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“Please don’t trade on leverage if you don’t understand the risks.”

That’s what Kraken’s Jesse Powell said to one user upset in the aftermath of a significant price decline on the crypto exchange’s ETH/USD market. On Monday, as crypto markets whipsawed, the price of ETH on Kraken sharply fell to $700 — dislocating from the broader market. As previously reported, Coinbase’s low for ETH at that time was just above $1,500.

Powell later took to Twitter and the broader press to explain that the move was caused by extreme selling, not a malfunction of the exchange’s trading engine. 

“We’re in the process of investigating,” Powell told Bloomberg News. “There doesn’t seem to be any evidence of a trading-engine malfunction. It seems like trades process accurately.”

The response to questions about a trade engine glitch followed a Twitter post from Coin Metrics data analyst Kevin Lu, prompting pushback from Powell.

In one exchange on Twitter, Powell was more blunt, asking: “How do you define ‘fair’? The system worked as intended. Everyone knew the rules up front. What more can you ask for?”

Indeed, the recent bout of volatility impacted a wide swath of traders, according to the available market data. As bitcoin fell below $48,000 earlier in Tuesday’s trading session, nearly $6 billion in crypto futures positions were liquidated. 

© 2021 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

After remaining at a discount for months, the exchange rate of USDT to Renminbi (RMB) has flipped to a premium compared to the foreign exchange rate for U.S. dollars. 

Industry players say the flip is indicative of a near-term USDT shortage as bitcoin’s price briefly fell below $47,000 on Tuesday and over $5 billion in crypto derivatives positions were liquidated in the past 24 hours.

Crypto over-the-counter traders on major exchanges that cater to Chinese investors, including Huobi, OKEx and Binance — as well as second-tier venues like Gate.io — are now quoting bids and asks for USDT at around 6.59 yuan per unit, based on real-time data seen by The Block.

Meanwhile, the onshore foreign exchange rate for 1 USD is centered around 6.45 yuan, according to data from major Chinese commercial banks. This means that USDT is trading at OTC desks in China at a more than 2% premium, having grown from 0.3% on Monday morning China time.

To put it in context, the USDT-to-yuan rate had been trading at as much as a 2% discount for months prior to the Lunar New Year in early February.

One factor that may have contributed to the flip is heightened demand from Chinese buyers, especially those who are not crypto-native. These buyers entered the market following the bull run during 2020 that was primarily driven by U.S institutional investors, said Flex Yang, co-founder and CEO of crypto lender Babel Finance. 

“Chinese investors have since then been racing to find channels to purchase bitcoin …. resulting in higher demand [for USDT] on the OTC market,” he said.

Ever since the People’s Bank of China banned domestic companies from operating centralized order books for yuan-to-crypto trading in 2017, OTC merchants have become the only way for China-based investors to cash in or out in order to participate in crypto-to-crypto trading.

Taking a step back, Annabelle Huang, partner at Hong Kong-based trading firm Amber, said the “markets typically see some seasonality of USDT/CNY trading at a discount over the Chinese New Year holiday given repatriation of yuan back over the festive season.”

While her firm hasn’t “observed any strong buying flows or anything significant per se that drove the recent flip into premium,” she said that “historically the pair exhibited the correlation where USDT would trade at a premium when BTC drops, either on the back of collateral top-up or dip-buying perhaps.”

“[Bitcoin perpetual contracts] funding rate has stayed quite elevated and we remain cautious on BTC and ETH in the short term,” she added. “Pullback triggered by long-liquidation should not be surprising, which we are witnessing.”

The BTC funding rate is a fee adjusted every several hours on exchanges to balance the supply and demand between perpetual long and short positions.

When the contracts change hands above bitcoin’s spot prices, the funding rate will be positive as a fee that long holders pay to short holders. If the contracts trade below bitcoin’s spot prices, the funding rates will be negative and short holders will pay the opposite. The higher the funding rate is, the more leveraged the market tends to be. 

Indeed, just days prior to bitcoin’s price surge to an all-time high above $58,000 over the weekend, the 7-day moving average of BTC funding rates in annualized terms reached as much as 117% on some exchanges, based on The Block’s Dashboard.

Yang argued that the crypto market has become overbought with “arbitrage opportunities everywhere” and thus resulting in significant demand for USDT.

“We anticipate a major market correction as a result of the low liquidity of both USDT and BTC and may last for 2 weeks,” Yang said.

