New York, NY, June 14, 2023 — Digital Asset Research (DAR), a specialized provider of ‘clean’ crypto data and research, today recommends asset vetting diligence as a result of increased U.S. cryptocurrency regulatory activity and the growing number of digital assets classified as a security. As institutional market participants explore digital assets, a rigorous vetting process is essential to assess asset strength and legitimacy. By carefully evaluating an asset, institutional participants can make informed decisions and mitigate risks when interacting with this emerging asset class.

“For institutional investors, diligence on digital assets is essential because the space is still very new, largely unregulated, and complex,” said Kristen Mierzwa, Head of Digital Assets, Index Investments Group, FTSE Russell. “DAR’s asset vetting evaluations give FTSE Russell a complete asset picture, from cryptography to codebase, to inform opinions on which assets are best for our indices.”

Digital assets have emerged to become one of the most interesting asset classes with a current value in the $1 trillion range. With an ambiguous regulatory environment, institutional investors gain advantages by undergoing a rigorous asset vetting process to manage and mitigate risk. Digital assets pose unique risks due to their open-source nature, the uncertain regulatory environment, and the ever growing number of new digital assets.

In 2022 through its comprehensive vetting process, DAR identified red flags associated with Terra’s LUNA token such as its algorithmic design, a lack of transparency surrounding its governance, and potential liquidity challenges. LUNA experienced a catastrophic setback when its related UST stablecoin destabilized and lost its peg, resulting in billions of dollars in losses for many investors.

In another example, the SEC filed a complaint against Ripple, the company behind the XRP token, in December 2020, alleging that it had conducted a $1.3 billion unregistered securities offering. While the case remains ongoing, it highlights the need to examine any token’s issuance mechanism as part of understanding if it could be considered a security by regulators.

“The regulatory landscape is complicated and constantly evolving,” said Pat Clancy, Head of Digital Asset Strategy, PolySign. “We use DAR’s asset vetting to help satisfy internal compliance and external regulators, which in turn informs which assets we want to support for institutional custody.”

DAR developed six key digital asset vetting factors institutional investors should assess to understand a digital asset’s risks and potential value.

• Token Use Cases, Economics, and Supply-Demand Dynamics — Reviews a digital asset’s functionality and tokenomics to understand its use case and issuance model.
• Technology and Cryptographic Standards — Identifies underlying technology and cryptographic standards to evaluate security, scalability, and performance.
• Codebase Assessment — Assesses code and/or smart contracts against a series of digital asset industry best practices.
• Validation and Consensus Mechanism — Evaluates the asset’s consensus mechanism (such as Proof-of-Work or Proof-of-Stake) and related tradeoffs between security, decentralization, scalability, and energy efficiency.
• Regulatory Compliance — Reviews the asset’s regulatory landscape to see if it is known to operate outside acceptable boundaries.
• Network Health and Decentralization — Finds out if the asset has a healthy and decentralized network including validators, which is vital for long-term sustainability and growth potential.

DAR follows a transparent Asset Vetting Methodology to evaluate digital assets to determine if they meet institutional investor standards for codebase construction and maintenance, community, security, liquidity, and regulatory compliance.

To learn more, request an Asset Vetting Report sample for risk or investment.

Introduction

Blockchain technology has evolved significantly since the introduction of Bitcoin in 2009. The foundational premise of blockchain is the use of a decentralized ledger that enables multiple participants to reach a consensus on the outcome of events, such as transactions, without the need to rely on centralized intermediaries.

To ensure participants agree on the state of the network, blockchains use a “consensus mechanism”. Consensus mechanisms are processes followed to achieve agreement across a decentralized network while maintaining trust and security.

Bitcoin utilizes a Proof-of-Work (PoW) consensus mechanism, which relies on computational power to reach consensus, validate transactions, and secure the network. As the blockchain industry has matured, new types of consensus mechanisms emerged. The most popular consensus mechanism in recent years is Proof-of-Stake (PoS), which relies on a process called staking.

What is Proof-of-Stake?

The concept of PoS was first introduced in 2011 by Sunny King and Scott Nadal in their Peercoin whitepaper. It emerged as an alternative to the energy-intensive PoW model, which requires miners to solve complex cryptographic problems to validate transactions and secure the network.

To solve these complex problems, PoW miners need to use massive computational power. Over time, many industry participants argue that the capital expenditure and operational costs of mining Bitcoin have become a barrier for smaller players, leading to the centralization of mining pools. Additionally, PoW as a consensus mechanism also has a challenge in scaling up its transaction throughput. As a result, the majority of newer blockchain networks have decided to adopt a different consensus mechanism than PoW, with PoS being one of the most popular alternatives.

In PoS networks, miners are commonly called “validators”. Validators are responsible for the same actions that miners do in PoW networks, such as validating transactions and securing the network. However, instead of deploying computational power, validators are required to “stake” the native token associated with the underlying blockchain network that they are participating in.

How Staking Works

There are numerous implementations of PoS. At its core, PoS validators are chosen to create new blocks and validate transactions based on the number of tokens they hold and are willing to “stake” as collateral. Validators are then incentivized to do the right thing as their staked tokens can be forfeited if they act maliciously or harm the network.

Instead of risking capital in the form of mining rigs and operational costs as they would in a PoW blockchain, validators in a PoS network risk their capital in the form of the native tokens associated with the underlying blockchain.

In PoW, miners risk USD-denominated capital through operational, electricity, and hardware costs, which does not incentivize miners to keep their mining rewards. PoW miners often sell their rewards to cover expenses or to purchase more mining rigs to scale up their operations and capture market share.

In PoS, validators stake the native token of the blockchain they are validating instead of purchasing mining rigs. As a result, validators are not risking USD-denominated assets. This aligns incentives between the validators and the blockchain network while reducing the need to sell their rewards to cover expenses. The goal is to create a compounding loop that increases their market share (and consequently their rewards) if validators decide to stake their rewards.

Proponents of PoS argue that this compounding loop contributes to the safety of the consensus mechanism as validators have a vested interest in the long-term health of the network due to their staked tokens. This makes it expensive and unprofitable for attackers to compromise the network.

On the other side, those against PoS argue that implementations of PoS often add a layer of centralization. For instance, Delegated Proof-of-Stake is a version of PoS whereby stakers select delegates to validate the network, outsourcing the required work to a third-party for a small fee taken from earned staking rewards.

Yield & Energy Efficiency

There are also two additional benefits of PoS related to yield and energy efficiency.

Yield

The rewards generated from PoS networks are a substantial source of yield. Yield generated from staking and participating in a blockchain network is equivalent to a stock dividend that is automatically reinvested in the underlying equity. By contrast, in PoW systems, there is no pathway for an asset owner to receive more of the same asset by participating in the network; PoW assets such as Bitcoin require asset owners to lend out the asset in order to receive yield.

See the table below for details on staking yield on top PoS assets.

