Ethereum is a distributed blockchain computing platform for smart contracts and decentralized applications. Its native token is ether (ETH), which primarily serves as a means of payment for transaction fees and as collateral for borrowing specific ERC-20 tokens within the decentralized finance (DeFi) sector.

Ethereum

Casey Wagner

As regulation continues to heat up in the US, Genesis has teamed up with qualified custodian BitGo Trust on a tri-party solution for institutional clients, the companies announced Wednesday.&nbsp;



Under the agreement, BitGo Trust will provide qualified custody services and cold storage for assets held on behalf of Genesis&#8217; institutional clients, the companies said.&nbsp;



The teams are hoping to bring tried and true methods of security to the <a href="https://blog.bitgo.com/managing-counterparty-risk-importance-of-tri-party-collateral-management-in-crypto-714be0823590" target="_blank" rel="noreferrer noopener">crypto ecosystem</a>. 



“Institutions require a segregation of responsibilities. Trading, settlement, and custody need to be with separate institutions to minimize counterparty exposure,” Adam Sporn, head of prime brokerage at BitGo, told Blockworks. “In traditional finance, the credit crisis in 2008 led to a significant increase in tri-party relationships and we are seeing the same thing post-FTX in the digital asset space.”



The goal is to combine security with deep liquidity and trading expertise, Genesis added.&nbsp;



“Institutional clients are increasingly looking to trading partners that can mitigate their



concerns about counterparty risk exposure in the current environment,” Derar Islim, Genesis interim CEO, said. “With demand for a solution rising, we quickly understood that the clear path to meet this demand was to segregate credit and capital risk with regulated and qualified custodians.”&nbsp;



It’s not the first time Genesis and BitGo have teamed up. In 2019, Genesis Global Trading formed an agreement with BitGo to provide trading services from custody accounts.&nbsp;



Custody security and regulation concerns have ramped up since 2019, though, but both companies are confident in their level of compliance and transparency.&nbsp;



BitGo Trust offers a $250 million insurance policy and holds SOC 1 Type 2 and SOC 2 Type 2 certifications; compliance tools to measure risks associated with technology solutions.&nbsp;



“Institutional-grade custodial solutions are now expected to offer a suitable blend of the best available technology and the strongest reputational standards,” Gordon Grant, co-head of trading at Genesis, said. “Multi-signature, multi-party computation with hardware isolation, and cold-storage facilities have been part of an opening gambit for service offerings in this respect.”



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Genesis, BitGo Trust Collaborate on Custody Product for Institutions

Layer-1 blockchains have recovered strongly from December market lows, underlining their prominence as a paramount sector of the cryptocurrency industry. The native assets for key players like Ethereum, BNB Chain, Solana, and Avalanche have posted massive gains across the board, with investors weighing up the possibility of a continued uptrend.



Tellingly, adoption metrics for the underlying networks have emerged as a crucial indicator for predicting the price action of layer-1 (L1) projects. <a href="https://www.bloomberg.com/professional/blog/ethereums-moat-reinforced-in-bear-market-solana-has-value/">On-chain data reveals that an L1 asset&#8217;s value tends to increase or decline based on user activity and demand for blockspace.</a> Therefore, tracking the relationship between active addresses and the price of an L1 asset can enable investors to spot potential opportunities. These insights also deliver a gauge for measuring the competitive moat of a layer-1 network.



The <a href="https://www.bloomberg.com/professional/solution/bloomberg-terminal/">Bloomberg Terminal</a> provides actionable trading data from on-chain activity across leading L1 networks. Analyzing these data sets gives investors the competitive edge to make calculated investments into L1 ecosystems.



<h2>The year so far for L1s</h2>



Market valuations for L1 projects has rebounded from the harsh conditions created by the fallout of several centralized crypto companies, including FTX, Celsius, BlockFi, Genesis Capital, and several others. As of late December 2022, most L1 assets traded more than 90% below their all-time highs.



Nonetheless, the collapse of centralized entities emphasized the need for blockchain-based alternatives powered largely by L1 networks. This has, in turn, led to an increase in user demand for L1 assets to own a stake in these networks and access decentralized applications.&nbsp;



Unsurprisingly, the market value for a subset of L1 assets (ETH, BNB, SOL, AVAX) tracked by Bloomberg Intelligence has risen by an average of 79% year-to-date. Solana&#8217;s SOL token is the biggest gainer, with nearly 150% gains since the turn of the year. The most widely used networks, Ethereum and BNB Chain, have also recorded 38% and 28% gains, respectively.


<div class="wp-block-image">
<figure class="aligncenter size-full"><img decoding="async" loading="lazy" width="534" height="396" src="https://blockworks-co.imgix.net/wp-content/uploads/2023/03/image-17.png" alt="" class="wp-image-50707" srcset="https://blockworks-co.imgix.net/wp-content/uploads/2023/03/image-17.png?w=534 534w, https://blockworks-co.imgix.net/wp-content/uploads/2023/03/image-17.png?w=300 300w, https://blockworks-co.imgix.net/wp-content/uploads/2023/03/image-17.png?w=347 347w, https://blockworks-co.imgix.net/wp-content/uploads/2023/03/image-17.png?w=352 352w, https://blockworks-co.imgix.net/wp-content/uploads/2023/03/image-17.png?w=295 295w, https://blockworks-co.imgix.net/wp-content/uploads/2023/03/image-17.png?w=80 80w" sizes="(max-width: 534px) 100vw, 534px" /><figcaption class="wp-element-caption">Source: Bloomberg</figcaption></figure></div>


Regardless of the recovery of L1s, the year ahead is likely to be volatile. Unlike the recent increase linked to a broader market recovery from oversold levels,  Bloomberg Intelligence Senior Market Structure Analyst Jamie Douglas Coutts <a href="https://www.bloomberg.com/professional/blog/ethereums-moat-reinforced-in-bear-market-solana-has-value/">predicts that</a> &#8220;price momentum [for L1s] will need to be matched with strengthening fundamentals [while] pointers such as user adoption and protocol monetary policy” will be crucial, especially as the L1 wars resume in the coming months.



<h2>Competitive moats for L1 networks</h2>



The 2022 bear market provided a stern test for L1 ecosystems, with user activity recording a steep decline throughout the year. At the same time, the downturn provided a yardstick for measuring the competitive moat of each L1 network.&nbsp;



For instance, Ethereum and BNB Chain showed greater resilience to the lower blockspace demand than competing L1s Solana and Avalanche. The number of active addresses on Solana and Avalanche dropped by 69.9% and 26.46%, respectively, while Ethereum and BNB saw less than a 2% decline under the same user metric.


<div class="wp-block-image">
<figure class="aligncenter size-full"><img decoding="async" loading="lazy" width="532" height="539" src="https://blockworks-co.imgix.net/wp-content/uploads/2023/03/image-14.png" alt="" class="wp-image-50704" srcset="https://blockworks-co.imgix.net/wp-content/uploads/2023/03/image-14.png?w=532 532w, https://blockworks-co.imgix.net/wp-content/uploads/2023/03/image-14.png?w=296 296w, https://blockworks-co.imgix.net/wp-content/uploads/2023/03/image-14.png?w=254 254w, https://blockworks-co.imgix.net/wp-content/uploads/2023/03/image-14.png?w=258 258w, https://blockworks-co.imgix.net/wp-content/uploads/2023/03/image-14.png?w=216 216w, https://blockworks-co.imgix.net/wp-content/uploads/2023/03/image-14.png?w=80 80w" sizes="(max-width: 532px) 100vw, 532px" /><figcaption class="wp-element-caption">Source: Bloomberg</figcaption></figure></div>


The number of active addresses on an L1 is a crucial metric as it represents the number of actual users on each chain. Hence, the sustained demand for Ethereum and BNB Chain blockspace underlines their position as the leading destination for Web3 users.&nbsp;



In contrast, the decline in active addresses on Avalanche and Solana amid the bear market suggests user interest in these L1s is connected to short-term plays within the respective ecosystems. Moreover, the active addresses metric delivers other actionable insights for investors to optimize their L1 portfolio.



<h2>The power of active addresses </h2>



Bloomberg&#8217;s analysis demonstrates that the number of active addresses heavily impacts the price action of L1 assets. The study utilized the widely-trusted &#8220;R-squared&#8221; methodology to uncover that the <a href="https://www.bloomberg.com/professional/blog/ethereums-moat-reinforced-in-bear-market-solana-has-value/">correlation between price action and active addresses on the top three L1s</a> (Ethereum, BNB Chain, and Avalanche) ranged from moderate to strong.



Understandably, Solana&#8217;s price action correlated less to the number of active addresses distorted by heavy venture capital interest in the network and the collapse of its biggest backer, Alameda Research. The price of SOL recorded a linear regression of 0.01 over 33 monthly samples.


