Franklin Templeton claims that fund will be the first U.S. registered mutual fund run on blockchain technology.
Franklin Templeton, with about $1.4 trillion assets under management, said its OnChain U.S. Government Money Market Fund (FOBXX) is now supported on Ethereum via layer 2 blockchain Polygon.
The investment giant said in a press release, during Consensus 2023, that it continues to see operational efficiencies through use of blockchain-integrated systems, including increased security and faster transaction processing.
Read full coverage of Consensus 2023 here.
The fund is the first U.S. registered mutual fund to use a public blockchain to process transactions and record share ownership, the investment firm claimed in the press release. On Monday, the Stellar Network announced the fund is available on its network. Stellar has a $2.5 billion market capitalization and Polygon’s is over $9.5 billion.
“Extending the reach of the Franklin OnChain U.S. Government Money Fund to Polygon enables the fund to be further compatible with the rest of the digital ecosystem, specifically through an Ethereum-based blockchain,” said Roger Bayston, head of digital assets at Franklin Templeton, in the press release.
Franklin Templeton, which has been a proponent of blockchain technology in the past, continues to see operational efficiencies through use of a blockchain-integrated system, according to the statement. The firm announced in September that it will offer digital asset strategies to wealth managers.
The fund, which aims to provide steady income for its holders, invests at least 99.5% of its assets in government securities, cash and repurchase agreements. Money market funds are mutual funds that invest in highly liquid and short-term investments that intend to offer investors with low-risk options.
In the wake of recent market volatility and banking crisis, investors have been pouring into money market funds to hedge their investment risks. With more institutional investors pushing further into digital assets, traditional finance (TradFi) players are using this opportunity to merge both worlds by offering such funds via blockchain technology. Most recently, Ondo Finance said it is offering a stablecoin alternative that will be pegged to the U.S. dollar and backed by money-market funds that trade on traditional exchanges.
One share of Franklin Templeton’s fund is represented by one “BENJI” token, where the holders are able to gain exposure to the fund through digital wallets via the Benji Investments app, according to the press release.
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“Tokenized assets are going to positively rewire the global financial system, and Franklin Templeton is at the forefront of this movement,” said Colin Butler, global head of institutional capital at Polygon Labs, in the press release.
Emin Gün Sirer was addressing the annual Cornell Blockchain conference on New York City’s Roosevelt Island.
The blockchain and cryptocurrency space cannot consider itself mature until the day its regulators are able to read and audit code, Ava Labs CEO and founder Emin Gün Sirer told attendees of the annual Cornell Blockchain conference.
“Regulators are nowhere near that stage now,” Gün Sirer said at the Friday event on New York City’s Roosevelt Island. “They are busy doing other funny tricks.”
Crypto, particularly in the U.S., is in the gunsights of regulators following the collapse of FTX and other calamities that befell the space in 2022. But even the most draconian of clampdowns will not crush crypto, Gün Sirer said.
“Suppose we ban crypto altogether?” he said. “Generation Z is digital first, and they will not allow this technology to go away. They have seen how amazing these new rails can be.”
Several areas, Gün Sirer said, need to improve in order to get the next billion users into crypto, such as scalability, ease of use and adaptability. However, when asked about the feasibility of the secret sharing technology known as zero-knowledge proofs (ZKPs) to reach that scale, he was skeptical.
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“This space is often waiting for the next shiny new thing, which I call ‘Godot’ solutions,” Gün Sirer said, in reference to Samuel Beckett’s absurdist play “Waiting for Godot,” where the main protagonists are endlessly waiting for the arrival of something that never comes.
“If something doesn’t work today, there is usually a very good reason for that,” he said. “ZKPs are fantastic tech but for scalability, they are completely unproven. I have friends who are working on this, and I wish them the best. But if it does work, the latency will always be greater, and I worry about the user experience.”
From technical improvement efficiencies to novel market-based solutions, a plethora of projects are trying to improve the bitcoin mining’s environmental footprint.
The environmental impact of bitcoin mining was trending again in the last few weeks due to a Texas bill looking to limit its grid participation and a New York Times article that condemned the industry.
Bitcoin mining consumes about 145 terawatt hours (TWh) of electricity per year, says veri from Cambridge University’s Centre for Alternative Finance, which is about the power consumed by Sweden, according to the International Energy Agency.
To critics, bitcoin’s proof-of-work algorithm is wasteful by design as its electricity demand continuously grows. To industry advocates – it’s a feature, not a bug – as it secures the network while ensuring decentralization.
