securities and Exchange Board of India (SEBI) will oversee the industry. However, the Crypto Bill was not listed under the proposed legislation for 2022.
• The Indonesian financial services authority, Otoritas Jasa Keuangan (OJK), has prohibited the country’s financial institutions from “using, marketing, and/or facilitating crypto asset trading”. This does not cover non-financial institutions, which offer crypto assets for trading and investment, and fall under commodities regulation. Crypto assets are not allowed to be used for payments in Indonesia.
• The Monetary Authority of Singapore (MAS) will limit the promotion and advertising of digital asset trading to the local population by Digital Payment Token (DPT) service providers. Using a different approach, the United Kingdom’s Financial Conduct Authority (FCA) will limit the marketing of crypto assets to high net worth and/or sophisticated investors. Spain’s approach will require the National Securities Market Commission (CNMV) to authorize marketing campaigns by influencers and their sponsors promoting crypto assets, and must ensure investors are aware of the risks involved.
• Thailand’s financial regulators, which include the Bank of Thailand (BOT), the Securities and Exchange Commission (SEC), and the Ministry of Finance (MOF), jointly stated that they will seek to limit the adoption of digital assets to pay for goods and services, citing concerns around cybercrime, data privacy, money laundering, and price volatility.
• The Central Bank of Russia announced its intention to regulate digital assets and proposed a ban on crypto mining and trading, citing financial stability as a concern. However, members of the government are seeking restrictions on cryptocurrencies versus an outright ban.

Payments | Settlement

Trials using digital tokens for payments continue between central banks, domestic banks, and corporations aimed at exploring the benefits of the technology, mainly transaction efficiency and cost reduction. Payment service providers maintain their relevance by facilitating the demand for digital assets using traditional payment options and supporting the development of the digital asset ecosystem.

• The Central Bank of Bahrain (CBB) conducted a successful payment trial using JPMorgan’s JPM coin between Bank ABC and aluminium smelter Aluminum Bahrain. The CBB is seeking to remove the inefficiencies of inter-border transactions through the use of blockchain technologies.
• Coinbase announced it has partnered with Mastercard to allow non-fungible tokens (NFTs) acquired by Coinbase clients to be paid for using Mastercard cards on its soon-to-be-launched Coinbase NFT marketplace. NFT sales volume reached $23 billion in 2021, according to DappRadar’s 2021 Industry Report.
• Payments company Block (previously known as Square) is advancing its move into hardware by developing decentralized open source permissionless mining infrastructure. They are looking to make mining less concentrated and more efficient.

Decentralized Finance

Oracle service providers are emerging to challenge dominant players. Another blockchain protocol platform, Fantom, sees a boost in their total locked value due to new application launches and increased transaction volumes with existing apps. At the same time, Solana experienced another outage, resulting in user losses when they were unable to fund their accounts as smart contracts liquidated their positions. These challenges demonstrate the benefits of decentralized functionality (smart contracts functioning as they should) and expose the weaknesses that need to be addressed when the causes are network or infrastructure related. Adding to the DeFi world’s woes at the start of the year is an exploit of $322 million worth of Ethereum tokens from a blockchain bridge between Ethereum and Solana.

• Decentralized oracle network API3 (API3), a competitor to Chainlink, has listed on Binance, its second listing after Coinbase. API3 facilitates access to first-party off-chain information through data points known as “Beacons”, and aims to make API connectivity more secure, cost-efficient, and decentralized. Beacons can be combined to build decentralized APIs (dAPIs) using Airnode protocols. The API3 token is governed by a decentralized autonomous organization (DAO) through a staking mechanism.
• Protocol Fantom has reached fourth place after a surge in its total value locked ($9.7 billion), behind Terra ($14.9 billion) and Binance Smart Chain ($12.1 billion). The doubling in TVL from December was driven by new dApp launches on the protocol such as 0xDAO, and existing dApps experiencing increased TVL like Yearn Finance and RenVM.
• Solana experienced increased network congestion at a time when prices are trending significantly lower, leaving traders unable to fund their accounts or take action to mitigate the adverse moves in price. Solana supporters comment that the protocol is a victim of its own success – its increase in demand for its ability to provide high transaction speeds has resulted in expected “growing pains”. Unless developers move away from building on Solana or users decrease their usage of Solana-based dApps, Solana has yet to reach its full potential.
• Blockchain bridge between Ethereum and Solana, Wormhole, experienced a loss of 120,000 Ethereum tokens ($322 million at $2,681 ETH) in one of the largest exploits experienced by a decentralized protocol, according to data from The Block.