Energy Efficiency

PoW requires computational power for miners to effectively do their job. At a large enough scale, the energy consumed can be extremely significant. As the second largest digital asset by market capitalization, Ethereum was using 5.13 gigawatts on a continuing basis with PoW, or roughly equivalent to the same amount of energy consumed by 2,100 American homes. After transitioning to PoS, Ethereum is using 30,000x less energy. Ethereum.org posted data on Ethereum’s energy usage compared to estimates for various industries:

PoS Adoption

Today, many of the top digital assets by market capitalization are using PoS consensus mechanisms. Ethereum, which has more than $27 billion in Total Value Locked across its DeFi ecosystem, transitioned to PoS in September 2022. Additionally, 11 out of the top 25 digital assets by market capitalization are using PoS. See the table below for details.

Conclusion

In conclusion, PoS and staking activities are significant components of the digital asset market. The majority of top assets by market capitalization with smart contract functionality have adopted PoS in recent years. While there are ongoing discussions and improvements that can be implemented in the existing PoS landscape, PoS is currently the dominant consensus mechanism for Web3 and decentralized applications.

The Digital Asset Taxonomy System now classifies 1,594 assets, the broadest coverage on the market

London, Santa Monica, and New York, May 23, 2023 — Wilshire, a global investment technology and advisory company, and Digital Asset Research (DAR), a specialized provider of ‘clean’ digital asset data, research and insights, today announced that 123 additional assets have been classified and added to the Digital Asset Taxonomy System (DATS) as a result of its rules-based quarterly review process.

DATS now classifies 1,594 digital assets, the broadest coverage in the market, to enable traditional and digital-native financial institutions to perform sector-based performance attribution, assess sector themes and construct custom portfolios.

DATS routinely classifies the top 1,000 digital assets by market capitalization at the end of each quarter. The classification of an additional 123 digital assets at the April review follows a turbulent trading period over the last three quarters which resulted in significant changes to the market capitalization of many digital assets.

There was a change to the classification of DeFi assets that were built on top of Proof-of-Stake blockchains from “DeFi, Environmentally Focused” theme to “DeFi” post Ethereum’s adoption of the Proof-of-Stake consensus mechanism.

The updated classifications will be implemented on June 5,2023.

Martin Howard, SVP of Index Research at Wilshire commented, “Quarterly reviews of the Digital Asset Taxonomy System ensure that the sector classification remains representative of this nascent and rapidly evolving asset class. By publishing the rules-based methodology we aim to bring the utmost transparency to classification so that institutions can make investment decisions based on trusted data.”

Doug Schwenk, CEO of Digital Asset Research (DAR) and Deputy Co-Chair of the Wilshire Digital Assets Advisory Group, commented, “The continued growth of DATS is vital to the industry, as it provides much-needed structure and clarity in this ever-changing landscape. For institutions, DATS is the most rigorous classification framework facilitating organized and sustainable growth.”

How can investors use DATS in their investment management operations?

Traditional and digital-native asset owners, product issuers, custodians and research service providers can license DATS for the same purposes as they would when adopting an equity or fixed income classification system:

• Developing digital asset investment strategies and risk policies
• Issuing index-linked products based on sector-themed indexes
• Conducting performance attribution
• Constructing custom digital asset portfolios

The next review will be in July 2023. Visit www.wilshire.com/dats for more information and for the full DATS methodology.‍

About Wilshire

Wilshire is a global provider of market-leading indexes, advanced analytics and multi-asset investment solutions. A trusted partner to a diverse range of more than 500 institutional investors and financial intermediaries, our clients rely on us to improve investment outcomes for a better future. Wilshire is headquartered in the United States with offices worldwide and advises on over $1.3 trillion in assets, $83 billion of which are assets under management.

More information on Wilshire can be found at www.wilshire.com.

Over the past decade, digital assets have emerged to become one of the most fascinating asset classes. From early 2020 to 2023, the total market capitalization of digital assets went from approximately $200 billion to a peak of ~$3 trillion in late 2021, before retracing back to the $1 trillion range. This exceptional fluctuation raised mainstream awareness and increased institutional investors’ interest in digital assets.

However, digital assets are not without their own unique risks. The overwhelming and ever-expanding number of digital assets, their open-source nature, and regulatory ambiguity all contribute to the need for a comprehensive diligence process. Additionally, digital assets are a nascent asset class, often making them more akin to venture capital investments than blue-chip public equities.

A robust digital asset vetting process allows institutional market participants to understand an asset’s unique risks, potential value, and regulatory standing. Below, we explore the importance of selected key factors to consider when assessing digital assets.

KEY DIGITAL ASSET VETTING FACTORS

In this section, we detail key factors institutional investors should assess to understand a digital asset’s risks and potential value.

Token Use Cases, Economics, and Supply-Demand Dynamics

One unique attribute of digital assets is their ability to have multiple use cases. Unlike traditional equities that represent ownership and voting rights in a company, digital asset use cases are defined in their code and can vary to include functionality like securing a blockchain network, owning a certain percentage of a protocol’s revenue, holding protocol governance rights, or more. Gaining an understanding of how and why a digital asset is used is an important step in vetting the asset.

Relatedly, understanding a digital asset token’s economics or “tokenomics”, including how the token was initially launched and distributed, is crucial for assessing the asset’s long-term sustainability. A digital asset’s supply-demand mechanism will also affect its circulating supply and inflation rate, which are factors that can potentially impact its price.

For example, Ethereum completed its “Merge” upgrade in September 2022, which fully transitioned the network’s consensus mechanism from Proof-of-Work to Proof-of-Stake. The upgrade changed the way new ETH is issued and, as a result, the supply rate for ETH decreased, which resulted in a lower inflation rate.

Technology and Cryptographic Standards

Digital assets rely on their underlying technology and cryptographic standards to ensure security, scalability, and performance. To vet an asset, it is critical to understand how its underlying blockchain or distributed ledger technology (DLT) works. Factors such as permission requirements, transaction speed, energy efficiency, and interoperability with other blockchain networks are important considerations when assessing an asset’s potential longevity, safety, or possible investment growth.

Additionally, assessing the cryptographic standards used to secure an asset’s network to determine if they meet current best practices set by organizations such as the National Institute of Standards and Technology (NIST) is a key step in identifying potential vulnerabilities. For example, Ethereum utilizes the Elliptic Curve Digital Signature Algorithm (ECDSA), which is a NIST-approved signature algorithm; whereas Solana, a newer asset than Ethereum, utilizes an EdDSA signature algorithm, which is based on a newer elliptic curve that the NIST only adopted as of February 2023.

Codebase Assessment

A secure and well-maintained codebase is important for the success of a digital asset. Unlike traditional software, the smart contracts used by digital assets have unique properties that make it much more difficult to change their underlying code after it is published.

To assess a digital asset’s codebase, check that the asset has undergone independent smart contract audits from reputable firms and addressed any codebase vulnerabilities. The asset should also be taking active measures to further ensure its safety, possibly including incentivizing white hat hackers via bug bounties or engaging third-party intelligence firms to monitor for any potential loopholes in the codebase.

For example, a proposal to update Aave’s risk parameters was submitted to the protocol’s governance forum by a third-party risk management firm. As a DeFi lending protocol, it is critical for Aave to have monitoring for its risk parameters to prevent the accumulation of bad debt. A bad debt can occur if a malicious actor tries to game the lending-borrowing system; such an event happened in November 2022.

