Region by region, what is important to know right now in the moving world of digital assets, crypto, web3, blockchain...
NORTH AMERICA
1. Amazon: a NFT marketplace is coming
After months of speculation and a scoop released by Blockworks in January, The Big Whale reported last week that Amazon could launch its NFT platform as early as April 24th. Despite some unknowns regarding the exact timing (according to Blockworks, other sources said the launch would instead take place in May), what's increasingly certain is that starting in the spring of 2023, U.S. shoppers would be the first being able to purchase NFTs directly through a new Amazon Digital Marketplace tab. The rest of the world should follow later.
This kind of move by a giant like Amazon would mean a lot for the NFT and web3 worlds. It could unlock mainstream usage of these ecosystems. Especially if the sources cited by Blockworks are right: “Amazon shoppers would be able to purchase a fashion-oriented NFT tied to a pair of jeans — and pay with a credit card, sources said, just as they would with any other Amazon purchase.” In other words, buyers would be seamlessly using a blockchain based system without even knowing it. To propel this new offer, Amazon’s may by sending emails to every single US Prime Subscriber. That is 167 millions members. Another Blockworks’ source sums it up as follows: “They can onboard millions of users without educating people about self-custody, without educating people how to [set up] a MetaMask wallet.”
Regardless, many questions remain. What about a potential Amazon’s token to perform the transactions? At this point, its existence is very unclear. What blockchain backend would be used? Quoted sources talk about a private blockchain, but we don’t know if it will be a fork of an actual protocol or not. Not to mention the regulatory requirements which depend also on this technical choice: how exactly will Amazon meet government regulations in terms of KYC/AML (Know your Customer / Anti-money laundering)? The good news is that answers are coming.
2. A series of collapses in the banking system
The contagious effect of last year’s crypto collapses just added one more event: the collapse of Silvergate Bank, a key player in the cryptocurrency industry, and well recognized as a crypto friendly bank (Silvergate Bank provided banking services to many cryptocurrency companies, including exchanges and trading platforms).
In a nutshell, the 2022 FTX’s collapse provoked a dry off in deposits in Silvergate Bank’s statements which plummeted from US$13.3 billion at the end of September to US$6.3 billion by the end of the year. The bank tried to compensate its liquidity position by selling assets, but did so at fire sale prices (due to rising interest rates) incurring huge losses. The nosedive in trust was reinforced by an increased amount of short positions (traders that borrow shares to sell them, and repurchase them later for a lower price), betting on the fall of the bank.
Silvergate Bank development is significant to the crypto ecosystem, and highlights the challenges facing the cryptocurrency industry, and the need for more robust banking infrastructure and regulatory oversight. In particular, the latter could serve as the catalyst so that traditional banks decide to foray with confidence into the digital assets ecosystem. Regretfully, Silvergate Bank is not the only one closing its doors: a few days later, the crypto bank Signature Bank was seized and, as everyone knows, Silicon Valley Bank (SVB) collapsed.
The SVB case shares some elements of Silvergate’s situation - the rising of interest rates aggravated the conditions of the fall. It unfolded like this: SVB's main segment of clients were startups, which are not as abundant (especially credit-worthy ones) as regular firms and households. Particularly, during the pandemic, SVB had a lot of cash (startup activity was sagging) and invested it in securities paying 1.5%. However, the increase in interest rates by the Fed hit the value of securities held by SVB, and also dried up funding and liquidity of startups, SVB’s main clients. Under liquidity pressures, SVB’s startups clients began to withdraw their deposits. To satisfy those withdrawals the bank sold part of their securities at a loss, along with other components of their capital. A panic ensued and a bank run took place.
It is still too early to know the extent of the consequences of the collapse of these banks on the financial system. For now, the authorities are trying to limit the damage, to reassure that SVB’s deposits are not at risk and to avoid contagion effects. Further developments in the next BlockZero’s publications.
