Two Worlds Collide: Boon for Bitcoin

After nearly a decade in the making, the Securities and Exchange Commission (SEC) approved 11 applications for the first U.S.-listed exchange traded funds (ETF) that will track Bitcoin.¹ Yes, Bitcoin.

The news comes after years of debate that consisted of several hearings, public commentary, and advocation of potential risks and benefits of the game-changing decision. The ETFs will grant everyday investors exposure to the world’s largest cryptocurrency without needing to navigate previous hurdles to investing. It is a boon for the crypto industry that had recently weathered several scandals, and further validates Bitcoin, and potentially other cryptocurrencies, as a useable asset class.

Bitcoin’s dominance has recently experienced a further notable surge, with its market cap relative to all other cryptocurrencies increasing by 8% in 2023. The growth can be attributed to several factors, including increased institutional interest and mainstream adoption.

The prevailing trend suggests that Bitcoin’s market dominance is posed to persist in 2024, fueled by increasing investment participation from institutions and everyday investors through newly approved ETFs. Be prepared to see an increased maelstrom of advertising and marketing. (Perhaps more floating QR codes?)²

For some, this decision has not washed away concerns over cryptocurrency instability and risks – including the Chair of the SEC itself Gary Gensler. Gensler made it clear the SEC’s decision is not an endorsement of Bitcoin and should not be a signal of decisions to come. "Investors should remain cautious about the myriad risks associated with Bitcoin and products whose value is tied to crypto."³

In this edition of the Two Worlds Colliding series, we explore regulatory activity, crypto adoption both domestically and globally, security concerns, and the potential future of digital finance.

Continued Disagreements Over Crypto’s Regulatory Gray Area

Where there is indecision from regulators and lawmakers on how to treat a financial instrument, there is ambiguity that fosters room for disagreements, and arguments. Crypto stakeholders have been operating in a regulatory gray area for years, which continues to cultivate a tense spotlight on politicians, regulators, and crypto firms that are still learning how to get along. A U.S. Treasury official warned lawmakers that action needs to be taken in the U.S. to publish crypto-regulation standards before a financial crisis happens. The official warned, "For crypto assets, policymakers have a chance to act before a crisis to adopt higher standards that support responsible innovation…At the same time, it is critical that any legislative proposals don't undermine the already robust regulatory foundations that apply to financial institutions and capital markets."⁴

• A large cryptocurrency exchange claimed that the U.S. Treasury’s recent proposed cryptocurrency rulemaking does not address a regulatory gap and also would require large amounts of data and resources from crypto platforms. The cryptocurrency exchange filed a comment to the Treasury’s Financial Crimes Enforcement Network to argue against what it has deemed as a required “data dump” that is “a waste of time and resources.”⁵
• In late January, a cryptocurrency exchange faced off against the SEC in court arguing that the SEC’s lawsuit should be dismissed. The SEC alleged that tokens traded on a cryptocurrency exchange platform should be considered securities.⁶
• The CEO of a large crypto firm pointed fingers at the SEC during the World Economic Forum in Davos, Switzerland – stating that the SEC is the reason it has not pursued an initial public offering (IPO). Crypto-firm leaders are paying attention to ongoing regulatory matters when making pivotal business decisions. “Trying to go public with a very hostile regulator that has to approve your S-1 — that doesn't sound like a lot of fun to me.”⁷
• The newly approved Bitcoin spot ETF may open the door for a potential ethereum spot ETF. Blackrock, Fidelity, VanEck, and others have already filed for spot Ethereum ETFs, and one Bloomberg Intelligence Analyst suggests there is a 70% likelihood for approval. The SEC’s first verdict for the spot Ethereum ETF application has a deadline of May 23.⁸
  
  

Good Samaritan Hackers for a Good Price

The fourth quarter of 2023 saw an interesting trend emerge: victims being compensated for their losses. Instead of running off with their score, hackers have come back to the table to negotiate the return of the stolen goods. Several instances occurred where a large majority of the heist was returned and in exchange the victim paid a bounty and did not pursue legal action. In other instances, fear of reputational damage forced platforms suffering from security breaches to promise compensation to defrauded users.

