January 21, 2022
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This Week
Fed releases long-awaited report on central bank digital currency; Twitter launches verified NFT profile pictures; Bitcoin mining under global regulatory scrutiny.
Market Update
The total implied network value (market cap) of the digital assets market stands at $1.81tn, down 11% from last week (when it stood at $2.03tn). Bitcoin’s network value is 6.19% of gold’s market cap. Over the last 7 days, BTC is down 10.7%, ETH is down 15.4%, SOL is down almost 19%, and DOT is down 21%. Bitcoin dominance is 41.33%, up slightly from last week.
Data current as of 8:20am ET on January 21, 2022. Prices and Data via Messari.
Three Big Stories
🏛️ Fed Releases Long-Awaited CBDC Report
The Fed releases CBDC study and requests public commentary. Last week during Fed Chair Powell’s confirmation hearing with Senate Banking Committee, he teased that the Fed’s study on CBDCs was ready and would be released “in coming weeks.” The report dropped earlier than expected on Thursday afternoon. The paper discusses the existing financial and monetary system, new technologies and products including digital assets, and the potential benefits, risks & policy considerations of a potential U.S. CBDC.
Importantly, the paper is meant to serve as a first step for engagement between the Fed and stakeholders; it does not suggest any imminent decisions to implement a CBDC. Key highlights from the paper:

  • “The paper has been designed to foster a broad and transparent public dialogue about CBDCs in general, and about the potential benefits and risks of a U.S. CBDC. The paper is not intended to advance any specific policy outcome, nor is it intended to signal that the Federal Reserve will make any imminent decisions about the appropriateness of issuing a U.S. CBDC.”
  • “The Federal Reserve is committed to soliciting and reviewing a wide range of views as it continues to study whether a U.S. CBDC would be appropriate. Irrespective of any ultimate conclusion, Federal Reserve staff will continue to play an active role in developing international standards for CBDCs.”
  • “The Federal Reserve will only take further steps toward developing a CBDC if research points to benefits for households, businesses, and the economy overall that exceed the downside risks, and indicates that CBDC is superior to alternative methods. Furthermore, the Federal Reserve would only pursue a CBDC in the context of broad public and cross-governmental support.”

In the report, the Fed suggests a well-designed CBDC would ideally be privacy-protected, intermediated, widely transferable, and identity-verified. CBDC transactions would also need to be completed in real time and would be used for commerce, bill pay, and possibly even for tax collection or to make benefit disbursements to citizens. The Fed also lists potential benefits of: (i) safely meet future needs and demands for payment services, (ii) improvements to cross-border payments, (iii) support the dollar’s international role, (iv) financial inclusion, and (v) extend public access to safe central bank money.

Risks and policy considerations identified in the paper include: (i) changes to financial-sector market structure, (ii) safety and stability of the financial system, (iii) efficacy of monetary policy implementation, (iv) privacy and data protection and the prevention of financial crimes, and (v) operational resilience and cybersecurity.

Public comments are due in 120 days (May 20) on 24 posted questions that cover topics including: any considerations not mentioned in the report; the intermediaries and infrastructure that would be needed to implement a CBDC; and a series of design principles (e.g. whether CBDC should pay interest, should be recognized as legal tender, impacted intermediaries, and the tools and regulatory structure required).
OUR TAKE: The report is measured and very much in line with what the Fed and Presidential Working Group on Financial Markets (“PWG”) have signaled in prior reports, testimony, and interviews. The Fed is notably self-aware, admitting the obvious point that a CBDC shouldn’t be pursued if it’s not “superior to other methods that might address issues of concern” discussed in the paper—meaning, if it’s not a good solution to the problems in payments and monetary policy implementation the Fed sees, it shouldn’t be done.

Given that they don’t want to end the two-tiered banking system, the admission that “an intermediated model would facilitate the use of the private sector’s ability to innovate,” and the Fed’s promise to address and attempt to maintain privacy (at least among counterparties) as a core feature (as opposed to China’s digital yuan), it’s difficult to see how a CBDC would be any different than the current model. If the Fed doesn’t disintermediate banks and if they don’t create a massive state-operated surveillance panopticon, what good would a CBDC be at all?

Many of the benefits of a CBDC identified in the report (streamlined cross-border payments, international dollar support, financial inclusion, extended public access to dollars) are already being pursued by ongoing initiatives and innovations by fintechs, payment networks, and even the Fed itself (FedNow real-time payments network to launch 2023). Payments have naturally gotten faster, cheaper, and more accessible over time - it’s hard to see how a CBDC could serve as a more optimal solution. With respect to implementing monetary policy, the Fed doesn’t offer any critique about its existing workflow and technologies. And, in any case, the criticism of monetary policy is the policies, not the implementation.

Overall, the Fed doesn’t make a compelling case that there are significant problems in the payments and monetary system sufficient to justify disruptive innovation, or that a CBDC would be the appropriate innovation if there were.  
✔️ Twitter Adds NFT Verification
Social media giant Twitter is now capable of verifying non-fungible token (NFT) ownership. Select users can connect their cryptocurrency wallets to Twitter and feature an authenticated photo of any one of the NFTs held in their wallet. By doing so, these users will get a new hexa-shaped profile picture. The picture when clicked will open up a description of the NFT, its properties, token ID, and smart contract address. This information is pulled directly from the largest marketplace for NFTs, OpenSea. For now, the launch of this feature is limited to subscribers of Twitter’s decentralized social network project called Twitter Blue, formerly known as Bluesky. The feature is also only available to users on an Apple device residing in the U.S., Canada, Australia, or New Zealand.

