The tumbling bitcoin is hardly a piece of news anymore; the peaks and troughs are almost inherent to digital currencies. With tightening regulations and growing institutional skepticism, the bitcoin ETF was a revolutionary offering. Pent-up demand was awaiting an alternative passage to gain bitcoin exposure without actually owning one. Yet, two months down the line, it seems barely any different from the sharp movements in the broader crypto market itself. The question stands: what would be the ultimate ingress of cryptocurrencies in the mainstream world of investment funds.
The ProShares Bitcoin Strategy Exchange-Traded Fund – listed under the ticker ‘BITO’ – was launched as the most successful publicly-traded fund for any issuer on the New York Stock Exchange (NYSE). Exhibiting a prohibitive turnover of over $1 billion (plus an additional $1 billion in assets) in merely two days of trading, BITO was a dream debut for a fund solely based on pre-seed investments. While bitcoin continually vacillated in valuation, the BITO ETF clearly underscored the blooming demand for bitcoin exposure in the market of risk-averse institutional investors. It was the perfect bypass for investors looking to emulate movements in bitcoin without direct exposure to the volatile market of cryptocurrencies. However, two months forward, the BITO ETF has registered another record: from the most lucrative debut ever to the worst-performing ETF.
In two months, the fund has dropped by 30%: making it one of the ten worst performers with respect to returns after a public listing. Over the same timeline, even bitcoin has lost roughly 34% in value. While the analysts still believe that this roadblock isn’t necessarily a pitfall to the long-term transition of digital currencies to the world of investment funds, the year 2022 doesn’t really exude optimism either.
Since the start of this year, bitcoin is roughly down by 10% despite broader acclaim from investment banks and even multiple governments around the globe. Falling in tandem, BITO ETF is down nearly 9% this week alone. To gauge the slipping popularity from its apex, in the past two weeks of this year, BITO ETF has failed to report net inflows for any single day. According to Athanasios Psarofagis, an ETF analyst for Bloomberg Intelligence, the timing is unfortunate, yet not unforgiving. He stated: “You can see some other ETFs had a rough start out of the gate but can still raise assets.” Thus, the prime aspect is timing. As the Federal Reserve gears to taper bond purchases and hike interest rates, the broader plunge in cryptocurrencies is driving the worsening performance of the ETFs. While the fund is based on bitcoin futures contracts – a bitcoin derivative instrument traded on the Chicago Mercantile Exchange (CME) – the negative movement in the cryptocurrency itself is dictating the downfall in the futures: ultimately pushing the ETF into regression.
All is not gloomy for the world of Crypto finance. Recently, a renowned US-listed ETF – named WisdomTree Managed Futures Strategy Fund (WTMF) – allocated an estimated 1.5% of the mandated 5% of its assets to bitcoin futures. The firm reasoned that bitcoin’s ‘potential for absolute returns’ and ‘a unique role of a diversifier to traditional asset classes’ makes it an attractive asset. Their website added: “Our objective is to provide investors with this exposure [Bitcoin futures] in a risk-controlled manner via a systematic long-flat trend-following strategy that reacts quickly to changing market conditions.”
Ultimately, while the performance of ETFs is disappointing and regulatory frameworks are still restricting funds from directly linking to bitcoin instead of the futures, roadblocks have clearly not dented the growing desire for bitcoin exposure. And, in my opinion, this lack of correlation and unsusceptible swing in valuation would make a fundamental proposition for other institutional investors to follow suit in the forthcoming years: gradually shaping a digital revolution in the world of investment funds.
Metaverse Leading the Gaming Revolution: Are NFTs Truly the Future of the Industry?
Some call it the new tech boom, while others are wary of long-term implications. Regardless, the metaverse is quickly shaping into a phenomenon straight out of a science fiction novel. A virtual world that allows you to create customizable avatars, design and stake ownership of digital assets, or simply conduct business in a fantastical space. There is hardly any limit to the extent of its utility. Metaverse is getting touted as a revolution in how we perceive the internet; call it Web 3.0, if you may. However, while the tech giants are all set to reap billions off this fledgling concept, not all stakeholders are on board. The Gaming Industry appears to be leading the defiance as the mainstream appeal of the metaverse dangles in uncertainty – much like the broader crypto market.
According to a research firm, the metaverse marketspace – including games, gadgets, and online services – cumulated over $49 billion in 2020. Further, it is growing at a rapid pace of 40% annually. Clearly, this ‘evolution of the internet’ has attracted the magnates from various walks of the tech industry. Notably, the Gaming Industry is leaning towards the metaverse to offer users a distinctive virtual experience. The concept, however, is not new – just a little unorthodox. For decades, gamers have experienced platforms that serve as virtual reality hosting customizable avatars. Users have interacted in the digital setting, traded collectibles, and even developed arsenals of simulated treasures in the gaming world. Today, this innovative step is a leap towards Blockchain – a decentralized mechanism to interact and trade in a virtual setting. Understandably, the value of items fixed in a traditional format could now vary in a blockchain.