There is a third camp that sees bitcoin’s energy consumption as an opportunity. A slew of new products and companies are trying to mitigate the environmental impact with several innovative solutions that build on top of what is already in place to help miners become more sustainable.
Some of these projects are creating or taking advantage of market instruments that incentivize making bitcoin more “green,” while others are technical, centered around improving efficiencies and synergies around reusing the heat generated by the veri centers.
Renewable energy credits
One such product, offered by crypto lender BlockFills and fund Isla Verde Capital, aims to help not only miners but also investors to find a “green” solution for their energy usage.
The offering essentially is tradable environmental assets in the forms of carbon emissions offsets and Renewable Energy Credits (RECs). Carbon credits, assets that represent sequestered greenhouse gasses through projects such as reforestation, are as well known as they are criticized.
Renewable energy credits (RECs) represent ownership of the sustainability of electricity produced. These certificates represent 1 megawatt hour (MWh) of power produced from renewable sources such as wind, hydro and solar. They are usually separate to any power purchase agreements and are usually traded over the counter (OTC).
BlockFills and Isla Verde Capital tailor the purchase of RECs and carbon credits to miners’ needs, and later retire them, such that they can make claims about renewable energy sources.
The RECs are also geared towards bitcoin investors. “Massive asset managers” are now “looking at bitcoin, but they have these sustainability mandates that they must follow,” said BlockFills John Divine. The RECs can help them invest comfortably.
This might actually raise the price of RECs, “which directly incentivizes investment in renewable energy technology,” Divine said.
Incentivizing sustainability
Switzerland-based Block Green is another project that is trying to incentivize sustainable mining through a decentralized lending protocol. On their platform, liquidity providers looking for bitcoin-native investments can buy future hashrate over a specified period of time, or computing power.
The platform includes “know-your-miner” information about a company’s financials, operational veri, their energy sourcing and strategy. Block Green believes that market mechanisms on the platform will incentivize sustainable mining as liquidity providers will pick miners with sustainable operations, lowering their cost of capital.
“We are currently working with some of the largest miners in the U.S. and Canada and we have begun integrations with institutions such as custodians, exchanges and asset managers looking to give users access to transparent and scalable” returns on their bitcoin, said a spokesperson for the firm.
Tokenizing clean bitcoin
Another solution that is using financial incentives is offered by Clean Incentive and Sustainable Bitcoin Protocol (SBP). These companies are trying to promote investments in “clean” bitcoin by creating new, blockchain-based assets that miners can trade to capitalize on their use of renewables. Investors looking to verifiably own environmentally-conscious bitcoin are the right fit for these assets.
With SBP, miners can verify their use of clean energy with third-party auditors and be added to a registry. After that, for every block reward they get, they receive a Sustainable Bitcoin Mining Certificate, a blockchain-based asset which they can sell to institutional investors. SBP completed its first transaction of a sustainable bitcoin certificate in February.
Similarly, Clean Incentive looks to “collect, validate and tokenize ESG [environmental, social, and governance] attributes” from a network of miners, said its founder and CEO Casey Martinez, a veri scientist with experience in renewable energy.
The startup is still in stealth mode, but has already onboarded several miners, Martinez said Clean Incentive partnered with a small-scale miner from Canada, Ocean Falls Blockchain, in November.
Efficient cooling
Some of the more technical solutions that firms are providing include both hardware and software-related products.
Immersion cooling firm, LiquidStack, offers a hardware-based cooling solution that can cut the energy used by the computers in bitcoin mines by 40% and reduce their land use by one third, the company said in March.
For every megawatt (MW) of energy used for the actual computing in a veri center, LiquidStack’s solution uses 0.02 MW for cooling, whereas other options use 0.1 MW to 0.7 MW, LiquidStack said.
The firm, one of the earliest in the space, received funding from Trane Technologies (TT) in March, a 150-year old firm in the heating and cooling space which brought in $16 billion in revenues in 2022.
“What made LiquidStack attractive was its potential to improve sustainability for veri centers, including bitcoin mining, and its innovation,” said Amber Mulligan, VP of Strategic Sales and Marketing, Commercial HVAC Americas at Trane.
LiquidStack’s technology also makes heat reuse easier and more efficient, opening the door to a host of synergies for miners, said Mulligan, noting that because the heat is actually managed with liquids instead of traditional air cooling, capturing it and directing it to other uses is easier.
