Michael Bodley

<div id="highlights-block_61e722ee1b7fa" class="highlights">
 <ul>
 <li>The firm’s co-founder, Alan Howard, has made crypto investments with his personal wealth for several years</li>
 <li>BH Digital, the asset manager’s crypto division, has 25 employees and continues to grow</li>
 </ul>
 
</div>



Hedge fund firm Brevan Howard has launched its first dedicated crypto fund with 10 teams of portfolio managers and bold fundraising aspirations, according to two people familiar with the matter.



The flagship vehicle, BH Digital Multi-Strategy Fund, started trading earlier this month with a sizable amount of internal capital, sources said. The plan is to start broadly raising outside money in the second quarter — and expectations are that fundraising haul would amount to at least several hundred million dollars and perhaps more than $1 billion.



Sources were granted anonymity to discuss sensitive business dealings. A spokesperson for Brevan Howard declined to comment.&nbsp;



The fund is the inaugural vehicle of BH Digital, the new Brevan Howard unit dedicated to the global macro firm’s crypto investments. The division now has 25 employees overall and is scaling. It represents one of the largest — if not the largest —&nbsp;commitments by a legacy asset manager to digital assets.



<blockquote class="wp-block-quote">“Brevan is making an absolutely massive push into crypto,” one source said.</blockquote>



BH Digital Multi-Strategy Fund invests in both liquid cryptocurrencies and takes venture capital-style stakes in private blockchain companies. BH Digital is looking to hire additional portfolio managers in addition to the 10 it already has, with each team typically supported by analysts.&nbsp;



“(The firm’s) gone out and got the picks and shovels, but they need to be able to execute that type of strategy,” one source said.&nbsp;



The firm <a href="https://cms.blockworks.co/hedge-fund-manager-brevan-howard-investing-in-digital-assets/" target="_blank" rel="noreferrer noopener">started trading crypto</a> via its other funds last year.



Indications are that Brevan Howard’s marketing staffers have already begun to gauge the interest of the firm’s institutional limited-partners in the new fund.&nbsp;



“My understanding is they’ve just been making the internal calls to the large allocators that already have a Brevan product,” one source said.



Added another source: “With their network already, they&#8217;re going to do a great job of cross-selling. They’re going to have a massive raise in the second half of this year.”



The firm oversaw about $18 billion of assets under management in November 2021, the most recent figure available. Brevan Howard recently redeemed 15% of its $7 billion BH Alpha Strategies Fund from investors, <a href="https://www.bloomberg.com/news/articles/2022-01-11/brevan-howard-makes-hedge-fund-clients-commit-cash-for-longer" target="_blank" rel="noreferrer noopener">Bloomberg reported</a> — asking clients to lock up their cash for longer and mirroring a trend by its peers.



Co-founder Alan Howard has invested his personal wealth in cryptocurrencies for years, including backing crypto hedge fund firm One River Digital Asset Management.



Jason Cummins, Brevan Howard’s head of research and chief US economist, <a href="https://www.bloomberg.com/news/articles/2022-01-11/brevan-howard-makes-hedge-fund-clients-commit-cash-for-longer" target="_blank" rel="noreferrer noopener">joined One River’s advisory group</a> earlier this month.



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Brevan Howard Launches First Digital Assets Fund in ‘Massive’ Crypto Push

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?’

Casey Wagner

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

Ornella Hernandez

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

Bessie Liu

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

Ben Strack

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

Music NFTs are having a moment. From major record labels such as Warner Music Group to artists like Steve Aoki and 3LAU, the music industry is seeking opportunities to leverage Web3 to better monetize their work.



Warner Music Group, also called WMG, announced a multi-year partnership with the LGND.io startup on Tuesday to launch a music NFT marketplace on the Ethereum-compatible Polygon proof-of-stake sidechain.



Select WMG artists and creators will be chosen to drop songs as digital collectibles starting in January 2023, <a href="https://www.wmg.com/news/lgnd-io-partners-with-warner-music-group-polygon-on-new-music-and-collectibles-platform" target="_blank" rel="noreferrer noopener">according</a> to a statement from the company.&nbsp;



The platform, called LGND Music, will be a mobile and desktop application that will reportedly support music NFTs or their so-called “Virtual Vinyls” from other blockchains as well.&nbsp;



While iOS users will get to fully own their music tokens, their purchases on LGND’s iOS app will be subject to <a href="https://blockworks.co/news/apple-takes-bite-out-of-app-store-nfts-in-hunt-for-revenue" target="_blank" rel="noreferrer noopener">Apple’s 30% in-app purchase fee</a>.