Centralized Finance

Centralized finance firms, Celsius Networks and Blockfi, continue to deal with legal limitations as regulatory authorities, notably in the United States, determine whether the nature of their core lending business falls under securities regulation. Recently, the U.S. Securities and Exchange Commission launched their own investigation that included other platforms paying interest on digital assets. As assets under custody continue to grow, so too does the need for more diverse protection layers for digital assets.

• Celsius Networks, Gemini Trust, and Voyager Digital are being probed by the U.S. Securities and Exchange Commission (SEC) around their interest-bearing services on digital assets. They will determine if such offerings to their clients are considered securities and therefore fall under securities regulation.
• Lending platform Nexo is partnering with Bakkt Holdings to store a portion of their clients Bitcoin and Ethereum in the Bakkt Warehouse and diversify the protection layers of digital assets under custody into “warm” and “cold” wallets.

Custody

Digital custody and infrastructure technology remains a critical component for firms wanting to participate in the digital asset ecosystem. The Series E funding round by Fireblocks is proof that the future of digital assets infrastructure has gained critical mass and points towards a long runway ahead for expansion and growth in infrastructure. As momentum in the space accelerates, seasoned executives from traditional finance are moving across to digital finance firms.

• Digital asset infrastructure firm Fireblocks raised $550 million in a Series E funding round led by D1 Capital, valuing the company at $8 billion. The deal reflects the growing need not only for highly secure and scalable custodian and transfer network infrastructure, but also for the continuous development of integrated products and services through in-house innovation and strategic partnerships.
• Former London Metal Exchange CEO, Matthew Chamberlain, has joined digital asset custodian Komainu as its new CEO, bringing with him a wealth of experience from traditional finance that will position the company around meeting the custodial requirements of financial institutions moving into digital assets.

CBDCs

Central banks are discovering where CBDCs are of immediate benefit as wholesale CBDC projects reveal positive results. Retail focused CBDCs need more work to demonstrate clear benefits of their use case as a replacement for physical cash. It could be argued that the movement towards complete electronic payment and transfers is already underway and that cash is one step closer to being eliminated altogether regardless of the technology. However, common concerns amongst the central banks around CBDCs include transaction privacy and financial stability, meaning that physical cash is here to stay for a while longer.

• The Federal Reserve released a report on the digital dollar within the context of the payment system. They outlined their research into CBDCs uses and functions and the potential risks and benefits a CBDC poses to the system. The Fed’s view is that a digital dollar needs to be “privacy-protected, intermediated, widely transferable, and identity-verified.”
• The Bank of Korea reported the completion of the initial phase of their CBDC pilot which included the creation, issuance and distribution of the CBDC, and will move onto the next phase to test additional functions that allow for offline payments and transaction privacy.
• Bank Negara Malaysia will continue to explore various options around the use of CBDCs after its participation in Project Dunbar which involved a proof-of-concept pilot for blockchain-based cross-border remittances.
• The Swiss National Bank together with the Bank for International Settlements and the SIX stock exchange conducted trials of interbank transfers using a wholesale CBDC. The trial demonstrated how the best elements of the current financial system could be maintained and what new benefits could be harnessed from the emerging technology.
• The House of Lords Economic Affairs Committee in the United Kingdom released a report looking into a CBDC for retail usage. The report stated their concerns for the need of such a medium of exchange at this time, unconvinced that there are tangible benefits to be achieved regardless of the potential benefits commonly stated such as financial inclusion, reduced transaction costs, and efficiencies. They also cited concerns around the impact on financial stability from the creation of private money and how a CBDC should be designed to ensure safeguards are in place during times of economic stress.

