Carbono Insights #69 |Institutional Investment: The Force Awakens

Crypto unexpectedly gained support from two unlikely allies last week: Federal Reserve Chairman Jerome Powell and investment firm BlackRock. This development has opened the doors to increased institutional interest in the crypto market, sparking a renewed sense of optimism. Following months of a slight downward price trend, major cryptocurrencies, led by bitcoin, have experienced a resurgence.

Powell, whose statements are closely analyzed by analysts for predictive insights, expressed that bitcoin has “staying power.” Meanwhile, BlackRock surprised the market by filing for a spot bitcoin ETF, prompting a flurry of similar filings from competitors.

These institutional developments were not the only news in the sector. Deutsche Bank applied for a crypto custody license, and EDX, a crypto exchange supported by Citadel Securities, Fidelity, and Schwab, commenced its operations. More details regarding these events and their implications are discussed below.

Confidence in the crypto market is reciprocated as well. Circle, after withdrawing funds prior to the US debt ceiling agreement, has resumed purchasing US Treasuries. Simultaneously, MakerDAO has allocated an additional $700 million to their treasury holdings as part of their Real World Asset Strategy.

Further details about these topics are discussed below. Stay engaged and informed.

1. ETFs | Blackrock opens the ETF floodgates

In an unexpected turn, BlackRock filed for a spot bitcoin ETF. This move comes at a time when the US government is actively targeting the crypto industry. BlackRock, the world’s largest investment fund with approximately $10 trillion in assets under management, aims to introduce an investment vehicle that allows institutional investors to gain exposure to BTC without owning or trading the cryptocurrency.

Although the SEC has previously rejected similar proposals, several factors suggest that this time might be different:

• BlackRock boasts a commendable track record, having filed for 577 ETFs in the past with only one rejection. Their reputation and extensive network raise questions about potential insider knowledge.
• The SEC will soon be forced to provide explicit, official legal opinions on critical issues that could impact ETF viability. Ongoing lawsuits involving Ripple, Coinbase, and Grayscale prompt speculation about whether BlackRock possesses advanced knowledge of these outcomes.
• Most significantly, BlackRock’s filing proposes a solution to a major concern voiced by the SEC in previous ETF requests: the risk of market manipulation. BlackRock suggests utilizing Nasdaq software to monitor spot markets for wash sales, market manipulation, and other integrity-related measures.

BlackRock’s move has spurred other firms into action. Given the significant advantage of being a first mover in the ETF space, several giants have filed or refiled ETF proposals, including Invesco, Wisdom Tree, and Valkyrie, among others. While the ETF filing has injected hope into a somewhat stagnant ecosystem, its impact on crypto demand remains uncertain.

2. Institutions | A good-boy centralized exchange

EDX, a centralized exchange with backing from financial giants such as Fidelity, Schwab, Paradigm, Sequoia Capital, and Citadel, recently started offering services. EDX is non-custodial. As a platform facilitating trade price agreements between counterparties, EDX does not hold customer assets or settle trades, making it more compliant-friendly. Mishandling custodied funds has been the root cause of notable fraud cases in the crypto industry, such as FTX.

According to Bloomberg, EDX plans to introduce a clearinghouse later this year to facilitate trade settlements. However, even then, they’ll count on third-party banks, and a crypto custodian will hold customer assets. This move aims to address issues raised in the SEC’s lawsuit against Coinbase, particularly the operation of an unregistered clearinghouse.

These traditional finance (TradFi) giants have found a way to enter the centralized exchange business while circumventing friction points.

3. Binance | Binance to launch an OP Stackç-based L2

Binance is preparing to launch opBNB, an Ethereum Virtual Machine (EVM) compatible rollup, to complement their existing zero-knowledge experiment. This introduction is expected to improve throughput and reduce transaction costs for its centralized exchange customers. Additionally, it enables seamless application deployment between the Binance and Ethereum ecosystems.

opBNB will utilize Optimism’s OP Stack but as a closed-garden initiative. Transaction costs, for example, will be paid in $BNB. While Optimism as an ecosystem may not directly benefit from this integration, it serves as another compelling use case for their OP Stack. Other notable partnerships involving the OP stack include Coinbase’s Base L2, Andreessen Horowitz’s upcoming L2 plans, and Worldcoin’s blockchain.

4. Real World Assets | Circle and Maker believe again

Although institutional interest in crypto is on the rise, traditional investment avenues still offer stronger yields. Given the current context of potentially rising interest rates before the year’s end, there is more profit potential in conventional financial instruments than in the exuberance of DeFi.

Circle and MakerDAO recognize this reality. Circle, having withdrawn its investment in US Treasuries managed by BlackRock during uncertain US government debt ceiling negotiations, has resumed purchasing these assets. Meanwhile, MakerDAO has decided to replenish its Real World Asset (RWA) vault with $700 million worth of US Treasury bonds to back its stablecoin DAI.

MakerDAO’s move is notable considering their mid-term roadmap, known as the Endgame plan, which emphasizes reducing reliance on centralized powers and the presence of centralized stablecoins like USDC as collateral for DAI.

5. Bitcoin | Join the party?

Surprisingly, bitcoin has become the epicenter of crypto’s excitement. These days it looks like a time machine, taking us back to the early moments when developers explored additional functionalities for blockchain technology. After years of Ethereum’s development and market validation, bitcoin is now mirroring smart contract blockchains by introducing rudimentary NFTs, layer 2 solutions, and tokens.

For a comprehensive introduction to these developments, crypto founder and educator Zeneca has published two insightful pieces on Bitcoin Ordinals.

On Bitcoin Ordinals Part 1 and Part 2

These articles provide a 20-minute overview of the current happenings in the crypto world.

6. Auditing | To security and beyond

We have introduced the concept of smart contract audits and their general nature. Now, for the inquisitive readers, we present a finished product. Audita’s report on Botto’s smart contracts is now available for download in Botto’s Docs.

The manual audit identified two medium and five low code vulnerabilities, with no critical or high-level issues. Additionally, the report highlighted areas for improvement in documentation, code quality, gas optimization, and general project enhancements.

Manual audits, unlike automated or freelance assessments, provide detailed insights that extend beyond security, taking a collaborative approach to projects.