Crypto Crime Report, Grayscale vs. SEC, and Silvergate shutting down

1. Chainanalysis Crypto Crime Report

The Facts:

• Crypto analytics firm Chainanalysis reported their 2023 Crypto Crime Report, aggregating the illicit activity within the crypto industry for the year 2022.
• The share of all illicit crypto transactions in crypto is just a mere 0.24%, though the year prior, in 2021, the share was just half the size, with 0.12% out of all crypto transaction volumes.

Our Take:

• Despite the share of illicit transactions having increased, the constellation of the type of illicit transaction tells a different story, because all illegal activities have in fact lower volumes, except for stolen funds.
• This implies, that all types of crime, such as darknet market, frauds shops, cybercrime, terrorism financing, child abuse material, ransomware and even scams have decreased in volume over the past year and have been financed less with crypto than the year prior.
• A conclusion is that crypto is therefore less used for illicit activities and transactions, whereas only the stealing of crypto funds became an increasing issue.
• Overall the report can be perceived very positively, since crypto is moving away from general illicit activity, though its usage in these areas has always been limited.
• Nevertheless, the implications for safeguarding and having the right procedures in place to avoid having one´s crypto assets stolen are unambiguous, and suggest that it is crucial to either be aware of how to handle crypto assets, or seek out a trusted, safe crypto custodian instead.
• Another important insight from the report; roughly one in four crypto assets launched in 2022 have “pump and dump” like on-chain characteristics, with most tokens dropping as much as 90% in their initial trading week, which means that investors should carefully choose, on which crypto brokerage they choose to trade, in order to avoid accidentally investing in such “bad lemon” crypto assets.

2. Grayscale versus the SEC

The Facts:

• Since almost a decade there are talks of a BTC spot ETF (Exchange Traded Fund) being just around the corner in the U.S., yet all the applications for a BTC spot traded ETF have been declined by the SEC so far, though countless BTC futures ETF have been approved, resulting in Grayscale eventually suing the SEC.
• The SEC has been questioned during the initial hearing this week, since the SEC claims, that a BTC spot ETF can be manipulated, while a futures based BTC ETF cannot.

Our Take:

• Besides defying all logic, considering the SEC´s claim that a futures based ETF cannot be manipulated, while the spot ETF can be manipulated, even though the futures based product´s price is almost entirely dependent on the spot price, the judge so far agreed with Grayscale´s claims of the lawsuit, that a spot ETF should be approved in a similar manner their futures ETF has been approved, due to the argument stated above.
• The reaction has been a more positive sentiment for Grayscale and their current GBTC Grayscale Bitcoin Trust shares, which are up roughly 20% over the past week, during a time that the BTC price declined by roughly 2%.
• This marks the first time in more than a year, that the discount of GBTC shares compared to the value of the underlying BTC holdings has been shrinking, implying that the general confidence of the market in GBTC has improved.
• This has been backed by market analysts increasing their odds that the current GBTC share trust will likely be converted to a spot BTC ETF, once approved by the SEC, with certain analysts changing the odds in favor of Grayscale, away from the SEC.
• If the hearings and lawsuit progress as they started, the odds are in favor for GBTC being converted into a spot BTC ETF, which will be a bullish sign for the industry going forward.
• Furthermore, if a spot ETF were to be approved for BTC, institutional onboarding and inflows into BTC are highly likely, providing the liquidity required to drive prices higher.
• On another note, the crackdown against the crypto industry, also driven at large by the SEC, is not shared unanimously, as the U.S. state Missouri recently passed a bill that protects the right to operate a node in order to mine bitcoin.
• Also, Voyagers bankruptcy judge has dismissed the SEC´s objections over Binance´s acquisition of bankrupt Voyager due to finding no evidence, that Binance will misuse customer assets, or cannot be trusted, as claimed in the SEC´s objection.

3. Silvergate Bank decides to shut down its operations

The Facts:

• Silvergate Bank was one of the major banks supporting the crypto industry in the form of on- and off-ramping liquidity to the crypto industry, besides Signature Bank.
• Due to the recent financial troubles, the bank decided to wind down its operations this week, after its share price fell by more than 80% in the past month.

Our Take:

• With Silvergate Bank winding down its operations, the business lost another major TradFi player that embraced crypto assets and is currently only left with one major crypto banking partner, namely Signature Bank.
• Despite the rapid downfall and resulting decision to shut down, all customer deposits and funds will be fully repaid.
• Due to regulatory pressure, Silvergate was forced to distance itself from the crypto industry, and with the following decisions to only service specific clients, things slowly started to turn bad.
• Things slowly started to spiral downwards, with the regulatory pressures and resulting exit from the crypto industry causing a classical bank run, with more than $ 8 billion being withdrawn from the exchange since the end of last year.
• The big question remaining is, how the regulatory headwinds an ongoing Operation Chokepoint 2.0, as covered in the Weekly Wrap, will impact the remaining players in the crypto industry, going forward.
• One consequence is certainly the strengthening of the true crypto and decentralization trend, trading more via DEXES and using stablecoins for liquidity.
• On the other hand, further regulatory scrutiny makes investing and engagement with crypto less attractive, if the ease of use and business onboarding gets impeded.
• The most likely scenario out of both is, that honest businesses and ideas will persist, and will continue their operations going forward, one way or another.
• Since crypto itself cannot be regulated, but only the centralized industry surrounding it, the impact and headwinds are likely to be temporary, especially with increasing adoption in the long-run, forcing regulators to change their biased stance against the industry.

In other news

• Deadline for Mt. Gox creditors to choose repayment method delayed (via TheBlock)
• SEC and CFTC fight over regulatory control of ETH (via Coinmarketcap)
• Euro trading volume share doubled compared to USD since November (via Kaiko)
• Tax breaks for companies in Thailand issuing investment tokens (via Reuters)
• JPMorgan ending its banking relationship with Gemini (via Coindesk)
• “Cryptobank” Silvergate is winding down its business (via Watcher.Guru)
• Liquid Collective launched on Coinbase Prime and Bitcoin Suisse (via TheBlock)
• Ethereum´s Shapella goes live on testnet (via Cryptoslate)

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Curious what the year 2023 will look like? Read our 2023 Outlook, which has been published recently.

The latest episode of Decrypt titled “The Shanghai Upgrade and what is means for investors” focusses on the upcoming Ethereum upgrade dubbed Shanghai/Capella and its possible volatility implications. Will we see a bullish unlock?