© 2021 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

SEC commissioner Hester Peirce said Monday that federal regulators need to “provide both legal clarity and the freedom to experiment so that DeFi can compete with CeFi to offer investors financial services.”

Her comments came during a speech entitled “Atomic Trading” at a George Washington University Law School event focused on the digital economy and regulation. In what is perhaps a sign of the times, the published version of her remarks sported a pair of rocket-ship emojis. 

Peirce told The Block last September that decentralize finance — known by its acronym DeFi — will pose a challenge to federal regulators. “It’s going to challenge the way we regulate. And it’s going to cause us to ask questions about what we think the role of a regulator is in DeFi — and I’m not sure that I’ve answered that for myself yet,” she said at the time.

Tuesday’s remarks seem to indicate that her position on the subject has firmed up, with Peirce commenting that DeFi “will provide a very good test for our ability to regulate with an eye toward protecting the interests of investors and markets, not incumbents.”

She was quoted as saying:

“The anti-Wall Street sentiments coursing through the market events of recent weeks and the growing realization of the power that private and public centralized entities wield in our lives have inspired some to call for throwing the legacy financial system out entirely.  In its place, they would put decentralized finance (“DeFi”).  The nascent DeFi industry—a rapidly growing corner of the crypto world with significant money involved—is working on building an alternative to the legacy centralized financial system (“CeFi”) run through smart contracts rather than financial intermediaries.  DeFi facilitates lending, trading, and investing in crypto-assets.  DeFi users trust in smart contracts rather than counterparties.  Although a work in progress with all the growing pains and rough edges that implies, DeFi’s promises of democratization, open access, transparency, predictability, and systemic resilience are alluring.”

“We regulators, mindful of the potential upsides and downsides, need to provide both legal clarity and the freedom to experiment so that DeFi can compete with CeFi to offer investors financial services,” she went on to say.

Later in her speech, Peirce referenced calls from Robinhood CEO Vlad Tenev before Congress for advancement toward real-time settlements in the U.S. stock market. Addressing those comments, she invoked the potential for the technology that underpins digital assets to facilitate that change.

“In last week’s Congressional hearing, the CEO of Robinhood went even further and called for real-time settlement. After all, crypto transactions settle quickly and effectively without a central counterparty. Smart contracts and distributed ledger technology could make the entire clearing and settlement process in the equity markets faster and more efficient,” she said.

Ultimately, she expressed a desire for regulators to take an open-eyed approach to regulate various aspects of the digital economy, stating that the environment “does pose some new regulatory challenges, but it also gives us new tools to meet those challenges.”

“We should use those tools with genuine care for the freedom of the people we regulate.  We should welcome the new technology’s potential to improve the way markets work and to make them work for more people,” said Peirce.

Correction: A previous version of this report said that Peirce’s comments were given on Tuesday. They were given on Monday, February 22.

© 2021 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

Galaxy Digital is growing its ranks, and as part of that effort, the firm is building out a research unit that will provide resources for both in-house staffers as well as clients.

Led by Mike Novogratz, the New York-based crypto investment bank announced Tuesday that it has hired Alex Thorn, an alumnus of Fidelity Investments who led its affiliated crypto VC, Avon Ventures. 

In an interview with The Block, Thorn said that the expansion into research reflects Galaxy’s ambitions to be a full-service investment bank. On Wall Street, investment bankers — who advise clients on large transactions — also bundle research into their services. Still, Thorn said Galaxy wouldn’t be offering buy or sell ratings on different cryptos in the same way that sell-side analysts do for stocks. 

“This is going to be us sharing our viewpoint with the world,” he said.

On the internal side, it could help keep employees across the business up to date on new protocols and use cases. 

“We are going to figure out what the platform will look like,” Thorn said, adding that it won’t simply be “content marketing.” 

Galaxy’s move into research follows the launch of a mining business led by another Fidelity vet, Amanda Fabiano. 

Looking to the future, Galaxy is preparing to expand its headcount even further after a record year for its stock. 

Galaxy plans to grow its global team by 40% over the next year “with primary areas including research and client-facing personnel” across its asset management, sales, and advisory businesses. 

© 2021 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

Crypto firms Bitfinex and Tether have settled with the New York Attorney General’s (NYAG’s) office, ending a legal dispute that began in mid-2019.