<div class="wp-block-image">
<figure class="aligncenter size-full"><img decoding="async" loading="lazy" width="537" height="241" src="https://blockworks-co.imgix.net/wp-content/uploads/2023/03/image-15.png" alt="" class="wp-image-50705" srcset="https://blockworks-co.imgix.net/wp-content/uploads/2023/03/image-15.png?w=537 537w, https://blockworks-co.imgix.net/wp-content/uploads/2023/03/image-15.png?w=300 300w, https://blockworks-co.imgix.net/wp-content/uploads/2023/03/image-15.png?w=428 428w, https://blockworks-co.imgix.net/wp-content/uploads/2023/03/image-15.png?w=470 470w, https://blockworks-co.imgix.net/wp-content/uploads/2023/03/image-15.png?w=389 389w, https://blockworks-co.imgix.net/wp-content/uploads/2023/03/image-15.png?w=80 80w" sizes="(max-width: 537px) 100vw, 537px" /><figcaption class="wp-element-caption">Source: Bloomberg</figcaption></figure></div>


Investors derive from the above metrics that price action for ETH and AVAX relies more heavily on an uptick in active addresses, while BNB is subject to other market forces. Accessing such invaluable on-chain data in real-time through the Bloomberg Terminal equips market participants to allocate trading capital efficiently and amplify returns on investments. Monitoring the trend on active addresses is especially crucial to investors as L1 activity begins picking up again in a post-bear market environment.



<h2>L1 activity trends in 2023</h2>



The rebound in the market value of L1 assets does not directly reflect a resurgence in user activity on the underlying chains. Instead, it is more closely linked to a less-hostile macro environment where investor appetite gradually returns after a devastating year for financial markets.&nbsp;



L1 activity trends remain relatively low, with BNB Chain the only network seeing an increase in active addresses in 2023. The Ethereum L1 failed to add new active users but has seen an uptick in new addresses onboarding layer-2 solutions such as Optimism, Arbitrum, and Polygon. The Ethereum-native ecosystem has grown by over 20%, with addresses jumping from 330,000 to more than 420,000 in the past year. Such growth demonstrates Ethereum&#8217;s competitive moat and increasing significance as more L2 solutions come onto the scene.


<div class="wp-block-image">
<figure class="aligncenter size-full"><img decoding="async" loading="lazy" width="532" height="310" src="https://blockworks-co.imgix.net/wp-content/uploads/2023/03/image-18.png" alt="" class="wp-image-50708" srcset="https://blockworks-co.imgix.net/wp-content/uploads/2023/03/image-18.png?w=532 532w, https://blockworks-co.imgix.net/wp-content/uploads/2023/03/image-18.png?w=300 300w, https://blockworks-co.imgix.net/wp-content/uploads/2023/03/image-18.png?w=428 428w, https://blockworks-co.imgix.net/wp-content/uploads/2023/03/image-18.png?w=448 448w, https://blockworks-co.imgix.net/wp-content/uploads/2023/03/image-18.png?w=376 376w, https://blockworks-co.imgix.net/wp-content/uploads/2023/03/image-18.png?w=80 80w" sizes="(max-width: 532px) 100vw, 532px" /><figcaption class="wp-element-caption">Source: Bloomberg</figcaption></figure></div>


As the above Bloomberg Intelligence analysis further shows, Solana and Avalanche are the biggest underperformers, with unique active addresses relatively flat since the turn of the year. Both L1s inarguably require an uptick in the number of users and transaction activity to stage a comeback to 2022 highs.



<h2>Using the active address ratio to spot potential mispricing opportunities</h2>



Data and analysis available on the Bloomberg Terminal also tap into the active address ratio to address one of the biggest challenges for digital asset investors – evaluating an L1 project. Efficiently comparing active addresses to an asset&#8217;s market cap allows investors to identify mispricing opportunities.



Ethereum leads the ranking for L1 assets by market cap to active addresses ratio, owing to its high level of decentralization and network properties. The switch to PoS would also help Ethereum scale its ecosystem faster through L2 solutions.


<div class="wp-block-image">
<figure class="aligncenter size-full"><img decoding="async" loading="lazy" width="541" height="363" src="https://blockworks-co.imgix.net/wp-content/uploads/2023/03/image-16.png" alt="" class="wp-image-50706" srcset="https://blockworks-co.imgix.net/wp-content/uploads/2023/03/image-16.png?w=541 541w, https://blockworks-co.imgix.net/wp-content/uploads/2023/03/image-16.png?w=300 300w, https://blockworks-co.imgix.net/wp-content/uploads/2023/03/image-16.png?w=383 383w, https://blockworks-co.imgix.net/wp-content/uploads/2023/03/image-16.png?w=389 389w, https://blockworks-co.imgix.net/wp-content/uploads/2023/03/image-16.png?w=326 326w, https://blockworks-co.imgix.net/wp-content/uploads/2023/03/image-16.png?w=80 80w" sizes="(max-width: 541px) 100vw, 541px" /><figcaption class="wp-element-caption">Source: Bloomberg</figcaption></figure></div>


However, Bloomberg&#8217;s findings reveal that Solana may be mispriced despite having a significantly higher number of active users than Avalanche. Avalanche&#8217;s market cap to active address ratio trades at a 500% premium vs. Solana. The EVM-based chain boasts only 12% of Solana&#8217;s active addresses. The metric also indicates that SOL may be undervalued and primed for an increase as bear market effects wear off.



<h3>Optimize L1 portfolios with data-driven insights from Bloomberg&nbsp;</h3>



Layer-1 chains play a crucial role within the digital asset industry and represent a sizable portion of many investment portfolios. Investors can optimize their exposure to the L1 ecosystem with data-driven insights from Bloomberg Intelligence, available exclusively for Bloomberg Terminal subscribers. The <a href="https://www.bloomberg.com/professional/solution/bloomberg-terminal/">Bloomberg Terminal</a> grants users access to actionable on-chain data across different L1 networks, including Ethereum, BNB Chain, Solana, and Avalanche. For instance, analyzing high-value data on active addresses equips users to gauge an L1&#8217;s competitive moat and spot potential mispricing opportunities in real time. Investors can thus optimize short-term and long-term portfolios to maximize returns on the L1 bets.



This content is sponsored by <a href="https://www.bloomberg.com/professional/solution/bloomberg-terminal/">Bloomberg</a>.



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What the Strong Recovery of L1s Means — and How Active Addresses Will Be Key To Know Where They’re Going

Shalini Nagarajan

The US Office of the Comptroller of the Currency (OCC) has established a new fintech office to adapt to technological evolutions in banking, including crypto assets.



The Treasury said the office will add to its knowledge of digital assets, fintech partnerships and other emerging technology models that have an impact on OCC-supervised banks. It will also contribute to oversight of partnerships between traditional institutions and fintech firms.



Prashant Bhardwaj, who has worked in several roles across the financial sector for 30 years, has been appointed the new fintech office&#8217;s deputy comptroller and chief financial technology officer. His tenure begins April 10.



“To ensure that the federal banking system is safe, sound, and fair today and well into the future, we need to have a deep understanding of financial technology and the financial technology landscape,” Michael Hsu, acting comptroller of the currency, said in a <a href="https://www.occ.treas.gov/news-issuances/news-releases/2023/nr-occ-2023-31.html" target="_blank" rel="noreferrer noopener">statement</a>.&nbsp;



The OCC is a department under the Treasury in charge of executing laws relevant to national banks. Some of its powers include supervisory actions against banks, removal of bank directors and rejecting applications for new bank branches.



Hsu has previously urged the crypto industry to introduce stablecoin standards in the same vein as the World Wide Web Consortium and Internet Engineering Task Force’s approaches to guiding internet development.



In December, the OCC reiterated its stance on taking a <a href="https://blockworks.co/news/us-treasury-occ-crypto-problem" target="_blank" rel="noreferrer noopener">cautious approach</a> to crypto, pointing to various events that roiled digital asset markets in 2022.&nbsp;



One year earlier, Hsu had issued a reminder to federal savings associations and national banks to not participate in “certain cryptocurrency, distributed ledger, and stablecoin activities” without a non-objection notice from their regulatory supervisors.



“The events of this year in the crypto industry have revealed a high degree of interconnectedness between certain crypto participants through a variety of opaque lending and investing arrangements,” the agency said in a semi-annual Risk Perspective report.



Just before his recent retirement, Senator Pat Toomey pushed legislation that would see the OCC <a href="https://blockworks.co/news/lame-duck-senator-leaves-stablecoin-bill-legacy" target="_blank" rel="noreferrer noopener">gain direct oversight</a> of stablecoin issuers by way of a specialized licensing charter.



The agency was among three powerful US financial regulators to express skepticism over financial institutions holding crypto assets in January. Along with the Federal Reserve and the Federal Deposit Insurance Corporation, the OCC <a href="https://www.fdic.gov/news/press-releases/2023/pr23002a.pdf">warned</a> that risks associated with crypto should not spill over into the banking system.&nbsp;



“Based on the agencies’ current understanding and experience to date, the agencies believe that issuing or holding as principal crypto-assets that are issued, stored, or transferred on an open, public, and/or decentralized network, or similar system is highly likely to be inconsistent with safe and sound banking practices,” the agency said.



