Two Worlds Colliding: Can Anything Stop Crypto Momentum?

The Ethereum Merge, a long-awaited upgrade to the Ethereum network, designed to help Ethereum become more scalable, secure, and sustainable, was completed on September 15. Over the next few years, we will likely see institutions increasingly using crypto as key infrastructure to support Web3 application development. One report values the Metaverse alone between $8-13 trillion by 2030.

Amid market turmoil, one thing is clear: The innovation in the cryptocurrency community continues to dutifully churn out new products and services.

In the seventh edition of the Two Worlds Colliding series, we explore regulatory activity, crypto adoption both domestically and globally, security concerns, and the potential future of digital finance.

Regulators Push for More Information on Cryptocurrency Impacts

US regulators and politicians continue to discuss ramifications of cryptocurrency and stablecoin adoption. 

• The US Securities and Exchange Commission (SEC) is building a new office dedicated to crypto disclosures within its Division of Corporate Finance, which currently handles disclosures for publicly traded firms. 
• The US Treasury sanctioned USD Coin and Ethereum addresses connected to a cryptocurrency mixer, adding them to the Specially Designated Nationals list of the Office of Foreign Assets Control for connections to the laundering of over $7 billion of cryptocurrency, including $455 million stolen by a North Korea-affiliated cybercrime team known as Lazarus Group.
• Republicans on the House Financial Services Committee have requested the Federal Reserve to provide more information relating to a potential US Central Bank Digital Currency as the deadline from the Executive Order on Ensuring Responsible Development of Digital Assets approaches.
• The Federal Reserve has announced that its new payments service, FedNow, will be ready for launch between May and July 2023. The FedNow Service intends to decrease lags in payment time between financial institutions. FedNow is seen as both a steppingstone to a potential rollout of a Central Bank Digital Currency (CBDC), and as a way for financial institutions to compete with cryptocurrencies by offering cheap and reliable payments settlements.
• The House Energy and Commerce Committee is seeking information from four crypto-mining institutions to gather information and understanding on the environmental impacts of blockchain technology.
• The SEC has charged 11 individuals associated with an alleged fraudulent crypto Ponzi scheme that collected $300 million from millions of investors. The associated company claims to be a decentralized smart contract platform that markets aggressively to retail investors worldwide, including in the US.

Hackers Target Cryptocurrency Service Vulnerabilities

Risk concerns have increased due to high value hacks performed by bad actors on cryptocurrency platforms. 

• As of mid-August, hackers have stolen $1.4 billion in cryptocurrency using crypto bridges. Crypto bridges link blockchain networks together and allow users to bypass using a centralized exchange for transactions and have been a significant target for cybercriminals. Examples of hacks that leveraged attacking crypto bridges include the $615 million taken from Ronin, the bridge supporting Axie Infinity, and $320 million taken from Wormhole, another bridge that has been backed by Wall Street trading firm Jump Trading.
• As of mid-August, a total of more than $1.9 billion of cryptocurrency has been stolen in hacks on cryptocurrency services. This figure is a 60% increase from the same period in 2021, according to blockchain research firm Chainalysis.

M&A and Strategic Partnerships

Mergers and acquisitions (M&A) and strategic partnership growth continued in Q3 2022.

• BlackRock is teaming up with Coinbase to pursue crypto market expansion. BlackRock is partnering with Coinbase to make it easier for institutional investors to manage and trade Bitcoin. Top BlackRock clients will be able to use its Aladdin investment-management system to oversee their exposure to Bitcoin, and to facilitate financing and trading on Coinbase’s exchange. The focus of the partnership with Coinbase will initially be on Bitcoin.
• PayPal is adding to the list of crypto heavy hitters on the Travel Rule Universal Solution Technology (TRUST) network. PayPal has stepped up its regulatory compliance by joining TRUST to streamline its reporting requirements relating to the digital assets “travel rule.” The announcement comes two months after PayPal rolled out infrastructure enabling users to transfer, send, and receive digital assets between PayPal and other wallets and exchanges in June of 2022. TRUST was launched by a group of 18 US virtual asset service providers in February to streamline reporting and make the sharing of information between them easier and more transparent.

Emerging Products and Services

Despite concerns over a dampening economy, financial institutions have continued to innovate new products and services that leverage the power of digital assets. 

