Hacks in the crypto space are showing a worrying increase in frequency. A week after $200m BitMart breach, crypto exchange AscendEX (formerly Bitmax) suffered a $77.7m loss in a hot wallet compromise on Sunday. Meanwhile yesterday, play-to-earn NFT platform Vulcan Forged said 96 private keys had been stolen in a $140m theft.

The array of breaches in recent weeks underscores that for digital assets to become truly intertwined in the global economy, security must drastically improve. Crypto firms need to do a much better job with performing regular and thorough security audits, as well as running bug bounty programs to make sure most bugs are plugged.

On the flip side, recent attacks have emphasised that the crypto industry has made enormous strides in better withstanding major hacks. Vulcan Forged has already refunded affected users, while crypto exchange Huobi came forward to assist AscendEX. Similarly in the major Poly Network hack earlier this year, Tether stepped up to freeze some of stolen funds.

In other news, the bitcoin price has struggled to sustain any meaningful gains above $50k and is now trading at around $47k. The network has however reached a key milestone as 90% of all BTC ever to exist has been mined. The remaining 10% will take a lot more time to mine – possibly more than 100 years according to some estimations.

Lastly, we commissioned a new report that provides a comprehensive look the digital asset custody landscape. Huge thanks to Carlos Reyes, Research Analyst at The Block, for authoring it. Also, make sure not to miss The Block's The Scoop podcast dropping tomorrow which features our research lead, Fadi Aboualfa, to discuss the US congressional hearing on crypto, the race for the next 'Ethereum killer' and community driven tokens with Frank Chaparro and Larry Cemak.

Best Regards,

Iva Lila

Crypto industry representatives testified before Congress for the first time. Were they successful in persuading policymakers of the long-term potential of digital assets?

For the first time in history, crypto industry executives testified before Congress on Wednesday to discuss the future of digital assets and their recommendations to lawmakers on how to address policy and regulation. Senior executives from FTX (Sam Bankman-Fried), Circle (Jeremy Allaire), Coinbase (Alesia Haas), Bitfury (Brian Brooks), Stellar (Dennelle Dixon) and Paxos (Chad Cascarilla) all testified at the hearing, which to the surprise of many, was generally positive and constructive.

The key areas that Congress expressed most concern related to 1) the potential threat that stablecoins may have on financial stability, 2) hacks/security and 3) financial inclusion.

Brian’s presentation and articulation of the space was particularly impressive. One part of his prepared statement that critiqued the absence of a spot bitcoin ETF in the US hit particularly hard: “Can anyone explain, for example, why Fidelity Investments, one of America’s best known investment advisors, had to go to Canada to offer a bitcoin ETF? Or why physically settled crypto ETFs are safe and legal in Germany, Brazil and Singapore, but not in the United States?” Brooks also queried why crypto companies are able to receive e-money licenses to access the payments system in the UK, but in the US are reserved exclusively for chartered banks.

Also hats off to Jeremy Allaire who was masterful with his responses, arguing thatstablecoins compliment – instead of challenging – the competitiveness of the US dollar.

Maxine Waters raised concerns about Paxos' partnership with Novi (Meta's digital wallet), with Cascarilla responding that Novi is a very small piece of its business, noting also that Novi is a regulated MSB.

The hearing had its fair share of weird moments. Rashida Tlaib directing bitcoin mining questions exclusively to Stellar's Dixon left many scratching their heads, while Brad Sherman's comments on Hamster Coin, Cobra Coin and Mongoose Coin generated some chuckles (and in the aftermath inspired Mongoose Coin to become a reality). And of course, Bankman-Fried not having laced his shoes properly kicked the crypto meme machine into gear.

In a nutshell, it was highly encouraging to see congress support the need for a more thoughtful regulatory framework. I'd say that less than five of the 40 or so congressmen and women that got the floor were hostile in their questioning or came out swinging. Most seemed to understand the importance of nourishing crypto innovation in the US, and that overregulation risks driving crypto investment and innovation overseas. It will also be interesting to see if sentiment remains positive at the Senate Banking hearing on stablecoins taking place today (I'll be providing commentary on this in next Tuesday's newsletter).

UAE wealth fund Mubadala to invest in crypto. Will more sovereign wealth funds warm up to crypto in 2022?

It's not just the US getting comfortable with the idea that digital assets are here for the long haul. Abu Dhabi’s state investment fund, Mubadala Investment Company, which manages $243bn, confirmed yesterday that it's getting in on crypto.

Speaking to Hadley Gamble in a CNBC interview about his thoughts on the wider crypto market, CEO Khaldoon al-Mubarak said: "This is a business that had, what $200bn worth of crypto value two years ago, and it's $2.5T today and growing", adding, "while many people are sceptics, I don't fall in that category."

Mubarak didn't offer any indication of how much or where specifically the fund would invest, but the news that governments are looking to invest in digital assets via their sovereign wealth funds is being viewed as a huge bullish indication for the sector by market observers.

