#10 The Context: Innovation Begot by War

The perils of mining and the future of NFTs

Hi, hope you’re doing OK. This week we take in more surprises out of Ukraine, the travails of mining companies and another collection of NFT pieces.

As usual, a disclaimer: This newsletter collates the main headlines of the week in DeFi/crypto/metaverse/web3/NFT land and offers 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 (if one is mentioned, we’ll flag that.)

Your feedback is welcome, and if there’s anything we can help more on, don’t hesitate to ping us at thecontext@yapglobal.com

[tl;dr]

• Kyiv may be under siege, but its dire situation is forcing some significant innovation in how to raise money, even in what money is. And outside Ukraine innovation is helping plug gaps in sanction-busting.

• Regulations aren’t always a bad thing, especially if it means more certainty. Miners in Kazakhstan are learning the hard way.

• Is it game over for NFTs? Or are they just getting started? (Probably a bit of both.)

[Ukraine]

The Ukrainian government continues to innovate to raise funds and awareness. It’s a telling glimpse into how even governments can leverage decentralised networks — and into the risks involved. (We’ve looked at Ukraine in earlier newsletters: \#9, \#8 and \#7.)

• The government has streamlined its efforts to raise funds via a new website which routes crypto donations to the National Bank of Ukraine. The site is backed by crypto exchange FTX, staking platform Everstake and Kuna Exchange, according to CoinDesk. The site is here, raising $48 million so far. The government is also planning a NFT collection which it says will be 'like a museum of the war.’

• The government has also fashioned a Central Bank Digital Currency (CBDC) of sorts by allowing users of the ePidtrymka program, started to incentivise COVID vaccination, to spend funds in the stored-value card on on any products or good. It's also legalized the cryptocurrencies sector.

• Sanctions on Russia and Belarus, and fears that governments, companies and individuals may use crypto to bypass them, are providing the impetus for innovation in crypto analytics. Chainalysis, one of the best-known blockchain analytics companies, has made its new crypto sanctions monitoring tools free to the public. The tools include a smart contract which validates whether a cryptocurrency wallet address has been included in a sanctions list. It will be freely available for anyone to use. It's a race to cover all bases: according to Reuters Russians are trying to liquidate huge tranches of crypto in the UAE before the gates come down. Here's a breakdown of how Asian countries are dealing with crypto sanctions. Check out Crypto and War from Decentralized Law for some more insights.

• On the other side of the world, El Salvador is also using crypto to march into the history books, with plans for a Bitcoin-backed bond. In fact, El Salvador has said that Ukraine is a factor in timing the launch, adding to uncertainty around the issue, and stoking widespread skepticism that it's a good idea.

[Regulation]

In the rest of the world, the dance is inverted: it’s governments that are the cautious ones, worrying how far they should go in regulating it. Where that debate was anathema to most crypto players, a clear and sensible set of regulations are now more welcome, especially when the alternative is a mess.

Several stories illustrate parts of this dance:

• UK regulator has ordered crypto ATM operators to shut down, saying they are illegal. The Financial Conduct Authority is most concerned about 'smurfing', where money launderers deposit large sums in smaller amounts to evade detection. Singapore made a similar move earlier this year, although its concern was more to do with tackling a frenzy of retail trading in crypto.

• While most crypto has few physical working parts, making it the embodiment of decentralised and autonomous, that’s not the case with miners, who depend on vast caverns of hardware. Kazakhstan presented an alluring option for Bitcoin miners fleeing a crackdown in China, making it the second largest mining country after the U.S. But civil unrest, blackouts, taxes and ‘grey miners’ have changed all that, according to the Rest of World's Naubet Bisenov and Meaghan Tobin in Almaty: “It’s a mess”: How crypto mining went from boom to bust in Kazakhstan. While Kazakhstan's appeal was partly down to the lack of regulation about mining, that also left miners vulnerable to a backlash when power became a hot political issue.

• This may mark a turning point for the industry, where established miners prefer countries where regulations are clearer and energy production more stable, especially after the European Parliament voted to keep a provision that would have limited the use of mining out of a draft of the EU’s comprehensive regulatory package for governing digital assets, according to CoinDesk.

[NFTs]

Is the NFT ‘craze’ over? Or has it just begun?