On the software-side, Vancouver-based mining services firm, Lincoin, has created a program that miners can use to more efficiently and profitably manage their operations, including their participation in demand response programs and heat reuse activities.
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Demand response is when a miner, or other energy consumer, shuts down their operations at times of peak demand, such that the grid can meet the consumption needs. Often miners get paid for this. Heat reuse refers to the practice of using excess heat from a mining operation for another activity, such as greenhouse farming.
The software, called Rails, integrates real-time veri from over 20,000 grid nodes in 9 deregulated electricity markets in the U.S. and Canada, said a press release.
“Large scale miners use Lincoin to monitor real-time profitability, manage and optimize their operations, streamline tasks and participate in grid ancillary services while smaller miners use Lincoin to innovate by managing heat in greenhouses, monetize their surplus solar energy generation, or simply mine intelligently,” said CEO Medi Naseri in an email interview with CoinDesk.
The Securities and Exchange Commission is confirming crypto industry worries that, yes, the proposal last year to widen its view of securities exchanges is meant to fold in DeFi.
The U.S. Securities and Exchange Commission (SEC) may be coming for decentralized finance (DeFi) as it considers reopening a proposal from last year that would now explicitly target platforms for those crypto transactions as exchanges that need to be regulated.
The SEC proposed expanding the definition of the word “exchange” in January 2022 to capture a broader swath of trading activity in the U.S. At the time, the agency said in its proposed rulemaking that certain entities engaging in trading activity were not regulated as exchanges, creating a “regulatory disparity.”
The securities agency read last year’s comment letters from the crypto industry calling the initial proposal an overreaching power grab that failed to provide enough clarity about its meaning to be legitimate. The commission is going to vote Friday on what amounts to a response to that criticism. If approved, the updated proposal would use more direct language that includes DeFi in the widening definition of regulated exchanges, and it will detail its estimates on how much that change is expected to cost the industry.
The specific changes will be published after the meeting ends with a vote later today.
SEC Chair Gary Gensler contends that most crypto platforms are already operating as unregistered securities exchanges, with or without the latest tweaks to the definition of what it means to be an exchange. But he and the commission are poised to “reiterate the applicability of existing rules to platforms that trade crypto asset securities, including so-called ‘DeFi’ systems,” according to an SEC fact sheet outlining the changes.
“Calling yourself a DeFi platform is not an excuse to defy the securities laws,” he said in remarks prepared ahead of the meeting.
SEC officials, speaking to reporters ahead of Friday’s meeting, said the reopening and additional information came after a number of market participants asked for more information about the proposed amendments and how exactly they would be applied to crypto assets and DeFi.
The agency isn’t looking to actually define DeFi in the rule, according to SEC officials, but will evaluate each situation by how the activity is being handled, including whether there’s an intermediary and exactly what service that intermediary is providing.
In the prepared remarks, Gensler reiterated his view that “the vast majority of crypto tokens are securities” and that crypto trading platforms already meet existing requirements for securities exchanges.
“These platforms match orders of multiple buyers and sellers of crypto securities using established, non-discretionary methods,” he said. “That’s the definition of an exchange – and today, most crypto trading platforms meet it. That’s the case regardless of whether they call themselves centralized or decentralized.”
Industry pushback
The crypto industry has long advocated for U.S. rules that can bring certainty to how the companies and activities need to operate, though prominent crypto executives and their lobbyists have also said that the SEC’s position that they need to register and follow existing securities laws won’t work for this industry. The SEC has broadly chosen against a tailored approach to the cryptocurrency sector that would acknowledge how it differs from the rest of finance, with Gensler routinely arguing that longstanding securities laws are sufficient.
The SEC had pushed this exchange-definition rule and other proposals last year that – without detailing its intentions with crypto specifically – had suggested that the agency meant to formalize its reach into the digital assets sector.
Later, the agency became more explicit about having its eyes on digital assets, when it issued another proposal in February that could bar investment advisers from keeping assets at crypto firms.
With each proposed rule, the SEC’s walls are closing in on crypto businesses that insist there’s no path for them into regulated finance.
The agency received almost 400 comment letters on this week’s revisited proposal and disclosed 35 staff meetings and calls with Wall Street lobbyists, industry self-regulatory organizations, the Bank of England and others regarding the effort. A reopened comment period would give crypto lawyers and lobbyists another 30 days to argue against the rule before the agency will review those responses and decide whether to approve a final rule.
Even when the new exchange definition didn’t name crypto explicitly, the industry opposed it with the assumption that it had digital assets platforms in mind.
