Hong Kong And Financial Firms Embrace Crypto

DWS and PayPal plan new offerings while NFTs drive up Bitcoin fees

Banque du Canada

Compiled by the Oliver Wyman Forum

The sudden popularity of non-fungible tokens on the Bitcoin platform sends transaction fees soaring on the network, Germany’s largest mutual fund manager strikes a deal to offer crypto products, and the Hong Kong Monetary Authority urges banks to provide services to cryptocurrency firms. These are among the notable recent developments in the future of money.

Business Developments

Ordinals Drive Surge In Bitcoin Fees

The popularity of non-fungible tokens created on the Bitcoin blockchain using the Ordinals protocol helped drive transaction fees sharply higher in May, boosting miners’ fortunes and creating congestion on the network.

For the first time since 2017, miners earned more from processing transactions on the blockchain than what they earned in rewards for creating new coins, Coindesk reported. The average transaction fee exceeded $31 on May 8, 2023, compared with less than $2 in late April, according to BitInfoCharts.

The rise in fees is helping a mining industry that had several failures in recent months. That can be significant as the reward for mining new coins, currently 6.25 Bitcoin (about $172,000), is expected to halve in 2024 under the network’s automatic process. But those fees make it uneconomic to use the cryptocurrency for small transactions, and the associated rise in network congestion prompted crypto exchange Binance to pause withdrawals for about four hours on May 6.

DWS Partners With Galaxy To Offer Crypto ETPs

DWS, the largest German manager of retail mutual funds, has formed a strategic partnership with Galaxy Digital of the United States to offer cryptocurrency focused exchange-traded products (ETPs) to European investors.

DWS, a subsidiary of Deutsche Bank that manages 821 billion euros ($895 billion) in assets, said the partnership would help it provide “investor access to the growing blockchain and digital assets universe.” Galaxy Digital, led by former hedge fund manager Michael Novogratz, offers digital asset trading and asset management services as well as making principal investments.

Coinbase Commits To US As It Expands In Bermuda

Coinbase Global Chief Executive Brian Armstrong said on May 8 that the cryptocurrency exchange would not relocate overseas, something he had hinted at a few weeks earlier. He said he believed the firm would win a court battle to obtain clear guidance for the crypto industry from the US Securities and Exchange Commission (SEC).

In an interview with CNBC in Dubai, Armstrong said SEC Chair Gary Gensler was “a bit of an outlier” compared with jurisdictions like the European Union, which approved a new Markets jn Crypto-assets legislation in April.

Separately, Coinbase  announced on May 2 that it had opened an exchange in Bermuda to enable institutional investors to trade perpetual cryptocurrency futures. Coinbase International Exchange began trading Bitcoin and Ether futures, offering clients the ability to leverage their investment by up to five times.

PayPal Extends Crypto Transfers To Venmo Users

Payments company PayPal announced on April 28 that it would allow customers of its US payments app Venmo to transfer cryptocurrency between its platform and other wallets. PayPal introduced crypto transfers on its main platform last year. Venmo processed $245.3 billion in fiat transactions in 2022.

Bittrex Files For Bankruptcy In US

Cryptocurrency exchange Bittrex filed for bankruptcy in Delaware on May 8, with an executive saying the company “faced an untenable regulatory and economic environment” in the United States.

Bittrex previously announced it would wind down its US operations by the end of April after receiving notice that the US Securities and Exchange Commission might take legal action against the firm. The agency subsequently sued Bittrex in April for allegedly operating a national exchange in violation of US securities law. The bankruptcy filing does not affect Bittrex Global, the company’s non-US operation.

Policy Front

Canada’s Central Bank Launches CBDC Consultation

On May 8, the Bank of Canada launched a public consultation inviting Canadians to say what features they would like to see included in a central bank digital currency (CBDC) and express any concerns they might have about accessibility and privacy, the bank said in a statement.

In explaining its research on a CBDC, the central bank has previously cited the potential for a digital Canadian dollar to expand financial inclusion and to protect the currency’s role as other countries promote their own CBDCs. The online consultation will run for six weeks, and the central bank will publish a summary later this year. Any decision on whether to proceed rests with the government and parliament.

Hong Kong Urges Banks To Service Crypto Firms

The Hong Kong Monetary Authority instructed authorized institutions in the territory to provide banking services to cryptocurrency firms while adopting a risk-based approach to anti-money laundering measures.

The central bank provided the guidance in a circular issued on April 27. It follows recent moves by the authorities to provide a clear framework for digital assets businesses, including new rules for virtual asset trading platforms.

Bahamas Proposed Tighter Crypto Regulations

The Securities Commission of the Bahamas proposed tighter regulation of digital assets businesses in the wake of the collapse of the FTX exchange group.

The proposal, published on April 25, would expand regulation to a wider range of businesses, including those providing advice on or management of digital assets, and require that exchanges have systems and controls that are “adequate and appropriate for the scale and nature” of their activities. The proposal also would require registration of stablecoins and set standards for reserve assets, their custody and management, and reporting. Authorities hope the bill will be enacted into law by the end of June, The Block reported.

Biden Administration Proposes Green Tax On Crypto Mining

The administration of President Joe Biden proposed a 30% tax on the electricity used in cryptocurrency mining to minimize the industry’s impact on climate change, the White House Council of Economic Advisers announced on May 2.

Miners’ high energy consumption “has negative spillovers on the environment, quality of life, and electricity grids where these firms locate across the country,” the council said. It is far from clear that the proposal will win support in Congress.

Legal Beat

NFT Market Gets First Insider Trading Conviction

A former product manager at OpenSea, a leading exchange for non-fungible tokens (NFTs), was found guilty of wire fraud and money laundering on May 3 for what prosecutors described as insider trading, the first such conviction in the NFT market.

Prosecutors alleged that Nate Chastain bought 45 NFTs he knew would surge in value once they were posted on the OpenSea site and then sold them soon after listing for between two and five times the price he paid. Chastain’s lawyers argued that the company had no policies or guidance prohibiting employees from buying NFTs, and such rules were put in place only after his transactions became public.