The crypto-asset bull run continued, with Bitcoin hitting a new all-time high ($58,332) before settling back to close the month at $46,526 (+35.4%). The main driver continued to be increasing institutional investor interest, with some help from a few random Elon Musk tweets and the Tesla announcement that it had bought $1.5 billion of Bitcoin. Ethereum and other altcoins had a strong month on continuing interest in decentralized finance (DeFi). Bitfinex and Tether reached a $18.5 million settlement with the New York Attorney General over allegations that they hid the loss of commingled client and corporate funds and lied about Tether’s USDT reserves. India will reportedly go ahead with a complete ban on investment in crypto-assets, and the Central Bank of Nigeria banned all regulated financial institutions from providing services to crypto exchanges in the country.

Crypto-Asset Markets (see also the Annex in the PDF version)

Crypto-asset market capitalization increased by about 41% from January 30 to $1,389 billion with the price of Bitcoin finishing up 35.4% ($46,526) after hitting an all-time high of $58,332 (Figure 1). The main driver continued to be increasing institutional investor interest amid prospects of years of ultra-low interest rates and concerns about future inflation given expansionary monetary policies. For example, Tesla announced that it had invested $1.5 billion in Bitcoin and signaled its intent to begin accepting it as a form of payment. Also, new crypto-focused investment funds, including exchange-traded funds (ETFs), continue to pop up, something I discuss in a separate post. However, there were some signs that institutional investor interest was fading, as the Grayscale Bitcoin Trust premium turned negative, and Bitcoin “whales” were reported to be offloading. Altcoin market capitalization was up 45%, although Ethereum’s was up only 5% as its soaring “gas” fees turned attention to alternative tokens like Cardano (+260%), Binance Coin (+375%) and PolkaDot (+106%).

Source: https://coin.dance/stats/marketcaphistorical

The amount of crypto-assets on decentralized finance (DeFi) platforms increased 26% to $34.8 billion (from $27.7 billion on January 30). January decentralized exchange (DEX) trading volume soared to set an all-time high of $56 billion, according to data from Dune Analytics. DEXs use smart contracts on blockchain networks to let users swap between digital assets without transferring tokens to an exchange wallet or verifying their identity. However, DeFi Money Market (DMM) ceased operations as a result of U.S. Securities and Exchange Commission (SEC) inquiries, raising concerns that other DeFi applications may be next.[1]

Stablecoin market capitalizations continue to increase. Almost all are USD-pegged, and Tether’s USDT remains dominant ($34.8 billion) despite the controversy that surrounds it (see below). USDC is followed by USDC ($9.0 billion), Dai ($2.3 billion) and BUSD ($2.3 billion). Of note, Canada’s VersaBank Canadian dollar-pegged VCAD crypto-asset will become the world’s first bank-issued stablecoin. 

The last Monthly Monitor talked about how USD-pegged Empty Set Dollar (ESD), launched in September 2020 and one of the first algorithmic stablecoins to come to market, briefly held the #6 position in the stablecoin league table. (An algorithmic stablecoin adjusts its supply to maintain its peg.) However, ESD broke its peg massively, and is now trading below $0.20 ($50 million market capitalization). However, there’s another very viable-looking USD-pegged stablecoin, TerraUSD which sits at #7 ($700 million market capitalization). I discuss it in a separate post.

Bitfinex and Tether reached a $18.5 million settlement with the New York Attorney General (NYAG) over allegations that they hid the loss of commingled client and corporate funds and lied about Tether’s USDT reserves. By May 18, 2021 and on a quarterly basis thereafter for two years, the firms will be required to publish reports on the composition of USDT reserves. Without admitting or denying any wrongdoing, Tether committed to publicly share these reports. Also earlier in the month, Ripple reported that the last $550 million of the loan at the center of the lawsuit was paid off. However, the lawsuit did not cover the rumored role of Tether in a huge BTC pumping scheme, which I discuss here.

