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Crypto Native

Traditional markets have experienced weak performance, and institutional investors are expecting slower economic growth in the future, as higher interest rates take effect to reduce inflation. Digital assets having fallen from their peak in November 2021 are looking more attractive to qualified investors, and large financial institutions are making it easier for them to access these markets.

• According to a study by Fidelity Digital Assets, 74% of surveyed institutions are planning to buy digital assets in the future. Fidelity has also been actively expanding their digital asset product range by offering ether trading to their institutional clients, and launching a physically backed bitcoin exchange traded product (ETP) in Hong Kong. KPMG China’s survey of 30 family offices in Hong Kong and Singapore found 92% of respondents interested in acquiring digital assets in the context of weak traditional market performance making digital assets more attractive.
• Bank of New York Mellon (BNY Mellon) has launched custody services of digital assets starting with Bitcoin and Ethereum. Last month Nasdaq Inc. announced their plans to offer custody services to institutional investors. In BNY Mellon’s case, they have received regulatory approval from the New York Department of Financial Services, while Nasdaq’s regulatory approval is still pending.

Regulation | Regulators

Global regulators are seeking to balance retail access to digital assets and measures to protect retail investors as they engage this emerging asset class. Thousands of companies in Brazil are reported to hold some form of digital assets on their balance sheets.

• Over 12,000 Brazilian companies hold crypto, according to a report from Brazilian tax authority Receita Federal do Brasil (RFB). Digital assets are taxable in the country at a range between 12-25%. However, stablecoin does not attract the tax on financial operations (IOF) that ranges between 1.1%-6.38% usually applied to foreign currency, making it an attractive mode to move money.

• At a conference on financial markets and policy, the United States Securities and Exchange Commision (SEC) Chairman Gary Gensler stated that while the Commodity Futures Trading Commission (CTFC) have certain powers to address fraud and market manipulation, it should be given authority to regulate stablecoins to reduce risks to the financial system.
• Hong Kong is seeking consultation with digital asset exchanges on how to allow retail investors access to trade cryptocurrencies and digital asset exchange traded funds (ETFs). In Singapore, the Monetary Authority of Singapore (MAS) has proposed that retail investors seeking to access digital assets will need to undergo financial knowledge checks before they are allowed to trade. Stablecoin issuers will also need to match their fiat reserves backing their stablecoin issued and in circulation.

Tokenization

Governments and their central banks continue to demonstrate interest in using blockchain tokenization technologies for issuing digital government bonds. Asset managers in Europe will gain access to value-based investments through tokenized funds.

• Israel will perform live testing of a digital bond platform to issue, trade and clear state digital bonds using blockchain and digital asset infrastructure technology by VMWare and Fireblocks. In 2021, the European Investment Bank (EIB) launched a €100 million 2-year bond on the Ethereum public blockchain, governed by French law and with a consortium of banks as joint lead managers.
• Investre has developed a platform for asset managers to tokenize funds such as UCITS (Undertaking for Collective Investment in Transferable Securities) giving retail investors access to value-based investments. Investors are able to acquire investments directly from the asset manager on primary or secondary markets through the Investre platform.

Web3

Decentralized Finance (DeFi) technologies are being used in tokenization trials conducted by a central bank related to digital government bonds and cross-border foreign exchange transactions. Staking has been adopted into the non-fungible tokens (NFTs) ecosystem as a way to generate yield for users and encourage holders to remain in the ecosystem. Zero-knowledge identity protocols are being developed to solve for privacy of personal data and enable engagement with blockchain based products and services.

• As part of the Monetary Authority of Singapore’s Project Guardian, DBS Bank, JPMorgan, Marketnode, SBI Digital, and Temasek conducted a number of trials involving the tokenization of Singapore Dollar and Japanese Yen deposits and digital government bonds. Permissioned DeFi protocol Aave Arc was forked and deployed on Polygon as part of the liquidity pool trial for trading tokenized bonds.
• Non-fungible tokens (NFT) platform Goodfellas NFT adopted the decentralized finance concept of staking, and applied it to NFTs to generate yield. This provides additional utility to the Gooodfella NFT ecosystem by encouraging NFT holders to lock in their purchases and have the ability to use credits or Binance BNB tokens to mint new NFTs.
• Notebook Labs raised $3.4 million in a seed round to create a zero-knowledge identity protocol to maintain anonymity and privacy in Web3. Zero-knowledge identity proof involves a cryptographic technique that allows a user to prove their identity online without revealing private data and allow for Sybil-resistant log-ins. JPMorgan, through its Onyx subsidiary, announced plans to develop a similarly focused blockchain-based identity solution for Web3.

