#9 The Context 10.03.2022
Is crypto the key to international finance?
Hope you're well. This week's newsletter, as per its name, tries to collate the main stories of the week in DeFi/crypto/metaverse/web3/NFT-land and to offer some 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. Your feedback is welcome, and if there’s anything we can help more on, don’t hesitate to ping us at thecontext@yapglobal.com.
Thanks for reading.
[tl;dr]
The invasion of Ukraine has illustrated that crypto has become a key part of international finance, for good and ill;
The departure of a key DeFi innovator has forced the community to address an elephant in the room;
Some important steps in regulation, and the ongoing battle to become the crypto hub.
[Ukraine and Russia: next steps]
The war, and the analysis of the ramifications of the war, continue to cast a cloud over crypto, even if not all participants are aware of them. (Here's last week's newsletter which focused on several crypto angles of the crisis.)
First off, the crisis has reminded us that DeFi is increasingly perceived as one part of a broader investment portfolio, and so increasingly rides the waves of a wider sea. Tascha Labs explores potential impacts of this, pointing to developments in other markets, such as the rush to the safety of the USD and the impact on commodity prices sparked by cutting Russia off from world markets.
Then there's the role of crypto in Ukraine and Russia, highlighting that while DeFi is not as decentralised as it professes to be, the crisis both illustrates and drives its varied utility:
On the one hand, centrally controlled crypto exchange Coinbase confirmed it was blocking 25,000 Russia-linked crypto addresses. That, on top of all the main financial sanctions, limits Russia's (and Russians') room for manoeuvre. And officials in the West are watching closely for potential crypto sanctions evasion. The EU has made clear that its financial sanctions extend to crypto. Here's a guide from Chainalysis on how exchanges can comply with cryptocurrency sanctions.
But all is not lost for Russia. There's still quite a bit of ruble-denominated crypto transactions, especially in Tether, according to Kaiko data. An analysis by Elliptic pointed out that, if Russia turned to crypto to bypass sanctions, it wouldn't be the first to do it, with Iran and North Korea both scoring some success. While Russia's options are constrained by being a much bigger player, and facing a more savvy regulatory landscape, it could commit its idle energy reserves to crypto mining. Check out a piece by Shinobi that explores the sanctions and crypto issue deeper.
On the other hand, with most of its financial infrastructure disconnected or destroyed, Ukraine is making the most of it. Ukrainian journalist and analyst Dmytro Kharkov says that most NGOs there accept Bitcoin donations, while Ukraine's deputy minister highlights how the government is already putting $25M in donated crypto to good use.
And the sanctions are having another effect, according to David Z Morris of Coindesk. Corporations will increasingly turn to crypto for settling accounts, in part because of not wanting to be exposed to 'risky' fiat currencies, but also to hedge against the risk of the West restricting access to the dollar-based economy, as they had done for Russia and Belarus.
[Growing pains]
The announced departure of two key players in DeFi has highlighted some of the vulnerabilities -- and strengths -- of the space. Andre Cronje, sometimes called the godfather of DeFi, and Anton Nell announced they were quitting and would close more than 20 of their projects. Although Cronje had handed over Yearn Finance, a yield vault protocol, to a DAO in July 2020, the YFI token lost 12% of its value before recovering somewhat. Their departure has raised questions about the sustainability of the DeFi ecosystem if it still depends on the ‘founder” or influential figures like Cronje. Cronje's reputation and prominence in DeFi has inevitably impacted the tokens he has been associated with, a connection he has noted in the past. But the long-term impact of their departure may not be disastrous. While it should prompt the community to consider whether their departure signal something more problematic about DeFi, Cronje had not been working directly on many of the projects he had founded for some time, according to colleagues. Most of the projects being shut down were front-ends for autonomous contracts, and other players have been developing new front-ends for interacting with these contracts, according to CoinDesk's Andrew Thurman. Ultimately, the reaction to his departure is what’s interesting to watch rather than his actual decision to quit the space.
[Regulations and Hub-bub]
In the rest of the world, there are two races going on: to set in place regulations that reduce the danger of scammers, consumer hazards and tax evasion, and another, to woo the crypto giants of today (and tomorrow) to set up shop on their shores. China has made clear its own position (welcoming to blockchain, not to the rest of it); that mostly leaves the U.S., European Union and smaller players like Singapore, Hong Kong and Switzerland.
Rules
President Biden has issued an executive order requiring federal agencies to report back on what they're doing regarding crypto. It's the first time Biden has weighed in formally on the subject, and was generally seen as a positive move by [the crypto community. Reuters called it a holistic and deliberative approach. Here’s the Treasury statement: President Biden's Executive Order on Digital Assets.
Europe crypto regulations are set to move forward after looking to drop a phrase that might be interpreted as a ban on Proof-of-Work blockchains like Bitcoin. The European Parliament will vote on the regulations on March 14.