“The proposal fails to adapt to – let alone acknowledge – the fundamentally new ways in which individuals can conduct asset exchanges using DeFi protocols,” the Blockchain Association and the DeFi Education Fund argued in a 2022 letter to the SEC. “Instead, it would improperly apply regulations designed for intermediating exchanges like the New York Stock Exchange to software or software developers.”
Rep. Patrick McHenry (R-N.C.), the chairman of the House Financial Services Committee that oversees the SEC, wrote a letter to Gensler with another committee member that said the agency seemed to be trying “to expand the SEC’s jurisdiction beyond its existing statutory authority to regulate market participants in the digital asset ecosystem, including in decentralized finance”
Circle Internet Financial sought the chance to ask for more specific rules for crypto.
“In view of the unique architecture of digital asset markets, we suggest that the commission would benefit the most from a wide-ranging concept release focused on digital assets markets and how best to achieve its policy goals in light of the unique architecture of such markets,” the company’s comment letter suggested.
But some were glad last year at the possibility crypto could be folded into this SEC oversight.
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“The cryptocurrency industry is rapidly expanding with some industry lobbyists insisting that their offerings and platforms fall outside the securities laws and regulations,” Better Markets, a Washington-based group advocating for tougher protections in the financial system, wrote in a comment letter last year. “But clearly, the commission must apply securities regulation equally to all securities regardless of how novel, ‘innovative,’ popular, or profitable such offerings may be.”
It’s been a tough month for DeFi in U.S. policy circles, after the U.S. Treasury Department also made clear last week that DeFi services should be subject to anti-money-laundering laws, saying the platforms have been used by criminals and for terrorist financing.
The 6,000% increase in taxes per kilowatt hour of energy may “ultimately destroy the industry” in the country.
Sweden, the last remaining stronghold of bitcoin miners in Europe, is abolishing tax incentives for data centers in July – potentially putting the last nail in the coffin for the industry in the region.
Energy prices in Europe have spiked in the past year largely in part due to the war in Ukraine, driving out bitcoin miners. The northernmost regions of Norway and Sweden were some of the last areas where the industry was still profitable and operating – although the crowd had thinned out – as they offer an ideal environment for data centers; cool and home to cheap hydroelectricity.
But not even these remote parts of Europe remained unaffected from the energy crisis, which caused prices to increase and some miners to turn off their operations, at least partly, in 2022.
Energy prices started to normalize in 2023, but the upcoming tax will likely stop any new investment in Sweden, which is currently home to about 150 megawatts (MW) of mining. The tax will increase from SEK 0.006 ($0.0006) to SEK 0.36 ($0.035) per kilowatt hour (kWh) starting July of this year, according to the financial budget published in November 2022.
Based on the average electricity prices last year, the tax hike could bring the all-in energy cost to $0.093/kWh, said Jaran Mellerud, senior analyst at mining services firm Luxor Technologies. A MicroBT Whatsminer M30s, a moderately efficient and commonly used machine, would be at break-even point given current market conditions, he said.
Hive Blockchain (HIVE), a Canada-based miner with 25% of its energy capacity in Sweden as of the end of 2022, declined to comment on this story. CoinDesk couldn’t find an instance where Hive disclosed the tax hike explicitly in any of its filings. The firm has discussed its disagreement with Swedish Tax Authorities over $32.4 million in VAT that it thinks it should recover.
Norway, which hosts 250-300 MW of mining, also increased its taxes from $0.0086 to $0.015 per kWh in January, said Mellerud.
Not all hope is lost for Norway, as its energy is overall cheaper and the tax hike is more modest, Mellerud said. The industry will continue developing there, said Denis Rusinovich, co-founder of mining consulting firm Cryptocurrency Mining Group.
Looking for ways out
Sweden’s tax hike makes mining in the region “prohibitively expensive in Sweden and could ultimately destroy the industry,” said Mellerud, so bitcoin miners are looking for solutions.
Many miners are looking to diversify elsewhere, as the new tax will drastically reduce their profitability, said Enerhash CEO Daniel Jogg, who operates a site in Sweden. The tax also requires companies to pay in advance for a few months, which creates some serious cash constraints at a difficult time for the industry, he said.
Some miners could try to get through the tax hike by switching to self-mining instead of hosting others’ machines, said Rusinovich.
Others are looking at ways to get around the tax by reusing the heat produced in the data centers such that they are taxed as heat producers, Mellerud said.