Validation and Consensus Mechanism

The consensus mechanism and validation process are core to the security of a digital asset’s network, as well as the network’s capability to scale and resist attacks. Evaluating the consensus mechanism (such as Proof-of-Work or Proof-of-Stake) that an asset’s network uses and considering related tradeoffs between security, decentralization, scalability, and energy efficiency are important when vetting a digital asset.

Often, founders and original investors have a high level of control over newer assets, which adds an element of centralization and counterparty risk. When vetting a digital asset, it is important to evaluate if there is enough validator (or miner) diversity to ensure that the blockchain network is not susceptible to bad actors or collusion among participants.

For example, Solana is a newer blockchain network than Ethereum. As of March 2023, the top 54 Solana validators control more than 50% of the network. By contrast, Ethereum hit over 500,000 validators as of January 2023. As a best practice, the number of validators should increase as a network decentralizes.

Regulatory Compliance

As a new and digital-first asset class, digital assets must navigate a complex and evolving cross-jurisdictional regulatory landscape. Market participants from all over the world can interact in on-chain digital asset markets, which means that digital assets are exposed to regulatory requirements globally. Issuers of digital assets need to understand the legal landscape extremely well and ensure compliance with regulations.

As part of asset vetting, evaluating a project’s legal strategy and its approach to addressing potential regulatory issues is crucial. In addition, it is important to consider whether an asset’s use cases might draw scrutiny from regulators, with revenue sharing and stablecoin mechanisms drawing the most attention from regulators historically.

For example, the U.S. Securities and Exchange Commission (SEC) charged LBRY for conducting an unregistered sale of “crypto asset securities”. The SEC won the case and LBRY was unable to continue its development, citing that the company had to pay millions of dollars in legal fees.

Network Health and Decentralization

The ultimate goal of any permissionless blockchain network is to decentralize. For instance, the founder of Ethereum, Vitalik Buterin, no longer has controlling power over the network. Although Buterin has a strong reputation and following, at this point his influence and impact over Ethereum is dependent on his work.

A healthy and decentralized network is vital for the long-term sustainability and growth potential of a digital asset. As part of asset vetting, evaluate the network’s decentralization by examining factors such as the distribution of token holdings, node distribution, and its governance structure. Often, a blockchain network might look like it has been decentralizing, but the ultimate owners of the underlying tokens might only be a small number of groups; this is akin to an individual that obfuscates corporate ownership via shell companies.

Additionally, it is critical to assess the network’s robustness by looking at metrics such as transaction density, cliques, and network paths. These metrics provide insight into how value is being transferred in the network. A decentralized blockchain network should have fairly decentralized network metrics.

For example, the top 10 richest wallets for Ethereum hold ~28.94% of ETH’s total supply, while the top 10 richest wallets for Uniswap hold ~52.61% of UNI’s total supply as of 17 May 2023.

ASSET VETTING TAKEAWAYS

As institutional market participants increasingly explore digital assets, a rigorous vetting process is essential to assess the strength and legitimacy of an asset. By carefully evaluating factors related to token use cases, tokenomics, technology, cryptography, codebase construction, regulatory compliance, and decentralization, institutional participants can make informed decisions and minimize their risks when interacting with this emerging asset class.

CASE STUDY: Terra Luna

Terra, a popular blockchain platform, experienced a catastrophic setback when its UST stablecoin destabilized and lost its peg in 2022. UST was designed to maintain a 1:1 peg to the US dollar, but lost its peg due to a death spiral caused by its stability mechanism, resulting in billions of dollars in losses for investors.

Background

Terra is a blockchain network with a dual native token system. LUNA, the network’s native token, serves as the governance and gas token powering the underlying blockchain network. UST, the network’s native stablecoin, is algorithmically pegged to LUNA via an arbitrage mechanism.

The relationship between LUNA and UST was that 1 UST could always be redeemed for $1 worth of LUNA, regardless of the current market price of LUNA. When the price of UST went below $1, investors could buy UST for less than $1, exchange it for $1 worth of LUNA, and sell LUNA in the open market for profit.

Additionally, the supply of LUNA was elastic. As a result, when the price of UST decreased, new LUNA was issued and sold on the open market by arbitrageurs. This loop caused the price of LUNA to further drop, leading to a death spiral.

The UST Stablecoin Failure

UST’s algorithmic design was the primary factor that caused its failure. The mechanism relied on LUNA as collateral to support UST’s value, but the value of LUNA was highly volatile. This volatility undermined the stability of UST, and eventually led to a rush to exit that turned into a death spiral. What happened to LUNA was a combination of a traditional bank run combined with a circular looping mechanism that led to a loss of value for both LUNA and UST.

How Digital Asset Vetting Could Have Helped

A comprehensive digital asset vetting process would have included a thorough examination of the supply-demand dynamics of the LUNA token. Through asset vetting, market participants would have learned about:

• Potential risks associated with the nature of the LUNA asset’s issuance. A deep evaluation of the digital asset space would have also shown that similar concepts had not been successful previously.
• A lack of transparency in Terra’s governance structure. The capital that was raised to defend the 1:1 peg might have not been utilized appropriately.
• Demand for UST being artificially inflated via Anchor protocol, an entity that was associated with the team behind Terra, which promised a 20% annual yield on a stablecoin that was supposedly pegged to the U.S. dollar.

Conclusion

The failure of Terra’s UST stablecoin serves as a reminder of the importance of thorough due diligence and digital asset vetting for institutional market participants. By carefully examining a digital asset’s supply-demand dynamics and governance structure, market participants can better understand potential pitfalls and make informed decisions about whether to interact with a particular digital asset.

In the case of Terra LUNA’s UST stablecoin, a rigorous vetting process could have helped investors identify the red flags in its algorithmic design, the lack of transparency surrounding its governance, and potential liquidity challenges.

CASE STUDY: XRP

A lawsuit between Ripple Labs Inc. (Ripple), the company behind the XRP (XRP) digital asset, and the SEC is one of the most important ongoing events in the digital asset regulatory space. In December 2020, the SEC filed a complaint against Ripple, alleging that the company had conducted a $1.3 billion unregistered securities offering.

Background

The XRP digital asset was created in 2012 by Ripple Labs as a means to facilitate cross-border transactions. Proceeds from XRP’s sale were used to fund Ripple’s operational activities as the firm developed its Ripple payment network. Over time, XRP became one of the top digital assets, often ranking in the top 10 largest digital assets by market capitalization.

The SEC alleged that the sales of XRP met the four prongs of the framework for an investment contract laid out in 1946 case SEC v. W.J. Howey Co., 328 U.S. 293 (1946). In that case, the U.S. Supreme Court found that an investment contract means a contract whereby “[1] a person invests his money [2] in a common enterprise and is led to [3] expect profit [4] solely from the efforts of” others.

Here, the SEC has argued that Ripple conducted an unregistered securities offering because purchasers of XRP relied on Ripple’s efforts to increase the value of XRP.

The XRP Case and its Implications

The legal case between Ripple and the SEC is ongoing, but its outcome will have significant consequences for both the company and the broader digital asset space.

