Macauley Peterson

<div id="highlights-block_61b3756bdbc06" class="highlights">
 <ul>
 <li>Evergrande’s bonds and stock have been trading near their all-time lows this week</li>
 <li>“Watch credit default swap spreads on sovereign debt” for signs of credit contagion, advises Greg Foss</li>
 </ul>
 
</div>



After many close calls for the embattled Evergrande property developer, a failed interest payment earlier this week led Fitch Ratings to <a href="https://www.fitchratings.com/research/corporate-finance/fitch-downgrades-evergrande-subsidiaries-hengda-tianji-to-restricted-default-09-12-2021" target="_blank" rel="noreferrer noopener">downgrade Evergrande’s credit rating</a> to RD (restricted default) — on Thursday.



Markets have been anticipating the potential for defaults on distressed debt from Evergrande <a href="https://cms.blockworks.co/evergrande-is-suspending-trades-friday-heres-what-that-means/" target="_blank" rel="noreferrer noopener">for months</a>. The company <a href="https://cms.blockworks.co/update-evergrande-has-paid-part-of-148-13m-interest-due-yet-dmsa-begins-bankruptcy-proceedings/" target="_blank" rel="noreferrer noopener">narrowly averted</a> a default in November, with last-minute interest payments, but on Monday, two bonds issued by Scenery Journey Ltd., passed their 30-day grace period, <a href="https://www.fitchratings.com/research/corporate-finance/fitch-downgrades-evergrande-subsidiaries-hengda-tianji-to-restricted-default-09-12-2021" target="_blank" rel="noreferrer noopener">Fitch wrote</a>, triggering the downgrade.



Evergrande subsidiary ​​Tianji Holding Ltd. owed the specific interest payments. Their non-payment opens up the potential for cross defaults on the parent’s offshore notes as well, totaling $19.2 billion of dollar debt, as <a href="https://www.bloomberg.com/news/articles/2021-12-09/evergrande-defaults-for-first-time-as-china-debt-strains-spread" target="_blank" rel="noreferrer noopener">reported by Bloomberg</a>.



Fitch noted in their downgrade notice that the “restricted” classification comes as “there has been no initiation of bankruptcy filings, administration, receivership, liquidation, or other formal winding-up procedures as yet with business operations continuing.”



In <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2021/1203/2021120302119.pdf" target="_blank" rel="noreferrer noopener">an exchange filing</a> a week ago, Evergrande stated it plans “to actively engage with offshore creditors to formulate a viable restructuring plan of them Company’s offshore indebtedness for the benefit of all stakeholders.”



Evergrande’s bonds <a href="https://www.bloomberg.com/news/articles/2021-12-09/evergrande-to-be-handled-in-market-oriented-way-pboc-s-yi-says" target="_blank" rel="noreferrer noopener">have been trading</a> for 20 cents on the dollar, near their September lows, and its stock fell Monday to a new low.




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<h3>Government reaction</h3>



People’s Bank of China (PBoC) Governor Yi Gang sought to downplay the risks to financial markets during recorded remarks on Thursday for a seminar held with the Hong Kong Monetary Authority, <a href="https://www.wsj.com/articles/market-can-weather-evergrande-crisis-chinas-top-central-banker-says-11639040788">according to the Wall Street Journal</a>:



<blockquote class="wp-block-quote">“The risk caused by a few real-estate firms in the short run would not undermine the market for the medium and the long run,” Mr. Yi said.</blockquote>



The PBoC <a href="https://cms.blockworks.co/btc-market-starts-monday-neutral-after-major-weekend-washout/" target="_blank" rel="noreferrer noopener">cut the reserve requirements</a> for banks on Monday, injecting the equivalent of about $188 billion of stimulus, a sign of its efforts to contain the crisis.



<blockquote class="wp-block-quote">“The [PBoC] eased to help smooth the ‘default.’  In reality, the default has been priced in and anticipated for six months. The real issue will be credit contagion. Watch credit default swap spreads on sovereign debt as a warning signal,” Greg Foss, executive director of strategic initiatives at Validus Power Corp, told Blockworks.</blockquote>



That contagion could hit offshore creditors hard, as any restructuring plan <a href="https://www.bloomberg.com/news/articles/2021-12-05/china-braces-for-evergrande-restructuring-after-months-of-tumult" target="_blank" rel="noreferrer noopener">would likely prioritize</a> the millions of Chinese homeowners who put up down payments on Evergrande developments, as well the company’s employees and local suppliers, and any other investors who have more senior claims.



One question is where the Chinese leadership’s priorities will lie if credit conditions worsen. In Thursday’s comments, Yi Gang <a href="https://www.nytimes.com/article/evergrande-debt-crisis.html" target="_blank" rel="noreferrer noopener">blamed</a> Evergrande’s problems on its “own poor management and reckless expansion.” Political concerns are trumping economic ones, <a href="https://www.csis.org/analysis/evergrande-dilemma-and-beijings-credibility" target="_blank" rel="noreferrer noopener">according to analysis</a> from the Center for Strategic &amp; International Studies.



“Beijing’s reaction to financial stress has clearly changed…One of the reasons that the Evergrande crisis is spreading to global markets is that investors can no longer be certain that Beijing is trying to maintain the same economic growth rates as in the past,” ​​Logan Wright, director of China markets research at Rhodium Group, wrote in October.



Bitcoin was down 7% yesterday, and has failed to get back above the $50,000 mark in Friday trading. In the past, Evergrande&#8217;s problems <a href="https://cms.blockworks.co/crypto-market-loses-250-billion-as-evergrande-fears-mount/" target="_blank" rel="noreferrer noopener">have been correlated</a> with weakness across the asset spectrum, although major international equities markets have remained relative unfazed this time around compared with major digital asset names.




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Evergrande Default Adds to Market Jitters

Ornella Hernandez

Twitter users are reacting to OpenSea’s continual policy changes and what appears to be a haphazard verification processes. Recently, the marketplace flip flopped on its stance on creator royalties before ultimately deciding to <a href="https://blockworks.co/news/web3-nft-ape-dao-hot-wheels" target="_blank" rel="noreferrer noopener">continue enforcing creator fees on all existing collections</a>.



Now, users are <a href="https://twitter.com/quantwhale/status/1600887538767519745?s=20&amp;t=E1IyiGl6iAn32eRd94ZyGw" target="_blank" rel="noreferrer noopener">pointing</a> out that OpenSea is verifying certain accounts while disabling others in an “unfair” way.



One user named nirozin <a href="https://twitter.com/nirozin/status/1600840003424133120?s=20&amp;t=710Q7pmmyR_G3mnfWv1j-g" target="_blank" rel="noreferrer noopener">tweeted</a> that all of his wallets were suddenly disabled on OpenSea “after 2 years of trading for a total of million of $ and thousands of NFT&#8217;s on several wallets.” 



When he emailed customer support, the OpenSea Customer Experience team responded that his accounts were found to have violated their terms of service, but did not offer an additional explanation.&nbsp;



Nirozin’s collection is one of reportedly many smaller creators that may have been having issues getting verified.&nbsp;



Others <a href="https://twitter.com/quantwhale/status/1600887538767519745?s=20&amp;t=E1IyiGl6iAn32eRd94ZyGw" target="_blank" rel="noreferrer noopener">claim</a> that OpenSea has been “stonewalling” verification and “manually removing the request verification button” for certain collections, naming OnChainBirds as an example.



Additionally, users are commenting on another move that OpenSea announced on Thursday regarding its stance on enforcing creator royalty fees. In a Twitter thread, it <a href="https://twitter.com/opensea/status/1600913295300792321?s=20&amp;t=BqQ1CCCcUpE-4NhexYMDHg" target="_blank" rel="noreferrer noopener">said</a> it will transfer ownership of the list of Ethereum marketplaces blocked for “not respecting creator fees” over to a multi-signature collective. 



The collective is called Creator Ownership Research Institute (CORI) and includes OpenSea, Nifty Gateway, Zora, Manifold, SuperRare and Foundation as members that will enforce the use of the blocklisting “Operator Filter” tool that OpenSea introduced last month.



It supports what is known as the Royalty Registry, an on-chain contract that helps marketplaces properly allocate royalty amounts to the right recipients. CORI is making it possible for contracts that did not originally support on-chain royalties to easily add them.



One user <a href="https://twitter.com/ChainLeftist/status/1600951657432596481?s=20&amp;t=AFWfLUywuz3mgFDmJ0iuXQ" target="_blank" rel="noreferrer noopener">said</a> it gives the impression of a “cartel” and it would “better if it was controlled by respected artists and not by the marketplaces.”



