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Controversial legislation targeting unhosted cryptocurrency wallets advances by narrow margins through the law committees of the EU Parliament; OpenSea teases the launch of a forthcoming integration of Solana NFTs to its marketplace; Ripple co-founder Chris Larsen and allies at Greenpeace USA unveil a new campaign to change Bitcoin's codebase. |
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The total implied network value (market cap) of the digital assets market stands at $2.04tn, up 4% from last week (when it stood at $1.96tn). Bitcoin’s network value is 6.65% of gold’s market cap. Over the last 7 days, BTC is mostly flat, ETH is up 5.5%, LUNA is up 14%, and SOL is up a whopping 25%. Bitcoin dominance is 41.47%, down about 1 percentage point from last week. |
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Data current as of 12:00 AM ET on April 1, 2022. Prices and Data via Messari.
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🗳️EU Parliament Advances Controversial Crypto Legislation |
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EU Parliament advances controversial AML legislation targeting "unhosted” wallets. By narrow margins, the law committees of the EU Parliament--ECON & LIBE--voted to accept the revised text of the Transfer of Funds Regulation (TFR), which aims to combat money laundering and terrorist financing. It is effectively the EU's implementation of Financial Aaction Task Force's (“FATF”) Travel Rule covering crypto transactions. Recall the Travel Rule imposes customer due diligence requirements (e.g., collecting personally identifiable information ("PII") on payers/recipients) on virtual asset service providers ("VASPs"). Though FATF's recommendations are non-binding, they serve as guidance for policymakers and regulators across local jurisdictions. (Read more about FATF's Travel Rule in our previous note here).
Next steps in the legislative process would be an announcement of the ECON proposal in the plenary session which, if no one challenges, would be followed by a trilogue between the EU Parliament, Commission, and Council. The trilogue, expected to take several months, would offer the last chance to introduce changes to the TFR. Once accepted, the regulation would take effect 20 days after the trilogue. Note that after entry, the text of the TFR would permit CASPs 9 months to adopt rollout plans, and then an additional 9 months to implement the rollout plan before compliance becomes mandatory.
The revised text of the TFR impose additional reporting requirements on crypto-asset service providers (referred to as "CASPs" in the TFR) for transactions involving "unhosted" wallets. The most significant amendments (as highlighted by @paddi_hansen) to the TFR require:
- CASPs to not just collect PII for transfers to/from unhosted wallets (in any amount, not just those >EUR1000), but also to verify the accuracy of the information. This would mean CASPs would have to collect and verify PII on the other party that may not be customers before the transfer could be permitted.
- CASPs must report to the competent authorities any time a customer receives a transaction >EUR 1000 from an unhosted wallet even if there is no suspicion of money laundering for suspicious behavior.
- One year from the application of the law, the EU Commission would be required to submit a report that assesses the effectiveness of the compliance obligations, analyze usage trends for unhosted wallets, and suggest whether additional measures are needed to mitigate the risks posed by transfers involving unhosted wallets.
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OUR TAKE: The vote to accept the TFR regulation draft represents a setback for crypto in the EU, where lawmakers had recently voted against a ban on proof-of-work cryptoassets. Justification for some of these revisions appear to be goal-oriented for greater effectiveness in combating money laundering or terrorism financing and aligning with FATF's Travel Rule. It's worth noting that some FATF member states have already established local laws to adhere to Travel Rule's recommendations (e.g., Coinbase sent out notice last week that it will be implementing changes that require customers to provide recipient data for transfers to another VASP, which goes into effect at the beginning of April for users in Canada, Japan and Singapore). But the revised text of the TFR regulation draft in Europe now reaches far beyond FATF's recommendations that covered VASP<>VASP transactions to extend also to "CASP"<>"unhosted" wallets. The amendments affecting self-hosted wallet transactions appear to be short-sighted (perhaps due to amplified concerns due to the Ukraine-Russia conflict) and suggest EU lawmakers may not be fully considering the costs involved for implementation and the new risks that would be introduced.
