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U.S. SEC’s crypto guidelines push up costs for lenders, disrupting projects

By Hannah Lang and Michelle Price

WASHINGTON (Reuters) – Banks’ cryptocurrency projects have been upended by U.S. Securities and Exchange Commission (SEC) accounting guidance that would make it too capital-intensive for lenders to hold crypto tokens on behalf of clients, according to more than half a dozen people with knowledge of the matter.  

A slew of lenders including U.S. Bancorp, Goldman Sachs Group Inc, JPMorgan Chase & Co, BNY Mellon, Wells Fargo & Co, Deutsche Bank, BNP Paribas and State Street Corp offer or are working on crypto products and services for clients in a bid to tap in to the $1 trillion crypto market, according to their public statements and media reports.

But on March 31, the SEC said public companies that hold crypto assets on behalf of clients or others must account for them as liabilities on their balance sheets due to their technological, legal and regulatory risks.

While the guidance applies to all public companies, it is especially problematic for banks because their strict capital rules, overseen by bank regulators, require them to hold cash against balance sheet liabilities. The SEC did not consult the banking regulators when issuing the guidance, according to four of the people.

The SEC’s move complicates banks’ efforts to jump on the digital asset bandwagon, and could keep them on the sidelines even as they report increased demand from clients looking to access the burgeoning market.

“This has thrown a huge wrench in the mix,” one of the sources said. Lenders building out crypto offerings have had “to cease moving forward with those plans pending any kind of further action from the SEC and the banking regulatory agencies,” they added.

Custody banks State Street and BNY Mellon, which have been building digital asset offerings, are among those whose projects have been disrupted, according to three people with knowledge of the matter.

While the accounting guidance does not stop State Street from offering crypto custody services, it would make doing so uneconomical, said Nadine Chakar, head of State Street Digital. “We do have an issue with the premise of doing that, because these are not our assets. This should not be on our balance sheet,” said Chakar.

A spokesperson for BNY Mellon declined to comment on the status of its crypto custody project. “BNY Mellon believes digital assets are here to stay, and increasingly becoming part of the mainstream of finance,” he added.

When asked about the SEC guidance, a U.S. Bancorp spokesperson said it is still servicing existing clients for which it offers bitcoin custody services. “However, we are pausing intake of additional clients in this service as we evaluate the evolving regulatory environment.”

One executive at a European bank looking to launch crypto custody services said it would now be prohibitively costly for the bank to do so in the United States due to the SEC guidance.

Spokespeople for the SEC and the other banks declined to comment.

The problems the SEC guidance is causing for banks, which have not previously been reported, underscore the broader challenges lenders face in trying to capitalize upon the growing crypto market amid ongoing regulatory confusion and skepticism.

“We’ve heard from a wide variety of stakeholders, banks among them, about how challenging this new staff accounting bulletin would be for them to be able to enter in to the space of custodying crypto assets,” U.S. Representative Trey Hollingsworth, who sent SEC Chair Gary Gensler a letter in July expressing concern about the guidance, said in an interview.

“This edict came down without guidance, without input, without feedback, without conversation being had with industry.”

CAPITAL PUNISHMENT?

As the cryptocurrency market ballooned in 2020, financial institutions were eager to cash in. Despite the crypto market contracting significantly this year, lenders still see an opportunity for their services.

Offering to hold clients’ digital assets appeared the safest way to enter the market. Banks commonly offer custody for a variety of financial instruments and have generally not been required to reflect them on their balance sheet, unless they are commingled with the bank’s own assets.

The SEC guidance departed from that practice. At a conference last week, the SEC’s acting chief accountant said that custodied crypto assets present “unique” risks which meet the definition of a liability under U.S. accounting standards.

In a June letter to bank regulators, however, the Securities Industry and Financial Markets Association, American Bankers Association and the Bank Policy Institute said such risks are already mitigated by strict bank supervision and rules.

Factoring in planned international Basel capital rules, the guidance could cost more than $1 of capital for every $1 of digital assets held, the groups estimated, meaning crypto custody “effectively would be prohibited.”

The SEC guidance also appears to apply where lenders outsource the custody function to a third party, such as Anchorage Digital, the sources said.

Diogo Mónica, president of Anchorage Digital, said the capital cost was “completely unsupportable” and that “every single bank” Anchorage works with is now waiting on regulators before proceeding to work with Anchorage on crypto custody solutions.

Industry groups have been lobbying the SEC to carve banks out of the guidance, according to four of the sources and industry letters, although the agency appears unpersuaded, one of those people said. Some lenders, instead, are seeking individual exemptions, two people said.

The industry is also lobbying the banking regulators to issue guidance that would neutralize the capital impact of the SEC guidance, although changing capital rules would be a major undertaking which looks unlikely in the short term, the people said.

The Federal Reserve, the Office of the Comptroller of the Currency and Federal Deposit Insurance Corp declined to comment.

(Reporting by Hannah Lang and Michelle Price in Washington; Additional reporting by Pete Schroeder in Washington; Editing by Matthew Lewis)

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U.S. Senate to grill SEC’s Gensler over climate, China and crypto

By Pete Schroeder and Michelle Price

WASHINGTON (Reuters) – An aggressive regulator is critical to maintaining the United States as the “gold standard” for capital markets, U.S. Securities and Exchange Commission (SEC) chair Gary Gensler will tell the U.S. Senate Banking Committee on Thursday.

Gensler will appear before the panel for its regular oversight duties, but the hearing comes at a time of Republican frustration over his agenda. They claim he has overstepped his authority with a broad assault on U.S. capital markets and adopted a hostile stance toward the financial industry.

Republican representative Tom Emmer told Reuters in July that, under Gensler, the SEC had “politicized rulemaking and discouraged good faith cooperation.”

But in prepared testimony released ahead of the hearing, Gensler insisted his new rules are critical to the predominant status of U.S. markets.