Another user <a href="https://twitter.com/spreekaway/status/1600929783805710336?s=20&amp;t=jD5WyBKHT8F4up5J4P1kBQ" target="_blank" rel="noreferrer noopener">warned</a> “that if sufficient % of the cartel are forced to implement any unpopular feature they will try to force everyone to do it to avoid other exchanges from taking over their market share.”



OpenSea <a href="https://twitter.com/opensea/status/1600913297842180098?s=20&amp;t=BqQ1CCCcUpE-4NhexYMDHg" target="_blank" rel="noreferrer noopener">claims</a> it is acting out an “existential imperative for the space to preserve creator fees.” However, this move comes at a time when NFT marketplaces are split between defending the royalty scheme for NFT creators and ensuring they keep their market share of users and sales volume. Experimenting with various policies may have come at the cost of its customers.



Nevertheless, OpenSea remains the most used marketplace for Ethereum NFTs. It recently <a href="https://opensea.io/blog/articles/1-billion-from-creator-fees-in-2022" target="_blank" rel="noreferrer noopener">stated</a> that creators on the platform earned over $1 billion in 2022 directly from creator fees on secondary NFT sales, not including sponsorship revenue, engagement incentives or grants.



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As OpenSea Flexes Marketplace Influence, Some Users Are Worried

Ben Strack

A lawsuit against Grayscale to explore potential “mismanagement” of its Bitcoin Trust (GBTC) is likely to give more insight into the trust’s inner workings, but could drag on, one attorney predicts.&nbsp;



The complaint, filed by Fir Tree Capital Management in Delaware’s Court of Chancery Tuesday on behalf of its private funds and shareholders, came a day before GBTC began trading at a record discount to its net asset value.&nbsp;



“Plaintiffs have serious questions about Grayscale’s mismanagement of the Trust and the troubling reports about liquidity issues within Digital Currency Group and its corporate affiliates, which have been exacerbated by a recent raft of bankruptcy filings in the digital assets market,” the complaint states.



Digital Currency Group is the parent company of Grayscale and Genesis Global Trading.



“We respect the views of our shareholders, and appreciate engaging directly with them on the details of our product structures and operating model,” a Grayscale spokesperson said.



A spokesperson for Fir Tree Capital Management did not comment beyond the complaint.&nbsp;&nbsp;



<a href="https://www.linkedin.com/in/brian-newman-65218077/" target="_blank" rel="noreferrer noopener">Brian Newman</a>, an attorney at law firm Dykema, told Blockworks that while there’s no question Fir Tree has a right to certain information, the key question is going to be how much. 



“Generally speaking, these types of cases result in the disclosure of much more information than most trusts would like,” he said.



A main piece of information that Fir Tree is likely seeking is the exact relationship between Digital Currency and affiliates Grayscale and Genesis.&nbsp;&nbsp;



The potential interdependence between these companies is “especially troubling” after the collapse of crypto exchange FTX and hedge fund Three Arrows Capital, according to the complaint.



The lending division of Genesis <a href="https://blockworks.co/news/genesis-halts-lending" target="_blank" rel="noreferrer noopener">halted customer redemptions and new loan originations</a> in the aftermath of FTX’s collapse.



“It really comes down to a fiduciary duty issue,” Newman said. “You buy shares in a trust and you are basically handing over control to the trustee to manage your investment, but at the same time, the trustee has an obligation to manage your investment with reasonable business judgment and provide a reasonable amount of information.”



<h3>Likely a long process</h3>



Grayscale lawyers are likely to try to delay the suit, Newman said — particularly as it <a href="https://blockworks.co/news/grayscale-lawsuit-moves-forward-as-gbtc-discount-widens" target="_blank" rel="noreferrer noopener">moves forward with its own lawsuit</a> against the SEC to overturn the regulator’s decision to deny GBTC’s conversion to an ETF. 



It may take between eight months and a year before this suit could go to trial before a Delaware Chancery Court judge, he said.



“The last thing [Grayscale] wants is anything throwing a wrench into their efforts to convert GBTC to an exchange-traded fund,” Newman said.



The complaint calls Grayscale’s attempt to convert GBTC to an ETF “wasteful.”



“That strategy will likely cost years of litigation, millions of dollars in legal fees, countless hours of lost management time, and goodwill with regulators,” the complaint states. “All the while, Grayscale will continue to collect fees from the Trust’s dwindling assets.”



Founded in 2013, <a href="https://grayscale.com/products/grayscale-bitcoin-trust/" target="_blank" rel="noreferrer noopener">GBTC</a> has $10.6 billion in assets under management and charges a 2% annual fee. 



A Grayscale spokesperson said the firm remains committed to converting GBTC to an ETF, adding that it believes an ETF is the best long-term product structure for the trust.  



<h3>Redemptions not allowed as GBTC discount widens</h3>



Grayscale amended the trust’s agreement in 2018 to prohibit it from operating a redemption program for GBTC shares “unless otherwise determined by the sponsor,” according to the complaint.&nbsp;



“In the absence of any legal prohibition that would restrict the Trust from accommodating redemptions, Grayscale appears to be maintaining this untenable status quo to enrich itself, its management, and its affiliates,” according to the complaint.



A Grayscale spokesperson declined to comment on the firm’s decision to stop redemptions and if it would consider lifting it.



GBTC’s discount to net asset value reached a record high of roughly 47.3% on Wednesday, according to <a href="https://ycharts.com/companies/GBTC/discount_or_premium_to_nav" target="_blank" rel="noreferrer noopener">YCharts.com</a> — up from 43.6% on Tuesday. 



“The fact that Grayscale’s Bitcoin Trust is now trading at nearly 50% discount is just awful for holders of GBTC,” Bradley Duke, co-founder at crypto ETP firm ETC Group, said. “It really highlights the vast differences in structure quality between different investment vehicles.”



Industry participants have said <a href="https://blockworks.co/news/whats-next-for-ftx-and-its-customers-after-bankruptcy-filing" target="_blank" rel="noreferrer noopener">the bankruptcy of FTX</a> and its ripple effects <a href="https://blockworks.co/news/the-grayscale-dilemma-a-record-discount-and-a-golden-goose" target="_blank" rel="noreferrer noopener">hurt the prospect</a> of regulators allowing Grayscale to convert GBTC to an ETF — the method Grayscale has cited as the best way to solve the discount issue.



<a href="https://blockworks.co/news/sec-grayscale-exploring-bitcoin-trust-options" target="_blank" rel="noreferrer noopener">Some have proposed</a> Grayscale filing for Regulation M with the SEC. Regulation M, if granted, allows for a fund to simultaneously create and redeem shares.



Bryan Armour, director of passive strategies research at Morningstar, previously told Blockworks that Grayscale has not shown the willingness to allow redemption of GBTC shares because it would create costs and lower future revenue from management fees.



Jan van Eck, CEO of ETF issuer VanEck, told Blockworks Wednesday that it’s very rare for closed-end fund issuers to open up a fund.&nbsp;



“GBTC is a regulated fund that is operated according to industry standards and has been reviewed by regulators, so I don&#8217;t see any merit to the lawsuit,” he added.



Casey Wagner contributed reporting.



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Lawsuit Against Grayscale Likely To Drag On, Attorney Says

Bessie Liu

Maxine Waters, chair of the House Financial Services Committee, tweeted on Thursday that plans to subpoena fallen crypto celebrity Sam Bankman-Fried to testify at the FTX hearing on Dec. 13 are still very much on the table.&nbsp;



CNBC first <a href="https://www.cnbc.com/2022/12/07/ftx-maxine-waters-doesnt-plan-to-subpoena-sam-bankman-fried-to-testify-at-hearing-on-crypto-exchanges-collapse.html" target="_blank" rel="noreferrer noopener">reported</a> that Waters had been trying to convince Bankman-Fried to testify voluntarily and did not have plans to subpoena him, claims Waters denied.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">Lies are circulating <a href="https://twitter.com/CNBC?ref_src=twsrc%5Etfw">@CNBC</a> that I am not willing to subpoena <a href="https://twitter.com/SBF_FTX?ref_src=twsrc%5Etfw">@SBF_FTX</a>. He has been requested to testify at the December 13th hearing. A subpoena is definitely on the table. Stay tuned.&mdash; Maxine Waters (@RepMaxineWaters) <a href="https://twitter.com/RepMaxineWaters/status/1600643111973261312?ref_src=twsrc%5Etfw">December 8, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