Among the first artists featured on LGND Music are slated to include those represented by the WMG-owned electronic music label Spinnin’ Records.



<h3>Steve Aoki and 3LAU</h3>



The Web3 community loves its parties and DJs, and two of the most prolific electronic musicians — Steve Aoki and Justin “3LAU” Blau — fittingly announced that they will use their CryptoPunks NFTs as their alter egos to form a new group called Punx.&nbsp;



<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">We bring to you: PUNX 10 years of friendship has led to this moment. We are excited to introduce a conceptual music/art project partly inspired by our own <a href="https://twitter.com/cryptopunksnfts?ref_src=twsrc%5Etfw">@cryptopunksnfts</a>. the sound of <a href="https://twitter.com/itsthepunx?ref_src=twsrc%5Etfw">@itsthepunx</a> will be different from either of our current sounds, in fact… <a href="https://t.co/mNlogCLmCz">pic.twitter.com/mNlogCLmCz</a>&mdash; 3LAU (@3LAU) <a href="https://twitter.com/3LAU/status/1600179646456135682?ref_src=twsrc%5Etfw">December 6, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



New music from the duo, who have been friends for 10 years, according to Aoki, will be released in 2023.



“This isn’t an NFT,” tweeted the pair, but rather Punx is described as a “conceptual music/art project” with a different sound than fans are used to from the musicians.&nbsp;&nbsp;



Both Aoki and Blau changed their respective Twitter profile pictures to Punk #6748 and Punk #6708, respectively, signaling that these NFTs may be used as characters in music videos or other visual imagery.



Another example of a duo using their NFTs for musical projects is Eminem and Snoop Dogg, who <a href="https://twitter.com/SnoopDogg/status/1540189746877632514?s=20&amp;t=OJ0ecgoIZOSYaNxeosMrMA" target="_blank" rel="noreferrer noopener">turned</a> their Bored Apes into avatars for an MTV performance. Additionally, Bored Ape and Mutant Ape NFT characters have also been used to form a virtual band called Kingship under Universal Music Group’s 10:22PM label.



Blau owns the music NFT marketplace Royal that allows users to own a piece of a song or album&#8217;s streaming royalty rights. While historically it has only worked with huge acts like Nas, Diplo and Chainsmokers, Royal has now started to give smaller, emerging artists the chance to sell percentages of streams of their songs in the form of tokens.&nbsp;



Independent artist Jake Zimma released his first drop on Royal this week and sold out in two hours. He told Blockworks that this opportunity was a way to “not just grow financially but also a way to engage with fans and generate awareness of my music and brand.”&nbsp;&nbsp;



“While the ups and downs of crypto currencies may be unpredictable, trends within musicians&#8217; streaming behavior can easily be counted on,&#8221; Zimma said.



<blockquote class="wp-block-quote">&#8220;It&#8217;s an exciting new way for musicians and music fans to get involved with the crypto world, hopefully without as much chaos.&#8221;</blockquote>



“At the end of the day everyone loves music,” he added.&nbsp;



<h3>Windows’ Winamp MP3 player</h3>



Another company trying to ride the music NFT wave is Winamp — Windows’ desktop media player from the ‘90s.



Its latest update for desktop <a href="https://www.winamp.com/wp-content/uploads/press-release-2022.12.06-winamp-player-now-supports-audio-nfts.pdf" target="_blank" rel="noreferrer noopener">allows</a> its 83 million users to play audio files embedded in their NFTs, <a href="https://twitter.com/winamp/status/1600226376442793985?s=20&amp;t=XNWMZWx0QF8Ec-4EMMYzWg" target="_blank" rel="noreferrer noopener">tweeted</a> Winamp — but it requires a few steps. Those with NFT music libraries on MetaMask would need to link their wallets via Brave, Chrome or Firefox browsers to import the files into Winamp as an .m3u playlist.&nbsp;



Winamp supports ERC-721 and ERC-1155 audio and video files and is compatible with Ethereum and Polygon NFTs.