“As markets have evolved, our rules have continued to evolve as well,” he said. “I think we should do everything we can to maintain and enhance that gold standard of our capital markets.”

CLIMATE RULE CONCERNS

Republicans are especially concerned about a draft SEC rule requiring public companies to disclose climate-related risks, including greenhouse gas emissions. Corporate groups say it is onerous and exceeds the agency’s authority.

Gensler is likely to be grilled on the climate rule, especially in light of a recent Supreme Court decision to curb the Environmental Protection Agency’s power, which some legal experts say undermines the SEC’s authority on the rule.

But Gensler said the rule would provide needed clarity and consistency to an issue important to investors and being disclosed by some companies under disparate frameworks.

CRYPTOCURRENCY CRITICISMS

Republicans will also pressure Gensler on what some see as his increasingly hawkish stance on cryptocurrency oversight, said Isaac Boltansky, director of policy research for brokerage BTIG.

Gensler made headlines last week when he said crypto companies may need multiple SEC registrations and split their operations into separate legal entities.

Senator Pat Toomey, the senior Republican on the committee criticized Gensler’s approach in July.

“What is the SEC doing now to help ensure the crypto community gets the regulatory clarity it has repeatedly asked for? They deserve answers now, not later.”

In his prepared testimony, Gensler said such “disaggregation” could enhance investor protections and guard against conflicts of interest. He added that SEC staff was working with traditional market intermediaries interested in entering the crypto market, and urged Congress to not inadvertently undermine existing investor protections while crafting cryptocurrency legislation.

U.S.-CHINA AUDIT DEAL

Gensler also struck a cautious tone on a recent deal between U.S. and Chinese officials on auditing U.S.-listed Chinese firms, noting the accord is meaningful only if U.S. officials actually are permitted to fully investigate Chinese auditors.

If not, roughly 200 companies would still face the prospect of trading restrictions in the United States, he warned.

“There was a fair amount of fanfare after the agreement in August, but there are still some real questions about how the agreement will work and some understandable skepticism on Capitol Hill about its prospects for success,” said Boltansky.

(Reporting by Michelle Price and Pete Schroeder; Editing by Josie Kao)

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Explainer-Ethereum’s energy-saving Merge upgrade

By Elizabeth Howcroft and Hannah Lang

(Reuters) – Ethereum, the blockchain that underpins the world’s second-largest crypto token ether, on Thursday underwent a major software upgrade that slashes the amount of energy needed to create new coins and carry out transactions.

Here’s what you need to know about the “Merge” as the shift is known.

WHAT IS ETHEREUM?

Like other blockchains, Ethereum is essentially a digital database shared across a network of computers. It records ownership of the cryptocurrency ether, and other Ethereum-based digital assets such as non-fungible tokens.

Proponents say Ethereum will form the backbone of much of the widely hyped but still unrealised “Web3” vision of an internet where crypto takes centre stage in applications and commerce.

SO WHAT IS THE MERGE?

The “Merge” is a change to the way Ethereum processes transactions and how new ether tokens are created.

It involved the Ethereum blockchain combining with a new separate blockchain. The new system, known as “proof-of-stake”, slashes the Ethereum blockchain’s energy consumption by 99.9%, developers say.

Most blockchains, including bitcoin’s, devour large amounts of energy, sparking criticism from some investors and environmentalists.

The Ethereum Foundation, a prominent non-profit organisation that says it supports Ethereum, says the upgrade will pave the way for further blockchain updates that will facilitate cheaper transactions.

HOW BIG OF A DEAL IS THIS?

Ethereum backers say the Merge is a monumental moment for the $1 trillion crypto sector.

Proponents believe the Merge will make Ethereum more favourable compared to arch-rival bitcoin – the world’s top cryptocurrency – in terms of price and usability.

That could see Ethereum applications become more widely used.

Some investors are betting the change will be significant for the price of ether, which has gained more than 50% since the end of June, compared to bitcoin’s minimal gains.

Ether’s price showed little reaction to the Merge’s completion on Thursday, trading at around $1,624.

PROOF-OF-STAKE? SOUNDS TECHNICAL

It is. But it’s also important.

There are different ways transactions on the blockchain – the software that underpins most crypto – can be verified. In the “proof-of-work” system previously used by Ethereum, new transactions were checked by crypto miners.

Miners used powerful computers that solved complex maths puzzles and updated the blockchain, earning new crypto tokens. While this made records on the blockchain secure, it was highly energy-intensive.

In the “proof-of-stake” system, ether owners will lock up set amounts of their coins to check new records on the blockchain, earning new coins on top of their “staked” crypto.

SOUNDS LIKE A NO-BRAINER, RIGHT?

Maybe. While Ethereum developers say the “proof-of-stake” model has safeguards to ward off hackers, others say criminals could attack the blockchain under the new system.

If a single entity accumulated the majority of ether staked to validate new transactions, they could alter the blockchain and steal tokens. Crypto experts also say there is a risk that technical glitches could mar the Merge, and that scammers could take advantage of confusion to steal tokens.

It may also become easier for developers to build programmes on the Ethereum network, potentially boosting adoption. Still, those updates are likely months, if not years, away.

(Reporting by Hannah Lang in Washington and Elizabeth Howcroft, editing by Tom Wilson, Chizu Nomiyama and Jason Neely)

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Ethereum blockchain has completed major software upgrade, co-founder says

(Reuters) – A major software upgrade to the Ethereum blockchain aimed at drastically reducing its energy usage has been completed, Vitalik Buterin, Ethereum inventor and co-founder tweeted on Thursday. The upgrade, known as the “Merge”, will change how transactions on the Ethereum blockchain occur and how ether tokens, the second-largest crypto coin after bitcoin, are created. Under the change, Ethereum will move from a “proof of work” system, in which energy-hungry computers validate transactions by solving complex maths problems, to a “proof of stake” system, where individuals and companies act as validators, using their ether as collateral, to win newly created tokens.

