Newsletter: Recap July

Laws and regulations lead the market

During the month of July, actions in the digital assets regulatory environment took the spotlight again. The various events in the market caused Bitcoin to fluctuate between the price levels of $29,000 and $31,600. In the first two weeks, Ripple achieved a partial victory against the Security and Exchange Commission (SEC) as a new New York court ruled the sales of XRP tokens through exchanges and algorithms weren’t investment contracts. Moreover, asset manager BlackRock refiled their Bitcoin spot Exchange Traded Fund (ETF) as their first filing was deemed inadequate and unclear by the SEC, notably, Coinbase is mentioned on all five ETF filings as a surveillance-sharing partner. The release of the latest CPI figures indicated that inflation seems to continue slowing down, however, the Federal Reserve maintains its hawkish stance. You can read more about the events of the first half of July in our Market Update.

In the latter part of the month, the SEC once again grabbed headlines when Brian Armstrong, the CEO of cryptocurrency exchange Coinbase, revealed that the regulatory body had instructed the firm to delist all cryptocurrencies except for Bitcoin. Concurrently, cryptocurrency exchange Binance decided to withdraw its application for a cryptocurrency license in Germany.

Adding to the tumultuous events, former Celsius CEO, Alex Mashinsky, faced an arrest and charges brought by federal prosecutors. Meanwhile, a controversial new cryptocurrency named Worldcoin emerged, stirring discussions and debates within the market. Lastly, Twitter, the prominent social media platform, rebranded to "X". Rumors suggest that this move is a part of Elon Musk's ambitious vision to create an all-encompassing "everything app".

Former Celsius CEO arrested

On the 13th of July, former Celsius CEO Alex Mashinsky was arrested and faced seven charges by federal prosecutors. These charges include allegations of committing securities fraud, commodities fraud, wire fraud, as well as securities manipulation and other fraud charges. It's worth noting that Celsius, the cryptocurrency lender where Mashinsky was formerly the CEO, has declared bankruptcy.

Celsius was once a major player in the industry, boasting assets under management worth a staggering $12 billion. However, in July 2022, rumors began circulating about liquidity issues within Celsius, leading to the suspension of withdrawals and eventually culminating in the announcement of the company's bankruptcy.

As part of the legal proceedings, Celsius has agreed to a $4.7 billion settlement, although this payment will not be made until creditors and investors are repaid through the bankruptcy process. However, the situation is complex, as Celsius has a $1.2 billion deficit following the bankruptcy.

While Mashinsky is being charged, Sam Bankman-Fried is waiting for his verdict. The founder of the collapsed cryptocurrency exchange FTX received more positive news as one of the charges against him was dropped by Manhattan prosecutors. The charge in question was conspiracy to make unlawful campaign contributions. The reason for dropping this charge was that the prosecutors were unable to obtain permission from the government of the Bahamas for pursuing it.

Previously, another charge against SBF was forced to be dropped on similar grounds. This specific charge was related to the violation of anti-bribery statutes. Despite these dropped charges, SBF faces several other serious charges, including wire and securities fraud allegations.

Launch of Worldcoin sparks controversy

On July 24th, a new cryptocurrency called Worldcoin made its debut, but its launch has stirred up controversy in the market. Interestingly, Sam Altman, the founder of OpenAI, is also the mastermind behind Worldcoin. The main aim of this cryptocurrency is to provide a privacy-preserving digital identity, known as World ID. This unique identification system is designed to help distinguish real human beings from artificial intelligence (AI).

World ID offers verified users the opportunity to receive the new cryptocurrency, and the claim is that this will be done "simply for being human." However, the controversy started when users discovered that in order to verify their identity, they are required to provide biometric information in the form of an iris scan. This scan must be conducted at specific locations using a device called an "Orb," which is currently available in 20 countries. Once fully verified, users receive 25 WLD tokens, which is currently valued at approximately $50.

Prior to the official launch, an impressive two million individuals had signed up for World ID. However, on the actual launch day, only 1,200 people from around the world signed up, with around 600 individuals coming from Hong Kong. This sharp contrast between the pre-sign-up numbers and the actual sign-ups suggests that enthusiasm for the project may be lacking.

The controversy surrounding the token extends to the distribution and unlocking of tokens. During the launch, a total of eight million tokens were distributed through an airdrop. However, the circulating supply of Worldcoin is currently approximately 110 million tokens, indicating a substantial difference. The company attributed this difference to tokens being allocated to market makers.

As currently, 110 million tokens are in circulation, this means that almost 99% still need to be unlocked. Approximately 40% of the tokens are scheduled to be unlocked between July 2024 and July 2025. Besides the unfavorable locking schedule, most criticisms went to the use of biometric data for verification, despite that the organization has stated that it doesn't collect personal information and can delete the biometric data upon user request.

Twitter rebrands to "X"

On July 23rd, the well-known Twitter logo underwent a rebranding and was replaced with the letter X, causing some confusion among its users. This significant change came after the social media platform was acquired by Elon Musk in October 2022. Shortly after the acquisition, Musk wasted no time in initiating a major overhaul of the organization.

On November 14, approximately half of Twitter's workforce was laid off, signaling his determination to make substantial changes. He also issued an ultimatum to the remaining employees, urging them to fully commit to the new direction of Twitter or consider leaving the company.