The primary concerns with the revised text of the TFR regulation draft include data protection and security, as well as a failure of the EU to preserve its citizens’ fundamental rights to privacy and access to financial tools that allow for greater economic independence. The reporting regime under the TFR comes with increased cybersecurity risks as personally identifying information (name and address) would be paired with one's financial data associated with a public wallet address on a transparent blockchain. This exposes citizens to greater risk of crime - if the reported data is leaked, it could be used by criminals to target certain individuals. The amendments could also make crypto's use in DeFi more costly and burdensome as it relies on self-custody of crypto assets through so-called "unhosted" wallets. Indeed, users would probably not be able to use CASPs as on/offramps directly to/from DeFi applications, as those applications are not persons and therefore CASPs may not be able to identify them sufficiently for the purposes of fulfilling their “unhosted” wallet identification requirements under the regulation.
But the value of crypto goes beyond just DeFi usage - crypto is what's driving the global transition to web3, which champions the ability for individuals to create and share value. Perhaps the most impactful unintended consequence of the TFR would be that it stifles innovation and puts Europe at a competitive disadvantage against other nations. As messaging and reporting data standards have not yet been established for the global crypto industry, Europe's stricter regulations raises the potential for regulatory arbitrage and would drive innovation to other economic regions. The European economy could certainly use the financial lift from serving as a web3 innovation hub, but the TFR in its current form would not support that vision.
Thankfully, the TFR draft has not yet been finalized and there remains several opportunities to change the text. Several industry-led efforts by centralized exchanges and custodians are also taking initiatives to protect customer privacy and security while complying with CFT/AML requirements have been underway as well. The next few months will likely see intense lobbying and education efforts to help EU lawmakers understand how the rules on self-hosted wallets are unjust and unwarranted, and would have significant social and financial consequences. Given the narrow voting margins to approve the TFR draft, we remain optimistic that the proposed draft text will be amended for the greater good. -CY
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☀️ NFT Marketplace OpenSea Confirms Solana Integration
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OpenSea teases launch of Solana integration in recent Tweet. While rumors have been swirling about this integration since January, OpenSea all but confirmed a launch date of April for its support of Solana NFTs from its official Twitter account. In this move, Solana would be the third Layer 1 blockchain and fourth blockchain overall to be added to the OpenSea platform to-date. Currently, Solana NFTs trade on Solana-focused NFT marketplaces, such as Magic Eden, which has captured ~90% of the NFT trading market according to data from Dune Analytics. Soon, Magic Eden may see its era of dominance on Solana NFT trading come to an end.
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With this integration, users on OpenSea will be able to select “Solana” from the drop-down menu of “All chains” when browsing the rankings of existing NFT collections. More importantly, they will be able to switch between their existing connected wallets (such as MetaMask) and a Solana-compatible wallet to buy, sell, and display Solana-based NFTs. Phantom is expected to be the first Solana-based wallet to be integrated, but this detail has yet to be confirmed by OpenSea. With this move, OpenSea may soon be one of the first widely-adopted crypto applications where a single user record has multiple wallets across different chains associated with it. |
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OUR TAKE: OpenSea, a company flush with cash from its recent $300M Series C fundraise, has deemed Solana worthy of inclusion in its platform despite having its pick of other Layer 1s (such as Avalanche and Terra). This move is noteworthy given that a Solana integration is perhaps the most complex from a technical perspective (given the chain is not EVM-compatible), though the same could be said for Terra. In spite of this, OpenSea decided that the opportunity cost of its scarce engineering resources coupled with the risks of new potential exploits specific to Solana’s rust-based smart contracts was smaller than the benefits it could reap by adding compatibility with Solana for its 1+ million users. This endorsement is a win for the Solana ecosystem as a whole and it adds another stamp of legitimacy to Solana's unique approach towards scaling blockchains. That said, we would be shocked if OpenSea didn’t add support for other Layer 1 blockchains in the near future — they only stand to gain from increasing transaction volume by expanding their product offering to as many chains as they can reasonably support.
Solana’s NFT ecosystem, while much smaller than Ethereum, has shown decent adoption numbers since it first gained traction this past summer. Data from Dune Analytics puts Solana-based NFT volumes at ~$45M per month compared to $3-5B for Ethereum-based NFTs (good for ~1% of ETH volume). Data from Hyperspace pegs the entire Solana NFT market cap at ~$1.8B (roughly half the market cap of ETH-based Bored Apes Yacht Club alone). While Solana-based NFTs are still a very small slice of the entire NFT landscape, they are generally much cheaper and more accessible to mainstream users. This is important as OpenSea is surely looking to expand its userbase past the “crypto elite” who are often swallowing $60+ gas fees to sell six-figure NFTs. It will be interesting to watch how OpenSea’s latest move impacts the growth of the Solana NFT ecosystem as a whole.
