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Tom Rodgers
Tom Rodgers Head of Research
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ETC Group Crypto Minutes Week #14

UK Chancellor to regulate cryptoassets and legalise stablecoins as payment, aping US plan to become “global hub” for industry, Bitcoin proves tripartite investment thesis with Terra $10bn plan to make it global reserve asset, and Metaverse/Web3 funds are driving a 50x boom in crypto investments from venture capital.

UK to regulate cryptoasset sector, legalise stablecoins as payment

Not content to allow the Americans to become global leaders in cryptoassets without a fight, the UK government announced on 4 April 2022 it will regulate the sector to allow consumers to use stablecoins and cryptoassets safely and legally.

It's my ambition to make the UK a global hub for cryptoasset technology, and the measures we've outlined today will help to ensure firms can invest, innovate and scale up in this country said Chancellor Rishi Sunak in a statement.

Stablecoins like USDC and BGBP are the lifeblood of the cryptoasset industry, providing on-ramps for consumers from fiat (state-backed) currencies like the US dollar and the British pound sterling into cryptoassets such as Bitcoin and Ethereum. They are pegged 1:1 to a reference asset such that they maintain stable value relative to traditional currencies, or to commodities like gold or silver, thereby bypassing the day-to-day volatility evident in large sections of the industry.

The stablecoin market cap is increasing by around $100m daily, and most recently hit a total of $180bn, according to The Block Crypto data .

graph

In a keynote speech to UK Fintech Week, financial services minister John Glen said the UK's tax code would not need “ major surgery ” to make it work for crypto.

If crypto technologies are going to be a big part of the future, then we in the UK want to be in, and in on the ground floor. We see enormous potential in crypto and we want to give ourselves every chance to take maximum advantage

To date the UK government has been relatively suspicious of cryptoassets in general, with the Bank of England and the market regulator, the Financial Conduct Authority, regularly warning consumers that trading cryptoassets could mean they will lose all of their money. And while since 2016 the UK has run a fintech sandbox programme, which contains multiple crypto custody and trading businesses, it has never before put forward a framework for legalising the whole sector.

Part of the Chancellor's plan includes:

  • Ordering the Royal Mint, which supplies all of the nation's coinage, to create an NFT
  • Using blockchain to issue sovereign debt or UK Gilts, the equivalent of US Treasury bonds
  • Extending the Investment Manager's Exception (IME) to cryptoassets

This latter point is particularly impactful. London has long been a centre of the fund management industry globally and UK tax treatments are designed to attract foreign investment funds to use UK fund managers: regulated funds are not considered to be UK tax resident even if their central management “abides” in the UK.

But The City has been badly hurt by Brexit, with the finance sector losing most of its access to the European Union, its largest export partner, Square Mile policy chief Catherine McGuinness told Reuters earlier this year.

The IME effectively aims to cut the UK tax take on investment transactions and attract foreign investment funds to London.

Make no mistake: Rishi Sunak's long-term plan is to attract the world's largest cryptoasset investment funds to The City (and hence, pull them away from Dublin, the EU, Singapore, Hong Kong and New York) by offering significant tax incentives.

Bitcoin: Cross border currency, pristine collateral and now global reserve asset

One part of the investment thesis of Bitcoin has effectively been proven in Q1 2022. Its utility as an agnostic, seizure-resistant cross-border asset was evident in the $100m+ donations to Ukraine and the ability of citizens to move value out of the country in the face of Russian aggression and impossible-to-access banking capital. See for reference this CNBC story of a Ukrainian refugee fleeing to Poland with $2,000 in Bitcoin – his life savings -- on a USB stick. There will be many more like it.

graph

Another part of the investment thesis is Bitcoin as corporate treasury and global reserve asset. We know KPMG has been the first domino of the Big Four to fall, adding Bitcoin to its treasury in place of cash in February 2022. And first-mover MicroStrategy – the US public company that owns the most of the cryptoasset at 125,000BTC – is using Bitcoin as pristine collateral for a $205m loan (to buy more Bitcoin, of course). Now Terraform Labs, the de facto owner-operator of the $40bn market cap Terra blockchain, plans to use Bitcoin as the reserve asset backing its UST stablecoin.

Co-Founder and CEO of Terraform Labs, Do Kwon, announced a plan to accumulate $10bn of Bitcoin to use as the backing asset for his company's private US dollar-pegged stablecoin.

Doing so would make Terraform the third largest corporate holder of Bitcoin globally. Kwon laid out this strategy on 23 March , noting that a consortium of VC funds including Jump Capital, Three Arrows Capital and others had raised $2.2bn for the first portion of the Bitcoin buy.

These Terra backers now explicitly state they are establishing a UST reserve protocol to ensure the stablecoin maintains its 1:1 peg to the dollar.