As part of the settlement, Bitfinex and Tether have agreed to pay $18.5 million, according to a statement from New York Attorney General Letitia James.

In April 2019, the NYAG’s office alleged that Bitfinex used Tether’s funds to secretly cover $850 million lost to payment processor Crypto Capital. The lost funds allegedly triggered withdrawal problems for Bitfinex’s customers in late 2018.

Bitfinex at the time had said that it did not lose money. Instead, Crypto Capital’s funds had been seized by government authorities in Portugal, Poland, and the U.S. Bitfinex has been seeking to recover those funds since then.

As part of today’s settlement, Bitfinex and Tether admitted to no wrongdoing. Jason Weinstein, a partner at Steptoe & Johnson and counsel to Bitfinex and Tether, told The Block that the NYAG office’s findings are “limited only to the nature and timing of certain disclosures.”

“Contrary to online speculation, there was no finding that Tether ever issued tethers [USDT] without backing, or to manipulate crypto prices,” said Weinstein, a former federal prosecutor.

Stuart Hoegner, general counsel of Bitfinex and Tether, told The Block that the settlement amount should be viewed “as a measure of our desire to put this matter behind us and focus on our business.”

As part of the settlement agreement, Tether volunteered to provide the NYAG’s office and the public a quarterly update on USDT’s reserves backing, a recommendation with which the NYAG agreed. “We share the Attorney General’s goal of increasing transparency,” Hoegner told The Block. “We would disclose — both to the Attorney General’s Office and to the public — additional information about Tether’s reserves on a quarterly basis.”

In the settlement agreement, the NYAG’s office also acknowledged Bitfinex’s recent loan repayment to Tether. Earlier this month, Bitfinex announced that it repaid Tether the remaining loan balance of $550 million and closed the credit line.

With the settlement, the long-running legal dispute — which at one point saw lawyers from both sides sparring before a New York appeals court — comes to a close. Bitfinex and Tether say they provided more than 2.5 million pages of documentation to the NYAG’s office to close the matter.

© 2021 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

Quick Take

• CMS Holdings is a principal investment firm focused on the digital asset ecosystem founded in 2019 by Daniel Matuszewski and Bobby Cho
• The firm engages in equity deals, but to date, most of its capital has been deployed in token deals involving the tokens of DeFi protocols or the associated tokens of blockchain protocols
• In total, the firm’s active portfolio consists of at least 41 startups and protocols across seven verticals, which The Block has mapped out

This research piece is available to
members of The Block Genesis.
You can continue reading
this Genesis research on The Block.

The price of bitcoin has dipped below $48,000 from nearly $57,500 on Monday as derivatives positions worth almost $6 billion get force liquidated by crypto exchanges.

In the last 24 hours, $5.65 billion worth of open interest was liquidated by crypto exchanges, according to tracker Bybt.com. In other words, crypto exchanges liquidated traders’ overleveraged positions.

Traders overleverage, or trade on margin, thinking that bitcoin’s price would go up and they would benefit more. But when bitcoin’s price goes below the liquidation price of their positions, exchanges force liquidate or close their positions because traders cannot fulfill margin requirements of their leveraged positions.

More than 645,000 traders were liquidated in the last 24 hours, and the largest single liquidation order happened on Huobi for bitcoin, valued at $20.66 million, according to Bybt.

In terms of total liquidations across exchanges, Binance had the largest share (over $2.5 billion), followed by Huobi (around $1.40 billion) and OKEx (over $745 million). In terms of crypto assets, bitcoin positions formed most liquidations, followed by ether (ETH) and XRP.

The liquidations appear to the highest in crypto’s history. Although the past data isn’t immediately available, BitMEX’s liquidations last year provide a good sense. BitMEX, the biggest crypto futures exchange at the time, saw over $700 million worth of liquidations then.

Bitcoin is trading at around $47,900 at the time of writing, according to TradingView.

© 2021 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

TD Ameritrade’s former head of digital assets is headed to the Federal Reserve.

Sunayna Tuteja is now the central bank’s chief innovation officer, according to a LinkedIn update. Tuteja took up the role in February.

Tuteja had been at TD Ameritrade since 2014 prior to the transition. During her time there, she worked with emerging technologies, eventually as Head of Digital Assets and Digital Ledger Technology.

Tuteja headed TD Ameritrade’s dedicated crypto team. Her position built out the brokerage’s crypto offerings, building blockchain and crypto partnerships. TD Ameritrade’s crypto offerings include bitcoin futures through CME Group. It’s also an investor in crypto exchange ErisX.