Those packing up are also facing an uphill battle, said Rusinovich: “The market of potential buyers has completely dried up and there are only less than a handful of real buyers left.”
Broken trust
It is unclear whether Sweden’s new taxes were intended towards miners or the entire data center industry. The tax hike was proposed by the Swedish Ministry of Finance, which was also pushing for a ban on bitcoin mining in the European Union last year, Mellerud pointed out.
“This could be viewed as an attack on bitcoin mining,” he said.
In 2017, Sweden enacted a 98% tax cut for data centers, looking to attract businesses. Four years later, the industry hasn’t created the jobs the country was hoping for, and the macroeconomic environment has changed, said the budget report.
The energy crisis has increased electricity rates for households, and the tax cuts currently in place might actually be taking away energy from other, more job-creating industries in the manufacturing sector, said the budget.
Miners are disappointed by how the tax hike was rolled out, with what seemed like little notice or communication. Firms like Hive tout Sweden as a “stable” jurisdiction, where they don’t worry about abrupt unilateral changes in the regulatory regime.
Microsoft (MSFT), which also operates data centers in the region, has protested the measure’s abruptness, particularly given that the government had commissioned a report on the energy impact of data centers that wasn’t finished at the time of the tax hike decision, according to the budget.
There has been no official communication to the bitcoin miners active in the region, only a page on the tax authority’s website that was updated to show the change, said Rusinovich.
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That, plus the fact that the tax will be implemented in the middle of the calendar year, making it hard to plan ahead, has rubbed miners the wrong way. Companies can request a refund for any taxes levied before the start of July, a spokesperson for the Swedish tax agency said.
Enerhash will keep its operations in Sweden because they are still profitable, particularly given its geographic diversification, but they will not be investing additionally. Why would you invest there when the legal framework can change so abruptly, Jogg asked.
Celsius Network contacted 130 interested parties and signed confidentiality agreements with 40, before choosing NovaWulf.
Digital asset investment firm NovaWulf is poised to take over all assets belonging to bankrupt crypto lender Celsius Network and roll them into a new company, once its creditors have been paid out.
NovaWulf will manage the new company for five years, which will have a new name and a new board of directors, and will be traded through a fairly untested method of putting tokenized equity on blockchain. The five-year management term can be renewed. The board of directors will be chosen by NovaWulf and the official committee of creditors, which represents their interests in the bankruptcy. The plan could take effect as soon as June 30.
NovaWulf has committed $45 million in the transaction, but the Celsius assets it will manage could be worth as much as $2 billion, according to Marc D. Puntus, co-head of Centerview Partners, the investment banker working with Celsius during the bankruptcy case. The assets in question include Celsius’s mining unit, its loan portfolio, staked cryptocurrency, and other alternative investments, according to court filings.
However, the team will have a big task ahead of it – turning around one of the most spectacular collapses in crypto history. The leadership sees the bankruptcy process as a way to turn over a new leaf, and then some.
“What I’m really most excited about is the flexibility to be in a position to play offense, when you have an entire industry that’s playing defense,” given that major crypto firms are either in bankruptcy or facing regulatory scrutiny, said NovaWulf co-founder and managing partner Jason New.
Celsius contacted 130 interested parties and signed non-disclosure agreements with 40, before choosing NovaWulf, according to filings.
NovaWulf is related to TeraWulf (WULF), a publicly traded mining company. The two firms share their two co-founders, who don’t have any formal executive roles at NovaWuf, only in the miner – Nazar Khan, who is also the miner’s chief operating officer and chief technology officer, and CEO Paul Prager. NovaWulf’s team has had experience with complicated bankruptcies such as Lehman Brothers.
Tokenized equity
The tokenized equity of the new company will be traded on-chain and outside of stock exchanges. It will however have to follow SEC disclosure rules, which should make its workings more transparent. Just a month before Celsius filed for Chapter 11, industry commentators were disapproving of its opacity.
The equity tokens will be sold on the Provenance Blockchain, according to a presentation filed with the bankruptcy court. Figure Technologies will also provide infrastructure for the tokenized securities.
General earn creditors, with claims below $5,000, will see 70% recovery of their claims in liquidy crypto, the presentation said. Up to 100% of the rest of the assets, minus what is needed to run the new company, will be dispersed to earn creditors with claims over $5,000, who will also receive tokenized securities of the new company.
How Celsius creditors’ claims will be treated in the current bankruptcy plan, excerpt from presentation filed with the court on March 1.
