The development of the situation with Terra and the extreme fear in the crypto market. Key events of the week

The bitcoin rate has fallen by 0,22% over the past seven days. The asset reached its highest value on May 16, when 1 BTC was trading at $31 460, the lowest values were registered on May 19 at $28 654 per coin. As of May 20, 11:50 Moscow time, the bitcoin exchange rate is $30 194 (according to Binance).

The value of the second most capitalized cryptocurrency Ethereum has declined by 1,46% over the past seven days. The native token of the cryptocurrency exchange Binance (BNB) rose in price by 2,3%.

The total capitalization of the crypto market fell from $1,31 trillion to $1,29 trillion over the week, with bitcoin dominating 44,8%. Ethereum's share is 19,1%.

Regulation of the crypto market in Russia

On May 18, the head of the Ministry of Industry and Trade of the Russian Federation Denis Manturov announced the possible legalization of cryptocurrencies in Russia as a means of payment. The minister did not specify exact dates, but noted that it “will happen sooner or later.” Russian authorities are now actively dealing with the issue of the regulation of digital assets. However, the Bank of Russia and the Ministry of Finance are still unable to come to a common agreement.

On May 19, The Ministry of the Interior (MVD) of Russia agreed on the finalized draft laws “On Digital Currency” and “On Amending Certain Laws of the Russian Federation in connection with the adoption of the Federal Law “On Digital Currency”. If these laws are passed, representatives of the Russian Interior Ministry will have the power to seize and confiscate cryptocurrencies and later store them in a special wallet of the department.

This week, the State Duma passed the first reading of the draft law on the introduction of taxation of transactions with digital financial assets (DFAs). According to the document, the tax base for transactions with DFAs is defined as the difference between the sale and purchase price, including taxes. For Russian companies, the tax on income will be 13%, while foreign companies will pay 15%. Information system operators’ services and the issuance of DFAs will be exempt from VAT.

First digital financial assets may appear in Russia before the end of 2022. This was stated by the head of the State Duma Committee on the Financial Market Anatoly Aksakov. He confirmed the registration of platforms for the issuance of DFAs by SberBank, Norilsk Nickel, and Transmashholding.

According to the official, DFAs will be able to become the basis for financial settlements on the blockchain. In addition, their use will gradually transfer all relationships between companies to a distributed ledger.

Integration of NFTs into social media

VKontakte is planning to launch a marketplace to sell NFTs. The company’s management believes that VKontakte should become the main provider of access to non-fungible tokens in Russia and CIS countries. In the future, the social network may create its own metaverse.

Streaming music service Spotify started limited testing of NFTs on its platform, giving artists the opportunity to promote tokens with their profiles. Some users of the Android app in the US will be able to switch to viewing and buying NFTs on external marketplaces; the platform itself does not sell tokens or charge a share of sales. The results of the test will help the platform decide whether to implement this feature and whether to consider further integration of NFTs on Spotify. DJ Steve Aoki and indie band The Wombats are taking part in the test.

Universal Music Group (UMG), a music company, entered into a partnership agreement with the LimeWire NFT marketplace. The deal will allow UMG label artists to issue their own non-fungible tokens.

LimeWire used to be a social network for sharing music. In April 2022, entrepreneurs Paul and Julian Zehetmayr bought the project to repurpose it into an NFT music marketplace. LimeWire has already raised more than $10 million in investment, with the site set to officially launch in late May 2022. LimeWire will offer music and other collectibles in the form of NFTs.

Expert opinions on Bitcoin

Last week Sam Bankman-Fried, the founder of cryptocurrency exchange FTX, criticized the use of bitcoin as a means of payment. He stated that the bitcoin system of validating transactions is unable to scale and cope with the millions of transactions that would be required to make the cryptocurrency an effective means of payment. The 30-year-old billionaire also said that an alternative type of blockchain with a Proof-of-Stake (PoS) algorithm would be needed to create a functional crypto payments network. He added that using PoS would make transactions effective, easy, and less energy-intensive.

The opposite view is held by Jack Dorsey, the CEO of the payment solutions developer, Block (formerly Square). He called bitcoin the only candidate for the money on the internet. According to Dorsey, the development of BTC may seem slow compared to other cryptocurrencies, but this is due to the deliberate decisions made to maintain it as a means of storing and transferring money.

Economist and founder of HS Dent Publishing Harry Dent expects the widespread adoption of BTC as a digital monetary standard in the long term. At the same time, he assumed the bitcoin price would fall below $3 000 reaching $500 000 at the next rise of the crypto market.

Bloomberg Intelligence senior analyst Mike McGlone believes that only bitcoin and Ethereum will benefit in the long run from the US Federal Reserve System’s (Fed) policy tightening. He considers temporary declines in cryptocurrency rates amid a falling stock market to be the norm. According to the analyst, the Fed’s interest rate hike will hurt stock markets more than major cryptocurrencies.

