By Brett Munster
Proof of Reserves comes to TradFi
One of the promises of blockchain technology is that it can be audited by anyone, at any time, from anywhere in the world. We explored the concept of Proof of Reserves in past issues and explained how it enables crypto networks that take advantage of this capability to be more transparent and compliant than traditional financial infrastructure. It turns out, that capability is beginning to seep into Wall Street.
Bitwise recently published the public bitcoin address for their spot bitcoin ETF holdings (BITB). For the first time in history, anyone at any time can independently verify the holdings and flows of an ETF. In its announcement, Bitwise pointed out that on-chain transparency is core to Bitcoin’s ethos, adding that publishing the wallet addresses is a first step toward increasing public transparency.
Source: https://twitter.com/BitwiseInvest/status/1750224060620111912
The ability to allow anyone to confirm for themselves that every last bitcoin is accounted for and be able to track the flows in real time is a level of transparency the traditional financial system has never been able to achieve. Take gold for example. Throughout its history, the gold market has continuously dealt with issues of fraud. One of the largest and most recent frauds was China’s gold scandal in 2020 when about 4% of the Chinese gold reserves apparently never existed. Over the years millions of dollars of fake gold bars stamped with the logos of major refineries have been inserted into the global market. And while it’s true many physical gold ETFs are subject to an audit; audits are only done periodically (usually once a year), typically only audit a portion of the gold held, and requires investors to trust the audit firm to be accurate and truthful. Audits still rely on humans and human based audits aren’t infallible, as Enron clearly demonstrated. There is simply no way for an average investor to verify on their own that a gold ETF, or any ETF for that matter, has the assets they claim to. But that’s exactly what Bitwise is enabling with their ETF.
Of course, publishing your public key also means anyone, anywhere in the world can send bitcoin to that wallet. This being the crypto industry, a few people decided to donate small amounts of bitcoin to Bitwise’s public wallet address just because they could. Since publishing the address, the Bitwise wallet has accumulated over $5,000 in various assets, including small amounts of bitcoin, other tokens and NFTs which means Bitwise now has the only over-collateralized bitcoin ETF (maybe the only over-collateralized ETF period) on the market. Though the amount is negligible compared to the total AUM, those bitcoin do accrue to the benefit of the shareholders of BITB.
Bitwise is clearly leading from the front in this regard. Hopefully the practice of on-chain audibility starts to become industry standard, not just for the bitcoin ETFs, but all financial instruments. Last year we saw three of the largest bank failures in history occur, which potentially could have been identified earlier if anyone in the world could have audited the various bank holdings. By tokenizing real world assets, blockchain technology can drastically improve transparency and auditability of our legacy financial system. It’s pretty clear that over time more financial instruments are going to move on-chain and that’s a good thing.
Many have theorized that a bitcoin ETF would lead to bitcoin becoming co-opted by the traditional financial system. I don’t believe that to be the case. If anything, bitcoin is imparting its ideals on Tradfi and making the legacy financial system better.
Our regulatory approach to crypto is harming U.S. businesses
When the internet was first developed in the 80s and 90s, it was allowed to flourish without too much regulatory intervention. That’s not to say the internet didn’t have its share of challenges and issues as it was scaling to hundreds of millions of users, but the largely hands off approach from U.S. regulators was a factor in the U.S. becoming the world leader in the internet age. It enabled the conditions for many of the world’s largest internet companies (Google, Facebook, Microsoft, Apple, Netflix, Amazon, Nvidia, etc…) to be built in the U.S.
The U.S. should be the world leader in the crypto industry too. The U.S. has a plethora of engineering talent, financial market experience, and capital to enable the crypto industry to thrive in the U.S. But unlike the approach taken with the early days of the internet, the current regulatory landscape has hamstrung the growth of the crypto industry in the U.S.
While other jurisdictions such as the European Union, Switzerland, Singapore, Brazil, Japan, and others have passed clear and favorable laws, the U.S. regulatory bodies have taken a regulation by enforcement approach. The most notable of which has been the SEC, which has decided to go after good actors such as Coinbase and Kraken despite not issuing any formal guidance to the industry. The result is the U.S. is beginning to fall behind the rest of the world.
This isn’t a theoretical or subjective argument either, we can see it clearly in the data. Every year, Electric Capital puts together an amazing report that does a deep analysis of the developer ecosystem within the crypto industry. This year’s report highlighted a startling trend: engineering talent in the crypto industry is leaving the U.S. for more friendly jurisdictions. Since 2018, the number of developers working in the crypto industry has doubled. However, during that time, the share of developers who work in the U.S. has dropped from 40% to 26%. Meanwhile, jurisdictions with more friendly frameworks such as South Asia, Latin America, and Europe have seen their share of developers grow substantially.
