TBW #40: The Positive Attitude for 2023 😎

THE BIG NEWS

Our EXCLUSIVE NEWS

👉 PSAN: the fear of an accelerated timetable

The year 2023 could probably have got off to a better start for crypto companies 🇫🇷. Just before the holidays and in response to the FTX scandal, Senator Hervé Maurey (UDI, centre-right), pushed through an amendment requiring any player wanting to operate as a digital asset service provider (DASP) to obtain "authorisation" from the Autorité des marchés financiers (AMF) no later than... 1 October 2023.

Until now, crypto companies have only had to obtain "registration".

The measure, which must now be put to a vote by MPs at the National Assembly on 24 January, has been heavily criticised for two reasons: firstly, because this obligation was already provided for by the European MiCA regulation, which will come into force in 2024. Then, and above all, because this text greatly reduces the time needed to adapt.

Currently, companies are expected to have 12 months from this date (18 months if they are already registered at national level) to comply. This would bring the timetable forward by two years for some. "With this law, many start-ups will not be able to obtain authorisation in time", stresses a French player.

The problem of deadlines stems from the lack of staff at the AMF, which does not have the resources to deal with all the files. According to our information, an emergency meeting was organised on 22 December with the AMF, the Treasury Directorate General (part of Bercy) and representatives of the Association for the Development of Digital Assets (Adan).

The idea of the meeting was to see how to prevent start-ups from being penalised by this potential new regulation. But the meeting didn't lead to much. "We came up against a brick wall", says a participant from Adan. As we await the vote on January 24, the political negotiations are shaping up to be (very) heated.

THE BIG STORY

Web3: 10 trends to watch in 2023

While 2022 was essentially marked by falling markets and a few big crashes, technology and projects did not disappear. We take a look back at the hot topics and themes that will be driving 2023.

1/ Back to basics: self-custody and privacy

As recent events have proved, claiming to be "crypto" or "Web3" is not enough to be better than the players in traditional finance. Far from it! The collapse of the Terra/Luna ecosystem led to the bankruptcy of crypto-lending company Celsius and the Three Arrows fund, which themselves accelerated the fall of FTX in November, exposing a completely sclerotic system.

While we wait to find out whether the worst is over (more on this below in the Big Focus), this debacle in centralised finance (CeFi) has put the spotlight on a hot topic: keeping one's own cryptocurrencies.

The only way to avoid losing your funds remains to keep your cryptos yourself 💡

This is the Web3 philosophy based on decentralisation and taking back control of our data and our money. This is partly what led to the creation of a certain... Bitcoin.

There are no 36 solutions for ensuring the safekeeping of your cryptos yourself: either with non-custodial wallets (MetaMask, Spot, Rabby, etc.) or hardware wallets (Ledger). One sure sign of this is that all these players have seen their business soar in recent months.

"We have reached historic figures", confirms Ledger boss Pascal Gauthier. The same goes for Spot; in an interview, the start-up's co-founder, Édouard Steegmann, confessed to us that he had exceeded 500,000 downloads.

Of course, we shouldn't be naive. Keeping your cryptocurrencies clean isn't easy, and there are risks: one mishandle can lose you everything 😒

Privacy protection, which has been somewhat forgotten of late, should also feature prominently. The reactions to the conviction of one of the developers of Tornado Cash (a tool that anonymises transactions) and the change in the terms of use of MetaMask (which collects its users' IP addresses) have shown just how sensitive the subject is.

The strong comeback of cryptos specialising in anonymous transactions is also an indicator. Monero (XMR) is currently making a remarkable comeback in the rankings of the sector's largest capitalisations.

2/ The value of DeFi is no longer in doubt

The FTX scandal is undoubtedly the best publicity that decentralised finance (DeFi) could have dreamed of. While obviously not everything is perfect, it brings transparency where centralised finance (CeFi) is particularly opaque.

Of course we're thinking of decentralised exchanges like Uniswap, whose monthly volumes regularly hover between $30 billion and $50 billion despite the fall in prices.

Proof that Uniswap has the wind in its sails, its activity momentarily outstripped Coinbase's after the FTX episode. And on certain major pairs, its liquidity is also greater than on Binance.

Let's be clear, Uniswap will not be used by tens of millions of people tomorrow, but the protocol has made progress in terms of simplicity. Since December, it has been possible to buy cryptos directly on Uniswap by credit card or bank transfer (via a service provider). Uniswap has also opened up to the exchange of NFTs, which could attract other users.