(Reporting by Tom Wilson and Maria Ponnezhath in Bengaluru; editing by Jason Neely)

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Yen jumps vs dollar after BOJ rate check, hints on intervention, U.S. PPI data

By Caroline Valetkevitch and Alun John

NEW YORK/LONDON (Reuters) – The yen was up more than 1% against the dollar on Wednesday after the Bank of Japan conducted a rate check in possible preparation for currency intervention, with the Japanese currency strengthening more in the wake of U.S. producer prices data.

In a rate check, central bank officials call up dealers and ask for the price of buying or selling yen. However, actually intervening to support the currency would be a larger step.

Japanese Finance Minister Shunichi Suzuki told reporters on Wednesday that recent yen moves have been “rapid and one-sided”, adding that yen-buying currency intervention was among the government’s options should such moves continue.

“Most market participants are on pins and needles awaiting whether or not we’re going to get any sort of intervention from the ministry of finance in Japan,” said Bipan Rai, North American head of FX strategy at CIBC Capital Markets in Toronto.

“It’s one of those things where we’ve seen comments so many times about the fact that they’re watching and monitoring the yen. The fact that they did a rate check overnight kind of indicates we’re in greater proximity toward intervention. But just intervention by itself we don’t think is going to be all that successful outside of an immediate knee-jerk reaction.”

The recent sharp gains in the dollar versus the yen have been tied to the hawkish stance from the Federal Reserve in raising interest rates to control inflation. The dollar hit a 24-year peak against the yen last week.

The dollar fell 1% against the yen right after news of the rate check. Nikkei website reported the rate check, citing unidentified sources, and Reuters later confirmed it with a market source. The dollar was last down 1.4% at 142.67 yen, hitting a session low of 142.6 in the wake of the PPI data.

The dollar index, which tracks the currency against six main peers, was down 0.3% on Wednesday at 109.55, a day after registering its largest daily percentage gain since March 2020 on an unexpected rise in the U.S. consumer price index (CPI).

On Wednesday, data showed producer prices fell for second straight month in August, while it also showed underlying producer inflation rising moderately last month.

Financial markets now have fully priced in an interest rate hike of at least 75 basis points at the conclusion of the Fed’s policy meeting next week, according to the CME’s Fedwatch tool.

As inflation is a small concern in Japan, authorities are keeping yields on Japanese government bonds pinned down to help with the economic recovery. [JP/T]

In contrast, the two-year U.S. Treasury yield, a bellwether for interest rate expectations, rose another 3.2 basis points to 3.788% after jumping 18.5 bps on Tuesday following the consumer price data.

The euro was up 0.1% against the dollar at $0.9979.

========================================================

Currency bid prices at 10:42AM (1442 GMT)

Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid

Previous Change

Session

Dollar index

109.5500 109.8300 -0.25% 14.517% +109.9300 +109.2700

Euro/Dollar

$0.9979 $0.9968 +0.11% +0.00% +$1.0024 +$0.9956

Dollar/Yen

142.6700 144.6200 -1.35% +0.00% +144.9550 +142.5800

Euro/Yen

142.36 144.08 -1.19% +0.00% +144.4700 +142.3000

Dollar/Swiss

0.9609 0.9619 -0.10% +0.00% +0.9631 +0.9591

Sterling/Dollar

$1.1565 $1.1494 +0.61% +0.00% +$1.1578 +$1.1480

Dollar/Canadian

1.3159 1.3175 -0.11% +0.00% +1.3206 +1.3149

Aussie/Dollar

$0.6742 $0.6733 +0.14% +0.00% +$0.6748 +$0.6705

Euro/Swiss

0.9588 0.9583 +0.05% +0.00% +0.9628 +0.9582

Euro/Sterling

0.8628 0.8674 -0.53% +0.00% +0.8684 +0.8629

NZ

Dollar/Dollar $0.6012 $0.6000 +0.08% +0.00% +$0.6013 +$0.5978

Dollar/Norway

10.1000 10.1125 +0.10% +0.00% +10.1460 +10.0710

Euro/Norway

10.0806 10.0641 +0.16% +0.00% +10.1251 +10.0577

Dollar/Sweden

10.6880 10.6882 +0.09% +0.00% +10.7160 +10.6211

Euro/Sweden

10.6662 10.6570 +0.09% +0.00% +10.6779 +10.6369

(Reporting by Caroline Valetkevitch in New York and Alun John in London and Kevin Buckland; Editing by Kim Coghill, Edmund Klamann, Toby Chopra, Mark Heinrich and Jonathan Oatis)

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Cryptoverse: Ether snaps at bitcoin’s heels in race for crypto crown

By Medha Singh and Lisa Pauline Mattackal

(Reuters) – For years, ether could barely dream of challenging its big brother bitcoin. Now, its ambitions may be becoming more realistic.

The second-biggest cryptocurrency is taking market share from bitcoin ahead of an all-important “Merge” software upgrade that could sharply reduce the energy usage of its Ethereum blockchain, should the developers pull it off in coming days.

Bitcoin’s dominance, or its share of the crypto market’s market value, has slipped to 39.1% from this year’s peak of 47.5% in mid-June, according to data platform CoinMarketCap. Ether, on the other hand, has climbed to 20.5% from 16%.

The upstart is still a long way from overtaking bitcoin as the No.1 cryptocurrency, a reversal known to aficionados as “the flippening”. It’s made up ground, though; in January 2021, bitcoin reigned supreme at 72%, while ether occupied a slender 10%.

As for price, one ether is now worth 0.082 bitcoin, near December 2021 highs and sharply above the 2022 low of 0.049 in June.