Diem (formerly Libra) is reportedly preparing to launch a minimum viable project based around a U.S. dollar stablecoin in March. In that regard, crypto-asset custodian Fireblocks and payments platform First Digital Assets Group will be partnering with Diem to provide digital plumbing to allow financial service providers such as banks, exchanges, payment service providers and digital wallets to plug into Diem. In a move obviously with Diem in mind, in a legal opinion on the European Union rules, the European Central Bank said it should have the final word on whether a stablecoin should be allowed to launch in the euro zone, and that this binding for national authorities assessing applications to issue stablecoins.   

Crypto-related regulatory developments

India will reportedly go ahead with a complete ban on investment in crypto-assets, while providing existing investors a three- to six-month transition period to exit their holdings. Also, the Central Bank of Nigeria (CBN) banned all regulated financial institutions from providing services to crypto exchanges in the country. The CBN warned of stiff penalties to financial institutions that fail to comply with the directive. As a result, the country’s Securities and Exchange Commission put plans to regulate crypto-assets on hold. 

The U.S. SEC and Ripple said that there’s little chance of settlement ahead of the expected trial over alleged securities infractions. The SEC is accusing Ripple Labs and its lead executives of being in violation of securities laws with $1.3 billion generated from XRP sales. The SEC also amended its complaint to include allegations that Ripple purposely manipulated XRP’s price by increasing and decreasing XRP sales depending on market conditions.

Other digital asset market developments (see also Table 1 in the PDF version)

Incumbent financial institutions aren’t shrinking from fintech challenges. MasterCard announced plans to support crypto-assets in 2021, and said it is “actively engaging” with several major central banks to support CBDC initiatives. Visa is piloting a suite of application programming interfaces (APIs) to let banks connect to digital asset bank Anchorage’s infrastructure, to allow their customers to buy and sell digital assets. Visa is already working with crypto companies to issue bank cards and has partnered with 35 crypto firms to date, but this is the first time the company has offered crypto services to banks. Bank of New York Mellon announced plans to hold, transfer and issue Bitcoin and other crypto-assets as an asset manager on behalf of its clients. 

Retail CBDC developments (see also Table 2 in the PDF version)

The IMF’s Sonja Davidovic posted the first topical piece on our new Global Fintech Intelligencer blog. As central banks advance their CBDC work, they are faced with questions on how to interoperate with other digital assets. To unravel the interoperability conundrum and provide a robust digital ecosystem for the economy, China has launched the Blockchain Service Network (BSN). Although in its early stages, the BSN remains a unique attempt to build a global interoperability network that connects digital assets both across borders and networks. 

A Sveriges Riksbank staff memo argued that it would be misguided to expect cash-like features of a CBDC. For a CBDC to be cash-like, it would need to be both anonymous and usable off-line, but the memo claims that the technical construction of digital currencies requires that they be verified by a remote ledger, in order to avoid double spending. It dismisses the possibility of using tamperproof local devices that cannot be programmed so that a token cannot be spent more than once. However, Mondex used tamper-resistant hardware to do exactly what the memo says is impossible. It failed due to a flawed business model, and not any technical shortcomings.

A Swiss National Bank working paper proposed a double spending-resistant token-based CBDC system. It showed how earlier-deployed, software-only electronic cash can be improved upon to preserve transaction privacy, meet regulatory requirements, and offer quantum-resistant protection against systemic privacy risk. The proposed CBDC system is based on blind signatures and a two-tier architecture, that purportedly guarantees perfect, quantum-resistant transaction privacy and provides anti-money laundering and counter terrorism financing protections stronger than those of banknotes.

Canadian fintech firm Bidali has reportedly launched a pilot to test a digital Bermuda dollar with the support of the Bermuda government. Under the pilot program, popular local rum company Gosling’s Limited will be accepting digital Bermuda dollars through the Stellar network. From there it hopes to expand to other businesses in Bermuda. Bermuda is a British island territory that does not have a central bank and the Bermuda dollar is pegged one-to-one to the U.S. dollar – it is effectively a non-digital government-issued stablecoin with one USD in reserve for every Bermuda Dollar that’s issued. Also, since 2019, Bermudans have been able to pay taxes with USDC stablecoins.