Capital movement in the crypto market

Analytics firm CryptoQuant published data showing the outflow of bitcoins from exchanges. According to the charts, as of May 16, it recorded the lowest BTC netflow on the platforms over the last 8 months. The netflow indicator is calculated based on the difference between bitcoins coming to the exchange and those withdrawn. A positive value for the indicator points to an increase in reserves. For spot markets, a high value usually indicates increasing selling pressure.

At the same time, weekly capital inflow into crypto funds set a record since the start of the year. $274 million was invested in digital asset-based investment products. Bitcoin had the most money invested, $298,6 million. Ethereum funds, on the contrary, faced an outflow of $26,7 million. Leading the way was an investment product from the asset manager, Purpose Investments. An ETF called Purpose Bitcoin ETF saw $284,8 million invested.

On May 17, the Fear & Greed Index (F&G) of the cryptocurrency market fell to its lowest point since March 28, 2020. The sentiment indicator reached 8/100 (extreme fear), indicating extreme investor concern. The market unrest began after the TerraUSD (UST) stablecoin rate collapsed and Tether (USDT) temporarily lost its peg to the US dollar as well as the after bitcoin fell below the $30 000 mark.

Crypto Fear & Greed Index is an indicator that measures the general mood of investors in the market. It is measured on a numerical scale from 0 to 100, where zero means “extreme fear” and 100 means “extreme greed.” Volatility, market volume, capitalization of the first cryptocurrency, trends, as well as social media sentiment are analyzed to determine the index.

The collapse of the Terra ecosystem

The TerraUSD (UST) algorithmic stablecoin began its collapse on May 8, falling to $0,22 on May 11. On May 13, the Terra network announced that it was suspending operations in order to develop a recovery plan.

On May 16, the co-founder of the Terra (LUNA) blockchain Do Kwon proposed to conduct a hard fork of the network. According to Kwon’s plans, the new chain will not be linked to the TerraUSD (UST) stablecoin, and the old one will continue to exist under the name Terra Classic (LUNC). However, the Terra community did not support this idea. 90% of users oppose the separation of the blockchain into two separate networks.

On May 17, it became known that Terraform Labs lawyers began to leave the company. According to profiles on LinkedIn, Terra’s general counsel Marc Goldich, chief litigation and regulatory counsel Noah Axler, and chief corporate counsel Lawrence Florio left in May 2022. Some Twitter users speculate that the lawyers left the company because of concerns about their future salaries.

Bill Ackman, the head of Pershing Square Capital Management, compared the collapse of the Terra blockchain ecosystem to the collapse of a pyramid scheme. Ackman explained that the price of the native token LUNA was supported only by demand from new investors and the limited supply of available coins. The ecosystem of the network collapsed when the number of token sellers exceeded the number of buyers.

South Korean authorities intend to hold parliamentary hearings after the UST collapse to develop measures to protect investors. Do Kwon has also been called upon to speak at the hearing and explain the reasons for what happened.

South Korea’s Tax Service accused Do Kwon and the company he founded, Terraform Labs, of evading more than 100 billion won ($78,4 million) in income and corporate taxes. The agency’s website reports that shortly before the rate collapse of the TerraUSD (UST) stablecoin and its backing token LUNA, Do Kwon attempted to liquidate a South Korean company in order to move overseas. This led authorities to suspect that Kwon was evading taxes.

South Korean law firm LKB & Partners intends to file a lawsuit against Terraform Labs CEO Do Kwon on behalf of retail investors. Several LKB & Partners’ employees who lost their investments as a result of the TerraUSD (UST) stablecoin value collapse may join the class action.

Stablecoin news

The European Central Bank (ECB) may start developing and testing the digital euro as early as 2023. According to Fabio Panetta, a member of the ECB’s executive committee, this phase will take the regulator up to three years. He also noted that the successful implementation of a central bank digital currency (CBDC) could be facilitated by its recognition as legal tender and use in P2P payments.

The Bank of Russia plans to develop technological interaction with other countries through the faster payment system and the digital ruble. In addition, the regulator sees opportunities to integrate the electronic ruble with foreign digital currencies such as the yuan, the bank’s First Deputy Governor Olga Skorobogatova said.

Circle (the issuer of the USDC stablecoin) reported that the asset is fully backed by fiat dollars and US Treasury bonds. According to Circle, as of May 13, 2022, the collateral structure of the USDC centralized stablecoin consists of 22,9% ($11,6 billion) of cash dollars and 77,1% ($39 billion) of US Treasury bonds. A total of 50,6 million USDC are in circulation.

All reserves are held in US entities, the investment firm BlackRock and the Bank of New York Mellon. Circle stressed that one USDC can always be exchanged for one US dollar.

Tether was prohibited from hiding information about USDT collateral. The Supreme Court of the State of New York refused a petition filed by USDT Tether Limited, the issuer of the stablecoin. In it, it asked for permission to block public access to documents explaining the composition of Tether’s reserves over the past few years. In addition, Tether conducted a $3 billion USDT burn on May 12 to restore the asset's peg to the dollar. Developers destroyed 3 billion USDT in one day using a special account called Tether Treasury.

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