The representative of California&#8217;s 43rd District in Congress previously <a href="https://twitter.com/RepMaxineWaters/status/1598693811252875264?ref_src=twsrc%5Etfw%7Ctwcamp%5Etweetembed%7Ctwterm%5E1599511560384225281%7Ctwgr%5Ed5ecf0c111da7a38f395f195ad6cc9fd81c08585%7Ctwcon%5Es3_&amp;ref_url=https%3A%2F%2Fwww.cnbc.com%2F2022%2F12%2F07%2Fftx-maxine-waters-doesnt-plan-to-subpoena-sam-bankman-fried-to-testify-at-hearing-on-crypto-exchanges-collapse.html" target="_blank" rel="noreferrer noopener">tweeted</a> at the fallen crypto celebrity, politely inviting him to participate at the hearing. In response, Bankman-Fried <a href="https://twitter.com/SBF_FTX/status/1599511560384225281?ref_src=twsrc%5Etfw%7Ctwcamp%5Etweetembed%7Ctwterm%5E1599511560384225281%7Ctwgr%5Ed5ecf0c111da7a38f395f195ad6cc9fd81c08585%7Ctwcon%5Es1_&amp;ref_url=https%3A%2F%2Fwww.cnbc.com%2F2022%2F12%2F07%2Fftx-maxine-waters-doesnt-plan-to-subpoena-sam-bankman-fried-to-testify-at-hearing-on-crypto-exchanges-collapse.html" target="_blank" rel="noreferrer noopener">said</a>, “Once I have finished learning and reviewing what happened, I would feel like it was my duty to appear before the committee and explain.”



Adding, “I’m not sure that will happen by the 13th. But when it does, I will testify.”



Waters’ gentle approach to Bankman-Fried,was criticized by crypto community members, and many were concerned about his cushy relationship with elected officials through previous <a href="https://blockworks.co/news/ftx-donations-campaign-finance" target="_blank" rel="noreferrer noopener">campaign donations</a>.



Her <a href="https://twitter.com/RepMaxineWaters/status/1599858166359068676" target="_blank" rel="noreferrer noopener">subsequent</a> pleas, which took a dig at the former FTX CEO’s recent media tour, were left unanswered by Bankman-Fried.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">.<a href="https://twitter.com/SBF_FTX?ref_src=twsrc%5Etfw">@SBF_FTX</a>, Based on your role as CEO and your media interviews over the past few weeks, it’s clear to us that the information you have thus far is sufficient for testimony. (1/3) <a href="https://t.co/YUVVjOkC40">https://t.co/YUVVjOkC40</a>&mdash; Maxine Waters (@RepMaxineWaters) <a href="https://twitter.com/RepMaxineWaters/status/1599858166359068676?ref_src=twsrc%5Etfw">December 5, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



Under <a href="https://www.govinfo.gov/content/pkg/USCODE-2020-title28/pdf/USCODE-2020-title28-partV-chap117-sec1783.pdf#:~:text=%C2%A7%201783-,%C2%A7%201783,of%20person%20in%20foreign%20country&amp;text=The%20person%20serving%20the%20subpoena,the%20issuance%20of%20the%20subpoena." target="_blank" rel="noreferrer noopener">US law</a>, a court can issue a subpoena to a US resident or national in a foreign country if “the court finds that particular testimony or the production of the document or other thing by him is necessary in the interest of justice.”



A subpoena can also be issued if it is not possible to obtain a testimony without the appearance of the witness. Which means in the case of FTX, whether or not a subpoena of Bankman-Fried — who is currently believed to be in the Bahamas — can be issued will also depend on the other witnesses who will be called upon to testify.



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Maxine Waters Is Prepared To Subpoena Sam Bankman-Fried

Casey Wagner

In a speech this week, European Central Bank board member Fabio Panetta called for broader taxation on crypto assets, which he likened to a Ponzi scheme. 



“The EU should introduce a tax levied on cross-border crypto issuers, investors and service providers,” Panetta said during the speech on Wednesday. “This would generate revenues that can be used to finance EU public goods that counter the negative effects of crypto-assets.”



Cryptoassets have become the “bubble of a generation,” Panetta added, citing “easy-money” scams and misrepresentations of return rates across the asset class.&nbsp;



The speech comes as the European Union advances cryptocurrency-related policy in Parliament. The industry is beginning to unpack what this may mean for the future. 



In November, the EU passed the Digital Operational Resilience Act (DORA), a bill that was originally proposed as a package with the Markets in Crypto Assets Regulation (MiCA), which is expected to pass into law before the end of the year. DORA is expected to be formally adapted in 2024.&nbsp;



DORA, designed to target cyber fraud and attacks, will require financial institutions, including crypto companies, to report any cyber-related security breaches or compromises. The law also requires tech firms providing cybersecurity resources to handle oversight.&nbsp;



The crypto industry has expressed concerns about how the law will impact third party, non-EU based companies, giving the legislation a global impact, Monica Oracova, chief operating officer and co-founder of the Naoris Protocol, said. 



“The framework principles set up by DORA…do not address the existing collection of single points of failure in cybersecurity systems today,” Oracova said. “Only by implementing a decentralized security mesh, removing the points of weakness, and adopting cryptographic controls, zero-knowledge proofs and reports in a decentralized ecosystem, will we be able to see real improvements.”



DORA’s policies, Oracova added, will likely not effectively prevent hacks or phishing attacks, but they could make business owners more accountable regarding the selection and enforcement of cybersecurity. 



When it comes to crypto, no amount of technological innovation is likely to satisfy Panetta, who warned, “regulation will not turn risky instruments into safe money.”



“Instead, a stable digital finance ecosystem requires well-supervised intermediaries and a risk-free and dependable digital settlement asset, which only digital central bank money can provide,” he added.



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Crypto’s ‘Easy Money’ Scams Need Tougher Oversight – ECB Board Member

Michael Bodley

Most everyone in institutional crypto trading these days has a simple mandate: Position appropriately for an extended bear market — and fine tune capital-raising efforts accordingly.&nbsp;



For <a href="https://blockworks.co/news/two-prime-teams-up-with-bain-capital-backed-venture-fund" target="_blank" rel="noreferrer noopener">Two Prime</a>, the sentiment has triggered a shift in how the digital assets-focused firm sells itself to prospective clients. And it’s even led to the notion that the hedge fund firm might no longer be much of a hedge fund firm at all.



Performance fees are out; liquidity and customized portfolios are in. The natural next step, the firm told Blockworks, is to increasingly concentrate on separately managed accounts and de-emphasize the operation’s commingled funds, at least when it comes to business development.



Two Prime — which has about $200 million in assets under management and has historically counted a number of sizable bitcoin mining operators as clients — now considers itself more of an asset manager than anything else.&nbsp;



Adam Richard, the firm’s Miami-based head of capital formation, told Blockworks that such internal deliberations spurred a bit of an about-face when it comes to the marketing materials Richard shops to big-money potential investors. 


<div class="wp-block-image">
<figure class="alignright size-medium"><img loading="lazy" width="300" height="283" src="https://cms.blockworks.co/wp-content/uploads/2022/12/Adam-Richard-300x283.jpeg" alt="" class="wp-image-41497" srcset="https://cms.blockworks.co/wp-content/uploads/2022/12/Adam-Richard-300x283.jpeg 300w, https://cms.blockworks.co/wp-content/uploads/2022/12/Adam-Richard-768x723.jpeg 768w, https://cms.blockworks.co/wp-content/uploads/2022/12/Adam-Richard-273x257.jpeg 273w, https://cms.blockworks.co/wp-content/uploads/2022/12/Adam-Richard-277x261.jpeg 277w, https://cms.blockworks.co/wp-content/uploads/2022/12/Adam-Richard-232x219.jpeg 232w, https://cms.blockworks.co/wp-content/uploads/2022/12/Adam-Richard-80x75.jpeg 80w, https://cms.blockworks.co/wp-content/uploads/2022/12/Adam-Richard-50x47.jpeg 50w, https://cms.blockworks.co/wp-content/uploads/2022/12/Adam-Richard.jpeg 1000w" sizes="(max-width: 300px) 100vw, 300px" /><figcaption>Adam Richard | Source: Two Prime</figcaption></figure></div>


The effort, which has intensified in the wake of <a href="https://blockworks.co/news/5-highlights-ftx-bankruptcy" target="_blank" rel="noreferrer noopener">FTX’s bankruptcy</a>, has resulted in literature that places security and tailor-made, “bespoke” strategies front and center. There’s also now a heavy emphasis on downside protection, of course.



“We took a hard look at ourselves and said, ‘Let’s focus less and less on the hedge fund and more on SMAs and hedging and almost delta-neutral strategies,” Richard said. “What we’re really doing here is straight asset management.”&nbsp;



Added Richard: “If we’re not a crypto hedge fund, what are we?”