"The post-FTX environment is favourable to DeFi and we should continue to see innovations with more efficient decentraliss players, more products using Ethereum's secondary layers (see part no. 7) and even options (financial products that allow you to hedge against volatility risks)," explains Stanislas Barthélémi, crypto expert for KPMG.

This development should enable the emergence of decentralised exchanges equipped with an order book and futures contracts. The DYDX and GMX projects appear to be the most advanced in this regard.

We will also be keeping a close eye on MakerDAO's change of strategy, which now invests a very large proportion of its reserve in real-world assets, in particular US sovereign bonds.

This may seem a surprising choice for a DeFi player, but it proves to be quite interesting when it comes to offering returns in an environment where cryptos no longer offer many.

MakerDAO's decentralised stablecoin, DAI, should soon see the arrival of a major competitor with GHO, the future stablecoin over-collateralised with the Aave lending protocol. Its launch date is not yet known, but it could offer a boost to its ecosystem by strengthening Aave's business model.

3/ Restoring trust in CeFi

The goal for centralised exchange platforms will be to restore trust.

Many customers were scalded by the sharp fall in FTX and the - disastrous - episode around the evidence of reserves did not convince many... Several platforms presented as an audit of their accounts, what was only an internal document concerning only part of their reserves. There weren't even any liabilities...

The most symbolic case is that of Binance. Mazars, which was working with the world leader in the sector, decided to suspend its contract. Another industry player, Armanino LLP (auditor of FTX's US arm), meanwhile, has decided to pull out of cryptos.

Of course, not everyone has jumped ship. Several members of the so-called Big 4 (Deloitte, EY, KPMG and PWC) are working on cryptos and Web3 topics.

Coinbase is audited by Deloitte while Bitfarms is audited by PWC. What do these two groups have in common? They are both listed on the stock exchange and subject to major regulatory constraints, such as the obligation to publish their accounts every quarter. A factor that changes everything, as Binance or Cryptocom have set the framework for their "proof of reserve" themselves.

The platforms have all the more reason to change gear as some brokers (Bitpanda, Trade Republic, etc.) could steal market share: while they are more expensive in terms of commissions, they have the advantage of offering more guarantees; many of them are audited and subject to more stringent regulations. This is an important point, because according to our information, Binance's organisation has been judged "far too complex" by several firms.

4/ Binance in a quasi-monopolistic situation

The collapse of FTX has not only resulted in colossal losses. It has also wiped out one of Binance's main competitors, if not THE main competitor.

To give you an idea, Changpeng Zhao's group now has over 75% market share (in volumes handled in January), a level it has never reached! 😳

To date, Binance's most serious competitor is also the one offering the most different model, namely Coinbase. The American company has been listed on Wall Street since April 2021, which makes it much safer in accounting terms, but is not without consequences. Since the collapse of FTX and the fall in the markets, the yield on some of Coinbase's bonds has soared above 12%!

its share price has also been divided by 10 (yes 10!) since it was floated. Brian Armstrong's group is currently worth "only" 8 billion dollars - its lowest ever, leading some to say that the American company has become a "prey" for others. "What about a hostile takeover of Coinbase by JP Morgan? It's all conceivable, it's not financial fiction," explains Jean-Marie Mognetti, CEO and co-founder of CoinShares, which is one of the largest crypto asset managers in Europe.

The stability of Coinbase is crucial for the crypto universe, as the company ensures the safekeeping of 10% of bitcoins in circulation.

In Europe, platforms are expected to take the lead through a "MiCA compatible" organisation, named after the future European regulation.

One such platform could be Kraken. The company's efforts in terms of transparency have not gone unnoticed by regulators. According to our information, the American platform (which is a pioneer in the sector) is well on the way to being one of the first giants to obtain European approval.

European-based platforms (Bitstamp, Paymium, etc.) remain in ambush, but are posting much more modest volumes.

5/ Implementation of MiCA in Europe

After a year of intense negotiations between the various members of the European Union, the MiCA regulation, which will provide a framework for cryptos for its 27 member countries, will finally be able to be voted on definitively. The vote is scheduled for February 🗓️

On the basis of this vote, the exchange platforms - which are the first to be affected by this new framework - will be able to start work on the major projects. The aim is to put themselves in fighting order to obtain the "mandatory" authorisation that will allow them to operate throughout Europe.