“People are now viewing Ethereum as essentially a safe asset because they’ve seen the success of the network, they think it’s not going anywhere,” said Joseph Edwards, head of financial strategy at fund management firm Solrise Finance.

“There’s a permanency to how Ethereum is perceived in the crypto ecosystem.”

Graphic: Bitcoin dominance wanes: https://graphics.reuters.com/FINTECH-CRYPTO/WEEKLY/zdvxomazgpx/chart.png

CAPRICIOUS CRYPTO

The Merge, expected to take place on Thursday after several delays, could lead to wider use of the blockchain, potentially boosting ether’s price – although nothing is certain in a capricious crypto market.

Ethereum forms the backbone of much of the “Web3” vision of an internet where crypto takes centre stage, powering applications involving crypto offshoots such as decentralised finance and non-fungible tokens – although this much-hyped dream is still unrealised.

Bitcoin and ether have both nearly halved this year on concerns about supersized interest rate hikes from central banks. Nonetheless, investors seem to like the look of the Merge, with ether up over 65% since the end of June. Bitcoin has barely budged in the same period.

“We’re going to see (ether’s) attractiveness to some investors who are concerned about energy consumption,” said Doug Schwenk, CEO of Digital Asset Research, although he cautioned that ether was still a long way behind bitcoin.

THE KING IS STRONG

The diminishing bitcoin dominance in crypto’s current bear market is a departure from previous market cycles when investors sold lesser tokens – “altcoins” – in favor of the more liquid and reliable bitcoin.

Dethroning the king is no easy feat, though.

Bitcoin is still by far the most well-known cryptocurrency. Mainstream investors who have dipped their toes in the crypto market since 2020 have tended to turn first to bitcoin, as the most liquid and widely-traded token.

Its market cap of $427 billion is still more than double Ether’s $210 billion, and market participants firmly believe the original digital coin remains the gold standard in crypto due to its limited supply.

Some market players say bitcoin’s grip on the crypto crown is still strong, even if it has to accept other contenders. For example, Hugo Xavier, CEO of K2 Trading Partners, said its dominance could improve to 50%-60% range if the crypto market turns bullish but it is unlikely to touch 70% again.

(Reporting by Medha Singh and Lisa Pauline Mattackal in Bengaluru; Editing by Tom Wilson and Pravin Char)

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Bank capital rules for cryptoassets due by year end

LONDON (Reuters) – The global Basel Committee of banking regulators will complete work on “robust” rules for how banks must set aside capital to cover cryptoassets on their books, the committee’s oversight body said on Tuesday.

“On cryptoassets, members reiterated the importance of designing a robust and prudent regulatory framework for banks’ exposures to cryptoassets that promotes responsible innovation while preserving financial stability,” the Group of Central Bank Governors and Heads of Supervision (GHOS) said in a statement.

“The GHOS tasked the Committee with finalising such a framework around the end of this year.”

(Reporting by Huw Jones; Editing by Alison Williams)

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Brother of ex-Coinbase manager pleads guilty to insider trading charge

NEW YORK (Reuters) – The brother of a former Coinbase Global Inc product manager pleaded guilty on Monday to a wire fraud conspiracy charge in what U.S. prosecutors have called the first insider trading case involving cryptocurrency.

Nikhil Wahi said in a virtual court hearing before U.S. District Judge Loretta Preska that he made trades based on confidential Coinbase information.

Prosecutors say Ishan Wahi, the former product manager, shared confidential information with his brother and their friend Sameer Ramani about forthcoming announcements of new digital assets that Coinbase would allow users to trade.

Ishan Wahi has pleaded not guilty. Ramani, who was also charged, is at large.

(Reporting by Luc Cohen in New York; Editing by Bernadette Baum)

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Ethereum blockchain to undergo major upgrade to cut energy use

By Elizabeth Howcroft

LONDON (Reuters) – A long-awaited software upgrade to the Ethereum blockchain aimed at slashing its huge energy consumption is expected this week, a move proponents say may widen the technology’s use and support the price of the ether token.

The upgrade, known as the “Merge,” will mark a radical change to how transactions on the Ethereum blockchain occur and ether tokens are created. The new system will consume 99.95% less energy, according to the Ethereum Foundation https://ethereum.org/en/upgrades/merge/, a body which acts as a spokesperson for the network.

The exact timing for the Merge is unknown, but Google and other sites tracking the blockchain were on Monday predicting it would take place in the early hours of Thursday. The Ethereum Foundation has said it will take place on Sept. 10-20. The event has been delayed several times previously.

If successful, Ethereum will move from a “proof of work” system – in which energy-hungry computers validate transactions by solving complex mathematical problems – to a “proof of stake” protocol, in which individuals and companies act as validators, using their ether as collateral, in a bid to win fresh tokens.

Ether is the second-largest cryptocurrency after bitcoin, with a market capitalisation of around $200 billion, according to data site CoinGecko. There are around 1 million to 1.5 million transactions per day on the Ethereum blockchain, compared to Bitcoin’s 200,000 to 300,000, according to CoinMetrics data.

Crypto prices plunged earlier this year as a broader downturn in financial markets prompted investors to ditch risky assets. Ether has risen around 65% since the end of June ahead of the Merge, while bitcoin has seen little change.

“This is a very material development in the overall evolution plan for Ethereum,” said James Malcolm, head of FX strategy at UBS. Still, he said, it may not necessarily impact the price of ether as the Merge is already priced in.

ENERGY-SAVING?

The high energy use of crypto and blockchain tech has drawn criticism from some investors and environmentalists. A single transaction on Ethereum currently requires as much power as an average U.S. household uses in a week, according to researcher Digiconomist https://digiconomist.net/ethereum-energy-consumption.

To proponents, the energy-saving upgrade represents a major step forward in the race to become the world’s top blockchain.

Ethereum has become the blockchain of choice for various functions in the world of decentralised finance, including smart contracts and projects involving tokens representing traditional assets such as stocks and bonds.