Japan's financial regulator is planning to amend existing laws to boost its ability to oversee crypto.
Zones
Then there are those territories trying to put their best foot forward to make themselves as alluring as possible.
The U.S. state of Virginia is the first state to codify the right to provide virtual currency custody services. Texas reached the same point through regulation. Custodial services for crypto essentially involve a bank being responsible for the storing (and use) of private keys to the assets. PWC explainer here. Colorado last month became the first US state to accept crypto as payment for taxes and fees.
And then there's the ongoing battle to be THE home of crypto. This is in some ways a battle between and among the Middle East and Asia. There's unlikely to be any single winner, but there are more candidates than you might expect:
In Asia, it's not just Singapore and Hong Kong slugging it out. **Malaysia** is hoping to become the next crypto hub. It has case law going for it, English is widely used, and there are no capital gains taxes on crypto. It has also benefited from an influx of COVID/crackdown refugees from Hong Kong. But does it have what it takes?
Hong Kong still feels it has the edge, especially when it comes to NFTs and the metaverse. That might be wishful thinking. While the Hong Kong Monetary Authority plans to release regulations on crypto in July, there's still that nagging question mark about where China's much harsher regulatory regime ends and Hong Kong's starts.
Then there's Singapore, which on the one hand understands well the needs of the crypto community, and has long offered a welcoming hand. But it doesn't see crypto as a transformational technology domestically; the Monetary Authority of Singapore issued guidelines to local cryptocurrency service providers in January, telling them not to promote their services locally. The press release headline made it crystal clear: MAS Issues Guidelines to Discourage Cryptocurrency Trading by General Public
Hong Kong's woes and Singapore's uncertainty means the title race is still wide open, not just in Asia but wider afield: The United Arab Emirates, for example, is pushing hard to become a global crypto hub, and is preparing to issue licenses for virtual assets service providers (VASPs, or DeFi companies) by the end of this quarter. But within the UAE, there's competition between Dubai and Abu Dhabi, and with the independent kingdom of Bahrain, where Binance recently got approval for a crypto exchange..
[Tidbits]
Art is an area where DeFi has made a mark, not least via NFTs. But the tangling is growing: Philips, one of the big auction houses, says it will accept crypto in payment for the $70 million collection of Jean-Michel Basquiat And what about DAOs? Can decentralised autonomous organisations help artistic communities thrive? Water & Music, a research DAO focusing on the music business has explored how some 30 online music and creator communities "now self-identify as decentralised autonomous organisations". How are they faring? (Here's a piece by the FT on DAOs, which it concludes could be the future of companies.)
More blurring of the lines between DeFi and CeFi infrastructure: A NASDAQ listed sports gaming (think betting) company called DraftKings has signed a deal with Polygon to be a network validator. This would, according to CryptoSlate, be the first time a major publicly-traded firm has taken an active role in blockchain governance. Polygon validators are responsible for verifying the authenticity and validity of transactions on the network and earn rewards in return. DraftKings, which has already worked with Polygon on NFTs, said it wanted to 'futureproof' the company.
Phish and chips: The COVID-led shortage of semiconductors is churning up the landscape. Cybercriminals who breached Nvidia are demanding what Ars Technica calls one of the most unusual demands ever, highlighting some of the tensions between supporters of crypto and gamers. Nvidia limited the potential of some of its GPU chips via something it called Lite Hash Rate, or LHR, to reduce the appeal of their products to cryptominers, who had been snapping up the few available graphics cards, to the frustration of gamers. The hackers have demanded Nvidia remove LHR and wants Nvidia to make all its drivers open source. At the same time Intel is embracing the community. Having announced the release of new mining-friendly ASIC chips, it has now cut a deal with HIVE Blockchain, a green crypto miner, where HIVE will incorporate Intel's chips into its mining equipment.
[Interesting reads]
My first story in MIT Tech Review and added ramblings on Web3 and Ethereum’s Beacon Chain: Amy Castor, a long-time skeptic, takes aim in particular at hopes that a new version of Ethereum will magically solve all its scaling problems.
A dystopian take on DAOs from The New York Times. Here's a more upbeat take: How DAOs and blockchain can improve the way we organize and another, a business strategist saying that corporations are ungovernable, but DAOs aren't the answer either.
Here's another skeptic, this time Luke Plant, one of the core developers behind Django, an open-source web framework: The technological case against Bitcoin and blockchain.
And if you're struggling with the lingo, here's a Crypto Glossary from Apollo Capital.
This newsletter is pulled together by a team led by Jeremy Wagstaff, formerly of the WSJ, BBC and Reuters and Samantha Yap, founder of YAP Global. Other members: Farhan Musa, Rebecca Campbell and Ruby Wu. Many thanks to Joey Woo for production. Any views expressed here are not necessarily those of the writers, YAP Global or its clients.