What happened this week around blockchain and cryptocurrencies? The most relevant local and international events as well as appealing background reports in a pointed and compact weekly review.
Selected articles of the week:
Stablecoins are cryptocurrencies primarily tied to fiat currencies such as the US dollar. They are critical to the crypto ecosystem because they serve as a bridge between traditional finance and decentralized finance (DeFi), providing users access to the benefits of blockchain technology without the volatility of traditional cryptocurrencies. Leading stablecoin issuers maintain 1:1 reserves in cash at reputable financial institutions to ensure stability. Verification of these deposits is conducted annually by regulated entities such as Circle Financial (USDC) through a “Big Four” auditor. However, counterpart risk to banks remains, as evidenced by the recent incident over the weekend. The collapse of Silicon Valley Bank (SVB) – the largest bank failure since the 2008 financial crisis – had a significant impact on the backing of the second-largest stablecoin, USDC. The insolvent bank, which had custody of around 8% of the reserves of the blockchain dollar, caused USDC to plummet to under 88 cents amidst ensuing panic. Although the stablecoin’s binding was restored through the government’s bailout of Silicon Valley Bank, the loss of confidence in the cryptocurrency industry’s sub-sector cannot be underestimated.
A summarizing review of what has been happening at the crypto markets of the past week. A look at trending sectors, liquidity, volatility, spreads and more. The weekly report in cooperation with market data provider Kaiko.
For crypto firms such as exchanges and investment firms, bank accounts are crucial as they require access to traditional financial services for fiat currency transactions. In the US, these companies primarily relied on three crypto-friendly financial institutions: Silvergate Bank, Silicon Valley Bank (SVB), and Signature Bank. These banks provided crypto companies with a critical bridge to the fiat system that other institutions did not offer. However, within a week, both Silvergate and SVB closed their doors due to a classic asset-liability mismatch. Consequently, the industry was hit hard over the weekend. In a joint statement by the US Treasury Department, the Federal Reserve, and the Federal Deposit Insurance Corporation (FDIC) regarding the situation around insolvent Silicon Valley Bank, the regulatory bodies announced the closure of Signature Bank to protect depositors. A more detailed explanation was not provided. The closure of the last of the three crypto-friendly US financial institutions sparked speculation among industry representatives that it was a direct attack on the industry. However, the authorities denied these allegations in various statements.
The closure of Signature Bank, which provided services to several crypto companies, represents another significant setback for the industry.
The regulatory environment for cryptocurrency companies in the United States has recently become increasingly strict. On the one hand, the collapse of previously cryptocurrency-friendly financial institutions has made it difficult to find a reliable banking partner. On the other hand, US regulatory authorities are acting more aggressively than ever before. The Securities and Exchange Commission (SEC), which is responsible for regulating securities markets in the US, is engaged in numerous legal disputes with cryptocurrency companies and has announced its intention to regulate almost all cryptocurrencies under US securities law. Other agencies, such as the Federal Reserve (Fed), the Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC), have also explicitly spoken out against doing business with the industry. These developments are prompting many US cryptocurrency companies to consider moving abroad, with Switzerland presenting an attractive location. The landlocked state in the heart of Europe has been known as a banking and financial center for centuries. With a favorable regulatory environment, an advanced infrastructure, and a growing community of blockchain enthusiasts, Switzerland has become a hub for cryptocurrency companies from around the world.
The regulatory environment in the U.S. is becoming uncertain for crypto companies, which is why many are taking refuge in crypto-friendly Switzerland.
Central bank digital currencies (CBDCs) are digital versions of national currencies issued and secured by central banks. CBDCs are seen as attractive among monetary policymakers for their potential to improve financial integration, enhance payment system efficiency, and simplify the implementation of monetary policy. While central banks around the world are considering the introduction of CBDCs for everyday payments, the Swiss National Bank (SNB) sees innovation in this area as a matter for the private sector. The Swiss Bankers Association (SBA) has taken up this challenge and describes in a whitepaper on the “book money token” (Buchgeld-Token, BGT) a Swiss franc stablecoin that would be issued as a joint project by leading Swiss banks. A summary.
The SBA wants to digitize book money and promote Swiss payment transactions with a bank-backed digital franc (BGT).
Additionally: The Blockchain Trilemma poses the challenge of achieving three fundamental properties in a blockchain system simultaneously: security, scalability, and decentralization. Ethereum, the second-largest blockchain platform after Bitcoin, notoriously struggles with this issue. The platform allows developers to create decentralized applications (dApps) that require high computing power, leading to slow transaction processing times and high fees. To overcome this challenge, scaling solutions such as “Optimistic Rollups” have been developed. Optimistic Rollups are a layer-2 scaling solution that aggregates transactions off-chain and only periodically sends a bundle to the main chain. This approach significantly reduces transaction fees and increases scalability while maintaining the same level of security and decentralization. For the leading Optimistic Rollup, Arbitrum, the issuance of its own governance token (ARB) marks the beginning of a new chapter.
Arbitrum distributes their governance token ARB to users through an airdrop, handing over the protocol to a DAO.