Winamp users’ responses on Twitter varied from “You lost me with NFTs” to “Lol. No” and “will try this new version.”



Winamp CEO Alexandre Saboundjian stated that Winamp is the “the very first standalone player reading audio NFTs.” His plans also include launching a cross-platform creator service that links artists and fans directly in early 2023.



<h3>Growth of music NFTs</h3>



Music NFT marketplace Sound.xyz reported that the number of mints of NFTs has doubled in each of the last two months. Dune Analytics data <a href="https://dune.com/nicoelzer/sound-xyz">showed</a> that over a third — around 12,000, of the platform’s 30,000 mints came in November. And so far in December, there have already been more than 7,400 new mints, signaling the likelihood that the total mints will pass last month’s record.



NFTs, whether music or art, enable creators to foster a community around their work built on ownership over their digital assets. Artists can earn royalties each time the NFT is sold, while collectors who also have a stake in ownership may gain exclusive access to shows, merch, meet and greets and more.



Traditionally, the labels who represent these artists distribute their music to streaming platforms such as Spotify and Apple Music. A percentage of revenue from users who subscribe to these platforms is then redistributed among the label, artists and producers in the form of royalties.&nbsp;



This model, however, is a “disaster,” according to Gino The Ghost, music producer and founder of music NFT project Blocktones.&nbsp;



“Labels are making more [money] than ever before while signed artists and the creatives behind those records make pennies (of a penny) on the dollar…Spotify has yet to even turn a profit. Nobody wins,” he <a href="https://twitter.com/GinoTheGhost/status/1539286360170844162" target="_blank" rel="noreferrer noopener">tweeted</a>.



Music NFTs provide a unique vehicle of distribution, he <a href="https://twitter.com/GinoTheGhost/status/1539286005253038080?s=20&amp;t=h1LEW-nSyjFkak3RemdAlw" target="_blank" rel="noreferrer noopener">added</a>, because it “allow artists to package their music in a non-conventional way. Set the supply, engage with your fans, and activate your community with future application.”



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Music NFTs Aren’t Listening to Market Conditions

When it comes to US crypto regulation, the two federal agencies at the forefront may need to collaborate to clear up a number of uncertainties, according to a former CFTC chair.



“The SEC and the CFTC could jointly create a self-regulatory organization,” former CFTC head Tim Massad said during a virtual appearance hosted by the <a href="https://global-dca.org/" target="_blank" rel="noreferrer noopener">Global DCA</a> Wednesday. 



Self-regulatory organizations set industry standards and regulations, most notably in the financial sector. While they still are subject to government oversight, they allow industry participants to keep an eye on each other and ensure best practices are followed.&nbsp;



Neither the SEC nor the CFTC has the power to solely tackle the regulation of digital assets, according Massad, now a research fellow at Harvard University’s School of Government. &nbsp;



The lines are currently blurred, Massad said — with the CFTC taking control over exchange-traded bitcoin and ether <a href="https://blockworks.co/news/cme-group-to-offer-options-on-ether-futures" target="_blank" rel="noreferrer noopener">futures markets</a> and the <a href="https://blockworks.co/news/qa-the-sec-classified-9-tokens-as-securities-now-what" target="_blank" rel="noreferrer noopener">SEC stepping in</a> when it deems a crypto token a security. Though the exact classification of tokens is a separate issue, Massad said the two agencies need to come together to oversee crypto’s cash market, predominantly housed by exchanges.&nbsp;



A new organization could “develop common standards that would apply to trading venues and other intermediaries, regardless of whether a particular token is a security, a commodity or something else,” he added.&nbsp;



If the SEC and CFTC moved to create a self-regulatory organization, it would not be the first of its kind. The <a href="https://www.sec.gov/rules/sro.shtml" target="_blank" rel="noreferrer noopener">New York Stock Exchange</a> and Fixed Income Clearing Corporation are two examples.&nbsp;



The crypto industry would be responsible for paying for any new collective, which would be responsible for enforcing the rules the SEC and CFTC create.&nbsp;



“It&#8217;s ironic, of course, that we&#8217;re also at this point where we have these large intermediaries, large trading venues that are essentially unregulated, or only very lightly regulated,” Massad said. “And I say it&#8217;s ironic because when you read the original bitcoin white paper and think about the purpose of bitcoin, it was to eliminate large trusted intermediaries, or at least eliminate the need to rely on large trusted intermediaries and create peer-to-peer systems for transferring value.”