Following the SEC’s complaint, many exchanges delisted XRP from their platforms, causing its price to plummet. A decision that is unfavorable to Ripple could cause XRP’s price to fall again, as well as create consequences for other digital assets with similar mechanisms and issuance models to XRP. A decision against Ripple might also mean that notable crypto exchanges have been facilitating the transaction of unregistered securities.

Whatever the outcome of the Ripple case is, it will set a precedent that will likely impact digital assets and how they are viewed by regulators globally.

How Digital Asset Vetting Could Have Helped

The definition of what makes a digital asset a security from a legal and regulatory perspective is the most important unanswered question in the crypto industry. However, a comprehensive digital asset vetting process would have included a thorough examination of the XRP token’s issuance mechanism, which is one of the factors critical to that analysis. Through digital asset vetting, market participants would have been aware of:

• Potential risks related to how XRP conducted its initial token sale and allocation. Unlike some assets where new supply issuance is controlled by validators, foundations, or strict decentralized governance processes, the entire supply of 100 billion XRP tokens were initially pre-mined. The founders retained around 20 billion XRP while the remaining 80 billion have been continuously sold throughout the years, with Ripple having control over sales.
• Potential risks associated with how new XRP tokens are released into circulation. Unlike layer 1 blockchain networks such as Ethereum, Ripple has continuously sold XRP, even after the SEC lawsuit. Both ETH and XRP conducted an Initial Coin Offering (ICO), but new ETH can only be received by validators who actively participate in the network; the team behind Ethereum cannot sell additional ETH tokens to the open market. Whereas in Q1 2023, Ripple sold $361M worth of XRP tokens.

Conclusion

The XRP lawsuit serves as a reminder of the importance of rigorous digital asset vetting for investors in the digital asset space. The nascent nature of the asset class often means that there is currently uncertainty surrounding token security classification and regulatory compliance.

By carefully examining how an asset was issued, its ongoing supply-demand mechanisms, and its level of decentralization, investors can better understand potential pitfalls and make more informed decisions about their investments. In the case of XRP, a rigorous vetting process could have helped investors identify red flags surrounding its pre-mining and the issuance mechanisms of new XRP tokens.

This information could have helped market participants assess the risk of the token being considered a security and allowed them to weigh the potential consequences of an SEC lawsuit.

As the regulatory environment surrounding digital assets matures, institutional investors must prioritize thorough digital asset vetting processes to adapt to changes, minimize risks, and make well-informed decisions.

MarketVector IndexesTM and DAR are teaming up to bring sophisticated and accessible digital asset indexes to market

Press release courtesy of MarketVector.

FRANKFURT, Germany — (BUSINESS WIRE) — MarketVector IndexesTM (“MarketVector”), a pioneer in the digital assets space, announces a collaboration with Digital Asset Research (DAR). Through this initiative, MarketVector will leverage DAR’s data, underpinned by DAR’s exchange vetting process, to power index methodologies and create robust, transparent indexes for market use.

DAR, based in New York, delivers ‘clean’ data and research focused on quality, transparency, and accuracy. The firm drives data integrity by using rigorous methodologies including quarterly Exchange Vetting which serves as the foundation for its highest quality pricing data. In addition to Exchange Vetting DAR provides data to manage crypto market risks including Asset Vetting, and Counterparty Diligence.

“We’re pleased to be supporting MarketVector as a source of crypto asset pricing, yields, market data, and as calculation agent for MarketVector indexes,” said Doug Schwenk, CEO of DAR. “As one of the earliest firms to publish digital asset indexes and support products, MarketVector has continuously provided leadership and innovation in the space. Our unique Exchange Vetting process resulting in the highest quality data will support them as they go to the next level.”

Pioneering the digital asset market since 2017, MarketVector leads the industry providing a suite of institutional-quality benchmarks across single- and multi-token investable indexes. These Digital Asset Indexes enable investors to measure, benchmark, and capture the performance of targeted coins and categories within the digital asset ecosystem.

”Through the deployment of DAR data, our team is proud to bring to market even more cutting-edge, institutional quality indexes in the digital assets space,” said Steven Schoenfeld, CEO of MarketVector. “The opportunity to leverage high-quality data through DAR is exciting as we develop more opportunities in the digital assets space. We remain optimistic about the crypto sector and expanding our digital asset partnerships with DAR reflects our confidence.”

About MarketVector Indexes — www.marketvector.com

MarketVector IndexesTM (“MarketVector”) is a regulated Benchmark Administrator in Europe, incorporated in Germany and registered with the Federal Financial Supervisory Authority (BaFin). MarketVector maintains indexes under the MarketVectorTM, MVIS® and BlueStar® names. With a mission to accelerate index innovation globally, MarketVector is best known for its broad suite of Thematic indexes, long-running expertise in Hard Asset-linked Equity indexes, and its pioneering Digital Asset index family. MarketVector is proud to be in partnership with more than 25 Exchange-Traded Product (ETP) issuers and index fund managers in markets throughout the world, with approximately USD27.04 billion in assets under management.

New York, NY, April 12, 2023 — Digital Asset Research (DAR), a leading provider of crypto asset data and research, today announced the release of its April 2023 Crypto Exchange Vetting results. In an environment where cryptocurrencies trade across hundreds of lightly regulated or unregulated exchanges, DAR’s vetting processes apply institutional-level diligence to digital asset markets to meet an industry-wide need for reliable crypto data.

Over 450 exchanges were evaluated to identify 15 Vetted Exchanges. The following exchanges continue to maintain their status as Vetted Exchanges: Binance.US; bitbank; Bitfinex; bitFlyer; Bitstamp; Bittrex; CEX.IO; Coinbase; Coincheck; Gemini; itBit; Kraken; LMAX; and Okcoin. GMO Coin Co. is added as a new Vetted Exchange. Bitso, BTC Markets, CrossTower, and Zaif are no longer Vetted Exchanges.

Eight exchanges are now considered Watchlist Exchanges for potential future inclusion on the Vetted Exchanges list: Binance; CoinTiger; Crypto.com; Gate.io; Huobi; KuCoin; LATOKEN; and Phemex. Bitrue and CoinEx are no longer Watchlist Exchanges.

The Exchange Vetting process combines quantitative and traditional qualitative due diligence to identify exchanges reporting accurate volumes and eliminate exchanges that are not appropriate for determining an accurate market price.

“Our mission is to provide the highest quality data in the industry,” said Doug Schwenk, DAR’s CEO. “Our quarterly analysis of digital asset exchanges underpins our prices for 10,000+ crypto assets. In addition, it helps our institutional customers identify venues with more reliable market activity, less likely to have been manipulated.”

The Exchange Vetting process follows an Asset Vetting process that was completed in March and evaluated over 1,000 digital assets to identify assets appropriate for various institutional use cases. During the Asset Vetting process, digital assets are evaluated to determine if they meet institutional investor standards for codebase construction and maintenance, community, security, liquidity, and regulatory compliance.

Results of the Exchange Vetting process determine pricing sources used to calculate DAR reference prices for institutional clients, including Bloomberg, Chainlink, FTSE Russell, the FTSE DAR Reference Price, and Refinitiv.

DAR performs its Exchange Vetting processes quarterly. Results will next be announced in July 2023.

To learn more, book a consult.

