The Breakdown - The Institutions Aren’t Just Sticking With Crypto, They’re Expanding Their Offerings

Episode Date: October 22, 2022

This episode is sponsored by Nexo.io, Circle and FTX US.   On today’s episode, NLW gives the latest in his recurrent theme on “post-narrative institutionalization” – the idea that during the 2022 bear market institutional actors have not only not abandoned the crypto industry but increased their stake with a look forward to the next bull run.  - Nexo Pro allows you to trade on the spot and futures markets with a 50% discount on fees. You always get the best possible prices from all the available liquidity sources and can earn interest or borrow funds as you wait for your next trade. Get started today on pro.nexo.io. - Circle, the sole issuer of the trusted and reliable stablecoin USDC, is our sponsor for today’s show. USDC is a fast, cost-effective solution for global payments at internet speeds. Learn how businesses are taking advantage of these opportunities at Circle’s USDC Hub for Businesses. - FTX US is the safe, regulated way to buy Bitcoin, ETH, SOL and other digital assets. Trade crypto with up to 85% lower fees than top competitors and trade ETH and SOL NFTs with no gas fees and subsidized gas on withdrawals. Sign up at FTX.US today. - “The Breakdown” is written, produced by and features Nathaniel Whittemore aka NLW, with today’s editing by Eleanor Pahl and research by Scott Hill. Jared Schwartz is our executive producer and our theme music is “Countdown” by Neon Beach. Music behind our sponsors today is “War” by Enoch Yang and “The Life We Had” by Moments. Image credit: Malte Mueller/Getty Images, modified by CoinDesk. Join the discussion at discord.gg/VrKRrfKCz8.

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexus.com, and FTCS, and produced and distributed by CoinDes. What's going on, guys? It is Friday, October 21st, and today we are talking as we so often have this bare market about post-narrative institutionalization. Before we dive into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the breakers discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. Also a disclosure, as always, in addition to them being a sponsor of the show,

I also work with FTX. All right, so as I said, today, we're catching up on one of my favorite themes post-narrative institutionalization. And if it feels to you at this point like I'm trying to make this meme, you are at least a little right. In all seriousness, I think this is one of the key hallmarks of this spare market, that not only are we not seeing some mass exodus and brain drain, but that in fact, the institutions that started learning and circling around the edges during the last bull run, by and large, have stuck around. In fact, many have deepened their engagement prepping for an inevitable return to focus on this space. And of course, doing so while taking advantage of the relative quiet. This is not about some big press push where institutions

are trying to look cool by being ahead of the curve. It is, in fact, instead, just actual business units planning ahead. Stories confirm this over and over and over, so let's look today at some of the latest. On Monday, brokerage firm Bernstein said that despite it being crypto-winter, the firms that showed up during the 2020 and 21 bull market continue to invest. A few notes from that report. First, investors who were ambivalent about digital assets even up to late last year have delayed plans. If by the second time around that Bitcoin had hit 60,000, you still weren't ready to jump, you may not be ready to jump now yet either. However, the report also suggests that the quote-unquote crypto converts, who started experimenting

back in that bull market, have stayed involved. Private market investors continue to look for opportunities, although they are, quote, way more valuation sensitive. Many large asset managers are continuing to build their digital asset strategy, with an I-2, quote, actual direct digital asset allocations 12 to 18 months down the line. The authors of the report wrote, quote, this is probably the most encouraging part of the institutional adoption cycle, while recognizing that the actual impact on the market is probably 12 months away.

One trend during this time has been a shift away from liquid token strategies and towards venture capital funds that have inherently a longer time horizon. The report also suggested that many investors were surprised that Ethereum's merge to proof of stake went as smoothly as it did, although they also seemed surprised that it was a sell-the-news event, although anyone who had lived through a Bitcoin having could have told them to expect exactly that. Now, a couple of weeks ago, this same firm wrote a report about NFTs that declared them profoundly not dead. And in that, we are already in different territory than most reports about anything in crypto in 2018 and 2019. Bernstein's NFT report basically made the argument that what started out

looking like a toy to use Chris Dixon's famous parlance, is now in the process of becoming a fully transformational sector that is redefining the crypto consumer stack in terms of games, social, content, commerce, and brokerage. The report argues that NFTs are a key part of how crypto is going and will go mainstream. They noted that key collections like the board apes retain extremely high floors. They also point out that monthly active users on platforms like OpenC remains relatively stable. Finally, the report bets that there's a lot more in store, things like NFT powered games with true ownership of in-game assets and brands leveraging NFTs to sell digital goods for real-life experiences. All right, so that is one firm talking about not dead and institutions sticking around.