Tuteja has spoken on bitcoin investment and the rise of decentralized finance, both at organized panels and on her personal platforms. She once told Blockworks that she herself is a bitcoiner, and she tweeted her admiration for the bitcoin community in December 2020.

“This is a community that keeps bouncing back every time they are written off, and bounce back stronger, having been stress tested in ways expected and unexpected,” she tweeted. 

Fed Chair Jerome Powell has taken an interest in innovation recently, saying the central bank’s work on assessing stablecoin risks is a “very high priority.” Treasury Secretary Janet Yellen also encouraged the Fed to continue looking into central bank digital currencies, since she feels many questions remain. It is unclear exactly how Tuteja’s work will impact current innovation efforts and how her role will inform Fed activity..

© 2021 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

The U.S. Senate has set a date for the confirmation hearing of Gary Gensler, President Joe Biden’s nominee to be the next chair of the Securities and Exchange Commission. 

Gensler will face the Senate Committee on Banking, Housing and Urban Affairs on March 2. The hearing will take place remotely.

Alongside Gensler will be Biden’s pick for director of the Consumer Financial Protection Bureau, Rohit Chopra. Chopra is currently a commissioner of the Federal Trade Commission.

Allison Herren Lee is serving as acting chairwoman of the U.S. securities regulator while Gensler awaits confirmation. Gensler, a former CFTC chairman, nabbed the Biden nomination in mid-January. He’s also led Biden’s transition planning for financial industry oversight since November of 2020.

Gensler’s been skeptical but interested in cryptocurrency and blockchain technology, based on past public statements. As a former professor at the MIT Sloan School of Management, Gensler served as a senior advisor to MIT Media Lab’s Digital Currency Initiative.

The hearing will be webcast at 10:00 a.m. ET. 

© 2021 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

One of the largest trading firms in the world is operating behind the scenes of a brand new exchange-traded fund in Canada. 

Evolve EBIT (EBIT) commenced trading Friday on the Toronto Stock Exchange and has since racked up $12 million in assets under management. Still, missed in many of the news stories covering the launch was information about a key partner for the fund: its designated market maker. 

Evolve picked Virtu Financial — the $5 billion publicly traded market-making firm — as its DMM. The DMM plays a big role in the launch of a new fund, supporting liquidity for the product as well as redemptions. Virtu will support large block trades in the product for institutions looking to put on large positions, according to a source.

Virtu will purchase the underlying to conduct such a block trade, leveraging Gemini’s clearing service, the source added.

The news is noteworthy, given it is the first crypto product for which Virtu is serving as a designated market maker. Although high-speed trading firms were among the first financial services firms to embrace the volatility of the crypto market, Virtu has been more conservative, avoiding dealing directly with spot bitcoin until recently. 

Fast-growing market

As for EBIT, its market debut has been dwarfed by another Canadian ETF, BTCC, which has clocked in eye-popping volumes since it began trading last week and has seen its AUM top $400 million.

As noted by Bloomberg’s Eric Balchunas, BTCC’s volumes on Friday were three times more than any other ETF and “proportionally speaking” equivalent to $5 billion in volumes for a US fund. 

Still, Balchunas said that EBIT had a healthy debut, noting in a message to The Block that “normally a new launch is lucky to be in Top 100 most traded Day One.”

“#1 by 3x over simply doesn’t happen,” he remarked.

Canada Bitcoin ETF $BTCC traded $350m (CAD+USD) today, a 40% jump from yesterday (defying typical Day Two dropoff) and 3x more than any other ETF (unreal). Proportionally speaking this is equiv to about $5b in volume in US (or about 7x more than $GBTC). Two-day aum est $330m. pic.twitter.com/jqJfQGRsnp

— Eric Balchunas (@EricBalchunas) February 19, 2021

As for Virtu’s aspirations, the firm is eying the US market for upcoming new fund products.

Although an ETF hasn’t been approved in the US, there is a long list of firms from Grayscale to VanEck to Bitwise that could enter the market should securities regulators shift their stance on whether to approve such products.

In a sense, those aspirations square with Virtu’s broader aim to bulk up its customer-facing block trading desk. The firm maintains a specialized desk that offers execution in “harder-to-trade” orders in blocks. 

© 2021 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.