Wholesale CBDC developments (see also Table 2 in the PDF version)

The Digital Currency Institute of the People’s Bank of China and the Central Bank of the United Arab Emirates joined the m-CBDC Bridge central bank digital currency (CBDC) project for cross-border foreign currency payments. The m-CBDC Bridge initiative is run in partnership with the BIS Innovation Hub (BISIH), the Hong Kong Monetary Authority and the Bank of Thailand. It will further explore the capabilities of distributed ledger technologies by developing a proof-of-concept prototype to support real-time cross-border foreign exchange payment-versus-payment transactions in multiple jurisdictions, operating 24/7. It will analyse business use cases in a cross-border context with both domestic and foreign currencies. 

The South African Intergovernmental Fintech Working Group launched “Project Khokha 2” to explore the use of tokenized money, blockchains and wholesale central bank digital currency (CBDC) in South Africa. The CBDC will use R3’s Corda enterprise blockchain, and the settlement token and debenture will use a variant of Cosmos blockchain interoperability solution. Accenture will be responsible for tokenizing the wholesale CBDC on Corda. Block Markets Africa will help with distributed ledger technology, tokenizing the bonds and the wholesale payment token using its custom Cosmos-based solution. And Deloitte will document the insights. Other participants in the trials will include commercial banks Absa, FirstRand, Investec, Nedbank, and Standard Bank, the Johannesburg Stock Exchange (JSE), and Strate, South Africa’s central securities depository. 

General Fintech Developments (see also Table 3 in the PDF version)

The People’s Bank of China (PBoC) China National Clearing Center (CNCC) and its Digital Currency Research Institute (DCRI) has partnered with SWIFT to launch a new financial payment service, Finance Gateway Information Service Limited. No further details on the functions or scope of the funding were offered on the registration document. SWIFT owns 55% of the incorporation contribution, CNCC owns 34%, DCRI 3%, CNCC’s subsidiary Cross-border Interbank Payments and Settlement Limited (5%), and the Clearing Association of China (3%).

The pandemic continued to drive consumers to PayPal and Venmo. Paypal added a record 72.7 million active accounts in 2020, with the addition of 16 million accounts in the fourth quarter. Venmo, PayPal’s peer-to-peer (P2P) service, processed $47 billion in payments, up 60% from a year earlier. Similarly, payment volumes and values at U.S. interbank retail P2P payment service Zelle increased 58% (to 1.2 billion transactions) and 62% ($307 billion sent) and 457 new financial institutions joined its network in 2020, bringing the total number to nearly 7,000. Also, according to Zelle research, more than 85% of consumers either use or plan to use P2P services.  

Miscellaneous commentary and research (see also Table 4 in the PDF version)

A U.S. Fed paper identified high-level environmental preconditions that support a U.S. retail CBDC, aimed at sparking further inquiry. These preconditions were broadly grouped into five areas: clear policy objectives, broad stakeholder support, strong legal framework, robust technology, and market readiness. Within each area, detailed elements were discussed. It recognized that these areas and elements were not exhaustive because many systems, tools, processes, and structures will need to be in place for a CBDC. In addition, many of these elements are interconnected.

A Minneapolis Fed article found that “the benefits of a central bank digital currency (CBDC) in the United States are not immediately obvious. Largely due to the legal and regulatory framework supporting the payments infrastructure, an end user’s buying power and ability to trust in the integrity of a transaction are the same for banknotes and bank account balances. Because the banking sector facilitates the exchange of funds between parties, the absence of central bank-issued digital money for general purposes is not currently an issue for most Americans.” Also, this VoxEU article asked tough questions about the need for CBDC, and the high risk that a CBDC introduction could be a gigantic flop.

[1] DMM users were depositing DAI, USDC, USDT, or ETH to the DMM smart contract in exchange for DMM mTokens that offered over 6% interest rates on the real-world car loans that backed them. DMM runs off a custom-built Chainlink oracle. The SEC subpoena requested information about the mTokens, the DMG governance tokens, and other details surrounding DMM’s operations and governance.