Congress, meanwhile, continues to mull over the Digital Commodity Consumer Protection Act (DCCPA), which received vocal support from now-disgraced FTX founder Sam Bankman-Fried. The legislation would grant the CFTC more power in overseeing cryptocurrency markets.&nbsp;



Current CFTC Chair Rostin Behnam <a href="https://blockworks.co/news/sbf-cftc-crypto-bill" target="_blank" rel="noreferrer noopener">appeared before Congress</a> earlier this month, where he highlighted the importance of the bill — and suggested it could have softened the blow of the recent FTX collapse.



“Based on what we know thus far, a lot of the issues that have arisen and sort of come to light are significant conflicts of interest, significant allegations of commingling customer money and house money, lack of books and records, lack of corporate governance and risk controls, just to name a few,” Behnam said. “And these are, from our understanding in working with [bill sponsors] on the DCCPA, core elements of the DCCPA.”



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Ex-CFTC Chair: Crypto Regulation Could Be Joint SEC, CFTC Effort

A member of the House Committee on Financial Services is calling for the Government Accountability Office, known as Congress’ investigation arm, to look into the SEC and its “failure to protect the investing public” from FTX.&nbsp;



Rep. Ritchie Torres, D-N.Y., drafted the <a href="https://emmer.house.gov/_cache/files/0/c/0c7fc863-7916-4b19-bc44-52bef772287e/9B0B9D1CA9B3C215DDC762DF5B0F6864.3.16.22.emmer.sec.letter.pdf" target="_blank" rel="noreferrer noopener">letter</a>, dated Tuesday.&nbsp;



“Chair Gensler took the position that the SEC had clear authority to investigate crypto exchanges,” Torres told Blockworks via email.



<blockquote class="wp-block-quote">“When it comes to government failure, the public official singularly responsible for failing to expose the FTX fraud is SEC Chair Gary Gensler.”</blockquote>



Torres also referred to the SEC’s handling of FTX as “egregious mismanagement.” 



“If he had clear authority to do so, why did he fail to uncover the largest crypto Ponzi scheme in history?” Torres added. “It is on Congress to pass laws, but it is on the regulators to apply those laws to conduct investigations, and in the case of Gary Gensler, the regulators failed catastrophically. Chair Gensler has some explaining to do.”



Torres’ call for investigation comes months after he, along with Reps. Tom Emmer, R-Ind., Josh Gottheimer, D-N.J., Jake Auchincloss, D-N.J., Ted Budd, R-N.C., Warren Davidson, R-Ohio, Byron Donalds, R-Fl., and Darren Soto, D-Fl., drafted a <a href="https://emmer.house.gov/_cache/files/0/c/0c7fc863-7916-4b19-bc44-52bef772287e/9B0B9D1CA9B3C215DDC762DF5B0F6864.3.16.22.emmer.sec.letter.pdf" target="_blank" rel="noreferrer noopener">letter</a> to Gensler asking about the SEC’s jurisdiction over non-SEC regulated entities. 



“The SEC’s regulatory functions, while broad, are limited to the extent of its statutorily mandated jurisdiction,” the letter, published in March 2022, read. “It appears there has been a recent trend towards employing the Enforcement Division’s investigative functions to gather information from unregulated cryptocurrency and blockchain industry participants in a manner inconsistent with the Commission’s standards for initiating investigations.”&nbsp;



The letter does not mention any specific cryptocurrency companies representatives were concerned the SEC was investigating, FTX or otherwise.&nbsp;



Torres did receive campaign donations linked to FTX founder Sam-Bankman-Fried, according to Federal Election Commission filings, but the Congressman elected to donate his contribution, his office <a href="https://blockworks.co/news/ftx-donations-campaign-finance" target="_blank" rel="noreferrer noopener">told Blockworks</a> last month.



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Gensler ‘Singularly Responsible’ for Failing To Expose FTX Fraud, Rep. Says

One of the world’s largest asset managers is exploring the use cases for NFTs despite a turbulent crypto market environment, noting such tokens’ relevance beyond just digital art.