• Wall Street giant Depository Trust & Clearing Corporation (DTCC) launches a private blockchain platform to settle trades more quickly. DTCC, which processes all trades in the US stock market, has launched a private blockchain project aimed at settling trades more quickly for clients. Project Ion was first created as a pilot program in 2020 and has since gone live, processing an average of more than 100,000 bilateral equity transactions per day in a parallel processing environment.
• Binance and Mastercard partner to target a card launch toward Argentine users. Crypto exchange Binance has partnered with Mastercard to launch a cryptocurrency card for customers in Argentina. The card will allow users to spend their cryptocurrencies in more than 90 million Mastercard-affiliated merchants around the world. Crypto payments with the card will be “seamless,” as the product will instantly convert digital assets to fiat current in real time upon checkout. Every user in the country will be available for the product as long as they have completed the exchange know-your-customer process and presented a valid national ID.
• Still waiting: VanEck's third Bitcoin spot exchange-traded funds (ETF) application has been delayed by the SEC. The wait for a first Bitcoin spot exchange-traded fund continues as the SEC buys more time to decide on VanEck's proposed Bitcoin ETF. VanEck filed their first application with the SEC in 2017 and it was eventually denied. The company filed a second application with the SEC in 2021 and it was ruled out. The company filed a third application in June 2022. This attempt was set to expire on August 27, but the SEC has given itself until October 11 to make a ruling.

Global Governing Authorities Wrestle with Crypto Risks

Similar to the US, other nations are confronted with risk management obstacles regarding cryptocurrency firms. 

• Authorities in India have conducted searches at the offices of a venture-backed crypto exchange. The crypto firm has announced that the reported searches were not related to money laundering. Other reports suggest the searches were related to the country’s foreign exchange statutes.
• Singapore’s Money Authority is considering adopting stricter requirements for the retail crypto market with the objective of fostering a digital asset-rich environment with strong risk management capabilities.
• The European Union, as part of a larger legislation targeting anti-money laundering, is building a new regulatory body that will directly oversee anti-money laundering related to crypto asset service providers. The proposal is expected to have major implications for all financial institutions in the EU. 
• The Central African Republic launched the Sango Platform in July, a national crypto project and central hub for crowdfunding, distribution, and community support efforts.

Cryptocurrency Adoption Continues to Rise in the US

There are several signs indicative of continuing growth in US consumer adoption.

• Venture capital firms poured $14.2 billion into crypto in the first half of 2022, which was already more than double all years prior to 2021.
• CoinGecko reveals the US state most interested in Bitcoin and Ethereum. In a report shared by CoinGecko, internet users from California accounted for 43% of all Bitcoin and Ethereum web traffic searches (between 5/2/2022 – 8/21/2022) on the crypto-tracking website. Internet users from Illinois and New York had the second- and third-most searches.
• US dominates crypto ATMs installations and Bitcoin hash rate worldwide. With China moving out of the picture following a ban on crypto, the US maintains the top position in terms of Bitcoin hash rate contribution and ATM installations worldwide. Prior to cracking down on Bitcoin mining, China historically represented more than 50% of the total hash rate up until February 2021. With China out of the competition, the US picked up the slack to become the highest Bitcoin hash rate contributor—representing 37.84% of the total mining power by January 2022.

The Spread of CBDC

• More than 105 countries (accounting for approximately 95% of global GDP) have at least started researching, developing, piloting, or launching Central Bank Digital Currencies (CBDCs)—an increase of 25 countries since our last reporting. 
• Ten countries have launched full-scale CBDCs. Jamaica is the latest country to launch a CBDC, and China’s pilot is scheduled to expand in 2023.

What Luminaries are Saying

“So in my mind, the use cases [of crypto] haven’t arisen fully, and the regulation hasn’t caught up and I think that’s why you see the financial industry, in general, being a little bit slow in catching up.”—Umar Farooq, CEO of JPMorgan’s blockchain unit Onyx Digital Assets.

“Our institutional clients are increasingly interested in gaining exposure to digital asset markets and are focused on how to efficiently manage the operational life cycle of these assets.”—Joseph Chalom, global head of strategic ecosystem partnerships at BlackRock.

“… it’s only in the past few years that crypto assets have moved from being niche products in search of a purpose to having a more mainstream presence as speculative investments, hedges against weak currencies, and potential payment instruments.”— Aditya Narain and Marina Moretti, International Monetary Fund.

“Nothing about the crypto markets is incompatible with the securities laws…Investor protection is just as relevant regardless of the underlying technologies. We’re technology-neutral, but we’re not public policy-neutral.”—Gary Gensler, SEC chair. 

Related Press Coverage

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Crypto Bank Silvergate Asked by US Senators to Explain FTX Ties (Yahoo! Finance)

Lawyers see crypto regulations coming in 20203 because industry needs to rebuild trust (TechCrunch)

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