Hi investors, this has been an exceptional week in crypto.

In this edition we'll cover the Bitcoin and Ethereum markets, some very bullish news around crypto custody from the US banking regulators and thoughts about the growth of crypto-dollars on public blockchains.

Let's dive in!

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Bitcoin.

BTC is trading at $9,579 at the time of writing, we're up +4.65% since last week on increasing spot volume

Derivatives volumes have also been steadily increasing this week.

I suspect this acceleration to be partly a consequence of a series of bullish news around crypto custody.

On July 22, the Office of the Comptroller of the Currency (OCC - the regulatory body that supervises chartered banking in the US) announced in a letter that banking institutions that fall under their rule are now allowed to custody cryptographic assets.

The letter makes it clear that "banks [must] continue to satisfy their customers' needs for safeguarding their most valuable assets, which today for tens of millions of Americans includes cryptocurrency".

This doesn't come at a complete surprise. The acting comptroller (pronounced "controller") Brian Brooks is Coinbase's former Chief Legal Officer and a long time crypto believer.

This is undoubtedly some very bullish news for crypto in general. However, a number of questions remain.

First, as Caitlin Long pointed out in a lengthy tweet storm, most US chartered banks operate in states that lack a comprehensive legal framework around crypto custody. It's one thing to be allowed to hold crypto assets, it's another to create legal security around crypto custody transacting in digital assets. Building this framework will take time so don't expect banks to jump onboard the crypto bandwagon like, next week.

This announcement also puts a question mark around the future of crypto custodians that are not chartered banks (Anchorage, BitGo, Coinbase, BlockFi, Fidelity Digital Assets etc.)

Do these need to become banks to remain competitive?

Becoming a bank in the US is extremely difficult (because of capital requirement and legal red-tape) but I see alternative solutions:

• Chartered banks partnering with non-chartered custodians to provide sub-custody services. In the words of Matt Walsh (Castle Island): "imagine a world where JPMorgan is offering crypto asset accounts "powered by" Fidelity Digital Assets"

• Chartered banks acquiring custodians in a storm of M&A activities or rolling-out their own in-house custody solutions as bulge-bracket bank Chartered Standard recently announced

As a result I think the news is equally bullish for holders of equities in companies that provide institutional custody solutions.

Of course, it's expected that the news will make some OG bitcoiners grind their teeth. After all, the financialization of Bitcoin stirs concerns around privacy and self-custody, which is a core pillar of the Bitcoin philosophy.

The good news is that physically holding your BTC on a hardware wallet or a multi-sig wallet a la Casa will always be an option for the purists.

It's important to remember that physically holding crypto also come with significant risks of "wrench" attacks or losing the private keys to your assets. I believe that people should have the option to trust a third party to custody their asset if they so desire.

On this note, it will also particularly interesting to see whether US banks will accept custody of crypto-dollars in the future.

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Crypto-Dollars.

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For those unfamiliar wit the concept, crypto-dollars can be defined as:

"Cryptographic tokens which circulate on public blockchains and aim to track the return of sovereign currencies"

Source: Crypto-Dollars - The Story So Far

These include mainly fiat-backed stablecoins (Tether, USDC), crypto-backed stablecoins (DAI) but exclude -as far as this research is concerned- the more "exotic" types of stablecoins such as Ampleforth.

A collaborative report issued by BitStamp and CoinMetrics, ominously titled "The Rise of Stable Coins" makes a good case for crypto-dollars on blockchain rails to be crypto's first "killer-app" (which is enormously ironic).

The report highlights the following findings:

• The issuance of crypto-dollars has exploded since last March market breakdown, probably from crypto-holders seeking to find safety in a stable asset during hyper-volatile times:

• In the world of crypto-dollars, fiat-backed stablecoins (particularly Tether) are kings:

• Crypto-dollars now settle more value than BTC or ETH:

• Crypto-dollars are not completely fungible because their difference in liquidity translate into differences in cost of execution (low liquidity leads to increased slippage which increases the cost of execution for large trades):

• While not yet used for retail transactions,crypto-dollars address distribution is skewed towards smaller amounts ($1 - $1k USD) which indicate that crypto-dollars are also used as a store-for-value.

The report concludes that crypto-dollars success has also been largely the consequence of a regulatory laissez-faire.

However, that window might be about to close soon because of regulatory concerns around money laundering.

A broad enforcement of FATF's travel rule in particular could lead to a considerable slow down in the growth of crypto-dollars, particularly the ones issued off-shore such as Tether.

Tether is once again coming under regulatory scrutiny. On July 7th, Bloomberg reported that The Financial Action Task Force (FATF) stated that stablecoins need to comply with standards to prevent against money laundering and the financing of terrorism. This would mean that exchanges, OTC desks, and the companies behind stablecoins need to create processes to
monitor transactions and be KYC compliant. A global focus on KYC compliance could put a damper on the OTC desk and arbitrage activity that has contributed to Tether’s supply growth.

Overall, this report is an absolute must-read as it highlights one of crypto's most overlooked success-story. Crypto-dollars have effectively enabled shadow banking on public blockchain rails and helped spread dollars to traders and investors all around the world.

Speaking of success, let's look at Ethereum.

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Ethereum.

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Ether (ETH) is trading at $284 USD at the time of writing, we're up +20.78% since last week and slowly lifting off the local long-term market bottom as hype is building around the project.

After being delayed yet again, Phase 0 of Ethereum 2.0 is now set to roll out in November this year and, Medalla the first multi-client test-net for ETH 2.0 is to launch in August.

As I pointed out in my last market musing, ETH the asset is well positioned for a long hold investment (not financial advice, views are my own).

First, DeFi is starting to generate an enormous amount of fees which will soon only be payable in ETH thanks to the EIP-1559 upgrade.

Source: CoinMetrics

Second, I believe ETH is currently going through a repricing event similar to what happened to DeFi tokens in the past 2-3 months.

For what it's worth, the P/E ratio of ETH (as computed by Token Terminal) is roughly a full order of magnitude smaller than Bitcoin's

Source: Token Terminal

The Ethereum network meanwhile is nearing (or surpassing) Bitcoin with regards to key metrics such as total fees or developer activity.

To be clear, I think comparing BTC to ETH is apples to oranges, Ethereum is a very different network than Bitcoin, both technically and philosophically. However, it's important to keep in mind that crypto markets are sensitive to simple metrics (such as P/E ratio) and it's undeniable that some DeFi products, which for me includes crypto-dollars and specialized crypto-dollars market places like Curve.fi are finding product market fit.

Source: Crypto Dollars - The Story So Far by Castle Island Venture

One thing to keep in mind though is the potential adverse consequences of the rise of crypto-dollars / DeFi on the health of Ethereum.

Tether (currently the asset of choice for DeFi) has been consistently ranked in the top 3 most gas-hungry projects on Ethereum since March 2020.

Source: ETH Gas Station

This has lead to a x10 increase in median gas price (72 gwei at the time of writing) since March 2020:

An exponential hike in gas price is a double-edge sword.

On the one hand it's fundamentally bullish because it reflects increasing use /interest/dev activity on Ethereum. On the other hand it is a reminder that Ethereum's most pressing issue is scalability.

Serenity cannot come soon enough.

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What I am Reading/Listening to:

The Changing World Order pt.2 by Ray Dalio

A Superior Financial System by Chris Burniske

Grant Williams Unplugged from MacroVoices podcast

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That's it for this week's analysis, see you next weekend for more market insights.

Until then,

🦊