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ETC Group Crypto Minutes Week #46
Bitcoin’s status as a macro hedge asset boosted as US inflation prints a three-decade high, Senators already proposing
crypto amendments as $1.2trn infrastructure bill made law, Taproot upgrade sees smart contracts on Bitcoin, while we
sort through a swathe of global regulatory updates in Week 46.
Head of Research
Bitcoin macro credentials spike as US inflation hits 31-year high
The CPI print from the US Bureau of Labor Statistics produced uncomfortable moments for policymakers this week, as it
showed inflation had risen 6.2% over the past 12 months. That’s the highest inflation number in 31 years, and occurs
just as President Biden signed into law one of the most significant infrastructure bills in US history with a $1.2
With 10-year US Treasuries yielding around 1.6%, these numbers put real interest rates at minus 4.6%, comparable with
the difficult times of the early 1970s, and putting holders of government bonds at an enormous disadvantage. A permanent
— and not “transitory” inflation cycle could clearly damage portfolios for years to come, perhaps explaining why Bitcoin
hit a fresh all-time high of over $69,000 on 10 November.
Across the pond in the UK, the Bank of England is having to answer similarly uncomfortable questions over why it chose
to hold interest rates at 0.1%, given the central bank’s Monetary Policy Committee projection that UK inflation would
hit 5% by April 2022.
In the last three months, inflationary fears have spooked institutional investors to the point that they have shifted
ever greater proportions of their assets into crypto ETPs. Growing confidence in the asset class both as an innovative
and creative force in changing financial services, and as a macro hedge, is likely behind these large net inflows.
Digital asset investment products have seen 13 consecutive weeks of net inflows, bringing year-to-date totals to a
record $9bn, according to data produced by asset manager CoinShares. On 9 November 2021, ETC Group reached its own
record milestone with a total of $2bn of AUM across its Europe-listed ETPs for Bitcoin, Ethereum, Litecoin and Bitcoin
The continued inflows suggest recent headwinds for digital assets, such as the widened China ban, were seen as buying
opportunities for investors.
James Butterfill, head of research, CoinShares
Mastercard and Visa comprise the top two credit, debit and pre-paid card payment systems worldwide outside of China. According to industry data specialists Nilson Report, Mastercard processed more than $4.5 trillion in payments volume in 2021.
Returning for a moment to Joe Biden’s infrastructure bill: the controversial cryptocurrency elements are still being
digested by the markets: but the main three points to note are that
Cryptocurrency “brokers” (largely interpreted as exchanges like Coinbase) will have to issue non-employment
income forms to both the IRS and their customers to disclose who their customers are;
Companies and exchanges will have to report every time they receive more than $10,000 in cryptocurrency; and
The legislation includes fairly extensive tax reporting provisions, hoping to fund parts of the $1.2trn total
expanding a section of the US tax code called 6050I to include digital assets, including NFTs.
The provisions will not come into force until January 2024, so expect to see an intense 26 months of lobbying from the
US crypto industry, along with amendment suggestions and standalone bills coming before Congress.
One of the first suggestions has already arrived: Senators Cynthia Lummis of Wyoming and Senate Finance Committee
Chairman Ron Wyden of Oregon introduced an amendment to reverse some of the provisions, notably:
[To] revise the rules of construction applicable to information reporting requirements imposed on brokers with respect
to digital assets and for other purposes.
Lummis Wyden Bill, 15 November 2021
The bill targets the slippery “broker” definition, aiming to exclude startups and other blockchain technology developers
from having to report user data to government agencies.
Decentralised apps like DeFi are permissionless by design; asking providers like these to collect information on users
is a source of much consternation in the crypto sector. SEC Commissioner Caroline Crenshaw recently wrote in the
inaugural edition of The International Journal of Blockchain Law that DeFi protocols like Curve Finance, MakerDAO and
Aave should be in conversation with the regulator to solve the dilemma of how to regulate a sector designed on
In moving to DeFi, I suspect most retail investors are not doing so because they seek greater privacy; they are seeking
better returns than they believe they can find from other investments.
