Region by region, what is important to know right now in the moving world of digital assets, crypto, web3, blockchain...
NORTH AMERICA
1. Genesis' crypto lending businesses file for bankruptcy protection
Genesis Global Holdco LLC, the crypto holding company of Genesis Global Capital, a crypto lending company, has filed for bankruptcy in January 2023. This announcement follows a 2022 that has been rocked by major collapses in the cryptocurrency industry particularly with Terra's stablecoin, Three Arrows Capital and FTX. According to the latest balance sheet, Genesis owes more than $3.5 billion to its 50 major creditors, such as Gemini, Cumberland and Mirana. In its filing, Genesis Global Capital said it expected the restructuring process to provide funds for its creditors.
It is important to remember that Genesis Global Holdco and its divisions are owned by Digital Currency Group (DCG), a venture capital firm, which also owns CoinDesk (the industry's leading media, research and events platform), Grayscale (the largest digital currency asset management company), Foundry (a financing and advisory firm focused on mining and staking digital assets) and Luno (a leading global digital asset exchange and portfolio). Following the news about Genesis, DCG assured that it would continue its operations as usual. As part of the restructuring, DCG said it intends to satisfy its obligations to Genesis of approximately $526 million due May 2023 and $1.1 billion due June 2032. Finally, we can see that the chain of events in 2022 still has a significant impact on industry players, causing them to liquidate their assets or even file for bankruptcy.
2. CBDCs could "revolutionize global financial systems" according to Bank of America
The finance sector is increasingly talking about Central Bank Digital Currencies (CBDC). Actually, at least 114 central banks are now exploring this kind of digital asset, which is 35 more than in May 2020. Recently, analysts at Bank of America released a paid white paper devoted entirely to CBDC to assess the disruptive potential of these digital currencies. And their conclusions are pretty definitive:
“We view distributed ledgers and digital currencies, such as CBDCs and stablecoins, as a natural evolution of today's monetary and payment systems. Digital currencies and programmable payments already exist, but the underlying CBDC infrastructure is what makes these digital currencies so transformative. Our view is CBDCs that leverage distributed ledger technology have the potential to revolutionize global financial systems and may be the most significant technological advancement in the history of money.”
In their minds, because of the distributive ledger on which they are based, CBDCs are the keys to solving the main problems of the current financial system. Rather than a centralized bank-owned infrastructure resulting in a fragmented landscape and the involvement of many third-party intermediaries, the decentralized and mutual nature of CBDC’s distributive ledger will eliminate these frictions and improve efficiency, interoperability, innovation and yield. To give us the full picture, the paper takes an in-depth look at all current projects around the world (China, USA, Latin America, Europe…). But, in each case, three main arguments prevail when a country justifies its choice to explore CBDCs:
Increasing the efficiency for cross-border, and domestic payments and transfers ($156tn in 2022): Not only can cross-border payments take up to 7 days to settle, which lead to inefficiencies, but the use of intermediaries (2.6 on average) such as Western Union and correspondent banks makes them expensive. As for domestic payments, they rely on payment service providers such as Visa and Mastercard in exchange for service fees from customers and merchants. CBDCs would have the power to change that by bypassing these third-party providers.
Reducing the risks of central banks losing monetary control: Alongside CBDCs, another type of digital asset is developing quickly: stablecoins (read our Thought Leadership on this subject). Given the uncontrolled growth of these new currencies, BoA’s analysts fear a systemic risk of inflation and loss of monetary control. But this risk could be largely mitigated by the issuance of CBDCs: “We expect stablecoin adoption and use for payments to increase in the absence of CBDCs as financial institutions explore digital asset custody and trading solutions”, the authors write. “However, CBDCs' design and programmability will likely determine the level of future stablecoin adoption and usage. We also note that the potential for CBDCs to displace stablecoins largely depends on the former being interoperable with blockchains.”
CBDC issuances may increase financial inclusion: This is one of the main social arguments in favor of CBDCs. These digital currencies have the potential to bank the unbanked, i.e. to give access to financial services to those who cannot under the current system (it represents 6.5% of the US population and 1.4 billion of people on the planet). “Unbanked individuals lack access to savings/checking accounts and are oſten unable to establish credit histories, which limit their ability to obtain credit cards or loans”, the report states. “As a result, these unbanked individuals frequently use costly check cashing, money order and payday lending services, further compounding inequities.” By allowing individuals to treat directly with the Central Bank and lowering the cost of operation, CBDCs would lower the barrier of entry to accessing basic financial services.