• The Financial Times calls it ‘The great NFT sell-off’, saying that the average selling price of an NFT has fallen more than 48% since its November 2021 peak. And players in Axie Infinity, the biggest blockchain/NFT game, have complained of shrinking rewards as the game's token has fallen in price by 67.5% in the past year, according to the CoinTelegraph.

• But the FT also acknowledges that NFTs may just be getting started, flush with fresh venture capital (SoftBank's Z Holdings plans to launch an NFT marketplace in 180 countries, according to Bloomberg, while Solana NFT marketplace Magic Eden - a YAP client - raised $27M) and buyouts (BAYC backer Yuga Labs bought CryptoPunks and Meebits.)

• More important for the long run, it notes, will be evolving into “an important technology for a new vision of the web.” How that pans out is anyone's guess, but there are already plenty of clues as to how NFTs may fit well into existing industries. Mighty Jaxx is an interesting example of the growth of 'phygital’, the fusing of physical collectibles, VR, AR, NFCs, blockchain — and NFTs, while esports is hoping that NFTs, as keys to unlock perks, etc, will help it "level up" from relative niche to a globally embraced entertainment. (See [tidbits] below for how tokens are working out, or not working out, for football.)

[tidbits]

• How will the Fed’s rate hike impact crypto? Depends, as ever, who you ask. A Bloomberg piece quoted one analyst as saying, “Rising rates are like a wet blanket on crypto,” as investors look for less risk, but that may all be changing with Biden's call for greater regulatory clarity. And news of ConsenSys raising $450 million meant many investors shrugged off the rate hike. In fact BTC at least for now, hasn't done too shabbily, and altcoins actually outperformed, suggesting there's still a healthy appetite for risk.

• **Football’s** continuing love affair with crypto, or more specifically, 'fan tokens’, has thrown up more revelations: Socios, a key player in football's financial ecosystem having put more than $200 million into the game, is facing accusations that it manipulated its token’s price, by withholding millions of dollars’ worth of tokens due to staff and advisors. What looked like a win-win for clubs, fans and promoters is now raising alarm: Premier League clubs are reviewing their relationships with Socios, according to the Daily Mail.

• Crypto Centres: Binance Granted a Crypto Asset Service Provider License From Bahrain’s Central Bank*** and Crypto exchange FTX wins licence, plans regional HQ in Dubai. That piece is in the Straits Times of Singapore, which appears to be losing ground to its Middle East rivals. We wrote more on this in \#9. For the religious implications of the Gulf states’ embrace of crypto, see Gerrit De Vynck's piece for WaPo in [reading] below; For some of the more immediate concerns about evading sanctions via crypto, see [Ukraine] above.

• Ukrainian Crypto Entrepreneur Juggling Aid With Business and Survival For those Ukrainians who stayed behind, through choice or otherwise, it has, unsurprisingly, been a grim ordeal. But they're still playing a part, through bullets or bits.

[reading]

• Crypto and Islam: Muslims debate whether bitcoin, dogecoin are allowed It's not just an obscure matter of religious law: “Four of the 10 biggest sovereign wealth funds are run by majority-Muslim countries in the Persian Gulf, together holding hundreds of billions of dollars...Although those funds are not required to invest only in sharia-compliant assets, large portions of them are.”

• Facebook Libra: the inside story of how the company’s cryptocurrency dream died How a lukewarm Biden Administration scuttled Zuckerberg's digital money hopes, “marking one of the most spectacular, if little-noted, failures of his career. The Washington Post did a similar, though shorter, piece in January: Facebook’s Diem cryptocurrency failure followed D.C. regulator pushback.

• A deeper look at Tron founder Justin Sun and his many escapes by Christopher Harland-Dunaway of The Verge: > When I spoke to one employee who told me about [one of Sun's projects], I challenged them and asked why Sun would possibly risk something so brazen. The employee speculated without hesitation. “If he breaks so many laws at such a rapid pace, it’d be impossible for anyone to catch up to him.” So far, no one has. And so far, it’s always worked.

[Journalists]

• CoinDesk have poached Alan Campbell from Bloomberg to be President, Data & Indices. Campbell ran BBG's index business, which sets benchmarks for multiple assets. The idea is to lift the quality of CoinDesk's crypto data dashboards for institutional clients used to Bloomberg and Eikon terminals.

• And Jacquelyn Melinek of Blockworks is moving across to TechCrunch later this month. Previously she’d been at Platts and Bloomberg, illustrating that the revolving door between crypto- and mainstrean media is working well both ways.

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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.