Since then, the platform has undergone various transformations, including sharing ad revenue among users and relaxation of tweeting policies. New revenue models have been introduced as part of Musk's vision to create an "everything" app. This app is envisioned to be a comprehensive platform where users can communicate, shop, consume entertainment and perform a wide array of activities. Musk's vision is to make it possible for users to do tasks like ordering groceries, booking classes, paying bills, and socializing, all within the same app.

In the past, Musk has been known to tease his following with his interest in Dogecoin. The rebranding to X sparked speculation of the role that cryptocurrency Dogecoin might play in Musk's future plans. It wouldn’t be that far-fetched as he even enabled the use of Dogecoin to purchase Tesla cars. Further fueling the speculation, Musk has added the Dogecoin logo to his bio on Twitter since the rebranding took place.

Over the past three years, Musk has been highly engaged in the digital assets market, repeatedly expressing his belief in its potential. However, as he took a step back from his role as CEO at X, it is still questionable whether cryptocurrencies will be part of the "everything" app.

Binance enters new market after leaving Germany

On July 26, cryptocurrency exchange Binance made an announcement that they are withdrawing their application for a cryptocurrency license in Germany. This decision came after news outlet Reuters published a story one month earlier, stating that Binance's application had not been granted, as confirmed by individuals with direct knowledge of the matter. Despite this, Binance had initially expressed its commitment to work towards fulfilling the requirements of FaFin, the German financial regulator. However, due to shifts in both the global market and regulatory landscape, the company has now taken the proactive step of withdrawing its BaFin application, according to a spokesperson's statement.

Over the past three months, Binance has also made the decision to leave other countries, including the Netherlands, Belgium, Cyprus, and Canada. Additionally, the exchange has faced regulatory action from the Securities and Exchange Commission as they were charged by operating an unregulated securities exchange. The exchange has experienced a turbulent year, however, expectations are that the firm is allocating their resources to the upcoming European Markets in Crypto Assets Regulation and their battle against the SEC.

On the 31st of July, Binance achieved a significant milestone by becoming the first virtual asset exchange to obtain an Operational Minimum Viable Product License in Dubai. This license was secured by its subsidiary, Binance FZE. As a result, Binance can now provide its services, such as exchange and broker-dealer services, to institutional and qualified retail investors.

In 2021, the United Arab Emirates took a proactive step towards becoming the leading jurisdiction for virtual asset services. While some economic zones might push these firms away, the UAE has embraced them and created a welcoming environment for such businesses. This move signals the UAE's commitment to fostering innovation and growth in the virtual asset space.

Curve Finance experiences hack

On 30st of July, several liquidity pools on Curve Finance, the market third largest decentralized exchange, which used the smart contract language Vyper were exploited. The firm behind the programming language stated that three versions were vulnerable to an exploit and projects which relied on these versions should immediately reach out to them. On the Curve Finance exchange, four pools were hacked and a total of approximately $47M worth of digital assets was stolen.

As various DeFi protocols utilized the Vyper programming language, the DeFi sector underwent a stress test as users, afraid of potential losses, started to massively withdraw their assets from projects. Curve Finance witnessed the largest outflow as users withdrew almost half of the exchanges total value locked. Three projects on the BNB chain also experienced an exploit due to the Vyper vulnerability, which resulted in $73,000 worth of assets being stolen. Notably, an ethical hacker was able to retrieve 2,879 Ether , ~$5,4M, from the exploiter and returned the amount to the exchange.

However, the decentralized exchange has some significant dangers looming over the horizon. Curve Founder, Michael Egorov, used 427.5M Curve tokens (CRV), approximately 47% of the circulating supply, in order to get a ~100M loan. This loan has been gathered on various lending platforms with the two biggest positions on Aave and Fraxlend. Michael provided $305M worth of CRV as collateral for a loan of 63.2M USDT, the liquidation threshold of this loan is at 55%, so his position is eligible for liquidation at 0.3767 CRV/USDT. At the time of writing, the CRV/USDT price is fluctuating between 0.50 - 0.60 USDT.

On Fraxlend, there is another problem, Michael provided 59M CRV tokens for $15.8M, although this a smaller position, it poses a larger risk due to Fraxlend’s Annual Percentage Yield. This interest rate changes based on the assets borrowed, known as the utilization rate. When the rate falls below the target, interest rates fall; when utilization rises over the target, interest rates rise. So, when the pool is fully utilized, the interest rate of the borrower doubles every 12 hours. The pool reached 100% utilization rate on 1st of August but has now dropped to ~70%. The danger lies if the pool reaches 100%, the interest rate can increase to 10,000% APY after 3.5 days.

This would lead to a liquidation of the loan regardless of the CRV token price. This would cause a ripple effect throughout the DeFi sector as the CRV token doesn’t have much liquidity on-chain, ~$10M, and $370K on Binance. This will then result in significant price declines in the CRV token. The liquidation would as well cause that lending platforms are settled with bad debt, Aave will lose $63M, and cause other lending platforms to cease their operations.

The Hodl Funds

The events in the month of July have led to a decrease in the Hodl funds. The Hodl Gib Fund, the Hodl Algo Fund, the Hodl.nl Genesis Fund, the Hodl.nl Consensus Fund and the Hodl.nl Oracle Fund ended at an interim Net Asset Value (NAV) of €947.49, €1,020.35, €2.91, €2.82, and € 0.35. True Asset Fund II ended the month with a NAV of €15,264.87. Clients of True Asset Fund can view their personal performance in the IQ-EQ portal. The final Net Asset Value NAV is currently being calculated by the fund administrator and will be published in the client portal during the week.

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