3. Kraken will launch a crypto bank
Kraken, a U.S.-based cryptocurrency exchange, has announced that it will launch its own bank for digital assets, despite a challenging regulatory environment. Indeed, Kraken has reportedly already received, in 2020, the approval from a Wyoming state regulator, allowing the crypto exchange to operate as an independent bank.
Originally, the plan was for the bank to be launched in 2021, in phases, until 2022 when the full launch would take place. Chief Legal Officer Santori finally announced that the roll-out would take place soon. First, the bank would serve the U.S.-based customers and potentially expand its client base in the future. By becoming a crypto bank, Kraken will be the first US crypto-currency exchange to create a bank, which stands for "Special Purpose Depository Institution". Thus it will allow Kraken to hold digital assets, manage payment systems and allow its customers to easily switch from fiat currency to crypto currency.
However, with the announcement of the collapse of three major banks in the crypto industry, namely Silvergate Bank, Silicon Valley Bank and Signature Bank (see previous news), Kraken has not indicated whether it is continuing with its crypto banking project regardless of what is currently happening. News should follow shortly on this subject.
EUROPE
4. Axa Investment registers as crypto service provider in France
Axa's asset management entity, AXA Investment Managers, has received the status of digital services asset provider (PSAN) from the AMF (Autorité des marchés financiers). This Registration allows it to carry out activities related to cryptocurrencies, such as to hold cryptocurrencies or to carry out transactions for the purchase/sale of digital assets against legal tender, or for the exchange of digital assets against other digital assets.
“This Registration as a PSAN is an important step for us and should benefit us as part of our initiatives around blockchain technology that we are actively working on, such as the tokenisation of financial securities or funds, the use of central bank digital currency or stablecoins,” Axa IM told Citywire Selector’s sister site, Citywire France.
This PSAN registration status must be distinguished from the PSAN agreement status. Because of its cost (100,000 to 150,000 euros) and its regulatory constraints (mandatory solvency, insurance and equity criteria), the agreement is so difficult and time-consuming to obtain that no French institution has it. Following the FTX crash, the Parliament considered a few weeks ago to make this agreement mandatory - causing a lot of worries in the crypto ecosystem - but legislators have finally voted for a simple reinforced regime of registration.
Thus, after July 2023, new requirements will be necessary to obtain this PSAN registration: new entrants must demonstrate a secure and resilient IT system, justify new methods for preventing conflicts of interest and internal controls, and implement a "custody agreement" to separate client accounts from the provider's accounts. For now… On the horizon is the new European directive known as MiCa (for Market in crypto assets), which should come into force by 2024 and push for a regulatory framework closer to the agreement regime.
In the meantime and ahead of legislation evolution, Axa IM is laying the groundwork for a real cryptocurrency asset management business. The insurer, via its subsidiary, is one of the most proactive institutions in this area in France. As said by BFM Business: "There, Axa IM seems to really take the direction of service to the individual with this initiative, fully integrating cryptocurrencies into wealth management solutions."
5. Project Icebreaker: breaking new paths in cross-border retail CBDC
The Bank of International Settlement (BIS) released on March 6th, 2023 the findings from the project Icebreaker, a collaboration between the Bank of Israel, Norges Bank, Sveriges Riksbank and the BIS Innovation Hub Nordic Centre. As over 90% of central banks are in various phases of exploration and experimentation of CBDCs (Central Bank Digital Currencies), Project Icebreaker, as the name suggests, offers insights into how cross-border and cross-currency payments can be enabled with minimal requirements on national CBDC systems, with a focus on “retail CBDCs” (rCBDCs) as opposed to wholesale CBDCs explored in previous BIS Projects.
In a nutshell, each country may have its own rCBDC systems with different distribution models.