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Fresh OCC ‘Fintech Office’ Tasked With Keeping Up With Crypto

Sebastian Sinclair

SEC Chair Gary Gensler voiced his support of President Joe Biden’s request to fund his agency to the tune of $2.4 billion, claiming the funding would go a long way to taming the “wild west” of the crypto markets.



“I am pleased to support the President’s [financial year] 2024 request of $2.436 billion for the SEC, to put us on a better track for the future,” Gensler said during a House Financial Services subcommittee hearing.



Rapid technological innovation in the financial markets, particularly crypto, has led to misconduct in emerging areas, he added in his <a href="https://docs.house.gov/meetings/AP/AP23/20230329/115576/HHRG-118-AP23-TTF-GenslerG-20230329.pdf" target="_blank" rel="noreferrer noopener">published remarks</a>.



<a href="https://blockworks.co/news/gary-gensler-bait-switch-coinbase">Critics argue</a> the agency, under Gensler, has unfairly targeted the industry, which has led to a series of high-profile enforcement actions through litigation — most recently with crypto exchange Coinbase’s receipt of a <a href="https://blockworks.co/news/sec-serves-coinbase-in-latest-alleged-crypto-securities-violation">Wells notice</a> earlier this month.&nbsp;



The regulator is alleging Coinbase violated US securities through its spot market, staking service, Coinbase Prime and Coinbase Wallet. Weeks prior, rival exchange <a href="https://blockworks.co/news/kraken-settles-sec-crypto-staking-program">Kraken agreed</a> to settle with the SEC for $30 million over similar allegations, without admitting wrongdoing.



The funding, if approved by Congress, would allow the agency to double its headcount, allowing the division handling crypto affairs “to investigate misconduct on a larger scale.”



“Addressing this requires new tools, expertise and resources,” Gensler said. It would also speed up the pace of enforcement investigation through “resolutions.”



The SEC did not immediately respond to a request for comment.



“These additional resources would strengthen the division’s ability to protect American families by addressing risks in the crypto markets, cyber and information security, and the resiliency of critical market infrastructure,” he said.



Crypto is “rife with noncompliance,” Gensler added, seemingly ignoring Coinbase’s accusation it has attempted to engage with the regulator on multiple occasions for a clear path to registration.&nbsp;



“Investors have put hard-earned assets at risk in a highly speculative asset class,” he said.



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Gensler Cheers $2.4B Funding Proposal for SEC in Biden Budget

The world’s largest asset manager, BlackRock, said Thursday it believes the US Federal Reserve would continue its campaign of future rate hikes, despite market expectations of a freeze.



It could mean a volatile road lies ahead for digital assets in the short-term, based on prior performances throughout 2021 and 2022 and present-day announcements from the central bank, experts say.



Bitcoin (<a href="https://blockworks.co/price/btc">BTC</a>), which has so far managed to climb a wall of worry in the wake of the Fed’s <a href="https://blockworks.co/tag/interest-rates">aggressive rate hikes</a>, benefited from uncertainty in the banking sector as investors sought to hedge via a <a href="https://blockworks.co/news/institutions-bullish-on-eth-price">flight to quality</a>.&nbsp;



The biggest headwinds now facing the US and global economy are not immediate, Dmitry Lapidus, of crypto-native investment fund Dragonfly, told Blockworks.



The Fed “did a great job bailing the banks out” and the effect on GDP is likely to be exaggerated for the remainder of the year, he said.



“I think they cluster somewhere around Q3/Q4 when excess savings are drawn down and housing data is likely to accelerate to the downside.”



Despite the Fed’s recent dovish stance of easing rate hikes, as evidenced by its 25 basis point rise instead of the previously anticipated 50, market uncertainty still lingers.



Lapidus said for crypto, “it’s tough to decouple” from the macroeconomic environment, with the “pain trade” continuing to be up in all risk assets as long as liquidity was supported.



In the near term, he predicts the trend of higher prices for digital assets to continue.



<h2>Future rate hikes?</h2>



The Federal Reserve will next convene to determine short-term interest rates on May 3, with analysts predicting a split chance between a 25 bps increase or the decision to maintain current rates, data from CME Group’s <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">FedWatch</a> tool shows.



BlackRock <a href="https://www.bloomberg.com/news/articles/2023-03-28/markets-are-wrong-on-us-rate-cut-bets-blackrock-says" target="_blank" rel="noreferrer noopener">believes</a> the central bank will avoid rate cuts this year and opt to continue curbing inflation, albeit at a less aggressive pace than the year prior. Lapidus agrees, pointing to&nbsp; “stubborn” and “sticky” core inflation, as well as the contained banking crisis. In that world, rates would continue to rise.



Previous hikes show the impact on digital assets has had mixed results, particularly at a time when the industry was dealing with several major bankruptcies and declining valuations.



The two largest drops in bitcoin’s price on rate hike announcements occurred on May 5, 2022 (-7.9%) and June 16 of the same year (-9.6%), taking the federal funds rate from 1.5% to 1.75%. Both came before the larger interest rate hikes of 75 bps in the latter half of 2022.



If the Fed reaccelerates its pace with indications of significantly more rate hikes to come, then the crypto rally will falter, Markus Thielen, Matrixport&#8217;s head of research, told Blockworks.



“The debate about a higher terminal rate would also have negative implications for tech companies and start-ups,” he said.



<h2>Change of pace</h2>



Still, the environment in which digital assets now operate has significantly changed from two years ago, when rates had come off historic lows which sustained a decade of cheap borrowing costs.



The price of bitcoin actually rose about 8% on a rate hike of 75 bps <a href="https://blockworks.co/news/fed-raises-rates-75-basis-points-again">on July 27, 2022</a>. Other instances, including the hikes on <a href="https://blockworks.co/news/fed-ends-0-75-streak-opts-for-lower-rate-increase-in-december">Dec. 14</a>, <a href="https://blockworks.co/news/federal-reserve-raises-interest-rates-25-bps">Feb. 1</a>, 2023, and, most recently, <a href="https://blockworks.co/news/federal-reserve-interest-rate-25-bps-march">on March 22</a>, resulted in moderate increases in bitcoin’s price.



Research-focused digital assets brokerage firm K33 <a href="https://k33.com/research/analysis/analysis/correlations-are-declining-and-it-makes-sense" target="_blank" rel="noreferrer noopener">said</a> in a Thursday post that growth had been the main priority amid the zero-interest rate regime, which had kicked into high gear from the outset of the COVID-19 pandemic.



“In crypto, the growth focus was perverse. This is the source of the yearlong correlated hangover that was 2022,” the firm said.



The abundance of capital available to startups via private fundraising led to a prioritization of growth over everything else, with lower interest rates further fueling that trend, K33 said.



While the impact on digital asset performance over the short term appeared sensitive to future hikes, the longer-term implications of “high-interest rates are unknown,” it said.



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BlackRock Predicts More Rate Hikes, Possible Short-Term Volatility for Crypto

A new MIT masters thesis from a US Space Force major contends bitcoin is not just a form of internet money — but a weapon to be utilized by the Pentagon in modern warfare.



In an exhaustive 400-page dissertation, Major Jason Lowery claims bitcoin’s proof-of-work consensus mechanism presents a massive shift in the way world powers could wage war.



Instead of boots on the ground or nukes in the air, Lowery suggests nations battle by competing for Bitcoin block rewards, <a href="https://www.politico.com/newsletters/digital-future-daily/2023/03/30/space-force-major-to-pentagon-mine-bitcoin-00089745" target="_blank" rel="noreferrer noopener">Politico reported</a> Thursday.



“Space Force” is the newest brand of the US Armed Forces, created in December 2019. It&#8217;s responsible for organizing, training and equipping military persons across the stars in a bid to protect US and allied interests.



Lowery is an active-duty US Space Force astronautical engineer and US National Defense Fellow at MIT whose job it is to advise senior military personnel on the implications of bitcoin, according to a bio of his latest book.&nbsp;Politico says it confirmed his rank with an Air Force spokesperson.



Lowery&#8217;s thesis was released as a <a href="https://www.amazon.com/Softwar-Projection-National-Strategic-Significance/dp/B0BW358F37" target="_blank" rel="noreferrer noopener">book</a> in February under the title &#8220;Softwar: A Novel Theory on Power Projection and the National Strategic Significance of Bitcoin.&#8221; It&#8217;s said to describe a scenario in which governments duke it out with hashrate; fighting something akin to a Cold War, where the spoils are bitcoin and bragging rights.



The blurb reads:



&#8220;Using scientific concepts from biology, evolution, anthropology, political science, and computer theory, Lowery summarizes the dynamics of power projection in human society and provides an argument for why emerging proof-of-work technologies (namely Bitcoin) will have a dramatic impact on how humans organize, cooperate, and compete on a global scale by empowering populations to project physical power in, from, and through cyberspace.&#8221;



Bitcoin’s consensus could also be harnessed to deter denial-of-service attacks, Lowery reportedly reasons, which would make it costly and therefore prohibitive for bad actors to spam software systems based on its principles.



