Monochrome Monthly Recap | October - November 2022

BINANCE AND FTX: A Summary of Events

On 2 November, it was reported that Alameda Research’s balance sheet was largely illiquid. This catalysed the chain of events to come, since Alameda Research is one of the two businesses of Sam Bankman-Fried, the founder of crypto-asset exchange FTX. It was noted that Alameda Research’s single largest asset on their balance sheet was FTT tokens, which comprised US$3.66 billion of the $14.6 billion of assets on Alameda Research’s balance sheet. FTT is a governance token issued by FTX. This revelation exposed how close the two of Sam Bankman-Fried’s businesses were. Further, it highlighted that the balance sheet of Alameda Research was being bolstered by a token that its sister company minted.

This potential conflict of interest was publicly highlighted which prompted a mass sell off of the FTT token. Over the following days, the value of FTT tokens plummeted, triggering fears of a liquidity crisis.

A week later, on 9 November, competing crypto-asset exchange Binance agreed, in principle and subject to due diligence, to buy FTX. This announcement was confirmed by the CEOs of both FTX and Binance. Sam Bankman-Fried, the founder of FTX, tweeted the following statement:

“Things have come full circle, and FTX.com’s first, and last, investors are the same: we have come to an agreement on a strategic transaction with Binance for FTX.com (pending DD etc.)” - Sam Bankman-Fried, founder and CEO of FTX.

The following day however, in light of its due diligence, Binance announced it would not acquire FTX. The following statement was issued by a spokesperson of Binance:

“As a result of corporate due diligence, as well as the latest news reports regarding mishandled customer funds and alleged U.S. agency investigations, we have decided that we will not pursue the potential acquisition of FTX.com” - a spokesperson of Binance.

The end result of these events was that FTX customers were effectively stranded, as FTX had paused customer withdrawals in the fear of a potential bank run.

These recent events again raise the critical issue of investor protections. Paused customer withdrawals have been a common theme amidst the 2022 bear market, with prominent crypto-asset institutions Celsius Network, Voyager Digital, and now FTX all pausing customer withdrawals at the first sign of financial distress. It will be interesting to observe how upcoming crypto-asset exchange regulations evolve as a result of these events, and how they will impact investors, exchange operators and regulators.

Many people are unable to retrieve savings from the FTX exchange with speculation that it will take years for legal process to retrieve assets at cents on the dollar.

AUSTRALIAN REGULATORY UPDATE: Crypto-assets Mentioned for the First Time in Australia’s Budget

On 25 October, the Australian Government released its national budget for 2022-23. This national budget was notable since it marked the first time that crypto-assets have ever been mentioned in the national budget. This budget provided further clarification regarding the tax treatment of crypto-assets in Australia, clarifying that digital assets would be categorised as an asset class, rather than foreign currency.

The fact that crypto-assets have been mentioned in national budget papers is significant as it shows the increasing prominence of this asset class. This sentiment was echoed by Michael Bacina, partner at law firm Piper Alderman, who noted this recognition from the Australian Government was a ‘sign of the rising adoption of cryptocurrency.’

Rishi Sunak Becomes Newest UK Prime Minister; UK Stablecoin Rules Approved by Lawmaker Committee

On 24 October, it was announced that Rishi Sunak had been chosen to become the United Kingdom’s newest leader of the Conservative Party, and therefore Prime Minister, following the resignation of Liz Truss the week prior. During his time as Finance Minister under the Prime Ministership of Boris Johnson, Sunak announced his intention to turn the UK into a crypto-asset hub. As such, his ascension to the office of Prime Minister could potentially be positive news for the crypto-asset world. This news was coupled with additional news from the UK stipulating that domestic lawmakers had agreed on new rules for stablecoins on 27 October.

During his time as Finance Minister, Sunak was involved in various developments within the crypto-asset industry. For instance, he helped to introduce the Financial Services and Markets Bill, which if passed into law, would provide local regulators power over the crypto-asset industry. Furthermore, during his time as Finance Minister, the Royal Mint, which is the UK’s coin producer, was tasked with creating a non-fungible token (NFT) collection.

Conversely, with regards to stablecoin regulations, the UK has opted to take a cautious approach, and begin with the most stable and least volatile tokens. The recently appointed Economic Secretary to the Treasury, Andrew Griffith, had this to say regarding the new rules for stablecoins:

“We wish to tentatively seize those opportunities … not fall behind other markets, but also proceeded in a cautious way” - Andrew Griffith, Economic Secretary to the Treasury.

The newly enacted bill also gives the UK Treasury powers to extend the regulatory net beyond stablecoins, given appropriate permission. As such, developments are expected to continue in this dynamically evolving situation.

Reserve Bank of India to Begin Wholesale Central Bank Digital Currency Pilot on 1 November

On 31 October, the Reserve Bank of India (RBI) announced its intention to introduce a pilot wholesale central bank digital currency (CBDC) on 1 November, and to introduce a retail version within the next month. The CBDC will be known as the “digital rupee”, and in a statement issued by the RBI, the use case for the digital rupee will be the “settlement of secondary market transactions in government securities” because they will reduce transaction costs.

The RBI’s announcement comes amid a recent surge in central banks announcing their intentions to develop CBDCs. Most notably, the Reserve Bank of Australia is scheduled to complete a CBDC pilot by mid-2023, and the central banks of Israel, Norway and Sweden are currently collaborating to explore the potential of retail CBDCs.

With regards to the RBI’s pilot CBDC project, nine prominent Indian banks have been identified for participation. Additionally, considering that India will take over the G-20 group presidency from 1 December 2022 to 30 November 2023, the country will have the opportunity to have strong influence in framing global crypto-asset regulations within this period.

In terms of the difference between wholesale and retail CBDCs, wholesale CBDCs are primarily utilised by financial institutions such as banks to conduct interbank transactions such as cross-currency payments. Conversely, retail CBDCs are utilised by the general populace to conduct everyday transactions.

The RBI has shown strong commitment to the pilot project, and is confident that the project will bolster India’s digital economy. Regarding this, the RBI stated that the digital rupee system will:

“Bolster India’s digital economy, enhance financial inclusion, and make the monetary and payment systems more efficient” - Reserve Bank of India.

Considering that the pilot project launched on 1 November this year, it will be interesting to observe how the project performs, and how this will influence India’s stance on crypto-assets in the short-to-medium term.

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