Ethereum backers say the tech will form the basis of a new financial system, in which money and assets can be traded in the form of crypto tokens without the need for providers of traditional financial services.

Others see it as a cornerstone of so-called “Web3,” a hyped but still unrealised iteration of the internet where blockchain and crypto assets take centre stage.

Still, ether has so far seen limited mainstream adoption as a means of payment, with trading by far the most popular use.

(Reporting by Elizabeth Howcroft; editing by Tom Wilson and Louise Heavens)

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U.S. SEC to set up new office for crypto filings

(Reuters) – The U.S. securities regulator will set up two new offices to deal with filings related to crypto assets and the life sciences sector, the agency said on Friday.

The “Office of Crypto Assets” and the “Office of Industrial Applications and Services” will join seven existing offices under the Securities and Exchange Commission (SEC) department which handles corporate disclosure filings.

“As a result of recent growth in the crypto asset and the life sciences industries, we saw a need to provide greater and more specialized support,” Renee Jones, director of the Division of Corporation Finance, said in a statement.

Cryptocurrencies and other digital assets have soared in popularity over recent years and are getting increasingly intertwined with the regulated financial system, saddling policymakers with monitoring risks in a largely unregulated sector.

2022 has seen a sharp drop in crypto demand though, as global risk sentiment was walloped by the Ukraine crisis, aggressive monetary policy tightening and decades-high inflation.

Allegations of money laundering against some crypto firms as well as consumer data violations in the United States, the biggest market for digital assets, have also affected demand.

(Reporting by Manya Saini in Bengaluru; Editing by Devika Syamnath)

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FTX Ventures plans to take 30% stake in Scaramucci’s SkyBridge Capital

By Mehnaz Yasmin

(Reuters) – FTX Ventures plans to scoop up a 30% stake in SkyBridge Capital, the companies said, making it the latest in a flurry of deals by cryptocurrency’s white knight Sam Bankman-Fried.

Financial terms of the deal were not disclosed by the companies.

SkyBridge, the alternative investment firm led by Anthony Scaramucci, will use a portion of the proceeds from the deal to deploy $40 million in cryptocurrency investments to hold on its balance sheet as a long-term investment, according to a joint statement by the companies.

The news was first reported by CNBC earlier in the day.

“I don’t think that Sam Bankman-Fried’s recent movement is an altruistic gesture,” said Richard Gardner, chief executive officer of Modulus Global, a software provider to big-ticket Wall Street clients.

“Some investors may see this as a turnaround for the industry, but I think it is more of a life jacket than a lifeboat.”

The cryptocurrency sector found a savior in Bankman-Fried, 30, who threw several lifelines to digital asset platforms as cryptocurrency prices cratered this year.

The head of one of the largest cryptocurrency exchanges had said in July that he and his company still have a “few billion” on hand to shore up struggling firms that could further destabilize the digital asset industry.

His crypto trading arm, Alameda Research, provided $200 million in cash, a stablecoin revolving credit facility and a facility of bitcoin to Voyager Digital before it went bankrupt, while FTX had handed another $400 million revolving credit facility to BlockFi with an option to buy it for up to $240 million.

In January, FTX unveiled FTX Ventures, a $2 billion venture capital fund focused on digital asset investments, which it has since drawn on to help bail out firms that are lacking liquidity, but not assets.

(This story corrects last name to “Gardner”, not “Garner” in paragraph 5)

(Reporting by Mehnaz Yasmin in Bengaluru; Editing by Maju Samuel)

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Bitcoin leaps above $21,000 as U.S. dollar sags

SINGAPORE (Reuters) – Bitcoin surged past the $20,000 barrier and was potentially heading for its best day in six months on Friday as the U.S. dollar fell broadly and markets found reasons to be cheerful at the end of a dour week.

Bitcoin, the biggest cryptocurrency by market value, rose more than 9% to $21,254, a two-week high. If it holds, the daily percentage gain would be the largest since late February.

Ether, the second-biggest, rose more than 5% to hit a three-week peak at $1,746. Bitcoin had been as low as $18,540 on Wednesday.

Market participants said there was no particular trigger for the gains beyond a broad upbeat mood in evidence across asset classes on Friday, led by a drop in the safe-haven dollar and reinforced by positive moves in global shares. [MKTS/GLOB]

Marcus Sotiriou a market analyst at GlobalBlock attributed Bitcoin’s climb to optimism that the United States could report another decline in inflation next week.

Such a decline would typically be expected to support assets like cryptocurrencies that do well when markets have an optimistic tone.

If cryptocurrencies can hold their gains until Sunday’s close, Bitcoin could log a second weekly rise in a row, and its best week in about a month.

Ether’s weekend volatility may be heightened by a looming software upgrade known as the “merge”, due sometime between Sept. 10 and 20, with the exact timing uncertain.

The shift will radically change how transactions are processed and is supposed to slash energy consumption. Some exchanges plan to pause deposits and withdrawals while the upgrade occurs.

(Reporting by Tom Westbrook in Singpaore, additional reporting by Alun John in London; Editing by Mark Potter and Jane Merriman)

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Explainer-Understanding Ethereum’s major “Merge” upgrade

By Hannah Lang

(Reuters) – Ethereum, the blockchain that underpins the world’s second-largest crypto token ether, will soon undergo a major software upgrade that promises to slash the amount of energy needed to create new coins and carry out transactions.

Here’s what you need to know about the “Merge,” as the shift is known.

SO WHAT IS THE MERGE?

The Ethereum blockchain is due to merge with a separate blockchain, radically changing the way it processes transactions and how new ether tokens are created.

The new system, known as “proof-of-stake,” will slash the Ethereum blockchain’s energy consumption by 99.9%, developers say. Most blockchains, including bitcoin’s, devour large amounts of energy, sparking criticism from some investors and environmentalists.