Should the asset be viewed through that lens, it would serve the US’s interest to protect the network and foster an industry for domestic crypto mining, or so the thinking goes.&nbsp;



<h2>Bitcoin is a &#8216;national strategic imperative&#8217;</h2>



In a stark warning to US policymakers, the major contends the country should support and adopt bitcoin immediately in a bid to avoid losing its status as a global superpower.



That’s just the kind of message of which industry proponents have hoped for years.&nbsp;Although, it&#8217;s probably unlikely.



&#8220;Major Lowery concludes that Bitcoin represents a national strategic imperative that the US should support and adopt as quickly as possible, else it risks losing its lead as a global superpower in the 21st century,&#8221; states the book&#8217;s description. 



Instead, the current campaign employed by US regulators and the <a href="https://blockworks.co/news/bidens-view-on-crypto" target="_blank" rel="noreferrer noopener">White House</a> has been to offer up no support in that regard, opting to <a href="https://blockworks.co/news/crypto-regulation-policy-law" target="_blank" rel="noreferrer noopener">regulate digital assets through litigation</a> with little discourse, critics argue.&nbsp;Various arms of the US government have also routinely <a href="https://jlopp.github.io/us-marshals-bitcoin-auctions/" target="_blank" rel="noreferrer noopener">sold</a> bitcoin seized as a result of criminal cases.



“Our first amendment rights to free speech will not protect you from government regulators who are actively maneuvering to ban bitcoin under the argument that it represents a threat to national security,” <a href="https://twitter.com/JasonPLowery/status/1640808749328748574?s=20" target="_blank" rel="noreferrer noopener">Lowery tweeted</a> Tuesday.



“Your best bet is to argue that it would be a national strategic security hazard to ban bitcoin. It would be against the second amendment (not just the first). It&#8217;s an undefeatable argument, you just have to have the courage to use it,” he said.



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Pentagon, Mine Bitcoin To Stay Superpower: Space Force Major

The CFTC’s crackdown on Binance found US institutions have allegedly been interacting with the exchange, and market research shows liquidity depth may have been the main attraction. 



<a href="https://blockworks.co/tag/binance">Binance</a>, the world’s largest crypto exchange, long maintained the top spot in terms of trading volume and market share, but institutions may have been drawn to it for another reason: liquidity options.&nbsp;



“Liquidity is paramount in crypto, particularly for institutions that are building or selling large positions or trading frequently,” research analysts at Kaiko wrote in a note. “On this front, Binance again scores well, with spreads 36 times tighter than Binance.US and 8 times tighter than Coinbase as of this writing.”



Binance trading volume has traditionally suggested the majority of traders were in the US, considering US trading hours have been the most bustling times for trades executed on the platform. Year-to-date, 43.4% of Binance’s bitcoin (<a href="https://blockworks.co/price/btc">BTC</a>) trading volume has occurred during hours, just below Coinbase’s 47.5%.



“Unsurprisingly, Binance has the tightest spread for both BTC-USDT and ETH-USDT,” researchers said.&nbsp;



Radix Trading, a Chicago-based firm, identified itself as one of the three entities named in the CFTC’s complaint; “trading firm A,” the Wall Street Journal <a href="https://www.wsj.com/livecoverage/stock-market-news-today-03-28-2023/card/chicago-s-radix-says-it-is-trading-firm-a-in-binance-lawsuit-vO56wCCHBxs9YtKQfVGV?utm_campaign=Research%20newsletter&amp;utm_source=hs_email&amp;utm_medium=email&amp;utm_content=70276830&amp;_hsenc=p2ANqtz-9ZBfTThBpUq9daD3MJcL2fbITJQvbZy8PCdK4RUBHT4IC2utMjhjjyHswdP3w8tcFcwsFxGHs57EdZYY_YaEb-FzO0MRtUpGEPd1XWm9sEC87CgLQ" target="_blank" rel="noreferrer noopener">reported</a> Wednesday. The firm had to use offshore accounts to avoid restrictions, but the trouble could have been worth it, industry members say. 



The lawsuit could impact <a href="https://blockworks.co/news/can-we-solve-the-crypto-exchange-liquidity-problem">liquidity options for the rest of the market</a>.



“This could negatively impact market liquidity, which is already unusually thin,” said Noelle Acheson, author of Crypto is Macro Now and former head of market insights at Genesis. “The suit mentions a few large US trading desks that have been actively avoiding US regulations when dealing with Binance – these could end up temporarily laying low for a while.”



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Why Binance May Have Been Worth Risk for US Institutions 

Bessie Liu

Badger DAO plans to bring a synthetic bitcoin onto Ethereum through liquid staking derivatives.



The aim of the new cryptoasset, Dubbed eBTC, is to become one of the most decentralized synthetic bitcoin (<a href="https://blockworks.co/price/btc" target="_blank" rel="noreferrer noopener">BTC</a>) assets in the market backed solely by liquid-staked ether (<a href="https://blockworks.co/price/eth" target="_blank" rel="noreferrer noopener">ETH</a>) and reliant on immutable smart contracts.



There’s historically been a difficult environment to drive consistent utility and yield sources for bitcoin assets on Ethereum, Badger DAO’s head of marketing, who goes by <a href="https://twitter.com/0xWill_">Will</a>, told Blockworks.&nbsp;



Assets such as wBTC are in the custody of centralized entities. By comparison, liquid staking derivatives (LSDs) on Ethereum have driven a consistent, sustainable source of yield, and Badger hopes to tap the asset to build a bitcoin primitive on Ethereum that does not require bridging or wrapping.



“Your native bitcoin can stay on Bitcoin and you can play around, speculate and hold a decentralized bitcoin on Ethereum,” <a href="https://twitter.com/0xWill_">Will</a> said.&nbsp;



<h2>Fewer censorship risks than wBTC</h2>



As it stands, wBTC is one of the most commonly used forms of BTC on Ethereum, but with points of centralization come potential censorship risks.



eBTC, on the other hand, “eliminates the custodial risk as anyone can mint it and at launch, the protocol will be significantly governance minimized with a clear path toward further decentralization and censorship resistance,” according to Will.&nbsp;



Will said with eBTC, smart contracts will be immutable, and the user’s collateral or debt positions will not be controlled by any governance. Even so, plans for a multisig are still in place, and multisig governance will operate through BadgerDAO that can adjust the yield share fee earned from staked ETH collateral.&nbsp;



Read more: <a href="https://blockworks.co/news/what-are-multisig-wallets">What Are Multisig Wallets?</a>



“This is in direct contrast to many existing CDP systems and on-chain money markets that constantly need to adjust their risk parameters such as minimum collateralization ratio or others that have upgrade rights to the underlying smart contracts,” Will said.



<h2>How is eBTC pegged to BTC, anyway?&nbsp;</h2>



The new primitive is designed as an over-collateralized debt position that uses liquid-staked ether to borrow eBTC, meaning: To borrow eBTC, a user must provide a higher value as denominated in staked ether.



The debt position will be primarily determined through Chainlink’s LSD/BTC oracle, with Tellor as the backup oracle.



“If a user&#8217;s debt position falls below the minimum overcollateralization ratio, they are subject to liquidation,” Will said. “This is based on the staked ETH/BTC ratio not BTC in USD terms. These liquidation mechanics are open to the market to participate.”



The amount of staked eth backing eBTC will be publicly available for all buyers to see and is also available on-chain, Will said.&nbsp;&nbsp;



One driving factor for Badger to leverage staked ETH/BTC for BTC: Both assets have “historically tracked well together in terms of price…thus [ranking] low on the volatility scale.”



Will does say though, that as price fluctuations happen, liquidations are very much possible.&nbsp;



“With that being said, users&#8217; positions are fully redeemable for the underlying collateral at all times as long as their positions are within the liquidation threshold,” he said.&nbsp;



Badger is currently <a href="https://forum.badger.finance/t/ebtc-builder-update-1/5975">working</a> with RiskDAO to examine its risk exposures to different market conditions. Stability mechanisms and parameters are being explored as part of an ongoing design process.&nbsp;



“This process is still underway and will inform some key architectural decisions such as liquidation parameters and collateral ratios,” Will said.



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A New Synthetic Bitcoin Is Coming to Ethereum

Ben Strack

Though one of the largest public bitcoin miners suffered a net loss of $687 million in 2022, Marathon Digital’s CEO says it remains on track to more than double its hash rate in the next few months and expand to a new region.



Marathon Digital’s deficit last year sprinted up from a $37 million loss in 2021. The company attributed the higher shortfall, in part, to “unfavorable variances” in a company announcement earlier this month.



A total of $651 million of the losses were unrelated to business operations, <a href="https://blockworks.co/tag/marathon-digital" target="_blank" rel="noreferrer noopener">Marathon</a> CEO Fred Thiel told Blockworks in an interview. They came in the form of impairment charges on the company’s mining rigs and digital assets — incurred when the value of an asset falls below the cost at which it was purchased.