The company minted its first NFTs — issuing them to attendees of its first Innovation Forum held in September to offer clients a way to explore the digital assets ecosystem — and now seeks to move further into the space.



“We see NFTs in their literal sense and more generally than just for their application with artwork or collectibles,” <a href="https://www.linkedin.com/in/mikemuir/" target="_blank" rel="noreferrer noopener">Mike Muir</a>, Franklin Templeton’s head of digital assets technology, told Blockworks. “[An NFT] is an applicable construct for any unique asset for which only one exists.”



For example, Muir added, loans and property titles are unique assets that are not fungible.&nbsp;



Franklin Templeton allowed attendees of its Innovation Forum the ability to download the NFT through the firm’s Benji Investments app. It acted as “a badge” and was non-transferrable, the company said, and clients could use the token to access research from the Franklin Templeton digital assets team.



US clients across asset management and financial services have shown interest in interacting with digital assets such as NFTs, according to the company.



“Firsthand practical experiences like this create understanding and foster contemplation and thought as to what else may be possible,” Muir said. “In the long term, we are considering generalizing our issuance of NFTs for a variety of purposes and are devoted to uncovering new applications for these assets.”



Dmitriy Berenzon, a research partner at early-stage venture fund 1kx, said that exploring the issuance of on-chain assets is the right way to go for institutions. He added that Franklin Templeton is correctly using this tool to drive more engagement with their community.



<blockquote class="wp-block-quote">“It is not about permissioned blockchains that try to improve the efficiency of walled gardens, but rather about permissionless, crypto networks that drive human coordination at scale through the use of tokens,” Berenzon told Blockworks. </blockquote>



For other large financial services companies, NFTs can offer additional avenues for interacting with on-chain assets and liquidity, such as liquidity pools gated by know-your-customer (KYC) requirements, the 1kx research partner added.



“That said, they likely need more regulatory clarity prior to committing any significant amount of balance sheet,” Berenzon said.&nbsp;



<h3>An evolution for fund managers</h3>



Franklin Templeton, which had roughly $1.3 trillion in assets under management as of Oct. 31, has been moving deeper into the crypto space in recent months.



The company launched the <a href="https://www.franklintempleton.com/investments/options/money-market-funds/products/29386/SINGLCLASS/franklin-on-chain-u-s-government-money-fund/FOBXX" target="_blank" rel="noreferrer noopener">Franklin OnChain U.S. Government Money Fund</a> — a mutual fund using blockchain to process transactions and record share ownership — in April 2021.



The fund manager unveiled <a href="https://blockworks.co/news/franklin-templeton-preps-first-institutional-crypto-accounts" target="_blank" rel="noreferrer noopener">its first crypto-focused separately managed accounts</a> (SMAs) for investment professionals in September.



<a href="https://www.linkedin.com/in/roger-bayston-46256517a/" target="_blank" rel="noreferrer noopener">Roger Bayston</a>, the company’s segment lead, called digital assets “frontier risk alternatives” in <a href="https://blockworks.co/news/franklin-templeton-exec-digital-assets-are-frontier-risk-alternatives" target="_blank" rel="noreferrer noopener">an October interview with Blockworks</a>. He added that Franklin Templeton was looking into bringing additional digital asset investment strategies to market.



The fund giant’s move into NFTs comes after asset manager <a href="https://blockworks.co/news/vaneck-exec-use-cases-of-nfts-approaching-unlimited" target="_blank" rel="noreferrer noopener">VanEck launched an NFT collection</a> in May designed to ​​”build an active community of crypto-focused investors,” the firm said.



Though ProChain Capital President David Tawil said at the time VanEck’s launch was “a bit of a gimmicky way” to draw people into NFTs, he added that the effort could bridge gaps between the collectibles aspect of NFTs and their broader use cases.



VanEck’s NFT community started off with nearly 50,000 sign-ups, and the firm connected its members at in-person and virtual events, according to Matthew Bartlett, who leads VanEck’s NFT community and Web3 efforts.&nbsp;



Bartlett told Blockworks that the firm is encouraged to see another global asset manager using NFTs to foster client engagement and community building.&nbsp;



“We strongly believe that NFTs and related blockchain applications will become integral parts of the client engagement experience across a range of industries, from finance to social media to consumer technology,” he said.



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$1.3T Asset Manager Exploring Use Cases for 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;



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