Modern digital assets have existed for a little over a decade. Bitcoin was created in 2009 after the Global Financial Crisis. In 2014, Ethereum pioneered the development of smart contracts, enabling the creation of decentralized applications. Despite those early developments, the true growth and emergence of digital assets as a new asset class did not occur until the 2017 bull market when the total digital asset market capitalization went above $800 billion.

Even after a decade, crypto is still a nascent asset class. As of February 2023, crypto sits at ~$1.1 trillion in market capitalization, after reaching a peak of ~$3 trillion in 2021. By comparison, the combined market capitalization of the “FAANG” companies — Facebook (now Meta), Apple, Amazon, Netflix, and Google — is ~$5.3 trillion.

Crypto is also complex. It’s the only asset class that combines multidisciplinary fields with open-source principles. Anybody can create new digital assets and trade them 24/7, 365 days a year. These assets are also natively digital, which means that they are cross-jurisdictional in nature.

As a result, crypto markets are fragmented. There are hundreds of venues, with some regulated and others unregulated. There are venues that are managed via traditional business models, and there are also venues that are purely managed by code. These nuances have significant implications for crypto asset prices. In short, all crypto pricing is not the same.

In this piece, we take a deeper look at various factors that contribute to the quality of crypto asset prices, elaborate on their importance, and present a solution to this problem.

All Crypto Pricing Is Not the Same

The primary factors that make crypto markets fragmented are the number of venues the asset class can be traded on, the existence of decentralized exchanges (DEXs), and foreign exchange (FX) rate discrepancies across various jurisdictions.

Hundreds of Exchanges

Unlike U.S. equities, which have a central clearinghouse and a few major venues (like the NYSE and NASDAQ), crypto has hundreds of trading venues, each with its own markets, order matching engines, and settlement process. Even major commodities, like gold, only trade on approximately 40 exchanges globally.

In crypto, there are more than 600 crypto exchanges globally as of September 2022. Low barriers to entry mean that new exchanges are launched regularly. The codebase behind many matching engines is easily accessible and there are white-label services that allow ambitious entrepreneurs to start crypto exchanges.

The rules around starting a crypto exchange are also fairly ambiguous, especially in Emerging Markets (EMs). However, because of blockchain technology, crypto exchanges in EMs can easily access the same pool of capital and user base as exchanges in more regulated markets. Crypto market participants from around the world can easily use offshore exchanges, and they might be tempted to do so because of an exchange’s unique features.

Decentralized Exchanges

There are also decentralized applications that can power peer-to-peer transactions between market participants, creating what are known as decentralized exchanges (DEXs).

DEXs are fully managed by code and can run on their own via smart contracts on the blockchain. DEX users are not forced to complete any Know Your Customer (KYC) or Anti-Money Laundering (AML) processes and are able to conduct direct transactions “on-chain” without going through any centralized counterparties. DEXs began to emerge in mid-2020. Today there are hundreds of DEXs across multiple blockchain networks, further fragmenting crypto markets, which in turn affects the quality of crypto asset prices.

FX Rate Discrepancies

Additionally, as digital assets are traded globally, they are exposed to various FX rates. Crypto exchanges across the world are supporting trading pairs in their local currency, sometimes on top of USD-denominated pairs. This means that different capital control rules and the level of maturity of capital markets in different countries will affect crypto asset prices.

The most famous example of this is the price premium that Bitcoin has in South Korea, which is known as the “Kimchi Premium”. Bitcoin traded at a higher price in South Korea because of the country’s capital control rules, which limit cross-border flows of “hot” money.

Even recently, we are still seeing the Kimchi Premium phenomenon impact a high-demand asset. Aptos, a new Layer-1 blockchain valued at $4.5 billion that was founded by former employees of Meta’s now defunct stablecoin project, recently launched its APT token. DAR’s data shows that APT token prices on South Korean exchanges (like Korbit and Upbit) are considerably higher than US-based exchanges (like Binance.US and Coinbase).

Accurate Prices are Important

All the factors listed above contribute to the fragmentation of the crypto market. Therefore, liquidity becomes much more spread out than in traditional markets, especially for mid-cap and low-cap assets, causing discrepancies in crypto asset prices and their quality.

Institutions seeking an accurate price for crypto assets should consider the breadth and depth of their pricing sources and data set to ensure prices are representative of the larger market.

Why Crypto Asset Pricing Is Notoriously Unreliable

Free Aggregators and Misaligned Incentives

Many crypto market participants utilize free data aggregators as their primary resource for digital asset pricing. While this solution might be “good enough” for retail participants, institutional investors need to understand that there are significant differences between high-quality data providers and free aggregators.

Firstly, the incentives for free data aggregators are misaligned with maintaining the quality of the data. Free data aggregators generate the majority of their revenue via ad placements instead of from their data. They generally list as many assets as possible to ensure that they come up on top of search results to drive more traffic to their websites and increase ad revenue.

This business model offers no guarantee of data quality. The Block recently reported on a bug in CoinMarketCap’s data that showed the price of Bitcoin as $789 billion. As shown below, applications that are relying on this price data could have had significant issues, including potential impacts on end users’ capital:

“Some decentralized finance (DeFi) protocols also use CoinMarketCap as a source of price data. DeFi protocol DeFiChain tweeted, ‘Due to an error with the @CoinMarketCap API, all DeFiChain Vaults have automatically been halted for now, ensuring the safety of your loans.’ This implies that perhaps loans could have been liquidated based on the incorrect price data.” — The Block

Exchange Infrastructure

Crypto exchange infrastructure has also not always proven to be reliable. Even the most notable and well-capitalized exchanges have experienced problems that can have large consequences for market participants. For example, the price of Bitcoin on Binance.US had a flash crash on February 5, 2023, and dropped by over 25% to $17,020.33 momentarily. Such an event can cause substantial damage to market participants. Leveraged traders can get liquidated and investable index products relying on a bad price will be impacted. Kraken exchange also experienced a similar event in February 2021, when the price of ETH experienced a flash crash, deviating away from the broader market.

Unregulated Exchanges

The nascent nature of crypto markets and their globally distributed presence has also resulted in practices considered unacceptable or outright fraud in traditional markets. One well-known example is Quadriga, an exchange described as a fraud and a Ponzi scheme in a regulator’s report in the aftermath of losing $169M in client money.

When reviewing an exchange’s validity as a source for crypto asset prices, one test that can be run to identify potential fraud is a review of buy-sell patterns within its order book. An exchange with fraudulent or manipulated activity may exhibit a “coin toss” pattern in its order book or a pattern that appears to be created by a random number generator, rather than a pattern more likely to be observed in orderly markets where trades are more closely aligned with market movement.

In the chart below, Bitcoin trades made in the first 7 days of February 2023 are compared across two DAR Vetted Exchanges and two centralized exchanges that did not pass vetting. The Vetted Exchanges exhibit the expected pattern where the previous transaction’s buy or sell direction typically indicates the direction of the subsequent transaction, which is what drives asset prices up or down. In contrast, the other exchanges in the comparison appear to follow a pattern that appears uniformly random meaning someone buying or selling Bitcoin is no more likely than a coin toss at any given moment..

