#235—The crypto world moves on

Also, self-custody wallets take center stage

Dec 05, 2022

Welcome to Yaka Stuff, our weekly newsletter that covers news, industry perspectives, and updates from the Hard Yaka ecosystem. Check out last week’s report here.

This week:

The crypto world moves on
Self-custody wallets taken center stage
Elsewhere in crypto
Stuff happens

1. The crypto world moves on

Sam Bankman-Fried continues his media tour. From the NYTimes conference to George Stephanopoulos to Twitter Spaces with Kim Dotcom and Coffeezilla, it’s also a reminder that this is no longer a crypto story. Sure, for customers, the markets, and the industry’s credibility, it’s been devastating. But ultimately, this is a story of leveraged trades gone wrong, negligence, and potential fraud.

(An FT report from Friday details a single leveraged client trade that blew up in 2021, costing the exchange up to $1 billion and requiring a bailout from Alameda.)

So where do we go from here?

JPMorgan sees an accelerated push for regulations:

Crypto market regulatory initiatives that are already underway are likely to be accelerated in the wake of the collapse of crypto exchange FTX and sister company Alameda Research, JPMorgan said in a research report Thursday.
For example, after the European Parliament gives final approval to the European Union’s Markets in Crypto Assets (MiCA) bill, it will take 18 months before the regulation takes effect but FTX's collapse could shorten the timeline, the report said.
The bank notes that U.S. regulatory initiatives garnered more interest after the Terra network collapsed in May because of a “perceived need for increased oversight and consumer protections.” The collapse of crypto exchange FTX this month is also likely to lead to a greater sense of urgency.
Regulatory initiatives are likely to emerge focusing on custody and protection of customers’ digital assets, the unbundling of broker/trading/lending/clearing/custody activities, and transparency and the reporting of reserves, assets and liabilities, the note said.
JPMorgan says crypto derivatives trading will probably shift to regulated venues, and the Chicago Mercantile Exchange will likely to benefit from that change.

Morgan Stanley think there’s still plenty of infrastructure that needs to be developed:

While it is unclear how long that process may take, most participants were of the view that “crypto, blockchain and distributed-ledger technology are going to be developed further in the future and increasingly used to trade financial assets.”
The focus is still on building digital-asset infrastructure, though some investors are of the view that it could be a 10 to 15 year journey before digital assets become fully mainstream.

Despite everything, crypto is still the largest investment sector in 2022:

In the third quarter, investment in the sector was $879 million, the lowest recorded amount since the second quarter of last year.
But $6.5 billion has still been poured into the space over the past 12 months, far-outstripping the second most-backed space of fintech, which has raised $2.7 billion.
The sector’s status was also boosted by the fact that two of the largest deals in the quarter were blockchain projects Mysten Labs and Aptos Labs.

Binance is picking up where FTX left off, expanding into Japan:

Cryptocurrency exchange Binance plans to reenter the Japanese market after acquiring a 100% stake in a licensed crypto service provider in the country, Cointelegraph Japan reported.
In an official public announcement on Nov. 30, Binance CEO Changpeng Zhao said the crypto exchange was committed to re-entering the Japanese market under regulatory compliance. The acquisition of Sakura Exchange BitCoin (SEBC), a Japan Financial Services Agency-licensed business, would mark the re-entry of global exchange in the Japanese market after four years.

And then there’s Cardano creator Charles Hoskinson, who believes that none of this matters without digital identity:

Because centralized exchanges like Coinbase and Kraken need to comply with policies put forth by the international anti-money laundering watchdog the Financial Action Task Force, including the so-called Travel Rule, they may be able to restrict the movement of your crypto off their exchanges, Hoskinson said.
The Travel Rule compels virtual asset service providers to “hold, and transmit required originator and beneficiary information, immediately and securely, when conducting VA transfers” for transactions over the 1000 USD/EUR threshold.
The Financial Action Task Force uses the Travel Rule rule to prevent criminals from using fund transfers for illicit activities. Police can also subpoena transaction records if they suspect illegal activity.
If exchanges interpret the travel rule only to allow a customer to transfer virtual assets between themselves instead of off the exchange into a self-custodial wallet, then the customer essentially loses access to their crypto, Hoskinson said.
He added that a decentralized identity could be overlaid on blockchain transactions, incorporating standards established by the Decentralized Identity Foundation.

Finally, the future will be paved in stablecoins, according the Federal Reserve Bank of New York‘s financial research advisor Antoine Martin:

Instead of funnelling time, money and resources into the bottomless pit of central bank digital currency (CBDC) development, central banks should back stablecoins as an alternative.
This is the main takeaway from the Federal Reserve Bank of New York‘s financial research advisor Antoine Martin‘s research, which was presented at the Gillmore Centre Policy Forum. The forum took place at Warwick Business School‘s London location in the Shard on 21 November.
Martin’s research reveals that existing digital currencies have the potential to create a new path for CBDCs. Instead of throwing more money and resources into producing their own digital currency, he says that central banks could and should support the development of safe stablecoins.
Federal Reserve Bank of New York's financial research advisor Antoine Martin
Antoine Martin, financial research advisor, Federal Reserve Bank of New York
“Stablecoins are much better payment instruments than Bitcoin and stabalise their value by being backed by assets denominated in a fiat currency,” says Martin.
He explains how stablecoins commonly depend on the money of commercial banks to hold the reserve assets that back their coin representations. This is typically fulfilled by the US dollar.
“Stablecoins are very close cousins of Alipay and Tenpay’s digital payment platforms in China,” continues Martin.

Relevant:

2. Self-custody wallets take center stage

One of the key innovations of blockchain technology is that we can now self custody and manage our assets through digital, hardware, or even paper wallets.

Today, self-custody digital wallets are still pretty basic. But you could see a future where they become a portal for web3 or a decentralized superapp version of WeChat.

Enter the crypto browser wars (via /junhiraga and /gregkidd):

Yaka Stuff

#235—The crypto world moves on

Also, self-custody wallets take center stage

1. The crypto world moves on

2. Self-custody wallets take center stage

3. Elsewhere in crypto

4. Stuff happens

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