Analysts at Compass Point Research and Trading maintained its buy rating of the stock in a research note last week, noting that it excludes non-cash impairments in its estimates.



Marathon’s stock price was $7.83 at 1:00 pm ET on Thursday — down about 1.5% on the day.



Compass Point lowered its price target from $11.50 to $10, as analysts expect the company’s share count to increase and bitcoin holdings to decrease. Marathon sold 650 of the 683 bitcoins it produced in February for operating expenses — a practice the company expects to continue, according to Thiel.&nbsp;



<h2>Hash rate growth, moving into UAE</h2>



The Florida-based miner is on track to fulfill its hash rate growth target from 9.5 exahashes (EH), as of Feb. 28, to 23 EH by mid-year, Thiel said.



It energized about 19,000 bitcoin miners last month, including 8,000 S19 XPs, Bitmain’s most recent ASIC hardware release in July 2022.



Not included in the expected 23 EH of computing power is Marathon’s upcoming entrance into the United Arab Emirates. The company revealed a joint venture with FS Innovation to build and operate two crypto mining sites in Abu Dhabi — amounting to 250 megawatts.



Thiel called the expansion the firm’s “first foray into vertical integration,” noting that the site would utilize self-designed immersion systems. Marathon began an immersion-cooled pilot project in November, which involves submerging mining servers in a dielectric fluid. It found that such technology could reduce the cost of servers when compared to using air-cooled setups.



“They have very warm summers, and then outside that period of time the temperature is quite mild,” Thiel said of the region. “[It’s] the perfect marriage to their energy situation where we can come in, take all that stranded energy and use it for bitcoin mining.”



Keep reading for more excerpts from Blockworks’ interview with Thiel.



<hr class="wp-block-separator has-alpha-channel-opacity"/>



Blockworks: What could stand in the way of Marathon meeting its goal of 23 EH of computing power by mid-year?



Thiel: Our build-out domestically right now is predominantly with Applied Digital.



We don’t see any hindrances there. Construction is well on its way, if not completed, at a number of the sites. Miners have already been delivered, so that’s not an issue.



So, if you typically think of the issues, of ‘do you have regulatory approval for the energy to energize, do you have construction completed, do you have your transformers installed and on site, and do you have your miners?’ In all cases, those items have all been taken care of.



Blockworks: How do you think about managing your bitcoin holdings going forward?



Thiel: If you go back to the 2021 period, the cost of capital was very low. It was easy to raise debt, it was easy to raise equity capital, and so it made sense to <a href="https://www.blockworksresearch.com/glossary#hodl-slang">hodl</a> all your bitcoin.



Then we go through 2022, [there’s] a big price decline, the markets get tighter. We still had a good ability to raise equity capital, so we focused, in the second half of 2022, on really strengthening our balance sheet, paying off all our current and revolving debt…and building a cash pile while continuing to build a bitcoin pile.



For this year and going forward…we’re going to sell bitcoin to cover operating expenses. We’ll look to hodl the rest, and so over time our bitcoin pile should continue to grow.



And, as we need capital for growth initiatives, we’ll leverage the capital markets for that.



Blockworks: What about potential acquisition opportunities?



Thiel: There are still a lot of miners who made investments in infrastructure — power and sites — and were not able to raise capital to either fully complete those sites or populate them with their own miners.



So there are a number of sites coming to market that miners like us could look at potentially investing in or acquiring. We’re very picky as we look at that.&nbsp;



The last thing we want to do is go and add a bunch of two-generation-old miners that may only have a year or two of good life on them and pay any sort of price for those.”



If an opportunity comes along where we can essentially acquire a site with a great power energy agreement, and it’s renewable energy predominately and there just happens to be miners there, we’ll definitely look at it. We probably won’t pay anything for the miners because what we’re really looking at is access to the energy and infrastructure.



We’re looking much more at a mix of sites going forward — self-designed and self-built, some third-party and then also joint venturing with folks. So I think you’ll see much more diversity in our site mix going forward.



This interview was edited for clarity and brevity.



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Marathon CEO: ‘Diversity in Site Mix’ Is Key to Future Growth

David Canellis

Crypto and institutions go together like lightning and thunder these days. Traditional finance shops are moving over, while the digital asset market births debutants all by itself.



This brings about two problems:



<ol>
<li>How do institutions — which are meant to represent the smart money — find market moving information before markets move?</li>



<li>How can they share that information with clients while remaining compliant with strict data security controls?</li>
</ol>



The Tie, a crypto-native data platform, is gunning to solve both concerns. In the same vein as Bloomberg Terminal, the firm’s crypto-only terminal platform serves as an all-in-one screener for news, market data, regulatory filings, analytics and research.&nbsp;



The startup, founded in 2017, says it has attracted more than 150 hedge funds, asset managers, venture capital firms, over-the-counter desks, market makers and the like (and even news organizations such as Blockworks).



It’s common for such firms to rely on encrypted messaging apps such as WhatsApp, Signal or Telegram — but regulators have recently handed out billions of dollars in <a href="https://www.computerworld.com/article/3675289/16-wall-street-firms-fined-18b-for-using-private-text-apps-lying-about-it.html">fines</a> for communicating about trades or other orders via platforms that don’t preserve business records, a key SEC requirement.



Those firms require chat histories to be stored and logged in a compliant manner, and until recently, they haven’t had a way to communicate with their counterparties from within the terminal.



“The roll-out of The Tie Terminal Messenger enables firms like ours to take advantage of [the digital asset investor network] and compliantly communicate with a range of leading market participants including banks, asset managers, funds, and liquidity providers,” Rob Hadick, general partner at Dragonfly Capital, said in a statement.



<figure class="wp-block-image size-large"><img decoding="async" loading="lazy" width="1600" height="815" src="https://blockworks-co.imgix.net/wp-content/uploads/2023/03/image-8.png?w=1024&amp;h=1024" alt="" class="wp-image-50669" srcset="https://blockworks-co.imgix.net/wp-content/uploads/2023/03/image-8.png?w=1600 1600w, https://blockworks-co.imgix.net/wp-content/uploads/2023/03/image-8.png?w=300 300w, https://blockworks-co.imgix.net/wp-content/uploads/2023/03/image-8.png?w=1024 1024w, https://blockworks-co.imgix.net/wp-content/uploads/2023/03/image-8.png?w=768 768w, https://blockworks-co.imgix.net/wp-content/uploads/2023/03/image-8.png?w=1536 1536w, https://blockworks-co.imgix.net/wp-content/uploads/2023/03/image-8.png?w=428 428w, https://blockworks-co.imgix.net/wp-content/uploads/2023/03/image-8.png?w=470 470w, https://blockworks-co.imgix.net/wp-content/uploads/2023/03/image-8.png?w=389 389w, https://blockworks-co.imgix.net/wp-content/uploads/2023/03/image-8.png?w=80 80w" sizes="(max-width: 1600px) 100vw, 1600px" /></figure>



There are other firms shooting for the same market. Aurox, for one, is a free terminal service intended to support fast-moving crypto traders, but its offerings are more skewed towards retail investors, rather than institutional types.&nbsp;



Other crypto-specific terminals, such as Orion Terminal, are more like market aggregators, allowing trades across multiple platforms all under one umbrella platform. And of course, there’s the Bloomberg Terminal, which does support a number of cryptocurrencies, but its selection is comparatively limited.&nbsp;



To help service institutional types that need more variety, The Tie’s terminal messenger is SOC 2 compliant, a benchmark built by the American Institute of CPAs, which translates to strict internal controls regarding how data — such as sensitive financial messages between institutions — is stored (to avoid leaks and whatnot).



All Tie Terminal users are verified via corporate email, reducing the chance of profile spoofing commonly seen across Telegram and WhatsApp. The firm says around half of its clients are using the messenger app but declined to give specific metrics for total usage so far.



“More than 80 of our 150+ clients have turned on Messenger and we are already seeing a significant number of messages per day,” CEO Josh Frank told Blockworks. “We anticipate both users and messenger volume to increase over time as new connections are formed and comfort with the feature improves.”



The Tie was <a href="https://www.accesswire.com/693801/The-TIE-Announces-9-Million-Strategic-Funding-Round-at-100-Million-Valuation">valued</a> at $100 million in March last year, when it raised a $9 million round led by Avalanche-focused venture firm Blizzard.



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Institutions Are Going Crypto — But How Do They Share Info?