<h3>Two Prime clients want security and downside protection</h3>



The shift appears to be paying off, with Richard saying he’s been fielding a growing number of calls in recent weeks from big-money players interested in both hedging and levered beta products.



Two Prime imposes a minimum of $10 million per separate account, making the investment out of reach for most high-net worth individuals. Separately managed accounts are one-off vehicles with unique strategy mixes crafted for each investor. They are inherently liquid and do not impose restrictions on subscriptions or redemptions in the same style as hedge funds.



Richards has been speaking lately with a number of unidentified family offices and bitcoin mining rig operators, as well as larger players still, including the likes of pensions and endowments.&nbsp;



As a downside protection specialist, Two Prime sees a silver lining in the ongoing market-wide debacle — one which shows few signs of <a href="https://blockworks.co/news/what-a-recession-means-for-crypto" target="_blank" rel="noreferrer noopener">abating soon</a>. Its investment team offers strategies including crypto yield plays, customized hedges, levered beta and staking — as well as a number of delta-driven quantitative approaches. 



In the case of miners, consider what happens if bitcoin takes another plunge, down to $10,000 or $12,000. If it costs a miner about $14,000 to acquire one bitcoin, “you’re way in the red, and that’s going to be an issue,” Richard said. Two Prime’s hedging plays are designed to act as a buffer in such a case.&nbsp;



“It’s quite refreshing, too, because now — suddenly — all these miners who have been telling me, ‘We don’t have a lot of bitcoin to be putting in a yield strategy’ — they&#8217;ve all come around to this and are like, ‘I think we want to hedge.’”



Added Richard: “So, why not get ahead of it now?”



Yield strategies have been Two Prime’s bread and butter. They make up about 40% of its overall assets under management. An increasingly attractive combination: combining a yield-bearing product with a tail risk option to protect against another market dive.&nbsp;



Two Prime, run by Alex Blum, is headquartered in Denver. Its staffers are based throughout the US.&nbsp;



The yield products, which center around digital asset derivatives that target long and short volatility premiums, are available in formats denominated in bitcoin and ether — as well as dollars or stablecoin cash equivalents, such as USDC. Dollar-denominated products are typically favored by TradFi institutions, while more crypto-native traders often prefer not having to bring cash into the equation.



The <a href="https://blockworks.co/news/qa-how-two-prime-has-outperformed-bitcoin" target="_blank" rel="noreferrer noopener">firm’s returns</a> have been solid. Its low-yield derivatives strategy has gained 9.2% from inception in March 2021 through the end of November; medium yield has increased 14.5%; and high yield has booked a 20.2% gain over the same period.



Another of Richard’s selling points: Separate account funds are not commingled or loaned out — which played a key role in FTX’s implosion — and clients retain custody of their underlying assets.&nbsp;



“That’s what clients want today: security,” he said.



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Two Prime Shakes Up Strategy: ‘If We’re Not a Crypto Hedge Fund, What Are We?’

Whether bitcoin can serve as an effective medium of exchange has been debated since the world’s first cryptocurrency launched, but a recent uptick in demand from non-US markets demonstrates the use case has picked up steam, market participants told Blockworks.



Blockchain-enabled payments are particularly useful in emerging markets, Jack Mallers, founder and CEO of digital payments platform Strike, said in a <a href="https://www.businesswire.com/news/home/20221206005453/en/Strike-Launches-Lightning-Fast-Money-Transfers-to-Africa" target="_blank" rel="noreferrer noopener">statement</a>. 



In a bid to match growing demand, Strike launched a new feature for US users to send bitcoin to Nigeria, Ghana and Kenya instantly and with minimal fees, the company said Tuesday.&nbsp;



“High fees, slow settlement, and lack of innovation in cross-border payments have negatively impacted the developing world,” Mallers said.&nbsp;



The Central African Republic — one of the world’s most impoverished countries — made bitcoin its legal tender in April of this year, about seven months after El Salvador became the first nation to do so. The move was intended to be a “quick win” for setting the country up for future success, <a href="https://blockworks.co/news/central-african-republic-looks-for-quick-wins-becomes-second-country-to-adopt-bitcoin" target="_blank" rel="noreferrer noopener">government officials said</a>. 



“The current financial system isn&#8217;t set up in a way that ensures equal access for people and institutions from Africa,” Bernard Parah, founder and CEO of African payments provider Bitnob, said.&nbsp;



<a href="https://blockworks.co/news/why-emerging-markets-are-leading-the-charge-on-cbdcs" target="_blank" rel="noreferrer noopener">Emerging markets</a> have also come out as top innovators when it comes to crypto payments in recent months. 



Countries such as Jamaica, the Bahamas and Nigeria are at the forefront and have launched central bank digital currencies, while Brazil and Haiti have expressed interest in exploring their own. The trend can be attributed to these economies having more pressing, fundamental needs than those of more developed markets, according to Steve Aschettino, a Norton Rose Fulbright partner focused on fintech.&nbsp;



“Emerging economies appear to view CBDCs as a way to jump start their economies,” Aschettino told Blockworks. “More-developed nations have existing and widely adopted electronic payment mechanisms already in place. While one may say this is an advantage, their existing payments technology can also serve as a barrier to the creation and broad adoption of a CBDC.”



Economies with higher unbanked populations and less robust financial services infrastructure benefit the most from blockchain-enabled payments, according to the Bank for International Settlements. 



“Providing a cash-like digital means of payment, in light of reduced cash usage and an increase in private digital payment services, is the most common consideration,” a May <a href="https://www.bis.org/publ/bppdf/bispap123_a_rh.pdf" target="_blank" rel="noreferrer noopener">report</a> from the BIS said. “Other significant considerations include strengthening competition among [payment] service providers (PSPs), increasing efficiency and reducing the costs of financial services.”



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Bitcoin’s Case for Payments Builds With New Strike Development

FTX customers just can’t get a break.



In the latest twist from the crypto exchange’s fallout, NFTs minted on the FTX exchange now show a blank image instead of the original art. Any direct links to an NFT redirect to a restructuring page with information on the bankruptcy.



The lesson learned is one of Web3 companies relying on centralized services like Amazon Web Service (AWS) or the Google Cloud Platform, as Solana engineer jac0xb.sol signaled on Twitter. Collectors are unable to view their FTX-hosted NFTs because those collections are still hosting metadata on AWS.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">Oh look FTX hosted all the NFTs minted on their platform using a web2 API and now all those NFTs have broken metadata and the links go to a restructuring website. <a href="https://t.co/hsQgVru4BL">pic.twitter.com/hsQgVru4BL</a>&mdash; jac0xb.sol (@jacobdotsol) <a href="https://twitter.com/jacobdotsol/status/1600526700982710273?ref_src=twsrc%5Etfw">December 7, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



This includes the Coachella NFT collection, a Solana-based collection of lifetime passes to the music festival that generated $1.5 million at launch via the FTX US NFT marketplace. For weeks, holders have been left without the option to withdraw or transfer them while the site has been disabled. Even on Magic Eden, the image displays <a href="https://magiceden.io/item-details/HBTZiCag5f2b5eceBUsu31EYdpehSFTagTJH7EwXtpZX" target="_blank" rel="noreferrer noopener">an empty gray box</a>.



The NFTs no longer point to their original images because the FTX exchange hosted their NFT metadata on FTX US Web2 servers that have since been deactivated. This issue isn’t unique to FTX, and it underscores the need for permanent decentralized storage solutions.



More often than not, NFTs are not actually built “on-chain.” NFTs may host their smart contracts on the blockchain, but their media or metadata is off-chain. The metadata — name, description and author details — is often saved in the InterPlanetary File System (IPFS), a peer-to-peer system for preserving multimedia files. The image itself — usually a jpeg file — is then linked to the NFT’s metadata.



<a href="https://blockworks.co/tag/arweave" target="_blank" rel="noreferrer noopener">Arweave</a> is the leading Solana-focused alternative, <a href="https://twitter.com/baalazamon/status/1600672243268620288?s=20&amp;t=LzbkbCKgBebq_DI89jHy0w" target="_blank" rel="noreferrer noopener">recommended</a> by Solana developers, but it was not used for FTX’s NFT mints. As a result, the URLs that retrieve the smart contracts&#8217; storage and links to the ID of the related NFTs are now broken.



Some examples of popular on-chain NFT projects that do ingrain their metadata into the Ethereum blockchain, include Nouns DAO, Chainrunners and OnChainMonkey.



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FTX NFTs Are MIA: A Lesson on Centralized Risk

Chief bankruptcy judge of the Southern District of New York Martin Glenn has ordered failed crypto lender Celsius Network to return cryptocurrency worth $50 million back to its customers.