Let's look now at another financial institution about how they're expanding their offerings in this market. Massive asset manager fidelity is adding Ethereum trading to its product offering for institutional clients. The asset management giant has been quietly building out access to crypto for institutional clients over the past few months, adding an Ethereum index fund for accredited investors in early October, which tracks the price of Ethereum without direct holdings of the tokens, and this additional step will allow institutional clients to buy, sell, and transfer ether held in individual custodial wallets with fidelity starting from October 28th. The announcement makes the point that many have made, that the Ethereum merge has put

Ethereum in a different category for institutional investors. The announcement starts. With the Ethereum merge completed, many investors are looking at Ethereum through a new lens. Wherever you are in your exploration of Ethereum and Ether, its native token, and currently the second largest digital asset by market capitalization, Fidelity Digital Assets has the capabilities to help. Institutional Ethereum capabilities are coming to the Fidelity Digital Assets platform

on October 28, 2022. Investors will be able to buy, sell, and transfer Ether, accessing the same operational excellence, robust security, and dedicated client service model provided for Bitcoin investments today. There was a lot of hubbub before the merge, that the merge could create some significant tailwinds for ETH as related to a new class of institutional investor. This is the first example we've seen of that narrative coming to life. But let's keep moving.

Speaking at CoinDesk's Ideas Summit on Wednesday, the CEO of Investment Management giant Franklin Templeton Jenny Johnson said that she believed blockchain technology has the potential to be a massive disruptor to the traditional finance industry. She said that the firm's 75-year legacy is in part due to their openness to adapting its business to new technologies. She said, we have to be in the space. It's a complicated space, and we probably won't see the payouts in the space for five plus years, but you have to understand it to ensure that you're developing products that makes sense. Franklin Templeton, which holds more than $1.4 trillion in assets under management, began offering two crypto-focused separately managed accounts this quarter. These allow

financial advisors to easily make allocations to crypto assets on behalf of their clients. Johnson said she had seen a, quote, tremendous amount of interest in crypto from financial advisors, but also hesitancy around ensuring that clients can enter the asset class responsibly. It's really difficult, she said, for a person who sits outside of the ecosystem to understand how to enter it. She also cited ESG concerns, saying one of the most difficult things for an investor who's trying to have a portfolio that takes into consideration those environmental, social, and governance factors is that they don't have great data. Now, partially she was talking about this in terms of mining, which is obviously something that the Ethereum merge changes the narrative of, at least around that asset, but she also explained

that she believed blockchains could be used to improve the quality of data around ESG. Now, at a different event, the Walmart CTO also weighed in on crypto, saying he thinks it sits in the middle of three key areas of technological disruption, product discovery, payment, and delivery. In comments at Yahoo Finance's All-Market Summit on Tuesday, Walmart CTO Suresh Kumar said that Walmart is keenly aware of technological trends in the retail sector and is monitoring how Web3 will change the consumer experience. I have talked before, he said, about the way in which customers are getting inspired in discovering products. That is changing, and part of that is going to happen in the Metaverse. The retail giant is also looking to adapt to customers'

demands for crypto payment rails. I think a lot of the disruption is going to start happening in terms of different payment methods, he said, different payment options. Crypto is going to continue to play a very important role in that. Going on, he said, crypto will become an important part of how customers transact. We want to make sure that we make it as friction-free for customers to be able to transact and to be able to buy, and how they are able to derive value out of it. Now, this is not the first time that we've seen Walmart take an interest in crypto. Two board members also serve on the boards of crypto companies, blockchain.com, and consensus, and in 2021, the company filed seven patents related to NFTs and the Metaverse.