Lior Lamesh

There’s nothing more some in the crypto industry would like than to seize upon the failures of Silicon Valley Bank, Signature Bank and Silvergate to sow distrust of traditional financial institutions. And while it doesn’t seem these banks did anything illegal at this juncture, the events may indicate a broader, perhaps industry-wide, failure. In fact, a <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4387676">recent report suggests</a> that at least 190 additional banks in the US are currently in danger of uninsured market runs (similar to that of SVB and Signature).&nbsp;



Despite the crisis, traditional banks are in many ways still far better equipped to provide crypto services than their crypto counterparts are. First, banks are skilled at taking custody of assets in a manner that is secure and compliant with regulation. Second, banks, in many cases, are still considered to be more trustworthy and transparent than their crypto-native counterparts. And third (most importantly), traditional banks can offer more diversified portfolio management, straddling both the crypto and fiat domains. All three points here give banks a definite leg-up in providing digital asset services to retail and institutional investors alike.



<h2>A deep, dark void of trust&nbsp;</h2>



The hacks, insolvencies and crashing crypto valuations that characterized 2022 have eroded consumer trust and confidence in crypto to its lowest levels in years. Believers and skeptics alike have had their faith severely tested. Increasingly, both critics and crypto natives are calling for more regulation and oversight. Industry thought leaders and exchange CEOs are all urging for self-custody. With a general lack of trust for all things crypto native — and in particular centralized exchanges (CEX) — a major void has formed within the industry.



Up until now, the market has virtually been monopolized by crypto-native companies. Financial institutions have been slow to keep pace with their crypto-native counterparts. In fact, a recent <a href="https://www.bnymellon.com/content/dam/bnymellon/documents/pdf/insights/migration-digital-assets-survey.pdf">survey</a> by Celent found that 65 percent of institutions go through crypto-native platforms for digital asset services, such as trading, lending and borrowing.



However, over the last couple of years, traditional financial institutions have gradually warmed up to digital assets, realizing that they have been missing out on viable revenue-generating opportunities. With 35 percent of the market share at the end of 2022, traditional finance has been steadily gaining traction for crypto custody, even prior to the <a href="https://www.theguardian.com/technology/2022/nov/18/how-did-crypto-firm-ftx-collapse">collapse of FTX</a>.



<h2>Regulation is around the corner</h2>



Given the events of the past year, regulators around the world have upped their game. <a href="https://www.europarl.europa.eu/thinktank/en/document/EPRS_BRI(2022)739221">MiCA (Markets in Crypto Asset) regulations</a> are expected to be passed in the EU during the first half of 2023. Earlier this year, the <a href="https://www.finextra.com/newsarticle/41711/uk-govenment-outlines-plans-to-regulate-cryptoasset-industry?utm_medium=newsflash&amp;utm_source=2023-2-1&amp;member=136033">UK announced</a> plans to strengthen regulation in the crypto industry, with stricter rules for financial intermediaries, custodians and crypto trading platforms. The US is also slowly making progress with a <a href="https://cointelegraph.com/news/congress-may-be-ungovernable-but-us-could-see-crypto-legislation-in-2023">framework</a> published in late 2022, albeit with less certainty.&nbsp;



<h2>Straddling the divide</h2>



Banks offering digital asset services could easily straddle the divide between traditional finance and the ‘future economy’ by offering customers access to diversified portfolio management. No longer would investors need to manage their crypto with A and their fiat with B.



Case in point, the aforementioned Celent survey suggests that 70 percent of institutional investors would increase their digital asset activity if services like custody and management were available from recognized, trusted institutions.&nbsp;



Moreover, 72 percent of institutional investors prefer to work through financial institutions providing hybrid portfolios consisting of both digital and fiat-backed assets. This indicates that the prevailing separation of asset classes doesn’t provide the optimal strategy for most investors.



<h2>Not as easy as it seems</h2>



Traditional financial institutions are well-positioned to fill the void of ‘trust,’ have more experience in asset custody, and know how to work with regulatory bodies — all of which positions them to take advantage of new revenue-generating opportunities in the custody and management of digital assets.



But there’s certainly a learning curve for financial institutions entering the digital asset custody space. While banks are well versed in safeguarding fiat assets, the custody of digital assets often requires a different mindset. The very nature of these digital assets exposes them to unique challenges which require additional safeguards.&nbsp;



Banks need to look to technology solutions that will enable them to effectively custody digital assets in a way that fits their operational needs while providing the highest degree of security. Luckily, digital asset custody solutions have come a long way and are empowering financial institutions to play a larger role than many would have imagined a year ago.&nbsp;



Regulators, investors and responsible industry players are all looking to minimize uncertainty and guarantee basic investor protections. The crises experienced across both markets make the need for a safer, more stable, financial ecosystem for all more clear than ever before. An ecosystem in which traditional financial institutions have an opportunity to take the lead.



<hr class="wp-block-separator has-alpha-channel-opacity"/>


<div class="wp-block-post-author-biography">Lior Lamesh is the co-founder and CEO of GK8, a company that offers both traditional and crypto-native institutions an end-to-end platform for managing blockchain-based assets, including custody, DeFi, staking, NFT, CBDC, and tokenization support. Having honed his cyber skills in Israel’s elite cyber team reporting directly to the Prime Minister&#8217;s Office, Lior led the company from its inception to one of the most impressive acquisitions of 2021. In 2022 Lior, alongside his co-founder Shachar Shamai, were selected by Forbes to be included in its prestigious ‘Forbes 30 under 30’ list.</div>


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Crypto Custody Has a Problem and Only Banks Have a Solution

Binance was <a href="https://blockworks.co/news/bitcoin-and-ether-are-commodities-says-cftc-in-binance-lawsuit">sued</a> by the Commodity Futures Trading Commission this week for allegedly evading trading and derivatives rules.&nbsp;



The crypto exchange operated without proper registration and illegally allowed Americans to trade crypto derivatives on its platform, according to the regulator. Binance called the CFTC’s complaint “unexpected and disappointing,” saying it had worked collaboratively with the agency for more than two years.



CEO Changpeng Zhao himself <a href="https://www.binance.com/en/blog/from-cz/czs-response-to-the-cftc-complaint-2408916493005890282">said</a> that the lawsuit contained an “incomplete recitation of facts” and that the company does not agree with the CFTC’s depiction of several concerns raised.



But what’s interesting to note is that the exchange was hit with an <a href="https://blockworks.co/news/binance-cftc-damning-quotes">exhaustive list of allegations</a>, despite having a solid team with expertise in financial crimes.



It appears to be a question of timing, as much of the conduct at issue took place before Binance dramatically ramped up its compliance efforts, according to Leo Mizuhara, CEO of DeFi asset management platform Hashnote.



“If you broke the law in 2019, then it doesn’t matter that you reformed your behavior in subsequent years,” Mizuhara told Blockworks.



<h2>‘A’ for effort Binance, but…</h2>



Binance’s efforts do count for something in the eyes of regulators, per Dave Weisberger, CEO of algorithm-trading platform CoinRoutes.



“The CFTC does care that Binance has hired a global team of compliance experts — but it’s more complicated than this,” Weisberger told Blockworks. “Both the CFTC and SEC consider actions against organizations for previous actions important for deterring future bad behavior.”



Binance can argue that it already has taken steps to beef up compliance, pointing to recent history.



In Sept. 2021, Binance <a href="https://www.binance.com/en/blog/leadership/nils-andersenr%C3%B6ed-joins-binance-from-europol-to-further-strengthen-investigations-and-audit-team-421499824684902767">hired</a> Nils Anderson-Röed, a former dark web specialist at Interpol, to lead investigations into offenders trying to commit crimes on the exchange.&nbsp;



Around the same time, Tigran Gambaryan, a former special agent with the Internal Revenue Service, was <a href="https://www.binance.com/en/blog/leadership/former-irsci-special-agent-tigran-gambaryan-joins-binance-as-vp-of-global-intelligence-and-investigations-421499824684902817">appointed</a> Vice President of Global Intelligence and Investigations. His career history includes investigations in bank secrecy act violations, terrorism financing and one of crypto’s biggest heists ever — the Mt. Gox hack.



Less than three months ago, Anderson-Röed was promoted to the position of deputy head of financial crime compliance. And only last month, Binance <a href="https://www.binance.com/en-IN/feed/post/220706">hired</a> Noah Perlman, who has served as a global head of financial crimes at Morgan Stanley and as division counsel at US Drug Enforcement Administration New York, as chief compliance officer.



Back in 2021, Zhao had <a href="https://www.binance.com/en/blog/from-cz/a-letter-from-our-ceo-reflecting-on-progress-and-the-road-ahead-421499824684902301">openly</a> said that Binance would double the size of its global compliance team by the end of that year, as the industry was facing “a lot of uncertainty.”&nbsp;



Gambaryan rebutted comparisons to FTX by <a href="https://www.efinancialcareers.co.uk/news/2023/03/binance-financial-crime">some observers</a>, saying Binance’s compliance team is larger than the total number of employees at most exchanges, while FTX’s had virtually none.



“We are proud to have in our ranks some of the most celebrated cyber investigators representing virtually every single major international law enforcement agency across the globe,” a Binance spokesperson told Blockworks.&nbsp;



“Just as they did during their time in the public sector, the investigators in our financial crimes compliance team are working hard on the front lines to protect users from illicit actors seeking to access the crypto markets,” the spokesperson said.