Total overhaul
Taking on Celsius’ new chapter requires a certain amount of house cleaning: The new firm will have a new name and none of the pre-bankruptcy leaders will be involved, said NovaWulf’s New.
Celsius’s leadership has been slammed for its risky management online and offline, including in a report from a court-appointed examiner after the bankruptcy.
The mining business was, in former CEO and founder Alex Mashinsky’s view, a way to increase yield on customer deposits, according to the report. By June 2022, Celsius had lent out $579 million in Celsius Mining, its wholly owned subsidiary that was established in 2020, and forwarded another $70 million loan shortly before the bankruptcy, the report said.
Celsius was also using stablecoins bought with user funds as collateral to fund “the entire mining asset,” said CEO Chris Ferraro in a Slack message according to the examiners’ report. The company was doing the same to prop up other parts of its business.
By spring of 2022, some of the company’s senior management thought that an initial public offering (IPO) of the mining business could be used to plug a $1.1 billion hole in its balance sheet, along with the sale of other “non-balance sheet assets.”
But the value of the mining unit dropped from $2 billion to $2.9 billion in August of 2021, to $500 to $700 million at the time of the bankruptcy, meaning even if an IPO or sale had gone through, it likely wouldn’t have sufficed to plug in the balance sheet hole.
Risk management and an overreliance on third parties, known as hosting firms, formed Celsius’s mining’s Achilles heel.
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The new management will look to vertically integrate the mining business, which now counts about 120,000 machines. At least initially, they will be looking for hosting agreements, but a focus will be to set up their own hosting capacity down the line to better control risks and costs.
Asked whether the new firm will be working with TeraWulf for hosting, New said it wouldn’t.
DWF Labs made headlines with more than $200 million of investments in crypto projects such as CryptoGPT or Synthetix. A closer examination reveals that many of their deals aren’t typical venture capital investments, but packaged with market making services, pledges to boost trading volume or even selling tokens directly for a project’s treasury. Industry experts claim red flags and conflict of interest, but the firm says it’s all a misunderstanding.
The giants of crypto venture capital are mostly a well-known group of firms that’ve been around for years, companies like A16Z, Paradigm, Pantera Capital and Digital Currency Group (CoinDesk’s parent).
So the quick and loud emergence of a firm called DWF Labs as a seemingly large player in the space over the past few months caught many by surprise. They announced through press releases and media organizations like CoinDesk and The Block a slew of investments in projects including $40 million for internet alternative provider Tomi, $40 million for artificial intelligence-related token Fetch.AI and $10 million in AI-focused crypto data project CryptoGPT.
But a closer examination reveals DWF, whose founders made their money as crypto high-frequency traders, isn’t exactly a venture capital firm – not always, at least.
While the recent slew of headlines refer to DWF’s partnerships with crypto projects as ‘investments,’ DWF Labs actually functions more similarly to an over-the-counter (OTC) trading desk. The company typically approaches a crypto project with a token, and offers to buy millions worth of the token at a discount to market value, according to conversations with several crypto projects that have worked with DWF.
But DWF Labs says it’s all a misunderstanding. “There might be some questions on the use of the word investment,” said DWF Labs Partner Stefano Virgilli. “When we use the word ‘investment’ – to us the most important thing is that if we’re purchasing the tokens and they’re using the funds to further develop, that’s an investment,” he added.
The controversy
Investments in crypto projects typically follow a venture capital model. Projects tap venture firms for capital via funding rounds (i.e. pre-seed, seed, Series A, etc.) and, in turn, the investors receive a portion of the project’s equity. In most cases, particularly in early stage investments where a project has not yet launched a token, investors will receive a Simple Agreement for Future Tokens (SAFT), a contract that outlines the tokens allocated to the investor if the project launches a token in the future.
DWF Labs’ investments are more ad hoc in nature and the company primarily selects for projects that have already launched a token.
While DWF Labs refers to itself as “a global web3 venture capital and market maker” or “multi-stage web3 investment firm” in press releases, the deals are often presented as “strategic partnerships” that can include token acquisitions, market making services, pledges to boost a token’s liquidity and trading volume, and additional support with marketing and media presence.
Even helping projects’ treasuries to sell their token holdings, according to the press release the firm distributed about its launch in September.
In the post, the firm said that “DWF Labs invests in digital asset companies and supports existing markets, enabling digital asset companies to sell their tokens for up-front capital without adverse price impact,” adding that “DWF Labs buys tokens with its own funds, allowing its corporate customers to sell tokens quickly.”