The Ethereum Foundation, a prominent non-profit organization that says it supports Ethereum, says the upgrade will pave the way for further blockchain updates that will facilitate cheaper transactions. High costs and slow transaction times are currently two of the main issues users have with the Ethereum network.

AND WHEN’S IT HAPPENING?

Very soon. The merge is scheduled for completion between Sept. 10 and 20, though the exact timing is uncertain. Independent estimates point to Sept. 15 as the likely date.

Major crypto exchanges, including Coinbase Global and Binance, have said they will pause ether deposits and withdrawals during the merge. Users won’t need to do anything with their funds or digital wallets as part of the upgrade, they say.

HOW BIG OF A DEAL IS THIS?

Ethereum backers say the Merge is a monumental moment for the $1 trillion crypto sector.

Proponents believe the Merge will make Ethereum more favourable compared to arch-rival bitcoin – the world’s top cryptocurrency – in terms of price and usability.

That could see Ethereum applications become more widely used. Investors are betting the change will be significant for the price of ether, which has gained more than 50% since the end of June, compared to a slight loss for bitcoin.

PROOF-OF-STAKE? SOUNDS TECHNICAL

It is. But it’s also important.

There are different ways transactions on the blockchain – the software that underpins most crypto – can be verified. In the “proof-of-work” system currently used by Ethereum, new transactions are checked by crypto miners.

Miners use powerful computers that solve complex maths puzzles and update the blockchain, earning new crypto tokens. While this makes records on the blockchain secure, it’s highly energy-intensive.

In the “proof-of-stake” system, ether owners will lock up set amounts of their coins to check new records on the blockchain, earning new coins on top of their “staked” crypto.

SOUNDS LIKE A NO-BRAINER, RIGHT?

Maybe. While Ethereum developers say the proof-of-stake model has safeguards to ward off hackers, others say criminals could attack the blockchain under the new system.

If a single entity accumulated the majority of ether staked to validate new transactions, they could alter the blockchain and steal tokens. Crypto experts also say there is a risk that technical glitches could mar the Merge, and that scammers could take advantage of confusion to steal tokens.

It may also become easier for developers to build programs on the Ethereum network, potentially boosting adoption. Still, those updates are likely months, if not years, away.

(Reporting by Hannah Lang in Washington; editing by Tom Wilson and)

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Crypto intermediaries should register with U.S. SEC, agency chair says

By Michelle Price

WASHINGTON (Reuters) – Companies that help facilitate transactions in the cryptocurrency market should register with the U.S. Securities and Exchange Commission (SEC) just like other market intermediaries, the agency’s chair said on Thursday.

Gary Gensler said intermediaries in the crypto market provide a range of functions regulated by the SEC, including operating as an exchange, broker dealer, clearing agent and custodian, and should be registered accordingly.

“If you fall into any of these buckets, come in, talk to us, and register,” Gensler told an audience of attorneys in Washington, D.C., reiterating that the vast majority of crypto tokens qualify as securities and are captured by relevant laws.

“The commingling of the various functions within crypto intermediaries creates inherent conflicts of interest and risks for investors,” he added.

While Gensler has previously said crypto lenders fall under the SEC’s purview, his comments provide more detail on other crypto market actors the SEC believes fall within its jurisdiction.

The comments will likely spook crypto market participants who had hoped to avoid the costly requirements typically associated with SEC registration, including disclosures, risk management controls and capital and liquidity minimums, although it remains to be seen if such firms will voluntarily comply.

Gensler said he has asked SEC staff to work with crypto intermediaries to ensure they register each of their functions, which could involve splitting them out into separate legal entities to mitigate conflicts of interest.

He added, however, that the SEC may need to be flexible in applying existing disclosure requirements, noting tailored product disclosures exist elsewhere under the SEC’s regime.

(Reporting by Michelle Price; Additional reporting by Hannah Lang; Editing by Josie Kao)

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U.S. seizes $30 million in crypto from North Korea-linked hackers

(Reuters) – The United States has seized over $30 million in cryptocurrency stolen by North Korean-linked hackers Lazarus from the popular online game Axie Infinity, crypto intelligence firm Chainalysis said on Thursday.

The company said in a blog post it played a role in the recovery with U.S. law enforcement and other crypto organizations, without naming them, in the first ever recovery of stolen cryptocurrency by a North Korea hacking group.

Chainalysis and North Korea’s mission to the United Nations did not immediately respond to requests for comment. The FBI did not immediately respond to a request for comment.

The seizures represent about 10% of the total funds stolen in March from Ronin Network, a sidechain built for the play-to-earn game Axie Infinity, Chainalysis said.

Ronin said in March hackers stole about $615 million in cryptocurrency.

“We estimate that so far in 2022, North Korea-linked groups have stolen approximately $1 billion of cryptocurrency from DeFi protocols,” Chainalysis said. He was referring to decentralized finance protocols, an umbrella term for financial services offered on public blockchains.

The U.S Department of Treasury in May sanctioned virtual currency mixer Blender, saying it was used in the laundering process for the Axie Infinity heist.

The Treasury Department in April also linked Lazarus to the attack.

(Reporting by Rachna Dhanrajani in Bengaluru; Editing by Richard Chang)

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Coinbase backs lawsuit against U.S. Treasury over Tornado Cash sanctions

(Reuters) – Crypto exchange Coinbase on Thursday said it was funding a lawsuit against the U.S. Treasury Department to block sanctions barring Americans from Tornado Cash, a virtual currency mixer accused of helping hackers launder proceeds for cybercrimes.

The Treasury Department imposed sanctions on Tornado Cash last month over allegations they had laundered more than $7 billion worth of virtual currency. Some of those proceeds went to North Korean government-backed hackers, the department says.