Now, Walmart's interest in this space seems pretty broad, but he's also definitely got a focus on retail in the Metaverse, which, while related, is kind of its own thing. There was a hilarious quote from Congos who wrote Walmart making a Metaverse play makes sense. Ever walked around one at 3 a.m? It's surreal. Want to keep more profits when trading? Get the best possible prices and trade with 50% lower fees on Nexo Pro. The new Spot and Futures trading platform uses aggregated liquidity of over 3,000 order books collected from multiple sources. Utilizing the complete Nexo Suite allows you to earn interest and borrow funds as you wait for the next trade setup.

Visit pro.nexo.io. That's p.r.0.n-Xo.io and sign up today. This episode is brought to you by Circle, the sole issuer of USDC, and a leader in crypto that's held to a higher standard. USDC is a fast, safe, and efficient way to send money around the globe. USDC is always redeemable one-to-one for U.S. dollars and has over $45 billion in circulation as of October 13, 2022. Plus, Circle posts weekly reserve reports and monthly attestations of reserve capital, letting users know that USDA is safe, transparent, and compliant with regulations. Just go to circle.com backslash transparency to see why USDC is a trusted stable coin.

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Download the FTCX app today and use referral code breakdown to support the show. But let's take a quick detour into Metaverse land for a moment. A couple little bits of interesting news around Meta, aka Facebook. First, they've joined the multi-party computation alliance, which is a cryptographic privacy and Security Group. The MPC Alliance includes giants like Alibaba and Bosch, as well as a cohort of blockchain companies including Bolt Labs, Cipher Mode Labs, and Partesia blockchain. This week saw an influx of 34 new members, bringing the alliance up to 59 companies in total. Even more interesting to me on the meta or Facebook side was news out of the EU that they're already concerned about that

company in the context of antitrust issues in the Metaverse. In a blog post published on Monday, the European Union's antitrust authority expressed concerns over the potential that meta could limit users' choices and raise prices if they grow to dominate the market. The EU is preparing its own vision of the metaverse where people can interact, socialize, and trade like avatars. It likely sees the digital social space as another battleground in its long-running antitrust campaign against tech giants, which it views as threatening its consumer's welfare. While the blog post didn't mention meta specifically or their Metaverse Horizon world, it was focused on ensuring that competition law extended into digital products. It expressed

concern that large companies could design metaverses as walled gardens, which users can't easily leave, and said that large companies could, quote, constrain their consumers, business partners, and competitors in numerous ways. This includes forcing them to buy products directly, charging exorbitant prices, or misusing people's personal information. Obviously, the EU has been extremely active in antitrust claims against big tech in recent years. In September, they levied and then successfully defended in court one of the largest antitrust fines in history. That was a 4.1 billion euro fine against Google for effectively forcing Android phones to pre-install Google search app. The EU also passed legislation called the Digital Markets Act, which could see companies like Apple

and Amazon fined up to 20% of their annual revenue for pursuing anti-competitive digital market practices. The blog post said, quote, there are good reasons for competition law enforcers on both sides of the Atlantic to be actively accompanying technological and market evolutions in this area, and called for more discussions with the U.S. Department of Justice and Federal Trade Commission. Earlier this month, UK lawmaker Matt Hancock shared a similar opinion when speaking with CoinDesk. He said meta is in danger of becoming the AOL of Web 3. I'd love Web 3 to be able to go back to a much more vibrant and diverse range of players. The EU antitrust office has said it will publish a full paper on digital world's next spring.

All right, so that is all fascinating, but kind of infringing on our main topic. So back to the post-narrative institutionalization. and actually let's talk about Tesla, which was one of the absolute centerpieces of the narrative phase of institutionalization. From Elon's teasing in retrospect it was inevitable in late 2020, to Tesla's big Bitcoin buy which sent Bitcoin into the 60,000s in February 2021, to their heartbreaking and sort of confusing pullback a couple months later over environmental concerns. Now, one of the things about that pullback is that Tesla just stopped accepting Bitcoin for their vehicles, but said that they weren't selling.

