#1 BANKS TIGHTEN THE SQUEEZE ON CRYPTO EXCHANGES
In the 2002 hit song, ‘The Scientist’, Coldplay’s self-aggrandising frontman Chris Martin famously laments: “Nobody said it was easy. No one ever said it would be this hard.”
If you’re a returning reader of this Substack, welcome back! I suspect you may have just read the intro and are now wondering if we have lost our collective marbles in the space of a week. Fear not, we are not here today to discuss mediocre soft rock.
The prompt for this particularly depressing lyric was news last week that Signature Bank, one of Binance’s primary fiat banking partners, would be withdrawing support for transactions of less than $100,000 involving digital currencies.
Following some initial hysteria, Binance hastily put out its own press release clarifying that their other banking relationships remain operational and - crucially - that Signature’s policy decision was not a result of measures imposed by SWIFT at an institutional level.
As Signature Bank’s announcement drew mainstream headlines, it overshadowed a separate press release from Santander extending its current restrictions on customers’ ability to send funds to various leading crypto exchanges.
Neither piece of news is catastrophic in and of itself. Withdrawals from Binance in many regions are unaffected and, for most customers, everything remains business as usual. Similarly, Santander’s impacted customers can simply choose to switch to another bank.
So, much ado about nothing?
Check yourself before you wreck yourself
Crypto largely exists in a vacuum, with the industry ultimately connected to the ‘real world’ via a small number of fiat on and off-ramps. At the same time, crypto is inherently a hyper-growth industry and reliable means of converting fiat to crypto (and vice versa) are essential to fuel continued expansion. Any measures that threaten to cut off the ecosystem’s circulation must therefore be taken seriously.
In addition, whilst narrowing and unpredictable fiat ramps are inherently bearish on a macro scale, they also pose an immediate risk to users at an individual level.
Let’s take the example of tax. For most people, only two things in life are certain: death and their local tax authority demanding a share of their magic internet money.
Now, imagine for a moment that you are a responsible investor who both made a profit and also set aside enough in USDC to meet your tax obligations (already far-fetched, I know, but stick with me).
As the deadline approaches, you log in to Binance and attempt to liquidate your USDC to your domestic currency, only to find out that your particular region is no longer supported.
In a panic, you hastily transfer your USDC over to Crypto.com. Success, their banking partner allows you to swap to your local currency! Relieved, you issue a withdrawal request to your bank, but the transaction bounces.
Your bank has flagged the large cash deposit from Crypto.com as suspicious due to your lack of transaction history with the payment issuer. Your funds are immediately frozen whilst an investigation is undertaken.
This may sound far-fetched, but it is increasingly common. Even the most ostensibly reputable, US-regulated exchanges are feeling the crunch. For example, long-standing, fully-KYC’d Coinbase users are frequently being met with requests for “Enhanced Due Diligence”. Impacted users have had their full account functionality suspended until a (highly onerous and often entirely impractical) amount of personal and financial information has been disclosed and verified.
The squeeze on market leaders like Coinbase and Binance also threatens to push users towards dealing with more obscure and loosely-regulated exchanges. Not only does this pose an obvious threat to user safety, but dealings with these entities are also (ironically) more likely to attract attention from regulators and tax authorities.
Flight to fiat?
Before you run off and cash out your entire portfolio, it is worth remembering that there remain a number of benefits of holding stablecoins over fiat.
The most obvious is that stablecoins are required in order to earn yield from lending against USD holdings in DeFi protocols. However, on-chain yields remain historically low, especially when compared to the relatively high rates currently available in traditional markets. CeFi yields are similarly low and, in any case, the inherent custodial risks make this a non-starter.
As such, the only truly compelling reasons to hold stablecoins over fiat at present are opportunity cost and US dollar denomination:
Stablecoins provide a straightforward means of gaining exposure to the US Dollar, which for many is vastly preferable to holding their domestic currency. It is, however, worth noting that many retail banks offer US dollar accounts (such as Revolut) and there are funds that invest in US dollar-denominated money market instruments that can serve as a proxy for such exposure.
Some dry powder will always be required to take advantage of opportunities in the crypto markets as they arise. This percentage of your portfolio will inevitably vary depending on your activity in the crypto markets.
Given the pace of regulatory change, any stablecoins which do not fulfil one of these two purposes are exposed to unnecessary systemic risk and would be better withdrawn to fiat.
Fail to prepare, prepare to fail
The final cloud looming above this entire discourse is that we simply do not know what is going to come next.
It transpired that Signature Bank was not forced by SWIFT to change its policy on this occasion. However, the fear that this possibility created shows that we still operate in an industry that is a single regulatory decision away from a stablecoin bank run.
To those who simply wish to sit on the sidelines without their stable portfolio suffering an ongoing existential threat - we are truly sorry. Nobody said crypto would be easy, but nobody ever said it would be this hard.
Ribbit: Consider mitigating your exposure to regulatory risks by proactively reducing your stablecoin holdings in favour of fiat. This is particularly pertinent whilst the yields you can earn on stablecoins remain low.
There may be exceptions where your local currency is relatively underperforming and you are otherwise unable to access traditional dollar-denominated assets. A stablecoin allocation will also be needed to take advantage of market opportunities.
At a minimum, ensure you have off-ramped sufficient fiat to meet upcoming liabilities, particularly large outlays with set deadlines such as tax. Anticipate delays and plan well ahead of time.
Have alternative solutions ready in the event of a policy change from your regular bank or exchange. In our experience, online banks such as Monzo and Revolut tend to be more accomodating of crypto transactions than traditional high street options.