Tornado Cash did not comment on the sanctions when they were imposed on Aug. 8 and representatives for the platform were not immediately reachable. Coinbase CEO Brian Armstrong said the Treasury Department had gone too far “by sanctioning an entire technology instead of specific individuals.”

Armstrong added: “[There] are legitimate applications for this type of technology and as a result of these sanctions, many innocent users now have their funds trapped and have lost access to a critical privacy tool.”

Armstrong said Coinbase was funding the lawsuit, which he said was brought by six people. The New York Times reported that the lawsuit was filed on Thursday in federal court in the Western District of Texas.

The Treasury Department did not immediately respond to a request for comment.

(Reporting by Rami Ayyub; Editing by Susan Heavey and Mark Porter)

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Elon Musk $258 billion Dogecoin lawsuit expands

By Jonathan Stempel

NEW YORK (Reuters) – The $258 billion racketeering lawsuit accusing Elon Musk of running a pyramid scheme to support the cryptocurrency Dogecoin has expanded, adding seven new investor plaintiffs and six new defendants including his tunnel construction business Boring Co.

According to an amended complaint filed on Tuesday night in Manhattan federal court, Musk, his electric car company Tesla Inc, his space tourism company SpaceX, Boring and others intentionally drove up the price of Dogecoin more than 36,000% over two years and then let it crash.

By doing so, the defendants “profited tens of billions of dollars” at other Dogecoin investors’ expense, while knowing all along that the currency lacked intrinsic value and that its value “depended solely on marketing,” the complaint said.

Tesla, SpaceX and Boring did not immediately respond on Wednesday to requests for comment. Tesla disbanded its media relations department in 2020.

The original lawsuit was filed in June.

Shortly afterward, Musk, the world’s richest person, tweeted that he would “keep supporting Dogecoin,” and in an interview said “people that work around the factory at SpaceX or Tesla” asked him for that support, the amended complaint said.

Other new defendants include the Dogecoin Foundation, which calls itself a nonprofit providing governance and support for Dogecoin. It could not immediately be reached for comment.

The $258 billion in damages is triple the estimated decline in Dogecoin’s market value since May 2021.

That was around the time Musk, playing a fictitious financial expert on a “Weekend Update” segment of NBC’s “Saturday Night Live,” called Dogecoin “a hustle.”

Dogecoin traded at about 6 cents on Wednesday, down from around 74 cents in May 2021.

The case is Johnson et al v. Musk et al, U.S. District Court, Southern District of New York, No. 22-05037.

(Reporting by Jonathan Stempel in New York; Editing by Matthew Lewis)

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A year on, El Salvador’s bitcoin experiment is stumbling

By Nelson Renteria

CONCHAGUA, El Salvador (Reuters) – A year after El Salvador adopted bitcoin as legal tender, the area where the world’s first cryptocurrency city was meant to be built – a circular metropolis powered by a volcano – is still dense jungle.

President Nayib Bukele had promised that “Bitcoin City” would be a tax haven for crypto investors and miners equipped with an airport, residential and commercial areas, and a central plaza designed to look like a bitcoin symbol from the sky.

“Invest here and make all the money you want,” he said dressed all in white and wearing a reversed baseball cap, in front of hundreds of bitcoin enthusiasts in November 2021.

But on a recent visit to the area in the shadow of the Conchagua volcano in the east of the Central American country, Reuters found no heavy machinery, construction workers, or raw materials to indicate any progress towards building this grand symbol to bitcoin.

To many it has become, instead, a symbol of folly as bitcoin has crashed.

“This experiment has been very risky, too risky for a poor country,” said Oscar Picardo, director of the Institute of Science, Technology and Innovation at the private Francisco Gavidia University.

“It has been seen that (bitcoin) is a very speculative, highly variable financial asset,” he added.

A major part of the problem is that the drop in the value of bitcoin and other cryptocurrencies has alienated investors.

When El Salvador, one of the poorest countries in Latin America, adopted bitcoin as legal tender on September 7, 2021, the cryptocurrency was close to $47,000.

A year later, it is worth less than half and on Tuesday was trading at around $19,770.

The Bukele government declined to comment for this story but has defended doubling down on bitcoin -including the acquisition of 2,381 bitcoins- assuring it is a long-term plan.

It says its bitcoin policy has attracted investment, reduced bank commissions to zero, increased tourism and promoted financial inclusion. But the price drop has elevated El Salvador’s financial risk, complicating its search for funds to pay 1.6 billion dollars of sovereign bonds due in 2023 and 2025.

The International Monetary Fund has called on El Salvador to reverse bitcoin’s status as legal tender citing financial, economic and legal concerns; complicating a deal with the lender.

The use of the cryptocurrency has also failed to catch on, experts said.

Neither the presidency nor the ministry of finance would share figures on the use of bitcoin through the government’s bitcoin digital wallet Chivo.

But a survey by the National Bureau of Economic Research (NBER), a U.S.-based NGO, found that only 20% of Salvadorans who downloaded the Chivo app continued to use it after spending the $30 that the government gave in free credit to promote its use.

The study indicates the vast majority of Chivo downloads occurred in 2021, specifically in September, and that almost no downloads have taken place so far in 2022.

In theory, developing nations like El Salvador are ideal candidates for cryptocurrency adoption due to a continued reliance on cash and a largely unbanked population.

But, according to the April report, “bitcoin is not being widely used as a medium of exchange” because users “do not understand it, they do not trust it, it is not accepted by businesses, it is very volatile, and it involves high fees.”

Despite Salvadoran law requiring all companies to accept cryptocurrency, only 20% do so, according to the survey that interviewed 1,800 Salvadoran households.

Jesus Caceres’ small watch store in central San Salvador is one business that does. Three signs read “We accept bitcoin,” but the 47-year-old watchmaker has only ever made two sales with the cryptocurrency.

“One for $3 and one for $5, it was $8 in total. From then on, no one has approached me,” he said.