To counterbalance these advantages and offer a complete landscape, the paper takes also the time to list all the risks of a CBDC issuance, including more frequent bank runs, lack of coordination, competition with bank deposits, lack of adoption… Very concrete risks indeed, but each of them manageable or even avoidable, the authors note, if CBDCs are properly and carefully designed.
3. Binance acknowledges an error: it stored user funds with collateral
Binance, the world’s largest crypto platform, acknowledges it has mistakenly stored user funds with collateral. Indeed, the reserve for almost half of the 94 coins that Binance issues, more commonly known as B-Tokens, was held in a single wallet called “Binance 8”, which also holds customer assets. This results in the wallet holding much more tokens than it should compared to the number of tokens that was issued by Binance. As a consequence of this error, Binance has assured that it is in the process of transferring the assets in question into dedicated collateral wallets.
With the increase of investors observing the movement of funds and traffic on the various blockchains one would expect more people would be able to identify this type of error thus bringing more transparency to the "Proof of Reserve" process. Despite recent events, such as the collapse of FTX where several billion dollars in assets simply disappeared, one can still discern flaws in the dubious process of managing the reserves of various players, such as crypto exchanges. As a result, these questionable processes continue to diminish investor confidence in this market.
EUROPE
4. "The digital Euro would be a public good", says the President of the European CBDC task force
Fabio Panetta, Member of the Executive Board of the European Central Bank
January 23rd, Fabio Panetta, the Member of the Executive Board of the European Central Bank and President of the CBDC’s Task Force, made an enlightening declaration about the future digital Euro in front of the Committee on Economic and Monetary Affairs of the European Parliament.
“People’s payment behavior is changing at an unprecedented speed”, he started. “Over the past three years, cash payments in the euro area have dropped from 72% to 59%, with digital payments becoming increasingly popular. In the Netherlands and Finland, for example, cash is used only in one fifth of the transactions.”
Acknowledging this growing preference for electronic payments, Fabio Panetta thinks the digital Euro could allow Europeans to pay everywhere in the euro area, free of charge. However, he added, “the digital euro would not replace other electronic payment methods, or indeed cash. Rather, it would complement them. And by doing so, it would safeguard our monetary sovereignty while strengthening Europe’s strategic autonomy.”
For him, the digital euro can only be a public good, incorporating basic services free of charge (as is the case for cash). But, on top of these basic services, participating intermediaries would be allowed to build additional and fee-based services which people could use on a voluntary basis. “But let me be clear, he warned, the digital euro would never be programmable money. The ECB would not set any limitations on where, when or to whom people can pay with a digital euro. That would be tantamount to a voucher. And central banks issue money, not vouchers.”
When asked by the German media outlet Handelsblatt about the infrastructure and the potential filiation between Bitcoin and this digital Euro, Panetta reiterated that he remains a strong opponent to Bitcoin. While he said that no decision has yet been taken on the use of a blockchain, expressing doubts about its ability to support the transaction volume of the European CBDC as envisaged, he refused any comparison with the most popular crypto-currency: “In any case, our infrastructure will have nothing to do with bitcoin, which is not money and relies on a very inefficient and energy-intensive technology."
5. European Parliament proposes a special taxation on crypto assets
To stay on a related issue: in a previous statement in December 2022, the same Fabio Panetta had already pointed to this “energy intensive” aspect of Bitcoin, even proposing a taxation to address crypto's environmental costs, especially arising from the proof-of-work technology. He has been heard: the day after its last statement (see previous news), January 24th, the European Parliament proposed taxes on crypto assets to fund the European Union's annual budget of $185 billion.
Considering that crypto-assets are increasingly used as means of payment and part of investment strategies, the lawmakers think that “a European tax on crypto-assets would foster the emergence of a harmonized tax framework for crypto-assets, be more consistent with the crossborder nature of the crypto-assets market, and encourage the adoption of tax standards at the global level,” the report said.
This taxation proposal follows the approval of the Markets in Crypto Assets (MiCA) bill on October 10, 2022, which is scheduled to be ratified and implemented in the first quarter of 2023. This new legislation establishes a consistent regulatory framework for cryptocurrencies among the 27 member countries of the European Union. By providing a precise definition of the three classes of crypto-assets (asset-referenced tokens, e-money tokens and other crypto-assets), the MiCA bill paved the way for this taxation proposal.
It remains to be seen what form it will take. Taxation on capital gains resulting from crypto-asset activities? Taxation on crypto-asset transactions? Taxation on the mining and trading of crypto-assets leading to electricity consumption and environmental impact? All the options seem on the table for now.