Extreme Market Phenomena

Additionally, there are extreme market phenomena that can cause price discrepancies, even on assets with multi-billion dollar market capitalization. One recent example is the discrepancy in the price of TRX on the now defunct FTX exchange versus the broader market that occurred when the founder of TRX, Justin Sun, stated the following:

“We will do everything we can to protect our users, including exchange all #TRX, #BTT, #JST, #SUN, #HT on the FTX platform at a 1:1 ratio,” — Justin Sun

This statement caused the price of TRX on FTX to surge by more than 4,000%. Ensuring that one has a proper pricing data provider is crucial to understand what happens in the crypto market during extreme market phenomenon.

How DAR’s Data Solves This Problem

DAR’s pricing methodology solves many of the problems associated with crypto pricing by implementing thorough quantitative and qualitative diligence. To achieve this, DAR utilizes a five-step process to vet, qualify, aggregate, clean, and calculate digital asset prices.

Specifically, this process brings quality to crypto pricing data by vetting 450+ exchanges on a quarterly basis to currently qualify 18 Vetted Exchanges and 10 watchlist Exchanges. Only these exchanges are then utilized as pricing sources to calculate DAR’s 1,100+ ‘clean’ prices for digital assets.

Five Steps to DAR’s ‘Clean’ Prices

For institutional market participants, quality pricing data is critical, and there are numerous ways to utilize DAR’s clean prices. Use cases range from creating institutional-grade products (ETP, ETF) to calculating NAV and principal market prices for portfolio reporting to serving as a pricing oracle source for decentralized applications.

DAR’s customers have utilized quality pricing data for various use cases such as:

• Benchmark and Index Pricing
• Asset Pricing
• Oracle Pricing for Smart Contracts
• NAV Calculation
• Risk Management

As the crypto industry matures and further integrates with the broader financial system, the need for quality pricing data will continue to grow. DAR’s clean crypto asset prices ensure that institutional market participants will be equipped with high-quality data for their digital asset needs.

Book a consult with DAR to learn more or to request a sample of our Pricing Data vs Free Aggregators.

Calculating ‘Clean’ Crypto Prices In An Industry With Notoriously Bad Data was originally published in Digital Asset Research on Medium, where people are continuing the conversation by highlighting and responding to this story.

New York, NY, March 7, 2023 — Digital Asset Research (DAR), a leading provider of ‘clean’ crypto data and insights, today announced an expansion of its executive team amidst increased demand for institutional-quality digital asset market data. Co-founder Erin Friez has returned to DAR as Chief Operating Officer (COO) and Brian Stern joins as Chief Revenue Officer (CRO). Their hiring follows Kerstin Krall Walz joining the firm in 2022 as Chief Marketing Officer (CMO) and comes as DAR continues to add headcount while advancing a risk management focus as it helps clients confidently navigate the crypto space.

Despite a market downturn, crypto assets and the benefits of their underlying technology remain attractive to many of the institutional clients DAR serves. DAR continues to build for the next evolution of crypto by offering tools and data to assess risks and avoid the pitfalls of weak counterparties and subpar assets.

“From the crypto winter to FTX, this downturn has institutional clients asking for research that can help them conduct due diligence in the digital asset space and for the highest quality data to run their operations.” said Doug Schwenk, DAR’s CEO. “We see this as the perfect time to build transparent solutions that institutions can trust to grow their digital asset businesses. To better meet that client demand, we’ve been hiring for key positions and we’re excited to welcome Erin, Brian, and Kerstin to the executive team.”

From 2021 to 2022, DAR doubled its headcount and is continuing to add new positions this year. Erin Friez steps back into the role of COO at DAR with more than 15 years leading legal, regulatory, and product initiatives in the tech and fintech space. She has extensive experience in corporate and M&A law, advising companies from founding through successful exits. Erin previously served as Director of Crypto at PNC Asset Management and General Counsel/Head of Digital Assets at YieldX (sold to FNZ).

As CRO, Brian Stern brings twenty years of sales leadership to DAR with a track record of building, managing and motivating teams in early and high-growth stage companies while driving significant revenues. Previously, Brian held senior sales positions at AI and cybersecurity companies Cortical, RiskSense, and Electric Cloud. Brian holds BS and MS Engineering degrees.

CMO Kerstin Krall Walz is a sales-driven marketer laser-focused on growing DAR’s business by increasing awareness, trust, loyalty, and retention. Using her decades of marketing expertise at Walz Marketing, Saatchi & Saatchi, and Y&R, she helped clients identify differentiated positionings, bring brand identities to life, and develop breakthrough marketing plans.

Currently, DAR is hiring for a variety of positions. Specifically, the company is looking for Crypto and Market Data Technologists, Developers, Quants & Data Scientists, Research Analysts, Legal & Regulatory Experts, and Marketing and Sales personnel.

Digital Asset Research (DAR) Expands C-Suite to Meet Demand For Crypto Data and Diligence Services was originally published in Digital Asset Research on Medium, where people are continuing the conversation by highlighting and responding to this story.

NEW YORK, February 28, 2023 — Digital Asset Research (DAR), a leading provider of ‘clean’ crypto data, insights, and research, announced today that it joined the Pyth network, an oracle solution designed to deliver real-time, high fidelity, market data on the blockchain on a sub-second timescale.

Pyth network has established itself as the leading oracle solution for financial data, with more than 75 data providers contributing real time prices across asset classes including FX, Equities and Commodities apart from Crypto. Pyth data oracles are available to consume off-chain and on-chain across blockchains via the Wormhole network. Initially, DAR will publish real-time prices for 125+ crypto assets to the Pyth oracle, with plans to expand its data contribution as the network grows in scope.

Known for its transparent pricing methodologies, DAR brings quality to crypto pricing data through a process that starts by assessing over 450 exchanges quarterly to qualify only ~5% of evaluated exchanges as inputs for the calculation of institutional-quality prices. This rigorous process makes DAR’s contribution to the Pyth oracle reflect the highest standards in crypto pricing.

Doug Schwenk, DAR’s CEO, stated, “As a specialized provider of digital asset data, we’re honored to join Pyth in growing their oracle network and to contribute to the DeFi ecosystem overall. We look forward to furthering their greater mission of delivering reliable, accurate, real-time pricing data to hundreds of applications from lending protocols to derivative platforms.”

Abhimanyu Bansal, a contributor to the Pyth network, stated, “DAR is trusted by leading institutions for the quality and depth of their crypto market data. In the same vein, Pyth, as the leading oracle, has been immensely successful in bridging the gap between traditional and decentralized finance. We are confident that our partnership together will promote the growth of and attract new participants to DeFi.”

About DAR

Digital Asset Research (DAR) is a specialized provider of ‘clean’ digital asset data, insights, and research for institutional clients. Since 2017, DAR leads by rigorously vetting out noisy inputs for flagship clients such as Bloomberg, FTSE Russell, and Wilshire. Each day, DAR processes 200+ million trades to calculate 10,000+ institutional-quality digital asset prices and deliver a range of product solutions to navigate the cryptoverse.

With expertise in traditional finance and the digital asset space, DAR’s success is driven by a commitment to deliver honest data emphasizing accuracy, quality, and transparency.

