Cryptocurrency Monthly Report | March

Cryptocurrency Monthly Report: Key Takeaways

• Biden Executive Order on crypto, the future of money to dominate 2022 [1]

• Institutions move half a billion dollars into crypto ETPs [2]

• Crypto thesis plays out in real time with Ukraine and Russia [3]

Macro Outlook

Biden Executive Order on crypto, the future of money to dominate 2022

One of the most impactful events in the modern history of cryptoassets is coming, in the form of comprehensive federal-level regulation in the US.

On 7 March, Reuters, quoting an unnamed source, reported that President Joe Biden was expected to sign a long-awaited Executive Order by mid-March, directing the Justice Department, Treasury and other important agencies to study the legal and economic ramifications of cryptocurrencies, along with the possibility of creating a US central bank digital currency.

Last year the White House said it was considering implementing wide-ranging oversight of crypto markets, including closer supervision of decentralised finance (DeFi) and stablecoins.    

13% of Americans held or traded crypto in the last year, according to University of Chicago research. [4] That compares to 24% of Americans who held or traded equities.

Markets turned buoyant in the wake of a statement that appears to have been prematurely published on the US Treasury website. Treasury Secretary Janet Yellen said the pending executive order from the President “calls for a co-ordinated and comprehensive approach to digital asset policy [that] will support responsible innovation”. Industry news website Coindesk published an archived copy [5] of the post. The friendlier-than-expected language alleviated fears of a sudden tightening of US rules around cryptoassets.

At a state level, the US has been rushing to attract crypto businesses with swathes of favourable legislation. In early February a bipartisan group of US House lawmakers reintroduced the Virtual Currency Tax Fairness Act as an amendment to the IRS tax authority’s revised tax code, exempting consumers from having to report crypto transactions of less than $200.

On 21 February 2022 California State Senator Sydney Kamlager put forward Senate Bill 1275 to recognise Bitcoin as a payment method for state taxes in California, while her colleagues in the House are seeking to table a bill to make Bitcoin legal tender. Three days earlier, Colorado Governor Jared Polis announced on stage at an Ethereum conference that the state would accept taxes and fees in cryptocurrency by the summer of 2022.

Both Georgia and Illinois also put forward legislation in February to exempt industrial-scale Bitcoin miners operating in data centres of at least 75,000sq ft from paying state taxes, aiming to join Texas and Kentucky, who already offer similar incentives. Each of these four states has received scores of crypto companies rushing to leave China since that country’s ban on crypto mining in May 2021. At the time, China accounted for more than 60% of the world’s digital asset mining hashrate. Today it is effectively zero, with the US by far the largest beneficiary.

Institutions move half a billion dollars into crypto ETPs

Institutional data shows that after two months of large net outflows from crypto ETPs and ETFs, running from mid-December 2021 to mid-January 2022, the tide has turned, and sentiment has shifted positive among the richest global pools of capital.

We have now seen seven straight weeks of net inflows into institutional cryptoasset products, such as ETC Group’s physically-backed and centrally-cleared Bitcoin, Ethereum and Solana ETPs. Despite accelerating geopolitical risks, and commodity markets like oil and nickel seeing vast spikes, the data show that investors moved net $127m into crypto ETPs in the last week alone. [6] Bitcoin led the pack with $95m, the largest single weekly inflows since early December. Since sentiment shifted positive in late January, asset managers have moved almost half a billion dollars into crypto ETPs.

Institutional adoption continues to move ahead at a breathless pace. And while the SEC dismissed the latest set of applications for spot Bitcoin ETFs, firstly from investment advisor First Trust and SkyBridge Capital, and secondly from Fidelity,  [7] corporates continue to add major cryptoassets to their treasury.

KPMG Canada is the latest to cross the Rubicon, with a 7 February decision [8] by the Big Four accounting giant to add Bitcoin and Ethereum to its corporate treasury.