• Catalyx, a Canadian crypto exchange, halted trading and withdrawals in December after a security breach. Although the amount stolen was not disclosed, the company did announce they suspect the breach involved one of its employees.⁹
• The peer-to-peer trading platform, NFT Trader, suffered a security breach on December 16, where at least $3 million worth of nonfungible tokens (NFTs) were stolen. Interestingly, one of the hackers posted a public message offering to return the NFTs for a ransom payment.¹⁰
• On October 7, Stars Arena, a Web3 social media platform, suffered a major security breach that allowed $3 million of cryptocurrency to be stolen. Three days later, the hacker returned 90% of the stolen assets in exchange for a 10% bounty ($257,000).¹¹
• On November 22, KyberSwap suffered a significant security breach where attackers stole $48.8 million by taking advantage of a loophole related to the tick interval boundaries within KyberSwap’s concentrated liquidity pools, allowing them to artificially manipulate liquidity. In response, KyberSwap announced a treasury grant program to compensate the impacted users.¹²
• Over a two-month period, Justin Sun owned crypto platforms have been hacked four times, including HTX twice, resulting in over $200 million in lost funds. Despite Sun’s vow to fully reimburse the affected users, some crypto enthusiasts have urged the community to stay away from the exchanges, with some questioning who might be involved in the hacks.¹³
• On October 12, Platypus Finance was the victim of a hacker for the third time in 2023. The attack resulted in $2.3 million of crypto assets stolen, however, the hacker agreed to return 90% of the stolen assets if no legal action was taken, making the net loss only $167,400.¹⁴
  
  

Through Strategic Partnerships – Can FTX Rise From the Grave?

Merger and acquisition (M&A) activity among blockchain-related companies continued to grow with regulatory considerations remaining a critical factor in decision-making. Recently, firms with a Web3 focus saw the most M&A interest. Industry experts believe this is a trend to stay.

• In October, lawyers handling the FTX bankruptcy case revealed they are in negotiations with parties interested in an acquisition after receiving 70 acquisition inquiries. However, many industry experts are skeptical that a relaunch of FTX is even possible due to the severe reputational damage.¹⁵
• Two Web3-based news organizations, Decrypt and Rug Radio, have agreed to merge operations next year while retaining brand independence. Decrypt’s CEO, Josh Quittner, and Rug Radio’s co-CEOs, Farokh Sarmad and Loxley Fernandes, will each maintain leadership positions of the new holding company.¹⁶
• The governance bodies of the largest decentralized exchange on Cosmos, Osmosis, and the lending protocol, UX Chain are considering a merger. The proposal includes integrating UX Chain’s lending logic with Osmosis’ decentralized exchange to form a comprehensive DeFi hub.¹⁷
• GAMI, a Web3 venture builder, and the prominent non-profit organization, Doctors of the World, announced a new partnership that is expected to modernize charitable giving making donations instantaneous. The digital transformation project is expected to be completed by 2027.¹⁸
• In December, the Japan-based crypto exchange, Monex Group, announced its plan to acquire a majority stake in the asset management firm 3iQ Digital Holdings. According to the announcement, a key driver of the acquisition was 3iQ’s experience listing some of the first spot Bitcoin and Ether ETFs in North America. This announcement occurred shortly after Japan’s government introduced a tax reform that could have companies avoid unrealized gains taxes from crypto holdings.¹⁹
  
  

Crypto’s Dual Nature — Increased Global Adoption and Regulation

According to BTC Map, the number of in-person vendors accepting cryptocurrency has tripled globally in the last year. Bitcoin is now recognized as legal tender in Argentina. Hong Kong’s Securities and Futures Commission is accepting applications to create a spot crypto ETF. The U.K. Treasury proposed new regulations to bring crypto assets under the scope of financial service regulations, aiming to make the U.K. a global crypto hub.²⁰

• The European Central Bank’s Governing Council will be proceeding into the next phase of digital euro preparation after concluding a two-year investigative phase on design and distribution of a digital euro. The “preparation phase” will include laying foundation for the potential digital euro, including drafting a rulebook and provider selection for platform and infrastructure requirements. The theoretical digital euro would be designed to be widely accessible, free for basic use, and available both online and offline.²¹
• BTC Map, a crowdsourced cryptocurrency adoption tracker, reports a near tripling of vendors accepting cryptocurrency as payment. As of January 10, 2024, there are over 6,300 reported vendors accepting Bitcoin, up from 2,300 a year ago. Europe leads in the number of vendors, followed by North America and then South America.
• While Argentina, South America’s second-largest economy, grapples with hyperinflation and devaluation of the local Peso, many Argentinians have embraced cryptocurrencies such as Bitcoin and stablecoins. In December, President Javier Milei ratified that Bitcoin can be used as official currency in contracts, providing legal standing in courts.²²
• Hong Kong's Securities and Futures Commission (SFC) and the city's central bank are set to enable spot crypto ETFs and are now accepting applications for such funds. A circular published by the SFC states “[The SFC is] prepared to accept applications for the authorization of other funds with exposure to virtual assets, including virtual asset (VA) spot exchange-traded funds.”²³ The circular emphasizes heightened investor risk for VAs and proposed additional restrictions, such as offering those products only to professional investors or requiring consumers to pass a VA knowledge test before investing.