The Icebreaker hub platform is a hub-and-spoke solution that interlinks different domestic systems, essentially facilitating communication between rCBDC DLT-based systems, such that each rCBDC system needs only to connect with one external system. So the Icebreaker hub routs cross-border payment messages between domestic systems. The additional component of the experiment was the use of FX providers, which may or may not not provide its own FX wallet. The FX providers hold and manage rCBDC in their operating currencies. They submit buy and sales rates and the Icebreaker hub is responsible for maintaining a live database of the submitted FX quotes (a FX marketplace).
So how are trades settled? There are two main components. First, the use of a payment-versus-payment (PvP) settlement mechanism ensures that the final transfer of payment in one currency occurs if and only if the final transfer of a payment in another currency took place. Second, the use of a pair of hash time-locked contracts (HTLC) - a type of smart contracts that creates a time-based escrow that can be unlocked using a cryptographic passphrase - where “one side locks the payment from the payer to the FX provider wallet in the payer currency, and the other locks the payment from the FX provider’s wallet in the payee currency to the payee”. Using the same hash value for the two payments ensures that either both succeed (i.e. can be unlocked by the same secret before they time out) or both fail. The latter essentially establishes trust and safety, ensuring that payment from the payer (who placed the trade) was received before the currency is released into its wallet.
The result is a coordinated settlement that effectively reduces counterparty risk. Still, there could be erroneous cases, and as such a dispute resolution process would be required. The very long schema of the process that takes place only in few seconds can be viewed below:
Icebreaker: how does the system work?
The paper ends with a set of key policy considerations in terms of governance, resilience, the FX mechanism, liquidity provision for FX providers, pricing of services, privacy and AML/CFT, and in addressing and payment initiation, with as per usual more questions raised to be answered.
Still the project’s contributions were important in advancing knowledge and demonstrating a number of benefits beyond the important one of reducing costs, notably enabling cross-border interoperability in a standardized way, reducing settlement and counterparty risk, increasing competition and choice for consumers (by decoupling FX service from the FX transaction and use of bridge currencies), increasing cross-border reach, scalability and rapidity (a few seconds) - without rCBDC needing to leave its rCBDC system.
The project is relevant for developed and developing economies alike. As Deputy Governor Aino Bunge of the Sveriges Riksbank notes: “Although domestic payments have become less expensive, safer and more efficient, payments across currencies are still associated with high costs, slow speed and risk. When exploring CBDCs it is important to include cross-currency opportunities from the start. Project Icebreaker shows how different CBDC solutions in different countries could enable instant cross-currency transactions in a way that would greatly benefit the end users.”
SOUTH AMERICA
6. Canadian crypto miner Pow.re lands in Paraguay
Canadian miner Pow.re and many other miners have turned to Paraguay looking for cheap hydroelectric power that could otherwise go unused and could also help in the development of some remote regions where the mine could be set up (though, crypto mining requires limited manpower).
Granted by the country's national utility (ANDE), the Canadian firm secured a contract for 100 megawatts (MW) of power and started construction of its site near Itaipu, one of the largest dams in the world located in the Iguazu region. ANDE started energizing the transmission lines and the Pow.re site will bring 4.5 exahash/second (EH/s) of computing power once completed.
Electricity is a major component of crypto currency mining and constitutes a majority of crypto currency mining costs. Cryptocurrency miners typically look to obtain cheap, long term energy contracts to stabilize their operating expenses and this has led to increased scrutiny recently especially in a time when there have been energy shortages due to the war in Ukraine and other factors. For instance, as crypto miners have flocked to Paraguay in search of cheap power, conflict with ANDE emerged: the industry is accused of taking advantage of the resource without contributing to the local economy. Reason why electricity tariffs have been raised for miners.
Though the crypto currency industry has high energy demand, in recent years more and more of this energy is coming from renewable sources. According to the Bitcoin mining council, a voluntary organization of Bitcoin mining companies and other companies in the industry, which represents nearly 50% of the global bitcoin mining network hashrate, participants are utilizing electricity with a 63.8% sustainable mix as of Q4 2022. TeraWulf, a US based sustainability focused crypto mining company, has started mining bitcoin using nuclear power (a zero-carbon energy source) and has deployed its first 8,000 miners using nuclear power.
