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Crypto bulletin

October 11th, 2023

Crypto Bulletin – Week 204

Another rather quiet week on cryptocurrency markets, so it’s the industry news that’s grabbing attention. Unsurprisingly, much has been written about Sam Bankman-Fried’s trial in recent days as it’s in full swing.

SBF’s lawyers are seeking permission to question Gary Wang, co-founder of FTX. Specifically, they want to know to what extent legal advice influenced Wang in accepting loans from the collapsed cryptocurrency exchange’s sister fund, Alameda Research. The trial has already explored the loans of about 200 to 300 million dollars that Wang received from Alameda Research, used for various investments and the purchase of a house in the Bahamas. Although Wang claimed in preliminary meetings that he relied on lawyers and did not think the loans were designed to conceal the origin of the money, Bankman-Fried’s lawyers seek to know the lawyers involved, the extent of their involvement in the loans, and their exact terms. They also want to know if Wang had concerns when signing the loans. Bankman-Fried’s defense might also present promissory notes documenting the loans granted to Wang. Wang and Bankman-Fried, friends since high school and co-founders of FTX, have experienced contrasting public profiles during the cryptocurrency exchange’s years of operation.

Former Alameda Research CEO, Caroline Ellison, took the stand and told the jury that Bankman-Fried ordered her to commit crimes. Ellison, Bankman-Fried’s ex-girlfriend who admitted in December to committing fraud related to the collapse of the cryptocurrency exchange FTX, claimed it was Bankman-Fried who “set up the system allowing Alameda to take money.” This system allowed Alameda to grab client money. Ellison claimed that “several billion dollars” were taken from FTX clients to be used in investments, including a total of 14 billion dollars, with 10 billion used to repay its lenders. Also, when evaluating risks to determine how Alameda could get out of debt, Ellison estimated that the company would have a 30% chance of being able to repay all its loans in a market downturn and a 100% chance of not being able to do so, considering 3 billion dollars in non-liquid venture capital investments. Prosecutors allege that Bankman-Fried deceived clients by siphoning money from FTX to make risky transactions on Alameda and that, although Ellison was named CEO, it was Bankman-Fried who “really ran” the company, with Ellison being nothing more than a “front.”

In addition, Ellison revealed during her court testimony that he aspired to become President of the United States. She also shared that Bankman-Fried planned to dissuade Donald Trump from running for president by offering him a payment. Although their personal relationship ended, Ellison and Bankman-Fried continued to work together at Alameda Research and FTX until November 2022.

Lawyers for Sam Bankman-Fried might be gearing up for an appeal by prolonging the trial, according to a former prosecutor. Judge Lewis Kaplan reminded the defense that the goal is not to set a record for the longest trial, but to ensure the fairest trial, after observing that Bankman-Fried’s lawyers have spent hours during cross-examinations confirming facts and testimonial details. The judge repeatedly stated that this was not an appropriate use of court time. The trial, scheduled to last about six weeks, covers a lot of ground, with the agenda’s density even putting at least one juror to sleep in court. SBF’s lawyers, facing seven charges of fraud and conspiracy and risking several decades in prison, have been criticized by the judge for straying into unnecessary recap during cross-examinations. The lawyers might try to lay the groundwork for a possible appeal, in the event of a guilty verdict, by spending a lot of time on simple details, and asking for more information and time. Their strategy might involve suggesting that the trial went too fast and they did not have adequate opportunity to prepare for the trial, which might constitute inadequate defense under the American Constitution.

Israeli authorities, in collaboration with the cryptocurrency exchange platform Binance, have frozen several accounts supposedly linked to Hamas. This action, following deadly attacks by Hamas against Israel, also involves the Ministry of Defense and various national intelligence agencies. Although Binance claims to actively cooperate with global authorities to combat terrorism financing, police have confirmed that the accounts in question, established by Hamas, have been actively used to raise funds via social media since Saturday. Furthermore, Israeli police also worked with British police to freeze an account at Barclays Bank in the UK, to which Hamas had directly requested donations. It’s worth noting that Hamas’s use of cryptocurrencies to avoid international sanctions is not new, although the group announced last April the end of its cryptocurrency donation program, following successful efforts by governments to identify and prosecute donors.

In the context of this conflict, cryptocurrency becomes a favored tool for fundraising in the region. On Monday, a group of Israeli cryptocurrency sector leaders announced the creation of “Crypto Aid Israel,” a fund designed to collect donations in 12 different cryptocurrencies to support Israelis affected or displaced by the weekend’s violence. Cryptocurrency donations will be sent to Israeli non-governmental organizations that will in turn assist families who have fled southern Israel for Tel Aviv. On the other hand, in Gaza, cryptocurrency is also being used as a fundraising tool since the beginning of the Israeli airstrikes on Sunday. Several Arab charitable organizations have raised several thousand dollars in cryptocurrencies to help Gazans, although the rapid conversion of these digital funds into tangible aid remains uncertain due to the damage already done to Gaza’s infrastructure. Both sides, despite being in a violent conflict context, seem to find in cryptocurrencies an effective way to mobilize international support funds.