Weisberger thinks that whatever good will is engendered by Binance’s efforts only goes so far in light of other evidence.



“What struck me about this case as being important — and why I think Binance will likely have to settle with the CFTC — are the emails that allegedly prove that Binance worked with firms based and regulated in the United States to help them evade the rules,” Weisberger said.



Regardless of its investments in financial crime experts, Binance other behavior is still a big deal for the agency.



“The CFTC only cares about whether or not a crime has been committed, and changes to behavior taken after the alleged crime likely won’t be enough,” Mizuhara said.



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Binance Compliance Hires Didn’t Allay CFTC Investigators’ Concerns

John Lee Quigley

The Investor’s Guide to Bitcoin and Crypto Loans

Bitcoin and ether may be cryptocurrencies built atop public blockchains, but that’s really where their similarities end.&nbsp;



Yet they trade in almost exactly the same way — their prices move increasingly in tandem to near complete correlation. And they’ve been tightening ever since ether (<a href="https://blockworks.co/price/eth" target="_blank" rel="noreferrer noopener">ETH</a>) started trading almost eight years ago.&nbsp;



Across 2016 and 2017, bitcoin’s 100-day correlation with ether averaged at 35% (where 100% indicates complete correlation, -100% being complete inverse correlation). That number jumped to 66% across 2018 and 77% in 2019, before reaching more than 87% last year.



So far this year, bitcoin (<a href="https://blockworks.co/price/btc" target="_blank" rel="noreferrer noopener">BTC</a>) and ether’s correlation coefficient has averaged out to 98%. So, whatever bitcoin does — ether does too, with near perfect precision.



But why is their correlation increasing, and not decreasing? Their value propositions are quite different.&nbsp;



Read more: <a href="https://blockworks.co/news/the-investors-guide-to-crypto-correlation">The Investor’s Guide to Crypto Correlation</a>



Bitcoin is a pure-play decentralized cash system that doubles as a store of value. Bitcoin’s famous 21-million supply limit promotes scarcity in the vein of Austrian economics — that commodities should back currencies rather than the state.&nbsp;



Ethereum, on the other hand, supports an array of use-cases outside of the strict money doctrine: digital collectibles, prediction markets, metaverse communities and blockchain gaming.



ETH has no supply limit, with issuance and <a href="https://blockworks.co/news/ethereum-deflationary-2-months">burn rates more elastic</a>, tied to network usage.



<figure class="wp-block-embed is-type-wp-embed is-provider-flourish wp-block-embed-flourish"><div class="wp-block-embed__wrapper">
<iframe class="wp-embedded-content" sandbox="allow-scripts" security="restricted" title="Interactive or visual content" src="https://flo.uri.sh/visualisation/13127226/embed#?secret=RmfLVKbIpr" data-secret="RmfLVKbIpr" frameborder="0" scrolling="no" height="575" width="700"></iframe>
</div><figcaption class="wp-element-caption">All lines are leading to complete correlation.</figcaption></figure>



Dessislava Aubert, a Kaiko research analyst, told Blockworks that macro investors tend to group bitcoin and ether together as risk assets (or crypto more generally), leading them to treat the two in a similar manner.



“This could explain why they are highly correlated, especially during periods of market turmoil when investors tend to be less discerning,” Aubert said. “However, as these assets mature, and their fundamental differences become clearer this is likely to change.”



<h2>Mainstream investors treat bitcoin and ether the same way</h2>



A rise in mainstream investment could also be responsible for the correlation. Sam Doctor, chief strategy officer at crypto-focused financial services firm BitOoda, reasoned that the bitcoin and ether camps were initially different, leading to distinct investor groups pumping money into their preferred cryptocurrencies (in other words: BTC and ETH “maximalists”).



More mainstream investors — whether <a href="https://blockworks.co/news/study-retail-still-bullish-crypto-post-ftx">retail</a> or <a href="https://blockworks.co/news/74-of-institutions-plan-to-buy-crypto-fidelity-survey">institutional</a> — have joined the market in recent years. “These tend to view crypto more as one trade, want exposure to the asset class and are diversifying into the top two, three or four tokens,” Doctor said.



There are still investors committed to either bitcoin and ether, he added, but as more “protocol-agnostic” investors enter the space, the more correlated these assets should be.



That is, at least until the space matures to where large investors are making very informed decisions about which protocol to invest in,” Doctor said. “Today such investors are in the minority, in my view.”



Specific catalysts, such as Ethereum’s <a href="https://blockworks.co/news/effect-ethereum-shanghai-upgrade-price">Shanghai fork</a> (which will activate staking withdrawals) could reduce correlations, along with the general maturation of the digital asset class.&nbsp;



But for the most part, bitcoin and ether are still one trade, he explained, drawing similarities between high correlation in airline stocks which can break down when one particular carrier faces a challenge.



<figure class="wp-block-embed is-type-wp-embed is-provider-flourish wp-block-embed-flourish"><div class="wp-block-embed__wrapper">
<iframe class="wp-embedded-content" sandbox="allow-scripts" security="restricted" title="Interactive or visual content" src="https://flo.uri.sh/visualisation/13131853/embed#?secret=ZLd2hXyQHN" data-secret="ZLd2hXyQHN" frameborder="0" scrolling="no" height="575" width="700"></iframe>
</div><figcaption class="wp-element-caption">Ether began outstripping bitcoin in 2020, but their correlation has since rebounded.</figcaption></figure>



The evolution of bitcoin and ether’s correlation could map to three distinct phases, per Doctor:



<ol>
<li>Independent crypto projects with their dedicated market adherents (low correlation)</li>



<li>Institutional and retail investors with more passive strategies buying both tokens (high correlation)</li>



<li>More discriminating active strategies (lower correlation)</li>
</ol>



“At the moment, crypto investors at scale are still somewhat passive investors, rather than actively valuing and shifting between protocols based on an informed analysis of underlying fundamentals,” he said.



There’s another potential factor, beyond investor profiles: how crypto markets themselves have evolved.



<h2>Most crypto markets were once denominated in bitcoin</h2>



Nick Hotz, vice president of research at digital asset investment firm Arca, explained that in the ‘old days,’ there weren’t any trusted stablecoins (with <a href="https://blockworks.co/news/stablecoin-issuers-book-big-profits">Tether’s</a> <a href="https://blockworks.co/price/usdt" target="_blank" rel="noreferrer noopener">USDT</a> an exception in some cases).



This meant traders on the primary exchanges priced all assets against BTC. And in the early stages of ether’s life, it was considered just another altcoin that was “by and large traded against BTC,” Hotz said. This would have resulted in the assets being less correlated than today.



Hotz cited increased use of stablecoins USDC, USDT and DAI as quote assets as the biggest factor that drove up correlations for other cryptocurrencies relative to BTC across 2018 and 2019.



“A lot of big money now treats BTC and ETH simply as ‘risk,’ since they are the most liquid assets, and not as many trade their pair (ETH/BTC) anymore.”



<figure class="wp-block-embed is-type-wp-embed is-provider-flourish wp-block-embed-flourish"><div class="wp-block-embed__wrapper">
<iframe class="wp-embedded-content" sandbox="allow-scripts" security="restricted" title="Interactive or visual content" src="https://flo.uri.sh/visualisation/13133804/embed#?secret=5Xz7dJUQkX" data-secret="5Xz7dJUQkX" frameborder="0" scrolling="no" height="575" width="700"></iframe>
</div><figcaption class="wp-element-caption">Correlation streaks are becoming increasingly common.</figcaption></figure>



The correlation of the two today is more representative of external risks, such as <a href="https://blockworks.co/news/federal-reserve-interest-rate-25-bps-march">monetary policy</a>, crypto adoption, institutional market structure and <a href="https://blockworks.co/news/sec-serves-coinbase-in-latest-alleged-crypto-securities-violation">regulatory risk</a>, Hotz added, rather than the fundamentals of the two cryptocurrencies.&nbsp;



He also cited trends among larger investors, which show them treating digital assets as just one sub-sector of technology. “Assets of the same sector should be highly correlated (see: equity sectors), but should Bitcoin be highly correlated to a token that provides utility in a video game? Probably not.”



Hotz added: “For them to trade independently, there needs to be recognition of BTC and ETH as separate assets with very different fundamentals. Either that or more institutional interest in differentiating the two by pair trading them, which I think is unlikely.”



Studying the correlation between the top two cryptocurrencies and the S&amp;P perhaps reveals the real reason for the former’s tightening correlation: Everything is correlated with US-listed equities these days. Bitcoin and ether are simply no different.&nbsp;



“Periods when you see a spike in correlation [between BTC, ETH and the S&amp;P] are often also periods when the market is risk-off, so correlations have risen across the board,” Doctor said.



Doctor highlighted major events like the 2020 Covid sell-off and the 2022 bear market, marked by increasing BTC and ETH correlation with the S&amp;P: Risk-off markets beget high correlation between stocks and crypto. And markets are mostly risk-off right now.