Ubisoft – a French video game publisher – recently announced its foray into Non-Fungible Tokens (NFTs) – digital assets designed to track the proof of authenticity and ownership – through its blockchain platform called ‘Quartz’. An experimental additional to their popular game “Ghost Recon Breakpoint,” the platform offers players collectible virtual items – like helmets, clothing items, accessories – in the form of NFTs. According to a spokesperson of Ubisoft, this move allows users to collect and trade digital assets on the Blockchain. A similar venture was announced by GSC, a Ukrainian game developer, allowing crypto-based assets to customize in-game characters. While these moves are a transformative step towards the ultimate incorporation of blockchain technology, they have met widespread resistance from the gaming community. The anger stems from a widely shared belief that the gaming companies are now moving to NFTs to ‘squeeze profits’ from their games instead of improving the gameplay. “It is so obviously being done for profit, instead of just creating a beautiful game,” said an enraged gamer protesting on Reddit. Companies like Square Enix and a dozen more are planning a similar move towards NFTs in near-term. However, the industry is unarguably divided.
Major players in the tech industry are leading the road to the metaverse. A spotlight event is the attention-grabbing decision to rebrand Facebook as ‘Meta’. While market leaders like Apple and Google are honing their own devices to jump the bandwagon, not all players are on board. Notable entities have taken a decisive front against metaverse – especially in the gaming industry. For instance, Phil Spencer – Microsoft Xbox Chief – termed the efforts to bring NFTs to the gaming world as “exploitative”. For many executives, the issue is not just the ‘grab-cash’ model of this new transition. Instead, the fear of regulation weighs heavily against the metaverse to expand into mainstream reality. While micro-transactions have an implicit cap on the value exchange between the users, a move to NFTs opens the door to a broader platform for commerce and – inadvertently at least – speculation. Thus, regulatory forces would soon catch up with this tech boom: changing the gaming industry into a regulated exchange-like platform in the long term. “Rushing into offering NFTs without fully evaluating it could lead to serious damage,” said George Jijiashvili, principal analyst at Omdia.
Gaming studios like Ubisoft and GSC are relentlessly getting pushed to abandon their aspirations of a crypto revolution in the gaming industry. While for these studios, NFTs are a “premium (yet optional) addition” to allow gamers to earn by selling unique digital assets, the users are convinced that it’s nothing but a Ponzi scheme. Nonetheless, it is patent that even the industry is in two minds. And despite a conceptual revolution, NFTs are still in an embryonic stage: presumably inflated – via speculation – beyond their actual value. Hence, while a move towards metaverse might be the ultimate future of the tech industry – like the internet in the 90s -, the backlash is currently forcing the companies to backtrack for now. And bidding profitability against innovation – I think the choice is clear!
The Crypto Regulation: Obscure Classification Flusters Regulators as Crypto Expands into Derivatives Markets
Crypto regulation has long been a topic of debate in policymaking circles. As the white-hot market continues to soar in popularity and adaptation throughout the world, lawmakers in the United States are scouring common ground to comprehend the complex jargon and mechanism of the crypto sphere. Potential policies should be scrupulous yet inviting for the digital revolution to fully unravel in this modern financial reality. And with the rapid expansion of cryptocurrencies in the notoriously arcane derivatives market, lawmakers are expediting efforts to harness the outpacing development with a proper framework before another financial crisis overwhelms the economy. The question at the forefront is a dilemma: how to categorize the crypto offerings in a traditional sense?
The Bitcoin ETFs were all the rave when the Commodity Futures Trading Commission (CFTC) – the regulator of the derivatives markets – flashed the green light to the bitcoin futures to start trading in 2017. Yet, a debate sparked in terms of the broader classification of the crypto market. Would you define cryptocurrencies (tokens like Bitcoin and Ether) as securities or commodities? NFTs are digital products. By that definition, cryptocurrencies ought to be too. However, securities are passive investments in an enterprise with the expectation of returns (US Securities Act of 1933). Commodities are goods/services that entail a future delivery contingent on a contract (US Commodity Exchange Act of 1936). Neither of these definitions fully contemplate the concept of cryptocurrencies or NFTs. Lawmakers, regulators, and even investors are thus at the crossroads over this matter. An important decision is at stake over appropriate classification: whether the US Securities and Exchange Commission (SEC) regulates these tokens or should the CFTC take the helm.
According to a rare bipartisan stance, both the Democrat and the Republican representatives lean towards the class of commodities, calling on the derivatives regulator to reign in controlling cryptocurrencies. In a recent letter to the Chairman of the CFTC, the bipartisan members on both the Senate and House Agriculture Committees have called on the ‘critical role’ of the derivatives watchdog in regulating these digital assets. Noteworthy Senators like Debbie Stabenow and John Boozman wrote: “It is imperative that customers stay protected from fraud and abuse and that these markets are fair and transparent.”