This mix of sustainable energy could be expected to increase further in the future as the industry becomes more focused on carbon-free and sustainability. In many instances, renewable energy is harnessed in remote and inaccessible areas and requires significant investment to connect to the energy grid. Because Bitcoin miners are easily transportable, they could help provide the required funding in the initial years (through their consumption) to enable renewable power sources to have the required infrastructure to be connected to the grid.
Similarly, Bitcoin miners have the ability to shut off electricity and turn it back on in a matter of minutes, with virtually no impact on their ability to operate. A characteristic which has supposedly helped the state of Texas to stabilize its volatile energy grid where the miners switch off during high demand letting energy flow to homes, hospitals and other critical institutions while maintaining grid integrity by stabilizing load at off peak times..
7. Brazil wants to launch its CBDC by the end of 2024
In early March, Brazil's central bank announced the launch of its Central Bank Digital Currency (CBDC), the Digital Real, pilot project. Along with this announcement, the bank's CBDC expertise coordinator announced that public use of CBDC is expected to begin in late 2024. Brazil's CBDC will be built using a distributed ledger technology (DLT), which will settle wholesale interbank transactions. By using DLT, this will allow cost reductions and improve financial inclusivity to the retail population, considering that about 16% of the adult population of Brazil still does not have access to a bank account. Although CBDC is primarily being developed for wholesale transactions, retail consumers will have access to CBDC through tokenized bank deposits, which has generated a lot of interest from banks in Brazil. In addition to tokenized bank deposits, the government is also considering issuing tokenized government bonds. This interest in tokenized assets goes hand in hand with BlockZero's latest topic of the month “Real estate and blockchain: a promising deal”.
Since 2013, the Brazil financial ecosystem has gained a lot of exposure to digital payments, which has been concretized with the launch of Pix, a real-time payment system, in November 2020. With the launch of the CBDC, the Brazil Central Bank aims to replicate the success in terms of adoption that Pix has had. Indeed, Brazil's real-time payment system is held up as an example in the industry for its massive success. Fifteen months after its launch, 114 million people - or 67% of the Brazilian population - had made or received a transaction using Pix. In addition, 12.4 billion transactions were settled, with a total value of $1.2 trillion. This result is remarkable when compared to the per capita transactions of other major real-time payment systems. For example, it took Chile almost 11 years to reach 30 transactions per capita, while the Brazilian system did so in almost a year.
If the Brazilian central bank is able to replicate this success, it will represent a major milestone in the adoption of the CBDC, not only in Brazil, but also for the industry at large.
ASIA AND OCEANIA
8. Pakistan banks agree on blockchain-based KYC system development
On 2023 March 2, the Pakistan Banks’ Association (PBA) — a group of 31 traditional banks operating in Pakistan — signed off on developing a blockchain-based Know Your Customer (KYC) platform. Among the 31 member banks, there are international establishments such as the Industrial and Commercial Bank of China, Citibank and Deutsche Bank. It should be remembered that Know Your Customer (KYC) processes are a fundamental part of a financial institution’s anti-money laundering efforts. In 2020, we estimate at $1.2 Billion the amount of KYC spending.
As a blockchain-based system enables transparency and immutability, turning it into a KYC Blockchain system allows financial institutions to validatethe trustworthiness of the data and reinforce the security of the process.
And that is exactly the intention behind the move made by Pakistan: strengthen Anti-Money Laundering capabilities while countering terror financing — an initiative led by the State Bank of Pakistan (SBP). On top of that, the blockchain platform will also improve operational efficiencies, primarily aimed at improving customer experience during onboarding. The chosen technology is “Consonance”, the Avanza Group’s eKYC platform. The platform will use blockchain technology through which banks will be able to standardize and exchange - if customers consent to it - their details via a decentralized and self-regulated network. All participating member banks could assess their existing, as well as new customers, by utilizing information/ data available with any other bank on “Consonance”.