However, of course, this year they did end up actually selling Bitcoin. In the second quarter, Tesla sold 75% of its Bitcoin holdings, around 936 million worth in order to raise cash. Musk said at the time that the sale should not be taken as some verdict on Bitcoin, and yet there were a million obvious headlines basically doing exactly that. The point that I made then is that Bitcoin being able to be sold, when it's necessary and useful for a company to sell it, is something that recommends it as a balance sheet asset, not some knock-on. it. Part of the reason that it's so much more interesting to dynamic companies than something like gold is that you actually can sell it and find liquidity and get to cash quickly. Either way, people were really interested this week to see if Tesla would report selling any more of their BTC during Q3. When all was said done, for the third quarter, Tesla retained the remainder of their Bitcoin at around $218 million in value. All in all, that's not really what people

were focused on, as Elon set a very high bar for end-of-the-year performance. He said, we're looking forward to a record-breaking Q4. Knock-on-wood, it looks like we'll have an epic end of the year. He also had this gem, saying, I see a potential path for Tesla to be worth more than Apple and Saudi Aramco combined. Now, that doesn't mean it will happen or that it'll be easy. In fact, I think it will be very difficult and require a lot of work, some very creative new products, mass expansion, and always luck. Looking to other parts of the world, New Bank, the largest Brazilian digital bank by market value, has unveiled plans to release a token in Brazil, Colombia, and Mexico. The token called Newcoin will be available for the bank's 70 million users in the first half of next year.

It will be freely distributed and used to offer discounts and perks. The general manager at Newcoin said in a statement, We are opening a door to the future. Newcoin is a way to recognize customer loyalty and encourage engagement with Newbank products. The project is another step ahead in our belief in the transformative potential of blockchain technology, and to democratize it even more going beyond the purchase, sale and maintenance of cryptocurrencies in the new app. New Bank released its crypto trading platform in Brazil and June and reached one to million users the next month. Now, so far, this seems more like a loyalty token than what we think of

as a crypto now, but it's still notable as another global financial institution that's getting into this game. Finally, some interesting comments around where the future access points to the industry will be. Speaking at the Blockworks Digital Assets Summit in London on Tuesday, Fidelity Digital Asset Management head, Chris Tierer noted the banks have come around to crypto in the last year. He went so far, in fact, to say that banks could provide, quote, the future access points for crypto markets. He said that although there is a growing demand for access to crypto among clients, banks will need to see more regulatory clarity before they can confidently move into the industry. He noted that conversations about the asset class have become much more sophisticated over the last year, saying,

people have sort of realized what this technology enables, where it's going and what the future state is, and are much clearer about the direction of travel to get there. I think that, in and of itself, has sort of solidified the investment thesis, and there's been a groundswell of demand coming through the banks from their traditional client basis as well. Alexei Demienov, a managing director at Bank of America, speaking on the same panel said, As much the whole idea is to remove trust in a central party or trust in an intermediary, it is efficient, convenient, and safe to add a next relationship with the same institution. Previn Singh, the head of Credit Suisse's distributed ledger technology center of competency,

noted that some of the regulatory structures and practices from traditional finance could strengthen the crypto industry as the lines between the two become increasingly blurred. Quote, I think there's a slightly cartoonish picture painted in regards to competition, where it's Trad V-Fi versus Defi, and never the two shall meet. I'm really starting to think that it will never be the case. There's the best of both worlds you can use. Rita Martins had of FinTech Partnerships at HSBC said, until there is regulation, I think many of the big banks will probably not touch it.

But there are other areas around this space that we can definitely be looking at and that we are looking at. Now, all of this brings up a question of who should be the access points to crypto. Should it be new crypto-native institutions? Should it be financial institutions that have come into the space? should it be permissionless protocols that don't have any sort of institution behind them? Or should it just be the market that gets to decide? These are some of the biggest questions, especially as relates to the regulatory discussion right now, and something I'm sure we'll be covering over the weeks and months to come.

For now, once again, post-narrative institutionalization is one of the clear hallmarks of this bear market, and I am not going to stop beating that drum. I want to say thanks again to my sponsors, Next.org, www, circle, and FTX. And thanks to you guys for listening. Until tomorrow, be safe and take care of each other. Peace.