Glenn delivered the order during a hearing on Wednesday and applies to an estimated $44 million worth of crypto held in custody accounts that belong to Celsius users, and not the company.



Coins involved in transfers under $7,500 from interest bearing accounts to custody accounts were also ordered to be returned, a little over $11 million worth of crypto fell into that group, <a href="https://cases.stretto.com/public/x191/11749/PLEADINGS/1174909012280000000022.pdf" target="_blank" rel="noreferrer noopener">court papers</a> show.&nbsp;



The $50 million is just the tip of the iceberg, as it is estimated that the fallen crypto lender <a href="https://blockworks.co/news/celsius-faces-heat-for-1-2b-balance-sheet-hole-customers-owed-4-7b" target="_blank" rel="noreferrer noopener">owes over $4.7 billion</a> to its users.



“I want this case to move forward,” Glenn said in a hearing <a href="https://www.bloomberg.com/news/articles/2022-12-07/celsius-judge-orders-return-of-user-crypto-worth-50-million" target="_blank" rel="noreferrer noopener">first reported by Bloomberg</a>. “I want creditors to recover as much as they possibly can as soon as they possibly can.”



The majority of the collapsed lenders assets are cryptoassets in interest bearing accounts, and it is possible that Celsius could claim ownership of those assets based on rules around <a href="https://www.accountingtools.com/articles/preferential-transfer" target="_blank" rel="noreferrer noopener">preferential transfers</a>. The decisions on the future of these assets has yet to be made.&nbsp;



According to <a href="https://pacer-documents.s3.amazonaws.com/115/312902/126122257414.pdf" target="_blank" rel="noreferrer noopener">previous declaration filings</a>, Celsius had $5.5 billion in liabilities and $4.3 billion in assets — leaving it with at least $1.3 billion in shortfall, though <a href="https://blockworks.co/news/celsius-faces-heat-for-1-2b-balance-sheet-hole-customers-owed-4-7b" target="_blank" rel="noreferrer noopener">the actual hole may be larger</a>.



Celsius first filed for bankruptcy in July this year after the collapse of Singaporean-based hedge fund Three Arrows Capital, which failed to repay loans twice after the collapse of the Terra ecosystem.



Its bankruptcy proceedings are costing the fallen <a href="https://blockworks.co/news/celsius-creditors-fight-to-stop-23m-stablecoin-sale" target="_blank" rel="noreferrer noopener">company a small fortune</a>. Financial advisory firm for debtors Alvarez &amp; Marsal North America asked to be paid $2.3 million — 80% of the total compensation sought — for its services between July 14 and Aug. 31.



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Celsius Bankruptcy Judge Orders Return of $50M in User Assets

Shalini Nagarajan

A former chief technology officer of NFT platform Blockparty was arrested and charged for allegedly extorting $1 million, which he agreed to hold in his account while the company looked for a banking partner.



Rikesh Thapa, a 28-year-old from San Diego, California, used his leadership position to steal at least 10 bitcoin for his own advantage between December 2017 and September 2019, the Department of Justice <a href="https://www.justice.gov/usao-sdny/pr/chief-technology-officer-blockchain-company-charged-scheme-defraud-company-over-1" target="_blank" rel="noreferrer noopener">said</a> on Wednesday.



He allegedly used the assets on personal expenses including nightclubs, travel and clothing. Thapa faked records to cover his tracks.



“The defendant repeatedly stole from and defrauded the victim company — which he cofounded — in order to fund a luxurious personal lifestyle,” said Michael J. Driscoll, FBI assistant director in charge.



New Jersey-based Blockparty ventured out as a blockchain-based event ticketing platform in 2017, but the company launched an NFT creation and sale platform in 2020.



Blockparty was allegedly looking to branch out its banking options at a time when financial institutions were reluctant to transact with crypto companies in 2018. So, Thapa decided to hold $1 million of the platform’s money in his personal bank account while it figured out alternatives.



Blockworks reached out to Blockparty for comment but didn’t hear back by press time.



Thapa purportedly told a colleague that the funds were “a stationary 1mil in my account” that was not “touched or interacted with.” But he actually blew it on personal expenses.



In the summer of 2019, Blockparty’s CEO allegedly asked Thapa to return the $1 million. But he was refused, as the defendant said he needed to discuss potential tax consequences with an accountant and attorney. He resigned soon after.



Additionally, Thapa allegedly stole some 174,285 of Blockparty’s utility tokens to sell them to supposed investors in return for cash — without alerting the CEO. He later claimed the cash received was counterfeit.



He faces 20 years in prison if convicted on one count of wire fraud.



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Ex-Blockparty CTO Arrested for Stealing Company’s Bitcoin

Sebastian Sinclair

US federal prosecutors are reportedly investigating former FTX CEO Sam Bankman-Fried for his potential role in manipulating the price of two cryptocurrencies belonging to the now-defunct Terra ecosystem earlier this year.



According to a report by <a href="https://www.nytimes.com/2022/12/07/business/ftx-sbf-crypto-market-investigation.html" target="_blank" rel="noreferrer noopener">The New York Times</a> on Wednesday, Bankman-Fried is under investigation by prosecutors in Manhattan over Terra’s UST stablecoin and sister token LUNA.&nbsp;



Both collapsed in spectacular fashion in May when the algorithmic stablecoin wobbled from its peg shortly before dropping to $0.20 after redemptions skyrocketed. Luna’s price simultaneously tanked to near zero, thanks in part to Terra’s design.



The investigation, still in its infancy, is attempting to determine whether Bankman-Fried manipulated prices to the benefit of firms and entities he controlled. It is not proven if the former CEO has conducted any wrongdoing at this stage.



It is also unclear when the investigation began, though it is considered part of the larger inquiry into FTX’s collapse last month. FTX did not immediately respond to a request for comment.



In another angle prosecutors may wish to pursue, Bankman-Fried <a href="https://youtu.be/4o_jPzBZSIo?t=810" target="_blank" rel="noreferrer noopener">admitted</a> this week that, at least insofar as FTX customer withdrawals are concerned, funds held by the exchange were commingled between spot and margin traders — referring to &#8220;omnibus wallets between the various categories&#8221; — in apparent violation of <a href="https://twitter.com/yeluacaM/status/1590088976320278528" target="_blank" rel="noreferrer noopener">FTX’s Terms of Service</a>.



<blockquote class="wp-block-quote">&#8220;If you look at especially a lot of the withdrawals that happened, those withdrawals were not only necessarily coming from people who never used margin trading or futures or staking or anything else&#8230;that effectively meant that there was, if you want to put it this way, like, fungibility created during those withdrawals between assets,&#8221; Bankman-Fried said.</blockquote>



At some point, the cryptoassets available to process withdrawals ran out, with billions in customer demand left unfulfilled.



Blockworks Research analyst Ryan West has argued that the cascading liquidations at FTX during Terra’s unraveling may in fact have been the root cause of Alameda Research’s balance sheet woes — providing the seeds of FTX’s downfall.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">2/ My theory is that the hole was as a result of mishandled liquidations on FTX. Big cascading liquidation events could very easily cause an extremely big hole in such a short amount of time, especially with the way their liquidation engine is designed.&mdash; Westie 🟪 (@WestieCapital) <a href="https://twitter.com/WestieCapital/status/1591089081135439872?ref_src=twsrc%5Etfw">November 11, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



<a href="https://blockworks.co/news/cryptocurrency-luna-lurches-as-terra-usd-volatility-continues-erasing-billions" target="_blank" rel="noreferrer noopener">Terra’s crisis began</a> on May 7 when a large trader swapped UST for rival stablecoins and forced UST to dip to $0.99, sparking concerns over the stability and capacity of the crypto to hold its peg.&nbsp;



It was later revealed through <a href="https://blockworks.co/tag/luna" target="_blank" rel="noreferrer noopener">Terra’s failed algorithmic experiment</a> that more than $1 trillion had been wiped from crypto markets, forcing many firms underwater amid an industry-wide liquidity crunch.&nbsp;



FTX is rumored to have had exposure in Terra through its sister trading firm Alameda Research. Alameda is said to have owed now-bankrupt crypto lender Voyager Digital $1 billion. FTX US, the American arm of the exchange, purchased Voyager’s cryptoassets in late September, valued at roughly $1.4 billion in an <a href="https://blockworks.co/news/ftx-us-wins-voyager-digital-asset-auction-for-1-4b" target="_blank" rel="noreferrer noopener">auction bid</a>.



Alameda, meant to be separate from FTX, is at the center of the debacle that blew an $8 billion hole in FTX’s balance sheet following a series of allegedly fraudulent trades using customers’ commingled funds.