A Rising Tide Lifts All Boats — U.S. Adoption of Spot Bitcoin ETFs

The adoption of spot Bitcoin ETFs could create a windfall of capital for cryptocurrencies in the long run. According to the 2024 Cryptocurrency Adoption and Sentiment Report by Security.com, 21% of non-owners said they would be more likely to invest in cryptocurrency if a spot Bitcoin ETF were available. Meanwhile, efforts to create a U.S. Central Bank Digital Currency (CBDC) are receiving further pushback from Congress as well as a Federal Reserve governor.

• 40% of American adults now own crypto, up from 30% in 2023.   Adam Cochran, a managing partner at Cinneamhain Ventures stated "A Bitcoin ETF's biggest change is in its legitimacy for pension funds, RIAs, mutual funds… It was the same with gold back in the day. But, once it had a legitimate ETF, properly custodied and settled, and managed by the likes of BlackRock, it became legitimate for these funds and advisors to push it."²⁵
• In September 2023, Republicans in the U.S. House Financial Services Committee progressed an anti-CBDC bill. As of January 2024, 75 lawmakers show support for the bill up from 60 upon its introduction.²⁶  The bill aims to prohibit the Federal Reserve from issuing a digital dollar or any similar form of digital currency, citing concerns about consumer financial privacy and government overreach.²⁷
• Federal Reserve Governor Michelle Bowman expressed skepticism about the necessity of a U.S. CBDC, favoring further development of the FedNow Service, the Federal Reserve's new interbank system for instant payments launched in July 2023. Bowman states the risks of implementing a U.S. CBDC include “potential unintended consequences for the U.S. banking system and considerable consumer privacy concerns.”²⁸

What Luminaries Are Saying

“It's more difficult and expensive to take a compliant approach. You can't launch every product that customers want when it’s illegal…Today's news reinforces that doing it the hard way was the right decision.” Brian Armstrong – Co-Founder & CEO, Coinbase upon news of Binance’s settlement of U.S. charges for money laundering (November 21, 2023)²⁹

“American investors, small and large, have demonstrated eagerness to incorporate digital asset products into their portfolios. It is our duty to ensure that when they do so, the full protections afforded by our regulatory oversight are in place, and that illegal and illicit conduct is swiftly addressed.” Rostin Behnam – Chairman of the Commodity Futures Trading Commission (CFTC) (November 21, 2023)³⁰

“If you think of the current bank account provided by any financial institution, there is only so much you can do in terms of configurability and set of rules… That is what we are changing. We believe this is the first instance of a traditional financial firm building programmable payments at scale, using existing commercial bank money.” Naveen Mallela -- Head of Coin Systems at JPMorgan’s Onyx blockchain division, on programmatic payment capabilities functionality for JPM Coin (November 10, 2023)³¹

