A crash is an opportunity, not a disaster

It’s hard not to panic when you’re surrounded by extreme fear. Yet some manage to see the bigger picture and don’t allow themselves to be swayed by the current fallout in the crypto markets. Arca, a crypto hedge fund is one of those.

Arca manages $500 million in assets, and is one f the firms likely to be feeling the squeeze from the sudden and dramatic collapse of the Terra blockchain’s LUNA-powered stablecoin, UST. It also runs a Digital Assets Fund, in which LUNA is a core holding, according to the note.

Yet it sent a note out on Tuesday this week saying that it had held an ad hoc investment and risk committee meeting to discuss the situation.

This came after UST fell to a low of 63 cents and LUNA was trading at $24.60 on Monday. By Wednesday, UST was still at 63 cents, but LUNA had dramatically fallen below $1.15.

Arca’s response may come as a surprise to some, but not to all. In the note published Tuesday, Arca’s CEO Rayne Steinberg said, “After this analysis, we felt, and continue to feel, that UST will ultimately maintain its peg and a number of attractive opportunities had become available. For example, we were able to purchase UST at a significant discount to par in the DYF (Digital Yield Fund) and then deposit with FTX who were paying 100% APY (annual percentage yield) given the buyer/seller imbalance during peak fear.”

Steinberg added, “We have significant experience in distressed situations from 2008/2009 up to and including SUSHI and LEO (Bitfinex) in recent years. We welcome these opportunities to be buyers when others are fearful.”

And in a similar story, three funds of Cathie Wood’s ARK Investment Management bought a combined total of 546,579 shares of Coinbase Global (COIN). Coinbase shares were down 26.4% to $52.35 in post-market trading on Wednesday.

Although the ‘extreme fear’ meter must be going off the scale right now for crypto investors, the moves by Arca and Ark demonstrate that belief is still strong. They see it as an opportunity to buy at a discount – there are bound to be many others who think the same way. Crypto is not over, no matter what some might say.

DeFi protocol gets a global rating

In what is a first for DeFi, if not the entire crypto sector, the DeFi protocol Compound Treasury announced that it has received a credit rating of B- from S&P Global Ratings. According to Compound, this is the first time a major credit agency has issued a rating for an institutionalized DeFi protocol.

The S&P Global Ratings provides a scale of investment suitability, ranging from AAA (extremely strong) to D (in default). A score of B- indicates, “the issuer can meet financial commitments, though vulnerabilities to business, financial and economic conditions persist.”

S&P revealed that in arriving at Compund’s rating they had to consider “the uncertain regulatory regime for stablecoins, such as USDC. stablecoin-to-fiat convertibility risks and the Compound Treasury’s “limited capital base” along with a 4.00% per annum return obligation” in making the decision. However, the rating agency also said that the Compound protocol’s record of zero losses measured in USDC partially mitigates the risks of the offering.

Compound Treasury’s general manager Reid Cuming commented, “S&P’s rating helps our institutional clients more easily understand the opportunity and risks of crypto-powered cash management.” It is continuing to have discussions with S&P regarding the rating and said, “Compound Treasury’s ratings could be upgraded in the event of greater regulatory clarity for digital assets or a longer track record of solid performance.”

The Compound Treasury and its yield is supported by its underlying DeFi lending Compound protocol. To date, some 301,650 liquidity providers have deposited $6.94 billion worth of digital assets into the protocol, while 9,275 borrowers have taken out $1.83 billion worth of loans. Compound Treasury’s yield is above that of savings accounts at major US banks, however at the moment, the yield from Compound Treasury is only available to accredited investors or those meeting significant income and net worth thresholds. 

Non-custodial wallets are under threat

What is the difference between a custodial and non-custodial wallet? The prime difference between custodial and non-custodial cryptocurrency services is that the private key is managed by third parties in the former, whereas it is handled by users in the latter case.

The EU is proposing some regulatory changes regarding these wallets managed privately by users. On March 31, the European Parliament’s Committee on Economic and Monetary Affairs (ECON) approved provisions to Europe’s Transfer of Funds Regulation that restricts Virtual Asset Service Providers (VASPs) from transacting with unhosted wallets without verifying their owners’ identities beforehand. Furthermore, VASPs will be required to report all crypto transactions worth more than 1,000 EUR to relevant anti-money laundering authorities.

As Brian Armstrong, CEO of Coinbase says, “Imagine if the EU demanded your bank to report you to the authorities every time you paid your rent, simply because the transaction was over 1,000 Euros.” Armstrong also said that the regulation amounts to treating “every person who holds crypto differently from fiat.” And if you use Coinbase, or indeed any other centralized exchange, if you are being sent a transaction that is above €1,000 in value, “Coinbase will be required to collect, store, and verify information on the other party, which is not our customer, before the transfer is allowed.”

Patrick Hansen of Unstoppable Finance remarked, the upshot of such a piece of regulation would mean that transactions between non-custodial wallets and centralized exchanges “would become way more costly and burdensome” due to the data collection requirements.

Furthermore, Hansen pointed out that the databases storing names, home addresses, and other sensitive personal data would become the target of hackers and criminals, which could lead to increased incidents of hacking, phishing, and physical violence targeting crypto users. He also warned that the provisions of the regulations could have even more drastic effects in the future, namely that the EU Commission could “potentially move to impose an outright ban on transfers between VASPs and non-custodial wallets in the future.”

Fortunately, the legislation has not yet been passed, and a debate on it will start this April. Hansen is hopeful: “Individual voices from the council and commission make me optimistic that we can still achieve changes.” If the legislation does pass, cryptocurrency businesses will still have nine months to adopt plans to adopt and implement the regulation, and 18 months until they must ensure full compliance.

Fireblocks advances DeFi in capital markets

You may have noticed mentions of Fireblocks across a range of crypto-related articles. Now the crypto custody market has partnered with FIS, the Fortune 500 technology provider to banks and capital markets firms, to offer crypto services.

This deal will enable FIS’s 6,400 clients to access large crypto trading venues, liquidity providers, lending desks and decentralized finance (DeFi) applications. Who are FIS’s clients? A mixture of asset managers and hedge funds, as well as banks and brokers.

Adam Levine, Fireblocks’ Head of Corporate Strategy, said, “This is going to be a great opportunity to empower FIS’s clients to access all the weird and wonderful things of digital assets. Whether that’s holding a variety of cryptocurrencies, making payments on stablecoins, accessing lending and borrowing platforms, or accessing permissioned DeFi, which is appropriate for the regulated institutions that we’re talking about.”

It may seem like just another day, another deal. But, when you look at how regularly we are seeing similar stories in the crypto-related media, it is a clear indication that institutions are edging closer to crypto – provided the right sort of know-your-customer (KYC) is made available to them. In this case they will have been reassured by Fireblocks’ close relationship with Aave Arc to provide just this kind of support. Levine said, “FIS clients would absolutely have the opportunity to participate on Aave Arc; obviously, they will have to go through the KYC-related whitelisting process, which we don’t anticipate being a challenge.”

FIS is in a strong position as the big banks explore crypto products, even if they just dip their toes in the water with crypto derivatives. John Avery, FIS head of product for digital assets explained that since FIS is a fintech provider with 30 years of experience, they are well-placed to provide what the big banks are seeking. Avery said, “There are investors who will seek out synthetic exposure as their only means of access to crypto and digital asset investing. But for the market makers and the brokers, they will need access to the underlying physical assets.” He added, “The appetite of traditional clients to control their own wallet technology and get exposure to different types of these assets will grow over time, either for their own portfolios or to support their structured products or derivatives businesses on top.”