MIDDLE EAST AND AFRICA
9. Iran Completes Pre-Pilot Phase for Digital Rial
The Central Bank of Iran has announced the completion of the pre-pilot phase of its digital currency, the Digital Rial, and is now preparing for a pilot test in a real-world environment. The pilot phase of the Digital Rial is expected to involve a small number of banks and businesses, with the goal of testing the currency in a real-world environment and identifying any potential issues or areas for improvement. The development of the Digital Rial was accelerated after Iran was disconnected from the global provider of secure financial messages services, SWIFT in 2018.
Interestingly, the announcement takes place as Iran is preparing to meet with the Bank of Russia’s governor. Iran and Russia, two heavily sanctioned countries, are increasing their financial linkages, and besides the efforts to develop a digital currency, the two countries are trying to create an alternative payment system. In that regard, back in January they reported that their interbank communication and transfer systems were connected. Therefore, the Digital Rial is part of Iran’s policies to counterbalance sanctions and to solidify a Russia-Iran axis in the financial and payment settlement front.
10. There are lessons to be learned from Nigerians' rejection of their CBDC
In recent weeks, Nigerian citizens have taken to the streets to protest the country's cash shortage. This shortage is explained by the fact that the Nigerian government has pushed restrictions on cash, turning the Nigerian economy into a cashless economy, and to promote the adoption of the Nigerian CBDC, the eNaira. Which was quite low, as only 0.5% of Nigerians have used the CBDC so far compared to 50% of Nigerians that have used cryptocurrency. Despite the willingness of the Central Bank of Nigeria to move towards a cashless economy and promote financial inclusion, as the head of financial institutions ratings at Agusto and Co. mentions, "you can't legislate a change in behavior".
The impact of this current money shortage goes beyond the current protests. Indeed, several patients were left without treatment, many of whom died because their families were unable to raise the necessary funds, which was attributed to the current money crisis. Moreover, many families are not even able to pay for food or water because of the lack of money available. For instance, Nigerian citizen Godgift Inemesit said in an interview with AP News that she and her family usually eat three meals a day, but because there is no money to use, they must limit themselves to one meal a day. It is important to note that the lack of available money is mainly due to the fact that the Nigerian population's money is currently tied up in the bank and there are not enough banknotes, especially for a population that depends on cash. The population is still waiting for new banknotes to come. In addition, due to the current lack of money, in some regions, traders have begun to use another currency, such as the West African franc, for domestic transactions instead of their home currency.
The current crisis in Nigeria showcases the importance of considering the socio and economic context of a region in not only the conception but the deployment of a CBDC as it could highly influence the adoption and acceptance. Supporting this argument is a recent report from the Digital Currency Initiative, MIT Media Lab and Maiden, which found that in some regions the physicality of cash is more symbolic and culturally meaningful than digital currency. Many of those interviewed considered themselves "energized by the spirit of cash". It is important to note that in many economies such as Nigeria, the majority of money lending is done through friends or family members, about 45%, while only 7% of Nigerians over the age of 15 borrow money through formal financial institutions or using mobile money accounts. All of these considerations must be taken into account before making a major change in the monetary system, such as the implementation of a CBDC, as this could have a significant impact on a country's economy.
WHO ARE WE: BlockZero Advisors is a boutique consulting firm specializing in digital assets & blockchain. We support companies and organizations in the public and para-public sector through their digital transformation. BlockZero Advisors offers market intelligence services that can be tailored based on the clients needs and contexts to help inform decision-making. In addition, several times a month our team summarizes through our Newsletter the market movements and what we have been following for our client and ourselves. Finally, we issue Thought Leaderships on specific topics that discuss topics and issues that are relevant to our clients in this rapidly evolving space.