The other interesting thing to think about is whether there are synergies stemming from centralizing the trading of NFTs across different chains in one platform. Our guess is that there are some definite synergies. This is obvious from a liquidity perspective. NFTs, which are notorious for not being particularly liquid assets (especially on Solana) could see a brand-new source of liquidity in the form of OpenSea’s massive userbase. Instead of listing a Solana NFT on Magic Eden where there are ~40,000 users, one could list that same Solana NFT on OpenSea where there are already 1 million users.
To make an analogy, this move is reminiscent of eBay’s recent foray into the authenticated sneakers resale market. Previously, the authenticated resale market was limited to niche players such as Goat and StockX (both unicorns) who focus exclusively on sneakers and apparel. eBay, with its userbase of 150+ million users, now offers the exact same product; rare sneakers guaranteed to be authentic by human authenticators. From a sneaker reseller’s perspective, they would be incentivized to user eBay now in order to leverage the larger number of eyeballs on eBays platform and hopefully churn through their inventory of rare sneakers at a faster clip.
We imagine similar effects could be seen by OpenSea’s entry into the Solana NFT space. While it is true that OpenSea might simply slice off market share from existing Solana juggernauts such as Magic Eden, it seems more probable that this move will increase the size of the proverbial Solana NFT trading volume “pie”. This will yield enhance liquidity for Solana NFTs, which may also have the domino effect of increasing their prices overall. Ultimately, this move seems to be good for users who have more choice when it comes to buying, selling, minting, and showing-off their NFTs. -SQ
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🖥️ Debunking Larsen's 'Change the Code' Campaign
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Ripple Co-founder Chris Larsen and allies at Greenpeace USA seeks to change Bitcoin’s Proof of Work (PoW) mechanism. With a $5 million pledge and support from climate activist groups, Larsen is launching the “Change the code” campaign, advocating for the replacement of Bitcoin’s energy intensive PoW consensus protocol with an alternative type of blockchain consensus known as proof-of-stake (PoS). Larsen claims the campaign is a personal venture, detached from Ripple, a culmination of 1.5 years of thinking and $90 million invested in “climate change fighting efforts.” Back in April 2021, Larsen published an op-ed, arguing that Proof of Work, although brilliant, is an “outdated” technology that the industry should consider deserting for less energy-intensive mechanisms, stating that Bitcoin consumes an average of 132 TWh a year. In his op-ed, he argued that Proof of Stake is a more climate-friendly alternative to PoW.
The manifesto within “Change the code, not the climate” encompasses many of the same views Larsen published a year prior, such as Bitcoin uses “outdated” technology, crypto does not require a lot of energy to work, and that Proof of Stake is a “better model.” The campaign is a call to action designed to push industry participants to support a mechanism change. The campaign website argues that “50 key Bitcoin miners, exchanges, and core developers have the power to make a software change – as they did once before, in 2017.” Four central “facts” substantiate their call to action:
1. Annualized, BTC consumes >130 TWh, which is more than the country of Sweden
2. BTC alone could warm the planet by 2 degrees Celsius
3. BTC is catalyzing a rebirth in fossil fuel
4. Moving to a different validation mechanism would reduce BTC energy use by 99.9%.
Speakers at the campaign launch included key leadership from Greenpeace, Sierra Club, the Environmental Working Group, and municipal conservation organizations. A mobilization of grassroots efforts will accompany a mass advertisements campaign on mainstream and social media, such as the Wall Street Journal and Facebook. Many of the advertisements will target notable Bitcoin advocates by name, including Block CEO Jack Dorsey and Tesla CEO Elon Musk.
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OUR TAKE: Larsen and allies predicate the movement’s success on the ability of 50 key BTC entities and developers to change Bitcoins’ “code.” This is a claim debunked most obviously by the events of the BTC block size wars of 2016/2017 when most major Bitcoin companies and the vast majority of miners supported a hard fork upgrade to double the block size. Ultimately, the fork was not successfully activated due to a rejection of the code change by users running Bitcoin software (nodes), essentially establishing the concept of “node review,” somewhat akin to the judicial review established by the US Supreme Court in Marbury vs. Madison. While Larsen & Co. could pressure developers to create a new fork of Bitcoin, they cannot, as claimed, activate a code change on Bitcoin with only 50 approving entities and without the willingness of a vast number of not only miners and developers, but also network nodes. Nodes have power too, it turns out. And contrary to Larson’s assertion, the lesson from 2017 is that nodes can overwhelm even the largest and most organized campaign by miners and business stakeholders.
