#39 The Context: Are banks crypto’s friends, or foes?
Banks can’t ignore crypto, and not necessarily for the reasons you think
Hi, this week we collect some interesting reporting on the convoluted relationship between banks and crypto, on how DeFi’s plumbing and principles are under the microscope, and whether private blockchains, never discussed in polite DeFi company, might be more useful than they look.
The usual disclaimer: This newsletter collates the main themes and headlines of the week in DeFi/crypto/metaverse/web3/NFT land and tries to provide unbiased context. It’s aimed at anyone who wants to keep an eye on the space but isn’t following it too closely, or is on the hunt for story ideas and angles. It’s put together by a team at YAP, and doesn’t contain any promotion of our clients (if one is mentioned, we’ll flag that).
This was put together by a team led by founder Samantha Yap, and Jeremy Wagstaff, formerly of the journalism parish. Thanks to Ruby Wu, Sam O’Donohoe, Ewan Brewster, Becky Corbel, Joey Woo and Delon Chan for contributions. Reader feedback is as always welcome. Ping us at thecontext@yapglobal.com. Old newsletters can be found here.
[tl;dr]
Regulator to banks: don’t deny banking services to crypto companies just because you don’t like them
DeFi depends on its plumbing, so why does it keep going wrong?
Are private blockchains a bad idea, or could they be the vital connecting rail for DeFi?
[Banks: Crypto friend or foe?]
Banks are usually seen as the enemy of DeFi. As traditional finance they are the establishment to disrupt, to replace. But it’s never that easy: a lot of DeFi practitioners are refugees from TradFi, and a lot of investment, both in terms of purchases of tokens and investors in the projects that make them and make them work, are from venture capital and the banking industry. So with both trad- and de- finance in crisis mode, what does the future of this relationship look like?
Banks, it turns out, had tiny exposure to cryptocurrencies, according to the Bank for International Settlements. But while banks accounted for 0.14% of all crypto assets, there are one or two (not named) which are doing a lot of the reported business -- two banks made up more than half of overall crypto-asset exposures. The PDF is here.
But that was then. Now, some are reporting significant crypto inflows, despite the crash in fund values. Asset managers and those not wanting to go through the hassle of wallets are investing in exchange-traded products -- i.e. those products which invest directly in companies, or via futures contracts. (Story by Steve Johnson of the Financial Times)
Then again, this could be something else: with most of the money going to the big coins like Ethereum and Bitcoin, does this reflect a conviction that the winter is going to be a long one, and so better to ‘hodl‘ until spring arrives? (Story by Vildana Hajric of Bloomberg)
It’s probably not entirely irrelevant that banks aren’t having a great time at the moment: Cracks start to appear in the financial system: Bank of England, Credit Suisse and Deutsche Bank. And that turmoil is definitely prompting significant market moves into crypto)
And ultimately, banks cannot ignore crypto entirely. In a twist that might raise an eyebrow or two, Australian banks have been told not to ditch fintech, crypto and remittance customers because of fears over money-laundering or sanction-busting. Banks, the government said, fulfil an important gatekeeping role, which means not only exercising appropriate risk management procedures, but also ensuring that "core banking services are reasonably accessible across the community." The government's fear, beyond presumably banks becoming a law unto themselves, is that “denial of banking services to some groups and individuals would increase the risk that they are forced to operate outside the formal economy.” (Story by Ayesha de Kretser of the Australian Financial Review)
[Private blockchains and school runs]
Another bugbear for DeFi is the notion that blockchains might not be permissionless and public. There are often quizzical looks when someone sets up a private blockchain, because it sounds a little like you're using a technology for something it’s not intended for. Like using a Ferrari to do the school run. But they have shown resilience well beyond the 'we need a blockchain because the CEO wants one' era:
Tassat's blockchain interbank payments network, for example, has gone live with 3 banks. And there are several other interbank payment networks running on a blockchain:
UK-based Fnality, due to launch this month;
Singapore's Partior interbank network for multi-currency payments;
The USDF Consortium offering interbank payments for community U.S. banks
Companies see opportunities in linking private and public blockchains together, as well as connecting them to central bank digital currencies. The UK's Quant Network has been on a role price-wise this week, rising 16% while others languished, and is pitching itself somewhere at the intersection of the three worlds.
Another player, ParallelChain Lab, is seeking to build the bridge across the infrastructure divide with a proof-of-stake layer1 that provides 'native coupling of public and private blockchains.' ParallelChain has just won $50M From GEM Digital to fund its development. (Story by Omar Faridi of Crowdfund Insider)
Private blockchains have served as an entry-point for some companies into the wilder public world. Ernst & Young, for example, set up private blockchains and built its own tools for clients, but has more recently shifted to being a public blockchain player. (Story by Tim Hakki of Decrypt)
[Making the DeFi plumbing work]
Everything that’s good about DeFi is markedly different from what came before. But it’s also the most vulnerable, because of its pioneering nature, to things not working as they should. Indeed, sometimes it’s not clear how they should work.
Bad plumbing: Solana, unfortunately, has proven vulnerable to a misconfigured node, which took down the smart contract network (again, That’s the fourth in 2022).