<figure class="wp-block-embed is-type-wp-embed is-provider-flourish wp-block-embed-flourish"><div class="wp-block-embed__wrapper">
<iframe class="wp-embedded-content" sandbox="allow-scripts" security="restricted" title="Interactive or visual content" src="https://flo.uri.sh/visualisation/13255131/embed#?secret=hWQxc9C9hR" data-secret="hWQxc9C9hR" frameborder="0" scrolling="no" height="575" width="700"></iframe>
</div><figcaption class="wp-element-caption">Risk-off markets bring it all together.</figcaption></figure>



Still, there are signs that crypto markets are starting to make industry-specific investment decisions, rather than pure macro plays.&nbsp;



Kaiko’s Aubert pointed to recently-shrinking correlation between bitcoin and equities markets. The tech-heavy Nasdaq’s 30-day correlation with BTC has declined from an average of 60% last year to between 20% and 30% this year.



&#8220;As more value enters Bitcoin and its usage as a store of value increases, it is likely that its correlation with tech equities declines,&#8221; Aubert said. “In contrast ETH’s correlation with the Nasdaq could strengthen as it is arguably more similar to tech equities (it&#8217;s a decentralized, composable smart-contract network).”



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Why Are Bitcoin and Ether More Correlated Than Ever?

Ethereum scaling with zero-knowledge (zk) proof technology has rapidly moved from theory to functioning public mainnet, with dueling zero-knowledge Ethereum Virtual Machines (zkEVMs) from <a href="https://blockworks.co/news/zksyncs-evm-era-opens-to-the-public">Matter Labs</a> and <a href="https://blockworks.co/news/polygon-zkevm-live-on-ethereum">Polygon</a> launching in the past week.



Soon to follow will be ConsenSys, the Ethereum blockchain infrastructure company, which recently <a href="https://twitter.com/ConsenSys/status/1640643146240409600?s=20">deployed</a> its zkEVM onto an Ethereum testnet.



Zk rollups are considered a breakthrough in crypto technology, as zero-knowledge proofs allow information to be proven to be valid or invalid without revealing the information itself.



On Ethereum layer-2 rollups, this means that transactions can be batched and validated by Ethereum without revealing the specifics involved in the individual transactions on the Ethereum mainnet.&nbsp;



This type of technology can considerably lower transaction costs by compressing the data, making more efficient use of Ethereum blockspace.



<h2>How do zk rollups lower transaction fees?</h2>



Zk rollups built on Ethereum offload the computation and execution of smart contracts to a separate layer-2 blockchain built on top of the base layer.



This means that, rather than having the Ethereum mainnet validators process individual transactions, the rollup instead offloads that responsibility to a prover and verifier on the layer-2 network.



“Anyone can download the data and check if it is correct for some period of time,”&nbsp;<a href="https://www.blockworksresearch.com/">Blockworks Research</a> said.



Unlike Ethereum mainnet, where more users and more transactions lead to increased <a href="https://www.blockworksresearch.com/glossary#gas">gas</a> fees, <a href="https://ethereum.org/en/developers/docs/scaling/zk-rollups/">the costs</a> of writing data to mainnet from a zk rollup in fact decline as the number of users increases since the otherwise fixed cost is divided between all users whose transactions are in a batch, DeFi researcher who goes by the ​​pseudonym Ignas <a href="https://twitter.com/DefiIgnas/status/1641426707172425730">tweeted</a>.



&#8220;When there are fewer transactions the fixed cost is distributed among fewer users, leading to higher average gas fees per transaction. As transaction volume increases, the fixed cost gets spread out, and fees drop,&#8221; Ignas said.



Mikhail Komarov, founder of zk infrastructure developer =nil; Foundation, agrees, but with a caveat.



&#8220;In terms of L-1 transactions, this is true. But a user pays an L-2 fee, not an L-1 fee,&#8221; Komarov told Blockworks. &#8220;This means a rollup can charge some larger or smaller end-user fee with the only difference of using its own L-2 token for that.&#8221;



Current zk rollups, however, do not charge fees in a native token — if they have one — but instead use ether.



What exactly gets posted back to Ethereum mainnet depends on the specifics of the rollup implementation.



For instance, Polygon’s zkEVMs posts full transactions to mainnet, Bartek Kiepuszewski of L2Beat explained <a href="https://twitter.com/bkiepuszewski/status/1640728189109411841">on Twitter</a>, Tuesday. By contrast, both zkSync and StarkNet only submit changes in the state of the EVM that occur as a result of those transactions.&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">In contrast to other zkEVMs it posts full transactions (with signatures) to L1 calldata, not just state roots. <a href="https://twitter.com/zksync?ref_src=twsrc%5Etfw">@zksync</a> and <a href="https://twitter.com/Starknet?ref_src=twsrc%5Etfw">@Starknet</a> post only state diffs. Transactions are not compressed, expect L2 tx cost to be not the cheapest as a result /2&mdash; bartek.eth (@bkiepuszewski) <a href="https://twitter.com/bkiepuszewski/status/1640728189109411841?ref_src=twsrc%5Etfw">March 28, 2023</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



“Right now, we have to differentiate between systems that are EVM-equivalent and EVM-compatible,” Kiepuszewski <a href="https://youtu.be/eveHo7ncHt4?t=653">said</a> at Devcon Bogota, in October 2022. “I think we’re going to see a very interesting competition between systems that try to emulate the EVM as close as possible and systems that will prefer to make sure that the proving is optimized for the particular VM — and in this category I would definitely put zkSync and StarkNet. The competition between these two approaches is will be very interesting to watch.”



Similar to how transactions on layer-1 cost a gas fee, posting data from layer-2 validity proofs also requires a fee. Currently, transactions are posted through ordinary Ethereum “<a href="https://www.quicknode.com/guides/ethereum-development/transactions/ethereum-transaction-calldata/">calldata</a>” in a transaction. But this will change under <a href="https://blockworks.co/podcast/0xresearch/ac87740a-b80f-11ed-b2e2-4b2bbafab32b">EIP-4844</a>, Blockworks research said.&nbsp;



“It will be posted to these things called blobs that will have a separate fee market to normal transactions making it cheaper,” Blockworks Research said.



EIP-4844, also known as Proto-Danksharding, will the part of the next major Ethereum upgrade<a href="https://blockworks.co/news/ethereum-devs-opt-for-withdrawals-in-march-and-nothing-else"> after Shanghai</a>, dubbed Cancun.



&#8220;I would say the only thing which can drive down data availability cost is a better compression (proof and circuits &#8216;quality&#8217;),&#8221; Komarov said. &#8220;The better the compression — the smaller the L-1 [data availability] charge.&#8221;



Ultimately, technological and hardware improvements will reduce the costs of data availability further and, over the long run, transaction fees on Ethereum layer-2s using zk proofs will continue to come down, Blockworks Research said.



Updated March 30, 2023 at 12:02 pm ET: Additional comments.



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Zero-knowledge Rollups Get Cheaper With Scale

The price of bitcoin (<a href="https://blockworks.co/price/btc" target="_blank" rel="noreferrer noopener">BTC</a>) almost hit $29,200 on Thursday morning, reaching its highest point in more than nine months.



“Market structure is sound,” Anthony Rousseau, head of brokerage Solutions at TradeStation told Blockworks. 



Bitcoin last traded above $29,000 across late May and early June last year, per TradingView. BTC was hovering around $28,600 as of 8:45 am, ET.



“Prices do not represent the kind of doomsday scenario that widespread regulatory action seemingly could ignite in a structurally less-stable market.”



Since the start of the year, crypto has enjoyed a short-term trend which has stuck around, providing a convincing rationale for accumulation, Rousseau said.



James Lavish, managing partner at the Bitcoin Opportunity Fund, said the broader market had enjoyed a “risk-on day across the board.”



The broad S&amp;P 500 and Dow Jones indexes closed 1.4% and 1% higher, respectively, while tech-heavy Nasdaq Composite climbed 1.8%.



<figure class="wp-block-embed is-type-wp-embed is-provider-flourish wp-block-embed-flourish"><div class="wp-block-embed__wrapper">
<iframe class="wp-embedded-content" sandbox="allow-scripts" security="restricted" title="Interactive or visual content" src="https://flo.uri.sh/visualisation/13253017/embed#?secret=ZBiVEzdW2G" data-secret="ZBiVEzdW2G" frameborder="0" scrolling="no" height="575" width="700"></iframe>
</div><figcaption class="wp-element-caption">Bitcoin still has some catching up to do</figcaption></figure>



&#8220;Investors seem to be positioning themselves and their books ahead of some crucial data this week, namely the GDP and PCE inflation data,” Lavish said.



If data comes in weaker than expected, it would give US Federal Reserve Chair Jerome Powell more evidence to pause further rate rises, or so the theory goes.



Still, a shift in the global liquidity tide has been net positive for assets like bitcoin, Rousseau added.



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EthereumETH

about Ethereum

What is Ethereum?

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How many Ethereum are there?

What is the relative popularity of Ethereum?

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