Caroline Crenshaw, SEC Commissioner,IJBL Volume 1, November 2021
Smart contracts arrive on Bitcoin with Taproot upgrade
Bitcoin’s first major software upgrade in four years went into effect on Sunday 14 November at block 709,362.
With all the innovation happening on alternative blockchains, like Ethereum, Solana and Cardano, Bitcoin is in a
long-term battle to differentiate itself. So the implementation of the Taproot code upgrade on Bitcoin is of particular
Software for the Bitcoin Core 0.21.1 upgrade first appeared in May; this is the 21st major release of Bitcoin Core, the
original Bitcoin software client launched by Satoshi Nakamoto in 2009. It contains the activation code for a slew of
useful updates, including Schnorr signatures and Taproot.
This first esoterically-named technology, proposed by core developers as Bitcoin Improvement Proposal 340 was created by
cryptographer Claus Schnorr and are provably secure cryptographic digital signatures. As a brief introduction, bitcoin
needs these digital signatures to move coins around on the blockchain. In the past, the technology used something called
ECDSA (Elliptic Curve Digital Signature Algorithm) as the method of doing this. It’s worth looking again, here, at
Bitcoin’s UTXO model as described in the original Bitcoin whitepaper.
We define an electronic coin as a chain of digital signatures. Each owner transfers the coin to the next by digitally
signing a hash of the previous transaction and the public key of the next owner and adding these to the end of the coin.
A payee can verify the signatures to verify the chain of ownership.
Satoshi Nakamoto, Bitcoin: a peer to peer electronic cash system
Schnorr signatures come with clear advantages over ECDSA, and are particularly useful where transactions need to have
multiple signatures: parties can jointly create a public key, which they sign together as one. This has applications in
improving scalability and privacy, especially compared to the old system where public and private keys required their
own individual signatures. Now, multi-sig transactions will be shown on-chain just like single signature transactions:
this aggregation makes for small transaction sizes, saving space on the Bitcoin blockchain
Schnorr signatures are also linear, which allow developers to add a host of additional features to Bitcoin, the result
of which could be anything from cross-chain atomic swaps to sidechain channel creation and scriptless scripts — a way to
execute smart contracts off-chain.
The second major update, Taproot, is a backwards-compatible soft fork of the Bitcoin network that is essentially a
collection of many long-awaited upgrades. It enables Merkelized Abstract Syntax Trees, which allow for smaller
transaction sizes and the ability to create smart contracts on Bitcoin’s base layer and Layer 2 protocols like the
Lightning Network payments channel.
The key part of Taproot is that the relevant parts of a smart contract are revealed only when spending occurs: hiding
the back-end code in this way improves privacy and crucially, speed.
Together the upgrades are expected to be even more important for Bitcoin’s mass ecosystem development than the 2017’s
Segwit soft fork. In total it is expected to reverse the narrative that Bitcoin’s comparatively old technology makes it
unsuitable to compete with newer protocols engaged in innovative financial disruptions like DeFi and NFTs.
Additionally, the updates come at a time when Bitcoin hashrate — a measure of its stability and security, is again
approaching all-time highs, just 8% shy of its peak at 180.6 TH/s recorded in May 2021.
Global regulatory updates paint fascinating picture
In the past two weeks, it has been fascinating to watch a swathe of regulatory updates from across the globe. We’ll
start first in Israel, where local news agency Globes reports that the government has adopted new anti-money laundering
rules for fintech firms and virtual asset service providers. This additional support offers much needed legitimacy and
further integrates cryptocurrency into the burgeoning Israeli market.
The application of the regulations constitutes real progress for the Israeli economy, the fintech industry and for
improving financial competition.
Shlomit Wagman, director, Israel Money Laundering and Terror Financing Prohibition Authority
Bloomberg reports that Singapore is seeking to position itself as the world’s crypto centre. The head of the country’s
financial regulator told the paper that the city-state’s approach has been slow and steady to date, but regulatory
certainty has attracted the likes of institutionally-focused exchange Gemini.