It is quite common in the crypto industry for market making firms to have venture capital arms. Jump Crypto and Wintermute, two heavyweights in the crypto market-making sector, both began as trading firms. But both have since expanded into cutting venture checks for projects, and even building their own pieces of core infrastructure (Jump has backed the Wormhole cross-chain bridge and Wintermute has launched its own decentralized exchange).
However, the industry standard is that these contracts should be separated. Even though the lines between the two divisions can be blurred sometimes by the market makers, some industry observers have grown concerned about DWF’s recent activity and seemingly packaging different services under partnerships.
“It’s a massive conflict of interest,” Walter Teng, research firm Fundstrat’s vice president of digital assets, told CoinDesk. “If you invest, you want the token’s price to go up. If you market make, you can manipulate the price to go up by spoofing.”
“All of their ‘investments’ are poorly disguised agency OTC (over-the-counter) trades,” a market making firm’s executive told CoinDesk, who asked not to be named due to company policy. “They make a big announcement about ‘partnerships, investments’ or some other nonsense, but in reality it is a way for token projects to sell their treasury without announcing that they are selling their treasury.”
DWF’s managing partner Andrei Grachev defended the firm’s token maneuvers in a recent tweet, calling it “dumb” if a market maker (MM) leaves all the acquired or borrowed assets in a wallet, because an “MM should create markets, provide depth, improve order execution instead of doing nothing and waiting when the market is skyrocketing to execute its call options.”
DWF Labs’ strategy
DWF Labs launched in September, as an investment-focused arm of Digital Wave Finance, a top high-frequency trading firm that trades spot and derivatives on over 40 exchanges, according to the firm’s press release.
Grachev told CoinDesk that DWF Labs’ funding comes from the money earned from profits of the high-frequency trading business. Grachev denied that the firm has received any funding from Russia, a rumor circling within the crypto industry.
Grachev said that the firm has multiple types of investments, some with token lock-ups, others without vesting period, and focuses on projects with tokens. “We prefer to have tokens but we also have several equity deals,” said. “But frankly with equity…it is not our strong side,” he said.
While he said that DWF Labs “usually do not include market making deals in our venture side,” later, he admitted that “we have pure investments without market making, we have market making [agreements] without investment, and we have [them] combined.”
“As a market maker, of course we support our portfolio. If we invest, we will provide much more liquidity to the project compared to if we don’t invest,” Grachev said.
When asked about DWF’s investment strategy and due diligence, Grachev talked about focusing on five sectors – TradFi, DeFi, GameFi, CEXs and artificial intelligence – and aiming to “have stakes in all major chains (…) in order to have access to their ecosystems.” The firm looks for projects with “life and traction,” he said, checking social media posts and what exchanges their token is listed on.
“If a project is listed on BitFinex, Coinbase or Binance, then the project is proven and good because these exchanges have very strict due diligence and very strict policies of listing,” he added.
Grachev also said DWF doesn’t usually participate in specific venture rounds. “We just approach them,” he says.
CoinDesk viewed a series of messages between DWF Labs and a crypto project that showed a member of the DWF Labs team offering to invest in the project and provide free market-making services. DWF told the project it could invest via a direct OTC purchase of liquid tokens from the project’s treasury, or with a lock-up period and market-making services.
Messages from the market maker to another project showed that DWF offered to buy tokens in daily tranches without any lock-up period at a discount or in one installment with a one-year lock-up at a steeper discount. According to the message, DWF promised to help list the token on Korean exchanges including Binance Korea which the firm has “good relationship” with, create options trading and “build narrative” leveraging DWF’s team and media presence.
There were several past announcements when DWF mashed investments and market-making deals.
One instance was its strategic partnership announcement with derivatives trading platform Synthetix. According to a press release on March 16, the firm said it acquired $15 million of the project’s native token SNX “aimed at boosting liquidity and market making,” adding a quote from Grachev that “we are thrilled to invest in Synthetix.”
Blockchain data shows that DFW’s wallet – labeled by crypto intelligence firm Nansen – received 5.3 millions of SNX directly from Synthetix’s treasury wallet between March 14 and March 16. Then, the firm transferred all tokens to Binance in multiple transactions between March 16 and 20.
Transactions between DWF Labs and Synthetix treasury. (Nansen)
In November, DWF announced a $10 million investment in the TON ecosystem. The firm’s press release said that the “strategic partnership” with the project extends to “an investment, token development, market creation and exchange listing.” The partnership also includes “50 seed investments scheduled over the next 12 months,” doubling the TON token’s trading volume in the first three months of the partnership, and developing an OTC market “to let buyers and sellers complete large transactions.”