Source: Electric Capital, 2023 Crypto Developer Report
This trend is also apparent when it comes to crypto exchanges. Coinbase was launched in May 2012 and Binance wasn’t launched until July 2017. Despite more than a five-year head start by Coinbase, Binance was able to quickly become the world’s largest crypto exchange in large part because Binance, being headquartered outside of the U.S., could offer tokens and products such as derivatives and futures to international customers that U.S. based exchanges are barred from offering. In less than a year, Binance was able to surpass Coinbase in market share and has only increased its dominant position since. According to data from The Block, at the start of 2018, Binance accounted for roughly 22% of all global volume traded in crypto while Coinbase accounted for only roughly 5%. By 2023, Binance’s market share had almost tripled to as high as 62% while Coinbase remained around 5%. Because Coinbase has done its best to stay compliant with U.S. regulations, it basically has been forced by regulators to cede the entire international market to competitors based outside the U.S.
But an even more striking example is the stablecoin market. Historically, the two largest stablecoins have been USDT and USDC. USDT is managed by Hong Kong based iFinex while USDC is operated by Circle, a U.S. based business. As the stablecoin market exploded over the last four years, these two companies grew in tandem. USDT has always been slightly larger, but their growth was very comparable. At least it was until July 2022 when the SEC kicked its enforcement actions into high gear and issued its lawsuit against Coinbase and others. Then the banking crisis and fall of Silicon Valley Bank in 2023, where Circle kept some of its reserves, further exacerbated the global fear around using a stablecoin run by a U.S. entity. The ironic part of this is that both USDT and USDC are backed by U.S. dollars, but the global market would rather use the same product from an offshore based company than the one domiciled in America due to the regulatory environment.
Since then we have seen a steep divergence between the two. USDT has continued to grow and is close to crossing $100 billion of USDT in circulation, cementing itself as the dominant stablecoin in the market. Meanwhile, the total USDC in the market has fallen nearly 50% since July 2022.
Binance and Tether are two of the biggest businesses in crypto. Tether alone made $2.9 billion in profit in Q4 2023. That’s an annual run rate of nearly $12 billion per year. To put that in perspective, Tether is more profitable than Goldman Sachs. Tether is one of the most efficient, profitable businesses in the world (in any industry, not just crypto). It’s a shame that economic growth is accruing outside the U.S. due to our own self-inflicted restrictions.
Both Binance and Tether have direct U.S. based competitors. Had the regulatory environment been different, it’s very possible that the U.S. company could have been the market leader in both of those categories. Imagine if the U.S. levied enforcement actions against Google in the early 2000s that prevented it from becoming the leading search engine and a competitor based in Asia took its place. That is exactly what is happening with the crypto industry in the U.S. right now.
Crypto is a global industry by nature. Talent and capital freely flow to where it’s most welcomed. The crypto industry will continue to grow and thrive regardless of what the U.S. does or does not do. The question isn’t what will happen to the crypto industry, the question is whether the U.S. will remain as the global leader in technological and financial innovation.
In Other News
At least 18 senators in the United States support crypto.
New spot bitcoin ETFs amass 150,000 BTC as GBTC market share falls to 36%.
Visa enables crypto withdrawals on debit cards in 145 countries.
The Swiss city of Lugano embraces diverse digital currencies future.
Cryptocurrency thrives in China against odds.
Why crypto could swing the 2024 election.
Solana registers all-time high in monthly new addresses for January.
January saw Bitcoin’s highest monthly volume since September 2022.
25% of ETH supply is now staked on the network.
The Dencun upgrade on Ethereum is now scheduled for March 13.
U.S. Senators berate Gary Gensler for SEC’s “unethical” handling of crypto case.
Disclaimer: This is not investment advice. The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing contained constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments in this or in any other jurisdiction in which such solicitation or offer would be unlawful under the securities laws of such jurisdiction. All Content is information of a general nature and does not address the circumstances of any particular individual or entity. Opinions expressed are solely my own and do not express the views or opinions of Blockforce Capital or Onramp Invest.
Disclaimer: This is not investment advice. The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing contained constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments in this or in any other jurisdiction in which such solicitation or offer would be unlawful under the securities laws of such jurisdiction. All Content is information of a general nature and does not address the circumstances of any particular individual or entity. Opinions expressed are solely my own and do not express the views or opinions of Blockforce Capital or Onramp Invest.
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