The government has also encouraged Salvadorans working abroad to send money home through the Chivo government wallet, or other private ones, without charging commissions. Known as remittances, those transfers from abroad represent 26% of the GDP of the Central American country, one of the highest percentages in the world.

But according to statistics from the central bank, between September 2021 and June 2022, the country received nearly $6.4 billion dollars in remittances and less than 2% was transferred by digital cryptocurrency wallets.

Like the use of bitcoin, the government shares few details about “Bitcoin City”. But its future looks increasingly uncertain since the issuance of the “Bitcoin Bond,” which Bukele said would support the city’s construction, has been postponed following the cryptocurrency crash. Residents of the place where the city is planned, between the Conchagua volcano and the Gulf of Fonseca on the Pacific coast, feel the majority of the country’s 6.5 million inhabitants will not be favored. “It doesn’t benefit us poor people at all,” lamented fisherman and farmer Jose Flores, 48, who has lived in Conchagua for over three decades.

(Reporting by Nelson Renteria; Writing by Sarah Kinosian; Editing by Diego Ore, Stephen Eisenhammer and Alistair Bell)

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Cryptoverse: Bitcoin’s no longer the king of the swingers

By Lisa Pauline Mattackal

(Reuters) – Bitcoin’s been called a lot of things. Buzzy, beguiling, baffling, even bogus. But never boring.

Yet, of late, it’s been eerily subdued.

The king of the swingers has been uncharacteristically treading water for days at around $20,000 and hasn’t ventured far beyond that since June.

That spells trouble for traders and exchanges that profit from bitcoin’s wild price lurches, and is opening the door to its archrival ether which is preparing to up its crypto game by moving to a meaner and leaner blockchain.

“Bitcoin is not dead, it’s just boring at the moment, so traders are already looking for alternatives,” said Martin Leinweber, digital asset product strategist at MarketVector.

Bitcoin’s average 30-day volatility – a measure of how its price varies over a set period of time – has slumped to 2.7% from over 4% in early July, according to data firm Coinglass.

That number has stayed firmly below 5% in 2022, even in the most turbulent months of the “crypto winter” of depressed prices – a departure from the past five years when even periods of lower volatility were followed by spikes as high as 7%.

Similarly, an index from CryptoCompare, which uses bitcoin futures contracts to work out how far prices are expected to change, stands at just over 77, down from above 90 at the start of the year.

Bitcoin has seen periods of reduced volatility in the past, often during periods of depressed or falling prices, with its price swings often coming back as trading activity picks up.

This slump may be different, though.

“This has been a relatively long period of decreased volatility, it’s now beyond anything we’ve seen in even 2019 where these levels lasted around a quarter to a quarter-and-a-half,” said Stéphane Ouellette, CEO at crypto derivatives provider FRNT Financial.

ETHER OVERDRIVE

Leinweber at MarketVector pointed to an uptick in trading for ether and its derivatives as a side-effect of bitcoin’s subdued volatility.

Indeed, the price of ether – the No.2 crypto with a market cap of roughly $190 billion versus bitcoin’s $380 billion – has risen 50% since the start of July while bitcoin has been flat.

Ether doesn’t offer more price drama; it is far less volatile, with its highest level being just over 2% in March 2020 during the worst of the COVID market rout, according to data firm Messari.

Yet it is soaking up a lot of the crypto buzz at the moment as it stands on the verge of its “Merge”, expected to finally happen later this month, when it undergoes a radical shift to a system where the creation of new ether tokens becomes far less energy-intensive.

BURNED BY CRYPTO

For longer-term investors in traditional assets such as stocks or bonds, narrower swings in prices may seem like a positive. But for many investors and major cogs in the bitcoin and crypto economy, that’s not the case. Exchanges, for instance, make money by charging fees on trades; when volatility falls, trading activity tends to evaporate.

For crypto hedge funds, which tend to trade on swings in price, stabler values also offer diminishing chances to profit.

So what’s behind bitcoin’s fall in volatility?

For one, an investor flight from the broader crypto space, meaning fewer people are willing to trade their coins.

Cryptocurrencies have endured a torrid year as investors have dumped risky asset across the board in the face of rising inflation, with bitcoin falling about 60% and ether dropping 55%. Major blow-ups at two major coins and the bankruptcy of a big-name lender have also eroded confidence in the sector.

The dollar value of bitcoin trading volumes on major exchanges over a 7-day period has fluctuated between $127 million and $142 million, according to data from Blockchain.com, the lowest levels since October 2020. Similarly, trading in bitcoin futures is at its lowest levels since November 2020, data from the Block showed.

“The most elevated levels of volatility typically coincide with the greatest levels of interest in crypto,” said Ouellette added. “People got burned and are saying ‘I don’t really care about crypto right now’.”

(Reporting by Lisa Pauline Mattackal in Bengaluru; Editing by Tom Wilson and Pravin Char)

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Binance to convert users’ USDC into its own stablecoin

(Reuters) – Binance, the world’s largest crypto exchange, said on Monday it is introducing “BUSD Auto-Conversion,” which will be used to convert any existing user balances and new deposits of USD Coin (USDC), Pax Dollar (USDP) and True USD (TUSD) into its own stablecoin.

The move is intended to enhance liquidity and capital efficiency for users, the company said in a statement.

Binance said it will remove and cease any trading on spot pairs that include USDC, USDP and TUSD; it will start the conversion on Sept. 29.

USDC, which is principally operated by Circle Internet Financial and is the second largest stablecoin, has a nearly $51.9 billion market capitalization. Binance’s stablecoin, BUSD, is valued at about $19.4 billion, according to crypto data provider CoinGecko.

USDC products affected include saving accounts, DeFi staking subscriptions and crypto loans, which will be closed and liquidated on Sept. 23.

(Reporting by Shivani Tanna in Bengaluru; Editing by Leslie Adler)