MiCA is due to come into force in 2024, but all companies will have 12 months to comply, with a tolerance of 18 months for those already registered locally.

There is still one unknown about this timetable, as the political fallout from the FTX affair could force players to comply sooner than expected. In France, an amendment is currently being debated in Parliament to make authorisation mandatory from October 2023 (see the indiscretion above).

Authorisation is much more restrictive for platforms, particularly on investor protection. Those with more than 15 million users (mainly Binance) will have to present a relatively high equity ratio.

6/ The outcome of the Ripple trial in the United States

The coming year will be the year of deliberation in the case pitting Ripple against the SEC, the US financial watchdog, which has been accusing it since 2020 of illegally selling financial securities by issuing its own cryptocurrency: XRP.

The reason we're talking to you about this is that beyond the case of Ripple, this lawsuit could have an impact on the entire sector. "In the event of a favourable decision for the SEC, most of the tokens that exist on the market would be treated in the same way," explains lawyer Victor Charpiat. To put it plainly: all those with "pre-mined" tokens could become illegal on US soil. So that excludes Bitcoin and probably Ethereum... but that's about it.

The practical consequences of such a decision would be significant: "If these projects did not come into compliance (by paying heavy fines and accepting SEC trusteeship, editor's note), the buying and selling of their tokens would be banned on all platforms targeting the US public," insists Victor Charpiat.

The conclusion of the case is expected during the first half of the year. Ripple has already stated that the company would move to another country in the event of a conviction. An opportunity for Europe?

7/ The advent of Ethereum's secondary layers

While 2021 may have cast doubt on Ethereum's dominance as the main smart contracts platform, the last few months have clarified things quite a bit.

Without financial support from FTX-Alameda, it will be very complicated for the Solana ecosystem to catch up with the leader. Ethereum currently concentrates 60% of the value tied up in decentralised finance, and its move in September to proof-of-stake (which dropped its energy expenditure by more than 99%) has eliminated its main problem in the eyes of institutional players. "The success of the merge and the arrival of the "Shanghai update" (more on this below) will establish Ethereum's dominance," emphasises Jean-Marie Mognetti.

For retail users, Ethereum's transaction costs are still a major obstacle, but secondary layer (layer 2) solutions have made spectacular inroads in recent months.

Whether with Polygon (used for The Big Whale's NFT 🐳 ), Arbitrum or Optimism, it is now possible to access the entire Ethereum universe at reduced fees. The year 2023 could well be theirs, as several projects are planning to issue their own tokens, which should attract a huge amount of liquidity. The most eagerly awaited is undoubtedly that of StarkNet.

"Layers 2 will continue to improve and decentralise their governance. We should gradually see their use take precedence over the other layer 1s," believes Stanislas Bathélémi of KPMG.

"Their room for improvement is significant because the Ethereum EIP-4844 update, which is not due until 2024, should enable their costs to be reduced a little further," he adds.

8/ The real start of GameFi?

It hasn't all been plain sailing for blockchain gaming players. One of the best-known, Axie Infinity, has failed to create a truly sustainable and fun game (its system relies almost entirely on buying tokens and speculation), but new attempts should see the light of day in the coming months.

"Some experiments like Illivium, Ember Sword and Treeverse are promising and a far cry from the hype of Axie Infinity," Stanislas Barthélémi points out.

The example to follow is probably Sorare, which has managed to create a really fun game that players can enjoy without necessarily investing any money. Let's not forget that a game is first and foremost about... having fun!"

While Ubisoft failed to unleash the crowds after introducing NFTs into its Ghost Recon game, other major publishers, perhaps more compatible with the subject (we're publishing something on this next week 👀 ), are already in the starting blocks.

9/ The emergence of decentralised social networks

At The Big Whale, we're not going to hide it from you, we're very excited at the idea of decentralised social networks developing 🔥

Several attempts have already met with a little success in recent years (Mastodon in particular), but the arrival of Lens Protocol could give the sector a real boost. Designed by teams close to Aave, Lens Protocol provides the technological building blocks for developing Web3-style social tools.

The principle is quite simple: when you register, you get an NFT that replaces the traditional login and password. It's your digital identity card of sorts, and it 'improves' as you use it.

An example: people who follow you are not linked to the social platform, but to your NFT. The advantage of this system is that you can't lose your community and your content.