Reflecting a similar sentiment, Rostin Behnam – Chairman of the CFTC – stated that his powers are mostly limited to overseeing derivatives. The Agriculture Committees of the Congress oversee the CFTC regulating much of the expansive $610 trillion worth of the global derivatives market. Yet, he pointed out that with explosive growth in digital tokens, Congress ought to do more than merely direct the CFTC. It should also ensure that the CFTC has the tools and jurisdiction to function at its fullest potential. During his confirmation hearing before the Senate Agriculture Committee, Behnam stated: “We’ve been one of the few cops on the beat of limited statutory authority related to anti-fraud and anti-manipulation.” He also expressed his firm opinion to lawmakers regarding the “expansion of the authority of the CFTC.”
The jurisdiction, however, is contended by the SEC: claiming that the virtual currencies are securities; thus should fall in the purview of the SEC. The highlight of this supposed clash over regulatory authority is Gary Gensler – Chairman of the SEC. He has garnered attention for his stringent views rivaling the CFTC’s friendlier approach towards the crypto sphere. While Gensler classifies bitcoin as a commodity, he has confusingly refused to address the classification of Ether either as a commodity or a security. Nonetheless, the time is elapsing as players like Coinbase are rapidly expanding into the derivatives market, further blurring the line between traditional and virtual markets in the process. Until now, many of the US exchanges were skeptical from moving into the derivatives market due to regulatory uncertainty. Their global counterparts like Binance dabbled in leverage without the regulatory oversight feared by the US exchanges. However, more and more are now expanding into the fast-growing market. Meanwhile, the White House is weighing an executive order to draft a blueprint for regulating the market across the government. All while the broader classification is still questionable.
Whether to catalog digital tokens as commodities or securities, this debate is futile for institutions like Coinbase and FTX. These crypto exchanges lay the groundwork in diverse markets while operating the spot market. While the regulators are scrambling to define new digital phenomenons, these exchanges are preparing to dominate the bearish trends via diversification. And while the government is still envisioning tighter frameworks, these exchanges are hedging against the volatility that brings infamy to cryptocurrencies. The lawmakers should understand that while their fears of fraud and manipulation are justified, collaboration with these exchanges might actually solve this dilemma. The head of Coinbase Institutional, Brett Tajpual, hinted at such a notion: “We want to work with the regulators to make sure everything is in position to launch as early as we can.” He was talking about the recent acquisition of FairX, a CFTC-regulated crypto futures exchange.
Behnam also admitted that while the CFTC controls the $2.7 billion worth digital asset market, a strong collaboration with the SEC would be beneficial in regulating an industry of such colossal size and appeal to retail and institutional investors alike. The crypto expansion would continue to entice some, disenchant others. The right approach is collaborative engagement. Not just amongst regulators but on a broader scale, including these crypto exchanges and maybe even retail traders. The crypto sphere is still perplexing to lawmakers, these crypto visionaries might be the right tool for the regulators to maneuver through the complexities without hindering the financial revolution that is afoot.
Unifying Cryptocurrency ESG Efforts Key to Boost Global Adoption
Environmental and social impact is top of mind for investors as climate change and social cohesion top the list of Global Risks 2022.
Cryptocurrencies provide both new opportunities and new challenges related to ESG across a diverse and often-fragmented ecosystem.
To support the global efforts to accelerate the development and responsible use of cryptocurrency, the World Economic Forum, in collaboration with CoinDesk, announced today the Crypto Impact & Sustainability Accelerator (CISA).
CISA is designed to harmonize, enhance, and advance crypto-enabled ESG efforts across the globe. It aims to bring together a vibrant ecosystem around a uniform set of ESG goals through projects across three pillars that advance learning and enable leadership focused on diverse geographies. These include a digital ethnography of crypto-enabled financial inclusion efforts, the development of a toolkit on decentralized autonomous organizations, and the management of a workshop series focused on the intersection of crypto and net-zero efforts.
“The crypto ecosystem is expected to see massive worldwide adoption over the next few years,” said Sheila Warren, Head of Blockchain at the World Economic Forum. “There is an opportunity to shape an inclusive and sustainable future to ensure we maximize the benefits and minimize the risks ahead. This project aims to bring together leaders to accomplish just this.”
The Accelerator will bring together private companies, government representatives, academics, international organizations, experts, NGOs, in multistakeholder projects to further the global ESG agenda with actionable measures. Community members include Andreesen Horowitz, Celo, Chainalysis, CoinDesk, Coinshares, Ernst and Young, Ethereum Foundation, Goldman Sachs, Grayscale Capital, Ripple, and the Stellar Development Foundation.
“The world’s environmental, social and governance challenges defy national jurisdictions, corporate structures and any form of centralized authority,” said Michael Casey, Chief Content Officer at CoinDesk. “We need decentralized information solutions that are uniformly trusted by governments, companies, investors and the general public to inform reliable resource decisions that attack those problems. CoinDesk is thrilled to support CISA’s role in gathering a global, multi-stakeholder community to advance these kinds of crypto ESG solutions.”
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