About Pyth

Pyth is a first-party financial oracle network designed to publish continuous real-world data on-chain in a tamper-resistant, decentralized, and self-sustainable environment. The network incentivizes market participants — exchanges, market makers, and financial services providers — to share directly on-chain the price data collected as part of their existing operations. The network then aggregates this first-party price data on-chain and makes it available for free to either on- or off-chain applications. More details are available here: the website, whitepaper, docs, and wiki.

Digital Asset Research (DAR) Joins Pyth To Provide ‘Clean’ Crypto Pricing For DeFi and Smart… was originally published in Digital Asset Research on Medium, where people are continuing the conversation by highlighting and responding to this story.

In Q4 2022, the digital asset market experienced a significant drawdown in comparison to Q3 2022. The total digital asset market capitalization went from approximately $1 trillion at the beginning of the quarter to ~$850 billion by the end of 2022. Bitcoin started the quarter on a relatively positive note with its price soaring north of $21,000 before retracing back to a low of $15,700. During the same time period, the US Federal Reserve raised interest rates by 125 basis points (bps) in total, with increases of 75 bps in November and 50 bps in December, to further combat inflation.

The biggest crypto event in Q4 was the implosion of FTX, which happened on November 11. As one of the world’s largest crypto exchanges with a peak private market valuation of $32 billion, the fallout from FTX’s collapse is an unprecedented event. Its bankruptcy proceedings include multiple entities and span across various jurisdictions. It also catalyzes conversations regarding the importance of due diligence and counterparty risks associated with centralized entities in the space.

As the “crypto winter” continues, digital asset market participants are also concerned by the possible contagion caused by FTX and other bankrupt entities. Centralized entities including crypto exchanges and prime brokerages have been under increasing scrutiny. Customers are demanding more clarity and transparency into these businesses’ operational control and financial health.

Regulators around the world are also continuing their efforts against bad actors in the digital asset space. Multiple bankruptcy proceedings, including those of Three Arrows Capital, FTX, Voyager, and Celsius, will set legal precedents for the broader digital asset industry.

In Digital Asset Research’s (DAR’s) quarterly report series, we break down the state of the digital asset market from the perspective of institutional market participants, highlight crucial events, and provide commentary on potential future developments. This report is meant for informational purposes only, and should not be construed as investment, financial, or legal advice.

TABLE OF CONTENTS

INTRODUCTION 1

TABLE OF CONTENTS 2

WHAT HAPPENED IN Q4 2022 3

FTX Exchange Collapse 4

FTX and Alameda Research Contagion 6

Regulatory Enforcement 7

DAR Q4 2022 BY THE NUMBERS 9

SEC Calls FTX Token (FTT) a Security 16

CFTC and DOJ vs Mango Markets 16

SEC vs LBRY 17

INSTITUTIONAL DIGITAL ASSET PRODUCT RECAP 18

Spot-Based Bitcoin ETF Applications 21

Futures-Based Bitcoin ETF Applications 22

WHAT HAPPENED IN Q4 2022

The fourth quarter of 2022 was eventful for the digital asset market. FTX’s problem in early November spooked the broader market as the prices of BTC and ETH fell to a low of approximately -20% compared to the beginning of the quarter. The fear was then further exacerbated by Genesis halting withdrawals on November 16, with the market dropping approximately another 10% on the news.

The charts above show that Bitcoin was trading relatively close to the broader market before the FTX trouble in November. The Nasdaq Composite, S&P 500, and gold all were positively correlated with Bitcoin in October when looking at a 30-day rolling correlation, but became uncorrelated and eventually negative correlated with Bitcoin in November after the FTX collapse.

FTX Exchange Collapse

The chart above shows that Bitcoin was trading relatively close to the broader market before the FTX trouble in November.

Here is the timeline of FTX’s trouble:

• November 2 — CoinDesk broke a story on Alameda Research’s (FTX sister company) balance sheet.
• Out of $14.6 billion, $5.82 billion was reportedly denominated in FTX’s own token, called FTT.
• This new information spooked market participants, including Binance, the largest crypto exchange in the world.
• November 6 — Changpeng Zhao, Binance’s CEO, stated that the exchange decided to sell its FTT tokens worth around $529M due to “recent revelations that came to light”.
• November 8 — FTX saw $6 billion in withdrawals in under 72 hours as customers worried about the exchange’s solvency.
• November 8 — Sam Bankman-Fried announced that Binance has signed a Letter of Intention (LOI) to acquire FTX.
• November 9 — Binance backed out of the deal, citing much larger than expected issues at FTX and alleged U.S. agency investigations.
• November 10 — FTX paused withdrawals and suspended the addition of new clients.
• November 11 — FTX filed for bankruptcy.

FTX Token’s (FTT) price dropped by more than 90% in the span of a few days.

FTX and Alameda Research Contagion

Unsurprisingly, the FTX situation caused contagion to spread across the broader digital asset market. On November 10, crypto lender BlockFi paused withdrawals and stated it was unable to continue operating its business due to FTX’s collapse. Another crypto lender and prime broker, Genesis, also paused withdrawals on November 16 after losing around $175M due to FTX’s collapse.

In December, the broader digital asset industry was hit with a crisis of confidence, particularly as related to centralized entities, as Grayscale’s Bitcoin Trust (GBTC) hit a record discount of -50% and Binance’s outflows hit $6 billion in three days.

Another second-order effect of FTX and Alameda Research’s collapse is the state of their numerous investments. While there is no court decision yet regarding potential clawbacks, FTX’s influence spans various crypto protocols and even non-crypto companies. The Financial Times broke the story of Alameda’s venture capital portfolio, which amounted to more than $5 billion.

Alameda reportedly invested more than $5.2 billion across 400+ deals. The types of deals range between investments in equities, notes, tokens, or even as a Limited Partner in funds, including:

• $2.79 billion in equity investments
• $1.13 billion in fund investments
• $380M in token investments

The largest investments are in:

1. Genesis Digital Assets ($1.15 billion), a crypto mining company.
2. Anthropic ($500M), an AI safety and research company.
3. Digital Assets DA AG ($320M), a tokenization infrastructure company.
4. K5 ($300M), a venture capital firm.
5. IEX ($270M), an equity exchange and trading technology firm.

As FTX bankruptcy proceedings continue, more information will come to light regarding the nature of these deals. Creditors might be seeking clawbacks, which will add to the ongoing contagion.

Regulatory Enforcement

Another theme of Q4 2022 was regulatory enforcement. Regulators in the U.S., including the SEC, CFTC, and the DOJ, ramped up their crypto enforcement actions on various types of cases including market manipulation, bankruptcy, fraud, money laundering, and alleged unregistered securities offerings. This creates the need for an enhanced risk management framework and proper planning before launching new digital assets.

Some regulatory actions included:

• The DOJ arrested and charged Mango Market’s exploiter, Avraham Eisenberg, with market manipulation and commodities fraud.
• The SEC won its case against LBRY, with a federal judge ruling that LBRY’s sale of its native LBC token was an unregistered securities offering.
• The SEC charged FTX founder, Sam Bankman-Fried, with defrauding FTX investors.
• The US Justice Department is reportedly considering charging Binance and its executives with possible money laundering violations.
• The SEC is probing crypto lender Genesis for potential securities and accounting violations.