“With the fallout of Terra and 3AC in May/June, it is likely that Alameda experienced liquidity issues as a result of the declining price of FTT, which was likely utilized as loan collateral,” blockchain analysis firm Nansen wrote in a November <a href="https://www.nansen.ai/research/blockchain-analysis-the-collapse-of-alameda-and-ftx" target="_blank" rel="noreferrer noopener">blog post</a>.&nbsp;



Nansen said Alameda may have received an FTT-backed loan from FTX, pointing to on-chain data which suggested it “may have happened.”



FTT was the native utility token of the FTX exchange, used for reducing trading fees. It is also at the heart of the implosion as it was <a href="https://www.coindesk.com/business/2022/11/02/divisions-in-sam-bankman-frieds-crypto-empire-blur-on-his-trading-titan-alamedas-balance-sheet/" target="_blank" rel="noreferrer noopener">revealed on Nov. 2</a> that FTT made up a large portion of Alameda’s balance sheet — a fact that quickly brought about the downfall of the exchange nine days later.



Macauley Peterson contributed reporting.



This story was updated on Dec. 8, 2022, at 12:16 p.m. ET.



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SBF Has One More Thing To Worry About: A US Attorney Inquiry

Crypto venture funding has remained relatively strong this year — despite difficult macro conditions, the collapse of Terra, and FTX’s fallout, which decimated spot digital asset markets.



Crypto startups gathered nearly $20 billion of capital across 616 deals through the first three quarters of 2022, 41% more than they attracted in the same period last year, according to new <a href="https://pitchbook.com/news/reports/q3-2022-crypto-launch-report" target="_blank" rel="noreferrer noopener">data from Pitchbook</a> this week.



One explanation? Investors with ample dry powder have deployed their venture dollars into startups with beaten-up valuations, especially considering the sector’s overall youth.



But last year, deployed capital increased with each consecutive quarter. The picture is different for 2022.&nbsp;



Only $4 billion in investments were made in the third quarter, good for a 38.3% quarter-over-quarter slide. Still, Pitchbook expects investments to recover their pace once crypto prices trend upward.



<figure class="wp-block-image"><img src="https://lh6.googleusercontent.com/atnNuRC6JUuW5ROMLoP_7ZPdmv8SgpD2mjMGqqm43ydvSd8zSvjozOg6838hn4s7M-yOWDUew3hqUQDX1uBEgF_2JJcQR7gGaf_Q12dwJ6IDsJYKPbpxk0AyijpLb4tlVDYZnMkMdrROerwQPbB36bC5U5p89RO4JWJy89XkvMQ-j6cAhoPAiikae26gxA" alt=""/><figcaption>Source: Pitchbook</figcaption></figure>



The average funding for seed and early-stage crypto startups this year jumped to between $5 million and $20 million, from $3 million and $11.7 million in 2021. Meanwhile, capital deployed for late-stage startups has remained essentially flat at $30 million.



Investors poured $1.5 billion into Web3-oriented projects, marking a 44% jump sequentially in deal value, data showed.



“The long and short of it is crypto is far from done,” Pitchbook said in its report.



Outlook for the crypto industry weakened this year, led by a series of bankruptcies, including Three Arrows Capital, Celsius and Voyager.



More recently, crypto exchange FTX’s disintegration has further impacted the industry’s capacity to develop and design viable use cases. Against this backdrop of uncertainty, promising crypto startups are expected to become even more important to ensure the continuity of the industry.



Robert Le, a crypto analyst at Pitchbook, said mainstream adoption in the crypto industry is unlikely to take place until regulations improve and guidelines are established.



Crypto investment firm Galaxy Digital, meanwhile, found that funding for crypto startups hit a <a href="https://blockworks.co/news/crypto-venture-funding-hits-year-low-in-q3-2022-galaxy" target="_blank" rel="noreferrer noopener">year-low</a> in the third quarter. Investors gave only $5.5 billion to crypto projects, a drop from some $8 billion in the prior quarter.



This markdown began in the second quarter, when venture interest dwindled amid plummeting crypto prices triggered by TerraUSD’s crash and a meltdown in the crypto lending space.



Big name players are now hunting for bargain opportunities while valuations are low.



Goldman Sachs is reportedly looking to <a href="https://blockworks.co/news/goldman-sachs-crypto-bargains" target="_blank" rel="noreferrer noopener">spend millions of dollars</a> to buy or invest in distressed crypto companies. The bank is already conducting due diligence on its targets of interest. CEO David Solomon wrote in a <a href="https://www.wsj.com/articles/blockchain-is-much-more-than-crypto-david-solomon-goldman-sachs-smart-contracts-11670345993" target="_blank" rel="noreferrer noopener">Wall Street Journal op-ed</a> this week that he still sees promise in blockchain “if allowed to innovate under the right conditions.”



BlackRock CEO Larry Fink also <a href="https://blockworks.co/news/blackrock-ceo-still-in-crypto-for-the-tech-despite-ftx-scandal" target="_blank" rel="noreferrer noopener">remains bullish</a> on underlying blockchain technology — despite the industry taking a beating.



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2022 Crypto Venture Funding On Pace To Break 2021 Record

FinCEN, the US Treasury Department&#8217;s financial crimes unit, is zeroing in on DeFi regulation as government agencies scramble for greater industry oversight following the ratification of an executive order on digital assets earlier this year.



Slotted in between remarks on combating fraud and anti-corruption generally, Himamauli Das, the acting director of the Financial Crimes Enforcement Network, said in a <a href="https://www.fincen.gov/news/speeches/prepared-remarks-fincen-acting-director-himamauli-das-during-abaaba-financial-crimes" target="_blank" rel="noreferrer noopener">speech</a> Tuesday his agency was looking at DeFi’s “potential to reduce or eliminate the role of financial intermediaries that play a critical role in our AML/CFT [anti-money laundering/combating the financing of terrorism] efforts.”



The removal of intermediaries is seen by crypto natives as a <a href="https://blockworks.co/news/the-investors-guide-to-defi" target="_blank" rel="noreferrer noopener">major advantage</a> of DeFi, rendering it more efficient and removing counterparty risks, but FinCEN’s financial surveillance focus positions the existence of intermediaries as a strength of status quo. The unit did not immediately return a request for comment.



“We are engaging with relevant US government stakeholders in this effort, and we welcome engagement with industry — including the banking community — to better understand your assessment of the vulnerabilities and risks,” Das said.



The director was speaking during the American Bankers Association ABA Financial Crimes Enforcement Conference in Maryland, which concluded on Wednesday.



As part of the US Treasury Department, the FinCEN is tasked with combating money laundering and terrorism financing by leveraging the financial intelligence it gathers.



In line with ongoing efforts expected to carry over to the new year, Das said his agency would continue to evaluate the evolution of digital assets to try to discover any gaps in the current AML/CFT framework.



To that end, FinCEN will analyze whether further regulations are needed. Its efforts form part of the <a href="https://blockworks.co/news/biden-signs-crypto-executive-order-promoting-responsible-innovation" target="_blank" rel="noreferrer noopener">executive order</a> on digital assets, which was signed by President Joe Biden in March.



Multiple government agencies have since been exploring ways to ratchet <a href="https://blockworks.co/category/regulation" target="_blank" rel="noreferrer noopener">regulatory oversight</a> of cryptoassets, including the SEC and the CFTC which continue to <a href="https://blockworks.co/news/crypto-regulation-cftc-sec-tag-team" target="_blank" rel="noreferrer noopener">jostle for control</a>.



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FinCEN Invites Bankers To Assess DeFi Risk

While many say FTX founder Sam Bankman-Fried inadvertently ran a master class on how not to run a business, several crypto executives have recently partnered with online education platform MasterClass to teach a course on the space.&nbsp;



But the class does not elaborate on the bankruptcy of FTX and what led up to it. A MasterClass spokesperson told Blockworks that the lessons were in production before the crypto exchange’s crash.



&#8220;Sam Bankman-Fried was filmed for the class prior to the FTX crash,&#8221; the representative said. &#8220;Given recent events, he was removed.&#8221;&nbsp;



The class is taught by Binance CEO and co-founder Changpeng ‘CZ’ Zhao; Emilie Choi, president and COO of Coinbase Exchange; Chris Dixon, founder and managing partner at venture capital firm a16z; and Paul Krugman, an author and New York Times columnist.&nbsp;



The crypto executives join more than 180 instructors on the platform, which launched in 2014.



&#8220;Cryptocurrency and the blockchain have the potential to disrupt the financial system,&#8221; MasterClass CEO David Rogier said in a statement. &#8220;With the landscape rapidly changing every day, we&#8217;re bringing together the industry&#8217;s key voices to help members gain a foundational understanding of the crypto and blockchain ecosystem.”



