The securities have not been and will not be registered under the U.S. Securities Act of 1933, as amended or with any other regulatory authority of any State or other jurisdiction of the United States or Canada and (i) may not be offered, sold or delivered within the United States or Canada, or to, or for the account or benefit of any U.S. Person or Canadian, and (ii) may be offered, sold or otherwise delivered at any time only to transferees that are Non-United States Persons and Non-Canadians.

January 4, 2023

Tax; Lido; WEF

Welcome to Swarm Markets’ media memo. This weekly update provides comments from Swarm Markets’ co-founders, Philipp Pieper and Timo Lehes, on key industry news that has caught our eye, plus our own developments. 

Comments available on the following news items:

  • Tax tweaks hint at global crypto regulatory manoeuvres 
  • Lido jumps above MakerDAO for TVL
  • WEF sees institutional shift in crypto coming for 2023

Crypto regulatory manoeuvres already underway in 2023

With the year still new, news of regulatory movements are already underway as crypto looks to adapt to increasing scrutiny of the sector. 

Further regulation has become one of the key talking points in the wake of the high-profile collapse of platforms such as FTX and Celsius. Where once Swarm was in the minority of voices calling for a regulatory-first approach to crypto, the entire sector now seems onboard with the idea that regulation is essential, and in some cases a savior, for its long-term survival. 

In terms of what we’ve seen already – in the UK the rules have been updated to provide tax exemptions for investors in crypto asset funds that choose to base themselves in the UK. The UK has major legislation working its way through parliament right now, and Rishi Sunak’s Government is clearly in favor of bringing crypto business to its shores.

In Italy however, a rather different approach is underway with Giorgia Meloni’s government slapping a 26% capital gains tax on crypto asset holders. The two differing approaches seem to mark out different attitudes to the sector at a time when entrepreneurs need sensible positive rules to encourage the right kind of innovation. 

Furthermore, Morocco is preparing its own crypto asset regulatory framework. While a minnow compared to more influential regions such as the EU, US or even Singapore in TradFi terms, what is clear is that countries are gearing up to promote their own versions of crypto asset regulations. 

Morocco for its part has developed its rules in conjunction with the IMF and World Bank, and has reportedly consulted with central banks in France, Sweden and Switzerland. This is important as the major regulators that set out their rules first will have both first-mover advantage and will provide leadership for other countries to follow around the world on regulatory approaches. 

Lido jumps ahead of MakerDAO in TVL stakes

The shifting balance of total value locked (TVL) shows the potential of liquid staking for the DeFi sector. With Lido now commanding the largest volume of TVL, jumping above major players such as MakerDAO and Aave, 2023 is going to be a major year for solutions that offer crypto investors yield. 

The Ethereum Merge that took place in September 2022 has been overshadowed by wider market issues, compounded by problems with centralized platforms. But the weakness in the headline price of Ether is masking a major trend underway in which investors seek to earn rewards through staking. 

Liquid staking provides an attractive total return, underpinning why there has been major growth in propositions such as Lido’s. Liquid staking has significant benefits over self staking in that it lowers the barrier to entry for investors and gives investors greater flexibility. 

Wait times and long lockup periods are not ideal, especially as self-custody soars in the wake of various platform failures. Exchange staking requires a level of centralization that may be problematic for many who are concerned about the stability of these operators.  

Liquid staking bypasses these issues, allowing users to participate at lower levels while making redemption seamless thanks to derivative token issuance. It provides access to the benefits of staking, i.e. earning a yield, without exposing users to the risks we’ve all come to be wary of in recent months. 

With the Shanghai upgrade expected in the next few months, we’ll likely see more movement toward liquid staking. This will improve the proposition by allowing withdrawals of ether staked since December 2020, giving more functional options for those interested in taking advantage of the yield potential. 

WEF sees movement of crypto into the hands of institutions

In its year ahead remarks the World Economic Forum (WEF) has predicted that institutions will move to take a bigger role in crypto and blockchain innovation. 

Institutions are indeed well placed to move into the space, but this has to be done in a clear and coherent way. Regulation is a big factor in reassuring TradFi to dip its toes, but a clear value proposition is also key. This comes with the introduction of real world assets (RWAs) onto blockchain and unlocking the potential of those assets through digital ownership. 

The combination of regulated institutions, auditors and providers which attest the existence of assets and provide digital capabilities to exchange, hold and lend against those assets has enormous potential. Major projects such as MakerDAO have already accumulated hundreds of millions in RWAs in partnership with TradFi institutions, and we expect this trend to broaden and accelerate in the coming months. 

The introduction of RWAs to DeFi technology will prevent speculative asset bubbles we’ve seen in crypto, where highly correlated tokens sweep through boom and bust cycles on sheer momentum alone. In order to digitize assets that plug into the deep liquidity of traditional markets, participants must be able to verify their existence on demand. 

RWA digitisation is the future of the crypto sector and TradFi institutions are coming around to this idea quickly, as inroads from firms such as Goldman Sachs already evidence. The ultimate goal of this will be the unification of traditional asset classes and institutions with digital blockchain technologies provided by DeFi.