6. Swiss Bank Cité Gestion becomes a pioneer: it is the first private bank to tokenize its own shares
Cité Gestion, a Swiss private bank, has announced that it has tokenized its own shares using blockchain technology. The bank partnered with digital assets firm Taurus which used the Ethereum blockchain to issue tokens that represent shares in the bank and can be traded on the Swiss stock exchange. According to the bank, this is the first time that a private bank has tokenized its own shares and follows the tokenization steps taken by investment firms such as Hamilton Lane and KKR.
The bank stated that tokenizing its shares will increase transparency and reduce costs, as well as make it easier for investors to trade shares in the bank. Additionally, the bank also plans to use the tokens to offer its clients new investment opportunities, such as fractional ownership of assets.
This is significant for the blockchain industry as it shows the potential for the technology to be used in traditional financial systems and can lead to wider adoption of blockchain technology in the financial sector. In that sense, it highlights the potential benefits of tokenization such as increased transparency, fractional ownership of assets, and improved liquidity, while being compliant to regulations which can make investing more accessible to a wider range of individuals.
SOUTH AMERICA
7. Latin american stablecoin adoption expected to grow
The adoption rate of stablecoins in Latin America rose in 2022, in spite of the turbulence in the industry according to four regional crypto leaders. Moreover, the consensus of representatives of regional powerhouses such as Ledn (lending platform), Bitso (crypto platform), Ripio (digital asset platform), and Maker Growth (dedicated to the expansion of MakerDAO), is that this positive trend is expected to continue in 2023. The main reason behind such counterintuitive behavior -at least in 2022- is that Latin American citizens are using stablecoins as a store of value and protecting their financial resources against rampant inflation. Precisely, according to this news article from Chainalaysis, expected inflation in 2023 remains high, reinforcing the adoption of stablecoins.
Although storing value is definitively one of the key drivers of crypto adoption, additional research has identified at least two more factors behind. Chainalysis detected that sending remittances, especially exemplified in the cases of El Salvador and Mexico is another important crypto adoption factor. The same report emphasizes the so-called “seeking alpha” driver: adopting cryptocurrencies for profit, by engaging in speculative activity looking for financial gains.
ASIA AND OCEANIA
8. A SWIFT alternative for stablecoins and CBDCs? That is the proposal of China-backed blockchain project
The company developing China’s blockchain network aims to build a system for international settlements using stablecoins and state-issued digital currencies. The designer of China’s state-backed Blockchain-based Service Network (BSN), i.e. Hong Kong-based Red Date Technology, has launched a new project to implement both stablecoins and central bank digital currencies (CBDCs) in cross-border payments. Universal Digital Payments Network (UDPN) - that is the name of this future platform - should guarantee the interoperability between the two types of tokens.
The UDPN whitepaper precise that the goal is to allow businesses from different countries to “transact and settle in different regulated digital currencies”, then draws a parallel with SWIFT: “Just as the SWIFT network created the original common standard for messaging between financial institutions across different settlement systems, the UDPN will serve the same purpose for the emerging generation of CBDCs and stablecoins.” According to Red Date, a number of global Tier 1 banks will participate to the proof-of-concept trials that will take during the first half of 2023. No name were disclosed, but representatives of Deutsche Bank, HSBC, Standard Chartered, and the Bank of East Asia were seen at the UDPN event.
China seems to be leading in development of its CBDC platform and promotion of blockchain technology. China could be seeking to break free from the control the West has over the SWIFT network to process transactions. Other countries observing this development may make note and take necessary steps to be a part of the digital currency transformation.
MIDDLE EAST AND AFRICA
9. Saudi Central Bank Continues CBDC Experimentations
The Saudi Central Bank (SAMA) continues to experiment on Central Bank Digital Currency (CBDC). Better: it is currently focusing on domestic wholesale CBDC use cases, in collaboration with local banks and FinTechs. As we saw in previous news, this project echoes several central banks CBDC initiatives across the globe.
During this phase of the project, SAMA aims to evaluate how a CBDC-based payment solution would perform in terms of economic impact, market readiness, and creation of potential robust and fast applications. Besides, SAMA wants to review policy, legal and regulatory considerations in order to achieving the objectives of Saudi Vision 2030. Although no decision has been made on the introduction of CBDC in the Kingdom, the central bank does not slow down its efforts and intends to further explore the benefits and potential risks of implementing CBDC.
It should be remembered that SAMA and the Central Bank of UAE successfully conducted a pioneering CBDC experiment called “Project Aber” to examine uses of distributed ledger technology in cross border trade. With this experiment, SAMA appears to be taking a lead in the CBDC field. Given the influence that Saudi Arabia may have in the Middle East region, neighboring nations may take a wait-and-see approach to the results of the experiment to support their own CBDC plans.