Many crypto enthusiasts already display NFTs as their profile pictures on Twitter. However, the photos could easily be copied images of an NFT off of the internet or from another user’s profile. The hexa-shaped outline on Twitter is a symbol that affirms a user’s ownership of the NFT featured on their profile, similar to how the verified blue checkmark besides a user’s profile name affirms the identity of that user. Speaking to the motivations for developing this feature, a company spokesperson for Twitter said, “We’re now seeing people use NFTs as a form of identify and self-expression, and as a way to join the thriving community and increasingly active conversation on Twitter.”
OUR TAKE: Shortly following the launch of Twitter’s NFT Profile Picture functionality, OpenSea experienced an outage which caused several users to have trouble accessing and displaying their NFTs on Twitter. This incident highlights an ongoing concern around the services, products and infrastructure being built around NFT collections. Unlike NFTs, which are by definition immutable tokens created on a decentralized blockchain, the trading of NFTs and their presentation through Web2 platforms such as Twitter are still reliant on centralized platforms that at times can act as single points of failures barring user access to their own NFT collections. As the first iteration of Twitter’s NFT Profile Picture functionality, there is room for improvement. Over time, the feature could become less reliant on platforms like OpenSea for NFT verification but the unexpected difficulties that users faced displaying their NFTs as a result of OpenSea’s outage illustrates how large parts of the developing infrastructure for NFTs remain centralized.

This week OpenSea announced an acquisition of cryptocurrency wallet Dharma Labs. In addition, cryptocurrency exchange Coinbase unveiled a new partnership with Mastercard to enable NFT purchases within their in-house NFT marketplace, which like OpenSea is a centralized platform. Among ongoing developments for building infrastructure to support the adoption of NFTs, there are alternative initiatives focused on improving and progressing towards a fully decentralized tech stack for the creation, sale, and discovery of NFT collections. One that has gained considerable attention since their launch in early January is LooksRare. Read more about the OpenSea challenger from our take in last week’s newsletter.
🔍 Mining Under Global Scrutiny
Regulators around the world are looking at bitcoin mining. In the United States, Congress held a hearing on bitcoin mining and its energy consumption yesterday, though no further action is planned at this time. The New York State Senate will also be holding a closed-door hearing, after a previous ban on mining within the state failed to pass last year. European Union legislators have introduced a bill banning mining within the bloc, and Russia’s central bank has issued a recommendation to the government to ban all cryptocurrency activity, including mining. Amidst an internal energy crisis, Kazakhstan has also severely restricted mining within the country.
OUR TAKE: Increased regulatory attention is inevitable as cryptocurrency enters the mainstream. Appreciating BTC value in the last year and global energy scarcity brought on by covid and resource and supply chain mismanagement have brought attention to Bitcoin’s energy consumption. While the fact that multiple jurisdictions are simultaneously considering restrictions to bitcoin mining warrants attention, it seems unlikely that anything will come of any of these situations in the near term. We hope that regulators’ decisions around bitcoin mining will be well-informed, and factor in the industry’s economic contribution and job creation. 
Other News
  • Microsoft buys Activision Blizzard for $69 bn
  • Cryptocurrency exchange Crypto.com loses over $30 mn in bitcoin and ether
  • Intel to unveil a Bitcoin mining chip at upcoming ISSCC conference
  • Serena Williams appointed as board advisor for NFT platform SoRare
  • SEC rejects another Bitcoin spot ETF proposal
  • Gemini launches crypto prime brokerage through acquisition of trading tech platform Omniex
  • DeFi protocol Curve launches on Layer 2 protocol Optimism
  • Google forms new blockchain unit
  • Robinhood starts beta testing crypto wallet
From the Desk
Access our research on the Bloomberg Terminal with ERH GXY <GO>
US Govt Report Offers Glimpse of Digital Dollar
Read this November report from GDR's Head of Research Alex Thorn analyzing the Presidential Working Group on Financial Markets' report on stablecoins.
2021: Bitcoin Mining's Big Year
In this report, GDR's Karim Helmy and Galaxy Digital Mining's Brandon Bailey give a detailed overview of the major events and trends that made 2021 Bitcoin mining's most important year. They also share detailed predictions for 2022.
MEV: How Flashboys Became Flashbots
In this major report, GDR's Christine Kim does a deep dive on miner or maximal extractable value, how miners and bots frontrun users on Ethereum.
2021: Crypto VC's Biggest Year Ever
In this report, GDR's Head of Research Alex Thorn summarizes the epic year in VC investing that saw more than $33bn invested in crypto/blockchain startups.
Charts of the Week
GBTC, the popular bitcoin investment product offered by Grayscale, is trading at its biggest ever discount to spot BTC.
Total daily NFT trading volume on OpenSea & LooksRare nearly hit $1bn on Wednesday with a major contribution from LooksRare. On-chain data suggests significant wash trading on LooksRare, though.
Thank you!
Thanks for reading this week. Have a great weekend.

Please feel free to contact us at research@galaxydigital.io with any questions or comments.
Alex Thorn
Head of Firmwide Research
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