Another case is the firm’s investment into web3 influencer platform So-Col. According to a story by crypto-focused publication The Block and cited on DWF’s website, DWF invested $1.5 million in “a round” by purchasing So-Col’s native token SIMP in February. Irene Zhao, So-Col’s founder, said that the tokens have a one-year vesting period ending in February 2024. The post does not mention other services besides investing.
However, Nansen’s blockchain data on the Ethereum blockchain shows that DWF’s crypto wallet received 3.3 million SIMP tokens between March 6 and March 24. Within the same period, DWF sent some 2.6 million tokens to KuCoin exchange, then transferred the rest to an unknown wallet on March 30. After the announcement on March 28, SIMP almost doubled from around 1.7 cents in a week, then started to plummet on April 4 towards 1 cent, per CoinGecko data.
CoinDesk reviewed Telegram messages of a So-Col representative saying that they decided to work with DWF Labs because besides serving as a market maker DWF also invested in the project directly helping to extend the startup’s runway.
Sending tokens to exchanges
Grachev said that DWF Labs keeps most of its funds and investments on centralized exchanges (CEXs) and transferring tokens to an exchange does not indicate the company will sell.
“We keep all of our inventory, almost all of our inventory, not only our investments but our own funds on exchanges,” he said.
However, keeping supposedly long-term investments on exchanges is a worrying sign for some industry experts, hidden from savvy blockchain analysts and traders whether DWF sells tokens or uses them for market making purposes.
“It’s a red flag,” a founder, who asked to remain anonymous, of a crypto analytics firm with former market making experience told CoinDesk. “They [DWF Labs] market them as an investment, and then claim to do ‘market making’ so they can keep funds on exchanges and just dump.”
It’s hard to opine on where a firm like DWF should draw the line between VC and market making. Perhaps, a page from the TradFi banking playbook could work. In that realm, investment banking and trading/research is separated by a so-called Chinese wall. Where that line might need to be drawn for crypto investment firms is unclear.
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In the interview, Grachev admits his “biggest mistake” was not properly explaining his firm’s operating philosophy and investment process. “We need to be more open. I want [the community] to know how we work and then let people decide who is right and who is not right,” he said.
The rebalancing comes as ether rallies off a successful Shapella upgrade.
Decentralized reserve crypto project Olympus will increase holdings of “volatile assets” such as ether (ETH) in the treasury backing its OHM token after member approval Friday of a new Treasury Framework.
“We’re targeting 75% stablecoins and 25% directional exposure,” said an analyst on the Olympus treasury team who goes by the screen name Relwyn. That’s a change from the 79%-21% breakdown comprising Olympus’ $200 million treasury of stablecoins, volatile assets and protocol-owned liquidity.
The tweaking will give Olympus more exposure to ether, which at $8.4 million Friday was already the largest “volatile asset” in the reserve treasury backing OHM. Ether rallied hard this week after the much-anticipated Shapella upgrade failed to trigger the mass sell-off many traders had feared would come from a flood of newly unlocked ETH.
This shift is unlikely to be as “aggressive” on ETH that the framework’s authors said many community members called for. It will, however, result in a decrease in Olympus’ exposure to so-called stablecoins such as DAI that faltered during the March banking crisis.
“Treasury team recognizes the need for Olympus to decrease reliance on stablecoins with centralized backing,” the proposal read. “Increasing ETH exposure marginally is one step in that direction while not undermining the relative stability of OHM’s backing in the near term.”
Relwyn said the treasury operations team “agrees” with community members’ bullishness, but cautioned the protocol can’t just YOLO everything into ETH without incurring a hearty dose of risk. Number may go up right now, but “number can go down, too,” said Relwyn,
Another reason for the measured approach is operational, Relwyn said, noting Olympus’ mechanisms for rebalancing OHM’s backing could get wonky if the treasury’s ether holdings grow too large. Those mechanics currently price OHM in DAI, by far the treasury’s largest crypto holding at nearly $80 million.
“If it priced itself in ETH, it could have more heavy ETH backing,” Relwyn said. “Mixing the two can be dangerous” for how Olympus manages its so-called range-bound stability.
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The vote passed with nearly unanimous approval midday Friday. Seventy-six wallets that together held 23,000 OHM tokens participated in the vote.