Around 170 companies have applied for a license from the MAS after the Payment Services Act came into effect in January
2020, but while only three crypto firms have been approved to date, they include the brokerage arm of Singapore largest
bank, DBS Group Holdings, which is a local pioneer trading in digital tokens and white-labelling its asset tokenisation
We think the best approach is not to clamp down or ban these things. If and when a crypto economy takes off, we want to
be one of the leading players. It could help create jobs, create value-add, and I think more than the financial sector,
the other sectors of the economy will potentially gain.
Ravi Menon, managing director, Monetary Authority of Singapore
At the same time, the Hong Kong Securities and Futures Commission is reviewing whether to relax its rules to allow
retail investors take positions in cryptocurrency ETPs. Currently the regulator limits transactions of cryptocurrencies
via funds or trading platforms to professional investors who can prove holdings of at least HK$8m (€900,000).
India’s largest payments company Paytm, which IPO’d on 8 November for the country’s largest ever capital markets debut
at an upper-bounds valuation of $20bn, said it would consider offering Bitcoin services if the government could offer
more legal certainty.
Kazakhstan’s Senate has watched as the country’s Bitcoin mining sector has profited wildly from China’s ban: so it comes
as no great surprise that senior policymakers have now approved legislation regulating crypto service providers.
On a less positive note, religious leaders in the world’s largest Muslim country, Indonesia, have ruled that Bitcoin is haram, forbidding its use as payment.
In 2018 the Indonesian central bank declared that cryptocurrency was not “a legitimate instrument of payment” but said
in February 2019 that Bitcoin could be traded as a commodity. May 2021 estimates by Bappebti, the commodity futures
trading regulatory agency, found there were around 4.45 million cryptocurrency investors in the country, more than
double the number of investors in equities.
More recent updates from the trade ministry, according to Reuters, show that the value of cryptocurrency trading on the
commodities exchange reached $26bn this year, with the number of traders now at 6.5 million, compared to 2 million stock
The Bank of England announced the next steps for a digital pound CBDC on 9 November, noting that the earliest date for
launch would be in the second half of the decade. Serious research and negotiations are underway in Whitehall to choose
a technology partner for the central bank digital currency (CBDC). The UK has watched in recent months while Ukraine
chose Stellar as its infrastructural base, and senior officials in the EU proclaimed that CBDCs are highly likely to
become legal tender in their countries of origin.
Bitcoin shot to a new all-time high of more than $69,000 on 10 November in apparent reaction to US inflation figures,
but a clutch of structural tailwinds including the recent US futures ETF approval, increased clarity on regulatory
reform, and the Taproot upgrade failed to provide enough ammunition for bulls to hold onto recent gains. All told,
Bitcoin moved less than 1% across the two-week trading period from $60,757.31 to $60,795.35, with a clear support bounce
from below the $60,000-mark briefly hit on 16 November.
There was plenty of volatility on show for traders across the fortnight. Bulls held staunchly onto the $4,000+ level,
and optimists for the future of the oft-congested but massively-used blockchain would clearly suggest that now is a good
entry point before the switch to staking in spring 2022 takes Ethereum prices parabolic. An all-time high of $4,866.14
was printed on 10 November as ETH apparently fell upwards in response to inflation data, but a steep 15.5% pullback to
$4107.07 resulted in the days after. Like Bitcoin, Ether produced much noise but little result in the last two weeks,
ending 0.36% lower at $4,324.71.
Litecoin holders have enjoyed a rather cheerful October, pushing on through the mid-$100s and breaching the psychologically-important $200 barrier. There’s certainly less constancy to these trading sessions, as a little more volatility returned to the payments protocol’s march upwards. From a standing start at $184.60, Litecoin swung a total of 16.6% to its peak of $214.58. $172.19 was the lowest LTC went, but it swiftly rebounded back on course to the $200 mark, ending the fortnight 9.1% higher at $201.14.
Bitcoin Cash has been on a tear over the past fortnight, approaching the $800 highs posted in September and more closely
replicating the moves of Litecoin than its older cousin Bitcoin. From a starting point at $592.76, BCH added a quite
considerable 23.2% to reach $730.74 before cratering back into the $600 range. It must be quite frustrating for BCH
bulls that the currency climbed only 4% across the two-week session to end at $616.58.