The outcomes of these cases will set numerous legal precedents, which will have a non-trivial impact on shaping the future of the digital asset market.

To learn more about DAR’s market data offerings, including prices for 10,000+ digital assets and verifiable volumes from hundreds of exchanges, click here.

DAR Q4 2022 BY THE NUMBERS

Trading Volume

Bitcoin and Ethereum’s combined share of relative USD trading volume on Vetted Exchanges stayed relatively consistent in Q4 2022 with the exception of late October when Dogecoin surged significantly in trading volume.

Ethereum’s share of trading volume against Bitcoin saw a significant increase in early Q4 2022, reaching a high of 55% in late December.

Exchange Dynamics

Bitcoin trading activities across select DAR Vetted Exchanges spiked in early November 2022, coinciding with the collapse of FTX. Overall, volume stayed relatively stable in Q4 2022, with a slight decrease towards the end of the year.

Coinbase saw its percentage of total Bitcoin trading volume increase from approximately 50% to above 60% in Q4 2022 amongst select DAR Vetted Exchanges. Additionally, itBit saw a substantial increase in Bitcoin trading volume whereas OKCoin saw a significant decrease.

Ethereum trading activities across select DAR Vetted Exchanges spiked in early November 2022, coinciding with the collapse of FTX. Overall, volume stayed relatively stable in Q4 2022.

Binance.US saw its percentage of total Ethereum trading volume increase in December 2022, hitting a high of approximately 20% amongst selected DAR Vetted Exchanges. Additionally, itBit saw a substantial increase in its Ethereum trading volume, whereas OKCoin saw a significant decrease.

The Digital Asset Taxonomy System (DATS), developed in partnership with the Wilshire Digital Assets Advisory Group, was designed from the bottom up to capture the nuances of the digital landscape.

In Q4 2022, digital assets classified under DATS’ Notarization and Supply Chain sector generated the best performance whereas the Protocol Interoperability sector was the most significant laggard. All eight sectors generated negative returns in Q4 2022.

To learn more about the different classifications of more than 1,400 digital assets, click here.

REGULATORY HIGHLIGHTS

There were multiple notable regulatory developments in Q4 2022 that might affect the broader digital asset space moving forward. The most notable ones include an argument that FTT is a security, the Mango Market exploiter indictment, and the SEC case against LBRY.

To stay on top of digital asset regulatory developments, subscribe to DAR’s monthly regulatory recap newsletter here.

SEC Calls FTX Token (FTT) a Security

Overview: As part of a complaint filed on December 21, the SEC stated that the FTX token (FTT) was sold as an investment contract, thus classifying it as a security. The complaint highlights that proceeds from FTT sales would be utilized to fund development, marketing, and business operations of FTX. The complaint also notes FTX also used language that emphasized the profit potential of FTT.

FTT’s buy-and-burn mechanism was also mentioned in the complaint. This process whereby FTX would utilize its revenue to repurchase and burn FTT is akin to a stock buyback and contributed to the argument that FTT is a security.

The outcome of this complaint could have a significant impact on other digital assets that implement similar buy-and-burn mechanisms, as well as digital asset projects that have previously stated that their token sale was made to help fund the development of their protocol.

The Takeaway: Tokenomic designs that are closer to how equities work, such as buy-and-burn, governance vote, and revenue share, will be under increasing scrutiny as the SEC makes a case that such tokens should be considered securities.

CFTC and DOJ vs Mango Markets

Overview: Mango Markets, a DeFi protocol built on Solana that facilitates perpetual swaps trading and crypto lending, was exploited for more than $110M in October 2022. Avraham Eisenberg, the person who led the operation behind the exploit, took to Twitter to explain and justify his actions, stating that he merely utilized the Mango protocol as intended, exploiting a weakness in its design.

Eisenberg was arrested in Puerto Rico in December 2022. The U.S. Department of Justice announced Eisenberg’s arrest and charged him with offenses related to market-manipulation. A second filing signed by Assistant U.S. Attorneys Thomas S. Burnett and Noah Solowiejczyk charged Eisenberg with commodities fraud and manipulation.

Eisenberg allegedly executed the exploit by selling MNGO token perpetual contracts from one account under his control to another account that was also under his control. This action raised the price of the MNGO tokens significantly, achieving a large unrealized profit. The unrealized profits were then used as collateral to borrow funds, which drained funds from Mango Markets.

The Takeaway: In his explanation, Eisenberg argued that “code is law” and that the exploit was legal open market action. Regulators seem to think otherwise. While there’s no regulatory clarity for on-chain markets because they span countries and jurisdictions, the outcome of this case will set a precedent for the future of on-chain activities.

SEC vs LBRY

Overview: LBRY Inc., a blockchain-based publishing platform, was served by the SEC in March 2021 over its LBRY Credit (LBC) tokens, with the SEC alleging that LBRY Inc. had been selling unregistered securities offerings. On November 7, 2022, the SEC won the legal battle after a judge decided that LBRY’s tokens were securities.

The judge in the case reasoned that even if the LBRY team was completely silent about promises, contracts, or efforts, the action of pre-mining LBC tokens alone created a sufficient expectation of profits, motivating the LBRY team to “work tirelessly to improve the value of its blockchain for itself and any LBC purchasers”.

The Takeaway: The process of launching a new digital asset will become increasingly regulated. At the same time, the lack of regulatory clarity in the U.S. may push founders and innovation abroad to emerging markets with weaker regulatory agencies or to jurisdictions with friendlier crypto rules.

INSTITUTIONAL DIGITAL ASSET PRODUCT RECAP

Every month, DAR publishes a recap report that highlights developments related to institutional-grade digital asset products globally. In Q4 2022, the AUM of institutional digital asset products decreased alongside the broader digital asset market but has remained relatively high across multiple assets.

Highlights:

• The AUM of Grayscale’s Bitcoin and Ethereum trusts decreased by more than $3.3 billion in Q4 2022 and the discount for Grayscale Bitcoin Trust (GBTC) hit -51%.
• Excluding Grayscale, the top digital asset product issuers by AUM were XBT Provider and 21 Shares.
• Spot Bitcoin ETF applications continue to be rejected in the US. Grayscale stated that it will explore returning a portion of investor capital if the SEC refuses to approve its spot Bitcoin ETF.

The top digital asset product issuers by total AUM, excluding Grayscale, continue to be XBT Provider and 21Shares. Total AUM across providers decreased substantially in Q4 2022, which primarily happened in November after the FTX collapse.

ProShares and XBT Provider continue to have the largest average AUM across all of their products. Average AUM across top providers decreased in Q4 2022 as the broader digital asset market continued to experience a downturn.

Excluding products with less than $500,000 in AUM, Cosmos (ATOM), and Litecoin (LTC) saw considerable increases in their AUM in institutional products, whereas FTX Token (FTT) and Solana (SOL) saw the most significant decrease in AUM.

Spot-Based Bitcoin ETF Applications

Futures-Based Bitcoin ETF Applications

DAR Q4 2022 Report: Digital Asset Ecosystem was originally published in Digital Asset Research on Medium, where people are continuing the conversation by highlighting and responding to this story.