To date, it's Lenster, a kind of decentralised Twitter built on Lens, that offers one of the best experiences and offers a glimpse of new business models for content creators. Lenster allows users to receive rewards in cryptos by publishing posts or sharing those of others. 

This system opens up quite a few prospects and possible associations between DeFi and "DeSo" (decentralised social networks). "I'm a great believer in combining these two infrastructures," says Stanislas Barthélémi of KPMG.

The DeSo ecosystem is still in its infancy and is based around three main categories: applications that relate to the user interface (such as Lenster or Phaver), those that manage the infrastructure of relationships and publications (such as Lens) and finally those that provide storage for photos or videos (Arweave, Infura IPFS).

10/ How can we not mention Bitcoin?

Despite the cyclical downturn in prices, Bitcoin continues to grow. The reasons for this "success" vary according to geography. In some countries, it is an investment and even speculative product, while in others it provides access to financial services or helps to combat inflation, as the latest Chainalysis report highlights.

Bitcoin could benefit from additional appeal in the coming months as central bank digital currency projects take shape (the ECB is due to deliver its conclusions by this summer). It is interesting to note that in many countries where similar initiatives have been launched (Nigeria in particular), Bitcoin has benefited from the "anti-cash" wave.

However, we must remain vigilant about the mining industry, which is the heart of the system, whose financial difficulties are piling up due to falling prices and rising energy tariffs around the world ⚡ ️

Let us be reassured, the computing power protecting the network is nevertheless 40% greater than it was two years ago. The advent of a world where electricity is permanently more expensive could push miners to turn more to renewable sources, which have the advantage of being more affordable, even if they are sometimes more difficult to control. According to Cambridge University, in 2022 miners were using around 25% renewable energy in their mix.

THE BIG FOCUS

It's heating up for DCG

The US giant, which is caught up in the FTX collapse via its Genesis subsidiary, is under increasing pressure.

‍Usually this kind of exchange takes place in private, but, this time, Cameron Winklevoss has decided to play it differently. In a tweet published on Monday, the co-founder of US platform Gemini called out Barry Silbert, the boss of Digital Currency Group (DCG), accusing him of embezzling money from "hundreds of thousands of people" as part of the FTX bankruptcy.

This tweet immediately unleashed a mountain of reactions and prompted Barry Silbert to come out of the woodwork, who refuted the accusations. But what's really going on?

We take stock 🔍‍

👉 Where did the affair come from?‍

It all started on 16 November. On that day, crypto lending company Genesis announced a freeze on withdrawals from its platform, part of whose funds had gone up in smoke with the fall of FTX (on 11 November).

Genesis is no small player. This DCG subsidiary manages several billion dollars on behalf of companies, funds and platforms. Gemini was one of them and worked with Genesis to offer yield products to its clients; 8% per annum. 

In November, Barry Silbert pledged to help his group's subsidiary financially so that withdrawals on Genesis would resume. Except that nothing has happened since. Gemini's 340,000 customers have no access to their funds, valued at almost a billion dollars! 🫣

A complaint was filed against Gemini at the end of December, hence Cameron Winklevoss's tweet.‍

👉 What's the problem?‍

Aside from the fact that DCG didn't help its Genesis subsidiary, we have learned, in the meantime, that Genesis had lent money to... DCG. This is precisely what Cameron Winklevoss is pointing out. According to him, DCG had misappropriated money from Gemini customers.

"It's a situation not unlike FTX's with Alameda," points out lawyer Victor Charpiat.

The aim of Cameron Winklevoss is to put as much pressure as possible on Barry Silbert to recapitalise Genesis. He has given him until 8 January to do so, failing which he promises the matter will be settled in court.

One of the cards Gemini could play is the financial proximity between Genesis and DCG - exchanging money - to say they are the same company and force DCG to pay up. "‍

👉 Could DCG collapse?‍

It's impossible to know at this stage. What is certain is that DCG does not appear to have sufficient cash otherwise the situation would probably have already been resolved.

Some explain that if DCG cannot pay, another option might be to push the company to sell its positions within another of its subsidiaries, Grayscale. Founded in 2013, this company is quite simply the largest crypto asset manager on the planet (over $50 billion).

"It's their cash cow," confirms the head of one fund. But it's still a secondary option and we don't know how deep Grayscale's pockets are.

This edition was prepared with ❤️ by Raphaël Bloch and Grégory Raymond. The Big Whale is a free and independent media. By supporting us, you are contributing to its development.