Topics of the lessons range from the history of crypto, decentralization, Web3, DAOs, NFTs, the segment’s volatility and a debate between Krugman and Zhao on stablecoins — a hot topic following the collapse of <a href="https://blockworks.co/search" target="_blank" rel="noreferrer noopener">Terra</a>’s algorithmic stablecoin earlier this year.



The course comes nearly a month after crypto exchange FTX <a href="https://blockworks.co/news/whats-next-for-ftx-and-its-customers-after-bankruptcy-filing" target="_blank" rel="noreferrer noopener">filed for bankruptcy</a> amid allegations that the company transferred billions of dollars of user funds to sister company Alameda Research, also founded by Bankman-Fried.



The exchange faced a “liquidity crunch” after <a href="https://blockworks.co/news/binance-ceo-goes-full-fud-in-attempt-to-bury-ftx" target="_blank" rel="noreferrer noopener">Zhao tweeted</a> that Binance would liquidate its holdings of FTX token FTT. The price of FTT subsequently tumbled, leading to what Bankman-Fried called a “withdrawal backlog” at FTX.



Veteran restructurer John J. Ray III replaced Bankman-Fried as FTX’s CEO after his resignation. <a href="https://blockworks.co/news/worse-than-enron-sbfs-ftx-has-a-complete-absence-of-trustworthy-information" target="_blank" rel="noreferrer noopener">Ray said</a> the internal management of the company was “a complete failure.”



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Binance’s CZ Among Instructors for New Crypto MasterClass

Executives at fund manager VanEck are bullish on security tokenization accelerating in 2023 and believe sovereign institutions could be a main driver of a projected bitcoin price increase in the second half of next year.



The projected momentum around the use of blockchain technology is set to guide the firm to focus on crypto-native products going forward, they added.&nbsp;&nbsp;&nbsp;



The New York-based investment group expects financial institutions to tokenize more than $25 billion in off-chain assets onto blockchains next year, Matthew Sigel, VanEck’s head of digital assets research, said in a webinar Wednesday.&nbsp;



Such companies are likely to employ blockchains to simplify custody and settlement while reducing costs for customers, he added.



VanEck’s prediction comes as a number of institutions have expressed interest in the tokenization space over the past year, often distinguishing the use case of blockchain technology from the broader, volatile crypto space.



The central bank of Singapore <a href="https://blockworks.co/news/singapore-central-bank-ready-to-try-defi-after-crypto-giants-leave-for-dubai" target="_blank" rel="noreferrer noopener">revealed in May</a> it had teamed up with JPMorgan Chase for a blockchain pilot exploring the potential of DeFi. Called Project Guardian, the initiative sought to tokenize bonds and deposits, with smart contracts powering trade executions.&nbsp;



Nicole Olson, a senior vice president of digital product development at State Street, <a href="https://blockworks.co/news/state-street-sees-significant-opportunity-in-tokenization" target="_blank" rel="noreferrer noopener">told Blockworks</a> in an August interview that using distributed ledger technology to tokenize funds and private assets to improve efficiency and accessibility is something the company is working on for 2023.



Executives at Fund group WisdomTree, which manages $76 billion in assets, <a href="https://blockworks.co/news/wisdomtree-triples-down-on-future-blockchain-focus" target="_blank" rel="noreferrer noopener">has repeated its focus</a> in recent months to bring fixed income, equities and commodities into the digital world through blockchain-enabled funds and tokenized exposures.



More recently, Larry Fink, CEO of BlackRock — the world’s largest asset manager — said at the <a href="https://www.youtube.com/watch?v=PSVpth7uqb4" target="_blank" rel="noreferrer noopener">New York Times DealBook Summit</a> last week that “the next generation for markets and next generation for securities will be tokenization of securities.”



<h3>Crypto products focus</h3>



Considering its bullish case for tokenization, VanEck CEO Jan van Eck said during the webinar that the firm would focus on crypto-native products and solutions, which he referred to as “actual blockchain projects.”



The company’s NFT collection, <a href="https://blockworks.co/news/vaneck-exec-use-cases-of-nfts-approaching-unlimited" target="_blank" rel="noreferrer noopener">which it unveiled in May</a>, is a signal of what is to come in 2023, he added, but did not share specifics.



Otherwise, van Eck said, the company is “pretty full up” on crypto-related products.&nbsp;&nbsp;



The firm has a suite of crypto indexes and offers various ETPs in Europe investing in single tokens or a basket of cryptoassets.&nbsp;



VanEck has 68 ETFs trading in the US with combined assets of roughly $52 billion, according to <a href="https://www.etf.com/channels/vaneck-etfs" target="_blank" rel="noreferrer noopener">ETF.com</a>. Three of those funds offer exposure to the crypto space.



The company launched its Digital Transformation ETF (DAPP), which has top holdings including Block, MicroStrategy, Coinbase and Riot Blockchain, in April 2021. VanEck later launched its Bitcoin Strategy ETF (XBTF) in November 2021, following the launch of similar bitcoin futures funds by ProShares and Valkyrie.&nbsp;&nbsp;



DAPP and XBTF are down 83% and 63% this year, respectively. Each fund has about $20 million in assets.&nbsp;



The VanEck Gold and Digital Assets Mining ETF (DAM), which came to market in March, has had an even tougher time gathering assets — currently holding less than $1 million. The fund is down about 81% in 2022.



Industry watchers have said they expect ETF issuers <a href="https://blockworks.co/news/more-delistings-of-blockchain-etfs-could-be-coming" target="_blank" rel="noreferrer noopener">to shut down various crypto-related ETFs</a> amid the persistent drawdown.&nbsp;



“We are relatively slow to close ETFs just because of low assets,” van Eck told Blockworks in a message. “But the underlying constituents of DAM have really shrunk in market cap, so we are reviewing.”



<h3>Price prediction and sovereign institution adoption</h3>



VanEck executives said they expect bitcoin could sink to a range between $10,000 and $12,000 in the coming months as a wave of miner bankruptcies could highlight the low point of this crypto winter.&nbsp;



Bitcoin’s price was roughly $16,800 at 5:00 pm ET Wednesday.&nbsp;



Sigel said that he projects bitcoin’s price to rise to $30,000 in the second half of 2023 as inflation eases and the next bitcoin halving — set to occur in early 2024 — approaches.&nbsp;



The executive added that institutional adoption will be critical if bitcoin is to 10x again. But, he added, many Wall Street players won’t be as willing to sign off on direct crypto investments following events such as the collapse of Terra’s algorithmic stablecoin, FTX and Three Arrows Capital.



“So what types of institutions?” he said. “For me it comes back to sovereigns who have different geopolitical motivations and realities during this Russia-Ukraine war and period of increased financial censorship than they ever did before. And so that’s the wild card.”



VanEck expects at least one nation to add bitcoin or other digital assets to its sovereign wealth fund. Sigel added that a country like Brazil could be a leader in the tokenization of sovereign debt, noting that Itaú Unibanco, the country’s largest private bank, revealed plans to launch a tokenization platform in July.



El Salvador <a href="https://blockworks.co/news/el-salvador-approves-bitcoin-as-legal-tender-in-supermajority" target="_blank" rel="noreferrer noopener">became the first country to adopt bitcoin as legal tender</a> last year. The Central African Republic <a href="https://blockworks.co/news/central-african-republic-looks-for-quick-wins-becomes-second-country-to-adopt-bitcoin" target="_blank" rel="noreferrer noopener">became the second country</a> to do so in April.&nbsp;



The population of the two countries combined is roughly 10 million, but more nations following in those footsteps could drive further confidence in the space, according to Sigel.



“Let’s see if that [population of countries with bitcoin as legal tender] hits 80 million and what happens to the price of bitcoin and how the rest of the world reacts,” he said.



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Institutions To Tokenize $25B in Off-chain Assets in 2023, VanEck Execs Predict

If the US economy is headed into a recession, risk assets such as crypto and tech equities should buckle up, analysts say.&nbsp;



The New York Federal Reserve’s <a href="https://www.newyorkfed.org/research/capital_markets/ycfaq#/interactive" target="_blank" rel="noreferrer noopener">recession probability model</a> is now predicting a 38% chance that the US will go into a recession in the next 12 months. 



“This understates the real probability which, based on +60 years of history, is now close to 100%,” Nicolas Colas, co-founder of DataTrek Research, said.&nbsp;



The New York Fed uses the difference between 3-month and 10-year Treasury yields to determine their figure. Historically, nearly every single time the New York Fed’s model has called for a chance of recession above 30%, a recession was either already underway or occurred within 12 months, Colas noted. 