Mubadala's only known investment in crypto is its stake in MidChains – the only Emirati founded digital asset exchange in the UAE capital – via Mubadala Capital (the venture capital arm of Mubadala). Mubadala first took a stake in MidChains in 2019 and later increased its commitment in the company as it participated in a second funding round last year.

Elsewhere, crypto exchange giant Binance recently disclosed that it is in talks with sovereign wealth funds about them taking a stake in the world’s largest cryptocurrency exchange, while FTX named the Singapore sovereign fund Temasek and the Ontario Teachers’ Pension Plan Board as some of its backers in the extension of its Series B funding round. For an overview on notable SWF investments in crypto, have a read of this article I published at the start of Q2. In it, Copper's NED, David Shrier, commented that "Sovereign wealth funds will act as an accelerant on the crypto fire." Intrigued to see if this rings true.

Myanmar's shadow government adopts USDT as an official currency. Are stablecoins potentially valuable tools for financial freedom in geopolitical conflicts?

The most outlandish crypto news of the week emanated from Myanmar. The country's shadow government, the National Unity Government (NUG), yesterday declared the stablecoin Tether as its official currency.

The official announcement, which was published in Burmese, declared that USDT will help “accelerate the current trading and financial services.” The announcement also noted that USDT will be beneficial for citizens supporting the NUG since the current military regime controls the central bank and other banks in Myanmar, allowing it to trace any transaction.

For some background, Myanmar's NUG was exiled after the military seized control on 1 February 2021. Despite the NUG having virtually zero control over any territory in the country, the European Union acknowledges it as the country’s sole legitimate representative.

Following the coup, Myanmar's banks ran short of cash and the local currency (Kyat) dropped by over 60%. With this move, it seems that Myanmar's shadow government has selected USDT owing to 1) inflation issue with Kyat, 2) Tether's ties to USD and most importantly 3) as a means to freedom from military tyranny.

Right now, everyone is still trying to make sense of the news and the potential implications. Many are unsure about the NUG’s choice of stablecoin given that USDT has been facing several regulatory woes. What we do know for certain is that the convergence of digital assets and geopolitics is only going to accelerate... Definitely expect more headlines like this in 2022.

Roundup of other key developments

INSTITUTIONAL

• SBI announces crypto joint venture with Swiss digital exchange SIX

• BBVA Switzerland adds ETH to its cryptocurrency services

• Wells Fargo partners with HSBC to settle FX transactions using blockchain

LEGAL + REGULATORY + GOV + CBDCs

• French, Swiss central banks conduct digital FX experiment

• Bank of Russia to ban mutual funds from investing in bitcoin

• Crypto firms spent $5m lobbying senate in first three quarters of 2021

• IMF advocates for coordinated crypto policy among the world's governments

• Crypto regulations for South Africa are coming in 2022

• UK spy chief raises fears over China’s digital renminbi

COMPANY/PROTOCOL

• NYDIG announces $1bn funding round, valuing company at $7bn

• WhatsApp launches cryptocurrency payments pilot in the US

• Binance in talks with Indonesian heavyweights for crypto venture

• Binance Singapore arm acquires 18% stake in private stock exchange

• Binance Singapore withdraws crypto license application

• Fidelity Digital Assets receives FCA approval for its UK crypto business

• Polygon acquires Ethereum scaling startup Mir for $400m in MATIC

• Chainalysis to add support for Lightning Network bitcoin payments

• Tesla to accept Dogecoin as payment for some products

DeFi + WEB3 + NFTs + METAVERSE

• UNICEF launches NFTs on Ethereum to help connect schools to internet

• Bill Gates: Office meetings will be in the Metaverse within three years

• Nike just bought a virtual shoe company that makes NFTs and sneakers ‘for the metaverse

• Bored Ape Yacht Club to launch play-to-earn NFT game

• Metaverse company InfiniteWorld to go public in $700m SPAC merger.

• Solana Ventures looks to boost Web3 gaming with launch of $150m fund

What to watch out for this week

(In the run-up to Christmas, expect this section to remain pretty scant...)

TUESDAY 14 DECEMBER

• Members of the Federal Open Market Committee are set to hold their two-day policy-setting meeting on Tuesday and Wednesday, after which they will release their monetary policy statement and hold a press conference with Federal Reserve Chair Jerome Powell.

• United States Committee on Banking, Housing and Urban Affairs will meet to conduct a hearing called: “Stablecoins: how do they work, how are they used, and what are their risks?” Dante Disparte will be representing Circle.  

• The 21Shares mid-cap crypto index ETP to start trading on SIX Swiss Exchange. The index comprises of: BNB (31.1%), SOL (17.6%), ADA (16.5%), XRP (14.3%), DOT (10%), LTC (3.8%), MATIC (3.5%) as well as BCH (3.3%). 

WEDNESDAY 15 DECEMBER

• PolySwarm mainnet launch.