The American banking giant JPMorgan has launched its own blockchain tokenization platform, called Tokenized Collateral Network (TCN), according to a Bloomberg report dated October 11. TCN settled its first transaction for the asset management behemoth BlackRock. The TCN platform allows investors to use assets as collateral by transferring ownership of the collateral via blockchain technology without moving the assets in underlying registries. In its first public collateral exchange, TCN converted shares of a money market fund into digital tokens, which were then transferred to Barclays Plc as security for an over-the-counter derivatives swap between the two companies. Launched with the aim to streamline and scale the traditional transaction settlement process on a blockchain, TCN provides a faster, safer, and more efficient process thanks to the use of decentralized technology. According to Tyrone Lobban, head of Onyx Digital Assets at JPMorgan, TCN frees up previously immobilized capital and allows it to be used as collateral in ongoing transactions, which should enhance large-scale efficiency. The platform enables the creation, transfer, and settlement of tokenized traditional assets, thus facilitating nearly instantaneous movement of collateral compared to previously used methods. The blockchain platform also provides access to intraday liquidity through a secure repo transaction using tokenized collateral, thereby avoiding dependence on unsecured and costly credit lines.

The Securities and Exchange Commission, the US financial regulator, argues that cryptocurrencies have “no intrinsic or inherent value” in the context of its lawsuit against Coinbase, eliciting disapproval from Coinbase and cryptocurrency sector observers. This position is advanced in response to a motion to dismiss the lawsuit filed by the agency over the summer, with the SEC asking a judge to reject Coinbase’s position that cryptocurrency trading does not constitute an investment contract between the parties. The SEC justifies its position by reiterating that federal securities laws are designed to be interpreted flexibly, through the legal doctrine known as the “Howey Test”. However, according to the SEC, many cryptocurrencies are different simply because they “have no intrinsic or inherent value” in themselves. Paul Grewal, Coinbase’s Chief Legal Officer, brushed aside the SEC’s arguments, labeling them as “more of the same old position”. He asserts that, according to the SEC’s arguments, “everything from Pokemon cards to stamps to Swiftie bracelets would also be deemed securities”.

A report from Fidelity Digital Assets expresses a diametrically opposite opinion. According to it, Bitcoin is fundamentally different from other cryptocurrencies and represents an attractive monetary good and a compelling store of value in an increasingly digital world. Analysts Chris Kuiper and Jack Neureuter explain that traditional investors tend to use a technological investment framework when analyzing bitcoin, leading them to the false conclusion that as the first technology to emerge, it will be easily supplanted by superior technology or offer lower returns. However, the authors emphasize that bitcoin’s first technological breakthrough was not as a superior payment technology but as a superior form of money. The report stipulates that bitcoin is “fundamentally different from any other digital asset” and it is unlikely that other cryptocurrencies will surpass BTC as a monetary good as it is the “safest, most decentralized, and sound” digital currency. The success of the Bitcoin network is not mutually exclusive with the success of other networks, the report argues, as the rest of the digital asset ecosystem can meet different needs or solve other problems that bitcoin cannot. The report adds that the return profile of the world’s largest cryptocurrency is driven by two strong tailwinds: “the global growth of the broader digital asset ecosystem and the potential instability of traditional macroeconomic conditions.” It is also suggested that Bitcoin should be considered first and separate from all other digital assets that followed it, and be viewed as an entry point for traditional allocators looking to get exposure to the sector.

Paul Tudor Jones, billionaire and hedge fund manager, has expressed concerns about the current geopolitical climate and the US fiscal situation, calling them “most threatening” and “weakest he has ever seen”, respectively. Facing rising interest costs and American debt levels, Jones finds stocks less appealing. However, despite these economic challenges, he views Bitcoin and gold as attractive investment options, expressing a positive outlook on these assets as potential safe havens or strategic investments in this complex economic context.

The latest investment report from CoinShares indicates a massive influx of investments into the cryptocurrency market, reaching a total of 78 million dollars. The previous week had already seen positive entries, but this new week records almost a quadrupling of investment, moving from 21 million dollars and thus marking the largest week of inflows since July, according to James Butterfill, the report’s author. Bitcoin was the main beneficiary with entries totaling 43 million dollars, although some investors also increased their short positions on Bitcoin, investing an additional 1.2 million dollars. Trading volumes for cryptocurrency-related Exchange-Traded Products (ETPs) saw a robust increase of 37%, reaching 1.13 billion dollars. Furthermore, a marked regional divergence in investor sentiment is highlighted: 90% of total flows came from Europe, while the United States and Canada collectively received only 9 million dollars of inflows, according to the report. CoinShares notes that this divergence, also observed last month, can be attributed to the unfavorable regulatory climate in the United States.

 

 

Despite a price dip this week that seems to follow from a technical death cross, the $27,000 support level held overnight. If the price continues to respect this area, a bounce here in the gradual price increase from early September lows still appears plausible.

Rivemont Investments, manager of the Rivemont Crypto Fund.

The presented information is as of October 11th, 2023, unless otherwise indicated and is provided for information purposes only. The information comes from sources that we believe are reliable, but not guaranteed. This statement does not provide financial, legal or tax advice. Rivemont Investments are not responsible for any errors or omissions in the information or for any loss or damage suffered. 

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