DAOs do it differently: the decentralised autonomous organisation that runs crypto exchange SushiSwap has elected a new 'Head Chef' after months of drama. The community has been in turmoil since late last year, and pushed back against an earlier opaque selection process and over-generous salary. It's an illustration of how DAOs are becoming a significant force alongside a project's executives and investors. (Story by Samuel Haig of The Defiant)
The community at MakerDAO is also the focus of attention after the Winklevoss twins' Gemini crypto exchange has made a tempting offer. The deal would provide Maker some useful income, in return for holding more than 100 million of Gemini's USD-backed token GUSD in its ‘peg stability module.' Key will be MakerDAO's co-founder Rune Christensen, who has been at odds with some of the DAO, as well as the two core teams behind the project. After Christensen set up the DAO system he has accused it of apathy and competing interests. (Story by Samuel Haig of The Defiant)
[Tidbits]
We’ve talked before in this newsletter about the reputational risk for countries that woo crypto players. It looks great, until it doesn’t. Singapore is the latest to feel the burn: the FT reports that ‘crypto paradise’ Singapore has been stung by high-profile collapses. At the same time, the country just hosted a successful conference on crypto, where the dynamic chief fintech officer at the Monetary Authority of Singapore appeared on a panel. (Story by Scott Chipolina, Mercedes Ruehl, Christian Davies and Song Jung-a of the Financial Times)
And there’s the opportunity cost of not doing something: Japan’s prime minister says government investment in digital transformation will include Metaverse, NFTs. (Turner Wright of Cointelegraph)
Can and should institutions issue NFTs? Japan Post thinks they should, having launched a modest range of NFTs of stamps. And they're not the first: in 2021, Swiss Post released its first Swiss Crypto Stamp, and did another round this year, releasing Crypto Stamp 2.0. The central Bank of Lithuania also issued digital collectible coins as NFTs back in 2020.
What happens next in DeFi? Or is there going to be a next DeFi, or something else? A discussion at Token2049 tackled the question: Could DeFi Find A Place In The Future Of Finance? and reached some interesting conclusions. Bottom line: innovation can't be centrally built, so assume that the next wave of financial innovation will be hard to predict, but will likely come from the decentralised world. (Story by Joel Zhao of Chain Debrief)
That may be so, but bad things still seem to be happening: Celsius Network founder withdrew $10mn ahead of bankruptcy, according to the Financial Times.
[Reading]
Here's a deep dive report into web3 by boutique investment banker William Blair. Highlights some interesting companies in the space, and has a handy appendix on terms and a web3 overview.
A useful look at Regenerative Finance (ReFi) on Chris Skinner's blog. The piece is written by Letty Prados of Regenerative Living (part 2 is next week)
What is the metaverse and what could possibly go wrong? Central America’s first metaverse sold thousands of NFTs until OpenSea shut sales down.
[Conference Spotlight]
Token2049 SG | Samantha Yap | Despite the media painting a bleak image of the current bear market, Token2049 illustrated optimism within Asia over the future of crypto. An estimated 8,000 people attended what was South-East Asia's first major conference since the pandemic and one could not help but admire the advancements that the web3 space has made in that time. There were major players from all parts of the space including Astar Network from Japan and Wemade & Klaytn from Korea, to name a couple. Furthermore, despite a ban on crypto advertising made in Singapore, the F1 Grand Prix saw advertisements from ByBit, FTX, and Crypto.com within the business district.
Cosmoverse | Sam O’Donohoe | This year, the Cosmos community teamed up with the emerging tech community of Medellín to discuss the latest announcements in the Cosmos ecosystem. With an estimated 1,600 attendees (over double the attendance from last year), there was palpable excitement over the announcement of the latest Cosmos whitepaper. This sparked a resounding emphasis on liquid staking as a tool to boost interchain security – with talks from Osmosis, Quicksilver, and Neutron. The meaningful discussions taking place in the hallways of the venue combined with the collaborative efforts in the hackathon lounge reflected the togetherness of the community and the growth of the ecosystem.
[Events]
Future Blockchain Summit | October 10th - 13th 2022 | Dubai, UAE
DevCon Week | October 11th - 14th 2022 | Bogota, Colombia - Look out for the YAP Team on the ground!
Bitcoin Amsterdam | October 12th - 14th 2022 | Amsterdam, Netherlands
World Blockchain Expo | October 15th 2022 | Dubai UAE
Vietnam Blockchain Summit | October 19th - 20th 2022 | Hanoi, Vietnam
CoinAgenda Global | October 21st - 23rd 2022 | Las Vegas, USA
3rd Blockchain Expo | October 26th - 28th 2022 | Makuhari Messe, Japan
ETH Panama | October 26th - 28th 2022 | Panama City, Panama
ETH Lisbon | October 28th - 30th 2022 | Lisbon, Portugal
[DeFi Definitions]
An occasional segment exploring one particular aspect of DeFi.
This Week: ‘DEXs’ by Saad Qureshi.
A decentralised exchange (DEX) is a peer-to-peer marketplace where users can buy or sell cryptocurrencies without needing an intermediary to facilitate those trades or custody user funds.
DEXs do this by substituting those intermediaries - brokerages, exchanges, banks, and financial institutions - with automated smart contracts that execute under particular conditions. These smart contracts establish the prices through various means, but some of DeFi’s most successful DEXs operate using an automated market maker model (AMM) which sets the price of various tokens against each other using algorithms and shared pools of liquidity. The largest DEX by trading volume is an Ethereum-based project called Uniswap, with a current 24h trading volume of $790.45 million.
DEXs provide their users with private, open-source, and permissionless access to trading markets in whichever jurisdiction they may live in. Some see DEX’s inevitably overtaking their centralised counterparts and saw a glimpse of the future during the bull run of ‘DeFi Summer’ in 2020, when the trading volume of Uniswap surpassed the daily volume of Coinbase Pro.