#2 CANTO TAKE MY EYES OFF OF YOU
Canto is an EVM-compatible Layer 1 blockchain built using the Cosmos SDK.
Before we delve in, let’s break down the jargon:
Layer 1 means that Canto is a standalone blockchain ecosystem in its own right.
It is built using the Cosmos software development kit (the same toolkit used to build chains such as Atom, Osmosis and Juno). Blockchains built on Cosmos share elements of interoperability with each other, providing a number of benefits including the easier bridging of assets between chains.
On top is the base Cosmos layer, Canto has built an “Ethereum Virtual Machine”. This means that developers can easily port their Ethereum applications to run on Canto’s infrastructure.
The official Canto user guide can be found here. However, the easiest way to get started on Canto is to use the Synapse bridge. This will automatically convert your USDC on Ethereum to Canto’s native ‘NOTE’ stablecoin. Synapse charges a small fee for this service, but it is far more user-friendly than the chain’s native bridge.
This is all well and good, but why are we talking about it here?
Predictably, the answer is less to do with the fascinating tech and more to do with the fact its native token has been pumping.
Now, the market is hot, so this is certainly not an isolated phenomenon. However, we’ve noticed various traits that make Canto an interesting prospect on a longer time horizon.
Apes together, strong
Firstly, the bulk of Canto’s initial supply was farmed by its community, rather than allocated to VCs. Realistically, there are probably various investors and funds indirectly operating in the background, but it is a pleasant change of pace to not have a Silicon Valley fund openly forcing its 100x seed sale bags down your throat. On the contrary, it appears that such institutions are purchasing Canto on the open market.
Speaking of a lack of ‘Web3’, Canto is explicit in its attempts to differentiate itself from the growing trend of corporate ‘metaverse’-esque jargon. The community embraces those with an ‘OG’ crypto-native outlook, coining the term “Web+” as a way of mocking those who feign enthusiasm in crypto tech and culture in order to make a quick buck.
The chain’s USP is its aim to provide “public goods” (e.g. utilities and infrastructure that provide societal benefits rather than being solely profit-focused). This is something that Vitalik has written extensively about in the context of Ethereum’s greater ambitions. Most of the speculators buying into the recent Canto pump probably don’t genuinely care about these principles, but it certainly provides a distinctive narrative that the community can rally around.
If you want to experience a microcosm of the Canto community then this is best encapsulated by what many consider to be the chain’s killer app - the Slingshot DEX trading chat. In short, this all-in-one trading platform provides a novel sense of camaraderie to the act of gambling away your life savings.
Riding the wave
In terms of the Canto token itself, we do not recommend FOMO’ing into any coin that is up over 200% in a week. In fact, Canto’s price already appears to be correcting from its recent parabolic peak. The relative strength of the token over the coming weeks and months will tell us much about the conviction of its early community and the long-term prospects of the ecosystem.
However, there is still plenty of opportunity for profit to be made.
Those who read last week’s post on Shibarium will know that high-quality, original NFT collections tend to be consistent winners on trending chains. This has been no different for Canto, with their ‘OG’ NFT collection ‘Canto Long Necks’ seeing rapidly increasing prices and volume. The floor price is now sitting at a whopping ~$2,300.
We spotted this trend playing out last week and picked up ‘Dead Ends’ (first Canto generative art with an element of gamification) for ~500 Canto a piece and ‘Schnoises’ (an original profile picture collection) for ~100 Canto. Whilst prices have partially corrected, we were able to realise a 4x and 9x profit on these collections in less than a week, again proving the value in identifying such trends early.
You can track the current performance of Canto’s NFT collections on its primary marketplace, Alto.
In addition to keeping an eye out for future NFT collections, you can gain low-cost exposure to Canto’s growth by being early to the new wave of projects launching on the chain.
One of the best ways to identify such projects is to monitor the winners of developer events such as community hackathons. Simply being an early user of these protocols can offer incentives such as free NFT mints and token airdrops, making it well worth your time to delve in.
A flash in the pan?
Canto certainly faces a number of challenges in terms of the chain’s longer-term aspirations.
Foremost, for all the recent buzz around Canto, there really is not very much to do on the chain. At present, your options are limited to farming more Canto or playing around with a handful of community-built memecoins and NFT collections.
We are told a complex DeFi ecosystem is under construction, but attention spans in crypto are famously short-lived. There is no guarantee that Canto will sustain sufficient interest (and attract sufficient TVL) to incentivise talented developers to build there for the long term.
In addition, it is worth noting that many ordinary retail participants will inevitably be put off by the onboarding experience and the UI of certain core applications. This is particularly the case where such applications require interaction with the Cosmos base layer (especially if the native bridging experience is anything to go by).
However, despite these concerns, Canto remains a competitively-valued Layer 1 with a lot of promise. The key to its success will be its ability to onboard quality developers who can build out its ecosystem whilst maintaining an authentic community atmosphere.
Time will tell, but it certainly won’t hurt to keep an eye on future developments and put some inexpensive chips on the table, just in case.
Ribbit: Whilst Canto has the potential to form part of a longer-term portfolio, its recent explosion in price makes it a risky buy at these levels.
Now is a good time to seek out high-quality projects launching on the chain (e.g. by monitoring hackathons). Participate in project community channels and be an early user of new protocols launching on the chain.
In terms of NFTs, Canto Long Necks will likely remain the chain’s ‘blue chip’, but are relatively expensive. Less pricey options include collections such as Dead Ends and Schnoises. These could gain ‘OG’ status, but could just as easily be superseded by future collections.
Other promising Canto projects will inevitably be launched in the coming weeks and months. In the meantime, familiarise yourself with bridging to Canto and be ready to act as opportunities emerge.
great article, thanks!