1 Lang, Hannah, and Suzanne McGee. 2024. Review of US SEC Approves Bitcoin ETFs in Watershed for Crypto Market. Reuters. January 11, 2024. US SEC approves Bitcoin ETFs in watershed for crypto market.
2 “Two Worlds Colliding: Touchdown for Crypto – Superbowl Underscores Consumer Interest.” n.d. Guidehouse.com. Accessed January 23, 2024. https://guidehouse.com/insights/financial-services/2022/superbowl-underscores-crypto-consumer-interest.
3 “SEC.gov | Statement on the Approval of Spot Bitcoin Exchange-Traded Products.” n.d. Www.sec.gov. https://www.sec.gov/news/statement/gensler-statement-spot-Bitcoin-011023.
4 “Binance and SEC Face off in Court with Detailed Questioning from Judge.” n.d. The Block. Accessed January 23, 2024. https://www.theblock.co/post/273861/binance-and-sec-face-off-in-court-with-detailed-questioning-from-judge.
5 “Coinbase Urges US Treasury to Reconsider Bulk Data Reporting in Proposed Crypto Mixing Rules.” n.d. The Block. Accessed January 23, 2024. https://www.theblock.co/post/273887/coinbase-urges-us-treasury-to-reconsider-proposed-crypto-mixing-rules.
6 “Binance and SEC Face off in Court with Detailed Questioning from Judge.” n.d. The Block. Accessed January 23, 2024. https://www.theblock.co/post/273861/binance-and-sec-face-off-in-court-with-detailed-questioning-from-judge.
7 “Ripple Says It Looked at an IPO outside of the U.S.” n.d. CNBC. Accessed January 23, 2024. https://www.cnbc.com/video/2024/01/16/ripple-looked-at-an-ipo-outside-of-the-u-s.html.
8 “Speculation over Potential Ethereum ETF Approval in May Sends Ether Price Surging.” n.d. The Block. Accessed January 18, 2024. https://www.theblock.co/post/271874/ethereum-etf-approval-may-ether-price-surge.
9 “Catalyx Crypto Exchange Ceases All Trading after Security Breach.” n.d. The Block. Accessed January 17, 2024. https://www.theblock.co/post/269590/canada-catalyx-ceases-trading-security-breach.
10 Pereira, Ana, ed. 2023. Review of NFT Trader Hacked, Millions of Dollars in NFT Stolen. Coin Telegraph. December 16, 2023. https://cointelegraph.com/news/nft-trader-hacked-millions-dollars-nft-stolen.
11 COGHLAN, JESSE. 2023. Review of Stars Arena Recovers 90% of Stolen Funds after Offering $257K Bounty. Coin Telegraph. October 12, 2023. https://cointelegraph.com/news/stars-arena-recovers-stolen-funds-after-offering-bounty-exploit.
12 NWAOKOCHA, AMAKA. 2023. Review of KyberSwap Announces Treasury Grants for Hack Victims. Coin Telegraph. December 2, 2023. https://cointelegraph.com/news/kyberswap-announces-treasury-grants-for-hack-victims.
13 Partz, Helen. 2023. Review of Justin Sun-Related Crypto Platforms Hacked 4 Times in 2 Months. Coin Telegraph. November 23, 2023. https://cointelegraph.com/news/justin-sun-platforms-hacked-4-times.
14 SUN, ZHIYUAN. 2023. Review of Platypus Finance Recovers 90% of Assets Lost in Exploit. Coin Telegraph. October 17, 2023. https://cointelegraph.com/news/platypus-finance-recovers-90-percent-assets-lost-exploit.
15 Knight, Robert. 2023. Review of Multiple Buyers Consider Purchase and Relaunch of “Irreparable” FTX. Coin Telegraph. November 7, 2023. https://cointelegraph.com/news/purchase-relaunch-ftx-crypto-exchange.
16 “Decrypt, Rug Radio to Combine in ‘Merger of Equals’: Axios.” n.d. The Block. Accessed January 18, 2024. https://www.theblock.co/post/266890/decrypt-rug-radio-to-combine-in-merger-of-equals-axios.
17 “Osmosis and UX Chain Propose Merger within Cosmos Ecosystem.” n.d. The Block. Accessed January 18, 2024. https://www.theblock.co/post/265824/osmosis-ux-chain-merger-cosmos.
18 Jones, Chris. 2023. Review of Web3 Venture Builder and Charity Team up to Modernize Charitable Giving. Coin Telegraph. December 18, 2023. https://cointelegraph.com/news/Web3-venture-builder-and-charity-team-up-to-modernize-charitable-giving.
19 Wright, Turner. 2023. Review of Monex Group to Acquire Majority Stake in Asset Manager 3iQ. Coin Telegraph. December 28, 2023. https://cointelegraph.com/news/monex-group-majority-stake-3iq.
20 Griffith, Andrew. “Response to the Consultation and Call for Evidence - Forward.” Future financial services regulatory regime for cryptoassets. Accessed January 10, 2024. https://assets.publishing.service.gov.uk/media/653bd1a180884d0013f71cca/Future_financial_services_regulatory_regime_for_cryptoassets_RESPONSE.pdf. 
21 Bank, European Central. 2023. “Eurosystem Proceeds to next Phase of Digital Euro Project.” Www.ecb.europa.eu, October. https://www.ecb.europa.eu/press/pr/date/2023/html/ecb.pr231018~111a014ae7.en.html.
22 Ajibade, Ibrahim. “Argentina Approves Bitcoin (BTC) as ‘Official’ Currency.” Nasdaq, December 21, 2023. https://www.nasdaq.com/articles/argentina-approves-Bitcoin-btc-as-official-currency. 
23 Joint circular on intermediaries’ virtual asset-related activities, December 22, 2023. https://apps.sfc.hk/edistributionWeb/gateway/EN/circular/doc?refNo=23EC67. 
24 Blackstone, Tom. “2024 Cryptocurrency Adoption and Sentiment Report.” Security.org, January 3, 2024. https://www.security.org/digital-security/cryptocurrency-annual-consumer-report/.
25 “Why an ETF Matters - Coinbase Institutional Monthly Outlook.” Why an ETF matters - Coinbase Institutional Monthly Outlook. Accessed January 5, 2024. https://www.coinbase.com/institutional/research-insights/research/monthly-outlook/monthly-outlook-nov-2023.