Crypto News Bites 2022/11/09
Binance may bailout FTX / NTT Docomo invests $4b in web3 / YugaLabs NFT royalties
Top news summaries - details below
Crypto exchange Binance signs non-binding letter of intent to acquire rival FTX following a liquidity crunch. Binance CEO CZ raises doubts over FTX’s financial position, triggers a bank run causing a liquidity crisis, and then swoops in to buy them out! Ruthless. Lehman moment for crypto?
US senator points to Binance/FTX as catalyst for crypto legislation. Expect further govt scrutiny and regulations globally. Also Midterm election results might shape how BTC miners operate.
Japan telco NTT Docomo to spend $4b in web3. Given that they are the largest mobile operator in Japan with 84m users, this is pretty big for adoption.
YugaLabs suggests maintaining NFT royalties thru an allowlist. The company behind multiple top NFT collections such as Bored Ape Yacht Club and CryptoPunks explains their idea behind the recent creator royalty debate, as NFT marketplaces have been making them optional or removing them completely.
South Korea game studio NCsoft partners with blockchain developer Mysten Labs. Adoption for Mysten Labs’ Sui blockchain?
Market overview
Despite crypto exchange Binance looking to take over rival exchange FTX, the broad crypto market continues to fall on contagion fears as Binance can still walk away from the deal. Also they probably won’t extend the bailout offer to FTX’s sister firm Alameda, a crypto trading company with a large balance sheet, and Alameda would be forced to sell their assets in a fire-sale to raise liquidity. This feels like Lehman Brothers, and the summer crash from Luna/3AC/Celsius was Bear Stearns. Investor confidence is shaken, users withdrawing from multiple exchanges leading to delays, and until the deal is confirmed and details released most will probably stay on the sidelines.
US midterm elections continue, CPI data Thursday, then possibly no large macro catalysts until Dec FOMC. Senator Lummis comments on Binance/FTX, stating the need for clear crypto exchange regulations. Midterm election results might also shape how BTC miners operate, as many politicians have ESG concerns on the energy usage of the proof of work blockchain.
As an aside, my advice is to have multiple methods of moving your capital into / out of crypto.
Binance & FTX, other crypto exchanges
Binance signs a non-binding letter of intent to acquire rival FTX following a liquidity crunch. To summarize: CZ weakened FTX’s revenues, sold FTT, started a bank run on FTX, and can now buy for cheap a company once valued at $32b. Even shorter summary: Binance forced a $580m capital call on FTX.
It is a stunning development given that FTX is (was?) arguably the 2nd largest crypto exchange globally. Earlier in the year, Binance removed all trading fees for BTC & ETH, attracting volumes and starving competitors like FTX. A report last week raised liquidity concerns of Alameda’s balance sheet given the large amount of FTX’s token FTT held, and then CZ, Binance’s CEO, announced they are selling their FTT holdings, which was worth $580m, on a Sunday (great timing). CZ also drew a comparison to LUNA, a blockchain that collapsed earlier in May due to a bank run. This sparked a bank run on FTX as investors rushed to withdraw their assets, with users reporting multiple lengthy delays (personally it took me 13 hours to withdraw assets). FTX’s CEO SBF tweeted to allay liquidity fears, and Alameda’s CEO Ellison offered to buy them all at $22, but a day later the price failed to hold and dropped as low as $2.5. Facing even more user withdrawals, SBF was then forced to reach out to CZ, possibly after failing to raise capital from other investors. Irony of FTX bailing out other companies to then get bailed out just months later is not lost on me.
Ramifications of what transpired will be known at a later date, but this is not a good look for the industry. Adoption could slow as users see these bank runs / crypto crashes from what were the largest companies in the space (Terra Luna, Three Arrows Capital, Celsius, and now FTX), and there will be increased government scrutiny and regulation. I guess there’s no anti-monopoly law since Binance isn’t headquartered anywhere. This again shows the problems with centralized finance (CeFi), and while not perfect, decentralized finance (DeFi) probably would have avoided this particular issue.
Other exchanges such as Coinbase (COIN) are reportedly experiencing withdrawal issues. However, Coinbase being a US listed company should have higher transparency as it is under higher regulatory scrutiny, such as Germany issuing a warning to them today.
I will now be seriously considering DeFi exchanges for my own futures trading, names such as DYDX, GMX, PERP, GAINS etc, and expect other traders to do the same.
Adoption
Moving on from yet another blackswan event in crypto for 2022. In another sign that at least blockchain technology is here to stay, Japanese mobile operator NTT Docomo plans up to $4 billion web3 investments, partnering with professional services giant Accenture and multichain platform Astar (ASTR). This is pretty big news as NTT Docomo has 84m subscribers. ASTR token however is down 9% following the general crypto market.
My favorite type of crypto adoption is through games, and South Korean gaming company NCsoft, distributor of popular games such as Lineage and Guild Wars, has entered a strategic partnership with Mysten Labs, developer of the new Sui blockchain. Sui has no token yet but has gained hype as it is founded by former Meta executives.
NFTs
Founders of Yuga Labs, owners of bluechip NFT collection Bored Ape Yacht Club, have suggested maintaining an allowlist of marketplaces that enforces NFT creator royalties. The idea is when a transfer is initiated for an NFT smart contract, it checks whether the transfer is to a smart contract, which NFT marketplaces use to allow its users to trade. If it is a smart contract, then it checks against the allowlist whether the NFT marketplace respects creator royalty fees, otherwise the transaction fails. This is another potential solution to the trend of marketplaces not enforcing royalties in a bid to increase their own trading volumes, at the expense of creators drawn to NFTs for the secondary sales revenue.
Speaking of NFTs, Adam Neumann, co-founder of WeWork, has a new startup Flowcarbon which will be launching an NFT project Flow3ers that uses 67% of proceeds to purchase carbon credits. Auctioning 200 pieces from 8 artists. While I applaud the ESG component, this doesn’t seem to be pushing the technology itself in an interesting direction by itself.
Regulation
Despite the raging war in Ukraine, Bank of Russia is looking into NFT and smart contract regulation. Focus is of course on rules to tax digital securities and utility tokens.
Bank of Korea tested NFT trading and remittances with their central bank digital currencies (CBDC). This was a 10 month experiment into having a digital South Korean Won, and the country is amongst a growing handful that are piloting or have launched a CBDC, with many more researching or testing the proof of concept.
Bitcoin Miners
US listed Marathon Digital (MARA) misses Q3 revenue estimates, lowers hashrate outlook for the rest of 2022. Another example of the downturn that the mining sector is experiencing due to factors such as low BTC prices, higher financing costs, higher electricity prices etc. Multiple Bitcoin mining companies are in financial trouble but some such as US-listed Hive Blockchain (HIVE) had a strong production in Oct with no debt costs on equipment. Expecting further consolidation in the sector as the crypto winter weeds out the inefficient companies.
Return of the Villains
Adding another wrinkle to the news today, Do Kwon, the fugitive co-founder of collapsed blockchain Terra Luna that was once worth almost $45b, appears on a live stream of UpOnly. Joining him was Martin Shkreli, a convicted felon who was sentenced to 7 years of prison for securities fraud.
Su Zhu, co-founder of now bankrupt crypto hedge fund Three Arrows Capital, whose whereabouts are unknown but most think he is hiding in Dubai, returns to twitter after almost 4 months of silence.
Tokens Mentioned Today
BTC ETH FTT DYDX GMX PERP GAINS ASTR