Announcing the investment was Benjie Thomas, Canadian Managing Partner for KPMG Advisory. “Cryptoassets are a maturing asset class,” he said. “Investors such as hedge funds and family offices to large insurers and pension funds are increasingly gaining exposure…this investment reflects our belief that institutional adoption of cryptoassets and blockchain technology will continue to grow and become a regular part of the asset mix.”

As Michael Saylor, CEO of Bitcoin early adopter Microstrategy noted [9] recently: “People buy bitcoin because they want to buy an asset they understand that might have value in 100 years. The truth is there is no security trading on the Nasdaq or the New York Stock Exchange right now that you can understand 100 years from now.”

Saylor’s company now owns 125,051BTC [10] and remains the world’s leading publicly-traded company in terms of Bitcoin corporate treasury.

KPMG said it established a governance committee for oversight and to approve the treasury allocation, as well as assessing the tax and accounting implications of the transaction.

Crypto thesis plays out in real time with Ukraine and Russia

With Europe facing unprecedented turmoil, cryptoassets are at the heart of some incredible and groundbreaking uses of technology.

On 26 February the Ukrainian government posted on Twitter three wallet addresses: one for Bitcoin (BTC), one for Ethereum (ETH), and one for Tether (USDT), and within 24 hours raised millions of dollars.

By 8 March that figure had reached $60.5m, with 120,000 people donating cryptoassets of one kind or another. [11] They include Polkadot founder Gavin Wood, who sent $5.8m in DOT, while one devotee sent a CryptoPunk NFT worth $200,000 to the Ukrainian government’s Ethereum address. This displays precisely how it is not simply money, but any kind of tokenisable asset that can be moved cross-border on public blockchains. And because the Bitcoin and Ethereum networks maintain an open and transparent record of transactions, anyone can follow the donations in real-time. [12]

Pressure group UkraineDAO has also auctioned off an NFT [13] of the Ukrainian flag for $6.5m in ETH, the tenth most expensive NFT ever sold. The proceeds are to be donated to the Come Back Alive NGO.

It may take some time for the wider world to adequately process the idea that a sovereign nation has turned to a global community for critical crowdfunding using this novel technology and thereby validated the cryptoasset thesis. This is a new way to move and store value cross-border and peer-to-peer, in a frictionless way that avoids censorship and resists seizure.

To the point that Russia’s sanctioned wealthy could use crypto in the same way to evade sanctions, ETC Group have written a lengthy rebuttal [14] countering these assertions. Here is a short summary.

Public blockchain ledgers are terrible ways to launder large amounts of money because anyone can view a record of all transactions at any time. Coupled with the skill of forensic blockchain analysts like Chainalysis and Elliptic, who are employed by the US government, these are flows of money that are orders of magnitude larger than it would be possible to conceal. Oligarchs cannot cover their tracks with crypto, making it useless for evading sanctions. By contrast, sanctions may have frozen part of Russia’s foreign exchange assets, but its $132bn in gold reserves [15] could be a lifeline. It is much more likely that Russia will sell its gold reserves on international markets, swapping that for high-value currency to defend against the crashing ruble. US Senators are now urgently seeking [16] to close that loophole.

If Russia wants a SWIFT alternative, it won’t use Bitcoin. Instead of a public, open network it cannot control, Moscow is much more likely to use CIPS, the onshore yuan clearing and settlement system offered by China. To this point, both Sberbank and Alfa Bank will issue Mir cards [17] with China’s UnionPay, after Mastercard and Visa stopped operating [18] in the country.

Crypto Performance (As of 28.02.2022)

Please note that all performance figures are showing net data. Source: Bloomberg / HANetf. Data as of 28/02/2022
Performance before inception is based on back tested data. Back testing is the process of evaluating an investment strategy by applying it to historical data to simulate what the performance of such strategy would have been. Back tested data does not represent actual performance and should not be interpreted as an indication of actual or future performance. Past performance for the index is in USD. Past performance is not an indicator for future results and should not be the sole factor of consideration when selecting a product. Investors should read the prospectus of the Issuer (“Prospectus”) before investing and should refer to the section of the Prospectus entitled ‘Risk Factors’ for further details of risks associated with an investment in this product.

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