Digital Asset Infrastructure

Processing payments using digital assets allows users to benefit from lower transaction times and costs. Digital asset focused firms have built technology that enables secure integration between blockchain technologies related to payments, and to allow secure interoperability between chains.

• Global payment service providers Checkout.com and Worldpay have partnered with Fireblocks utilizing the Payments Engine suite of tools that enables instant fiat-to-stablecoin conversion. Merchants will benefit from simpler domestic and cross-border transaction flows and take advantage of the efficiencies and lower transaction costs often associated with blockchain technologies.
• Cross-chain custodial bridge builder ChainPort has partnered with various firms, such as play-to-earn gaming company Cornucopias (bridging BSC to Cardano), and layer-2 solution Dogechain (bridging to Polygon), to build permissionless token porting across different blockchain ecosystems. The firm enables interoperability between different blockchains and facilitates communication and transfer of value between them using cold storage wallets to store 95% of tokens ported between chains. Supported blockchains include Avalanche, Binance Smart Chain, Ethereum, Fantom, and Polygon.

CBDCs

Central banks continue to run projects to test blockchain technology infrastructure, identify operational gaps, and design the technological intricacies of central bank digital currencies (CBDC). However, the central bank announcements remain non-commital to whether they will issue a CBDC or what type of CBDC (retail or wholesale) they are looking to potentially issue.

• The Monetary Authority of Singapore (MAS) launched a wholesale CBDC cross-border initiative, Ubin+, with Banque de France, Swiss National Bank, and the Bank for International Settlements Innovation Hub. Focused on foreign exchange settlement, Ubin+ will build on learnings from Project Ubin that explored the use of blockchain technologies for clearing and settlement, and Project Dunbar that involved an experimental multi-CBDC settlement platform between central banks. From a retail CBDC perspective, Project Orchid was announced where various design and technical aspects will be explored, and how it will function and interact with existing payment infrastructures.
• The Federal Reserve Bank of New York’s Innovation Center released a report on the first phase of its Project Cedar wholesale CBDC involving foreign exchange spot settlement “from the perspective of the Federal Reserve.”

Regenerative Finance

The United Nations climate change summit COP27 kicked off in Egypt last week, with funding of poorer nations by richer nations being one of the agenda items. The issuing of green bonds to fund infrastructure projects in these developing nations, could be one avenue to support these countries in building a sustainable economy.

• The Climate Bonds Initiative is calling for annual green bond issuances of $5 trillion by 2025 to fight climate change. The $1 trillion milestone was reached by December 2020, and the $2 trillion milestone in 2021. As of the third quarter of 2022, $2 trillion of green bonds have been issued. However, the organization expects that to meet the Paris Agreement’s 2050 emission targets, more needs to be done to scale the capital flows into projects supporting emission reduction.
• The Indonesia Stock Exchange (IDX) is exploring the possibilities of collaborating with Metaverse Green Exchange (MVGX), a blockchain-based carbon credit exchange, to issue and trade carbon credit tokens.

Crypto-Native Market Analytics

Crypto-native markets continued to trade sideways and ended moderately higher month-on-month. Total Market Capitalization (TMC) reached just above $1 trillion in October. The month was quiet with again few catalysts to move the markets out of the sideways trend.

MONTHLY CHANGE

Source: Coingecko

Crypto-native markets ended the first month of the fourth quarter moderately higher.

TOP 10 MARKET CAPITALIZATION

Source: Coingecko

Digital asset markets remained relatively flat in October. The exception being Dogecoin which saw its market capitalization double on news of Elon Musk allowing the token to be used to purchase SpaceX merchandise.

BITCOIN [BTC]

Source: Glassnode

Bitcoin remained between $25,000 and $17,000 with little catalyst to move price in any clear direction.

BTC: ALL EXCHANGES NETFLOW

Source: Glassnode

Netflows turned negative at the beginning of October from exchanges.

REGIONAL BTC FLOWS [Last 7 Day Average, Nov 4]

Source: Chainalysis

Overall, BTC regional flows have been muted in Eastern Asia and North America. Western Europe has seen more flow activity notably from East Asia.

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.

ETHEREUM [ETH]

Source: Glassnode

Ethereum remained between the $1,000 to $2,000 levels. There has been no identifiable catalyst to move price in either direction.

TOTAL VALUE LOCKED [TVL, Oct 31]

Source: Glassnode, Defi Llama Total Value Locked

DeFi TVL continued to move sideways along with the underlying token prices.

PROTOCOL POSITION [TVL, Oct 31]

Source: Defi Llama, Fireblocks

Total value locked (TVL) for the protocols ranking behind Ethereum was mixed with Solana and Avalanche falling the most.

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.