Digital asset diaries: February 2024

The month in brief

Cryptoasset markets have entered an exceptionally exuberant period, with Bitcoin around all-time highs and US ETF performance having exceeded wildest expectations ($8.6 billion inflows in 8 weeks vs pre-launch forecasts of $14 billion in the first year). Despite this, the UK remains cautious about cryptoasset ETFs in the retail consumer context.

Indicators suggest this is beginning to filter through into corporate earnings, with Coinbase delivering a Q4 2023 earnings beat, reporting total revenue of $953.8M, of which $492.5M from consumer crypto; and Robinhood also publishing Q4 2023 crypto figures, up 10% at $43M.

Improved Q4 performance lines up with an October 2023 turnaround point for markets, supported by a switch to net inflow of new stablecoin capital and four consecutive months of spot trading volume increase, reaching $1.4T in the first month of the year. Given an even stronger Q1 for markets, we should expect to see further positive trend in the coming months.

In other news, Ethereum (asset: ETH) is once more in the spotlight amidst speculation of becoming the next cryptoasset to be approved for ETF, and an upcoming batch of network upgrades, notably to further lower fees on Ethereum L2s (‘side streets’ for the congested main Ethereum network).

Chainalysis also released its 2024 Crypto Crime report: headline figures were down, with a large proportion labelled to broad-based sanctions.

From the market

• London-headquartered cryptocurrency payments platform Baanx has raised a $20M Series A round: its focus will be on payments and expansion to US/Latam markets.
• Fintech Revolut is beta testing a new standalone cryptoasset exchange catering to more advanced traders, with lower fees.
• Robinhood and Revolut have announced partnerships with crypto wallet Metamask: this will allow Metamask wallet users to purchase crypto to their wallet through the fintechs’ order engines.
• Coinbase will offer ‘smart’ and ‘embedded’ non-custodial wallets aimed at abstracting away the complexities of self-custody; amidst increased trading volumes and demand on its infrastructure, the exchange also suffered a series of outages, flash crashes & customer balance issues.

In the UK

• Following its previous work in the area, the UK Law Commission has officially proposed draft legislation to recognise cryptoassets as a third category of legal property. 
• At the same time, bolstered cryptoasset seizure, confiscation and civil recovery powers arising out of the Economic Crime and Corporate Transparency Act 2023 will enter into force in April 2024.
• The Department for Science, Innovation and Technology has released its map of UK innovation clusters, including for the cryptocurrency economy. The UK cryptocurrency economy is currently reckoned to have a total turnover of £84.1 billion from 1252 companies receiving £7.1 billion in investment funding.
• Comparison website Finder has updated its UK cryptocurrency ownership stats to 11% of UK adults for 2024. This is reportedly up from 3% in 2018, and compares against the figure of 10% reported by YouGov last month.

Regulatory and operational

• The UK Financial Conduct Authority (FCA) had a busy month, issuing a number of finproms data reports (here, here and here) summarising its enforcement against finproms breaches, with a notable focus on the cryptoasset sector.
• This has included: 450 consumer alerts (illegal cryptoasset finproms) issued between 8 October and 31 December 2023; 35 apps removed from App Stores at regulator request; and a number of individual enforcement actions (full overview here).
• Public FCA communications over the last month again suggest that actions will be concerned less with the potential fines and prison time that had made headlines at launch, but rather a less overt strategy focused on applying pressure at the operational touchpoints (app stores, interactions with regulated UK businesses through e.g. on/off ramps or banking services) to quietly push non-compliant providers out of the UK marketplace.
• The FCA has also made updates to its cryptoasset firm registration pages, including a formalised process for firms to request a pre-application meeting. In the meantime, successful registration rates remain remarkably static at around 14% of applicants per the updated March data.

Upcoming

• Following the Spring Budget, the UK Government has confirmed its intention to implement the OECD’s Crypto-Asset Reporting Framework (CARF). CARF places a burden on reporting Cryptoasset Service Providers (RCASPs) to collect details on cryptoasset users and transactions, and report this data to tax authorities. The consultation is open now, with an implementation window of 2026/7. 
• Speaking to the implementation of Phase 1 of the future financial services regulatory regime for cryptoassets, City Minister Bim Afolami stated a Government commitment to a timeframe of 6 months. This marks the beginning of the shift away from the FCA cryptoasset registration regime and onto full FCA authorisation with the cross-cutting rules this brings.
• The EU’s MiCA framework for cryptoassets also enters into force this year: June 2024 for the stablecoin-focused part, and December 2024 for the rest. 
• A 2023 global policy review and 2024 calendar can be found here.

Sustainability in cryptoassets

• CCData released its latest ESG analysis for its benchmarked cryptoassets – 88% of the index’s total electricity demand is attributed to Bitcoin.
• 7RCC and Tidal Investments have a pending SEC filing for a ‘climate-conscious’ Bitcoin ETF combining Bitcoin holdings with carbon credit futures contracts.
• The US Energy Information Administration (EIA) has paused an initiative to collect data from US Bitcoin mining companies following successful legal challenge; the agency will now need to go through the standard notice and comment process.

As the digital asset landscape evolves, stakeholders will need to stay informed and adapt to changing market conditions and regulatory requirements. With innovation driving the industry forward, collaboration and compliance will be key to unlocking the full potential of cryptoassets in the global economy.