ESG Impact

Increasing appetite for green investments traditional finance has presented an opportunity for these investments to be launched on digital asset platforms and gain the benefits of the infrastructure, mainly transparency and efficiency.

• S&P Global has reported that green bond issuances by U.S. real estate investment trusts (REITs) grew from $8.40 billion in 2020 to $11.97 billion in 2021. The green bond market was the area of focus for Project Genesis being undertaken by the Bank of International Settlements (BIS) and the Hong Kong Monetary Authority (HKMA) late 2021. The project aimed to explore the use of blockchain technologies such as tokenization and smart contracts to normalize green investments by making them transparent and transferable.
• According to the Climate Bond Initiative, bonds issued under the Climate Bond Standard reached $210 billion in 2021. The goal is for global annual green investment of $5 trillion by 2025 where capital is allocated into projects that support clean energy, green transport and buildings, sustainable agriculture, and resilient infrastructure. The $1 trillion milestone is expected to be reached by the end of 2022 or early 2023 which would represent a five-fold increase from 2021.

Crypto-Native Market Analytics

Crypto-native markets suffered their second month of selling pressure throughout January, as risky assets including traditional equities fell. Outside of stablecoins, steep price falls were again seen in DeFi alternative coins (Alt Coins), with Solana (SOL) -45.9%, Aave (AAVE) -43.4%, and Compound (COMP) -40.9% bearing the brunt of the fall in prices. While short term price action can grab headline attention, the underlying use cases of these applications remain and serve as opportunities for those who take a long view of the markets to participate at lower prices.

CHART OF THE MONTH: DeFi Chain Battles

With the launch of multiple chains in the second half of 2021, foundations and developers have been battling it out to increase their dominance as they seek to lock-in on-chain value as represented by Total Locked Value (TVL). As the chart shows, the battle is far from over as each switch position as new applications launch and propel their TVL.

MONTHLY CHANGE

Most key tokens closed lower for the second month in a row as assets considered higher risk moved lower.

TOP 10 MARKET CAPITALIZATION

Stablecoins USDT and USDC are proving their worth as “stable” as the top tokens see their market cap continue to fall on lower prices.

BITCOIN [BTC]

Price cleared the September low of $39,876 and reached the 88.6% fibonacci retracement level that spanned the July-November ‘21 move. The longer term uptrend technically is under pressure with the $29,000 support range within reach.

ETHEREUM [ETH]

January saw price continue lower breaking $2,700 which could turn into a resistance range. Further weakness could see price reach towards the July ‘21 support range around $1,700.

BITCOIN : STOCK TO FLOW RATIO [BTC:STFR]

BTC is lower than STFR indicating it is undervalued.

BTC: ALL EXCHANGES NETFLOW

Net outflows were observed for 15 days in the later half of January as BTC continued to trade lower.

REGIONAL BTC FLOWS [Last 7 Day Average, Feb 2]

Regional flows outside of the major regions between the rest of the world (ROW) were high. Asia and North America intra-regional flows remained robust.

Assets typically flow within a region, likely due to preferences for local exchanges, but flows between regions often occur as a result of regulatory concerns, geopolitical changes, or significant market price variations.

TOTAL VALUE LOCKED [TVL, Jan 31]

TVL fell from $241.0B to $191.9B, almost wiping the gains seen in November as ETH prices fell from the all-time high of $4,859 and as Alt Coins came under pressure.

PROTOCOL POSITION [TVL, Jan 31]

Fantom total value locked doubled as liquidity mining and yield applications launched on the protocol such as 0xDAO and Iron Bank on 21 January. Existing applications also saw a surge in TVL including Yearn Finance, Scream, RenVM and Sushiswap.

DEFI PULSE INDEX [DPI]

Top 5 Tokens: Uniswap, Aave, Maker, Loopring and Synthetix.

Index information can be found at the Tokensets.com.

This reCap is distributed for general informational and educational purposes only and is not intended to constitute legal, tax, accounting, or investment advice. For other important disclosures.