In an event where the market price of UST materially deviates from the USD peg, holders of UST will be able to close the arbitrage and bring the market price of UST back to the peg by swapping UST for major, non-correlated assets like BTC that capitalise the reserve.

NFTs, DeFi, Web3 and Metaverse driving 645% explosion in crypto funds

New data from PwC shows the total value of crypto fundraising deals increased by 645% in the last 12 months, with crypto M&A jumping 50x from 2020 to 2021, from $1.1bn to $55.9bn. Among the figures released by the Big Four accounting company show that traditional VCs and investment funds, and not just crypto-specific entities, are entering the space with buckets of cash in a bid to find the next Metaverse and Web3 winners.

graph

Ethereum is still the backbone for ~70% of DeFi and NFT markets, and 90% of the crypto-focused Metaverse, as the host blockchain for Decentraland and Sandbox. Ethereum takes a cut whenever any transactions are recorded on these leading Metaverse and financial platforms.

But the Metaverse and Web3 extends far further. It is becoming the bridge between the Nasdaq tech giants of Microsoft and Google, online gaming, the next-generation of digital natives and this new world of crypto-based value.

Katie Haun is among the biggest entrepreneurs focused heavily on Metaverse and Web3. After her surprise exit from Silicon Valley VC giants Andreessen Horowitz (a16z) in December last year, Haun Ventures initially targeted $900m, but made headlines globally in March 2022 with a $1.5bn haul . This is the largest debut venture fund ever raised by a solo female founding partner, topping the $1.25bn raised by investment banker Mary Meeker in 2019. Haun's first investments will come from a $500m fund ringfenced for early-stage NFT and crypto startups, and $1bn aimed at more mature Metaverse/Web3 companies.

Recent declines in the price of Bitcoin have not stemmed the flow of capital into crypto VC. In March 2022 Electric Capital raised $400m to invest in Web3 startups and $600m to buy crypto directly. In the same month, the 1994-founded VC firm Bain Capital Ventures raised $560m for its first crypto-dedicated fund. Bain has been pouring money into DeFi since around 2015 and is an early investor in lending platform BlockFi and conglomerate Digital Currency Group.

Markets

BTC/USD

BTC/USD graph
Data as of 5 April 2022 | Source: TradingView.com

Bitcoin's time appears to be back at hand, with the number one cryptoasset showing a relative strength that contradicts its difficult start in 2022. Starting in the $40.9k area, then crossing heavy bearish resistance in the $44.8k level, Bitcoin topped out at $48.1k on 28 March, briefly sliding back to that same resistance point but finding new support there instead. Fresh regulatory encouragement for cryptoassets from the US, the UK and the Middle East cannot have hurt Bitcoin's cause, and certainly its wider institutional adoption as corporate treasury and as a reserve asset is enticing more cautious elements into crypto all the time. Across the fortnight BTC added a total of 15.2% against the dollar to finish the session knocking on the door of $47.2k.

ETH/USD

ETH/USD graph
Data as of 5 April 2022 | Source: TradingView.com

Ethereum has been charging ahead on the strength of its impending switch to Proof of Stake, with the Merge between the Beacon Chain and the new consensus layer tantalisingly close. Investors have been patiently waiting for 16 months for the network-wide upgrade, depositing $39bn of the cryptoasset into the Eth2 deposit contract for staking rewards of between 4% and 6%, and with the successful launch of the PoS chain on the Kiln public testnet, appetite is rising for the new version of Ethereum. Energy usage will be approximately 99% lower in Ethereum Proof of Stake than the older Proof of Work chain, a key metric when legislators worldwide are poring over the electricity and resource-usage of cryptoassets more generally. ETH finally breached hefty resistance at $3,400 on 28 March and now sits at its highest level since 6 January, having added 22% against the dollar across the fortnight. $4,000 may just be in sight for the smart contract pioneer if this heavily bullish momentum continues (and there are no further delays in the Proof of Stake switchover).

SOL/USD

SOL/USD graph
Data as of 5 April 2022 | Source: TradingView.com

Solana holders have been popping the champagne corks over the past two weeks, as the smart contract blockchain saw a near parabolic rise on the strength of rumours that OpenSea, the world's largest NFT marketplace by trading volume, would start listing its unique digital assets. After crashing below $80, a heavy fall since its stratospheric 2021 rise and a price point not seen since August 2021, SOL managed a spectacular 53% rise in total over the past fortnight. In a tweet all but confirming the April listing, of Solana NFTs, OpenSea teased “the best kept secret in web3”. Blowing past all resistance in the $100 and $115 areas, and at one point rising as high as $143.71, Solana closed out the two-week trading session at $135.85.

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