“The economy is entering slowdown mode as final third quarter nonfarm productivity data was revised higher and labor costs were significantly revised lower,” Edward Moya, senior market analyst at Oanda, said. “Yield curve inversion deepens and nears a four-decade low which is clearly setting up this economy for a recession that won&#8217;t be a mild one.”



With risk appetite fading, bitcoin and ether continued to trend lower Wednesday, each losing about 1.6% and 3%, respectively. Bitcoin continued to hover below $17,000.&nbsp;



Equities struggled to stay in the green Wednesday as well with the S&amp;P 500 and Nasdaq composite indexes losing 0.2% and 0.5%, respectively.&nbsp;



“Bitcoin has massive resistance at the $17,500 level and that should hold leading up to next week’s FOMC decision,” Moya said. “Long-term crypto bets that are waiting to be placed will require either a bullish fundamental trigger or a capitulation moment that has bitcoin testing a key technical level.”&nbsp;



The Fed is set to release its latest decision next week, and investors will surely want to know how Chair Jerome Powell is thinking about rates in view of a potential economic slowdown. 



As of Wednesday, futures markets were pricing in about a 75% probability that the Fed will opt for a 50 basis point rate hike, which would be a mild decrease from its streak of 75 basis point increases, according to <a href="https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html?redirect=/trading/interest-rates/countdown-to-fomc.html" target="_blank" rel="noreferrer noopener">data</a> from CME Group.



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Economists Predict Recession. Should Crypto Holders Worry?

The proliferation of blockchain-based games including Alien Worlds, Splinterlands or Axie Infinity shows no signs of slowing down. However, the larger video gaming industry is conflicted when it comes to supporting play-and-earn crypto mechanics and NFTs.&nbsp;&nbsp;



Almost all major game publishers now have blockchain development teams, but they are struggling to reconcile their traditional business approach with blockchain and its role in the future of games.&nbsp;



Some studios such as Ubisoft and its QuartzDigits platform allows players to buy and sell items for games such as Ghost Recon Breakpoint. And Fortnite developer Epic Games recently listed its first NFT title, Mythical Games’ Blankos Block Party, on its game store.



Microsoft even offered blockchain-as-a-service within Azure for almost a decade before offloading their existing customers to ConsenSys Quorum last year.&nbsp;



But others are taking the opposite approach. Video game distributor Steam banned all games that allowed NFT and crypto trades last year. Gabe Newell, president and co-founder of Steam’s parent company Valve, <a href="https://www.ign.com/articles/gabe-newell-nft-steam" target="_blank" rel="noreferrer noopener">cited</a> crypto’s volatility and the bad actors existing in the NFT space as its motivations.



The latest studio to oppose <a href="https://blockworks.co/news/the-investors-guide-to-gaming-nfts" target="_blank" rel="noreferrer noopener">GameFi</a> is Take-Two Interactive, parent company to Grand Theft Auto (GTA) creator Rockstar Games.



Rockstar recently updated the <a href="https://support.rockstargames.com/articles/11374598771091/Roleplay-RP-Servers" target="_blank" rel="noreferrer noopener">user guidelines</a> for its third-party or role-playing servers, effectively banning the buying and selling of crypto and NFTs.



The new measures affected unofficial Grand Theft Auto Online (GTAO) servers that may not have been supervised by Rockstar or approved to trade digital assets — for example, the Trenches server set up by a rapper named Lil Durk on GTA 5, which sold loot boxes, in-game properties and vehicles.



Following a cease-and-desist order from Rockstar, Trenches <a href="https://twitter.com/TrenchesRP/status/1594168052727226368?s=20&amp;t=vOyx9B0ttDK7r6G80q-FNw" target="_blank" rel="noreferrer noopener">tweeted</a> it “had no choice but to comply with their demands” and shut down.



Commenting on the case, a spokesperson from blockchain gaming platform Enjin told Blockworks that they are “disappointed that a cease and desist letter answered a transparent, good faith experiment with blockchain-based models.” Their hope is that “genuine dialogue” opens up with the goal of developing new user experiences.



In a similar move earlier this year, <a href="https://blockworks.co/news/web3-watch-yuga-labs-takes-voyagers-to-the-otherside-while-minecraft-bans-nfts" target="_blank" rel="noreferrer noopener">Minecraft developer Mojang banned NFT support</a> inside Minecraft client and server applications. Minecraft is not a blockchain based platform, but some server owners were creating unofficial Minecraft NFTs and some NFT metaverse projects, such as NFT Worlds and TheUplift World, which were built on top of Minecraft.



Gamers will always find a way around restrictions, however, and the metaverse company MyMetaverse was able to <a href="https://blockworks.co/news/web3-watch-nfts-return-to-minecraft-coinbase-provides-ens-usernames" target="_blank" rel="noreferrer noopener">re-implement playable NFTs not only on Minecraft</a> game servers, but also on modified versions of GTAO for the past few months. 



It used NFTs running on Efinity, a Polkadot parachain developed by gaming platform Enjin to give GTAO and Minecraft players a role-playing experience with gaming NFTs.



Microsoft had an early partnership with Enjin to enable NFTs for Minecraft, but aside from engaging players, Microsoft saw no direct benefit, according to Don Norbury, current chief technology officer at Neon, the publisher behind <a href="https://blockworks.co/news/blockchain-game-shrapnel-aims-for-aaa-status-in-web3" target="_blank" rel="noreferrer noopener">Shrapnel</a>. So the decision to shut it down can be chalked up to optics.



Now that Take-Two Interactive has also officially enforced its ban, the fate of servers like these is unknown. Norbury, who has worked at both Take-Two Interactive and Microsoft for a combined decade, told Blockworks the companies may just not yet know what to do with the technology.



“Take-Two/Rockstar/GTA clearly doesn’t hate NFTs or crypto — nor does Microsoft/Minecraft,” he said. The primary issue, he suggested, is that Rockstar and Microsoft don’t make any direct revenue from NFTs.



“It’s akin to launching a game in the Apple App Store and circumventing their requirements for platform transaction fees,” Norbury said, adding that a formalized partnership with MyMetaverse might solve the revenue problem, but that the “secondary issue for these companies is optics, strategy and regulation.”&nbsp;



He is referring to the fact that Take-Two Interactive, Rockstar and Microsoft are all “enormous” publicly traded companies that “must appease consumers and shareholders alike.”&nbsp;



“Suddenly incorporating NFTs into their product risks alienating a large portion of their users,” Norbury said, referring to the <a href="https://blockworks.co/news/ubisoft-nft-efforts-are-off-to-a-rocky-start" target="_blank" rel="noreferrer noopener">apprehension shown by some gamers</a>.



It comes down to “incompatible business strategies” and “internal dissonance.”



“[These companies] know blockchain is the future for games with interesting economies/trading/ownership, but they want to maintain their old approach to modeling project funding, design, economy, and marketing.” Norbury added.&nbsp;



Nevertheless, the money from venture capital being raised for blockchain games and metaverse projects isn’t slowing down. Over the October and November, the gaming market raised $534 million in funding, <a href="https://dappradar.com/blog/bga-game-report-october-november-2022" target="_blank" rel="noreferrer noopener">according</a> to DappRadar. 



In-game NFTs had a total trading volume of $55 million in the past two months, DappRadar said, with the Gods Unchained game generating 60% of the total trading volume for game assets. DappRadar calls the industry “resilient” despite the collapse of FTX and cites the impact on the NFT market.



Now it’s up to major game publishers to decide whether or not to go about adopting blockchain as a foundational technology and business model.

Major Game Studios Still Aren’t Sold on NFTs

Westie

Data Decoded: Layer 2s (Arbitrum and Optimism)

Permissionless is the brainchild of Blockworks and Bankless. Over 5,500 people attended the inaugural event in 2022, making Permissionless the world’s largest DeFi conference.&nbsp;



What sets Permissionless apart? It’s a crypto native’s paradise, crafted specifically for both builders and investors who are dedicated to scaling the industry.&nbsp;



Permissionless is headed to Austin in 2023, and you know what they say… Everything is bigger in Texas.&nbsp;



Permissionless 2023 will feature the biggest names in Web3, a gargantuan exposition hall filled with the top brands in the space, an awe-inspiring NFT Gallery, inclusive, community-focused parties and events, metaverse experiences, and so much more.



See you in Paradise.

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<h2>Why Sponsor Permissionless 2023?</h2>
If you’re serious about crypto, you have to be at Permissionless. Permissionless brings together DeFi builders, DAO participants, protocol developers, crypto companies, funds and institutions, and more. It’s a true crypto-native’s paradise, where you’ll have the opportunity to showcase your offerings and form lasting connections with the community.
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