Blockstone Capital Weekly Digest: Wednesday 8 March 2023
A summary of the most important developments in the digital asset industry, every week.
Welcome to the Blockstone Capital Weekly Digest. Our objective with this newsletter is to provide a concise summary on the developments driving digital asset markets. We also share our thoughts on key themes that we are watching, as well as any updates about our fund (now live!).
Silvergate was the word on everybody’s lips this past week, and before diving into this story, we would first like to highlight that our funds were not materially impacted by the unfolding situation at the bank. We have a thorough manager selection process and all our funds had already diversified their banking relationships prior to the collapse of FTX.
Crypto’s banking wobbles are understandably top of mind right now. Yet, innovation in the space continued unabated this past week, as demonstrated by developments at Li.Fi, Jack Dorsey’s Block, PancakeSwap and more. Though sentiment in crypto markets changes virtually everyday, at Blockstone, we find ourselves consistently impressed by the sheer number of market participants building and innovating – irrespective of price and negative sentiment.
As such, it’s impossible not to be bullish on the future of this burgeoning industry, and we very much look forward to following its growth and maturation with you.
Carl, Vegard and Yev
Liquidity crisis at Silvergate fuels search for alternative banking partners
Silvergate Capital, a crucial banking partner for crypto firms, is firmly in the spotlight as it enters an existential crisis.
Shares of the bank fell more than 50% on Thursday after a string of its clients cut ties with the bank amid uncertainties. At the time of writing, Silvergate’s stock has declined by 95% over the past year.
Silvergate is an FDIC insured California bank with a long history in the digital asset space, having signed its first crypto customer in 2014. Two years later, it became the first regulated bank to create a payment mechanism that converts crypto assets to fiat (Silvergate Exchange Network).
As one of a handful of banking institutions offering services to the US crypto industry, Silvergate going down poses a problem in the short-term horizon because there aren’t a great number of alternatives for crypto companies to partner with. Without strong crypto-friendly banks, mainstream crypto adoption becomes much more difficult.
However, crypto firms are responding and adapting:
Kraken is being applauded for planning to roll out its own bank despite having had a rough time with the US regulatory agencies as of late.
Coinbase has teamed up with Signature, but this may not be a viable route for others as the bank moved to reduce its exposure to the crypto ecosystem in the wake of the FTX collapse.
Dubai-based crypto exchange Bybit responded with a temporary suspension of USD deposits via wire transfer (including SWIFT) due to ‘service outages’ from their endpoint processing partner. However, Bybit has yet to answer whether that partner was Silvergate.
Swiss crypto banks are also being hailed as a necessary step to handle payments in this situation. We have seen clients opting for institutions offering segregated account solutions such as Sygnum Bank, which is regulated by the Swiss Financial Market Supervisory Authority. The Swiss regulatory framework considers crypto as an asset class, therefore banks can keep cryptocurrencies off balance sheets. As client assets are fully segregated and held off balance sheet, this presents zero counterparty risk, and clients can maintain ownership of their assets, no matter what.
Coinbase renews attempt to diversify from its core trading business with the purchase of One River Digital Asset Management
Coinbase, the second largest crypto exchange globally, said on Friday it has acquired One River Digital, a digital asset manager catering to institutional investors.
One River Digital will transition into Coinbase Asset Management and offer investment advisory services. Eric Peters will continue to lead the firm as its CEO and CIO. The firm’s advisor, former SEC Chairman Jay Clayton is also staying on through the sale, as is deputy CIO Marcel Kasumovich.
The acquisition is Coinbase’s first since February 2022, and comes in the wake of a disappointing quarterly earnings report and efforts to diversify its revenue streams. Bearish sentiment over the course of 2022 in the crypto space saw the flight of retail capital and a steep decline in retail trading volume, which was reflected in the exchange’s net loss of $2.6bn for the year.
Last month, we saw the exchange become the first publicly traded company to join the L2 race with its own Layer 2 Ethereum network, Base, which is built on top of Optimism's tech stack. The move to expand its offering may help Coinbase diversify its revenue, while focusing on its own ecosystem.
With the purchase of One River Digital, Coinbase is demonstrating a shift in its strategy to diversify beyond its current focus on serving retail customers. We believe that positioning towards institutional investors could be a promising move for the exchange that could unlock significant value.
Binance remains under pressure on multiple fronts
In recent weeks, Binance has been hit by a raft of challenges that only seem to be intensifying.
Not long after Paxos severed ties with the exchange, it was announced that Coinbase will be suspending trading of Binance’s BUSD stablecoin on its platform by this time next week. As such, investors have been pulling billions from the stablecoin. According to CoinMarketCap, the asset’s market cap has plummeted 46% in the past month. Despite its troubles, BUSD remains third-place in the $135.6bn stablecoin market.
Adding to Binance’s troubles is a recent explosive Wall Street Journal report that cites messages from former Binance employees, and claims the relationship between Binance and BinanceUS is more intertwined than both entities have disclosed. As per the article: “Binance developers in China maintained the software code supporting Binance.US users’ digital wallets, potentially giving Binance access to U.S. customer data.” It is thought these revelations could intensify pressure on the exchange from the SEC.
Meanwhile on Friday, during a bankruptcy hearing to evaluate the sale of bankrupt crypto lender Voyager to BinanceUS, an SEC lawyer testified that staff at the regulatory agency believe BinanceUS is running an unregistered securities exchange within the US. Market observers are arguing that it shouldn’t take a bankruptcy to gauge what the SEC’s position is with respect to whether crypto is a security.
Yesterday, BinanceUS overcame a major obstacle to acquire Voyager Digital in a deal worth over $1bn, with the bankruptcy judge overruling the SEC’s objection to the deal.
Roundup of other key developments from around the world
Ethereum core developers push Shanghai upgrade to early April. More
Tel Aviv Stock Exchange moves toward offering crypto trading. More
FTX sues Grayscale and DCG, citing 'exorbitant' fees. More
HSBC, Nationwide impose new restrictions on crypto asset purchases in the UK. More
Dubai’s crypto industry welcomes new licensing regime amid global regulatory uncertainty. More
US SEC plans to keep growing crypto unit as enforcement ramps up. More
French parliament votes for stringent crypto licensing regime. More
Robinhood Wallet is now available to all iOS customers worldwide. More
Multicoin Capital’s hedge fund lost 91.4% last year, investor letter reveals. More
BKCoin faces $100m crypto fraud trial. More
From Blockstone Capital
Carl quoted in Forbes
In a recent Forbes article, our Managing Partner, Carl Szantyr, comments on the pace of VC investments in digital asset markets. Read what he has to say here.
Blockstone Capital at Switzerland Hedge Fund Week
Our team is traveling to Zurich for Switzerland Hedge Fund Week this Friday.
Carl is looking forward to participating in a CryptoBrunch panel to discuss the role of digital assets in institutional portfolio construction, and how the regulatory landscape is evolving. Visit the AYU website for more details.
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