Moving on to address the other “facts” used to justify the campaign’s mission, Bitcoin is undoubtedly an energy-intensive technology; the University of Cambridge provides objective data on the network’s energy use. However, no well-substantiated research suggests that “Unless its price is decoupled from its energy use, Bitcoin will drive devastating climate impacts.” This opinion stems from critics conflating energy use and energy source. The campaign then cites a widely debunked [1,2,3,4] 2018 article in the Nature Climate Change Journal by Mora et al. to argue that Bitcoin’s proof-of-work will raise the Earth’s temperature by 2 degrees Celsius, an absurd study whose one of many profound errors is to base its argument upon the falsehood that Bitcoin mining’s energy usage scales linearly with transaction count.
Finally, “Change the Code” claims that “Bitcoin is resurrecting fossil fuels,” citing reports of miners buying US coal plants and using flared gas to power operations. The reality is that the best estimates available suggest that Bitcoin uses a higher sustainable energy mix than any other major industry. Many of the reports of “resurrecting” coal plants actually involve miners repurposing fossil fuel and coal mining waste to fuel BTC mining operations. An estimated 220 million tons of coal refuse cover more than 8,500 acres of Pennsylvania, the largest source of water pollution in the state. Pennsylvania’s government encourages the repurposing and cleanup of coal refuse and classifies it as a Tier II alternative energy resource. Using flared gas as a factoid in their justification is even more incoherent; BTC mining with flared gas makes it profitable to significantly reduce carbon emissions. Natural gas is a byproduct of most oil wells, and if there is not sufficient or economical takeaway capacity, drillers typically simply release it into the atmosphere (vent) or set it aflame (flare). Even in the case of flaring, significant portions of methane slip by uncombusted. Natural gas (methane) is at least 25x more potent at trapping heat in the atmosphere (“greenhouse gas”) than carbon dioxide, so combusting the methane in a generator and converting it to carbon dioxide significantly reduces greenhouse gas emissions. By hooking up BTC miners to that generator, producers can capture and make productive use of this methane while simultaneously converting it to significantly less potent greenhouse gases. -LM
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Axie Infinity’s Ronin Network suffers a $625mn exploit.
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MicroStrategy subsidiary MacroStrategy takes on a $205 mn loan to buy more BTC.
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India passes stiff crypto tax laws requiring residents to pay a capital gain tax of 30% on crypto transactions.
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U.S. President Biden releases his 2023 budget proposal, a non-binding policy document suggesting his administration’s budget priorities, which estimates $11bn in revenues from updating rules around crypto
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Polygon unveils a new identity service secured by zero-knowledge tech.
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35 high-profile NFTs stolen through widespread phishing attack involving hacked Twitter accounts.
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Access our research on the Bloomberg Terminal with ERH GXY <GO>
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An Introduction to On-Chain Fundamental Analysis |
In this major report, GDR's Christine Kim offers a comprehensive and generalized overview of how to use on-chain data for the fundamental analysis of cryptoassets.
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Galaxy Digital Research Podcast |
In the second episode of our weekly podcast series, newly named Galaxy Brains, we discuss the fortification of Terra stablecoin reserves with BTC, the proliferation of ETH staking derivatives in the decentralized finance ecosystem, and Avalanche's forthcoming browser wallet.
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This month Ethereum developers will decide whether or not to schedule a 6th delay to the difficulty bomb mechanism. A delay would indicate that developers require more time to test the highly anticipated Merge upgrade transitioning Ethereum from a proof-of-work to a proof-of-stake blockchain. |
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Bitcoin transaction fees are at all-time lows despite significant price volatility. One of the contributing factors to persisting low fees on Bitcoin is a practice known as transaction batching, which enables the bundling of multiple BTC transfers in one on-chain transaction. This practice realizes significant space saving, increases the ratio of economic activity to transaction count, and dramatically reduces the fees per individual BTC transfer. There are other factors contributing to low fees that will be discussed in more detail in an upcoming Galaxy Digital report, but you can see a significant increase in the portion of transfers contained within larger batch sizes since 2019 by observing the darker areas in the chart below.
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Thanks for reading this week. Have a great weekend.
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Alex Thorn
Head of Firmwide Research
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